NORTHWESTERN UNIVERSITY Student Name

Competency Assessment No. 3 ID No.

Refresher Course in Financial Accounting Course & Year
Summer, School Year 2018-2019 Score Raw: Final:

MULTIPLE CHOICE. Encircle the letter of your choice. On separate yellow sheets, provide computations, in good form,
to support your answer for items that require calculations.

1. Which of the following is an investment property?

A. Properties currently developed for use as future investment property
B. Investment properties that are currently developed for use as future owner-occupied property
C. Property that is leased out to another entity under a finance lease
D. Building rented out in an operating lease where the owner provides minimal services

2. Counting Crow’s investment property has a carrying amount of P3,600,000 under the fair value model, before
adjustment. If the fair value at year-end is P3,000,000, how much should be the gain or loss on transfer if Counting
Crow would shift to cost model?
A. gain of P600,000 reported as other comprehensive income
B. loss of P600,000 reported as other loss in the income statement
C. loss of P600,000 reported in equity as decrease in revaluation surplus
D. zero

Entity A acquires a building for P1,000,000. The building is to be leased out under various operating leases. The building
has an estimated useful life of 10 years and zero residual value. Entity A uses the cost model for its property, plant and
equipment and the fair value model for its investment property. At the end of Year 1, the building is assessed to have a
fair value of P1,080,000.

3. How much should Entity A recognize in profit or loss in relation to the building?
A. P80,000 gain on change in fair value
B. P100,000 depreciation
C. P180,000 gain on change in fair value
D. B and C

4. In compliance with the disclosure requirements of PAS 38, the amortization of an intangible asset is recorded as a:
A. debit to retained earnings and a credit to a contra account.
B. debit to retained earnings and a credit to the intangible asset account.
C. debit to amortization expense and a credit to the intangible asset account
D. debit to amortization expense and a credit to an intangible asset contra account.

5. Should the following fees associated with the registration of an internally developed patent be capitalized?

Legal fees Registration fees

A. No No
B. No Yes
C. Yes No
D. Yes Yes

6. What is proper time or time period over which to match the cost of an intangible asset with revenues if it is likely that
the benefit of the asset will last for an indefinite period?
A. Forty years
B. Fifty years
C. Immediately
D. At such time as reduction in value can be quantitatively determined.

B1
Ely Co. bought a patent from Baden Corp. on January 1, 2019, for P360,000. An independent consultant retained by Ely
estimated that the remaining useful life at January 1, 2019 is 15 years. Its unamortized cost on Baden’s accounting records
was P180,000; the patent had been amortized for 5 years by Baden.

7. How much should be amortized for the year ended December 31, 2019 by Ely Co.?
A. P0.
B. P18,000.
C. P24,000.
D. P36,000.

P360,000 ÷ 15 = P24,000.

Aberdeen Co. made expenditures for the following:

Cost in activities aimed at obtaining new knowledge P10,000

Marketing research to study consumer tastes 5,000
Cost of developing and producing a prototype model 3,000
Cost of testing the prototype model for safety and environmental friendliness 40,000
Cost revising designs for flaws in the prototype model 15,000
Salaries of employees, consultants, and technicians involved in R&D 20,000
Cost of conference for the introduction of the newly developed product including fee
of a model hired as endorser 100,000
Advertising to establish recognition of the newly developed product 30,000

8. How much is recognized as research and development expense?

A. P68,000
B. P72,000
C. P88,000
D. P94,000

Cost in activities aimed at obtaining new knowledge 10,000

Cost of developing and producing a prototype model 3,000
Cost of testing the prototype model for safety and environmental friendliness 40,000
Cost revising designs for flaws in the prototype model 15,000
Salaries of employees, consultants, and technicians involved in R&D 20,000
Total research and development expense 88,000

Tokyo Enterprises has four divisions. It acquired one of them, Green Products, on January 1, 2019 for P640,000,000, and
recorded goodwill of P81,200 as a result of that purchase. At December 31, 2019, Green Products had a recoverable
amount of P568,000,000. The carrying value of the Company’s net assets at December 31, 2019 was P592,000,000 (including
goodwill).

