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FINANCIAL

ACCOUNTING AND
REPORTING
EASY
E1. December 31, 2009, Entity X acquired an
investment for P100,000 plus a purchase commission
of P 2,000. The investment is classified as available for
sale. On December 31, 2009, quoted market price of
the investment is P 100,000. If the investment were
sold, a commission of P 3,000 would be paid. On
December 31, 2009, the entity should recognize
unrealized loss directly in equity of
a. P 2,000
c. P 5,000
b. P 3,000
d. P 0
A. 2000
E2, . D Company had the following deferred tax
balances at reporting date – Deferred tax assets, P
1,200,000; Deferred tax liabilities, P 3,000,000.
Effective from the first day of financial period, the
company rate of income tax was reduced from 40% to
30%. The adjustment to income tax expense to
recognize the impact of the tax rate change is:

a. DR P 600,000
b. DR P 450,000
c. CR P 600,000
d. CR P 450,000
D. CR 450,000
E3. Forester Company on adoption of PAS 41 has
reclassified certain assets and biological assets. The total
value of the forest assets is P6,000,000 which
comprises:
Freestanding trees 5,100,000
Land under trees 600,000
Roads in forests 300,000
In Forester Company’s statement of financial position,
what total amount of the forest assets shall be classified
as biological assets?
A) 5,100,000
B) 5,700,000
C) 5,400,000
D) 0
A – 5,100,000
O E4. The Naylor Company has determined that it needs to recognise an impairment
loss on each of two non-current assets; plant and land. The relevant amounts are as
follows:
O Plant
Land
O Original cost CU700,000
CU1,400,000
O Previous revaluations Nil
CU450,000
O Existing carrying amount CU700,000
CU1,850,000
O Impairment loss to be recognised in year CU200,000 CU300,000
O According to IAS36 Impairment of assets, how should each of the impairment losses
be recognised?
O Plant Land
O A In profit or loss In profit or loss
O B In profit or loss In other comprehensive income
O C In other comprehensive income In profit or loss
O D In other comprehensive income other comprehensive income
B. IAS36 paras 60-61 state that impairment losses on
assets that have not been
revalued are recognised in profit or loss. Impairment
losses on revalued
assets are treated as a revaluation
decrease.
E5. The initial direct cost in a direct financing lease
are added to the carrying amount of the leased
asset and this would effectively spread the initial
direct cost over the lease term and reduce the
amount of

a. interest expense
b. interest income
c. lease expense
d. lease income
b. interest income
E6. Act Company acquired an investment property with an
installment price of P2,400,000. The acquisition of the
property requires a down payment of 20% and a non-
interest bearing note payable at the end of each year for
five years. The prevailing market rate of interest for
similar instrument is 12%. The present value of factor of
annuity of 12% for four periods is 3.605. Act Company
incurred transaction costs amounting to P50,000 for the
property. What is the cost of acquiring the property?
a. 1,862,400 b. 1,914,320
c. 2,400,000 d. 2,450,000
b. 1,914,320
E7. On December 28, 2009, Hornets Company commits
itself to purchase a financial asset to be classified as held
to maturity for P 1,000,000 its fair value on commitment
(trade) date. This security has a fair value of P 1,002,000
and P 1,005,000 on December 31, 2009 (Hornets’
Financial Year End), and January 5, 2010 (settlement
date), respectively. If Hornets applies the settlement date
accounting method to account for regular way purchases
of its securities, the financial asset should be recognized
on January 5, 2010 at

a. P 1,000,000 b. P 1,005,000
c. P 1,002,000 d. P 0
a. P 1,000,000
E8. . The following pertains to Bull Company’s biological
assets:

Price of the asset in the market 5,000


Estimated commission to brokers and dealers 500
Estimated transport cost and other cost necessary
get asset to the market 300
Selling price in a binding contract to sell P 5,200

