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Test Bank: Advanced Accountin G
Test Bank: Advanced Accountin G
BANK
Advanced
Accountin
g
Part 2
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600,
Philippines
2
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1).............1
OVERVIEW ON THE TOPIC...........................................1
INTRODUCTION........................................................1
OBJECTIVE..............................................................4
SCOPE...................................................................5
DEFINITION OF BUSINESS COMBINATION........................5
Essential elements in the definition of a business combination 5
ACCOUNTING FOR BUSINESS COMBINATION....................7
IDENTIFYING THE ACQUIRER........................................8
DETERMINING THE ACQUISITION DATE.........................10
RECOGNIZING AND MEASURING GOODWILL..................11
Consideration transferred...............................12
Non-controlling interest..................................12
Previously held equity interest in the acquiree13
Net identifiable assets acquired.....................13
RESTRUCTURING PROVISIONS....................................22
SPECIFIC RECOGNITION PRINCIPLES............................23
1. Operating leases.......................................23
2. Intangible assets.......................................26
EXCEPTION TO THE RECOGNITION PRINCIPLE – CONTINGENT LIABILITIES 32
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES 34
Additional concepts on Consideration transferred 37
EXCEPTIONS TO THE MEASUREMENT PRINCIPLE.............40
CHAPTER 13: SUMMARY..........................................43
CHAPTER 13: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................44
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................48
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) 55
CHAPTER 14
BUSINESS COMBINATIONS (PART 2)............63
SHARE-FOR-SHARE EXCHANGES.................................63
BUSINESS COMBINATION ACHIEVED IN STAGES..............67
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION 70
MEASUREMENT PERIOD............................................73
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION 79
Reacquired rights...........................................82
Settlement of pre-existing relationships between the acquirer
and acquiree...................................................82
SUBSEQUENT MEASUREMENT AND ACCOUNTING...........89
DISCLOSURES........................................................96
CHAPTER 14: SUMMARY..........................................96
CHAPTER 14: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................97
CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................99
CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................108
CHAPTER 15
BUSINESS COMBINATIONS (PART 3)..........115
3
SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATION115
GOODWILL..........................................................115
Due diligence................................................116
Methods of estimating goodwill....................117
REVERSE ACQUISITIONS.........................................122
COMBINATION OF MUTUAL ENTITIES.........................126
CHAPTER 15: SUMMARY........................................127
CHAPTER 15: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................127
CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................128
CHAPTER 15: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................132
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER........134
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS
........................................................................141
CHAPTER 16
CONSOLIDATED FINANCIAL STATEMENTS (PART 1) 142
OVERVIEW ON THE TOPIC.......................................142
SCOPE...............................................................143
CONTROL...........................................................143
POWER..............................................................144
Administrative rights....................................145
Unilateral rights............................................145
Protective rights...........................................145
Substantive rights........................................146
Voting rights.................................................147
Substantive removal and other rights held by other parties
.....................................................................151
EXPOSURE OR RIGHTS TO VARIABLE RETURNS............151
ABILITY TO USE ITS POWER TO AFFECT INVESTOR’S RETURNS 151
ACCOUNTING REQUIREMENTS..................................152
Uniform accounting policies.........................152
Reporting date..............................................152
Consolidation period.....................................153
Measurement................................................153
NON-CONTROLLING INTERESTS (NCI).......................154
PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS154
CONSOLIDATION AT DATE OF ACQUISITION.................155
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION162
Step 1: Analysis of effects of intercompany transaction 162
Step 2: Analysis of net assets.......................162
Step 3: Goodwill computation......................163
Step 4: Non-controlling interest in net assets164
Step 5: Consolidated retained earnings.......164
Step 6: Consolidated profit or loss................164
Step 7: Profit or loss attributable to owners of parent and NCI
.....................................................................165
SUBSIDIARY’S OUTSTANDING CUMULATIVE PREFERENCE SHARES 180
CHAPTER 16: SUMMARY........................................181
CHAPTER 16: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................184
CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................185
4
CHAPTER 16: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................190
CHAPTER 17
CONSOLIDATED FINANCIAL STATEMENTS (PART 2) 193
INTERCOMPANY TRANSACTIONS...............................193
Intercompany sale of inventory....................203
Intercompany sale of property, plant and equipment 212
Intercompany dividends...............................220
Intercompany bond transaction...................228
CHAPTER 17: SUMMARY........................................235
CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................236
CHAPTER 18
CONSOLIDATED FINANCIAL STATEMENTS (PART 3) 241
IMPAIRMENT OF GOODWILL....................................241
INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS.246
CONTINUOUS ASSESSMENT.....................................255
Changes in ownership interest not resulting to loss of control
.....................................................................255
Loss of control..............................................261
Derecognition of other comprehensive income266
IMPORTANCE OF CONSOLIDATION.............................269
THEORIES OF CONSOLIDATION.................................269
Historical background...................................272
Advantages and disadvantages of the entity theory 272
ADDITIONAL ILLUSTRATIONS:...................................274
CONSOLIDATION OF REVERSE ACQUISITION................288
SPECIAL PURPOSE ENTITIES....................................295
CHAPTER 18: SUMMARY........................................296
CHAPTER 18: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................297
CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................297
CHAPTER 19
CONSOLIDATED FINANCIAL STATEMENTS (PART 4) 311
COMPLEX GROUP STRUCTURES................................311
Identifying the acquisition date....................312
Consolidation of a vertical group..................313
Consolidation of a D-shaped (mixed) group. 323
Complex group structure with Associate......327
INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COST 333
PUSH-DOWN ACCOUNTING.....................................338
PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES344
CHAPTER 19: SUMMARY........................................346
CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................346
CHAPTER 19: THEORY OF ACCOUNTS REVIEWER........353
CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................357
CHAPTER 20
SEPARATE FINANCIAL STATEMENTS..........358
OBJECTIVE..........................................................358
5
SCOPE...............................................................358
DEFINITIONS........................................................358
PREPARATION OF SEPARATE FINANCIAL STATEMENTS.....359
COST METHOD.....................................................359
FAIR VALUE METHOD.............................................359
EQUITY METHOD..................................................360
DISCLOSURE........................................................361
CHAPTER 20: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................362
CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................362
CHAPTER 20: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................363
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER........364
CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................364
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
.............................................................365
OBJECTIVE..........................................................365
Two ways of conducting foreign activities....365
Two main accounting issues.........................365
SCOPE...............................................................366
FUNCTIONAL CURRENCY.........................................366
CHANGE IN FUNCTIONAL CURRENCY.........................368
FOREIGN CURRENCY TRANSACTIONS.........................369
Initial recognition..........................................369
Subsequent measurement...........................370
Monetary items.............................................370
Direct and indirect quotation........................371
RECOGNITION OF EXCHANGE DIFFERENCES................371
ITEMS MEASURED AT OTHER THAN HISTORICAL COST...381
SEVERAL EXCHANGE RATES.....................................383
EXCHANGE DIFFERENCES RECOGNIZED IN OCI...........384
FOREIGN OPERATIONS...........................................385
Translation to the presentation currency......385
Translation procedures.................................386
Translation of a foreign operation.................393
Net investment in a foreign operation..........401
Disposal or partial disposal of a foreign operation 413
HYPERINFLATIONARY ECONOMY...............................414
Translation procedures – Hyperinflationary economy 414
DISCLOSURE........................................................419
CHAPTER 21: SUMMARY........................................419
CHAPTER 21: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................420
CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................424
CHAPTER 21: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................435
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER........445
CHAPTER 21 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................453
CHAPTER 22
6
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 1).........................454
OVERVIEW ON THE TOPIC.......................................454
INTRODUCTION....................................................454
PURPOSE OF DERIVATIVES......................................455
Risks.............................................................455
DEFINITION OF A DERIVATIVE..................................456
COMMON TYPES OF DERIVATIVES.............................458
MEASUREMENT OF DERIVATIVES..............................461
NO HEDGING DESIGNATION....................................461
HEDGING............................................................461
Hedging instrument......................................462
Hedged items...............................................463
HEDGE ACCOUNTING.............................................464
Hedging relationships...................................466
FAIR VALUE HEDGES..............................................466
CASH FLOW HEDGES.............................................467
HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION468
CHAPTER 22: SUMMARY........................................469
CHAPTER 22: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................470
CHAPTER 22: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................473
CHAPTER 23
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 2).........................475
ACCOUNTING FOR FORWARD CONTRACTS..................475
Illustration 1: Fair value hedge of a recognized asset 475
Illustration 2: No hedging designation (Held for speculation)
.....................................................................478
Illustration 3: Fair value hedge of a recognized liability 479
Illustration 4: No hedging designation (Held for speculation)
.....................................................................482
FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENT 482
Illustration 5: Fair value hedge of a firm sale commitment
.....................................................................483
Illustration 6: Fair value hedge of a firm purchase commitment
.....................................................................486
