ADVANCED FINANCIAL ACCOUNTING AND REPORTING

1. On January 1, 2021, Browns Co. entered into a franchise agreement with a company to do
business under Browns’ name. Browns had performed substantially all required services by
January 1, 2021, and the franchisee paid the initial franchise fee of P70,000 in full on that date.
The franchise agreement specifies that the franchisee must pay a continuing franchise fee of
P60,000 annually, of which 20% must be spent on advertising by Browns.

What journal entry should Browns make on January 1, 2021 to record receipt of the initial franchise fee
and the continuing franchise fee for 2021?
a. Cash 76,000
Franchise fee revenue 70,000
Revenue from continuing franchise fee 6,000
b. Cash 76,000
Unearned franchise fee 76,000
c. Cash 76,000
Franchise fee revenue 70,000
Revenue from continuing franchise fee 4,800
Unearned franchise fee 1,200
d. Cash 76,000
Prepaid advertising 1,200
Franchise fee revenue 70,000
Revenue from continuing franchise fee 6,000
Unearned franchise fee 1,200

Suggested answer (c)

The initial franchise fee in the amount of P70,000 is earned because the requirements has been
substantially performed by the franchisor; however, 20% of the continuing franchise fee (20% x 6,000 =
1,200) should be classified as unearned because this amount shall be spent on advertising. Therefore,
only 60% of the continuing franchise fee is earned as franchise fee.

2. On November 1, 2020, a franchisee bought a franchise from Max Turkey for a sales price of
P5,000,000 to sell Max Turkey’s products for a period of 20 years. Their agreement provides that
P500,000 will be paid in advance and the balance in 5 equal annual installments, evidenced by a
9% promissory note; and Max Turkey will be responsible in making the feasibility study of the
project and six months training of the franchisee’s staff and employees. The present value
factors for the 9% rate follow:

Present value of P1 for 5 periods 0.650

Present value of an annuity of P1 for 5 periods 3.890
Present value of an annuity of P1 for 5 periods (in advance) 4.240

Assuming collection of the note is reasonably assured, what is the amount of franchise revenue should
Max Turkey recognize for the year ended December 31, 2020?
a. 0
b. 1,085,000
c. 4,001,000
 d. 4,316,000

Suggested answer (a) 0

Again, FASB Statement No. 45 specifies that no revenue is to be recognized prior to substantial
performance of the services covered by the initial fee. Given that Max Turkey will provide six months
training of the franchisee’s staff and employees, which will not be substantially performed before May 1,
2021, thus, as of December 31, 2020, no amount of these payments will be recognized as franchise
revenue.

3. The basic purpose of derivative financial instruments is to manage some kind of risk such as all
of the following EXCPET
a. Stock price movements
b. Interest rate variations
c. Currency fluctuations
d. Uncollectibility of accounts receivable

Suggested answer (d) Uncollectibility of accounts receivable

Derivative financial instruments are contracts that are supposed to protect or hedge one or more of the
parties from adverse movement in the underlying base. The risk of uncollectibility of accounts receivable
can be managed by effective credit policies, and therefore, does not meet the definition of a financial
instrument.

4. In accordance with IFRS 7 Financial instrument: Disclosure, which of the following best describes
credit risk?
a. The risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation.
b. The risk of an entity will encounter difficulty in meeting obligations associated with financial
liabilities.
c. The risk that the fair value associated with an instrument will vary due to changes in the
counterparty’s credit rating.
d. The risk that an entity’s credit facilities will be withdrawn due to cash flow sensitivities.

PROB. 10 Suggested answer (a) The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation.

In other words, credit risk is the uncertainty over whether a counterparty or the party on the other side
of the contract will honor the terms of the contract.

