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ADVANCED FINANCIAL ACCOUNTING AND REPORTING

1. At contract inception, PFRS 15 requires an entity to determine how the performance

obligations identified in the contract will be satisfied. According to PFRS 15, how does
an entity satisfy a performance obligation in a long-term construction contract?
a. over time
b. at a point in time
c. any time
d. either a or b

2. Which of the following statements is correct?

a. Long-term construction contracts are unique from other contracts with customers.
Therefore, PFRS 15 excludes from its scope the accounting for long-term
construction contracts.
b. Long-term construction contracts are unique from other contracts with customers.
Therefore, PFRS 15 requires an entity to recognize revenue from long-term
construction contracts using either the percentage of completion method or the
zero-profit method.
c. PFRS 15 does not provide a special distinction between long-term construction
contracts from other types of contracts with customers. Therefore, an entity shall
apply the same principles in accounting for long-term construction contracts as
those applied to other types of contracts with customers.
d. PFRS 15 does not exclude long-term construction contracts from its scope.
However, because of the unique nature of long-term construction contracts, PFRS
15 requires an entity to recognize revenue from a long-term construction contract
that is expected to be completed within 3 years or more using the percentage of
completion method. For those that are expected to be completed within a shorter
period, revenue shall be recognized when construction is complete.

Use the following information for the next two questions:

PARAMOUR Co. was contracted by LOVER, Inc. for the construction of a flyover in 20x1.
The contract price is ₱10M. Information on costs is as follows:
20x1 20x2
1,600,00 6,000,0
Total costs incurred to date 0 00
6,400,00 1,500,0
Estimated costs to complete 0 00

3. How much revenue is recognized in 20x2?

a. 8M
b. 6M
c. 4M
d. 0

4. What is the percentage of the progress completed in 20x2?

a. 80%
b. 60%
c. 40%
d. 16%

5. VALEDICTION Construction Co. entered into a ₱80M fixed price contract for the
construction of a private road for FAREWELL SPEECH, Inc. The performance
obligation on the contract is satisfied over time. VALEDICTION measures its progress
on the contract using the “cost-to-cost” method. The estimated total contract cost is
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₱40M. The following were the actual costs incurred by VALEDICTION during the first
year of the construction:

Costs of negotiating the contract (charged immediately as 400,00

expense) 0
12,000,0
Costs of materials used in construction 00
2,000,
Costs of materials purchased but not yet used in construction 000
4,000,00
Site labor costs 0
800,00
Site supervision costs 0
480,00
Depreciation of equipment used in construction 0
240,0
Depreciation of idle construction equipment 00
Costs of moving plant, equipment and materials to and from the
contract site 160,000
560,00
Costs of hiring plant and equipment 0
Advance payments to subcontractors (subcontracted work is not
yet started) 80,000

What is the percentage of completion of the contract as of the end of the first year?
a. 42%
b. 45%
c. 46%
d. 50%

6. On Oct. 1, 20x1, ABC Co. enters into a construction contract with a customer. The
performance obligation in the contract will be satisfied over time. ABC Co. uses the
“cost-to-cost” method in measuring its progress. The estimated total contract cost is
₱10M. In 20x1, ABC Co. incurred a total cost of ₱6M, which includes ₱2M advance
payment to a subcontractor (the subcontracted work is not yet started) and ₱200,000
cost of materials not yet installed. ABC Co. does not regard the cost of the unused
materials as significant in relation to the expected total contract costs. Moreover, ABC
Co. retains control over the unused materials because it can use them in a contract
with another customer. The contract price is ₱20M. How much is the revenue
recognized in 20x1?
a. 7,600,000
b. 12,000,000
c. 8,200,000
d. 11,600,000

7. You are an accountant. Your client, a franchisor, asked you for an advice regarding the
recognition of revenue from a franchise contract. Your advice to your client would
most certainly be based on which of the following standards?
a. FAS No. 45 (US GAAP)
b. PFRS 15
c. PAS 15
d. PFRS 18

