Catanduanes State University

COLLEGE OF BUSINESS AND ACCOUNTANCY

Virac, Catanduanes

Acctg 2 – Conceptual Framework and Accounting Standards

FINAL EXAMINATION
May 25, 2021

Test I - Multiple Choice Questions:

1. D 11. A 21. B 31. D
2. A 12. D 22. A 32. B
3. D 13. B 23. B 33. A
4. B 14. A 24. D 34. B
5. D 15. A 25. B 35. A
6. D 16. C 26. A 36. A
7. D 17. A 27. B 37. C
8. C 18. A 28. B 38. B
9. B 19. D 29. B 39. B
10. C 20. D 30. A 40. C

Test II - Discussion Questions:

41-45: What is the general criterion used to decide whether an expenditure should be included in
the cost of property, plant, and equipment rather than being expensed?
- The expenditures incurred to obtain the benefits to be derived from the asset are
capitalized and included as a cost of property, plant and equipment. They include the
costs incurred in the acquisition of an asset and in putting the asset into operating
condition. Costs of maintaining the benefits at the levels originally expected are
expensed.

46-50: When several assets are purchased for a single lump sum, what is the principle used for
cost apportionment? Why it is necessary to apportion the cost?
- In a lump-sum purchase, the total purchase price should be allocated to the individual
assets on the basis of their relative fair market values. This allocation is necessary
because some of their assets may have different economic lives, may not be depreciable
by different methods.

51-55: Distinguish between the “cost model” and “fair value” model of accounting for
investment property.

- At Fair Value Model, investment property is measured at fair value, which is the amount
for which the property could be exchanged between knowledgeable, willing parties in an
arm’s length transaction while in Cost Model, investment properties that meet the criteria
 to be classified as held for sale or are included in a disposal group that is classified as
held for sale shall be measured.
56-60: What are the criteria for classifying non-current assets (or disposal groups) as held for
sale? The criteria for classifying non-current assets or disposal groups as held for sale are:
 If the carrying amount will be recovered principally through a sale transaction
rather than through continuing use.
 The asset must be available for immediate sale in its present condition subject
only to terms that are usual and customary for sales of such assets or disposal
groups and its sale must be highly probable.
61-75: A fitness club gives clients free month after they have paid for eleven months.
Approximately half of their clients remain with the club long enough to take advantage of this
offer? (15 points)

Required:

a. Define the term “liability”. Then explain whether the free month offer results in a liability
for the fitness club.
Liability is a present obligation of the entity to transfer economic resource as a
result of past events. An obligation is a duty or responsibility that the entity has no
practical ability to avoid. The entity has a duty or responsibility to act or perform as a
consequence of a binding contract or statutory requirements. Therefore the free month
offer of the fitness club is a liability because it is their obligation to settle their agreement.
If the customer paid for eleven months, then it is the entity’s obligation or duty to give
them a free month as said to the agreement.
b. Explain what makes a liability “current”. Then explain whether the free month offer
results in a current liability for the fitness club.
A liability shall classify current when; it expects to settle the liability in its normal
operating cycle, it holds the liability primarily for the purpose of trading, the liability is
due to be settled within twelve months after the reporting period or does not have an
unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. Therefor the free month offer of the fitness club is a current liability
because the fitness club obligation is due to be settled within twelve months, after paying
for eleven months of the customer, they would be given a free month and that is exactly
twelve months for them to settle their contract.
c. Define the term “contingent liability”. Then explain whether the free month results in a
contingent liability for the fitness club.
A contingent liability is a liability that may occur depending on the outcome of an
uncertain future event. A contingent liability is recorded if the liability can be reasonably
estimated. Therefor the free month offer is a contingent liability because their outcomes
are uncertain, the result will depend on the customers, if they paid for eleven months they
 will be given the free month offer, but if they did not, the customer will not get the free
offer.

76-82: Fix Company sells its bonds at a premium and applies the effective-interest method in
amortizing the premium. Will the annual interest expense increase or decrease over the life of
the bonds? Explain. (7 points)

When bonds are issued at a premium or discount, the market reacts to adjust the stated
interest rate to a market or effective interest rate. Because of the initial premium or discount, the
periodic interest payments over the bond’s life by the issuer do not represent the total interest
expense associated with the cash payment is necessary to reflect the effective interest being
incurred on the bonds.

Test III – Matching Type Questions: (83 - 90)

83. A

84. E

85. G

86. B

87. D

88. H

89. C

90. F

Test IV – Identification Questions:

91. Retained earnings / Accumulated profit or losses (appropriated retained earnings) – because
it is not available for dividend distribution and it is restricted for specific prupose.

92. Contributed capital or paid in capital (share capital) – because it is the amount invested when
they purchase shares.

93. Accumulated other comprehensive income (change in fair value that is attributable to
changes in the liability’s credit risk for particular liabilities designated as at fair value through
profit or loss.)

94. Accumulated other comprehensive income (unrealized holding loss on investments classified
as securities at fair value through other comprehensive income)
95. Contributed capital or paid in capital (Additional paid-in capital) – because it come from the
type of transaction such as other gains as corporation’s own shares, such as those arising from
share option plan.

96.

97.

98.

99. Accumulated other comprehensive income (Remeasurement of defined benefit plan)

100. Contributed capital or paid in capital (Additional paid-in capital) – because it come from the
type of transaction such as, conversion of convertible bonds.