CHRISTIAN COLLEGES OF SOUTHEAST ASIA

Don Julian Rodriguez, Sr. Avenue, Ma-a, Davao City

INTERMEDIATE ACCOUNTING 3
SEMI-FINAL EXAMINATION
1. The ledger of LEEWAY TOLERANCE Co. as of December 31, 20x1 includes the following:
Assets  
Petty cash fund 14,000
Cash in bank 40,000
Accounts receivable (including ₱30,000 pledged accounts) 70,000
Accounts receivable – assigned 50,000
Equity in assigned receivables 20,000
Notes receivable (including ₱40,000 notes receivable
discounted) 90,000
Notes receivable discounted 40,000
Advances to subsidiary 64,000
Held for trading securities 40,000
Inventory 124,000
Deferred charges 36,000
Cash surrender value 12,000
Bond sinking fund 200,000
Total assets 800,000

Liabilities  
Accounts payable 80,000
Estimated warranty liability 28,000
Loans payable related to assigned receivables (due in 12
months) 30,000
Accrued expenses 26,000
Bonds payable (due on December 31, 20x2) 200,000
Premium on bonds payable 16,000
Total liabilities 380,000

Additional information:
- Petty cash fund includes IOU’s from employees amounting to ₱4,000. The remaining balance of
₱10,000 represents bills and coins.
- The cash in bank balance represents the balance per bank statement. As of December 31, 20x1,
deposits in transit amounted to ₱20,000 while outstanding checks amounted to ₱3,000. Included
in the bank statement as of December 31, 20x1 is an NSF check amounting to ₱16,000.
- Accounts receivable (unassigned) includes uncollectible past due accounts of ₱8,000 which need
to be written-off.
- Also included in accounts receivable (unassigned) is a ₱10,000 receivable from a customer which
was given a special credit term. Under the special credit term, the customer shall pay the ₱10,000
 receivable in equal quarterly installments of ₱1,250. The last payment is due on December 31,
20x3.
- The held for trading securities include the reacquisition cost of LEEWAY Co.’s shares amounting
to ₱8,000.
- Inventory includes ₱60,000 goods in transit purchased FOB Destination but excludes ₱24,000
goods in transit purchased FOB Shipping point.

How much is the working capital?

a. 204,000
b. 224,000
c. 246,000
d. 254,000

2. The following statements relate to PAS1 Presentation of Financial Statements. Choose the correct
statement.
a. Many entities also present, outside the financial statements, reports and statements such as
environmental reports and value added statements, particularly in industries in which
environmental factors are significant and when employees are regarded as an important user
group. Reports and statements presented outside financial statements should be accounted
for using applicable PFRSs.
b. Applying a requirement is impracticable when the entity cannot apply it after making every
reasonable effort to do so.
c. An entity whose financial statements do not comply with PFRSs shall make an explicit and
unreserved statement of such noncompliance in the notes. If the entity’s financial statements
do comply with PFRSs, there is no need to make an explicit and unreserved statement of
such compliance in the notes.
d. Financial statements shall not be described as complying with PFRSs unless they comply
with most of the requirements of PFRSs.

3. Which of the following financial statements would not be dated as covering a certain reporting
period?
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity

Use the following information for the next two questions:

The records of HACK TO CHOP Co. on December 31, 20x1 showed the following information:
Sales 2,000,000
Sales discounts 20,000
Cost of sales 800,000
Distribution costs 96,000
Administrative costs 240,000
Casualty loss on typhoon 40,000
Dividends received from investments in FVPL 24,000
Dividends received from investment in associate 48,000
Share in the profit of an associate 72,000
 Dividends declared and paid 28,000
Interest expense 44,000
Unrealized gain on investments in FVPL 30,000
Unrealized gain on investments in FVOCI 38,000
Income tax expense 300,000
Loss on revaluation 26,000
Remeasurements of the net defined benefit liability (asset) - gain 22,000
Correction of understatement in depreciation in prior year 32,000
Translation adjustment of foreign operation – loss 8,000

