ReSA -The Review School of Accountancy Advanced Financial Accounting

and Reporting
MAY 2022 Batch
AFAR Quiz 2
COVERAGE - Week 7 to Week 13 Lecture
 AFAR-07: Home Office & Branch
 AFAR-08: Business Combinations
 AFAR-09: Separate & Consolidated FS
 AFAR-10: Intercompany Sales of Inventory
 AFAR-11: Intercompany Sales of Fixed Assets
 AFAR-12: Foreign Currency

1. On January 1, 2019, the fair values of Pink Conrad’s net assets were as follows:
Current Assets…………………………………………………………………………P 100,000
Equipment…………………………………………………………………………….. 150,000
Land…………………………………………………………………………………….. 50,000
Buildings………………………………………………………………………………… 300,000
Liabilities………………………………………………………………………………… 80,000

On January 1, 2019, Blue George Company purchased the net assets of the Pink Conrad Company by issuing
100,000 shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agreed that
Blue George would pay an additional amount on January 1, 2021, if the average income during the 2-year period
of 2019-2020 exceeded P80,000 per year. The expected value of this consideration was calculated as P184,000;
the measurement period is one year.

What amount will be recorded as goodwill on January 1, 2019?

a. Zero. c. P180,000
b. P100,000 d. P284,000
2. Using the same information in No. 1, assuming that on August 1, 2019 the contingent consideration happens to
be P170,000, what amount will then be recorded as goodwill on the said date?
a. Zero. c. P166,000
b. P86,000 d. P270,000
3. Using the same information in Nos. 1 and 2, assuming that on January 1, 2021, the date of settlement of the
contingent consideration clause agreement for P175,000, the entry should be:
a. Estimated liability for contingent consideration 170,000
Loss on estimated contingent consideration 5,000
Cash 175,000
b. Estimated liability for contingent consideration 175,000
Cash 175,000
c. Estimated liability for contingent consideration 184,000
Gain on estimated contingent consideration 9,000
Cash 175,000
d. No entry required.
4. The Boy George Company acquired the net assets of the Girl Conrad Company on January 1, 20x9, and made
the following entry to record the purchase:
Current Asset…………………………………………… 100,000
Equipment ……………………………………………… 150,000
Land ……………………………………………………… 50,000
Buildings ………………………………………………… 300,000
Goodwill ………………………………………………… 100,000
Liabilities ………………………………………, 80,000
Common stock, P 1 par ……………………. 100,000
Paid-in capital in excess of par …………… 520,000
Assuming that additional shares would be issued on January 1, 20x9 to compensate for any fall in the value of
Boy George common stock below P16 per share. The settlement would be to cure the deficiency by issuing
added shares based on their fair value on January 1, 2019. The fair price of the shares on January 1, 20x9 was
P10.

Page 1 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
What is the additional number of shares issued on January 1, 20x9 to compensate for any fall in the value of the
stock?
a. 160,000 c. 60,000
b. 100,000 d. 10,000
5. Using the same information in No. 4, what is the amount of paid-in capital in excess of par on January 1, 20x9
immediately after the additional shares were issued?
a. P520,000 c. P420,000
b. P460,000 d. No effect.
6. Major Corporation acquired Problem Company through an exchange of common shares. All of Problem's
assets and liabilities were immediately transferred to Major. Major's common stock was trading at P20 per
share at the time of exchange. Following selected information is also available.
Before Acquisition After Acquisition
Par value of shares outstanding……. P 200,000 P 250,000
Additional paid-in capital………….. P 350,000 P 550,000
Based on the preceding information, what number of shares was issued at the time of the exchange
a. P 5,000 c. P12,500
b. P10,000 d. P17,500
7. Using the same information in No. 6, what is the par value of Major's common stock?
a. P10 c. P 4
b. P 5 d. P 1
8. Using the same information in No. 6, what is the fair value of Problem's net assets, if goodwill of P56,000 is
recorded?
a. P194,000 c. P300,000
b. 244,000 d. 306,000
9. Connie Corporation had a realized foreign exchange loss of P15,000 for the year ended December 31, 2019
and must also determine whether the following items will require year-end adjustment:
• Connie had an P8,000 loss resulting from the translation of the accounts of its wholly-owned foreign
subsidiary for the year ended December 31, 2019.

• Connie had an account payable to an unrelated foreign supplier payable in the supplier’s local currency.
The Philippine peso equivalent of the payable was P64,000 on the October 31, 2014 invoice date, and it
was P60,000 on December 31, 2019. The invoice is payable on January 30, 2020.
.
In Connie’s 2019 consolidated income statement, what amount should be included as foreign exchange loss?
a. P11,000 c. P19,000
b. P15,000 d. P23,000
10. Selected information from the trial balances for the home office and the branch of Gerty Company at
December 31, 20x4 is provided. These trial balances cover the period from December 1 to December 31,
20x4. The branch acquires some of its merchandise from the home office (the branch is billed at 20% above
the cost to the home office and some of it from outsiders. Differences in the shipments accounts result entirely
from the home office policy of billing the branch at 20% above cost.