9. What amount of loss on impairment of goodwill should Tokyo record in 2019?

A. Zero
B. P24,000,000
C. P81,200,000
D. P72,000,000

592,000 – 568,000 = 24,000,000

B2
Decor, Inc. is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. As of this
date, the building has a carrying amount of P6,000,000, a fair value of P5,000,000 and estimated costs to sell of P200,000. At
the plan commitment date, there is a backlog of uncompleted customer orders.

Decor intends to sell the manufacturing facility, but without its operations. The entity does not intend to transfer the
facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer
orders.

10. How should Décor classify the manufacturing facility?

A. Included under property, plant and equipment at P6,000,000.
B. Included under property, plant and equipment at P4,800,000.
C. Classified as held for sale at P6,000,000
D. Classified as held for sale at P4,800,000

B – not available for immediate sale in its present condition; PPE at 4.8M (5M – 200K) because the manufacturing facility is
impaired.

On December 31, 20x1, Strike Company classified its building with a historical cost of P4,000,000 and accumulated
depreciation of P2,400,000 as held for sale. All of the criteria under PFRS 5 are complied with. On that date, the land has a
fair value of P1,400,000 and cost to sell of P80,000.

11. The entry on December 31, 20x1 includes

A. a debit to building for P1,320,000
B. a credit to accumulated depreciation for P2,400,000
C. a debit to impairment loss for P280,000
D. No reclassification entry will be made on December 31, 20x1

Held for sale asset (1.4M – 80K) 1,320,000

Accumulated depreciation 2,400,000
Impairment loss 280,000
Building 4,000,000

The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2019, contained the following accounts.

5-year Bonds Payable 8% P1,600,000

Bond Interest Payable 50,000
Notes Payable (3 months) 40,000
Notes Payable (5 years) 165,000
Mortgage Payable (P15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Taxes Payable (due 3/15 of 2020) 25,000

12. The total non-current liabilities reported on the statement of financial position are
A. P1,865,000.
B. P1,850,000.
C. P1,965,000.
D. P1,950,000.

The next two items are based on the following:

On May 1, 2019, Payne Co. issued P300,000 of 7% bonds at 103, which are due on April 30, 2026. Twenty detachable share
warrants entitling the holder to purchase for P40 one share of Payne’s ordinary shares, P15 par value, were attached to
each P1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2019, the fair value of Payne’s shares was
P35 per share and of the warrants was P2.

B3
13. On May 1, 2019, Payne should report bonds payable at
A. P296,640.
B. P288,000.
C. P300,000.
D. P309,000.

P300,000 × .96 = P288,000.

14. On May 1, 2019, Payne should credit Share Premium –Share Warrants for
A. P9,000.
B. P12,000.
C. P21,000.
D. P12,360.

(P300,000 × .96) = P288,000;

P300,000 × 1.03 = P309,000
P309,000 – P288,000 = P21,000.

On May 1, 2019, Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to
be a finance lease for Metcalf. The six-year lease requires payment of P87,000 at the beginning of each year, excluding
P15,000 per year executory costs that are payable directly by lessee to third parties. The incremental borrowing rate for the
lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six
years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271.

15. Metcalf should record the leased asset at

A. P509,256.
B. P488,661.
C. P434,366.
D. P416,799.

87,000 x 4.99271 = 434,466

Presented below is pension information for Green Company for the year 2019:

Interest on plan assets P24,000

Interest on vested benefits 15,000
Service cost 30,000
Interest on projected benefit obligation 21,000
Past service cost due to increase in benefits 18,000

16. The amount of pension expense to be reported for 2019 is

A. P93,000.
B. P69,000.
C. P60,000.
D. P45,000.

P30,000 + P21,000 + P18,000 – P24,000 = P45,000.

Presented below is information related to Noble, Inc. as of December 31, 2019.

Net gain(loss) P 90,000

Defined benefit obligation 3,600,000
Vested benefits 1,620,000
Plan assets (at fair value) 3,384,000

B4
17. The amount reported as the pension liability on Noble's statement of financial position at December 31, 2019 is as
follows:
A. Zero.
B. P90,000.
C. P126,000.
D. P216,000.

P3,600,000 – P3,384,000 = P216,000.