On June 1, 2020, Benguet Manufacturing Corp. received raw materials from a foreign vendor when the
spot rate is P40.00. Payment of 100,000 foreign currency is due in 90 days. On the same date, the
company acquired a forward contract to buy 120,00 foreign currency in 90 days. The following forward
rates per foreign currency were available:
 June 1, 90-day rate P40.30
June 30, 60-day rate 40.40
July 31, 30-day rate 40.10

5. What is the contract gain (loss) on hedge on an exposed position?

a. (40,000)
b. (30,000)
c. (20,000)
d. (10,000)

6. What is the exchange gain (loss) on a speculative contract in June 2020?

a. 0
b. 2,000
c. 10,000
d. 12,000

a. Suggested answer (b) P(30,000)

Contract gain (loss)

(40.00 – 40.30) x 100,000 P(30,000)

The gain or loss on forward contract on a hedge on an exposed position is the difference between the
spot rates over the life of the contract; that is, in this case, the spot rates at the inception date and the
forward rate.

b. Suggested answer (b) P2,000

Gain (loss) on speculative contract

(40.40 – 40.30) x (120,000 – 100,000) P2,000

A gain or loss on speculative contract should be determined by multiplying the foreign currency amount
of the contract by the difference between the forward rate available for the remaining maturity of the
contract and the contracted forward rate. And in some instances, the forward rate last used to measure
a gain or loss on that contract for an earlier period. In this case, the amount of forward contract as
means of speculation is the excess of the total foreign currency acquired in a forward contract over the
foreign currency used to hedge an exposed position, that is, 20,000 (120,000 – 100,000).

7. On January 2, 2020, Souvenir Co. a manufacturing company in Manila, sold goods to an

American company in California. USA for $10,000 when the foreign currency exchange rate is
P50.00 for a dollar. The goods are to be paid on March 31, 2020. On January 2, 2020, Souvenir
Co. acquires a three-month put option to sell $10,000. The strike price is P50.00 and the
premium is P5.00. On March 31, 2020, Souvenir receives $10,000 from American company in
settlement of the goods sold, when the foreign exchange rate is P48.00 per US dollar. What is
the amount that Souvenir would report in the statement of comprehensive income as a result of
this transaction?
a. 200,000
b. 450,000
 c. 480,000
d. 500,000

Suggested answer (b) 450,000

Thus, in this case, the amount to be reported in the statement of comprehensive income of the holder is
the difference between the strike price of P500,000 (50 x 10,000) and the premium of P50,000 (5 x
10,000) in the amount of P450,000.

8. The installment method of recognizing profit for accounting purposes is acceptable if

a. Collection in the year of sale do not exceed 30% of the total sales price
b. An unrealized profits account is credited
c. Collection of the sales price is not reasonably assured
d. The method is consistently used for all sales of similar merchandise

Suggested answer (c)

Generally, the profit on sale in the ordinary course of business is considered to be realized at the time of
sale unless it is uncertain whether the sale price will be collected. Thus, if collection of the sales price is
not reasonably assured, the installment method shall be used.

9. Under the cost recovery method of revenue recognition,

a. Income is recognized on a proportionate basis as cash is received on the sale of the product.
b. Income is recognized when the cash received from the sale of the product is greater than the
cost of the product.
c. Income is recognized immediately.
d. None of these.

Suggested answer (b)

Under the cost recovery method, gross profit is deferred and recognized only when the cumulative
receipts exceed the cost of the asset sold/

10. On January 2, 2020, Blake Co. sold a used machine to Cooper Inc. for P900,000 resulting to a
gain of P270,000. On that date, Cooper paid P150,000 cash and signed a P750,000 note bearing
interest at 10%. The note was payable in three annual installment of P250,000 beginning
January 2, 2021. Blake appropriately accounted for the sale under the installment method.
Cooper made a timely payment of the first installment on January 2, 2021, of P325,000, which
included accrued interest of P75,000. What amount of deferred gross profit should Blake report
at December 31, 2021?
a. 150,000
b. 172,500
c. 180,000
d. 225,000
Suggested answer (a) P150,000

Gross profit 270,000

Divide by selling price 900,000
Gross profit rate 30%

Total gross profit 270,000

Less realized gross profit from down payment
(150,000 x 30%) 45,000
Balance 225,000
Less realized gross profit from 1st installment
(250,000 x 30%) 75,000
Deferred gross profit, December 31, 2021 150,000

Again, installment method of accounting is a method of recognizing revenue at the point of collection;
thus, realization of which is based on the amount collected. Accordingly, any amount not yet collected is
the basis in determining the deferred gross profit.

