AVERAGE ROUND

1. The following statements are based on PAS 28 (Investment in Associates):

Statement I: An investment in an associate shall be accounted for using the equity method (benchmark) or cost
method (alternative).
Statement II: An investor shall discontinue the use of equity method from the date when it ceases to have
significant influence over an associate and shall account for the investment in accordance with PFRS 9.
Statement III: On the loss of significant influence, the investor shall measure at historical cost any investment
the investor retains in the former associate.
a. Only statement I is false
b. Only statement II is true
c. Only statement III is true
d. All of the statements are false
Answer: B

2. On January 1, 2022, SUN CORPORATION purchased a copyright for P500,000. The estimated useful life and
legal life of the copyright is 10 years and 12 years, respectively. During 2023, management determined that the
remaining useful life of the copyright was only 5 years. Legal costs of successfully defending the copyright
totalling to P50,000 was incurred on June 30, 2023.
On January 1, 2023, SUN signed an agreement to operate as a franchisee of another entity for an initial
franchise fee of P300,000. Of this amount, P30,000 was paid when the agreement was signed and the balance
was payable in three annual payments of P90,000 each, beginning December 31, 2023. The agreement provides
that the down payment is not refundable, and no future services are required of the franchisor. The present
value on January 1, 2023 of the three annual payments discounted at 10% (the implicit rate for a loan of this
type) is P224,100. The agreement also provides that 10% of the revenue from the franchise must be paid to the
franchisor annually. SUN's revenue from the franchise for 2023 was P2,000,000. SUN estimates the useful life
of the franchise to be ten years.
What is the total amount charged to profit or loss in 2023?
A. 365,410
B. 387,820
C. 337,820
D. 362,410
Answer: B
Solution:
Amortization expense - copy right (450,000/5) 90,000
Legal Fees 50,000
Interest expense - note payable (224,100*10%) 22,410
Amortization expense - franchise (254,100/10) 25,410
Continuing franchise fee (2,000,000*10%) 200,000
387,820
3. On July 1, 2022, IRON MAN CORP. a calendar year corporation, purchased the rights to a mine. The total
purchase price was P40,000,000, of which P5,000,000 was allocable to the land. As of that date, the total
estimated reserves were 3,600,000 tons. IRON MAN was expecting an extraction of 50,000 tons per month.
Exploration costs on the property amounted to P5,000,000, one-fourths of which resulted to dry holes.
IRON MAN’s accounting policy is to use successful effort method in accounting for its exploration costs.

The entity is legally required to restore the land to a condition appropriate for resale at an undiscounted
amount of P1,000,000. The market rate of interest is 10% at the date of transaction. (Round-off the present
value factors to two decimal places if necessary).

The entity constructed buildings on the site and was completed on September 30, 2022 at a total cost of
P5,500,000. The useful life of the building is 15 years with a residual value of P500,000. The depreciation of
the building are 60% attributable to mining operations and the remainder was attributable to operating
expenses.

The mining operations started when the building was completed and three-fourths of the total mineral mined
was sold during 2022

What is the total amount of expense in the statement of profit or loss for the year ended 2022?

A. 2,090,125
B. 2,128,375
C. 2,373,000
D. 2,109,625

Answer: D

Solution:

Acquisition cost 40,000,000

Exploration cost (5,000,000 x 3/4) 3,750,000
Restoration cost (1,000,000 x 0.39) 390,000
Total cost of wasting assets 44,140,000
Depletion 39,140,000/3,600,000 tons x 30,000 x 3 (978,500)
Carry amount, 12/31/2022 43,161,500

Depletion expensed (978,500 x 3/4) 733,875

Exploration cost (5,000,000 x 1/4) 1,250,000
Depreciation of building expensed:
Inventoriable [(5,000,000/3,600,000 tons) x 30,000 x 3) x 60% x 3/4] 56,250
Non-inventoriable [(5,000,000/3,600,000 tons) x 30,000 x 3) x 40%] 50,000
Interest expense (390,000 x 10% x 6/12) 19,500
Total D 2,109,625
4. The following information was included in the bank reconciliation for KAGURA CORP. for July of 2022:

Checks & charges recorded by bank in July, including a July service charge of P3,800, P942,600; Service
charge made by bank in June and recorded in books in July, P2,200; Customer's NSF check returned as a
bank charge in July (no entry made in books), 8,000; Customer's NSF check returned in June, recorded by the
company in July, P25,000; Outstanding checks in July 31, P400,000; Outstanding checks for June, P345,000;
Checks issued in July for P30,000 recorded by the company as, P2,000; Erroneous bank charge in July,
P20,000; Erroneous bank credit in June corrected in July, P50,000; and Erroneous book receipt in June
corrected in July, P10,000

What is the unadjusted disbursement per book on July 31, 2022?

A. 972,600
B. 920,600
C. 932,600
D. 925,000
Answer: D
Solution:
Disbursements per bank 942,600
Outstanding checks in June (345,000)
Outstanding checks in July 400,000
Erroneus bank charge in July (20,000)
Erroneous bank credit in June (50,000)
Adjusted disbursements 927,600

Disbursements per book (SQUEEZE) (925,000) D

Service charge - June (2,200)
Service charge - July 3,800
NFS Checks - June (25,000)
NFS Checks - July 8,000
Eroneous recording of issued check 28,000
Adjusted disbursement (10,000)
927,600

5. S1: Special purpose financial reports, such as prospectuses and computations prepared for taxation purposes,
are within the scope of the Conceptual Framework.

S2: If there is a conflict between the provisions of the conceptual framework and that of a financial
accounting standard, the conceptual framework should prevail.

A. True, false C. False, false

B. False, true D. True, true

Answer: C
6. Forever Company installed a new equipment at the production facility and incurred the following costs:

Cost of equipment per supplier’s invoice 2,800,000

Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Consultations used for advice on the acquisition of equipment 800,000
Interest charges paid to supplier for deferred credit 500,000
Estimated dismantling cost to be incurred as required by contract 400,000
Operating losses before commercial production 500,000

What total amount should Forever Company capitalize as cost of the equipment?
A. 5,100,000
B. 4,300,000
C. 5,300,000
D. 5,600,000

Answer: A

Solution:

Cost of equipment per supplier’s invoice 2,800,000

Initial delivery and handling cost 400,000
Cost of site preparation 700,000
Consultations used for advice on the acquisition of equipment 800,000
Estimated dismantling cost to be incurred as required by contract 400,000
A 5,100,000

7. Balmond Company commenced construction of a plant on February 1, 2021. The construction was
completed on October 31, 2021. The cost of the plant P50,000,000 was paid in full to the contractor and was
funded from general borrowings. The borrowings during 2021 comprised the following:

United Bank – 6% 20,000,000

Global Bank – 8% 10,000,000
Asian Bank – 10% 30,000,000

What amount should Balmond Company report as interest expense in 2021?

A. 1,875,000
B. 5,000,000
C. 1,666,667
D. 3,333,333

Answer: A
Solution:
United Bank (20,000,000 x 6%) 1,200,000
Global Bank (10,000,000 x 8%) 800,000
Asian Bank (30,000,000 x 10%) 3,000,000
Total borrowing cost incurred 5,000,000

Average capitalization rate (5,000,000/60,000,000) 8.33%

Capitalized borrowing cost (50,000,000 x 8.33% x 9/12) 3,125,000
Interest expense A 1,875,000
8. Celeste Company used the revaluation model for intangible assets. On March 1, 2021, the entity acquired
an intangible asset with indefinite life for P3,000,000. On December 31, 2021, it was determined that
the recoverable amount of the intangible asset was P2,700,000. On December 31, 2022, the intangible
asset had a recoverable amount of P2,820,000.

