SGV Cup Accounting

National Federation of Junior Philippine Institute of Accountants
Western Mindanao Council

18th Regional Mid-Year Convention
SGV CUP 1
TOPICS: THEORY OF ACCOUNTS & PRACTICAL ACCOUNTING 1
EASY
1. Any gain on a subsequent increase in the fair value less cost to sell of a noncurrent asset classified as
held for sale should be treated as follows:
A. The gain should be recognized in full.
B. The gain should not be recognized.
C. The gain should be recognized but not in excess of the cumulative impairment loss.
D. The gain should be recognized but only in retained earnings.
Answer: C
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations paragraph 21 states that
An entity shall recognize a gain for any subsequent increase in fair value less costs to sell of an
asset, but not in excess of the cumulative impairment loss that has been recognised either in
accordance with this IFRS or previously in accordance with IAS 36 Impairment of Assets.
2. The following are included in inventories, except
A. Assets held for sale in the ordinary course of business
B. Assets in the process of production for such sale
C. Assets in the form of materials or supplies to be consumed in the production process or in the
rendering of services
D. Assets in the form of office store supplies
Answer: D
IAS 2 Inventories paragraph 6 explicitly defines inventories as assets:
a) held for sale in the ordinary course of business;
b) in the process of production for such sale; or
c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Assets in the form of office store supplies are not included.
3. In 2011, Brighton Co. changed from the individual item approach to the aggregate approach in
applying the lower of FIFO cost or market to inventories. The change should be reported in
Brightons financial statements as a
A.
B.
C.
D.
Change in estimate on a prospective basis.

Cumulative effect of change in accounting principle on the current year income statement.
Retrospective application to the earliest period presented if practicable.
Prior period adjustment with a separate disclosure.
Answer: C
A change in inventory method no longer receives cumulative effect treatment on the income
statement. The accounting change is given retrospective application to the earliest period
presented, if practicable.
4. Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost for
A. Biological assets related to agricultural activity for which there is no active market.
B. Intangible assets for which there is no active market.
C. Any individual item of property, plant, and equipment.
D. Financial liabilities that are not held for trading.
Answer: C

