Qualifying Exam Reviewer 2017 - FAR

Junior Philippine Institute of Accountants College of Business Administration University of the East - Caloocan

Qualifying Exam Reviewer 2017 Financial Accounting and Reporting

I.

Development of Accounting Profession 1. It is the body authorized by law to promulgate rules and regulations affecting the practice of the accountancy professions in the Philippines. a. Philippine Institute of Certified Public Accountants b. Board of Accountancy c. Securities and Exchange Commission d. Professional Regulation Commission Commissi on b. Board of Accountancy 2. The international accounting standards are a. Rules-based rather that principles based b. Principle-based Principle- based rather than rule based c. Based on regulations, not concept d. Focused on quantitative rules

b. Principle-based Principle-b ased rather than rule based. 3. This accounting concept justifies the usage of accruals and deferrals. a. Materiality c. Consistency b. Cash basis of accounting d. Going concern d. Going concern 4. An item cannot be recognized in the balance sheet or the income statement unless it meets the two criteria of a. b. c. d.

Criterion 1 Completeness Probable economic benefits Materiality Materialit y Neutrality

Criterion 2 Measurement reliability reliabilit y Measurement reliability reliabilit y Relevance to others Relevance to others

b.

Probable economic benefits

Measurement reliability

5. The IASB Framework outlines two underlying assumptions of financial statements. These are a. b. c. d.

 Assumption 1 Accrual basis of accounting Cash basis of accounting Accrual basis of accounting Cash basis of accounting

Assumption 2 Relevance and reliability Insolvency assumption Going concern assumption Perpetual life concept

c. Accrual basis of accounting; going concern assumption 6. Which of the following statements concerning the Framework is incorrect? a. Primary responsibility for the preparation and presentation of the financial statements rests with the management. b. The Framework provides that the transactions must be accounted for in accordance with their legal form. c. Financial statements must not exclude complex matters in order to achieve understandability. d. Where any conflict arises between the Framework and a PFRS , the requirement of the PFRS prevails.

b. The Framework provides that the transactions must be accounted for in accordance with their legal form. 7. In respect to information included in financial statements, the accounting concept of “prudence” ensures that: a. The financial statements report what they purport to report . b. A degree of caution in the exercise of judgments about estimates is made. c. An appropriate balance is achieved between the relevance and the reliability of information that has been included. d. Information is provided to users within the time period in which it is most likely to bear on their decisions.

b. A degree of  caution in the exercise of judgments about estimates is made. II.

Cash and Cash Equivalents 8. Information about the sources and uses of an enterprise’s cash and cash equivalents is provided in the a. Balance sheet c. Statement of changes in equity b. Income statement d. Cash flow statement d. Cash flow statement 9. The following data pertain to Sanghaya Corporation on December 31, 2016: Current account at BPI Current account at PNB Payroll account

P 3,000,000 (50,000) 1,000,000

Foreign bank account – restricted (in peso) 750,000 Postage tamps 1,000 Employee’s post dated check   4,000 IOU from controller’s sister   10,000 Credit memo from a vendor for a purchase return 20,000 Traveler’s check  50,000 Not-sufficient funds-check 15,000 Money order 30,000 Petty cash fund (4,000 in currency; expenses receipts for 6,000) 10,000 Treasury bills, due 3/31/17 (purchased 12/31/16) 300,000 Treasury bills, due 1/31/17 (purchased 1/1/16) 110,000 Based on the above information, compute for the cash and cash equivalent that would be reported on the December 31, 2016 balance sheet. a. P 4,334,000 b. P 4,384,000

c. P 4,404,000 d. P 4,409,000

Current account at BPI Payroll account Traveler's check Money order Petty cash fund (the amount in currency only) Treasury bills, due 3/31/17 b.