Home Office Branch

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 30,000
Shipments to branch . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 -0-
Shipments to branch – loading / Unrealized profit
in branch inventory . . . . . . . . . . . . . . . . . . . . . . . . 3,600 -0-
Purchases (outsiders) . . . . . . . . . . . . . . . . . . . . . . . . 35,000 5,500
Shipments from home office . . . . . . . . . . . . . . . . . . -0- 9,600
Merchandise inventory, December 1, 20x4 . . . . . . . . 20,000 15,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 6,000

Additional information:
Merchandise inventory, December 31, 20x4:
Home office……………………………………………………………P20,000
Branch………………………………………………………………… 10,000

How much of the December 1, 20x4 inventory of the branch represents purchases from outsiders and how
much represents goods acquired from the home office?

Page 2 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

Outsiders Home Office Outsiders Home Office

a. P -0- P15,000 c. P12,000 P 3,000
b. P5,000 P10,000 d. P 3,000 P12,000

Used the following information for question 11 and 12:

The Best Corporation operates a branch in Dagupan City. The home office ships merchandise to the branch at
125 percent of its cost. Selected information from the December 31, 20x4 trial balance are as follows:

Home Office Branch

Books Books
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 600,000 P300,000
Shipments to branch . . . . . . . . . . . . . . . . . . . 200,000
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Shipments from home office . . . . . . . . . . . . - 250,000
Inventory, January 1, 20x4 . . . . . . . . . . . . . . 100,000 40,000
Allowance for overvaluation of branch
inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,000
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 50,000

Inventory at December 31, 20x4: Home office, P30,000; Branch, P60,000

11. The realized profit on sales made by the branch or overvaluation of cost of goods sold is:
a. P40,000 c. P46,000
b. P 86,000 d. None of the above.
12. The combined net income of the home office and the branch after adjustment is:
a. P226,000 c. P496,000
b. P326,000 d. P500,000
13. The Brooke Corporation has two branches, Branch P and Branch Q. The home office shipped P80,000 in
merchandise to Branch P and prepaid the freight charges of P500. A short time thereafter, Branch P was
instructed to ship this merchandise to Branch Q at a prepaid freight cost of P700. Freight charges for this
merchandise normally cost P800 when shipped from the home office directly to Branch Q. Compute the
excess freight on transfers of merchandise:
a. P700 c. P500
b. P800 d. P400

Use the following information for 14 and 15:

Ping Company acquires all of Sun Corp. in an asset acquisition. Ping paid P1,000,000 more than Sun's book value,
and this excess was attributed entirely to goodwill, as all of Sun's assets and liabilities were carried at amounts
equivalent to fair value. At the time of the combination, a lawsuit was pending against Sun, which Sun had not
recorded on its books. It was felt at the time that Sun would win the lawsuit, so no provision for it was made when
Ping recorded the asset acquisition.
14. Six months after the acquisition, new information reveals that the expected value of the lawsuit at the date
of acquisition was P400,000. The appropriate entry on Ping's books to record this new information.
a. Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
b. Loss on lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
d. No entry required.
15. Assume the same information as above, except that the value change is a result of events occurring
subsequent to acquisition. The appropriate entry on Ping's books to record the new information.
a. Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
b. Loss on lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 400,000
Estimated lawsuit liability . . . . . . . . . . . . . . . . . . . . . . . 400,000
d. No entry required.
Page 3 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

Use the following information for questions 16 to 19:

On January 1, 20x4, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance
sheet data for the companies at the combination date are given below:

Snicker Co. Snicker Co.

Pamela Co. Book Values Fair Values
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 18,000 P155,000 P155,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . 108,000 20,000 20,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,000 26,000 45,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 24,000 45,000
Plant assets . . . . . . . . . . . . . . . . . . . . . . . . . . 525,000 225,000 300,000
Accumulated depreciation . . . . . . . . . . . . . (180,000) (45,000)
Investment in Snicker Co . . . . . . . . . . . . . . . . 330,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . P960,000 P405,000 P565,000
Accounts payable . . . . . . . . . . . . . . . . . . . . P156,000 P105,000 P105,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 225,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 204,000 75,000
Total liabilities & equities . . . . . . . . . . . . . . . . . . P960,000 P405,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 20x4.
16. What amount of inventory will be reported?
a. P125,000 c. P139,250
b. P132,750 d. P144,000
17. What amount of goodwill or (gain) be reported based on fair value basis will be reported?
a. (P20,000) c. P25,000
b. (P25,000) d. Zero
18. What is the amount of consolidated retained earnings?
a. P204,000 c. P260,250
b. P209,250 d. P279,000
19. What is the amount of total assets?
a. P 921,000 c. P1,525,000
b. P1,185,000 d. P1,195,000
20. Betzler Company’s branch in Malate began operations on January 1, 20x4. During the first year of operations,
the home office shipped merchandise to the Malate branch that cost P250,000 at a billed price of P300,000.
One-fourth of the merchandise remained unsold at the end of 20x4. The home office records the shipments
to the branch at the P300,000 billed price at the time shipments are made. Freight-in of P2,000 on the
shipments from the home office was paid by the branch. The home office should make an adjusting entry for
freight-in as follows:
a. A year-end adjusting entry debiting the branch account for P500.
b. A year-end adjusting entry debiting the branch account for P2,000.
c. A year-end adjusting entry crediting the branch account for P500.
d. No year-end adjusting entry for the freight charge.

