FINANCIAL ACCONTING REPORTING

Elimination round:

Easy

1. Which ONE of the following statements best describes the term 'liability'?

a. An excess of equity over current assets

b. Resources to meet financial commitments as they fall due
c. The residual interest in the assets of the entity after deducting all its liabilities
d. A present obligation of the entity arising from past events

Answer: D
The correct answer is "A present obligation of the entity arising from past
events", as defined in para 49(b) of the Framework.

2. A factory equipment with an estimated useful life of 10 years was purchased by Carranglan Co.
on December 30, 2012. The equipment was expected to have a residual value of P 5,000 at the
end of its service life. The sum of the years’ digit method was used in computing depreciation. For
the year ended December 31, 2016 the depreciation applicable to this equipment was P 42,000.
The cost of the factory equipment purchased on December 30, 2012 was

a. P 325,000
b. P 293,750
c. P 335,000
d. P 330,000

Answer: C
42000 x 55/7= 330000 + 5000= 335000

3. During year 1, Lake Co. issued 3,000 of its 9%, P1,000 face value bonds at 101 ½ . In connection
with the sale of these bonds, Lake paid the following expenses:

Promotion costs P 20,000

Engraving and printing 25,000
Underwriters’ commissions 200,000

How much should be capitalized as bond issue costs?

a. P0
b. P220,000
c. P225,000
d. P245,000

Answer: D
Engraving and printing costs, legal and accounting fees, commissions, promotion costs,
and other similar costs should be recorded as bond issue costs and amortized over the
term of the bonds. All the costs given are bond issue costs, so the amount reported as
bond issue costs is P245,000 (P20,000 + P25,000 + P200,000).
Average

1. Are the following statements true or false, according to IAS1 Presentation of financial
statements?

(1) Dividends paid should not be unrecognized in the statement of comprehensive income.
(2) A loss on disposal of assets should be unrecognized in the statement of changes in
equity.

Statement (1) Statement (2)

a. False False
b. False True
c. True False
d. True True

Answer: B
A loss on disposal of assets is recognised in the statement of comprehensive income
because IAS16 Property, plant and equipment does not permit otherwise (IAS1 para 88).
Dividends paid are recognized in the statement of changes in equity (IAS1 para 106).

2. The records of Binmaley’s Department Store report the following data for the month of January
2010:

Sales 7,100,000
Sales Allowance 100,000
Sales Returns 500,000
Employee Discounts 200,000
Theft and other losses 100,000
Beginning Balance @ Cost 440,000
Beginning Balance @ SP 800,000
Puchase Returns @Cost 240,000
Purchases 4,500,000
Initial Markup
on Purchases 2,900,000
Freight-in 100,000
Purchase Returns @ SP 350,000
Add'l Mark up 250,000
Mark up Cancellation 100,000
Mark down 600,000

Using the average retail inventory method, Binmaley’s ending inventory is

a. 360,000
b. 384,000
c. 420,000
d. 448,000
 Answer: B
Cost Retail
Beginning Balance 440000 800000
Purchases 4500000 4500000
Initial Markup
on Purchases 2900000
Freight-in 100000
Purchase Returns (240000) -350000
Add'l Mark up 250000
Mark up Cancellation (100000)
Mark down (600000)
Mark down Cancellation 100000
4800000 7500000
Cost Ratio 0.64

Sales (7100000)
Sales Returns 500000
Employee Discounts (200000)
Theft and other losses (100000)
Ending Balance 600000
Ending Balance @ Cost
600000*0.64 384000
Difficult

1. Crow, Inc.is indebted to Scare under an P8,000,000, 10%, four- year note dated December 31,
2014. Annual interest of P800,000 was paid on December 31,2015 and 2016. During 2017, Crow
experienced financial difficulties and is likely to default unless concessions are made. On
December 31, 2017, Scare agreed to restructure the debt as follows:

● Interest of P800,000 due December 31, 2017 was waived.

● Extended the maturity to December 31, 2019
● The principal amount is reduced to P7,000,000
● The interest of P770,000 of the new principal will be paid on maturity date.

