FINANCIAL ACCOUNTING AND REPORTING

PROBLEM 1 – STATEMENT OF FINANCIAL POSITION

The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax expense.

Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
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 – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
126,000,000 126,000,000

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.
Inventory and accounts payable included goods purchased in transit, FOB destination, costing P500,000, and unsold goods held on
consignment at year-end, costing P300,000. The perpetual system is used. The preference share capital is redeemable mandatorily on
December 31, 2018.

1. What amount should be reported as current assets on December 31, 2017?

a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000

2. What amount should be reported as current liabilities on December 31, 2017?

a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000

3. What is the net income for 2017?

a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000

4. What amount should be reported as total shareholders’ equity on December 31, 2017?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000

PROBLEM 2 - STATEMENT OF FINNACIAL POSITION

On December 31, 2017, an entity showed the following current assets:

Cash 500,000
Accounts receivable 2,500,000
Inventory 2,000,000
Prepaid expenses 100,000
Total current assets 5,100,000

Cash on hand including customer postdated check of P20,000 and employee IOU of P10,000
130,000
Cash in bank per bank statement (outstanding checks on December 31, 2017, P70,000)
370,000
Total cash 500,000

Customers’ debit balances, net of customer deposit of P50,000 1,900,000

Allowance for doubtful accounts ( 150,000)
Sale price of goods invoiced to customers at 150% of cost on December 29, 2017 but delivered on
January 5, 2018 and excluded from reported inventory
750,000
Total accounts receivable 2,500,000

1. What is the adjusted cash balance?

a. 500,000
b. 470,000
c. 430,000
d. 400,000

2. What is the net realizable value of accounts receivable?

a. 1,970,000
b. 1,820,000
c. 1,800,000
d. 1,950,000
 3. What is the adjusted inventory?
a. 2,000,000
b. 2,375,000
c. 2,500,000
d. 2,750,000

4. What total amount of current assets should be reported?

a. 4,900,000
b. 4,830,000
c. 4,780,000
d. 4,630,000

PROBLEM 3 – STATEMENT OF COMPREHENSIVE INCOME

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 futures contract designated as a 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

1. 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

2. What net amount should recognized in other comprehensive income for the year?

a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000

3. What net amount in OCI should be presented as “may not be recycled to profit or loss?

a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000

4. What amount should be reported as net income?

a. 2,900,000
b. 2,300,000
c. 3,100,000
d. 2,400,000

5. What amount should be reported as comprehensive income?

a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000

PROBLEM 4 – INVESTMENT IN ASSOCIATE

On January 1, 2017, an entity acquired a 10% interest in an investee for P3,000,000. The investment was accounted for under the cost
method. During 2017, the investee reported net income of P4,000,000 and paid dividend of P1,000,000.

On January 1, 2018, the entity acquired a further 15% interest in the investee for P8,500,000. On such date, the carrying amount of the net
assets of the investee was P36,000,000 and the fair value of the 10% existing interest was P3,500,000.

The fair value of the net assets of the investee is equal to carrying amount except for an equipment whose fair value was P4,000,000 greater
than carrying amount. The equipment had a remaining life of 5 years.

The investee reported net income of P8,000,000 for 2018 and paid dividend of P5,000,000 on December 31, 2018.

1. What amount of investment income should be recognized in 2017?

a. 400,000
b. 100,000
c. 500,000
d. 300,000

2. What is the implied goodwill arising from the acquisition on January 1, 2018?
 a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0

3. What total amount of income should be recognized by the investor in 2018?

a. 2,000,000
b. 2,500,000
c. 2,300,000
d. 1,800,000

4. What is the carrying amount of the investment in associate on December 31, 2018?

a. 12,550,000
b. 12,350,000
c. 11,950,000
d. 12,750,000

PROBLEM 5 – INVESTMENT IN ASSOCIATE

An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s assets and liabilities at that date were
as follows:

Carrying amount Fair value

Cash 1,000,000 1,000,000

Accounts receivable 4,000,000 4,000,000
Inventory – FIFO 8,000,000 9,000,000
Land 5,500,000 7,000,000
Plant and equipment – net 14,000,000 22,000,000
Liabilities 7,000,000 7,000,000

The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The entity sold the land in 2018 for
P8,000,000 and reported a gain of P2,500,000.

The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid P1,000,000 cash dividend on
December 31, 2017 and P2,000,000 on December 31, 2018.

