CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING PREWEEK LECTURE
MAY 2024 CPALE BATCH 95
1. An entity provided the following account balances at year-end which had been adjusted except for income
tax expense:
Cash 3,600,000
Accounts receivable 3,500,000
Cost in excess of billings on long-term contracts 1,500,000
Billings in excess of cost on long-term contracts 700,000
Prepaid taxes 1,000,000
Property, plant and equipment, at carrying amount 4,000,000
Note payable - noncurrent 3,500,000
Share capital 2,000,000
Share premium 1,000,000
Retained earnings unappropriated 1,400,000
Retained earnings restricted for note payable 1,000,000
Earnings from long-term contracts 9,000,000
Costs and expenses 5,000,000
All receivables on long-term contracts are considered to be collectible with 12 months. During the year,
estimated tax payments of P1,000,000 were charged to prepaid taxes. The entity has not recorded income
tax expense. The rate is 25%. Which of the following statements are true?

a. The total current assets should be reported at P8,600,000.

b. The total current liabilities should be reported at P4,200,000.
c. The retained earnings should be reported at P4,400,000.
d. If an asset is held for trading, it shall be classified as noncurrent.

2. An entity reported the following liabilities on December 31, 2024:

Accounts payable, after deducting debit balances in suppliers’ accounts of P500,000 2,000,000
Short-term borrowings 1,500,000
Bonds payable due December 31, 2025 3,000,000
Discount on bonds payable 200,000
Bank loan due June 30, 2025 1,000,000
Credit balances in customers’ accounts 400,000
Share dividend payable 600,000
Claims for increase in wages by employees covered in pending lawsuit 700,000
Estimated expenses in redeeming prize coupons 800,000
Deferred tax liability 1,200,000
The P1,000,000 bank loan was refinanced with a 5-year loan on December 31, 2024. The financial
statements were issued on March 1, 2025. Which of the following statements is false?

a. The total current liabilities should be reported at P8,000,000.

b. The total noncurrent liabilities should be reported at P1,200,000.
c. A financial liability due within twelve months after the reporting period should be classified as
noncurrent if the entity has an existing right at the end of reporting period to defer settlement for at
least twelve months after the reporting period.
d. A liability that is expected to be settled within the normal operating cycle is classified as current.

3. Tanzania Company reported operating expenses other than interest expense for the year at 40% of cost of
goods sold but only 20% of sales. Interest expense is 5% of sales.
The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as the beginning
inventory. The net income for the year is P2,250,000. The income tax rate is 25%. What amount should be
reported as sales for the year?
a. 10,000,000
b. 15,000,000
c. 18,000,000
d. 12,000,000
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SITUATION – Four independent entities

Dean Company acquired 100% of Morey Company in the prior year. During the current year, the individual
entities included in their financial statements the following:
Dean Morey
Key officers’ salaries 750,000 500,000
Officers’ expenses 200,000 100,000
Loans to officers 1,250,000 500,000
Intercompany sales 1,500,000

Albania Company reported income before tax of P5,000,000 for the current year which included the following
amounts income before tax:
Equity in earnings of an associate 1,600,000
Dividend received from associate 300,000
Adjustment of profit of prior year for arithmetical error in depreciation (1,400,000)
Gain on sale of equity investment at FVOCI 1,000,000
Unrealized loss on foreign currency translation ( 500,000)

Roma Company provided the following data relating data to operating segments for current year:
Total revenue 50,000,000
Sales to external customers included in total revenue 10,000,000

Funko Company reported P5,000,000 net income for the quarter ended September 30, 2024 which included
the following after tax items:
• A P1,500,000 expropriation gain, realized on April 30, 2024 was allocated equally to the second, third
and fourth quarters of 2024.
• A P300,000 cumulative-effect loss resulting from change in inventory valuation method was
recognized on August 1, 2024.
In addition, the entity paid P600,000 on February 1, 2024 for 2024 calendar-year property taxes. Of this
amount, P150,000 was allocated to the third quarter of 2024. For the quarter ended September 30, 2024.

4. What total amount should be reported as related party disclosures in the notes to Dean Company’s
consolidated financial statements for the current year?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000

5. What amount should Albania Company report as income before tax?

a. 5,600,000
b. 4,700,000
c. 5,100,000
d. 6,600,000

6. What amount of external revenue must at least be reported by Roma Company for reportable segments?
a. 30,000,000
b. 37,500,000
c. 7,500,000
d. 6,000,000

7. For the quarter ended September 30, 2024, what amount should Funko report as net income?
a. 4,800,000
b. 4,650,000
c. 4,500,000
d. 5,300,000

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8. An entity purchased an equipment for P15,000,000 on January 1, 2024. The equipment had a useful life of
5 years with no residual value. On December 31, 2024, the entity classified the equipment as held for sale.
On such date, the fair value less cost of disposal of the equipment was P10,500,000. On December 31,
2025, the entity believed that the criteria for classification as held for sale can no longer be met.
Accordingly, the entity decided not to sell the equipment but to continue to use it. On December 31, 2025,
the fair value less cost of disposal of the equipment was P8,100,000.

