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(120 copies)

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department
FINAL EXAM in ACRV 1023
Review 2 – Practical Accounting 2, Part 1
First Semester, S.Y. 2019-2020

Shade the strip under the letter which represents your answer to the following
questions/problems. ANSWERS NOT IN THE ANSWER SHEET WILL NOT BE HONORED. NO
ALTERATION (OF ANY MANNER WHATSOEVER) IN YOUR ANSWERS. USE BALL POINT
PENS ONLY. NO MARKERS. NO FRIXION PENS. NO PENCILS.

Items 1-20

On January 1, 2019, Forester Corporation and Fortuner Company decided to enter into a business
combination. Forester Corporation’s book shows assets and liabilities amounting to 1,350,000 and
300,000, respectively. The shareholder’s equity is composed of 300,000 common stocks (10 par
value), 150,000 APIC and 600,000 retained earnings. The book value of Forester’s assets is
understated by 150,000 while its liability is overstated by 75,000.

Fortuner Company’s assets (inclusive of 15,000 goodwill) amounted to 500,000 while its liabilities
amounted to 150,000. The shareholder’s equity is composed of 120,000 common stocks (10 par
value), 105,000 APIC and 125,000 retained earnings. The fair value of Fortuner’s assets without
goodwill and liabilities should both be reduced by 75,000.

Forester Corporation acquired the net assets of Fortuner Company by issuing 25,000 shares and
cash of 10,000. Moreover, a contingent consideration of 80,000 will be paid when the market price
per share exceeds 15 or the average income for 2 years will amount to 1,500,000. The determinable
amount of the said contingent consideration at the date of combination amounted to 50,000. The
current market price of Forester’s stocks is 12 per share.

Forester Corporation paid the following as a result of business combination:

Finder’s fee 50,000

Legal, accounting, and other consulting fees 50,000
Cost of stockholder’s meeting to vote on the acquisition 20,000
SEC registration of the business combination 15,000
General administrative cost 15,000
Cost of printing stock certificates 10,000
Accountants’ fee related to the stock issuance 20,000
SEC registration 20,000
Stock listing application fees 10,000
Underwriting cost 10,000

1. What is the result of the combination on January 1, 2019?

A. 10,000 goodwill B. 10,000 gain C. 25,000 goodwill D. 25,000 gain

2. How much is the combined common stock?

A. 420,000 B. 550,000 C. 670,000 D. 720,000

3. How much is the combined APIC?

A. 130,000 B. 150,000 C. 235,000 D. 255,000

4. How much is the combined retained earnings?

A. 430,000 B. 450,000 C. 520,000 D. 540,000

5. How much is the combined total liability?

A. 350,000 B. 375,000 C. 425,000 D. 450,000

6. How much is the combined total asset?

A. 1,330,000 B. 1,500,000 C. 1,555,000 D. 1,575,000
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If on March 31, 2019, the fair value of the contingent consideration increased to 60,000 when the
price per share reaches 13.50. The following day, the market price reaches 16 per share.

7. What will be the result of the combination as of December 31, 2019?

A. 15,000 goodwill B. 25,000 goodwill C. 35,000 goodwill D. 55,000 goodwill

8. What should be the entry to settle the contingent consideration clause?

A. Estimated liability for contingent consideration 50,000
Loss on estimated contingent consideration 10,000
Cash 60,000

B. Estimated liability for contingent consideration 60,000

Loss on estimated contingent consideration 20,000
Cash 80,000

C. Estimated liability for contingent consideration 50,000

Goodwill 10,000
Loss on estimated contingent consideration 20,000
Cash 80,000

D. Estimated liability for contingent consideration 60,000

Gain on estimated contingent consideration 60,000

If on June 30, 2019, the fair value of the contingent consideration decreased to 20,000 and
subsequently increased by 20,000 on January 2, 2020 when the price per share reaches 13.50.

9. What will be the result of the combination as of December 31, 2019?

A. 5,000 goodwill B. 5,000 gain C. 15,000 goodwill D. 15,000 gain

10. How much is the estimated liability on contingent consideration to be reported in 2019?
A. 20,000 B. 30,000 C. 40,000 D. 50,000

11. How much is the gain or loss on contingent consideration to be reported in 2020 if the average
income as of December 31, 2020 amounts to 2,000,000?
A. 40,000 B. 60,000 C. (40,000) D. (60,000)

12. How much is the gain or loss on contingent consideration to be reported in 2020 if the market
price does not exceed 15 per share and the average income only amounts to 1,490,000?
A. 20,000 B. (20,000) C. 40,000 D. (40,000)

If on February 1, 2019, the fair value of the contingent consideration is determined at 55,000 but
subsequently decreased by 15,000 on June 1, 2019 based on facts existing at the date of acquisition.

