THEORY OF ACCOUNTS

(Discussion Compilation)

Julius P. Rocabo
Arleen M. Alegro-Rocabo

“I can do all things through Christ who gives me strength”

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BASIC ACCOUNTING PROCESS

1. The first step in the accounting cycle is to

a. Record transaction in a journal
b. Analyze transactions from source documents
c. Post journal entries to general ledger
d. Adjust the general ledger accounts

2. The debit and credit analysis of a transaction normally takes place

a. Before an entry is recorded in the journal
b. When the entry is posted to the ledger
c. When the trial balance is prepared
d. At some point in the accounting cycle

3. A transaction that has a net effect of increasing assets and equity is

a. Payment of an expense in cash
b. Sale of goods for cash
c. Retirement of treasury shares
d. Collection of accounts receivable

4. What function do accounting journals serve in the accounting process?

a. Recording
b. Classifying
c. Summarizing
d. Reporting

5. Credits are used to record increases in

a. Assets, revenues, liabilities and equity
b. Expenses, liabilities and equity
c. Revenues, dividends and assets
d. Revenues, liabilities and equity

6. When special journals are used, adjusting and closing entries are
generally recorded in the
a. Cash disbursement journal
b. Cash receipts journal

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 c. General journal
d. Purchases journal

7. Posting refers to the process of transferring information from

a. Journals to general ledger accounts
b. General ledger accounts to journals
c. Source document to journals
d. Journals to source documents

8. A subsidiary ledger is
a. A listing of accounts balances just before closing entries are prepared
b. A backup system to protect against unexpected destruction of
records
c. A listing of the components of accounts balances in the general
ledger
d. A listing of accounts of a subsidiary company owned by a parent
company

9. Which of the following is an adjunct account?

a. Accumulated profits and losses
b. Opening stocks
c. Carriage inwards
d. Accumulated depreciation

10. A trial balance that is in balance proves that

a. No significant errors exist in the ledger accounts
b. Total debits and total credits in the general ledger is equal
c. All transactions have been entered in the journal completely
d. All entries have been posted from journal to the ledger correctly

11. Adjusting entries involve

a. Only real accounts
b. Only nominal accounts
c. Only capital accounts
d. One real and one nominal accounts

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12. An example of adjusting entry is recording the
a. Payment of wages to employees
b. Depreciation of an equipment
c. Collection of an account
d. Purchase of an equipment

13. The advance receipt of rental fee is recorded by debiting cash and
crediting unearned rent, this approach of recording is known as
a. Asset method
b. Expense method
c. Liability method
d. Income method

14. Which of the following accounts is affected by the closing process?

a. Asset accounts
b. Liability accounts
c. Capital accounts
d. None of the choices

15. What is the effect of cash purchase of an inventory?

a. total assets decrease
b. total liabilities increase
c. total assets remain unchanged
d. total shareholders’ equity decrease

16. Which of the following documents does not initiate an entry to be made
in the account?
a. sales invoice
b. credit memorandum
c. purchase invoice
d. purchase order

17. The book of original entry is the

a. trial balance
b. journal
c. ledger
d. book of genesis
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18. What function do accounting ledgers serve in the accounting process?
a. recording
b. classifying
c. summarizing
d. reporting

19. Which special journal is used to record cash purchase transaction?

a. sales journal
b. purchase journal
c. cash receipt journal
d. cash disbursements journal

20. Which of the following constitutes both transposition and sliding errors?
a. a transaction amounting to P123.00 recorded in the journal as
P132.00
b. a transaction amounting to P32.50 recorded in the journal as P325.00
c. a transaction amounting to P888.00 unintentionally not recorded in
the journal
d. a transaction amounting to P570.00 recorded in the journal as
P7,500.00

21. A listing of all the general ledger accounts in a systematic form is called
a. subsidiary ledger
b. chart of accounts
c. voucher
d. accounts

22. Which of the following is a real(permanent) account rather than nominal

(temporary) account?
a. interest income
b. accrued income
c. distribution cost
d. income summary

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23. When the debit total exceeds credit total in the income statement
columns of the worksheet, this indicates
a. net loss
b. net income
c. zero profit
d. no meaningful amount

24. When the debit total exceeds the credit total in the balance sheet
columns of the worksheet, this indicates
a. net loss
b. net income
c. zero profit
d. no meaningful amount

25. An accrued expense is an expense that is

a. already paid and incurred
b. already paid but not yet incurred
c. already incurred but not yet paid
d. not yet incurred and not yet paid

26. a prepaid expense can best be described as an amount

a. paid and matched with earnings
b. paid but not matched with earnings
c. not paid and not matched with earnings
d. not paid but matched with earnings

27. If the advanced payment of an expense was initially recorded in an asset

account, then the adjusting entry will involve
a. a debit to expense and a credit to an asset account in the amount of
the expired cost
b. a debit to expense and a credit to an asset account in the amount of
the unexpired cost
c. a debit to an asset account and a credit to expense in the amount of
the expired cost
d. a debit to an asset account and a credit to expense in the amount of
the unexpired cost

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28. a credit balance in the income summary account represents
a. net income
b. net loss
c. liability
d. capital

29. Which of the following accounts would not be subject to a closing entry?
a. gain on sale of equipment
b. gain on sale of treasury shares
c. gain on sale of investment in bonds
d. gain on extinguishment of financial liabilities

30. Reversing entries are done

a. at the end of the accounting period
b. to correct erroneous entries made during the period
c. to reverse the effect of certain closing entries made at year end
d. to simplify the subsequent recording of certain kinds of recurring
transactions

31. Adjusting entries that should be reversed include prepaid items that
a. create an expense account when adjusted
b. create an asset account when adjusted
c. create an income account when adjusted
d. create a liability account when adjusted

32. The installation of accounting procedures for the accumulation and

reporting of financial data is known as
a. auditing
b. financial accounting
c. electronic data processing
d. accounting system

33. Statement I: The accounting cycle is part of the accounting process

Statement II: The accounting system is part of the accounting process
Statement III: The accounting system is part of the accounting cycle
a. only statement I is true
b. only statement II is true
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 c. only statement III is true
d. all statements are true

34. Which of the following is an adjunct account?

a. accumulated profits and losses
b. opening stocks
c. carriage inwards
d. accumulated depreciation

Adjusting entries Subject to reversing

entries?(yes/no)
Income 35
Accruals
Expense 36
Liability
37
method
Income
Income
38
method
Deferrals
Asset method 39
expense Expense
40
method

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CONCEPTUAL FRAMEWORK

FINANCIAL ACCOUNTING
- Provide information (financial).
- Used for “decision making”.

COMPONENTS OF FINANCIAL ACCOUNTING

A. Identifying
 the analytical component.
 “recognition or nonrecognition of business activities as
ACCOUNTABLE events.”
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 Note: an event is accountable if it has an effect on Assets,
Liabilities and equity.

B. Measuring
 the technical component.
 “the assigning of peso amounts to the accountable economic
transactions and events.

Note: the measurement basis used are Historical cost, current

cost, realizable value and present value.

C. Communicating
 the formal component.
 “the process of preparing and distributing accounting reports
to potential users of accounting information.

Note: Implicit in the communication process are the RECORDING,

CLASSIFYING and
SUMMARIZING aspects of accounting.

 RECORDING
- the process of systematically maintaining records of all
business transactions.
- also known as journalizing.

 CLASSIFYING
- the grouping of similar activities into their respective
classes.
- this is accomplished by posting to the ledger.

 SUMMARIZING
- the preparation of financial statements.

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MAIN AREAS OF ACCOUNTING
1. Public Accounting
- composed of individual practitioners and firms who render services
to the public for a fee.

2. Private Accounting
- composed of individual practitioners who are employed in private
business entities.

3. Government Accounting
- composed of individual practitioners and firms who render services to
the government such as custody and administration of funds.

UNDERLYING ASSUMPTIONS IN ACCOUNTING

1. Going Concern
- means that in the absence of evidence to the contrary, the entity is
viewed as continuing in operation indefinitely.

Note: going concern is the foundation of “cost principle.”

Other Implicit Accounting Assumptions

Accounting entity
- under this assumption, the entity is separate from the owners,
managers, and employees who constitute the entity.

Time period
- requires that the life of an entity is subdivided into time periods or
accounting periods which are usually of equal length.

Monetary unit
- has two aspects, QUANTIFIABILITY and STABILITY OF PESO.

Quantifiability
- means that assets, liabilities, capital, income and expenses be
stated in terms of a unit of measure which is the Philippine peso.

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 Stability of Peso
- means that purchasing power of the peso is stable or constant
and that its instability is insignificant and therefore may be
ignored.

Note: Accrual – which means that income is recognized when earned

regardless of when received and expense is recognized when incurred
regardless of when paid, is no longer part of the underlying assumption in
the New Conceptual Framework.

CONCEPTUAL FRAMEWORK
- Is a summary of the terms and concepts that underlie the preparation
and presentation of financial statements.
- Concerned with general-purpose fs (including conso fs) that is directed to
the common needs of a wide range of users

USERS AND THEIR INFORMATION NEEDS

1. Primary Users – Existing and potential investors, lenders and other
creditors.
2. Other Users – employees, customers, governments and their agencies,
and the public.

 Investors
- the provider of risk capital, are concerned with the risk inherent in
and the return provided by their investment. They need information
whether they should buy, hold, or sell.

 Employees
- interested in information about the stability and profitability of the
entity. They are interested in information which enables them to
assess the ability of the entity to provide remuneration, retirement
benefits and opportunities.

 Lenders

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 - are interested in information which enables them to determine
whether their loans and interest thereon will be paid when due.

 Suppliers and trade Creditors

- interested in information which enables them to determine
whether amounts owing to them will be paid on maturity.

 Customers
- interested in information about the continuance of the entity
especially if they have a long term involvement with or dependent on
the entity.

 Governments and their agencies

- interested in the allocation of resources and therefore the activities
of the entity. These users require information to regulate the
activities of the entity, determine taxation policies and as a basis of
national income and similar statistics.

 Public
- interested in information especially if the entity affect members of
the public in a variety of ways. Example if the entity has substantial
contributions in the economy.

BASIC PURPOSE OF CONCEPTUAL FRAMEWORK

1. Assist the FRSC in developing accounting standards that will represent

Philippine GAAP.
2. Assist preparers of FS in applying accounting standards and in dealing
with issues not yet covered by GAAP.
3. Assist the FRSC in its review and adoption of IFRS.
4. Assist users of FS in interpreting the information contained in the FS.
5. Assist auditors in forming an opinion as to whether FS conforms to
Philippine GAAP.
6. To provide information to those interested in the work of the FRSC in the
formulation of PFRS.

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Note: conceptual framework is not a PFRS. Nothing in this framework
overrides any specific PFRS. In case of conflict, the requirement of PFRS
prevails.
SCOPE OF CONCEPTUAL FRAMEWORK
1. C- oncepts of capital and capital maintenance.
2. O- bjective of Financial Reporting.
3. Q- ualitative characteristics that determine the usefulness of information in
FS.
4. E- lements of FS(definition, recognition and measurement).

Note: conceptual framework applies to the FS of all commercial, industrial and

business reporting entities, whether public or private sector. However, special
purpose FS (ex. Prospectuses and computations prepared for taxation) are
outside the scope of the framework.

OBJECTIVE OF FINANCIAL STATEMENTS

-To provide information about the financial information about the financial
position, performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.

-FS also show the results of the stewardship of management or the

accountability of management for the resources entrusted to it.

Note: management has the primary responsibility for the preparation and
presentation of the financial statements of the entity.

Financial Position
- Comprises its assets, liabilities, and equity at a particular time. It pertains
to the economic resources, liquidity, solvency, financial structure and
capacity for adaptation of an entity.

Financial Performance
- Comprises its revenue, expenses, and net income or loss for a period of
time.

Cash Flows

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- Information about the cash flows is useful in order to assess the
operating, investing and financing activities of the entity during a period.

ACCOUNTING CONCEPTS
1. Entity Theory - the accounting objective is geared toward proper income
determination. Proper matching of cost against revenue is the ultimate
end.

Assets = Liabilities + Equity

2. Proprietary Theory - the accounting objective is directed toward proper

valuation of assets.

Assets – Liabilities = Equity

3. Residual Equity Theory - the accounting objective is proper valuation of

assets. This is applicable where there are two classes of shareholders,
ordinary and preference.

Assets – Liabilities – Preference Shareholders’ Equity = Ordinary

Shareholders’ Equity

4. Fund Theory - the accounting objective is neither proper income

determination nor proper valuation of assets but the custody and
administration of funds. Example, government accounting and fiduciary
accounting.

Fund = cash inflows – cash outflows

FINANCIAL REPORTING
- Encompasses not only FS but also other means of communicating
information that relates directly or indirectly to the financial accounting
process.
- The main product is the financial reports, which includes financial
highlights, summary of important financial figures, analysis of financial
statements and significant ratios. Also includes nonfinancial information
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 such as description of major products and listing of corporate officers and
directors.

OBJECTIVE OF FINANCIAL REPORTING

1. To provide information useful in investment, credit and similar decision.
2. To provide information useful in assessing cash flow prospects.
3. To provide information about entity resources claims to those resources
and changes in them.

QUALITATIVE CHARACTERISTICS
- The qualities or attributes that make the financial accounting information
useful to the users.
- Classified into Fundamental and Enhancing Qualitative Characteristics.
Fundamental Qualitative Characteristics
- Relate to the content or substance of financial information.
1. Relevance
- Means the capacity of information to make a difference in a decision by
helping users form predictions about the outcome of past, present and
future events, or confirm or correct future expectations.
- Or simply, the capacity of information to influence a decision.
Ingredients of Relevance
Predictive value - when it can help users increase the likelihood of
correctly or accurately predicting or forecasting the information.

Confirmatory Value - when it enables users to confirm or correct earlier

expectations.

Note: The relevance of information is affected by its nature and

materiality. Information is material if its omission or misstatement could
influence the economic decision that the users make on the basis of the
financial information about an entity. Its factors include size and nature.

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 2. Faithful Representation
- Means that financial reports represent economic phenomena or
transactions in words and numbers. In simple language, the descriptions
and figures match what really existed or happened. And so, the actual
effects of the transactions should be properly accounted in the financial
statements.

Ingredients of Faithful Representation

Completeness - requires that relevant information should be presented in
a way that facilitates understanding and avoids erroneous implication.
This is the result of the standard of adequate disclosure or the principle of
full disclosure.

Neutrality - the information contained in the FS must be free from bias.

The information should not favor one party to the detriment of the other
party.

Free from Error – means that there are no errors or omissions in the
description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in the
process.

Note: Substance over form – which means the information, is to be

accounted in accordance with their substance and reality and not merely
their legal form, is not a separate component of faithful representation
rather, it is inherent for a representation to be faithful to be accounted in
their substance rather than merely representing their legal form.

Conservatism – which means, when alternative exist, the alternative

which has the least effect on the equity should be chosen, is not
discussed/ included in the discussion in the New Conceptual Framework.

Enhancing Qualitative Characteristics

- Relate to the presentation or form of the financial information.
1. Comparability

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- The ability to bring together for the purpose of noting points of likeness
and difference. Comparability may be made within an entity or between
and across entities.
- Consistency – which means the principle that requires accounting
methods and practices to be applied on a uniform basis from period to
period, is implicit in the qualitative characteristics of comparability.

Note: consistency does not mean that no change in accounting method

can be made. If the change will result to a more useful and meaningful
information, then such change should be made with full disclosure of the
change and the peso effect thereof.

2. Understandability
- Requires that financial information must be comprehensible or intelligible
to be useful.
- Users are assumed to have a reasonable knowledge of the economic
activities and accounting and willingness to the study the information
with reasonable diligence.

3. Verifiability
- Means that different knowledgeable and independent observers could
reach consensus, although not necessarily complete agreement, that a
particular depiction is a faithful representation.
- The financial information is verifiable in the sense that it is supported by
evidence so that an accountant that would look into the same evidence
would arrive at the same economic decision or conclusion.

4. Timeliness
- Means having information available to decision makers in time to
influence their decision.
- “relevant and faithfully represented financial information furnished after
a decision is made useless or of no value”.

ACCOUNTING CONSTRAINTS

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- The factors that may affect the relevance and reliability of financial
accounting information.

1. Cost-benefit - “the benefit derived from information should exceed the

cost incurred in obtaining the information”.

ELEMENTS OF FINANCIAL STATEMENTS

- Refer to the quantitative information shown in the statement of financial
position and statement of financial performance(income statement).
- Elements that are directly related to the measurement of financial
information are assets, liabilities and equity.
- Elements directly related to the measurement of performance are income
and expenses.

Assets - the resources controlled by the entity as a result of past transaction

or events and from which future economic benefits are expected to flow to
the entity.

Liabilities - are present obligation of the entity arising from past transactions
or events the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.

Equity - is the residual interest in the assets of the entity after deducting all of
its liabilities.

Income - the increase in economic benefit during the accounting period in the
form of inflow or increase in asset or decrease in liability that results in
increase in equity, other than contribution from equity participants.

Expense - the decrease in economic benefit during the accounting period in

the form of outflow or decrease in asset or increase in liability that results in
equity, other than contribution from equity participants.

RECOGNITION OF ELEMENTS
- The reporting of an asset, liability, income or expense on the face of the
financial statements of an entity.
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1. Asset recognition principle
- Asset is recognized when it is probable that future economic benefits will
flow to the entity and the asset has a cost or value that can be measured
reliably.
- Inherent in asset recognition principle is the cost principle.
2. Liability recognition principle
- Liability is recognized when it is probable that an outflow of resources
embodying economic benefits will be required for the settlement of a
present obligation and the amount can be measured reliably.

3. Income recognition principle

- Income is recognized when it is probable that increase in future economic
benefits related to an increase in an asset or a decrease in liability has
arisen and that the increase can be measured reliably.

Note: the condition for income recognition is basically present at the point
of sale which is also the point of delivery. The reason is that at the point of
sale, the entity has already transferred to the buyer the significant risks
and rewards of ownership of the goods.

Exception to the point of sale

1. Installment method
2. Cost recovery method or Sunk cost method
3. Cash method
4. Percentage of completion method
5. Production method

Definition of Income
- encompasses both Revenue and Gains

Revenue - arises in the course of ordinary regular activities of an entity and is

referred to in a variety of names including sales, fees, interest, dividends,
royalties and rent.

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Gains- represent other items that meet the definition of income and do not
arise in the course of ordinary regular activities of an entity.

Revenue from sale of goods

- PAS 18 on revenue recognition provides the following conditions:
1. The entity has transferred to the buyer the significant risks and rewards
of ownership of the goods.
2. The entity retains neither continuing managerial involvement nor
effective control over the goods sold.
3. The amount of revenue can be measured reliably.
4. It is probable that economic benefits associated with the transaction will
flow to the entity.
5. The costs incurred or to be incurred in respect of the transaction can be
measured reliably.

4. Expense recognition principle

- Expenses are recognized if it is probable that a decrease in future
economic benefits related to a decrease in asset or an increase in liability
has occurred and that the decrease in economic benefits can be
measured reliably.

Definition of expense
- Encompasses losses as well as those expenses that arise in the course of
the ordinary regular activities of the entity.

Matching principle
- Expense recognition principle is the application of the matching principle.
- “The generation of revenue is without any cost”.
1. Cause and effect association
- The expense is recognized when the revenue is already recognized.
- “Direct matching”.
- Examples include cost of sales, doubtful accounts, warranty expense and
sales commissions.

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2. Systematic and rational allocation
- Some costs are expensed by simply allocating them over the periods
benefited. The reason for this is that the cost will benefit future periods
and that there is an absence of a direct or clear association of the
expense with specific revenue.
- Examples include depreciation, amortization and allocation of
prepayments and deferred charges.

3. Immediate recognition
- The cost incurred is expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating certain cost with
future revenues.
- Examples include officers’ salaries, most administrative expense,
advertising and most selling expenses, amount to law suits and worthless
intangibles.

MEASUREMENT OF ELEMENTS
1. Historical cost
2. Current cost
3. Realizable value
4. Present value

Note: the performance of an entity is determined using two approaches

namely, capital maintenance and transaction approach.

1. Transaction approach
-the traditional preparation of an income statement.

2. Capital maintenance
- Net income occurs only after the capital used from the beginning of the
period is maintained.

1. Financial capital

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 - Is the absolute monetary value of the net assets contributed by the
shareholders and the value of the increase in net assets resulting from
earnings retained by the entity.
- Based on Historical cost
- Net income occurs when the financial or nominal amount of the net
assets at the end of the period exceeds the financial or nominal amount
of the net assets at the beginning of the period, after excluding
distributions to and contributions by owners during the period.

2. Physical capital
- Is the quantitative measure of the physical productive capacity to
produce goods and services.
- This requires that productive assets be measured at current cost.
- Physical capital is equal to the net assets of the entity expressed in terms
of current cost.
- Net income occurs when the physical productive capital of the entity at
the end of the period exceeds the physical productive capital at the
beginning of the period, after excluding distributions to and contributions
from owners during the period.

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CONCEPTUAL FRAMEWORK
1. The conceptual framework
a. Is considered a Philippine Financial Reporting Standards
b. Overrides Philippine Financial Reporting Standards
c. Is guided by Philippine Financial Reporting Standard
d. Is used as a guide by Philippine Financial Reporting Standards

2. The conceptual framework is intended to establish

a. GAAP in financial reporting by entities.
b. The meaning of present fairly in accordance with GAAP.

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 c. The objectives and concepts used in developing financial reporting
standards.
d. The hierarchy of sources of GAAP.

3. Which is not a basic purpose of the Conceptual Framework of

accounting?
a. To assist preparers of financial statements in applying the accounting
standards.
b. To assist the FRSC in developing accounting standards.
c. To assist the BOA in promulgating rules and regulations affecting the
practice of accountancy in the Philippines.
d. To assist FRSC in reviewing and adopting IFRS.

4. Which is not included in the scope of the FRSC conceptual framework?

a. Objective of FS
b. Concepts of capital and capital maintenance
c. Definition, recognition and measurement of the elements of FS
d. Generally accepted accounting principles

5. What is the objective of FS according to Conceptual Framework?

a. To provide information about the financial position, performance, and
changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.
b. To prepare and present a statement of financial position, a statement
of comprehensive income, a statement of cash flows, and a statement of
changes in equity.
c. To prepare and present comparable, relevant and reliable, and
understandable information to investors and creditors.
d. To prepare financial statements in accordance with applicable
standards and interpretations

6. The entity’s financial position as to liquidity, solvency and financial

structure is portrayed in which specific FS?
a. Statement of financial position
b. Statement of comprehensive income
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 c. Statement of cash flows
d. Statement of changes in equity

7. The objectives of financial reporting for entities are based on

a. The need for conservatism
b. Reporting on management stewardship
c. Generally accepted accounting principle
d. The need of the users of the information

8. These are accounting information users who are interested in information

about the profitability and stability of an entity in order to assess whether
they should buy, hold or sell their shares.
a. Employees
b. Lenders
c. Investors
d. General public

9. These are accounting information users who are interested in information

about profitability and stability of an entity in order to assess the ability of
the entity to provide remuneration, retirement benefits and employment
opportunities.
a. Customers c. Trade creditors
b. Suppliers d. Employees

10. These are accounting information users that require information to

regulate the activities of the entity, determine taxation policies and as a
basis for national income and similar statistics.
a. Investors c. General public
b. Academe d. Government and its agencies

11. The conceptual framework of accounting is applicable to all of the

following, except
a. General purpose financial statements
b. Special purpose financial statements
c. Commercial and industrial enterprises
d. Public enterprises

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 12. These are qualities or attributes that make financial accounting
information useful to users.
a. Quantitative techniques c. Qualitative characteristics
b. Underlying assumptions d. Accounting principles

13. The overriding qualitative characteristics of accounting information is

a. Usefulness for decision making c. Relevance
b. Freedom from bias d. Comparability

14. The two primary qualities that make accounting information useful for
decision making are
a. Comparability and consistency c. Relevance and Faithful
Representation
b. Materiality and timeliness d. Reliability and Relevance

15. Financial information exhibits the characteristics of consistency when

a. Expenses are reported as charges against revenue in the period in
which they are paid
b. Accounting entities give accountable events the same accounting
treatment from period to period
c. Gains and losses are not included on the income statement
d. Accounting procedures be adopted that give a consistent rate of
return

16. The consistency standard of reporting requires that

a. Expenses be reported as charges against the period in which they are
incurred.
b. The effect of changes in accounting upon income be properly disclosed.
c. Gains and losses should not appear in the income statement.
d. Accounting procedures be adopted that give a consistent rate of
return.

17. The financial information must be comprehensible or intelligible if it is to

be useful
a. Relevance c. Understandability
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 b. Reliability d. Comparability

18. Accounting information is considered to be relevant when it

a. Is verifiable and neutral
b. Is capable of making a difference in a decision
c. Is understandable by reasonably informed users of accounting
information
d. Is able to present complete information

19. Financial accounting is communicated early enough to be used for the

economic decision which it might influence and to avoid delay in making
the decision.
a. Predictive value c. Neutrality
b. Timeliness d. Completeness

20. If there is undue delay in reporting financial information, then it may lose
its
a. Relevance c. Objectivity
b. Reliability d. Conservatism

21. A quality of financial information that assures users that the information
is complete and faithfully represents what it purports to show.
a. Reliability
b. Relevance
c. Comparability
d. Understandability

22. The ability through consensus among measurers to ensure that financial
information represents what it purports to represent is an example of the
concept of
a. Relevance
b. Verifiability
c. Comparability
d. Feedback value

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23. Which of the following accounting concepts states that an accounting
transaction shall be supported by sufficient evidence to allow two or
more qualified individuals to arrive at essentially similar conclusions?
a. Prudence c. Periodicity
b. Objectivity d. Stable monetary unit

24. The assurance that financial accounting information is reasonably free

from bias and does not cater to the needs of specific users.
a. Consistency c. Neutrality
b. Verifiability d. Completeness

25. Conservatism is best described as selecting an accounting information

that
a. Understates assets and net income
b. Has least favorable impact on owners’ equity
c. Overstates liabilities and expenses
d. Is likely to mislead users of accounting information

26. Comparability is sometimes sacrificed for

a. Relevance c. Objectivity
b. Conservatism d. Reliability

27. The usefulness of providing information in the financial statements is

subject to the constraint of
a. Reliability
b. Consistency
c. Cost-benefit
d. Representational faithfulness

28. Statement I: Materiality is a primary qualitative characteristic rather than

a threshold or cut off point in determining useful information.
Statement II: Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the
financial statements.
Statement III: Materiality depends on the size of the item or error judged
in the particular circumstances of its omission or misstatement.
a. Only statement I is true c. Only statement I is false
27
 b. Only statement II is true d. Only statement III is false

29. Based on the conceptual framework, when should an item that meets the
definition of an element be recognized?
a. When it is probable that any future economic benefit associated with
the item will flow to or from the entity
b. When an element has a cost or value that can be measured reliably
c. When the entity obtains control of the rights or obligations
associated with the item
d. When it is probable that any future economic benefit associated with
the item will flow to or from the entity and the item has a cost that
can be measured with reliability.

30. According to the conceptual framework of accounting, the elements

directly related to the measurement of performance are
a. Assets, liabilities and equity c. Income and expenses
b. Gains and losses d. Revenues and losses

31. Determine the true statement

a. Income covers both revenues and gains
b. Revenues covers both income and gains
c. Gains cover both income and revenue
d. Income, revenues and gains are one and the same item

32. Which measurement bases are used in preparing the financial statements
according to the conceptual framework?
a. Historical cost and realizable value
b. Historical cost, current cost and realizable value
c. Historical cost, realizable value and present value
d. Historical cost, current cost, realizable value and present value

33. What are the two capital concepts included in the scope of the
Conceptual Framework?
a. Borrowed and invested capital c. Monetary and non-
monetary capital
b. Financial and physical capital d. Accounting and
economic capital
28
34. What are the underlying assumptions as mentioned by the conceptual
framework?
a. Accrual and going concern
b. Accrual and accounting entity
c. Accrual
d. Going Concern

35. Continuation of accounting entity in the absence of evidence to the

contrary is the basic concept of
a. Accounting entity c. Going concern
b. Time period d. Accrual

36. This means that there are no errors or omissions in the description of the
phenomenon, and the process used to produce the reported information
has been selected and applied with no errors in the process.
a.Freedom from error c. Objectivity
b.Verifiability d. Errorless Accounting

37. Revenues are recognized as earned, regardless of when the related cash
is received; expenses are recognized as incurred, regardless of when the
related cash is paid.
a. Cash basis
b. Accrual basis
c. Modified accrual basis
d. Modified cash basis

Items 38 to 40 are based on the following

“Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities, that is
intended to be useful in making economic decisions.”

38. One of the basic features of financial accounting is the

a. Direct measurement of economic resources and obligations and
changes in them in terms of money and sociological and psychological
impact.

29
 b. Direct measurement of economic resources and obligations and
changes in them in terms of money.
c. Direct measurement of economic resources and obligations and
changes in them in terms of money and sociological impact.
d. Direct measurement of economic resources and obligations and
changes in them in terms of money and psychological impact.

39. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an
economy as a whole or to members of society as consumers.
b. Business industries, rather than to individual enterprises or an
economy as a whole or to members of society as consumers.
c. Individual business enterprises, industries, and an economy as a whole,
rather than to members of society as consumers.
d.An economy as a whole and to members of society as consumers,
rather than to individual enterprises or industries.

40. During a period when an enterprise is under the direction of a particular

management, the financial reporting will directly provide information
about
a. Both enterprise performance and management performance
b. Management performance but not enterprise performance
c. Enterprise performance but not management performance
d. Neither enterprise performance nor management performance

 The world is a dangerous place, not because of those who do evil, but
because of those who look on and do nothing.

STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF COMPREHENSIVE INCOME

30
- includes the components of net income or loss and the components
of other comprehensive income during a period.

Methods of Presentation
1. Separate Statements
a. Income Statement – displaying the components of net
income or loss.
b. Statement of Comprehensive income – beginning with net
income or loss plus the components of other comprehensive
income.

2. Single Statements
- combined income statement and other comprehensive income.

Components of SCI:
1. Profit or Loss
- composed of income and expenses.
a. Income
Considered if there is:
↑ economic benefit.
 ↑ asset
 ↓ liability
 ↑ equity
1. Revenue – income that arises from ordinary activities.
2. Gains – income that arises from peripheral activities.

b. Expenses
Considered if there is:
↓ economic benefit.
 ↓ asset
 ↑ liability
 ↓ equity
1. Expenses – costs that arises from ordinary activities.
2. Losses – costs that arises from peripheral activities.

2. Other Comprehensive Income

31
 - includes items of income and expenses that are not recognized in
profit or loss but are
recognized directly as required or permitted by accounting
standards. It includes the
following items:
a. Unrealized gain or loss on Available for sale securities.
b. Gain or loss from foreign currency translation.
c. Unrealized gain or loss on cash flow hedge – the effective portion.
d. Change in revaluation surplus.
e. Actuarial gain or loss using full recognition approach.

Income Statement approach of presentation

1. Capital maintenance approach
* There is income if Capital End is greater than Capital beginning.

Income = Capital End > Capital Beginning

2. Transactions approach
* There is income if Revenue is greater than Expenses.
* This is considered the traditional preparation of income statement
in conformity with the GAAP.

Income = Revenue > Expenses

Transaction approach can either be:

1. Functional Presentation
- classifies expenses according to its FUNCTION.
- also called as Cost of Sales Method.
Ex. Cost of sales, Selling expense, Administrative expense,
Other expense.

2. Natural Presentation
- classifies expenses according to its NATURE.

32
 - also called as Nature of Expense Method.
Ex. Depreciation, Rent expense, Salaries and wages, etc.

Recognition of Income and Expenses

1. Income
Recognized if:
a. Probable - ↑ in economic benefit.
b. Measurable – “amount can be measured reliably.”

2. Expenses
Recognized if:
a. Probable - ↓ in economic benefit.
b. Measurable – “amount can be measured reliably.”

Matching Principle
- “The generation of revenue is not without any cost.”

Can either be:

1. Cause and Effect Association
- the expense is recognized when the revenue is already recognized.
Ex. Cost of sales, Doubtful accounts, Warranty expense, Sales
commissions.

2. Systematic and Rational Allocation

- the cost is allocated over the periods benefited.
Ex. Depreciation, Amortization, allocation of prepayments and
deferred charges.

3. Immediate Recognition
- the cost is expensed outright because of uncertainty of future
economic benefits or difficulty of reliably associating costs with future
revenues.
Ex. Officer’s salaries, most administrative expenses, advertising,
most selling expenses,
losses.

Measurement of Income and Expense

33
1. Income – measured at FAIR VALUE of consideration received or
receivable.
2. Expense – measured at FAIR VALUE of the consideration
paid/sacrificed or due/payable.

Recognition of Revenue from Sale of goods

Revenue is recognized when all of the following are met:
1. The enterprise has transferred to the buyer the significant risks and
rewards of ownership of the goods.
2. The enterprise retains neither continuing managerial involvement to
the degree usually associated with ownership nor effective control
over the goods sold.
3. The amount of revenue can be measured reliably.
4. It is probable that the economic benefits associated with the
transaction will flow to the enterprise.
5. The costs incurred or to be incurred in respect of the transaction can
be measured reliably.

Recognition of Revenue from Rendering of Services

Revenue is recognized when all of the following are met:
1. The amount of revenue can be measured reliably.
2. It is probable that the economic benefits associated with the
transaction will flow to the enterprise.
3. The costs incurred or to be incurred in respect of the transaction can
be measured reliably.
4. The stage of completion of the transaction at the balance sheet date
can be measured reliably.
Recognition of Revenue from Interest, Royalties and Dividends
Revenue is recognized when all of the following are met:
1. It is probable that the economic benefits associated with the
transaction will flow to the enterprise.
2. The amount of revenue can be measured reliably.

Note:
 Interest should be recognized on a time proportion basis that
takes into account the effective yield on the asset.

34
  Royalties should be recognized on an accrual basis in
accordance with the substance of the relevant agreement.
 Dividends should be recognized when the shareholder’s right
to receive payment is established.

 To catch lots of fish, you must first go to the water. 

STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION

- a statement showing the company’s resources (assets), obligations
(liabilities), and equity at a given point in time.

Elements of a Statement of Financial Position (Balance Sheet)

1. Assets
 Resources controlled by the entity.
 Result of past events.
 Inflow of economic benefits.
 Cost can be measured reliably.

2. Liabilities
 Present obligation of an entity.
 Arises from past events.
 Outflow of economic benefits.
 Cost can be measured reliably.

3. Equity
 The residual interest of the company’s assets after deducting
the liabilities.

Recognition of Assets and Liabilities

1. Assets
a. Probable - ↑ economic benefits.
b. Measurable – “cost can be measured reliably.”

35
2. Liabilities
a. Probable - ↓ economic benefits.
b. Measurable – “cost can be measured reliably.”

CLASSIFICATION OF ASSETS
1. Current Assets
An asset should be classified as current if it satisfies any of the
following: (PAS 1, par. 57)
a. Expected to be realized, held for sale or consumption in the
normal course of the enterprise’s operating cycle.
b. Held primarily for the purpose of being traded.
c. Expected to be realized within twelve months after balance
sheet date.
d. Cash or cash equivalent – not restricted.

Cash and cash equivalents

 Includes petty cash funds, cash in bank, cash on hand and any
cash equivalent.
 Should be unrestricted for use.

Held for Trading

 This category refers to TRADING SECURITIES.
 Acquired principally for the purpose of generating profit from
short-term fluctuations in price or dealer’s margin.

Expected to be realized within twelve months

 This category refers to SHORT-TERM NONTRADE
RECEIVABLES.
 They are classified as current asset (Nontrade receivable) if
they are collectible within one year from the end of reporting
period, the length of operating cycle notwithstanding.

Realized, sold or consumed

 This category refers to TRADE RECEIVABLES, INVENTORIES,
and PREPAYMENTS.

36
  They are classified as current assets because they are
expected to be realized, sold or consumed within the normal
operating cycle or one year, whichever is longer.

Presentation of Current Assets

a. Cash and Cash Equivalents.
b. Financial Assets (Trading Securities and Available for Sale
Securities – current)
c. Trade and other receivables.
d. Inventories.
e. Prepaid Expenses.

2. Non-current Assets
- other assets not classified as current asset.

Presentation of Non-current liabilities

a. Property, plant and equipment.
b. Long-term investments.
c. Intangible assets.
d. Other non-current assets.

CLASSIFICATION OF LIABILITIES
1. Current Liabilities
A liability should be classified as current if it satisfies any of the
following: (PAS 1, par. 60)
a. Expected to be settled in the normal course of the enterprise’s
operating cycle.
b. Held primarily for the purpose of being traded.
c. Due to be settled within twelve months after the balance sheet
date.
d. Entity does not have the unconditional right to defer settlement of
the liability for at
least twelve months after BS date.

Long-term debt falling due within one year

 Classified as current even if:
a. Original term was longer than twelve months.
37
 b. An agreement to refinance or reschedule payment
on a long-term basis is completed after the
reporting period.
 Classified as non-current if:
a. The entity has the discretion to refinance or roll
over an obligation for at least twelve months after
reporting period.

Breach of Covenants
 Classified as current if:
a. The borrowing agreement are breached or violated.
(Even if the lender agreed not to demand payment
after the end of the period).

 Classified as non-current if:

a. The lender has agreed on or before the end of the
reporting period to provide a grace period ending
at least twelve months after BS date.

Presentation of Current Liabilities

1. Trade and other payables.
2. Current Provisions
3. Short-term borrowings.
4. Current portion of long-term debt.
5. Current tax liability.

2. Non-current Liabilities
- all other liabilities not classified as current liabilities.

Presentation of Non-current Liabilities

1. Non-current portion of long-term debt.
2. Finance lease liability.
3. Deferred tax liability.
4. Long-term obligations to company officers.

38
 5. Long-term deferred revenue.

Estimated Liabilities
 are obligations which exist at the end of the reporting period
although the timing and amount is indefinite.
 Can be classified as current or non-current.
 Ex. Estimated liabilities for Premiums and Warranties.

Contingent Liability
 Present Obligation.
 Not probable.
 Not measurable.
 Can be probable or measurable but not both.

Treatment of Contingent Liability

1. If Possible – Disclosed.
2. If remote – Not disclosed.

Note: If the obligation is probable and the amount can be measured

reliably, the obligation is not a contingent liability but a PROVISION.

Contingent Asset
 A Possible asset.
 Arises from past event or transaction.
 Outcome is not within the control of the entity.

Treatment of Contingent Asset

1. If virtually certain – Recorded (no longer considered as contingent
asset).
2. If probable – Disclosed.
3. If possible – Not disclosed.
4. If remote – Not disclosed.

SHAREHOLDERS’ EQUITY
- the residual interest of owners in the net assets of a corporation
measured by the excess of assets over liabilities.
Old Term (Philippine Term) IAS Term
39
 Capital Stock
Subscribed Capital Stock
Preferred Stock
Common Stock
Additional Paid-in Capital
Retained Earnings (deficit)
Retained Earnings Appropriated
Revaluation Surplus
Treasury Stock
Share Capital
Subscribed Share Capital
Preference Share Capital
Ordinary Share Capital
Share Premium
Accumulated Profits (Losses)
Appropriation Reserve
Revaluation Reserve
Treasury Share

Forms of Statement of Financial Position

1. Report Form
- This form sets forth the three major sections in a downward
sequence of assets, liabilities and equity.

2. Account Form
- The presentation follows that of an account. The assets are
shown on the left side and the liabilities and equity on the
right side of the statement of financial position.

 Adversity is the diamond dust that heaven polishes its jewels

with.

STATEMENT OF RETAINED EARNINGS

- Shows the changes affecting directly the retained earnings
of an entity and relates the income statement to the
statement of financial position.

1. Net income or loss for the period

2. Prior period errors
3. Dividends declared and paid to shareholders
4. Effect of change in accounting policy
5. Appropriation of retained earnings

STATEMENT OF CHANGES IN EQUITY

40
 - A basic statement that shows the movements in elements
or components of the shareholders’ equity.

Note: the statement of retained earnings is no longer a required

basic statement but is a part of changes in equity.

STATEMENT OF CASH FLOWS

-a basic component of the financial statements which
summarizes the operating, investing and financing activities of
an entity.
- provides the information about the cash receipts and cash
payments of an entity during a period.

