Financial Accounting and Reporting

Easy
1. To calculate the tax base of a liability for employee benefits, which one of the following formulas would be
used?

a. Carrying amount + Future assessable amounts

b. Carrying amount – Future non-assessable amounts of revenue
c. Carrying amount + Future deductible amounts – Future assessable amounts
d. Carrying amount – Future deductible amounts + Future assessable amounts

Answer: D
As the liability does not relate to revenue received in advance, the tax base for the employee
benefit liability would be Carrying amount – Future deductible amounts + Future assessable
amounts

2. Rolly, Co. is a parent entity that invested in an associate. In accordance with IFRS 3, Business
Combinations, Raven determined that the acquisition involved a gain of ₱200,000. In accordance with
IAS 28, Investments in Associates and Joint Ventures, the gain should be

a. Included in the carrying amount of the investment

b. Deducted from the assets in the consolidated financial statements of Raven
c. Amortized as income in the determination of the investor’s share of the associate profit over the
period the investment is held.
d. Included as income in the determination of the investor’s share of the associate’s profit in the period

the investment was acquired.

Answer: D
IAS 28, par. 32(b) requires any excess of the entity’s share of the net fair value of the investee’s
identifiable assets and liabilities over the cost of the investment of the investment to be include in
the investor’s share of the associate’s profit or loss in the period which the investment is required

3. The following are examples of potential ordinary shares, except

a. Convertible preference shares

b. Convertible bonds
c. Stock options
d. Stock dividends

Answer: D
Stock dividends do not meet the definition of a potential ordinary share.
Under IAS 33 Earnings Per Share, potential ordinary share is a financial instrument or other
contract that may entitle its holder to ordinary shares.
Furthermore, stock dividends, in the computation of BEPS and DEPS, is treated as an adjustment
to the Weighted Average Number of Shares Outstanding.
4. Which of the following statements regarding derivatives is not true?

a. The derivatives should be recognized as assets and liabilities.

b. The derivatives should be reported at fair value.
c. Gains and Losses resulting from speculation should be deferred.
d. Gains and Losses from fair value hedge are reported immediately.

Answer: C
Speculations are for trading, thus, Gains and Losses must immediately reported at Profit or Loss.

5. Lakers Corp. signed an agreement with Miami, which requires that if Miami does not meet certain
contractual obligations, Miami must forfeit land worth ₱40,000 to Roland. Roland’s accountants believe
that Miami will not meet its contractual obligations, and it is probable Roland will receive the land by the
end of year 2. Roland uses IFRS for reporting purposes. How should Roland report the land?

a. As investment property in the asset section of the balance sheet.

b. As a contingent asset in the current asset section of the balance sheet.
c. In a footnote disclosure if the economic benefits are probable.
d. As a contingent asset and other comprehensive income for the period.

Answer: C
The requirement is to identify how Lakers should report the land. Answer (c) is correct because
IAS 37, Par.10 states that a contingent asset is a possible asset that arises from past events, and
is confirmed only by the occurrence of uncertain future events that are not within the control of
the reporting entity. A contingent asset is not recognized, but it is disclosed in the notes to the
financial statements if the economic benefits are probable. Answer (a) is incorrect because it
does not meet the definition of an asset. Answers (b) and (d) are incorrect because contingent
assets are not recognized in the balance sheet

6. Which of the following are the issues not addressed in IFRIC Interpretation 16 Hedges of a Net
Investment in a Foreign Operation?

a. the nature of the hedged risk and the amount of the hedged item for which a hedging relationship
may be designated
b. where in a group the hedging instrument can be held
c. what amounts should be reclassified from equity to profit or loss as reclassification adjustments on
disposal of the foreign operation
d. significance of financial instruments for the entity's financial position and performance.

Answer: D
Letter D is one of the objectives of IFRS 7 Financial Instruments: Disclosures.

7. An example of an item which is not a liability is

a. The portion of long-term debt due within one year

b. Advance from customer on contract
c. Accrued estimated warranty cost
d. Bonus issue

Answer: D
Bonus issue does not meet the definition of a liability. A liability of an entity is a present
 economic obligation for which the entity is the obligor. A bonus issue is an offer of free additional
shares to existing shareholders. There is, therefore, only an equity transfer
8. To produce an inventory valuation which approximates the lower of cost or market using the conventional
retail inventory method, the computation of the ratio of cost to retail should

a. Include markups but not markdowns.

b. Include markups and markdowns.
c. Ignore both markups and markdowns.
d. Include markdowns but not markups.

Answer: A
Under lower of cost or market using the conventional retail inventory method, only the markups
are included in the calculation of the cost to retail price ratio.

9. Self-Starter Sports, Inc. (SSSI) internally developed several assets. Which one of the following internally
generated assets should be recognized in accordance with PAS 38 Intangible Assets?
(Assume that the expected future economic benefits of the internally generated assets are probable, and
the cost of the asset can be measured reliably).

a. Brand name ‘OneStep’ associated with SSSI’s starter range

b. Customer lust of customers signed up to SSSI’s loyalty program
c. Computer program to keep track of customer’s orders and automate the generation of invoices
d. Masthead for a new sporting magazine called Soccer Highlights launched by SSSI

ANSWER: C
The internally generated software should be recognized in accordance with PAS38 Intangible
Assets.

Options A, B, and D are incorrect because the recognition of internally generated masthead,
brand name and customer list are prohibited by PAS 38 par. 63

10. Under IFRS any investment may be accounted for by fair value through profit and loss providing

a. It is traded in an active market.

b. It is an equity instrument.
c. It is a debt instrument.
d. The instrument matures within 2 years

Answer: A
The requirement is to identify for an investment to be accounted for using fair value through profit
and loss. Answer (a) is correct because the investment must be traded in an active market to be
accounted for using fair value through profit and loss.

11. Which of the following rates must be disclosed for defined benefit pension plans?
I. Discount rate.
II. Expected long-term rate of return on all of the employer’s assets.
III. Rate of compensation increase.

a. I and III.
b. II and III.
c. I, II, and III.
d. III only.
 Answer: A
According to PAS 19, paragraph 144, an entity shall disclose the significant actuarial assumptions
used to determine the present value of the defined benefit obligation Such disclosure shall be in
absolute terms (e.g. as an absolute percentage, and not just as a margin between different
percentages and other variables). When an entity provides disclosures in total for a grouping of
plans, it shall provide such disclosures in the form of weighted averages or relatively narrow
ranges.

