INTERMEDIATE ACCOUNTING 3

MOCK PHINMA EXAM

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G E N E R A L D I R E C T I O N S
READ THIS PAGE BEFORE STARTING THE ASSESSMENT

This is a 16 paged test and is composed of 1 sections and has a total score
of one hundred twenty (100) points. You have eighty (180) Minutes to finish
this examination. The breakdown of the exam is as follows:

(1) Multiple-choice Section. The questions in

this section is with four answer choices.
LEARNING OBJECTIVE:
Encircle the letter of your answer. This assessment measures
The test is composed of 100 questions with a the competence of the
rate of 1 points each. student in terms of
his/her application of
knowledge and skills in
All things unnecessary for the test must be
put in front of the testing area. Use BLACK or the following topics:
BLUE ink ballpen only. Write all your answers
on the designated answer sheet. Further, 1. Financial
erasures are strictly NOT allowed and will Liabilities
invalidate your answers. 2. Non – Financial
Liabilities
You may NOT use smart phones or reference 3. Provisions and
materials during the testing session. Only the Contingencies
allowed calculators should be used.
4. Leases
5. Income Taxes
Try to answer all questions. In general, if
you have some knowledge about a question, it is 6. Employee Benefits
better to try to answer it. You will not be
penalized for guessing.

Be sure to allocate your time carefully so you can complete the entire test
within the exam session. You may go back and review your answers at any time
during the exam session.

Those who are caught cheating or doing acts not allowed during the exam
shall be instructed to surrender their test papers and shall leave the testing
room immediately. Subsequently, their papers shall be rated as ZERO.

This concludes the instruction page.

You may now begin answering.

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
1. Which of the following situations would not lead to a finance lease classification?
a. Transfer of ownership to the lessee at the end of the lease term.
b. Option to purchase at a value below the fair value of the asset.
c. The lease term is for a major part of the asset’s life.
d. The present value of the minimum lease payments is 50% of the fair value of the asset.

2. Which of the following is a correct statement of one of the lease capitalization criteria?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the economic life of the leased property.
d. The minimum lease payments excluding executory costs equal or exceed 90% of the fair value of
the leased property.

3. Which statement is incorrect regarding IFRS 16 Leases?

a. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as
required by IAS 17 and, instead, introduces a single lessee accounting model.
b. A lessee is required to recognize assets and liabilities for all leases with a term of more than 12
months, unless the underlying asset is of low value.
c. A lessee is required to recognize depreciation of lease assets separately from interest on lease
liabilities in the income statement.
d. A lessor shall classify its leases as operating leases.

4. Which of the following is not likely an effect of IFRS 16 on lessee’s financial statements?
a. Increase in assets and liabilities.
b. Increase in finance costs
c. Increase in operating expenses.
d. Increase in financing cash outflows.

Information below are for items 5 to 7:

At the beginning of current year, an entity sold building with a remaining useful life of 30 years
and immediately leased it back for 5 years.

Sale price at below fair value 18,000,000

Fair value of building 20,000,000
Carrying amount of building 24,000,000
Annual rental payable at the end of each year 1,000,000
Implicit Interest rate 12%

5. What is the initial lease liability?

a. 3,600,000
b. 4,000,000
c. 4,800,000
d. 0

6. What is the cost of right of use of asset?

a. 3,000,000
b. 4,320,000
c. 5,760,000
d. 6,720,000

7. What is the loss on right transferred?

a. 4,000,000

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
b. 2,880,000
c. 5,760,000
d. 6,720,000

Information below are for items 8 to 12:

At the beginning of current year, an entity leased a building from a lessor with the following
pertinent information:
Annual rental payable at the end of each year 1,500,000
Initial direct cost paid 405,000
Lease bonus paid to lessor before commencement of the lease 300,000
Lease incentive received 50,000
Cost of restoring building as required by contract 1,500,000
Present Value of restoration cost discounted at 8% for 6 periods 945,000
Leasehold improvement – useful life 8 years 600,000
Purchase option that is reasonably certain to be exercised 1,000,000
Lease Term 6 years
Useful life of building 10 years
Implicit Interest rate 10%

8. What is the initial lease liability?

a. 7,100,000
b. 6,540,000
c. 9,210,000
d. 9,600,000

9. What is the cost of the right of use asset?

a. 8,750,000
b. 8,700,000
c. 9,255,000
d. 7,755,000

10. What total amount of interest expense should be reported for the current year?
a. 710,000
b. 785,600
c. 804,500
d. 830,000
11. What is the lease liability at year – end?
a. 6,310,000
b. 5,964,000
c. 9,060,000
d. 3,600,000

12. What is the depreciation of the right of use asset for current year?
a. 1,450,000
b. 1,550,000
c. 870,000
d. 875,000

Information below are for items 13 to 15:

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
On December 31, 2020, an entity leased two automobiles for executive use. The lease required
the entity to make five annual payments of P1, 500,000 beginning January 1, 2021. At the end of the
lease term, December 31, 2025, the entity had residual value guarantee of the automobiles at P1,
000,000. The interest implicit in the lease is 10%.