What amount should Celeste Company report as impairment loss for 2021 and gain on reversal of
impairment for 2022, respectively?

a. 300,000 and 150,000

b. 120,000 and 300,000
c. 300,000 and 120,000
d. 0 and 0

Answer: C

Solution:

Impairment loss in 2021 (3,000,000 - 2,700,000) 300,000

Reversal of impairment in 2022 (2,820,000 - 2,700,000) 120,000

C 300,000 and 120,000

9. During the current year, Mars Company began work on a research and development project. The project was
completed and commercial production of the developed product began in later part of the year.

All of the following expenditures were included in the Research and Development expense account:

Salaries and wages for laboratory research 1,000,000

Design of preproduction prototype 200,000
Quality control during commercial production 100,000
Materials and supplies consumed for laboratory research 400,000
Construction of preproduction prototype 150,000
Purchase of equipment used solely for the project with useful life of 5 years 600,000
Patent filing and legal fee for completed project 50,000
Payment to others for research 300,000
Cost of adapting the new monitor for the specific needs of a customer 250,000

What amount should Mars Company report as research and development expense?

A. 3,650,000
B. 3,950,000
C. 4,600,000
D. 3,800,000
Answer: B
 Solution:
Salaries and wages for laboratory research 2,000,000
Design of preproduction prototype 100,000
Materials and supplies consumed for laboratory research 500,000
Construction of preproduction prototype 250,000
Purchase of equipment used solely for the project with useful life of 5 years 700,000
Payment to others for research 400,000
B 3,950,000

10. In its financial statements, an entity used the equity method of accounting for its 30% ownership of an
investee. At December 31, 2021, an investor has a receivable from the investee. How is receivable reported in
investor’s 2021 financial statements?

A. None of the receivable should be reported, but the entire receivable should be offset against the investee’s
payable to the investor.
B. Seventy percent of the receivable should be separately reported, with the balance offset against 30% of the
investee’s payable to investor.
D. The total receivable should be included as part of the investment in associate without separate disclosure.
d. The total amount of the receivable should be disclosed separately.

Answer: D

11. Jupiter Company provided the following information for the current year:
Fair value of plan assets – January 1 4,500,000
Projected benefit obligation – January 1 7,000,000
Current service cost 600,000
Past service cost during the year 400,000
Settlement payment of benefit obligation before normal retirement date 2,200,000
Present value of benefit obligation settled before normal retirement date 1,050,000
Actual return on plan assets 950,000
Actuarial loss due to remeasurement of PBO due to change in actuarial assumptions 300,000
Contribution to the plan 2,500,000
Benefits paid retirees 2,000,000
Discount rate 10%

What amount should Jupiter Company report as employee benefit expense for the current year?

A. 3,350,000
B. 3,600,000
C. 2,400,000
D. 2,500,000

Answer: C
 Solution:
Current service cost 600,000
Past service cost 400,000
Loss on settlement in advance (1,050,000 - 2,200,000) 1,150,000
Interest expense (7,000,000 x 10%) 700,000
Interest income (4,500,000 x 10%) (450,000)
Employee benefit expense C 2,400,000
12. Kang-ho Company, a dealer in machinery and equipment, leased equipment to Mi-joo Company on July 1,
2022. The lease is for a ten-year period equal to the useful life of the asset expiring June 30, 2032. The first of
ten equal annual payments of P250,000 was made on July 1, 2022. Kang-ho had purchased the equipment for
P1,335,000 on January 1, 2022 and established a list selling price of P1,685,000. The present value on July 1,
2022 of the rent payments over the lease term discounted at 12% was P1,580,000.

What amount should Kang-ho Company record as gain on sale and interest income, respectively for 2022?

