1.

The objective of PAS 1 Presentation of Financial Statements is to prescribe the basis for presentation
of general purpose financial statements, to ensure
a. intra-comparability c. faithful representation
b. inter-comparability d. a and b

2. General purpose financial statements cater to what type of needs of users?

a. common needs c. a and b
b. specific needs d. loving and caring needs

3. The ledger of COPIOUS RICH Co. as of December 31, 20x1 includes the following:

15% Note payable 50,000

16% Bonds payable 100,000
18% Serial bonds 200,000
Interest payable -

Additional information:
COPIOUS Co.’s financial statements were authorized for issue on April 15, 20x2.
- The 15% note payable was issued on January 1, 20x1 and is due on January 1, 20x5. The note pays
annual interest every year-end. The agreement with the lender provides that COPIOUS Co. shall
maintain an average current ratio of 2:1. If at any time the current ratio falls below the agreement,
the note payable will become due on demand. As of the 3 rd quarter in 20x1, COPIOUS’s average
current ratio is 0.50:1. Immediately, COPIOUS informed the lender of the breach of the agreement.
On December 31, 20x1, the lender gave COPIOUS a grace period ending on December 31, 20x2 to
rectify the deficiency in the current ratio. COPIOUS promised the creditor to liquidate some of its
long-term investments in 20x2 to increase its current ratio.
- The 16% bonds are 10-year bonds issued on December 31, 1992. The bonds pay annual interest
every year-end.
- The 18% serial bonds are issued at face amount and are due in semi-annual installments of ₱20,000
every April 1 and September 30. Interests on the bonds are also due semi-annually. The last
installment on the bonds is due on September 30, 20x7.

How much is the total current liabilities?

a. 9,000
b. 100,000
c. 109,000
d. 120,000

Solution:

16% Bonds payable 100,000

Interest payable on the serial bonds (200K x 18% x 3/12) 9,000
Current liabilities 109,000
4. Entity B has the following information:

Inventory, beg. 120,000

Inventory, end. 192,000
Purchases 480,000
Freight-in 24,000
Purchase returns 12,000
Purchase discounts 16,800

How much is Entity B’s the cost of sales?

a. 402,300
b. 416,300
c. 420,300
d. 422,300

Inventory, beg. 120,000

Net purchases:
Purchases 480,000
Freight-in 24,000
Purchase returns (12,000)
Purchase discounts (16,800) 475,200
Total goods available for sale 595,200
Less: Inventory, end. (192,000)
Cost of goods sold 403,200

Use the following information for the next four questions:

The nominal accounts of Hazel Lee Co. on December 31, 20x1 have the following balances:

Accounts Dr. Cr.

Sales ₱1,045,000
Interest income 80,000
Gains 30,000
Inventory, beg. ₱80,000
Purchases 300,000
Freight-in 30,000
Purchase returns 15,000
Purchase discounts 27,000
Freight-out 25,000
Sales commission 60,000
Advertising expense 35,000
Salaries expense 350,000
Rent expense 60,000
Depreciation expense 80,000
Utilities expense 40,000
Supplies expense 30,000
Transportation and travel expense 25,000
 Insurance expense 10,000
Taxes and licenses 50,000
Interest expense 5,000
Miscellaneous expense 2,000
Loss on the sale of equipment 15,000

Additional information:
a. Ending inventory is ₱100,000.
b. Three-fourths of the salaries, rent, and depreciation expenses pertain to the sales department. The
sales department does not share in the other expenses.

5. In a statement of comprehensive income prepared using the single-step approach (nature of

expense method), how much is presented as ‘change in inventory’? (increase)/decrease
a. (288,000)
b. 288,000
c. (20,000)
d. 20,000

Single-step approach

Hazel Lee Co.

Statement of Comprehensive Income
For the period ended December 31, 20x1

INCOME
₱1,045,00
Sales
0
Interest income 80,000
Gains 30,000
TOTAL INCOME 1,155,000

EXPENSES
Net purchases (a) 288,000
Change in inventory (b) (20,000)
Freight-out 25,000
Sales commission 60,000
Advertising expense 35,000
Salaries expense 350,000
Rent expense 60,000
Depreciation expense 80,000
Utilities expense 40,000
Supplies expense 30,000
Transportation and travel expense 25,000
Insurance expense 10,000
Taxes and licenses 50,000
 Interest expense 5,000
Miscellaneous expense 2,000
Loss on sale of equipment 15,000
TOTAL EXPENSES 1,055,000

PROFIT FOR THE YEAR 100,000

Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YEAR ₱100,000

(a)
“Net purchases” is computed as follows:
Purchases ₱300,000
Freight-in 30,000
Purchase returns (15,000)
Purchase discounts (27,000)
Net Purchases ₱288,000

(b)
“Change in inventory” is computed as follows:

Inventory, beg. ₱80,000

Inventory, end 100,000
(₱20,000
Change in inventory – increase
)

6. In a statement of comprehensive income prepared using the single-step approach (nature of

expense method), how much is presented as total expenses?
a. 1,055,000
b. 1,075,000
c. 787,000
d. 772,000

7. In a statement of comprehensive income prepared using the multi-step approach (function of

expense method), how much is presented as distribution costs?
a. 398,500
b. 487,500
c. 467,500
d. 512,500

Multi-step approach

Hazel Lee Co.