Statement I: Noncurrent assets classified as held for sale are measured at the higher of carrying amount
and fair value less cost of disposal.
Statement II: The impairment loss for 2024 is P1,500,000.
Statement III: The equipment shall be reported at P9,000,000 on December 31, 2025.

a. All statements are true.

b. Statements II and III are true.
c. Only statement II is true.
d. Only statement III is true.

9. The entity had the following account balances on December 31, 2024:

Petty cash fund 50,000

Philippine Bank – current account 4,000,000
Manila Bank – current account (overdraft) (1,200,000)
Security Bank – value added tax account 200,000
Metrobank – payroll account 400,000
Cash on hand 500,000
Asia Bank – savings account for plant addition in 2025 1,500,000
Treasury bills 1,000,000
Treasury bonds 700,000
The petty cash fund included unreplenished December 2024 petty cash expense vouchers P5,000 and
employee IOU P5,000. The cash on hand included a P100,000 customer check payable to the entity dated
January 15, 2025. Check of P400,000 drawn against Philippine Bank current account dated and recorded
on December 31, 2024 was mailed to creditor on January 15, 2025. Which of the following is false?

a. Under the imprest system, the petty cash fund is overstated when unreplenished.
b. Investments with a maturity period of three months or less from the date of purchase shall be classified
as cash equivalents.
c. Cash and cash equivalents should be reported at P5,440,000.
d. Noncurrent assets should be reported at P2,200,000.

10. Marjorie Company reported an imprest petty cash fund of P50,000 with the following details:
Currencies 20,000
Coins 2,000
Petty cash vouchers 9,000
A check drawn by the entity payable to the order of Anne Cruz, petty cash custodian,
representing her salary 15,000
An employee check returned by the bank marked NSF 3,000
A sheet of paper with names of several employees together with contribution for a
birthday gift to a co-employee. Attached to the sheet of paper is a currency of 5,000
I. The petty cash fund should be reported at P37,000
II. A cash overage of P1,000 should be reported.
III. The replenishment of an imprest petty cash fund is recorded by debiting petty cash fund and crediting
cash in bank.
a. All statements are true.
b. Only statement II is true.
c. Only statement I is true.
d. Only statements I and II are true.

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SITUATION – Four independent entities

Galaxy Company provided the following information on December 31:

Credit memo for November recorded in December 600,000
Credit memo for December not yet recorded 800,000
Deposit in transit – December 1 1,200,000
Erroneous bank charge in December corrected by bank in December 200,000
Erroneous receipt by the entity in December not corrected until the following year 100,000
Total book receipts for December 8,500,000
Total bank credits in December 8,000,000

Zee Company provided the following information for October and November:
Checks and charges recorded by bank in November, including a November service
charge of P5,000 and NSF customer check of P20,000 550,000
Service charge made by bank in October and recorded by depositor in November 10,000
Total credits to cash in all journals during November 620,000
Customer NSF check returned in October and redeposited in November but no entry
made by depositor in either October or November 40,000
Outstanding checks on October 31 that cleared in November 230,000

Gucci Company used the net price method of accounting for cash discounts. In one of its transactions on
December 26, 2024, the entity sold merchandise with a list price of P2,000,000 to a client who was given a
trade discount of 20%, 10% and 5%. Credit terms were 4/10, n/30.

The goods were shipped FOB destination, freight collect. Total freight charge paid by the customer was
P50,000. On December 27, 2024, the customer returned damaged goods originally billed at P200,000.

