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NAME: Date:
Professor: Section: Score:

ACCOUNTING FOR SPECIAL TRANSACTIONS

FINAL GRADING EXAMINATION

Chapter 1 – Partnership Formation

1. A and B agreed to form a partnership. The contributions of the partners are as
follows:

A B
Cash 600,000
Inventory 20,000
Land 400,000
Equipment 50,000

Additional information:
 Half of the inventory is unpaid. The partnership agreed to assume the related
accounts payable.
 The land has a fair value of ₱700,000 and is subject to a mortgage of ₱100,000.
However, B agreed to settle the mortgage personally.

How much are the adjusted capital contributions of A and B, respectively?

a. 670,000; 690,000 c. 670,000; 700,000
b. 660,000; 700,000 d. 670,000; 600,000

Solution:
A B
Cash 600,000
Inventory 20,000
Land 700,000
Equipment 50,000
Accounts payable (20,000 x ½) (10,000)
Adjusted capital balances 660,000 700,000

2. A and B formed a partnership. The following are their contributions:

A B

Cash 400,000 -

Accounts receivable 100,000 -

700,00
Equipment 0

700,00
Total 500,000 0
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A, capital 500,000

700,00
B, capital 0

700,00
Total 500,000 0

Additional information:
 The accounts receivable includes a ₱30,000 account that is deemed uncollectible.
 The equipment is over-depreciated by ₱50,000. The equipment was obtained by B
through financing. The related loan payable has an unpaid balance of ₱250,000
which the partnership assumes on repaying.

Which partner has the higher capital credit, and how much?
a. A, ₱470,000 c. A, ₱500,000
b. B, ₱500,000 d. B, ₱400,000

Solution:

Partners
A B hip
Cash 400,000 - 400,000
Accounts
receivable
(100K – 30K) 70,000 - 70,000
Equipment
(700K+ 50K) 750,000 750,000
Loan payable (250,000) (250,000)
Net
contributions 470,000 500,000 970,000

3. Under the bonus method, the asset contribution of the partner receiving a bonus is
debited
a. at fair value.
b. at an increased amount with a corresponding decrease to the other partners’
asset contributions.
c. at a decreased amount with a corresponding increase to the other partners’
asset contributions.
d. b or c, depending on which partner is receiving the bonus.

Chapter 2 – Partnership Operations

4. A and B formed a partnership. The partnership agreement stipulates the following:
 Annual salary allowances of ₱80,000 for A and ₱40,000 for B.
 The partners share in profits and losses equally.

The partnership earned profit of ₱100,000. How much is the share of B?

a. 70,000 c. 48,000
b. 30,000 d. 52,000
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Solution:

A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining loss
(100K profit – 120K salaries) = -20K
(-20 x 50%); (-20K x 50%) (10,000) (10,000) (20,000)
As allocated 70,000 30,000 100,000

5. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of ₱10,000 for A and ₱40,000 for B.
 Bonus to A of 10% of the profit after partner’s salaries but before bonus.
 The partners share profits and losses on a 60:40 ratio.

During the period the partnership incurred a loss of ₱20,000 before deduction for
salaries. By what amount did B’s capital account change?
a. Increased by ₱12,000 c. Increased by ₱32,000
b. Decreased by ₱12,000 d. Decreased by ₱32,000

Solution:
A B Total
Amount being allocated (20,000)
Allocation:
1. Salaries 10,000 40,000 50,000
2. Bonus - - -
3. Allocation of remaining loss
(– 20K – 50K) = -70K
(-70K x 60%); (-70K x 40%) (42,000) (28,000) (70,000)
(32,000
As allocated ) 12,000 (20,000)

6. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of ₱10,000 for A and ₱40,000 for B.
 Bonus to A of 10% of the profit after partner’s salaries but before bonus and
interest.
 Interest of 12% on the beginning capital balance of A.
 The partners share profits and losses on a 60:40 ratio.

During the period the partnership earned profit of ₱200,000 before deduction for
salaries. B’s beginning capital balance was ₱60,000. How much is the share of A in the
profit?
a. 101,680 c. 110,820
b. 98,320 d. 96,720

A B Total
Amount being allocated 200,000
Allocation:
1. Salaries 10,000 40,000 50,000
2. Bonus (200K – 50K) x 10% 15,000 - 15,000
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3. Interest on capital (60K x 12%) 7,200 7,200

3. Allocation of remaining loss
(.2M – 50K – 15K – 7.2K) = 127.8K
(127.8K x 60%); (127.8K x 40%) 76,680 51,120 127,800
As allocated 101,680 98,320 200,000

7. A and B formed a partnership. The partnership agreement stipulates the following:

 First, A shall receive 2% of profit up to ₱200,000 and 5% over ₱200,000.
 Second, B shall receive 1% of the remaining profit over ₱200,000.
 Any remainder shall be shared equally.

During the year, the partnership earned profit of ₱500,000.

How much is the share of A in the profit?

a. 258,095 c. 241,095
b. 268,885 d. 241,905

Solution:
A B Total
Amount being allocated 500,000
Allocation:
1. Bonus to A
First 200K: (200K x 2%) 4,000 4,000
Over 200K: [(500K - 200K) x 5%] 15,000 15,000
2. Bonus to B
(500K - 4K - 15K – 200K) x 1% 2,810 2,810
3. Allocation of remaining profit
(500K - 4K - 15K - 2.810K) ÷ 2 239,095 239,095 478,190
As allocated 258,095 241,905 500,000

8. A, B and C formed a partnership. The partnership agreement stipulates the

following:
 Annual salary allowances of ₱100,000 for A and ₱20,000 for B.
 10% interest on the beginning capital balance of C.
 The partners share in profits and losses on a 40:40:20 ratio.

The partnership earned profit of ₱500,000. C’s capital account had a beginning
balance of ₱300,000. The difference between the amounts received by A and B is
a. 160,000. c. 80,000.
b. 240,000. d. 60,000.

Solution:
B(40 C(20
A (40%) %) %) Total
Amount being allocated 500,000
Allocation:
1. Salaries 100,000 20,000 120,000
30,00
2. Interest on capital (300K x 10%) 0 30,000
3. Allocation of remaining loss
70,00
(500K – 120K – 30K) = 350K 140,000 140,000 0 350,000
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160,00 100,0
As allocated 240,000 0 00 200,000

Answer: 240,000 – 160,000 = 80,000 difference

9. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowances of ₱80,000 for A and ₱40,000 for B.
 The partners share in profits and losses equally.

