FINANCIAL ACCOUNTING AND REPORTING (ACCY 23)

FINAL EXAMINATION

MULTIPLE CHOICE ( 2 POINTS EACH)

1. Which of the following may be classified as “other long-term investments?”

a. Shares of stocks purchased as long-term investment and irrevocably elected to be
measured at fair value through other comprehensive income.
b. Long-term investment in bonds held under a ‘hold to collect’ business model.
c. Treasury shares acquired at a deep discount and expected to be reissued at a
future date that extends beyond 12 months from the end of the reporting period.
d. Shares of stocks and bonds purchased using funds earmarked for the retirement
of bonds payable.

2. On March 1, 2001, a company established a sinking fund in connection with an issue

of bonds due in 2013. At December 31, 2003, the independent trustee held cash in the
sinking fund account representing the annual deposits to the fund and the interest
earned on those deposits. How should the sinking fund be reported in the company’s
balance sheet at December 31, 2003?
a. The cash in the sinking fund should appear as a current asset.
b. Only the accumulated deposits should appear as a noncurrent asset.
c. The entire balance in the sinking fund account should appear as a current asset.
d. The entire balance in the sinking fund account should appear as a noncurrent
asset.

Use the following information for the next three questions:

On January 1, 20x1, Light Co. insured the life of one of its key management personnel for
₱10,000,000. Light Co. is the beneficiary. The insurance policy requires annual payments
of ₱280,000 at the start of each year. Information on the cash surrender value is shown
below:
Policy year Cash surrender value
Dec. 31, 20x1 -
Dec. 31, 20x2 -
Dec. 31, 20x3 180,000
Dec. 31, 20x4 216,000
Dec. 31, 20x5 260,000

Additional information:
 Light Co. received ₱4,000 cash dividend from the life insurance on April 1, 20x4.
 The key employee died on October 1, 20x5.

3. What amount of insurance expense is recognized in 20x4?

a. 280,000
b. 276,000
 c. 244,000
d. 240,000

4. How much is the gain on the settlement of the life insurance in 20x5?
a. 9,681,000
b. 9,882,000
c. 10,000,000
d. 10,021,000

5. Which of the following statements is correct regarding the accounting for sinking
fund?
a. Sinking fund that is expected to be used in settling a currently maturing
obligation is presented as part of cash even if the sinking fund includes
investments in stocks and bonds.
b. Sinking fund is always presented as noncurrent asset.
c. The classification of a sinking fund as either current or noncurrent asset parallels
the classification of the related obligation for which the sinking fund was
established.
d. The investment income earned by the sinking fund is recognized in other
comprehensive income.

6. It is a financial instrument or other contract that derives its value from the changes in
value of some other underlying asset or other instrument.
a. embedded derivative
b. derivative
c. financial asset
d. all of these

7, Which of the following is not among the characteristics of a derivative?

a. it must have at least two or more notional amounts
b. its value changes in response to the change in an underlying
c. it requires no initial net investment or only a very minimal initial net investment
d. it is settled at a future date

8. Which of the following can be a notional amount for a derivative?

a. share price
b. number of currency units
c. interest rate
d. exchange rate

9. In which of the following derivative contracts would the investor most likely pay a
marginal deposit, which is treated as receivable, at the inception of the contract?
a. Forward contract
b. Futures contract
c. Call option
d. Put option

10, These are options that can be exercised only at expiration time.
 a. American options
b. European options
c. Bermudan options
d. Expired options

Use the following information for the next three questions:

On Dec. 1, 20x1, Kalinga Blend Co. enters into a futures contract to purchase 1,000 kilos
of coffee beans on February 1, 20x2 for ₱200 per kilo. The broker requires an initial
margin deposit of ₱20,000. The market prices per kilo of coffee beans are: ₱200 on Dec. 1,
20x1; ₱205 on Dec. 31, 20x1; and ₱215 on Feb. 1, 20x2.

11. Kalinga Blend is said to be in the

a. short position.
b. long position.
c. call position.
d. wrong position.

