PREMIUM, WARRANTIES, PROVISIONS

1. What is the cost of restructuring?

a. Cost of relocating business activities from one location to another
b. Investment in new system and distribution network
c. Marketing or advertising cost
d. Cost of retraining or relocating continuing staff
2. Events that qualify as restructuring include all of the following except:
a. Fundamental reorganization that an immaterial and insignificant impact on operations
b. Change in management structure such as elimination of a layer management
c. Closure of business location or relocation of business from one location to another
d. Sale or termination of business
3. The unavoidable costs under an onerous contract represent the “least net cost of exiting from the
contract” which is equal to the
a. Higher of cost of fulfilling the contract or the penalty from failure to fulfil the contract
b. Lower of cost of fulfilling the contract or the penalty from failure to fulfil the contract
c. Penalty arising from failure to fulfil the contract
d. Cost of fulfilling the contract
4. Which statement is incorrect where some or all of the expenditure required to settle a provision is
expected to be reimbursed by another party?
a. The reimbursement shall not be treated as separate asset and therefore netted against the
estimated liability for the provision
b. The expense relating to the provision may be presented net of the reimbursement
c. The amount of the reimbursement shall not exceed the amount of the provision
d. The reimbursement shall be recognized only when it is virtually certain that the reimbursement
would be received if the entity settles the obligation
5. Where there is a continuous range of possible outcomes and each point in that range is as likely as any
other, the range to be used is the
a. Minimum c. Midpoint
b. Maximum d. Summation of the minimum ang maximum
6. When the provision arises from a single obligation, the best estimate of the amount
a. Midpoint of the possible outcomes
b. Is the individual most likely outcome adjusted for the effect of other possible outcomes
c. Is determined as the individual most likely outcome
d. Reflects the weighting of all possible outcomes by their associated probabilities.
7. It is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits to be received under the contract
a. Sale contract c. Executor contract
b. Executed contract d. Onerous contract
8. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation c. An established pattern of past practice
b. A contract d. Other operation of law
9. A contingent liability
a. Is not recognized in the financial statement
b. Is the result of a loss contingency
c. Is accrued even though not reasonably estimated
d. Definitely exists as a liability but the amount and due date are indeterminable
10. It is possible asset that arises from past event and whose existence will be confirmed only by the
occurrence or nonoccurence of one or more uncertain future events not wholly within the control of the
entity
a. Provisions c. Intangible assets
b. Contingent asset d. Goodwill
11. Which of the following is the proper way to report a probable contingent asset?
a. As an asset c. As a disclosure only
b. As a deferred revenue d. No disclosure or accrual required
12. Provision should be recognized, when and only when
a. An entity has a present obligation as a result of a past event
b. It is probable that an outflow of resources embodying economic benefits will be acquired to settle
the obligation
c. A reliable estimate can be made of the amount of obligation
d. B and C only
 e. A, B and C
13. A contingent liability is
a. A possible obligation that arises from past events and whose existence will be confirm only by the
occurrence or non-occurence of one or more uncertain future events not wholly within the control
of the entity
b. A present obligation that arise from past events but not recognised as it is not probable that an
outflow of resources embodying economic benefits will be required to settle the obligation
c. A present obligation that arise from past events but not recognised as the amount of the
obligation cannot be measured with sufficient reliability
d. All of the above
14. In measuring the provision it will not include the
a. Risks and uncertainties into account
b. Discount of the provision if the time value of money is material
c. Gains from the expected disposal of assets specifically that if the expected disposal is closely
linked to the event giving rise to the provision
d. Onerous contract
15. A change in the liability for warranty is
a. A change in accounting estimate c. A prior period error
b. A change in accounting policy d. None of the above

Problems:
16. Barry Company included in one coupon in each box of fabric softener it sold. A pillowcase is offered as
a premium to customers who send in 10 coupons and a remittance of P20.
2017 2018
Boxes of fabric softener 500,000 800,000
Number of pillowcase purchased (P100 per unit) 20,000 25,000
Coupons redeemed 140,000 200,000
The entity experience indicated that only 30% of the coupons will be redeemed. What amount should
be reported as estimated premium liability on December 31, 2018? P400,000

Robinsons Company operates a customer loyalty program. The entity grants program members loyalty
points when they spend a specified amount on purchases. Program members can redeem the points for further
purchases. The points have no expiry date.
During 2017, the customer earned 160,000 points. But management expects that 75% of these points will
be redeemed. The stand alone selling price of each loyalty point is estimated at P20. The sales during 2017
amounted to P13,600,000 based on stand alone price.
On December 31, 2017, 57,600 points have been redeemed in exchange for purchases, In 2018, the
management revised its expectations and now expects 90% of the points to be redeemed . In 2018, the entity
redeemed 24,000 points.
17. What is the revenue earned from loyalty points for 2017? P979,200
18. What is the revenue earned from loyalty points for 2018? P176,800

19. In 2017, Delta Company began selling new line of products that carry a two year warranty against
defects. Based upon past experience with other products, the estimated warranty costs related to peso
sales are as follows: 1st year of warranty – 2%; 2nd year of warranty – 5%. Sales and actual warranty
expenses are presented below:
2017 2018
Sales 10,000,000 14,000,000
Actual Warranty Cost 200,000 600,000
How much will be the adjustment of the warranty liability in December 31, 2018?