Use the following information for questions 21 to 23:

Wren Corporation acquired 80% ownership of Arid Incorporated, at a time when Wren’s investment and Arid’s
book values were equal. During 20x4, Wren sold goods to Arid for P200,000 making a gross profit percentage of
20%. Half of these goods remained unsold in Arid’s inventory at the end of the year. Income statement information
for Wren and Arid for 20x4 were as follows:

Wren Arid
Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000 P 600,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . 500,000 400,000
Operating Expenses . . . . . . . . . . . . . . . . . . . . . . 500,000 __ 80,000
Separate incomes . . . . . . . . . . . . . . . . . . . . . . . . P 250,000 P 120,000

21. The 20x4 consolidated income statement showed cost of goods sold of
a. P720,000 c. P900,000
b. P880,000 d. P920,000

Page 4 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
22. Assuming the dividend declared by Arid for 20x4 amounted to P60,000, 5he 20x4 consolidated income
statement showed investment income of:
Cost Model Equity Method
a. P76,000 P80,000
b. P48,000 P56,000
c. P76,000 P28,000
d. P48,000 P76,000
23. The 20x4 consolidated income statement showed non-controlling income of
a. P2,000 c. P20,000
b. P8,000 d. P24,000
24. Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 20x4. On January 1, 20x5,
Reptile sold a building with a book value of P50,000 to Kestrel for P80,000. The building had a remaining
useful life of ten years and no salvage value. The separate balance sheets of Kestrel and Reptile on
December 31, 20x5 included the following balances:

Kestrel Reptile
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 250,000
Accumulated Depreciation – Buildings . . . . . . . . . . . . . . 120,000 75,000

The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that appeared,
respectively, on the balance sheet at December 31, 20x5, were
a. P620,000 and P192,000. c. P650,000 and P192,000.
b. P620,000 and P195,000. d. P650,000 and P195,000.

Use the following information for questions 25 to 27:

On 1/3/x6, Sayex (an 80%-owned subsidiary of Payex) sold equipment costing P100,000 to Payex for P45,000. At
the time of the sale, the equipment had a book value of P20,000 (having been depreciated using the straight-line
method, an original life of 10 years, and no estimated salvage value). Payex continued depreciating the equipment
by using the straight-line method but assigned a remaining life of 5 years.

25.What are the cost and accumulated depreciation, respectively, of this equipment in the 12/31/x7—not
12/31/x6—consolidated balance sheet?
a. P100,000 and P20,000. d. P100,000 and P100,000.
b. P100,000 and P18,000. e. None of the above.
c. P100,000 and P88,000.
26. What is the amount of the intercompany profit or loss that must be deferred at 12/31/x7—not 12/31/x6?
a. P25,000 c. P15,000 e. P8,000
b. P20,000 d. P12,000
27. What is the adjustment to Depreciation Expense in preparing the consolidation worksheet at 12/31/x7?
a. A debit of P5,000. c. A debit of P12,500. e. N/A
b. A credit of P5,000. d. A credit of P12,500.
28. The Pinoy Company acquired a foreign subsidiary on August 15, 20x2. Goodwill arising on the acquisition
was Nt Dollar 175,000. Consolidated financial statements are prepared at the year end of December 31, 20x2
requiring the translation of all foreign operations' results into the presentation currency of peso.

