External transaction or exchange transactions

are those economic events involving one entity and

CONCEPTUAL FRAMEWORK AND another entity.
Internal transaction are economic events
ACCOUNTING STANDARDS involving the entity only.

CHAPTER I 6. When is a transaction accountable or quantifiable?

ANSWER:
QUESTIONS: An event is accountable or quantifiable
when it has an effect on assets, liabilities and equity.
1. Define accounting.
7. Explain “measuring” as a component of 11
ANSWER:
accounting.
Accounting is a service activity. The
accounting function is to provide quantitative
ANSWER:
information, primarily financial in nature, about
An accounting process that is the assigning of
economic entities, that is intended to be useful in
peso amounts to the accountable economic
making economic decision.
transactions and events.
- Accounting Standards Council
8. What are the measurement bases used in
Accounting is the art of recording, classifying accounting?
and summarizing in a significant manner and in terms
of money, transactions and events which are in part ANSWER:
at least of a financial character and interpreting the The measurement bases are historical cost
results thereof. and current value.
- Committee on Accounting Terminology of the American Historical cost is the original acquisition cost and
Institute of Certified Public Accountants the most common measure of financial
transactions.
Accounting is the process of identifying, Current value includes fair value, value in use,
measuring and communicating economic fulfillment value and current cost.
information to permit informed judgement and
decision by users of the information. 9. Explain “communicating” as a component of
accounting.
-The American Accounting Association (statement in basic
accounting theory)
ANSWER:
The process of preparing and distributing accounting
2. What are the important points made in the reports to potential users of accounting information.
definition of accounting? Also the reason why accounting has been called
the “universal language of business”.
ANSWER:
One- Accounting is about quantitative 10. Explain recording, classifying and summarizing in
information. relation to the communicating component of
Two- The information is likely to be financial in accounting.
nature.
Three- The information should be useful in ANSWER:
decision making. Recording or journalizing is the process of the
systematically maintaining a record of all economic
3. Explain “identifying” as a component of business transactions after they have been identified
accounting. and measured.
Classifying is the sorting or grouping of similar
ANSWER: and interrelated economic transaction into their
Identifying is an accounting process that is respective classes.
the recognition or non-recognition of business - Accomplished by posting to ledger.
activities as “accountable” events. Summarizing is the preparation of financial
- statements which include the statement of financial
NOTE: Not all business activities are accountable. position, income statement, statement of
comprehensive income, statement of changes in
4. What are transactions? equity and statement of cash flows.

ANSWER:
It is the subject matter of accounting that is 11. Explain why accounting has been called the
also called the economic activity or the “universal language of business”.
measurement of economic resources and economic
obligations. Also classified as external and internal ANSWER:
transactions. Communication process is the reason why
accounting has been called the “universal language
of business” because it distributes accounting reports
5. Distinguish external transactions and internal to potential users of accounting information.
transactions.
12. Explain accounting as an information system.
ANSWER:
 recommendation of the Board of Accountancy shall
ANSWER: issue the Certificate of Registration to practice public
Accounting is an information system that accountancy which shall be valid for 3 years and
measures business activities, process information into renewable every 3 years upon payment required
reports and communicates the reports to decision fees.
makers.
22
13. What is the overall objective of accounting? 19. What are the three main areas in the practice of
the accountancy profession?
ANSWER:
The overall objective of accounting is to ANSWER:
provide quantitative financial information about a Public Accounting
business that is useful to statement users particularly Private Accounting
owners and creditors in making economic decisions. Government Accounting

14. Describe the accountancy profession. 20. Explain public accounting.

ANSWER: ANSWER:
R.A No. 9298 is the law regulating the practice It is composed of individual practitioners,
of accountancy in the Philippines. This is also known as small accounting firms and large multinational
the Philippine Accountancy Act of 2004. It has been organizations that render independent and expert
developed as a profession attaining a status financial services to the public.
equivalent to that of law and medicine. You must also
finish a degree in Bachelor of Science in 21. What are the three kinds of services offered by
Accountancy and pass a very difficult government CPAs in the practice of public accounting.
examination given by the Board of Accountancy.
ANSWER:
15. What is R.A 9298? Auditing
Taxation
ANSWER: Management advisory services
R.A No. 9298 is the law regulating the practice
of accountancy in the Philippines. This is also known 22. Explain auditing.
as the Philippine Accountancy Act of 2004.
ANSWER:
16. What do you understand by the Board of It is the primary service offered by most public
Accountancy? accounting practitioners. It is the examination of
financial statements by independent certified public
ANSWER: accountant for the purpose of expressing an opinion
It is the body authorized by law to promulgate as to the fairness with which the financial statements
rules and regulations affecting the practice of are prepared.
accountancy profession in the Philippines.
23. Describe the taxation service offered by CPAs.
17. Explain the limitation of the practice of public
accountancy. ANSWER:
It includes the preparation of annual income
ANSWER: tax returns and determination of tax consequences
A certificate of accreditation shall be issued of certain proposed business endeavors. To offer this
to certified public accountants in public practice only service effectively and efficiently, the public
upon showing in accordance with rules and accountant must be thoroughly familiar with the tax
regulations promulgated by the Board of laws and regulations and updated with changes in
Accountancy and approved by the Professional taxation law and court cases concerned with
Regulation Commission that such registrant has interpreting taxation law.
acquired a minimum of three years of meaningful
experience in any of the areas of public practice
including taxation. 24. Explain management advisory services.

ANSWER:
It is become increasingly important in recent
Page 19 years although audit and tax services are
undoubtedly the mainstay of public accountant. It
has no precise coverage but is used generally to refer
18. Explain the accreditation to practice to services to clients on matters of accounting,
accountancy. finance, business policies, organization procedures,
product costs, distribution and many other phases of
ANSWER: business conduct and operations.
Certified public accountants, firms and
partnerships of certified public accountants, 25. What are some management advisory services
including partners and staff members thereof, are offered by CPAs.
required to register with the Board of Accountancy
and Professional Regulation Commission for the ANSWER:
practice of public accountancy. The Professional Advice on installation of computer
Regulation Commission upon favorable system
 Quality control is essentially constructive in nature, it ceases when
Installation and modification of financial statements are already prepared. On the
accounting system other hand, auditing is analytical.
Budgeting “The
Forward planning and forecasting work of an auditor begins when the work of the
accountant ends”.
Design and modification of retirement
plans
34. Distinguish accounting and bookkeeping.
Advice on mergers and consolidations
ANSWER:
26. Explain private accounting. Bookkeeping is procedural and largely
concerned with development and maintenance of
ANSWER: accounting records.
It includes maintaining of records, producing - It is the “how” of accounting
the financial reports, preparing the budgets and Accounting is conceptual.
controlling and allocating the resources of the entity. - Concerned with the “why”, reason or
27. Explain government accounting. justification for any action adopted.

ANSWER: 35. Distinguish accounting and accountancy.

It encompasses the process of analyzing,
classifying, summarizing and communicating all ANSWER:
transactions involving the receipt and disposition of
Accountancy refers to the profession of
the government funds and property and interpreting
accounting practice.
the results thereof. The focus of government
Accounting is used in reference only to a
accounting is the custody and administration of
particular field of accountancy such as public
public funds.
accounting, private accounting and government
accounting.
28. What do you understand by the continuing
professional development of CPAs.
Page 20
ANSWER:
It refers to the inculcation and acquisition of
advanced knowledge, skill, proficiency and ethical
36. What is financial accounting?
and moral values after initial registration of the
Certified Public Accountant for assimilation into
ANSWER:
professional practice and lifelong learning.
Area of accounting that emphasizes
reporting to creditors and investors. And is concerned
29. What is the meaning of CPD credit units?
with the recording of business transactions and the
eventual preparation of financial statements
ANSWER:
CPD credit units (Continuing Professional
37. What is managerial accounting?
Development) refers to the CPD credit hours required
for the renewal of CPA license and accreditation of a
ANSWER:
CPA to practice the accountancy profession every
three years. Managerial accounting is the accumulation
and preparation of financial reports for internal users
only.
30. How many CPD credit units are required?

ANSWER:
38. What is the meaning of generally accepted
120 CPD credit units are required.
accounting principles or GAAP?

ANSWER:
31. What is the purpose of the required CPD credit
Represents the rules, procedures, practice
units?
and standards followed in the preparation and
presentation of financial statements. These are also
ANSWER:
like laws that must be followed in financial reporting.
For the renewal of CPA license and
accreditation of CPA to practice the accountancy
39. What constitute GAAP in the Philippines?
profession.
ANSWER:
32. What is the exemption from the CPD
The Accounting standards promulgated by
requirements?
the Financial Reporting Standards Council constitute
the “highest hierarchy” of generally accepted
ANSWER:
accounting principles in the Philippines.
A CPA shall be permanently exempted from
CPD requirements upon reaching the age of 65
40. Explain the purpose of accounting standards.
years.
ANSWER:
33. Distinguish accounting and auditing.
The purpose of accounting standard is to
33 identify proper accounting practices for the
ANSWER: preparation and presentation of financial statements.
Accounting embraces auditing. Accounting
 The IASB standard-setting process includes in the correct
41. What do you understand about the Financial order research, discussion paper. 44
Reporting Standards Council? Exposure draft and accounting standard.

ANSWER: 47. What do you understand by IFRIC?

It is the standard-setting body created by the
Professional Regulation Commission upon ANSWER:
recommendation of the Board of Accountancy to The counterpart of the PIC in the United
assist the Board of Accountancy in carrying out its Kingdom which has already replaced SIC.
powers and functions provided under R.A Act No.
9298. Its main function is to establish and improve 48. Explain why the Philippines has moved totally
accounting standards that will be generally from American accounting standards to
accepted in the Philippines. international accounting standards.

42. What is the composition of FRSC? ANSWER:

Support of international accounting
ANSWER: standards by Philippine organizations,
It is composed of 15 members with a such as the Philippines SEC, Board of
Chairman who had been or is presently a senior
Accountancy and PICPA.
accounting practitioner and 14 representatives.
Increasing internalization of business
which has heightened interest in a
43. What do you understand about PIC and IFRIC?
common language for financial
reporting.
ANSWER:
Improvement of international
PIC is the one that prepare interpretations of
PFRS for approval by the FRSC and to provide timely accounting standards or removal of
guidance on financial reporting issues not specifically free choices of accounting
addressed in current PFRS. treatments.
IFRIC which has already replaced the Increasing recognition of
Standing Interpretation Committee or SIC, it is the international accounting standards
counterpart of the PIC. by the World Bank, Asian
Development Bank, and World Trade
44. What do you understand about the International Organization.
Accounting Standards Committee?
49. What do you understand by the “International
ANSWER: Financial Reporting Standards”?
It is an independent private sector body, with
the objective of achieving uniformity in the ANSWER:
accounting principles which are used by business and It is essential to achieve goal of one uniform
other organizations for financial reporting around the and globally accepted financial reporting standards.
world.
50. What are collectively included in “Philippine
Financial Reporting Standards”?
45. What are the twin objectives of IASC?
ANSWER:
ANSWER: ω Philippine Financial Reporting
-To formulate and publish in the public interest Standards which correspond to
accounting standards to be observed in the International Financial Reporting
presentation of financial statements and to promote Standards.
their worldwide acceptance and observance.
-To work generally for the improvement and The Philippine Financial Reporting
harmonization of regulations, accounting standards Standards are numbered the same as their
and procedures relating to presentation of financial counterpart in International
statements. Financial Reporting Standards.

46. What is IASB?

ANSWER:
Committee, and Interpretations
developed by the Philippine
ω Philippine Accounting Standards Interpretations Committee.
which correspond to International
Accounting Standards.

The Philippine Accounting Standards

are numbered the same as their
counterpart in International
Accounting Standards.

ω Philippine Interpretations which

correspond to Interpretations of the
IFRIC and the Standing Interpretations
 PROBLEM 1-6 MULTIPLE CHOICE (IAA)
1. D
2. B
3. D
4. A
5.A

Page 28

PROBLEM 1-5 MULTIPLE CHOICE (IAA)

1. A
2. C
3. D
4. D
5. D
Page 21

PROBLEMS
PROBLEM 1-1 MULTIPLE CHOICE (ACP)

1. A
2. D

55

6. D
7. A
8. A
9. A
10. D

Page 29

6. A
7. B
8. D
9. A
3. B 10. A
4. A Page 26
5. B
Page 22 PROBLEM 1-4 MULTIPLE CHOICE (IFRS)

6. D 1. C
7. B 2. A
8. A 3. B
9. D 4. C
10. D 5. B
Page 23 Page 27
Page 30

PROBLEM 1-2 MULTIPLE CHOICE (ACP)

CONCEPTUAL FRAMEWORK
1. A AND ACCOUNTING
2. A
3. A STANDARDS

CHAPTER II
4. C
5. A
Page 24

QUESTIONS:
PROBLEM 1-3 MULTIPLE CHOICE (ACP)
1. What is the meaning of Conceptual Framework?
1. D
2. D ANSWER:
3. D Conceptual Framework is a summary of
4. A the terms and concepts that underlie the
preparation and presentation of financial
5. D
statements for external users.
Page 25
 Objective of financial reporting
2. What are the purposes of the Revised Qualitative characteristics of useful
Conceptual Framework? financial information
Financial statements and reporting
ANSWER: entity
To assist the International Elements of financial statements
Accounting Standards Board to Recognition and derecognition
develop IFRS Measurement
Standards based on consistent Presentation and disclosure
concepts. Concepts of capital and capital
To assist preparers of financial maintenance
statements to develop consistent
accounting policy when no Standard 7. Explain financial reporting.
applies to a particular transaction or
66
other event or where an issue is not
ANSWER:
yet addressed by an IFRS.
It is the provision of financial information
To assist preparers of financial
about an entity to external users that is useful to
statements to develop
them in making economic decisions and for
accounting
assessing the effectiveness of the entity’s
policy when a Standard allows a management.
choice of an accounting policy.
To assist all parties to understand 8. What is the overall objective of financial reporting?
and interpret the IFRS Standards.
ANSWER:
3. Explain the authoritative status of the The overall objective of financial reporting
Conceptual Framework. is to provide financial information about the
reporting entity that is useful to existing and
ANSWER: potential investors, lenders and other creditors in
In the absence of standard or an making decisions about providing resources to
interpretation that specifically applies to a the entity.
transaction, management shall consider the
applicability of the Conceptual Framework in 9. What are the specific objectives of financial
developing and applying an accounting policy reporting?
that results in information that is relevant and
reliable. ANSWER:
To provide information useful in
4. Explain the “primary users” and their information
making decisions about providing
needs.
resources to the entity.
To provide information useful in
ANSWER:
assessing the cash flow prospects of
These are the parties to whom general
the entity.
purpose financial reports are primarily directed.
They cannot require reporting entities to provide To provide information about the
information directly to them and therefore must entity resources, claims and changes
rely on general purpose financial reports for how in resources and claims.
much of the financial information needed.
10. Explain financial position.
5. Explain the “other users” and their information
needs. ANSWER:
Information about the entity’s economic
ANSWER: resources and the claims against the reporting
These are the users of financial information entity. In other words, financial position
other than the existing and potential investors, comprises the assets, liabilities and equity of an
lenders, and other creditors. They are so called entity at a particular moment in time.
because they are parties that may find the
general purpose financial reports useful but the 11. Explain liquidity and solvency.
reports are not directed to them primarily.
ANSWER:
Liquidity is the availability of cash in the
6. What is the scope of the Revised Conceptual near future to cover currently maturing
Framework? obligations. Solvency is the availability of cash
over a long term to meet financial commitments
ANSWER: when they fall due.
the income statement and statement regardless of when paid.
of comprehensive income.
12. Explain financial performance 14. Explain management stewardship
13. Explain accrual accounting. of the entity’s economic resources.
ANSWER:
The level of income earned by the ANSWER: ANSWER:
entity through efficient and effective Income is recognized when earned Information about how efficiently and
use of its resources. Also known as regardless of when received and effectively management has
results of operations and is portrayed in expense is recognized when incurred discharged its responsibilities to use
the entity’s economic resources helps 3. D 2. D
users to assess management 4. B 3. D
stewardship of 5. B 4. A
5. A

PROBLEM 2-2 MULTIPLE CHOICE (IFRS)

1. C
2. B
3. C
4. B

Page 44
Page 45
PROBLEM 2-3 MULTIPLE CHOICE (IAA)
PROBLEM 2-4 MULTIPLE CHOICE (ACP)
1. D 77
2. A 1. D
Page 43
Page 46

6. D
7. A
those resources. 8. A
9. A
15. What are the limitations of financial reporting? 10 A
Page 47
ANSWER:
General purpose financial reports do PROBLEM 2-5 MULTIPLE CHOICE (IAA)
not and cannot provide all the
information that existing and potential 1. A
investors, lenders and other creditors 2. B
need. 3. A
These users need to consider pertinent 4. C
information from other sources, for 5. A
example, general economic Page 48
conditions, political events and
industry outlook. 6. C
General purpose financial reports are 7. D
not designed to show the value of an 8. B
entity but the reports provide 9. D
information to help the primary users 10. D
estimate the value of the entity. Page 49
General purpose financial reports are
intended to provide common PROBLEM 2-6 MULTIPLE CHOICE (AICPA Adapted)
information to users and cannot
accommodate every request for 1. C
information. 2. C
To a large extent, general purpose 3. C
financial reports are based on Page 50
estimate and judgment rather than
exact depiction. 4. A
Page 42 5. A
Page 51
PROBLEMS
PROBLEM 2-1 MULTIPLE CHOICE (IFRS) CONCEPTUAL FRAMEWORK
AND ACCOUNTING
1. D
2. D
STANDARDS
3. D
4. D CHAPTER III
 Information is material if ommitting,
QUESTIONS misstating or obscuring it could reasonably be
expected be expected to influence the
1. What is the meaning of qualitative economic decisions that primary users of general
characteristics of financial information ? purpose financial statements make on the basis
ANSWER: of those statements which provide financial
These are the qualities or attributes that information about a specific reporting entity.
make financial accounting information useful to
the users. 11. What are the factors that may be considered
in determining materiality?
2. What are fundamental qualitative characteristics? ANSWER:
ANSWER: The size of the item in relation to the total of
It relates to the content or substance of the group to which the item belongs is tatekn into
financial information. account.
The nature of the item may be inherently 88
3. What are the two fundamental qualitative material because by its very nature it affects
characteristics? economic decision.
ANSWER:
12. Explain the fundamental qualitative
The fundamental qualitative characterisrics
characteristics of faithful representation.
are relevance and faithful representation.
ANSWER:
4. Explain the most efficient and effective process It means that the actual effects of the
of applying the fundamental qualitative transactions shall be properly accounted for and
characteristics. reported in the financial statements.
ANSWER:
The mos efficient and effective process of 13. What are the three ingredients of faithful
applying the fundamental qualittative representation?
characteristics would usually be:
First, identify an economic phenomenon that ANSWER:
has the potential to be useful. Completeness
Second, identify the type of information Neutrality
about the phenomenon that would be Free from error
most relevant and can be faithfully
represented. 14. Explain completeness of financial information.
Third, determine whether the information is
available. ANSWER:
It is the result of the adequate disclosure
5. Explain relevance. standard or the principle of full disclosure. It
includes all information necessary for a user to
ANSWER: understand the phenomenon being depicted,
Relevance is the capacity of the including all necessary descriptions and
information to influence a decision. explanations.

6. What are the two ingredients of relevance? 15. What is the standard of adequate disclosure?
ANSWER:
Predictive value ANSWER:
Confirmatory value All significant and relevant information
leading to the preparation of financial statements
shall be clearly reported.
7. Explain predictive value.
ANSWER: 16. Explain the notes to financial statements in
It can be used as an input to processes relation to completeness of financial information.
employed bu users to predict future outcome.
ANSWER:
8. Explain confirmatory value. It provides narrative description or
disaggregation of the items presented in the
ANSWER: financial statements and information about items
If it provides feedback about previous that do not qualify for recognition.
evaluations.
17. Explain neutrality of financial information.
9. When is an item material?

ANSWER: ANSWER:
An item is material if knowledge of it could It is not slanted, weighted, emphasized,de
reasonably affect or influence the economic emphasized or otherwise manipulated to increase
decision of the primary users of the fianncial the probability that financial information will be
statements. received favorably or unfavorably by users.it is
synonymous with all-encompassing principle of
fairness.
10. Explain the new definition of materiality. Page 70

ANSWER:
 ANSWER:
18. What is prudence? The quality of information that allows
comparisons within a single entity through time or
ANSWER: from one accounting period to the next.
Exercise of care and caution when dealing 27. Explain comparability between and across
with uncertainities in the measurement process entities.
such that assets or income are not overstated and
liabilitites or expenses are not understated.
ANSWER:
Neutrality is supported by the exercise of
The quality of information that allows
prudence.
comparisons between two or more entities
engaged in the same industry.
19. Explain conservatism.

ANSWER: 28. What is consistency?

It means that when alternatives exist, the
alternative which has the least effect on equity ANSWER:
should be chosen. Conservatism means “in case of 99
doubt, record any loss and dod not record any Refers to the use of the same method for
gain.” the same item, either from period to period within
an entity or in a single period across entities.
20. Explain free from error financial information.
29. Distinguish consistency from comparability.
ANSWER:
There are no errors or omissions in the ANSWER:
description of the phenomenon or transaction. Consistency is the uniform application
accounting method from period to period within
21. Explain the effect of measurement uncertainty an entity while comparability is the uniform
to usefulness of financial information. application of accounting method between and
across entities in the same industry.
ANSWER:
As long as the estimate is clearly and 30. Explain understandability.
accurately described and explained, even a high
level of measurement uncertainty does not affect ANSWER:
the usefulness of the financial information. It requires that financial information must
be comprehensible or intelligible if it is to be most
22. Explain the concept of substance over form. useful.

ANSWER: 31. Explain verifiability.

It is not considered a separate component
of faithful representation because it would be ANSWER:
redundant. Means that different knowledgeable and
independent observers could reach consensus,
although not necessarily complete agreement,
23. What are enhancing qualitative characteristics? that a particular depiction is a faithful
representation. It provides results that would be
ANSWER: substantially duplicated by measurers using the
It is intended to increase the usefulness of same measurement method.
the financial information that is relevant and
faithfully represented. 32. Distinguish direct verification and indirect
verification.
24. Enumerate the four enhancing qualitative
characteristics. ANSWER:
Direct verification means verifying an
ANSWER: amount or other representation through direct
Comparability observation, for example, by counting cash.
Understandability Indirect verification means checking the
Verfiability inputs to a model, formula or other technique
Timeliness and recalculating the inputs using the same
methodology.
25. Explain comparability.
33. Explain timeliness.
ANSWER:
It is the ability to bring together for the ANSWER:
purpose of noting points points of likeness and Financial information must be available or
difference. communicated early enough when a decision is
The enhancing qualitative characteristic that to be made. It enhances the truism that without
enables users to identify and understand knowledge of the past, the basis for prediction will
similarities and dissimilarities among items. usually be lacking and without interest in the
future, knowledge of the past is sterile.

