DAY 4_20MCQs_AFAR

1. Jason Company, a Philippine Corporation, sold inventory on credit to a Japanese Company on

April 8, 2020. Jason received payment of 35,000 yens on May 8, 2020. The exchange rate was
P1 = Y0.65 on April 8 and P1 = Y0.70 on May 8. What amount of foreign exchange gain or loss
should be recognized? (rounded to the nearest peso)
a. P10,500 loss
b. P10,500 gain
c. P1,750 loss
d. P3,846 loss
ANS: D
[(35,000 yens / .65) – (35,000 yens / .70) = P3,486 loss.

2. Jane had the following foreign currencies transactions during 2020:

Purchased merchandise from a foreign supplier on January 20, 2020, for the Philippine peso
equivalent to P60,000 and paid the invoice on April 20, 2020, at the Philippine peso equivalent to
P68,000

On September 1, 2020, borrowed the Philippine peso equivalent of P300,000 evidenced by a

note that is payable in the lender’s local currency on September 1, 2021. On December 31, 2020,
the Philippine peso equivalent of the principal amount of P320,000

In Jane’s 2020 income statement, what amount should be included is a foreign exchange loss?
a. 4,000
b. 20,000
c. 22,000
d. 28,000

ANS: D
The merchandise purchase results in a foreign exchange loss of P8,000, the difference between
the Philippine peso equivalent at the date of purchase, and the date of settlement. The increase
in the peso equivalent of the note’s principal results in a foreign exchange loss of P20,000. The
total foreign exchange loss is P28,000 (P8,000 + P20,000)

3. 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 a cost under the lower-of-cost-or market value. Currency
exchange rates for 1 peso follow:

January 1, 2020 0.15

April 1, 2020 0.16
June 1, 2020 0.17
December 31, 2020 0.19
Assume that the foreign currency is the subsidiary’s functional currency. What balances does a
consolidated balance sheet report as of December 31, 2020?
a. Marketable equity securities (P16,000); Inventory (P16,000)
b. Marketable equity securities (P17,000); Inventory (P17,000)
c. Marketable equity securities (P19,000); Inventory (P16,000)
d. Marketable equity securities (P19,000); Inventory (P19,000)

ANS: D
 The foreign currency is the functional currency, so a translation (or current rate method) is
appropriate. All assets are translated at the current exchange rate. (P100,000*.19=P19,000)

4. On January 1, 2020, Leonardo Co. sold equipment to its subsidiary, Bernie Corp., for P115,000.
The equipment had cost P 125,000, and the balance in accumulated depreciation was P45,000.
The equipment has estimated remaining useful life of eight years and no salvage value. Both
companies use straight-line depreciation. On their separate 2020 income statements, Leonardo
and Bernie reported depreciation expense of P84,000 and P60,000, respectively. The amount of
depreciation expense on the consolidated income statement for 2020 would have been
a. 144,000
b. 148,375
c. 139,625
d. 134,000

ANS: C

Depreciation expense:

Leonardo P84,000
Bernie 60,000
Consolidated depreciation expense P144,000

Realized gain thru depreciation expense

Sales price P115,000
Less: Book value (125,000 - 45,000) 80,000
Unrealized gain P35,000
Divided by remaining life 8
Depreciation expense P4,375

Consolidated depreciation expense (144,000 - 4,375) P139,625

This is a downstream intercompany sale of equipment. Realized gain (deduction to depreciation

expense) should be recognized thru amortization over the remaining useful life of the equipment.

5. Which of the following items is not remeasured using historical exchange rate under the temporal
or remeasurement method?
a. Accumulated depreciation on equipment
b. Cost of goods sold
c. Marketable equity securities
d. Retained earnings

ANS: C

Marketable equity securities are carried at market value and therefore translated at the current
exchange rate under the temporal method or remeasurement method

You have been instructed by Judy Company, a high-flying conglomerate, to conduct a purchase
audit of XYZ Co.'s net assets. You find the following information:

Total identifiable assets of XYZ Co. at fair market value P5,000,000

Liabilities 1,200,000
The average rate of return on net assets for XYZ Co.'s 15%
industry
Forecasted earnings per year based on past earnings figures 700,000
6. Determine the purchase price if Goodwill is measured based on the capitalization of excess
earnings at 15%:

a. 7,600,000
b. 8,466,667
c. 4,666,667
d. 6,400,000
ANS: C
Goodwill (130,000/15%) P866,667
Net assets 3,800,000
Purchase price P4,666,667

