PAS 12 INCOME TAXES

1. Because ABC Company uses different methods to depreciate equipment for financial statement and income tax
purposes, ABC has temporary differences that will reverse during the next year and add to taxable income. Deferred
income taxes that are based on these temporary differences should be classified in ABC Company’s balance sheet as
a. A current liability c. A noncurrent liability
b. A contra account to non current assets d. A contra account to current assets

2. The objective of accounting for income taxes is

a. Objectivity in the calculation of periodic expense
b. Recognition of assets and liabilities
c. Proper matching of periodic expense to periodic revenue
d. Consistency of tax expense measurement with tax planning strategies

3. Valuation allowance is the portion of deferred tax asset for which

a. It is more likely than not that a tax benefit will be realized
b. It is more likely than not that a tax benefit will not be realized
c. It is possible that a tax benefit will be realized.
d. It is possible that a tax benefit will not be realized

4. Interperiod tax allocation causes

a. Tax expense shown in the income statement to bear a normal relation to the tax liability
b. Tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or
minus the change in the deferred tax asset or liability balances for the year.
c. Tax expense in the income statement to be presented with the specific revenues causing the tax.
d. Tax liability shown in the balance sheet to bear a nominal relation to the income before tax reported in the income
statement.

5. Farrugia Limited has an asset which cost P300 and against which depreciation of P100 has accumulated. The
accumulated depreciation for tax purposes is P180 and the company tax rate is 30%. The tax base of this asset is:
a. P120; b. P220; c. P80; d. P20.

6. Silva Corporation has a product warranty liability amounting to P10 000. The product warranty costs are not tax
deductible until paid out to customers. The company tax rate is 30%. The company has:
a deductible temporary difference of p10 000; c. a tax base of P10 000;
b. an assessable temporary difference of P10 000; d. a future deductible amount of P0.

7. Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that:
a. applied at the beginning of the reporting period; c. at the rates that prevail at the reporting date;
b. at the end of the reporting period; d. are expected to apply when the asset or liability is settled

8. In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes:
a. does not permit the application of deferred tax accounting to goodwill;
b. allows the recognition of a deferred tax item in relation to goodwill;
c. requires that any deferred tax items in relation to goodwill be recognised directly in equity;
d. requires that any deferred tax items for goodwill be capitalised in the carrying amount of goodwill.

9. Tracey Limited revalued an item of plant from initial cost of P10 000 to fair value of P15 000. The company tax rate is
30%. The adjusting journal entry to recognise the tax effect of the revaluation will include the following item:
a. DR Deferred tax asset P3 500;
b. DR Deferred tax liability P3 500;
c. CR Deferred tax asset P1 500;
d. CR Deferred tax liability P1 500.

10. When a deferred tax asset is subsequently recognised by an acquirer, the following adjustment is made:
a. increase the carrying amount of goodwill;
b. reduce the carrying amount of goodwill;
c. reduce the carrying amount of the assets acquired;
d. increase the carrying amount of the assets acquired.
11. Deferred tax assets must be recognised for deductible temporary differences and for tax losses, but only to the extent
that:
a. it is probable that future taxable profits will be available;
b. it is possible that future taxable profits will be available;
c. it is likely that future deductible expenses will be incurred;
d. there is a chance that future deductible items will be incurred.

12. On 1 April 2007, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30
June 2006) Montgomery Company had the following tax balances:
 Deferred tax assets P26 250
 Deferred tax liabilities P21 000
What is the impact of the tax rate change on income tax expense?
a. increase P750; b. decrease P750; c. increase P875; d. decrease P875.

13. Metro Company had the following deferred tax balances at reporting date:
 Deferred tax assets P12 000
 Deferred tax liabilities P30 000
Effective from the first day of the next financial period, the company rate of income tax was reduced from 40% to 30%.
The adjustment to income tax expense to recognise the impact of the tax rate change is:
a. DR P6 000; b. DR P4 500; c. CR P6 000; d. CR P4 500.

14. The tax expense related to profit or loss of the period is required to be presented:
a. on the face of the balance sheet; c. in the cash flow statement;
b. on the face of the income statement; d. in the statement of changes in equity.

15. Unless a company has a legal right of set-off, IAS 12 Income Taxes, requires disclosure of all of the following
information for deferred tax balance sheet items:
I. The amount of deferred tax assets recognised.
II. The amount of the deferred tax liabilities recognised.
III. The net amount of the deferred tax assets and liabilities recognised.
IV. The amount of the deferred tax asset relating to tax losses.
a. I, II and IV only; b. I, II and III only; c. III and IV only; d. IV only.

16. Where a business transaction requires a direct adjustment to an equity account, the tax effect is adjusted against:
a. income; b. tax expense; c. equity; d. cash.

17. The purpose of an interperiod income tax allocation is to

a. allow reporting entities to fully utilize tax losses carried forward from a previous year.
b. Allow reporting entities whose tax liabilities vary significantly from year to year to smooth payments to taxing agencies
c. Recognize an asset or liability for the tax consequences of temporary differences that exist at the balance sheet.
d. Amortize the deferred tax liability shown on the balance sheet.

18. Recognizing tax benefits in a loss year due to a loss carryforward requires
a. Only a footnote disclosure
b. Creating a new carryforward for the next year
c. Creating a deferred tax asset
d. Creating a deferred tax liability

19. Intraperiod tax allocation

a. Involves the allocation of income taxes between current and future periods
b. Associates tax effect with different items in the income statement
c. Arises because certain revenue and expenses appear in the financial statements either before or after they are included
in the income tax return
d. Arises because different income statement items are taxed at different rates

20. Where a business transaction requires a direct adjustment to an equity account, the tax effect is adjusted against
a. income b. tax expense C. equity d. cash
21. Interperiod tax allocation accounts for
a. all differences between tax regulations and GAAP
b. tax effects of specific income statement items in the same period
c. permanent differences
d. temporary differences

22. Which of the following statements is true?

a. temporary differences occur because accounting standards and income tax laws differ as to when they recognize
assets, liabilities, owner’s equity, revenues, gains, expenses and losses
b. the term “ future taxable amounts” relates to a deferred tax assets
c. “Future taxable amounts” include revenues and gains that are included in the tax return before they are recognized for
accounting purposes
d. “Future deductible amounts” include expenses and losses that are included in the tax return before they are recognized
for accounting purposes

23. Taxable income of a corporation

a. Differs from accounting income due to differences in intraperiod allocation between the two methods of income
determination
b. Differs from accounting income due to differences in interperiod allocation and permanent differences between the two
methods of income determination
c. Is based on generally accepted principles
d. Is reported on the corporation’s income statement

24. The DEFERRED INCOME TAXES LIABILITY account would be credited if

a. income tax expense were greater than the income tax payable
b. income tax expense were less than the income tax payable
c. either a or b
d. neither a or b

25. Where a business transaction requires a direct adjustment to an equity account, the tax effect is adjusted against
a. income b. tax expense c. equity d. cash

26. An entity is undertaking a reorganization. Under the plan, part of the entity’s business will be demerged and will be
transferred to a separate entity, Entity Z. This also will involve a transfer of part of the pension obligation to Entity Z.
Because of this, Entity Z will have a deduction temporary difference at its year-end of December 31, 2004. It is
anticipated that Entity Z will be loss making for the first four years of its existence, but thereafter it will become a
profitable entity. The future forecasted profit is based on estimates of sales to intergroup companies. Should Entity Z
recognize the deductable temporary difference as a deferred tax asset?
a. The entity should recognize a deferred tax asset
b. Management should not recognize a deferred tax assets as future profitability is not certain
c. The entity should recognize a deferred tax asset if the authenticity of the budgeted profits can be verified
d. The entity should recognize a deferred tax asset if the intergroup profit in the budgeted profit is eliminated

27. An entity has revalued its property and has recognized the increase in the revaluation reserve in its financial
statements. The carrying value of property was P8 million, and the revalued amount was P10 million. Tax of the
property was P6 million. In the country, the rate applicable profits made on the sale of property is 30%. Where will the
tax liability be recognized and at what amount?
a. In the income statement at P600,000
b. In equity at P1.2 million
c. In statement of recognized income and expense at P1.4 million
d. In retained earnings at P700,000

28. A current liablities of an entity include fines and penalties for environmental damange. The fines and penalties are
started at P10 million. The fines and penalties are not deductible for tax purposes. What is the tax base of the fines and
penalties?
a. P10 million b. P3 million c. P13 million d. zero

29. The process of reporting discontinued operations, net of income tax on the income statement is known as
a. interperiod tax allocation b. intraperiod tax allocation c. deferred tax recognition d. accrued tax recognition
30. An entity, cash basis taxpayer, prepares accrual basis financial statements. In its year-end balance sheet, the entity’s
deferred income tax liabilities increased compared to the prior year. Which of the following changes would cause this
increase in deferred tax liabilities?
I. An increase in prepaid insurance
II. An increase in rent receivable
III. An increase in warranty obligation
a. I only b. I and II c. II and III d. III only

PAS 14 SEGMENT REPORTING

1. A group is organized into a number of business divisions across the world. The group has two main classes of
business: insurance and banking. The management Board receives information from each business division on a
quarterly basis and wishes to report segmental information on the basis of these divisions. What should be the basis of
the group’s reporting of the primary segmental information?
a. The worldwide business division
b. The classes of business
c. The entity should make full disclosure on the basis of the worldwide divisions and the classes of business
d. It would depend on the different (or differing) risks and rewards but is likely to be the different classes of business

2. A chemical entity has no overseas sales. The entity produces different products from the process. The entity sells its
product to small businesses, to larger national business, and to multinational entities. The management of the entity
proposed to disclose just one business segment. Can the entity disclose just one business segment because it sells all of
its products nationally?
a. Yes, IAS 14 will allow the entity to disclose a single business segment
b. No, the entity can identify three different sets of customers and should, therefore disclose information on that basis
c. Yes, even though there are three different groups of customers, they all present the same risks to the entity
d. IAS 14 is silent on this matter.

3. An entity has created a new market research division that will be financed internally. The entity has two business
segments: domestic electrical goods and computer products. The segment will not receive any apparent benefits from the
new division. Will the new division be disclosed under IAS as a separate business segment?
a. The segment should be separately reported or combined with the corporate segments and should be disclosed as part
of the unallocated items.
b. The new business division should be included with the electrical segment
c. The new business division should be included with the computer segment
d. The new business division should be separately reported
4. An entity is in the entertainment industry and organizes outdoor concerts in four different areas of the world: Europe,
North America, Austalasia, and Japan. The entity reports to the board of directors on the basis of each of the four
regions. The management accounts show the probability for each of the four regions, with allocations for that
expenditure which is difficult to directly charge to a region. The concerts are of two types: popular music and classical
music. What is the appropriate basis for segment reporting in this entity?
a. The segments should be reported by class of business, that is, popular and classical music
b. The segments should be reported by region so Australasia and Japan would be combined
c. The segment information should be reported by as North America and the rest of the world.