1. What is the implied a goodwill arising from the acquisition?

a. 200,000
b. 600,000
c. 800,000
d. 400,000

2. What is the investment income for 2017?

a. 880,000
b. 480,000
c. 400,000
d. 580,000

3. What is the investment income for 2018?

a. 1,080,000
b. 2,280,000
c. 1,680,000
d. 2,880,000

4. What is the carrying amount of the investment in associate on December 31, 2018?

a. 15,360,000
b. 15,000,000
c. 16,560,000
d. 13,800,000

PROBLEM 6 – BOND INVESTMENT AT FVOCI

An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June 30 and December 31. The bonds
were purchased for P5,100,000 plus transaction cost of P108,000 at an effective interest rate of 7%.

The business model for this investment is to collect contractual cash flows and sell the bonds in the open market. On December 31, 2017,
the bonds were quoted at 106.

1. What amount of interest income should be reported for 2017?

a. 400,000
b. 200,000
c. 364,560
d. 363,940

2. What is the adjusted carrying amount of the investment on December 31, 2017?
 a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000

3. What amount should be recognized in OCI in the statement of comprehensive income for 2017?

a. 300,000
b. 125,440
c. 128,060
d. 92,000

4. If the entity elected the fair value option, what total amount of income should be recognized for 2017?

a. 400,000
b. 492,000
c. 600,000
d. 200,000

PROBLEM 7 – PROPERTY, PLANT AND EQUIPMENT

January 1, 2017, an entity disclosed the following balances:

Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000

During the current year, the following transactions occurred:

* A tract of land was acquired for P2,000,000 cash as a building site.

* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity. On the acquisition date, each
share had a quoted price of P45 on a stock exchange. The plant facility was carried on the seller’s books at P1,600,000 for land and
P5,400,000 for the building at the exchange date. Current appraised values for the land and the building, respectively, are P2,000,000
and P8,000,000. The building has an expected life of forty years with a P200,000 residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred were freight and unloading
P100,000 and installation P300,000. The equipment has a useful life of ten years with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at the entity’s various plant locations. These
expenditures had an estimated useful life of fifteen years.
* Research and development costs were P1,100,000 for the year.
* A machine costing P200,000 on January 1, 2010 was scrapped on June 30, 2017. Straight line depreciation had been recorded on the
basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2017. Original cost of the machine sold was P700,000 on January 1, 2014, and it was
depreciated on the straight line basis over an estimated useful life of eight years and a residual value of P50,000.

1. What is the total cost of land on December 31, 2017?

b. 7,800,000
c. 7,600,000
d. 8,000,000
e. 6,800,000

2. What is the total cost of land improvements on December 31, 2017?

a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000

3. What is the total cost of buildings on December 31, 2017?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000

4. What is total cost of machinery and equipment on December 31, 2017?

a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000

PROBLEM 8 - INCOME TAX

An entity had the following financial statement elements for which the December 31, 2017 carrying amount is different from the December
31, 2017 tax basis:

Carrying amount Tax basis Difference

Equipment 5,500,000 4,000,000 1,500,000

Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000

The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation for tax purposes.

The accrued liability is the estimated health care cost that was recognized as expense in 2017 but deductible for tax purposes when actually
paid.
In January 2017, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility of the project, this cost
was capitalized and amortized over 3 years for accounting purposes. However, the total amount was expensed in 2017 for tax purposes.

The pretax accounting income for 2017 is P15,000,000. The income tax rate is 30% and there are no deferred taxes on January 1, 2017.

1. What amount should be reported as current tax expense for 2017?

a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000

2. What amount should be reported as total tax expense for 2017?

a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000

3. What amount should be reported as deferred tax liability on December 31, 2017?

a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000

4. What amount should be reported as deferred tax asset on December 31, 2017?
.
a. 750,000
b. 600,000
c. 150,000
d. 0

PROBLEM 9 - BENEFIT COST

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%

1. 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

2. What is the net remeasurement loss for the current year?

a. 200,000
b. 100,000
c. 300,000
d. 400,000

3. What is the projected benefit obligation on December 31?

a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000

4. What is the fair value of plan assets on December 31?

a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 4,050,000

1. 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

PROBLEM 10 - SALES TYPE LEASE

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, 2017, 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, 2016

