FINANCIAL ACCOUNTING AND REPORTING

1. Financial Accounting can be broadly defined as the area of accounting that prepares
A. Financial statements to be used by investors only
B. Financial statements to be used primarily by management
C. General purpose financial statements to be used by parties internal to the business enterprise
only
D. General purpose financial statements to be used by parties both internal and external to the
business enterprise

2. Preparation of consolidated FS when a parent-subsidiary relationship exists is an example of the

A. Comparability characteristic
B. Economic entity assumption
C. Neutrality characteristic
D. Relevance characteristics

3. Which of the following situations violates the concepts of reliability?

A. Data on segments having the same expected risks and growth rates are reported to analysis
estimating future profits
B. Financial statements are issued nine months late
C. Management reports to stockholder’s new project undertaken, but the financial statements
never report the projected results
D. Financial statements include a property with a carrying amount increased to management’s
estimate of market value

4. Which term best describes information that influences the economic decisions of users?
A. Prospective C. Reliable
B. Relevant D. Understandable

5. Under PFRS Conceptual Framework (2010), which of the following is considered a fundamental
characteristic rather than an enhancing characteristic of financial information?
A. Faithful representation C. Understandability
B. Timeliness D. Verifiability

6. Which is the correct order of the following steps in the accounting cycle?
Step 1. Preparation of financial statements
Step 2. Making closing entries in the general journal
Step 3. Posting transaction entries in the general ledger
Step 4. Making reversing entries in the general journal
A. 2,3,4,1 C. 3,1,2,4
B. 2,4,3,1 D. 3,1,4,2

7. Which of the following errors will probably be disclosed by the preparation of a trial balance
(i.e., would cause it to be out of balance)?
A. Failure to post part of a journal
B. Failure to post an entire journal entry (i.e., nothing is posted)
C. Failure to record an entity in the journal (i.e., nothing is entered)
D. Posting the debit of a journal entry as a credit, and the credit as a debit
8. All of the following can be classified as cash and cash equivalents, except
A. Bank drafts
B. Equity investments
C. Loan notes held due for repayment in 90 days
D. Redeemable preference shares acquired and due in 60 days

9. ABC Company uses the allowance method in recognizing uncollectible accounts. Ignoring
deferred taxes, the entity to record the write-off of a specific uncollectible account
A. Affects neither net income now working capital
B. Decreases both net income and working capital
C. Affects neither net income nor accounts receivable
D. Decreases both net income and accounts receivable

10. At what amount is a financial asset or financial liability measured on initial recognition?
A. Zero
B. The consideration paid (received) for the financial asset (financial liability)
C. Acquisition costs, which is the consideration paid plus any directly attributable costs
D. Fair value. For items that are not measured at fair value through profit or loss, transaction
costs are also included in the initial measurement

11. It is a method of accounting whereby the investment is initially recognized at cost and adjusted
thereafter for the post acquisition change in the investor’s share of the investee’s net assets
A. Consolidation method C. Equity method
B. Cost method D. Fair value method

12. Which describe the risk that an entity will encounter if it has difficulty in meeting obligations
associated with financial liabilities?
A. Credit risk C. Liquidity risk
B. Financial risk D. Payment risk

13. When a periodic inventory system is used

A. Two entries must be made when goods are purchased
B. Cost of goods sold is a residual amount, rather than an account
C. Ending inventory is treated as an expense and beginning inventory is treated as an asset
D. ‘Purchases’ account is not used; all inventory purchase entries are debited to inventory
account

14. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares
of the entity is
A. A compound financial instrument C. A primary financial instrument
B. A derivative financial instrument D. An equity instrument

15. Common shares issued would exceed common shares outstanding as a result of
A. Declaration of a stock dividend C. Purchase of treasury stock
B. Declaration of stock split D. Payment in full of subscribed stock

