Activity for SME

Test I - Multiple Choices. Choose the letter of the best answer. 1.

c.

Which can qualify as SME? a. Finance entity b. Insurance entity c. Meralco d. None of the above

2.

The entity has public accountability if I. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary businesses. II. Its debt instruments and equity instruments are traded in a public market or it is not in the process of issuing such instruments for trading in a public market. III. It holds assets in fiduciary capacity for a broad group of outsiders for reasons intended as its primary business. a. I and II only b. I and III only c. II and III only d. I, II and III

3.

All of the following are exempted from the mandatory adoption of the Philippine Financial Reporting Standards for Small and Medium-sized Entities (PFRS of SMEs), EXCEPT a. An entity with concrete plans to conduct an initial public offering within the next two years. b. An entity that was able to acquire another entity whose shares are traded in the local market. c. A wasting asset entity that is using Full IFRS which pays a dividend and a liquidating dividend every year as part of its plan to liquidate its assets. d. The entire above are exempted.

4.

Which of the following entities is “publicly accountable”? I. An entity whose shares are traded in a public market. II. An entity whose debts but not its shares are traded in a public market. a. Only the First statement is true. b. Only the Second statement is true c. All the statements are false d. All the statements are true

5.

b.

The following are qualitative characteristics which both the Full PFRS and PFRS for SMEs enumerated specifically, EXCEPT? a. Relevance b. Faithful representation c. Comparability d. Timeliness

6.

The following are financial statements that can be prepared under the PFRS for SMEs, EXCEPT? a. Statement of Financial position b. Single statement of income and retained earnings c. Notes to financial statements d. Statement of financial position as at the beginning of the earliest comparative period

7.

A public accountable entity that uses the PFRS for SMEs shall not describe the financial statements as conforming to PFRS for SMEs, even if it is required by law to prepare the financial statements in accordance with PFRS for SMEs. Which of the following entities is covered by this prohibition? a. An entity that’s not a public utility.

d.

An entity that holds assets in a fiduciary capacity for a broad group of users as one of its businesses. An entity that operates primarily as a supermarket chain and enters into insurance contracts as the insurer with its customers. An entity that holds assets in fiduciary capacity for a broad group of outsiders for reasons incidental to a primary business.

8.

On 20 February 2011, before an entity’s 31 December 2010 financial statements were authorized for issue, a court ordered the entity to pay CU120,000 damages in full and final settlement of a patent infringement lawsuit brought against the entity by one of its competitors. The patent infringement occurred in 2009. The amount of damages awarded to the competitor was significantly higher than the CU10,000–CU30,000 that the entity had justifiably expected to pay throughout the duration of the case. The entity will not contest the judgment. In its 31 December 2009 annual financial statements the entity reported its liability for the lawsuit at CU20,000—this estimate was appropriately made taking account of all available evidence at the time the financial statements were authorized for issue. In its 31 December 2010 financial statements the entity must: a. Restate the comparative information at 31 December 2009 (i.e. retrospective restatement of a prior period error). b. Measure the provision at 31 December 2010 at CU120,000 (comparative information 2009: CU20,000), i.e. account prospectively for the change in accounting estimate in its 2010 financial statements. c. Measure the provision at 31 December 2010 at CU20,000 (comparative information 2009: CU20,000) and record the effect of the higher than expected settlement in profit or loss for the year ended 31 December 2011 (i.e. account prospectively for the change in accounting estimate in the period that the final settlement amount was determined) d. Do nothing for the problem is too long.

9.

A change in the presentation and classification of items in a financial statements is allowed I. When it is required by a standard. II. When a change in the presentation and classification will demonstrate a more appropriate presentation and classification. a. I only b. II only c. Both I and II d. Neither I nor II

10. When an SME changes the end of the reporting period and presents financial statements for a period longer or shorter than one year, an SME must disclose: I. The period covered by the financial statements. II. The reason for using a longer or shorter period. III. The fact that amounts presented in the financial statements are entirely comparable. a. I and II only b. I and III only c. II and III only d. I, II and III 11. All of the following are considered line items in the statement of financial position, except a. Biological assets carried at fair value through profit or loss.

b. c. d.

Investment in associates using the equity method. Investment property. Current tax assets and liabilities.