The requirement is to identify the assets for which the entity may use fair value as deemed cost
upon adoption of IFRS. Answer C is correct because the entity may use fair value as deemed cost
for any individual item of property plant and equipment.
5. Under IFRS 8 Operating Segments, entity-wide disclosures include the following except:
A. Information about intersegment sales or transfer
B. Information about major customers
C. Information about geographical areas
D. Information about products and services
Answer: A
IFRS 8 Operating Segments paragraphs 32 34, entity-wide disclosures do not include
information about intersegment sales or transfer.
6. 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:
January 1
December 31
FIFO
1,420,000
1,580,000
Weighted Average
1,540,000
1,660,000
Assuming a tax rate of 35%, what amount should Loki report as the effect of this accounting change?
a. -0b. 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
7. On July 31, 2015, Gossip Girl Company discounted at the bank, a customers P1,200,000,
6-month, 10% notes receivable dated May 31, 2015. The bank discounted the note at 12%. How
much is the net proceeds of Gossip Girl Company from the discounted note?
a. P1,128,000
b. P1,152,000
c. P1,209,600
d. P1,234,800
ANSWER: C
Maturity Value of the Note:
[1,200,000 + (1,200,000 x 10% x 6/12)]
Less Discount
[1,260,000*(12% x 4/12)]
Net Proceeds
P1,260,000
50,400
P1,209,600
8. On July 1, 2015, one of LLOYD INC.s delivery trucks was destroyed in an accident. On that date,
the trucks book value was P900,000. On July 15, 2007, LLOYD INC. received and recorded a
P42,000 invoice for a new engine that was installed in the truck in May 2007 and another P6,000
invoice for various repairs.
What amount should LLOYD INC. use to determine the gain or loss on disposal of the truck?
a. P900,000
b. P942,000
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c. P948,000
d. P936,000
ANSWER: B
The amount used to determine the gain or loss would include the book value and the invoice for the
new engine. The invoice for repairs are recorded as an expense and not capitalized as part of the
trucks cost.
9. On January 2, 2011, Brandon Company received a grant of P60,000 to compensate it for costs it
incurred in planting trees over a period of five years. Brandon Company will incur such cost in this
manner:
Years
Costs
2011
P2,000,000
2012
P4,000,000
2013
P6,000,000
2014
P8,000,000
2015
P10,000,000
What amount of income should Brandon Company recognize at the end of the year 2015?
a. P8,000,000
b. P12,000,000
c. P16,000,000
d. P20,000,000
ANSWER: D
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance provides that
grants shall be recognized in profit or loss on a systematic basis over the periods in which the entity
recognizes as expenses the related costs for which grants are intended to compensate.
Year
Grant
Ratio
Income Recognized
2011
P60,000,000
X 2/30
=
P4,000,000
2012
P60,000,000
X 4/30
=
P8,000,000
2013
P60,000,000
X 6/30
=
P12,000,000
2014
P60,000,000
X 8/30
=
P16,000,000
2015
P60,000,000
X 10/30 =
P20,000,000
10. Orange Companys P190,000 net income for the quarter ended September 30, 2015 included the
following after tax items:
a. A P120,000 gain on the disposal of equipment, realized on April 30, 2015 was allocated equally
to the 2nd, 3rd and 4th quarters.
b. A P32,000 cumulative effect loss resulting from a change in inventory valuation method was
recognized on August 4, 2015.
In addition, Orange Company paid P96,000 on February 1, 2015, for 2015 calendar year property
taxes, of this amount, P24,000 was allocated to the 3 rd quarter of 2015. For the quarter ended
September 30, 2015, how much should Oranges report as net income?
a. 182,000
b. 206,000
c. 222,000
d. 230,000
ANSWER: A
Net income reported
Gain on disposal (P120,000/3)
Cumulative effect-loss
Net Income
P190,000
(40,000)
32,000
P182,000
The gain on disposal is not allocated among the interim periods; the full amount is recognized on a
particular interim period, that is, the period when the transaction actually occurred. The cumulative
effect-gain or loss is not reported in the income statement.
AVERAGE
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1. When an owner-occupied property becomes an investment property to be carried at fair value, the
resulting increase in carrying amount is:
A. treated to the extent that the increase reverses a previous impairment loss, the increase is
recognized in other comprehensive income.
B. treated as part of other comprehensive income or revaluation surplus within equity, if no
previous impairment has been recorded.
C. recognized directly to profit or loss.
D. None of the above.
Answer: B
Paragraph 62 of PAS 40 Investment Property
TRANSFERS
Up to the date when an owner-occupied property becomes an investment property carried at fair
value, an entity depreciates the property and recognizes any impairment losses that have
occurred. The entity treats any difference at that date between the carrying amount of the property
in accordance with IAS 16 and its fair value in the same way as a revaluation in accordance with
IAS 16. In other words:
(a) any resulting decrease in the carrying amount of the property is recognized in profit or loss.
However, to the extent that an amount is included in revaluation surplus for that property, the