4. How much is the other comprehensive income?

a. 42,000 c. 34,000
b. 36,000 d. 26,000

5. How much is the total comprehensive income?

a. 612,000 c. 516,000
b. 627,000 d. 584,000

6. Comprehensive income (or total comprehensive income) includes

a. Profit or loss d. a and b
b. Other comprehensive income e. all of these
c. Transactions with owners

7. What is the purpose of reporting comprehensive income?

a. To report changes in equity due to transactions with owners.
b. To report a measure of overall performance of an entity.
c. To replace profit with a better measure.
d. To combine income from continuing operations with income from discontinued operations
and extraordinary items.

8. PFRS 15 applies to
a. contracts with customers.
b. contracts with sellers.
c. all contracts entered into by an entity in the ordinary course of its business.
d. a and b

9. ABC Co., a dealer of medical machines, enters into the following contracts:
I. ABC Co. transfers a machine to X Hospital at contract inception but ABC Co. retains legal
title until the full payment of the consideration.
II. ABC Co. transfers a machine to Y Medical Clinic at contract inception. The consideration is
due after two years. At contract inception, Y is undergoing financial difficulties. This raises
significant doubt in Y’s ability and intention of paying the consideration. ABC Co. cannot
reliably estimate the outcome of the contract.
III. ABC Co. transfers a machine to Z Co. under a lease contract. The contractual period is 5
years, which is equal to the machine’s estimated useful life. At the end of the contract, Z Co.
 is given the option of purchasing the machine. ABC’s past experience shows that almost all
customers avail of the purchase option.

Identify the contracts to which PFRS 15 may be applied.

a. Contract 1 c. Contracts 1 and 3
b. Contract 2 d. None of these

10. The consideration received from a contract with a customer that does not meet the criteria under
‘Step 1’ of PFRS 15 is
a. recognized as liability. c. disclosed only
b. recorded through memo entry only. d. b and c

11. A good or service that is not distinct (choose the incorrect statement)
a. shall be combined with the other promises in the contract.
b. may be treated, together with other promises in the contract, as a single performance
obligation.
c. may be identified as a part of a bundle of goods or services or a part of a series of goods or
services to be transferred to the customer.
d. shall be ignored. The entity allocates the transaction price only to the other promises in the
contract that are distinct.

12. According to PFRS 15, revenue from a performance obligation that is not satisfied over time is
recognized
a. over time as the entity progresses towards the complete satisfaction of the obligation.
b. at a point in time when the performance obligation is satisfied.
c. when the contract ceases to be enforceable.
d. a or b

13. Arrange the following steps of revenue recognition in accordance with PFRS 15.
I. Identify the performance obligations in the contract
II. Recognize revenue when (or as) the entity satisfies a performance obligation
III. Determine the transaction price
IV. Identify the contract with the customer
V. Allocate the transaction price to the performance obligations in the contract
a. IV, I, V, III, II c. IV, I, III, V, II
b. III, IV, I, V, II d. IV, III, I, V, II

14. Which of the following must be met before a contract with a customer is accounted for under
PFRS 15?
a. The collection of the consideration must be certain.
b. The contract must be in writing so that there will be no doubt in the customer’s ability and
intention to pay the consideration.
c. The promised goods or services must have already been transferred to the customer.
d. Both contracting parties must acknowledge, whether explicitly or implicitly, the rights and
obligations created under the contract.
15. Which of the following may be treated as a performance obligation to be accounted for
separately?
I. A promise to transfer a distinct good or service
II. A promise to transfer a distinct bundle of goods or services
III. A promise to transfer a series of distinct goods or services that are substantially the same and
have the same pattern of transfer to the customer
IV. A promise that is implied by the entity’s customary business practices which, at contract
inception, creates a valid expectation on the part of the customer that the entity will satisfy
the promise
a. I only c. I, II and III
b. I and II d. all of these

16. A good or service is distinct if:

I. The customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer.
II. The promise to transfer the good or service is separately identifiable from other promises in
the contract.
a. I only c. I and II
b. II only d. none of these

17. Revenue is recognized when (or as) the entity satisfies a performance obligation. According to
PFRS 15, revenue is measured at
a. the fair value of the consideration received or receivable.
b. the transaction price.
c. the stand-alone selling price of the good or services transferred.
d. the amount of the transaction price allocated to the performance obligation satisfied.

