You are on page 1of 45

DIAGNOSTIC AFAR 2018

Question #1
An entity will primarily generate and expend cash in one primary economic environment. According to PAS 21, the effects
of changes in foreign exchange rates, the correct term for the currency of this primary economic environment is the
Foreign currency
Presentation currency
Reporting currency
Functional currency

Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #2
It is the allotment release by Local Government Units (LGU) or Department of Budget and Management to barangays.
Internal Revenue Allotment (IRA)
Subsidy - LGU
Barangay Social Fund
Income fro grants and donations

Advanced Accounting - Government Accounting (Easy)

Question #3
All of the following are characteristics of a derivative, except
It settled at a future date
It requires no initial investment or an initial net investment
It is acquired for the purpose of generating a profit from short-term fluctuations in market factors
Its value changes in response to the change in a specified underlying

Advanced Accounting - Derivatives (Average)

Question #4
Corporation Lizzy acquired 2,000 shares of the voting stock of Corporation Lizette in the open market at P48 per share.
Direct costs associated with the acquisition total of P4,000. Balance sheets of both companies on January 1, 2017,
immediately after the acquisition of shares of Lizzy, are as follows:
Corporation Lizzy Corporation Lizette
Cash 50,000 10,000
Temporary investments 80,000 40,000
Receivables (net) 95,000 10,000
Investment in Corporation Lizette 100,000
Machinery and equipment (net) 100,000 45,000
Land 50,000 20,000
Total assets 475,000 125,000
Accounts payable 75,000 25,000
Common stock (P20 par) 250,000 50,000
Excess over par 90,000 30,000
Retained earnings 60,000 20,000
Total liabilities and SHE 475,000 125,000
The fair values of Lizzy and Lizette assets on January 1m 2017 are presented below. Liabilities of both companies are
properly valued at their respective book value:
Lizzy Lizette
Cash 50,000 10,000
Temporary investment 100,000 50,000
Receivables (net) 95,000 8,000
Investment in Corporation Lizette 100,000 -
Machinery 110,000 40,000
Land 100,000 30,000
555,000 138,000
The total consolidated assets must be
520,000 613,000 522,600 518,600
SOLUTION:
Total consolidated assets must be the total book value of Lizzy excluding investment in Lizette, and fair market value of
Lizette plus goodwill from business combination, if any. Percent of control: (2,000/50,000)/20 = 80%
Cost of investment
Fair value of stocks issues (2,000 x 48) 96,000
Fair value of investment (138,000 - 25,000) x 80% 90,400
Goodwill 5,600
Total consolidated assets
Book value of the assets of Lizzy excluding investment (475,000 - 100,000)
375,000
Fair value of the assets of Lizette 138,000
Goodwill from the business combination 5,600
Total 518,600
Advanced Accounting - Consolidation After Acquisition (Difficult)

Question #5
Aliza Trading established a branch in Quezon City to distribute part of the goods purchased by it from other suppliers.
Aliza ships merchandise to the branch at 20% above cost. The following account balances are taken from ledger balances
of the home office and the branch:
Home Office Branch
Sales 384,000 134,400
Beginning inventory 76,800 38,400
Purchase 320,000
Shipment to branch 83,200
Shipment from home office 99,840
Operating expenses 46,080 23,040
Ending inventory 62,720 30,720
Calculate the combined net income.
108,800 90,880 104,960 106,080
SOLUTION:
Branch net income
Sales 134,400
Less: Cost of sales at cost 89,600
Gross profit 44,800
Less: OPEX 23,040
Net income 21,760
Head office sales 384,000
Less: Cost of sales
Beginning inventory 76,800
Purchases 320,000
Shipments (83,200)
End (62,720) 250,880
Gross profit 133,120
Less: OPEX 46,080
Head Office net income 87,040
Branch net income 21,760
Combined net income 108,800
Advanced Accounting - Home Office & Branch Accounting (Average)
Question #6
On July 1, the Joshua Company, organized a sales outlet in Cebu City. Following are the home office-branch transactions
for the month of July:
July 1 The home office transferred P250,000 to its Cebu branch.
2 Merchandise costing the home P30 per unit was shipped to the branch at an invoice price of P40 per unit.
Ten thousand units were shipped on July 2; a second order was to be filled by local suppliers.
2 Shipping costs on the above were paid as follows:
By the office: P15,000
By the branch: P5,000
5 Additional merchandise was acquired by the branch from regional distributors, 5,000 units at P31
6 Display equipment was purchased by the home office, cost P360,000, and was delivered to the branch.
Plant assets accounts were kept by the home office.
10 Branch sales for the period July 3-10; on account, 8,000 units at P50.
18 Branch collections on account, P320,000
25 Branch sales for the period July 11-24; on account, 5,000 units at P50
29 Cash remittance by branch to home office, P100,000
30 Monthly summary of branch cash expenses: Advertising (P4,000); Sales commission (65,000);
Miscellaneous (P1,000)
31 Depreciation recorded by the home office for July included P15,000 that related to the display equipment
used by the branch. Insurance on this equipment was amortized by the home office in the amount of
P2,500.
31 Inventories of merchandise at the branch on July 31 included the following:
From the home office (1,500 units x P40)
From local suppliers (500 units x P31)
Determine the correct balance of reciprocal account after recording branch net income or loss.
648,500 665,500 582,500 599,500
SOLUTION:
Sales
(8,000 x 50) 400,000
(5,000 x 50) 250,000 650,000
Cost of sales:
Shipments from home office (10,000 x 40) 400,000
Add: Shipping costs (15,000 + 5,000) 20,000
Total 420,000
Less: Cost of ending inventory (1,500/10,000 x 420,000) 63,000 (357,000)
Purchases from outside suppliers (5,000 x 31) 155,000
Less: Ending inventory (500 x 31) 15,500 (139,500)
Gross profit 153,500
Less: Operating profit
Advertising 4,000
Sales commissions 65,000
Miscellaneous 1,000
Depreciation 15,000
Insurance 2,500 (87,500)
Net income reported by the branch 66,000
Cash to Cebu branch 250,000
Merchandise shipped to Cebu branch (40 x 10,000) 400,000
Shipping cost paid by the home office 15,000
Cash remittance by Cebu branch to home office (100,000)
Depreciation charged to Cebu branch by the home office 15,000
Insurance charged to Cebu branch by the home office 2,500
Branch reported net income 66,000
Balance of reciprocal accounts 648,500
Advanced Accounting - Home Office & Branch Accounting (Difficult)
Question #7
Jane had the following information
1. Purchased merchandises from a foreign supplier on January 20, 2016 for the Philippine peso equivalent of P60,000
and paid the invoice on April 20, 2016 at the Philippine peso equivalent of P68,000.
2. On September 1, 2016, borrowed the Philippine peso equivalent of P300,000 evidence by a note that is payable in the
lenders local currency on September 1, 2017. On December 31, 2016, the Philippine peso equivalent of the principal
amount was P320,000.
In Janes income statement, what amount should be included as a foreign exchange loss?
22,000 20,000 4,000 28,000
SOLUTION:
Loss (60,000 - 68,000) 8,000
Loss (300,000 - 320,000) 20,000
Total 28,000
Advanced Accounting - Foreign Currency Transactions and Translations (Difficult)