12. When after the end of the reporting period an event occurs that is indicative of conditions that arose after the end of the reporting period I. The entity shall disclose the nature and effect of the event in the financial statements. II. The entity shall adjust the related amounts recognized in the financial statements. a. I only b. II only c. Both I and II d. Neither I nor II 13. An SME bills a customer for goods that are yet to be delivered to the customer. Delivery is delayed in accordance with the instruction from the customer. The seller recognizes revenue when the customer takes title provided I. It is possible that delivery will be made. II. The item is on hand, identified and ready for delivery to the customer at the time sale is recognized. III. The customer specifically acknowledges the deferred delivery instruction. IV. The usual payment terms apply. a. I and II only b. I, II and III only c. II, III and IV only d. I, II, III and IV 14. What is the measurement of investments in nonconvertible and nonputtable preference shares? a. All such investments shall be measured at fair value through profit or loss. b. All such investments shall be measured at amortized cost using the effective interest method. c. All such investments shall be measured at cost less impairment. d. If the shares are publicly traded or their fair value can otherwise be measured reliably, the investments shall be measured at fair value through profit or loss.

“Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

15. Which of the following scenarios would not lead to the presumption that an entity exerts significant influence? a. Holding directly 20% or more of the voting power of the investee. b. Holding indirectly, through a subsidiary, 20% or more of the voting power of the investee. c. Holding indirectly, through a joint venture, 20% or more of the voting power of the investee. d. Holding directly 10% of voting power of the investee and holding indirectly, through a subsidiary, 10% of the voting power of the investee. 16. An entity must account for its investment in jointly controlled entities after initial recognition using: a. Either the cost model or the fair value model (using the same accounting policy for all investments in jointly controlled entities). b. Either the cost model or the fair value model (model can be elected on an investment-by-investment basis). c. Either the cost model, the equity method or the fair value model (using the same accounting policy for all investments in jointly controlled entities). d. Either the cost model, the equity method or the fair value model (model can be elected on an investment-byinvestment basis). 17. Investment in jointly controlled entities must be tested for impairment, if the entity uses: a. The cost model, equity method or fair value model. b. The cost model or the equity method. c. The cost model or the fair value model. d. The equity method or the fair value model. 18. A subsidiary is: a. An entity over which an investor has significant influence. b. An entity, including an unincorporated entity such as a partnership, which is controlled by another entity (known as a parent). c. An entity over which an investor has joint control. d. An entity that has one or more associates. Page 2

19. Which, if any, of the scenarios below would lead to the presumption that an entity exerts significant influence over another entity? a. holding directly 50 per cent of the voting power of the investee. b. holding indirectly, through a subsidiary, less than 20% of the voting power of the investee. c. holding indirectly, through a joint venture, 20 per cent or more of the voting power of the investee. d. holding directly 10 per cent of voting power of the investee and holding indirectly, through a subsidiary, 10 per cent of the voting power of the investee. 20. The objective of general purpose financial statements prepared in accordance with the IFRS for SMEs is: a. To support the reporting entity’s annual tax return b. To provide the government of the jurisdiction in which the reporting entity operates with financial information for use in government statistics or government planning or both c. To provide management of the reporting entity with financial information about the reporting entity d. To provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs (e.g investors and creditors) 14. Which of the following describes Small and Medium-sized entities according to IFRS? I. Entities who do not have public accountability II. Entities who do publish general purpose financial statements for various users III. Entities where its debt or equity instruments are traded in a public market. a. I and II only b. I and III only c. II and III only d. I, II and III. “Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

15. Which of the following describes Small and Medium-sized entities in the Philippine setting according to Securities and Exchange Commission? I. With total assets between P3,000,0000 and P350,000,000 and with total liabilities between P3,000,000 and P250,000,000. II. That is not required to financial statements under SEC Rule 68.1. III. That is not in the process of filing financial statements for the purpose of issuing any class of instruments in a public market. IV. That is a not a holder of secondary license issued by a regulatory agency such as a bank, investment house, a finance company, insurance company, dealers, a mutual fund and pre-need company. a. I, II, III and IV b. II, III and IV c. II and III d. I, II and III 16. A microbusiness entity are entities whose total assets or total liabilities are below the P3,000,000 floor threshold. Which of the following bases of accounting can it use? I. Full IFRS II. IFRS for SMEs III. Single entry system IV. Modified cash basis by the Bureau of Internal Revenue (BIR) V. Cash basis a. I and II only b. I, II, III and IV only c. I, II and IV only d. I, II, III IV and V 17. Which of the following entities are exempt from mandatory adoption of the IFRS for SME? I. A subsidiary of a parent. II. A subsidiary of foreign parent that will be moving toward full IFRS. III. A subsidiary of a foreign parent that has been applying the standard for a nonpublicly accountable entity for local reporting purposes and is considering moving to PFRS for SMEs in order to align with the expected move of its foreign parent to the same standard. IV. It has short-term projections that show that it will breach the quantitative thresholds set in the criteria for an Page 3

V.