18. According to PFRS 15, the transaction price is allocated to each performance obligation
identified in a contract based on the
a. relative stand-alone prices of the distinct goods or services promised to be transferred.
b. contractual agreement with the customer.
c. expected costs of satisfying the performance obligations.
d. a or b

19. According to PFRS 15, revenue from a performance obligation that is satisfied over time is
recognized
a. over time as the entity progresses towards the complete satisfaction of the obligation.
b. at a point in time when the performance obligation is satisfied.
c. when the contract ceases to be enforceable.
d. a or b

20. ABC Co. enters into a contract with XYZ, Inc. to deliver 2 apples, 3 mangoes and 5 potatoes for a
total consideration of ₱100. In accounting for the contract, which of the following is probably not
true?
a. ABC Co. identifies three performance obligations in the contract.
b. ABC Co. allocates the ₱100 transaction price over the promises to deliver the apples,
mangoes and potatoes on the basis of relative stand-alone selling prices of those goods.
 c. The allocation of the transaction price may result to the identification of a discount.
d. No revenue is recognized until all of the 2 apples, 3 mangoes and 5 potatoes are delivered
even though the 2 apples were delivered first before the mangoes and potatoes.

21. Non-current assets are presented as current assets in the statement of financial position
a. only when they are expected to be sold within 12 months from the end of reporting period.
b. only if they are actually sold after the reporting period but before the date of authorization of
the financial statements for issue.
c. only when they qualify as held for sale assets under PFRS 5.
d. never presented as current items.

22. The qualification of an asset to be classified as held for sale after the reporting period but before
the financial statements are authorized for issue
a. is a non-adjusting event after the reporting period.
b. is an adjusting event after the reporting period.
c. is an extraordinary item.
d. a or b

23. A noncurrent asset classified as held for sale in accordance with PFRS 5 has not been sold after a
year. The asset shall continue to be presented as held for sale under PFRS 5 if
a. the delay is due to events beyond the entity’s control.
b. the entity remains committed to its plan to sell the asset.
c. the noncurrent asset is actually sold after the reporting period but before the financial
statements were authorized for issue.
d. a and b

24. According to PFRS 5, gain on impairment reversal on an asset held for sale is
a. recognized for the fair value change during the period.
b. recognized in other comprehensive income.
c. recognized only to the extent of cumulative impairment losses previously recognized.
d. not recognized.

25. The results of discontinued operations are presented separately in the statement of profit or loss
and other comprehensive income
a. as a single amount gross of tax.
b. as a single amount net of tax.
c. as part of the regular line items.
d. a or b

26. According to PFRS 5, held for sale classification is permitted when

a. the noncurrent asset or disposal group is available for immediate sale in its present
condition.
b. the sale is highly probable.
c. a and b
d. the sale actually occurred after the reporting period but before the financial statements were
authorized for issue.
27. According to PFRS 5, assets held for sale are measured at
a. fair value. c. carrying amount.
b. fair value less costs to sell. d. lower of b and c

28. According to PFRS 5, a disposal group may qualify as discontinued operation if

a. it is a component of an entity.
b. it meets the held for sale classification criteria.
c. a and b
d. none of these

29. The results of a discontinued operations are presented in the statement of profit or loss
a. before the profit or loss from continuing operations but after the profit for the year.
b. after the profit or loss from continuing operations but before the profit for the year.
c. separately from the profit or loss from continuing operations and it does not affect the profit
for the year.
d. as an adjustment to the beginning balance of the retained earnings.

