FINANCIAL ACCOUNTING AND REPORTING

EASY
1. Which statement is correct regarding the Conceptual Framework?
a. It assists the Board of Accountancy in promulgating rules and regulations affecting the
practice of accountancy in the Philippines.
b. The enhancing qualitative characteristics, either individually or as a group, can make
information useful even if that information is irrelevant or not faithfully represented.
c. Only items that meet the definition of an asset, a liability or equity are recognized in
the statement of financial position.
d. The new definition of asset requires that it should be certain or likely that economic
benefits will arise.

2. Which of the following concepts or principles relates most directly to reporting accounting
changes and errors?
a. Conservatism c. Objectivity
b. Consistency d. Materiality

3. The following trial balance of an entity on December 31, 2022 has been adjusted except
for income tax expense.

Cash 6,000,000
Accounts receivable 14,000,000
Inventory 9,200,000
Property, plant and equipment 25,000,000
Accounts payable 8,200,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings, Jan. 1 9,000,000
Net sales and other income 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
125,200,000 125,200,000

During the year, estimated tax payments of P5,000,000 were charged to income tax
expense. The tax rate is 30% on all types of revenue. The preference share capital is
redeemable mandatorily on December 31, 2023.

What amount should be reported as current assets on December 31, 2022?

a. P29,200,000 c. P29,500,000
b. P29,700,000 d. P30,000,000

4. A debt instrument with NO ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place:
 A. The present value of the debt instrument must be approximated using an imputed
interest rate
B. It should not be recorded on the books of either party until the fair value of the
property becomes evident
C. The board of directors of the entity receiving the property should estimate a value to be
signed to the will serve as a basis for the transaction
D. The directors of both entities involved in the transaction should negotiable a value to be
assigned to the property

5. On July 1, 2022, the entity purchased a noncash asset with a list price of P260,000 by
issuing a five-year noninterest-bearing note. The market or "going" rate of interest for
this note was 12%. The note will; be paid in five equal annual P64,000 installments each
June 30, 2023 through 2027. The interest expense to be recognized by the entity for the
year ended December 31, 2022 is
A. P27,685 C. P13,842
B. P15,600 D. Nil

6. Which statement is incorrect regarding the definition of lease in PFRS 16?

A. The definition applies to both parties to a contract, ie the customer (‘lessee’) and the
supplier (‘lessor’).
B. PFRS 16 retains the definition of a lease in PAS 17 but changes the guidance setting
out how to apply it.
C. The changes mainly relate to the concept of control used within the definition—PFRS 16
determines whether a contract contains a lease on the basis of whether the customer
has the right to control the use of an identified asset for a period of time.
D. The changes to the guidance on the definition inPFRS 16 are expected to affect
conclusions about whether contracts contain a lease for the vast majority of contracts.

7. Which of the following items should be included in a company's inventory at the statement
of financial position date?
A. Goods in transit which were purchased f.o.b. destination.
B. Goods received from another company for sale on consignment.
C. Goods sold to a customer which are being held for the customer to call for at his or her
convenience.
D. None of these.

8. Which statement is incorrect regarding PFRS 13?

A. It defines fair value.
B. It sets out in a single PFRS a framework for measuring fair value.
C. It requires disclosures about fair value measurements.
D. It identifies the items that should be measured at fair value.

9. Entity A had a plantation forest that is likely to be harvested and sold in 30 years. The
income should be accounted for in the following way:
A. No income should be reported until first harvest and sale in 30 years.
B. Income should be measured annually and reported using a fair value approach that
recognizes and measures biological growth.
 C. The eventual sale proceeds should be estimated and matched to the profit and loss
account over the 30-year period.
D. The plantation forest should be valued every 5 years and the increase in value should
be shown in the statement of profit or loss.

