AFAR: Diagnostic Exam

Question #1
Jane had the following information
1. Purchased merchandises from a foreign supplier on January 20, 2016 for the Philippine peso
equivalent of P60,000 and paid the invoice on April 20, 2016 at the Philippine peso equivalent of
P68,000.
2. On September 1, 2016, borrowed the Philippine peso equivalent of P300,000 evidence by a
note that is payable in the lenders local currency on September 1, 2017. On December 31, 2016,
the Philippine peso equivalent of the principal amount was P320,000.
In Janes income statement, what amount should be included as a foreign exchange loss?
4,000 28,000 22,000 20,000

Question #2
An insurance contract can contain both deposit and insurance elements. An example might be a
reinsurance contract where cedent receives a repayment of the premiums at a future time if there
are no claims under the contract. Effectively this constitutes a loan by the cedent that will be
repaid in the future. PFRS 4 requires that
The premium paid is treated purely as a loan and is accounted for under PAS 39. The
premium is accounted for under PAS 18 each payment by the cedent is accounted for as a
loan advance and as a payment for insurance cover. The insurance premium is accounted for
as a revenue item in the income statement.

Question #3
Dollar-denominated short-term financial assets are translated for financial reporting purposes,
based on
Historical rate Forward rate Average spot rate Closing rate

Question #4
Partial sale of an investment in a subsidiary, which does not result in a change of control, is
treated as follows:
It is recorded directly in income. It results in the revaluation of the whole of the equity
interest. It is recorded directly in equity. It results in the adjustment of the goodwill.

Question #5
On January 2, 2015, Mycors Inc. signed an agreement to operate as franchisee of Mang Inasal
for an initial franchise fee of P2,343,750 for 10 years. Of this amount, P468,750 was paid when
the agreement was signed and the balance payable in three annual payments beginning on
December 31, 2015. Mycors signed a non-interest bearing note for the balance. The implicit
interest rate is 18%. Assume that substantial services amounting to P730,000 had already been
rendered by the franshisor and indirect costs of P53,750 have also been incurred.
If collection of the note is not reasonably assured, calculate the net income. For the year ended
December 31, 2015. Use PV factor 2.17.
456,026 509,776 700,150 753,900

Question #6
The statement of financial position of NPO shall report separately 3 classes of net assets that
exclude _______ .
Donated net assets Temporarily restricted net assets Permanently restricted net
assets Unrestricted net assets

Question #7
On January 1, 2013, two real estate companies (the parties - Baste Company and Barny
Company) set up a separate vehicle (Bardie Company) for the purpose of acquiring and
operating a shopping center. The contractual arrangement between the parties establishes joint
control of the activities that are conducted in Bardie Company. The main feature of Bardies legal
form is that the entity, not the parties, has the rights to the assets, and obligations for the
liabilities, relating to the arrangement. These activities include the rental of the retail units,
managing the car park, maintaining the center and its equipment, such as lifts, and building the
reputation and customer base for the center as a whole.
As a result, Baste Company paid P1.6 million for 50,000 shares of Bardies voting common
stock, which represents a 40% investment. No allocation to goodwill or other specific account
was made. The joint control over Bardie is achieved by this acquisition and so Baste applies the
equity method. Bardie distributed a dividend of P2 per share during the year and reported net
income of P560,000. What is the balance in the Investment in Bardie account found in Bastes
financial records as of December 31, 2013?
1,784,000 1,844,000 1,724,000 1,884,000

Question #8
On December 1, 2016, Gary Inc. entered into a 120-day forward contract to purchase 250,000
US dollars for speculative purposes. Gary, Inc, fiscal year ends on December 31. The exchange
rates are as follows:
Date Spot rate Forward rate (3/31/10)
December 1, 2016 P45.00
December 31, 2016 46.00
January 30, 2017 45.60
March 31, 2017 45.10
How much is the forex gain or loss to be reported from this forward contract in 2017?
 300,000 350,000 250,000 225,000

Question #9
Steve had the following information
1. Purchased merchandises from a foreign supplier on January 20, 2017 for the Philippine peso
equivalent of P60,000 and paid the invoice on April 20, 2017 at the Philippine peso equivalent of
P68,000.
2. On September 1, 2017, borrowed the Philippine peso equivalent of P300,000 evidence by a
note that is payable in the lenders local currency on September 1, 2018.
3. On December 31, 2017, the Philippine peso equivalent of the principal amount was P320,000.
In Steves 2017 income statement, what amount should be included as foreign exchange loss?
4,000 20,000 28,000 22,000

Question #10
Romeo Construction has consistently used the percentage of completion method. On January 10,
2015, Romeo began work on P1,500,000 construction contract. At the inception date, the
estimated cost of construction was P1,125,000. The following data relate to the progress of the
contract:
Income recognized at December 31, 2015 150,
Costs incurred January 10, 2015 through December 31, 2016 900,
Estimated cost to complete, December 31, 2016 300,
What percent was completed in 2016?
cannot be determined 75% 35% 40%

Question #11
Which of the following statements is wrong regarding long-term construction contracts?
The latest estimated of anticipated cost of materials, labor and subcontracting costs and
indirect cost required to complete a project should be used to determine the progress toward
completion. The amount of expected warranty cost is part of the estimated cost at
completion. If upon completion of the project the balance of Progress Billings is greater than
the balance of Construction in Progress, the excess is due to customer which is a liability.
General administrative costs may be part of contract costs but would usually be expensed.

