University of San Jose-Recoletos Accounting 30 – Special Topics

College of Commerce Prelims Departmental Examinations

Accountancy and Finance Department

Problem 1

On January 1, 2017, ValDay Company reported the following information in relation to a defined benefit
plan:

January 1 December 31
Defined Benefit Obligation 3,590,000 ?
Fair Value of Plan Assets 4,650,000 ?
Asset Ceiling 590,000 360,000

The following were gathered from the actuarial report for the year ended December 31, 2017:

Current service cost 684,300

Past service cost 218,400
Liability extinguished in settlement 516,200
Increase in DBO due to change in assumption 154,700
Discount rate 7.5%

The following data were also gathered from the report of the trustee who manages the fund set aside for
retirement payments:

Assets paid in settlement 487,700

Net income generated from plan assets 294,200
Benefits given to retired employees 336,900
Actual contributions to plan assets 580,000

Questions

1. The post employment expense to be recognized in 2017 is

a. P 829,950
b. P 1,143,450
c. P 874,200
d. P 794,700

2. The remeasurement gain/loss recognized in 2017 is

a. P 209,250 loss
b. P 209,250 gain
c. P 19,950 gain
d. P 19,950 loss

3. The gain or loss on settlement in 2017 is

a. P 54,550 loss
b. P 54,550 gain
c. P 28,500 gain
d. P 28,500 loss
 4. The effect of asset ceiling is
a. P 193,950
b. P 229,200
c. P 35,250
d. P 470,000

5. The amount of defined benefit obligation is

a. P 4,063,550
b. P 4,400,450
c. P 4,699,600
d. P 5,187,300

6. The amount of fair value of plan asset is

a. P 4,063,550
b. P 4,400,450
c. P 4,600,600
d. P 5,187,300

7. The ending balance of the prepaid benefit cost is

a. P 636,050
b. P 490,000
c. P 340,050
d. P 360,000

Problem 2

Bitter Company produces authentic cotton blazers and the Company needs 75,000 kilos of raw materials
in the production process. On October 1, 2016, the entity purchased a call option as a fair value hedge
to 75,000 kilos on February 1, 2017. The option strike price is P120 per kilo. The entity paid P60,000 for
the call option. This derivate contract means that if the market price is higher than P120, the Company
can exercise the option and buy the asset at the strike price of P120. If the market price is lower than
P120, the Company can throw away the option and buy the asset at the cheaper price. The market price
and the time value of option are as follows:

Market price Time value

per kilo of option
December 31, 2016 P150 49,000
February 1, 2017 P140 18,000

Questions:

8. How much is the derivative asset as of December 31, 2016?

a. P 2,239,000
b. P 2,299,000
c. P 1,500,000
d. P 2,250,000

9. How much is the gain/loss on the derivative as of December 31, 2016? Indicate whether gain or
loss.
a. P 2,239,000
b. P 2,299,000
c. P 1,500,000
d. P 2,250,000
 10. What is the cash settlement from the speculator on February 1, 2017?
a. P 1,500,000
b. P 2,200,000
c. P 1,000,000
d. P 1,800,000

11. How much is the net purchases on February 1, 2017?

a. P 0
b. P 9,000,000
c. P 11,250,000
d. P 10,500,000

12. Assume the market price on February 1, 2017 is P110, what amount should be recognized as
loss on call option in 2017?
a. P 2,239,000
b. P 2,299,000
c. P 0
d. P732,000

Problem 3

On October 1, 2017, Batter Company purchased on account the following equipment from different
suppliers around the world. These purchases are payable on March 1, 2018. The details of these
purchases are as follows:

Country
Equipment No. of origin Price Currency

1 USA 75,650 dollars

2 Chinese 125,230 yuan
3 Russia 46,780 euro
4 Bahrain 36,490 dinar
5 Malaysia 88,470 ringgit

Also on the October 1, 2017, the Company entered into a forward currency contract with a speculator and
agreed to pay the payables based on the conversion rate as of date of purchase. This forward contract is
designated as fair value hedge of the payable that is designated in foreign currency.

The exchange rate as of October 1, 2017, December 31, 2017 and March 1, 2018 are as follows:

October 1, March 1,
2017 December 31, 2017 2018

P47/dollar P43/dollar P45/dollar

P7.25/yuan P7.66/yuan P7.78/yuan
P50/euro P49/euro P47/euro
P126/dinar P129/dinar P127.50/dinar
P11/ringgit P10/ringgit P12/ringgit
Questions:

13. The accounts payable as of December 31, 2017 is

a. P 12,096,341.80
b. P 12,291,314.40
c. P 12,373,377.50
d. P 11,986,906.10

14. The of derivative asset or liability as of December 31, 2017 amounted to

a. P194,972.60 asset
b. P 194,972.60 liability
c. P 277,035.70 asset
d. P 277,035.70 liability

15. The amount gain or loss on foreign exchange gain recognized in 2018 amounted to
a. P 194,972.60 gain
b. P 194,972.60 gain
c. P 277,035.70 asset
d. P 277,035.70 liability

16. The amount paid to the supplier of equipment on March 1, 2018 amounted to
e. P 12,096,341.80
f. P 12,291,314.40
g. P 12,373,377.50
h. P 11,986,906.10

17. The amount paid/received to the speculator on March 1, 2018 amounted to

a. P 82,053.10 pay
b. P 82,053.10 receive
c. P 472,008.30 pay
d. P 472,008.30 receive

Problem 4

Farmland Company produces milk on its farms. The entity produces 20% of the community’s milk that is
consumed. Farmland Company owns 5 farms and has a stock of 2,100 cows and 1,050 heifers.