decrease is recognized in other comprehensive income and reduces the revaluation surplus
within equity.
(b) any resulting increase in the carrying amount is treated as follows:
(i) to the extent that the increase reverses a previous impairment loss for that property,
the increase is recognized in profit or loss. The amount recognized in profit or loss does not
exceed the amount needed to restore the carrying amount to the carrying amount that would
have been determined (net of depreciation) had no impairment loss been recognized.
(ii) any remaining part of the increase is recognized in other comprehensive income and
increases the revaluation surplus within equity. On subsequent disposal of the investment
property, the revaluation surplus included in equity may be transferred to retained earnings.
The transfer from revaluation surplus to retained earnings is not made through profit or loss.
2. Under PAS 11, Contract costs comprise of costs that relate directly to the specific contract. This
includes:
I.
site labor costs, including site supervision
II.
costs of moving plant, equipment and materials to and from the contract site
III.
claims from third parties
IV.
costs of hiring plant and equipment
A. I
B. II and III
C. I, II and IV
D. I, II, III and IV
Answer: D
Paragraph 16 and 17 of PAS 11 Construction Contracts
16 Contract costs shall comprise:
a) costs that relate directly to the specific contract;
b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
c) such other costs as are specifically chargeable to the customer under the terms of the
contract.
17 Costs that relate directly to a specific contract include:
a) site labour costs, including site supervision;
b) costs of materials used in construction;
c) depreciation of plant and equipment used on the contract;
d) costs of moving plant, equipment and materials to and from the contract site;
e) costs of hiring plant and equipment;
f) costs of design and technical assistance that is directly related to the contract;
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g) the estimated costs of rectification and guarantee work, including expected warranty
costs; and
h) claims from third parties.
3. Which of the following statements regarding interest methods of allocations is not true?
A. The term interest methods of allocation refers both to the convention for periodic reporting
and to the several approaches to dealing with changes in estimated future cash flows.
B. Interest methods of allocation are reporting conventions that use present value techniques in
the absence of a fresh-start measurement to compute changes in the carrying amount of an
asset or liability from one period to the next.
C. Interest methods of allocation are grounded in the notion of current cost.
D. Holding gains and losses are generally excluded from allocation systems.
Answer: C
Like depreciation and amortization conventions, interest methods are grounded in notions of
historical cost, not current cost.
4. Deferred tax assets are the amount of income taxes recoverable in future periods in respect of:
A. Permanent differences
B. Carryforward of unused tax losses only
C. Taxable temporary differences and carryforward of unused tax losses
D. Deductible temporary differences and carryforward of unused tax credits.
Answer: D
Paragraph 5 of PAS 12 Income taxes:
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
5. Hedging relationships are of three types. Which of the following is not included as set forth by
IAS 39?
A. Fair Value Hedge
B. Cash Flow Hedge
C. Hedge of a Net Investment in a Foreign Operation
D. Hedge of Foreign Currency Risk of a Firm Commitment
Answer: D
Based on IAS 39 Financial Instruments: Recognition and Measurement, paragraph 86, hedging
relationships are of three types:
a) fair value hedge: a hedge of the exposure to changes in fair value of a recognised asset or
liability or an unrecognised firm commitment, or an identified portion of such an asset,
liability or firm commitment, that is attributable to a particular risk and could affect profit or
loss.
b) cash flow hedge: a hedge of the exposure to variability in cash flows that (i) is attributable to
a particular risk associated with a recognised asset or liability (such as all or some future
interest payments on variable rate debt) or a highly probable forecast transaction and (ii)
could affect profit or loss.
c) hedge of a net investment in a foreign operation as defined in IAS 21.
6. Service Company markets products to real estate agents and to new homeowners, purchased a
customer list for P600,000 on January 2, 2014. Because turnover among real-estate agents and new
homeowners gradually become established homeowners, the list is expected to have economic value
for only four years. The Company uses the straight-line method of depreciation. In January 2015, the
customer list was tested for impairment as a result of substantial turndown in the real estate market in
the area. It is estimated that the customer list will generate future cash flows of P100,000 per year for
the next three years and that the fair value (less costs to sell) of the customer list is P240,000. The
market rate of interest on this date is 8%. What amount of impairment loss on customer lists should
Service Company recognize?
5

