THEORY OF ACCOUNTS - MOCK
Question 1
An entity purchases a building and the seller accepts payment
partly in equity shares and partly in debentures of the entity.
This transaction should be treated in the cash flow statement
as follows:
a. This does not belong in a cash flow statement and
should be disclosed only in the footnotes to the
financial statements
b. Ignore the transaction totally since it is a noncash
transaction. No mention is required in either the
cash flow statement or anywhere else in the
financial statements.
c. The purchase price of the building should be
investing cash outflow and the issuance of
debentures financing cash outflows while the
issuance of share of investing cash outflow.
d. The purchase of the building should be investing
cash outflow and the issuance of shares and the
debentures financing cash outflows.
Theory of Accounts - PAS 7 (Difficult)
Question 2
An entity has an asset that was classified as held for sale.
However, the criteria for it remain as held for sale no longer
apply. The entity should therefore:
a. Recognize the noncurrent asset at its carrying
amount prior to its classification as held for sale as
adjusted for subsequent depreciation, amortization,
or revaluation.
b. Measure the noncurrent asset at the lower of its
carrying amount before the asset was classified as
held for sale (as adjusted for subsequent
depreciation, amortization, or revaluation) and its
recoverable amount at the date of the decision not
to sell.
c. Remeasure the noncurrent asset at fair value.
d. Leave the noncurrent asset in the financial
statements at its current carrying value.
Theory of Accounts - PFRS 5 (Difficult)
Question 3
A manufacturing group has just acquired a controlling interest
in a football club that is listed on a stock exchange. The
management of the manufacturing group wishes to exclude the
football club from the consolidated financial statements on the
grounds that its activities are dissimilar. How should the
football club be accounted for?
a. The entity should be consolidated as there is no
exemption from consolidation on the grounds of
dissimilar activities.
b. The entity should not be consolidated using the
purchase method but should be consolidated using
equity accounting.
c. The entity should not be consolidated and should
appear as an investment in the group accounts.
d. The entity should not be consolidated; details
should be disclosed in the financial statements.
Theory of Accounts - PAS 27 (Difficult)
Question 4
Mason Company built a new factory building during 2014 at a
cost of P20 million. At December 31, 2014, the net book value
of the building was P19 million. Subsequent to year-end, on
March 15, 2015, the building was destroyed by fire and the
claim against the insurance company proved futile because the
cause of the fire was negligence on the part of the caretaker of
the building. If the date of authorization of the financial
statements for the year ended December 31, 2014, was March
31, 2015, Mason Company should
a. write off the net book value to its scrap value
because the insurance claim would not fetch any
compensation.
b. disclose this nonadjusting event in the footnotes.
c. make a provision for 3/4 of the net book value of
the building based on prudence
d. make a provision for 1/2 of the net book value of
the building
Theory of Accounts - PAS 10 (Difficult)
 THEORY OF ACCOUNTS - MOCK
Question 5
Which of the following facts or circumstances would not trigger
a need to test an evaluation and exploration asset for
impairment?
a. A decision to discontinue exploration and
evaluation activities have not led to the discovery
of commercially viable quantities of mineral
resources.
b. The absence of budgeted or planned substantive
expenditure on further exploration and evaluation
activities in the specific area.
c. The expiration-or expected expiration in the near
future-of the period for which the entity has the
right to explore in the specific area, unless the right
is expected to be renewed.
d. Lack of sufficient data to determine whether the
carrying amount of the exploration and evaluation
asset is likely to be recovered in full from
successful development or by sale.
Theory of Accounts - PFRS 6 (Difficult)
Question 6
An entity is planning to dispose of a collection of assets. The
entity designates these assets as a disposal group, and the
carrying amount of these assets immediately before the
classification as held for sale was P20 million. Upon being
classified as held for sale the asset were revalued at P18
million. The entity feels that the fair value less cost to sell
would be P17 million. How would the reduction in the value of
the assets on classification as held for sale be treated in the
financial statements?
a. The entity recognizes a loss of P2 million
immediately before classification as held for sale
and then recognizes an impairment loss of P1
million
b. The entity recognizes an impairment loss of P2
million.
c. A loss of P3 million immediately before classifying
the disposal group as held for sale
d. The entity recognizes an impairment loss of P3
million.
Theory of Accounts - PFRS 5 (Difficult)
Question 7
Club Cosmetic, a large manufacturer of cosmetics, sells