Question #8
A construction entity signed a contract to build a theater over a period of two years, and with this contract also signed a
maintenance contract for five years. Both contracts are negotiated as a single package and are closely interrelated to
each other. The two contracts should be
Segmented and considered two separate contracts
Recognized under the full cost recovery method
Treated differently, the building contract under the full cost recovery method and the maintenance contract under the
percentage of completion method.
Combined and treated as a single contract

Advanced Accounting - Construction Accounting (Average)


Question #9
Kenneth Company, Inc. franchisor, entered into a franchise agreement with Orville Trading, franchisee on March 31,2013.
The total franchise fee is P500,000, of which P100,000 is payable upon signing and the balance in four equal annual
installments. The downpayment is refundable in the event the franchisor fails to render services and none thus far had
been rendered. When Kenneth Company prepares its financial statements on March 31, 2013, the franchise fee revenue
to be reported is:
100,000
0
400,000
500,000

Advanced Accounting - Franchise Accounting (Average)

Question #10
Which of the following is not objective evidence of impairment of a financial asset?
Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of
financial assets although the decrease cannot yet be associated with any individual financial asset. A breach of
contract, such as a default or delinquency in interest or principal payments. A decline in the fair value of the asset
below its previous carrying amount Significant financial difficulty of the issuer or obligor.
Advanced Accounting - Derivatives (Difficult)

Question #11
A contractor enters into a construction contract on January 1, 2011. The contractor agrees to a fixed price of P9,000 to
build a bridge. The contractor's initial estimate of contract costs is P8,000. The contract expects that it will take three years
to build the bridge.
The contractor has a December 31 year-end.
By the end of the first year of the contract (December 31, 2011), the contractor's estimate of total costs has increased to
P8,050 (costs incurred in 2011 amounted to P2,093).
In 2012, the customer and contractor agree to a variation resulting in an increase in contract revenue of P200 and
estimated additional contract costs of P150. At the end of 2012, costs incurred of P4,075 include P100 paid for standard
materials stored at the site to be used in 2013 to complete the project.
The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred
for work performed to date bear to the latest estimated total contract costs.
Determine the revenue for the year 2013:
2,392
2,592
2,340
4,468

Advanced Accounting - Construction Accounting (Average)

Question #12
On October 3, 2020, Mike Inc. entered into a forward contract with BPI Bank for the speculation to buy $100 to be
delivered on January 30, 2021. The following direct exchange rates were provided:
October 3, 2020 December 31, 2020 January 30, 2021
Spot-buying P40 P43 P41
Spot-selling P42 44 44
Forward-buying 120 days 41 40 42
Forward-selling 120 days 43 45 42
Forward-buying 90 days 42 44 45
Forward-selling 90 days 45 41 44
Forward-buying 60 days 46 40 42
Forward-selling 60 days 43 42 41
Forward-buying 30 days 42 41 45
Forward-selling 30 days 41 40 42
What is the net foreign currency gain (loss) to be recognized by Mike for the years ended December 31, 2020 and
December 31, 2021, respectively?
(P200) and P300 P200 and (P100) P300 and (P200) (P300) and P400
SOLUTION:
12/31/2020 forward selling 30-day rate 40
10/3/2020 forward selling 120-day rate (43)
Change in forward rate (3)
100
Forex loss (300)

1/30/2021 selling spot rate 44


12/31/2020 forward selling 30-day rate (40)
Change in forward rate 4
100
Forex gain 400
Since the forward rate increased (decreased) therefore the forward contract receivable also increased resulting to a gain
(loss).
Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #13
On December 31, 2017, the home office of Trisha Supply Company recorded a shipment of merchandise to its Glenda
branch as follows:
Glenda branch 30,000
Shipments to Glenda branch 25,000
Unrealized profit in Glenda branch inventory 4,000
Cash (for freight charges) 1,000
The Glenda branch sells 40% of the merchandise to outside entities during the rest of December 31, 2017. The books of
the home office and Trisha branches are closed on December 31 of each year. On January 5, 2018, the Glenda branch
transfers half of the original shipments to the Sandy branch and the Glenda branch pays P500 freight on the shipment.
At what amounts should the 60% of the merchandise remaining unsold at December 31, 2017 be included in the inventory
of the Glenda branch on December 31, 2017?
15,600 15,000 17,400 18,000
SOLUTION:
Shipments from home office 29,000
Freight in 1,000
Total available for sale 30,000
60%
Ending inventory of branch 18,000
Shipments from home office 29,000
Over allowance (4,000)
Shipments from home office at cost 25,000
Freight 1,000
Total available for sale at cost 26,000
60%
Ending inventory of branch at cost 15,600
Advanced Accounting - Home Office & Branch Accounting (Average)

Question #14
Net assets restricted by the governing board of a non-government, not-for-profit organization are reported as part of:
Unrestricted net assets
Any of these, depending on the terms
Temporarily restricted net assets
Permanently restricted net assets

Advanced Accounting - Not for Profit Organizations (Average)


Question #15
On January 1, 2016, Bartell Company sold its idle plant facility to Cooper, Inc. for P1,050,000. On this date the plant had a
net book value of P735,000. Cooper paid P150,000 cash on January 1, 2016, and signed a P900,000 note bearing
interest at 10%. The note was payable in three annual installments of P390,000 beginning January 1, 2017. This included
interest of P90,000. Bartell appropriately accounted for the sale under the installment method.
Cooper made a timely payment of the first installment on January 1, 2017. At December 31, 2017, Bartell has deferred
gross profit of
270,000 153,000 180,000 225,000
SOLUTION:
The total gross profit (GP) on the sale is P315,000 (selling price of P1,050,000 less depreciated cost of P735,000), and
the GP rate is 30% (P315,000/P1,050,000). GP recognized in 2016 is P45,000 (30% x P150,000 down payment), and GP
recognized in 2017 is P90,000 (30% x (P390,000 - P90,000)). This leaves a balance of P180,000 in deferred GP.
Deferred gross profit
Recognized 2016 45,000 315,000 Total gross profit
Recognized 2017 90,000
180,000 Balance 12/31/2017
GP is recognized only on the portion of the sales price collected, not on the interest collected (P90,000). A short-cut
approach is to multiply the remaining balance in installment notes receivable by the GP rate (P600,000 x 30% =
P180,000).
Advanced Accounting - Installment Sales (Average)

