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5-millan-SME - Multiple choice
Accountancy (St. Vincent's College Incorporated)
Studocu is not sponsored or endorsed by any college or university
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PROBLEM: MULTIPLE CHOICE – TEHORY
1. The PFRS for SMEs is based on which of the following?
a. IFRS for NPAEs
b. IFRS for SMEs
c. SFAS for SMEs
d. US GAAP
2. The PFRS for SMEs is
a. To be used in conjunction with full PFRS
b. A separate (stand-alone) standard
c. Similar to the Conceptual Framework
d. All of the above.
3. The PFRS for SMEs is intended to apply to the
a. General purpose financial statements of SMEs
b. Special purpose financial statements of SMEs
c. General purpose financial statements of SMEs and micro entities
d. A and b
4. Which of the following entities may apply the PFRS for SMEs?
a. Small and medium-sized entities (SMEs)
b. Private entities
c. Non-publicly accountable entities (NPAEs)
d. All of these
5. Which of the following statements is incorrect regarding the application of the PFRS for SMEs?
a. The PFRS for SMEs is only the minimum standard that qualifying entities need to adopt for
the preparation and presentation of their financial statements.
b. SMEs are prohibited from applying the full PFRSs.
c. SMEs may nevertheless opt to adopt the full PFRSs.
d. Publicly accountable entities do not have an option of applying the PFRS for SMEs in lieu of
the full PFRSs.
6. The decision as to which entities may apply the PFRS for SMEs rests with the
a. FRSC
b. IASB
c. Philippine SEC
d. All of these
7. An entity has public accountability when (choose the incorrect statement)
a. The entity’s equity securities are publicly listed.
b. The entity holds assets in a fiduciary capacity for a broad group of outsiders
c. The entity holds assets in a fiduciary capacity for a broad group of outsiders because they
hold and manage financial resources entrusted to them by clients, customers or members
not involved in the management of the entity, for reasons incidental to a primary business.
d. The entity’s debt securities are publicly listed.
8. Micro entities (choose the incorrect statement)
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9.
10.
11.
12.
13.
14.
a. Are entities that have total assets or total liabilities below P3 million
b. May use “another acceptable basis of accounting”
c. Have the options of applying either the PFRS for SME or the full PFRSs
d. All of the statements are correct.
Which of the following accounting provisions has been eliminated in the PFRS for SMEs?
a. Earnings per share
b. Measurement of inventory at the lower of cost and NRV
c. Depreciation of long-lived assets
d. Classification of Land and/or buildings as investment property
All of the following accounting provisions have been eliminated in the PFRS for SMEs except:
a. “Held for sale” classification
b. Measurement of held for trading securities at fair value
c. Segment reporting
d. Interim reporting
If a publicly accountable entity uses the PFRS for SMEs, its financial statements
a. Shall be described as conforming to the PFRS for SMEs only if law or regulation in its
jurisdiction permits or requires the IFRS for SMEs to be used by publicly accountable
entities.
b. Shall not be described as conforming to the PFRS for SMEs if law or regulation in its
jurisdictions prohibits the use of IFRS for SMEs by publicly accountable entities
c. Shall be described as conforming to the PFRS for SMEs only if law or regulation in its
jurisdiction permits or requires the IFRS for SMEs to be used by publicly accountable
entities; provided, an explicit and unreserved statement of compliance is disclosed in the
notes.
d. Shall not be described as conforming to the PFRS for SMEs even if law or regulation in its
jurisdiction permits or requires the IFRS for SMEs to be uses by publicly accountable entities.
The major objective of the financial statements of an SME is to provide information about all of
the following except
a. Financial position
b. Performance
c. Cash flows
d. Management’s stewardship
This qualitative characteristic requires information to be presented in a comprehensible manner
to users who have reasonable knowledge of business and economic activities and accounting
and a willingness to study the information with reasonable diligence.
a. Faithful presentation
b. Relevance
c. Understandability
d. Reliability
Information has this qualitative characteristics if it is capable of influencing the economic the
economic decisions of users by helping them evaluate past, present or future events or
conforming, or correcting.