12. Given the definition adopted in PAS 32, Financial Instruments: Presentation, which one of the following
would not be a financial instrument?

a. Cash at bank
b. Bill of exchange
c. Prepaid insurance
d. Forward exchange contract

Answer: C
A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity. Prepaid insurance would not meet the
definition because it involves a right (obligation) to receive (deliver) a service rather than cash or
an equity instrument.

13. For the fiscal years 2019 and 2020, Raptors Inc. reported the following:

Year Ended December 31

2019 2020
Net Sales ₱44,123,486 ₱36,124,961
Accounts Receivable 749,321 719,365

Compute the accounts receivable turnover for 2020 and the number of days’ sales in receivable at the
end of 2020. Round to two decimal places.

a. 49.19 and 7.16 days

b. 49.19 and 7.30 days
c. 49.19 and 7.20 days
d. 49.19 and 7.26 days

Answer: B
Accounts receivable turnover = Net Sales / Average accounts receivable
Accounts receivable turnover = 36,124,961 / ((749,321+719,365)/2)
Accounts receivable turnover = 49.19

Number of days’ sales in receivables = Accounts receivable, end of year/Ave. daily sales
Number of days’ sales in receivables = 719,365/(36,124,961/365 days)
Number of days’ sales in receivables = 7.30
14. A company holds two main portfolios of debt securities. Both portfolios provide cash flows that meet the
test of solely payments of interest and principal in PFRS 9. Securities held in portfolio A are sold on a
regular basis, based on movements in the prices of the securities in the portfolio. Securities held in
portfolio B are never sold but are held to maturity.

How should the portfolio be classified and measure? Select which one of the following is correct.

a. Both at fair value

b. Both at amortized cost
c. Portfolio A at fair value and portfolio B at amortized cost
d. Portfolio A at amortized cost and portfolio B at fair value

Answer: C
The objective with portfolio A is to buy and sell securities to gain from movements in fair value
and hence fair value method is required as the requirements in PFRS 9, par 4.1.2 to achieved
amortized cost measurement are not met. With portfolio B, the objective is not to buy and sell
based on movements in fair value but to benefit from the contractual cash flows. Further, PFRS 9,
par 4.1.2 requires its measurement at amortized cost (except where the portfolio is designated as
measure at fair value through profit or loss).

15. Which of the following is true for PFRS for SMEs?

a. Under PFRS for SMEs, the use of an accrued benefit valuation method (the projected unit credit
method) for employee benefit obligation is required for calculating defined benefit obligations.
b. Under PFRS for SMEs, Intangible assets, including goodwill are assumed to have finite lives and are
amortized.
c. Under PFRS for SMEs, Research costs and development costs are expenses, however, development
costs are capitalized if certain criteria are met.
d. Under PFRS for SMEs, only equity method is permitted in accounting for investment in associates.

Answer: B

Under PFRS for SMEs, Intangible assets, including goodwill are assumed to have finite lives and
are amortized.

In PFRS for SMEs, the cost model is the only permitted model. All intangible assets, including
goodwill, are assumed to have finite lives and are amortized.
Answer A, C and D are wrong as they pertain to the measurement in Full PFRS. SMEs are
accounted for as follows:

A. The circumstance-driven approach is applicable, which means that the use of an accrued
benefit valuation method (the projected unit credit method) is required if the information that is
needed to make such a calculation is already available, or if it can be obtained without undue
cost or effort. If not, simplifications are permitted in which future salary progression, future
service or possible mortality during an employee’s period of service are not considered. [PFRS
for SMEs 28.18-28.20]
B. All research and development costs are recognized as an expense. [PFRS for SMEs 18.14]
C. An investor may account for its investments using one of the following: The cost model (cost
less any accumulated impairment losses); The equity method, and; The fair value through
profit or loss model. [PFRS for SMEs 14.4]
 Financial Accounting and Reporting
Average

1. Zulu, Inc. enters into a contact with a customer to deliver a phone package to the customer In return for
an n upfront payment of ₱33,990. Under the terms of the contract the customer will receive a ‘free’ phone
upon signing the contract, and phone service for two years. Zulu also sells phones and phones services
separately.

Which one of the following statements is correct?

a. At contract inception, Zulu recognized revenue of ₱33,990

b. At contract inception, Zulu recognized a contract liability of ₱33,990
c. Zulu identifies one performance obligation in the phone package
d. Zulu identifies two performance obligations in the phone package

Answer: D
Any distinct good or service promised to a customer as a result of a contract gives rise to a
performance obligation. There are two distinct goods or services to be delivered to the customer
in the phone package: the phone and the phone service. Both the phone and the phone plan are
considered as distinct as the customer can benefit from the good (the phone) or service (the
phone service) either on its own or together with other readily available resources; and Zulu's
promise to transfer the phone to the customer can be separately identifiable from its promise to
provide phone services under the contract (see PFRS 15, Par. 27).

2. On January 1, 2020, Deer Corp. met the criteria for discontinuance of a business component. For the
period January 1 through October 15, 2020, the component had revenues of ₱500,000 and expenses of
₱800,000. The assets of the component were sold on October 15, 2020, at a loss for which no tax benefit
is available. In its income statement for the year ended December 31, 2020, how should Deer report the
component’s operations from January 1 to October 15, 2020?

a. ₱500,000 and ₱800,000 should be included with revenues and expenses, respectively, as part of
continuing operations.
b. ₱300,000 should be reported as part of the loss on operations and disposal of a component.
c. ₱300,000 should be reported as an extraordinary loss.
d. ₱500,000 should be reported as revenues from operations of a discontinued component.

Answer B
The operating loss of ₱300,000 (₱500,000 revenues less ₱800,000 expenses) relates to a
discontinued component, so it is part of discontinued operations, not continuing operations. It is
combined with the loss from disposal on the income statement.

