PFA 1
CHAPTER 1 – STATEMENT OF FINANCIAL POSITION
Elaiza Denise P. Adia
Problem 1-1 (IFRS)
Darwin Company provided the following information at year-end:
Cash
1,500,000
Accounts receivable
1,200,000
Inventory, including inventory expected in the ordinary course of
operations to be sold beyond 12 months amounting to P700,000
1,000,000
Financial asset held for trading
300,000
Equity investment at fair value through other comprehensive income
800,000
Equipment held for sale
Deferred tax asset
2,000,000
150,000
What amount should be reported as total current assets at year-end?
a.
b.
c.
d.
6,000,000
4,000,000
6,800,000
4,800,000
Solution:
Cash
1,500,000
Accounts receivable
1,200,000
Inventory
1,000,000
Financial asset held for trading
300,000
Equipment held for sale
2,000,000
Total current assets
6,000,000
In the absence of statement to the contrary, equity investment at a fair value through other
comprehensive income shall be classified as noncurrent asset.
Under the IFRS, deferred tax asset is a noncurrent asset.
Under the IFRS, noncurrent asset held for sale is a current asset.
Problem 1-2 (AICPA Adapted)
Petite Company reported the following current assets at year-end.
Cash
5,000,000
Accounts receivable
2,000,000
Inventory, including inventory goods received on consignment
P200,000
Bond investment at fair value through other comprehensive income
800,000
1,000,000
Prepaid expenses, including a deposit of P50,000 made on inventory to
be delivered in 18 months
150,000
Total current assets
8,950,000
Cash in general checking account
3,500,000
Cash fund to retire 5-year old bonds payable
1,000,000
Cash held to pay value added taxes
Total cash
500,000
5,000,000
What total amount of current assets should be reported at year-end?
a.
b.
c.
d.
6,750,000
6,700,000
7,700,000
7,750,000
Solution:
Cash
(3,500,000 + 500,000)
Accounts receivable
4,000,000
2,000,000
Inventory
(
800,000 - 200,000)
600,000
Prepaid expenses
(
150,000 - 50,000)
100,000
Total current assets
6,750,0
00
The goods received on consignment should be excluded from inventory.
The cash fund to be used to retire bonds payable in 2021 should be classified as noncurrent
because the bond mature in more than one year.
The bond investment at fair value through other comprehensive income is a noncurrent asset.
Problem 1-3 (AICPA Adapted)
Rice Company was incorporated on January 1, 2019, with P5,000,000 from the issuance of share
capital and borrowed funds of P1,500,000. During the first year, net income was P2,500,000.
On December 15, the entity paid a P500,000 cash dividend. On December 31, 2019, the
liabilities had increased to P1,800,000.
On December 31, 2019, what amount should be reported as total assets?
a.
b.
c.
d.
6,500,000
9,300,000
8,800,000
6,800,000
Solution:
Liabilities
1,800,000
Share capital
5,000,000
Retained earnings (P2,500,000 less dividend P500,000)
2,000,000
Total current assets
8,800,0
00
Problem 1-4 (AICPA Adapted)
Mirr Company was incorporated on January 1, 2019 with proceeds from the issuance of
P7,500,000 in share capital and borrowed funds of P1,100,000.
During the first year, revenue from sales and consulting amounted to P8,200,000, and operating
costs and expenses totaled P6,400,000.
On December 15, 2019, the entity declared a P300,000 dividend, payable to shareholders on
January 15, 2020. The liabilities increased to P2,000,000. By December 31, 2019.
On December 31, 2019, what amount should be reported as total assets?
a.
b.
c.
d.
11,000,000
11,300,000
10,100,000
12,100,000
Solution:
Liabilities
2,000,000
Share capital
7,500,000
Retained earnings (P2,500,000 less dividend P500,000)
1,500,000
Total current assets
11,000,
000
Problem 1-5 (AICPA Adapted)
Arabian Company reported the following current assets as year-end:
Cash
4,500,000
Accounts receivable
7,900,000
Notes receivable, net of discount note P500,000
2,000,000
Inventory
1,000,000
Deferred charges
1,000,000
19,400,000
Accounts receivable comprised the following:
Trade accounts receivable
Allowance for doubtful accounts
Claim against shipper for goods lost in transit
5,000,000
( 500,000)
400,000
Selling price of Arabian Company’s unsold goods sent to tar Company
on consignment at 150% of cost and excluded from Arabian’s ending
inventory
3,000,000
7,900,000
What amount should be reported as total current assets at year-end?
a.
b.
c.
d.
17,400,000
17,000,000
18,400,000
15,400,000
Solution:
Cash
4,500,000
Accounts receivable
5,000,000
Allowance for doubtful accounts
( 500,000)
Notes receivable
2,000,000
Claim receivable
400,000
Inventory (4,000,000 + 2,000,000)
Total current assets
6,000,000
17,400,000
The selling price of the unsold goods out on consignment is excluded from accounts receivable
but the cost of the goods should be included in inventory.
The cost of goods out on consignment is P3,000,000 divided by 150% or P2,000,000.
The discounted note receivable is properly netted against the total notes receivable.
The deferred charges are noncurrent because technically they expire in more than one year after
the reporting period.
Rayan L. Aminodin
Problem 1-6 (AICPA Adapted)
East Company reported the following current assets at year-end:
Cash
3,500,000
Accounts receivable
3,000,000
Inventory
2,800,000
Prepaid insurance
Total current assets
200,000
9,050,000
The accounts receivable consisted of the following:
Customer’s accounts
1,400,000
Employees' accounts collectible currently
200,000
Advances to subsidiary
500,000
Allowance for doubtful accounts
Subscription receivables, not collectible currently
Total accounts receivable
( 100,000)
500,000
3,000,000
What total amount should be reported as current assets at year-end?
a.
b.
c.
d.
8,000,000
9,500,000
8,500,000
9,000,000
Solution:
Cash
3,500,000
Accounts receivable
1,400,000
Allowance for doubtful accounts
Receivables from employees
Inventory
Prepaid insurance
Total current assets
( 100,000)
200,000
2,800,000
200,000
8,000,000
The advances to subsidiary should be classified as noncurrent.
The subscription receivable should be reported as a deduction from subscribed share capital
because it is not collectible currently.
Problem 1-7 (AICPA Adapted)
Ivan Company showed the following current assets at the year-end:
Cash
3,200,000
Accounts receivable
2,500,000
Inventory
2,000,000
Total current assets
7,700,000
Cash on hand, including customer postdated check P100,000 and
employee IOU P50,000
500,000
Cash in bank per bank statement (outstanding check at year-end
P200,000)
2,700,000
Total cash
3,200,000
What total amount should be reported as current assets?
a.
b.
c.
d.
7,700,000
7,450,000
7,400,000
7,500,000
Solution:
Cash on hand
( 500,000 – 100,000 – 50,000 )
350,000
Cash in bank
2,500,000
Accounts receivable
2,600,000
Advance to employee
50,000
Inventory
2,000,000
Total current assets
7,500,000
2,700,000
Cash in bank per bank statement
Outstanding check
( 200,000)
Adjusted cash in bank
2,500,000
Accounts receivable
2,500,000
Customer postdated check
Adjusted balance
The customer check should be reverted to account receivable.
100,000
2,600,000
Problem 1-8 (AICPA Adapted)
Gar Company reported the following liability account balances on December 31, 2019:
Accounts receivable
1,900,000
Bonds payable, due December 31,2020
3,400,000
Discount on bonds payable
200,000
Deferred tax liability
400,000
Dividends payable
500,000
Income tax payable
900,000
Note payable, due January 31, 2021
600,000
On December 31, 2019, what total amount should be reported as current liabilities?
a.
b.
c.
d.
7,100,000
6,700,000
6,500,000
6,900,000
Solution:
Accounts payable
Dividends payable
1,900,000
500,000
Income tax payable
900,000
Bonds payable
3,400,000
Discount on bonds payable
Total current liabilities
( 200,000)
6,500,000
Under IFRS, a deferred tax liability is classified as noncurrent.
The bonds payable minus the discount on bonds payable should be classified as current because
the bonds are due within one year.
The dividends payable and income tax payable are normally classified as current.
The note payable is classified as noncurrent because it matures in more than one year from the
end of the reporting period.
Problem 1-9 (AICPA Adapted)
Brite Company provided the following information on December 31, 2019:
Accounts payable
5,500,000
Note payable, 8% unsecured, due July 1, 2020
4,000,000
Accrued expenses
350,000
Contingent liability
450,000
Deferred tax liability
250,000
Bonds payable, 7%, due March 31, 2020
Premium on bonds payable
5,000,000
500,000
The contingent liability is an accrual for possible loss on a P1,000,000 lawsuit filed against the
entity.
The legal counsel expects the suit to be settled in 2020 and has estimated that the entity will be
liable for damages in the range of P450,000 to P750,000.
The deferred tax liability is not related to an asset for financial reporting and is expected to
reverse in 2020.
What total amount should be reported as current liabilities on December 31, 2019.
a.
b.
c.
d.
10,350,000
10,150,000
10,400,000
10,950,000
Solution:
Accounts payable
Notes receivable
Accrued expenses
Bonds payable
Premium on bonds payable
550,000
4,000,000
350,000
5,000,000
500,000
Total current liabilities
10,400,000
The contingent liability is only disclosed because it is a possible loss.
Under IFRS, the deferred tax liability is classified as noncurrent regardless of the reversal
period.
The bonds payable plus the premium on bonds payable should be classified as current because
the bonds are due within one year from the end of reporting period.
Problem 1-10 (PHILCPA Adapted)
Burma Company disclosed the following information:
Accounts payable, after deducting debit balances in the suppliers'
accounts amounting to P100,000
Accrued expenses
Credit balances of customers' accounts
Share dividend payable
Claims for increase in wages and allowance by employees of the
entity, covered in a pending lawsuit
Estimated expenses in redeeming prize coupons
4,000,000
1,500,000
500,000
1,000,000
400,000
600,000
What amount should be reported as total current liabilities?
a.
b.
c.
d.
6,700,000
6,600,000
7,100,000
7,700,000
Solution:
Accounts payable (4,000,000 + 100,000)
4,100,000
Accrued expenses
1,500,000
Credit balances in customers' accounts
500,000
Estimated liability for coupons
600,000
Total current liabilities
7,700,000
Accounts payable
4,000,000
Debit balances in suppliers’ accounts
Adjusted accounts payable
100,000
4,100,000
The debit balances in suppliers’ accounts are not “netted” against accounts payable but should
be reported as current asset.
The share dividend payable is not an accounting liability but presented as part of shareholders'
equity as an addition to share capital.
The claims for increase in wages and allowance should be disclosed as contingent liability.
Aleli M. Arcoirez
Problem 1-11 (AICPA Adapted)
Mazda Company reported the following liability balances on December 31, 2019:
10% note payable issued on October 1, 2018, maturing October 1, 2020
2,000,000
12% note payable issued on March I, 2018, maturing on March 1, 2020
4,000,000
The 2019 financial statements were issued on March 31, 2020.
Under the loan agreement, the entity has the discretion to refinance the 10% note payable for at
least twelve months after December 31, 2019.
On March 1, 2020, the entire P4,000,000 balance of the 12% note payable was refinanced
through issuance of a long-term obligation payable lump sum.
What amount of the notes payable should be classified as current on December 31, 2019?
a. 6,000,000
b. 4,000,000
c. 2,000,000
d.
0
Solution:
The 10% note payable is classified as noncurrent.
PAS I, paragraph 73, provides that if an entity has the discretion to refinance or roll over an
obligation for at least twelve months after the reporting period under an existing loan facility, the
obligation shall be classified as noncurrent, even if it would otherwise be due within a shorter
period.
The 12% note payable is classified as current.
PAS I, paragraph 72, provides that an obligation that matures within one year from the end of
reporting period is classified as current even if it is refinanced on a long-term basis after the
reporting period and before issuance of the financial statements.
The 12% note payable is refinanced on March 1, 2020 after the end of reporting period on
December 31, 2019 and therefore classified as current.
Problem 1-12 (AICPA Adapted)
Willem Company reported the following liabilities on December 31, 2019:
Accounts payable
2,000,000
Short-term borrowings
1,500,000
Bonds payable due December 31, 2021
3,000,000
Premium on bonds payable
500,000
Mortgage payable, current portion P500,000
3,500,000
Bank loan, due June 30, 2020
1.000.000
The P1,000,000 bank loan was refinanced with a 5-year loanon December 31, 2019. The
financial statements were issued March 1, 2020.
What total amount should be reported as current liabilities on December 31, 2019?
a. 7,500,000
b. 5,000,000
c. 8,500,000
d. 4,000,000
Solution:
Accounts payable
Short-term borrowings
Mortgage payable — current portion
Total current liabilities
2,000,000
1,500,000
500,000
4,000,000
The bank loan is classified as noncurrent because it is refinanced on December 31, 2019, the
end of reporting period.
The bonds payable plus the premium on bonds payable should be classified as noncurrent
because the bonds are due in more than one year from the end of reporting period.
Problem 1-13 (AICPA Adapted)
Ronny Company provided the following information on December 31, 2019:
Accounts payable, net of creditors' debit balances P200,000
Accrued expenses
Bonds payable due December 31, 2021
Premium on bonds payable
Deferred tax liability
Income tax payable
Cash dividend payable
Share dividend payable
Note payable — 6%, due March 1, 2020
Note payable — 8%, due October 1, 2020
2,000,000
800,000
4,500,000
500,000
500,000
1,100,000
600,000
400,000
1,500,000
1,000,000
The financial statements for 2019 were issued on March 31,2020.
On December 31, 2019, the 6% note payable was refinanced on a long-term basis.
Under the loan agreement, the entity has the discretion to refinance the 8% note payable for at
least twelve months after December 31, 2019.
1. Who amount should be reported as total current liabilities?
a. 7,200,000
b. 4,700,000
c. 6,200,000
d. 5,100,000
2. What amount should be reported as total noncurrent liabilities?
a. 8,400,000
b. 5,500,000
c. 8,000,000
d. 7,500,000
Solutions:
Question 1
Accounts payable
Accrued Expenses
Income tax payable
Cash dividend payable
2,200,000
800,000
1,100,000
600,000
Total current liabilities
4,700,000
Accounts payable
Debit balances of creditors
2,000,000
200,000
Adjusted accounts payable
2,200,000
The creditors' debit balances are not netted against accounts payable but should be reported as
current asset.
The share dividend payable is part of shareholders' equity as an addition to share capital.
Question 2
Bonds payable
Premium on bonds payable
Deferred tax liability
Note payable — 6%
Note payable — 8%
4,500,000
500,000
500,000
1,500,000
1,000,000
Total noncurrent liabilities
8,000,000
The 6% note payable is classified as noncurrent because it is refinanced at the end of reporting
period on December 31, 2019.
The 8% note payable is also classified as noncurrent because the entity has discretion to
refinance.
The bonds payable plus the premium on bonds payable should be classified as noncurrent
because the bonds mature in more than one year from the end of reporting period.
Problem 1-14 (IAA)
Manchester Company provided the following information on December 31, 2019:
Employee income texts withheld
900,000
Cash balance of First State Bank
2,500,000
Cash overdraft at Harbor Bank
1,300,000
Accounts receivable with credit balance
750,000
Estimated expenses of meeting warranties
500,000
Estimated damages as a result of unsatisfactory performance on a contract
1,500,000
Accounts payable
3,000,000
Deferred serial bonds, issued at par and bearing interest at 12%, payable
in semiannual installments of P500,000 due April 1 and October 1 of each
year, the last bond to be paid on October 1, 2025. Interest is also
paid semiannually.
5,000,000
Who amount should be reported as total current liabilities on December 31, 2019?
a. 8,100,000
b. 7,950,000
c. 9,100,000
d. 7,350,000
Solution:
Employee income taxes withheld
Cash overdraft
Accounts receivable with credit balance
Estimated warranty liability
Estimated damages payable
Accounts payable
Accrued interest on bonds payable from October 1 to
December 31, 2019 (5,000,000 x 12% x 3/12)
900,000
1,300,000
750,000
500,000
1,500,000
3,000,000
Total current liabilities
8,100,000
150,000
The bonds will be paid over 5 years because the semiannual payment is P500,000. Since the last
bond will be paid on October 1, 2025, the first bond will be paid on April 1, 2021.
Accordingly, there is no currently maturing bond in 2019.
Problem 1-15 (AICPA Adapted)
Charice Company provided the following information on December 31, 2019:
•
•
•
•
Accounts payable amounted to P500,000 and accrued expenses totaled P300,000 on
December 31, 2019.
On December 15, 2019, the entity declared a rash dividend of P7 per share on 100,000
outstanding shares, payable on January 15,2020.
On July 1, 2019, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%.
The bonds mature on June 30, 2024, and pay interest annually every June 30.
The pretax financial income was P8,500.000 and taxable income was P6,000,000. The
difference is due to P1,000,000 permanent difference and P1,500,000 of taxable
temporary difference to reverse in 2020.
The income tax rate is 30%. The entity made estimated income tax payments during the
year of P1.000,000.
What amount should be reported as total current liabilities on December 31, 2019?
a. 3,500,000
b. 2,700,000
c. 2,300,000
d. 2,500,000
Solution:
Accounts payable
Accrued expenses
Dividends payable (100,000 shares*7)
Accrued interest payable (5,000,000 x 8% x 6/12)
Income tax payable
Total current liabilities
Current tax expense (6,000,000 x 30%)
Estimated tax payment
Income tax payable
500,000
300,000
700,000
200,000
800,000
2,500,000
1,800,000
(1,000,000)
800,000
The interest on the bonds payable is payable annually on June 30. Thus, there is an accrued
interest payable from July to December 31, 2019 or six months.
Esterh A. Asilo
Problem 1-16 (AICPA Adapted)
United Company provided the following current assets and shareholders' equity at year-end:
Cash
600,000
Financial assets at fair value through profit or loss,
including cost of P300,000 of United Company
shares
1,000,000
Accounts receivable
3,500,000
Inventory
1,500,000
Total current assets
6,600,000
Share capital
5,000,000
Share premium
2,000,000
Retained earnings
Total shareholders' equity
500,000
7,500,000
What amount should be reported as total shareholders' equity?
a. 7,200,000
b. 7,500,000
c. 7,800,000
d. 5,200,000
Solution:
Share capital
5,000,000
Share premium
2,000,000
Retained earnings
500,000
Treasury shares, at cost
(300,000)
Total shareholders' equity
7,200,000
The treasury shares are excluded from financial assets at fair value through profit or loss but
should be reported as a deduction from shareholders' equity.
Cash
600,000
Financial at assets at fair value (1,000,000 – 300,000)
700,000
Accounts receivable
3,500,000
Inventory
1,500,000
Total current assets
6,300,000
Problem 1-17 (AICPA Adapted)
Kalinga Company the following information at year-end:
Share capital
Share premium
Treasury shares, at cost
Actuarial loss on defined benefit plan
Retained earnings unappropriated
Retained earnings appropriated
Revaluation surplus
Cumulative translation adjustment — credit
15,000,000
5,000,000
2,000,000
1,000,000
6,000,000
3,000,000
4,000,000
1,500,000
What amount should be reported as total shareholders ' equity?
a. 31,500,000
b. 32,500,000
c. 28,500,000
d. 25,500,000
Solution:
Share capital
15,000,000
Share premium
5,000,000
Retained earnings unappropriated
6,000,000
Retained earnings appropriated
3,000,000
Revaluation surplus
4,000,000
Cumulative translation adjustment — credit
1,500,000
Actuarial loss on defined benefit plan
(1,000,000)
Treasury shares, at cost
(2,000,000)
Total shareholders' equity
31,500,000
The actuarial loss on defined benefit plan is reported as component of other comprehensive
income.
The credit in the cumulative translation adjustment account is a translation gain reported as
component of other comprehensive income.
If the cumulative translation adjustment account has a debit balance, it is a translation loss.
Problem 1-18 (IAA)
Silver Company provided the following information at year-end:
Share premium
Accounts payable
Preference share capital, at par
Ordinary share capital, at par
Sales
Total expenses
Treasury shares at cost – ordinary
Dividends
Retained earnings — beginning
1,000,000
1,100,000
2,000,000
3,000,000
10,000,000
7,800,000
500,000
700,000
1,000,000
What amount should be reported as total shareholders' equity at year-end?
a. 8,000,000
b. 8,500,000
c. 5,800,000
d. 8,700,000
Solution:
Sales
10,000,000
Total expenses
(7,800,000)
Net income
2,200,000
Retained earnings — beginning
1,000,000
Dividends
(700,000)
Retained earnings — ending
2,500,000
Preference share capital
2,000,000
Ordinary share capital
3,000,000
Share premium
1,000,000
Retained earnings
2,500,000
Treasury shares at cost
(500,000)
Total shareholders' equity
8,000,000
Problem 1-19 (AICPA Adapted)
Mont Company reported net assets totaling P8,750,000 at year-end which included the
following:
Treasury shares of Mont Company at cost
Idle machinery
Trademark
Allowance for inventory writedown
250,000
100,000
150,000
200,000
What amount should be reported as net assets at year-end?
a. 8,500,000
b. 8,400,000
c. 8,300,000
d. 8,200,000
Solution:
Reported net assets
8,750,000
Treasury shares
(250,000)
Adjusted net assets
8,500,000
The treasury shares are not assets but should be deducted from total shareholders' equity.
The idle machinery, trademark and allowance for inventory writedown are properly included in
the computation of net assets.
Problem 1-20 (AICPA Updated)
Puzzle Company provided the following information at year-end:
Cash and cash equivalents
Accounts receivable, net of allowance P100,000
Inventory
Property, plant, and equipment at carrying amount
Accounts payable
Wages payable
Share capital
Share premium
500,000
2,000,000
6,000,000
12,000,000
4,400,000
1,500,000
6,000,000
4,000,000
The only asset not listed is short-term investment.
The only liabilities not listed are a P3,000,000 note payable due in two years and related accrued
interest of P100,000 due in four months.
The current ratio at year-end is 1.5 to 1.00.
1. What is the amount of current liabilities?
a. 5,900,000
b. 6,000,000
c. 9,000,000
d. 8,900,000
2. What is the amount of short-term investment?
a. 700,000
b. 400,000
c. 500,000
d.
0
3. What is the balance of retained earnings at year-end?
a. 2,000,000
b. 6,000,000
c. 5,000,000
d. 1,500,000
Solutions:
Question 1
Accounts payable
4,400,000
Wages payable
Accrued interest payable
Total current liabilities
1,500,000
100,000
6,000,000
Question 2
Current liabilities
Multiply by current ratio
6,000,000
1.50
Total current assets
9,000,000
Cash and cash equivalents
(500,000)
Accounts receivable
(2,000,000)
Inventory
(6,000,000)
Short-term investment
500,000
Question 3
Current assets
9,000,000
Property, plant and equipment
12,000,000
Total assets
21,000,000
Current liabilities
(6,000,000)
Note payable — noncurrent
(3,000,000)
Share capital
(6,000,000)
Share premium
(4,000,000)
Retained earnings
2,000,000
PFA 1
CHAPTER 2- STATEMENT OF FINANCIAL POSITION
Jerlyn S. Bautro
Problem 2-1 (AICPA Adapted)
Kenya Company provided the following information on December 31, 2019:
Cash in bank, net of bank overdraft ₱500,000
Petty cash, unreplenished petty cash expenses ₱10,000
Notes receivable
Accounts receivable, net of customers’ accounts with credit balances ₱
1,500,000
Inventory
Bond sinking fund
Total current assets
Accounts payable, net of suppliers’ accounts with debit balances of ₱
1,000,000
Notes payable
Bond payable due June 30,2020
Accrued expenses
Total current liabilities
1. What amount should be reported as total current assets on December 31, 2019?
a.
b.
20,040,000
c.
20,050,000
d.
24,040,000
19,040,000
2. What amount should be reported as total current liabilities on December 31, 2019?
a.
b.
19,000,000
16,000,000
5,000,000
50,000
4,000,000
6,000,000
3,000,000
3,000,000
21,050,000
7,000,000
4,000,000
3,000,000
2,000,000
16,000,000
c.
15,500,000
d.
15,000,000
Solution:
Question 1
5,500,000
Cash in bank ( 5,000,000 + 500, 000)
Petty cash ( 50,000 – 10, 000)
40,000
4,000,000
Notes receivable
7,500,000
Accounts receivable (6,000,000 + 1,500,000)
3,000,000
3,000,000
Inventory
1,000,000
Bond sinking fund
Debit balances in accounts payable
24,040,000
Total current assets
The bank overdraft is not netted against the cash in bank but should be classified as current liability.
The customers’ credit balances are not netted against accounts receivable but should be classified as
current liability.
The bond sinking fund is classified as current asset because the bond payable is already classified as
current liability.
The classification of the bond sinking fund should parallel the classification of the related liability.
Question 2
500,000
Bank overdraft
Credit balances in accounts receivable
1,500,000
8,000,000
Accounts payable ( 7,000,000 + 1,000,00 )
4,000,000
Notes payable
3,000,000
2,000,000
Bond payable
Accrued expenses
19,000,000
Total current liabilities
The debit balances in suppliers’ accounts are not netted against accounts payable but should be
classified as current asset.
Problem 2-2 (AICPA Adapted)
Gold Company provided the following trial balance on December 31, 2019:
Cash overdraft
Accounts receivable
Inventory
Prepaid expenses
Land held for sale
Property, plant and equipment
Accounts payable
Accrued expenses
Ordinary share capital
Share premium
Retained earnings
100,000
350,000
600,000
100,000
1,000,000
950,000
200,000
150,000
1,500,000
250,000
800,000
3,000,000
3,000,000
Checks amounting to ₱300,000 were written to vendors and recorded on December 29, 2019 resulting
in a cash overdraft of ₱100,000. The checks were mailed on January 15, 2020.
Land held for sale was sold for cash on January 31, 2020.
The entity issued the financial statements on March 31, 2020.
1. What total amount should be reported as current assets?
a.
b.
2,050,000
c.
1,950,000
d.
1,250,000
2,250,000
2. What total amount should be reported as current liabilities?
a.
b.
500,000
c.
350,000
650,000
d.
300,000
3. What is the total shareholders’ equity?
a.
b.
1,750,000
2,550,000
c.
1,500,000
d.
2,300,000
Solutions:
Question 1
200,000
Cash
350,000
Accounts receivable
600,000
Inventory
100,000
Prepaid expense
1,000,000
Land held for sale
2,250,000
Total current assets
The undelivered checks should be adjusted as follows:
Cash
Accounts payable
Cash (overdraft)
Debit adjustment
Adjusted cash balance
300,000
300,000
(100,000)
300,000
200,000
Under PFRS 5, the land held for sale should be reported as current asset.
Question 2
Accounts payable
Accrued expenses
500,000
150,000
Total current liabilities
650,000
Accounts payable
Undelivered checks
200,000
300,000
Adjusted accounts payable
500,000
Question 3
Ordinary share capital
Share premium
Retained earnings
1,500,000
250,000
800,000
Total shareholders’ equity
2,550,000
Problem 2-3 (AICPA Adopted)
Trey Company provided the following trial balance at year-end which had been adjusted except for
income tax expense:
1,250,000
Cash
Accounts receivable
Prepaid taxes
Accounts payable
Share capital
Share premium
Retained earnings-beginning
Foreign currency translation adjustment
Revenue
Expenses
1,650,000
500,000
200,000
1,000,000
500,000
1,500,000
800,000
4,000,000
3,000,000
7,200,000
7,200,000
During the current year, estimated tax payments of ₱500,000 due from customer were charged to
prepaid taxes. The entity has not yet recorded income tax expense.
There were no differences between financial and taxable income. The tax rate is 30%.
Included in accounts receivable is ₱500,000 due from customer. Special terms granted to this customer
require payment in equal semiannual installments of ₱125,000 every April 1 and October 1.
1. What amount should be reported as total current assets at year-end?
a.
2,850,000
b.
2,650,000
c.
2,900,000
d.
3,100,000
2. What amount should be reported as retained earnings at year-end?
a.
3,500,000
b.
2,000,000
c.
2,200,000
d.
1,400,000
Solutions:
Question 1
Cash
Accounts receivable
Prepaid taxes
1,250,000
1,400,000
200,000
Total current assets
2,850,000
Accounts receivable
Noncurrent portion ( 125,000 + 125,000 )
1,650,000
(250,000)
Current portion
1,400,000
Entry made
Prepaid taxes
Cash
500,000
500,000
Adjusting entry
Income tax expense
Prepaid taxes
300,000
300,000
Prepaid of income taxes
Income tax expense
500,000
300,000
Prepaid taxes – year-end
200,000
Question 2
Revenue
Expenses
Income before income tax
Income tax expense ( 30% * 1,000,000 )
Net income
4,000,000
(3,000,000)
1,000,000
(300,000)
700,000
Retained earnings – beginning
1,500,000
Retained earnings - ending
2,200,000
The debit balances in the foreign currency translation adjustment is a component of other
comprehensive income and a deduction from total shareholders’ equity because it is a translation loss.
Problem 2-4 (AICPA Adapted)
Mint Company provided the following account balances at year-end which had been adjusted except for
income tax expense:
Cash
Accounts receivable
Cost in excess of billings on long-term contracts
Billing in excess of cost on long-term contracts
600,000
3,500,000
1,600,000
700,000
Prepaid taxes
Property, plant, and equipment, at carrying amount
Note payable – noncurrent
Share capital
Share premium
Retained earnings unappropriated
Retained earnings restricted for note payable
Earnings from long-term contracts
Costs and expenses
450,000
1,510,000
1,620,000
750,000
2,030,000
900,000
160,000
6,680,000
5,180,000
All receivables on long-term contracts are considered to be collectible within 12 months. During the
year, estimated tax payments of ₱450,000 were charged to prepaid taxes. The entity has not recorded
income tax expense. The tax rate is 30%.
At year-end, what amount should be reported as
1. Total retained earnings?
a.
1,950,000
b.
2,110,000
c.
2,400,000
d.
2,560,000
2. Total noncurrent liabilities?
a.
1,620,000
b.
1,780,000
c.
2,320,000
d.
2,480,000
3. Total current assets?
a.
5,000,000
b.
4,100,000
c.
5,700,000
d.
6,150,000
4. Total shareholders’ equity?
a.
2,940,000
b.
2,780,000
c.
4,890,000
d.
4,730,000
Solutions:
Question 1
Earnings from long-term contracts
Cost and expenses
6,680,000
(5,180,000)
Income before income tax
Income tax expense ( 30% * 1,500,000 )
1,500,000
(450,000)
Net income
Retained earnings unappropriated
Retained earnings restricted
1,050,000
900,000
160,000
Total retained earnings
2,110,000
Question 2
Note payable-noncurrent
The billings in excess of cost on long term contracts account is a current liability.
1,620,000
Question 3
Cash
Accounts receivable
Cost in excess of billings on long term contracts
600,000
3,500,000
1,600,000
Total current assets
5,700,000
The prepaid taxes of ₱450,000 represent the actual income tax expense for the current year. Thus, there
is no prepayment.
Question 4
]
Share capital
Share premium
Retained earnings
750,000
2,030,000
2,110,000
Total shareholders’ equity
4,890,000
Problem 2-5 (AICPA Adapted)
Shaw Company provided the following trial balance on December 31, 2019 which had been adjusted
except for income tax expense:
Cash
Accounts receivable
Inventory
Property, plant and equipment (net)
Accounts payable and accrued liabilities
Income tax payable
Deferred tax liability
Share capital
Share premium
Retained earnings, January 1
Net sales and other revenue
Costs and expenses
Income tax expense
600,000
2,800,000
2,000,000
10,500,000
1,800,000
1,500,000
700,000
2,500,000
3,000,000
3,500,000
15,000,000
10,000,000
2,100,000
28,000,000
28,000,000
The accounts receivable included ₱1,000,000 due from a customer and payable in quarterly installments
of ₱125,000. The last payment is due December 30, 2021.
During the year, estimated tax payment of ₱600,000 was charged to income tax expense. The income
tax rate is 30%.
On December 31, 2019, what amount should be reported as
1. Total current assets?
a.
3,400,000
b.
4,400,000
c.
5,400,000
d.
4,900,000
2. Total current liabilities?
a.
2,700,000
b.
3,300,000
c.
4,050,000
d.
3,450,000
3. Retained earnings?
a.
8,500,000
b.
6,400,000
c.
7,000,000
d.
3,500,000
Solutions:
Question 1
Cash
Accounts receivable
Inventory
600,000
2,300,000
2,000,000
Total current assets
5,700,000
Accounts receivable
Noncurrent portion ( 125,000 * 4 )
2,800,000
( 500,000)
Adjusted current portion
2,300,000
Question 2
Accounts payable and accrued liabilities
Income tax payable ( 1,500,000 – 600,000)
1,800,000
900,000
Total current liabilities
2,700,000
Entries made
Income tax expense
Cash
600,000
Income tax expense
Income tax payable
1,500,000
600,000
1,500,000
Adjusting entry
Income tax payable
Income tax expense
600,000
600,000
Question 3
Net sales and other revenue
Cost and expenses
Income before income tax
Income tax expense ( 30% * 5,000,000 )
Net income
Retained earnings – January 1
Retained earnings- December 31
15,000,000
(10,000,000)
5,000,000
(1,500,000)
3,500,000
3,500,000
7,000,000
Irish Joy D. Bituin
PROBLEM 2-6 (AICPA Adapted)
Cara Company provided the following information for the current year:
Current Assets
Property, plant, and equipment
Current liabilities
Noncurrent
January 1
700,000
3,000,000
?
1,000,000
December 31
?
4,000,000
300,000
?
Working capital P600,000 remained unchanged.
Net income for the current year was P400,000
No dividends were declared during the year and there were no other changes in shareholder's equity.
1. What is the amount of current assets on December 31?
a 900,000
b 300,000
c 600,000
d 450,000
2. What is the shareholder’s equity on December 31?
a 3,000,00
b 2,600,000
c 2,700,000
d 3,700,000
3. What is the amount of noncurrent liabilities on December 31?
a.
2,200,00
b.
1,100,000
c.
1,600,000
d.
1,900,000
Solution:
Question 1
Current assets - December 31 (SQUEEZE)
Current liabilities - December 31
Working capital - December 31
900,000
300,000
600,000
Question 2
Current assets - January 1
Property, plant, and equipment - January 1
Total assets - January 1
Current liabilities
Noncurrent liabilities
Shareholder's equity - January 1
Net income for current year
Shareholders' equity - December 31
Current assets - January 1
Current liabilities - January 1 (SQUEEZE)
Working capital - January 1
700,000
3,000,000
3,700,000
(300,000)
(1,000,00)
2,600,000
400,000
3,000,000
700,000
100,000
600,000
Question 3
Current assets - December 31
Property, plant, and equipment - December 31
Total Assets - December 31
Current liabilities - December 31
Noncurrent liabilities - December 31 (SQUEEZE)
Shareholders' equity - December 31
900,000
4,000,000
4,900,000
(300,000)
(1,600,00)
3,000,000
PROBLEM 2-7 (IAA)
Goodrich Company provided the following information on December 31, 2019:
Accounts payable
Bank note payable - 10%
Bank note payable - 11%
Mortgage note payable - 10%
Bonds payable
●
6,500,000
3,000,000
5,000,000
2,000,000
4,000,000
●
The P3,000,000, 10% note was issued March 1, 2019, payable on demand. Interest is payable every
six months.
●
The one-year P5,000,000, 11% note was issued January 15, 2019.
On December 31, 2019, the entity negotiated a written agreement with the bank to replace the note
with a 2-year, P5,000,000, 10% note to be issued January 15, 2020.
●
The 10% mortgage note was issued October 1, 2016, with a term of 10 years. Terms of the note give
the holder the right to demand immediate payment if the entity fails to make a monthly interest
payment within 10 days from the date the payment is due.
On December 31, 2019, the entity used three months behind in making the required interest
payment.
●
The bonds payable are ten-year, 8% bonds, issued June 30,2010. Interest is payable semiannually on
June 30 and December 31.
1. What amount should be reported as total current liabilities?
a
15,650,000
b
11,650,000
c
20,650,000
d
13,650,000
2. What amount should be reported as total noncurrent liabilities?
a.
8,000,000
b.
7,000,000
c.
5,000,000
d.
0
Solution:
Question 1
Accounts payable
Bank note payable – 10%
Accrued interest payable
Mortgage note payable
Bonds payable – due June 30, 2020
Total current liabilities
6,500,000
3,000,000
150,000
2,000,000
4,000,000
15,600,000
The mortgage note payable becomes payable on demand because of failure to make the required
interest payment for three months.
The bonds mature on June 30, 2020 which is within one year from the end of reporting period.
Since the 10% bank note payable was issued on March 1, 2019 with interest payable semiannually, the
interest payment dates are March 1 and September 1.
Interest accrued on the 10% bank note payable
from September 1 to December 31, 2019
(3,000,000 x 10% x 4/12)
100,000
Interest accrued on the mortgage note payable
(2,000,000 x 10% x 3/12)
Accrued interest payable – December 31, 2019
50,000
150,000
There is no accrued interest on the bonds payable because the interest is payable June 30 and December 31.
Question 2
Bank note payable – 11%
5,000,000
The 11% bank note payable is classified as noncurrent because it was refinanced on a long-term basis on
December 31, 2019.
PROBLEM 2-8 (IAA)
Aroma Company provided the following information on December 31, 2019:
Cash
Accounts receivable
Inventory
Prepaid expenses
Property, plant, and equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Bonds payable
Share capital
Retained earnings
300,000
800,000
1,650,000
250,000
8,800,000
800,000
1,250,000
250,000
4,000,000
5,000,000
500,000
A P500,000 note payable to bank, due on June 30, 2020, was deducted from the balance on deposit in
the same bank.
The entity recorded checks of P200,000 in payment of accounts payable on December 31, 2019. These
checks were still on hand on January 20, 2020.
An advance payment P100,000 from a customer for goods to be delivered in 2020 was deducted from
accounts receivable.
1. What total amount should be reported as current assets on December 31, 2019?
a
3,800,000
b
3,600,000
c
3,700,000
d
3,900,000
2. What total amount should be reported as current liabilities on December 31, 2019?
a
2,100,000
b
2,300,000
c
1,900,000
d
2,200,000
Solutions:
Question 1
Cash
Accounts receivable
Inventory
Prepaid expenses
Total current assets
Cash
Note payable deducted from cash in bank
Undelivered checks
Adjusted cash balance
1,000,000
900,000
1,650,000
250,000
3,800,000
300,000
500,000
200,000
1,000,000
The note payable due June 30, 2020 should be known as current liability.
The undelivered checks should be adjusted by debiting cash and crediting accounts payable
Accounts receivable
Advance payment from erroneously deducted
from accounts receivable
Adjusted carrying amount
800,000
Accounts Receivable
Advances from customer
100,000
100,000
900,000
100,000
The cash advance from the customer is shown as current liability.
Question 2
Accounts payable
Accrued expenses
Note payable-bank
Advances from customers
Total current liabilities
Accounts payable
Undelivered checks
Adjusted balance
1,450,000
250,000
500,000
100,000
2,300,000
1,250,000
200,000
1,450,000
PROBLEM 2-9 (AICPA Adapted)
Daet Company provided the following accounts balances and related information at year-end:
Cash
3,700,000
Accounts receivable
1,500,000
Allowance for doubtful accounts
Inventory
Prepaid Insurance
Total current assets
200,000
2,000,000
300,000
7,700,000
Analysis of cash
Cash in bank
1,300,000
Bank overdraft in another bank
(300,000)
Cash set aside for plant addition
2,000,000
Petty cash fund
10,000
Cash withheld from wages
190,000
General cash
500,000
Total cash
3,700,000
The accounts receivable included past due account in the amount of P100,000. The account is deemed
uncollectible and should be written off.
The inventory included goods held on consignment amounting to P150,000 and goods of P200,000
purchased and received at year-end.
Neither of these items have been recorded as a purchase.
The prepaid insurance included cash surrender value of life insurance of P50,000.
1. What is the adjusted cash balance?
a
2,000,000
b
1,700,000
c
4,000,000
d
2,300,000
2. What is the adjusted balance of accounts receivable?
a.
1,200,000
b.
1,400,000
c.
1,300,000
d.
1,500,000
3. What is the adjusted inventory?
a
2,200,000
b
2,000,000
c
1,850,000
d
1,600,000
4. What total amount should be reported as current assets at year-end?
a
5,400,000
b
5,100,000
c
5,300,000
d
5,200,000
Solutions:
Question 1
Cash in bank
Petty cash fund
Cash withheld from wages
General cash
1,300,000
10,000
190,000
500,000
Total cash
2,000,000
The bank overdraft is not "netted" but reported as current liability.
The cash set aside from plant addition is shown as noncurrent asset,
Question 2
Accounts receivable
Account to be written off
1,500,000
(100,000)
Adjusted balance
1,400,000
Question 3
Inventory
Goods held on consignment
2,000,000
(150,000)
Adjusted balance
1,850,000
The goods of P200,000 purchased and received are properly included inventory.
Question 4
Cash
Accounts receivable
Allowance for doubtful accounts
Inventory
Prepaid insurance (300,000 - 50,000)
Total current assets
The cash surrender value is shown as noncurrent asset.
2,000,000
1,400,000
(100,000)
1,850,000
250,000
5,400,000
PROBLEM 2-10 (PHILCPA Adapted)
Icarus Company provided the following data at year-end:
Cash
Accounts receivable
Inventory
Prepaid expenses
Accounts payable
Interest payable
Income tax payable
Money claim of the union pending final decision
Mortgage payable, due in four annual installments
2,000,000
3,000,000
1,900,000
100,000
2,500,000
150,000
300,000
500,000
2,000,000
Analysis of cash
Cash in bank
Customer check marked NSF
Employee IOU
Deposit with court for case under litigation
Total cash
1,650,000
100,000
50,000
200,000
2,000,000
Analysis of accounts receivable
Customers' debit balances
Advances to subsidiary
Advances to suppliers
Advances to officers due currently
Allowance for doubtful accounts
Selling price of merchandise invoiced at 120%
of cost undelivered and excluded from inventory
Total accounts receivable
1. What amount should be reported as total current assets?
a
6,600,000
b
6,300,000
c
6,800,000
d
6,400,000
1,600,000
400,000
200,000
300,000
(100,000)
600,000
3,000,000
2. What amount should be reported as total current liabilities?
a
3,450,000
b
3,400,000
c
3,950,000
d
3,700,000
Solutions:
Question 1
Cash in bank
Accounts receivable
Allowance for doubtful accounts
Allowance to employee – IOU
Advances to officers currently due
Advances to suppliers
Inventory
Prepaid expenses
Total current assets
1,650,000
1,700,000
(100,000)
50,000
300,000
200,000
2,400,000
100,000
6,300,000
Accounts receivable
Customer check marked NSF
Adjusted balance
1,600,000
100,000
1,700,000
The customer check marked NSF should be reverted to accounts receivable.
The cash deposit with court is classified as noncurrent.
Inventory
Cost undelivered inventory (600,000/120)
Adjusted balance
1,900,000
500,000
2,400,000
The selling price of undelivered inventory is excluded from accounts receivable, but the cost should be
included in inventory.
Question 2
Accounts payable
Interest payable
Income tax payable
Mortgage payable - current portion (2,000,000/4)
Total current liabilities
2,500,000
150,000
300,000
500,000
3,450,000
The money claim of the union pending the final decision should be disclosed as contingent liability.
Chapter 3 - Notes To Financial Statements
Events after reporting period
Graceanne D. Cueto
Problem 3-1 (AICPA Adapted)
Dean Company acquired 100% of Morey Company in the prior year. During the current year, the
individual entities included in their financial statements the following:
Key officers' salaries
Officers' expenses
Loans to officers
Intercompany sales
Dean
750,000
200,000
1,250,000
1,500,00
Morey
500,000
100,000
500,000
What total amount should be reported as related party disclosures in the notes to Dean
Company's consolidated financial statements for the current year?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000
Solution 3-1 Answer d
Loans to officers:
Dean
Morey
1,250,000
500,000
Key officers' salaries:
Dean
Morey
Total
750,000
500,000
3,000,000
Intercompany sales are no longer disclosed when consolidated financial statements are prepared.
Problem 3.2(AICPA Adapted)
During the current year, Jane Company engaged in the following transactions:
Key management personnel compensation
Sales to affiliated entities
2,000,000
3,000,000
What total amount should be included as related party disclosures in Jane Company's separate
financial statements for the current year?
a. 5,000,000
b. 3,000,000
C. 2,000,000
d.
0
Solution 3-2 Answer a
5,000,000
PAS 24, paragraph 16, requires disclosure of key management personnel compensation.
The sales to affiliated entities shall be disclosed in Jane Company's separate financial statements
but eliminated in consolidated financial statements.
Problem 3-3 (IFRS)
Gibson Company reported that remuneration and other payments made to entity's chief executive
officer during the current year were:
Annual salary
Share options and other share-based payments
Contributions to retirement benefit plan
Reimbursement of travel expenses for business trips
2,000,000
1,000,000
500,000
1,200,000
What total amount should be disclosed as "compensation" to key management personnel?
a. 3,500,000
b. 4,700,000
c. 3,000,000
d. 2,500,000
Solution 3-3 Answer a
All, except reimbursement of travel expenses.
Problem 3-4 (IFRS)
The audit of Anne Company for the year ended December 31, 2019 was completed on March 1,
2020.
The financial statements were signed by the managing director on March 15, 2020 and approved
by the shareholders on March 31, 2020.
*
On January 1 5, 2020, a customer owing P900, 000 to Anne Company filed for
bankruptcy.
The financial statements included an allowance for doubtful accounts pertaining to this
customer of P100, 000.
*
Anne Company's issued share capital comprised 100,000 ordinary shares with P100 par
value.
The entity issued additional 25,000 shares on March 1, 2020 at par value.
* Equipment with carrying amount of P525, 000 was destroyed by fire on December 15, 2019.
Anne Company had booked a receivable ofP400, 000 from the insurance entity on December
31, 2019.
After the insurance entity completed an investigation on February 1, 2020, it was discovered that
the fire took place due to negligence of the machine operator. As a result, the insurer's liability
was zero on this claim.
What total amount should be reported as "adjusting events" on December 31, 2019?
a. 1,300,000
b. 1,200,000
c. 3,800,000
d. 3,700,000
Solution 3-4 Answer b
Doubtful accounts (900,000 minus allowance 100,000)
Loss on claim receivable
Total adjusting events
800,000
400,000
1,200,000
Problem 3-5 (IFRS)
The end of reporting period of Norway Company is December 31, 2019 and the financial
statements for 2019 are authorized for issue on March 15, 2020.
*
On December 31, 2019, Norway Company had a receivable of P 400,000 from a
customer that is due 60 days after the end of reporting period. On January 15, 2020, a receiver
was appointed for the said customer. The receiver informed Norway that the P 400,000 would
be paid in full by June 30, 2020.
* Norway Company had equity investments held for trading. On December 31, 2019, these
investments were recorded at the fair value of P 5,000,000. During the period up to February
15, 2020, there was a steady decline in the fair value of all the shares in the portfolio, and on
February 15, 2020, the fair value had fallen to P 2,000,000.
* Norway Company had reported a contingent liability On December 31, 2019 related to a
court case in which Norway Company was the defendant. The case was not heard until the
first week of February 2020. On February 15, 2020, the judge handed down a decision against
Norway Company. The judge determined that Norway Company was liable to pay damages
totaling P 3,000,000.
* On December 31, 2019, Norway Company had a receivable from a large customer in the
amount of P 3,500,000. On January 31, 2020, Norway Company was advised in writing by the
liquidator of the said customer that the customer was insolvent and only 10% of the receivable
will be paid on April 30, 2020.
What total amount should be reported as "adjusting events" on December 31, 2019?
a. 6,150,000
b. 9,150,000
c. 9,550,000
d. 6,500,000
Solution 3-5 Answer a
Litigation loss
Doubtful accounts expense (3,500,000 x 90%)
Total amount of adjusting events
3,000,000
3,150,000
6,150,000
The financial assets held for trading are measured at fair value which must be determined at the
end of each reporting period.
Problem 3-6 (IFRS)
Ginger Company is completing preparation of the financial statements for the year ended
December 31, 2019. The financial statements are authorized for issue on March 31, 2020.
* On March 15, 2020, a dividend was declared and a contractual profit share payment of P
1,000,000 was made, based on the profit for the year ended December 31, 2019.
* February 1, 2020, a customer went into liquidation having owed the entity P 500,000 for
the past 5 months.
No allowance had been made against this account in the financial statements.
* On March 20, 2020, a manufacturing plant was destroyed by fire resulting in a financial
loss of P 2,500,000.
What total amount should be recognized in profit or loss for 2019 to reflect adjusting events after
the end of reporting period?
a. 4,000,000
b. 3,000,000
c. 2,500,000
d. 1,500,000
Solution 3-6 Answer d
Contractual profit share payment
Doubtful accounts expense
Total adjusting events
1,000,000
500,000
1,500,000
The dividend declaration is not recognized in profit or loss but a deduction from retained
earnings on March 15, 2020.
The manufacturing plant destroyed by fire on March 20, 2020 is a non-adjusting event requiring
disclosure only in the financial statements for 2019.
The fire loss should be recognized in 2020.
Events after reporting period
Ejay Kaye Delos Reyes
Problem 3-7 (IFRS)
During 2019, Marian company was sued by a competitor for P5,000,000 for infringement of a
patent.
Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a provision
on December 31, 2019.
Subsequently, on March 15, 2020, the Supreme Court decided in favor of the party alleging
infringement of the patent and ordered the defendant to pay the aggrieved party a sum of
P3,500,000.
The financial statements were prepared by management on February 15, 2020 and approved by
the board of directors on March 31, 2020.
1. What amount should be recognized as accrued liability on December 31, 2019?
a. 5,000,000
b. 3,500,000
c. 3,000,000
d. 1,500,000
2. What amount should be adjusted on December 31, 2019 in relation to this event?
a. 1,000,000
b. 3,000,000
c. 500,000
d.
0
Solution 3-7:
Question 1:
Accrued liability – December 31, 2019
3,500,000
The actual amount of P3,500,000 should be accrued as liability because the suit was decided on
March 15.2020 which is prior to the issuance of the financial statements on March 31, 2020.
Question 2:
Accrued liability – December 31, 2019
Provision already accrued
Increase in accrued liability
3,500,000
3,000,000
500,000
Problem 3-8 (IFRS)
Caroline Company provided the following events that occurred after December 31, 2019:
Jan. 15, 2020
Feb. 15, 2020
Mar. 10, 2020
Mar. 15, 2020
P3,000,000 of accounts receivable was written off due to the bankruptcy of a
major due to the bankruptcy of a major customer.
A shipping vessel of the entity with carrying amount of P5,000,000 was
completely lost at sea because of a hurricane.
A court case involving the entity as the defendant was settled and the entity
was obligated to pay the plaintiff P1,500,000. The entity previously has not
recognized a liability for the suit because management deemed it possible that
the entity would lose the case.
A factory with a carrying of P4,000,000 was completely razed by forest fire
that erupted in the vicinity.
The management completed the draft of the financial statements for 2019 on February 10, 2020.
On March 31, 2020, the board of directors authorized the financial statements for issue.
The entity announced the profit and other selected information on March 22, 2020.
The financial statements were approved by shareholders on April 2, 2020 and filed with the
regulatory agency the very next day.
What total amount should be reported as adjusting events on December 31, 2019?
a. 9,500,000
b. 8,500,000
c. 9,000,000
d. 4,500,000
Solution 3-8:
Accounts written off
Loss from lawsuit
Total adjusting events
3,000,000
1,500,000
4,500,000
The loss on the shipping vessel and the fire loss should be recognized in 2020 and not in 2019.
PFA 1
Chapter 4 – Statement of Comprehensive
Income
Ma. Nicole H. Buisan
Problem 4-1 (AICPA Adapted)
Brock Company reported operating expenses in two categories, namely distribution and general
and administrative.
The adjusted trial balance at year-end included the following expense and loss accounts for
current year:
Accounting and legal fees
Advertising
Freight out
Interest
Loss on sale of long-term investment
Officers’ salaries
Rent for office space
Sales salaries and commissions
1,200,000
1,500,000
800,000
700,000
300,000
2,250,000
2,200,000
1,400,000
One-half of the rented premises is occupied by the sales department.
What amount should be reported as total distribution costs?
a.
b.
c.
d.
4,800,000
4,000,000
3,700,000
3,600,000
Solution:
Advertising
Freight out
Rent
Sales salaries and commissions
Total distribution costs
(2,200,000 x ½)
1,500,000
800,000
1,100,000
1,400,000
4,800,000
Problem 4-2 (AICPA Adapted)
Lee Company reported the following data for the current year:
Legal and audit fees
Rent for office space
Interest on inventory loan
Loss on abandoned data processing equipment
Freight in
Freight out
Officers’ salaries
Insurance
Sales representative salaries
Research and development expense
1,700,000
2,400,000
2,100,000
350,000
1,750,000
1,600,000
1,500,000
850,000
2,150,000
1,000,000
The office space is used equally by the sales and accounting departments.
What amount should be classified as general and administrative expenses?
a.
b.
c.
d.
5,250,000
6,450,000
5,600,000
6,250,000
Solution:
Legal and audit fees
Rent for office space
Officers’ salaries
Insurance
Total general and administrative expenses
(2,400,000 x ½)
1,700,000
1,200,000
1,500,000
850,000
5,250,000
Problem 4-3 (AICPA Adapted)
Vigor Company provided the following information for the current year:
Net accounts receivable at
Net accounts receivable at
Account receivable turnover
Inventory at
Inventory at
Inventory turnover
January 1
December 31
January 1
December 31
900,000
1,000,000
5 to 1
1,100,000
1,200,000
4 to 1
What is the gross income for the current year?
a.
b.
c.
d.
150,000
200,000
300,000
400,000
Solution:
Net sales
= Average accounts receivable x accounts receivable turnover
= 950,000 x 5
= 4,750,000
Cost of goods sold
= Average inventory x inventory turnover
= 1,150,000 x 4
= 4,600,000
Gross income
= 4,750,000 – 4,600,000
= 150,000
Problem 4-4 (PHILCPA Adapted)
Hiligaynon Company provided the following information for the current year:
Beginning inventory
Freight in
Purchase returns
Ending inventory
Selling expenses
Sales discount
400,000
300,000
900,000
500,000
1,250,000
250,000
The cost of goods sold is six times the selling expense.
What is the amount of gross purchases?
a.
b.
c.
d.
6,500,000
6,700,000
8,000,000
8,200,000
Solution:
Beginning Inventory
Gross purchases
Freight in
Purchase returns
(SQUEEZE)
Goods available for sale
Ending inventory
Cost of goods sold
400,000
8,200,000
300,000
(900,000)
8,000,000
(500,000,)
(1,250,000 x 6)
7,500,000
Problem 4-5 (PHILCPA Adapted)
Bicolano Company provided the following data for the current year:
Inventory
Purchases
Purchase returns and allowances
Sales returns and allowances
Inventory on
Gross profit rate
January 1
December 31
2,000,000
7,500,000
500,000
750,000
2,800,000
20%
1. What is the cost of goods sold?
a.
b.
c.
d.
6,700,000
6,200,000
7,200,000
9,000,000
2. What is the amount of gross sales for the current year?
a.
b.
c.
d.
7,750,000
8,500,000
7,000,000
9,125,000
Solutions:
Question 1
Inventory
Purchases
Purchase returns and allowances
Goods available for sale
January 1
Inventory
December 31
Cost of goods sold
2,000,000
7,500,000
(500,000)
9,000,000
(2,800,000)
6,200,000
Question 2
Net Sales
Sales returns and allowances
Gross sales
Cost ratio
(6,200,000 / 80%)
(100% minus 20%)
7,750,000
750,000
8,500,000
80%
In the absence of any statement to the contrary, the gross profit rate is based on sales.
Kyna Raissa S. Cayabyab
Problem 4-6 (AICPA Adapted)
Kay Company provided the following information for the current year:
Increase in raw materials inventory
Decrease in goods in process inventory
Decrease in finished goods inventory
Raw materials purchased
Direct labor payroll
Factory overhead
Freight out
Freight in
150,000
200,000
350,000
4,300,000
2,000,000
3,000,000
450,000
250,000
What is the cost of goods sold for the current year?
a.
b.
c.
d.
9,950,000
9,550,000
9,250,000
9,150,000
Solution 4-6 Answer a
Raw materials purchased
Freight in
Increase in raw materials
4,300,000
250,000
(150,000)
Raw materials used
Direct labor
Factory overhead
4,400,000
2,000,000
3,000,000
Total Manufacturing Cost
Decrease in goods in process
9,400,000
200,000
Cost of Goods Manufactured
Decrease in finished goods
9,600,000
350,000
Cost of goods sold
9,950,000
Any increase in inventory decreases cost of goods sold and any decrease in inventory increases
cost of goods sold.
Problem 4-7 (PHILCPA Adapted)
Argentina Company incurred the following costs and expenses during the current year:
Raw material purchases
Direct labor
Indirect labor — factory
Factory repairs and maintenance
Taxes on factory building
Depreciation — factory building
Taxes on salesroom and general office
Depreciation — sales equipment
Advertising
Sales salaries
Office salaries
Utilities — 60% applicable to factory
Raw materials
Work in process
Finished goods
4,000,000
1,500,000
800,000
200,000
100,000
300,000
150,000
50,000
400,000
500,000
700,000
500,000
Beginning
300,000
400,000
500,000
1.
What is the cost of raw materials used?
a.
b.
c.
d.
3,850,000
4,000,000
4,150,000
4,750,000
2.
What is the cost of goods manufactured for the current year?
a.
b.
c.
d.
7,450,000
7,200,000
7,100,000
7,300,000
3.
What is the cost of goods sold for the current year?
a.
b.
c.
d.
7,300,000
6,900,000
7,600,000
8,300,000
Ending
450,000
350,000
700,000
Solution 4-7
Question 1 Answer a
Beginning raw materials
Raw material purchases
Raw materials available for use
Ending raw materials
300,000
4,000,000
4,300,000
(450,000)
Raw materials used
3,850,000
Question 2 Answer c
Raw materials used
Direct labor
Factory overhead:
Indirect labor
Factory repairs and maintenance
Taxes on factory building
Depreciation — factory building
Utilities (60% x 500,000)
Total manufacturing cost
Beginning work in process
Ending work in process
Cost of goods manufactured
3,850,000
1,500,000
800,000
200,000
100,000
300,000
300,000 1,700,000
7,050,000
400,000
(350,000)
7,100,000
Question 3 Answer b
Beginning finished goods
Cost of goods manufactured
Goods available for sale
Ending finished goods
500,000
7,100,000
7,600,000
(700,000)
Cost of goods sold
6,900,000
Problem 4-8 (PHILCPA Adapted)
Mercury Company showed cost of goods sold of P4,320,000 in the statement of comprehensive
income after the first year of operations.
The total manufacturing cost comprised the following:
Materials used
Direct labor incurred
Manufacturing overhead
50%
30%
30%
Goods in process at year-end amounted to 10% of the total manufacturing cost.
Finished goods at year-end amounted to 20% of the cost of goods manufactured.
What is the amount of the direct labor cost incurred?
a.
b.
c.
d.
1,800,000
2,400,000
3,000,000
5,400,000
Solution 4-8 Answer a
Total manufacturing cost
Goods in process — end
100%
10%
6,000,000
(600,000)
Cost of goods manufactured
Finished goods — end (20% x 90%)
90%
18%
5,400,000
(1,080,000)
Cost of goods sold
72%
4,320,000
Total manufacturing cost (4,320,000 / 72%)
6,000,000
Direct labor cost (30% x 6,000,000)
1,800,000
Problem 4-9 (IAA)
Tanzania Company reported operating expenses other than interest expense for the year at 40%
of cost of goods sold but only 20% of sales. Interest expense is 5% of sales.
The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as
the beginning inventory.
The net income for the year is P2,100,000. The income tax rate is 30%.
1.
What is the amount of sales for the year?
a.
b.
c.
d.
10,000,000
15,000,000
18,000,000
12,000,000
2.
What is the amount of purchases?
a.
b.
c.
d.
6,000,000
7,200,000
3,000,000
3,600,000
Solution 4-9
Question 1 Answer d
Income before income tax (2,100,000 / 70%)
Sales (3,000,000 / 25%)
Sales
Cost of goods sold
Operating expenses
Interest expense
Income before income tax
Percentage of cost of goods sold (20% divided by 40%)
3,000,000
12,000,000
(
(
(
100%
50%)
20%)
5%)
25%
50%
Question 2 Answer b
Cost of Goods Sold (50% of 12,000,000)
Multiply by
6,000,000
120%
Purchases
7,200,000
Problem 4-10 (PHILCPA Adapted)
Ronalyn Company reported that the financial records were destroyed by fire at the end of the
current year.
However, certain statistical data related to the income statement are available.
Interest expense
Cost of goods sold
Sales discount
The beginning inventory was P500,000 and decreased 20% during the year.
Administrative expenses are 25% of cost of goods sold but only 10% of gross sales.
Distribution costs represent 70% of the operating expenses.
1.
What is the amount of gross sales?
a.
b.
c.
d.
7,500,000
8,000,000
4,500,000
5,000,000
2.
What is the total amount of operating expenses?
a.
b.
c.
d.
1,750,000
2,500,000
3,000,000
2,700,000
3.
What is the income before tax for the current year?
a.
b.
c.
d.
1,500,000
1,000,000
1,800,000
1,750,000
200,000
3,000,000
300,000
Solution 4-10
Question 1 Answer a
Cost of goods sold ( 10% / 25%)
40%
Cost of goods sold
Divide by cost ratio
3,000,000
40%
Gross sales
7,500,000
Question 2 Answer b
Administrative expenses (10% x 7,500,000)
750,000
Operating expenses ( 750,000 / 30%)
Administrative expenses
2,500,000
(750,000)
Distribution costs
1,750,000
Question 3 Answer a
Sales
Sales discount
Net sales
Cost of goods sold
Gross income
Administrative expenses
Distribution costs
Interest expense
Income before income tax
7,500,000
(300,000)
7,200,000
(3,000,000)
4,200,000
(750,000)
(1,750,000)
(200,000)
1,500,000
PFA 1
CHAPTER 5 – STATEMENT OF
COMPREHENSIVE INCOME
Mel E. Cruz
Problem 5-1 (AICPA Adapted)
Thorpe Company reported net income of P7,500,000 for the net current year which included the
following amounts:
Unrealized loss on foreign currency translation
Gain on early retirement of bonds payable
Adjustment of profit of prior year for error in depreciation, net of tax effect
Loss from fire
(500,000)
2,200,000
(750,000)
(1,400,000)
What amount should be reported as adjusted net income?
a.
b.
c.
d.
6,250,000
9,500,000
8,000,000
8,750,000
Solution:
Net income per book
Add: Unrealized loss as component of other
comprehensive income
Adjustment of profit of prior year
Adjusted net income
7,500,000
500,000
750,000
1,250,000
8,750,000
The gain on early retirement of bonds payable and the loss from fire are properly included in
the computation of net income.
Problem 5-2 (AICPA Adapted)
Pearl company reported income before tax of P5,000,000 for the current year which included the
following amounts:
Equity in earnings of Cinn Company – 40% interest
Dividend received from Cinn Company
Adjustment of profit of prior year for arithmetical error in depreciation
Gain on sale of equity investment at FVOCI
1,600,000
400,000
(500,000)
1,000,000
What amount should be reported as income before tax?
a. 4,100,000
b. 4,600,000
c. 5,500,000
d. 5,100,000
Solution:
Reported income before tax
Add: Adjustment of profit of prior year
Total
Less: Dividend received from Cinn
Gain on sale of equity investment
Corrected income before tax
5,000,000
500,000
5,500,000
400,000
1,000,000
1,400,000
4,100,000
The prior period error is added back to income because it is shown as a deduction in the
statement of retained earnings.
The dividend received from Cinn is incorrectly included in income because it is treated as a
return of investment since the interest is 40% and therefore the equity method is used.
The equity in earnings of Cinn Company is properly part of income because the entity is
applying the equity method.
The gain on sale of equity investment is not included in profit or loss but recognized directly in
retained earnings.
Problem 5-3 (IAA)
Remy Company had the following events and transactions during 2019:
●
●
●
●
●
Depreciation for 2018 was discovered to be understated by P300,000.
A litigation settlement resulted in a loss of P250,000.
The inventory on December 31, 2017 was overstated by P200,000.
The entity disposed of a recreational division at a loss of P600,000
The income tax rate is 30%
1. What is the effect of these events on the income from continuing operations for 2019?
a.
b.
c.
d.
175,000
385,000
665,000
750,000
2. What is the effect of these events on net income for 2019?
a.
b.
c.
d.
245,000
595,000
420,000
850,000
Solutions:
Question 1
After-tax effect of litigation loss (250,000 x 70%)
175,000
The depreciation error is treated retrospectively as a correction of retained earnings.
The inventory error is counterbalancing.
The loss on disposition of the recreational division is part of discontinued operations.
Question 2
After-tax effect of litigation loss
After-tax effect of litigation loss on discontinued division (600,000 x 70%)
Total effect on net income
175,000
420,000
595,000
Problem 5-4 (IFRS)
Divina Company provided the following information for the current year:
Income from continuing operations
Income from discontinued operations
Unrealized gain on financial asset – FVPL
Unrealized loss on equity investment – FVOCI
Unrealized gain on debt investment – FVOCI
Unrealized gain on futures contract designated as a cash flow hedge
Transaction loss on foreign operations
Net “remeasurement” gain on defined benefit plan
Loss on credit risk of a financial liability at FVPL
Revaluation surplus during the year
4,000,000
500,000
800,000
1,000,000
1,200,000
400,000
200,000
600,000
300,000
2,500,000
1. What amount should be reported as net income for the current year?
a. 4,000,000
b. 4,500,000
c. 5,300,000
d. 4,800,000
2. What net amount should be reported as OCI for the current year?
a.
b.
c.
d.
4,000,000
3,500,000
3,200,000
700,000
3. What amount should be reported as comprehensive income for the current year?
a.
b.
c.
d.
5,200,000
7,700,000
8,500,000
7,200,000
Solutions:
Question 1
Income from continuing operations
Income from discontinued operation
Net income
4,000,000
500,000
4,500,000
The unrealized gain on financial asset at FVPL is already included in income from continuing
operations.
Question 2
Unrealized loss on equity investment at FVOCI
Unrealized gain on debt investment at FVPL
Unrealized gain on futures contract designated as a cash flow hedge
Transaction loss on foreign operations
Net “remeasurement” gain on defined benefit plan
Loss on credit risk of a financial liability at FVPL
Revaluation surplus during the year
Net amount of OCI – gain
(1,000,000)
1,200,000
400,000
(200,000)
600,000
(300,000)
2,500,000
3,200,000
Question 3
Net income
Other comprehensive income
Comprehensive income
4,500,000
3,200,000
7,700,000
Problem 5-5 (IAA)
Bangladesh Company provided the following information for the current year:
Sales
Cost of goods sold
Distribution costs
General and administrative expenses
Interest expense
Gain on early extinguishment of long-term debt
Correction of inventory error, net of income tax – credit
Investment income – equity method
Gain on expropriation
Income tax expense
Dividends declared
50,000,000
30,000,000
5,000,000
4,000,000
2,000,000
500,000
1,000,000
3,000,000
2,000,000
5,000,000
2,500,000
What is the income from continuing operations?
a.
b.
c.
d.
9,000,000
8,000,000
9,500,000
7,000,000
Solution 5-5 Answer c
Sales
Cost of goods sold
Gross income
Gain on expropriation
Investment income
Total income
Expenses:
Distribution costs
General and administrative
Finance Cost
Income before tax
Income tax expense
Net income
Interest expense
Gain on early extinguishment
Finance cost
50,000,000
(30,000,000)
20,000,000
2,000,000
3,000,000
25,000,000
5,000,000
4,000,000
1,500,000
10,500,000
14,500,000
(5,000,000)
9,500,000
2,000,000
(500,000)
1,500,000
Monica M. Garcia
Problem 5-6 (IAA)
Rosebud Company provided the following information for the current year:
Sales
Cost of goods sold
Foreign translation adjustment – credit
Selling expenses
Unusual and infrequent gain
Correction of inventory error
General and administrative expenses
Income tax expense
Gain on sale of investment
Proceeds from sale of land at cost
Dividends
5,000,000
2,800,000
400,000
700,000
400,000
200,000
600,000
150,000
50,000
800,000
300,000
What amount should be reported as income from continuing operations?
a.
b.
c.
d.
1,200,000
1,350,000
1,600,000
2,000,000
Solution:
Sales
5,000,000
Costs of goods sold
(2,800,000)
Gross income
2,200,000
Other income
450,000
Total income
2,650,000
Expenses:
Selling expenses
700,000
General and administrative expenses
600,000
(1,300,000)
Income before income tax
1,350,000
Income tax expense
( 150,000)
Income from continuing operations
1,200,000
Unusual and infrequent gain
Gain on sale of investment
Other income
400,000
50,000
450,000
The credit balance in the foreign translation adjustment account is a component of other
comprehensive income
Problem 5-7 (AICPA Adapted)
Vane Company provided the following information for the current year:
Debit
Sales
Cost of goods sold
Credit
5,750,000
2,400,000
Administrative expenses
700,000
Sales commissions
500,000
Interest revenue
250,000
Freight out
150,000
Uncollectible accounts expense
150,000
Loss on sale of equipment
100,000
Loss on early retirement of long-term debt
200,000
4,200,000
Finished goods inventory:
January 1
December 31
Income tax rate
6,000,000
4,000,000
3,600,000
30%
1. What amount should be reported as cost of goods manufactured?
a.
b.
c.
d.
2,000,000
2,150,000
2,800,000
2,950,000
2. What amount should be reported as income from continuing operations?
a.
b.
c.
d.
1,260,000
1,295,000
1,400,000
1,470,000
Solutions:
Finished Goods Inventory - January 1
4,000,000
Cost of goods manufactured (SQUEEZE)
2,000,000
Goods available for sale
6,000,000
Finished goods inventory - December 31
(3,600,000)
Cost of goods sold
2,400,000
Question 1
The cost of goods manufactured is “squeezed” by working back from the cost of goods sold.
Question 2
Sales
5,750,000
Cost of goods sold
(2,400,000)
Gross Income
3,350,000
Interest revenue
250,000
Total Income
3,600,000
Expenses:
Administrative expenses
700,000
Sales commissions
500,000
Freight out
150,000
Uncollectible accounts expense
150,000
Loss on sale of equipment
100,000
Loss on early retirement
200,000
(1,800,000)
Income before income tax
1,800,000
Income tax expense (30% ×
1,800,000)
(540,000)
Net Income
1,260,000
Problem 5-8 (IFRS)
Dahlia Company provided the following information for the current year:
Sales
9,500,000
Interest revenue
250,000
Gain sale of equipment
100,000
Revaluation surplus during the year
Share of profit of associate
Cost of goods sold
1,200,000
350,000
6,000,000
Finance cost
150,000
Distribution costs
500,000
Administrative expenses
300,000
Translation loss on foreign operation
200,000
Income tax expense
950,000
What is the net income for the current year?
a.
b.
c.
d.
2,300,000
3,300,000
4,200,000
2,100,000
Solution:
Sales
9,500,000
Cost of goods sold
6,000,000
Gross Income
3,500,000
Other Income (250,000 + 100,000)
350,000
Share of profit of associate
350,000
Total Income
4,200,000
Expenses:
Distribution costs
500,000
Administrative expenses
300,000
Finance cost
150,000
950,000
Income before income tax
3,250,000
Income tax expense
(950,000)
Net Income
2,300,000
Revaluation surplus during the year
1,200,000
Translation loss on foreign operation
(200,000)
Other comprehensive income
1,000,000
Comprehensive income (2,300,000 +
1,000,000)
3,300,000
Problem 5-9 (IFRS)
Rose Company, an investment entity, provided the following income and expenses for the
current year:
Dividend income from investments
9,200,000
Distribution income from trusts
500,000
Interest income on deposits
700,000
Income from bank treasury bills
100,000
Unrealized gain on derivative contract as cash flow hedge
400,000
Income from dealing in securities and derivatives held for trading
600,000
Writedown of securities and derivatives held for trading
150,000
Other income
250,000
Finance cost
300,000
Administrative staff costs
3,800,000
Sundry administrative costs
1,200,000
Income tax expense
1,700,000
1. What is the total income before tax?
a.
b.
c.
d.
11,200,000
11,350,000
10,700,000
10,750,000
2. What is the total amount of expenses before tax?
a.
b.
c.
d.
5,450,000
5,300,000
5,000,000
5,150,000
3. What is the net income for the current year?
a.
b.
c.
d.
5,900,000
3,700,000
4,200,000
5,500,000
4. What is the comprehensive income for the current year?
a.
b.
c.
d.
4,200,000
4,600,000
3,800,000
9,200,000
Solutions:
Question 1:
Dividend income from investments
9,200,000
Distribution income from trusts
500,000
Interest income on deposits
700,000
Income from bank treasury bills
100,000
Income from dealing in securities and derivatives held for trading - net
amount
450,000
Other income
250,000
Total income
11,200,000
Income from dealing in securities and derivatives held for trading
600,000
Writedown of securities and derivatives held for trading
(
150,000)
Net amount
450,000
Question 2
Administrative staff costs
3,800,000
Sundry administrative costs
1,200,000
Finance cost
Total expenses
300,000
5,300,000
Question 3
Total income
11,200,000
Total expenses
(5,300,000)
Income before income tax
Income tax expense
Net income
5,900,000
(1,700,000)
4,200,000
Question 4
Net income
4,200,000
Other comprehensive income:
Unrealized gain on derivative
contract
Comprehensive income
400,000
4,600,000
Problem 5-10 (IAA)
Empress Company provided the following data for the current year:
Retained earnings, January 1
3,000,000
Dividends declared
1,000,000
Sales
8,400,000
Dividend income
100,000
Inventory, January 1
1,000,000
Purchases
3,700,000
Salaries
1,540,000
Contribution to employees' pension fund
300,000
Delivery
200,000
Miscellaneous expense
120,000
Doubtful accounts expense
10,000
Depreciation expense
80,000
Loss on sale of investment
100,000
Income from discontinued operation, net of tax
500,000
Income tax expense
150,000
Inventory on December 31 at cost
850,000
Net realizable value of inventory
700,000
1. What is the cost of goods sold?
a.
b.
c.
d.
3,850,000
4,000,000
4,150,000
4,700,000
2. What is the total amount of expenses before income tax?
a.
b.
2,350,000
2,500,000
c.
d.
2,250,000
2,050,000
3. What is the net income for the current year?
a.
b.
c.
d.
2,000,000
2,500,000
1,500,000
2,650,000
4. What is the balance of retained earnings on December 31?
a.
b.
c.
d.
4,000,000
4,500,000
3,500,000
4,650,000
Solutions:
Question 1:
Inventory, January 1
1,000,000
Purchases
3,700,000
Goods available for sale
4,700,000
Inventory on December 31 at NRV
(700,000)
Cost of goods sold after inventory writedown
4,000,000
Question 2:
Salaries
1,540,000
Contribution
300,000
Delivery
200,000
Miscellaneous expense
120,00
0
Doubtful accounts
10,000
Depreciation
Loss on sale of investment
Total expenses before tax
80,000
100,000
2,350,000
Question 3
Sales
Cost of goods sold
Gross income
Dividend income
Total income
Total expenses
8,400,000
(4,000,000)
4,400,000
100,000
4,500,000
(2,350,000)
Income before income tax
2,150,000
Income tax expense
(150,000)
Income from continuing operations
2,000,000
Income from discontinued operation
Net income
500,000
2,500,000
Question 4
Retained earnings - January 1
3,000,000
Net income
2,500,000
Total
5,500,000
Dividends declared
(1,000,000)
Retained earnings - December 31
4,500,000
Chapter 6 – Noncurrent Asset Held for Sale
Ejay Kaye Delos Reyes
Problem 6-1 (IFRS)
Dana Company accounted for noncurrent assets using the cost model. On October 1, 2019, the
entity classified a noncurrent asset as held for sale.
At that date, the carrying amount was P3,200,000, the fair value was estimated at P2,000,000 and
the cost of disposal at P200,000.
On December 31, 2019, the asset was sold for net proceeds of P1,850,000.
What amount should be recognized as impairment loss for 2019?
a. 1,000,000
b. 1,200,000
c. 1,350,000
d.
0
Solution: 6-1
Carrying amount
Fair value less cost of disposal (2,200,000 – 200,000)
Impairment loss
3,200,000
2,000,000
1,200,000
PFRS 5, paragraph 15, provides that an entity shall measure a noncurrent asset or disposal group
classified as held for sale at the lower of carrying amount and fair value less cost of disposal.
Sale price
Carrying amount - December 31, 2019
Loss on disposal
1,850,000
2,000,000
(150,000)
Problem 6-2 (IFRS)
Arlene Company accounted for noncurrent assets using cost model. On October 30, 2019, the
entity classified a noncurrent asset as held for sale.
At that date, the carrying amount was P1,500,000, the fair value was estimated at P1,100,000 and
the cost at P150,000.
On December 31, 2019, the asset was sold for net proceeds of P800,000.
1.
What amount
a. 550,000
b. 400,000
c. 700,000
d.
0
2.
What amount
a. 550,000
b. 700,000
c. 150,000
d.
0
should
should
be
be
reported
as
impairment
recognized
as
loss
on
loss
disposal
for
for
Solution: 6-2
Question 1:
Carrying amount
Fair value less cost of disposal (1,100,000 - 150,000)
Impairment loss
1,500,000
950,000
550,000
Question 2:
Sale price
Carrying amount on December 31, 2019, date of sale
Loss on disposal
800,000
950,000
(150,000)
2019?
2019?
Problem 6-3 (IFRS)
On January 1, 2019, Racelle Company purchased land at a cost of P6,000,000. The entity used
the revaluation model for this asset.
The fair value of the land was P7,000,000 on December 31, 2019 and P8,500,000 on December
31,2020.
On July I, 2021, the entity decided to sell the land and therefore classified the asset as held for
sale.
The fair value of the land on this date is P7,600,000. The estimated cost of disposal is very
minimal.
On December 31, 2021, the land was sold for P8,000,000.
1. What amount in OCI should be recognized in the statement of comprehensive income for the
year ended December 31, 2020?
a. 2,500,000
b. 1,500,000
c. 400,000
d. 900,000
2. What amount should be recognized as gain or loss on sale of land in 2021?
a. 2,000,000 gain
b. 1,000,000 gain
c. 400,000 gain
d. 500,000 loss
3. What amount of OCI is recycled to retained earnings in 2021?
a. 1,000,000
b. 1,600,000
c. 2,500,000
d. 2,000,000
Solution: 6-3
Question 1:
Fair value - December 31, 2020
Fair value - December 31, 2019
Revaluation surplus in 2020 - OCI
8,500,000
7,000,000
1,500,000
Question 2:
Sale price
Carrying amount equal to fair value on July 1, 2021
Gain on sale of land
8,000,000
7,600,000
400,000
Question 3:
2019
Jan. 1
Land
6,000,000
Cash
Dec. 31 Land
6,000,000
1,000,000
Revaluation surplus
2020
Dec. 31 Land
1,000,000
1,500,000
Revaluation surplus
2021
July 1 Revaluation surplus
Land (8,500,000 – 7,600,000)
1
Land held for sale
Land
Dec. 31 Cash
1,500,000
900,000
900,000
7,600,000
7,600,000
8,000,000
Land held for sale
Gain on sale of land
31 Revaluation surplus
Retained Earnings
(2,500,000 – 900,000)
7,600,000
400,000
1,600,000
1,600,000
Kate Ann Eje
Problem 6-4 (IFRS)
Surreal Company accounted for noncurrent assets using the revaluation model. On October 1,
2019, the entity classified a land as held for sale.
At that date. the carrying amount of the land was P5,000,000 and the balance in the revaluation
surplus was P1,500,000.
At same date, the fair value of the land was estimated at P5,500,000 and the cost of disposal at
P100,000.
On December 31 ,2019, the fair value less cost of disposal of the land did not change. The land
was sold on January 31, 2020 for P6,000,000.
l. What amount should be recognized as impairment loss in 2019?
a.
b.
c.
d.
100,000
500,000
400,000
0
2. What is the adjusted carrying amount of the land on December 31, 2019?
a.
b.
c.
d.
5,000,000
5,500,000
5,400,000
3,500,000
3. What amount should be reported as gain on disposal of land in 2020?
a.
b.
c.
d.
1,000,000
2,600,000
500,000
600,000
4. What amount of OCI is reclassified to retained earnings in 2020?
a.
b.
c.
1,500,000
2,600,000
500,000
d.
0
Solution:
Question 1
Carrying amount equal to fair value
Fair value loss cost of disposal (5,500,000-100,000)
Impairment loss for 2019
P 5,500,000
5,400,000
P 100,000
Question 2
Adjusted carrying amount on December 31, 2019
5,400,000
Question 3
Sale price
Carrying Amount
Gain on sale
P 5,500,000
5,400,000
P 100,000
Question 4
Revaluation surplus — October 1, 2019
Increase in fair value (5,500,000—5,000,000)
Revaluation surplus reclassified to retained earnings
2019
Oct 1 Land
Revaluation surplus
1 Land held for sale
Land
1 Impairment Loss
Land held for sale
2020
Jan 31 Cash
Revaluation surplus
Gain on sale of land
P 1,500,000
500,000
P 2,000,000
500,000
500,000
5,500,000
5,500,000
100,000
100,000
6,000,000
5,400,000
600,000
31 Revaluation surplus
Retained Earnings
2,000,000
2,000,000
Problem 6-5 (IFRS)
Affable Company purchased an equipment for P5,000,000 on January 1, 2019. The equipment
has a useful life of 5 years with no residual value.
On December 31, 2019, the entity classified the equipment as held for sale. On such date, the fair
value less cost of disposal of the equipment was P3,500,00.
On December 31, 2020, the entity believed that the criteria for classification as held for sale can
no longer be met.
Accordingly, the entity decided not to sell the equipment but to continue to use it.
On December 31, 2020, the fair value less cost of disposal of the equipment was P2,700,000.
1. What is the carrying amount of the equipment on December 31, 2019 before classification as
held for sale??
a.
b.
c.
d.
5,000,000
4,000,000
3,500,000
4,500,000
2. What amount of impairment loss should be recognized in 2019?
a.
b.
c.
d.
1,500,000
1,000,000
500,000
0
3. What amount should be included in profit or loss in 2020 as a result of the reclassification of
the equipment to property, plant and equipment?
a.
b.
c.
d.
800,000 gain
800,000 loss
300,000 gain
300,000 loss
4. What is the adjusted carrying amount of the equipment on December 31, 2021?
a.
b.
c.
2,700,000
1,800,000
2,000,000
d.
3,000,000
Solution:
Question 1
Answer B
Question 2
Cost - January 1, 2019
Accumulated depreciation (5,000,000/5)
Carrying amount before classification — December 31, 2019
Fair value less cost of disposal
Impairment loss for 2019
P 5,000,000
(1,000,000)
4,000,000
3,500,000
P 500,000
Question 3
Cost - January 1, 2019
Accumulated depreciation (5,000,000/5 x 2 years)
Carrying amount — no classification as held for sale
Fair value less cost of disposal
Measurement of equipment as PPE
P 5,000,000
(2,000,000)
3,000,000
2,700,000
P 2,700,000
Under PFRS 5, paragraph 27, an entity shall measure a noncurrent asset that ceases to be
classified as held for sale at the lower between:
a. The carrying amount on the basis that the asset had never been classified as held for sale.
b. The recoverable amount on the date of the decision not to sell. The recoverable amount is the
higher between fair value less cost of disposal and value in use.
Carrying amount per book
Measurement of equipment as PPE
Loss on reclassification
Question 4
P 3,500,000
(2,700,000)
P 800,000
Measurement of equipment — December 31, 2020
Depreciation for 2021 (2,700,000 / 3 years remaining)
Carrying amount — December 31, 2021
P 2,700,000
(900,000)
P 1,800,000
Problem 6-6 (IFRS)
Clara Company purchased equipment for P5,000,000 on January 1, 2019 with a life of 10 years
and no residual value.
On December 31, 2020, the entity classified the equipment as held for sale. The fair value of the
equipment on December 31, 2020 was P3,000,000 and the cost of disposal P100,000.
On December 31, 2021, fair value of the equipment was P3,800,000 and the cost of dismissal
P200,000. The value in use was determined to be P3,300,000.
On December 31, 2021. the entity believed that the criteria for classification as held for sale can
no longer be met.
l. What amount of impairment loss should be recognized for 2020?
a.
b.
c.
d.
300,000
800,000
700,000
0
2. What is the measurement of the equipment that ceases as held for sale on December 31,
2021?
a.
b.
c.
d.
3,200,000
4.000,000
3,500,000
3,600,000
3. What amount should be recognized as gain as a result of the reclassification in 2021?
a.
b.
c.
d.
800,000
300,000
400,000
0
Solution:
Question 1
Cost - January 1, 2019
Accumulated depreciation — December 31, 2020
5,000,000/10 x 2 years)
Carrying amount — December 31, 2020
Fair value less cost of disposal — December 31, 2020
(3,300,000 - 100,000 cost of disposal)
Impairment loss for 2020
P 5,000,000
(1,000,000)
4,000,000
3,200,000
P
800,000
Question 2
Carrying amount — December 31, 2020
Depreciation that would have been recognized in 2021
(5,000,000/10)
Carrying amount — December 31, 2021
Fair value — December 31, 2021
Cost of disposal
Recoverable amount — December 31, 2021
P 4,000,000
(500,000)
3,500,000
3,800,000
(200,000)
3,600,000
The fair value less cost of disposal is the recoverable amount because it is higher than the value
in use of P3,300,000.
The measurement of the equipment as PPE on December 31, 2021 is equal to the carrying
amount of P3,500,000 on the basis that there was no classification as held for sale because this is
lower than the recoverable amount of P3,600,000.
Question 3
Measurement of equipment as PPE
Carrying amount per book — December 31, 2021
Gain on reclassification
P 3,500,000
(3,200,000)
300,000
PFA 1
Chapter 07–Discounted Operation
Nikka Mae M. Evangelista
Problem 7-1 (IFRS)
On September 30, 2019, when the carrying amount of the net assets of a business segment was
P70,000,000, Young Company signed a legally binding contract to sell the business segment.
The sale is expected to be completed by January 31, 2020 at a sale price of P60,000,000.
In addition, prior to January 31, 2020, the sale contract obliged Young Company to terminate the
employment of certain employees of the business segment incurring an expected termination cost
of P5,000,000 to be paid on June 30, 2020.
The segment revenue and expenses for 2019 were P40,000,000 and P45,000,000, respectively.
The income tax rate is 30%.
What amount should be reported as loss from discontinued operation for 2019?
a. 14,000,000
b. 20,000,000
c.
15,000,000
d. 10,500,000
Solution:
Revenue
Expenses
Impairment loss
Termination Cost
40,000,000
(45,000,000)
(10,000,000)
( 5,000,000)
Loss from discontinued operation
Tax Effect (30% x 20,000,000)
(20,000,000)
6,000,000
Net loss from discontinued operation
14,000,000
Selling price
Carrying amount
60,000,000
(70,000,000)
Impairment loss
(10,000,000)
Problem 7-2 (IFRS)
Xavier Company has three segments. A, B and C. Segment C, the closing division, is deemed
inconsistent with the long-term direction of the entity. Management has decided to dispose of
Segment C.
On November 15, 2019, the board of directors of Xavier Company voted to approve the disposal
and an announcement was made.
On that date the carrying amount of Segment C's net assets was P90,000,000 and the fair value
less cost of disposal was P70,000,000.
Segment C’s revenue and expenses for 2019, respectively, were and P50,000,000 and
P45,000,000, including an interest of P5,000,000 attributable to Segment C.
There was no further impairment of assets between November 15 and December 31, 2019. The
income tax rate is 30%.
What amount of loss from discontinued operation should be reported for 2019?
a.
15,000,000
b.
10,500,000
c.
7,000,000
d.
5,000,000
Solution:
Revenue
50,000,000
Expenses
(45,000,000)
Impairment loss
(20,000,000)
Loss from discontinued operation
(15,000,000)
Loss after tax (15,000,000 x 70%)
10,500,000
Carrying amount
90,000,000
Fair value less cost of disposal
70,000,000
Impairment loss
20,000,000
Problem 7-3 (IFRS)
Zebra Company is a diversified entity with nationwide interests in commercial real estate
development, banking. mining and food distribution. The food distribution division was deemed
to be inconsistent with the long-term direction of the entity.
On October l, 2019 the board of directors voted to approve the disposal of this division. The sale
is expected to occur in August 2020.
The food distribution had revenue of P35,000,000 and expenses of P27,000.000 for the period
January 1 to September 30, and revenue of P15,000,000 and expenses of P10,000,000 for the
period October I to December 31.
The carrying amount of the division's net assets on December 31, 2019 was P55,000,000 and the
fair value less cost of disposal was P60,000,000.
The sale contract required Zebra to terminate certain employees incurring an expected
termination cost of P4,000,000 to be paid by December 15, 2020. The income tax rate is 30%.
What amount should be reported as income from discontinued operation for 2019?
a.
b.
c.
d.
7,700,000
8,300,000
9,000,000
6,300,000
Solution:
Revenue – January 1 to December 31
Expenses – January 1 to December 31
Termination Cost
50,000,000
(37,000,000)
( 4,000,000)
Income before tax
Income tax expenses (30% x 9,000,000)
9,000,000
2,700,000
Income from discontinued operation
6,300,000
Fair value less cost of disposal
Carrying amount of net assets
Expected gain – not recognized
60,000,000
55,000,000
5,000,000
Problem 7-4 (IFRS)
Vernon Company had two operating divisions, one manufacturing farm equipment and the other
office supplies. Both divisions are considered separate components.
The farm equipment component had been unprofitable and on September 1, 2019, the entity
adopted a plan to sell the assets of the division.
The actual sale was effected on December 15, 2019 at a price of P3,000,000. The carrying
amount of the division's assets was P5,000,000.
The farm equipment division incurred before-tax operating loss of P1,500,000 from the
beginning year through December 15, 2019.
The entity's after-tax income from continuing operations is P9,000,000. The income tax rate is
30%.
1. What amount should be reported as net income for the current year?
a.
b.
c.
d.
5,500,000
6,550,000
6,300,000
7,600,000
Solutions:
Income from discontinued operations
Loss from discontinued operation
9,000,000
(2,450,000)
Net income
6,550,000
Sale price of division assets
Carrying amount of assets
3,000,000
5,000,000
Loss on disposal December 15, 2019
Farm equipment division operating loss for 2019
(2,000,000)
(1,500,000)
Total loss from discontinued operation
(3,500,000)
Loss after tax (3,500,000 x 70%)
(2,450,000)
Problem 7-5 (IFRS)
Dublin Company had two operating divisions, one manufacturing machinery and the other
breeds and sells horses. Both divisions are considered separate components.
The horse division has been unprofitable and on November 15, 2019, the entity adopted a formal
plan to sell the division. At December 31, 2019, the component was considered held for sale.
The sale was completed on April 30, 2020.
On December 31, 2019, the carrying amount of the assets of the horse division was P5,000,000.
On that date, the fair value of the assets less cost of disposal was P4,000,000.
The before-tax operating loss of the horse division for the year was P1,500,000.
The after-tax income from continuing operations of the entity for 2019 was P8,000,000. The
income tax rate is 30%.
1. What is the net income for 2019?
a.
b.
c.
d.
4,500,000
5,600,000
3,850,000
6,250,000
Solutions:
Income from discontinued operations
Loss from discontinued operation
8,000,000
(1,750,000)
Net income
6,250,000
Fair value of assets of horse division
Carrying amount of assets
4,000,000
5,000,000
Impairment loss on December 31, 2019
Operating loss of horse division for the year
(1,000,000)
(1,500,000)
Total loss
Tax effect (70% x 2,500,000)
(2,500,000)
( 750,000)
Loss from discontinued operation
(1,750,000)
Problem 7-6 (IAA)
In 2019, Isuzu Company decided to discontinue the Electronics Division,
a separately identifiable component of Isuzu's business. On December 31, 2019, the division had
not been completely sold.
However, negotiations for the final and complete sale are progressing in a positive manner and it
is probable that the disposal will be within a year.
Analysis of the records for the year disclosed the following relative to
the Electronics Division:
Operating loss for 2019
Loss on disposal of some Electronics Division assets
during 2019
Expected operating loss in 2020 preceding final disposal
Expected gain in 2020 on disposal of division
8,000,000
500,000
1,000,000
2,000,000
What amount should be reported as pretax loss from discontinued
operation in 2019?
a. 8,000,000
b. 8,500,000
c. 9,500,000
d. 7,500,000
Solution 7-6 Answer b
Operating loss for 2019
Loss on disposal in 2019
Pretax loss from discontinued operation
8,000,000
500,000
8,500,000
The expected operating loss in 2020 and expected gain on disposal in 2020 are not recognized
in 2019.
Gwyneth Kaye Flores
Problem 7-7 (AICPA Adapted)
On December 31, 2019, Max Company committed to a plan to discontinue the operations of
Underwear Division.
The fair value of the facilities was P1,000,000 less than carrying amount on December 31, 2019.
The division's operating loss for 2019 was P2,000,000 and the division was actually sold for
P1,200,000 less than carrying amount in 2020.
The entity estimated that the division's operating loss for 2020 would be P500,000.
What amount should be reported as pretax loss from discontinued operation in 2019?
a.
b.
c.
d.
3,000,000
2,000,000
1,000,000
3,200,000
Solution 7-7 Answer a
Operating loss in 2019
Impairment loss in 2019
Loss from discontinued operation
2,000,000
1,000,000
3,000,000
Problem 7-8 (IAA)
Flame Company has two divisions, North and South. Both qualify as business components.
In 2019, the entity decided to dispose of the assets and liabilities of division South and it is
probable that the disposal will be completed early next year.
The revenue and expenses of Flame Company are as follows:
Sales-North
Total nontax expenses-North
Sales-South
Total nontax expenses-South
2019
5,000,000
4,400,000
3,500,000
3,900,000
2018
4,600,000
4,100,000
5,100,000
4,500,000
During the later part of 2019, the entity disposed of a portion of division South and recognized a
pretax loss of P2,000,000 on the disposal.
What amount should be reported as pretax loss from discontinued operation in 2019?
a.
b.
c.
d.
2,000,000
2,400,000
1,400,000
1,600,000
Solution 7-8 Answer b
Sales — South 2019
Expenses — South 2019
Operating loss
Loss on disposal
Total pretax loss for 2019
3,500,000
3,900,000
( 400,000)
(2,000,000)
(2,400,000)
Problem 7-9 (IAA)
Jazz Company operates two restaurants, one in Boracay and one in Dakak. The operations and
cash flows of each of the two restaurants are clearly distinguishable.
During 2019, the decided to close the restaurant in sell the property. It is probable that the
disposal will be completed early next year.
The revenue and expenses for 2019 and for the preceding two years are as follows:
2019
2018
2017
Sales-Boracay
60,000
48,000
40,000
Cost of goods sold-Boracay
26,000
22,000
18,000
Other expenses-Boracay
14,000
13,000
12,000
Sales-Dakak
23,000
30,000
52,000
Cost of goods sold-Dakak
14,000
19,000
20,000
Other expenses-Dakak
17,000
16,000
15,000
The other expenses do not include income tax expense. During the later part of 2019, the entity
sold some of the kitchen equipment of the Dakak restaurant and recognized a pretax gain of
P1,5,000 on the
disposal.
What amount should be reported as pretax income or loss from discontinued operation for 2019?
a. 8,000 loss
b. 7,000 gain
c. 5,600 loss
d. 1,000 gain
Solution 7-9 Answer b
Sales — Dakak 2019
Cost of goods sold Dakak 2019
Other expenses — Dakak 2019
Gain on disposal
Income from discontinued operation before tax
23,000
(14,000)
(17,000)
15,000
7,000
Problem 7-10 (IFRS)
Marquee Company, a parent entity, approved on December 1, 2019 a plan to sell a subsidiary.
The sale is expected to be completed on March 31, 2020.
The year-end is December 31, 2019 and the financial statements were approved on March 1,
2020.
The subsidiary had net assets with carrying amount of P 15,000,000 including goodwill of P
1,500,000 on December 31 , 2019.
The subsidiary made a loss of P3,000,000 from January 1 to March 1, 2020 and is expected to
make a further loss of P2,000,000 up to the date of sale.
At the date of approval of the financial statements, the entity was in negotiation for the sale of
the subsidiary but no contract had been signed.
The entity expected to sell the subsidiary for P9,000,000 and to incur cost of disposal of
P500,000.
The value in use of the subsidiary was estimated to be P10,000,000.
On December 31, 2019, what is the measurement of the subsidiary which is considered as a
disposal group classified as held for sale?
a.
b.
c.
d.
15,000,000
10,000,000
9,000,000
8,500,000
Solution 7-10 Answer d
Carrying amount
15,000,000
Fair value
Cost of disposal
Fair value less cost of disposal
9,000,000
( 500,000)
8,500,000
A noncurrent asset or disposal group classified as held for sale shall be measured at the lower of
carrying amount and fair value less cost of disposal. The value in use is ignored.
Chapter 08 – Change in Accounting Policy
Evangeline T. de Vera, Jeremy U. Del Carmen, Lea Mae R. Delos Reyes, Charmaine Estoye,
Glydel Kyle A. Falqueza
Problem 8-1 (AICPA Adapted)
During 2019, Orca Company decided to change from the FIFO inventory valuation to the
weighted average method. The income tax rate is 30%.
January 1 inventory
December 31 inventory
FIFO
7,100,000
7,900,000
Weighted average
7,700,000
8,200,000
What amount should be reported as the cumulative effect of the accounting change for
2019?
a. 420,000 increase
b. 420,000 increase
c. 600,000 increase
d. 600,000 decrease
Solution 8-1 Answer a
FIFO inventory – January 1
Weighted average inventory – January 1
Cumulative effect
Cumulative effect after tax (70% x 600,000)
7,100,000
7,700,000
600,000
420,000
The change from FIFO to weighted average is a change in accounting policy. The cumulative
effect of the change accounting policy is an adjustment of retained earnings.
Inventory
Retained Earnings
Increase tax payable
600,000
420,000
180,000
Problem 8-2 (AICPA Adapted)
Goddard Company had used the FIFO method of inventory valuation since it began operation in
2016. The entity decided to change the weighted average method for measuring inventory at the
beginning of the 2019. The income tax rate is 30%.
The following schedule shows year-end inventory balances.
Year
FIFO
2016
4,500,000
2017
7,800,000
2018
8,300,000
Weighted Average
5,400,000
7,100,000
7,800,000
What amount should be reported for 2019 as the cumulative effect of change in accountancy
policy?
a. 500,000 decrease
b. 350,000 decrease
c. 500,000 increase
d. 350,000 increase
Solution 8-2 Answer b
Inventory, December 31, 2018
FIFO
Weighted Average
Decrease in inventory
8,300,000
7,800,000
500,000
The adjustment on January 1, 2019 to reflect the change in inventory method is:
Retained earnings
(70% x 500,000)
350,000
Income tax payable
(30% x 500,000)
150,000
Inventory
500,000
Since the retained earning account is a debit, it is shown as a deduction.
Note that the cumulative effect of a change in inventory method is determined by considering
only the existing inventory of the immediately preceding year which in this case is 2018.
The inventory balances in 2016 and 2017 are ignored because of the effect on net income is
counterbalancing.
QUESTION 8-3 Multiple Choice (IAA)
Bangko Company used the cost recovery method of an accounting since it began operations in
2016. In 2019, management adopt the percentage of completion method.
Revenue from completed contracts
Cost of completed contracts
Income from operations
Casualty Loss
Income
2016
25,000,000
18,000,000
7,000,000
0
7,000,000
2017
42,000,000
29,000,000
13,000,000
0
13,000,000
2018
40,000,000
28,000,000
12,000,000
(2,000,000)
10,000,000
Analysis of the accounting records disclosed the following income by contracts using the
percentage of completion method.
Contract 1
Contract2
Contract 3
Contract 4
Contract 5
2016
7,000,000
5,000,000
3,000,000
2017
8,000,000
7,000,000
1,000,000
2018
2,000,000
6,000,000
(1,000,000)
What amount of pretax cumulative effect of change in accounting policy should be reported in
the statement of retained earnings for 2019?
a. 6,000,000
b. 8,000,000
c. 7,000,000
d.
0
QUESTION 8-4 Multiple Choice (IAA)
During 2019, Build Company changed from the cost recovery method to the percentage of completion
method. The tax rate is 30%.
The entity revealed the following gross income under the cost recovery and percentage of completion
method:
2017
2018
2019
Cost recovery method
950,000
1,250,000
1,400,000
Percentage of completion
1,600,000
1,900,000
2,100,000
How should this accounting change be reported in 2019?
a. 1,400,000 increase in income
b. 1,400,000 increase in retained earnings
c. 910,000 increase in income
d. 910,000 increase in retained earnings
Solution:
Cumulative gross income for 2017 and 2018 – percentage of completion
Cumulative gross income for 2017 and 2018 – cost recovery
Cumulative increase
Tax effect (1,300,000 x 30%)
Addition to retained earnings on January 1, 2019
Journal entry on January 1, 2019
Construction in progress
Retained earnings
Income tax payable
1,300,000
910,000
390,000
3,500,000
(2,200,000)
1,300,000
( 390,000)
910,000
PROBLEM 8-5 (AICPA Adapted)
ABC Company provided the following net income and inventory:
2019
Net income using LIFO
2,750,000
Year-end inventory – LIFO
1,400,000
Year-end inventory - LIFO
900,000
2020
3,000,000
2,000,000
1,600,000
What amount should be reported as net income for 2020 using the FIFO cost flow?
a. 2,900,000
b. 2,600,000
c. 3,500,000
d. 3,100,000
Solution 8-5 Answer a
Net income - LIFO
Understatement of inventory
2019 (1,400,000 – 900,000)
2020 (2,000,000 – 1,600,000)
Net Income - FIFO
2019
2,750,000
2020
3,000,000
500,000
-3,250,000
(500,000)
400,000
2,900,000
PFA 1
Chapter 09 – Change in Accounting Estimate
Yanni Lourisse A. Villasin; Aphol Joyce B. Mortel; Gelyn F. Nuestro; Veia G. Saldua; John Christopher
O. Supnet; Katherine Shane M. Mauleon
Problem 9-1 (IAA)
Blue Company purchased a machine on January 1, 2016 for P6,000,000. At the date of
acquisition, the machine had a life of six years with no residual value. The machine was
depreciated on a straight line basis.
On January 1, 2019, the entity determined that the machine had a useful life of eight years from
the date of acquisition with no residual value.
What is the depreciation of the machine for 2019?
a.
b.
c.
d.
750,000
600,000
375,000
500,000
Solution:
Cost
6,000,000
Accumulated depreciation (6,000,000 / 6 x 3)
3,000,000
Carrying amount – January 1, 2019
3,000,000
Depreciation for 2019 (3,000,000 / 5 years)
600,000
Revised life
8 years
Years expired
3
Remaining revised life
5 years
This is a change in accounting estimate.
The procedure is to allocate the remaining depreciable amount over the remaining revised life.
Problem 9-2 (AICPA Adapted)
On January 1, 2016, Flax Company purchased a machine for P5,280,000 and depreciated it by
the straight line method using an estimated useful life of eight years with no residual value.
On January 1, 2019, the entity determined that the machine had a useful life of six years from the
date of acquisition and the residual value was P480,000
An accounting change was made in 2019 to reflect this additional information.
What amount should be reported as accumulated depreciation for the machine on December 31,
2019?
a.
b.
c.
d.
2,920,000
3,080,000
3,200,000
3,520,000
Solution:
Acquisition cost – January 1, 2016
5,280,000
Accumulated depreciation for 2016, 2017 and 2018
(5,280,000 / 8 x 3)
1,980,000
Carrying amount – January 1, 2019
3,300,000
Accumulated depreciation – January 1, 2019
1,980,000
Depreciation for 2019 (2,820,000 / 3years)
940,000
Accumulated depreciation – December 31, 2019
2,920,000
Carrying amount – January 1, 2019
3,300,000
Residual
(480,000)
Depreciable amount – January 1, 2019
Value
2,820,000
Revised life
6years
Years expired
3
Remaining revised life
3 years
Problem 9-3 (IFRS)
On January 1, 2015, Roma Company purchased equipment for P4,000,000. The equipment has a
useful life of 10 years and a residual value of P400,000.
On January 1, 2019, the entity determined that the useful life of the equipment was 12 years from
the date of acquisition and the residual value was P480,000.
1. What is the carrying amount of the equipment on January 1, 2019?
a.
b.
c.
d.
2,560,000
2,920,000
2,400,000
2,800,000
2. What is the depreciation of the equipment for 2019?
a.
b.
c.
d.
175,000
260,000
360,000
300,000
Solutions:
Question 1
Cost – January 1, 2015
Accumulated depreciation – January 1, 2019
(4,000,000 – 400,000 / 10 x 4)
Carrying amount – January 1, 2019
4,000,000
1,440,000
2,560,000
Question 2
Carrying amount – January 1, 2019
Residual value
Depreciable amount
Depreciation for 2019 (2,080,000 / 8 years)
Revised useful life
Expired
Remaining useful life
2,560,000
(480,000)
2,080,000
260,000
12 years
(4)
8 years
Problem 9-4 (IFRS)
Acute Company was incorporated on January 1, 2016. In preparing the financial statements for
the year ended December 31, 2018, the entity used the following original cost and useful life for
the property, plant and equipment:
Original Cost
15,000,000
10,500,000
3,500,000
Building
Machinery
Furniture
Useful Life
15 years
10 years
7 years
On January 1, 2019, the entity determined that the remaining useful life is 10 years for the
building, 7 years for the machinery and 5 years for the furniture.
The entity used the straight line method of depreciation with no residual value.
What amount should be reported as total depreciation for 2019?
a.
b.
c.
d.
2,650,000
3,700,000
2,550,000
3,500,000
Solution:
Building
Cost – January 1, 2016
Machinery
15,000,000
10,500,000
Furniture
3,500,000
Accumulated depreciation:
(15,000,000 / 15 x 3)
3,000,000
(10,500,000 / 10 x 3)
(3,500,000 / 7 x 3)
3,150,000
_________
_________
1,500,000
12,000,000
7,350,000
2,000,000
Carrying amount –
January 1, 2019
Depreciation for 2019
Building
Machinery
Furniture
(12,000,000 /10)
(7,350,000 / 7)
(2,000,000 / 5)
Total depreciation for 2019
1,200,000
1,050,000
400,000
2,650,000
Problem 9-5 (IAA)
On January 1, 2019, Canyon Company decided to decrease the estimated useful life of an
existing patent from 10 years to 8 years.
The patent was purchased on January 1, 2014 for P3,000,000. The estimated residual value is
zero.
The entity decided on January 1, 2019 to change the depreciation method from an accelerated
method to straight line method.
On January 1, 2019, the cost of an equipment is P8,000,000 and the accumulated depreciation is
P3,400,000.
The remaining useful life of the equipment on January 1, 2019 is 10 years and the residual value
is P200,000
What is the total charge against income for 2019 as a result of the accounting changes?
a.
b.
c.
d.
940,000
960,000
627,500
647,500
Solutions:
Patent - January 1, 2014
Accumulated amortization (3,000,000 / 10 x 5)
Carrying amount – January 1, 2019
3,000,000
1,500,000
1,500,000
Amortization of patent for 2019 (1,500,000 / 3)
Depreciation for 2019 (4,600,000 – 200,000 / 10)
500,000
440,000
Total charge against income for 2019
940,000
Revised estimated life of patent
Years expired
8 years
(5)years
Remaining life of patent
3 years
Problem 9-6 (IFRS)
On January 1, 2017, Brazilia Company purchased for P4,800,000 a machine with a useful life of
ten years and a residual value of P200,000.
The machine was depreciated by the double declining balance and the carrying amount of the
machine was P3,072,000 on December 31, 2018.
The entity changed to the straight line method on January 1, 2019. The residual value did not
change.
What is the depreciation expense on this machine for 2019?
a.
b.
c.
d.
287,200
384,000
460,000
359,000
Solution:
Depreciation for 2019 (2,872,000 / 8 years remaining)
359,000
Carrying amount – January 1, 2019
Residual value
Depreciable amount
3,072,000
(200,000)
2,872,000
Straight line rate (100% / 10)
Double declining rate (10% x 2)
Acquisition cost – January 1, 2017
Accumulated Depreciation – January 1, 2019
2017 (20% x 4,800,000)
2018 (20% x 3,840,000)
Carrying amount – January 1, 2019
10%
20%
4,800,000
960,000
768,000
1,728,000
3,072,000
Under PAS 16, paragraph 61, a change in depreciation method is accounted for as a change in
accounting estimate.
PFA 1
Chapter 10 – Prior Period Errors
Ma. Ruby A. Bagsit
Problem 10-1 (IAA)
Effective January 1, 2019, King Company adopted the accounting policy of expensing
advertising and promotion costs when incurred.
Previously, advertising and promotion costs applicable to future periods were recorded in
prepaid expenses.
The entity can justify the change which was made for both financial statement and income tax
reporting purposes.
The prepaid advertising and promotion costs totaled P600,000 on December 31 , 2019. The
income tax rate is 30%.
What is the net charge against income for 2019 as a result of the change?
a.
600,000
b.
180,000
c.
420,000
d.
0
Solution:
The entity committed an error of deferring advertising and promotion costs
A prior period error is not included in profit or loss but treated as an adjustment of the beginning
balance of retained earnings.
Problem 10-2 (IFRS)
Harbor Company events during 2019:
• It was decided to write from inventory which was over two years old as it was obsolete.
• sales of P1,500,000 had been omitted from the financial statements for the year ended
December 31, 2018.
What pretax amount should be reported as prior period error in the financial statements for
2019?
a.
2,500,000
b.
1,500,000
c.
1,000,000
d.
0
Solution:
Only the unrecorded sale of P1,500,000 on December 31 , 2018 is treated as prior period error in
the financial statements for 2019.
The write off of the inventory of Pl,000,000 is included in profit or loss for 2019 because this is a
change in accounting estimate.
Problem 10-3 (AICPA Adapted)
Universal Company failed to accrue warranty cost ofP500,000 on December 31, 2018.
In addition, a change from straight line to accelerated depreciation made at the beginning of 2019
resulted in a cumulative effect of P400,000 on retained earnings.
What pretax amount should be reported as prior period error in 2019?
a.
500,000
b.
900,000
c.
400,000
d.
0
Solution:
Only the unrecorded warranty cost of P500,000 on December 31, 2018 should be accounted for
as a prior period error.
The change in depreciation method in accounting estimate.
Problem 10-4 (IFRS)
Extracts from the statement of financial position of Animus Company showed the following:
Development costs
Amortization
December 31, 2020
December 31, 2019
8,000,000
5,800,000
(1,800,000)
(1,200,000)
The capitalized development costs relate to a single project that commenced in 2017.
It has now been discovered that one of the criteria for capitalization has never been met.
1. What amount of pretax adjustment is required to restate retained earnings on January 1, 2020?
a.
6,200,000
b.
1,600,000
c.
4,600,000
d.
0
2. What amount of the development costs should be expensed in 2020?
a.
5,800,000
b.
6,200,000
c.
1,600,000
d.
0
Solutions:
Question 1:
Development costs
December 31, 2019
Amortization
Carrying amount
5,800,000
(1,200,000)
December 31, 2019
4,600,000
The entity committed and error in capitalizing the development costs
Thus, the carrying amount of P4,200,000 on December 31, 2019 is treated as prior period error in
the statement of retained earnings for 2020.
Question 2:
The remainder of the carrying amount of development costs on December 31, 2019 should be
expensed in 2020.
Development costs
December 31, 2020
Amortization
8,000,000
(1,800,000)
Carrying amount
December 31, 2020
6,200,000
Carrying amount
December 31, 2019
(4,200,000)
Remaining Carrying amount
December 31, 2019
1,600,000
Problem 10-5 (IFRS)
In reviewing the draft financial statements for the year ended December 31 , 2020, Bituin
Company decided that market conditions were such that the provision for inventory obsolescence
on December 31 , 2020 should be increased by P3,000,000.
If the same basis of calculating inventory obsolescence been applied on December 31 , 2019, the
provision would have been PI higher than the amount recognized in the statement of
comprehensive income
1. What adjustment should be made to the net income of 2020?
a.
6,200,000 decrease
b.
1,600,000 increase
c.
4,600,000 decrease
d.
0 increase
2. What adjustment should be made to the net income of 2019 presented as a comparative figure
in the 2020 financial statements?
a.
1,800,000 decrease
b.
3,000,000 increase
c.
3,000,000 decrease
d.
0
Solutions:
Question 1:
The increase in the provision for inventory obsolescence on December 31, 2020 is deducted from
the net income of 2020.
Question 2:
The increase in the provision for inventory obsolescence in 2019 is ignored because this is
considered a change in accounting estimate.
Problem 10-6 (IFRS)
Samar Company reported the following events during the year ended December 31, 2020:
● A counting error relating to the inventory on December 31, 2019 was discovered.
This required a reduction in the carrying amount of inventory at that date of P2,000,000
● The provision for uncollectible accounts receivable on December 31, 2019 P500,000.
During 2020, P800,000 was written off related to the' December 31, 2019 accounts
receivable.
● The income tax rate is 30%.
What adjustment is required to restate retained earnings on January l, 2020?
a.
1,400,000
b.
2,000,000
c.
2,500,000
d.
0
Solution:
The reduction in the carrying amount of inventory on December 31, 2019 of is a prior period
error to be presented net of tax in the statement of retained earnings for 2020.
Prior period error
Income Tax
Net adjustment to retained earnings
2,000,000
30% c 2,000,000
(600,000)
1,400,000
The provision for uncollectible accounts receivable is a change in accounting estimate and
therefore has no effect on the retained earnings.
The change in accounting estimate should be currently and prospectively.
Problem 10-7 (AICPA Adapted)
After the issuance of the 2019 financial statements, Narra Company discovered a computational
error of P150,000 in the calculation of the December 31, 2019 inventory.
The error resulted in a PI 50,000 overstatement in the cost of goods sold for the year ended
December 31, 2019.
In October 2020, the entity paid the amount ofP500,000 in settlement of litigation instituted
against it during 2020.
The income tax rate is 30%.
In the financial statements for 2020, what is the adjustment of the retained earnings on January
I , 2020?
a.
150,000 credit
b.
105,000 credit
c.
350,000 debit
d.
245,000 debit
Solution:
The inventory on December 31 , 2019 was understated resulting to overstatement of cost of
goods sold and understatement of net income for 2019.
Thus, the retained eamings should be kicreased and credited directly.
Prior period error
January 1, 2020
150,000
Retained earnings
Income tax payable
105,000
30%
45,000
The settlement of the litigation in 2020 is included in the profit or loss of 2020.
Litigation loss
Cash
500,000
500,000
Problem 10-8 (IFRS)
Natasha Company reported net income ofP700,000 for 2020. The entity declared and paid
dividend of P 150,000 in 2020.
In the financial statements for the year ended December 31, 2019, entity reported retained
earnings of P1,100,000 on January 1, 2019.
net income for 2019 was P600,000 and the entity declared and paid dividend ofP300,000 in2019.
In 2020, after the 2019 financial statements were approved for is-AE, the entity discovered an
error in the December 3 1, 2018 financial
The net effect of the error was a P650,000 overstatement of net income for the year ended
December 31, 2018 due to underdepreciation.
What amount should be reported as retained earnings on December
a.
1,300,000
b.
1,400,000
c.
1,650,000
d.
1,950,000
Solution:
Retained earnings
January 1, 2019
Net income for 2019
600,000
Dividend declared and paid in 2019
Retained earnings
1,100,000
December 31, 2019
Net income for 2020
(300,000)
1,400,00
700,000
Prior period error in 2018 due to underdepreciation
(650,000)
Dividend declared and paid in 2020
(150,000)
Retained earnings
1,300,000
December 31, 2020
Problem 10-9 (AICPA Adapted)
While preparing the 2019 financial statements, Dek Company discovered computational errors in
the 2017 and 2018 depreciation expense.
These errors resulted in overstatement of each year's income by P100,000, net of income tax.
The following amounts were in the previously issued financial statements:
Retained earnings, January 1
Net Income
Retained earnings, December 31
2017
2018
2,000,000
2,800,000
800,000
600,000
2,800,000
3,400,000
The net income for 2019 is correctly reported at P700,000.
What amount should be reported as retained earnings on December 31, 2019?
a.
3,900,000
b.
4,100,000
c.
4,300,000
d.
4,000,000
Solution:
Retained earnings
January 1, 2019
3,400,000
100,000 x 2
(200,000)
Prior period error:
Underdepreciation in 2017 and 2018
Corrected beginning balance
3,200,00
Net income for 2019
700,000
Retained earnings
December 31, 20219
3,900,000
Problem 10-10 (AICPA Adapted)
On January 1, 2019, Raven Company discovered that it had incorrectly expensed a P2,100,000
machine purchased on January 1, 2016.
The entity estimated the machine's original useful life to be 10 years ai the residual value at
P100,000.
The entity. Used the straight-line method of depreciation and is subject to a 30% income tax
missed.
In the 2019 financial statements, what amount should be reported as a prior period error?
a.
1,659,000
b.
1,029,000
c.
1,050,000
d.
1,680,000
Solution:
Machine incorrectly expensed
Unrecorded depreciation for 2016, 2017 and 2018
2,100,000
2,000,000 / 10 x 3 years
Net overstatement of expense
Tax effect
(600,000)
1,500,000
30% x 1,500,000
(450,000)
Net understatement of retained earnings
1,050,000
Cost
2,100,000
Residual value
(100,000)
Depreciable amount
2,000,000
The amount of P I is a prior period error directly credited to retained earnings because net
income of prior years was understated.
Journal entry on January I, 2019
Machinery
2,100,000
Accumulated depreciation
Retained earnings
Income tax payable
600,000
1,050,000
450,000
PFA 1
Chapter 11 – Operating Segment
Bhea B. Gutierrez
Problem 11-1 (ACP)
Aroma Company and its divisions are engaged solely in manufacturing operations. The entity
reported the following segment profit (loss) for the current year:
V
W
X
Y
Z
In the segment information for the current year, what are the reportable segments?
a. V, W, X and Y
b. V, W and X
c. V and W
d. V, W, X, Y and Z
3,400,000
1,000,000
(2,000,000)
400,000
(200,000)
2,600,000
Solution: 11-1
Segment Profit
V
W
X
Y
Z
Segment Loss
3,400,000
1,000,000
400,000
4,800,000
2,000,000
200,000
2,200,000
The total profit figure is the basis for identifying the reportable segments because it is higher
than the total loss figure.
Accordingly those segments with a profit or loss of at least 10% of P 4,800,000 or P 480,000 are
reportable. Thus, V, W and X are reportable.
Problem 11-2 (AICPA Adapted)
Correyy Company and its division are engaged solely in manufacturing operations. The
following data pertain to the industries in which operations were conducted for the current year:
Industry
A
B
C
D
E
Revenue
Profit
Assets
10,000,000
8,000,000
6,000,000
3,000,000
4,250,000
1,750,000
1,400,000
1,200,000
550,000
675,000
20,000,000
17,500,000
12,500,000
7,500,000
7,000,000
F
1,500,000
225,000
3,000,000
32,750,000
5,800,000
67,500,000
How many reportable segments does Correyy have?
a.
Three
2.
Four
3.
Five
4.
Six
Solution: 11-2
Under PFRS 8, an entity shall disclose information about an operating segment that meets any of
the following quantitative thresholds:
1. The segment revenue, including both sales to external customers and intersegment sales
or transfers, is 10% or more of the combined revenue, internal and external, of all
operating segments.
2. The segment profit or loss is 10% or more of the greater of the fo11owing in absolute
amount:
a. The combined profit of all operating segments with profit.
b. The combined loss of all operating segments with loss.
3. The assets of the segment are 10% or more of the combined assets of all operating
segments.
Accordingly, A. B, C, D and E are reportable segments because their revenue or profit or asset is
at least 10% of the combined amount.
Problem 11-3 (IFRS)
Macbeth Company, an entity listed on a recognized stock exchange, reports operating results
from its North American division to the chief operating decision maker.
The entity revealed the following segment information for the current year:
Revenue
Profit
Assets
3,800,000
1,200,000
1,800,000
Number of employees
2,500
The results for all of the operating segments in total are:
Revenue
Profit
Assets
Number of employees
40,000,000
10,000,000
20,000,000
25,000
Which piece of information determines that the North American division is a reportable
segment?
a. Revenue
b. Profit
c. Assets
d. Number of employees
Solution: 11-3
Profit threshold (1,200,000/10,000,000)
12%
The revenue of the North American segment of P 3,800,000 is less than 10% of the total revenue
of P 40,000,000 of all operating segments.
The assets of the North American segment of P 1,800,000 are less than 10% of the total assets of
P 20,000,000 of all operating segments.
The number of employees is not a criterion in determining reportable segment.
Problem 11-4 (AICPA Adapted)
Aria Company and its divisions provided the following information for the current year:
Sales to unaffiliated customers
Intersegments sales of products similar to those
sold to unaffiliated customers
20,000,000
6,000,000
Interest earned on loans to other operating segments
400,000
Aria Company and all of its divisions are engaged solely in manufacturing operations.
What is the minimum amount of segment revenue in order that a division can be considered a
reportable segment?
a. 2,640,000
b. 2,600,000
c. 2,040,000
d. 2,000,000
Solutions: 11-4
Sales to unaffiliated customers
Intersegment sales
Combined revenue
Test of reportable segment (10% of 26,000,000)
20,000,000
6,000,000
26,000,000
2,600,000
Under PFRS 8, paragraph 13, segment revenue includes sales to external customers and
intersegment sales of operating segments engaged solely in manufacturing.
Cora J. Javier
Problem 11-5 (AICPA Adapted)
Timmy Company provided the following information pertaining to revenue earned by operating
segments for the current year:
Segment
Alo
Bix
Cee
Dil
Combined
Elimination
Consolidated
Sales to
unaffiliated
customers
5,000
8,000
4,000
43,000
Intersegment
sales
Total
revenue
3,000
4,000
16,000
8,000
12,000
4,000
59,000
60,000
60,000
23,000
(23,000)
-
83,000
(23,000)
60,000
In conformity with the revenue test, what is the total revenue of the reportable segments?
a. 83,000
b. 71,000
c. 51,000
d. 60,000
Solution:
Total revenue
Alo
Bix (reportable)
Cee
Dil (reportable)
Revenue threshold (10% x 83,000)
8,000
12,000
4,000
59,000
83,000
8,300
Only Bix and Dil have a revenue of 10% or more of the combine revenue and therefore are
considered reportable segments.
Note that the revenue includes both sales to unaffiliated customers and intersegment sales.
Problem 11-6 (AICPA Adopted)
In the income statement for the current year, Grum Company reported revenue P50,000,000,
excluding intersegment sales P10,000,000, expenses P47,000,000 and net income P3,000,000.
Expenses include payroll costs of P15,000,000.
The combined identifiable assets of all operating segments at year-end totaled P40,000,000.
l. What is the minimum amount of sales to a major customer?
a. 5,000,000
b. 4,000,000
c. 6,000,000
d. 4,700,000
2. What is the minimum amount of external revenue to be disclosed by reportable segments?
a. 22,500,000
b. 30,000,000
c. 33,750,000
d. 37,500,000
Solution:
Question 1
10% x 50,000,000
5,000,000
PFRS 8, paragraph 34, provides that a major customer disclosure is required if an entity derives
10% or more of its external revenue from a single customer or group of entities under common
control.
Question 2
75% x 50,000,000
37,500,000
Under PFRS 8, paragraph 15, the total external revenue attributable to reportable operating
segments must be at least of the total entity external revenue.
Problem 11-7 (AICPA Adapted)
Graf Company discloses supplemental operating segment information. The following
information is available for the current year:
Segment
X
Y
Z
Sales
5,000,000
4,000,000
3,000,000
Traceable expenses
3,000,000
2,500,000
1,500 000
12,000,000
7,000,000
Additional expenses are as follows:
Indirect expenses
General corporate expenses
Interest expense
Income tax expense
1,800,000
1,200,000
600,000
400,000
The interest expense and income tax expense are regularly reviewed by the chief operating
decision maker as a measure of profit or loss.
Appropriate common expenses are allocated to segments based on the ratio of a segment's sales
to total sales.
What is Segment Z's profit for the current year?
a. 900,000
b. 950,000
c. 800,000
d. 500,000
Solution:
Sales - Segment Z
Expenses:
Traceable expenses
Indirect expenses (3/12 x 1,800,000)
Interest expense (3/12 x 600,000)
Income tax (3/12x 400,000)
Segment profit
3,000,000
1,500,000
450,000
150,000
100,000
2,200,000
800,000
General corporate expenses are not allocated to operating segments as a measure of profit or
loss.
Problem 11-8 (AICPA Adapted)
Clay lines has three lines of business, each of which was determined to be reportable segment.
The entity sales aggregated P7,500,000 in the current year, of which Segment No. 1 contributed
40%.
Traceable costs were P1,750,000 for Segment No. I out of a total of P5,000,000 for the entity as
a whole.
For external reporting, the entity allocated common costs of P 1,500,000 based on the ratio of a
segment's income before common costs to the total income before common costs.
In the financial statements for the current year, what amount should be reported as profit for
Segment No. 1?
a. 1,250,000
b. 1,000,000
c. 650,000
d. 500,000
Solutions:
Sales (40% x 7,500,000)
Traceable costs
Segment profit before common cost
Common cost
(1,250,000/2,500,000 x 1,500,000)
Segment profit
Segment 1
3,000,000
1,750,000
Total
7,500,000
5,000,000
1,250,000
2,500,000
750,000
1,500,000
500,000
1,000,000
Problem 11-9 (AICPA Adapted)
Colt Company has four manufacturing divisions, each of which has been determined to be a
reportable segment.
Common costs are appropriately allocated on the basis of each division's sales in relation to
Colt's aggregate sales.
Colt's Delta division accounted for 40% of Colt's total sales in the current year.
For the current year, Delta division had sales of P8,000,000 and traceable costs of P4,800,000. In
addition, the Delta division incurred interest expense of P 680,000.
In the current year, Colt incurred costs of P800,000 that were not directly traceable to any of the
divisions.
It is an entity policy that interest expense is included in the measure of profit or loss that is
reviewed by the chief operating decision maker.
What amount should be disclosed as Delta's profit for the current year?
a. 3,200,000
b. 3,000,000
c. 2,880,000
d. 2,200,000
Solutions:
Sales - Delta division
Expenses:
Traceable costs
Allocated indirect costs (40% x 800,000)
Interest expense
Segment profit
8,000,000
4,800,000
320,000
680,000
5,800,000
2,200,000
Note that the interest expense is included in the measure of profit or loss that is reviewed by the
chief operating decision maker.
Sairell R. Lat
Problem 11-10 (IAA)
Eagle Company operates in several different industries. Total sales for Eagle Company totaled
P14,000,000, and total common costs amounted to for the current year.
For internal reporting purposes. Eagle Company allocated common costs based on the ration of a
segment’s sales to total sales.
Segment A contributed 25 % to the total sales and incurred specific costs of P1,100,000.
What is the profit of Segment A?
a.
b.
c.
d.
3,500,000
1,875,000
2,400,000
775,00
Solution:
Solution 11-10 Answer d
Sales — Segment A
(25% x 14,000,000)
Specific costs
Allocated common costs
Segment profit
3,500,000
(1,100,000)
(25% x 6,500,000)
(1,625,000)
775,000
Problem 11-11 (AICPA Adapted)
Tay lor Company, a publicly owned entity, assesses performance and makes operating decisions
using the following information for the reportable segments:
Total segment revenue
7,700,000
Total segment profit
500,000
The total segment profit included intersegment profit of P50,000. In addition, the entity has
P10,000 of common costs for reportable segments are not allocated in reports reviewed by the
chief operating decision marker.
What amount should be reported segment profit?
a.
550,000
b.
450,000
c.
510,000
d.
500,000
Solution:
An entity shall report a measure of profit and loss based on the measure
reported to the chief operating decision maker.
Common costs are not allocated to segments when assessing
performance.
Problem 11-12 (IAA)
Congo Company provided the following data for the current year:
Sales
Cost Of goods sold
Expenses
Depreciation
Income tax expense
60,000,000
28,000,000
14,000,000
4,000,000
4,000,000
The entity has two major reportable segments, X and Y. An analysis revealed that P1,000,000 of
the total depreciation expense and P2,000,000 of the expenses are related to general corporate
activities.
The remaining expenses and sales are directly allocable to segment activities according to the
following percentages:
Segment X
Segment Y
Others
Sales
40%
45%
15%
Cost of goods sold
35
50
15
Expenses
40
40
20
Depreciation
40
45
15
What amount should be reported as profit of Segment X?
a.
8,200,000
b.
6,600,000
c.
7,000,000
d.
5,400,000
Solution:
Sales
Cost of Goods Sold
Gross Income
Expenses
Depreciation
(40%x60,000,000)
(35%x28,000,000)
24,000,000
( 9,800,000)
(40%x12,000,000)
(40%x3,000,000)
14,200,000
(4,800,000)
(1,200,000)
Segment Profit – Segment X
8,200,000
Problem 11-13 (IAA)
Revlon Company had no intersegment sales and provided the following data for the current year:
Segment
1
2
3
4
5
6
7
Others