Illustration 7: FV hedge - firm purchase commitment (Present
value)...........................................................489
Illustration 8: FV hedge - firm purchase commitment (Present
value)...........................................................492
FAIR VALUE HEDGE VS. CASH FLOW HEDGE...............494
FIRM COMMITMENT VS. FORECAST TRANSACTION........495
CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE
........................................................................496
SUBSEQUENT ACCOUNTING FOR ACCUMULATED OCI IN CASH FLOW HEDGE
........................................................................496
Illustration 9: Cash flow hedge – forecasted purchase transaction
.....................................................................497
Illustration 10: Cash flow hedge of a forecasted sale transaction –
Present value (Indirect quotation)................501
Illustration 11: CF hedge of a recognized liability – Present value
.....................................................................503
7
CHAPTER 23: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................506
CHAPTER 23: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................509
CHAPTER 23: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................518
CHAPTER 24
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 3).........................523
ACCOUNTING FOR FUTURES CONTRACT.....................523
Illustration 1: No hedging designation..........523
Illustration 2: FV hedge of a recognized asset measured at fair
value.............................................................525
Illustration 3: FV hedge of a recognized asset measured at
LOCON..........................................................527
Illustration 4: Fair value hedge of a firm sale commitment
.....................................................................528
CASH FLOW HEDGE – SPECIFIC ACCOUNTING.............530
Illustration 5: CF hedge – Assessment of Hedge effectiveness
.....................................................................531
ACCOUNTING FOR OPTIONS....................................535
Illustration 1: Fair value hedge of a recognized asset – Put option
.....................................................................535
Illustration 2: No hedging designation – Call option 537
Illustration 3: CF hedge - forecasted transaction (Indirect
quotation).....................................................539
ACCOUNTING FOR SWAPS.......................................541
Illustration 1: CF hedge - variable-rate debt (Payment at
maturity)......................................................541
Illustration 2: CF hedge - variable-rate debt (Periodic payments)
.....................................................................543
FAIR VALUE HEDGE – HEDGED ITEM IS MEASURED AT AMORTIZED COST
........................................................................547
Illustration 3: Fair value hedge of a fixed-rate debt547
CHAPTER 24: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................552
CHAPTER 24: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................560
CHAPTER 25
ACCOUNTING FOR DERIVATIVES AND HEDGING
TRANSACTIONS (PART 4).........................569
ACCOUNTING FOR NET INVESTMENT HEDGES.............569
Illustration: Hedge of a net investment in foreign operation
.....................................................................569
EMBEDDED DERIVATIVES........................................574
Hybrid contracts with financial asset hosts. .575
Separation of embedded derivative from host contract 575
ADDITIONAL ILLUSTRATIONS:...................................576
CHAPTER 25: SUMMARY........................................584
CHAPTER 25: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................585
CHAPTER 25: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................585
CHAPTER 25: THEORY OF ACCOUNTS REVIEWER........591
8
CHAPTER 25 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS
........................................................................614
CHAPTER 26
CORPORATE LIQUIDATION AND REORGANIZATION 615
INTRODUCTION....................................................615
CORPORATE LIQUIDATION.......................................615
Measurement basis......................................615
Financial reports...........................................616
REORGANIZATION.................................................642
Types of corporate reorganization................642
CHAPTER 26: SUMMARY........................................643
CHAPTER 26: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................646
CHAPTER 26: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................651
CHAPTER 26: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................658
APPENDICES
APPENDIX A...........................................664
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1A CONTENTS AT A
GLANCE
APPENDIX B...........................................665
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1B CONTENTS AT A
GLANCE
APPENDIX C...........................................666
INTERMEDIATE FINANCIAL ACCOUNTING - PART 2 CONTENTS AT A
GLANCE
APPENDIX D...........................................667
INTERMEDIATE FINANCIAL ACCOUNTING - PART 3 CONTENTS AT A
GLANCE
APPENDIX E............................................668
ADVANCED ACCOUNTING - PART 1 CONTENTS AT A GLANCE
REFERENCES..........................................669
9
Chapter 13
Business Combinations (Part 1)
Liabilities
Payables 1,600,000 1,600,000
Non-controlling interests
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, KNAVE acquired 80% of the equity interests of
RASCAL, Inc. in exchange for cash. Because the former owners of
RASCAL needed to dispose of their investments in RASCAL by a
specified date, they did not have sufficient time to market RASCAL to
multiple potential buyers.
1
As January 1, 20x1, RASCAL’s identifiable assets and liabilities have
fair values of ₱4,800,000 and ₱1,600,000, respectively.
Transaction costs
Use the following information for the next two questions:
Fact pattern
2
On January 1, 20x1, SMUTTY acquired all of the identifiable assets
and assumed all of the liabilities of OBSCENE, Inc. On this date, the
identifiable assets acquired and liabilities assumed have fair values
of ₱6,400,000 and ₱3,600,000, respectively.
Restructuring provisions
9. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable
assets and assumed all of the liabilities of BEG, Inc. by paying
cash of ₱4,000,000. On this date, the identifiable assets acquired
and liabilities assumed have fair values of ₱6,400,000 and
₱3,600,000, respectively. ENTREAT Co. has estimated
restructuring provisions of ₱800,000 representing costs of
exiting the activity of BEG, costs of terminating employees of
BEG, and costs of relocating the terminated employees. How
much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
3
11. As of January 1, 20x1, HISTRIONAL holds a building and a
patent which are being rented out to THEATRICAL, Inc. under
operating leases. HISTRIONAL has determined that the terms of
the operating lease on the patent compared with market terms
are unfavorable. The fair value of the differential is estimated at
₱80,000. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d.
1,200,000
Liabilities
Bonds payable (w/ face amount of 1,800,00
1,600,000
₱1,600,000) 0
4
Trade secret processes 140,000
Mask works 180,000
1,080,0
Total 00
Additional information:
The computer software is considered obsolete.
The patent has a remaining useful life of 10 years and a
remaining legal life of 12 years.
FLEXIBLE, Inc. recognized the research and development costs as
expenses when they were incurred.
Customer contract #1 refers to an agreement between FLEXIBLE,
Inc. and Numbers Co., a customer, wherein FLEXIBLE, Inc. is to
supply goods to Numbers Co. for a period of 5 years. As of
acquisition date, the remaining period in the agreement is 3
years. LITHE and FLEXIBLE believe that Numbers Co. will renew
the agreement at the end of the current contract. The agreement
is not separable.
Customer contract #2 refers to FLEXIBLE’s insurance segment’s
portfolio of one-year motor insurance contracts that are
cancellable by policyholders.
FLEXIBLE, Inc. transacts with its customers solely through
purchase and sales orders. As of acquisition date, has a backlog
of customer purchase orders from 60% of its customers, all of
whom are recurring customers. The other 40% of FLEXIBLE’s
customers are also recurring customers. However, as of
acquisition date, FLEXIBLE has no open purchase orders or other
contracts with those customers.
The internet domain name is registered.
Additional information:
SUBTERFUGE intends to sell immediately a factory plant included
in the identifiable assets of DECEPTION. All of the “held for sale”
classification criteria under PFRS 5 are met. As of January 1,
20x1, the factory plant has a fair value of ₱1,200,000 and a
carrying amount of ₱1,000,000 in the books of DECEPTION. Costs
to sell the factory plant is ₱80,000.
Not included in the identifiable asset of DECEPTION is a research
and development intangible asset that SUBTERFUGE does not
intend to use. The fair value of this asset is ₱200,000.
Also, not included in the identifiable asset of DECEPTION is a
customer list, with an estimated value of ₱40,000, in the form of
a database where the nature of the information is subject to
national laws regarding confidentiality.
5
How much is the goodwill (gain on bargain purchase)?
a. 1,200,000 b. 1,280,000 c. 1,080,000 d.
1,040,000
Contingent liabilities
15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable
assets and assumed all of the liabilities of SCOLD, Inc. by paying
cash of ₱4,000,000. On this date, SCOLD’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively. Non-controlling interest has a fair value of ₱320,000.
As of January 1, 20x1, SCOLD had the following which were not
included in the acquisition-date fair value measurement of liabilities:
SCOLD has an existing contract with a customer to deliver
products at a specified future date. In accordance with the
agreement, SCOLD shall pay a penalty for failure to deliver the
said goods. CHIDE determined that the fair value of the penalty is
₱40,000. However, because CHIDE expects to comply with the
agreement, it was assessed that payment of penalty is
improbable.
SCOLD has guaranteed a bank loan of a third party. CHIDE shall
replace SCOLD as the guarantor. If the third party defaults on the
loan, CHIDE will be held liable for the guarantee. CHIDE
determined that the fair value of the guarantee is ₱120,000.
However, both SCOLD and CHIDE believe that the third party will
not default on its loan from the bank.
There is a pending unresolved litigation filed by a third party
against SCOLD. CHIDE determined that the fair value of settling
the litigation is ₱200,000. However, because the legal counsels of
both CHIDE and SCOLD strongly believe that they will win the
case, it was assessed that payment for the settlement of the
litigation is improbable.
6
amount of ₱240,000 in the books of PRODIGIOUS and a fair
value of ₱320,000.
Included in the liabilities assumed is an estimated liability on a
pending lawsuit filed against EXTRAORDINARY by a third party
with an acquisition-date fair value of ₱400,000. The carrying
amount of the liability in EXTRAORDINARY’s books immediately
before the business combination is ₱480,000. EXTRAORDINARY
guarantees to indemnify PRODIGIOUS for any settlement amount
of the liability in excess of ₱480,000.
Deferred taxes
17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets
and assumed all of the liabilities of DISHONOR, Inc. As of this
date, the carrying amounts and fair values of the assets and
liabilities of DISHONOR acquired by ATTAINDER are shown below:
Carrying
Assets amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses
on (120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Payables 1,600,000 1,600,000
7
carrying amounts and fair values of the assets and liabilities of
ABSURD are shown below:
Carrying
Assets amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses
on (120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000
8
Chapter 14
Business Combinations (Part 2)
Additional information:
COLLOQUY’s share capital consists of 60,000 ordinary shares with
par value of ₱40 per share.
CONVERSATION’s share capital consists of 3,000 ordinary shares
with par value of ₱400 per share.
9
Use the following information for the next three questions:
On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into
a business combination effected through exchange of equity
instruments. The combination resulted to CONJUNCTION obtaining
100% interest in UNION. Both of the combining entities are publicly
listed. As of this date, CONJUNCTION’s shares have a quoted price of
₱400 per share. CONJUNCTION Co. recognized goodwill of ₱300,000
on the business combination. No acquisition-related costs were
incurred. Additional selected information at acquisition date is shown
below:
CONJUNCTION Combined
Co. entity
(before
acquisition) (after acquisition)
Share capital 2,400,000 2,800,000
Share premium 1,200,000 4,800,000
Totals 3,600,000 7,600,000
10
Business combination achieved in stages – from PAS 28
11. On January 1, 20x1, OBDURATE Co. acquired 30% ownership
interest in STUBBORN, Inc. for ₱400,000. Because the investment
gave OBDURATE significant influence over STUBBORN, the
investment was accounted for under the equity method in
accordance with PAS 28.