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a. Faithful presentation
b. Relevance
c. Understandability
d. Reliability
15. Entities that adopt the PFRS for SMEs
a. Are not required to present comprehensive income
b. Are required to present profit or loss for the year only
c. Are required to present performance in a single statement only
d. Permitted to present performance in single financial statement or in two financial
statements
PROBLEM 2: MULTIPLE CHOICE – THEORY
1. According to the PFRS for SMEs, this term best describes the arithmetical difference
between all items of income and expenses, including gains and losses.
a. Profit or loss
b. Total comprehensive income
c. Other comprehensive income
d. Equity
2. Assets and liabilities are initially measured at
a. Historical cost
b. Fair value
c. Historical cost unless the PFRS for SMEs requires initial measurement at fair value.
d. Fair value unless the PFRS for SMEs requires initial measurement at historical cost.
3. According to the PFRS for SMEs, investments in quoted equity instruments or those whose
fair value can otherwise be measured reliably are measured at
a. Fair value with changes in fair value recognized in profit or loss (FVPL)
b. Fair value with changes in fair value recognized in other comprehensive income (FVOCI)
c. Amortized cost
d. A or b
4. According to the PFRS for SMEs, inventories are subsequently measured at
a. Cost
b. Fair value
c. Net realizable value
d. The lower cost and selling price less costs to complete and sell.
5. According to the PFRS for SMEs, property, plant and equipment are subsequently measure
at
a. Historical cost less accumulated depreciation
b. Revalued amount less accumulated depreciation
c. The lower of depreciated cost and recoverable amount
d. A or b
6. According to the PFRS for SMEs, investment property is subsequently measured at
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7.
8.
9.
10.
11.
12.
a. Fair value
b. Cost
c. A or b
d. Investment property classification is not permitted
According to the PFRS for SMEs, most liabilities other than financial liabilities are measured
at
a. Amortized cost
b. The best estimate of the amount that would be required to settle the obligation at the
reporting date.
c. Fair value with changes in fair value recognized profit or loss; recognition in other
comprehensive income prohibited
d. A or c
Which of the following is an example of offsetting in accordance with the standard?
a. Deducting allowance for inventory obsolescence in determining the carrying amount of
inventory
b. Deducting allowance for uncollectability in determining the carrying amount of accounts
receivable
c. Deducting disposal costs from the sale price of property, plant and equipment in
determining the gain or loss on disposal
d. Deducting disposal costs (e.g., sale commissions and delivery expense) from the sale
price of inventories sold in determining the gross profit.
In assessing whether the going concern assumption is appropriate, management takes into
account all available information about the future, which is at least, but is not limited to,
a. 1 year from the reporting date
b. 24 months from the reporting date
c. 3 months from the reporting date
d. Any of these as a policy choice
When management is aware, in making its assessment, of material uncertainties related to
events or conditions that cast significant doubt upon the entity’s ability to continue as a
going concern, the entity shall
a. Not prepare financial statements based on a going concern basis
b. Disclose those uncertainties
c. A and b
d. Not disclose those uncertainties
According to the PFRS for SMEs, an entity shall present a complete set of financial
statements (including comparative information)
a. At least annually
b. At least quarterly
c. At least semi-annually
d. Not disclose those uncertainties
When comparative amounts are reclassified, an entity shall disclose which of the following?
a. The nature of the reclassification
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b. The amount of each item or class of items that is reclassified
c. The reason for the reclassification
d. All of theses
13. The entity may omit the statement of changes in equity and, in lieu thereof, present a single
statement of income and retained earnings if the only changes to equity during the periods
for which financial statement are presented arise from (choose the incorrect statement)
a. Profit or loss and payment of dividends
b. Issuances of share capital
c. Correction of prior period errors
d. Changes in accounting policy
14. An SME may present only an income statement or a statement of comprehensive income in
which the ‘bottom line’ is labeled ‘profit or loss’
a. If it chooses to as a matter of an accounting policy choice
b. If the only changes in its equity for the period are limited to share issuances, payment of
dividends and profit or loss
c. Under no circumstances
d. If it has no items of other comprehensive income in any of the periods for which
financial statements are presented.
