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CHAPTER 6
1. The organization that established international accounting standards is the

International Accounting Standards Board.
2. The pronouncements of the International Accounting Standards Board are
called International Accounting Standards.
3. Currencies are commodities.
4. The actual changing of one currency into another currency is called
conversion.
5. The process of expressing amounts stated in one currency in terms of
another currency through the use of an appropriate currency exchange rate
between the two currencies is called translation.
6. The number of units of a foreign currency needed to acquire one unit of the
domestic currency is referred to as the indirect quotation of the exchange
rate.
7. The number of units of a domestic currency needed to acquire one unit of the
foreign currency is referred to as the direct quotation of the exchange rate.
8. Exchange rates that are determined by market conditions are termed floating
fee or floating rates.
9. The exchange rate for immediate delivery of currencies exchanged is the spot
rate.
10. The primary long-run cause of exchange rate changes is attributable to
differential rates of inflation.
11. A theory that explains long-run changes in exchange rates is called
purchasing power parity.
12. When a transaction is to be settled by the receipt or payment of a fixed
amount of a specified currency, the receivable or payable respectively, is said
to be denominated in that currency.
13. A party to a foreign transaction measures and records the transaction in the
currency of the country in which the party is located.
14. When a domestic exporter is to receive payment in a foreign currency at a
date later than the transaction date, the domestic exporter is said to be in a
(n) exposed asset position.
15. When a domestic importer is to make payment in a foreign currency at a date
later than the transaction date, the domestic exporter is said to be in a (n)
exposed liability position.
16. The date of which a transaction to import or sell inventory is recorded is called
the transaction date.
17. In settling foreign currency transactions, companies usually use bank wire
transfers.
False 1. International accounting standards are promulgated by the International
Organization of Securities Commissioners.
True 2. U.S. accounting standards currently do not comply with international
accounting standards in all areas.
False 3. In general, international accounting standards are more demanding than
U.S. accounting standards.
True 4. In general, U.S. accounting standards are more stringent than international
accounting standards.
False 5. It is a major effort to bring a U.S. company’s financial statements into
compliance with international accounting standards.
False 6. The process of actually changing one currency into another currency is
called translation.
True 7. The number of units of the foreign currency needed to acquire one unit of
the domestic currency (the Philippine peso) is referred to as the indirect quotation of
the exchange rate.
False 8. The number of units of the domestic currency (the Philippine peso) needed
to acquire one unit of the foreign currency is referred to as the indirect quotation of
the exchange rate.
True 9. To determine the Philippine peso equivalent of an amount stated in a foreign
currency, multiply the foreign currency by the direct exchange rate.
False 10. To determine the Philippine peso equivalent of an amount stated in a
foreign currency, multiply the foreign currency by the indirect exchange rate.
True 11. A foreign currency is strengthening; as a result, the indirect exchange rate
will decrease.
False 12. A foreign currency is weakening; as a result, the indirect exchange rate
will decrease.
True 13. The Philippine peso is weakening; as a result, the direct exchange rate will
increase.
False 14. The Philippine peso is strengthening; as a result, the direct exchange rate
will increase.
True 15. Floating rates and forward rates mean different things.
False 16. Fixed rates and forward rates mean the same thing.
True 17. Denominated means the currency in which settlement must be made.
False 18. Importing and exporting transactions are always measured in one
currency and denominated in a different currency.
False 19. An importing transaction is initially recorded on the books at the order (or
commitment) date.
False 20. In importing and exporting transactions, the transaction date and the
settlement date can never coincide.
False 21. In importing and exporting transactions, bank wire transfers must be used.
True 22. For foreign currency transactions, the IASB adopted the two-transaction
perspective—not the one-transaction perspective.
True 23. Adjusting foreign currency receivables and payables to the spot rate at
intervening financial reporting dates is essentially current-value accounting.
False 24. Under the one-transaction perspective, the existence of intervening
financial reporting dates between the transaction date and the settlement date is
irrelevant.
True 25. Under the two-transaction perspective, changes in the exchange rate
between the transaction date and the settlement date would not result in an
adjustment to the amount initially recorded as a sale in an exporting transaction.
False 26. Under the one-transaction perspective, FX transaction gains or losses are
not reported currently in the income statement.
False 27. In a foreign currency transaction in which the exchange rate changes
between the transaction date and the settlement date, one party will report an
exchange gain while the other party will report an exchange loss.
False 28. Exchange gains from foreign currency transactions are taxable when
recognized.
True 29. Exchange gains from foreign currency transactions are taxable when
realized.
False 30. Exchange losses from foreign currency transactions are tax deductible
when recognized.
True 31. FX transaction gains and losses recognized at intervening financial
reporting dates as a result of adjusting foreign currency receivables and payables
are always unrealized.
False 32. From the perspective of both domestic importers and domestic exporters
who have exposed positions, it is better to have the direct exchange rate increase
rather than decrease.
False 33. Domestic exporters having exposed positions prefer the Philippine peso to
get stronger.
True 34. Domestic importers having exposed positions prefer the Philippine peso to
get stronger.
False 35. Foreign currency transactions gains and losses are displayed in an
income statement as extraordinary items because they are unusual in nature and
are not expected to recur as a consequence of customary and continuing business
activities.
False 36. If the spot rates for the local currency unit (LCU) are: buying rate LCU1 =
P0.0090; and selling rate, LCU1 = P0.0096, a Philippine multinational enterprise
pays P900 to a foreign currency dealer for a LCU 100,000 draft.
True 37. The buying spot rate is used by a Philippine multinational enterprise to
restate a trade account receivable from a foreign customer denominated in the
foreign currency.
False 38. The pronouncements of the International Accounting Standards Board
establish accounting rules that must be used by U.S. multinational enterprises.
True 39. Spot rates are exchange rates applicable to current foreign currency
transactions.
True 40. Under the one-transaction perspective for foreign currency transactions,
the original amount entered in the accounting records for a foreign merchandise
purchase subsequently is adjusted when the exact amount of Philippine peso
required to obtain the foreign currency for payment to the supplier is known.
False 41. A decrease in the selling spot rate for a foreign currency in which a trade
account receivable of a Philippine multinational enterprise is denominated produces
a foreign currency transaction gain to the enterprise.
True 42. International Accounting Standards often are similar to the FASB’s
Statements of Financial Accounting Standards.
False 43. The liability under a forward contract is measured by the difference
between the forward rate and the spot rate on the date of the contract.
True 44. Foreign currency transaction gains attributable to a forward contract
designated as a hedge of a foreign-currency denominated firm commitment are
recognized in the carrying amount of the hedged item.
True 45. A foreign currency transaction gain or loss is recognized on a forward
contract that was not designated as a hedge whenever the forward rate for the
foreign currency changes.
46. The impetus behind the move to upgrade international accounting standards has
recently come from
a) The Securities and Exchange Commission
b) The International Organization of Securities Commissioners
c) The International Accounting Standards Board
d) The Financial Accounting Standards Board
e) The United Nations
47. Which of the following is false concerning Philippine GAAP relative to U.S.
GAAP countries in general?
a) Philippine GAAP requires more disclosure of lines of business than US GAAP
b) US GAAP requires more detailed information for interim financial reporting
c) US GAAP is largely based on tax laws
d) Some Western European countries allow wide latitude in smoothing out
earnings
e) None of the above
