ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Problem Portion

Numbers 1 and 2 (Partnership Formation)

A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with
assessed value of P100,000 with historical cost of P800,000 and accumulated depreciation of
P600,000. A day after the partnership formation, the equipment was sold for P 300,000.

B will contribute a land and building with carrying amount of P1,200,000 and fair value of P1,500,000.
The land and building are subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership. The partners agreed that B will have 60% capital interest in the partnership. The partners
also agreed that C will contribute sufficient cash to the partnership.

1. What is the total agreed capitalization of the ABC Partnership?

A. 1,500,000
B. 2,000,000
C. 2,500,000
D. 3,000,000

2. What is the cash to be contributed by C in the ABC Partnership?

A. 500,000
B. 600,000
C. 700,000
D. 800,000

Numbers 3 and 4 (Partnership Operation – Capital Account Transactions)

On January 1, 2018, A, B and C formed ABC Partnership with total agreed capitalization of
P1,000,000. The capital interest ratio of the ABC Partnership is 5:1:4 while the profit or loss ratio is
3:2:5, respectively for A, B and C.

During 2018, A and B made additional investments of P200,000 and P500,000, respectively. At the end
of 2018, B and C made drawings of P300,000 and P100,000, respectively. On December 31, 2018, the
capital balance of B is reported at P200,000.

3. What is the net income or net loss of ABC Partnership for the year ended December 31, 2018?
A. 500,000 loss
B. 1,000,000 loss
C. 800,000 income
D. 1,200,000 income

4. What is the capital balance of C on December 31, 2018?

A. 150,000
B. 50,000
C. 200,000 33 5
D. 250,000
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Numbers 5, 6, and 7 (Partnership Operation – Distribution of profit or loss)

On January 1, 2018, A, B and C formed ABC Partnership with original capital contribution of
P300,000, P500,000 and P200,000. A is appointed as managing partner.

During 2018, A, B and C made additional investments of P500,000, P200,000 and P300,000,
respectively. At the end of 2018, A, B and C made drawings of P200,000, P100,000 and P400,000,
respectively. At the end of 2018, the capital balance of C is reported at P320,000. The profit or loss
agreement of the partners is as follows:

 10% interest on original capital contribution of the partners.

 Quarterly salary of P40,000 and P10,000 for A and B, respectively.
 Bonus to A equivalent to 20% of Net Income after interest and salary to all partners
 Remainder is to be distributed equally among the partners.

5. What is the partnership profit for the year ended December 31, 2018?
A. 900,000
B. 1,020,000
C. 1,050,000
D. 960,000

6. What is A’s share in partnership profit for 2018?

A. 190,000
B. 340,000
C. 540,000
D. 200,000

7. What is B’s share in partnership profit for 2018?

A. 200,000
B. 290,000
C. 50,000
D. 90,000

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Number 8 (Admission of partner by purchase)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 1:6:3:
Current Assets 1,000,000 Total Liabilities 600,000
Noncurrent Assets 2,000,000 A, Capital 900,000
B, Capital 800,000
C, Capital 700,000

On January 1, 2019, D is admitted to the partnership by purchasing 40% of the capital interest of B at a
price of P500,000.

What is the capital balance of B after the admission of D on January 1, 2019?

A. 540,000
B. 480,000
C. 420,000
D. 300,000

Number 9 (Retirement of partner)

On December 31, 2018, ABC Partnership’s Statement of Financial Positions shows that A, B and C
have capital balances of P500,000, P300,000 and P200,000 with profit or loss ratio of 1:3:6. On
January 1, 2019, C retired from the partnership and received P350,000. At the time of C’s retirement,
an asset of the partnership is undervalued.

What is the capital balance of A after the retirement of C?

A. 462,500
B. 537,500
C. 562,500
D. 525,000

Number 10 (Retirement of partners)

On December 31, 2018, ABC Partnership’s Statement of Financial Position shows that A, B and C
have capital balances of P400,000, P300,000 and P100,000 with profit or loss ratio of 1:4:5. On
January 1, 2019, C retired from the partnership and received P80,000. At the time of C’s retirement, the
assets and liabilities of the partnership are properly valued.

What is the capital balance of B after the retirement of C?

