Chapter 49

PFRS for Small and Medium-sized Entities

(SMEs)

PROBLEM 49-1: MULTIPLE CHOICE – THEORY

1. B 6. C 11. D
2. B 7. C 12. D
3. A 8. D 13. C
4. D 9. A 14. B
5. B 10. B 15. D

PROBLEM 49-2: MULTIPLE CHOICE – THEORY

1. B 6. A 11. A
2. C 7. B 12. D
3. A 8. C 13. B
4. D 9. A 14. D
5. D 10. B 15. A

PROBLEM 49-3: MULTIPLE CHOICE – THEORY

1. D 11. D
2. E 12. C
3. A 13. B
4. C 14. C
5. B 15. C
6. C 16. A
7. A 17. C
8. C 18. A
9. D 19. C
10. D 20. C

1
PROBLEM 49-4: MULTIPLE CHOICE – THEORY
1. C 11. C
2. D 12. A
3. D 13. C
4. D 14. A
5. A 15. A
6. C 16. A
7. D 17. D
8. A 18. A
9. A 19. C
10. A 20. A

PROBLEM 49-5: THEORY

1. A

2. D

3. C

4. B

5. C

6. B

7. D

8. D

9. D

10. E

PROBLEM 49-6: TRUE OR FALSE

1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. TRUE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. TRUE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. FALSE 10. FALSE 15. TRUE 20. FALSE

2
PROBLEM 49-7: TRUE OR FALSE
1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. TRUE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. TRUE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. FALSE 10. FALSE 15. TRUE 20. FALSE

PROBLEM 49-8: TRUE OR FALSE

1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. FALSE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. FALSE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. TRUE 10. FALSE 15. TRUE 20. FALSE

PROBLEM 49-9: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Revenues 5,000
Dividend income 800
Operating and other expenses (3,200)
Profit for the year 2,600
Retained earnings, Jan. 1 2,400
Adjustments to opening balance:
Cumulative effect of change in accounting policy
(2,600 FIFO - 3,200 Average) (600)
Retrospective effect of correction of error (1,200)
Adjusted retained earnings, Jan. 1 600
Dividends declared (350)
Retained earnings, Dec. 31 2,850

2. A (See solutions below)

3. A (See solutions below)
4. B (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Acquisition cost 1,000
Transaction costs 70
Initial measurement 1,070

3
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @6%

 (1,200 x PV of 1 @6%, n=5) + (50 x PV ordinary annuity of 1
@6%, n=5) = 1,070
 (1,200 x 0.747258) + (50 x 4.212364) = 1,070
 897 + 211 = 1,108 is not equal to 1,070

Second trial: @7% (we need a lower amount so we’ll increase the
rate)
 (1,200 x PV of 1 @7%, n=5) + (50 x PV ordinary annuity of 1
@7%, n=5) = 850
 (1,200 x 0.712986) + (50 x 4.100197) = 1,070
 856 + 205 = 1,061 is not equal to 1,070

From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x% - 6%
7% - 6%
1,070 - 1,108
=
1,061 - 1,108 0.81

Effective interest rate (x%) = 6% + .81% = 6.81%

The amortization table using 6.81% as the effective interest is

prepared as follows:
Date Payments Int. income Amortization Present value
1/1/x0 1,070
12/31/x0 50 73 23 1,093
12/31/x1 50 74 24 1,117
12/31/x2 50 76 26 1,143
12/31/x3 50 78 28 1,171
12/31/x4 50 80 30 1,201

Use the following information for the next three questions:

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. A (See solutions below)

4
6. B (See solutions below)
7. D (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Issue price 900
Transaction costs (50)
Initial measurement 850

The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @10%

 (1,100 x PV of 1 @10%, n=5) + (40 x PV ordinary annuity of 1
@10%, n=5) = 850
 (1,100 x 0.620921) + (40 x 3.790787) = 850
 683 + 152 = 835 is not equal to 850

Second trial: @9% (we need a higher amount so we’ll decrease the
rate)
 (1,100 x PV of 1 @9%, n=5) + (40 x PV ordinary annuity of 1
@9%, n=5) = 850
 (1,100 x 0.649931) + (40 x 3.889651) = 850
 715 + 156 = 871 is not equal to 850

From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x% - 9%
10% - 9%
850 - 871
=
835 - 871 0.58

Effective interest rate (x%) = 9% + .58% = 9.58%

The amortization table using 9.58% as the effective interest is

prepared as follows:
Date Payments Int. expense Amortization Present value
1/1/x0 850
12/31/x0 40 81 41 891
12/31/x1 40 85 45 937
12/31/x2 40 90 50 987
12/31/x3 40 95 55 1,041

5
12/31/x4 40 100 60 1,101

8. A
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. C (850,000 proceeds – 1,000,000 carrying amount) = 150,000

loss

10. C
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.
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.

11. C
Solution:
Cost model (equal to acquisition cost) 100,000
Equity model [100K + (30K x 20%) - (10K x 20%)] 104,000
Fair value model (equal to year-end fair value) 110,000