Assuming an income tax rate of 32%, how much should Crow report as gain in restructuring in its
profit or loss for the year ended December 31, 2017?

a. P320,000
b. P680,000
c. P1,181,208
d. P1,205,626

Answer: C
Carrying Value of Liability
Face Value P8,000,000
Accrued Interest 800,000 P8,800,000
Less: Restructured debt
New Principal P7,000,000
Future Interest 770,000
Total Future Amount P7,770,000
X PV of 10% after a year 0.909 7,062,930
Gain on Restructuring P1,737,070
Less: Income tax (P1737070 x 32%) 555,862
Net P1,181,208
Final round:

Easy

1. Which ONE of the following statements best describes the term 'depreciation'?

a. The systematic allocation of an asset's cost less residual value over its useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its carrying
amount
d. The amount by which the carrying amount of an asset exceeds its recoverable
amount

Answer: A
"The systematic allocation of an asset's cost…" is the correct answer.
See IAS16 para 6 for definitions.
Average

1. Which of the following is a correct statement of one of the lease capitalization criteria?

a. The lease transfers ownership of the property to the lessor

b. The lease contains a purchase option
c. The lease term is equal to or more than 75% of the economic life of the leased
property
d. The minimum lease payments excluding executory costs equal or exceed 90% of the
fair value of the leased property.

Answer: C
Lease Capitalization Criteria:
● The lease transfers ownership of the property to the lessee.
● The lease contains bargain purchase option
● The lease term is equal to or more than 75% of the economic life of the leased
property
● The PV of the MLP excluding executory costs equal or exceed 90% of the fair value
of the leased property.

2. Camper Company acquires a subsidiary with a view to selling it. The subsidiary meets the criteria
to be classified as held for sale. At the balance sheet date, the subsidiary has not been sold and
six months have passed since its acquisition. At the balance sheet date, the carrying value of the
subsidiary is P4,500,000; its estimated selling price is P6,000,000 and estimated cost to sell is
P1,200,000. At how much should the subsidiary be valued at balance sheet date?

a. P3,300,000
b. P4,500,000
c. P4,800,000
d. P6,000,000

Answer: B
Estimated selling price P6,000,000
Less: Cost to sell 1,200,000
Fair Value P4,800,000
Carrying Value P4,500,000
Lower P4,500,000
Difficult

1. The Mirror Company classified a non-current asset accounted for under the cost model as held
for sale on 31 December 20X6. Because no offers were received at an acceptable price, Mirror
decided on 1 July 20X7 not to sell the asset, but to continue to use it. In accordance with IFRS5
Non-current assets held for sale and discontinued operations, the asset should be measured on
1 July 20X7 at (select one answer)

a. he lower of its carrying amount and its recoverable amount

b. the higher of its carrying amount and its recoverable amount
c. the lower of its carrying amount on the basis that it had never been classified as held
for sale and its recoverable amount
d. the higher of its carrying amount on the basis that it had never been classified as held
for sale and its recoverable amount

Answer: C
IFRS5 para 27 in effect requires an entity ceasing to classify an asset as held
for sale to remeasure it as if it had never been held for sale, subject to an
impairment test (the recoverable amount test) at that date.

2. Wall Company leased office premises to Fox, Inc. for a 4- year term beginning January 2, 2014.
Under the terms of the operating lease, rent for the first year is P216,000 and rent for years 2
through 4 is P337,500 per annum. However, as an inducement to enter the lease. Fox was
allowed to use the leased asset rent- free for the first three months. Income tax rate for all years
is 32%. In its December 31, 2014 statement of financial position of Wall Company, what amount
should be reported as deferred tax liability?

a. None
b. P42,120
c. P51,840
d. P93,969

Answer: A
1st year cash rental (P216,000 x 9/12) P 162,000
2nd to 4th year cash rental (P337,500 x 3 years) 1,012,500
Total cash rental for 4 years P1,174,500
/ Lease term 4 years
Annual rent expense (financial) P 293,625
Rent expense (taxation- amount paid in 2014 162,000
Excess financial over taxation (future deductible P 131,625
amount)
X tax rate 32%
Deferred tax asset P 42,120

Deferred tax liability None

Clincher:

1. The presentation of notes to financial statements in a systematic manner is

a. Voluntary
b. Mandatory
c. Mandatory, as far as practicable
d. Depends on the industry

Answer: C
The presentation of notes to financial statements in a systematic manner is mandatory as
far as practicable.

2. The following expenditures relating to the plant building were made by Sydney Company during
the year ended December 31, 2016:

Replacement of the old single roof with a fireproof tile roof P296,000
Repainted the plant building 20,000
Major investments to the electrical wiring system 70,000

How much should be capitalized in 2014?

a. P70,000
b. P90,000
c. P296,000
d. P366,000

Answer: D
Replacement of old single roof P296,000
Major investments to electrical writing system 70,000
Total cost to be capitalized P366,000

Repainting an old building does not improve the condition of the building beyond its
original assessed standard.