13. What is the lease liability on December 31, 2021?

a. 4,412,500
b. 5,375,000
c. 6,062,500
d. 4,805,000

14. What is the current portion of the lease liability on December 31, 2021?
a. 1,500,000
b. 1,058,750
c. 962,500
d. 750,000

15. What is the interest expense for 2021?

a. 480,500
b. 537,500
c. 441,250
d. 606,250

16. On January 1, 2020, an entity entered into 5-year lease with a lessor. Annual lease payments of
P1,200,000 including annual executory cost of P200, 000 are payable at the end of each year. The
entity knows that the lessor expects an 8% implicit rate on the lease. The entity has a 10%
incremental borrowing rate. The equipment is expected to have a 10 years useful life. In addition, a
third party had guaranteed to pay the lessor a residual value of P500,000 at the end of the lease. On
December 31, 2020, what is the principal amount of the lease obligation?
a. 3,990,000
b. 3,309,200
c. 3,676,400
d. 3,971,040

17. At the beginning of current year, an entity entered into an 8-year finance lease for an equipment. The
entity accounted for the acquisition of the finance lease at P5,000,000 which included a P500,000
bargain purchase option that is reasonably to be exercised. The expected fair value of the equipment
is P400,000 at the end of the 10-year useful life. What amount of straight line depreciation should be
recognized for the current year?
a. 575,000
b. 460,000
c. 625,000
d. 450,000

18. At the beginning of current year, an entity entered into 8-year lease for an equipment. The entity
accounted for the acquisition as a finance lease for P6,000,000 which included a P600,000 residual
value guarantee. At the end of the lease, the asset will be revert back to the lessor. It is estimated that
the fair value of the asset at the end of the 10-year useful life would be P400,000. What amount of
straight line depreciation should be recognized for the current year?

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
a. 675,000
b. 700,000
c. 540,000
d. 560,000

19. On January 1, 2020, an entity purchased new machine for P6,000,000 for the purpose of leasing it.
The machine had an estimated 10-year life. On April 1, 2020, the entity leased the machine to a
lessee for three years at a monthly rental of P400,000. The lessee paid the rental for one year of
P4,800,000 on April 1, 2020 and additionally paid P900,000 to the lessor as a lease bonus to obtain
the 3 year lease. On April 1, 2020, the entity paid P300,000 to a broker as a finder fee. What is the
net rental income for 2020?
a. 3,150,000
b. 4,350,000
c. 3,200,000
d. 4,400,000

20. On July 1, 2020, an entity leased an equipment to a lessee under a 3-year operating lease. Total rent
for the lease term is P3,600,000 payable P50,000 monthly for the 1 st year, P75,000 monthly for the 2 nd
year and P175,000 monthly for the last lease year. All payments were made when due. On June 30,
2022, what amount should be reported as accrued rent receivable?
a. 2,100,000
b. 1,200,000
c. 900,000
d. 0

21. During the first year of the entity’s existence, employees earned accumulating vacation leave as
follows:
Employee Ave. wage per Vacation leave Vacation leave taken
day earned
Alma 400 10 10
Lorna 600 15 10
Fe 800 20 5
What amount should be recognized as expense from vacation leave during the first year?
A. 29,000 C. 15,000
B. 14,000 D. 19,000

22. Refer to the preceding problem. What should be reported as accrued vacation pay at year end?
A. 29,000 C. 15,000
B. 14,000 D. 19,000

23. A profit sharing bonus plan requires an entity to pay 10% of net income before bonus and tax to
employees who served throughout the current year and will continue to serve the following year.
The entity reported P20 million net income before tax and tax. The entity expects to save 5% of
the maximum bonus through staff turnover. What should be the bonus expense for the year?
A. 2,000,000 C. 1,900,000
B. 1,000,000 D. 1,800,000

24. A company provided the following information for the current year:
Current service cost 1,300,000
Actual return on plant assets 600,000
Interest expense-PBO 550,000
Interest income on plan assets 500,000