On January 1, 2019, Parks Co. has the following balances:

Defined benefit obligation P4,200,000

Fair value of plan assets 3,750,000

The discount rate is 10%. Other data related to the pension plan for 2019 are:

Service cost P240,000

Past service costs 54,000
Contributions 270,000
Benefits paid 225,000
Actual return on plan assets 264,000
Net gain on liability 18,000

18. The balance of the defined benefit obligation at December 31, 2019 is
A. P4,572,000.
B. P4,671,000.
C. P4,629,000.
D. P4,635,000.

P4,200,000 + P240,000 – P225,000 + (P4,200,000 × .10) – P54,000 – P18,000 = P4,671,000.

19. The fair value of plan assets at December 31, 2019 is

A. P3,531,000.
B. P3,789,000.
C. P4,059,000.
D. P4,284,000.

P3,750,000 + P264,000 + P270,000 – P225,000 = P4,059,000.

20. Recognition of tax benefits in the loss year due to a loss carryforward requires
A. the establishment of a deferred tax liability.
B. the establishment of a deferred tax asset.
C. the establishment of an income tax refund receivable.
D. only a note to the financial statements.

Mathis Co. at the end of 2019, its first year of operations, prepared a reconciliation between pretax financial income and
taxable income as follows:

Pretax financial income P 500,000

Estimated litigation expense 1,250,000
Installment sales (1,000,000)
Taxable income P 750,000

B5
The estimated litigation expense of P1,250,000 will be deductible in 2021 when it is expected to be paid. The gross profit
from the installment sales will be realized in the amount of P500,000 in each of the next two years. The estimated liability
for litigation is classified as non-current and the installment accounts receivable are classified as P500,000 current and
P500,000 noncurrent. The income tax rate is 30% for all years.

21. The income tax expense in 2019 is

A. P150,000.
B. P225,000.
C. P250,000.
D. P500,000.

Income taxes payable = (P750,000 × 30%) = P225,000

Change in deferred tax liability = (P1,000,000 × 30%) = P300,000
Change in deferred tax asset = (P1,250,000 × 30%) = P375,000
P225,000 + P300,000 – P375,000 = P150,000.

22. The net deferred tax asset to be recognized is

A. P75,000.
B. P150,000.
C. P375,000.
D. P225,000.

(P1,250,000 – P1,000,000) × 30% = P75,000.

23. According to IFRS, redeemable preference shares should be

A. included with ordinary shares.
B. included as a liability.
C. excluded from the statement of financial position.
D. included as a contra item in shareholders’ equity.

On January 1, 2019, the statement of financial position of Profuse Company shows the following information:

Share capital (authorized, 10,000 shares with a par value of P400) P3,200,000
Share premium 640,000
Share premium – treasury 20,000
Retained earnings 2,140,000
Shareholders’ equity P6,000,000

24. On July 1, 2019, the entity reacquires 1,000 shares at P560 and immediately retires them. The entry on July 1, 2019
includes a
A. debit to Retained Earnings for P60,000
B. debit to Share Premium – Issuance for P80,000
C. credit to Share Premium – Retirement for P60,000
D. credit to Retained Earnings for P80,000

Share capital 400,000

Share premium – issuance 80,000
Retained earnings 80,000
Cash 560,000

3,200,000/400 = 8,000 shares issued

1/8 x 640,000 = 80,000

The shareholders’ equity of Ashley Company at July 31, 2019 is presented below:

B6
Ordinary shares, par value P20, authorized 400,000 shares; issued and outstanding
200,000 shares P4,000,000
Share premium 160,000
Retained earnings 650,000
Total P4,810,000

On August 1, 2019, the board of directors of Ashley declared a 10% share dividend on ordinary shares, to be distributed
on September 15th. The market price of Ashley's ordinary shares was P35 on August 1, 2019, and P38 on September 15,
2019.

25. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this share
dividend?
A. P400,000.
B. P700,000.
C. P760,000.
D. P500,000.

The reckoning date is date of declaration; 10% is considered “small”, so capitalized is market value 200,000 x 10% = 20,000
x 35 = 700,000

During 2019, Brad Company issued 5,000 convertible preference shares of P100 par value for P110 per share. One share
can be converted into three ordinary shares of Brad’s P25-par at the option of the preference shareholder. On December
31, 2009, when the market value of the ordinary share was P40, all of the preference shares were converted.

