EASY

1. Which is an example of a nominal and contra account?

a. freight-in
b. sales discount
c. purchases
d. Allowance for doubtful account.

ANSWER: B
Nominal accounts are the temporary accounts, such as the income statement accounts. In other
words, nominal accounts are the accounts that report revenues, expenses, gains, and losses.

2. The normal balance of an account is on the:

a. Debit side of the account
b. Credit side of the account
c. Side represented by increase in the account balance
d. Side represent by the decrease in the account balance

ANSWER: C

3. Minecraft Company quarries marble at two locations and sells it to be used in construction of
buildings. The Company provides for a depletion rate of 5%. The quarry is leased on a year-to-
year basis with the Company paying a royalty of P0.05 per ton of marble quarried. Other data
relevant to the requirements are:

Estimated total reserves, tons 60,000,000

Tons quarried through December 31, 2014 4,000,000
Tons quarried, 2014 1,600,000
Sales, 2014 P1,200,000

How much would be the depletion for 2014 for financial reporting purposes?
a. P-0-
b. P60,000
c. P80,000
d. P300,000

ANSWER: A
Since the two quarries are merely leased and the Company pays a P0.05 royalty for every ton of
marble quarried, Minecraft will not recognize the quarries as assets in its books and will record
only royalty expense for leasing them. Hence, there is no depletion expense.

4. In analyzing the shareholder’s equity section of the WESTOROS Corp., the following
information was abstracted from the accounts at December 31, 2015:

Total income since incorporation P7,875,000

Total cash dividends paid 2,437,500
Proceeds from sale of donated stock 843,750
 Total value of stock dividends distributed 562,500
Excess of proceeds over cost of treasury stock sold 131,250

What should be the balance of the Retained earnings account as of December 31, 2015
a. P6,218,750
b. P4,875,000
c. P7,031,250
d. P10,031,250

ANSWER: B

Total income since incorporation P7,875,000

Total cash dividends paid (2,437,500)
Total value of stock dividends distributed (562,500)
Retained Earnings, 12/31/2015 P4,875,000

5. Real accounts include all of the following except

a. dividend
b. asset
c. liability
d. equity

ANSWER: A
AVERAGE

1. The objectives of financial reporting are based on

a. Generally accepted accounting principles
b. Reporting for regulators
c. the need for conservatism
d. the needs of the users of the information

ANSWER: D
The objective of general purpose financial reporting1 is to provide financial information
about the reporting entity that is useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the entity. Those decisions involve
buying, selling or holding equity and debt instruments, and providing or settling loans and other
forms of credit. (Conceptual Framework for Financial Reporting)

2. Financial statements shall include disclosures of material transaction between related parties
except.
a. Nonmonetary exchanges by affiliates
b. Sales of inventory by a subsidiary to the parent
c. Expenses allowance for executives which exceed normal business practice
d. An entity’s agreement to act as surety for a loan to the chief executive officer.

ANSWER: B.
This transaction is eliminated during consolidation and as such not considered a related
party transaction

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

ANSWER: D

4. Refers to the change in the present value of the defined benefit obligation resulting from a plan
amendment or curtailment
a. Past service cost
b. Defined benefit cost
c. Defined benefit liability
d. Actuarial gains/losses

ANSWER: A
 Refer to IAS 19- Employee Benefits, paragraph 102 “Past service cost is to the change
in the present value of the defined benefit obligation resulting from a plan amendment or
curtailment”

5. On December 1, 2015, Thrift Store received 1,000 leather jackets on consignment from Polaris
Company. Polaris’ cost for the leather jackets was P1,600 each, and they were priced to sell at
P2,000. Commission rate was 10%. 200 leather jackets remained. What amount should Thrift
Store report as payable for consigned goods in its December 31, 2015 statement of financial
position?
a. P360,000
b. P1,440,000
c. P1,600,000
d. P1,800,000

ANSWER: B

Sales (1,000 units -200 units, end x P2,000) P1,600,000

Less: Commission (P1,600,000 x 10%) 160,000
Payable to consignor P1,440,000
DIFFICULT

1. During 2015, Loki Company decided to change from FIFO method of inventory valuation to the
weighted-average method. Inventory balances under each method were as follows:

FIFO Weighted Average

January 1 1,420,000 1,540,000
December 31 1,580,000 1,660,000

Assuming a tax rate of 35%, what amount should Loki report as the effect of this accounting
change?
a. -0-
b. P78,000
c. P80,000
d. P120,000

