Financial Accounting and Reporting

1. Which of the following is a purpose of the Conceptual Framework for Financial

Reporting?
a. To assist the IASB in the development of IFRS based on consistent
concepts.
b. To assist preparers of financial statements in developing consistent
accounting policies when no accounting standard applies to a particular
transaction or event, or when an accounting standard allows a choice of
accounting policy or treatment.
c. To assist all parties in understanding and interpreting IFRS
d. All of the foregoing.

Answer: D

2. Which of the following are the enhancing qualitative characteristics of useful

financial information?
I. Comparability
II. Completeness
III. Understandability
IV. Verifiability
V. Timeliness
VI. Consistency
a. I, II, III, and IV
b. I, III, IV, and V
c. II, III, IV, V
d. III, IV, V, and VI

Answer: B

3. The historical cost of a liability is equal to the

a. Amount received to incur the liability.
b. Amount received to incur the liability plus transaction costs.
c. Amount received to incur the liability minus transaction costs.
d. Amount received to incur the liability with consideration of the effect of
inflation.

Answer: C

4. Golden Closet Co. received an advance payment from a customer amounting to

P50,000 on December 29, 2022 for goods that will be delivered on January 2,
2023. The entity credited a liability account in its books to record the said
 transaction. Which of the following is true if no adjustment is made at the end of
2022?
a. Income for 2022 will be understated.
b. Income for 2022 will be overstated.
c. Total assets balance at the end of the year is overstated.
d. Balances of accounts are correctly stated.

Answer: D

5. Reversing entries apply to all

a. Accruals
b. Deferrals
c. Adjusting entries
d. Closing entries

Answer: A

6. On February 1, 2019, RMM bank approved a 3-year loan evidenced by a note to

Rkive Co. for P3,600,000 at 12% interest per annum to be paid every January 31
and the principal repayment exactly after 3 years. Rkive set up a sinking fund to
cover the principal payment at the end of the loan period while interest
settlements will be coming from yearly operations. The sinking fund will receive
deposits every January 31 until it becomes sufficient to settle the obligation.

How much will the current liability of Rkive Co. increase on December 31, 2019?
a. 396,000
b. 432,000
c. 1,200,000
d. 3,600,000

Answer: A – Only the interest payable for December 31, 2019 will be accounted
for as current liability. Interest = (3,600,000 x 12% x 11/12) = 396,000

7. With the given facts in No. 6, at what amount will the equity of RMM increase on
December 31, 2019?
a. 3,600,000
b. 36,000
c. 432,000
d. 396,000

Answer: D – Interest = 3,600,000 x 12% x 11/12 = 396,000; interest amounting

396,000 will increase the equity of TCC.
8. With the given facts in No. 6, At what amount will the equity of Rkive Co.
decrease in 2020?
a. 1,596,000
b. 1,632,000
c. 432,000
d. 396,000

Answer: C – Interest Expense (Jan. 1 – Jan. 31) = 3,600,000 x 12% x 1/12 =

36,000 : Interest Expense (Feb. 1 – Dec. 31) = 3,600,000 x 12% x 11/12 =
396,000 : 36,000 + 396,000 = 432,000

9. In preparing bank reconciliation, which of the following items would be deducted

from the balance per bank statement to arrive at the adjusted cash balance?
a. Bank service charge
b. Certified checks
c. Deposits in transit
d. Outstanding checks

Answer: D

10. Statement 1: Deposit in transit, sometimes, can be used as a book reconciling

item.
Statement 2: An accountant may leave book and bank balances unequal with
each provided that the difference is immaterial.
Statement 3: Timing difference serves as one of the reasons why most of the
time bank balance is not equal with book balance.
Statement 4: Errors committed by an employee of the company in recording cash
transactions may form part of bank reconciling items.
a. False, True, True, False
b. False, False, True, False
c. True, True, True, False
d. True, False, True, False