5. An entity has split its business segments on the basis of the law governing its different types of business. Two
business segments that the entity has identified are insurance and banking. Within the banking group, several different
services are provided: retail banking, merchant banking, and small business advisory service. The insurance entities sell
travel insurance, and property insurance. The entity operates throughout the world in several countries and continents.
What basis should the entity report its segmental information?
a. On the basis of its business divisions c. On the basis of the services it offers within those divisions
b. By geographical location d. The entity should just show one segment, entitled banking insurance

6. An entity is engaged in the manufacturing industry and has recently purchased an 80% holding in a small financial
services group. The group does not meet any of the threshold criteria for a reportable segment. Can the entity disclose
the financial services group as a separate business segment?
a. No, because it does not meet any of the IAS criteria, it cannot be disclosed as a separate segment
b. Yes, even though it does not meet the IAS criteria, an entity can disclose business segments separately if they are a
distinguishable component
c. The entity can disclose only 80% of the results and net assets of the banking group
d. Because of the disparity in types of business, the group should disclose its segmental information on a geographical
basis.

7. An entity operates in the gas industry and has four different productive processes within the production cycle. It is
essentially a vertically integrated business. The entity proposes to disclose segmental information regarding each of the
four operations. Can the entity disclose separately as business segments the four operations within the production cycle?
a. No. it must show a single segment covering all the various operations
b. IAS 14 says that it is compulsory to show each different operation separately
c. IAS 14 encourages voluntary disclosure of the segments, and it is considered to be good practice
d. The entity should group together various operations and show exploration, production, and chemicals as one segment
and retailing as another segment

8. An entity manufactures suits, clothing, bed linen, and various cotton and manmade fiber products. It has several
segments, which are reported internally as
Segments Sales Profits Segment assets
Suits 40% 45% 50%
Shirts 30% 35% 33%
Bed linen 15% 10% 7%
Blinds 8% 6% 5%
Cloth 7% 4% 5%
100% 100% 100%
The table represents the percentage of sales, profit, and segment assets that are attributable to the different segments.
The entity wants to present bed linen and cloth as a single but is wondering whether the information can be aggregated.
How will the segmental information be presented in the financial statements?
a. Bed linen and cloth, suits, and shirts, will all be shown as separate segments with blinds
b. All of the segments should be presented separately
c. Suits, shirts, and bed linen will be separate segments with blinds and cloth shown as a single segment
d. Suits and cloth will be one segment with shirts, bed linen, and blinds shown as other separate segment

9. Both business segments and geographical segments are considered as primary segment reporting formats with full
segments disclosure on each basis.
a. Matrix presentation c. Primary reporting basis
b. Dual presentation d. Secondary reporting basis

10. In financial reporting for segments of an entity, the revenue of a segment should include
a. Intersegment billings for the cost of shared facilities
b. Intersegment sales of services similar to those sold to unaffiliated customers
c. Equity in income from unconsolidated subsidiaries
d. Gain on extinguishment of debt

PAS 16 PROPERTY PLANT AND EQUIPMENT

1. The “benchmark” valuation of property, plant and equipment in the balance sheet of an enterprise is
a. At revalued amount, which equal to the fair value at the date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment loss.
b. Cost of asset, or other amount substituted for cost in the financial statements less its residual value.
c. Amount of cash or cash equivalent paid or the fair value of other consideration given to acquire the asset at the time of
its acquisition or construction.
d. Amount which the asset is recognized in the balance sheet after, deducting any accumulated depreciation and
accumulated impairment losses.

2. The cost of property, plant and equipment comprises all of the following except:
a. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and
rebates.
b. Cost of opening a new facility or introducing a new product or service.
c. Any cost directly attributable to bringing the asset to the condition or location necessary for it to be capable of
operating in the manner intended by management
d. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located and
for which the entity has a present obligation.

3. When an item of property, plant and equipment is acquired by issuing debt securities, which is the best basis for
establishing the historical cost of the acquired asset?
a. Face value of the bonds issued c. Fair value of the asset received
b. Historical cost of the asset received d. Fair value of the bond issued

4. Major spare parts and standby equipment which are expected to be used over a period of more than one year should
be classified as
a. Inventory b. Property, plant and equipment c. Supplies d. Expenses

5. The term “betterment” refers to

a. Expenditures made for new facilities, which increase “capacity”
b. Expenditures made to improve existing facilities by increasing “capacity”
c. Expenditures made to help continuity of service capacity
d. Expenditures made to restore “capacity” after abandonment of retirement.

6. The most common method of recording depletion for accounting purposes is the
a. Percentage of depletion method c. Production or output method
b. Straight line d. Decreasing charge method

7. An entity imported machinery to install in its new factory premises before year end. However, due to circumstances
beyond its control, the machinery was delayed by a few months but reached the factory premises before year-end. While
this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund
the cost of the plant. What is the proper treatment of freight and interest expense?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed
c. Freight charge should be capitalized but interest cannot be capitalized under these circumstances
d. Both expenses should be expensed

8. Under IAS 16 Property, Plant and Equipment, an entity may choose to measure assets using the revaluation model. If
this model is chosen, revaluation increments are recognised:
a. in profit or loss of the period in which the revaluation is undertaken;
b. as a deferred credit in the balance sheet;
c. directly in equity;
d. as an increase in the balance of the relevant accumulated depreciation account.

9. In relation to an asset revaluation surplus, an entity:

a. is not able to use this surplus for the payment of future dividends;
b. is able to use this surplus for the payment of future dividends;
c. is not able to transfer this surplus to any other reserve account;
d. can transfer the surplus to the income statement when the asset is disposed of.

10. The cost of land does not include

a. Costs of grading, filling, draining, and clearing
b. Costs of removing old buildings
c. Costs of improvements with limited lives
d. Special assessments

11. Under which of the following depreciation methods is it possible for depreciation expense to be higher in the later
years of an asset’s useful life?
a. Straight- line
b. Activity method based on units of production
c. Sum-of-the-years’ digits
d. Declining balance

12. Which of the following is not a major characteristic of a plant asset?

a. Possesses physical substance c. Acquired for use
b. Acquired for resale d. Yields services over a number of years

13. The cost of land typically includes the purchase price and all of the following costs except
a. Grading, filling, draining, and clearing costs
b. Street lights, sewers, and drainage systems cost
c. Private driveways and parking lots
d. Assumption of any liens or mortgages on the property

14. The sale of a depreciable asset resulting in a loss indicated that the proceeds from the sale were
a. Less than current market value
b. Greater than cost
c. Greater than book value
d. Less than book value

15. A change in the estimated useful life of a building

a. Is not allowed by generally accepted accounting principles
b. Affects the depreciation on the building beginning with the year of the change
c. Must be handled as a retroactive adjustment to all accounts affected, back to the year of the acquisition of the building
d. Creates a new account to be recognized on the income statement reflecting the difference in net income up to the
beginning of the year of the change

16. Healty Inc. bought a private jet for the use of its top-ranking officials. The cost of the private jet is P150 million and
can be depreciated either using a composite useful life or useful lives of its major components. It is expected to be used
over a period of 7 years. The engine of the jet has a useful life of 5 years. The private jet’s tires are replaced every 2
years. The private jet will be depreciated using the straight-line method over
a. 7 years composite useful life
b. 5 years useful life of the engine, 2 years useful life of the tires, and 7 years useful life applied to the balance cost of
the jet
c. 2 years useful life based on the conservatism (the lowest useful life of all the parts of the jet)
d. 5 years useful life based on a simple average of the useful lives of all major components of the jet

17. An entity imported machinery to install in its new factory premises before year-end. However, due to circumstances
beyond its control, the machinery was delayed by a few months but reached the factory premises before year-end. While
this was happening, the entity learned from the bank that it was being charged interest on the loan it had taken to fund
the cost of plant. What is proper treatment of freight and interest expense under IAS 16?
a. Both expenses should be capitalized
b. Interest may be capitalized but freight should expensed
c. Freight charges should be capitalized but interest cannot be capitalized under these circumstances
d. Both expenses should be expensed

18. XYZ Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capital-intensive industry and thus has
significant other property, plant and equipment that it carries in its books. It decided to revalue its property, plant and
equipment. The company’s accountant has suggested the alternative that follow. Which one of the options should XYZ
Inc. select in order to be in line with the provisions of IAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as that method is less cumbersome and easy
compared to revaluing all assets together.
b. Revalue an entire class of property, plant, and equipment
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate

19. An entity installed a new production facility and incurred a number of expenses at the point of installation. The
entity’s accountant is arguing that most expenses do not qualify for capitalization. Included in those expenses are initial
operating losses. These should be
a. Deferred and amortized over a reasonable period of time
b. Expensed and charge to the income statement
c. Capitalized as part of the cost of plant as directly attributable cost
d. Taken to retained earnings since it is unreasonable to present it as part of the current year’s income statement.
20. IAS 16 requires that revaluation surplus resulting from initial revaluation of property, plant, and equipment should be
treated in one of the following ways. Which of the four options mirrors the requirements of IAS 16?
a. Credited to retained earnings as this is an unrealized gain
b. Released to the income statement an amount equal to the difference between the depreciation calculated on historical
cost vis-à-vis revalued amount.
c. Deducted from current assets and added to the property, plant and equipment
d. Debited to the class of property, plant and equipment that is being revalued and credited to a reserve captioned
“revaluation surplus.” Which is presented under “ equity”

PAS 17 LEASES
1. In a lease that is recorded as a direct-financing lease by the lessor, interest revenue
a. Does not arise
b. Should be recognized over the period of the lease in an increasing rate.
c. Should be recognized over the period of the lease in a decreasing rate
d. Should be recognized in full as revenue at the lease’s inception

2. Initial direct costs incurred by the lessor in an operating lease shall be

a. Added to the carrying amount of the leased asset and recognized as expense over the lease term on the same basis as
the lease income
b. Deferred and allocated to income over the lease term in proportion to the recognition of the rent income.
c. Recognized as expense in the income statement in the period in which they are incurred
d. Deferred and allocated to income over the lease term or immediately recognized as expense at the option of the lessor

3. If the sale and lease back transaction results in a finance lease, any gain from the sale and lease back should
a. Be recognized in income immediately
b. Be deferred and amortized over the lease term
c. Be deferred and amortized over the shorter between the lease term and the life of the asset
d. Not be recognized

4. Which is the correct accounting treatment for a finance lease in the accounts of a lessor?
a. Treat as a noncurrent asset equal to net investment in lease. Recognize all finance payments in income statement.
b. treat as a receivable equal to gross amount receivable on lease. Recognize finance payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the lease. Recognize finance payment by reducing debt and taking
interest to income statement.
d. Treat as a receivable equal to net investment in the lease. Recognize finance payments in cash by reduction debt.

5. Lessors should show assets that are out on operating leases and income therefrom as which of the following
a. The assets should be kept off the balance sheet and the lease income should go to reserves
b. The asset should be kept off the balance sheet and the lease income should go to the income statement
c. The asset should be shown in the balance sheet according to its nature and the lease income should go to reserves
d. The asset should be shown in the balance sheet according to its nature with the lease income going to the income
statement.