a.
b.
c.
d.
P-0P192,300
P210,000
P450,000
ANSWER:B
Recoverable amount (Note A)
Carrying value (600,000 x )
Impairment Loss
P257,700
(450,000)
P192,300
Note A - Recoverable amount is higher between:

Fair value less cost to sell
Value in use (P100,000 x 2.577)
P240,000
P257,700
7. Rowena Company grants 150 share options to each of its 500 employees on January 2, 2013, and
exercisable starting December 31, 2015 for a 2-year period. Each grant is conditional upon the employee
working for the entity over the next three years. Rowena estimates the fair value of each option is P40. On
the basis of weighted average probability, the entity estimates that 20% of the employees will leave
during the three-year period and forfeit their rights to share options. During the year 2013, 20 employees
leave and during the three-year period and believes that 20% is a fair estimate of employee departures.
During 2014, a further 22 employee leave. Due to low turnover as of December 31, 2014, Rowena revises
its estimate of employee departures over the three-year period from 20% to 15%. During 2015, a further
18 employees leave. What is the compensation expense to be recognized by Antonia Company for the
share options in 2015?
a. P800,000
b. P900,000
c. P940,000
d. P1,700,000
ANSWER: C
Cumulative compensation expense 2015:
150 x 40 x (500-60) persons
P2,640,000
Cumulative compensation expense 2014:
150 x 40 x (500 x 85%) persons x 2/3
1,700,000
Compensation expense 2015
940,000
8. On December 31, 2015, Ronnin Company has 200,000 ordinary shares outstanding with a par value of
P100 per share. Information revealed that Ronnin had a 9% convertible debenture, P1,000,000 face value
bonds. The bond has a carrying value of P1,067,830 as of January 2, 2015 based on a prevailing rate of
7%. Each 1,000 bond is convertible into 20 ordinary shares. The bonds were dated January 1, 2015. Net
income after tax of 32% for 2015 was P418,000.
How much should Ronnin Company report as diluted earnings per share in its financial statements?
a. P1.90
b. P2.09
c. P2.13
d. P2.89
ANSWER: B
Basic earnings per share (P418,000/200,000)
Diluted earnings per share:
Net income after tax
Interest after tax of convertible debt
P1,067,380 x 7% x (1-32%)
Total
Outstanding shares if bond was converted from the beginning
[200,000 + (1,000,000/1,000 x 20)]
Earnings per share
6
P2.09
418,000
50,807
468,807
220,000
2.13