8. If the promise to grant a license is distinct and that the license provides the customer
the “right to access” the entity’s intellectual property, how is revenue recognized from
the initial fee in the contract?
a. in full upon the signing of the contract
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b. in full when the customer obtains and starts using the license
c. in full when the initial services to setup the contract are substantially performed
d. deferred and amortized over the license period

Use the following information for the next two questions:

On Jan. 1, 20x1, Pane Co. entered into a franchise agreement with Hero Co. The franchise
contract gives Hero Co. the right to use Pane’s trademark and proprietary processes for a
period of 4 years. The franchise requires payment of an upfront fee of ₱1,000,000,
payable at contract inception, and 5% monthly royalty based on sales. Aside from the
granting of the license, the franchise agreement also requires Pane Co. to undertake pre-
opening activities to setup the contract and post-commencement activities, such as
research and development and marketing campaigns, to support the intellectual property.
Although the activities do not result in the direct transfer of a good or service to Hero Co.
as the activities occur, it is expected that Hero Co. will benefit from them. All the
necessary preparations were completed and Hero Co. started business operations on
January 31, 20x1.

9. How should Pane Co. recognize revenue from the initial franchise fee?
a. in full on January 1, 20x1
b. in full on January 31, 20x1
c. deferred and amortized over 4 years starting Jan. 1, 20x1
d. deferred and amortized over 4 years starting Jan. 31, 20x1

10. How should Pane Co. recognize revenue from the continuing franchise fee?
a. Pane Co. shall estimate the variable consideration and amortize it as revenue in
full on Jan. 1, 20x1.
b. Pane Co. shall estimate the variable consideration and amortize it as revenue over
the license period.
c. Pane Co. shall estimate the variable consideration, discount it to present value,
subject it to “Constraining estimates of variable consideration,” and amortize it to
revenue over the license period.
d. Pane Co. shall recognize revenue equal to 5% of the franchisee’s sales as the sales
occur.

11. On December 31, 20x1, Entity A enters into a contract with Customer X to transfer
a license for a fixed fee of ₱100,000 payable as follows:
 20% payable upon signing of contract.
 80% due in four equal annual installments starting December 31, 20x2. The
appropriate discount rate is 12%.

The license provides Customer X rights over Entity A’s patented processes. Customer X
continues to operate using its trade name and has the discretion of developing a new
product name for the products it will produce using the patented processes. The license
does not explicitly require Entity A to undertake activities that will significantly affect the
intellectual property to which Customer X has rights. Neither does Customer X expect
that Entity A will undertake such activities. Entity A grants the license to Customer X on
December 31, 20x1. How much revenue from the franchise contract will Entity A
recognize in 20x1?
a. 80,747
b. 21,187
c. 20,000
d. 0

12. In accounting for sales on consignment, sales revenue and the related cost of
goods sold should be recognized by the
a. consignor when the goods are shipped to the consignee.
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b. consignee when the goods are shipped to the third party.

c. consignor when notification is received that the consignee has sold the goods.
d. consignee when cash is received from the customer.

Use the following information for the next two questions:

Schindler Co. consigns 20 water heaters to Paralax Co. on January 1, 20x1. The unit cost
per water heater is ₱10,000. Schindler pays ₱3,000 in transporting the water heaters to
Paralax. At month-end, Paralax remits ₱232,000 for the sale of 16 water heaters, after
deduction for the following:

20% commission based on selling price

Freight out ₱16,000
Installation costs ₱ 8,000

13. How much is the profit recognized by Schindler on the consignment arrangement?
a. 60,600
b. 66,000
c. 66,900
d. 69,600

14. How much is the total cost of the unsold water heaters?
a. 40,600
b. 44,600
c. 46,400
d. 46,000

Use the following for the next two questions:

On January 1, 20x1, Pete Electrical Shop received from Marion Trading 300 pieces of
bread toasters. Pete was to sell these on consignment at 50% above original cost, for a
15% commission on the selling price. After selling 200 pieces, Pete had the remaining
unsold units repaired for some electrical defects for which he spent ₱2,000. Marion
subsequently increased the selling price of the remaining units to ₱330 per unit. On
January 31, 20x1, Pete remitted ₱64,980 to Marion after deducting the 15% commission,
₱850 for delivery expenses of sold units, and ₱2,000 for the repair of 100 units. The
consigned goods cost Marion Trading ₱200 per unit, and ₱900 had been paid to ship
them to Pete Electrical Shop. All expenses in connection with the consignment were
reimbursable to the consignee.

15. The consignment profit on the units sold was

a. 12,200
b. 12,880
c. 13,000
d. None of these

16. The value of inventory on consignment was

a. 8,120
b. 8,800
c. 8,920
d. None of these

17. In September 20x1, DEF Co. consigned 3,200 books costing ₱60 and retailing for
₱100 each to GHI Co., debiting Accounts Receivable and crediting Sales for the retail
sales price. Freight cost of ₱3,200 was debited to Freight Expenses by the consignor.
On September 30, 20x1, DEF Co. received from GHI Co. the amount of ₱142,020 in
full settlement of the balance due, and Accounts Receivable was credited for this
amount. The consignor deducted a commission of ₱20 for each book sold, a total of
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₱180 for delivery expenses and a total of ₱200 for advertising expense. How many
books were actually sold by GHI. Co.?
a. 1,424
b. 1,780
c. 2,064
d. 3,200

18. Leaf Co. began operations on January 1, 20x1. Leaf uses the “installment sales
method” of accounting. Data for 20x1 are as follows:

Installment accounts receivable, Dec. 500,

31, 20x1 000
900,
Installment sales
000
Cost ratio 60%

How much is the realized gross profit in 20x1?

a. 148,000
b. 152,000
c. 160,000
d. 162,000

19. BUCOLIC RURAL Co. uses the “installment sales method.” Information on
BUCOLIC’s transactions during 20x1 and 20x2 is shown below:

20x1 20x2

2,400,0
Installment sales 2,000,000 00

1,320,0
Cost of sales 1,200,000 00

1,080,0
Gross profit 800,000 00
Cash collections from:

20x1 sales 800,000 400,000

20x2 sales 960,000

How much is the total realized gross profit in 20x2?

a. 160,000
b. 432,000
c. 592,000
d. 642,000

20. Banana Co. began operations on January 2, 20x1. Banana uses the “installment
sales method” of accounting. Banana’s records on December 31, 20x1 show the
following information:

Installment accounts receivable, Dec. 31, 800,

20x1 000
Deferred gross profit, before year-end 560,
adjustment 000
Gross profit on sales 40%
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How much is the realized gross profit in 20x1?

a. 240,000
b. 248,000
c. 256,000
d. 260,000

21. ABASE HUMILIATE Co. is currently preparing its combined financial statements
for the year ended December 31, 20x1. As of this date, the “Investment in branch”
account has a balance of ₱380,000 while the “Home office” account has a balance of
₱528,000. The following information has been gathered:
(a) The home office allocated unpaid utilities expenses amounting to ₱40,000 to the
branch which the branch did not record in full. Instead, the branch sent a wrong
adjusting memo to the home office reducing the charge by ₱10,000 and setting up a
liability for the remaining amount.
(b) The home office erroneously credited the branch for a return of shipment of
merchandise worth ₱100,000. The branch did not make any return of merchandise.
(c) The branch mistakenly received a copy of the home office correcting entry for item (b)
above dated January 3, 20x2 and entered a credit in favor of the home office on
December 31, 20x1.
(d) The branch mistakenly sent the home office a debit memo amounting to ₱12,000 for
an apparent remittance of collections which did not happen. The home office did not
record the debit memo.