Revenue
620,000
100,000
340,000
190,000
180,000
70,000
120,000
380,000
Profit (Loss)
200,000
20,000
70,000
(30,000)
(25,000)
10,000
(20,000)
(25,000)
Assets
400,000
80,000
300,000
140,000
180,000
120,000
140,000
140,000
The "others" category includes five operating segments, none of which has revenue or
assets greater than P 80,000 and none with an operating profit.
Operating Segments I and 2 produce very similar products and use very similar
production processes, but serve different customer types and use quite different product
distribution system.
These differences are due in part to the fact that Segment 2 operates in a regulated
environment while Segment 1 does not.
Operating Segments 6 and 7 have very similar products, production processes, product
distribution systems, but are organized as separate divisions since they serve substantially
different types of customers.
Neither Segments 6 and 7 operate in a regulated environment.
What are the reportable segments for the current year?
a. Segments l, 3, 4 and 5
b. Segments l, 3, 4, 5 and 7
c. Segments l, 2, 3, 4 and 5
d. Segments l. 3, 4, 5 and Segments6and 7 combined as one segment
Solutions:
Segment
1
2
3
4
5
6
7
Others
Total
Revenue
620,000
100,000
340,000
190,000
180,000
70,000
120,000
380,000
2,000,000
Profit (Loss)
200,000
20,000
70,000
(30,000)
(25,000)
10,000
(20,000)
(25,000)
200,000
Assets
400,000
80,000
300,000
140,000
180,000
120,000
140,000
140,000
1,500,000
1. The information above shows that any operating segment with revenue equal to or greater
than P200,000 is a reportable segment (segments 1 and 3).
Any segment with assets equal to or greater than P150,000 is a reportable segment (segments 1,
3 and 5).
The total profit for all segments with profit totals P300,000. As a result, any segment with profit
or loss equal to or greater than an absolute amount of P30,000 is a reportable segment (segments
1, 3 and 4).
Thus, Segments 1, 3, 4 and 5 are reportable segments.
2. The revenue of the reportable segments is as follows:
Segment
1
640,000
3
340,000
4
190,000
5
180,000
Total Revenue
Percentage (1,330,000/2,000,000)
1,330,000
65%
If the total external revenue attributable to reportable segments constitutes less than 75% of the
entity external revenue, additional segments shall be identified even if they do not meet the
10% quantitative thresholds until at least 75% of the entity external revenue is included in
reportable segments.
Moreover, reportable segments that are below the 10% threshold can be aggregated as one
segment if they have similar economic characteristics and share a majority of the five
aggregation criteria as follows:
a. Nature of product
b. Nature of production process
c. Class of customer
d. Method of distributing product
e. Regulated environment
Since Segments 6 and 7 are similar in four of the five criteria, these segments can be aggregated
as one reportable segment.
Revenue
Profit (loss)
Segment Assets
Segment 6
70,000
10,000
120,000
Segment 7
120,000
(20,000)
140,000
Total
190,000
(10,000)
260,000
With Segments 6 and 7 considered as one reportable segment, the total segment revenue
increases to P1520,000 or 76% of the total. The 75% requirement has been met.
Revenue of reportable segments before aggregation
Revenue of additional reportable segments
Total
Percentage
1,330,000
190,000
1,520,000
(1,520,000/2,000,000)
76%
3. In conclusion, Segments 1, 3, 4. 5 and Segments 6 and 7 (combined) shall be considered
reportable segments.
CHAPTER 12 - INTERIM REPORTING
Maevelyn Garcia
Problem 12-1 (AICPA Adapted)
Farr Company had the following transactions during the first quarter:
Loss from typhoon
Loss from inventory writedown
Loss from disposal of a business segment
Payment of fire insurance premium for calendar year
700,000
500,000
1,000,000
100,000
What total amount of expenses should be included in the income statement for the first quarter?
a. 1,300,000
b. 2,225,000
c. 1,475,000
d. 2,300,000
Solution 12-1 Answer b
Loss from typhoon
Loss from inventory writedown
Loss from disposal of a business segment
Insurance expense (100,000 / 4)
700,000
500,000
1,000,000
25 000
Total expenses
2,225,000
Under PAS 34, paragraph 28, the general rule in preparing interim financial statements is that
costs and expenses that clearly benefit more than one interim period are allocated to the interim
periods affected.
Thus, the insurance premium of P100,000 is allocated over four quarterly interim periods.
Gains and losses are not allocated over the interim periods. Thus, the loss from typhoon, loss
from inventory writedown and loss from disposal of business segment are reported in the
quarter when incurred.
Inventories shall be measured at the lower of cost and net realizable value even for interim
purposes.
Accordingly, if the net realizable value is lower than cost, a loss on inventory writedown shall be
recognized regardless of whether the writedown is temporary or nontemporary.
Problem 12-2 (IAA)
Everest Company has historically reported bad debt expense of 5% sales in each quarter. For the
current year, the entity followed the same procedure in the three quarters of the year.
However, in the fourth quarter, the entity determined that bad debt expense for the entire year
should be P450,000.
Sales in each quarter of the year were first quarter P2,000,000, second quarter P1,500,000, third
quarter P2,500,000 and fourth quarter P4,000,000.
What amount of bad debt expense should be recognized for the fourth quarter?
a. 200,000
b. 150,000
c. 300,000
d. 400,000
Solution 12-2 Answer b
Bad debt expense for the entire year
Bad debt expense:
First quarter
450,000
(5% x 2,000,000)
100,000
Second quarter (5% x 1,500,000)
75,000
Third quarter (5% x 2,500,000)
125,000
Bad debt expense for fourth quarter
300,000
150,000
Problem 12-3 (IFRS)
Davao Company prepares quarterly interim financial reports. The entity sells electrical goods
and normally 5% of customers claim on their warranty.
The provision in the first quarter was calculated at 5% of sales to date which amounted to
P10,000,000.
However, in the second quarter, a design fault was found, and warranty claims were expected to
be 10% for the whole year. Sales for the second quarter amounted to P15,000,000.
1. What amount of warranty expense should be reported in the interim income statement for
the first quarter?
a. 1,000,000
b. 750,000
c. 500,000
d. 250,000
2. What amount of warranty expense should be reported in the interim income statement for
the second quarter?
a.
b.
c.
d.
2,000,000
1,250,000
1,500,000
750,000
Solution 12-3
Question 1 Answer c
Warranty expense for first quarter (5% x 10,000,000)
500,000
Question 2 Answer a
Total warranty expense - first and second quarter
(10% x 25,000,000)
Warranty expense recognized in first quarter
(5% x 10,000,000)
Warranty expense - second quarter
2,500,000
500,000
2,000,000
Problem 12-4 (AICPA Adapted)
Kell Company reported P950,000 net income for the quarter ended September 30,2019 which
included the following after tax items:


A P600,000 expropriation gain, realized on April 30, 2019, was allocated equally to the
second, third, and fourth quarters of 2019.
A P150,000 cumulative-effect loss resulting from a change in inventory valuation method
was recognized on August 1, 2019.
In addition, the entity paid P480,000 on February 1, 2019, for 2019 calendar-year property taxes.
Of this amount, P 120,000 was allocated to the third quarter of 2019.
For the quarter ended September 30, 2019, what amount should be reported as net income?
a. 1,100,000
b. 1,020,000
c.
950,000
d. 900,000
Solution 12-4 Answer d
Net income per book
Expropriation gain incorrectly included (600,000 / 3)
Balance
Add back — Cumulative effect loss
Adjusted net income
950,000
(200,000)
750,000
150,000
900 000
Gains should be recognized in the interim period when realized. Thus, the gain realized on April
30, 2019 should be fully recognized in second quarter.
The cumulative effect of a change in accounting policy is shown in the statement of retained
earnings, not in the income statement.
Problem 12-5 (IFRS)
Mount Company operates in the travel industry and incurs costs unevenly throughout the year.
Advertising costs of P2,000,000 were incurred on March l, 2019 and staff bonuses are paid at
year-end based on sales.
Staff year-end bonuses are expected to be around P20,000,000 for the year.
What total amount of expenses should be included in the quarterly financial report ending March
31, 2019?
a. 7,000,000
b. 5,500,000
c. 5,000,000
d. 3,500,000
Solution 12-5 Answer a
(2,000,000 + 5,000,000)
7,000,000
Advertising P2,000,000 is reported in the interim period when incurred.
Year-end bonuses are allocated over the entire year or P20,000,000 divided by four or
P5,000,000 every quarter.
Problem 12-6 (IFRS)
The terms and conditions of employment with Pauline Company include entitlement to share in
the staff bonus system, under which 5% of the profit for the year before charging the bonus is
allocated to the bonus pool, provided the annual profit exceeds P50,000,000.
The profit before accrual of any bonus for the first half of the current year amounted to
P40,000,000 and the latest estimate of the profit before accrual of any bonus for the year as a
whole is P60,000,000.
What amount should be recognized in profit or loss as bonus expense for the half year ended
June 30?
a. 1,500,000
b. 3,000,000
c. 2,000,000
d.
0
Solution 12-6 Answer c
Bonus for half year ended June 30
(5% x 40,000,000)
2,000,000
Angelo Guiriba
Problem 12-7 (IAA)
Snider Company is preparing interim financial statements for the first quarter ended March 31.
Expenses in the first quarter totaled P4,000,000 of which 25% was variable.
The fixed expenses included television advertising expense of P1,600,000 representing air time
to be incurred evenly during the current year and depreciation expense of P600,000 for the year
for an equipment that was available for use on January 1.
What amount should be reported as total expenses for the first quarter ended March 31?
a.
b.
c.
d.
4,000,000
2,800,000
4,150,000
2,350,000
Solution 12-7 Answer d
Variable expenses (4,000,000 x 25%)
Fixed expenses, excluding advertising and depreciation
(3,000,000 - 1,600,000 - 600,000)
Advertising allocated to the first quarter (1,600,000/4)
Depreciation from January 1 to March 31 (600,000 x 3/12)
Total expenses to be reported in the first quarter
Expenses for first quarter
Variable expenses (25% x 4,000,000)
Fixed expenses
1,000,000
800,000
400,000
150,000
2,350,000
4,000,000
(1,000,000)
3,000,000
Problem 12-8 (AICPA Adapted)
At the beginning of current year, Builder Company entered into a P20,000,000 long-term fixed
price contract to construct a factory building.
The entity accounted for this contract under the percentage of completion at the end of each
quarter for the current year.
Quarter
Percentage of completion
Estimated cost
1
10%
15,000,000
2
10%
15,000,000
3
25%
19,200,000
4
25%
19,200,000
No work was performed in the second and fourth quarters.
1. What amount of income should be reported in the first quarter?
a. 2,000,000
b. 200,000
c. 500,000
d.
0
2. What amount of income should be reported in the second quarter?
a. 500,000
b. 250,000
c. 750,000
d.
0
3. What amount of income or loss should be reported in the third quarter?
a. 200,000 income
b. 200,000 loss
c. 300,000 income
d. 300,000 loss
4. What amount of income should be reported in the fourth quarter?
a. 800,000
b. 400,000
c. 200,000
d.
0
Solution 12-8
Question 1 Answer c
Quarter 1
Contract price
Estimated cost
Gross income
Multiply by percentage of completion
Contract revenue
20,000,000
15,000,000
5,000,000
10%
500,000
Question 2 Answer d
Quarter 2
No income is reported because the estimated cost and percentage of completion are the
same as Quarter 1 and therefore no work was done in Quarter 2.
Question 3 Answer d
Quarter 3
Contract price
Estimated cost
Gross income
Multiply by percentage of completion
Cumulative contract revenue
Contract revenue in Quarter 1
Realized loss in Quarter 3
20,000,000
19,200,000
800,000
25%
200,000
(500,000)
(300,000)
Question 4 Answer d
Quarter 4
No income is reported because the estimated cost and percentage of completion are the
same as Quarter 3 and therefore no work was done in Quarter 4.
Problem 12-9 (AICPA Adapted)
Bailar Company, a calendar-year entity, reported the following income before income tax and
effective tax rate for the first three quarters of the current year:
First quarter
Second quarter
Third quarter
Income before tax
6,000,000
7,000,000
8,000,000
Effective tax rate
30%
30%
25%
1. What is the income tax expense for the first quarter?
a. 1,500,000
b. 1,800,000
c. 1,200,000
d. 2,400,000
2. What is the income tax expense for the second quarter?
a. 1,750,000
b. 2,800,000
c. 2,100,000
d. 1,400,000
3. What is the income tax expense for the third quarter?
a. 5,250,000
b. 1,350,000
c. 2,400,000
d. 2,000,000
Solution 12-9
Question 1 Answer b
Question 2 Answer c
Question 3 Answer b
Cumulative income tax
First quarter
Second quarter
Third quarter income tax expense
(25% x 21,000,000)
(30% x 6,000,000)
(30% x 7,000,000)
5,250,000
(1,800,000)
(2,100,000)
1,350,000
Problem 12-10 (IAA)
Hyper Company prepared the following income statement for then current year:
Sales
Cost of goods sold
Gross income
Gain on sale of equipment
Total income
Operating expenses
Casualty loss
Income before tax
Income tax - 30%
Net income
6,000,000
(2,800,000)
3,200,000
100,000
3,300,000
( 500,000)
( 300,000)
2,500,000
750,000
1,750,000
* Third quarter sales were 30% of total sales.
* For interim reporting purposes, a gross profit rate of 40% can be justified.
* Variable operating expenses are allocated in the same proportion as sales.
* Fixed operating expenses are allocated based on the expiration of time.
* Of the total operating expenses, P400,000 relate to variable expenses and P100,000 relate to
fixed expenses.
* The equipment was sold on June 1.
* The casualty loss occurred on September 1.
What amount should be reported as income before tax for the third quarter ended September 30?
a. 275,000
b. 375,000
c. 500,000
d. 300,000
Solution: 12-10
Sales
Cost of goods sold
Gross income
Variable expenses
Fixed Expenses
Casualty loss
Income before tax
(30% X 6,000,000)
(60% x 1,800,000)
(30% X 400,000)
(100,000 / 4)
1,800,000
(1,080,000)
720,000
(120,000)
(25,000)
(300,000)
275,000
The gain on sale of equipment is reported in the second quarter, not in the third quarter, because
the equipment is sold on June 1. The casualty loss is reported in the third quarter when
incurred.
PFA 1
Chapter 26-Inventory
Sierra, Maryjoy B. (Problem 26-1 – Problem 26-8)
Recinto, Kristal (Problem 26-9 – Problem 26-16)
Problem 26-1 (IAA)
Aman Company provided the following data:
Items counted in the bodega
4,000,000
Items included in the count specifically segregated per sale contract
100,000
Items in receiving department, returned by customer, in good condition
50,000
Items ordered and in the receiving department
400,000
Items ordered; invoice received but goods not received. Freight is on
300,000
account of seller.
Items shipped today, invoice mailed, FOB shipping point
250,000
Items shipped today, invoice mailed, FOB destination
150,000
Items currently being used for window display
200,000
Items on counter for sale
800,000
Items in receiving department, refused because of damage
180,000
Items included in count, damaged and unsalable
Items in the shipping department
50,000
250,000
What is the correct amount of inventory?
a.
b.
c.
d.
5,700,000
6,000,000
5,800,000
5,150,000
Solution 26-1 Answer a
Items counted in the bodega
4,000,000
Items included in the count specifically segregated
(100,000)
Items returned by customer
50,000
Items in ordered and in receiving department
400,000
Items shipped today, FOB destination
150,000
Items for display
200,000
Items on counter for sale
800,000
Damaged and unsalable items included in count
(50,000)
Items in the shipping department
250,000
5,700,000
Problem 26-2 (IAA)
Lunar Company included the following items in inventory:
Materials
1,400,000
Advance for materials ordered
200,000
Goods in process
650,000
Unexpired insurance in inventory
Advertising catalogs and shipping cartons
Finished good in factory
Finished good in entity-owned retail store,
60,000
150,000
2,000,000
750,000
including 50% profit on cost
Finished goods in hands of consignees including
400,000
40% profit on sales
Finished goods in transit to customers, shipped FOB
250,000
destination at cost
Finished goods in out on approval, at cost
100,000
Unsalable finished goods, at cost
50,000
Office supplies
40,000
Materials in transit, shipped FOB shipping point,
330,000
excluding freight of P30,000
Goods held on consignment, at sales price, cost P150,000
What is the correct amount of inventory?
200,000
a.
b.
c.
d.
5,375,00
5,500,000
5,540,000
5,250,000
Solution 26-2 Answer b
Materials
1,400,000
Goods in process
Finished goods in factory
650,000
2,000,000
Finished goods in entity-owned retail store (750,000/150%)
500,000
Finished goods in hands of consignees (400,000x60%)
240,000
Finished goods in transit
250,000
Finished goods out on approval
100,000
Materials in transit (300,000+30,000)
360,000
Correct inventory
5,500,000
Problem 26-3 (IAA)
Ram Company provided the following information the end of current year.
Finished goods in storeroom, at cost, including overhead
2,000,000
of P400,000 0r 20%
finished goods in transit, including freight charge of
250,000
P20,000, FOB shipping point
Finished goods held by salesmen, at selling price,
140,000
cost, P100,000
Goods in process, at cost of materials and direct labor
Materials
Materials in transit, FOB destinations
Defective materials returned to suppliers
Shipping supplies
Gasoline and oil for testing finished goods
Machine lubricants
What is the correct amount of inventory?
a.
b.
c.
d.
4,000,000
4,170,000
4,270,000
4,090,000
720,000
1,000,000
50,000
100,000
20,000
110,000
60,000
Solution 26-3 Answer b
Finished goods
2,000,000
Finished goods held by salesmen at cost
100,000
Goods in process
900,000
Materials
1,000,000
Factory supplies:
Gasoline and oil for testing finished goods
Machine lubricants
Correct inventory
Goods in process, including overhead
110,000
60,000
4,170,000
100%
Overhead
20%
Goods in process, excluding overhead
80%
Total cost of goods in process (720,000/80%)
900,000
Problem 26-4 (IFRS)
Brilliant Company has incurred the following costs during the current year:
Cost of purchase based on vendors’ invoices
Trade discounts on purchases already deducted
5,000,000
500,000
from vendors’ invoices
Import duties
Freight and insurance in purchases
400,000
1,000,000
Other handling costs relating to imports
100,000
Salaries of accounting department
600,000
Brokerage commission paid to agents for arranging imports
200,000
Sales commission paid to sales agents
300,000
After-sales warranty costs
250,000
What is the cost of purchases?
a.
b.
c.
d.
5,700,000
6,100,000
6,700,000
6,500,000
Solutions 26-4 Answer c
Cost of purchases
Import duties
Freight and insurance
5,000,000
400,000
1,000,000
Other handling costs
100,000
Brokerage commission
200,000
Total cost of purchases
6,700,000
The salaries of accounting department, sales commissions and after-sales warranty costs are not
inventoriable but should be expensed immediately.
Problem 26-5 (IFRS)
Corolla Company incurred the following cost:
Materials
700,000
Storage costs of finished goods
180,000
Delivery to customers
40,000
Irrecoverable purchase taxes
60,000
At what amount should the inventory be measured?
a.
b.
c.
d.
880,000
760,000
980,000
940,000
Solution 26-5 Answer b
Materials
Irrecoverable purchase taxes
Total cost of inventory
700,000
60,000
760,000
Problem 26-6 (AICPA Adapted)
At year-end, Kerr Company purchased goods costing P500,000 FOB destination. These goods
were received at year-end. The costs incurred in connection with the sale and delivery of the
goods were:
Packaging for shipment
10,000
Shipping
15,000
Special handling charges
25,000
What total cost should be included in inventory?
a.
b.
c.
d.
545,000
535,000
520,000
500,000
Solution 26-6 Answer d
When goods are purchased FOB destination, the seller is responsible for costs incurred in
transporting the goods to the buyer.
Problem 26-7 (AICPA Adapted)
Stone Company had the following transactions during December:
Inventory shipped on consignment to Beta Company
Freight paid by Stone
Inventory received on consignment from Alpha Company
Freight paid by Alpha
No sales of consigned goods were made in December.
What amount should be included in inventory on December 31?
a.
b.
c.
d.
1,200,000
1,250,000
1,800,000
1,890,000
Solution 26-7 Answer d
1,800,000
90,000
1,200,000
50,000
Inventory shipped on consignment to Beta
Freight paid by Stone
Total cost of consigned inventory
1,800,000
90,000
1,890,000
Problem 26-8 (AICPA Adapted)
On October 1, 2019, Grimm Company consigned 40 freezers to Holden Company costing P14,00
each for sale at P20,000 each and paid P16,000 in transportation costs.
On December 30, 2019, Holden Company reported the sale of 10 freezers and remitted
P170,000. The remittance was net of the agreed 15% commissions.
What amount should be recorded as consignment sales revenue for 2019?
a.
b.
c.
d.
154,000
170,000
196,000
200,000
Solution 26-8 Answer d
Freezers sold (10xP20,000)
200,000
Problem 26-9 (AICPA Adapted)
On December 1, 2019, Alt Department Store received 505 sweaters on consignment from Todd.
Todd's cost for the sweaters was P800 each, and they were priced to sell at P1,0000.
Alt's commission on consigned goods is 10%. On December 31, 2019, 5 sweaters remained.
On December 31, 2019, what amount should be reported as payable for consigned goods?
a.
b.
c.
d.
490,000
454,000
450,000
404,000
Solution 26-9 Answer c
Payable for consigned goods (500,000 – 50,000 commission)
450,000
Problem 26-10 (AICPA Adapted)
Clem Company provided the following for the current year:
Central warehouse
Held by consignees
Beginning inventory
1,100,000
120,000
Purchases
4,800,000
600,000
Freight in
100,000
Transportation to consignees
Freight out
Ending inventory
50,000
300,000
80,000
1,450,000
200,000
What is the cost of goods sold for the current year?
a.
b.
c.
d.
4,550,000
4,850,000
5,070,000
5,120,000
Solution 26-10 Answer d
Beginning inventory
1,220,000
Purchases
5,400,000
Freight in (100,000 + 50,000)
Goods available for sale
Ending inventory (1,450,000 + 200,000)
Cost of goods sold
150,000
6,770,000
(1,650,000)
5,120,000
Problem 26-11 (AICPA Adapted)
Venice Company included the following in inventory at year end:
Merchandise out on consignment at sale price,
1,500,000
including 30% markup on sales
Goods purchased in transit, shipped FOB shipping point
Goods held on consignment by Venice
1,200,000
900,000
At what amount should the inventory be reduced?
a.
b.
c.
d.
1,350,000
3,600,000
2,400,000
2,100,000
Solution 26-11 Answer a
Markup on goods out on consignment (1,500,000 × 30%)
450,000
Goods held on consignment
900,000
Total reduction
1,350,000
Problem 26-12 (AICPA Adapted)
Dean Sportswear regularly buys sweaters from Mill Company and is allowed trade discounts of
20% and 10% from the list price.
Dean made a purchase during the year and received an invoice with a list price of P 600,000, a
freight charge of P 15,000 and payment terms of 2/10, n/30.
What is the cost of the purchase?
a.
b.
c.
d.
432,000
447,000
438,360
435,000
Solution 26-12 Answer b
List price
Trade discount
600,000
(20% × 600,000)
Balance
Trade discount
(120,000)
480,000
(10% × 480,000)
( 48,000)
Invoice price
432,000
Freight charge
15,000
Total Cost of purchase
447,000
Purchases are normally recorded at gross. Thus, the cash discount is ignored.
Problem 26-13 (AICPA Adapted)
On June 1, 2019, Pitt Company sold merchandise with a list price of P 5,000,000 to Burr
account. Pitt allowed trade discounts of 30% and 20%
On June 11, 2019, the customer paid in full.
Credit terms were 2/10, n/30 and the sale was made FOB shipping point. Pitt prepaid P 200,000
of delivery costs for Burr as an accommodation.
1. What amount should be reported as sales revenue?
a. 5,000,000
b. 2,800,000
c. 3,500,000
d. 2,500,000
2. What amount was received by Pitt from Burr as remittance in full?
a. 2,744,000
b. 2,940,000
c. 2,944,000
d. 3,140,000
Solution 26-13 Question 1 Answer b
Question 2 Answer c
List price
5,000,000
Trade discounts:
30% × 5,000,000
(1,500,000)
3,500,000
20% × 3,500,000
( 700,000)
Invoice price – sales revenue
2,800,000
Cash discount (2% × 2,800,000)
Net amount
Add: Reimbursement of delivery cost
Total remittance from Burr
(
56,000)
2,744,000
200,000
2,944,000
Problem 26-14 (IAA)
On August 1, Stella Company recorded purchases of inventory of P 800,000 and P 1,000,000
under credit terms of 2/15, net 30.
The payment due on the P 800,000 purchase was remitted on August 16. The payment due on the
P 1,000,000 purchase was remitted on August 31.
Under the net method and the gross method, these purchases should be included at what
respective amounts in the determination of cost of goods available for sale?
a.
b.
c.
d.
Net method
Gross method
1,784,000
1,764,000
1,764,000
1,800,000
1,764,000
1,800,000
1,784,000
1,764,000
Solution 26-14 Answer C
Net method
Purchases (800,000 + 1,000,000)
1,800,000
Purchase discount taken (2% × 800,000)
(
16,000)
Purchase discount not taken (2% × 1,000,000)
(
20,000)
Net amount
1,764,000
Under the net method, the purchase discount is deducted from purchases regardless of whether
taken or not taken.
Gross method
Purchases
Purchase discount taken
Net purchases
1,800,000
(
16,000)
1,784,000
Under the gross method, the purchases are recorded at gross and only the purchase discount
taken is deducted from purchases in determining cost of goods available for sale.
Problem 26-15 (AICPA Adapted)
Rabb Company records purchases at gross amount but wishes to change to recording purchases
net of purchase discounts. Discounts available on purchase for the current year amount to
P20,000. Of this amount, P2,000 is still available in the accounts payable balance.
The balances in the accounts at year-end before conversion are;
Purchases
1,000,000
Purchase discount taken
Accounts payable
8,000
300,000
What amount should be reported as accounts payable at year-end after the conversion?
a.
b.
c.
d.
298,000
292,000
288,000
282,000
Solution 26-15 Answer a
Accounts payable at gross
Discount available in the accounts payable balance
Accounts payable at net
300,000
(
2,000)
298,000
Problem 26-16 (IAA)
Wine Company recorded purchases at net amount. On December 10, the entity purchase
merchandise on account, P4,000,000, terms 2/10, n/30. The entity returneP300,000of the
December 10 purchase and received credit on account. The account had not been paid on
December 31.
At what amount should accounts payable be adjusted on December 31?
a.
b.
c.
d.
74,000
86,000
80,000
0
Solution 26-16 Answer a
Gross invoice
4,000,000
Purchase return
( 300,000)
Net purchases
3,700,000
Purchase discount loss (2% x 3,700,000)
74,000
The 10-day discount period has already expired. Thus, the accounts payable should stated at the
green amount.
Chapter 27 – Inventory Inclusion
Abegail C. Mendoza
Ma. Hazel R. Mendoza
Jasmine Lorraine S. Oruga
Problem 27-1 (AICPA Adapted)
Hero Company reported inventory on December 31, 2019 at P6,000,000 based on a physical
count of goods priced at cost and before any necessary year-end adjustments relating to the
following:


Included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2019. These goods had a cost of P125,000 and were picked up by the carrier
on January 7, 2020.
Goods shipped FOB shipping point on December 28, 2019, from a vendor to Hero were
received and recorded on January 4, 2020. The invoice cost was P300.000.
What amount should be reported as inventory on December 31, 2019?
a.
b.
c.
d.
5,875,000
6,000,000
6,175,000
6,300,000
Solution:
Physical count
Goods shipped FOB shipping point on December 30, 2019 to Hero and
received January 4, 2020
Inventory, December 31, 2019
6, 000,000
300,000
6,300,000
The goods costing P125,000 are properly included in the December 31, 2019 physical count
because the goods are shipped FOB shipping point only on January 7, 2020 when picked up by
common carrier
Problem 27-2 (AICPA Adapted)
Madel Company revealed in inventory on December 31, 2019 at P3,250,000 based on a physical
count priced at cost before any necessary adjustment for the following:

Merchandise costing P300,000 shipped FOB shipping point from a vendor on December 31,
2019 was received on January 5, 2020.

Merchandise costing P220,000 shipped FOB destination from a vendor on December 28,
2019 was received on January 3, 2020.

Merchandise costing P380,000 shipped to a customer FOB destination on December 28,
2019 arrived at the customer location on January 6, 2020.

Merchandise costing P120,000 was being held on consignment by Trisha Company, a
consignee of Madel Company.
What amount should be reported as inventory on December 31, 2019?
a.
b.
c.
d.
3,670,000
3,930,000
4,050,000
3,050,000
Solution:
Physical count
Merchandise shipped FOB shipping point December 30, 2019 received
January 5, 2020
Merchandise shipped to customer FOB destination December 28, 2019
received by customer January 6, 2020
Merchandise out on consignment held by consignee
Inventory- December 31, 2019
3,250,000
300,0000
380,000
120,000
4,050,000
The Merchandise shipped FOB destination December 28, 2019 from a vendor was properly
excluded because it was received January 3, 2020.
Problem 27-3 (AICPA Adapted)
Colombia Company reported the December 31, 2019 inventory at P2,500,000. The entity
revealed the following transactions.

Goods shipped to the entity FOB destination on December 26, 2019 were received on
January 2, 2020. The invoice costs of P300,000 is included in the preliminary inventory
balance.

At year-end the entity held P250,000 of merchandise on consignment from another entity.
This merchandise is included in the preliminary inventory balance.

On December 29, 2019 merchandise costing P100,000 was shipped to a customer FOB
shipping point and arrived at the customer location on January 3, 2020. The merchandise is
not included in the preliminary inventory balance.

At year-end the entity had merchandise costing P150,000 out on consignment with the
another entity. The merchandise is not included in the preliminary inventory balance.
1. What amount of pretax adjustment is required to restate retained earnings on January 1, 2020?
a.
b.
c.
d.
2,100,000
2,200,000
2,400,000
2,500,000
Solution:
Reported Inventory
Goods in transit purchased FOB destination inventory incorrectly included
Merchandise held on consignment incorrectly included
Merchandise out on consignment incorrectly excluded
Inventory- December 31, 2019
2,500,000
(300,000)
(250,000)
150,000
2,100,000
The merchandise costing P100,000 shipped to customer FOB shipping point is correctly not
included in the inventory balance.
Problem 27-4 (AICPA Adapted)
Reverend Company conducted a physical count on December 31, 2019 which showed inventory
with a total cost of P5,000,000.
However, further investigation revealed that the following items were excluded from the count.

Goods sold to a customer which are being held for the customer to call at the customers
convenience with a cost of P200,000.

A packing case containing a product costing P500,000 standing in the shipping room was not
included in the physical count because it was marked “hold for shipping instructions”.

Goods in process costing P300,000 held by an outside processor for further processing.

A special machine costing P250,000, fabricated to order for a customer, was finished and
specifically segregated at the back part of the shipping room on December 31, 2019.
The customer was billed on that date and the machine was excluded from inventory although
it was shipped on January 2, 2020.
What amount should be reported as inventory on December 31, 2019?
a.
b.
c.
d.
6,000,000
6,250,000
6,050,000
5,800,000
Solution:
Physical count
Goods in process
Inventory marked “hold for shipping instructions”
Inventory- December 31, 2019
5, 000,000
300,000
500,000
5,800,000
Problem 27-5 (IAA)
Baritone Company counted and reported the ending inventory on December 31, 2019 at
P2,000,000.
None of the following items were included when the total amount of the ending inventory was
computed:
Goods located in the entity's warehouse that are on
consignment from another entity
Goods sold by the entity and shipped
FOB destination were in transit
on December 31, 2019 and received by the
customer on January 2, 2020
Goods purchased by the entity and shipped
FOB seller were in transit on December 31, 2019
and received by the entity on January 2, 2020
Goods sold by the entity and shipped
FOB shipping point were in transit
on December 31, 2019 and received by the
customer on January 2, 2020
150,000
200,000
300,000
400,000
What amount should be reported as inventory on December 31, 2019?
a.
b.
c.
d.
2,500,000
2,350,000
2,900,000
2,750,000
Solution:
Reported inventory
Goods sold in transit, FOB destination
Goods purchased in transit, FOB seller
Inventory - December 31, 2019
The term FOB seller is the same as FOB shipping point.
2,000,000
200,000
300,000
2,500,000
Problem 27-6 (IAA)
Joy Company conducted a physical count on December 31, 2019 which revealed inventory with
a cost of P4,410,000.
The following items were excluded from the physical count:
Merchandise held by Joy on consignment
Merchandise shipped by Joy FOB destination to a
customer on December 31, 2019 and was received
by the customer on January 5, 2020
Merchandise shipped by Joy FOB shipping point to a
customer on December 31, 2019 and was received
by the customer on January 5, 2020
Merchandise shipped by a vendor FOB destination on
December 31, 2019 and was received by Joy on
January 5, 2020
Merchandise purchased FOB shipping point was
shipped by the supplier on December 31, 2019
and received by Joy on January 5, 2020
610,000
380,000
460,000
830,000
510,000
What amount should be reported as inventory on December 31, 2019?
a.
b.
c.
d.
5,300,000
4,690,000
3,800,000
4,920,000
Solution:
Physical count
Merchandise sold in transit, FOB destination
Merchandise purchased in transit, FOB shipping point
Inventory - December 31, 2019
4,410,00
0
380,000
510,000
5,300,00
0
Problem 27-7 (AICPA Adapted)
Black Company reported accounts payable on December 31, 2019 at P4,500,00 before any
necessary year-end adjustments relating to the following transactions:

On December 27, 2019, Black wrote and recorded checks to creditors totaling P2,000,000
causing an overdraft of P500,000 in Black's bank account on December 31, 2019. The
checks were mailed on January 10, 2020.

On December 28, 2019, Black purchased and received goods for P750,000, terms 2/10,
n/30. Black records purchases and accounts payable at net amount. The invoice was
recorded and paid January 3, 2020.

Goods shipped F.O.B. destination on December 20, 2019 from a vendor to Black were
received January 2, 2020. The invoice cost was P325,000.
On December 31, 2019, what amount should be reported as accounts payable?
a.
b.
c.
d.
7,575,000
7,250,000
7,235,000
7,553,500
Solution:
4,500,00
0
2,000,00
0
Accounts payable per book
Undelivered checks to creditors
Goods purchased and received on December 28, 2019
750,000
Purchase discount (2% × 750,000)
(15,000
)
Total accounts payable
735,000
7,235,00
0
Adjusting entry for the undelivered checks
Cash
2,000,000
Accounts Payable
2,000,000
Problem 27-8 (AICPA Adapted)
Kew Company reported accounts payable on December 31, 2019 at P2,200,000 before
considering the following data:

Goods shipped to Kew FOB shipping point on December 22, 2019, were lost in transit. The
invoice cost of P40,000 was not recorded by Kew. On January 7, 2020, Kew filed a P40,000
claim against the common carrier.

On December 27, 2019, a vendor authorized Kew to return, for full credit, goods shipped and
billed at P70,000 on December 3, 2019. The returned goods were shipped by Kew on
December 28, 2019. A P70,000 credit memo was received and recorded by Kew on January
5, 2020.

On December 31, 2019, Kew has a P500,000 debit balance in accounts payable to Ross, a
supplier, resulting from a P500,000 advance payment for goods to be manufactured.
What amount should be reported as accounts payable on December 31, 2019?
a.
b.
c.
d.
2,170,000
2,680,000
2,730,000
2,670,000
Solution:
Accounts payable per book
Goods shipped FOB shipping point on December 22, 2019
and lost in transit
Purchase returns
Advance payment erroneously debited to accounts payable
Adjusted accounts payable
2,200,000
40,000
(70,000)
500,000
2,670,000
Kew Company shall suffer the loss of the goods in transit because the goods are shipped FOB
shipping point.
Appropriately, Kew Company must file a claim against the common carrier.
Problem 27-9 (AICPA Adapted)
Ashwood Company reported accounts payable on December 31, 2019 at P900,000 before any
necessary year-end adjustments relating to the following:

Goods were in transit from a vendor to Ashwood on December 31, 2019. The invoice cost
was P50,000 and the goods were shipped FOB shipping point on December 29, 2019. The
goods were received on January 4, 2020

Goods shipped FOB shipping point on December 20, 2019 from a vendor to Ashwood were
lost in transit.
The invoice cost was P25,000. On January 5, 2020, Ashwwood filed a P25,000 claim against
the common carrier.