11. On January 2, 2020, Easy Pay Co. sold a plant to Menchie CO. for P1,500,000. On that date, the
plant’s carrying amount was P1,000,000. Menchie gave Easy Pay P300,000 cash and a
P1,200,000 note, payable in four annual installments of P300,000 plus 12% interest. Menchie
made the first principal and interest payment of P444,000 on December 31, 2020. Easy Pay uses
the installment method of revenue recognition. In its 2020 income statement, what amount of
realized gross profit should Easy Pay report?
a. 344,000
b. 200,000
c. 148,000
d. 100,000

Suggested answer (b) 200,000

Gross profit (1,500,000 – 1,000,000) 500,000

Divide by selling price 1,500,000
Gross profit rate 33 1/3%

Amount paid at the date of sale 300,000

Add amount applying to principal at Dec. 31, 2020 300,000
Total collections applying to principal 600,000
Multiply by gross profit rate 33 1/3%
Realized gross profit 200,000

The installment method recognizes income on sales as the related receivable is collected. In case,
collections include interest, it is the amount applying to principal which is the basis in determining the
realized profit.

12. Which of the following statements is correct with respect to a limited partnership?
a. A limited partner may be an unsecured creditor of the limited partnership.
b. A general partner may not also be limited partner at the same time.
 c. A general partner may be a secured creditor of the limited partnership.
d. A limited partnership can be formed with limited liability for all partners.

Suggested answer (c) A general partner may be secured creditor of the limited partnership.

A general partner has a voice in management and has unlimited personal liability. Anyone, including a
secured creditor of the limited partnership, may be a general partner if he/she takes on these
responsibilities.

13. Partnership capital and drawings accounts are similar to the corporate
a. Paid in capital, retained earnings, and dividends accounts.
b. Retained earnings account.
c. Paid in capital and retained earnings accounts.
d. Preferred and common stock accounts.

Suggested answer (a)

Partnership capital accounts are similar to corporate paid in capital and retained earnings; while
partnership drawing accounts are similar to corporate dividends accounts.

14. If a new partner acquires a partnership interest directly from the partners rather than from the
partnership itself,
a. No entry is required.
b. The partnership assets should be revalued.
c. The existing partners’ capital accounts should be reduced, and the new partner’s account
increased.
d. The partnership has undergone a quasi-reorganization.

Suggested answer (c) The existing partner’s capital should be reduced and the new partner’s account
increased.

When a new partner deals directly with an existing partner or partners rather than with the partnership
entity, the acquisition price is paid to the selling partner/s and not to the partnership itself. The
partnership records the redistribution of capital interests by transferring all or a portion of the seller’s
capital to the new partner’s capital account but does not record the transfer of any asset or
consideration.

As of December 31, the books of AME Partnership showed capital balances of A – P40,000; M – P25,000;
and E – P5,000. The partners’ profit and loss ratio were 3:2:1, respectively. The partners decided to
dissolve and liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all
liabilities amounting to P12,000, they still have P28,000 cash left for distribution.

15. The loss on the realization of the non-cash assets was

a. 40,000
b. 42,000
c. 44,000
 d. 45,000

16. Assuming that any partner’s capital debit balance is uncollectible, the share of A in the P28,000
cash for distribution would be
a. 19,000
b. 18,000
c. 17,800
d. 40,000

a. Suggested answer (b) 42,000

Total capital before liquidation (40,000 + 25,000 + 5,000) 70,000

Less: Cash left for distribution 28,000
Loss on realization of the non-cash assets 42,000

Upon payment to partners in the event of liquidation, the amount of cash available for distribution is
always equal to the total partners’ capital.

b. Suggested answer (c) 17,800

A M E
Capital balances before liquidation 40,000 25,000 5,000
Loss on realization (3:2:1) (42,000) (21,000) (14,000) (7,000)
Balances 19,000 11,000 (2,000)
Absorption of E (3:2) (1,200) (800) 2,000
Cash payment to A and B 17,800 10,200 -

In the event of liquidation, all liquidation expenses and gains or losses from conversion of partnership
assets must be allocated to the partners before assets actually are distributed to the individual partners.
Failure to consider these factors may result in the premature distribution of assets to a partner.
Furthermore, generally accepted accounting principle states that partners should contribute assets to
the partnership to the extent of their debit balances. However, if such contribution is not possible
because of special personal or legal considerations, the debit balances will be viewed as a realization
loss and allocated according to the remaining partners’ profit or loss ratio.