FINANCIAL STATEMENTS – PART 1

1. Which financial statement (FS) would a potential investor primarily use to

asses the company’s liquidity and financial flexibility?
a. Statement of comprehensive income
b. Statement of financial position
c. Statement of changes in equity
d. Statement of retained earnings

2. The format of statement of financial position wherein the asset section is

shown side-by-side with the liabilities and equity section is known as
a. Account form c. Functional presentation
b. Report form d. Natural presentation

3. Which if the following is an essential characteristic of an asset?

a. The claims to an asset’s benefits are legally enforceable
b. An asset is tangible
c. An asset is obtained at a cost
d. An asset provides future benefits

41
4. Which of the following statements best describes a liability?
a. An excess of equity over current asset
b. Resources to meet financial commitments as they fall due
c. The residual interest in the assets of the entity after deducting all
of its liabilities
d. A present obligation of the entity arising from past events

5. Under PAS 1, assets in the statement of financial position are broadly

classified into
a. Tangible asset c. Depreciable and non-
depreciable
b. Current and non-current d. Monetary and non-monetary

6. Under PAS 1, which of the following does not refer to a current asset?
a. It is held primary for the purpose of being traded
b. It is expected to be realize within twelve months after the
balance sheet (BS) date
c. It is a cash or a cash equivalent restricted for more than 12
months from BS date
d. It is expected to be realized, sold or consumed within the entity’s
normal operating cycle

7. Under PAS 1, which of the following does not refer to a current liability?
a. It is expected to be settled within the entity’s normal operating
cycle
b. It is held primarily for the purpose of being traded
c. It is due to be settled within twelve months after the balance
sheet date
d. The entity has an unconditional right to defer settlement of the
liability for at least twelve months after the balance sheet date

8. The REFINANCING (rolling over) of current maturing long-term debt of an

entity completed after the balance sheet date but before the FS are
authorized for issue requires that such date shall be classified as
a. Current, if the refinancing is at the discretion of the entity owing
the debt
42
 b. Current, the discretion of the entity to refinance the debt
notwithstanding
c. Non-current, if the refinancing is at discretion of the entity owing
the debt
d. Non-current, if the refinancing is not at the discretion of the
entity owing the debt

9. When an entity BREACHES an undertaking under a long-term loan

agreement with the effect that the liability becomes payable on demand,
the liability is classified as
a. Current, even if the lender has agreed not to demand payment
as a consequence of the breach
b. Current, only if the lender demands immediate payment as a
consequence of the breach
c. Non-current, even if the lender has agreed not to demand
payment as a consequence of the breach
d. Non-current, only if the lender demands immediate payment as a
consequence of the breach

10. A general feature of FS presentation that requires an entity to present

separately each material class of similar items and present separately
items of dissimilar nature or function unless they are immaterial.
a. Consistency of presentation c. Comparative information
b. Materiality and aggregation d. Fair presentation and
compliance with PFRS

11. Offsetting of liabilities and assets is

a. Allowed in all cases c. Allowed unless not permitted
by PFRS
b. Not allowed in all cases d. Not allowed unless permitted
by PFRS

12. Which is not required to be presented as minimum information on the

face of the balance sheet?
a. Biological assets
b. Contingent liability
c. Investment property
43
 d. Investments accounted under equity method

13. Which of the following is not an acceptable presentation of the statement

of financial position?
a. Assets presented in the order of liquidity
b. Non-controlling interests presented within the equity
c. Provisions presented as part of the liability section
d. Deferred tax liabilities presented as part of current liabilities

14. Under PAS 37, it is an existing liability of uncertain timing or account

a. Provision c. Accrued liability
b. Unearned income d. Note payable

15. An obligation is not a contingent liability but should be recognized as a

provision when
a. Amount is measurable and settlement of obligation is frequent
b. Amount is measurable and settlement of obligation is probable
c. Obligation is unusual in nature and settlement of obligation is
probable
d. Obligation is unusual in nature and occurs frequently

16. These provides narrative description or disaggregation of items disclose

on the face of the financial statements and information about items that
do not qualify for recognition.
a. Financial reports
b. Value-added statements
c. Notes to the financial statements
d. Summary of significant accounting policies

17. What is the purpose of information presented in notes to the financial

statements?
a. To present management’s responses to auditor comments
b. To correct improper presentation in the financial statements
c. To provide disclosures required by generally accepted accounting
principles
44
 d. To provide recognition of amounts not included in the total of the
financial statements

18. The normal order of presenting the notes to the financial statement is:
A) Statement of measurement basis and accounting policies applied
B) Supporting information or computation for line items presented
and aggregated in FS
C) Statement of compliance with GAAP (i.e., PFRS)
D) Commitments, contingencies, and other required financial and
non-financial disclosures
a. A, C, B, D c. C, A, B, D
b. C, A, D, B d. C, B, A, D

19. The ‘summary of significant accounting policies’ section of the notes to

the FS should not indicate
a. The measurement basis used in preparing the FS
b. The accounting policies used that are relevant to an
understanding of the FS
c. The supporting computation for items aggregated on the face of
the FS
d. Whether the company is using FIFO or weighted average method
for costing inventory

20. An entity is required to present the following non-financial disclosures,

except
a. Domicile and legal form of the entity
b. Description of the nature of the entity’s operation
c. Names of major shareholders and company board members
d. Name of parent and ultimate parent of the group of companies

21. Which of the following is not a related party as envisaged by PAS 24?
a. A director of the entity
b. The parent company of the entity
c. The son of the executive officer of the entity
d. A shareholder of the entity that holds 1% stake in the entity

45
22. Under PAS 24, close family members of an individual considered as
related party include all of the following, except
a. The individual’s domestic partner and children
b. Children of the individual’s domestic partner
c. Dependents of the individual or the individual’s domestic partner
d. Brothers and sisters of the individual

23. When a related party transaction has occurred ,an entity shall disclose in
the notes to the financial statements of the following items, except
a. The nature of the related party relationship
b. The amount of the related party transaction
c. The method of pricing for the related party transaction
d. The amount of outstanding balance and any related provisions for
bad debts

24. PAS 24 requires disclosure of compensation of key personnel. Which of

the following would not be considered as compensation for this purpose?
a. short-term benefits c. termination benefits
b. share-based payments d. reimbursement of out of
pocket expense

25. Relationships between parents and subsidiaries shall be disclosed

a. even if there had been no transaction between these related
parties
b. only if there had been transactions between these related parties
c. only if there had been transactions between these related parties
and the amount is substantially material
d. only if there have been transactions between these related
parties and the amount is to be settled in normal business terms

26. Under PAS 10 events after the balance sheet date ( reporting period ) are
favorable and unfavorable events that occur between the
a. BS date and blind date
b. BS date and FS issue date
46
 c. BS date and the date when the FS are authorized for issue
d. The date when the FS are authorized for issuance and FS issue
date

27. The FS are authorized for issue when

a. the FS are made available to shareholders
b. the shareholders approve the FS at their annual stockholders
meeting
c. the board of directors reviews the FS and authorizes them for
issue
d. the approved FS are filled with a government regulatory body

28. These are post BS events that provide evidence of conditions that existed
at the BS date.
a. adjusting events c. favorable events
b. non-adjusting events d. extraordinary events

29. These are post- BS events that are indicative of conditions that arose after
the BS date
a. adjusting events that require adjustments of amounts recognized
in the FS
b. adjusting events that require certain disclosures in the notes
c. non-adjusting events that require adjustment of amounts
recognized in the FS
d. non-adjusting events that require certain disclosure in the notes

30. Dividends declared by the entity after BS date shall be treated as a(n)
a. adjusting events c. non-adjusting event
b. contingent event d. extraordianary event

Events after Balance Sheet Date

Indicate ‘AE’ if the post event is classified as an adjusting event;

otherwise, indicate ‘NE’(non-adjusting event)

31. Announcement of a plan to discontinue operations

47
 32. Bankruptcy of a customer that occurs after the BS date
33. A major business combination after BS date
34. Abnormally large changes in asset prices or foreign exchange rates
35. Destruction of a major production plant by fire
36. Sale of inventories after BS date that may give evidence about their Net
realizable value
37. Discovery of fraud or errors that show the FS are incorrect
38. Major common share transactions and potential common share
transactions after BS date
39. Expropriation of major assets by the government
40. Determination after BS date of the profit sharing or bonus payment if the
enterprise has the present obligation at BS date to make such payment

 A smooth sea never made a skillful mariner.

FINANCIAL STATEMENTS – PART 2

1. The income statement shows information about an entity’s

a. Liquidity c. cash flow
b. Performance d. financial
structure

2. It is an increase in economic benefits in the form of an increase in assets

or a decrease in liabilities that results in an increase in equity, other than
contribution from owners
a. Asset c. gain
b. Income d. profit

3. They refer to increase in equity from peripheral or incidental transactions

of an entity
a. Revenues c. comprehensive
income
b. Dividends d. gains

48
4. According to the conceptual framework, an entity’s revenue may result
from
a. a decrease in an asset from primary operations
b. an increase in an asset from incidental transactions
c. an increase in liability from incidental transactions
d. a decrease in liability from primary operations

5. Normally, revenue is recognized

a. when the customer’s order is received
b. when the customer’s order is accompanied by check
c. when the transaction results to recording an accounts receivable
d. when the title to the goods changes

6. Gains on asset not yet sold are identified, in precise sense, by the term
a. Unrecorded c. unrecognized
b. Unrealized d. unallocated

7. It is a decrease in economic benefit in a form of a decrease in asset or an

increase in liability that results in a decrease in equity, other than
distribution to owners.
a. asset c. income
b. liability d. expense

8. Expense is recognized
a. when it has been paid for
b. when it is probable that economic benefit can be measured reliably
c. when it is probable that the outflow of economic benefit has
occurred
d. when it is probable that an outflow of economic benefits has
occurred and it can be measured reliably

9. In accounting, the term “probable” means that the probability that the
event will occur is
a. highly uncertain
b. more than the probability that the event will not occur
c. less than the probability that the event will not occur
d. same as the probability that the event will not occur
49
10. It is the process that involves the simultaneous or combined recognition
of revenue and expenses that result directly and jointly from the same
transactions or events.
a. matching of cost with revenue
b. matching of revenue with cost
c. systematic and rational allocation
d. immediate recognition

11. If an asset provides benefits for several periods, its cost is allocated to the
periods benefited in the absence of a more direct basis for relating the
costs to revenue.
a. associating cause and effect
b. systematic and rational allocation
c. immediate recognition
d. installment method

12. Which of the following is not considered as an application of the cause

and effect association principle?
a. cost of sales
b. sales commission
c. depreciation of property
d. uncollectible accounts expense

13. Under PFRS, goodwill is no longer subject to amortization but is now

subject to a regular test for impairment. The impairment of goodwill is an
application of
a. cause and effect association
b. systematic and rational allocation
c. immediate recognition
d. partial recognition method

14. Under the transactions approach, net income is computed as the excess
of
50
 a. total assets over total liabilities
b. income over expense
c. ending capital over beginning capital
d. beginning capital over ending capital

15. Under a strict transaction approach to income measurement, which of

the following would not be considered a transaction?
a. payment of taxes
b. sale of merchandise inventory at 30% markup
c. write down of inventories from cost to net realizable value
d. exchange of property valued at market price for anther property

16. Under the capital maintenance approach, net income is computed as the
excess of
a. beginning over ending capital, excluding the effect of investments
and withdrawals by owners
b. ending over beginning capital, including the effect of investments and
withdrawals by owners
c. ending over beginning capital, excluding the effect of investments
and withdrawals by owners
d. beginning over ending capital, including the effect of investments and
withdrawals by owners

17. The income statement is presented wherein expenses are classified

according to their function, as part of cost of sales, selling activities,
administrative activities and other operating expenses
a. cost of sales method
b. nature of expense method
c. account form
d. report form

18. Which of the following is not considered in the cost of goods sold?
a. office supplies
b. work-in-process
c. raw materials
d. finished goods

51
19. Which of the following is not a distribution cost?
a. salesmen salaries
b. depreciation of delivery equipment
c. freight out
d. freight in

20. Which of the following is not a general and administrative expense?

a. depreciation of building
b. advertising
c. insurance expense
d. office salaries

21. Which item is no longer presented in the face of the income statement?
a. finance cost
b. tax expense
c. extraordinary items
d. share of income or loss of associates and joint venture (accounted
under equity method)

22. A transaction that is material in amount, unusual in nature and infrequent

in occurrence should be presented in the income statement separately as
a
a. component of income from continuing operations
b. component of income from discontinued operations, before tax
c. component of income from discontinued operations, after tax
d. prior period error

23. The results of discontinued operations should be presented as a single

amount in the
a. statement of changes in equity
b. income statement in juxtaposition with income from continuing
operations
c. income statement, net of tax separately from income from continuing
operations

52
 d. income statement, before tax, separately from income from
continuing operations

24. An entity shall disclose on the face of the income statement the allocation
of profit or loss between
a. parent and subsidiary
b. ordinary and extraordinary items
c. continuing and discontinued operations
d. non-controlling(minority) interest and owners of the parent

25. Comprehensive income includes changes in equity, except those resulting

from distribution to and contributions from owners. Which of the
following is not a component of comprehensive income?
a. revenue
b. dividends
c. losses
d. expenses

26. It is the total of income less expenses, excluding the components of other
comprehensive income
a. total comprehensive income
b. profit or loss
c. accumulated profit or loss
d. retained earnings

27. This comprises items of income and expenses that are not recognized in
profit or loss as required or permitted by PFRS.
a. total comprehensive income
b. other comprehensive income
c. accumulated profits and losses
d. retained earnings

28. Which item is not a component of other comprehensive income?

a. change in revaluation surplus
b. foreign currency translation gain or loss
c. unrealized gain or loss on trading securities

53
 d. unrealized gain or loss from derivative contracts designated as cash
flow hedge

29. The statement of comprehensive income shall include information about

I. profit or loss
II. other comprehensive income
a. I only b. II only
c. both I and II d. neither I and II

30. A change in accounting estimate is considered as a

a. change in accounting policy
b. correction of prior period errors
c. normal recurring adjustment
d. irregular book adjustment

31. Prospective application of the effect of change in estimate means that the
change is applied to transactions from the
a. date of change
b. balance sheet date
c. beginning of the year change
d. date of issuance of FS

32. The effect of change in estimate should be

a. shown as adjustment to retained earnings
b. treated as an extraordinary item, net of related tax
c. accounted for in profit or loss in the prior period only
d. accounted for in profit or loss in the period of change and future
periods

33. It is the specific principle, basis, convention, rule and practice adopted by
an entity in preparing and presenting the financial statements
a. accounting policy
b. accounting estimate
c. prior period error
d. generally accepted accounting principles

54
34. Retrospective application means that any effect of change should be
reported as
a. a current adjustment to profit or loss
b. a catch up adjustment to the opening balance of retained earnings
c. an extraordinary item
d. a component of discontinued operations

35. Prospective application of a change in accounting policy is required when

a. a retrospective application will tend to understate the equity position
b. the amount of adjustment to the opening balance of retained
earnings can be reasonably determined
c. the amount of adjustment to the opening balance of retained
earnings cannot be reasonably measured
d. retrospective application will tend to understate equity position

36. A change in accounting policy includes all of the following except

a. the initial adoption of a policy to carry assets at revalued amount
b. the change from expensing to capitalizing borrowing costs
c. the change in inventory valuation from FIFO to weighted average
method
d. the change in depreciation method from straight line to double
declining balance method

37. If it is difficult to distinguish between a change in accounting estimate and

a change in accounting policy, then the change is treated as a
a. change in accounting policy
b. change in accounting estimate
c. prior period error
d. current period error

38. Prior period error include all of the following, except

a. effects of mathematical mistakes
b. mistakes in applying accounting policies
c. oversights or misinterpretation of facts and fraud
d. effects of a change in the estimated useful life of an asset

55
 39. Prior period errors discovered in the current period are reported as
a. extraordinary items
b. adjustments to the opening balance of retained earnings
c. component of current income from continuing operations
d. component of current income from ordinary activities

40. A change in reporting entity and measurement basis is generally treated

as a change in accounting
a. policy c. assumption
b. estimate d. concept

 Don't ask for a light load, but rather ask for a strong back.

CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS

- Cash includes money and any other negotiable instrument that is payable
in money and acceptable by bank for deposit and immediate credit.
- Includes checks, bank drafts and money orders because these are
acceptable by bank for deposit and immediate credit.

Note: for an asset to be considered as cash an item must be considered as

unrestricted in use. This means that the cash must be immediately
available in the payment of current obligations and not subject to any
restrictions, contractual or otherwise.

1. Cash on hand
– includes undeposited cash collections and other cash items
awaiting deposit. Ex. Customer’s check, cashier’s or manager’s
checks, traveler’s checks, bank drafts and money orders.

2. Cash in bank
– includes demand deposit or checking account and savings
deposit which are unrestricted as to withdrawal.

56
 3. Cash fund set aside for current purposes such as petty cash fund
payroll fund and dividend fund.

CASH EQUIVALENTS
- Are short term highly liquid investments that are readily convertible
into cash and so near their maturity that they present insignificant
risk of changes in the value because of changes in interest rates.
- Only highly liquid investments that are acquired three months
before maturity can qualify as cash equivalents.

Note: the date of purchase must be three months before maturity.

VALUATION OF CASH
1. Face value - generally
2. Current exchange rate – cash in foreign currency
3. Estimated realizable value – if the bank or financial institution holding
the funds of the company is in bankruptcy or financial difficulty.

Note: the caption “cash and cash equivalents” should be shown as first
item among the current assets. However, the details must be disclosed in
the notes to financial statements.

I. Investment of excess cash (time deposit, money market instrument,

treasury bills)
a. Three months or less – “cash and cash equivalents”
b. More than three months to one year – “ temporary investment or
short-term investment”
c. More than one year – non current asset “ long-term investment”

II. Cash fund for certain purpose

a. Current purpose – part of “cash and cash equivalent”( ex. Petty cash
fund, payroll fund, travel fund, interest fund, dividend fund and tax
fund).
b. Noncurrent purpose – it is part of “long-term investment” (ex. Sinking
fund, preference share redemption fund, contingent fund, insurance

57
 fund, and fund for the acquisition or construction of property, plant
and equipment.

III. Bank overdraft

- When the cash in bank account has a credit balance. This is the
result of issuance of checks in excess of the deposits.
- Classifies as current liability and should not be offset against other
bank accounts with debit balances.

Note: bank overdraft is not permitted in the Philippines.

Exception to the rule on overdraft

- Offset against other bank account with debit balance if the bank
maintains two or more accounts in one bank.
- If the amount is immaterial

IV. Compensating balance

- Takes the form of minimum checking or demand deposit account
balance that must be maintained in connection with a borrowing
arrangement with a bank.

a. not legally restricted – part of cash

b. legally restricted
1. short-term – “cash held as compensating balance”
2. long-term – “noncurrent investment”

Note: if the problem is silent, not legally restricted (Conrado Valix), legally
restricted (Conrado Uberita), legally restricted (in practice).

V. Undelivered checks
- When they have been merely drawn and recorded but not given to
the payees.

Cash xx
Accounts payable xx

VI. Postdated checks

58
 - Means checks are drawn, recorded and already given to payees but
they bear a date subsequent to balance sheet date.

Cash xx
Accounts payable xx

VII. Stale checks

- When the checks are not encashed by the payees within a relatively
long period of time.

Note: the banking practice dictates that checks not encashed within six
months shall be
considered stale.

1. Immaterial
Cash xx
Miscellaneous income xx

2. Material
Cash xx
Accounts payable xx

VIII. Window dressing

- Whenever some books are left open beyond the end of accounting
period for the purpose of showing a better picture of the financial
highlights and profit activities of the business.

IX. Lapping
- A practice used for concealing a cash shortage. It consists of
misappropriating a collection from one customer and concealing this
defalcation by applying subsequent collection made from another
customer.

X. Kiting
- Another device used to conceal a cash shortage.
- This is usually employed at the end of the month.
59
 - It occurs when a check is drawn against a first bank and depositing
the same check in a second bank to cover the shortage in the latter
bank.

ACCOUNTING FOR CASH SHORTAGE

Cash shortage xx
Cash xx

1. Cashier/ custodian
Due from cashier xx
Cash shortage xx

2. Cause is unclear
Loss from cash shortage xx
Cash shortage xx

ACCOUNTING FOR CASH OVERAGE

Cash xx
Cash overage xx

1. Cashier/custodian
Cash overage xx
Payable to cashier xx

2. No claim
Cash overage xx
Miscellaneous income xx

IMPREST SYSTEM
- A system is a system of control of cash which requires that all cash
receipts should be deposited intact and all cash disbursements should be
made by means of check.
- There are times that this becomes impractical especially when small
amounts are paid so it becomes necessary to establish a petty cash fund.

1. Imprest fund system

- Usually followed in handling petty cash transactions.
60
The pertinent accounting procedures are:
a. Establishment of fund

Petty cash fund xx

Cash in bank xx

b. Payment of expenses out of the fund

- No journal entry (only a petty cash voucher is prepared ).

c. Replenishment of petty cash payments

Expenses xx
Cash in bank xx

d. Adjustment for unreplenished expenses

Expenses xx
Petty cash fund xx

e. Increase in fund

Petty cash fund xx

Cash in bank xx

f. Decrease in fund

Cash in bank xx
Petty cash fund xx

2. Fluctuating fund system

- The checks drawn to replenish the fund do not necessarily equal the
petty cash disbursements. The replenishment checks are simply
drawn upon the request of the petty cashier.

a. Establishment of fund

61
 Petty cash fund xx
Cash in bank xx

b. Payment of expenses out of the fund

Expenses xx
Petty cash fund xx

c. Replenishment or increase of the fund

Petty cash fund xx

Cash in bank xx

d. No adjustment at the end of the period because petty cash expenses

are recorded outright.

e. Decrease in the fund

Cash in bank xx
Petty cash fund xx

BANK RECONCILIATION
- A statement which brings into agreement the cash balance per book and
the cash balance per bank.
- necessary only for a demand deposit account.

Bank statement
- a monthly report of the bank to the depositor showing the cash
balance per bank at the beginning, the deposits acknowledged, the
checks paid, other charges and credits and the daily cash balance per
bank during the month.

Reconciling items

1. Book reconciling items

a. credit memos
b. debit memos
62
 c. errors

2. Bank reconciling items

a. deposit in transit
b. outstanding checks
c. errors

Adjusted Balance Method

Book balance xx Bank balance

xx
Add: Credit memos xx Add: Deposit in Transit
xx
Total xx Total
xx
Less: Debit memos (xx) Less: Outstanding checks
(xx)
Errors xx Errors
xx
Adjusted book balance xx Adjusted bank balance
xx

Credit memos
- representing deposits credited by the bank to the account of the
depositor but not recorded by the depositor as cash receipts.

a. notes receivable collected by bank

b. proceeds of bank loan
c. matured time deposits transferred by the bank to the account of the
depositor

Debit memos
- refer to items not representing checks paid by bank which are
charged or debited by the bank to the account of the depositor but
not yet recorded by the depositor as cash disbursements.

a. NSF or no sufficient fund checks

63
 b. Technically defective checks
c. Bank service charge
d. Reduction of loan

Deposit in transit
- are collections already recorded by the depositor as cash receipts
but not yet recorded by the depositor as cash receipts but not yet
reflected on the bank statement.

a. collections already forwarded to the bank but too late to appear in

the bank statement.
b. Undeposited collections or those still in the hands of the depositor (
cash on hand ).

Outstanding checks
- checks already recorded by the depositor as cash disbursements but
not yet reflected on the bank statement.

a. checks drawn for payment and already given to payees but not yet
presented for payment.
b. Certified checks – deduction from total outstanding checks

Form of bank reconciliation

a. adjusted balance method – the book balance and the bank balance
are brought to a correct cash balance that must appear on the
balance sheet.

b. book to bank method – the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.

c. bank to book method – the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.

Preparation of adjusting entries

- only the book reconciling items require adjusting entries on the book of
the depositor. The adjustments are necessary to bring the cash balance to
its correct balance for statement presentation purposes.
64
 PROOF OF CASH
- an expanded reconciliation in that it includes proof of receipts and
disbursements.
- useful in discovering possible discrepancies in handling cash.

Adjusted balance method

Previous Current Month (CM)
Month (PM)
Balance Receipts Disbursements Balance
Balance per xx xx xx xx
book
Credit Memo
PM xx (xx)
CM xx xx
Debit Memo
PM (xx) (xx)
CM xx (xx)
Errors xx(xx) xx(xx) xx(xx) xx(xx)
Adjusted book xxxx xxxx xxxx xxxx
balance

Balance per xx xx xx xx
bank
Deposit in
transit
PM xx (xx)
CM xx xx
Outstanding
checks
PM (xx) (xx)
CM xx (xx)
Errors xx(xx) xx(xx) xx(xx) xx(xx)
Adjusted bank xxxx xxxx xxxx xxxx
balance

65
  It is not the critic who counts, nor the man who points out how
the strong man stumbled, or where the doer of deeds could have done
them better. The credit belongs to the man who is actually in the
arena, whose face is marred by dust and sweat and blood; who
strives valiantly; who errs and comes short again and again; who
knows great enthusiasms, great devotions; who spends himself in a
worthy cause; who, at the best, knows in the end the triumph of high
achievement, and who, at the worst, if he fails, at least fails while
daring greatly, so that his place shall never be with those timid
souls who know neither victory nor defeat.

CASH AND CASH EQUIVALENTS

1. One of the following is least likely classified as CASH for financial

reporting purposes.
a. Bank drafts and money orders
b. Stale checks issued to creditors
c. Post-dated checks from customers
d. Undelivered checks to trade suppliers

2. Under PAS 7, CASH EQUIVALENTS are short-term and highly liquid

investments that are
a. Classified as available-for-sale securities
b. Readily convertible into cash and acquired one year before maturity
c. Readily convertible into cash and acquired six months before maturity
d. Readily convertible into cash and acquired three months before
maturity

3. Balance sheet date is December 31, 2009. Which of the following is not a
cash equivalent?
a. 12-month BSP treasury note due February 15, 2010 (date of purchase:
November 30, 2009)
b. 6-month BSP treasury note due January 15, 2010 (date of purchase:
October 1, 2009)

66
 c. 3-month BSP treasury bill due March 15, 2010 (date of purchase:
December 15, 2009)
d. 1-month money market placement

4. Cash deposited in a bank experiencing financial difficulty is written down

to
a. Present value c. Estimated realizable value
b. Maturity value d. Value in use

5. Cash denominated in foreign currency shall be translated to Philippine

peso using
a. Closing rate c. Historical rate
b. Average rate d. Passing rate

6. Significant deposits in a foreign bank subject to foreign exchange

restriction should be classified
a. As cash and cash equivalents with appropriate disclosure
b. As non-trade receivables with appropriate disclosure
c. As held-to-maturity securities with appropriate disclosure
d. As part of noncurrent assets with appropriate disclosure

7. A material credit balance in the ‘cash in bank’ account (BANK

OVERDRAFT)
a. Is treated as an error
b. Is treated as a current liability
c. Is netted against cash and a net cash amount is reported
d. May be offset against a demand deposit account maintained in another
bank

8. Checks drawn before the balance sheet date but held for later delivery
(UNDELLIVERED CHECKS)
a. Should be treated as trade receivable
b. Should be regarded as cash equivalent
c. Should be restored back to cash balance
d. Should be treated as outstanding checks for bank reconciliation
purposes

67
9. Deposits held as compensating balances
a. Usually do not earn interest
b. If unrestricted as to withdrawal may be included as cash
c. If legally restricted and held against short-term credit may be included
as cash
d. If legally restricted and held against long-term credit may be included
among current assets

10. The payment of accounts payable made after the close of the accounting
period are recorded as if it were made at the end of the current period.
a. Window dressing c. Kiting
b. Lapping d. Fishing

11. All of the following are necessary components of internal control over
cash, except:
a. Daily deposit of all receipts in the company’s bank account
b. Bank reconciliation
c. Petty cash system
d. Cash reserve

12. Which of the following is an incorrect application of the Imprest system of

cash control?
a. Cash receipts must be deposited on a regular basis
b. Cash disbursements must be made in the form of checks, regardless of
the amount
c. Material cash disbursements must be made in the form of checks
d. Insignificant cash disbursements must be made out of the petty cash
fund

13. Petty cash fund is

a. Restricted cash
b. Set aside for the payment of payroll
c. Separately classified as a current asset
d. Money kept on hand for making minor disbursements of coins and
currency

14. What is the major purpose of an Imprest petty cash fund?

68
 a. To ease the payment of cash to vendors
b. To effectively control cash disbursements
c. To effectively plan cash inflows and outflows
d. To determine the honesty of the petty cashier

15. Under the Imprest fund system, the ‘petty cash fund’ account is debited
a. Only when the fund is created
b. When the fund is created and every time it is replenished
c. When the fund is created and when the size of the fund is increased
d. When the fund is abolished and when the size of the fund is decreased

Petty Cash Accounting

For purposes of replenishing the petty cash fund, assume the following
amounts:
 Petty cash fund: P 10,000 (representing the size of the fund)
 Petty cash vouchers: P 5,000 (representing various expenses paid out of
the petty cash fund)

CASE Coins & Amount of Petty Cash Replenishment Jou

Currencies Replenishment Check
1 P 5,000 P 5,000 Expenses 5,000
Cash in Bank 5,00
17)
2 P 4,000 16) __________ 18)
19)

3 P 7,000 20) __________ 21)

22)
23)

24. The entry to replenish the petty cash fund for P 1,000 of various minor
expenditures would
include a:

69
 a. Debit to cash c. Debit to petty cash
b. Credit to cash d. Credit to petty cash

25. IOUs found in the petty cash drawer at the time of replenishment should
be reported as part
of
a. Cash and cash equivalents c. Trading securities
b. Receivables d. Inventories

26. An employee asks for an authorized reimbursement of transportation

charges out of the Imprest petty cash fund. To document this transaction,
the petty cashier should

a. Debit ‘transportation expense’ c. Credit ‘cash’

b. Debit ‘receivable from employee’ d. Prepare the petty cash
voucher

27. The ‘Cash Short or Over’ account

a. Is a real account
b. Is contra-cash account
c. Is debited upon reimbursement when the petty cash funds prove out
over
d. Is debited upon reimbursement when the petty cash funds prove out
short

28. A debit balance (i.e., shortage) in the ‘Cash Short or Over’ account at the
end of the period that can be attributed to the fault of the petty cashier is
treated as a
a. Payable to employee c. Miscellaneous expense
b. Receivable from employee d. Miscellaneous income

29. A bank reconciliation is

a. A merger of two previously competing banks currently in the process of
reconciliation
b. A statement sent by bank to depositor on a monthly basis
c. A formal financial statement that lists all of a firm’s bank account
balances and previously
70
 closed bank accounts
d. A schedule that accounts for the differences between a firm’s bank
statement balance (balance
per bank) and the balance shown in its general ledger (balance per
books)

30. This is normally added to the cash balance per ledger in order to
determine the correct cash
balance.
a. Note receivable collected by bank in favor of the depositor and
credited to depositor’s
account
b. Service charge
c. NSF customer check
d. Erroneous bank debit

31. This is normally deducted from the bank statement balance in preparing
bank reconciliation.
a. Certified check
b. Deposit in transit
c. Outstanding check
d. Reduction of loan charged to the account of the depositor

32. Balance per bank is LESS than correct balance. No error was committed.
There must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Deposits in transit
d. Bank charges not yet recorded by the company

33. Balance per book is MORE than correct balance. No error was committed.
There must be
a. Deposits credited by the bank but not yet recorded by the company
b. Outstanding checks
c. Deposits in transit
71
 d. Bank charges not yet recorded by the company

34. Bank statements provide information about all of the following, except
a. NSF checks
b. Banks charges for the period
c. Checks cleared during the period
d. Errors unintentionally made by the depositor

35. Which will not require an adjusting entry in the depositor’s books?
a. Bank service charge
b. NSF check from customer
c. Deposit of another company is credited to the account of the depositor
d. Check in payment of account payable for P 2,000 is recorded by the
depositor

 What a great feeling to look back on what you've already

climbed. 

LOANS AND RECEIVABLES

LOANS AND RECEIVALBLES

- nonderivative financial asset.
- with fixed or determinable payments.
- may or may not have fixed or determinable payments.
- not quoted in an active market (not traded).
- the holder can recover substantially all of its investment.
- the holder does not have the intention to hold them to maturity.

CONCEPT OF RECEIVABLES
- a FINANCIAL ASSET.
- represent a contractual right to receive cash or another financial
asset from another entity.

1. Trade Receivables
72
 - claims arising from sale of merchandise or services in the ordinary
course of business.
- classified as CURRENT ASSET.

a. Accounts Receivables
- open accounts or not supported by promissory notes.

b. Notes Receivables
- supported by formal promise to pay in the form of notes.

2. Nontrade Receivables
- claims arising from sources other than the sale of merchandise or
services in the ordinary course of business.
- classified as CURRENT ASSET if collectible within one year.
- classified as NONCURRENT ASSET if collectible after one year.

Note: For banks and other financial institutions, receivables result

primarily from loans to customers.

Examples of Nontrade receivables

1. Advances to shareholders, directors, officers and employees.
 current – collectible within one year.
 noncurrent – collectible beyond one year.
2. Advances to affiliates – treated as long-term investment.
3. Advances to suppliers – treated as current asset.
4. Subscriptions receivable
 current – collectible within one year.
 deduction from subscribed share capital – collectible
beyond one year.
5. Debit balance in creditors account
 current – collectible within one year.
 if amount is not material – can be offsetted and
shown as net accounts payable.
6. Special deposit on contract bids – normally classified as
noncurrent asset.
7. Accrued income – current asset.
8. Claims receivable – current asset.
73
MEASUREMENT OF RECEIVABLES
A. Initial Measurement
1. Short-term - @ FACE VALUE

2. Long-term
a. Interest bearing - @ FACE VALUE

b. Non-interest bearing - @ PRESENT VALUE

B. Subsequent Measurement - @ AMORTIZED COST

Accounts Receivable
A. Initial Measurement - @ Face Value

B. Subsequent Measurement - @ NET REALIZABLE VALUE

Note: Net realizable value is computed as Initial amount less

deductions from ordinary course of business activities.

Deductions from Accounts Receivable

1. Allowance for Freight Charge
2. Allowance for Sales Return
3. Allowance for Sales Discount
4. Allowance for Doubtful Accounts

FREIGHT CHARGE
I. Terms related to Freight charge

1. FOB Destination
- ownership of goods are vested to the buyer upon
receipt of goods.
74
 - seller pays the freight charge up to point of
destination.

2. FOB Shipping Point

- ownership of goods are vested to the buyer upon
shipment of goods.
- buyer pays the freight charge from shipment to
point of destination.

3. Freight Collect
- freight charge is actually paid by the buyer.

4. Freight Prepaid
- freight charge is already paid by the seller.

ALLOWANCE FOR SALES RETURNS

- considered as a deduction from sales

Sales return xx
Allowance for sales return xx

SALES DISCOUNT
- a reduction from invoice price.

Note: Cash discount can either be sales discount – discount on the

part of the seller or purchase discount – discount on the part of
the buyer.

1. Gross Method
- initially records sales at gross amount.
- records sales discount account if payment is made on
discount period.

2. Net Method
- initially records sales at net amount.

75
 - do not record sales discount account if payment is made on
discount period since it already recorded the transaction at
net.

ACCOUNTING FOR BAD DEBTS

o the assumed portion of the credit that cannot be collected.
o considered as selling expense if credit and collection is under
the charge of the sales manager.
o considered as administrative expense if credit and collection
is under the charge of an officer other than the sales
manager.

1. Allowance Method
- requires the recognition of a bad debt loss if the accounts
are doubtful of collection.

a. Considered doubtful of collection

Doubtful Accounts xx
Allowance for Doubtful accounts xx

b. Considered worthless or uncollectible

Allowance for doubtful accounts xx
Accounts receivable xx

c. Recovery of accounts previously written off

Accounts receivable xx
Allowance for doubtful accounts xx

Cash xx
Accounts receivable xx

2. Direct Write-off Method

- requires recognition of bad debt loss only when the
accounts proved to be worthless or uncollectible.

a. Considered doubtful of collection

No entry.
76
 b. Considered worthless or uncollectible
Bad debts xx
Accounts receivable xx

c. Recovery of accounts previously written off

Accounts receivable xx
Bad debts xx

Cash xx
Accounts receivable xx

METHODS OF ESTIMATING DOUBTFUL ACCOUNTS

1. Aging of Accounts Receivable
- involves an analysis of the accounts where they are
classified into not due or past
due.
- past due accounts are classified in terms of length of period
they are past due.
- an allowance is determined by multiplying the total of each
classification by the
rate or percent of loss experienced by the entity for each
category.
- amount computed represents the REQUIRED ALLOWANCE
FOR DOUBTFUL
ACCOUNTS AT THE END OF THE PERIOD.

2. Percent of Accounts Receivable

- has the advantage of presenting the accounts receivable at
estimated net
realizable value.
- an allowance is determined by multiplying ending balance of
accounts receivable
by a certain rate.
- the resulting balance/amount is the required balance for the
allowance for
doubtful accounts.
77
 3. Percent of Sales
- has the advantage of presenting proper matching of cost
against revenue
because bad debt loss is directly related to sales and
reported in the year of
sale.
- a certain rate is multiplied by the amount of sales to
determine the doubtful
accounts expense.

LOANS RECEIVABLE
- receivables of banks and other financial institutions.
- can either be short-term or long-term.

Origination Fees – the fees charged by the bank against the

borrower for the creation of the loan.

1. Origination fees received from borrower

- recognized as unearned interest income and
amortized over the term of the loan.

2. Direct origination costs

- origination fees not chargeable against the
borrower.
- offsetted directly against any unearned origination
fees received.

Note: Origination fees received > Direct origination cost =

Unearned interest income*
* amortization will increase interest income.

Origination fees received < Direct origination cost = Direct

origination costs**
** amortization will decrease interest income.

78
 Principal amount of receivable xx
Origination fees received (xx)
Direct origination cost incurred xx
Initial carrying amount of loan xx

Note: Because of the origination fees received and the direct

origination costs, a NEW EFFECTIVE RATE must be computed. The
effective rate is computed through the “TRIAL AND ERROR” or
“INTERPOLATION” approach.

Impairment of Loan
- to be assessed at every end of reporting period to determine
any impairment loss.

Objective evidence of impairment

1. Significant financial difficulty of the issuer or obligor.
2. Breach of contract, such as default or delinquency in interest
or principal payment.
3. Debt restructuring
4. Probability of the borrower’s bankruptcy or other financial
reorganization.
5. Disappearance of an active market.
6. Decrease in the estimated future cash flows.

Measurement of Impairment
- measured as the difference between the carrying amount of the
loan and the present
value of estimated future cash flows discounted at the original
effective rate of the
loan.
- the amount of loss shall be recognized in profit or loss.

RECEIVABLE FINANCING
- the financial flexibility or capability of an entity to raise money
out of its receivables.

1. Pledging of Accounts Receivable

79
 2. Assignment of Accounts Receivable
3. Factoring of Accounts Receivable
4. Discounting of Notes Receivable

Pledge of Accounts Receivable

- receivable is considered as a collateral security for the payment
of the loan.
- the accounting entry made is the accounting for the loan only.
- if the loan is discounted, the interest for the loan is deducted in
advance.
- considered as borrowings only.
- is general, because all accounts receivable serve as collateral
security for the loan.

Assignment of Accounts Receivable

- means that a borrower called the assignor transfers its rights in
some of its accounts
receivable to a lender called the assignee in consideration for a
loan.
- is specific, because specific accounts receivable serve as
collateral security for the
loan.

1. Notification Basis
- customers are notified to make their payments directly to
the assignee.

2. Nonnotification Basis
- customers are not informed that their accounts have been
assigned.

Note: *The assignee usually lends only a certain percentage of the

face value of the
accounts assigned because the assigned accounts may not
be fully realized.
The percentage may be 70%, 80% or 90%.

80
 * The assignee charges interest for the loan, service charge
or finance charge
and assignment.

Factoring of Accounts Receivable

- sale of accounts receivable on a WITHOUT RECOURSE
NOTIFICATION BASIS.

Note: *In factoring, an entity sells its accounts receivable to a

bank or finance entity
called a factor.
*A gain or loss is recognized – the difference between
proceeds received and
carrying value.

1. Casual Factoring
- considered as ordinary sale of receivable.
- difference between sales price over book value is
considered gain or loss.

2. Factoring with a continuing agreement

- there is a continuing agreement between the finance
company and the entity.
- the factor assumes the credit and collection function.
- the factor usually charges a commission.
- the factor also withholds an amount as protection against
customer’s returns and allowances and other special
adjustments (FACTORS HOLDBACK).

Note: Factor’s holdback is a receivable from factor and classified

as current asset.

Notes Receivable
- are claims supported by formal promises to pay usually in the
form of notes.

81
 Note: When a promissory note matures and is not paid, it is said
to be dishonored.

Measurement of Notes Receivable

1. Initial Measurement
a. short-term - @ face value

b. long-term
1. interest bearing - @ face value
2. noninterest bearing - @ present value

2. Subsequent Measurement - @ amortized cost

Discounting of Notes Receivable

- means that the payee may obtain cash by indorsing it. Thus,
legally the payee becomes an endorser and the bank becomes an
endorsee.

1. With recourse
- means that the endorser shall pay the endorsee (bank) if the
maker dishonors the note. This is the contingent liability or
secondary liability of the endorser.

a. Conditional sale of Notes Receivable

- there is a need to recognize a contingent liability – “note
receivable
discounted”.

Note: Note receivable discounted account is deducted from

total notes receivable when preparing the statement of
financial position with disclosure of the contingent liability.

b. Secured Borrowing
- the note receivable is not derecognized but instead an
accounting liability is recorded at an amount equal to the
face amount of the note receivable discounted.

82
2. Without recourse
- means that the endorser avoids future liability even if the
maker refuses to pay the endorsee on the date of maturity.