12. What amounts of derivative asset (liability) should Kalinga Blend Co. recognize on
Dec. 1, 20x1 and Dec. 31, 20x1, respectively?
a. 20,000; 15,000 c. 0; 5,000
b. (20,000); (15,000) d. 0; (5,000)

13, <List A> How much net cash did Kalinga Blend Co. receive from or pay to the broker
on settlement date? <List B> How much gain (loss) did Kalinga Blend Co. recognize on
settlement date?
<List A> <List B>
a. 5,000 10,000
b. (5,000) (10,000)
c. 15,000 5,000
d. 35,000 10,000

Use the following information for the next two questions:

Jackhammer Co. purchased a foreign currency option to purchase 1,000,000 units of a
specified currency at ₱47 per unit. Jackhammer Co. paid ₱7,500 for the option.

14. The option referred to above is a

a. call option.
b. text option.
c. put option.
d. remove option.

15, Which of the following statements is correct?

a. There is no entry for the option on initial recognition.
b. If the spot rate increases above the strike price, the option would be ‘out of the
money’.
c. If the spot rate decreases below the strike price, the option would be ‘in the
money’.
d. The maximum loss that Jackhammer Co. can recognize on the option is ₱7,500.
Use the following information for the next two questions:
On Jan. 1, 20x1, Confused Co. enters into an interest rate swap on a ₱2,000,000 loan
whereby Confused Co. agrees to receive variable interest and pay fixed interest of 9%.
Swap payments shall be made every Dec. 31 in the next three years. The following are
the current market rates:
Jan. 1, 20x1 9%
Jan. 1, 20x2 8%
Jan. 1, 20x3 12%

16. What amount of derivative asset (liability) should Confused Co. recognize on Dec.
31, 20x1?
a. (17,147)
b. 17,147
c. (35,665)
d. 35,665

17.. What amount of gain (loss) should Confused Co. recognize on Dec. 31, 20x2?
a. 53,571
b. (53,571)
c. 69,236
d. 37,906

Use the following information for the next two questions:

The current rate on January 1, 20x1 is 10%. Annay Co. believes that market rates will
decrease in the future. Accordingly, on January 1, 20x1, Annay Co. enters into an interest
rate swap on a ₱2,000,000 loan. Under the agreement, Annay Co. agrees to receive fixed
interest at 10% and pay variable interest. Swap payments shall be made at the end of
each year in the next three years. The following are the current market rates:
Jan. 1, 20x1 10%
Jan. 1, 20x2 12%
Jan. 1, 20x3 14%

18. What amount of derivative asset (liability) should Annay Co. recognize on Dec. 31,
20x1?
a. 40,000
b. (40,000)
c. (35,714)
d. (67,602)

19. What amount of gain (loss) should Annay Co. recognize on Dec. 31, 20x3?
a. 2,573
b. (2,573)
c. (9,825)
d. 10,365

20. Investments in associates are accounted for under

a. PAS 8.
b. PFRS 9.
c. PAS 28.
 d. PFRS 28.

21. An investment in equity securities is accounted for as investment in associate if

a. the investment represents 20% or more ownership interest over the investee.
b. the fair value of the equity securities cannot be determined on a continuing basis.
c. the investment provides the investor significant influence over the investee.
d. the entity’s management elects to do so.

22. AUSTERE Co. owns 20% of SEVERE, Inc.’s ordinary shares. SEVERE also has
outstanding cumulative 6% preference shares of ₱8,000,000, none of which is held by
AUSTERE. Dividends are in arrears for three years as of year-end. SEVERE reported
year-end profit of ₱4,000,000 and declared no dividends. How much is AUSTERE Co.’s
share in the profit of the associate?
a. 704,000
b. 800,000
c. 512,000
d. 770,000

23. Porky Co. owns 40% of Watwat, Inc.’s ordinary shares. On July 1, 20x2, Porky Co.
sells half of its investment in Watwat shares for ₱800,000. The adjusted balances of the
related accounts immediately before the sale are as follows:
 Investment in associate ₱2,400,000
 Cumulative share in Watwat’s revaluation gains 1,000,000

Porky retains significant influence over Watwat after the sale.