Question #12
DMCI contractors had a 3-year construction contract in 2012 for P900,000. The company uses
the percentage of completion method for financial statement purposes. Income to be recognized
each year is based on the ratio of cost incurred to total estimated cost to complete the contract.
Data on this contract follows:
 Accounts receivable - construction contract billings 30,
Construction in progress 93,750
Less: Amount billed 84,375
10% retention 9,
Net income recognized in 2012 before tax 15,
DMCI contractors maintains a separate bank account for each construction contract. Bank
deposits to this contract amounted to P50,000.
What was the estimated total income before tax on this contract?
144,000 135,000 45,000 94,000

Question #13
Foreign operations that are an integral part of the operations of the entity would have the same
functional currency as the entity. Where a foreign operation functions independently from the
parent, the functional currency will be
the same as the presentation currency that of the parent that of the country of
incorporation determined using the guidance for determining an entitys functional currency

Question #14
Rommel, Inc acquired a 60% interest in Mikee Company several years ago. During 2014, Mikee
sold inventory costing P75,000 to Rommel for P100,000. A total of 16% of this inventory was
not sold to outsider until 2015. During 2015, Mikee sold inventory costing P96,000 to Rommel
for P120,000. A total of 35% of this inventory was not sold to outsiders until 2016. In 2015,
Rommel reported cost of sales of P380,000 while Mikee reported P210,000. What is the
consolidated cost of sales?
594,400 473,440 474,400 522,400

Question #15
Which of the following statements is (are) false?
I PFRIC 12 specifies that the infrastructure to be recognized as property, plant and equipment of the
operator because the contractual service arrangement does not convey the right to control the use of
public service infrastructure to the operator.
II The operator has access to operate the infrastructure to provide the public service on behalf of the gr
in accordance with the terms specified in the contract.
III Under the terms of the contractual arrangement, the operator acts as a service provider by constructi
upgrading the infrastructure used to provide a public service, and operates and maintains that
infrastructure (operation services) for a specified period of time.
I only II only I and III only I and II only

Question #16
DMCI has used the cost-to-cost percentage of completion method of recognizing profits. Tony
assumed leadership of the business after the recent death of his father Ton. In reviewing the
records, Tony finds the following information regarding a recently completed building project
for which the total contract price was P50 million.
Construction in progress account balance 2015 10,000,
Construction cost incurred during 2017 20,500,
Gross profit (loss) recognized in 2015 1,000,
Gross profit (loss) recognized in 2016 3,500,
Gross profit (loss) recognized in 2017 (500,0
How much cost was incurred in 2016?
25,500,000 46,000,000 9,000,000 16,500,000

Question #17
On 1/3/2020, PLDT sold equipment costing P100,000 to its 100% owned subsidiary, Idion, for
P80,000. At the time of the sale, the equipment had been 50% depreciated using the straight line
method and an assigned life of 10 years. Idion continued depreciating the equipment by using the
straight-line method over a remaining life of 5 years.
What is the amount of the intercompany profit or loss that must be deferred at 12/31/2020?
16,000 14,000 6,000 24,000

Question #18
Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in
Philippine peso as follows:
Stated
Current rates Historical rates
Accounts receivable, current 200,000 220,
Accounts receivable, long-term 100,000 110,
Prepaid insurance 50,000 55,
Goodwill 80,000 85,
430,000 470,
The subsidiarys functional currency is the local currency unit. What amount should Roses
balance sheet include for the preceding items?
435,000 450,000 440,000 430,000

Question #19
In 2015, a private not-for-profit hospital received a P200,000 cash contribution to its endowment
fund. During the year, hospital administration invested P150,000 of the funds. Which of the
following statements regarding the effect of these transactions on the preparation of the hospitals
cash flow is true?
 The P150,000 investment will appear in the investing activities section of the cash flow
statement as a cash inflow. The P150,000 contribution will appear in the financing activities
section of the cash flow statement as a cash inflow. The P200,000 contribution will appear in
the investing activities section of the cash flow statement as a cash inflow. The P200,000
contribution will appear in the financing activities section of the cash flow statement as a cash
inflow.

Question #20
The following transactions were incurred for the year by the Company:
1. Transfer of P13,000 merchandise to an agency to establish a working fund.
2. Receipt of sales orders from the agency, P130,000.
3. Collection of agency accounts by the home office, P91,000.
4. Home office disbursements representing agency expenses, P11,700.
5. Replenishment of the agency working fund upon receipt of expense vouchers for P5,850.
6. Cost of goods sold identified with the agency sales, P93,600.
How much is the net income traceable to the agency?
18,850 5,850 (72,150) 36,400