Effective with the current year, Hall Company adopted a new accounting method for estimating the allowance
for doubtful accounts at the amount indicated by the year-end aging of accounts receivable.
Allowance for doubtful accounts, January 1 250,000
Provision for doubtful accounts during the current year at 2% of credit sales of P10,000,000 200,000
Accounts written off 205,000
Estimated uncollectible accounts per aging on December 31 220,000

11. What amount should Galaxy report as deposit in transit on December 31?
a. 2,000,000
b. 2,100,000
c. 1,800,000
d. 1,000,000

12. What amount should Zee Company repost as outstanding checks on November 30?
a. 275,000
b. 300,000
c. 315,000
d. 290,000

13. What amount should Gucci Company report as net realizable value of accounts receivable?
a. 1,118,000
b. 1,168.000
c. 1,071,280
d. 1,121,280

14. What amount should Hall report as doubtful accounts expense for the current year?
a. 220,000
b. 205,000
c. 200,000
d. 175,000
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15. From inception of operations, an entity carried no allowance for doubtful accounts. Uncollectible accounts
were expensed as written off and recoveries were credited to income as collected. During 2024, a policy
was established to maintain an allowance for doubtful accounts based on historical bad debt loss percentage
applied to year-end accounts receivable. The historical bad debt loss percentage is to be recomputed each
year based on all available past years up to a maximum of five years.
Year Credit sales Writeoffs Recoveries
2020 1,500,000 15,000 0
2021 2,250,000 38,000 2,700
2022 2,950,000 52,000 2,500
2023 3,300,000 65,000 4,800
2024 4,000,000 83,000 5,000
The entity reported accounts receivable of P1,250,000 on December 31, 2023 and P2,000,000 on
December 31, 2024.
I. The allowance for doubtful accounts should be reported at P20,000 on December 31, 2023.
II. The allowance for doubtful accounts should be reported at P34,000 on December 31, 2024.
III. The doubtful accounts expense should be reported at P78,000 for 2024.
a. Statements I, II and III are true.
b. Only statements I and II are true
c. Only statement II is true
d. All statements are false.

16. An entity factored P7,500,000 accounts receivable to a finance entity at the end of current year. Control
was surrendered. The factor accepted the accounts receivable subject to recourse for nonpayment. The fair
value of the recourse obligation was P200,000. The factor assessed a fee of 2% and retained a holdback of
4% of the accounts receivable. In addition, the factor charged 12% interest computed on a weighted average
basis of 60 days. Which of the following statements is true?

a. The initial loss on factoring is P297,945.

b. The cash receipt from the factoring is P6,902,055.
c. When an entity factored accounts receivable without recourse with bank, the transaction is best
described as sale of accounts receivable with risk of uncollectible accounts retained by the entity.
d. Factoring of accounts receivable does not involve derecognition of such receivable.
17. National Bank granted a 10-year loan to Abbo Company in the amount of P1,500,000 with stated interest
rate of 6%. Payments are dur monthly and are computed to be P16,650. National Bank incurred P40,000
of direct loan origination cost and P20,000 of indirect loan origination cost. In addition, National Bank
charged Abbo Company a 4-point nonrefundable loan origination fee.
Statement I: The initial carrying amount of the loan receivable on the part of National Bank is P1,500,000
Statement II: The initial carrying amount of the loan payable on the part of Abbo Company is P1,440,000.
a. All statements are true.
b. Only statement I is true.
c. All statements are false.
d. Only statement II is true.
18. Empire Company revealed inventory on December 31, 2024 at P3,250,000 based on a physical count priced
at cost and before any necessary adjustment for the following:
• Merchandise costing P300,000 shipped FOB shipping point from a vendor on December 31, 2024 was
received on January 5, 2025.
• Merchandise costing P380,000 shipped to a customer FOB destination on December 28, 2024 arrived
at the customer location on January 6, 2025.
• Merchandise costing P120,000 was being held on consignment by a consignee of Empire Company.
What amount should be reported as inventory on December 31, 2024?
a. 3,650,000
b. 3,630,000
c. 4,050,000
d. 3,550,000

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19. Mako Company provided the following data relating to an inventory:

Units Unit cost Total cost
July 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchases 16,000 150 2,400,000
31 Purchase return 5,000 150 750,000
Which of the following statements is false?
a. Under the weighted average method, the inventory on July 31 should be reported at P2,785,650.
b. Under the moving average method, the inventory on July 31 should be reported at P2,550,000.
c. Under the FIFO method, the inventory on July 31 should be reported at P2,250,000.
d. If goods are ordinarily interchangeable, an entity may use either FIFO or average method.

20. Harem Company started operations on January 1, 2024 and adopted the weighted average method:
2024 2025 2026
Sales 3,000,000 4,000,000 4,800,000
Cost at goods sold 1,500,000 2,000,000 2,400,000
Gross income 1,500,000 2,000,000 2,400,000
Expenses 800,000 900,000 1,000,000
Net income 700,000 1,100,000 1,400,000
The entity provided the following comparative inventory amount:
Weighted average FIFO
December 31, 2024 270,000 420,000
December 31, 2025 300,000 500,000
December 31, 2026 380,000 650,000
I. The net income under FIFO should be reported at P850,000 for 2024.
II. The net income under FIFO should be reported at P1,300,000 for 2025.
III. The net income under FIFO should be reported at P1,470,000 for 2026.
a. All statements are true.
b. All statements are false.
c. Only statements I and III are true.
d. Only statement III is true.