3,000,000 1,000,000 50,000 30,000 4,000 300,000 P 4,384,000

10. You noted the following composition of Hiyas Company’s “cash account” as of December 31, 2016 Demand deposit Time deposit - 30 days NSF check of customer Money market placement (due June 30, 2017) Savings deposit in a closed bank IOU from employee Pension fund Petty cash fund Customer check dated January 1, 2017 Customer check outstanding for 18 months

P 3,000,000 2,000,000 40,000 1,500,000 100,000 20,000 2,000,000 10,000 50,000 40,000 9,760,000

 Additional information are as follows: a) Check of P 100,000 in payment of accounts payable was recorded on December 31, 2016 but mailed to suppliers on January 7, 2017. b) Check of P 300,000 dated January 15, 2017 in payment of accounts payable was recorded and mailed on December 31, 2016. c) The company uses the calendar year. The cash receipts journal was held open until January 15, 2017, during which time P400,000 was collected and recorded on December 31, 2011.

The cash and cash equivalent to be shown on the December 31, 3016 balance sheet is a. b. c. d.

P 5,010,000 P 6,510,000 P 6,550,000 P 6,250,000

Demand deposit Time deposit Petty cash fund Undelivered check (payment to suppliers) Post dated check (payment to suppliers) Window dressing

III.

P 3,000,000 2,000,000 10,000 100,000 300,000 (400,000) a. P 5,010,000

Bank Reconciliation and Proof of Cash 11. The journal entries for a bank reconciliation a. May include a debit to accounts payable for an NSF check. b. May include a credit to accounts receivable for an NSF check. c. May include a debit to office expense for bank service charges. d. Are taken from the balance per bank only. c. May include a debit to office expense for bank service charges. 12. A proof of cash is a a. Proof of company’s liquid position. b. Proof of the existence of a cash deposit in a bank. c. Reconciliation of the cash receipts and payments during the previous period, together with the beginning and ending balances of cash. d. Reconciliation of the cash receipts and payments during the current period, together with the beginning and ending balances of cash.

d. Reconciliation of the cash receipts and payments during the current period, together with the beginning and ending balances of cash. 13. The bookkeeper of Sambisig Company recently prepared the following reconciliation on December 31, 2016:

Balance per bank statement  Add: Deposit in transit Checkbook and other bank charge Error made by Sambisig in recording check 1005 (issued in

bank

20,000,000 1,500,000 50,000 150,000

December) Customer check marked DAIF

500,000

Total Deduct: Outstanding checks Note collected by bank (includes P 200,000 interest) Balance per book

1,900,000 2,300,000

2,200,000 22,200,000 4,200,000 18,000,000

Sambisig has P 1,000,000 cash on hand on December 31, 2016. The amount to be reported as cash on the balance sheet as of December 31, 2016 should be: a. P 19,600,000 c. P 20,600,000 b. P 18,600,000 d. P 19,750,000 Balance per book Checkbook and other bank charge Check marked as DAIF Notes collected Cash on hand Book error  Adjusted cash balance

18,000,000 (50,000) (500,000) 2,300,000 1,000,000 (150,000) c. 20,600,000

14. Reconciliation of Adliwa Corporation’s b ank account at November 30, 2016 follows: Balance per bank statement Deposit in transit Checks outstanding Correct cash balance

P 3,150,000 450,000 (45,000) P 3,555,000

Balance per books Bank service charge Correct cash balance

P 3,558,000 (3,000) P 3,555,000

December data are as follows: Checks recorded Deposits recorded Collection by bank (P600,000 plus interest) NSF check returned with December bank statement Balances

Bank P3,450,000 2,430,000 630,000 15,000 2,745,000

Books P3,540,000 2,700,000 2,715,000

The checks outstanding on December 31, 2016 amount to: a. P45,000 c. P90,000 b. P135,000 d. None of the above

Checks recorded by book (December) Checks recorded by bank (December) Checks outstanding (November) Checks outstanding on December 31 IV.