The partnership earned profit of ₱100,000 after salaries. How much is the share of B?
a. 70,000 c. 130,000
b. 30,000 d. 90,000

Solution:
Profit before salaries = 100,000 + 80,000 + 40,000 = 220,000

A B Total
Amount being allocated 220,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining profit
(220K profit – 120K salaries) = 100K
(100K x 50%); (100K x 50%) 50,000 50,000 100,000
As allocated 130,000 90,000 220,000

10. A and B formed a partnership. The partnership agreement stipulates the

following:
 Monthly salary allowances of ₱10,000 for A and ₱4,000 for B. The salaries are
recognized as expenses.
 The partners share equally in profits and losses.

The partnership earned profit of ₱360,000. How much is the share of A?

a. 300,000 c. 148,000
b. 228,000 d. 128,000

Solution:
Annual salaries:
 A: (10,000 x 12 months) = 120,000
 B: (4,000 x 12 months) = 48,000

Profit before salaries = 360,000 + 120,000 + 48,000 = 528,000

A B Total
Amount being allocated 528,000
Allocation:
1. Salaries 120,000 48,000 168,000
2. Allocation of remaining profit
(528K profit – 168K salaries) = 360K
(360K x 50%); (360K x 50%) 180,000 180,000 360,000
As allocated 300,000 228,000 528,000
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11. A and B share equally in partnership profits and losses. During the year, A’s
capital account has a net increase of ₱50,000. Partner A made contributions of
₱10,000 and capital withdrawals of ₱60,000 during the year. How much was the
partnership profit for the year?
a. 180,000 c. 210,000
b. 200,000 d. 480,000

Solution:

Step 1:
A, Capital
- beg.
Withdrawa 60,00 10,00
ls 0 0 Additional investment
? Share in profit
50,00
end. 0

Step 2:

A, Capital
- beg.
Withdrawa 60,00 10,00
ls 0 0 Additional investment
100,0 Share in profit
00 (squeeze)
50,00
end. 0

Step 3: 100,000 ÷ 50% = 200,000

12. A and B formed a partnership. The partnership agreement stipulates the

following:
 Annual salary allowance of ₱100,000 for A, the managing partner.
 10% bonus to A after salaries but before deduction for the bonus.
 The partners share in profits and losses equally.

The share of A in the partnership profit during the period was ₱595,000, including a
bonus of ₱90,000. How much was the share of B?
a. 386,000 c. 405,000
b. 398,000 d. 504,000

Solution:

Step 1:
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 100,000
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2. Bonus 90,000 90,000

3. Allocation of remaining profit

? ? ?
As allocated 595,000 ? ?

Step 2:
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 100,000
2. Bonus 90,000 90,000
3. Allocation of remaining profit

405,000(a) ? ?
As allocated 595,000 ? ?

(a)
595,000 – 100,000 – 90,000 = 405,000

Step 3:
A B Total
Amount being allocated ?
Allocation:
1. Salary of A 100,000 100,000
2. Bonus 90,000 90,000
3. Allocation of remaining profit

405,000 405,000(c) 810,000 (b)

As allocated 595,000 405,000(d) ?

(b)
405,000 ÷ 50% = 810,000
(c)
810,000 x 50% = 405,000
(d)
equal to (c)

Chapter 3 – Partnership Dissolution

Use the following information for the next eight questions:
The partners’ capital accounts in AB Partnership before the admission of a new partner
are as follows:

Capital accounts P/L ratios

200,00
A, Capital 0 60%

120,00
B, Capital 0 40%
320,000

13. C purchases 20% interest in the partnership from A for ₱120,000. How much is
the capital balance of A after the admission of C?
a. 133,333 c. 96,000
b. 24,000 d. 148,000
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(200,000 x 40%/60%) = 133,333

14. C purchases 20% interest in the partnership proportionately from A and B for
₱120,000. How much is the gain or loss recorded in the partnership books?
a. 48,000 c. 60,000
b. 56,000 d. 0

15. Using the case in #14 above, how much is the total equity of the partnership
after the admission of C?
a. 320,000 c. 240,000
b. 440,000 d. 200,000

16. C acquires 20% interest in the partnership by investing ₱120,000 to the

business. No bonus is given to C. How much is the capital balance of A after the
admission of C?
a. 200,000 c. 240,000
b. 264,000 d. 0

17. What is the P/L ratio of B after the admission of C?

a. 22% c. 32%
b. 28% d. 40%

(100% - 20% interest of C) x 40% = 32%

18. Before the admission of C, B decides to retire. A acquires B’s interest for
₱180,000. How much is the capital balance of A after the retirement of B?
a. 200,000 c. 280,000
b. 264,000 d. 320,000

19. Before the admission of C, B decides to retire. The partnership pays B ₱180,000
in settlement of his partnership interest. How much is the capital balance of A after
the retirement of B?
a. 200,000 c. 260,000
b. 140,000 d. 320,000

Solution:
Date B, Capital 120,000
A, Capital 60,000
Cash 180,000
to record the withdrawal of B from the partnership

A, Capital after B’s retirement = 200,000 – 60,000 = 140,000

20. Using the case in #18 above, how much is the total equity of the partnership
after the retirement of B?
a. 320,000 c. 240,000
b. 440,000 d. 500,000

Solution:
Date B, Capital 120,000*
A, Capital 120,000*
to record the withdrawal of B from the partnership
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* No change in total equity.

Chapter 4 – Partnership Liquidation

21. A and B decided to liquidate their partnership business. The statement of
financial position of the business shows the following information:

Assets Liabilities A, Capital (50%) B, Capital (50%)

100,000 20,000 40,000 40,000

The partners were able to convert all assets into ₱90,000 cash. How much did B
receive from the final settlement of his interest?
a. 30,000 c. 28,000
b. 35,000 d. 36,667

Solution:
Step 1: Compute for the gain or loss
Net cash proceeds 90,000
Less: Carrying amount of all assets (100,000)
Total loss (10,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right
of offset)

A (50%) B (50%) Totals

Capital balances 40,000 40,000 80,000
Allocation of loss
[10K x (50%& 50%)] (5,000) (5,000) (10,000)
Amts. received by the partners 35,000 35,000 70,000

22. A and B decided to liquidate their partnership business. The statement of

financial position of the business shows the following information:

Assets Liabilities A, Capital (50%) B, Capital (50%)

200,000 80,000 70,000 50,000

The partners were able to convert all assets into ₱180,000 cash. How much did A and
B receive from the final settlement of their interests, respectively?
a. 50,000; 50,000 c. 70,000; 30,000
b. 60,000; 40,000 d. 56,667; 43,333

Solution:
Step 1: Compute for the gain or loss
Net cash proceeds 180,000
Less: Carrying amount of all assets (200,000)
Total loss (20,000)

Step 2: Allocate the gain or loss to the partners’ capital balances (include their right
of offset)
A (50%) B (50%) Totals
Capital balances 70,000 50,000 120,000
Allocation of loss
[20K x (50%& 50%)] (10,000) (10,000) (20,000)
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Amts. received by the partners 60,000 40,000 100,000