26. Explain comparability within a single entity.

 2. D
PROBLEM 3-5 MULTIPLE CHOICE (IAA)
34. Explain cost constraint on useful
financial information. PROBLEM 3-4 MULTIPLE CHOICE (IAA) 1. D
2. D
ANSWER: 1. A 3. A
A consideration of the cost incurred in 2. B 4. A
generating financial information 3. B 5. D
against the benefit to be obtained 4. B
from having the information. 5. B

35. What is the rule on cost constraint?

ANSWER:
It is important that such cost is justified
by the benefit derived from the
financial information.
Page 78

6. B
7. C
8. C
9. C
10. B

10

Page 71

PROBLEMS:
PROBLEM 3-1 MULTIPLE CHOICE (IAA)
Page 79
1. A
7. C
8. D
9. C
10. A
Page 75
3. A
4. B PROBLEM 3-3 MULTIPLE CHOICE (IAA)
5. A
Page 72 1. D
2. C
6. B 3. D
7. C 4. A
8. D 5. D
9. C Page 76
10. B
Page 73
6. C
7. A
PROBLEM 3-2 MULTIPLE CHOICE (IAA) 8. B
9. D
1. D 10. B
2. C Page 77
3. D Page 80
4. C
5. A PROBLEM 3-6 MULTIPLE CHOICE (AICPA Adapted)
Page 74
1. B
6. B 2. B
 3. C RELEVANCE
4. B
5. A 2. It is the ability to bring together for the purpose of
Page 81 noting points of likeness and difference.
ANSWER:
6. B COMPARABILITY
7. D
8. C 3. It requires that users have some knowledge of the
9. A complex economic activities of entities, the
10. B accounting process and the technical terminology in
Page 82 the statements.
ANSWER:
PROBLEM 3-7 IDENTIFICATION (ACP) UNDERSTANDABILITY

Indicate the accounting concept that is defined or 4. Preparers of statements should not try to increase
described. the usefulness of the information to a few users to the
detriment of others who may have opposing interests.
1. Information that has no bearing on an economic ANSWER:
decision to be made is useless. NEUTRALITY
ANSWER:

5. In case of conflict between economic PROBLEM 3-8 TRUE OR FALSE (IAA)

substance and legal form of a transaction, the
economic
ANSWER:
substance shall prevail. VERIFIABILITY
ANSWER:
SUBSTANCE OVER FORM 15. The older the information, the less useful.
ANSWER:
6. Small expenditures for tools are expensed TIMELINESS
immediately. Page 83
ANSWER: TRUE 1. A conceptual framework is a coherent
MATERIALITY system of interrelated objectives and fundamentals
7. When in doubt, recognize all losses and recognize that lead to consistent standards.
gain. FALSE 2. Fundamental qualitative characteristics of
ANSWER: financial accounting information are either relevant
CONSERVATISM or prudent.
FALSE 3. An enhancing qualitative characteristic is
8. The information should be presented in a manner confirmatory value.
that facilitates understanding and avoids erroneous FALSE 4. A fundamental qualitative characteristic is
implication. understandability.
ANSWER: FALSE 5. To be a faithful representation, an
COMPLETENESS information must be predictive and confirmatory.
TRUE 6. An enhancing quality of financial
9. It is the capacity of the information to influence a accounting information is comparability.
decision. FALSE 7. Applying different accounting treatment to 11
ANSWER: similar event from period to period is violation of
RELEVANCE verifiability.
TRUE 8. The idea of consistency does not mean that
10. The description and numbers or figures must entities cannot switch from one accounting method
match what really existed or happened. to another.
ANSWER: FALSE 9. Financial statement users are assumed to
FAITHFUL REPRESENTATION have no reasonable knowledge of business and
financial accounting matters.
11. The financial statements shall be accompanied FALSE 10. Entities consider only quantitative factors in
by notes to financial statements. determining whether an item is material.
ANSWER: FALSE 11. Neutrality and predictive value are
COMPLETENESS characteristics of relevant information.
FALSE 12. The tendency to recognize favorable
12. There are no errors or omissions in the description events early is an example of conservatism.
of the phenomenon. FALSE 13. The Conceptual Framework focuses
ANSWER: primarily on the needs of internal users of financial
FREE FROM ERRORS information.
TRUE 14. The overall objective of financial reporting is
13. It is the goal achieved by to provide information for making economic
consistency. ANSWER: decisions.
COMPARABILITY FALSE 15. Once an accounting method is adopted,
it should never be changed.
14. This enhancing qualitative characteristics implies Page 84
consensus.
 6. Explain going concern assumption.
CONCEPTUAL FRAMEWORK AND
ANSWER:
ACCOUNTING STANDARDS

CHAPTER IV
It means that in the absence of evidence to
the contrary, the accounting entity is viewed as
continuing in operation indefinitely.

QUESTIONS: 7. Explain time period assumption.

1. What is the general objective of financial
statements? ANSWER:
It requires that the definite life of an entity is
ANSWER: subdivided into accounting periods which are usually
Provide infromation about economic of equal length for the purpose of preparing financial
resources of the reporting entity claims against the reports on financial position, performance and cash
entity and changes in the economic resources claims. flows.

2. Explain a reporting period. 8. Distinguish calendar year and natural business 12

year.
ANSWER:
Period when financial statements are ANSWER:
prepared for general purpose financial reporting. Calendar year is a twelve – month period that
ends on December 31.
3. Explain a reporting entity. Natural business year is a twelve – month period
that ends on any month when the business is
ANSWER: at the lowest or experiencing slack season.
An entity that is required or chooses to
prepare financial statements. It can be a single entity 9. Explain monetary unit assumption.
or a portion of an entity, or can comprise more than
one entity. Reporting entity is not necessarily a legal ANSWER:
entity. An accounting principle that concern about
the valuation of transactions or event that entity
4. Define consolidated financial statements, records in its financial statement. It has two aspects,
unconsolidated financial statements and combined namely quantifiability and stability of the peso.
financial statements.
10. Explain quantifiability and stability of the peso in
ANSWER: relation to monetary assumption unit.
Consolidated financial statements provide
information about the assets, liabilities, equity, ANSWER:
income and expenses of both the parent and Quantifiability aspect means that the assets,
its subsidiaries as a single reporting entity. Also liabilities, equity, income and expenses should
useful for existing and potential investors, be stated in terms of a unit of measure which
lenders and other creditors of the parent in is the peso in the Philippines.
their assessment of future net cash inflows to Stability of the peso assumption means that the
the parent. purchasing power of peso is stable or
Unconsolidated financial statements are constant and that its instability is insignificant
designed to provide information about the and therefore may be ignored.
parent’s assets, liabilities income and expenses
and not about those of the subsidiaries. Can Page 93
be useful to the existing and potential investors
lenders and other creditors of the parent PROBLEMS:
because a claim against the parent typically PROBLEM 4-1 MULTIPLE CHOICE
does not give the holder of that claim against (CONCEPTUAL FRAMEWORK)
subsidiaries.
Combined financial statements provide 1. A
financial information about the assets, 2. C
liabilities, equity income and expenses not
3. D
linked with parent and subsidiary relationship.
4. A
5. D
5. Explain underlying assumptions in the preparation
Page 94
of financial statements.
PROBLEM 4-2 MULTIPLE CHOICE (IAA)
ANSWER:
These are the basic notions or fundamental
1. B
premises on which the accounting process is based.
Accounting assumptions are also known as 2. D
postulates. It serves as the foundations or bedrock of 3. D
accounting in order to avoid misunderstanding but 4. D
rather enhance the understanding and usefulness of 5. B
the financial statements. Page 95
 PROBLEM 4-5 IDENTIFICATION (IAA)
6. B 7. C

by the accounting practice.

8. C
9. B 1. An entity decided to publish financial statements
10. D only in the years when it had good news to report.
Page 96
ANSWER:
PROBLEM 4-3 MULTIPLE CHOICE (AICPA Adapted) GOING CONCERN
1. D
2. A 2. An entity reported inventory, property, plant and
3. D equipment and intangible assets at current value at
4. A year-end.
5. B
Page 97 ANSWER:
MONETARY UNIT ASSUMPTION
PROBLEM 4-4 (IAA) 13
For each situation, identify the underlying assumption 3. An electronics entity owned by a proprietor
involved. reported the cost of the proprietor’s swimming pool
as an asset of the entity.
1. The operations of a saving bank are being
evaluated by the Bangko Sentral ng Pilipinas. During ANSWER:
the investigation, the BSP has determined that ACCOUNTING ENTITY
numerous loans made by top management were
unwise and have seriously endangered the future of 4. An entity prepared financial statements adjusted
the saving bank. for changes in purchasing power.

ANSWER: ANSWER:
GOING CONCERN MONETARY UNIT ASSUMPTION

2. The parent entity in Manila has a subsidiary in 5. A mining entity kept no accounting records after
Japan. The financial statements of the subsidiary are starting business. The entity is waiting until the mine is
translated to pesos for consolidation with the financial exhausted to determine the success or failure of
statements of the parent entity at year-end. business.

ANSWER: ANSWER:
MONETARY UNIT ASSUMPTION GOING CONCERN

3. A machinery was imported from USA at a certain PROBLEM 4-6 IDENTIFICATION (IAA)
cost five years ago. Because of inflation, the
machinery has now a current replacement cost Identify the assumption defined or described.
which is very much higher than the historical cost.
Management would like to report the machinery at 1. An entity reported financial statements in nominal
current replacement cost. pesos that have mixed rather uniform amount of
purchasing power.
ANSWER:
MONETARY UNIT ASSUMPTION ANSWER:
MONETARY UNIT
4. An entity has experienced a drastic reduction in
revenue by reason of a long dry spell in the area 2. A multinational entity published a complete set of
where the entity grows its tobacco. financial statements at least once a year, regardless
The management decided to wait until next year and of whether the financial results were good or bad.
present financial statements for a two-year period
rather than prepare now the traditional twelve-month ANSWER:
financial statements. TIME PERIOD

ANSWER: 3. The pesos of today can buy as much goods and

TIME PERIOD services as the pesos five years ago.

5. A subsidiary was exhibiting poor financial ANSWER:

performance for the current year. MONETARY PERIOD (HISTORICAL COST)
In an effort to increase the subsidiary’s reported
income, the parent entity purchased goods from the 4. An accounting entity is viewed as continuing in
subsidiary at twice the normal mark up. operation in the absence of evidence to the
contrary.
ANSWER:
ACCOUNTING ENTITY ANSWER:
GOING CONCERN
Page 98
Identify the assumption that is most clearly violated
5. An accounting practitioner mixed personal economic resource even if the probability that it will
accounting records with the records of the produce economic benefit is low.
accounting practice.
7. Explain control of an economic resource.
ANSWER:
ACCOUNTING ENTITY ANSWER:
Page 99 An entity controls an asset if it has the present
ability to direct the use of the asset and obtain the
CONCEPTUAL FRAMEWORK AND economic benefits that flow from it. It also includes
the ability to prevent others from using such asset
ACCOUNTING STANDARDS and therefore preventing others from obtaining the

CHAPTER V
economic benefits from the asset. It may arise if an
entity enforces legal rights.

8. Define a liability.

QUESTIONS: ANSWER:
14
1. Define the elements of financial statements. It is defined as the present obligation of an
entity to transfer an economic resource as a result of
ANSWER: past events. The new definition clarifies that a liability
The elements of financial statements refer to is the obligation to transfer an economic resource
the quantitative information reported in the financial and not the ultimate outflow of economic benefits.
statement of financial position and income
statement. Elements of financial statements are 9. What are the essential characterictics of a liability?
considered as the “building blocks” from which the
financial statements are constructed. ANSWER:
The essential characteristics of a liability are: The
2. What are the elements directly related to the entity has an obligation.
measurement of financial position? The entity liable must be identified. It is not necessary
that the payee or the entity to whom the obligation
ANSWER: is owed be identified.
The elements that are directly related to the The obligation is to transfer an economic resource.
measurement of financial position are: The obligation is a present obligation that exist as a
Asset result of past event.
Liability This means that a liability is not recognized until it is
Equity incurred.

3. What are the elements directly related to the 10. Explain an obligation.
measurement of financial performace?
ANSWER:
ANSWER: It is a duty or responsibility that an entity has no
The elements that are directly related to the practical ability to avoid. Obligations can either be
measurement of financial performace are: Income legal or constructive. It may be legally enforceable
Expense as a consequence of a binding contract or statutory
requirement.
4. Define an asset.
11. Explain transfer of economic resources.
ANSWER:
Asset is defined as a present economic ANSWER:
resource controlled by the entity as a result of past It may include:
events. It is a right that has the potential to produce Obligation to pay cash.
economic benefits. Obligation to deliver goods or noncash
resources.
5. What are the essential characteristics of an asset? Obligation to provide services at some future
time.
ANSWER: Obligation to exchange economic resources
The asset is a present economic resource. The with another party on unfavorable terms.
economic resource is a right that has the potential to Obligation to transfer an economic resource if
produce economic benefits. specified uncertain future event occurs.
The economic resource is controlled by the entity as a
result of past events. 12. Define income.

6. Explain a right to produce economic benefit. ANSWER:

It is defined as increases in assets or decreases in
ANSWER: liabilities that result in increases in equity other than
For potential to exist, it does not need to be those relating to contributions from equity holders. It
certain or even likely that the right will produce encompasses both revenue and gains.
economic benefits. It is only necessary that the right
already exists. A right can meet the definition of an
 2. C
3. C
13. Distinguish income from revenue. 4. D
5. B
ANSWER: Page 112
Income is increases in assets or decreases in liabilities
that result in increases in equity other than those
relating to contributions from equity holders. Revenue CONCEPTUAL FRAMEWORK AND
arises in the course of the ordinary regular activities ACCOUNTING STANDARDS

CHAPTER VI
and is referred to by variety of different names
including sales, fees, interest, dividends, royalties, and
rent.

14. Define an expense.

QUESTIONS:
ANSWER: 15
Expense is defined as decreases in assets or increases
in liabilities that result in decreases in equity, other 1. Explain recognition of the elements of financial
than those relating to distributions to equity holders. statements.

15. Distinguish expenses from loss. ANSWER:

It is a process of capturing for inclusion in the
ANSWER: financial statement an item that meets the definition
Expenses arise in the course of ordinary regular of an asset, liability, equity, income or expense.
activities include cost of goods sold, wages and
depreciation. 2. Explain the recognition criteria for the elements of
Losses do not arise in the course of the ordinary financial statements.
regular activities and include losses resulting from
disasters. ANSWER:
Page 107 It does not focus anymore on how people probable
economic benefits will flow to or from the entity and
PROBLEMS: that the cost can be measured reliably.

PROBLEM 5-1 MULTIPLE CHOICE (ACP) 3. What is derecognition?

1. A
2. B ANSWER:
3. A It is defined as the removal of all or part of a
recognized asset or liability from the statement of
4. A
financial position.
5. B
4. Explain the point of sale income recognition.
Page 108
ANSWER:
The basic principle of income recognition is that
6. B
income shall be recognized when earned. With
7. C
respect to sale of goods in the ordinary course of
8. D business, the point of sale is unquestionably the point
9. B of income recognition. The reason is that it is at the
10. A point of sale that the entity has transferred to the
Page 109 buyer the significant risks and rewards of ownership of
the goods. Stated differently, legal title to the goods
PROBLEM 5-2 MULTIPLE CHOICE (Conceptual passes to the buyer at the point of sale. Moreover, it
Framework) is at the point of sale that the entity has transferred
control of the goods to the customer.
1. D
2. D 5. What are the three applications of the matching
3. D principle?
4. D
5. B ANSWER:
Page 110 The matching principle has three applications,
namely:
6. A a. Cause and effect association
7. B b. Systematic and rational allocation
8. D c. Immediate recognition
9. C
10. C
Page 111 6. Explain cause and effect association principle.

ANSWER:
PROBLEM 5-3 MULTIPLE CHOICE (AICPA Adapted) This is actually the "strict matching concept.
This process, commonly referred to as the matching
1. B of cost with revenue, involves the simultaneous or
combined recognition of revenue and expenses that Fair value is an exit price or exit value.
result directly and jointly from the same transactions Fair value can be observed directly using
or events. market price of the asset or liability in an
active market.
7. Explain systematic and rational allocation In cases where fair value cannot be directly
principle. measured, an entity can use present value of cash
flows.
ANSWER: Fair value is not adjusted for transaction cost.
The reason for this principle is that the cost The reason is that such cost is a characteristic
incurred will benefit future periods and that there is an of the transaction and not of the asset or
absence of a direct or clear association of the liability.
expense with specific revenue.
When economic benefits are expected to arise over 12. Explain value in use.
several accounting periods and the association with
income can only be broadly or indirectly determined, ANSWER:
expenses are recognized on the basis of systematic 16
and allocation procedures. Value in use is the present value of the cash
flows that an entity expects to derive from the use of
8. Explain immediate recognition principle. an asset and from the ultimate disposal. Value in use
does not include transaction cost on acquiring the
ANSWER: asset but includes transaction cost on the disposal of
Under this principle, the cost incurred is the asset. Value in use is an exit price or exit value.
expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating 13. Explain fulfilment value.
certain costs with future revenue.
An expense is recognized immediately: ANSWER:
a. When an expenditure produces no Fulfillment value is the present value of cash
future economic benefit. that an entity expects to transfer in paying or settling
b. When cost incurred does not qualify a liability.
or ceases to qualify for recognition as an asset. Fulfillment value does not include transaction cost on
incurring a liability but includes transaction cost on
9. What are the two categories of measurement? fulfillment of a liability. Fulfillment value is an exit price
or exit value.
ANSWER:
The Revised Conceptual Framework mentions 14. Explain current cost.
two categories:
a. Historical cost ANSWER:
b. Current value Current cost of an asset is the cost of an
equivalent asset at the measurement date
10. Explain historical cost. comprising the consideration paid and transaction
cost.
ANSWER: Current cost of a liability is the consideration that
The historical cost or original acquisition cost of would be received less any transaction cost at
an asset is the cost incurred in acquiring or creating measurement date.
the asset comprising the consideration paid plus Similar to historical cost, current cost is also based on
transaction cost. The historical cost of a liability is the the entry price or entry value but reflects market
consideration received to incur the liability minus conditions on measurement date.
transaction cost. Simply stated, historical cost is the
entry price or entry value to acquire an asset or to 15. Explain the guideline in selecting an appropriate
incur a liability. An application of the historical cost measurement basis.
measurement is to measure financial asset and
financial liability at amortized cost. The amortized cost ANSWER:
reflects the estimate of future cash flows discounted In selecting a measurement basis for an asset
at a rate determined at initial recognition. or a liability and for the related income and expense,
it 1s necessary to consider the nature of the
11. Explain fair value. information that the measurement basis will produce.
In most cases, no single factor will determine which
ANSWER: measurement basis should be selected.
Fair value of an asset is the price that would be The relative importance of each factor will depend
received to sell an asset in an orderly on and circumstances.
transaction between market participants at The information produced by the measurement basis
measurement date. must be useful to the users of financial statements. To
Fair value of liability is the price that would paid achieve this, the information must be both relevant
to transfer a liability in an orderly and faithfully represented.
Historical cost is the measurement basis most
company adopted in preparing financial statements.
transaction between market participants at
the measurement date. Page 121

PROBLEM 6-7 IDENTIFICATION (IAA)

PROBLEM 6-1 MULTIPLE CHOICE (Conceptual
Framework) violated by the accounting practice described. Do
not use any answer more than once.
1. A
2. B 1. An entity charges the cost of new office
3. C equipment to expense in the year of purchase
4. B although the equipment is expected to help
5. D produce revenue for many years.
Page 122 ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION 2. An entity
PROBLEM 6-2 MULTIPLE CHOICE (IAA) records sales after inventory has been produced but
before it is sold.
1. A
ANSWER:
2. D
INCOME RECOGNITION
3. A
4. C 17
5. C 3. An entity having 150 accounts payable lists each
Page 123 account among the liabilities in the statement of
financial position.
PROBLEM 6-3 MULTIPLE CHOICE (AICPA Adapted)
ANSWER:
1. B CAUSE AND EFFECT
2. D
3. B
4. A 4. An entity does not report the major details about
5. B the shareholders’ equity.
Page 124
ANSWER:
PROBLEM 6-4 MULTIPLE CHOICE (AICPA Adapted) GOING CONCERN/MATERIALITY

1. D 5. An entity follows a policy of recording an item as

2. C an asset when the entity is in doubt whether the item
is an asset or an expense of the current period.
3. A
4. D
ANSWER:
5. A
PRUDENCE
Page 125
6. The accountant of the entity keeps a detailed
6. C
depreciation record on every asset no matter how
7. B
small its value.
8. B
9. B ANSWER:
10. B MATERIALITY
Page 126
7. A construction firm signed a three-year contract to
PROBLEM 6-5 MULTIPLE CHOICE (IAA) build a skyway connecting Alabang and Tagaygay
City. The firm immediately records the full contract
1. B price as revenue.
2. A
3. D ANSWER:
4. D INCOME RECOGNITION
5. B
Page 127 8. Competition has taken away much of the business
of an airline. The airline is unwilling to report its plans
6. D to sell half of its fleet of aircraft.
7. C
8. C ANSWER:
9. D STANDARD ADEQUATE DISCLOSURE
10. C
Page 128 9. A department store changes accounting method
every year in order to report a higher net income
PROBLEM 6-6 MULTIPLE CHOICE (Conceptual possible under accounting standards.
Framework)
ANSWER:
1. D CONSISTENCY
2. D
3. D
4. D 10. The damaged inventory of a department store is
5. B being written down. The manager bases the write
Page 129 down on subjective opinion in order to minimize
income tax.
Identify the principle or concept that is most clearly
ANSWER: ANSWER:
INCOME RECOGNITION CAUSE AND EFFECT ASSOCIATION
Page 130
10. The lower of cost and net realizable value is used
PROBLEM 6-8 IDENTIFICATION (IAA) to measure inventory.

Indicate the principle, concept or constraint that best ANSWER:

supports each of the following statements. Do not use 18
an answer more than once. CONSERVATISM
Page 131
1. An entity records a new machine at the cash
equivalent price paid. PROBLEM 6-11 DISCUSSION (IAA)

ANSWER: Indicate the accounting concept that is the most

applicable.

2. A large entity decides that whenever an asset has 1. Timely financial information with predictive and
a cost of less than P10,000, the cost will be charged to confirmatory value is presented.
expense even though the asset may benefit several
accounting periods. ANSWER:
RELEVANCE
ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION 2. Error-free financial information is presented.