6. A company leases a new building. Title to the building will pass to the lessee at the end of the lease. Based on these
facts,
a. It will be a capital lease, regardless of additional facts
b. It will be a capital lease, provided other necessary conditions are met
c. It will be an operating lease, despite any additional facts
d. It will be an operating lease, provided other necessary conditions are met

7. Which of the following statements characterizes a sales type lease?

a. The lessor recognizes only interest revenue over the life of the asset
b. The lessor recognizes only interest revenue over the lease term
c. The lessor recognizes a dealer’s profit at lease inception and interest revenue over the lease term
d. The lessor recognizes a dealer’s profit at lease inception and interest revenue over the asset life

8. Which of the following statements characterizes lessor accounting for residual values?
a. Guaranteed residual values are included in the gross investment amount, but unguaranteed residual values are
excluded from the gross investment
b. Unguaranteed residual values are included in the gross investment amount, but guaranteed residual values are
excluded from the gross investment
c. Guaranteed residual values and unguaranteed residual values are excluded from the gross investment.
d. Guaranteed residual values and unguaranteed residual values are included in the gross investment

9. The classification of the lease is normally carried out

a. At the end of the lease term c. At the inception of the lease
b. After a “cooling off” period of one year d. When the entity deems it to be necessary

10. According to IAS 17 Leases, because lease payments are made over the lease term, the payments must be divided
into the following components:

I II III IV
 Reduction of the lease liability Yes Yes No Yes
 Interest expense incurred Yes No Yes No
 Reimbursement of lessor costs Yes Yes Yes No
 Receipt of lease incentives No No Yes Yes

a. I; b. II; c. III d. IV

11. In relation to finance leases, the following information must be disclosed separately in the financial statements of
lessors:
I. Unearned finance income.
II. Contingent rents recognised as income in the period.
III. The unguaranteed residual values accruing to the benefit of the lessee.
IV. The accumulated allowance for uncollectible minimum lease payments receivable.
a. I, II and IV only; b. I, III and IV only; c. II, III and IV only; d. II and IV only.

12. When substantially all of the risks and rewards incident to ownership remain with the lessor, the arrangement is
treated as:
a. an operating lease; b. a finance lease; c. a sale and leaseback; d. a non-lease, rental arrangement.

13. Under IAS 17 Leases, lessors are required to account for lease receipts from operating leases as:
a. revenue, on a reducing balance basis over the lease term;
b. income, on inception date of the lease;
c. income, on a straight-line basis over the lease term;
d. revenue, at the end of the lease term.

14. In respect to non-cancellable operating leases, lessees are required under IAS 17 Leases, to disclose the total of
future minimum lease payments for each of the following periods:
a. not later than 3 months;
b. later than 3 months and not later then 6 months;
c. later then 6 months and not later than 9 months;
d. not later than one year.

15. With respect to operating leases, lessors are required under IAS 17 Leases, to make the following disclosures:
I. Total contingent rents recognised as income in the period.
II. Future minimum lease payments under individual, cancellable operating leases, separately.
III. A general description of the lessee’s leasing arrangements.
IV. Future minimum lease payments under non-cancellable operating leases in aggregate.
a. I, II and III only; b. I, III and IV only; c. II and III only; d. I, II and IV only.

16. A lessee when accounting for a lease incentive received under an operating lease treats is as a:
a. increase in rental income over the lease term;
b. increase in rental expense over the lease term;
c. reduction in rental expense over the lease term;
d. reduction in rental income over the lease term;
17. Burgess Limited accepts a lease incentive to enter into a 3-year operating lease for a building. The incentive is a cash
amount of P5 000 received on signing of the lease agreement. The lessee initially records this transaction as follows:
a. DR Lease expense P5 000
CR Cash P5 000;
b. DR Incentive from lessor P5 000
CR Cash P5 000;
c. DR Incentive to lessee P5 000
CR Rent income P5 000;
d. DR Cash P5 000
CR Lease incentive from lessor P5 000.

18. Timely Limited accepts a lease incentive to enter into a 4-year operating lease for equipment. The incentive is cash
amounting to P10 000 that will be paid on the date the lease agreement is signed. On inception of the lease, the lessor
will record:
a. DR Cash P10 000
CR Incentive to lessee P10 000;
b. DR Incentive to lessee P10 000
CR Cash P10 000;
c. DR Rent income P10 000
CR Rent expense P10 000;
d. DR Cash P10 000
CR Rent income P10 000.

19. A lease transaction that involves the sale of an asset that is then leased back to the seller for all or part of its
remaining economic life is known as:
a. a sale and leaseback; b. a novated lease; c. an operating lease; d. a leveraged lease.

20. If a sale and leaseback transaction results in a finance lease, IAS 17 Leases, provides the following accounting
treatment for any excess of sales proceeds over the carrying amount:
a. recognise directly in retained earnings of the seller-lessee;
b. immediately recognise as income by the seller-lessee;
c. defer and amortise over the lease term;
d. include in the capitalised amount of the leased asset.

21. The classification of a lease as either an operating or finance lease is based on

a. The length of the lease
b. The transfer of the risks and rewards of ownership
c. The minimum lease payments being at least 50% of the fair value
d. The economic life of the asset

22. The accounting concept that is principally used to classify lease into operating and finance is
a. Substance over form b. Prudence c. Neutrality d. Completeness

23. Which of the following situations would prima facie lead to a lease being classified as an operating lease?
a. Transfer of ownership to the lessee at the end of the lease term
b. Option to purchase at a value below the fair value of the asset
c. The lease term is for a major part of the asset’s life
d. The present value of the minimum lease payments is 50% of the fair value of the asset

24. The classification of a lease is normally carried out

a. at the end of the lease term c. At the inception of the lease
b. after a “ cooling off” period of one year d. When the entity deems it to be necessary

25. Where there is a lease of land and buildings and the title to the land is not transferred, generally the lease is treated
as if
a. The land is a finance lease, the building is a finance lease
b. The land is a finance lease, the building is an operating lease
c. The land is an operating lease, the building is a finance lease
d. The land is an operating lease, the building is an operating lease

26. The lease of land and building when split causes difficulty in the allocation of the minimum lease payments. In this
case the minimum lease payments should be split
a. According to the relative fair value of two elements
b. By the entity based on the useful life of the two elements
c. Using the sum of the digits method
d. According to any fair method devised by the entity

27. An entity classifies a lease of land and buildings as an investment property under IAS 40. The entity has adopted the
fair value model. In this case
a. Separate measurement of the lease of land and buildings is compulsory
b. Separate measurement of the lease of land and buildings is not required
c. The lease is treated as an operating lease
d. The lease cannot be treated as an operating lease

28. Which is the correct accounting treatment for a finance lease in the accounts of a lessor?
a. Treat as a noncurrent asset equal to a net investment in lease. Recognize all finance payments in income statements
b. Treat as a receivable equal to gross amount receivable on lease. Recognize finance payments in cash and by reducing
debtor.
c. Treat as a receivable equal to net investment in the lease. Recognize finance payment by reducing debtor and taking
interest to income statement
d. Treat as a receivable equal to net investment in the lease. Recognize finance payments in cash and by reduction of
debtor

29. The profit on a finance lease transaction for lessors who are manufacturers of dealers should
a. Not be recognized separately from finance income
b. Be recognized in the normal way on the transaction
c. Only be recognized at the end of the lease term
d. Be allocated on a straight-line basis over the life of the lease

30. In the case of sale and leaseback transactions, if the sale is at below the fair value of the assets and the loss is
compensated by future lease payments, then the loss is
a. Recognized immediately in reserves
b. Deferred and amortized over the useful life of the assets
c. Deferred until the end of the lease term
d. Recognized immediately in the profit and loss

31. Lessor should show assets that are out on operating leases and income therefrom as follows:
a. The asset should be kept off the balance sheet and the lease income should go to reserves
b. The asset should be kept off the balance sheet and the lease income should go to the income statement
c. The asset should be shown in the balance sheet according to its nature and the lease income should go to reserve
d. The asset should be shown in the balance sheet according to its nature with the lease income going to the income
statement

PAS 18 REVENUE
1. The following statements about the scope of PAS 18 is correct except
a. Goods includes goods produced by the entity for the purpose of sale and goods purchased for resale, such as
merchandise purchased by a retailer or land and other property held for resale.
b. The rendering of services typically involves the performance by the entity of a contractually agreed task over an agreed
period of time
c. Services should be rendered within a single period.
d. Some contracts for the rendering of services are directly related to construction contracts, for example, those for
services of project managers and architects.

2. The use by others of entity assets gives rise to revenue in the form of: _______ charges for the use of cash or cash
equivalents or amounts due to entity
a. Interest b. Royalties c. Dividends d. Insurance
3. It is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity
when those inflows result in increases in equity, other than increases relating to contributions from equity participants
a. Interest b. Royalties c. Dividends d. Insurance

4. When measuring the revenue from dividends, IAS 18 Revenue, allows the recognition of dividend revenue only when:
a. the revenue has been realised; c. when the right to receive payment is established;
b. the cash is received; d. the dividend amount is determined and the dividend has been declared.

5. So long as it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be
measured reliably, revenue from royalties should be recognised on:
a. an accruals basis; c. the net present value of cash flows method;
b. the cash basis of accounting; d. a percentage of completion basis.

