ACCOUNTANCY PHILIPPINES

DAILY REVIEW FOR FAR

June 05 2020

Question No. 1
It is the power to participate in the financial and operating policy decisions of the investee but
not control or joint over those policies.

Answer: Significant influence

Question No. 2
If the market price is greater than the strike or exercise price underlying derivative, the call
option is

A. At the money
B. Out of the money
C. In the money
D. On the money

Answer: C- In the money

If the market price is lower than the exercise price, the call option is Out of the money.
If the market price is equal to the exercise price, the call option is At the money.

Question No. 3
True/False
Cost of surveying, cost of clearing, cost of grading, leveling, and landfill, cost of subdividing and
other cost of permanent improvement are subject to depreciation to land account?

Answer: False
*Cost of surveying, cost of clearing, cost of grading, leveling, and landfill, cost of subdividing and
other cost of permanent improvement are not subject to depreciation to land account
*Fences, water systems, drainage systems, sidewalks,pavements and cost of trees, shrubs and
other landscaping are subject to depreciation over their useful life.

Question No. 4
SMU Corporation’s checkbook balance on December 31, 2020, was P160,000. On the same
date, SMU held the following items in its safe:
● A P5,000 check payable to SMU, dated January 2, 2021, was not included in the December 31
checkbook balance.
● A P3,500 check payable to SMU which was deposited December 19 and included in the
December 31 checkbook balance, was returned by the bank on December 22 marked NSF. The
check was re-deposited on December 25 2020, and cleared on December 30.
● A P25,000 check payable to a supplier and drawn on SMU’s account, was dated and recorded
on December 31, but was not mailed until January 19, 2021.

In its December 31, 2020 statement of financial position, how much should SMU report as
cash?

Answer: P185,000
160k+25k = 185k

Question No. 5
It is a contract in which the unavoidable costs of meeting the obligation under the contract
exceed the economic benefits to be received under the contract.

A. Executory contract
B. Sale contract
C. Executed contract
D. Onerous contract

Answer: D - Onerous contract

Question No. 6
During 2020, Titanic Company guaranteed a supplier's P500,000 loan from a bank. On October
1, 2020, Titanic Company was notified that the supplier had defaulted on the loan and filed for
bankruptcy protection. Counsel believed Titanic Company will probably have to pay P250,000
under its guarantee. As a result of the supplier's bankruptcy, Titanic Company entered into a
contract in December 2020 to retool its machines so that the entity could accept parts from
other suppliers. Retooling costs are estimated to be P300,000. What amount should Titanic
Company report as accrued liability on December 31, 2020?

Answer: P250,000
The guarantee should be accrued as a provision because the loss is possible and the amount
can be reasonably estimated.
Question No. 7
True/False
Wasting asset entity is an entity engaged solely or substantially in the exploitation of natural
resources.

Answer: True

Question No. 8
Capacity Company counted the ending inventory on December 31, 2020 and reported the
amount of P2,000,000 before any corrections. None of the following items were included when
the total amount of the ending inventory was computed:

* Goods located in the entity's warehouse are on consignment from another entity P150,000
* Goods sold by the entity and shipped FOB destination were in transit on December 31, 2020
and received by the customer on January 2, 2021 P200,000
* Goods purchased by the entity and shipped FOB shiping point were in transit on December
31, 2020 and received by the entity on January 2, 2021. 300,000
* Goods sold by the entity and shipped FOB shipping point were in transit on December 31,
2020 and received by the entity customer on January 2, 2021. 600,000

What amount of inventory should be reported on December 31, 2020?

Answer: P2,500,000
Unadjusted Inventory P2,000,000
Included in Inventory account:
Goods sold by the entity under FOB Destination 200,000
Goods purchased by the entity under FOB Shipping point 300,000
Adjusted amount of Inventory P2,500,000

Question No. 9
Which of the following types of assets would typically be reported on a company's balance
sheet as an intangible asset?

I. Derivative securities
II. Cost of research and development
III. Leasehold improvements
IV. Cost of patent registrations
V. Goodwill

Answer: IV and V

Question No. 10
On October 1, 2020, Mickie Company purchased a P2,000,000 face value 12% bonds for 96 plus
accrued interest and brokerage fees. Interest is paid semiannually on January 1 and July 1.
Brokerage fee for this transaction was P60, 000. At what total amount was paid for the
acquisition of the bonds?