16. A restriction of retained earnings is most likely to be required by the

A. Purchase of treasury stock
 B. Amortization of past service cost
C. Payment of last maturing series of a serial bond issue
D. Exhaustion of potential benefits of the investment credit

17. “Option pricing model” is used in accounting for

A. Interest in joint venture
B. Treasury share transactions
C. Share-based payment
D. Impairment of goodwill and intangible assets

18. Under PAS 21, which rate should an entity’s noncurrent assets be translated when its functional
currency figures are being translated into a different presentation currency
A. The average rate C. The historical exchange rate
B. The closing rate D. The spot exchange rate

19. Pagadian Corporation has supplied you with the following list of its bank accounts and cash at
December 31, 2020:

Checking account (compensating balance of with no restriction) 15,000

48,000
Savings account, 2% 30,000
Certificate of deposit, 6 months, 10% due April 20, 2021 60,000
Money market (30-day certificate), current rate, 9.75% 40,000
Payroll account 20,000
Certificate of deposit, 3 months, 10% due
February 15, 2021 75,000
Petty cash 1,500
Total 274,500

What should be the balance to be reported as “Cash and Cash Equivalents” in the December 31, 2020
statement of financial position of Pagadian Corporation?
a. 139,500
b. 199,500
c. 214,500
d. 274,500

Answer: c

Checking account 48,000

Savings account 30,000
Money Market (30-day) 40,000
Payroll account 20,000
Certificate of time deposit, due Feb. 15. 2021 75,000
Petty cash fund 1,500
Total cash and cash equivalents 214,500

20. Baybay Co. provided the following information about the composition of its cash on December
31, 2020:
  Commercial savings account of P600,000 and a commercial checking account balance of P900,000
are held at BPI.
 Money market fund account held by Citibank that permits Baybay to write checks in this balance,
P5,000,000.
 Travel advances of P180,000 for executive travel for the first quarter of next year (employee to
pay through salary deduction).
 A separate cash fund in the amount of P1,500,000 is restricted for the retirement of long-term
assets.
 Petty cash fund, P10,000.

What is the correct amount of cash and cash equivalents Baybay Company should report in its December
31, 2020 statement of financial position?
a. 610,000
b. 1,510,000
c. 6,400,000
d. 6,510,000

Answer: d

Commercial - savings account 600,000

Commercial – checking account 900,000
Money market fund (cash equivalent 5,000,000
Petty cash fund 10,000
Correct cash and cash equivalents 6,510,000

21. On December 31, 2020, the “Receivables” account of Antipolo company shows an amortized cost
of P1,950,000. . Subsidiary details show the following:

Trade accounts receivable, P775,000; Trade notes receivable, P100,000;installments receivable, normally
due one (1) year to two (2) years, P300,000; Customers’ accounts reporting credit balances arising from
sales returns, P30,000; Advance payments for purchase of merchandise, P150,000; Customers’ accounts
reporting credit balances arising from advance payments, P20,000; Cash advances to subsidiary,
P400,000, Claims from insurance company, P15,000; Subscription receivable due in 60 days, P300,000;
Accrued interest receivable, P10,000.

How much should be presented as “trade and other receivables” under current assets?
a. 725,000
b. 1,125,000
c. 1,290,000
d. 1,650,000

Answer: d

Trade accounts receivable 775,000

Trade notes receivable 100,000
Installments receivable 300,000
Advance payments 150,000
 Claims from insurance company 15,000
Subscription receivable 300,000
Accrued interest receivable 10,000
Trade & other receivables 1,650,000

22. On June 1, 2020, Pasig Corp. sold merchandise with a list price of 300,000 to Pedro Company on
account. Pedro was given the following trade discounts of 30% and 20%. Credit terms were 2/15,
n/40 and the sale was made F.O.BO. point of destination . on June 10, 2020, when the
merchandise were delivered, Pedro Company paid P5,000 of delivery costs for Pasig as an
accommodation. What amount should Pedro Company remit to Pasig Company as full payment
on June 14, 2020?