merchandise to Paint Company, a retailer, which in turn sells
the goods to the public at the large through its chain of retail
outlets. Paint Company purchases merchandise from Club
Cosmetic under a consignment contract. When should revenue
from the sale of merchandise to Paint Company be recognized
by Club Cosmetic?
a. It will depend on the terms of the delivery of the
merchandise by Club Cosmetic to Paint Company
b. It will depend on the terms of payment between
Club Cosmetic and Paint Company.
c. When goods are delivered to Paint Company
d. When goods are sold by Paint Company
Theory of Accounts - PAS 18 (Difficult)
Question 8
How should repayment of a long-term loan comprising
repayment of the principal amount and interest due to date on
the loan be treated in a cash flow statement?
a. The repayment of the principal portion of the loan
is a cash flow belonging in investing activities section;
the interest payment should be netted against
interest received on bank deposits, and the net
amount of interest should be disclosed in the
operating activities section.
b. The repayment of the principal portion of the loan
is a cash flow belonging in the investing activities
section; the interest payment belongs in the
operating activities section because PAS 7 does not
permit any alternatives in case of interest payments.
c. The repayment of the principal portion of the loan
is a cash flow belonging in the investing section; the
interest payment belongs either in the operating
activities section or the investing section.
d. The repayment of the principal portion of the loan
is a cash flow belonging in the investing activities
section, the interest payment belongs either in the
operating activities section or the financing activities
section.
Theory of Accounts - PAS 7 (Difficult)
 THEORY OF ACCOUNTS - MOCK
Question 9
Wellness Company, a new company manufacturing and selling
consumable products, has come out with an offer to refund the
cost of purchase within one month of sale if the customer is not
satisfied with the product. When should Wellness Company
recognize the revenue?
a. After one month of sale
b. Only if goods are not returned by the customers
after the period of one month
c. At the time of sale along with an offset to revenue
of the liability of the same amount for the possibility
of the return.
d. When goods are sold to the customers
Theory of Accounts - PAS 18 (Difficult)
Question 10
Which of the following is not objective evidence of impairment
of a financial asset?
a. A decline in the fair value of the asset below its
previous carrying amount
b. A breach of contract, such as a default or
delinquency in interest or principal payments.
c. Significant financial difficulty of the issuer or
obligor.
d. Observable data indicating that there is a
measurable decrease in the estimated future cash
flows from a group of financial assets although the
decrease cannot yet be associated with any individual
financial asset.
Theory of Accounts - PAS 39 (Difficult)
Question 11
Is there any exception to the requirement to measure at fair
value financial assets classified as the fair value through profit
or loss or available for sale?
a. Yes. If the entity has the positive intention and
ability to hold assets classified in those categories to
maturity, they are measured at amortized cost.
b. No. Such assets are always measured at fair value.
c. Yes. If the fair value of such assets increases above
cost, the resulting unrealized holding gains are not
recognized but deferred until realized.
d. Yes. Investments in unquoted equity instruments
that cannot be reliably measured at fair value (or
derivatives that are linked to and must be settled in
such unquoted equity instruments) are measured at
cost.
Theory of Accounts - PAS 39 (Difficult)
Question 12
What is the principle for recognition of a financial asset or a
financial liability in PAS 39?
a. A financial asset is recognized when, and only
when, the entity obtains the risks and rewards of
ownership of the financial assets and has the ability
to dispose the financial asset.
b. A financial asset is recognized when, and only
when, it is probable that future economic benefits
will flow to the entity and the cost or value of the
instrument can be measure reliably.
c. A financial asset is recognized when, and only
when, the entity obtains control of the instrument
and has the ability to dispose of the financial asset
independent of the actions of others.
d. A financial asset is recognized when, and only
when, the entity becomes a party to the contractual
provision of the instrument.
Theory of Accounts - PAS 39 (Difficult)
Question 13
A construction company is in the middle of a 2 year
construction contract when it receives a letter from the
customer extending the contract by a year and requiring the
construction company to increase its output in proportion of
the number of years of the new contract to the previous
contract period. This is allowed in recognizing additional
revenue according to PAS 11 if
a. It is probable that the customer will approve the
variation and the amount of revenue arising from the
variation, whether the amount of revenue can be
reliably measured or not.
 THEORY OF ACCOUNTS - MOCK