3. Which of the following should not be disclosed in an enterprise’s statement of cash flows prepared using
the indirect method?

a. Interest paid, net of amounts capitalized.

b. Income taxes paid.
c. Cash flow per share.
d. Dividends paid on preferred stock.
 Answer: C
Cash flow per share should not be reported on the statement of cash flows because it may be
misleading and may be incorrectly used as a measure of profitability. Answers (a) and (b) are
incorrect because, when the indirect method is used, separate disclosure is required for interest
paid (net of amounts capitalized) and income taxes paid. Answer (d) is incorrect because,
regardless of the method used, dividends paid on preferred stock are reported as a financing
activity

4. Recognize if the statements are True or False:

i. Debt securities include corporate debt, convertible bonds, US Treasury and municipal securities,
redeemable preferred stock, commercial paper, and other secured debt instruments.
ii. Debt securities exclude unsecured trade receivables and consumer loans and notes receivable
because they are not normally traded on organized exchanges and because of cost/benefit
considerations.
iii. Debt securities include ownership interests (common, preferred, and other capital stock), rights to
acquire ownership interests (rights, warrants, call options), and rights to dispose of ownership
interests (put options).

a. True, False, True

b. True, True, False
c. True, False, False
d. False, False, False

Answer: B
A. Concepts of Accounting and Investment Percentage

1. Debt securities are “any security representing a creditor relationship with an entity.”
a. This includes corporate debt, convertible bonds, US Treasury and municipal securities,
redeemable preferred stock, commercial paper, and other secured debt instruments.
b. Excluded are unsecured trade receivables and consumer loans and notes receivable because
they are not normally traded on organized exchanges and because of cost/benefit
considerations.
c. Investments in debt securities are classified into three categories: trading securities, available-
for-sale securities, and held-to-maturity securities.

2. Equity securities include ownership interests (common, preferred, and other capital stock),
rights to acquire ownership interests (rights, warrants, call options), and rights to dispose of
ownership interests (put options). The accounting rules for investments in the common stock
of
another corporation are generally based on the percentage of the voting stock obtained.

5. All of the following statements about Consolidated financial statements except

a. Consolidated financial statements combine like items of assets, liabilities, equity, income, expenses
and cash flows of the parent with those of its subsidiaries.
b. When it is impracticable to have the same reporting dates for parent and subsidiaries, the most recent
financial statements of the subsidiary are used, adjusted for the effects of significant transactions or
events between the reporting dates of the subsidiary and consolidated financial statements. The
difference between the date of the subsidiary's financial statements and that of the consolidated
financial statements shall be no more than one month.
 c. Consolidated Financial statements offset (eliminate) the carrying amount of the parent's investment in
each subsidiary and the parent's portion of equity of each subsidiary
d. Consolidated financial statements eliminate in full intragroup assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of the group (profits or losses
resulting from intragroup transactions that are recognized in assets, such as inventory and fixed
assets, are eliminated in full).

Answer: B
According to PFRS 10, Consolidated financial statements:
 combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries
 offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how to
account for any related goodwill)
 eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group (profits or losses resulting from
intragroup transactions that are recognised in assets, such as inventory and fixed assets, are
eliminated in full).

The parent and subsidiaries are required to have the same reporting dates, or consolidation
based on additional financial information prepared by subsidiary, unless impracticable. Where
impracticable, the most recent financial statements of the subsidiary are used, adjusted for the
effects of significant transactions or events between the reporting dates of the subsidiary and
consolidated financial statements. The difference between the date of the subsidiary's financial
statements and that of the consolidated financial statements shall be no more than three months.

6. Salter, Inc. has completed its 2020 financial statements which reveal, in part, the following information.

Profit for the year ₱110,000

Total comprehensive income 130,000
Dividends paid 35,000
Opening equity balances
Share Capital 300,000
Retained Earnings 220,000
Asset Revaluation Surplus 60,000
No more share capital was issued during the reporting period
Other comprehensive income relates to the revaluation of land and buildings to fair value

In accordance with IAS 1, Presentation of Financial Statements, which one of the following items would
correctly be include in the statement of changes in equity for the year ended December 31, 2020?

a. Closing retained earnings – ₱295,000

b. Closing retained earnings – ₱315,000
c. Total closing equity – ₱655,000
d. Total closing equity – ₱695,000

Answer: A
Closing Retained Earnings
Opening retained earnings ₱220,000
Profit for the year 110,000
Dividends Paid (35,000)
₱295,000

Total Closing Equity

 Share capital ₱300,000
Retained Earnings 295,000
Asset revaluation surplus 80,000
₱675,000

7. For the year ended June 30, 2020, Pringle, Inc. had an accounting profit of ₱20,000 and a taxable profit
of ₱170,000. The tax expense of Pringle for the year ended
June 30, 2020 was ₱60,000. At June 30, 2020 it was determined that the company had a deferred tax
liability of ₱27,000. Assume that there was no deferred tax asset at the beginning or end of the period.

The tax rate is 30%. Which one of the following statements is correct?

a. The deferred tax liability as at June 30, 2019 was ₱0

b. The deferred tax liability as at June 30, 2019 was ₱18,000
c. The current tax expense for the year ended June 30, 2020 was ₱33,000
d. The deferred tax expense for the year ended June 30, 2020 was ₱27,000

Answer: B
Tax expense = Current tax expense + Deferred tax expense. The current tax expense for the year
ended June 30, 2020 is ₱51,000 (taxable profit ₱170,000 x 30%). Tax expense is given as ₱60,000.
Therefore, the deferred tax expense = tax expense (₱60,000) – Current tax expense (₱51,000) =
₱9,000.

The increase in the deferred tax expense would be reflected in the closing deferred tax liability.
Hence, the opening deferred tax liability is the closing deferred tax liability (₱27,000) less deferred
tax expense for the period (₱9,000), which is equal to ₱18,000.