Terms in discounting of notes

1. Net Proceeds
- the discounted value of the note received by the endorser
from the endorsee.

Net Proceeds = Maturity value – Discount

2. Maturity value
- the amount due on the note at the date of maturity.

Maturity Value = Principal + Interest

3. Maturity date
- the date on which the note should be paid.

4. Principal
- the amount appearing on the face of the note. It is also
referred to as FACE VALUE.

5. Interest
- the amount of interest for the full term of the note.

Interest = Principal x rate x time

6. Interest rate

83
 - the rate appearing on the face of the note.

7. Time
- the period within which interest shall accrue.

8. Discount
- the amount of interest deducted by the bank in advance.

Discount = Maturity value x discount rate x discount period

9. Discount Rate
- the rate used by the bank in computing the discount.
- if no discount rate is given, the interest rate is safely
assumed as the discount rate.

10. Discount period

- the period of time from the date of discounting to maturity
date.
- the UNEXPIRED TERM of the note.

 Great spirits have always encountered violent opposition from

mediocre minds.

RECEIVABLES & RECEIVABLE FINANCING

1. One of the following is classified as financial asset.

a. ordinary shares of the issuer c. accounts
receivable
b. loans payable by the borrower d. inventory

84
2. Statement I: Trade receivables are classified as current assets if they are
to be collected within one year or within the normal operating cycle,
whichever is shorter.
Statement II: Non-trade receivables are classified as current assets if they
are to be collected within one year or within the normal operating cycle,
whichever is longer.
a. both statements are true c. only statement
I is true
b. both statements are false d. only statement
I is false

3. Which of the following is a trade receivable?

a. claims in litigation c. amounts due
from customers
b. loans to employees d. receivables
from affiliates

4. The operating cycle

a. measures the time elapse between cash disbursement for
inventory and cash collection of the sales price
b. refers to the seasonal variations experienced by business entities
c. should be used to classify asset and liabilities as current if it is less
than one year
d. cannot exceed a period of one year

5. On the balance sheet date, accounts receivable are generally reported at

a. pawn value c. maturity value
b. net realizable value d. market value

6. Receivables denominated in foreign currency should be translated to

local currency using
a. closing rate c. historical rate
b. average rate d. mortality rate

7. A credit balance in accounts receivable resulting from overpayments,

advanced payments and sales returns should be classified as
(CUSTOMERS CREDIT BALANCE)
85
 a. a current liability c. a contra asset
b. a long-term liability d. a note
disclosure

8. When a note receivable is dishonored, it is debited to

a. accounts receivable at face value
b. accounts receivable at face value plus interest and other charges
c. dishonored note receivable at face value
d. dishonored note receivable at face value plus interest and other
charges

9. Statement I: Short-term notes, interest bearing or non-interest bearing,

are stated at face value
Statement II: Interest bearing long-term note shall be stated at face value.
Statement III: Non-interest bearing long-term notes shall be stated at
discounted value.
a. all statements are true c. only statement
I is false
b. only statement I is true d. Only
statement II is true

10. On the basis of substance over form, the interest on a non-interest

bearing note is equal to
a. zero
b. the excess of the face value over the present value
c. the excess of the present value over the face value
d. the excess of market value over the present value

11. Uncollectible account expense:

a. should not occur if a company properly investigates customers
based on credit history
b. is the amount an entity must pay whenever a customer fails to
pay his or her account
c. is the amount an entity must pay to a collection agent to recover
amounts on overdue accounts
d. represents the loss in accounts receivable that eventually turn
out to be uncollectible
86
12. A method of estimating uncollectible accounts that emphasizes asset
valuation rather than income measurement is the allowance method
based on
a. aging of receivables c. gross credit sales
b. direct write-off d. net credit sales

13. The advantage of relating bad debt experience to accounts receivable is

that this approach
a. gives a reasonable amount of receivables in the balance sheet
b. relates bad debt expense to the period of sale
c. does not require knowledge of the balance in the allowance for
doubtful accounts
d. does not require estimates of uncollectible accounts

14. Which method of recording bad debt loss is consistent with accrual
accounting?
a. allowance method c. percent of sales
method
b. direct write-off method d. percent of accounts
receivable method

15. Under the allowance method, the entry to recognize bad debt expense
a. increases net income c. has no effect on current assets
b. decreases current assets d. has no effect on net
income

16. Under the allowance method, the allowance for doubtful accounts would
decrease when
a. specific accounts receivable is collected
b. accounts previously written-off is collected
c. accounts previously written-off becomes collectible
d. specific uncollectible account is written off

17. Under the allowance method, the entry to record the write-off of a
specific account would
87
 a. decrease both accounts receivable and net income
b. increase allowance for uncollectible accounts and decrease net
income
c. decrease both accounts receivable and the allowance for
uncollectible accounts
d. decrease accounts receivable and increase the allowance for
uncollectible accounts

18. Under the allowance method, entries at the time of collection of an

account previously written off would
a. increase net income
b. have no effect on net income
c. decrease the allowance for doubtful accounts
d. have no effect on the allowance for doubtful accounts

19. Under the direct write-off method, uncollectible accounts expense is

recognized
a. as a percentage of net sales during the period
b. as a percentage of net credit sales during the period
c. as indicated by aging the accounts receivable at the end of the
period
d. as a specific accounts receivable are determined to be worthless

20. Which of the following is not a means of using receivables to obtain

immediate cash?
a. pledge and assignment of receivables
b. factoring of accounts receivables
c. aging of accounts receivable
d. discounting of notes receivable

21. The amount of receivables that are hypothecated or pledged against

borrowings should be
a. excluded from tot al receivables with disclosures
b. excluded from total receivables without disclosures
c. included in total receivables with disclosure
d. included in total receivables without disclosure

88
22. A financing arrangement whereby one party formally transfers its rights
to accounts receivable to another party in consideration for a loan.
a. pledge c. factoring
b. assignment d. discounting

23. The amount of accounts receivable is included in total receivables with

appropriate disclosure when
a. pledged (yes); assigned (yes); factored (yes)
b. pledged (yes); assigned (yes); factored (no)
c. pledged (yes); assigned (no); factored (no)
d. pledged (no); assigned (no); factored (no)

24. The assignor’s equity in assigned accounts that is required to be disclosed

in the notes is equal to the
a. assigned accounts receivable
b. bank loan balance
c. assigned accounts receivable minus the bank loan balance
d. bank loan balance minus the assigned accounts receivable

25. When accounts receivable of a company are sold outright to a company

that normally buys AR, the accounts receivable are said to have been
a. pledged c. factored
b. assigned d. collateralized

26. Factoring of receivables is usually done on a

a. with recourse, notification basis
b. without recourse, notification basis
c. with recourse, non-notification basis
d. without recourse, non-notification basis

27. ABC Company factored its receivables without recourse with XYZ Bank.
ABC received cash as a result of this transaction which is best described as
a
a. loan from XYZ collateralized by ABC’s accounts receivable
b. loan from XYZ to be repaid by the proceeds from ABC’s accounts
receivable

89
 c. sale of ABC’s accounts receivable to XYZ with the risk of
uncollectible accounts retained by ABC
d. Sale of ABC’s accounts receivable to XYZ with the risk of
uncollectible accounts transferred to XYZ

28. It is a predetermined amount withheld by the factor as a protection

against customer returns, allowances and other special adjustments.
a. equity in assigned accounts c. factors
holdback
b. service charge d. loss on
factoring

29. When accounts receivable are factored,

a. accounts receivable should be credited
b. payable to factor is credited
c. a contingent liability is ordinary created
d. the factoring is accounted for as a borrowing

30. If a note receivable is discounted without recourse

a. the contingent liability may be disclosed in either a contra
receivable or a note to the FS
b. liability for the note receivable discounted should be credited
c. note receivable should be credited
d. the transaction should be accounted for as a borrowing as
opposed to a sale

31. Note receivable discounted with recourse should be

a. excluded from total receivables without disclosure of the
contingent liability
b. excluded from total receivables with disclosure of the contingent
liability
c. included in total receivables without disclosure of the contingent
liability
d. included in total receivables with disclosure of the contingent
liability

90
 32. Under PAS 39, loans and receivables are financial assets with a fixed or
determinable amounts are
a. derivative, quoted
b. derivative, non-quoted
c. non-derivative, quoted
d. non-derivative, non-quoted

33. Under PAS 39, loans and receivables are initially measured at
a. fair value
b. fair value plus transaction cost that are directly attributable to
the acquisition
c. maturity value
d. maturity value plus transaction costs that are directly attributable
to the acquisition

34. Under PAS 39, loans and receivables are measured on the balance sheet
date at
a. cost
b. fair value
c. amortized cost using straight line method
d. amortized cost using effective interest method

35. Which of the following accounts shall be considered a form of receivable?

a. accrued income
b. accrued expense
c. prepaid expense
d. unearned income

 Accept challenges, so that you may feel the exhilaration of

victory.

INVENTORIES

91
INVENTORY
- assets held for sale in the ordinary course of business.
- assets held in production for sale.
- Materials or supplies to be consumed in production process.
- Cost of rendering a service.

Classes of Inventories
1. Manufacturing Concern
- one that buys goods which are altered or converted into another
form before they are made available for sale.

1. Raw Materials
– goods to be used in the production process.

2. Goods in Process
– are partially completed products which require further process
or work
before they can be sold.

3. Finished Goods
- completed products which are ready for sale.

2. Trading Concern
- one that buys and sells goods in the same form purchased.
- the term merchandise inventory is generally applied to goods held
by trading concern.

3. Service Concern
- one that offers services for a fee.

Note: All goods to which the entity has title shall be included in the
inventory, regardless of location. This includes goods owned and on
hand, goods in transit and sold FOB destination, goods in transit and
purchased FOB shipping point, goods out on consignment, goods in

92
 the hand of salesmen or agents, and goods held by customer on
approval or on trial.

I. Ownership of the goods in transit

a. FOB Destination
- ownership of goods purchased is transferred only upon receipt
of the goods by the
buyer at the point of destination.
- the goods in transit are still the property of the seller.
- the seller shall legally be responsible for freight charges and
other expenses up to
the point of destination.

b. FOB shipping point

- ownership is transferred upon shipment of goods.
- the goods in transit are the property of the buyer.
- the buyer shall legally be responsible for freight charges and
other expenses from
the point of shipment to the point of destination.

II. Freight Terms

a. Freight Collect
- the freight charge on the goods shipped shall be collected by the
common carrier
from the buyer.
- the freight charge is actually paid by the buyer.

b. Freight Prepaid
- the freight charge on the goods shipped is already paid by the
seller.

III. Maritime Shipping Terms

a. Free Alongside (FAS)
- the seller bears all expenses and risk involved in delivering the
goods to the dock or
shipping area.
93
 - the buyer bears the cost of loading and shipment.
- title passes to the buyer when the carrier takes possession of
the goods.

b. Cost, insurance and freight (CIF)

- the buyer agrees to pay in a lump sum the cost of the goods,
insurance cost and
freight charge.
- the seller must pay for the cost of loading.
- title and risk of loss shall pass to the buyer upon delivery of the
goods to the carrier.

c. Ex-ship
- the seller bears all expenses and risk of loss until the goods are
unloaded.
- title and risk of loss shall pass to the buyer.

IV. Consignment
- a method of marketing goods in which the owner(consignor)
transfers physical
possession of certain goods to an agent(consignee) who sells
them on the owner’s
behalf.
- consigned goods should be included in consignor’s inventory
and excluded from the
consignee’s inventory.
- freight and other handling charges on goods out on
consignment are part of the cost
of goods consigned.

V. Accounting for Inventories

a. Periodic System
- calls for the physical counting of goods on hand at the end of
the accounting period
to determine quantities.
- gives actual or physical inventories.

94
 - generally used when the inventory items turn over is rapid and
have small peso
investment.

b. Perpetual System
- requires the maintenance of records called stock cards that
usually offer a running
summary of the inventory inflow and outflow.
- gives book or perpetual inventories.
- commonly used when the inventory items turn over is slow and
have large peso
investment.

VI. Discounts
a. Trade Discounts
- deductions from the list or catalog price in order to arrive at the
invoice price which
is the amount actually charged to the buyer.
- not recorded in the company’s books.

b. Cash Discounts
- deductions from the invoice price when payment is made within
the discount period.
- the purpose is to encourage prompt payment.

1. Purchase Discounts
- cash discount on the part of the buyer.
- deducted from purchases to arrive at net purchases.

2. Sales Discounts
- cash discount on the part of the seller.
- deducted from sales to arrive at net sales.

VII. Methods of recording purchases

a. Gross Method
- purchases and accounts payable are recorded at gross.

95
 b. Net Method
- purchases and accounts payable are recorded at net.
- the cost represent the cash equivalent price on the date of
payment and therefore
the theoretically correct historical cost.

VIII. Measurement of Inventory

a. Lower of cost or net realizable value
b. Cost shall be determined by using FIFO or Weighted Average
Method.
c. Specific Identification Method – for asset that are segregated for
specific projects.

IX. Cost of inventories

a. Cost of Purchase
- comprises the 1) Purchase price, 2) Import duties, 3) Irrevocable
taxes, 4) Freight
charges, 5) Handling and other directly attributable costs.
- trade discounts and rebates and similar items are deducted in
determining the cost
of purchase.
- if purchased with deferred settlement terms, the difference
between purchase price
and amount paid is recognized as interest expense.

b. Cost of Conversion
- includes cost directly related to converting materials into
finished goods such as
direct labor and factory overhead.

c. Other cost incurred in bringing the inventories to their present

location and condition.

Note: these costs are excluded from the cost of inventories and
recognized as expenses in the period in which they are incurred.
1. Abnormal amounts of wasted materials, labor and
other production costs.
96
 2. Storage costs, unless these costs are necessary in the
production process prior to a further production stage.
3. Administrative overheads that do not contribute to
bringing inventories to their present location and
condition.
4. Distribution or selling costs.

X. Cost Determinant
a. First in, First out (FIFO)
- assumes that the goods first purchased are first sold and
consequently the goods
remaining in the inventory at the end of the period are the most
recently purchased
or produced.
- the inventory is thus expressed in terms of recent or new prices
while the cost of
goods sold is representative of earlier or old prices.
Note: In period of inflation or rising prices, the FIFO method would
result to the highest net income. However, in a period of deflation
or declining prices, the FIFO method would result to the lowest net
income.
1. FIFO – Periodic
2. FIFO – Perpetual

b. Weighted Average
1. Weighted Average – Periodic
- the average unit cost is computed by dividing the total
cost of goods available
for sale by the total number of units available for sale.

2. Weighted Average – Perpetual

- also known as MOVING AVERAGE method.
- under this method, a new weighted average unit cost
must be computed after
every purchase.

c. Last in, Last out (LIFO)

97
 - assumes that the goods last purchased are first sold.
- the inventory is thus expressed in terms of earlier or old prices
and the cost of goods
sold is representative of recent or new prices.

1. LIFO – Periodic
2. LIFO – Perpetual

d. Specific Identification
- means that specific costs are attributed to identified items of
inventory.
- requires records which will clearly determine the actual costs of
goods on hand.
- appropriate for inventories that are segregated for a specific
project and inventories
that are not ordinarily interchangeable.

XI. Measurement at Lower of Cost or NRV

a. Net Realizable Value
- is the estimated selling price in the ordinary course of business
less estimated cost
to complete and cost to sell.
- usually written down on an item by item basis.

b. Cost
- the amount of purchase price plus directly attributable cost.

XII. Accounting for inventory write-down

a. Direct Method
- the inventory is recorded at the lower of cost or net realizable
value.
- any loss on inventory write-down is buried in the cost of goods
sold.

b. Allowance Method
- the inventory is recorded at cost and any loss on inventory
write-down is accounted
98
 for separately.
- under this method, a loss account “loss on inventory write-
down” is debited and a
valuation account “allowance for inventory write-down” is
credited.

XIII. Purchase Commitments

- are obligations of the entity to acquire certain goods sometime
in the future at a
fixed price and fixed quantity.
- any losses which are expected to arise from firm and
noncancelable commitments
shall be recognized.

- if there is decline in purchase price after a purchase

commitment has been made, a
loss is recorded in the period of the price decline.

INVENTORY ESTIMATION
- the approximation of the value of the inventory when it is not
possible to take physical count, or even if physical count is possible,
the same may prove costly, difficult or inconvenient at the moment.

a. Gross Profit Method

- often used to estimate the value of an inventory from accounting
records without taking
physical count.
- based on the assumption that the rate of gross profit remains
approximately the same
from period to period and therefore the ratio of cost of goods sold
to net sales is
relatively constant from period to period.

Computed as follow:
COST OF GOODS AVAILABLE FOR SALE (COGAS) xxxx

99
 COST OF SALES
(xxxx)
ENDING INVENTORY
xxxx

Computation of cost of sales can be:

1. Based on Sales
- computed by multiplying cost ratio with net sales.

2. Based on Cost
- computed by multiplying sales ratio with net sales.

Note: In computing for the net sales, the Sales Allowance and
Sales Discount are
DISREGARDED. It is for the reason that these items decreased the
amount of sales, however they do not affect the volume of goods
sold.

b. Retail Inventory Method

- generally employed by department stores, supermarkets and other
retail concerns
where there is a wide variety of goods.
- came to its name because the selling price or retail price is tagged to
each item.

The following information is required in determining retail inventory

method.
1. Beginning inventory at cost and at retail.
2. Purchases at cost and at retail.
3. Adjustments such as Markup, Markup Cancelation,
Markdown, Markdown Cancelation, Departmental Transfer,
Breakage, Shrinkage, Theft, Damage goods and Employee
Discount.

Computed as follows:
COST OF GOODS AVAILABLE FOR SALE @ RETAIL xxxx
NET SALES (xxxx)
100
 ENDING INVENTORY @ RETAIL xxxx
x COST RATIO %
ENDING INVENTORY @ COST xxxx

Cost ratio Formula:

COGAS @ COST
Cost ratio =
COGAS @ RETAIL

Retail Inventory Considerations

1. Initial markup
- original markup on cost of goods.
2. Original retail
- the sales price at which the goods are first offered for sale.
3. Additional markup
- increase in sales price over the original sales price.
4. Markup Cancelation
- decrease in sales price but not below original sales price.
5. Net additional markup
- markup less markup cancellation.
6. Markdown
- decrease in sales price below the original sales price.
7. Markdown cancellation
- increase in sales price but not above original sales price.

8. Net Markdown
- markdown less markdown cancelation.
9. Maintained Markup
- difference between cost and sales price after the above
adjustments.

Other adjustments and their treatment

1. Purchase discount
- deducted from purchases @ cost only.
2. Purchase return
- deducted from purchases @ cost and retail.
3. Purchase allowance
- deducted from purchases @ cost only.
101
 4. Freight in
- addition to purchases @ cost only.
5. Departmental transfer in
- addition to purchases @ cost and retail.
6. Departmental transfer out
- deduction from purchases @ cost and retail.
7. Sales discount and sales allowance
- disregarded.
8. Sales return
- deducted from sales.
9. Employee discounts
- added to sales.
10. Normal shortage, shrinkage, spoilage, breakage
- deducted from COGAS @ retail.
11. Abnormal shortage, shrinkage, spoilage, breakage
- deducted from COGAS @ cost and retail.

Retail inventory approaches

1. Conservative Approach
- includes net markup, excludes net markdown and includes
beginning inventory in computing for the cost ratio.

2. Average Cost Approach

- includes net markup, includes net markdown and includes
beginning inventory in computing for the cost ratio.

3. FIFO Approach
- includes net markup, includes net markdown but do not
include beginning inventory in computing for the cost ratio.

 Challenges are what make life interesting; overcoming them is

what makes life meaningful.

INVENTORIES

102
1. Which of the following is not considered as inventory under PAS 2?
a. Supplies and materials awaiting use in the production process.
b. Land and other property purchased and held for resale
c. Cost of service of which a service provider has not yet recognized the
related revenue
d. Abnormal amounts of wasted materials, labor and other production
costs.

2. An entity shall include in its inventory all goods

a. Owned but not possessed by the entity at the balance sheet date
b. Owned and possessed by the entity at the balance sheet date
c. Owned by the entity at the balance sheet date, regardless of location
d. Possessed but not owned by the entity at the balance sheet date

3. Goods on consignment should be included in the inventory of

a. the consignor but not the consignee
b. both the consignor and the consignee
c. the consignee but not the consignor
d. neither the consignor nor the consignee

4. freight and other handling charges incurred in the transfer of goods from the
consignor to
consignee are
a. expense on the part of the consignee
b. expense on the part of the consignor
c. inventoriable by the consignee
d. inventoriable by the consignor

5. FOB destination means that

a. the freight charges are actually to be paid by the seller
b. the freight charges are actually to be paid by the buyer
c. the ownership of the goods are actually transferred upon receipt of the
goods by the buyer and the seller is the owner of the goods while in
transit
d. the ownership of the goods is transferred upon shipment of the goods
by the seller and the buyer is the owner of the goods while in transit
103
6. The buyer actually paid the freight charges but is not legally obliged to do so
a. FOB destination, freight prepaid
b. FOB destination, freight collect
c. FOB shipping point, freight prepaid
d. FOB shipping point, freight collect

7. An entity should include one of the following items in its merchandise

inventory
a. Goods purchased FOB destination still en route
b. Goods held for pick-up by the buyer
c. Goods sold FOB shipping point still en route
d. Goods purchased FOB shipping point still en route

8. Inventories should be measured at

a. cost or net realizable value whichever is higher
b. cost or fair value less cost to sell, whichever is lower
c. lower of cost or net realizable value, item by item
d. lower of cost or net realizable value, by total

9. For a merchandising company, inventory cost shall exclude

a. purchase price
b. transportation and handling costs
c. trade discounts and rebates
d. import duties and other taxes

10. For a manufacturing company, inventory cost shall include

a. abnormal waste
b. storage and selling costs
c. variable administrative overhead
d. fixed manufacturing overhead

11. Net realizable value is computed as

a. estimated selling price less estimated cost to sell
b. estimated selling price less estimated cost to complete
c. estimated selling price less estimated cost to sell and estimated cost to
complete
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 d. estimated selling price less estimated cost to complete, estimated cost
to sell and normal profit margin

12. Under PAS 2, they are “individuals who buy or sell commodities for others or
on their own
account.”
a. commission agents c. finders
b. broker-traders d. seekers

13. Under PAS 2, commodities of broker traders are measured at

a. cost c. fair value
b. net realizable value d. fair value less cost to sell

14. The proper cost method for inventories that are not ordinarily
interchangeable and goods or
serives produced and segregated for specific projects is the
a. specific identification c. last in, first out
b. first in, first out d. weighted average

15. If the specific identification of costing inventory is impracticable under the

circumstances, the
cost of inventories is assigned by using which set of cost flow assumptions?
a. FIFO or weighted average
b. LIFO or weighted average
c. FIFO or LIFO
d. LILO or LIFO

16. Which inventory costing method is most conservative in periods of declining

inventory costs?
a. FIFO
b. LIFO
c. Weighted average
d. Cannot be determined without more information

17. Which costing method results in inventory being stated at the most recent
acquisition; costs?
a. specific identification
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 b. weighted average
c. LIFO
d. FIFO

PERIODIC PERPETUAL
18. Purchase on account __________ Inventory xx
xx Accounts Payable
Accounts Payable xx
xx
19. Freight on Purchases Freight in xx __________ xx
Cash xx Cash xx
20. __________ Cash xx Cash xx
Purchase Returns Inventory xx
xx

21. Credit sales Accounts Receivable xx Accounts Receivable xx

Sales Sales xx
xx
__________ xx
__________xx
22. Use of stock cards:
YES or NO
23. Use of moving
average:
YES or NO
24. Periodic physical
count:
Required or Optional
25. Internal Control:
SUPERIOR or INFERIOR
26. Peso amount:
LARGE or SMALL
27. Turnover/ Velocity:
FAST or SLOW

28. Under the periodic inventory system, the opening stock is the

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 a. Net purchases minus the total goods sold
b. Net purchases minus the closing stock
c. Total goods available for sale minus the net purchases
d. Total goods available for sale minus the total goods sold

29. Which of the following pairs of inventory terms would not usually go
together?
a. Periodic inventory system-freight in
b. Perpetual inventory system-cost of goods sold account
c. Gross method-purchase discount taken
d. Net method-purchase discount taken

30. Theoretically, cash discounts permitted on purchased raw materials should be

a. added to other income, whether taken or not
b. added to other income, only if taken
c. deducted from inventory, whether taken or not
d. deducted from inventory, only if taken

31. Which will not require inventory estimation?

a. inventory destroyed by a major fire incident in the production facility
b. proof of the reasonable accuracy of the physical inventory count
c. external and internal financial statements are prepared
d. year-end reporting for inventory shown on the face of the statement of
financial position

32. Under the gross profit method, if the gross profit rate is based on sales, the
cost of sales is
computed as
a. gross sales divided by sales ratio
b. gross sales times cost ratio
c. net sales divided by sales ratio
d. net sales times cost ratio

33. Under the gross profit method, if the gross profit rate is based on cost, the
cost of sales is
computed as
a. net sales times cost ratio
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 b. net sales divided by sales ratio
c. gross sales times cost ratio
d. gross sales divided by sales ratio

34. The retail inventory method would include which of the following in the
calculation of the goods
available for sale at both cost and retail?
a. freight in
b. purchase returns
c. markups
d. markdowns

35. In computing cost ratio, the conservative/conventional retail method should

a. include mark up and markdown
b. exclude markup and markdown
c. include markup but not markdown
d. exclude markup but not markdown

36. When a portion of inventories has been pledged as security on a loan

a. an equal amount of retained earnings should be appropriated
b. the fact should be disclosed but the amount of current assets should
not be affected
c. the value of the inventory pledged should be subtracted from the loan
balance
d. the cost of the pledged inventories should be transferred from current
assets to noncurrent
assets

37. Inventories encompass all of the following, except

a. merchandise purchased by a retailer
b. land and other property not held for sale
c. finished goods produced
d. materials and supplies awaiting use in the production process

38. Net realizable value is

a. current replacement cost
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 b. estimated selling price
c. estimated selling price less estimated cost to complete
d. estimated selling price less estimated cost to complete and estimated
cost to sell

39. The inventory of a service provider may simply be described as

a. work in progress
b. unbilled services
c. billed services
d. services inventory

40. Which of the following is not an acceptable basis for valuation of inventory in
published financial
statements?
a. historical cost
b. current replacement cost
c. prime cost
d. current selling price less cost of disposal

 It is not good for all our wishes to be filled; through sickness we

recognize the value of health; through evil, the value of good;
through hunger, the value of food; through exertion, the value of
rest.

AGRICULTURE

AGRICULTURE (PAS 41)

- applies to the following:

1. Biological Assets
- are living animals and living plants.

2. Agricultural Produce
- the harvested product of an entity’s biological assets.
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3. Government Grant related to Biological Assets

Note: PAS 41 is applied to agricultural produce at the point of

harvest. Thereafter, PAS 2 on inventories shall be applied.

Agriculture
- the management by an entity of the biological transformation
and harvest of biological assets for sale or for conversion into
agricultural produce on into additional biological assets.
- Examples of agricultural activity includes:
1. Raising livestock
2. Annual or perennial cropping
3. Cultivating orchards and plantations
4. Floriculture
5. Aquaculture, including fish farming

Features of agricultural activity

a. Capability to change
- Living animals and plants are capable of biological
transformation.

b. Management of change
- the management of agricultural activity to facilitate the
biological transformation by enhancing or at least stabilizing
conditions necessary for the process to take place.

c. Measurement of change
- the change in quality or quantity brought about by biological
transformation or harvest.

Biological Transformation
- comprises the process of growth, degeneration, production
and procreation that cause qualitative or quantitative
changes in a biological asset.

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1. Asset changes
a. Growth
- increase in quantity or improvement in quality or an
animal or plant.
b. Degeneration
- decrease in quantity or deterioration in quality of an
animal or plant.

c. Procreation
- creation of additional living animal or plant.

2. Production of agricultural produce

Recognition of biological asset or agricultural produce

a. The entity controls the asset as a result of past
events.
b. It is probable that future economic benefits
associated with the asset will flow to the entity.
c. The fair value or cost of the asset can be measured
reliably.

Measurement
1. Biological asset
- measured at fair value less costs to sell.

2. Agricultural produce
- measured at fair value less costs at the point of harvest.

Fair value of biological asset

- there is a presumption that fair value can be measured
reliably for a biological asset.
- if fair value is unreliable, the biological asset shall be
measured at cost less accumulated depreciation and any
accumulated impairment loss.

Fair value of agricultural produce

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 - In all cases, an entity shall measure agricultural produce at
the point of harvest at fair value less cost to sell.
- The fair value of agricultural produce stops at the point of
harvest.

Determination of fair value

PAS 41 sets out several ways of measuring fair value which
include the following:

1. Quoted price in an active market.

2. Most recent market transaction price.
3. Market price for similar asset with adjustment to reflect any
differences.
4. Sector benchmark, such as value of an orchard per hectare, or
value of cattle per kilogram.
5. Present value of expected net cash flows from the asset.

Accounting for Gain or Loss

1. Biological asset
- any gain or loss on initial recognition and subsequent
changes in fair value less cost to sell shall be included in
PROFIT OR LOSS.

2. Agricultural produce
- any gain or loss arising from initial recognition at fair value
less cost to sell shall also be included in PROFIT OR LOSS.

Note: An entity shall disclose the aggregate gain or loss arising on

the initial recognition of biological assets and agricultural produce
and from the change in fair value less cost to sell of biological
assets.

Government grant
1. Unconditional
- recognized as income at its fair value less cost to sell.

2. Conditional
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 - recognized as income only when the conditions attaching to
the grant are met.

 ...Attitude to me is more important than facts. It is more

important than the past, than education, than money, than
circumstances, than failures, than success, than what other people
think, say or do. It is more important than appearance, gift, or skill.
It will make or break a company...a church...a home.
The remarkable thing is we have a choice every day regarding the
attitude we will embrace for that day...I am convinced that life is
10% what happens to me and 90% how I react to it. And so it is with
you... we are in charge of our attitudes.

INVESTMENTS

INVESTMENTS
- assets held for accretion of wealth through distribution (ex.
Interest, royalties, dividends and rentals).
- assets held for capital appreciation or for other benefits to the
investing entity such as those obtained through trading
relationship.

Reasons for holding investment:

1. Accretion of wealth
2. Capital appreciation
3. Ownership control
4. Meeting business requirements
5. Protection

Financial Instruments
- any contract that gives rise to a financial asset of one entity
and a financial liability or an equity instrument of another
entity.

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- encompasses a financial asset, a financial liability and an
equity instrument.

Financial asset:
Any asset that is:
1. Cash
2. A contractual right to receive cash or another financial asset
from another entity.
3. A contractual right to exchange financial instrument with
another entity under conditions that are potentially
FAVORABLE.
4. An equity instrument of another entity.

Financial liability
Any liability that is a contractual obligation:
1. To deliver cash or other financial asset to another entity.
2. To exchange financial instruments with another entity under
conditions that are potentially UNFAVORABLE.

Equity security
- encompasses any instrument representing ownership shares
and right, warrants or options to acquire or dispose of
ownership shares at a fixed or determinable price.

CLASSIFICATION OF INVESTMENTS
A. Investment in equity securities
B. Investment in debt securities
C. Investment property
D. Other investments

INVESTMENT IN EQUITY SECURITIES

- represents ownership interest in an equity (ex. Ordinary
share or preference share) or the right to acquire ownership
interest (ex. Share options, share warrants and etc.).

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 Note: This term does not encompass callable or redeemable
preference share, treasury share and convertible bonds.

1. Small investments
2. Investment in subsidiary
3. Investment in associate

SMALL INVESTMENTS
- are investments in the investee’s stock without controlling
interest or significant influence.

1. Investment to Profit or Loss

- also known as Trading Security.
- acquired principally for the purpose of generating a profit
from short-term fluctuations in price or dealer’s margin.
- generally marketable (with readily determinable market
value).

Measurement:
a. Initial Recognition
- measured at FAIR VALUE.
- transaction cost incurred is considered as outright
expense.

b. Subsequent Recognition
- measured at FAIR VALUE.
- changes in fair value subsequent to acquisition are
reported in the profit or loss of the period of such
change.

Reclassification of Investment to Profit or Loss

- transfer in and out of this category is not
allowed by the standards.

2. Investment to OCI or Equity

- also known as Available for Sale Security.

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Measurement:
1. Initial recognition
a. Marketable
- measured at FAIR VALUE plus TRANSACTION
COST.

b. Non-marketable
- measured at FAIR VALUE plus TRANSACTION
COST.

2. Subsequent recognition
a. Marketable
- measured at FAIR VALUE or IMPAIRED VALUE (if
there’s objective evidence of impairment).
- any change(increase or decrease) is reported in
equity.

b. Non-marketable
- measured at HISTORICAL COST or
BOOK/CARRYING VALUE.
- if securities are impaired, it is reported at
IMPAIRED VALUE.

Impairment of Available for sale – Equity

- The cumulative loss that has been recognized
directly in equity must be removed from equity
and recognized in profit or loss. This includes any
decline in fair value already recognized in equity
plus the impairment loss.

Acquisition of investment
a. Dividends-on
- if acquired or sold between the date of declaration
and date of record.

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 - the cost of acquiring the instruments includes the
amount paid for the instruments plus the amount
paid for the dividends.

b. Ex-dividend
- if acquired or sold between the date of record and
date of payment.
- the cost of acquiring the instruments include only
the amount paid for the instrument.

Accounting for Dividends on Equity Instruments

1. Cash dividend
- recognized as income at the date of declaration.
- measured at Face Value.

2. Property dividend
- recognized as income at the date of declaration.
- measured at Fair Value of the property.

3. Share dividend
- not recognized as income.
- memo entry only is made to acknowledge the receipt of
new shares.

a. Small Dividends
- if dividend is less than 20%.
- recorded at Fair Value.

b. Large Dividends
- if dividend is 20% or above.
- recorded at Par value.

4. Shares in lieu of cash dividends

- recognized as income.
- measured at fair value of the shares.

5. Cash in lieu of share dividends

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 - not recognized as dividend income.
- the cash received is the proceeds of the as if sale of shares.

Accounting for share rights

a. Upon receipt
- the carrying value of the equity instrument is allocated using
the percentage of their separate market values over the
combined market values of the equity and the share rights.

1. Rights-on
- means that the equity instrument is currently
traded with the right to acquire additional shares.
- the market value of the equity instrument already
includes the market value of the share rights.

2. Ex-rights
- means that the equity instruments are separately
traded.
- the market value of the equity instruments is
separate from the market value of the share rights.

b. Upon exercise
- the cost assigned to the new shares acquired will be debited
to a separate investment in equity account (trading or
available for sale).
- the cost assigned should include the amount paid in
acquiring new shares plus the cost assigned to the rights
being exercised.

c. Upon expiration
- if the share rights were not exercised and had they expired,
the cost assigned to an expired share rights should be
charged to Loss on Share Rights.

INVESTMENT IN EQUITY & INVESTMENT IN ASSOCIATE

Classification of Investment in Equity Securities

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1. Investment in Subsidiary
2. Investment in Associate
3. Small Investments

INVESTMENT IN SUBSIDIARY
- When the ownership interest is more than 50%.
- The entity has Control over the other entity.
- Accounted under Cost or Purchase Method.

INVESTMENT IN ASSOCIATE
- When the ownership interest is 20% to 50%.
- The entity has Significant Influence over the other entity.
- Accounted under Equity Method.

Associate
- is an entity, including an un-incorporated entity such as a
partnership, over which the investor has significant influence
and that is neither a subsidiary nor an interest in a joint
venture.

Measurement
Equity Method
- a method of accounting whereby the investment is initially
recorded at cost and adjusted thereafter for post-acquisition
change in the investor’s share of net assets of the investee.
- The profit or loss of the investor includes the investor’s share
of the profit or loss of the investee adjusted for the effect of
any fair value differences recognized on acquisition of the
associate.

1. Initial Recognition
- measured at historical cost (The fair value plus transaction
cost incurred).

2. Subsequent Recognition

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 - the cost and carrying value of the equity securities is
increased or decreased to recognize the investor’s share of
the profit or loss of the investee after the date of acquisition.

INVESTMENT IN DEBT INSTRUMENTS

- represent creditor’s claim with fixed amount and usually
some interest obligation (ex. Government securities,
corporate bonds, convertible bonds, commercial paper, etc.).

Classification of Debt Securities

1. Trading Securities
2. Available for Sale Securities
3. Held to Maturity Securities

INVESTMENT TO PROFIT OR LOSS (TRADING SECURITIES)

Measurement:
1. Initial Recognition
- measured at historical cost (fair value which is the
transaction price).
- Any transaction cost incurred is recognized outright as
an expense.

2. Subsequent Recognition
- remeasured at fair value.
- any increase or decrease in the value of the debt
instrument is recognized in profit or loss.
- not subject to amortization since they are sold within a
very short period of time.

INVESTMENT IN AVAILABLE FOR SALE SECURITIES

Measurement:
1. Initial Recognition
- measured at historical cost (fair value plus any
transaction cost incurred).

2. Subsequent Recognition
- remeasured at fair value.
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 - any increase or decrease in the value of the debt
instrument is recognized directly in equity.
- subject to amortization because they are generally held
for a longer period of time.

INVESTMENT IN HELD TO MATURITY SECURITIES

Held to maturity investments

- Non-derivative financial assets.
- With fixed or determinable payments and fixed maturity.
- The entity has the positive intention to hold them to
maturity.

Measurement:
1. Initial Recognition
- measured at historical cost (fair value plus any
transaction cost incurred).

2. Subsequent Recognition
- not remeasured but reported at amortized cost.
- increases or decreases as a result of market fluctuations
are not recognized.
- if there is objective evidence of impairment the debt
security should be remeasured at its impaired value.

The Tainting Rules

When an entity during the current financial year has sold or
reclassified more than an insignificant amount of held to maturity
investments before maturity, it is prohibited from classifying any
financial asset as held to maturity for a period of two years after
the occurrence of this event. Furthermore, all the entity’s held to
maturity investments must be reclassified into the available for
sale category and measured at fair value. In a sense a penalty is
imposed for a change in management’s intention. When the
prohibition ends (at the end of the second year following the
tainting), the portfolio becomes cleansed and the entity is once

121
 more able to asset that it has the intent and ability to hold debt
instruments to maturity.

Change in the category of a debt instrument

1. AFS to HTM
- measured at amortized cost rather than at fair value.
- the amortized cost of the investment in available for sale on
the date of transfer will become the cost of the new category.

Note: The amortized cost is the expected net cash inflow

based from holding the investment till maturity discounted at
the effective rate which is the rate at the time the original
investment was initially recognized.

2. HTM to AFS
- measured at fair value at the date of transfer rather than at
amortized cost.
- the difference of the fair value and the amortized cost is
recognized as unrealized gain or loss to be reported in the
statement of comprehensive income under the category
other comprehensive income.

INVESTMENT PROPERTY

Investment Property
- A property held by the owner or the lessee under a finance
lease to earn rentals or for capital appreciation or both.
- Can be land or building or both.

Measurement
1. Initial Recognition
- Initially recorded at cost (fair value plus directly attributable
cost).

2. Subsequent Recognition
a. Cost Model
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 - measured at cost less accumulated depreciation less
any accumulated impairment losses.
- if cost model is followed, the fair value of the
property should be disclosed.

b. Fair Value Model

- the fair value policy requires the enterprise to
revalue its investment properties each year, any gain
or loss being included in the net profit or loss for the
period.

Note: If an entity has previously measured an investment

property at fair value, it shall continue to measure the
property at fair value until disposal ( or until the property
becomes owner-occupied property or the entity begins to
develop the property for subsequent sale in the ordinary
course of business) even if comparable market
transactions become less frequent or market prices
become less readily available.

Transfer to or from Investment Property Classification (transfer

under the fair value model)
1. Investment Property to Property, Plant and Equipment
- it should be carried at fair value.
- the fair value at the date of transfer becomes the deemed
cost for subsequent accounting under PAS 16.

2. Investment Property to Inventory

- it should be carried at fair value.
- the fair value at the date of transfer becomes the deemed
cost for subsequent accounting under PAS 2.

3. Property, plant and equipment to Investment Property

- it should be carried at fair value up to the date of transfer.
- any gain or loss is accounted for as revaluation surplus or
deficit in equity in accordance with PAS 16.

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4. Inventories to Investment Property
- it should be carried at fair value.
- any difference between the fair value and previous carrying
amount at the date of transfer is recognized in profit or loss.

5. Property, plant and equipment(self-constructed or

developed) to Investment Property
- when construction or development of a self-constructed
property is complete it should be transferred to investment
property. Until this point the property is accounted for under
PAS 16.
- if the investment property is to be carried at fair value, any
difference between fair value and previous carrying amount
at the date of transfer should be recognized in profit or loss.

Transfer under the cost model

- When an entity has a policy of carrying the investment
property at the cost model, properties transferred in the
same way and under the same circumstances as described on
the above transfers. However, such transfers do not change
the carrying amount of the property transferred, that is, no
revaluation gains or loss arise, nor they change the cost of the
property for measurement or disclosure purposes.

FUND AND OTHER INVESTMENTS

Fund – is defined as cash and other assets set aside for a specific
purpose either by reason of the action of management or by
virtue of a contract or legal requirement.
- may be in the form of cash, securities and other assets.

1. Current (current asset)

- includes petty cash fund, payroll fund, interest fund,
dividend fund, and tax fund.