How much is the net adjustment to the “Investment in branch” account? increase
(decrease)
a. 100,000
b. 48,000
c. (48,000)
d. (52,000)

Use the following information for the next eleven questions:

The following information was taken from the records of a branch:
2,800,
Sales by branch 000
Beginning inventory -
Billings to branch by home 2,500,
office 000
400,
Operating expenses 000
Ending inventory at billed 1,000,
price 000

The following information was taken from the records of the home office:
2,600,
Branch current account 000
2,000,
Shipments to branch 000
Allowance for markup - 500,0
Unadjusted 00

22. What is the billing rate based on cost?

a. 20%
b. 25%
c. 120%
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d. 125%

23. What is markup percentage based on cost?

a. 20%
b. 25%
c. 120%
d. 125%

24. How much is the sales of branch to be included in the combined financial
statements?
a. 2,800,000
b. 2,240,000
c. 2,333,333
d. 0

25. How much is the realized markup of the branch?

a. 300,000
b. 240,000
c. 380,000
d. 270,000

26. How much is the cost of goods sold of the branch to be included in the combined
financial statements?
a. 1,500,000
b. 1,800,000
c. 1,200,000
d. 900,000

27. How much is the ending inventory of the branch to be included in the combined
financial statements?
a. 1,000,000
b. 8333,333
c. 1,250,000
d. 800,000

28. How much is the unrealized markup in ending inventory?

a. 200,000
b. 166,667
c. 230,000
d. 266,667

29. How much is the ending balance of the “allowance for markup” account before
combining the financial statements?
a. 200,000
b. 166,667
c. 230,000
d. 266,667

30. How much is the individual profit of the branch?

a. 880,000
b. 900,000
c. 920,000
d. 1,020,000

31. How much is the true profit of the branch?

a. 1,200,000
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b. 1,400,000
c. 1,250,000
d. 1,266,667

32. How much is the adjusted balance of the branch current account immediately prior
to combining the financial statements?
a. 3,800,000
b. 3,400,000
c. 3,500,000
d. 3,666,667

33. The home office transfers inventory worth ₱600,000 to Branch #1. Freight paid by
the home office is ₱40,000. Later on, the home office instructs Branch #1 to transfer
the merchandise to Branch #2. Branch #1 pays freight of ₱12,000. If the merchandise
had been shipped directly from the home office to Branch #2, the freight cost would
have been ₱56,000. The entries to record the transactions described includes
a. a credit to savings on freight of ₱4,000 in the books of Branch #1.
b. a credit to savings on freight of ₱4,000 in the books of Branch #2.
c. a credit to savings on freight of ₱4,000 in the books of the home office.
d. none of these

34. According to PFRS 17, insurance service result is recognized in

a. profit or loss.
b. other comprehensive income.
c. a or b
d. partly a and partly b

Use the following information for the next two questions:

Entity A obtains life insurance for its key employee from Entity B (an insurance company).
Entity B cedes the insurance contract with Entity A to Entity C, another insurance
company.

35. The contract between Entity A and Entity B is

a. direct insurance contract
b. indirect insurance contract
c. reinsurance contract
d. retrocession

36. How should Entity B account for the insurance contract with Entity C?
a. using the general model
b. using the premium allocation approach
c. using the modified version of the general model applicable for onerous insurance
contracts
d. using a modified version of (a) or (b) applicable to reinsurance contracts held

37. Under the general model of PFRS 17, a group of insurance contracts is initially
measured at
a. the fulfillment cash flows.
b. the contractual service margin.
c. a or b, as an accounting policy choice
d. sum of a and b

38. According to PFRS 17, insurance finance income or expenses are

a. recognized in profit or loss.
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b. disaggregated into amounts recognized in profit or loss and in other

comprehensive income.
c. a or b
d. recognized directly in equity.

Use the following information for the next six questions:

Rainy August Afternoon Co. (RAA) enters into a service concession arrangement whereby
RAA undertakes to build a public infrastructure, operate that infrastructure over a
specified period, and thereafter transfer it to the government (the grantor). In addition,
RAA is obligated to recondition the infrastructure a year before it is handed over to the
government. This is regardless of the infrastructure’s condition and level of usage. In
return, the government promises to pay RAA a fixed amount of cash plus interest in each
year during the operation period.