48. Actually changing one currency into another currency is called
a) Translation
b) Denominating
c) Measuring
d) Conversion
49. If one foreign currency units (FCU) can be exchanged for P1.50 of Philippine
currency, what fraction should be used to compute the indirect quotation of the
exchange rate expressed in FCU?
a) P1.50/1
b) 1/P1.50
c) 1/.667
d) .667/1
50. To express 1,000 Foreign Currency Units (FCUs) in pesos, it is necessary to
a) Divide the indirect exchange rate by 1,000 FCUs
b) Multiply the indirect exchange rate by 1,000 FCUs
c) Divide the 1,000 FCUs by the direct exchange rate
d) Multiply the 1,000 FCUs by the direct exchange rate
51. The process of expressing amounts stated in one currency in terms of another
currency by using appropriate currency exchange rates is called
a) Measurement
b) Conversion
c) Translation
d) Denominating
52. Floating exchange rates are also referred to as
a) Free rates
b) Fixed rates
c) Spot rates
d) Direct rate
53. Exchange rates determined by market conditions are commonly referred to as
a) Floating rates
b) Direct rates
c) Spot rates
d) Official rates
54. Which of the following exchange rates does not fit under the floating exchange
rate system?
a) Future rates
b) Official rates
c) Spot rates
d) Forward rates
55. In the long run, changes in exchange rates can best be attributed to
a) Foreign trade deficits or surpluses
b) Foreign investment deficits or surpluses
c) Differential trade deficits or surpluses
d) Differential rates of inflation
56. Which of the following items is not a cause that affects the price of a currency in
either the short run or the long run?
a) Interest rates
b) A foreign trade deficit or surplus
c) Foreign investment
d) Purchasing power parity theory
57. A domestic company having importing and exporting transactions involving
credit and requiring settlement in foreign currency will hope that the direct exchange
rate
a) Increases for both types of transactions
b) Decreases for both types of transactions
c) Increases for exporting transactions and decreases for importing transactions
d) Decreases for exporting transactions and increases for importing transactions
58. In unhedged importing or exporting transactions, which of the following dates is
not a date having any accounting significance insofar as amount reportable to
stockholders?
a) The intervening financial reporting date
b) The settlement date
c) The transaction date
d) The commitment date
59. For unhedged importing and exporting transactions involving credit and requiring
settlement in foreign currency, which of the following dates would never be of
concern or have accounting significance?
a) The forward rate date
b) The transaction date
c) The settlement date
d) The intervening financial reporting date(s)
60. For importing transactions denominated in a foreign currency, any change in the
exchange rate between the transaction date and any intervening financial reporting
date(s) is reported as
a) An adjustment to the foreign currency receivable
b) A gain or loss to be added to or subtracted from the initially recorded cost of
inventory
c) A gain or loss in the current income statement
d) A deferred gain or loss in the balance sheet pending settlement
61. For importing and exporting transactions, recognizing in the income statement
FX transaction gains or losses resulting from adjustments made at intervening
financial reporting dates is not
a) A disregarding of the realized versus unrealized concept
b) Essentially current-value accounting
c) Consistent with the one-transaction perspective
d) Allowed unless there is an offsetting loss or gain from a related hedging
transaction
62. A domestic exporter has foreign currency receivables. The exporter’s risk
exposure is that the
a) Foreign currency will strengthen
b) Direct exchange rate will decrease
c) Peso will weaken
d) Indirect exchange rate will decrease
63. A domestic importer whose transactions are in foreign currency has risk
exposure that the
a) Foreign currency will strengthen
b) Direct exchange rate will decrease
c) Peso will weaken
d) Indirect exchange rate will decrease
64. In a bank wire transfer, which of the following occurs?
a) Currency physically changes hands between the banks involved when the
wire transfer occurs
b) Currency is physically moved between countries by the banks involved at the
wire transfer date
c) The result is that the two banks involved create a payable and receivable
between each other
d) Both b and c
e) Both a and b
65. Concerning importing and exporting transactions, which of the following
statements is false?
a) Gains and losses on adjustments to foreign currency receivables and
payables may be reported net in the income statement
b) Gains and losses on adjustments to foreign currency receivables and
payables are unrealized in nature
c) When a domestic company has a gain or loss as a result of adjusting a
foreign currency receivable or payable, the foreign company will have the
opposite result
d) FX transaction gains are taxable when realized
66. A foreign currency transaction loss occurs on an open-account purchase from a
foreign supplier denominated in local currency units (LCU) of the foreign supplier’s
country if the:
a) Buying spot rate for the LCU decreases between the purchase date and the
payment date
b) Selling spot rate for the LCU decreases between the purchase date and the
payment date
c) Buying spot rate for the LCU increases between the purchase date and the
payment date
d) Selling spot rate for the LCU increases between the purchase date and the
payment date
67. A foreign currency transaction gain or loss is:
a) A change in the exchange rate quoted by a foreign currency dealer
b) A term synonymous with translation of a foreign currency to pesos
c) The difference between the recorded pesos amount of a trade account
receivable or a trade account payable denominated in a foreign currency and
the amount of pesos ultimately received or paid
d) A change from the current/noncurrent method to the monetary/nonmonetary
method of remeasuring a foreign investee’s financial statements to the pesos
functional currency
68. A transaction gain or loss at the settlement date is:
a) A change in the exchange rate quoted by a foreign exchange trader
b) Synonymous with the translation of foreign currency financial statements into
dollars
c) The difference between the recorded dollar amount of an account receivable
denominated in a foreign currency and the amount of dollars received
d) The difference between the buying and selling rate quoted by a foreign
exchange trader at the settlement date
69. From the viewpoint of a Philippine company, a foreign currency transaction is a
transaction:
a) Measured in a foreign currency
b) Denominated in a foreign currency
c) Measured in Philippine currency
d) Denominated in Philippine currency
70. The exchange rate quoted for future delivery of foreign currency is the definition
of a (n):
a) Direct exchange rate
b) Indirect exchange rate
c) Spot rate
d) Forward exchange rate
71. A transaction loss would result from:
a) An increase in the exchange rate applicable to an asset denominated in a
foreign currency
b) A decrease in the exchange rate applicable to a liability denominated in a
foreign currency
c) The import of merchandise when the transaction is denominated in a foreign
currency
d) A decrease in the exchange rate applicable to an asset denominated in a
foreign currency
72. The best definition for direct quotes would be “direct quotes measure…
a) How much foreign currency must be exchanged to receive 1 domestic
currency
b) Current or spot rates
c) How much domestic currency must be exchanged to receive 1 foreign
currency
d) Exchange rates at a future point in time
73. A Philippine company purchases medical lab equipment from a Japanese
company. The Japanese company requires payment in Japanese yen. In this
transaction, the yen would be referred to as the
a) Domestic currency for the Philippine company
b) Denominated currency
c) Purchasing currency
d) Selling currency
74. A spot rate may be defined as
a) The price a foreign currency can be purchased or sold today
b) The price today at which a foreign currency can be purchased or sold in the
future
c) The forecasted future value of a foreign currency
d) The U.S. dollar value of a foreign currency
e) The Euro value of a foreign currency
75. A Philippine company that has purchased inventory from a German vendor
would be exposed to a net exchange gain on the unpaid balance if the
a) Amount to be paid was denominated in dollars
b) Peso weakened relative to the Euro and the Euro was the denominated
currency
c) Peso strengthened relative to the Euro and the Euro was the denominated
currency
d) Philippine company purchased a forward contract to buy Euros
76. A Philippine company that has sold its product to a German firm would be
exposed to a net exchange gain on the unpaid receivable if the
a) Amount to be paid was denominated in dollars
b) Peso weakened relative to the Euro and the Euro was the denominated
currency
c) Peso strengthened relative to the Euro and the Euro was the denominated
currency
d) Philippine company purchased a forward contract to buy Euros
77. A bank dealing in foreign currency tells you that the foreign currency will buy you
P.80 Philippine peso. The bank has given you
a) A direct quote
