xy FINANCIAL AC CPA REVIEW SCHOOL OF THE PHILIPPINES. Manila ‘COUNTING AND REPORTING THEORY February 12, 2017 First Preboard Examination 8:00 a.m. to 9:00 a.m. MULTIPLE CHOICE: MARK FULLY with PENCIL No, 2 the letter of your choice on the answer sheet provided. Make the mark DARK but do not use too much pressure, ERASURES ARE STRICTLY NOT ALLOWED. An asset shall be classified as current when if satisfies any of the following eritetia, except 4. It is expected to be realized or is intended for sale or consumption within the entity's normal operating cycle, - b. Its held primarily for the purpose of being traded, c. It is expected to be realized beyond twelve months after the end of the reporting period I is cash or cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period. Which statement i$ incorrect concerning the presentation of the income statement? 8. The nature of expense method means that expenses are aggregated according to their mature. for example, depreciation, employee benefits and amortization expense. b. The function of expense method classifies expenses according to their function as part of cost of goods sold, cost of distribution and cost of administrative activities. Because the nature of expense method or the function of expense method has merit for the different types of entities, the standard requires management to select the more relevant and reliable presentation. d. IFRS requires the use of the cost of goods sold method because this presentation often provides more relevant information than the nature of expense method. Which one of the following enhances the usefulness of accounting information? a. Monetary unit b. Understandability c. Neutrality d:-Predictive All of following transactions require disclosure in, the financial statements of an cule, cio 8. Sold goods ro another entity owned by the son of theentity’s chief director ent b. Sold goods to the aunt of the entity's chief director e& c. Sold goods to a shareholder of the entity who owns 10% of the ordinary shares but is a member of the bourd of directors. d. Sold a fully depreciated car to an associate ; ; 1 ES the date of the financial statements and the date these statements were authorized for ‘sug, he-foHowing events took place. All are considered nonadjusting events, except 8. Major ordinary share wansuctions b, Issuing guarantes ¢. Significant decline in the market value of equity in investments at FVOCI 4, Determination of bonus payment since entity has already the present obligation at the reporting date Results of discontinued operation shalt include all of the following, extept a Revenues and expenses from discontinued operations, b. Any impairment loss ©. Expected gain Loss from disposal of discontinued operation assetsPage 2 7 Amentity that changed an accounting policy voluntarily should y_ 2 torr shareholders prior to taking the decision bb Account for it retrospectively i Py = © Mreatthe tect or the change asa component of comprehensive income Treat it prospectively and adjust the effect of the change in the cutrent period and future periods 8. (A noneurent asset or disposal group is classified as “held for sale” when the asset is available X immediate sale an he sale is highly probable-For the sale to be highly probable. the aale shoul! quality for recognition asm completed sale within ‘Six months from the statement of financial position date. Six months from the date of classification as held for sale. . One year from the statement of financial position date. ‘One year from the date of classification as held for sale. ee % All of following are classified as biological assets, éxcept 8 Bearer plants b animals Dual use plants 4. Agricultural produce growing on the bearer plant 'O\Where there is a production tycle of more than one year for a biological asset, the Standard encourages separate disclosure ofthe a. Physical change only. b. Price change only © Total change in value 4. Physical change and price chang; 11. Which is a financial liability? Provision \ b. Deferred tax liabitity ¢. Income tax liability / 4. Bond payable 12. Which statement best describes the principle for classifying an issued financial instrument as either financial liability or equity? a. Issued instruments are classified as liabilities or equity in accordance with the substance of the. contractual arrangement and the definitions of a financial liability, financial asset, and an equity instrument. b. Issued instruments are classified as liabilities or equity in accordance with ‘the legal form of the contractual arrangement and the definitions ofa financial liability, financial seset ond ox equity instrument. 6. Issued instruments are classified as libiltes or equity in accordance with management designation of the contractual arrangement. 4. Issued instruments are classified as liabilities or equity in accordance with the risk and rewards of the contractual arrangement, | Had 13. In the case of grant related to an asset, which is the accounting t tment? 4, Record the Brant at a nominal value in the first year and write it off in the subsequent year. '. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the asset © Record the grant at fir value in the first year and take it to income in the subsequent year 4. Take it to the income statement and disclose it as an extraordinary gain.¢ Page 3 14. Which of the following items should be included in an extity's inventory? & Goods in transit which were sold FOB destination. ~~ b. Goods received from another *F entity for sale on consignment. h © Goods sold to a sustomer which is being held forthe uatafer to call for at te customer's convenience. 