15. The PFRS for SMEs does not address the presentation of all of the following except
a. Comparative information
b. Earnings per share
c. Interim financial reports
d. Segment information
PROBLEM 3: MULTIPLE CHOICE – THEORY
1. Which of the following is not included in the minimum line items in the statement of financial
position of an SME?
a. Investment property carried at fair value through prof loss.
b. Intangible assets.
c. Biological assets carried at cost depreciation and impairment, less accumulated depreciation and
impairment
d. Goodwill
2. Which of the following is not included in the minimum line items in the statement of financial
position of an SME?
a. Investments in associates
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b. Deferred tax liabilities
c. Non-controlling interest, presented within equity separately from the equity attributable to the
owners of the parent.
d. Equity attributable to the owners of the parent
e. Treasury shares
3. A change from the single-statement approach to the twostatement approach, or vice versa, of
presenting comprehensive income is
a. a change in accounting policy accounted for retrospectively
b. a change in accounting policy accounted for prospectively
c. a change in accounting estimate accounted for prospectively
d. prohibited
4. Which of the following is not included in the other comprehensive income of an SME?
a. Some gains and losses arising on translating the financial statements of a foreign operation.
b. Some actuarial gains and losses.
c. Gains or losses on investments in FVOCI securities.
d. Some changes in fair values of hedging instruments.
5. The statement of cash flows of an SME
a. provides information about the changes in cash and cash equivalents of an entity for a reporting
period, showing no separate changes from operating activities, investing activities and financing
activities.
b. provides information about the changes in cash and cash equivalents of an entity for a reporting
period, showing separately changes from operating activities, investing activities and financing
activities.
c. is only an optional statement
d. is required only under certain circumstances
6. An SME shall present cash flows from operating activities using
a. the direct method only
b. the indirect method only
c. either the direct method or the indirect method
d. none of these
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7. When presenting a statement of cash flows, cash flows arising from transactions in foreign currency
shall
a. be translated to the entity’s functional currency using the exchange rate at the date of the cash flow.
b. be translated to the entity’s functional currency using the exchange rate at the reporting date.
c. be disclosed only
d. not be presented
8. When presenting a statement of cash flows, cash flows arising - from income tax shall
a. be classified as investing cash flows.
b. be classified as financing cash flows unless they can be specifically identified with operating and
investing activities.
c. be classified as operating cash flows unless they can be specifically identified with financing and
investing activities.
d. not be classified as either operating, investing or financing activity.
9. Which of the following may validly form part of the cost of inventories of an SME?
a. Borrowing costs directly attributable to the production of inventories that are not mass produced or
routinely produced.
b. Administrative overheads that do not contribute to bringing the inventories to their present location
and
condition.
c. Advertising costs needed to market the products.
d. Commissions paid to brokers on the purchase of a inventories.
10. Which of the following cost formulas is not available for an SME?
a. Specific identification
b. First-in, first-out (FIFO)
c. Weighted average cost
d. Last-in, firs-out (LIFO)
11. An SME shall account for its investment in associates using the
a. Cost model
b. Equity method
c. Fair value model
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d. Any of these as an accounting policy choice
12. If the fair value of a land and/or building that would otherwise be classified as investment
property cannot be measured reliably, then the asset(s) is
a. nonetheless classified as investment property’
b. nonetheless classified as investment property but with appropriate disclosures in the notes
c. classified as property, plant and equipment
d. b or c as an accounting policy choice
13. An SME shall measure its investment property as follows:
a.
b.
c.
d.
Initial
Cost
Cost
Cost or Fair value
Cost
Subsequent
Cost or Fair value
Fair value
Fair value
Fair value
Changes in fair values
Not recognized
Profit or loss
Profit or loss
Profit or loss or OC
14. If a reliable measurement of fair value becomes unavailable for an investment property held by an
SME, the investment property is
a. reclassified to Property, plant, and equipment and shall not be reclassified again as investment
property.
b. nonetheless continued to be classified as investment Property with appropriate disclosures in the
notes
c. reclassified to property, plant, and equipment until fair value becomes available again.
d. none of these
15. After initial recognition, the property, plant and equipment of an SME shall be measured at
a. cost less any accumulated depreciation and any accumulated impairment loss.
b. revalued amount less any accumulated depreciation and any accumulated impairment loss.
c. a or b
d. fair value with no depreciation recognized, but changes in fair values recognized in profit or loss.
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16. How do SMEs account for research and development costs?
a.
b.
Research costs
Expensed '
Expensed
c.
Expensed
d.