Question #21
PSY Corporation owns 90% of the outstanding common shares of SVG Company. On January 2,
2016, office equipment that had a carrying value to SVG Company P480,000 and has a
remaining life of 10 years was sold to PSY Corporation for P400,000. On the other hand, last
August 31, 2017, PSY Corporation sold a second hand delivery van to SVG Company at a gain
of P30,000 (remaining life of 5 years).
Included in the January 1, 2017 inventory of PSY Company was merchandise inventory worth
P65,000 while SVG Company had P80,000 on its December 31, 2017. These inventories came
from inter-company sales and purchases. PSY Corporation included a mark-up of 25% on cost
while SVG Company charged a 30% mark-upon sales.
Each of the two companies has net incomes in 2016 and 2017 as follows:
2016 2017
PSY Corporation 1,200,000 1,500,000
SVG Company 900,000 1,000,000
What is the amount of the consolidated net income attributable to controlling interest in 2017?
2,369,500 2,398,350 2,377,600 2,366,350

Question #22
When can the classification of an instrument which has been determined on initial recognition,
be changed?
Reclassifications are only permitted on the change of an entitys business model and are
expected to occur only infrequently. Reclassifications are only permitted on the change of
the contractual cash flows. Reclassifications are only permitted where a category becomes
tainted. Reclassifications are not permitted.

Question #23
What is meant by full goodwill method?
A bargain purchase. The recognition of the goodwill, which relates to the non-
controlling interest and the controlling interest. The recognition of the goodwill, which
relates to the parent companies interest. The recognition of the goodwill, which relates to the
non-controlling interest.

Question #24
When the outcome of the construction contract can be estimated reliably, which of the following
accounting treatment is proper?
The construction costs shall be deferred without reference to the stage of completion of the
contract activity at the end of the reporting period. The construction revenue shall be
recognized only to the extent of contract costs incurred that it is probable will be recoverable.
When it is probable that total contract costs will exceed total contract revenue, the expected
loss shall be recognized as an expense immediately without reference to the stage of completion
of the contract activity at the end of the reporting period. The balance construction in
progress account will be equal to cumulative construction revenue recognized even if it is
probable that total contract costs will exceed total contract revenue.

Question #25
On June 18, Julie Corporation entered into a firm commitment to purchase specialized equipment
from the Vita Company fro Y80,000,000 on August 20. The exchange rate on June 18 is Y100 =
P1. To reduce the exchange rate risk that could increase the cost of the equipment in pesos. Julie
pays P12,000 for a call option contract. This contract gives Julie the option to purchase
Y80,000,000 at an exchange rate of Y100 = P1 on August 20. On August 20, the exchange rate if
Y93 = P1.
How much did Julie save by purchasing the call option?
60,215 12,000 Julie would have been better off not to have purchase the call option.
48,215

Question #26
Caris Philippines, a private not-for-profit health care entity located in Quezon City, charged a
patient of P8,600 for services. It actually billed this amount to the patients third-party payor. The
third-party payor submitted a check for P7,900 with a note stating that the reasonable amount is
paid in full per contract. Which of the following statements is true?
 The third-party payor retained the P700 and will convey it to the health-care facility at the
start of the next fiscal period. The health-care facility recorded the P700 as a contractual
adjustment that it will not collect. The patient is responsible for paying the remaining P700.
The health-care facility will rebill the third-party payor for the remaining P700.

Question #27
On July 1, 2015, DMCI Construction Company contracted to build an office building for RH
Corporation for a total contract price of P9.75 million. On July 1, Mean estimated that it would
take between 2 to 3 years to complete the building. On December 31, 2017, the building was
deemed substantially completed. Following are accumulated contract costs incurred, total
estimated costs, and accumulated billings to RH for 2015, 2016, and 2017.
12/31/2015 12/31/2016 12/31/2017
Contract costs incurred to date 750,000 6,000,000 10,500,
Total estimated costs 7,500,000 10,000,000
Billings to RH 1,500,000 5,500,000 9,250,
Using the percentage of completion method, determine the correct income (loss) from
construction to be presented in the income statement of the company for the years 2015, 2016
and 2017, respectively.
P225,000; (P250,000); (P500,000) P225,000; (P225,000); (P750,000) P225,000;
(P475,000); (P500,000) P225,000; P250,000; (P750,000)

Question #28
The following are information regarding parent and subsidiary.
1 Sales of P60,000 to Dean with P20,000 gross profit. Dean had P15,000 of this inventory on hand at year
end. Clark owns a 15% interest in Dean and does not exert significant influence.
3 Purchases of raw materials totaling P240,000 from Kent Corporation, a wholly-owned subsidiary. Kents
gross profit on sale was P48,000. Clark had P60,000 of this inventory remaining on December 31, 2008
Before eliminating entries, Clark had consolidated current assets of P320,000. What amount
should Clark report in its December 31, 2008, consolidated balance sheet for current assets?
308,000 320,000 317,000 303,000

Question #29
On October 3, 2020, Mike Inc. entered into a forward contract with BPI Bank for the speculation
to buy $100 to be delivered on January 30, 2021. The following direct exchange rates were
provided:
October 3, 2020 December 31, 2020 January 30,
Spot-buying P40 P43 P41
Spot-selling P42 44 44
 Forward-buying 120 days 41 40 42
Forward-selling 120 days 43 45 42
Forward-buying 90 days 42 44 45
Forward-selling 90 days 45 41 44
Forward-buying 60 days 46 40 42
Forward-selling 60 days 43 42 41
Forward-buying 30 days 42 41 45
Forward-selling 30 days 41 40 42
What is the net foreign currency gain (loss) to be recognized by Mike for the years ended
December 31, 2020 and December 31, 2021, respectively?
P200 and (P100) (P300) and P400 P300 and (P200) (P200) and P300