a. 168,000
b. 164,640
c. 159,740
d. 159,640

Answer: d

Invoice price (300,000 x 70% x 80%) 168,000

Less: Cash discount (168,000 x 2%) 3,360
Net 164,640
Less: Freight cost – reimbursable against the seller 5,000
Remittance 159,640

23. Iloilo, Inc. reported the following items in its December 31, 2020 trial balance:

Accounts Payable P1,089,000

Advances to Employees 45,000
Unearned Rent Revenue 228,000
Estimated Liability Under Warranties 258,000
Cash Surrender Value of Officer’s Life Insurance 75,000
Bonds Payable 5,000,000
Discounts on Bonds Payable 225,000
Trademark 390,000
How much should Iloilo report as total liabilities in its December 31, 2020 statement of financial position?

a. P6,410,000
b. P6,800,000
c. P6,845,000
d. P7,410,000

Answer: a
Accounts payable P1,089,000
Unearned rent revenue 288,000
Estimated liability under warranties 258,000
Bonds payable 5,000,000
Discount on bonds payable (225,000)
 Total liabilities P6,410,000

24. Macapagal Company reported total assets of P1,050,000 and total liabilities of P680,000 in its
December 31, 2020 statement of financial position. The following transactions occurred during 2021:

 On August 1, Macapagal Company issued an additional 5,000 ordinary shares at P25 per share.
 The company paid dividends totaling P80,000.
 Net income during the year was P110,000.
 Reacquired treasury shares of 2,000 at P30; subsequently, reissued 1,000 for P39 per share.
 No other changes occurred in Shareholders’ Equity during the year.

What is the balance of Macapagal’s Shareholders’ Equity section in its December 31, 2021 statement of
financial position?

a. 400,000
b. 504,000
c. 525,000
d. 685,000

Answer: b

Assets, December 31, 2020 1,050,000

Less: Liabilities, December 31, 2020 680,000
Shareholders Equity, December 31, 2020 370,000
Proceeds from issuance of additional shares (5,000 x P25) 125,000
Payment of dividends (80,000)
Net income for 2021 110,000
Treasury share (2,000 x P30) (60,000)
Proceeds from reissue of treasury shares (1,000 x P39) 39,000
Shareholders’ equity, December 31, 2021 504,000

25. Palawan Company reported the following information for 2020:

Sales revenue 500,000

Cost of goods sold 350,000
Operating expenses 55,000
Unrealized translation gain 20,000
Cash dividends received on the securities 2,000

Ignore income tax, for 2020, Palawan Company would report comprehensive income before tax of

a. 117,000
b. 115,000
c. 97,000
d. 20,000

Answer: a
 Sales revenue 500,000
Cost of goods sold 350,000
Operating expenses (55,000)
Cash dividends received on the securities 2,000

Net income before tax 97,000

Other comprehensive income:
Unrealized translation gain, 20,000
Comprehensive income before tax 117,000
26. The following information was taken from the accounting records of Laoag Company for the
year ended December 31, 2020:

Decrease in finished goods inventory 700,000

Increase in raw materials inventory 300,000
Freight-out 900,000
Factory overhead 6,000,000
Direct labor 4,000,000
Raw materials purchased 8,600,000

There was no work in process inventory at the beginning or at the end of the year. The cost of goods sold
is –
a. 17,600,000
b. 18,200,000
c. 18,400,000
d. 19,000,000

Answer: d

Raw materials, used:

Raw materials purchased 8,600,000
Less: Increase in raw materials inventory 300,000 8,300,000
Direct labor 4,000,000
Factory overhead 6,000,000
Factory cost/cost of goods manufactured 18,300,000
Add: Decrease in finished goods inventory 700,000
Cost of goods sold 19,000,000
27. San Pablo Company has three lines of business, each of which was determined to be reportable
segment. San Pablo Company sales aggregated P15,000,000 in 2020 of which segment #1
contributed 40%. Traceable costs were P3,500,000 for September to November out of a total of
P10,000,000 for the company as a whole. For internal reporting, San Pablo allocates common
costs of P3,000,000 based on the ratio of a segment’s income before common costs. In its 2020
financial statements, how much should San Pablo report as operating profit for segment no. 1?