21. An entity reported the following information for the current year:
Beginning inventory 5,000,000
Purchases 26,000,000
Freight in 2,000,000
Purchase returns and allowances 3,500,000
Purchase discounts 1,500,000
Sales 40,000,000
Sales returns 3,000,000
Sales allowances 500,000
Sales discounts 1,000,000
A physical inventory taken at year-end resulted in an ending inventory of P4,000,000. At year-end, unsold
goods out on consignment with selling price of P1,000,000 are in the hands of a consignee. The gross profit
rate is 40%. What is the estimated cost of inventory shortage?
a. 1,800,000
b. 2,700,000
c. 1,200,000
d. 2,100,000

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22. An entity used the retail inventory method to estimate inventory at year-end.
Cost Retail
Beginning inventory 720,000 1,000,000
Purchases 4,580,000 7,100,000
Net markups 700,000
Net markdowns 500,000
Sales 6,800,000
Estimated normal shoplifting losses 100,000
Abnormal spoilage 500,000 800,000
I. Under conservative approach, the estimated cost of ending inventory is P360,000.
II. Under average cost approach, the estimated cost of ending inventory is P384,000.
a. All statements are true.
b. All statements are false.
c. Only statement I is true.
d. Only statement II is true.

23. An entity is engaged in raising dairy livestock. The entity provided the following information during
current year:
Carrying amount on January 1 5,000,000
Increase due to purchases 2,000,000
Gain arising from change in fair value less cost of disposal attributable to price change 400,000
Gain arising from change in fair value less cost of disposal attributable to physical change 600,000
Decrease due to sales 850,000
Decrease in fair value due to harvest 200,000
Which of the following statements are false?
a. Biological assets are measured at fair value less cost of disposal.
b. The biological asset be reported at P6,950,000 at end of the current year.
c. Under IFRS, bearer plants shall be classified as biological assets.
d. Under IFRS bearer animals shall be classified as biological assets.

24. An entity insured the life of its president for P6,000,000. The entity is the beneficiary of the ordinary
insurance policy. The premium is P400,000. The policy is dated January 1, 2020. The cash surrender values
on December 31, 2023 and 2024 are P120,000 and P160,000, respectively. The entity follows the calendar
year as its fiscal year. The president died on October 1, 2024 and the policy was collected on December
31, 2024. No premium was refunded on the insurance settlement. What is the gain on life insurance
settlement?
a. 5,620,000
b. 5,780,000
c. 5,740,000
d. 5,580,000

25. On January 1, 2024 an entity purchased nontrading equity securities designated irrevocably at fair value
through other comprehensive income. On December 31, 2024, the cost and market value were:
Cost Market
Security One 2,000,000 2,400,000
Security Two 3,000,000 3,500,000
Security Three 5,000,000 4,900,000
On December 31, 2025, the entity sold Security One for P2,500,000. What amount should be recognized
as unrealized gain in 2024 and directly in retained earnings as a result of sale of financial asset in 2025?
a. 800,000 unrealized gain and 100,000 credit in retained earnings
b. 800,000 unrealized gain and 100,000 debit in retained earnings
c. 800,000 unrealized gain and 500,000 credit in retained earnings
d. 800,000 unrealized gain and 500,000 debit in retained earnings