b) An indirect quote
c) The official (fixed) rate
d) A forward rate
78. When an economic transaction is denominated in a currency other than the
entity’s domestic currency, the entity must establish a
a) Domestic rate
b) Hedge rate
c) Rate of currency exchange
d) Rate of exchange
79. Which of the following factors influences the spread between forward and spot
rates?
a) Which currency is denominated as the domestic currency
b) The length of the forward exchange contract
c) The current cross rate between the two currencies
d) All are factors that may influence the spread
80. A forward exchange contract is being transacted at a premium if the current
forward rate is
a) Less than the expected spot rate
b) Greater than the expected spot rate
c) Less than the current spot rate
d) Greater than the current spot rate
81. Foreign currency transactions not involving a hedge should be accounted for
using
a) The one-transaction method
b) The two-transaction method
c) A hybrid of the one- and two- transaction methods
d) Either the one- or the two- transaction method
82. A transaction involving foreign currency will most likely result in gains and losses
to the reporting entity if the
a) Forward exchange contract is selling at a premium
b) Transaction is denominated and measured in the reporting entity’s currency
c) Transaction takes place in a country with a tiered monetary system
d) Transaction is denominated in a foreign currency and measured in the
reporting entity's currency
83. Which of the following does not represent an exchange risk on an exposed
position to a company transacting business with a foreign vendor?
a) Transaction is denominated in foreign currency settled at a future date
b) Firm commitment to purchase inventory to be paid for in foreign currency
c) Forecasted foreign currency transaction with a high probability of occurrence
d) Firm commitment to purchase inventory denominated in U.S. dollars
84. The number of types of forward contracts for which the established standards
requires:
a) Three
b) Four
c) Five
d) Six
85. An entity denominated a sale of goods in a currency other than its functional
currency. The sale resulted in a receivable fixed in terms of the amount of foreign
currency to be received. The exchange rate between the functional currency and the
currency in which the transaction was denominated changed. The effect of the
change should be included as a:
a) Separate component of stockholders’ equity whether the change results in a
gain or a loss
b) Separate component of stockholders’ equity if the change results in a gain
and as a component of income if the change results in a loss
c) Component of income if the change results in a gain and as a separate
component of stockholders’ equity if the change results in a loss
d) Component of income whether the change results in a gain or a loss
86. An entity denominated a December 15, 20x4, purchase of goods in a currency
other than its functional currency. The transaction resulted in a payable fixed in
terms of the amount of foreign currency, and was paid on the settlement date,
January 20, 20x5. The exchange rates between the functional currency and the
currency in which the transaction was denominated changed at December 31, 20x4,
resulting in a loss that should:
a) Not be reported until January 20, 20x5, the settlement date
b) Be included as a separate component of stockholders’ equity at December
31, 20x4
c) Be included as a deferred charge at December 31, 20x4
d) Be included as a component of income from continuing operations for Choose
the correct answer for each of the following questions
87. On October 1, 20x4 XY Company, a Philippine company, contracted to purchase
foreign goods requiring payment in pesos one month after their receipt in XY’s
factory. Title to the goods passed on December 15, 20x4. The goods were still in
transit on December 31, 20x4. Exchange rates were 1 peso to 22 foreign currency
units (FCUs), 20 FCUs, and 21 FCUs on October 1, December 15, and December
31, 20x4, respectively. XY should account for the exchange rate fluctuations in 20x4
as
a) A loss included in net income before extraordinary items
b) A gain included in net income before extraordinary items
c) An extraordinary gain
d) An extraordinary loss
88. On October 2, 20x4, LL Co., a Philippine company, purchased machinery from
ST, a foreign company, with payment due on April 1, 20x5. If LL’s 20x4 operating
income included no foreign exchange gain or loss, then the transaction could have
a) Resulted in an extraordinary gain
b) Been denominated in U.S. dollars
c) Caused a foreign currency gain to be reported as a contra account against
machinery
d) Caused a foreign currency translation gain to be reported as a separate
component of stockholders’ equity
89. Philippine based Corporate X has a number of importing transactions with
companies based in UK. Importing activities result in payables. If the settlement
currency is the British Pound, which of the following will happen by changes in the
direct or indirect exchange rates?
Direct Exchange Rate Indirect Exchange Rate
Increases Decreases Increases Decreases
a. NA NA NA NA
b. Loss Gain Gain Loss
c. Loss Gain NA NA
d. Gain Loss Loss Gain
90. Philippine based Corporation X has a number of exporting transactions with
companies based in Sweden. Exporting activities result in receivables. If the
settlement currency is the Swedish Krona, which of the following will happen by
changes in the direct or indirect exchange rates?
a. Loss Gain NA NA
c. NA NA NA NA
91. Corporation X has a number of exporting transactions with companies based in
Vietnam. Exporting activities result in receivables. If the settlement currency is the
US dollar, which of the following will happen by changes in the direct or indirect
exchange rates?
a. Loss Gain NA NA
c. NA NA NA NA
92. May foreign currency transaction gains or losses be recognized on the following
transactions denominated in a foreign currency:
Purchase of Sales of
Merchandise? Merchandise?
a. Yes Yes
b. Yes No
c. No Yes
d. No No
93. Which of the following best describes current GAAP with respect to the required
reporting currency?
a) A currency other than the peso may be the reporting currency in financial
statements
b) Only the peso may be the reporting currency in financial statements
c) Companies can change their reporting currency as much as they wish
d) Companies can never change their reporting currency
94. An exchange rate of P1.32:1 FC
a) Means that each peso is worth 1.32 FC
b) Implies that the peso has strengthened vis-à-vis the FC
c) Implies that the GC has strengthened vis-à-vis the peso
d) Can also be expressed as P1: 0.76 FC
95. Which of the following terms describes the change in currency values relative to
one another as a result of market conditions?
a) Exchange rate
b) Fixed exchange rate
c) Floating exchange rate
d) None of the above
96. Which of the following terms describes the change in currency values relative to
one another as a result of decisions made by politicians?
a) Exchange rate
d) Floating exchange rate
97. Which of the following terms describes currency values relative to one another?
a) Exchange rate
d) Floating exchange rate
98. Which of the following statements is not accurate with regard to a purchase or
sale denominated in a foreign currency?
a) The account titles would be the same as a similar transaction undertaken with
a Philippine company
b) Future fluctuations of the foreign currency’s value are not anticipated
c) The amount recorded in the financial records will be the estimated value of
the foreign currency paid or received
d) The amount recorded in the financial records is the number of foreign
currency units exchanged
99. What is the date called when a foreign currency transaction is originally
recorded?
a) Origination date
b) Balance sheet date
c) Transaction date
d) Settlement date
100. What is the date called when a foreign currency transaction is paid through the
exchange of currency?
a) Origination date
b) Balance sheet date
c) Transaction date
d) Settlement date
Which of the following statements is not correct?
a. Joint arrangements may be entered into to manage risks involved in a project
b. Joint arrangements may be entered into to provide the parties with access to new technology or
new markets
c. Joint arrangements require investors to have equal interests in the joint arrangement
d. The key feature of a joint arrangement is that the parties involved have joint control over the
decision making in relation to the joint arrangement
The particular relationship between parties that signifies the existence of a joint arrangement is
a. Significant influence by one party over the other party;
b. Control over the operating policies of one party by another party;
c. Shared influence by two parties over the activities of another party;
d. Joint control by the parties over the activities of an operation.
The matters generally dealt with in a joint arrangement contract include the:
I II III IV
- activity, duration and reporting obligations Yes Yes Yes Yes
- capital contribution of the venturers Yes Yes Yes No
- sharing of the output, expenses or results No Yes Yes Yes
- voting rights of the venturers No No Yes No
a. I
b. II
c. III
d. IV
PFRS 11 Joint Arrangements provides that joint control exists where:

a. No single party is in a position to control the activity unilaterally;
b. The decisions in areas essential to the goals of the joint arrangement do not require the
consent of the parties;
c. No one party may be appointed as the manager of the joint arrangement;
d. One party alone has power to control the strategic operating decisions of the joint
arrangement.
Which of the following is correct?

a. All joint arrangements which are not structured through a separate vehicle are classified as
joint ventures;
b. For a joint venture, the rights pertain to the rights and obligations associated with individual
assets and liabilities, whereas with a joint operation, the rights and obligations pertain to
the net assets.
c. In considering the legal form of the separate vehicle if the legal form establishes rights to
individual assets and obligations, the arrangement is a joint operation. If the legal form
establishes rights to the net assets of the arrangement then the arrangement is a joint
venture.
d. Where the joint operators have designed the joint arrangement so that its activities
primarily aim to provide the parties with an output if will be classified as a joint venture.
Which of the following statements is not true in relation to joint control?
a. Each party must have an equal interest for joint control to exist
b. Joint control exists only where there is contractually agreed sharing of control
c. Entities over which a party has joint control are accounted for in accordance with PFRS 11 Joint
Arrangements
d. Joint control requires the unanimous consent of the parties sharing control
In relation to supply of a service to a joint operation by one of the joint operators, which of the following
statements is correct?
a. A joint operator can recognize 100% of the earned through the supply of services to the joint
operation;
b. A joint operator is entitled to recognize a profit from the supply of services to itself;
c. A joint operator cannot earn a profit on supplying services to itself;
d. A joint operator is not able to recognize the service revenue or service cost for the services
supplied to the joint operation
PetroTex shares the use, in equal measure, of an oil pipeline with four other oil companies. The joint
operation states that the maintenance of the pipeline will also be shared on an equal basis by all five
parties. This pipeline project is considered as a:
a. Joint operation
b. Joint venture
c. Business combination
d. Statutory consolidation
In relation to No. 8, PetroTex also has a joint arrangement with two other companies to share control of
Antonio Oil. The arrangement states that all three companies have an equal say in the running of
Antonio Oil. None of the three partners is able to dominate the strategic and operation activities of
Antonio Oil. This pipeline project is considered as a:
a. Joint operation
b. Joint venture
A joint arrangement has three parties in which A owns 50% voting rights, while B owns 30% and C owns
20% voting rights in the arrangement. The terms of the contract among the parties A, B, and C state that
at minimum 75% of the voting rights are needed to exercise the control over the arrangement. This
arrangement is:
a. Joint operation
b. Joint venture
An arrangement is established by two parties and each party owns 50% voting rights of the arrangement
and the terms of the contract require that at minimum 51% voting rights are needed to exercise the
control over the management.
a. Joint control
b. No Joint venture
A joint arrangement is established by three parties in which A owns 50% voting rights while B and C each
owns 25% voting rights of that arrangement. The terms of the contract among A, B and C state that a
minimum of 75% voting rights are needed to exercise the control over the arrangement. This joint
arrangement is:
a. Joint operation
b. No Joint venture
Two parties established a joint arrangement in the form of an incorporated separate legal entity. Each
party to the arrangement owns 50% voting rights of the incorporated entity. The incorporation results in
the separation of the joint owners from this entity and this reflects that the assets and liabilities held in
the jointly control entity are the assets and liabilities of the incorporated entity, in such a case, the
parties to the entity have the right to the net assets of the entity; therefore it will be treated as:
a. Joint operation
b. Joint venture
c. Associate
d. Subsidiary
A and B decide to enter into a joint arrangement to produce a new product. A undertakes one
manufacturing process and B undertakes the other. A and B have agreed that decisions regarding the
joint operation will be made unanimously and that each will bear their own expenses and take on
agreed share of the sales revenue from the product
a. Joint operation
b. Joint venture
c. Associate
d. Subsidiary
For the purposes of equity accounting for an investment in an associate, it is presumed that the investor
has significant influence over the other entity where the investor holds:
a. Between 1% and 5% of the voting power of the investee;
b. Between 5% and 10% of the voting power of the investee;
c. 20% or more of the voting power of the investee;
d. 50% or more of the voting power of the investee;
The following are regarded as factors indicating the existence of significant influence over another
entity:
I II III IV
- representation on the board of directors Yes Yes Yes Yes
- participation in decisions about dividends No Yes Yes Yes
- interchange of managerial personnel No No No Yes
- ability to control the investee’s operating activities No Yes No No
a. I;
b. II;
c. III;
d. IV;
For the purposes of equity accounting, significant influence is regarded as the power of an investor to:
a. Control the financial and operating policy decisions of an investee;
b. Participate in the financial and operating policy decisions of an investee;
c. Participate in the day-to-day management of a joint venture interest;
d. Dominate the financing decisions of an entity
Which of the following statements is correct?
a. All joint arrangements are accounted for under PAS 28
b. Joint arrangements classified as joint ventures are accounted for under PFRS 11
c. Joint arrangements classified as joint ventures are accounted for under PAS 28
d. Joint arrangements classified as joint operations are accounted for under PAS 28
For the purposes of equity accounting for an investment in an associate, it is presumed that the investor
has significant influence over the other entity where the investor holds:
a. Between 1% and 5% of
b. Between 5% and 10% of the voting power of the investee;
c. 20% or more of the voting power of the investee;
d. 50% or more of the voting power of the investee;
When disclosing information about investments in associate, PAS 28 Investments in Associates and Joint
Ventures, requires separate disclosure of which of the following
I. Shares in associates, in the statement of financial position
II. Share of profit or loss of associates, in the statement of profit or loss and other comprehensive
income.
III. Share of any discontinuing operations, in the statement of changes in equity
IV. Shares of changes recognized directly in the associate's equity, in the statement of changes in equity
a. I, II, III and IV;
b. I, II and IV only;
c. II, II and IV only
d. I, II and III only;
When eliminating any unrealized profit arising when a joint operator provides services to a joint
operation the profit is eliminated against:
a. The investment in the joint operation;
b. Retained earnings;
c. Work in progress, finished goods and other inventory related accounts;
d. Cost of goods sold
Bosch Co. received a cash dividend from a common stock investment. Should Bosch resort on increase in
the investment account if it accounts for the investment under the fair value method or the equity
method?
a. Fair value method, NO; Equity method, NO
b. Fair value method. YES: Equity method, YES
c. Fair value method, YES: Equity method, NO
d. Fair value method, NO: Equity method, YES
PFRS requires joint ventures to be reported as
a. Equity method investments.
b. Trading securities.
c. Equity method or proportionately consolidated investments.
d. Available-for-sale securities.
ABC Company uses the equity method to report its investment in 25% of the stock of XYZ Company. Its
original investment cost exceeded 25% of the book value of XYZ by a large amount. ABC is computing
equity in net income of XYZ for the current year, which is five years after the acquisition. Which situation
below requires ABC to adjust the equity in net income number for write-offs of the difference between
investment cost and XYZ's book value?
Attribute the difference to
a. Goodwill
b. Brand names with indefinite life.
c. Databases with a 3-year life.
d. Plant assets with a 20-year life.
Impairment losses on equity method investments are
a. Not reported.
b. Reported in other comprehensive income.
c. Reported as a direct adjustment to beginning retained earnings.
d. Reported on the income statement.
Equity in net income is affected by all but which one of these items related to the investee?
a. Impairments of indefinite life intangibles of the investee.
b. Markup on inventory sold by the investee to the investor
c. Markup on inventory sold by the investor to the investee -
d. Amortization of previously unreported intangibles of the investee
Which of the following statements is true concerning proportionate consolidation for joint ventures?
a. It is allowed under U.S. GAAP but not under PFRS
b. It was abolished under PFRS for most joint ventures, as of 2013
c. It is allowed for separate reporting of the joint venture’s financial statements
d. It is a way to avoid reporting the joint venture’s leverage on the investor’s balance sheet
An investor who owns 30% of the common stock of an investee is most likely to exercise significant
influence requiring use of the equity method when:
a. The investor and investee sign an agreement under which the investor surrenders significant
rights
b. The investor tries and fails to obtain representation on the investee’s board of directors
c. Tries and fails to obtain financial information from the investee
d. The second largest investor owns 1% of the investee’s outstanding stock
Where an acquisition in an associate results in an excess the excess is accounted for in the year of
acquisition as follows:
a. As a credit against the investment in associate account.
b. As a credit against the share of associate profile account
c. As a debit against the share of associates retained earnings
d. No adjustment is required due to the single line method of accounting followed under the
equity method
An investor uses the equity method to account for an investment in common stock. After the date of
acquisition, the equity investment account of the investor is:
a. Not affected by its share of the earnings or losses of the investee
b. Not affected by its share of the earnings of the investee but is decreased by its share of the
losses of the investee
c. Increased by its share of the earnings of the investee but is not affected by its share of the
investee’s losses,
d. Increased by its share of the earnings of the investee and is decreased by its share of the
investee’s losses
Richard uses the equity method to account for its investment in Plains on January 1. On the date of
acquisition, Plains’ land and buildings were undervalued on its balance sheet. How do these excesses of
fair values over book values affect Richard's Equity Income from Plains?
a. Building, Decrease: Land, Decrease
b. Building, Decrease: Land, No Effect
c. Building, Increase; Land, Increase
d. Building, Increase; Land, No Effect
On January 1, Wolf purchased 15% of Fieldman’s common stock. On August 1, it purchased another
30% of Fieldman’s common stock. During October, Fieldman declared and paid a cash dividend on its
common stock. How much income from Fieldman should Wolf report on its income statement?
a. 15% of Fieldman 's income for January 1 to July 31, plus 45% of Fieldman ‘s income for the
remainder of the year
b. 45% of Fieldman 's income from August 1 to December 31 only
c. 40% of Fieldman's income
d. The amount of dividends received from Fieldman,
Which of the following does not indicate an investor company’s ability to significantly influence an
investee?
a. Material inter-company transactions
b. The investor owns 30% while another investor owns 70%
c. Interchange of personnel
d. Technological dependency
When a company holds between 20% and 50% of the outstanding stock of an investee. Which of the
following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circumstances
indicate that it is unable to exercise “significant influence" over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise “significant influence” over the investee.
d. The investor should always use the fair value method to account for investment.
When an investor can no longer exert significant influence over the investee, it must change to the fair
value method. What is the required accounting treatment on investor’s books?
a. A prior period adjustment is recorded to bring retained earnings to what it would have been if
the new method had been used in the past
b. The book value on the date of change becomes the “cost” of the investment
c. The investment will be adjusted to its fair value
d. Both b and c are required
The primary beneficiary of a variable interest enterprise:
a. Must include the assets, liabilities, and results of the variable interest enterprise in its
consolidated financial statements
b. Can simply record income on a cash basis when dividends are received or income accrued
c. Only recognizes a gain or loss on the sale of its interest in the variable interest enterprise
d. Only includes the results of the variable interest enterprise if it has in excess of 50% of the
voting share capital of the variable interest enterprise
CHAPTER 11
20. In consignment sales, the consignee:
a. Records the merchandise as an asset on its books