10. Sunflower Company acquired some new equipment. The following data have been
made available to you:

List price of the equipment P14,000

Cash discount available but not taken on purchase 200
Freight paid on the new equipment 250
Cost of removing the old equipment 170
Installation costs of the new equipment 430
Testing costs before the equipment was put to
regular operation (including P120 in wages of the
regular equipment operator) 295
Loss on premature retirement of the old equipment 120
Estimated cost of manufacturing similar equipment
in the company's own plant, including overhead 13,800

What amount should Sunflower capitalize as the cost of the new equipment?
A. P14,525 C. P14,775
B. P14,695 D. P14,945

MODERATE

1. PFRS 6 applies to expenditures incurred.

A. When searching for an area that may warrant detailed exploration, even though the
entity has not yet obtained the legal rights to explore a specific area
B. When the legal rights to explore a specific are have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resources are not yet
demonstrable
C. When a specific area is being developed and preparations for commercial extraction are
being made
D. In extracting mineral resources and processing the resource to make it marketable or
transportable

2. On January 1, 2022, Golden State Corporation purchased a patent for P330,000 cash. The
20-year legal life of the patent begins from January 1, 2017 (date of registration). Golden
State initially intends to use the patent throughout its remaining useful life. But on
December 31, 2022, Golden State estimated that the total useful life of the patent would
probably be 15 years from date of registration with no residual value. At the end of the
current accounting year, December 31, 2022, Golden State should patent amortization
expense of:
A. P22,000 C. P30,000
B. P27,500 D. P33,000
3. When assessing the recoverable amount of assets that have previously been subject to an
impairment loss, which of the following indicators assist in providing external evidence that
an impairment loss has reversed?
A. The asset’s market value has decreased significantly during the period.
B. Significant changes with an adverse effect on the entity have taken place.
C. Market interest rates have decreased during the period.
D. Internal reporting sources indicate that the economic performance of the asset will not
be as good as expected.

4. Miraleste Corp. accounts for non-current assets using the cost model. On 30 October 2022
the entity classified a non-current asset as held for sale in accordance with PFRS5. At that
date the asset's carrying amount was P15,000,000, its fair value was estimated at
P11,000,000 and the costs to sell at P1,500,000. On 20 November 2022 the asset was sold
for net proceeds of P9,200,000. In accordance with PFRS5, what amount should be
included as a loss on disposal in Miraleste Corp.’s statement of comprehensive income for
the year ended 31 December 2022?
A. Nil C. P5,500,000
B. P300,000 D. P5,800,000

5. When funds are borrowed to pay for construction of assets that qualify for capitalization of
interest, the excess funds not needed to pay for construction may be temporarily invested
in interest-bearing securities. Interest earned on these temporary investments should be
A. Offset against interest cost incurred during construction.
B. Used to increase the cost of assets being constructed.
C. Multiplied by an appropriate interest rate to determine the amount of interest to be
capitalized.
D. Recognized as revenue of the period.

6. Yu Tang Corp. commenced the construction of a new packaging plant on 1 February 2022.
The cost of P1,800,000 was funded from existing borrowings. The construction was
completed on 30 September 2022.

The entity’s borrowings during 2022 comprised:

o Loan from Allied Bank: P800,000 at 6% per annum;
o Loan from BDO Bank: P1 million at 6.6% per annum; and
o Loan from Metro Bank: P3 million at 7% per annum.

The amount of borrowing costs to be capitalized by Yu Tang Corp. in relation to the

packaging plant is
A. Nil C. P 91,125
B. P81,000 D. P121,500

7. The following statements relate to cash. Which statement is incorrect?

A. The purpose of establishing a petty cash fund is to pay small expenses which cannot be
paid conveniently by means of check.
B. Classification of a restricted cash balance as current or noncurrent should parallel the
classification of the related obligation for which the cash was restricted.
 C. Compensating balances required by a bank may be included in “cash and cash
equivalent”.
D. The term “cash equivalent” refers to demand credit instruments such as money order
and bank drafts.