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26. An entity acquired at the beginning of 2024 trading equity instrument for P5,000,000 including transaction
cost of P550,000 The fair value was P5,900,000 at December 31, 2024 and the transaction cost that would
be incurred on the sale of the investment is estimated at P500,000. What amount of unrealized gain should
be recognized for 2024?
a. 1,450,000
b. 1,400,000
c. 950,000
d. 900,000
27. On January 1, 2024, Purl Company purchased as a long-term investment P5,000,000 face amount of Shaw
Company’s 8% bonds for P4,562,000. The bonds were purchased to yield 10% interest. The bonds mature
on January 1, 2029 and pay interest annually on December 31. The interest method of amortization is used.
I. The interest income should be reported at P461,820 for 2025.
II. The carrying amount of the bond investment is P4,680,020 on December 31, 2025.
III. The interest method of amortizing bond discount provides for an increasing discount amortization
and decreasing interest income.
a. Statements I, II and III are true
b. Statement II is not true.
c. Only statement II is true
d. Only statements I and II are true.
28. At the beginning of current year, an entity purchased 30,000 shares of an investee’s 200,000 outstanding
ordinary shares for P6,000,000. On that date, the carrying amount of the acquired shares on the investee’s
books was P4,000,000. The investor attributed the excess of cost over carrying amount to patent. The
patent has a remaining useful life of 10 years. During the current year, the entity’s officers gained a majority
of the investee’s board of directors. The investee reported earnings of P5,000,000 for the current year and
declared and paid dividend of P3,000,000 at year-end. Which of the following statements is true?
a. The entity shall report investment income at P450,000.
b. The carrying amount of the investment at year-end shall be reported at P6,100,000.
c. Significant influence is an arrangement of which two or more parties have joint control.
d. If an entity holds at least 20% of the voting power on an investee, it is presumed that the entity does
not have significant influence.
29. On December 31, 2024, an entity, a real estate company, has an existing building used for administrative
purposes and land that is be sold in the ordinary course of business. The building has a carrying amount of
P50,000,000 and the land has a cost of P2,500,000. On December 31, 2024, the entity decided to change
the use of both building and land. The existing building shall be rented out under an operating lease. The
administrative staff will be relocated to a new building that was acquired by the entity. The land will be
held for capital appreciation. Both assets shall be carried at fair value. On December 31, 2024, the fair
values of the building and land were P65,000,000 and P4,500,000 respectively.
Statement I: The building and land shall be reclassified to investment property.
Statement II The entity shall recognize P15,000,000 as revaluation surplus on December 31, 2024.
Statement III: The entity shall recognize P2,000,000 in profit or loss on December 31, 2024.
a. All statements are true.
b. Only statement I is true.
c. Statements II and III are true.
d. Only statement II is true.
30. An entity commenced construction of a building on March 1, 2024. The construction was completed on
September 1, 2024. The cost of the building P30,000,000 was paid in full to the contractor on March 1,
2024. The entity had outstanding during 2024 P16,000,000 note payable bearing interest at 10% and
P20,000,000 note payable bearing interest at 5.5%. None of the borrowings were specified for the
construction of the building.
I. The capitalizable borrowing cost should be reported at P1,125,000
II. The interest expense should be reported at P1,575,000 for 2024.
a. Statements I and II are true.
b. Statements I and II are not true.
c. Only statement I is true.
d. Only statement II is true.

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31. An entity had the following loans outstanding in 2024:

Specific construction loan – 8% 5,000,000
General purpose loan – 10% 20,000,000
The entity began the construction of a building on January 1, 2024 and the building was completed on
December 31, 2024. The expenditures during 2024 were January 1, P3,000,000, July 1 P6,000,000 and
November 1 P9,000,000.
I. The capitalizable interest should be reported at P650,000 for 2024.
II. The cost of the building should be reported at P18,650,000 on December 31, 2024.
III. The interest expense should be reported at P1,750,000 for 2024.
IV. The interest revenue on specific borrowing reduces interest expense reported in the income
statement.
a. All statements are true
b. All statements are not true.
c. Statements I, II and III are true
d. Only statements I and II are true.

32. An entity incurred the following costs in relation to property, plant and equipment:
Cash paid for purchase of land and an old building 2,500,000
Mortgaged assumed on the land purchased, including interest accrued P100,000 1,000,000
Realtor commission 300,000
Legal fees, realty taxes and documentation expenses 50,000
Amount paid to relocate persons squatting on the property 100,000
Cost of tearing down an old building on the land to make room for construction
of new building 200,000
Salvage value of old building demolished 50,000
Cost of fencing the property after construction 250,000
Amount paid to contractor for the building constructed 5,000,000
Building permit fee 50,000
Excavation 50,000
Architect fee 200,000
I. The cost of the land should be reported at P3,950,000.
II. The cost of the building should be reported at P5,450,000
III. The cost of demolishing an old building on land purchased without constructing a new building should
be expensed as incurred minus salvage proceeds.
a. All statements are true.
b. Only statements I and II are true
c. All statements are false.
d. Only statement II is false.

33. An entity reported an impairment loss of P2,500,000 in 2021. This loss was related to an equipment
acquired on January 1, 2013 for P20,000,000 with no residual value. Straight line annual depreciation on
the asset was recorded at P800,000 until 2021. Depreciation for 2022 was computed based on the
recoverable amount of the asset on December 31, 2021. The entity decided to measure the asset using the
revaluation model on December 31, 2024. On such date, the asset had a fair value of P16,500,000.
I. The recoverable amount of the equipment on December 31, 2021 is P10,300,000.
II. The gain on reversal of impairment on December 31, 2024 should be reported at P2,031,250.
III. The revaluation surplus should be recorded at P6,100,000 on December 31, 2024.
IV. The basis of reversal of impairment must be the recoverable amount of the impaired asset at the end
of reporting period.
a. All statements are true.
b. All statement are false
c. Only statements I, II and III are true.
d. Only statements I and II are true.