Answer: B

11. BTS Co. wants to determine the amount of cash to be reported on its December
31, 2021 balance sheet. The following information is provided:
• Travel advance of P175,000 for executive travel for the first quarter
for next year (employee to reimburse through salary deduction).
• Currency and coins on hand amounted to P4,200.
• A bank overdraft of P23,000 has occurred at one of the banks the
company uses to deposit its cash receipts. At the present time, the
company has no other deposits in this bank.
 • A separate fund in the amount of P1,320,000 is restricted for the
retirement of long-term debt.
• Petty Cash Fund, P3,400
• Commercial savings account of P950,000 and a commercial
checking account balance of P590,000 are held at TCC Banking
Corporation.
• An IOU from Seokjin Kim, a company officer, in the amount of
P5,000.
• The company has two certificates of deposit, each totalling
P430,000. These certificates of deposit have a maturity of 120
days.
• BTS Co. has received a check that is dated January 12, 2022 in the
amount of P152,000.
BTS Co.’s adjusted cash and cash equivalents balance on December 31, 2021
is:
a) 1,517,600
b) 2,715,600
c) 1,571,600
d) 1,547,700

Answer: D

Currency and coins on hand 4,200

Petty cash fund 3,400
Commercial saving account 950,000
Commercial checking account 590,000
Cash and cash equivalents, 12/31/21 1,547,600

12. Which of the following items are true about discount on notes receivable?
I. The face value of the note is higher than its present value
II. The present value of the note is higher than its face value
III. The nominal rate is higher than the effective rate
IV. The effective rate is higher than the effective rate
a) I and III
b) I and IV
c) II and III
d) II and IV

Answer: B

13. When specific accounts receivables are set up as collateral security for
borrowings, the accounts receivable are said to be…
 a. Pledged
b. Assigned
c. Factored
d. Discounted

Answer: B

14. What method of accounting is used to account for investments in associate?

a. Cost method
b. Fair value method
c. Equity method
d. Consolidation method

Answer: C

15. On January 2, 2022, SVT Co. purchased 2,500 ordinary shares of GYU Co. at
P210 per share plus transaction costs of P5,250. These shares are acquired for
trading purposes. On December 31, 2022, the ordinary shares of GYU Co. are
quoted at P244 per share.
On February 14, 2023, SVT Co. sold 750 shares of the GYU Co. ordinary shares
at P252 per share. SVT Co. incurred transaction costs amounting to P2,840 in
relation to the sale. On December 31, 2023, the ordinary shares of GYU Co. are
quoted at P274.

What amount of unrealized gain (loss) on fair value change shall be reported in
profit or loss for 2022?
a. 79,750
b. (79,750)
c. 85,000
d. (85,000)

Answer: C

Fair Value, 12/31/2022 (2,500 x 244) 610,000

Balance before adjustment, 12/31/2022 (2,500 x 210) (525,000)
Unrealized gain on fair value change - 2022 85,000

16. With the given facts in No. 15, what amount of gain (loss) on sale shall be
recognized on February 14, 2023?
a. 3,160
b. (3,160)
c. 6,000
 d. (6,000)

Answer: A

Selling Price (750 x 252) 189,000

Transaction costs incurred (2,840)
Net proceeds from sale 186,160
Carrying value of shares sold [(610,000/2,500) x 750] (183,000)
Gain on sale 3,160

17. If gross profit is based on cost then

a. Cost more than 100%
b. Gross profit is 100%
c. Net sales is 100%
d. Cost is 100%

Answer: D

18. On January 1, 2021, Bighit Co. was established to manufacture a single product.
The company’s production and sales records for 2021 – 2023 are made available
below:
Production Sales
Units Cost Units Sales Revenue
2021 300,000 P1,350,000 195,000 P1,823,250
2022 325,000 1,690,000 295,000 2,330,500
2023 290,000 1,653,000 245,000 2,082,500
Compute for the inventory beginning for 2023 using FIFO cost flow.