1. What is the gross investment in the lease?

a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000

2. What is the net investment in the lease?

a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000

3. What is the total financial revenue?

a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000

4. What amount should be recognized as interest income for 2017?

a. 600,480
b. 492,480
c. 536,760
d. 521,280

5. 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

Theory
(1-5)
1. Which of the following statements regarding reversing d. Is democratic in the sense that a majority of
entries is incorrect? accountants must agree with a standard before it becomes
a. Deferrals are generally entered in statement of enforceable.
financial position accounts, thus making reversing
4. Which of the following is not a benefit associated with the
entries unnecessary. Conceptual Framework?
b. All accruals should be reversed. a. A conceptual framework should increase financial
c. Adjusting entries for depreciation and bad debts are statement users' understanding and confidence in financial
never reversed. reporting.
d. Reversing entries change amounts reported in the
statement of financial position for the previous b. Practical problems should be more quickly solvable
period. by reference to an existing conceptual framework.
2. As part of the objective of financial reporting, “assessing cash c. A coherent set of accounting standards and rules
flow prospects” is interpreted to mean should result.
a. Cash basis accounting is preferred over accrual basis
accounting. d. Business entities will need far less assistance from
b. Information about the financial effects of cash accountants because the financial reporting process will be
quite easy to apply.
receipts and cash payments is generally considered
the best indicator of an entity’s present and 5. When classifying assets as current and noncurrent
continuing ability to generate favorable cash flows. a. The amount at which current assets are carried and
c. Over the long run, trends in revenue and expenses reported must reflect realizable cash value.
are generally more meaningful than trends in cash b. Prepayments for items such as insurance are included
receipts and disbursements. in “other assets” rather than as current assets as they
d. All of the choices are correct regarding “assessing will ultimately be expensed.
cash flow prospects”. c. The time period by which current assets are
3. Financial accounting standard-setting distinguished from noncurrent assets is determined
a. Can be described as a social process which reflects by the seasonal nature of the business.
political actions of various interested user groups as well d. Assets are classified as current if they are reasonably
as a product of research and logic. expected to be realized in cash or consumed during
the normal operating cycle.
b. Is based solely on research and empirical findings. (18-35)
6. A cash equivalent is a short-term, highly liquid investment
c. Is a legalistic process based on rules promulgated by
that is readily convertible into known amount of cash and
governmental agencies.
a. Is acceptable as a means to pay current
liabilities.
 b. Has a current market value that is greater a. No income should reported annually until first harvest
than original cost and sale in 30 years.
b. Income should be measured annually and reported
c. Bears an interest rate that is at least equal to using a fair value approach that recognizes and
the prime rate of interest at the date of liquidation. measures biological growth.
d. Is so near maturity that it presents c. The eventual sale proceeds should be estimated over
insignificant risk of change in interest rate. the 30-year period.
d. The plantation forest should be valued every five
years and the increase in value should be reported as
7. Which of the following methods of determining bad debt component of other comprehensive income.
expense does not properly match expense and revenue?
13. Which of the following information should be disclosed in
a. Charging bad debts with a percentage of relation to biological asset and agricultural produce?
sales under the allowance method. a. Separate disclosure of the gain or loss relating to
b. Charging bad debts with an amount derived biological asset and agricultural produce.
from a percentage of accounts receivable under the b. The aggregate gain or loss arising on the initial
allowance method. recognition of biological assets and agricultural
produce and from the change in fair value less
c. Charging bad debts with an amount derived estimated cost of disposal of biological asset.
from aging accounts receivable under the allowance c. The total gain or loss from biological asset,
method. agricultural produce, and from change in fair value
d. Charging bad debts as accounts are written less estimated costs of disposal of biological asset.
off as uncollectible. d. There is no requirement to disclose separately any
gain or losses.