b. It is probable that the customer will approve the
variation and the amount of revenue arising from
the variation, and the amount of revenue can be
reliably measured.
c. The contract is sufficiently advanced and it is
probable that the specified performance standards
will be exceeded or met.
d. Negotiations have reached an advanced stage and
it is probable that the customer will accept the claim.
d. Increasing the contingency reserve by P700 million
Theory of Accounts - PAS 10 (Difficult)
Question 16
A construction company signed a contract to build a theater
over a period of 2 years, and with this contract also signed a
maintenance contract for 5 years. Both the contracts are
negotiated as a single package and are closely interrelated to
each other. The two contracts should be

Theory of Accounts - PAS 11 (Difficult)
Question 14
What is an entity required to consider in developing accounting
policies for exploration and evaluation activities?
a. Treated differently, the building contract under the
completed contract method and maintenance
contract under the percentage of completion
method.
b. Segmented and considered 2 separate contracts

a. The definitions, recognition criteria, and c. Recognized under the completed contracted
measurement concepts for assets, liabilities, income method.
and expenses in the Framework.
d. Combined and treated as a single contract.
b. Recent pronouncements of standard-setting
bodies, accounting literature, and accepted industry Theory of Accounts - PAS 11 (Difficult)
practices.
Question 17
c. The requirements and guidance in Standards and
PFRS 6 applies to expenditures incurred
Interpretations dealing with similar and related
issues.
a. When the legal rights to explore a specific area
have been obtained, but the technical feasibility and
d. Whether the accounting policy results in
commercial viability of extracting a mineral resource
information that is relevant and reliable.
are not yet demonstrable.
Theory of Accounts - PFRS 6 (Difficult)
b. When specific area is being developed and
Question 15 preparations for commercial extraction are being
made.
SM Investments decided to operate a new amusement park
that will cost P1 billion to build in the year 2014. Its financial c. In extracting mineral resources and processing the
year-end is December 31, 2014. SM Investment has applied for resource to make it marketable or transportable.
a letter of guarantee for P700 million. The letter of guarantee
d. When searching for an area that may warrant
was issued on March 31, 2015. The audited financial
detailed exploration, eventhough the entity has not
statements have been authorized to be issued on April 18,
yet obtained the legal rights to explore a specific
2015. The adjustment required to be made to the financial
area.
statement for the year ended December 31, 2014, should be
Theory of Accounts - PFRS 6 (Difficult)
a. Disclosing P700 million as a contingent liability in
2014 financial statement

b. Do nothing

c. Booking a P700 million long-term payable.