Expensed or capitalized
Development costs
Expensed
Expensed, although can be
capitalized in certain instances
Capitalized, although can be
expensed in certain instances
Capitalized or expensed
17. When an SME acquires an intangible asset through an exchange that lacks commercial substance
a. the intangible asset acquired is measured at the fair value of the asset given up (plus cash paid /
minus cash
received)
b. the intangible asset acquired is measured at the fair value of the asset received.
c. the intangible asset acquired is measured at the carrying amount of the asset given up (plus cash paid
/ minus
cash received).
d. whichever is the most clearly determinable of the foregoing.
18. Subsequent to initial recognition, an SME shall measure intangible assets at
a. cost less any accumulated amortization and any accumulated impairment losses.
b. revalued amount less any accumulated amortization and any accumulated impairment losses.
c. fair value through profit or loss.
d. any of these as a matter of accounting policy choice.
19. How do SMEs subsequently account for intangible assets with indefinite useful life?
a. Test them for impairment at least annually.
b. Test them for impairment only when there is indicator for impairment.
c. Amortize them over a presumed useful life of 10 years.
d. Amortize them over a presumed useful life of 20 years.
20. An SME shall classify its lease transactions as
a. Operating leases only
b. Financing leases only
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c. a or b
d. neither a nor b
PROBLEM 4: MULTIPLE CHOICE – THEORY
1. Which of the following entities would most likely qualify as an SME?
a. An incorporated CPA review school with total liabilities of more than P3M but less than
P250M
b. An unlisted rural bank
c. A pawnshop with total assets of P2.9M and total liabilities of P2M.
d. An incorporated ‘pyramid scheme’ company with total assets of P350M
2. Rex Collide-one Toothpick, Inc. manufacturers toothpicks. Rex’s total assets and total
liabilities are both below P3M.
a. Rex may use the provisions of the National Internal Revenue Code together with the
Bureau of Internal Revenue rulings when preparing the income statement.
b. Rex may use the PFRS for SMEs if Rex chooses to
c. Rex’s accountant is a topnotch CPA. Rex has no problem applying the full PFRSs. Rex is
not prohibited from applying the full PFRSs.
d. Rex shall use the cash basis of accounting.
3. Darrell Joe Poothick, Inc. is an unlisted entity and does not have any fiduciary obligations.
Darrell has total assets and total liabilities of P350M and P250M, respectively. Which of the
following statements is true?
a. Darrell may use the PFRS for SMEs but Darrell is not prohibited from applying, selectively,
some provisions of the full PFRSs if Darrell chooses to do so.
b. Darrell may use the PFRS for SMEs but Darrell is not prohibited from applying, selectively,
some provisions of the Conceptual Framework.
c. If Darrell chooses to apply the PFRS for SMEs, it shall apply that standard in its entirely
without reference to any of the standards comprising the full PFRS and the Conceptual
Framework except in certain instances mentioned under the PFRS for SMEs.
d. Darrell cannot qualify as an SME because Darrell is big and dark.
4. Mark Expensive Peanuts, Inc. uses the PFRS for SMEs. In 20x1, current year, Mark’s total
assets increases from P350M to P450M. The increase is judged to be continuing. As an
accountant, what advice can you give to Mark?
a. Mark should transition to the full PFRS in its 20x1 financial statement.
b. Mark should transition to the full PFRS in its 20x2 financial statements.
c. Mark should do nothing.
d. Mark should put more garlic in his peanuts.
5. Raymund Excala, Inc. is the owner of a beauty parlor franchise. Raymund appropriately uses
the PFRS for SMEs. In the previous year and current year, Raymund’s total assets and total
liabilities have increased beyond the ceiling of the size criteria for an SME. As an accountant,
what advice can you give to Raymund?
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a. Raymund should change its current financial reporting framework if the increase is 10%
or more.
b. Raymund should change its current financial reporting framework if the increase is 20%
or more.
c. Raymund should change its current financial reporting framework if the increase is
considered continuing and is 20% or more.
d. Raymund should consider including hair spa in its services.
6. SMEs classify financial instruments into
a. Fair value and amortized cost
b. Basic and non-basic
c. Regular and special
d. Simple and complicated
7. Basic financial instruments are subsequently measured at
a. Amortized cost
b. Fair value through profit or loss
c. Fair value through other comprehensive income
d. Choice (a) except for those that are publicly traded or whose fair value can otherwise be
measured reliably without undue cost or effort which are measured using choice (b).