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
Loss on plan settlement 250,000
Past service cost during the year 400,000
Actuarial gain during the year 200,000
What is the defined benefit expense for the current year?
A. 1,700,000 C. 2,300,000
B. 2,000,000 D. 1,900,000

25. Refer to the preceding problem. What is the net remeasurement gain – OCI?
A. 100,000 C. 300,000
B. 200,000 D. 400,000

26. On January 01, Year 1, a company reported the following information about its defined benefit
plan:
Fair value of plan assets (FVPA) 7,000,000
Projected benefit obligation (PBO) 7,500,000
Current service cost 1,400,000
Contribution to the plan 1,200,000
Actual return on plan assets 840,000
Decrease in PBO due to actuarial assumptions 200,000
Present value of defined benefit obligation settled 2,000,000
Settlement price of defined benefit obligation 1,900,000
Discount rate 10%
What should be the employee benefit expense to be reported in the statement of income?
A. 2,150,000 C. 1,350,000
B. 2,050,000 D. 1,450,000

27. Refer to the preceding problem. What should be the net remeasurement gain or loss – OCI for
the year?
A. 140,000 gain C. 340,000 gain
B. 140,000 loss D. 60,000 loss

28. Refer to the preceding problem. What should be the FVPA on December 31, Year 1?
A. 7,140,000 C. 8,200,000
B. 7,540,000 D. 7,000,000

29. Refer to the preceding problem. What should be the PBO on December 31, Year 1?
A. 7,950,000 C. 7,650,000
B. 7,450,000 D. 9,650,000

30. Refer to the preceding problem. What is the balance of the prepaid/accrued benefit cost on
December 31, Year 1?
A. 310,000 prepaid C. 650,000 prepaid
B. 310,000 accrued D. 650,000 accrued

31. If an actuarial valuation has not been prepared at the date of the report of a defined benefit plan:
A. The most recent valuation should be used as a base and the date of the valuation disclosed.
B. Actuarial valuation should be used as a base and the date of the valuation disclosed.
C. Fair market valuation should be used and the actuarial valuation disclosed.
D. All the choices are correct.

32. Remeasurements of the net defined benefit liability (asset) recognized in other comprehensive
income
A. Shall be reclassified to profit or loss in a subsequent period
B. The entity may transfer those amounts recognized in other comprehensive income within
equity
C. May be transferred to asset or liability account.

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
D. None of the foregoing.

33. Which of the following statements is incorrect regarding actuary as used in defined benefit plan?
A. The projected unit credit method sees each period of service as giving rise to an additional
unit of benefit entitlement and measures each unit separately to build up the final obligation.
B. An entity shall determine its mortality assumptions by reference to its best estimate of the
mortality of plan members both during and after employment.
C. The rate used to discount post-employment benefit obligations (both funded and unfunded)
shall be determined by reference to market yields at the end of the reporting period on high
quality corporate bonds.
D. IAS 19 requires an entity to involve a qualified actuary in the measurement of all material
post-employment benefit obligations.

34. Defined benefit plans (Choose the incorrect one.)

A. The entity is, in substance, underwriting the actuarial and investment risks associated with
the plan.
B. Consequently, the expense recognized for a defined benefit plan is not necessarily the
amount of the contribution due for the period.
C. Defined benefit plans may be unfunded, or they may be wholly or partly funded by
contributions by an entity, and sometimes its employees, into an entity, or fund.
D. None of the foregoing.

35. Accumulating paid absences (Choose the incorrect one).

A. An entity recognizes no liability or expense until the time of the absence, because employee
service does not increase the amount of the benefit.
B. Accumulating paid absences are those that are carried forward and can be used in future
periods if the current period’s entitlement is not used in full.
C. Accumulating paid absences may be either be vesting or non-vesting.
D. An entity shall measure the expected cost of accumulating paid absences as the additional
amount that the entity expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.

36. An entity reported advance rental income of P600,000 which is immediately taxable for Year
1.The rent would be fully earned the following year. Tax rate is 30%. Accounting and taxable
income are presented as follows:
Year 1 Year 2
Accounting income 5,000,000 7,000,000
Taxable income 5,600,000 6,400,000
The deferred tax asset/liability on Year 1
A. 180,000, asset C. 1,500,000, asset
B. 180,000, liability D. 1,500,000, liability

37. Refer to no. 36. The tax expense for year 2 is

A. 2,100,000 C. 1,740,000
B. 1,920,000 D. 1,800,000

38. Hilton company reported pretax accounting income of P6,200,000 for Year 1. It includes
P200,000 interest from investment in government bonds. Accounting depreciation is P500,000
while the depreciation on tax return is P600,000. Tax rate is 30%. The tax expense for Year 1
A. 1,860,000 C. 1,770,000
B. 1,800,000 D. 1,830,000