8. Which of the following statements is true about factoring of 14. When activities involve production through natural growth
accounts receivable without recourse? or aging of biological asset, revenue is earned as the plant
or living animal grows.
a. The transaction may be accounted for a. Completion of production basis
either as a secured borrowing or as a sale. b. Percentage of completion approach
b. The receivables are used as collateral for a c. Accretion approach
promissory note issued to the factor by the owner of d. Zero-profit approach
the receivables.
15. The criteria for recognition of revenue at the completion
c. The factor assumes the risk of collectibility of production of precious metals include which of the
and absorbs any credit losses in collecting the following?
receivables. a. Sale price is reasonably assured.
d. The financing cost should be recognized b. No significant costs are involved in distributing the
ratably over the collection period of the receivables. product.
c. Units are interchangeable.
d. All of these are required for revenue recognition at the
completion of production
9. PFRS requires all of the following when classifying
receivables, except
16. PFRS requires entities to measure financial assets based
a. Indicate the receivables classified as current and
on all of the following, except
noncurrent.
a. The business model for managing financial assets.
b. Disclose any receivables pledged as collateral.
b. Whether the financial asset is a debt or an equity
c. Disclose all significant concentrations of credit risk
investment.
arising from receivables.
c. The contractual cash flow characteristics of the
d. All of the choices are required by PFRS when
financial asset.
classifying receivables.
d. All of the choices are PFRS requirements.
10. When the cost of goods sold method is used to record
17. What is the effective interest rate of a debt instrument
inventory at net realizable value
measured at amortized cost?
a. There is a direct reduction in the selling
a. The stated rate of the debt instrument.
price of the product that results in a loss being
b. The interest rate currently charged by the entity or by
recorded in the income statement prior to the sale.
others for similar debt instrument.
b. A loss is recorded by debiting loss on c. The interest rate that exactly discounts estimated
inventory decline and crediting directly the inventory future cash payments through the expected life of the
account debt instrument to the net carrying amount of the
instrument.
c. Only the portion of the loss attributable to d. The basic, risk-free interest rate.
inventory sold during the period is recorded.
d. The net realizable value figure for ending 18. When an entity holds between 20% and 50% of the
inventory is substituted for cost and the loss is buried outstanding ordinary shares of an investee, which of the
in cost of goods sold. following statements applies?
a. The investor should always use the equity method to
account for the investment.
11. Which of the following statements is true regarding b. The investor should use the equity method to account
inventory writedown and recovery of writedown? for the investment unless
a. Recovery of inventory writedown is circumstances indicate that it is unable to exercise
prohibited under PFRS. significant influence over the investee.
b. PFRS requires separate reporting of c. The investor must use the fair value method unless it
reversal of inventory writedown. can clearly demonstrate the ability to exercise
significant influence over the investee.
c. PFRS requires entities to record writedown d. The investor should always use the fair value method
in a separate loss account. to account for the investment.
d. All of the choices are correct.
19. How is the impairment test carried out for an investment
12. An entity had a plantation forest that is likely to be in associate?
harvested and sold in 30 years. How should income be a. The goodwill is separated from the rest of the
accounted for? investment and is impairment tested individually.
b. The entire carrying amount of the investment is tested
for impairment by comparing the recoverable amount
with the carrying amount.
 c. The carrying amount of the investment should be b. The amount of interest cost capitalized during the
compared with the market value. period should not exceed the actual interest cost
d. The recoverable amounts of all investments in incurred.
associates should be assessed together to determine c. When excess borrowed funds not immediately needed
whether there has been an impairment on all for construction are temporarily invested, any interest
investments. earned should be recorded as interest revenue.
d. The minimum amount of interest to be capitalized is
20. Which of the following instruments would not be classified determined by multiplying a weighted average interest
as a financial liability? rate by the amount of average accumulated
a. A preference share that will be redeemed by the issuer expenditures on qualifying assets during the period.
for cash at a future date.
b. A contract for the delivery of as many of the entity’s 27. Which of the following is true regarding government
ordinary shares as are equal in value to a fixed amount grant related to asset?
at a future date.
c. A written call option that gives the holder the right to
purchase a fixed number of the entity’s ordinary shares a. Depreciation is higher and net income lower if the
in return for a fixed price. grant is recorded as deferred revenue.
d. An issued perpetual debt instrument b. Depreciation is higher and net income lower if the
grant is an adjustment to the asset.
21. What are the conditions for offsetting of financial assets c. Depreciation is higher if the grant is a deferred
and financial liabilities? revenue and net income is not affected.
a. A legal right of set-off. d. Depreciation is higher if the grant is adjustment of
b. A legal right of set-off and an intention to settle net or the asset.