3. The entity allocates the cost of a patent to the ANSWER:

accounting periods in which it helps to produce the FREE FROM ERROR
revenue. 3. The same accounting policies are applied from
period to period.
ANSWER:
MATCHING PRINCIPLE ANSWER:
CONSISTENCY
4. The entity estimates and records interest expense
on a 5-year noninterest-bearing not payable. 4. Notes to financial statements are prepared in
order to have a fair presentation.
ANSWER:
FAIR VALUE ANSWER:
NOTES TO FINANCIAL STATEMENTS
5. Subscriptions received in advance by a magazine
publishing entity are treated as deferred revenue until 5. The annual depreciation is recognized.
the magazines are published.
ANSWER:
ANSWER:
EXPENSE RECOGNITION 6. An allowable exception to the point of sale is the
recording and reporting of inflows at the end of
6. Users have trouble making interperiod comparisons production.
when an entity changes accounting principles from
one year to the next. ANSWER:
POINT OF SALE INCOME RECOGNITION
ANSWER:
CONSISTENCY 7. All repair tools are expensed when purchased
even if the useful life is more than one year.
7. Many users of financial statements prefer
accounting principles such as accelerated ANSWER:
depreciation that tend to state income on the “low SYSTEMATIC AND RATIONAL ALLOCATION
side”.
8. A patent is capitalized and amortized over the
ANSWER:
period benefited.
CONSERVATISM
ANSWER:
HISTORICAL COST
8. The entity should always report the important
details about share capital, for example, the number
of shares authorized, shares issued, shares in treasury,
9. Rent paid in advance is recorded as prepaid rent
subscribed shares and par value.
expense.
ANSWER:
ANSWER:
FAITHFUL REPRESENTATION
FULFILLMENT VALUE
9. An allowance for doubtful accounts is established.
10. Events after the end of reporting are either
adjusted or disclosed.
ANSWER: ANSWER:
STANDARD ADEQUATE DISCLOSURE Page 134 The presentation and disclosure can be an
effective communication tool about the information
PROBLEM 6-12 DISCUSSION (IAA) in financial
19
An entity provided the following situations: statements.
A reporting entity communicates information about
1. The entity’s accountant increased the carrying its assets, liabilities, equity, income and expenses by
amount of a patent from the original cost of presenting and disclosing information in the financial
P1,000,000 to the recently appraised value of statements.
P3,000,000. Effective communication of information in financial
statements makes the information more relevant and
ANSWER: contributes to a faithful representation of an entity's
DISAGREE, THIS IS A CASE OF FRAUD AND assets liabilities, income and expenses.
UNFAITHFULLY REPRESENTED REPORT. Effective communication of information in financial
statements also enhances the understandability and
2. The entity paid for the personal travel of the chief comparability of information in the financial
executive officer and charged travel expense. statements.
Effective communication in financial statements is
ANSWER: supported by not duplicating information in different
DISAGREE, THE ENTITY AND PERSONAL EXPENSES parts of the financial statements,
SHOULD BE SEPARATED. Duplication is usually unnecessary and can make
financial statements less understandable.
3. At the end of the current reporting period, the
entity received an order from a customer. The 2. Explain classification of assets, liabilities and equity.
merchandise will be shipped in early next year.
Because the sale was made to a long-time customer ANSWER:
and the invoice was paid in the current year, the Classification is the sorting of assets, liabilities,
controller recorded the sale in the current year. equity, income and expenses on the basis of shared
or similar characteristics.
ANSWER: Classifying dissimilar assets, liabilities, equity, income
and expenses can obscure relevant information,
4. In the middle of the current year, the entity paid a reduce understandability and comparability and
certain amount to an insurance company for one may not provide a faithful representation of financial
year comprehensive insurance coverage. The entity information.
recorded the entire expenditure as an expense in It may be necessary to classify components of equity
current year. separately if such components are subject to legal,
regulatory and other requirements.
ANSWER: Thus, ordinary share capital, preference share
capital, share premium and retained earnings
should be disclosed separately.
5. The entity included a note in the financial
statements that described a pending lawsuit against 3. Explain classification of income and expenses.
the entity.
ANSWER:
ANSWER: Income and expenses are classified as
components of profit loss and components of other
comprehensive income.
REQUIRED: The Revised Conceptual Framework has introduced
the term Statement of financial performance to refer
State whether you agree or disagree with the financial to the statement of profit or loss together with the
reporting practice. Briefly explain your answer. statement presenting other comprehensive income.
The statement of profit or loss is the primary source of
information about an entity's financial performance
Page 135 tor the reporting period.
Al income and expenses should be appropriately
classified and included in the statement of profit or
loss.

CONCEPTUAL FRAMEWORK AND However, there are certain items of income and
ACCOUNTING STANDARDS expenses that are presented outside of profit or loss

CHAPTER VII
but included in other comprehensive income. The
components of other comprehensive income are
subsequently recycled or reclassified to profit or loss or
retained earnings.
QUESTIONS:
4. What is aggregation?
1. Explain presentation and disclosure as an effective
communication tool. ANSWER:
Aggregation is the adding together of assets,
liabilities, equity, income and expenses that have Under this concept, net income occurs "when the
similar or shared characteristics and are included in physical productive capital of the entity at the end of the
the same classification. year exceeds the physical productive capital at the
Aggregation makes information more useful by beginning of the period, also after excluding distributions
summarizing a large volume of detail. However, to and contributions from 20
aggregation may conceal some of the details. owners during the period.
Page 142
5. Explain capital maintenance.
PROBLEM 7-1 MULTIPLE CHOICE (Conceptual
ANSWER: Framework)
The capital maintenance approach means
that net income occurs only after the capital used 1. D
from the beginning of the period is maintained. In 2. A
other words, net income is the amount an entity can 3. C
distribute to its owners and be as "well-off" at the end 4. A
of the year as at the beginning.
5. D
Page 143
6. Distinguish return on capital and return of capital.
PROBLEM 7-2 MULTIPLE CHOICE (Conceptual
ANSWER:
Framework)
The capital maintenance approach means
that net income occurs only after the capital used
1. A
from the beginning of the period is maintained. In
2. B
other words, net income is the amount an entity can
distribute to its owners and be as "well-off" at the end 3. A
of the year as at the beginning. 4. D
5. C
7. Explain financial capital. Page 144

ANSWER:
Financial capital is the monetary amount of CONCEPTUAL FRAMEWORK AND
the net assets contributed by shareholders and the ACCOUNTING STANDARDS
amount of the increase in net assets resulting from
earnings retained by the entity.
Financial capital is the traditional concept based on
historical cost and adopted by most entities.
CHAPTER VIII
8. Explain the net income under the financial capital QUESTIONS:
concept.
1. What are financial statements?
ANSWER:
Under the financial capital concept, net ANSWER:
income occurs when the nominal amount of the net
Financial statements are the means by which
assets at the end of the year exceeds the nominal
the information accumulated and processed in
amount of the net assets at the beginning of the
financial accounting is periodically communicated to
period, after excluding distributions to and
the users.
contributions by owners during the period."
The financial statements are the end product or main
output of the financial accounting process. Financial
9. Explain physical capital.
statements are a structured financial representation
of the financial position and financial performance of
ANSWER: an entity.
Physical capital is the quantitative measure of
the physical productive capacity to produce goods 2. What are the components of financial statements?
and services.
The physical productive capacity may be based on,
ANSWER:
for example, units of output per day or physical
A complete set of financial statements
capacity of productive assets to produce goods and
comprises the following components:
services.
1. Statement of financial position
2. Income statement
3. Statement of comprehensive income
This concept requires that productive assets be
measured at current cost, rather than historical cost. 4. Statement of changes in equity
Productive assets include inventories and property, 5. Statement of cash flows
plant and equipment. 6. Notes, comprising a summary of significant
The current costs for these productive assets must be accounting, accounting policies and other
maintained in order that physical capital is also explanatory notes
maintained.
3. Explain the objective of financial statements.
10. Explain the net income under the physical capital
concept. ANSWER:
The objective of financial statements is to
ANSWER: provide information about the financial p0sition,
financial performance and cash flows of an entity
that is useful to a wide range of users in making fiscal year or operating cycle or financial year.
economic decisions.
9. What are the line items for current assets?
4. What is the frequency of reporting of financial
statements? ANSWER:
Current assets are usually listed in the order of
ANSWER: liquidity PAS 1, paragraph 54, provides that as a
Financial statements shall be presented at minimum, the line items under current assets are: a
least annually. Cash and cash equivalents
When an entity's end of reporting period changes, b. Financial assets at fair value such as trading
and financial statements are presented for a period securities and other investments in quoted equity
longer or shorter than one year, an entity shall instruments
disclose: c. Trade and other receivables
a. The period covered by the financial statements. b. d. Inventories
The reason for using a longer or shorter period. c. The e. Prepaid expenses
fact that amounts presented in the financial
statements are not entirely comparable. 10. Define noncurrent assets.

5. Define a statement of financial position. ANSWER:

The caption "noncurrent assets" is a residual
ANSWER: definition. PAS 1, paragraph 66, simply states that "an
A statement of financial position is a formal entity shall classify all other assets not classified as
statement showing the three elements comprising current as
financial position, namely assets, liabilities and equity. noncurrent". In other words, what is not included in
Investors, creditors and other statement users analyze the definition of current assets is deemed excluded.
the statement of financial position to evaluate such All others are classified as noncurrent assets.
factors as liquidity, solvency and the need of the
entity for additional financing.
11. Identify the non-current assets.

ANSWER:
6. What are the essential characteristics of an asset? Accordingly, noncurrent assets include the
following:
ANSWER: a. Property, plant and equipment
Assets are classified only into two, namely b. Long-term investments
current assets and noncurrent assets. c. Intangible assets
When an entity supplies go0ods or services within a d. Deferred tax assets
clearly identifiable operating cycle, the separate e. Other noncurrent assets
classification of current and noncurrent assets is a
useful information by distinguishing between net 12. What are the essential characteristics of a liability?
assets that are continuously circulating as working
capital from the not assets used in long-term ANSWER:
operations.
A liability has three essential characteristics:
The operating cycle of an entity is the time between the (a) it embodies a present duty or responsibility to one
acquisition of assets for proce8sing and their realization in or more other entities that entails settlement by
cash or cash equivalents. When the entity's normal probable future transfer or use of assets at a specified
operating cycle is not clearly 21 or determinable date, on occurrence of a specified
identifiable, the duration is assumed to be twelve event, or on demand,
months. (b) the duty or responsibility obligates a particular
entity, leaving it little or no discretion to avoid the
7. What are the classification of assets? future sacrifice, and
(c) the transaction or other event obligating the
ANSWER: entity has already happened
PAS 1, paragraph 66, provides that an entity
shall classify an asset as current when: 13. What are the classification of liabilities?
a. The asset is cash or cash equivalent
unless the asset is unrestricted to settle a liability for ANSWER:
more than twelve months after the reporting period. PAS 1, paragraph 69, provides that an entity
b. The entity holds the asset primarily shall classify a liability as current when:
for the purpose of trading. a. The entity expects to settle the
c. The entity expects to realize the liability within the entity's normal operating cycle. b.
asset within twelve months after the reporting period. The entity holds the liability primarily
d. The entity expects to realize the for the purpose of trading.
asset or intends to sell or consume it within the entity's c. The liability is due to be settled
normal operating cycle. within twelve months after the reporting period. d. The
entity does not have an
8. Define current assets. unconditional right to defer settlement of the liability
for at least twelve months after the reporting period.
ANSWER:
any asset which can reasonably be expected 14. Define current liabilities.
to be sold, consumed, or exhausted through the
normal operations of a business within the current ANSWER:
 current liabilities are often understood as all recognition.
liabilities of the business that are to be settled in cash Notes contain information in addition to that
within the fiscal year or the operating cycle of a given presented in the statement of financial position,
firm, whichever period is longer. income statement; statement of comprehensive
income, statement of changes in equity and
15. What are the line items for current liabilities? statement of cash flows.
In other words, notes to financial statements are used
ANSWER: to report information that does not fit into the body
PAS 1, paragraph 54, provides that as a of the financial statements in order to enhance the
minimum, the face of the statement of financial understandability of the financial statements.
position shall include the following line items for
current liabilities:
a. Trade and other payables 20. Explain the two forms of statement of financial?
b. Current provisions
c. Short-term borrowing ANSWER:
d. Current portion of long-term debt In practice, there are two customary forms in
e. Current tax liability presenting the statement of financial position, namely:
a. Report form

16. Explain the treatment of currently maturing long

term debt. 6. D
7. D
ANSWER: 8. C
A liability which is due to be settled within 9. D
twelve months after the reporting period is classified 10. C
as current, even if: Page 174
a. The original term was for a period
longer than twelve months. This form sets forth the three major sections in a
b. An agreement to refinance or to downward sequence of assets, liabilities and equity. b.
reschedule payment on a long-term basis is Account form
completed after the reporting period and before the As the title suggests, the presentation follows that of
financial statements are authorized for issue. an account, meaning, the assets are shown on the
However, if the refinancing on a long-term basis is left side and the liabilities and equity on the right side
completed on or before the end of the reporting of the statement of financial position.
period, the refinancing is an adjusting event and Page 161
therefore the obligation is classified as noncurrent.
22 PROBLEM 8-5 MULTIPLE CHOICE (PAS 1)
17. Explain the effect of breach of covenants on the 1. B
classification of liability. 2. D
3. A
ANSWER: 4. A
PAS 1, paragraph 74, provides that the liability 5. D
is classified as current even if the lender has agreed, Page 166
after the reporting period and before the statements
are authorized for issue, not to demand payment as PROBLEM 8-6 MULTIPLE CHOICE (PAS 1)
a consequence of the breach. 1. C
This liability is classified as current because at 2. A
reporting date the borrower does not have an 3. A
unconditional right to defer payment for at least 4. D
twelve months after the reporting period. Page 167
However, Paragraph 75 provides that the liability is
classified as noncurrent if the lender has agreed on 5. A
or before the end of reporting period to provide a 6. A
grace period ending at least twelve months after the 7. A
end of reporting period.
8. A
Page 168
18. What are the elements comprising the equity of a
corporation?
9. C
ANSWER:
10. C
1. Paid in capital or contributed capital
Page 169
2. retained earnings
3. treasury stock
PROBLEM 8-7 MULTIPLE CHOICE (IFRS)
19. What is the meaning of “notes to financial
1. D
statements”?
2. C
3. C
ANSWER:
4. A
Notes to financial statements provide
Page 170
narrative description or disaggregation of items
presented in the financial statements and
information about items that do not qualify for
 QUESTIONS:
5. C
6. A 1. Define an income statement.
7. C
8. D ANSWER:
Page 171 An income statement is à formal statement
showing the financial performance of an entity for a
given period of time.
9. A The financial performance of an entity is primarily
10. A measured in terms of the level of income earned by
Page 172 the entity through the effective and sufficient
utilization of its resources.
PROBLEM 8-8 MULTIPLE CHOICE (AICPA The financial performance is also known as the results
Adapted) 1. A of operations of the entity.
2. D The transaction approach is the traditional
3. D preparation of the income statement in conformity
4. A with accounting standards.
5. A
Page 173 2. Explain the usefulness of an income statement.
PROBLEM 8-9 MULTIPLE CHOICE (AICPA Adapted)
ANSWER:
1. A The income statement for a period presents
2. D the income, expenses, gains, losses and net income
3. D or loss recognized during the period,
4. D Information about financial performance is useful in
predicting future performance and ability to
5. D
generate future cash flows.
Page 175
3. Define comprehensive income.
PROBLEM 8-10 MULTIPLE CHOICE (IAA)
23 ANSWER:
1. C
Comprehensive income is the change in
2. D equity during a period resulting from transactions and
3. A other events, other than changes resulting from
4. D transactions with owners in their capacity as owners.
5. B Accordingly, comprehensive income includes:
Page 176 a. Components of profit or loss
b. Components of other
PROBLEM 8-11 MULTIPLE CHOICE (IAA) comprehensive income

1. C 4. Distinguish components of profit or loss and

2. C components of other comprehensive income.
3. D
4. D ANSWER:
5. D The term profit or loss is the total of income less
Page 177 expenses, excluding the components of other
comprehensive income. In other words, this is the
6. C "bottom line" in the traditional income statement. An
7. D entity may use "net income" or "net loss" to describe
8. B profit or loss.
9. C
10. B 5. Identify components of other comprehensive
Page 178 income.

PROBLEM 8-12 MULTIPLE CHOICE (IAA) ANSWER:

Oher comprehensive income comprises items
1. B of income and expenses including reclassification
2. D adjustments that are not recognized in profit or loss as
required or permitted by Philippine Financial
3. D
Reporting Standards.
4. D
The components of "other comprehensive income"
5. B
include the following:
Page 179
1. Unrealized gain or loss on equity investment
measured at fair value through other comprehensive
CONCEPTUAL FRAMEWORK AND income
ACCOUNTING STANDARDS 2. Unrealized gain or loss on debt investment
measured at fair value through other comprehensive

CHAPTER IX income.
3. Gain or loss from translation of the financial
statements of a foreign operation comprehensive income, namely:
4. Revaluation surplus during the year. 1. Two statements:
5. Unrealized gain or loss from derivative a. An income statement showing the
contracts designated as cash flow hedge components of profit or loss.
6. "Re measurements" of defined benefit plan, b. A statement of comprehensive
including actuarial gain or loss income beginning with profit or loss as shown in the
7. Change in fair value attributable to credit income statement plus or minus the components of
risk of a financial liability designated at fair value other comprehensive income.
through profit 2. Single statement of comprehensive income
or loss. This is the combined statement
24 showing the components of profit or loss and
6. Explain the presentation of other comprehensive components of other comprehensive income in a
income. single statement.

ANSWER: 11. Identify the common sources of income.

PAS 1, paragraph 82A, provides that the
statement of comprehensive income shall present ANSWER:
line items for amounts of other comprehensive a. Sales of merchandise to customers
income during the period classified by nature. b. Rendering of services
The line items for amounts of OCI shall be grouped as c. Use of entity resources
follows: d. Disposal of resources other than products
a. OCI that will be reclassified
subsequently to profit or loss when specific conditions 12. Identify the components of expenses.
are met.
b. OCI that will not be reclassified ANSWER:
subsequently to profit or loss but to retained earnings. Components of expense
a. Cost of goods sold or cost of sales
7. What are the components of other comprehensive b. Distribution costs or selling expenses
income that are subsequently reclassified to profit or
c. Administrative expenses
loss?
d. Other expenses
e. Income tax expenses
ANSWER:
OCI that will be reclassified to profit or loss
13. What are the formula in computing cost of goods
a. Unrealized gain or loss on debt
sold of a merchandising concern?
investment measured at fair value through other
comprehensive income. b. Gain or loss from
ANSWER:
translating
Cost of goods sold of merchandising
financial statements of a foreign operation.
concern Beginning inventory xx Net purchases xx
c. Unrealized gain or loss on derivative
contracts designated as cash flow hedge.
Goods available for sale xx Ending
inventory (xx)
8. What are the components of other comprehensive
income that are not subsequently reclassified to profit
or loss?
Cost of goods sold xx
ANSWER:
OCI that will be reclassified to retained Gross purchases xx Freight in xx
earnings
a. Unrealized gain or loss on equity investment
Total xx
measured at fair value through other comprehensive
Purchase returns,
income.
allowances and discounts (xx) Net
b. Revaluation surplus during the year, the
realization of the revaluation surplus is through
purchases xx
retained earnings.
c. Re measurements of defined benefit plan,
including actuarial gain or loss.
d. Change in fair value attributable to credit
risk of a financial liability designated at fair value
14. What is the formula of computing the cost of
through profit or loss.
goods sold of a manufacturing entity?

9. Explain the reclassification of the components of ANSWER:

other comprehensive income that are not reclassified Cost of goods sold of manufacturing
to profit or loss. concern Beginning raw materials xx
Net purchases xx
ANSWER:
Raw materials available for use xx
10. Explain the two options of presenting Ending raw materials (xx)
comprehensive income.
Raw materials used xx
ANSWER: Direct labor xx
An entity has two options of presenting Factory overhead xx
 total of profit or loss and other comprehensive
Total manufacturing cost xx income.
25
Beginning goods in process xx 19. Explain the two forms of income statements.

Total cost of goods in process xx ANSWER:

Ending goods in process (xx) Functional presentation
This form classifies expenses according
Cost of goods manufactured xx to their function as part of cost of goods sold,
Beginning finished goods xx distribution costs, administrative expenses and other
expenses.
Goods available for sale xx Natural presentation
Ending finished goods (xx) The natural presentation is referred to
as the nature of expense method. Under this form,
Cost of goods sold xx expenses are aggregated according to their nature
and not allocated among the various functions within
15. Define distribution cost. the entity.

ANSWER: 20. Which form of income statement is required?

Distribution costs constitute costs which are
directly related to selling, advertising and delivery of ANSWER:
goods to customers. PAS 1 does not prescribe any format.
Page 198 Paragraph 105 simply states that because each
method of presentation has merit for different types of
entities, management is required to select the
16. Define administrative expense. presentation that is reliable and more relevant.

ANSWER: 21. What is a single statement of comprehensive

Administrative expenses constitute cost of income?
administering the business.
Administrative expenses ordinarily include all ANSWER:
operating expenses not related to selling and cost of Another option in presenting the components
goods sold. of profit or loss and components of other
comprehensive income 1s to prepare a single
17. Define other expenses. statement of comprehensive income,
Again, this single statement is the combined income
ANSWER: statement and statement of comprehensive income,
Other expenses are those expenses which are Using the preceding data, the single statement of
not directly related to the selling and administrative comprehensive income following the "functional
function. presentation" may appear as follows:

18. As a minimum, what are the line items that are 22. Define a statement of retained earnings.
reported on the face of the income statement and
statement of ANSWER:
comprehensive income? The statement of retained earnings shows the
changes affecting directly the retained earnings of
ANSWER: an entity and relates the income statement to the
PAS 1, paragraph 82, provides that as a statement of financial position.
minimum, the income statement and statement of
comprehensive income shall include the following
line items: 23. What are the common items that directly affect
a. Revenue retained earnings?
b. Gain and loss from the de recognition of financial
asset measured at amortized cost as required by FRS ANSWER:
9. The important data affecting the retained
earnings that should be clearly disclosed in the
statement of retained earnings are:
a. Profit or loss for the period
c. Finance cost b. Prior period errors
d. Share in income or loss of associate and joint c. Dividends declared and paid to
venture accounted for using the equity method e. shareholders
Gain or loss on the reclassification of financial asset d. Effect of change in accounting policy
from amortized cost to fair value profit or loss f. Gain or e. Appropriation of retained earnings
loss on the reclassification of financial asset from fair
value other comprehensive income to fair value profit 24. Define a statement of changes in equity.
or loss.
g. Income tax expense ANSWER:
h. A single amount comprising discontinued 26
operations The statement of changes in equity is a basic
i. Profit or loss for the period statement that shows the movements in the elements
j. Total other comprehensive income or components of the shareholders' equity.
k. Comprehensive income for the period being the The statement of retained earnings is no longer a
required basic statement but it is a part of the
statement of changes in equity. Problem 9-19 MULTIPLE CHOICE (AICPA Adapted)

25. Define a statement of cash flow. 1. B

2. B
ANSWER: 3. A
A statement of cash flows is a component of 4. D
financial statements summarizing the operating, 5. D
investing and financing activities of an entity. Page 217

In simple language, the statement of cash flows Problem 9-20 MULTIPLE CHOICE (IAA)
provides information about the cash receipts and
cash payments of an entity during a period. 1. D
An entity shall prepare a statement of cash flows and 2. D
present it as an integral part of the financial 3. C
statements for each period for which financial
4. A
statements are presented.
5. C
The primary purpose of a statement of cash flows is to
Page 218
provide relevant information about cash receipts
and cash payments of an entity during a period.
CONCEPTUAL FRAMEWORK AND
Page 199 ACCOUNTING STANDARDS
Problem 9-15 MULTIPLE CHOICE (PAS 1)
1. B CHAPTER X
2. C
3. B QUESTIONS:
4. B
5. D 1. Define a statement of cash flows.
Page 211
ANSWER:
6. A A statement of cash flows is a component of
7. D financial statements summarizing the operating,
8. A investing and financing activities of an entity. In simple
9. D language, the statement of cash flows provides
10. D information about the cash receipts and cash
Page 212 payments of an entity during a period. An entity shall
prepare a statement of cash flows and present it as
Problem 9-16 MULTIPLE CHOICE (IFRS) an integral part of the financial statements for each
1. C period for which financial statements are presented.
2. C
3. D
2. Explain the primary purpose of a statement of cash
4. B
flows.
5. A
Page 213
ANSWER:
The primary purpose of a statement of cash flows is
to provide relevant information about cash receipts
Problem 9-17 MULTIPLE CHOICE (IAA)
and cash payments of an entity during a period.
1. D
2. C
3. Define cash.
3. D
4. C ANSWER:
5. B Cash includes more than just the physical traditional
Page 214 bills and coins. Cash can include any other
currencies, as well as undeposited cheques and
6. C amounts in a current account.
7. A
8. A 4. Define cash equivalents.
9. D 27
10. B ANSWER:
Page 215 Cash equivalents are short-term highly liquid
investments that are readily convertible to known
Problem 9-18 MULTIPLE CHOICE (IAA) amount of cash and which are subject to an
insignificant risk of change in value.
1. C
2. B 5. What are the three classifications of cash flows?
3. A
4. D ANSWER:
5. A The statement of cash flows shall report cash
Page 216 flows during the period classified as operating,
investing and financing activities.
 shall be classified as financing cash flow because it is
6. Explain operating activities, investing activities and a cost of obtaining financial resources.
financing activities. Alternatively, dividend paid may be classified as
operating cash flow in order to assist users to
ANSWER: determine the ability of the entity to pay dividends
Operating activities are the cash flows derived out of operating cash flows.
primarily from the principal revenue producing
activities of the entity. 10. Explain the treatment of income taxes in a
statement of cash flows.
Investing activities are the cash flows derived from
the acquisition and disposal of long-term assets and ANSWER:
other investments not included in cash equivalent. PAS 7, paragraph 35, provides that cash flows
arising from income taxes shall be separately
Financing activities are the cash flows derived from disclosed as cash flows from operating activities
the equity capital and borrowings of the entity. unless they can be specifically identified with
investing and financing activities.
7. Explain the treatment of noncash investing and Tax cash flows are often difficult to match to the
financing transactions. originating underlying transaction, so most of the time
all tar cash flows are classified as arising from
ANSWER: operating activities.
PAS 7, paragraph 43, provides that investing Page 227
and financing transactions that do not require use of
Cash or cash equivalent shall be excluded from the Problem 10-10 MULTIPLE CHOICE (PAS 7)
statement of cash flows.
Noncash investing and financing transactions shall) 1. C
be disclosed also where in the financial statements 2. B
either in the notes to financial statement or in a 3. A
separate schedules or in a way that provide all 4. C
relevant information about these transactions. 5. C
Page 234
8. Explain the treatment of interest paid and interest
received in a statement of cash flows. 6. D
7. D
ANSWER: 8. B
PAS 7, paragraph 33, provides that interest 9. D
paid and interest received shall be classified as 10. B
operating cash flows because such items enter into Page 235
the determination of net income or loss
Problem 10-11 MULTIPLE CHOICE (IFRS)
Alternatively, interest paid may be classified as financing
1. A
cash flow because it is a cost of obtaining financial
2. C
resources.
3. A
Alternatively, interest received may be classified as
investing cash flow because it is a return on investment. 4. A
For a financial institution, interest paid and interest 5. D
received are usually classified as operating cash flows. Page 236
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
Problem 10-12 MULTIPLE CHOICE (IFRS)

1. D
2. C
CHAPTER XI
3. A QUESTIONS:
4. B
5. C 28
Page 237 1. Define accounting policies.

ANSWER:
9. Explain the treatment of dividend received and
dividend paid in a statement of cash flows. Accounting policies are the specific principles,
bases, conventions, rules and practices
ANSWER: applied by an entity in preparing and
PAS 7, paragraph 33, provides that dividend presenting financial statements. These policies
received shall be classified as operating cash flow are essential for a proper understanding of the
because it enters into the determination of net information contained in the financial
income. statements.