23. Partners A, B and C decided to liquidate their partnership. A summary of the

partnership’s statement of financial position is shown below:

Cash 50,000
Noncash assets 1,200,000
Total 1,250,000

Accounts payable 100,000

Payable to A 50,000
A, Capital (40%) 400,000
B, Capital (40%) 450,000
C, Capital (20%) 250,000
1,250,00
Total
0

Three-fourths (3/4) of the noncash assets were sold for ₱920,000. The partnership paid
₱5,000 transaction costs on the sale. How much cash did C receive from the settlement
of the partners’ interests?
a. 163,000 c. 193,000
b. 186,000 d. 206,000

Solution:

Sale of noncash assets

920,000
Liquidation expenses
(5,000)
Net cash proceeds 915,000
Less: Carrying amount of non-cash assets (1,200,000)
Total loss on sale (285,000)

A (40%) B (40%) C (20%) Totals

Capital balances 400,000 450,000 250,000 1,100,000
Payable to A (right of offset) 50,000 50,000
Total 450,000 450,000 250,000 1,150,000
Allocation of loss
[285K x (40%; 40% & 20%)] (114,000) (114,000) (57,000) (285,000)
Amts. received by the partners 336,000 336,000 193,000 865,000

24. Partners A, B and C decided to liquidate their partnership. A summary of the

partnership’s statement of financial position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%) B (30%) C (50%)
20,000 480,000 30,000 100,000 170,000 200,000

Half of the noncash assets were sold for ₱370,000. The partnership paid ₱2,000
liquidation expenses. How much cash did B receive from the settlement of the
partners’ interests?
a. 163,400 c. 139,600
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b. 168,000 d. 136,400

Solution:

Net cash proceeds (370,000 – 2,000) 368,000

Less: Carrying amount of non-cash assets (480,000)
Total loss on sale (112,000)

A (20%) B (30%) C (50%) Totals

Capital balances 100,000 170,000 200,000 470,000
Allocation of loss
[112K x (20%; 30% & 50%)] (22,400) (33,600) (56,000) (112,000)
Amts. received by the partners 77,600 136,400 144,000 358,000

Use the following information for the next three questions:

Partners A, B and C decided to liquidate their partnership. A summary of the
partnership’s statement of financial position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%) B (30%) C (50%)
160,000 ? 90,000 200,000 370,000 480,000

All the noncash assets were sold for ₱870,000. The partnership paid ₱12,000
liquidation expenses.

25. How much is the carrying amount of the noncash assets?

a. 740,000 c. 980,000
b. 860,000 d. 1,020,000

Solution:
Assets Liabilities Equity
Cash Noncash A (20%) B (30%) C (50%)
160,000 980,000* 90,000 200,000 370,000 480,000

* (90,000 + 200,000 + 370,000 + 480,000 – 160,000) = 980,000

26. How much is the loss on the sale of noncash assets, including the effect of
liquidation expenses?
a. 98,000 c. 120,000
b. 112,000 d. 122,000

Solution:
Net cash proceeds (870,000 – 12,000) 858,000
Less: Carrying amount of non-cash assets (980,000)
Total loss on sale (122,000)

27. How much cash did A receive from the settlement of the partners’ interests?
a. 175,600 c. 149,600
b. 183,400 d. 128,400

Solution:
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A (20%) B (30%) C (50%) Totals

Capital balances 200,000 370,000 480,000 1,050,000
Allocation of loss
[122K x (20%; 30% & 50%)] (24,400) (36,600) (61,000) (122,000)
Amts. received by the partners 175,600 333,400 419,000 928,000

28. Partners A, B and C decided to liquidate their partnership. A summary of the

partnership’s statement of financial position is shown below:

Assets Liabilities Equity

Cash Noncash A (20%) B (30%) C (50%)
20,000 480,000 30,000 100,000 170,000 200,000

One-third of the noncash assets were sold for ₱70,000. The partnership paid ₱8,000
liquidation expenses. Partner C is insolvent. How much cash did A receive from the
settlement of the partners’ interests?
a. 12,400 c. 13,600
b. 16,800 d. 12,800

Solution:

Net cash proceeds (70,000 – 8,000) 62,000

Less: Carrying amount of non-cash assets (480,000)
Total loss on sale (418,000)

A (20%) B (30%) C (50%) Totals

Capital balances 100,000 170,000 200,000 470,000
Allocation of loss
[418K x (20%; 30% & 50%)] (83,600) (125,400) (209,000) (418,000)
Total 16,400 44,600 (9,000) 52,000
Allocation to solvent partners* (3,600) (5,400) 9,000 -
Amts. received by the partners 12,800 39,200 - 52,000

* (9,000 x 2/5 = 3,600); (9,000 x 3/5 = 5,400)

Use the following information for the next two questions:

Partners A, B and C decided to liquidate their partnership. A summary of the
partnership’s statement of financial position is shown below:

Cash 50,000
Noncash assets 1,200,000
Total 1,250,000

Accounts payable 100,000

Payable to A 50,000
A, Capital (50%) 540,000
B, Capital (30%) 360,000
C, Capital (20%) 200,000
1,250,00
Total
0

29. If a cash priority program is prepared, which partner is paid first and how much
is the total payments to that partner before all partners will share on the available
cash based on their profit or loss ratios?
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a. A, ₱20,000 c. B, ₱96,000
b. B, ₱90,000 d. B, ₱60,000

Solution:

Step 1: Determine the MLAC and Rankings

A (50%) B (30%) C (20%)

Capital balances 540,000 360,000 200,000
Payable to A (right of offset) 50,000
Total 590,000 360,000 200,000
Divide by: P/L ratios 50% 30% 20%
MLAC 1,180,000 1,200,000 1,000,000

Rankings 2nd 1st 3rd

Step 2: Equalize the MLAC

A (50%) B (30%) C (20%)
Rank of payment 2nd 1st 3rd
Maximum loss absorption capacity 1,180,000 1,200,000 1,000,000
Difference between 1st and 2nd (20,000)
Total 1,180,000 1,180,000 1,000,000
Difference between 1st, 2nd, & 3rd (180,000) (180,000)
Equal balance of MLAC 1,000,000 1,000,000 1,000,000

Step 3: Cash priority program

Cash priority program
A (50%) B (30%) C (20%)
Rank of payment 2nd 1st 3rd
1st priority (20,000 x 30%) 6,000
2nd priority (180,000 x 50% & 30%) 90,000 54,000
Totals 125,000 60,000 -