30. Which of the following is included in profit from continuing operations?

a. extraordinary items c. other comprehensive income
b. discontinued operations d. income tax expense

31. Entity A’s total shareholders’ equity on January 1, 20x1 was ₱180,000. The following were the
transactions during the year:
 Entity A issued additional share capital amounting to ₱360,000.
 Total income earned amounted to ₱1,000,000.
 Total expenses incurred amounted to ₱560,000.
 Entity A declared dividends of ₱140,000.

How much is the total shareholders’ equity on December 31, 20x1?

a. 840,000 c. 640,000
b. 700,000 d. 540,000

32. Entity A reported profit of ₱340,000 for the year ended December 31, 20x1. Depreciation expense
for the year was ₱100,000. The following are the changes in the operating assets and liabilities of
Entity A during 20x1:

20x1 20x0
Accounts receivable 560,000 300,000
Accounts payable 240,000 120,000

How much is the net cash from operating activities?

a. 820,000 c. 300,000
b. 580,000 d. 100,000

Use the following information for the next two questions:

The following were the cash transactions of Entity A during the period:
 Cash receipts from sale of goods 650,000
Cash paid for purchases of inventory 340,000
Cash receipts on loans taken from a bank 200,000
Cash paid for interest expense 20,000
Cash payment for the acquisition of property, plant and
equipment 180,000

33. How much is the net cash from (used in) operating activities?
a. 155,000 c. 290,000
b. (155,000) d. (290,000)

34. How much is the net cash from (used in) investing activities?
a. 180,000 c. 20,000
b. (180,000) d. -

Use the following information for the next three questions:

The comparative statement of financial position and statement of comprehensive income of Entity A
on December 31, 20x1 are shown below:

Entity A
Statement of Financial Position
As of December 31, 20x1

ASSETS 20x1 20x0

Cash and cash equivalents 440,000 200,000
Trade and other receivables 130,000 120,000
Inventory 120,000 480,000
Prepaid assets 40,000 160,000
Total current assets 730,000 960,000

Property, plant & equipment 760,000 440,000

Total noncurrent assets 760,000 440,000

1,490,00 1,400,00
TOTAL ASSETS 0 0

LIABILITIES
Trade and other payables 620,000 560,000

EQUITY
Owner’s capital 870,000 840,000
 TOTAL LIABILITIES & 1,490,00 1,400,00
EQUITY 0 0
   

Entity A
Statement of Comprehensive Income
For the year ended December 31, 20x1

Sales 1,000,000
Cost of sales (600,000)
GROSS PROFIT 400,000
Rent income 150,000
Depreciation expense (240,000)
Insurance expense (120,000)
Bad debts expense (30,000)
Loss on sale of equipment (40,000)
PROFIT FOR THE YEAR 120,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE
120,000
YR.

Additional information:
 Equipment with carrying amount of ₱240,000 was sold for ₱200,000 resulting to a loss on sale of
₱40,000.
 Acquisition of equipment for cash amounted to ₱800,000.
 Owner drawings totalled ₱90,000.

35. How much is the cash flows from (used in) operating activities?
a. 930,000 c. 400,000
b. (930,000) d. (400,000)

36. How much is the cash flows from (used in) investing activities?
a. 600,000 c. 400,000
b. (600,000) d. (400,000)

37. How much is the cash flows from (used in) financing activities?
a. 440,000 c. 90,000
b. (440,000) d. (90,000)
 c. 90,000
d. (90,000)

38. Year-end net assets would be overstated and current expenses would be understated as a result
of failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance c. Accrued wages payable
b. Depreciation of fixed assets d. All of these

39. Dane Co. received merchandise on consignment. As of March 31, Dane had recorded the
transaction as a purchase and included the goods in the physical count of ending inventory.
Dane uses the periodic inventory system. None of the consigned goods have been sold during
the period. The effect of this on its financial statements for March 31 would be
a. no effect.
b. profit is correct but current assets and current liabilities are overstated.
c. profit, current assets and current liabilities are overstated.
d. profit and current liabilities are overstated.