8. The following information pertained to Azur Co. for the year:

Purchases ₱102,800
Purchase discounts 10,280
Freight in 15,420
Freight out 5,140
Beginning inventory 30,840
Ending inventory 20,560

What amount should Azur report as cost of goods sold for the year?

a. ₱102,800
b. ₱118,220
c. ₱123,360
d. ₱128,500

Answer: B
Azur should report cost of goods sold calculated as:
Cost of goods sold (CGS) = Beg. Inventory + Net purchases1 + Freight in – Ending Inventory
CGS = ₱ 30,840 + ₱92, 5202 + ₱15,420 – ₱20,560 CGS = ₱118,220

Freight out is a selling expense and does not enter the calculation of cost of goods sold.
Net purchase = Purchases – Purchase returns and allowances – Purchase discounts
9. Which one of the following instruments does not satisfy the sole payments of interest and principal
requirement in IFRS 9?

a. A variable rate loan where the rate varies based on LIBOR up to a specified cap
b. A variable rate loan where the rate varies based on LIBOR and any changes in the credit risk
c. A variable rate loan where, if the loan is repaid before maturity, the borrower pays a 25% premium as
a penalty for early repayment
d. A variable rate loan where the loan can be extended at the applicable interest rate at the time of
extension

Answer: C
The instrument in Option C fails the test as the premium for early repayment exceeds what
paragraph B4.1.11 of IFRS 9 describes as a ‘reasonable additional compensation for the early
termination of the contract’.

10. Cranston Inc. reported an impairment loss of ₱150,000 on its income statement for the year ended
December 31, year 3. This loss was related to long-lived assets which Cranston intended to use in its
operations. On the company’s December 31, year 3 balance sheet, Cranston reported these long-lived
assets at ₱920,000 and, as of December 31, year 3, Cranston estimated that these long-lived assets
would be used for another five years. On December 31, year 4, Cranston determined that the fair values
of its impaired long-lived assets had increased by ₱25,000 over their fair values at December 31, year 3.
On the company’s December 31, year 4 balance sheet, what amount should be reported as the carrying
amount for these long-lived assets? Assume straight-line depreciation and no salvage value for the
impaired assets.

a. ₱761,000
b. ₱736,000
c. ₱945,000
d. ₱756,000

Answer: B
The reduced carrying amount of Cranston’s assets (₱920,000) should be accounted for as their
new cost, and this amount should be depreciated over the remaining useful life of five years.
Restoration of previously recognized impairment losses is prohibited. Therefore, Cranston should
report .80 × ₱920,000 or ₱736,000 as the carrying amount of its impaired long-lived assets on its
December 31, year 4 balance sheet.

11. Hope, Inc. has determined that one of its cash-generating units (CGUs) has sustained an impairment loss
of ₱50,000. The carrying amounts of the assets within the CGU are as follows:

Asset 1 ₱150,000
Asset 2 200,000
Asset 3 50,000
TOTAL ₱400,000

The estimated fair value less costs of disposal of Asses 2 is ₱190,000, which is greater that its value-in-
use.

A number of options are being considered as the amounts of impairment loss to be allocated to the three
assets within the CGU.
 In accordance with IAS 16, Property, Plant and Equipment and IAS 36, Impairment of Assets, which one
of the following options would be the amount of impairment loss allocated to the three assets?

Asset 1 Asset 2 Asset 3 Total

a. ₱16,667 ₱16,667 ₱16,666 ₱50,000
b. ₱18,750 ₱25,000 ₱6,250 ₱50,000
c. ₱20,000 ₱10,000 ₱20,000 ₱50,000
d. ₱30,000 ₱10,000 ₱10,000 ₱50,000

Answer: D
In the first instance, the impairment loss would be allocated in proportion to the carrying amount
of each asset.

150,000/400,000 x ₱50,000 = ₱18,750

200,000/400,000 x ₱50,000 = ₱25,000
50,000/400,000 x ₱50,000 = ₱6,250

The carrying amount of the assets after this allocation would be as follows.

Asset 1 = ₱150,000 – ₱18,750 = ₱131,250

Asset 2 = ₱200,000 – ₱25,000 = ₱175,000
Asset 3 = ₱50,000 – ₱6,250 = ₱43,750

However, Asset 2 has fair value less costs of disposal of ₱190,000, which is greater that its value
in use. Therefore, the impairment loss for Asset 2 is limited to ₱10,000 (₱200,000-₱190,000)
(IAS36, par. 5). The remaining impairment loss of ₱15,000 attributable to Asset 2 must be
allocated to the remaining assets in the CGU in proportion to their carrying amounts after
impairment loss.

₱131,250/175,000 x ₱15,000 = ₱11,250

₱43,750/175,000 x ₱15,000 = ₱3,750

Therefore, the impairment loss for each asset would be as follows:

Asset 1 = ₱18,750 + ₱11,250 = ₱30,000

Asset 2 = ₱10,000
Asset 3 = ₱6,250 + ₱3,750 = ₱10,000

12. An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a
12% return. At the end of the lease term, the equipment will revert to the lessor.

On January 1, 2020, an equipment is leased to a lessee with the following information:

Cost of equipment to the entity ₱3,500,000

Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2019
 What amount of cost of goods sold should be recognized in recording the lease?

a. ₱3,260,000
b. ₱3,500,000
c. ₱3,740,000
d. ₱3,460,000

Answer: D
Cost of equipment ₱3,500,000.00
PV of unguaranteed residual value (240,000.00)
Initial direct cost 200,000.00
Cost of goods sold ₱3,460,000.00

Residual value- unguaranteed ₱600,000.00

PV of 1 at 12% for 8 periods x.40
PV of unguaranteed residual value 240,000.00

13. Pat Company reported the following information on December 31, 2020:

Preference Share, P100 par ₱230,000

Share Premium – Preference 80,500
Ordinary Share, P15 par 525,000
Share Premium – Ordinary 275,000
Subscribed Ordinary Share 5,000
Retained Earnings 190,000
Notes Payable 400,000
Subscription receivable – Ordinary 40,000

Determine the legal capital:

a. ₱740,000
b. ₱755,000
c. ₱760,000
d. ₱800,000

Answer: C
Preference Share, ₱100 par ₱230,000
Ordinary Share, ₱15 par 525,000
Subscribed Ordinary Share 5,000
Total Legal Capital ₱760,000

If shares are par, share premium is not included in the computation of legal capital

14. Fleming Company provided the following information on selected transactions during 2020:

Dividends paid to preferred stockholders 150,000

Loans made to affiliated corporations 700,000
Proceeds from issuing bonds 800,000
Proceeds from issuing preferred stock 1,050,000
Proceeds from sale of equipment 450,000
Purchases of inventories 1,200,000
 Purchase of land by issuing bonds 300,000
Purchases of treasury stock 600,000

The net cash provided (used) by investing activities during 2020 is

a. (600,000)
b. (250,000)
c. 100,000
d. 450,000

Answer: B
(700,000) + 450,000 = (250,000)
Dividends paid, proceeds from issuing bonds and preferred stock, and purchase of treasury stock
are financing activities. Purchase of inventories is an operating activity. Purchase of land by
issuing bonds is a non-cash transaction.