6. According to IAS 18 Revenue, the revenue from ‘interest’ should be recognised using the following measurement basis:
a. the accrual basis;
b. the cash basis;
c. the historical cost basis;
d. a time proportionate basis that takes into account, the effective yield;

7. Revenue is generally recognized when realized or realizable and earned. This statement describes the
a. Consistency characteristic c. Relevance recognition principle
b. Matching principle d. Relevance characteristic

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

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

9. “Bill and held” sales, in which delivery is delayed at the buyer’s request but the buyer assumes title and accepts
invoicing, should be recognized when
a. The buyer makes an order
b. The seller starts manufacturing the goods
c. The title has been transferred but the goods are kept on the seller’s premises
d. It is probable that the delivery will be made, payment terms have been established, and the buyer has acknowledged
the delivery instructions

10. ABC Inc. is a large manufacturer of machines. XYZ Ltd., a major customer of ABC Inc., has placed an order for a
special machine for which it has given a deposit 112,500 to ABC Inc. The parties have agreed on a price for the machine
of 150,000. As per the terms of the sales agreement, it is an FOB (free on board) contract and the title passes to the
buyer when goods are loaded onto the ship at the port. When should the revenue be recognized by ABC Inc.?
a. When the customer orders the machine
b. When the deposit is received
c. When the machine is loaded on the port
d. When the machine has been received by the customer

11. Revenue from an artistic performance is recognized once

a. The audience register for the event online
b. The tickets for the concert are sold
c. Cash has been received from the ticket sales
d. The event takes place

12. X Ltd., a large manufacturer of cosmetics, sells merchandise to Y Ltd., a retailer, which in turn sells retail outlets. Y
Ltd, purchases merchandise from X Ltd, under a consignment contract. When should revenue from the sale of
merchandise to Y Ltd, be re recognized by X Ltd.?
a. When goods are delivered to Y Ltd.
b. When goods are sold by Y Ltd.
c. It will depend on the terms of delivery of the merchandise by X Ltd. to Y Ltd. (i.e., CIF [cost, insurance, and freight] or
FOB)
d. It will depend on the terms of payment between Y Ltd. and X Ltd. (i.e., cash or credit)

13. M Company a new company manufacturing and selling consumable products, has come out with an offer to refund
the cost of purchase within one month of sale if the customer is not satisfied with the product. When M Company
recognize the revenue?
a. when goods are sold to the customers
b. After one month of sale
c. Only if goods are not returned by the customers after the period of one month
d. At the time of sale along with an offer to revenue of the liability of the same amount for the possibility of the return

14. Micrium, a computer chip manufacturer company, sells its products to its distributors for onward sales to the ultimate
customers. Due to frequent fluctuations in the market prices for these goods. Micrium has a “price protection” clause in
the distributor agreement that entitles it to raise additional billings in case of upward price movement. Another clause in
the distributor’s agreement is that Micrium can at any time reduce its inventory by buying back goods at the cost at which
it sold the goods to the distributor. Distributor pay for the goods within 60 days from the sale of goods to them. When
should Micrium recognize revenue on sale of goods to the distributors?
a. When the goods are sold to the distributors
b. When the distributors pay to Micrium the cost of goods (i.e., after 60 days of the sale of goods to the distributor)
c. When goods are sold to the distributor provided estimated additional revenue is also booked under the “protection
clause” based on past experience
d. When the distributor sell goods to the ultimate customers and there is no uncertainty with respect to the “price
protection” clause or the buyback of goods

15. Company X Inc. manufacturers and sells standard machinery. One of the conditions in the sale contract is that
installation of machinery will undertaken by X Inc. During December 2005 X received onetime contract from A Company
to manufacture, install, and maintain customized machinery. It is the first time X Inc. will be producing this kind of
machinery, and it is expecting numerous changes that would need to be made to the machine after the installation is
completed, which one period is described in the contract of sale as the “maintenance period.” The total cost of making
the changes during the maintenance period cannot be reasonably estimated at the time of the installation. When should
the revenue from sale of this special machine be recognized?
a. when the machinery is produced
b. When the machinery is produced and delivered
c. When the installation is complete
d. When the maintenance period as per the contract of sale expires

PAS 19 EMPLOYEE BENEFITS

1. Which is incorrect concerning the measurement of a defined contribution plan?
a. The contribution should be recognized as expense in the period it is payable
b. Any unpaid contribution at the end of the period should be recognized as accrued liability
c. An enterprise should disclose the amount recognized as an expense for a defined contribution plan.
d. The enterprise pays fixed contributions into a separate entity known as a fund, and will have a legal or constructive
obligation to pay further contributions if the fund does not have sufficient assets to pay all employee benefits.

2. Under a defined benefit plan, past service cost is

a. Increase in the present value of the defined benefit obligation resulting from employee service in the current period.
b. The increase during a period in the present value of the defined benefit obligation which arises because the benefits
are one period closer to settlement.
c. Service rendered in prior periods resulting from the introduction of a retirement benefit plan or amendment of an
existing plan.
d. Present value of expected future payments required to settle the obligation arising from employee service in the
current and prior periods.

3. When an entity opts to present the income statement classifying expenses by function, which of the following is not
required to be disclosed as “additional information”?
a. Depreciation expense b. Employee benefits expense
c. Director’s remuneration c. Amortization expense

4.The present value of future benefits payable as a result of work done before the start or changes in a pension plan is
the definition of
a. Minimum liability b. Fair value of plan assets c. Projected benefit obligation d. Prior service cost

5. Which is not a component of pension expense under a defined benefit plan?

a. Amortization of past service cost c. Expected return on plan assets
b. Gain or loss on curtailment/settlement d. Actual return on plan assets

6. An entity operates a defined benefit plan that pays employees an annual benefit based on their number of years of
service. The annual payment does allow the employer to vary the final benefit. Over the last five years the entity has
used this flexibility to increase employees’ pensions by the current growth in earnings per share. How will employees’
benefit be calculated if they retire in the current period?
a. It will be based on the existing plan rules with no additional award.
b. It will be based on the existing plan rules plus the current rate of growth of earnings per share.
c. It will be based on the plan rules plus the current rate of inflation.
d. It will be based on the plan rules plus the increase in earnings per share anticipated over the remaining working lives
of the employees.

7. An entity uses Philippine Financial Reporting Standards to prepare its financial statements, but the defined benefit
obligation has been calculated using assumptions that are different from PFRS. The financial statements of the entity also
do not take into account unrecognized past service costs. How should the entity measure its net pension liability?
a. The net present value of the defined benefit obligation less the fair value of plan assets.
b. The net present value of the defined benefit obligation less the fair value of plan assets less the unrecognized past
service costs.
c. The net present value of the defined benefit obligation less the fair value of the plan assets less the unrecognized past
service costs and in addition, a review of the assumptions should be undertaken to remeasure the obligation.
d. The value of the entity’s balance sheet will simply be used in the consolidated financial statements.

8. Which of the following statements characterizes defined contribution plans?

a. They are more complex in construction than defined benefit plans
b. The employer’s obligation is satisfied by making the appropriate amount of periodic contribution
c. The investment risk is borne by the employer
d. Contributions are made in equal amounts by employer and employees

9. If the actual return on pension fund assets exceeds the expected return for the period, the difference is
a. A deferred loss
b. A deferred gain
c. Recognized as a loss in the current period
d. Recognizes as a gain in the current period

10. Which of the following is not a component of net periodic pension cost?
a. Interest cost
b. Expected return on plan assets
c. Benefits paid to retirees
d. Amortization of past service cost

11. Which of the following measures of an employer’s pension obligation under a defined benefit plan will result in the
largest measurement of the liability?
a. Vested benefits pension obligation c. Projected benefit obligation
b. Unvested benefits pension obligation d. Accumulated benefit obligation

12. Which of these elements are taken into account when determining the discount rate to be used?
a. Market yields at the balance sheet date on high-quality corporate bonds
b. Investment or actuarial risk
c. Specific risk associated with the entity’s business
d. Risk that future experiences may differ from actuarial assumptions

13. Which of these events will cause a change in a defined benefit obligations?
a. changes in mortality rates or the proportion of employees taking early retirement
b. changes in the estimated salaries or benefits that will occur in the future
c. Changes in the estimated employee turnover
d. all of these

14. Which of these assets should be included within the valuation of plan assets
a. Unpaid contributions
b. Unlisted corporate bonds that are redeemable but not transferable without the entity’s permission
c. A loan to the entity that cannot be assigned to a third party
d. Investment is listed companies

15. An entity has decided to improve its defined benefit pension scheme. The benefit payable will be determined by
reference to 60 years service rather than 80 years service. As a result, the defined benefit pension liability will increase
by P10 million. The average remainig service lives of the employees is 10 years. How should the increase in the pension
liability by P10 million be treated in the financial statements?
a. The past service cost should be charged against retained profit
b. The past service cost should be charged against profit or loss for the year
c. The past service cost should be spread over the remaining working lives of the employees
d. The past service cost should not be recognized

PAS 20 ACCOUNTING FOR GOVERNMENT GRANT AND DISCLOSURE OF GOVERNMENT ASSISTANCE

1. In the case of a nonmonetary grant, which of the following accounting treatments is prescribed by IAS 20?
a. record the asset at replacement cost and the grant at a nominal value
b. record the grant at a value estimated by management
c. record both the grant and the asset at fair value of the nonmonetary asset
d. record only the asset at fair value; do not recognize the fair value of the grant

2. In the case of grants related to an asset, which of these accounting treatments (balance sheet presentation) is
prescribed by IAS 20?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount of the asset
c. Record the grant at fair value in the first year and take it to income in the subsequent year
d. Take it to the income statement and disclose it as an extraordinary gain

3. In the case of grants related to income, which of these accounting treatments is prescribed by IAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity
b. Present the grant in the income statement as ”other income” or as a separate line item, or deduct it from the related
expense.
c. Credit the grant to “retained earnings” on the balance sheet
d. Credit the grant to sales or other revenue from operations in the income statement

4. Which of these disclosures is not required by IAS 20?

a. The accounting policy adopted for government grants, including methods of presentation adopted in the financial
statements
b. Unfulfilled conditions and other contingencies attaching to government assistance
c. The names of the government agencies that gave the grants along with the dates of sanction of the grants by these
government agencies and the dates when cash was received in case of monetary grants
d. The nature and extent of government grants recognized in the financial statements and an indication of other forms of
government assistance from which the entity has directly benefited

5. Which of these disclosures is not required by PAS 20?

a. The accounting policy adopted for governments grants, including methods of presentation adopted in the financial
statements.
b. Unfulfilled conditions and other contingencies attaching to governments assistance.
c. The names of the government agencies that gave the grants along with the dates when cash was received in case of
monetary grants.
d. The nature and extent of government grants recognized in the financial statements and an indication of other forms of
government assistance from which the entity has indirectly benefited

6. Which of the following is not specifically excluded from the purview of PAS 20 on government grant?
a. Government participation in ownership of the entity
b. Government grant covered by PAS 41
c. Government assistance provided in the form of tax benefits
d. Forgivable loan from the government

PAS 21 THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES

1. 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
a. That of the parent.
b. Determined using the guidance for determining an entity’s functional currency.
c. That of the country of incorporation
d. The same as the presentation currency.

2. Generally speaking, a gain or loss arising from (1) foreign currency transaction and (2) foreign currency translation are
reported in the
a. (1) Income statement (2)Income statement
b. (1) Income statement (2) Balance sheet
c. (1) Balance sheet (2) Income statement
d. (1) Balance sheet (2) Balance sheet

3. Which of these considerations would not be relevant in determining the entity’s functional currency?
a. The currency that influences the costs of the entity
b. The currency in which finance is generated
c. The currency in which receipts from operating activities are retained
d. The currency that is the most internationally acceptable for trading

4. 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 operations functions independently from the parent, the functional currency will be
a. That of the parent
b. Determined using the guidance for determining an entity’s functional currency
c. That of the country of incorporation
d. The same as the presentation currency

5. An entity started trading in country A, whose currency was the dollar. After several years the entity expanded and
exported its product to country B, whose currency was the euro, and conducted business through a branch. The
functional currency of the group was deemed to be the dollar but by the end of 2007, 80% of the business was
donducted in country B using the euro. At the end of 2006, 30% of the business was conducted in the euro. The
functional currency should
a. Remain the dollar
b. Change to the euro at the beginning of 2007
c. Change to the euro at the end of 2007
d. Change to the euro at the end of 2007 if its is considered that the underlying transactions, events, and conditions
business have changed

6. An entity started trading in country A, whose currency was the dollar, After several years the entity expanded and
exported its product to country B, whose currency was the euro. The business was conducted through a subsidiary in
country B. The subsidiary is essentially an extension of the entity’s own business, and the directors of the two entities
are common. The functional currency of the subsidiary is
a. The dollar b. The euro c. The dollar or the euro d. Difficult to determine

7. An entity has a subsidiary that operates in a country where the exchange rate fluctuates wildly and there are seasonal
variations in the income and expenditures patterns. Which of the following rates of exchange would probably be used to
translate the foreign subsidiary’s income statement?
a. Year-end spot rate
b. Average for the year
c. Average of the quarter-end rates
d. Average rates for each individual month of the year

PAS 23 BORROWING COSTS

1. The period of time during which capitalization of interest begins and when capitalization of interest ends is
a. From the time funds are borrowed until the asset is substantially complete and ready for its intended use.
b. From the time the first expenditures are incurred until the asset is substantially complete and ready for its intended
use.
c. From the time the first expenditures are incurred until no further interest cost is being incurred
d. From the time the first expenditures are incurred until activities necessary to get the asset for its intended use have
begun.