Statement of Comprehensive Income
For the period ended December 31, 20x1

Notes
Sales ₱1,045,000
Cost of sales 1 (268,000)
GROSS PROFIT 777,000
Other income 2 110,000
Distribution costs 3 (487,500)
Administrative expenses 4 (279,500)
Other expenses 5 (15,000)
Interest expense (5,000)
PROFIT FOR THE YEAR 100,000
Other comprehensive income -
COMPREHENSIVE INCOME FOR THE YR. ₱100,000

Note 1: Cost of sales

Inventory, beg. ₱80,000
Purchases 300,000
Freight-in 30,000
Purchase returns (15,000)
Purchase discounts (27,000)
Total goods available for sale 368,000
Inventory, end (100,000)
Cost of sales ₱268,000

Note 2: Other income

Interest income ₱80,000
Gains 30,000
Other income ₱110,000

Note 3: Distribution costs

Freight-out ₱25,000
Sales commission 60,000
Advertising expense 35,000
Salaries expense (350,000 x 3/4) 262,500
Rent expense (60,000 x 3/4) 45,000
Depreciation expense (80,000 x 3/4) 60,000
Distribution costs ₱487,500

Note 4: Administrative expenses

Salaries expense (350,000 x 1/4) ₱87,500
Rent expense (60,000 x 1/4) 15,000
Depreciation expense (80,000 x 1/4) 20,000
Utilities expense 40,000
Supplies expense 30,000
Transportation and travel expense 25,000
 Insurance expense 10,000
Taxes and licenses 50,000
Miscellaneous expense 2,000
Administrative expenses ₱279,500

Note 5: Other expenses

Loss incurred on the sale of equipment – 15,000

8. In a statement of comprehensive income prepared using the multi-step approach (function of

expense method), how much is presented as administrative expenses?
a. 297,500
b. 302,500
c. 287,500
d. 279,500

Use the following information for the next two questions:

DEMOTIC POPULAR Co. acquires through foreclosure a property comprising land and buildings
that it intends to sell. The fair value of the land and buildings is ₱6,000,000 and costs to sell are
₱200,000. The related defaulted receivables have a carrying amount of ₱5,000,000.

9. The entity does not intend to transfer the property to a buyer until after it completes renovations
to increase the property’s sales value. How should DEMOTIC Co. classify the land and
buildings?
a. Included under property, plant and equipment at ₱5,000,000.
b. Included under investment property at ₱5,000,000.
c. Included under investment property at ₱5,800,000.
d. Classified as held for sale at ₱5,800,000

C (6M – 200K) = 5.8M investment property because the property is not available for sale in its present
condition

10. After the renovations are completed and the property is classified as held for sale but before a
firm purchase commitment is obtained, the entity becomes aware of environmental damage
requiring remediation. The entity still intends to sell the property. However, the entity does not
have the ability to transfer the property to a buyer until after the remediation is completed. The
costs of renovations made totaled ₱200,000. The estimated costs of remediation are ₱100,000.
How should DEMOTIC Co. classify the land and buildings?
a. Included under property, plant and equipment at ₱5,700,000.
b. Included under investment property at ₱6,000,000.
c. Included under investment property at ₱5,700,000.
d. Classified as held for sale at ₱5,700,000

B (5.8M (see no. 5) + 200K costs of renovations = 6M. The land and buildings are classified as investment
property and not as held for sale assets because they are not available for immediate sale in their
present condition.
11. An entity is committed to a plan to sell a manufacturing facility in its present condition and
classifies the facility as held for sale at that date. After a firm purchase commitment is obtained,
the buyer’s inspection of the property identifies environmental damage not previously known to
exist. The entity is required by the buyer to make good the damage, which will extend the period
required to complete the sale beyond one year. However, the entity has initiated actions to make
good the damage, and satisfactory rectification of the damage is highly probable. The
manufacturing facility has a carrying amount of ₱10,000,000 and fair value less costs to sell of
₱10,600,000. How should the entity classify the manufacturing facility?
a. Held for sale, ₱10.6M c. PPE, ₱10M
b. Held for sale, ₱10M d. PPE, ₱10.6M

B – The exception to the “1-yr. requirement” is met.

12. Under the indirect method, the cash flow from operating activities is determined by adjusting
the reported profit by (choose the incorrect statement)
a. adding back non-cash expenses
b. adding back decreases in operating assets
c. deducting decreases in operating liabilities
d. adding back increases in operating assets

13. Under the indirect method, the cash flow from operating activities is determined by adjusting
the reported profit by (choose the incorrect statement)
a. deducting non-cash income
b. deducting increases in operating assets
c. deducting decreases in nonoperating liabilities
d. deducting gains on sale of nonoperating assets

14. When preparing a statement of cash flows using the direct method, amortization of patent is
a. shown as an increase in cash flows from operating activities.
b. shown as a reduction in cash flows from operating activities.
c. included with supplemental disclosures of noncash transactions.
d. not reported in the statement of cash flows or related disclosures.

15. Which of the following statements regarding cash equivalents is correct?

a. A one-year Treasury note could not qualify as a cash equivalent.
b. All investments meeting the PFRS 9 Financial Instruments criteria must be reported as cash
equivalents.
c. The date a security is purchased determines its "original maturity" for cash equivalent
classification purposes.
d. Once established, management's policy for classifying items as cash equivalents cannot be
changed.

16. Using the indirect method, cash flows from operating activities would be increased by which of
the following?
a. Gain on sale of investments
b. Increase in prepaid expenses
 c. Decrease in accounts payable
d. Decrease in accounts receivable

Use the following information for the next three questions:

The movements in the cash account of DEADLOCK STANDSTILL Co. during 20x2 are shown
below.

Cash
beg. 400
7,60
Sales 12,000 0 Purchases
2,40
Interest income 40 0 Operating expenses
Rent income 540 60 Interest expense
Dividend income 80 140 Income taxes
Sale of held for trading securities 1,600 200 Investment in FVOCI
2,20
Sale of old building 1,040 0 Purchase of equipment
Collection of non-trade note 120 260 Loan granted to employee
Proceeds from loan with a bank 3,200 480 Payment of loan borrowed
Issuance of shares 1,940 400 Reacquisition of shares
180 Dividends
7,04
0 end.

17. How much is the cash flows from operating activities?

a. 4,600
b. 4,840
c. 5,040
d. 4,060

D (Refer to solutions below)

18. How much is the cash flows from investing activities?

a. (1,500)
b. 1,500
c. 1,240
d. (1,240)

A (Refer to solutions below)

19. How much is the cash flows from financing activities?

a. 4,800
b. (4,800)
c. 4,240
d. 4,080
D Solutions:

DEADLOCK STANDSTILL Co.