The fair value of the identifiable net assets of NOISY, Inc. on January
1, 20x1 is ₱4,000,000. NOISY chose to measure non-controlling
interest at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets.
11
a. (1,680,000) b. (1,320,000) c. (880,000) d. 0
12
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
How should RIBALD account for the new information obtained on July
1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill
by ₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill
by ₱400,000.
13
c. As a retrospective restatement resulting to decrease in
goodwill by ₱400,000. The adjustment is treated as a
correction of a prior period error.
d. The new information obtained is ignored. No adjustment to
goodwill is necessary.
Additional information:
In addition to the business combination transaction, the following
have also transcribed during the negotiation period:
a. After the business combination, TRANSPARENT will enter into
liquidation and DIAPHANOUS agreed to reimburse TRANSPARENT
for liquidation costs estimated at ₱80,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the
appraisal fee of a building included in the identifiable assets
acquired. The agreed reimbursement is ₱40,000.
c. DIAPHANOUS entered into an agreement to retain the top
management of TRANSPARENT for continuing employment. On
acquisition date, DIAPHANOUS agreed to pay the key employees
signing bonuses totaling ₱400,000.
d. To persuade, Mr. Five-six Numerix, the previous major shareholder
of TRANSPARENT, to sell his major holdings to DIAPHANOUS,
DIAPHANOUS agreed to pay an additional ₱200,000 directly to Mr.
Numerix.
e. Included in the valuation of identifiable assets are inventories
with fair value of ₱360,000. Ms. Vital Statistix, a former major
shareholder of TRANSPARENT, shall acquire title to the goods.
14
On the other hand, SLAVE recognized the license fee paid to THRALL
as prepayment and amortized it based on the number of products
sold. The carrying amount of the prepayment on January 1, 20x1 is
₱200,000.
15
As of January 1, 20x1, there is a pending patent infringement suit
filed by EMBARRASSING, Inc. against DEMULCENT Co. DEMULCENT
recognized a probable loss on the lawsuit amounting the ₱520,000.
The patent in question shall be transferred to DEMULCENT after the
business combination. DEMULCENT’s legal advisers determined that
the fair value of the settlement of the pending lawsuit is ₱400,000.
How much is the goodwill (gain on bargain purchase)?
a. 840,000 b. 800,000 c. 280,000 d. 920,000
After assessing the expected level of profits for the year based on
forecasts and plans, as well as industry trends, VERITY estimated
that the fair value of the contingent consideration is ₱40,000.
23. Case #1: (Refer to previous problem) The actual profit for the
year is ₱2,200,000. The contingent consideration will be settled
on January 15, 20x2. The entry on December 31, 20x1 includes a
a. debit to loss of ₱20,000 to be recognized in profit or loss
b. credit to gain of ₱20,000 to be recognized in profit or loss
c. debit to loss of ₱20,000 to be recognized in OCI
d. credit to gain of ₱20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the
year is ₱1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of ₱40,000 to be recognized in profit or loss
b. credit to gain of ₱40,000 to be recognized in profit or loss
c. debit to loss of ₱40,000 to be recognized in OCI
d. credit to gain of ₱40,000 to be recognized in OCI
16
PRECIPITOUS’s shares increases to ₱480 per share as of December
31, 20x1. After consideration for the vesting conditions,
PRECIPITOUS estimated that the fair value of the contingent
consideration on January 1, 20x1 is ₱360,000.
26. Case #1: (Refer to previous problem) The actual market price
of PRECIPITOUS’s shares on December 31, 20x1 is ₱480. The
contingent consideration will be settled on January 15, 20x2. The
entry on December 31, 20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in profit or loss
c. debit to loss of ₱120,000 in OCI
d. no entry is required
Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a
ten-year contract. The contract required HORRIBLE to pay the CEO
₱400,000 if HORRIBLE is acquired before the contract expires. On
January 1, 20x1, Mr. Boss was still employed and MACABRE assumes
the obligation of paying Mr. Boss the contracted amount. How much
is the goodwill (gain on bargain purchase)?
a. 1,200,000 b. 1,920,000 c. 1,520,000 d.
1,120,000
17
Chapter 15
Business Combinations (Part 3)
18
Applications of the Direct valuation method – Purchase price
Use the following information for the next three questions:
ABOMINATE Co. is estimating the goodwill in the expected purchase
of DISLIKE, Inc. in January 20x6. The following information was
determined.
Year-end net
Year Earnings
assets
20x1 480,000 1,920,000
20x2 520,000 2,320,000
20x3 540,000 2,160,000
20x4 500,000 2,240,000
20x5 560,000 2,360,000
Total 2,600,000 11,000,000
How much is the purchase price using the "present value of average
excess earnings" approach to goodwill measurement?
a. 1,516,315 b. 3,378,901 c. 43,378,901 d.
41,516,315
19
Applications of the Direct valuation method
Use the following information for the next three questions:
DREARY Co. and DISMAL, Inc. decided to combine and set up a new
entity – Alphabets Corporation. The individual records of the
combining constituents show the following:
DREARY DISMAL,
Co. Inc.
Net assets (at fair 1,600,00 2,400,
values) 0 000
Average annual 320,00 480,
earnings 0 000
It was agreed that the normal rate of return is 10% of net assets.
Excess earnings shall be capitalized at 20%.
10. How much are the total contributions by DREARY and DISMAL,
respectively?
DREARY DISMAL
a. 3,600,000 2,400,000
b. 2,400,000 3,600,000
c. 1,600,000 2,400,000
d. 1,800,000 2,200,000
Reverse acquisition
13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires
CBA Co., a publicly listed entity, through an exchange of equity
instruments. CBA Co. issues 5 shares in exchange for each
ordinary share of ZYX, Inc. All of ZYX’s shareholders exchange
their shares in CBA Co. Therefore, CBA Co. issues 40,000 ordinary
shares in exchange for all 8,000 ordinary shares of ZYX, Inc.
20
The fair value of each ordinary share of ZYX at January 1, 20x1 is
₱800. The quoted market price of CBA’s ordinary shares at that date
is ₱160.
21
existence of contingent liabilities is often reflected in a lower
purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.
c. Increase the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
d. Increase the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.
(Adapted)
a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]
22
d. Making acquisitions at the top of a “bull” market for shares.
(Adapted)
11. The aggregate cash flows arising from acquisitions and from
disposals of subsidiaries or other business units resulting to loss
or obtaining of control are presented separately and classified as
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only
23
effect would this decision have on the allocation of the purchase
price?
a. The unrecognized deferred tax would be allocated to goodwill,
which would increase by ₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would arise.
(Adapted)
24
a. When it meets the definition of an asset in the Conceptual
Framework document only.
b. When it meets the definition of an intangible asset in PAS 38,
Intangible Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted
accounting principles even though it does not meet the
definition in PAS 38.
d. Where it has been acquired in a business combination.
(Adapted)
25
d. Reverse the impairment charge only if the original
circumstances that led to the impairment no longer exist and
credit retained earnings.
(Adapted)
26
d. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s operating segments 3
months after the date of acquisition.
27
d. Only past and present acquisitions of entities that have
previously and currently prepared their financial statements
using PFRS.
(Adapted)
34. PFRS 3 is mandatory for all new acquisitions from March 31,
2004. Entities have to cease the amortization of goodwill arising
from previous acquisitions. The balance of goodwill arising from
those acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next
accounting year.
d. Tested for impairment on March 31, 2004.
(Adapted)
28
Chapter 16
Consolidated Financial Statements (Part
1)
On January 1, 20x1, the fair value of the assets and liabilities of XYZ,
Inc. were determined by appraisal, as follows:
Carryi Fair
ng Fair value
XYZ, Inc.
amou value increm
nts s ent
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
124,00
92,000 32,000
Inventory 0
200,00 240,00
40,000
Equipment 0 0
Accumulated (40,00 (48,00
(8,000)
depreciation 0) 0)
(24,00 (24,00
-
Accounts payable 0) 0)
296,0 360,0
64,000
Net assets 00 00
29
The equipment has a remaining useful life as of 4 years from January
1, 20x1.
Carryi Fair
ng Fair value
XYZ, Inc.
amou value increm
nts s ent
Cash 20,000 20,000 -
Accounts
48,000 48,000 -
receivable
Inventory 92,000 124,00 32,000
30
0
200,00 240,00
40,000
Equipment 0 0
Accumulated (40,000 (48,00
(8,000)
depreciation ) 0)
(24,000 (24,00
-
Accounts payable ) 0)
296,0 360,0
64,000
Net assets 00 00
31
0 0
1,672,0 496,00
TOTAL LIABILITIES AND EQUITY 00 0
32
Retained
earnings 96,000
Total equity 296,000
33
0
(660,000
(288,000)
Cost of goods sold )
Gross profit 540,000 192,000
(160,000
(40,000)
Depreciation expense )
(128,000
(72,000)
Distribution costs )
Interest expense (12,000) -
Profit for the year 240,000 80,000
34
Chapter 17
Consolidated Financial Statements (Part
2)
35
Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected
to value NCI at fair value. Owlet’s net identifiable assets
approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of ₱40,000.
36
impairment and found to be impaired (in total) by ₱32,000 for the
current year.
37
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At
this time, Piglet's net identifiable assets have a carrying amount of
₱720,000 which approximates fair value.
During the last month of the year, Piglet sold goods to Pig for
₱324,000. Piglet had marked up these goods by 50% on cost. One-
third of these goods remain unsold at year-end. The group assessed
that there is no impairment loss on goodwill for the current year.
The individual statements of profit or loss of the entities for the year
ended December 31, 20x1 are shown below:
38
20. Bear Co. owns 75% of Cub Co.’s ordinary shares. Cub Co. has
12%, ₱400,000 outstanding cumulative preference shares, none
of which are held by Bear Co. The carrying amount of Cub’s net
identifiable assets at acquisition date approximates fair value.