2. Non-current (long-term investment)

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 - includes sinking fund, preference share redemption fund,
replacement fund, plant expansion fund, contingency fund
and insurance fund.

 A man sees in the world what he carries in his heart.

INVESTMENTS - 1

1. Under PAS 39, it is any contract that gives rise to a financial asset of one
entity and a financial liability or equity instrument of another entity.
a. Financial instrument c. Hedging instrument
b. Negotiable instrument d. Debt instrument

2. Under PAS 32, it is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
a. Debt instrument c. Hybrid instrument
b. Equity instrument d. Compound instrument

3. Available for sale investment are securities

a. Considered as a derivative instrument
b. Purchased with the intent of selling in the near future or very soon to
generate a profit from short-term fluctuation in price or dealer’s
margin
c. Purchased and held indefinitely and will be available to be sold when
the need
for liquid funds arises
d. With fixed or determinable payments and fixed maturity that an
enterprise has
the positive intent and ability to hold to maturity

4. Under PAS 39, which of the following is not a category of financial assets?
a. Financial assets at fair value through profit or loss
b. Available for sale investments
c. Held to maturity investments
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 d. Held for sale investments

5. The term ‘financial assets at fair value through profit or loss’ may refer to
a. Trading securities (TS)
b. Available for sale securities (AFS)
c. Held to maturity securities (HTM)
d. Investment in unaffiliated companies and associates

6. Equity securities may be classified as

a. TS only c. TS or AFS
b. AFS only d. TS, AFS or HTM

7. Debt securities may be classified as

a. HTM only c. AFS or HTM
b. TS or HTM d. TS, AFS or HTM

8. Trading securities are classified as

a. Current assets c. Current or noncurrent assets
b. Noncurrent assets d. Current or noncurrent liabilities

9. Investment(s) that may be classified as CURRENT at initial recognition.

a. TS only c. TS and AFS
b. AFS only d. TS, AFS and HTM

10. Investment(s) that may be classified as NON-CURRENT at initial

recognition.
a. TS and AFS c. TS and HTM
b. AFS and HTM d. TS, AFS and HTM

11. Transaction costs incurred are expensed in acquiring this type of

investment
securities.
a. TS only c. HTM only
b. AFS only d. TS and AFS

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12. Transaction costs directly attributable to the acquisition of a financial
asset do not include
a. Fees and commissions to c. Financing and administrative costs
agents
b. Levies by regulatory agencies d. Transfer taxes and duties

13. Subsequent to acquisition, these securities are generally reported at FAIR

VALUE.
a. TS and AFS c. TS and HTM
b. AFS and HTM d. TS, AFS and HTM

14. It is the amount for which an asset could be exchanged, or a liability

settled, between knowledgeable and willing parties in an arm’s length
transaction.
a. Present value c. Carrying value
b. Fair value d. Amortized cost

15. Investment in equity instrument that do not have a quoted market price
in an
active market and whose fair value cannot be reliably estimated is
measured at
a. Cost c. Lower of cost or net realizable value
b. Net realizable value d. Discounted value

16. Unrealized gains or losses on TS are generally presented on the face of the
a. Income statement
b. Statement of cash flows
c. Statement of financial position
d. Statement of changes in equity

17. Unrealized gains or losses on AFS are included and presented in the
a. Liability section of the balance sheet
b. Equity section of the balance sheet
c. Income statement
d. Statement of cash flows

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 18. Held-to-maturity securities are generally carried subsequent to acquisition
at
a. Amortized cost (straight line method)
b. Amortized cost (scientific method)
c. Fair value less costs to sell
d. net realizable value

19. Unrealized gains or losses on HTM are

a. Recognized in the income statement
b. Recognized in asset section of the balance sheet
c. Recognized in equity section of the balance sheet
d. Not recognized

20. Impairment loss may be recognized for all of the following, except
a. Loans and receivables c. Available-for-sale securities
b. Trading securities d. Held-to-maturity securities

21. Cash dividends are recognized as income by the investor on the

a. Date of declaration c. Date of payment
b. Date of record d. Date of balance sheet

22. Property dividends are treated by the investor as a (an)

a. Return of investment
b. Non-accountable event
c. Income at the cost of the property
d. Income at the fair value of the property

23. Liquidating dividends are treated by the investor as a (an)

a. Return of investment
b. Non-accountable event
c. income at the cost of the property
d. Income at the fair value of the property

24. Share dividend of the same class

a. Increases investment cost per share and total cost of investment
b. Decreases investment cost per share and total cost of investment

128
 c. Increases investment cost per share but no effect on total cost of
investment
d. Decreases investment cost per share but no effect on total cost of
investment

25. Share dividend of different class received by the investor

a. Is not recorded
b. Is documented through a note disclosure only
c. Is recorded by debiting new investment account and crediting income
d. Is recorded by debiting new investment account and crediting original
investment account

26. Shares received in lieu of cash dividend are treated as

a. Stock dividends
b. Income at par value of the shares received
c. Income at fair value of the shares received
d. Income at the cash dividend that would have been received

27. Cash received in lieu of share dividends is treated as

a. Income at the par value of the shares that would have been received
b. Income at the fair value of the shares and investment cost per share
c. If the stocks are received and later sold, with gain or loss on sale being
recognized
d. If the stocks are received and later sold, with gain or loss on sale not to
be
recognized

28. Reverse stock splits

a. a. Increase the number of shares and investment cost per share
b. Decrease the number of shares and investment cost per share
c. Increase the number of shares but decrease the investment cost per
share
d. Decrease the number of shares but increase the investment cost per
share

29. An entity over which the investor exercises significant influence is called
a. Associate c. Subordinate
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 b. Affiliate d. Subsidiary

30. Under PAS 28, significance influence means

a. The holding of significant proportion of the share capital in another
entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions
of an
entity
d. The mutual sharing in the risks and benefits of a combined entity

31. What level of investment in voting stock would lead to the presumption
that an
investor has an ability to exercise significant influence over an associate?
a. 20% or less c. More than 20%
b. 20% or more d. More than 50%

32. Under the cost method, cash dividends received by the investor from the
investee are recorded as
a. Dividend income
b. An addition to the investment account
c. A deduction from the investor’s share of the investee’s profits
d. An addition to the investor’s share of the investee’s profits

33. Under the equity method, cash dividends received by the investor from
the
associate are recorded as
a. Dividend income
b. A deduction from the investment account
c. A deduction from the investor’s share of the associate’s profits
c. An addition to the investor’s share o f the associate’s profits

34. Under the equity method of accounting for investment in associates, the
investment account is
a. Increased by the share in the earnings of the associates but is not
affected by the
share in the losses of the associates
130
 b. Decreased by the share in the losses of the associates but is not
affected by the
share in the earnings of the associates
c. Increased by the share in the earnings of the associates and decreased
by the
share in the losses of the associates
d. Not affected by the share in the earnings or losses of the associates

35. An investor shall discontinue the use of equity method from the date it
loses significant influence over an associate and upon loss of significant
influence, the remaining interests shall be valued at
a. Original cost of the investment
b. Amortized cost uses effective interest method
c. Fair value, with the resulting remeasurement gain or loss included in
profit or
loss
d. Fair value, with the resulting remeasurement gain or loss included in
other
comprehensive income

 You can't expect people to look eye to eye with you if you are
looking down on them.

INVESTMENTS - 2

1. Serial bonds are

a. Bonds that give the bondholders the right to exchange their bonds for
other
securities
b. Bonds that may be called in or redeemed by the issuing corporation
prior to
maturity date
c. Bonds that have a series of maturity dates and hence, payable in
installments

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 d. Bonds that mature on a single date.

2. Unsecured bonds are called

a. Debenture bonds c. Registered bonds
b. Mortgage bonds d. Serial bonds

3. Transaction costs incurred in acquiring bond investment are expensed

immediately for
a. Trading securities c. Held to maturity securities
b. Available for sale securities d. All f the choices

4. These are investments in bonds carried at fair value on BS date, with any
unrealized gain or loss included as a component of income.
a. Trading securities c. Held to maturity securities
b. Available for sale securities d. None of the choices

5. If an entity fails to amortize the premium on its trading bond investment,

the
income is
a. Overstated c. Not affected
b. Understated d. Either overstated or understated

6. These are investments in bonds carried at fair value on BS date, with any
unrealized gain or loss included as a component of equity.
a. Trading securities c. Held to maturity securities
b. Available for sale securities d. None of the choices

7. For an available for sale (AFS) bond investment, unrealized gain is

computed
based on the excess of
a. Fair value over original cost
b. Fair value over amortized cost
c. Original cost over fair value
d. Amortized cost over fair value

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8. Investment in bonds classified as held to maturity (HTM) securities are
generally
carried at
a. Fair value, with any unrealized gain or loss included as a component of
income
b. Fair value, with any unrealized gain or loss included as a component of
equity
c. Amortized cost, with any premium or discount amortized using
straight-line
method
d. Amortized cost, with any premium or discount amortized using
effective
interest method

9. An investor purchased a bond classified as a held to maturity investment

between
interest payment dates at a premium. At the purchase date, the carrying
value of
the bond is
a. Less that the bond face value and the cash paid to the seller
b. Less than the bond face value but more than cash paid to the seller
c. More than the bond face value but less than the cash paid to the seller
d. More than the bond face value and the cash paid to the seller

10. For a debt security transferred from HTM to AFS, the difference between
the
carrying amount of investment and fair value at the date of transfer is
a. Recognized as a component of income
b. Recognized as a component of equity
c. Recognized as a component of cash flow
d. Not recognized

11. For a debt security transferred from AFS to HTM, any previous unrealized
gain or
loss recognized directly in equity is
a. Recognized in profit or loss immediately at the date of transfer

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 b. Included in equity and amortized to profit or loss ovee the remaining
life of the held to
maturity using the straight line method.
c. Included in equity and amortized to profit or loss over the remaining
life of the
held to maturity security using the effective interest method
d. Recognized as an adjustment of retained earnings.

12. A bond investment with interest payment dates on May 1 and November
1 is
purchased on August 1. The amount of (A) interest receivable and (B)
interest
income on December 31 would be equal to
a. (A) 5 months (B) 8 months c. (A) 5 months (B) 5 months
b. (A) 2 months (B) 8 months d. (A) 2 months (B) 5 months

13. Which of the following refers to the effective rate rather than nominal
rate of
interest?
a. Stated rate c. Coupon rate
b. Contract rate d. Yield rate

14. An entity made a year-end amortization for its only investment in bonds:

Dec. 31 Investment (Bonds) 100

Interest Income 100

The bond investment must have been purchased at

a. Par c. A discount
b. Face value d. A premium

15. Assuming the same journal entry in no. 14, one can conclude that
a. Effective rate is equal to the nominal rate
b. Effective rate is higher than the nominal rate
c. Effective rate is lower than the nominal rate
134
 d. Effective rate is less than or equal to the nominal rate

16. The investor’s interest income for a period would be highest if the bond is
purchased at
a. A discount c. Par
b. A premium d. Face value

17. A bond investment with interest payment dates on February 1 and August
1 is
sold June 1, the cash received from the sale
a. Does not include the accrued interest
b. Includes accrued interest for two (2) months
c. Includes accrued interest for four (4) months
d. Includes accrued interest for seven (7) months

18. An independent trustee holds cash in the sinking fund account

representing annual
deposits to the fund and the interest earned on those deposits. How
should the
sinking fund be reported in the company’s balance sheet?
a. The cash in the sinking fund should appear as a current asset
b. Only the accumulated deposits should appear as a noncurrent asset
c. The entire balance in the sinking fund account should appear as a
current asset
d. The entire balance in the sinking fund account should appear as a
noncurrent
asset

19. If cash in a bond sinking fund is used to purchase investments, the sinking
fund
a. Increases when investments are purchased
b. Decreases when investments are purchased
c. Increases by the revenue earned on investments
d. Is not affected by revenue earned on investments

20. Which of the following terms best describes property held to earn rentals
or for
135
 capital appreciation?
a. Freehold property
b. Leasehold property
c. Owner-occupied property
d. Investment property

21. Which of the following would NOT be reported as an investment

property?
a. Building owned by the entity and leased out under one or more
operating leases
b. Land held for long-term capital appreciation
c. Land held for currently undetermined future use
d. Owner-occupied property

22. Under PAS 40, which of the following best describes owner-occupied
property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production of goods and for administrative
purposes
c. Property held to earn rentals
d. Property held for capital appreciation

23. PAS 40 requires that investment property be accounted for using the
a. Cost model or fair value model
b. Cost model or revaluation model
c. Cost model or net realizable value model
d. Cost, fair value or net realizable value model

24. Under the cost model, an investment property is carried on each balance
sheet date at
a. Fair value
b. Cost less accumulated depreciation
c. Cost less accumulated impairment losses
d. Cost less accumulated depreciation and impairment losses

136
25. Under the fair value model, any unrealized gain or loss on investment
property is
a. Not recognized
b. Recognized in the income statement
c. Recognized in the equity section n of the balance sheet as a general
reserve
d. Recognized in the equity section of the balance sheet as a valuation
reserve

26. In case of property held under an operating lease and classified as

investment
property,
a. The entity has to account for the investment property under the cost
model
only.
b. The entity has to use the fair value model only
c. The entity has the choice between the cost model and fair value model
d. The entity needs only to disclose the fair value and can use the cost
model

27. Which of the following additional disclosures must be made when an

entity
chooses the cost model as its accounting policy for investment property?
a. Fair value of the property
b. Present value of the property
c. Value in use of the property
d. Net realizable value of the property

28. When the entity uses the cost model, transfer between investment
property and
owner-occupied property shall be accounted for at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Present value of expected future cash flows

137
 29. A transfer from investment property carried at fair value to owner-
occupied
property shall be accounted for at
a. Fair value, which becomes the deemed cost for subsequent accounting
b. Carrying amount
c. Historical cost
d. Present value of expected future cash flows

30. If owner-occupied property is transferred to investment property that is

to be
carried at fair value, the difference between the carrying amount of the
property
and its fair value shall be treated as
a. A change in estimate
b. A change in accounting policy
c. Unrealized gain in profit or loss
d. Revaluation of property, plant and equipment

 You can tell more about a person by what he says about others
than you can by what others say about him.

PROPERTY, PLANT & EQUIPMENT

PROPERTY, PLANT AND EQUIPMENT

- Tangible assets.
- Used in business (used in production, supply of goods or services, for
rental purposes and for administrative purposes).
- Expected to be used over a period of more than one year.

RECOGNITION OF PPE
1. Probable → economic benefit.
2. Measurable → “can be measured reliably”.

138
MEASUREMENT OF PPE
a. Initial Recognition
- measured at COST.

Note: Cost is the amount of cash or cash equivalent paid and the fair
value of the other consideration given to acquire an asset at the time
of acquisition or construction.

b. Subsequent Recognition
1. Cost Model
- measured at COST LESS ACCUMULATED DEPRECIATION AND
ACCUMULATED IMPAIRMENT LOSS.
2. Revaluation Model
- measured at REVALUED AMOUNT (fair value at date of
revaluation less subsequent accumulated depreciation and
accumulated impairment loss).

Elements of Cost
a. Purchase price (including import duties & nonrefundable purchase
taxes – after deducting trade discounts and rebates).
b. Directly attributable costs – bringing the asset to its location and
condition necessary for its intended use.
c. Cost of dismantling and removing the item and restoring the site on
which it is located.

Directly attributable costs (Examples)

1. Cost of employee benefits directly attributable from the acquisition
or construction of PPE.
2. Cost of site preparation.
3. Initial delivery and handling cost.
4. Installation and assembly cost.
5. Professional fees.
6. Cost of testing.

ACQUISITION OF PROPERTY
1. Cash basis
139
2. On account subject to cash discount
3. Installment basis
4. Issuance of debt instrument or equity instrument
5. Exchange
6. Donation
7. Government grant
8. Construction

Acquisition on Cash basis

- the cost of the item of property, plant and equipment is the Cash
Price Equivalent at the recognition date.
- The cost of the asset acquired includes the cash paid plus directly
attributable costs such as freight, installation cost and other cost
necessary in bringing the asset to the location and condition for its
intended use.

Acquisition on Account
- if acquired on account subject to cash discount, the cost of the asset
is equal to the invoice price minus the discount, whether taken or
not.
- If the discount is not taken, it is charged to purchase discount lost and
shown as other expense.

Acquisition on installment basis

- if acquired on installment basis, its cost is the cash price equivalent.
- The excess of the installment price over the cash price is treated as an
interest to be amortized over the credit period.
- However, if PPE was acquired by installment and there is no available
cash price, the asset is recorded at an amount equal to present value
of all payments.

Issuance of debt instrument or equity instrument

- the cost of the PPE is the fair market value or the asset received or
securities issued whichever is clearly determinable.

Issuance of share capital/equity instruments (Valix approach):

a. Fair value of the property received.
140
b. Fair value of the share capital.
c. Par value or stated value of the share capital.

Issuance of bonds payable/debt instruments (Valix approach):

a. Fair value of bonds payable.
b. Fair value of asset received.
c. Face value of bonds payable.

Exchange
- The cost of an item of PPE acquired in exchange for a nonmonetary
asset or a combination of monetary and nonmonetary asset is
measured at fair value, unless the exchange transaction lacks
commercial substance (PAS 160.
Computed as follows:

Exchange: Value Received = Value Parted With

1. With Commercial substance (Valix Approach):

- Any gain or loss is fully recognized.
a. No cash involved
i. Fair value of property given
ii. Fair value of property received
iii. Cost or book value of property given

b. Cash is involved
i. Fair value of asset given plus cash payment (payor).
ii. Fair value of asset given minus the cash received
(recipient).

2. Without Commercial substance (Valix Approach):

- Gain or loss is not recognized.
a. No cash involved
i. Book value of property given
141
 ii. Book value of property received

b. Cash is involved
i. Book value of asset given plus cash payment (payor).
ii. Book value of asset given minus the cash received
(recipient).

Commercial substance:
- the event or transaction causing the cash flows of the entity to
change by reason of the exchange.

a. The cash flow of the asset received differs from the cash flow of the
asset transferred and the difference is significant relative to the fair
value of the asset exchanged.

b. The entity-specific value of the portion of the entity’s operations

affected by the transaction changes as a result of the exchange and
the exchange is significant relative to the fair value of the asset
exchanged.

Trade-in
- a form of exchange.
- Involves a non-dealer acquiring the asset from a dealer.
- Usually involves a significant amount of cash.

Recorded as follows: (Valix Approach)

1. Fair value of asset given plus cash payment
2. Trade in value of asset given plus cash payment (in effect, this is the
fair value of the asset received).

Donation
1. Shareholders
a. With restriction
- reported as donated capital.
b. Without restriction
- reported as donated capital.
142
2. Non-shareholders (ex. Government Grant)
a. With restriction
- reported as liability.
b. Without restriction
- reported as other income.

Construction
The cost of self constructed PPE shall include:
1. Cost of Direct Materials
2. Cost of Direct Labor
3. Cost of Factory Overhead

Note: When the actual cost of construction is less than the price at which
the constructed asset can be purchased from outside parties, the
difference is not income but SAVING. This saving will be realized in the
future periods by reason of lower depreciation charges on the asset.

Where the actual cost of construction is more than the price at which the
asset can be purchased from outside parties, still the constructed asset
shall be recorded at actual cost. The difference is not loss on the
construction.

Intervening Operations
- Operations that occur in connection with the construction or
development of an item of PPE but are not necessary to bring the
item to the location and condition for its intended use.
- The income and related expenses of incidental operations are
recognized in profit or loss and included in their respective
classification of income and expenses.

Derecognition
- Means that the cost of the PPE together with the related
accumulated depreciation shall be removed from the company’s
records.
- Computed as the difference between net proceeds and carrying value
of the item.
143
- Gain or loss on Derecognition shall be included in profit or loss and
treated as other income.

Fully depreciated property

- When book value is equal to Zero or book value is equal to residual
value.
- The cost of fully depreciated asset remaining in service and the
related accumulated depreciation ordinarily shall not be removed
from the accounts.
- Entities are encouraged but not required to disclose fully depreciated
property.

Property classified as held for sale

- If the asset is available for immediate sale in its present condition
within one year from the date of classification as held for sale.
- Such asset shall be excluded from PPE but presented separately as
current asset.
- An entity shall measure a noncurrent asset classified as held for sale
at the lower of its carrying amount or fair value less cost to sell.
- The write-down to fair value less cost to sell is treated as an
impairment loss.
- PFRS 5, par. 25 provides that a noncurrent asset classified as held for
sale shall not be depreciated.

BORROWING COSTS
- Are interest and other costs that an entity incurs in connection with
borrowing of funds.
- This definition encompasses interest an all types of borrowing,
including finance leases and ancillary costs incurred in connection
with arrangement of borrowing. PAS 23 as amended provides that
borrowing costs include:

a. Interest expense calculated using the effective interest

method as described in PAS 39.
b. Finance charge with respect to a finance lease.

144
 c. Exchange difference arising from foreign currency borrowing
to the extent that is regarded as an adjustment to interest
cost.

Accounting for borrowing cost

1. If the borrowing is directly attributable to the acquisition,
construction or production of a qualifying asset, the borrowing cost is
required to be capitalized as cost of the asset.
The capitalization of borrowing cost is mandatory for a qualifying
asset.

2. All other borrowing costs shall be expensed as incurred.

Asset financed by “Specific borrowing”

- The amount of capitalizable borrowing cost is the actual borrowing
cost incurred during the period less any investment income from the
temporary investment of those borrowings.

Borrowing Cost = Actual Borrowing Cost – Investment Income

Asset financed by “general borrowing”

- The amount of capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period multiplied by a
capitalization rate or average interest rate.
- The capitalizable borrowing cost shall not exceed the actual interest
incurred.
- Capitalization rate or average rate is equal to the total annual
borrowing cost divided by the total general borrowings outstanding
during the period.

Borrowing Cost = Average asset x Average Interest Rate

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Commencement of capitalization
The capitalization of borrowing costs as part of the cost of a qualifying
asset shall commence when the following three conditions are present:

1. When the entity incurs expenditures for the asset.

2. When the entity incurs borrowing costs.
3. When the entity undertakes activities that are necessary to prepare
the asset for the intended use or sale.

LAND, BUILDING AND MACHINERY

Land Account
1. Used as plant site – treated as PPE.
2. Held for a currently undetermined use – treated as Investment
Property.
3. Held for long-term capital appreciation – treated as Investment
Property.
4. Held for current sale – treated as Inventory.

Cost chargeable to land

1. Purchase price.
2. Legal fees and other expenditures for establishing clean title.
3. Broker’s commission.
4. Escrow fees.
5. Fees for registration and transfer of title.
6. Cost of relocation or reconstruction of property belonging to others
in order to acquire possession.
7. Mortgages, encumbrances and interest on such mortgages assumed
by buyer.
8. Unpaid taxes up to date of acquisition assumed by buyer.
9. Cost of survey.
10. Cost of clearing and demolishing unwanted old structures, less
proceeds from salvage.
11. Payments to tenants to induce them to vacate the land.
12. Cost of permanent improvements such as cost of grading, leveling
and landfill.

146
13. Cost of option to buy the acquired land. If the land is not acquired,
the cost of option is expensed outright.

Land Improvements
1. Subject to depreciation
- charged to a special account “land improvements”. Ex. Fences,
water systems,
drainage systems, sidewalks, pavements and cost of trees,
shrubs and othe
landscaping.
- should be depreciated over their useful life.

2. Not subject to depreciation

- charged to the land account. Ex. Cost of surveying, cost of
clearing, cost of grading,
leveling and landfill, cost of subdividing and other cost of
permanent improvement.

Special assessments
- Taxes paid by the landowner as a contribution to the cost of public
improvements.
- Treated as part of cost of the land.

Real property taxes

- Generally, treated as outright expense.
- If assumed by the buyer, this are capitalized but only up to the date
of acquisition.

Building Account
a. Cost of building when purchased
1. Purchase price.
2. Legal fees and other expenses incurred in connection with
the purchase.
3. Unpaid taxes up to date of acquisition.
4. Interest, liens and other encumbrances on the building
assumed by the buyer.
5. Payments to tenants to induce them to vacate the building.
147
 6. Any renovating or remodeling costs incurred to put a building
purchased in a condition suitable for its intended use such as
lighting installations, partitions and repairs.

b. Cost of building when constructed

1. Materials used, labor employed and overhead incurred
during the construction.
2. Building permit or license.
3. Architect fee.
4. Superintendent fee.
5. Cost of excavation.
6. Cost of temporary buildings used as construction offices and
tools or materials shed.
7. Expenditures incurred during the construction period such as
interest on construction loans and insurance.
8. Expenditures for service equipment and fixtures made a
permanent part of the structure.
9. Cost of temporary safety fence around construction site and
cost of subsequent removal thereof. However, the
construction of a permanent fence after the completion of
the building is recognized as land improvement.
10. Safety inspection fee.

Sidewalks, pavements, parking lot, driveways

1. Part of blueprint
- treated as part of building account.

2. Not part of blueprint

- charged to land improvements account.

Claims for damages

1. Where insurance is taken during the construction of a building, the
cost of insurance is charged to the building account.
2. Where the insurance is not taken, the payment for damages should
be expensed outright.

Building Fixtures
148
1. Immovable
- If they are attached to the building in such a manner that the
removal thereof may destroy the building, they are charged to
the building account.

2. Movable
- They are charged to furniture and fixtures and depreciated over
their own useful life.

Ventilating system, lighting system, elevator

1. Par of blueprint
- charged to building account

2. Not part of blueprint

- charged to “building improvements” account and depreciated
over their useful life or remaining life of the building whichever is
shorter.

Specific principles on land and building

a. If land and building are acquired at a single cost, the single cost is
allocated to the land and building on the basis of their relative fair
value.

b. If land and an old building which is to be razed are acquired at a single

cost, the single cost is allocated to the land only.

The net cost of razing the building, (cost of razing minus salvage) is
charged to the land account.

If subject to a lease contract, any payments to tenants to induce them

to vacate the premises before the lease expiration are also charge to
the land account.

c. If the building owned by the entity is leased to tenants and the

building is demolished to make room for the construction of a new
one, any payments to tenants to induce them to vacate the building
shall be charged to the cost of the new building.
149
Machinery Account
When machinery is purchased, the cost normally includes the following:
1. Purchase price.
2. Freight, handling, storage and other cost related to the acquisition.
3. Insurance while in transit.
4. Installation cost, including site preparation and assembling.
5. Cost of testing and trial run, and other cost necessary in preparing the
machinery for its intended use.
6. Initial estimate of cost of dismantling and removing the machinery
and restoring the site on which it is located, and for which the entity
has a present obligation.
7. Fee paid to consultants for advice on the acquisition of the
machinery.
8. Cost of safety rail and platform surrounding machine.
9. Cost of water device to keep machine cool.

Note: If a machinery is moved to a new location, the undepreciated cost

of the old installation cost is expensed and the new installation cost is
charged to the new asset.

SUBSEQUENT EXPENDITURES

Generally: treated as an expense

Specifically: can be treated as ASSET (capitalized) if:
a. Probable → economic benefit.
b. Measurable → “cost can be measured reliably”.

1. Additions
- Modifications or alterations which increase the physical size or
capacity of the asset.
a. New unit – depreciated over its useful life.
b. Expansion, enlargement or extension of old asset –
depreciated over its useful life or remaining life of the asset
whichever is shorter.

150
2. Improvements or betterments
- Are modifications or alterations which increase the service life or
the capacity of the
asset.
- They represent replacement with a better or superior quality.
- They are normally capitalized.

3. Replacements
- Involves substitution of an equal or lesser quality.
- They are normally capitalized.

4. Repairs
- Those expenditures used to restore assets to good operating
condition upon their
breakdown or replacement of broken parts.

a. Extraordinary Repairs – should be capitalized.

b. Ordinary Repairs – charged to expenses.

5. Rearrangement cost
- The relocation or reinstallation of an asset which proves to be less
efficient in its original
location.
- cost is capitalized and amortized over the remaining life of the asset
to which it pertains.

DEPRECIATION
- The systematic allocation of the depreciable amount of an asset over
its useful life.
- Treated as expense in the face of the financial statements.
- Begins when an asset is available for use and ceases when the asset is
derecognized.
- Shall be discontinued, if the asset is classified as “held for sale”.

Kinds of Depreciation
1. Physical Depreciation

151
 - Related to the depreciable asset’s wear and tear and
deterioration over a period.

2. Functional/Economic Depreciation
- arises from obsolescence or inadequacy of the asset to
perform efficiently.

Methods of Depreciation
1. Equal or Uniform Charge Methods
- Considers depreciation as a function of time rather than as a
function of usage.
a. Straight Line
b. Composite Method
c. Group Method

2. Variable Charge or Use-factor Methods

- Considers depreciation as a function of use rather than passage
of time.
a. Working Hours or Service Hours
b. Output or Production Method

3. Decreasing Charge or Accelerated or Diminishing Balance

- provides higher depreciation in the earlier years and lower
depreciation in the later
years of the life of the asset.
- this is on the philosophy that new assets are generally capable
of producing more
revenue in the earlier years than in the later years.
a. Sum of Year’s Digits
b. Declining Balance Method

4. Other Methods
a. Inventory or appraisal
b. Retirement Method
c. Replacement Method

Straight Line Method

152
- The annual depreciation charge is calculated by allocating the
depreciable amount equally over the number of years of
estimated useful life.

Depreciable Amount
Annual Depreciation =
Useful Life

Composite Method
- Assets that are dissimilar in nature or assets that have different
physical characteristics and vary widely in useful life, are grouped
together and treated as a single unit.
- Composite life of the asset should be determined.

Composite Life = Total Depreciable Amount ÷ Total Annual

Depreciation

- Composite rate of the asset should be determined.

Composite Rate = Total Annual Depreciation ÷ Total Cost

Group Method
- Assets that are similar in nature and in estimated useful life are
grouped and treated as a single unit.
- Treated the same way as the Composite Method.

Working Hours Method

153
- A depreciation rate per hour should be determined.

Depreciation = Actual Hours Worked x Depreciation Rate per

Hour

Dep’n Rate per Hour = Depreciable Amount ÷ Estimated Service Hours

Output or Production Method

- A depreciation rate per hour should be determined.

Dep’n = Actual Output Produced x Depreciation Rate per

Hour

Dep’n Rate per Hour = Depreciable Amount ÷ Estimated

Units of Output

Sum of Year’s Digits

- provides for depreciation that is computed by multiplying the
depreciable amount by a series of fractions whose numerator is
the digit in the life of the asset and whose denominator is the
sum of the digits in the life of the asset.

Life + 1
SYD Rate = Life (----------------)
2

Annual Dep’n = SYD Rate x Depreciable Amount

154
 Declining Balance Method
- A fixed or uniform rate is multiplied by the declining book value
or undepreciated cost of the asset in order to arrive at the annual
depreciation.

1. 200% Declining/Double Declining Balance Method

1
DDB Rate = -------- (2)
Life

Annual Dep’n = DDB Rate x Book Value

2. 150% Declining Balance Method

1
150%DB Rate = -------- (1.5)
Life

Annual Dep’n = 150%DB Rate x Book Value

Inventory Method
- Consists of merely estimating the value of the asset at the end
of the period.
- Depreciation is computed as the difference between the
balance of the asset account and the value at the end of the
year.

155
 - In recording depreciation, no accumulated depreciation account
is maintained. The depreciation is credited directly to the asset
account.
- This depreciation approach is applied generally to assets which
are small and relatively inexpensive.

Retirement Method
- No depreciation is recorded until the asset is retired. The
amount of depreciation is equal to the original cost of the asset
retired minus salvage proceeds.
- Suitable when a large number of similar items are employed by
the enterprise and the items are constantly being retired and
replaced.

Replacement
- No depreciation is recorded until the asset is retired and
replaced. The amount of depreciation is equal to the replacement
cost of the asset retired, minus salvage proceeds.
- Suitable when a large number of similar items are employed by
the enterprise and the items are constantly being retired and
replaced.

CHANGE IN USEFUL LIFE, DEPRECIATION METHOD AND SALVAGE VALUE

Change in Useful Life

- Accounted for as a change in accounting estimate.
- The depreciation charge for the current and future periods shall
be adjusted.

Change in Salvage Value

- Accounted for as a change in accounting estimate.
- The depreciation charge for the current and future periods shall
be adjusted.

Change in Depreciation Method

- Accounted for as a change in accounting estimate.

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 - The depreciation charge for the current and future periods shall
be adjusted.

REVALUATION OF A PROPERTY, PLANT & EQUIPMENT

- Happens only if the asset (PPE) is subsequently recorded under the
Revaluation Model.

Note: When an item of PPE is revalued, the entire class of PPE to which
that asset belongs should be revalued.

Basis of Revaluation
1. Fair value
- Usually equal to the market value determined by professional
qualified valuers.

2. Depreciated Replacement Cost

- Replacement cost of the PPE minus the corresponding accumulated
depreciation.
- This amount is actually the “sound value” of an asset.
Note: The difference between fair value or depreciated replacement
cost and book value of the PPE is called revaluation surplus. This is
also called as “revaluation increment”.

Approaches in recording the revaluation

1. Proportional Approach
- The accumulated depreciation at the date of revaluation is
restated proportionately with the change in the gross
carrying amount of the asset so that the carrying amount of
the asset after revaluation equals the revalued amount.

2. Elimination Approach
- The accumulated depreciation is eliminated against the
gross carrying amount of the asset and the net amount
restated to the revalued amount of the asset.

Treatment of Revaluation Surplus

157
 - considered as a component of other comprehensive income
(OCI).
- transferred directly to retained earnings when the surplus is
realized.
- if asset is depreciated, part of the surplus is being realized as the
asset is used
(piecemeal realization).

To record revaluation:
Asset xx
Revaluation Surplus xx

To record piecemeal realization:

Revaluation Surplus xx
Retained Earnings xx

Reversal of a revaluation increase

- When an asset’s carrying amount is decreased as a result of
revaluation, the decrease shall be recognized as expense.
- The revaluation decrease shall be charged directly against any
revaluation surplus to the extent that the decrease is a reversal of
a previous revaluation and the balance is charged to expense.

To record reversal of revaluation increase:

Revaluation Surplus xx (up to amount of rev. increase)
Impairment Loss xx
Asset xx

Reversal of a revaluation decrease

- When an asset’s carrying amount is increased as a result of
revaluation, the increase shall be credited to revaluation surplus.
- The revaluation increase shall be recognized as income to the
extent that it reverses a revaluation decrease of the same asset
previously recognized as an expense.

To record the revaluation decrease:

Impairment Loss xx
158
 Asset xx

To record the reversal of revaluation decrease:

Asset xx
Revaluation gain xx (up to amount
of impairment loss)
Revaluation Surplus xx

IMPAIRMENT OF A PROPERTY, PLANT & EQUIPMENT (PAS 36)

- A fall in the market value of an asset so that its recoverable amount is
now less than its carrying amount in the statement of financial
position.
- If an assets carrying amount is higher than its recoverable value, the
asset is judged to have suffered an impairment loss. The asset
therefore should be reduced by the amount of impairment loss.
-
Measurement of Recoverable Amount
The higher between the following:

1. Fair Value less Cost to Sell

- The amount obtainable from the sale of an asset in arm’s length
transaction between knowledgeable and willing parties, less cost
to sell.
- Also called as “net selling price”.

Note: Cost to sell are incremental costs directly attributable to the

sale of an asset or cash generating unit. Examples include:
1. Legal Costs
2. Stamp duty and similar transaction taxes
3. Costs of removing the asset
4. Direct incremental costs to bring the asset into condition for
sale.

2. Value in Use
- Is measured as the present value or discounted value of future
net cash flows (inflows less outflows) expected to be derived
from an asset.
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 - The cash flows are pretax cash flows and pretax discount rate is
applied in determining the present value.

Treatment of Impairment Loss

- The impairment loss shall be recognized immediately by
reducing the asset’s carrying amount to its recoverable amount.
- The impairment loss is recognized in profit or loss and presented
separately in the income statement.

To record impairment loss:

Impairment Loss xx
Accumulated Depreciation xx

Reversal of an impairment loss

- The reversal of the impairment loss shall be recognized
immediately as income in the income statement.
- Any reversal of an impairment loss on a revalued asset shall be
treated as a revaluation increase, meaning, credited to income to
the extent that it reverses a previous revaluation decrease, and
any excess credited directly to revaluation surplus

Impairment of a Cash Generating Unit (CGU)

Cash Generating Unit (CGU)
- Is the smallest identifiable group of assets that generate cash
inflows from continuing use that are largely independent of the
cash inflows from other assets or group of assets.

Treatment of Impairment in a CGU

PAS 36, par. 104 , provides that when an impairment loss is
recognized for a CGU, this loss shall be allocated to the assets of
the unit in the following order:

1. First, to the GOODWILL.

2. Then, to all other NONCASH assets of the unit on a prorate
basis, based on their
carrying amount.

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 How a man plays a game shows something of his character, how
he loses shows all of it.

GOVERNMENT GRANTS

GOVERNMENT GRANT
- Are assistance by government in the form of transfers of resources to
an entity in return for part or future compliance with certain
conditions relating to the operating activities of the entity.
- Sometimes called as subsidies, subventions or premiums.
- A forgivable loan from government is treated as a government grant
when there is reasonable assurance that the entity will meet the
terms for forgiveness of the loan.
- The benefit of a government loan with a below-market rate of
interest is treated as a government grant. The benefit is measured as
the difference between the proceeds received and the initial carrying
value of the loan.

RECOGNITION & MEASURMENT

Government grants, including nonmonetary grants at fair value, shall be
recognized when there is reasonable assurance that:
a. The entity will comply with the conditions attaching to them.
b. The grants will be received.
Government grants shall not be recognized on a cash basis as this is not
consistent with generally accepted accounting practice.

CLASSIFICATION OF GOVERNMENT GRANTS

a. Grants related to assets
- These are government grants whose primary condition is that an
entity qualifying for them shall purchase, construct or otherwise
acquire long-term assets.

b. Grants related to income

- These are government grants other than those related to assets.

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ACCOUNTING FOR GOVERNMENT GRANTS
Government grants shall be recognized as income over periods necessary
to match them with the related costs which they are intended to
compensate, on a systematic basis.

1. The standard provides that “grants” in recognition of specific expenses

shall be recognized as income over the period of the related expense.

2. The standard provides that “grants” related to depreciable assets shall

be recognized as income over the periods and in proportion to the
depreciation of the related assets.

3. The standard provides that “grants” related to nondepreciable assets

requiring fulfillment of certain conditions shall be recognized as income
over the periods which bear the cost of meeting the conditions.

4. The standard provides that a government grant that becomes

receivable as compensation for expense or losses already incurred or for
the purpose of giving immediate financial support to the entity with no
further related costs shall be recognized as income of the period in which
it becomes receivable.

PRESENTATION OF GOVERNMENT GRANTS

1. Government grants related to assets, including nonmonetary grants
at fair value, shall be presented in the statement of financial position
in either of two ways:
a. By setting the grant as deferred income.
b. By deducting the grant in arriving at the carrying amount of
the assets.

2. Government grants related to income are presented as follows:

a. The grant is presented in the income statement, either
separately or under the general heading “other income.”
b. Alternatively, the grant is deducted from the related expense.

Repayment of government grant

162
 A government grant that becomes repayable shall be accounted for as a
change in accounting estimate.
1. Repayment of a grant related to income shall be applied first against
any unamortized deferred income and any excess shall be recognized
immediately as an expense.

2. Repayment of a grant related to asset shall be recorded by increasing

the carrying amount of the asset.

 People don't care how much you know, until they know how
much you care.

WASTING ASSETS

WASTING ASSETS
- Refers to “mineral resources”. They are called as such because they
are physically consumed and once consumed, they cannot be
replaced anymore.
- Mineral resources include minerals, oil, natural gas and similar
nonregenerative resources.

MEASUREMENT
c. Initial Recognition
- measured at COST.
Note: Cost is the amount of cash or cash equivalent paid and the fair
value of the other consideration given to acquire an asset at the time
of acquisition or construction.
d. Subsequent Recognition
1. Cost Model
- measured at COST LESS ACCUMULATED DEPRECIATION AND
ACCUMULATED IMPAIRMENT LOSS.
2. Revaluation Model

163
 - measured at REVALUED AMOUNT (fair value at date of
revaluation less subsequent accumulated depreciation and
accumulated impairment loss).

COST OF WASTING ASSET

a. Acquisition Cost
b. Exploration Cost
c. Development Cost
d. Estimated Restoration Cost

Acquisition Cost
- The price paid to obtain the property containing the natural resource.
- If there is residual value (land value) after the extraction of natural
resource, the said shall be deducted from the total acquisition cost to
get the depletable cost.

Exploration Cost
- The expenditure incurred before the technical feasibility and
commercial viability of extracting a mineral resource are
demonstrated.
- Simply stated, the exploration cost is the cost incurred in an attempt
to locate the natural resource that can economically be extracted or
exploited.

1. Successful Effort Method

- Only the exploration cost directly related to the discovery of
commercially producible natural resource is capitalized as cost of
the resource property.
- Exploration cost related to unsuccessful discovery is expensed in
the period incurred.

2. Full Cost Method

- All exploration costs, whether successful or unsuccessful are
capitalized as cost of the successful resource discovery.

Development Cost

164
- The cost incurred to exploit or extract the natural resource that has
been located through successful exploration.