A. 284,000
B. 308,000
C. 316,000
D. 320,000

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Number 11 (Partnership Dissolution – Admission of New Partner by Investment)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 1:6:3:
Current Assets 1,300,000 Total Liabilities 300,000
Noncurrent Assets 2,000,000 A, Capital 1,400,000
B, Capital 700,000
C, Capital 900,000
On January 1, 2019, D is admitted to the partnership by investing P1,000,000 to the partnership for
20% capital interest.
If the all the assets of the existing partnership are properly valued, what is the capital balance of C after
the admission of D?
A. 960,000
B. 900,000
C. 840,000
D. 1,200,000

Numbers 12 and 13 (Admission of new partner by investment)

On December 31, 2018, the Statement of Financial Position of ABC Partnership provided the
following data with profit or loss ratio of 5:1:4:
Current Assets 1,500,000 Total Liabilities 500,000
Noncurrent Assets 2,000,000 A, Capital 1,100,000
B, Capital 1,200,000
C, Capital 700,000
On January 1, 2019, D is admitted to the partnership by investing P500,000 to the partnership for 10%
capital interest. The total agreed capitalization of the new partnership is P3,000,000.

12. What is the capital balance of D after his admission to the partnership?
A. 500,000
B. 300,000
C. 350,000
D. 400,000

13. What is the capital balance of C after the admission of D to the partnership?
A. 580,000
B. 820,000
C. 500,000
D. 780,000

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Numbers 14 and 15 (Partnership Liquidation – Lump Sum Liquidation)

On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss
ratio of 6:1:3 of partners A, B and C respectively, revealed the following data:

Cash 1,000,000 Other Liabilities 2,000,000

Receivable from A 500,000 Payable to B 1,000,000
Other noncash assets 2,000,000 Payable to C 100,000
A, Capital 700,000
B, Capital (650,000)
C, Capital 350,000
On January 1, 2019, the partners decided to liquidate the partnership. All partners are legally declared
to be personally insolvent. The other noncash assets were sold for P1,500,000. Liquidation expenses
amounting to P100,000 were incurred.

14. How much cash was received by B at the end of partnership liquidation?
A. 250,000
B. 150,000
C. 290,000
D. 270,000

15. How much cash was received by C at the end of partnership liquidation?
A. 270,000
B. 150,000
C. 350,000
D. 220,000

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Numbers 16, 17 and 18 (Partnership Liquidation – Installment Liquidation)

On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss
ratio of 5:3:2 of respective partners A, B and C. showed the following information:

Cash 1,600,000 Total Liabilities 2,000,000

Noncash assets 1,400,000 A, Capital 100,000
B, Capital 500,000
C, Capital 400,000

On January 1, 2019, the partners decided to liquidate the partnership in installment. All partners are
legally declared to be personally insolvent.

As of January 31, 2019, the following transactions occurred:

 Noncash assets with a carrying amount P1,000,000 were sold at a gain of P100,000.
 Liquidation expenses for the month of January amounting to P50,000 were paid.
 It is estimated that liquidation expenses amounting to P150,000 will be incurred for the month
of February, 2019.
 20% of the liabilities to third persons were settled.
 Available cash was distributed to the partners.

As of February 28, 2019, the following transactions occurred:

 Remaining noncash assets were sold at a loss of P100,000.
 The final liquidation expenses for the month of February amounted to P100,000.
 The remaining liabilities to third persons were settled at a compromise amount of P1,500,000.
 Remaining cash was finally distributed to the partners.

16. What is the amount of cash received by partner C on January 31, 2019?
A. 260,000
B. 240,000
C. 300,000
D. 350,000

17. What is the share of B in the maximum possible loss on January 31, 2019?
A. 275,000
B. 110,000
C. 120,000
D. 165,000

18. What is the amount of total cash withheld on January 31, 2019?
A. 550,000
B. 1,600,000
C. 1,750,000
D. 1,700,000

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Numbers 19, 20 and 21 (Corporate Liquidation)

Cagayan Company is experiencing financial problems which resulted to ultimate bankruptcy. The
statement of financial position of the entity before liquidation is presented below:
Cash 100,000 Income tax payable 200,000
Inventory 300,000 Salaries payable 300,000
Land 200,000 Note payable 800,000
Mortgage payable 100,000
Accounts payable 400,000
Contributed capital 500,000
Deficit (1,700,000)

 The note payable is secured by the inventory with net realizable value of P250,000.
 The mortgage payable is secured by the land with fair value of P120,000.