2. Under PAS 23, which of the following may not be considered a qualifying asset?
a. A power generation plant that normally may not be considered a construct.
b. An expensive private jet that can be purchased from a local vendor
c. A too bridge that usually takes more than a year to build
d. A ship that normally takes one to two years to complete.

3. The period of time during which interest must be capitalized ends when
a. The assets is substantially complete and ready for its intended use
b. No further interest cost is being incurred
c. The asset is abandoned, sold, or fully depreciated
d. The activities that are necessary to get the asset ready for its intended use have begun

4. Borrowing costs can be capitalized as part of the asset when

a. The asset is a qualifying asset and the entity has opted for the benchmark treatment.
b. The asset is a qualifying asset and the entity has opted for the allowed alternative treatment, but it is not probable that
the borrowing costs will result in future economic benefits to the entity.
c. The asset is a qualifying asset and the entity has opted for the allowed alternative treatment and it is probable that the
borrowing costs will result in future economic benefits to the entity, but the costs cannot be measured reliably.
d. The asset is a qualifying asset and the entity has opted for the allowed alternative treatment and it is probable that the
borrowing costs will result in future economic benefits to the entity, and the costs can be measured reliably.

5. Which of the following costs may not be eligible for capitalization as borrowing costs under IAS 23?
a. Interest on bonds issued to finance the construction of a qualifying asset
b. Amortization of discounts or premiums relating to borrowings that qualify for capitalization
c. imputed cost of equity
d. Exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to
interest costs pertaining to a qualifying asset

6. Capitalization of borrowing costs

a. Shall be suspended during temporary periods of delay
b. May be suspended only during extended periods of delays in which active development is delayed
c. Should never be suspended once capitalization commences
d. Shall be suspended only during extended periods of delays in which active development is delayed

7. Which of the following is not a disclosure requirement under IAS 23?

a. Accounting policy adopted for borrowing cost
b. Amount of borrowing costs capitalized during the period
c. Segragation of assets that are “ qualifying assets” from other assets on the balance sheet or as a disclosure in the
footnotes to the financial statements
d. Capitalization rate used to determine the amount of borrowing costs eligible for capitalization

PAS 24 RELATED PARTY DISCLOSURE

1. Which can be classified as related parties?
a. Two entities simply because they have a director or other key management personnel in common.
b. Public utilities, government departments and agencies.
c. Venturers in relation to the joint venture
d. Two venturers simply because they share joint control over a joint venture.

2. Unrelated parties include all of the following, except

a. Two venturers simply because they share joint control over a joint venture.
b. Providers of finance, trade unions, public utilities and government departments and agencies simply by virtue of their
normal dealings with an entity.
c. A customer, supplier, franchisor or general agent with whom an entity transacts a significant volume of business,
merely by virtue of the resulting economic dependence.
d. Postemployment benefit plan for the benefit of employees of the entity.

3. Close family members of an individual are those who may be expected to influence or be influenced by that individual
in their dealings with the entity. Close family members include all of the following, except
a. The individual’s spouse and children
b. Children of the individual’s spouse
c. Dependents of the individual or the individual’s spouse
d. Brothers and sisters

4. It is the method used in pricing transactions between related parties by making reference to comparable goods sold in
an economically comparable market to a buyer unrelated to the seller.
a. No specific method c. Fixed price method
b. Cost plus 10 % mark-up method d. Uncontrolled price method

5. PAS 24 requires disclosure of compensation of key management personnel. Which of the following would not be
considered “compensation” for this purpose?
a. Short-term benefits b. Share-based payments
c. Termination benefits d. Reimbursement of out-of-pocket expenses

6. If there have been related party transactions during the year, an entity needs to make, at a minimum, certain
disclosures. Which of the following is not a required minimum disclosure?
a. The amount of the related party transactions.
b. The amount of the outstanding related party balances and their terms and conditions along with the details of
guarantees given and received
c. The amount of similar transactions with unrelated parties to establish that comparable related party transactions have
been entered at arm’s length.
d. Provisions for doubtful debts related to the amount of outstanding related party balances and expense recognized
during the year in respect of bad or doubtful debts due from related parties.

7. The minimum disclosures prescribed under PAS 24 are to be made separately for certain categories of related parties.
Which of the following is not among the list of categories specified under the Standard for purposes of separate
disclosure?
a. Entities with joint control or significant influence over the entity.
b. The parent company of the entity
c. An entity that has a common director with the entity
d. Joint ventures in which the entity is a venturer.

8. Which of the following is not a related party as envisaged by IAS 24?

a. A director of the entity
b. The parent company of the entity
c. A shareholder of the entity that holds 1% stake in the entity
d. The son of the chief executive officer of the entity

9. IAS 24 requires disclosure of compensation of key management personnel. Which of the following would not be
considered “compensation” for this purpose
a. short-term benefits
b. share-based payments
c. termination benefits
d. Reimbursement of out-of-pocket expenses

10. The minimum disclosure prescribed under IAS 24 are to be made separately for certain categories of related parties.
Which of the following is not among the list of categories specified under the Standard for the purpose of separate
disclosure
a. Entities with joint control or significant incluence over the entity
b. The parent company of the entity
c. An entity that has a common director with the entity
d. Joint ventures in which the entity is a venturer
PAS 32 & 39 FINANCIAL INSTRUMENTS

1.Which one is not a financial asset?

a. Cash
b. To deliver cash or other financial asset to another enterprise
c. A equity instrument of another enterprise
d. A contractual right to exchange financial instrument with another enterprise under conditions that are potentially
favorable

2. “Trading securities” are

a. Debt and equity securities that are purchased and held indefinitely and will be available to be sold in response to
liquidity needs.
b. Debt securities acquired with the positive intent and ability of holding them until maturity.
c. Financial assets with fixed or determinable payments that are not quoted in an active market.
d. Debt and equity securities acquired by the enterprise with the intent of selling them in the “near term” or very soon

3. “Available for sale securities” transferred into held to maturity securities shall be accounted for at fair value. What is
correct treatment of the security’s unrealized gain or loss at the date of transfer?
a. The unrealized gain or loss at the date of transfer shall continue to be reported as a component of stockholders’ equity
but shall be amortized through interest income over the remaining life of the debt security using the straight-line method
of amortization
b. The unrealized gain or loss at the date of transfer shall be recognized as a component of income.
c. This reclassification is not permitted under IAS
d. The unrealized gain or loss at the date of transfer shall continue to be reported as a component of stockholders’ equity
but shall be amortized through interest income over the remaining life of the debt security using the effective interest
method.

4. How should the value of nondetachable stock warrants attached to a debt security be accounted for?
a. A noncurrent liability c. A separate portion of paid-in capital
b. No value assigned d. An appropriation of retained earnings

5. Which of the following items is classified as a financial asset?

a. ordinary shares of the issuer; c. accounts receivable;
b. loans payable (owed by the borrower); d. inventory.

6. All of the following would be regarded as financial instruments except:

a. bank overdraft; b. notes payable; c. cash; d. equipment.

7. According to IAS 32 Financial Instruments: Disclosure and Presentation , which of the following items would be
regarded as a financial liability?
a. ordinary shares held in another entity;
b. a contract that is a non-derivative for which the entity is obliged to deliver a variable number of its own equity
instruments;
c. a contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market
price;
d. the right of a depositor to obtain cash from a financial institution with which it has deposited cash.

8. All of the following are regarded as financial instruments:

I. Deposits held by a financial institution;
II. Ordinary shares;
III. Raw materials inventories;
IV. Property, plant and equipment.
V. Accounts receivable and accounts payable.
a. I, II, IV and V only; b. II, III and IV only; c. I, II and V only; d. I, IV and V only.

9. The following events provide objective evidence that a financial asset has been impaired:
I. A default in interest payments.
II. The borrower enters into bankruptcy.
 III. Significant financial difficulty of the issuer.
IV. The downgrade of an entity’s credit rating.
a. I, II and III only; b. II, III and IV only; c. I, III and IV only; d. II and IV only.

10. IAS 39 Financial Instruments: Recognition and Measurement, requires that ‘Held-to-maturity’ investment be initially
measured at:
a. fair value; c. discounted future cash outflows;
b. fair value plus transaction costs; d. discounted future net cash flows.

11. The formal documentation of a hedging relationship must include identification of:

I II III IV
The hedging instrument No No Yes Yes
The hedged item No Yes Yes No
The nature of the risk being hedged No Yes Yes Yes
How the entity will assess hedge effectiveness Yes No Yes No
a. I b. II c.III d. IV

12. To be regarded as ‘highly effective’ in achieving offsetting changes in fair value or cash flows, actual hedge results
must be in the range:
a. 70% - 100%; b. 80% - 125%; c. 90% - 100%; d. 20% - 50%.

13. Whitnall Limited lost P150 on a hedging and had a corresponding gain on the hedged item of P100. The effectiveness
range for these associated transactions is:
a. 100% - 150%; b. 20% - 30%; c. 0% - 15%; d. 66% - 150%.

14. The degree to which changes in the fair value or cash flows of a hedge item that are attributable to a hedge risk are
offset by the changes in the fair value or cash flows of a hedging instrument, describes:
a. transaction exposure; b. hedge ineffectiveness; c. hedge effectiveness; d. transaction variability.

15. When accounting for a cash flow hedge, IAS 39 Financial Instruments: Recognition and Measurement, requires that
hedge ineffectiveness is:
a. recorded in profit or loss; c. recorded separately as a financial liability;
b. separately recorded in equity; d. capitalised as a deferred asset.

16. Under IAS 39 Financial Instruments: Recognition and Measurement, when a fair value hedge instrument expires it:
a. must be transferred within equity to retained earnings; c. must be discontinued retrospectively;
b. remains permanently in equity; d. must be discontinued prospectively.