12. C
Solution:
Cost model (equal to dividend received) (10K x 20%) 2,000
Equity model - share in profit (30K x 20%) 6,000
Fair value model (dividend + fair value gain) (2K + 10K) 12,000

13. C (See solutions below)

14. C (See solutions below)

Solutions:
Year Annual rentals
1 360,000
2 (360K x 110%) 396,000
3 (396K x 110%) 435,600
4 479,160
5 527,076

6
15. A (See solutions below)
16. C (See solutions below)
17. A (See solutions below)
18. A (See solutions below)
Solutions:
Year Annual rentals
1 100,000
2 (100K x 105%) 105,000
3 (105K x 105%) 110,250
Total rentals 315,250
Divide by: Lease term 3
Annual rent expense/ income 105,083

Rent expense - Year 1 105,083

Rentals paid (100,000)
Rent payable - Year 1 5,083

Rent income - Years 1 and 2 (105,083 x 2) 210,167

Rentals received (100K + 105K) (205,000)
Rent receivable - Year 2 5,167

19. A (See solutions below)

20. B (See solutions below)
Solutions:
Major defects (5,000 x 8% x P100) 40,000
Minor defects (5,000 x 12% x P20) 12,000
Warranty expense 52,000
Actual repair costs (10,000)
Year-end provision 42,000

7
PROBLEM 49-10: MULTIPLE CHOICE – COMPUTATIONAL

1. B (See solutions below)

2. D (See solutions below)
Solutions:
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @10%

 (340,000 x PV of 1 @10%, n=2) = 280,992
 (340,000 x 0.826446) = 280,992 is equal to 280,992
Therefore, the effective interest rate is 10%.

Revenue 280,992
Cost of sales (280,992 x 100%/130%) (216,148)
Gross profit 64,844
Interest income (280,992 x 10%) 28,099
Operating expenses (50,000)
Profit 42,944

3. D
Solution:
The carrying amount of the equipment on December 31, 20x1 is
computed as follows:
(1,600,000 – 100,000) x 7/15 + 100,000 = 800,000

The recoverable amount is determined as follows:

a. Fair value less costs to sell = (700,000 – 20,000) = 680,000
b. Value in use
Net cash Present
Year flows PV of 1 factors value
20x2 180,000 0.8928571429 160,714
20x3 167,400 0.7971938776 133,450
20x4 155,682 0.7117802478 110,811
20x5 144,784 0.6355180784 92,013
20x6 134,649 0.5674268557 76,404
20x7 125,224 0.5066311212 63,442
20x8 116,458 0.4523492153 52,680
Residual value 100,000 0.4523492153 45,235
Value in use 734,750

8
The recoverable amount is the value in use of P734,750 – the higher
amount.

The impairment loss is computed as follows:

Recoverable amount 734,750
Carrying amount (800,000)
Impairment loss (65,250)

4. D
Solution:
Pretax income 18,000
Permanent differences -
Accounting profit subject to tax 18,000
Warranty provision (FI < TI) 3,000
Interest receivable (FI > TI) (1,000)
Depreciation (FI > TI) (30,000)
Taxable profit (Tax loss) (10,000)

Depreciation for financial reporting purposes (200K ÷ 10) 20,000

Depreciation for taxation purposes (200K ÷ 4) 50,000
Taxable temporary difference (FI > TI) (30,000)
or
Carrying amount (200K x 9/10) 180,000
Tax base (200K x 3/4) 150,000
Taxable temporary difference (FI > TI) 30,000

Required annual income tax payment -

Quarterly tax payments 50,000
Prepaid income tax / Current tax asset 50,000

5. D
Solution:
Warranty provision (FI < TI) 3,000
Tax loss 10,000
Valuation allowance on tax loss (10,000 x 60%) (6,000)
Total deductible temporary difference 7,000
Multiply by: Tax rate applicable to 20x2 and future periods 30%
Deferred tax asset - Dec. 31, 20x1 2,100

6. A
Solution:
Interest receivable (FI > TI) 1,000
Depreciation (FI > TI) 30,000
Total taxable temporary difference 31,000

9
Multiply by: Tax rate applicable to 20x2 and future periods 30%
Deferred tax liability - Dec. 31, 20x1 9,300

7. A
Solution:
Accounting profit subject to tax 18,000 x 35% current tax rate = 6,300

8. B
Solution:
Pretax income 280,000
Interest income subject to final tax (30,000)
Nondeductible entertainment expense 25,000
Accounting profit subject to tax 275,000
Bad debt expense (FI < TI) 2,000
Depreciation (FI > TI) (100K - 75K) (25,000)
Taxable profit 252,000

Taxable profit 252,000

Multiply by: Tax rate 30%
Current tax expense 75,600

9. D
Solution:
Change in DTA (2,000 x 30%) (600)
Change in DTL (25,000 x 30%) 7,500
Deferred tax expense 6,900

10. A
Solution:
Accounting profit subject to tax 275,000
Multiply by: Tax rate 30%
Income tax expense 82,500

10