 THEORY OF ACCOUNTS - MOCK
Question 18
Manila Ventures deals extensively with foreign entities, and its
financial statements reflect these foreign currency transactions.
Subsequent to the balance sheet date, and before the date of
authorization of the issuance of the financial statements, there
were abnormal fluctuations in foreign currency rates. Manila
Ventures should
a. Adjust the foreign exchange year end balances to
reflect all the abnormal fluctuations in foreign
exchange rates (and not just adverse movements)
b. Adjust the foreign exchange year-end balances to
reflect the abnormal adverse fluctuations in foreign
exchange rates.
c. Disclose the post-balance sheet event in footnotes
as a nonadjusting event
d. Ignore the post-balance sheet event.
Theory of Accounts - PAS 10 (Difficult)
Question 19
When it is difficult to distinguish between a change of estimate
and a change in accounting policy, then an entity should
a. Apportion, on a reasonable basis, the relative
amounts of change in estimate and the change in
accounting policy and treat each one accordingly.
b. Treat the entire change as a change in accounting
policy
c. Since this change is a mixture of 2 types of changes,
it is best if it is ignored in the year of the change, the
entity should then wait for the following year to see
how the change develops and then treat it
accordingly.
d. Treat the entire change as a change in estimate
with appropriate disclosure
Theory of Accounts - PAS 8 (Difficult)
Question 20
Is an entity ever required or permitted to change its accounting
policy for exploration and evaluation expenditures?
a. Yes, entities are free to change accounting policy
for these expenditures as long as the selected policy
results in information that is relevant and reliable.
b. Yes, but only if the change makes the financial
statements more relevant to the economic decision
making needs of users and no less reliable, or more
reliable and no less relevant to those needs.
c. No, entities would be permitted to change
accounting policy only on adoption of a new or
revised Standard that replaces the existing
requirements in PFRS 6.
d. Yes, the entities are required to change their
accounting policy for these expenditures if the
change would result in more useful information for
users of financial statements.
Theory of Accounts - PFRS 6 (Difficult)
Question 21
How should the assets and liabilities of a disposal group
classified as held for sale be shown in the balance sheet?
a. The assets and liabilities should be offset and
presented as a single amount.
b. The assets of the disposal group should be shown
separately from other assets in the balance sheet,
and the liabilities of the disposal group should be
shown separately from other liabilities in the
balance sheet.
c. The assets and liabilities should be presented as a
single amount and as a deduction from equity
d. There should be no separate disclosure of assets
and liabilities that form part of the disposal group
Theory of Accounts - PFRS 5 (Difficult)
Question 22
Integrated Machines manufactures and sells standard
machinery. One of the conditions in the sale contract is that
installation of machinery will be undertaken by Integrated
Machines. During December 2014, Integrated Machines
received a special onetime contract from Jones Company to
manufacture, install and maintain customized machinery. It is
the first time Integrated Machines will be producing this kind of
machinery, and it is expecting numerous changes that would
need to be made to machine after the installation is completed,
 THEORY OF ACCOUNTS - MOCK
which one period is described in the contract of sale as the
maintenance period. The total cost of making the changes
during the maintenance period cannot be reasonable estimated
at the time of the installation. When should the revenue from
sale of this special machine be recognized?
a. When the machinery is produced
b. When the maintenance period as per the contract
of sale expires.
c. When the machinery is produced and deliver
d. When the installation is complete
Theory of Accounts - PAS 18 (Difficult)
Question 23
What is the accounting treatment of the hedging instrument
and the hedged item under fair value hedge accounting?
a. The hedging instrument is measured at fair value,
and the hedged item is measured at fair value with
respect to the hedged risk. Changes in fair value are
recognized directly in equity to the extent the hedge
is effective.
b. The hedging instrument is accounted for in
accordance with the accounting requirements for the
hedged item, if the hedge is effective.
c. The hedging instrument is measured at fair value
with changes in fair value recognized directly in
equity to the extent the hedge is effective. The
accounting for the hedged item is not adjusted.
d. The hedging instrument is measured at fair value,
and the hedged item is measured at fair value with
respect to the hedged risk. Changes in fair value are
recognized in profit or loss.
Theory of Accounts - PAS 39 (Difficult)
Question 24
In which of the following circumstances is derecognition of a
financial asset not appropriate?
a. The contractual rights to the cash flows of the
financial assets have expired.
b. The financial asset has been transferred and
substantially all the risks and rewards of ownership of
the transferred asset have also been transferred.
c. The financial asset has been transferred and the
entity has retained substantially all the risks and
rewards of ownership of the transferred asset.
d. The financial asset has been transferred and the
entity has neither retained nor transferred
substantially all the risks and rewards of ownership of
the transferred asset. In addition, the entity has lost
control of the transferred asset.
Theory of Accounts - PAS 39 (Difficult)
Question 25
Does PFRS 6 require an entity to recognize exploration and
evaluation expenditure as assets?
a. Yes, but only to the extent such expenditure is
recoverable in future periods.
b. No, such expenditure is always expensed in profit
or loss as incurred.
c. Yes, but only to the extent the technical feasibility
and commercial viability of extracting the associated
mineral resource have been demonstrated.
d. Yes, but only to the extent required by the entity
accounting policy for recognizing exploration and
evaluation assets
Theory of Accounts - PFRS 6 (Difficult)
Question 26
Joy Enterprises has P150,000 in accounts receivable at the end
of Year 1, and it estimates its bad debts to be 5% of the
receivables. Hence, the accountant reports P7,500 as bad debts
and the net realizable value as P142,500. Under which of the
following circumstances will the amount of bad debts reported
most likely reduce?
a. If the company shortens the credit period allowed.
b. If the allowance for doubtful accounts has a credit
balance of P1,500
c. If the allowance for doubtful accounts has a debit
balance of P1,500
 THEORY OF ACCOUNTS - MOCK