39. For Year 1, Tantrum reported pretax financial income of P6,000,000. Analysis revealed that
P500,000 is exempted from income tax and P400,000 is a taxable temporary difference. Tax rate
is 30%. The tax expense for Year 1

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
A. 1,800,000 C. 1,650,000
B. 1,530,000 D. 1,950,000

40. Viking Company shows P1 million pretax net income for Year 1. Tax rate is 30%.The following
items were observed:
Item Tax return Income Statement
Rent income 70,000 120,000
Depreciation 280,000 220,000
Premium on officers life - 90,000
insurance
Provision for income tax for Year 1
A. 294,000 C. 327,000
B. 300,000 D. 360,000

41. For Year 1, Everlasting Company reported accounting income of P9 million before tax. Tax rate is
30%. Other information follows:
Interest income on government bonds 700,000
Tax return depreciation in excess of depreciation per book 1,300,000
Warranty expense (accrual) 600,000
Actual warranty payment 300,000
Income from installment sales reported per tax return,
in excess of income per book 200,000
Income tax expense for Year 1
A. 2,700,000 C. 2,490,000
B. 2,250,000 D. 2,130,000

42. West Company leased a building and received P4 million annual rental payment on July 1, Year 1
which was the start of the lease. Rent income is taxable when received. Tax rate is 30%. Deferred
tax asset is
A. 300,000 C. 1,200,000
B. 600,000 D. none

43. Xavier Co. is in the first year of operations. The entity reported pretax accounting income of
P4,000,000 and provided the following items:
Premium on life insurance of key officer 100,000
Depreciation on tax return in excess of book depreciation 120,000
Interest on municipal bonds 53,000
Warranty expense 40,000
Actual warranty repairs 33,000
Bad debt expense 14,000
Beginning balance in allowance for uncollectible accounts 0
Ending balance in allowance for uncollectible accounts 8,000
Rent received in advance that will be recognized
evenly over the next three years 240,000
What is the taxable income for 2017?
A. 4,182,000 C. 4,047,000
B. 4,102,000 D. 4,082,000

44. Bio Co. reported the following information during the first year of operations:
Pretax financial income 8,000,000
Nontaxable interest received 250,000
Long-term loss accrual in excess of deductible amount 500,000
Tax depreciation in excess of financial depreciation 1,250,000
Income tax rate 30%
What is the taxable income?

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
A. 7,000,000 C. 8,500,000
B. 7,250,000 D. 8,750,000

45. Refer to the preceding problem. What is the current tax expense?
A. 2,325,000 C. 2,400,000
B. 2,100,000 D. 1,950,000

46. Refer to the preceding problem. What is the accounting income subject to tax?
A. 8,000,000 C. 8,250,000
B. 7,750,000 D. 7,250,000

47. Refer to the preceding problem. What is the total tax expense?
A. 2,400,000 C. 2,100,000
B. 2,325,000 D. 2,175,000

48. Refer to the preceding problem. What is the deferred tax liability at year-end?
A. 150,000 C. 375,000
B. 225,000 D. 525,000

49. Refer to the preceding problem. What is the deferred tax asset at year-end?
A. 150,000 C. 225,000
B. 375,000 D. 350,000

50. Which of the following guidance on measuring deferred taxes is incorrect?

A. Where the tax rate or tax base is impacted by the manner in which the entity recovers its
assets or settles its liabilities, the measurement of deferred taxes is consistent with the way
in which an asset is recovered or liability settled.
B. Where deferred taxes arise from revalued non-depreciable assets, deferred taxes reflect
the tax consequences of selling the asset.
C. Deferred taxes arising from investment property measured at fair value reflect the rebut-
table presumption that the investment property will not be recovered through sale.
D. If dividends are paid to shareholders, and this causes income taxes to be payable at a higher
or lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are
measured using the tax rate applicable to undistributed profits.