Question #16
By applying the definition provided in PAS 21, which item will be regarded as a monetary item?
Inventory
Property, plant and equipment
Land and buildings
Accounts receivable

Advanced Accounting - Foreign Currency Transactions and Translations (Easy)

Question #17
On December 1, 2016, Gary Inc. entered into a 120-day forward contract to purchase 250,000 US dollars for speculative
purposes. Gary, Inc, fiscal year ends on December 31. The exchange rates are as follows:
Date Spot rate Forward rate (3/31/10)
December 1, 2016 P45.00 P45.50
December 31, 2016 46.00 46.50
January 30, 2017 45.60 45.30
March 31, 2017 45.10
How much is the forex gain or loss to be reported from this forward contract in 2017?
300,000 225,000 250,000 350,000
SOLUTION:
(46.50 - 45.10) x 250,000 = 350,000
Advanced Accounting - Foreign Currency Transactions and Translations (Difficult)

Question #18
SLEX enters into an arrangement under which it will build and operate a toll bridge. Company B is entitled to charge users
for driving over the toll bridge for the period from the completion of construction until 1 million cars have driven across the
bridge, at which point the concession arrangement will end. SLEX incurred a total cost of P1 billion for the construction of
the toll bridge. How shall SLEX account for its infrastructure asset?
It shall be classified and treated as intangible asset to be amortized on the basis of usage or unit method of 1 million
cars.
It shall be classified and treated as financial asset
It shall be bifurcated into intangible asset and financial asset
It shall be classified and treated as intangible asset to be amortized using straight line method of presumed life of 10
years.
Advanced Accounting - Joint Venture (Average)

Question #19
A construction company is in the middle of a 2 year construction contract when it receives a letter from the customer
extending the contract by a year and requiring the construction company to increase its output in proportion of the number
of years of the new contract to the previous contract period. This is allowed in recognizing additional revenue according to
PAS 11 if
Negotiations have reached an advanced stage and it is probable that the customer will accept the claim.
It is probable that the customer will approve the variation and the amount of revenue arising from the variation,
whether the amount of revenue can be reliably measured or not.
It is probable that the customer will approve the variation and the amount of revenue arising from the variation, and
the amount of revenue can be reliably measured.
The contract is sufficiently advanced and it is probable that the specified performance standards will be exceeded or
met.
Advanced Accounting - Construction Accounting (Difficult)

Question #20
Anas Inc. granted a franchise to Mocca for the Makati area. The franchisee was to pay a franchisee of P500,000, payable
in five equal annual installments starting with the payment upon signing of the agreement. The franchise was to pay
monthly 3% of gross sales of the preceding month. Should the operations of the outlet prove to be unprofitable, the
franchise may be canceled with whatever obligations owing Anas, Inc. in connection with the P500,000 franchise fee
waived. The prevailing interest rate is 14%. The first year generated a gross sales of P2,500,000.
What is the amount of unearned franchisee fee after the first year of operations?
291,400 391,400 575,000 500,000
SOLUTION:
Unearned franchise fee: p100,000 x 2.914 = P291,400 Since the franchise maybe canceled with any outstanding balance
to be waived, then that amount still to be collected is considered unearned.
Advanced Accounting - Franchise Accounting (Difficult)

Question #21
A parent is not required to present consolidated financial statements
When the parent is wholly owned subsidiary
When the parent and the subsidiary are engaged in dissimilar activities
When the parent is virtually wholly owned provided parent does not obtain approval of the owners of minority interest
When there is a three-month time lag in the fiscal periods of the parent and its subsidiary
Advanced Accounting - Consolidation After Acquisition (Average)

Question #22
On January 2, 2017, Magnolia Ice Cream signed an agreement authorizing Trisha to operate as franchisee for an initial
franchise fee P500,000 received upon signing of the agreement. Trisha commenced operations on August 1, 2017, at
which date all of the initial services required of Magnolia Ice Cream had been performed at a cost of P120,000. The
franchise agreement further provides that Trisha must pay a 10% monthly continuing franchising fee. Sales reported from
August 1 to December 31, 2017 amounts to P400,000.
What is the net income related with franchise fee to be reported by Magnolia Ice Cream in 2017?
380,000 420,000 540,000 500,000
SOLUTION:
Cash received / Initial Franchise Fee 500,000
Direct cost (120,000)
Gross profit on initial franchise fee 380,000
Continuing franchise fee (400,000 x 10%) 40,000
Net income 420,000
Since the franchise reported gross sales starting August, therefore as of December 31, there is substantial performance
already and the initial franchise fee is recognized as revenue.
Advanced Accounting - Franchise Accounting (Average)

Question #23
Joshua Corporation is considering an acquisition of Pane Company. Pane has a capital structure of 50 percent debt and
50 percent equity, with a current book value of P10 million in assets. Panes pre-merger beta is 1.36 and is not likely to be
altered as a result of the proposed merger. Joshuas pre-merger beta is 1.02 and both it and Pane face a 40 percent tax
rate. Joshuas capital structure is 40 percent debt and 60 percent equity, and it has P24 million in total assets. The net
cash flows from Pane available to Joshuas stockholders are estimated at P4.0 million for each of the next three years and
a terminal value of P19.0 million in Year 4. Additionally, new debt issued by the combined firm would yield 10 percent
before-tax, and the cost of equity is estimated at 12.59 percent. Currently, the risk-free rate is 6.0 percent and the market
risk premium is 5.88 percent.
What is the present value (to the nearest thousand) of the Pane cash inflows to Joshua?
25,620,000
14,695,000
20,536,000
22,847,000
31,000,000

Advanced Accounting - Business Combination (Difficult)

Question #24
Abby Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed and the
balance in five annual payments. The present value of the future payments, discounted at 10% is P68,234. The
franchisee has the option to purchase P15,000 of equipment for P12,000. Abby has substantially provided all initial
services required and collectability of the payments is reasonably assured. The amount of the revenue from franchise fees
is:
90,234
93,234
115,000
25,000

SOLUTION:
25,000+68,234=93,234
Advanced Accounting - Franchise Accounting (Average)