a. 750,000
b. 1,000,000
c. 1,500,000
 d. 2,000,000

Answer: b

Revenue of segment #1 (15,000,000 x 40%) 6,000,000

Traceable operating expense – segment 1 (3,500,000)
Operating profit before common cost 2,500,000
Indirect cost – segment 1 (3,000,000 x 50%*) 1,500,000
Operating profit – segment 1 1,000,000

Total revenue of all segments 15,000,000

Less: Total traceable cost of all segments 10,000,000
Operating profit before common costs – all segments 5,000,000
Ratio of segment 1 operating profit = 2,500,000 ÷ 5,000,000
= 50%*
28. Zabala Company acquired an investment property with an installment price of P2,400,000. The
acquisition of the property requires a down payment of 20% and a non-interest bearing note payable at
the end of each year for five years. The prevailing market rate of interest for similar instrument is 12%.
The present value of factor of annuity of 12% for four periods is 3.605. Zabala Company incurred
transaction costs amount to P50,000 for the property. What is the cost of acquiring the property?

a. 1,862,400
b. 1,914,320
c. 2,400,000
d. 2,450,000

Answer: b
Down Payment (P2,400,000 x 20%) 480,000
PV of future payments (P2,400,000 x 80% ÷ 5 x 3.605) 1,384,320
Fair value of the investment property 1,864,320
Add: Transaction costs 50,000
Historical cost of the investment property 1,914,320

29. On May 1, 2019, Yacob company purchased a debt security having a face value of P2,000,000
with an interest rate of 9% for P2,100,000 including the accrued interest. Yacob Company intends to hold
the instrument for an indefinite period but not until maturity. The bonds mature on January 1, 2025, and
pay interest semi-annually on January 1 and July 1. On December 31, 2020, the bonds had a market value
of P2,205,000. What amount should Yacob report for short-term investment in debt securities?

a. 2,000,000
b. 2,040,000
c. 2,100,000
d. 2,205,000

Answer: b
 Amount paid 2,100,000
Less: Accrued interest (from January 1 to May 1)
(P2,000,000 x 9% x 4/12) 60,000
Acquisition cost 2,040,000

30. On January 2, 2019, Afable Company invested in a 4-year 10% bond with a face value of
P6,000,000 in which interest is to be paid every December 31. The bonds has an effective interest
rate of 9% and was acquired for P6,194,220. Afable Company has a portfolio of commercial loans
that it holds to sell in the short term. On December 31, 2019, the security has a fair value of
P6,400,000.

On December 31, 2019, Afable Company acquires Carlos Company that manages commercial loans and
has a business model that holds the loans in order to collect the contractual cash flows.

Afable Company original portfolio of commercial loans is no longer for sale, and the portfolio is now
managed together with the acquired commercial loans and all are held to collect the contractual cash
flows. On December 31, 2020, the debt investment has a fair value of P6,550,000.

What amount should the debt investment be reported in the December 31, 2020 statement of financial
position?

a. 6,105,353
b. 6,151,700
c. 6,400,000
d. 6,550,000

Answer: a

Interest Date Interest Earned Interest Income Premium Book Value

at 9% Amortization
Jan. 1, 2019 6,194,220
Dec. 31, 2019 600,000 557,480 42,520 6,151,700
Dec. 31, 2020 600,000 553,653 46,347 6,105,353

31. Burgos Company had the following transactions during the year:

1/1 Ordinary shares outstanding 300,000

2/1 Issued a 10% stock dividend 30,000
3/1 Issued ordinary shares in a “purchase” combination 90,000
7/1 Issued ordinary shares for cash 80,000

12/31 Ordinary shares outstanding 500,000

What is the weighted average number of shares outstanding?

a. 400,000
b. 442,500
c. 445,000
d. 460,000

Answer: c

January 1 300,000 x 1.10 x 12/12 330,000

March 1 90,000 x 10/12 75,000
July 1 80,000 x 6/12 40,000

Average number of shares 445,000

The stock dividend is treated as a change from the date the original shares are issued.

