MULTIPLE CHOICE THEORY

1. According to PFRS 15, each contract is accounted for separately. However, two or more contracts
entered into at or near the same time with the same customer are combined and accounted for as a
single contract if any of the following conditions are met, except
a. The contracts are negotiated as a package with a single commercial objective.
b. The amount of consideration to be paid in one contract depends on the price or performance of
the other contract.
c. Some or all of the goods or services promised in the contracts are a single performance
obligation.
d. At contract inception, the collectability of the consideration is probable of collection.

2. Which of the following does not indicate that a promise to transfer a good or service is separately
identifiable?
a. The good or service is not an input to a combined output specified by the customer.
b. The good or service does not significantly modify another good or service promised in the
contract.
c. The good or service is not highly interrelated with other goods or services promised in the
contract.
d. The customer's decision of not purchasing a good or service affects the other promised goods
or services in the contract.

3. At contract inception, PFRS 15 requires an entity to determine how the performance obligations
identified in the contract will be satisfied. According to PFRS 15, how does an entity satisfy a
performance obligation in a long-term construction contract?
a. over time
b. at a point in time
c. dismissal time
d. either a or b

4. Which of the following does not indicate that a performance obligation is satisfied over time?
a. The customer simultaneously receives and consumes the benefits provided by the entity's
performance as the entity performs.
b. The entity's performance creates or enhances an asset (e.g. work in progress) that the
customer controls as the asset is created or enhanced.
 c. The entity's performance creates an asset with an alternative use to the entity and the entity
has an enforceable right to payment for performance completed to date.
d. The entity's performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.

5. Pane Co. enters into a 5-year construction contract with a customer. At contract inception, Pane Co.
determines its performance obligations in the contract and concludes that it has a single performance
obligation. Pane Co. also determines that it retains control over the promised goods and services in the
contract during the construction period. Moreover, Pane Co.'s performance creates an asset that has an
alternative use to Pane Co. Pane Co. would most likely recognize revenue from the contract
a. over the 5-year period by measuring its progress towards the complete satisfaction of the
performance obligation.
b. when the construction is completed and the promised goods and services are transferred to
the customer.
c. using the percentage of completion, because this is the method required by PFRS 15 for all
long-term construction contracts.
d. either a or b as a matter of accounting policy choice.

6. Under the percentage of completion method, contract revenue, for the period is computed
a. by multiplying the percentage-of-completion to the transaction price.
b. by dividing the contract price by the percentage-of-completion and deducting revenues already
recognized in the prior periods.
c. by multiplying the percentage-of-completion to the contract price and deducting revenues
already recognized in the prior periods.
d. by multiplying the percentage-of completion to the contract price and adding revenues already
recognized in the prior periods.

7. entity uses the output method based on surveys of work performed to measure its progress on a
performance obligation that is satisfied over time. Which of the following items affects the entity's
computation for the revenue to be recognized each year?

Receivable Collections on progress billings

a. Yes Yes
b. Yes No
c. No Yes
d. No No
8. ABC Co.'s performance obligation under a 4-year construction contract with a customer will be
satisfied at a point in time. Progress billings were recorded and collected in the third year. Based on
events occurring in the third year, a loss is now anticipated on the contract. When will the effect of each
of the following be reported in the entity's income statement?

Third year progress billings Anticipated loss

a. Not third year; Third Year
b. Not third year; Fourth Year
c. Third year; Third year
d. Third year; Fourth year

9. Which of the following is an output method of measuring an entity's progress towards the complete
satisfaction of a performance obligation in a contract with a customer?

a. costs incurred
b. resources consumed
c. appraisal of results achieved
d. labor hours expended

10. An entity enters into a contract with a customer to build an asset for P1M. In addition, the terms of
the contract include a penalty of P100,000 if the construction is not completed within three months of a
date specified in the contract. Which of the following statements is correct?

a. The transaction price is a fixed amount of ₱900,000.

b. The transaction price includes a fixed amount of P1,000,000 and a variable amount of
₱100,000.
c. The transaction price includes a fixed amount of P900,000 and a variable amount of ₱100,000.
d. The transaction price is a variable amount of ₱900,000.

