EXPANDED OPPORTUNITY

ACC 221 – Part 1

1. In accounting for a defined benefit pension plan

a. An appropriate funding pattern must be established to ensure that enough funds will be available at
retirement to meet the benefits promised.
b. The employer’s responsibility is simply to make a contribution each year based on the formula
established in the plan.
c. The expense recognized each period is equal to the cash contribution.
d. The liability is determined based upon known variables that reflect future salary levels promised to
employees.

2. De Guzman Company has established a defined benefit pension plan for the employees. Annual payments
under the pension plan are equal to 3% of an employee’s highest lifetime salary multiplied by the number of
years with the entity. An employee’s salary in 2021 was P300,000. The employee is expected to retire in 10
years, and the salary increases are expected to average 4% per year during that period. As of December 31,
2021, an employee has worked for 12 years. The future value of 1 at 4% for 10 periods is 1.48. What is the
amount of annual pension payment that will be used in computing the employee’s projected benefit
obligation on December 31, 2021?
a. P 108,000 b. P 159,840 c. P 198,000 d. P 293,040

3. An analysis of equity of Juan Corporation as of January 1, 2018, is as follows:

Share capital – ordinary, par value P20; authorized 100,000 shares;

Issued and outstanding 90,000 shares 1,800,000
Share premium – ordinary 900,000
Retained earnings 760,000
Total 3,460,000

Juan uses cost method of accounting for treasury share and during 2018 they entered into the following
transactions:

Acquired 2,500 of its shares for P75,000.

Sold 2,000 treasury shares at P35 per share.
Sold the remaining treasury shares at P20 per share.

Assuming no other equity transactions occurred during 2018, what should Juan report at December 31, 2018,
as total share premium?
a. P 895,000 b. P 900,000 c. P 905,000 d. P 915,000

4. An appropriation of retained earnings for future plant expansion will result in

a. The established of a fund to help finance future plan expansion.
b. The setting aside of cash to be used for future plant expansion.
c. A decrease in cash with an equal increase in the investments and funds.
d. The disclosure that management does not intend to distribute in the form of dividends assets equal to
the amount of the appropriation.

5. In accounting for share-based compensation, what interest rate is used to discount both the exercise price of
the option and the future divided stream?
a. The entity’s known incremental borrowing rate.
b. The current market rate that entities in the particular industry use to discount cash flows.
c. The risk-free interest rate.
d. Any rate that entities can justify as being reasonable.

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6. Sta. Ana Company has granted share options to its employees with a fair value of P6,000,000. The options
best in three years. The Monte-Carlo model was used to value the options. On January 1, 2014, the date of
grant, the estimate of employees leaving during the vesting period is 5%. On January 1, 2015, the estimate of
employee leaving before the vesting date was revised to 6%. On December 31, 2016, a total of 10% of the
employees left the company. What would be the compensation expense for the year 2016?
a. P 1,640,000 b. P 1,800,000 c. P 1,860,000 d. P 1,880,000

7. Which of the following statement is correct regarding accounting changes that result in financial statements
that are effect the statements of a different reporting entity?
a. Cumulative-effect adjustments should be reported as a separate item in the financial statements
pertaining to the year of the change.
b. No restatements or adjustments are required if the changes involve the cost r equity methods of
accounting for investments.
c. No restatements or adjustments are required if the changes involve the cost or equity methods of
accounting for investments.
d. The financial statements of all prior periods presented are adjusted retrospectively.

8. Daisyrie Company began operations on January 1, 2020. The entity used the FIFO method of valuing its
inventory. Management is contemplating a change to the weighted average method and is interested in
determining what effect such change will have on net income. The following information has been
developed:

2020 2021
FIFO ending inventory 2,400,000 2,700,000
Average ending inventory 2,000,000 2,100,000
Net income under FIFO 1,200,000 1,700,000

What would be the net income for 2021 if there is a change from FIFO to weighted average method?
a. P1,500,000 b. P1,700,000 d. P2,300,000 d. P2,700,000

9. During the current year, an entity discovered that ending inventory reported in its prior year financial
statements was understated. How should the entity account for this understatement in the comparative
statement?
a. Adjust the beginning inventory.
b. Restate the financial statements with corrected balances for all periods presented.
c. Adjust the ending balance in the retained earnings account.
d. Make no entry because the error will self-correct.

10. On January 2, 2021, to better reflect the variable use of its only machine, Holly, Inc. elected to change its
method of depreciation from the straight-line method to the units of production method. The original cost of
the machine on January 2, 2019, was P50,000, and its estimated life was ten years. Holly estimates that the
machine’s total life is 50,000 machine hours. Machine hours usage was 8,500 during 2019 and 3,500 during
2020. Holly’s income tax rate is 30%. Holly should report the accounting change in its 2021 financial
statements as a(n)
a. Cumulative effect of a change in accounting principle of P2,000 in its income statement.
b. Entry for current year depreciation expense on the income statement and treated on a prospective basis.
c. Cumulative effect of a change in accounting principle of P1,400 in its income statement.
d. Adjustment to beginning retained earnings of P1,400.

11. The effects of a change in accounting principle should be recorded on a prospective basis when the change is
from the
a. Cash basis of accounting for vacation pay to the accrual basis.
b. Straight-line method of depreciation for previously recorded assets to the double-declining balance
method.