Question #30
PNO Corporation subsidiary buys marketable equity securities and inventory on April 1, 2020,
for 100,000 foreign currencies each. It pays for both items on June 1, 2020, and they are still on
hand at year-end. Inventory is carried at cost under the lower-of-cost-or market value. Currency
exchange rates for 1 peso follow:
January 1, 2020
April 1, 2020
June 1, 2020
December 31, 2020
Assume that the foreign currency is the subsidiarys functional currency. What balances does a
consolidated balance sheet report as of December 31, 2020?
Marketable equity securities (P19,000); Inventory (P16,000) Marketable equity
securities (P19,000); Inventory (P19,000) Marketable equity securities (P17,000); Inventory
(P17,000) Marketable equity securities (P16,000); Inventory (P16,000)

Question #31
In what way does PFRS 9 require embedded derivatives to be accounted for?
Embedded derivatives are accounted for at fair value with gains and losses going to OCI.
Embedded derivatives that would have been separately accounted for at FVTPL under IAS
39 because they were not closely related to the financial asset host will no longer be separated.
Embedded derivatives that would have been separately accounted for at FVTPL under IAS
39 because they were not closely related to the financial asset host will have to be separated.
Embedded derivatives are accounted for at amortized cost.

Question #32
Hsensi Company sells goods for cash, on normal credit (2/10, n/30). However, on July 1, 2015,
the Company sold a used computer for P22,000; the inventory carrying value was P4,400. The
company collected P2,000 cash and agreed to let the customer make payments on the P20,000
whenever possible during the next 12 months. The company management stated that it had no
reliable basis for estimating the probability of default. The following additional data are
available: (a) collection on the installment receivable during 2015 were P3,000 and during 2016
were P2,000, and (b) on December 1, 2016, Hsensi repossessed the computer (estimated net
realizable value, P7,000).
Determine the realized gross profit on installment sales for the year 2015.
1,600 4,000 5,600 2,400

Question #33
The Ezra Company acquired an 80% interest in the Elaine Company when Elaines equity
comprised share capital of P100,000 and retained earnings of P500,000. Elaines current
statement of financial position shows share capital of P100,000, a revaluation reserve of
P400,000 and retained earnings of P1,400,000.
Under PAS 27, Consolidated and Separate Financial Statements, what figure in respect of
Elaines retained earnings should be included in the consolidated statement of financial position?
1,520,000 720,000 1,040,000 1,440,000

Question #34
It is an authorization issued by the DBM to government agencies to withdraw cash from the
National Treasury through the issuance of Modified Disbursement System Checks
Appropriation Allotment Obligation Notice of Cash Allocation

Question #35
When the bankruptcy court grants the order for relief:
The bankruptcy court confirms that the reorganization plan is fair an equitable. Creditors
may not seek payment of their claims directly from the debtor corporation. The court
discharges the debtor except for claims provided for in the reorganization plan. The
reorganization plan has been accepted by at least two-thirds in amount and over half in number
of claims.

Question #36
The preclosing general ledger trial balances at December 31, 2015 for the Ropali Company and
its Naga City branch office are shown below:
Trial Balance
Home Office Branch
Dr (Cr) Dr (Cr)
Cash 3,600,000 8
Accounts receivable 3,500,000 1,2
 Inventory 7,000,000 1,5
Plant assets - net 9,000,000
Branch office 2,000,000
Accounts payable (3,600,000) (1,3
Accrued expenses (1,400,000) (2
Home office (9
Capital stock (5,0
Retained earnings (4,5
Sales (44,000,000) (9,5
Purchases 29,000,000 2,4
Purchases from Home office 4,5
Expenses 4,400,000 1,6
Your audit disclosed the following data:
1. On December 23, the branch office manager purchased P400,000 of furniture and fixtures but
failed to notify the home office. The bookkeeper, knowing that all fixed assets are carried
on the home office recorded the proper entry on the branch office records. It is the Companys
policy not to take any depreciation on assets acquired in the last half of a year.
2. On December 27, a branch office customer erroneously paid his account of P200,000 to the
home office. The bookkeeper made the correct entry on the home office books but did not notify
the branch office.
3. On December 30, the branch office remitted cash of P500,000, which was received by the
home office in January, 2016
4. On December 3, the branch office erroneously recorded the December allocated expenses
from the home office as P50,000 instead of P150,000.
5. On December 31, the home office shipped merchandise billed at P300,000 to the branch
office, which was received in January, 2015.
6. The entire opening inventory of the branch office had been purchased from the home office,
Home office 2015 shipments to the branch officer were purchased by the home office in 2015.
The physical inventories at December 31, 2015, excluding the shipment in transit, are:
Home office 5,500,000 (at cost)
Branch office 2,000,000 (comprised of P1,800,000 from home office and P200,000 from outside ven
7. The home office consistently bills shipments to the branch office at 20% above cost. The sales
account is credited for the invoice price.
How much is the correct net income of the branch?
2,200,000 2,100,000 2,340,000 2,240,000