3,540,000 (3,450,000) 45,000 b. 135,000

Receivables 15. Credit balances in accounts receivables should be classified as a. Current liabilities c. Addition to current assets b. Part of accounts payable d. Deduction from accounts receivable

b. Part of accounts payable 16. Hirayag Company provided the following transactions affecting accounts receivable for the year 2016: Sales (cash and credit) Cash received from credit customers (took advantage of 4/10, n/30 discount feature) Cash received from cash customers  Accounts receivable written off as worthless Credit memorandum issued to credit customers for sales returns and allowances Cash refunds given to cash customers for sales returns and allowances Recoveries on accounts receivable written off as uncollectible in prior periods but not included in cash received from customers stated above

5,900,000 3,024,000 2,100,000 50,000 250,000 20,000 80,000

The balances on January 1, 2016 were as follows:  Accounts receivable  Allowance for doubtful accounts

950,000 100,000

The entity provided for uncollectible account losses by crediting allowance for doubtful accounts in the amount of P70,000 for the current year. What are the balances of accounts receivable and allowance for doubtful expense on December 31, 2016? a. 1,300,000; 200,000 c. 1,426,000, 300,000 b. 1,300,000, 130,000 d. 1,476,000, 200,000

Beg. bal Credit sales

 Accounts Receivable 950,000 *3,800,000 **3,150,000 50,000 250,000 a. 1,300,000

Written off

 Allowance for D/A 100,000 50,000 70,000 80,000

Collections Written off Credit memo

Beg. bal. D/A expense Recovery of  A/R

a. 200,000 *Credit sales = Total sales – cash sales 3,800,000 = 5,900,000  – 2,100,000 **Collection = Cash received + discount or cash received / 1 - discount rate 3,150,000 = 3,024,000/.96 Recovered accounts receivable are subsequently collected, hence it is not included in computing for ending balance of accounts receuvable V.

Inventories 17. On December 31, 2016, a storm surge damaged the warehouse of Siuala Company. The following pertains to the data recovered. January 1 1,500,000

Inventory Purchases Cash sales Collections of accounts receivable  Accounts receivable Gross profit on sales

700,000

December 31 5,500,000 900,000 8,400,000 1,100,000 40%

What is the inventory loss from the storm surge? a. 1,720,000 b. 2,260,000 c. 1,180,000 d. 2,700,000

Beg bal Sales (squeeze) Collections Ending bal

 Accounts Receivable 700,000 8,800,000 8,400,000 1,100,000

Beg bal. Purchases COGS*

Inventory 1,500,000 5,500,000 5,820,000 c. 1,180,000

* Cost of Goods Sold = Total sales x (1-Gross Profit on sales) = (8,800,000+900,000) x (1-.40) = 5,820,000 VI.

Equity Investments 18. Fradejas Company acquired an equity financial instrument for P4,000,000 on June 15, 2016. The financial instrument is classified as financial asset at fair value through other comprehensive income. Direct acquisition cost amounted to P700,000. On December 31, 2016, the fair value of the instrument was P5,500,000 and the transaction costs that would be incurred on the sale of the investment are estimated at P640,000. What gain should be recognized in profit or loss for the year ended December 31, 2016? a. P900,000 b. P800,000 c. P0 d. P200,000

c. P0 19. Alipio Company provided the following data for 2016: i. Received P500,000 cash dividend from William Company. ii. Received P60,000 liquidating dividend from Trinidad Company. Alipio owns 5% interest in Trinidad. iii. Gonzales Company declared P2,000,000 cash dividend from which Alipio owns 2% interest in Gonzales’s equity. Dividends are payable on the 15 th of January the following year. What amount should Alipio report as dividend income for 2016? a. P540,000 b. P100,000 c. P600,000 d. P40,000

a. P540,000 Cash dividend from William Company Cash dividend from Gonzales Company (2,000,000*.02)

VII.