Statement of cash flows
For the year ended December 31, 20x2

Cash flows from operating activities

12,000
Cash receipts from customers
40
Cash receipts for interest income
540
Cash receipts for rent income
80
Cash receipts for dividend income
(7,600)
Cash paid to suppliers
(2,400)
Cash paid for operating expenses
2,660
Cash generated from operations
(60)
Interest paid
(140)
Income taxes paid
1,600
Cash receipt from sale of held for trading securities
4,060
Net cash from operating activities

Cash flows from investing activities

(200)
Cash payment for acquisition of investment in FVOCI
1,040
Cash receipt from sale of old building
(2,200)
Cash payment for acquisition of equipment
120
Cash receipt from collection of loan granted
(260)
Cash payment for loan granted
(1,500)
Net cash used in investing activities

Cash flows from financing activities

3,200
Cash proceeds from loan borrowed
(480)
Cash payment for loan borrowed
1,940
Cash proceeds from issuance of share capital
(400)
Cash payment for acquisition of treasury shares
(180)
Cash payment for dividends
4,080
Net cash from financing activities
 6,640
Net increase in cash and cash equivalents
400
Cash and cash equivalents, beginning
7,040
Cash and cash equivalents, end

Use the following information for the next four questions:

BLITHE JOYFUL Co. had the following information during 20x2:
Accounts receivable, January 1, 20x2 2,400
Accounts receivable, December 31, 20x2 1,600
Sales on account and cash sales 32,000
Bad debts expense 800
Accounts payable, January 1, 20x2 1,400
Accounts payable, December 31, 20x2 800
Cost of sales 16,000
Increase in inventory 3,600

Operating expenses on accrual basis 4,880

Increase in accrued payables for operating expenses 1,640
Decrease in prepaid operating expenses 1,560

Property, plant, and equipment, January 1, 20x2 7,200

Property, plant, and equipment, December 31, 20x2 10,800

Additional information:
 There were no write-offs of accounts receivable during the year.
 Equipment with an accumulated depreciation of ₱800 was sold during the year for ₱480
resulting to a gain on sale of ₱60.

20. How much is the cash receipts from customers?

a. 38,200
b. 37,400
c. 35,400
d. 32,800

Solution:
Accounts receivable
Jan. 1, 20x2 2,400 - Write-offs
Collections of accounts
Sales 32,000 32,800 receivables (squeeze)
1,600 Dec. 31, 20x2

21. How much is the cash payments to suppliers?

a. 19,000
 b. 20,200
c. 22,000
d. 23,400

Solution:
Inventory
Jan. 1, 20x2 -  
Net purchases (squeeze) 19,600 16,000 Cost of sales
3,600 Dec. 31, 20x2

Accounts payable
1,400 Jan. 1, 20x2
Payments for purchases on
account (squeeze) 20,200 19,600 Net purchases (accrual)
Dec. 31, 20x2 800  

22. How much is the cash payments for operating expenses?

a. 1,680
b. 4,800
c. 4,960
d. 8,080

Solution:
Prepaid expense / Accrued expense
Prepaid expense, beginning 1,560 - Accrued expense, beg.
Cash paid for operating expenses
(squeeze) 1,680 4,880 Operating expense (accrual basis)
Accrued expense, end 1,640 - Prepaid expense, end

23. How much is the cash payments for acquisition of property, plant, and equipment?
a. 3,600
b. 4,820
c. 4,080
d. 4,940

Solution:
The entry for the sale of equipment is re-constructed as follows:
20x2 Cash on hand (given) 480
Accumulated depreciation (given) 800
Equipment (squeeze) 1,220
Gain on sale (given) 60
 Property, plant and equipment
Jan. 1, 20x2 7,200  
Historical cost of equipment sold (see
Acquisition of PPE (squeeze) 4,820 1,220 journal entry above)
10,800 Dec. 31, 20x2

24. ABC Co. has the following information as of December 31, 20x1:
Jan. 1 Dec. 31
Accounts receivable 100,000 250,000
Allowance for bad
15,000
debts 20,000
Net credit sales 850,000
Bad debt expense 60,000
Recoveries 20,000

How much is the total cash receipts from customers during the period?
a. 970,000
b. 879,000
c. 907,000
d. 897,000

Solution:
Accounts receivable
beg. 90,000
Net credit sales 1,200,000 73,000 Write-offs a
Collections from customers (including
Recoveries 10,000 907,000 recoveries) - (squeeze)
320,000 end.

a
The amount of write-offs is computed as follows:
Allowance for doubtful accounts
26,000 beg.
Write-offs (squeeze) 73,000 10,000 Recoveries
80,000 Bad debt expense
end. 43,000

25. BLUFF DECEIVE Co. has the following information as of December 31, 20x2:

Jan. 1 Dec. 31
Accounts receivable 16,000 20,000
Allowance for bad debts (400) (1,000)
Prepaid rent 3,840 3,200
Accounts payable 6,800 8,800
BLUFF reported profit of ₱8,800 for the year, after depreciation expense of ₱200, gain on sale of
equipment of ₱240, and restructuring and other provisions of ₱400. None of the provisions
recognized during the period affected cash.