51. Magiging CPA Ako Inc. has the following accounts on December 31, Year 1:
Accounts payable 425,000
Notes payable due on July 1, Year 2 200,000
Premium on notes payable 12,000
Bonds payable due on March Year 3 850,000
Discount on bonds payable 27,000
Advances from customers 36,000
Advances to employees 64,000
Bank loans payable (semiannual installment of 50,000) 450,000
Accrued interest expense 75,000
Deferred rent income 117,000
Bank overdraft PBI (no other account on PBI) 28,000
Share dividends payable 150,000
Deferred tax liability 73,000
How much is the current liabilities as of December 31, Year 1?
A. 993,000 C. 1,038,000
B. 876,000 D. 1,066,000

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INTERMEDIATE ACCOUNTING 3
MOCK PHINMA EXAM
52. Refer to no. 51. How much is the non-current liabilities as of December 31, Year 1?
A. 1,363,000 C. 1,201,000
B. 1,246,000 D. 1,173,000

53. Kokota Tayo Company included a coupon in each box of soap it sold. A shampoo is offered as
premium to customers who send in 5 coupons plus remittance of P25. Management expects that
40% of the coupons will be redeemed each year. Details of the transactions in 2015 and 2016 are
as follows:
Year 1 Year 2
Boxes of soap sold 380,000 510,000
Bottles of shampoo purchased (P100/bottle) 30,000 42,000
Coupons redeemed 140,000 200,000
What amount of premium expense would be recognized for Year 1?
A. 2,100,000 C. 2,280,000
B. 3,900,000 D. 2,400,000

54. Refer to no. 53. What amount of estimated premium liability would be reported on December 31,
Year 2?
A. 210,000 C. 230,000
B. 220,000 D. 240,000

55. Papasa Ako Manufacturing started selling products with two-year warranty against defects. Based
on industry experience of similar products, the estimated warranty costs related to peso sales
would be 3% in the first year of warranty and 6% in the second year of warranty.
Year 1 Year 2
Sales P 5,000,000 P 6,000,000
Actual warranty costs 187,000 598,000
What amount of warranty expense would be recognized for Year 1?
A. 150,000 C. 540,000
B. 187,000 D. 450,000

56. Refer to no. 55. What amount of estimated warranty liability would be reported on December 31,
Year 2?
A. 205,000 C. 540,000
B. 263,000 D. 360,000

57. His Plans is Greater Inc. has prepared the payroll for the month of December Year 1. The
employer is obliged to share the same amount of statutory deductions plus EC premiums
contribution of P18,000. Remittances of payroll taxes are made the following month. The
following are the employee’s share on payroll taxes for the month of December Year 1:
Witholding taxes 236,000
SSS premiums 87,000
Philheallth premiums 21,000
Pag-ibig premiums 16,000
What amount of payroll tax expense would be recognized for the December Year 1 payroll?
A. 378,000 C. 360,000
B. 142,000 D. 124,000

58. Refer to no. 57. What amount of payroll tax liability would be reported as of December 31, Year
1?
A. 756,000 C. 520,000
B. 284,000 D. 502,000

59. May Purpose A Co. earned P12 million net income before bonus and tax for the year. The
company decided to give 20% bonus to its officers.

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MOCK PHINMA EXAM
What would be the bonus payable to officers if the bonus is based on net income after bonus but
before tax?
A. 2,400,000 C. 2,000,000
B. 1,473,685 D. 1,565,840

60. Kayang-kaya Co. sells magazine subscription to its customers. The balance of advance
subscription revenue account on December 31, Year 1 is P650,000. Cash received from
subscribers for Year 2 totaled P1,750,000. Outstanding subscriptions as of December 31, Year 2
expires as follows:
During 2016 P 550,000
During 2017 870,000
During 2018 450,000
What amount would be reported as advance subscription revenue as of December 31, Year 2?
A. 1,870,000 C. 2,400,000
B. 1,850,000 D. 2,100,000

61. Refer to no. 60. What amount of subscription revenue would be recognized for Year 2?
A. 550,000 C. 530,000
B. 520,000 D. 540,000

62. During Year 1, Third-Year Next Sem Inc. is a defendant in two lawsuits that will be ruled by the
court late in 2016. There is no indication that the claimants will settle out of court. Details of the
cases are as follows:
o Company legal counsel believes that there is 25% chance of losing the infringement case and
that the damages to be paid by Hula Inc. range from P400,000 to P750,000. The best
estimate however is P600,000.
o Company legal counsel believes that there is a 20% chance of winning the labor case filed by
former employees. Lawyers also believe that there is a 30% chance the company will be
required to pay P150,000 and 70% chance the company will be required to pay P350,000. A
10% risk adjustment factor to the probability-weighted expected cash flows is considered
appropriate to reflect the uncertainties in the cash flow estimates. Present value of 1 at 6% for
one period is 0.943. Time value of money discounted at 6% is considered material.
What amount of provision for the infringement case would be recognized on December 31, Year
1?
A. -0- C. 600,000
B. 575,000 D. 750,000

63. What amount of provision for the labor case would be recognized on December 31, 2015?
A. 255,200 C. 300,817
B. 290,000 D. 240,654