40. If the cost of ordinary repairs is capitalized as an addition to the building account during the
current year,
a. net income for the current year will be understated.
b. stockholders' equity at the end of the current year will be understated.
c. total assets at the end of the current year will not be affected.
d. total liabilities at the end of the current year will not be affected.

41. ABC Co. completes the draft of its December 31, 20x1 year-end financial statements on January
31, 20x2. On February 5, 20x2, the board of directors reviews the financial statements and
authorizes them for issue. The entity announces its profit and selected other financial
information on February 23, 20x2. The financial statements are made available to shareholders
and others on March 1, 20x2. The shareholders approve the financial statements at their annual
meeting on March 18, 20x2 and the approved financial statements are then filed with a
regulatory body on April 1, 20x2. Events after the reporting period are those occurring
a. from December 31, 20x1 to February 5, 20x2.
b. from January 1, 20x2 to February 5, 20x2.
c. from January 1, 20x2 to February 23, 20x2.
d. from January 1, 20x2 to March 18, 20x2.

42. These are events that are indicative of conditions that arose after the reporting period.
a. Events after the reporting period c. Adjusting events
b. Non-adjusting events d. all of these

43. Entity A recognized a provision for a pending litigation amounting to ₱50,000 on December 31,
20x1 (end of current reporting period). This amount is reflected in Entity A’s reported profit of
₱600,000 for the year 20x1. Shortly after December 31, 20x1, but before the financial statements
were authorized for issue, the litigation is settled for ₱40,000. The correct profit in 20x1 is
a. 600,000 . c. 640,000.
 b. 610,000 . d. 590,000

44. Which of the following is an example of an adjusting event?

a. Major business combination after the reporting period.
b. A building is totally razed by fire after the reporting period.
c. Sale of inventories after the reporting period that gives evidence to their net realizable value
at the end of reporting period.
d. Issuance of shares of stocks after the reporting period.

45. Which of the following is an example of a non-adjusting event?

a. Bankruptcy of a customer after the reporting period that indicates that the carrying amount
of a trade receivable at the end of reporting period is impaired.
b. Evidence indicating that an asset is impaired as at the end of the reporting period.
c. Legal proceedings after the reporting period for an incident that occurred before the end of
the reporting period.
d. Significant decline in foreign exchange rates after the reporting period resulting to massive
losses on recognized foreign currency denominated financial instruments.

46. According to PAS 8, in the absence of a PFRS that specifically deals with a transaction,
management shall
a. refer to the concepts under the Conceptual Framework.
b. adopt the provisions of the US GAAP.
c. use its judgment in developing and applying an accounting policy that results in information
that is relevant and reliable.
d. consider the applicability of relevant accounting literature.

47. According to PAS 8, a change in accounting policy is accounted for

a. using a transitional provision, if any.
b. retrospectively.
c. prospectively, if retrospective application is impracticable.
d. a, b or c, whichever is most appropriate

48. This refers to applying a new accounting policy to transactions, other events and conditions as if
that policy had always been applied.
a. Retrospective application c. Prospective application
b. Retrospective restatement d. Impracticable application

49. According to PAS 8, a change in accounting estimate is accounted for

a. using a transitional provision, if any.
b. retrospectively.
c. prospectively.
d. a, b or c, whichever is most appropriate

50. Entity A changes its inventory cost formula from FIFO to weighted average. How should Entity
A account for this change?
a. by retrospective restatement, as a change in accounting policy
 b. by prospective application, as a change in accounting estimate
c. by retrospective application, as a change in accounting policy
d. as a correction of prior period error

51. According to PAS 24, related party disclosures are necessary

a. because related party transactions may have resulted to assets and liabilities that were
recognized in the financial statements of the reporting entity.
b. to notify users of financial statements of the fact that related party transactions may not have
been made on arm’s length basis.
c. to indicate the possibility that an entity’s financial position and performance might have
been affected by the existence of such relationship.
d. in order to eliminate or minimize the effects of related party transactions on the financial
statements of the reporting entity.