The following condensed balance sheet is presented for the partnership of Alfa and Beda, who share
profits and losses in the ratio of 60:40, respectively:

Cash 45,000
Other assets 625,000
Beda, loan 30,000
700,000

Accounts payable, 120,000

Alfa, capital 348,000
Beda, capital 232,000
700,000
 17. The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit
Capp as a new partner with a 20% interest. No goodwill or bonus is to be recorded. What
amount should Capp contribute in cash or other assets?
a. 110,000
b. 116,000
c. 140,000
d. 145,000

18. Instead of admitting a new partner, Alfa and Beda decide to liquidate the partnership. If the
other assets are sold for P500,000, what amount of the available cash should be distributed to
Alfa?
a. 255,000
b. 273,000
c. 327,000
d. 348,000

a. Suggested answer: (d) 145,000

Total capital [(348,000 + 232,000)/80%] 725,000

Capp’s interest x 20%
Cash or other assets to be contributed by Capp 145,000

It should be pointed out that the problem clearly state that no bonus or goodwill is to be recognized,
thus the total capital of the old partners was used as the basis in computing the total capital of the
partnership.

b. Suggested answer; (b) 273,000

Alfa Beda
Capital balances 348,000 232,000
Beda, loan (30,000)
Total interest 348,000 202,000
Loss on realization (625,000 – 500,000) 6:4 (75,000) (50,000)
Cash to be distributed 273,000 152,000

19. Which cost accumulation procedure is most applicable in continuous mass production
manufacturing environments?
a. Standard
b. Actual
c. Process
d. Job order

Suggested answer (c) Process

Process costing system is a method of accumulating and assigning costs to units of production in
companies producing large quantities of homogeneous products. It accumulates costs by cost
component in each production department and assign costs to units using equivalent units of
production.

20. The product flow format where certain portions of the work are done simultaneously and then
brought together for completion is called
a. Applied
b. Parallel
c. Standard
d. Sequential

Suggested answer (b) Parallel

In parallel product flow, certain portions of the are done simultaneously and then brought together in a
final process or processes for completion and transfer to finished goods.

21. Which of the following characteristics applies to process costing but not to job order costing?
a. Identifiable batches of production
b. Equivalent units of production
c. Averaging process
d. Use of standard costs

suggested answer (b) Equivalent units of production

Equivalent units of production are calculated in a process costing system. It allows work in process to be
stared in terms of completed units, a step not necessary in a job order costing system, which assigns
costs individually to each job. Stating work in process in terms of equivalent units of production permits
calculation of average unit costs for mass produced homogeneous goods.

Store Co. adds materials at the start of production. October information for the company follows:

Beginning work I process (45% complete) 10,000 units

Started this period 120,000 units
Ending work in process (80% complete) 8,200 units
Beginning work in process costs:
Materials P24,500
Conversion 68,905
Current period costs:
Materials 75,600
Conversion 130,053

22. How many units must be accounted for?

a. 128,200
b. 138,200
c. 130,000
d. 118,200
 23. What is the total cost to account for?
a. 205,653
b. 299,058
c. 274,558
d. 93,405

a. Suggested answer (c) 130,000

Work in process, beginning 10,000

Add: started this period 120,000
Total units to be accounted for 130,000

In the absence of lost units, the total units to be accounted for, which is the completed units and work in
process at the end of the period, is the sum of work in process at the beginning of the period and units
started during the period.

b. Suggested answer (b) 299,058

Beginning work in process costs (24,500 + 68,905) 93,405

Add: current period costs (75,600 + 130,053) 205,653
Total costs to be accounted for 299,058

24. During May, Mercer Co. completed 50,000 units costing P600,000, exclusive of spoilage
allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000
units, costing P80,000, were 50% complete at May 31. All units are inspected between the
completion of manufacturing and transfer to finished goods inventory. Normal spoilage for the
month was P20,000, and abnormal spoilage of P50,000 was also incurred during the month. The
portion of total spoilage that should be charged against revenue in May is
a. 50,000
b. 20,000
c. 70,000
d. 60,000
e. 30,000