64. Papasa Co. Department Store sells gift certificates, redeemable for store merchandise. Data
about the gift certificates are as follows:
Year 1 sales 1,800,000
Year 2 sales 2,000,000
Year 1 redemptions 1,000,000
Year 2 redemption of current year sales 1,400,000
Year 2 redemptions of prior year’s sales 420,000
Experience indicates that 10% of the gift certificates will not be redeemed at all.
What amount of unearned revenue would be reported as of December 31, Year 1?
A. 620,000 C. 380,000
B. 800,000 D. 200,000

65. What amount of unearned revenue would be reported as of December 31, Year 2?
A. 400,000 C. 980,000

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MOCK PHINMA EXAM
B. 600,000 D. 890,000

66. On January 01, Year 1, the Your Name, CPA Company constructed a nuclear facility for P25
million and is required by law to remove and dismantle the platform at the end of its useful life of
10 years. Estimated decommissioning cost at the end of ten years is P6 million. Based on 10%
discount rate, the PV of 1 for 10 periods is 0.3855. How much is the interest expense for Year 1?
A. 600,000 C. 254,430
B. 231,300 D. 200,000

67. Refer to no. 66. The decommissioning liability as of December 31, Year 2 should be
A. 6,000,000 C. 2,313,000
B. 2,544,300 D. 2,798,730

68. The following are examples of events that may fall under the definition of restructuring, except
A. Changes in management structure, for example, eliminating a layer of management
B. Fundamental reorganizations that have a material effect on the nature and focus of the
entity’s operations
C. The closure of business locations in a country or region or the relocation of business activities
from one country or region to another
D. None of the above

69. Under IFRIC 1, changes in the measurement of an existing decommissioning liability shall be
accounted as (the related asset is measured using the revaluation model)
A. A decrease in the liability shall be recognized in profit or loss and increase the revaluation
surplus within equity.
B. The extent that a decrease in liability reverses a revaluation deficit the change in the liability
shall be recognized in profit or loss.
C. An increase in the liability shall be recognized in profit or loss, except that it shall be
recognized in other comprehensive income and reduce the revaluation surplus within equity
to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
D. An increase in the liability shall be recognized in other comprehensive income, and reduce
the revaluation surplus within equity to the extent of any credit balance existing in the
revaluation surplus in respect of that asset.

70. Which of the following statement regarding the requirements in PAS 37 is incorrect?
A. Gains on the expected disposal of assets are not taken into account in measuring a provision,
even if the expected disposal is closely linked to the event giving rise to the provision.
B. Provisions shall not be recognized for future operating losses.
C. An entity shall not recognize a contingent liability.
D. Present value of the amount of a provision is ignored even if the effect of the time value of
money is material because provision is typically considered a current asset.

71. Which of the following statements about financial liabilities is false?

A. Offsetting of a financial asset and a financial liability is prohibited by PFRS 9.
B. Under PFRS 9, an entity shall not reclassify any financial liability.
C. A financial liability shall be recognized in the statement of financial position when, and only
when, the entity becomes party to the contractual provisions of the instrument.
D. An entity shall remove a financial liability (or a part of a financial liability) from its statement of
financial position when, and only when, it is extinguished.

72. Which statement is correct regarding financial liabilities designated as at fair value through profit
or loss?
A. An entity shall present a gain or loss on a financial liability in profit or loss for change in the
fair value of the financial liability that is attributable to changes in the credit risk.

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B. If presenting the change in fair value attributable to credit risk would create or enlarge an
accounting mismatch in profit or loss, an entity shall present all gains or losses on that liability
(including the effects of changes in the credit risk of that liability) in profit or loss.
C. Initial designation of a financial liability as measured at fair value through profit or loss is
revocable.
D. All of the foregoing.

73. Defined by PFRS 9 as the amount at which the financial liability is measured at initial recognition
minus the principal repayments, minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount.
A. Present value of a financial liability C. Carrying amount of a financial liability
B. Fair value of a financial liability D. Amortized cost of a financial liability

74. MNO Company is experiencing financial difficulty and is renegotiating debt restructuring with the
creditor to relieve its financial distress. The entity has carrying amount of P4 million note payable
and P80,000 accrued interest expense. The following are the options contemplated upon by ABC
Company for its debt restructuring arrangements:
 Transferring its real property consisting of a parcel of land and a building to the creditor as
payment of debt. The land has a cost of P2 million and fair market value of P2.5 million. The
building has a cost of P5 million, P2,850,000 accumulated depreciation, and fair market value
of P1.8 million.
 Offering its own 35,000 ordinary shares as payment of debt. Fair value per share is P110 and
par value is P100. Fair value of the note payable is P3.9 million.
What amount of gain/(loss) on extinguishment of debt shall be recognized if the asset swap was
chosen?
A. 70,000 loss C. 220,000 loss
B. 70,000 gain D. 220,000 gain