26. What amount should Brad credit to ordinary share capital and share premium as a result of the conversion?
Ordinary share capital Share premium
A. P375,000 P175,000
B. P375,000 P225,000
C. P500,000 P50,000
D. P600,000 Zero

Issue price of preference shares (5,000 x 110) 550,000

Ordinary shares issued at par value (5,000 x 3 =15,000 shares x 25) 375,000
Share premium 175,000

Melissa Company granted share options to its employees with a fair value of P4.5 million on January 1, 2018. The options
vest in 3 years and the options are exercisable starting January 1, 2021 until December 31, 2022.

On December 31, 2018, it was estimated that 5% of employees will leave the entity during the vesting period. This
estimate was revised to 6% during the year 2019. On December 31, 2020, employee records indicate that 90% of the
employees stayed and became entitled to the options.

27. What would be the expense charged during the year ended December 31, 2018?
A. P1,350,000
B. P1,410,000
C. P1,425,000
D. P1,500,000

4,500,000 x 95% = 4,275,000; 4,275,000/3 = 1,425,000

Jane Company has granted 200 share appreciation rights to each of its 300 employees on January 1, 2018. The rights are
due to vest on December 31, 2019, with payment being made on December 31, 2020. During 2018, the company estimated
that all options would vest, although only 90% of the options actually vested.

B7
Share prices are as follows:

Jan. 1, 2018 P20 Dec. 31, 2019 P27

Dec. 31, 2018 24 Dec. 31, 2020 30

28. How much compensation expense should be recorded for the year ended December 31, 2019?
A. P96,000
B. P108,000
C. P120,000
D. P258,000

60,000 x (24-20) x ½ = 120,000

60,000 x (27-20) = 420,000 x 90% = 378,000 – 120,000 = 258,000

At December 31, 2019 and 2018, Lapham Company had 200,000 shares of ordinary shares and 20,000 shares of 5%, P100
par value cumulative preference shares outstanding. No dividends were declared on either the preferred or ordinary
shares in 2019 or 2018. Net income for 2019 was P1,000,000.

29. For 2019, basic earnings per common share amounted to

A. P4.00.
B. P4.50.
C. P4.75.
D. P5.00.

BEPS = [1,000,000 – (20,000 x 5)] / 200,000 = 4.50

At December 31, 2018, Bacon Company had 1,200,000 shares of ordinary shares outstanding and P10,000,000 of 6%
convertible bonds outstanding at December 31, 2018, which are convertible into 800,000 shares of ordinary shares. On
September 1, 2019, an additional 400,000 shares of ordinary shares were issued. No bonds were converted into ordinary
shares in 2019. The net income for the year ended December 31, 2019, was P3,750,000. The income tax rate was 30%.

30. What should be the diluted earnings per share for the year ended December 31, 2019, rounded to the nearest centavo?
A. P1.76
B. P1.95
C. P2.04
D. P2.81

DEPS = [3,750,000 + (10,000,000 x 6% x 70%)] / [1,200,000 + (400,000 x 4/12) + 800,000] = 1.95

Helical Co. reported profits of P1,600,000 and P2,400,000 in 20x1 and 20x2, respectively. In 20x3, the following prior period
errors were discovered:
 Prepaid supplies in 20x1 were overstated by P80,000.
 Accrued salaries payable in 20x1 were understated by P160,000.
 Repairs and maintenance expenses in 20x1 amounting to P400,000 were erroneously capitalized and being
depreciated over a period of 4 years.

The unadjusted balances of retained earnings are P6,400,000 and P8,800,000 as of December 31, 20x1 and 20x2,
respectively.

31. How much is the correct profit in 20x1?

A. P1,006,000
B. P1,610,000
C. P1,720,000

B8
 D. P1,060,000

20x1 20x2
Unadjusted profits 1,600,000 2,400,000
Corrections - (over) understatement:
(a) Overstatement of 20x1 prepaid assets (80,000) 80,000
(b) Understatement of 20x1 accrued salaries (160,000) 160,000
(c.1) Expenses erroneously capitalized (400,000) -
(c.2) Depreciation recognized on repair costs
(400,000 ÷ 4) 100,000 100,000
Net adjustment to profit* (540,000) 340,000
Correct profits 1,060,000 2,740,000

32. How much is the correct retained earnings in 20x1?

A. P5,806,000
B. P5,520,000
C. P5,860,000
D. P5,420,000

20x1 20x2
Unadjusted retained earnings 6,400,000 8,800,000
Net effect of errors on retained earnings:
20x1: (540,000)* (540,000)
20x2: 340,000 + (540,000)* ________ (200,000)
Adjusted retained earnings 5,860,000 8,600,000

*Amounts represent the net effect of errors in profits. See item 32.