30. Three-fourths (3/4) of the noncash assets were sold for ₱920,000. The
partnership paid ₱5,000 transaction costs on the sale. How much cash did A receive
from the settlement of the partners’ interests under the cash priority program?
a. 447,500 c. 493,500
b. 386,500 d. 306,500

Solution:

Net cash proceeds (920,000 – 5,000) 915,000

Add: Cash, beg. 50,000
Less: Accounts payable (100,000)
Cash available for distribution to partners 865,000

A (50%) B (30%) C (20%) Total

Available cash 865,000
Allocation:
1st priority 6,000 (6,000)
Balance 859,000
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2nd priority 90,000 54,000 (144,000)

Balance 715,000
Payment after priority
[715K x (50%; 30% & 20%)] 357,500 214,500 143,000 (715,000)
1st installment payment 447,500 274,500 143,000 -

Chapter 5 – Corporate Liquidation & Reorganization

31. Bye-bye Corporation is undergoing liquidation. Relevant information as of
January 1, 20x1 is shown below:

Carrying Net realizable

ASSETS amounts values
Cash 200,000 200,000
Accounts receivable 500,000 450,000
Equipment - net 600,000 150,000
Land 1,000,000 1,300,000
TOTAL ASSETS 2,300,000 2,100,000

LIABILITIES
Accounts payable 700,000 700,000
Salaries payable 800,000 800,000
Notes payable 500,000 500,000
Loan payable 750,000 750,000
Total liabilities 2,750,000 2,750,000

EQUITY
Share capital 1,000,000
Deficit (1,450,000)
Capital deficiency (450,000)

TOTAL LIABILITIES &

2,300,000
EQUITY

Additional information:
 Administrative expenses expected to be incurred during the liquidation process is
₱180,000.
 The equipment is pledged as collateral security for the notes payable.
 The land is pledged as collateral security for the loan payable.

Assuming all the assets were sold, and all the liabilities were settled, equal to their
realizable values, how much would Mr. A, an unsecured non-priority creditor, would
expect to receive from his ₱500,000 claim from Bye-bye Corporation?
a. 98,312.24
b. 104,761.90
c. 130,912.34
d. 214,711,24

Assets pledged to fully secured creditors:

Land 1,300,000
Loan payable (750,000)
Available for unsecured creditors 550,000
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Assets pledged to partially secured creditors:

Equipment - net 150,000
Notes payable (500,000)
Available for unsecured creditors -

Free assets:
Excess of land over loan payable 550,000
Cash 200,000
Accounts receivable 450,000
Total free assets 1,200,000
Unsecured liabilities with priority:
Administrative expenses (180,000)
Salaries payable (800,000)
Net free assets 220,000

Unsecured liabilities with priority:

Administrative expenses 180,000
Salaries payable 800,000
980,000

Fully secured creditors:

Loan payable 750,000

Partially secured creditors:

Notes payable 500,000

Unsecured liabilities without priority:

Notes payable - excess 350,000
Accounts payable 700,000
1,050,000

Total realizable value of assets 2,100,000

Less: Unsecured liabilities with priority

Salaries (800,000)
Administrative expenses (180,000) (980,000)

Less: Fully secured liabilities

Loan payable (750,000)

Less: Secured portion of partially secured

Liabilities
Notes payable (fair value of equipment) (150,000)

Excess available to unsecured liabilities without priority (Net free

220,000
assets)

Less: Unsecured liabilities without priority

Notes payable - excess over fair value of
equipment (500K - 150K) (350,000)
Accounts payable (700,000)

Estimated deficiency to unsecured non-priority creditors (830,000)

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Net free assets

Estimated recovery percentage of unsecured
= Total unsecured liabilities without
creditors without priority
priority

= 220,000 ÷ 1,050,000 (see requirement ‘b’) = 20.95%

500,000 x 20.95% = 104,761.90

Chapter 6 – Joint Arrangements

Use the following information for the next two questions:

A, B, and C formed a joint operation. The joint operators shall make initial
contributions ₱40 each. Profit and loss shall be divided equally. The following data
relate to the joint operation’s transactions:
A B C
Joint operation 32 Cr. 40 Cr. 48 Cr.
Expenses paid from JO cash 20 8 12
Value of inventory taken 20 24 16

32. How much is the joint operation’s sales?

a. 280
b. 40
c. 80
d. 76

A
Solution:
The joint operation’s sales are computed as follows:

Joint operation

Initial contributions
(10 x 3) 120

Expenses (5 + 2 + 3) 40 280 Sales (squeeze)

120 Credit balance (8 + 10 + 12)

33. How much is the cash settlement to B?

a. ₱80 receipt
b. ₱80 payment
c. ₱32 receipt
d. ₱76 receipt
 P a g e | 17

D
Solution:
The joint operation’s profit is computed as follows:

Joint operation

Initial contributions (40 x 3) 120 280 Sales

Expenses (20 + 8 + 12) 40 60 Unsold merchandise (20+24+ 16)

180 Profit - net credit balance

Cash settlement to B is computed as follows:

Joint operation – B

Contributions 40 24 Inventory taken

Share in profit (180 ÷ 3) 60

Cash settlement - receipt 76

Use the following information for the next two questions:

A, B and C formed a joint operation for the sale of assorted fruits during the Christmas
season. Their transactions during the two-month period are summarized below:

Joint operation
Nov. 5 Merchandise-A 8,500 Nov. 15 Cash sales-C 20,400
12 Merchandise-B 7,000 18 Cash sales-C 4,200
14 Freight-in-C 200 30 Merchandise-B 1,210
Dec. 10 Purchases-C 3,500 Dec. 25 Unsold mdse. 540
charged to A
22 Selling expenses- 550
C

The joint arrangement provided for the division of gains and losses among A, B and C
in the ratio of 2:3:5. The joint operation is to close on December 31, 2008.

34. What is the joint operation profit?

a. (6,600) b. 6,600 c. 6,060 d. (6,060)
B
Solution:
Joint operation
Merchandise-A 8,500 20,400 Cash sales-C
Merchandise-B 7,000 4,200 Cash sales-C
Freight-in-C 200 1,210 Merchandise-B
Purchases-C 3,500 540 Unsold mdse. charged to A
Selling expenses-C 550
6,600 Profit - excess credit

35. What is the amount of cash that A will receive on final settlement?
 P a g e | 18

a. 9,280 b. 9,712 c. 8,500 d. 1,212

A
Solution:
Joint operation – A
Merchandise - A 8,500
1,320 540 Unsold mdse. charged to A
9,280 Receipt - excess debit

Use the following information for the next two questions:

A and B agreed on a joint operation to purchase and sell car accessories. They agreed
to contribute ₱25,000 each to be used in purchasing the merchandise, share equally in
any gain or loss, and record their joint operation transactions in their individual books.
After one year, they decided to terminate the joint operation, and data from their
records were:

A B
Joint operation 18,000 Cr. 20,200 Cr.
Expenses paid from JO cash 1,850 2,600
Value of inventory taken 1,000 1,800
36. How much is the joint operation sales?
a. 84,670 b. 88,450 c. 92,650 d. 93,350

C
Solution:
Joint operation
Merchandise-A 25,000
Merchandise-B 25,000
Expenses (1,850 +
4,450 92,650 Sales (squeeze)
2,600)
38,200 Credit balances (18K + 20.2K)

37. How much is the joint operation profit?

a. 32,880 b. 34,650 c. 41,000 d. 42,750

C
Solution:
Joint operation
Merchandise-A 25,000
Merchandise-B 25,000 92,650 Sales
Expenses 4,450 2,800 Inventory taken
41,000 Profit - excess credit

38. LL, MM and NN formed a joint operation to purchase a piece of lot and to erect
an apartment building for sale. LL is to manage the joint operation; hence, he will
receive a bonus of 10% of the joint operation’s gain before deducting the bonus as
an expense. Any remaining gain or loss is to be divided equally among the
participants. The joint operation is completed on August 31, 20x1. On this date, the
accounts of MM and NN show the following balances:
Books of
MM NN
Account with LL 16,000 Cr. 16,000 Cr.
Account with MM 32,000 Cr.
 P a g e | 19

Account with NN 18,000 Dr.

There are unused constructions supplies which LL agreed to take over at its cost of
₱42,000.Final settlement with the joint operators will require payments as follows:
a. LL pays NN ₱11, 200, and MM pays NN ₱14, 000.
b. LL pays NN ₱25, 600, and MM ₱14, 400.
c. LL pays MM ₱14, 400, and NN pays LL ₱30,800.
d. LL pays MM ₱35,600, and NN pays LL ₱14,400.

D
Solution:
The joint operation profit is computed as follows:

Joint operation
Account with LL 16,000 18,000 Account with NN
Account with MM 32,000 42,000 Unused supplies
12,000 Profit - excess credit

The joint operation profit is distributed to the joint operators as follows:

LL MM NN Total
Bonus to LL 1,200 1,200
Allocation of
balance 3,600 3,600 3,600 10,800
As allocated 4,800 3,600 3,600 12,000

The net cash settlements are computed as follows:

Joint operation - LL
Balance 16,000
Sh. In profit 4,800 42,000 Inventory taken
21,200 Payment - excess credit

Joint operation – MM
Balance 32,000
Sh. In profit 3,600 - Inventory taken
Receipt - excess debit 35,600

Joint operation – NN
18,000 Balance
Sh. In profit 3,600 - Inventory taken
14,400 Payment - excess credit

From the above computations:

 LL has a net payment of 21,200.
 MM has a net receipt of 35,600.
 NN has a net payment of 14,400.

Since LL is the designated manager, he holds the joint operation’s cash. Therefore, LL is the one who will
distribute the final cash settlement. The final settlement is as follows:
LL shall pay MM his net receipt of 35,600. In turn, LL shall receive NN’s net payment of 14,400.

39. The following are the transactions of a joint operation formed by A, B and C
during a year:
a. A contributed cash of ₱100 and merchandise costing ₱200.
 P a g e | 20

b. B contributed merchandise costing ₱400. Freight-in paid by B is ₱20.

c. C made purchases amounting to ₱100 using the cash contributed by A.
d. C paid expenses of ₱200 using its own cash.
e. C made total sales of ₱800. All the merchandise was sold except one-half of those
contributed by B.
f. C is appointed as the manager of the joint operation. As compensation, C is entitled
to a ₱30 salary plus bonus of 25% on profit after salary and bonus.
g. Interest of 10% per annum is allowed to A and B’s capital contributions.
h. C is charged for the cost of any unsold inventory. Profit or loss after necessary
adjustments shall be divided equally.

How much is B’s cash settlement?

a. 34 receipt
b. 322 receipt
c. 454 payment
d. 454 receipt

Solution:
Profit or loss is computed as follows:
Joint operation
Merchandise – A 200 800 Sales – C
Purchases - A's cash 100
Merchandise – B 400 210 Unsold inventory charged to C*
Freight - in – B 20
Expenses – C 200
Profit before salary and bonus -
90 Credit balance
Salaries expense - C 30
Profit after salary but before bonus
60 - Credit balance
Bonus expense** 12
48 Profit after salary and bonus
*Unsold inventory: (₱400 plus ₱20 freight-in) multiplied by one-half.
**Bonus is computed as follows:
P
B = P -
1 + Br
B = 60 – (60 ÷ 1.25%) = 12

Allocation to: A B C Totals

Profit before salary and bonus 90
Salary to C 30 (30)
Bonus to C 12 (12)
Profit after salary and bonus 48
Interest on capital:
A - (300 x 10%) 30 (30)
B - (420 x 10%) 42 (42)
Profit after interests on capital (24)
Allocation (24 ÷ 3) (8) (8) (8) 24
Net share - as allocated 22 34 34 -

Cash settlement is determined as follows:

Joint operation - B
 P a g e | 21

Inventory contributed 400

Freight paid 20
Net share in profit 34
Cash settlement –
receipt 454

Chapter 7 – Construction Contracts

40. 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 c. dismissal time
b. at a point in time d. either a or b

41. 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 contracts with customers. Therefore, an entity shall apply
the same principles in accounting for long-term construction contracts as those
applied to other 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

42. How much revenue is recognized in 20x2?

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

B Solution:
6M / (6M + 1.5M) = 80% x 10M = 8M revenue to date;
 P a g e | 22

1.6M / (1.6M + 6.4M) = 20% x 10M = 2M revenue in 20x1;

(8M – 2M) = 6M revenue in 20x2

43. What is the percentage completed in 20x2?

a. 60% b. 50% c. 40% d. 16%

A (80% completion to date – 20% completion in 20x1) = 60%

Chapter 8 – Accounting for Franchise Operations – Franchisor

44. State the correct sequence of the following steps of revenue recognition under
PFRS 15.
I. Determine the transaction price
II. Recognize revenue when (or as) the entity satisfies a performance obligation
III. Identify the performance obligations in the contract
IV. Allocate the transaction price to the performance obligations in the contract
V. Identify the contract with the customer

a. V, IV, II, I, III c. V, I, IV, III, II

b. V, III, I, IV, II d. V, I, III, IV, II

Use the following information for the next two questions:

On January 1, 20x1, Franchisor Co. enters into a contract with Franchisee Co. The
franchise contract gives Franchisee Co. the right to use Franchisor’s trade name and
the right to sell Franchisor’s products for a period of 4 years. The franchise requires
payment of an upfront fee of ₱1,000,000, payable at contract inception, and 5% of
future sales of the products, payable at each month-end.