13. What will be the result of the combination as of December 31, 2019?
A. 15,000 goodwill B. 20,000 goodwill C. 30,000 goodwill D. 45,000 goodwill

14. How much is the gain or loss to be reported in 2019?

A. 0 B. (5,000) C. (15,000) D. 15,000

15. How much is the gain or loss to be reported in 2020 if the market price per share on June 30,
2020 reaches 15.20?
A. 25,000 B. 40,000 C. (25,000) D. (40,000)

16. How much is the gain or loss on contingent consideration to be reported in 2020 if the market
price does not exceed 15 per share and the average income only amounts to 1,000,000?
A. 25,000 B. 40,000 C. (25,000) D. (40,000)

If on February 1, 2019, the fair value of the contingent consideration is determined at 70,000 based
on the fact existing at the date of acquisition but subsequently decreased by 15,000 on June 1, 2019
based on facts existing after the date of acquisition.

17. What will be the result of the combination as of December 31, 2019?
A. 15,000 goodwill B. 20,000 goodwill C. 30,000 goodwill D. 45,000 goodwill

18. How much is the gain or loss to be reported in 2019?

A. 0 B. (5,000) C. (15,000) D. 15,000
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19. How much is the gain or loss to be reported in 2020 if the market price per share on June 30,
2020 reaches 15.20?
A. 15,000 B. 25,000 C. (25,000) D. 55,000

20. How much is the gain or loss on contingent consideration to be reported in 2020 if the market
price does not exceed 15 per share and the average income only amounts to 1,000,000?
A. 25,000 B. (25,000) C. (55,000) D. 55,000

21. How should goodwill be measured in a business combination?

A. The consideration transferred minus the identifiable net assets acquired
B. The total of the consideration transferred plus the amount of any non-controlling interest
in the acquiree minus the identifiable net assets acquired
C. The total of the consideration received plus the fair value of the previously held interest
in the acquiree minus the identifiable net assets acquired
D. The total of the consideration transferred, plus the amount of any non-controlling interest
in the acquiree plus the fair value of previously held interest in the acquiree minus the
identifiable net assets acquired

22. When should an acquirer derecognize a contingent liability recognized as a result of an

acquisition?
A. When it becomes more likely than not that the entity will not be liable
B. When the contingency is resolved
C. At the end of the year of acquisition
D. When it is reasonably possible that the liability will not require payment

23. IFRS 3 requires that the contingent liabilities of the acquired entity should be recognized at fair
value. The existence of contingent liabilities is often reflected in a lower purchase price. Recognition
of such contingent liabilities will
A. Decrease the value of goodwill thus decreasing the risk of impairment of goodwill
B. Decrease the value of goodwill thus increasing the risk of impairment of goodwill
C. Increase the value of goodwill thus decreasing the risk of impairment of goodwill
D. Increase the value of goodwill thus increasing the risk of impairment of goodwill

24. When does the measurement period end for a business combination in which there was
incomplete accounting information on the date of acquisition?
A. When the acquirer receives the information or one year from the acquisition date,
whichever occurs earlier
B. On the final date when all contingencies are resolved
C. Thirty days from the date of acquisition
D. At the end of the reporting period in the year of acquisition

25. Which of the following statements is true in relation to business combination achieved in stages?
A. The pre-existing equity interest shall be remeasured at fair value with any resulting gain
or loss included in profit or loss.
B. The pre-existing equity interest shall be remeasured at fair value with any resulting gain
or loss included in other comprehensive income.
C. The pre-existing equity interest shall be remeasured at fair value with any resulting gain
or loss recognized in retained earnings.
D. The pre-existing equity interest shall not be remeasured.

26. BREXIT CORPORATION consigned 500 men’s suits to EURO GALLERY, Inc. at a suggested
retail price of P500 each. The freight cost of P2,000 for the consignment was paid by EURO upon
receipt of the consigned goods. The agreement between BREXIT and EURO is that any sales in
excess of the suggested retail price will accrue to EURO. EURO paid delivery expenses of P2,100
for units sold, subject to subsequent settlement. EURO submitted an account sales on the sale of
270 suits, 40% of which was sold at P640 each and the balance at P580 per suit. All these sales
were in cash. BREXIT’s cost is P375 each suit. BREXIT determines consignment profit for each
consignee and uses the Consignment-Out account. EURO uses the Consignment-In account for all
consignment sales transactions.