19. What is the amount received by the holder of the note payable at the end of corporate liquidation?
A. 320,000
B. 300,000
C. 250,000
D. 260,000

20. What is the amount received by the holder of the mortgage payable at the end of corporate
liquidation?
A. 120,000
B. 200,000
C. 150,000
D. 100,000

21. What is the amount received by the employees at the end of corporate liquidation concerning their
salaries?
A. 100,000
B. 120,000
C. 72,000
D. 300,000

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Numbers 22 and 23 (Corporate Liquidation)

Surigao Company is bankrupt and has undergone corporate liquidation. Presented below is its
statement of financial position before the start of liquidation:

Cash 300,000 Accounts Payable 100,000

Machinery 500,000 Salaries Payable 200,000
Building 1,200,000 Income tax Payable 300,000
Loan Payable 400,000
Mortgage payable 500,000
Contributed capital 800,000
Deficit (300,000)

 Liquidation expenses amounting to P600,000 were paid.

 The loan payable is secured by the machinery with fair value of P300,000.
 The mortgage payable is secured by the building.
 At the end of liquidation, the holder of loan payable received P340,000.

22. What is the amount received by the holder of accounts payable at the end of liquidation?
A. 85,000
B. 15,000
C. 40,000
D. 60,000

23. What is the amount of net free assets available at the end of liquidation?
A. 80,000
B. 40,000
C. 120,000
D. 200,000

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Numbers 24, 25 and 26 (Joint Arrangement classified as Joint Operation)

Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the

incorporating entities as component for their final products of cellular phones and tablets.

The contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of
60:40. At the end of first operation of Entity C, the financial statements provided the following data:

Inventory 1,000,000 Accounts payable 2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the
assets and liabilities of Entity C:
 Entity A owns the land and incurs the loan payable of Entity C.
 Entity B owns the building and incurs the note payable of Entity C.
 The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their
capital interest in Entity C.
 The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000
and P2,000,000, respectively. As of the end of the first year, Entity A and Entity B were able to
resell 30% and 60% of the inventory coming from Entity C to third persons.

24. What is the amount of total assets to be reported by Entity A concerning its interest in Entity C?
A. 5,400,000
B. 3,000,000
C. 3,600,000
D. 5,000,000

25. What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C?
A. 1,800,000
B. 2,200,000
C. 2,800,000
D. 2,400,000

26. What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C?
A. 2,300,000
B. 2,100,000
C. 3,000,000
D. 2,500,000

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Numbers 27 and 28 (Joint Arrangement classified as Joint Venture Equity Method)

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C
which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities
provided that the decisions on relevant activities of Entity C will require the unanimous consent of
both entities. Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of Entity C. The financial statements of Entity C provided the following data for its two-year
operation:
Net income (loss) Dividends declared
2018 200,000 100,000
2019 (2,000,000) -

27. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of
Financial Position on December 31, 2019?
A. 1,080,000
B. 1,040,000
C. 240,000
D. 200,000

28. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of
Financial Position on December 31, 2019?
A. 1,500,000
B. 1,620,000
C. 360,000
D. 900,000

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Number 35 (Installment sales)

Nikko Company, which began operations on January 5, 2018, appropriately uses the installment
method of revenue recognition. The following information pertains to the operations for 2018 and
2019:

2018 2019
Sales 300,000 450,000
Collections from :
2018 sales 100,000 50,000

2019 sales - 150,000

Accounts written off from
2018 sales 25,000 75,000
2019 sales - 150,000

Gross profit rates 30% 40%

What amount should be reported as deferred gross profit on December 31, 2019?
A. 75,000
B. 80,000
C. 112,000
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D. 125,000
Numbers 36 and 37 ( Installment sales)

Appliance Company reports gross profit on the installment basis. The following data are available:

2018 2019 2020

Installment sales 240,000 250,000 300,000
Cost of goods – installment sales 180,000 181,250 216,000
Gross profit 60,000 68,750 84,000

Collections
2018 installment contracts 45,000 75,000 72,500
2019 installment contracts 47,500 80,000
2020 installment contracts 62,500