The franchise contract requires Franchisor Co. to undertake activities that would
further improve its brand and its products, to which Franchisee Co. has rights, by
continuously undertaking research and development projects and marketing and
promotional activities. Although those activities do not result in the transfer of a good
or a service to Franchisee Co. as those activities occur, it is expected that Franchisee
Co. will benefit from those activities.

All of the necessary preparations were completed, and TIPPLE Co. started operations,
on January 31, 20x1.

45. How should Franchisor Co. recognize revenue from the ₱1,000,000 initial
franchise fee?
a. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 1,
20x1.
b. Recognize the ₱1,000,000 initial franchise fee as revenue in full on January 31,
20x1.
c. Recognize the ₱1,000,000 initial franchise fee as revenue throughout the license
period.
d. Any of the above, as a matter of accounting policy choice.

46. How should Franchisor Co. recognize revenue from the 5% of sales continuing
franchise fee?
 P a g e | 23

a. Franchisor Co. shall estimate the variable consideration and amortize it as

revenue over the license period.
b. Franchisor Co. shall estimate the variable consideration, subject the estimate to
the “Constraining estimates of variable consideration” principle of PFRS 15 and
amortize it as revenue over the license period.
c. Franchisor Co. shall discount the amount determined in Choice (b) above and
amortize it as revenue over the license period.
d. Franchisor Co. shall recognize revenue equal to 5% of Franchisee’s sales as and
when those sales occur.

Chapter 9 – Consignment Sales

47. ABC Co. produces a wide variety of frozen foods. Due to the faltering economy,
ABC closed its provincial sales outlets. Instead, ABC outsourced various
distributors to sell its products. Each distributor accepting delivery shall pay ABC
10% of the factory selling price of the goods delivered and accepted. However, if
the distributor fails to sell all of the goods accepted before their expiration dates,
ABC is obligated to repurchase the unsold goods. In June 20x1, ABC delivered
goods with total factory selling price of ₱10,000,000 to its distributors. ABC
received 10% of the total factory selling price of the goods delivered. When should
ABC recognize revenue from the goods delivered?
a. When the goods are shipped to the distributor.
b. When the goods are sold to the ultimate customers.
c. When the distributor pays ABC Co.
d. When ABC received the 10% of the total factory selling price of the goods
delivered.

48. Goods on consignment should be included in the inventory of

a. The consignee but not the consignor.
b. The consignor but not the consignee.
c. Both the consignor and consignee.
d. Neither the consignor nor the consignee.

49. Consignor Co. paid the in-transit insurance premium for consignment goods
shipped to Consignee Co. In addition, Consignor advanced part of the commission
that will be due when Consignee sells the goods. Should Consignor include the in-
transit insurance premium and the advanced commissions in inventory costs?
Insurance premium Advanced commission
a. Yes Yes
b. No No
c. Yes No
d. No Yes

50. Black Co., a consignee, paid the freight costs for goods shipped from White Co.,
a consignor. These freight costs are to be deducted from Black’s payment to White
when the consignment goods are sold. Until Black sells the goods, the freight costs
should be included in Black’s
a. Cost of goods sold c. Selling expenses
b. Freight-out costs d. Receivable

51. X Ltd., a large manufacturer of cosmetics, sells merchandise to Y Ltd., a retailer,

which in turn sells the goods to the public at large through its chain of retail
outlets. Y Ltd. purchases merchandise from X Ltd. under a consignment contract.
 P a g e | 24

When should revenue from the sale of merchandise to Y Ltd. Be recognized by X

Ltd.?
a. When goods are delivered to Y Ltd.
b. When goods are sold by Y Ltd.
c. It will depend on the terms of delivery of the merchandise by X Ltd. to Y Ltd.
(i.e., CIF [cost, insurance, and freight] or FOB).
d. It will depend on the terms of payment between Y Ltd. and X Ltd. (i.e., cash or
credit).

Use the following information for the next three questions:

Trumpet Co. consigned eight heavy machineries to Cold Breeze Co. Each machine
costs ₱1,000,000 and has a suggested retail price of ₱2,100,000. Trumpet paid
₱200,000 in transporting the machines to the consignee’s place of business. At the end
of the period, Cold Breeze reported three unsold machines and remitted the collections
on sales during the period, after deducting the following:
Commission (based on sales net of commission) 20%
Finder’s fee (based on commission) 5%
Delivery, installation and testing (on each unit sold) ₱50,000

Materials generated from the testing were sold for ₱5,000 and included in the
remittance to Trumpet Co.

52. How much profit is earned by the consignor from the sale?
a. 3,292,500
b. 5,375,000
c. 1,025,000
d. 3,412,500

Total sales [2,100,000 x (8-3)] 10,500,000

Cost of goods sold (a) (5,125,000)
Gross profit 5,375,000
Commission (b) (1,750,000)
Finder's fee (5% x 1,750,000) (87,500)
Delivery, installation and testing (50,000 x 5) - 5,000 scrap (245,000)
Profit 3,292,500

(a)
Cost of goods sold is computed as follows:
Unit cost 1,000,000
Freight per machine (200,000 ÷ 8) 25,000
Total unit cost 1,025,000
Multiply by: No. of machines sold 5
Cost of goods sold 5,125,000

(b)
The commission is computed as follows:
We will use the following formula for bonus after bonus:

B = P – [P ÷ (1 + Br)]

Commission = Gross sales – [Gross sales ÷ (1 + Commission rate)]

Commission = 10,500,000 – [10,500,000 ÷ (1 + 20%)]
Commission = 10,500,000 – 8,750,000
Commission = 1,750,000
 P a g e | 25

53. How much was the net remittance to the consignor?

a. 9,182,500
b. 8,417,500
c. 8,850,500
d. 7,891,500

Total sales [2,100,000 x (8-3)] 10,500,000

Commission (1,750,000)
Finder's fee (87,500)
Delivery, installation and testing (50,000 x 5) - 5,000 scrap (245,000)
Net remittance 8,417,500

54. How much is the cost of the unsold machineries?

a. 3,075,000
b. 2,987,000
c. 1,025,000
d. 1,000,000

Unit cost before freight 1,000,000

Freight per machine (200,000 ÷ 8) 25,000
Total unit cost 1,025,000
Multiply by: No. of unsold machines 3
Ending inventory 3,075,000

Chapter 10 – Installment Sales Method

55. HEARTY WARM & SINCERE Co. uses the “installment sales method.”
Information on HEARTY’s transactions during 20x1 and 20x2 is shown below:
20x1 20x2
Installment sales 4,000,000 4,800,000
Cost of sales 2,400,000 2,640,000
Gross profit 1,600,000 2,160,000
Cash collections from:
20x1 sales 1,600,000 800,000
20x2 sales 1,920,000

How much is the realized gross profit in 20x2?

a. 1,484,000
b. 1,284,000
c. 1,184,000
d. 984,000

C
20x1: 800,000 x (1.6M / 4M) = 320,000
20x2: 1,920,000 x (2.16M / 4.8M) = 864,000
320,000 + 864,000 = 1,184,000

56. RIBALD OFFENSIVE Co. uses the installment method. On December 31, 20x3,
RIBALD Co.’s records show the following balances:
Deferred gross profit (before year-end adjustments) 2,252,000
Installment receivable - 20x2 960,000
Installment receivable - 20x3 2,400,000
 P a g e | 26

Gross profit rate in 20x2 is 24% based on sales while gross profit rate in 20x3 is
331/3% based on cost.