Alternatively, dividend received may be classified as 2. Define a change in accounting policy.

investing cash flow because it is a return on
investment. ANSWER:
PAS 7, paragraph 34, provides that dividend paid
 Change in the method of inventory pricing from
Accounting policies must be applied the FIFO to weighted average method.
consistently for similar transactions and events. Change in the method of accounting for long
And a change in this policy shall be made term construction contract from cost recovery
only when: a. Required by an accounting method to percentage of completion
standard. method.
The change will result to more relevant The initial adoption of policy to carry assets at
and faithfully represented information revalued amount is a change in accounting
policy to be dealt with as revaluation.
about the financial position, financial
Change from cost model to fair value model in
performance and cash flows of the
measuring investment property.
entity.
Change to a new policy resulting from the
requirement of a new PFRS
3. Give examples of change in accounting policy.

ANSWER:

4. When is a change in accounting policy 9. Define prior period errors.

allowed?
ANSWER:
ANSWER: A change in accounting policy shall be
made only when:
subsequent development.

Required by an accounting standard. 8. How is a change in accounting estimate reported?

The change will result in more relevant ANSWER:

and faithfully represented information
about the financial position, financial The effect of a change in accounting
performance and cash flows of the estimate shall be recognized currently
entity. and prospectively by including it in
income or loss of:
5. How is a change in accounting policy reported?
(a) the period of change if the change
ANSWER: affects that period only, and
(b) the period changes and future periods if
A change in accounting policy required by a the change affects both. A change in accounting
standard or an interpretation shall be applied estimate shall not be accounted for by restating
in accordance with the transitional provisions amounts reported in financial statements prior
therein. If the standard or interpretation periods.
contains no transitional provisions or if an Prior period errors are omissions and
accounting policy is changed voluntarily, the misstatements in the financial statements for
change shall be applied retrospectively or one or more periods arising from a failure to
retroactively. use or misuse of reliable information. Errors
may occur as a result of mathematical
6. Explain the adoption of an accounting policy in the mistakes, mistakes in applying accounting
absence of an accounting standard. policies, misinterpretation of facts, fraud or
oversight.
ANSWER:
10. Explain the treatment of prior period
In the absence of accounting standard that
specifically applies to a transaction or event, errors. ANSWER:
management shall use judgment in selecting
an applying an accounting policy that results 29
in information that is relevant to the economic Prior period errors shall be corrected
decision making needs of users and faithfully retrospectively by adjusting the opening
represented. balances of retained earnings and affected
assets and liabilities. An estimate may need
7. Define a change in accounting estimate. revision if changes occur regarding the
circumstances on which the estimate was
ANSWER: based or as a result of new information, more
experience or subsequent development.
A change in accounting estimate is a normal
or recurring correction or adjustment of an Page 245
asset or liability which is the result of the use of
an estimate. An estimate may need revision if PROBLEM 11-11 MULTIPLE CHOICE (IFRS)
changes occur regarding the circumstances 1.B
on which the estimate was based or as a result 2.A
of new information, more experience or 3.D
 Page 251 Page 254

4.B PROBLEM 11-13 MULTIPLE CHOICE (AICPA

5.C Adapted) 1. D
6.A 2. A
7.D 3. D
Page 252 4. C
5. A
8.D Page 255
9.D
10.C 1. A
Page 253 2. B
3. D
PROBLEM 11-12 MULTIPLE CHOICE (AICPA Page 256
Adapted) 1. D
2. C 4. D
3. C 5. A
4. C Page 257
5. D

PROBLEMS
CONCEPTUAL FRAMEWORK AND
Problem 12-1 (IFRS)
ACCOUNTING STANDARDS

CHAPTER XII
when the board of directors reviews the financial
statements and authorizes them issue. In some cases,
an entity is required to submit the financial statements
to the shareholders for approval after the financial
QUESTIONS:
statements have been issued. In such cases, the
financial statements are authorized for issue on the
1. Define events after the reporting period.
date of issue by the board of directors and not on the
ANSWER: date when shareholders approve the financial
statements.
PAS 10, paragraph 3, defines events Page 262
after reporting period as those events, whether
favorable and unfavorable, that occur between the The audit of Anne Company for the year ended
end of reporting period and the date on which the December 31, 2020 was completed on March 1, 2021.
financial statements are authorized for issue. These
The financial statements were signed by the
events are also known as subsequent events.
managing director on March 15, 2021 and approved
by the shareholders on March 31, 2021.
2. What are the type of events after reporting period?
The following events have occurred:
ANSWER:

a. Adjusting events 1. On the January 15, 2021, a customer owing

P900,000 to Anne filed for bankruptcy.
b. Nonadjusting events

3. Explain adjusting events after reporting period. The financial statements include an allowance for 30
doubtful accounts pertaining to the customer only of
ANSWER: P100,000.

2. The entity’s issued share capital comprised 100,000

Adjusting events after the reporting
ordinary shares with P100 par value.
period are those that provide evidence of conditions
that exist at the end of reporting period.
The entity issued additional 25,000 shares on March 1,
2021 at par value.
4. Explain nonadjusting events after reporting period.
3. Equipment with carrying amount of P525,000 was
ANSWER:
destroyed by fire on December 15, 2020.

Nonadjusting events after reporting The entity has booked a receivable of P400,000 from
period are those that are indicative of conditions that the insurance entity.
arise after the end of reporting period.
After the insurance entity completed the investigation
5. When are financial statements considered on February 1, 2021, it was discovered that the fire
authorized for issue? took place due to negligence of the machine
operator.
ANSWER:
As a result, the insurer’s liability was zero on the
Financial statements are authorized for issue
claim. REQUIRED:
NORWAY COMPANY
PREPARE ADJUSTING ENTRIES ON DECEMBER 31, 2020
FOR THE EVENTS AFTER REPORTING PERIOD. 1. The receivable of P400,000 is a nonadjusting event
because the amount is still fully collectible
PROBLEM 12-1
2. The change in fair value of the investments on
February 15, 2021 is a nonadjusting event because
ANNE COMPANY trading investments are measured at fair value at
every year-end.
1. Doubtful accounts
800,000
3. Loss on litigation
Allowance for doubtful accounts
3,000,000
800,000
Estimated liability
3,000,000
2. The issuance of additional shares on march 1, 2021
is a nonadjusting event
4. Doubtful accounts
3,150,000
3. Loss on claim
Allowance for doubtful accounts (3,500,000 x
400,000
90%) 3,150,000
Claim receivable
400,000
Page 264
Page 263

PROBLEM 12-5 MULTIPLE CHOICE (IAS 10)

Problem 12-2 (IFRS)
1. C
Norway Company reported that the year-end is
2. A
December 31, 2020 and the financial statements are
3. A
authorized for issue on March 15, 2021.
4. A
Page 266
1. On December 31, 2020, Norway Company had a
receivable of P400,000 from a customer that is due 60
days after the end of reporting period. On January 15, PROBLEM 12-6 MULTIPLE CHOICE (IAA)
2021, a receiver was appointed for the said customer.
The receiver informed Norway that the P400,000 would 1. D
be paid in full by June 30, 2021. 2. D
3. C
2. Norway Company measured share investments 4. D
held for trading at fair value through profit or loss. On 5. D
December 31, 2020, these investments were recorded Page 267
at the market value of P5,000,000. During the period up
to February 15, 2021, there was a steady decline in the 31
market value of all the shares in the portfolio, and on PROBLEM 12-7 MULTIPLE CHOICE (IFRS)
February 15, 2021, the market value had fallen to
P2,000,000. 1. B
2. A
3. Norway Company had reported a contingent 3. D
liability on December 31, 2020 related to a court case Page 268
in which Norway Company was the defendant. The
case was not heard until the first week of February,
2021. On March 1, 2021, the judge handed down a
4. C
decision against Norway Company. The judge
5. A
determined that Norway Company was liable to pay
Page 269
damages and costs totaling P3,000,000.

4. On December 31, 2020, Norway Company had an CONCEPTUAL FRAMEWORK AND

account receivable from a large customer in the ACCOUNTING STANDARDS
amount of P3,500,000. On January 31, 2021, Norway
Company was advised by the liquidator of the said
customer that the customer was insolvent and would
be unable to repay the full amount owed to Norway
CHAPTER XIII
Company. The liquidator advised Norway Company in
QUESTIONS:
writing that only 10% of the account receivable will be
paid on April 30, 2021.
1. Define related party.
REQUIRED:
ANSWER:
PREPARE ADJUSTING ENTRIES ON DECEMBER 31, 2020 Related party - Parties are considered
TO REFLECT THE EVENTS AFTER REPORTING PERIOD. to be related if one party has:
PROBLEM 12-2
a. the ability to control the other party 2. Associates -meaning the entities over which
one party exercises significant influence.
b. the ability to exercise significant influence
over the other party, and 3. Venturer in a joint venture. It includes the
c. joint control over the reporting entity. subsidiary or subsidiaries of the joint venture.

2. Give examples of related parties. 4. Key management personnel - those persons

having authority and responsibility for planning,
ANSWER: directing, and controlling the activities of the entity,
directly or indirectly, including any executive director
1. Affiliates - meaning the parent, the
or nonexecutive director.
subsidiary and fellow subsidiaries.

Loans to officers:
3. Explain related party disclosure.

ANSWER:
Dean Morey
PAS 24, paragraph 12, requires disclosure of Key officers’ salaries 750,000 500,000 Officers’
related party relationships where control exists expenses 200,000 100,000 Loans to Officers
irrespective of whether there have been transactions 1,250,000 500,000 Intercompany sales 1,500,000
between related parties. In other words, relationships
between parents and subsidiaries shall be disclosed What total amount should be reported as related
party disclosures in the notes to Dean Company’s
regardless of whether there have been transactions
consolidated financial statements for the current
between the related parties. year?

4. What are the minimum disclosure for related party a. 1,500,000

transactions? b. 1,550,000
c. 1,750,000
ANSWER:
d. 3,000,000
a. The amount of the transaction. Dean 1,250,000 Morey 500,000
b. The amount of outstanding balance, terms
Key officers' salaries:
and conditions, whether secured or
Dean 750,000 Morey 500,000 Total 3,000,000
unsecured, and nature of consideration to
be provided in settlement.
page 277
c. The allowance for doubtful accounts related
to the outstanding balance.
PROBLEM 13-3 MULTIPLE CHOICE (PAS 24)
d. The doubtful accounts expense recognized
during the period in respect of amount due 1. D
from related parties. 2. B
3. C
5. Give examples of unrelated parties.
4. D
ANSWER: 32
5. D
1. Two entities simply because they have a Page 278
director or key management personnel in
PROBLEM 13-4 MULTIPLE CHOICE (IFRS)
common.
2. Providers of finance, trade unions, public
1. D
utilities and government agencies in the
2. D
course of their normal dealings with an
3. B
entity by virtue only of those dealings.
4. D
3. A single customer, supplier, franchisor or
5. A
general agent with whom an entity transacts a
Page 279
significant volume of business merely by virtue of the
resulting economic dependence.
6. C
4. Two venturers simply because they share
7. C
joint control over a joint venture.
8. B
Page 276
9. B
PROBLEM 13-1 (AICPA Adapted) 10. D
Page 280
Dean Company acquired 100% of Morey Company in
the prior year. During the current year, the individual CONCEPTUAL FRAMEWORK AND
entities included in their financial statements the
following:
ACCOUNTING STANDARDS

CHAPTER XIV
 personnel directly engaged in providing the service,
QUESTIONS: including supervisory personnel and attributable
overhead.
1. Define inventories.
6. Explain the cost formulas in determining cost of
ANSWER: inventories.

Inventories are assets held for sale in the ANSWER:

ordinary course of business, in the process of
production for such sale or in the form of materials or PAS 2, paragraph 25, expressly provides that the cost
supplies to be consumed in the production process or of inventories shall be determined by using either;
in the rendering of services. a First in, first out (FIFO) method - assumes that
“the goods first purchased are first sold” and
2. What are the components of cost of consequently the goods remaining in the
inventory at the end of the period are those
inventories? ANSWER:
most recently purchased or produced. In
other words, the FIFO is in accordance with
The cost of inventories shall comprise; (a) cost the ordinary merchandising procedure that
of purchase, (b) cost of conversion, and (c) other the goods are sold in the order they are
cost incurred in bringing the inventories to their purchased. The rules are “first come, first sold.”
present location and condition. b Weighted average - the cost of the beginning
inventory plus the total cost of purchases
during the period is divided by the total units
3. Explain cost of purchase, cost of conversion and
other cost included in cost of inventories.
purchased plus those in the beginning
ANSWER: inventory to get a weighted average unit
The cost of purchase of inventories comprises cost. Such weighted average unit cost is then
multiplied by the units on hand to derive the
the purchase price, import duties and irrecoverable
inventory value. In other words, the average
taxes, freight, handling and other costs directly
unit cost is computed by dividing the total
attributable to the acquisition of finished goods,
cost of goods available for sale by the total
materials, and services. Trade discounts, rebates and
number of units available for sale.
other similar items are deducted in determining the
cost of purchase. Cost of conversion of inventories 7. Explain the specific identification of determining
includes cost directly related to the units of cost of inventories.
production such as direct labor. It also includes
systematic allocation of fixed and variable ANSWER:
production overhead that is incurred in converting
materials into finished goods. Specific identification means that specific costs are
attributed to identified items of inventory. The cost of
Other cost included in the cost of inventories only to inventory is determined by simply 33
the extent that it is incurred bringing the inventories to multiplying the units on hand by the actual unit cost.
their present location and condition. PAS 2, paragraph 23, provides that this method is
appropriate for inventories that are segregated for a
4. Identify certain costs that are excluded from the cost
specific project and inventories that are not ordinarily
of inventories.
interchangeable.
ANSWER:
8. What is the standard in measuring inventory in the
The following costs are excluded from the cost of statement of financial position?
inventories and recognized as expenses in the period
when incurred: ANSWER:

Abnormal amounts of wasted PAS 2, paragraph 9, provides that inventories

materials, labor and other shall be measured at the lower of cost and net
productions costs. realizable value. The cost of inventory is determined
Storage costs, unless necessary in using either FIFO cost or average cost. The
the production process prior to a measurement of inventory at the lower of cost and
further production stage. net realizable value is known as LCNRV.
Administrative overheads
Distribution or selling costs. 9. Explain net realizable value.

5. Explain the cost of inventories of a service provider. ANSWER:

ANSWER: Net realizable value or NRV is the estimated

selling price in the ordinary course of business less the
Cost of inventories of a service provider estimated cost of completion and the estimated cost
consists primarily of the labor and other costs of of disposal.
 Page 307
10. Explain the accounting for inventory
PROBLEM 14-25 MULTIPLE CHOICE (PAS 2)
write-down. ANSWER:
1.C
Accounting for inventory write-down 2.D
states that if the cost is lower than net realizable value, 3.D
there is no accounting problem because the inventory is 4.A
stated at cost and the increase in value is not recognized. 5.C
And if the net realizable value is lower than cost, the Page 308
inventory is measured at net realizable value. In this case,
PROBLEM 14-26 MULTIPLE CHOICE (IFRS)
the problem is the proper treatment of the write-down of
the inventory to the net realizable value. The write-down
1.D
of inventory to net realizable value is accounted for using 2.D
the allowance method 3.B
Page 29 4.A
5.A
Page 309
PROBLEM 14-20 MULTIPLE CHOICE (PAS 2)
1. D
2. C 6.A
3. D 7.C
4. D 8.A
5. A 9.C
Page 302 10.B
Page 310

PROBLEM 14-21 MULTIPLE CHOICE (IFRS)

CONCEPTUAL FRAMEWORK AND
1. D
2. A ACCOUNTING STANDARDS

CHAPTER XV
3. D
4. B
5. C
Page 303
QUESTIONS:

6. C 1. Define property, plant and equipment.

7. A Answer:
8. B Property, plant and equipment are tangible
assets that are held for use in production or supply of
9. A
goods or services, for rental to others, or for
10. A
administrative purposes, and are expected to be
Page 304
used during more than one period.
PROBLEM 14-22 MULTIPLE CHOICE (IAA)
2. What are the major characteristics in defining 34
1.B property, plant and equipment?
2.A Answer:
3.D Accordingly, the major characteristics in the
4.D definition of property, plant and equipment are: a.
5.A The property, plant and equipment are tangible
Page 305 assets, meaning with physical substance. The
property, plant and equipment are used in business,
PROBLEM 14-23 MULTIPLE CHOICE (IAA) meaning used in production or supply of goods or
services, for rental purposes and for administrative
1. C purposes.
2. A The property, plant and equipment are expected to
be used over a period of more than one year.
3. D
4. B
3. Give examples of property, plant and
5. C
equipment. Answer:
Page 306
Land, land improvements, building, machinery,
ship, aircraft, motor vehicle, furniture and fixtures,
PROBLEM 14-24 MULTIPLE CHOICE (IAA)
office equipment and tools are examples of
property, plant and equipment.
1. D
2. C 4. Explain the recognition of property, plant and
3. D equipment.
4. B Answer:
5. B An item of property, plant and equipment shall
be recognized as asset when;
it is probable that future economic benefits 10. What is the cost of an asset acquired on account
associated with the asset will flow to the entity the subject to a cash discount?
cost of the asset can be measured reliably. Answer:
When an asset is acquired on account
5. Explain the measurement of property, plant and subject to a cash discount, the cost of the asset is
equipment at recognition and after recognition. equal to the invoice price minus the discount,
Answer: regardless of whether the discount is taken or not.
An item of property, plant and equipment that Cash discounts are generally considered as reduction
qualifies for recognition as an asset shall be of cost and not as income.
measured at cost. Cost is the amount of cash or cash
equivalent paid and the fair value of the other 11. If an asset is acquired on the installment basis, the
consideration given to acquire an asset at the time of asset is recorded at what amount?
acquisition or construction. Answer:
When payment for item of property, plant and
6. What are the elements of cost of property, plant equipment is deferred beyond normal credit terms,
and equipment? the cost is the cash price equivalent. In other words, if
Answer: an asset is offered at a cash price and at an
The cost of an item of property, plant and equipment installment price, the asset shall be recorded at the
comprises: cash price. The excess of the installment price over the
Purchase price, including import duties and cash price is treated as an interest to be amortized
nonrefundable purchase taxes, after over the credit period.
deducting trade discounts and rebates.
Cost directly attributable to bringing the asset to 12. Discuss the accounting procedure when an asset
the location and condition necessary for it to is acquired through the issuance of share capital.
be capable of operating in the manner Answer:
intended by management. Philippine GAAP provides that if shares are issued for
Initial estimate of the cost of dismantling and consideration other than actual cash, the proceeds
removing the item and restoring the site on shall be measured by the fair value of the
consideration is received. Accordingly, where a

which it is located for which an entity has a

present obligation. property is acquired through the issuance of share
7. Explain directly attributable costs. capital, the property shall be measured at an
Answer: amount equal to the following in the order of
Cost of employee benefit arising directly from priority: Fair value of the property received
the construction or acquisition of the item of property, Fair value of the share capital
plant and equipment. Fair value or stated value of the share capital
Cost of site preparation
Initial delivery and handling cost 13. Discuss the accounting procedure when an asset
Installation and assembly cost is acquired by issuing bonds payable.
Professional fee Answer:
Costs of testing whether the asset is PFRS 9, paragraph 5.1.1, provides the asset
functioning properly. acquired by issuing bonds payables measured in the
following order:
8. Give examples of costs which are expensed rather Fair value of bonds payable
than capitalized as property, plant and equipment. Fair value of asset received
Answer: Face amount of bonds payable
Examples of cost that are expensed rather
than recognized as element of cost of property, plant 35
and equipment are: 14. Discuss the accounting procedure for recording
Cost of opening a new facility an exchange.
Cost of introducing a new product or service, Answer:
including cost of advertising and promotion Cost PAS 16, paragraph 24, provides that the cost
of conducting business in a new location or with a of an item of property, plant and equipment
new class of customer, including cost of staff acquired in exchange for a non-monetary asset or a
training combination of monetary and non-monetary asset is
Administration and other general overhead measured at fair value plus any cash payment.
cost However, the exchange is recognized at carrying
Initial operating loss amount if the exchange transaction lacks
commercial substance.
9. What is the cost of the asset acquired on a cash
basis? 15. What would the cost of self-constructed property,
Answer: plant and equipment include?
The cost of an item of property, plant and equipment Answer:
is the cash price equivalent at the recognition date. The cost of self-constructed property, plant
The cost of asset acquired on a cash basis simply and equipment includes:
includes the cash paid plus directly attributable costs direct cost of materials
such as freight, installation cost and other cost direct cost of labor
necessary in bringing the asset to the location and indirect cost and incremental overhead
condition for the intended use. specifically identifiable or traceable to the
construction.
 Page 322 estimate.

