FINANCIAL ACCOUNTING AND REPORTING

EASY

1. The account title “Inventories” as shown on an entity’s financial statements

includes
a. Goods sold with a buyback arrangement
b. Goods held on consignment
c. Unused supplies for administrative purposes
d. Goods in transit, purchased FOB buyer
2. The following statements relate to cash. Which statement is true?
a. The term “cash equivalent” refers to demand credit instruments such as
money order and bank drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand
to cover all normal operating expenses for a period of time.
c. Classification of a restricted cash balance as current or non-current should
parallel the classification of the related obligation for which the cash was
restricted.
d. Compensating balances required by a bank should always be excluded from
“cash and cash equivalent”.
3. Cash equivalents do not include:
a. Two-month treasury bills
b. Commercial papers purchased with three months of maturity
c. Money market instrument (one month)
d. Equity investments at FV through profit or loss (expected to be sold in two
months)
4. On January 1, 2022, Idaho Company had a balance in the Allowance for Doubtful
Accounts of P10,000. During 2022, it wrote off P13,500 of accounts and collected
P2,000 on accounts previously written off. The balance in Accounts Receivable
was P200,000 at January 1 and P250,000 at December 31. At December 31, 2022,
Idaho Company estimated that 5% of accounts receivable will prove to be
uncollectible.

What is the Bad Debts Expense for the year 2022?

a. P14,000
b. P11,000
c. P2,500
d. P12,500
Answer:
(10,000 + 2,000 – 13,500) + (250,000 x 5%) = 14,000

5. Megan Company issues P2,000,000 6% convertible bonds on June 1, 2022.

Interest is Exam payable annually. The conversion option can be exercised in a
number of years’ time. The liability component is initially measured at P1,841,160
based on an 8% market rate of interest for a similar nonconvertible bond. What
amounts are recognized in the statement of financial position at May 31, 2023?
a. a liability of P1,813,867 and equity of P186,133
b. a liability of P1,868,453 and equity of P158,840
c. a liability of P1,961,160 and equity of P38,840
d. a liability of P1,988,453 and equity of P11,547
Answer:
1,841,160 x 1.08 - 120,000 1,868,453
Share premium (2M - 1,841,160) 158,840
6. Which of the following shall be included in the reported balance of inventory in
the statement of financial position?
a. cost of goods shipped out on consignment to another entity.
b. cost of goods purchased with a buyback agreement.
c. cost of goods sold in transit – CIF terms.
d. cost of undelivered goods sold in bill and hold agreement
7. Under IFRS, a contingency is described as
A. An estimated liability.
B. A potentially large liability.
C. The same as it is described by US generally accepted accounting principles.
D. An event which is not recognized because it is not probable that an outflow
will be required or the amount cannot be reasonably estimated.
8. In the year ended December 31, 2022, William Company, a drinks manufacturer,
sold a vat of maturing whisky to Harry Company for P4,600,000. Willian Company
has signed a contract agreeing to repurchase the whiskey in eight years' time at
P5,400,000. What amount of revenue from sale should William recognized on
December 31, 2022?
a. P5,400,000
b. P900,000
c. P4,600,000
d. P0
Answer: D
The legal form of the transaction is a sale followed by a repurchase at a later
Exam date. It is however, clear from the scenario that the economic reality is that
William is using the maturing whisky as security for an eight-year loan with the
bank.
9. S1: Since equity is the residual amount of assets over liabilities, equity cannot be
recognized individually from the other elements of the financial position
S2: Physical form is a necessity for an item to be classified as asset.

A. False, false
B. False, true
C. True, true
D. True, false

10. Which of the following is not a characteristic of faithful representation?

A. The financial information must have predictive value and confirmatory value.
B. The financial information must be complete within the bounds of materiality
and cost
C. The financial information contained in the financial statements must be free
from bias.
D. The phenomena described in the financial statements and the process used to
produce the reported information must be free from error.

AVERAGE

1. Which of the following statements concerning interest-bearing notes receivable is

generally a false statement?
a. Discount on notes receivable should be deducted to arrive at the carrying
value of notes receivable
b. Amortizing the discount causes the carrying amount of the notes receivable to
gradually increase over the life of the note
c. Amortizing the premium causes the carrying amount of the notes receivable
to gradually decrease over the life of the note
d. None of the above choices
2. Which of the following items is not matched correctly with its basis of valuation for
purposes of reporting in the Statement of Financial Position?
a. Cash → Face value
b. Long-term interest-bearing note with unrealistic rate → Face value
c. Long-term non-interest-bearing note → Present value
d. Accounts receivable→ Amortized cost
3. Which of the following is recorded by a credit to accounts receivable but do not
affect the net realizable value of the accounts receivable?
a. estimated sales return at year-end.
b. provisions for estimated bad debts.
c. write-off of accounts receivable proven to be uncollectible.
d. sale of merchandise on account with 2/10, n/30 credit terms.
4. Sun and Moon Inc. factors P2,000,000 of its accounts receivables without recourse
for a finance charge of 5%. The finance company retains an amount equal to 10%
of the accounts receivable for possible adjustments. What would be recorded by
Sun and Moon as a gain (loss) on the transfer of receivables?
a. P100,000 gain
b. P200,000 loss
c. P100,000 loss
d. P300,000 loss
Answer: [2,000,000 x 5% = 100,000 loss]