Defaults
Unpaid balance of 2018 installment contracts 12,500 15,000
Value assigned to repossessed merchandise 6,500 6,000
Unpaid balance of 2019 installment contracts 16,000
Value assigned to repossessed merchandise 9,000

36. What is the realized gross profit before loss on repossession for 2020?
A. 49,775
B. 57,625
C. 48,975
D. 56,625

1. What is the loss on repossession for 2020?

A. 5,250
B. 2,600
C. 7,850
D. 9,000

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Number 38 (Installment sales)

Davao Company uses the installment method of income recognition. The entity provided the following
pertinent data:

2018 2019 2020

Installment sales 300,000 375,000 360,000
Cost of goods sold 225,000 285,000 252,000

Balance of Deferred Gross Profit at Year end

2018 52,500 15,000 -
2019 54,000 9,000
2020 72,000

What is the total balance of the Installment Accounts Receivable on December 31, 2020?
A. 270,000
B. 277,500
C. 279,000
D. 300,000

Numbers 39 and 40 (Installment Sales)

On January 1, 2018, an entity sold a car to a customer at a price of P400,000 with a production cost of
P300,000. It is the entity’s policy to employ installment method to recognize gross profit from
installment sales.

At the time of sale, the entity received cash amounting to 25% of the selling price and old car with
trade-in allowance of P50,000. The said old car has fair value of P150,000. The customer issued a
5-year note for the balance to be payable in equal annual installments every December 31 starting
2018. The note payable is interest bearing with 10% rate due on the remaining balance of the note.

The customer was able to pay the first annual installment and corresponding interest due. However,
after the payment of the second interest due, the customer defaulted on the second annual installment
which resulted to the repossession of the car sold with appraised value of P110,000. On December 31,
2019, the repossessed car was resold for P140,000
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39. What is the entity’s realized gross profit for the year ended December 31, 2018?
A. 50,000
B. 120,000
C. 108,000
D. 128,000

40. What is the loss on repossession for the year ended December 31, 2019?
A. 30,000
B. 20,000
C. 10,000
D. 40,000

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Numbers 41, 42 and 43 (Revenue Recognition – Franchise Fees)

On January 1, 2018, an entity granted a franchise to a franchisee. The franchise agreement required the
franchisee to pay a nonrefundable upfront fee in the amount of P400,000 and on-going payment of
royalties equivalent to 5% of the sales of the franchisee. The franchisee paid the nonrefundable upfront
fee on January 1, 2018.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the
following performance obligations:

 To construct the franchisee’s stall with stand-alone selling price of P200,000.

 To deliver 10,000 units of raw materials to the franchisee with stand-alone selling price of
P250,000.
 To allow the franchisee to use the entity tradename for a period of 10 years starting January 1, 2018
with stand-alone selling price of P50,000.

On June 30, 2018, the entity completed the construction of the franchisee’s stall. On December 31,
2018, the entity was able to deliver 3,000 units of raw materials to the franchisee. For the year ended
December 31, 2018, the franchisee reported sales revenue amounting to P100,000.

The entity had determined that the performance obligations are separate and distinct from one another.

41. What is the amount of nonrefundable upfront fee to be allocated to the construction of the
franchisee’s stall?
A. 200,000
B. 160,000
C. 250,000
D. 120,000

42. What is the amount of revenue to be recognized in relation to the use of delivery of raw materials
for the year ended December 31, 2018?
A. 100,000
B. 200,000
C. 60,000
D. 75,000

43. What is the amount of revenue to be recognized in relation to the use of entity’s tradename for the
year ended December 31, 2018?
A. 5,000
B. 4,000
C. 50,000
D. 10,000

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Numbers 44 and 45 (Revenue Recognition – Net Income of Franchisor)

On January 1, 2018, an entity granted a franchise agreement to a franchisee. The contract provided that
the franchisee shall pay an initial franchise fee of P500,000 and on-going payment of royalties
equivalent to 8% of the sales of the franchisee.

On January 1, 2018, the franchisee paid downpayment of P200,000 and issued a 3-year noninterest
bearing note for the balance payable in three equal annual installments starting December 31, 2018.
The note has present value of P240,183 with effective interest rate of 12%.