20. YES Company is evaluating whether each of the following would be a liability, a provision or a contingent
liability or none of the above:
 An amount of P350,000 owing to MAYBE Company for services rendered during May 2016.
 Long service leave estimated to be P5,000,000, owing to employees in respect of past service
 Provision of P500,000 for the overhaul of a machine. The overhaul is needed every 5 years and the
machine was 5 years old as at June 30, 2016.
How much should be reported as Provisions in YES Company’s statement of financial position as of June
30, 2016? P5,000,000

21. Included in the sales revenue of Imba Company for the year 2016 is an amount of P3million relating to
sales made under a special promotion in December 2016. These goods were sold with an accompanying
voucher equal to the selling price. Five years after the sale, these vouchers will be exchanged for goods
of the customer’s choice. The profit margin on these goods is expected to be 30% of the selling price, and
 market research estimates that 50% of the vouchers will be redeemed. The present value of P1 at the time
of redemption is 0.60. The provision for voucher scheme as of December 31, 2016 is? P630,000

22. City Company included one coupon in each package sold. A towel is offered as a premium to customers
who send in 10 coupons.
2014 2015
Packages sold 500,000 800,000
No of towels acquired at P40 each 30,000 45,000
No of towels distributed as premium 20,000 50,000
No of towels to be distributed next period 5,000 10,000
What amount should be reported as premium expense in 2015? P2,200,000

23. During 2014, Mei Company introduced a new line of machines that carry a three year warranty against
defects. Based on experience, warranty costs are estimated at 2% of sales in the year of sale; 4% in the
year after sale; and 6% in the second year after sale. Sales were P1,200,000; P3,000,000 and P4,200,000 for
2014; 2015; and 2016 respectively. Actual warranty expenses were P18,000; P90,000; and P270,000 for 2014;
2015 and 2016 respectively. What amount should be reported as warranty liability on December 31, 2016?
P630,000

24. During 2014, RINA Company is the defendant in a patent infringement lawsuit. The lawyer believes there
is a 30% chance that the court will dismiss the case and the entity will incur no outflow of economic
benefits. However, if the court rules in favour of the claimant, the lawyer believe that there is a 20%
chance that the entity will be required to pay damages of P200,000 and an 80% chance that the entity
will be required to pay damages of P100,000. Other outcomes are unlikely. The court is expected to rule
in late December 2015.There is no indication that the claimant will settle out of court. A 7% risk adjustment
factor to the probability –weighted expected cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates. An appropriate discount rate is 5% per year. The present value of
1 at 5% for one period is 0.95. What is the measurement of the provision for lawsuit? P85,386

25. GRETCH Company estimated annual warranty expense at 2% annual net sales. The entity reported net
sales of P4,000,000 for 2014 and made warranty payments of P50,000 during the year. The warranty liability
was p60,000 on January 1, 2014. What amount should be reported as warranty liability on December 31,
2014? P90,000

Candy Company offers a coffee mug as a premium for every ten 50 cent candy bar wrappers presented by
customers together with P1.00. The purchase price of each mug to the company is 90 cents; in addition it costs
50 cents mail each mug. The result of the premium plan for the years 2014 and 2015 are as follows:
2014 2015
Coffee mugs purchased 480,000 400,000
Candy bars sold 3,750,000 4,500,000
Wrappers redeemed 1,900,000 2,800,000
2014 wrappers expected to be redeemed in 2015 1,300,000
2015 wrappers expected to be redeemed in 2016 1,800,000
26. The premium expense for the year ended December 31, 2015 is: P 165,000
27. The inventory of premium mugs as of December 31, 2015 is: P369,000
28. The estimated liability for premiums as of December 31, 2015 is: P90,000

29. In 2014, Slime Corporation began selling a new line of products that carry a two year warranty against
defects. Based upon past experience with other products, the estimated warranty costs related to peso
sales are as follows: First year of warranty – 2%; Second Year of warranty – 5%. Sales and actual warranty
expenditures for 2014 and 2015 are presented below: Sales – P450,000 (2014); P600,000 (2015); Actual
Warranty expenditures – P15,000 (2014); P30,000 (2015). What is the estimated liability at the end of 2015?
P28,500