How much should EURO remit to BREXIT for the aforementioned sales to customers?
A. 105,400 B. 107,500 C. 130,340 D. 130,900
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27. IFRS 15 provides that initial franchise fee shall be recognized over time (percentage of
completion method) if any one of the following criteria provided below is met. Which of the following
indicators show that the initial franchise fee shall be recognized as revenue at a point in time instead
of over time?
A. When the franchise simultaneously receives and consumes the benefits provided by the
franchisor’s performance as the franchisor performs.
B. When the franchisor’s performance creates or enhances an asset that the franchisee
controls as the asset is created or enhanced.
C. When the franchisor’s performance does not create an asset with alternative use to the
franchisor and the franchisor has an enforceable right to payment for performance
completed to date.
D. When the franchisee has legal title to the franchise and has the significant risks and
rewards of ownership of the franchise.

28. XY, Inc., franchisor, entered into a franchise agreement with AB, Inc., franchisee on July 1, 2020.
The initial franchise fees agreed upon is P850,000, of which P150,000 is payable upon signing and
the balance to be covered by a non-interest-bearing note payable in four equal annual installments.
It was agreed that the down payment is not refundable, notwithstanding lack of substantial
performance of services by franchiser. Probability of collection is unlikely.

The following expenses were incurred:

Initial services: Continuing Services:

Direct Cost 235,000 Direct Cost 23,900
Indirect Cost 64,000 Indirect Cost 9,000

The management of AB has estimated that they can borrow loan at the rate of 12% (PV factor 3.04).
The franchisee commenced its operations on July 31, 2020. A continuing franchise fee equal to 5%
of its monthly gross sales was also specified in the contract. AB reported gross sales of P950,000
for the month.

How much is the net income to be reported on August 31, 2020?

A. 48,910 B. 59,550 C. 72,810 D. 83,450

29. The Fountain chain of restaurants sold a fastfood restaurant franchise to Ortega. The sale
agreement, signed on January 2020 called for a P100,000 down payment plus two P50,000 annual
payments representing the value of initial franchise services rendered by The Fountain. In addition,
the agreement required the franchisee to pay 8% of its gross revenues to the franchisor. The
restaurant opened early in 2020 and its sales for the year amounted to P750,000. The prevailing
rate for similar notes was 12%. How much is the total revenue for the year 2020?
A. 84,505 B. 244,505 C. 254,646 D. 266,646

Number 30: Bonus item

Items 31-32

On January 1, 2018, Erect 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

31. What is the excess of construction in progress over progress billings (or vice versa) at year-end?
A. 30,000 excess billings B. 80,000 excess billings
C. 20,000 excess construction in progress D. 50,000 excess construction in progress
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32. What is the realized gross profit for the year ended December 31, 2019?
A. 0 B. 50,000 C. 150,000 D. 200,000

33. If the initial measurement of repossessed inventory is lower than the net of defaulted installment
receivable and its corresponding deferred gross profit, the difference shall be recognized as
A. Loss on repossession to be presented as part of income from continuing operation before
tax
B. Deferred loss on repossession to be presented as current asset
C. Gain on repossession to be presented as part of other comprehensive income
D. Deferred gain on repossession to be presented as current liability

34. 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

35. 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 D. 125,000

36. When a contract modification does not result in a separate performance obligation, the additional
products are priced
A. at the standalone price of the product.
B. at the blended price of original contract and contract modification.
C. at the average selling price of original selling price and standalone price.
D. at the selling price specified in contract modification.

37. Unconditional rights to receive consideration because a performance obligation has been
satisfied are
A. reported as a receivable on the statement of financial position.
B. reported as a contract asset on the statement of financial position.
C. reported as a contract liability on the statement of financial position.
D. not reported on the balance sheet.

38. Partial satisfaction of a multiple performance obligation is reported on the statement of financial
position as
A. contract liability. B. contract asset. C. receivable. D. unearned revenue.

39. Nonrefundable upfront fees

A. should be recognized immediately upon receipt of payment.
B. such as activation fees for cable should be recognized as revenue immediately.
C. such as a one-time initiation fee in a health club should be recognized immediately.
D. should not be recorded as revenue at the time of payment if they are for future delivery
of products and services.
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40. Consideration paid or payable to customers

A. includes volume rebates which increases the cost to the customer.
B. includes discounts which reduces the cost of purchases to the company.
C. reduces the consideration received and the revenue to be recognized.
D. includes prompt settlement discount which increases revenue.