Question #25
When disclosing information about investments in associate, PAS 28 Investment in Associates and Joint Ventures,
requires separate disclosure of which of the following?
I Shares in associates in the statement of financial position
II Share profit or loss associates in the statement of profit or loss and other comprehensive income
III Share of any discontinuing operations in the statement of changes in equity
IV Shares of changes recognized directly in the associates equity in the statement of changes in equity
I, II, III and IV I, II and III only II, III and IV only I, II and IV only
Advanced Accounting - Joint Venture (Average)

Question #26
On January 2, 2015, Mycors Inc. signed an agreement to operate as franchisee of Mang Inasal for an initial franchise fee
of P2,343,750 for 10 years. Of this amount, P468,750 was paid when the agreement was signed and the balance payable
in three annual payments beginning on December 31, 2015. Mycors signed a non-interest bearing note for the balance.
The implicit interest rate is 18%. Assume that substantial services amounting to P730,000 had already been rendered by
the franshisor and indirect costs of P53,750 have also been incurred.
If collection of the note is not reasonably assured, calculate the net income. For the year ended December 31, 2015. Use
PV factor 2.17.
456,026 753,900 700,150 509,776
SOLUTION:
Downpayment 468,750
Present value (312,500 x 2.17) 1,356,250
IFF 1,825,000
Less: Franchise cost 730,000
Franchise profit 1,095,000

Gross profit rate (1,095,000/1,825,000) 60%


Realized gross profit (468,750 + ((625,000 - 244,125) x 60%) 509,775
Interest income 244,125
Expenses (53,750)
Net income 700,150
Advanced Accounting - Franchise Accounting (Difficult)

Question #27
A manufacturing group has just acquired a controlling interest in a football club that is listed on a stock exchange. The
management of the manufacturing group wishes to exclude the football club from the consolidated financial statements on
the grounds that its activities are dissimilar. How should the football club be accounted for?
The entity should be consolidated as there is no exemption from consolidation on the grounds of dissimilar activities.
The entity should not be consolidated and should appear as an investment in the group accounts. The entity
should not be consolidated using the purchase method but should be consolidated using equity accounting. The entity
should not be consolidated; details should be disclosed in the financial statements.
Advanced Accounting - Consolidation After Acquisition (Difficult)

Question #28
BPI US is operating within US territory wherein the functional currency is the US $. However, the presentation currency of
the bank is Philippine peso. The following financial position data for the year 2020 are provided:
Total assets on 12/31/2020 $1,000
Total liabilities on 12/31/2020 200
Ordinary shares on 12/31/2020 300
Share premium on 12/31/2020 100
Retained earnings on 1/1/2020 200
Net income for year 2020 300
Dividends declared on 12/1/2020 100
The following additional data are provided.
1. All ordinary shares are issued on January 1, 2015.
2. The translated amount of retained earnings at Philippine peso on December 31, 2019 is P8,000.
3. The following direct exchange rates are determined:
1/1/2015 45
12/31/2019 42
12/1/2020 41
12/31/2020 43
Average rate for 2020 44
What is the translation gain (loss) to be recognized by BPI US in its Statement of Comprehensive Income for the year
ended December 31, 2020?
P100 gain (P600) loss P800 gain (P700) loss
SOLUTION:
Net income in $ 300
Weighted average rate 44
Net income in Peso 13,200

Dividends declared 12/1/2020 in $ 100


Rate at the date of declaration 41
Dividends declared in Peso 4,100

Retained earnings in Peso 1/1/2020 8,000


Net income in Peso 13,200
Dividends declared in Peso (4,100)
Retained earnings in Peso 12/31/2020 17,100

Assets in Peso (1,000 x 43) 43,000 DR


Liabilities in Peso (200 x 43) 8,600 CR
Ordinary shares in Peso (300 x 43) 12,900 CR
Share premium in Peso 4,300 CR
Retained earnings in Peso 17,100 CR
Cumulative translation adjustment 100 CR
The rate used of the ordinary shares and share premium was the rate at the date of declaration which was the same as
the closing rate.
Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #29
Personal services include
Advertising, rent, insurance and gasoline
Travelling, training and seminar, telephone, internet staff development
Bank charges, interest, loss on foreign exchange transactions
Salaries, allowances and bonuses

Advanced Accounting - Government Accounting (Average)

Question #30
This serves as the covering letter in transmitting the agency's financial statements to the COA, DBM and other oversight
agency.
Postclosing trial balance
Preclosing trial balance
Statement of management responsibility
Note to the financial statements

Advanced Accounting - Government Accounting (Average)

Question #31
Which of the following statements concerning the different types of hedging transactions is incorrect?
In hedging transaction designated as hedge of net investment in foreign operation, unrealized holding gain or loss on
hedging instrument which is considered effective portion will be recognized in other comprehensive income with
reclassification adjustment to profit or loss if realized.
In hedging transaction designated as fair value hedge, unrealized holding gain or loss on hedged item will be
recognized in profit or loss.
In hedging transaction which is undesignated, unrealized holding gain or loss on hedging instrument will be
recognized in profit or loss.
In hedging transaction designated as cash flow hedge, unrealized holding gain or loss on hedged item will be
recognized in other comprehensive income with reclassification adjustment to profit or loss if realized.
Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #32
On December 18, 2010, the statement of affairs of Paz Company, which is in bankruptcy liquidation, included the
following:
Assets pledged for fully secured liabilities 100,000
Assets pledged for partially secured liabilities 40,000
Free assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000
Compute the estimated amount to be paid to the unsecured liabilities with priority:
48,000
64,000
60,000
80,000

Advanced Accounting - Corporate Liquidation (Average)

Question #33
Kenneth Company had a Swiss franc receivable resulting from exports to Switzerland and a Mexican peso payable
resulting from imports from Mexico. Kenneth recorded foreign exchange gains related to both its franc receivable and
peso payable. Did the foreign currencies increase or decrease in Philippine peso value from the date of the transaction to
the settlement date?
Franc (Increase); Mexican Peso (Decrease)
Franc (Decrease); Mexican Peso (Decrease)
Franc (Increase); Mexican Peso (Increase)
Franc (Decrease); Mexican Peso (Increase)

Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #34
When a secured claim is not fully settled by the selling of the underlying collateral
The unsettled portion is classified as an unsecured priority claim
The unsettled portion remains as an unsecured priority claim.
The unsettled portion remains as a secured claim
The unsettled portion of the claim cannot be collected by the creditor
Advanced Accounting - Corporate Liquidation (Average)
Question #35
Financial statements of non profit organization includes all of the following, except
Statement of financial position
Statement of activities
Statement of cash flows
Statement of changes in equity

