SME’S

NAME OF STUDENT;

YEAR AND SECTION

ENCIRCLE THE CORRECT ANSWER ;

1. An SME has the following information ;

Retained earnings Jan. 1 2,400
Transactions during the year ;
Revenues 5,000
Dividend income 800
Operating and other expenses 3,200
Dividends declared 350

Additional information ;
- During the year , the SME changed the cost flow formula for its inventories from the FIFO
method to the weighted average method . Information on the effects of the change is
shown below;
- FIFO AVERAGE

JAN 1 3,200 2,600

DEC. 31 5,300 6,400

- It was found out that depreciation in the previous period has been overstated by 1,200
- If the SME’S , opts to present a statement of income and retained earnings , the bottom
line in the statement shows an amount equal to
- A. 2,600
- B. 2,850
- C. 4,550
- D. 4,050

2. Use the following information for the next three questions ;

On January 1, 2020 , an entity acquires a bond for 1,000 pesos incurring transactions costs of
70 pesos , interest of 80 is receivable annually , in arrears over the next five years starting
December 31, 2020 . The bond has a mandatory redemption of 1,200 on December 31, 2024.
How much is the initial carrying amount of the bond?
a. 1,070
b. 930
c. 1,000
d. 1,200
3. How much is the interest income in 2020? (round off interest note to two decimal places )
a. 73
b. 84
c. 02
 d. 87
4. How much is the carrying amount of the bond on December 31, 2020?
a. 998
b. 1.093
c. 1,074
d. 1,104

Use the following information for the next three questions ;

On January 1, 2020 , an entity issue a bond for 900. Incurring transaction costs of 50, interest of 40 is
payable annually , in arrears over the next five years starting December 31, 2020. The bond has a
mandatory redemption of 1,100 on December 31, 2024 .

5. How much is the initial carrying amount of the bond?

a. 850
b. 950
c. 800
d. 900
6. How much is the interest expense in 2020? (round off interest rate to two decimal places
a. 94
b. 81
c. 87
d. 93

7. How much is the carrying amount of the bond on December 31, 2020? ( round off interest rate
to two decimal places )
a. 961
b. 1,003
c. 934
d. 891

Use the following information for the next three questions

An SME sells a group of its accounts receivable with carrying amount of 1,000,000 and fair value of
1,200,000 to a bank for 850,000. The SME continues to handle collections from the debtors on behalf
of the bank , including sending monthly statements , and the bank pays the entity of market rate fee
for servicing the receivables . The entity is obliged to remit promptly to the bank any and all amounts
collected , but it has no obligation to the bank for slow payment or non payment of the debtors .

8. How much of the receivables are derecognized ?

a. 1,000,000
b. 850,000
c. 1,020,000
d. 0
9. How much is gain or loss on derecognition ?
a. 20,000
b. 170,000
 c. 150,000
d. 0

10. Use the fact pattern from the preceding problem except that the SME has agreed to buy back
from the bank any receivables for which the debtor is in arrears as to principal or interest for
more than 120 days . The effect of the transaction is
a. Derecognition of receivable
b. Recognition of loss equal to 150,000
c. Non derecognition of receivable but a liability is recognized for the 850,000 cash receipt.
d. A and b

Use the following information for the next two questions

On January 1, 2021 and SME acquires 20 percent interest in the equity of another entity for 100,000.
The interest acquired gives the SME significant influence over the investee . During the period , the
investee reports profit of 30,000 and declares dividends of 10,000. The fair value of the investment on
December 31, 2021 is 110,000. The entity uses the PFRS for SME’s.

11. Which acceptable accounting model results to the highest carrying amount of the investment
as of December 31, 2021 ?
a. Cost model
b. Equity model
c. Fair value model
d. None of these
12. Which acceptable accounting model results to the highest investment income recognized in
profit or loss in 2021 ?
a. Cost model
b. Equity model
c. Fair value model
d. None of these
13. SME Company entered into a 5 year operating lease with lessor inc. . Annual lease is 360,000 .
However , subsequent lease payments shall be increased taking into consideration the effect
of general inflation. The consensus forecasts by local banks is that the general price level index
, as published by the government will increase by an average of 10 percent annually ove the
next five years .
How much is the rent expense recognized by SME Company in the second year of the lease ?
a. 439,567
b. 435,600
c. 396,000
d. 360,000
14. How much is the rent income recognized by Lessor Inc, in the third year of the lease ?
a. 439,567
b. 479,106
c. 435,600
d. 479,160
 Use the following information for the next four questions
SME Co. entered a three year operating lease with Lesor Inc. Annual lease is 100,000. The
lease contract contains a provision for an annual increase in the rent equal to 5 percent. The
additional rentals are not related to general inflation .
15. How much is the balance of rent payable at the end of the first year of the lease.
a. 5,083
b. 5,938
c. 5,632
d. 0
16. How much is the balance of rent receivable at the end of second year of the lease ?
a. 5,094
b. 5,234
c. 5,167
d. 0
17. How much is the rent expense recognized by SME Co. in the second year of the lease ?
a. 105,083
b. 110,250
c. 115,763
d. 151,763
18. How much is the rent income recognized by Lessor Inc. in the third year of the lease ?
a. 105,083
b. 110,250
c. 115,763
d. 151,763