Thus, the balance of 300,000 on January 1 would become 330,000 shares.

32. At the current year-end, Salvacion Company issued 4,000 ordinary shares of P100 par value in
connection with a stock dividend. The market value per share on the date of declaration was P150. The
shareholders’ equity accounts immediately before issuance of the stock dividend shares were as follows:

Ordinary share capital P100 par, 50,000 shares authorized,

20,000 shares outstanding 2,000,000
Share premium 3,000,000
Retained earnings 1,500,000

What amount should be reported as retained earnings immediately after the stock dividend?

a. 1,100,000
b. 1,500,000
c. 2,100,000
d. 900,000

Answer: a

4,000 shares/20,000 – 20% stock dividend

Retained earnings before stock dividend 1,500,000

Stock dividend (4,000 x 100) (400,000)

Retained earnings after stock dividend 1,100,000

If the stock dividend is 20% or more, the par or stated value is debited to retained earnings.

33. On January 1, 2020, Naniong Company granted share options to certain key employees as
additional compensation. The options were for 100,000 ordinary shares of P10 par value at an
option price of P15 per share. Market price of this share on January 1, 2020 is P8. The options
were exercisable beginning January 1, 2020 and expire on December 31, 2021. On April 1, 2020,
all share options were exercised. What amount of compensation expense should be reported in
2020?

a. 800,000
b. 500,000
c. 200,000
d. 125,000

Answer: a

Fair value of share options (100,000 x 8) 800,000

If the options vest immediately, the total fair value of the share options shall be recognized immediately
in full as expense.

34. On March 1, 2020, Guzman Company issued at 103 plus accrued interest 4,000 of 9%, P1,000 face
value bonds. The bonds are dated January 1, 2020 and mature on January 1, 2029. Interest is
payable semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. What
is the net cash received from the bond issuance?

a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000

Answer: d

Issue price (4,000,000 x 103%) 4,120,000

Accrued interest from January 1 to March 1, 2020
(4,000,000 x 9% x 2/12) 60,000
Total 4,180,000
Less: Bond issue cost 200,000

Net cash received from bond issuance 3,980,000

 35. On January 1, 2020, Santiago Company issued 9% bonds in the face amount of P5,000,000, which
mature on January 1, 2029. The bonds were issued for P4,695,000 to yield 10%. Interest is payable
annually on December 31. The entity used the interest method of amortizing bond discount. On
December 31, 2020, what is the carrying amount of the bonds payable?

a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

Answer: b

Interest expense (4,695,000 x 10%) 469,500

Interest paid (5,000,000 x 9%) 450,000

Amortization of discount for 2020 19,500

Bonds payable 5,000,000

Discount on bonds payable (305,000 – 19,500) (285,500)

Carrying amount – December 31, 2020 4,714,500

36. On December 31, 2020, Espinosa Company leased equipment from Atienza Company.

 The estimated seven-year useful equipment life coincides with the lease term.
 The first of the seven equal annual P200,000 lease payments was paid on December 31, 2020.
 Atienza Company’s implicit interest rate of 12% is known to Espinosa.
 Espinosa’s incremental borrowing rate is 14%.
 Present value of an annuity of 1 in advance for seven periods is 5.11 at 12% and 4.89 at 14%.
 Tiger Company paid initial direct cost of P100,000.