4. Goods in transit which were sold FOB shipping point, / 1S. Amy writedown of inventory to net realizable value and all losses of inventory shall be ‘a Recognized as operating expense-in the period the writedown or loss occurs. 'b. Recognized as other expense in the period the writedown or loss occurs. ¢. Recognized as component of cost of goods sold in the period the writedown or loss occurs. 4. Deferred until the related inventory is sold. 16. IAS 36 on “impairment of assets” applies to which of the following? Inventories Financial assets Assets held for sale Property, plant, and equipment Beer 17. Value-in-use is . e & The undiscounted present value of future cash flows arising from the continuing use of the asset and from its disposal. t b. The discounted present value of future cash flows arising from continuing use of the asset and from its disposal. > / © The higher of an asset's fair value less cost to sell and its market value. “ ——d. The amount at which the asset is recognized in the statement of financial position. 18.\Depending’en the business model and cash flow test, debt investments are measured at jl a. Amortized cost a ae b. Fair value through profit or loss dD \ c. Fair value through other comprehensive income ~\\ @. Amortized cost, fair value through profit or loss, fair value through other comprehensive cae . 19. All of the following financial assets may be.reclassified into another category, except “a. Debt investments at amortized cost - b. Debt investments at fair value through OCI ¢. Held for trading debt investments DV d. Debt investments at fair value through profit or loss under the fair value option <7 20, Whichtatemen is incorrect éonceming the equity method? a~The investment in associate is initially recorded at cost. - . The investment in associate is increased or decreased by the investor's share of the profit or Joss of the investee after the date of acquisition, ‘ c. The investor's share of the profit or loss of the investee is recognized in the investor's profit 7 or loss. e d. Distributions received from the investee are recognized in the investor's profit or loss. 21, [fan associate hes outstanding noncumulative preference shares. the investor gomputes its share of the profit or loss of the associate @. Without regard to the preference dividends b. Afier deducting the preference dividends only when declared, 1. WO © After deducting the preference dividends whether declared or not. 6 4d. After adding the preference dividends whether declared or not.Paye 4 22. Investinent property includes all of the following, except 4. Land held for long-term capital appreciation ’. Land for a currently undetermined use. = Py & Balding owned by te entiy or held under inno ease and eased out under oe or mae ‘operating leases 4, Property held for future use as owner-occupied 23. Which statement is true ittyelation to cash? The term “eash equivalent” refers to demand credit instruments such as money order and | bank drafts. ~ . The-purpose of establishing a petty cash fund is Jp keep enough cash on hand to cover al (ormal operating expenses fr a-period OF fime. A p c. Classification of a restricted cash balance as current or noncurrent should parallel the G classification ofthe related obligation for which the cash was restricted = d. Compensating balances required by a bank should always be excluded from “cash and cash equivalents”. y~ 24, Trade receivables are classified as current assets when reasonably expected to be collected ‘E> Within one year Db D b. Within the normal operating cycle - -/ © Within one year or within the normal operating cycle, whichever is shorter 4. Within one year or within the normal operating cycle, whichever y 25. Which of the following statements js meorrect in relation to ceivable? a. Ifthe estimate of doubtful accounts expense is made on the basis of net credit sales, an entry is made each period to the account, “allowance for doubtful accounts,” without regard to the prior balance in that account. +p, b. Assignment of accounts receivable qualifies as derecognition of asset and a gain or loss on the transfer should be recognized. ©. If credit terms to customers were 2/10, 9/30, a two percent discount will be granted if payment is made within 10 days from the invoice date. 4. If the estimate of doubtful accounts expense is made on the basis of accounts receivable, the balance of the account, “allowance for doubtful accounts,” is adjusted so that the adjusted balance reflects the computed amount needed to properly value the accounts receivable. 26, Which of the following types of accounts measure economic flows ove period of time? a. Real accounts b. Nominal accounts _ c. Mixed accounts 4. Contra accounts 27. The purpose of adjusting entries is to \ a. Prepare revenue and expense accounts for recording the transactions of the next period. —~ Apply the realization principle and the matching principle to transactions affecting two or t more accounting periods. ) c. Adjust daily the balances in asset, liability, revenue and expense accounts for the effects of business transactions, 4. Adjust the capital account for the revenue, expense and withdrawal transactions. which occurred during the year. 28. Reversing entries should not/bg made for_ “Dp Adjusting entry for depreciation ‘Adjusting entry for receipts in advance initially recorded as liability ‘Adjusting entry for prepayment of costs initially