1. CPA Inc. is a manufacturer of televisions.

The domestic market for electronic goods is

currently not doing well, and therefore many entities in this business are switching to
exports. As per the audited financial statements for the year ended December 31, 2021,
the entity had net losses of Php2 million. At December 31, 2021, its current assets
aggregate to Php20 million and the current liabilities aggregate to Php25 million. Due to
expected favorable changes in the government policies for the electronics industry, the
entity is projecting profits in the coming years. Furthermore, the shareholders of the
entity have arranged alternative additional sources of finance for its expansion plans and
to support its working needs in the next 12 months.

Required: Should CPA Inc. prepare its financial statements under the going concern
assumption? Why? State the factors

2. Perseverance Inc. purchases motorcycles from various countries and exports them to
Madrid Spain. Perseverance has incurred these expenses during 2021:
a. Cost of purchases (based on vendors’ invoices)
b. Trade discounts on purchases
c. Import duties
d. Freight and insurance on purchases
e. Other handling costs relating to imports
f. Salaries of accounting department
g. Brokerage commission payable to indenting agents for arranging imports
h. Sales commission payable to sales agents
i. After-sales warranty costs

Required: Perseverance Inc. is seeking your advice on which costs are permitted under
PAS 2 to be included in cost of inventory.

3. PATIENCE Inc., as part of its cash management activities, invested Php10 million in
redeemable preference shares (within three months from the date of their redemption).
To do so, PATIENCE instructed its bank to use a maturing time deposit (a two-month
fixed deposit) with the bank.

Required: Determine how PATIENCE Inc. would treat in its cash flow statement the cash
outflows resulting from the investment of funds in redeemable preferred shares and the
cash inflows resulting from the withdrawal of funds from the bank by using a maturing
time deposit.

4. On January 1, 2020, Success Inc. issued convertible bonds with conversion to take place
on or before the expiry of two years from the date of issuance of the debt. On December
15, 2021, the board of directors of Success Inc. decided to convert the bonds at year-end
and issue equity shares.

Required: How would Success Inc. treat this transaction in its cash flow preparation?

5. In the case of an entity when measuring employee stock option an estimate of employee
turnover is calculated based on the available information on the grant date. The
accountant of entity DREAM BIG INC excluded certain vital information derived by HR
department so that historical employee turnover of 35% will be drastically reduced to
just little over 5% in future because of effective HR management. Hence, there was under
 estimation of employee benefits arising out of employee stock option in the year of grant.
There was a 4 years of vesting period. In the year 3, there arises a need for revision of
accounting estimate as there was lower employee turnover.

Required: Should the above classified as change in accounting estimate and accounted
for in accordance with PAS 8?

6. During the year 2020, Passer Corp. was sued by a competitor for Php15 million for
infringement of a trademark. Based on the advice of the company’s legal counsel, Passer
Corp. accrued the sum of Php10 million as a provision in its financial statements for the
year ended December 31, 2020. Subsequent to the balance sheet date, on February 15,
2021, the Supreme Court decided in favor of the party alleging infringement of the
trademark and ordered the defendant to pay the aggrieved party a sum of Php14 million.
The financial statements were prepared by the company’s management on January 31,
2021, and approved by the board on February 20, 2021.

Required: Should Passer Corp. adjust its financial statements for the year ended
December 31, 2020?

7. An entity has spent Php600,000 in developing a new product. These costs meet the
definition of an intangible asset under PAS 38 and have been recognized in the balance
sheet. Local tax legislation allows these costs to be deducted for tax purposes when they
are incurred. Therefore, they have been recognized as an expense for tax purposes. At
the year-end the intangible asset is deemed to be impaired by Php50,000.

Required: Calculate the tax base of the intangible asset at the accounting year-end.

8. Richer Inc. is installing a new plant at its production facility. It has incurred these costs:
a. Cost of the plant (cost per supplier’s invoice plus taxes)
2,500,000
b. Initial delivery and handling costs
200,000
c. Cost of site preparation
600,000
d. Consultants used for advice on the acquisition of the plant
700,000
e. Interest charges paid to supplier of plant for deferred credit
200,000
f. Estimated dismantling costs to be incurred after 7 years
300,000
g. Operating losses before commercial production
400,000

Required: Please advise Richer Inc. on the costs that can be capitalized in accordance
with PAS 16.
9. On 1 January 2021 an entity paid one of its employees Php1,000 for work performed in
the manufacture of the entity’s goods in December 2020. All of the goods manufactured
by the employee in December were sold to the entity’s customers by 31 December 2020.

Required: How should the entity recognize the Php 1,000 at December 31, 2020?