Goods shipped FOB destination on December 21, 2019 from a vendor to Ashwood were
received on January 6, 2020. The invoice cost was P15,000
What amount should be reported as accounts payable on December 31, 2019?
a.
b.
c.
d.
925,000
940,000
950,000
975,000
Solution:
Accounts payable per book
Goods in transit FOB shipping point
Goods shipped FOB shipping point lost in transit
Adjusted accounts payable
900,000
50,000
25,000
975,000
The goods shipped FOB Destination on December 31, 2019 are excluded because the goods
were received on January 6, 2020.
Problem 27-10 (AICPA Adapted)
Bakun Company began operation late in 2018. For the first quarter ended March 31, 2019, the
entity provided the following information:
Total merchandise purchased through March 31, 2019
recorded at net
Merchandise inventory on January 1, 2019
at selling price
4,900,000
1,500,000
All merchandise was acquired on credit and no payments have been made on accounts payable
since the inception of the entity.
All merchandise is marked to sell at 50% above invoice cost before time discounts of 2/10, n/30.
No sales were made in 2019.
What amount of cash is required to eliminate the current balance in accounts payable?
a.
b.
c.
d.
6,000,000
5,900,000
6,400,000
5,750,000
Solution:
Purchases through March 31, 2019 (4,900,000 / 98%)
Inventory – 1/1/2019, at cost (1,500,000 / 150%)
Total gross amount to be paid
PFA 1
Chapter 28 – Sales Revenue
Kimberly R. Manalo
Andrea B. Marasigan
5,000,000
1,000,000
6,000,000
Rhea Joyce A. Mañibo
Problem 28-1 (AICPA Adapted)
Lewis Company’s usual sales terms are net 60 days, FOB shipping point. Sales, net of returns
and allowances, totaled P9,200,000 for the year ended December 31, 2019, before year-end
adjustments.
• On December 27, 2019, Lewis authorized a customer to return, for full credit, goods shipped
and billed at P200,000 on December 15, 2019. The returned goods were received by Lewis
on January 4, 2020, and a P200,000 credit memo was issued and recorded on the same date.
• Goods with an invoice amount of P300,000 were billed and recorded on January 3, 2020. The
goods were shipped on December 30, 2019.
• Goods with an invoice amount of P400,000 were billed and recorded on December 30, 2019.
The goods were shipped on January 3, 2020.
• On January 5, 2020, a customer notified Lewis that goods billed and shipped on December
21, 2019 were lost in transit. The involve amount was P500,000.
What amount should be reported as net sales for 2019
a.
b.
c.
d.
9,300,000
9,100,000
8,400,000
8,900,000
Solution:
9,200,000
Net Sales per book
Sales returns
Goods shipped on December 30, 2019
but recorded January 3,2020
Goods shipped on January 3, 2020
erroneously recorded on December 30, 2019
Adjusted net sales
(200,000)
300,000
(400,000)
8,900,000
The goods sold and lost in transit are properly included in sales because the customer will suffer
the loss since the term is FOB shipping point.
Problem 28-2 (IFRS – Sale with right of return)
On December 15, 2019, Bagani Company sold 20,000 units at P250 per unit or a total of
P5,000,000. The entity granted the customers a right to return within 30 days if not satisfied and
will receive either a full refund if cash was already paid or a full credit for the amount owed as
the entity.
It estimated that 6% of the units sold will be returned within the 30-day period. The cost for each
unit is P175. The entity uses the perpetual method.
1. What amount of sales revenue should be recognized on December 5, 2019?
a.
b.
c.
d.
4,700,000
5,000,000
2,500,000
0
2. What amount of refund liability should be recorded on December 15, 2019?
a.
b.
c.
d.
510,000
300,000
210,000
0
3. What amount should be recorded as cost of recover asset on December 15, 2019?
a.
b.
c.
d.
300,000
150,000
210,000
0
4. What amount of cost of goods sold should be reported on December 15, 2019?
a.
b.
c.
d.
3,500,000
3,290,000
3,200,000
0
Solution:
IFRS 15, paragraph B21, provides that an entity shall recognize the following with respect to a
sale with a right to return:
1. Revenue based on the sale price minus the expected return
2. Refund liability equal to the sale price of the expected return
3. Recover asset and corresponding reduction of cost of goods sold equal to the cost of the
expected return
Question 1:
Gross Sales
Expected sale return (6% x 5,000,000)
Sales revenue
5,000,000
(300,000)
4,700,000
Question 2:
Refund liability – sale price of expected return
300,000
Question 3:
Expected return (6% x 20,000 units)
Cost of recover asset (1,200 x 175)
1,200)
210,000
Question 4:
Cost of goods sold (20,000 x 175)
Cost of recover asset
Cost of goods sold to be reported
3,500,000
(210,000)
3,290,000
Journal entries on December 15, 2019
1. Accounts Receivable
5,000,000
Sales
Refund liability
2. Cost of goods sold
4,700,000
300,000
3,500,000
Inventory
3. Recover
asset
Cost of goods sold
3,500,000
210,000
210,00
0
Problem 28-3 (IFRS)
On December 1, 2019, Marvel Company sold 5,000 units at P500 per unit. The entity granted the
customers a right of return within 45 days if not satisfied. The customers shall receive either a
full refund if cash was already paid or a full credit for the amount owed.
Based on past experience, it is estimated that 5% of the units sold will be returned within the 45day period. The cost per unit is P200.
It estimated that 6% of the units sold will be returned within the 30-day period. The cost for each
unit is P175. The entity uses the perpetual method.
1. What amount should be reported as sales revenue for December?
a.
b.
c.
d.
2,500,000
2,375,000
2,625,000
0
2. What amount should be recognized as refund liability for the goods sold in December?
a.
b.
c.
d.
125,000
250,000
150,000
0
Solution:
Question 1:
Gross Sales (5,000 x P500)
Right of return (5% x 2,500,000)
Sales revenue for December
2,500,000
(125,000)
2,375,000
Question 2:
Refund liability (5% x 5,000 x P500)
The refund liability is equal to the sale price of the expected return.
125,000
Problem 28-4 (AICPA Adapted)
Fenn Company had sales of P5,000,000 during December. Experience had shown that
merchandise equaling 7% of sales will be returned within 20 days and an additional 3% will be
returned within 90 days.
Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will
be exchanged for merchandise of equal or greater value.
What amount should be reported for net sales in the income statement for the month of
December?
a.
b.
c.
d.
4,500,000
4,250,000
3,900,000
3,750,000
Solution:
Gross Sales
Estimated Sales Returns (10% x P5,000,000)
Net Sales
P5,000,000
(500,000)
P4,500,000
As a conservative approach, sales revenue should be reduced by the 10% estimated probable
sales returns. However, the estimated exchanges of 15% will not result to reduction of sales.
Problem 28-5 (AICPA Adapted)
Marie Company, a distributor of machinery, bought a machine from the manufacturer in
November 2019 for P10,000. On December 30, 2019, the entity sold this machine for P15,000
under the following terms: 2% discount if paid within thirty days, 1% discount if paid after thirty
days but within sixty days, or payable in full within ninety days if not paid within the discount
periods.
However, the customer had the right to return this machine if it was unable to resell the machine
before expiration of the ninety-day payment period, in which case customer’s obligation would
be canceled.
In the net sales for the year ended December 31, 2019, what amount should be included for the
sale of this machine?
a.
b.
c.
d.
15,000
14,700
14,850
0
Problem 28-6 (AICPA Adapted)
On October 1, 2019, Acme Company sold 100,000 gallons of heating oil to Kam Company at
P30 per gallon. Fifty thousand gallons were delivered on December 15, 2019, and the remaining
50,000 gallons were delivered on January 15, 2020.
Payment terms were: 50% due on October 1, 2019, 25% on the first delivery, and the remaining
25% due on the second delivery.
What amount of revenue should be recognized from the sale during 2019?
a.
b.
c.
d.
3,000,000
1,500,000
2,250,000
750,000
Solution:
(50,000 x 30)
1,500,000
The revenue should be recognized at the point of sale which is usually the point of delivery.
Problem 28-7 (AICPA Adapted)
Charlene Farms produced 50,000 kilos of tobacco during 2019 for a certain customer which has
agreed to purchase the entire production at the prevailing market price. Recent legislation assures
that the market price will not fall below P70 per kilo during the next two years. The costs of
selling and distributing the tobacco are immaterial and can be reasonably estimated. The entity
reported inventory at expected exit value.
During 2019, the entity sold and delivered to the customer 40,000 kilos at the market price of
P70. The entity sold the remaining 10,000 kilos during 2020 at the market price of P72.
What amount of sales revenue should be recognized in 2019?
a.
b.
c.
d.
2,800,000
2,880,000
3,500,000
3,600,000
Solution:
Sales revenue in 2019 (50,000 x P70)
3,500,000
Revenue is recognized at the point of production for agricultural, mineral and forest product
when a sale is assured under a forward contract.
The remainder of the sales in 2020 of P20,000 (10,000 x P2) is recognized as revenue in 2020
and not a correction of 2019 revenue.
Problem 28-8 (AICPA Adapted)
Emco Company had the following transactions in 2019:
•
Emco sold goods to a customer for P50,000, FOB shipping point on Dec. 30, 2019.
•
Emco sold 3 pieces of equipment on a contract over a three-year period.
The sale price of each piece of equipment is P100,000. Delivery of each piece of equipment
is on Feb. 10 of each year.
In 2019, the customer paid a P200,000 down payment and will pay P50,000 per year in 2020
and 2021. Collectability is reasonably assured
•
On June 1, 2019, Emco signed a contract for P200,00 for goods to be sold on account.
Payment is to be made in two installments of P100,000 each on Dec. 1, 2019 and Dec. 1,
2020.
The goods are delivered on Oct. 1, 2019. Collection is reasonably assured and the goods may
not be returned.
•
Emco sold goods to a customer on July 1, 2019 for P500,000. If the customer dies not sell the
goods to retail customers by Dec. 31, 2020, the good can be returned to Emco.
The customer sold the goods to retail customer on Oct. 1, 2020.
What amount of sales revenue should be recognized in 2019?
a.
b.
c.
d.
350,000
850,000
450,000
550,000
Solution:
Good Sold FOB shipping point
Delivery of one equipment on Feb. 10, 2019
Good Sold on Account on Oct.1, 2019
Total Sales Revenue in 2019
50,000
100,000
200,000
350,000
Problem 28-9 (AICPA Adapted)
Delicate Company is a wholesale distributor of automotive replacement parts.
The entity provided the following information on December 31, 2019:
Inventory in December 31 bases on physical count
Accounts Payable
Sales
1,250,000
1,000,000
9,000,000
A. Parts held on consignment from another entity to Delicate, the consignee, amounting to
P165,000, were included on the physical count on December 31, 2019, and in accounts
payable on December 31, 2019.
B. P20,000 of parts which were purchased and paid for in December 2019, were sold in the last
week of 2019 and appropriately recorded as sales of P28,000.
The part was included on the physical count on December 31, 2019 because the parts were
on the loading dock waiting to be picked up by customer.
C. Parts in transit on December 31, 2019 to customers, shipped FOB shipping point on
December 28, 2019, amounted to 34,000. The customers received the parts on January 6,
2020.
Sales of P40,000 to the customers for the parts were recorded by Delicate on January 2,
2020.
D. Retailers were holding P210,000 at cost and 250,000 at retail, of goods on consignment from
Delicate, at their stores on December 31, 2019.
E. Goods were in transit from a vendor to Delicate December 31, 2019. The cost of goods was
P25,000. The goods shipped FOB shipping point on December 29, 2019.
1. What is the correct amount of inventory?
a.
b.
1,300,000
1,320,000
c.
d.
1,334,000
1,090,000
2. What is the correct amount of accounts payable?
a.
b.
c.
d.
835,000
960,000
975,000
860,000
3. What is the correct amount of sales?
a.
b.
c.
d.
9,250,000
9,290,000
9,040,000
9,000,000
Solution:
Unadjusted
A
B
C
D
E
Adjusted
Inventory
1,250,000
(165,000)
(20,000)
—
210,000
25,000
1,300,000
Accounts Payable
1,000,000
(165,000)
—
—
—
25,000
860,000
Net Sales
9,000,000
—
—
40,000
—
—
9,040,000
Problem 28-10 (AICPA Adapted)
Quarry Company, a manufacturer of small tools, provided the following information for the year
ended December 31, 2019:
Inventory in December 31 bases on physical count
Accounts Payable
Sales
1,750,000
1,200,000
8,500,000
Additional Information
A. Included on the physical count were tools billed to a customer FOB shipping point on
December 31, 2019. These tools had a cost of P28,000 and were billed at 35,000. The
shipment was in loading dock waiting to be picked up by the common carrier.
B. Good were in transit from a vendor to Quarry Company on December 31, 2019. The invoice
cost was P50,000 and the goods were shipped FOB shipping point on December 29, 2019.
C. Work in Process Inventory costing P20,000 was sent to an outside processor for plating on
December 30,2019.
D. Tools returned by customers ad held pending inspection in the return goods area on
December 31, 2019 were not included on the physical count. On January 8, 2020 the tools
costing P26,000 were inspected and returned to inventory. Credit memos totaling P40,000
were issued to customers on the same date.
E. Tools shipped to a customer FOB destination on December 26, 2019 were in transit on
December 31, 2019 and had a cost of P25,000. Upon notification receipt by the customer on
January 2, 2020, Quarry Company issued a sales invoice for P42,000.
F. Goods with an invoice cost of P30,000 received from a vendor at 5:00 pm on December 31,
2019 were recorded on a receiving report date January 2, 2020. The goods were not included
in accounts payable on December 31, 2019.
G. Goods received from a vendor on December 26, 2019 were included on the physical count.
However, the related P60,000 vendor invoice was not included in accounts payable on
December 31, 2019 because the accounts payable copy of the receiving report was lost.
H. On January 3, 2020, a monthly freight bill in the amount of P20,000 was received. The bill
specifically related to merchandise purchased in December 31,2019, one-half of which was
still in the inventory on December 31,2019.
The freight charge was not included in either the inventory or accounts payable on December
31, 2019.
1. What is the correct amount of inventory?
a.
b.
c.
d.
1,883,000
1,911,000
1,885,000
1,925,000
2. What is the correct amount of accounts payable?
a.
b.
c.
d.
1,330,000
1,280,000
1,250,000
1,270,000
3. What is the correct amount of sales?
a.
b.
c.
d.
8,460,000
8,500,000
8,465,000
8,425,000
Solution:
Unadjusted
A
B
C
D
E
F
G
H
Adjusted
PFA 1
Inventory
1,750,000
—
50,000
20,000
26,000
25,000
30,000
—
10,000
1,911,000
Accounts Payable
1,200,000
—
50,000
—
—
—
—
60,000
20,000
1,330,000
Net Sales
8,500,000
(35,000)
—
—
(40,000)
—
—
—
—
8,425,000
Chapter 29 – INVENTORY COST FLOW
FIFO and average method
Alaiza Mae B. Matibag (Problem 29-1 – Problem 29-3)
Gwyneth M. Medina (Problem 29-4 – Problem 29-6)
Camille R. Marasigan (Problem 29-7 – Problem 29-10)
Problem 29-1 (AICPA Adapted)
Marsh Company had 150,000 units of product A on hand at January 1, costing P21 each.
Purchases of Product A during the month of January were:
January 10
18
28
Units
200,000
250,000
100,000
Unit Cost
22
23
24
A physical count on January 31 shows 250,000 units of product A on hand.
What is the cost of the inventory on January 31 under the FIFO method?
a. 5,850,000
b. 5,550,000
c. 5,350,000
d. 5,250,000
Solution:
January 18
28
Total FIFO Cost
Units
150,000
100,000
250,000
Unit Cost
23
24
Total Cost
3,450,000
2,400,000
5,850,000
Problem 29-2 (IAA)
Jayson Company used the perpetual system.
The following information has been extracted from the records about one product:
Jan 1
6
Feb 5
Mar 5
Mar 8
Apr 10
Apr 30
Beginning Balance
Purchases
Sales
Purchases
Purchase Return
Sale
Sale Return
Units
8,000
3,000
10,000
11,000
800
7,000
300
Unit Cost
70.00
70.50
Total Cost
560,000
211,500
73.50
73.50
808,500
58,800
If the FIFO cost flow method is used, what is the cost of the inventory on April 30?
a. 330,750
b. 315,000
c. 433,876
d. 329,360
Solution:
From March 5 purchase (4,500unitsx73.50)
Whether periodic or perpetual system, the FIFO inventory is the same.
330,750
Problem 29-3 (IAA)
Mildred Company is a wholesaler of office supplies. The FIFO periodic inventory is used.
The entry reported the following activity for inventory of calculators during the month of
August:
August 1
7
12
21
22
29
Inventory
Purchase
Sale
Purchase
Sale
Purchase
Units
20,000
30,000
36,000
48,000
38,000
16,000
Cost
36.00
37.20
38.00
38.60
What is the ending inventory on August 31?
a. 1,500,800
b. 1,501,600
c. 1,522,880
d. 1,529,600
Solutions
Beginning Inventory
Purchases (30,000+48,000+16,000)
Total Units Available
Sales (36,000+38,000)
Ending Inventory in Units
From August 21 purchase (24,000x38.00)
From August 29 purchase (16,000x38.60)
Total cost of inventory, August 31
20,000
94,000
114,000
(74,000)
40,000
912,000
617,600
1,529,600
Problem 29-4 (IAA)
Lagoon Company accumulated the following data for the current year.
Raw Materials – beginning inventory
Purchases
Purchases
90,000 units @ P7.00
75,000 units @ P8.00
120,000 units @ P8.50
The entity transferred 195, 000 units of raw materials to work in process during the year.
Work in process – beginning inventory
Direct Labor
Manufacturing overhead
Work in process – ending inventory
50,000 units @ P14.00
3,100,000
2,950,000
48,000 units @ P15.00
The entity used the FIFO method for valuing inventory.
1. What is the cost of raw materials used?
a. 1,485,000
b. 2,250,000
c. 1,530,000
d. 3,015,000
2. What is the total manufacturing cost?
a. 8,300,000
b. 7,535,000
c. 7,580,000
d. 9,065,000
3. What is the cost of goods manufactured for the current year?
a. 7,535,000
b. 8,235,000
c. 7,515,000
d. 8,280,000
Solutions:
Question 1:
Purchases
Purchases
(75,000 × 8.00)
(120,000 × 8.50)
600,000
1,020,000
Total Purchases
1,620,000
Beginning raw materials (90,000 × 7)
Purchases
Raw materials available for use
Ending raw materials (90,000 × 8.50)
Raw materials used
630,000
1,620,000
2,250,000
(765,000)
1,485,000
Beginning raw materials of 90,000 units plus purchases of 75,000 and 120,000 minus 195,000
units transferred equals 90,000 ending raw materials.
Question 2:
Raw materials used
Direct labor
Manufacturing overhead
Total manufacturing cost
1,485,000
3,100,000
2,950,000
7,535,000
Question 3:
Total manufacturing cost
Beginning work in process (50,000 × 14)
Total work in process
Ending work in process (48,000 × 15)
Cost of goods manufactured
7,535,000
700,000
8,235,000
(720,000)
7,515,000
Problem 29-5 (IAA)
Hilltop Company sells a new product. During a move to a new location, the inventory records for
the product were misplaced. The entity has been able to gather some information from the
purchases and sales records. The July purchases are as follows:
July
5
10
15
25
Quantity
10,000
12,000
15,000
14,000
Unit cost
65
70
60
55
Total cost
650,000
840,000
900,000
770,000
On July 31, 17,000 units were on hand.
The sales for July amount to P6, 000,000 or 60,000 units at P100 per unit. Gross profit on sales
for July was P2, 400,000.
The entity has always used a periodic FIFO inventory costing system.
1. What is the cost of the inventory on July 31?
a. 3,600,000
b. 1,670,000
c.
770,000
d. 950,000
2. What is the cost of inventory on July 1?
a. 1,390,000
b. 2,400,000
c.
950,000
d.
760,000
3. What is the number of units available for sale on July 1?
a. 34,000
b. 26,000
c. 10,000
d. 9,000
Solutions:
Question 1:
July
15
25
FIFO inventory – 7/31
Quantity
3,000
14,000
17,000
Unit cost
60
55
Total cost
180,000
770,000
950,000
Question 2:
Sales
Gross Profit
Cost of goods sold
Inventory – July 31
Cost of goods available for sale
Purchases for July
Inventory – July 1
July
5
10
15
25
Total cost of purchases for July
6,000,000
(2,400,000)
3,600,000
950,000
4,550,000
(3,160,000)
1,390,000
650,000
840,000
900,000
770,000
3,160,000
Question 3:
July 1 (SQUEEZE)
Units purchased
Unit available for sale
Units sold
July 31
26,000
51,000
77,000
(60,000)
17,000
The July 1 balance is squeezed by working back from the July 31 balance.
Problem 29-6 (PHILCPA Adapted)
Lane Company provided the following inventory card during February:
Jan.
Feb.
Price
100
Purchase
Units
20,000
10
31
8
110
30,000
9 Returns from factory (Jan. 10 lot)
28
Units Balance
Used
Units
20,000
10,000
10,000
40,000
(1,000)
41,000
11,000
30,000
Using the weighted average method, what is the cost of inventory on February 28?
a. 3,180,000
b. 3,150,000
c. 3,120,000
d. 3,300,000
Solutions:
Units
Unit cost
Total cost
January 10
20,000
100
2,000,000
February 8
30,000
110
3,300,000
50,000
Weighted Average unit cost (5,300,000/50,000)
Cost of inventory (30,000 × 106)
5,300,000
106
3,180,000
Problem 29-7 (AICPA Adapted)
During the month of January, Metro Company which used a perpetual inventory system
recorded the following information pertaining to inventory:
Balance on 1/1
Purchased on 1/7
Sold on 1/20
Purchased 1/25
Units
10,000
6,000
9,000
4,000
Unit cost
100
300
Total cost
1,000,000
1,800,000
500
2,000,000
Units on hand
10,000
16,000
7,000
11,000
Under the moving average method, what amount should Metro report as inventory on January
31?
a. 2,640,000
b. 3,225,000
c. 3,300,000
d. 3,900,000
Solutions:
January 1
January 7
Balance (2,800,000/16,000)
January 20 sale
Balance
January 25
Balance (3,225,000/11,000)
Units
10,000
6,000
16,000
(9,000)
7,000
4,000
11,000
Unit cost
100
300
175
175
175
500
293
Total cost
1,000,000
1,800,000
2,800,000
(1,575,000)
1,225,000
2,000,000
3,225,000
Problem 29-8 (AICPA Adapted)
Frey Company recorded the following data pertaining to raw material during the month of
January:
Units
Date
1/1 Inventory
1/8 Issue
1/20 Purchase
Received
Cost
200
12,000
240
Issued
4,000
On hand
8,000
4,000
16,000
What is the moving average unit cost of the inventory on January 31?
a.
b.
c.
d.
220
224
230
240
Solutions:
January 1
8
20
(3,680,000/16,000=230)
Units
8,000
(4,000)
4,000
12,000
16,000
Unit cost
200
200
200
240
230
Total cost
1,600,000
(800,000)
800,000
2,880,000
3,680,000
Problem 29-9 (IAA)
Celine Company that used the perpetual system provided the following data relating to an
inventory item.
Jan. 1
10
15
16
30
31
Beginning balance
Purchase
Sale
Sale return
Purchase
Purchase return
Units
5,000
5,000
7,000
1,000
16,000
2,000
Unit cost
200
250
Total cost
1,000,000
1,250,000
150
150
2,400,000
300,000
What is the moving average unit cost on January 31?
a. 167
b. 165
c. 181
d. 225
Solutions:
Jan. 1
10
15
16
30
31
Beginning balance
Purchase
Balance
Sale
Balance
Sale return
Balance
Purchase
Balance
Purchase return
balance
Units
5,000
5,000
10,000
(7,000)
3,000
1,000
4,000
16,000
20,000
(2,000)
18,000
Unit cost
200
250
225
225
225
225
225
150
165
150
167
Total cost
1,000,000
1,250,000
2,250,000
(1,575,000)
675,000
225,000
900,000
2,400,000
3,300,000
(300,000)
3,000,000
Observe that the moving average unit cost changes every time there is a new purchase or a
purchase return.
The moving average unit cost is not affected by a sale or a sale return.
Problem 29-10 (IAA)
Yakal Company reported that a flood recently destroyed many of the financial records. The
entity used an average cost inventory valuation system.
The entity made a physical count at the end of each month in order to determine monthly ending
inventory value. By examining various documents, the following data are gathered:
Ending inventory at July 31
Total cost of units available for sale in July
Cost of goods sold during July
Cost of beginning inventory, July 1
Gross profit on sales for July
July 5
11
15
16
Total purchases
Units
55,000
53,000
45,000
47,000
200,000
60,000 units
1,452,100
1,164,100
4.00 per unit
935,900
Unit cost
5.10
5.00
5.50
5.30
1.
a.
b.
c.
d.
What is the number of units on July 1?
102,500
140,000
76,500
60,000
2.
a.
b.
c.
d.
How many units were sold during the month of July?
242,500
140,000
302,500
260,000
3.
a.
b.
c.
d.
What is the cost of the inventory on July 31?
288,000
410,000
312,600
240,000
Solutions:
Total cost
280,500
265,000
247,500
249,100
1,042,100
Question 1:
Cost of units available for sale for July
Purchases for July
Cost of inventory- July 1
Numbers of unit- July 1 (410,00/P4)
1,452,100
(1,042,100)
410,000
102,500
Question 2:
July 1 inventory
Purchases for July
Total units available for sale for July
July 31 inventory
Units sold during the month of July
102,500
200,000
302,500
(60,000)
242,500
Question3:
Average unit cost (1,452,100/302,500)
Inventory- July 31 (60,000 x 4.80)
4.80
288,000
Another Approach
Cost of units available for sale for July
Cost of goods sold for July
Inventory- July 31
1,452,100
(1,164,100)
288,000
PFA 1
Chapter 30 – Relative Sales Price Method
Christine Paula H. Malabag (Problem 30-1- Problem 30-2)
Krysha Kaye T. Maliwanag (Problem 30-3- Problem 30-4)
Angeline A. Manalo (Problem 30-5)
Problem 30-1 (AICPA Adopted)
Casa Company purchased a tract of land for P12,000,000. The entity incurred additional cost of
P3,000,000 during the remainder of the year in preparing the land for sale.
The tract of land was subdivided into residential lots.
Lot Class
A
B
C
a.
b.
c.
d.
Number of lots
100
100
200
Sales price per lot
240,000
160,000
100,000
3,000,000
3,750,000
6,000,000
7,200,000
Solution 30-1:
A
B
C
(100 x 240,000)
(100 x 160,000)
(100 x 100,000)
Sales Price
24,000,000
16,000,000
20,000,000
60,000,000
Fraction
24/60
16/60
20/60
Allocated cost
6,000,000
4,000,000
5,000,000
15,000,000
Incidentally, the cost of each class A lot is P6,000,000 divided by 100 lots or P60,000
Problem 30-2 (IAA)
Solid company purchased a plot of ground for P18,000,000. The entity also paid an independent
appraiser for the land the amount of P500,000.
The land was developed as residential lots at a total cost of P41,500,000.
Number of lots
20
40
100
Highland
Midland
Lowland
Sales price per lot
1,000,000
750,000
500,000
What total cost should be allocated to Highland lots?
a.
b.
c.
d.
12,000,000
11,900,000
8,400,000
8,300,000
Solution 30-2:
Highland
Midland
Lowland
(20 x 1,000,000)
(40 x 750,000)
(100 x 500,000)
Sales price
20,000,000
30,000,000
50,000,000
100,000,000
Fraction
20/100
30/100
50/100
Total Cost
12,000,000
18,000,000
30,000,000
60,000,000
Problem 30-3 (PHILCPA Adapted)
Elixir Company bought a 10-hectare land for P5,800,000 to be improved, subdivided into lots
and eventually sold.
Taxes and documentation expenses on the transfer of the property amounted to P80,000
Lot class
A
B
C
D
Number of lots
10
20
30
40
Selling price per lot
100,000
80,000
70,000
60,000
Total clearing cost
None
100,000
300,000
800,000
What amount should be allocated as total cost of Class B lots under the relative sales price
method?
a.
b.
c.
d.
1,176,000
1,220,000
1,276,000
1,700,000
Solution 30-3:
A
B
C
D
(10 x 10,000)
(20 x 80,000)
(40 x 70,000)
(50 x 60,000)
Sales Price
1,000,000
1,600,000
2,800,000
3,000,000
8,400,000
Fraction
10/84
16/84
28/64
30/84
Allocated cost
700,000
1,120,000
1,960,000
2,100,000
5,880,000
Allocated cost of Class B
Clearing cost of Class B
Total cost
1,120,000
100,000
1,220,000
Purchase price
Taxes and documentation
Total cost to be allocated
5,800,000
80,000
5,880,000
Problem 30-4 (AICPA Adapted)
During the current year, Link Development Company purchased a tract of land for P9,000,000.
Additional cost of P1,500,000 was incurred in subdividing the land during the year.
Of the tract acreage, 70% was subdivided into residential lots and 30% was conveyed to the city
for road and a park.
Lot class
A
B
C
Number of lots
100
100
200
Sales price per lot
120,000
80,000
50,000
Under the relative sales value method, what is the cost allocated to each Class A lot?
a.
b.
c.
d.
29,400
42,000
36,000
26,250
Solutions 30-4:
A
B
C
(100 x 120,000)
(100 x 80,000)
(200 x 50,000)
Sales Price
12,000,000
800,000
10,000,000
30,000,000
Purchase price of land
Additional cost
Total cost
Cost of Class A per lot (4,200,000 / 100 lots)
Fraction
12/30
8/30
10/30
Allocated cost
4,200,000
2,800,000
3,500,000
10,500,000
9,000,000
1,500,000
10,500,000
42,000
Problem 30-5 (PHILCPA Adopted)
Apitong Company manufactures bath towels. The production comprises 60% of “Class A” which
sells for which sells for which sells for P500 per dozen and 40% of “Class B” which sells for
P250 a dozen.
During the current year, 60,000 dozens were produced at an average cost of P360 a dozen.
The entity revealed the following inventory at the end of the current year:
2,200 dozens “Class A” @ P360
3,000 dozens “Class B” @ P360
Total Inventory
792,000
1,080,000
1,872,000
Using the relative sales value method which management considers as a more equitable basis of
cost distributions, what is the measurement of the inventory?
a.
b.
c.
d.
1,170,000
1,665,000
1,872,000
2,340,000
Solutions 30-5:
Class A (60% x 60,000)
Class B (40% x 60,000)
Total average cost (60,000 x 360)
Allocated Cost:
Class A (18/21,600,000)
Class B (6/21,600,000)
Total Average Cost
Unit Cost:
Class A (16,200,000 / 36,000)
Class B (5,400,000 / 24,000)
Inventory cost:
Class A (2,200 x 450)
Class B (3,000 x 225)
Total Inventory
Units
36,000
24,000
60,000
Sales Price
500
250
Total
18,000,000
6,000,000
24,000,000
21,600,000
16,200,000
5,400,000
21,600,000
450
225
990,000
675,000
1,665,000
PFA
1
Chapter 31 – Lower of Cost and Net Realizable
Value
Purchase commitment
Francheska Dianne C. Rosales (Problem 31-1 – 5)
Jean Pauline M. Salazar (Problem 31-6 – 10)
John Paul M. Salazar (Problem 31-11 – 15)
Problem 10-1 (IAA)
Winter Company provided the following inventory data at year-end:
Skis
Boots
Ski equipment
Ski apparel
Cost
2,200,000
1,700,000
700,000
400,000
NRV
2,500,000
1,500,000
800,000
500,000
What amount should be reported as inventory at year-end?
a.
b.
c.
d.
5,000,000
5,300,000
4,800,000
5,200,000
Solution:
Skis
Boots
Ski equipment
Ski apparel
Cost
NRV
LCNRV
2,200,000
2,500,000
2,200,000
1,700,000
1,500,000
1,500,000
700,000
800,000
700,000
400,000
500,000
400,000
5,000,000
5,300,000
4,800,000
Inventories shall be measured at the lower of cost and net realizable value applied by individual
item.
Problem 31-2 (AICPA Adapted)
Harris Company provided the following information for an interview at year-end:
Historical cost
Estimated selling price
Estimated completion and selling cost
Replacement cost
1,200,000
1,300,000
150,000
1,100,000
What amount should be reported as inventory at year-end?
a.
b.
c.
d.
1,100,000
1,150,000
1,200,000
1,300,000
Solution:
Historical cost
Net realizable value (1,300,000-150,000)
LCNRV
1,200,000
1,150,000
1,150,000
Problem 31-3 (AICPA Adapted)
Aloha Company determined the following information for an inventory at year-end:
Historical cost
Current replacement cost
Net realizable value
Net realizable value less a normal profit margin
Fair value
2,000,000
1,400,000
1,800,000
1,700,000
1,900,000
What amount should be reported as inventory at year-end?
a.
b.
c.
d.
1,400,000
1,700,000
1,800,000
1,900,000
Solution:
Historical cost
Net realizable value
LCNRV
2,000,000
1,800,000
1,800,000
Problem 31-4 (IFRS)
Chicago Company has two products in the industry:
Selling price
Materials and conversion costs
General administration costs
Estimated selling costs
Product X
Product Y
2,000,000
3,000,000
1,500,000
1,800,000
300,000
800,000
600,000
700,000
At the year-end, the manufacture of items of inventory has been completed but no selling costs
have yet been incurred.
1. What amount should be reported as inventory using the LCNRV individual approach?
a.
b.
c.
d.
3,700,000
3,200,000
3,800,000
3,300,000
2. What amount should be reported as inventory using the LCNRV total approach?
a.
b.
c.
d.
3,300,000
3,200,000
3,700,000
2,450,000
In the absence of any statement to the company, the LCNRV should be applied using the
individual approach.
Solution:
Question 1
Net realizable value is the estimated selling price less the estimated cost to complete and the
estimated cost of disposal.
Materials and conversion costs
Selling price
Selling costs
Net realizable value
Product X
Product Y
1,500,000
1,800,000
2,000,000
( 600,000)
1,400,000
3,000,000
( 700,000)
2,300,000
Measurement at lower amount
1,400,000
1,800,000
Measurement of Inventory:
Product X
Product Y
Total Inventory – individual approach
1,400,000
1,800,000
3,200,000
Question 2
Materials and conversion costs:
Product X
Product Y
Total cost
1,500,000
1,800,000
3,300,000
Net realizable value:
Product X
Product Y
Total net realizable value
LCNRV total approach
1,400,000
2,300,000
3,700,000
3,300,000
Problem 31-5 (AICPA Adapted)
Based on a physical inventory taken at year-end, Chewy Company determined the chocolate
inventory on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000.
The entity estimated that after further processing costs of P2,400,000, the chocolate could be
sold as finished candy bars for P8,000,000. The normal profit margin is 10% of sales.
Using the measurement at the lower of cost and net realizable value, what amount should be
reported as chocolate inventory at year-end?
a.
b.
c.
d.
5,600,000
4,000,000
5,200,000
4,800,000
Solution:
Estimated sales price
Cost to complete – processing cost
8,000,000
(2,400,000)
Net realizable value
5,600,000
FIFO cost
Net realizable value
LCNRV
5,200,000
5,600,000
5,200,000
Problem 31-6 (IAA)
Greece Company provided the following data for the current year:
Inventory – January 1:
Cost
Net realizable value
Net Purchases
Inventory - December 31:
Cost
Net realizable value
3,000,000
2,800,000
8,000,000
4,000,000
3,700,000
What amount should be reported as cost of goods sold?
a.
b.
c.
d.
7,000,000
7,100,000
7,300,000
7,200,000
Solution:
Inventory – January 1, at cost
Net Purchases
3,000,000
8,000,000
Goods available for sale
11,000,000
Inventory - December 31, at cost
(4,000,000)
Cost of goods sold before inventory writedown
Loss on inventory writedown
Cost of goods sold after inventory writedown
Required allowance - December 31
(4,000,000 – 3,700,000)
Allowance for inventory writedown – January 1
(3,000,000 – 2,800,000)
Loss on inventory writedown
7,000,000
100,000
7,100,000
300,000
(200,000)
100,000
The amount of any inventory writedown to net realizable value and all losses on inventory shall
be included in cost of goods sold.
The amount of any reversal of inventory writedown shall be deducted from cost of goods sold.
Problem 31-7 (IAA)
At year-end, Julie Company reported ending inventory at P3,000,000 and the allowance for
inventory writedown before any adjustment at P150,000.
Historical cost
Replacement cost
Sales price
Net realizable value
Normal profit
Product 1
Product 2
Product 3
Product 4
800,000
900,000
1,200,000
550,000
250,000
1,000,000
1,200,000
1,300,000
1,100,000
150,000
700,000
1,000,000
1,250,000
950,000
300,000
500,000
600,000
1,000,000
350,000
300,000
What amount of loss on inventory writedown should be included in cost of goods sold?
a.
b.
c.
d.
100,000
200.000
400,000
250,000
Solution:
Product 1
Product 2
Product 3
Product 3
Cost
NRV
LCNRV
800,000
1,000,000
700,000
500,000
550,000
1,100,000
950,000
350,000
550,000
1,000,000
700,000
350,000
2,600,000
Note that under IFRS, replacement cost and normal profit are not taken into consideration in
applying LCNRV.
Total cost
LCNRV
Required allowance for inventory writedown
Allowance before adjustment
Increase in allowance
3,000,000
2,600,000
400,000
(150,000)
250,000
Loss inventory writedown
Allowance for inventory writedown
250,000
250,000
Problem 31-8 (IAA)
White Company carried four items in inventory. The following per-unit data relate to these items
at the end of first year of operations:
Units
Cost
Sale price
Selling cost
Normal profit
A
25,000
105
130
15
20
B
20,000
85
90
10
10
C
40,000
50
45
5
5
D
30,000
65
75
15
10
Category 1:
Category 2:
1. What is the measurement of inventory under LCNRV applied to individual item?
a.
b.
c.
d.
7,625,000
8,275,000
7,725,000
7,875,000
2. What is the measurement of inventory under LCNRV applied to inventory category?
a.
b.
c.
d.
7,875,000
7,725,000
8,275,000
7,625,000
3. What is the measurement of inventory under LCNRV applied to inventory as a whole?
a.
b.
c.
d.
8,275,000
7,625,000
7,875,000
7,725,000
Solutions:
(a)
(b)
(c)
Units
Unit cost
NRV
A
25,000
105
115
B
20,000
85
80
C
40,000
50
40
D
30,000
65
60
(axb)
(axc)
Total cost
NRV
LCNRV
A
2,625,000
2,875,000
2,625,000
B
1,700,000
1,600,000
1,600,000
4,325,000
4,475,000
C
2,000,000
1,600,000
1,600,000
D
1,950,000
1,800,000
1,800,000
Subtotal
3,950,000
3,400,000
Grand total
8,275,000
7,875,000
Category 1:
Category 2:
Category 1:
Subtotal
Category 2:
Question 1:
7,625,000
LCNRV – by individual item
7,625,000
Question 2:
LCNRV – by category
Total cost
NRV
Lower
Category 1
4,325,000
4,475,000
4,325,000
Category 2
3,950,000
3,400,000
3,400,000
7,725,000
Question 3:
Total cost
Total NRV
LCNRV - by total
8,275,000
7,875,000
7,875,000
Problem 31-9 (IFRS)
Uptown Company used the perpetual method to record inventory transactions for the current
year.
Inventory
Sales
Sales return
Cost of goods sold
Inventory losses
1,900,000
6,500,000
150,000
4,600,000
120,000
In the latter part of the year, the entity recorded a P150,000 credit sale of goods costing
P100,000.
These goods were sold on FOB destination terms and were in transit at year-end. The goods were
included in the physical count.
The inventory at year-end determined by physical count had a cost of P2,000,000 and a net
realizable value of P1,700,000.
Any inventory writedown is not yet recorded.
What amount should be reported as cost of goods sold for the current year?
a.
b.
c.
d.
5,
020,000
4,500,000
4,720,000
4,920,000
Solutions:
Physical inventory
Net realizable value
Inventory writedown
Cost of goods sold per book
Cost of goods incorrectly recorded as sold
Inventory losses
Loss on inventory writedown
Adjusted cost of goods sold
2,000,000
1,700,000
300,000
4,600,000
( 100,000 )
120,000
300,000
4,920,000
Problem 31-10 (AICPA Adapted)
Altis Company reported the following information for the current year:
Sales (100,000 units at P150)
Sales discount
Purchases
Purchase discount
15,000,000
1,000,000
9,300,000
400,000
The inventory purchases during the year were as follows:
Beginning inventory, January 1
Purchases, quarter ended March 31
Purchases, quarter ended June 30
Purchases, quarter ended Sept. 30
Purchases, quarter ended Dec. 31
Units
Unit cost
Total cost
20,000
30,000
40,000
50,000
10,000
60
65
50
75
80
1,200,000
1,950,000
2,800,000
3,750,000
800,000
150,000
10,500,000
The accounting policy is to report inventory in the financial statements at the lower of cost and
net realizable value.
Cost is determined under the first-in, first-out method.
At year-end, the entity has determined that the replacement cost of inventory was P70 per unit
and the net realizable value was P72 per unit. The normal profit margin is P10 per unit.
What amount should be reported at cost of goods sold for the current year?
a.
b.
c.
d.
6,500,000
6,300,000
6,700,000
6,900,000
Solution:
Allowance method
September 30 (40,00 x 75)
3,000,000
December 31 (10,000 x 80)
800,000
FIFO cost
3,800,000
Net realizable value (50,000 x 72)
3,600,000
Inventory writedown
200,000
Inventory – January 1 at cost
Purchases
Purchase discount
1,200,000
9,300,000
( 400,000 )
Goods available for sale
10,100,000
Inventory - December 31 at cost
(3,800,000)
Cost of goods sold before inventory writedown
Loss on inventory writedown
Cost of goods sold after inventory writedown
6,300,000
200,000
6,500,000
Direct Method
Goods available for sale
Inventory – December 31 at NRV
Cost of goods sold
10,100,000
(3,600,000)
6,500,000
Observe that the cost of goods sold is the same whether allowance method or direct method.
Problem 31-11 (IAA)
In 2019, North company experienced a decline in the value of inventory resulting in a writedown from cost of P3,600,000 to net realizable value of P3,000,000.
The entity used the allowance method to record the necessary adjustment.
In 2020, market conditions have improved dramatically. On December 31, 2020, the inventory
had a cost of P5,000,000 and net realizable value of P4,600,000.
What is included in the adjusting entry on December 31, 2020?
a.
b.
c.
d.
Debit gain on reversal of inventory writedown P200,000
Credit gain on reversal of inventory writedown P400,000
Debit allowance for inventory writedown P200,000
Credit allowance for inventory writedown P400,000
Solution:
2019
Loss on inventory writedown
Allowance for inventory writedown
600,000
600,000
Cost – December 31, 2019
Net realizable value
Loss on inventory writedown
2020
Allowance for inventory writedown
Gain on reversal of inventory writedown
Cost – December 31, 2020
Net realizable value
Required allowance – December 31, 2020
Allowance – December 31, 2019
Allowance – December 31, 2019
3,600,000
3,000,000
600,000
200,000
200,000
5,000,000
4,600,000
400,000
600,000
(200,000)
Problem 31-12 (AICPA Adapted)
On December 31, 2019, Dos Company has outstanding purchase commitments for 50,000
gallons at P20 per gallon of new material.
It is determined that the market price of the new material has declined to P17 per gallon on
December 31, 2019 and it is expected to decline further to P15 in the first quarter of 2020.
What amount should be recognized as loss on purchase commitment in 2019?
a.
b.
c.
d.
850,000
150,000
250,000
0
Solution:
Loss on purchase commitment (50,000 x 3)
150,000
Problem 31-13 (IACPA Adapted)
On October 1, 2019, Gorgeous Company entered into a 6-month, P5,200,000 purchase
commitment for a supply of a special product.
On December 31, 2019, the market value of this material had fallen to P5,000,000
On march 31, 2020, the market value of the purchase commitment is P4,900,000.
What amount should be recognized as loss on purchase commitment in 2020?
a.
b.
c.
d.
200,000
100,000
300,000
0
Solution:
Market value – December 31, 2019
Market value – March 31, 2020
Additional loss on purchase commitment in 2020
5,000,000
4,900,000
100,000
Problem 31-14 (IAA)
On November 15, 2019, Diamond Company entered into a commitment to purchase 10,000
ounces of gold on February 15, 2020 at a price of p310 per ounce.
On December 31, 2019, the market price of gold is P270 per ounce. On February 15, 2020, the
price of gold is P300 per ounce.
1. What amount should be recognized as loss on purchase commitment in 2019?
a.
b.
c.
d.
400,000
100,000
300,000
0
2. What amount should be recognized as gain on purchase commitment in 2020?
a.
b.
c.
d.
400,000
300,000
100,000
0
3. What amount should be debited to purchases on February 15, 2020?
a.
b.
c.
d.
3,000,000
3,100,000
2,700,000
3,500,000
4. What amount should be recognized as accounts payable on February 15, 2020?
a.
b.
c.
d.
2,700,000
3,100,000
3,500,000
3,000,000
Solutions:
Question 1:
Forward price
Market price – December 31, 2019
Decrease in price
Loss on purchase commitment
310
270
40
400,000
Estimated liability for purchase commitment
(10,000 x 40)
Question 2:
400,000
Market price – December 31, 2019
Market price – February 15, 2020
Increase in price
270
300
30
Gain on purchase commitment (10,000 x 30)
300,000
To gain on purchase commitment cannot exceed the loss on purchase commitment previously
recognized.
Thus, the amount of P300,000 is properly recognized.
Question 3:
Answer a
Question 4:
Entry on February 15, 2020
Purchases (10,000 x 300)
Estimated liability for purchase commitment
Accounts payable (10,000 x 310)
Gain on purchase commitment
3,000,000
400,000
3,100,000
300,000
The amount of purchases should be recorded at the lower between the forward price and the
market price at the date of purchase.
The accounts payable must be recorded at the forward price or agreed purchase price.
Problem 31-15 (AICPA Adapted)
On January 1, 2019, Card Company signed a three-year noncancelable purchase contract, which
allows Card to purchase up to 5,000 units of a computer part annually from Hart Company at
P100 per unit and guarantees a minimum annual purchase of 1,000 units.
During 2019, the part unexpectedly became obsolete. Card had 2,500 units of this inventory on
December 31, 2019, and believed these parts can be sold as scrap for P20 per unit.
1. What amount of loss from the purchase commitment should be reported in the 2019
income statement?
a. 240,000
b. 200,000
c. 160,000
d. 360,000
2. What amount should be recognized as loss on inventory writedown in 2019?
a. 360,000
b. 560,000
c. 200,000
d. 0
Solution:
Question 1:
Remaining contract – 1,000 units each year
2020
2021
(1,000 x P100)
(1,000 x P100)
100,000
100,000
Total
Estimated realizable value (2,000 x P20)
200,000
40,000
Loss on purchase commitment
160,000
Question 2:
Inventory – December 31, 2019, at cost
(2,500 units x P100)
Net realizable value (2,500 units x P20)
250,000
50,000
Loss on inventory writedown
200,000
PFA 1
Chapter 32 – Gross Profit Method
July Kristell I. Villanueva (Problem 32-1 – Problem 32-4)
Lyka A. Villas (Problem 32-5 – Problem 32-8)
Mary Jane G. Macaraig (Problem 32-9– Problem 32-10)
Problem 32-1 (AICPA Adapted)
Gecelle Company reported during the current year:
Beginning Inventory
Net purchases
Net sales
500,000
2,500,000
3,200,000
A physical count at year-end resulted in an inventory of P575,000. The gross profit had remained
constant at 25%. The entity suspected that some inventory may have been taken by a new
employee.
What is the estimated cost of missing inventory at year-end?
a. 100,000
b. 175,000
c. 225,000
d. 25,000
Solution:
Beginning inventory
Net purchases
Goods available for sale
Cost of goods sold (75% x 3,200,000)
500,000
2,500,000
3,000,000
(2,400,000)
Ending inventory
Physical inventory
600,000
575,000
Missing Inventory
25,000
In the absence of any contrary statement, the gross profit rate is based on sales.
Thus, if the gross profit rate is 25% on sales, the cost ratio is 75%.
Problem 32-2 (AICPA Adapted)
Karen Company reported the following information for the current year:
Beginning inventory
Purchases
Freight in
Purchase returns and allowances
3,500,000
Purchase discounts
Sales
Sales returns
Sales allowances
Sales discounts
1,000,000
5,000,000
26,000,000
2,000,000
1,500,000
40,000,000
3,000,000
500,000
A physical inventory taken at year-end resulted in an ending inventory of P4,000,000.
At year-end, unsold goods out on consignment with selling price of P1,000,000 are in the hands
of a consignee.
The gross profit was 40% on sales.
1. What is the cost goods available for sale?
a.
b.
c.
d.
28,000,000
31,000,000
33,000,000
29,500,000
2. What is the cost of goods sold?
a.
b.
c.
d.
21,900,000
22,200,000
21,300,000
24,000,000
3. What is the estimated cost of inventory shortage?
a.
b.
c.
d.
1,800,000
2,700,000
1,200,000
2,100,000
Solutions:
Question 1
Beginning inventory
Purchases
Freight in
Purchase returns and allowances
(3,500,000)
Purchase discounts
5,000,000
26,000,000
2,000,000
(1,500,000)
Cost of goods available for sale
28,000,000
Question 2
Sales
Sales return
40,000,000
(3,000,000)
Net sales
Multiply by cost ratio
37,000,000
60%
Cost of goods sold
22,200,000
Net sales
Gross profit rate on sales
100%
(40%)
Cost ratio
60%
Sales allowances and sales discounts are ignored in determining net sales under the gross profit
method.*
Question 3
Cost of goods available for sale
Cost of goods sold
Ending inventory
Physical count
Cost of goods out on consignment
(1,000,000 x 60%)
Cost of inventory shortage
28,000,000
(22,200,000)
5,800,000
(4,000,000)
( 600,000)
1,200,000
Problem 32-3 (AICPA Adapted)
At year-end, Pamela Company reported that a flood caused severe damage to the entire
inventory. Based on recent history, the entity had a gross profit of 25% of sales.
The entity provided the following information for the current year:
Inventory, January 1
Purchases
Purchase returns
Sales
Sales returns
Sales allowances
500,000
4,000,000
200,000
5,600,000
400,000
100,000
1. What is the cost of goods sold for the year?
a. 4,160,000
b. 4,080,000
c. 3,900,000
d. 3,825,000
2. What is the cost of ending inventory damaged by flood?
a. 475,000
b. 400,000
c. 260,000
d. 220,000
Solutions:
Sales
Sales returns
5,600,000
(400,000)
Net sales
5,200,000
Cost ratio (100% - 25%)
75%
Sales allowances are ignored in determining net sales under the gross profit method.
Goods available for sale
Cost of goods sold (75% x 5,200,000)
Ending inventory destroyed
4,300,000
(3,900,000)
400,000
Problem 32-4 (AICPA Adapted)
On September 30, Brock Company reported that a fire caused severe damage to the entire
inventory. The entity had a gross profit of 30% on cost.
The entity provided the following data for nine months ended September 30.
Inventory at January 1
Net purchases
Net sales
A physical inventory disclosed usable damaged goods which can be sold for P100,000.
1. What is the estimated cost of goods sold for the nine months ended September 30?
a. 5,500,000
b. 4,970,000
c. 5,096,000
d. 5,600,000
2. What is the estimated amount of fire loss?
a. 1,500,000
b. 1,400,000
c. 2,004,000
d. 1,964,000
Solutions:
Cost of goods sold (7,280,000 / 130%)
5,600,000
Sales ratio (100% + 30%)
130%
Inventory – January 1
Net purchases
1,100,000
6,000,000
Goods available for sale
7,100,000
Cost of goods sold
(5,600,000)
Inventory – September 30
Realizable value of damaged goods
1,500,000
(100,000)
Fire loss on inventory
1,400,000
Problem 32-5 (IAA)
At year-end, a storm surge damaged the warehouse of Braveheart Company. The entire
inventory and many accounting records were completely destroyed.
January 1
Inventory
Purchases
Cash Sales
Collection of accounts receivable
Accounts Receivable
Gross profit on sales
December 1
1,500,000
700,000
5,500,000
900,000
8,400,000
1,100,000
40%
What is the inventory loss from the storm surge?
a.
b.
c.
d.
1,180,000
1,720,000
2,700,000
2,260,000
Solution:
Collection of accounts receivable
Accounts Receivable – January 1
Accounts Receivable – December 31
8,400,000
(700,000)
1,100,000
Sales on Account
Cash sales
Total Sales
8,800,000
900,000
Inventory – January 1
Purchases
Goods available for sale
Cost of goods sold (9,700,000 x 60%)
Inventory – December 31
Cost ratio (100%-40%)
9,700,000
1,500,000
5,500,000
7,000,000
(5,820,000)
1.180,000
60%
Problem 32-6 (IAA)
On the night of September 30,2019, a fire destroyed most of the merchandise inventory of Sonia
Company.
All good were completely destroyed except for partial damaged goods that normally sell for
P100,000 and that had an estimated net realizable value of 25,000 and undamaged goods that
normally sell for P60,000.
Inventory, January 1
Net Purchases, January 1 through September 30
Net Sales, January 1 through September 30
Net Sales
Cost of goods sold
Gross Income
Total
9,000,000
6,750,000
2,250,000
2018
5,000,000
3,840,000
1,160,000
660,000
4,240,000
5,600,000
2017
3,000,000
2,200,000
800,000
2016
1,000,000
710,000
290,000
What is the estimated amount of fire loss on September 30,2019?
a.
b.
c.
d.
700,000
615,000
630,000
580,000
Solution:
Average gross profit rate (2,250,000/9,000,000)
25%
Cost Ratio (100% - 25%)
75%
Inventory – January 1
Net purchases
Goods available for sale
Cost of goods sold (5,600,000x75%)
Inventory – September 30
Less: Undamaged goods (60,000x75%)
Realizable value of damaged goods
Fire loss
660,000
4,240,000
4,900,000
(4,200,000)
700,000
45,000
25,000
70,000
630,000
Problem 32-7 (AICPA Adapted)
At year-end, Empress Company had a fire which completely destroyed the goods in process
inventory. A physical inventory was taken after the fire.
The raw materials were valued at P600,000, the finished goods at P1,000,000 and factory
supplies at P100,000 at year-end.
The beginning inventories consisted of the following:
Finished goods
Goods in process
Raw Materials
Factory Supplies
1,400,000
1,000,000
300,000
400,000
Data for the current year
Sales
Purchases
Freight in
Direct labor
Manufacturing overhead – 50% of direct labor
Average gross profit on sales
3,000,000
1,000,000
100,000
800,000
?
30%
1. What is the cost of goods sold?
a.
b.
c.
d.
2,100,000
1,700,000
1,900,000
2,300,000
2. What is the cost of goods manufactured?
a.
b.
c.
d.
2,500,000
1,700,000
3,100,000
2,300,000
3. What is the estimated cost of the ending goods in process that were completely destroyed by
the fire?
a.
b.
1,300,000
2,100,000
c.
d.
2,000,000
1,700,000
Solutions
Question 1:
Cost of goods sold ( 70% x 3,000,000 )
2,100,000
Question 2:
Finished goods - beginning
Cost of goods manufactured (SQUEEZE)
1,400,000
1,700,000
3,100,000
(1,000,000)
Goods available for sale
Finished goods – ending
Cost of goods sold
2,100,000
The cost of goods manufactured is “squeezed” by simply working back from the cost of goods
sold.
Question 3:
Raw materials - beginning
Purchases
Freight in
Raw materials available for use
Raw materials – ending
Raw materials used
Direct labor
Manufacturing overhead (50% x
800,000 )
Total manufacturing cost
Goods in process – beginning
300,000
1,000,000
100,000
1,100,000
1,400,000
( 600,000 )
800,000
800,000
400,000
2,000,000
1,000,000
3,000,000
Total goods in process
Goods in process – ending (SQUEEZE)
Cost of goods manufactured
(1,300,000)
1,700,000
The amount of ending goods in process is “squeezed” by simply working back from the cost of goods
manufactured.
The factory supplies are no longer considered because these are already included in manufacturing
overhead.
Problem 32-8 (IAA)
Moderate Company provided the following information :
Sales on account
Cash sales
June
7,200,000
720,000
July
7,360,000
800,000
August
7,600,000
1,040,000
All merchandise is marked up to sell at invoice cost plus 20%. Inventory at the beginning of each
month is 30% of that month’s cost of goods sold.
1. What is the cost of goods sold?
a.
b.
c.
d.
5,760,000
6,000,000
6,080,000
6,600,000
2. What is the amount of purchases for July?
a.
b.
c.
d.
6,528,000
8,304,000
6,800,000
6,920,000
Solutions:
Question 1:
Cost of goods sold for June
(7,200,000+800,000 = 7,920,000/ 120%)
6,600,000
Question 2:
Cost of goods sold for July
(7,360,000+800,000 = 8,160,000/ 120%)
Cost of goods sold for August
(7,600,000+1,040,000 = 8,640,000/ 120%)
Inventory – July 1
Purchases for July ( SQUEEZED)
Goods Available for sale
(30% x 6,800,000)
6,800,000
7,200,000
2,040,000
6,920,000
8,960,000
Inventory – July 31
Cost of goods sold for July
(30% x 7,200,000)
Sales ratio (100%+20%)
(2,160,000)
6,800,000
120%
Problem 32-9 (AICPA Adapted)
On April 30, a fire damaged the office of Amaze Company. The following balances were
gathered from the general ledger on March 31:
Accounts receivable
Inventory – January 1
Accounts payable
Sales
Purchases

920,000
1,880,000
950,000
3,600,000
1,680,000
An examination of April bank statement and cancelled checks revealed checks written
during the period April 1 – 30 as follows:
Accounts payable as of March 31
240,000
April merchandise shipments
80,000
Expenses
160,000
Deposits during the same period amounted to ₱ 440,000 which consisted of collections
from customers with the exception of ₱ 20,000 refund from a vendor for merchandise is
returned in April.

Customers acknowledged indebtedness of ₱ 1,040,000 at April 30. Customers owed
another ₱ 60,000 that will never be recovered. Of the acknowledged indebtedness,
₱40,000 may prove uncollectible.

Correspondence with suppliers revealed unrecorded obligations at April 30, of ₱ 340,000
for April merchandise shipment including ₱ 100,000 for shipment in transit on that date.

The average gross profit rate is 40%.

