ARAULLO UNIVERSITY

ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR)

EASY
1. The modified accrual basis under the New Government Accounting System (NGAS)
prescribes that
a. Expenses are recognized as paid
b. Expenses are recognized as paid except when a specific law requires otherwise
c. Expenses are recognized as incurred
d. Expenses are recognized as incurred except when a specific law requires
otherwise

2. An inconsistency in accounting theory can occur because

a. internally developed goodwill is expensed, while purchased goodwill is
capitalized
b. both internally developed goodwill and purchased goodwill are expensed
c. internally developed goodwill is capitalized, while purchased goodwill is
expensed
d. both internally developed goodwill and purchased goodwill are capitalized

3. A Philippine importer that purchases merchandises from a foreign firm’s foreign current unit
(FCU) would be exposed to a net exchange gain on the unpaid balance if the
a. Peso weakened relative to the FCU and the FCU was the denominated currency
b. Peso weakened relative to the FCU and the peso was the denominated currency
c. Peso strengthened relative to the FCU and the FCU was the denominated currency
d. Peso strengthened relative to the FCU and the peso was the denominated currency

4. For which type of hedge are changes in fair value deferred and amortized as an equity
adjustment?
a. Cash flow hedge
b. Operating hedge
c. Fair value hedge
d. Notional value hedge

5. For nonprofit organizations, contributions are reported in the Statement of Activities using all
of the following categories, EXCEPT:
a. Unrestricted
b. Board-restricted
c. Temporarily restricted
d. Permanently restricted

6. The consideration transferred in a business combination is measured as the fair value of the:
a. Net assets acquired
b. Costs directly attributable to the combination
c. Consideration given only
d. Consideration given plus directly attributable costs

7. Under PAS 11, when it is probable that total contract costs on a fixed price construction
contract will exceed total contract revenue, the expected loss should be
a. Set off against profit of other construction contract where available
b. Recognized as an expense immediately, unless revenue to date exceeds costs to
date
c. Apportioned to the years of the contract according to the percentage of
completion method
d. Recognized as an expense immediately

8. In partnership,
a. Management consists of the board of directors
b. Profits are always divided equally among partners
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c. Dissolution results when a partner leaves the partnership
d. No partner is liable for more than a proportion of the company’s debts

9. Under PFRS 4, it refers to a party that has a right to compensation under an insurance
contract if an insured event occurs.
a. Cedant
b. Insurer
c. Reinsurer
d. Policyholder

10. Given a hyperinflationary economy under PAS 29, which of the following elements of the
statement of financial position is not restated using the general price index?
a. Monetary and nonmonetary assets
b. Monetary assets and liabilities
c. Nonmonetary assets and liabilities
d. Nonmonetary assets and liabilities

AVERAGE
1. CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x4,
just before the admission of DD, show the following balances:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 6,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,200
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 20,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
CC, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000

It is agreed that for purposes of establishing CC’s interest the following adjustments shall be
made:
a. An allowance for doubtful accounts of 3% of accounts receivable is to be established.
b. The merchandise inventory is to be valued at P23,000.
c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be
recognized.

DD is to invest sufficient cash to obtain a 1/3 interest in the partnership. CC’s adjusted capital
before the admission of CC:

a. P28,174 c. P35,374
b. P35,347 d. P36,374

2. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,
20x4, have been restated into pesos as follows:
Restated at
Current Rates Historical Rates
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 47,500 P45,000
Accounts receivable . . . . . . . . . . . . . . 95,000 90,000
Inventory, at market . . . . . . . . . . . . . . 76,000 72,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000 54,000
Equipment (net) . . . . . . . . . . . . . . . . . . 142,500 135,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P418,000 P396,000

(1) Assuming the functional currency of the subsidiary is the peso, what total should be
included in Parker's consolidated balance sheet at December 31, 20x4, for the above
items?
(2) Assuming the functional currency of the subsidiary is the local currency, what total should
be included in Parker's consolidated balance sheet at December 31, 20x4, for the above
items?
a. (1) P407,500; (2) P418,000 c. (1) P407,500; (2) P407,500
b. (1) P418,000; (2) P407,500 d. (1) P418,000; (2) P418,000
3. Flapper Jack's Inc. sells franchises for an initial fee of P36,000 plus operating fees of P500 per
month. The initial fee covers site selection, training, computer and accounting software, and
on-site consulting and troubleshooting, as needed, over the first five years. On March 15,
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20x4, Anton signed a franchise contract, paying the standard P6,000 down with the balance
due over 5 years with interest.