Use the following information for the next two questions

An SME provides one year warranty for the products it sells . During the period, the SME made total
sales of 5,000 units . It was estimated that 80 percent of the units sold may not have any defects . A
major defect requires repair costs of 100 while a minor defect requires repair costs of 20. Actual repair
costs incurred for defective units sold during the year amounted to 10,000

19. How much warranty provision is recognized at year end ?

a. 42,000
b. 52,000
c. 58,000
d. 68,000
20. How much is the warranty expense for the period ?
a. 42,000
b. 52,000
c. 68,000
d. 58,000

Use the following information for the next two questions

An SME sells goods in exchange for a 340,000 note receivable in two years time. The cash sales price
of the goods is 280,992 . The gross profit rate based on cost on the transaction is 30 percent . Other
operating expenses amounted to 50,000.

21. How much is the sales revenue recognized by the SME?

a. 340,000
b. 280,992
c. 64,844
d. 334,156
22. How much is the profit (loss) of the SME?
a. 14,844
b. (14,844)
c. 46,988
d. 42,944

On December 31, 2021 , an SME tests for impairment an equipment which was acquired 8 years ago
for 1,600,000. The equipment has an originally estimated useful life of 15 years and residual value of
100,000.

The fair value of the equipment on December 31, 2021 is 700,000. Costs to sell are estimated at
20,000. The SME makes the following cash flow projections for value in use computation. The pre tax
discount rate is 12 percent. Cash flows are expected to occur at the end of each year .

Year Net cash flows

2022 180,000

2023 167,400

2024 155,682

2025 144,784

2026 134,649

2027 125,224

2028 116,458

23. How much is the impairment loss?

a. 110,485
b. 112,746
c. 72,460
d. 65,250

Use the following information for the next four questions

An SME has a pretax profit of 18,000 in 2021. The following were the transactions during the period ;
 - A warranty provision of 3,000 has been recognized for goods sold during the period. The
amount recognized as a provision is not deductible for tax purposes until it is actually paid
or used.
- Interest receivable of 1,000 has been recognized on a note. The interest is taxable only
when actually collected .
- On January 1, 2021 , the SME acquired an equipment for 200,000 for 200,000. The asset is
being depreciated on a straight line basis .
- Any tax losses are permitted to be carried forward as tax deduction in future periods.
However the SME expects to use only 40 percent of any tax losses within the permitted
carry forward period.
- The currently enacted tax rate is 35 percent, while the substantially enacted tax rate for
2022 and future periods is 30 percent .
- The SME made quarterly income tax payments during the period for a total of 50,000.
- There are no temporary differences as of the beginning of the period.
24. How much is the current tax (liability ) as of December 31, 2021?
a. (14,000)
b. 6,000
c. (40,000)
d. 50,000
25. How much is the deferred tax asset as December 31, 2021 ?
a. 1,050
b. 2,450
c. 3,900
d. 2,100
26. How much of the deferred tax liability as of December 31, 2021?
a. 9,300
b. 10,850
c. 8,700
d. 9,000
27. How much is the income tax expenses as of December 31, 2021 ?
a. 6,300
b. 3,600
c. 4,600
d. 0

Use the following information for the next three questions ;

An SME reports pretax profit of 280,000 . The tax rate is 30 percent . The pretax profit reflects the
following ;

- Interest income of 30,000 that is subject to final tax

- Entertainment expense of 25,000 that is not tax deductible
- A 10,000 bad debts expense of which 8,000 pertain to worthless receivables actually
written off and the remaining 2,000 pertain to estimated allowance for other receivables .
Only worthless receivables actually written off are tax deductible .
- Depreciation of 75,000 . However the tax deductible depreciation is 100,000.
28. How much is the current tax expense?
a. 82,500
b. 75,600
c. 83,600
d. 78,300
29. How much is the deferred tax expense? (BENEFIT )
A. 23,000
B. (6,900)
C. (23,000)
D. 6,900
30. HOW much is the income tax expense ?
a. 82,500
b. 75,600
c. 83,600
d. 78,300