Property, Plant and Equipment 20. The following costs qualify for recognition except a. Cost of site of operation b. Cost of opening a new facility c. Cost of employee benefits of persons doing the installation d. Professional fees

500,000 40,000 540,000

c. Cost of employee benefits of persons doing the installation 21. The cost model means that the PPE are carried at cost less any accumulated depreciation and any accumulated impairment loss. The revaluation model means that the PPE are carried at the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment loss a. Both statements are false b. Both statements are true c. Only the first statement is true d. Only the first statement is false. b. Both statements are true 22. On January 1, 2016, Thor Company took out a loan of P12,000,000 in order to finance specifically the renovation of a building. The loan carried annual interest at 10%. Work on the building, started from January 1, was substantially completed on October 31 of the same year. The load was repaid on December 31, 2016 and P150,000 investment income was earned in the period to October 31 on the proceeds of the loan not yet used for the renovation. Compute for the amount of borrowing cost to be included in the cost of the building. a. P1,050,000 b. P1,350,000 c. P1,200,000 d. P850,000

d. P850,000 Interest incurred Interest income Capitalized borrowing cost VIII.

(12,000,000 x ,10 x 10/12)

1,000,000 (150,000) 850,000

Statement of Financial Position 23. Coulson Company reported the following assets on December 31, 2016 Cash (includes P1,000,000 sinking fund and P400,000 postdated check))  Accounts Receivable Inventory Deferred Tax Asset Noncurrent Asset Held for Sale

4,000,000 6,800,000 4,500,000 2,500,000 3,000,000

The accounts receivable is comprised of the following amount Customers’ debit balance, net of customers’  credit balance of P200,000  Allowance for doubtful accounts Selling prince of unsold inventory sent out on consignment at 125% of cost and already included in the ending inventory at cost  Accounts Receivable

5,000,000 (700,000) 2,500,000

6,800,000

On December 31, 2016, what amount should be reported as total current assets? a. P15,000,000 b. P17,000,000 c. P17,500,000 d. P16,600,000 Cash (4,000,000-1,000,000-400,000)  Accounts Receivable (5,000,000+200,000-700,000+400,000) Inventory NCA held for sale

IX.

2,600,000 4,900,000 4,500,000 3,000,000 a. 15,000,000

Statement of Comprehensive Income 24. Benedict Company provided the following data for the current year Income from continuing operations Income from discontinued operations Unrealized gain on available for sale securities Unrealized gain on futures contract designated as a cash flow hedge  Actuarial loss during the year fully recognized in the other comprehensive income Foreign translation adjustment - debit Revaluation surplus during the year

5,000,000 600,000 900,000 400,000 300,000 100,000 2,500,000

What is the comprehensive income for the current year? a. P8,400,000 b. P9,000,000 c. P8,000,000 d. P8,200,000 Income from continuing operations Income from discontinued operations Unrealized gain on available for sale securities Unrealized gain on futures contract  Actuarial loss Loss on foreign translation adjustment Revaluation surplus

5,000,000 600,000 900,000 400,000 (300,000) (100,000) 2,500,000 b. 9,000,000

X.

Statement of Cash Flows 25. Which of the following is not an objective of cash flow statements? a. To provide information to enable assessment of the ability of the entity to generate future cash flows. b. To provide information to enable assessment of the ability of the entity to pay dividends and meet financial obligations c. To provide information to enable assessment of the ability of the entity to generate long term profitability. d. To provide information to enable assessment of the ability of the entity to finance changes in the nature and scope of activities.

d. To provide information to enable assessment of the ability of the entity to finance changes in the nature and scope of activities. 26. How would cash received from the sale of shares in another company be classified in a cash flow statement? a. Operating activities c. Financing activities b. Investing activities d. None of the above

b. Investing activities XI.

Error Correction 27. Jackson Company’s statement included errors as follows: Year 2015 2016

Ending Inventory 200,000 overstated 300,000 understated

Depreciation 50,000 understated 100,000 overstated

How much should retained earnings be retroactively adjusted at January 1, 2017? a. Deduct P250,000 c. Add P350,000 b. Add P250,000 d. Add P150,000

Understated depreciation on 2015 Understated ending inventory on 2016 Overstated depreciation on 2016

Effect on Net Income

Adjustment to retained earnings

Overstated

Deduct 50,000

Understated (due to overstated COGS)

 Add 300,000

Understated

Add 100,000 c. Net adjustment: Add 350,000

28. A change in accounting policy from one that is not generally acceptable to one that is generally acceptable should be treated as a. An error and corrected by prior-period adjustment. b. A change in accounting policy and the cumulative effect included in the net income. c. A change in accounting policy and prior period financial statements are related to profit or loss. d. A change in accounting policy and adjustments are made prospectively.

a. An error and corrected by prior-period adjustment. XII.