Assume that at the time of signing the contract, collection of the receivable was assured
and that service obligations were substantial. However, by October 20, 20x4, substantially
all continuing obligations had been met. The journal entry required at October 20, 20x4
would include a:
a. Credit to franchise fee receivable for P27,000.
b. Debit to unearned franchise fee revenue for P36,000.
c. Credit to franchise fee revenue for P9,000.
d. Debit to unearned franchise fee revenue for P27,000.

4. Duck Corporation acquired a 70% interest in Whistle Corporation on January 1, 20x5, when
Whistle’s book values were equal to their fair values. During 20x5, Duck sold merchandise
that cost P75,000 to Whistle for P110,000. On December 31, 20x5, three-fourths of the
merchandise acquired from Duck remained in Whistle’s inventory. Separate incomes
(investment income not included) of Duck and Whistle are as follows:
Duck Whistle
Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . P 150,000 P 200,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . 90,000 70,000
Operating Expenses . . . . . . . . . . . . . . . . . . . . 12,000 15,000
Separate incomes . . . . . . . . . . . . . . . . . . . . . . P 48,000 P 115,000
The consolidated income statement for Duck Corporation and subsidiary for the year
ended December 31, 20x5 will show consolidated cost of sales of?
a. P50,000 c. P133,750
b. P76,250 d. P160,000

5. Equipment with a book values of P120,000 is sold in a liquidation process for cash of P110,000.
This equipment was security for a P150,000 bank loan. Any remainder is consider
unsecured. How would this transaction be reported on the Statement of Realization and
Liquidation?
a. A reduction in non-cash assets of P120,000
b. A loss reported to owner's equity of P10,000
c. A disbursement of cash to the bank of P110,000, a reduction in partially secured
liability of P150,000, and an increase in unsecured without priority liability of
P40,000
d. all of the above would occur

6. If consolidated statements are presented for the first time instead of statements of several
individual companies, this change should be accounted for
a. retrospectively
b. prospectively
c. by cumulative effect adjustment
d. by footnote disclosure only

7. Which models are allowed to be used by the private operator for build-operate-transfer
(BOT) schemes under IFRIC 12?
I – Financial Asset model III – Property, Plant & Equipment model
II – Intangible Asset model
a. I and II
b. I and III
c. II and III
d. I, II and III

8. What are two major classifications of government income under NGAS?

a. National and local income
b. General and specific income
c. Regular and specific income
d. Internal and external income
9. Which of the following is among those listed under PAS 29 as indicators of hyperinflation
according to PAS 29?
a. People prefer to keep their wealth in monetary assets
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b. People prefer to keep their wealth in relatively stable foreign currency
c. Interest rates, wages and prices are not linked to a price index
d. The cumulative inflation rate over five years exceeds or is approaching 100%

10. What is the CORRECT accounting for Joint Arrangements?

a. All joint arrangements are accounted for under PAS 28.
b. Joint arrangements classified as joint ventures are accounted for under PFRS 11.
c. Joint arrangements classified as joint ventures are accounted for under PAS 28.
d. Joint arrangements classified as joint operations are accounted for under PAS 28.