22. What is the useful life of an asset?

16. Explain derecognition of property, plant and Answer:
equipment. The useful life of an asset is either the period
Answer: over which an asset is expected to be available for
Derecognition means that the cost of use by the entity, or the number of production or
property, plant and equipment together with the similar units expected to be obtained from the asset
related accumulated depreciation shall be removed by the entity.
from the statement of financial position.
PAS 16, paragraph 67, provides that the carrying 23. When is the straight line method adopted?
amount of an item of property, plant, and equipment Answer:
shall be derecognized on disposal or when no future Under the straight line method, the annual
economic benefits are expected from the use or depreciation charge is calculated by allocating the
disposal. depreciable amount equally over the number of years
of useful life. It is adopted when the principal cause of
17. Explain the treatment of fully depreciated depreciation is passage of time.
property.
Answer: 24. When is the production method adopted?
A property is said to be fully depreciated when Answer:
the carrying amount is equal to the residual value. In The production or output method assumes that
such a case, the asset account and the related depreciation is more a function of use rather that
accumulated depreciation account are closed and passage of time. It is adopted if the principal cause of
the residual value is set up in a separate account. depreciation is usage.
However, it is not uncommon for an entity to
continue to use an asset after it has been fully 25. When is the diminishing balance method adopted?
depreciated. The cost of fully depreciated asset Answer:
remaining in service and the related accumulated The diminishing balance or
depreciation ordinarily shall not be removed from the accelerated methods provide higher depreciation in
accounts. Entities are encouraged but not required the earlier years and lower depreciation in the later
to disclose fully depreciated property.

years of the useful life of the asset. Thus, these

18. Define depreciation. methods result in decreasing depreciation charge
Answer: over the useful life. This method includes sum of years’
Depreciation is defined as the systematic digits method and double declining balance.
allocation of the depreciable amount of an asset over
the useful life. Depreciation is not so much a matter of Page 323
valuation. It is a matter of cost allocation in
recognition of the exhaustion of the useful life of an Problem 15-8 (IAA)
item of property, plant and equipment. The objective
of depreciation is to have each period benefiting from Siargao Company recently acquired two items of
the use of the asset bear an equitable share of the equipment.
asset cost. ♣ Acquired a press at an invoice price of
P3,000,000 subject to a 5% cash discounts
19. Explain the depreciation period. which was taken.
Answer:
The depreciable amount of an asset shall be Cost of freight and insurance during shipment were
allocated on a systematic basis over the useful life. P50,000 and installation cost amounted 36
Depreciation of an asset begins when it is available for to P200,000.
use, meaning, when the asset is in the location and
condition necessary for the intended use by ♣ Acquired a welding machine at an invoice
management. Depreciation ceases when the asset is
price of P2,000,000 subject to a 10% cash
derecognized.
discount which was not taken. Additional
welding supplies were acquired at a cost of
20. What is the depreciable amount? P100,000.
Answer:
Depreciable amount is the cost of an asset or What is the total increase in the equipment account
other amount substituted for cost, less the residual as a result of the transactions?
value. Each part of an item of property, plant and
equipment with a cost that is significant in relation to a 4,900,000
the total cost of the item shall be depreciated
b 5,000,000
separately.
c 5,100,000
d 5,200,000
21. What is residual value?
Page 328
Answer:
Residual value is the estimated net amount
Problem 15-10 multiple choice (PAS 16)
currently obtainable if the asset is at the end of useful
life. The residual value of an asset shall be reviewed at
1. D
least at each financial year-end and if expectation
differs from the previous estimate, the change shall be 2. B
accounted for as a change in an accounting 3. C
4. D
5. D
Page 329

Problem 15-11 multiple choice (IAA)

1. B
2. A
3. A
4. C
5. B
Page 330

Problem 15-12 multiple choice (AICPA Adapted)

1. D
2. C
3. A
4. B
Page 331
37
Problem 15-13 multiple choice (PAS 16)
1. A
2. C CONCEPTUAL FRAMEWORK AND
3. D ACCOUNTING STANDARDS

CHAPTER XVI
Page 332

4. A
5. D
Page 333
1. Define a government grant.
It is an assistance to government in the form of
Problem 15-14 multiple choice (IAA) transfer of resources to an entity in return for part or
1. C future compliance with certain conditions relating to
2. D operating activities of the entity.
3. D
4. A 2. Explain the recognition and measurement of
5. D government grant.
Page 334 Government grant shall be recognized when
there is reasonable assurance that:
Problem 15-15 multiple choice (PAS 16) a. the entity will comply with the
1. D conditions attaching to the grant.
2. D b. the grant will be received.
3. B Government grant shall not be recognized on a cash
4. A basis as this is not consistent with generally accepted
5. C accounting practice.
Page 335
3. Explain accounting for grant in recognition of
expenses.
6. A
Government grants are recognized in profit or
7. B
loss on a systematic basis over the periods in which the
8. B
entity recognizes expenses for the related costs for
9. D
which the grants are intended to compensate, which
10. D in the case of grants related to assets requires setting
Page 336 up the grant as deferred income or deducting it from
the carrying amount of the asset.

4. Explain accounting for grant related to depreciable

asset.
Grant related to depreciable asset shall be
recognized as income over the periods and in
proportion to the depreciation of the related asset.

5. Explain accounting for grant related to

nondepreciable asset requiring fulfillment of certain
conditions.
Grant related to nondepreciable asset
requiring fulfillment of certain conditions shall be
recognized as income over the periods which bear
the cost of meeting the conditions.

6. Explain accounting for grant received as

compensation for expenses or losses already incurred.
A government grant that becomes receivable PROBLEM NO. 2:
as compensation for expenses or losses already
incurred or for the purpose of giving immediate Journal entries for first year
financial support to the entity with no further related
costs shall be recognized as income of 1. Cash 40,000,000
the period in which it becomes receivable. Deferred grant income 40,000,000

7. Explain the presentation of government grant 2. Building 50,000,000

related to asset. Cash 50,000,000
It shall be presented in the statement of
financial position in either of two ways: 3. Depreciation 2,500,000
a. By setting the grant as deferred Accumulated Depreciation 2,500,000
income. (50,000,000/20)
b. BY deducting the grant in arriving at
the carrying amount of the asset 4. Deferred grant income 2,000,000

8. Explain the presentation of government grant Grant income 2,000,000 (40,000,000/20)

related to income.
Shall be presented as follows: PROBLEM NO. 3:
a. the grant is presented in the income
statement, either separately or under the Journal Entries in the First year:
general heading “other income”.
b. Alternatively, the grant is deducted 1. Land 50,000,000
from the related expense. Deferred grant income 50,000,000

9. Define government assistance. 2. Factory/Building 80,000,000

It is the action by government designed to Cash 80,000,000
provide an economic benefit specific to an entity or
range of entities qualifying under certain criteria. 3. Depreciation 3,200,000
Accumulated Depreciation 3,200,000
10. What are the necessary disclosures related to (80,000,000/25 years)
government grant?
a. The accounting policy adopted for 38 4. Deferred Grant Income 2,000,000
government grant including the method of Grant income 2,000,000 (50,000,000/25 years)
presentation adopted in the financial statements. b.
The nature and extent of government grant PROBLEM NO. 4:
recognized in the financial statements and an
indication of other forms of government assistance Cash 10,000,000
from which the entity has directly benefited.
Grant income 10,000,000
c. Unfulfilled conditions and other
contingencies attaching to government assistance
that has been recognized.
Page 346 PROBLEM 16-2

PROBLEM 16-1 1st year 2,000,000

2nd year 2,000,000
PROBLEM NO. 1: 3rd year 6,000,000
10,000,000
1st year 2,000,000
2nd year 4,000,000
Journal Entries for the first year:
3rd year 6,000,000
4th year 8,000,000
1. Land 12,000,000
20,000,000
Deferred Grant Income 12,000,000
Journal Entries- first year
2. Operation 10,000,000
Cash 10,000,000
Cash 30,000,000
Deferred grant income 30,000,000
1st year (2/10 x 12 000 000) 2 400 000 2nd year
(2/10 x 12 000 000) 2 400 000 3rd year (6/10 x 12
Deferred grant income
000 000) 7 200 000 12 000 000
Grant income

Environmental expenses 2,000,000

Cash 2,000,000
PROBLEM 16-4
First year (2/20 x 30,000,000) 3,000,000 Second year
(4/20 x 30,000,000) 6,000,000 Third year (6/20 x DEFERRED INCOME APPROACH
30,000,000) 9,000,000 Fourth year (8/20 x 30,000,000)
12,000,000 30,000,000 1. Machine 7,000,000 Cash 7,000,000
 Page 352
2. Cash 1,000,000 Deferred Grant income 1,000,000
6.D
3. Depreciation 7.A
Accumulated Depreciation 8.B
9.A
Cost of Machine 7,000,000 Residual value 10.B
(500,000) Depreciable amount 6,500,000 Page 353

Annual Depreciation (6,500,000/5 years) 1,300,000 PROBLEM 16-11 MULTIPLE CHOICE (IFRS)

Deferred grant income 200,000 1.C

2.B
3.C
4.C
Grant income 200,000 5.A
(1,000,000/5 years) Page 354

DEDUCTION FROM ASSET APPROACH

CONCEPTUAL FRAMEWORK AND
Machine 7,000,000 Cash 7,000,000 ACCOUNTING STANDARDS
Cash 1,000,000 Machine 1,000,000
CHAPTER XVII
Depreciation 1,100,000 Accumulated Depreciation
1,100,000
1. Define borrowing costs.
Acquisition cost 7,000,000 Government grant (1,000,000) It is defined as interest and other costs that an
Net cost 6,000,000 39 entity incurs in connections with borrowing of funds.
Residual Value (500,000) Depreciable amount
5,500,000 2. What is a qualifying asset for purposes of
capitalization of borrowing cost?
Annual Depreciation (5,500,000/5 years) 1,100,000 An asset that necessarily takes a substantial
period of time to get ready for the intended use or
PROBLEM 16-10 MULTIPLE CHOICE (PAS 20) sale.
Examples includes the ff:
1. A a. manufacturing plant
2. C b. Power generation facility
3.A c. intangible asset
4.A d. Investment property.
5.D

HAMLET COMPANY
3. Explain the accounting for borrowing cost.

It can be capitalized when the asset is a

qualifying asset and it is probable that the borrowing 7. Explain commencement of capitalization of
cost will result to future economic benefit and the borrowing cost.
cost can be measured reliably. The capitalization starts when all three
All the borrowing cost shall be expensed as conditions are met: expenditures are incurred,
incurred. borrowing costs are incurred, and the activities
necessary to prepare the asset for its intended use or
4. Explain the capitalization of borrowing cost of asset sale are in progress. Expenditures on the asset are
financed by specific borrowing. incurred when the prepayments are made
If the funds are borrowed specifically for the (payments of the instalments).
purpose of acquiring a qualifying asset, the amount
of capitalizable borrowing cost is actual borrowing 8. Explain suspension of capitalization of borrowing
cost incurred during the period less any investment cost.
income from the temporary investment of those an entity may incur borrowing costs during
borrowings. extended periods in which it suspends the activities
necessary to prepare the asset for its intended use or
5. Explain the capitalization of borrowing cost for asset sale, and that such costs are costs of holding partially
financed by general borrowing. completed assets and do not qualify for
If the funds are borrowed generally and used capitalization.
for acquiring a qualifying asset, the amount of
capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period
multiplied by a capitalization rate or average interest 9. Explain cessation of capitalization of borrowing
rate. cost.
Capitalization of borrowing cost ceases when
6. Explain the capitalization of borrowing cost for asset all the activities necessary to prepare the qualifying
financed by both specific and general borrowing. assets are complete. If an asset has been completed
in parts and a completed part is capable of being 2.B
used while the construction for the other part 3.C
continues then the capitalization for that completed 4.A
part will cease. 5.B
Page 371
10. What are the necessary disclosures related to
borrowing cost? 6.D
The standard requires the entity to disclose the 7.A
following: Borrowing cost capitalized during the 8.A
accounting period; The weighted average borrowing
9.B
cost rate or percentage used to determine the
10.D
borrowing costs eligible for capitalization
Page 372
Page 363
Construction Cost 6,000,000 Interest (6,000,000 x 10%
x 11/12) 550,000 Interest Income (80,000) 6,470,000
CONCEPTUAL FRAMEWORK AND
CAGAYAN COMPANY ACCOUNTING STANDARDS
Interest Incurred (24,000,000 x 10% x 10/12) 2,000,000
Interest Income (200,000) 1,800,000
CHAPTER XVIII
MOSES COMPANY
Specific Borrowing (4,000,000 X 10%) 400,000
General Borrowing (750,000 X 12%) 90,000 490,000 1. Define associate.
Associate is simply defined as an entity over
(4,750,000-4,000,000 = 750,000- general borrowing) 40 which the investor has significant influence.
JOSHUA COMPANY
Average Expenditure 3,000,000 Specific Borrowing 2. Define significant influence.
(2,200,000) General Borrowing 800,000 The power to participate in the financial and
operating policy decisions of the associate
Specific Borrowing (2,200,000 x 10%) 220,000 Interest but not control or joint control over those
Income (45,000) General Borrowing (800,000 x 9%) policies.
72,000 247,000
3. What is the practical guidance in determining
ELYSEE COMPANY significant influence?
Average expenditures (30,000,000 / 2) 15,000,000
Applicable Specific Borrowing (10,000,000) General When an investor exercises significant influence over
Borrowing 5,000,000 the investee, one or more of the following indicators is
usually present:
12% 20-year bonds issued 30,000,000 3,600,000 8%
5-year notes payable 10,000,000 800,000 40,000,000 Representation on the board of directors or
4,400,000 equivalent governing body of the investee
Participation in policy-making processes,
Average Capitalization (if asked) (4,400,000 / including participation in decisions about
40,000,000) 11% dividends or other distributions
Material transactions between the investor and
Interest on Specific Borrowing the investee
(10,000,000x10%) 1,000,000 Interest Income Interchange of managerial personnel
(100,000) Interest on General Borrowing Provision of essential technical information
(5,000,000 x 11% 550,000 1,450,000

PROBLEM 17-8 MULTIPLE CHOICE (PAS 23) 4. Explain the equity method of accounting for share
investment.
1. D The equity method is applied when a
2. C company's ownership interest in another
3. D company is valued at 20–50% of the stock in
Page 368 the investee.
The equity method requires the investing
4. C company to record the investee's profits or
5. A losses in proportion to the percentage of
6. A ownership.
7. D
Page 369 5. What is the meaning of “excess of cost over
carrying amount” with respect to acquisition of share
8. D investment?
9. A If the assets of the investee are fairly valued, the
10. C excess of cost. over carrying amount of the
underlying net assets to goodwill.
Page 370

PROBLEM 17-9 MULTIPLE CHOICE (IFRS) If the excess is attributable to undervaluation of

depreciable asset, it is amortized over the
remaining life of the depreciable asset.
1.C
 2. C
6. Explain an impairment loss with respect to an 3. D
investment in associate. 4. B
If the carrying amount of an investment in an Page 387
associate or joint venture exceeds its
recoverable amount, an impairment loss is
recognized. The loss is allocated to the
investment as a whole and not to the
underlying assets of the investee that make up 5. B
the carrying amount of the investment. 6. D
7. D
7. Explain the accounting procedure if an associate 8. A
has cumulative and noncumulative preference Page 388
shares.
41
In case of cumulative preferred stock, any 9. B
unpaid dividends on preferred stock are 10. C
carried forward to the future years and must
Page 389
be paid before any dividend is paid to
common stockholders.
PROBLEM 18-10 MULTIPLE CHOICE (AICPA Adapted)
Any unpaid dividend on preferred stock for a
year is known as ‘dividends in arrears’. The
1. D
disclosure of dividends in arrears is of great
2. D
importance for the investors and other users of
financial statements. 3. C
Unlike cumulative preferred stock, unpaid 4. A
dividends on noncumulative preferred stock Page 390
are not carried forward to the subsequent
years. If preferred stock is noncumulative and CONCEPTUAL FRAMEWORK AND
directors do not declare a dividend because
of insufficient profit in a particular year, there is
ACCOUNTING STANDARDS
no question of dividends in arrears.

8. Explain the discontinuance of the equity method.

CHAPTER XIX
An investor should discontinue the use of the equity Questions:
method from the date that:
1. Define impairment asset.
it ceases to have significant influence but An impaired asset is an asset that has a market
retains either in part or in whole its investment value less than the value listed on the
or company's balance sheet. When an asset is
the use of the equity method is no longer deemed to be impaired, it will need to be
appropriate as the associate operates under written down on the company's balance
severe long-term restrictions. sheet to its current market value.
The carrying value should be regarded as cost
thereafter. 2. What are the internal sources of information that
would indicate possible impairment?
9. Explain the measurement of the investment in
associate when significant influence is lost. The internal information that should be considered
If an investor loses significant influence over an which may indicate impairment include:
associate, it derecognizes that associate and
recognizes in profit or loss the difference Evidence of obsolescence or physical damage
between the sum of the proceeds received Changes to the asset’s use, including
and any retained interest, and the carrying
Asset becoming idle
amount of the investment in the associate at
Plan to discontinue or restructure the operation
the date significant influence is lost.
to which the asset belongs
Plan to dispose of the asset before previously
10. What are the circumstances when the equity
expected date
method is not applicable?
Reassessing the useful life as finite rather than
Another group of shareholders has majority
infinite
ownership, and operate it without regard to
the investor's views. The investor is unable to Poor performance
obtain sufficient information to apply the
equity method. The investor is unable to 3. What are the external sources of information that
obtain representation on the investee's board would indicate possible impairment?
of directors.
Page 382 The external information that should be considered
which may indicate impairment include:

PROBLEM 18-9 MULTIPLE CHOICE (PAS 28)

1. A Decline in asset value: more so than normal

wear and tear
 Changes in the entity’s environment; If the carrying amount of the unit exceeds the
technological, market, economic or legal recoverable amount of the unit, the entity
conditions. must recognize an impairment loss.
Increase in market interest rate, this will affect Page 405
the asset’s value in use.
Carrying amount of net assets: If this is greater Problem 19-9 multiple choice (IFRS)
than the market capital of a company, there
may be impairment 1. B
4. What is the recoverable amount of an asset? 2. C
Recoverable amount is the greater of an asset's 3. A
fair value less costs to sell, or its value in use. 4. A
Thus, the concept essentially focuses on the greatest 5. B
value that can be obtained from an 42 Page 411
asset, either by selling or using it.
6. B
5. Explain fair value less cost of disposal. 7. D
Fair value less costs to sell (FVLCS) is the amount 8. D
obtainable from the sale of the asset in an 9. A
arm's length transaction between 10. B
knowledgeable and willing parties, less the Page 412
costs of disposal. This term is consistent with the
measurement basis in IFRS 5 Non-current Assets Problem 19-10 Multiple choice (IFRS)
Held for Sale and Discontinued Operations.
1. A
6. Explain value in use. 2. D
Value-in-use is the net present value of the cash 3. D
flows generated by an asset as it is currently
4. D
being used by the owner. This amount may be
5. D
less than the net present value of cash flows
Page 413
from the highest and best use to which an
asset can be put.
CONCEPTUAL FRAMEWORK AND
7. Explain the reversal of an impairment loss. ACCOUNTING STANDARDS
Reversal of an impairment loss on CGU is
allocated to individual assets on a pro-rata
basis, but the increased carrying amount
cannot be higher than the carrying amount
CHAPTER XX
that would have been determined (net of
depreciation) without impairment loss in 1. Define intangible asset
previous years. An intangible asset is an asset that lacks
physical substance. Examples are patents,
8. What is the meaning of cash generating unit? A copyright, franchises, goodwill, trademarks,
cash-generating unit is the smallest identifiable and trade names, as well as software. This is in
group of assets that generates cash inflows that contrast to physical assets and financial
are largely independent of the cash inflows from assets.
other assets or groups of assets
2. Explain “identifiability” of an intangible asset
9. Explain the allocation of impairment loss across Identifiability is the characteristic that
the assets of a cash generating unit. conceptually distinguishes other intangible assets
An impairment loss is recognized for a cash from goodwill.
generating unit where the recoverable
amount of the unit is less than the carrying 3. Explain “control” of an intangible asset The
amount of the unit. The impairment loss is definition of intangible asset requires that the
allocated to reduce the carrying amount of intangible asset must be controlled by the entity,
the assets of the unit on a pro rata basis, and an entity controls an intangible asset if it has
based on the carrying amount of each asset ability to obtain economic benefits related to the
in the unit. asset and can restrict others from such benefits.