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

18. What is the principal of accounting for a compound instrument?

a. The issuer shall classify a compound instrument as either a liability or equity based on evaluation of the predominant
characteristics of the contractual arrangement.
b. The issuer shall classify the liability and equity components of a compound instrument separately as financial liability or
equity instrument.
c. The issuer shall classify a compound instrument as a liability in its entirely, until converted into equity, unless the equity
components shall be presented separately.
d. The issuer shall classify a compound instrument as a liability in its entirely, until converted equity.

19. Which of the following items is not precluded from classification as held-to-maturity investment?
a. An investment in an unquoted debt instrument.
b. An investment in a quoted equity instrument
c. A quoted derivative financial asset
d. An investment in a quoted debt instrument
20. At what amount is a financial asset or financial liability measured on initial recognition?
a. The consideration paid or received for the financial asset or financial liability
b. Acquisition cost
c. Fair value
d. Zero

21. What is the best evidence of the fair value of a financial instrument?
a. Its cost, including transaction costs directly attributable to the purchase origination or issuance of the financial
instrument.
b. Its estimated value determined using discounted cash flow techniques, option pricing models or other valuation
techniques.
c. Its quoted price, if an active market exists for the financial instrument.
d. The present value of the contractual cash flows less impairment.

22. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments.
c. The interest rate that exactly discounts estimated future cash payments or receipts through the expected life of the
debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices

23. Which embedded derivative should not be accounted for separately?

a. An investment in a convertible bond that is classified as available for sale.
b. An investment in a bond whose interest payments are linked to the price of gold and the bond classified as available
for sale
c. An investment in the bond whose interest payments are linked to the price of silver and the bond is classified as at fair
value through profit or loss.
d. A call option in an investment in an equity instrument that allows the issuer to repurchase the instrument.

24. Which category includes only debt securities?

a. Marketable equity securities b. Available for sale securities c. Trading securities d. Held to maturity securities

25. Uncertainly that the party on the other side of an agreement will abide by the terms of the agreement is referred to
as
a. Price risk b. Credit risk c. Interest rate risk d. Exchange rate risk

26. A contract, traded on an exchange, that allows an company to buy a specified quantity of a commodity or a financial
security at a specified price on a future date is referred to as
a. Interest rate swap b. Forward contract c. Futures contract d. Option

27. In exchange for the right inherent in an option contract, the owner of the option will typically pay a price
a. Only when a call option is exercised
b. Only when a put option is exercised
c. When either a call option or a put option is exercised
d. At the time the option is received regardless of whether the option is exercised or not.

28. If the price of the underlying is greater than the strike or exercise price of the underlying, the call option is
a. At the money b. In the money c. On the money d. Out of the money

29. The process of bifurcation

a. Protects an entity from loss by entering into a transaction
b. Includes entering into agreements between two counterparties to exchange cash flows over specified period of time in
the future
c. Is the interaction of the price or rate with an associated or liability
d. Separates an embedded derivative from its host contract

STOCKHOLDERS EQUITY
1. Treasury stock was acquired for cash at more of its par value, and then subsequently sold for cash at its par value.
Assuming the use of the preferred method, what is the effect of the subsequent sale of the treasury stock on each of the
following?
Additional paid-in-capital Retained earnings
a. Increase Decrease
b. Increase No effect
c. No effect Decrease
d. No effect Increase

2. Which of the following features of preferred stock would make the security more like a debt than an equity instrument?
a. Participating b. Redeemable c. Voting d. Noncumulative

3. Fall Company owned shares of Hall Company on October 31, 2005. Fall declared and distributed a property dividend of
Hall Company shares when the fair value exceeded the carrying amount. What would be the accounting effects as a
consequence of the dividend declaration and distribution?
a. The dividends are recorded at fair value and retained earnings decreased
b. The dividends are recorded at cost and retained earnings increased
c. The dividends are recorded at cost and retained earnings decreased
d. The dividends are recorded at fair value and retained earnings increased

4. The bonus issue of shares has the following impact on the equity of a company;
a. total equity increases;
b. total equity decreases;
c. one equity account increases and another equity account decreases by an equal amount;
d. only the amount of issued share capital changes.

5. A company issued share option is an instrument that gives the holder the right but not the obligation to:
a. buy a certain number of shares in the company by a specified date at a stated price;
b. sell a certain number of shares in the company by a specified date at a stated price;
c. receive a certain dividend declared by the company by a specified date;
d. receive a bonus issue of shares in a proportion as notified by the company.

6. Dividends declared after the balance sheet date but before the financial statements are authorised for issue:
a. meet the criteria for recognition as a liability;
b. satisfy the criteria for recognition as an expense;
c. are recognised in the balance sheet as they meet the definition of equity;
d. do not meet the IAS 37 criteria of a present obligation.

7. Cash dividends are paid on the basis of the number of shares

a. Authorized b. Issued c. Outstanding d. Outstanding less the number of treasury shares

8. “Gains” on sale of treasury shares under the cost method should be credited to
a. Reserve b. Share premium c. Profit or loss d. Accumulated profit or loss

9. Stock dividends distributable should be classified

a. On the income statement as an expense
b. On the balance sheet as an asset
c. On the balance sheet as a liability
d. On the balance sheet as an item of stockholders’ equity

10. Which of the following transactions does not result in an increase in retained earnings?
a. Correction of an error in which administrative expense was overstated in a previous year
b. Issuance of a 3-for-1 stock split
c. A quasi-reorganization
d. Earning of net income for the period

11. All of the following distributions to stockholders are considered asset of capital distributions, except
a. Liquidating dividends b. Stock splits c. Property distributions d. Cash dividends
12. A call option on a common share is more valuable when there is a lower
a. Market value of the underlying share
b. Exercise price on the option
c. Time to maturity on the option
d. Variability of market price on the underlying share

13. Various features and restrictions are often attached to preferred stock. Which of the following combinations of
features are most typical of preferred stock with primarily debt characteristics rather than equity characteristics?
a. Noncumulative, participating, nonredeemable, voting
b. Cumulative, participating, redeemable, voting
c. Cumulative, nonparticipating, redeemable, non-voting
d. Noncumulative, nonparticipating, redeemable, non-voting

14. What is the accounting for treasury share transactions?

a. On repurchase of treasury shares, a gain or loss is recognized equal to the difference between the amount at which the
shares were issued and the repurchase price for the shares.
b. On reissuance of treasury shares, a gain or loss is recognized equal to the difference between the previous repurchase
rice and the reissuance price.
c. On repurchase or reissuance of previously repurchased own shares, no gain or loss is recognized
d. Treasury shares are accounted for as financial assets.

15. Which of the following is not one of the basic shareholders’ rights?
a. The right to participate in earnings
b. The right to maintain one’s proportional interest in the corporation
c. The right to participate in the proceeds of the sale of corporate assets upon liquidation of the corporation
d. The right to inspect the accounting records of the corporation

16. The par value of ordinary share represents

a. The liquidation value of the share
b. The book value of the share
c. The legal nominal value assigned to the share
d. The amount received by the corporation when the share was originally issued

17. Select the statement that is incorrect concerning the appropriations of retained earnings
a. Appropriations of retained earnings do not change the total amount of shareholders’ equity.
b. Appropriations of retained earnings reflect funds set aside for a designated purpose, such as plant expansion.
c. Appropriations of retained earnings can be made as a result of contractual requirements
d. Appropriations of retained earnings can be made at the discretion of the board of directors

18. Undistributed stock dividends should be reported as

a. A current liability
b. An addition to share capital outstanding
c. A reduction in total shareholders’ equity
d. A note to the financial statements

RECEIVABLES

1. The following statements pertain to presentation and valuation of receivables. Which is not in accordance with
generally accepted practice?
a. Credit balances in customers’ account receivable should be offset against other receivables to arrive at the net
amount.
b. Receivable balances should be valued at face amount minus allowance for doubtful accounts and for any
anticipated adjustments, which in the normal course of events will reduce the amount of receivable to estimated
realizable value.
c. Long-term notes receivables which nominally bear no interest or an interest, which is unreasonably low should be
stated at present value.
d. Receivables denominated in foreign currency should be translated to local currency using the exchange rate on
balance sheet date.
 2. Which of method of estimating doubtful accounts fairly presents the net realizable value of accounts receivable?
a. Percentage of sales method
b. Aging of accounts receivable method.
c. Percent of accounts receivable method
d. Direct write off method

3. On September 1 of this year, a company received a one-year note receivable bearing interest at the market rate.
The face amount of the note receivable and the entire amount of the interest are due on August 31, of next year.
At December 31, 2005, the company should report in its balance sheet
a. No interest receivable
b. Interest receivable for the interest accruing this year
c. Interest receivable for the entire amount of the interest due on August 31 of next year
d. A deferred credit for interest applicable to next year.

4. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale depending upon the substance of the
transaction
b. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables
c. The factor assumes the risks of collectibility and absorbs any credit losses in collecting the receivable
d. The financing cost (interest expense) should be recognized ratably over the collection period of the receivable

5. A troubled debt restructuring will generally result in a

a. Loss by the debtor and a gain by the creditor
b. Loss by both the debtor and the creditor
c. Gain by both the debtor and creditor
d. Gain by the debtor and a loss by the creditor

PAS 38 INTANGIBLES

1. The cost of generating goodwill among customers and potential clients is

a. Recognized as an asset because the inflow of future economic benefits is highly probable and the cost of the goodwill
can be measured reliable.
b. Not recognized as an asset because the cost cannot be measured reliably although the inflow of future economic
benefits is highly probable.
c. Recognized as an expense
d. Recognized as revenue

2. An intangible asset arising from the development phase of an internal project should be recognized if the entity can
demonstrate all of the following except
a. The technical feasibility of completing the intangible asset so that it will be available for use or sale.
b. An enterprise’s intention to complete the intangible asset and the use or sell it
c. The ability of an enterprise to use or sell the intangible asset.
d. It is impossible that future economic benefits will flow to the enterprises and the cost of completing the project can be
measured with reliability

3. On January 1, 2005, Aubrey Company had capitalized costs for a new computer software product with an economic
life of four years. Sales for 2005 were ten percent of expected total sales of the software. However, the pattern of future
sales cannot be measured reliably. At December 31, 2005, the software had a net realizable value equal to eighty percent
of the capitalized costs. The unamortized cost reported on the December 31, 2005 balance sheet should be
a. Net realizable value c. Ninety percent of net realizable value
b. Seventy-five percent of capitalized cost d. Ninety percent of capitalized cost

4 Which of the following cost is not considered as part of the cost of intangible assets?
a. Cost of preparing the asset for its intended use
b. Cost of testing the asset whether asset is functioning properly
c. Cost of introducing a new product
d. Cost of employee benefits arising directly from bringing the asset to its working condition.