Inventory with a cost of ₱ 260,000 was salvaged and sold for ₱ 140,000. The balance of
the inventory was a total loss.
1. What is total amount of sales up to April 30?
a. 4,200,000
b. 4,220,000
c. 4,140,000
d. 4,160,000
2. What is the total amount of purchases up to April 30?
a.
b.
c.
d.
1,760,000
2,100,000
2,020,000
1,680,000
3. What is the inventory on April 30?
a.
b.
c.
d.
1,476,000
1,464,000
1,440,000
1,428,000
4. What is the fire loss to be recognized on April 30?
a. 1,440,000
b. 1,300,000
c. 1,340,000
d. 1,200,000
Solution
Question 1
Accounts receivable - April 30
Writeoff
Collections from customers (440,000 - 20,000)
Total
Less: Accounts receivable - March 31
Sales for April
Sales up to March 31
Total Sales
Question 2
Accounts payable - April 30 for April shipments
Payment for April merchandise shipment
Purchases of April
Purchases up to March 31
1,040,000
60,000
420,000
1,520,000
920,000
600,000
3,600,000
4,200,000
340,000
80,000
420,000
1,680,000
Total purchases up to April 30
Cost Ratio (100% - 40%)
Question 3
Inventory - January 1
Purchases
Purchase return
Goods available for sale
Cost of good sold (4,200,000 - 60%)
Inventory - April 30
Cost Ratio (100% - 40%)
Question 4
Inventory - April 30
Goods in transit
Salvage value of inventory
Fire loss
2,100,000
60%
1,880,000
2,100,000
(20,000)
3,960,000
(2,520,000)
1,440,000
60%
1,440,000
(100,000)
(140,000)
1,200,000
Problem 32 – 10 (AICPA Adapted)
In conducting an audit of Remy Company for the year ended June 30, 2019, the entity’s CPA
observed that the physical inventory at an interim date, May 31, 2019.
Inventory, July 1, 2018
Physical Inventory, May 31, 2019
Sales for 11 months ended May 31, 2019
Sales for year ended June 30, 2019
Purchases for 11 months ended May 31, 2019
Purchases for year ended June 30, 2019
a. Shipments received in May and included in the
physical inventory but recorded as June purchases
b. Shipments received in unsalable condition and
excluded from physical invemtory. Credit memos
had not been received nor had chargebacks to
vendors been recorded:
Total at May 31, 2019
Total at June 30, 2019 (including the May
unrecorded chargebacks)
875,000
950,000
8,400,000
9,600,000
6,750,000
8,000,000
75,000
10,000
15,000
c. Deposit made with vendor and charge to purchases
in April 2019. Product was shipped in July 2019.
20,000
d. Deposit made with vendor and charge to purchases
in May 2019. Product was shipped FOB Destination,
on May 29, 2019 and was included in May 31, 2019
physical inventory as goods in transit.
55,000
e. Through the carelessness of the receiving
department
a June shipment was damaged by rain. This shipment
was later sold in June at the cost of
100,000
1. What is the cost of goods sold for the month of June 2019?
a. 980,000
b. 960,000
c. 880,000
d. 780,000
2. What is the inventory on June 30, 2019?
a.
b.
c.
d.
1,240,000
1,140,000
1,160,000
1,340,000
Solution
Question 1
Balances
a
b
c
d
Adjusted
Physical Inventory
May 31, 2019
950,000
−
−
−
(55,000)
895,000
Purchases up to
May 31,2019
6,750,000
75,000
(10,000)
(20,000)
(55,000)
6,740,000
Purchases up to
June 30, 2019
8,000,000
−
(15,000)
(20,000)
−
7,965,000
Inventory - July 1, 2018
Purchases up to May 31, 2019
Goods available for sale
Inventory - May 31, 2019
Cost of goods sold
875,000
6,740,000
7,615,000
(895,000)
6,720,000
Sales up to May 31, 2019
Cost of goods sold
Gross profit
8,400,000
6,720,000
1,680,000
Gross profit rate on sales (1,680,000/8,400,000)
20%
Cost ratio (100% - 20%)
80%
Sales for June 2019 (9,600,000 - 8,400,000)
Question 2
980,000
Inventory, July 1, 2018
Purchases for the year ended June 30, 2019 (as adjusted)
Goods available for sale
Cost of goods sold
Sales with profit (9,500,000 - 80%) 7,600,000
Sales without gross profit
100,000
Inventory, June 30, 2019
875,000
7,965,000
8,840,000
(7,700,000)
1,140,000
PFA 1
Chapter 33 – Retail Method
Nadin Olga D. Semira
Rachell V. Undecimo
Diana Rose M. Vico
Problem 33-1 (AICPA Adopted)
Janelle Company used the retail inventory method to approximate the ending inventory.
Beginning Inventory
Purchases
Freight-in
Purchase Returns
Purchase Allowances
Departmental transfer in
Markup
Markup Cancelation
Markdown
Markdown Cancelation
Sales
Sales Discounts
Employee Discounts
Estimated Normal Shoplifting Loss
Estimated Normal Shrinkage
Cost
650,000
9,000,000
200,000
300,000
150,000
200,000
Retail
1,200,000
14,700,000
500,000
300,000
400,000
100,000
1,200,000
200,000
9,500,000
100,000
500,000
600,000
400,000
1. What is the estimated cost of ending inventory using the conservative approach?
a. 2,400,000
b. 2,460,000
c. 3,060,000
d. 2,700,000
2. What is the estimated cost of ending inventory using the average cost approach?
a. 2,560,000
b. 2,624,000
c. 3,264,000
d. 2,880,000
Solution 33-1
Question 1 Answer a
Beginning Inventory
Purchases
Freight-in
Purchase Returns
Purchase allowances
Department transfer in
Markup
Markup cancelation
Goods Available-Conservative
Markdown
Markdown Cancelation
Goods Available-Average
Sales
Employee discounts
Normal Shoplifting loss
Normal Shrinkage
Ending Inventory at Retail
Cost
650,000
9,000,000
200,000
(300,000)
(150,000)
200,000
9,600,000
9,600,000
Retail
1,200,000
14,700,000
(500,000)
300,000
400,000
(100,000)
16,000,000
(1,200,000)
200,000
15,000,000
(9,500,000)
(500,000)
(600,000)
(400,000)
4,000,000
Conservative Cost Ratio (9,600,000/16,000,000)
Conservative Cost (60%x4,000,000)
60%
2,400,000
Question 2 Answer a
Average Cost Ratio (9,600,000/15,000,000)
Average Cost (64%x4,000,000)
64%
2,560,000
Note that ending inventory at retail of P4, 000, 000 is the same whether conservative or average
cost approach.
In the absence of any statement to the contrary, the average cost approach should be followed.
Problem 33-2 (AICPA Adopted)
At year end, Huff Company provided the following information:
Beginning Inventory
Purchases
Additional Markups
Available for Sale
Cost
735,000
4,165,000
4,900,000
Retail
1,015,000
5,775,000
210,000
7,000,000
Sales for the year totaled P5, 530, 000. Markdowns amounted to P70, 000.
Under the approximate lower of average cost or market retail method, what is the ending
inventory?
a.
b.
c.
d.
1,540,000
1,400,000
1,078,000
980,000
Solution 33-2 Answer D
Available for Sale
Markdowns
Sales
Ending Inventory
Conservative Cost Ratio (4,900,000/7,000,000)
Ending Inventory at cost
Cost
4,900,000
Retail
7,000,000
(70,000)
(5,530,000)
1,400,000
70%
980,000
The approximate lower of average cost or market retail method is the same as the conservative
or conventional retail approach.
Problem 33-3 (AICPA Adopted)
Dean Company used the retail inventory method to estimate inventory at year-end.
Cost
720,000
4,080,000
Beginning Inventory
Purchases
Net Markups
Net Markdowns
Sales
Estimated Normal Shoplifting Losses
Retail
1,000,000
6,300,000
700,000
500,000
6,820,000
80,000
Under the average cost retailed method, what is the estimated cost of ending inventory?
a.
b.
c.
d.
408,000
600,000
360,000
384,000
Solution 33-3 Answer D
Beginning Inventory
Purchases
Net Markups
Available for Sale- Conservative
Cost ratio (4,800,000/8,000,000)
Net markdowns
Available for Sale-Average
Cost ratio (4,800,000/7,500,000)
Sales
Estimated shoplifting losses
Ending Inventory at retail
Conservative Cost (600,000 x 60%)
Average Cost (600,000 x 64%)
Cost
720,000
4,080,000
4,800,000
Retail
1,000,000
6,300,000
700,000
8,000,000
4,800,000
(500,000)
7,500,000
60%
The requirement is the average cost approach.
(6,820,000)
(80,000)
600,000
360,000
384,000
Problem 33-4 (IAA)
Caramel Company used the average retail inventory method. At year-end, the following
information relating to the inventory was gathered.
Beginning Inventory
Purchases
Purchase Discounts
Freight in
Markups
Markdowns
Sales
Sales Return
Sales discount
Sales Allowance
Cost
190,000
2,990,000
40,000
150,000
Retail
450,000
4,350,000
300,000
400,000
4,400,000
100,000
50,000
30,000
What is the estimated cost of the ending inventory?
a.
b.
c.
d.
400,000
280,000
245,000
315,000
Solution 33-4 Answer B
Beginning Inventory
Purchases
Purchase Discounts
Freight in
Markups
Markdowns
GAS-Average (cost ratio- 70%)
Net sales (4,400,000-100,000)
Ending inventory at retail
Average cost (400,000 x 70%)
Cost
190,000
2,990,000
(40,000)
150,000
3,290,000
Retail
450,000
4,350,000
300,000
(400,000)
4,700,000
(4,300,000)
400,000
280,000
Note that the sales discount and sales allowance are ignored in determining the net sales under
the retail method.
Problem 33-5 (AICPA Adopted)
Hutch Company used the average cost retail inventory method to account for inventory. The
following informationrelated to operations fo the current year:
Beginning invetory and purchases
Net markups
Net markdowns
Sales
Cost
6,000,000
Retail
9,2000,000
400,000
600,000
7,800,000
What amount should be reported as cost of goods sold for the current year?
a.
b.
c.
d.
4,800,000
4,875,000
5,200,000
5,250,000
Solution 33-5 Answer C
Beginning invetory and purchases
Net markups
Net markdowns
Goods available for Sales
Cost Ratio (6,000/9,000)
66 2/3%
Sales
Ending inventory
Average cost (1,200,000 x 66 2/3%)
Goods available for sale
Ending inventory
Cost of goods sold
Cost
6,000,000
6,000,000
Retail
9,2000,000
400,000
(600,000)
9,000,000
(7,800,000)
1,200,000
800,000
6,000,000
(800,000)
5,200,000
Problem 33-6 (IAA)
Domicile Company had the following amounts all at retail:
Beginning inventory
Purchases
Purchase return
Net markup
Net markdown
Sales
Sales return
Employee discounts
Normal shortage
Abnormal shortage
180,000
6,000,000
300,000
900,000
140,000
3,600,000
90,000
80,000
130,000
200,000
What is the ending inventory at retail?
a.
b.
c.
d.
2,700,000
2,800,000
2,880,000
2,920,000
Solution 33-6 Answer A
Beginning inventory
Purchases
Purchase return
Net markup
Net markdown
Abnormal shortage
Goods available for sale at retail
Less: Sales
Sales return
Employee discounts
Normal shortage
Ending inventory at retail
180,000
6,000,000
(300,000)
900,000
(140,000)
(200,000)
6,440,000
3,600,000
(90,000)
80,000
130,000
3,720,000
2,720,000
Problem 33-7 (PHILCPA Adopted)
At the beginning of current year, the inventory of Ron Company was P1,000,000 at retail and
P560,000 at cost. During the current year, the entity registered the following purchases:
Cost
Retail price
Original markup
4,000,000
6,200,000
2,200,000
The amount of net sales was P5,400,000. The following reductions were made in the reatil price:
To meet price competition
To dispose of overstock
Miscellaneous reductions
50,000
30,000
120,000
During the current year, the selling price of the certain inventory increased from P200 to P300.
This additional markup applied to 5,000 items but was later canceled on the remaining 1,000
items.
What is the estimated cost of ending invetory using the average cost retail metod?
a.
b.
c.
d.
2,000,000
2,400,000
1,240,000
1,200,000
Solutions 33-7 Answer C
Beginning inventory
Purchases
Markup (5,000xP100)
Markup cancelation (1,000 x P100)
Goods available-conservation 60%
Markdowns (reduction in retail price)
Goods available-average 62%
Net sales
Ending invetory at retail
Conservative cost (60% x 2,000,000)
Average cost (62% x 2,000,000)
Cost
560,000
4,000,000
4,560,000
4,560,000
1,200,000
1,240,000
Retail
1,000,000
6,200,000
500,000
(100,000)
7,600,000
(200,000)
7,400,000
(5,400,000)
2,000,000
Problem 33-8 (IAA)
Airborne company used the average cost retail inventory method. The entity provided the
following information for the current year.
Beginning Inventory
Net purchase
Departmental transfer – credit
Net markup
Inventory shortage – sales price
Employee discounts
Sales, including sales of P400,000 of items which
were marked down from P500,000
Cost
1,650,000
3,725,000
200,000
Retail
2,200,000
4,950,000
300,000
150,000
100,000
200,000
4,000,000
What is the estimated cost of ending inventory?
a. 1,950,000
b. 2,600,000
c. 1,924,000
b. 2,250,000
Solution 33-8 Answer A
Beginning Inventory
Net purchase
Departmental transfer – credit
Net markup
Markdown (5000,000 – 400,000)
Goods available for sale (75%)
Sales
Inventory shortage – sales price
Employee discounts
Ending inventory at retail
Average cost (2,600,000 x 75%)
Cost
1,650,000
3,725,000
(*200,000)
5,175,000
Retail
2,200,000
4,950,000
(300,000)
150,000
(100,000)
6,900,000
(4,000,000)
(100,000)
(200,000)
2,600,000
1,950,000
Problem 33-9 (AICPA Adapted)
Bizarre Company had always inventoried finished goods at selling price and prepared the
following statement on this basis
Sales
Raw materials used at cost
Labor
Overhead
Total
Work in process at cost:
January 1
December 31
Cost of goods manufactured
Finished good at selling price:
January 1
December 31
Gross Income
1,400,000
500,000
600,000
240,000
1,340,000
612,000
752,000
240,000
840,000
140,000
1,200,000
600,000
600,000
800,000
What is the cost of goods sold?
a. 500,000
b. 200,000
c. 840,000
b. 600,000
Solution 33-9 Answer C
Finished goods – January 1 (60% x 240,000)
Cost of goods manufactured (squeeze)
Goods available for sale
Finished goods – December 31(60% x 840,000)
Cost of goods sold
Cost
140,000
1,200,000
1,344,000
(540,000)
840,000
The amount of goods manufactured at retail is determined by simply working back.
Cost ratio
=
=
=
Goods manufactured at cost
Goodsmanufactured at retail
1,200,000/2,000,000
60%
Retail
240,000
2,000,000
2,240,000
(840,000)
1,400,000
Problem 33-10 (AICPA Adapted)
Union company used the FIFO retail method of inventory valuation. The entity provided the
following information for the current year.
Beginning Inventory
Purchases
Net markups
Net markdowns
Employee discounts
Sales, revenue
Cost
600,000
3,000,000
Retail
1,500,000
5,500,000
500,000
1,000,000
200,000
4,500,000
What is the estimated cost of ending inventory?
a. 1,200,000
b. 1,040,000
c. 1,000,000
b. 960,000
Solution 33-10 Answer A
Beginning Inventory
Purchases
Net markups
Net markdown
Net purchases
Cost ratio (3,000,000/5,000,000)
Goods available for sale
Sales
Ending inventory at retail
FIFO cost (2,600,000 x 65%)
Cost
600,000
3,000,000
Retail
1,500,000
5,000,000
500,000
1,000,000
300,000
60%
3,600,000
5,000,000
1,200,000
6,500,000
(4,500,000)
2,000,000
Problem 33-11 (IAA)
Ross Company provided the following data for the current year.
Beginning Inventory
Net purchase
Net markup
Net markdown
Net sales
Cost
1,650,000
4,200,000
Retail
2,000,000
?
800,000
200,000
?
The entity used the average retail inventory method to estimate ending inventory. It was
determined that the average cost of the ending inventory was P1,950,000. If the entity used the
FIFO retail method, the cost ratio would have been 60%.
1. What is the amount of the net purchases at original retail before markup and markdown?
a.
b.
c.
d.
7,600,000
7,000,000
4,200,000
6,400,000
2. What amount was reported as net sales
a.
b.
c.
d.
9,000,000
3,000,000
6,000,000
7,000,000
3. What amount was reported as cost of goods sold?
a.
b.
c.
d.
3,900,000
3,000,000
3,600,000
1,800,000
Solution 33-11
Under the FIFO retail, the cost ratio is determined by considering the current purchases only
excluding beginning inventory but including markup and markdown.
Question 1 Answer D
Net Purchases (SQUEEZE)
4,200,000
Net markup
800,000
Net markdown
Net purchase after markup and markdown
6,400,000
(200,000)
4,200,000
Net purchases at cost
7,000,000
4,200,000
Divided by FIFO cost ratio
60%
Net purchases after markup and markdown
7,000,000
Question 2 Answer C
Beginning inventory
1,650,000
2,000,000
Net purchases
4,200,000
6,400,000
Net markup
800,000
Net markdown
Goods available for sale
Average cost ratio (5,850,000/9,000,000)
Ending inventory at cost
Divide by average cost ratio
(200,000)
5,850,000
9,000,000
65%
1,950,000
65%
Ending inventory at retail
3,000,000
Goods available for sale at retail
9,000,000
Ending inventory at retail
(3,000,000)
Net Sales
6,000,000
Question 3 Answer A
Goods available for sale at cost
Ending inventory at cost
Cost of goods sold
5,850,000
(1,950,000)
3,900,000
PFA 1
CHAPTER 34 – Biological Assets
Michelle Aubrey B. Panopio (Problem 34-1 - Problem 34-3)
Abegail I. Perez (Problem 34-4 - Problem 34-6)
Nicole D. Pintor (Problem 34-7 - Problem 34-9)
Problem 34-1 (IFRS)
Forester Company provided the following assets in a forest plantation and farm:
Freestanding trees
Land under trees
Roads in forest
Animals related to recreational activities
Bearer plants
Bearer animals
Agricultural produce growing on bearer plants
Agricultural produce harvested
Plants with dual use
1. What total amount should be reported as biological assets?
a. 7,800,000
b. 7,200,000
c. 8,400,000
d. 9,200,000
2. What total amount should be included in property, plant, and equipment?
a. 4,600,000
b. 3,400,000
c. 1,800,000
d. 4,200,000
5,000,000
600,000
300,000
1,000,000
1,500,000
2,000,000
800,000
1,200,000
1,400,000
Solutions:
Question 1:
Freestanding trees
Bearer animals
Agricultural produce growing on bearer plants
Plants with dual use
Total biological assets
5,000,000
2,000,000
800,000
1,400,000
9,200,000
Question 2:
Land under trees
Roads in forest
Animals related to recreational activities
Bearer plants
Total property, plant, and equipment
The agricultural produce harvested should be included in inventory.
600,000
300,000
1,000,000
1,500,000
3,400,000
Problem 34-2 (IFRS)
Joan Company provided the following data:
Value of biological asset at acquisition cost on December 31, 2019
Fair valuation surplus on initial recognition at fair value on December 31,
2019
Change in fair value to December 31, 2020 due to growth and price
fluctuation
Decrease in fair value due to harvest in 2020
600,000
700,000
100,000
90,000
1. What is the carrying amount of the biological asset on December 31, 2020?
a. 1,400,000
b. 1,310,000
c. 1,300,000
d. 1,490,000
2. What amount of net gain from change in fair value of biological asset should be reported in
the 2020 income statement?
a. 100,000
b. 800,000
c. 710,000
d. 10,000
Solutions:
Question 1:
Acquisition cost – December 31, 2019
Increase in fair value on initial recognition
Change in fair value in 2020
Decrease in fair value due to harvest
Carrying amount – December 31, 2020
Question 2:
600,000
700,000
100,000
(90,000)
1,310,000
Change in fair value in 2020
Decrease in fair value due to harvest in 2020
Net gain from change in fair value in 2020
100,000
(90,000)
10,000
Problem 34-3 (IFRS)
Salve Company is engaged in raising dairy livestock. The entity provided the following
information during the year:
Carrying amount on January 1
Increase due to purchases
Gain arising from change in fair value less cost of disposal attributable to
price change
Gain arising from change in fair value less cost of disposal attributable to
physical change
Decrease due to sales
Decrease due to harvest
5,000,000
2,000,000
400,000
600,000
850,000
200,000
What is the carrying amount of the biological asset on December 31?
a.
b.
c.
d.
6,950,000
6,000,000
8,000,000
7,150,000
Solution:
Carrying amount – January 1
Increase due to purchases
Gain from change in fair value due to price change
Gain from change in fair value due to physical change
Decrease due to sales
Decrease due to harvest
Carrying amount – December 31
5,000,000
2,000,000
400,000
600,000
(850,000)
(200,000)
6,950,000
Problem 34-4 (IAA)
Bear Company produced milk for sale to local and national ice cream producers. The entity
began operations at the beginning of current year by purchasing milk cows for P8, 000, 000.
The entity provided the following information for the current year:
Acquisition cost, January 1
Change in fair value due to growth and price changes
Decrease in fair value due to harvest
Milk harvested during the year but not yet sold
8,000,000
2,500,000
250,000
400,000
1. What amount of gain on change in fair value should be recognized for biological asset in the
current year?
a. 2,500, 000
b. 2,250,000
c. 2,900,000
d. 2,650,000
2. What amount of gain on change in fair value should be reported for agricultural produce in
the current year?
a. 200,000
b. 400,000
c. 150,000
d. 0
Solutions:
Question 1:
Change in fair value due to growth and price changes
Decrease in fair value due to harvest
Net gain from Biological asset
2,500,000
(250,000)
2,250,000
Question 2:
Inventory
400,000
Gain on agricultural produce
400,000
Problem 34-5 (IFRS)
On January 1, 2014, Farm Company planted trees on its land. The entity purchased the land two
years ago at a cost of P1, 000,000.
The trees were considered bearing plants and had accumulated cost of P500, 000 on December
31, 2018.
By January 1, 2019, the trees have matured and were produce for a period of 5 years.
On December 31, 2019, the trees produced fruit and the fair value less cost of disposal on such
date was P50, 000. There was no harvest during 2019.
On December 31, 2020, the fruits were harvested and the fair value less cost of disposal on such
date was P75, 000.
1. What is the carrying amount of the property, plant, and equipment on December 31, 2019?
a. 1, 500,000
b. 1, 400,000
c. 1, 000,000
d. 0
2. What is the carrying amount of the biological asset on December 31, 2019?
a. 550, 000
b. 450, 000
c. 50, 000
d. 0
3. What amount of gain from change in fair value is recognized for the agricultural produce for
the year ended December 31, 2020?
a. 75, 000
b. 50, 000
c. 25, 000
d. 0
Solutions:
Question 1:
Bearer plants – January 1, 2019
Depreciation for 2019 (500,000÷5)
500,000
(100,000)
Carrying amount of bearer plants – December 31, 2019
Land
Total Property, Plant, and Equipment
400,000
1,000,000
1,400,000
The bearer plants are included in property, plant, and equipment and therefore depreciated upon
maturity over the five-year period expected to produce fruit.
Of course, the land is non-depreciable.
Question 2:
Fair value less cost of disposal – December 31, 2019
50,000
The agricultural produce growing on bearer plant is considered biological asset and measured
at fair value less cost of disposal.
Question 3:
Fair value less cost of disposal — December 31, 2020
Fair value less cost of disposal — December 31, 2019
Gain from change in fair value in 2020
75,000
50,000
25,000
Problem 34-6 (IFRS)
At the beginning of the current year, Honey Company had a herd of 10 2-year old animals.
One animal aged 2.5 years was purchased on July 1for P108 and one animal was born on July 1.
No animals were sold or disposed of during the year.
Fair value less cost disposal per unit
2 – year old animal on January 1
2.5 – year old animal on July 1
New born animal on July 1
2 – year old animal on December 31
2.5 – year old animal on December 31
New born animal on December 31
3 – year old animal on December 31
1.5 – year old animal on December 31
100
108
76
105
111
72
120
80
1. What is the fair value of the biological assets on December 31?
a. 1,400
b. 1,320
c. 1,440
d. 1,360
2. What amount of gain from change in fair value of biological assets should be recognized in
the current year?
a. 222
b. 292
c. 300
d. 332
3. What is the gain from change in fair value due to price change?
a. 292
b. 222
c. 237
d. 55
Solutions:
Question 1:
Fair value pf 3-year old animals on December 31 (11 x P120)
Fair value of 0.5-year old animal on December 31, the newborn (1 x P80)
Total fair value – December 31
1,320
80
1,400
Question 2:
Fair value of 10 animals on January 1 (10 x P100)
Acquisition cost of one animal on July 1
Carrying amount of biological assets excluding the newborn – December
31
1,000
108
1,108
Fair value on December 31
Carrying amount
Gain from change in fair value
1,400
1,108
292
Question 3
Gain from change in fair value due to price change:
10 2-year old animals (105 - 100 = 5 x 10)
1 2.5-year old animal (111 - 108 = 3 x 1)
1 newborn on July 1 (72 - 70 = 2 x 1)
Total
50
3
2
55
Gain from change in fair value due to physical change:
10 3 – year old animals acquired January 1 (120 – 105 = 15 x 10)
1 3 – year old animal acquired July 1 (120 – 111 = 9 x 1)
1 0.5 – year old born on July 1 (80 – 72 = 8 x 1)
1 newborn (70 x 1)
Total
150
9
8
70
237
Price change
Physical change
Total gain from change in fair value
55
237
292
Problem 34-7 (IFRS)
Columbia Company is a producer of coffee. The entity is considering tge valuation of harvested
coffee beans.
Industry practice is to value the coffee beans at market value and uses as reference a local
publication “Accounting for Successful Forms”.
On December 31, 2019, the entity has harvested coffee beans costing P3,000,000 and with a fair
value less cost of disposal of P3,500,000 at the point harvest.
Because of long aging and maturation process after harvest, the harvested coffee beans were still
on hand on December 31, 2020.
On December 31, 2020, the fair value less cost of disposal s P3,900,000 and the net realizable
value is P3,200,000.
What is the measurement of the coffee beans inventory on December 31, 2020?
a.
b.
c.
d.
3,000,000
3,500,000
3,200,000
3,900,000
Solution:
Fair value measurement stops at the point of harvest and PAS 2 on inventory appllies after such
date.
Accordingly, the coffee beans inventory shall be measured at the lower of cost and net realizable
value on December 31, 2020.
The fair value less cost of disposal of P3,500,000 at the point of harvest is the initial cost of
coffee beans inventory for purposes of applying PAS 2.
The net realizable value of P3,200,000 is the measurement on December 31, 2020 because this is
lower than the deemed cost of P3,500,000.
Problem 34-8 (IFRS)
Dairy Company provided the following information for the current year:
Cash
Trade and other receivables
Inventories
Dairy livestock-immature
Dairy livestock- mature
Property, plant and equipment, net
Trade and other payables
Note payable - long term
Share capital
Retained earnings – beginning
Fair value of milk produced
Gain from change in fair value
Inventories used
Staff costs
Depreciation expense
Other operating expenses
Income tax expense
1. What is the net income for the current year?
a. 650,000
b. 600,000
c. 130,000
d. 185,000
2. What is the fair value of the biological assets at year-end?
a. 550,000
b. 450,000
c. 500,000
d. 400,000
Solutions:
500,000
1,500,000
100,000
50,000
400,000
1,400,000
520,000
1,500,000
1,000,000
800,000
600,000
50,000
140,000
120,000
15,000
190,000
55,000
Question 1:
Fair Value of milk produced
Gain from change in fair value
Total Income
Inventories used
Staff costs
Depreciation expense
Other operating expenses
Income before income tax
Income tax expense
Net Income
600,000
50,000
650,000
(140,000)
(120,000)
( 15,000)
(190,000)
185,000
( 55,000)
130,000
Question 2:
Dairy livestock - immature
Dairy livestock - mature
Fair value of biological assets
50,000
400,000
450,000
Problem 34-9 (IAA)
At the beginning of the current year, Divine Company purchased a vineyard costing P6,000,000.
It was determined that the grape vines can produce fruit for a period of 8 years.
During the year, the entity harvested grapes with a fair value less cost of disposal of P2,000,000.
By the end of the year, the grapes were sold for P3,500,000.
The entity incurred operating expenses of P500,000. The entity used the perpetual method.
1. What is the gross income on sales?
a. 3,500,000
b. 1,500,000
c. 2,000,000
d. 1,750,000
2. What is the pretax net income?
a. 1,250,000
b. 2,750,000
c. 2,250,000
d. 3,000,000
Solutions:
Question 1:
Sales
Cost of goods sold
Gross income
3,500,000
2,000,000
1,500,000
Question 2:
Gross income
Gain from agricultural produce -harvested grapes
Operating expenses
Depreciation of bearer plant (6,000,000 / 8 years)
Pretax net income
1,500,000
2,000,000
( 500,000)
( 750,000)
2,250,000
PFA 1
Chapter 01 – The Accounting Profession
Ma. Ruby A. Bagsit
QUESTION 1-23 Multiple choice (ACP)
1. What is the law regulating the practice of accountancy in
a. R.A. No. 9298
b. R.A. No. 9198
c. R.A. No. 9928
d. RA. No. 9892
2. It is the body authorized by law to promulgate rules and regulations affecting the practice
of the accountancy profession in the Philippines.
a. Board of Accountancy
b. Philippine Institute of Certified Public Accountants
c. Securities and Exchange Commission
d. Financial Reporting Standards Council
3. The qualifications of the members of the Board of Accountancy include all of the
following, except
a. Must be a natural-born citizen and a resident of the Philippines.
b. Must be duly registered CPA with at least ten years of work experience in any scope
of practice of accountancy.
c. Must be of good moral character and must not have been convicted of crime
involving moral turpitude.
d. Must have any pecuniary interest, directly or indirectly, in any school conferring
an academic degree necessary for admission to the practice of accountancy.
4. What are. the three main areas in the practice of the accountancy profession?
a. Public accounting, private accounting, and managerial accounting
b. Auditing, taxation and managerial accounting
c. Financial accounting, managerial accounting and corporate accounting
d. Public accounting, private accounting, and government accounting
5. What is the primary service of CPAs in public practice?
a. Auditing
b. Taxation
c. Managerial accounting
d. Controllership
6. Accountants employed in entities in various capacity as accounting staff, chief accountant
or controller are said to be engaged in
a. Public accounting
b. Private accounting
c. Government accounting
d. Financial accounting
7. It is the area of the accountancy profession that encompasses the process of analyzing,
classifying, summarizing and communicating all transactions involving the receipt and
disposition of government funds and property and interpreting the results thereof.
a. Internal auditing
b. External auditing
c. Private accounting
d. Government accounting
8. The Continuing Professional Development is required for
a. Renewal of CPA license
b. Accreditation to practice the accountancy profession.
c. Both renewal of CPA license and accreditation to practice the accountancy
profession.
d. Neither renewal of CPA license nor accreditation to practice the accountancy
profession.
9. Certified Public Accountants are licensed by
a. The Philippine Institute of Certified Public Accountants
b. The Securities and Exchange Commission
c. The Financial Executives Institute of the Philippines
d. The state government
10. Which statement is incorrect in relation to the practice of public accounting?
a. Single practitioners for the practice of public accounting shall be registered CPAs in
the Philippines.
b. Partners of partnership formed for the practice of public accounting shall be
registered CPAs in the Philippines.
c. The Securities and Exchange Commission can register any corporation
organized for the practice of public accounting.
d. The Professional Regulation Commission upon favorable recommendation of the
Board of Accountancy shall issue certificate of accreditation to CPAs in public
practice provided the registrant has acquired a minimum of three years of
meaningful experience in public practice.
QUESTION 1-24 Multiple choice (ACP)
1. Which is the accounting standard-setting body in the Philippines at the present time?
a. Accounting Standard Council
b. Auditing and Assurance Standards Council
c. Philippine Accounting Standards Board
d. Financial Reporting Standards
2. All of the following are represented in FRSC, except
a. Board of Accountancy
b. Securities and Exchange Commi88ion
c. Commission on Audit
d. Department of Budget and Management
3. The Philippine Financial Reporting Standards collectively include
a. PFRS corresponding to IFRS.
b. PAS corresponding to IAS
c. Philippine Interpretations corresponding to IFRIC and SIC Interpretations and
Interpretations developed by PIC.
d. All of these are included in Philippine Financial Reporting Standards.
4. GAAP is an abbreviation for
a. Generally authorized accounting procedures
b. Generally applied accounting procedures
c. Generally accepted auditing practices
d. Generally accepted accounting principles
5. Accounting standard-setting has been characterized as
a. A political process
b. Using a scientific method
c. Pure deductive reasoning
d. A legal process
QUESTION 1-25 Multiple choice (IFRS)
1. The International Accounting Standards Board was formed
a. To enforce IFRS in foreign countries
b. To develop a single set of high quality IFRS
c. To establish accounting standards for multinational entities
d. To develop accounting standards for countries that do have their own standard-setting
bodies
2. The IASB declared that the merits of proposed standards are assessed
a. From a position of neutrality
b. From a position of materiality
c. Based on possible impact on behavior
d. Based on arguments of lobbyist
3. What is the chronological order in the evaluation of a typical standard?
a. Exposure draft, Standard and Discussion paper
b. Exposure draft, Discussion paper and Standard
c. Standard, Discussion paper and Exposure draft
d. Discussion paper, Exposure draft and Standard
4. The IASB publishes standards called
a. International Accounting Standards
b. Financial Reporting Standards
c. International Financial Reporting Standards
d. Statement of Financial Accounting Standards
5. The IASB employs a due process system which
a. Is an efficient system for collecting dues from members.
b. Enables interested parties to express their views on issues under consideration.
c. Identifies the most important accounting issues.
d. Requires that all CPAs must receive a copy of IFRS.
6. What is due process in the standard-setting by IASB?
a. IASB operates in full view of the public.
b. Public hearings are held on proposed standards.
c. Interested parties can make their views known.
d. All of these are part of due process in standard-setting.
7. What is a possible danger if politics plays too big a role in developing IFRS?
a. Accounting standards are not truly generally accepted.
b. Individuals may influence the standards.
c. User groups become active.
d. The IASB delegates its authority to elected officials.
8. Accounting standard-setting
a. Can be described as a political process which reflects political actions of various
interested user groups.
b. Is based solely on research and empirical findings.
c. Is a legalistic process.
d. Is democratic in the sense that a majority of accountants must agree,
9. The International Accounting Standards Board
a. Was the predecessor to the IASC.
b. Can overrule the USA GAAP.
c. Promotes the use of high quality and understandable global accounting
standards.
d. Has its headquarters in Geneva
10. IFRIC Interpretations issued by IASB
a. Are considered authoritative and must be followed.
b. Cover newly identified financial reporting issues not specifically addressed.
c. Cover issues with conflicting interpretations.
d. All of these are true about IFRIC Interpretations.
QUESTION 1-26 Multiple choice (IAA)
1. Financial accounting is concerned with Has.
a. General purpose reported on financial position and financial performance.
b. b Special reports for inventory management.
c. Special report for income tax computation.
d. General purpose report on change in share prices.
2. Financial accounting can be broadly defined as the area of amounting that prepares
a. General purpose financial statements to be used by parties internal to the entity.
b. b Financial statements to be used by investors.
c. General purpose financial statements to be used by parties both internal and
external to the entity.
d. Financial statements to be used primarily by management.
3. Financial accounting emphasizes reporting to
a. Management
b. Regulatory bodies
c. Internal auditors
d. Creditors and investors
4. Managerial accounting emphasizes
a. Reporting financial information to external users
b. Reporting to the Securities and Exchange Commission
c. Combining accounting with data processing
d. Developing accounting information for use within an
5. Which statement is true regarding managerial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting need not follow GAAP while financial accounting must
follow GAAP.
c. Managerial accounting has a future focus.
d. The emphasis on managerial accounting is relevance and the emphasis on financial
accounting is timeline
QUESTION 1-27 Multiple choice (IAA)
1. Generally accepted accounting principles
a. Are accounting principles based on law.
b. Derive their credibility and authority from law.
c. Derive their authority from regulatory authority.
d. Derive their credibility and authority from recognition and acceptance by the
accountancy profession.
2. Which statement best describes generally accepted accounting principles?
a. The accounting principles have been formulated in the public sector.
b. The accounting principles have been developed on the basis of such factors as
usage and practical necessity.
c. The accounting principles are the same as laws .
d. The accounting principles do not apply to SMEs.
3. Proper application of generally accepted accounting principles is most dependent upon
a. Existence of specific guidelines
b. Oversight of regulatory bodies
c. External audit function
d. Professional judgment of the accountant
4. Once an accounting standard has been established
a. The standard is continually reviewed to see if modification is necessary.
b. The standard is not reviewed.
c. The task of reviewing the standard is given to a national organization of CPAs.
d. No revisions should be made to the standard.
5. The primary responsibility for properly applying GAAP lies with
a. External auditor
b. Internal auditor
c. Management
d. National accounting organization
PFA 1
Chapter 02 – CONCEPTUAL FRAMEWORK:
Objective of Financial Reporting
Atienza, Kimberly Claire P.; Jochebed Jasa; Marc Constante Matira; Mariel Balanza;
Andrea A. Balmes
QUESTION 2-12 Multiple choice (IFRS)
2. Which statement is not true about the Conceptual Framework for Financial Reporting?
e. The Conceptual Framework is an IFRS.
f. The Conceptual Framework describes the concepts for general purpose financial
reporting.
g. In case of conflict, the requirements of the IFRS prevail over the Conceptual
Framework.
h. All of these statements are not true.
3. Which is a purpose of the Conceptual Framework?
a. To assist the ISB to develop IFRS based on consistent concepts.
b. To assist preparers to develop consistent accounting policy when no Standard applies
to a particular transaction.
c. To assist all parties to understand and interpret IFRS.
d. All of these can be considered a purpose of the Conceptual Framework.
4. Which is not a purpose of the Conceptual Framework?
a. To assist users of financial statements in interpreting the Standards.
b. To assist preparers of financial statements in applying the Standards.
c. To assist preparers of financial statements in developing an accounting policy when a
Standard allows an accounting policy choice.
d. To assist the Board of Accountancy in promulgating rules and regulations
affecting the accountancy profession.
5. The Conceptual Framework provides the foundation for Standards that
a. Contribute to transparency by enhancing international comparability and quality of
financial information.
b. Strengthen accountability of management.
c. Contribute to economic efficiency by helping investors to identify opportunities and
risks across the world.
d. All of these are the result of IFRS.
QUESTION 2-13 Multiple choice (IFRS)
1. What is the authoritative status of the Conceptual Framework?
a. The Conceptual Framework has the highest level of authority.
b. In the absence of a standard or an interpretation that specifically applies to a
transaction, the Conceptual Framework shall be followed.
c. In the absence of a standard or an interpretation that specifically applies to a
transaction, management shall consider the applicability of the Conceptual
Framework in developing and applying an accounting policy that results in
information that is relevant and reliable.
d. The Conceptual Framework applies only when the IASB develops new standards.
2. The Conceptual Framework is intended to establish
a. GAAP in financial reporting.
b. The meaning of "present fairly in accordance with GAAP”.
c. The objectives and concepts for use in developing standards of financial
accounting and reporting.
d. The hierarchy of sources of GAAP.
3. A Conceptual Framework should
a. Lead to uniformity of financial statements
b. Eliminate alternative accounting principles.
c. Guide multinational entities in developing generally accepted auditing standards.
d. Define the basic objectives, terms and concepts of accounting.
4. Which is not a purpose of the Conceptual Framework?
a. To provide definitions of key terms and concepts
b. To provide specific guidelines for resolving situations not covered by existing
accounting standards.
c. To assist accountants selecting among alternative accounting and reporting
methods.
d. To assist IASB in the standard-setting process.
QUESTION 2-14 Multiple choice (IAA)
1. In the Conceptual Framework for Financial Reporting, what provides the "why" of
accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Element of financial statement
d. Objective of financial reporting
2. The underlying theme of the Conceptual Framework is
a. Decision usefulness
b. Understandability
c. Timeliness
d. Comparability
3. Which is not of purpose of having a Conceptual Framework?
a. To enable the accountancy profession to solve more quickly emerging practical
problems
b. To provide a foundation from which to build more useful financial accounting
standards
c. To enhance comparability of financial statements across entities
d. To assist regulatory agencies in issuing rules and regulations for a particular
industry
4. Which statement is not true concerning the Conceptual Framework?
a. The Conceptual Framework should be a basis for standard setting.
b. The Conceptual Framework should allow practical problems to be solved more
quickly.
c. The Conceptual Framework should be based on fundamental truth derived
from the law of nature.
d. The Conceptual Framework should increase users' understanding and confidence
in financial reporting.
QUESTION 2-15 Multiple choice (IAA)
1. The overall objective of financial reporting is to provide information
a. That is useful for decision making.
b. About assets, liabilities and equity of an entity.
c. About financial performance during a period.
d. That allows owners to assess management performance.
2. The primary focus of financial reporting has been on meeting the needs of which of the
following groups?
a. Management
b. Existing and potential investors, lenders and other creditors
c. National taxing authorities
d. Independent CPAs
3. The primary objective of financial reporting is to provide useful information to
a. Management
b. Capital providers
c. Regulatory body
d. Government
4. Which is an objective of financial reporting?
a. To provide information that is useful in making investing and credit
decisions.
b. To provide information that is useful to management.
c. To provide information about the potential users.
d. To provide information about ways to solve internal and external conflicts about
the entity.
5. What is an objective of financial reporting?
a. To provide information that is useful to management in making decisions.
b. To provide information that clearly portrays nonfinancial transaptions.
c. To provide information that is useful to assess the amount, timing, and
uncertainty of prospective cash receipts.
d. To provide information that excludes claims against the resources.
6. An objective of financial reporting is to provide
a. Information about the investors in the entity.
b. Information about the liquidation value.
c. Information that is useful in assessing cash flow prospects.
d. Information that will attract new investors.
7. Assessing cash flow prospects is interpreted to mean
a. Cash basis accounting is preferred over accrual basis.
b. Information about the financial effects of cash receipts and cash payments is
generally considered the best indicator of ability to generate favorable cash flows.
c. Over the long run, trends in revenue and expenses are generally more
meaningful than trends in cash receipts and disbursements.
d. All of the choices are correct regarding assessing cash flow prospects.
QUESTION 2-16 Multiple choice (AICPA Adapted)
1. The objectives of financial reporting are based on
a. The need for conservatism
b. Reporting on management stewardship
c. Generally accepted accounting principles
d. The needs of the users of the information
2. Financial reporting pertains to
a. Individual business entities, rather than to industries or an economy as a
whole or to members of society as consumers
b. Individual business entities and an economy as a whole or to members of society
as consumers
c. Individual business entities and an economy as a whole, rather than to industries
or to members of society as consumers
d. Individual business entities, industries and an economy as a whole, rather than to
members of society as consumers
3. During a period when an entity is under the direction of a particular management,
financial reporting will directly provide information about
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance
4. Which of the following is not true about an objective of financial reporting?
a. Financial reporting shall provide information about entity resources, claims
against those resources and changes in them.
b. Financial reporting shall not provide information useful in evaluating
management stewardship.
c. Financial reporting shall provide information useful in investment, credit and
similar decisions.
d. Financial reporting shall provide information useful in assessing cash flow
prospects.
5. Which is not an objective of financial reporting?
a. To provide information about assets and claims against those assets
b. To provide information that is useful in assessing sources and uses of cash
c. To provide information that is useful in lending and investing decisions
d. To provide information about liquidation value of an entity
PFA 1
Chapter 03 – CONCEPTUAL FRAMEWORK:
Qualitative Characteristics
Jose Jigoro John Billen; Claire Brett E. Burgos; Regina Coeli C. Cabangon; Cabillo, Russel
Ashley B.; Godwin J. De Guzman; Kristialyn Del Mundo
QUESTION 3-27 Multiple Choice (IAA)
1. What are qualities characteristics of financial statements?
a. Qualitative characteristics are the attributes that make the information provided
in financial statements useful users.
b. Qualitative characteristics are broad classes of financial effects of transactions and
other events.
c. Qualitative characteristics are non-qualitative aspects of financial position and
financial performance.
d. Qualitative characteristics measure the extent to which an entity has complied with all
relevant standards and interpretations.
2. Qualitative characteristics
a. Are considered either fundamental or enhancing.
b. Contribute to the decision-usefulness of financial reporting information.
c. C. distinguish better information from inferior information for decision- making
purposes.
d. All of the above
3. The fundamental qualitative characteristics are
a. Relevance and faithful representation
b. Relevance, faithful representation and materiality
c. Relevance and reliability
d. Faithful representation and materiality
4. Accounting information is considered relevant when it
a. Can be depended upon to represent the economic conditions and events that is
intended to represent.
b. Is capable of making a difference in a decision.
c. C. is understandable by reasonably informed users.
d. Is verifiable and neutral.
5. The ingredients of relevant financial information are
a. Predictive value and confirmatory value
b. Predictive value, confirmatory value and timeliness
c. Predictive value, confirmatory value and materiality
d. Predictive value, confirmatory value and timeliness
6. What is the quality of information that gives assurance that it is reasonably free from
error and bias?
a. Relevance
b. Faithful representation
c. Verifiability
d. Neutrality
7. Which is the best description of faithful representation in relation to information in
financial statements?
a. Influence on the economic decision of users
b. Inclusion of a degree of caution
c. Freedom from material error
d. Comprehensibility to users
8. To achieve faithful representation, the financial statements
a. Must have predictive and confirmatory value.
b. Must be complete, neutral and free from error.
c. Are understandable, comparable, verifiable and timely.
d. Must possess all of these.
9. The financial accounting information in directed toward the common needs of users.
a. relevance
b. verifiability
c. neutrality
d. completeness
10. The economic substance of a transaction shall prevail over the legal form.
a. Form over substance
b. Substance over form
c. Relevance
d. Completeness
QUESTION 3-28 Multiple Choice (IAA)
1. The enhancing qualitative characteristics of financial information are
a. Comparability and understandability
b. Verifiability and timeliness
c. Comparability, understandability and verifiability
d. Comparability, understandability, verifiability and timeliness
2. Financial information exhibits consistency when
a. Accounting procedures are adopted which smooth net income and make results
consistent between years.
b. Gains and losses are shown separately.
c. Accounting entities give similar events that same accounting treatment each
period.
d. Expenditures are reported as expenses.
3. When information about two different entities engaged in the same industry has been
prepared and presented in similar manner, the information exhibits the enhancing
qualitative characteristics of
a. Relevance
b. Faithful Representation
c. Consistency
d. Comparability
4. The characteristic that is demonstrated when a high degree of consensus can be secured
among independent measurers using the same measurement method is
a. Relevance
b. Understandability
c. Verifiability
d. Neutrality
5. Which concept of accounting holds that, to the maximum extent possible, financial
statements shall be based on arm’s length transactions?
a. Revenue realization
b. Verifiability
c. Monetary Unit
d. Matching
6. An entity issuing the annual financial reports within one month at the end of reporting
period is an example of which enhancing quality of accounting information?
a. Neutrality
b. Timeliness
c. Predictive Value
d. Representational faithfulness
7. Allowing entries to estimate rather than physically count inventory at an interim period is
an example of a tradeoff between
a. Verifiability and Comparability
b. Timeliness and Comparability
c. Timeliness and Verifiability
d. Neutrality and Consistency
8. Which qualitative characteristics of financial information requires that information
should not be biased in favor of one group of users to the detriment of others?
a. Relevance
b. Free from error
c. Completeness
d. Neutrality
9. For information to be more useful, the linkage between the users, and the decisions made
is
a. Relevance
b. Faithful Representation
c. Understandability
d. Verifiability
10. Which statement is true in relation to the enhancing qualitative characteristic of
understandability?
a. Users have a reasonable knowledge of business and economic activities and
review the information with reasonable diligence.
b. Users are expected to have significant business knowledge.
c. Financial statements shall exclude complex matters.
d. Financial statements shall be free from material error.
QUESTION 3-29 Multiple choice (IAA)
1. The overriding qualitative characteristic of accounting information is
a. Relevance
b. Understandability
c. Faithful representation
d. Decision usefulness
2. Which of the following terms best describes information that influences the economic
decisions of users?
a. Reliable
b. Prospective
c. Relevant
d. Understandable
3. What is the quality of information that enables users to better forecast future operations?
a. Faithful representation
b. Materiality
c. Comparability
d. Relevance
4. According to the Conceptual Framework, predictive value and confirmatory value are
ingredients of
a. Relevance
b. Faithful representation
c. Understandability
d. Comparability
5. Which term best describes information in financial statements that is unbiased?
a. Understandable
b. Comparable
c. Relevant
d. Neutral
6. What is meant by comparability when discussing financial accounting information?
a. Information has predictive and confirmatory value.
b. Information is reasonably free from error.
c. Information is measured and reported in a similar fashion across entities.
d. Information is timely.
7. What is meant by consistency when discussing financial accounting information?
a. Information is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.
8. Which of the following is not an enhancing qualitative characterisitc?
a. Understandability
b. Profit-oriented
c. Timeliness
d. Comparability
9. Changing the method of inventory valuation should be reported under what quality of
information?
a. Understandability
b. Verifiability
c. Timeliness
d. Comparability
10. When an entity applies the same accounting treatment to similar events from period to
period, the entity is exhibiting which of the following qualities?
a. Verifiability
b. Consistency
c. Predictive value
d. All of the choices are correct
QUESTION 3-30 Multiple choice (IAA)
1. When there is agreement between a measure or description and the phenomenon it
purports to represent, the information possesses which characteristic?
a. Verifiability
b. Predictive value
c. Faithful representation
d. Timeliness
2. The qualitative characteristic of faithful representation includes
a. Predictive value
b. Neutrality
c. Confirmatory value
d. Timeliness
3. Enhancing qualitative characteristics of accounting information include all of the
following, except
a. Timeliness
b. Materiality
c. Comparability
d. Verifiability
4. The enhancing quality of understandability means that information should be understood
by
a. Those who are experts in the interpretation of financial information
b. Those who have a reasonable understanding of business and economic activities
c. Financial analysts
d. CPAs
5. Enhancing qualitative characteristics of accounting information include
a. Relevance and comparability
b. Comparability and timeliness
c. Understandability and relevance
d. Neutrality and comparability
6. When different accountants independently agree on the amount and method of reporting
an economic event, what is the concept demonstrated?
a. Reliability
b. Comparability
c. Completeness
d. Verifiability
7. Verifiability implies
a. Legal evidence
b. Logic
c. Consensus
d. Legal verdict
8. When an entity has started placing its quarterly financial statements on its web page,
thereby reducing by ten days the time to get information to investors and creditors, the
qualitative concept involved is
a. Comparability
b. Consistency
c. Timeliness
d. Faithful representation
9. When an entity changed the inventory valuation method, which characteristic is
jeopardized by this change?
a. Comparability
b. Representational faithfulness
c. Consistency
d. Feedback value
10. Recognizing expected loss immediately but deferring expected gain is an example of
a. Materiality
b. Conservation
c. Cost effectiveness
d. Timeliness
QUESTION 3-31 Multiple choice (AICPA Adopted)
1. The ability through consensus among measurers to ensure that information represents
what it purports to represent is an example of the concept of
a. Relevance
b. Verifiability
c. Comparability
d. Feedback value
2. Which of the following accounting concepts states that an accounting transaction shall be
supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar conclusion?
a. Conservatism
b. Objectivity
c. Periodicity
d. Stable monetary unit
3. Objectivity is assumed to be achieved when a transaction
a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arm’s length transaction between two independent parties
d. Allocates revenue and expenses in a rational and systematic manner
4. The principle of objectivity includes the concept of
a. Summarization
b. Classification
c. Conservatism
d. Verifiability
5. Proponents of historical cost maintain that statements prepared using historical cost are
more
a. Objective
b. Relevant
c. Indicative of purchasing power
d. Conservative
6. The consistency standard requires that
a. Expenses should be reported when incurred.
b. The effect of accounting changes upon income should be properly disclosed.
c. Gains and losses should not be recognized.
d. Accounting procedures should be adopted when the result is a consistent rate of
return.
7. Which of the following relates to both relevance and faithful representation?
a. Comparability
b. Feedback value
c. Neutrality
d. Free from error
8. Which violates the concept of faithful representation?
a. Financial statements were issued nine months late.
b. Expected risks are not reported.
c. Property, plant and equipment with carrying amount increased to management
estimate of market value.
d. Management reports regularly refer to new projects.
9. What is the underlying concept governing the GAAP pertaining to recording gain
contingencies?
a. Conservatism
b. Relevance
c. Consistency
d. Reliability
10. The usefulness of providing information in financial statements is subject to the
constraint of
a. Consistency
b. Cost-benefit
c. Reliability
d. Representational faithfulness
QUESTION 3-32 Multiple choice (IAA)
1. Which statement about materiality is true?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of relative size or importance.
c. An item is material if the conclusion or omission would influence the judgment of a
primary user.
d. All of these statements are true about materiality
2. An item would be considered material when
a. The expected benefits exceed additional costs.
b. The impact on earnings is greater than 10%.
c. The standard definition of materiality is met.
d. The omission or misstatement would make a difference to the primary users.
3. The Conceptual Framework includes which constraint?
a. Prudence
b. Conservatism
c. Cost
d. All of the choices are constraints
4. Which best describes the cost-benefit constraint?
a. The benefit of the information must be greater than the cost of providing it.
b. Financial information should be free from cost.
c. Cost of providing financial information is not always evident or measurable but must
be considered.
d. All of the choices are correct.
5. Conservatism is selecting an accounting alternative that
a. Understates assets and net income
b. Has the least favorable impact on equity
c. Overstates liabilities
d. Is likely to mislead users of financial information
PFA 1
Chapter 04 – Conceptual Framework
Camarig, Lovely Queen Shaira C.; Colobong, Quencey Jane B.; De Castro, Roseshel S.
QUESTION 4-12 Multiple Choice (Conceptual Framework)
6. What is the general objectives of financial statements?
i. To provide information about economic resources of an entity, claims against the entity
and changes in the economic resources and claims.
j. To assess future cash flows to the entity.
k. To assess management stewardship.
l. To satisfy the information needs of primary users.
7. A reporting entity is
e. Necessarily a legal entity.
f. Necessarily an economic entity.
g. An entity that is required or chooses to prepare financial statements.
h. A regulatory government authority.
8. A reporting entity
e. Can be a single entity.
f. Can be a portion of single entity.
g. Can compromise more than one entity.
h. All of these can be considered as a reporting entity.
9. If the reporting entity comprises both the parent and its subsidiaries, the financial statements are
referred to as,
e. Consolidated Financial Statements
f. Unconsolidated Financial Statements
g. Combined Financial Statements
h. Separate Financial Statements
10. Combine financial statements provide financial information about
e. The parent and its subsidiaries
f. The parent
g. The subsidiaries
h. Two or more entity without a parent-subsidiary relationship
QUESTION 4-13 Multiple Choice (IAA)
1. Which best describes and the them going concern?
a. When current liabilities exceed current assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalent to the entity
d. The expenses exceed income
2. Which is an implication of the going concern assumption?
a. The historical cost principle is credible
b. Depreciation and amortization policies are justifiable and appropriate
c. The current and noncurrent classification of assets and liabilities is justifiable and
significant
d. All of these are an implication of going concern
3. The relatively stable economic, political and social environment supports
a. Conservatism
b. Materiality
c. Timeliness
d. Going concern
4. Which of the following is not a basic assumption underlying financial accounting?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Historical cost assumption
5. Which basic assumption may not be followed when an entity in bankruptcy reports financial
results?
a. Economic entity assumption
b. Going concern assumption
c. Periodicity assumption
d. Monetary unit assumption
6. The economic entity assumption
a. Is inapplicable to unincorporated businesses
b. Recognizes the legal aspects of business organizations
c. Requires periodic income measurement
d. Is applicable to all forms of business organizations
7. What is being violated if an entity provides financial reports in connection with a new product
introduction?
a. Economic entity
b. Periodicity
c. Monetary unit
d. Continuity
8. Which underlying assumption serves as the basis for preparing financial statements at artificial
points in time?
a. Accounting entity
b. Going concern
c. Accounting period
d. Stable monetary unit
9. Which basic accounting assumption is threatened by the existences of severe inflation in the
economy?
a. Monetary unit assumption
b. Periodicity assumption
c. Going concern assumption
d. Economic entity assumption
10. Inflation is ignored in accounting due to
a. Economic entity assumption
b. Going concern assumption
c. Monetary unit assumption
d. Time period assumption
Questions 4-14 Multiple choice (AICPA Adapted)
1. The concept of accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved
2. When a parent and subsidiary relationship exists, consolidated financial statements are
prepared in recognition of
a. Legal entity
b. Economic entity
c. Stable monetary unit
d. d. Time period
3. The evaluation of promise to receive cash in the future at present value is valid because
fo what accounting concept?
a. Entity
b. Time period
c. Going Concern
d. Monetary Unit
4. What is the accounting concept that justifies the usage of accruals and deferrals?
a. Going concern
b. Materiality
c. Consistency
d. Stable Monetary Unit
5. During the lifetime an entity accountant produce financial statements at arbitrary points
in time in accordance with what basic accounting concept?
a. Accrual
b. Periodicity
c. Unit of measure
d. d. Continuity
Chapter 05 – Conceptual Framework Elements of Financial Statements
Esguerra, Michaiah Alexandra; Jill Wendy R. De Torres
QUESTION 5-10 Multiple Choice (ACP)
1. The elements directly related to the measurement of financial position are
a. Asset, liability and equity
b. Asset and liability
c. Income and expenses
d. Asset, liability, equity, income and expense
2. The elements of financial position describe amounts of resources and claims against
resources
a. During a period of time
b. At a moment in time
c. During a period of time and at a moment in time
d. Neither during a period of time nor at a moment in time
3. The elements directly related to the measurement of financial performance are
a. Income and expense
b. Asset, liability and equity
c. Asset and liability
d. Income, expense and equity
4. It is a present economic resource controlled by the entity as a result of past events.
a. Asset
b. Liability
c. Equity
d. Income
5. It is a present obligation of the entity to transfer an economic resource as a result of past
events.
a. Asset
b. Liability
c. Equity
d. Expense
6. It is the residual interest in the assets of the entity after deducting all the liabilities.
a. Income
b. Equity
c. Retained earnings
d. All of the choices match the definition
7. It is an increase in asset or a decrease in liability that results in increase in equity other
than contribution from equity holders.
a. Asset
b. Liability
c. Income
d. Expense
8. It is a decrease in asset or an increase in liability that results in decrease in equity other
than distribution to equity holders
a. Asset
b. Liability
c. Income
d. Expense
9. This arises in the course of ordinary regular activities of the entity and is referred to by a
variety of different names including sales, fees, interest, dividends, royalties, and rent.
a. Income
b. Revenue
c. Profit
d. Gain
10. Which statement in relation to income is true?
a. Income encompasses both revenue and gain
b. Revenue encompasses both income and gain.
c. Gain encompasses both income and revenue.
d. Income is technically the same as revenue.
QUESTION 5-11 Multiple Choice (Conceptual Framework)
1. Which is not within the new definition of an asset
a. An asset is a present economic resource
b. The economic resource is a right that has potential to produce economic benefit
c. The economic resource is controlled by the entity as a result of past event
d. Future economic benefit is expected to flow to the entity.
2. Which of the following criteria need not be satisfied for a liability to exist?
a. The entity has an obligation
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of a past event.
d. The settlement is expected to result in an outflow of economic benefit
3. A present obligation exists as a result of past event if
a. The entity has already obtained economic benefit.
b. The entity must transfer an economic resource.
c. The entity has not yet obtained economic benefit but must transfer an economic
resource.
d. The entity has already obtained economic benefit and must transfer
economic resource.
4. Rights that have the potential to produce economic benefits and correspond to an
obligation of another entity include all, except
a. Right to receive cash
b. Right to receive goods
c. Right to exchange economic resources wih another entity on faborable terms.
d. Right over property, plant, and equipment
5. An economic resource could produce economic benefit it an entity is entitled to all,
except
a. To receive contractual cash flows
b. To exchange economic resources with another entity on unfavorable terms
c. To receive cash by selling the economic resource to
d. To extinguish a liability by transferring an economic resource
6. It is the present ability to direct the use of an economic resource and obtain the benefit
that may flow from it.
a. Control
b. Legal right
c. Obligation
d. Ownership
7. It is a duty or responsibility that an entity has no practical ability to avoid
a. Right
b. Obligation
c. Equity
d. Expense
8. Obligations to transfer an economic resource include all, except.
a. Obligation to pay cash
b. Obligation to deliver goods
c. Obligation to provide services
d. Obligation to transfer an economic resource even if a specified future event
does not occur
9. Which statement is not true about income and expense?
a. Income is increase in asset or decrease in liability that results in increase in equity
other than contribution from equity holders
b. Expense is decrease in asset or increase in liability that results in decrease in
equity other than distribution to equity holders
c. Income and expenses are the elements that relate to financial position
d. Income is broader than revenue
10. This new term refers to the statement of profit or loss and a statement presenting other
comprehensive income.
a. Income statement
b. Statement of comprehensive income
c. Statement of financial performance
d. Statement of financial position
QUESTION 5-12 Multiple Choice (AICPA Adapted)
1. Revenue may result from
a. A decrease in an asset from primary operations.
b. An increase in an asset from incidental transactions.
c. An increase in a liability from incidental transactions.
d. A decrease in a liability from primary operations.
2. What is the primary distinction between revenue and gains?
a.
b.
c.
d.
The materiality of the amount
The likelihood that the transaction will recur
The nature of the activity that gives rise to the transaction
The method of disclosing the transaction
3. The term income
a. Includes revaluation surplus
b. Includes adjustment of prior period error.
c. Includes gain resulting from the sale of an asset in an arm’s length transaction.
d. Is the same as retained earnings.
4. A decrease in an asset arising from peripheral or incidental transaction is called
a. Capital expenditure
b. Cost
c. Loss
d. Expense
5. An outflow of asset based on an activity that represents the major operations is called
a. Loss
b. Liability
c. Expense
d. Equity
TFA
Chapter 06 – CONCEPTUAL FRAMEWORK
Recognition and Measurement
Rose Ann Penalosa; Mary Eliza Lei Lumbera; Lezyl Untalan; Alvin Garais; Akira Zen
Pantollana; Kyla Christelle Garcia; Roumella Lane Muzar
QUESTION 6-17 Multiple Choice (Conceptual Framework)
1. It is the process of capturing for inclusion in the financial statements an item that meets
the definition of the elements.
a. Recognition
b. Measurement
c. Classifying
d. Derecognition
2. An item is recognized in the financial statements if
a. It is probable that economic benefits will flow to or from the entity.
b. It meets the definition of an asset, liability, equity, income and expense.
c. The entity has ownership of such item.
d. It is probable that economic benefits will flow to or from the entity and that the cost
can be measured reliably.
3. Recognition of an element is appropriate when information results in
a. Relevance
b. Faithful representation
c. Both relevance and faithful representation
d. Neither relevance nor faithful representation
4. It is the removal of all or part of a recognized asset or liability from the statement of
financial position.
a. Write off
b. Derecognition
c. Extinguishment
d. Retirement
5. Derecognition normally occurs when
a. An item no longer meets the definition of an asset or a liability.
b. The entity loses control of the asset.
c. The entity no longer has a present obligation of the liability.
d. Under all of these circumstances.
QUESTION 6-18 Multiple Choice (IAA)
1. Generally, revenue is recognized
a. At the point of sale.
b. When cause and effect are associated.
c. At the point of cash collection.
d. At appropriate points throughout the operating cycle.
2. Which of the following is not an accepted basis for recognition of revenue?
a. Passage of time
b. Performance of service
c. Completion of percentage of a project
d. Upon signing of contract
3. Revenue from sale of goods is recognized
a. When the customer order is received.
b. When the customer order is accompanied by a check.
c. Only if the transaction will create an account receivable.
d. When the title to the goods changes.
4. Which of the following practices may not be an acceptable deviation from recognizing
revenue at the point of sale?
a. Upon receipt of cash
b. During production
c. Upon receipt of order
d. End of production
5. Which of the following represents the least desirable choice for the recognition of
revenue?
a. Recognition of revenue during production
b. Recognition of revenue when a sale occurs
c. Recognition of revenue when cash is collected
d. Recognition of revenue when production is completed
QUESTION 6-19 Multiple Choice (AICPA Adapted)
1. Revenue recognition conventionally refers to
a. The process of identifying transaction to ne recorded as revenue in an accounting
period.
b. The process of measuring and relating revenue and expenses during a period.
c. The earning process which gives rise to revenue realization.
d. The process of identifying those transactions that result in an inflow of assets to the
entity.
2. Which means the process of converting noncash resources into cash or claims to cash?
a. Allocation
b. Collection
c. Recognition
d. Realization
3. Gains on assets unsold are identified by the term
a.
b.
c.
d.
Unrecorded
Unrealized
Unrecognized
Unallocated
4. The term recognized is synonymous with the term
a.
b.
c.
d.
Recorded
Realized
Matched
Allocated
5. Which statement conforms to the realization concept?
a.
b.
c.
d.
Depreciation was assigned to product unit cost
Equipment was sold in exchange for a note receivable
Cash was collected on accounts receivable
Product unit cost were assigned to cost of good sold
QUESTION 6-20 Multiple Choice (AICPA Adapted)
1. Which of the following is not a theoretical basis for the allocation of expense?
a. Immediate Recognition
b. Systematic and rational allocation
c. Cause and effect association
d. Profit maximization
2. Costs that can be reasonably associated with specific revenue but not with specific product
should be
a. Expensed in the period incurred
b. Allocated to the specific product based on the best estimate of the product processing
time
c. Expensed in the period in which the related revenue is recognized
d. Capitalized and then amortized over a reasonable period
3. Which of the following is an example of the cause and effect association principle?
a. Sales commission
b. Allocation of insurance cost
c. Depreciation of property, plant and equipment
d. Officers’ salaries
4. Which of the following is an application of the systematic and rational allocation principle?
a. Doubtful accounts
b. Research and development cost
c. Warranty cost
d. Amortization of intangible asset
5. Which of the following would be matched with current revenue on a basis other than
association of cause and effect?
a. Goodwill
b. Cost of good sold
c. Sales commission
d. Warranty cost
6. Why are certain costs of doing business capitalized when incurred and then depreciated or
amortized?
a. To reduce the income tax liability
b. To aid management in the decision-making process
c. To match the cost of production with revenue
d. To adhere to the accounting concept of conservatism
7. Which principle best describes the rationale for matching depreciation with revenue?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition
8. Which of the following should be expensed under the principle of systematic and rational
allocation?
a. Salesman’s monthly salaries
b. Insurance premiums
c. Transportation to customers
d. Electricity to lights office building
9. The write off of a worthless patent is an example of which of the following principles?
a. Associating cost and effect
b. Immediate recognition
c. Systematic and rational allocation
d. Objectivity
10. What is an example of cost that cannot be directly related to a particular revenue but incurred
to obtain benefits that are exhausted in the period when the cost is incurred?
a. Sales commission
b. Sales salaries
c. Freight in
d. Prepaid insurance
QUESTION 6-21 Multiple Choice (IAA)
1. The matching principle is best demonstrated by
a.
b.
c.
d.
Not recognizing any expense unless some revenue is realized
Associating effort with accomplishment
Recognizing prepaid rent received as revenue
Establishing an appropriation for contingency
2. Bad debt expense is recognized according to which expense recognition principle?
a.
b.
c.
d.
Direct matching
Immediate recognition
Systematic and rational allocation
Critical event recognition
3. What is the general approach as to when product costs are recognized as expense?
a.
b.
c.
d.
In the period when the expenses are paid.
In the period when the expenses are incurred.
In the period when the vendor invoice is recognized.
In the period when the related revenue is recognized.
4. When should an expenditure be recorded as an asset rather than an expense?
a.
b.
c.
d.
Never
Always
If the amount is material
When there is a right that has the potential to produce economic benefit
5. Which accounting principle is being observed when an accountant charges to expense a cost
that contributed to revenue during a period?
a. Revenue Realization
b. Matching
c. Monetary Unit
d. Conservatism
6. Which is not acceptable for recognition expense?
a.
b.
c.
d.
Systematic and Rational Allocation
Direct Matching
Immediate Recognition
Cash Disbursement
7. A cause and effect relationship is implicit in the
a.
b.
c.
d.
Realization Principle
Historical Cost Principle
Matching Principle
Going Concern Assumption
8. An example of direct matching would be
a.
b.
c.
d.
Depreciation Expense
Office Salaries Expense
Direct labor cost incurred to produce inventory sold
Advertising Expense
9. Which category is subject to immediate recognition?
a.
b.
c.
d.
Utilities expense for the production line
Repair and maintenance expense incurred on production equipment of a manufacturer
The salary of the production foreman
The salary of the entity president
10. Which principle best describes the rationale for distribution and administrative expenses?
a.
b.
c.
d.
Direct Matching
Systematic and Rational Allocation
Immediate Recognition
Partial Recognition
QUESTION 6-22 Multiple choice (Conceptual Framework)
1. Which Statement is true about current value?
e. Fair value of an asset is the price that would be received to sell an asset in an orderly
transaction.
f. Value in use is the present value of the cash flows expected to be derived from an
asset.
g. Fulfillment value is the present value of the cash expected for the payment of
liability.
h. All of these statements are true about current value.
2. The measurement bases include
a. Historical cost
b. Current value
c. Assessed value
d. Historical cost and current value
3. Current value includes
a. Fair value and present value
b. Fair value and current cost
c. Current cost and value in use
d. Fair value, value in use and current cost
4. Which measurement attribute is not currently used?
a. Present value
b. Fair value
c. Current cost
d. Inflation adjusted cost
5. Which term best describes the amount that represents the immediate purchase cost of an
asset?
a. Historical cost
b. Realizable value
c. Present value
d. Current cost
QUESTION 6-23 Multiple choice (IAA)
1. Asset measurements in financial statements
a. Are confined to historical cost
b. Are confined to historical cost and current cost
c. Reflect several financial attributes
d. Do not reflect output value
2. Which of the following should be considered a current value measure?
a. Replacement cost and exit value
b. Replacement cost and discounted cash flow
c. Exit value and discounted cash flow
d. Replacement cost, exit value and discounted cash flow
3. The primary measurement basis is
a. Historical cost
b. Fair value
c. Value in use
d. Current cost
4. Which measurement basis is currently used in financial statements?
a. Present value
b. Present value and settlement value
c. Settlement value and fair value
d. Present value, settlement value and fair value
5. Which measurement attribute is the most relevant?
a. Present value
b. Exit value
c. Current cost
d. Historical cost
TFA
Chapter 07 – CONCEPTUAL FRAMEWORK
Recognition and Measurement
Danica P. Ilumin, Nicole M. Perez
QUESTION 7-9 Multiple choice (Conceptual Framework)
1. The presentation and disclosure requirement achieves all of the following, except
a. An effective communication tool
b. More relevant and faithfully represented financial information
c. Understability and comparability of information
d. Financial position, financial performance and cash flows
2. It is the sorting of assets, liabilities, equity, income and expenses with similar
characteristics.
a. Classification
b. Summarization
c. Interpretation
d. Recognition
3. All of the following can considered appropriate classification, except
a.
b.
c.
d.
Current and noncurrent assets
Current and noncurrent liabilities
Ordinary share capital and preference share capital
Offsetting asset and liability
4. Income and expenses are classified as
a. Profit or loss and other comprehensive income
b. Profit loss and retained earnings
c. Retained earnings and other comprehensive income
d. Ordinary and extraordinary
5. What is the new term to describe the statement of profit or loss together with the
statement showing other comprehensive income.
a. Income statement
b. Statement of profit or loss
c. Statement of other comprehensive income
d. Statement of financial performance
QUESTION 7-10 Multiple choice (Conceptual Framework)
1. Financial capital is defined as
a.
b.
c.
d.
Net asset in monetary terms.
Net assets in terms of physical productive capacity.
Legal capital
Share capital issued and outstanding.
2. The physical capital maintenance concept requires the adoption of which measurement basis?
a.
b.
c.
d.
3.
Which concept is applied to net income and other comprehensive income?
a.
b.
c.
d.
4.
Historical cost
Current cost
Fair value
Present value
Financial capital
Physical capital
Legal capital
Borrowed capital
Which statement regarding the term profit is true?
a. Profit is any amount over and above the required to maintain the capital at the beginning
of the period.
b. Profit is equal to income minus expenses.
c. Profit is the equivalent of net income under IFRS.
d. All of these statements are true about the term profit.
5. Under the financial capital concept, net income occurs when
a. The nominal amount of net assets at the year-end increased.
b. The physical productive capital at the year-end increased after excluding any
distributions to and contributions from owners
c. The nominal account of net assets at year-end increased after excluding
distributions to and distributions from owners.
d. The physical productive capital at year-end increased.
TFA 1
Chapter 8 – Accounting Process
Sherwin M. Legarte
Anne Kristine P. Jusay
Allia Marie A. Landig
QUESTION 8-1 Accounting Cycle
What are the steps in the accounting cycle?
ANSWER:
1. Analyzing the business documents or transactions. This means that the accountant
determines the impact of the transactions on the financial position as represented by the
basic equation "assets equal liabilities plus equity.
2. Journalizing - This is the process of recording the transactions in a journal.
3. Posting - Transactions as classified and recorded in the Journal are transferred to the
appropriate accounts in the general ledger and subsidiary ledger, if appropriate.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a postclosing trial balance
9. Preparing the reversing entries
Actually, the accounting process can be classified into two parts, namely recording phase and
summarizing phase.
The recording phase includes analyzing the transaction, journalizing and posting.
The summarizing phase includes the unadjusted trial balance, adjusting entries, financial
statements, closing entries, postclosing trial balance and reversing entries,
The postclosing trial balance, reversing entries and worksheet are optional.
QUESTION 8-2 Journal
What is a journal?
ANSWER:
The most fundamental journal is the general journal, often called simply as journal.
A journal is a chronological record of transactions.
A general journal entry consists of the transaction date, the accounts and amounts to be debited,
the accounts and amounts to be credited, and a brief explanation of the transaction.
A simple journal entry consists of one debit and one credit.
A compound journal entry consists of two or more debits or two or more credits.
QUESTION 8-3 Ledger
What is a ledger?
ANSWER:
The general ledger, often called simply as the ledger, is a group of accounts.
An account is the accounting device used in summarizing the effects of transactions on each
asset, liability, equity, revenue and expense.
The accounts used by a particular entity are usually expressed in the form of chart of accounts.
A chart of accounts is a listing of all the entity's general ledger accounts in a systematic form.
QUESTION 8-4 Trial Balance
What is a trial balance?
ANSWER:
A trial balance is a list of general ledger accounts with their respective debit or credit balance.
The trial balance prepared at this time is often called the unadjusted trial balance because
account balances do not yet reflect adjustments.
A trial balance is prepared at the end of every accounting period after all transactions for the
period have been recorded and posted to the general ledger.
The trial balance is a control device that helps eliminate accounting errors.
When total debits do not equal total credits, the trial balance is out of balance. This condition
alerts the accountant that errors have been made.
On the other hand, if the total debits equal total credits, the trial balance is said to be in balance.
However, this condition does not necessarily signify the absence of errors.
For example, the trial balance does not indicate the failure to record a transaction or the
recording of a transaction in the wrong accounts.
QUESTION 8-5 Purpose of Trial Balance
What are the purposes of a trial balance?
ANSWER:
1. The trial balance provides evidence that the total debits in the general ledger equal
credits.
2. The trial balance provides information that helps the accountant to formulate adjustments.
QUESTION 8-6 Transposition, Transplacement and Error of Omission
Describe transposition, transplacement and error of omission.
ANSWER:
1. Transposition - The figures are interchanged. For example, P 1, 234 is written as P4,
123.
2. Transplacement - Error in placing the decimal point. For example, P12, 000 is written as
P1, 200.
3. Error of omission - A transaction is not recorded. For example, a sale of P10, 000 is not
journalized.
QUESTION 8-7 Recording Expenses
What are the two methods of recording expenses?
ANSWER:
1. Expense method - The original payment is debited to an, expense account.
For example, the payment for a one-year insurance premium is debited to insurance
expense account.
2. Asset method - The original payment is debited to an asset account.
For example, the payment for a one-year insurance premium is debited to prepaid
insurance account.
QUESTION 8-8 Recording Income
What are the two methods of recording income?
ANSWER:
1. Income method -An income account is credited for the receipt of the income.
For example, the receipt of a one-year rental is credited to rental income account.
2. Liability method -A liability account is credited for the receipt of the income.
For example, the receipt of a one-year rental is credited to unearned rental income
account.
QUESTION 8-9 Adjusting Entries
What are adjusting entries?
ANSWER:
Adjusting entries are made at the end of every accounting period in order to split mixed
accounts or to bring the account up to date.
Adjusting entries allocate revenue and expenses between current and future periods.
Moreover, every adjusting entry affects both a real account and a nominal account. Under
the cash basis of accounting, revenue is recorded only when cash is received, and expenses are
recorded when paid in cash.
In contrast, the accrual basis of accounting requires recognition of revenue when earned and
recognition of expenses when incurred.
Generally accepted accounting principles require the use of accrual accounting.
Accordingly, adjusting entries are necessary for a fair and accurate measurement of performance
and financial position on the accrual basis.
QUESTION 8-10 Proforma Adjustments
What are the items that normally require adjusting entries?
Indicate the proforma adjustment.
ANSWER:
1. Ending inventory
Inventory – end
Income summary or cost of sales
xxx
xxx
2. Doubtful accounts
Doubtful accounts
Allowance for doubtful accounts
xxx
xxx
3. Depreciation
Depreciation
Accumulated depreciation
xxx
xxx
4. Prepaid expenses are and therefore already paid but not yet incurred an asset. If the asset
method is used or if the account appearing on the trial balance is an asset account, the
adjusting entry is:
Expense
Prepaid expense
xxx
xxx
If the expense method is used or if the account appearing on the trial balance is an expense
account, the adjusting entry 18
Prepaid expense
Expense
xxx
xxx
5. Accrued expenses are expenses already incurred but not yet paid and therefore a
liability.
Expenses
Accrued expenses
xxx
xxx
6. Deferred income is income already received but not yet earned and therefore a liability.
If the liability method is used or if the account appearing on the trial balance is a liability
account, the adjusting entry is:
Deferred income
xxx
Income
xxx
If the income method is used or if the account appearing on the trial balance is an income
account, the adjusting entry is:
Income
xxx
Deferred income
xxx
7. Accrued income is income already earned but not yet received. and therefore an asset.
Accrued income
Income
xxx
xxx
QUESTION 8-11 Worksheet
What is a worksheet?
ANSWER:
A worksheet is multicolumn sheet of paper that an accountant necessary uses in compiling and
summarizing the information for the preparation of the financial statements.
A worksheet is not a formal statement.
A worksheet is only a tool of an accountant in the preparation of financial statements.
The accountant prepares a worksheet at that stage of the accounting cycle when it is time to
make adjustments and prepare financial statements.