Diluted earnings per share
P2.09
Because diluted earnings per share is increased when taking into account the convertible bond, the
convertible bond is antidilutive and is ignored in the calculation of diluted earnings per share.
Therefore, diluted earnings per share is equal to the basic earnings per share of P2.09.
9. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal
group, and the carrying amount of these assets immediately before classification as held for sale was
P20,000,000. Upon being classified as held for sale, the assets were revalued to P18,000,000. The entity
feels that fair value less cost to sell would be P17,000,000. How would the reduction in the value of the
assets on classification as held for sale be treated in the financial statements?
a. The entity recognizes a loss of P2,000,000 immediately before classification as held for sale and
then recognizes an impairment loss of P1,000,000
b. The entity recognizes an impairment loss of P3,000,000
c. The entity recognizes an impairment loss of P2,000,000
d. The entity recognizes a loss of P3,000,000 immediately before classifying the disposal group as
held for sale.
ANSWER: A
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations states that immediately
before the initial classification of the asset (or disposal group) as held for sale, the carrying amounts
of the asset shall be measured in accordance with applicable PFRSs. Prior to classification, the assets
are covered in PAS 16 Property, Plant, and Equipment and revaluation is appropriate per standard.
Thus a revaluation loss of P2,000,000 should be recognized first and a subsequent impairment loss of
P1,000,000 at year-end.
10. On June 30, 2015, Kimmy Company sold equipment with an estimated useful life of 10 years and
immediately leased it back for 5 years. The equipments carrying amount was P820,000. The sales price
was P750,000. The fair value of the equipment was P790,000. The lease agreement is an operating lease.
What amount of deferred loss should the Company recognize on June 30, 2015 assuming future rental
is equal to market rate rent?
a. P-0b. P30,000
c. P40,000
d. P70,000
ANSWER: A
PAS 17 Leases provides that for operating leases, if the sales price is below fair value, any profit or
loss shall be recognized immediately, except that if the loss is compensated by future lease payments
at below market price, it shall be deferred and amortized in proportion to the lease payments over the
period for which the asset is expected to be used. Since the loss is not compensated by lower future
rentals, the loss is not deferred and expensed immediately.
Fair Value
Selling Price
Loss recognized outright
Deferred loss
P790,000
(750,000)
40,000
P-0-
DIFFICULT
1. When deciding on the discount rate that should be used, which factors should not be taken into
account?
A. The time value of money
B. Risk that relate to the asset for which the future cash flows estimates have not been adjusted
C. Risks specific to the asset for which future cash flows estimates have been adjusted
D. Pretax rates
Answer: C
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According to paragraph 55 of IAS 36 Impairment of Assets, The discount rate (rates) shall be a
pre-tax rate (rates) that reflect(s) current market assessments of:
a) the time value of money; and
b) the risks specific to the asset for which the future cash flow estimates have not been
adjusted.
2. Which of the following statements is not correct?
A. Periodic allocations of acquisition cost, made on a systematic and rational basis, are
recognized as current expense in conformity with the matching principle
B. Depreciation accounting is a process of valuation, not of allocation
C. At acquisition cost, operational assets are recorded at cost on the basis of the cost principle
D. Subsequent to acquisition, tangible assets that have a limited life are reported at the cost
recognized at acquisition less accumulated allocations of such cost
Answer: B
It is explicitly indicated in IAS 16 Property, Plant and Equipment, paragraph 6 that Depreciation
is the systematic allocation of the depreciable amount of an asset over its useful life.
3. An entity shall disclose a single amount on the face of the income statement comprising the total of
A. The post-tax profit or loss of discontinued operations and the pre-tax gain or loss recognized
on the measurement to fair value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operations.
B. The post-tax profit or loss of discontinued operations and the post tax gain or loss recognized
C. The pre-tax profit or loss of discontinued operations and the post tax gain or loss recognized
D. The pre-tax profit or loss of discontinued operations and the pre-tax gain or loss recognized
Answer: B
As stated in paragraph 33 of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, an entity shall disclose:
a) a single amount in the statement of comprehensive income comprising the total of:
i.
the post-tax profit or loss of discontinued operations and
ii.
the post-tax gain or loss recognised on the measurement to fair value less costs to
sell or on the disposal of the assets or disposal group(s) constituting the
discontinued operation.
4. Which of the following statements are true?
I.
An intangible asset should be measured initially at cost
II.
If payment for an intangible asset is deferred beyond normal credit terms, its cost is the
equivalent cash price
III.
If an intangible asset is acquired in exchange for equity instruments of the reporting
enterprise, the cost of the asset is the fair value of the equity instruments issued, which is
equal to the fair value of the asset.
IV.
The acquirer may recognise a group of complementary intangible assets as a single asset
provided the individual assets have similar useful lives.
A.
B.
C.
D.
I and II
I, II and III
II, III and IV
I, II, III and IV
Answer: D
I IAS 38 Intangible Assets paragraph 24 states that An intangible asset shall be measured
initially at cost.
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II IAS 38 paragraph 32 says that If payment for an intangible asset is deferred beyond normal
credit terms, its cost is the cash price equivalent. The difference between this amount and the total
payments is recognised as interest expense over the period of credit unless it is capitalised in
accordance with IAS 23 Borrowing Costs.
III IAS 38 paragraph 8 states that Cost is the amount of cash or cash equivalents paid or the
fair value of other consideration given to acquire an asset at the time of its acquisition or
construction.
IV - IAS 38 paragraph 37 states that The acquirer may recognise a group of complementary
intangible assets as a single asset provided the individual assets have similar useful lives. For
example, the terms 'brand' and 'brand name' are often used as synonyms for trademarks and other
marks. However, the former are general marketing terms that are typically used to refer to a group
of complementary assets such as a trademark (or service mark) and its related trade name,
formulas, recipes and technological expertise.
5. A subsidiarys fiscal year-end is June 30 and the parents fiscal year-end is December 31. The effect
of this difference is significant to the consolidated financial statements. In preparing consolidated
financial statements
A. The subsidiary should be consolidated using more recent interim financial statements.
B. The subsidiary should not be consolidated but its financial results are disclosed in the notes to
the consolidated financial statements.
C. The subsidiary should be consolidated using its June 30 annual financial statements
D. The subsidiary should not be consolidated but accounted for by the equity method in the
consolidated financial statements.
Answer: A
Appendix B of PFRS 10, paragraph B92-93 states that:
B92 The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date. When the end of the
reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for
consolidation purposes, additional financial information as of the same date as the financial
statements of the parent to enable the parent to consolidate the financial information of the
subsidiary, unless it is impracticable to do so.
B93 If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the effects
of significant transactions or events that occur between the date of those financial statements and
the date of the consolidated financial statements. In any case, the difference between the date of
the subsidiary's financial statements and that of the consolidated financial statements shall be no
more than three months, and the length of the reporting periods and any difference between the
dates of the financial statements shall be the same from period to period.
Accordingly, the financial statements of the subsidiary should be adjusted at least as of September
30.
6. Jackson Company is engaged in a small export business. The Company maintains limited records.
Most of the Companys transactions are summarized in a cash journal while; non-cash transactions
are recorded by making memo entries. The following are abstracted from the Companys records.
Accounts receivable
370,000
Increase
Notes receivable
200,000
Decrease
Accounts payable
150,000
Decrease
Notes payable-trade
200,000
Increase
Notes payable-bank
300,000
Increase
Sales returns
30,000
Sales discounts
20,000
Purchase returns
80,000
Purchase discounts
35,000
Accounts written off
60,000
Recovery of accounts written off
18,000
Cash sales
300,000
Cash purchases
250,000
Cash received from account customers
1,500,000
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Cash payment to trade creditors
What is the amount of gross sales?
a. P1,780,000
b. P2,062,000
c. P2,080,000
d. P2,130,000
1,200,000
ANSWER: B
Increase in accounts receivable
Sales returns
Accounts written off
Collection
Sales Discount
Total
Less: Decrease in notes receivable
Recovery of write-off
Sales on account
Cash Sales
Gross sales
P 370,000
30,000
60,000
1,500,000
20,000
P1,980,000
P200,000
18,000
218,000
P1,762,000
300,000
P2,062,000
7. MEGATRON Inc. reported inventory of P360,000 on December 31, 2015. The following data were
gathered to confirm the reported inventory figure.
Inventory, December 31, 2014
Purchases during 2015
Cash sales during 2015
Shipment received on December 26, 2015 included in
physical inventory but not recorded as purchases
Deposit made with suppliers, entered as purchased;
goods were not received during 2015
Collections on accounts receivable during 2015
Accounts receivable, December 31, 2014
Gross profit percentage on sales
P320,000
1,410,000
350,000
10,000
20,000
1,800,000
250,000
300,000
40%
What is the estimated inventory shortage on December 31, 2015?