Suggested answer (d) P60,000

Abnormal spoilage P50,000

Normal spoilage on completed units sold
(25,000/50,000 x 90,000) 10,000
Portion of total spoilage that should be charged
against revenue P60,000
Abnormal spoilage P50,000
Normal spoilage on completed units sold
(25,000/50,000 x 20,000) 10,000
Portion of total spoilage that should be charged
against revenue P60,000
 25. Elsa, Inc. instituted a new process in October. During this month, 20,000 units were started in
Department A. of the units started, 2,000 were lost in process, 14,000 units were transferred to
Department B, and 4,000 units remained in process on October 31. The work in process at
October 31 was 100% complete as to material costs and 50% complete as to conversion costs.
Material costs of P54,000 and conversion costs of P80,000 were charged to Department A in
October. What was the total cost transferred to Department B?
a. 93,800
b. 112,000
c. 105,000
d. 114,200
e. None of these

Suggested answer (b) P112,000

Materials Conversion
Completed and transferred 14,000 14,000
Work in process, end (4,000)
Materials (100% x 4,000) 4,000
Conversion (50% x 4,000) 2,000
Equivalent units of production 18,000 6,000

Completed & transferred units P14,000

Multiply by total unit cost:
Materials (P54,000/18,000) P3.00
Conversion (P80,000/16,000) 5.00 8.00
Total costs transferred to Dept. B P112,000

Under the traditional costing system, normal lost units discovered at the start or during the process
should not have any equivalent units of production and should have no cost to be accounted by the first
department.

26. An entity will primarily generate and expend cash in one primary economic environment.
According to IAS 21, The Effects of Changes in Foreign Exchange Rates, the correct term for the
currency of this primary economic environment is the
a. Presentation currency
b. Functional currency
c. Reporting currency
d. Foreign currency

Suggested answer (b) Functional currency

IAS 21 defines functional currency as the currency of the primary economic environment in which the
entity operates, and the primary economic environment is normally the one in which it primarily
generates and expends cash.
 27. According to IAS 21, The Effects of Changes in Foreign Exchange Rates, at which rate should an
entity’s non-current assets be translated when its functional currency figures are being
translated into different presentation currency?
a. The historical rate
b. The closing rate
c. The average rate
d. The spot exchange rate

Suggested answer (b) Closing rate

Closing rate is the spot exchange rate at the balance sheet date. This is sometimes referred to as current
rate.

28. On September 1, 2020, Bain Corp. received an order for equipment from a foreign customer for
300,000 local currency units (LCU) when the peso equivalent was P96,000. Bain shipped the
equipment on October 15, 2020 and billed the customer for 300,000 LCU when the peso
equivalent was P100,000. Bain received the customer’s remittance in full on November 16, 2020
and sold the 300,000 LCU for P105,000. In its income statement for the year ended December
31, 2020, Bain should report a foreign exchange transaction gain of
a. 0
b. 4,000
c. 5,000
d. 9,000

Suggested answer (c) P5,000

Peso equivalent, October 15, 2020 P100,000

Peso equivalent, November 16, 2020 105,000
Foreign exchange transaction gain P 5,000

29. On September 1, 2020, Cano & Co. sold merchandise to a foreign firm for 250,000 francs. Terms
of the sale require payment in francs on February 1, 2021. On September 1, 2020, the spot
exchange rate was P1.20 per franc. At December 31, 2020, Cano’s year-end, the spot rate was
P1.19 but the rate increased to P1.22 by February 1, 2021, when payment was received. How
much should Cano report as foreign exchange transaction gain or loss in its 2021 income
statement?
a. 0
b. 2,500 loss
c. 5,000 gain
d. 7,500 gain

Suggested answer (d) P7,500 gain

Peso equivalent, December 31, 2020 (250,000 x 1.19) P297,500

Peso equivalent, February 1, 2021 (250,000 x 1.22) 305,000
Foreign exchange transaction gain in 2021 income statement P 7,500
 30. Hunt Co. purchased merchandise for 300,000 francs from a vendor in Belgium on November 30,
2020. Payment in Belgium francs was due on January 30, 2021. The exchange rates to purchase
one franc were as follows:

Nov. 30, 2020 Dec. 31, 2020

Spot rate P1.65 P1.62
30-day rate 1.64 1.59
60-day rate 1.63 1.56

In its December 31, 2020 income statement, what amount should Hunt report as foreign exchange gain?
a. 12,000
b. 9,000
c. 6,000
d. 0