10. Wiser Corp. received a grant of Php150 million to install and run a windmill in an
economically backward area. Wiser Inc. has estimated that such a windmill would cost
Php250 million to construct. The secondary condition attached to the grant is that the
entity should hire labor in the local market (i.e., from the economically backward area
where the windmill is located) instead of employing workers from other parts of the
country. It should maintain a ratio of 1:1 local workers to workers from outside in its
labor force for the next 5 years. The windmill is to be depreciated using the straight-line
method over a period of 10 years.

Required: Advise Wiser Corp. on the treatment of this grant in accordance with PAS 20.

11. An entity buys inventory from a foreign supplier for EUR4 million. The functional
currency of the entity is the dollar. The date of the order was March 31, 2021, the date of
shipping was April 7, 2021, the date of the invoice was April 8, 2021, the date the goods
were received was April 15, 2021, and the date the invoice was paid was May 31, 2021.

Required: What is the date of the transaction for the purpose of recording the purchase of
inventory?

12. Facts
a. Wonderful Inc. engaged a consulting firm to advise it on many projects that it had
been planning to undertake in order to diversify its operations and enhance its
public image and ratings. With this mandate, the consulting firm set out to prepare
a feasibility study for the construction of a shopping mall that would house anchor
tenants such as world-class international designers and well-known global retail
chains. The consulting firm advised Wonderful Inc. that this kind of a project
would do wonders to its corporate image. This shopping mall had certain
distinguishing features that were unique in many respects, and it could easily win
the coveted title of the most popular commercial complex in the country. Based on
this advice, Wonderful Inc. began construction of the shopping mall on a huge plot
of land in the heart of the city. Substantial amounts were spent on its construction.
Architects from around the globe competed for the project, and the construction
was entrusted to the best construction firm in the country. The construction took
over two years from the date the project was launched. The total cost of
construction was financed by a term loan from an international bank.
b. The consulting firm also advised Wonderful Inc. to launch a car dealership that
deals only in world-renowned, expensive brand names, such as Audi and BMW.
According to the research study undertaken by the consulting firm, this would be
 yet another business to diversify and invest in order to enhance the corporate
image of Wonderful Inc. with people who matter, as such an exclusive car
dealership would cater only to the needs of the top management of multinational
corporations (MNCs) operating in the country. Wonderful Inc. invested in this
business by borrowing funds from major local banks. Besides the corporate
guarantees Wonderful Inc. gave to the banks, they also insisted on depositing with
the banks title deeds of the cars as security for the loans until the entire loan
amounts remain unpaid.

Required:
a. Would the shopping mall be considered a qualifying asset under the Standard?
Would the interest expense on the term loan borrowed for the construction of the
shopping mall qualify as eligible borrowing costs?
b. Would the expensive cars purchased by the car dealership be considered qualifying
assets under the Standard, thereby making it possible for Wonderful Inc. to
capitalize the borrowing costs, which are substantial compared to the costs of the
cars? Would borrowing costs include guarantee commission paid to banks for
arranging corporate guarantees in addition to interest expense on bank loans?

13. Fascinating Inc. is a manufacturer of automobile spare parts. It transacts business

through a business model that has worked for several years and has made the entity a
successful enterprise that is rated in the top 10 businesses in its field by a trade journal.
Fascinating Inc. believes in working with reliable and dependable vendors and also sells
only to entities that it can either control or exercise significant influence over. The
business model works in this way:
a. Fascinating Inc. purchases everything it needs from Magnificent Inc., a well-
known supplier. Due to the high quality of the material that Magnificent Inc. has
provided over the last 10 years, Fascinating Inc. has never purchased from any
other supplier. Thus it may be considered economically dependent on
Magnificent Inc.
b. Fascinating Inc. sells 70% of its output to a company owned by a director and the
balance to an entity that is its “associate” by virtue of Fascinating Inc. owning
35% of the share capital of that company.
c. Fascinating Inc. stores inventory in a warehouse that is leased from the wife of its
director. The lease rentals are at arm’s length.
d. Fascinating Inc. has provided an interest-free loan to a company owned by the
chief executive officer (CEO) of Fascinating Inc. for the purposes of financing the
purchase of delivery vans which the company owned by the CEO is using for
transporting goods from the warehouse of the supplier to the warehouse used by
Fascinating Inc. for storing inventory.

Required: Based on the requirements of PAS 24, identify which transactions would need
to be disclosed as related party transactions under PAS 24.