On June 30, 2018, the entity completed the performance obligation of the franchise at a cost of
P352,146. Aside from that, the entity incurred
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indirect
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cost of P22,009.
The franchisee started operation on July 1, 2018 and reported sales revenue amounting to P50,000 for
the year ended December 31, 2018. The franchisee paid the first installment on its due date.

44. If the collection of the note receivable is reasonably assured, what is the gross profit to be
recognized by the entity for the year ended December 31, 2018 in relation to the initial franchise
fee?
A. 66,028
B. 44,014
C. 22,009
D. 88,037

45. If the collection of the note receivable is reasonably assured, what is the net income to be reported
by the entity for the year ended December 31, 2018?
A. 98,850
B. 94,850
C. 70,028
D. 92,037

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Numbers 46, 47 and 48 (Construction contract - Percentage of Completion Method)

On January 1, 2018, Solid Company accepted a long-term construction project for an initial contract
price of P1,000,000 to be completed on June 30, 2020. On January 1, 2019, the contract price was
increased to P1,500,000 by reason of change in the design of the project. The outcome of the
construction contract can be estimated reliably. The project was completed on December 31, 2020
which resulted to penalty amounting to P200,000. The entity provided the following data concerning
the direct costs related to the said project for 2018 and 2019:

2018 2019
Costs during the year 440,000 680,000
Remaining estimated costs to complete at year-end 660,000 280,000

46. What is the construction revenue for the year ended December 31, 2018?
A. 340,000
B. 400,000
C. 440,000
D. 360,000

47. What is the realized gross profit for the year ended December 31, 2019?
A. 200,000
B. 80,000
C. 180,000
D. 100,000
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48. What is the balance of construction in progress on December 31, 2019?

A. 1,200,000
B. 1,020,000
C. 1,120,000
D. 900,000

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Numbers 49, 50 and 51 (Construction contract - Cost Recovery Method)

On January 1, 2018, Hardrock Company started the construction of a building at a fixed contract price
of P1,000,000. On the same date, the customer paid a mobilization fee equal to 5% of contract price
that will be deductible from the first billing. The outcome of construction contract cannot be estimated
reliably

During 2018, the entity billed the customer equivalent to 30% of the contract price. During 2019, the
entity billed again the customer amounting to 20% of the contract price. During 2020, the entity billed
again the customer amounting to 40% of the contract price. The remaining billing was made at the year
of completion of the project.

The entity made collection from the customer at the end of 2018, 2019 and 2020, in the amount of
P120,000, P450,000 and P180,000, respectively. The entity provided the following data concerning the
direct costs related to the said project:

2018 2019 2020

Cumulative costs incurred at year-end 360,000 800,000 870,000
Remaining estimated costs to complete at year-end 840,000 250,000 50,000

49. What is the realized gross profit for the year ended December 31, 2019?
A. 50,000
B. 200,000
C. 150,000
D. 0

50. What is the excess of construction in progress over progress billings or excess of progress billings
over construction in progress on December 31, 2020?
A. 30,000 excess billings
B. 80,000 excess billings
C. 20,000 excess construction in progress
D. 50,000 excess construction in progress

51. What is the balance of accounts receivable on December 31, 2020?

A. 150,000
B. 100,000
C. 120,000
D. 50,000

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Numbers 52, 53 and 54 (Home Office, Branch and Agency Transactions)

Siargao Company set up a branch in a province. The entity and its branch provided the following data
for the second year of branch operation:

Home Office Branch

Sales revenue to outside customer 33 1,000,000
5 500,000
Beginning inventory 50,000 30,000
Purchases from outside supplier 400,000 100,000
 Shipment to branch 200,000
Shipment from home office 250,000
Ending inventory 80,000 50,000
Operating expenses 150,000 40,000

 The home office to branch markup based on cost is 25% this year and last year.
 20% of the beginning inventory of the branch came from outside supplier.
 24% of the ending inventory of the branch came from the last year’s shipment from the home
office while 50% of the ending inventory of the branch came from current year’s shipment from the
home office.