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34. An entity started business in 2024 and sold printers with a three-year warranty. The warranty cost is
estimated as a percent of sales 3% in the first year of warranty, 5% in the second year of warranty and 10%
in the second year of warranty.

The entity was able to sell 7,500 units in 2024 and 10,000 units in 2025 at P4,000 per unit. The entity
incurrent actual warranty cost of P800,000 in 2024 and P2,400,000 in 2025. Sales and repairs occurred
evenly throughout the year.

1. What amount should be reported as adjusted warranty liability on December 31, 2025?
a. 9,675,000
b. 9,600,000
c. 9,300,000
d. 8,100,000

2. What amount should be reported as adjusted warranty expense for 2025?

a. 7,475,000
b. 6,925,000
c. 7,200,000
d. 7,400,000

Computation
January 1, 2024 sales
First contract year 2024 ( 3% x 15,000,000) 450,000
Second contract year 2025 ( 5% x 15,000,000) 750,000
Third contract year 2026 (10% x 15,000,000) 1,500,000

July 1, 2024 sales

First contract year July 1,2024 to June 30, 2025 450,000
Second contract year July 1, 2025 to June 30, 2026 750,000
Third contract year July 1, 2026 to June 30, 2027 1,500,000
Total warranty expense for 2024 5,400,000

2024 sales still under warranty on December 31, 2025

Third contract year January 1,2024 sales - 2026 1,500,000
Second contract year July 1, 2024 sales - January 1, 2026 to June 30, 2026 (750,000 x ½) 375,000
Third contract year July 1, 2024 sales - July 1, 2026 to June 30, 2027 1,500,000
2024 sales still under warranty on December 31, 2025 3,375,000

January 1, 2025 sales

First contract year 2025 ( 3% x 20,000,000) 600,000
Second contract year 2026 ( 5% x 20,000,000) 1,000,000
Third contract year 2027 (10% x 20,000,000) 2,000,000

July 1, 2025 sales

First contract year July 1, 2025 to June 30, 2026 600,000
Second contract year July 1, 2026 to June 30, 2027 1,000,000
Third contract year July 1, 2027 to June 30, 2028 2,000,000
Total warranty expense for 2025 7,200,000

2025 sales still under on December 31, 2025

Second contract year January 1, 2025 sales – 2026 1,000,000
Third contract year January 1, 2025 sales - 2027 2,000,000
First contract year July 1, 2025 sales - January 1, 2026 to June 30, 2026 (600,000 x ½) 300,000
Second contract year July 1, 2025 sales - July 1, 2026 to June 30, 2027 1,000,000
Third contract year July 1, 2025 sales - July 1, 2027 to June 30, 2028 2,000,000
2024 sales still under warranty on December 31, 2025 6,300,000

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35. An entity operates a customer loyalty program. The entity grants program members loyalty points when
they spend a specified amount of purchases. Program members can redeem the points for further purchases.
The points have no expiry date. During 2024, the customer earned 60,000 points. Management expects the
100% of these points will be redeemed. The stand-alone selling price of each loyalty point is P20. The
sales during 2024 amounted to P6,800,000 based on stand-alone selling price. On December 31, 2024,
28,800 points have been redeemed in exchange for purchases. In 2025, the management revised
expectations and now expects 90% of the points to be redeemed. In 2025, the entity redeemed 9,000 points.
Statement I: The transaction price allocated to the loyalty points on January 1, 2024 is P1,200,000.
Statement II: The revenue from the points in 2024 is P489,600.
Statement III: The revenue from the points in 2025 is P224,400.
a. All statements are true.
b. Only statements II and III are true.
c. Only statement II is true.
d. All statements are false.