5. Which of the following statements are not correct about amortization?

a. Amortization should still be charged even if the value of the asset exceeds its carrying amount.
b. Amortization commences when the asset is first used.
c. Amortization commences when the asset is available for use whether or not operations commences.
d. Assets that are unavailable for use should not be amortized but should be reviewed for impairment under IAS 36 at
least annually

6. Intangible asset like goodwill may be

a. Capitalized only when purchased
b. Capitalized either when purchased or created internally
c. Capitalized only when created internally
d. Written off directly earnings

7. In accounting for a business combination, which of the following intangibles should not be recognized as an asset apart
from goodwill?
a. Trademarks b. Lease agreements c. Employee quality d. Patents

8. Operating losses incurred during the start-up year of a new business should be
a. Accounted for and reported like the operating leases of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortised over five years
d. Capitalized as an intangible asset and amortised over useful life

9. A competitor has sued an entity for unauthorized use of its patented technology. The amount that the entity may be
required to pay to the competitor succeeds in the lawsuit is determinable with reliability, and according to the legal
counsel it is less than probable but more than remote that an outflow of the resources would be needed to meet the
obligation. The entity that was sued should at year-end
a. Recognize a provision for this possible obligation
b. Make a disclosure of the possible obligation in footnotes to the financial statements.
c. Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the amount paid on
settlement, if any
d. Set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the possible liability.

10. Which item listed below does not qualify as an intangible asset?
a. Computer software b. Registered patent
c. Copyright that is protected d. Notebook computer

11. Which of the following items would qualify as an intangible asset?

a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A program at Harvard University while
working with the company.
c. Operating losses during the initial stages of the project
d. Legal costs paid to intellectual property lawyers to register a patent.

12. Which of the following research and development related costs should be capitalized and amortized over current and
future periods?
a. Labor and material costs incurred in building a prototype model
b. Cost of testing equipment that will also be used in another separate research and development project scheduled to
begin next year
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project currently in process.

13. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge product
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A. program at Harvard University while
working with the company
c. Operating losses during the initial stages of the project
d. Legal costs paid to intellectual property lawyers to register a patent

PAS 41 AGRICULTURE
1. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income should be accounted
for in which of the following way?
a. No income should be reported annually until first harvest and sale in 30 years.
b. Income should be measured annually and reported using a fair value approach that recognizes and measures biological
growth.
c. The eventual sale proceeds should be estimated and matched to the profit and loss account over the 30-year period.
d. The plantation forest should be valued every 5 years and the increase in value should be shown in the statement of
recognized gains and losses.

2. A gain or loss arising on the initial recognition of a biological asset and from a change in the fair value less estimated
point of sale costs of a biological asset should be included in
a. The net profit or loss for the period
b. The statement of recognized gains and losses
c. A separate revaluation reserve
d. A capital reserve within equity

3. Land that is related to agricultural activity is measured

a. At fair value
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40 Investment Property
c. At fair value in combination with the biological asset that has been grown on the land
d. At the resale value separate from the biological asset that has been grown on the land.

4. Where the fair value of the biological asset cannot be determined reliably, the biological asset should be measured at
a. Cost
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation and accumulated impairment losses
d. Net realizable value

5. It is the management by an entity of the biological transformation of living animals or plants for sale into agricultural
produce or into additional biological assets
a. Agricultural activity b. Biological activity c. Economic activity d. Development activity

6. Generally speaking, biological assets relating to agricultural activity should be measured using
a. Historical cost c. A fair value approach
b. Historical cost less depreciation less impairment d. Net realizable value

7. Which of the following values in unlikely to be used in fair value measurement?

a. Quoted market price in a market
b. The most recent market transaction price
c. The present value of the expected net cash flows from the assets
d. External independent valuation

PAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

1. XYZ Company sells appliances that include a three-year warranty. Service needed under the warranty are performed by
an independent mechanic under a contract with XYZ. Based on experience, warranty costs are estimated at P300 for each
appliance sold. When should XYZ recognize the warranty costs?
a. Evenly over the life of the warranty c. When appliances are sold
b. When the services are performed d. When payments are made to the mechanic

2. Are contracts under which neither party has performed any of its obligations or both parties have partially performed
their obligations to an equal extent
a. Legal contract b. Obligating contract c. Executory contract d. Onerous contract

3. Which of this statements is incorrect about the scope of IAS 37

a. the standard does not apply to all executory contracts
b. Some amounts treated as provisions may relate to the recognition of revenue, for example where an entity gives
guarantees in exchange for a fee, IAS 37 does not address the recognition of revenue.
c. The standard defines provisions as liabilities of uncertain timing or amount.
d. IAS 37 does not prohibit nor requires capitalization of the costs recognized when a provision is made

4. Is a liability of uncertain timing or amount

a. provision b. liability c. legal obligation d. constructive obligation

5. JayJay Limited estimated that the future cash outflows relating to settlement of warranty obligations would be as
follows:
 In 1 year P40 000
 In 2 years P50 000
 In 3 years. P60 000.
A government rate for bonds with similar terms, is 6%. What is the present value of the total expected future cash
outflow?
a. P132 563; b. P140 510; c. P150 000; d. P159 000.

6. According to IAS 37 Provisions, Contingent Liabilities and Contingent Asset, when providing for the future a future
event such as the clean-up of a contaminated site, gains and other cash inflows that are expected to arise on the sale of
asset related to the clean-up, must be treated as follows:
a. set-off against the provision for the clean-up;
b. measured separately of the provision;
c. recognised directly in equity in the period in which the cash inflows arose;
d. recognised as a deferred asset.

7. The following is statement made in IAS 37 Provisions, Contingent Liabilities and Contingent Assets:
‘a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits expected to be received under it’.
This statement provides a definition of:
a. an onerous contract; b. a future operating loss;
b. a deferred liability; d. a present obligation.

8. McCann Company announced its plans for a major restructuring of its operations. Under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, the entity is able to:
a. capitalise all direct and indirect restructuring costs;
b. set up a provision for the best estimate of all restructuring costs;
c. provide only for restructuring costs that are directly and necessarily caused by the restructuring;
d. provide for restructuring costs that are associated with the ongoing activities of the entity.

9. Purcell Company is a manufacturer of swimming pools and provides its customers with warranties at the time of sale.
The warranty applies for three years from the date of sale. Past experience shows that there will be some claims under
the warranties. The appropriate treatment of this items under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, is to:
a. note disclosure is required, but do not recognise in the financial statements;
b. recognise the best estimate of costs as a provision;
c. charge the costs directly to profit or loss in the period in which the economic outflows occur;
d. transfer the expected amount of the warranty from retained earnings to a special reserve account in equity.

10. A railway company is required, under law, to overhaul its rail-tracks every three years as a safety measure. The
appropriate treatment of this event for the purposes of preparing financial statements is:
a. recognise as a provision for future maintenance costs;
b. estimate the future maintenance costs and charge as depreciation over the next three years;
c. disclose in the notes as a contingent liability, but do not recognise;
d. estimate the future cash outflows and discount to determine the amount to be recognised as a deferred liability.

11. The following statement, contained in IAS 37 Provisions, Contingent Liabilities and Contingent Assets, defines:
a. a deferred liability; b. a contingent liability; c. a deferred asset; d. a contingent asset.

12. At balance sheet date, Raschella Limited was awaiting the final details of a court case for damages awarded in its
favour. The amount and possible receipt of damages is unknown and will not be decided until the court sits again in
several months time. How is this event dealt with in the preparation of the financial statements?
a. do not recognise or disclose in the financial statements as the possibility of receiving damages is remote;
b. recognise as an asset in the financial statements as the receipt of damages is probable;
c. disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court
decision is out of its control;
d. recognise as a deferred asset in the balance sheet and re-classify as a non-current asset when the court decision is
known.

13. In respect to a contingent liability, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, requires disclosure
of
a. any increase in the contingent liability during the period;
b. an estimate of its financial effect;
c. the carrying amount at the beginning and end of the period;
d. an indication of the uncertainties about the amount or timing of expected outflows.

14. For each class of provision, an entity is required under IAS 37 Provisions, Contingent Liabilities and Contingent Assets,
to disclose the following information:
I. The carrying amount at the beginning and end of the period.
II. Amounts incurred and charged against the provision during the period.
III. Comparative information.
IV. Unused amounts reversed during the period.
V. Additional provisions made during the period.
a. I, II, IV and V only; b. I, II, and III only; c. II, III and IV only; d. I, III, IV and V only.

15. Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting treatment for future
operating losses is to:
a. determine a reasonable estimate of the cost and provide for the future liability;
b. determine the cost and charge it directly against retained earnings;
c. not recognise such items in the financial statements;
d. measure on the basis of estimated future cash flows.

16. According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets , the appropriate treatment for a
contingent asset in the financial statements of en entity is:
a. disclosure of information in the notes, but do not recognise in the financial statements;
b. recognition in the financial statements, and note disclosure;
c. recognition in the financial statements, but no further disclosure in the notes;
d. do not recognise in the financial statements, and do not disclose in the notes.

17. A provision shall be recognized when

a. An entity has a present obligation (legal or constructive) as a result of a past events; it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of
the amount of the obligation
b. An entity has a future obligation (legal or constructive) as a result of a past events; it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of
the amount of the obligation
c. An entity has a present obligation (legal or constructive) as a result of a past events; it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and a measurable estimate can be made
of the amount of the obligation
d. An entity has a present obligation (legal or constructive) as a result of a past events; it is reasonably possible that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be
made of the amount of the obligation

18. A ____________ is a programme that is planned and controlled by management, and materially changes either, the
scope of a business undertaken by an entity or the manner in which that business is conducted
a. Onerous contract b. restructuring c. Contingency d. Provision

19. Which of the following statements about Recognition of provision is incorrect?

a. In rare cases it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise
to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists
at the balance sheet date.
b. In almost all cases it will be clear whether a past event has given rise to a present obligation.
c. A past event that leads to a present obligation is called an obligating event.
d. Financial statements deals with the financial position of an entity at the end of its reporting period and possible
position in the future

20. Which of the following statements are true?

I. An entity shall not recognize a contingent liability
II. An entity shall not recognize a contingent asset
a. I only b. II only c. Both I and II d. Niether I nor II

21. Which of the following statements about contingent liabilities is correct?

a. A contingent liability is disclosed, as required by the standard, unless the possibility of an outflow of resources
embodying economic benefits is reasonably possible.
b. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by
other parties is treated as a provision.
c. Contingent liabilities may develop in a way not initially expected. Therefore they are assessed continually to determine
whether an outflow of resources embodying economic benefits has become probable.
d. A Contingent liability is recognized in the financial statements in the period in which the change in probability occurs.

22. Which of the following statements about contingent assets is incorrect?

a. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow
of economic benefits to the entity.
b. Contingent assets are not recognized in financial statements since this may result in the recognition of income that
may never be realized
c. A contingent asset is not disclosed, as required by IAS 37 where an inflow of economic benefits is probable.
d. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial
statements.

23. the amount recognized as a provision shall be the

a. minimum of the range c. mean of the expenditure
b. maximum of the range d. best estimate of the expenditure

24. Which of the following statements about IAS 37 is incorrect

a. The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present
obligation at the balance sheet date.
b. The risk and uncertaintaies that inevitably surround many events and circumstances shall be taken into account in
reaching the best estimate of a provision
c. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the
expenditure expected to be required to settle the obligation.
d. The discount rate (or rates) shall be a post-tax rate (or rates) that reflect(s) current market assessments of the time
value of money and the risks specific to the liability.