The entity’s biological assets should be valued at


a. P 4,700 b.4,400
c. 4,500 d. 4,200
d. 4,200
E9. . White Airlines sold a used jet aircraft to brown
company for P 800,000 accepting a five year 6% note
for the entire amount. Browns incremental borrowing
rate was 14%. The annual payment of principal and
interest on note was to be P189,930. The aircraft
could have been sold at an established cash price of P
651,460. The present value of an ordinary annuity of
P1 at 8% for five periods is 3.99. The aircraft should
be capitalized on Browns book at

a. P 949,650
c. P 757,820
b. P 800,000
d. P 651,460
d. P 651,460
E10. On July 2009, Jenny Ltd leases a machine with
a fair value of P 109,445 to Rose Ltd for five years at
annual rental (in advance) of P 25,000 and Rose Ltd
guarantees in full estimated residual value of P
15,000 on return of the asset. What would be the
intestest rate implicit in the lease?

a. 14%
c. 10%
b. 12%
d. 9%
b. 12%
AVERAGE
. On January 2004, Entity A issued a 10 percent convertible debenture with a
face value of P 1,000,000 maturing on 31 December 2013. The debenture is
convertible into ordinary shares of Entity A at a conversion price of P25 per
share. Interest is payable half yearly in cash. At the date of issue, Entity A could
have issued non convertible debt with a ten year term bearing a coupon
interest rate of 11 percent.

On January 1 2009, to induce the holder to convert the convertible debenture


promptly, Entity A reduces the conversion price to P20 if the debenture is
converted before 1 March 2009 (ie within 60 days). The market price of Entity
A’s ordinary shares on the date the terms are amended is P 40 per share.

Compute the amount to be recognize in profit or loss as a result of the


amendment of the terms

a. P 400,000
c. P 50,000
b. P 200,000
d. P 0
a. P 400,000
A2. . Windom Corp. on January 1, 2007 granted share options for
100,000 share of its P10 par value ordinary shares to its key
employees. The market price of the ordinary share on that date
was P 23 per share and the option price was P 20. The Black
Scholes option pricing model determines total compensation
expense to be P 600,000. The options are exercisable beginning
January 1, 2010 provided those key employees are still in
Windom’s employ at the time the options are exercised. The
options expire on January 1, 2011.

On January 1, 2010 when the market price of the share was P29
per share, all 100,000 options were exercised. The amount of
compensation expense Windom should record for 2009 is.

a. P 100,000 c. P 150,000
b. P 200,000 d. P 700,000
b. P 200,000
A3. The White Company set up a defined benefit post-
employment plan with effect from 1 January 20X7. In the
first year the expected return on plan assets was
PHP5,000, the actual return on plan assets was
PHP4,000, the current service cost was PHP12,000 and
White's contributions paid into the plan were PHP7,500.
What is the net expense to be recognized in profit or loss
for the year ended 31 December 20X7, according to
IAS19 Employee benefits?
A PHP8,000
B PHP3,500
C PHP7,000
D PHP2,500
C. 7,000
A4. The Markab Company has acquired a trademark relating to the
introduction of a new manufacturing process. The costs incurred were as
follows:
Cost of trademark PHP 3,500,000
Expenditure on promoting the new product PHP 50,000
Employee benefits relating to the testing of the
proper functioning of the new process PHP 200,000

According to IAS38 Intangible assets, what is the total cost that should be
capitalized as an intangible non-current asset in respect of the new
process?
A PHP3,750,000
B PHP3,700,000
C PHP3,500,000
D PHP3,550,000
B. 3,700,000
A5, Ball Company purchased a P1,000,000 ordinary life’s insurance
policy on its president. Ball Company is the beneficiary under the
life insurance policy. The policy year and Ball’s accounting year
coincide. Additional data available for the year ended December 31,
2011 are as follows:
Cash Surrender Value, January 1 43,500
Cash Surrender Value, December 31 54,000
Annual advance premium payment paid January 1 20,000
Dividend Received July 1 3,000

What amount should be reported as life insurance expense for


2011?