15. Jenny Company sells a variety of items to its customers. At December 31, 2020, the balance of Jenny
Company’s ending inventory account was ₱5,000,000 and allowance for inventory writedown account
before any adjustment was ₱200,000. Relevant information about the inventories and the breakdown of
inventory cost and market data at December 31, 2020 follows:

Net Realizable
Item Cost Replacement Cost Sales Price Value Normal Profit
A ₱1,000,000 ₱1,100,000 ₱1,450,000 ₱700,000 ₱100,000
B 1,500,000 1,200,000 1,750,000 1,600,000 200,000
C 1,700,000 1,300,000 2,000,000 1,450,000 250,000
D 800,000 1,000,000 1,300,000 950,000 250,000
Total 5,000,000 4,600,000 6,500,000 4,700,000 800,000

How much is the loss on inventory writedown to be included in Jenny Company’s cost of sales?
a. ₱550,000
b. ₱350,000
c. ₱200,000
d. ₱100,000

Answer: B
Item Cost Net Realizable Value Lower of cost or NRV Cost – lower of cost
or NRV
A ₱1,000,000 ₱700,000 ₱700,000
B 1,500,000 1,600,000 1,500,000
C 1,700,000 1,450,000 1,450,000
D 800,000 950,000 800,000
Total ₱5,000,000 ₱4,700,000 ₱4,450,000 ₱550,000

Allowance for Inventory writedown, Beg ₱200,000

Loss on Inventory Writedown, 12/31 350,000
Allowance for Inventory writedown, End ₱550,000
 Financial Accounting and Reporting
Difficult

1. The following information has been provided to you by Neverland Corporation:

Increase in Raw Materials Inventory ₱6,200

Work-in-Process Inventory, ending 7,500
Raw Materials purchased 18,700
Direct Labor incurred 15,400
Factory Overhead 150% of DL
Cost of Goods Sold 62,400
Increase in Finish Goods Inventory 7,900

How much is the Total Cost of Goods Put Into Process?

a. ₱38,500
b. ₱54,500
c. ₱77,800
d. ₱51,000

Answer: C
Raw Materials purchased ₱18,700
Increase in Raw Materials Inventory (6,200)
Raw Materials used 12,500
Direct Labor incurred 15,400
Factory Overhead 23,100
Total Manufacturing Cost 51,000

WIP Inventory, ending 7,500

Cost of Goods Manufactured* 70,300
Total Cost of Goods Put Into Process 77,800

*Cost of Goods Sold 62,400

Increase in Finished Goods Inventory 7,900
Cost of Goods Manufactured 70,300

2. For interim financial reporting, a loss from earthquake occurring in the second quarter should be

a. Recognized ratably over all four quarters with the first quarter being restated
b. Recognized ratably over the last three quarters
c. Recognized in the second quarter
d. Disclosed by a note only in the second quarter

Answer: C
There are three ways expenses can be properly matched against revenues: association of cause
and effect, systematic and rational allocation, and immediate recognition.
When both the associating cause and effect and systematic and rational allocation methods
cannot be used, expenses are recognized immediately. For example, it can be difficult to identify
 future benefits of some costs incurred, or for some costs no rational allocation scheme can be
devised.

3. An entity provided the following pension plan information:

Projected benefit obligation – January 1 ₱3,500,000

Fair value of plan assets – January 1 2,800,000
Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%

What is the employee benefit expense for the current year?

a. ₱2,245,000
b. ₱1,905,000
c. ₱2,525,000
d. ₱1,750,000

Answer: A
Current service cost ₱1,750,000.00
Past service cost 425,000.00
Interest expense (10% x 3,500,000) 350,000.00
Interest income (10% x 2,800,000) (280,000.00)
Employee benefit expense ₱2,245,000.00

4. According to PAS 37, Contingent Liability is a:

I. Possible obligation that arises from past event and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more future uncertain events not wholly within the control of
the entity.
II. Present obligation that arises from past event and it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation or the amount of the obligation
cannot be measured reliably.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer: C
As per PAS 37 par. 10, Contingent Liability is defined as:
a. a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity; or
b. a present obligation that arises from past events but is not recognised because:
 it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
 the amount of the obligation cannot be measured with sufficient reliability.
5. Parent entity has a controlling interest in Subsidiaries A, B and C and has significant influence over
Associates 1 and 2. Subsidiary C has significant influence over
Associate 3. Please refer to the diagram below:

For the financial statements of Subsidiary C, which of the following are considered as related parties in
accordance with PAS 24: Related Party Disclosures?

a. Associate 3, Parent, Subsidiary B only

b. Associate 3, Parent, Subsidiary B and Associate 2 only.
c. Subsidiary B, Parent, Subsidiary A only
d. All are considered as related parties

Answer: D
For Subsidiary C’s financial statements, Parent, Subsidiaries A and B and Associates 1, 2 and 3
are related parties.