How much is the cash flows from operating activities?

a. 4,800
b. 5,600
c. 8,800
d. 8,400

Solution:
Cash flows from operating activities
Profit 8,800
Adjustments for:
Depreciation expense 200
Gain on sale of building (240)
Restructuring and other provisions 400
9,160
Increase in accounts receivable, net
[(20,000 – 1,000) – (16,000 – 400)] (3,400)
Decrease in prepaid rent 640
Increase in accounts payable 2,000
Net cash from operating activities 8,400

Use the following information for the next two questions:

INORDINATE EXCESSIVE Co. had the following information for 20x2:
 Acquired 3-month treasury bills for ₱200,000.
 Acquired equipment with a purchase price of ₱4,000,000 by paying 20% in cash and issuing a
note payable for the balance. There were no payments made on the note during the year.
 Acquired land with fair value of ₱3,200,000 by issuing shares with aggregate par value of
₱2,400,000. The excess is credited to share premium.
 Extended a ₱1,600,000 loan to a director.
 Borrowed ₱1,280,000 from a bank. Used the cash proceeds as follows: ₱800,000 for additional
working capital and ₱480,000 to settle scrip dividends declared in 20x1.
 Settled an outstanding note payable by issuing shares with aggregate par value of ₱800,000.
Share premium resulted from the transaction amounted to ₱280,000.

26. How much is the net cash flows from (used in) investing activities?
a. (2,400,000)
b. 2,400,000
c. 800,000
d. (800,000)

Cash flows from investing activities

Cash payment for acquisition of equipment (4M x 20%) (800,000)
Cash proceeds of loan granted to officer (1,600,000)
 Net cash used in investing activities (2,400,000)

27. How much is the net cash flows from (used in) financing activities?
a. (800,000)
b. 800,000
c. (2,400,000)
d. 2,400,000

Cash flows from financing activities

Cash receipt from borrowings 1,280,000
Cash payment for dividends (480,000)
Net cash used in financing activities 800,000

Use the following information for the next three questions:

Information on LA-DI-DA SHOWY Co.'s financial position and performance as of December 31,
20x2 and 20x1 are presented below.

LA-DI-DA SHOWY Company

Statement of financial position
As of December 31, 20x2
ASSETS 20x2 20x1
Current assets
Cash and cash equivalents 1,000,000 600,000
Held for trading securities 480,000 -
Accounts receivable – net 1,520,000 1,240,000
Rent receivable 100,000 40,000
Inventory 2,000,000 3,600,000
Prepaid insurance 200,000 160,000
Total current assets 5,300,000 5,640,000
Noncurrent assets
Investment in bonds 360,000 340,000
Buildings 10,000,000 4,000,000
Accumulated depreciation (800,000) (800,000)
Goodwill 360,000 400,000
Total noncurrent assets 9,920,000 3,940,000
TOTAL ASSETS 15,220,000 9,580,000
LIABILITIES AND EQUITY
Current liabilities
Accounts payable 480,000 320,000
Unearned rent 80,000 120,000
Insurance payable 240,000 180,000
Dividends payable 920,000 480,000
Income tax payable 60,000 140,000
Short-term loan payable - 200,000
 Total current liabilities 1,780,000 1,440,000
Noncurrent liabilities
Bonds payable 4,000,000 4,000,000
Discount on bonds (380,000) (400,000)
Deferred tax liability 60,000 40,000
Total noncurrent liabilities 3,680,000 3,640,000
TOTAL LIABILITIES 5,460,000 5,080,000
Equity
Share capital 8,000,000 4,000,000
Retained earnings 1,760,000 500,000
 TOTAL EQUITY 9,760,000 4,500,000
TOTAL LIABILITIES AND
EQUITY 15,220,000 9,580,000
     

LA-DI-DA SHOWY Company

Statement of profit or loss
For the year ended December 31, 20x2
Sales 20,000,000
Cost of sales (12,000,000)
Gross income 8,000,000
Rent income 1,800,000
Interest income 80,000
Insurance expense (400,000)
Bad debts expense (60,000)
Interest expense (400,000)
Loss on sale of building (160,000)
Unrealized gain on investment 80,000
Other expenses (4,800,000)
Profit before tax 4,140,000
Income tax expense (1,200,000)
Profit for the year 2,940,000

Additional information:
 During 20x2, LA-DI-DA purchased held for trading securities for ₱400,000. The fair value of the
shares on December 31, 20x2 is ₱480,000.
 The allowance for doubtful accounts has balances of ₱80,000 and ₱40,000 as of December 31, 20x2
and 20x1, respectively.
 During 20x2, LA-DI-DA sold an old building with historical cost of ₱3,200,000 for ₱1,040,000.
 LA-DI-DA inadvertently included depreciation expense in the “Other expenses” line item.
 There were no acquisitions or disposals of investment in bonds during the period.
 During 20x2, LA-DI-DA issued shares with an aggregate par value of ₱4,000,000 for ₱4,000,000
cash.

28. How much is the net cash flows from (used in) operating activities?
a. (6,000,000)
b. 6,000,000
 c. 6,600,000
d. (7,600,000)

Solution:
Cash flows from operating activities
2,940,000
Profit for the year

Adjustments for:
2,000,000
Depreciation expense
40,000
Impairment loss on goodwill
160,000
Loss on sale of building
(80,000)
Unrealized gain on held for trading securities
(20,000)
Amortization of discount on investment in bonds
20,000
Amortization of discount on bonds payable
5,060,000

(280,000)
Increase in accounts receivable, net
(60,000)
Increase in rent receivable
1,600,000
Decrease in inventory
(40,000)
Increase in prepaid insurance
160,000
Increase in accounts payable
(40,000)
Decrease in unearned rent
60,000
Increase in insurance payable
(80,000)
Decrease in income tax payable
20,000
Increase in deferred tax liability
6,400,000

(400,000)
Cash paid for the acquisition of held for trading securities
6,000,000
Net cash from operating activities

29. How much is the net cash flows from (used in) investing activities?
a. (8,160,000)
b. 8,460,000
c. (9,200,000)
d. 8,160,000

Solution:
Cash flows from investing activities
Cash receipt from sale of old building 1,040,000
Cash payment for acquisition of building (9,200,000)
Net cash used in investing activities (8,160,000)

30. How much is the net cash flows from (used in) financing activities?
a. (2,560,000)
b. 2,560,000
c. (2,960,000)
d. 2,960,000

Solution:
Cash flows from financing activities
Cash proceeds from issuance of share capital 4,000,000
Cash payment for short-term loan (200,000)
Cash payment for dividends (1,240,000)
Net cash from financing activities 2,560,000

31. REMNANT REMAINDER Co.’s cash balances as of December 31, 20x2 and 20x1 were ₱7,040,000
and ₱400,000 respectively. REMNANT’s December 31, 20x2 statement of cash flows reported net
cash used in investing activities of ₱1,500,000 and net cash from financing activities of
₱4,080,000.