52. What is the net income reported by the branch in its separate income statement for the current year?
A. 130,000
B. 124,000
C. 114,000
D. 95,000

53. What is the ending inventory to be reported by the entity in its combined statement of financial
position?
A. 128,000
B. 115,000
C. 130,000
D. 122,600

54. What is the overstatement in the cost of goods sold reported by the branch in its separate income
statement for the current year?
A. 54,000
B. 50,000
C. 52,000
D. 47,400

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Number 55 (Home office and branch)

The home office in Quezon City ships and bills merchandise to its provincial branch at cost. The
branch carries its own accounts receivable and makes its own collections. The branch also pays its
expenses. The branch transactions for 2018 are reflected in the following information:

Cash 20,000
Accounts receivable 80,000
Home Office 180,000
Shipments from Home Office 250,000
Sales 225,500
Expenses 55,500
December 31, 2018 inventory 65,000

What is the balance of the Investment in Branch account in the home office book?
A. 180,000
B. 195,000
C. 165,000
D. 175,000

Numbers 56 and 57 (Home office and branch)

Coffee Company decided to open a branch33in Manila.

5 Shipments of merchandise to the branch totaled
P54,000 which included a 20% markup on cost. All accounting records are kept at the home office. The
branch submitted the following report summarizing the operations for the year ended December 31,
2018:

Sales on account 74,000

Sales on cash basis 22,000
Collections of accounts receivable 60,000
Expenses paid 38,000
Expenses unpaid 12,000
Purchase of merchandise for cash 26,000
Inventory on hand, December 31; 80% from home office 30,000
Remittance to home office 55,000

56. What is the branch inventory on December 31, 2018 at cost?

A. 25,000
B. 20,000
C. 26,000
D. 10,000

57. What is the branch net income for the current year?
A. 1,000
B. 4,000
C. 800
D. 500

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Numbers 58, 59, 60 and 61 (Business Combination - Acquisition of Net Assets)

Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares with par value of P10
and bonds payable with face amount of P500,000. The bonds are classified as financial liability at
amortized cost.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand,
the bonds payable are trading at 110.

Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A also paid P40,000
acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:

Entity A Entity B
Current assets 1,000,000 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 200,000 400,000
Noncurrent liabilities 300,000 500,000
Ordinary shares 500,000 200,000
Share premium 1,200,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the
noncurrent assets of Entity B have fair value of P1,300,000. On the same date, the current liabilities of
Entity B have fair value of P600,000 while the noncurrent liabilities of Entity A have fair value of
P500,000.

58. What is the goodwill or gain on bargain purchase arising from business combination?
A. 50,000 goodwill
B. 150,000 gain on bargain purchase
C. 120,000 goodwill
D. 70,000 gain on bargain purchase

59. What total amount should be expensed as incurred at the time of business combination?
A. 20,000
B. 70,000
C. 30,000
D. 50,000

33 after 5the business combination?

60. What is Entity A’s amount of total assets
A. 4,520,000
 B. 4,810,000
C. 4,750,000
D. 4,440,000

61. What is Entity A’s amount of total liabilities after the business combination?
A. 2,240,000
B. 2,510,000
C. 2,320,000
D. 2,130,000

Page 22

Numbers 62 and 63 (Business Combination – Acquisition of majority shares)

33 5
Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B which enabled the
former to obtain control of the latter at an acquisition price of P1,000,000. Entity A paid P100,000
acquisition related costs and P50,000 indirect costs of business combination.

At the date of acquisition, the net assets of Entity B are reported at P1,600,000. An asset of Entity B is
overvalued by P60,000 while one liability is undervalued by P40,000.

62. What is the initial measurement of noncontrolling interest in net assets in the consolidated
statement of financial position?
A. 320,000
B. 300,000
C. 250,000
D. 316,000

63. What is the goodwill or gain on bargain purchase arising from business combination?
A. 250,000 gain on bargain purchase
B. 150,000 gain on bargain purchase
C. 50,000 goodwill
D. 200,000 gain on bargain purchase

Numbers 64 and 65 (Step Acquisition)

On January 1, 2018, Entity A acquired 30,000 out of 100,000 outstanding ordinary shares of Entity B
for P90,000 or 30% interest. For the six months ended June 30, 2018, Entity B reported net income of
P40,000.

On July 1, 2018, Entity A acquired additional 60,000 ordinary shares of Entity B or 60% interest at a
price of P4 per share or total cost of P240,000. Entity A paid P20,000 acquisition related costs and
P10,000 indirect costs of business combination.