8. Non-basic financial instruments are subsequently measured a
a. Amortized cost
b. Fair value through profit or loss
c. Fair value through other comprehensive income
d. Choice (b) except for those whose fair values cannot be reliably determined without
undue cost or effort which are permitted to be measured at cost less impairment.
9. Under PFRS for SMEs. Investments in associates are accounted for
a. At cost
b. At fair value
c. Using the equity method
d. Any of those
10.
An SME declares dividends after the reporting period but before the financial
statements are authorized for issue. Which of the following statements is incorrect?
a. The SME shall treat the dividend declaration as an adjusting event after the reporting
period.
b. The SME shall disclose only the dividend declaration in its current year financial
statements but should not recognize it.
c. The SME may make an appropriation of its current year retained earnings or the
dividends declared.
d. The SME shall not recognize any dividend payable in its current year financial statements.
PROBLEM 5: TRUE OR FALSE
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F
1. An SME does not have a “cash and cash equivalents” line item in its balance sheet while an
entity that uses the full PFRSs has - this line item
F
2. An SME does not have an inventory account while an entity that uses the full PFRSs has this
account.
T
3. An SME is not required to present an additional balance sheet dated as of the beginning of
the
or
preceding year if the SME makes a retrospective application, retrospective restatement
correction of a prior period error.
F
4. An SME is does not have an “allowance for bad debts” account.
F
5. An SME is not required to measure its inventory at the lower of cost and net realizable value
(NRV) while an entity that uses the full PFRSs is required to do this.
T
6.
If an SME does not have any items of other comprehensive income in any of the periods for
which financial statements are presented, it may present only an income statement, or it may
present
a statement of comprehensive income in which the ‘bottom line’ is labeled as
‘profit or loss’.
F
7. An SME shall use only the direct method of presenting cash flows from operating activities
in the statement of cash flows while an entity that uses the full PFRSs may present such cash
flows either using the direct or indirect method.
F
8. An SME is exempt from measuring its long- term, noninterest-bearing notes receivable at
present
T
9. An SME does not account for changes in fair values of investments in equity securities in
other
F
value.
comprehensive income.
10. An SME does not account for nonmonetary exchanges of items of property, plant and
equipment.
F
11. An SME does not account for customer loyalty programs.
T
12. An SME may omit the statement of changes in equity and, in lieu thereof, present a single
statement of income and retained earnings if the only changes to equity during the
periods for
which financial statements are presented arise from profit or loss,
payment of dividends, corrections of prior period errors, and changes in accounting policy.
F
13. An SME is exempted from accounting for interest revenue under the effective interest
method.
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F
14. An SME does not recognize any dividend income from its investment in equity securities.
T
15. An SME i does not have a “noncurrent assets held for sale” classification.
F
16. An SME does not recognize any prepaid assets because disbursements for these items are
expensed outright.
F
17. An SME does not have any accounting for share-based payments. These transactions are
accounted
for only by entities using the full PFRSs.
T
18. An SME is not required to present any operating segment information.
F
19. An SME does not account for any government grants.
F
20. An SME does not account for cash-settled share-based payments.
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PROBLEM 6: TRUE OR FALSE
F
1. An SME does not need to have post-employment benefit plans.
F
2. An SME does not account for any provisions.
T
3. An SME -recognizes research and development costs as expenses in the period incurred
unless they
form part of the cost of another asset.
F
4. An SME does not use debits, and credits when journalizing transactions.
T
5. An SME is not required to present earnings per share information.
T
6.
F
7. An SME does not have an accountant.
F
8. An SME does not account for intangible assets. Such items are expensed outright.
T
9. An SME is required to disclose key management personnel compensation in total only.
F
10. An SME does not account for derivatives and hedging transactions
F
11. An SME does not discount its long-term, noninterest-bearing notes payable.
F
12. An SME does not use the effective interest method for long-term, noninterest bearing
receivables
and payables.
F
13. An SME does not account for biological assets.
F
14. An SME's biological assets do not include only plants and animals but also people. .
T
15. An SME uses also the FIFO or the Average cost formulas to account for its inventories.
F
16. An SME does not need to present other comprehensive income. These items are
An SME amortizes all of its intangible assets.
disregarded.
F
17. An SME does not account for any investment in associate.
F
18. An SME accounts for changes in accounting policy and correction of prior period error using
prospective application.