b. Records a liability for the merchandise held on consignment
c. Recognizes revenue when it ships merchandise to the consignor
d. Prepares an “account report” for the consignor which shows sales, expenses, and cash receipts
21. Revenue is recognized by the consignor when the:
a. Goods are shipped to the consignee

b. Consignee receives the goods
c. Consignor receives an advance from the consignee
d. Consignor receives an account sales from the consignee
22. 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
23. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be
recognized by the:
a. Consignor when the goods are shipped to the consignee

b. Consignee when the goods are shipped to the third party
c. Consignor when notification is received the consignee has sold the goods
d. Consignee when cash is received from the customer
24. The roe of the agent in a Principal-Agent relationship is to
a. Arrange for the principal to provide goods or services to a customer

b. Provide the goods or services for a customer
c. Market the principal goods and services to prospective customers
d. Develop and maintain goodwill of the principal’s customers
25. The use of the net method of recognizing revenue by an agent
a. Is appropriate as long as both revenue and costs are included

b. Is the correct method in a Principal-Agent relationship
c. Could result in an overstatement of the agent’s revenue
d. Cost result in an understatement of the agent’s revenue
26. Consignments are a specialized marketing method whereby the
a. Consignee purchases goods for sale and sends payment when goods are sold
b. Consignee (agent) holds title to the product
c. Consignee pays for good up front and is paid when merchandise is sold
d. Consignee takes possession of merchandise but title remains with manufacturer
27. Consigned goods are recognized as revenues by the
a. Consignor when a sale to a third party has occurred

b. Consignor when the merchandise has been shipped to a consignee
c. Consignee when a sale to a third party has occurred
d. Consignor when it receives payment from consignee for goods sold
28. Which of the following is most true regarding consignment arrangements?
a. Revenue is recognized at the point in time when the consignment arrangement is made
b. Revenue is recognized when goods are transferred to the consignee
c. Revenue is recognized upon sale by the consignee to an end customer
d. Revenue is never recognized because GAAP does not allow such arrangements
29. Consignments are a specialized marketing method whereby the
a. Consignee purchases goods for sale and sends payment when goods are sold
b. Consignee (agent) holds title to the product
c. Consignee pays for good up front and is paid when merchandise is sold
d. Consignee takes possession of merchandise but title remains with manufacturer
30. Consigned goods are recognized as revenues by the
a. Consignor when a sale to a third party has occurred

b. Consignor when the merchandise has been shipped to a consignee
c. Consignee when a sale to a third party has occurred
d. Consignor when it receives payment from consignee for goods sold
31. Sweeney most likely should recognize revenue when:
a. He paints the painting, because the painting is produced while he works

b. When he transfers the painting to a barbershop
c. When the barbershop sells the painting
d. When the barbershop’s right of return expires
32. After Sweeney has transferred a painting to a barbershop, the painting:
a. Should be counted in Sweeney’s inventory until the barbershop sells it

b. Should be counted in the barbershop’s inventory, as the barbershop now possesses it
c. Should be counted in either Sweeney’s or the barbershop’s inventory, depending on which
incurred the cost of preparing the painting for display
d. We lack sufficient information to know who should carry the painting in inventory
33. Which of the following is most true regarding consignment arrangements?
a. Revenue is recognized at the point in time when the consignment arrangement is made
b. Revenue is recognized when goods are transferred to the consignee
c. Revenue is recognized up sale by the consignee to an end customer
d. Revenue is never recognized because GAAP does not allow such arrangements
CHAPTER 13
HOME OFFICE AND BRANCH ACCOUNTING: GENERAL PROCEDURES
True 1. An expense item allocated by the home office to a branch is recorded by the branch by a
debit to an expense ledger account and a credit to the Home office account
True 2. A debit to the Home Office ledger account and a credit to the Trade Accounts Receivable
account in the accounting records of a branch indicate that the home office collected accounts
receivable of the branch
False 3. Start-up costs incurred by a branch in the initial months of operations are appropriately
deferred and amortized in subsequent profitable accounting periods
False 4. If the home office carries branch equipment in its accounting records, an acquisition of
equipment by the branch is recorded in the home office accounting records by a debit to the
Investment in Branch ledger account and a credit to the Equipment: Branch Account
True 5. Separate financial statements of home office and branch do not meet the needs of
investors, creditors, or other outside users of financial statements.
False 6. In a working paper for combined financial statements of home office and branch, the
balance of the Shipments to Branch ledger account is eliminated against the balance of the
Investment in Branch account.
False 7. If the perpetual inventory system is used by both the home office and the branch, the
reciprocal ledger accounts used by the branch are the Home Office and Shipments from Home
Office accounts.
False 8. The “shipments to branch” account is added to the home office’s purchases account in
determining home office cost of goods sold.
True 9. When inventory is received from the home office, a branch increases its home office
account.
True 10. Reciprocal home office and branch accounts are eliminated when home office and
branch financial statements are combined for external reporting.
False 11. The “branch office” account on the home office’s books and the “home office” account
on the branch’s books are examples of nonreciprocal accounts whose balances would be
combined when the home office is preparing a balance sheet for all its combined operations.
True 12. When performing the “end-of-the-period reconciliation between the Home Office
account on the branch’s books and the Branch Account on the home office’s books, shipments in
transit from the branch back to the home office will be treated as an addition to the home
office’s Branch Account.
False 13. When performing the “end-of-the-period reconciliation between the Home Office
account on the branch’s books and the Branch Account on the home office’s books, home office
expenses which are allocated to the branch office from the home office will be subtracted from
the Home Office Account on the branch’s books
True 14. There are three ways to reconcile the balance in the home office’s Branch Account with
the balance in the branch’s Home Office Account. One way would be to reconcile from the home
office balance to the branch balance. A second way would be to reconcile from the branch
balance to the home office balance. A final way would be to reconcile both the home office’s
branch balance and the branch’s home office balance to the adjusted true balance.
True 15. The incremental profitability of a branch office may be hidden if the home office
allocates too many fixed costs to the branch office
False 16. A major disadvantage of a centralized accounting system is that the profitability of
branch operations cannot be determined because branch operations are not accounted for in a
separate general ledger.
True 17. Home office allocations to a branch are not required under current standards
True 18. Income taxes can be allocated to a branch
True 19. Branch fixed assets can be carried on the home office’s books under a decentralized
accounting system
False 20. If branch fixed assets are recorded on the home office’s books, depreciation expense
would not be charged to branch operations
CHAPTER 14
HOME OFFICE AND BRANCH ACCOUNTING: SPECIAL PROCEDURES
TRUE 1. The balance of the allowance for Overvaluation of Inventories: Branch ledger account is
deducted from the balance of the investment in branch account in the separate balance sheet of
the home office.
FALSE 2. If the home office bills shipment of merchandise to the branch at 25% above home
office cost and the judgment balance of the allowance for Overvaluation of Inventories: Branch
ledger account is 2,400 and amount of branch inventories at build prices is 81,600.
TRUE 3. If the branch managers are responsible for ordering merchandise from the home office
any exist freight costs incurred as a result of inter-branch shipments are absorbed by the
appropriate branch rather than by the home office.
TRUE 4. Freight cost on merchandise shipped, as directed by the home office, by Westside
branch to Eastside branch in excess of normal freight costs from the home office to Eastside
Branch are recognized as operating expenses of the home office.
FALSE 5. A markup of 16 2/3% on billed price is equal to the markup of 14 2/7% on cost of
merchandise shipped to the branch by the home office.
FALSE 6. If the home office bills merchandise shipments to the branch at prices above the home
office cost, the net income reported to the home office by the branch is overstated from a total
company point of view.
FALSE 7. In a combined balance sheet for home office and branch, the balance of the allowance
for overvaluation of inventories: branch ledger account is deducted from the balance of the
investment in branch account.
FALSE 8. A home office ships merchandise to its branch at the transfer price greater than cost.
When this merchandise is resold by the branch to outside entities the branch's profit will be
overstated.
TRUE 9. A closing entry prepared by a branch will adjust the loading account and record branch
profit or loss in the home office account.
TRUE 10. Unrealized profits from transactions between a home office and its branch are
eliminated in preparing combined financial statements for the enterprise.
FALSE 11. A home office records shipments to its branch at billing prices and adjusts the loading
account at year-end . When this approaches used, the loading account during the period will
always be zero.
TRUE 12. If a "loading" account is used, the "shipments to branch" account on the home office
books is created for the actual cost of shipments made to the branch whereas the "shipments
from the home office" on the branch's books includes any initial unrealized profit.
FALSE 13. Freight charges incurred by the branch office on merchandise inventory shipped from
the home office would be included in the branch cost of goods available-for-sale even if the
wrong merchandise was shipped from the home office.
TRUE 14. One reason why a branch office would not have a "loading" account is that the home
office usually does not want the branch personnel to know the amount of unrealized profit built
into the merchandise's transfer price.
FALSE 15. It is equally probable that a "loading" account could be charged with an unrealized
inventory loss as it is that it could be charged with an unrealized inventory profit.
TRUE 16. As a general rule, the "loading" account will be credited for the unrealized profit
element of the merchandise shipped to the branches and debited for the amount of any realized
inventory profits.
TRUE 17. If the "Shipments from the Home Office" account and the "Shipments to the Branch
Office" account are kept on a reciprocal basis and home office charges of mark-up on these
shipments, there will be no need to adjust the loading account at the end of the period for any
realized inventory profits.
TRUE 18. If the "Shipments from the Home Office" account and the "Shipments to the Branch
Office" account are kept on a reciprocal basis and the home office charges a markup on this
shipments, two adjustments to the loading account will be needed at the end of the period. One
adjustment will be needed to adjust the "Shipments to Branch" account down to its cost basis,
and, a second adjustment will be needed to transfer any realized inventory profits from the
loading to the "Branch Profit" account.
FALSE 19. When a branch receives merchandise a transfer prices that include a loading factor
and sells that merchandise, its cost of goods sold will be understated and its income will be
overstated.
20. The Allowance for Overvaluation of Inventories: Branch ledger account of the home office is
debited:
a) When the home office ships merchandise to the branch at a billed price that exceeds
cost
b) In a journal entry to close the account at the end of an accounting period
c) When the branch’s ending inventory is recorded in the home office accounting records
d) In some other circumstances
21. Amongst the various reasons given for the internal transfer of merchandise inventory at a
price above its cost are:
a) The equitable allocation of income amongst the various units of the business enterprise
b) Efficiency in pricing inventories
c) Concealment of the true profit margins from branch personnel
d) All of the above are considered valid reasons
22. A branch office is allowed to make sales, carry inventory for resale to customers, and incur
normal operating expenses. The home office ships merchandise to the branch office at cost plus
a 20% markup. The home office uses a loading account. If the loading account is used in its
customary fashion, it will track:
a) Unrealized inventory profits only
b) Unrealized inventory profits and overall branch profits but not branch losses
c) Unrealized inventory profits and overall branch profits and losses
d) Overall branch profits and losses but not unrealized inventory profits
23. It is generally accepted that a branch office should incur and pay for, or at least be charged
with it, the reasonable caused of transporting merchandise into the branch office and preparing
it for sale to customers. In light of this generally accepted practice, which of the following
charges for freight costs would be considered unreasonable if imposed on the branch office:
a) Requiring the branch to ship some of its inventory or another branch location due to
inventory shortages at the destination branch
b) Charging a cost to the branch for freight charges that is a fixed percentage of the cost
billed to the branch for the inventory itself
c) Charging freight charges to a branch office for inventory shipped by mistake where the
number of such mistakes occur rather frequently
d) All of the situations would normally be considered unreasonable
24. In preparing combined financial statements, which of the following accounts are eliminated
(brought to a zero balance) in the combining process?
Branch Income or Loss Purchases Sent to Branch
a) Yes Yes
b) No Yes
c) No No
d) Yes No
25. In the year end general ledger closing procedures, which accounts are closed in arriving at
Cost of Sales?
Purchases Sent to Branch Purchases from Home Office
a) Yes Yes
b) No Yes
c) No No
d) Yes No
26. The general ledger entry to adjust the Intracompany Profit Deferred account at the end of
an accounting period
a) Is reversed in the following accounting period
b) Is reversed in the combining process
c) Results in an entry in the combining process that is essentially a reclassification entry
d) Results in the Intracompany Profit Deferred account being reduced to a zero balance in
the combined column of the combining statement worksheet
D. Which of the following accounts is a reciprocal account to the Investment in Branch account?
a. Branch Income
b. Equity in Home Office
c. Home office capital
d. None of the above
D. In preparing combined financial statements, which of the following accounts are eliminated (brought
to a zero balance) in the combining process?
Branch Income or Loss Home office capital