1. Tangible Development Cost

- The cost of tangible equipment is not capitalized as cost of
natural resource. It is set
up in a separate account (Property, Plant and Equipment) and
depreciated in
accordance with normal depreciation policies.
- Includes transportation equipment, heavy machinery, tunnels,
bunker and mine
shaft.

2. Intangible Development Cost

- The cost is capitalized as cost of the natural resource.
- Includes drilling, sinking mine shaft and construction of wells.

Restoration Cost
- The estimated costs of restoring the property to its original condition
after extraction activities are complete.

DEPLETION
- The systematic allocation of the depletable cost of a wasting asset
over the period the natural resource is extracted or produced.

Depletion Method
a. Production or Output Method
Computed as follows:

Depletable Cost
Depletion rate per unit = ---------------------------------------
Estimated units to be extracted

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 Depletion = Depletion rate per unit x Actual units extracted

Revision of depletion rate

- To be treated as a change in accounting estimate.
- Change in accounting estimate is to be handled currently and
prospectively, if necessary.
- The procedure is to revise the depletion rate on a prospective basis,
that is, by dividing the remaining depletable cost of the wasting asset
by the revised estimate of the productive output.

Depreciation of mining property

- The depreciation of equipment used in mining operations is based on
the life of the equipment or the life of the wasting asset, whichever is
shorter.

1. Straight Line → Life of equipment < Life of wasting asset.

2. Output Method → Life of equipment > Life of wasting asset.

Note: When the output method is used in depreciating mining property, in

the event of shutdown, such method cannot be used. In this case, the
depreciation in the year of shutdown is based on the remaining life of the
equipment following the straight line method.

In other words, the remaining book value of the equipment is divided by

the remaining life of the equipment to arrive at the depreciation in the
year of shutdown.

When operations are resumed, the depreciation is again computed

following the output method. But in this case, a new depreciation rate per
unit is computed by dividing the remaining book value of the equipment
by the remaining or revised estimate of the deposit.

166
 Trust fund doctrine
- The share capital of a corporation is conceived as a trust fund for the
protection of creditors. Consequently, such capital cannot be
returned to shareholders during the lifetime of the corporation.
- Accordingly, the corporation cannot pay dividends if it has a deficit
because this would be tantamount to a return of capital to
shareholders.

Wasting asset doctrine

- A wasting asset corporation or an entity engaged in the extraction of
a natural resource, can legally return capital to shareholders during
the lifetime of the corporation.
- Accordingly, a wasting asset corporation can pay dividend not only to
the extent of retained earnings but also to the extent of accumulated
depletion.

Complete Formula: Maximum dividend that can be declared and paid by

a wasting asset corporation:
Retained Earnings
xx
Add: Accumulated Depletion
xx
Total
xx
Less: Capital liquidated in prior years xx
Unrealized depletion in ending inventory xx
xx
Maximum dividend
xx

 People often say that 'beauty is in the eye of the beholder,' and I
say that the most liberating thing about beauty is realizing that you
are the beholder. This empowers us to find beauty in places where

167
 others have not dared to look, including inside ourselves. 

PROPERTY, PLANT & EQUIPMENT

1. Property, Plant & Equipment (PPE) does not include:

a. Property not subject to depreciation, such as land used as a factory site
b. Property subject to depreciation, such as building used for administrative
purposes
c. Property subject to amortization, such as franchise acquired to obtain
business rights
d. Property subject to depletion, such as timber, oil and mining lands and leases

2. Which of the following items is capitalized as part of the cost of PPE?

a. Cost of opening a new facility
b. Cost of relocation or reorganizing an entity’s operations
c. Cost of introducing a new product or conducting a business in a new location
d. Cost directly attributable to bringing the PPE to intended location and
condition

3. Which of the following items is not capitalized as part of the cost of PPE?
a. Professional fees
b. Initial operating loss
c. Cost of site preparation and testing
d. Initial estimate of the cost of dismantling and removing the PPE

4. Which of the following items is not chargeable to the Land account?

a. Cost of survey by engineers
b. Expenditure for fence, water system, sidewalk and pavement
c. Broker’s commission and fees for registration and title transfer
d. Attorney’s fee and any other expenditures for establishing clean title

5. The following charges are generally capitalized to the Land account except
a. Cost of option of land not acquired
b. Payments to tenants to induce them to vacate the premises
c. Buyer-assumed mortgages and encumbrances like property taxes

168
 d. Special assessments for local improvements which benefit the property

6. The land acquired has an unwanted building that should be demolished.

Assuming a salvage value can be recovered from the demolition of the building,
the land account should be charged with the
a. Salvage value c. Cost of demolition plus salvage value
b. Cost of demolition d. Cost of demolition minus salvage
value

7. Which of the following items is not chargeable to the Machinery and

Equipment account?
a. Freight and installation costs
b. Material, labor and other expenditures incurred in placing the equipment
ready for use
c. Testing costs of the equipment or facilities before they are ready for
productive use
d. Repair cost incurred when equipment is damaged in the process of
installation

8. When a group of assets is acquired for a lump sum price, the total cost should
be allocated to the individual assets based on their relative
a. Fair value c. Assessed value
b. Book value d. Appraised value

9. The cost of property acquired on credit with available cash discount is equal to
a. Invoice price plus cash discount, taken or not
b. Invoice price minus cash discount, taken or not
c. Invoice price plus cash discount, only when taken
d. Invoice price minus cash discount, only when taken

10. The cost of property acquired by installment is equal to

a. Cash purchase price c. Installment price
b. Invoice price d. List price

11. Property acquired through the issuance of securities (shares or bonds) of a

closely held corporation should be recorded at
169
 a. Fair value of the property acquired
b. Fair value of the securities issued
c. Fair value of the property acquired or fair value of the securities issued,
whichever is lower
d. Fair value of the property acquired or fair value of the securities issued,
whichever is higher

12. Property acquired in exchange for a non-monetary asset and the exchange
lacks commercial substance, the cost of the asset acquired is measured at
a. Fair value of the asset given
b. Fair value of the asset received
c. Carrying amount of the asset given
d. Carrying amount of the asset received

13. The cost of self-constructed property, plant and equipment does not include
a. Direct costs of materials and labor
b. Indirect costs and overhead specifically identifiable or traceable to the
construction
c. Abnormal amount of wasted material, labor or overhead incurred in the
construction
d. Financing costs attributable to construction incurred up to the completion
of construction

14. Under PAS 23, borrowing costs incurred in acquiring, producing or

constructing a qualifying asset
are
a. Expensed in the period incurred
b. Capitalized as part of the cost of the qualifying asset
c. Expensed (benchmark treatment); capitalized (allowed alternative
treatment)
d. Capitalized (benchmark treatment); expensed (allowed alternative
treatment)

15. Which of the following items is not a qualifying asset for purposes of
capitalizing borrowing
Costs?
a. Manufacturing plants
170
 b. Power generation facilities
c. Inventories that produced in large quantities over a short period of time
d. Inventories that require a substantial period of time to bring them to a
salable condition

16. If the qualifying asset is financed by SPECIFIC borrowing, the borrowing cost
capitalized is equal
to
a. Actual borrowing costs incurred during the construction period
b. Actual borrowing costs incurred during and after the construction period
c. Actual borrowing costs incurred during construction period less any
investment income on the
temporary investment of borrowings
d. Actual borrowing costs incurred during and after the construction period
less any investment
income on the temporary investment of borrowings

17. If the qualifying asset is financed by GENERAL borrowing, the borrowing cost
capitalized is equal to
a. Actual borrowing costs incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. (Average expenditures on the asset multiplied by a capitalization rate) or
(actual borrowing costs), whichever is higher
d. (Average expenditures on the asset multiplied by a capitalization rate) or
(actual borrowing costs), whichever is lower

18. The carrying amount of a property is increased as a result of revaluation.

Assuming no revaluation was made before, the increase should be credited to
a. Accumulated depreciation
b. Revaluation gain, shown as a component of income
c. Revaluation surplus, shown as a component of equity
d. Retained earnings, shown under equity section of the balance sheet

19. The carrying amount of a property is decreased as a result of revaluation.

Assuming no revaluation was made before, the decrease should be
debited to
a. Accumulated depreciation
171
 b. Revaluation or impairment loss
c. Revaluation surplus, shown as a component of equity
d. Retained earnings, shown under equity section of the balance sheet

20. A revaluation increase shall be recognized as income

a. Always
b. When the asset is revalued for the first time
c. When the asset is revalued frequently than usual
d. When it reverses a revaluation decrease of the same asset previously
recognized as expense

21. If a revalued property is sold, the related revaluation surplus is transferred

directly to
a. Revaluation gain c. Additional paid-in-capital
b. Retained earnings d. Accumulated depreciation

22. Major spare parts and standby equipment that are expected to be used over a
period of more
than one year should be classified as
a. Property, plant and equipment c. Noncurrent investment
b. Inventory d. Expense

23. Property, plant and equipment acquired by way of donation are usually
recorded at
a. Recorded value of the asset
b. Fair value of the donated asset
c. Nil amount- memorandum entry is necessary
d. Appraised value as determined by the board of directors

24. Under PAS 20, these represent assistance by government in the form of
transfers of resources to an enterprise in return for past or future compliance
with certain conditions relating to the operating activities of the enterprise.
a. Government warnings c. Government grants
b. Government discounts d. Government interventions

25. Government grants are generally treated as

a. Income as matched with related costs
172
 b. Donated capital
c. Part of retained earnings
d. A memorandum entry only

26. Grants related to depreciable assets should be recognized as income

a. In proportion to the depreciation of the related assets
b. On a straight line basis over the useful life of the depreciable asset
c. In proportion to the compliance of the conditions set for the grantee
d. Any of these

27. What is depreciation?

a. It is a process of asset valuation for balance sheet purposes
b. It applies only to long-lived intangible assets
c. It is used to indicate a decline in market value of a long-lived asset
d. It is an accounting process which systematically allocates long-lived asset
cost to accounting
periods

28. Periodic depreciation expense is primarily the result of applying the

a. Revenue principle c. Cost principle
b. Full-disclosure principle d. Matching principle

29. Depreciation is best described as a method of

a. Cost allocation
b. Asset valuation
c. Current value allocation
d. Useful life determination

30. It is related to a depreciable asset’s deterioration over a period due to use or

non-use.
a. Physical depreciation
b. Mental depreciation
c. Psychological depreciation
d. Functional depreciation
173
31. It arises from obsolescence or inadequacy of the asset to perform efficiently.
a. Psychiatric depreciation
b. Physiological depreciation
c. Psychological depreciation
d. Functional depreciation

32. Depreciation measurement should be based on

a. Past input exchange price
b. Current input exchange price
c. Future input exchange price
d. Current output exchange price

33. Which of the following is not considered in determining the useful life of an
item of PPE?
a. Expected usage of the asset c. Technical obsolescence
b. Legal limits d. Residual value

34. Which of the following terms best describes the costs or an amount
substituted for costs of an asset less its residual value?
a. Revalued amount c. Recoverable amount
b. Carrying amount d. Depreciable amount

35. A depreciation method that provides higher depreciation expense during the
early years of asset lilfe.
a. Sum of years’ digits method
b. Straight-line method
c. Service hours method
d. Units of production method

36. Which of the following statements is the assumption on which straight-line

depreciation is based?
a. The operating efficiency of the asset decreases in late years
b. Service value declines as a function of time rather than time
c. Service value declines as a function of obsolescence rather than time
d. Physical wear and tear are more important than economic obsolescence

174
37. A method that excludes residual value from the base for the depreciation
calculation is
a. Straight line
b. Service hours
c. Productive output
d. Declining balance

38. A depreciation method used where the usage of the asset varies considerably
from period to period and the service life is more a function of use rather
than passage of time.
a. Straight-line method
b. Units of production method
c. Sum of year’s digits method
d. Declining balance method

39. The most common method of recording depletion for wasting assets is the
a. Effective interest method
b. Sum-of-the-years method
c. Straight-line method
d. Output method

40. If there is a change from sum of years’ digits to straight line method
a. The accumulated depreciation is adjusted to its appropriate balance
through retained earnings based on the straight line method
b. The accumulated depreciation is adjusted to its appropriated balance
through net income based on the straight line method
c. The accumulated depreciation balance is not adjusted but the remaining
book value is allocated over the remaining life using the straight line method
d. The accumulated depreciation balance is not adjusted but the remaining
book value is allocated over the original life using the straight line method

175
  People are like stained-glass windows. They sparkle and shine
when the sun is out, but when the darkness sets in their true beauty
is revealed only if there is a light from within.

INTANGIBLE ASSETS

INTANGIBLE ASSETS
- An identifiable nonmonetary asset without physical substance.
- Must be controlled by the entity as a result of past event and from
which future economic benefits are expected to flow to the entity.

RECOGNITION OF INTANGIBLE ASSETS

1. Probable – “future economic benefit”.
2. Measurable – “can be measured reliably”.

MEASURMENT
1. Initially - @ COST
The cost of an intangible asset depends on the following:
1. Separate Acquisition
2. Acquisition as part of Business Combination
3. Acquisition by way of a government grant
4. Acquisition by exchange
5. Acquisition by self-creation or internal generation

Separate Acquisition
a. Acquired separately and in the form of cash
- the cost includes the purchase price, import duties, non
refundable purchase taxes and directly attributable costs
after deducting trade discounts and rebates.

b. Deferred beyond normal credit terms

- the cost is the cash price equivalent. The difference
between the cash price equivalent and total payments is
recognized as interest expense over the credit period.

176
Acquisition as part of Business Combination
a. If an intangible asset is acquired in a business combination, the
cost of the intangible asset is based on its fair value on the date
of acquisition.

b. If there is an active market, the quoted market price which is

usually the current bid price provides the most reliable estimate
of fair value.

c. If there is no active market, the fair value of the intangible

asset is equal to the amount which would be paid by the entity
for the asset in an arm’s length transaction between
knowledgeable and willing parties.

Acquisition by government grant

In accordance with PAS 20, the intangible asset acquired by way
of government grant may be initially recorded at either:
a. Fair value

b. Nominal amount or zero, plus any expenditure that is directly

attributable to preparing the asset for its intended use.

Acquisition by exchange
- The cost of an item of PPE acquired in exchange for a
nonmonetary asset or a combination of monetary and
nonmonetary asset is measured at fair value, unless the exchange
transaction lacks commercial substance (PAS 16).

Computed as follows:

Exchange: Value Received = Value Parted With

Internally generation
The cost of an internally generated intangible asset comprises all
directly attributable costs necessary to create, produce and

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 prepare the asset to be capable of operating it in the manner
intended by management.

Examples of directly attributable costs are:

1. Cost of materials and services used or consumed in generating
the intangible asset.
2. Costs of employee benefits arising from the generation of the
intangible asset.
3. Fees to register a legal right.
4. Amortization of patents and licenses that are used to generate
the intangible asset.

Note: PAS 38 explicitly provides that “internally generated brands,

mastheads, publishing titles, customer lists and items similar in
substance shall not be recognized as intangible assets”.

2. Subsequent recognition
a. Cost Model – carried at cost less any accumulated amortization
and any accumulated impairment loss.

b. Revaluation Model – carried at revalued amount (Fair value

less any subsequent
amortization and any subsequent accumulated impairment
loss).

INTANGIBLE ASSETS
a. Identifiable
If the intangible asset is acquired through purchase, there is a
transfer of legal right that would make the asset identifiable.
Moreover, if the asset could be sold, transferred, licensed, rented
or sold separately, the intangible asset is identifiable.

Examples of identifiable intangible assets are:

1. Patent
2. Copyright
3. Franchise
4. Trademark or brandname
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 5. Leasehold or lease rights
6. Computer Software
7. Fishing rights and other specific rights

b. Unidentifiable
An intangible asset is unidentifiable if it cannot be sold,
transferred, licensed, rented or exchanged separately. The
intangible asset is inherent in a continuing business and can only
be identified with the entity as a whole. This unidentifiable
intangible asset is referred to as goodwill.

AMORTIZATION OR IMPAIRMENT

1. Intangible assets with limited life – amortized over their useful life

2. Intangible assets with indefinite life – subject to impairment at least

annually whenever there is indication that the intangible may be
impaired.

Note: An impairment loss on an intangible asset is recognized if its

recoverable amount is less than the carrying amount. The recoverable
amount is the higher between fair value less cost to sell and value in use.

Amortization Method
The method of amortization shall reflect the pattern in which the future
economic benefits from the asset are expected to be consumed by the
entity.

However, if such pattern cannot be determined reliably, the straight line

method of amortization will be used.

PATENT
- an exclusive right granted by the government to an inventor enabling
him to control the manufacture, sale or other use of his invention for a
specified period of time.

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 Note: The legal life of patent is 20 years from the date of filing the
application.

Cos of Patent
a. Purchased – Purchase price and directly attributable costs.
b. Internally developed – cost of licensing

Legal fees and other costs of successfully prosecuting or defending a

patent shall be expensed. If the litigation is unsuccessful, the legal costs
and the remaining cost of the patent shall be written off as loss.

Amortization of Patent
a. Original Patent
– amortized over the legal life or useful life, whichever is shorter.

b. Competitive Patent
- acquired to protect an original patent.
- amortized over the remaining life of the old patent.

c. Related Patent
– acquired in order to extend the life of the old patent.
- amortized over the extended life.
- if there were no extension in life, amortized over its own life and
the cost of the old patent is to be amortized over the remainder
of its life.

COPYRIGHT
- an exclusive right granted by the government to the author,
composer or artist enabling him to publish, sell or otherwise benefit
from his literary, musical or artistic work.

Cost of Copyright
- consists of all expenses incurred in the production of the work
including those required to establish or obtain the right.
- if purchased, the cost includes the cash paid, and directly
attributable cost necessary for its intended use.

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 Amortization of copyright
- Theoretically, the cost of the copyright shall be amortized over
the useful life. In practice, it is often difficult to estimate the
useful life of the copyright (lifetime of the author plus 50 years
after death). Thus, it is advisable to write off the cost of the
copyright against the revenue of first printing.

FRANCHISE
- Under the franchise agreement, one party called the franchisor grants
certain rights to another party called the franchisee.
- The franchise may be :
a. Government and private entity.
b. Private entities.

Cost of Franchise:
- the cost includes the lump sum payments for the acquisition of
the franchise and all legal expenses incurred in connection with
the acquisition of the right.

Note: The lump sum payment is known as initial franchise fee and
therefore the cost of the franchise. If the franchise agreement
requires the franchisee to make periodic payments to the
franchisor, such payment is considered as expense and is known
as periodic franchise fee.

Amortization or Impairment of Franchise

a. If franchise is granted for a definite period – amortized over the useful

life or definite period whichever is shorter.

b. If franchise is granted indefinitely – not subject to amortization but

tested for impairment annually.

LEASEHOLD OR LEASE RIGHT

- The right acquired by the lessee by virtue of a contract of lease to use
the specific property owned by the lessor for a definite period of time
in consideration for a certain sum of money.
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Points to consider in Leasehold:
a. Lease Bonus – charged to prepaid rent and allocated as rent expense
over the lease term.
b. Periodic payments – reported as expense on the part of the lessee and
income on the part of the lessor.

Amortization of Leasehold
- Amortized over the life of the lease.

LEASEHOLD IMPROVEMENTS
- Are alterations or modifications on the leased property made by the
lessee.
- Legally, this reverts to the lessor at the end or termination of the
lease contract.
- Classified as property, plant and equipment.
- Depreciated over the life of the lease or the life of the improvement,
whichever is shorter.
- Residual value is ignored.

TRADEMARK
- a symbol, sign, slogan or name used to mark a product to distinguish
it from other products.

Cost of Trademark
a. If purchased – purchase price plus directly attributable costs.
b. If internally developed – the cost includes expenditures required to
establish it, including filing fees, registry fees and other expenses incurred
in securing the trademark such as design cost of the trademark.

Note: If the trademark is successfully prosecuted or defended, the

litigation cost is an outright expense because such cost is simply intended
to maintain the intangible asset rather than to increase the economic
benefit.

Trademark is not subject to amortization but subject to impairment.

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 GOODWILL
- Arises when earnings exceed normal earnings by reason of good
name, capable staff and personnel, high credit standing, reputation
for fair dealings, reputation for superior products, favorable location
and a list of regular customers.

Recognition of Goodwill
a. Internally generated – not recorded
b. Purchased – recognized as an asset

Note: The amount of goodwill cannot exceed the amount paid.

MEASUREMENT OF GOOWILL
a. Residual Approach – The excess of the purchase price over the net
tangible and identifiable assets is considered goodwill.

b. Direct Approach – Goodwill is measured on the basis of the future

earnings of the entity.
1. Purchase of average excess earnings
2. Capitalization of average excess earnings
3. Capitalization of average earnings
4. Present value method

Note: Goodwill is not subject to amortization but tested annually for

impairment. Goodwill does not generate cash flows independently from
other assets or group of assets and therefore recoverable amount is
determined for the cash generating unit to which goodwill belongs.

When an impairment loss is recognized for a cash generating unit, this

loss shall be allocated to the assets of the unit in the following order:

a. First, to the goodwill allocated to the cash generating unit.

b. Then, to all other noncash assets of the cash generating unit prorate
based on carrying
amount.
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 RESEARCH AND DEVELOPMENT COST
a. Research Phase – original and planned investigation undertaken with
the prospect of gaining scientific or technical knowledge and
understanding.

b. Development phase – the application of the research findings or other

knowledge to a plan or design.

Treatment of R & D Cost

a. Research Cost – expensed as incurred.
b. Development Cost – may qualify as intangible asset if:
1. The completion of intangible asset is technically feasible.
2. There is an intention to complete the intangible asset and use
or sell it.
3. There is the ability to use or sell the intangible asset.
4. The intangible asset will generate probable future economic
benefits.
5. There is the availability of resources or funding to complete
development and to use or sell the asset.
6. There is the availability to measure reliably the expenditure
attributable to the intangible asset during its development.

Note: Acquired R & D is recognized as an asset at cost, even if a

component is research.

 Everything has beauty, but not everyone sees it.

INTANGIBLE ASSETS & IMPAIRMENT

OF INTANGIBLE ASSETS

1. Under PAS 38, which of the following is not part of the definition of intangible
assets?
a. Identifiable non-monetary assets c. Future economic benefits
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 b. Lacking physical substance d. With finite life

2. Which item listed below does not qualify as an intangible asset?

a. Computer software c. Copyrights that are protected
b. Registered patent d. Notebook computer

3. The cost of separately acquired intangible assets includes all of the following,
except:
a. Purchase price of the intangible asset
b. Administration and other general overhead costs
c. Any import duties and nonrefundable purchase taxes
d. Direct cost of preparing the asset for its intended use

4. If payment for an intangible asset is deferred beyond normal credit terms, its
cost is the
a. Cash price equivalent c. Installment price
b. Invoice price d. Regular price

5. If an intangible asset is acquired in a business combination, its cost is equal to

a. Carrying amount of the acquiree
b. Carrying amount of the acquirer
c. Fair value at the date of acquisition
d. Fair value at the date of balance sheet

6. The cost of intangible asset acquired by way of government grant is recorded at

a. Fair value c. Either of these
b. Nominal amount plus direct costs d. Neither of these

7. It is the systematic allocation of the cost of an intangible asset, less any residual
value,
as expense over the useful life of the intangible asset.
a. Amortization c. Bifurcation
b. Impairment d. Realization

8. A change in the residual value of an intangible asset shall be treated as a

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 a. Change in accounting policy c. Change in reporting entity
b. Change in accounting estimate d. Prior period error

9. Which of the following factors is not considered in determining the useful life
of an
intangible asset?
a. Initial cost c. Expected usage of the asset
b. Legal or contractual provisions d. Expected actions of competitors

10. If the pattern of consuming the benefit from an intangible asset cannot be
determined
reliably, then the cost of intangible asset is amortized over its finite useful life
using the
a. Straight-line method c. Units of production method
b. Sum-of-the-years-digit method d. Declining balance method

11. Which of the following statements is false regarding INTANGIBLE ASSETS?

a. An intangible asset may be accounted for using cost or revaluation model
b. The amount of an intangible asset with a finite useful life shall be allocated
on a
systematic basis over its useful life
c. An intangible asset wit an indefinite useful life shall be allocated on a
systematic
basis over its useful life
d. Internally generated goodwill, brands, mastheads, publishing titles,
customer lists
and items similar in substance shall be recognized as intangible assets

12. Which of the following statements is false regarding PATENT?

a. The cost of a purchased patent includes acquisition price and any directly
attributable expenditure incurred in preparing the asset for its intended use.
b. All related research & development expenditures for an internally
developed patent
are expensed as incurred; if any, the capitalizable cost includes licensing and
legal
fees incurred in securing the patent rights.

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 c. Legal fees and other costs of successfully defending a patent are capitalized
as
patent cost.
d. Patents should be amortized over the legal life or useful life, whichever is
shorter.
13. Which of the following statements is false regarding COPYRIGHT?
a. A copyright is an exclusive right granted by government to the authors of
literary,
musical, artistic and similar works for their exclusive benefit
b. Copyright is generally amortized over its useful life during which the
benefits,
sales and royalties are expected
c. Due to difficulty in estimating a copyright’s period of benefit, it is a common
practice to write off the cost of copyright against the revenues of the first
printing
or release
d. The term of protection for a copyright is during the lifetime of the author
plus 5
years after death

14. Which of the following statements is false regarding FRANCHISE?

a. Franchise agreements may be made between the government and private
entities
b. The cost of franchise includes the lump sum payment (i.e., initial franchise
fee) and
all legal fees and expenses incurred in connection with franchise acquisition
c. Periodic or continuing franchise fee should be expensed in the period
incurred
d. Franchise should be amortized over contract term or useful life, whichever
is
longer

15. Which of the following statements is false regarding GOODWILL?

a. Internally developed goodwill is not recognized as an intangible asset.
b. Purchased goodwill arising from business combination is recognized as an
asset.

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 c. Purchased goodwill can be measured based on either the direct valuation
(excess
earnings) approach or indirect valuation approach
d. Goodwill should be amortized over its useful life but not to exceed 20 years

16. Which of the following statements is false regarding LEASEHOLD?

a. A leasehold is the right acquired by the lessee by virtue of a contract of
lease to use
the specific property owned by the lessor for a definite period of time
b. If material, the cost of leasehold is amortized over the lease term
c. If immaterial, the cost of leasehold may be expensed immediately
d. Leasehold and leasehold improvements are both classified as intangible
assets

17. Which of the following statements is false regarding TRADEMARK?

a. A trademark is a symbol, sign, name, logo or other distinctions used by
companies
to mark a product to distinguish it from other products
b. The legal life of trademark in the Philippines is for a non-renewable term of
20
years.
c. A trademark with a indefinite life is not amortized but tested annually for
impairment
d. Any cost incurred in successfully defending a trademark in legal courts is
immediately expensed

18. Statement I: A COMPUTER SOFTWARE is generally classified as an intangible

asset.
Statement II: Computer software purchased for resale should be treated as
inventory.
Statement III: Computer software purchased as an integral part of a machine is
treated
as PPE.
a. True, true, true c. False, true, true
b. True, true, false d. False, true, false

19. Which of the following statements is false regarding RESEARCH and

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 DEVELOPMENT (R&D) COSTS?
a. RESEARCH is the original and planned investigation undertaken with the
prospect
of gaining new scientific or technical knowledge and understanding on a
project.
b. DEVELOPMENT is the application of research findings or other knowledge to
plan or design for the production of new product prior to the start of
commercial
production.
c. No intangible asset arising from research shall be recognized; expenditure
on
research shall be recognized as an expense when it is incurred
d. If an entity cannot distinguish the research phase from the development
phase, the
entity treats the R&D expenditure as if it were incurred in the development
phase
only

20. Development cost may qualify as an intangible asset if an entity can

demonstrate all
of these, except
a. Ability to measure reliable development cost to be capitalized as an
intangible asset
b. Technical feasibility and intention of completing the intangible asset for sale
or use
c. The mechanism by which the intangible asset will generate probable
economic
benefits
d. Ability to exercise significant influence over another entity

21. Which is not considered a research and development activity?

a. Routine on-going efforts to refine, enrich or improve quality of existing
product
b. Laboratory research aimed at discovery of new knowledge
c. Conceptual formulation and design or possible product or process
d. Design, construction and operation of a pilot plant

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22. PAS 36 on ‘impairment of assets’ applies to which of the following assets?
a. Inventories
b. Assets held for sale
c. Financial assets
d. Property, plant and equipment

23. A property’s recoverable amount is equal to its

I. Fair value less costs to sell
II. Value in use (VIU)
a. I only c. I or II, whichever is higher
b. II only d. I or II, whichever is lower

24. If the fair value less costs to sell cannot be determined

a. The asset is not impaired
b. The recoverable amount is the value-in-use
c. The net realizable value is used
d. The carrying value of the asset remains the same

25. If assets are to be disposed of

a. The recoverable amount is the fair value less costs to sell
b. The recoverable amount is the value in use
c. The asset is not impaired
d. The recoverable amount is the carrying value

26. The best evidence of an asset’s fair value less costs to sell is
a. The carrying value of the asset
b. The fair value in an active market
c. The best estimate of knowledgeable parties
d. The selling price in a binding sale agreement

27. The ‘costs to sell’ in ‘fair value less costs to sell’ shall NOT include
a. Legal costs
b. Transaction taxes
c. Removal Costs
d. Financing Charges

28. The value in use (VIU) of an asset is equal to the

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 a. Discounted future pre-tax net cash flows from the use of the asset
b. Discounted future after-tax net cash flows from the use of the asset
c. Discounted future pre-tax net cash flows from the use and eventual disposal
of the
asset
d. Discounted future after-tax net cash flows from the use and eventual
disposal of the
asset

29. Under PAS 36, estimates of future cash flows normally would cover
projections over
a maximum of
a. Five years
b. Ten years
c. Fifteen years
d. Twenty years

30. A cash-generating unit (CGU) is

a. The smallest business segment of a company
b. Any grouping of assets that generates cash flows
c. Any group of assets that is reported separately to management
d. The smallest group of assets that generates independent cash flows from
continuing
use

31. When allocating impairment loss to CGU, such loss should reduce the carrying
amount of which asset first?
a. Property, plant and equipment
b. Intangible assets
c. Goodwill
d. Current assets

32. Which of the following impairment losses should never be reversed?

a. Impairment loss on PPE
b. Impairment loss on goodwill
c. Impairment loss on loans and receivable
d. Impairment loss on an operation segment
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  The glory of young men is their strength: and the beauty of old
men is the grey head. 

LIABILITIES

ESSENTIAL CHARACTERISTICS:
1. The liability is a PRESENT OBLIGATION of an entity.
2. The liability arises from PAST TRANSACTION/EVENT.
3. The settlement of the liability requires an OUTFLOW of resources
embodying economic benefits.

MEASUREMENT
Initial Measurement
1. Short-term - @ FACE VALUE

2. Long-term
a. Interest bearing - @ FACE VALUE

b. Non-interest bearing - @ PRESENT VALUE

Subsequent Measurement - @ AMORTIZED COST

CLASSIFICATION OF LIABILITIES
1. Current liabilities
2. Non-current liabilities

CURRENT LIABILITIES
An entity shall classify a liability as current when:
1. The entity expects to settle the liability within the entity’s NORMAL
OPERATING CYCLE.
2. The entity holds the liability primarily for the purpose of being TRADED.
3. The liability is due to be settled within TWELVE MONTHS AFTER BS
DATE.

192
 4. The entity DOES NOT HAVE AN UNCONDITIONAL RIGHT TO DEFER
SETTLEMENT of the liability for at least twelve months after the reporting
period.

NON-CURRENT LIABILITIES
The non-current liabilities is a residual definition. All liabilities not
classified as current fall into this category. This includes the following:
1. Noncurrent portion of long-term debt
2. Finance lease liability
3. Deferred tax liability
4. Long-term obligation to entity officers
5. Long-term deferred revenue

LONG-TERM DEBT FALLING DUE WITHIN ONE YEAR

 Classified as CURRENT even if:
1. Original term was for a period longer than twelve months.
2. An agreement to refinance or to reschedule payment on a long-term basis
is completed after the reporting period and before the FS is authorized for
issue.

However, if the refinancing on a long-term basis is completed on or before

the end of the reporting period, the refinancing is an adjusting event and
therefore the obligation is classified as NONCURRENT.

Furthermore, if the entity has the discretion to refinance or roll over an

obligation for at least twelve months after the reporting period under an
existing loan facility, the obligation is classified as NONCURRENT even if it
would otherwise be due within a shorter period.

If the refinancing or rolling over is not at the discretion of the entity, the
obligation is classified as CURRENT LIABILITY.

COVENANTS
Covenants are restrictions on the borrower as to undertaking further
borrowings, paying dividends, maintaining specified level or working capital
and so forth.

193
If certain conditions relating to the borrower’s financial situation are
breached, the liability becomes payable on demand.

In other words, the liability shall be classified as CURRENT even if the lender
has agreed not to demand payment as a consequence of breach.

However, the liability shall be classified as NONCURRENT if the lender has

agreed on or before the end of the reporting period to provide a grace period
ending at least twelve months after that date.

ESTIMATED LIABILITIES
Estimated liabilities are obligations which exist at the end of reporting period
although their amount is not definite.

An estimated liability is considered as a PROVISION which is both probable

and measurable.

Estimated liabilities are either CURRENT OR NONCURRENT in nature.

Examples include estimated liability for premium, award points, warranties,
gift certificates and bonus.

PREMIUMS
Premiums are articles of value such as toys, dishes, silverware, and other
goods and in some cases cash payments, given to customers as result of past
sales or sales promotion activities.

ACCOUNTING PROCEDURES:
1. Purchase of premiums
Premiums xx
Cash xx

2. Distribution of premiums to customers

Premium expense xx
Premiums xx

3. At the end of the year, if premiums are still outstanding

Premium expense xx
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 Estimated premium liability xx

FINANCIAL STATEMENT CLASSIFICATION

1. Premiums – Current asset
2. Estimated premium liability – Current liability
3. Premium expense – Selling expense

WARRANTY
Home appliances like television sets, stereo sets, radio sets, refrigerators and
the like are often sold under guarantee or warranty to provide free repair
service or replacement during a specified period if the products are defective.

ACCOUNTING PROCEDURES:

a. Accrual Approach
> At the time of sale a liability for warranty costs arises and therefore
should be given accounting recognition.

Estimated warranty is recorded as follows:

Warranty Expense xx
Estimated warranty liability xx

Payment of actual warranty costs:

Estimated warranty liability xx
Cash xx

b. Expense as incurred Approach

> The approach of expensing warranty cost only when actually incurred.

Estimated warranty:
Not recognized!

Payment of actual warranty costs:

Warranty expense xx
Cash xx

GIFT CERTIFICATES
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 Many megamalls, department stores and supermarkets sell gift certificates
which are redeemable
in merchandise.

ACCOUNTING PROCEDURES:
1. Sale of gift certificates
Cash xx
Gift certificates payable xx

2. Redemption of GC’s.
Gift certificates payable xx
Sales xx

3. Expiration of GC’s
Gift certificates payable xx
Forfeited gift certificates xx

REFUNDABLE DEPOSITS
Refundable deposits consist of cash or property received from customers but
which are refundable after compliance with certain conditions.

The best examples of refundable deposit is the customer deposit for returnable
containers like bottles, drums, tanks and barrels.

ACCOUNTING PROCEDURE:
1. Customer deposit.
Cash xx
Container’s deposit xx

2. Customer returns container.

Container’s deposit xx
Cash xx

3. Customer fail to return container.

Container’s deposit xx
Containers xx
Gain on sale of containers xx
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BONUS COMPUTATION
Large entities often compensate key officers and employees by way of bonus for
superior income realized during the year.

The main purpose of this scheme is to motivate officers and employees by

directly relating their well being to the success of the entity.

The bonus computation has four variations:

1. Bonus is before bonus and before tax.
2. Bonus is after bonus but before tax.
3. Bonus is after bonus and after tax.
4. Bonus is after tax but before bonus.

CUSTOMER LOYALTY PROGRAM

The customer loyalty program is generally designed to reward customers for past
purchases and t0 provide them with incentives to make further purchases.

If the customer buys goods or services, the entity grants the customer award
credits often described as “points”.

RECOGNITION AND MEASUREMENT

Under IFRIC 13, an entity shall account for the award credits as a “separately
component of the initial sale transaction”.

The granting of award credits is effectively accounted for as a “future delivery of

goods or services”. The fair value of the consideration received with respect to
the initial sale shall be allocated between the award credits and the sale. The
consideration allocated to the award credits is measured at fair value.

The subsequent recognition of the amount allocated to the award credits as

revenue depends on the following:

1. The entity supplies the award itself.

2. A third party supplies the award.

The entity supplies the award itself

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The consideration allocated to the award credits is initially recognized as deferred
revenue and subsequently recognized as revenue within the award credits are
redeemed.

The amount of revenue recognized shall be based on the number of award credits
that have been redeemed relative to the total number expected to be redeemed.

A third party supplies the awards

The entity shall assess whether it is collecting the consideration allocated to the
award credits on its own account as principal in the transaction, or on behalf of
the third party as agent of the third party.

If the entity is collecting the consideration as principal in the transaction, the

amount of revenue is equal to the gross consideration allocated to the award
credits.

If the entity is collecting the consideration as an agent of the third party, the
amount of revenue is equal to the net amount retained on its own account. This
net amount is the difference between the consideration allocated to the award
credits and the amount payable to the third party for supplying the awards.

The revenue from the award credits shall be recognized at the point of initial sale.

PAYROLL TAXES
The entity as an employer is required to withhold from the salaries of each
employee the following:
1. Income tax payable by the employee.
2. Employee’s contribution to the SSS.
3. Employee’s contribution to Philhealth.
4. Employee’s contribution to Pag-ibig Fund.

Such amount withheld from the salaries of the employees shall be recognized as
current liability unit remitted by the entity to the appropriate government
authority.

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In addition to the amounts withheld from the salaries of the employees, the
entity is required by law to make a contribution for SSS, Philhealth and Pag-ibig
fund representing its share in the benefits of the employees.

DEFERRED REVENUE
Deferred revenue or unearned revenue is income already received but not yet
earned. It is considered as current liability if realizable within one year and
noncurrent liability if realizable for more than one year.

PROVISION AND CONTINGENT LIABILITY

PROVISION
Provision is an existing liability of uncertain timing or uncertain amount. The
liability definitely exists at the end of reporting period but the amount is
indefinite or the date when the obligation is due is also indefinite, and in some
cases, the payee cannot be identified or determined.

Actually, a provision maybe equivalent of an estimated liability or loss

contingency that is ACCRUED because it is both probable and measurable.

RECOGNITON
1. Present obligation (legal or constructive)
2. Probable
3. Measurable

MEASUREMENT
The amount recognized as a provision should be the BEST ESTIMATE of the
expenditure required to settle the present obligation at the end of reporting
period.

1. Continuous range of outcomes – MIDPOINT is to be used.

2. Large population of items – EXPECTED VALUE (generated by weighing possible
outcomes).

EXAMPLES OF PROVISIONS
1. Warranties
2. Environmental contamination
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 3. Decommissioning or abandonment costs
4. Court case
5. Guarantee

CONTINGENT LIABILITY
1. Possible obligation
2. Present obligation
3. Can be Probable
4. Can be Measurable

Not recognized inn the financial statements by shall be disclosed only.

BONDS PAYABLE
A formal unconditional promise, made under seal, to pay a specified sum of
money at a determinable future date, and to make periodic interest payment at a
stated rate until the principal sum is paid.

TYPES OF BONDS
1. Term – with a single date of maturity.
2. Serial – with a series of maturity dates.

3. Mortgage – secured by a mortgage on real properties

4. Collateral – secured by stocks and bonds
5. Debenture – without collateral security

6. Registered – requires the registration of the name of the bondholders

7. Coupon or bearer – the name of the bondholders are not required to
be registered

8. Convertible – can be exchange for shares of the issuing entity

9. Callable – may be called in for redemption prior to maturity date
10. Guaranteed – issued whereby another party promises to make
payment if the borrower fails to
do so
11. Junk – high risk, high-yield bonds issued by entities that are heavily
indebted or in weak
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 financial condition.

For us to be able to understand the concept and proper accounting of

BONDS PAYABLE we first need to consider the activities that transpire in
the life cycle of a bonds payable.

Those activities include the following:

1. Authorization
2. Issuance
3. Amortization
4. Retirement

AUTHORIZATION
Accounting for bond authorization will defer depending on the method employed
by the entity which can be:
1. Memorandum approach
- No journal entry is made, only a memorandum stating the company’s amount of
bonds authorized.

2. Journal entry approach

- A journal entry is made which includes:

Unissued bonds payable xx

Authorized bonds payable xx

ISSUANCE
Issuance of bonds payable may be at:

A. Face, above face, below face (No premium/discount, premium, discount)

1. Face – no “gain/loss” to be recorded. Journal entry is simply

Asset xx
Bonds payable xx

2. Above face – a “gain” is recognized (Premium on bonds payable). Journal entry

would include a

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 recognition of the related premium. The premium on bonds payable is added to
the face of the
bond in order to determine the carrying value. The premium on bonds payable
is to be amortized
over the life of the bonds.

Asset xx
Bonds payable xx
Premium on bonds payable xx

3. Below face – a “loss” is recognized (Discount on bonds payable). Journal entry

would include a
recognition of the related discount. The discount on bonds payable is deducted
to the face of the
bond in order to determine the carrying value. The discount on bonds payable
is to be amortized
over the life of the bonds.