How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,425,000 163,000
b. 1,377,000 163,000
c. 1,377,000 211,000
d. 1,425,000 211,000
39
Chapter 18
Consolidated Financial Statements (Part
3)
40
420, 60,0
Inventory 000 00
300,
Investment in subsidiary 000 -
800, 200,0
Equipment 000 00
(240, (80,0
Accumulated depreciation 000) 00)
1,672 496,
TOTAL ASSETS ,000 000
41
a. 296,000 b. 280,000 c. 208,000 d. 276,000
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling
interest at fair value. A value of ₱75,000 is assigned to the non-
controlling interest.
4. How much is the consolidated profit for 20x1?
a. 296,000 b. 280,000 c. 278,000 d. 276,000
Case #1 Case #2
(proportionate) (fair value)
(1) Consideration transferred 300,000 300,000
(2) Non-controlling interest
72,000 75,000
in the acquiree
(3) Previously held equity
- -
interest in the acquire
Total 372,000 375,000
Fair value of net
identifiable assets (360,000) (360,000)
acquired
Goodwill 12,000 15,000
As of December 31, 20x1, XYZ, Inc. increased its net assets (after
fair value adjustments) by ₱40,000 to ₱400,000. The NCI in net
assets is updated as follows:
Case #1 Case #2
(proportiona (fair
te) value)
NCI at acquisition date – Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x ₱40,000) 8,000 8,000
42
Carrying amount of NCI – Jan. 1,
80,000 83,000
20x2
43
13. If NCI is measured at “proportionate share,” what is the direct
adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. gives ABC
significant influence over XYZ. The statements of financial
position immediately before the sale are shown below:
44
Investment in
300,000 - -
subsidiary
Equipment 800,000 200,000 1,040,000
Accumulated (240,000
(80,000) (336,000)
depreciation )
Goodwill - - 12,000
1,672,00
TOTAL ASSETS 496,000 1,904,000
0
45
Carrying amount of NCI – Dec. 31, 20x1 82,400
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. does not give ABC
significant influence over XYZ.
46
Nymph were ₱320,000. The quoted price of Nymph's shares was ₱14
per share at acquisition date.
Additional information:
Included in the total assets of Nymph is land classified as
investment property with a cost of ₱720,000. Its fair value at
acquisition date was ₱800,000 and by June 30, 20x3 this had
risen to ₱1,280,000. Nymph uses the cost model for its
investment properties. However, the group's policy for
investment properties is the fair value model.
Also at acquisition date, Nymph's building classified as property,
plant, and equipment had a fair value of ₱120,000 in excess of its
carrying amount. The building's remaining useful life is 5 years at
that date. The group's depreciation method is straight-line basis.
The inter-company current accounts included receivables and
payables of ₱40,000 on June 30, 20x3.
An impairment test at June 30, 20x3 concluded that consolidated
goodwill was impaired by ₱80,000.
Cockroach elected to measure NCI at the NCI's fair value. There
have been no changes in Nymph’s number of outstanding shares
subsequent to date of acquisition.
21. How much is the goodwill to be presented in the June 30, 20x3
consolidated financial statements?
a. 550,000 b. 620,000 c. 485,000 d. 530,000
47
On January 1, 20x1, Rabbit Co. acquired 40% of Bunny Co. for
₱160,000. At this time, Bunny's net identifiable assets has a carrying
amount of ₱400,000 which approximates fair value. The investment
was classified as “investment in associate.”
48
Sheep's separate financial statements reported profit of ₱866,000
for the year ended December 31, 20x1. Profit attributable to NCI was
appropriately determined at ₱167,000.
31. How much is the profit of Lamb for the year ended December
31, 20x1?
a. 175,000 b. 625,000 c. 700,000 d. 225,000
Comprehensive problem
Use the following information for the next ten questions:
On January 1, 20x1, Peter Co. acquired 90% ownership interest in
Simon Co. for ₱488,000. Peter Co. elected to measure NCI at fair
value. NCI was assigned a fair value of ₱60,000.
Among the transactions of Peter and Simon during 20x1 were the
following:
Peter's accounts receivable include a receivable from Simon
amounting to ₱12,000 while Simon's accounts payable include a
payable to Peter amounting to ₱8,000. The difference was due to
a check amounting to ₱4,000 deposited by Simon directly to
Peter's bank account which was not yet recorded by Peter in its
49
books. The check has already cleared in Simon’s bank account.
50
3,728,00
1,020,000
Sales 0
(1,700,00
(472,000)
Cost of goods sold 0)
2,028,00
548,000
Gross profit 0
Interest income 8,000
(644,000
Depreciation expense )
(256,000
(144,000)
Distribution costs )
Interest expense (40,000) -
Loss on sale of equipment - (4,000)
Dividend income 72,000 -
1,160,0
380,800
Profit for the year 00
38. How much is the NCI in net assets as of December 31, 20x1?
a. 82,080 b. 82,720 c. 82,800 d. 82,880
41. How much are the profit attributable to the owners of the
parent and to NCI, respectively?
Owners of parent NCI
a. 1,239,500 23,600
b. 1,326,400 71,600
c. 1,319,200 30,800
d. 1,432,600 37,400
42. How much is the total consolidated assets as of December 31,
20x1?
a. 5,781,200 b. 5,797,200 c. 5,823,200 d. 5,689,200
51
Reverse acquisition - NCI
Fact pattern
On January 1, 20x1, Small Co. issues 2.5 shares in exchange for each
ordinary share of Big Co. The fair value of Big Co.'s shares on January
1, 20x1 is ₱480 while the fair value of Small Co.'s shares is ₱192.
The statements of financial position of the combining entities
immediately before combination show the following information:
Case #1: (Refer to fact pattern) All of Big Co.’s shares were
exchanged for Small Co.’s shares.
44. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733
Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were
exchanged for Small Co.’s shares.
49. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733
52
a. 22,800 b. 25,680 c. 16,800 d. 26,400
53
Chapter 19
Consolidated Financial Statements (Part
4)
Scenario #2:
3. On January 1, 20x1, P acquires 80% interest is S1. On January 1,
20x3, S1 acquires 60% interest in S2. What is the acquisition
date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
54
Consolidation of a vertical group – Same acquisition date
Use the following information for the next seven questions:
The following transactions occurred on January 1, 20x1:
P acquired 80% interest in S1 for ₱400,000 when the retained
earnings of S1 were ₱120,000. NCI in S1 has a fair value of
₱100,000.
S1 acquired 60% interest in S2 for ₱200,000 when the retained
earnings of S2 were ₱40,000. NCI in S2 (direct and indirect) has a
fair value of ₱160,000.
7. How much is the total NCI in net assets as of December 31, 20x1?
a. 305,620 b. 264,320 c. 265,220 d. 236,220
55
8. How much is the consolidated retained earnings as of December
31, 20x1?
a. 687,680 b. 667,280 c. 698,020 d. 688,420
56
Statements of profit or loss
For the year ended December 31, 20x1
720, 408, 192,0
Revenues 000 000 00
(400, (320,0 (120,0
Expenses 000) 00) 00)
320 88, 72,
Profit ,000 000 000
14. How much is the total NCI in net assets as of December 31,
20x1?
a. 229,600 b. 237,600 c. 237,088 d. 232,680
17. How much are the profit attributable to owners of parent and
to the NCIs?
Parent NCI in S1 NCI in S2
a. 348,200 8,400 0
b. 358,400 9,600 0
c. 407,680 15,200 29,120
d. 407,930 15,380 22,690
Additional information:
57
S1 S2
Retained earnings – January 1, 20x1 120,000 40,000
Fair value of NCI – January 1, 20x1 100,000 160,000
21. How much is the total NCI in net assets as of December 31,
20x1?
a. 232,680 b. 237,600 c. 274,320 d. 229,600
58
22. How much is the consolidated retained earnings as of
December 31, 20x1?
a. 638,400 b. 705,680 c. 637,780 d. 698,480
24. How much are the profit attributable to owners of parent and
to the NCIs?
Parent NCI in S1 NCI in S2
a. 324,800 15,600 27,600
b. 358,400 9,600 0
c. 425,680 17,600 36,720
d. 366,480 17,680 67,840
Additional information:
B C D E
Retained earnings – Jan. 1, 120,00
20x1 0 40,000 8,000 32,000
Fair value of NCI – Jan. 1, 100,00 160,00 192,00
20x1 0 0 72,000 0
59
480,00 320,00 240,00 280,00
800,000
Other assets 0 0 0 0
1,360,0 920,0 640,0 240,0 280,0
Total assets 00 00 00 00 00
29. How much is the total NCI in net assets as of December 31,
20x1?
a. 282,768 b. 237,600 c. 274,320 d. 229,600
32. How much are the profit attributable to owners of parent and
to the NCIs?
Parent NCI in B NCI in C NCI in D NCI in
E
60
a. 439,632 19,520 43,248 0 0
b. 358,400 9,600 0 31,272 0
c. 425,680 17,600 36,720 6,890 2,530
d. 443,932 18,768 37,860 0 0
61
a. It should be excluded from consolidation and the equity
method should be used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in
accordance with PFRS 9.
d. It is not permitted to be excluded from consolidation because
control is not lost.
(Adapted)
62
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the
casting vote at board meetings in the event that there is not a
majority decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and
therefore does not have control.
d. No, control can be exercised only through voting power, not
through a casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public.
The company was formerly a state-owned entity. The national
regulator has retained the power to appoint the board of
directors. An overseas entity acquires 55% of the voting shares,
but the regulator still retains its power to appoint the board of
directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
63
13. Which of the following exemplifies the application of the ‘entity
theory’ of consolidation?
a. Consolidated profit = Parent’s separate profit + Share of
Parent in Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit
15. During the year, COMITY Co. sold equipment to its subsidiary,
MUTUAL COURTESY Co., at a gain. The equipment has a
remaining useful life of 5 years. Which of the following
statements is true in the preparation of the consolidated financial
statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the
equipment is sold to an unrelated party.
c. The carrying amount of the asset and the related depreciation
are adjusted downwards.
d. The carrying amount of the asset and the related depreciation
are adjusted upwards.