a. Yes Yes
b. No Yes
c. No No
d. Yes No
D. A control feature in a decentralized accounting system is
a. The balance in the investment in Branch account must equal the balance in the Home Office
Capital account
b. The balance in the Investment in Branch account must equal the balance in the Home Office
Capital account less the branch’s cumulative unremitted profits
c. The intracompany accounts are eliminated in preparing combined financial statements
d. The balance in the Investment in Branch account must equal the balance in the Branch Income
account
B. Which of the following would explain why the Investment in Branch account is less than the Hoome
Office Capital account?
a. A cash transfer to the branch is in transit

b. A cash transfer to the home office is in transit
c. An inventory shipment to the branch (at cost) is in transit
d. A home office has received and deposited a remittance from a branch customer but has not yet
notified the branch
e. None of the above
A. A home office, month-end allocation of previously recorded advertising expenses to a branch

requires the following entry on the home office’s books:
Debit Credit
a. Investment in Branch Advertising Expense
b. Home Office Capital Advertising Expense
c. Branch Income Home Office Capital
d. Investment in Branch Accrued Liabilities
B. A home office, month-end allocation of previously recorded advertising expenses to a branch
requires the following entry on the branch’s books to record the allocation:
Debit Credit
a. Advertising expense Accrued liabilities
b. Branch income Home Office capital
c. Advertising expense Branch income
d. Home Office capital Accrued liabilities
D. The Shipments to Branch Ledger account in the accounting records of the home office of a
business enterprise:
a. Is an asset valuation account

b. Indicates that the home office uses the periodic inventory system
c. Is adjusted at the end of the accounting period to equal the unrealized profit in the branch’s
ending inventories
d. Is not displayed in the home office’s separate financial statements
C. The Western Branch of Rivas Company reported a net income of 60,000 for the month of
January. The appropriate journal entry (explanation omitted) for the home office of Rivas
Company is:
a. Income Summary 60,000

Income: Western Branch 60,000
b. Income: Western Branch 60,000
Income Summary 60,000
c. Investment in Western Branch 60,000
Income: Western Branch 60,000
d. Investment in Western Branch 60,000
Income Summary 60,000
C. Both a home office and a branch use the periodic inventory system. If at the end of an
accounting period the balance of the branch’s Home Office ledger account does not agree with
the balance of the home office’s Investment in Branch account because of a shipment of
merchandise in transit from the home office to the branch
a. The home office debits Investment in Branch and credits Shipments in Transit to Branch
b. The branch debits Home Office and credits Shipments in Transit from Home Office
c. The home office debits Shipments in Transit to Branch and credits Investment Branch
d. The branch debits Shipments in Transit from Home Office and credits Home Office
A. The fiscal year of King Company which is located in Manila end on September 30. On September
30,20x4, the home office of King Company shipped merchandise costing 80,000 to Rizal Branch
and prepared an appropriate entry for the shipment. The Rizal Branch did not receive the
merchandise on that same day. Both the home office and the branch use the perpetual
inventory system.
The end of period adjustments on September 30,20x4 should include:
a. A debit to Inventories and a credit to Home Office Current in the branch accounting records
b. A debit to Branch Current and a credit to Inventories in the home office accounting records
c. A debit to Home Office Current and a credit to Inventories in the branch accounting records
d. Other journal entry
B. Among the journal entries (explanation omitted) in the accounting records of the home office of
Price Company was the following:
Office Equipment: Lang Branch 12,500