VI. VII. VIII. IX. a. b. c. d.

SME and the breach is expected to be significant and continuing due to its long-term effect on the entity’s asset or a liability size. It is part of a group, either as a significant joint venture or an associate, that is reporting under full IFRS. It is a branch office of a foreign entity reporting under full IFRS. It has a concrete plan to conduct an initial public offering in the next year. It has a subsidiary that is mandated to report under full IFRS. It has been preparing financial statements using Full PFRS and has decided to liquidate its assets. I, II, III, IV, V, VI, VIII, IX only. II, II, IV, V, VI, VII, VIII and IX only. II, IV, V, VI, VII, VIII and IX only. All of the above

18. Which of the following qualitative characteristics that is specifically stated both in Full IFRS and IFRS for SME? I. Understandability II. Relevance III. Materiality IV. Reliability V. Faithful representation VI. Verifiability VII. Substance over Form VIII. Prudence IX. Completeness X. Comparability XI. Timeliness XII. Balance between benefit and cost a. I, II, IV, and XI only b. I, II, V and XI only c. I, II, and XI only d. I, II, V, VI and XI only

Test II - Modified True or False. Choose the letter of the best answer. a. b. c. d.

Only the first statement is true. Only the second statement is true. All of the statements are true. None of the statements is true.

26. Statement I – Cost of opening a new facility and borrowing costs are not costs of an item of property, plant and equipment, and an entity

“Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

shall recognize them as an expense when they are incurred. Statement II - IFRS for SMEs requires an annual review of residual value, useful life and depreciation method of property, plant and equipment. 27. Statement I - A small community bank that takes deposits from the general public can assert that its financial statements are prepared in compliance with the requirements of the IFRS for SMEs because the jurisdiction in which the bank operates has no formal reporting requirements that apply to the entity. Statement II - An entity that chooses not to account for deferred taxes according to Section 29 Income Tax of IFRS for SME but opt to follow IAS 12 can still claim compliance with IFRS for SME as it is properly disclosed in the notes the said deviation. 21. Statement I – Section 16 Investment Property allow an accounting policy choice of either fair value through profit or loss or a costdepreciation-impairment model (with some limited exceptions). Statement II – The cost of a purchased investment property comprises its purchase price and any directly attributable expenditure such as legal and brokerage fees, property transfer taxes and other transaction costs such as borrowing cost. 22. Statement I - Section 14 Investment in Associates requires an entity to choose to account for any of its investments in associates in either cost model, fair value model or equity method. Statement II - Even though an SME entity has elected the cost model as its accounting policy for investments in associates, it must account its investment in associate using the fair value if the associate has a published price quotation. 23. Statement I – An entity shall measure inventories at the lower of cost and estimated selling price less costs to complete and sell. Statement II – Section 13 Inventories does not apply to the measurement of inventories held by producers of agricultural and forest products, agricultural produce after harvest and mineral and mineral products, to the extent they are measured at fair value less cost to sell. 24. Statement I – An SME entity can still claim compliance with IFRS for SME if it has opt to Page 4

apply the recognition and measurement provisions if IAS 39 Financial Instruments: Recognition & Measurement and the disclosure requirements of section 11 Basic Financial Instruments and section 12 Other Financial Instruments Issues. Statement II – Section 11 requires an amortized cost model for all basic financial instruments except for investments in nonconvertible and nonputtable preference shares and nonputtable ordinary shares that are publicly traded or whose fair value can otherwise be measured reliably.

Statement II – At the end of each reporting period, an entity shall measure all financial instruments within the scope of section 12 at fair value and recognize changes in fair value in profit or loss except for equity instruments or contracts linked to it that is not publicly traded and whose fair value cannot be measured reliably. 27. Statement I – If the IFRS for SME specifically addresses a transaction, other event or condition, an entity shall apply the IFRS always. Statement II – An application of an accounting policy for transactions, other events or conditions that differ in substance from those previously occurring is considered a changed in accounting policy.