7. A company is considering purchasing another company, which has the following assets and
liabilities.
Cost Fair Market Value
Accounts receivable P 4,800,000 P4,400,000
Inventory 4,800,000 5,000,000
Prepaid Insurance 200,000 200,000
Buildings and equipment (net) 1,400,000 4,000,000
Accounts payable (3,200,000) (3,200,000)
Net assets P8,000,000 P 10,400,000

If the purchase price is 12,600,000, the amount of goodwill to be charged in recording the
acquisition is
a. 4,600,000
b. 2,400,000
c. 2,200,000
d. 0
ANS: C

Purchase price P 12,600,000

The fair market value of net 10,400,000
assets
Goodwill P2,200,000

The accounting method used is Acquisition Method as per IFRS 3. Goodwill is computed by
deducting the Fair Market Value of Net Assets from the Purchase Price.

8. On April I, 2020, AV Corp. acquired 80% of the outstanding stocks of SR Corp. for P2,500,000.
SR Corp.'s stockholders' equity at the end of 2020 is as follows: Common stock, P80 par P2,
000,000, additional paid-in capital P500,000, and Retained Earnings P750,000. The fair value of
the non- controlling interest is P68S,000. All the assets of SR were fairly valued except for its
inventories, which are undervalued by P90,000, Land, which is undervalued by P50,000, and the
Patent, which is undervalued by P125,000. The said patent has a remaining useful life of five
years. Both companies use the straight-line method for depreciation and amortization.
Shareholders' equity of AV Corp. on December 31, 2020, is composed of Common stock, P50
par P3,500,000, APIC P750,000, and retained earnings P2,460,000. Goodwill, if any, should be
decreased by P22,500 every year-end. No additional issuance of capital stocks occurred.
 Consolidated shareholders' equity

a. 7,419,150
b. 7,893,750
c. 7,112,600
d. 7,865,750

ANS: B

P5,500,000 + P1,250,000 + P265,000 +P 878,750 = P7,893,750

9. Michael Corporation owned 70% of the voting common stock of Gabriel Company. On January 2,
2020, Gabriel sold a parcel of land to Michael. The land had a book value of P35,000 and was
sold to Michael for P45,000. Gabriel's reported net income for 2020 was 119,000. What is the
non-controlling interest's share of Gabriel's net income?
a. 35,700
b. 31,800
c. 9,600
d. 22,200
e. 26,100

ANS: B

Parent NCI

Net income from owned

operations:
Michael (parent) and Gabriel (subsidiary), 70%; 30% P83,300 P35,700
Unrealized gain on sale of land (45,000 – P35,000 =
P 13,000) - upstream sales, 70%; 30% (9,100) (3,900)
Non-controlling interest in Gabriel's net income P31,800

This is an upstream intercompany sale of non-depreciable asset (land). No gain on sale of land
will be recognized for both the parent and NCI not until sale of land to third party.

10. Nhang Company owned all of the voting common stock of Jorge Co. On January 2, 2020, Nhana
sold some equipment to Jorge for P125,000. The equipment had cost P140,000. At the time of
the sale, the balance in accumulated depreciation was P40,000. The equipment had a remaining
life of five years and a P0 salvage value, Straight-line depreciation is used by both Nhang and
Jorge. At what amount should the equipment (net depreciation) be included on the Consolidated
balance sheet dated December 31, 2020?
a. 100,000
b. 95,000
c. 75 ,000
d. 80,000
e. 85,000
ANS: D
Equipment's original cost P140,000
Less: Accumulated depreciation (date of sale) (40,000)
2020 depreciation [(P 140,000-P40,000-P0, salvage)/ 5 (20,000)
Net Book Value, 12/31/2020 P80,000

Equipment’s original cost P140,000

 Less: Accumulated depreciation (as if no sale occurred) (60,000)
Net Book Value, 12/31/2020 P80,000

This is a downstream intercompany sale of equipment. Equipment shall be included on the

Consolidated Balance Sheet as if no intercompany sale occurred.

11. The following information pertains to the building contract of Carrie Construction Company,
wherein the fixed contract price is P40 million.
2020 2021 2022
Estimated costs P10,050,000 P15,075,000 P8,375,000

Progress billings 5,000,000 12,500,000 22,500,000

Cash collection 4,000,000 11,500,000 24,500,000

Assume that all costs are incurred, all billings to customers are made, and all collections from
costumers are received within 30 days of billing, as planned. Under the percentage-of-completion
method of revenue recognition is used, how much is the income from construction for the year
2022?

a. 1,950,000
b. 1,625,000
c. 4,875,000
d. 2,925,000

ANS: B

Total contract price P40,000,000

Total estimated costs
2020 P10,050,000
2021 15,075,000
2022 8,375,000 33,500,000
Estimated gross profit P6,500,000
2022 gross profit (8,375,000/33,500,000 x 6,500,000) P1,625,000

Since Percentage of Completion (POC) is used, Input Measure or Cost to Cost method will be
used because outcome can be estimated reliably. Gross Profit will be recognized as a percentage
of cost incurred to date over total estimated cost.