How much is the net cash flows from (used in) operating activities?
a. (4,060,000)
b. 4,060,000
c. 4,600,000
d. (4,600,000)

Solution:
4,060,000
Net cash from operating activities squeeze
(1,500,000)
Net cash from investing activities
4,080,000
Net cash used in financing activities
6,640,000
Net increase in cash during the period
400,000
Cash, beginning balance
7,040,000
Cash, ending balance start
32. During 20x1, ALBEIT ALTHOUGH Company decided to change from the Average cost formula
for inventory valuation to the FIFO cost formula. Inventory balances under each method were as
follows:
Average FIFO
January 1 4,000,000 4,800,000
December 31 8,000,000 8,400,000

Income tax rate is 30%. What is the net cumulative effect of the accounting change in ALBEIT’s
opening retained earnings balance?
a. 400,000 increase c. 280,000 increase
b. 560,000 decrease d. 560,000 increase

D (4,800,000 – 4,000,000) x 70% = 560,000 increase

33. On January 1, 20x1, PRISTINE UNCORRUPTED Co. acquired an equipment for ₱4,000,000. The
equipment will be depreciated using the straight-line method over 20 years. The estimated
residual value is ₱400,000.

In 20x6, following a reassessment of the realization of the expected economic benefits from the
equipment, PRISTINE Co. changed its depreciation method to sum-of-the-years digits (SYD). The
remaining useful life of the asset is estimated to be 4 years and the residual value is changed to
₱200,000. How much is the depreciation expense in 20x6?
a. 1,160,000 b. 1,140,000 c. 1,233,560 d. 1,110,669

A [(4M – 400K) x 15/20 + 400K] – 200K x 4/10 = 1,160,000

Use the following information for the next two questions:

On January 10, 20x2, prior to the authorization of LIBERTINE IMMORAL Co.’s December 31, 20x1
financial statements for issue, the accountant of LIBERTINE Co. received a bill for an advertisement
made in the month of December 20x1 amounting to ₱1,600,000. This expense was not accrued as of
December 31, 20x1.

34. The correcting entry, if the books are still open, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
d. a credit to retained earnings for ₱1,600,000

A (Dr.) Advertising expense 1.6M; (Cr.) Advertising payable 1.6M

35. The correcting entry, if the books are already closed, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
 d. a credit to retained earnings for ₱1,600,000

C (Dr.) Retained earnings 1.6M; (Cr.) Advertising payable 1.6M

36. On January 15, 20x3 while finalizing its 20x2 financial statements, DIAPHANOUS
TRANSPARENT Co. discovered that depreciation expense recognized in 20x1 is overstated by
₱1,600,000. Ignoring income tax, the entry to correct the prior period error includes
a. a debit to depreciation expense for ₱1,600,000
b. a debit to retained earnings for ₱1,600,000
c. a credit to depreciation expense for ₱1,600,000
d. a debit to accumulated depreciation for ₱1,600,000

D (Dr.) Accum. Dep’n. 1.6M; (Cr.) Retained earnings 1.6M

Use the following information for the next four questions:

GULOSITY GREEDINESS Co. reported profits of ₱4,000,000 and ₱8,000,000 in 20x1 and 20x2,
respectively. In 20x3, the following prior period errors were discovered:
 The inventory on December 31, 20x1 was understated by ₱200,000.
 An equipment with an acquisition cost of ₱1,200,000 was erroneously charged as expense in
20x1. The equipment has an estimated useful life of 5 years with no residual value. GULOSITY
Co. provides full year depreciation in the year of acquisition.

The unadjusted balances of retained earnings are ₱8,800,000 and ₱16,800,000 as of December 31, 20x1
and 20x2, respectively.

37. How much is the correct profit in 20x1?

a. 7,560,000
b. 5,610,000
c. 4,760,000
d. 5,160,000

D (Refer to solutions below)

38. How much is the correct profit in 20x2?

a. 7,560,000
b. 5,160,000
c. 5,720,000
d. 5,610,000

  20x1 20x2
Unadjusted profits 4,000,000 8,000,000
Corrections - (over) understatement:
(a) Understatement of Dec. 31, 20x1 inventory 200,000 (200,000)
(b.1) Capitalizable costs charged as expense 1,200,000 -
(b.2) Depreciation expense not recognized (240,000) (240,000)
Net adjustment to profit 1,160,000 (440,000)
Correct profits 5,160,000 7,560,000

39. How much is the correct retained earnings in 20x1?

a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000

A (Refer to solutions below)

40. How much is the correct retained earnings in 20x2?

a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000

20x1 20x2
Unadjusted retained earnings 8,800,000 16,800,000
Net effect of errors on retained earnings:
20x1: 1,160,000* 1,160,000
20x2: (440,000) + 1,160,000* 720,000
Adjusted retained earnings 9,960,000 17,520,000
*Amounts represent the net effect of errors in profits (refer to previous solution).

Use the following information for the next four questions:

HELICAL SPIRAL Co. reported profits of ₱1,600,000 and ₱2,400,000 in 20x1 and 20x2, respectively.
In 20x3, the following prior period errors were discovered:
 Prepaid supplies in 20x1 were overstated by ₱80,000.
 Accrued salaries payable in 20x1 were understated by ₱160,000.
 Repairs and maintenance expenses in 20x1 amounting to ₱400,000 were erroneously capitalized
and being depreciated over a period of 4 years.