Question #37
Anas Inc. granted a franchise to Mocca for the Makati area. The franchisee was to pay a
franchisee of P500,000, payable in five equal annual installments starting with the payment upon
signing of the agreement. The franchise was to pay monthly 3% of gross sales of the preceding
month. Should the operations of the outlet prove to be unprofitable, the franchise may be
canceled with whatever obligations owing Anas, Inc. in connection with the P500,000 franchise
fee waived. The prevailing interest rate is 14%. The first year generated a gross sales of
P2,500,000.
What is the amount of unearned franchisee fee after the first year of operations?
500,000 391,400 291,400 575,000

Question #38
Dickie Corporation contracted to build a building for Dickson Company. The contract price was
P500,000 and Dickie estimated that construction costs would total P420,000. The construction
period lasted until September 1, 2015. Costs during the each period, estimated total cost of the
product at the end of the year, billings and cash collected during the year were as follows:
2015 2016 201
Cost during the period 105,000 195,000 1
Estimated or actual total costs 420,000 425,000 4
Billings during the period 100,000 150,000 2
Cash collected during the period 80,000 140,000 2
The amount of gross profit recognized in 2016 using the percentage of completion method must
be:
32,942.50 80,000 36,500 20,000

Question #39
On January 2, 2017, Magnolia Ice Cream signed an agreement authorizing Trisha to operate as
franchisee for an initial franchise fee P500,000 received upon signing of the agreement. Trisha
commenced operations on August 1, 2017, at which date all of the initial services required of
Magnolia Ice Cream had been performed at a cost of P120,000. The franchise agreement further
provides that Trisha must pay a 10% monthly continuing franchising fee. Sales reported from
August 1 to December 31, 2017 amounts to P400,000.
What is the net income related with franchise fee to be reported by Magnolia Ice Cream in 2017?
500,000 420,000 540,000 380,000

Question #40
Under a build-operate-transfer (BOT) scheme covered by IFRIC 12w, any borrowing costs
incurred by the private operator for infrastracture projects shall be
Expensed (Financial Asset model); Capitalized (Intangible Asset model) Capitalized
(Financial Asset model); Capitalized (Intangible Asset model) Capitalized (Financial Asset
model); Expensed (Intangible Asset model) Expensed (Financial Asset model); Expensed
(Intangible Asset model)

Question #41
Aliza Trading established a branch in Quezon City to distribute part of the goods purchased by it
from other suppliers. Aliza ships merchandise to the branch at 20% above cost. The following
account balances are taken from ledger balances of the home office and the branch:
Home Office Branch
Sales 384,000 1
Beginning inventory 76,800
Purchase 320,000
Shipment to branch 83,200
Shipment from home office
Operating expenses 46,080
Ending inventory 62,720
Calculate the combined net income.
106,080 104,960 108,800 90,880

Question #42
On January 1, 2019, A acquired a 60% interest in B for P80 million. A already held a 10%
interest which had been acquired for P12 million but which was fair valued at P15 million at
January 1, 2019. The fair value of the non-controlling interest at January 1, 2019, was P47
million and the fair value of the identifiable net assets of B was P130 million. A gain relating to
the revaluation of the original equity interest would be recorded as follows
P3 million P38 million P12 million P35 million

Question #43
A loss from a construction contract shall be fully and immediately recognize under
Both the cost recovery and percentage-of-completion method Neither the cost recovery
nor percentage-of-completion method The percentage-of-completion method The cost
recovery method

Question #44
SLEX enters into an arrangement under which it will build and operate a toll bridge. Company B
is entitled to charge users for driving over the toll bridge for the period from the completion of
construction until 1 million cars have driven across the bridge, at which point the concession
arrangement will end. SLEX incurred a total cost of P1 billion for the construction of the toll
bridge. How shall SLEX account for its infrastructure asset?
It shall be classified and treated as financial asset It shall be classified and treated as
intangible asset to be amortized using straight line method of presumed life of 10 years. It
shall be classified and treated as intangible asset to be amortized on the basis of usage or unit
method of 1 million cars. It shall be bifurcated into intangible asset and financial asset
Question #45
Build-operate-transfer BOT arrangement under the scope of IFRIC 12 are usually made between
(among):
The government (grantor) and a private entity (operator) General public (grantor) a
private entity (operator) and the government The government (operator) and a private entity
(grantor) The government (grantor) general entity (operator) and a private entity

Question #46
Partial sale of a subsidiary, which results in the retention of significant influence so that the
remaining investment constitutes an associate, is dealt with as follows:
It is recorded directly in income. It results in the revaluation of the whole of the equity
interest. It results in the retained interest being measured at fair value and a gain or loss
being calculated on the disposal of the subsidiary. It is recorded directly in equity.

Question #47
The Rissa Company has entered into a contract on June 1, 20X3 that requires it to issue its own
ordinary shares with a value of CU250,000 on 31 May 20X6. In accordance with PAS32,
Financial instruments presentation, the company should classify the contract as
Financial asset
Embedded derivative
Financial liability
Equity instrument

Question #48
When disclosing information about investments in associate, PAS 28 Investment in Associates
and Joint Ventures, requires separate disclosure of which of the following?
I Shares in associates in the statement of financial position
II Share profit or loss associates in the statement of profit or loss and other comprehensive income
III Share of any discontinuing operations in the statement of changes in equity
IV Shares of changes recognized directly in the associates equity in the statement of changes in equity
I, II and IV only II, III and IV only I, II and III only I, II, III and IV