16. During the year, BAFFLE Co. sold part of its controlling interest
in TO COFUSE Co. The sale did not affect BAFFLE’s control over
TO CONFUSE. Which of the following statements is true?
a. The equity adjustment would be larger if BAFFLE measures NCI
at the NCI’s proportionate share in the subsidiary’s net
identifiable assets rather than at fair value.
b. The equity adjustment would be larger if BAFFLE measures NCI
at fair value rather than at the NCI’s proportionate share in the
subsidiary’s net identifiable assets.
c. There would be no equity adjustment if the net disposal
proceeds equal the original cost of the interest sold.
d. c and d
64
a. False, False b. False, True c. True, False d. True
True
19. Which of the following is not a valid condition that will exempt
an entity from preparing consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another
entity.
b. The parent entity’s debt or equity capital is not traded on the
stock exchange.
c. The ultimate parent entity produces consolidated financial
statements available for public use that comply with PFRS.
d. The parent entity is in the process of filing its financial
statements with a securities commission.
(Adapted)
1 1
. C 6. D 1. A 16. A
2 1
. C 7. D 2. D 17. C
3 1
. C 8. B 3. B 18. C
4 1
. A 9. B 4. D 19. D
5 1 1
. C 0. C 5. C 20. D
65
Chapter 20
Separate Financial Statements
66
2. These are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent
and its subsidiaries are presented as those of a single economic
entity.
a. General purpose financial statements c. Individual financial
statements
b. Consolidated financial statements d. Separate financial
statements
1
. D
2
. B
3
. D
4
. D
67
Chapter 21
The Effects of Changes in Foreign
Exchange Rates
68
The contract price is £40,000 (pound sterling). The contract term is
FOB shipping point. The inventories were shipped on December 1,
20x1. The sale was settled on January 3, 20x2.
10. How much is the total FOREX gain (loss) resulting from the
sale transaction?
a. 160,000 b. 120,000 c. 80,000 d. 40,000
11. How much are the total FOREX gains/losses recognized by ABC
Co. from the purchase and sale transactions described above?
Purchase Sales
a. (4,048) 146,570
b. 4,048 (146,572)
c. 3,922 (66,667)
d. (3,922) 66,667
Pakistani Swedish
a. (4,048) 146,572
b. 3,922 (66,667)
69
c. (3,922) 66,667
d. 0 0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000
(Brazilian reals) when the exchange rate is ₱24:BRL1. ABC Co.
reported foreign exchange loss of ₱80,000 in its 20x1 statement of
profit or loss and a ₱20,000 foreign exchange gain of ₱20,000 in its
20x2 statement of profit or loss.
16. How much is the cost of the equipment in the 20x1 statement
of financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of
these
17. How much is the cost of the equipment in the 20x2 statement
of financial position?
a. 1,040,000 b. 960,000 c. 1,020,000 d. None of
these
Loan transaction
19. On July 1, 20x1, ABC Co. obtained a $40,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year. How much is the foreign
exchange gain (loss) to be recognized in the year-end statement
of profit or loss?
a. (200,000) b. (220,000) c. (210,000) d.
210,000
Cash account
Use the following information for the next two questions:
70
ABC Co., a domestic corporation based in the Philippines, frequently
sells goods overseas through the internet. All online sales are on
cash basis. The movements in ABC’s US dollar account are shown
below:
Cash in bank - U.S.
dollar
$40,00
Jan. 1 (₱48:$1) 0
80,00
Sept. 30 (₱45:$1) 0 20,000 Dec. 16 (₱44:$1)
$100,00
0 Dec. 31 (₱45:$1)
Average rate
Use the following information for the next two questions:
On December 15, 20x1, ABC Co. sent one of its key management
personnel to a seminar in Malaysia. ABC Co. advanced MYR 40,000
(ringgits) to the manager subject to liquidation. The exchange rate
on December 15, 20x1 is ₱14: MYR1.
22. How much is the total FOREX gain (loss) on December 31,
20x1?
a. (24,000) b. (32,000) c. 24,000 d. (38,000)
71
Purchased inventories on December 1, 20x1 for ZAR 4,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1 ₱48: CHF1
April 30, 20x1……………………….₱47:CHF1 ₱50: CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1 ₱12: CHF1
April 30, 20x1……………………….₱13:CHF1 ₱16: CHF1
27. How much is the FOREX gain (loss) on the sale transaction?
a. 16,000 b. 12,000 c. (16,000) d. (12,000)
Revaluation of asset
28. On January 1, 20x1, ABC Co. acquired equipment for MWK
4,000,000 (kwachas) from a company based in Malawi. The
equipment’s estimated useful life is 4 years. ABC Co. uses the
straight line method of depreciation and the revaluation model.
72
Jan. 1, 20x1………………………………………….₱0.20 : MWK 1
Dec. 31, 20x1………………………………………..₱0.26 : MWK 1
How much is the total gain (loss) on translation for the year?
a. 1,280,000 b. (1,120,000) c. 1,120,000 d.
960,000
Goodwill
Use the following information for the next two questions:
On January 1, 20x1, a Philippine holding company acquired 100%
interest in a subsidiary based in Kenya for KES 40M (shillings). The
fair value of the net assets of the subsidiary at that date was KES 32
million (shillings).
73
At the date of the acquisition the fair value of the net assets of the
subsidiary were 5,600,000 wons. This included a fair value
adjustment in respect of land.
74
35. How much is the total translation gain (loss) to be recognized
in other comprehensive income in 20x1?
a. 152,000 b. 121,600 c. 161,600 d. 136,000
75
For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
₱m ADMm
Revenue 16,000 32,000
Cost of sales (10,000) (16,000)
Gross profit 6,000 16,000
Operating expenses (2,000) (4,000)
Dividends received 240
Interest expense (400) (1,200)
Interest income 160 400
Profit before tax 4,000 11,200
Income tax expense (1,200) (4,000)
Profit after tax 2,800 7,200
Extraordinary item (800)
Profit for the year 2,800 6,400
Additional information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRSs (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM400
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM8,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years
on the straight line basis.
d) During the year, ABC Co. sold ₱120 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by year-end, but only one half of the relevant finished goods have
been sold. XYZ, Inc. received the goods on September 1 and paid
on September 21. The foreign exchange difference remains in
current liabilities.
e) ABC Co. made a loan of ₱200 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at year-
end. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
76
41. How much is the goodwill as of December 31, 20x1?
a. 4,000 b. 620 c. 500 d. 1,400
42. How much is the NCI in net assets as of December 31, 20x1?
a. 523 b. 553 c. 624 d. 829.50
77
Loan payable 120,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during
the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
78
51. How much is the translated profit (loss) for 20x1?
a. (4,461) b. 4,240 c. (4,561) d. (4,362)
Requirements:
a. What is the presentation currency of ABC Co.?
b. What is the functional currency of ABC Co.?
c. ABC acquired specialized mining equipment from Japan, invoiced
in Japanese yen. What type of currency is the Japanese yen under
PAS 21 definitions?
Requirements:
a. What is ABC Philippines Co.’s functional currency?
b. What is ABC Philippines Co.’s presentation currency?
3. ABC Co. started its operations in China, where the currency is the
yuan. After several years, ABC Co. expanded and exported its
product to the Philippines, and conducted business through a
branch. The functional currency of the group was deemed to be
the yuan but by the end of 20x1, 80% of the business was
conducted in the Philippines. At the beginning of 20x1, 30% of
the business was conducted in Philippine pesos.
79
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1
6. ABC Co. had the following transactions during the last month of
the current reporting period:
Purchased raw materials from Pakistani Co., a company based in
Pakistan, for 200,000 rupees on December 17, 20x1 to be settled
on January 5, 20x2.
Sold inventory to Swedish Co., a company based in Sweden, for
40,000 kroners on December 20, 20x1 to be settled on January 5,
20x2.
Requirements:
a. How much are the FOREX gains/losses recognized by ABC Co.
from the purchase and sale transactions described above?
b. How much are the total FOREX gains/losses recognized by
Pakistani Co. and Swedish Co. from the purchase and sale
transactions, respectively?
80
a. Exchange rates on December 31, 20x1 and on settlement date in
20x2.
b. Carrying amount of accounts payable in the 20x1 statement of
financial position.
c. Cost of equipment in the 20x1 and 20x2 statements of financial
position.
9. ABC Co. obtained a $40,000 loan at the middle of the year. At the
end of the year, the loan payable is appropriately reported at
₱2,200,000. None of the principal on the loan has been paid
during the year. There has been a 10% increase in the exchange
rate (expressed in direct quotation) from the date the loan has
been obtained to the end of reporting period.
Requirement: What is the exchange rate at the date the loan has
been obtained?
10. On July 1, 20x1, ABC Co. obtained a $20,000 loan that bears
10% annual interest when the spot exchange rate is ₱50:$1. The
closing rate on December 31, 20x1 is ₱55:$1. No payments had
been made on the loan during the year.
12. On December 15, 20x1, ABC Co. sent one of its key
management personnel to a seminar in Malaysia. ABC Co.
advanced MYR 20,000 (ringgits) to the manager subject to
liquidation. The exchange rate on December 15, 20x1 is ₱14:
MYR1.
81
January 3, 20x2. The exchange rate on January 3, 20x2 is ₱12:
MYR 1.
13. ABC Co. had the following foreign currency transactions during
the year:
Acquired equipment on January 1, 20x1 for THB 20,000 (bahts)
from a Thailand-based company when the current exchange rate
was ₱1.2: THB 1. The equipment is depreciated over 5 years
using the straight-line method.
Purchased inventories on December 1, 20x1 for ZAR 2,000
(rands) from a company based in South Africa when the current
exchange rate was ₱5: ZAR 1.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying Selling
Swiss Francs
April 1, 20x1…………………………₱44:CHF1 ₱48: CHF1
April 30, 20x1……………………….₱47:CHF1 ₱50: CHF1
Bolivars
April 1, 20x1…………………………₱10:CHF1 ₱12: CHF1
April 30, 20x1……………………….₱13:CHF1 ₱16: CHF1
82
On December 31, 20x1, the equipment was determined to have a
net appraised value of MWK 2,400,000 (kwachas). The relevant rates
are as follows:
At the date of the acquisition the fair value of the net assets of the
subsidiary were 2,800,000 wons. This included a fair value
adjustment in respect of land.