The acquisition price per share of the additional shares clearly reflected the fair value of the existing
interest of Entity A in Entity B. It is the policy of Entity A to initially measure the noncontrolling
interest in net assets of the acquiree at fair value. The fair value of the noncontrolling interest in net
assets of the acquiree is reliably measured at P50,000.

At the acquisition date, the net assets of Entity B were reported at P400,000. An asset of Entity B was
overvalued by P50,000 while one liability wass overvalued by P30,000.

64. What is the gain on remeasurement of the existing Investment in Entity B as a result of step
acquisition?
A. 18,000
B. 30,000
C. 24,000
D. 12,000

65. What is the goodwill or gain on bargain purchase as a result of the business combination?
A. 18,000 goodwill
B. 20,000 gain on bargain purchase
C. 24,000 goodwill
D. 30,000 goodwill

33 5
 Page 23

Numbers 66, 67 and 68 (Consolidated Financial Statements)

On January 1, 2018, Entity A acquired 70% of outstanding ordinary shares of Entity B at a price of
P210,000. On the same date, the net assets of Entity B were reported at P260,000. On January 1, 2018
Entity A reported retained earnings of P2,000,000 while Entity B reported retained earnings of
P200,000.

All the assets and liabilities of Entity B are fairly valued except machinery which is undervalued by
P80,000 and inventory which is overvalued by P10,000. The said machinery has remaining useful life
of four years while 40% of the said inventory remained unsold at the end of 2018.

For the year ended December 31, 2018, Entity A reported net income of P1,000,000 and declared
dividends of P200,000 in the separate financial statements while Entity B reported net income of
P150,000 and declared dividends of P20,000 in the separate financial statements.
33 5

Entity A accounted the investment in Entity B using cost method in the separate financial statements.
66. What is the noncontrolling interest in net assets on December 31, 2018?
A. 124,800
B. 130,200
C. 126,000
D. 133,800

67. What is the consolidated net income attributable to parent shareholders for the year ended
December 31, 2018?
A. 1,102,200
B. 1,162,200
C. 1,141,200
D. 1,095,200

68. What is the amount of consolidated retained earnings on December 31, 2018?
A. 3,012,200
B. 2,991,200
C. 2,952,200
D. 2,945,200

33 5
 Page 24

Numbers 69, 70, 71 and 72 (Consolidated Financial Statements - Intercompany sales)

On January 1, 2019, Entity A acquired 60% of outstanding ordinary shares of Entity B at a gain on
bargain purchase of P40,000. For the year ended December 31, 2020, Entity A and Entity B reported
sales revenue of P2,000,000 and P1,000,000 in their respective separate income statements. At the
same year, Entity A and Entity B reported cost of goods sold of P1,200,000 and P700,000 in their
respective separate income statements.

During 2019, Entity A sold inventory to Entity B at a selling price of P280,000 with gross profit rate of
40% based on cost. On the other hand, Entity B sold inventory to Entity A at a selling price of
P400,000 with gross profit rate of 30% based on sales during 2020.

On December 31, 2019, 25% of the goods coming from Entity A remained in Entity B’s inventory but
all were eventually sold to third persons during 2020. As of December 31, 2020, 40% of the goods
coming from Entity B were eventually sold to third persons.

For the year ended December 31, 2020, Entity A reported net income of P500,000 while Entity B
reported net income of P200,000 and distributed dividends of P50,000. Entity A accounted for its
inventory in Entity B using cost method in its separate financial statements.

69. What is the consolidated sales revenue for the year ended December 31, 2020?
A. 2,600,000
B. 2,320,000
C. 3,000,000
D. 2,720,000

70. What is the consolidated gross profit for the year ended December 31, 2020?
A. 1,120,000
B. 1,048,000 33 5
C. 1,028,000
D. 1,152,000
71. What is the noncontrolling interest in net income for the year ended December 31, 2020?
A. 100,800
B. 59,200
C. 51,200
D. 88,000

72. What is the consolidated net income attributable to parent’s shareholders for the year ended
December 31, 2020?
A. 766,800
B. 596,800
C. 606,800
D. 626,800

33 5
 Page 25

Numbers 73, 74, 75 and 76 (Consolidated Statements-Intercompany gain or loss on disposal)

On January 1, 2019, Entity A acquired 80% of outstanding ordinary shares of Entity B at a gain on
bargain purchase of P180,000. The following intercompany transactions occurred for between the two
entities:

 On January 1, 2019, Entity B sold a land to Entity A with a cost of P1,000,000 at a selling price of
P1,100,000. The land was eventually sold by Entity A to third persons during 2020.