How much is the realized gross profit in 20x3?

a. 982,600
b. 1,014,200
c. 1,291,600
d. 1,421,600

D Solution:
DGP (before year-end adjustments) 2,252,000
Less: Adjusted balance of deferred gross profit:
Installment receivable,20x2 x GPR
(960K x 24%) 230,400
Installment receivable,20x3 x GPR
(2.4M x 331/3%/1331/3%) 600,000 830,400
Decrease in DGP - Realized gross profit 1,421,600

57. VISAGE APPEARANCE Co. uses the installment method. The following
information was taken from VISAGE’s records:
20x1 20x2
Installment sales ? ?
Cost of sales 1,200,000 1,320,000
Installment receivable - 20x1 1,200,000 800,000
Installment receivable - 20x2 1,440,000
Gross profit rates based on sales 40% 45%

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

a. 492,000
b. 506,000
c. 582,000
d. 592,000

D Solution:
Installment receivable - 20x1, Jan. 1, 20x2 1,200,000
Installment receivable - 20x1, Dec. 31, 20x2 (800,000)
Decrease representing collections during the year 400,000
Multiply by: Gross profit rate 40%
Realized gross profit in 20x2 from 20x1 sale 160,000

Installment sales - 20x2 (1.32M / 55%*) 2,400,000

Installment receivable - 20x2 (1,440,000)
Decrease representing collections during the year 960,000
Multiply by: Gross profit rate 45%
Realized gross profit in 20x2 from 20x1 sale 432,000

Total realized gross profit - 20x2 592,000

*Cost ratio or 100% less 45% gross profit rate

Use the following information for the next two questions:

 P a g e | 27

DECORTICATE PEEL Co. uses the installment method. The following information was
taken from DECORTICATE’s records:
20x1 20x2
Deferred gross profit (adjusted ending balances):
from 20x1 sale 480,000 320,000
from 20x2 sale 648,000
Gross profit rates based on sales 40% 45%
Cash collections from:
20x1 sales 800,000 400,000
20x2 sales 960,000

58. How much are the balances of installment receivables on December 31, 20x2?
From 20x1 From 20x2
a. 800,000 1,440,000
b. 2,000,000 2,400,000
c. 1,440,000 800,000
d. 2,400,000 2,000,000

Deferred gross profit - 20x1 sale, Dec. 31, 20x2 320,000

Divide by: Gross profit rate 40%

Installment receivable - 20x1, Dec. 31, 20x2 (a) 800,000

Add back: Collections from 20x1 sales (800K + 400K) 1,200,000

Installment sale - 20x1 (b) 2,000,000

Deferred gross profit - 20x2 sale 648,000

Divide by: Gross profit rate 45%

Installment receivable - 20x2, Dec. 31, 20x2 (a) 1,440,000

Add back: Collections from 20x2 sales 960,000

Installment sale - 20x2 (b) 2,400,000

59. Compute for the installment sales in 20x1 and 20x2.

20x1 20x2
a. 800,000 1,440,000
b. 2,000,000 2,400,000
c. 1,440,000 800,000
d. 2,400,000 2,000,000

60. PERAMBULATE STROLL Co. uses the installment method. The following
information was taken from PERAMBULATE’s records:

20x1 20x2
Installment sales 2,000,000 2,400,000
Cost of sales 1,200,000 1,320,000
Cash collections from:
20x1 sales 800,000 400,000
 P a g e | 28

20x2 sales 960,000

How much is the total deferred gross profit on December 31, 20x2?
a. 320,000
b. 1,440,000
c. 648,000
d. 968,000

Solution:
Gross profit rate - 20x1: [(2M-1.2M)/2M] 40%
Gross profit rate - 20x2: [(2.4M-1.32M)/2.4M] 45%

Installment sale - 20x1 2,000,000

Cash collections (800K + 400K) (1,200,000)
Installment receivable - 20x1, Dec. 31, 20x2 800,000
Multiply by: GPR 40%
Deferred gross profit - 20x1, Dec. 31, 20x2 320,000

Installment sale - 20x2 2,400,000

Cash collections (960,000)
Installment receivable - 20x2, Dec. 31, 20x2 1,440,000
Multiply by: GPR 45%
Deferred gross profit - 20x2, Dec. 31, 20x2 648,000

Total deferred gross profit - Dec. 31, 20x2 (320K + 648K) 968,000

61. PHILANDERING FLIRTING Co. uses the installment method. PHILANDERING

Co. has the following collection policy on its installment sales:
 20% down payment
 Balance collectible as follows: 50% in the year of sale, 30% in the second year, and
20% in the third year.
 Installment sales during 20x1, 20x2 and 20x3 were ₱2,400,000, ₱3,000,000 and
₱3,600,000, respectively.
 Gross profit rate throughout the three years was 40% based on sales.

How much is the total realized gross profit in 20x3?

a. 1,440,000
b. 3,264,000
c. 1,305,000
d. 950,400

Solution:
20x1 20x2 20x3
Installment sales 2,400,000 3,000,000 3,600,000
Down payment (20%) 480,000 600,000 720,000
Collection of balance:
- from 20x1 sales:
1st yr. [(2.4M x 80%*) x 50%]; 2nd yr. [(2.4M
x 80%) x 30%]; 3rd yr. [(2.4M x 80%) x 20%] 960,000 576,000 384,000
1,200,000 720,000
 P a g e | 29

- from 20x2 sales:

1st yr. [(3M x 80%) x 50%];
2nd yr. [(3M x 80%) x 30%];
1,440,000
- from 20x3 sales
1st yr. [(3.6M x 80%) x 50%]
Total collections 1,440,000 2,376,00 3,264,000
Multiply by: Gross profit rate 40% 40% 40%
Realized gross profits 576,000 950,400 1,305,600
*100% less 20% down payment = 80% balance

Chapter 11 – Home office, Branch & Agency Accounting

62. 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)

A
Solution:

(Home office books) (Branch books)

Investment in
branch Home office
Dr./(Cr.) (Dr.)/Cr.
Unadjusted balance 380,000 528,000
(a) Allocated expense not recorded in full - 40,000
(b) Erroneous credit by home office 100,000 -
(c) Erroneous correcting entry - (100,000)
(d) Erroneous debit memo - 12,000
Net adjustments - Requirement (a) 100,000 (48,000)
Adjusted balances - Requirement (b) 480,000 480,000
 P a g e | 30

Use the following information for the next eleven questions:

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

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

63. What is the billing rate based on cost?

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

D
Solution:
Billing rate based Billings to branch by home office
on cost = Shipments to branch
= 2,500,000 ÷ 2,000,000 = 125%

64. What is markup percentage based on cost?

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

B
Solution:
Markup percentage Allowance for markup
based on cost = Shipments to branch
= 500,000 ÷ 2,000,000 = 25%

65. 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

A - ₱2,800,000 – the sales by branch.