A worksheet facilitates the preparation of financial statements by
a. Providing a place where adjusting entries can be made informally before they are journalized
and posted.
b. Providing an orderly means whereby each account can be classified according to the financial
statement in which it will appear.
c. Providing a balancing mechanism that helps to uncover accounting errors.
Actually, the balancing figure in the worksheet is the net income or net loss.
If the total of the debits exceeds the total of the credits in the income statement columns, there is
a net loss.
Accordingly, in the statement of financial position columns, if the total of the credits exceeds the
total of the debits, there is also a net loss.
If the total of the credits exceeds the total of the debits in the income statement columns, there is
a net income.
Accordingly, in the statement of financial position columns, "the total of the debits exceeds the
total of the credits, there also a net income.
QUESTION 8-12 Closing Entries
What are closing entries?
ANSWER:
Closing entries are made at the end of an accounting period after adjusting entries and financial
statements have been prepared for the purpose of closing all nominal or temporary accounts.
To close an account means to reduce its balance to zero.
Closing nominal accounts is logical because they measure activities that have occurred during
a given period of time.
At the end of an accounting period, nominal accounts have served their purpose.
Thus, their balances must be reduced to zero so that the new nominal accounts can be used to
measure activities in the next accounting period.
Actually, nominal accounts are temporary equity accounts.
Accordingly, their balances may be transferred directly to an equity account during closing.
However, most accountants transfer nominal accounts to a clearing account known as income
summary.
The income summary account summarizes the net income or net loss for the period and its
balance is ultimately closed to capital in the case of a proprietorship or retained earnings in the
case of a corporation.
QUESTION 8-13 Postclosing Trial Balance
What is a postclosing trial balance?
ANSWER:
A postclosing trial balance is simply a listing of general ledger accounts and their balances after
the closing entries have been made.
Accordingly, the postclosing trial balance consists entirely of real or permanent accounts.
QUESTION 8-14 Reversing Entries
What are reversing entries?
ANSWER:
Reversing entries are made at the beginning of the new accounting period in order to transfer all
accrued and prepaid items established by adjusting entries to the nominal accounts that are to
be used in recording transactions during the new period.
These are called reversing entries because they are the exact opposite of certain adjusting entries
made at the end of the preceding period.
Reversing entries do not mean that the adjusting entries reversed are unnecessary or inaccurate.
The sole purpose of reversing entries is to simplify the recording of certain kinds of recurring
transactions.
The adjustments normally requiring reversal at the beginning of the new period are:
a. Accrued expenses
b. Prepaid expenses, if the expense method is used in recording expense
c. Accrued income
d. Deferred income, if the income method is used in recording income.
QUESTION 8-15 Principles of Debit and Credit
Explain the principle of debit and credit.
ANSWER:
The term “debit” refers to the left side of an account and “credit” refers to the right side of an
account.
When both sides of an account are each totaled, and the smaller sum is deducted from the larger
sum, the difference is called the balance of the account.
Every account has a normal balance, which is simply the balance ordinarily found in an account.
The normal balance may be either a debit or credit, depending on the type of account.
If an account has a normal debit balance, it is increased when debited and decreased when
credited.
If an account has a normal credit balance, it is increased when credited and decreased when
debited.
Thus, a debit does not necessarily mean an increase and a credit does not necessarily mean a
decrease.
Proper analysis of transactions requires understanding of the types of accounts with their normal
balances.
These accounts are summarized below.
Account
Asset
Liability
Equity
Revenue
Expense
Normal balance
Debit
Credit
Credit
Credit
Debit
Balance increased by
Debit
Credit
Credit
Credit
Debit
Balance decreased by
Credit
Debit
Debit
Debit
Credit
QUESTION 8-16 Multiple choice (LAA)
1. The first step in the accounting cycle is to
a. Record the transaction in a journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger accounts
d. Adjust the general ledger accounts
2. What is the last step in the accounting cycle considering the following?
a. Prepare a postclosing trial balance
b. Journalize and post closing entries
c. Prepare financial statements
e. Journalize and post adjusting entries
3. Which is done first in the accounting process?
a. Financial statements are prepared
b. Adjusting entries are recorded
c. Nominal accounts are closed
d. A postclosing trial balance is prepared
4. Which is not among the first five steps in the accounting cycle?
a. Record transactions in journals
b. Record closing entries
c. Adjust the general ledger accounts
d. Post entries to general ledger accounts
5. Which is an optional step in the accounting cycle?
a. Adjusting entries
b. Closing entries
c. Financial statements
d. Reversing entries
6. Which is logical order in the accounting cycle?
a. Posting
b. Adjusting entries, trial balance, Closing entries, postclosing, reversing entries
c. Financial statements, recording, adjusting entries
d. Reversing entries, adjusting entries, closing entries
7. Factors that shape an accounting information system include
a. Nature of business
b. Size of the entity and nature of business
c. Volume of data and size of entity
d. Nature of business, size of entity and volume of data
8. Basic steps in the recording process include all of the following, except
a. Transfer the journal information to the appropriate account in the statement
of financial position
b. Analyze each transaction for the effect on the accounts.
c. Enter the transaction information in a journal.
d. All of the choices are correct regarding the basic steps in the recording process.
9. The accounting record where a transaction is initially recorded is
a. Ledger
b. Account
c. Trial balance
d. Journal
10. The use of computers in processing accounting data
a. Eliminates the need for accountants.
b. Eliminates the double entry system.
c. Eliminates the need for financial reporting standards.
d. May result in the elimination of document trails used to verify accounting
records.
QUESTION 8-17 Multiple choice (LAA)
1. In recording transaction
a. The word “debit” means increase and the word “credit” means decrease
b. Assets, expenses, and drawing accounts are debited for increases
c. Liabilities, revenue, and drawing accounts are debited for increases
d. Assets, expenses, and capital accounts are debited for increases
2. Which is false concerning the rules of debit and credit?
a. The left side of an account is always the debit side and the right side is always the
credit side
b. Increases in assets and expenses are debit entries, and increases in liabilities,
equity and revenue are credit entries
c. The normal balance of any account appears on the side
d. The word "debit" means to increase and the word "credit" means to
decrease.
3. Debits
a.
b.
c.
d.
Increase assets and decrease expenses, liabilities, revenue and equity.
Increase assets and expenses and decrease liabilities, revenue and equity.
Increase assets and equity and decrease liabilities, expenses and revenue.
Decrease assets and expenses and increase liabilities, revenue and equity.
4. Which statement is true regarding debits and credits?
a. In the income statement, debits are used to increase account balances, whereas in
the statement of financial position, credits are used to increase account balances.
b. Before adjustments, debits will not equal credits in the trial balance.
c. The rules for debit and credit and the normal balance o equity are the same as
for liability.
d. In the income statement, revenue is increased by a debit whereas in the statement
of financial position, retained earnings account is increased by a debit.
5. The debit and credit analysis of a transaction normally takes place
a. Before an entry is recorded in a journal.
b. When the entry is posted to the ledger.
c. When the trial balance is prepared.
d. At some other point in the accounting cycle.
6. Which of the following is not a possible combination of a journal entry?
a. Increase in asset and increase in liability.
b. Decrease in equity and increase in liability.
c. Decrease in liability and decrease in asset.
d. Increase in asset and decrease in equity.
7. The normal balance of an account is on the
a. Debit side of the account
b. b. Credit side of the account
c. Side represented by increases in the account balance
d. Side represented by decreases in the account balance
8. The double entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry and then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. All of these describe the double entry system.
QUESTION 8-18 Multiple choice (LAA)
1. The accounting equation must remain in balance
a. Throughout each step in the accounting cycle.
b. Only when journal entries are recorded.
c. Only at the time the trial balance is prepared.
d. Only when formal financial statements are prepared
2. The book of original entry is known as
a. Subsidiary ledger
b. Trial balance
c. General ledger
d. Journal
3. A general journal
a. Chronologically lists transactions and other events expressed in terms of
debit and credit.
b. Contains one record for each asset, liability, equity, revenue and expense.
c. Lists all the increases and decreases in each account in one place.
d. Contains only adjusting entries.
4. A simple journal entry
a. Consists of one debit and one credit
b. Consists of two debits and one credit
c. Consists of one debit and two credit
d. Is a memorandum entry
5. A journal entry that contains more than two accounts is called
a. A posted journal entry
b. An adjusting journal entry
c. An erroneous journal entry
d. A compound journal entry
6. Which accounts measure economic time flows over a period of time?
a. Real accounts
b. Nominal accounts
c. Mixed accounts
d. Contra accounts
7. Which of the following is a nominal account?
a. Unearned revenue
b. Salary expense
c. Inventory
d. Retained earnings
8. Nominal accounts are also called
a. Temporary accounts
b. Permanent accounts
c. Real accounts
d. Mixed accounts
9. Real accounts include all of the following, except
a. Dividends
b. Assets
c. Liabilities
d. Equity
10. Equity is not affected by all
a. Cash receipts
b. Dividends
c. Revenue
d. Expenses
QUESTION 8-19 Multiple choice (LAA)
1. Posting is to the process of transferring information from
a. Journal to the general ledger
b. General ledger to the journal
c. Source document to the journal
d. Journal to the source document
2. A general ledger is defined as
a. A group of transactions
b. A group of all statement of financial position accounts
c. A group of all income statement accounts
d. The entire group of accounts
3. What function do ledgers serve in the accounting process?
a. Reporting
b. Summarizing
c. Classifying
d. Recording
4. A subsidiary ledger is
a. A listing of the components of account balances
b. A backup system to protect against record destruction
c. A listing of accounts before closing entries
d. A listing of accounts of a subsidiary
e.
5. A chart of accounts is
a. A flowchart of all transactions
b. An accounting procedure manual
c. A journal
d. A list of all account titles in the general ledger
QUESTION 8-20 Multiple choice (LAA)
1. The trial balance
a. Proves that debits are greater than credits when entity has net income. the
b. Uncovers any errors in journalizing and posting prior to preparation of the
statement of financial position.
c. Is useful in preparing the statement of financial position.
d. All of the choices are correct.
2. Which of the following is not a principal purpose of an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger
accounts.
3. Which statement is true regarding the trial balance?
a. Preparation of the trial balance ensures that all amounts have been posted to the
correct accounts.
b. Preparation of the trial balance is a step in the recording process.
c. Preparation of the trial balance determines that total debits equal total
credits.
d. Preparation of the trial balance determines that total debits equal total credits and
that all amounts have been posted to the correct accounts.
4. Which statement regarding a trial balance is incorrect?
a. A trial balance is a test of the equality of the debit and credit balances in the
ledger.
b. A trial balance is a list of all of the open accounts in the ledger with their
balances.
c. A trial balance proves that no errors of any kind have been made in the
accounts during the accounting period.
d. A trial balance helps to localize errors within an identifiable time period.
5. An unadjusted trial balance
a. Provides information that is helpful when making adjusting entries
b. Proves that no errors have been made
c. Usually contains the account balances that should appear in the financial
statements
d. Is a summary taken directly from the general journal
6. The trial balance
a. Is a listing of all the account balances in the order the accounts appear in the
statement of financial position,
b. Has as the primary purpose of proving that all journal entries were made for the
period.
c. Can be used to uncover errors in journalizing and posting.
d. Is used to prepare the statement of financial position.
7. Numerous errors may exist even though the trial balance columns agree. Which is not
one of these errors?
a. A transaction is not journalized
b. Transposition error
c. A journal entry is posted twice
d. A transaction is recorded and amount posted at an incorrect
8. A trial balance may prove that debits and credits are equal, except
a. An amount could be entered in the wrong account.
b. A transaction could have been entered twice.
c. A transaction could have been omitted.
d. All of these may prove that debits and credits are equal.
QUESTION 8-21 Multiple choice (LAA)
1. Adjusting entries involve
a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. One real and one nominal account
2. If an expense has been incurred adjusting entry would involve but not yet recorded, the
a. A liability and an asset
b. A liability and a revenue
c. An expense and an asset
d. An asset and a revenue
3. The adjusting entry for depreciation has the same effect as the adjusting entry for
a. An unearned income
b. A prepaid expense
c. An accrued expense
d. An accrued income
4. An adjusting entry to accrue wages incurred but not yet paid is an example of
a. Aligning recorded costs with appropriate accounting periods
b. Aligning recorded revenue with appropriate accounting periods
c. Reflecting unrecorded expenses incurred during an accounting period
d. Reflecting unrecorded revenue earned during an accounting period
5. Which of the following least resembles a typical adjusting entry?
a. Debit an asset and credit revenue
b. Debit an expense and credit liability
c. Debit revenue and credit liability
d. Debit an asset and credit liability
6. An adjusting entry should never include
a. Debit expense and credit liability
b. Debit expense and credit revenue
c. Debit liability and credit revenue
d. Debit revenue and credit liability
7. Adjusting entries
a. Are often prepared after the end of reporting period but dated as of the end of
reporting period.
b. Are necessary to conform with standards.
c. Include both accruals and deferrals.
d. All choices are correct about adjusting entries.
8. Which statement is incorrect regarding adjusting entries?
a. Cash is neither debited nor credited.
b. Each adjusting entry affects one statement of financial position account and one
income statement account.
c. Each adjusting entry affects one revenue account and one expense account
d. Adjusting entries involve accruals or deferrals.
9. An entity must make adjusting entries
a. To ensure that the revenue recognition and expense recognition principles are
followed.
b. Each time it prepares financial statements.
c. To account for accruals or deferrals
d. All of the choices are correct regarding adjusting entries
10. Which statement best defines an accrual?
a. Adjusting entries where cash flow precedes revenue expense recognition.
b. Adjusting entries where revenue or expense recognition precedes cash flow.
c. Adjusting entries where cash flow and revenue expense recognition are
simultaneous.
d. Adjusting entries where revenue or expenses recognized in the absence of cash
flow evidence.
Question 8-22 Multiple Choice (IAA)
1. A prepaid expense can best be described as an amount
a. Paid and currently matched with earnings.
b. Paid and not currently matched with earnings.
c. Not paid and currently matched with earnings.
d. Not paid and not currently matched with earnings.
2. An accrued expense can best be described as an amount
a. Paid and currently matched with earnings.
b. Paid and not currently matched with earning.
c. Not paid and not currently matched with earnings.
d. Not paid and currently matched with earnings.
3. An accrued revenue can best be described as an amount
a. Collected and currently matched with expenses.
b. Collected and not currently matched with expenses.
c. Not collected and currently matched with expenses.
d. Not collected and not currently matched with expenses.
4. An unearned revenue can best be described as an amount
a. Collected and currently matched with expenses.
b. Collected and not currently matched with expenses.
c. Not collected and currently matched with expenses.
d. Not collected and not currently matched with expenses.
5. Which of the following properly describes a deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid at the same time period that an expense is incurred.
Question 8-23 Multiple Choice (IAA)
1. Closing entries
a. Are optional step in the accounting cycle.
b. Affect only real accounts.
c. Permit an entity to analyze routine and repetitive transactions the same way all the
time.
d. Remove the balances from the temporary accounts.
2. Which of the following closing procedures is unique to a corporation?
a. Close each revenue account to the income summary account.
b. Close each expense account to the income summary account.
c. Close the income summary account to the retained earnings account.
d. Close the owner's drawing account to the owner's capital account.
3. After the accounts have been closed
a. All the accounts have zero balances.
b. The asset, liability and shareholders' equity accounts have zero balances.
c. The revenue, expense, income summary and retained earnings accounts have zero
balances.
d. The revenue, expense and income summary accounts have zero balances.
4. Which statement best describes the purpose of closing entries?
a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of temporary accounts to zero so that these are used
to accumulate the revenue, expenses and dividends of the next period.
d. To complete the record of various transactions that were started in a prior period.
5. The closing entries
a. Must debit or credit one income statement account and one statement of financial
position account.
b. Include closing the dividends account to income summary.
c. Are posted to the appropriate general ledger accounts.
d. All of the choices are correct regarding closing entries
6. If income is greater than expenses, the income summary account will be closed by
a. Crediting income summary and debiting retained earnings.
b. Debiting income summary and crediting retained earnings.
c. Debiting cash and crediting income summary.
d. Debiting income summary and crediting cash.
7. The post-closing trial balance
a. Provides a convenient listing of account balances that can be used to prepare the
financial statements.
b. Does not include nominal accounts.
c. Is identical to the statement of financial position.
d. Proves that accounts have been closed properly.
8. The post-closing trial balance
a. Consists of statement of financial position & accounts only.
b. Will balance if a transaction is not journalized and posted or if a transaction is
journalized and posted twice.
c. Shows that the accounting equation is in balance at the end of the accounting
period.
d. All of the choices are correct regarding the post-closing trial balance.
Question 8-24 Multiple Choice (IAA)
1. Reversing entries
a. Are normally prepared for accruals and prepayments.
b. Are necessary to achieve a proper matching of revenue and expense.
c. Are desirable to exercise consistency and establish standardized procedures.
d. Must be made at year-end. and expense.
2. Reversing entries
a. Impact the income statement only.
b. Impact the statement of financial position and the income statement.
c. Are not allowed under Philippine Financial Reporting Standards.
d. Change amounts reported in the financial statements of the preceding period.
3. Which statement regarding reversing entries is incorrect?
a. Deferrals entered in statement of financial position accounts make reversing
entries unnecessary.
b. All accruals should be reversed.
c. Adjusting entries for depreciation and doubtful accounts are never reversed.
d. Reversing entries change amounts statement of financial reported in the
statement of financial position for the previous per the period.
4. Reversing entries apply to
a. All adjusting entries
b. All deferrals
c. All accruals
d. All closing entries
5. Reversing entries apply to all of the following, except
a. Unearned revenue
b. Accrued wages
c. Prepaid insurance
d. Depreciation
6. Adjusting entries that should be reversed include
a. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these adjusting entries require reversal
7. A reversing entry should never be made for an adjusting entry that
a. Accrues unrecorded revenue.
b. Adjusts expired costs from an asset account to an expense account.
c. Accrues unrecorded expenses.
d. Adjusts unexpired costs from an expense account to an asset account.
8. Adjusting entries that should be reversed include those for prepaid or unearned items that
a. Create an asset or a liability account.
b. Were originally entered in a revenue or expense account.
c. Were originally entered in an asset or liability account.
d. Create an asset or a liability account and were originally entered in a
revenue or expense account.
9. An entity initially records prepayments in real accounts and makes reversing entries
when appropriate.
Which of the following year-end adjusting entries should be reversed?
a. The adjusting entry to record depreciation for the period.
b. The adjusting entry to record the portion of service fees received in advance that
is earned by year-end.
c. The adjusting entry to record supplies used during the period.
d. The adjusting entry to record service fees earned by year-end but not billed.
10. An entity initially records prepayments in nominal accounts.
Which of the following year-end adjusting entries should be reversed?
a. The adjusting entry to record inventory at year-end.
b. The adjusting entry to record the portion of rental received in advance that
is unearned at year-ènd.
c. The adjusting entry to record doubtful accounts.
d. The adjusting entry to record amortization of patent.
TFA 1
Chapter 9 – Financial Statements
Frances Sandee C. Javier
Celine P. America
QUESTION 9-1
What are the financial statements?
ANSWER 9-1
Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users.
In other words, the financial statements are the end product or main output of the financial
accounting process.
Financial statements are a structure financial representation of the financial representation of
the financial position and financial performance of an entity.
QUESTION 9-2
What are general purpose financial statements?
ANSWER 9-2
General purpose financial statements are statements that have been prepared for use by those
who are not in a position to require an entity to prepare reports tailored to their particular
information needs.
Reports prepared at the request of an entity’s management or bankers are not general
purpose financial statements because they are prepared specifically to meet the needs of
management or bankers.
General purpose financial statements are directed to all common users and not to specific
users.
QUESTION 9-3
Enumerate the complete set of financial statements.
ANSWER 9-3
A complete set of financial statements comprises:
1.
2.
3.
4.
5.
6.
Statement of financial position
Income statement
Statement of comprehensive income
Statement of changes in equity
Statement of cash flows
Notes, comprising a summary of significant accounting policies and other explanatory
information
QUESTION 9-4
Explain the objective of financial statements.
ANSWER 9-4
The objective of financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users in
making economic decisions.
Financial statements also show the results of the management stewardship of the resources
entrusted to it.
To meet the objective, financial statements provide information about the following:
a. Assets
b. Liabilities
c. Equity
d. Income and expenses, including gains and losses
e. Contributions by and distributions to owners in their capacity as owners
f. Cash flows
QUESTION 9-5
Explain the responsibility for financial statements.
ANSWER 9-5
The management of an entity has the primary responsibility for the preparation and
presentation of the financial statements of an entity
The Board of Directors in discharging its responsibilities reviews and approves the financial
statements before these are submitted to the shareholders of the entity.
QUESTION 9-6
Explain the accountability of management.
ANSWER 9-6
Management is accountable for the safekeeping of the entity’s resources and for their proper,
efficient and profitable use.
Shareholders are interested in information that helps them to assess how effectively
management has fulfilled this role as this is relevant to the decisions concerning their
investment and the reappointment or replacement of management.
QUESTION 9-7
What are the general features in the preparation and presentation of financial statements?
ANSWER 9-7
1.
2.
3.
4.
5.
6.
7.
8.
Fair presentation and compliance with PFRS
Going concern
Accrual basis
Materiality and aggregation
Offsetting
Frequency of reporting
Comparative information
Consistency of presentation
QUESTION 9-8
Explain fair presentation and compliance with Philippine Financial Reporting Standards.
ANSWER 9-8
The financial statements shall present fairly the financial position, financial performance and
cash flows of an entity.
Virtually, in all circumstances, fair presentation is achieved if the financial statement are
prepared in accordance with Philippine Financial Reporting Standards which represent the
GAAP in the Philippines.
An entity whose financial statements comply with PFRS shall make an explicit and
unreserved statement of such compliance in the notes
Fair presentation is defined as faithful representation of the effects of transaction and other
events in accordance with the definition and recognition criteria for assets, liabilities, income
and expenses laid down in the Conceptual Framework.
Fair presentation requires an entity:
a. To select and apply accounting policies in accordance with PFRS.
b. To prevent information that provides relevant, reliable, comparable and understandable
information.
c. To provide additional disclosures necessary for the users to understand the entity’s
financial statements.
An entity cannot rectify inappropriate accounting policies either by disclosure of the
accounting policies used or by the notes or explanatory material.
QUESTION 9-9
Explain the preparation of financial statements on a going concern basis.
ANSWER 9-9
Going concern means that the accounting entity is viewed as continuing in operation
indefinitely in the absence of evidence to the contrary.
Financial statements shall be prepared on a going concern basis, such fact shall be disclosed
together with the measurement basis and the reason therefor.
QUESTION 9-10
Explain accrual basis of accounting.
ANSWER 9-10
An entity shall prepare financial statements, except for cash flow information, using the
accrual basis of accounting.
Under accrual basis, the effects of transactions and other events are recognized when they
occur and not as cash or cash equivalent is received or paid, and these are recorded and
reported in the financial statements of the periods to which they relate.
Simply stated, accrual accounting means that income is recognized when earned regardless
of when received and expense is recognized when incurred regardless of when paid.
The essence of accrual accounting is the recognition of accounts receivable, accounts
payable, prepaid expenses, accrued expenses, deferred income and accrued income.
QUESTION 9-11
Explain materiality aggregation.
ANSWER 9-11
An entity shall present separately each material class of similar items.
An entity shall present separately items of dissimilar nature or function unless they are
immaterial.
Materiality provides that the specific requirements of Philippine Financial Reporting
Standards need not be met if the resulting information is not material.
QUESTION 9-12
Explain offsetting.
ANSWER 9-12
Assets and liabilities, and income and expenses, when material, shall not be offset against
each other.
Offsetting may be done when it is permitted by another PFRS.
For example, gains and losses on disposal of assets are reported by deducting from the
proceeds the carrying amount and the related selling expenses.
Expenditures related to a provision and reimbursed under a contractual arrangement with a
third party may be netted against the related reimbursement.
In addition, gains and losses arising from a group of similar transactions are reported on a
net basis.
For example, foreign exchange gains and losses or unrealized gains and losses arising from
measurement of financial assets at fair value are netted against each other.
The reporting of assets net of valuation allowances is permitted because technically this is
not offsetting.
Thus, accounts receivable may be shown net of allowance for doubtful accounts.
QUESTION 9-13
Explain frequency of reporting.
ANSWER 9-13
An entity shall present a complete set of financial statements at least annually.
When an entity changes the end of it reporting period and presents financial statements for a
period longer or shorter that one year, an entity shall disclose:
a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely comparable.
QUESTION 9-14
Explain the presentation of comparative information.
ANSWER 9-14
Except when a standard or an interpretation permits or requires otherwise, an entity shall
disclose comparative information in respect of the previous period for all amounts reported
in the current period’s financial statements.
In other words, the financial statements of the current period shall be presented with
comparative figures of the financial statements of the preceding year.
Comparative information shall also be included for narrative and descriptive information
when it is relevant to an understanding of the current period’s financial statements.
For example, details of a legal dispute, the outcome of which was uncertain at last reporting
date and is yet to be resolved, are disclosed in the current period.
QUESTION 9-15
What is a “third” statement of financial position required?
ANSWER 9-15
A third statement of financial position is required when an entity:
1. Applies an accounting policy retrospectively.
2. Makes retrospective restatement of items in the financial statements.
3. Reclassifies item in the financial statements.
Under these circumstances, the entity shall present three statement of financial positionas at:
a. The end of the current period
b. The end of the previous period
c. The beginning of the pervious comparative period
QUESTION 9-16
Explain consistency of presentation
ANSWER 9-16
The presentation and classification of financial statement items shall be uniform from one
accounting period to the next
Any change is allowed when it is required by another standard or when a significant change
in the nature of operations of the entity will demonstrate a more appropriate revised
presentation.
QUESTION 9-17
Explain the identification of financial statements
ANSWER 9-17
Financial statements shall be clearly identified and distinguished from other information in the
same published document.
An entity shall clearly identify each financial statement and the notes.
In addition, the following information shall be prominently displayed and repeated when
necessary for the information presented to be understandable:
a. The name of the reporting entity
b. Whether the financial statements cover the individual entity or a group of entities.
c. The date of the end of the reporting period or the period covered by the financial
statements, whichever is appropriate to the related component of the financial statements.
d. The presentation currency
e. The level of precision used in the amounts in the financial statements.
QUESTION 9-18 Multiple Choice (PAS 1)
1. A complete set of financial statements includes all, except
a. Statement of financial position
b. Statement of changes in equity
c. Notes to financial statements
d. Environmental reports
2. What is the objective of financial statements?
a. To provide information about the financial position, financial performance and
changes in financial position useful to a wide range of users
b. To prepare a statement of financial position and statement of comprehensive income
c. To present relevant, reliable, comparable and understandable information
d. To prepare financial statements in accordance with all applicable standards
3. The primary responsibility for the preparation of the financial statements is reposed in
a. Management of the entity
b. Internal auditor
c. External auditor
d. Controller
4. The major financial statements include all, except
a. Statement of financial position
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings
5. The major financial statements include all, except
a. Statement of financial position
b. Statement of changes in financial position
c. Statement of comprehensive income
d. Statement of changes in equity
1.
QUESTION 9-19 Multiple Choice (IFRS)
1. When an entity changed the reporting period longer or shorter than one year, an entity shall
disclose all, except
a. Period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial statements are not entirely comparable.
d. The fact that similar entities in the geographical area in which the entity operates
have done so.
2. Which is not a component of financial statements?
a. Statement of financial position
b. Statement of changes in equity
c. Report of board of directors
d. Notes to financial statements
3. Which is included in a complete set of financial statements?
a. A statement of compliance with local legislation
b. A statement of changes in equity
c. Statements of financial position for the last five years
d. Value added statement
4. Which is included within the financial statements?
a. A statement of retained earnings
b. Accounting policies
c. An auditor's report
d. Board of directors' report
5. An entity shall clearly identify each financial statement and display all of the following,
except
a. Name of the reporting entity.
b. Names of major shareholders of the entity.
c. The presentation currency.
d. Whether the financial statements cover the individual entity or a group of entities.
QUESTION 9-20 Multiple Choice (PAS 1)
1. Which statement is incorrect concerning fair presentation of financial statements?
a. Fair presentation requires the faithful representation of the effects of transactions and
other events.
b. Financial statements shall present fairly the financial position, financial performance and
cash flows of an entity.
c. In virtually all circumstances, a fair presentation is achieved by compliance with
applicable PFRS.
d. An entity whose financial statements comply with PFRS shall not make an explicit
and unreserved statement of such compliance in notes.
2. Which of the following cannot be considered fair presentation of financial statements?
a. To present information in a manner that provides relevant and faithfully represented
financial information.
b. To provide additional disclosures when compliance with specific PFRS is insufficient to
understand the financial position and financial performance.
c. To select and apply accounting policies in accordance with applicable PFRS.
d. To rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory information.
3. Which statement indicates a going concern?
a. Management intends to liquidate the entity.
b. Management intends to cease the operations of the entity.
c. Management has no realistic alternative but to cease the operations of the entity.
d. None of these would indicate going concern
4. An entity is permitted to depart from a particular standard if all conditions are satisfied, except
a. In extremely rare circumstances.
b. When management concludes that compliance with the standard would be misleading.
c. When the departure from the standard is necessary to achieve fair presentation.
d. When the Conceptual Framework for Financial Reporting prohibits such a
departure.
5. The effects of transactions and other events on economic resources and claims are depicted in
the periods in which those effects occur even if the resulting cash receipts and payments occur in
a different period.
a. Accrual accounting
b. Cash accounting
c. Modified accrual accounting
d. Modified cash accounting
6. Financial statements must be prepared at least
a. Annually
b. Quarterly
c. Semiannually
d. Every two years
7. Technically, offsetting in financial statements is accomplished when
a. The allowance for doubtful accounts is deducted from accounts receivable.
b. The accumulated depreciation is deducted from property, plant and equipment.
c. The total liabilities are deducted from total assets.
d. Gain or loss from disposal of noncurrent asset is reported by deducting from the
proceeds the carrying amount of the asset and the related disposal cost.
8. The presentation and classification of items in the financial statements shall be retained from
one accounting period to the next.
a. Consistency of presentation
b. Materiality
c. Aggregation
d. Comparability
9. A third statement of financial position as at beginning of the earliest comparative period
presented is required
a. When an entity applies an accounting policy retrospectively.
b. When an entity makes a retrospective restatement of items in the financial statements.
c. When an entity reclassifies items in the financial statements.
d. Under all of these circumstances
10. Which statement in relation to financial statements is incorrect?
a. General purpose financial statements do not and cannot provide all of the information
that primary users need.
b. General purpose financial statements are designed to show the value of the
reporting entity.
c. General purpose financial statements are intended to provide common information to
users.
d. Financial statements are largely based on estimate and judgment rather than exact
depiction.
QUESTION 9-21 Multiple Choice (IFRS)
1. Items of dissimilar nature or function
a. Must always be presented separately.
b. Must not be presented separately.
c. Must be presented separately if material.
d. Must be presented separately even if immaterial.
2. Materiality depends on
a. The nature of the omission or misstatement.
b. The absolute size of the omission or misstatement.
c. The relative size and nature of the omission.
d. The judgment of management.
3. An entity must disclose comparative information for
a. The previous comparable period for all amounts.
b. The previous comparable period for all amounts and for all narrative and descriptive
information.
c. The previous comparable period for all amounts and for all narrative and
descriptive information relevant to an understanding of the financial statements.
d. The previous two comparable periods for all amounts.
4. When the classification of items in the financial statements is changed, the entity
a. Must not reclassify the comparative amounts.
b. Can choose whether or not to reclassify.
c. Must reclassify the comparative amounts unless it is impracticable to do so.
d. Must reclassify the current year amounts only.
5. An entity shall present
a. The statement of cash flows more prominently.
b. The statement of financial position more prominently.
c. The income statement more prominently.
d. Each financial statement with equal prominence.
QUESTION 9-22 Multiple Choice (IAA)
1. Which would likely prepare the most accurate financial forecast for an entity based on
empirical evidence?
a. Investors using statistical models
b. Corporate management
c. Financial analysts
d. Independent certified public accountants
2. What is the most useful information in predicting future cash flows?
a. Information about current cash flows
b. Current earnings based on accrual accounting
c. Information regarding the accounting policies used
d. Information regarding financial position
3. The accrual basis of accounting is most useful for
a. Determining the amount of income tax liability.
b. Predicting short-term financial performance.
c. Predicting long-term financial performance.
d. Determining the amount of dividends to shareholders.
4. Accrual accounting is used because
a. Cash flows are considered less important.
b. It provides a better indication of ability to generate cash flows than cash basis.
c. It recognizes revenue when cash is received.
d. It is one of the implicit assumptions.
5. The financial statements prepared under GAAP
a. Do not articulate with one another.
b. Reflect a single measurement which is historical cost.
c. Are not highly precise because estimate and judgment must be made.
d. Contain a limited number of future projections.
TFA 1
Chapter 10 – Statement of Financial Position
Kristine Joy Landicho
Loremie Landicho
Joanna Rose Lopez
QUESTION 10-1
Define a statement of financial position.
ANSWER 10-1
A statement of financial position is a formal statement showing the three elements comprising
financial position, namely assets, liabilities and equity.
Investors, creditors and other statement users analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the need of the entity for additional financing.
Liquidity is the ability of the entity to meet currently maturing obligations.
Solvency is the availability of cash over the longer term to meet maturing obligations.
Information about liquidity and solvency is useful in predicting the ability of the entity to comply
with future financial commitments and to pay dividends to shareholders.
QUESTION 10-2
Define current assets.
ANSWER 10-2
PAS 1, paragraph 66, provides that an entity shall classify an asset as current when:
a. The asset is cash or a cash equivalent unless the asset is restricted from being exchanged or
used to settle a liability for at least twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The entity expects to realize the asset or intends to sell or consume it within the entity's normal
operating cycle.
QUESTION 10-3
What is the presentation of current assets in the statement of financial position?
ANSWER 10-3
Current assets are usually listed in the statement of financial position in the order of liquidity.
The line items under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value profit as loss such as trading securities and other investments
in quoted equity instruments.
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
QUESTION 10-4
Define noncurrent assets.
ANSWER 10-4
The caption noncurrent assets is a residual definition.
PAS 1, paragraph 66, simply states all other that an entity shall classify assets not classified as
current as noncurrent.
QUESTION 10-5
Define current liabilities.
ANSWER 10-5
PAS 1, paragraph 69, provides that an entity shall classify a liability as current when:
a. The entity expects to settle the liability within the entity's normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
QUESTION 10-6
Explain the presentation of current liabilities.
ANSWER 10-6
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial position
shall include the following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
The term trade and other payables is a line item for accounts payable, notes payable, accrued
interest on note payable, dividends payable and accrued expenses.
No objection can be raised if the trade accounts and notes payable are separately presented.
QUESTION 10-7
What are noncurrent liabilities?
ANSWER 10-7
The term noncurrent liabilities is a residual definition.
PAS 1, paragraph 69, provides that all liabilities not classified as current liabilities are classified
as noncurrent liabilities.
Examples of noncurrent liabilities are:
a. Noncurrent portion of long-term debt
b. Finance lease liability
c. Deferred tax liability
d. Long-term obligations to entity officers
e. Long-term deferred revenue
QUESTION 10-8
Explain the treatment of a currently maturing long-term debt.
ANSWER 10-8
A liability which is due to be settled within twelve months after the reporting period is classified
as current, even if.
a. The original term was for a period longer than twelve months.
b. An agreement to refinance or to reschedule payment on a long-term basis is completed after
the reporting period and before the financial statements are authorized for issue.
However, if the refinancing on a long-term basis is completed on or before the end of the
reporting period, the refinancing is an adjusting event and therefore the obligation is classified
as noncurrent.
QUESTION 10-9
Explain the treatment of a currently maturing obligation if there is a discretion to refinance.
ANSWER 10-9
If the entity has the discretion to refinance or roll over an obligation for at least twelve months
after the reporting period under an existing loan facility, the obligation is classified as
noncurrent even if it would otherwise be due within a shorter period.
The reason for this treatment is that such obligation is considered to form part of the entity's
long-term refinancing because the entity has the unconditional right under the existing loan
agreement to defer payment for at least twelve months after the end of the reporting period.
Note that the refinancing or rolling over must be at the discretion of the entity.
Otherwise, if the refinancing or rolling over is not at the discretion of the entity, the obiigation is
classified as a current liability.
QUESTION 10-10
What are covenants?
ANSWER 10-10
Covenants are often attached to borrowing agreements which represent undertakings by the
borrower.
These covenants are actually restrictions on the borrower as to undertaking further borrowings,
paying dividends, maintaining specified level of working capital and so forth.
Under these covenants, if certain conditions relating to the borrower's financial situation are
breached, the liability becomes payable on demand.
QUESTION 10-11
Explain the effect of breach of covenants on the classification of the liability.
ANSWER 10-11
PAS 1, paragraph 74, provides that "the liability is classified as current even if the lender has
agreed, after the reporting period and before the statements are authorized for issue, not to
demand payment as a consequence of the breach”.
This liability is classified as current because at reporting date the borrower does not have an
unconditional right to defer payment for at least twelve months after the reporting period.
However, Paragraph 75 provides that the liability is classified as noncurrent if the lender has
agreed on or before the end of reporting period to provide a grace period ending at least twelve
months after the end of reporting period.
QUESTION 10-12
What is the meaning of equity?
ANSWER 10-12
Equity is the residual interest in the assets of the entity after deducting all of the liabilities.
Simply stated, equity means "net assets" or total assets minus liabilities.
The terms used in reporting the equity of an entity depending on the form of the business
organization are:
a. Owner's equity in a proprietorship
b. Partners' equity in a partnership
c. Shareholders equity in a corporation
However, the term equity may simply be used for all business organizations.
QUESTION, 10-13
As a minimum, what are the line items on the face of the statement of financial position?
ANSWER 10-13
PAS 1, paragraph 54, provides that as a minimum, the face of the statement of financial
position shall include the following:
1. Cash and cash equivalents
2. Financial assets (other than 1, 3 and 6)
3. Trade and other receivables
4. Inventories
5. Property, plant and equipment
6. Investment in associates accounted for by the equity method
7. Intangible assets
8. Investment property
9. Biological assets
10. Total of assets classified as held for sale and assets included in disposal group classified
as held for sale
11. Trade and other payables
12. Current tax liability
13. Deferred tax asset and deferred tax liability
14. Provisions
15. Financial liabilities (other than 1l and 14)
16. Liabilities included in disposal group classified as held for sale
17. Noncontrolling interest
18. Share capital and reserves
The listing of the line items is not exclusive.
PAS 1 simply provides a list of items that are so different in nature and function to warrant
separate presentation on the face of the statement of financial position.
Paragraph 55 provides that additional line items, headings and subtotals shall be presented
on the face of the statement of financial position when such presentation is relevant to the
understanding of the financial position of an entity.
QUESTION 10-14
Explain the presentation of assets and liabilities in the statement of financial position.
ANSWER 10-14
PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, and
current and noncurrent liabilities on the face of the statement of financial position.
Current and noncurrent presentation of assets and liabilities provides useful information when
the entity supplies goods or services within a clearly identifiable operating cycle.
In the Philippines, the common practice is to present in the statement of financial position
current assets before noncurrent assets, current liabilities before noncurrent liabilities, and equity
after liabilities.
Other formats may be equally appropriate provided the distinction is clear. This is in accordance
with paragraph 7 of the Preface to IAS 1.
However, all assets and liabilities are presented broadly in the order of liquidity when such
presentation is reliable and more relevant.
Note that the format of the statement of financial position as illustrated in the appendix to IAS 1
presents assets, liabilities and equity as follows:
Noncurrent assets
Current assets
Equity
Noncurrent liabilities
Current liabilities
This is the practice in other jurisdiction, like the United Kingdom.
QUESTION 10-15 Multiple choice (PAS 1)
1. When there is much variability, the operating cycle is measured at
a. The mean value
b. The median value
c. Twelve months
d. Three years
2. The operating cycle of an entity
a. Is the time between the acquisition of materials entering into a process and their
realization in cash.
b. Is the period of time normally elapsed in converting trade receivables back into cash.
c. Is a period of one year.
d. Refers to the seasonal variation experienced by entities.
3. An entity shall classify an asset as current under all of the following conditions, except
a. The entity expects to realize the asset or intends to sell or consume it within the entity's
normal operating cycle.
b. The entity holds the asset for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The asset is cash or a cash equivalent that is restricted to settle a liability for more
than twelve months after the reporting period.
4. An entity shall classify a liability as current when under all of the following conditions,
except
a. The entity expects to settle the liability within the entity's normal operating cycle.
b. The entity holds the liability primarily for the purpose of trading.
c. The liability is due to be settled within twelve months after the reporting period.
d. The entity has an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.
5. Which obligations are classified as current even if these are due to be settled after more
than twelve months from the end of the reporting period?
a. Trade payables and accruals for employee and other operating cost
b. Current portion of interest-bearing liabilities
c. Bank overdrafts
d. Dividends payable
6. Current and noncurrent presentation of assets and liabilities provides useful information
when the entity
a. Supplies goods or services within a clearly identifiable operating cycle
b. Is a financial institution
c. Is a public utility
d. ls a nonprofit organization
7. A presentation of assets and liabilities in increasing or decreasing order of liquidity
provides information that is reliable and more relevant than a current and noncurrent
presentation for
a. Financial institution
b. Public utility
C. Manufacturing entity
d. Service provider
8. In the Philippines, the common practice is to present in the statement of financial position
a. Current assets before noncurrent assets, current liabilities before noncurrent
liabilities and equity after liabilities.
b. Noncurrent assets before current assets, noncurrent liabilities before current liabilities
and equity after liabilities.
c. Current assets before noncurrent assets, noncurrent liabilities before current liabilities
and equity after liabilities.
d. Noncurrent assets before current assets, current liabilities before noncurrent liabilities
and equity after liabilities.
9. A financial liability due within twelve months after the reporting period shall be
classified as noncurrent
a. When it is refinanced on a long-term basis before the issue of financial statements.
b. When the entity has no discretion to refinance for at least twelve months.
c. When it is refinanced on a long-term basis after the end of reporting period.
d. When it is refinanced on a long-term basis on or before the end of reporting
period.
10. When an entity breaches under a long-term loan agreement on or before the end of the
reporting period with the effect that the liability becomes payable on demand, the liability
is classified as
a. Current under all circumstances
b. Noncurrent under all circumstances
c. Current if the lender has agreed after the reporting period and before the
issuance of the statements not to demand payment as a consequence of the breach.
d. Noncurrent if the lender agreed after the reporting period to provide a grace period for
at least twelve months after the reporting period.
QUESTION 10-16 Multiple choice (IFRS)
1. In presenting a statement of financial position, an entity
a. Must make the current and noncurrent presentation.
b. Must present assets and liabilities in order of liquidity
c. Must choose either the current and noncurrent or the liquidity presentation, meaning
free choice of presentation.
d. Must make the current and noncurrent presentation, except when a presentation
based on liquidity provides information that is reliable and more relevant.
2. Assets to be sold, consumed or realized as part of the normal operating cycle are
a. Current assets
b. Noncurrent assets
c. Classified as current or noncurrent in accordance with other criteria
d. Noncurrent investments
3. Liabilities that an entity expects to settle within the normal operating cycle are classified
as
a. Noncurrent liabilities
b. Current or noncurrent liabilities in accordance with other criteria
c. Current liabilities
d. Equity
4. In which section of the statement of financial position should cash that is restricted for
the settlement of a liability due 18 months after the reporting period be presented?
a. Current assets
b. Equity
c. Noncurrent liabilities
d. Noncurrent assets
5. In which section of the statement of financial position should employment taxes that are
due for settlement in 15 months' time be presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
6. An entity has a loan due for repayment in six months' time, but the entity has the option
to refinance for repayment two years later. The entity plans to refinance this loan. In
which section of the statement of financial position should this loan be presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
7. Which of the following must be included on the face of the statement of financial
position?
a. Investment property
b. Number of shares authorized
c. Contingent asset
d. Shares in an entity owned by that entity
8. Which of the following is not required to be presented as minimum information on the
face of the statement of financial position?
a. Investment property
b. Investment accounted under the equity method
c. Biological asset
d. Contingent liability
9. Which of the following must be included as a line item in the statement of financial
position?
a. Contingent asset
b. Property, plant, and equipment analyzed by class
c. Share capital and reserves analyzed by class
d. Deferred tax asset
10. Which statement about the statement of financial position is not true?
a. Biological assets should be reported in the statement of financial position.
b. The number of shares authorized for issue should be reported in the statement of
financial position or the statement of changes in equity or in the notes.
c. Provisions should be recognized in the statement of financial position.
d. A revaluation surplus on a noncurrent asset in the current year should be
recognized in the income statement.
QUESTION 10-17 Multiple choice (AICPA Adapted
1. In analyzing financial statements, which financial statement would a potential investor
primarily use to assess liquidity and financial flexibility?
a. Statement of financial position
b. Income statement
c. Statement of retained earnings
d. Statement of cash flows
2. Which is an essential characteristic of an asset?
a. The claims to the benefits are legally enforceable
b. An asset is tangible
c. An asset is obtained at a cost
d. An asset is a present economic resource
3. Conceptually, asset valuation accounts are
a. Assets
b. Neither assets nor liabilities
c. Part of shareholders’ equity
d. Liabilities
4. Working capital is
a. Assets which enable the entity to operate profitably.
b. Capital which has been reinvested in the business.
c. Unappropriated retained earnings.
d. Current assets less current liabilities.
5. The basis for classifying assets as current or noncurrent is the period of time normally
elapsed from the time the entity expends cash to the time it converts
a. Inventory back into cash or 12 months, whichever is shorter.
b. Receivables back into cash or 12 months, whichever is longer.
c. Tangible fixed assets back into cash or 12 months, whichever is longer.
d. Inventory back into cash or 12 months, whichever is longer.
6. The operating cycle concept
a. Causes the distinction between current and noncurrent to depend on cash realization
within one year.
b. Permits some assets to be classified as current even though more than one year
removed from becoming cash.
c. Has become obsolete.
d. Affects the income statement only.
7. When classifying assets as current and noncurrent
a. Current assets must reflect realizable cash value.
b. Prepayments are included in other assets.
c. Current assets are determined by the seasonal nature.
d. Assets are classified as current if reasonably expected to be realized in cash or
consumed during the normal operating cycle.
8. The term net assets represents
a. Retained earnings
b. Current assets less current liabilities
c. Total contributed capital
d. Total assets less total liabilities
9. Treasury shares should be reported as
a. Current asset
b. Investment
c. Other asset
d. Reduction of shareholders' equity
10. The term deficit refers to
a. An excess of current assets over current liabilities
b. An excess of current liabilities over current assets
c. A debit balance in retained earnings
d. A prior period error
QUESTION 10-18 Multiple choice (AICPA Adapted
1. Which should be classified as current asset?
a. Trade accounts receivable normally collectible in 18 months
b. Cash for the redemption of preference shares
c. Cash surrender value
d. A deposit on machinery ordered within six months
2. Which should not be considered as a current asset?
a. Installment accounts receivable due over 18 months in accordance with normal trade
practice
b. Prepaid taxes
c. Financial asset held for trading
d. Cash surrender value
3. Current assets should never include
a. A receivable not collectible within one year
b. Current tax asset
c. Goodwill arising in & business combination
d. Premium paid on a bond investment
4. Equity investments held to finance construction of additional plant should be classified as
a. Current assets
b. Property, plant, and equipment
c. Intangible assets
d. Noncurrent investments
5. Which of the following is not a noncurrent investment?
a. Cash surrender value
b. Franchise
c. Land held for speculation
d. A sinking fund
QUESTION 10-19 Multiple choice (IAA)
1. The statement of financial position is useful for analyzing all of the following, except
a. Liquidity
b. Solvency
c. Profitability
d. Financial flexibility
2. The statement of financial position is useful for all of the following, except
a. To compute rate of return
b. To analyze cash inflows and outflows for the period
c. To evaluate capital structure
d. To assess future cash flows
3. What is one criticism not normally aimed at a statement of financial position?
a. Failure to reflect current value information
b. The extensive use of separate classifications
c. An extensive use of estimate
d. Failure to include items of financial value that cannot be recorded objectively
4. The statement of financial position
a. Omits many items that are of financial value
b. Makes very limited use of judgment and estimate
c. Uses fair value for most assets and liabilities
d. All of the choices are correct
5. Which is a limitation of a statement of financial position?
a. Many items that are of financial value are omitted
b. Judgment and estimate are used
c. Current fair value is not reported
d. All of these are a limitation of the statement or financial position
6. The amount of time that is expected to elapse until an asset is realize into cash is referred
to as
a. Solvency
b. Financial flexibility
c. Liquidity
d. Exchangeability
7. Which is not an acceptable major asset classification?
a. Current assets
b. Investments
c. Property, plant, and equipment
d. Deferred charges
8. Which is not an element of working capital?
a. Accrued interest on notes receivable
b. Goodwill
c. Goods in process
d. Temporary investments
9. Accrued revenue would normally appear under
a. Noncurrent assets
b. Current liabilities
c. Noncurrent liabilities
d. Current assets
10. Which is classified as a noncurrent asset?
a. Plant expansion fund
b. Prepaid rent
c. Supplies
d. Goods in process
TFA 1
Chapter 11 – Notes to Financial Statements
Patricia Nicole V. Castillo
QUESTION 11-8 Multiple choice (PAS 1)
1. Which is a purpose of the notes to financial statements?
a. To present information about the basis of preparation of financial statements and
accounting policies used.
b. To disclose the information required by PFRS but not presented elsewhere in the
financial statements.
c. To provide additional information not presented but necessary for a fair presentation.
d. All of these can be considered a purpose of the notes to financial statements.
2. Which is -the first item in presenting the notes to financial statements?
a. Statement of compliance with PFRS
b. Other disclosures, such as contingent liabilities, unrecognized contractual
commitments, and nonfinancial disclosures
c. Supporting information for items presented on the face of the financial statements
d. Summary of significant accounting policies
3. An entity is required to disclose all of the following nonfinancial information, except
a. description of the nature of the entity's operations and the principal activities
b. The name of the parent entity and the ultimate parent
c. Domicile and legal form of the entity, the country of incorporation and address of the
registered office.
d. Names and addresses of directors and officers.
4. Notes to financial statements
a. Are relatively unimportant facts
b. Document the source of financial statement facts
c. Are an integral part of financial statements
d. Are irrelevant and immaterial facts
TFA 1
Chapter 11 – Notes to Financial Statements
Patricia Nicole V. Castillo
QUESTION 11-9 Multiple choice (IFRS)
1. The presentation of the notes to financial statements in a systematic manner
a. Is voluntary
b. Is mandatory
c. Is mandatory, as far as practicable
d. Depends on the industry
2.
The cross-reference between each line item in the financial statements and any related
information disclosed in the notes to financial statements
a. Is voluntary
b. Is mandatory
c. Depends on the industry
d. Is either voluntary or mandatory
3. Disclosure of information about key sources of estimation uncertainty
a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry
4. Disclosure of information about judgments
a. Is voluntary
b. Is mandatory
c. Is either voluntary or mandatory
d. Depends on the industry
TFA 1
Chapter 11 – Notes to Financial Statements
Patricia Nicole V. Castillo
QUESTION 11-10 Multiple choice (AICPA Adapted)
1. What is the purpose of information presented in the notes to financial statements?
a. To provide disclosures required by generally accepted accounting principles
b. To correct improper presentation in the financial statements
c. To provide recognition of amounts not included in the financial statements
d. To present management response to auditor comments
2. Which is incorrect regarding notes to financial statements should not be used to
a. Describe significant accounting policies.
b. Describe depreciation methods employed.
c. Describe the principles and methods peculiar to the industry in which the entity
operates.
d. Correct an improper presentation in the financial statements.
3.
An entity shall disclose in the summary of significant accounting policies
a. The measurement basis used in preparing the financial statements.
b. All the measurement bases irrespective of whether used by the entity.
c. The measurement basis used in preparing the financial statements and the
accounting policies used.
d. All of the measurement bases and the accounting policy choices available to the
entity irrespective of whether used.
4. Which of the information should be disclosed in the summary of significant accounting
policies?
a. Refinancing of debt subsequent to the reporting period
b. Guarantee of indebtedness of others
c. Criteria for determining which investments are treated as cash equivalents
d. Adequacy of pension plan assets relative to vested benefits
TFA 1
Chapter 11 – Notes to Financial Statements
Jobilleen H. Lopez
QUESTION 11-10 Multiple choice (AICPA Adapted)
5. The summary of significant accounting policies should disclose
a. Proforma effect of retroactive application of an accounting change
b. Basis of profit recognition on long term construction contracts
c. Adequacy of pension plan assets in relation to vested benefits
d. Future lease payments
6. The summary of significant accounting policies should disclose
a. The composition of property, plant and equipment and the depreciation method used
b. The composition of property, plant, and equipment only
c. The depreciation method only
d. Neither the composition of property, plant, and equipment nor the depreciation
method used
1. Which of the following should be included in the summary of significant accounting
policies?
a. Property, plant, and equipment recorded at cost with the depreciation computed
principally by straight line method
b. A business component was sold during the current year
c. Breakdown of sales attributable to business components
d. Future ordinary share dividends are expected to approximate sixty percent of
earnings
2. Which of the following is not a required disclosure of accounting policies?
a. The measurement basis used
b. Key management personnel involved in drafting the summary of significant
accounting policies
c. Disclosures required by Standards
d. The nature of operations and the policies that the users of the financial statements
would expect to be disclosed
QUESTION 11-11 Multiple choice (IAA)
1. Notes to financial statements
a. Must be quantifiable.
b. Must, qualify as an element.
c. Amplify items presented in the financial statements.
d. All of these are characteristics of notes to financial statements.
2. Which is incorrect regarding notes to financial statements?
a. IFRS requires specific note disclosures including disaggregation of inventories.
b. IFRS requires a maturity analysis for receivables.
c. IFRS requires that all notes should be clear, simple to understand and
nontechnical in nature.
d. All of the choices are correct regarding notes to financial statements.
3. The disclosure of accounting policies is important to financial statement users in
determining
a. Net income for the year.
b. Whether accounting policies are consistently applied from year to year.
c. The measurement of obsolete inventory.
d. Whether the working capital position is adequate.
4. The standard of adequate disclosure is best described by which of the following?
a. All information related to operating objectives must be disclosed in the financial
statements.
b. Information about each account balance appearing in the financial statements is
included in the notes.
c. Enough information should be disclosed in order that a prospective investor can make
a wise decision.
d. Disclosure of any financial facts significant enough to influence the judgment of
a primary user.
5. Application of full disclosure principle
a. Is theoretically desirable but not practical because the cost of complete disclosure
exceeds the benefit.
b. Is violated when important financial information is buried in the notes to financial
statements.
c. Is demonstrated by the use of supplementary information presenting the effects
of changing prices.
d. Requires that the financial statements should be consistent and comparable.
6. An inventory accounting policy that should be disclosed is a summary of significant
accounting policies is
a. Composition of inventory into raw materials, work in process and finished goods
b. Major backlog of inventory orders
c. Method used for pricing inventory
d. All of these should be disclosed in the summary of significant accounting policies
7. Significant accounting policies may not be
a. Selected on the basis of judgment
b. Selected from existing acceptable alternatives
c. Unusual or innovative in application
d. Omitted from financial statement disclosure
8. Which of the following is a method of disclosing relevant financial information?
a. Supporting schedule
b. Parenthetical explanation
c. Cross reference
d. All of these are methods of disclosure
TFA 1
Chapter 12 – Related Party Disclosure
Ma. Ruby A. Bagsit
QUESTION 12-7 Multiple choice (PAS 24)
1. Related parties include nil of the following.
a. Parent, authority, and fellow subsidiaries
b. Associates
c. Key management personnel and close family members of such key management
personnel
d. Two venturers simply because they share joint control over a joint venture
2. A related party transaction in u transfer
a. Between related parties when a price is charged.
b. Between related parties, regardless of whether a price is charged.
c. Between unrelated parties when a price is charged.
d. Between unrelated parties, regardless of whether a price is charged.
3. Unrelated parties include which of the following?
a. Providers of finance in the normal course of business
b. Government agencies
c. Single customer with significant volume of business
d. All of these are unrelated parties
4. Close family members of an individual include all , except
a. The individual's spouse and children
b. Children of the individual's spouse
c. Dependents of the individual or individual's spouse
d. Brothers and sisters of the individual
5. The 'minimum disclosures. about related party transactions include all of the following,
except
a. The amount of the transaction
b. Amount of outstanding balance
c. Allowance for doubtful accounts related to the outstanding balance
d. Nature of the relationship
QUESTION 12-8 Multiple choice (IFRS)
1. Which is not included in key management personnel compensation?
a. Short-term benefit
b. Share-based payment
c. Termination benefit
d. Reimbursement of out-of-pocket expenses
2. Which of the following is not a mandated disclosure about related party transactions?
a. Relationship between parent and subsidiaries
b. Names of all the associates that an entity hag dealt with during the year.
c. Name of tie entity's parent and, if different, the ultimate controlling party.
d. If neither the entity's parent nor the ultimate controlling entity produces financial
statement available for public use, then the name of the next most senior parent that
does go.
3. The Philippine Financial Reporting Standards collectively include
a. The amount of related party transaction
b. The amount, of the outstanding balance
c. The amount of similar transaction with unrelated parties to establish that
comparable related party transaction has been entered at arm's length
d. Doubtful debt related to the out8tanding balance
4. Related party transactions include all, except
a. A venturer sold goods to the joint venture.
b. Sold a car to the uncle of the entity’s finance director
c. Sold goods to another entity owned by the daughter of the managing director.
e. All of these are related party transactions.
5. All of following are related party transactions, except
a. Transferred goods from inventory to a subsidiary
b. Sold an entity car to the wife of the managing
c. Sold an asset to an associate
d. Took out a huge bank loan
6. An entity that entered into a related party transaction would be required to disclose all,
except
a. Nature od the relationship between parties
b. Nature of any future transactions planned between the parties and the terms
involved
c. Peso amount of the transaction.
d. Amount due from or to related parties.
7. Which is not a required related party disclosure?
a.
b.
c.
d.
The son of the chief executive officer of the entity
The parent of the entity
An entity that has a common director with the entity
Joint venture in which the entity is a venturer
8. All Of the following are related parties, except
a. Joint venture in which the entity is a venturer
b. A postemployment benefit plan for the employees
c. An executive director of the entity
d. The partner of a key manager is a major supplier
9. Which of the following is not a related party?
a. A shareholder owning twenty percent
b. An entity providing banking facilities
c. An associate
d. Key management personnel
10. Which of the following should be included in key management personnel compensation?
a. Social security contributions
b. Postemployment benefits
c. Social security contributions and postemployment benefits
d. Social security contributions, postemployment benefits and dividends to shareholders
QUESTION 12-9 Multiple choice (AICPA Adapted)
1. Financial statements shall include disclosure of material transactions between related
parties, except
a. Nonmonetary exchange by affiliates
b. Sales of inventory by a subsidiary to the parent when consolidated financial
statements are prepared.
c. Expense allowance for executive which exceed normal business practice
d. An entity’s agreement to act as surety for a loan to the chief executive officer
2. Which should be disclosed as related party transaction in the entity's separate financial
statements?
a. Key management personnel compensation
b. Sales to affiliated entities
c. Key management personnel compensation and sales to affiliated entities
d. Neither key management personnel compensation nor sales to affiliated entities
3. An entity has cosigned the mortgage note on the home of its president guaranteeing the
indebtedness in the event that the resident should default. The entity considers the
likelihood default to be remote. How should the guarantee be treated in the financial
statements?
a. Disclosed only
b. Accrued only
c. Accrued and disclosed
d. Neither accrued nor disclosed
4. Which of the following transactions most likely would be a related party transaction
requiring disclosure?
a. The entity borrowed P 1,000,000 from Southwest Bank issuing a noninterest-bearing
note.
b. The entity borrowed P 2,000,000 Northwest Bank at rate significantly above the
prevailing market rate.
c. The entity ed P500,000 from Eastwest Bank with no scheduled terms for how or
when funds will be repaid.
d. All of these would be disclosed as related party
TFA 1
Chapter 13 – Events After the Reporting Period
Ma. Ruby A. Bagsit
QUESTION 13-6 Multiple choice (IFRS)
1. Events after the end of reporting period are favorable or unfavorable events that occur
between
a. The end of the reporting period and the date of the next annual financial statement8.
b. The end of the reporting period and the date of the next interim or annual financial
statements.
c. The end of the reporting period and the date when the financial statements are
authorized for issue.
d. The end of reporting period and the date of the next interim financial statements.
2. Adjusting events are events that
a. Provide evidence of conditions that existed at the end of the reporting period.
b. Are favorable and indicative of conditions that arose after the end of the reporting
period.
c. Are unfavorable and indicative of conditions that arose after the end of the reporting
period.
d. Provide of conditions that existed after the date the financial statements were
authorized for issue.
3. When after the end of reporting period an event occurs that is indicative of conditions
that arose after the end of reporting period
a. The entity shall disclose the nature and effect of the event in the financial
statements.
b. The entity shall adjust the related amount in the financial statements.
c. The entity shall disclose the nature and effect of the event and adjust the related
amount.
d. The entity shall disclose nothing.
4. The financial statements are authorized for issue
a. When the board of directors reviews the financial statements and authorizes
them for issue.
b. When the financial statements are made available to shareholders.
c. When the shareholders approve •the financial statements at their annual meeting.
d. When the approved financial statements are filed with a regulatory body.
QUESTION 13-7 Multiple choice (IAA)
1. Which event after the reporting period would require adjustment?
a. Loss of plant as a result of fire
b. Change in the market price of investment
c. Loss on inventory resulting from flood 1088
d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end
2. Events that occur after the current year-end but before the financial statements are issued
and affect the realizability of accounts receivable should be
a. Discussed in the management annual report.
b. Disclosed in the notes to financial statements.
c. Used to record an adjustment to bad debt expense.
d. An adjustment directly to retained earnings.
3. Nonadjusting events include all, except
a. A major business combination after reporting period
b. Announcing a plan to discontinue an operation
c. Expropriation of major asset after reporting period
d. Destruction of a major production plant a fire before the end of the reportingperiod
4. Nonadjusting events include all, except
a. The entity announced a discontinued operation.
b. An agreement to purchase the leased building.
c. Destruction of a major production plant by fire.
d. A mistake in the calculation of allowance for doubtful accounts.
5. Which event after the end of reporting period would generally require disclosure?
a. Retirement of key management personnel
b. Settlement of litigation when the event that gave rise to the litigation occurred in a
prior period
c. Strike of employees
d. Issue of a large amount of ordinary Share
QUESTION 13-8 Multiple choice (IFRS)
1. At the end of the current reporting Period, an entity carried a receivable from a major
customer who declared bankruptcy after the end of reporting period and before the
issuance of financial statements. What should be reported at the current year-end?
a. Disclose the fact that the customer has declared bankruptcy.
b. Make a provision for the event after reporting period in the financial statements.
c. Ignore the event and wait for the outcome of the bankruptcy.
d. Reverse the sale pertaining to the receivable in the comparative statement for the
prior period.
2. An entity decided to build and operate an amusement park next year. The entity applied
for a letter of guarantee which was issued before the issuance of the financial statements
of the current year. What is the adjustment required at the current year-end?
a. Book a long-term payable for the amount of guarantee
b. Disclose the guarantee as a contingent liability
c. Increase the contingency reserve
d. Do nothing
3. An entity built a new factory building during the current year. Subsequent to the current
year-end and before issuance of financial statements, the building was destroyed by fire
and the claim against the insurance entity proved futile because the cause of the fire was
negligence on the. part of the caretaker of the building. What should be reported at the
current year-end?
a. Write off the carrying amount of the building
b. Make a provision for one-half of the carrying amount of the building
c. Make a provision for three-fourths of the carrying amount of the building
d. Disclose the nonadjusting event in the notes to financial statements
4. An entity lease extensively with foreign currency transactions. Subsequent to the end of
reporting period and before the date of authorization of the issuance of the financial
statements, there were abnormal fluctuations in foreign currency rate. What should be
reported at the current year-end?
a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations
b. Adjust the foreign exchange year-end balance to reflect all abnormal fluctuations and
not just adverse movements
c. Disclose the post-reporting period event
d. Ignore the post-reporting period event
5. Which statement is true in relation to events after reporting period?
a. Notes to the financial statements should give details of material adjusting events
included in those financial statements.
b. Notes to the financial statements should give details of material nonadjusting
events which could influence the economic decisions of primary users.
c. A decline in the fair value of trading investments would normally be classified as an
adjusting event.
d. The settlement of a long-running court case would normally be classified as a
nonadjusting event.
TFA 1
Chapter 14- Statement of Comprehensive
Income
Joy Ann I. Marasigan
QUESTION 14-11 Multiple choice (PAS 1)
1. The term comprehensive income
a. Must be reported on the face of the income statement.
b. Includes all changes in equity except those resulting from investments by and
distributions to owners.
c. Is the net change in owners’ equity for the period.
d. Is synonymous with the term net income.
2. It is the total of income less expenses, excluding the components of other comprehensive
income.
a. Comprehensive income
b. Profit or loss
c. Accounting income
d. Economic income
3. This term comprises items of income and expense including reclassification adjustments
that are not recognized in profit or loss as required or permitted by PFRS.
a. Comprehensive income
b. Other comprehensive income
c. Profit or loss
d. Retained earnings
4. All of the following components of OCI should be reclassified to profit or loss, except
a. Gain or loss from translating the financial statements of a foreign operation
b. Gain or loss on remeasuring debt investment at fair value through other
comprehensive income
c. The effective portion of gain or loss on hedging instrument in a cash flow hedge
d. Gain or loss on remeasuring equity investment at fair value through other
comprehensive income
5. Earnings
a. Include certain gains excluded from comprehensive income
b. Are the same as comprehensive income
c. Exclude certain gains and losses included in comprehensive income
d. Include certain gains and losses excluded from comprehensive income
6. Which of the following components of OCI should be reclassified to retained earnings?
a. Revaluation surplus
b. Remeasurements of defined benefit plan
c. Gain or loss attributable to credit risk of a financial liability designated at fair value
through profit or loss
d. All of these components of OCI should be reclassified to retained earnings
7. The two-statement approach of presenting comprehensive income is preparing
a. A comparative statement of comprehensive income
b. A combined statement of comprehensive income and retained earnings
c. A combined income statement and a statement of changes in equity
d. A separate income statement and a separate statement of comprehensive income
8. Total comprehensive income for the period is presented
a. Showing separately the total amount attributable to owners of the parent and
the noncontrolling interest.
b. Showing separately an analysis of expenses by function.
c. Showing separately an analysis of expenses by nature.
d. Showing separately profit or loss and the total of other comprehensive income.
TFA 1
Chapter 14- Statement of Comprehensive Income
Marinelli Joy Magbanua
QUESTION 14-12 Multiple choice (IFRS)
1. An entity shall present an analysis of expenses using a classification based on:
a. The nature of expenses.
b. The function of expenses.
c. Either the nature of expenses or the function of expenses, whichever provides
information that is reliable and more relevant.
d. Either the nature of expenses or the function of expenses, whichever the entity
would prefer to present.
2. Separate line items in an analysis of expenses by nature include
a. Purchases, transport costs, employee benefits, depreciation, extraordinary items.
b. Purchases, distribution costs, administrative costs, employee benefits, depreciation,
taxes.
c. Depreciation, purchases, transport costs, employee benefits and advertising
costs.
d. Cost of goods sold, administrative and distribution costs.
3. Separate line items in an analysis of expenses by function include
a. Purchases, transport costs, employee benefits, depreciation, extraordinary items
b. Purchases, distribution costs, administrative costs, employee benefits, depreciation,
taxes
c. Depreciation, purchases, transport costs, employee benefits and advertising costs
d. Cost of goods sold, administrative and distribution costs
4. Under IFRS, the extraordinary item presentation
a. Has not changed from current rules.
b. Has been eliminated.
c. Has been eliminated from net of tax presentation.
d. Has been eliminated from EPS reporting.
TFA 1
Chapter 14- Statement of Comprehensive
Income
Rodelyn N. Magsino
QUESTION 14-13 Multiple choice (AICPA Adapted)
1.What is the purpose of reporting comprehensive income!
a. To report transactions with owners
b. To report a measure of overall entity performance
c. To replace net income with a better measure
d. To combine income from continuing operations within come from discontinued
operations
2. Which of the following changes during a period is not a component of other
comprehensive income?
a. Remeasurement of defined benefit plan
b. Treasury share, at cost
c. Foreign currency translation adjustment
d. Unrealized gain on equity instrument measured at fair value through other
comprehensive income
3. Other comprehensive income includes all of the following, except
a. Unrealized gain on forward contract designated as cash flow hedge
b. Loss from translating the financial statements of a foreign operation
c. Actuarial gain on defined benefit obligation
d. Dividend paid to shareholders
4. All of the following are a component of other comprehensive income, except
a. Foreign currency translation adjustment
b. Unrealized gain and loss on financial asset held for trading
c. Deferred loss on derivative financial instrument designated
d. Change in revaluation surplus as cash flow hedge