Paragraph 9(b) of PAS 24 states that an entity is related to a reporting entity if any of the following
conditions applies:
 The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
 One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).
 Both entities are joint ventures of the same third party.
 One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
 The entity is a post- employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a
plan, the sponsoring employers are also related to the reporting entity.
 The entity is controlled or jointly controlled by a person identified in (a).
 A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
 The entity, or any member of a group of which it is a part, provides key management
personnel services to the reporting entity or to the parent of the reporting entity.
6. The records of Binmaley’s Department Store report the following data for the month of January 2020:

Sales ₱7,100,000
Sales Allowance 100,000
Sales Returns 500,000
Employee Discounts 200,000
Theft and other losses 100,000
Beginning Balance @ Cost 440,000
Beginning Balance @ SP 800,000
Puchase Returns @Cost 240,000
Purchases 4,500,000
Initial Markup
on Purchases 2,900,000
Freight-in 100,000
Purchase Returns @ SP 350,000
Add'l Mark up 250,000
Mark up Cancellation 100,000
Mark down 600,000
Mark down cancellation 100,000

Using the average retail inventory method, Binmaley’s ending inventory is

a. ₱360,000
b. ₱384,000
c. ₱420,000
d. ₱448,000

Answer: B
Cost Retail
Beginning Balance ₱440,000 ₱800,000
Purchases 4,500,000 4,500,000
Initial Markup
on Purchases 2,900,000
Freight-in 100,000
Purchase Returns (240,000) -350,000
Add'l Mark up 250,000
Mark up Cancellation (100,000)
Mark down (600,000)
Mark down Cancellation 100,000
4,800,000 7,500,000
Cost Ratio 0.64
Sales (7,100,000)
Sales Returns 500,000
Employee Discounts (200,000)
Theft and other losses (100,000)
Ending Balance ₱600,000
Ending Balance @ Cost (600000*0.64) ₱384,000
7. Crow, Inc.is indebted to Scare under an ₱8,000,000, 10%, four- year note dated December 31, 2019.
Annual interest of P800,000 was paid on December 31,2020 and 2021. During 2022, Crow experienced
financial difficulties and is likely to default unless concessions are made. On December 31, 2022, Scare
agreed to restructure the debt as follows:

 Interest of ₱800,000 due December 31, 2022 was waived.

 Extended the maturity to December 31, 2023
 The principal amount is reduced to ₱7,000,000
 The interest of ₱770,000 of the new principal will be paid on maturity date.

Assuming an income tax rate of 32%, how much should Crow report as gain in restructuring in its profit or
loss for the year ended December 31, 2022?

a. ₱320,000
b. ₱680,000
c. ₱1,181,208
d. ₱1,205,626

Answer: C
Carrying Value of Liability
Face Value ₱8,000,000
Accrued Interest 800,000 ₱8,800,000
Less: Restructured debt
New Principal ₱7,000,000
Future Interest 770,000
Total Future Amount ₱7,770,000
X PV of 10% after a year 0.909 7,062,930
Gain on Restructuring ₱1,737,070
Less: Income tax (P1737070 x 32%) 555,862
Net ₱1,181,208

According to PFRS 9, net present value of cash flows should be at least 10% different from the
carrying amount of the original debt to recognize a gain on restructuring.
(1.73 million / 8.8 million = 19.65%)

8. On March 31, 2020 Sangre Company, a medium-sized entity, which uses the equity model, acquired 30%
of the ordinary shares that carry voting rights at a general meeting of shareholders of Knight Company for
₱1,500,000. On December 31, 2020, Knight Company declared a dividend of ₱250,000 for the year 2017
but reported a net income of ₱400,000 for the year ended December 31, 2017. At December 31, 2020,
the recoverable amount of Sangre Company’s investment in Knight Company is ₱1,450,000 (fair value of
₱1,465,000 less cost to sell of ₱15,000). There is no published price quotation for Knight Company
shares. On March 21, 2020, the fair value net asset of Knight Company was ₱4,500,000. What is the net
amount to be reported in the profit or loss of 2020 in relation to this investment?

a. ₱25,000
b. ₱53,750
c. ₱78,750
d. ₱105,000
 Answer: A
Acquisition cost ₱1,500,000
Share in the reported income
₱400,000 x 30% x 9/12 90,000
Share in dividend
₱250,000 x 30% (75,000)
GW amortization
(₱1,500,000 – ₱1,350,000)/10 years x 9/12 (11,250)
Carrying value of investments ₱1,503,750
Fair value 1,450,000
Impairment loss ₱53,750

Share in the net income ₱90,000

Adj. on the income due to the amortization of GW (11,250)
Impairment loss (53,750)
Net amount ₱25,00

Since the entity is an SME, goodwill is amortized over 10 years.

9. On July 1, 2020, Emerald Company exchanged its equipment with another equipment of another
company. The following data were made available:

Equipment ₱5,000,000
Accumulated Depreciation 3,200,000
Fair value of equipment received 1,100,000
Cash received on exchange 900,000

If the cash flows of the equipment were not the same, what is the amount of gain or loss from exchange?

a. None
b. ₱200,000
c. ₱700,000
d. ₱900,000

Answer: B
Received Parted
FV ₱1,100,000 ₱2,000,000
Cash 900,000

Fair value of asset given up ₱2,000,000

Book value of asset given up 1,800,000
Gain ₱200,000
10. On June 30, 2019, Kukuro, Inc. issued twenty ₱10,000, 7% bonds at par. Each bond was convertible into
200 shares of common stock. On January 1, 2020, 10,000 shares of common stock were outstanding.
The bondholders converted all the bonds on July 1, 2020. The following amounts were reported in
Kukuro’s income statement for the year ended December 31, 2020:

Revenues ₱977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Net income ₱ 35,000

What is Kukuro’s 2020 diluted earnings per share?

a. ₱2.50
b. ₱2.85
c. ₱2.92
d. ₱3.50

Answer: B
The effect of convertible bonds is included in diluted EPS under the if converted method, if they
are dilutive. The bonds are dilutive as shown below.

₱35,000
Basic EPS = = ₱2.92
(1/2) 10,000 + (1/2) 14,000

Incremental (7% x ₱10,000) – 30% (7% x ₱10,000) ₱490

= = = ₱2.45
per share effect 200 shares per bond 200

Since ₱2.45 < ₱2.92, the bonds are dilutive. Under the if converted method, the assumption is
made that the bonds were converted at the beginning of the current year (1/1) or later in the
current year if the bonds were issued during the current year. In this case, conversion is assumed
for the first six months of 2020 only because the bonds were actually converted on July 1. Under
their assumed conversion, the numerator would increase because bond interest expense would
not have been incurred for the first six months of the year [1/2 (₱14,000 – 30% × ₱14,000) =
₱4,900]. The denominator would increase because the 4,000 shares (20 × 200) would have been
outstanding for the first six months of the year (4,000 × 6/12 = 2,000). Therefore, diluted EPS is
₱2.85.