simultaneously.
c. The existence of a clearing mechanism or other market 28. Which of the following statements is incorrect in relation
mechanism for net settlement and an expectation of to government grant?
net settlement. a. Any adjustment needed when a government grant
d. A netting agreement and an expectation of net becomes repayable is accounted for as a change in
settlement. accounting estimate.
b. In respect of loan from the government at zero
22. In which of the following circumstances is derecognition of interest rate, an imputed interest charge should be
a financial asset not appropriate? recognized in profit or loss.
a. The contractual rights to the cash flows of the c. Where conditions apply to a government grant, it
financial asset have expired. should only be recognized when there is reasonable
b. The financial asset has been transferred and assurance that the conditions will be met.
substantially all of the risks and rewards d. A government grant that becomes receivable as
of ownership of the transferred asset have also been compensation for losses already incurred should be
transferred. recognized as income of the period in which it
c. The financial asset has been transferred and the entity becomes receivable
has retained substantially all of the risks and rewards
of ownership of the transferred asset. 29. The major difference between the service life of an asset
d. The financial asset has been transferred and the entity and the physical life is that
has lost control of the transferred asset. a. Service life refers to the time an asset will be used and
physical life refers to how long the asset will last.
23. Which of the following is not a relevant consideration b. Physical life is the life of an asset without
when evaluating whether to derecognize a financial consideration of residual value and service life
liability? requires the use of residual value.
a. Whether the obligation has been discharged. c. Physical life is always longer than service life.
b. Whether the obligation has been canceled. d. Service life refers to the length of time an asset is of
c. Whether the obligation has expired. use to the original owner, while physical life refers to
d. Whether substantially all of the risks and rewards of how long the asset will be used by all owners.
the obligation have been transferred.
(40-53) 30. Of the following costs related to the development of
24. Borrowing costs can be capitalized as part of the cost of an mineral resources, which one should not be included
asset when in depletable cost?
a. The asset is a qualifying asset a. Acquisition cost of the mineral resource deposit
b. The asset is a qualifying asset and it is not probable b. Exploration cost
that the borrowing costs will result in future economic c. Tangible equipment cost associated with machinery
benefits to the entity used to extract the mineral resource
c. The asset is a qualifying asset and it is probable that d. Intangible development cost such as drilling cost,
the borrowing costs will result in future economic tunnel, and shaft
benefits to the entity but the costs cannot be measured
reliably. 31. An entity is required to consider which of the following in
d. The asset is a qualifying asset and it is probable that developing accounting policy for exploration and
the borrowing costs will result in future economic evaluation activities?
benefits to the entity and the costs can be measured a. The requirements and guidance in Standards and
reliably. Interpretations dealing with similar and related issues.
b. The definitions, recognition criteria, and measurement
25. Which of the following assets could be treated as concepts for assets, liabilities, income, and expenses
qualifying asset for the purpose of capitalizing interest in the Conceptual Framework.
costs? c. Recent pronouncements of standard-setting bodies,
a. Investment property accounting literature and accepted industry practices.
b. Investments in financial instruments d. Whether the accounting policy results in information
c. Inventories that are manufactured or produced in large that is relevant and reliable.
quantity on a repetitive basis and take a substantial
period of time to get ready for use or sale 32. When calculating the estimate of future cash flows, which
d. Biological assets of the following cash flows should not be included?
a. Cash flows from disposal
26. Which of the following statements is true regarding b. Income tax payments
capitalization of interest? c. Cash flows from the sale of assets produced by the
a. Interest cost in connection with the purchase of land to asset.
be used as a building site should be debited to the land d. Cash outflows incurred to generate the cash inflows
account. from the continuing use of the asset.
33. An entity is considering to apply an impairment test to an c. The expense relating to the provision may be
individual asset or to the cash generating unit to which presented net of the reimbursement.
the asset belongs. Which of the following statements is d. The reimbursement shall not be treated a as separate
true? asset and therefore “netted” against the estimated
a. If the individual asset does not generate cash liability for the provision.
inflows that are largely independent from other
assets, the cash generating unit should be identified. 40. When the effective-interest method is used to amortize
b. If the individual asset generates a significant bond premium or discount, the periodic amortization
proportion of cash inflows of the entity as a whole, would
the cash generating unit should not be identified. a. Increase if the bonds were issued at a discount.
c. If the individual asset generates an insignificant b. Decrease if the bonds were issued at a premium.
proportion of cash inflows to the entity as a whole, c. Increase if the bonds were issued at a premium.
the cash generating should not be identified. d. Increase if the bonds were issued at either a discount
d. All of these statements are true. or a premium.