DIFFICULT

On December 12, 2010, Imp Company entered into three forward exchange contract to
purchase 100,000 FC (foreign currency) in 90 days. The relevant exchange rates are as follows:
Forward Rate
Spot Rate (for March 12, 2017)
November 30, 2016……………………… P .87 P .89
December 12, 2016……………………… .88 .90
December 31, 2016……………………… .92 .93

1. Imp entered into the first forward contract to hedge a purchase of inventory in November
2016, payable in March 2017. At December 31, 2010, what amount of foreign currency
transaction gain from this forward contract should Imp include in net income?
a. P 0 c. P 5,000
b. P 3,000 d. P10,000

2. Imp entered into the second forward contract to hedge a commitment to purchase
equipment being manufactured to Imp’s specifications. The expected delivery date is
March 2017 at which time settlement is due to the manufacturer. The hedge qualifies as a
fair value hedge. At December 31, 2016, what amount of foreign currency transaction gain
from this forward contract should Imp include in net income?
a. P 0 c. P 5,000
b. P 3,000 d. P10,000

3. Finley Company sells office equipment. On January 1, 20x3, Finley entered into an installment
sale contract with Miller Company for a six-year period expiring January 1, 20x9. Equal
annual payments under the installment sale are P936,000 and are due on January 1. The first
payment was made on January 1, 20x3.
Additional information is as follows:
 The cash selling price of the equipment, i.e., the amount that would be realized on an
outright sale, is P4,584,000.
 The cost of sales relating to the equipment is P3,825,000.
 The finance charges relating to the installment period are P1,032,000 based on a stated
interest rate of 9% which is appropriate. For tax purposes, Finley appropriately uses the
accrual basis for recording finance charges.
 Circumstances are such that the collection of the installment sale is reasonably assured.
 The installment sale qualified for the installment method of reporting for tax purposes.
 Assume that the income tax rate is 30%.

What income (loss) before income taxes should Finley appropriately record as a result of this
transaction for the year ended December 31, 20x3?

a. P154,979 c. P 759,000
b. P483,299 d. P1,087,320
4. Lark Corp. has a contract to construct a P5,000,000 cruise ship at an estimated cost of
P4,000,000. The company will begin construction of the cruise ship in early January 20x4 and
expects to complete the project sometime in late 20x7. Lark Corp. has never constructed a
cruise ship before, and the customer has never operated a cruise ship. Due to this and other
circumstances, Lark Corp. believes there are inherent hazards in the contract beyond the
normal, recurring business risks. Lark Corp. expects to recover all its costs under the contract.
During 20x4 and 20x5, the company has the following activity:
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20x4 20x5
Costs to date P 980,000 P 2,040,000
Estimated costs to complete 3,020,000 1,960,000
Progress billings during the year 1,000,000 1,000,000
Cash collected during the year 648,000 1,280,000

On its statement of financial position at December 31, 20x5, what amount will be reported
related to the Construction in Process account?
a. P40,000 costs in excess of billings.
b. P1,020,000 costs in excess of billings.
c. P40,000 billings in excess of costs.
d. P20,000 billings in excess of costs.

5. The after-closing balances of Carter Corporation’s home office and its branch at January 1,
20x4 were as follows:
Home Office Branch
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,000 P 2,000
Accounts receivable-net . . . . . . . . . . . . . . . . . . . . 10,000 3,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 5,500
Plant assets-net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 20,000
Branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __28,000 _____-0-
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P105,000 P 31,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . P 4,500 P 2,500

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 500
Unrealized profit-branch inventory . . . . . . . . . . . . 500- -0-
Home office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 28,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 -0-
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __17,000 _____-0-
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P105,000 P 31,000

A summary of the operations of the home office and branch for 20x4 follows:
1. Home office sales: P100,000, including P33,000 to the branch. A standard 10% markup on
cost applies to all sales to the branch. Branch sales to its customers totaled P50,000.
2. Purchases from outside entities: home office, P50,000; branch P7,000.
3. Collections from sales: home office P98,000 (including P30,000 from branch); branch
collections, P51,000.
4. Payments on account; home office, P51,500; branch P4,000.
5. Operating expenses paid: home office, P20,000; branch, P6,000.
6. Depreciation on plant assets: home office, P4,000; branch P1,000.
7. Home office operating expenses allocated to the branch, P2,000.
8. At December 31, 20x8, the home office inventory is P11,000 and the branch inventory is
P6,000, of which P1,050 was acquired from outside suppliers.
The combined net income amounted to:
a. P -0- c. P21,000
b. P4,550 d. P25,550
6. The balance sheet of Venner and Wigstaff Partnership immediately before the partnership
was incorporated as Venwig Corporation follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10,500
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,400
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,900
Venner, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Wigstaff, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Equipment (net of P18,000 Depreciation) . . . . . . . . . . . . . . . . . . . . . . __60,000
Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P128,400