52. What is overriding consideration when determining the existence of a related party relationship?
a. The ability of one party to affect decisions of another party regarding relevant activities
through the existence of control, joint control or significant influence.
b. The presence of relationship either by consanguinity or affinity.
c. The presence of a significant interest by one party over the other.
d. The presence of significant business transactions and economic dependence between the
parties.

53. Mr. Y and Ms. Z share joint control over Ventures, Inc. Which of the following are related
parties?
a. Mr. Y and Ms. Z c. Ventures, Inc. and PAS 24
b. Ventures, Inc. and Mr. Y d. none of these

54. Entity A is the parent company of Entity B. Which of the following is required to be disclosed in
the group’s (Entity A and B’s) consolidated financial statements?
a. the related party relationship between Entity A and Entity B
b. the related party transactions during the period
c. the outstanding balances in (c)
d. all of these

55. Catalyst Co. is engaged in business process outsourcing. Catalyst subcategorizes its main
services into four: Information Technology, After-sales Support, Accounting, and Offsite Data
Management. Catalyst operates in five major geographical areas: Southeast Asia, North America,
South America, Australia and Europe. Internal reports are based on these five geographical
areas. What is the most appropriate basis of segment reporting for Catalyst?
a. On the basis of the main services provided.
b. On the basis of the geographical areas of operations.
c. On the basis of the domicile country of Catalyst and the rest of the world.
d. Any of these.

56. Segment A qualifies under the 10% test of total revenues but not on the profit or loss and total
assets tests. Segment A
a. is not a reportable segment.
 b. is nonetheless included in the “all others” segment.
c. may be reported as a separate segment.
d. all of these

57. Information on an entity’s operating segments is shown below:

Operating segments Total revenue Profit Identifiable assets

A 1,000,000 200,000 4,000,000
B 500,000 120,000 1,000,000
C 300,000 30,000 800,000
D 500,000 50,000 1,700,000
E 200,000 60,000 800,000
F 900,000 400,000 1,000,000
Totals 3,400,000 860,000 9,300,000

The reportable segments are

a. A, B and F c. A, B, C, D and F
b. A, B, D and F d. All segments

58. Entity A wants to publish quarterly interim financial reports. Which of the following standards
may Entity A apply in preparing and presenting its interim financial reports?
a. PAS 1 c. PFRS 1
b. PAS 34 d. a or b

59. If an entity does not prepare interim financial reports,

a. its annual financial statements would not conform to the PFRSs.
b. its annual financial statements should not be described to have been prepared in accordance
with PFRSs
c. the conformance of its annual financial statements with the PFRSs is not affected.
d. a and b

60. Which of the following is correct regarding the provisions of PAS 34?
a. All entities should publish quarterly interim reports.
b. All publicly-listed entities should publish quarterly interim reports.
c. All publicly-listed entities should publish semi-annual interim reports.
d. PAS 34 does not require any entity to publish interim reports, and how often.

61. Interim financial reports prepared in accordance with PAS 34 shall, at a minimum, include
a. semi-annual interim financial statements.
b. complete set of financial statements.
c. condensed set of financial statements.
 d. a statement of financial position and an income statement.

62. Entity A publishes quarterly interim financial reports. Entity A’s annual depreciation for items
of PPE is ₱120,000. At the end of the first quarter, Entity A’s inventories have a cost of ₱600,000
and a net realizable value of ₱510,000. Entity A expects that the total employee bonuses (13 th
month pay) that will be paid at year-end will amount to ₱60,000. How much is the total amount
of expense to be recognized from the items described above in Entity A’s first quarter statement
of profit or loss?
a. 120,000 c. 30,000
b. 135,000 d. 270,000

63. Under the cash basis of accounting, revenues are recorded

a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.

