Numbers 4, 5 and 6

Mesmerize Company reported net income of P1,450,000 for the year ended December 31, 2018. Below are some
transactions during 2018 that might affect the entity’s cash flow.

 Purchased 100 treasury shares at a cost of P200 per share. These shares were reissued at P250 per share.
Financing Activity: Acquisition and issuance of shares
 Sold 100 ordinary shares of Globe Company at P2,000 per share. The acquisition cost of the shares was P1,650 per
share and the carrying amount on disposal date was P1,800 per share. The investment was measured irrevocably at
FVOCI.
Investing Activity: Cash receipt from sale of non-current asset
 Revised the estimate for doubtful accounts. Before 2018, the estimate is 1% of net sales. In 2018, it was increase to 2%.
Net sales for 2018 totaled P5,000,000 and accounts receivable at gross amount decreased by P120,000 during 2018.
 Issued 500 ordinary shares with P100 par value for a patent. The fair value of the shares on the date of issue was P230
per share.
 Depreciation expense for the year 2018 was P390,000.
 The entity had 30% of Saint Company’s ordinary shares held as long-term investment. Saint reported net income of
P270,000 for 2018.
Interest paid and dividends received enter the determination of profit or loss, and are, therefore generally classified as operating activities.
 Cash dividends paid for the year 2018 totaled P20,000.
Dividends paid are distributions to shareholders, who are considered to be providers of finance. Hence, generally dividends paid are classified as financing activity.
Alternatively, they may be classified as a components of cash flows from operating activities in order to assist users to determine the ability of an enterprise to
pay dividends out of operating cash flows.

Cash flows from operating activities

Profit before income tax P1,450,000
Adjustments for
Gain on sale of assets (20,000)
Allowance in receivables 100,000
Decrease in trade and other receivables 120,000
Depreciation 390,000
Income from associates (81,000)
Cash generated from operations 1,959,000

4. What is the net cash flow from operating activities?

a. 1,944,000 provided
b. 1,959,000 provided
c. 1,979,000 provided
d. 2,060,000 provided

Cash Flows from Operating Activities are primarily derived from the principal revenue-producing activities of the enterprise.

5. What is the net cash flow from investing activities?

a. 200,000 provided
b. 281,000 provided
c. 119,000 provided
d. 46,000 used

Cash Flows from Investing Activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
a. Cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized
development costs and self-constructed property, plant and equipment;
b. Cash receipts from sales of property, plant and equipment, intangibles and other non-current assets
c. Cash payments to acquire investments in equity or debt instruments of other enterprises
d. Cash advances and loans made to other parties (other than advances and loans made by a financial institution)
e. Cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution)
f. Cash payments for future contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading
purposes, or the receipts are classified as financing activities.

Gain on sale of assets P81,000

Cash receipt from sales of investment account 200,000
Cash flows from investing activities P281,000

6. What is the net cash flow from financing activities?

a. 5,000 provided
b. 15,000 provided
c. 100,000 provided
d. 15,000 used
Cash flows from financing activities is useful in predicting claims on future cash flows by providers of capital to the enterprise. Cash flows from financing activities
are cash flow transactions with non-trade creditors and shareholders.
a. Cash proceeds from issuing shares or other equity instruments
b. Cash payments to owners to acquire or redeem the enterprise’s shares
c. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages, and other short or long-term borrowings
d. Cash repayments of amounts borrowed
e. Cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease

Cash payments to reacquire shares (20,000)

 Cash receipts upon reissuance of treasury stock 25,000
Cash payments for declaration of dividends (20,000)
Cash flows from financing activities (15,000)

Number 7 and 8

On November 1, 2018, Constantine Company received P24,000 representing royalty revenue for three months. On February
1, 2019, the entity received P108,000 representing royalty revenue for one year. The entity used the income method and
did not prepare reversing entries.
Cash 24,000
Royalty Revenue 24,000

Royalty Revenue 8,000 Deferred Royalty Revenue 8,000 Deferred: (8,000)

Deferred Royalty Revenue 8,000 Royalty Revenue 8,000 Royalty Revenue: 8,000

Cash 108,000
Royalty Revenue 108,000 Royalty Revenue: 116,000

Royalty Revenue 9,000 Royalty Revenue: 107,000

Deferred Royalty Revenue 9,000 Deferred: 1,000

Since there was no reversing entry made prior to the year, the balance of nominal accounts at the beginning of the period is zero.