5. Which of the following is not an acceptable option of reporting other comprehensive
income?
a. In a separate statement of comprehensive income
b. In a single statement of comprehensive income
c. In the notes
d. In a statement of changes in equity
6. When a complete set of financial statements is presented, comprehensive income and the
components should
a. Appear as a part of discontinued operations.
b. Be reported net of related income tax effect, in total and individually.
c. Appear in a supplemental schedule in the notes.
d. Be displayed in a statement that has the same prominence as other financial
statements.
7. Why is reclassification adjustment used when reporting other comprehensive income?
a. To reclassify an item of comprehensive income as another item of comprehensive
income
b. To avoid double counting of items
c. To make net income equal comprehensive income
d. To adjust the income tax effect
8.Unusual and infrequent gain and loss should be reported
a. As an extraordinary item net of tax below income from continuing operations.
b. As an extraordinary item net of tax within income from continuing operations.
c. As a separate line item within income from continuing operations.
d. As a separate line item below income from continuing operations.
QUESTION 14-14 Multiple choice (IAA)
1. The limitations of the income statement include all of the following, except
a. Items that cannot be measured reliably are not reported.
b. Only actual amounts are reported in net income.
c. Income measurement involves judgment.
d. Income numbers are affected by the accounting method.
2. Which of the following would represent the least likely use of an income statement?
a. Use by customers to determine an entity's ability to provide needed goods and
services
b. Use by labor unions to examine earnings closely as a basis for salary discussions
c. Use by government to formulate tax policy
d. Use by investors interested in financial position
3. The income statement would help in which of the following?
a. Evaluate liquidity
b. Evaluate solvency
c. Estimate amount, timing, and uncertainty of future cashflows
d. Estimate future financial flexibility
4. Investors and creditors use income statement information for each of the following, except
a. To evaluate the future performance of an entity.
b. To provide a basis for predicting future performance.
c. To help assess the risk and uncertainty of achieving future cash flows.
d. To evaluate the past performance of an entity.
5. The income statement would help in which of the following?
a. Assess capital structure
b. Determine financial position
c. Estimate future cash flows
d. Estimate need for additional financing
TFA 1
Chapter 14 – Statement of Comprehensive
Income
Lordin Kaye G. Magbujos
QUESTION 14-15 Multiple choice (IAA)
11. The income statement reveals
m. Resources and equity at a point in time.
n. Resources and equity for a period of time.
o. Net earnings at a point in time.
p. Net earnings for a period of time.
12. Conceptually, net income is a measure of
i. Wealth
j. Change of wealth
k. Capital maintenance
l. Cash flow
13. Which term cannot be used to describe a line item in the statement of comprehensive
income?
a. Revenue
b. Gross income
c. Income before tax
d. Extraordinary
14. Comprehensive income includes all, except
a. Revenue and gain
b. Expense and loss
c. Preference share dividend
d. Unrealized gain and loss on derivative contract
15. Comprehensive income includes all, except
a. Dividend revenue
b. Loss on disposal of asset
c. Investment by owners
d. Unrealized gain on trading investment
QUESTION 14-16 Multiple choice (IAA)
1. Income determination is arrived at by
a. Measuring the change in owner’s equity
b. Identifying the change in the purchasing power
c. Using a transaction approach
d. Applying the value-added concept
2. Net income equals
a. Assets minus liabilities
b. Revenue minus cost of goods sold
c. Revenue minus expenses
d. Cash receipts minus cash payments
3. Comprehensive income always
a. Is the same as net income
b. Is greater than net income
c. Is less than net income
d. Could be greater than or less than net income
4. Gains are
a. Inflows from selling a product to a customer
b. Increases in equity resulting from transfers of assets to the entity from the owners
c. Increases in equity from peripheral transactions
e. All of these can be considered gains
5. Change in equity from nonowner sources is
a. Comprehensive income
b. Revenue
c. Expense
d. Gain or loss
TFA 1
Chapter 14- Statement of Comprehensive
Income
Kim Frances G.Manalo
QUESTION 14-17 Multiple choice (IFRS)
1. In the statement of changes in equity, the effect of a change in accounting policy is
presented
a. Separately for each component of equity.
b. In aggregate for total equity
c. In total for the amount attributable to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of parent and the noncontrolling
interest
2. In the statement of changes in equity, the effect of the correction of a prior period error is
presented
a. Separately for each component of equity.
b. In aggregate for total equity.
c. In total for the amount attributable to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of the parent and the
noncontrolling interest.
3. Which does not appear in the statement of retained earnings?
a. Net loss
b. Prior period error
c. Preference share dividend
d. Other comprehensive income
4. Which appears first in a statement of retained earnings?
a. Net income
b. Prior period error
c. Cash dividend
d. Share dividend
5. Corrections of errors in prior period are included in
a. Retained earnings
b. Other comprehensive income
c. Net income
d. Share premium
TFA 1
Chapter 15 - Non-Current Assets Held For Sale
Kim Frances G. Manalo
QUESTION 15-9 Multiple choice (PFRS 5)
1. It is group of assets to be disposed of by sale or otherwise, together as a group in a single
transaction, and liabilities directly associated with those assets that will be transferred in
the transaction.
a. Disposal group
b. Discontinued operation
c. Noncurrent asset
d. Cash generating unit
2. An entity shall classify a noncurrent asset or disposal group as held for sale when
a. The carrying amount of the asset or disposal group is recovered through a sale
transaction
b. The carrying amount of the asset or disposal group is recovered through continuing
use.
c. The noncurrent asset or disposal group is abandoned.
d. The noncurrent asset or disposal group is idle or retired from active use.
3. For the sale of a noncurrent asset to be highly probable, which of the following
statements is incorrect?
a. Management must be committed to a plan to sell the asset.
b. An active program to locate a buyer and complete the plan must have been initiated.
c. The asset must be actively marketed for sale at a reasonable price in relation to the
current fair value.
d. The sale is expected to qualify for recognition as a completed sale within two
years from the date of classification of the asset as held for sale.
4. An entity shall measure a noncurrent asset or disposal group classified as held for sale at
a. Carrying amount
b. Fair value less cost of disposal
c. Lower of carrying amount and fair value less cost of disposal.
d. Higher of carrying amount and fair value less cost of disposal.
5. Noncurrent asset classified as held for sale shall be presented as
a. Current asset
b. Other noncurrent asset
c. Noncurrent investment
d. Property, plant and equipment
6. If the fair value less cost of disposal is lower than the carrying amount of a noncurrent
asset classified as held for sale, the difference is
a. Not accounted for.
b. Accounted for as an impairment loss.
c. Charged to depreciation.
d. Debited to retained earnings.
7. What is the treatment of any gain on a subsequent increase in the fair value less cost of
disposal of a noncurrent asset classified as held for sale?
a. The gain shall be recognized in full.
b. The gain shall not be recognized.
c. The gain shall be recognized but not in excess of the cumulative impairment loss
previously recognized.
d. The gain shall be recognized but only in retained earnings.
8. A noncurrent asset that is to be abandoned shall not be classified as held for sale because
a. The carrying amount is recovered principally through continuing use.
b. It is difficult to value.
c. It is unlikely that the noncurrent asset is sold within twelve months.
d. It is unlikely that there is an active market for t noncurrent asset.
TFA 1
Chapter 15 – Non-Current Assets Held for Sale
Danielle Louisse C. Magbojos
QUESTION 15-10 Multiple choice (IFRS)
1. In order for a noncurrent asset to be classified as held for sale, the sale must be highly
probable. What is the meaning of highly probable?
a.
b.
c.
d.
The future gale is likely to occur.
The future gale is more likely than not to occur.
The sale is certain.
The probability is higher than more likely than not.
2. How should the assets and liabilities of a disposal group classified as held for sale be
reported in the statement of financial position?
a. The assets and liabilities shall be offset and presented as a single amount.
b. The assets of the disposal group shall be reported separately under current
assets and the liabilities of the disposal group shall be reported separately under
current liabilities.
c. The assets and liabilities shall be presented as a single amount and ag a deduction
from equity.
d. There should be no separate disclosure of assets and liabilities that form part of a
disposal group.
3. An entity acquired a subsidiary exclusively with a view to selling it. The subsidiary met
the criteria to be classified as held for sale. At the end of reporting period, the subsidiary
has not yet been sold and six months have passed since the acquisition. How will the
subsidiary be measured in the statement of financial position at the date of the first
financial statements after acquisition?
a.
b.
c.
d.
At fair value
At the lower of cost and fair value less cost of disposal
At carrying amount
In accordance with applicable IFRS
4. An entity recently moved to a new building. The old building is being actively marketed
for sale and the entity expects to complete the sale in four months.
Which of the following statements is incorrect regarding the old building?
a.
b.
c.
d.
It will be reclassified as an asset held for sale.
It will be classified as a current asset.
It will no longer be depreciated.
It will be measured at historical cost.
5. An entity classified a noncurrent asset accounted for under the cost model as held for sale
at the current year-end. Because no offers were received at an acceptable price, the entity
decided at the end of next year not to sell the asset but to continue to use it.
The asset shall be measured at the end of next year at what amount?
a. The lower of carrying amount and recoverable amount
b. The higher of carrying amount and recoverable amount
c. The lower of carrying amount on the basis that the asset had never been
classified as held for sale and recoverable amount
d. The higher of carrying amount on the basis that the asset had never been classified as
held for sale and recoverable amount
TFA 1
Chapter 16 – Discontinued Operation
Nesshrene J. Medrano
QUESTION 16-5 Multiple choice (IFRS)
16. Which criterion does not have to be met in order for an operation to be classified as
discontinued?
q. The operation shall represent a separate major line of business or geographical area.
r. The operation is a part of a single plan to dispose of a separate major line of business
or geographical area.
s. The operation is a subsidiary acquired exclusively with a view to resale.
t. The operation must be sold within three months of the year-end.
17. An entity manufactures and sells household products. The entity experienced losses
associated with the small appliance group. Operations and cash flows for this group can
be clearly distinguished from the rest of the entity’s operations. The entity decided to sell
the small appliance group. What is the earliest point at which the entity shall report the
small appliance group as a discontinued operation?
m.
n.
o.
p.
When the entity classifies it as held for sale.
When the entity receives an offer for the segment.
When the entity first sells any of the assets of the segment.
When the entity sells the majority of the assets of the segment.
18. Which is the requirement for a component of an entity to be classified as a discontinued
operation?
e. The activities must cease permanently prior to the financial statements being
authorized for issue.
f. The component must be a reportable segment.
g. The assets must have been classified as held for sale in the previous financial
statements.
h. The component must have been a cash generating unit while being held for use.
19. What is the presentation of the results from discontinued operation in the income
statement?
e. The entity shall disclose a single amount on the face of the income statement
below the income from continuing operations.
f. The amounts from discontinued operations shall be broken down over each category
of revenue and expense.
g. Discontinued operations shall be shown as a movement on retained earnings.
h. Discontinued operations shall be shown as a line item after gross income with the
related tax being shown as part of income tax expense.
20. Which statement is incorrect concerning the presentation of the discontinued operation in
the statement of financial position?
e. Assets of the component held for sale are presented separately under current assets.
f. Assets of the components held for sale are measured at the lower between fair value
less cost of disposal and carrying amount.
g. Liabilities of the component held for sale are presented separately under current
liabilities.
h. Depreciable assets of the component held for sale shall be depreciated.
TFA 1
Chapter 16 – Discontinued Operation
Reinalyn L. Mendoza
QUESTION 16-6 Multiple choice (AICPA Adapted)
1. Which of the following criteria is not required for the results of a component of an entry
to be classified as discontinued operation?
a. Management must have entered into a sale agreement.
b. The component is available for immediate sale.
c. The operations and cash flows of the component shall be eliminated from the
operations of the entry as a result of the disposal.
d. The entity shall not have any significant continuing involvement in the operations of
the component after disposal.
2. Which disposal could qualify as discontinued operation?
a. Disposal a component that is similar in nature to other components but has operations
and cash flows distinguishable from the rest of the entity.
b. Disposal of a component due to a major change in business strategy.
c. Disposal of a small component within the current business strategy.
d. Disposal of a component with distinguishable operations and cash flows from the rest
of entity.
3. Which should be considered as discontinued operation?
a. The operations and cash flows of a component have been eliminated from the
ongoing operations of the entity as a result of a disposal transaction.
b. The entity continues to have a significant continuing involvement in the operations of
a component after the disposal transaction.
c. The entity outsources the manufacturing operations of a component and sells the
manufacturing facility of the component but continues to sell the product.
d. All of these should be considered as discontinued operations.
4. When a component of an entity was continued during the current year, the loss on
discontinued operation should
a. Exclude the associated employee relocation cost.
b. Exclude operating loss for the period.
c. Include associated employee termination cost.
d. Exclude associated lease cancelation cost.
5. When an entity decided to sell a business component, the gain on the disposal should be
a. Presented as other income.
b. Presented as an adjustment to retained earnings.
c. Netted against the loss from operations of the component as a part of
discontinued operation.
d. Included in other comprehensive income.
6. When a component of a business has been discontinued during the year, the loss on
discontinued operation should
a. Include operating loss of the current period.
b. Exclude operating loss during the period.
c. Be classified an extraordinary item.
d. Be classified an operating item.
7. When a component of a business has been discontinued during the year, the component’s
operating loss of the current period should be included in
a. Income statement as part of revenue and expenses.
b. Income statement as part of the loss on the discontinued operations.
c. Income from continuing operations.
d. Retained earnings.
8. When an entity discontinued an operation and disposed of the discontinued operation, the
transaction should be reported in the income statement as
a. A prior period error
b. Other income and expense item
c. An amount after income from continuing operations and before net income
d. A bulk sale of assets included in income from continuing operations.
TFA 1
Chapter 17 – Accounting Estimate
Clarissa P. Julita; John Patrick A. Inocentes
QUESTION 17-4 Multiple choice (AICPA)
1. How should the effect of a change in accounting estimate be accounted for?
a.
b.
c.
d.
By restating amounts reported in financial statements of prior periods
By reporting proforma amounts for prior periods
As a prior period adjustment to beginning retained earnings
In the period of change and future periods if the change affects both
2. Which of the following is characteristic of a change in accounting estimate?
a. It usually need not be disclosed
b. It does not effect the financial statements of prior period
c. It should be reported through the restatement of the financial statements
d. It makes necessary the reporting of proforma amounts for prior periods
3. A change in the periods benefited by a deferred cost because additional information has
been obtained is
a. An accounting change that should be reported in the period of change and
future periods if the change affects both
b. An accounting change that should be reported by restating the financial statements of
all prior periods presented
c. A correction of an error
d. Not an accounting change
4. A change in the residual value of an asset arising because additional information has
been obtained is
a. An accounting change that should be reported in the period of change and
future periods if the change affects both
b. An accounting change that should be reported by restating the financial statements of
all prior period presented
c. A correction of an error
d. Not an accounting change
5. The effect of a change in accounting that is inseparable from the effect of a change in
accounting estimate should be reported
a. By restating the financial statements of all prior periods presented
b. As a correction of an error
c. As a component of income from continuing operations, in the period of change
and future periods if the change affects both
d. As a separate disclosure after income from continuing operations
6. Which of the following should be reported when an entity changed from the straight line
method of depreciation to the double declining balance method?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported currently and prospectively
7. Which of the following is not a justification for a change in depreciation method?
a. A change in the estimated useful life
b. A change in the pattern of the estimated future benefit
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the estimated future benefit
8. Which of the following should be reported when an entity changed the expected service
life of an asset?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported in the period of change and
future periods
QUESTION 17-5 Multiple choice (AICPA)
1. Which is not classified as an accounting change?
a. Change in accounting policy
b. Change in accounting estimate
c. Error in the financial statements
d. All of these are classified as an accounting change
2. Why is retrospective treatment of change in accounting estimate prohibited?
a. A change in accounting estimate is a normal recurring correction or adjustment.
b. The retrospective treatment is not allowed.
c. Retrospective treatment of a change in accounting estimate is required by IFRS.
d. IFRS is silent on the issue.
3. Which of the following is required for a change from sum of years' digits to straight line
method of depreciation?
a. The cumulative effect on prior years is reported in the statement of retained earnings
b. Retrospective restatement
c. Recomputation of depreciation for current and future years
d. All of these are required
4. Which is the best explanation why accounting changes are classified into change in
accounting policy and change in accounting estimate?
a. The materiality of the change
b. Each change involves different method of recognition in the financial statements
c. The fact that some treatments are considered GAAP
d. The need to provide a favorable profit picture
PFA 1
Chapter 18 – Accounting Policy
Maria Angela T. Vergara, Rhianne A. Pesigan, Ericka Jhane C. Hermosa, Jannelle M. Ramirez,
Antonette S. Manalo, Jenny Rose R. Martinez, Paula Angela Mae C. Peñas
QUESTION 18-12 Multiple choice (IFRS)
21. Which is the first step within the hierarchy of guidance when selecting accounting
policies?
u. Apply a standard from IFRS if it specifically relates to the transaction.
v. Apply the requirements in IFRS dealing with similar and related issue.
w. Consider the applicability of the definitions, recognition criteria and measurement
concepts in the Conceptual Framework.
x. Consider the most recent pronouncements of other standard setting bodies.
22. In the absence of an accounting standard that applies specifically to a transaction, what is
the most authoritative source in developing and applying an accounting policy?
q. The requirement and guidance in the standard or interpretation dealing with
similar and related issue.
r. The definition, recognition criteria and measurement of asset, liability, income, and
expense in the Conceptual Framework.
s. Most recent pronouncement of other standard-setting body.
t. Accounting literature and accepted industry practice.
23. A change in accounting policy shall be made when
I.
Required by law.
II.
Required by an accounting standard or an interpretation of the standard.
III.
The change will result in more relevant or reliable information about the financial
position, financial performance, and cash flows of the entity.
i.
j.
k.
l.
I and III only
II and III only
I and II only
I, II, and III
24. Why is an entity permitted to change an accounting policy?
i. The change would allow the entity to present a more favorable profit picture.
j. The change would result in the financial statements providing more reliable and
relevant information about financial position, financial performance, and cash
flows.
k. The change is made by the internal auditor.
l. The change is made by the CPA.
25. A change in accounting policy requires what kind of adjustment to the financial
statements?
i. Current period adjustment
j. Prospective adjustment
k. Retrospective adjustment
l. Current and prospective adjustment
26. A change in accounting policy requires that the cumulative effect of the change for prior
periods should be reported as an adjustment to
a. Beginning retained earnings for the earliest period presented.
b. Net income for the period in which the change occurred.
c. Comprehensive income for the earliest period presented.
d. Shareholders’ equity for the period in which the change occurred.
27. Which of the following is accounted for as a change in accounting policy?
a. A change in the estimated useful life of property, plant, and equipment
b. A change from cash basis to accrual basis of accounting
c. A change form expensing immaterial expenditures to deferring and amortizing them
when material
d. A change in inventory valuation from FIFO to average method
28. A change in accounting policy includes all of the following, except
a. The initial adoption of an accounting policy to carry asset at revalued amount
b. The change from cost model to revaluation model in measuring property, plant, and
equipment
c. A change in the measurement basis
d. A change from one method of depreciation to a different method of depreciation
29. Which of the following should be treated as change in accounting policy?
a. A change is made in the method of calculating the provision for doubtful accounts
b. A change from cost model to fair value model in measuring investment property
c. An entity engaging in construction contract for the first time needs on accounting
policy to deal with this
d. All of these qualify as change in accounting policy
30. When it is difficult to distinguish between a change in accounting estimate and a change
in accounting policy, the change is treated as
a. Change in accounting estimate with appropriate disclosure
b. Change in accounting policy
c. Correction of an error
d. Change in accounting estimate with no appropriate disclosure
QUESTION 18-13 Multiple choice (IFRS)
1. An entity that changed an accounting policy voluntarily should
a. Inform shareholders prior to taking the decision.
b. Account for the change retrospectively.
c. Treat the effect of the change as a component of other comprehensive income.
d. Treat the change prospectively and adjust the effect of the change in the current
period and future periods.
2. Which statement best describes prospective application?
a. Recognizing a change in accounting policy in the current and future periods affected
by the change.
b. Correcting the financial statements as if a prior period error had never occurred.
c. Applying a new accounting policy to transactions occurring after the date at
which the policy is changed.
d. Applying a new accounting policy to transactions as if that policy had always been
applied.
3. Which term best describes applying a new accounting policy to transactions as if that
policy had always been applied?
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
4. This means correcting the recognition, measurement and disclosure of amounts of
elements of financial statements as if a prior period error had never occurred.
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
5. All of the following should be treated as a change in accounting policy, except
a. A new accounting policy of capitalizing development cost as a project has
become eligible for capitalization for the first time.
b. A new policy resulting from the requirement of a new IFRS.
c. To provide more relevant information, items of property, plant and equipment are
now being measured at fair market value, whereas they had previously been measured
at cost.
d. All of these qualify as change in accounting policy.
QUESTION 18-14 Multiple choice (AICPA)
1. If it is impracticable to determine the cumulative effect of an accounting change to any of
the prior periods, the accounting change should be accounted for
a. As a prior period adjustment.
b. On a prospective basis.
c. As a cumulative effect change on the income statement.
d. As an adjustment to retained earnings.
2. Where it is impracticable to determine the period-specific effect of the change on
comparative information for one or more prior periods presented, the retrospective
application or restatement is applied
a. Retrospectively only to the extent that is impracticable
b. Prospectively only to the extent that is impracticable
c. Retrospectively to the extent that estimates can be made
d. Prospectively only to the extent that estimates can be made
3. Applying a requirement of a Standard or an Interpretation is impracticable when the entity
cannot apply it after making every effort to do so.
Which of the following is not included in the definition of impracticable?
a. The effect of the retrospective application is not determinable.
b. The retrospective application requires assumption about what management intention
would have been at a time.
c. The retrospective application requires significant estimate.
d. The entity would find the determination of the effect to be immaterial.
QUESTION 18-15 Multiple choice (AICPA)
1. Prior period errors
a. Do not include the effect of a mistake in the application of accounting policy.
b. Do not affect the presentation of prior period comparative financial statements
c. Do not require further disclosure.
d. Are reflected as adjustment of the opening balance of retained earnings of
the earliest period presented.
2. An example of a correction of an error in previously issued financial statements is a
change
a. From FIFO method of inventory valuation to the average method.
b. In the service life of property, plant and equipment.
c. From cash basis to accrual basis of accounting.
d. In the tax assessment related to a prior period.
3. An entity that changed from cash basis to accrual basis of accounting during the current
year should report
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting policy.
c. Component of income from continuing operations.
d. Component of an income from discontinued operations.
4. A change from an accounting principle that is not generally accepted to one that is
generally accepted should be reported as
a. Component of income from continuing operations
b. Component of discontinued operations
c. An adjustment of retained earnings
d. Component of other comprehensive income
QUESTION 18-16 Multiple choice (IFRS)
1. During the current year, an entity discovered that ending inventory reported in the
financial statements for the prior year was understated. How should the entity account for
this understatement?
a. Adjust the beginning inventory in the prior year.
b. Restate the financial statements with corrected balances for all periods
presented.
c. Adjust the ending balance in retained earnings at current year-end.
d. Make no entry because the error will self-correct.
2. On March 15, 2020, the entity discovered that depreciation expense for 2019 was
overstated. The 2019 financial statements were authorized for issue on April 1, 2020.
What must the entity do?
a. Correct the 2019 financial statements before issuing them.
b. Reduce depreciation for 2020.
c. Restate the depreciation expense reported for 2019 in the comparative figures of the
2020 financial statements.
d. Do nothing.
3. On April 1, 2020, the entity discovered that depreciation expense for 2019 was
overstated. The 2019 financial statements were authorized for issue on March 15, 2020.
What must the entity do?
a. Reissue the 2019 financial statements with the correct depreciation expense.
b. Reduce depreciation for 2020.
c. Restate the depreciation expense reported for 2019 in the comparative figures of
the 2020 financial statements.
d. Do nothing.
QUESTION 18-17 Multiple choice (AICPA)
1. A change in reporting entity is actually a change in
a. Accounting policy
b. Accounting estimate
c. Accounting method
d. Accounting concept
2. Which is not a change in reporting entity?
a. Changing the entities in combined financial statements.
b. Disposition of a subsidiary or other business unit.
c. Presenting consolidated statements in place of the separate financial statement of
individual entities.
d. Changing specific subsidiaries that constitute the group for which consolidated
financial statements are presented.
3. What is the proper accounting treatment for a change in reporting entity?
a. Restatement of financial statements of all prior periods presented
b. Restatement of current period financial statements
c. Note disclosure and supplementary schedule
d. Adjustment of retained earnings and note disclosure
4. An entity has included in the consolidated financial statements this year a subsidiary
acquired several years ago that was appropriately excluded from consolidation last year.
How should this change be reported?
a. An accounting change that should be reported prospectively
b. An accounting change that should be reported retrospectively
c. A correction of an error
d. Neither an accounting change nor a correction of an error
TFA 1
Chapter 19 – Interim Financial Reporting
Maridel L. Merhan
QUESTION 19-10 Multiple choice (PAS 34)
6. Which statement is true regarding interim reporting?
a. The independent view is required for interim financial statements.
b. Interim reports are required on a quarterly basis.
c. Interim reports are not required.
d. Interim reports require the preparation of only a statement of earnings and a statement
of financial position.
7. Which statement about an interim report is true?
a. An interim financial report must consist of a complete set of financial statements.
b. An interim financial report must consist of a condensed set of financial statements.
c. An interim financial report may consist of a condensed set or complete set of
financial statements.
d. All of these statements are true.
8. Which basic financial statements are prepared as a minimum for interim financial
reporting?
a. Statement of financial position and income statement
b. Statement of financial position, income statement and statement of comprehensive
income
c. Statement of financial position, statement of comprehensive income and statement of
cash flow
d. Statement of financial position, statement of comprehensive income, statement of
cash flows and statement of changes in equity
9. Publicly listed entities are encouraged to provide interim financial reports
a. At least at the end of the half year and within 60 days of the end of interim
period
b. Within a month of the half year-end
c. On a quarterly basis
d. Whenever the entity wishes
TFA
CHAPTER 19-INTERIM FINANCIAL REPORTING
Sherwin B. Paña
QUESTION 19-11 Multiple Choice (IFRS)
1. Interim financial reports shall be published
a. Once a year at any time during the year.
b. Within a man of the half year-end.
c. On a quarterly basis
d. Whenever the entity wishes.
2. If an entity does not prepare interim financial reports
a.
b.
c.
d.
The year-end financial statements are deemed not to be comply with IFRS.
The year-end financial statements compliance with IFRS is not affected.
The year-end financial statements shall not be acceptable under local jurisdiction.
Interim financial reports shall be included in the year-end financial statements
3. Interim financial reports shall include as a minimum
a.
b.
c.
d.
A complete set of financial statements.
A condensed set of financial statements and selected notes.
A condensed statement of financial position and an income statement.
A condensed statement of financial position, income statement and statement of
cash flows.
4. An interim financial report shall include as a minimum all of the following components
except
a. Condensed statement of financial position and statement of comprehensive
income.
b. Condensed statement of cash flows.
c. Condensed statement of changes in equity.
d. Accounting policies and explanatory notes.
5. There is a presumption that anyone reading interest financial reports shall
a. Understand all International Financial Reporting Standards.
b. Have access to the records of the entity.
c. Have access to the most recent annual report.
d. Not make decisions based on the report.
6. When the business is seasonal, what does IFRS suggest?
a. Additional notes be written in the interim reports about seasonal nature of the
business
b. Disclosure of financial information for the latest 12 months and comparative
information of for the prior comparable 12-month period in addition to the
interim report
c. Additional disclosure in the accounting policy note
d. No additional disclosure.
7. Which statement is true regarding interim financial statements?
a. Interim financial statements are required.
b. If interim financial statements are presented, four basic financial statements
are required.
c. If interim financial statements are presented, only a statement of financial position
and a statement of comprehensive income are required.
d. Interim financial statements must be presented with the most recent annual
financial statements.
8. An entity is preparing interim financial statements for six months ended June 30, 2020. In
the interim financial statements for six months, the statement of financial position on
June 30, 2020, a statement of comprehensive income for six months ended June 30, 2020
and a statement of cash flows for six months ended June 30, 2020 shall be presented. In
addition, all of the following shall be presented, except
a. Statement of financial position on June 30, 2019
b. Statement of financial position on December 31 , 2019
c. Statement of comprehensive income for six months ended June 30 , 2019
d. Statement of cash flows for six months ended June 30, 2019
TFA 1
Chapter 19 – Interim Financial Reporting
Angelika A. Silva
QUESTION 19-12 Multiple choice (AICPA Adapted)
1. Interim financial statements are usually presented on a
a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis
2. For interim reporting, an inventory loss from a market decline in the second decline
quarter shall be recognized as a loss
a. In the fourth quarter
b. Proportionately in each of the second, third and fourth quarters
c. Proportionately in each of the first, second, third and fourth quarters
d. In the second quarter
3. For external reporting purposes, it is appropriate to use estimated gross profit rate to
determine the cost of goods sold for
a. Interim reporting
b. Year-end reporting
c. Interim reporting and year-end reporting
d. Neither interim reporting nor year-end reporting
4. For interim financial reporting, an expropriation gain occurring in the second quarter
shall be
a. Recognized ratably over the last three quarters
b. Recognized ratably over all four quarters with the first quarter being restated
c. Recognized in the second quarter
d. Disclosed in the second quarter
5. Advertising costs incurred shall be deferred to provide an appropriate expense in each
period for
a. Interim reporting
b. Year-end reporting
c. Interim reporting and year-end reporting
d. Neither interim reporting nor end-year reporting
TFA 1
Chapter 19 – Interim Financial Reporting
Angelika A. Silva
QUESTION 19-12 Multiple choice (AICPA Adapted)
6. Interim financial statements are usually presented on a
e. Monthly basis
f. Quarterly basis
g. Semiannual basis
h. Nine-month basis
7. For interim reporting, an inventory loss from a market decline in the second decline
quarter shall be recognized as a loss
e. In the fourth quarter
f. Proportionately in each of the second, third and fourth quarters
g. Proportionately in each of the first, second, third and fourth quarters
h. In the second quarter
8. For external reporting purposes, it is appropriate to use estimated gross profit rate to
determine the cost of goods sold for
e. Interim reporting
f. Year-end reporting
g. Interim reporting and year-end reporting
h. Neither interim reporting nor year-end reporting
9. For interim financial reporting, an expropriation gain occurring in the second quarter
shall be
e. Recognized ratably over the last three quarters
f. Recognized ratably over all four quarters with the first quarter being restated
g. Recognized in the second quarter
h. Disclosed in the second quarter
10. Advertising costs incurred shall be deferred to provide an appropriate expense in each
period for
e. Interim reporting
f. Year-end reporting
g. Interim reporting and year-end reporting
h. Neither interim reporting nor end-year reporting
TFA 1
Chapter 20 – Operating Segments
Amiel Christian F. Mendoza
QUESTION 20-15 Multiple choice (PFRS 8)
1. Segment reporting shall apply to
a. Separate financial statements of an entity only.
b. Consolidated financial statements of a group only.
c. Both the separate financial statements of an entity and the consolidated
financial statements of a group.
d. Neither the separate financial statements of an entity nor the consolidated financial
statements of a group.
2. If a financial report contains both the consolidated financial statements of a parent and
the parent’s separate financial statements, segment information is required in
a. The separate financial statements only.
b. The consolidated financial statements only.
c. Both the separate and consolidated financial statements.
d. Neither the separate nor the consolidated financial statements.
3. An operating segment is a component of an entity
a. That engages in business activities from which it may earn revenue and incur
expenses.
b. Whose operating results are regularly reviewed by the entity's chief operating
decision maker.
c. For which discrete information is available.
d. All of these characterize an operating segment.
4. Which quantitative threshold is not a requirement in qualifying a reportable segment?
a. The segment revenue, both external and internal, is 10% or more of the combined
external and internal revenue of all operating segments.
b. The segment profit or loss is 10% or more of the greater between the combined profit
of profitable segments and combined loss of unprofitable segments.
c. The segment assets are 10% or more of the combined assets of all operating
segments.
d. The segment assets are 20% or more of the combined assets of all operating
segments.
5. Which statement is true concerning the 75% overall size test for reportable segments?
a. The total external and internal revenue of all reportable segments is 75% or more of
the entity’s external revenue.
b. The total external revenue of all reportable segments is 75% or more of the entity’s
external and internal revenue.
c. The total external revenue of all reportable segments is 75% or more of the
entity’s external revenue.
d. The total internal revenue of all reportable segments is 75% or more of the entity’s
internal revenue.
6. The term chief operating decision maker
a. Refers to a manager with a specific title.
b. Must be disclosed by title in the financial reporting for segments.
c. Must be described in the disclosures for the financial reporting for segments.
d. Refers to a function of allocating resources to the operating segments and
assessing their performance.
7. Which statement is not true with respect to a chief operating decision maker?
a. The term chief operating decision maker identifies a function and not necessarily a
manager with a specific title.
b. In some cases, the chief operating decision maker could be the chief operating
officer.
c. The board of directors acting collectively could qualify as the chief operating
decision maker.
d. The chief internal auditor would generally qualify as chief operating decision
maker.
8. In financial reporting for operating segments, an entity shall disclose all of the following,
except
a. Type of product and service from which each reportable segment derives revenue.
b. The title of the chief operating decision maker.
c. Factors used to identify the reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.
9. Two or more operating segments may be aggregated into a single operating segment if all
of the following conditions are satisfied, except
a. The segments have similar characteristics.
b. The segments share a majority of the nature of product or service, nature of
production process, class of customer, method of product distribution and regulatory
environment.
c. The aggregation is consistent with the core principle of segment reporting.
d. The segments have dissimilar characteristics.
10. Operating segments that do not meet any of the quantitative thresholds
a. Cannot be considered reportable.
b. May be considered reportable and separately disclosed if management believes
that information about the segment would be useful to the users of the financial
statements.
c. May be considered reportable and separately disclosed if the information is for
internal use.
d. May be considered reportable and separately disclosed if this is the practice within
the economic environment in which the entity operates.
TFA 1
Chapter 20 – Operating Segments
Princess Rachelle Anne M. Tisbe
Question 20-16 Multiple Choice (PFRS 8)
1. What are the disclosures required in relation to operating segments?
a.
General information about the operating segment.
b.
Information about segment profit or loss, including specified revenue and expenses
included in profit or loss, segment assets and segment liabilities.
c.
Reconciliation of total segment revenue, total segment profit or loss, total segment assets
and total segment liabilities to the corresponding amounts in the entity’s financial statements.
d.
All of these are required to be disclosed.
a.
b.
c.
d.
2. An entity shall disclose which of the following general information?
Factors used to identify the reportable segments
Types of products and services
Factors used to identify the reportable segments and types of products and services
Names of the board of directors
3. Segment reporting requires that an entity should provide reconciliations of
segment information. Which is not a required reconciliation?
a.
The total of the reportable segments’ revenue to the entity revenue
b.
The total of the reportable segments’ profit or loss to the entity profit or loss before tax
expense and discontinued operations
c.
The total number of major customers of all segments to the total number of major
customers of the entity
d.
The total of the reportable segments’ assets to the entity assets
4. Which of the following is a required enterprises-wide disclosure regarding
external customers?
a.
The identify of any external customer considered to be major by management
b.
The identify of any external customer providing 10% or more of a particular operating
segment revenue
c.
Information on major customers is not required in segment reporting
d.
The fact that transactions with a particular external customer constitute at least
10% of the total entity’ revenue
5. An operating segment is considered reportable when any of the following
conditions is met, except
a.
Segment revenue is 10% or more of the combined revenue of all of the entity’s segments
b.
Segments assets are 10% or more of the combined assets of all segments
c.
Segments liabilities are 10% or more of the combined liabilities of all segments
d.
Segment’s profit or loss is 10% or more of the combined profit of all segments that did
not incur a loss
TFA 1
Chapter 20 – Operating Segments
Lhana Iane D. Tuazon
Problem 20-17 Multiple Choice (PFRS 8)
1. Entity-wide disclosures include all, except
a. Information about products
b. Information about geographical areas
c. Information about major customers
d. Information about intersegment revenue disclosure
2. Which statement is true about major customer?
a. A major customer is defined as one providing revenue which amounts to 10% or
more of combined external revenue of all operating segments.
b. The identities of major customers need not be disclosed.
c. The entity shall disclose the total amount of revenue from major customers,
d. All of these statements are true about major customer disclosures
3. Which entity is required to report on business segments?
a. Publicly traded
b. Not for profit
c. Joint venture
d. Nonpublic
4. An entity must disclose all of the following about each reportable segment if the amounts
are used by the chief operating decision maker, except
a. Depreciation expense
b. Allocated expense
c. Interest expense
d. d Income tax expense
5. An entity shall disclose for each reportable segment all of the following specified
amounts included in the measure of profit or loss, except
a. Revenue from external customers
b. Revenue from internal customers
c. Interest revenue
d. Gain on disposal of investment
6. An entity shall disclose for each reportable segment all of the following specified
amounts included in the
a.
b.
c.
d.
Depreciation and amortization
The entity's interest in the profit or loss of associate
Income tax expense
General corporate expenses
7. An entity must disclose all of the following about each reportable segment if the amounts
are used by the chief operating decision maker, except
a. Unusual items
b. Income tax expense
c. Intersegment revenue
d. Cost of goods sold
8. For segment reporting purposes, which test must be applied to determine if a component
is a reportable operating segment?
a. Revenue test and asset test
b. Revenue test, asset test and profit or loss test
c. Revenue test, asset test and expense test
d. Revenue test, asset test and cash flow test
9. What is the practical limit to the number of reportable operating segments?
a. Five segments
b. Ten segments
c. Six segments
d. Four segments
10. The approach used in segment reporting is known as
a. Segment approach
b. Revenue approach
c. Management approach
d. d Enterprise approach
TFA
Chapter 25 – Inventories
Katrina Loren M. Adame
QUESTION 25-1
Define inventories.
ANSWER 25-1
PAS 2, paragraph 6, defines inventories as assets which are held for sale in the ordinary course
of business, in the process of production for such sale or in the form of materials or supplies to
be consumed in the production process or in the rendering of services.
QUESTION 25-2
What is the general rule as to what goods shall be included in inventory?
ANSWER 25-2
The general rule is that all goods to which the entity has title shall be included in inventory,
regardless of location.
In other words, it is ownership that determines inventory inclusion or inventory exclusion.
As long as the entity is the owner of the goods to be inventoried, the goods shall be included in
inventory.
QUESTION 25-3
Explain FOB destination and FOB shipping point in connection with purchase of inventory.
ANSWER 25-3
FOD destination – means that the ownership of the goods purchased is vested in the buyer upon
receipt thereof.
Accordingly, the seller is still the owner of the goods in transit and shall legally be responsible
for freight charges and other expenses up to the point of destination.
FOB shipping point – means that the ownership of the goods purchased is vested in the buyer
upon the shipment thereof.
Accordingly, the buyer is already the owner of the goods in transit and shall legally be
responsible for freight charges and other expenses from the point of shipment to the point of
destination.
The terms “FOB destination” and FOB shipping point” determine ownership of the goods in
transit and the party who is supposed to pay the freight charge and other expenses from the point
of shipment to the point of destination.
QUESTION 25-4
Explain freight collect and freight prepaid.
ANSWER 25-4
Freight collect means the freight charge on the goods shipped is not yet paid.
The common carrier shall collect the same from the buyer. Thus, under this, the freight charge is
actually paid by the buyer.
Freight prepaid means that the freight charge on the goods shipped is already paid by the seller.
The terms “freight collect” and “freight prepaid” determine the party who actually paid the
freight charge but not the party who is supposed to legally pay the freight charge.
QUESTION 25-5
Explain fully FAS, CIF and Ex-ship in relation to maritime shipping.
ANSWER 25-5
FAS or free alongside
A seller who ships FAS must bear all expenses and risk involved in delivering the goods up to
the dock next to or alongside the vessel on which the goods are to be shipped.
The buyer bears the cost of loading and shipment and thus, title passes to the buyer when the
carrier takes possession of the goods.
CIF or cost, insurance and freight
Under this shipping contract, the buyer agrees to pay in a lump sum the cost of the goods,
insurance and freight charge.
The shipping contract may be modified as CF which means that the buyer agrees to pay in a
lump sum the cost of the goods and freight charge only.
In either case, the seller must pay for the cost of loading.
Thus, title and risk of loss shall pass to the buyer upon delivery of the goods to the carrier.
Ex-ship
A seller who delivers the goods ex-ship bears all expenses and risk of loss until the goods are
unloaded at which time title and risk of loss shall pass to the buyer.
Angela Mariz D. Agbing
QUESTION 25-6
Explain the two systems of accounting for inventories.
ANSWER 25-6
1. Periodic or Physical System
The periodic system calls for the physical counting of goods on hand at the end of the
accounting period to determine quantities.
The quantities are then multiplied by the recorded unit costs to get the inventory value.
This approach gives actual or physical inventory.
Thus, under this approach, the cost of goods sold is computed only at the end of the
period by deducting the physical inventory from the total cost of goods available for sale.
The periodic inventory procedure is generally used when the individual inventory items
have small peso investment, such as groceries, hardware and auto parts
2. Perpetual system
The perpetual system requires the keeping of stock cards that summarize inventory
inflow and outflow.
Inventory increases and decreases are reflected in the stock cards and the resulting
balance represents the inventory. This approach gives book or perpetual inventory.
Under this approach, the costs of goods sold is computed at the time of every sale.
The perpetual inventory procedure is commonly used when the inventory items treated
individually have large peso investment such as jewelry and cars.
When the perpetual system is used a physical count of the units on hand should at least
be made once a year or at frequent intervals to confirm the balance appearing on the
stock cards.
QUESTION 25-7
Distinguish cash discounts and trade discounts.
ANSWER 25-7
1. Cash discounts are reductions in the invoice price allowed only when payment is made
within the discount period.
Cash discounts are called purchase discount on the part of the buyer and sales discount
on the part of seller.
Trade discounts are reductions in the list price or catalog price in order to get the invoice
price or the amount actually charged to the buyer.
2. Cash discounts are recorded but trade discounts are not recorded.
3. The purpose of cash discounts is to engage prompt payment.
The purpose of trade discounts is to encourage trading or prompt sales.
QUESTION 25-8
Explain the two methods of recording purchases.
ANSWER 25-8
1. Gross method
As the title suggests, the purchases are recorded at the gross amount of the invoice.
Cash discounts taken are recorded in a purchases discount account at the time of
payment.
The purchases discount is deducted from purchases when measuring cost of goods sold.
2. Net method
The purchases are recorded at net amount, meaning, the cost of purchases is measured
net of cash discounts allowable whether taken or not taken.
QUESTION 25-9
What is cost of an inventory?
ANSWER 25-9
The cost of inventory comprises:
a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventory to the present location and condition
QUESTION 25-10
Explain the cost of purchase of an inventory.
ANSWER 25-10
The cost of purchase of an inventory comprises:
a. Purchase price
b. Import duty and irrecoverable tax
c. Freight and other handling cost
d. Other cost directly attributable to the acquisition of the inventory
Trade discounts, rebates and other similar items are deducted in determining the cost of
purchase.
QUESTION 25-11
Explain the cost of conversion of an inventory.
ANSWER 25-11
The cost of conversion of an inventory includes cost directly related to the units of production
such as direct labor.
The cost of conversion also includes a systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished goods.
Donna R. Aguado
QUESTION 25-12
What is the treatment of the following costs in connection with inventory?
a. Abnormal amounts of wasted materials
b. Storage costs
c. Administrative overheads that do not contribute to bringing inventories to their present
location and condition
d. Distribution costs
Answer 25 -12
Such costs are excluded from the cost of inventory and recognized as expenses in the period
when incurred.
The reason is that these costs are not necessary in bringing the inventory to the present location
and condition.
However, storage costs related to goods in process or part-finished goods are inventoriable.
QUESTION 25-13
Explain the cost of inventory of a service provider.
Answer 25 - 13
The cost of inventory of a service provider comprises:
a. Labor and other cost of personnel directly engaged in providing the service
b. Compensation of supervisor directly engaged in providing the service
c. Attributable overhead incurred in providing the service
QUESTION 25-14 Multiple choice (PAS 2)
10. The cost of purchase of inventory does not include
i. Purchase price
j. Import duties and irrecoverable taxes
k. Freight, handling and other directly attributable cost
l. Trade discounts, rebates and other similar items
11. The costs of conversion include all, except
a. Direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead
12. The allocation of fixed factory overhead is based on
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity or actual use
d. Relative sales value method
13. How should unallocated fixed overhead be treated?
a. Allocated to finished goods and cost of goods sold.
b. Allocated to raw materials, goods in process and finished goods.
c. Recognized as an expense in the period incurred.
d. Allocated to cost of goods sold.
14. Variable production overhead is allocated to each unit of production on the basis of
a. Normal capacity of the production facilities
b. Actual use of the production facilities
c. Either the normal capacity of the actual use
d. Neither the normal capacity nor the actual use
QUESTION 25-15 Multiple choice (IFRS)
1.
Which of the following should not be taken into account when determining the cost of
inventory?
a. Storage costs of part-finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping
2.
The cost of inventory does not include
a. Salaries of factory staff.
b. Storage cost necessary in the production process before a further production stage.
c. Abnormal amount of wasted materials.
d. Irrecoverable purchase tax.
3.
Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff
d. Factory overhead based on normal capacity
4.
Which of the following should be taken into account when determining the cost of
inventory?
a. Storage cost of part-finished goods
b. Abnormal freight-in
c. Recoverable purchase tax
d. Interest on inventory loan
5.
Costs incurred in bringing the inventory to the present location and condition include
a. Cost of designing product for specific customers
b. Abnormal amount of wasted material
c. Storage cost not necessary in the production process before a further production stage
d. Distribution cost
Ma. Nicole P. Alcaraz
6. Inventories encompasses all of the following, except
y. Merchandise purchased by a retailer
z. Land and other property not held for sale
aa. Finished goods produced
bb. Materials and supplies for use in production
7. A property developer must classify properties that it holds for sale in the ordinary course
of business as
u. Inventory
v. Property, plant and equipment
w. Financial asset
x. Investment property
8. Factory supplies to be consumed in the production process are reported as
m. Inventory
n. Property, plant and equipment
o. Investment property
p. Intangible asset
9. Which of the following should not be reported as inventory?
m. Land acquired for resale by a real estate firm
n. Shares and bonds held for resale by a brokerage firm
o. Partially completed goods held by a manufacturing entity
p. Machinery acquired by a manufacturing entity
10. When determining the cost of an inventory, which of the following should not be
included?
m. Interest on loan obtained to purchase the inventory
n. Commission paid when inventory is purchased
o. Labor cost of the inventory when manufactured
p. Depreciation of plant equipment used in manufacturing
QUESTION 25-16 Multiple choice (AICPA Adapted)
6. Theoretically, cash discounts permitted should be
a. Added to other income, whether taken or not
b. Added to other income, only if taken
c. Deducted from inventory, whether taken or not
d. Deducted from inventory, only if taken
7. Which of the following generally would not be separately accounted for in the
computation of cost of goods sold?
a. Trade discounts applicable to purchases
b. Cash discounts taken
c. Purchase returns and allowances
d. Cost of transportation for merchandise purchased
8. The use of purchase discount account implies that the recorded cost of a purchased
inventory is
a. Invoice price
b. Invoice price plus any purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether taken or not
9. The use of a discount lost account implies that cost of a purchased inventory is
a. Invoice price
b. List price
c. Invoice price less the purchase discount taken
d. Invoice price less the purchase discount allowable whether or not taken
10. The valuation of inventory on a prime cost basis
a. Would achieve the same results as direct costing
b. Would exclude all overhead from inventory cost
c. Is always achieved when standard costing is adopted
d. Is always achieved when the FIFO is adopted
QUESTION 25-17 Multiple choice (IAA)
1. Which term represents the deduction from the invoice price of purchased goods granted
for early payment?
a. Sales discount
b. Purchase discount
c. Trade discount
d. Purchase return and allowance
2. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as
a. Trade discount
b. Quantity discount
c. Size discount
d. Cash discount
3. The purchase is recorded as a credit to accounts payable
a. As if the discount is to be taken, if using the gross method
b. Without regard for the discount, if using the net method
c. As if the discount is to be taken, if using the net method
d. As if the discount is to be taken, using either the gross or net method
4. When recording accounts payable, a purchase discount is recorded
a. If using the net method
b. If using the gross method, but only if the payment is made during the discount
period
c. If using the net method, provided the payment is made during the discount period
d. If using the gross method, but the purchase discount is reduced by any purchased
discount lost
5. Using the gross method, purchase discount lost is
a. Included in purchases
b. Added to accounts payable
c. Included in interest expense
d. Deducted from interest income
Divina Marie M. Atienza
QUESTION 25-18 Multiple choice (IAA)
1. Why is inventory included in the computation of net income?
a. To determine cost of goods sold
b. To determine sales revenue
c. To determine merchandise returns
d. Inventory is not included in the computation of net income
2. Which of the following is a characteristic of a perpetual inventory system?
a. Inventory purchases are debited to a purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change
in inventory.
3. Which of the following is incorrect about the perpetual inventory method?
a. Purchases are recorded as debit to the inventory account.
b. The entry to record a sale includes a debit to cost of goods sold and a credit to
inventory.
c. After a physical inventory count, inventory is credited for any missing
inventory.
d. Purchase returns are recorded by debiting accounts payable and
crediting purchase returns and allowances.
4. An entry debiting inventory and crediting cost of goods sold would be made when
a. Merchandise is sold and the periodic inventory method is used.
b. Merchandise is sold and the perpetual inventory method is used.
c. Merchandise is returned and the perpetual inventory method is used.
d. Merchandise is returned and the periodic inventory method is used.
5. Which is not acceptable for valuation of inventory?
a. Historical cost
b. Current Replacement cost
c. Prime cost
d. Estimated selling price less cost of disposal
6. In the periodic system, the beginning inventory is
a. Net purchases minus cost of goods sold
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases
d. Total goods available for sale minus cost of goods sold
7. Entities must allocate the cost of all goods available for sale between
a. The cost goods on hand at the beginning and the cost of goods purchased during
the period.
b. The cost of goods on hand at the end and the cost of goods purchased during the
period.
c. The income statement and the statement of financial position.
d. All of the choices are correct.
8. An exception to the general rule that costs should be charged to expense in the period
incurred is
a. Factory overhead costs incurred on a product manufactured but not sold
during the current period.
b. Interest cost for financing of inventories that are routinely manufactured.
c. General and administrative fixed cost incurred in connection with the
purchase of inventory.
d. Sales commission and salary incurred in connection with the sale of inventory.
QUESTION 25-19 Multiple choice (IAA)
1. What is consigned inventory?
a. Goods that are shipped and title transfers to the consignee.
b. Goods that are sold but payment is not required until the goods are sold.
c. Goods that are shipped but title remains with the consignor.
d. Goods that have been segregated for shipment to a customer.
2. Goods on consignment are included in the inventory of
a. The consignor but not the consignee
b. Both the consignor and the consignee
c. The consignee but not the consignor
d. Neither the consignor nor the consignee
3. How is a significant amount of consignment inventory reported?
a. Reported separately by the consignor.
b. Combined with other inventory of the consignor.
c. Reported separately by the consignee.
d. Combined with other inventory of the consignee.
4. Freight and other handling charges incurred in the transfer of goods from the consignor to
consignee are
a. Expense on the part of the consignor
b. Expense on the part of the consignee
c. Inventoriable by the consignor
d. Inventoriable by the consignee
5. Measurement of inventory requires the determination of all of the following, except
a. The costs to be included in inventory.
b. The physical goods to be included in inventory.
c. The cost of goods held on consignment.
d. The cost flow assumption.
Lovely Rose R. Atienza
QUESTION 25-20 Multiple choice (IAA)
15. Sales where the goods are delivered only when the buyer makes final payment are called
m. Bill and hold sales
n. Sales subject to installation or inspection
o. Consignment sales
p. Layaway sales
16. Sales in which the buyer is not yet ready to take delivery but does take title are known as
e. Barter sales
f. Bill and hold sales
g. Layaway sales
h. Sales with buyback
17. When activities involved production through natural growth or aging of biological assets,
revenue is recognized as the plant or living animal grows. This is known as what
approach?
e. Completion of production basis
f. Fair value approach
g. Accretion approach
h. Cost recovery or zero profit approach
18. For which of the following products is it appropriate to recognize revenue at the
completion of production even though no sale has been made?
e. Automobile
f. Large appliance
g. Residential unit
h. Precious metal
TFA
Chapter 26 – Inventory Cost Flow
Lovely Rose R. Atienza
QUESTION 26-1
What are the acceptable cost flow assumptions in measuring inventory?
ANSWER 26-1
The cost flow assumptions acceptable under IFRS are:
a. FIFO or first in, first out
b. Weighted average
c. Specific identification
IFRS prohibits LIFO or last in, first out.
QUESTION 26-2
Explain FIFO method of inventory valuation.
ANSWER 26-2
The FIFO method assumes that “the goods first purchased are first sold” and consequently the
goods remaining in the inventory at the end of the period are those most recently purchased or
produced.
In other words, the FIFO is in accordance with the ordinary merchandising procedure that the
goods are sold in the order they are purchased. The rule is “first come, first sold”.
The inventory is thus expressed in terms of recent or new prices while the cost of goods sold is
representative of earlier or old prices.
This method favors the statement of financial position in that the inventory is stated at current
replacement cost.
The objection to the method is that there is improper matching of cost against revenue because
the goods sold are stated at earlier or older prices resulting in understatement of cost of sales.
QUESTION 26-3
Explain the periodic weighted average method of inventory valuation
ANSWER 26-3
The periodic weighted average method means that cost of the beginning inventory plus the total
cost of purchases during the period is divided by the total units purchased plus those in the
beginning inventory to get a weighted average unit cost.
Such weighted average unit cost is then multiplied by the units on hand to derive the inventory
value.
The average unit cost is computed by dividing the total cost of goods available for sale by the
total number of units available for sale.
QUESTION 26-4
Explain the perpetual weighted average method.
ANSWER 26-4
When used in conjunction with the perpetual system, the weighted average method is popularly
known as the moving average method.
PAS 2, paragraph 27, provides that the weighted average may be calculated on a periodic basis
or as each additional shipment is received depending upon the circumstances of the entity.
Under moving average method, a new weighted average unit cost must be computed after every
purchase and purchase return.
Thus, the total cost of goods available after every purchase and purchase return is divided by the
total units available for sale at this time to get a new weighted average unit cost.
Such new weighted average unit cost is then multiplied by the units on hand to get the inventory
cost.
This method requires the keeping of inventory stock cards in order to monitor the “moving” unit
cost after every purchase.
Rizz Anne G. Balog
QUESTION 26-5
Explain the specific identification method of inventory valuation?
ANSWER 26-5
Specific identification means that specific costs are attributed to identified items of inventory.
The cost of the inventory is determined by simply multiplying the units on hand by their actual
unit cost.
This requires records which will clearly determine the actual costs of goods on hand.
PAS 2, paragraph 23, provides that this method is appropriate for inventories that are segregated
for specific project and inventories that are not ordinarily interchangeable.
The specific identification method may be used in either periodic or perpetual inventory system.
The major argument for this method is that the flow of the inventory cost corresponds with the
actual physical flow of goods.
With specific identification, there is an actual determination of cost of units sold and on hand.
The major argument against this method is that it is very costly to implement even with highspeed electronic computers.
QUESTION 26-6
What is the meaning of relative sales price method of inventory measurement?
ANSWER 26-6
When different commodities are purchased at a lump sum, the single cost is apportioned among
the commodities based on their respective sales price.
The relative sales price method is based on the philosophy that cost is proportionate to selling
price.
QUESTION 26-7
Explain the measurement of inventory at standard costs.
ANSWER 26-7
Standard costs are predetermined product costs established on the basis of normal levels of
materials and supplies, labor, efficiency and capacity utilization.
A standard cost is predetermined and, once determined, is applied to all inventory movements –
inventory, goods available for sale, purchases and goods sold or placed in production.
PAS 2, paragraph 21, states that the standard cost method may be used for convenience if the
results approximate cost.
However, the standards set should be realistically attainable and are reviewed and revised
regularly in the light of current conditions.
QUESTION 26-8 Multiple choice (AICPA Adapted)
1. Which of the following inventory method reports most closely the current cost of
inventory?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO
2. Which inventory cost flow assumption would consistently result in the highest income in
a period of sustained inflation?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification
3. In a period of falling prices, the use of which inventory cost flow method would
typically result in the highest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average
d. Specific identification
4. In a period of rising prices, the inventory cost allocation method that tends to result in
the highest reported net income is
a. LIFO
b. FIFO
c. Moving average
d. Weighted average
5.
a.
b.
c.
d.
During periods of rising prices, when the FIFO method is used, a perpetual inventory
system would
Not be permitted.
Result in a higher ending inventory than a periodic inventory system.
Result in the same ending inventory as a periodic inventory system.
Result in a lower ending inventory than a periodic inventory system.
Patricia Ann G. Buen
6. Which method of inventory pricing best approximates specific identification of the actual
flow of costs and units?
a. LIFO
b. FIFO
c. Moving average
d. Weighted average
7. Cost of goods sold is the same under a periodic system and a perpetual system when an
entity uses
a. FIFO
b. LIFO
c. Weighted Average
d. Specific identification
8. Which inventory cost flow assumption provides the best measure of earnings, where
“best” means most appropriate for predicting future earnings, when prices have been
declining?
a. FIFO
b. Specific identification
c. LIFO
d. Average cost
9. Assuming no beginning inventory, what can be said about the trend of inventory prices if
cost of goods sold computed using the FIFO method exceeds cost of goods sold using the
average cost method?
a. Prices decreased
b. Prices remained unchanged
c. Prices increased
d. Price trend cannot be determined from the information
10. The cost of ending inventory was lower using FIFO than LIFO. If there is no beginning
inventory what direction did the cost of purchases move during the period?
a. Up
b. Down
c. Steady
d. Cannot be determined
QUESTION 26-9 Multiple choice (IAA)
1. IFRS prohibits which of the following cost flow assumptions?
a. LIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions is allowed
2. What is the inventory pricing procedure in which the oldest costs rarely have an effect on
the ending inventory?
a. FIFO
b. LIFO
c. Specific identification
d. Weighted average
3. In a period of falling prices which inventory method generally provides the lowest
amount of ending inventory?
a. Weighted average
b. FIFO
c. Moving average
d. Specific identification
4. In a period of falling prices which inventory method generally provides the lowest
amount of net income?
a. Weighted average
b. Moving average
c. FIFO
d. Specific identification
5. The costing of inventory must be deferred until the end of reporting period under which
of the following method of inventory valuation?
a. Moving average
b. Weighted average
c. LIFO perpetual
d. FIFO perpetual
6. The cost of inventories that are not ordinarily interchangeable and goods or services
produced and segregated for specific projects shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Specific identification
7. Which is the reason why the specific identification method may be considered ideal for
assigning cost to inventory and cost of goods sold?
a. The potential for manipulation of net income is reduced.
b. There is no arbitrary allocation of cost.
c. The cost flow matches the physical flow.
d. It is applicable to all types of inventory.
8. IFRS requires the specific identification method in certain circumstances. Which of the
following is likely to be a circumstance where the specific identification method can be
used?
a. Unit price is low.
b. Inventory turnover is low.
c. Inventory quantities are large.
d. All of the choices are likely circumstances.
9. Which of the following cost flow assumptions is used for inventory when an entity builds
townhouses?
a. FIFO
b. Specific identification
c. Weighted average
d. Any of these cost flow assumptions
TFA
CHAPTER 27 - LOWER OF COST AND NET
REALIZABLE VALUE
Jelie A. Camacho
QUESTION 27-1
Explain fully the measurement of inventory in the statement of financial position.
ANSWER 27-1
a. PAS 2 provides the following clearcut principles concerning measurement of inventory:
a. Paragraph 9 provides that inventory inventories shall be measured at the lower of cost
and net realizable value or now known as LCNRV.
b. Paragraph 25 provides that the cost of inventories shall be determined by using either the
FIFO method or weighted average method.
c. Paragraph 23 provides that the cost of inventories that are not ordinarily interchangeable
and inventories that are segregated for specific projects shall be determined by using
specific identification method.
QUESTION 27-2
What is net realizable value?
ANSWER 27-2
Net Realizable Value or NRV is the estimated selling price in the ordinary course of business less
the estimated cost of completion and the estimated cost of disposal.
The cost of inventories may not be recoverable if the inventories are damaged or have become
wholly or partially obsolete, of if the selling prices have declined.
QUESTION 27-3
Explain the measurement of inventory at the lower of cost and net realizable value.
ANSWER 27-3
Inventory is usually written down to net realizable value on an item by item or individual
basis.
It is not appropriate to write down inventory based on a classification of inventory, for example,
finished goods or inventory in a particular industry or geographical segments.
If the cost is lower than net realizable value, the inventory is stated at cost and the increase in
value is not recognized.
If the net realizable value is lower than the cost, the inventory is measured at net realizable value
and the decrease in value is recognized as expense.
QUESTION 27-4
What are the two methods of accounting for inventory writedown to net realizable value?
ANSWER 27-4
The two methods of accounting for inventory writedown to net realizable value are:
1. Direct Method
2. Allowance Method
QUESTION 27-5
Explain the direct method of accounting for inventory writedown to net realizable value.
ANSWER 27-5
The inventory is recorded at the lower cost and net realizable value.
This method is also known as “cost of goods sold” method because any loss on inventory
writedown is not accounted for separately but “buried” in the cost of goods sold.
QUESTION 27-6
Explain the allowance method of accounting for inventory writedown to net realizable value.
ANSWER 27-6
The inventory is recorded at cost and any loss n inventory writedown is accounted for
separately.
The allowance method is also known as “lost method”.
A loss account, “loss on inventory writedown” is debited and a valuation account “allowance for
inventory writedown” s credited for the inventory writedown.
The loss on inventory writedown is included in the computation of cost of goods sold.
In the subsequent years, this allowance account is adjusted upward or downward depending on
the difference between the cost and net realizable value of the inventory at year-end.
If the required allowance decreases, a gain on reversal of inventory writedown is recorded.
However, the gain is limited only to the extent of the allowance balance.
The gain on reversal of inventory writedown is also included in the computation of cost of goods
sold as a deduction.
Preferably, the allowance method is used in order that the effects of writedown can be clearly
identified.
As a matter of fact, PAS 2, requires disclosure of the amount of any inventory writedown and
the amount of any reversal of inventory writedown.
However, PAS 2 does not state any preference in accounting for inventory writedown to net
realizable value.
Arianne Camille B. Conti
QUESTION 27-7
Explain the measurement of agricultural, mineral and forest products.
ANSWER 27-7
PAS 2, paragraph 4, provides that inventories of agricultural, forest and mineral products are
measured at net realizable value of certain stages of production.
This occurs when agricultural crops have been harvested or mineral ores have been extracted and
a sale is assured:
a. When there is a forward contract or government guarantee
b. When a homogeneous market exists and there is a negligible risk of failure to sell.
QUESTION 27-8
Explain the measurement of commodities of broker-traders.
ANSWER 27-8
PAS 2, paragraph 3, provides that commodities of broker-traders are measured at fair value less
cost of disposal.
Broker-traders are those who buy and sell commodities for others or on their own account.
The inventories of broker-traders are principally acquired with the purpose of selling them in the
near future and generating a profit from fluctuations in price or broker-traders’ margin.
QUESTION 27-9
What are purchase commitments?
ANSWER 27-9
Purchase commitments are obligations of an entity to acquire certain goods sometime in the
future at a fixed price and fixed quantity.
Actually, a purchase order has already been made for future delivery of goods fixed in price and
fixed in quantity.
Where the purchase commitments are significant or unusual, disclosure is required in the
accompanying notes to financial statements.
Any losses which are expected to arise from firm and noncancelable purchase commitments
shall be recognized.
If there is a decline in purchase price after a noncancelable purchase commitment has been
made, a loss is recorded in the period of the price decline.
Note that a purchase commitment must be noncancelable in order that a loss on purchase
commitment can be recognized.
Thus, if at the end of the reporting period, the purchase price falls below the agreed price the
difference is accounted for as a debit to loss on purchase commitment and a credit to an
estimated liability.
Actually, the recognition of a loss on purchase commitment is an adaptation of the measurement
at the lower of cost and net realizable value.
Accordingly, if the market price rises by the time the entity makes the purchase, a gain on
purchase commitment would be recorded.
However, the amount of gain to be recognized is limited to the loss on purchase commitment
previously recorded.
QUESTION 27-10 Multiple choice (PAS 2)
1. Inventories shall be measured at
a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Higher of cost and net realizable value
2. The cost of inventory shall be measured using
a. FIFO
b. Average method
c. LIFO
d. Either FIFO or average method
3. Net realizable value is
a. Current replacement cost
b. Estimated selling price
c. Expected selling price less expected cost to complete and expected cost of disposal
d. Estimated selling price less estimated cost to complete and estimated cost of
disposal
4. Inventories are usually written down to net realizable value
a. Item by item
b. By classification
c. By total
d. By segment
5. The amount of any writedown of inventory to net realizable value and all losses of
inventory shall be
a. Recognized as operating expense.
b. Recognized as other expense.
c. Recognized as component of cost of goods sold.
d. Deferred until the related inventory is sold.
De Castro, Jamaica B.
QUESTION 27-11 Multiple choice (ACP)
1. How should trade discounts be dealt with when valuing inventories at the lower of cost
and net realizable value?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted in arriving at cost
2. How should prompt payment discount be dealt with when valuing inventories at
LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost
3. How should sales staff commission be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost
4. How should import duties be dealt with when valuing inventories at LCNRV?
a. Added to cost
b. Ignored
c. Deducted in arriving at NRV
d. Deducted from cost
QUESTION 27-12 Multiple Choice (IAA)
1. Which statement is incorrect regarding LCNRV?
a. Net realizable value is the estimated selling price less estimated cost to complete and
estimated cost of disposal.
b. In most situations, entities measure inventory on a total inventory basis.
c. The direct method may be used to record the income effect of valuing inventory at net
realizable value.
d. An entity may use an allowance account to reduce inventory to net realizable value.
2. Which statement is true regarding inventory writedown and reversal of writedown?
a. Reversal of inventory writedown is prohibited.
b. Separate reporting of reversal of inventory writedown is required.
c. An entity is required to record an inventory writedown in a separate loss account.
d. All of the choices are correct.
3. Lower of cost and net realizable value
a. Results in the lowest valuation if applied to the total inventory.
b. Results in the lowest valuation if applied to major group of inventory.
c. Results in the lowest valuation if applied to individual item of inventory.
d. Must be applied to major group.
4. LCNRV of inventory
a. Is always either the net realizable value or cost.
b. Must be equal to net realizable value.
c. May sometimes be less than net realizable value.
d. Must be equal to estimated selling price less cost to complete.
5. Lower of cost and net realizable value of inventory valuation is best described as the
a. Reporting of a loss when there is a decrease in the future utility below the
original cost.
b. Method of determining cost of goods sold.
c. Assumption to determine inventory flow.
d. Change in inventory value to net realizable value.
6. What is the reason for the inventory measurement at lower of cost and net realizable
value?
a. To report a loss when there is a decrease in the future utility below the original selling
price.
b. To be conservative.
c. To report a loss when there is a decrease in the future utility below the original
cost.
d. To permit future income to be recognized.
7. Which method may be used to record a loss on inventory writedown to NRV?
a. Loss method
b. Accrual method
c. Cost of goods sold method
d. Loss method and cost of goods sold method
8. When the cost of goods sold method is used to record inventory at net realizable value
a. There is a direct reduction in the estimated selling price that results in a loss.
b. A loss is recorded directly by crediting inventory.
c. Only the portion of the loss attributable to inventory sold during the period is
recorded.
d. The net realizable value for ending inventory is substituted for cost and the loss
is buried in cost of goods sold.
Argel Joseph B. De Gala
QUESTION 27-13 Multiple Choice (IAA)
5. The credit balance that arises when a loss on a purchase commitment is recognized
should be
e. Presented as a current liability
f. Subtracted from ending inventory
g. Presented as an appropriation of retained earnings
h. Presented in the income statement
6. If a material amount of inventory has been ordered through a formal purchase contract at
the end of reporting period for future delivery at firm prices
e. This fact must be disclosed
f. Disclosure is required only if prices have declined since the date of the order
g. Disclosure is required only if prices have since risen substantially
h. An appropriation of retained earnings is necessary
7. When a portion of inventory has been pledged as security for a loan
e. The value of the inventory pledged should be deducted from the debt
f. An equal amount of retained earnings should be appropriated
g. The fact should be disclosed but the amount of current assets should not be
affected
h. The cost of pledged inventory should be transferred from current assets to noncurrent
assets
8. An example of an inventory accounting policy that should be disclosed is
e. Effect of inventory profit caused by inflation
f. Classification of inventory into raw materials, work in process and finished goods
g. Identification of major suppliers
h. Method used for inventory costing
QUESTION 27-14 Multiple Choice (IAA)
9. Commodities of broker-traders are measured at
e. Fair value
f. Fair value less cost of disposal
g. Cost
h. Net realizable value
10. Commodity broker-traders
e. Produce commodities such as rice or corns.
f. Hold inventory primarily to sell in the near term and generate a profit from
price fluctuation.
g. Measure inventory at LCNRV.
h. All of the choices are correct regarding broker-traders.
11. NRV is the general rule for measuring which inventory?
e. Commodity held by broker-traders
f. Computer component held for sale
g. Inventory priced on an item by item basis
h. All of these inventories are measured at NRV
12. Net realizable value is used to measure which inventory?
e. Agricultural inventories
f. Minerals
g. Commodities held by broker-traders
h. All of these are measured at net realizable value
13. Which financial attribute would not be used to measure inventory?
e. Historical cost
f. Current replacement cost
g. Net realizable value
h. Present values of cash flows
TFA
Chapter 28 – Gross Profit and Retail Method
QUESTION 28-1
What are the reasons for making an estimate of inventory?
ANSWER 28-1