A. 245,000 and 159,600

B. 350,000 and 172,200
C. 350,000 and 86,100
D. 245,000 and 79,800

Answer: C
Solution:
Gross profit (1,580,000 - 1,335,000) 245,000
Interest income (1,580,000 - 250,000 = 1,330,000 x 12% x 6/12) 79,800

D 245,000 and 79,800

13. At the beginning of the current year, Beaumont Company was authorized to issue 100,000 shares with a P50
par value. The entity had the following share capital transactions during the year:

January 1 Sold 80,000 shares at P60 per share

April 1 Reacquired 4,000 treasury shares at P75 per share
May 1 Approved a 5-for 1 share split
September 30 Issued a 10% share dividend when the market value of a share was P30
November 30 Reissued 4,000 treasury shares at P40 per share
December 31 Net income for the year was P4,000,000

What amount should Beaumont Company report as additional paid in capital?

A. 1,660,000
B. 1,560,000
C. 1,420,000
D. 1,700,000
Answer: A
 Solution:
January 1 (80,000 x (60 – 50)) 800,000
September 30 (38,000 x (30 – 10)) 760,000
November 30 (4,000 x (40 – 15)) 100,000
Total share premium at year-end A 1,660,000

Shares issued on January 1 80,000

Treasury shares (4,000)
Balance 76,000
5-for-1 share split 5
Outstanding shares before the share dividend 380,000

Par value per share after the share split (50 / 5) 10

Cost per treasury share after the share split (75 / 5) 15

14. A nonpublicly accountable entity can claim compliance with IFRS for SMEs when

I. The entity prepares financial statements in accordance with local tax requirements that are substantially the
same as the IFRS for SMEs.
II. The entity prepares financial statements in accordance with local tax requirements that are, except in
name, word for word the same as IFRS for SMEs.
III. The entity prepares the financial statements in accordance with IFRS for SMEs.
IV. The entity prepares the financial statements in accordance with full IFRS.

A. II, III and IV

B. I and II
c. III and IV
d. II and III

Answer: D

15. During 2021, an entity did not recognize any deferred tax asset when a loss from a discontinued operation
was carried forward for tax purposes. This was because it was not probable that taxable income will be
available against which the deferred tax asset can be used at that time. However, during 2022, the tax benefit
of the loss carried forward reduced current taxes payable on continuing operations for 2022. How should the
tax benefit from the carryforward be presented in the 2022 income statement?

A. As part of income from continuing operations

B. As part of gain or loss from discontinued operations
C. As a cumulative adjustment in retained earnings
D. As an extraordinary gain

Answer: A
16. Happy Company provided the following transactions affecting accounts receivable during the current year:

Sales – cash and credit 8,900,000

Cash received from credit customers who paid beyond the discount period 1,000,000
Cash received from credit customers who took advantage of the 4% discount 2,400,000
Cash received from cash customers 3,060,000
Accounts receivable written off as worthless 60,000
Credit memoranda issued to credit customers for sales return and allowances 350,000
Cash refunds given to cash customers for sales return and allowances 170,000
Recoveries on accounts receivable written off as uncollectible in prior period
not included in cash received from customers stated above 70,000

At the beginning of the current year, the balances are accounts receivable P960,000 and the allowance for bad
debts of P80,000. At year-end, an aging of accounts receivable indicated that P200,000 would be
uncollectible.

What gross amount should Happy Company report as accounts receivable at year-end?

A. 2,890,000
B. 3,060,000
C. 3,130,000
D. 2,950,000
Answer: A
Solution:

Accounts receivable – beginning 960,000

Sales on account (8,900,000 – 3,060,000) 5,840,000
Collection of accounts receivable beyond the discount period (1,000,000)
Collection of accounts receivable within the discount period (2,400,000)
Sales discount (2,400,000 / 96% = 2,500,000 x 4%) (100,000)
Accounts written off (60,000)
Credit memo issued to credit customers for sales returns and allowance (350,000)
Gross accounts receivable A 2,890,000

17. On January 4, 2021, Saturn Company paid P3,240,000 for 10,000 shares of an investee. The investment
represents a 30% interest in the net assets of the investee. The investor received dividends of P20 per share
on December 15, 2021. The investee reported net income of P2,600,000 for the year ended December 31,
2021. The market value of the investee’s share at December 31, 2021 was P310. On the purchase date, the
carrying amount of the investee’s net assets was P8,000,000. The fair value of the investee’s depreciable asset
with remaining useful life of six years exceeded carrying amount by P800,000. The remainder of the excess of
cost of the investment over the carrying amount of net assets purchased was attributable to goodwill.