75. Refer to preceding problem. What amount of gain/(loss) on extinguishment of debt shall be
recognized if the asset swap was chosen?
A. 230,000 loss C. 100,000 loss
B. 230,000 gain D. 100,000 gain

76. On December 31, Year 1, ABC Company and an overdue 10% note payable to DBO Bank at P8
million and accrued interest expense of P800,000. On that date, DBO Bank offered modification
of terms of the liability as follows:
 Principal is reduced by P2 million and accrued interest is condoned
 Maturity is extended to December 31, Year 5
 The new interest rate of 12% is payable every December 31
 PV of 1 at 10% for 4 periods is 0.683 and PV of 1 at 12% for 4 periods is 0.636
 PV of an ordinary annuity of 1 at 10% for 4 period is 3.17 and PV of an ordinary annuity of 1
at 12% for 4 period is 3.037
What amount of gain/(loss) on extinguishment of debt shall be recognized for Year 1?
A. 2,797,360 loss C. 2,419,600 loss
B. 2,797,360 gain D. 2,419,600 gain

77. Refer to preceding problem. How much is the carrying amount of note payable as of December
31, Year 1?
A. 6,380,400 C. 4,098,000
B. 6,002,640 D. 3,816,000

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78. Refer to preceding problem. How much is the interest expense for Year 2?
A. 600,000 C. 638,040
B. 720,000 D. 629,844
79. Refer to preceding problem. How much is the carrying amount of note payable as of December
31, Year 2?
A. 6,380,400 C. 6,208,284
B. 6,002,640 D. 6,298,440

80. Refer to preceding problem. Assuming there is no substantial modification of terms. The entry to
record the new liability will include a credit to
A. Premium on note payable, P2,800,000 C. Premium on note payable, P800,000
B. Gain on extinguishment of debt, P2,800,000 D. Gain on extinguishment of debt, P800,000

81. Gain or loss on extinguishment of debt accounted as asset swap is equals to

A. Carrying amount of liability extinguished minus carrying amount of asset transferred.
B. Fair value of liability extinguished minus fair value of asset transferred.
C. Carrying amount of liability extinguished minus fair value of asset transferred.
D. Fair value of liability extinguished minus carrying amount of asset transferred.

82. There is substantial modification of terms of the old liability if the gain or loss on extinguishment of
debt is
A. More than 10% of the present value of the new liability.
B. At least 10% of the present value of the new liability.
C. More than 10% of the carrying amount of the old liability.
D. At least 10% of the carrying amount of the old liability.

83. On March 01, Year 1. BinaleWala Inc. issued at 102 plus accrued interest, 1,000 of its 9% P1,000
par value bonds. The bonds are dated January 01, Year 1 and mature on January 01, Year 11.
Interest is payable semi-annually every June 30 and December 31. Lagpak paid transaction costs
directly attributable to bond issuance amounting to P5,000. The company elected the fair value
option of measuring financial liabilities. The bonds are quoted at 103 on December 31, Year 1.
Realized net cash flow from the bond issuance would be
A. 1,025,000 C. 1,040,000
B. 1,030,000 D. 1,045,000

84. Refer to the preceding problem. What amount of gain/(loss) from change in fair value of bonds
would the entity recognized for Year 1.
A. 15,000 gain C. 10,000 gain
B. 15,000 loss D. 10,000 loss

85. A 12%, P1 million total par value bonds were issued for P1,049,737 and yielded 10% effective
rate. The bond was issued on March 1, Year 1 and matures after 3 years. Interest is payable
every March 31. What is the interest expense to be recognized for Year 2?
A. 104,973 C. 101,818
B. 103,471 D. 103,722

86. Refer to the preceding problem. What is the carrying amount of bonds on December 31, Year 2?
A. 1,034,711 C. 1,020,937
B. 1,037,215 D. 1,018,182

87. Lalaban Pa Co. issued a total of P4 million par value bonds on January 01, Year 1. Nominal
interest is 10% and effective interest is 9%. Interest is payable annually every December 31 and
the bonds will mature on December 31, Year 4. Pertinent present value factors are as follows:

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MOCK PHINMA EXAM

9% 10%
Present value of 1 for 4 periods 0.70843 0.68301
Present value of ordinary annuity of 1 for 4
periods 3.23972 3.16987
What is the issue price of the bonds?
A. 4,000,000 C. 4,129,608
B. 4,400,000 D. 4,119,520