34. Which of the following items would qualify as an intangible 41. A debt instrument with no ready market is exchanged for
asset? property whose fair value is currently indeterminable.
a. Advertising and promotion on the launch of a huge When such a transaction takes place
product. a. The present value of the debt instrument must be
b. College tuition fees paid to employees who decide to approximated using an imputed interest rate.
enroll in an executive M.B.A program at Harvard b. It should not be recorded on the books of either party
University while working with the entity. until the fair value of the property becomes evident.
c. Operating losses during the initial stages of the project. c. The board of directors of the entity receiving the
d. Legal costs paid to intellectual property lawyers to property should estimate a value for the property that
register a patent. will serve as a basis for the transaction.
d. The directors of both entities involved in the
35. Which of the following disclosures is not required with transaction should negotiate a value to be assigned to
respect to intangible assets? the property.
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning 42. Which of the following situations would prima facie lead
and the end of the year. to a lease being classified as an operating lease?
c. Contractual commitments for the acquisition of a. Transfer of ownership to the lessee at the end of the
intangible assets. lease term.
d. Fair value of similar intangible assets used by b. Option to purchase at a value below the fair value of
competitors. the asset.
c. The lease term is for a major part of the asset’s life.
36. The reason goodwill is referred to as a master valuation d. The present value of the minimum lease payments is
account is that 50% of the fair value of the asset.
a. It represents the purchase price of a business that is
about to be sold. 43. Which of the following is a correct statement of one of the
b. It is the difference between the fair value of the net lease capitalization criteria?
identifiable assets as compared with the purchase price a. The lease transfers ownership of the property to the
of the acquired business. lessor.
c. The value of a business is computed without b. The lease contains a purchase option.
consideration of goodwill and then goodwill is added c. The lease term is equal to or more than 75% of the
to arrive at a master valuation. economic life of the leased property.
d. It is the only account in the financial statements that is d. The minimum lease payments excluding executory
based estimated value. costs equal or exceed 90% of the fair value of the
leased property.
37. Which of the following is not one of the criteria which must
be met before development costs can be capitalized? 44. In a defined contribution plan, a formula is used that
a. The entity has sufficient financial resources to a. Defines the benefits that the employee will receive at
complete the project. the time of retirement.
b. The entity intends to complete the project and either b. Ensures that pension expense and the cash funding
use or sell the intangible asset. amount will be different.
c. The entity can reliably identify the research costs c. Requires an employer to contribute a certain sum each
incurred to bring the project to economic feasibility. period based on the formula.
d. The project has achieved technical feasibility. d. Ensures that employers are at risk to make sure funds
are available at retirement.
(57)
38. A provision is recognized 45. In a defined benefit plan, a formula is used that
a. When there is a legal obligation arising from a past a. Requires that the benefit of gain or the risk of loss from
obligating event, the probability of the outflow of the assets contributed to the pension plan be borne by
resources is more than remote but less than probable, the employee.
and a reliable estimate of the amount can be made. b. Defines the benefits that the employee will receive at
b. When there is a constructive obligation as a result of a the time of retirement.
past obligating event, the outflow of resources is c. Requires that pension expense and the cash funding
probable, and a reliable estimate of the amount can be amount be the same.
made. d. Defines the contribution the employer is to make and
c. When there is a possible obligation arising from a no promise is made concerning the ultimate benefits to
past event, the outflow of resources is probable, and be paid out to the employees.
an approximate amount can be set aside toward the
obligation. 46. In accounting for a defined benefit plan
d. When management decides that it is essential that a a. An appropriate funding pattern must be established to
provision should be made. ensure that enough money would be available at
(59-70) retirement to meet the benefits promised.
39. Which statement is incorrect where some or all of the b. The employer's responsibility is simply to make a
expenditure required to settle a provision should be contribution each year based on the formula
reimbursed by another party? established in the plan.
a. The reimbursement shall be recognized only when it c. The expense recognized each period is equal to the
is virtually certain that the reimbursement would be cash contribution.
received if the entity settles the obligation. d. The liability is determined based upon known
b. The amount of the reimbursement shall not exceed the variables that reflect future salary levels promised to
amount of the provision. employees.
47. Which of the following is taken into account when
determining the discount rate for a defined plan?
a. Market yields at the end of reporting period on high-
quality corporate bonds.
b. Investment or actuarial risk.
c. Specific risk associated with the entity’s business.
d. Risk that future experience may differ from actuarial
assumptions.
48. Taxable income of a corporation
a. Differs from accounting income due to differences in
interperiod allocation between the two methods of
income determination.
b. Differs from accounting income due to differences in
interperiod allocation and permanent differences
between the two methods of income determination.
c. Is based on international financial reporting
standards.
d. Is reported in the income statement.

49. All of the following would result to deferred tax asset,

except
a. Interest expense is accrued but included in taxable
income on a cash basis.
b. The accumulated depreciation on an asset is greater
than accumulated tax depreciation
c. Development costs have been capitalized and
amortized but were deducted in determining taxable
income in the period incurred.
d. The tax base for a machine is greater than the
carrying amount.

50. Entities allocate income tax expense to all of the

following, except
a. Discontinued operation
b. Prior period adjustment
c. Gross profit
d. Other comprehensive income