Investment in Lang Branch 12,500
This journal entry indicates that:
a. The home office acquired office equipment for the branch

b. The home office shipped office equipment to the branch
c. The branch acquired office equipment, which is carried in the accounting records of the home
office
d. None of the foregoing occurred
B. The Income: Branch ledger account is maintained in the accounting records of:
a. The home office only
b. The branch only
c. Both the home office and the branch
d. Neither the home office nor the branch
D.If at the end of an accounting period the balance of the Investment in Branch ledger account in the
accounting records of the home office is 20,000 and the balance of the Home Office account in the
accounting records of the branch (after the branch recorded closing entries) is 25,500, the most likely
explanation for the discrepancy of 5,500 is a:
a. Remittance of cash is best described to the branch not recorded by the home office
b. Net income of branch not recorded by the home office
c. Net loss of branch not recorded by the home office
d. Collection by the home office of a branch note receivable not recorded by the branch
A.The Home Office ledger account in the accounting records of a branch is best described as:
a. A revenue account
b. An equity account
c. A deferred revenue account
d. None of the foregoing
D.The following journal entry (explanation omitted) appeared in the accounting records of Marty
Corporation’s only branch:
Operating expenses 600,000

Home Office 600,000
The journal entry indicates that:
a. The branch incurred operating expenses for the benefit of the home office
b. The home office incurred operating expenses for the benefit of the branch
c. The branch paid the home office for services rendered to the branch
A.In a working paper for combined fianancial statements of home office and branch, the branch’s net
income is included in:
a. The debit column of the branch income statement section and the credit column of the branch
statement of retained earnings section
b. The credit column of the branch income statement section and the debit column of the branch
statement of retained earnings section
c. The debit column of the branch income statement section and the credit column of the home
office statement of retained earnings section
d. Some other manner
B.A debit to the Income Summary ledger account and a credit to the Home Office account appear in:
a. The accounting records of the home office to record the net income of the home office
b. The accounting records of the home office to record the net income of the branch
c. The accounting records of the branch to record the net income of the branch
d. Some other manner
D.The following journal entry (explanation omitted) appeared in the accounting records of the home
office of Silversmith Company:
Investment in Seaside Branch 8,980

Operating expenses 8,980
This journal entry indicates that:
a. The branch incurred operating expenses for the benefit of the home office
b. The home office incurred operating expenses for the benefit of the branch
c. The branch paid the home office for services rendered to the branch
C.If both the home office and the branch of a business enterprise use the periodic inventory system,
the home office’s Shipments to Branch ledger account:
a. Is a valuation account for the home office’s Investment in Branch account

b. Always should have the same balance as the branch’s Shipments from Home Office account
c. Is a revenue account
d. Is a valuation account for the home office’s Purchases account
C.If both the home office and the branch of a business enterprise use the perpetual inventory
system, a Shipment to Branch ledger account appears in the accounting records of:
a. The home office only

b. The branch only
c. Both the home office and the branch
d. Neither the home office nor the branch
B. On January 31, 20x4, the home office of Wall Company collected a trade account receivable of Doris
Branch. The accounting for this transaction by Wall Company should include a:
a. Credit to Trade Accounts Receivable: Doris Branch in the accounting records of the home office
b. Debit to Cash in Transit in the accounting records of Doris Branch
c. Credit to Investment in Doris Branch in the accounting records of the home office
d. Debit to Receivable from Home Office in the accounting records of Doris Branch
B. If the home office of Mobile Company maintains the accounting records for the plant assets of the
branch, and the branch acquired equipment for 100,000, the appropriate journal entry for the branch is:
a. Debit the Home Office Current account and credit a plant asset account for 100,000
b. Debit the Home Office Current account and credit Cash for 100,000
c. Debit to plant asset account and credit the Home Office Current account for 100,000
d. Debit Cash and credit the home Office Current account for 100,000
A company has an external sales agency. The company allows the sales agency to incur and pay for all its
expenses and approved asset purchases. The company has never transferred any tangible assets to the
agency and created the agency by simply establishing an agency working capital fund of 25,000.
Whenever the sales agency needs more working capital it transmits the receipts for what it has spent
back to the main office which then sends cash back to the agency to cover the remitted items. Small
amounts of merchandise inventory are sent to the agency for display and demonstration purposes.
These items are transferred at cost.
C. An operation such as the one described above most closely resembles a(n):
a. Voucher system
b. Petty cash system
c. Accounts receivable subsidiary ledger
d. Accounts payable subsidiary ledger
D. The primary advantages of the system described is that it:
a. Is adequate for effective control over agency expenses

b. Is adequate for measuring the contribution of agency operations to enterprise income
c. It is simple to establish and maintain
d. It provides a basis for determining if agency operations are being performed efficiently
A.Which of the following statements most correctly describes the types of information that a sales
agency would have to collect for the home office to properly determine the sales agency’s probability
a. Only agency sales, operating expenses, and cost of sales

b. Only agency sales and operating expenses
c. Only agency sales, cost of sales, operating expenses, and the actual or average amount of fixed
assets located at the agency locations
d. Only agency sales, operating expenses, and the ending balances of accounts receivable
D. Which of the following statements correctly describes the relationship between the accounting
systems used for a sales agency when compared to the accounting systems used for a branch office:
a. The sales agency accounting system cannot be set up to measure the probability of the sales
agency but the branch accounting system can be set up to measure the probability of the branch
b. The sales agency accounting system can be set up to measure the probability of the sales agncy
but the branch accounting system cannot be set up to measure the probability of the branch
c. The accounting system of the sales agency is not usually considered a separate segment of the
company’s entire accounting system but the accounting system of the branch office is usually
considered a separate segment of the company’s entire accounting system
d. None of the above.
B. In preparing the financial statements of the home office and its various branches:
a. Nonreciprocal accounts are eliminated but reciprocal accounts are combined