d. If the company lengthens the credit period allowed a. The hedging instrument is measured at fair value,
with changes in fair value recognized directly in
SOLUTION: equity to the extent the hedge is effective. The
accounting for the hedged item is not adjusted.
If there is an existing credit balance in the allowance for
doubtful accounts, then the bad debt expense should be b. The hedging instrument is accounted for in
adjusted downward, as it is necessary to adjust the balance only accordance with the accounting requirements for the
to the desired level. Therefore, the correct balance will be hedged item, if the hedge is effective.
P7,500 - P1,500 = P6,000
c. The hedged item and hedging instrument are both
Theory of Accounts - Uncategorized (Uncategorized) measured at fair value with respect to the hedged
risk, and changes in fair value are recognized in profit
Question 27
or loss.
The cash flows and net income from four business
d. The hedged item and hedging instrument are both
segments for Bay Company have been provided.
Segment Segment 2 Segment 3 Segment 4 measured at fair value with respect to the hedged
1 risk, and changes in fair value are recognized directly
Cash flows in equity.
from:
Operations 53,000 (250) (3,000) 2,000 Theory of Accounts - PAS 39 (Difficult)
Investing (4,000) 6,000 8,000 (3,000)
activities Question 29
Financing 1,080 (1,000) (1,000) 1,080
activities The latest financial statements of Joey Properties show 140,000
Net income 1,500 1,750 2,375 1,500 outstanding shares, par value of P10. The current market value
Which segment should be discontinued by the company? per share is P25. At the beginning of current year, the company
reacquired 10,000 shares at P4 per share. The company follows
a. Segment 2 because cash used in operations is low
the cost method for the accounting of treasury stock. The
and cash flow from investing activities is not properly
current year’s books of accounts show the value of outstanding
utilized.
shares as follows:
b. 1 because net income is lowest and requires high
Common stock, P10 par 1,400,000
investments
Less: Treasury stock 100,000
Net common stock, P10 par 1,300,000
c. Segment 3 because cash used in operations is high
and cash inflow is predominantly from investing
activities
The Company’s CFO did not approve the financial statements.
The most likely reason for CFO’s disapproval is that:
d. Segment 4 because net income and cash inflow
from operations are low.
a. The par value of the treasury stock should be
presented as a deduction from par value of issued
SOLUTION:
shSSSares of the same class.
Segment 3 because cash used in operations is high and cash
b. The treasury stock is incorrectly valued based on
inflow is predominantly from investing activities. Segment 3
par value, instead of valuing at the current market
should be discontinued because the major portion of income of
rate.
the segment could be from the sale of its assets.
c. The treasury stock should be reported as an asset.
Theory of Accounts - Uncategorized (Uncategorized)
d. The treasury stock is incorrectly valued based on
Question 28
par value, instead of valuing at the acquisition price.
What is the accounting treatment of the hedging instrument
SOLUTION:
and the hedged item under cash flow hedging?
 THEORY OF ACCOUNTS - MOCK
In the cost method, the treasury stock account is debited for the
cost of the shares reacquired. Therefore, the value of treasury
stocks should be P40,000 (10,000 shares x P4), acquired at the
acquisition price.
Theory of Accounts - Uncategorized (Uncategorized)
Question 30
Bayer AG introduced a new drug in the market on December
31, 2014. Bayer AG’s financial year ends on December 31, 2014.
It was the only company that was permitted to manufacture
this patented drug. The drug is used by patients suffering from
a irregular heartbeat. On March 31, 2015, after the drug was
introduced, more than 1,000 patients died. After a series of
investigations, authorities discovered that when this drug was
simultaneously used to regulate hypertension, the patient’s
blood would clot and patient suffered a stroke. A lawsuit for
P100,000,000 has been filed against Bayer AG. The financial
statements were authorized for issuance on April 30, 2015.
Which of the following options is the appropriate accounting
treatment for this post-balance sheet event under PAS 10?
a. The entity should provide P100,000,000 because
this is an adjusting event and the financial statements
were authorized to be issued after the accident.
b. The entity should disclose P100,000,000 as a
contingent liability because it is an adjusting event.
c. The entity should disclose P100,000,000 as a
contingent liability because it is a present obligation
with an improbable outflow.
d. Assuming the probability of the lawsuit being
decided against Bayer AG is remote, the Company
should disclose it in the footnotes, because it is a
nonadjusting material event.
Theory of Accounts - PAS 10 (Difficult)
Question 31
PFRS 4 was introduced principally for what reason?
a. As a response to recent scandals within the
insurance industry.
b. To completely overhaul insurance accounting.
c. Because of pressure from the financial services
authorities in several countries.
d. To make limited improvements to the accounting
for insurance accounting.
Theory of Accounts - PFRS 4 (Average)