83
ABC Co. elected to measure non-controlling interest at the NCI’s
proportionate share of the fair value of the subsidiary‘s net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
84
ABC Co. XYZ, Inc.
₱m* ADMm*
Current assets 4,000 4,400
Investment in subsidiary 880
Property, plant and equipment 6,000 3,600
TOTAL ASSETS 10,880 8,000
Additional information:
85
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRS (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM200
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM4,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years on
the straight line basis.
d) During the year, ABC Co. sold ₱60 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by the year-end, but only one half of the relevant finished goods
have been sold. XYZ, Inc. received the goods on September 1 and
paid on September 21. The foreign exchange difference remains
in current liabilities.
e) ABC Co. made a loan of ₱100 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at year-
end. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for ₱250,000.
86
21. ABC Co., a corporation based in the Philippines, has a foreign
branch that is operating in a hyperinflationary economy. The
financial statements of the branch prior to restatement and
translation are shown below:
Cash 92,000
Inventory 80,000
Building 200,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during
the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
87
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
88
5. In preparing consolidated financial statements of a U.S. parent
company with a foreign subsidiary, the foreign subsidiary's
functional currency is the currency:
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily generates
and expends cash.
(Adapted)
89
c. the difference calculated from reporting the same number of
units of a foreign currency, in the presentation currency, at
different exchange rates.
d. the average difference between the exchange rate at the
beginning and end of a period.
16. The foreign operation may trade profitably, but the investment
may be adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
c. Exchange rates remaining the same.
d. a or b
(Adapted)
90
At the end of 20X6, 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 20X7.
c. Change to the euro at the end of 20X7.
d. Change to the euro at the end of 20X7 if it is considered that
the underlying transactions, events, and conditions of business
have changed.
(Adapted)
91
24. If the $ falls in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
25. If the $ rises in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
26. If the $ falls in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
27. If the $ rises in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
92
a. Recorded in equity, until the disposal of the net investment.
c. a or b
b. Recognized in the period’s income statement.
d. Ignored.
(Adapted)
93
a. ignored. c. recognized in equity.
b. recognized in profit or loss d. a or c
94
45. According to the relevant accounting standard, when assets
are bought by foreign branches on different dates how should we
account for changes in the exchange rates on those dates?
a. The rates on the dates of purchase should be used for each
asset bought
b. A weighted average should be used for the exchange rate
c. An average exchange rate should be used to convert
d. The exchange rate on the earliest date of purchase should be
used
(Adapted)
95
51. The central bank of Country X buys and sells its own currency
to ensure that the currency is always exchanged in a ratio of 2:1
with the currency of Country Y. What can we conclude about
these two currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country
Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency
of Country Y.
(Adapted)
11 21 31 41 51
1. D . C . B . A . B . B
12 22 32 42 52
2. D . C . A . A . A . D
13 23 33 43 53
3. D . A . D . B . A . C
14 24 34 44 54
4. D . C . B . A . D . B
5. D 15 C 25 B 35 A 45 A
96
. . . .
16 26 36 46
6. B . B . A . B . C
17 27 37 47
7. D . D . A . B . B
18 28 38 48
8. B . B . A . D . B
19 29 39 49
9. C . A . B . B . B
10 20 30 40 50
. B . B . B . A . C
97
Chapter 23
Accounting for Derivatives and Hedging
Transactions (Part 2)
98
8 The total net effect of the two contracts in 20x1 and 20x2 profit
or loss is – gain (loss)
a. 40,000 b. (40,000) c. 100,000 d. 0
99
15 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 2,400 b. (2,400) c. 1,200 d. (1,200)
19 The total net effect of the two contracts on profit or loss in 20x2 is
– gain (loss)
a. (1,600) b. (400) c. 1,600 d. 0
100
23 The entries on December 15, 20x1 include
a a debit to accounts receivable for ₱1,880,000
b a credit to sales for ₱1,880,000
c both a and b
d none
24 The entry on December 31, 20x1 for the hedged item includes
a debit to loss on forward contract for ₱60,000
b debit to gain on forward contract for ₱60,000
c a credit to firm commitment for ₱60,000
d a debit to firm commitment for ₱60,000
ABC Co. was concerned about the fluctuation in the Korean won, so
on this date, ABC Co. entered into a 30-day forward contract to buy
40,000 wons for ₱49,600 from a bank at the forward rate of ₱1.24.
101
32 Assuming the forward contract is settled on a net cash basis, how
much is the net cash settlement receipt (payment) on January 15,
20x2?
a. 4,000 b. (4,000) c. 2,400 d. (2,400)
102
Information on fair values is shown below:
Fair value
Fair value of firm
Forwa of forward commitme
Spot rd contract nt
Date price price (asset) (liability)
Oct. 1, 20x1 155 160 - -
Dec. 31, 20x1 151 153 27,727 a (27,727)
Mar. 31, 20x2 147 147 52,000 b (52,000)
a
[(160 – 153) x 4,000] x present value factor using 4%, assumed
appropriate rate, for three months (or 0.9902427).
b
[(160 – 147) x 4,000.
103
kilograms of cabbage at the current forward rate of ₱40 per kilogram
to be settled on a net cash basis on March 31, 20x2.
41 The fair value of the forward contract on Dec. 31, 20x1 is – asset
(liability)
a. 39,608 b. (39,608) c. 40,000 d. 0
42 The fair value of the firm commitment on Dec. 31, 20x1 is – asset
(liability)
a. 39,608 b. (39,608) c. (40,000) d. 0
104
Forward price 45 55 60
54 How much is the gain (loss) on the hedged item on December 31,
20x1?
a. 5,887 profit or loss c. (5,887) OCI
105
b. (5,887) profit or loss d. 0
55 How much sale revenue is recognized in 20x2?
a. 424,286 b. 400,716 c. 406,772 d. 412,500
Additional information:
ABC Co. chooses to account for the hedging instrument as a cash
flow hedge.
The initial spot/forward difference (or ‘forward points’) amounts to
₱16,000 over the 2-month term of the forward contract [400,000
x (1.24 forward rate - 1.20 spot rate)]. This difference will be
amortized as interest expense using the effective interest
method.
Given the spot/forward relationship above, the implicit interest
rate is 19.84% per annum or 1.6530% per month.
The following are the relevant present value factors:
Dec. 31, 20x1: PV of ₱1, @ 0.5%, n=1 (1 month)………0.99502
Jan. 31, 20x2: PV of ₱1, @ 0.5%, n=0 (maturity date)…1
59 The FOREX gain (loss) on the hedged item on December 31, 20x1
is
a. (12,000) b. 12,000 c. 9,886 d.
106
a. 19,876 b. (19,874) c. 11,940 d. (11,940)
62 The FOREX gain (loss) on the hedged item on January 31, 20x2 is
a. (28,000) b. 28,000 c. 26,399 d. 0
107
Chapter 24
Accounting for Derivatives and Hedging
Transactions (Part 3)
3. How much is the total net effect of the derivative on the 20x1 and
20x2 profit or loss? Gain (loss)
a. (60,000) b. 60,000 c. (40,000) d. 40,000
We will assume that the fair values shown below already reflect
costs to sell.
Dec. 1,
20x1 Dec. 31, 20x1 Feb. 1, 20x2
108
Futures price 12,100 12,300 11,800
10. How much is the total net cash receipt (payment) on the two
contracts?
a. 4,840,000 b. (4,840,000) c. (504,000) d. 504,000
109
12. How much is the derivative asset (liability) as of December 31,
20x1?
a. 0 b. (68,000) c. (56,000) d. 56,000
110
a. 200,000 b. (200,000) c. (320,000) d.
320,000
23. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on March
31, 20x1? – Gain (loss)
a. 5,680 b. (5,680) c. 6,160 d. (6,160)
24. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on March 31, 20x1? –
Gain (loss)
a. 0 b. 560 c. 480 d. (480)
27. How much is the effective portion of the change in fair value of
derivative recognized in other comprehensive income on June 30,
20x1? – Gain (loss)
a. (3,840) b. 3,840 c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value
of derivative recognized in profit or loss on June 30, 20x1? – Gain
(loss)
111
a. (480) b. 480 c. (960) d. 960
29. How much is the net cash settlement receipt (payment) on the
derivative instrument on June 30, 20x1?
a. 3,360 b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on
profit or loss? Favorable (unfavorable)
a. 3,840 b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1,
how much is the cost of goods sold?
a. 384,800 b. 375,280 c. 381,440 d. 371,920
32. How much is the gain (loss) on the put option on December
31, 20x1?
a. 0 b. 40,000 c. (10,000) d. 10,000
33. How much is the net gain (loss) on the exercise of the put
option on January 15, 20x1?
a. (20,000) b. 20,000 c. 12,000 d. 8,000
34. Assume that the spot rate on January 15, 20x2 is ₱0.48. How
much is the gain (loss) on the put option on January 15, 20x1?
a. (20,000) b. 20,000 c. (32,000) d. (40,000)
Additional information:
April 1, June 30,
20x1 20x1
112
35. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in intrinsic value?
a. 24,000 b. (24,000) c. 800 d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in time value?
a. 800 b. (800) c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on the
call option on July 1, 20x1?
a. 24,000 b. (24,000) c. 23,200 d. (23,200)
Oct. 1, ₱1 : INR
25,600 25,600
20x1 1.40
Dec. 31, ₱1 : INR
13,196 24,000
20x1 1.45
Apr. 1, ₱1 : INR
- 36,552
20x2 1.50
a
These amounts are determined using an option pricing model. They
are provided in order to simplify the problem.
113
41. How much derivative asset (liability) is recognized on
December 31, 20x1?
a. 13,196 b. (24,000) c. 24,000 d. 37,196
114
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000
variable-rate loan with interest payments due at each year-end
and the principal due on December 31, 20x3.