a. P60,000
b. P50,000
c. P40,000
d. P5,000
ANSWER: C
Collections on accounts receivable during 2015
Cash Sales during 2015
Total Sales
Purchases (1,410,000+10,000-20,000)
Inventory, December 31, 2014
Cost of Goods Available for Sale
Cost of Goods Sold (2,200,000 x 60%)
Ending Inventory, per records
Ending Inventory, per physical count
Estimated inventory shortage
10
1,800,000
(250,000)
300,000
350,000
2,200,000
1,400,000
320,000
1,720,000
1,320,000
400,000
(360,000)
P40,000

8. Angel has an associate, Buttle, and owns 40% of the share capital. The fair value of Buttles net assets at
acquisition was P6,000,000 and the initial carrying amount including goodwill in Angels books was
P2,200,000. The carrying amount of the investment at December 31, 2015 is P2,800,000 and Buttles net
assets are fair valued at P9,000,000. Buttle issues new shares so that Angels holding is reduced to 20% as
Angel did not subscribe for the new shares which raised P8,000,000. The accounting for Buttle on the
issue of the new shares will be:
a. The carrying value of the associate decreases by P200,000 and the loss on dilution is P200,000
b. The carrying value of the associate increases by P2,200,000 and the gain on dilution is
P2,200,000
c. The carrying value of the associate increases by P200,000 and the gain on dilution is P200,000
d. The carrying value of the associate decreases by P2,200,000 and the gain on dilution is
P2,200,000
ANSWER: C
Angels share in the issue of new shares
(P8,000,000 x 20%)
Carrying value of disposed interest
(P2,800,000 x 20%/40%)
Gain on dilution/ increase in carrying value
P1,600,000
(1,400,000)
P200,000
9. The following are the details abstracted from the records of CINDY Corp.
i.
The President is to receive a bonus consisting of a basic amount equivalent to 5% of the
Companys net income before deduction of bonus but after deduction of corporate income tax.
ii.
In addition, the basic bonus will be increased by the Companys tax savings because the total
amount of bonus is deductible in computing the Companys taxable income. The tax savings is
the difference between the income tax the Company would have paid if there were no bonus and
the taxes the Company must pay after deducting the bonus.
iii.
CINDY Corp. reported a net income of P280,000 in 2015 before deduction of the Presidents
bonus and the corporate income tax.
iv.
The Company is subject to a corporate income tax of 35% of its net income after deducting the
Presidents bonus.
Compute for the total amount of bonus the President should receive in 2015.
a. P9,100
b. P9,352
c. P14,387
d. P14,136
ANSWER:C
B=5% x (280,000 T) + (280,000 x 35% - T)
T=35% x (280,000 B)
T=98,000 0.35B
B=5% x (280,000 98,000+ 0.35B) + (98,000 98,000 +0.35B)
B=5% x (182,000 + 0.35B) +0.35B
B=9,100 + 0.0175B + 0.35B
0.6325B=9,100
B=14,387
10. CO Company provides the following information for the year ended December 31, 2015:
Net monetary assets, January 1
P1,320,000
Sales
4,500,000
Purchases
1,800,000
Expenses
1,350,000
Income tax
900,000
Cash dividend paid on December 31
300,000
The sales, purchases, expenses and income tax were accrued evenly during the year. Selected price
index numbers are: January 1 110; Average for the year 125; December 31 140.
How much is the gain or loss on purchasing power?
11