7. What is included in the adjusting entry on December 31, 2018?

a. Credit royalty revenue P24,000
b. Debit royalty revenue P8,000
c. Credit deferred royalty revenue P16,000
d. Debit royalty revenue P16,000
8. What is included in the adjusting entry on December 31, 2019?
a. Credit deferred royalty revenue P9,000
b. Debit deferred royalty revenue P1,000
c. Credit deferred royalty revenue P1,000
d. Debit royalty revenue P8,000

Number 13

On December 31, 2018, Calm Company appropriately reported P80,000 unrealized loss in OCI for equity securities
measured irrevocably at FVOCI.

Security Cost Fair value at December 31, 2019

X 1,250,000 1,600,000
Y 1,000,000 950,000
Z 1,750,000 1,250,000

What amount of unrealized loss is recognized in the 2019 statement of changes in equity?

a. 200,000
b. 120,000
c. 280,000
d. 0
Cost 4,000,000
Unrealized Loss (80,000)
Carrying Amount, 2018 3,920,000
Fair Value, 2019 3,800,000
Unrealized Gain on FA at FVOCI 120,000

Cost 4,000,000
Fair Value, December 2019 3,800,000
Unrealized loss on financial assets through OCI 200,000

Numbers 14 and 15

Gates Company invested P2,000,000 in Broth Company for 25% interest. Broth paid out 40% of net income in dividends
each year. The investment account showed the following details:

Initial cost 5,000,000

Debit to the investment account 1,000,000
Credit to the investment account (400,000)
Investment balance at year-end 5,600,000

14. What amount of investment income was reported by Gates?

a. 1,600,000
 b. 1,000,000
c. 1,400,000
d. 650,000

Initial Investment 2,000,000

Divided by: Acquired Interest 25%
Total Broth Interest 8,000,000
Divided from: Initial Investment 5,000,000
Interest 62.5%
Debit to investment account 1,000,000

15. What amount of net income was reported by Broth?

a. 4,000,000
b. 5,600,000
c. 1,600,000
d. 2,400,000

Numbers 16 and 17

The following information was available from the inventory records of Rich Company for January:

Units Unit Cost

Balance at January 1 30,000 9.77
Purchases: January 6 20,000 10.30
January 26 27,000 10.71
Sales: January 7 25,000
January 31 40,000

16. What amount of inventory should be reported under FIFO?

a. 128,520
b. 117,240
c. 123,600
d. 122,880
17. What amount of inventory should be reported under the moving average method?
a. 126,060
b. 122,880
c. 123,120
d. 124,370
Moving average versus weighted average method

Numbers 22 and 23

On January 1, 2018, Kohl Company purchased equipment for P1,200,000 with a useful life of 8 years with no residual value.
On December 31, 2019, new technology was introduced that would accelerate the obsolescence of the equipment. The entity
estimated the present value of the expected future net cash flows on the equipment at P580,000 and the fair value less cost
of disposal at P600,000. The entity determined the recoverable amount of the equipment on December 31, 2020 at
P570,000.
The recoverable amount an asset is the higher of its value in use (present value of the future cash flows expected to be derived by the entity from the asset) and its fair
value less costs to sell (amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal).

Entries for impairment would include a credit to the impaired asset, thus no accumulated depreciation is recorded.

22. What amount of inventory should be reported under the moving average method?
a. 150,000
b. 330,000
c. 300,000
d. 0
23. What amount of gain on reversal of impairment loss should be recognized for the year 2020?
a. 300,000
b. 250,000
c. 70,000
d. 0

Numbers 24 and 25

Yoon Company provided the following information pertaining to intangible assets:

 A patent was purchased from Graf Company for P2,500,000 on January 1, 2017. Yoon estimated the remaining life to
be 10 years. The patent was carried at Graf’s records at a carrying amount of P2,000,000 when sold to Yoon. On January
1, 2018, Yoon estimated that the remaining life of the patent is only 5 years.
 During 2018, a franchise was purchased from Reymont Company for P5,800,000. In addition, 5% of revenue from the
franchise must be paid to Reymont. Revenue from the franchise for 2018 was P35,000,000. The useful life of the
franchise is 10 years and a full year’s amortization is taken on the year of purchase.
 Yoon incurred research and development costs of P500,000 in 2018. Yoon estimated that these costs will be recouped
by December 31, 2021.