Accrual Basis and Cash Basis 29. Accrual basis profit is more useful for a. Predicting the performance of an entity for the succeeding reporting period. b. Determining the amount of income tax payable to the government. c. Determining the amount that will be paid as interest to creditors and dividends to shareholders. d. Predicting the long term performance of an entity.

a. Predicting the performance of an entity for the succeeding reporting period. 30. When converting from cash basis to accrual basis of accounting, which of the following adjustments should be made to cash collections from customers to arrive at the accrual bases of sales? a. Add beginning accounts receivable b. Subtract beginning accounts receivable c. Subtract ending account receivable d. Add ending accounts receivable

d. Add ending accounts receivable 31. Sy Company reported sales revenue of P2,300,000 in its income statement for the year ended December 31, 2016. Additional information are as follows:  Accounts receivable  Allowance for uncollectible accounts

12/31/2015 2,000,000 70,000

12/31/2016 2,600,000 120,000

During the year. Sy wrote off uncollectible accounts totalling P30,000. Under cash basis of accounting, Sy would have reported 2016 sales of a. P1,670,000 b. P1,620,000

c. P1,720,000 Beg. bal. Sales Write-off Collections Ending bal.

d. None of the above  Accounts Receivable 2,000,000 2,300,000 30,000 a. 1,670,000 2,600,000

32. Ferrer Company kept its records on a cash basis. At the end of 2016, the accountant prepared the following cash basis income statement: Revenue Expenses Net income

1,910,000 809,000 1,101,000

In preparing the income statement, the following amounts of accrued, prepaid and unearned items were ignored at the end of 2015 and 2016:

 Accrued revenue Unearned revenue  Accrued expenses Prepaid expenses

2015 91,000 66,000 49,000 46,000

2016 73,000 108,000 65,000 56,000

The net income on the accrual basis for 2016 should be: a. P1,167,000 b. P1,067,000 c. P1,035,000 d. P1,103,000 Unadjusted net income Decrease in accrued revenue Increase in unearned revenue *Increase in accrued expense **Increase in prepaid expenses  Adjusted net income

1,101,000 (18,000) (42,000) (16,000) 10,000 c. 1,035,000

* Expense Account 16,000  Accrued Expense (Liability) 16,000 Thus, an increase in a trade current liability account is a deduction from net income of cash basis to arrive at accrual basis net income **Prepaid Expense (Asset) 10,000 Expense Account 10,000 Thus, an increase in trade current asset account is an addition to net income of cash basis to arrive at accrual basis net income

XIII.

Bonds Payable

33. On January 1, 2016. Madrid Company issued 9% bonds in the face amount of P4,000,000, which mature on January 2, 2025. The bonds were issued for P3,756,000 to yield 10% resulting in bond discount of P244,000. Using the effective interest method, compute for the unamortized bond discount if the interest is payable annually on December 31. a. P259,600 c. P15,600 b. P228,400 d. P375,600

Date

1/1/16 12/31/16

(A) Nominal Interest (4,000,000 x .09) 360,000

(B) Effective Interest (D x .10)

375,600

(C) Discount  Amortization (B-A) 15,600

(D) Carrying Value (Previous D + C) 3,756,000 3,771,600

Unamotized bond discount = Face amount  – carrying value = 4,000,000 – 3,771,600 = 228,400 (B) 34. On January 1, 2016, Delos Santos Company issued 3 year bonds with face value of P5,000,000 at 98. Additionally, the entity paid bond issue cost of P140,000. The nominal rate is 10% and the effective rate is 12%. The interest is payable annually on December 31. The entity used the effective interest method in amortizing bond discount and issue cost. What is the carrying amount of bonds payable on December 31, 2016? a. P4,831,200 b. P4,688,800 c. P4,760,000 d. P4,943,200 Issue price (5,000,000 x .98) Bond issue cost Carrying value, 1/1/16 Date

1/1/16 12/31/16

(A) Nominal Interest (5,000,000 x .1) 500,000

4,900,000 (140,000) 4,760,000 (B) Effective Interest (D x .12) 571,200

(C) Discount  Amortization (B-A) 71,200

(D) Carrying Value (Previous D + C) 4,760.000 a. 4,831,200

XIV.