Advanced Accounting - Not for Profit Organizations (Easy)

Question #36
Mendiola Construction is constructing a skyscraper in the heart of town and has signed a fixed price two-year contract for
P21 million with the local authorities. It has incurred the following cost relating to the contract by the end of first year:
Material cost 5,000,000
Labor cost 2,000,000
Construction overhead 2,000,000
Marketing costs 500,000
Depreciation of idle plant and equipment 500,000
At the end of the first year, it has estimated cost to complete the contract, P9 million.
What profit or loss from the contract should Mendiola Construction recognize at the end of the first year?
1,280,000 (9.5/18.5 x P2,500,000) 1,500,000 (9/18 x P3,000,000) 1,005,000 (10/19 x P2,000,000) 1,000,000
(9/18 x P2,000,000)
Advanced Accounting - Construction Accounting (Difficult)

Question #37
Dallas Motors Auto, a national autoparts chain, is considering purchasing a smaller chain, Southern Auto. Dallas Motorss
analysts project that the merger will result in incremental net cash flows of P2 million in Year 1, P4 million in Year 2, P5
million in Year 3, and P117 million in Year 4. The Year 4 cash flow includes a terminal value of P107 million. Assume all
cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Southerns post-
merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and
the market risk premium is 4 percent. What is the value of Southern Auto to Dallas Motors Auto?
60,350,000
88,230,000
67,000,000
72,520,000
81,930,000

Advanced Accounting - Business Combination (Difficult)

Question #38
Lane Co., which began operations on January 1, 2017, appropriately uses the installment method of accounting. The
following information pertains to Lanes operations for the year 2017:
Installment sales P1,000,000
Regular sales 600,000
Cost of installment sales 500,000
Cost of regular sales 300,000
General and administrative expenses 100,000
Collections on installment sales 200,000
The deferred gross profit account in Lanes December 31, 2017 balance sheet should be
320,000 500,000 400,000 150,000
SOLUTION:
Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit
rate to subsequent cash collections. At the time of sale, gross profit of P500,000 is deferred (P1,000,000 - P500,000). The
gross profit rate is 50% (P500,000 / P1,000,000). Since 2017 collections on installment sales were P200,000, gross profit
of P100,000 (50% x P200,000) is recognized in 2017. This recognition of gross profit would decrease the deferred gross
profit account to a 12/31/2017 balance of P400,000 (P500,000 - P100,000). Note that regular sales, cost of regular sales,
and general and administrative expenses do not affect the deferred gross profit account.
Advanced Accounting - Installment Sales (Average)

Question #39
What is the principle for recognition of a financial asset or a financial liability in PAS 39?
A financial asset is recognized when, and only when, the entity obtains control of the instrument and has the ability to
dispose of the financial asset independent of the actions of others.
A financial asset is recognized when, and only when, the entity becomes a party to the contractual provision of the
instrument.
A financial asset is recognized when, and only when, the entity obtains the risks and rewards of ownership of the
financial assets and has the ability to dispose the financial asset.
A financial asset is recognized when, and only when, it is probable that future economic benefits will flow to the entity
and the cost or value of the instrument can be measure reliably.
Advanced Accounting - Derivatives (Difficult)

Question #40
Abby Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed and the
balance in five annual payments. The present value of the future payments, discounted at 10% is P68,234. The
franchisee has the option to purchase P15,000 of equipment for P12,000. Abby has substantially provided all initial
services required and collectability of the payments is reasonably assured. The amount of the revenue from franchise fees
is:
115,000
93,234
25,000
90,234

Advanced Accounting - Franchise Accounting (Average)


Question #41
Jojo, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Camiguin Branch with the
latter paying P600 for freight cost. Subsequently, the head office authorized Camiguin Branch to transfer the goods to
Bohol Branch for which the latter was billed for the P10,000 cost of the goods and freight charge of P200 for the transfer.
If the head office had shipped the goods directly to Bohol Branch, the freight charge would have been P700. The P100
difference in freight cost would have been disposed of as follows:
Charged to Camiguin Branch
Charged to Bohol Branch
Charged to the Head Office
Considered as savings

Advanced Accounting - Home Office & Branch Accounting (Average)

Question #42
Which of the following statements is (are) false?
I PFRIC 12 specifies that the infrastructure to be recognized as property, plant and equipment of the operator
because the contractual service arrangement does not convey the right to control the use of the public
service infrastructure to the operator.
II The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in
accordance with the terms specified in the contract.
III Under the terms of the contractual arrangement, the operator acts as a service provider by constructing or
upgrading the infrastructure used to provide a public service, and operates and maintains that infrastructure
(operation services) for a specified period of time.
I and III only I and II only I only II only
Advanced Accounting - Joint Venture (Average)
Question #43
PFRS 4 was introduced principally for what reason?
As a response to recent scandals within the insurance industry.
Because of pressure from the financial services authorities in several countries.
To completely overhaul insurance accounting.
To make limited improvements to the accounting for insurance accounting.
Advanced Accounting - Insurance Contracts (Average)

Question #44
The Rissa Company has entered into a contract on June 1, 20X3 that requires it to issue its own ordinary shares with a
value of CU250,000 on 31 May 20X6. In accordance with PAS32, Financial instruments presentation, the company should
classify the contract as
Embedded derivative
Equity instrument
Financial liability
Financial asset

Advanced Accounting - Derivatives (Easy)

Question #45
When the bankruptcy court grants the order for relief:
The bankruptcy court confirms that the reorganization plan is fair an equitable.
The court discharges the debtor except for claims provided for in the reorganization plan.
The reorganization plan has been accepted by at least two-thirds in amount and over half in number of claims.
Creditors may not seek payment of their claims directly from the debtor corporation.
Advanced Accounting - Corporate Liquidation (Average)

Question #46
Exchange differences arising from translation of financial statement of a foreign entity are
Recognized directly in retained earnings
Recognized as accumulated translation adjustments in the equity section
Capitalized if the differences resulted from severe devaluation of a currency
Recognized as accumulated translation adjustments in profit or loss

Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #47
Dorian and Donnie are partners who share profits and losses in a 2:3 ratio. The partnership will be liquidated in
installments. Some noncash assets have been sold, but other assets with a book value of P126,000 remain. Liabilities are
now P16,000, and liquidation expenses are expected to be P7,200. The capital balances are P92,000 for Dorian and
P68,000 for Donnie.
Assuming the available cash is distributed, how much is the share of Dorian?
42,800 8,000 32,000 26,800
SOLUTION:
Liabilities still unpaid 16,000
Capital of Dorian 92,000
Capital of Donnie 68,000
Total 176,000
Less: Noncash assets (126,000)
Cash balance 50,000
Less: Anticipated expenses (7,200)
Liabilities to be paid (16,000)
Available to owners 26,800
Dorian Donnie Total
Capital balance 92,000 68,000 320,000
Liquidation loss (53,280) (79,920) 133,200
Deficiency (11,920) 11,920 26,800
Cash distribution 26,800 - (26,800)
Advanced Accounting - Partnership (Difficult)

Question #48
According to PAS 21, The effects of changes in foreign exchange rates, at which rate should an entity's noncurrent assets
be translated when its functional currency figures are being translated into a different presentation currency?
The spot exchange rate
The average rate
The historical exchange rate
The closing rate

Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #49
James Inc. purchased a P1 million life insurance policy on its president, of which James is the beneficiary. Information
regarding the policy for the year ended December 31, 2013 follows:
Cash surrender value, 1/1/13 87,000
Cash surrender value, 12/31/13 108,000
Annual advance premium paid 1/1/13 40,000
During 2013, dividends of P6,000 were applied to increase the cash surrender value of the policy. What amount should
James report as life insurance expense for 2013?
21,000
13,000
19,000
40,000

Advanced Accounting - Derivatives (Average)

Question #50
Tillary Company, which began business on January 1, 2017, appropriately uses the installment sales method of
accounting. The following data are available for 2017:
Installment accounts receivable, December 31, 2017 P200,000
Deferred gross profit, December 31, 2017
(before recognition of realized gross profit) P140,000
Gross profit on sales 40%
The realized gross profit on installment sales for the year ended December 31, 2017, should be
80,000 70,000 50,000 60,000
SOLUTION:
As this is the first year of operations, all P140,000 is from 2017 sales. In the absence of any defaults and repossessions
during the year, this represents the total gross profit (GP) for 2017. Therefore, the total debits to installment AR for 2017
sales (1) can be computed by dividing the deferred GP by the GP ratio, or P350,000 (P140,000/40%). Next, cash
collections (2) can be calculated as: P350,000 total debits - P200,000 ending balance = P150,000 cash collections.
Finally, GP realized in 2017 (3) would be 40% times cash collections of P150,000 for P60,000 GP realized.
Installment AR Deferred GP
Beg. bal. 0 150,000 (2) 0 Beg. bal.
(1) 350,000 (3) 60,000 140,000
End. bal. 200,000
Advanced Accounting - Installment Sales (Average)
Question #51
Foreign operations that are an integral part of the operations of the entity would have the same functional currency as the
entity. Where a foreign operation functions independently from the parent, the functional currency will be
that of the parent
determined using the guidance for determining an entitys functional currency
the same as the presentation currency
that of the country of incorporation
Advanced Accounting - Foreign Currency Transactions and Translations (Average)

Question #52
Tillary Company, which began business on January 1, 2017, appropriately uses the installment sales method of
accounting. The following data are available for 2017:
Installment accounts receivable, December 31, 2017 P200,000
Deferred gross profit, December 31, 2017
(before recognition of realized gross profit) P140,000
Gross profit on sales 40%
The cash collections on installment sales for the year ended December 31, 2017, should be
130,000 120,000 150,000 100,000
SOLUTION:
As this is the first year of operations, all P140,000 is from 2017 sales. In the absence of any defaults and repossessions
during the year, this represents the total gross profit (GP) for 2017. Therefore, the total debits to installment AR for 2017
sales (1) can be computed by dividing the deferred GP by the GP ratio, or P350,000 (P140,000/40%). Next, cash
collections (2) can be calculated as: P350,000 total debits - P200,000 ending balance = P150,000 cash collections.
Finally, GP realized in 2017 (3) would be 40% times cash collections of P150,000 for P60,000 GP realized.
Installment AR Deferred GP
Beg. bal. 0 150,000 (2) 0 Beg. bal.
(1) 350,000 (3) 60,000 140,000
End. bal. 200,000
Advanced Accounting - Installment Sales (Average)

Question #53
On January 1, 2012, Mark Company received a two-year P500,000 loan. The loan calls for payment to be made at the
end of each year based on the prevailing market rate at January 1 of each year. The interest rate on January 1, 2012, was
10%. Anthony company also has a two-year P500,000 loan, but Anthony's loan carries a fixed interest rate of 10%. Mark
Company does not want to bear the risk that interest rates may increase in year two of the loan. Anthony Company
believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest
rate swap agreement whereby Anthony agrees to make Mark's interest payment in 2013 and Mark likewise agrees to
make Anthony's interest payment in 2013. The two companies agree to make settlement payments, for the difference
only, on December 31, 2013. The interest rate on January 1, 2013 is 12%. How much should be recognized as derivative
asset at December 31, 2012?
10,000
0
8,929
9,091

Advanced Accounting - Derivatives (Difficult)

Question #54
Which of the following transactions will increase the normal balance of home office account in the separate statement of
financial position of the branch?
Payment by the branch of home offices loans payable
Collection by the home office of branchs receivable
Debit memo received from the home office
Credit memo issued by the home office
Advanced Accounting - Home Office & Branch Accounting (Average)

Question #55
PSY Corporation owns 90% of the outstanding common shares of SVG Company. On January 2, 2016, office equipment
that had a carrying value to SVG Company P480,000 and has a remaining life of 10 years was sold to PSY Corporation
for P400,000. On the other hand, last August 31, 2017, PSY Corporation sold a second hand delivery van to SVG
Company at a gain of P30,000 (remaining life of 5 years).
Included in the January 1, 2017 inventory of PSY Company was merchandise inventory worth P65,000 while SVG
Company had P80,000 on its December 31, 2017. These inventories came from inter-company sales and purchases.
PSY Corporation included a mark-up of 25% on cost while SVG Company charged a 30% mark-upon sales.
Each of the two companies has net incomes in 2016 and 2017 as follows:
2016 2017
PSY Corporation 1,200,000 1,500,000
SVG Company 900,000 1,000,000
What is the amount of the consolidated net income attributable to controlling interest in 2017?
2,377,600 2,366,350 2,369,500 2,398,350
SOLUTION:
Net income of controlling interest, 2016
Net income of parent per books 2016 1,200,000
Share net income of subsidiary per books 2016 (900,000 x 90%) 810,000
Upstream unrealized loss 2016 (80,000 x 90%) 72,000
Upstream realized loss 2016 (8,000 x 90%) (7,200)
Upstream ending inventory 2016 (19,500 x 90%) (17,550)
Consolidated net income attributable to parent 2,057,250
Net income of controlling interest, 2017
Net income of parent per books 2017 1,500,000
Share net income of subsidiary per books 2017 (1,00,000 x 90%) 900,000
Downstream unrealized gain, 8/31.2017 (30,000)
Downstream realized gain, 12/31/2017 2,000
Upstream realized loss 2017 (8,000 x 90%) (7,200)
Upstream RP beginning inventory 2017 (19,500 x 90%) 17,550
Downstream UP ending inventory 2017 (16,000)
Consolidated net income attributable to parent 2,366,250
Advanced Accounting - Consolidation After Acquisition (Average)