Question 32
Which of the following types of information does PFRS 7 not
require to be disclosed about the significance of financial
instruments?
a. Information about financial instruments,
contracts, and obligations under share-based
payment transactions.
b. Fair values of financial instruments
c. Carrying amounts of categories of financial
instruments.
d. Information about the use of hedge accounting
Theory of Accounts - PFRS 7 (Difficult)
Question 33
In addition to financial assets at fair value through profit or loss,
which of the following categories of financial assets is
measured at fair value in the balance sheet?
a. Investments in unquoted equity instruments.
b. Held to maturity investments
c. Loans and receivables
d. Available for sale financial assets
Theory of Accounts - PAS 39 (Average)
Question 34
What is the best evidence of the fair value of a financial
instrument?
a. Its quoted price, if an active market exists for the
financial instrument.
b. Its cost, including transactions directly attributable
to the purchase, origination, or issuance of the
financial instrument.
c. The present value of the contractual cash flows less
impairment.
 THEORY OF ACCOUNTS - MOCK
d. Its estimated value determined using discounted
cash flow techniques, option pricing models, or other
valuation techniques.
Theory of Accounts - PAS 39 (Difficult)
Question 35
At what amount is a financial asset or financial liability
measured on initial recognition?
a. The consideration paid or received for the financial
asset or financial liability.
b. Zero
c. Fair value. For items that are not measured at fair
value through profit or loss, transaction costs are
also included in the initial measurement.
d. Acquisition cost. Acquisition cost is the
consideration paid or received plus any directly
attributable transaction costs to the acquisition or
issuance of the financial asset or financial liability.
Theory of Accounts - PAS 39 (Difficult)
Question 36
The current ratio for Manuel Inc. for the previous 5 years is
as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
Current 5 4.5 4.9 1.2 4.2
ratio
Which of the following factor is the most likely reason for the
low current ratio in Year 4?
a. Long-term debts were due for repayment in year
4.
b. Working capital in year 4 decreased due to an
increase in accounts payable
c. The company reduced its credit period in year 4.
d. Materials were purchased on credit in Year 4 for
which payment is due.
SOLUTION:
The current portion of long-term debt is included in current
liabilities in the year of repayment. Hence, the principal amount
for long-term debts might have been due in Year 4 and
classified as current liabilities.
Theory of Accounts - Uncategorized (Uncategorized)
Question 37
Which of the following transfers of financial assets qualifies for
derecognition?
a. A loan of a security to another entity.
b. A sale of a portfolio of short-term accounts
receivables where the entity guarantees to
compensate the buyer for any losses in the portfolio.
c. A sale of a financial asset where the entity retains
an option to buy the asset back at its current fair
value on the repurchase date.
d. A sale of a financial asset where the entity agrees
to repurchase the asset in one year for a fixed price
plus interest.
Theory of Accounts - PAS 39 (Difficult)
Question 38
What are the principal objectives of PFRS 7?
a. To provide presentation and disclosure
requirements for financial instruments.
b. To require disclosures about an entity’s exposure
to off-balance-sheet instruments and other complex
transactions.
c. To require disclosures about the significance of
financial instruments for an entity’s financial
position and financial performance and qualitative
and quantitative information about the exposure to
the risks arising from financial instruments.
d. To set out specified balance sheet and income
statement formats for financial entities
Theory of Accounts - PFRS 7 (Difficult)
Question 39
EM Electronics, a computer chip manufacturing company, sells
its products to its distributors for onward sales to the ultimate
customers. Due to frequent fluctuations in the market prices
for these goods, EM Electronics has a price protection clause in
the distributor agreement that entitles it to raise additional
billings in case of upward price movement. Another clause in
the distributor’s agreement is that EM Electronic can at any
 THEORY OF ACCOUNTS - MOCK
time reduce its inventory by buying back goods at the cost at
which it sold the goods to the distributor. Distributors pay for
the goods within 60 days from the same of goods to them.
When should EM Electronics recognize revenue on sale of
goods to the distributors?
a. When the distributor sells goods to the ultimate
customers and there is no uncertainty with respect
to the price protection clause or the buyback of
goods.
b. When the distributors pay to EM Electronics the
cost of the goods.
c. When goods are sold to the distributor provided
estimated additional revenue is also booked under
the protection clause based on past experience
d. When the goods are sold to the distributors
Theory of Accounts - PAS 18 (Difficult)
Question 40
Matsushita Corporation changes its method of valuation of
inventories from weighted-average method to FIFO method.
Matsushita should account for this change as