Asset xx
Discount on bonds payable xx
Bonds payable xx

B. On interest date or between interest dates

1. On interest date
- No accounting problem is met. Proceeds of the bonds issued is equal to
the issue price.

2. Between interest dates

- An accounting problem is met. Proceeds of the bonds issued include an
ACCRUED INTEREST
which is paid by the buyer or investor.

C. With Share Warrants or Convertible

1. With Share Warrants
- Considered as compound financial instruments (meaning, two
instruments – bonds payable
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 and share warrants).
- The total consideration should be divided between the two instruments
by using the
RESIDUAL APPROACH.
- Under the residual approach, the fair value of the bonds payable is
considered first and the
excess of the total consideration is given to the share warrants.

2. Convertible Bonds
- Considered as compound financial instruments (meaning, two
instruments – bonds payable
and conversion privilege).
- The total consideration should be divided between the two instruments
by using the
RESIDUAL APPROACH.
- Under the residual approach, the fair value of the bonds payable is
considered first and the
excess of the total consideration is given to the conversion privilege.

MEASUREMENT
Bonds payable is initially recognized at FACE VALUE. After initial recognition,
bonds payable shall be measured at AMORTIZED COST using the EFFECTIVE
INTEREST METHOD.

AMORTIZATION
Amortization of the bonds payable will depend on whether the bond is issued at:
1. Premium or discount

Amortization of PREMIUM
Amortization of a Premium on bonds payable will decrease the interest expense
account, journalized as follows:

Premium on bonds payable xx

Interest expense xx

Amortization of DISCOUNT

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Amortization of a Premium on bonds payable will increase the interest expense
account, journalized as follows:

Interest expense xx
Discount on bonds payable xx

2. The bonds is a TERM or SERIAL

Term bonds – can be amortized by using the following amortization method.

1. Effective interest method.
2. Straight line method

Serial bonds – can be amortized by using the following amortization method.

1. Effective interest method.
2. Bond outstanding method.
3. Straight line method.

RETIREMENT OF BONDS
Retirement of bonds will depend on whether the bonds were retired:
1. On maturity date
- No accounting problem is encountered. This would simply require the
cancelation of the
bonds payable and of course the payment of the accrued interest on the
date of maturity.

2. Before maturity date

- If the bonds are retire prior to maturity date, the following procedures are
followed:
1. Determine the carrying value of the bonds payable at the date of
retirement.
2. Determine the carrying value of the discount, bond issue cost and
premium, if any at the
date of retirement.
3. The accrued interest at the date of retirement should be determined.
4. Total cash payment should be computed, that is – retirement price plus
accrued interest.
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 5. Gain or loss on retirement is computed, that is – retirement price
minus carrying value.
6. Retirement is recorded by cancelling the CV of the accounts recognized
above.

SPECIAL CONSIDERATIONS ON BONDS PAYABLE

1. Recording interest in bonds
The following are the transactions that may affect the interest expense account
that needs to be
considered:
1. Payment of interest (may be annually or semi-annually).
Interest expense xx
Cash xx

2. Accrual of interest (at the end of the period).

Interest expense xx
Accrued int. payable xx

3. Accrual of interest (at the beginning of the period – for bonds issued
between int. dates).
Interest expense xx
Accrued interest payable xx

4. Amortization of bonds (either Premium or Discount on bonds payable).

Interest expense xx
Discount on bonds payable xx
Or
Premium on bonds payable xx
Interest expense xx

2. Accounting for treasury bonds

The acquisition of treasury bonds calls for the same accounting procedures
accorded to a formal
retirement of bonds prior to the maturity.

The Treasury bond is debited at face value and any unrelated unamortized
premium or discount or
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 issue cost should be canceled. Any accrued interest paid is charged to interest
expense.

The difference between the acquisition cost and the carrying amount of the
treasury bonds is
treated as gain or loss on the acquisition of treasury bonds.

 "I am only one, But still I am one. I cannot do everything, But

still I can do something; and because I cannot do everything, I will
not refuse to do the something that I can do."

ACCOUNTING FOR LEASES(IAS 17)

Classification of leases
1. FINANCE LEASE
 The lease transfers ownership of the asset to the lessee by the end
of the lease term
 The lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than fair value at the date the
option becomes exercisable that, at the inception of the lease, it is
reasonably certain that the option will be exercised. (Bargain
Purchase Option)
 The lease term is for the major part of the economic life of the
asset, even if title is not transferred. (75% of the economic life of
an asset – American Standard)
 At the inception of the lease, the present value of the minimum
lease payments amounts to at least substantially all of the fair
value of the leased asset. (At least 90% of the fair value of the
leased asset – American Standard)
 the lease assets are of a specialized nature such that only the
lessee can use them without major modifications being made

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 Other situations that might also lead to classification as a finance lease
are:
 if the lessee is entitled to cancel the lease, the lessor's losses
associated with the cancellation are borne by the lessee
 gains or losses from fluctuations in the fair value of the residual fall
to the lessee (for example, by means of a rebate of lease
payments)
 the lessee has the ability to continue to lease for a secondary
period at a rent that is substantially lower than market rent

ACCOUNTING BY LESSEES
1. FINANCE LEASE
- Should be recorded as an asset and a liability at the lower of the fair value
of the asset and the present value of the minimum lease payments
(discounted at the interest rate implicit in the lease, if practicable, or else
at the entity's incremental borrowing rate) whichever is lower.
- Finance lease payments should be apportioned between the finance
charge and the reduction of the outstanding liability (the finance charge
to be allocated so as to produce a constant periodic rate of interest on
the remaining balance of the liability).
- The depreciation policy for assets held under finance leases should be
consistent with that for owned assets. If there is no reasonable
certainty that the lessee will obtain ownership at the end of the lease –
the asset should be depreciated over the shorter of the lease term or
the life of the asset.

Note:
- Components of Minimum Lease Payments:
 Rental payments during the lease term.
 Any payment required under a bargain purchase option.
 Any guaranteed residual value in the absence of bargain purchase
option.
- Contingent rent and executory costs are not included in the
computation of the minimum lease payments.
- Initial direct costs are included as part of the amount recognized as an
asset under the lease.

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2. OPERATING LEASE
- Lease payments should be recognized as an expense in the income
statement over the lease term on a straight-line basis, unless another
systematic basis is more representative of the time pattern of the
user's benefit.
- Incentives for the agreement of a new or renewed operating lease should
be recognized by the lessee as a reduction of the rental expense over the
lease term, irrespective of the incentive's nature or form, or the timing of
payments.
 Ex. Lease bonus is treated as prepaid rent by the lessee to be
amortized over the lease term.
- Leasehold improvements made by the lessee shall be depreciated over
the life of the improvements or lease term, whichever is shorter.
- Any security deposit refundable upon the lease expiration is accounted
for as an asset by the lessee.

ACCOUNTING BY LESSORS
1. FINANCE LEASE
Direct Financing Lease
- An arrangement between a financing entity and a lessee.
- Recognizes only interest income
- Gross Investment is equal to:
 Gross rental for the entire lease term plus
 Absolute amount of the residual value – whether guaranteed or
unguaranteed. (This is the amount debited to lease receivable)
- Net investment in the lease is equal to:
 Cost of the asset plus
 Initial direct cost paid by the lessor
- Unearned Interest income
 The difference between Gross Investment and Net Investment in
the lease.
- Initial Direct Cost

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  Added to the cost of the asset to get the net investment.

Sales Type Lease

- A manufacturer of a dealer that uses a lease to facilitate the sale of its
product.
- Recognizes interest income and gross profit
- Gross Investment is equal to:
 Gross rental for the entire lease term plus
 Absolute amount of the residual value – whether guaranteed or
unguaranteed. (This is the amount debited to lease receivable)
- Net investment is equal to:
 Present value of the gross rentals plus
 Present value of the residual value – whether guaranteed or
unguaranteed.

- Unearned interest income

 The difference between Gross Investment and Net Investment in
the lease.
- Sales
 The amount is equal to the Net Investment in the lease or Fair
Value of the asset whichever is lower.
- Cost of Sales
 Equal to the cost of the asset sold plus initial direct cost paid by the
lessor.
- Gross Profit
 Sales minus cost of sales
- Initial Direct Cost
 Expensed immediately in a sales type lease as a component of cost
of sales.

2. OPERATING LEASE
- Should be presented in the balance sheet of the lessor according to the
nature of the asset.
- Lease income should be recognized over the lease term on a straight-
line basis, unless another systematic basis is more representative of
the time pattern in which use benefit is derived from the leased asset is

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 diminished. (The periodic rental received by the lessor in an operating
lease is simply recognized as rent income).
- Incentives for the agreement of a new or renewed operating lease should
be recognized by the lessor as a reduction of the rental income over the
lease term, irrespective of the incentive's nature or form, or the timing of
payments.
 Ex. Lease bonus – should be recognized as unearned rent to be
amortized over the lease term.
- Leased property remains as an asset of the lessor as such he bears all the
ownership and executory costs such as depreciation of leased property,
real property taxes, insurance and maintenance.
- Initial direct costs incurred shall be added to the carrying amount of the
leased asset and recognized as an expense over the lease term.
- Security deposit refundable upon the lease term shall be accounted for as
a liability by the lessor.

SALE AND LEASBACK TRANSACTIONS

- For a sale and leaseback transaction that results in a finance lease, any
excess of proceeds over the carrying amount is deferred and amortized
over the lease term.

- For a transaction that results in an operating lease:

 if the transaction is clearly carried out at fair value - the profit or
loss should be recognized immediately
 if the sale price is below fair value - profit or loss should be
recognized immediately, except if a loss is compensated for by
future rentals at below market price, the loss it should be
amortized over the period of use
 if the sale price is above fair value - the excess over fair value
should be deferred and amortized over the period of use
 if the fair value at the time of the transaction is less than the
carrying amount – a loss equal to the difference should be
recognized immediately.

ACCOUNTING FOR INCOME TAX

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ACCOUNTING INCOME ---- Financial Accounting Income Permanent Difference

TAXABLE INCOME -----------Taxation Income Temporary Difference

PERMANENT DIFFERENCES
- Revenues/expenses included in either accounting income/taxable
income but not both
- Nontaxable revenues & nondeductible expenses
- Have no future tax consequences or do not result to income tax payable
- Examples:
 Gain on sale of life insurance of officers & employees where the
corporation is the beneficiary
 Dividend revenue received by domestic corporation from a domestic
corporation
 Fines & penalties for violation of law

TEMPORARY DIFFERENCES
- Differences between the ‘carrying value’ of an asset/liability and the ‘tax
base’
- Include ‘timing difference’
- Give rise to ‘deferred tax asset’ or ‘deferred tax liability’

Timing Differences- items of income & expense included in both accounting

income & taxable income at different time periods

Kinds of Temporary Difference

1. Taxable Temporary Difference
- Results in ‘future taxable amount’
- Results to ‘deferred tax liability’

2. Deductible Temporary Difference

- Results in ‘future deductible amount’ from taxable income
- Results to ‘deferred tax asset’
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Deferred Tax Liability
- Income tax payable in future periods with respect to a taxable temporary
difference
- Arises from the following:
(1) AI > TI
(2) CV > Tax Base (Asset)
(3) CV < Tax Base (Liability)

AI > TI (Future Taxable Amounts)

- Revenues & gains included in accounting income of the current period
but taxable in future periods
Ex. Installment Sale

- Expenses & losses deductible for tax purposes in current period but
deductible for accounting purposes in future periods

Ex. Development Cost – capitalized & amortized in accounting,

but currently deductible for tax

Deferred Tax Liability (not a timing difference)

1. Asset revalued upward with no equivalent adjustment for tax purposes
2. CV of investment in subsidiary is higher than tax base because it did not
distribute income to the parent/investor.
3. Cost of business combination accounted as purchase with no equivalent
adjustment for tax purposes

Deferred Tax Asset

- Income tax recoverable in future periods with respect to deductible
temporary difference & operating loss carryforward
- Arises from the following:
(1) AI < TI
(2) CV < Tax Base (Asset)
(3) CV > Tax Base (Liability)

AI < TI (Future Deductible Amount)

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- Revenues & gains included in TI of current period but are included in
accounting income of future periods
Example:
 Rent received in advance

- Expenses & losses deductible for accounting income of current period but
are deductible for tax purposes in future periods
Example:
 Probable & measurable litigation loss
 Doubtful accounts – expensed for accounting purposes but
deductible for tax purposes
when written off
 Impairment loss – ignored for tax purposes until asset is sold

Methods of Accounting
1. Income Statement Approach
- Focuses on timing differences (differences affecting I/S of one
period that will reverse in future period)

2. B/S Approach
- Focuses on all temporary difference including timing difference

Accounting Procedures
1. Current Tax Expense = Taxable Income x Tax Rate
* amount of income tax paid/payable for the year
* journal entry:

Income tax expense xx

Income tax payable xx

2. Deferred Tax Liability = Taxable Temporary Difference x Tax Rate

* journal entry:

Income tax expense xx

Deferred tax liability xx

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 3. Deferred Tax Asset = Deductible Temporary Difference x Tax Rate
* journal entry:

Deferred tax asset xx

Income tax benefit xx

4. Total Income Tax Expense:

Current tax expense xx

Deferred tax expense xx
Income tax benefit xx
Total income tax expense xx

OR

Taxable Income xx (x tax rate = Current tax expense)

Taxable Temporary Difference (xx) (x tax rate = Deferred tax expense)
Deductible Temporary Difference xx (x tax rate = Income tax benefit)
Accounting Income xx (x tax rate = Total income tax
expense)

Current Tax Liability

- The current tax expense or the amount of income tax actually payable
- Classified as current liability

Current Tax Asset

- Excess of tax paid over tax payable for the current period
- Classified as current asset

NOTE: Deferred tax asset & deferred tax liability will be presented on the
noncurrent portion of the B/S.

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ACCOUNTING FOR EMPLOYEE BENEFITS

Employee benefits
- all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment.

Short-term employee benefits

- employee benefits (other than termination benefits) that are expected to
be settled wholly before twelve months after the end of the annual
reporting period in which the employees render the related service.

- When an employee has rendered service to an entity during an

accounting period, the entity shall recognise the undiscounted amount of
short-term employee benefits expected to be paid in exchange for that
service:
(a) as a liability (accrued expense), after deducting any amount already paid.
If the amount already paid exceeds the undiscounted amount of the
benefits, an entity shall recognise that excess as an asset (prepaid
expense) to the extent that the prepayment will lead to, for example, a
reduction in future payments or a cash refund.
(b) as an expense, unless another IFRS requires or permits the inclusion of
the benefits in the cost of an asset

Post-employment benefits
- employee benefits (other than termination benefits and short-term
employee benefits) that are payable after the completion of employment.
- formal or informal arrangements under which an entity provides post-
employment benefits for one or more employees.
- classified as either defined contribution plans or defined benefit plans,
depending on the economic substance of the plan as derived from its
principal terms and conditions.

Defined contribution plans

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 - post-employment benefit plans under which an entity pays fixed
contributions into a separate entity (a fund) and will have no legal or
constructive obligation to pay further contributions if the fund does not
hold sufficient assets to pay all employee benefits relating to employee
service in the current and prior periods.
- entity’s legal or constructive obligation is limited to the amount that it
agrees to contribute to the fund. Thus, the amount of the post-
employment benefits received by the employee is determined by the
amount of contributions paid by an entity (and perhaps also the
employee) to a post-employment benefit plan or to an insurance
company, together with investment returns arising from the
contributions.
- In consequence, actuarial risk (that benefits will be less than expected)
and investment risk (that assets invested will be insufficient to meet
expected benefits) fall, in substance, on the employee.

Defined benefit plans

- post-employment benefit plans other than defined contribution plans.
Under defined benefit plans:
(a) the entity’s obligation is to provide the agreed benefits to current and
former employees; and
(b) actuarial risk (that benefits will cost more than expected) and investment
risk fall, in substance, on the entity. If actuarial or investment experience
are worse than expected, the entity’s obligation may be increased.

Accounting by an entity for defined benefit plans involves the following

steps:

(a) determining the deficit or surplus. This involves:

(i) using an actuarial technique, the projected unit credit method, to
make a reliable estimate of the ultimate cost to the entity of the
benefit that employees have earned in return for their service in the
current and prior periods. This requires an entity to determine how
much benefit is attributable to the current and prior periods and to
make estimates (actuarial assumptions) about demographic variables
(such as employee turnover and mortality) and financial variables

216
 (such as future increases in salaries and medical costs) that will affect
the cost of the benefit;
(ii) discounting that benefit in order to determine the present value of
the defined benefit obligation and the current service cost;
(iii) deducting the fair value of any plan assets from the present value of
the defined benefit obligation;

(b) determining the amount of and the net defined benefit liability (asset)
as the amount of the deficit or surplus determined in (a), adjusted for
any effect of limiting a net defined benefit asset to the asset ceiling.

(c) determining amounts to be recognised in profit and loss:

(i) current service cost.
(ii) any past service cost and gain or loss on settlement.
(iii) net interest on the net defined benefit liability (asset).

(d) determining the remeasurements of the net defined benefit liability

(asset), to be recognised in other comprehensive income, comprising:
(i) actuarial gains and losses;
(ii) return on plan assets, excluding amounts included in net interest on
the net defined benefit liability (asset); and
(iii) any change in the effect of the asset ceiling, excluding amounts
included in net interest on the net defined benefit liability (asset).

Where an entity has more than one defined benefit plan, the entity
applies these procedures for each material plan separately.

Other long-term employee benefits

- all employee benefits other than short-term employee benefits,
postemployment benefits and termination benefits. IAS 19R requires a
simplified method of accounting for other long-term employee benefits.
- this method does not recognise remeasurements in other comprehensive
income.

Termination benefits
- employee benefits provided in exchange for the termination of an
employee’s employment as a result of either:
217
 (a) an entity’s decision to terminate an employee’s employment before the
normal retirement date; or
(b) an employee’s decision to accept an offer of benefits in exchange for the
termination of employment.

An entity shall recognise a liability and expense for termination benefits

at the earlier of the following dates:
(a) when the entity can no longer withdraw the offer of those benefits; and
(b) when the entity recognises costs for a restructuring that is within the
scope of IAS 37 and involves the payment of termination benefits.

COMPONENT OF DEFINED BENEFIT COST (IAS 19R)

1. SERVICE COST which comprises:
a. Current service cost
b. Past service cost – whether vested or nonvested
c. Any gain or loss on settlement
Present value of the defined benefit obligation vs Settlement Price
(includes any plan assets transferred and any payments made directly
by the entity)

2. NET INTEREST which comprises

a. Interest expense on defined benefit liability = PBO, beg * discount
rate
b. Interest income on plan assets = FVPA, beg * discount rate
c. Interest on the effect of asset ceiling = Effect of the asset ceiling, beg.
* discount rate

3. REMEASUREMENTS which comprises:

a. Actuarial gains and loss
b. Actual return on plan assets less interest income on plan assets
c. Any change in the asset ceiling = Change in the effect of asset ceiling,
excluding interest

The service cost and net interest are included in the profit or loss as
component of employee benefit expense.

218
 All of the remeasurements are fully recognized through other
comprehensive income and are not recycled or reclassified
subsequently.

PLAN ASSETS

Plan assets comprise of assets held by a long-term benefit fund and

qualifying insurance policies. It is the source of fund set aside in meeting
future benefit payments.

Plan assets are measured at fair value. The usual components of the fair
value of plan assets are:
a. Contribution to the fund
b. Interest income on plan assets Actual return on plan assets
c. Remeasurement gain or loss on plan assets
d. Benefits paid
Plan assets
Beginning Benefits paid
Contributions Actuarial loss
Actual returns Settlement price
Actuarial gains

BENEFIT OBLIGATION

Benefit obligation refers to the amount of money a company must pay

into a defined-benefit pension plan to satisfy all pension entitlements
that have been earned by employees up to that date. The benefit
obligation of the enterprise can be (a) accumulated benefit obligation or
(b) projected benefit obligation.

Accumulated benefit obligation is the actuarial present value of all

benefits attributed by the pension benefit formula to employee service
rendered before a specified date. The amount is based on the current
compensation level of employees and therefore includes no assumptions
about future salary increases.

219
 Projected benefit obligation is the actuarial present value of all benefits
attributed by the pension benefit formula to employee service rendered
before a specified date based on a future compensation level. The
amount of the benefit obligation includes future salary increases that the
entity projects it will pay to employees during the remainder of their
employment.

The usual components of the benefit obligation are:

a. Current service cost
b. Past service cost
c. Interest expense on BPO
d. Benefits paid
e. Actuarial gains or losses
 Actuarial gains and losses are changes in the present value of the
defined benefit obligation resulting from experience adjustments
and the effects of changes in actuarial assumptions.
 The usual causes of actuarial gains and losses include the
following:
a. Unexpected high or low rate of employee turnover, early
retirement or mortality and increases in salary
b. Change in assumptions concerning benefit payment options
c. Change in discount rate
 Actuarial gains and losses are permanently excluded from profit
or loss
 Actuarial gains or losses can be determined as follows:
a. Actual benefit obligation > Estimated amount =
Actuarial loss
b. Actual benefit obligation < Estimated amount =
Actuarial gain

Defined Benefit Obligations

Benefits paid Beginning
Actuarial gain Current service cost
PV of DBO settled Past service cost
Interest expense
Actuarial Loss

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 PREPAID/ACCRUED BENEFIT COST
FV of Plan Assets >< Benefit Obligation =
Prepaid/accrued benefit

 If FV of plan assets is more than the benefit obligation, the plan is

overfunded. There is a prepaid benefit cost, or Surplus (IAS 19R)
 Surplus must not exceed the asset ceiling determined by using the
discount rate in the
measurement of the defined benefit obligation
 Asset ceiling is the present value of any economic benefits available in the
form of refunds from the plan or reduction in future contributions to the
plan
 Effect of asset ceiling = Surplus vs Asset ceiling
 Change in the effect of asset ceiling = Effect of asset ceiling, beg. vs Effect
of asset ceiling, end

TRANSITIONAL PROVISIONS
 Any transitional effect of the application of the amendment under IAS R
shall be accounted for as an adjustment of the beginning balance of
retained earnings.
 Any balance representing unamortized past service cost and
unrecognized actuarial gains/losses will be eliminated by making an
adjustment to RE, beg.
 Dr/Cr Prepaid/Accrued benefit Cost and Dr/Cr RE, beg.

CURRENT & NONCURRENT LIABILITIES

1. Liabilities are
a. Any accounts having credit balances after closing entries are made.
b. Obligations to transfer ownership shares to other entities in the future.
c. Obligations arising from past transactions and payable in assets or
services in the future.
d. Deferred credits that are recognized and measured in conformity with
generally accepted
221
 accounting principles.

2. Which one of the following items is not a liability?

a. Dividends payable in shares c. Advances from customers on
contracts
b. Accrued estimated warranty cost d. Maturing portion of
long-term debt

3. Which of the following should not be included in the current liabilities section
of the balance
sheet?
a. Deferred tax liability
b. Trade notes payable
c. Trade accrued expenses
d. Short-term non-interest bearing notes payable

4. Under PAS 37, liabilities are present obligations which represent

a. Legal obligations only c. Both legal and constructive
obligations
b. Constructive obligations only d. Neither legal nor constructive
obligations

5. It is an event that creates a legal or constructive obligation because the entity

has no other
realistic alternative but to settle the obligation.
a. Events after the balance sheet date c. Adjusting event
b. Contingent event d. Obligating event

6. A present obligation that is probable and for which the amount can be
reasonably estimated shall
a. Not be accrued shall be disclosed in the notes to the financial
statements
b. Be accrued by debiting an appropriated retained earnings account and
crediting a liability
account
c. Be accrued by debiting an expense account and crediting an
appropriated retained
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 earnings account
d. Be accrued by debiting an expense account and crediting a provision
account

7. An outflow of resources embodying economic benefits is deemed as probable

when the probability
that
a. The event will occur is greater than the probability that the event will
not occur
b. The event will not occur is greater than the probability that the event
will occur
c. The event will occur is the same as the probability that the event will
not occur
d. The event will occur is at least 90% likely

8. Management can estimate the amount of loss will occur if a foreign

government expropriates
some company assets. If expropriation is reasonably possible, a loss
contingency should be
a. Disclosed but not accrued as a liability
b. Disclosed and accrued as a liability
c. Accrued as a liability but not disclosed
d. Neither accrued as a liability nor disclosed

9. A contingent liability
a. Has a most probable value of zero but may require payment if a given
future event occurs
b. Definitely exists as a liability but its amount or due date is
indeterminate
c. Is commonly associated with operating loss carry forwards
d. Is not disclosed in the financial statements

10. Where the provision being measured involves a large population of items, the
obligation is
estimated by weighing all possible outcomes by their associated probabilities.
This statistical
method of estimation is called
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 a. Expected value c. Interpolation
b. Realizable value d. Normal distribution

11. Premium on bonds payable is a(n)

a. Valuation account c. Accumulation account
b. Contra account d. Adjunct account

12. The rate of interest that is used to discount the future cash payments on a
debt to the cash
equivalent is least likely to be described by which of the following terms?
a. Effective interest rate c. Stated interest rate
b. Yield interest rate d. Prevailing interest rate

13. If a bond was sold at 108, the stated rate of interest was:
a. Equal to market rate
b. Not related to market rate
c. Higher than market rate
d. Lower than market rate

14. The bond interest expense for a period is more than interest paid when bonds
are sold at
a. A premium c. A discount
b. Par d. A yield

15. The market price of a bond issued at a discount is the present value of its
principal amount at
the market(effective) rate of interest
a. Less than present value of all future interest payments at the market
(effective) rate of
interest
b. Less the present value of all future interest payments at the rate of
interest stated on the
bond
c. Plus the present value of all future interest payments at the market
(effective) rate of
interest
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 d. Plus the present value of all future interest payments at the rate of
interest stated on the
bond

16. For bonds payable, the cash interest paid in each interest period is:
a. The same amount regardless of whether the bonds were sold at a
discount or a premium
b. Different depending upon the date of sale
c. Not the same amount when the stated and yield interest rates are
different
d. Dependent on the initial amount of accrued interest

17. Costs incurred in issuing ten-year bonds which sold at a slight premium should
be
a. Charged to retained earnings when the bonds are issued
b. Expensed in the year in which incurred
c. Capitalized as organization cost
d. Reported on the balance sheet as a deduction from bonds payable and
amortized over ten-
year bond term

18. When the interest payment dates of a bond are May 1 and November 1, and
a bond issue is
sold June 1, the amount of cash received by the issuer will be
a. Decreased by accrued interest from June 1 to November 1
b. Decreased by accrued interest from May to June 1
c. Increase by accrued interest from June 1 to November 1
d. Increased by accrued interest from May to June 1

19. The proceeds from a bond issued with detachable share warrants should be
accounted for
a. Entirely as bonds payable
b. Entirely as equity
c. Partially as unearned revenue and partially as bonds payable
d. Partially as equity and partially as bonds payable

20. A troubled debt restructuring will generally result in a

225
 a. Loss by the debtor and a gain by the creditor
b. Loss by both the debtor and the creditor
c. Gain by both the debtor and the creditor
d. Gain by the debtor and a loss by the creditor

21. Under PAS 39, the difference between the carrying amount of a financial
liability extinguished
and the consideration given shall
a. Be recognized in profit or loss
b. Be included in equity
c. Be included in retained earnings
d. Not be recognized

22. The classification of leases, from the standpoint of the lessee are
a. Operating or sales type lease
b. Operating or direct financing
c. Direct financing, sales type or operating
d. Finance or operating

23. The classification of lease is normally carried out

a. At the end of lease term
b. At the inception of the lease
c. After a cooling off period of one year
d. When the entity deems it to be necessary

24. If the lessor records unearned rent at the inception of a lease, then the lease
must
a. Be an operating lease
b. Be a direct financing lease
c. Contain a bargain purchase option
d. Be an annuity due

25. The appropriate valuation of an operating lease on the balance sheet of a

lessee is
a. The present value of the sum of the lease payments discounted at an
appropriate rate
226
 b. The market value of the asset at the date of the inception of the lease
c. The absolute sum of the lease payments
d. Zero unless the lessee made a prepayment of rent

26. The accounting concept that is principally considered to classify leases into
operating and finance
is
a. Substance over form c. Neutrality
b. Prudence d.
Completeness

27. The classification of a lease as either operating or finance lease is based on

a. The length of the lease
b. The transfer of the risks and rewards of ownership
c. The minimum lease payments being at least 50% of the fair value
d. The economic life of the asset

28. Which of the following situations would prima facie lead to a lease being
classified as an
operating lease?
a. Transfer of ownership to the lessee at the end of the lease term
b. Option to purchase at a value below the fair value of the asset
c. The lease term is for a major part of the asset’s life
d. The present value of the minimum lease payments is 50% of the fair
value of the asset

29. What are the three types of period costs that a lessee experiences with
finance leases?
a. Depreciation expense, executory costs, rent expense
b. Executory costs, interest expense, rent expense
c. Rent expense, interest expense, depreciation expense
d. Interest expense, depreciation expense, executory costs

30. The lessee measures the cost of a leased asset and lease liability of a finance
lease based on
a. Fair market value of the leased asset
b. Future value of the periodic rental payments
227
 c. Sum of the annual cash payments to be made during term of the lease
d. Present value of the periodic rental payments

31. When a company sells a property and leases it back under finance lease, any
gain on sale is
usually
a. Recognized in the current year
b. Recognized as a prior period adjustment
c. Recognized at the end of the lease
d. Deferred and amortized as income over the lease term

32. Deferred tax accounting is applicable to

a. Public enterprise only
b. Nonpublic enterprise only
c. Both public and nonpublic enterprises
d. Neither public nor nonpublic enterprises

33. Interperiod tax allocation accounts for

a. All differences between tax regulations and Philippine Financial
Reporting Standards
b. Tax effects of specific income statements items in the same period
c. Permanent differences
d. Temporary differences

34. These are items of revenue and expenses that are included in either
accounting income or
taxable income but will never be included in the other.
a. Permanent differences
b. Temporary differences
c. Timing differences
d. Exchange differences

35. Permanent differences differ from temporary differences in that

a. Permanent differences occur more infrequently than temporary
differences
b. A permanent difference cannot change its status once designated, but
a temporary
228
 difference may be classified in a later period
c. Permanent differences do not reverse themselves in subsequent
periods
d. Permanent differences are both unusual and infrequent

36. It is the amount of income tax paid or payable for the year as determined in
applying the
provisions of the enacted tax law to the taxable income.
a. Current tax expense
b. Deferred tax expense
c. Income tax expense
d. All of these

37. It is the change during the year in an entity’s deferred tax liability and
deferred tax asset.
a. Current tax expense
b. Deferred tax expense
c. Income tax expense
d. All of these

38. Current tax expense plus deferred tax expense is

a. A meaningless sum
b. Income tax expense
c. Tax deductible expense
d. None of these

39. Under PAS 12, it is the amount attributable to the asset or liability
(recognized) for tax purposes.
a. Tax savings
b. Tax base
c. Tax shield
d. Tax benefits

40. In computing the change in deferred tax accounts, which tax rates are used?
a. Current tax rate
b. Estimated future tax rates
c. Enacted future tax rates
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 d. Past years’ tax rates

41. A temporary difference that would result in a deferred tax liability is

a. Operating loss carryforward
b. Accrual of warranty expense
c. Excess of tax depreciation over accounting depreciation
d. Subscription received in advance

42. A temporary difference that would result in a deferred tax asset is

a. Tax, penalty or surcharge
b. Dividend received on stock investment
c. Excess tax depreciation over accounting depreciation
d. Rent received in advance included in taxable income at that time of
receipt but deferred for
accounting purposes

43. All forms of consideration given by an enterprise in exchange for service

rendered by employees.
a. Employee benefits
b. Employee remuneration
c. Employer’s contribution
d. Employer’s share

44. If an employee loses all benefits if he/she is separated from the entity before
retirement,
benefits are
a. Funded
b. Unfunded
c. Vested
d. Not vested

45. What is the current service cost component of pension expense?

a. These are the best estimates of the variables that will determine the
ultimate cost of
providing post-employment benefits
b. These are assets held by an entity that is legally separate from the
reporting entity and
230
 exists solely to pay or fund employee benefits
c. It is the increase in the present value of the defined benefit obligation
resulting from
employee service in the current period
d. It is the increase in the present value of the defined benefit obligation
for services
rendered by employees in prior periods resulting from the introduction
of a retirement
benefit plan or amendment of an existing plan

46. The mandated method of determining the present value of the defined
benefit obligation.
a. Projected unit credit method
b. Entry age normal method
c. Individual level premium method
d. Aggregate method

47. Interest cost included in the net pension cost recognized by an employer
sponsoring a defined
benefit pension plan represents the
a. Amortization of the discount on unrecognized prior service cost
b. Increase in the fair value of plan assets due to passage of time
c. Increase in the benefit obligation due to passage of time
d. Shortage between the expected and actual return on plan assets

48. Under PAS 19, which of the following is deducted in the computation of the
benefit expense?
a. Fair value of plan assets
b. Expected return on plan assets
c. Actual return on plan assets
d. Actuarial loss on plan assets

49. If the actual return on plan assets is more than the expected return, the
difference is treated as
an
a. Amortization of past service cost
b. Effect of curtailment or settlement
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 c. Actuarial gain
d. Actuarial loss

50. Under a defined contribution plan, any unpaid contribution at the end of the
period should be
a. Ignored
b. Recognized as an accrued expense
c. Recognized as an accrued expense

 "Life is change. Growth is optional. Choose wisely."

SHAREHOLDERS’ EQUITY

SHAREHOLDERS’ EQUITY
In a corporation, the owner’s claim against the asset is called shareholders’ equity
or stockholders’ equity or simply equity.

In order for us to fully have a complete grasp of the significant concepts

regarding shareholders’ equity, we first need to know and understand the
activities that affect the life of the shares of stocks.

Activities that affect the life of the shares of stocks.

1. Authorization
2. Issuance
3. Reacquisition
4. Reissuance
5. Retirement

AUTHORIZATION
Accounting for the authorization of share capital will depend on what approach is
employed by the entity.
1. Memorandum Entry Method

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- No entry is made to record the authorized share capital. Only a memorandum is
made for the total
authorized share capital.

2. Journal Entry Method

- The authorization to issue share capital is recorded by debiting unissued share
capital and crediting
authorized share capital.

Unissued share capital xx

Authorized share capital xx

ISSUANCE
Accounting for the issuance of share capital will depend on two factors namely:
A. The method used (Memorandum/journal entry method)
1. Memorandum Entry Method
- When share capital is issued, it is credited to SHARE CAPITAL account.

2. Journal Entry Method

- When share capital is issued, it is credited to UNISSUED SHARE CAPITAL
account.

B. At par, below par, above par

1. Issuance at par
- no accounting problem is met. No “gain/loss”. Simply record the issuance of
shares at par as
follows:
Asset/Liabilities xx
Share Capital xx

2. Issuance at above par

- a “gain” is to be recognized. Recognize the issuance of shares as follows:

Asset/Liabilities xx
Share capital xx
Share premium xx

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 3. Issuance at below par
- a “loss” is to be recognized. Recognize the issuance of shares as follows:

Assets/Liabilities xx
Discount on share capital xx
Share Capital xx

Note: The account share capital is always recorded at par or stated value.
Share premium account is recorded in the shareholders’ equity as part
of the share
Premium account.
Discount on share capital account is recorded in the shareholders equity
as a deduction.
Our corporation code prohibits the issue of share at a discount. Thus, the
discount is not
considered a loss to the issuing entity but the share holder is held liable
therefore and
accounted as discount liability of the shareholders.

REACQUISITION
After subscription of shares, some of the subscribers may not be able to pay the
balance due in their subscription leaving the shares in delinquency and is to be
sold at public auction.

At the public auction, the shares are sold to a person called the “highest bidder”.
A highest bidder is the one who is willing to pay the “offer price” of the
delinquent shares for the smallest number of shares.

The offer price normally includes the following:

1. Balance due on subscription
2. Interest accrued on the subscription due
3. Expenses of advertising and other costs of sale

If after two public auctions the shares of stocks are not sold, the corporation is
obliged under the law to purchase or reacquire its own shares of stocks.

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This reacquisition of shares of stock by the entity shall be accounted at COST and
is recognized as TREASURY SHARES. In such a case, the pertinent entries are as
follows:

a. Treasury shares xx
Subscription receivable xx
Interest income xx
Advance on delinquency sale xx

b. Subscribed share capital xx

Share capital xx

REISSUANCE
Reissuance of entity’s own shares previously reacquired may be done at cost,
below cost, or above cost.
1. Reissuance at cost
- no accounting problem is met. Reissuance of shares at cost is simply recorded at
cost. No “gain/loss” is
recognized.
Cash xx
Treasury shares xx

2. Reissuance at below cost

- reissuance of shares at below cost is to be accounted at the total consideration
received. A “loss” is
recognized and is charged to the following in order:
1. Share premium – treasury shares
2. Retained earnings
Cash xx
Share premium- TS xx
Treasury shares xx

3. Reissuance at above cost

- reissuance of shares at above cost is to be accounted at the total consideration
received. A “gain”
235
is recognized.
Cash xx
Treasury shares xx
Share premim-TS xx

RETIREMENT
Retirement of entity’s own shares previously reacquired may be:
1. Cost is equal to par value
- simply cancel the share and its related accounts.
Share capital xx
Treasury share xx

2. Par is greater than cost

- a “gain” is recognized in cancelling the share and its related accounts.
Share capital xx
Treasury shares xx
Share premium-TS xx

3. Par is less than cost

- a “loss” is recognized in cancelling the share and its related accounts. Such loss is
debited to the
following in the order:
1. Share premium – original issuance
2. Share premium – TS
3. Retained earnings

Share capital xx
Share premium-OI xx
Share premium-TS xx
Retained earnings xx
Treasury shares xx

SPECIAL CONSIDERATIONS IN SHAREHOLDERS’ EQUITY

1. Preincorporation Subscription requirement
- 25% of shares authorized must be subscribed. 25% of shares subscribed must be
fully paid. However, in no case, shall be paid in capital be less than P5,000.

236
2. Accounting for Organization Cost
Legal fees – recognized as expense
Incorporation fees – recognized as expense
Share issuance costs – debited to share premium, if share premium is
insufficient, excess is
charged to expense.

3. Accounting for Legal Capital

The portion of the paid in capital arising from issuance of share capital which
cannot be returned
to the shareholders in any form during the lifetime of the corporation.

The amount of legal capital is determined as follows:

1. Par value shares – the aggregate par value of shares ISSUED &
SUBSCRIBED.
2. No-par value shares – total consideration received.

4. Accounting for redeemable preference share

A redeemable preference share is one which has a mandatory redemption date
or one which must
be redeemed at the option of the holder.

A redeemable preference share is considered a financial liability and therefore

classified as current
Or noncurrent liability depending on the redemption date.

A redeemable PS is not considered as compound financial liability.

Issuance of redeemable PS
Cash/other asset xx
Redeemable PS xx

Payment of dividends
Interest expense xx
Cash xx

Redemption of PS
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 Redeemable PS xx
Loss on redemption xx
Cash xx

5. Accounting for convertible PS

A convertible preference share is one which gives the holder the right to
exchange the holdings
for other securities of the issuing corporation.
A convertible PS is not considered as compound financial liability.
Conversion from PS to CS
Preference share capital xx
Share premium – PS xx
Ordinary share capital xx
Share premium – OS xx

6. Accounting for PS issued with share warrants

A convertible PS is considered as compound financial liability – the preference
share and the
warrants. Thus, consideration received shall be allocated between the
preference share and the
warrants on the basis of their RELATIVE FAIR VALUE.
Issuance of PS and warrants
Cash xx
Preference shares xx
Share premium – PS xx
Share warrants outstanding xx

Exercise of warrants
Cash xx
Share warrants outstanding xx
Ordinary share capital xx
Share premium xx

Expiration of warrants
Share warrants outstanding xx
Share premium xx

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 Note: Share warrants outstanding account is reported as part of share
premium.

7. Accounting for Donated Capital

Donations received shall be recorded at the fair value of the items received.
Accounting for the
donations of capital will depend on the following:

1. Shareholders donation – recorded at fair value and credited to DONATED

CAPITAL account.
2. Nonshareholders – recorded at fair value and recognized as either income or
liability.
a. Donation is with restrictions – recognized as liability (unearned income)
b. Donation is without restrictions – recognized as income

8. Accounting for recapitalization

Recapitalization occurs when there is a change in the capital structure of the
entity. The old
shares are canceled and new shares are issued. The typical recapitalizations
are:
1. Changes from par to no par
2. Changes from no par to par
3. Reduction of par value
4. Reduction of stated value
5. Split up
6. Split down

Changes in the par value of share capital shall be charged or credited to share
premium. If an
increase in share capital exceed share premium, the excess shall be charged to
retained earnings.

Split Up
- a transaction whereby the original shares are called in for cancelation and
replaced by a larger number accompanied by a reduction in the par value
or stated value.

239
 Split Down
- is the reverse of split up. It is a transaction whereby the original shares are
canceled and replaced by a smaller number accompanied by an increase in
the par value or stated value.

No formal entry is necessary to record share split.