₱35,000 +₱4,900 ₱39,900

= = ₱2.85
12,000 + 2,000 14,000
11. An entity provided the following pension plan information:
Projected benefit obligation – January 1 ₱3,500,000
Fair value of plan assets – January 1 2,800,000
Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%

What amount should be reported as accrued benefit cost on December 31?

a. ₱1,745,000
b. ₱1,750,000
c. ₱1,045,000
d. ₱700,000

Answer: A
PBO – January 1 ₱3,500,000
Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid (250,000)
PBO – December 31 ₱5,975,000

FVPA – January 1 ₱2,800,000

Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid (250,000
FVPA – December 31 ₱4,230,000

FVPA – December 31 ₱4,230,000

PBO – December 31 (5,975,000)
Prepaid/accrued benefit cost – December 31 (₱1,745,000)

12. Ezekiel Company takes a full year’s depreciation expense in the year of an asset’s acquisition, and no
depreciation expense in the year of disposition. Data relating to one of Ezekiel’s depreciable assets at
December 31, 2019, are as follows:

Acquisition year 2017

Cost ₱148,721,421
Residual Value 123,141
Accumulated Depreciation 118,878,624
Estimated Useful life 5 years

Using the same depreciation method as used in 2017, 2018, and 2019, how much depreciation expense
should Ezekiel record in 2020 for this asset?
 a. ₱19,813,104
b. ₱29,719,656
c. ₱39,626,208
d. ₱49,532,760

Answer: A
The requirement is to calculate the amount of depreciation expense to be recorded in 2020. After
three years (2017-2019), accumulated depreciation is ₱118,878,624. Therefore, the method that
was used was the sum-of-the-years’ digits (SYD) method. Using this method, after three years the
balance in accumulated depreciation would be 12/15 of the depreciable base (5/15 + 4/15 + 3/15).
The depreciable base is the cost (₱148,721,421) less the residual value (₱123,141), or
₱148,598,280. Thus, using the SYD method, accumulated depreciation at 12/31/19 would be
₱118,878,624 (₱148,598,280 × 12/15), which matches the amount given in the problem. 2020
depreciation expense, using the SYD method is ₱19,813,104 (₱148,598,280 × 2/15).

13. Cancun, Inc. reported net income of ₱23,498,632 for 2020. Changes occurred in several balance sheet
accounts during 2020 as follows:
Investment in Videogold, Inc. stock, carried on the equity basis ₱2,342,349 increase
Accumulated depreciation, caused by major repair to projection equipment 1,762,438 decrease
Premium on bonds payable 3,432,223 decrease
Deferred income tax liability (long-term) 762,345 increase

In Cancun’s 2020 cash flow statement, the reported net cash provided by operating activities should be

a. ₱16,961,715
b. ₱21,646,413
c. ₱18,486,405
d. ₱30,035,549

Answer: C
Net income was ₱23,498,632. Three of the four items given are net income adjustments (the major
repair to projection equipment [₱1,762,438] is a cash outflow under investing activities), resulting
in net cash provided by operating activities of ₱18,486,405.
Net income ₱23,498,632
Equity method income (2,342,349)
Premium amortization (3,432,223)
Increase in def. tax liability 762,345
Cash provided by operating activities ₱18,486,405

When equity method income is recorded, the offsetting debit is to the investment account, not
cash; when premium on bonds payable is amortized, the credit to interest expense is offset by a
debit to the premium account, not cash. Therefore, both items increase income without increasing
cash, and must be deducted as a net income adjustment. For the deferred tax items, when income
tax expense is debited, the offsetting credit is to deferred tax liability, not cash. Therefore, this
item decreases net income without decreasing cash, and it must be added back as a net income
adjustment. Note that there should normally be depreciation expense as a net income adjustment,
but it is not given.

14. If (₱576,564.23) net of tax is the reclassification adjustment included in other comprehensive income in
the year the securities are sold, what is the gain (loss) that is included in income from continuing
operations before income taxes? Assume a 30% tax rate.
a. ₱ (576,564.23)
 b. ₱ (823,663.19)
c. ₱ 576,564.23
d. ₱ 823,663.19

Answer: D
If ₱576,564.23 (net of tax) is being deducted from other comprehensive income as a
reclassification adjustment, ₱576,564.23 must be the amount of unrealized gains (net of tax) that
have been recognized in other comprehensive income. The realized gains will then be recognized
in income from continuing operations before tax. The gains before tax effects are ₱823,663.19
(₱576,564.23 ÷ 70%).

15. The following information was obtained from the audited financial statements of ABC Company for the
year ended December 31, 2019:

Operating Income ₱3,500,000

Selling, Administrative and other operating expenses 1,800,000
Finance cost 250,000
10% Convertible Bonds 2,500,000
Income tax rate 30%

Additional data:
1. There were 35,000 ordinary shares outstanding throughout the year.
2. On January 1, 2019, there were options outstanding to purchase 20,000 ordinary shares at ₱30 per
share. The average market price during the year was ₱40 per share.

What is ABC’s diluted earnings per share for 2019?

a. ₱26.93
b. ₱25.38
c. ₱17.14
d. ₱31.42

Answer: B
Operating Income ₱3,500,000
Operating expenses (1,800,000)
Finance cost (250,000)
Income before income tax 1,450,000
Income tax after income tax (1,450,000*70%) ₱1,015,000

Number of ordinary Shares:

Shares outstanding 35,000
Incremental Shares:
Option shares 20,000
Assumed treasury shares* (15,000) 5,000
Total 40,000
DEPS (1,015,000/40,00) 25.38

*Options Outstanding 20,000

Multiply by Redemption price 30.00
Total 600,00
0
Divide by Average Market 40
 Price
Assumed Treasury Shares 15,000

Financial Accounting and Reporting

Clincher

1. Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during year 2. The
cumulative effect of this change should be reported in Lore’s year 2 financial statements as a

a. Prior period adjustment resulting from the correction of an error.

b. Prior period adjustment resulting from the change in accounting principle.
c. Component of income before extraordinary item.
d. Component of income after extraordinary item.