recorded as asset ‘All of these adjusting entries do not require reversing entry aece29. Conceptually, interim financial statements can be described as emphasizing See Timelidess over faithful representation. '. Faithful representation over relevance €. Relevance over comparability 4. Comparability over neutrality 30, Which of the following OCI may be regycled to profit or loss? ‘4. Changes in revaluation surplus ‘ , Remeasurement gains and losses on defined benefit plans . Gains and losses on remeasuring e4uity investments at FVOCL , D 4d. Effective portion of gains and losses on derivatives in a cash flow hedge ~” 31. Which of the following statements concerning patents is correct? Legal costs incurred to successfully defend an internally developed patent should be ‘expensed as incurred, i b. Legal fees and other direet costs incurred in registering ¢,patent should be capitalized and amortized on a straight-line basis over a five-year period. ¢. Research and development contract services purchased from others and used to develop patented manufacturing process should be capitalized and amortized over the patent's ‘economic life. a dd. Research and development costs incurred to develop a patented item should be capitalized and amortized on a straight-line basis over 20 years | 3, whic smementis incorrect congemning li ilties and provisions? ) A provision should be recognized for costs that need to be incurred to operate in the future: . Itis not necessary to know the identity of the party to whom the obligation is owed for the recognition of a liability. ©. A provision is @ liability of uncertain amount or timing. d. When an entity accepts responsibility for unlawful environmental damage. a provision must be recognized. 33 An entity issued $00, 10% bonds, each bond having «RI,000 face value et:98. Bond issuance. ‘costs amounted P10,000.. How should the entity calculate the net proceeds to be received from the issuance? ~ : a. Discount the bonds at the stated rate of interest. b. Discount the bonds at 98. Dd ‘c. Discount the bonds at the stated rate of interest and deduct bond issuance costs. ~ d. Discount the bonds at 98 and deduct bond issuance costs. 34, Accrued liability for interest payments is based on the ‘a Market interest rate 7 i } b. Stated interest rate c. Cost of capital Dy d. Internal rate of return ‘ Le IS 35. The questions of what assets does the entity own, what does it owe and what are the residual ‘equity interests inthe entity’s net assets reflect the entity's > Financial position y Financial performance Changes in financial position Financial position and financial performance > 36. Which statement ig incorrect regarding the characteristics of(q derivative? ‘& “The value of the derivative must change in response to a change inraih underlying variable >. The derivative has no notional amount . The derivative must require no initial net investment or an initial small investment 4. The derivative is settled of future date.Page 6 37. A long-term debi that is due to be settled within twelve months after the end of the reporting period is classified as eurren{ whem An agreement to refinange on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issue. b. The entity has the discretion to refinance or roll over the obligation for at least twelve months after the end of the reporting period under an existing loan facility © An agreement to refinance on a long-term basis is completed at end of reporting period and h before the issuance of the financial staternents 4. Under all of these circumstances CG + 38. Which statement if incorrect }voncerning 4 change in aecounting estimate? a. The use of a feasonabfe estimate is an essential part of the preparation of the financial statements and does not undermine their reliability 'b. An estimate may have to be revised if changes occur reyarding the circumstances on which the estimate was based or as a result of new information, more experience or subsequent development. & C By its nature, the revision of an estimate does not relate to prior periods but may be E accounted for as a correction ofan error. ¥ As a result of the uncertainties in business activities. many items in financial statements cannot be measured with precision but can only be estimated 39, The petty cash fund account under the i a. Only when the fund is created. an t b. When the fund is created and everytime it is replenished. ~ When the fund is ereated and when the size of the fund is inereased. 4. When the fund is created and when the fund is decreased fund system is debited 40, Freight prepaid seats ‘The freight charge is paid by the seller The freight charge is paid by the buyer { The ownership of the goods is transferved upon receipt of the goods by the buyer at the point, is ( of the destination and the seller is the owner of the goods in transit XS 4 ‘The ownership of the goods is transferred upon shipment of the gdods and the buye owner of the goods in transit ese the 41. What is the treatment of premiuin or discount on trading bond investment? a. As part of the cost ofthe bone! investment until the investment is sold AD & Astancrte costorthe hon mvecnen and amore ve yeu c. As expense or revenue in the period the bond is purchased. 