The following adjustments to the balance sheet of the partnership were recommended by a
CPA before accounting records for Venwig Corporation were to be established:
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 An allowance for doubtful accounts was to be established in the amount of P1,200.
 Short-term prepayments of P800 were to be recognized.
 The current fair value of inventories, P48,000, and the current fair value of equipment ,
P72,000, were to be recognized.
 Accrued liabilities of P750 were to be recognized.

Immediately following incorporation, the additional paid-in capital in excess of par should be
credited for:

a. P128,850 c. P78,850
b. P96,000 d. No additional paid-in capital
7. At December 31, 20x5, the following information has been collected by Maxwell Company’s
office and branch for reconciling the branch and home office accounts.
 The home office’s branch account balance at December 31, 20x5 is P590,000. The
branch’s home office account balance is P506,700.
 On December 30, 20x5, the branch sent a check for P40,000 to the home office to settle
its account. The check was not delivered to the home office until January 3, 20x6.
 On December 27, 20x5, the branch returned P15,000 of seasonal merchandise to the
home office for the January clearance sale. The merchandise was not received by the
home office until January 6, 20x6
 The home office allocated general expenses of P28,000 to the branch. The branch had
not entered the allocation at the year-end.
 Branch store insurance premiums of P900 were paid by the home office. The branch
recorded the amount at P600.

The correct balance of the reciprocal account amounted to:

a. P575,000 c. P534,700
b. P535,000 d. P507,000

8. Gianne Co., sold a computer on installment basis on October 1,20x4. The unit cost to the
company was P86,400, but the installment selling price was set at P122,400. Terms of
payment included the acceptance of a used computer with a trade-in allowance of
P43,200. Cash of P7,200 was paid in addition to the traded-in computer with the balance to
be paid in ten monthly installments due at the end of each month commencing the month
of sale.
It would require P1,800 to recondition the used computer so that it could be resold for
P36,000. A 15% gross profit was usual from the sale of used computer. The realized gross profit
from the 20x4 collections amounted to:

a. P5,760 c. P11,520
b. P14,100 d. P48,960

9. On December 30, 2006, Leigh Museum, a not-for-profit organization received a P7,000,000

donation of Day Company shares with donor-stipulated requirements as follows:
 Shares valued at P5,000,000 are to be sold, with the proceeds used to erect a public
viewing building.
 Shares valued at P2,000,000 are to be retained with the dividends used to support
current operations.

As a consequence of the receipt of the Day shares, how much should Leigh report as
temporarily restricted net assets on its 2006 statement of financial position (balance sheet)?

a. P 0 c. P5,000,000
b. P 2,000,000 d. P 7,000,000

10. Three joint operators are involved in a joint operation that manufactures ships chandlery. At
the beginning of the year the joint operation held P50,000 in cash. During the year the joint
operation incurred the following expenses: Wages paid P20,000, Overheads accrued
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P10,000. Additionally, creditors amounting to P40,000 were paid and the joint operators
contributed P15,000 cash each to the joint operation. The balance of cash held by the joint
operation at the end of the year is:
a. P 5,000 c. P 35,000
b. P25 000 d. P 75,000

11. Rizzalyn Corporation, a capital goods manufacturing business that started on January 4,
20x3, and operates on a calendar-year basis. The following data were taken from the
records of 20x3 and 20x4:
20x3 20x4
Installment Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 480,000 P620,000
Gross profit as a percent of costs . . . . . . . . . . . . . . . . 25% 28%
Cash collections on sales of 20x3 . . . . . . . . . . . . . . . . . P 140,000 P240,000
Cash collections on sales of 20x4 . . . . . . . . . . . . . . . . . P -0- P180,000
Compute the realized gross profit to be reported in the 20x4 income statement:
Installment Sales Method Cost Recovery Method
a. P 87,375 P -0-
b. 87,375 180,000
c. 39,375 -0-
d. 48,000 240,000