Question #56
Which of these considerations would not be relevant in determining the entity's functional currency?
The currency in which finance is generated
The currency in which receipts from operating activities are retained
The currency that influences the costs of the entity
The currency that is the most internationally acceptable for trading

Advanced Accounting - Foreign Currency Transactions and Translations (Easy)

Question #57
With respect to the cost a business acquisition, PFRS 3 requires cost(total consideration) to be allocated
Based on recoverable amounts
Based on fair values
To the assets based on their carrying values
Based on original costs

Advanced Accounting - Business Combination (Easy)


Question #58
Bucca Warehousing Corporation bought a building at auction on June 30, 2017, for P1,000,000. On July 2, 2017, before
occupying the building, Bucca sold it to a triple-A rated company for P1,200,000. Bucca received a cash down payment of
P300,000 and a first mortgage note at the market rate of interest, for the balance. No additional payments were required
until 2018. On September 1, 2017, an independent appraiser valued the property at P1,500,000. On its 2017 income tax
return, Bucca reported the sale on the installment basis. How much gain should Bucca recognize in its income statement
for the year ended December 31, 2017?
300,000
0
200,000
50,000
SOLUTION:
The installment method of recognizing revenue is not acceptable for financial reporting purposes unless the
circumstances are such that the collection of the sales price is not reasonably assured. Since the property was sold to a
triple-A rated company and the value of the property is appreciating, collection can be assumed to be reasonably assured.
Therefore, the entire gain should be recognized for financial reporting purposes at the date of sale:
Sales price Cost of building = Gain recognized
P1,200,000 P1,000,000 = P200,000
Advanced Accounting - Installment Sales (Average)

Question #59
The following transactions were incurred for the year by the Company:
1. Transfer of P13,000 merchandise to an agency to establish a working fund.
2. Receipt of sales orders from the agency, P130,000.
3. Collection of agency accounts by the home office, P91,000.
4. Home office disbursements representing agency expenses, P11,700.
5. Replenishment of the agency working fund upon receipt of expense vouchers for P5,850.
6. Cost of goods sold identified with the agency sales, P93,600.
How much is the net income traceable to the agency?
36,400 18,850 (72,150) 5,850
SOLUTION:
Agency sales receipts 130,000
Cost of sales (93,600)
Gross profit 36,400
Expenses (11,700 + 5,850) (17,550)
Net income of the agency 18,850
Advanced Accounting - Home Office & Branch Accounting (Average)

Question #60
A construction contractor has a fixed price contract for P100,000 to construct a building (the project).The contractor's
initial estimate of total contract costs is P60,000. It will take two years to construct the building.At the end of the first year
of the project (31 December 2013) the contractor has incurred costs of P20,000 on the contract, including P2,000 on
cement that is held offsite. The entity's estimate of total contract costs has stayed the same.The contractor determines the
stage of completion of the construction contract by reference to the proportion that costs incurred for work performed to
date bear to the estimated total costs.
Determine the expenses for the year 2013:
18,000
20,000
33,333
13,333

Advanced Accounting - Construction Accounting (Average)


Question #61
Jinkee Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of realization and
liquidation is presented below:
Assets:
Assets to be realized 1,375,000
Assets acquired 750,000
Assets realized 1,200,000
Assets not realized 1,375,000
Liabilities:
Liabilities liquidated 1,875,000
Liabilities not liquidated 1,700,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
Revenues and Expenses:
Supplementary charges/debits 3,125,000
Supplementary credits 2,800,000
The net gain (loss) for the three-month period ending March 31 is:
750,000
425,000
250,000
(325,000)

Advanced Accounting - Corporate Liquidation (Difficult)


Question #62
If the foreign operation reports in the currency of a hyperinflationary economy, assets, liabilities income and expenses
shall be translated at
Forward rate
Average rate
Closing rate
Exchange rate on the date of transaction

Advanced Accounting - Foreign Currency Transactions and Translations (Easy)

Question #63
It is the currency of the primary economic environment in which the entity operates.
Functional currency
Local currency
Foreign currency
Presentation currency

Advanced Accounting - Foreign Currency Transactions and Translations (Easy)

Question #64
The recognition of unrealized gain or loss on the measurement of the financial assets and insurance liabilities as a
component of other comprehensive income is described in insurance parlance as
fair value accounting hedge accounting shadow accounting current value accounting
Advanced Accounting - Insurance Contracts (Average)
Question #65
Below is the unadjusted trial balance of Elmer Corporation at December 31, 2015
Debit Credit
Cash 2,500
Installment accounts receivable, 2014 20,000
Installment accounts receivable, 2015 70,000
Inventory, December 31, 2015 100,000
Other assets 248,500
Accounts payable - trade 25,000
Unrealized gross profit, 2013 10,000
Unrealized gross profit, 2014 43,000
Unrealized gross profit, 2015 50,000
Capital stock 300,000
Retained earnings 40,000
Gain on repossession 3,000
Operating expenses 25,000
Total 466,000 466,000
Cost of goods sold had been uniform over the years at 60% of sales.
Elmer Corporation adopts perpetual inventory procedures. On installment sales, the corporation charges installment
accounts receivable and credits inventory gross profit accounts.
Repossessions of merchandise have been made during the 2015 due to some customers failure to pay maturing
installments. Analysis of these transactions were summarized as follows:
Inventory 3,750
Unrealized gross profit, 2013 400
Unrealized gross profit, 2014 1,200
Installment accounts receivable, 2013 1,000
Installment accounts receivable, 2014 3,000
Gain on repossession 1,350
The repossessed merchandise was unsold at December 31, 2015. It was ascertained that they were booked upon
repossession at original costs. A fair valuation of these items would be a sale price of the repossessed merchandise at
P5,000 after incurring costs of reconditioning of P2,500 and cost to dispose them in the market at P250.
The realized gross profit on 2015 sales was:
22,000 28,000 68,000 62,000
SOLUTION:
50,000/.40 = 125,000 - 70,000 = 55,000 x 40% = 22,000
Advanced Accounting - Installment Sales (Difficult)