25. Statement I - A financial instrument is a contract that gives rise to a financial asset and a financial liability or equity instrument to an entity. Statement II - When a financial asset or financial liability is recognized initially, an entity shall measure it at the transaction price (including transaction costs) always.

28. Statement I – Section 10 Accounting policies, estimates and errors provides a different standard of accounting treatments for changes in accounting policy, accounting estimates and prior period errors compared to PAS 8 Accounting policies, changes in accounting estimates and errors. Statement II – To the extent practicable, an entity shall correct a material prior period error retrospectively in the first financial statements authorized for issue after its discovery.

26. Statement I – When a financial asset or financial liability that falls under the scope of Section 12 Other Financial Instruments is recognized initially, an entity shall measure it at its fair value, which is normally the transaction price.

Test III - Matching Type. Match information in Box A to Box B (An answer can only be used once) BOX A

a. d. g. j. m. p. s.

P 8, 980,000 P 900,000 P 690,000 P 345,000 P 400,000 P 8,580,000 P 47,160,000

b. e. h. k. n. q. t.

P 490,000 P 1,375,000 P 640,000 P 375,000 P 1,652,800 P 80,000,000 P 500,000

c. f. i. l. o. r. u.

P 1, 300,000 P 300,000 P 47,000,000 P 47, 125,000 P 1,650,000 P 48,000,000 P 425,000

BOX B 29. On January 1, 2013, an SME acquired a building for P50,000,000. On December 31, 2013, management assessed that the useful life of the building is 40 years from the date of acquisition with residual value of P10,000,000. The fair value of the building of the building on the same date is P65,000,000. On December 31, 2015, SME reassessed that the useful life of building is P50 years with residual value of P6,000,000. The fair value of the building on December 31, 2015 is P80,000,000. What is the carrying amount of the building on December 31, 2015? 30. On January 1, 2013, an SME acquired a building for P10,450,000 excluding the P500,000 nonrefundable purchase taxes. The purchase agreement provided for payment to be made in full on December 31, 2014. Legal fees of P220,000 were incurred in acquiring the building and paid on January 1, 2013. The building is held to earn lease rentals and for capital “Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

Page 5

appreciation. An appropriate discount rate is 12%. What is the initial cost of the building? 31. On January 1, 2013, an SME acquired 30% of the ordinary shares of an investee for P8,000,000 plus transaction cost of P100,000. The SME uses the cost model to account for the investment in associate. The investee recognized net loss of P5,000,000 for 2013 and paid dividends of P2,000,000 on December 31, 2013. The fair value of the investment is P8,580,000 on December 31, 2013 and the cost of disposal is estimated at P400,000. The fair value can be measured reliably without undue cost or effort. What is the carrying amount of the investment in associate on December 31, 2013? 32. An SME sold goods with list price of P1,000,000 to a customer on normal credit terms of 30 days interest-free credit. Ten days after the sale, the customer paid the entity P690,000 in full as final settlement of debt that arose from the sale of the goods. The amount received from the customer included P50,000 value added tax collected by the entity on behalf of the national government. The settlement amount is net of P200,000 trade discount,P100,000 volume rebate and P10,000 prompt settlement discount. What is the revenue from the sale of goods? 33. An SME acquired an item of inventory for P2,000,000 on a two-year interest free credit. No cash price is available for an identical item of inventory in the same market. However, the appropriate discount rate is 10%. The PV of 1at 10% is 0.9091 for one period and 0.8264 for two periods. What is the purchase price for the inventory? 34. On January 1, 2014 an SME machine manufacturing entity sells a customer a machine for P2,000,000 with payment in two years’ time. This sale transaction includes an implicit financing transaction (two-year loan). The current cash sale price for that item if customers pay on delivery is P1,650,000. What amount will be recorded as trade receivables? 35. On January 1, 2013 an entity acquired a plant for P900,000. Management estimates the useful life of the plant as ten years measured from the date of acquisition. Furthermore, it estimates the residual value of the plant as P100,000. Management judges that the straight-line method reflects the pattern in which it expects to consume the plant’s future economic benefits. At December 31, 2014 the plant was damaged and its recoverable amount was estimated as P690,000. What is the carrying amount of the plant on December 31, 2014? 36. During 2013, An SME Company decided to change from the FIFO method of inventory valuation to the weighted average method. Inventory balances under each method were as follows: FIFO Weighted average January 1 7,200,000 7,700,000 December 31 7,900,000 8,300,000 Ignoring income tax, what amount should be reported as the effect of the accounting change in the statement of changes in equity for 2013? 37. While preparing the financial statements for 2013. Dakila Company discovered computational errors in the 2011 and 2012 depreciation expense. These errors resulted in overstatement of year’s income by P25,000, net of income tax. The net income for 2013 is correctly reported at P500,000 The following amounts were reported in the previously issued financial statements: 2012 2011 Retained Earnings, January 1 700,000 500,000 Net Income 150,000 200,000 Retained Earnings,December 31 850,000 700,000 What is the balance of retained earnings on December 31, 2013? 38. On March 1, 2013 entity SME A acquired 30 percent of the ordinary shares that carry voting rights at a general meeting of shareholders of entity SME B for P500,000 and account for this investment under cost model. On December 31, 2013 entity SME B declared a dividend of P100,000 for the year 2013. Entity B reported a profit of P80,000 for the year ended December 31, 2013. At December 31, 2013, the recoverable amount of entity SME A’s investment in entity SME B is 490,000. There is no published price quotation for entity B. What is the carrying amount of the investment in associate in December 31, 2013? 39. On January 1,2013, entities A and B each acquired 30 percent of the ordinary voting shares of entity X for P300,000. Entities A and B immediately agreed to share control over entity X. For the year ended December 31, 2013 entity X reported profit of P400,000 and declared a dividend of P150,000. At “Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