Suggested answer (b) P9,000

Peso equivalent, Nov. 30, 2020 (300,000 x P1.65) P495,000

Peso equivalent, Dec. 31, 2020 (300,000 x P1.62) 486,000
Foreign exchange gain, 12/31/20 P 9,000

31. Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc. at December 31, 2020,
have been translated into Philippine pesos as follows:

Translated at
Current rate Historical rate
Note receivable, long-term P240,000 P200,000
Prepaid rent 85,000 80,000
Patent 150,000 170,000
P475,000 P450,000

What total amount should be included in Rowan’s December 31, 2020 consolidated balance sheet for
the above accounts using the translation method recognized under PAS 21?
a. 450,000
b. 455,000
c. 475,000
d. 495,000

Suggested answer (c) P475,000

Again, under the only one translation method recognized by PAS 21, assets and liabilities are translated
at the closing rate, and income and expenses are translated at the exchange rates at the dates of the
transactions or at the average rate for the period when this is a reasonable approximation. Therefore, all
assets shall be translated at closing rate (current rate).

32. Manila Corp., a wholly owned subsidiary of Asia, Inc. in California, USA, has certain expense
accounts for the year ended December 31, 2020, stated in US dollars as follows:
 US dollars
Selling expenses 360,000
Salaries and wages 600,000
Depreciation expense 240,000

The exchange rates at various dates are as follows:

Peso equivalent of 1 US dollar
December 31, 2020 P40.00
Average for year ended 12/31/20 35.00
January 1, 2020 25.00

Assume that the charges to the expense accounts occurred approximately evenly during the year. What
total peso amount should be included in Asia’s 2020 consolidated income statement to reflect these
expenses?
a. 30,000,000
b. 39,000,000
c. 42,000,000
d. 48,000,000

Suggested answer (c) P42,000,000

Selling expenses (360,000 x 35) P12,600,000

Salaries and Wages (600,000 x 35) 21,000,000
Depreciation (240,000 x 35) 8,400,000
Consolidated expenses P42,000,000

33. On December 31, 2021, the Branch Current in the Home Office books shows a balance of
P50,000. The following facts are ascertained:
1. Merchandise billed at P12,500 is in transit on December 31 from the home office to the branch.
2. The branch collected a home office accounts receivable for P3,500. The branch did not notify the
home office of such collection.
3. On December 30, the home office sent cash of P7,500 to the branch, but this was charged to
general expense; the branch has not received the cash as of December 31.
4. Branch profit for December was recorded by the home office at P2,400 instead of P2,040.
5. The branch returned supplies of P1,500 to the home office but the home office has not yet
recorded the receipt of the supplies.

Assume all other transactions have been properly recorded. What is the unadjusted balance of the
Home Office Current account on the branch books on December 31, 2021?
a. 64,140
b. 39,140
c. 14,000
d. 13,000

Suggested answer (b) P39,140

 Branch Current
(HO Books)
Unadjusted balance, 12/31/20 P50,000
2. Collection of home office receivable by the branch 3,500
3. Cash sent to branch which was erroneously charged to
Gen. Exp. 7,500
4. Erroneous recording of branch profit
(2,400 – 2,040) (360)
5. Unrecorded supplies retuned by the branch (1,500)
Adjusted balance, 12/31/20 P59,140

HO Current
(Branch Books)
Unadjusted balance, 12/31/20 P39,140
1. Merchandise in transit 12,500
2. Cash sent by home office still in transit 7,500
Adjusted balance, 12/31/20 P59,140

34. The following information pertains to shipments of merchandise from Home Office to Branch
during 2020:

Home office’s cost of merchandise P160,000

Intracompany billings 200,000
Sales by branch 250,000
Unsold merchandise at branch, 12/31/20 20,000

In the combined income statement of Home Office and Branch for the year ended December 31, 2020,
what amount of the above transactions should be included in sales?
a. 250,000
b. 230,000
c. 200,000
d. 180,000

Suggested answer (a) P250,000

Generally, a working paper for combined financial statements is prepared for the following purposes:
(a), to eliminate the reciprocal accounts: (b), to eliminate any intercompany inventory profit, and (c), to
combine accounts for like assets and like liabilities.

Therefore, the correct amount of sales to be included in the combined income statement is the
P250,000 sold by the branch to outsiders.