25. Which of the following statements about IAS 37 is incorrect

a. Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a
provision where there is sufficient objective evidence that they will occur.
b. Gains from the expected disposal of assets shall be taken into account in measuring a provision
c. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement shall be recognized when and only when, it is virtually certain that reimbursement will be received if the
entity settles the obligation.
d. In the income statement, the expense relating to a provision may be presented net of the amount recognized for a
reimbursement

26. Which of the following statements about IAS 37 is incorrect

a. Provision shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate
b. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the
obligation, the provision shall be reversed.
c. Where discounting is used, the carrying amount of a provision decreases in each period to reflect the passage of time.
d. A provision shall be used only for expenditure for which the provision was originally recognized.
27. Which of the following statements about the application of the recognition and measurement rules of IAS 37 is
correct?
a. Provisions shall be recognized for future operating losses
b. If an entity has a contract that is onerous, the present obligation under the contract shall not be recognized and
measured as a provision
c. No obligation arises for the sale of an operation until the entity is committed to the sale, ie there is a binding sale
agreement
d. Identifiable future operating losses up to the date of a restructuring are included in a provision, except to those that
relate to a onerous contract.

28. When can a “provision” be recognized?

a. When there is a legal obligation arising from a past obligating event, the probability of the outflow of resources is more
than remote but less than probable, and a reliable estimate can be made of the amount of the obligation.
b. When there is a constructive obligation as a result of a past obligating event, the outflow of resources is probable, and
a reliable estimate can be made of the amount of the obligation.
c. When there is a possible obligation arising from a past event, the outflow of resources is probable, and an approximate
amount can be set aside toward the obligation.
d. When management decides that it is essential that a provision be made for unforeseen circumstances and keeping in
mind this year the profits were enough but next year there may be losses.

PAS 33 EARNINGS PER SHARE

1. “Earnings per share” is calculated before accounting for which of the following?
a. Preference dividend for the period c. Taxation
b. Ordinary dividend d. Minority interest

2. In the computation of diluted EPS; which of the following are potential ordinary shares?
a. Nonconvertible preference shares (Yes); Share options (Yes)
b. Nonconvertible preference shares (Yes); Share options (No)
c. Nonconvertible preference shares (No); Share options (Yes)
d. Nonconvertible preference shares (No); Share options (No)

3. Ordinary shares issued as part of a business combination are included in the EPS calculation in the case of the
“purchase” method from.
a. The beginning of the accounting period
b. The date of acquisition
c. The end of the accounting period
d. The midpoint of the accounting year.

4. Which statement is true concerning EPS calculation?

I. Potential ordinary shares issued by a subsidiary shall be included in diluted EPS as they could potentially have an
impact on the net profit for the period and the number of shares to be included in the calculation.
II. An entity shall disclose diluted EPS only if it differs from basic EPS by a material amount.
a. I only b. II only c. Both I and II d. Neither I nor II

5. In calculating diluted earnings per share, which of the following should not be considered?
a. The weighted average number of ordinary shares outstanding
b. The amount of dividends declared on cumulative preference shares
c. The amount of cash dividends declared on ordinary shares
d. The number of ordinary shares resulting from the assumed conversion of debentures outstanding

6. In applying the treasury stock method of computing diluted earnings per share, when is it appropriate to use the
average market price of ordinary share during the year as the assumed repurchase price?
a. Always
b. never
c. When the average market price is higher than the exercise price
d. When the average market price is lower than the exercise price

CASH AND CASH EQUIVALENTS

1. If the cash balance shown in the company’s bank statement is more than the correct cash balance and neither the
company nor the bank has made any errors, there must be
a. Deposits in transit
b. Bank charges not yet recorded by the company
c. Outstanding checks
d. Withdrawals made by the company debited to another account.

2. An item that should be excluded from cash and cash equivalents on the December 31, 2005 balance sheet of Haydee
Company is
a. A customer’s check denominated in foreign currency.
b. A check issued by Haydee Company on December 30, 2005, but dated January 10, 2006.
c. A P1,000,000 time deposit which matures in 4-months
d. A P100,000 balance in the company’s current account maintained as a payroll fund.

3. Daffy Company placed P1.5 million in the money market for 120 days subject to a pretermination clause. The P1.5
million should be
a. Included as part of the cash and cash equivalents with the appropriate disclosure on the notes to the financial
statements
b. Recorded as part of tits marketable financial assets without need of any disclosure.
c. Treated as short-term receivable with appropriate disclosure in the notes to the financial statements
d. Considered as part of its marketable financial assets with appropriate disclosure in the notes to financial statements.

4. . Which of the following is not a basic characteristic of a system of cash control?

a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals

LIABILITIES

1. The use of the effective interest method in amortizing a premium on bonds payable would result in
a. An increasing amount of interest expense and a decreasing carrying amount for the bonds payable.
b. A decreasing amount of interest expense and an increasing carrying amount for the bonds payable.
c. A decreasing amount of interest expense and a decreasing carrying amount for the bonds payable.
d. An increasing amount of interest expense and an increasing carrying amount for the bonds payable

2. A two-year note was issued in an arm’s length transaction at face value for cash at the beginning of this year. There
were no other rights or privileges exchanged. The interest rate is specified at 12% per annum. Principal and interest are
payable at maturity. The prevailing rate of interest for a loan of this kind is 15% per year. What amount of interest rate
should be used to record interest expense for this year and next year respectively?
a. 12 percent and 15 percent c. 12 percent and 12 percent
b. 15 percent and 15 percent d. 15 percent and 12 percent

3. A investor purchased a bond as a long term investment on January 1. The investor’s carrying value at the end of the
first year would be highest if the bond was purchased at
a. Discount and amortized by the straight line method
b. Discount and amortized by the effective interest method
c. Premium and amortized by the straight-line method
d. Premium and amortized by the effective interest method

4. When convertible bonds are exchanged for other securities of the issuer, the securities received are measured at
a. Book value of bonds converted c. Fair value of the securities received
b. Fair value of the bonds converted d. Book value of the securities received

5. In December 2004, catalogs were printed for use in a special promotion in January 2005. The
Catalogs were delivered by the printer on December 13, 2004, with an invoice for P70,000 attached. Payment was made
in January 2005. The P70,000 should be reported as a deferred cost at the December 31, 2004 balance sheet date
because of the
a. Matching principle. b. Revenue recognition principle. c. Reliability principle. d. Cost principle.

6. The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
a. Bond indenture b. Bond debenture c. Registered bond d. Bond coupon

7. Fox Inc. issued bonds with a maturity amount of P200,000

and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
a. The yield (effective or market) rate of interest exceeded the nominal (stated) rate.
b. The nominal rate interest exceeded the yield rate
c. The yield and nominal rate coincided
d. No necessary relationship exist between the two rates

8. Under the effective interest method of bond discount or premium amortization, the periodic interest expenses is equal
to
a. The stated (nominal) rate of interest multiplied by the face value of the bonds
b. The effective (yield) rate of interest multiplied by the face value of the bonds
c. The stated rate multiplied by the beginning-of-period carrying amount of the bonds
d. The effective rate multiplied by the beginning-of-period carrying amount of the bonds

9. If bonds are sold at a discount and the effective interest method of amortization is used, interest expense will
a. Increase from one period to another
b. Remain constant from one period to another
c. Equal the cash interest payment each period
d. Be less than the cash interest payment each period

10. An entity neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the failure
to record discount amortization on interest expense and bond carrying value, respectively?
a. Understate and understate b. Understate and overstate
c. Overstate and overstate d. Overstate and overstate

11. When interest expense is calculated using the effective-interest amortization method, interest expense (assuming that
interest is paid annually) always equals the
a. Actual amount of interest paid
b. Book value of the bonds multiplied by the stated interest rate
c. Book value of the bonds multiplied by the effective interest rate
d. Maturity value of the bonds multiplied by the effective interest rate

ANSWER KEY PAS 12 :

1. C
2. B
3. D
4. D
5. A
6. A
7. D
8. A
9. D
10. B
11. C
12. B
13. D
14. B
15. A
16. C
17. C
18. C
19. B
20. C
21. D
 22. A 15. B 6. D 27. D
23. B 16. C 28. B
24. A 17. D PAS 21 29. D
25. C 18. B 1. B
26. B 19. A 2. B STOCKHOLDERS
27. B 20. C 3. D EQUITY
28. A 21. B 4. B 1. C
29. B 22. A 5. D 2. B
30. B 23. D 6. A 3. C
24. C 7. D 4. C
PAS 14 25. C 5. A
1. D 26. A PAS 23 6. D
2. B 27. B 1. B 7. C
3. A 28. C 2. B 8. B
4. D 29. B 3. A 9. D
5. C 30. B 4. D 10. B
6. B 31. D 5. C 11. B
7. C 6. D 12. B
8. A PAS 18 REVENUE 7. C 13. C
9. A 1. C 14. C
10. B 2. A PAS 24 15. D
3. C 1. C 16. C
PAS 16 4. A 2. D 17. B
1. C 5. D 3. D 18. B
2. B 6. B 4. D
3. C 7. C 5. D RECEIVABLES
4. B 8. C 6. C 1. A
5. B 9. D 7. C 2. B
6. C 10. C 8. C 3. B
7. C 11. D 9. D 4. C
8. C 12. B 10. C 5. D
9. B 13. A PAS 38
10. C 14. D PAS 32 & 39 1. B
11. B 15. D 1. C 2. D
12. B 2. D 3. B
13. C PAS 19 EMPLOYEE 3. C 4. C
14. D BENEFITS 4. B 5. B
15. B 1. A 5. C 6. A
16. B 2. A 6. D 7. C
17. C 3. C 7. B 8. A
18. B 4. D 8. C 9. B
19. B 5. D 9. A 10. D
20. D 6. D 10. B 11. D
7. C 11. C 12. B
PAS 17 8. B 12. B 13. D
1. 1. C 9. B 13. D
2. A 10. C 14. C PAS 41
3. B 11. C 15. A 1. B
4. C 12. A 16. D 2. A
5. D 13. D 17. D 3. B
6. A 14. D 18. B 4. C
7. C 15. B 19. D 5. A
8. D 20. C 6. C
9. C PAS 20 21. C
10. A 1. C 22. C
11. A 2. B 23. C
12. A 3. B 24. D
13. C 4. C 25. B
14. D 5. C 26. C
PAS 37

1. C
2. C
3. A
4. A PAS 33
5. A 1. C
6. B 2. B
7. A 3. A
8. C 4. C
9. B 5. C
10. B
11. D CASH
12. C 1. C
13. B 2. C
14. A 3. D
15. C 4. B
16. A
17. A LIABILITIES
18. B 1. C
19. D 2. B
20. C 3. C
21. C 4. A
22. C 5. B
23. D 6. A
24. D 7. B
25. B 8. D
26. C 9. A
27. C 10. A
28. B 11. C