Question #49
Corporation Lizzy acquired 2,000 shares of the voting stock of Corporation Lizette in the open
market at P48 per share. Direct costs associated with the acquisition total of P4,000. Balance
sheets of both companies on January 1, 2017, immediately after the acquisition of shares of
Lizzy, are as follows:
Corporation Lizzy Corporation Lizette
Cash 50,000 10,
Temporary investments 80,000 40,
Receivables (net) 95,000 10,
Investment in Corporation Lizette 100,000
Machinery and equipment (net) 100,000 45,
Land 50,000 20,
Total assets 475,000 125,
Accounts payable 75,000 25,
Common stock (P20 par) 250,000 50,
Excess over par 90,000 30,
Retained earnings 60,000 20,
Total liabilities and SHE 475,000 125,
The fair values of Lizzy and Lizette assets on January 1m 2017 are presented below. Liabilities
of both companies are properly valued at their respective book value:
Lizzy Lizette
Cash 50,000 10,
Temporary investment 100,000 50,
Receivables (net) 95,000 8,
Investment in Corporation Lizette 100,000
Machinery 110,000 40,
Land 100,000 30,
555,000 138,
The total consolidated assets must be
613,000 522,600 518,600 520,000

Question #50
Which of the following statements concerning the different types of hedging transactions is
incorrect?
In hedging transaction which is undesignated, unrealized holding gain or loss on hedging
instrument will be recognized in profit or loss. In hedging transaction designated as hedge of
net investment in foreign operation, unrealized holding gain or loss on hedging instrument which
is considered effective portion will be recognized in other comprehensive income with
reclassification adjustment to profit or loss if realized. In hedging transaction designated as
fair value hedge, unrealized holding gain or loss on hedged item will be recognized in profit or
loss. In hedging transaction designated as cash flow hedge, unrealized holding gain or loss
on hedged item will be recognized in other comprehensive income with reclassification
adjustment to profit or loss if realized.
Question #51
The recognition of unrealized gain or loss on the measurement of the financial assets and
insurance liabilities as a component of other comprehensive income is described in insurance
parlance as
hedge accounting shadow accounting fair value accounting current value
accounting

Question #52
Which of the following transactions will increase the normal balance of home office account in
the separate statement of financial position of the branch?
Payment by the branch of home offices loans payable Credit memo issued by the home
office Debit memo received from the home office Collection by the home office of
branchs receivable

Question #53
Which of the following events will not necessarily be a consequence of PFRS 9?
More assets will be tested for impairment and the loss will be in excess of the expected
credit loss. Some financial assets that are currently disaggregated into host financial assets
that are not at FVTPL will instead be measured at FVTPL in their entirety. Some
instruments that may under IAS 39 have been measured entirely at amortized cost or as available
for sale, will more likely be measured at FVTPL. Assets that are currently classified as held
to maturity are likely to continue to be measured at amortized cost, as they are held to collect the
contractual cash flows and often give rise to only payments of principal and interest.

Question #54
Joel and Jonats formed a joint venture on January 1, 2013 to operate two stores to be managed by
each venturers/participants. They agreed to contribute cash as follows:
Joel
Jonats
Profits and losses are to be divided in the capital ratio. All venture transactions are for cash. Cash
receipt and disbursements of the business during the 4-month period handled through the
participants venturers bank accounts are as follows:
Joel Jonats
Receipts 78,920 65,
Disbursements 62,275 70,
On April 30, the remaining non-cash venture assets in the hands of the participants/venturers
were sold for P60,000. The venture is terminated and settled is made between Joel and Jonats.
The P60,000 is divided between the participants/venturers as follows:
 Joel (16,180); Jonats (43,820) Joel (48,095); Jonats (11,905) Joel (21,905); Jonats
(38,095) Joel (26,180); Jonats (33,820)

Question #55
Par Company owns 60% of Sub Corps outstanding capital stock. On May 1, 2008, Par advanced
Sub P70,000 in cash, which was still outstanding at December 31, 2008. What portion of this
advance should be eliminated in the preparation of the December 31, 2008 consolidated balance
sheet?
0 42,000 70,000 28,000

Question #56
An entity has the following four financial instruments and wishes to know whether they will be
valued at fair value or valued at amortized cost.
1 Bond with stated maturity and payments of principal and interest linked to unleveraged inflation index
the currency in which the instrument is issued.
2 Bond convertible into equity of the issuer.
3 An inverse floating interest rate loan.
4 Bond with a variable interest rate and an interest cap.
1 and 2 at amortized cost, 3 and 4 at fair value. 3 and 4 at amortized cost, 1 and 2 at fair
value. 1 and 4 at amortized cost, 2 and 3 at fair value. 2 and 3 at amortized cost, 1 and 4
at fair value.