a. A change in accounting policy and account for it
prospectively.
b. A change in estimate and account for it
prospectively.
c. Account for it as a correction of an error and
account for it retrospectively.
d. A change in accounting policy and account for it
retrospectively.
Theory of Accounts - PAS 8 (Difficult)
Question 41
Which of the following is not a disclosure required by PFRS 6?
a. Information about commercial reserve quantities.
b. The amounts of assets, liabilities, income and
expense, and operating and investing cash flows
arising from the exploration and evaluation of
mineral resources.
c. Accounting policies for exploration and evaluation
expenditures, including the recognition of exploration
and evaluation assets.
d. Information that identifies and explains the
amounts recognized in the financial statements
arising from the exploration for and evaluation of
mineral resources.
Theory of Accounts - PFRS 6 (Difficult)
Question 42
Under PAS 39, is a derivative that is embedded in another
contract accounted for separately from that other contract?
a. It depends. PAS 39 requires embedded derivatives
to be accounted for separately if and only if, the
economic characteristics and risks of the embedded
derivative and the host contract are not closely
related and the combined contract is not measured
at fair value with changes in fair value recognized in
profit or loss.
b. It depends. PAS 39 requires embedded derivatives
to be accounted for separately as derivatives if, and
only if, the entity has embedded the derivative in
order to avoid derivatives accounting and has no
substantive business purpose for embedding the
derivative.
c. Yes. PAS 39 requires all derivatives (both
freestanding and embedded) to be accounted for as
derivatives.
d. No. PAS 39 precludes entities from splitting
financial instruments and accounting for the
components separately.
Theory of Accounts - PAS 39 (Difficult)
Question 43
Which of the following criteria do not have to be met in order
for an operation to be classified as discontinued?
a. The operation should represent a separate line of
business or geographical area.
b. The operation must be sold within 3 months of
the year-end
c. The operation is part of a single plan to dispose of a
separate major line of business or geographical area
 THEORY OF ACCOUNTS - MOCK
d. The operation is a subsidiary acquired exclusively
with a view to resale.
Theory of Accounts - PFRS 5 (Difficult)
Question 44
Which of the following is not a relevant consideration when
evaluating whether to derecognize a financial liability?
a. Whether the obligation has been canceled.
b. Whether the obligation has been discharged.
c. Whether the obligation has expired
d. Whether substantially all the risks and rewards of
the obligation have been transferred.
Theory of Accounts - PAS 39 (Average)
Question 45
The cash flow from operations for Petro Chemicals is P25,000
for the current year. If the amortization expense increases by
P5,000 and the other factors remain same, under which of the
following assumptions will the cash flow from operations
remain unaffected?
a. The company has an infinite life.
b. A change in amortization method will not have a
retrospective effect.
c. The company can change the depreciation method
in between a financial year.
d. The company is operating in a tax-free
environment
SOLUTION:
Cash flow from amortization arises because of the tax shield. In
a tax-free environment, change in amortization will not affect
the cash flows from operations.
Theory of Accounts - Uncategorized (Uncategorized)
Question 46
Under PAS 39, all of the following are characteristics of a
derivative except:
a. It is settled at a future date.
b. It is acquired or incurred by the entity for the
purpose of generating a profit from short-term
fluctuations in market factors.
c. Its value changes in response to the change in a
specified underlying.
d. It requires no initial investment or an initial net
investment that is smaller than would be required for
other types of contracts that would be expected to
have a similar response to changes in market factors.
Theory of Accounts - PAS 39 (Difficult)
Question 47
Which of the following is not a condition for hedge accounting?
a. The hedge is expected to reduce the entity’s net
exposure to the hedged risk, and the hedge is
determined actually to have reduced the net entity-
wide exposure to the hedged risk.
b. For cash flow hedges, a forecast transaction must
be highly probable and must present an exposure to
variations in cash flows that could ultimately affect
profit or loss.
c. The hedge is expected to be highly effective in
achieving offsetting changes in fair value or cash
flows attributable to the hedged risk, the
effectiveness of the hedge can be reliably measured,
and the hedge is assessed on an ongoing basis and
determined actually to have been effective.
d. Formal designation and documentation of the
hedging relationship and the entity’s risk
management objective and strategy for undertaking
the hedge at inception of the hedging relationship.
Theory of Accounts - PAS 39 (Difficult)
Question 48
What is the effective interest rate of a bond or other debt
instrument measured at amortized cost?
a. The interest rate that exactly discounts estimated
future cash payments or receipts through the
 THEORY OF ACCOUNTS - MOCK