The unadjusted balances of retained earnings are ₱6,400,000 and ₱8,800,000 as of December 31, 20x1
and 20x2, respectively.

41. How much is the correct profit in 20x1?

a. 1,006,000
b. 1,610,000
c. 1,720,000
d. 1,060,000

D (Refer to solutions below)

42. How much is the correct profit in 20x2?
a. 2,704,000
b. 2,160,000
c. 2,740,000
d. 2,610,000

Solutions:
  20x1 20x2
Unadjusted profits 1,600,000 2,400,000
Corrections - (over) understatement:
(a) Overstatement of 20x1 prepaid assets (80,000) 80,000
(b) Understatement of 20x1 accrued salaries (160,000) 160,000
(c.1) Expenses erroneously capitalized (400,000) -
(c.2) Depreciation recognized on repair costs
(400,000 ÷ 4) 100,000 100,000
Net adjustment to profit (540,000) 340,000
Correct profits 1,060,000 2,740,000

43. How much is the correct retained earnings in 20x1?

a. 5,806,000
b. 5,520,000
c. 5,860,000
d. 5,420,000

C (Refer to solutions below)

44. How much is the correct retained earnings in 20x2?

a. 8,960,000
b. 8,600,000
c. 8,860,000
d. 8,420,000

B (Refer to solutions below)

Solutions:
20x1 20x2
Unadjusted retained earnings 6,400,000 8,800,000
Net effect of errors on retained earnings:
20x1: (540,000)* (540,000)
20x2: 340,000 + (540,000)* (200,000)
Adjusted retained earnings 5,860,000 8,600,000
*Amounts represent the net effect of errors in profits (refer to previous solution).

Use the following information for the next fifteen questions:

THRALL SLAVE Company made the following errors:
a. December 31, 20x1 inventory was understated by ₱100,000.
b. December 31, 20x2 inventory was overstated by ₱160,000.
c. Purchases on account in 20x1 were understated by ₱400,000 (not included in physical count).
d. Advances to suppliers in 20x2 totaling ₱520,000 were inappropriately charged as purchases.
e. December 31, 20x1 prepaid insurance was overstated by ₱20,000.
f. December 31, 20x1 unearned rent income was overstated by ₱104,000.
g. December 31, 20x2 interest receivable was understated by ₱68,000.
h. December 31, 20x2 accrued salaries payable was understated by ₱120,000.
i. Advances from customers in 20x2 totaling ₱240,000 were inappropriately recognized as sales but
the goods were delivered in 20x3.
j. Depreciation expense in 20x1 was overstated by ₱28,800
k. In 20x2, the acquisition cost of a delivery truck amounting to ₱360,000 was inappropriately
charged as expense. The delivery truck has a useful life of five years. THRALL’s policy is to
provide a full year’s straight line depreciation in the year of acquisition and none in the year of
disposal.
l. A fully depreciated equipment with no residual value was sold in 20x3 for ₱200,000 but the sale
was recorded in the following year.

Profits before correction of errors were ₱492,000, ₱624,000, and ₱840,000 in 20x1, 20x2, and 20x3,
respectively.

Retained earnings before correction of errors were ₱4,492,000, ₱5,116,000 and ₱5,956,000 in 20x1,
20x2, and 20x3, respectively.

45. What is the net effect of the errors on the 20x1 profit? (over) understatement
a. (187,200)
b. 187,200
c. (164,200)
d. 164,200

A (Refer to solutions below)

46. What is the net effect of the errors on the 20x2 profit? (over) understatement
a. (572,000)
b. 572,000
c. 563,400
d. (563,400)

B (Refer to solutions below)

47. What is the net effect of the errors on the 20x3 profit? (over) understatement
a. (78,000)
b. 78,000
c. (60,000)
 d. 60,000

D (Refer to solutions below)

48. How much is the correct profit (loss) in 20x1?

a. (348,000)
b. 348,000
c. 324,800
d. 304,800

D (Refer to solutions below)

49. How much is the correct profit (loss) in 20x2?

a. 1,196,000
b. 1,296,000
c. 1,684,800
d. 1,286,000

A (Refer to solutions below)

50. How much is the correct profit (loss) in 20x3?

a. 900,000
b. 926,000
c. 968,400
d. 986,000

A (Refer to solutions below)

Solutions:
20x1 20x2 20x3
Unadjusted profits 492,000 624,000 840,000
Corrections - (over)/understatement
a. Understatement of 20x1 inventory 100,000 (100,000) -
b. Overstatement of 20x2 inventory (160,000) 160,000
c. Understatement of 20x1 purchases (400,000) 400,000 -
d. Overstatement of 20x2 purchases 520,000 (520,000)
e. Overstatement of 20x1 prepaid
insurance (20,000) 20,000 -
f. Overstatement of 20x1 unearned
rent 104,000 (104,000) -
g. Understatement of 20x2 interest
income 68,000 (68,000)
h. Understatement of 20x2 accrued
salaries (120,000) 120,000
i. Overstatement of 20x2 advances/
sales (240,000) 240,000
j. Overstatement of 20x1 depreciation
expense 28,800 - -
k. Acquisition cost of delivery truck in
20x2 360,000
k.1 Depreciation on delivery truck (72,000) (72,000)
l. Gain on sale in 20x3 not recorded* 200,000
Net correction on profits
(over) / under (187,200) 572,000 60,000
Corrected profits 304,800 1,196,000 900,000

*Since the equipment sold is fully depreciated and it has no residual value, the proceeds represents the gain on sale.