64. White Co. wants to convert its 2003 financial statements from the accrual basis of accounting to
the cash basis. Both supplies inventory and office salaries payable increased between January 1,
2003, and December 31, 2003. To obtain 2003 cash basis net income, how should these increases
be added to or deducted from accrual-basis net income?
Supplies inventory Office salaries payable
a. Deducted Deducted
b. Deducted Added
c. Added Deducted
d. Added Added

65. Insurance payments P150,000

Prepaid insurance, Jan. 1 65,000
Prepaid insurance, Dec. 31 85,000
Accrued insurance payable decreased by 35,000

How much is the insurance expense under accrual basis accounting?

a. 205,000
b. 65,000
c. 130,000
d. 95,000

66. Unearned rent, Jan. 1 P170,000

Unearned rent, Dec. 31 85,000
Accrued rent income, Jan. 1 180,000
Accrued rent income, Dec. 31 200,000
Rental payments received 560,000

How much is the Rent income under the accrual basis accounting?
a. 455,000
b. 625,000
 c. 665,000
d. 645,000

67. Payments made for income taxes P760,000

Income tax payable increased by 200,000
Deferred tax liability, Jan. 1 360,000
Deferred tax liability, Dec. 31 470,000
Deferred tax asset, Jan. 1 85,000
Deferred tax asset, Dec. 31 65,000

Income tax expense under accrual basis accounting is

a. 1,090,000 c. 850,000
b. 960,000 d. 830,000

68. QUIRK ACCIDENT Co. reports profit before tax of ₱200,000 in its 2nd quarter interim financial
statements before consideration for the following:
a. Inventory with a carrying amount ₱10,000 has a net realizable value of ₱12,000. It is expected
that the change in value will reverse in the 3 rd quarter. There have been no write-downs of
inventory recognized in previous periods.
b. An investment property measured under the cost model has a carrying amount of ₱150,000 but
its recoverable amount is ₱140,000.
c. An investment in FVPL measured at acquisition cost of ₱20,000 has a fair value of ₱38,000 as at
the end of 2nd the quarter. However, the increase in fair value is expected to be only temporary.
d. No depreciation is recognized during the 2 nd quarter. The annual straight-line depreciation of
items of PPE is ₱60,000.
e. ABC Co. has a policy of providing 12 days paid vacation leaves for its employees. The vacation
leaves are vesting and accumulating. Total paid vacation leaves eligibility of employees for the
full year is ₱140,000. However, only ₱20,000 worth of paid vacation leaves have been availed of
during the quarter.
f. It was discovered that depreciation in the previous year was overstated by ₱7,000.

Requirement: Compute for the adjusted profit before tax.

69. FATUOUS SILLY Co. is preparing its interim financial statements for the period ended March
31, 20x1. The following relate to the transactions during the first quarter:
a. Total sales for the interim period was ₱2,000,000.
b. Cost of sales was ₱900,000.
c. FATUOUS is liable for 5% commission on its sales to its sales representatives and agents. No
commission has yet been paid as of March 31, 20x1.
d. The allowance for doubtful accounts has a balance of ₱10,000 as of January 1, 20x1. The
required balance as of March 31, 20x1 is ₱30,000. There were no write-offs or recoveries during
the period.
e. A building with historical cost of ₱2,400,000 is being depreciated over 5 years using straight
line method.
f. FATUOUS prepaid a one-year insurance on its assets for ₱80,000 on January 1, 20x1,.
g. Property taxes for 20x1 amounting to ₱52,000 was paid in January.
 h. Advertising costs of ₱100,000 were incurred in February on promotional activities held on
Valentine’s Day.
i. Year-end staff bonuses are expected to be around ₱184,000. Employees become entitled to the
bonuses as they provide services to FATUOUS during the year.
j. FATUOUS’s president is entitled to a 10% bonus on profit before bonus and taxes.
k. Loss on sale of a used equipment on March 2, 20x1 was ₱60,000.
l. FATUOUS incurred ₱24,000 on unanticipated repairs on its factory equipment on March 16,
20x1.
m. Due to the unexpected breakdown of the factory equipment on March 16, 20x1, FATUOUS has
planned a major periodic overhaul of its other equipment to be held annually starting on
December 31, 20x1. The cost of the major planned periodic overhaul is estimated at ₱96,000.
n. FATUOUS leases one of its retail stores. Monthly rentals are ₱10,000, however, the lease
contracts provide for a contingent rent equal to 2% of the excess of sales over ₱1,800,000.
o. FATUOUS’s budget for 20x1 included charitable contributions of ₱58,000 and employee
training costs of ₱26,000. None of those costs were incurred as of March 31, 20x1.
p. p Other operating expenses incurred during the first quarter totaled ₱240,000.