14. Marvelous Corp owns 22% of Company Y and is entitled to appoint two directors to the
board, which consists of eight members. The remaining 78% of the voting rights are held
by two other companies, each of which is entitled to appoint three directors. The board
makes decisions on the basis of a simple majority. Because board meetings are often held
at very short notice, Marvelous Corp does not always have representation on the board.
Often the suggestions of the representative of Marvelous Corp are ignored, and the
decisions of the board seem to take little notice of any representations made by the
director from Marvelous Corp.
 Required: Should Marvelous Corp account its investment to Company Y under equity
method?

15. An entity keeps three weeks’ inventory of raw materials on hand and has a substantial
amount of finished goods inventory. The entity operates in a hyperinflationary
environment.

Required: Advise the entity as to how to restate its inventory.

16. Outstanding Corp is evaluating whether each of these items is a financial instrument and
whether it should be accounted for under PAS 32:

a. Cash deposited in banks

b. Gold bullion deposited in banks
c. Trade accounts receivable
d. Investments in debt instruments
e. Investments in equity instruments, where Outstanding Corp does not have
significant influence over the investee
f. Investments in equity instruments, where Outstanding Corp has significant
influence over the investee
g. Prepaid expenses
h. Finance lease receivables or payables
i. Deferred revenue
j. Statutory tax liabilities
k. Provision for estimated litigation losses
l. An electricity purchase contract that can be net settled in cash
m. Issued debt instruments
n. Issued equity instruments

Required: Help Outstanding Corp to determine (1) which of the above items meet the
definition of a financial instrument and (2) which of the above items fall within the
scope of PAS 32.

17. An entity issues 4 million convertible bonds at January 1, 2021. The bonds mature in
three years and are issued at their face value of Php10. The bonds attract interest arrears.
Each bond can be converted into two ordinary shares. The company can settle the
principal amount of the bonds in ordinary shares or in cash. When the bonds are issued,
the interest rate for a similar debt without the conversion rights is 10%. At the issue date
the market price of an ordinary share is Php4. Ignore taxation. The company is likely to
settle the contract by issuing shares.

Profit attributable to ordinary shareholders to December 31, 2021

Php33 million
Ordinary shares outstanding
10 million

Allocation of proceeds of bond:

Liability
Php30 million
Equity
Php10 million
 Total
Php40 million

Required: Calculate basic and diluted earnings per share for the year to December 31,
2021.

18. Triumph Corp, an entity publicly quoted on a stock exchange, owns 15% of the equity
capital of Glee Inc. This equity investment is classified as “available for sale” under PFRS
9. The year-end of Triumph Corp is December 31, 2021, and an interim report has been
prepared at June 30, 2021, using PAS 34. At January 1, 2021, the fair value of the
investment in Glee Inc was Php2 million. The investment in Glee Inc was deemed to be
impaired at June 30, 2021, and an impairment loss of Php500,000 was determined at that
date. However, at December 31, 2021, the fair value of the investment in Glee Inc had
risen to Php2.3 million.

Required: Explain how the preceding transaction should be shown in the financial
statements for the period to December 31, 2021.

19. An entity is preparing its financial statements for the year ending November 30, 2021.
Certain items of plant and equipment were scrapped on January 1, 2022. At November
30, 2021, these assets were being used in production by the entity and had a carrying
value of Php5 million. The value-in-use of the asset at November 30, 2021, was deemed
to be Php6 million, and its fair value less costs to sell was thought to be Php50,000 (the
scrap value).

Required: What is the recoverable amount of the plant and equipment at November 30,
2021?

20. Superb Inc. is an oil entity that is exploring oil off the shores of Hundred Islands. It has
employed oil exploration experts from around the globe. Despite all efforts, there is a
major oil spill that has grabbed the attention of the media. Environmentalists are
protesting and the entity has engaged lawyers to advise it about legal repercussions. In
the past, other oil entities have had to settle with the environmentalists, paying huge
amounts in out-of-court settlements. The legal counsel of Superb Inc. has advised it that
there is no law that would require it to pay anything for the oil spill; the parliament of
Hundred Islands is currently considering such legislation, but that legislation would
probably take another year to be finalized as of the date of the oil spill. However, in its
television advertisements and promotional brochures, Superb Inc. often has clearly
stated that it is very conscious of its responsibilities toward the environment and will
make good any losses that may result from its exploration. This policy has been widely
publicized, and the chief executive officer has acknowledged this policy in official
meetings when members of the public raised questions to him on this issue.

Required: Does the above give rise to an obligating event that requires Superb Inc. to
make a provision for the cost of making good the oil spill? State the factors

21. Costs generally incurred by a newly established entity include

a. Preopening costs of a business facility