4. As part of cost of the bond investment and amortized over the remaining life of the bond. 42. If the qualifying asset is financed by general borrowings, the capitalizable borrowing cost is equal to vY ~~ x Actual borrowing cost incurred \ b. Total expenditures on the asset multiplied by a capitalization rate 2 Average expenditures on the asset rpultiplied by « eapitalization rate or actual borrowing c ‘cost incurred, whichever is lower \ 4. Average expenditures on the asset multiplied by a capitalization rate of actual borrowing, cost incurred, whichever is higher 43, Which statement is incorrect concerning the depreciation methods? 4. Under the output method, the cost per anit of production is constantye 1) A, 0. the straigtt tne method's particularly appropriate where the asset is expected to decline in Wks usefulness as a function of time and the expected use pattem of the asset is fairly constant over time, ; c. The sum of years” digits method provides for u decreasing depreciation charge @. Fiscyeur depreciation usder the double declining balance method is computed as the " Gepreciable amount multilied by double te stright line ratePage 7 44, Estimated liabilities are disclosed in financial statements by @ A footnote to the statements x 'b. Showing the amount among the liabilities but not extending it tothe liability total * > t An appropriation of retained earings a Appropriately classifying them as regular liabilities in the statement of financial position. 45. Which statement fs true when a retail store received cash and issued a gift certificate that is tedeemable in merchandise’? C & Deferred revenue account should be decreased b. Deferred revenue account should be increased ~ ¢. Revenue account should be decreased d. Revenue account should be increased 46. The retail inventory-method would include which of the following in the calculation of the ‘goods available for sale at both cost and retail?” a, Freight in © \ b. Purchase returns ©. Markups ' 4. Markdowns 47, Depreciated replacement cost is equal to the ‘& Depreciable amount f b. Carrying amount eb isos : 4. Appreciation 48. Which statement is incorrect concerning goodwill? ‘2. Goodwill shall not be amortized because the useful life is indefinite b. Goodwill shall be tested for impairment at least annually or more frequently if events or ‘changes in circumstances indicate a possible impairment. J, cI there is an indication that goodwall may be impaired. the recoverable amount of the cash ie q) ‘generating unit to which the goodwill belongs shall be determined. 4. Ifthe recoverable amount of the eash generating unit to which the goodwill belongs exceeds the carrying amount ofthe unit, the entity must recognize an impairment loss. 49. If the investor ceases to have significant influence over an associate. how should the ‘investment be'treated?~ ‘a. It should still be treated using equity accounting It should be treated in accordance with IFRS 9. )\,&. The investment should be frozen atthe date at which the investor ceases to have significant eh -a= 4. The investment should be treuted at cos. 50. WhichJof the following We dealt with by {AS 4Don agriculture? cei ee \ B-Kecounting for biologie asses, [Sb tnitia! measurement of ogricultural produce harvested from the entity's biological assets €. Processing of agriculteral produce after harvesting. 4. Accounting treatment of government grants received in respect of biological assets. 51. The objectives of financial reporting aré based on. a The néeds of the users of the information 1) & Tab for consort Wa Reporting on management stewardship 4 |. Generally accepted accounting principlesbv CR of q D Q & y '52. Which of the following is allowable for financial reporting under IFRS’ Completed contract method |b. Extraordinary items © LIFO 4. Lower of cost of net realizable value 53. In genesAl, an entity preparing interim financial statements should Defer recognition of seasonal revenue. 'b. Use the same accounting principles followed in prepariog the latest annual financial statements Allocate reVenue and expenses evenly over the quarters, rezandless of when they actually occurred .) Disregard permanent decreases in the market value of inventory 54. Under IFRS, the approach used in segment reporting is known as, A Segment approach / b. Revenue approach ¢. Management approach 4. Enterprise approach 55. The notes to financial statements should not be used to a. Describe significant accounting policies. b, Describe depreciation methods employed. c. Describe the principles and methods peculiar to the industry.“ 4. Correct an improper presentation in the financial statements ‘56. Under IFRS, a prior period error includes all of the following. except a. Incorrect application of accounting policy b. Measurement mistake ‘ : Changing accounting poicy 4. Disclosure mistake St. Which Of the following attibuies woufd‘novbe used to measure inventor? a. Historical cost = \ . Replacement cost ¢. Net realizable value \ d. Present value of future cash flows > 58. An entity purchased land Tor future use and appropriately classifies the land as investment property. What valuation model may be used to report the land? a. Fair value model or revaluation model b. Fair value through profit or loss model ©. Cost model or fair value model 4. Cost model or revaluation model 0 59 The ipsirmedt rules for long-lived assets apply to all ofthe fallowing. except ‘GE Buttding cureeitly used in the business ~~ b, Financial instruments c. Land 4. Minicomputers used to run a production process fe pboninceny is‘described oy a Arresttmated Viability ~ _ b. Anevent which is not recognized because it is not probable that an outflow will be required | __ or the amount cannot be reasonably estimated cA potentially small liability \ 4. A potentially large liability END Fate