A) 6,500
B) 9,500
C) 17,000
D) 20,000
A – 6,500
A6. . An entity has granted share option to its employees.
The total expense to the vesting date of December 31,
2010, has been calculated as P 8 million. The entity has
decided to settle the award early, on December 31, 2009.
The expense charge in the income statement since the
grant date of January 1, 2007, had been year to December
31, 2007, 2 million, and year to December 31, 2008, 2.1
million. The expense that would have been charge in the
year to December 31, 2009 was P 2.2 million. What would
be the expense charged in the income statement for the
year December 31, 2009?

a. P 2.2 million c. P 3.9 million


b. P 8.0 million d. P 2.0 million
c. P 3.9 million
A7. The Palila Company purchased a varnishing machine for
PHP150,000 on 1 January 20X7.

The company received a government grant of PHP13,500 in


respect of this asset. Company policy was to depreciate the
asset over 4 years on a straight-line basis and to treat the
grant as deferred income. Under IAS20 Government grants
and government assistance, what should be the carrying
amounts of the machine and the deferred income ("DI")
balance at 31 December 20X8?
Carrying amount DI balance
a PHP75,000 PHP6,750
b PHP112,500 PHP10,125
c PHP81,750 PHP6,750
d PHP75,000 PHP13,500
a. PHP75,000 & PHP6,750
A8. . House Publishers offered a contest in which the winner
would receive P 1 million payable over 20 years. On
December 31, 2009, House announced the winner of the
contest and signed a note payable to the winner for P 1
million, payable in P 50,000 installments every January 2.
Also on December 31, 2009 House purchased an annuity
for P 418,000 to provide the P 950,000 prize monies
remaining after the first P 50,000 installment which was
paid on January 2, 2010. In its 2009 income statements,
what should House report as contest prize expense?

a. P 0 C. P 468, 250
b. P 418, 250 d. P 1,000,000
c. P 468, 250
A9. When an economy ceases to be hyperinflationary, an entity
shall discontinue the preparation and presentation of financial
statements under a condition of hyperinflationary economy.
Thus the amount expressed in the measuring unit current at
the end of the previous reporting period shall be
a. the present Value amount in the subsequent
financial statement.
b. the carrying amount in the subsequent financial
statement.
c. the fairvalue amount in the subsequent financial
statement.
d. the historical Value amount in the subsequent
financial statement
B. the carrying amount in
the subsequent financial
statement.
A10. On January 1, 2009, the lending company made a P
200,000 8% loan. The interest is receivable at the end of each
year, with the principal amount to be received at the end of 5
years. As of December 31, 2009, the interest for the current
year has not been received nor recorded because the borrower
is experiencing financial difficulties. The lending company
negotiated a restructuring of the loan. The payment of all of the
interest based on the original will be delayed until the end the 5
year loan term. In addition, the amount of principal repayment
will be dropped from P 200,000 to P 100,000. The prevailing
interest rate for similar type of the loan as of December 31,
2009 is 10%.

The loan impairment loss to be recognize in 2009 profit or loss


is
a. P 67,700 c. P 77,492
b. P 73,506 d. P 0
a. P 67,700
DIFFICULT
D1. . Selected records from the accounting records of Malakas
Company are as follows:
Net accounts receivable at Dec. 31, 2011 1,900,000
Net accounts receivable at Dec. 31, 2012 1,000,000
Account receivable turnover 5:1
Inventory at Dec. 31, 2005 1,100,000
Inventory at Dec.31, 2006 1,200,000
Inventory turnover 4:1

What is the amount of gross margin?


P 5,150,000
D2. The December 31, 2012 statement of financial position of Melissa
Company showed shareholders’ equity of P5,000,000. The share capital of
P3,000,000remained unchanged during the year.

Transactions during the year which affected the equity were:


An adjustment of retained earnings for 2010 overdepreciation 100,000
Gain on sale of treasury shares 300,000
Dividend declared, of which P400,000 were paid 600,000
Net income for 2012 800,000
What is the balance of retaned earnings on January 1, 2012?
P1,400,000
D3. An entity grants to an employee the right to choose either
1,000 phantom shares, ie a right to a cash payment equal to
the value of 1,000 shares or 1,200 shares. The grant is
conditional upon the completion of three years service.