The following rates of exchange have been identified:

Rate at August 15, 20x2 Nt Dollar 1.321 : P1
Rate at December 31, 20x2 Nt Dollar 1.298 : P1
Average rate for the year ended December 31, 20x2 Nt Dollar 1.302 : P1
Average rate for the period from August 15 to December 31, 20x2 Nt Dollar1.292 : P1

According to PAS 21 (The effects of changes in foreign exchange rates), at what amount should the goodwill
be measured in the consolidated statement of financial position?
a. P134,409 c. P134,823
b. P135,449 d. P312,449
29. The Pinay Company acquired The Kanchengjunga Company, a foreign subsidiary, on September 10, 20x2.
The fair value of the assets of Kanchengjunga was the same as their carrying amount except for land where
the fair value was Nt dollar 50,000 greater than carrying amount. This fair value adjustment has not been
recognized in the separate financial statements of Kanchengjunga. Consolidated financial statements are

Page 5 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
prepared at the year end of December 31, 20x2 requiring the translation of all foreign operations' results into
the presentation currency of peso. The following rates of exchange have been identified:

Rate at 10 September 20x2 Nt Dollar 1.62 : P1

Rate at 31 December 20x2 Nt Dollar 1.56 : P1
Average rate for the year ended December 31, 20x2 Nt Dollar 1.60 : P1
Average rate for the period from 10 September to December 31, 20x2 Nt Dollar 1.58: P1

According to PAS 21 (The effects of changes in foreign exchange rates), what fair value adjustment is
required to the carrying amount of land in the consolidated statement of financial position?
a. P30,864 c. P31,250
b P32,051 d. P31,646
30. The Witley Company has the peso as its functional currency. On October 16, 20x2 Witley ordered some
inventory from a foreign supplier and agreed a purchase price of 160,000 yens. The inventory was received
on November 15, 20x2.

On December 31, 20x2 the inventory remained on hand and the trade payable balance for the inventory
purchase remained outstanding. The supplier was paid on January 27, 20x3 and the inventory was sold on
January 31, 20x1.

The following information about exchange rates is available:

October 16, 20x2 P1 = 2.60 yens
November 15, 20x2 P1 = 2.50 yens
December 31, 20x2 P1 = 2.40 yens
January 27, 20x3 P1= 2.25 yens

According to PAS 21 (The effect of changes in foreign exchange rates), at what amount should the trade
payable balance due to the supplier be presented in the statement of financial position of Witley on
December 31, 20x2?
a. P61,538 c. P66,667
b P64,000 d. P71,111
31. The balance in SM Corp.’s foreign exchange loss account was P15,000 on December 31, 20x2, before any
necessary year-end adjustment relating to the following:
(1) SM had a P20,000 debit resulting from the restatement in pesos of the accounts of its wholly owned
foreign subsidiary for the year ended December 31, 20x2.
(2) SM had an account payable to an unrelated foreign supplier, payable in the supplier’s local currency on
January 27, 20x3. The Philippine peso equivalent of the payable was P100,000 on the November 28,
20x2, invoice date, and P 106,000 on December 31, 20x2.

In SM’s 20x2 consolidated income statement, what amount should be included as foreign exchange loss in
computing net income?
Functional Currency – LCU Functional Currency is Peso
a. P21,000 P41,000
b. P21,000 P21,000
c. P41,000 P21,000
d. P41,000 P41,000

Items 32 to 34 are based on the following information:

On September 1, 2019, Ramus Company purchased machine parts from Jacky Chan Company for 6,000,000 Hong
Kong dollars to be paid on January 1, 2020. The exchange rate on September 1 is HK $7.7 = P1. On the same date,
Ramus enters into a forward contract and agrees to purchase HS $6,000,000 on January 1, 2020, at the rate of HK
$7.7 = P1. On December 31, 2019 and on January 1, 2020, the exchange rate is HK $8.0 = P1.

32. What is the fair value of the forward contract on December 31, 2019?
a. P 0 c. P750,000
b. P 29,221 d. P779,221
33. What is the nominal value of the HK $ forward contract on December 31, 2019?
a. P 0 c. P750,000
b. P 29,221 d. P779,221

Page 6 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
34. What is the notional value of the HK $ forward contract?
a. P 0 c. P750,000
b. P 29,221 d. P779,221

Use the following information for questions 35 and 36:

On 8/3/x6, Buyox entered into a noncancellable purchase agreement with a foreign vendor involving a custom-
made machine. Buyox took delivery of the machine on 12/1/x6 (120 days later). The purchase price was 100,000
foreign currency units (FCUs), which Buyox remitted to the vendor on l/30/x7 (60 days after delivery). Direct
exchange rates on the respective dates are as follows:

8/3/x6 12/1/x6 12/31/x6 1/30/x7

Spot rate .............................................. …. P1.60 P1.64 P1.67 P1.70
Forward rate ........................................ …. P1.60 P1.64 P1.67 P1.70

Also on 8/3/x6, Buyox entered into a 180-day FX forward to buy 100,000 FCUs.