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

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

A
Solution:
Total unrealized markup
(or unadjusted balance of allowance account)
(or 2,500,000 x 25%/125%) 500,000
Less: Unrealized markup in ending inventory
(250K x 25%/125%) (200,000)
Realized markup 300,000

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

C
Solution:
Inventory, beg. (at cost) -
Shipments from home office (at cost) (2.5M ÷ 125%) 2,000,000
Total goods available for sale 2,000,000
Inventory, end (at cost) (1M ÷ 125%) (800,000)
Cost of goods sold (at cost) 1,200,000

68. 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

D (1,000,000 ÷ 125%) = 800,000

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

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

A (1,000,000 x 25%/125%) = 200,000

70. 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

A
Solution:
Allowance for markup – unadjusted 500,000
Realized markup (300,000)
Allowance for markup - end. 200,000

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

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

B
Solution:
Sales 2,800,000
Cost of sales:
Inventory, beg. -
Shipments from home office 2,500,000
Total goods available for sale 2,500,000
Inventory, end. (1,000,000) (1,500,000)
Individual gross profit of branch 1,300,000
Operating expenses (400,000)
Individual profit of branch 900,000

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

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

A
Solution:
Sales 2,800,000
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Cost of sales:
Inventory, beg. -
Shipments from home office - at cost
2,000,000
(625K ÷ 125%)
Total goods available for sale 2,000,000
Inventory, end. - at cost
(800,000) (1,200,000)
(250K ÷ 125%)
True gross profit of branch 1,600,000
Operating expenses (400,000)
True profit of branch 1,200,000

73. How much is the adjusted balance of the branch current account immediately
prior to combining the financial statements?
a. 3,200,000 b. 3,400,000 c. 3,500,000 d. 3,666,667

C
Solution:
Branch current (or Investment in branch) – unadjusted 2,600,000
Individual profit of branch 900,000
Branch current – adjusted 3,500,000

74. The home office transfers inventory worth P600,000 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

D - Savings on freight are not accounted for.

Chapter 12 – Insurance Contracts

75. Insurance risk includes which of the following?
a. lapse or persistency risk c. expense risk
b. financial risk d. pure risk

Use the following information for the next two questions:

Entity A obtains insurance 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.

76. The contract between Entity B and Entity C is

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

77. How should Entity C account for the insurance contract with Entity B?
a. using the general model or the premium allocation approach
 P a g e | 33

b. using the modified version of the general model applicable for reinsurance
contracts held
c. using the modified version of the general model applicable for onerous
insurance contracts
d. a or b, as an accounting policy choice

78. PFRS 17 requires an entity to combine its insurance contracts into portfolios
and further subdivide the insurance contracts comprising each portfolio into
groups. Which of the following is not one of the groups of insurance contracts
within a portfolio?
a. those that are onerous at initial recognition
b. those that, at initial recognition, have no significant possibility of becoming
onerous in subsequent periods
c. those that are neither onerous at initial recognition nor expected to become
onerous in subsequent periods
d. those that pay premiums at initial recognition which are to be measured using
the simplified approach

79. The significant risk that is transferred from the policyholder to the issuer of an
insurance contract is
a. lapse or persistency risk. c. expense risk.
b. financial risk. d. insurance risk.

80. 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

81. Which of the following is not one of the characteristics of an insurance contract?
a. transfer of significant insurance risk from the policyholder to the issuer
b. policyholder pays the issuer for the transfer of risk
c. issuer indemnifies the policyholder for losses when the insured event occurs
d. transfer of significant insurance risk from the issuer to the policyholder

82. 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

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.

83. The contract between Entity A and Entity B is

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

84. How should Entity B account for the insurance contract with Entity C?
a. using the general model
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b. using the modified version of the general model applicable for reinsurance
contracts held
c. using the modified version of the general model applicable for onerous
insurance contracts
d. using the model applicable for onerous insurance contracts
e. any of these as a matter of accounting policy choice

85. According to PFRS 17, an insurance contract is not derecognized when

a. it is extinguished.
b. it has expired.
c. its terms have been modified and the modification is substantive.
d. its terms have been modified and the modification is not substantive.

Chapter 13 – Accounting for BOT

86. Under a BOT arrangement that is within the scope of IFRIC 12, the operator
(choose the incorrect statement)
a. is a private entity.
b. receives a right and incurs an obligation to provide public services
c. acts as a service provider.
d. is a public sector entity.

87. Which of the following contracts is within the scope of IFRIC 12 Service
Concession Arrangements?
a. ABC Co., a private entity, wins a government bid to provide computer equipment
to be used in the upcoming elections.
b. DEF Co., a private entity, wins a government bid to operate a canteen in a
government agency office.
c. XYZ, Inc., a private entity, wins a government bid to provide internet access to
all government offices and cellular phones and plans to all government
employees.
d. GHI Co., a private entity, wins a government bid to construct, operate and
maintain for 25 years an expressway. At the end of the contract, GHI Co. shall
handover the express way to the government.

88. How should the operator in a BOT contract subsequently measure the
consideration from the contract that is in the form of a financial asset?
a. at amortized cost
b. at fair value through other comprehensive income
c. at fair value through profit or loss
d. any of these

89. An operator under a service concession arrangement may capitalize borrowing

costs during the construction phase of the contract in accordance with PAS 23 if
a. the consideration in the contract is in the form of a financial asset
b. the consideration in the contract is in the form of an intangible asset
c. a or b
d. neither a nor b

STANDARDS
90. You are an accountant. Your client, a franchisor, asked you for an advice
regarding the accounting for revenues from a franchise contract. Your advice to
your client would most certainly be based on which of the following standards?
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a. FAS No. 45 (US GAAP)

b. PFRS 15
c. PAS 15
d. PFRS 18

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