Question #57
Below is the unadjusted trial balance of Elmer Corporation at December 31, 2015
Debit C
Cash 2,500
Installment accounts receivable, 2014 20,000
Installment accounts receivable, 2015 70,000
Inventory, December 31, 2015 100,000
Other assets 248,500
Accounts payable - trade
Unrealized gross profit, 2013
Unrealized gross profit, 2014
Unrealized gross profit, 2015
Capital stock
Retained earnings
Gain on repossession
Operating expenses 25,000
Total 466,000
Cost of goods sold had been uniform over the years at 60% of sales.
Elmer Corporation adopts perpetual inventory procedures. On installment sales, the corporation
charges installment accounts receivable and credits inventory gross profit accounts.
Repossessions of merchandise have been made during the 2015 due to some customers failure to
pay maturing installments. Analysis of these transactions were summarized as follows:
Inventory 3,750
Unrealized gross profit, 2013 400
Unrealized gross profit, 2014 1,200
Installment accounts receivable, 2013 1,
Installment accounts receivable, 2014 3,
Gain on repossession 1,
The repossessed merchandise was unsold at December 31, 2015. It was ascertained that they
were booked upon repossession at original costs. A fair valuation of these items would be a sale
price of the repossessed merchandise at P5,000 after incurring costs of reconditioning of P2,500
and cost to dispose them in the market at P250.
The realized gross profit on 2015 sales was:
68,000 62,000 22,000 28,000

Question #58
On January 2, 2017, Diversified Enterprises signed a franchise agreement with DTSI Company
for an initial franchise fee of P92,500. Of this amount DTSI paid P17,500 upon the signing of the
franchise contract and the balance is payable in four annual payments of P18,750 starting
December 31, 2017. DTSI issued 12% interest-bearing notes for the balance. Collection of the
notes are not reasonably assured.
The down-payment is not refundable; it represents the actual cost of initial services provided by
Diversified before formal signing. However, additional substantial services have yet to be
performed by Diversified. During 2017 additional direct franchise cost of P45,750 and indirect
cost of P15,000 were incurred by Diversified.
It is also agreed that DTSI will pay continuing franchise fee at 3% of its gross sales revenue. The
franchise outlet commenced business operations on October 1, 2017 and its gross sales totaled
P600,000 by year-end.
The net income recognized by Diversified from the DTSI franchise in 2017 is
37,150 19,312.50 36,812.50 16,590

Question #59
Electricity companies A and B (involved in electricity sales but not distribution) jointly establish
a power generation entity (Company C) to build and operate a power plant. Companies A and B
each have a 50% ownership interest in Company C, which is structured as a corporation. The
incorporation enables the separation of Company C from Companies A and B and, as a
consequence, the assets and liabilities held in Company C are the assets and liabilities of
Company C. The contractual arrangement between the parties does not specify that the parties
have rights to the assets or obligations for the liabilities of Company C.
However, the parties also enter into an off-take agreement requiring the following:
1. Companies A and B agree to purchase all the power generated by Company C in a ratio of
50:50. Company C cannot sell any of the output to third parties, unless this is approved by
companies A and B. Because the purpose of the arrangement is to provide companies A and B
with power they require, such sales to third parties are expected to be uncommon and not
material.
2. The price of the power sold to companies A and B is set forth in the off-take agreement at a
level that is designed to cover the costs of production and administrative expenses incurred by
company . The arrangement is intended to operate at a break-even level.
What is the proper classification of this joint arrangement?
It is classified as joint operation because the off-take agreement reflects the exclusive
dependence of Company C upon Companies A and B for the generation of cash flows and the
rights of Company A and B to all of the economic benefits of the assets of Company C. It is
classified as joint operation because PFRS 11 provides that in case of doubt, a joint arrangement
shall be classified as joint operation instead f joint venture. It is classified as joint venture
because the incorporation enables the separation of Company C from Companies A and B and,
as a consequence, the assets and liabilities held in Company C on the assets and liabilities of
Company C. It is classified as joint venture because the arrangement is established through a
separate vehicle, an incorporated entity Company C.

Question #60
An operator build a road at a cost of P100 million that fair value her of construction services is
P110 million, the total operating costs of the road are P70 million and total cash inflows over the
life of the concession are P200 million.
Applying IFRIC 12, Service Concession Agreement, by how much is total revenue under the
intangible asset model higher or lower than the total revenue under the financial asset model over
the life of the concession.
no difference P110 million (P110 million) P10 million

Question #61
The Rommel Company was organized in 2015. Shortly after opening its doors to the public at
the main store, Rommel Company established a branch in another city. At the end of the second
year of operations, the home office received the following condensed income statement from the
branch:
Revenues
Cost of goods sold
Gross margin
Selling and administrative expenses
Net income
The management at the home office questioned the accuracy of these figures and assigned you
the task of verifying the branch data. Your review of the records uncovered the following facts:
1. The beginning of year balance in unrealized profit to branch was P12,000.
2. During the period, the home office shipped goods to the branch that had cost the main store
P150,000. However, your review of the branch receiving reports revealed that a number of
shipments from the home office had been recorded twice by the branch accountant.
3. The branch is billed a uniform 25% above cost and receives inventory only from the home
office.
4. The branch ending inventory was correctly reported at a billed price of P43,500.
5. When reconciling reciprocal accounts, you found that the branch had not recorded P4,000 of
services performed by the Home Office and billed to the branch. All other selling and
administrative expenses were correctly reported by the branch.
Compute the correct net income of the branch.
50,800 22,000 66,800 62,800