35. What should be the capitalized cost of the equipment?

a. P160,000 c. P167,000
b. P164,000 d. P170,000
36. What is the FX gain or loss recognized in earnings for 20x6 on the foreign currency commitment?
a. P0 d. P7,000 gain
b. P4,000 gain. e. P7,000 loss
c. P4,000 loss

Use the following information for questions 37 and 38:

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 20x4, have been
restated into pesos as follows:
Restated at
Current Rates Historical Rates
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 47,500 P 45,000
Accounts receivable . . . . . . . . . . . . . . 95,000 90,000
Inventory, at market . . . . . . . . . . . . . . 76,000 72,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,000 54,000
Equipment (net) . . . . . . . . . . . . . . . . . . 142,500 135,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P418,000 P396,000

37. Assuming the functional currency of the subsidiary is the peso, what total should be included in Parker's
consolidated balance sheet at December 31, 20x4, for the above items?
a. P407,500 d. P403,500
b. P418,000 e. P398,500
c. P396,000
38. Assuming the functional currency of the subsidiary is the local currency, what total should be included in
Parker's consolidated balance sheet at December 31, 20x4, for the above items?
a. P407,500 d. P403,500
b. P418,000 e. P398,500
c. P396,000
39. LL Corporation owns a foreign subsidiary with 2,600,000 local currency units (LCU) of property, plant, and
equipment before accumulated depreciation on December 31, 20x4 of this amount. 1,700,000 LCU were
acquired in 20x2 when the rate of exchange was 1.5 LCU = P1, and 900,000 LCU were acquired in 20x3
when the rate of exchange was 1.6 LCU = P1. The rate of exchange in effect on December 31, 20x4, was 1.9
LCU = P1. The weighted average of exchange rates that were in effect during 20x4 was 1.8 LCU = P1.
Assuming that the property, plant, and equipment are depreciated using the straight-line method over a 10-
year period with no salvage value.

How much depreciation expense relating to the foreign subsidiary’s property, plant, and equipment should
be charged in LL’s statement of income for 20x4?

Page 7 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
Functional Currency – LCU Functional Currency is Peso
a. P144,444 P169,583
b. P144,444 P144,444
c. P169,583 P144,444
d. P169,583 P169,583
40. On January 1, 20x4, PP Company formed a foreign subsidiary. On February 15, 20x4, PP’s subsidiary
purchased 100,000 local currency units (LCU) of inventory. Of the original inventory purchased on February
15, 20x4, 25,000 LCU made up the entire inventory on December 31, 20x4. The exchange rates were 2.2
LCU= P1 from January 1, 20x4, to June 30, 20x4, and 2 LCU = P1 from July 1, 20x4, to December 31, 20x4.
The December 31, 20x4, inventory balance for PP’s foreign subsidiary should be restated in pesos in the
amount of:
Functional Currency – LCU Functional Currency is Peso
a. P12,500 P11,364
b. P12,500 P12,500
c. P11,364 P12,500
d. P11,364 P11,364

END

Goodluck and GOD BLESS!!!

*Faith may be defined briefly as an illogical belief in the occurrence of the impossible.*
*Faith is a higher faculty than reason.*
*The secret of life is not just to live, but to have something worthwhile to
*Be not afraid of life. Believe that life is worth living and your belief
will help create the fact.*
*Develop an attitude of gratitude, and give thanks for everything that happens to you,
knowing that every step forward is a step toward achieving something bigger
and better than your current situation.*
*The remarkable thing we have is a choice every day regarding the attitude we will
embrace for that day. We cannot change our past...
We cannot change the fact that people will act in a certain way.
We cannot change the inevitable. The only thing we can do is play on the one string we
have, and that is our attitude.*
*The great thing in the world is not so much where you are
but in what direction you are going*
*There are only two things in the world to worry over; the things you can control,
and the things you can’t control. Fix the first forget the second.*

Page 8 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

Suggested Answers and Solutions

1. d
Consideration transferred:
Shares: (100,000 shares x P6.20)……………………… P620,000
Contingent consideration………………………………. 184,000
Total……………………………………………………. P804,000
Less: Fair value of net identifiable assets acquired:
Current assets………………………………………… P100,000
Equipment……………………………………………… 150,000
Land …………………………………………………… 50,000
Buildings ……………………….……………………… 300,000
Liabilities………………………………………………. ( 80,000) 520,000
Goodwill……………………………………………………. P284,000

The P184,000 is one classical example of contingencies when the future income of the acquirer is regarded as
uncertain; the agreement contains a clause that requires the acquirer to provide additional consideration to the
acquiree if the income of the acquirer is not equal to or exceeds a specified amount over a specified period.

2. d
Goodwill, 1/1/2019……………………………………………………............ P 284,000
Less: Adjustment on contingent consideration (P184,000 – P170,000) 14,000
Goodwill, 8/1/2019……………………………………………………............. P 270,000

Changes that are the result of the acquirer obtaining additional information about facts and circumstances
that existed at the acquisition date, and that occur within the measurement period (which may be a maximum
of one year from the acquisition date) are recognized as adjustments against the original accounting for the
acquisition (and so may impact goodwill) – see Section 11.3.[PFRS 3 par. 58]

Incidentally, the entry to record the revision of goodwill should be:

Estimated liability for contingent consideration…. 14,000
Goodwill………………………………………… 14,000

3. a – refer to Nos. 1 and 2 for further discussion.