Determination of inventory loss due to fire and other catastrophe or theft of merchandise
Proof of the reasonable accuracy of a physical count. This is popularly known as the
“gross profit test.”
Preparation of interim statements or statements of less than one year.
However, year-end statements require physical count, not mere estimate of inventory value.
QUESTION 28-2
Explain the gross profit method of estimating cost of ending inventory.
ANSWER 28-2
Under the gross profit method, the ending inventory is computed “goods available for sale minus
cost of goods sold.”
The cost of goods sold is determined through the use of the gross profit rate and this is the reason
the gross profit method is called as such.
This method is based on the major assumption that the rate of gross profit remains approximately
the same from period to period and therefore the ratio of cost of goods sold to net sales is
relatively constant from period to period.
Claren A. Dimayacyac
QUESTION 28-3
Explain the retail method of estimating the cost of ending inventory.
ANSWER 28-3
The retail inventory method came to its name because selling price and retail price is tagged to
each item and therefore the ending inventory is stated at selling price.
The ending inventory is computed using the following formula:
Goods available for sale at selling price minus net sales equals ending inventory at selling price
multiplied by the cost ratio equals the ending inventory at cost.
The cost ratio under the retail method is computed by dividing the goods available for sale at
cost by the goods available for sale at selling price.
QUESTION 28-4
What information is required under the retail inventory method?
ANSWER 28-4
The use of the retail inventory method requires that records to be kept which must show the
following data:
a.
b.
c.
d.
e.
Beginning inventory valued at cost and at retail price.
Purchases during the period at cost and at retail price.
Total goods available for sale for the period at cost and at retail price.
Total sales for the period.
Adjustments to the original retail price such as additional markup, markup cancelation,
markdown and markdown cancelation
f. Other adjustments, such as departmental transfer, breakage, shrinkage, theft, damaged
goods and employee discount.
QUESTION 28-5
What are the applications of the retail inventory method?
ANSWER 28-5
1. Conservative approach
The cost ratio is determined by including markups and excluding mardowns in computing
the goods available for sale at retail.
This approach is known as the conventional or lower of average cost and net realizable
value approach.
2. Average cost approach
The markups and markdowns are both included in the computation of the cost ratio.
3. FIFO approach
A cost ratio is computed for the current year. Thus, only the current purchases are
considered together with markups and markdowns.
The beginning inventory is excluded in the computation
QUESTION 28-6
Which approach is followed in measuring inventory under retail inventory method?
ANSWER 28-3
PAS 2, paragraph 22; provides that the percentage used under the retail method shall take into
consideration inventory that has been marked down to below the original selling price.
An average percentage for each retail department is often used.
This means that the average cost approach shall be applied in conjunction with the retail
inventory method.
Of course, PAS 2 requires either the FIFO or average method as a cost formula.
The standard prohibits the LIFO cost flow assumption.
QUESTION 28-7
1. The gross margin method of estimating ending inventory may be used for all of the
following, except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of the validity of an inventory cost determined under either periodic or
perpetual system.
2. The gross profit method assumes that
a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years.
c. Inventory values have not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior
years.
3. The gross profit method of estimating inventory would not be useful when
a. A periodic system is in use and inventories are required form interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty, and the
specific data required for inventory valuation are not available.
c. There is a significant change in the mix of products being sold.
d. The relationship between gross profit and sales remains stable over time.
4. The gross profit method of estimating inventory is not valid when
a. There is a substantial increase in the quantity of inventory during the year.
b. There is a substantial increase in the cost of inventory during the year.
c. The gross margin percentage changes significantly during the year.
d. All ending inventory is destroyed by fire before it can be counted.
Arianne H. Dorado
5. The gross profit method is invalid when
a. A portion of inventory is destroyed.
b. There is a substantial decrease in inventory.
c. There is no beginning inventory.
d. The gross profit percentage applicable to the goods in ending inventory is
different from the percentage applicable to goods sold during the period.
6. Which statement is not valid about the gross profit method?
a. It may be used by auditors.
b. It is an acceptable accounting procedure.
c. It may be used to estimate inventory for interim statements.
d. It may be used to estimate inventory for annual statements.
7.
Which is not a basic assumption of the gross profit method?
a. The beginning inventory plus net purchases equals total good to ne accounted for.
b. Goods not sold must be on hand.
c. The sales reduced to cost basis when deducted from the sum of beginning inventory
and net purchases will result to inventory on hand.
d. The amount of purchases and the amount of sales remain relatively unchanged
from the previous period.
8.
How is the gross profit method used in relation to inventory valuation?
a. To verify the accuracy of the perpetual inventory record
b. To verify the accuracy of the physical inventory
c. To estimate the cost of goods sold
d. To provide a FIFO inventory value
QUESTION 28-8 Multiple Choice (AICPA Adopted)
1. An advantage of the retail inventory method is that it
a. Permits entities to avoid taking an annual physical inventory.
b. Gives a more accurate measurement of inventory.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination of the
inventory.
2. To produce an inventory valuation which approximates the lower of cost and NRV using
the retail method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns
b. Include markups and markdowns
c. Ignore both markups and markdowns
d. Include markdowns but not markups
3.
When the conventional retail inventory method is used, markdowns are commonly
ignored in the computation of cost to retail ratio because
a. There maybe no markdowns during the year.
b. This tends to give a better approximation of the lower of average cost and net
realizable value.
c. Markups are also ignored.
d. This tends to result in the showing of normal profit margin in a period when no
markdown goods have been sold.
4.
The retail inventory method would include which of the following in the calculation of
the goods available for sale at both cost and retail?
a. Freight In
b. Purchase Returns
c. Markups
d. Markdowns
5. With regard to method, which is the most accurate statement?
a. Generally, accountants ignore net markups and net markdowns in computing the cost
ratio.
b. Generally, accountants exclude net markups and include net markdowns in
computing cost ratio.
c. The retail method results in a lower ending inventory if net markups are
included but net markdowns are excluded in computing the cost ratio.
6.
The conventional retail method produces an ending inventory that approximates
a. Lower of average cost and net realizable value
b. Lower of FIFO cost and net realizable value
c. Lower of LIFO cost and net realizable value
d. Lower of cost and net realizable value
7. The retail method is based on the assumption that
a. Final inventory and the total goods available for sale contain the same
proportion of high cost and low cost ratio goods.
b. Gross margin is the same each period
c. Ratio of cost to retail changes at a constant rate.
d. Proportions of markup and markdown to selling price are the same.
8. If the conservative retail inventory method is used, which of the following calculations
would include or exclude net markdowns?
Cost ratio
a.
b.
c.
d.
Include
Include
Exclude
Exclude
Ending Inventory at Retail
Include
Exclude
Include
Exclude
Gonzales, Charlene Jane S.
9. An inventory method which is designed to approximate inventory valuation at the lower
of average cost and net realizable value is
a. Average retail method
b. FIFO retail
c. Conventional retail method
d. LIFO retail
10. Which of the following is not reason why the retail inventory method is used widely?
a.
b.
c.
d.
As a control measure in determining inventory shortage
For insurance information
To permit the computation of net income without a physical count of inventory
To defer income tax liability
QUESTION 28-9 Multiple Choice (IAA)
1. Which of the following is not required when using the retail inventory method?
a. All inventory items must be categorized according to the retail markup
percentage
b. Total cost and retail price of goods purchased
c. Total cost and retail price of the goods available for sale
d. Total sales for the period
2. What condition is not necessary when using the retail inventory method?
a. Total cost of goods sold for the period
b. Total cost and retail price of goods purchased
c. Total cost and retail price of goods available for sale
d. Total sales for the period.
3. What is the effect of freight in on the cost-retail ratio when using the conservative retail
method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markup
d. Decreases the cost-retail ratio
4. What is the effect of net markup on the cost-retail ratio when using the conservative retail
method?
a. Increases the cost-retail ratio
b. No effect on the cost-retail ratio
c. Depends on the amount of the net markup
d. Decreases the cost-retail ratio
5. Which of the following would cause a decrease in the cost ratio used in the retail
inventory method?
a. Higher retail prices
b. Lower net markups
c. More employee discounts
d. Higher freight in charges
TFA
Chapter 29- Biological Assets
QUESTION 29-1
Define biological assets, agricultural produce and harvest
ANSWER 29-1
Biological assets are living animals and living plants.
Agricultural produce is the harvested product of the entity’s biological assets.
Harvest is the detachment of produce from a biological asset or the cessation of a biological
asset’s life processes.
QUESTION 29-2
Give examples of biological assets, agricultural produce and products that are the result of
processing after harvest.
ANSWER 29-2
Biological asset
1. Sheep
2. Trees in plantation forest
3. Sugar cane plant
4. Tobacco plant
5. Dairy cattle
6. Pigs
Agricultural Produce
Wool
Felled trees
Harvested cane
Picked Leaves
Milk
Carcass
Product after harvest
Yarn, carpet
Logs, lumber
Sugar
Cured tobacco
Cheese
Sausage, cured ham
The measurement of biological assets and agricultural produce is covered by PAS-41 and the
measurement of products after harvest is covered by PAS 2 on inventories
Hazel T. Hidalgo
QUESTION 29-3
Define agricultural activity.
ANSWER 29-3
Agricultural activity or simply agriculture is the management by an entity of the biological
transformation and harvest of biological assets for sale or for conversion into agricultural
produce or into additional biological assets.
Biological transformation comprises the processed of growth, degeneration, production and
procreation that cause qualitative or quantitative changes in a biological asset.
Agricultural activity covers a diverse range of activities such as the following:
1. Raising Livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including fish farming
QUESTION 29-4
What are the conditions for the recognition of a biological asset or agricultural produce?
ANSWER 29-4
The entity shall recognize a biological asset or an agricultural produce when:
1. The entity controls the asset as a result of past event.
2. It is probable that future economic benefits associated with the asset will flow to the entity.
3. The fair value or cost of the asset can be measured reliably.
QUESTION 29-5
Explain the measurement of biological asset.
ANSWER 29-5
A biological asset shall be measured on initial recognition and at the end of each reporting period
at fair value less cost of disposal.
QUESTION 29-6
Explain the measurement and presentation of agricultural produce.
ANSWER 29-6
a. Agricultural produce as it grows
Agricultural produce growing on bearer plant is measured at fair value lost cost of disposal with
changes recognized in profit or loss as the produce grows.
The agricultural produce growing on bearer plant remains within the scope of IAS 41.
In other words, agricultural produce is measured at the end of each reporting period prior to
harvest at fair value less cost of disposal.
IAS 41 further provides that agricultural produce growing on bearer plant shall be classified and
presented as biological asset.
b. Harvested produce
Harvested produce is measured at fair value less cost of disposal at the point of harvest.
The harvested product becomes an inventory and shall be measured subsequently at the lower of
cost and net realizable value.
The harvested product is recorded by debiting inventory and crediting gain from change in fair
value.
QUESTION 29-7
Explain the fair value measurement of biological asset.
ANSWER 29-7
There is a presumption that fair value can be measured reliably for a biological asset.
However, this presumption can be rebutted only on initial recognition for a biological asset for
which market-determined prices are not available or estimates of fair value are determined to be
clearly unreliable.
In such a case, the biological asset shall be measured at cost less accumulated depreciation and
any accumulated impairment loss.
However, once the fair value of such biological asset becomes clearly measurable, the entity
shall measure the biological asset at fair value less cost of disposal.
QUESTION 29-8
Explain the fair value measurement of agricultural produce.
ANSWER 29-8
In all cases, an entity shall measure agricultural produce at the point of harvest at fair value less
cost of disposal.
The prevailing view is that the fair value of agricultural produce at the point of harvest can
always be measured reliably.
The fair value measurement of agricultural produce stops at the time of harvest. After that date,
PAS 2 on inventory shall apply.
Cyrus Christopher A. Isana
QUESTION 29-9
Define a bearer plant.
ANSWER 29-9
a. A bearer plant is a living plant that:
b. Is used in the production or supply of agricultural produce.
c. Is expected to bear produce for more than one period
Has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
QUESTION 29-10
Explain the accounting treatment for a bearer plant.
ANSWER 29-10
Bearer plants are originally considered biological assets included within the scope of IAS 41 and
measured at fair value less cost of disposal.
The IASB decided that bearer plants should now be accounted for in the same way as property,
plant and equipment in IAS 16 because the operation of bearer plants is similar to that of
manufacturing.
Bearer plants are used solely to grow agricultural produce over several periods.
At the end of the productive life, the bearer plants are usually scrapped.
A bearer plant that no longer bears produce is commonly cut down and sold as scrap at the end
of the productive life.
QUESTION 29-11
Give examples of bearer plants.
ANSWER 29-11
Typical examples of bearer plants are:
a. Trees that produce fruits are bearer plants while the fruits growing on the trees are
agricultural produce until harvested.
In an oil palm plantation, a coconut tree is the bearer plant and the fruit is the agricultural
produce.
When immature, the coconut fruit can be harvested for drinking, known as “buko” juice
in the vernacular.
When mature, the coconut fruit can be processed to give oil, charcoal from the hard shell
and copra from the dried coconut flesh.
b. In a vineyard, the grape vines are the bearer plants and the grapes are the agricultural
produce.
The following should not be considered bearer plants:
a. Trees grown to be harvested and sold as log or lumber are not bearer plants.
b. Annual crops which do not bear produce for more than one period and are held solely to
be harvested as agricultural produce such as corn and rice are not bearer plants.
QUESTION 29-12
Explain the accounting treatment of a plant with dual use.
ANSWER 29-12
A plant with dual use is reported as biological asset and not as bearer plant.
A plant may have a dual use, namely:
a.
The plant is cultivated for bearing agricultural produce.
b. The plant itself is being sold either as a living plant or an agricultural produce.
For example, rubber trees may be cultivated to grow rubber milk as agricultural produce and at
the same time, may be sold as living plant or cut down at the end of the productive life to be sold
as lumber or wood.
In this case, the rubber trees are recognized as biological asset because of the dual use.
However, the rubber trees are recognized as bearer plants when simply cut down and sold for
scrap upon maturity.
Shara H. Laya
QUESTION 29-13
Explain the treatment of bearer animals.
ANSWER 29-13
Bearer animals, like bearer plants, may be hold solely for the produce that they bear.
However, bearer animals will continue to be accounted for under IAS 41 in accordance with
IASB pronouncement.
In other words, bearer animals shall be reported as biological assets.
QUESTION 29-14
Explain the treatment of animal-related recreational activities.
ANSWER 29-14
Managing recreational activities, for example, game parks and zoos, is not agricultural activity.
The reason is that there is no management of the transformation of the biological asset but
simply control of the number of animals.
The natural breeding that takes place is not a managed activity and is incidental only to the main
activity of providing a recreational facility.
Animals related to recreational activities shall be accounted for in accordance with PAS 16,
Property, plant and Equipment.
QUESTION 29-15 Multiple Choice (PAS 41)
1. Biological assets
a. Are found in Biotech entities.
b. Are living animals or living plants and must disclosed as a separate line item in
the statement of financial position.
c. Must be measured at cost.
d. Do not generally have future economic benefit.
2. Which statement is true about biological asset?
a. Biological assets are measured at fair value less cost of disposal.
b. When fair value cannot be determined reliably, the biological asset shall be measured
at cost less accumulated depreciation and impairment loss.
c. There is a presumption that the fair value of biological asset can be measured reliably.
d. All of these statements are true about biological assets.
3. It is the management by an entity of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce or into additional
biological asset.
a. Agricultural activity
b. Biological activity
c. Economic activity
d. Development activity
4. Biological transformation results from asset changes through all of the following except
a. Growth
b. Degeneration
c. Procreation
d. Production of agricultural produce
5. Agricultural activity results in which of the following type of asset?
a. Biological asset
b. Agricultural produce
c. Biological asset and agricultural produce
d. Neither Biological asset or agricultural produce
6. Agricultural activity includes all of the following, except
a. Raising livestock
b. Perennial cropping
c. Aquaculture
d. Ocean fishing
7. Agricultural produce is
a. The harvested product from biological asset.
b. Measured at the time of harvest at the cost of production.
c. Measured at each reporting period at fair value.
d. All of the choices are correct.
8. Agricultural produce as it grows on bearer plant is measured at year-end prior to harvest
at
a. Fair value
b. Fair value less cost of disposal
c. Fair value plus cost of disposal
d. Fair value less cost of disposal at the point of harvest.
9. Agricultural produce harvested is measured at
a. Fair value
b. Fair value less cost of disposal at the point of harvest.
c. Cost less cost of disposal
d. Fair value plus cost of disposal at the point of harvest.
10. The harvested agricultural produce is
a. Accounted for as inventory.
b. Initially recognized at fair value less cost of disposal at the point of harvest.
c. Recorded as gain from change in fair value.
d. All of these are correct about the harvested agricultural produce.
Raina Marie G. Mangubat
QUESTION 29-16 Multiple choice (IFRS)
31. A bearer plant is a living plant that
cc. Is used in the production or supply of agricultural produce
dd. Is used to bear produce more for more than one period
ee. Has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
ff. Must process all these characteristics
32. All of the following can be considered bearer plant, except
a. Coconut tree
b. Grape vine
c. Rubber tree
d. Tree in the forest plantation to be harvested and sold as log or lumber
33. A living plant with dual use is classified as
a. Bearer plant
b. Biological asset
c. Investment property
d. Inventory
34. Which statement is true in relation to bearer plant?
a. The bearer plant and the related agricultural produce are accounted as two separate
assets.
b. The bearer plant is a noncurrent asset.
c. The agricultural produce is usually presented as current asset unless it takes more
than one year to mature.
d. All of these statements are true about bearer plant.
35. According to IASB, bearer plants are accounted for as
a. Biological assets with disclosure
b. Biological assets without disclosure
c. Property, plant and equipment
d. Noncurrent investment
36. Mature bearer plant is measured using
a. Cost model
b. Revaluation model
c. Either cost model or revaluation model
d. Either cost model or fair value model
37. According to IASB, bearer animals are accounted for as
a. Biological assets
b. Property, plant and equipment
c. Investment property
d. Agricultural produce
38. Animals related to recreational activities are classified as
a. Biological asset
b. Property, plant and equipment
c. Investment property
d. Intangible asset
39. Regarding the choice of measurement basis used for biological assets, IFRS
a. Sets out several ways of measuring fair value
b. Recommends the use of historical cost
c. Recommends the use of current cost
d. Recommends the use of present value
40. Where the fair value of the biological asset cannot be determined reliably, the biological
asset is measure at
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment loss
d. Net realizable value
QUESTION 29-17 Multiple choice (IFRS)
1. Generally speaking, biological assets relating to agricultural activity shall be measured
using
a. Historical cost
b. Historical cost less depreciation less impairment
c. A fair value approach
d. Net realizable value
2. Which of the following is unlikely to be used in fair value measurement of biological
asset?
a. Quoted market place
b. The most recent market transaction price
c. The present value of the expected net cash flows
d. External independent valuation
3. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The
income shall be accounted for in which of the following?
a. No income shall be reported annually until first harvest and sale in 30 years.
b. Income shall be measured annually and reported using a fair value approach
that recognizes and measures biological growth.
c. The eventual sale proceeds shall be estimated and recognized over 30-year period.
d. The plantation forest shall be valued every 5 years and the increase in value shall be
recognized as component of other comprehensive income.
4. Which statement is true regarding agricultural produce?
a. In all cases, an entity shall measure agricultural produce at fair value less cost of
disposal at the point of harvest.
b. The prevailing view is that the fair value of agricultural produce at the point of
harvest can always be measured reliably.
c. The fair value measurement of agricultural produce stops at the time of harvest.
d. All these statements are true regarding agricultural produce.
5. Which of the following information shall be disclosed in relation to biological asset and
agricultural produce?
a. Separate disclosure of the gain or loss relating to the biological asset and agricultural
produce.
b. The aggregate gain or loss arising on the initial recognition of biological asset
and agricultural produce and from the change in fair value less cost of disposal
of biological asset
c. The total gain or loss from biological asset, agricultural produce, and from changes in
fair value less cost of disposal of biological asset.
d. There is no requirement in the standard to disclose separately any gain or loss.
6. A gain or loss arising on the initial recognition of a biological asset and from a change in
the fair value less cost of disposal of a biological asset shall be included in
a. The profit or loss for the period
b. Other comprehensive income
c. A revaluation reserve
d. Retained earnings
7. Where there is a long aging or maturation process after the harvest, the accounting for
such products shall be dealt with by
a. PAS 41, Agriculture
b. PAS 2, Inventories
c. PAS 16, Property, plant and equipment
d. PAS 40, Investment property
8. When agricultural produce is harvested, the harvest shall be accounted for as inventory at
a. The fair value less cost of disposal at the point of harvest
b. The historical cost of the harvest
c. The historical cost less accumulated impairment loss
d. Fair value
9. Which of the following criteria must not be satisfied before a biological asset can be
recognized?
a. The entity controls the asset as a result of past event.
b. It is probable that future economic benefits relating to the asset will flow to the entity.
c. An active market for the asset exists.
d. The fair value can be measured reliably.
10. Land that is related to agricultural activity is measured
a. At fair value
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40,
Investment Property
c. At fair value in combination with the biological asset.
d. At the resale value separate from the biological asset.
QUESTION 29-18 Multiple choice (IFRS)
1. All except the following would be classified as biological asset, except
a. Dairy cattle
b. Chicken
c. Egg
d. Tree
2. Which of the following would be classified as agricultural produce?
a. Lumber
b. Bush
c. Butter
d. Apple
3. All of the following are classified as agricultural produce, except
a. Sugar
b. Wool
c. Cotton
d. Milk
4. Which of the following would be classified as a product that is the result of processing
after harvest?
a. Cotton
b. Wool
c. Bananas
d. Cheese