F
19. An SME need not depreciate its items of property, plant and equipment.
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F
20. An SME does not account for termination benefits of its employees.
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1. If the SMEs opts to present a statement of income and retained earnings, the bottom line in the
statement shows an amount equal to – B. 2,850
On the January 1, 20x0, an entity acquires a bond for P1,000, incurring transaction costs of P70. Interest
of P80 is receivable annually, in arrears, over the next five years staring December 31, 20x0. The bond
has a mandatory redemption of P1,200 on December 31, 20x4.
2. How much is the initial carrying amount of the bond? A. 1,070
3. How much is the interest income in 20x0? A. 73
4. How much is the carrying amount of the bond on December 31, 20x0? B. 1,093
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On January 1, 20x0, an entity issues a bond for P900, incurring transaction costs of P50. Interest of P40 is
payable annually, in arrears, over the next five years starting December 31, 20x0. The bond has a
mandatory redemption of P1,100 on December 31, 20x4.
5. How much is the initial carrying amount of the bond? A. 850
6. How much is the interest expense in 20x0? B. 81
7. How much is the carrying amount of the bond on December 31, 20x0? D. 891
FACT PATTERN
An SME sells a group of its accounts receivable with carrying amount of P1,000,000 and fair value of
P1,020,000 to a bank for P850,000. The SME continues to handle collections from the debtors on behalf
of the bank, including sending monthly statements, and the ban pays the entity a market-rate fee for
servicing the receivables. The entity is obliged to remit promptly to the bank any and all amounts
collected, but it has no obligation to the bank for slow payment or non-payment by the debtors.
8. How much of the receivables are derecognized? A. 1,000
Analysis: The entity has transferred to the bank substantially all of the risks and rewards of
ownership of the receivables. Accordingly, it removes the receivables from its statement of
financial position (i.e., derecognizes them), and it shows no liability in respect of the proceeds
received from the bank.
9. How much is gain or loss on derecognition? C. 150,000
(850,000 proceeds – 1,000,000 carrying amount) = 150,000 loss
10. Use the fact pattern from the preceding problem except that the SME has agreed to buy back
from the bank any receivables for which the debtor is in arrears as to principal or interest for
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more than 120 days. The effect of the transaction is C. non-derecognition of receivables but a
liability is recognized for the P850,000 cash receipt.
Analysis: In this case, the entity has retained the risk of slow payment or non-payment by the
debtors—a significant risk with respect to receivables. Accordingly, the entity does not treat the
receivables as having been sold to the bank, and it does not derecognize them. 6 Instead, it
treats the proceeds from the bank as a loan secured by the receivables. The entity continues to
recognize the receivables as an asset until they are collected or written off as uncollectible.
INVESTMENT IN ASSOCIATES
On January 1, 20x1, an SME acquires 20% interest in the equity of another entity for P100,000. The
interest acquired gives the SME significant influence over the investee. During the period, the investee
reports profit of P30,000 and declares dividends of P10,000. The fair value of the investment on
December 31, 20x1 is P110,000. The entity uses the PFRS for SMEs,
11. Which acceptable accounting model results to the highest carrying amount of the investment as
of December 31, 20x1? C. Fair Value Model
12. Which acceptable accounting model results to the highest investment income recognized in
profit or loss in 20x1? C. Fair Value Model
LEASES
SME Co. entered into a 5-year operating lease with Lessor, Inc. Annual lease is P360,000. However,
subsequent lease payments shall be increased taking into consideration the effect of general inflation.
The consensus forecast by local banks is the general price level index, as published by the government,
will increase by an average of 10% annually over the next five years.
13. How much is the rent expense recognized by SME Co. in the second year of the lease?
C. 396,000
14. How much is the rent income recognized by the Lessor Inc. in the third year of the lease?
C. 435,600
SME Co. entered into a 3-year operating lease with Lessor, Inc. Annual lease is P100,000. The lease
contract contains a provision for an annual increase in the rent equal to 5%. The additional rentals are
not related to general inflation.
15. How much is the balance of the rent payable at the end of the first year of the lease?
A. 5,083
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16. How much is the balance of the rent receivable at the end of the second year of the lease?