10. Explain impairment of a cash generating unit with

goodwill. 4. Explain “future economic benefit” that may be
derived from an intangible asset.
A cash-generating unit to which goodwill has been The future economic benefit embodied in an
allocated shall be tested for impairment at least asset is the potential to contribute, directly or
annually by comparing the carrying amount of the indirectly, to the flow of cash and cash
unit, including the goodwill, with the recoverable equivalents to the entity or with respect of
amount of the unit: not-for-profit entities, whether in the public or
private sector, the future economic benefits
If the recoverable amount of the unit exceeds are also used to provide goods and services in
the carrying amount of the unit, the unit and accordance with the entities' objectives.
the goodwill allocated to that unit is not
impaired 5. What are the two conditions that must be
presented for the recognition of an intangible asset? Development activities are strategies to gain
knowledge, skills, or abilities. These are specific
An intangible asset shall be recognized if, and only if: (a) it actions, relationships, tasks, or programs for
is probable that the expected future economic 43 employees.
benefits that are attributable to the asset will flow to
the entity; and 13. Explain the accounting for research cost. The
(b) the cost of the asset can be measured reliably. accounting for research and development
involves those activities that create or improve
6. Explain the initial measurement of intangible asset. products or processes. The core accounting rule
Intangible assets are measured initially at cost. in this area is that expenditures be charged to
After initial recognition, an entity usually measures expense as incurred. ... Testing products and
an intangible asset at cost less accumulated processes. Modifying formulas, products, or
amortization. It may choose to measure the asset processes.
at fair value in rare cases when fair value can be
determined by reference to an active market. 14. Explain the accounting for development cost.
The accounting for research and development
7. Explain the measurement of cost of an intangible involves those activities that create or improve
asset acquired separately. products or processes. The core accounting rule
in this area is that expenditures be charged to
The cost of a separately acquired intangible asset expense as incurred
comprises:
(a) its purchase price, including import duties 15. What are the criteria for the recognition of
and non-refundable purchase taxes, after development cost as an intangible asset?
deducting trade discounts and rebates; and
(b) any directly attributable cost of preparing There is an option to defer the development
the asset for its intended use. expenditure and carry it forward as an intangible
asset if the following criteria are met:
8. What is the cost of an internally generated
intangible asset? there is a clearly defined project
the cost of an internally generated intangible expenditure is separately identifiable
asset comprises all directly attributable costs the project is commercially viable
necessary to create, produce and prepare the project is technically feasible
the asset to be capable of operating in the project income is expected to outweigh cost
manner intended by management. resources are available to complete the project
Page 429
9. What is the treatment of internally generated
brand, masthead, publishing title, customer list and PROBLEM 20-7 MULTIPLE CHOICES (PAS 36)
other item similar in substance?
Internally generated brands, mastheads, 1. D
publishing titles, customer lists and items similar 2. C
in substance shall not be recognized as 3. D
intangible assets. 4. D
Page 433
Expenditure on internally generated brands,
mastheads, publishing titles, customer lists and 5. D
items similar in substance cannot be 6. D
distinguished from the cost of developing the 7. D
business as a whole. Therefore, such items are 8. D
not recognized as intangible assets. Page 434

10. Define the terms “research” and development” 9. D

Research and development (R&D) includes 10. D
activities that companies undertake to innovate Page 435
and introduce new products and services. It is often
the first stage in the development process. The goal
is typically to
PROBLEM 20-8 MULTIPLE CHOICE (PAS 38)

1. C
take new products and services to market
2. B
and add to the company's bottom line.
3. D
11. Identify the research activities. 4. A
Refers to activities that result in the creation of Page 436
new knowledge and/or the use of existing
knowledge in a new and creative way so as 5. A
to generate new concepts, methodologies 6. D
and understandings. This could include 7. A
synthesis and analysis of previous research to 8. D
the extent that it leads to new and creative Page 437
outcomes.
9. B
12. Identify the development activities. 10. B
 Page 438 1. Define an investment property.
44 Answer:
PROBLEM 20-9 MULTIPLE CHOICE (IFRS) It defines as a property (land or building or both) held
by the owner or rented by the lessee under finance
1. D lease, to earn rentals or for capital appreciation. These
2. D are lands and building, because they are non
3. A movable property.
4. C
5. B 2. Define an owner-occupied property.
Page 439 Answer:
These are land held by an owner for use in the
6. D production or supply of goods or services or
7. B administrative purposes; or sale in the ordinary course
of business.
8. B
9. D
3. Give examples of investment property.
10. D
Answer:
Page 440
Examples of investment property are the following:
Land held for long-term appreciation in value,
PROBLEM 20-10 MULTIPLE CHOICE (IAA)
rather than for short term sale in the ordinary
course of business;
1. D Land whose future use is undeterminable. If
2. C future use is not yet determined, land is
3. C assumed to be held for capital appreciation;
4. D A building owned or held under a finance lease
Page 441 and leased out under an operating lease

5. A 4. What is the treatment of property that is partly

6. D investment and partly owner-occupied?
7. D Answer:
8. A If a property is being under dual-use i.e. property
Page 442 contains a part of the property which is held for rental
earnings or capital appreciation and another part
9. A which is held for use in the production, supply of
10. C goods/services, or for use in administration. Such
Page 443 property will be accounted for as:
If both portions are separable i.e. (could be sold
PROBLEM 20-11 MULTIPLE CHOICE (IFRS) or leased out separately under finance lease),
1. D then entity should account for each portion
2. B on individual basis under relevant IAS
3. D If both portions are not separable i.e. (could not
4. D be sold or leased out separately under
5. A finance lease), the property will be treated as
Investment Property only, if an immaterial part
Page 444
of such property is held for use in the
production, supply of goods/services or for use
PROBLEM 20-12 MULTIPLE CHOICE (AICPA
in administration.
ADAPTED) 1. A
2. B
Investment property should not include Ancillary
3. B
Services (Meals, Cleaning, Security, Utilities, and
4. A
Maintenance services). If in case of a certain
Page 445

property, an entity provides ancillary services to the

5. D
occupants of a property, the entity shall apply the
6. A following:
7. B The property will be Investment Property, if
8. C quantum of the services is immaterial or
Page 446 insignificant. For example, security or
maintenance services.
9. B The property will not be Investment Property, if
10. A quantum of the services is material or
Page 447 significant. For example, owner-managed
hotel. Therefore, such properties will be
CONCEPTUAL FRAMEWORK AND covered in IAS 16

ACCOUNTING STANDARDS 5. What is the treatment of property leased to an

CHAPTER XXI
affiliate?
Answer:
The property which is leased to, the Parent 45
Co. by a Subsidiary Co. or vice versa, will not
TOPIC QUESTIONS be treated as Investment Property in the
 consolidated financial statements, instead it
will be treated as Owner-occupied Property 8. What is the measurement of investment property
under IAS 16, because the property is under subsequent to initial recognition?
owner-occupied use from the Group Answer:
perspective. Any expenditure upon Investment Property, during
However, the property will remain Investment the life of Investment Property will be recognize in the
Property in the individual financial statements carrying amount of investment property, if such
of the entity who owns it. expense results in increase in economic benefits of
the investment property that would obtain otherwise.
6. When is an investment property recognized? A Any other expense to maintain the Investment
property will be recognized as Investment Property if Property will be treated as expense in the statement
it meets the following criteria: of profit or loss.
The definition of Investment Property The entity has two options to account for the
If future economic benefits are probable to flow Investment Property at reporting date;
to the entity Cost Model
Its cost is reliably measurable. Fair Value Model
7. Explain the initial measurement of investment
property? 9. Explain the cost model and fair value model of
Answer: measuring investment property.
The Investment Property is initially measured at Cost Answer:
including Transaction Costs. The cost of Investment The entity has two options to account for the
Property includes: Investment Property at reporting date;
Purchase Price and Cost Model
Any directly related cost such as (professional or Fair Value Model
legal charges, property transfer taxes & any
other transaction costs)
2. A
5. C 3. D
Whichever model is chosen; it should 6. D 4. A
be applied for all the Investment 7. D 5. A
Properties held by the entity. Cost 8. A
Model:
The entity which chooses Cost model
to account for its Investment Property
after initial recognition, will measure
the investment Property as per Cost
Model rules prescribed in IAS 16 i.e.
Cost less Accumulated Depreciation
Less Accumulated impairment loss.

Fair Value Model:

The entity which chooses Fair Value
model to account for its Investment
Property after initial recognition, will
measure the investment Property at Page 467
Fair Value.
Under fair vale model, the 9. A
investment property will be measured 10. D
at fair value on reporting date.
Any change (increase or decrease)
46
in the fair value of investment property
at reporting date, will be reported to
the statement of profit or loss.
Investment property under fair value
model is not depreciated.

Problem 21-8 Multiple Choice (IFRS)

1. C
2. A
3. D
4. A

Page468

Problem 21-9 Multiple Choice (PAS 40)

1. B
Page 466
 harvest;
(1) sheep to wool to yarn or carpets;
(2) dairy cattle to milk to cheese;
(3) bushes to leaf to tea or cured tobacco;
(4) fruit trees to picked fruit to processed
fruit.
10. Explain the fair value of investment.
Answer: 2. What is an agricultural activity?
The fair value of the investment property is Answer:
determined as per the requirements of IFRS 13; Agricultural activity is the management by an entity
however, the entity should also consider the following of the biological transformation and harvest of
points; biological assets for sale, or for conversion into
The fair value should be determined as per the agricultural produce, or into additional biological
current condition of the investment property, assets.
in the current market conditions.
If in exceptional circumstances, the fair value of 3. Explain biological transformation.
a certain investment property is not Answer:
determinable and alternative reliable Biological transformation comprises the processes of
measurements (discounted cash flows) are growth, degeneration, production, and procreation
also not available, then entity should measure that cause qualitative or quantitative changes in a
such investment property under cost model till biological asset.
the date of disposal and residual value of
such property will assumed to be zero.
If the fair value of an investment property being 4. Explain the recognition of biological asset and
constructed is not available, and entity agricultural produce.
estimates that the fair value of such property Answer:
will be determinable upon its completion, then An entity should recognize a biological asset or
in such circumstances entity should account agriculture produce when, and only when: the
for the investment property being constructed entity controls the asset as a result of past events;
under cost model until it is probable that future economic benefits
Its fair value becomes available or Construction will flow to the entity; and
work is finished the fair value or cost of the asset can be
Page 429 measured reliably.

Problem 21-7 Multiple choice (PAS 40) 5. Explain the initial measurement of biological
1. C asset. Answer:
2. D Biological assets should be measured on initial
3. D recognition and at subsequent reporting dates at
4. B fair value less costs to sell, unless fair value cannot
5. A be reliably measured.
Page 463
6. Explain the measurement of agricultural produce
6. C as it grows and once harvested.
7. B Answer:
8. A Agricultural produce should be measured at fair
Page 464 value less costs to sell at the point of harvest.
Because harvested produce is a marketable
9.A commodity, there is no 'measurement reliability'
10. A exception for produce. A gain on initial recognition
Page 465 of agricultural produce at fair value should be
Page 469 included in profit or loss for the period in which it
arises. All costs related to biological assets that are
measured at fair value are recognized as expenses
CONCEPTUAL FRAMEWORK AND when incurred, other than costs to purchase
ACCOUNTING STANDARDS biological assets.

CHAPTER XXII 7. Define bearer plant.

Answer:
Bearer plant is a living plant that:
TOPIC QUESTIONS - Is used in the production or supply of agricultural
produce
1. Define biological assets, agricultural produce and - Is expected to bear produce for more than one
harvest. period, and
Answer: - Has a remote likelihood of being sold as
Biological assets are living animals and living plants. agricultural produce, except for incidental scrap
Agricultural produce is the harvested product of the sales.
entity’s biological assets.
Harvest is the detachment of produce from a 8. Explain the treatment of bearer plant.
biological asset or the cessation of a biological Answer:
asset’s life processes. If an entity grows plants both to bear produce and
Examples of biological assets, agricultural produce, for sale as living plants or agricultural produce,
and products that are the result of processing after apart from incidental scrap sales, it must continue
to account for those plants at fair value less costs
to sell in their entirety (for example, trees that are CONCEPTUAL FRAMEWORK
cultivated for their lumber as well as their fruit).
Before bearer plants are placed into production AND ACCOUNTING
(i.e. before they reach maturity and bear fruit) they STANDARDS
should be measured at accumulated cost.

9. Explain the treatment of bearer CHAPTER XXIII

animals. Answer:
The bearer plants as property, plant and equipment
(PPE) per IAS16 allows the preparer to value the 1. Explain the meaning of a provision.
bearer plants at cost, less subsequent depreciation Answer:
or impairment or at a revalued amount. Provision is an existing liability of uncertain
No additional disclosure requirements were added timing or amount.
specifically for bearer plants. In general, the bearer
plants do not generate cash flows independently of 2. What are the three conditions necessary for the
the land, and may therefore be seen together with recognition of a provision as a liability?
the land as a cash-generating unit. The impairment Answer:
test would then also take place at the level of the The three conditions necessary for the recognition
cash-generating unit (thus bearer plants and land it of a provision as a liability are the following:
is situated on). a. The entity has a present obligation, legal or
constructive, as a result of a past event.
b. It is probable that an outflow of resources
10. Explain the treatment of animal-related embodying economic benefits would be required
recreational activities. to settle the obligation.
Answer:
Animals related to recreational activities shall be
accounted for in accordance with PAS16, PPE, c. The amount of the obligation can be measured
because any recreational activities are not an reliably.
agricultural activity.
Page 484 3. Define a legal obligation and constructive
obligation.
Problem 22-10 Multiple Choice (PAS 41) Answer:
1. B A legal obligation is an obligation arising
2. A from a contract legislation or other perspective of
3. D law. While, a constructive obligation exists when
4. C the entity from an established pattern of practice
5. D Page 493 or stated policy has created a valid expectation
that it will accept certain responsibilities.

47 4. What is the measurement of a

provision? Answer:
6. D A provision is measured at the amount that
7. D the entity would rationally pay to settle the
8. B obligation at the end of the reporting period or to
9. B transfer it to a third party at that time.
10. D Page 494 5. Discuss briefly each of the following in
connection with measurement of a provision.
Problem 22-11 Multiple Choice (IFRS) Answer:
a. Risks and uncertainties
1. D
Risk describes variability of outcome.
2. D
However, uncertainty does not justify the creation
3. B
of excessive provision or a deliberate
4. C
overstatement of liabilities.
5. C
Page 495 b. Present value of obligation
When the effect of the time value of money
6. A is material, the amount of provision shall be the
7. B present value of the expenditure expected to be
8. C settle the obligation.
9. C c. Future events
10. B Future events that affect the amount
Page 496 required to settle an obligation shall be reflected in
the amount of a provision where there is a
Problem 22-12 Multiple Choice (IFRS) sufficient evidence that they will occur.
1. B
2. C d. Expected disposal of assets
3. A Gains from expected disposal of assets shall
4. B not be taken into account in measuring a provision.
5. A In other words, any cash inflows from disposal are
Page 497 treated separately from the measurement of the
provision.
e. Reimbursements Problem 23-10 Multiple Choice (PAS 37)
The reimbursement shall be treated as a 1. B
separate asset and not netted against the 2. D
estimated liability for the provision. 3. D
4. C
f. Changes in provisions Page 516
The provision shall be reveresed if it is no
longer probable that an outflow of economic 5. A
benefits would be required to settle the obligation. 6. A
7. C
g. Use of provision 8. A
If an expenditure is charged against a Page 517
provision that was originally recognized for another
purpose, that would camouflage the impact of two 9.C
different events.
10. D
Page 518
h. Future operating losses
A provision for operating losses is not
Problem 23-11 Multiple Choice (PAS 37)
recognized because a past event creating a
1. D
present obligation has not occured.
2. D
3. C
i. Onerous contract
Page 519

If an entity has an onerous contract, the

4. A
present obligation under the contract shall be
recognized and measured as a provision. 5. C
Page 520
6. Define a contingent liability.
Answer: Problem 23-12 Multiple Choice (IAA)
A contingent liability is a liability that may 1. D
occur depending on the outcome of an uncertain 2. D
future event. A contingent liability is recorded if 3. D
the contingency is likely and the amount of the 4. A
liability can be reasonably estimated. The liability 5. C
may be disclosed in a footnote on the financial Page 521
statements unless both conditions are not met.
6. D
7. Distinguish a contingent liability from a 7. D
provision. Answer: 8. B
An entity recognizes a provision if it is 48 9. B
probable that an outflow of cash or other 10. B
economic resources will be required to settle the Page 522
provision. If an outflow is not probable, the item is
treated as a contingent liability. Problem 23-13 Multiple Choice (IAA)
1. C
2. A
8. Explain the treatment of a contingent 3. D
liability. Answer: 4. D
A contingent liability shall not be recognized 5. D
in the financial statements but shall be disclosed Page 523
only. But, if a contingent liability is remote, no
disclosure is necessary.
CONCEPTUAL FRAMEWORK
9. Define a contingent asset. AND ACCOUNTING
Answer: STANDARDS
Contingent asset is a possible asset that
arises from past event and whose existence will
be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future
CHAPTER XXIV
events not wholly within the control of the entity.
1. Define a financial instrument.
10. Explain the treatment of a contingent Answer:
asset. Answer: A financial instrument is any contract that gives
Contingent asset should not be recognized - but rise to both a financial asset of one entity and a
should be disclosed where an inflow of economic financial liability or equity instrument of another
benefits is probable. When the realization of entity.
income is virtually certain, then the related asset is
not contingent asset and its recognition is 2. Define a financial asset.
appropriate. Page 509 Answer:
A financial asset is a liquid asset that gets
its value from a contractual right or ownership 2. C
claim. 3. C
4. B
3. Give example of financial asset. 5. B
Answer: Page 534
Cash, stocks, bonds, mutual funds, and
bank deposits are all are examples of financial 6. D
assets. 7. A
8. D
4. Define a financial liability. 9. C
Answer: 10. B
A financial liability is any liability that is a Page 535
ontractual obligation to deliver cash or other
financial asset to another entity and also to Problem 24-4 Multiple Choice (IFFRS)
exchange financial instruments with another 1. A
entity under conditions that are potentially
2. B
unfavorable.
Page 536
5. Give examples of financial liability.
3. D
Answer:
4. C
Some examples of financial liability are: Trade
5. D
accounts payable, Notes payable, Loans
Page 537
payable and Bonds payable.
1. A
6. Define an equity instrument.
2. D
Answer:
3. B
An equity instrument is any contract that
evidences a residual interest in the assets of an 4. A
entity after deducting all of the liabilities. 5. A
Page 538

7. What is the guideline in determining whether a

financial instrument is a financial liability or an CONCEPTUAL FRAMEWORK
equity instrument?
Answer:
AND ACCOUNTING
STANDARDS

CHAPTER XXV
8. Explain a redeemable preference share.
Answer:
Redeemable preference shares are a type
of preference share. A company issues them to
shareholders and later redeems them. This means
Topic Questions
the company can buy back the shares at a later
date.
1. What entities are required to report deferred tax
asset or liability?
9. Explain the accounting for a compound
Answer:
financial instrument.
Deferred tax accounting is applicable to all
Answer:
entities, whether public or nonpublic entities. A
A compound financial instrument, such as a
public entity is an entity: (a) whose equity and
convertible bond, is split into equity and liability 49 debt securities are traded in a stock exchange or
components. When the instrument is issued, over-the
the equity component is measured as the counter market and (b) whose equity or debt
difference between the fair value of the securities are registered with Securities and
compound Exchange Commission in preparation for sale of
instrument and the fair value of the liability securities.
component.
2. Explain accounting income and taxable
10. Explain the accounting for bonds payable income. Answer:
issued with share warrants and convertible Accounting income or financial income is
bonds. the net income for the period before deducting
Answer: income tax expense. While Taxable income is the
Share warrants attached to a bond may be income for the period determined in accordance
detachable or nontachable. Wheather with the rules established by the taxation
detachable or nondetachable, the warrants authorities upon which income taxes are payable
have a value and therefore shall be accounted or recoverable.
for separately. While, convertible bonds give the
holder the right to convert their bondholdings into 3. Explain permanent differences.
share capital of the issuing entity whithin a Answer:
specified period of time. Permanent differences are items of revenue
Page 532 and expense which are included in either
accounting income or taxable income but will
Problem 24-3 Multiple Choice (PAS 32) never be included in the other. Actually,
1. D permanent differences pertain to nontaxable
revenue and nondeductible expenses. Moreover, in accounting income of future periods. For
permanent differences do not give rise to differed example, rent received in advance is
tax asset and liability because they have no future taxable at the time of receipt but deferred
tax consequences. in future periods for accounting purposes.
Expenses and losses are deducted from
4. Explain temporary differences. accounting income of current period but
Answer: are deductible for tax purposes in future
Temporary differences are items of income periods. For example, doubtful accounts
and expenses which are included in both are deducted from accounting income but
accounting income and taxable income but at are deductible for tax purposes when
different time periods. In addition, it gives rise either proved worthless in future period.
to a deferred tax liability or deferred tax asset.
11. Explain current tax asset and current tax
5. Explain taxable temporary differences. liability. Answer:
Answer: If the amount of tax already paid for the
Taxable temporary difference is the current period exceeds the amount actually
temporary difference that will result in future payable for the period, the excess is recognized
taxable amount in determining taxable income of as a current tax asset. While a current tax liability is
future periods. the current tax expense or the amount of income
tax actually payable. This is classified as current
6. Explain deductible temporary liability.
differences. Answer:
Expenses and losses are deductible for tax 12. Explain the statement presentation of current
purposes is the current period but deductible for tax asset and current tax liability.
accounting purposes in future periods. (a) Answer:
Accelerated depreciation for accounting purposes. A current tax liability or current tax asset
(b) Prepaid expenses has already been deducted shall be measured using the tax rate that has
on a cash basis in determining taxable income of been enacted and effective at the end of the
the current period. reporting period.

7. Explain a deferred tax liability. 13. Explain the statement presentation of deferred
Answer: tax asset and deferred tax liability.
Deferred tax liability is the amount of Answer:
income tax payable in the future periods with A deferred tax liability or deferred tax asset
respect to a taxable temporary difference. shall be measured using the tax rate that has been
Moreover, a deferred enacted by the end of the reporting period and
expected to apply to the period when the asset is
realized or the liability is settled.
tax liability arises when accounting income is
higher than taxable income because of future
taxable amount.
14. Explain the measurement of current tax asset
8. Give examples of temporary differences and current tax liability.
resulting to higher accounting income than Answer:
taxable income. Answer: The current tax liability or current tax asset is
Revenues and gains are included in measured at 30% but the deferred tax liability or
accounting income of the current period deferred tax asset is measured using the new
but deductible for accounting purposes in enacted tax rate of 25%.
future periods.
Expenses and losses are deductible for tax 15. Explain the measurement of deferred tax asset
purposes is the current period but and deferred tax liability.
deductible for accounting purposes in Answer:
future periods. PAS 12, paragraph 70, provides that
deferred tax liability is presented as noncurrent
9. Explain a deferred tax asset. liability and deferred tax asset is presented as
Answer: noncurrent asset. Moreover, a deferred tax asset or
50 deferred tax liability shall not be discounted.
PAS 12, paragraph 24, provides that a Page 549
deferred tax asset shall be recognized for all
deductible temporary differences and operating Problem 25-5 Multiple Choice (PAS 12)
loss carryforward when it is probable that taxable 1. A
income will be available against which the 2. B
deferred tax asset can be used. In other words, a 3. B
deferred tax asset is the deferred tax 4. A
consequence attributable to a future deductible 5. C
amount and operating loss carryforward. Page 552

10. Give examples of temporary differences 6. A

resulting to higher taxable income than 7. C
accounting income. Answer: 8. B
Revenue and gains are included in taxable 9. A
income of current period but are included 10. A
 Page 553 5
1
CONCEPTUAL FRAMEWORK Answer:
straightforward because the obligation of
AND ACCOUNTING the entity is determined by the amount
STANDARDS contributed for each period.

CHAPTER XXVI 8. Explain the components of a defined benefit

cost. Answer:
PAS 19, paragraph that an entity shall
recognize the following components of defined
1. Define employee benefits.
benefits cost.
Answer: 1. Service cost which comprises:
employee benefits are all forms of Current service cost
consideration given an entity in exchange for
Past service cost
service rendered by employees or for termination
Any gain or loss on plan settlement
of employment.
2. Net interest
3. Remeasurements which comprises:
2. Define short-term employee benefits.
Remeasurements od plan assets
Answer:
are employee benefits other than Remeasurements of defined benefits
termination benefits which are expected to be obligation
settled wholly within twelve months after the end of Remeasurements of the effect of assets
annual reporting period in which the employee ceiling
render the related service.
9. Explain plan assets and actual return on plan
3. Explain the recognition and measurement of assets.
short term employee benefits. Answer:
Answer: plan assets comprise assets held by a long
fairly straightforward because there are no term benefit fund and qualifying insurance policy.
actuarial assumptions. There is no possibility of The components of actual return on plan assets
actuarial gain or lose because short-term employee include the following:
benefits are measured on an undiscounted basis. Interest, dividend and other income derived
from the plan assets.
4. Define post-employment benefits. Realized and unrealized gains and losses on
Answer: the plan assets.
are employee benefits, other than
termination benefits and short-term employee 10. Explain the remeasurement of plan
benefits, which are payable after completion of assets. Answer:
employment. the difference between actual return on
plan assets and interest income on plan assets.
Is the actual return is higher than interest
income, the difference is a remeasurement
5. Explain fully a defined contribution plan. gain.
Answer: If the actual return is less than the interest
a postemployment benefit plan under income, the difference is a remeasurement
which an entity pays fixed contributions into a loss.
separate entity known as the fund. The
contribution is definite but the benefit is indefinite. 11. Explain the remeasurement of projected
benefit obligation.
6. Explain fully a defined benefit plan. Answer:
Answer: the recognition of actuarial gain and
simply defined as a postemployment plan actuarial loss. Actuarial gain and loss are changes
other than s defined contribution plan. Under a in the present value of the projected benefit
defined benefit plan, an entity’s obligation is to obligation resulting from experience adjustments
provide the agreed benefit to employees. The and the effects of changes in actuarial occurred.
benefit is definite but the contribution is indefinite.