5. Bruh Company purchased a tooling machine on January 3, 2015 for P500,000. The
machine was being depreciated on the straight-line method over an estimated
useful life of 10 years, with no residual value. At the beginning of 2022, the
company paid P125,000 to overhaul the machine. As a result of this improvement,
the company estimated that the useful life of the machine would be extended an
additional 5 years (15 years total). What should be the depreciation expense
recorded for the machine in 2022?

a. P34,375
b. P50,000
c. P41,667
d. P55,000
Answer: [500,000 x 3/10 = 150,000 + 125,000 = 275,000 / 8 = 34,375]

DIFFICULT

1. Identify the missing component (X) in the equation:

Retained Earnings, end = Net income to date + period-period adjustments – cash dividends
to date – property dividends to date – X

a. Net unrealized loss on equity investments at FV through OCI.

b. Share dividends declared to date.
c. Share split declared to date.
d. All of them may be the missing component.
2. Which of the following statements is incorrect regarding interim reporting?
A. PFRS requires a complete set of financial statements at the interim reporting date.
B. No accruals or deferrals in anticipation of future events during the year should be
reported.
C. PFRS does not mention about the integral and independent view of interim financial
reporting.
D. PFRS requires entities to expense interim amount like advertising expenditures that
could benefit later interim periods.
3. Delaware Company factored accounts receivable without recourse for P5,300,000. The
entity received P5,000,000 cash immediately from the factor. The remaining P300,000 will
be received once the factor verifies that none of the accounts receivable is in dispute. The
accounts receivable had a face amount of P6,000,000. The entity had previously established
an allowance for bad debts of P250,000 in connection with such accounts.

What amount of loss on factoring should be recognized?

a. P700,000
b. P450,000
c. P750,000
d. P0
Answer: [5,300,000 – (6,000,000 – 250,000) = 450,000]

4. Given the following, how is impairment loss computed?

X = carrying amount
Y = fair value less costs of disposal
Z = value in use

A. Impairment loss = X – Y
B. Impairment loss = higher between of Y and Z minus X
C. Impairment loss = lower between of Y and Z minus X
D. Impairment loss = Z – Y
5. In relation to callable and redeemable preference shares, which of the below statements is
incorrect?
I. Dividends of both types of shares are presented within profit or loss.
II. Gain or loss on redemption of redeemable preference shares are presented within
the equity section rather than in profit or loss.
III. Both types of shares have mandatory redemption date.

A. I and II
B. I, II and III
C. II and III
D. Answer not given
E. I and III

TIE BREAKER

1. Under a defined contribution plan, the retirement benefits expense is

A. equal to an actuarially determined amount
B. equal to the agreed periodic contribution to the fund
C. equal to the contribution made during the period
D. zero, if no employee retired during the period
2. All of the following are characteristics of a derivative, except
A. It is settled at a future date.
B. The value changes in response to an underlying.
C. It requires no initial or a small initial net investment
D. It is acquired for the purpose of generating a profit from short-term fluctuation in
market factor.
3. Which of the following assets held by an enterprise would not qualify as investment
property as defined by IAS 40, Investment Property?
A. Land held for capital appreciation
B. Building held to earn rentals
C. Land for sale in the ordinary course of business
D. Land held for undetermined future use
FOR 4-5
The petty cash fund of California Company was counted on December 31, 2022. The
following items were found:
Total bills and coins 2,737.50
Certified check of general manager dated December 15, 2022 2,250
Petty cash vouchers not yet replenished:
 Postage stamps 420
 Supplies 975
 IOU of employee 750
Company check representing replenishment of petty cash fund 7,725
Unused postage stamps 180
An envelope containing contributions of employees for the death of a fellow employee
(contents intact) 4,500
The petty cash fund was established at P15,000.
4. What is the correct amount of the petty cash fund on December 31, 2022?
a. 14,857.50
b. 12,712.50
c. 10,462.50
d. 2,737.50
Answer: [2,737.5 + 2,250 + 7,725 = 12,712.5]

5. What is the amount of shortage or overage?

a. 142.50 short
b. 37.50 short
c. 322.50 short
d. 0
Answer: [(15,000 - 420 - 975 – 750 = 12,855) – 12,712.50 = 142.50 shortage]