THEORY OF ACCOUNTS TEST I

1. At the balance sheet date, December 31, 2014, Electron Company carried a
receivable from MI Electronics, a major customer, at P10 million. The
authorization date of the financial statements is on February 16, 2015. MI
Electronics declared bankruptcy on Valentines day (February 14, 2015). Electron
Company will
a. reverse the sale pertaining to this receivable in the comparatives for the prior
period and treat this as an error under PAS 8
b. make a provision for this post-balance sheet event in its financial
statements (as opposed to disclosure in footnotes)
c. ignore the event and wait for the outcome of the bankruptcy because the
event took place after the year-end.
d. disclose the fact that MI has declared bankruptcy in the footnotes.

2. Jonas Company is a large manufacturer of machines. Sion Company, a major

company of Jonas Company has placed an order for a special machine for which
it has given a deposit of 112,500 to Jonas Company. The parties have agreed on
a price for the machine of P150,000. As per the terms of the sales agreement, it
is an FOB (free on board) contract and the title passes to the buyer when goods
are loaded onto the ship at the port. When should the revenue be recognized by
Jonas Company
a. When the machine is loaded on the port
b. When the deposit is received
c. When the machine has been received by the customer
d. When the customer orders the machine

3. Under PAS 39, all of the following are characteristics of a derivative except:
a. It is settled at a future date.
b. It is acquired or incurred by the entity for the purpose of generating a
profit from short-term fluctuations in market factors
c. Its value changes in response to the change in a specified underlying
THEORY OF ACCOUNTS TEST I

d. It requires no initial investment or an initial net investment that is smaller than

would be required for other types of contracts that would be expected to have
a similar response to changes in market factors.

4. The cash flow from operations for Petro Chemicals is P25,000 for the current
year. If the amortization expense increases by P5,000 and the other factors
remain same, under which of the following assumptions will the cash flow from
operations remain unaffected?
a. The company has an infinite life
b. A change in amortization method will not have a retrospective effect
c. The company can change the depreciation method in between a financial
year
d. The company is operating in a tax-free environment

5. Which of the following criteria do not have to be met in order for an operation to
be classified as discontinued?
a. The operation should represent a separate line of business or geographical
area
b. The operation must be sold within 3 months of the year-end
c. The operation is part of a single plan to dispose of a separate major line of
business or geographical area
d. The operation is a subsidiary acquired exclusively with a view to resale.

6. Under PAS 39, is a derivative that is embedded in another contract accounted for
separately from that other contract?
a. It depends. PAS 39 requires embedded derivatives to be accounted for
separately if and only if, the economic characteristics and risks of the
embedded derivative and the host contract are not closely related and
the combined contract is not measured at fair value with changes in fair
value recognized in profit or loss
THEORY OF ACCOUNTS TEST I

b. Yes. PAS 39 requires all derivatives (both freestanding and embedded) to be

accounted for as derivatives
c. No. PAS 39 precludes entities from splitting financial instruments and
accounting for the components separately.
d. It depends. PAS 39 requires embedded derivatives to be accounted for
separately as derivatives if, and only if, the entity has embedded the
derivative in order to avoid derivatives accounting and has no substantive
business purpose for embedding the derivative.

7. Which of the following is not a disclosure required by PFRS 6?

a. Information about commercial reserve quantities
b. The amounts of assets, liabilities, income and expense, and operating and
investing cash flows arising from the exploration and evaluation of mineral
resources
c. Accounting policies for exploration and evaluation expenditures, including the
recognition of exploration and evaluation assets
d. Information that identifies and explains the amounts recognized in the
financial statements arising from the exploration for and evaluation of mineral
resources.

8. EM Electronics, a computer chip manufacturing company, sells its products to its

distributors for onward sales to the ultimate customers. Due to frequent
fluctuations in the market prices for these goods, EM Electronics has a price
protection clause in the distributor agreement that entitles it to raise additional
billings in case of upward price movement. Another clause in the distributors
agreement is that EM Electronic can at any time reduce its inventory by buying
back goods at the cost at which it sold the goods to the distributor. Distributors
pay for the goods within 60 days from the same of goods to them. When should
EM Electronics recognize revenue on sale of goods to the distributors?
THEORY OF ACCOUNTS TEST I

a. When the distributor sells goods to the ultimate customers and there is
no uncertainty with respect to the price protection clause or the
buyback of goods
b. When the distributors pay to EM Electronics the cost of the goods
c. When goods are sold to the distributor provided estimated additional revenue
is also booked under the protection clause based on past experience
d. When the goods are sold to the distributors

9. What are the principal objectives of PFRS 7?

a. To provide presentation and disclosure requirements for financial instruments
b. To require disclosures about an entitys exposure to off-balance-sheet
instruments and other complex transactions
c. To require disclosures about the significance of financial instruments
for an entitys financial position and financial performance and
qualitative and quantitative information about the exposure to the risks
arising from financial instruments
d. To set out specified balance sheet and income statement formats for financial
entities

10. Bayer AG introduced a new drug in the market on December 31, 2014. Bayer
AGs financial year ends on December 31, 2014. It was the only company that
was permitted to manufacture this patented drug. The drug is used by patients
suffering from a irregular heartbeat. On March 31, 2015, after the drug was
introduced, more than 1,000 patients died. After a series of investigations,
authorities discovered that when this drug was simultaneously used to regulate
hypertension, the patients blood would clot and patient suffered a stroke. A
lawsuit for P100,000,000 has been filed against Bayer AG. The financial
statements were authorized for issuance on April 30, 2015. Which of the following
options is the appropriate accounting treatment for this post-balance sheet event
under PAS 10?
THEORY OF ACCOUNTS TEST I

a. The entity should provide P100,000,000 because this is an adjusting event

and the financial statements were authorized to be issued after the accident
b. The entity should disclose P100,000,000 as a contingent liability because it is
an adjusting event
c. The entity should disclose P100,000,000 as a contingent liability
because it is a present obligation with an improbable outflow
d. Assuming the probability of the lawsuit being decided against Bayer AG is
remote, the Company should disclose it in the footnotes, because it is a
nonadjusting material event.