a.
b.
c.
d.
P204,000
P414,000
P504,000
P1,884,000
ANSWER: B
Net monetary assets, January 1 restated
(1,320,000 x140/110)
Net Change in net monetary assets:
Profit
(4,500,000 1,800,000 1,350,000 900,000) x
140/125
Cash dividend paid on December 31
Net monetary assets, December 31 restated
Actual monetary assets, December 31
(1,320,000 +4,500,000 1,800,000 1,350,000
900,000 - 300,000)
Loss on purchasing power (1,884,000 1,470,000)
P1,680,000
504,000
(300,000)
1,884,000
1,470,000
P414,000
CLINCHER
1. A companys wages payable increased from the beginning to the end of the year. In the companys
statement of cash flows in which the operating activities section is prepared under the direct method,
the cash paid for wages would be
A. Salary expense plus wages payable at the beginning of the year.
B. Salary expense plus the increase in wages payable from the beginning to the end of the year.
C. Salary expense less the increase in wages payable from the beginning to the end of the year.
D. The same as salary expense.
Answer: C
In a statement of cash flows in which the operating activities section is prepared using the direct
method, the cash paid for wages would be equal to the accrual-basis salary expense, plus/minus any
decrease/increase in the wages payable account. (The logic is essentially the same as an accrual-basis
to cash-basis adjustment.)
2. The excess of the fair value of leased property at the inception of the lease over its cost or carrying
amount should be classified by the lessor as
A. Unearned income from a sales-type lease.
B. Unearned income from a direct-financing lease.
C. Manufacturers or dealers profit from a sales-type lease.
D. Manufacturers or dealers profit from a direct financing lease.
Answer: C
The excess of the fair value of leased property at the inception of the lease over the lessors cost is
defined as the manufacturers or dealers profit. Answer A is incorrect because the unearned income
from a sales-type lease is defined as the difference between the gross investment in the lease and the
sum of the present values of the components of the gross investment. Answer B is incorrect because
the unearned income from a direct-financing lease is defined as the excess of the gross investment
over the cost (also the PV of lease payments) of the leased property. Answer D is incorrect because a
sales-type lease involves a manufacturers or dealers profit while a direct financing lease does not.
3. Bannon Corp. transferred financial assets to Chapman, Inc. The transfer meets the conditions to be
accounted for as a sale. As the transferor, Bannon should do each of the following, except
A. Remove all assets sold from the balance sheet.
B. Record all assets received and liabilities incurred as proceeds from the sale.
C. Measure the assets received and liabilities incurred at cost.
D. Recognize any gain or loss on the sale.
12

Answer: C
The transferor, Bannon, should measure the assets received and liabilities incurred at fair value, not at
cost. The transferee, Chapman, should record any assets obtained and liabilities incurred at fair value.
4. 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
patent
Legal life
Annual amortization
P44,200
20 years
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.
5. On January 2, 2015, Silence Corporation has an investment property that was carried at fair value
with a carrying amount of P2,400,000 (historical cost, P2,500,000). As of December 31, 2015, the
carrying amount of the property is P2,300,000. On December 31, 2015, the fair market value of the
property was P2,800,000. On this date, Silent Corporation decided to reclassify/transfer the property
to inventory. On the date of transfer, what amount should the inventory be valued?
a. P2,300,000
b. P2,400,000
c. P2,500,000
d. P2,800,000
ANSWER: D
Per PAS 40 Investment Property, a transfer from investment property carried at fair value to owneroccupied property or inventories shall be in accordance with PAS 16 or PAS 2 for which the
propertys deemed cost for subsequent accounting shall be its fair value at the date of change in use.
Thus, the inventory should be valued at P2,800,000.
13

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National Federation of Junior Philippine Institute of Accountants

Western Mindanao Council

Change in estimate on a prospective basis.

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Note A - Recoverable amount is higher between:

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What is the estimated inventory shortage on December 31, 2015?

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