4. c
Deficiency: (P16 – P10) x 100,000 shares issued to acquire…………………….P 600,000
Divided by: Fair value of share…………………………………………………..P 10
Added number of shares to issue…………………………………....................... 60,000

An example of contingencies is where the acquirer issues to the acquiree and the acquiree is concerned that the
issue of these shares may make the market price of the acquirer’s shares decline over time. Therefore, the
acquirer may offer additional cash or shares if the market price falls below a specified amount over a specific
period of time.

5. b – (P520,000 – P60,000 = P460,000), refer to No. 19 for further discussion if market price falls below a specified
amount.

Changes resulting from events after (post-combination changes) the acquisition date (e.g., meeting an earnings
target, reaching a specified chare or reaching a milestone on research and development project) are not
measurement period adjustments. Such changes are therefore accounted for separately from the business
combination. The acquirer accounts for changes in the fair value of contingent consideration that are not
measurement period adjustments as follows:
1. contingent consideration classified as equity is not remeasured and its subsequent settlement is
accounted for within equity; and
2. contingent consideration classified as an asset or liability…

Page 9 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
The problem on hand falls under No. 1, so no adjustment would be required to goodwill but accounted for within
the equity section. Incidentally, the entry would be:
Paid-in capital in excess of par………………………….. 60,000
Common stock, P1 par…………………………….. 60,000

6. c
Par value of shares outstanding before issuance P200,000
Par value of shares outstanding after issuance 250,000
Par value of additional shares issued P 50,000
Divided by: No. of shares issued* __12,500
Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000

Paid-in capital after issuance (P250,000 + P550,00) 800,000
Paid-in capital of share issued at the time of exchange P250,000
Divided by: Fair value per share of stock P 20
Shares issued 12,500

7. c – refer to No. 6

8. a
Consideration transferred: Shares – 12,500 shares P250,000
Less: Goodwill 56,000
Fair value of identifiable net assets acquired P194,000

9. a
Foreign exchange loss before adjustments…………………………………………P 15,000
Add (deduct): adjustments
Gain on accounts payable – buyer (P64,000 – P60,000)…………………………....( 4,000)
Adjusted foreign exchange loss in the income statement.……………………………P 11,000

The P8,000 loss resulting from translation of a subsidiary is presented at the stockholders’ equity section of the
consolidated balance sheet.

10. d
Billed Price Cost Allowance
Merch. Inventory, 12/31/20x4 *P12,000 P10,000 P 2,000
Shipments 9,600 8,000 1,600
Cost of Goods Sold P 3,600
*P2,000 / 20% = P10,000 + P2,000 = P12,000.
Merchandise inventory, December 1, 20x4…………………………………P 15,000
Less: Shipments from home office at billed price*………………………… 12,000
Merchandise from outsiders……………………………………………………P 3,000

11. c
125% 100% 25%
Billed Price Cost Allowance
Merchandise inventory, 1/1/x4 40,000
Shipments 250,000
Cost of goods available for sale 290,000
Less: MI, 12/31/x4 (P60,000 x 80%) 60,000
Overvaluation of CGS(230,000x 25/125) 230,000 46,000*

Page 10 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

12. b – P326,000
Sales (P600,000 + P300,000) ……………………………………… P 900,000
Less: Cost of goods sold
Merchandise inventory, beg.
[P100,000 + (P40,000/1.25)] ……………………….…… P 132,000
Add: Purchases…………………………………………… 350,000
Cost of goods available for sale……………………… P 482,000
Less: MI, ending [P30,000 + (P60,000/1.25)] ………… 78,000 404,000
Gross profit……………………………………………………… P 496,000
Less: Expenses (P120,000 + P50,000)………………………. _ 170,000
Net Income …………………………………………………. P 326,000

13. d
Freight actually paid by:
Home Office……………………………………………………………………..P 500
Branch P…………………………………………………………………………. 700
Total…………………………………………………………………………….. P 1,200
Less: Freight that should be recorded…………………………………………….. 800
Excess freight……………………………………………………………………………P 400

14. c – within the measurement period, since the term “at the date of…” is an indication that the is an existing facts
and circumstance on the acquisition date.
Goodwill 400,000
Estimated Lawsuit liability 400,000

15. b – not within the measurement period and it is considered as a “subsequent event”, then changes on estimates
will course through “gain or loss…”
Loss on lawsuit 400,000
Estimated Lawsuit liability 400,000

16. d [P99,000 + (P26,000 + P19,000 increase)] or (P99,000 + P45,000, FV) = P144,000

Parent Subsidiary
BV BV Dr. Cr. CBS
Inventory 99,000 26,000 *19,000 144,0000
*P45,000 – P24,000 = P19,000

17. a [(P330,000/75%) – (P565,000 – P105,000)] = (P20,000) – full-goodwill approach

18. a - P only

19. d
Total Assets of P P 960,000
Less: Investment in S (330,000)
Book value of assets of P P 630,000
Book value of assets of S (no push-down acctg.) 405,000
Book value reported by P and S P1,035,000
Increase in inventory (P45,000 – P26,000) 19,000
Increase in land (P45,000 - P24,000) 21,000
Increase in plant assets [P300,000 – (P225,000 – P45,000)] 120,000
Goodwill (full) _____0
Total assets reported P1,195,000

If partial-goodwill – same answer with full-goodwill/fair value basis, since there is no goodwill but a gain to
be closed to retained earnings account.