41. Puss Inc., a shoe retailer, sells boots in different styles. In early November the company starts
selling “SunBoots” to customers for P70 per pair. When a customer purchases a pair of SunBoots,
Puss also gives the customer a 30% discount coupon for any additional future purchases made in
the next 30 days. Customers can’t obtain the discount coupon otherwise. Puss anticipates that
approximately 20% of customers will utilize the coupon, and that on average those customers will
purchase additional goods that normally sell for P100. For the month of December, Puss was able
to sell 1,000 pairs of SunBoots. Using the residual approach, how much of the transaction price is
allocated to the SunBoots?
A. 21,000 B. 49,000 C. 64,000 D. 70,000

42. What is the main reason for the difference between the branch’s net income reported by the
branch and the true branch’s income computed by the home office?
A. Because of overstatement of branch’s cost of sales for goods coming from outsiders.
B. Because of overstatement of branch’s cost of sales for goods coming from home office.
C. Because of overstatement of total goods available for sale coming from home office.
D. Because of overstatement of branch’s ending inventory coming from home office.

43. Fish Gawk Company set up a branch in a province. The entity and its branch provided the
following data for the second year of branch operations:

Home Office Branch

Sales revenue to outside customer 2,000,000 1,000,000
Beginning inventory 100,000 60,000
Purchases from outside supplier 800,000 200,000
Shipment to branch 400,000
Shipment from home office 500,000
Ending inventory 160,000 100,000
Operating expenses 300,000 80,000

The home office to branch mark-up based on cost is 25% since the start of the branch’s operations.
20% of the beginning inventory of the branch came from an outside supplier. 24% of the ending
inventory of the branch came from 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. What is the net
income reported by the branch in its separate income statement for the current year?
A. 190,000 B. 228,000 C. 248,000 D. 260,000

44. Which of the following accounting models applies if the operator has a contractual right to receive
cash from or at the direction of the grantor and the grantor has little, if any, discretion to avoid
payment?
A. Financial Asset Model
B. Intangible Asset Model
C. Part-financial asset, part-intangible asset model
D. Bifurcated Model

45. Which of the following accounting models applies if the operator receives a right (a license) to
charge users, or the grantor, based on usage of the public service?
A. Financial Asset Model
B. Intangible Asset Model
C. Part-financial asset, part-intangible asset model
D. Bifurcated Model

46. Which of the following is not required by SIC 29 to be disclosed in the notes to financial
statements?
A. a description of the arrangement
B. cumulative changes in the arrangement occurring throughout the arrangement
C. how the service arrangement has been classified
D. significant terms of the arrangement that may affect the amount, timing and certainty of
future cash flows
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47. At the date of partnership formation of ABC Partnership, the amount credited to A’s capital is
less than the fair market value of the property he contributed. Which of the following is the most valid
reason?
A. The property contributed by A is impaired.
B. The property contributed by A has been subjected to positive asset revaluation.
C. Bonus has been given by Partner A to the other partners.
D. Goodwill arising from partnership formation has been recognized.

48. Which of the following transactions shall not affect the capital balance of a partner?
A. Share of a partner in the partnership’s net loss
B. Receipt of bonus by a partner from another partner based on agreement
C. Advances made by the partnership to a partner
D. Additional investment by a partner to the partnership

49. If a partner who retired from the partnership receives less than the capital balance before
retirement which also resulted to decrease in the capital balance of the remaining partners, which is
correct?
A. The retiring partner receives bonus from the remaining partners.
B. An impairment loss is recognized before the retirement.
C. Revaluation surplus is recognized before the retirement.
D. The retiring partner gives bonus to the remaining partners.

50. On December 31, 2019, the Statement of Financial Position of ABC Partnership with profit or
loss ratio of 6:1:3, revealed the following data:

Cash 2,000,000 Other liabilities 4,000,000

Receivable from A 1,000,000 Payable to B 2,000,000
Other non-cash assets 4,000,000 Payable to C 200,000
A, Capital 1,400,000
B, Capital (1,300,000)
C, Capital 700,000

On January 1, 2020, the partners decided to liquidate the partnership. All partners are legally
declared to be personally insolvent. The other non-cash assets were sold for 3,000,000. Liquidation
expenses amounting to 200,000 were incurred. How much cash was received by B at the end of the
partnership liquidation?
A. 300,000 B. 500,000 C. 540,000 D. 580,000

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Prepared by: Checked by:

Patrick Louie E. Reyes, CPA Jerome D. Marquez, CPA, MBA

ACRV 1023 Instructor Accountancy Program Chair
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SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Accountancy Department
MIDTERM EXAM in ACRV 1023
Review 2 – Practical Accounting 2, Part 1
First Semester, S.Y. 2019-2020
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ANSWER SHEET

NAME: ______________________________________ _CODE: SET [] A [] B

INSTRUCTOR: PROCTOR:

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(120 copies)