24. What is the carrying amount of the intangible assets on December 31, 2018?
a. 7,220,000
b. 7,520,000
c. 7,395,000
d. 7,020,000
25. What total amount of expenses should be reported in the income statement for 2018?
a. 3,280,000
b. 1,530,000
c. 1,750,000
d. 2,955,000

Numbers 31, 32 and 33

On January 1, 2018, Flips Company is authorized to issue 100,000 P100 par value ordinary shares. The following
transactions occurred during 2018:

January 1 Issued 40,000 ordinary shares at P130 per share

February 1 Issued 30,000 ordinary shares for the following assets:

Machine 500,000 fair value

Land None
Building 1,100,000 fair value

The ordinary shares are selling at P120 on this date

July 1 Purchased 10,000 ordinary shares at P150 per share to be held as treasury
August 1 Declared a 2 for 1 split
September 15 Reissued 5,000 treasury shares at P100 per share
December 31 Declared a P10 per share cash dividend on the ordinary shares
December 31 Net income for the year is P3,000,000

31. What is the share capital at year-end?

a. 7,000,000
b. 6,000,000
c. 6,250,000
d. 5,000,000
32. What is the share premium at year-end?
a. 1,800,000
b. 1,925,000
c. 1,200,000
d. 1,325,000
33. What is the balance of retained earnings at year-end?
a. 3,000,000
b. 1,600,000
c. 1,750,000
d. 1,800,000
34. What is the total shareholder’s equity at December 31,2018?
a. 9,425,000
b. 8,950,000
c. 9,550,000
d. 8,925,000

Number 35

Ortago Company sustained heavy losses for several years and underwent quasi-reorganization on December 31, 2018. The
following information is available:

Fair value Carrying amount

Inventory 5,700,000 6,000,000
Equipment 7,200,000 8,000,000
The share capital is P6,000,000 with P6 par value, share premium is P1,500,000 and the deficit is P6,200,000 before the
adjustments. The par value per share is reduced by P2. What amount must be shareholders contribute to eliminate the
deficit?

a. 6,200,000
b. 3,800,000
c. 1,800,000
d. 0

Numbers 41 and 42

Shapiro Company manufactures an X-ray machine and leases it to Capitol Hospital. The entity provided the following
information pertaining to the finance lease agreement:

Commencement of the lease January 1, 2018

Annual rental payable in advance every January 1 600,000
Lease term 10 years
Useful life of the machine 12 years
Cost of the machine 3,000,000
Fair value of the machine on January 1, 2018 4,950,000
Legal fees in directly signing the lease 140,000
Guaranteed residual value 150,000
Implicit rate in the lease 10%

The machine will revert back to Shapiro on January 1, 2028. The present value of an ordinary annuity and annuity due for
10 periods at 10% are 6.14 and 6.76. The present value of 1 for 10 period at 10% is 0.39.

41. What amount of sales revenue should be recognized by Shapiro?

a. 4,956,780
b. 4,056,000
c. 3,742,500
d. 4,114,500
42. What amount of interest income should recognize for 2018?
a. 405,600
b. 345,600
c. 411,450
d. 351,450

Numbers 43 and 44

Nielson Company, in its first year of operations, had the following differences between carrying amount and tax base of
assets and liabilities at December 31, 2018:

Carrying amount Tax base

Equipment 4,000,000 3,500,000
Warranty liability 1,500,000 0

The warranty liability will be settled in 2019. The difference in equipment will reverse in amounts of P200,000, P200,000
and P100,000 for the years 2019, 2020 and 2021 respectively. The financial income for 2018 is P5,500,000 and the tax rate
is 30% for the years 2018-2020 and 25% for 2021. It is probable that the entity will report taxable income in the future
periods.

