QUIZ - PAS 10 and PAS 8

Multiple Choice

Identify the choice that best completes the statement or answers the question.

1. Which of the following is not a counterbalancing error?

a. An understatement of purchases in the current period because the invoice was received
late.

b. Omission of depreciation for equipment purchased during the current period.

c. Omission of an adjustment to take up the unused supplies during the period.

d. Understatement of accrued salaries expense.

2. A company using a periodic inventory system neglected to record a purchase of merchandise on account at
yearend. This merchandise was omitted from the yearend physical count. How will these errors affect assets,
liabilities, and equity at yearend and net earnings for the year?

Assets Liabilities Equity Net Earnings

a. No effect Understate Overstate Overstate

b. No effect Overstate Understate Understate

c. Understate Understate No effect No effect

d. Understate No effect Understate Understate

3. Which of the following is true in distinguishing retrospective and prospective?

I Most, but not all, changes in accounting policy are reported using the retrospective approach. T

II Prior years' financial statements are restated when the prospective approach is used. F

III The after-tax cumulative adjustment on income is no longer required for changes in accounting
policy. T

a. I and III only (not sure) c. II and III only

b. I and II only d. I, II and III

4. Which of the following is not true?

I Changes in accounting policy require a disclosure justifying the change in the first set of financial statements
that the change is made. T

II All changes reported using the retrospective approach require adjustments for prior period errors. F

III All changes in estimate are accounted for retrospectively. F

a. I and III only c. II and III only (not sure)

b. I and II only d. I, II and III

5. Which of the following is incorrect?

I Both changes in accounting estimates and material error corrections are reported prospectively. F

II A change from straight-line depreciation to the declining balance method to record the decline in the
carrying amount of property, plant, and equipment requires use of the retrospective approach.

a. I only* c. Both I and II

b. II only d. Neither I nor II

6. Which of the following statements is/are true?

I A change in accounting policy does not require note disclosure in the current year financial statements.

II Error corrections require restatement of all the affected prior year financial statements reported in
comparative financial statements. T

a. I only c. Both I and II

b. II only d. Neither I nor II

7. Which of the following changes would not be accounted for using the prospective approach?

a. a change in the net realizable value of inventory

b. a change from measuring inventory from cost to lower of cost and net realizable value

c. a change from straight-line to double-declining-balance depreciation

d. a change from double-declining-balance to straight-line depreciation

8. The modified retrospective approach requires ______.

 a. a modification of prior years' financial statements

b. a journal entry to adjust account balances in the beginning of the year of change

c. both a modification of prior years' financial statements and a journal entry to adjust
account balances in the beginning of the year of change

d. neither a modification of prior years' financial statements nor a journal entry to adjust
account balances in the beginning of the year of change

9. Which of the following would not be accounted for using the retrospective approach?

a. a change from weighted-average to FIFO inventory costing

b. a change from the cost method to the revaluation method for properties with known
market values

c. a change in depreciation methods

d. a change from the fair value model to the cost model for investment properties

10. Which of the following statements is true regarding correcting errors in previously issued financial statements
prepared in accordance with International Financial Reporting Standards (IFRS)?

a. The error can be reported in the current period if it's not considered practicable to report it
prospectively.

b. The error can be reported in the current period if it's not considered practicable to report it
retrospectively.

c. Retrospective application is required with no exception.

d. none of these

The next item(s) is/are based on the following

EZE COMPANY underwent a restructuring in 2015. The company conducted a thorough internal audit, during
which the following facts were discovered. The audit occurred during 2015 before any adjusting entries or closing
entries are prepared.

A Additional printers were acquired at the beginning of 2013 and added to the company's office network. The
P45,000 cost of the printers was inadvertently recorded as maintenance expense. The printers have five-year
useful lives and no material salvage value. This class of equipment is depreciated by the straight-line method.
 B Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the expenditure as
office supplies. The error was discovered a week later.

C On December 31, 2014, inventory was understated by P112,000 due to a mistake in the physical inventory
count. The company uses the periodic inventory system.

D Three years earlier, the company recorded a 3% stock dividend (12,000 ordinary shares, PI par) as follows:

Retained earnings 12,000

Ordinary share capital 12,000

The shares had a market price at the time of P10 per share.

E At the end of 2014, the company failed to accrue interest expense that accrued during the last four months of
2014 on bonds payable. The bonds which were issued at face value mature in 2019. The following entry was
recorded on March 1, 2015, when the semiannual interest was paid

Interest expense 180,000

Cash 180,000

F A three-year insurance policy was purchased at the beginning of 2014 for P216,000. The full premium was
debited to insurance expense at the time.

Based on the preceding information, determine the following: (Ignore tax effects.)

11. The entry to correct the error described in item A should include a

a. Debit to equipment - P18,000.

b. Credit to retained earnings - 27,000.

c. Debit to depreciation expense - P27,000.

d. Credit to accumulated depreciation - P18,000.