How much of the cumulative share in Watwat’s revaluation gains is derecognized on

July 1, 20x2?
a. 1,000,000
b. 500,000
c. 250,000
d. 0

24 Which of the following standards addresses the accounting for property, plant and
equipment?
a. PAS 12 c. PAS 26
b. PAS 16 d. PFRS 5

25, Which of the following is least likely capitalized as cost of land?

a. Grading, filling, draining clearing and similar site development activities
b. Survey
c. Landscaping and similar improvements that have limited useful lives.
d. Special assessment

26. On January 1, 20x1, REEDY SLENDER Co. purchased fixtures at an installment price
of ₱520,000. REEDY paid ₱40,000 cash down payment and issued a three-year
noninterest bearing note of ₱480,000 payable in three equal annual installments starting
December 31, 20x1 for the balance. The prevailing rate for the note as of January 1, 20x1 is
12%. How much is the initial cost of the fixtures?
a. 360,000 c. 480,000
b. 424,293 d. 520,000

27. TRANSCEND EXCEED Co. traded-in an old machine for a new model. Pertinent data
are as follows:
Old equipment:
Cost 200,000
Accumulated depreciation 80,000
Average published retail value 24,000

New equipment:
List price 380,000
Cash price without trade in 280,000
Cash price with trade in 220,000

How much is the gain (loss) recognized by TRANSCEND Co. on the transaction?
a. 60,000 c. (60,000)
b. 160,000 d. 0

28. Nail Bite Co. acquired land with fair value of ₱4,000,000 in exchange for Nail Bite’s
10,000 shares with par value of ₱40 per share and quoted price of ₱360 per share. How
much gain (loss) should Nail Bite Co. recognize on the exchange?
a. 3,200,000 c. (400,000)
b. 400,000 d. 0

29. Which of the following is considered when depreciating an asset under the cost
model?
a. The cost of the asset. c. The change in the fair value of the asset.
b. The useful life of the asset. d. Both a and b.

30. Which of the following depreciation methods will most likely result in the highest
amount of reported profit in the early years of an asset’s useful life?
a. Straight line c. 150% declining balance
b. Double declining balance d. Sum-of-the-years’ digits

31.The most commonly used depreciation method is the

a. straight-line method. c. replacement method.
b. depreciation method based on revenue. d. inventory method.

32. Assume that a drill press is rebuilt during its sixth year of use so that its useful life is
extended 5 years beyond the original estimate of 10 years. If the asset recognition criteria
are met, the cost of rebuilding the drill press should be charged to the appropriate:
a. expense account c. asset account
b. accumulated depreciation account d. liability account
33. DEPLORABLE BAD Co. acquired a machine on October 5, 20x1 for a total cost of
₱160,000. The machine was estimated to have a useful life of 4 years and a salvage value
of ₱10,000. DEPLORABLE BAD Co. uses the sum-of-the-years’ digits method and
prorates full-year depreciation to the nearest month. DEPLORABLE BAD Co. sold the
machine on December 27, 20x2 for ₱40,000. How much is the gain (loss) on the sale?
a. (48,750) c. (32,250)
b. 48,750 d. 32,250

34. On January 1, 20x1, KNAVE RASCAL Co. acquired a machine for a total cost of
₱80,000,000. The machine was depreciated using the sum-of-the-years’ digits method
over a period of 10 years. On January 1, 20x4, KNAVE Co. changed its depreciation
method to the double declining balance method. How much is the depreciation expense
in 20x4?
a. 40,727,272 c. 12,556,780
b. 11,635,782 d. 13,556,702

Use the following information for the next three questions:

On January 1, 20x1, Entity A received land with fair of ₱200,000 from the government
conditioned on the construction of a building on the lot. Entity A started immediately the
construction and it was completed on December 31, 20x1 for a total cost of ₱1,000,000.
The building has an estimated useful life of 10 years and zero residual value.

35. How much is the income from government grant in 20x1 and 20x2, respectively?
20x1 20x2
a. 0 200,000
b. 200,000 0
c. 0 20,000
d. 20,000 20,000

END
---- GOOD LUCK---