The farms produces 800,000 kilograms of milk a year and the average inventory held is 15,000 kilograms
of milk. However, on December 31, 2016 the entity is currently holding 50,000 kilograms of milk in
powder. On December 31, 2016, the biological assets are:

Purchased on or before January 1, 2016 (3 years old) 2,100 cows

Purchased on January 1, 2016 (2 years old) 300 heifers
Purchased on July 1, 2016 (1.5 years old) 750 heifers

No animals were born or sold during the current year. The unit fair value less cost of disposal is as
follows:

January 1, 2016

1-year old 3,000

2-year old 4,000
July 1, 2016

1-year old 3,000

December 31, 2016

1-year old 3,200
2-year old 4,500
1.5-year old 3,600
3-year old 5,000

The entity has had problems during the year. Contaminated milk was sold to customers. As a result, milk
consumption has gone down. The entity’s business is spread over different parts of the country.

There are 600 cows and 200 heifers in the Batangas farm and all these animals has been purchased on
January 1, 2016.

18. What is the fair value of biological assets on January 1, 2016?

a. 9,300,000
b. 9,600,000
c. 8,400,000
d. 7,200,000

19. What is the fair value of biological assets purchased on July 1, 2016?
a. 2,250,000
b. 3,000,000
c. 3,750,000
d. 3,375,000

20. What is the fair value of biological assets on December 31, 2016?
a. 14,550,000
b. 15,750,000
c. 15,225,000
d. 11,850,000
e.

21. What is the increase in fair value of biological assets on December 31, 2016?
a. 3,000,000
b. 5,250,000
c. 4,950,000
d. 6,150,000

22. What is the increase in fair value of biological assets due to physical change?
a. 1,260,000
b. 1,740,000
c. 3,000,000
d. 1,440,000
Theories

23. All the following are based on a highly probable forecast transaction, except
a. Forward contract
b. Futures contract
c. Option
d. Interest rate swap

24. It is a contract traded on an exchange that allows an entity to buy a specified quantity of a
commodity at a specified price on a specified future date.
a. Interest rate swap
b. Forward contract
c. Futures contract
d. Option

25. Which statement in incorrect concerning an option?

a. All call option is the right to purchase an asset at a specified price at some future time.
b. A put option is the right to sell an asset at a specified price during a definite period at
some future time.
c. An option is a right and not an obligation.
d. An option requires no payment.

26. In exchange for the right inherent in an option contract, the owner of the option will typically pay a
price
a. Only when a call option is exercised.
b. Only when a put option is exercised.
c. When either a call option or a put option is exercised.
d. At the time the option is received regardless of wheter the option is exercised or not.

27. The amount initially paid for a call option is

a. Option premium
b. Notional amount
c. Strike price
d. Intrinsic value

28. If the market price is lower than the option price, the call option is
a. In the money
b. At the money
c. On the money
d. Out of the money

29. What is an option to convert a convertible bond into ordinary shares?

a. Embedded derivation
b. Host security
c. Hybrid security
d. Compound instrument
30. Gains and losses on cash flow hedge are
a. Ignored completely.
b. Recorded as part of other comprehensive income.
c. Reported directly in net income.
d. Reported directly in retained income.

31. A pension asset is reported when

a. The accumulated benefit obligation exceeds the fair value of the plan assets
b. The accumulated benefit obligation exceeds the fair value of the plan assets but a past
service cost exists.
c. Plan assets at fair value exceed the accumulated benefit obligation
d. Plan assets at fair value exceed the projected benefit obligation

32. In calculation the pension expense to be recognized for a period by an employer sponsoring a
defined benefit plan, which component will not be included?
a. Actuarial present value of benefits attributed by the pension benefit formula to employee
service during current period.
b. Interest cost on the projected benefit obligation.
c. Excess of accumulated benefit obligation over the fair value of the plan assets.
d. Gain or loss on plan settlement.

33. What is the discount rate for pension plans?

a. The market yield at the end of the reporting period for high-quality corporate bonds
b. The rate of return on plan assets
c. The weighted average interest rate
d. The bank prime interest rate

34. Remeasurement gains or losses would include all of the following, except
a. An increase in the projected benefit obligation.
b. The difference between the interest income and the actual retirement of the plan assets.
c. Any increase or decrease in the asset ceiling net of the interest on the asset ceiling.
d. The difference between the amount settled and the amount of liability extinguished in
settlement.

35. Retirement benefit plan investments shall be carried at

a. Fair value
b. Historical cost
c. Amortized cost
d. Value in use