12. The entry to correct the error described in item D should include a
 a. Credit to share premium - P120,000.

b. Debit to retained earnings - P108,000.

c. Debit to retained earnings - P120,000.

d. Credit to ordinary share capital - P108,000.

13. The accrued interest payable account balance at December 31, 2015 should be

a. P60,000 c. P180,000

b. P120,000 d. P240,000

14. The prepaid insurance account balance at December 31, 2015 should be

a. P 0 c. P144,000

b. P72,000 d. P216,000

15. The correct interest expense on bonds for 2015 is

a. P120,000 c. P360,000

b. P180,000 d. P400,000

16. On January 4, 2013, GUYANA, INC. purchased computer hardware for P600,000. On the date of acquisition,
Guyana's management estimated that the computers would have an estimated useful life of 5 years and would have
a residual value of P60,000. The company used the double declining-balance method to depreciate the computer
hardware.

In January 2014, Guyana's management realized that technological advancements had made the computers
virtually obsolete and that they would have to be replaced. Management decided to change the estimated useful life
of the computer hardware to 2 years.

How much depreciation on computer hardware should be recorded in 2014?

a. P144,000 c. P300,000

b. P120,000 d. P360,000
 The next item(s) is/are based on the following

TONGA COMPANY decided on January 2, 2014, to review its accounting practices. This is due to changing
economic conditions and to make its financial statements more comparable to those of other companies in its
industry.

The following changes will be effective as of January 1, 2014:

1 Tonga decided to change its allowance for bad debts from 2% to 4% of its outstanding receivables balance.
Tonga's receivable balance at December 31, 2014, was P690,000. Allowance for bad debts had a debit balance
of P2,000 before adjustment.

2 Tonga decided to use the straight-line method of depreciation on its equipment instead of the sum-of-the-
years'-digits method. It was also decided that this asset has 10 more years of useful life as of January 2, 2014.
The equipment was purchased on January 1, 2004, at a cost of P1,100,000. On the acquisition date, it was
estimated that the equipment would have a 15-year useful life with no residual value.

17. The entry to record the current year provision for bad debts is

a. Bad debt expense 29,600

Allowance for bad debts 29,600

b. Allowance for bad debts 29,600

Bad debt expense 29,600

c. Bad debt expense 25,600

Allowance for bad debts 25,600

d. Allowance for bad debts 25,600

Bad debt expense 25,600

18. What is the amount of depreciation on equipment for the current year?

a. P45,833 c. P13,750

b. P9,167 d. P32,083
 The next item(s) is/are based on the following

In the past, PERU COMPANY has depreciated its computer hardware using the straight-line method. The
computer hardware has a 10% salvage value and an estimated useful life of 5 years. As a result of the rapid
advancement in information technology, management of Peru has determined that it receives most of the benefits
from its computer facilities in the first few years of ownership. Hence, as of January 1, 2014, Peru proposes
changing to the sum-of-the-years'-digits method for depreciating its computer hardware. The following computer
purchases were made by Peru at the beginning of each year.

2011 P90,000

2012 50,000

2013 60,000

19. How much depreciation expense was recorded by Peru in 2011, 2012, and 2013?

2011 2012 2013

a. P18,000 P28,000 P40,000

b. 36,000 36,000 36,000

c. 16,200 36,000 36,000

d. 16,200 25,200 36,000

20. The amount of depreciation expense that should be recognized in 2014 is

a. P21,240 c. P52,380

b. P63,280 d. P34,200

21. Throw Company began operations on January 1, 2013. Prior to any adjustments, the retained earnings
account is reproduced below.

Debit Credit Balance

01/01/13 - - 0

12/31/13 Profit for the year - 1,200,000 1,200,000

08/31/14 Dividends paid 400,000 - 800,000

12/31/14 Profit for the year - 1,500,000 2,300,000

 The company failed to properly recognize accruals and prepayments. Selected accounts revealed the
following information:

2013 2014

Prepaid expenses P80,000 P60,000

Accrued expenses 25,000 40,000

Unearned income 110,000 50,000

Accrued income 70,000 100,000

What is the adjusted balance of Throw Companys retained earnings at December 31, 2014?

a. P2,355,000 c. P2,385,000

b. P2,370,000 d. P2,570,000

22. On January 1, 2014 Cheese Company acquired and installed an oil rig. The was acquired at its fair value
of P20,000,000 and the company incurred a total P2,000,000 to install and prepare the asset for its
intended use. The estimated useful life of the rig is 10 years and after which the company has an
obligation to dismantle immediately. Initial estimate of the cash outflow to dismantle the rig is P500,000.
The discount rate is 10%. On January 1, 2016 Cheese Company revised the estimate to dismantle the rig
to P700,000.