 On January 1, 2019, Entity A sold a white machinery to Entity B with a cost of P200,000 and
accumulated depreciation of P40,000 at a selling price of P180,000. The machinery is already 4
years old at the date of sale. The residual value of white machinery is immaterial.

 On July 1, 2020, Entity B sold a black machinery to Entity A at with a cost of P270,000 and
accumulated depreciation of P180,000 at a selling price of P60,000. The machinery is already 6
years old at the date of sale. The residual value of black machinery is immaterial.

For the year ended December 31, 2020, Entity A reported net income of P800,000 while Entity B
reported net income of P500,000 and distributed dividends of P150,000. Entity A accounted for its
inventory in Entity B using cost method in its separate financial statements.

73. What is the consolidated depreciation expense of machinery for 2020?

A. 40,000
B. 55,000
C. 61,667
D. 42,333

74. What is the consolidated carrying amount of machinery on December 31, 2020?
A. 225,000
B. 215,000
C. 200,000
D. 210,000

75. What is the noncontrolling interest in net income for 2020?

A. 124,000
B. 105,000
C. 125,000
D. 104,000

76. What is the consolidated net income attributable to parent shareholders for 2020?
A. 1,538,750
B. 1,518,750
C. 1,398,750 33 5
D. 1,418,750
 Page 26

Separate Financial Statements - Cost Method and Fair Value Model or Equity Method

Numbers 77, 78, 79 and 80

On January 1, 2020, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of
P900,000. Entity A paid P20,000 costs related to acquisition of shares.

At the acquisition date, the net assets of Entity B were reported at P950,000. All the assets of Entity B
are properly valued except for a machinery which is undervalued by P150,000. The machinery has a
remaining useful life of 5 years.
33 5
For the year ended December 31, 2020, Entity B reported net income of P200,000 and declared
dividends in the amount of P30,000.
The fair value of Investment in Entity B on December 31, 2020 is P1,000,000 while the cost of
disposal is 5%.

Entity A voluntarily prepared its separate financial statements.

77. If Entity A elects cost method to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?
A. 900,000
B. 920,000
C. 1,000,000
D. 950,000

78. What is the investment income for 2020 if Entity A elects cost method to account its Investment
in Entity B in its separate financial statements?
A. 7,000
B. 27,000
C. 180,000
D. 107,000

79. If Entity A elects fair value model to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2020?
A. 900,000
B. 920,000
C. 1,000,000
D. 950,000
80. What is the net effect in profit or loss for 2020 if Entity A elects fair value model to account its
Investment in Entity B in its separate financial statements?
A. 7,000
B. 27,000
C. 180,000
D. 107,000

33 5
 Page 27

Numbers 81, 82 and 83 (Nonprofit Organization – Statement of Financial Position)

In the first year of operations of a nonprofit organization, the following transactions occurred:

 The nonprofit organization received P1,000,000 fund from a donor who stipulated that it shall be
invested indefinitely and the dividend from such investment shall be used for research project of
the organization. Dividend amounting to P150,000 was received during the year but only P50,000
was spent for the research project.

 The nonprofit organization received P300,000 fund from a donor who stipulated that it shall be
used for the acquisition of service car. The nonprofit organization used P100,000 of the fund for the
acquisition of a service car with useful life of 5 years. The car was acquired at the middle of the
year.

 The nonprofit organization received P500,000 fund who stipulated that it shall be used based on the
discretion of the Board of Trustees of the nonprofit organization. The nonprofit organization used
P100,000 for the acquisition of souvenir items which were sold by the nonprofit organization for
P150,000. The remaining P400,000 was designated by the Board of Trustees for future fundraising
projects.

81. What is the amount of permanently restricted

33
net
5
assets at the end of the first year?
A. 1,100,000
B. 1,300,000