115
ABC Co. expects that the current interest rates will decrease in the
future. Thus, ABC Co. enters into a “receive fixed, pay variable”
interest rate swap. Swap payments shall be made at each year-end.
116
Chapter 25
Accounting for Derivatives and Hedging
Transactions (Part 4)
117
a. 2,400,000 b. (2,400,000) c. (1,000,000) d.
1,000,000
9. Case #1: If the exchange rate on April 1, 20x1 is FC35: ₱1, how
much is the net cash settlement? - Receipt / (Payment)
a. 14,286 b. (14,286) c. 12,366 d. (12,366)
118
10. Case #2: If the exchange rate on April 1, 20x1 is FC50: ₱1,
how much is the net cash settlement? - Receipt / (Payment)
a. 23,478 b. (23,478) c. 20,000 d. (20,000)
11. Case #3: If the exchange rate on April 1, 20x1 is FC45: ₱1,
how much is the fair value of the interest rate swap? – Asset /
(Liability)
a. 11,111 b. (11,111) c. 12,366 d. (12,366)
ABC Co. expects that the price of paper will fluctuate because of the
upcoming elections. Thus, on January 1, 20x1, ABC Co. enters into a
forward contract to purchase 1,000 reams of paper at a forward rate
of ₱2,400 per ream. If the market price on April 15, 20x1 is more
than ₱2,400, ABC Co. shall receive the difference from the broker. On
the other hand, if the market price is less than ₱2,400, ABC Co. shall
pay the difference to the broker. The forward contract will be settled
net on April 15, 20x1. The discount rate is 10%.
12. If the price of paper is ₱2,800 per ream on March 31, 20x1,
how much is the derivative asset (liability) to be recognized in
ABC Co.’s first quarter financial statements?
a. 367,338 b. (367,338) c. 400,000 d. (400,000)
13. If the price of paper is ₱2,200 per ream on March 31, 20x1,
how much is the derivative asset (liability) to be recognized in
ABC Co.’s first quarter financial statements?
a. 187,333 b. (187,333) c. 200,000 d. (200,000)
119
16. If the current market price of corn is ₱160 per kilo on
December 31, 20x2, what amount of derivative asset (liability)
shall be reported in ABC Co.’s 20x2 year-end financial
statements? The appropriate discount rate is 10%.
a. 3,636,364 b. (3,636,364) c. 4,000,000 d.
(4,000,000)
Futures contract
17. ABC Co. has the following futures contract:
Futures Market
Qua price - price -
ntity 1/1/x1 12/31/x1
1 "Long" futures contract
400 2,000 1,800
to purchase gold
2 "Long" futures contract
800 1,600 1,900
to purchase silver
3 "Short" futures contract 4,00
250 220
to sell coffee beans 0
4 "Short" futures contract 6,00
60 75
to sell potatoes 0
Call option
Use the following information for the next two questions:
On May 6, 20x1, ABC Co. entered into a firm commitment to
purchase equipment from a foreign company for FC 4,000,000 when
the exchange rate was FC 40: ₱1. Payment is due on June 1, 20x1.
18. Case #1: If the exchange rate on June 1, 20x1 is FC 35: ₱1,
how much did ABC Co. save by purchasing the call option?
a. 14,286 b. (14,286) c. (14,000) d. 0
19. Case #2: If the exchange rate on June 1, 20x1 is FC 50: ₱1,
how much did ABC Co. save by purchasing the call option?
a. 20,000 b. (20,000) c. (6,000) d. 0
Put option
20. On March 31, 20x1, ABC Co. acquired for ₱40,000 a put option
which entitles ABC Co. to sell 20,000 units of a commodity for
₱880 per unit. The option expires on July 1, 20x1. On July 1, 20x1,
the current market price of the commodity is ₱1,000 per unit.
How much is the loss on the put option to be recognized by ABC
Co. in its 20x1 financial statements?
a. 40,000 b. 240,000 c. 280,000 d. 0
120
Use the following information for the next four questions:
On October 1, 20x1, ABC Co. acquired for ₱40,000 a call option
which entitles ABC Co. to purchase 20,000 units of a commodity for
₱880 per unit. The option is exercisable on March 31, 20x2. The call
option was not designated as a hedging instrument. The following
are the current market prices:
88
October 1, 20x1
0
96
December 31, 20x1
0
1,0
March 31, 20x1
00
22. How much is the unrealized gain (loss) on December 31, 20x1?
a. (1,560,000) b. 1,560,000 c. 1,600,000 d. (1,600,000)
24. How much is the realized gain (loss) on the call option on
March 31, 20x2?
a. 760,000 b. (840,000) c. (800,000) d.
800,000
ABC Co. was worried about future fluctuations in interest rates. Thus,
on January 1, 20x1, ABC Co. entered into an interest rate swap
wherein ABC Co. shall receive interest at whatever the current
market rate of interest is at the beginning of the year and pay fixed
interest at 10%. Swap payment shall be made only at maturity date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%,
how much is the net cash settlement at maturity date? – Receipt
(Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
Case #2:
27. If the current market rate of interest on January 1, 20x3 is
12%, how much is the net cash settlement at maturity date? –
Receipt (Payment)
121
a. (80,000) b. 80,000 c. (30,000) d. 0
30. How much is the fair value of the interest rate swap on
December 31, 20x1? – Asset (Liability)
a. 40,000 b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on
December 31, 20x2? – Asset (Liability)
a. 384,292 b. 202,806 c. 143,234 d. 36,697
122
Chapter 25: Theory of Accounts Reviewer
1. In accordance with PFRS 7, which of the following best describes
the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities?
a. Liquidity risk b. Credit risk c. Financial risk d.
Payment risk
(Adapted)
123
8. When an entity is unable to separate an embedded derivative
from its host contract, the entity should classify the hybrid
instrument as
a. FVPL b. FVOCI c. Amortized cost d. a or b
10. Arnold Co. purchased a call option on the rice field of Robert
Co. on January 1, 200A exercisable on or before January 1, 200B.
On December 31, 200A, the fair market value of the rice field was
below the call option price, making the instrument “out of the
money,” and Arnold Co. decided not to exercise the call option.
Which of the following statements is correct?
a. The call option does not meet the definition of a derivative
under PFRSs regarding settlement at a future date.
b. The call option does not meet the definition of a derivative
under PFRSs regarding the absence of initial net investment or
the presence of a little initial net investment
c. The call option meets the definition of a derivative under
PFRSs regarding settlement at a future date since expiry at
maturity is a form of settlement even though there is no
additional exchange of consideration.
d. The call option meets the definition of a derivative; however, it
should be written off on December 31, 200A and a
corresponding financial liability should be recognized.
124
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all
over the world
d. investment in subsidiary on a domestic corporation selling e-
load and auto load only within the Philippines.
125
21. An agreement between two parties to exchange a specified
amount of a commodity, security, or foreign currency at a
specified date in the future with the price or exchange rate being
set now is referred to as a(n)
a. interest rate swap. c. futures contract.
b. forward contract. d. option.
(Adapted)
22. If a cannery wanted to lock in the price they would pay for
peaches in August four months before harvest (in April of the
same year), they would be most likely to enter into which kind of
agreement?
a. Interest rate swap c. Futures contract
b. Fixed commodities contract d. Option
(Adapted)
23. A contract giving the owner the right, but not the obligation, to
buy or sell an asset at a specified price any time during a
specified period in the future is referred to as a(n)
a. interest rate swap. c. futures contract.
b. forward contract. d. option.
(Adapted)
27. For which type of derivative are changes in the fair value
deferred and recognized as an equity adjustment?
a. Fair value hedge c. Operating hedge
b. Cash flow hedge d. Notional value hedge
(Adapted)
126
28. Which choice best describes the information that should be
disclosed related to derivative contracts?
a. Fair value c. Both a and b
b. Notional amount d. Neither a nor b
(Adapted)
127
(Adapted)
34. Assume that the price of the WSM shares has risen to $120 per
share on March 31, 2002, and the Hall is preparing financial
statements for the quarter ending March 31. As regards this
option, Hall, Inc., would report which of the following?
a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. a description of the change in price would be disclosed in the
notes to the financial statements, but would not be reflected in
the financial statements.
d. Nothing would be reported in the financial statements or the
notes thereto.
(Adapted)
128
36. The $400 paid by Hall, Inc., to Baird Investment is referred to
as
a. the option premium. c. the strike price.
b. the notional amount. d. the intrinsic value.
(Adapted)
37. Assume that the price per share of WSM stock is $120 on April
30, 2002, and that the time value of the option has not changed.
In order to settle the option contract, Hall, Inc., would most likely
a. pay Baird Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the
shares at $120 per share to Baird.
c. receive $20,000 from Baird Investment.
d. receive $400 from Baird Investment.
(Adapted)
129
(Adapted)
130
47. Ron Jensen is a speculator who does not currently own GHP
Corporation common stock but believes it will increase in market
value by 25 percent over the next month. Jensen can most likely
achieve the highest percentage return on the expected stock
price increase by:
a. writing GHP put options. c. buying GHP put options.
b. buying GHP call options. d. buying GHP common stock.
(Adapted)
131
53. Standardized futures contracts are an aid to increased market
liquidity because:
a. standardization results in less trading activity.
b. uniformity of the contract terms broadens the market for the
futures by appealing to a greater number of traders.
c. standardization of the futures contract stabilizes the market
price of the underlying commodity.
d. non-standardized forward contracts are not allowed to trade.
(Adapted)
132
d. American options are far more common than European
options.
(Adapted)
63. James Anthony has a short position in a put option with a strike
price of $94. If the stock price is below $94 at expiration, what
will happen to Anthony’s short position in the option?
a. The person who is long the put option will not exercise the put
option.
b. He will have the option exercised against him at $94 by the
person who is long the put option.
c. He will exercise the option at $94.
d. He will let the option expire.
(Adapted)
133
a. whatever the long call gains, the short call loses.
b. the short put position has limited gain but also has limited
loss.
c. the long put position can gain infinitely, but the long call
position can only lose the premium.
d. the long put position has limited gain but also has limited loss.