C. 5,167
17. How much is the rent expense recognized by SME Co. in the second year of the lease?
A. 105,083
18. How much is the rent income recognized by SME Co. in the third year of the lease?
A. 105,083
PROVISIONS AND CONTENGENCIES
An SME provide a one-year warranty for the products it sells. During the period, the SME made total
sales of 5,000 units. It was estimated that 80% of the units sold may not have any defects, 12% may
have minor defects and 8% may have major defects. A major defect requires repair costs of P100 while a
minor defect requires repair costs of P20. Actual repair costs incurred for defective units sold during the
year amounted to P10,000.
19. How much warranty provision is recognized at year-end? A. 42,000
20. How much is the warranty expense for the period? B. 52,000
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PROBLEM 8: MULTIPLE CHOICE – COMPUTATIONAL
Revenue
Lise the following information for the next two questions:
An SME sells goods in exchange for a P340,000 note receivable in two years’ time. The cash sale price of
the goods is 280,992. The gross profit rate based on cost on the transaction is 30%. Other
operating expenses amounted to P50,000.
1.
How much is the sale revenue recognized by the SME?
a. 340,000
2.
b. 280,992
c. 64,844
d. 334,156
How much is the profit (loss) of the SME?
a. 14,844
b. (14,844)
c. 46,988
d. 42,944
Impairment of assets
3.
On ‘December: 31, 20x1, an SME tests for impairment an equipment which was acquired 8 years
ago for P1,600,000. The equipment has an originally estimated useful life of 15 years and
residual value of P100,000,
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The fair value of the equipment on December 31, 20x1 is P700,000. Costs to sell are estimated
at P20,000. The SME makes the following cash flow projections for value in use computation.
The pre-tax discount rate is 12%. Cash flows are expected to occur at the end of each year.
Year
20x2
20x3
20x4
20x5
20x6
20x7
20x8
Net Cash Flows
180,000
167,400
155, 682
144, 784
134, 649
125, 224
116, 458
How much is the impairment loss?
a. 110,485
b. 112,746
c. 72,460
d. 65,250
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Income tax
Use the following information for the next four questions:
An SME has a pretax profit of P18,000 in 20x1. The following were the transactions during the period.
•
•
•
•
•
•
•
4.
A warranty provision of P3,000 has been recognized for goods sold during the period. The
amount recognized as a provision is not deductible for tax purposes until it is actually paid or
used.
Interest receivable of P1,000 has been recognized on a note. The interest is taxable only when
actually collected.
On January 1, 20x1, the SME acquired an equipment for P200,000. The asset is being
depreciated on a straight-line basis over 10 years. For tax purposes, the asset is depreciated
over 4 years on a straight-line basis (accelerated tax depreciation).
Any tax losses are permitted to be carried forward as tax deduction in future periods. However,
the SME expects to use only 40% of any tax losses within the permitted carry forward period.
The currently enacted tax rate is 35% enacted tax rate for 20x2 and future periods is 30%.
The SME made quarterly income tax payments period for a total of P50,000.
There are no temporary differences as a while the substantially during the t the beginning of the
How much is the current tax asset (liability) as of December 31, 20x1?
a. (4,000)
b. 6,000
c. (40,000)
d. 50,000
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5.
How much is the deferred tax asset as of December 31, 20x1?
a. 1,050
6.
b. 2,450
c. 3,900
d. 2,100
How much is the deferred tax liability as of December 31, 20x1?
a. 9,300
b. 10,850
c. 8,700
d. 9,000
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7.
How much is the income tax expense as of December 31, 20x1?
a. 6,300
b, 3,600
c. 4,600
d.0
Use the following information for the next three questions:
An SME reports pretax profit of P280,000. The tax rate is 30%. The pretax profit reflects the following:
•
•
•
•
8.
Interest income of P30,000 that is subject to final tax.
Entertainment expense of P25,000 that is not tax deductible.
A P10,000 bad debt expense, of which 8,000 pertain to worthless receivables actually written
off and the remaining P2,000 pertain to estimated allowance for other receivables, Only
worthless receivables actually written off are tax — deductible.
Depreciation. of 75,000. However, the tax deductible depreciation (accelerated) is P100,000.
How much is the current tax expense?
a. 82,500
b. 75,600
c. 83,600
d. 78,300
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9.
How much is. the deferred tax expense (benefit)?
a. 23,000
10.
b. (6,900)
c. (23,000)
d. 6,900
How much is the income tax expense?
a. 82,500
b. 75,600
c. 83,600
d. 78,300
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