What is the carrying value of the oil rig immediately after the revised estimate was accounted for?

a. P17,600,000 c. P17,754,216

b. P17,660,916 d. P17,847,516

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

On January 1, 2014 Cheese Company acquired and installed an oil rig. The was acquired at its fair value
of P20,000,000 and the company incurred a total P2,000,000 to install and prepare the asset for its
intended use. The estimated useful life of the rig is 10 years and after which the company has an
obligation to dismantle immediately. Initial estimate of the cash outflow to dismantle the rig is P500,000.
The discount rate is 10%. On January 1, 2016, the oil rig was revalued when its fair value was
P19,000,000. On January 1, 2017 Cheese Company revised the estimate to dismantle the rig to P700,000.
Cheese Company uses the piecemeal transfer to account for the revaluation surplus subsequent to its
initial recognition.
23. What is the carrying value of the oil rig on January 1, 2017 immediately after the revised estimate was
accounted for?

a. P17,600,000 c. P17,754,216

b. P17,660,916 d. P17,847,516

24. What is balance of the revaluation surplus on January 1, 2017 immediately after the change in the
estimate of demolition cost was recognized?

a. P987,429 c. P1,143,152

b. P1,090,061 d. P1,245,784

25. DESULTORY UNPLANNED Co. uses a calendar period for its financial reporting. Its current financial
statements are authorized for issue on March 1, 20x1. DESULTORYs events after the reporting period
are those events that occur (MILLAN, #2 pp. 394)

a. from January 1, 20x1 to March 1,20x1

b. from December 31,20x1 to March 1,20x1

c. from January 1,20x0 to March 1,20x1

d. from January 1,20x0 to March 1,20x1

26. Which of the following events requires an adjustment to the current years financial statements?
(Millan, pp. 396 #10.)

a. Errors discovered after the reporting period and after the financial statements are
authorized for issue.
b. Significant decline in the fair value of financial assets measured at fair value
through profit or loss.
c. A change in the estimate of warranty obligation due to changes in circumstances
occurring after the reporting period but did not exist as of the end of the reporting
period.
d. The sale of inventory which provides information regarding the inventorys net
realizable value as of the end of the reporting period. ✅
27. A new drug named “EEE” was introduced by Genius Inc. in the market on December 1, 2005. Genius
Inc.s financial year ends on December 31, 2005. It was the only company that was permitted to
manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On
March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of
investigations, authorities discovered that when this drug was simultaneously used with “BBB,” a drug
used to regulate hypertension, the patients blood would clot and the patient suffered a stroke. A lawsuit
for P100,000,000 has been filed against Genius Inc. The financial statements were authorized for
issuance on April 30, 2006. Which of the following options is the appropriate accounting treatment for
this post-balance sheet event under IAS 10?

a. The entity should provide P100,000,000 because this is an “adjusting event” and
the financial statements were authorized to be issued after the accident
b. The entity should disclose P100,000,000 as a contingent liability because it is an
“adjusting event.”
c. The entity should disclose P100,000,000 as a “contingent liability" because it is a
present obligation with an improbable outflow.
d. Assuming the probability of the lawsuit being decided against Genius Inc. is
remote, the entity should disclose it in the footnotes, because it is a nonadjusting
material event.

28. At the balance sheet date, December 31, 2005, ABC Inc. carried a receivable from XYZ, a major
customer, at P10 million. The “authorization date” of the financial statements is on February 16, 2006.
XYZ declared bankruptcy on Valentines Day (February 14, 2006). ABC Inc. will

a. Disclose the fact that XYZ has declared bankruptcy in the footnotes,

b. Make a provision for this post-balance sheet event in its financial statements (as
opposed to disclosure in footnotes).
c. Ignore the event and wait for the outcome of the bankruptcy because the event
took place after the year-end.
d. Reverse the sale pertaining to this receivable in the comparatives for the prior
period and treat this as an “error” under IAS 8.
29. Excellent Inc. built a new factory building during 2005 at a cost of P20 million. At December 31, 2005,
the net book value of the building was P19 million. Subsequent to year-end, on March 15, 2006, the
building was destroyed by fire and the claim against the insurance company proved futile because the
cause of the fire was negligence on the part of the caretaker of the building. If the date of authorization of
the financial statements for the year ended December 31, 2005, was March 31, 2006, Excellent Inc.
should

a. Write off the net book value to its scrap value because the insurance claim would
not fetch any compensation.
b. Make a provision for one-half of the net book value of the building.

c. Make a provision for three-fourths of the net book value of the building based on
prudence.
d. Disclose this nonadjusting event in the footnotes.

30. International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. Subsequent to the balance sheet date, and before the “date of authorization” of the
issuance of the financial statements, there were abnormal fluctuations in foreign currency rates.
International Inc. should

a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations in foreign exchange rates.
b. Adjust the foreign exchange year-end balances to reflect all the abnormal
fluctuations in foreign exchange rates (and not just adverse movements).
c. Disclose the post-balance sheet event in footnotes as a nonadjusting event.

d. Ignore the post-balance sheet event.