7. Explain accounting for a defined contribution plan.

estimated amount, there in an reporting period in which the
actuarial gain. employees render the related service.
12. Explain fair value of plan assets.
Answer: 14. Define other long-term employee
the source of fund set aside in meeting benefits. Answer:
future benefit payments. all employee benefits other than Problem 26-9 Multiple Choice (PAS 19)
short-term employee benefits, 1. D
13. Explain projected benefit postemployment benefits and 2. D
obligation. termination benefits. In other words, 3. D
Answer: other long-term employee benefits are4. D
higher than the estimated amount, empl0yee benefits which are not 5. C
there is an actuarial loss. If the actual expected to be settles wholly within
benefit obligation is lower than the twelve months after the end of annual
 5. B

Page 583

6. D
7. C
8. C
9. A
10. B
Page 584

Problem 26-10 Multiple Choice (IAA)

1. C
2. B 52
3. B
4. A
Page 582
Page 585

15. Define termination benefits.

CONCEPTUAL FRAMEWORK AND
Answer: ACCOUNTING STANDARDS

CHAPTER XXVII
employee benefits provided in exchange for
the termination of an employee’s employment as a
result of either:
An entity’s decision to terminate an employee’s
employment before the normal retirement
1. What is the meaning of earnings per
date.
share? ANSWER:
An employee’s decision to accept an offer of
Earnings per share is the amount attributable
benefits in exchange for the termination of
to every ordinary share outstanding during the period.
employment.
Page 573
2. Explain the uses of earnings per share.
ANSWER:
Problem 26-6 Multiple Choice (PAS 19)
Uses of earnings per share are;
1. C
(1) a determinant of the market price of ordinary
2. D
share, thus indicating the attractiveness of the
3. A
ordinary share as an investment,
4. C
(2) a measure of performance of management in
Page 578
conducting operations,
(3) the basis of dividend policy of an entity.
5. D
6. A 3. What are the two presentations of earnings per
7. A share?
8. A ANSWER:
Page 579 The two presentations of earnings per share
are;
Problem 26-7 Multiple Choice (IFRS) (1) basic earnings per share,
1. A (2) diluted earnings per share.
2. C
3. D 4. Explain the presentation of earnings per share in the
4. C income statement.
Page 580 ANSWER:
An entity shall present on the face of the
Problem 26-8 Multiple Choice (PAS 19) income statement the basic and diluted earnings per
1. A share for income or loss from continuing operations.
2. B An entity that reports a discontinued operation shall
3. A disclose the basic and diluted amounts per share for
4. B the discontinued operation either on the face of the
Page 581 income statement or in the notes to the statements.
An entity shall present basic and diluted earnings per
5. D share even if the amounts are negative, for example,
6. C basic loss per share.
7. A
8. A
5. Explain the formula for the computation of basic
earnings per share. bond payable.
ANSWER:
Basic earnings per share=net 12. Explain the treatment of convertible
income/ordinary shares outstanding preference share in computing diluted earnings
The net income is equal to the amount after per share. ANSWER:
deducting dividends on preference share. If there is a convertible preference share,
the computation of diluted earnings per share
6. What is the treatment of preference dividend in also assumes that the preference share is
computing basic earnings per share? converted into ordinary share. The net income is
ANSWER: not reduced anymore by the amount of
If the preference share is cumulative, the preference dividend. The number of ordinary
preference dividend for the current year only id shares outstanding is increased by the number of
deducted from the net income, whether such ordinary shares that would have been issued
dividend is declared or not. If the preference share upon conversion of the preference share.
is noncumulative, the preference dividend for the
current year is deducted from net income only if 13. Define share options and share warrants.
there is declaration. If there is a significant change ANSWER:
in the ordinary shares capital during the year, the 53
weighted average number of ordinary shares Share options are granted to employees
outstanding during the period should be used as enabling them to acquire ordinary shares of the
denominator. entity at a specified price during a definite period
of time. Share warrants are granted to
7. Explain the formula for the computation of basic shareholders enabling them to acquire ordinary
loss per share. shares of the entity at a specified price during a
ANSWER: definite period of time.
If the preference share is cumulative, the By definition, options and warrants have no cash
preference dividend is added to the net loss to get yield but they derive their value from the right to
total loss to the ordinary shareholders. However, if obtain ordinary shares at a specified price that is
the preference share is noncumulative, the usually lower than the prevailing market price.
preference dividend is ignored because Options and warrants are dilutive if the exercise
presumably there is no declaration since there is a price or option price is less than the average
net loss. market price of the ordinary shares.

8. Define a potential ordinary share. 14. Explain the treasury share method of
ANSWER: computing incremental ordinary shares.
Potential ordinary share is a financial ANSWER:
instrument or other contract that may entitle the The treasury share method is used to simplify
holder to ordinary shares. the computation of increment ordinary shares that
are assumed to be issued for no consideration as
9. What are the three major types of potential a result of options and warrants.
ordinary shares?
ANSWER: 15. Explain diluted loss per share.
Three major types of potential ordinary ANSWER:
shares are dilution, anti-dilution and If the entity has a net loss, only the basic loss
per share is computed and reported. The diluted
10. Define dilution and anti-dilution. loss per share is the same as the basic loss per
ANSWER: share but not reported anymore.
Dilution arises when the inclusion of the Page 599
potential ordinary shares decreases the basic
earnings per share or increases the basic loss per Problem 27-11 Multiple Choice (PAS 33)
share. In this case, the potential ordinary shares are
dilutive securities. Anti-dilution arises when the 1. D
inclusion of the potential ordinary shares increases 2. B
basic earnings per share or decreases basic loss per 3. C
share. In this case, the potential ordinary shares are 4. D
considered as anti-dilutive and therefore ignored in 5. D
computing diluted earnings per share. Page 605

11. Explain the treatment of convertible bond 6. A

payable in computing diluted earnings per share.
7. A
ANSWER:
8. B
The computation of diluted earnings per
9. C
share assumes that the bond payable is converted
10. C
into ordinary share. Adjustments shall be made
both to net income and to the number of ordinary Page 606
shares outstanding. The net income is adjusted by
adding back the interest expense on the bond Problem 27-12 Multiple choice (IAA)
payable, net of tax. The number of ordinary shares 1. C
outstanding is increased by the number of ordinary 2. C
shares that 3. B
4. B
5. C
would have been issued upon conversion of the Page 607
 shall not describe an interim financial reports as
complying with PFRS unless it complies with all of the
CONCEPTUAL FRAMEWORK
AND ACCOUNTING requirements of each applicable Philippine
STANDARDS Financial Reporting Standard.

CHAPTER XXVIII 7. Give examples of selected explanatory notes to

accompany interim financial report.
ANSWER:
Examples of selected explanatory notes are;
1. Explain interim financial reporting. (a) write down of inventories to net realizable
ANSWER: value and the reversal of such a write down,
Interim financial reporting means the (b) recognition of a loss from the impairment of
preparation and presentation of financial property, plant and equipment and intangible
statements for a period of less than one year. assets and the reversal of such an impairment loss,
(c) the reversal of any provision for restructuring,
2. Is it require to prepare interim financial (d) acquisitions and disposal of items of property,
reports? ANSWER: plant and equipment,
Yes, PAS 34 prescribes the minimum content (e) commitments for the purchase of property,
of an interim financial report and the principles for plant and equipment,
recognition and measurement in complete or 54
condensed financial statements for an interim
(f) litigation settlements,
period. Publicly traded entities are encouraged to
(g) corrections of prior period errors in previously
provide interim financial reports at least
reported financial data,
semiannually and such reports are to be made
(h) changes in the economic circumstances that
available not later than 60 days after the end of
affect fair value of financial assets and financial
interim period.
liabilities,
(i) any debt default or any breach of a debt
3. Explain the frequency of interim
covenant that has not been corrected
reporting. ANSWER:
subsequently, (j) related party transaction,
PAS 34 does not mandate which entities are
(k) changes in the classification of financial
required to publish interim financial reports, how
assets, (l) contingent liabilities and contingent
frequently, or how soon after the end of an interim
assets.
period.
Interim financial reports may be presented monthly,
8. Explain the presentation of interim financial
quarterly or semiannually.
statements on a comparative basis.
ANSWER:
4. Explain interim reporting under Philippine
The presentation of interim financial
jurisdiction.
statements on a comparative basis are composed
ANSWER:
of statement of financial position, income
The Securities and Exchange Commission
statement, statement of comprehensive income,
and Philippine Stock Exchange requires entities
statement of changes in equity and statement of
covered by the reportorial requirements of Revised
cash flows.
Securities Act to file quarterly interim financial
reports within 45 days after the end of each of the
9. What are the basic principles in the preparation
first three quarters.
and presentation of interim financial statements?
The SEC also requires entities covered by the Rules
ANSWER:
on Commercial Papers and Financing Act to file
Basic principles are;
quarterly financial reports within 45 days after each
(1) PAS 34, paragraph 28, provides that an entity
quarter end.
shall apply the same accounting policies in the
Entities that provide interim financial reports in
interim financial statements as are applied in the
conformity with Philippine Financial Reporting
annual financial statements,
Standards shall conform to the recognition,
(2) revenues from products sold or services
measurement and disclosure requirements set out
rendered are generally recognized for interim
in the standard.
reports on the same basis as for the annual
reports,
5. What are the components of an interim financial
(3) cost and expense are recognized as incurred in
report?
an interim period,
ANSWER:
(4) paragraph 21 provides that if the business is
Components of an interim financial report
highly seasonal, in addition to the current interim
are; (1) condensed statement of financial position,
period financial statements, the entity is
(2) condensed statement of comprehensive
encouraged to disclosed financial information,
income, (3) condensed statement of changes in
equity, (4) condensed statement of cash flows, (5) paragraph 41 provides that the preparation of
(5) selected explanatory notes. interim financial reports generally requires a
greater use of estimation than annual financial
reports.
6. Explain compliance of interim financial report
with PFRS.
ANSWER:
10. Explain the treatment of a change in
PAS 34, paragraph 19, provides that if an
accounting policy in interim financial reporting.
entities interim financial report is in compliance with
ANSWER:
Philippine Financial Reporting Standard. An entity
 PAS 34, paragraph 43, provides that a prices that compensate for the expected
change in accounting policy shall be reflected by loss
restating the financial statements of prior interim
periods of the current year and the comparable
interim periods of the financial year. The objective of purchasing power during the credit
of this requirement is to ensure that a single period even if the period is short.
accounting policy is applied to a particular class of Interest rates, wages and prices are linked
transaction throughout the entire financial year. to a price index.
Page 621 The cumulative rate over 3 years is
approaching or exceeds 100 %.

Problem 28-11 Multiple choice (IFRS) 2. Explain the financial reporting in a

1. D hyperinflationary economy.
2. B Answer:
3. B PAS 29, paragraph 8, provides that the
4. D financial statements of an entity that reports in the
5. D currency of a hyperinflationary economy, whether they
Page 626 are based on historical cost approach or a current cost
approach, shall be stated in terms of the measuring
6. C unit current at the end of reporting period. Presentation
7. D of the information required under PAS 29 55
8. A as a supplement to understated financial
9. B statements is not permitted. The restatement of
10. B financial statements of an entity that reports in
Page 627 the currency of a hyperinflationary economy is
accomplished by means of constant peso
Problem 28-12 Multiple Choices (AICPA accounting.
Adapted) 1. B
2. D 3. Explain monetary and nonmonetary items.
3. A Answer:
4. C PAS 21 defines monetary items as money
held and assets and liabilities to be received or
5. D
paid in fixed or determinable amount of money.
Page 628
The essential feature of a monetary item is a right
to receive or an obligation to deliver a fixed or
6. D
determinable amount of money. In simple
7. B language, monetary items refer to cash and
8. A assets that represent a fixed amount of pesos to
9. D be received, or obligations that represent a fixed
10. B amount of pesos to be paid.
Page 629 Nonmonetary items, by the process of
exclusion, may be defined as those items
CONCEPTUAL FRAMEWORK that cannot be classified as monetary.
These items are so called nonmonetary
AND ACCOUNTING because their
STANDARDS peso amounts reported in the financial

CHAPTER XXIX
statements differ from the amounts that are
ultimately realizable or payable. The
essential feature of a nonmonetary item is
the absence of a right to receive or an
TOPIC QUESTIONS obligation to deliver a fixed or
determinable amount of money.
1. What are the characteristics of an 4. What is the formula for restatement?
economic environment indicating Answer:
hyperinflation? Index number at end of reporting period /
Answer: Index number on acquisition date x Historical cost
Hyperinflation is indicated by characteristics of
the economic environment of a country which 5. What are the procedures for restating
include but are not limited to the following financial statements in a hyperinflationary
The general population prefers to keep its economy?
wealth nonmonetary assets or in relatively Answer:
stable foreign currency. Accordingly, The items in the financial statements are
amounts held in local currency are classified into monetary and nonmonetary.
immediately Monetary items are not restated because these
invested in nonmonetary assets or are already expressed in terms of the monetary
stable foreign currency to maintain unit current at the end of reporting period.
purchasing Nonmonetary items are restated by
power. applying the general price index from the
The general population regards monetary date of
amounts not in terms of local currency but in acquisition to the end of reporting period.
terms of a relatively stable foreign currency Some nonmonetary items that are carried
Sales and purchases on credit take place at at amounts current at end of reporting
 period,
such as net realizable value and fair value CONCEPTUAL FRAMEWORK
are no longer restated.
Some nonmonetary items are carried at AND ACCOUNTING
amount current at date other than STANDARDS

CHAPTER XXX
acquisition date, for example, property,
plant and
equipment are revalued. In such case, the
carrying amounts are restated from the
date of revaluation. TOPIC QUESTIONS
1. Define first time adopter.
Answer:
All items in the income statement are A first time adopter is an entity that presents
restated by applying the change in the for the first time its financial statements in conformity
general price index from the dates when the with Philippine Financial Reporting Standards. In
items of other words, an entity is considered first time
income and expenses were initially adopter when for the first time such entity makes
recorded. However, for practical an explicit and unreserved statement that its
purposes, the average index may be general purpose
used.
The general purchasing power gain or loss is
computed on monetary items. The gain or financial statements comply with Philippine
loss on purchasing power is included in Financial Reporting Standards.
profit or loss.
The restated amount of property, plant 2. Define first PFRS financial statements.
and equipment, goodwill and other Answer:
intangible asset is reduced when it exceeds The first PFRS financial statements are the
the first annual statements in which an entity adopts
recoverable amount. PFRS by an explicit and unreserved statement of
Any revaluation surplus recognized compliance with PFRS.
previously is eliminated.
Retained earnings would be the 3. What are the conditions in order that financial
balancing figure in the restated statements presented by an entity would qualify
statement financial position. as first PFRS financial statements?
When comparative statements are Answer:
prepared, the monetary items of the Financial statements presented by an entity
preceding year are expressed in terms of in the current year would qualify as first PFRS
the index number at the end of the current financial statements under the following
year. conditions:
Page 638 56
When an entity presented its most recent previous
Problem 29-7 Multiple Choice (IFRS) financial statements:
1. D Under national GAAP inconsistent with PFRS in all
2.C respects.
3.A In conformity with PFRS in all respects but
4.D these statements did not contain an explicit
5.A and unreserved statement of compliance
Page 643 with PFRS.
Containing an explicit statement of
6.A compliance with some but not all PFRS.
7.C Under national GAAP with a reconciliation of
8.D selected figures to amounts determined
9.A under PFRS.
10.A When an entity prepared financial
Page 644 statements in the previous period under
PFRS but the financial statements were for
Problem 29-8 Multiple Choice (AICPA internal use only.
Adapted) 1. B When an entity prepared financial
2. A statements in the previous period under
3. D PFRS for consolidation purposes without
4. D preparing a complete set of financial
5. C statements.
Page 645 When an entity did not present financial
statements in the previous period.
6. A
4. Explain the date of transition to PFRS.
7. A
Answer:
8. C
The date of transition to PFRS refers to the
9. D
beginning of the earliest period for which an entity
10. A
presents full comparative information under PFRS
Page 646
in its first PFRS financial statements. The date of
transition to
PFRS depends on two factors, namely: Page 653
a. The date of adoption of PFRS.
b. The number of years of comparative 8. C
information that an entity decides to present 9. D
together with the financial statements in the year 10. D
of adoption. Page 654

5. Define an opening PFRS statement of financial

position.
CONCEPTUAL FRAMEWORK
Answer: AND ACCOUNTING
An opening PFRS statement of financial STANDARDS
position is the statement of financial position
prepared by a first time adopter а on the date of
transition to PFRS. The opening PFRS statement of
financial position is the starting point for
CHAPTER XXXI
accounting in accordance with PFRS.
QUESTIONS
6. What are the requirements in preparing an
opening PFRS statement of financial position?
1. Define a share-based compensation
Answer:
plan. Answer:
In preparing the opening statement of
A share-based compensation plan is a
financial position, an entity is required to:
compensation arrangement established by
a. Recognize all assets and liabilities required by
the entity whereby the entity’s employees
PFRS. b. Derecognize assets and liabilities not
shall receive equity shares in exchange for
permitted by PFRS.
their services or the entity incurs liabilities to
the employees in amounts based on the
price of its shares.
c. Reclassify items that it recognized under previous
GAAP as one type of asset, liability or equity but a
different type of asset, liability or equity under PFRS.
2. Explain the two share-based compensation plans.
d. Measure all recognized assets and liabilities in
compliance with PFRS. Answer:
The two share-based compensation plans are
7. How should a first time adopter recognize the the following:
adjustments required to present an opening PFRS a. Equity settled- The entity issues equity
statement of financial position? instruments in consideration for services
Answer: received, for example, share options.
Any adjustments required to present an b. Cash settled- The entity incurs a liability
opening PFRS statement of financial position should for services received and the liability is
be recognized in retained earnings or if based
appropriate, in another component of equity. on the entity’s equity instruments, for
8.What are the first PFRS financial statements example, share appreciation rights.
prepared by a first time adopter?
Answer: 3. What are share options?
If the entity adopts PFRS for the first time in Answer:
the current year, its first PFRS financial statements
Share options are granted to officers and key
include the following:
employees to enable them to acquire
1. Three statements of financial position at the end shares of the entity during a specified
of current year, at the end of prior year and at the period upon
date of transition to PFRS
57
2. Two statements of comprehensive income for
fulfilment of certain conditions at a
the current year and prior year
specified price. These are typically granted
3. Two separate income statements for the current
to officers and key employees as part of
year and prior year.
their remuneration package, in addition to
4. Two statements of changes in equity for the a cash salary and other employment
current year and prior year. benefits.
5. Two statements of cash flows for the current year 4. Explain briefly the fair value method of
and prior year. measuring compensation arising from share
6. Notes to financial statements including options.
comparative information. Answer:
Page 651 Fair value method means that the
compensation is equal to the fair value of
Problem 30-1 Multiple Choice (IFRS) the share options on the date of grant.
1. B
2. C 5. Explain the accounting procedure if an entity
3. C cancels or settles share options during the vesting
4. B period.
Page 652
Answer:
5. C PFRS 2, paragraph 28, provides that if an
6. D entity cancels or settles a grant of share
7. D options during the vesting period, the entity
 shall account for the cancelation or
settlement as an acceleration of vesting. 5. D
6. B
6. Explain fully a cash settled share-based 7. A
payment transaction. 8. C
Page 670
Answer:
Cash settled share-based transaction is when 9. C
the entity incurs a liability for services
10. D
received and the liability is based on the
Page 671
entity’s equity instruments, for example,
share appreciation rights.
PROBLEM 31-8 MULTIPLE CHOICE (IFRS)
1. B
7. Distinguish cash settled share-based payment
transaction from an equity settled share-based 2. D
transaction. 3. C
Answer: 4. D
In cash settled share-based transaction, the 5. C
entity incurs a liability for services received Page 672
and the liability is based on the entity’s
equity instruments, while in equity settled CONCEPTUAL FRAMEWORK
share
based transaction, the entity issues equity AND ACCOUNTING
instruments in consideration for services STANDARDS

CHAPTER XXXII
received.

8. What is a share appreciation right?

Answer:
Share appreciation right entitles the QUESTIONS
employee to a cash payment equal to the 1. Define noncurrent asset and a disposal
increase in the price of a given number of group. Answer:
shares over a given period. Noncurrent asset is may be an individual
asset, like land and building, or a disposal
group, while a disposal group is a group of
9. Distinguish a share appreciation right from a assets to be disposed of, by sale or
share option. otherwise, together as a group in a single
Answer: transaction,
Like a share option, a share appreciation
right is viewed as compensation for services
rendered. and liabilities directly associated with those
Unlike in a share option, the entity shall assets that will be transferred in the
recognize a liability because a share transaction.
appreciation right is actually an obligation
on the part of the entity to pay cash in the 2. When is a noncurrent asset classified as held for
future on exercise date. sale?
Answer:
10. Explain the recognition and measurement of PFRS 5, paragraph 6, provides that a
compensation arising from share appreciation right. noncurrent asset is classified as held for sale
Answer: if the carrying amount will be recorded
The recognition of compensation includes the principally through a sale transaction rather
following: than through continuing use.
a. If the share appreciation right vests
immediately, the compensation is 3. What are the conditions for classification as held
recognized immediately. for sale?
b. If the share appreciation right does not Answer:
vest until the employee completes a The conditions for classification as held for sale are 58
definite vesting period, the the following:
compensation is recognized over the The asset or disposal group is available for
vesting period. immediate sale in the present condition.
The measurement of compensation states that the In other words, the current condition of the
compensation is based on the fair value of the asset should be adequate to be effectively
liability at the reporting date and shall be ” sold as seen”.
measured at every year-end until it is finally settled. The sale must be highly probable.
Page 665
4. What is the meaning of “highly probable”?
PROBLEM 31-7 MULTIPLE CHOICE (PFRS 2) Answer:
1. B For sale to be highly probable, the following
2. A conditions must be met:
3. B Management must be committed to a plan
4. A to sell the asset or disposal group.
Page 669 An active program to locate a buyer and
 complete the plan must have been initiated. liabilities of the group shall be presented
The sale is expected to be a “completed separately and cannot be offset as a single
sale” within one year from the date of amount.
classification as held for sale. Page 681
The asset or disposal group must be actively
marketed for sale at a sale price that is PROBLEM 32-4 MULTIPLE CHOICE (PFRS 5)
reasonable in relation to the fair value. 1. A
Actions required to complete the plan 2. A
indicate that it is unlikely that the plan will 3. D
be significantly changed or withdrawn. 4. C
Page 684
5. Explain the measurement of noncurrent asset
classified as held for sale. 5. A
Answer: 6. B
PFRS 5, paragraph 15, provides that an entity 7. C
shall measure a noncurrent asset or disposal 8. A
group classified as held for sale at the lower Page 685
of carrying amount or fair value less cost of
disposal. 9. B
10. C
6. Explain the write-down of the noncurrent asset
Page 686
to fair value less cost of disposal.
Answer:
If the fair value less cost of disposal is lower
than carrying amount of the asset or CONCEPTUAL FRAMEWORK
disposal group, the write-down to fair value AND ACCOUNTING
less cost of disposal is treated as an
impairment loss. STANDARDS

CHAPTER XXXIII
If the noncurrent asset is a disposal group, the
impairment loss is apportioned across the
assets based on carrying amount.
QUESTIONS
7. Explain the treatment of a subsequent increase in
1. Define a discontinued operation.
fair value less cost of disposal relating to an asset
Answer:
classified as held for sale.
Discontinued operations are an accounting
Answer:
term that refers to parts of a company's core
If subsequently there is an increase in the fair
business or product line that have been divested
value less cost of disposal, PFRS 5,
or shut down. Discontinued operations are
paragraph 21, provides that an entity shall
reported on the income statement separately
recognize a gain but not in excess of any
from continuing operations.
impairment loss previously recognized.
59
8. What is the treatment of abandoned noncurrent 2. Give examples of discontinued operation.
asset or disposal group? Answer:
Answer:
Selling by a diversified entity of a major
PFRS 5, paragraph 13, provides that an entity
division that represents the entity's only
shall not classify as held for sale a
activities in the electronics industry.
noncurrent asset or disposal group that is to
Selling by a meat packing entity of controlling
be abandoned.
interest in a furniture entity.
Selling by a communications entity of all its
radio stations.
9. Explain the treatment of a change in
A conglomerate is engaged in commodity
classification of a noncurrent asset classified as
business, real estate, manufacturing and
held for sale. Answer:
construction business.
PFRS 5, paragraph 27, provides that the entity
shall measure the noncurrent asset that
3. Explain the presentation of a discontinued
ceases to be classified as held for sale at the
operation in the income statement.
lower between:
Answer:
⮚ Carrying amount of the asset on the basis that
Provides that an entity shall disclose a single
the asset had not been classified as held for
amount comprising the total of post-tax profit or
sale.
loss recognized on the measurement to fair value
⮚ Recoverable amount at the date of the
less to cost of disposal or on the disposal of the
subsequent decision not to sell.
assets or disposal group constituting the
discontinued operation.
10. Explain the presentation of noncurrent asset
classified as held for sale in the statement of
4. Explain the presentation of a discontinued
financial position.
operation in the statement of financial position.
Answer: Answer:
PFRS 5, paragraph 38, provides that if the Provides that the assets of the component shall be
noncurrent asset is a disposal group
presented as a single amount under current assets
classified as held for sale, the assets and
and the liabilities of the component shall be
presented as a single amount under current An impairment loss is recognized when the
liabilities. fair value less cost of disposal of the
The assets and liabilities of the component cannot discontinued operation is lower than the
be offset against the other. carrying amount of the net assets.
Any gain or loss from the actual disposal of
5. What are the disclosures about discontinued the assets and settlement of the liabilities of
operation. a discontinued operation.
Answer: The termination cost of employees and other
The amount of revenue, expenses and costs which are directly incurred as a result
income or loss attributable to the of the discontinuance.
discontinued operation during the current Page 693
period and the related income tax.