Answer: P2,040,000
Price(2M*0.96) P1,920,000
Accrued interest(2M*.12*3/12) 60,000
Brokerage fees 60,000
Cash paid P2,040,000

Question No. 11
On January 1, 2020, Ariana Company has an overdue 10% notes payable to Sea Bank at
P8,000,000 and accrued interest of P800,000. As a result of a restructuring agreement on
January 1, 2020, Sea Bank agreed to the following provisions:

* The principal obligation is reduced by P2,000,000.

* The accrued interest of P800,000 is forgiven.
* The date of maturity is extended to December 31, 2023.
* Annual interest of 12% is to be paid for 4 years every December 31.

Use two decimals in the present value factor.

What is the present value of the new note payable on January 1, 2020?

Answer: P6,362,400
PV of 1 (1.10^-4) = 0.68
PV of ordinary annuity ((1.10^-4)-1/.10))) 3.17

PV of Principal(6M*0.68) P4,080,000
PV of Interest(6M*.12*3.17) 2,282,400
PV of note payable-1/1/20 P6,362,400

Question No. 12
Statement 1: Appropriated retained earnings represent that portion which has been
unrestricted for any dividend declaration.
Statement 2: A deficit is an asset and deduction from shareholders' equity.

A. Statement 1 is correct
B. Statement 2 is correct
C. Both statement are correct
D. Both statement are incorrect

Answer: D - Both statement are incorrect

* Appropriated retained earnings represent that portion which has been restricted for any any
dividend declaration.
* A deficit is not an asset but deduction from shareholders's equity. (Accumulated losses)

Question No. 13
The policy of Romcom is to debt bad debt expense for 3% of all new sales. The following are
Company's sales and allowance for bad debt for the past four years.

Sales for 2017 P3,000,000; 2018 P2,950,000; 2019 P3,120,000; 2020 P2,420,000.
Allowance for Bad debts for 2017 P45,000; 2018 P56,000; 2019 P60,000; 2020 P75,000.

Compared to 2019, the accounts written off by Romcom Company in 2020 increased/decreased
by what amount?

Answer: 32,000
Accounts written off for 2019:
Bad debts exp. Beg. P56,000
Bad debts exp. (3,120,000*.03) 93,600
Accounts written off(Squeeze) (89,600)
Bad debts exp. -12/31/19 P60,000

Accounts written off for 2020:

Bad debts exp. Beg. P60,000
Bad debts exp. (2,420,000*.03) 72,600
Accounts written off(Squeeze) (57,600)
Bad debts exp. -12/31/20 P75,000

Accounts written off for 2020 57,600

Accounts written off for 2019 89,600
Decreased by (32,000)

Question No. 14
The bonus agreement of Levy Company provides that the general manager shall receive an
annual bonus of 10% of the net income after bonus and tax. The income tax rate is 30%. The
general manager receives P280,000 for the current year as bonus. What is the income before
bonus and tax?

Answer: P4,280,000
Income after bonus and tax (280k/.10) P2,800,000
Income before tax (2,800,000/.70) 4,000,000
Income before bonus and tax (4M+280k) 4,280,000

Proof:
Income before bonus and tax P4,280,000
Less: Bonus 280,000
Income before Tax 4,000,000
Less: Tax(4M*.30) 1,200,000
Income after bonus and tax P2,800,000

Question No. 15
The following are appropriate procedures for controlling the petty cash fund, except

A. To monitor variations in different types of expenditures, the petty cash custodian files petty
cash vouchers by category of expenditure after replenishing the fund.
B. To replenish the fund, the general cashier issues a company check to the petty cash
custodian, rather than cash.
C. To determine that the fund is being accounted for satisfactorily, surprise counts of the fund
are made from time to time by the internal auditor or other responsible official.
D. Each individual to whom petty cash is paid is required to present signed receipts to the petty
cash custodian.