11. According to PFRS 15, a promise to grant a license is distinct if

a. The use of the license is highly dependent on a related service.
b. The customer can benefit from the license on its own (or together with other resources) and
the license is separately identifiable.
c. The promise is satisfied over time.
d. The license is integral to the functionality of a tangible good.
12. Which of the following would most likely be considered as a separate performance obligation in a
franchise agreement?
a. initial services required of the franchisor that are in substance activities to setup the contract
b. equipment that the franchisee is required to purchase or otherwise obtain from a third party
supplier
c. grant of license to use the franchisor's trademark
d. activities that the franchisor is required to undertake to support the intellectual property
covered in the franchise

13. If the promise to transfer a license is distinct,

a. the entity shall treat all the promises in the contract as a single performance obligation.
b. the entity shall determine whether the performance obligation is satisfied over time or at a
point in time using the 'general principles' of PFRS 15.
c. the entity shall determine the nature of the grant of license as either "right to access" or "right
to use."
d. b and c

14. Entity A enters into a franchise contract with Customer X. The agreement provides Customer X the
right to access Entity A's intellectual property. How should Entity A recognize revenue from the franchise
agreement?
a. over time, as Customer X receives and consumes the benefit from Entity A's performance of
providing access to its intellectual property.
b. at a point in time when Entity A transfers control over the promised license to Customer X.
c. a or b as a matter of an accounting policy choice
d. when there is "substantial performance" by Entity A in accordance with US GAAP.

15. If a franchise contract requires the franchisor to undertake activities that would affect the
franchisor's intellectual property to which the franchisee has rights, the performance obligation is
satisfied

a. at a point in time.
b. over time.
c. under time.
d. anytime.
16. An entity enters into a contract with a customer to license (for a period of three years) intellectual
property related to the design and production processes for a good. The contract also
specifies that the customer will obtain any updates to that intellectual property for new designs or
production processes that may be developed by the entity. The updates are essential to the customer's
ability to use the license because the customer operates in an industry in which technologies change
rapidly. The entity does not sell the updates separately and the customer does not have the option to
purchase the license without the updates. Which of the following statements is incorrect?

a. The promises to grant the license and to provide the updates are two separate performance
obligations.
b. The license and the updates are accounted for together as a single performance obligation.
c. The general principles are applied to determine how the performance obligation is satisfied.
D. The single performance obligation is satisfied over time.

17. Direct costs of a franchise contract incurred by a franchisor and within the scope of PFRS 15 are
recognized as expense using the

a. matching concept.
b. immediate recognition principle.
c. effective interest method.
d. concept of conservatism or prudence.

18. On Nov. 1, 20x1, NEFARIOUS Co. enters into a contract to transfer a license to EVIL Co. The license
provides EVIL the right to use NEFARIOUS' intellectual property over a four-year period. In exchange,
EVIL pays a fixed consideration, which is due at contract inception. The intellectual property
does not change over the license period. NEFARIOUS effectively transfers the license to EVIL on Jan. 31,
20x2. NEFARIOUS incurred direct contract costs in 20x1. How should NEFARIOUS account for the fixed
consideration and the contract costs, respectively?

Fixed consideration Contract costs

a. revenue in full on 11/1/x1; expensed in full on 11/1/x1
b. revenue in full on 1/31/x2; expensed in full on 1/31/x2
c. revenue in full on 1/31/x2; expensed in full in 20x1
d. deferred and amortized; deferred and amortized
19. If at contract inception the collectability of the promised consideration is significantly uncertain.

a. no revenue is recognized from the contract, and any amount received is recognized as liability.
b. revenue from the contract is recognized using the "installment method."
c. the accrual method is disregarded and revenue is recognized only when cash collections
exceed the costs incurred.
d. any of these as a matter of accounting policy choice

20. The uncertainty in the collectability of contract revenue that arises in a subsequent period is

a. accounted for as a retrospective adjustment to revenue.

b. accounted for prospectively as a "catch-up" adjustment to revenue.
c. accounted for as impairment of receivable and/or contract asset.
d. accounted for as a prior-period error.

21. In a consignment arrangement, which party bears which type of risk?

Inventory risk; Credit risk

a. Consignor; Consignor
b. Consignor; Consignee
c. Consignee; Consignor
d. Consignee; Consignee

22. Which of the following indicates that an entity is a principal rather than an agent?

a. Another party is primarily responsible for fulfilling the contract.

b. The entity has no the discretion in establishing the price at which the good or service is sold to
a customer.
c. The entity ultimately bears the loss if the customer fails to pay the sale price.
d. The entity does not have inventory risk.