Recapitalization does not affect the total stockholders’ equity.

SHARE-BASED COMPENSATION

SHARE-BASED COMPENSATION
Share-based compensation plan is a compensation arrangement established by
the entity whereby the entity’s employees shall receive shares of capital in
exchange for their services or the entity incurs liabilities to the employees in
amount based on the price of its shares.

Share-based compensation can be:

A. Equity settled
- The entity issues equity instruments in consideration for services received.
Example is share options.

B. Cash settled
- The entity incurs liability for services received and the liability is based on the
entity’s instruments. Example is share appreciation rights.

SHARE OPTIONS
Share options are granted to officers and key employees to enable them to
acquire shares of the entity during a specified period upon fulfillment of certain
conditions at a specified price.

MEASUREMENT OF COMPENSATION
A. Fair value method
- The compensation is equal to the fair value of the share options on the date of
grant.
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B. Intrinsic value method
- The compensation is equal to the intrinsic value of the share options that is –
excess of market value over option price.
- To be used only if the fair value of the share option cannot be estimated reliably.

RECOGNITION OF COMPENSATION
A. Vest immediately
- The employee is not required to complete a specified period of service before
unconditionally entitled to the share option.

B. Do not vest immediately

- The compensation is recognized as expense over the service period or vesting
period – from the date of grant to the exercise date.

SHARE APPRECIATION RIGHT

Cash settled share-based compensation shall be reported at fair value of the
liability. The entity shall remeasured the fair value of the liability at each reporting
date and at the date of settlement with any changes in fair value recognized in
profit or loss.

MEASUREMENT OF COMPENSATION
The compensation is based on the FAIR VALUE OF THE LIABILITY at the reporting
date and shall be remeasured at every year-end until it is finally settled. Any
changes in fair value are included in profit or loss. The fair value of the liability is
equal to the “excess of the market value of share over a predetermined price for
a given number of shares over a definite vesting period”.

RECOGNITION OF COMPENSATION
A. Vest immediately
- The employee is not required to complete a specified period of service before
unconditionally entitled to the share option.

B. Do not vest immediately

- The compensation is recognized as expense over the service period or vesting
period – from the date of grant to the exercise date.

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RETAINED EARNINGS

RETAINED EARNINGS
Retained earnings represent the cumulative balance of periodic net income or
loss, dividend distributions, prior period errors, changes in accounting policy and
other capital adjustments.
The following are the transactions that may affect the retained earnings account:

RETAINED EARNINGS
Ending xx Beginning xx
Net loss xx Net income xx
Errors xx Errors xx
Dividends xx

The transactions that may affect your retained earnings account have already
been discussed in the previous chapters. Let’s focus on the accounting for
dividends.

DIVIDENDS
Dividends are distributions of earnings or capital to the shareholders in
proportion to their shareholdings. Dividends can either be:

A. Dividends out of earnings

- dividends out of earnings is also called as “return on capital”. Return on capital
encompasses the
following types of dividends

1. Cash dividends
- to be settled by the payment of cash which can either be based on an
amount of peso per share or percent of par/stated value.
Declaration
Retained earnings xx
Cash dividends payable xx

242
 Payment
Cash dividends payable xx
Cash xx

2. Property dividends
- to be settled by the payment or distribution of non-cash asset.
- recorded at the fair value of the asset distributed with any change
adjusted to equity.
Declaration
Retained earnings xx
Property dividends payable xx

Payment
Property dividends payable xx
Property xx

3. Liability dividends
- liability dividends are actually deferred cash dividends. Liability
dividends may be in the form of bond and scrip.

Bonds dividends – applies to “long-term” liabilities and paid with interest.

Scrip dividends - applies to “short-term” liabilities and paid with or
without interest.

4. Stock dividends
- stock dividends are distributions of the earnings of the entity in the form
of the entity’s own shares. When stock dividends are declared, the
retained earnings of the entity is capitalized, meaning transferred to
share capital.

a. Small stock dividends

- if the stock dividends is less than 20%.
- reported at fair value on the date of declaration.

b. Large stock dividends

- if the stock dividend is 20% or more.
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 - reported at par value on the date of declaration.

B. Dividends out of capital

When capital is returned to shareholders, it is known as dividend out of capital
or liquidating
dividend. This kind of dividend is also referred to as “return of capital”.

As a rule, liquidating dividends are paid to the shareholders when the entity is
dissolved and
liquidated. During the lifetime of the entity, it is illegal to return capital to the
shareholders
because it will be in violation of “trust fund doctrine”.

However, wasting asset corporations may declare dividends which are in part
distributions of
Earnings and in part distribution of capital.

APPROPRIATION OF RETAINED EARNINGS

The appropriation of retained earnings may be described as follows:

1. Legal appropriation
- arises from the fact that the legal capital cannot be returned to the shareholders
until the entity is dissolved and liquidated.
- Thus, if an entity acquires its own shares, a portion of the retained earnings
must be appropriated for an amount equal to the cost of the treasury shares.

2. Contractual appropriation
- arises from the fact that the terms of the bond issue and preference share issue
may impose restriction on the payment of dividends.
- the appropriated balance may be described as “retained earnings appropriated
for sinking fund or bond redemption” and “retained earnings appropriated for
redemption of preference shares”.

3. Voluntary or discretionary appropriation

- is a matter of discretion on the part of management. It may arise from the fact
that management wishes to preserve the funds for expansion purposes or for
covering possible losses or contingencies.
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The appropriation accounts may be described as follows:
a. Retained earnings appropriated for plant expansion.
b. Retained earnings appropriated for increase in working capital.
c. Retained earnings appropriated for contingencies.

BOOK VALUE & EARNINGS PER SHARE

BOOK VALUE PER SHARE

Book value per share is the amount that would be paid on each share assuming
the entity is liquidated and the amount available to shareholders is exactly the
amount reported as shareholders’ equity.

The formula for the computation of book value per share is:

Total Shareholders’ Equity

Book value per share =
Number of shares outstanding

Where there are two classes of share capital, it is necessary to apportion the
shareholders’ equity between the preference share and ordinary share. The book
value per share should be computed as follows:

Preference Shareholders’ Equity

Book value per preference share =
Preference Shares Outstanding

Ordinary Shareholders’ Equity

Book value per ordinary share =
Ordinary Shares Outstanding

For purposes of apportionment between the preference share and ordinary

share, the following procedures should be observed:

1. An amount equal to the par or stated value is allocated to the preference share
and ordinary
share.

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2. Any balance of the shareholders’ equity in excess of the par or stated value is
then apportioned
taking into account the liquidation value and dividend rights of the preference
shareholders.

Computation of amount and shares outstanding:

Shares Amount
Share capital issued xx xx
Add: Share capital subscribed xx xx
Total xx xx
Less: treasury shares at par (xx) (xx)
Amount and shares outstanding xx xx

Liquidation value of preference share

The liquidation value is the amount which the preference shareholders normally
receive upon the liquidation of the corporation. The liquidation value may be
more than the par value.

Preference as to assets
The preference shareholders are entitled to payment not only for liquidation
value but also for dividend in arrears

Preference as to dividends
The preference means that if dividends are declared the preference shareholders
have the right to receive dividends first before ordinary shareholders are paid a
dividend.
When preference share has preference as to dividends, the dividend right may
be:

1. Noncumulative
- The preference share is entitled only to current year dividends.

2. Cumulative
- The preference share is entitled to all dividends in arrears.

3. Nonparticipating

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- The preference share is entitled to receive only the dividends equal to the fixed
rate.

4. Participating
- The preference share is entitled to receive dividends in excess of the basic or
fixed rate.
- Participating preference share may be fully participating with ordinary share on
a pro data basis or
participating only to a certain amount or percentage.

- However, before the preference share can participate, the ordinary share should
receive first an
amount equal to the basic preference rate, meaning preference rate times the
par value of the
ordinary share outstanding.

Special notes:
1. In the absence of specific designation, preference share is assumed to be
noncumulative and
nonparticipating.
2. Dividends in arrears usually include current dividends. Dividends in arrears in
prior years shall be
specifically disclosed, otherwise, there are no arrearages.
3. In case there are two classes of preference share with different dividend rates
and both are
participating, the lower rate shall be the basis for allocation to the ordinary
share.

EARNINGS PER SHARE

The earnings per share figure is the amount attributable to every ordinary share
outstanding during the period. Thus, the earnings per share information pertains
only to ordinary share. It is not necessary for preference share because there is a
definite rate of return for such share.

A. Basic earnings per share

- computed as follows:
Basic EPS = Net income – PS dividends
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 WACSO

If the preference share is cumulative, the preference dividend for the current
year only is deducted from the net income, whether, such dividend is declared or
not.

If the preference share is noncumulative, the preference dividend for the current
year is deducted from net income only if there is declaration.

B. Basic loss per share

If he preference share is cumulative, the preference dividend is added to the net
loss to get total loss to the ordinary shareholders.

If the preference share is noncumulative, the preference dividend is ignored

because presumably there is no declaration since there is net loss.

C. Diluted earnings per share

The computation for DEPS is similar with basic earnings per share only that there
is the presence of “dilutors”.

Dilutors refer to potential ordinary shares which has the effect of decreasing the
Basic earnings per share or increasing the basic loss per share.

The three major types of potential ordinary shares are:

1. Convertible bonds payable
2. Convertible preference share
3. Share option and warrant

The computation of diluted earnings per share is based on the “as if” scenario:
a. “As if” the convertible bond payable is converted into ordinary share.
b. “As if” the convertible preference share is converted into ordinary share.
c. “As if” the share options and warrant are exercised.

In short, the computation of diluted earnings per share will be as follows:

Net Income
Diluted earnings per share = + “As if” effect
WACSO

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Presentation
An entity shall present on the face of the income statement basic and diluted
earnings per share for income or loss.
Note: Public entities are required to present earnings per share.

 "Motivation is an external, temporary high that pushes you

forward. Inspiration is a sustainable internal glow which pulls you
forward."

SHAREHOLDERS’ EQUITY

1. Which of the following is not a characteristic of a corporation?

a. Separate legal entity c. Flexible ownership
b. Limited liability of shareholders d. Nontaxable entity

2. A primary element that distinguishes accounting for corporations from

accounting for other legal forms of business organization (e.g., partnerships) is
that
a. GAAP apply to corporations but have only little applicability to other forms
of organization
b. The corporation draws sharper distinction in accounting for sources of
capital
c. In corporation, retained earnings may be reduced only by the declaration of
dividends
d. The entity theory relates primarily to the other forms of business
organization

3. Which of the following is not among the basic rights of a shareholder?

a. To share in corporate earnings
b. To vote in the election of directors
c. To subscribe for additional share issues
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 d. To represent himself in the name of the corporation

4. The par value of an ordinary share represents

a. The book value of the share
b. The liquidation value of the share
c. The legal nominal value assigned to the share
d. The amount received by the corporation when the share was originally
issued

5. When shares are sold at an amount higher than par value, the excess over par
shall be credited to
a. Share premium c. Share options
b. Share warrants d. Retained earnings

6. Any costs incurred to issue shares above par value (i.e., share issue costs) shall
be debited to
a. Expense c. Organization cost
b. Share premium d. Retained earnings

7. Treasury shares are recorded at

a. Par value of the shares reacquired
b. Cost only if acquired above par value
c. Cost only if acquired below par value
d. Cost regardless of whether they are acquired above or below par value

8. The purchase (acquisition) of treasury shares

a. Decreases shares outstanding c. Decreases shares issued
b. Decreases shares authorized d. Has no effect on shares outstanding

9. How should a corporation reflect treasury shares on its balance sheet?

a. As part of current assets
b. As part of noncurrent assets
c. As a deduction from retained earnings
d. As a deduction from shareholders’ equity

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10. The ‘gain’ on sale (re-issuance) of treasury shares is
a. Disclosed in the notes to the financial statements
b. Considered in the computation of profit or loss
c. Credited to retained earnings
d. Credited to share premium

11. The ‘loss’ on sale (re-issuance) of treasury shares is

a. Considered in the computation of profit or loss
b. Disclosed in the notes to the financial statements
c. Debited to retained earnings even when share premium is sufficient to
absorb the loss
d. Debited to retained earnings only when share premium is insufficient to
absorb the loss

12. Which of the following is issued to shareholders of a corporation to acquire its

unissued or treasury shares within a specified time at a specific price?
a. Share option c. Share dividend
b. Share warrant d. Share split

13. An entity issued rights to its existing shareholders to purchase unissued

ordinary shares at more than par value. Share premium would be recorded
when the rights
a. Are issued c. Are exercisable
b. Are exercised d. Are not exercised

14. Share options as an equity-settled share-based compensation are

a. Rights privileges granted to existing shareholders only
b. Considered as additional compensation to the officers and employees
c. Privileges granted to company employees to acquire stocks of other entities
d. Usually offered at an option price higher than the market value of the
option shares

15. Under PFRS 2, the method used to measure employee stock options and other
payments to employees in the form of equity securities is:
a. Par value c. Selling price
b. Fair value d. Discounted cash flows

251
16. Under PFRS 2, if the fair value of the share options cannot be estimated
reliably, then share options are measured based on
a. Par value c. Theoretical parity value
b. Intrinsic value d. Appraised value

17. Under PFRS 2, a cash-settled share-based payment (e.g., share appreciation

rights) will increase which of the following elements of the financial
statement?
a. Income c. Liability
b. Asset d. Equity

18. Contributed capital does not include

a. Preference shares
b. Share premium on preference shares
c. Capital accumulated by retention of earnings
d. Capital resulting from reissuance of treasury shares at a price above its
acquisition price

19. A retained earnings appropriation is used to

a. Smooth periodic income
b. Restrict earnings available for dividends
c. Absorb a fire loss when a company is self-insured
d. Provide for a contingent loss that is probable and measurable

20. A restriction of retained earnings is most likely to be required by the

a. Purchase of treasury stock
b. Amortization of past service cost
c. Payment of last maturing series of a serial bond issue
d. Exhaustion of potential benefits of the investment credit

21. Which dividend when declared does not create a liability?

a. Cash dividend c. Scrip dividend
b. Share dividend d. Property dividend

22. Which of the following dividends is usually not debited to retained earnings?
a. Cash dividend c. Share dividend
b. Property dividend d. Liquidating dividend
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23. Dividends paid out of a financial liability (e.g., preference shares with
mandatory redemption) are
a. Not recorded
b. Charged as expense
c. Charged against retained earnings
d. Charged against related financial liability

24. When dividends are declared and paid in shares of stock,

a. Total shareholders’ equity does not change
b. Total shareholders’ equity decreases
c. Working capital decreases
d. Current ration increases

25. At what amount per share should retained earnings be reduced for a 20%
stock dividend?
a. Zero c. Market value at the date of
declaration
b. Par value d. Market value at the date of issuance

26. If the stock dividend is less than 20%, how much of the retained earnings
should be capitalized?
a. Par value of the shares
b. Fair value of the shares on the date of record
c. Fair value of the shares on the date of issuance
d. Fair value of the shares on the date of declaration

27. Dividends in arrears are

a. Dividends on common stock that have not been declared
b. Dividends on preferred stock that have been declared but not paid
c. Cumulative preferred dividends that have not been declared for a given
period of time
d. Noncumulative preferred dividends that has not been declared for a given
period of time

28. Dividends should be expensed when they come from

a. Ordinary shares
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 b. Treasury shares
c. Cumulative preference shares
d. Redeemable preference shares with mandatory redemption

29. When the total shareholders’ equity is smaller than the contributed capital,
this deficiency is called
a. A net loss c. A liability
b. A dividend d. A deficit

30. The primary purpose of quasi-reorganization is to give the entity the

opportunity to
a. Obtain relief from its creditors
b. Eliminate a deficit in retained earnings
c. Revalue understated assets to their fair value
d. Distribute shares of a newly created subsidiary to shareholders

31. When an entity goes through a quasi-reorganization, the balance sheet

carrying amounts are stated at
a. Original cost c. Replacement value
b. Original book value d. Fair value

32. Immediately after the quasi-reorganization, the retained earnings account

a. Has a zero balance
b. Remains the same as it was before the quasi-reorganization
c. Has a debit balance equal to the write-down of the assets which were
overstated
d. Is appropriated to the full amount until the company shows sign of
financial recovery

33. The accounting for quasi-reorganization usually involves

a. Write-up of assets and write-down of retained earnings
b. Write down of both assets and retained earnings
c. Write-down of assets and elimination of a deficit
d. Write-up of assets and elimination of deficit

34. A company may effect a stock split in order to

a. Lower the market price per share
254
 b. Raise the unit market price of its shares
c. Decrease the number of shares outstanding
d. Narrow down distribution of its shares to shareholders

35. Choose the most correct statement regarding a 2-for-1 share split and a 100%
share dividend.
a. Neither affect par value
b. Both cause the same reduction in retained earnings
c. Both double the number of shares outstanding
d. Both cause a significant increase in the ordinary shares account

36. Which of the following earnings per share (EPS) should be disclosed on the
face of income statement?
a. Basic earnings per share only
b. Diluted earnings per share only
c. Both basic and diluted earnings per share
d. Neither basic nor diluted earnings per share

37. EPS disclosures are

a. Encouraged for all entities
b. Required for all public and non public entities
c. Encouraged for public entities and required for nonpublic entities
d. Required for public entities and encouraged for nonpublic entities

38. In computing the basic EPS, the numerator used is the

a. Income before interests and taxes
b. Income available to ordinary shares
c. Income available to ordinary and preference shares
d. Income after interests and taxes but before preference share dividends

39. In computing the basic EPS, the denominator used is the

a. Ordinary shares outstanding at the end of the year
b. Ordinary shares outstanding at the beginning of the year
c. Weighted average ordinary shares outstanding during the year
d. Weighted average ordinary and preference shares outstanding during the
year

255
40. For purposes of computing the weighted average number of shares
outstanding during the year, a midyear event that must be treated as
occurring at the beginning of the year is the
a. Issuance of share warrants
b. Purchase of treasury shares
c. Sale of additional ordinary shares
d. Declaration and payment of share dividend

41. To compute basic EPS, the amount of preferred dividends on noncumulative

preferred stock should be
a. Disregarded
b. Added to net income, only when declared
c. Deducted from net income, only when declared
d. Deducted from net income, whether declared or not

42. To compute basic loss per share, the annual preferred dividend on cumulative
preferred stock is
a. Disregarded
b. Deducted from the net loss, whether declared or not
c. Added to the net loss, whether declared or not
d. Added to the net loss, only when declared

43. It is a financial instrument or other contract that may entitle its holder to
ordinary shares.
a. Ordinary share c. Treasury share
b. Preference share d. Potential ordinary share

44. Which of the following is not an example of a potential ordinary share (i.e.,
dilutors)?
a. Treasury shares
b. Options and warrants
c. Financial liabilities that are convertible to ordinary shares.
d. Equity instruments that are convertible to ordinary shares.

45. It is the reduction in EPS or increase in loss per share resulting from the
assumption
that potential ordinary shares will materialize (e.g., warrants are exercised;
256
 convertibles are converted).
a. Diminution c. Dilution
b. Demolition d. Anti-dilution

46. In computing diluted EPS, dividends on non-convertible cumulative preferred

stock
should be
a. Ignored
b. Deducted from net income whether declared or not
c. Deducted from net income only when declared
d. Added to net income, net of related tax

47. In computing diluted EPS, dividends on convertible cumulative preferred stock

should be
a. Ignored
b. Deducted from net income whether declared or not
c. Deducted from net income only when declared
d. Added to net income, net of related tax

48. What is the inherent justification underlying the concept of potential ordinary
shares (diluters) in
EPS computation?
a. Cost-benefit
b. Substance over form
c. Materiality
d. Timeliness

 "We aim above the mark to hit the mark."

PFRS FOR SMALL & MEDIUM-SIZED ENTITIES

Scope and Definition: Debt or Equity Secu

No public public market (in
Accountability issuin
SME
Issues General Hold257
assets in fiduc
purpose FS primary bus
Note: An entity with public accountability cannot claim compliance with the IFRS
for SMEs (even if jurisdiction permits its use)

Covered corporations as SME’s

1. Have total assets of between P3 million and P350 million or total liabilities
of between P3 million and P250 million;
2. Are not required to file financial statements under SRC Rule 68.1;
3. Are not in the process of filing their financial statements for the purpose
of issuing any class of instruments in a public market;
4. Are not holders of secondary licenses issued by a regulatory agency, such
as banks, investment houses, finance companies, insurance companies,
securities broker/dealers, mutual funds and pre-need companies; and
5. Are not public utilities

CONCEPTS AND PERVASIVE PRINCIPLES

Objective of financial statements of SMEs:
- To provide information about financial position, performance and cash
flows useful for the economic decision-making of a broad range of users.

Qualitative characteristics of information in financial statements:

- Understandability
- Relevance
- Reliability
- Materiality
- Substance over form
- Prudence
- Completeness
- Comparability
- Timeliness
- Balance between benefit and cost

258
FINANCIAL STATEMENT PRESENTATION
Set of financial statements prepared in accordance with the IFRS for SMEs
comprises:
- Statement of financial position
- Statement of comprehensive income (or a separate income statement
and statement of comprehensive income
- Statement of changes in equity
- Statement of cash flows (using direct or indirect method)
- Notes
 Explicit and unreserved statement of compliance with the IFRS for
SMEs must be made when, and only when, financial statements
comply with all requirements of the IFRS for SMEs
 Allows a true and fair override when regulatory framework permits
 Combined statement of income and retained earnings:
*Only profit or loss, dividends, error correction, change in
accounting policy
 Third statement of financial position not required
 If expenses presented by function in statement of comprehensive
income, then further disclosure by nature not required in notes

CONSOLIDATED FINANCIAL STATEMENTS

A SME that is a parent prepares consolidated financial statements unless:
- Entity is itself a subsidiary and its ultimate or intermediate parent’s
financial statements comply with full IFRSs or IFRS for SMEs; or
- Its only subsidiaries were acquired with intention of selling or disposing of
them within one year

Subsidiaries consolidated using same reporting date as parent, unless

impracticable
Uniform accounting policies

SEPARATE FINANCIAL STATEMENTS

- Permitted but not required
- Accounting policy choice to account for each of investments in
subsidiaries, associates and jointly controlled entities:
 Cost less impairment; or

259
  Fair value through profit or loss

ACCOUNTING POLICY HEIRARCHY

- When no specific guidance is available in the IFRS for SMEs, consider in
descending order:
 Guidance in the IFRS for SMEs on similar and related issues
 Definitions, recognition criteria and measurement concepts in Section
2 Concepts and Pervasive Principles
- May consider full IFRSs, but not required to do so
- No reference made to considering the pronouncements of other
standard-setters

FINANCIAL INSTRUMENTS
Two classification categories:
1. Amortized cost
2. Fair value through profit or loss

BASIC FINANCIAL INSTRUMENTS

Examples normally within scope of Section 11:
- Cash
- Demand and fixed-term deposits
- Debt instruments such as accounts, notes and loans receivable and
payable
- Bonds and similar debt instruments
- Investments in non-convertible preference shares
- Investments in non-puttable ordinary or preference shares
- Commitments to receive a loan that cannot be settled net in cash

OTHER FINANCIAL INSTRUMENTS

Examples normally within the scope of Section 12:
- Options, rights, warrants, futures, forwards
- Interest rate swaps that can be settled net in cash or by exchanging
another financial instrument
- Qualifying hedging instruments
- Asset-backed securities
- Commitments to make a loan
260
 - Commitments to receive a loan that can be settled net in cash

INVESTMENT IN ASSOCIATES AND JOINT VENTURES

- Accounting policy choice in consolidated financial statements for all
associates and / or all jointly controlled entities:
 Equity method
 Cost model (but fair value if public price quotation available)
 Fair value through profit or loss (but cost if undue cost or effort)
- Proportionate consolidation not permitted

INVESTMENT PROPERTY
Measurement:
- Fair value through profit or loss, if fair value can be determined reliably
without “undue cost or effort” on an ongoing basis
- Otherwise accounted for as PPE

Mixed-use property
- Separated between investment property and PPE
- If fair value of investment property cannot be determined reliably
without undue cost or effort, account for entire property as PPE

Property held by a lessee under an operating lease

- May be classified as investment property if:
 Otherwise would meet definition of investment property; and
 Its fair value can be measured without undue cost or effort on an
ongoing basis
- Classification alternative available on a property-by-property basis

PROPERTY, PLANT AND EQUIPMENT

Measurement after initial recognition
- Cost less accumulated depreciation and impairment losses
- Component accounting applies
- Revaluation model not permitted
- Review useful lives, residual values and depreciation methods only when
indication they have changed

261
INTANGIBLE ASSETS (OTHER THAN GOODWILL)
Measurement after initial recognition
- Cost less accumulated amortization and impairment losses
- Revaluation model not permitted
- Amortized over useful life; if unable to reliably estimate, presumed to be
10 years
- Test for impairment only when indication in all cases
- Review useful lives, residual values and amortization methods only when
indication they have changed

Useful lives
- All intangible assets are considered to have finite useful lives

Research and development expenditure

- Expense as incurred
- Capitalization of development expenditure not permitted

Acquired as part of a business combination

- Not recognized separately from goodwill if its fair value cannot be
measured reliably:
 Not separable from goodwill
 No history / evidence of exchange transactions, and estimates
depend on immeasurable variables

BUSINESS COMBINATIONS AND GOODWILL

Recognition and measurement requirements largely consistent with IFRS 3
(2004) rather than IFRS 3 (2008):
- Definition of a business combination
- Treatment of transaction costs, contingent consideration, contingent
liabilities
- Calculation of goodwill and non-controlling interest
-
Scope consistent with IFRS 3 (2008):
- Business combinations achieved by contract alone and business
combinations between mutual entities not excluded from scope

262
Goodwill
- Calculation of goodwill consistent with IFRS 3 (2004)
- Considered to have a finite useful life
- Subsequent measurement consistent with intangible assets, i.e., cost less
accumulated amortization and impairment losses
- Amortized over useful life; if unable to reliably estimate, presumed to be
10 years
- Tested for impairment only when indication

EMPLOYEE BENEFITS
Defined benefit schemes
- Accounting policy choice for actuarial gains or losses:
 Profit or loss; or
 Other comprehensive income
- Calculation of obligation:
 If necessary information can be obtained without undue cost or
effort, use projected unit credit method consistent with IAS 19
 If necessary information cannot be obtained without undue cost or
effort, a simplified approach is applied
- Actuarial valuations:
 Not required annually
 Roll-forward procedures
- Introduction, change, curtailment, settlement
 Any gain or loss recognized in profit or loss in current period

Group plans
- Permitted to recognize charge based on reasonable allocation of group
charge (if parent presents consolidated financial statements under full
IFRSs or IFRS for SMEs)

SPECIALIZED INDUSTRIES
Extractive activities
- No specific guidance
- Apply relevant sections of IFRS for SMEs

263
Agriculture
- Measure biological assets at cost less accumulated depreciation and
impairment losses if fair value is not reliably determinable without undue
cost or effort

Service concessions
- Accounting treatment like that in full IFRSs
- Not clear whether same arrangements will be classified as service
concession arrangements under full IFRSs and IFRS for SMEs

TRANSITION TO IFRS FOR SME

- Transitional provisions apply to allfirst-time adopters of the IFRS for SMEs
(including an entity that previously used full IFRSs)
- An entity can be a first-time adopter of the IFRS for SMEs only once
- Mandatory exceptions:
 Derecognition
 Accounting estimates
 Discontinued operations
 Measuring NCI
-
- Voluntary exemptions:
 Business combinations
 Share-based payments
 Fair value as deemed cost
 Revaluation as deemed cost
 Cumulative translation differences
 Deferred income tax
 Service concession arrangements
 Extractive activities
 Compound financial instruments
 Arrangements containing a lease
 Decommissioning liabilities
 Separate financial statements
- Apply transitional provisions to earliest period practicable

OTHER DIFFERENCES FROM FULL PFRS

264
Borrowing costs
- Expensed as incurred (capitalization prohibited)

Foreign currency translation

- On disposal of a foreign operation cumulative exchange differences
relating to that operation recognized in OCI are not reclassified to profit
or loss

Operating leases
- If payments are structured to increase in line with expected inflation,
then timing of recognition of income and expenditure reflects this

Inventories
- Permitted to use most recent purchase price if this approximates cost

Revenue: construction of real estate

- If accounted for as a sale of goods, then revenue recognized only upon
delivery of completed real estate to the buyer

Impairment of non-financial assets

- Test for impairment only when indication

CONSIDERATION PRIOR TO ADOPTING PFRS FOR SMEs

- Local financial reporting requirements
- Users and comparability to other entities
- Business impacts
- Long-term goals
- Group reporting
- Cost

 "Kind words can be short and easy to speak, but their echoes are
truly endless."

265
SMALL AND MEDIUM – SIZED ENTITIES

1. When is (was) the effective date of application of PFRS for SMEs in the
Philippines?
a. 13 October 2009 c. 01 January 2010
b. 03 December 2009 d. 01 January 2013

2. Statement 1: SMEs are entities that do not have public accountability.

Statement 2: SMEs are entities that publish general purpose financial
statements for external
users.
Statement 3: SMEs are entities that publish special purpose financial statements
for internal users.
a. Only statement I is true c. Only statement III is false
b. Only statement II is true d. Only statement I is false

3. Based on Philippine SEC rules, which is not among the criteria to quality as
SMEs?
a. Entities with total assets between P3 million and P350 million
b. Entities with total liabilities between P3 million and P250 million
c. Entities that are not in the process of filing FS for purposes of issuing any
class of instrument in a public market
d. Public utility companies or holders of secondary licenses issued by a
regulatory agency

4. Entities considered as holders of secondary licenses issued by a regulatory

agency are not considered as SMEs. Which of following is not among this type
of entities?
a. Public utility companies
b. Insurance and pre-need companies
c. Securities dealer/broker and mutual fund companies
d. Commercial banks, investment houses and finance companies

5. Which standard included in full PFRS is also covered by the PFRS for SMEs?
a. Earnings per share c. Interim & segment reporting
b. Business combinations d. Non-current assets held for sale

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6. What are the common measurement bases used to measured FS elements of
SMEs?
a. Historical cost and fair value
b. Historical cost, current cost and fair value
c. Historical cost, present value and fair value
d. Historical cost, current cost, present value and fair value

7. Under certain conditions, it is permitted for SMEs to replace both Statement of

Comprehensive Income and Statement of Changes in Equity with
a. Statement of Income
b. Statement of Retained Earnings
c. Statement of Income and Retained Earnings
d. Statement of Changes in Equity-Related Transactions

8. Which is not considered as Other Comprehensive Income for SMEs?

a. Some actuarial gains and losses
b. Some foreign exchange translation gains and losses
c. Some changes in fair values of hedging instruments
d. Some gains and losses on available-for-sale securities

9. Consolidated financial statements of SMEs must include the financial

statements of the entity and
its
a. Associates
b. Subsidiaries
c. Controlled special purpose entities
d. Subsidiaries and controlled special purpose entities

10. In the separate FS of a parent company that qualifies as SME, investment in

subsidiaries is accounted for by using
a. Cost less impairment or equity method
b. Equity method or fair value with changes in fair value recognized in
profit or loss
c. Cost less impairment or fair value with changes in fair value recognized in
profit or loss
267
 d. Equity method, cost less impairment or fair value with changes in fair
value recognized in profit or loss

11. Which of the following is not considered a “basic” financial instrument for
SMEs?
a. Cash and bank accounts c. Bonds and loans payable
b. Commercial papers and bills d. Options and warrants

12. What model is required in accounting for basic financial instruments or SMEs?
a. Cost model c. Revaluation model
b. Amortized cost model d. Fair value model

13. Which of the following is not considered as “other” financial instrument for
SMEs?
a. Derivatives
b. Hedging instruments
c. Investments in convertible and puttable shares
d. Investments in non-convertible and non-puttable shares

14. What model is required in accounting for “other” financial instruments of

SMEs?
a. Cost model c. Revaluation model
b. Amortized cost model d. Fair value model

15. One of the following is not used in accounting for investment in associates
and interests in joint ventures of SMEs.
a. Cost model c. Fair value model
b. Equity model d. Revaluation model

16. Statement 1: PPE of SMEs shall be accounted for using the cost model or
revaluation model.
Statement 2: Investment properties of SMEs shall be accounted for using the
cost model or fair value model.
Statement 3: Intangible assets of SMEs shall be accounted for using the cost
model or revaluation model.
a. Only statement I is true c. All statements are true
b. Only statement II is true d. All statements are false
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17. If an SME is unable to make a reliable estimate of the useful life of an
intangible asset, the life is presumed to be
a. Five years c. Twenty years
b. Ten years d. Indefinite

18. All business combinations entered into by SMEs shall be accounted for by
applying the
a. Purchase method c. Equity method
b. Pooling-of-interest method d. Purchase or pooling-of-interest
method

19. Which method is used by SMEs in recognizing revenue from rendering

services?
a. Installment method c. Percentage-of-completion method
b. Cost recovery method d. Accrual method

20. Borrowing costs incurred by SMEs shall be

a. Expensed in the period incurred
b. Capitalized as part of the cost of the qualifying assets
c. Expensed (benchmark); capitalized (alternative)
d. Capitalized (benchmark); expensed (alternative)

21. Under Section 27, Impairment of Asset for SMEs is divided into:
a. Impairment of PPE and impairment of assets other than PPE
b. Impairment of goodwill and impairment of assets other than goodwill
c. Impairment of inventories and impairment of assets other than
inventories
d. Impairment of long-term assets and impairment of assets other than
long-term assets

22. Under defined benefit plans, SMEs shall recognize all actuarial gains and
losses in the period in which they occur as part of
a. Profit or loss c. Equity section of the balance sheet
b. Other comprehensive d. Profit or loss or other comprehensive
income income

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23. Which is not a category of specialized activities cited by Section 34 of the PFRS
for SMEs?
a. Agriculture c. Extractive activities
b. Insurance d. Service concessions

24. SMEs engaged in agricultural activities shall account for biological assets using
the
a. Fair value model only
b. Cost model, only if the fair value model is not applicable
c. Fair value model, only if the cost is not applicable
d. Cost model or fair value model at the discretion of the entity

 "As one person I cannot change the world, but I can change the
world of one person."

COST ACCUMULATION for PRODUCT COSTING

1. Direct material costs are

a. Prime and conversion costs c. Conversion and manufacturing costs
b. Prime and manufacturing costs d. Prime, conversion and manufacturing cos

2. Utilities expense incurred in production facilities (e.g., water, heat and light) is
classified as
a. Factory overhead c. Prime cost
b. Period cost d. Administrative overhead

3. Wages paid to factory superintendent are

a. Conversion costs c. Prime costs
b. Manufacturing costs d. Conversion and manufacturing costs

4. Property taxes on a manufacturing plant are generally considered as

a. Non-manufacturing cost c. Semi-variable cost
b. Period cost d. Conversion cost

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5. 1st statement: JOB ORDER COSTING is the best cost accumulation procedure to
use when many batches, each differing as to product specification, are produced.
2nd statement: PROCESS COSTING is the best accumulation procedure to use
when there is a continuous mass production of like units.
3rd statement: Job order costing uses a job order sheet; process costing uses a
cost of production report.
a. True, true, true c. False, true, true
b. True, false, true d. False, false, true

6. Actual, normal and standard cost systems may be used in conjunction with
a. Process costing only c. Either job order or process costing
b. Job order costing only d. Neither job order nor process costing

7. A non-manufacturing organization may use

a. Process costing only c. Either job order or process costing
b. Job order costing only d. Neither job order nor process costing

8. In a job order cost system, direct labor costs usually are recorded initially as an
increase in
a. Factory overhead applied c. Finished goods
b. Factory overhead control d. Work in process

9. A direct labor overtime premium is charged to a specific job when the overtime
is caused by
a. Increased overall level of activity
b. Customer’s requirement for early completion of job
c. Management’s failure to include the job in the production schedule
d. Management’s requirement that the job be completed before the
annual factory vacation
closure

10. In a job-costing system, what account is debited when issuing indirect

materials to production?
a. Materials control c. Manufacturing overhead control
b. Work-in-process control d. Manufacturing overhead applied
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11. In job order costing, the application of FOH would be reflected in the general
ledger as an
increase in
a. Factory overhead control c. Work-in-process
b. Finished goods d. Cost of goods sold

12. Under-applied factory overhead results when

a. A plant is operated at less than its normal capacity
b. Factory overhead costs incurred are greater than costs charged to
production
c. Factory overhead costs are less than the cost charged to production
d. Factory overhead costs incurred are unreasonably low relative to the
units produced

13. The appropriate method for the disposition of under-applied or over-applied

factory overhead
a. Is to cost of goods sold only
b. Is to finished goods inventory only
c. Is apportioned to cost of goods sold and finished goods inventory
d. Depends on the significance of the amount

14. When should process costing be used in assigning costs to produce?

a. If the product is manufactured on the basis of each order received
b. When production is only partially completed during the accounting
period
c. If the product is composed of mass-produced homogeneous units
d. Whenever standard costing techniques should not be used

15. Which one is most likely to use process costing in accounting for production
costs?
a. Road builder c. Newspaper publisher
b. Electrical contractor d. Automobile repair shop

16. Process cost accounting is the method to be used in assigning costs to

products
a. Which are manufactured on the basis of each order received
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 b. Which are only partially completed during the accounting period
c. As an average cost per unit for all units in process during the
accounting period
d. When standard cost accounting is not used in continuous process

17. Which of the following is a characteristic of a process costing system?

a. Work-in-process inventory is restated in terms of completed units
b. Costs are accumulated by order
c. It is used by a company manufacturing custom machinery
d. Standard costs are not applicable

18. In process costing, units received by a department from another department

is treated by
receiving department as
a. Raw materials c. Finished goods
b. Work-in-process d. Equivalent units

19. In a production cost report using process costing, transferred-in costs are
similar to
a. Materials added (beginning of process)
b. Conversion costs added (during process)
c. Cost transferred to next process
d. Cost included in beginning inventory

20. In developing FOH application rate under process costing, this serves as the
denominator.
a. Actual factory overhead c. Actual direct labor hours
b. Estimated factory overhead d. Estimated direct labor hours

21. The cost per equivalent unit under the weighted average method of process
costing considers
a. Current cost only
b. Current cost plus cost of ending work in process (WIP) inventory
c. Current cost plus cost of beginning work in process inventory
d. Current cost less cost of beginning work in process inventory

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22. Current period’s cost per equivalent unit under FIFO process costing considers
current period
costs
a. Only c. Less cost of beginning WIP
b. Plus cost of beginning WIP d. Plus cost of ending WIP

23. FIFO process costing will produce the same cost of goods manufactured as the
average method
if
a. The goods produced are homogeneous in nature
b. There are no lost units
c. There is no beginning inventory
d. Beginning and ending inventories are equal

24. By-products
a. Are regarded as the main products of the joint process
b. Have relatively less sales value than joint products
c. Have relatively less sales value than scrap
d. Occur before the split-off point

25. Joint costs are used for

a. Controlling costs
b. Setting the selling price of a product
c. Determining whether to continue producing an item
d. Determining inventory costs for accounting purposes

26. Joint product costs are generally allocated using the

a. Relative sales value c. Relative profitability
b. Additional costs after split-off d. Direct labor hours

27. For purposes of allocation joint costs to joint products, the sales price at point
of sale, reduced
by cost to complete after split-off is assumed to be equal to the
a. Total costs
b. Joint costs
c. Relative sales value at the split-off
d. Sales price less a normal profit margin at the point of sale
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28. The characteristic which is most often used to distinguish a product as either a
joint product or a
by-product is the
a. Amount of labor used in processing the product
b. Amount of separable product costs that are incurred in processing
c. Amount (i.e., weight, inches, etc.) of the product produced in the
manufacturing process
d. Relative sales value of the products produced in the process

29. One of the accepted methods of accounting for a by-product is to recognize

the value of the by-
product as it is produced. Under this method, inventory costs for the by-
product would be based
on
a. An allocation of some portion of joint costs but not any subsequent
processing costs
b. Neither an allocation of some portion of joint costs plus any
subsequent processing costs
c. Neither an allocation of some portion of joint costs plus any
subsequent processing costs
d. An allocation of some portion of joint costs plus any subsequent
processing costs

30. Normal spoilage is properly classified as

a. Extraordinary item c. Product cost
b. Period cost d. Deferred charge

31. If the amount of spoilage in a manufacturing process is abnormal, it should be

classified as a
a. Deferred charge c. Period cost
b. Joint cost d. Product cost

275
32. The sale of scrap from a manufacturing process usually would be recorded as
a. Decrease in factory overhead control
b. Increase in factory overhead control
c. Decrease in finished goods control
d. Increase in finished goods control

33. ABC Company experienced scrap, normal spoilage and abnormal spoilage in
its manufacturing
process. The cost of units produced includes
a. Scrap but not spoilage
b. Normal spoilage but neither scrap nor abnormal spoilage
c. Scrap and normal spoilage but not abnormal spoilage
d. Scrap, normal spoilage and abnormal spoilage

34. In standard costing, an unfavorable price variance occurs because of

a. Price increases on raw materials
b. Price decreases on raw materials
c. Less than anticipated levels of waste in the manufacturing process
d. More than anticipated levels of waste in the manufacturing process

35. If a company follows a practice of isolating variances at the earliest time, what
would be the
appropriate time to isolate and recognize a direct material price variance?
a. When materials are issued
b. When materials are purchased
c. When materials are used in productions
d. When the purchase order is originated

36. The difference between the actual labor rate multiplied by the actual hours
worked and the
standard labor rate multiplied by the standard labor hours is the
a. Total labor variance c. Labor usage variance
b. Labor rate variance d. Labor efficiency variance

37. Excess direct labor wages resulting from overtime premium will be disclosed
in which variance?
a. Yield c. Labor efficiency
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 b. Quantity d. Labor rate

38. A company uses a two-way variance analysis for overhead: budget

(controllable) and volume.
The volume variance is based on the
a. Total overhead application rate
b. Fixed overhead application rate
c. Variable overhead application rate
d. No overhead application is allowed

39. Immaterial standard cost variance is usually closed to

a. Cost of goods sold c. Inventory units
b. Cost of goods manufactured d. Cost of goods sold and inventory units

40. The accounting system that collects financial and operating data on the basis
of the underlying
nature and extent of cost drivers is
a. Activity-based costing c. Cycle-time costing
b. Target costing d. Variable costing

41. Which of the following is not true regarding the use of activity based costing
(ABC)?
a. Several cost drivers must be identified.
b. Costs associated with non-value adding activity must be minimized.
c. The number of labor hours is used as cost driver for total production
cost.
d. Consumption ratios are computed based on the usage of identified
activity.