12. Ana's 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 Ana's, Inc. in connection with the P500,000 franchise
fee waived. The prevailing interest rate is 14%. The first year generated gross sales of
P2,500,000.

What is the amount of unearned franchise fee after the first year of operations?
a. 575,000
b. 291,400
c. 391,400
d. 500,000
ANS: B
 Unearned franchise fee: P100,000 x 2.914 = P291,400

Since the franchise may be canceled with any outstanding balance to be waived, then that
amount still to be collected is considered unearned. PVF of Annuity Due of 1 @ 14% for 4 periods
(after the first year) is 2.914. Gross sales amount is irrelevant.

13. On January 2, 2020, Mycor's Inc. signed an agreement to operate as a franchisee of Mang Inasal
for an initial franchise fee of P2,343,750 for ten years. Of this amount, P468,750 was paid when
the agreement was signed and the balance payable in three annual payments beginning on Dec
ember 31, 2020. Mycor's 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 franchisor, and indirect costs of P53,750 have also been incurred.

If the collection of the note is not reasonably assured, calculate the net income. For the year
ended December 31, 2020. Use PV factor 2.17.
a. 753,900
b. 509,776
c. 700,150
d. 456,026

ANS: C

Down payment P468, 750

Present value ((2,343,750-468,750)/3)x 2.17) 1,356,250
Initial franchise fee P1,825,000
Less: Franchise cost 730,000
Franchise profit P 1,095,000

Gross profit rate (1,095,000 / 1,825,000) 60%

Interest Income (P1,356,250*18%) 244,125

Realized gross profit (468,750 + ((625,000 – 244,125) x 60%) P509,775

Interest income 244,125
Expenses (53,750)
Net income P700,150

Since the collectability of the note is not reasonably assured, Installment Method should be used
(Gross Profit Rate and Realized Gross Profit should be computed). Collections shall include both
down payment and installment payment attributable to principal only. Interest income and indirect
cost of initial services rendered shall be included in computation of Net Income.

Michael, Gabriel, and Raphael are partners sharing profits on a 5:3:2 ratio. On January 1, 2020, Joshua
was admitted into the partnership with a 20% share in profits. The old partners continue to participate in
profits in their original ratios. For the year 2020, the partnership book showed a net income of P25,000. 1t
was disclosed, however, that the following errors were committed:

2019 2020
Accrued expenses not recorded at year-end P1,200
Inventory overstated P3,100
Purchases not recorded, for which goods have been received inventories 2,000
Income received in advance not adjusted (Income Method used) 1,500
 Unused supplies not taken up at year-end (Expense Method used) 900

14. The share of partners Michael in the 2020 corrected net income is:
a. 9,400
b. 10,000
c. 11,750
d. 12,500
ANS: A
Net income per books
P25,000
Accrued expenses not recorded at the end of 2019 (2020 expense overstated)
1,200
Inventory overstatement at the end of 2020 (2020 COGS understated;
2020 income overstated) (3,100)
Purchases not recorded in 2020 (2020 COGS understated; 2020 income overstated) (2,000)
Income received in advance not adjusted at the end of 2019 (2020 income understated) 1,500
Unused supplies not taken up at the end of 2020 (2020 expense overstated) 900

Adjusted net income P23,500

Adjusted profit and loss share (5/10 of (100%-20%) 40%
The profit share of Michael P9.400

15. The Home Office in Makati shipped merchandise costing P80,000 to the Manila branch and paid
for the freight charges of P600. The home office bills the branch at 125% of the cost. Manila
branch was subsequently instructed to transfer one-half of the merchandise to Quezon City
branch, wherein Quezon City branch paid for P200 freight. If the shipment were made directly
from Makati to Quezon City, the freight cost would have been P400. By how much will Manila
branch charge the Home Office account for the transfer?
a. 50,300
b. 50,600
c. 51,300
d. 50,500
ANS: A
P80,000 x 1.25 = (100,000 + 600) x 50% = P50,300

Manila Branch will charge the HO at half the total Billed Price (Cost+Mark-up+Freight charges).
Since Quezon City branch was the one who paid the freight on the transfer it will be one to
charge it to the HO, not Manila.