36. An entity sells bedsheets for P3,000 per set. If a customer buys 4 sets in a single transaction the customer
shall receive a coupon for one additional set for free. It is expected that 80% of the free product coupons
will be redeemed.
During 2024, the entity sold 1,000 sets at P3,000 per set or P3,000,000. During 2025, the entity delivered
75 free additional sets to customers. The stand-alone selling price of free product coupon is equal to the
selling price of the free product adjusted by the expected redemption.
I. The stand-alone selling price of the free product coupons is P600,000.
II. The sales revenue for 2024 should reported at P2,500,000.
III. The deferred revenue from coupons should be reported at P350,000 on December 31, 2025.
a. All statements are true
b. Only statements II and III are true
c. Statement III is false
d. All statements are false

37. During the current year, an entity sold gift certificates worth P16,000,000 to customers in exchange for
future delivery of its product. The certificates are nonrefundable and the entity expected that 15% of the
gift certificates will not be redeemed. During the year the entity redeemed gift certificates worth
P10,200,000. What amount should be recognized as breakage revenue from gift certificates for current
year?
a. 2,400,000
b. 2,040,000
c. 1,800,000
d. 360,000

38. An entity issued on January 1, 2024 20-year bonds of P5,000,000 for P5,426,000 to yield 10%. Interest is
payable annually on December 31 at 11%. On June 30, 2025, the entity retired 2,000 bonds with P1,000
face amount per bond at 96 plus accrued interest. The accounting period is the calendar year. Which of the
following statements is false?

a. Interest expense for the year 2024 is P542,600.

b. Interest expense for the year 2025 is P325,116.
c. The gain on retirement of bonds in 2025 is P245,812.
d. The carrying amount of the remaining bonds on December 31, 2025 is P3,246,276.

Date (11%) Interest paid (10%) Interest expense Amortization Carrying amount
1/1/2024 (2,000/5,000 x 5,426,000) 2,170,400
12/31/2024 220,000 217,040 2,960 2,167,440
6/30/2025 110,000 108,372 1,628 2,165,812

1/1/2024 (3,000/5,000 x 5,426,000) 3,255,600

12/31/2024 330,000 325,560 4,440 3,251,160
12/31/2025 330,000 325,116 4,884 3,246,276

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39. An entity transferred real state to the creditor pursuant to a debt restructuring in full settlement of a liability.
Carrying amount of liability liquidated 1,500,000
Carrying amount of real estate transferred 1,000,000
Fair value of real estate transferred 900,000
What amount should be recognized as gain or loss on extinguishment of debt?
a. 600,000 gain
b. 600,000 loss
c. 500,000 gain
d. 500,000 loss

40. On December 31, 2024, an entity leased a machine for a five-year period. Equal annual payments under
the lease are P1,050,000 including P50,000 annual executory cost and are due on December 31 of each
year. The first payment was made on December 31, 2024, and the second payment was made on December
31, 2025. The five lease payments are discounted at 10% over the lease term. The present value of
minimum lease payments at the inception of the lease and before the first annual payment was P4,170,000.
I. The carrying amount of the lease liability is P3,170,000 on December 31, 2024.
II. The interest expense is P417,000 for 2024.
III. The carrying amount of the liability is P2,487,000 on December 31, 2025.
IV. The interest expense is P317,000 for 2025.
a. All statements are true.
b. Only statements I and III are true.
c. Statement IV is false
d. Only Statements I, III and IV are true.

41. An entity leased equipment to a lessee on January 1, 2024 for an eight-year period. Equal payments under
the lease are P500,000 and are due on January 1 of each year. The first payment was made on January 1,
2024. The selling price of the equipment is P2,900,000 and the carrying amount is P2,000,000. The lease
is appropriately accounted for as a sales type lease. The lessor incurred an initial direct cost of P100,000.
The present value of the lease payments at an implicit interest rate of 12% is P2,780,000. Which of the
following statements is false?

a. The total financial revenue on January 1, 2024 is P1,220,000.

b. The gross profit on the sale is P800,000.
c. The interest income for 2024 is P273,600.
d. The carrying amount of the lease receivable on January 1, 2025 is P2,053,600.

42. At the beginning of current year, an entity sold an equipment with remaining life of 20 years and
immediately leased it back for 5 years at the prevailing market rental.
Sale price at fair value 5,000,000
Carrying amount of equipment 6,000,000
Annual rental payable at the end of each year 500,000
Implicit interest rate 6%
Present value of an ordinary annuity of 1 at 6% for 5 periods 4.21
I. The initial lease liability should be recorded at P2,105,000.
II. The cost of right of use asset should be recorded at P2,526,000.
III. The loss on right transferred should be reported at P579,000
IV. The right of use asset shall be presented as a separate line item under noncurrent assets.
a. All statements are true
b. Only statements I, II and III are true.
c. Statement II is false
d. All statements are false