Intangibles

35. Which of the following are the essential characteristics of an intangible asset? a. Identifiability, controlled by the enterprise, expected future economic benefits and indefinite useful life. b. Identifiiability, controlled by the enterprise, and indefinite useful life. c. Identifiability, owned by the enterprise, expected economic benefits and definite useful life. d. Identifiability, controlled by the enterprise and expected future economic benefits

d. Identifiability, controlled by the enterprise and expected future economic benefits 36. Which of the following are considered as research and development activity? i. Laboratory research aimed at discovery of new knowledge ii. Design, construction and testing of pre-production prototypes and models iii. Routine design of tools, jigs, molds and dies. iv. Conceptual formulation and design of product or process alternatives. a. i, ii, iii and iv b. ii, iii and iv only c. i, ii and iv only d. i and iv only.

c. i, ii and iv only XV.

Biological Asset Ingat Yemen company has a herd of 10 2 year old animals on January 1, 2015. One animal aged 2.5 years was purchased on July 1, 2015 for P108, and one animal was born on July 1, 2015. No animals were sold or disposed of during the year. The fair value less cost of disposal per unit is as follows: 2 year old animal on January 1 100 2.5 year old animal on July 1 108 New born animal on July 1 70 2 year old animal on December 31 105 2.5 year old animal on December 31 111 New born animal on December 31 72 3 year old animal on December 31 120 0.5 year old animal on December 31 80 37. What is the fair value of the biological assets on December 31? a. 1,400 c. 1,440 b. 1,320 d. 1,360

Fair value of 3 y/o animals on December (11x120) Fair value of 0.5 y/o animal on December (1 x 80)

1,320 80 a. 1,400

38. What is the gain from change in fair value due to price change? a. 292 c. 237 b. 222 d. 55 10 2 year old animals [(105-100) x 10] 1 2.5 year old animal [(111-108) x 1] 1 newborn on July [(72-70) x 1]

XVI.

50 3 2 d. 55

Property, Plant and Equipment (Revaluation)

39. Queen Tela Company owned an equipment costing P5,200,00 with original residual value of P400,000. The life of the asset is 10 years and was depreciated using the straight line method. The equipment has a replacement cost of P8,000,000 with residual value of P200,000. The age of the asset is 4 years. The appraisal of the equipment showed a total revised useful life of 12 years and the entity decided to carry the equipment at revalued amount. Before income tax, what amount should be initially reported as revaluation surplus? a. 6,680,000 c. 2,600,000 b. 1,680,000 d. 1,600,000

Equipment Residual value Depreciable amount  Accumulated depreciation (4/10 x 4,800,000) (4/10 x 7,800,000) Balance XVII.

Cost 5,200,000 (200,000) 5,000,000

Replacement Cost 8,000,000 (200,000) 7,800,000

Appreciation 2,800,000 2,800,000

3,120,000 4,680,000

1,200,000 d. 1,600,000

1,920,000 3,080,000

Diluted Earnings Per Share

40. Bane Company had earnings per share of P120 for the current year, before taking any dilutive securities into consideration. No conversion or exercise of dilutive securities took place during the year. However, possible conversion of convertible preference shares would have reduced earnings per share to P119. The effect of possible exercise of ordinary share warrants would have reduced earnings per share by an additional P2.

What amount should be reported as diluted earnings per share? a. 121 c. 117 b. 120 d. 119

Basic earnings per share Effect of possible conversion of preference shares Effect of possible exercise of warrants Diluted earnings per share

120 (1) (2) c. 117