16. 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 are representing agency expenses, P11,700.
5. Replenishment of the agency working fund upon receipt of expense vouchers for P5,850.
6. The cost of goods sold identified with agency sales, P93,600.
How much is the net income traceable to the agency?
a. 5,850
b. 18,850
c. 36,400
d. (72,150)
 ANS: B
Agency sales receipts (#2) P130,000
Cost of sales (#6) (93,600)
Gross profit P36,400
Expenses (11,700 (#4) + 5,850 (#5)) (17,550)
Net income of the agency P 18,850

Establishment of working fund and collection of agency accounts by the home office does not
affect the amount of Net Income traceable to the agency.

17. USC, a nonprofit university, received the following cash contributions from donors during the year
2020:
Unrestricted contributions P 250,000
Contributions restricted by donors for scholarship programs 100,000
Contributions from a donor who stipulated that the money be spent in
accordance with the wishes of the hospital's board of trustees 75,000
Contributions restricted by donors for equipment acquisitions P125,000
Assuming the university spent P 75,000-of the donors' contributions for scholarship programs on
financing this year's scholars, how much should be included in its current fund's revenue for the year
ended December 31, 2020?
a. 350,000
b. 325,000
c. 400,000
d. 250,000
ANS: C
Unrestricted contributions P250,000
Contributions from a donor who stipulated that the money be spent by the
wishes to the hospital's board of trustees 75,000
Contributions used for scholarship 75,000
Current fund revenue P400,000

18. TD decided to withdraw from his partnership with SM and MR. Before his withdrawal, TD's capital
balance was P 58,000, while SM's was P64,000, and MR's was P77,000. Also, the partnership's
total assets amounted to P 450,000, but the partners agreed that a fixed asset was under
depreciated by P 15,000. TD, SM, and MR share profits and losses in the ratio of 2:4:4,
respectively, If TD was paid P53,200 upon his retirement, how much is the remaining partnership
net assets after TD's withdrawal?
a. 182,800
b. 130,800
c. 160,800
d. 197,800
ANS : B

Net assets before TD's withdrawal

(450,000(Assets) - 251,000(Liabilities)) P199,000 (P58,000+64,000+77,000)
Adjustment for depreciation (15,000)
Net assets, adjusted P184,000
Payment to TD (53,200)
Net assets, after TD’s withdrawal P130,800
19. Hannah and Blanca, having capital balances of P 140,000 P 75,000 respectively, decided to
admit Jet in to their partnership. Jet is to invest a sufficient amount to have a 25% interest in the
partnership. If Hannah and Blanca share profit in a proportion of 3:1, respectively, and Blanca's
capital balance after Jet's investment is P84,250, how much was invested by Jet?
a. 121,250
b. 84,000
c. 167,750
d. 121,000
ANS: D

Blanca's capital after Jet's admission P84,250

, Blanca's capital before Jet's admission (75,000)
Increase in Blanca, Capital P9,250
Total bonus to old partners (9,250/25%) P37,000

Old partner's capital, adjusted with bonus P252,000

(P140,000+75,000+37,000)

Jet's capital credit (252,000/75%) x 25% 84,000

Add: bonus to old partners 37,000
Cash invested by Jet P121,000

The profit and loss ratio of Hannah and Blanca is 75%;25%. The new profit and loss ratio of Hannah,
Blanca, and Jed is 56.25%,18.75%,25%, respectively.

20. On April I, 2020, AV Corp. acquired 80% of the outstanding stocks of SR Corp. for P2,500,000. SR
Corp.'s stockholders' equity at the end of 2020 is as follows: Common stock, P80 par P2, 000,000,
additional paid-in capital P500,000, and Retained Earnings P750,000. The fair value of the non-
controlling interest is P68S,000. All the assets of SR were fairly valued except for its inventories, which
are undervalued by P90,000, Land, which is undervalued by P50,000, and the Patent, which is
undervalued by P125,000. The said patent has a remaining useful life of five years. Both companies use
the straight-line method for depreciation and amortization. Shareholders' equity of AV Corp. on December
31, 2020, is composed of Common stock, P50 par P3,500,000, APIC P750,000, and retained earnings
P2,460,000. Goodwill, if any, should be decreased by P22,500 every year-end. No additional issuance of
capital stocks occurred.
Consolidated shareholders' equity
a. 7,419,150
b. 7,893,750
c. 7,112,600
d. 7,865,750