Requirement: Compute for the profit or loss for the first quarter ended March 31, 20x1.

70. IGNOMINY DISGRACE Co.’s profits before tax for the 1st and 2nd quarters of 20x1 were
₱1,760,000 and ₱1,840,000 before any necessary adjustments for the items listed below.
a. Total unfavorable manufacturing cost variances amounted to ₱48,000 in the 1st quarter.
IGNOMINY expects that the manufacturing cost variances will be absorbed by year-end.
There were no work-in-process inventories as of the end of the 1st and 2nd quarters.
b. Newspaper advertisement costs of ₱180,000 were paid on April 1, 20x1. The advertisement
shall appear in the weekly newspaper publications over the remaining months of the year.
c. IGNOMINY’s held for trading securities acquired on February 4, 20x1 for ₱400,000 had a fair
value of ₱200,000 on March 31, 20x1. IGNOMINY had expected that the fair value decline
was only temporary. In fact, on June 30, 20x1, the recovery exceeded the previous write-
down in investment by ₱40,000.
d. Research and development costs incurred during the 1 st and 2nd quarters totaled ₱20,000 and
₱24,000, respectively. In July 20x1, technical feasibility has been established and, therefore,
development costs of ₱10,000 and ₱14,000 expensed in the 1st and 2nd quarters would have
qualified for capitalization.
e. On January 20x1, IGNOMINY recognized an account receivable denominated in US dollars
amounting to $2,000. The exchange rate on that date was ₱40:$1. On March 31, 20x1, the
exchange rate was ₱30:$1. IGNOMINY had expected that the change in the exchange rate
was only temporary. In fact, on June 30, 20x1, the exchange rate was ₱45:$1. The receivable is
collectible on September 2, 20x1.
f. A land with a carrying amount of ₱400,000 had a recoverable amount of ₱384,000 on March
31, 20x1.

Requirement: Compute for the adjusted profits before tax for the 1st and 2nd quarters.

71. Among the transactions of WRY TO TWIST Company for the first two quarters of 20x1 were the
following:
 a. WRY recognized a ₱200,000 write-down in its inventory during the first quarter. WRY had
expected that the write-down will reverse in the second quarter, and in fact, in the second
quarter, the recovery exceeded the previous write-down by ₱40,000.
b. WRY provides warranty for its sales. In the first quarter, WRY estimated a 5% warranty
obligation on its first quarter sales of ₱2,000,000. In the second quarter, a change in
accounting estimate was made. It was estimated that the cost of warranty should be 10% of
total sales. The second quarter sales amounted to ₱2,400,000.
c. WRY has been estimating its bad debt expense as 2% of credit sales. However, in the second
quarter, a change was made to the percentage of ending receivable. Under this method, the
required balance of the allowance for doubtful accounts as of June 30, 20x1 is computed at
₱60,000. The allowance has a balance of ₱10,000 at the beginning of the year. Total write-offs
during the first six months of 20x1 amounted to ₱24,000; recoveries totaled ₱6,000. Credit
sales for the 1st and 2nd quarters amounted to ₱2,000,000 and ₱4,000,000, respectively.

Requirement: What are the effects of the transactions listed above on profit or loss before tax in the
first and second quarter interim financial statements of WRY?

72. APPOSITE FITTING Co. expects to earn ₱200,000 pre-tax profit each quarter. APPOSITE has tax
rates of 20% on the first ₱400,000 of annual earnings and 30% on all additional earnings. Actual
earnings match expectations.

Requirement: Compute for (a) the weighted average annual income tax rate and (b) income tax expense
recognized in the quarterly interim financial statements.

“It does not matter how slowly you go as long as you do not stop.” – Confucius

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