a. 710,000
b. 716,000
c. 708,000
d. 702,000

Answer: D

No. of units in beg. Inventory, 1/1/2022 (300,000-195,000) 105,000

No. of units produced – 2022 325,000
No. of units available for sale 430,000
No. units sold – 2022 (295,000)
No. of units in end. Inventory, 12/31/2022 135,000
Multiply by the unit cost – 2022 (1,690,000/325,000) 5.20
702,000
19. With the given facts in No. 18, compute for the inventory ending for 2023 using
the FIFO cash flow.
a. 810,000
b. 936,000
c. 1,026,000
d. 1,040,000

Answer: C

No. of units in beg. Inventory, 1/1/2023 135,000

No. of units produced – 2023 290,000
No. of units available for sale 425,000
No. units sold – 2023 (245,000)
No. of units in end. Inventory, 12/31/2023 180,000
Multiply by the unit cost – 2023 (1,653,000/290,000) 5.70
1,026,000

20. On January 1, 2021, Hope World Co. placed an order for equipment. The
supplier shipped the equipment on January 15, 2021 and was received by Hope
World Co. on February 1, 2021. Installation and testing were finished on March 1,
2021 and the equipment is available for use on this date. However, Hope World
Co. started using the equipment only on May 1, 2021. According to IAS 16
Property, plant and equipment, when should Hope World Co. start depreciating
the said equipment?
a. January 1, 2021
b. January 15, 2021
c. February 1, 2021
d. March 1, 2021
e. May 1, 2021

Answer: D

21. At the start of the year, the opening balances of Land and Building of Red Velvet
Co. were P2,200,000 and P6,500,000, respectively. Below are transactions that
happened during the current year:
A plot of land was purchased for P1,000,000. An amount of P175,000 was paid
to a real estate agency to acquire land, and P50,000 was spent to clear the area.
Timber and gravel were salvaged and sold for P25,000 during the cleaning of the
site.
For P4,500,000, a second plot of land with a building was purchased. The
appraiser placed a P2,000,000 value on the land and a P1,000,000 value on the
building. The structure was dismantled for P120,000 shortly after the purchase. A
 new building was built for P5,500,000, plus a P55,000 excavation fee, a P70,000
architect charge, and a P50,000 building permit.
A third parcel of property was purchased for P2,000,000 and is being retained for
future usage, although, the plan is not clear.

Under the section of property, plant and equipment, how much should be
reported as the total cost of land?
a. 6,980,000
b. 7,000,000
c. 7,100,000
d. 8,600,000

Answer: A

Beg. Balance for Land 2,200,000

First plot of land:
Cost 1,600,000
Payment to real estate agent 175,000
Cost of cleaning 30,000
Timber and gravel recovery (25,000) 1,780,000
Second plot of land (4,500,000 x 2/3) 3,000,000
Total cost of land under PPE 6,980,000

22. With the given facts in No. 21, how much is the cost of the new building?
a. 5,200,000
b. 5,300,000
c. 5,805,000
d. 6,700,000

Answer: C

Demolition of old building 120,000

New construction cost 5,500,000
Excavation fee 55,000
Architect fee 70,000
Building permit 60,000
Total cost of new building 5,805,000

23. SVT Co. owned an equipment costing P6,760,000 with original residual value of
P520,000. The life of the asset is 10 years and was depreciated using the
straight-line method.
 The equipment has a replacement cost of P10,400,000 with residual value of
P260,000. The age of the asset is 4 years.
The appraisal of the equipment 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. 2,080,000
b. 3,380,000
c. 2,184,000
d. 8,784,000

Answer: A

Cost 6,760,000
Accumulated Depreciation (2,496,000)
Carrying value 4,264,000

Replacement cost 10,400,000

Accumulated depreciation (4,056,000)
Depreciation replacement cost 6,344,000

Depreciation cost 6,344,000

Carrying value (4,264,000)
Revaluation surplus 2,080,000

24. On January 1, 2021, TXT Co. acquired a machinery at a cost of P2,500,000. It

was estimated to have a useful life of 10 years and no residual value. The co.
uses the cost model to account for the machinery and the straight-line method is
used in depreciating the machinery.
On December 31, 2022, the co. tested the machinery for possible impairment
and determined that the recoverable value of the said machinery amounted to
P1,500,000.
On December 31, 2023, it was revealed that the recoverable value of the
machinery had increased to P1,875,000.