ANSWER: B
A change from the FIFO to average method of inventory costing requires a retroactive adjustment
since this is a change in accounting policy. The amount to be adjusted to the accumulated profits
is the difference between the beginning balances of inventory under FIFO and weighted average
method as follows:
Weighted Average, January 1 P1,540,000
FIFO, January 1,420,000
Effect of change in policy before tax 120,000
Tax effect (120,000 x 35%) (42,000)
Effect of change in policy after tax P78,000

2. Paris Corporation incurred P198,900 of research and development costs to develop a product for
which a patent was granted on January 2, 2012. Legal fees and other costs associated with
registration of the patent totaled P44,200. On January 2, 2015, Paris paid P62,400 for legal fees in
a successful defense of the patent. The patent has a useful economic life of 20 years. What
amount should Paris record as amortization expense for 2015?
a. P2,210
b. P5,200
c. P7,800
d. P19,500

ANSWER: A

Legal fees and other costs for registration of the P44,200

patent
Legal life 20 years
Annual amortization P2,210

IAS 38 Intangible Assets states that an intangible asset shall be recognized if and only if: (a) it is
probable that the expected future economic benefits that are attributable to the asset will flow to
the entity, and (b) the cost can be measured reliably. Based on the given facts, only legal fees and
other costs for registration can be capitalized as cost of the patent.
 Legal fees for the successful defense cannot be capitalized as it is incurred only to maintain the
asset and will not enhance and contribute to the expected future benefits from the patent.

Research and development costs as a rule are not capitalized except for development costs under
strict conditions in PAS 38 of which the problem is silent.

3. When the fair value of plan assets exceed the defined benefit obligation:
a. Requires the recognition of an asset
b. Requires the recognition of an asset if the excess fair value of plan assets exceeds the corridor
amount
c. Recommends but does not require the recognition of an asset
d. Does not permit recognition of an asset

ANSWER: A
Refer to PFRS 9, Revised

4. What is the first item presented in the notes to the financial statements?
a. Statement of compliance with PFRS
b. summary of significant accounting policies
c. supporting information for items presented in the financial statements
d. other disclosures, including contingent liabilities, unrecognized contractual commitments and
nonfinancial disclosures

ANSWER: A

5. Under PAS 8, which of the following is the first step within the hierarchy of guidance when
selecting accounting policies?
a. Consider the most recent pronouncements of other standard setting bodies.
b. apply standard from PFRS if it specifically relates to the transaction, other event, or condition
c. consider the applicability of the definitions, recognition criteria and measurement concepts in
the Conceptual Framework
d. Apply the requirements in PFRS dealing with similar and related issues

ANSWER: B
CLINCHER

1. How should an unrealized gain on foreign currency transaction be presented in a statement of

cash flows?
a. as an inflow under “financing activities” because it arises from a foreign currency transaction
b. It should be ignored as it is an unrealized gain
c. It should be disclosed in the notes to the financial statements by way of abundant precautions
d. as an adjustment to the net income under “operating activities”

ANSWER: D

2. Which of the following is not a qualitative characteristic that enhance the usefulness of
information?
a. Relevance
b. Comparability
c. Verifiability
d. Timeliness

ANSWER: A Please refer to the Conceptual Framework for further discussion.

3. Which of the following statements if false?

a. Gains represent other items that meet the definition of income and may, or may not, arise in
the course of the ordinary activities of an entity.
b. The definition of revenue encompasses both income and gains
c. Various kinds of assets may be received or enhanced by income
b. d .Gains represent increases in economic benefits

ANSWER: B
The definition of income encompasses both revenue and gains. Revenue arises in the
course of the ordinary activities of an entity and is referred to by a variety of different names
including sales, fees, interest, dividends, royalties and rent.

4. Assets are carried at the amount of cash or cash equivalents that would have to be paid if the
same or an equivalent asset was acquired currently refers to
a. Historical cost
b. Current Cost
c. Settlement value
b. Present value

ANSWER: B
5. Based on the conceptual framework which of the following statements regarding financial
position is not true?
a. The elements directly related to the measurement of financial position are assets, liabilities
and equity
b. The definitions of an asset and a liability identify their essential features but do not attempt to
specify the criteria that need to be met before they are recognized in the balance sheet
c. In assessing whether an item meets the definition of an asset, liability or equity, attention
needs to be given to its underlying substance and economic reality and not merely its legal
form.
d. Balance sheets drawn up in accordance with current IFRSs may not include items that do not
satisfy the definitions of an asset or liability and are not shown as part of equity

ANSWER: D
Balance sheets drawn up in accordance with current IFRSs may include items that do not
satisfy the definitions of an asset or liability and are not shown as part of equity. However, this
would underlie future reviews of existing IFRSs and the formulation of further IFRSs (GAAIT)