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 c. Presentation of statements of individual companies to their inclusion in consolidated statements.
d. Completed-contract method of accounting for long-term construction-type contracts to the percentage-
of-completion method.

12. On January 1, 2017, Flax Co. purchased a machine for P528,000 and depreciated it by the straight-line
method using an estimated useful life of eight years with no salvage value. On January 1, 2020, Flax
determined that the machine had a useful life of six years from the date of acquisition and will have a salvage
value of P48,000. An accounting change was made in 2020 to reflect these additional data. The accumulated
depreciation for this machine should have a balance at December 31, 2020, of
a. P292,000
b. P308,000
c. P320,000
d. P352,000

13. S1 Company began operations on January 1, 2015. Financial statements for 2015 and 2016 contained the
following errors:
Dec. 31, 2015 Dec. 31, 2016
Ending Inventory 150,000 too high 100,000 too low
Depreciation expense 140,000 too high -
Insurance expense 25,000 too low 25,000 too high
Prepaid insurance 25,000 too high

In addition, on December 31, 2016, fully depreciated equipment was sold for P30,000, but the sale was not
recorded until 2017. No corrections have been made for any of the errors. Ignore income tax considerations.
The total effect of the errors on the balance of S1 Company’s accumulated profits at December 31, 2016 is
understated by
a. P 45,000 b. P 130,000 c. P 155,000 d. P 170,000

14. The term comprehensive income

a. Must be reported on the face of the income statement.
b. Includes all changes in equity during a period except those resulting from investments by and
distributions to owners.
c. Is the net change in owners’ equity for the period.
d. Is synonymous with the term net income.

15. Kirvy Company reported the following components of other comprehensive income for the current year:

Unrealized loss on futures contract designated as cash flow hedge 500,000

Revaluation surplus during the year 350,000
Unrealized gain on nontrading equity investment measured at FVOCI 150,000
Remeasurement gain on employee benefits 120,000
Gain on translation of financial statements of a foreign operation 150,000
Loss from change in fair value attributable to credit risk of a financial liability
designated at FVPL 200,000

In preparing the statement of comprehensive income, what net income should be reported as components of
other comprehensive income that may not be recycled to profit or loss?
b. P 350,000 b. P 420,000 c. P 470,000 d. P 620,000

16. Which statement about discontinued operation is true?

a. The gain or loss on disposal of a component of a business should be reported as other income
b. Earnings per share should not be presented for discontinued operation
c. Results of operations of a discontinued component should be reported below income from continuing
operation

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 d. The gain or loss on disposal of a component of a business should not be segregated but reported together
with the results of continuing operations.

17. On April 1, 2021, Jenny Company has a machine with a cost of P1,000,000 and accumulated depreciation of
P750,000. On April 1, 2021, Jenny Company classified the machine as held for sale and decided to sell the
machine within 1 year. On April 1, 2021, the machine had an estimated selling price of P100,000 and a
remaining useful life of 2 years. It is estimated that selling costs associated with the disposal of the machine
will be P10,000. On December 31, 2021, the estimated selling price of the machine had increased to P150,000
with estimated selling cost of P20,000.

What amount should be recognized as gain on reversal of impairment on December 31, 2021?
a. P40,000 b. P60,000 c. P73,750 d. P93,750

18. Which is a financing activity in the statement of cash flows?

a. Cash purchase of intangible asset
b. Cash purchase of treasury shares
c. Cash received as repayment for funds loaned
d. Cash purchase of bonds issued by another entity

19. Selected information from V1 Corporation’s 2015 accounting records is as follows:

Proceeds from issuance of ordinary shares 4,000,000

Stock issue cost 100,000
Proceeds from issuance of bonds 2,300,000
Cash dividends on ordinary shares paid 500,000
Cash dividends on preference shares paid 300,000
Purchases of treasury shares 600,000
Sales of shares officers and employees not included above 550,000
Payment for interest on borrowings 120,000

V1 Corporation’s statement of cash flows for the year ended December 31, 2015 would show net cash
provided by financing activities of
a. P 4,900,000 b. P 5,000,000 c. P 5,350,000 d. P 5,450,000

20. If the share option is converted on April 30,

Statement I The potential ordinary shares are included in diluted EPS up to April 30 weighted accordingly.
Statement II In basic EPS, from the date converted to the year-end weighted accordingly
a. Both statements are true c. Statement 1 is false while statement II is true
b. Both statements are false d. Statement 1 is true while statement II is false

21. At December 31, 2025, I1 Company had 2,000,000 shares of ordinary shares outstanding. On March 1, 2026,
I1 Company issued 500,000 shares of preference shares, which were convertible into 1,500,000 ordinary
shares. During 2026, I1 Company declared and paid P1,000,000 cash dividends on the ordinary shares and
P800,000 cash dividends on the preference shares. Net income for the year ended December 31, 2026, was
P6,500,000. Assuming an income tax rate of 35%, what should be the diluted earnings per share for the year
ended December 31, 2026?
a. P 1.75 b. P 1.86 c. P 2.00 d. P 2.85

22. In the absence of liquidation value, the preference shareholders shall receive what amount in the event of
liquidation?
a. Liquidation value
b. Par value or stated value
c. Book value
d. Fair value