Question #66
When the outcome of the construction contract can be estimated reliably, which of the following accounting treatment is
proper?
When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognized
as an expense immediately without reference to the stage of completion of the contract activity at the end of the reporting
period.
The construction costs shall be deferred without reference to the stage of completion of the contract activity at the end
of the reporting period.
The construction revenue shall be recognized only to the extent of contract costs incurred that it is probable will be
recoverable.
The balance construction in progress account will be equal to cumulative construction revenue recognized even if it is
probable that total contract costs will exceed total contract revenue.
Advanced Accounting - Construction Accounting (Average)

Question #67
On January 2, 2017, Diversified Enterprises signed a franchise agreement with DTSI Company for an initial franchise fee
of P92,500. Of this amount DTSI paid P17,500 upon the signing of the franchise contract and the balance is payable in
four annual payments of P18,750 starting December 31, 2017. DTSI issued 12% interest-bearing notes for the balance.
Collection of the notes are not reasonably assured.
The down-payment is not refundable; it represents the actual cost of initial services provided by Diversified before formal
signing. However, additional substantial services have yet to be performed by Diversified. During 2017 additional direct
franchise cost of P45,750 and indirect cost of P15,000 were incurred by Diversified.
It is also agreed that DTSI will pay continuing franchise fee at 3% of its gross sales revenue. The franchise outlet
commenced business operations on October 1, 2017 and its gross sales totaled P600,000 by year-end.
The net income recognized by Diversified from the DTSI franchise in 2017 is
36,812.50 37,150 19,312.50 16,590
SOLUTION:
Journal entry upon signing of franchise contract
Cash 17,500
Notes receivable 75,000
Franchise revenue 17,500
Unearned franchise revenue 75,000
Installment sales 75,000
Installment cost 45,750
Gross profit 29,250
Gross profit % 39%

Initial franchise fee 17,500,000


Realized gross profit (18,750 x 39%) 7,312.50
Continuing franchise fees (600,000 x 3%) 18,000
Interest revenue (75,000 x 12%) 9,000
Direct cost (17,500)
Indirect cost (15,000)
Net income 19,312.50
Advanced Accounting - Franchise Accounting (Average)
Question #68
Congressional authorization in the form of a law to make payments out of the public treasury for specific purposes after
compliance with certain conditions:
Allotment
Appropriations
Budgeting
Obligation

Advanced Accounting - Government Accounting (Average)

Question #69
Jim Builders reports under PAS 11, and constructed a new subdivision during 2013 and 2014 under contract with Cactus
Development Co. Relevant data are summarized below:
Contract amount P3,000,000
Costs 2013 1,200,000
2014 600,000
Gross profit 2013 800,000
2014 400,000
Contract billings 2013 1,500,000
2014 1,500,000
The Company uses the cost recovery method under PAS 11 to recognize revenue.
What would be the journal entry SDH would use to record revenue in 2014?
(DR) Accounts receivable 1,500,000
(CR) Revenue for long-term contracts 1,500,000
(DR) Costs of construction 2,000,000
(DR) Gross profit 1,000,000
(CR) Revenue for long-term contracts 3,000,000
(DR) Construction-in-progress 1,200,000
(DR) Costs of construction 600,000
(CR) Revenue for long-term contracts 1,800,000
(DR) Construction-in-progress 400,000
(DR) Costs of construction 600,000
(CR) Revenue for long-term contracts 1,000,000

Advanced Accounting - Construction Accounting (Average)

Question #70
Dickie Corporation contracted to build a building for Dickson Company. The contract price was P500,000 and Dickie
estimated that construction costs would total P420,000. The construction period lasted until September 1, 2015. Costs
during the each period, estimated total cost of the product at the end of the year, billings and cash collected during the
year were as follows:
2015 2016 2017
Cost during the period 105,000 195,000 125,000
Estimated or actual total costs 420,000 425,000 425,000
Billings during the period 100,000 150,000 250,000
Cash collected during the period 80,000 140,000 260,000
The amount of gross profit recognized in 2016 using the percentage of completion method must be:
32,942.50 80,000 36,500 20,000
SOLUTION:
Contract price 500,000
Total estimated costs 425,000
Estimated gross profit 75,000
Percentage of completion ((105,000 + 195,0000)/425,000) 70.59%
Gross profit realized to date 52,942.50
Less: Gross profit realized prior year
Contract price 500,000
Total estimated cost (420,000)
Estimated gross profit prior year 80,000
Percent of completion (105,000/420,000) 25% (20,000)
Gross profit realized 2015 32,942.50
Advanced Accounting - Construction Accounting (Difficult)

Question #71
Electricity companies A and B (involved in electricity sales but not distribution) jointly establish a power generation entity
(Company C) to build and operate a power plant. Companies A and B each have a 50% ownership interest in Company
C, which is structured as a corporation. The incorporation enables the separation of Company C from Companies A and B
and, as a consequence, the assets and liabilities held in Company C are the assets and liabilities of Company C. The
contractual arrangement between the parties does not specify that the parties have rights to the assets or obligations for
the liabilities of Company C.
However, the parties also enter into an off-take agreement requiring the following:
1. Companies A and B agree to purchase all the power generated by Company C in a ratio of 50:50. Company C cannot
sell any of the output to third parties, unless this is approved by companies A and B. Because the purpose of the
arrangement is to provide companies A and B with power they require, such sales to third parties are expected to be
uncommon and not material.
2. The price of the power sold to companies A and B is set forth in the off-take agreement at a level that is designed to
cover the costs of production and administrative expenses incurred by company . The arrangement is intended to operate
at a break-even level.
What is the proper classification of this joint arrangement?
It is classified as joint operation because PFRS 11 provides that in case of doubt, a joint arrangement shall be
classified as joint operation instead f joint venture.
It is classified as joint venture because the arrangement is established through a separate vehicle, an incorporated
entity Company C.
It is classified as joint venture because the incorporation enables the separation of Company C from Companies A
and B and, as a consequence, the assets and liabilities held in Company C on the assets and liabilities of Company C.
It is classified as joint operation because the off-take agreement reflects the exclusive dependence of Company C
upon Companies A and B for the generation of cash flows and the rights of Company A and B to all of the economic
benefits of the assets of Company C.
Advanced Accounting - Joint Venture (Average)