35. Makati Co. bills its Valenzuela branch for merchandise at 140% of cost. At the end of January
2020, the branch reported the following information:
 Merchandise from
Home Office
(At billed price)
Inventory, January 1 P7,560
Shipments received 28,280
Inventory, January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch inventory at
January 31?
a. 2,400
b. 2,160
c. 8,080
d. None of the above

Suggested answer (a) P2,400

Branch inventory, January 31, at billed price 8,400

Less: branch inventory, January 31 at cost
(8,400/140%) 6,000
Allowance for overvaluation, inventory January 31 2,400

36. The term “control” means ownership, directly or indirectly through subsidiaries of
a. More than one-half of the outstanding voting stock of another company.
b. At least 20% of the voting stock of another company.
c. At least 50% of the voting stock of another company.
d. At least 10% of the voting stock of another company.

Suggested answer (a)

IAS 27 requires that an entity is included in the consolidated financial statements where it is controlled
by another entity. Control is usually obtained where one entity owns more than half of voting rights,
although it is possible to have control in other circumstances.

37. On January 1, 2020, SMV Corp. issued 200,000 additional shares of P10 par value common stock
in exchange for all of QM Corp’s common stock. Immediately before this business combination,
SMV’s stockholder’s equity was P8,000,000 and QM’s stockholder’s equity was P4,000,000. On
January 1, 2020, fair market value of SMV’s common stock was P20 per share, and fair market
value of QM’s net assets was P4,000,000. SMV’s net income for the year ended December 31,
2020, exclusive of any consideration of QM, was P1,250,000. QM’s net income for the year
ended December 31, 2020, was P300,000. During 2020, SMV paid dividends of P450,000. SMV
had no business transactions with QM in 2020. Assuming that purchase method was used in this
business combination, how much is the consolidated stockholder’s equity at December 31,
2020?
a. 8,800,000
b. 9,100,000
c. 13,100,000
d. 13,350,000
Suggested answer (c) 13,100,000

SMV’s stockholders’ equity, 1/1/20 8,000,000

Fair value of the stock issued in the combination
(200,000 x 20) 4,000,000
Combined net income (1,250,00 +300,000) 1,550,000
Dividends paid by SMV in 2020 (450,000)
Consolidated stockholders’ equity 13,100,000

38. Poe, Inc. acquired 100% of Shaw Co. in a business combination on September 30, 2020. During
2020, Poe declared quarterly dividends of P25,000 and Shaw declared quarterly dividends of
P10,000. Under the purchase method of accounting for the business combination, what amount
should be reported as dividends declared in the December 31, 2020 consolidated statement of
retained earnings?
a. 100,000
b. 105,000
c. 130,000
d. 140,000

Suggested answer (a) 100,000

Purchase method:
2020 dividend, Poe, Inc. (25,000 x 4) 100,000

39. On January 1, 2020, Owen Corp. purchased all of Sharp Corp.’s common stock for P1,200,000.
On that date, the fair values of Sharp’s assets and liabilities equaled their carrying amounts of
P1,320,000 and P320,000, respectively. During 2020, Sharp paid cash dividends of P20,000.
Selected information for the separate balance sheets and income statements of Owen and
Sharp as of December 31, 2020, and for the year ended follows:

Owen Sharp
Balance Sheet Accounts:
Investment in subsidiary 1,300,000
Retained earnings 1,240,000 560,000
Total stockholders’ equity 2,620,000 1,120,000

Income Statement Accounts:

Operating income 420,000 200,000
Equity in earnings of Sharp 120,000
Net income 400,000 140,000

a. In Owen’s 2020 consolidated income statement, what amount should be reported for
amortization of goodwill?
a. 0
b. 12,000
c. 18,000
d. 20,000
b. In Owen’s December 31, 2020 consolidated balance sheet, what amount should be reported as
total retained earnings?
a. 1,240,000
b. 1,360,000
c. 1,380,000
d. 1,800,000

a. Suggested answer (a) 0

Under PFRS 3, goodwill is no longer amortized but tested for impairment frequently.

b. Suggested answer (a) 1,240,000

Acquisition cost 1,200,000

Less: market value of the net assets acquired 1,000,000
(1,320,000-320,000) 200,000
Goodwill