AFAR Questions
AFAR Questions
AFAR Questions
1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value
method to account for this investment. Trace reported net income of $110,000 for 2008 and paid
dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this
investment in 2008?
A) $16,500.
B) $9,000.
C) $25,500.
D) $7,500.
E) $50,000.
2. 4. A company should always use the equity method to account for an investment if
A) it has the ability to exercise significant influence over the operating policies of the investee.
B) it owns 30% of another company’s stock.
C) it has a controlling interest (more than 50%) of another company’s stock.
D) the investment was made primarily to earn a return on excess cash.
E) it does not have the ability to exercise significant influence over the operating policies of the
investee.
3. In a situation where the investor exercises significant influence over the investee, which of the
following entries is not actually posted to the books of the investor?
1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment
account.
A) Entries 1 and 2.
B) Entries 2 and 3.
C) Entry 1 only.
D) Entry 2 only.
E) Entry 3 only.
4. Which one of the following statements is not a key feature of the acquisition method?
a. The measurement of acquired identifiable assets at fair value
b. Goodwill is measured as the consideration transferred plus the amount of any non-
controlling interest, plus the fair value of any previously held equity interest in the
acquiree, less the fair value of the identifiable net assets acquired
c. Cost of the business combination is measured at the fair value of the net assets
received from the acquiree
d. An acquirer being identified for each business combination
5. Baby Frames, Inc., evaluates manufacturing overhead by using variance analysis. The
following information applies to the month of May:
Actual Budgeted
Number of frames manufactured 19,000 20,000
Variable overhead costs P4,100 P2 per direct labor
hour
Fixed overhead costs P22,000 P30,000; P1 per unit
Direct labor hours 2,100 hours 0.1 hour per frame
6. When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the
withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to
the withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.
7. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their
partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to
withdraw from the partnership. An appraisal of the business and its property estimates the fair
value to be $ 200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has
agreed to receive $20,000 in exchange for her partnership interest. What amount should land be
recorded on the partnership books?
A) $20,000.
B) $30,000.
C) $45,000.
D) $50,000.
E) $200,000.
8. What is a marshaling of assets?
A) a listing of estimated realizable values of a business's assets
B) the order in which the creditors of a partnership will be paid as partnership assets are
liquidated
C) the order in which partners receive cash as partnership assets are liquidated
D) a ranking of claims against an individual
E) the order in which the partnership's assets are liquidated
A) 1 and 2 only
B) 3 and 4 only
C) 1, 2, and 3
D) 1, 2, 3, and 4
E) Neither 1, 2, 3, or 4
10. A discount or premium on a forward contract is deferred and included in the measurement of
the related foreign currency transaction if the contract is classified as a:
11. On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an
unamortized discount of $28,000. Steiner Company, an 80% subsidiary, purchased $350,000 of
these bonds at 102. The gain or (loss) on the retirement of Plueger’s bonds is:
a. $14,000 loss.
b. $14,000 gain.
c. $21,000 loss.
d. $21,000 gain.
12. Under SFAS 141R, what value of the assets and liabilities are reflected in the financial
statements on the acquisition date of a business combination?
a. Carrying value
b. Fair value
c. Book value
d. Average value
13. Which statement below is false concerning IFRS for marketable debt and equity
investments?
a. Trading investments are reported at fair value, with unrealized gains and losses
reported in income.
b. Available-for-sale investments are reported at fair value, with unrealized gains
and losses reported in equity.
c. Impairment losses are reported in equity, and cannot be reversed.
d. Held-to-maturity investments are reported at amortized cost.
14. In relation to goodwill arising from a business combination, which one of the following
statements is in accordance with PFRS 3 Business Combinations?
15. Baker Co. has a franchise restaurant business. On January 15 of the current year, Baker charged
an investor a franchise fee of P65,000 for the right to operate as a franchisee of one of Baker’s
restaurants. A cash payment of P25,000 towards the fee was required to be paid to Baker during
the current year. Four subsequent annual payments of P10,000 with a present value of P34,000 at
the current market interest rate represent the balance of the fee which is expected to be collected
in full. The initial cash payment is nonrefundable and no future services are required by Baker.
What amount should Baker report as franchise revenue during the current year?
a. 25,000
b. 0
c. 65,000
d. 59,000
ANSWERS:
1. B
2. A
3. D
To apply the acquisition method, one of the combining entities must be identified as the acquirer.
PFRS 3 requires the acquirer to measure the identifiable assets acquired and the liabilities
assumed at acquisition-date fair values.
PFRS 3 require goodwill to be measured as the excess between the aggregate of the
consideration transferred, the amount of any non-controlling interest in the acquire and the fair
value of any previously held equity interest in the acquire, less the fair value of the net assets
acquired
5. ANS: B
SOL:
Rule: The formula for the production volume variance component for overhead variances is
computed as applied overhead minus budgeted overhead based on standard hours. The sole
difference between these two calculated amounts is the application of fixed factory overhead.
Applied Overhead
(Std Var OH Rate x Std DLH Allowed) + (Std Fixed OH Rate x Actual Production)
= (P2.00 x .1 x 19,000) + (P1.00 x 19,000) = P22,800
14. ANS: A
SOL:
PFRS 3 Business Combinations notes that Intangible Assets requires the acquirer to measure
goodwill at the amount recognized at the acquisition date less any accumulated impairment
losses.
Goodwill must be tested for impairment annually, not just when circumstances indicate that
impairment may have occurred.
15. ANS: D
SOL:
Revenue on a franchise agreement should be recognized when the franchisor has substantially
performed all material services and conditions, and collectibility is reasonably assured. Baker
should recognize P59,000 in revenue: the initial cash payment (P25,000) plus the present value of
the future cash payments (P34,000).