(Adapted)
134
71. Consider a commercial bank that is about to make a large
variable-rate loan. Which of the following would be an appropriate
position for the bank to hedge its risk with this loan? Pay:
a. variable to a currency swap counterparty and receive fixed.
b. variable to an interest rate swap counterparty and receive
fixed.
c. fixed to an interest rate swap counterparty and receive
variable.
d. fixed to a currency swap counterparty and receive variable.
(Adapted)
135
I. Specifically identified to the hedged asset, liability or
unrecognized firm commitment.
II. Expected to be highly effective in offsetting changes in the fair
value of the hedged item.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(AICPA)
80. On December 31, 199X, the end of its fiscal year, Smarti
Company held a derivative instrument which it had acquired for
speculative purposes during November, 199X. Since its
acquisition the fair value of the derivative had increased
materially. On December 31, how should the increase in fair value
of the derivative instrument be reported by Smarti in its financial
statements?
a. Recognized as a deferred credit until the instrument is settled.
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income
for 199X.
d. Disregarded until the instrument is settled.
(AICPA)
81. Gains and losses from changes in the fair value of a derivative
designated and qualified as a fair value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the
balance sheet until the derivative is settled.
c. Recognized in current net income in the period in which the
fair value of the derivative changes.
d. Recognized as a component of other comprehensive income in
the period in which the fair value of the derivative changes.
(AICPA)
136
change in value of a derivative which qualifies as a cash flow
hedge be reported in financial statements?
Effective portion in Ineffective portion in
a. Current income Current income
b. Current income Other comprehensive income
c. Other comprehensive income Current income
d. Other comprehensive income Other comprehensive
income
(AICPA)
137
d. Jeter could be hedging a future need to make a payment in
Japanese yen or it could be speculating that the Japanese yen
will become more valuable.
(Adapted)
138
a. The translation loss less the exchange gain is reported
separately as other comprehensive income.
b. The translation loss less the exchange gain is reported in the
income statement.
c. The translation loss is reported separately in the stockholders’
equity section of the balance sheet and the exchange gain is
reported in the income statement.
d. The translation loss is reported in the income statement and
the exchange gain is reported separately in the stockholders’
equity section of the balance sheet.
(AICPA)
139
two rials, twenty rials, and twenty-one rials on October 1,
December 15, and December 31, 2003, respectively. Velec should
account for the exchange rate fluctuation in 2003 as
a. A loss included in net income c. An extraordinary gain.
b. A gain included in net income d. An extraordinary loss.
(AICPA)
140
b. Must be “highly effective” throughout its life.
c. No initial net investment.
d. One or more underlyings and notional amounts.
(AICPA)
141
(AICPA)
115. Gains and losses on the hedged asset/liability and the hedged
instrument for a fair value hedge will be recognized
a. In current earnings.
b. In other comprehensive income.
c. On a cumulative basis from the change in expected cash flows
from the hedged instrument.
d. On the balance sheet either as an asset or a liability.
(AICPA)
142
I. The risk of exchanging a lower interest rate for a higher
interest rate.
II. The risk of nonperformance by the counterparty to the
agreement.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(AICPA)
143
123. All of the following are characteristics of a derivative except:
a. It is acquired or incurred by the entity for the purpose of
generating a profit from short-term fluctuations in market
factors.
b. Its value changes in response to the change in a specified
underlying (e.g., interest rate, financial instrument price,
commodity price, foreign exchange rate, etc.).
c. It requires no initial investment or an initial net investment
that is smaller than would be required for other types of
contracts that would be expected to have a similar response to
changes in market factors.
d. It is settled at a future date.
(Adapted)
144
a. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized in profit or
loss.
b. The hedging instrument is measured at fair value, and the
hedged item is measured at fair value with respect to the
hedged risk. Changes in fair value are recognized directly in
equity to the extent the hedge is effective.
c. The hedging instrument is measured at fair value with changes
in fair value recognized directly in equity to the extent the
hedge is effective. The accounting for the hedged item is not
adjusted.
d. The hedging instrument is accounted for in accordance with
the accounting requirements for the hedged item (i.e., at fair
value, cost or amortized cost, as applicable), if the hedge is
effective.
(Adapted)
145
17. B 37. C 57. D 77. C 97. D 117. C
18. A 38. C 58. A 78. A 98. B 118. A
19. B 39. B 59. A 79. C 99. D 119. C
20. C 40. D 60. D 80. B 100. C 120. C
146
Chapter 26
Corporate Liquidation and
Reorganization
ASSETS
Current assets:
Cash 160,000
Accounts receivable 880,000
Note receivable 400,000
Inventory 2,120,000
Prepaid assets 40,000
3,600,000
Noncurrent assets:
Land 2,000,000
Building, net 8,000,000
Equipment, net 1,200,000
11,200,000
Total assets 14,800,000
Additional information:
The following information was determined before the
commencement of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
147
b. The note receivable is fully collectible. An accrued interest
receivable of ₱40,000 was not yet recorded.
c. The inventory has an estimated selling price of ₱1,680,000 and
estimated costs to sell of ₱40,000.
d. The prepaid assets are non-refundable.
e. The land and building have fair values of ₱8,000,000 and
₱3,200,000, respectively. However, Andrix Asterix Co. expects to
sell both the land and building for a total selling price of
₱10,400,000. Costs to sell the land and building are negligible as
the prospective buyer agrees to shoulder all necessary costs of
transferring title to the property.
f. The equipment is expected to be sold at a net selling price of
₱800,000.
g. Administrative expenses expected to be incurred during the
liquidation process is ₱120,000. This amount is not yet reflected
on the statement of financial position.
h. Accrued expenses include accrued salaries of ₱100,000.
i. Accrued interest on the loan payable amounting to ₱60,000 was
not reflected in the statement of financial position.
j. All of the other liabilities are stated at their expected settlement
amounts.
1. How much are the total assets pledged to fully secured creditors?
a. 11,200,000 b. 12,000,000 c. 10,400,000 d. 0
148
11. How much can the shareholders expect to
recover from their equity interests?
a. 483 ,000 b. (478,800) c. (165,186) d. 0
Additional information:
a. An accrued interest receivable of ₱40,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the
liquidation process is ₱120,000. This amount is not yet reflected
on the statement of financial position.
c. Accrued interest on the loan payable amounting to ₱60,000 was
not reflected in the statement of financial position.
The following are the transactions that have transcribed during the
period:
a. Of the total account receivable, only ₱660,000 have been
collected. The remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining
balance was written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for ₱1,200,000. Actual costs to sell
were ₱20,000.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for ₱10,400,000, as expected.
f. The equipment was sold for ₱880,000.
g. Of the total accrued expenses, only the accrued salaries of
₱100,000 were paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. ₱880,000 were paid for the note payable. The lender waived
payment for the balance.
k. Actual administrative expenses paid amounted to ₱108,000.
149
17. The statement of realization and liquidation will
show total “liabilities to be liquidated” of
a. 15,664,000 b. 15,484,000 c. 15,544,000 d. 15,244,000
Recovery of claims
Use the following information for the next five questions:
Rex Toothpix Co. is undergoing liquidation. Information on Rex
Toothpix Co.’s assets and liabilities is shown below:
Book Realizabl
ASSETS value e value
Assets pledged to fully secured
360,000 480,000
creditors
Assets pledged to partially secured
208,000 192,000
creditors
Free assets 600,000 576,000
150
1,168,000 1,248,000
LIABILITIES
Unsecured liabilities with priority 288,000 288,000
Fully secured creditors 384,000 384,000
Partially secured creditors 240,000 240,000
Unsecured creditors without priority 432,000 432,000
1,344,000 1,344,000
24. If the assets are sold at realizable values, how
much cash is available to pay unsecured creditors without
priority?
a. 336,000 b. 384,000 c. 624,000 d. 288,000
151
30. How much can Raymund Lipstix Co. expect to
recover from its receivable?
a. 800,000 b. 4,800,000 c. 640,000 d.0
Errors
32. Berns Sunog-kutix Co. has voluntarily filed
petition for bankruptcy. Berns Sunog-kutix Co.’s inexperienced
accountant determined that the expected recovery percentage of
unsecured creditors without priority is 20%. The unsecured
creditors have refuted this and demanded an audit of the
accountant’s computations. The following information was
determined from the accountant’s working papers:
Assets and liabilities immediately before the commencement of
liquidation process:
Total assets - at book value 8,000,000
Unsecured creditors with priority 1,040,000
Fully secured creditors 3,600,000
Partially secured creditors 2,080,000
Unsecured creditors without priority 1,760,000
During the period, assets with total book value of ₱4,000,000
were sold for ₱3,760,000. A portion of the proceeds were used to
settle fully secured liabilities of ₱2,160,000 and partially secured
liabilities of ₱1,480,000.
The remaining unsold assets have the following realizable values:
Assets pledged to fully secured creditors 1,280,000
Assets pledged to partially secured creditors 560,000
All other assets 2,060,000
Further investigations revealed the following:
a. Estimated liquidation expenses amounting to ₱160,000 were
not yet recorded.
b. Additional unsecured liability without priority of ₱200,000
should be accrued.
Liabilities:
Unsecured liabilities with priority 80,000 80,000
Fully secured creditors 480,000 480,000
Partially secured creditors 160,000 160,000
Unsecured liabilities without priority 560,000 560,000
152
1,280,000 1,280,000
Unrecorded items:
Dividend receivable 20,000
Interest payable 8,000
Estimated administrative expenses 40,000
LIABILITIES:
8,520,00
Liabilities liquidated
0
4,760,00
Liabilities not liquidated
0
Liabilities to be 11,480,0
liquidated 00
Liabilities assumed 128,000
SUPPLEMENTARY ITEMS:
Supplementary
expenses 100,000
Supplementary income 72,000
35. How much is the net gain (loss) for the period?
a. (4,132,000) b. (28,000) c. 4,160,000 d. (4,160,000)
153