43. What is the current tax expense for 2018?

a. 1,950,000
b. 1,625,000
c. 1,350,000
d. 1,500,000
44. What is the total tax expense for 2018?
a. 1,645,000
b. 1,650,000
c. 1,625,000
d. 2,200,000

Numbers 49 and 50

Accardo Company, an SME, constructed a building at total cost of P10,500,000 that was completed on January 1, 2018. The
useful life of the building is 10 years. Included in the cost was borrowing cost for 2018 amounting to P200,000. Accardo
borrowed P4,000,000 to finance the construction of the building on January 1, 2016 and is due on January 1, 2021. The
annual interest is payable every December 31. The building is to be leased out under an operating lease to unrelated parties
starting 2018 and the entity received rentals of P1,200,000 for 2018. The entity also determined that it can measure the
fair value of the building on an ongoing basis without undue cost and effort. On December 31, 2018, the fair value of the
building is P12,000,000. The entity paid P250,000 and P320,000 of property taxes and maintenance cost respectively for
2018.

49. What is the initial cost of the building on January 1, 2018?

a. 10,500,000
b. 10,300,000
c. 10,550,000
d. 10,750,000
50. What net amount of income should be reported by SME for 2018?
a. 880,000
b. 630,000
c. 1,100,000
d. 2,130,000

Numbers 51 to 70 (Theory)

51. The International Accounting Standard Board

a. Was the predecessor to the IASC.
b. Can overrule the FRSC when their policies disagree.
c. Promotes the use of high quality and understandable global accounting standards.
d. Had its headquarters in Geneva.
52. General-purpose financial statements are the product of
a. Financial accounting
b. Managerial accounting
c. Both financial and managerial accounting
d. Neither financial nor managerial accounting
53. What is the quality of information that is capable of making a difference in a decision?
a. Faithful representation
b. Understandability
c. Timeliness
d. Relevance
54. Which statement about discontinued operation is true?
a. The gain or loss on disposal of a component of a business should be reported as other income
b. Results of operations of a discontinued component should be reported below income from continuing
operations
c. Earnings per share should not be presented for discontinued operation
d. The gain or loss on disposal of a component of a business should not be segregated but reported together
with the results of continuing operations
63. In a debt settlement in which the modification is substantial, a gain should be recognized when
a. Carrying amount of the debt is less than the total future cash flows
b. Carrying amount of the debt is greater than the present value of the future cash flows
c. Present value of the debt is less than the present value of the future cash flows
d. Present value of the debt is greater than the present value of the future cash flows
64. Once the total compensation for share options is measured at the date of grant
a. It can be changed in future periods related to a change in market conditions
b. It can be changed to reflect the changes in the market price of an entity’s ordinary shares
c. An entity is permitted to adjust the number of share options expected to the actual number of
instruments vested.
d. All of the choices are correct.
65. In computing the basic EPS, if the preference shares are cumulative, the amount that should be deducted as an
adjustment to the numerator is the
a. Preference dividends in arrears
b. Preference dividends in arrears net of tax
c. Annual preference dividend net of tax
d. Annual preference dividend
66. How does an entity treat share issue costs when incurred?
a. A deduction from share premiums
b. Expense
c. A deferred charge
d. An intangible asset
67. When an entity amends a pension plan, past service cost should be?
a. Treated as a prior period adjustment because no future periods are benefited
b. Amortized over the vesting period if the benefits are not vested
c. Recorded in other comprehensive income
d. Reported as an expense in the period the plan is amended
68. Which statement is not true about the fair value option?
a. The fair value option is irrevocable
b. The fair value option must be elected for all equity investments
c. Electing the fair value option for debt investments simply measures the investment at FVPL
d. All of the statements are true
69. All of the following topics are addressed in PFRS for SME, except
a. Revaluation model for property, plant and equipment
b. Measurement of basic debt instruments
c. Earnings per share
d. Cost model for investment in associate
70. What is the effect of an overstatement of ending inventory in the current period in the income of next period?
a. Overstated
b. Understated
c. Correctly stated
d. The answer cannot be determined from the information