At grant date, the entity’s share price is P 50 per share. At


the end of years 1 and 2, the share price is P 52 and P 55
respectively. The entity estimates that the grant date fair
value of the share alternative is P 48 per share.

Computer for the amount to be recognize as compensation


expense in year 2.
a. P 21,867 b. P 15,750
b. c. P 14,000 d. P15,050
a. P 21,867
D4. 2. One of the conditions that must be satisfied in order
to recognize revenue in a transaction involving the rendering
of services is that the stage of completion of the transaction
at the end of the reporting period can be measured reliably.
Which TWO of the following methods for determining the
stage of completion of a contract involving the rendering of
services are specifically referred to in IAS18 Revenue, as
being acceptable?
A Costs incurred to date as a percentage of the estimated
total costs of the transaction
B Advances received to date as a percentage of the total
amount receivable
C Surveys of work performed
D Revenue to date divided by total contract revenue
A&C
D5. The Polyphony Company had 100,000
equity shares in issue on 1 January 20X7. On
1 July 20X7 it issued 20,000 new shares by
way of a 1 for 5 bonus. On 1 October 20X7 it
issued 28,000 new shares for cash at full
market price. When calculating basic earnings
per share, how many shares should be divided
into the profit after tax, according to IAS33
Earnings per share?
D 127,000
D6. Magic Company had the following capital during the 2008 and
2009:

Preference share capital, P 100 par, 10% cumulative, 100,000 shares


P 10,000,000
Ordinary share capital, P 100 par, 400,000 shares
40,000,000

Magic reported profit of P 8,000,000 for the year ended December 31,
2009. Magic paid no preference share dividends during 2008 and paid
P 1,500,000 preference share dividends during 2009. On January 31,
2010, prior to the date that financial statements are authorized for
issue, Magic distributed 10% ordinary share dividend.

In its 2009 income statement, what amount should Magic report as


basic earnings per share?

a. P 17.50 b. P16.25
b. c. P 15.91 d. P 14.77
C. P 15.91
D7. The Tanager Company purchased a boring machine on 1
January 20X1 for PHP81,000.
The useful life of the machine is estimated at 3 years with a
residual value at the end of this period of PHP6,000. During its
useful life, the expected units of production from the machine are:
20X1 12,000 units
20X2 7,000 units
20X3 5,000 units
What should be the depreciation expense for the year ended 31
December 20X2, using the most appropriate depreciation method
permitted by IAS16 Property, plant and equipment?
A PHP27,000
B PHP21,875
C PHP23,625
D PHP25,000
B PHP21,875
D8. SEASON’S INC acquired an asset that had a cost of P
130,000. The asset is being depreciated over a 5 year
period using the sum of the year’s digit method. It has a
salvage value estimated at P 10,000. The loss/gain if the
asset is sold for P 38,000 at the end of the third year is
a. P 4,000 gain
B. P 68,000 loss
C. P 20,000 loss
d. P 92,000 loss
a. P 4,000 gain
D9. . Victoria Company had purchased equipment for P
10,000,000 on January 1, 2007. The equipment had a 5
year life and a residual value of 1,000,000. Victoria
Company depreciated the equipment using the straight
line method. On December 31, 2009, Victoria questioned
the recoverability of the carrying amount of this
equipment. On December 31, 2009 the undiscounted
expected net future cash flows related to the continued
use and eventual disposal of the equipment totaled P
4,800,000. The equipment’s fair value on December 31,
2009 is P 4,000,000 while the discounted cash flows
related to the equipment is P 4,200,000. After any loss on
impairment has been recognized, what is the carrying
amount of the equipment.?
P 4,200,000
D10. Berry Company had the following transactions in its first year of
operations:
Sales (90% collected in the first year) P7,500,000
Disbursements for cost and expenses 6,000,000
Purchase of equipment for cash 2,000,000
Proceeds from issuance of ordinary shares 2,500,000
Payments on short-term borrowings 250,000
Proceeds from short-term borrowings 500,000
Depreciation on equipment 400,000
Disbursement for income tax 450,000
Bad debt write off 300,000

What is the cash balance at year end?


P 1,050,000

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