Page 6

December 31, 2013 the fair value of each venturer’s investment in entity X is P425,000. Entities A and B uses the cost model to account for its investment in jointly controlled entities. However, there is no published price quotation for entity X. Investments are accounted for using the cost model. At December 31, 2013, the venturers must report their investment in entity X at: 40. On January 1,2013, entities X and Y each acquired 30 percent of the ordinary voting shares of entity Z for P300,000. Entities X and Y immediately agreed to share control over entity Z. On January 2, 2013 entity Z declared a dividend of P100,000 for the year 2012. On December 31, 2013 entity Z reported a profit of P400,000 and declared and paid dividend of P150,000 for the year 2013. At December 31, 2013 the fair value of each venturer’s investment in entity Z is P425,000. However, there is no published price quotation for entity Z. Investments in entity Z are accounted for using the equity method. At December 31, 2013, the venturers must report their investment in entity Z (a jointly controlled entity) at: 41. On January 1,2013, entities A and B each acquired 30 percent of the ordinary voting shares of entity X for P300,000. Entities A and B immediately agreed to share control over entity X. For the year ended December 31, 2013 entity X reported profit of P400,000 and declared a dividend of P150,000. At December 31, 2013 the fair value of each venturer’s investment in entity X is P425,000. Entities A and B uses the cost model to account for its investment in jointly controlled entities. However, there is a published price quotation for entity X. Investments are accounted for using the cost model. At December 31, 2013, the venturers must report their investment in entity X at: 42. On January 1, 2013, an SME acquired a building for P50,000,000. On December 31, 2013, management assessed that the useful life of the building is 40 years from the date of acquisition with residual value of P10,000,000. The fair value of the building of the building on the same date is P65,000,000. On December 31, 2015, SME reassessed that the useful life of building is P50 years from January 1, 2015 with residual value of P6,000,000. The fair value of the building on December 31, 2015 is P48,000,000. What is the carrying amount of the building on December 31, 2015? 43. On January 1, 2013, an SME acquired a building for P50,000,000. On December 31, 2013, management assessed that the useful life of the building is 40 years from the date of acquisition with residual value of P10,000,000. The fair value of the building of the building on the same date is P65,000,000. On December 31, 2015, SME reassessed that the useful life of building is P50 years with residual value of P6,000,000. The fair value of the building on December 31, 2015 is P47,000,000. What is the carrying amount of the building on December 31, 2015? -

END -

“One thing: you have to walk, and create the way by your walking; you will not find a readymade path. It is not so cheap, to reach to the ultimate realization of truth. You will have to create the path by walking yourself; the path is not ready-made, lying there and waiting for you. It is just like the sky: the birds fly, but they don't leave any footprints. You cannot follow them; there are no footprints left behind.” ― Osho

“Life has two rules: #1 Never quit #2 Always remember rule #1.”-Unknown

Page 7