Answer: A
A change in accounting principle is a change from one generally accepted principle to another
generally accepted principle. A correction of an error is the correction of a mathematical mistake,
a mistake in the application of an accounting principle, an oversight or misuse of existing facts,
or a change from an unacceptable principle to a generally accepted one. Therefore, a switch from
the cash basis (unacceptable) to the accrual basis (acceptable) is a correction of an error reported
as a prior period adjustment.

2. Which of the following criteria is not required for a component’s results to be classified as discontinued
operations?

a. Management must have entered into a sales agreement.

b. The component is available for immediate sale.
c. The operations and cash flows of the component will be eliminated from the operations of the entity
as a result of the disposal.
d. The entity will not have any significant continuing involvement in the operations of the component
after disposal.

Answer: A
Management is not required to have entered into a sales agreement. It is sufficient if management
is committed to a disposal plan that is reasonable. The other items are all required for
presentation as discontinued operations.

3. A company has included in its consolidated financial statements this year a subsidiary acquired several
years ago that was appropriately excluded from consolidation last year. This should be reported as

a. An accounting change that should be reported prospectively.

b. An accounting change that should be reported retrospectively.
c. A correction of an error.
d. Neither an accounting change nor a correction of an error.

Answer: B
 An accounting change that is a change in reporting entity is given retrospective application to the
earliest period presented, if practicable. The term “restatement” refers only to correction of errors
in previously issued financial statements.

4. According to the Private Company DecisionMaking Framework, which of the following is not a potential
differential factor between public business entities and private companies potentially necessitating the
need for alternative private company guidance?

a. Number of company investments.

b. Number of primary users.
c. Accounting resources.
d. Ownership and capital structure

Answer: A
Potential differential factors between public business entities and private companies include: (1)
number of primary users and their access to management; (2) investment strategies of primary
users; (3) ownership and capital structure; (4) accounting resources and (5) learning about new
financial reporting guidance.

5. On July 1, 2019, Emerald Company exchanged its equipment with another equipment of another
company. The following data were made available:

Equipment ₱5,123,436
Accumulated Depreciation 3,645,288
Fair value of equipment received 1,964,766
Cash received on exchange 940,192

If the cash flows of the equipment were the same, what is the amount of gain or loss from exchange?

a. None
b. ₱1,426,810
c. ₱486,618
d. ₱940,192

Answer: A
Since the transaction lacks commercial substance (cash flows of the equipment were the same),
no gain or loss should be recognized.

6. Which of the following enhances the relevance of accounting information?

a. Monetary unit
b. Understandability
c. Neutrality
d. Predictive Value
Answer: B
Financial information is useful when it is relevant and represents faithfully what it purports to
represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely, and understandable. – paragraph 2.4, Revised Conceptual Framework
7. In accordance with PAS 1 Presentation of Financial Statements, which one of the following items must be
separately presented in the statement of financial position?

a. Net assets
b. Non-financial assets
c. Asset revaluation surplus
d. Issued capital and reserves
Answer: D
As per PAS 1 par. 54(r), Issued capital and Reserves is presented separately in the statement of
financial position. PAS 1 does not explicitly mention to present separately the choices in A, B,
and C.

8. An entity reported the following data for the current year:

Net Sales ₱ 9,500,000 Cost of Goods Sold 4,000,000 Selling Expenses 1,000,000 Administrative
Expenses 1,200,000 Interest Expense 700,000 Gain from expropriation of Land 500,000 Income Tax
800,000 Income from Discontinued Operations 600,000 Unrealized Gain on Equity Investment at
FVOCI 900,000 Unrealized Loss on future contracts designated as Cash Flow Hedge 400,000 Increase
in projected benefit obligation due to actuarial assumptions 300,000 Foreign Translation Adjustment –
Debit 100,000 Revaluation Surplus 2,500,000
What amount should be reported as income from continuing operations?

a. ₱ 3,100,000
b. ₱ 2,300,000
c. ₱ 1,800,000
d. ₱ 2,900,000

Answer: B
Net Sales ₱ 9,500,000
Cost of Goods Sold (4,000,000)
Gross income 5,500,000
Gain from expropriation of Land 500,000
Total Income 6,000,000
Selling Expenses ₱ 1,000,000
Administrative Expenses 1,200,000
Interest Expense 700,000
Income Before Tax 3,100,000
Income Tax (800,000)
Income from continuing operations ₱ 2,300,000

9. Roller, Inc. is testing an asset for impairment. The carrying amount of the asset is ₱85,000. The following
data has been obtained by Roller in relation to the asset:
 Future cash flows expected to be derived from the asset, ₱100,000
 Estimated fair value of the asset, ₱80,000
 Present value of the future cash flows expected to be derived from the asset, ₱60,000
 Costs of disposal of the asset, ₱2,000

In accordance with PAS 36, Impairment of Assets, what is the recoverable amount of the asset?
Select which one of the following is correct.

a. ₱60,000
 b. ₱78,000
c. ₱80,000
d. ₱100,000

Answer: B
The recoverable amount of an asset is the ‘higher of its fair value less costs of disposal and its
value in use’ (PAS 36, par. 6). The value in use is the ‘present value of the future cash flows
expected to be derived from an asset’ (par. 6). In this case, the fair value less costs of disposal
is ₱78,000 (₱80,000 less ₱2,000) and the present value of the future cash flows is ₱60,000.
Therefore, the higher amount is the fair value less costs of disposal, ₱78,000.

10. Fleming Company provided the following information on selected transactions during 2020:
Dividends paid to preferred stockholders ₱150,000
Loans made to affiliated corporations 700,000
Proceeds from issuing bonds 800,000
Proceeds from issuing preferred stock 1,050,000
Proceeds from sale of equipment 450,000
Purchases of inventories 1,200,000
Purchase of land by issuing bonds 300,000
Purchases of treasury stock 600,000

The net cash provided (used) by investing activities during 2020 is

a. (₱600,000)
b. (₱250,000)
c. ₱100,000
d. ₱450,000
Answer: B
(₱700,000) + ₱450,000 = (₱250,000)
Dividends paid, proceeds from issuing bonds and preferred stock, and purchase of treasury
stock are financing activities. Purchase of inventories is an operating activity. Purchase of land
by issuing bonds is a non-cash transaction.