20. d - No entry should be made in the books of the home office, since the freight should be chargeable to the branch
and the payment of the freight was made by the branch.

Page 11 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

21. a - P720,000 = P500,000 + P400,000 - P200,000 +P 20,000

22. d
Cost method: P60,000 x 80% = P48,000
Equity Method:
Equity In Subsidiary Income/Investment Income

*UPEI of Parent 20,000 96,000 NI-S (P120,000 x 80%)

76,000

* P200,000 x ½ = P100,000 x 20% = P20,000 x 100% (downstream) = P20,000

23. d - Downstream situation

S Company’s net income from own/separate operations P120,000
x: NCI % 20%
P 24,000

24. a
Combined building amounts P650,000
Less: Intercompany gain __30,000
Consolidated buildings P620,000

Combined Accumulated Depreciation P195,000

Less: Piecemeal recognition of gain ___3,000
Consolidated accumulated depreciation P192,000

25. c
Original cost of P 100,000

Accumulated depreciation, 1/1/20x6 (P100,000 - P20,000) P 80,000

Add: Additional depreciation (P100,000 – P80,000) / 5 years x 2 years ____8,000
Accumulated depreciation, 12/31/20x7 P 88,000
26. c
Sales price P 45,000
Less: Book value
Cost P100,000
Less: Accumulated depreciation __80,000 __20,000
Unrealized gain on sale P 25,000
Less: Realized gain - depreciation (P25,000 / 5 years) x 2 years __10,000
Net unrealized gain, 12/31/20x7 P 15,000
27. b
Eliminating entries:
12/31/20x7: subsequent to date of acquisition
Realized Gain – depreciation
Accumulated depreciation 5,000
Depreciation expense 5,000
[P45,000 - (P100,000 - P80,000) = P25,000 / 5 years or P4,000 – P9,000 =
P5,000

“Should be in CFS” Parent – Sayex “Recorded as” Subsidiary - Payex

Depreciation expense Depreciation expense
(P20,000 /5 years) 4,000 (P45,000 / 5 years) 9,000
Acc. Depreciation 4,000 Acc. depreciation 9,000

Page 12 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)

28. c – Nt Dollar 175,000 / Nt Dollar 1.298 = P134,823

Goodwill arising from acquisition……………………………………… Nt Dollar 175,000
Divided by: Closing/Current rate (Nt dollar : peso)……………………..Nt Dollar 1.298
Goodwill in the consolidated balance sheet……………………………. P134,823

In the consolidated financial statements, any goodwill arising on the acquisition of a foreign operation should
be treated as an asset of the foreign operation. The goodwill should therefore be expressed in the functional
currency of the foreign operation and translated at the closing rate at the date of each statement of financial
position. The same treatment is required of any fair value adjustments to the carrying amounts of assets and
liabilities arising on the acquisition of a foreign operation. In both cases exchange differences are recognized
in other comprehensive income, rather than as part of the profit or loss for the period.
29. b
Fair value adjustments (undervaluation of land)……………… ………….Nt 50,000
Divided by: CLOSING / CURRENT RATE on the balance sheet
(Nt dollar per peso)…………………………………………… 1.56
Fair value adjustments…………………………………………………………... P 32,051
PAS21 par. 47 requires fair value adjustments to the carrying amounts of assets and liabilities arising on the
acquisition of a foreign operation to be treated as assets and liabilities of the foreign operation. Therefore
they are translated at the closing rate of exchange.
30. c – 160,000 yens x P1 / 2.40 yens = P66,667
PAS 21 par. 23 (a) requires the foreign currency monetary items, such as trade payables, of an entity to be
retranslated at the closing rate at the end of a reporting period.
31. a
LCU Peso
is Functional Currency is Functional Currency
P15,000 = Preadjusted foreign P15,000 = Preadjusted foreign
exchange loss exchange loss
6,000 = Foreign currency 6,000 = Foreign currency
transaction loss transaction loss
($100,000 - $106,000) 20,000 = Remeasurement gain
P21,000 = Foreign exchange P41,000 = Net foreign
Loss exchange loss
Note: The term “restatement” used by foreign subsidiary is an indication that the temporal or
remeasurement method is used.
32. b
Fair value of Forward Contract:
September 1, 2019 (no initial fair value –
PAS 39 par. 43 ……………………………………………………………………… P 0
December 31, 2019:
9/1/2019: Current (original) Forward rate
(HK$6,000/HK$7.7 …………………………………………...P779,221
12/31/2019: Spot rate (HK$6,000,000/HK$8.0) …………………… 750,000
Forex loss on forward contract …………………………………………………........ 29,221
Fair value of forward contract, 12/31/20x7 (a payable) …………………………….. P29,221