23. ABC Co. produces a wide variety of frozen foods. Due to the faltering economy, ABC closed its
provincial sales outlets. Instead, ABC outsourced various distributors to sell its products. Each
distributor accepting delivery shall pay ABC 10% of the factory selling price of the goods delivered and
accepted. However, if the distributor fails to sell all of the goods accepted before their expiration dates,
ABC is obligated to repurchase the unsold goods. In June 20x1, ABC delivered goods with total factory
selling price of ₱10,000,000 to its distributors. ABC received 10% of the total factory selling price of the
goods delivered. When should ABC recognize revenue from the goods delivered?

a. When the goods are shipped to the distributor.

b. When the goods are sold to the ultimate customers.
c. When the distributor pays ABC Co.
d. When ABC received the 10% of the total factory selling price of the goods delivered.

24. Black Co., a consignee, paid the freight costs for goods shipped from White Co., a consignor. These
freight costs are to be deducted from Black's payment to White when the consignment goods are sold.
Until Black sells the goods, the freight costs should be included in Black's

a. Cost of goods sold.

b. Freight-out costs.
c. Selling expenses.
d. Receivable.

25. Entity A consigns goods to Entity B. Normally, end customers buy over-the-counter from Entity B.
However, in some cases, Entity B ships the goods to the customer. Entity B deducts the shipping cost
from the amount remitted to Entity A. How should Entity A account for the shipping cost?

a. Freight in
b. Receivable
c. Commission expense
d. Freight out

26. Groovy Co., a big corporation domiciled in the Philippines, enters into a 3-year contract with a
customer. At contract inception, Groovy assesses the customer's ability and intention to pay the
consideration in the contract and concludes that the collectability of the consideration is significantly
uncertain. For financial reporting, Groovy should do all of the following except

a. not recognize any revenue until the criteria under PFRS 15 are met.
b. recognize any consideration received from the contract as liability.
c. reassess the contract in subsequent periods using the guidance in PFRS 15.
d. apply the "installment sales method."
27. Which of the following methods of recognizing revenue is in accordance with the principles of the
PFRSs?

Installment sales method Cost recovery method (Traditional)

a. Yes; Yes
b. No; Yes
c. Yes; No
d. No; No

28. Which of the following equations is incorrect regarding the installment sales method?

a. Realized gross profit = Gross profit rate x Collection

b. Ending receivable = Sale price - Collection
c. Deferred gross profit = Ending receivable x Gross profit rate
d. Gross profit rate = Ending receivable + Deferred gross profit

29. Merchandise received as trade-in is recognized at

a. trade-in value
b. fair value
c. current cost.
d. original cost.

30. Cash collection is a critical event for income recognition in the

Installment sales method Cost recovery method (Traditional)

a. Yes; Yes
b. No; Yes
c. Yes; No
d. No; No
31. For external reporting, the individual financial statements of the home office and the branch are
combined

a. by using complex consolidation procedures.

b. by recognizing the home office's own assets, liabilities, income and expenses plus its share in
the branch's assets, liabilities, income and expenses.
c. by adding together similar items of assets, liabilities, income and expenses.
d. by adding together similar items of assets, liabilities, income and expenses and eliminating
reciprocal accounts.

32. A credit memo received from the branch is recorded by the home office as

a. Credit to home office account

b. Credit to allocated expense
c. Credit to investment account
d. Debit to investment account

33. The freight on shipment of inventories from the home office to the branch that is paid by the branch
is recorded by the home office as

a. Debit to freight-in.
b. Credit to freight-in.
c. Credit to investment account.
d. Not recorded.

34. A cash remittance from the branch to the home office is recorded by the home office as

a. Debit to investment account.

b. Credit to cash.
c. Debit to home office
d. Credit to investment account
35. Shipments of inventory to the branch may be billed at other than cost. When billing prices are above
cost, the unrealized mark-up is initially recorded by the home office

a. in an "allowance" account.
b. as a credit to investment in branch account.
c. as an addition to the cost of "shipments to branch."
d. a and c