42. Allocation basis in activity based costing system are justified only if they lead
to
a. More accurate inventory value c. Better cost driver analysis
b. Better management decisions d. More accurate product costs

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43. In ABC system, what should be used to assign a department’s manufacturing
overhead costs to
products produced in varying lot sizes?
a. A single cause and effect relationship
b. Multiple cause and effect relationship
c. Relative net sales values of the products
d. A product’s ability to bear cost allocations

44. ABC may be used in conjunction with

a. Process costing only c. Either process or job order
costing
b. Job order costing only d. Neither process nor job order
costing

45. Which cost accumulate procedure is most appropriate for just-in-time

production system?
a. Job order costing c. Activity-based costing
b. Process costing d. Backflush costing

 "A man can do only what a man can do. But if he does that each
day he can sleep at night and do it again the next day."

BUSINESS COMBINATIONS, INSTALLMENTS SALES

& CONSTRUCTION CONTRACTS

1. It is a transaction in which an acquirer obtains control of one or more

businesses.
a. Business Combination
b. Business takeover
c. Corporate readjustment
d. Corporate spin off

2. It is the entity that obtains control of another entity which is called the
acquiree.

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 a. Acquirer c. Investor
b. Controller d. Investee

3. Two or more entities combine into a single entity that is in turn taken over by
one of the
combining entities.
a. Statutory merger
b. Statutory consolidation
c. Stock acquisition
d. All of the choices

4. Which of these relationships describe a statutory consolidation?

a. Maulach Co. + Monticana Co. = Monticana Co.
b. Kentie Co. + Reyna Co. = Kentie Co.
c. Papa Co. + Mama Co. = Papa Co. & Mama Co.
d. Ken Lloy Co. + Reyna Alda Co. = Sweet Couple Co.

5. A business combination that gives rise to a ‘parent and subsidiary’ relationship

is
a. Statutory merger c. Stock acquisition
b. Statutory consolidation d. All of these

6. It is the part of the profit and net assets of a subsidiary attributable to equity
interests that is
not owned by the parent.
a. Residual interest c. Controlling interest
b. Non-controlling interest d. Bond interest

7. An entity shall account for each business combination by applying the

a. Pooling of interest method c. Proportionate
consolidation
b. Equity method d. Acquisition
method

8. The acquisition (purchase) method of accounting for business combination

involves all the
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 following steps, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring identifiable assets acquired and liabilities
assumed
d. Recognizing and measuring goodwill and its amortization over the
useful life

9. An acquirer might obtain control of an acquiree in all of the following, except

a. By transferring cash and other assets
b. By issuing equity interests
c. By incurring liabilities
d. By acquiring interest in a joint venture

10. The consideration transferred in a business combination shall be measured at

a. Fair value
b. Carrying amount
c. Fair value or carrying amount, whichever is higher
d. Fair value or carrying amount, whichever is lower

Treatment of acquisition related costs in a business combination:

Acquisition-related costs Treatment
11. DIRECT COSTS E
Examples: legal fees; finder’s fees; brokerage fees;
audit fees
12. INDIRECT COSTS E
Examples: management salaries; depreciation &
allocated overhead
13. COST OF ISSUING EQUITY SECURITIES -APIC
Examples: SEC registration fees; cost for printing
stock certificates
14. COST OF ISSUING DEBT SECURITIES
15. CONTINGENT CONSIDERATIONS

16. The acquirer shall measure the identifiable assets acquired and liabilities
assumed at their

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 acquisition-date
a. Fair values c. Depreciable amounts
b. Carrying amounts d. Recoverable amounts

17. Goodwill recognized in a business combination should be:

a. Recognized as an intangible asset and amortized over its useful life
b. Written off against retained earnings
c. Recognized as an intangible asset and tested for impairment when a
trigger event occurs
d. Recognized as an intangible asset and tested regularly for impairment

18. Under the acquisition method, when the acquisition-date fair value of net
identifiable assets
acquired exceeds the sum of considerations transferred in a business
combination, the excess
shall be accounted for as
a. A goodwill that shall be amortized for no more than 20 years
b. A goodwill that shall not be amortized but tested regularly for
impairment
c. A gain on bargain purchase, recognized in profit or loss before doing
reassessment
d. A gain or bargain purchase, recognized in profit or loss after doing
reassessment

19. An acquirer holds 35% equity interest in an acquiree and then subsequently
purchases another
35% equity interest in order to gain control over the acquiree.
a. Business combination of entities under common control
b. Business combination achieved in stages
c. Business combination involving mutual entities
d. Business combination through joint ventures

20. Companies A and B combine on July 1 of the current year. The combination is
properly
accounted for under the acquisition method. How should the results of
operations (income) be
reported for the year ended December 31?
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 a. Combined from July 1 to December 31 and disclosed for the combined
entity from January
1 to June 30
b. Combined from July 1 to December 31 and disclosed for the combined
entity for the entire
year
c. Combined for the entire year and disclosed for the entities from
January 1 to June 30
d. Combined for the entire year and disclosed for the separate entities for
the entire year

INSTALLMENT SALES & CONSTRUCTION CONTRACTS

1. Under PAS 18, revenue from sales shall be recognized at a point when
a. Management decides it is appropriated to do so
b. The product is available for sale to the ultimate consumer
c. The entire amount of receivable has been collected from the customer
d. The entity has transferred to buyer the risks and rewards of ownership
of the goods

2. In normal sale, generally the most uncertain factor in revenue recognition

process is
a. The seller’s fulfillment of its responsibility in the transaction
b. The measurability of the resource or item to be received by the seller
c. The realizability of the resource or item to be received by the seller
d. The relevance of the resource or item received by the seller

3. The installment method of accounting violates the rule on revenue recognition

because
a. Revenue is recognized at the ‘point of sale’
b. Revenue is recognized at the ‘point of collection’
c. Revenue is recognized proportionately on the basis of ‘percentage of
completion’
d. Revenue is not recognized at all

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4. Under the installment method of accounting, each cash collection made after
the sale is composed of:
a. Cost only c. Cost and profit
b. Profit only d. None of these

5. Under the installment method of accounting, income recognized equals cash

collected multiplied by:
a. Gross profit percentage c. Return on sales
b. Net operating profit percentage d. Cost ratio percentage

6. Under the installment method of accounting, installment accounts receivable x

gross profit rate =
a. Realized gross profit c. Construction in progress
b. Deferred gross profit d. Progress billings

7. Under the cost recovery method, gross profit on an installment sale is

recognized as income
a. On the date of sale
b. In proportion to the cash collections
c. On the date the final cash collection is received
d. After cash collections equal to the cost of sales have been received

8. The installment method of accounting may be used if the

a. Installments are due in different years
b. Percentage-of-completion method is inappropriate
c. Collection period extends over more than 12 months
d. Ultimate amount collectible is indeterminate so that collection is not
reasonably assured

9. The cost recovery method

a. Is used only when circumstances surrounding a sale are so uncertain
that earlier recognition is impossible
b. Is the most common method of accounting for real estate sales
c. Is similar to percentage of completion accounting
d. is never acceptable under generally accepted accounting principles

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10. A company produces expensive equipment for sale on installment contracts.
When there is doubt about eventual collectability, the income recognition
method least likely to overstate income is
a. The installment method c. At the time of delivery
b. The cost recovery method
d. At the time the equipment is completed

11. Which revenue recognition reflects the greatest degree of uncertainty about
future events?
a. Sales method applied to sales of a department store
b. Cost recovery method applied to installment sales contract
c. Production method for a gold mining operation
d. Percentage of completion on a construction contract

12. Under PAS 11, it is a contract specifically negotiated for the construction of an
asset or combination of assets that are closely interrelated in terms of their
design, technology, function, or ultimate use.
a. Construction contract c. Future contract
b. Option contract
d. Build-operate-transfer contract

13. A construction contract in which the contractor is reimbursed for allowable or

defined costs plus a percentage of such costs or a fixed fee.
a. Fixed price contract c. Cost-plus contract
b. Variable price contract d. Market price contract

14. In selecting an accounting method for a construction project, what is the

primary factor considered?
a. The terms of payment in the construction contract
b. Dependable estimates can be made as to the extent of progress toward
completion
c. The inherent nature of the contractor’s technical facilities used in
construction
d. The method used by the contractor to account for other long-term
construction contracts

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15. The percentage of completion method of accounting for construction contract
is preferable when
a. Estimates of costs and extent of progress toward completion are
reasonably dependable
b. The collectability of progress billings from the customer is reasonably
assured
c. A contractor is involved in numerous projects
d. The contract is of relatively short duration

16. The cost recovery method of accounting for long-term construction contract is
preferable when
a. A contactor is involved in numerous projects
b. The contract entails relatively long period of construction
c. Estimates of costs to complete construction toward completion are
reasonably dependable
d. Lack of dependable estimates or inherent hazards cause forecasts to be
doubtful

17. The calculation of income recognized in the first year of a 3-year construction
contract using the percentage of completion method is generally based on
the ratio of
a. Total estimated costs to estimated costs to complete
b. Total estimated costs to actual costs incurred to date
c. Actual costs incurred to date to total estimated costs
d. Estimated costs to complete to total estimated costs

18. Which of these items may be included in the contract price of a construction
project?
a. Incentive payment c. Variation
b. Claim
d. All of these

19. An ‘incentive payment’ is

a. An instruction by the customer for the change in the scope of the work
to be performed in the contract
b. An amount that the contractor seeks to collect from a customer as
reimbursement for costs not included in the contract price
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 c. An additional amount paid to the contractor if specified performance
standards are met or exceeded
d. Not considered in determining the final contract revenue

20. The effect of a change in the estimate of contract revenue and contract cost is
accounted for as
a. Change in accounting estimate c. Prior period error
b. Change in accounting policy
d. Component of equity
21. Under the percentage of completion method, the Construction-in-Progress
(CIP) account, normally includes
a. Construction costs only c. Construction costs and
profit
b. Construction profit only d. Construction costs,
profit and progress billings

22. If Progress Billing (PB) account for a project is greater than the Construction-
in-Progress (CIP) account,
a. it should be presented as CIP (net of PB) under current asset section
b. It should be presented as CIP (net of PB) under non-current asset
section
c. It should be presented as PB (net of CIP) under current liability section
d. It should be presented as PB (net of CIP) under non-current liability
section

23. Under percentage of completion method, the Progress Billing account is a

a. Contra current asset account c. Noncurrent liability account
b. Contra noncurrent asset account d. Revenue account

24. When should an expected loss on a long-term construction contract be

recognized?
a. Immediately (cost recovery); immediately (percentage of completion)
b. Immediately (cost recovery); over the life of project (percentage of
completion)
c. Contract completion (cost recovery); over the life of project
(percentage of completion)

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 d. Contract completion (cost recovery); immediately (percentage of
completion)

 "I'd rather be optimistic and a fool, than pessimistic and right."

STATEMENT OF CASH FLOWS

1. The statement of cash flows shall be presented as a(n)

a. Supplementary financial statement
b. Integral part of the basic set of financial statements
c. Parenthetical note to the financial statements
d. Supporting schedule for amount appearing as cash and cash equivalents

2. The primary purpose of the statement of cash flows is

a. To provide relevant information about cash receipts and cash payments of
an entity during a
period
b. To help investors, creditors and other users to assess the entity’s ability to
generate positive future net cash flows
c. To disclose separately noncash investing and financing activities
d. To assess the ability of the entity to pay dividends to shareholders
3. Under PAS 7, the term “cash flows” shall include
a. Inflows of cash
b. Inflows and outflows of cash
c. Inflows and outflows of cash equivalents
d. Inflows and outflows of cash and cash equivalents

4. Cash as distinguished from cash equivalents, comprises

a. Cash on hand and demand deposits
b. Cash on hand and short-term highly liquid investments
c. Cash on hand, demand deposits, and short-term highly liquid investments
d. Cash on hand, compensating balance, and short-term highly liquid
investments

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5. The statement of cash flows shall report for a certain period cash flows that are
classified as
either
a. Operating or financing activities
b. Investing or financing activities
c. Operating or investing activities
d. Operating, investing or financing activities

6. Operating activities are

a. Principal revenue-producing activities of the entity and other activities that
are not investing or financing activities
b. Acquisition and disposal of long-term assets and other investment not
included in cash equivalents
c. Activities that result in changes in the size and composition of the
contributed equity and borrowings of the entity
d. Primarily lending and borrowing activities

7. In preparing the cash flow statement, the purchase of a 3-month treasury bill
would
a. Have no effect
b. Be treated as an outflow for financing activities
c. Be treated as an outflow for lending activities
d. Be treated as an outflow for investing activities

8. Cash flows from operating activities may be computed using

a. Direct method c. Either direct or indirect method
b. Indirect method d. Neither direct nor indirect method

9. Cash flows from investing and financing activities may be computed using
a. Direct method c. Either direct or indirect method
b. Indirect method d. Neither direct nor indirect method

10. In a cash flow statement, if used equipment is sold at a gain, the amount
shown as a cash flow from investing activities equals carrying amount of the
equipment
a. Plus the gain
b. Plus the gain and less the amount of tax attributed to the gain
288
 c. Plus both the gain and the amount of tax attributed to the gain
c. With no addition or subtraction

11. In a cash flow statement using the indirect method, depreciation is added
back to reported net earnings because depreciation
a. Is a direct source of cash
b. Reduces reported net earnings but does not involve an outflow of cash
c. Reduces reported net earnings and involves an inflow of cash
d. Is an inflow of cash to a reserve account for replacement of assets

12. How should a gain from sale of used equipment for cash be reported in a cash
flow statement using the indirect method?
a. In investing activities as a reduction of the cash inflow from the sale
b. In investing activities as cash outflow
c. in operating activities as a deduction from income
d. In operating activities as an addition to income

13. In a cash flow statement using the indirect approach for operating activities,
an increase in inventory is presented as
a. Outflow of cash c. Addition to net income
b. Inflow and outflow of cash d. Deduction from net income

14. If a company issues a balance sheet and an income statement with

comparative figures from last year, a statement of cash flows
a. Is no longer necessary, but may be issued at the company’s option
b. Should not be issued
c. Should be issued for each period for which an income statement is
presented
d. Should be issued for the current year only

ACTIVITY 1: Classify the following transactions according to the appropriate

activity by putting check marks:
CASH FLOW TRANSACTIONS OPERATING INVESTING FINAN
Proceeds from issuance of debt and equity instruments X
Payments to acquire trading securities X
Payments to acquire securities other than trading securities X

289
Payments to acquire PPE, intangibles and other long-term X
assets
Receipts from sale of goods and rendering of services X
Payments to owners to acquire or redeem shares X
Receipts from royalties, fees, commission and other revenues X
Payment for futures contracts and interests in joint ventures X
Payment to suppliers for goods and services X
Cash advances and loans made by non-financial entities X
Cash advances and loans made by financial entities X
Payments by a lessee for a finance lease liability X
Income tax payments and refunds X

ACTIVITY II: Identify the benchmark and allowed alternative treatments under
PAS 7 for the following cash flow transactions:
Benchmark treatment Alternative treatment
Interests received O I
28 Interests paid O F
29 Dividends received O I
30 Dividends paid F O

ACTIVITY III: Indentify the treatment of the following items in computing the
operating cash flows using the INDIRECT method. Indicate:
(+) if added to net income
(-) if deducted from net income
(0) if not considered under indirect method

31 Depreciation of building +
32 Increases in trade payables +
33 Decreases in accounts receivable +
34 Payment of interests on bonds 0
indebtedness
35 Loss on sale of property +
36 Increases in inventories -
37 Impairment of held-to-maturity securities +
38 Decreases in trade accrued expenses -
39 Receipt of dividends from associate 0
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 40 Gain on sale of long-term investments -

GOVERNMENT ACCOUNTING

1. Per PD 1445, it is the process of analyzing, recording, classifying, summarizing

and communicating all transactions involving receipts and dispositions of
government funds and interpreting the result thereof.
a. Cost accounting c. Government accounting
b. Financial accounting d. Government auditing

2. What is the legal basis of the New Government Accounting System (NGAS)?
a. RA 9298
b. 1987 Constitution of the Philippines
c. CoA Circular No. 2002-003
d. PD 1445

3. NGAS was made effective to all national and local government units (except
barangays) starting
a. January 1, 2001 c. January 1, 2003
b. January 1, 2002 d. January 1, 2004

4. The objectives of NGAS include all of the following, except

a. To simplify government accounting and its eventual computerization
b. To adopt a system that is conformity with Philippine Financial Reporting
Standards (PFRS)
c. To keep close tabs on erring officers that misappropriate government
funds
d. To generate periodic and relevant financial reports for better monitoring
of performance

5. Which is not charged with the government accounting responsibility?

a. Commission on Audit (COA)
b. Department of Budget and Management (DBM)
291
 c. National Government Agencies
d. Legislative Department

6. It is the government body that keeps the general accounts of the government
and prepares the annual financial statements of the national government,
local government agencies and government-owned or controlled operations
(GOCCs)?
a. Commission on Audit
b. Bureau of Treasury
c. Department of Budget and Management
d. Department of Finance

7. What are the components of the financial statements (FS) under NGAS?
a. Balance sheet, statement of income and expenses and notes to FS
b. Balance sheet, statement of income and expenses and cash flow
statement
c. Balance sheet, statement of income and expenses and statement of
government equity
d. Balance sheet, statement of income and expenses, cash flows statement,
statement of government equity and notes to the FS

8. It shall be responsible for the approval of accounting system for government

agencies and the formulation and implementation of the National Budget.
a. DBM c. Bureau of Treasury
b. CoA d. Philippine Congress

9. It is a system of prescribing the procedures for recording appropriations,

allotments and obligations.
a. Fund accounting c. Obligation accounting
b. Budgetary accounting d. Treasury disbursement coding
system

10. It is an authorization made by law or other legislative enactment, directing

payments of goods and services out of government funds under specified
conditions or for specific purposes
a. Allotment c. Appropriation
b. Obligation d. Malversation
292
11. It is the authorization issued by the DBM to an agency thereby enabling the
latter to incur obligation up to a specified amount that is within a legislative
appropriation.
a. Allotment c. Appropriation
b. Obligation d. Malversation

12. Under NGAS, allotments by DBM are recorded in the registries

a. Monthly c. At the beginning of the period
b. Quarterly d. At the end of the period

13. It is the allotment by the Central office to its Regional office.

a. Regular allotment c. Ordinary Allotment
b. Suballotment d. Secondary Allotment

14. It refers to the commitment by a government agency arising from an act of a

duly authorized official that binds the government to the immediate or
eventual payments of a sum of money.
a. Allotment c. Appropriation
b. Obligation d. Malversation

15. It is an authorization issued by the DBM to government agencies to withdraw

cash from the National Treasury through the issuance of Modified
Disbursement System checks.
a. Allotment c. Appropriation
b. Obligation d. Notice of Cash Allocation

16. The phase in the national budget cycle that involves the comparison of
performance with predetermined plans and the evaluation of expenditures
and performance is called
a. Execution c. Preparation
b. Authorization d. Accountability

17. The following are the systems followed in the NGAS, except
a. Commercial accounting c. Responsibility accounting
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 b. Double-entry bookkeeping d. Fund accounting

18. What is the basis of accounting under the NGAS?

a. Cash basis c. Modified accrual
b. Accrual basis d. Modified cash

19. The modified accrual basis means

a. Income is recognized when received while expenses are recognized
when incurred
b. Income is recognized when earned while expenses are recognized when
paid
c. Income is recognized when received while expenses are recognized when
paid, except for transactions that are required by law to be accounted for
under other basis
d. Income is recognized when earned while expenses are recognized when
incurred, except for transactions that are required by law to be
accounted for under cash and other bases

20. Which is not a basic feature of NGAS?

a. One-fund concept
b. Two-column trial balance
c. Three-digit account number system
d. Four-digit responsibility account coding structure

21. Which is not a basic feature of NGAS?

a. Straight-line depreciation
b. Allowance for doubtful accounts
c. Corollary and negative (red) entries
c. Allowance for doubtful accounts
d. Perpetual inventory system

22. Journals and ledgers are the book of accounts of the national government
agencies. Which of the following journals shall be used under NGAS?
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 a. Journal of checks issued
b. Journal and analysis of obligations
c. Journal of bills rendered
d. General journal

 NATIONAL GOVERNMENT Books: cash journal, general journal, general

ledger, subsidiary ledger
 REGULAR AGENCY Books: cash receipts journal, cash disbursements journal,
check disbursements journal, general journal, general ledger and subsidiary
ledger.

23. This serves as the basis for recording transactions in the general journal.
a. Journal Entry Voucher (JEV) c. Government bidding files
b. Source documents d. Government contractor form

24. Which of the following is not a Regular Agency Book?

a. General journal c. Cash journal
b. General ledger d. Check disbursement journal

25. Under NGAS, supplies and materials purchased for inventory purposes are
recorded using
a. First-in, first-out (FIFO) c. Weighted average
b. Last-in, first-out (LIFO) d. Moving average

26. Once a government agency receives Notice of Cash Allocation (NCA), it shall
debit “Cash-National Treasury, Modified Disbursement System” and credit
a. NCA – Local Government
b. NCA – National Government
c. Subsidy Income – Local Government
d. Subsidy Income – National Government

NOTE: Notice of Cash Allocation (NCA) is the authorization by DBM to an agency

to withdraw cash from the National Treasury through the issuance of Modified
Disbursement System checks.

27. Petty cash fund being maintained by government agencies shall be

maintained under
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 a. Fluctuating fund system c. Either of these
b. Imprest system d. Neither of these

28. Under NGAS, the standard residual value of depreciable assets is equal to
a. 10% of cost c. P1,000
b. Zero d. P5,000

29. It represents all funds received by the government from taxes, grants, aids
and subsidies.
a. Government income c. Cash fund
b. Government surplus d. Borrowing

30. What are the two major classifications of government income?

a. National and local income c. External and internal income
b. General and specific income d. Any of these

31. Specific income accounts of the government include all of the following,
except
a. Taxes imposed on income c. Taxes on international trade
b. Taxes imposed on properties d. Grants and donations

32. Which is not a major classification of government expenses?

a. Personal services
b. Financial expenses
c. Selling and administrative expenses
d. Maintenance & other operating expenses

33. Personal services in government entities would normally include

a. Advertising, rent, insurance and gasoline
b. Salaries, bonuses, seminar and telephone
c. Travels, training, seminar and telephone
d. Bank charges, interest and foreign currency exchange losses

34. These accounts are closed to the government equity account at the end of the
period.
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 a. Balance sheet accounts c. Guarantee deposits
b. Intermediate accounts d. Allowance for doubtful accounts

NOTE: Intermediate accounts include cost of goods sold, income summary, prior
period errors, retained operating surplus, subsidy to regional office and subsidy
to operating unit.

35. A government agency shall maintain which of the following registries for
allotments and obligations?
a. Registry of Allotments and Obligations – Personal Services (RAOPS)
b. Registry of Allotments and Obligations – Maintenance & Other Operating
Expenses (RAOMO) & Registry of Allotments and Obligation – Financial
Expense (RAOFE)
c. Registry of Allotments and Obligations – Capital Outlay (RAOCO)
d. All of the choices

36. In controlling and monitoring the appropriations and allotment, DBM shall
maintain the following registries, except
a. Registry of Appropriation & Allotments (RAPAL)
b. Registry of Special Purpose Fund Appropriation (RESPFA)
c. Registry of Allotments & NCA (RANCA)
d. Registry of Notice of Cash Allocation and Replenishments (RENREP)

37. Which of the following is not included in the accounting reports of the
government?
a. Balance sheet and cash flow statement
b. Statement of retained earnings
c. Statement of income and expenses
d. Preclosing and postclosing trial balance

38. How frequent shall a government unit covered by NGAS prepare financial
reports?
a. Monthly c. Semi-annually
b. Quarterly d. Annually

39. Under NGAS, how frequent should the trial balance be prepared?
a. Monthly c. Semi-annually
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 b. Quarterly d. Annually

40. This consists of cash and resources of the government that are available for
any purpose.
a. General fund c. Trust fund
b. Special fund d. Depository fund

41. Fund administered by government under a fiduciary capacity is referred to as

a. General fund c. Trust fund
b. Special fund d. Depository fund

42. Which is (are) a special purpose fund created as required by law or by a donor
agency?
a. Miscellaneous Personnel Fund c. Organizational Adjustment Fund
b. Calamity Fund d. All of the choices

43. Which is not a local government fund?

a. General Fund c. Special education fund
b. Infrastructure fund d. Pork barrel fund

44. A local government fund that constitutes the annual contribution from city or
municipality in the amounts approved by law for each barrio which is spent solely
for community development projects.
a. Infrastructure fund c. Trust fund
b. Special education fund d. Barrio development fund

45. Disbursement of local funds must be approved by

a. Division head c. Accountant
b. Local administrator d. Local chief executive

TERMINOLOGIES
1. A government official that disburses government funds beyond approved
budget may be charged with
a. Technical malversation c. Estafa
b. Money laundering d. Graft and corruption

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2. The activities necessary to perform a major purpose for which a government
entity is established.
a. Program c. Resources
b. Project d. Internal control

3. It is a compound of program covering a homogeneous group of activities that

result in the accomplishment of an identifiable output.
a. Resources c. Project
b. Program d. Expected results

4. The services, products or benefits accruing to the public estimated in terms of

performance target.
a. Resources c. Project
b. Program d. Expected results

5. The actual asset of the government agency such as cash, receivables, land and
buildings.
a. Resources c. Project
b. Program d. Expected results

6. A national budget designed wherein total estimated revenue is more than total
estimated expenditures.
a. Supplemental budget c. Line item budget
b. Balance budget d. Special budget

7. This type of budget focuses on the objects of expenditure such as salaries and
wages, traveling expenses, freight, supplies, materials and equipment.
a. Line item budget c. Special budget
b. Performance budget d. Supplemental budget

8. This is a process in budget preparation that requires systematic consideration

of all programs, projects and activities with the use of defined ranking
procedures, and does not accept the prior year’s budget as a starting point for
analysis.
a. Zero-based budgeting c. Performance budgeting
b. Balanced budgeting d. Special budgeting

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9. A covering letter in transmitting an agency’s accounting reports to CoA, DBM
and other agencies.
a. Pre-closing trial balance
b. Post-closing trial balance
c. Statement of management responsibility
d. Notes to the FS

10. It is the allotment release by Local Government Units (LGU) or Department of

Budget and Management to barangays.
a. Internal Revenue Allotment (IRA) c. Income from grants and
donations
b. Barangay Social Fund d. Subsidy - LGU

 "Work like you don't need the money, love like you've never been
hurt and dance like no one is watching."

FOREIGN CURRENCY & HYPER INFLATION

1. It is the currency of the primary economic environment in which the entity

operates.
a. Functional currency c. Home currency
b. Presentation currency d. Host currency

2. Under PAS 21, which is not among the factors considered in determining an
entity’s functional currency?
a. The currency that mainly influences the sales price of goods and services
b. The currency that mainly influences the costs of the entity
c. The currency that is most internationally acceptable for trading
d. The currency in which funds from financing activities are generated

3. It is the currency other than the functional currency of the entity.

a. Fake currency c. Presentation currency

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 b. Foreign currency d. Forfeited currency

4. It is the spot exchange rate on the balance sheet date.

a. Historical rate c. Closing rate
b. Passing rate d. Inflation rate

5. The most relevant exchange rate to be quoted by a bank to an imported would

be:
a. Selling spot rate c. Forward rate
b. Buying spot rate d. Backward rate

6. These are money held and financial assets to be received and financial liabilities
to be paid in fixed or determinable amount of money.
a. Foreign reserves c. Non-monetary items
b. Monetary items d. Financial instruments

7. Which is incorrect in reporting foreign currency transactions at the balance

sheet date?
a. Foreign currency monetary items shall be reported using the closing rate.
b. Foreign currency non-monetary items shall be reported using the closing
rate.
c. Foreign currency non-monetary items measured at historical cost shall be
translated using the exchange rate at the date of transaction.
d. Foreign currency non-monetary items measured at fair value shall be
translated using the exchange rate existing when the fair value was
determined.

8. Exchange differences arising from foreign currency transactions shall be

a. Recognized only when settled
b. Recognized as a component of equity (other comprehensive income)
c. Recognized in the profit or loss in the period in which they arise
d. Capitalized if the differences resulted from severe devaluation of a
currency

9. An exchange difference that results from a severe devaluation of currency

against which there is no practical means of hedging shall be charged to

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 a. Deferred foreign exchange loss and amortized over the useful life of the
asset
b. Related asset and amortized over the useful life of the asset
c. Foreign exchange loss, recognized in the income statement
d. Foreign exchange loss, recognized in the equity section of the balance
sheet

10. It is an entity that is a subsidiary, associate, joint venture or branch of

reporting entity, whose activities is base or conducted in a country other
than the country of the reporting entity.
a. Foreign counterpart c. Foreign operation
b. Foreign affiliate d. Multinational company

11. It is the currency in which the financial statements are presented

a. Fake currency c. Presentation (measurement) currency
b. Foreign currency d. Functional currency

12. It is the process of expressing the foreign currency financial statements (FS) of
foreign operations in terms of the presentation currency of the reporting
entity.
a. Foreign currency transaction c. Foreign currency speculation
b. Foreign currency translation d. Foreign currency hedging

Indicate the exchange rate to use in translating the FS of foreign operations (e.g.,
foreign subsidiary) into the presentation currency of the reporting company (e.g.,
parent company). Choose one from the following rates:
CLOSING RATE AVERAGE RATE HISTORICAL RATE

Foreign Currency Translation

Non-Hyperinflationary Economy Hyperinflationary Economy
Assets 13 CR 17
Liabilities 14 18
Shareholders’ Equity 15 19
Income & Expenses 16 20

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Under PAS 21, income and expenses in income statement are translated at the
exchange rate at the date of transaction or the average rate for the period when
this is a reasonable estimation.

21. In translating the financial statements of foreign operations, income and

expenses are translated
at
a. Closing rate c. Exchange rate at the date of transaction
b. Future rate d. Forward rate

22. Exchange differences arising from foreign currency translation are

a. Recognized only when settled
b. Recognized as a component of equity (other comprehensive income)
c. Recognized in the profit or loss in the period in which they arise
d. Capitalized if the differences resulted from severe devaluation of a
currency

23. Under PAS 29, which of the following situations does not indicate that
hyperinflation exist?
a. People prefer to keep their wealth in non-monetary assets.
b. People prefer to keep their wealth in relatively stable foreign currency.
c. The cumulative inflation rate over three years exceeds or is approaching
50%.
d. Credit sales and purchase take place at prices that compensate for the
expected loss of purchasing power during the credit period even if
credit period is short.

24. The FS of an entity that reports in the currency of a hyperinflationary

economy are stated in
terms of:
a. Historical cost c. Lower of cost or market value
b. Current cost d. Measuring unit current at the BS
date

25. The restatement of FS of an entity that reports in the currency of a

hyperinflationary economy is accomplished by means of
a. Nominal peso accounting c. Split accounting
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 b. Constant peso accounting d. Intrinsic accounting

26. In hyperinflationary economy, balance sheet amounts not expressed in the

measuring unit current at balance sheet date are restated by applying the
a. General price index c. Suggested retail price index
b. Consumer price index d. Manufacturer price index

27. In a hyperinflationary economy, monetary items

a. Are restated using the general price index
b. Are restated using the specific price index
c. Are not restated because they do not represent money held and items to
be received or paid in money
d. Are not restated because they are already expressed in terms of the
measuring unit at the balance sheet date

28. Which is not considered as a monetary item for purposes of restating the FS?
a. Allowance for doubtful c. Discount on bond payable
accounts
b. Accumulated depreciation d. Advances to employees

29. The gain or loss on the net monetary position in a hyperinflationary economy
shall be charged to
a. Experience c. Retained earnings
b. Profit or loss d. Other comprehensive income

30. An entity should present information on the effect of changing prices in a

hyperinflationary economy in
a. The auditor’s report c. The notes to the financial statements
b.The body of financial d.Themanagement report to
statements shareholders

 "The greatest revenge is to accomplish what others say you

cannot do."

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NOT- FOR – PROFIT ORGANIZATIONS

1. It is a legal and accounting entity that is operated for the benefit of society as a
whole rather than for the benefit of an individual proprietor or group of
partners or stockholders.
a. Nongovernmental c. Government-owned & controlled
organization corporations
b. Nonprofit organization d. De facto corporations

2. Nonprofit organizations (NPO) include all of the following, except

a. Professional associations c. Hospitals
b. Schools, colleges and d. Government-owned & controlled
universities corporations

3. Which of the following is not necessarily regarded as nonprofit organizations?

a. Cooperatives c. Country clubs
b. Partnerships d. Labor unions

4. The characteristics of NPO that resemble the characteristics of governmental

units include all of the following, except
a. Stewardship of resources c. Importance of budget
b. Financing of citizenry d. Governance by board of directors

5. The characteristics of NPO that resemble the characteristics of business entities

include all of the following, except
a. Governance by board of c. Use of accrual basis
directors
b.Measurement of cost d. No profit motivation
expirations

6. Financial statement of not-for-profit organization focuses on

a. Basic information for the organization as a whole
b. Standardization of funds nomenclature
c. Inherent differences of not-for-profit organization that impact reporting
presentations
d. Distinctions between current fund and noncurrent fund

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7. Financial statements of nonprofit organization includes all of the following,
except
a. Statement of financial position c. Statement of activities
b. Statement of changes in equity d. Statement of cash flows

8. The statement of financial position of nonprofit organization displays the

organization’s
a. Assets, liabilities and equity c. Excess of assets over liabilities
b. Assets, liabilities and fund d. Assets, liabilities and net assets
balance

9. The statement of financial position of NPO shall report separately 3 classes of

net assets that
exclude
a. Donated net assets c. Temporarily restricted net assets
b. Unrestricted net assets d. Permanently restricted net assets

10. Which of these classifications is required for reporting of expenses by all not-
for-profit
organizations?
a. Natural classifications in the statement of activities of notes to the FS
b. Functional classification in the statement of activities or notes to the FS
c. Functional classification in the statement of activities and natural
classification in a matrix format in a separate statement
d. Functional classification in the statement of activities and natural
classification in the notes to the FS

11. A voluntary health and welfare organization is required to prepare a

a. Statement of changes in equity
b. Statement of comprehensive income
c. Statement of functional expenses
d. Statement of management responsibility

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12. Accounting for nonprofit organizations is essentially
a. Fund accounting c. Commercial accounting
b. State accounting d. Managerial accounting

13. A fund commonly used by nonprofit organizations is least described by which

of the following terms?
a. Restricted fund c. Calamity fund
b. Unrestricted fund d. Endowment fund

14. This type of fund includes all of the assets of a nonprofit organization that are
available for use as authorized by the governing board and are not restricted
for specific purposes. It is regarded as
a. Unrestricted fund c. Permanent endowment fund
b. Restricted fund d. Term endowment fund

15. This type of fund is used to account for asset available for current use but
expendable only as authorized by the donor of the assets.
a. Unrestricted fund c. Plant fund
b. Restricted fund d. Agency fund

16. Net assets that are restricted by the governing board of a non-government,
not-for-profit organization are reported as part of:
a. Permanently restricted net assets
b. Temporarily restricted net assets
c. Unrestricted net assets
d. Any of these, depending on the terms

17. This type of fund is used to account for assets held by the nonprofit
organization acting as
custodian.
a. Annuity fund c. Agency fund
b. Life income fund d. Loan fund

18. The revolving fund established by a nonprofit university for the purpose of
granting loans to students to satisfy their school needs.
a. Annuity fund c. Loan fund
b. Life income fund d. Endowment fund
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19. This type of fund is established for the land, building and equipment of
nonprofit organizations.
a. Endowment fund c. Annuity fund
b. Plant fund d. Life income fund

20. This type of fund is established for assets contributed to a nonprofit

organization with the stipulation that the organization shall pay specified
fixed amount periodically to a designated beneficiary for a specified period
of time.
a. Annuity fund c. Agency fund
b. Life income fund d. Loan fund

21. Which of these describe the behavior of (1) annuity fund and (2) life income
fund?
a. (1) fixed fund (2) variable fund c. (1) fixed (2) fixed
b. (1) variable fund (2) fixed fund d. (1) variable (2) variable

22. A type of fund wherein the principal must be maintained indefinitely in

revenue producing investments and only the revenue from investments may
be expended.
a. Agency fund c. Life income fund
b. Annuity fund d. Permanent endowment fund

23. A type of fund wherein the principal may be expended after the passage of
certain period or the occurrence of an event specified by the donor.
a. Permanent endowment fund c. Term endowment fund
b. Quasi-endowment fund d. Current endowment fund

24. Unconditional promises to give (pledges) are recognized as contribution

revenue when
a. The promise is received c. The time or purpose restriction is
satisfied
b. The related receivable is d. The future event binding the promisor
collected occurs
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25. Unconditional promises to give that are collectible within one year of the
financial statement date
a. Should be reported at their gross amount
b. Should be reported at the gross amount less an allowance for
uncollectible accounts
c. Should be reported at the present value of the amounts expected to be
collected
d. Should not be reported until collected

26. For a private NPO, when is a donor’s conditional promise to give considered
unconditional?
a. Only when the condition is substantially met
b. When the possibility that the condition will not be met is remote
c. When the conditional promise is made
d. When the cash or other asset promised is received

27. Facilities and materials contributed to a nonprofit organization shall be

measured at
a. Fair value at the time of donation
b. Fair value at the time of first use
c. Book value of the donor
d. Any of these

28. Fund raising expenses of nonprofit organization are displayed in the

statement of activities as
a. Expenses, part of program services
b. Expenses, part of supporting services
c. Deferred expenses
d. Contra-revenue

29. The cash flow statement for a nonprofit hospital should report cash flows
according to which of the following classifications?
a. Operating and investing activities
b. Investing and financing activities
c. Operating and financing activities
d. Operating, investing and financing activities
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30. The “contractual adjustment account” of a nonprofit hospital is a (an)
a. Expense account c. Loss account
b. Contra-revenue account d. Asset account

 "You can't do anything about the length of your life, but you can
do something about its width and depth."

 "When odds are one in a million, be that one."

 "Perfection consists not in doing extraordinary things, but in

doing ordinary things extraordinarily well."

 "Decision is often the difference between greatness and

mediocrity. In every man's life there comes a time when he must
search for a cause, a work, an ideal to which he can give himself.
Whether he says 'Yes' or 'No' to the challenge will determine his
future."

 "Wise is the person who profits from the mistakes of the past,
recognizes the opportunities of the present, and anticipates the
challenges of the future."

 "Words, like tranquil waters behind a dam, can become reckless

and uncontrollable torrents of destruction when released without
caution and wisdom."

People always come into your life for a reason, a season and a
lifetime. When you figure out which it is, you know exactly what to
do.

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 When someone is in your life for a REASON, it is usually to meet a
need you have expressed outwardly or inwardly. They have come to
assist you through a difficulty, or to provide you with guidance and
support, to aid you physically, emotionally, or even spiritually.
They may seem like a godsend to you, and they are. They are there
for a reason, you need them to be. Then, without any wrong doing on
your part or at an inconvenient time, this person will say or do
something to bring the relationship to an end. Sometimes they die,
Sometimes they just walk away. Sometimes they act up or out and
force you to take a stand. What we must realize is that our need has
been met, our desire fulfilled; their work is done. The prayer you sent
up has been answered and it is now time to move on.

When people come into your life for a SEASON, it is because your
turn has come to share, grow, or learn. They may bring you an
experience of peace or make you laugh. They may teach you
something you have never done. They usually give you an
unbelievable amount of joy. Believe it! It is real! But, only for a
season. And like Spring turns to Summer and Summer to Fall, the
season eventually ends.

LIFETIME, relationships teach you a lifetime of lessons; those

things you must build upon in order to have a solid emotional
foundation. Your job is to accept the lesson, love the person/people
(anyway);, and put what you have learned to use in all other
relationships and areas in your life. It is said that love is blind but
friendship is clairvoyant.
Thank you for being part of my life.....

- Sir Juls

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