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43. An entity reported pretax financial income of P6,000,000 for the current year. The income tax rate is 25%.
Tax return Accounting record
Rent received in advance 800,000 0
Depreciation 1,500,000 1,000,000
Payment of penalty 0 250,000
Premiums on officers’ life insurance 0 150,000
Doubtful accounts expense 200,000 300,000
Warranty cost 400,000 600,000
I. The current tax expense should be reported at P1,750,000.
II. The total tax expense should be reported at P1,500,000
III. The deferred tax liability should be reported at P125,000.
IV. The deferred tax asset should be reported at P275,000.
a. All statements are true. c. Statements I, III and IV are true
b. Only statements I and II are true. d. Two statements are false
44. On January 1, 2024 an entity had 100,000 ordinary shares outstanding.
February 1 21,000 ordinary shares were sold in the market.
April 1 Purchased 5,000 ordinary shares to be held in treasury.
July 1 Issued P1,000,000, 5-year, 10% bonds at face amount. Each P1,000 bond
is convertible into 50 ordinary shares.
July 1 35,000 ordinary shares were sold.
October 1 A 10% bonus issue was declared and distributed.
December 31 Net income for 2024 was P2,926,000. The income tax rate is 25%.
I. The basic earnings per share should be reported at P20.00.
II. The diluted earnings per share should be reported at P17.05.
III. Dilutive convertible bonds are deemed to have been converted into ordinary shares at the start of
the period.
a. All statements are true c. Only statement I is true.
b. Only statements I and II are true d. All statements are false.
45. An entity provided the following information relative to its defined benefit plan for the current year:
Projected benefit obligation – January 1 4,500,000
Fair value of plan assets- January 1 4,000,000
Current service cost 1,700,000
Past service cost due to amendment of the plan 300,000
Benefits paid to retirees 1,000,000
Contribution to the plan 1,200,000
Actual return on plan assets 600,000
Actuarial gain due to remeasurement of projected benefit obligation 200,000
Discount rate 10%
I. The projected benefit obligation should be reported at P5,750,000 on December 31.
II. The fair value of plan assets should be reported at P4,800,000 on December 31.
a. All statements are true. c. Only statement I is true.
b. All statements are false. d. Only statement II is true.
46. On January 1, 2021, SME acquired a trademark of a line herbal products for P450,000. The SME expects
to continue marketing the products using the trademark indefinitely. An analysis provides evidence that
the line of trademark products may generate net cash inflows for an indefinite period. An estimate of the
useful life of the trademark is not possible. A competitor developed a technological breakthrough in 2024
expected to result in a product that will reverse the demand for SME’s patented product line. At December
31, 2024, the recoverable amount of the trademark was P80,000. It is expected that the demand for SME’s
product line will remain until December 31, 2026, when the competitor launches the new product. The
SME intended to continue manufacturing the patented products until December 31, 2026. What amount
should be recorded as amortization of trademark for 2021 and 2024, respectively?
a. 45,000 and 105,000 c. 45,000 and 31,500
b. 105,000 and 45,000 d. 150,000 and 0
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47. An entity provided the following data:
December 31, 2024 December 31, 2025
Accounts receivable 840,000 780,000
Inventory 1,500,000 1,400,000
Accounts payable 950,000 980,000
Total sales were P12,000,000 for 2025 and P11,000,000 for 2024. Cash sales were 20% of total sales each
year. Cost of goods sold was P8,400,000 for 2025. Variable general and administrative expenses for 2025
were P1,200,000. The variable expenses have varied in proportion to sales. Variable expenses have been
paid 50% in the year incurred and 50% the following year. Fixed expenses, including P350,000
depreciation and P50,000 bad debt expense, totaled P1,000,000 each year. Eighty percent of fixed expenses
involving cash were paid in the year incurred and 20% the following year. Each year there was a P50,000
bad debt estimate and a P50,000 writeoff.
I. The total collections from customers amounted P12,060,000 during 2025.
II. The purchases amounted to P8,300,000 during 2025.
III. The total disbursements for purchases amounted to P8,270,00 during 2025.
IV. The total disbursements for fixed and variable expenses amounted to P1,750,000.
a. All statements are true.
b. Only three statements are true.
c. Two statements are false
d. All statements are false

48. An entity provided the following data for the current year:

Gain on sale of equipment 100,000

Proceeds from sale of equipment 200,000
Purchase of bond investment with face amount of P2,000,000 1,800,000
Amortization of bond discount 150,000
Dividend declared 4,500,000
Dividend paid 4,000,000
Proceeds from sale of treasury shares costing P650,000 750,000

Statement I: The entity shall report net cash flow used by financing activities at P3,250,000.
Statement II The entity shall report net cash flows used in investing activities at P1,800,000.

a. All statements are true.

b. All statements are false.
c. Only statement I is true.
d. Only statement II is true.

END

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