33. On January 15, 20x3 while finalizing its 20x2 financial statements, Diana Co. discovered that depreciation expense
recognized in 20x1 is overstated by P1,600,000. Ignoring income tax, the entry to correct the prior period error
includes
A. a debit to depreciation expense for P1,600,000
B. a debit to retained earnings for P1,600,000
C. a credit to depreciation expense for P1,600,000
D. a debit to accumulated depreciation for P1,600,000

(Dr.) Accum. Dep’n. 1.6M; (Cr.) Retained earnings 1.6M

On April 1, 2019, Ivy began operating a service proprietorship with an initial cash investment of P1,000. The
proprietorship provided P3,200 of services in April and received full payment in May. The proprietorship incurred
expenses of P1,500 in April which were paid in June. During May, Ivy drew P500 against her capital account.

34. What was the proprietorship's income for the two months ended May 31, 2019, under the following methods of
accounting?
Cash basis Accrual basis
A. P1,200 P1,200
B. P1,700 P1,700
C. P2,700 P1,200
D. P3,200 P1,700

Cash basis Accrual basis

Revenue 3,200 3,200
Expenses - (1,500)
Profit 3,200 1,700

B9
Entity Co. uses the cash basis of accounting and reported income of P87,000 in 20x1. The following items were considered
in the computation of the cash basis net income.

Inventory, beginning P12,000

Inventory, ending 18,000
Receivables, beginning 40,000
Receivables, ending 38,000
Payables, beginning 19,000
Payables, ending 25,000

35. The accrual basis income is

A. P97,000
B. P73,000
C. P89,000
D. P85,000

Accrual basis profit (squeeze) 85,000

Increase in inventory (6,000)
Decrease in receivables 2,000
Increase in payables 6,000
Cash basis profit 87,000

The following information is available for Acequia Company for 20X2:

Disbursements for purchases P700,000

Increase in trade accounts payable 50,000
Decrease in merchandise inventory 20,000

36. Costs of goods sold for 20X2 was

A. P770,000.
B. P730,000.
C. P670,000.
D. P630,000.

P700,000 + P50,000 + P20,000 = P770,000.

The following changes in account balances of the Martello Company during the current year are presented below:

Increase
Assets P3,560,000
Liabilities 1,080,000
Share capital 2,400,000
Share premium 240,000

There were no changes in retained earnings other than for a dividend declaration and payment of P520,000.

37. What is the net income for the current year?

A. P360,000
B. P920,000
C. P1,960,000
D. P2,480,000

Increase in assets 3,560,000

B10
Increase in liabilities (1,080,000)
Net increase 2,480,000
Add: Dividends 520,000
Total 3,000,000
Less: Increase in capital:
Ordinary shares 2,400,000
Additional paid in capital 240,000 2,640,000
Net income 360,000

38. Conceptually, interim financial statements can be described as emphasizing

A. Timeliness over faithful representation
B. Faithful representation over relevance
C. Relevance over comparability
D. Comparability over verifiability

39. Sweetie Company adopts the calendar year as its reporting period and published interim financial statements for the
quarter ended September 30, 2019. Which of the following financial statements does not bear a correct date or period?
A. Statement of financial position as of September 30, 2019 and as of December 31, 2018
B. Statement of financial position as of September 30, 2019 and as of September 30, 2018
C. Income statement for the quarter ended September 30, 2019 and for the quarter ended September 30, 2018
D. Income statement for the nine months ended September 30, 2019 and for the nine months ended September 30,
2018

Exodus Corporation incurs costs unevenly throughout the financial year. Advertising costs of P2 million were incurred in
February 2019, and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to be around P30 million
per year based on sales of P300 million. Total sales for the quarter ended March 31, 2019 were P70 million.

40. What costs should be included for the quarter ended March 31, 2019?
A. P9.5 million
B. P8.0 million
C. P7.5 million
D. P9.0 million

2 + 10% X 70 = 9.0

End of Examinations

B11