What amount should be recorded by Espinosa Company initially as cost of the equipment?

a. 1,400,000
b. 1,022,000
c. 1,122,000
d. 1,078,000

Answer: c

Present value of rentals (200,000 x 5.11) 1,022,000

Initial direct cost 100,000

Total cost of equipment 1,122,000

The commencement of the lease is December 31, 2020 and the first annual payment was made on
December 31, 2020 in advance.
Thus, the present value of an annuity of 1 in advance factor applicable to the implicit interest rate of 12%
is used in determining the present value of rentals.

37. During 2020, Garcia Company became involved in a tax dispute with the BIR. On December 31,
2020, the tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of
additional taxes was P500,000. After the 2020 financial statements were issued, the entity received and
accepted a BIR settlement offer of P550,000. What amount of accrued liability should have been reported
on December 31, 2020?

a. 650,000
b. 550,000
c. 500,000
d. 0

Answer: c

The reasonable estimate of P500,000 is recorded. The accepted BIR offer is not recorded because it was
made after the statements are issued. In 2021, when the BIR settlement offer of P550,000 is accepted, an
additional liability of P50,000 will be recognized.

38. Bringas Company included one coupon in each box of laundry soap sold. A towel is offered as a
premium to customers who send in 10 coupons and a remittance of P20.

2020 2021
Boxes of soap sold 500,000 800,000
Number of towels purchased (P100 per towel) 20,000 25,000
Coupons redeemed 140,000 200,000

The entity estimated that only 30% of the coupons would be redeemed. What is the premium liability on
December 31, 2021?

a. 500,000
b. 400,000
c. 320,000
d. 80,000

Answer: b

Coupons to be redeemed in 2020 and 2021

(1,300,000 x 30%) 390,000
Coupons redeemed in 2020 and 2021 (140,000 + 200,000) 340,000

Outstanding coupons – December 31, 2021 50,000

Number of towels (50,000 / 10) 5,000

Multiply by cost of towel minus remittance (100 – 20) 80
Premium liability – December 31, 2021 400,000

39. Juliano Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1,
2020, maturing on January 1, 2024 and paying interest semiannually on January 1 and July 1. It is estimated
that the bonds would sell only at 103 without the conversion feature. Each P1,000 bond is convertible
into 10 ordinary shares with P100 par value. What is the increase in shareholders’ equity arising from the
issuance of the convertible bonds on January 1, 2020?

a. 350,000
b. 500,000
c. 150,000
d. 0

Answer: a

The issue of convertible bonds payable is also accounted for as a compound financial instrument.

Accordingly, PAS 32, paragraph 29, mandates that the original issuance of convertible bonds payable shall
be accounted for as partly liability and partly equity.

The liability component is equal to the market value of the bonds without the conversion privilege. The
equity component is the remainder or residual of the issue price of the bonds with conversion privilege.

Issue price of bonds with conversion privilege

(5,000,000 x 110) 5,500,000
Market value of bonds without conversion privilege
(5,000,000 x 103) 5,150,000

Residual amount allocated to conversion privilege 350,000

40. Hernandez Company provided the following information for the current year:

 Purchased a building for P1,200,000. Paid P400,000 and signed a mortgage with the seller for the
remaining P800,000.
 Executed a debt-equity swap and replaced a P600,000 loan by giving the lender ordinary shares
worth P600,000 on the date and swap was executed.
 Purchased land for P1,000,000. Paid P350,000 and issued ordinary shares worth P650,000.
 Borrowed P550,000 under a long-term loan agreement. Used the cash from the loan proceeds as
follows: P150,000 for purchase of additional inventory, P300,000 to pay cash dividend, and
P100,000 to increase the cash balance.

What amount should be reported as net cash used in investing activities in the statement of cash flows?

a. 1,200,000
 b. 2,200,000
c. 400,000
d. 750,000

Answer: d

Cash paid for purchase of building (400,000)

Cash paid for purchase of land (350,000)

Net cash used – investing (750,000)

The debt-equity swap is disclosed as a financing activity. The borrowing of P550,000 is a cash inflow from
financing.

The purchase of inventory of P300,000 is operating and the dividend payment of P100,000 is financing.