How much is the impairment loss reported in 2022?

a. Zero
b. 500,000
c. 1,000,000
d. 1,500,000
 Answer: B

Annual Depreciation = 2,500,000 / 10 = 250,000

Cost 2,500,000
Accumulated Depreciation- 12/31/2022 (250,000 x 2) (500,000)
Carrying value – 12/31/2022 2,000,000
Recoverable value (1,500,000)
Impairment Loss - 2022 500,000

25. With the given facts in No. 24, what is the carrying amount of the machinery on
December 31, 2023 before reversal of the impairment?
a. 1,312,500
b. 1,350,000
c. 1,500,000
d. 1,750,000

Answer: A

Carrying value – 1/1/2023 1,500,000

Depreciation – 2023 (1,500,000/8) (187,500)
Carrying value – 12/31/2023 before reversal of the impairment 1,312,500

26. With the given facts in No. 24, what amount of gain on reversal of impairment
should be reported in profit or loss for 2023?
a. Zero
b. 187,500
c. 437,500
d. 562,500

Answer: C

Increased carrying value* 1,750,000

Carrying value – 12/31/2023 before reversal of the impairment (1,312,500)
Amount of gain on reversal of impairment allowed to be recognized 437,500
* The increased carrying value is the lower amount between the recoverable
amount (P1,875,000) and the carrying amount of the asset had there been no
impairment (P1,750,000).

27. What is the allocation of an impairment loss recognized for a cash generating
unit (CGU)?
a. Across the assets of the CGU based on carrying amount
b. Across the assets of the CGU based on fair value
 c. First, to any goodwill, and the balance to the other assets prorate based
on their fair values
d. First, to any goodwill, and the balance to the other assets prorate based
on their carrying amounts.

Answer: D

28. On January 1, 2022, JEON Co. reported patent of P3,360,000, net of P480,000
accumulated amortization. The patent was acquired on January 1, 2020, at which
date the remaining legal life is 16 years. On the same date, it was determined
that the useful life of the patent was only 8 years from date of acquisition.
Also on January 1, 2022, the entity purchased a trademark from PARK Co. In
connection with the purchase of trademark, the parties entered into a non-
competition agreement. JEON Co. paid a total of P1,600,000 to PARK Co. for the
purchase of the trademark and the agreement not to compete for a five-year
period in the line of business covered by the trademark. 60% of the acquisition
price will be allocated to trademark and the remainder to the noncompetition
agreement. Moreover, JEON Co. agreed to pay PARK Co. P100,000 annually on
January 1 of each year for 5 years.

What is the amortization expense to be reported for 2022 in relation to the

intangible assets?
a. 548,000
b. 688,000
c. 740,000
d. 880,000

Answer: B

Patent Amortization (3,360,000/6) 560,000

Trademark amortization (not amortized since its life is considered to be indefinite) -
Noncompetition agreement [(1,600,000 x 40%)/5] 128,000
Amortization Expense - 2022 688,000

29. A non-current asset to be classified as held for sale is considered to be impaired

when
a. The fair value less costs of disposal is higher than its carrying value
b. The fair value less costs of disposal is lower than its carrying value
c. The fair value is higher than its carrying amount
d. The fair value is lower than its carrying amount

Answer: B
30. On December 31, 2021, Genius Co. classified one its equipment as held for sale.
The equipment had a cost of P400,000 and accumulated depreciation of
P144,000 on that date.
The fair value of the equipment was estimated at P210,000 and the cost of
disposal at P10,000

What amount should be reported as impairment loss for 2021?

a. Zero
b. 36,000
c. 46,000
d. 56,000

Answer: D

Carrying value – 12/31/2021 (400,000 – 144,000) 256,000

Fair value led cost of disposal – 12/31/2021 (210,000 – 10,000) (200,000)
Impairment Loss 56,000