39. What standard should RAA apply in recognizing and measuring the revenue from
the contract?
a. IFRIC 15
b. PFRS 12
c. PFRS 9
d. PFRS 15

40. How many performance obligations are there in the contract?

a. one
b. two
c. three
d. four

41. The revenue recognized in Year 3 is equal to

a. the collection during that year.
b. the fair value of the consideration received in that year.
c. the transaction price allocated to the performance obligation(s) satisfied during
that year.
d. This is preposterous! How can I know? There are no monetary amounts given in
the problem.

42. How should RAA account for the resurfacing services in the contract?
a. as a separate performance obligation that is accounted for under PFRS 15
b. as a provision that is accounted for under PAS 37
c. partly a and partly b
d. not accounted for

43. During the construction period, RAA recognizes an asset that is reported in the
financial statements as
a. contract asset.
b. receivable (a financial asset).
c. intangible asset.
d. property, plant and equipment.

44. After the construction period, RAA accounts for the asset recognized on the
contract using
a. PFRS 15.
b. PAS 16.
c. PFRS 9.
d. PAS 38.
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45. Entity A, a Philippine company, was sub-contracted to landfill a construction site by

a contractor, a Chinese construction company. The contract states a fixed price for
various landfilling activities that will take place in different stages of the construction
during the first two to three years. In measuring and recognizing the revenue from the
contract, Entity A will most likely refer to which of the following standards?
a. PAS 11
b. PFRS 15
c. PAS 18
d. US GAAP
e. Chinese GAAP

46. You are the accountant of Mang Jolly, a fast-growing fast-food restaurant. During
the year, Mang Jolly granted Mr. A, an unrelated party, rights to operate a Mang Jolly
restaurant in a specified location. The grant of rights includes the use of Mang Jolly’s
trade mark, trade processes, menu, and concept. Mr. A paid an upfront fee for the
grant of rights and agreed to make additional payments equal to 5% of its sales from
the restaurant. To account for the arrangement, which of the following standards is
most likely to be relevant to you?
a. PAS 11
b. PFRS 11
c. PFRS 15
d. US GAAP

47. You are an auditor. During the current audit season, you were engaged to perform
an external audit for Entity X, an insurance company. When making an audit program,
which of the following standards is most likely to be relevant to you?
a. PAS 4
b. PFRS 11
c. PFRS 17
d. US GAAP

Use the following information for the next two questions:

A and B formed a joint operation. The following were the transactions during the
year:
A B
Total purchases 400 320
Total sales 480 240
Expenses paid 800
Other income 40

The joint operation was completed at the end of the year. Each joint operator is
entitled to a 10% commission on its purchases and a 20% commission on its sales.
Any remaining profit or loss is divided equally.

48. How much is the profit (loss) of the joint operation?

a. 760
b. (760)
c. 840
d. (840)

49. On the cash settlement between the joint operators,

a. A pays B ₱368.
b. B pays A ₱368.
c. A pays B ₱428.
d. B pays A ₱428.
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50. A, B, and C formed a joint operation which was completed during the year. The
accounts of the joint operators show the following balances:
Books of Books of
A B Books of C

Account with A - 10 Dr. 10 Dr.

Account with B 16 Dr. - 16 Dr.

Account with C 26 Cr. 26 Cr.

On the cash settlement between the joint operators,

a. B and C pays A ₱16 and ₱10, respectively, for a total of ₱26 payment to A.

b. A and B pays C ₱10 and ₱16, respectively, for a total of ₱26 payment to C.
c. C pays A and B ₱10 and ₱16, respectively.
d. A, B and C pays D.

“You will eat the fruit of your labor; blessings and prosperity will be yours.”
(Psalm 128:2)
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