expected life of the debt instrument or, when b. Make a provision for this post-balance sheet
appropriate, a shorter period to the net carrying event in its financial statements (as opposed to
amount of the instrument. disclosure in footnotes)

b. The interest rate currently charged by the entity or c. Ignore the event and wait for the outcome of the
by others for similar debt instruments. bankruptcy because the event took place after the
year-end.
c. The basic, risk-free interest rate that is derived
from observable government bond prices. d. Disclose the fact that MI has declared bankruptcy
in the footnotes.
d. The stated coupon rate of the debt instrument.
Theory of Accounts - PAS 10 (Difficult)
Theory of Accounts - PAS 39 (Difficult)

Question 49

Jonas Company is a large manufacturer of machines. Sion

Company, a major company of Jonas Company has placed an
order for a special machine for which it has given a deposit of
112,500 to Jonas Company. The parties have agreed on a price
for the machine of P150,000. As per the terms of the sales
agreement, it is an FOB (free on board) contract and the title
passes to the buyer when goods are loaded onto the ship at the
port. When should the revenue be recognized by Jonas
Company

a. When the machine is loaded on the port

b. When the deposit is received

c. When the machine has been received by the

customer.

d. When the customer orders the machine

Theory of Accounts - PAS 18 (Difficult)

Question 50

At the balance sheet date, December 31, 2014, Electron

Company carried a receivable from MI Electronics, a major
customer, at P10 million. The authorization date of the financial
statements is on February 16, 2015. MI Electronics declared
bankruptcy on Valentine’s day (February 14, 2015). Electron
Company will

a. Reverse the sale pertaining to this receivable in the

comparatives for the prior period and treat this as an
error under PAS 8.