51. What is the net effect of the errors on the 20x1 retained earnings? (over) understatement
a. (182,700)
b. 182,700
c. (165,200)
d. (187,200)

D (Refer to solutions below)

52. What is the net effect of the errors on the 20x2 retained earnings? (over) understatement
a. 348,800
b. (348,800)
c. (384,800)
d. 384,800

D (Refer to solutions below)

53. What is the net effect of the errors on the 20x3 retained earnings? (over) understatement
a. 444,800
b. (444,800)
c. 524,800
d. (524,800)

A (Refer to solutions below)

54. How much is the correct retained earnings in 20x1?

a. 4,304,800
b. 4,404,800
c. 4,524,400
d. 4,340,800

A (Refer to solutions below)

55. How much is the correct retained earnings in 20x2?

 a. 5,500,800
b. 5,756,800
c. 5,246,400
d. 5,340,400

A (Refer to solutions below)

56. How much is the correct retained earnings in 20x3?

a. 6,340,800
b. 6,400,800
c. 6,479,800
d. 7,004,400

Solutions:
  20x1 20x2 20x3
Unadjusted retained earnings 4,492,000 5,116,000 5,956,000
Net effect of errors on profits in:
20x1 (187,200) (187,200) (187,200)
20x2 572,000 572,000
20x3 60,000
Net effect of errors on retained earnings (over) /
under (187,200) 384,800 444,800
Adjusted retained earnings 4,304,800 5,500,800 6,400,800

57. What is the net effect of the errors on the 20x1 working capital? (over) understatement
a. (216,000)
b. 216,000
c. 80,000
d. (80,000)

58. What is the net effect of the errors on the 20x2 working capital? (over) understatement
a. 228,000
b. (228,000)
c. (68,000)
d. 68,000

59. What is the net effect of the errors on the 20x3 working capital? (over) understatement
a. No effect
b. 132,000
c. 200,000
d. (200,000)
C

Solutions:
  20x1 20x2 20x3
Effect of errors on working capital (over)/under
a. Understatement of 20x1 inventory 100,000
b. Overstatement of 20x2 inventory (160,000)
c. Understatement of 20x1 accounts
payable a (400,000)
d. Understatement of 20x2 advances to
suppliers b 520,000
e. Overstatement of 20x1 prepaid
insurance (20,000)
f. Overstatement of 20x1 unearned rent 104,000
g. Understatement of 20x2 interest
receivable 68,000
h. Understatement of 20x2 accrued salaries (120,000)
i. Understatement of 20x2 advances to
customers c (240,000)
l. Understatement of cash due to the sale of
equipment not recorded in 20x3 200,000

Net effect of errors on working capital (over)/under (216,000) 68,000 200,000

a
If purchases on account is understated, accounts payable is also understated. Understatement in
current liabilities overstates working capital.
b
Advances to suppliers are normally classified as current receivables. Understatement in current assets
understates working capital.
c
Advances from customers are normally classified as current liabilities. Understatement in current
liabilities overstates working capital.

60. TRIBULATION GREAT DISTRESS Co.’s current reporting period ends on December 31, 20x1.
The following transactions occurred after the end of reporting period:
 On January 5, 20x2, TRIBULATION declared ₱8,000,000 dividends.
 On January 15, 20x2, TRIBULATION issued 1,000 shares with par value per share of ₱400 for
₱2,400 per share.
 On January 20, 20x2, TRIBULATION installed an oil rig. Current legislation requires that the oil
rig be uninstalled at the end of its useful life and the site where it was installed be restored.
TRIBULATION estimates the present value of the decommissioning and restoration cost at
₱4,000,000.
 On February 1, 20x2, a building with a carrying amount as of December 31, 20x1 of ₱2,000,000
was totally razed by fire.
 On February 10, 20x2, TRIBULATION received notice of a litigation in relation to an accident
that happened on December 31, 20x1. TRIBULATION estimates a probable loss of ₱800,000.
 On March 5, 20x2, TRIBULATION purchased a subsidiary for ₱40,000,000 in a business
combination accounted for using the acquisition method. Goodwill of ₱10,000,000 was
recognized on the business combination.

The financial statements were authorized for issue on March 1, 20x2.

What is the total amount of the adjusting events?
a. 6,800,000
b. 800,000
c. 4,800,000
d. 30,000,000

B 800,000 probable loss on litigation

61. UNCORK RELEASE Co.’s current reporting period ends on December 31, 20x1. The following
transactions occurred after the end of reporting period:
 On January 20, 20x2, a pending litigation was resolved requiring a settlement amount of
₱400,000. The 20x1 year-end financial statements included a provision for loss on litigation of
₱480,000.
 Inventories costing ₱4,000,000 were recognized at their net realizable value of ₱3,600,000 in the
20x1 year-end financial statements. During January 20x2, the inventories were sold for
₱3,520,000. Actual selling costs amounted to ₱120,000.
 The year-end accounts receivable include a ₱400,000 receivable from RELINQUISH, Inc. No
allowance for doubtful accounts was recognized on this receivable as of December 31, 20x1. On
February 3, 20x2, RELINQUISH filed for bankruptcy. It was estimated that the receivable will
not be collected.
 The fair value of financial assets measured at fair value through profit or loss significantly
declined to ₱320,000 on February 28, 20x2. The financial assets are recognized in the 20x1 year-
end financial statements at ₱1,200,000 which is their fair value as of December 31, 20x1.
 On March 5, 20x2, a case was resolved requiring a settlement amount of ₱800,000. The 20x1 year-
end financial statements included a provision for loss on litigation of ₱600,000.

UNCORK Co.’s profit for the year ended December 31, 20x1 before consideration of the above
transactions is ₱8,800,000. The financial statements were authorized for issue on March 1, 20x2.