b. Both reciprocal and nonreciprocal accounts are eliminated
c. Both reciprocal and nonreciprocal accounts are combined
d. Reciprocal accounts are eliminated and nonreciprocal accounts are combined
CHAPTER 22
12. Identify which of the following are insurance contracts:
a. Compensation is cash or kind to contract holders for losses suffered while
travelling
b. Financial guarantee contract that requires payment even if the holder has not
insured a loss on the failure of the debtor to make payments when due
c. Deferred annuity contract where the holder will receive or can elect to receive a
life contingent annuity at rates prevailing when the annuity begins
d. Loan contract containing a pre-payment fee that is waived if pre-payment results
from the borrower’s death
a. Financial guarantee contract that requires payment even if the holder has not
b. Deferred annuity contract where the holder will receive or can elect to receive a
c. Loan contract containing a pre-payment fee that is waived if pre-payment results
d. A contract that requires specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due
a. A catastrophe bond in which principal interest payments are reduced significantly
if a specified triggering event occurs and the triggering event includes a condition
that the issuer of the bond suffered a loss
b. Loan contract containing a pre-payment fee that is waived if pre-payment results
c. Financial guarantee contract that requires payment even if the holder has not
d. Deferred annuity contract where the holder will receive or can elect to receive a
15. An insurance contract can contain both deposit and insurance elements. An
example might be a reinsurance contract where the cedent receives a repayment of the
premiums at a future time if there are no claims under the contract. Effectively this
constitutes a loan by the cedent that will be repaid in the future. PFRS 4 requires that:
a. Each payment by the cedent is accounted for as a loan advance and as a
payment for insurance cover
b. The insurance premium is accounted for as a revenue item in the income
statement
c. The premium is accounted for under PFRS 15
d. The premium paid is treated purely as a loan and is accounted for under PFRS 9
16. Which of the following accounting practices has been outlawed by PFRS No. 4?
a. Shadow accounting
b. Catastrophe accounting
c. A test for the adequacy of recognized insurance liabilities
d. An impairment test for reinsurance assets
17. Which of the following types of insurance contract would probably not be covered by
PFRS 4?
a. Motor insurance
b. Life insurance
c. Medical insurance
d. Pension plan
18. PFRS says that insurance contracts should:
a. Be covered by existing accounting policies during phase one
b. Comply with the PFRS Framework document
c. Comply with all existing PFRS
d. Be covered by PAS 32 and PFRS 9 only
19. PFRS 4 does not apply to:
a. Product warranties, which are covered by PFRS 15 and PAS 37;
b. Employer’s assets and liabilities under employee benefit plans, which are
covered by PAS 19 and PFRS 2
c. Contingent consideration payable or receivable in a business combination, which
is covered by PFRS 3, Business Combinations
d. Property insurance contract
20. Which of the following items are outside the scope of PFRS 4 unless the issuer
elects to apply PFRS 4 to such contracts?
a. Financial guarantee contracts
b. Motor insurance
c. Medical insurance
d. Life insurance
21. PFRS 4 permits an insurer to change its accounting policies for insurance contracts
only if, as a result:
a. Its financial statements present information that is more relevant
b. No less reliable, or more reliable
c. No less relevant
d. All of the above
22. The term “unbundle” is defined as
a. An uncertain future event that is covered by an insurance contract and creates
insurance risk
b. A contract under which on party (the insurer) accepts significant insurance risks
from another party (the policyholder) by agreeing to compensate the policyholder
if a specified uncertain future event (the insured event) adversely affects the
policyholder
c. Represents the first phase of the project on insurance contracts
d. Account for the components of a contract as if they were separate contracts
23. To unbundle a contract, an insurer component shall:
a. Apply PFRS 4 to the insurance component
b. Apply PFRS 9 to deposit component
c. Both a and b
24. It is an assessment of whether the carrying amount of an insurance liability needs to
be increase (or the carrying amount of related deferred acquisition costs or related
intangible assets decreased), based on a review of future cash flows:
a. Unbundle
b. Insurance risk
c. Insured event
d. Liability adequacy test
25. It is defined as a cedant’s (policyholder under a reinsurance contract) net
contractual rights under a reinsurance contract. A reinsurance contract is an insurance
contract issued by one insurer (the reinsurer) to compensate another insurer (the
cedant) for losses on one or more contracts issued by the cedant:
a. General Insurance Business
b. Insurance risk
c. Reinsurance assets
d. Liability adequacy test
26. Which of the following items are not peculiar to insurance business are as a follows:
a. Premiums
b. Reinsurance
c. Claims and Acquisition costs
d. Risk default
27. In accordance with the accrual assumption, the full amount of the premium is not
recognized immediately as income when received; instead, the premium is normally
regarded as being earned:
a. Every other month of different amount
b. Every other month of equal amount
c. Only at the end of the year
d. Evenly over the period of the policy
28. Premiums could have been written by insurance agents close to the end of the
reporting period, but the policies may not have been booked-in at the end of the
reporting period by the insurer due to administrative delays in the submission of returns
by the agents
a. Reinsurance
b. Claims
c. Acquisition costs
d. Pipeline premiums
29. Methods of computing the unearned premium reserve, as follows:
a. Fixed percentage method
b. Time apportionment method
c. Both a and b
30. This method measures the unearned premium reserve by applying a specified
percentage to the total premiums written in each class of business insurance
c. Straight-line method
d. Declining balance method
31. This method may be applied to calculate the unearned premium reserve both for
policies that are annual (one year) and non-annual (more than or less than one-year)
c. Straight-line method
d. Declining balance method
32. This method computes the unearned premiums, policy by policy, on a pro-rata basis
in respect of the unexpired periods of the respective insurance policies at the end of
each period:
a. The 1/365th method
b. The 1/24th method
c. The 1/8th method
d. The straight line method
33. This method represents a practical simplification of the time apportionment method
but can only be applied for insurance policies which have a term of one year
c. The 1/8th method
34. This method is based on the general assumption that the premiums are spread
uniformly over the quarter and the average date of all policies written in quarter is in the
middle of the quarter
c. The 1/8th method
35. It is a demand by any party for payment by the insurer of a policy benefit on account
of an alleged loss resulting from an event or events alleged to be covered by a policy of
insurance
a. Liability adequacy test
b. Pipeline premiums
c. Acquisition cost
d. Insurance claim
36. The term “claims” is often used interchangeably with the term
a. Policy benefits
b. Losses
c. Both a and b
37. These are commissions and agency related expenses incurred in securing
premiums on general insurance policies:
a. Reinsurance
b. Claims
38. These are expenses other than allocated claim expenses which relate to the
reporting, recording and adjustment of claims. This may include the entire expense of
the claims department such as office overheads, sales of staff and a proportion of
senior management overheads
a. Unallocated claims expense (“UCE”)
b. Actual claims
c. Allocated claims expense
d. Policy benefits
39. Acquisition costs are commission and agency related expenses incurred in securing
premiums on general insurance policies
a. Reinsurance
b. Claims
40. It arises when the unearned premium reserve is less than the anticipated claims and
related expenses:
a. Premium deficiency
b. Claims
d. Premiums
41. It is an arrangement whereby the reinsurer, in consideration of a premium, agrees to
indemnify the principal ceding insurer against the loss, or part of the loss, which the
latter may sustain under the policy or policies that the insurer has written
a. Reinsurance
b. Claims
42. It is an insurer that reinsures part or the whole of a risk with one or more reinsurers.
The risk reinsured is referred to as an outward reinsurance
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Victim
43. It is an insurer which accepts part of a risk from ceding insurer by way of
reinsurance. The risk acceptance is referred to as inward reinsurance
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Victim
44. It is defined as "a reinsurance of reinsurance assumed where the reinsurer will
retrocede a whole or a part of the risk accepted from the direct insurer to another
reinsurer”
a. Reinsurer
b. Ceding insurer
c. Beneficiary
d. Retrocession
45. It is a reinsurance whereby the ceding insurer and reinsurer share premiums and
claims relating to the original contracts of insurance in the same proportion as the share
of the reinsurer(s)
a. Treaty reinsurance
b. Facultative insurance
c. Proportional reinsurance
d. Non-proportional reinsurance
46. It is a reinsurance whereby the ceding insurer undertakes payment of all losses up
to a pre-agreed amount. The balance of any loss that exceeds that agreed limit will be
met by the reinsurers, usually up to a contractual maximum
47. It is defined as a form of reinsurance where business is ceded on the basis of an
agreement between the ceding insurer and the reinsurer, whereby the ceding insurer
agreed to cede and the reinsurer agrees to accept automatically the reinsurance of the
risk written by the ceding insurer, which fall within the scope of the treaty, subject to the
limits and terms specified therein
48. It is defined as a form of reinsurance offered on an individual risk basis, and where
the ceding insurer makes the offer of reinsurance and the reinsurer has the option to
accept or reject the risk and to quote the terms for acceptance
49. This means that the premiums shall be earned evenly over the period of the risk
coverage, and that the portion of the premium that relates to the unexpired periods shall
be carried forward as unearned premium reserve
c. Outward reinsurance
d. Inward reinsurance
50. In an outward reinsurance arrangement, premium and commission shall be
accounted for in the same accounting period as the original policy to which the
reinsurance relates. Claims recoveries and any related expenses should be accounted
for in the same accounting period as the original policy and claims to which the
reinsurance relates
c. Outward reinsurance
Financial guarantee contract is a contract that requires the issue to make specified
payments to reimburse the holder for a loss it incurs because a specified debtor fails to
make payment when due in accordance with the original or modified terms of a debt
instrument
c. Financial guarantee

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CHAPTER 6

1. The organization that established international accounting standards is the

PFRS 11 Joint Arrangements provides that joint control exists where:

Which of the following is correct?

20. In consignment sales, the consignee:

a. Records the merchandise as an asset on its books

21. Revenue is recognized by the consignor when the:

a. Goods are shipped to the consignee

22. Goods on consignment should be included in the inventory of:

a. The consignor but not the consignee

a. Consignor when the goods are shipped to the consignee

24. The roe of the agent in a Principal-Agent relationship is to

a. Arrange for the principal to provide goods or services to a customer

25. The use of the net method of recognizing revenue by an agent

a. Is appropriate as long as both revenue and costs are included

26. Consignments are a specialized marketing method whereby the

a. Consignor when a sale to a third party has occurred

28. Which of the following is most true regarding consignment arrangements?

29. Consignments are a specialized marketing method whereby the

30. Consigned goods are recognized as revenues by the

a. Consignor when a sale to a third party has occurred

31. Sweeney most likely should recognize revenue when:

a. He paints the painting, because the painting is produced while he works

32. After Sweeney has transferred a painting to a barbershop, the painting:

a. Should be counted in Sweeney’s inventory until the barbershop sells it

33. Which of the following is most true regarding consignment arrangements?

HOME OFFICE AND BRANCH ACCOUNTING: SPECIAL PROCEDURES

Branch Income or Loss Home office capital

D. A control feature in a decentralized accounting system is

a. A cash transfer to the branch is in transit

A. A home office, month-end allocation of previously recorded advertising expenses to a branch

a. Is an asset valuation account

a. Income Summary 60,000

Office Equipment: Lang Branch 12,500

This journal entry indicates that:

a. The home office acquired office equipment for the branch

Operating expenses 600,000

The journal entry indicates that:

Investment in Seaside Branch 8,980

This journal entry indicates that:

a. Is a valuation account for the home office’s Investment in Branch account

a. The home office only

D. The primary advantages of the system described is that it:

a. Is adequate for effective control over agency expenses

a. Only agency sales, operating expenses, and cost of sales

a. Nonreciprocal accounts are eliminated but reciprocal accounts are combined

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