8. The bank statement of Baltoy, Inc. for April showed an ending balance of P169,263.
Deposits in transit on April 30 was P18,200. Outstanding checks as of April 30, were
P59,435, including a P5,000 check which the bank had certified on April 27. During the
month of April, the bank charged back NSF checks in the amount of P3,435 of which
P1,835 had been redeposited by April 20. On April 23, the bank charged Baltoy’s account
for a P2,200 items which should have been charged against Boltay, Inc., the error was not
detected by the bank. During April, the proceeds from notes collected by the bank for
Baltoy, Inc. was P7,548 and bank charges for this services was P18. How much is the
unadjusted balance per books of Baltoy, Inc. on April 30?
A. P141,158 C. P130,828
B. P135,228 D. P129,298

9. Which of the following statements best defines a derivative financial instrument?

A. Its value is derived from an underlying primary instrument, it requires little initial
investment, and it is settled at a future date.
B. Its value is derived from an underlying primary instrument, it requires substantial initial
investment, and it is settled at a future date.
C. Its value is derived from an underlying primary instrument, it requires little initial
investment, and it is exercised immediately.
D. Its value is derived from the stock market, it requires little initial investment, and it is
settled at a future date.

10. An entity issued a financial liability designated at FVTPL for P1 million. At the end of the
reporting period, the fair value of the financial liability decreased by P100,000 attributable
to:

Credit risk P30,000

Interest rate risk 60,000
Other price risk 10,000

The decrease in fair value of the financial liability to be recognized in profit or loss is
A. P100,000 C. P70,000
B. P 90,000 D. Nil

DIFFICULT

1. On January 1, 2021, Madelle Corp. granted an employee an option to purchase 3,000

shares of Madelle's P5 par value ordinary shares at P20 per share. The grant is subject to
the award being ratified in a general meeting of the shareholders. A meeting on April 30,
2021 approved the award. The option became exercisable on December 31, 2022, after
the employee completed two years of service.
 The market prices of Madelle's shares and share options were as follows:
Market price Market price of
of share similar share option
Date
Jan. 1, 2021 P30 P7
April 30, 2021 35 8
Dec. 31, 2021 50 9
Dec. 31, 2022 45 11

Madelle should recognize compensation expense in 2022 profit or loss of

A. P24,000 C. P12,000
B. P21,000 D. P10,500

2. The following differences enter into the reconciliation of accounting profit and taxable
profit of an entity for the year ended December 31, 2022, its first year of operations.

Accounting profit P4,500,000

Excess tax depreciation 3,000,000
Litigation accrual 450,000
Unearned rent income deferred on the books but
appropriately recognized in taxable income 250,000
Interest income from long-term certificate of deposit 100,000

Additional information:
 Excess tax depreciation will reverse equally over a four-year period, 2023-2026.
 It is estimated that the litigation liability will be paid in 2026.
 Rent income will be recognized during the last year of the lease, 2026.
 Interest income from long-term certificate of deposit is tax exempt.
 Tax rate is 30%.

Compute for the deferred tax expense (benefit) for 2022.

A. P690,000 C. P840,000
B. P810,000 D. P(960,000)

3. An entity is considering the proper accounting for these contracts:

 The entity issued 100,000 warrants for P2 each. Each warrant gives the holder the right
to acquire one new P10 ordinary share for P50 during the next four years. The market
value of each warrant at the end of the reporting period is P5.
 At the end of the reporting period, the entity purchased a call option that gives it the
right to repurchase 10,000 of its own shares for a fixed price of P60 per share. The
entity paid P60,000 for these options.
 At the end of the reporting period, the entity entered into a forward contract that
requires it to repurchase 2,000 of its own shares for P120,000 at the end of the next
accounting period. No consideration is paid or received at the inception of the contract.
The market interest rate is 10% on the date of agreement.
 At the end of the reporting period, the entity entered into a non-derivative contract to
deliver to another entity as many of the entity’s own ordinary shares as will equal
P100,000. This contract is to be settled one month from the date of agreement.
 At the end of the reporting period, the net increase in the entity’s equity as a result of
these contracts is
A. P 30,908 C. P140,000
B. P130,908 D. P330,908

4. Twilight Corporation has determined that its fine china division is a cash-generating unit.
The carrying amounts of the assets at 31 December 2022 are as follows:

Factory P210,000
Land 150,000
Equipment 120,000
Inventory 60,000
Total P540,000

Twilight Corporation calculated the value in use of the division to be P510,000. The fair
value less costs of disposal of the land is P145,000.