How much is the adjusted profit?

a. 8,820,000
b. 9,020,000
c. 10,820,000
d. 8,280,000

Solution:
Unadjusted profit, December 31, 20x1 8,800,000
(a) Reduction in provision for loss on pending litigation
(480K – 400K) 80,000
(b) Reduction in NRV of inventories [3.6M - (3.52M –120K)] (200,000)
(c) Impairment loss on receivables (400,000)
Adjusted profit, December 31, 20x1 8,280,000

Use the following information for the next two questions:

The following relates to the transactions of GRIMACE FROWN Co. during 20x1:
Directors' and officers' remuneration 8,000,000
Post-employment benefits of officers 800,000
Fringe benefits in the form of housing assistance to
directors and officers 20,000,000
Share options granted to officers 1,200,000
Officers' expenses on travels, representation and
entertainment subject to liquidation and
reimbursement 400,000
Loans to directors and officers 12,000,000
Sales to related entities 40,000,000

62. How much is the amount of related party disclosures on GRIMACE’s separate financial
statements?
a. 30,000,000
b. 52,000,000
c. 82,000,000
d. 42,000,000

C Key management personnel compensation (8M + 800K + 20M + 1.2M) + Related party transactions
(12M + 40M) = 82M

63. How much is the amount of related party disclosures on GRIMACE’s consolidated financial
statements?
a. 12,000,000
b. 30,000,000
c. 82,000,000
d. 42,000,000

D Key management personnel compensation (8M + 800K + 20M + 1.2M) + Related party transactions
(12M) = 42M

64. DEMENTED INSANE Co. is preparing its year-end financial statements and has identified the
following operating segments:
Segment
s Revenues Profit (loss) Assets
A 4,000,000 800,000 56,000,000
B 4,800,000 560,000 72,000,000
C 1,080,000 (280,000) 48,000,000
D 960,000 (2,800,000) 4,000,000
E 1,160,000 200,000 5,600,000
Totals 12,000,000 (1,520,000) 185,600,000
What are the reportable segments?
a. A, B and D
b. A, B, C and D
c. A and B
d. A, B, C, D and E

 Revenue test: Threshold = 1,200,000 (12,000,000 x 10%). Reportable segments are A and B.

 Profit or loss test: Total profits (800,000 + 560,000 + 200,000 = 1,560,000); Total losses (280,000
+ 2,800,000 = 3,080,000).

Threshold = 308,000 (3,080,000 (higher) x 10%). Reportable segments are A, B and D.

 Asset test: Threshold = 18,560,000 (185,600,000 x 10%). Reportable segments are A, B and C.

 The reportable segments are A, B, C and D.

65. EMBOSOM CHERISH Co. engages in five diversified operations namely, operations A, B, C, D,
and E. Information on these segments are shown below:
Segment
s Revenues Profit (loss) Assets

A 3,200 800 40,000

B 3,200 400 8,000

C 200 40 4,000

D 600 80 8,000

E 800 280 24,000

Totals 8,000 1,600 84,000

Additional information:
a. For internal reporting purposes, segments A and B are considered as one operating segment.
b. Segment E is considered as an operating segment for internal decision making purposes.
c. Segments C and D have similar economic characteristics and share a majority of the aggregation
criteria.

What are the reportable segments?

a. A, B, C, D and E
b. A, B and E
c. A and B as one segment and E
d. A and B as one segment, E, and C and D as one segment

D
  Management approach: Reportable segments are A and B aggregated as a single reportable
segment and E.

 Quantitative tests: C and D aggregated as a single reportable segment.

66. SORDID DIRTY Co. is preparing its year-end financial statements and has identified the
following operating segments:
Inter-
External segment Total
Segments revenues revenues revenues Profit Assets
A 4,800,000 2,400,000 7,200,000 2,800,000 48,000,000
B 1,600,000 400,000 2,000,000 1,600,000 28,000,000
C 1,000,000 - 1,000,000 400,000 4,000,000
D 800,000 - 800,000 320,000 3,200,000
E 600,000 - 600,000 280,000 2,800,000
F 400,000 - 400,000 200,000 2,000,000
Totals 9,200,000 2,800,000 12,000,000 5,600,000 88,000,000

Management believes that between segments C, D, E and F, segment C is most relevant to external
users of financial statements.

What are the reportable segments?

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

 Quantitative tests: A and B. However, their total external revenues is less than the 75% limit.
Therefore, C is included as reportable in order to meet the 75% limit, even if segment C does not
qualify in any of the quantitative tests.

67. RUSTIC RURAL Co. has the following information on its operating segments.
Inter-
External segment Total
Segments revenues revenues revenues Profit Assets
A 4,800,000 2,400,000 7,200,000 2,800,000 48,000,000
B 1,600,000 400,000 2,000,000 1,600,000 28,000,000
C 1,000,000 - 1,000,000 400,000 4,000,000
D 800,000 - 800,000 320,000 3,200,000
E 600,000 - 600,000 280,000 2,800,000
F 400,000 - 400,000 200,000 2,000,000
Totals 9,200,000 2,800,000 12,000,000 5,600,000 88,000,000
RUSTIC Co. shall provide disclosure for major customers if revenues from transactions with a single
external customer amount to how much?
a. 920,000
b. 280,000
c. 1,200,000
d. 560,000

A (9,200,000 x 10%) = 920,000

68. You are the accountant of Entity X. The board of directors asked you for an advice because they
feel like the company’s financial statements do not properly reflect the company’s financial
position. The board noted out that the company’s properties (i.e., land) are absurdly stated at
their historical cost. The properties were acquired 50 years ago and the market prices of the
properties have more than tripled since then. In providing your professional advice, you will
most certainly quote the provisions of which of the following standards?
a. PAS 7
b. PAS 1
c. PAS 16
d. PAS 8

69. PFRS 8 relates to which of the following?

a. Disclosure of operating segments
b. Disclosure of related party relationships and transactions
c. Disclosure of events after the reporting period
d. Interim financial reporting

70. "Aanhin mo pa ang damo kung patay na ang kabayo.”

a. Relevance
b. Timeliness
c. Biological asset - Horse
d. PFRH – Philippine Financial Reporting Horse
e. b and c

B – choice (c) is wrong. A dead animal cannot qualify as a biological asset. Stocks of grass used for
feeding horses are considered “Supplies” rather than biological assets. “Bio” means life.

“I press on toward the goal to win the prize for which God has called me heavenward in Christ Jesus.” –
(Philippians 3:14)

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