Question #62
On July 1, the Joshua Company, organized a sales outlet in Cebu City. Following are the home
office-branch transactions for the month of July:
July 1 The home office transferred P250,000 to its Cebu branch.
2 Merchandise costing the home P30 per unit was shipped to the branch at an invoice price of
unit. Ten thousand units were shipped on July 2; a second order was to be filled by local sup
2 Shipping costs on the above were paid as follows:
By the office: P15,000
By the branch: P5,000
5 Additional merchandise was acquired by the branch from regional distributors, 5,000 units a
6 Display equipment was purchased by the home office, cost P360,000, and was delivered to t
Plant assets accounts were kept by the home office.
10 Branch sales for the period July 3-10; on account, 8,000 units at P50.
18 Branch collections on account, P320,000
25 Branch sales for the period July 11-24; on account, 5,000 units at P50
29 Cash remittance by branch to home office, P100,000
30 Monthly summary of branch cash expenses: Advertising (P4,000); Sales commission (65,00
Miscellaneous (P1,000)
31 Depreciation recorded by the home office for July included P15,000 that related to the displa
equipment used by the branch. Insurance on this equipment was amortized by the home offi
amount of P2,500.
31 Inventories of merchandise at the branch on July 31 included the following:
From the home office (1,500 units x P40)
From local suppliers (500 units x P31)
Determine the correct balance of reciprocal account after recording branch net income or loss.
582,500 599,500 648,500 665,500

Question #63
Which of the following types of information does PFRS 7 not require to be disclosed about
exposure to risks arising from financial instruments?
 Qualitative and quantitative information about operational risk. Qualitative and
quantitative information about liquidity risk. Qualitative and quantitative information about
credit risk. Qualitative and quantitative information about market risk.

Question #64
Certain balance sheet accounts of a foreign subsidiary of Rose Company have been stated in
Philippine peso as follows:
Stated
Current rates Historical rates
Accounts receivable, current 200,000 220,
Accounts receivable, long-term 100,000 110,
Prepaid insurance 50,000 55,
Goodwill 80,000 85,
430,000 470,
The subsidiarys functional currency is peso. What amount should Roses balance sheet include
for the preceding items?
440,000 435,000 450,000 430,000

Question #65
Baste Company owns an 80% controlling interest in the Bastion Company. Bastion regularly
sells merchandise to Baste, which then sold to outside parties. The gross profit on all such sales
is 40%. On January 1, 2016, Baste sold land and a building to Bastion. The value of the parcel is
20% to land and 80% to structures. The data are the following:
Baste Bastion
Internally generated net income, 2016 1,560,000 750,
Internally generated net income, 2017 10,320,000 705,
Intercompany merchandise sales, 2016 300,
Intercompany merchandise sales, 2017 360,
Intercompany inventory, December 31, 2016 45,
Intercompany inventory, December 31, 2017 60,
Cost of real estate sold on January 1, 2016 1,800,000
Sales price of real estate on January 1, 2016 2,400,000
Depreciable life of building 20 y
For 2016, what is the consolidated comprehensive income attributable to controlling interest?
1,597,500 1,875,000 1,569,600 1,575,000

Question #66
Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve
Company on January 2, 2014 and Steve Company is dissolved. As compensation, Patrick
Company gave 24,000 shares of its common stock, 12,000 shares of its 8% preferred stock , and
cash of P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick
Company had the following characteristics:
Common, par value P5; fair value, P20
Preferred, par value P100; fair value, P100
Immediately prior to acquisition, Steve Companys balance sheet was as follows:
Cash 132,000
Accounts receivable (net of P4,000 allowance) 170,000
Inventory 200,000
Land 384,000
Building and equipment, net 1,032,000
Total 1,918,000

Current liabilities 228,000

Bonds payable, 10% 400,000
Common stock, P5 par value 600,000
Additional paid in capital 380,000
Retained earnings 310,000
Total 1,918,000
An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal
to their book values except for the following, which had fair values as indicated:
Accounts receivable
Inventory
Land
Bonds payable
How much must be the goodwill recognized as a result of this business combination?
94,000 0 322,000 454,000

Question #67
Journals and ledgers are the book of accounts of the national government agencies. Which of the
following journals should be used under NGAs
General journal Journal and analysis of obligations Journal of bills rendered
Journal of checks issued

Question #68
When translating foreign currency denominated financial statements into the functional currency,
the exchange differences are recognized:
directly in the retained earnings account as a deferred asset or liability as an item of
gain or loss in the statement of profit or loss and other comprehensive income as a separate
component of equity
Question #69
Occasionally a franchise agreement grants the franchise the right to make future bargain
purchases of equipment of supplies. When recording the initial franchise fee, the franchisor
should
record a portion of the initial franchise fee as unearned revenue which will increase the
selling price when the franchisee subsequently makes the bargain purchases. defer
recognition of any revenue from the initial franchise fee until the bargain purchases are made
increase revenue recognized from the initial franchise fee by the amount of the expected
future purchases none of answers are correct

Question #70
Magic granted a franchise to Major for the Makati area. The franchisee was to pay a franchisee
of P250,000, payable in five equal annual installments starting with the payment upon signing of
the agreement. The franchise was to pay monthly 3% of gross sales of the preceding month.
Should the operations of the outlet prove to be unprofitable, the franchise may be canceled with
whatever obligations owing Magic in connection with the P250,000 franchise fee waived. The
prevailing interest rate is 14%. The first year generated a gross sales of P1,250,000.
What is the amount of unearned franchise fee after the first year of operations?
250,000 287,500 195,700 145,700