4. Define an operating segment.

PROBLEM 33-7 MULTIPLE CHOICE Answer:
(IFRS) 1. D

2. A produces and the geographical areas in

3. D which an entity operates.
Page 697
3. What is the scope of PFRS 8?
4. A Answer:
5. A IFRS 8 applies to the financial statements of any
Page 698 entity whose debt or equity instruments are
traded in a public market or who is seeking to
PROBLEM 33-8 MULTIPLE CHOICE (AICPA ADAPTED) issue any class of instruments in a public
1. C market.
2. C an operating segment can generally be
3. A thought of as a distinguishable component of
4. B an entity that is engage in business activities
5. C which generates revenue and incur expenses.
Page 699
5. Define a chief operating segment.
Answer:
CONCEPTUAL FRAMEWORK AND Operating segments are components of an
ACCOUNTING STANDARDS entity about which separate financial

CHAPTER XXXIV
information is available that is evaluated
regularly by the chief operating decision
maker in deciding how to allocate resources
and in assessing performance.
PROBLEM 34-5 MULTIPLE CHOICE (IFRS)
1. B 6. What are the quantitative thresholds in identifying 60
2. C reportable segments?
3. D Answer:
Page 706 If the total external revenue reported by
operating segments constitutes less than 75%
4. C of the total revenue, additional operating
5. B segments shall
Page 707 be identified as reportable segments until at
least 75% of the entity's revenue is included in
CONCEPTUAL FRAMEWORK AND reportable segments.

ACCOUNTING STANDARDS 7. Explain the 75% threshold in identifying

CHAPTER XXXV
reportable segments.
Answer:
At least 75 per cent of the total external
revenue of the entity must be reflected by the
QUESTIONS identified reportable segment, if this is not the
case the entity will be required to identify
1. What is the core principle of segment reporting? additional reportable
Answer: segments until at least 75 per cent of the total
core principle of segment reporting states that external revenue of the entity is reflected by
reportable.
an entity shall disclose information to enable
users of financial statements to evaluate the
nature and financial effects of the business 8. Enumerate the information to be disclose for
activities in which it engages and the each reportable segment.
economic environments in which it operates. Answer:
An entity shall disclose the following for each
reportable operating segment:
2. Explain briefly segment reporting.
General information about the operating
Answer:
segment
is the disclosure of certain financial information
Information about profit or loss, including
about the products and services and an entity
 specified revenue and expenses included in 8. D
the measure of profit or loss Page 721
Information about segment assets and segment
liabilities and the basis of measurement 9. B
Reconciliation of the totals of segment 10. D
revenue, segment profit or loss, segment Page 722
assets, segment liabilities and other material
segment items to corresponding items in the PROBLEM 35-6 (IFRS)
entity’s financial statements
1. B
9. Explain the disclosure about general 2. C
information. Answer: 3. B
4. D
10. Explain the disclosure about profit or loss for
5. B
each reportable segment.
Page 723
Answer:
an entity shall disclose for each reportable
segment measure of profit or loss, total assets
and total liabilities, also disclose a measure of CONCEPTUAL FRAMEWORK AND
profit or loss under all circumstances ACCOUNTING STANDARDS

11. What are the entity-wide disclosure? CHAPTER XXXVI

Answer:
are additional information that is required to be 1. Explain the initial measurement of financial
disclose by all entities if such information is not asset. Answer:
provided as part of the reportable segment an entity shall measure a financial asset at a fair
information value plus, in the case of financial asset not at
fair value through profit or loss, transaction
12. What is the entity-wide disclosure about product cost that are directly attribute to the
and services? acquisition of financial asset
Answer:
an entity shall disclose the revenue from 2. Explain the subsequent measurement of
external customers for each product and financial asset.
services Answer:
61
13. What is the entity-wide disclosure about Where assets are measured at fair value,
geographical areas? gains and losses are either recognized entirely
Answer: in profit or loss (fair value through profit or loss,
an entity shall disclose the following FVTPL), or recognized in other comprehensive
geographical information: income (fair value through other
(1) revenue from external customers in the entity’s comprehensive income, FVTOCI).
country of domicile, and in all foreign operations in
total 3. What are the financial asset measured at fair
(2) separate disclosure of material revenue from value through profit or loss?
external customers in an individual foreign country Answer:
Financial asset held for trading or popularly
14. What is major customer? known as “trading securities”
Answer: All other investment in quoted equity
is defined as a single external customer instruments
providing revenue which amounts to 10% or Debt investment that are irrevocably
more of an entity’s external revenue. designated on initial recognition as at fair
value through profit or loss
15. Explain the major customer All debt investment that do not satisfy the
disclosure. Answer: requirements for measurement at amortized
the entity shall disclose the fact of reliance on cost and at fair value through other
major customers, the total amount of revenue comprehensive income
from major customers and the identity of the
segment or segments reporting the revenue. 4. Explain financial asset held for trading.
Page 717 Answer:
are debt and equity securities that are
PROBLEM 35-5 MULTIPLE CHOICE (AICPA ADAPTED) purchased with the intent of selling them in
the “near term” or very soon
1. B
2. D 5. Explain measurement of equity investment at
3. D fair value through other comprehensive income.
4. C Answer:
Page 720 All equity investments in scope of IFRS 9 are to
be measured at fair value in the statement of
5. B financial position, with value changes
6. C recognized in profit or loss, except for
7. D those equity investments for which the entity
 has elected to present value changes in the business model is to collect contractual
'other comprehensive income'. cash flow if the contractual cash flows are
solely payments of principal and interest, in
6. Explain measurement of debt investment such case, the financial asset shall be
at amortized cost. measured at amortized cost
Answer:

4. Define active market.

7. Explain measurement of debt investment at ANSWER:
fair value through other comprehensive income.

Answer: sellers transacting business in the principal market for

an asset or liability. These participants are
8. Explain the treatment of unrealized gain or loss on independent or unrelated parties, have reasonable
financial at fair value. understanding of the transaction and are willing or
Answer: motivated to do and enter into a transaction to buy
Securities that are held-for-trading are and sell the item.
recorded on the balance sheet at their fair An active market is a market that regularly
value, and the unrealized gains and losses are experiencing high transaction volumes.
recorded on the income statement.
Therefore, the increase or decrease in the fair 5. Define principal market.
value of held-for-trading securities impacts the ANSWER:
company's net income and its earnings-per A principal market is the market with the
share (EPS) greatest volume and level of activity for the asset
or liability.
9. Explain the derecognition of equity investment at
fair value through other comprehensive income. 6. Define most advantageous market.
Answer: ANSWER:
Most advantageous market is the market that
10. Explain derecognition of equity investment at fair maximizes the amount that would be received to sell
value through other comprehensive income. Answer: the asset or minimizes the amount that could be
Page 733 paid to transfer the liability.
62
CHAPTER 36-5 7. Explain the valuation premise in measuring
fair value.
1.D ANSWER:
2.D In determining the fair value of an asset or a
3.C liability, an entity may refer to information that is
4.D directly observable or readily available. The fair
5.A value shall not be adjusted for transaction cost.
Page 736 If location is a characteristic of an asset, the fair
value shall be adjusted for transport cost that would
6.B be incurred to transport the asset from its current
7.C location to the principal or most advantageous
8.B market.
9.C
10.D 8. Explain highest and best use of an asset.
Page 737 ANSWER:
The highest and best use of the asset might
provide maximum value either on a stand-alone
CONCEPTUAL FRAMEWORK AND basis, or as a group in with other asset and
ACCOUNTING STANDARDS liability.

CHAPTER XXXVII 9. Explain the three valuation techniques in

measuring fair value.
ANSWER:
1. Define Fair Value. The three valuation techniques that can be
ANSWER: used to measure fair value:
Fair value refers to an “exit price” or market price Market approach – this approach uses prices
under current market conditions at measurement and relevant information for market
rate. It is also the price in an orderly transaction and transactions for identical and comparable
agreed upon by market participants. asset.
Income approach – this income approach
2. What is an orderly transaction? focuses on converting future amounts into
ANSWER: discounted cash flows.
An orderly transaction is a transaction that Cost approach-this approach relies on the
allows for normal marketing activities that are usual current replacement cost to replace the asset
and customary. with a comparable asset.

3. Explain Market Participants. 10. Explain the fair value hierarchy.

ANSWER: ANSWER:
Market participants are those buyers and The fair value hierarchy or evidence of fair
value is enumerated as follows: accordance with the core principle should apply the
Level 1 is quoted prices for identical items in following five-step model:
active, liquid and visible market such as stock Step 1 Identify the contract with the customer
exchanges. This quoted price provides the Step 2 Identify the performance obligation in the
most reliable evidence of fair value and shall contract
be used without adjustment. Step 3 Determine the transaction price
Level 2 is observable either directly or Step 4 Allocate the transaction price to the
indirectly information for similar items in active performance obligations in the contract
or inactive markets, such as two similarly Step 5 Recognize revenue when or as the entity
situated buildings in a downtown real estate satisfies a performance obligation
market.
Level 3 are unobservable inputs to be used in 4. Define a contract.
situations where markets don’t exist or are ANSWER:
illiquid such as the present credit cases. At this
point, fair market valuation becomes highly
A contract is an agreement between two or
more parties that creates enforceable rights and
subjective. Unobservable inputs are usually obligations in a contract.
developed by the entity using the best 5. What are the criteria for recognizing a contract
available information from the entity’s own with a customer?
data. ANSWER:
The parties to the contract have approved
The fair value hierarchy gives the highest priority to the contract in writing, orally or in accordance with
quoted prices (unadjusted) in active markets for customary business practice, rights and obligations of
identical assets or liabilities (Level 1), and the lowest the parties in the contract can be identified,
priority to unobservable inputs(Level3) payment terms in the contract can be identified, the
Page 742 contract has commercial substance and the
collection of the consideration is probable.
1.B
2.A 6. Define a performance obligation.
3.D ANSWER:
4.D A performance obligation is a promise to 63
Page 743 deliver a good or service in a contract with customer.

5.C 7. Define a transaction price.

6.A ANSWER:
7.B The transaction price is the amount of
8.A consideration in a contract to which an entity
Page 744 expects to be entitled in exchange for transferring
good or service to a customer.
9.B
10.B
Page 745
8. Explain the allocation of the transaction price to
multiple performance obligations.
CONCEPTUAL FRAMEWORK AND ANSWER:
ACCOUNTING STANDARDS The transaction price is allocated to each

CHAPTER XXXVIII
performance obligation on the basis of relative stand
alone selling price of each good or service. This
stand-alone selling price is the price that the entity
would sell a promised good or service separately to
a customer.
1. Define revenue and income.
ANSWER: 9. When is revenue recognized?
Revenue is income in the ordinary course of ANSWER:
business activities. The transaction price is allocated to each
Income is increase in economic benefit during performance obligation on the basis of relative stand
the accounting period in the form of an inflow or alone selling price of each good or service.
enhancement of asset or decrease in liability that
results in an increase of equity, other than 10. Explain the revenue recognition at a point in time
contribution from equity participants. or over time.
ANSWER:
2. What is the core principle of revenue recognition? The entity shall recognize revenue at a point
ANSWER: of time when the customer has the significant risks
Revenue is recognized in a manner that and rewards of ownership, when the customer has
depicts the transfer of good and service to a legal title to the asset and when the entity has the
customer and the revenue reflects the consideration right to receive payment for the asset and for which
to which an entity expects to be entitled. the customer is obliged to pay.
The entity shall also recognize revenue when the
3. What is the five-step model in recognizing revenue? entity has an enforceable right to receive payment
ANSWER: for performance completed on date. For example,
An entity that recognizes revenue in constructing a specialized asset that only the
customer can use or constructing an asset in 3.B
accordance with customer order. 4.C
Page 769
11. Explain the recognition of a sale with a right of _
return.
ANSWER:
The entity shall recognize a sale with the right
return when the revenue equal to the total sale price
CONCEPTUAL FRAMEWORK AND
less the sale price of the expected return and when ACCOUNTING STANDARDS

CHAPTER XXXIX
a recover asset and the corresponding reduction of
cost of goods sold equal to the cost of the expected
return.

12. Define consignment. 1. Define a lease under the new lease

ANSWER: standard. Answer:
Consignment is a method of marketing goods A lease is defined as a contract or part of a
in which the entity called the consignor transfers contract that conveys the right to use the underlying
physical possession of certain goods to a dealer or asset for a period of time in exchange for
distributor called the consignee that sells the goods consideration.
on behalf of the consignor.
2. Explain the finance lease model on the part of the
13. Define bill and hold arrangement. lessee.
ANSWER: Answer:
Bill and hold arrangement is a contract under 64
which an entity bills a customer for a product but the IFRS 16, paragraph 22, provides that at the
entity retains possession of the product. commencement date, a lessee shall recognize a
right of use asset and lease liability.
14. What are the criteria for the recognition of This simply means that a lessee is required to
revenue in a bill and hold arrangement. initially recognize a right of use asset for the right to
ANSWER: use the underlying asset over the lease term and
The following criteria must be met for the lease liability for the obligation to make payments.
recognition of revenue in a bill and hold All leases shall be accounted for by the lessee
arrangement: as a finance lease under the new lease standard.
a. The customer has requested for the arrangement.
b. The product must be identified separately as 3. Define underlying asset, lessee and lessor.
belonging to the customer. Answer:
c. The product must be ready for physical transfer to The underlying asset is the subject of a lease
the customer anytime. for which the right to use that asset has been
d. The entity cannot have the ability to use the provided by the lessor to the lessee.
product or to direct it to another customer. The lessee is the entity that obtains the right to
use an underlying asset for a period of time in
15. Explain the customer loyalty exchange for consideration.
program. ANSWER: The lessor is the entity that provides the right
The customer loyalty program builds to have a to use an underlying asset for a period of time in
brand loyalty, it was designed to reward customers for exchange for consideration.
past purchases. If the customer buys good and
services, the entity grants the customer award credits 4. Explain the operating lease model on the part of
often described as “points”. The entity can redeem the lessee.
the “points” by distributing to the customer free or Answer:
discounted goods or services. IFRS 16, paragraph 5, provides that a lessee is
A customer may be required to accumulate to permitted to make an accounting policy election to
specified minimum number of award credits or apply the operating lease accounting and not
“points” before they can have redeemed. Page 760 recognize an asset and lease liability in two optional
exemptions.
1.D a. Short-term lease
2.D b. Low value lease
3.B
4.D 5. What are the two conditions in order that a lessee
5.D may apply the operating lease model?
Page 767 Answer:
Stated differently, a lessee may or may not
apply the operating lease accounting if the lease is
6.A short-term or if the underlying asset is of low value.
7.D
8.A 6. Explain short-term lease.
9.B Answer:
10.C A short-term lease as a lease is defined as that
Page 768 has a term of 12 months or less at the
commencement date of the lease.
1.B A lease that contains a purchase option is not
2.C a short-term lease.
 a. Fixed lease payments or periodic
rental
7. Explain a low value lease. b. Variable lease payments
Answer: c. Exercise price of a purchase option if
Low value asset is a matter of professional the lessee is reasonably certain to
judgement. exercise the option
The lease shall assess the value of an d. Amount expected to be payable by
underlying asset based on the value of asset when it is the lessee under a residual value
new regardless of the age of the asset being leased. guarantee
A lease of an underlying asset does not e. Termination penalties if the lease term
qualify as a low value lease if the nature of the asset is
reflects the exercise of a termination
such that the asset is typically not of low value when
option.
new.
For example, a lease of car would not qualify
as low value lease because a new car would 13. When is a lease classified as finance lease or 65
typically not be of low value. operating lease on the part of lessor?
Typically, low value underlying assets include Answer:
personal computers, office furniture and equipment. Whether a lease is a finance lease or an
operating lease depends on the substance of the
8. Define a finance lease. transaction rather than the form of the contract.
Answer: Under IFRS 16, paragraph 63, among others,
A finance lease is defined as a lease that any of the following situations would normally lead to
transfers substantially all of the risks and rewards a lease being classified as a finance lease:
incidental to ownership of an underlying asset. a. The lease transfers ownership of the
underlying asset to the lessee at the
9. What are the components of the cost of right of use end of the lease term.
of asset? b. The lessee has an option to purchase
Answer: the asset at a price which is expected
The cost of right of use of asset comprises: a. The to be sufficiently lower than the fair
present value of lease payments value at the date the option becomes
b. Lease payments made to lessor such as exercisable.
lease bonus, less any incentive At the inception of the lease, it is reasonably certain
received. the option will be exercised.
c. Initial direct costs incurred by the lease c. The lease term is for the major part of
d. Estimate of cost of dismantling and the economic life of the underlying
restoring the underlying asset for which asset even if title is not transferred.
the lease has a present obligation. Under USA GAAP, major part means at least 75% of
the economic life of an asset.
10. Explain the depreciation of right of use of d. The present value of the lease
asset? Answer: payments amounts to substantially all
The lessee shall apply normal depreciation of the fair value of the underlying asset
policy for right of use of asset. at the inception of the lease.
IFRS 16, paragraph 32, provides that the Under USA GAAP, substantially all means at least 90%
lessee shall depreciate the right of use asset over the of the fair value of the underlying asset.
useful life of the underlying asset under the following
conditions: 14. What are the two classifications of finance lease
a. The lease transfers ownership of the on the part of the lessor?
underlying asset to the lessee at the end Answer:
of lease term. On the part of the lessor, a finance lease is
b. The lessee is reasonably certain to exercise either: a. Direct financing lease
a purchase option. b. Sales type lease
If there is no transfer of ownership to the lessee or if
the purchase option is not reasonably certain to be 15. Distinguish direct financing lease from sale type
exercised, the lessee shall depreciate the right of use lease.
asset over the shorter between the useful life of the Answer:
asset and the lease term. A direct financing lease recognizes only
interest income while a sales type lease recognizes
11. Explain the measurement of lease interest income and gross profit on sale.
liability. Answer: The main distinction between the two is the
The lessee shall measure the lease liability at presence or absence of a manufacturer or dealer
the present value of lease payments. profit or loss.
The lease payments shall be discounted using Page 785
the interest rate implicit in the lease desired by the
lessor.
If the implicit interest rate cannot be readily 1.A
determined, the incremental borrowing rate of the 2.C
lessee is used. 3.A
4.D
5.A
12. What are the components of lease
Page 790
payments? Answer:
Components of lease payments
6.D
7.A
8.A 6. Explain the measurement of noncash asset to be
9.B distributed to owners.
10.C Answer:
Page 791 Paragraph 15A of PFRS 5 provides that an
entity shall measure a noncurrent asset classified for
1.D distribution to owners at the lower of carrying
2.D amount and fair value less cost to distribute.
3.A Accordingly, if the fair value less cost to
4.D distribute is lower than the carrying amount of the
asset at the end of the reporting period, the
5.C
difference is accounted for as impairment loss.
Page 792
7. Explain the measurement of equity instrument
1.C
issued to extinguish a financial liability.
2.C
Answer:
3.C
IFRIC 19 provides that the equity instrument
4.B issued to extinguish a financial liability shall be
Page 793 measured at the following amounts in the order of
priority:
a. Fair value of equity instrument issued
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS b. Fair value of liability extinguished

CHAPTER XXXX c. Carrying amount of liability extinguished

8. What is the presentation of the gain or loss on

extinguishment of a financial liability by issuing equity
instrument?
1. Define a decommissioning liability.
Answer:
Answer:
The difference between the carrying amount of the
IFRIC 1 defines decommissioning liability as an
financial liability and initial measurement of the equity
obligation to dismantle, remove and restore an item
instrument shall be recognized as a gain or loss on
of property, plant and equipment as required by law
extinguishment.
or contract.
The gain or loss on extinguishment shall be reported as a
separate line item in the income statement.
2. What is the treatment of a decommissioning
liability?
9. What is the classification of members’ shares in
Answer:
cooperative entities?
66 Answer:
The decommissioning liability is capitalized as
Member’s share in cooperative entities may be classified
cost of the property and initially recognized at
as equity or liability depending on the terms and
present value.
conditions of the financial instrument.
3. Explain the treatment of a change in the
10. What are the conditions necessary to classify
decommissioning liability.
members’ shares in cooperative entities as equity? Answer:
Answer:
Members’ shares in cooperative entities are classified as
a. A decrease in decommissioning
equity if the members did not have a right to request for
liability is deducted from the cost of redemption under either of the following conditions:
the asset. a. If the entity has an unconditional right to refuse
b. An increase in decommissioning redemption of the members’
liability is added to the cost at the shares.
asset. b. If the redemption is unconditionally prohibited by law,
regulation or the
4. What is a distribution of noncash asset to entity’s charter.
owners? Answer: Page 802
The distribution of noncash asset to owners is
actually payment of property dividend to CHAPTER 40-6
shareholders. 1.B
2.A
5. Explain the measurement of the dividend payable
3.A
as a result of distribution of noncash asset to owners.
4.C
Answer:
Page 807
IFRIC 17, paragraph 11, provides that an entity
shall measure a liability to distribute noncash asset as
CHAPTER 40-7
a dividend to its owner at the fair value of the asset
to be distributed 1.A
The dividend payable is initially recognized at 2.A
the fair value of the noncash asset on the date of 3.C
declaration ad is increased or decreased as a result 4.B
of the change in fair value of the asset at year-end Page 808
and date of settlement.
CHAPTER 40-8
1.A
2.B
3.C
4.D
5.A
Page 809

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