What amount should Saturn Company report as investment income for 2021?

A. 780,000
B. 500,000
C. 740,000
D. 980,000
Answer: C
 Solution:
Cost 3,240,000
Carrying amount of net assets acquired (8,000,000 x 30%) 2,400,000
Excess cost 840,000
Excess cost attributable to equipment (800,000 x 30%) (240,000)
Goodwill on the purchase 600,000

Share in the net income (2,600,000 x 30%) 780,000

Amortization of excess cost – equipment (240,000 / 6) (40,000)
Investment income for 2021 C 740,000

18. GLORY INC. used the retail inventory method to estimate inventory for interim statement purposes. Data
relating to the computation of the inventory on December 31, 2014 are as follows:
Cost Retail
Inventory, January 1 820,000 1,000,000
Purchases 4,080,000 6,300,000
Markup 700,000
Markdown 500,000
Sales 5,900,000
Normal shoplifting losses 100,000

Under the average cost approach, what is the estimated cost of inventory on December 31, 2014?

A. 1,080,000
B. 980,000
C. 1,020,000
D. 1,000,000

Answer: B
Solution:
Cost Retail
Inventory, January 1 820,000 1,000,000
Purchases 4,080,000 6,300,000
Markup - 700,000
Markdown - (500,000)
Goods available for sale 4,900,000 7,500,000
Cost Ratio 65%
Sales (5,900,000)
Normal shoplifting losses (100,000)
Inventory at retail 1,500,000
Average cost B 980,000
19. On December 1, 2014, BAYANI CORP. assigned specific accounts receivable totaling P3,000,000 as
collateral on a P1,500,000, 12% note from a certain bank. The entity will continue to collect the assigned
accounts receivable. In addition to the interest on the note, the bank also charged a 5% finance fee deducted
in advance on the P1,500,000 value of the note. The December collections of assigned accounts receivable
amounted to P1,000,000 less cash discounts of P50,000. On December 31, 2014, the entity remitted the
collections to the bank in payment for the interest accrued on December 31, 2014 and the note payable.

What amount should be disclosed as the equity of BAYANI CORP. in assigned accounts on December 31,
2014?

A. 1,270,000
B. 1,450,000
C. 1,435,000
D. 1,500,000

Answer: C

Solution:
Account receivable - assigned (3,000,000 - 1,000,000) 2,000,000
Note payable (565,000)
C 1,435,000

20. Star Company provided the following information on December 31, 2021:
Accounts payable amounted to P600,000 and accrued expenses totaled P300,000 on December 31, 2021. On December
15, 2021, the entity declared a cash dividend of P7 per share on 100,000 outstanding shares, payable on January 15, 2022.
On July 1, 2021, the entity issued P5,000,000, 8% bonds for P4,400,000 to yield 10%. The bonds mature on June 30,
2026 and pay interest annually every June 30. The pretax financial income was P8,500,000 and taxable income was
P6,000,000. The difference is due to P1,000,000 permanent difference and P1,500,000 of taxable temporary difference to
reverse in 2022. The income tax rate is 25%. The entity made estimated income tax payments during the year of
P1,000,000.

What amount should Charice Company report as current liabilities on December 31, 2021?

A. 2,400,000
B. 3,400,000
C. 2,000,000
D. 2,200,000
Answer: A
Solution:
Accounts payable 600,000
Accrued expense 400,000
Dividends payable (7 x 100,000) 700,000
Accrued interest on bonds payable (5,000,000 x 8% x 6/12) 200,000
Income tax payable (6,000,000 x 25% = 1,500,000 - 1,000,000) 500,000
A 2,400,000