Answer: A
The petty cashier should not have custody of paid petty cash vouchers to prevent their reuse.
Question No. 16
At the beginning of 2020, Mario Company reported the following:

Accounts receivable P2,000,000

Allowance for doubtful accounts P100,000

Additional information for the current year:

* Cash sales of the entity amount to P800,000 and represent 10% of gross sales.
* 90% of the credit sales customers do not take advantage of the 5/10, n/30 terms.
* Customers who did not take advantage of the discount paid P5,940,000.
* It is expected that cash discounts of P10,000 will be taker on accounts receivable outstanding
at December 31, 2020.
* Sales returns amounted to P80,000. All returns were from charge sales.
* During the year accounts totaling P60,000 were written off as uncollectible. Recoveries during
the year amounted to P10,000. This amount is not included in the collections.
* The allowance for bad debts is adjusted so that it represent a certain percentage of the
outstanding accounts receivable at year-end.

What is the net amount of accounts receivable at year-end?

Answer: P2,270,000
Accounts Receivable:
A/R Beg. P2,000,000
Credit sales((800k/.10)-800k) 7,200,000
Total collections(720k+5,940M) (6,660,000)
Sales returns charge on sales (80,000)
Accounts written off (60,000)
Accounts Receivable, end P2,400,000
Allowance for bad debts, end
(100k/2M*2.4M) (120,000)
Allowance for sales discount (10,000)
Net realizable value P2,270,000

Question No. 17
Which statement is correct regarding operating segments?
A. Start up cost cannot be considered operating segments before earning revenues.
B. An entity's post-employment benefits plans are not operating segments.
C. Segment manager is synonymous to chief operating decision-maker.
D. Operating segments that do not meet any of the quantitative threshold cannot be
considered reportable.

Answer: B
Post-employment benefits plan is under PAS 19: EMPLOYEE BENEFITS

Question No. 18
Face value of bonds P4,000,000
Acquisition cost P4,138,000, excluding transaction cost of P18,000
Date of issue January 1, 2020
Date of maturity December 31, 2024
Coupon rate 10%
Effective interest rate ?

What is the carrying amount of bonds on December 31, 2020?

Answer: 9%, P4,130,040

Using formula:
Effective rate = Interest received ± (Discount/Premium÷periods up to maturity)÷Carrying
amount or acquisition of bonds

Interest received(4M*10%) P400,000

Premium of bonds(4,156,000-4,000,000) P156,000

400,000-(156,000/5periods)/4,156,000
400,000-31,200/4,156,000
368,800/4,156,000
Effective interest rate= 0.09/9%

Carrying amount of bonds-Dec. 31, 2020 ((4,156,000*1.09)-400,000) P4,130,040

Question No. 19
Gamboa Company reported operating expenses in two categories, namely distribution and
administrative. The adjusted trial balanceat year end included the following expense and loss
accounts for current year. One-half of the rented premises is occupied by the sales department.
Accounting and legal fees P1,300,000
Advertising, P1,500,000
Freight out, P800,000
Interest, P600,000
Loss on sale of long term investment, P500,000
Officer's salaries, P2,350,000
Rent for office space, P2,500,000
Sales salaries and commisions, P1,500,000

What amount should be reported as distribution costs?

Answer: P5,050,000
Advertising P1,500,000
Freight out 800,000
Rent for office space(2.5M/2) 1,250,000
Sales salaries and commissions 1,500,000
Total Distribution costs P5,050,000

Question No. 20
The Muntanga Company commenced the construction of a new packaging plant on 1 February
20X9. The cost of P1,800,000 was funded from existing borrowings. The construction was
completed on 30 September 20X9. Muntanga's borrowings during 20X9 comprised:

Loan from Wally Bank: P800,000 at 6% per annum;

Loan from Jose Bank: P1 million at 6.6% per annum; and
Loan from Maniac Bank: P3 million at 7% per annum.

In accordance with IAS23 Borrowing costs, the amount of borrowing costs to be capitalized in
relation to the packaging plant is?

Answer: P81,000
Interest: Loan 1 P48,000 (800k*6%)
Loan 2 66,000 (1M*6.6%)
Loan 3 210,000 (3M*7%)
Total 324,000
Total Principal 4,800,000
Average rate 6.75%
Construction cost 1,800,000
Construction period (in years) 8/12
Capitalizable borrowing cost P81,000