The carrying amount of Twilight Corporation’s equipment after allocating impairment loss
is
A. P110,909 C. P112,308
B. P113,333 D. P112,500

5. Cash in bank balance of William Co. on January 1, 2022 was P70,000 representing 35%
paid-up Capital of its authorized share capital of P200,000. During the year you
ascertained the following postings to some accounts, as follows:

Debit Credit
Petty cash fund P 2,000
Accounts receivable trade 450,000 P290,000
Subscriptions receivable 60,000 50,000
Delivery equipment 50,000
Accounts payable trade 280,000 430,000
Bank loan 35,000 80,000
Accrued expenses 1,500
Subscribed share capital 60,000
Unissued share capital 130,000
Authorized share capital 200,000
Sales 450,000
Purchases 430,000
Expenses (including depreciation of P5,000
and accrued expenses of P1,500) 90,000

Cash in bank balance of William Co. at December 31, 2022 was

A. P41,500 C. P34,500
B. P33,000 D. P39,500

6. The following information pertains to Lender A’s loan portfolio at December 31, 2022:
 PV of Expected Past due
Loan Amount Future Cash Flows status
1 P600,000 P360,000 91 days
2 500,000 450,000 Current
3 400,000 320,000 31 days
4 300,000 270,000 Current
5 200,000 160,000 61 days
6 100,000 60,000 91 days

Lender A considers all loans over 90 days past due to be credit-impaired based on
historical experience with recovering the associated debt.

Additional information taking into account historical information, current conditions and
forward- looking information, including actual loss experience and recoveries from the sale
of collateral, is as follows:

Probability of default in the 2%

next 12 months
Lifetime probability of default
Credit-impaired loans 100%
Not credit-impaired loans 5%

The total loss allowance to be recognized by Lender A at December 31, 2022 is

A. P287,600 C. P282,400
B. P283,600 D. P280,000

7. On January 1, 2022, the Esmee Lending Company made a P200,000, 8% loan. The
interest is receivable at the end of each year, with the principal amount to be received at
the end of 5 years. As of December 31, 2022, the interest for the current year has not
yet been received nor recorded because the borrower is experiencing financial difficulties.
The lending company negotiated a restructuring of the loan. The payment of all of the
interest based on the original principal will be delayed until the end the 5-year loan term.
In addition, the amount of principal repayment will be dropped from P200,000 to
P100,000. The prevailing interest rate for similar type of loan as of December 31, 2022 is
10%. The interest income to be recognized by Esmee Lending Company in 2023 is
A. P12,294 C. P10,584
B. P11,431 D. P 9,800

8. Kat Corp. has the following accounts with Sam Corp., an associate:

Investment in ordinary shares P4,500,000

Investment in preference shares 1,600,000
Loans receivable - unsecured 900,000
Loans receivable - secured 500,000
Accounts receivable 200,000
Accounts payable 100,000
 If the ‘share of loss of associate’ recognized by Kat Corp. is P6,500,000, how much should
be allocated to Loans receivable – unsecured?
A. P900,000 C. P400,000
B. P720,000 D. Nil

9. Emong Co. purchased a put option on Apol ordinary shares on August 1, 2022, for
P10,000. The put option is for 20,000 shares, and the strike price is P30. The option
expires on January 31, 2023. The following data are available with respect to the put
option:

Market Price of Time Value

Date Apol Shares of Put Option
December 31, 2022 P31 per share P2,100
January 31, 2023 P32 per share 0

What was the effect on profit of entering into the derivative transaction for the year 2022?
A. P12,100 increase C. P10,000 decrease
B. P10,000 increase D. P 7,900 decrease

10. An entity is required to publish interim financial reports and is currently considering the
accounting for the following:
 Sales of the entity for the first two quarters are as follows:

Quarter ended Amount

March 31 P3,200,000
June 30 3,000,000

 On January 1, the entity signed a 1-year rental with quarterly payments of P100,000
due at the end of each quarter. In addition, the entity must pay contingent rent of
5% of all sales in excess of P10,000,000. The contingent rent is payable on January
31 of the following year. The entity estimates that it is probable that it will pay
additional rent.
 The entity sells electrical goods, and normally 5% of customers claim on their
warranty. The provision in the first quarter was calculated as 5% of sales to date.
However, in the second quarter, a design fault was found and warranty claims were
expected to be 10% for the whole year.
 The entity paid P400,000 fire insurance premium for the calendar year.
 The entity paid P600,000 on February 1 for the calendar-year property tax.
 In the first week of April, the entity made unanticipated major repairs to its
equipment at a cost of P180,000.
 The inventory at June 30 was includes P500,000 of slow moving inventory that is
expected to be sold for a net amount of P300,000.

The total expense to be recognized in the entity’s profit or loss for the quarter ended June
30 is
a. P1,215,000 c. P1,095,000
b. P1,190,000 d. P 895,000
CLINCHER

1. There are certain accounting treatments which are not allowable under the Standard for
SMEs. Which of the following accounting treatments are not allowable under the
Standard?
A. Weighted-average method for inventory'
B. Equity method for associates'
C. Revaluation model for intangible assets.
D. Temporary difference approach for deferred taxation.

2. Changes in account balances of an entity for 2022, except for retained earnings, are:
Increase
(Decrease)
Cash P5,000,000
Accounts receivable, net 3,500,000
Inventory 2,000,000
Investments ( 500,000)
Accounts payable (3,000,000)
Bonds payable 4,000,000
Share capital 6,000,000
Share premium 1,000,000

What should be the 2022 net income, assuming there were no entries in the retained
earnings account except for the net income and a dividend declaration of P2,000,000
which was paid in the current year?
a. P2,000,000 c. P7,000,000
b. P4,000,000 d. P9,000,000

3. The Royal Furniture Mfg. Co. fabricated furniture and fixtures for its office use in the
company’s plant during the year. The following data were taken from the company’s
records:

Materials Direct Labor

Finished goods P100,800 P151,200
Office furniture & fixtures 67,200 50,500

Factory overhead amounted to P134,000. Normal production of finished goods results to

420 units. Due to the fabrication of office furniture and fixtures, finished goods produced
totaled 294 units only in the current year.

What is the total cost of office furniture and fixtures?

a. P117,600 c. P175,029
b. P157,900 d. P251,600

4. Mernadeth Corporation reported P70,000 of inventory on December 31, 2022, based on

physical count. Additional information was given as follows:
a. Included in the physical count were goods billed to a customer, FOB shipping point, on
 December 31, 2022. The goods had a cost of P3,000 and have been billed at P5,000.
The shipment is ready for pick-up by the delivery contractor.
b. Goods were in transit from a vendor. The invoice cost was P8,000 and goods were
shipped FOB shipping point on December 31, 2022.
c. Work in process costing P500 was sent to an outside processor for finishing on
December 30, 2022.
d. Goods out on consignment amounted to P4,600 (sales price); shipping costs, P120
(markup is 15% on cost).
The correct amount Mernadeth Corporation’s inventory at December 31, 2022 is
A. P85,620 C. P82,620
B. P85,500 D. P82,500

5. The Premier National Bank has a note receivable of P200,000 from the Marvelous
Company that it is carrying at face value and is due on December 31, 2026. Interest on
the note payable at 9% each December 31. The Marvelous Company paid the interest
due on December 31, 2022, but informed the bank that it would probably miss the next
two years' interest payments because of its financial difficulties. After that, it expected to
resume its annual interest payments, but it would make the principal payment one year
late, with interest paid for that additional year at the time of the principal payments. How
much should be recognized by Premier National Bank as impairment loss in 2022?
A. P12,752 C. P31,671
B. P19,965 D. P32,812