88. Refer to the preceding problem. What amount of interest expense would be recognized for Year
1?
A. 371,665 C. 366,335
B. 369,115 D. 363,305

89. Refer to the preceding problem. What is the carrying amount of the bonds payable on December
31, Year 1?
A. 4,129,608 C. 4,070,387
B. 4,101,273 D. 4,036,722

90. Refer to the preceding problem. After interest and principal payments of the bonds on December
31, Year 2, the 40% of the bonds were retired at 99. What amount of gain/(loss) on early
retirement of bonds would be recognized?
A. 44,155 loss C. 56,509 loss
B. 44,155 gain D. 56,509 gain

91. Pogi Yung Prof Co. issued a total of P4 million par value bonds on January 01, Year 1. Nominal
interest is 9% and effective interest is 10%. Interest is payable annually every December 31.
Likewise, the bonds mature annually for four years in equal installments beginning December 31,
Year 1. Pertinent present value factors are as follows:

9% 10%
Present value of ordinary annuity of 1 for 4
periods 3.23972 3.16987
Present value of 1 for 1 period 0.91743 0.90909
Present value of 1 for 2 periods 0.84168 0.82645
Present value of 1 for 3 periods 0.77218 0.75131
Present value of 1 for 4 periods 0.70843 0.68301
What is the issue price of the bonds?
A. 3,916,991 C. 1,973,559
B. 2,948,690 D. 3,948,690

92. Refer to the preceding problem. What is the interest expense for Year 2
A. 391,699 C. 294,869
B. 360,000 D 270,000

93. After interest and principal payments of the bonds on December 31, Year 2, the remaining bonds
were reacquired at 99. What amount of gain/(loss) on acquisition of treasury bonds would be
recognized?
A. 6,441 loss C. 21,310 loss
B. 6,441 gain D. 21,310 gain

94. During Year 1, Royal Corporation issued at 95, one thousand of its 8%, P5,000 par value bonds
due in 10 years. One detachable share warrants entitling the holder to buy 20 ordinary shares
(P50 par) of Royal’s ordinary shares for P55.was attached to each bond. Shortly after issuance,
the bonds are selling at 10% ex-warrant, and each warrant is quoted P60. The PV of 10% for an

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MOCK PHINMA EXAM
ordinary annuity of P1 for 10 periods is 6.145 and the PV of P1 at 10% for 10 periods is 0.385.
What amount of the proceeds from bond issuance will be recorded as part of shareholders’
equity?
A. 60,000 C. 250,000
B. 225,000 D. 367,000

95. Refer to the preceding problem. If the warrants were exercised, the journal entry to record the
exercise of warrants would include a credit to share premium - ordinary amounting to
A. 100,000 C. 467,000
B. 327,000 D. none

96. On January 1, Year 1, Trader Company issued its 8%, 5-year convertible bonds with face amount
of P6 million for P5,900,000. Interest is payable every December 31. The debt instrument is
convertible into 50,000 ordinary shares with P100 par. When the bonds were issued, the
prevailing market rate for similar debt without conversion option is 10%. (Use 4 decimal places for
PV factors) What is the portion of the proceeds representing the component of equity?
A. None C. 355,016
B. 100,000 D. 454,800

97. When the conversion option was exercised, the bonds have carrying amount of P5,850,000. The
journal entry on the exercise of the conversion privilege will include a credit to share premium
amounting to
A. 850,000 C. 504,320
B. 353,470 D. 1,205,016

98. At the beginning of the first year, an entity issued bonds at a discount. The entity incorrectly use
straight line method instead of effective interest method of amortization. How would the following
be affected at year-end of the first year?
Carrying amount of bonds Retained earnings
A. Overstated Understated
B. Understated Overstated
C. Overstated Overstated
D. Understated Understated

99. A five-year term bond was issued on January 1 of year 1 at a premium. The carrying amount of
the bonds on December 31 of year 2 would be
A. Higher than the carrying amount on January 1 of year 1.
B. Higher than the carrying amount on December 31 of year 1.
C. Higher than the carrying amount on December 31 of year 3.
D. Lower than the carrying amount on December 31 of year 3.

100. When using effective interest method of amortization, the periodic amortization on a term bond
would
A. Increase if the bonds were issued at a discount.
B. Decrease if the bonds were issued at a premium.
C. Increase whether the bonds were issued at a discount of premium.
D. Decrease whether the bonds were issued at a discount of premium.

- END OF EXAMINATION -

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