*Under the forward contract, Ramus must pay P779,2921 to purchase HK$6,000,000 on
January 1, 2020. Equivalently, Ramus can make a settlement payment if the peso value of
HK$6,000,000 on January 1, 2020, is less than P779,221, and it can receive a payment if the value is
more. In this case, the value is P750,000 (HK$6,000,000/8.0). So Ramus must make a payment.

33. b – refer to No. 32 computation

34. d
HK$6,000,000/HK$7.7 = P 779,221. The notional amount is the total amount of the asset or
liability that underlies the derivative contract. The national amount can be misleading
because the value of a derivative is a function of changes in prices or interest rates and is
normally equal to just a small fraction of the national amount of the underlying asset.

Page 13 of 14 pages
ReSA - The Review School of Accountancy AFAR Quiz 2
Coverage: AFAR – 07 to 12 (ReSA Batch 43 – May 2022 Batch)
A notional amount may be expressed in the number currency units, shares, bushels, pound or other units
specified in the financial instrument.
The P779,221 is the national amount of the forward contract, but has a fair value of P0 on
the day the forward agreement is signed, e.g., September 1, 2019. In summary, there might be a possibility
that notional amounts grossly overstate/understate both the fair value and the potential cash flows of the
derivative.

35. a
December 1, 20x6: Spot rate – P1.64 x 100,000....…………............. P164,000
Less: Firm Commitment – liability (credit balance)
8/3/20x6: Original (120-day) forward rate…………………….P 1.60
12/1/20x6: Remaining (60-day) forward rate………………… 1.64
Loss on Firm Commitment………………………………………....P 0.04
Multiplied by: No. of FCs……………………………………… 100,000 4,000
Value of machine...........................……………………………………… P160,000
36. c - refer to No. 35 (Note: There is no more commitment after the date of transaction which is 12/1/20x6)
37. a
The peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Cash and accounts
receivable are monetary assets remeasured at current exchange rate of P47,500 and P95,000, respectively.
Inventory is a nonmonetary asset (carried at market value) are remeasured at the current exchange rate of
P76,000. Land and equipment, both nonmonetary assets (carried at cost) are remeasured at the historical exchange
rate of P54,000 and P135,000, respectively.
38. b
Because the functional currency is the local currency, a translation (or current rate method) is required. All assets
accounts are translated at current rates.
39. a
LCU – it is assumed that historical rate is not practicable (despite the presence of it), then PAS 21 requires the
use of average rate [(2,600,000 - 0)/10 years x 1.8LCU per peso = P144,444]
Peso - expense related to nonmonetary asset such as depreciation should be remeasured using the historical
exchange rate (exchange rate when the equipment was acquired), i.e., :
20x2: (1,700,000 LCU – 0)/10 years = 170,000 LCU /1.5 LCU per peso..P113,333
20x3: (900,000 LCU – 0)/10 years = 90,000 LCU /1.6 LCU per peso…… 56,250
Total……………………………………………………………………….P169,583
40. a
LCU – the current rate method is used since the term “translated” was used, a translation (or current rate method)
is required. Inventory account is translated at current rate (25,000 LCU / 2 LCU per peso = P12,500)
Peso – the peso is the functional currency, so a remeasurement (or temporal method) is appropriate. Inventory is
a nonmonetary asset (carried at cost) is remeasured at the historical exchange rate of 2.2 LCU per peso (25,000
LCU / 2.2 LCU per peso = P11,364)

Goodluck and GOD BLESS!!!

*There are only two things in the world to worry over; the things you can control,
and the things you can’t control. Fix the first, forget the second.*
*No act of kindness, no matter how small is ever wasted. *
*One individual plus courage is a majority. *
*There is no great and no small To the Soul that make s it all:
And where it comes, all things are equal; And it comes everywhere.*
***Ask not for a larger garden, but for a finer seeds***
***Ask not for a lighter burden, but for a broader shoulder***
***There are divine things more beautiful than words can tell***
*The only thing that stands between a man and what he wants from life is often merely the will to try it and
the faith to believe that it is possible*
*In every trial, there’s a treasure waiting to be unearthed*
*Never take direction from a crowd for your personal life. And never choose to quit just because somebody
disagrees with you*
*Opportunities are usually disguised as hardwork, so most people don’t recognize them*

Page 14 of 14 pages