30. Hose Corporation gives warranties at the time of sale to purchasers of its product. Under the terms of the
contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing
defects that become apparent within one year from the date of sale. On the basis of experience, it is
probable that there will be some claims under the warranties.
Sales of P10 million were made evenly throughout 2014. At December 31, 2014 the expenditures
for warranty repairs and replacements for the product sold in 2014 are expected to be made 50% in 2014
and 50% in 2015. Assume simplicity that all the 2015 outflows of economic benefits related to the warranty
repairs and replacements take place on June 30,2015.
Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs of
replacement costing 90% of sale price.
The entity has no reason to believe future warranty claims will be different from past experience.
At December 31, 2014 the appropriate discount factor for cash flows expected to occur on June 30, 2015
is 0.95238. Futhermore, an appropriate risk adjustment factor to reflect the uncertainties in the cash flow
estimates is an increment of 6 percent to the probability weighted expected cash flows.
At December 31, 2015 the entity recognizes a warranty provision measured at: P106,000
Intangible Asset
1. 1st statement: Research and development costs must be expensed in the period incurred
unless it can be clearly demonstrated that the expenditure will have alternative future use or
unless contractually reimbursable. True
2nd statement: Amortization method is one of the factors considered in determining the useful
life of an intangible asset. False

2. 1st statement: Cost of testing prototype before economic feasibility has been demonstrated
must be capitalized. False
2nd statement: An entity that acquires an intangible asset may use the revaluation model for
subsequent measurement if the useful life of the intangible asset can be reliably determined.
False (there is an active market).

3. 1st statement: Cost of marketing research for a new product should be excluded from research
and development expense. True
2nd statement: Amortization of an intangible asset with a finite useful life shall commence when
it is available for the intended use. True

4. 1st statement: A patent should be amortized over the useful life or twenty years, whichever is
longer. False
2nd statement: Reconciliation of carrying amount at the beginning and end of the year is one
of the disclosures needed for intangible assets. True

5. 1st statement: Perpetual franchise is an example of intangible assets that should not be
amortized. True
2nd statement: A trademark is amortized and tested for impairment whenever there is an
indication of impairment. False (not amortized)

6. If the company is using revaluation model for property, plant and equipment the revalued
amount is
a. Fair value at the date of acquisition less any accumulated depreciation less any
impairment losses
b. Fair value at the beginning of the year less any accumulated depreciation less any
impairment losses
c. Fair value at the end of the year less any accumulated depreciation and impairment
losses
d. Fair value at the date of revaluation less any accumulated depreciation and impairment
losses
7. Which of the following is incorrect with regards value in use
a. The discount rate used in estimating future cash flows is current after tax rate that reflects
the current assessment of the time value of money and the risks specific to the asset.
b. Cash flows shall be based on reasonable and supportable assumptions.
c. The projections of cash inflows and cash outflows must be based from the continuing use
of the asset.
d. It should not include cash inflows or outflows from financing activities
8. Tangible equipment used in the extraction of minerals must be depreciated using
a. Output method
b. Straight line method
c. Either straight line or output method depending on the useful lives.
d. The company can choose based on their preference
9. How will the reversal of a revaluation decrease be treated
a. As income to the extent that it reverses a revaluation decrease of the same asset
previously recognized as an expense
b. A credit to revaluation surplus
c. As an expense directly against to revaluation surplus
 d. As an expense directly charge to impairment loss
10. How will the reversal of an impairment loss on a revalued asset be treated?
a. Credited to income to the extent that it reverses a previous revaluation decrease and
any excess credited to revaluation surplus
b. Immediately recognized as income in the income statement
c. As an expense and debited to gain on the reversal of impairment
d. Immediately recognized as expense in the income statement
11. What is a cash generating unit?
a. The group of assets that generate cash inflows from continuing use that are largely
independent of the cash flows from other group of assets.
b. The smallest group of assets that generate cash inflows from continuing use that are
largely independent of the cash inflows from other group of assets
c. The largest group of assets that generate cash inflows from continuing use that are largely
independent of the cash flows from the other group of assets
d. The group of assets that generate cash inflows from continuing use that are not
independent of the cash flows from other group of assets.
12. Which of the following statement is/are true?
I – Goodwill does not generate cash flows independently from other assets or group of assets,
and therefore, the recoverable amount of goodwill as an individual asset cannot be
determined.
II – An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
a. I only c. II only
b. I and II only d. None of the above
13. Which of the following is correct concerning corporate assets
a. Corporate assets are group or divisional assets such as head office building, EDP, or
equipment or a research center
b. The recoverable amount of an individual corporate asset cannot be determined unless
management has decided to dispose of the asset
c. If there is an indication that a corporate asset may be impaired, the recoverable amount
of the cash generating unit to which the corporate asset belongs is determined and
compared with the carrying amount of the cash generating unit.
d. All of the above
14. What is the allocation of an impairment loss recognized for a cash generating unit?
a. First to goodwill, and the balance to other assets prorata based on carrying amount
b. First to goodwill, and ht balance to other assets prorate based on fair value
c. Across the assets of the unit based on fair value
d. Across the assets of the unit based on carrying amount
15. Which of the following statement is incorrect about corporate asset?
a. Corporate assets are group or divisional asset such as head office building, EDP
equipment or a research center.
b. Essentially, corporate assets generate cash inflows independently from other assets.
c. The recoverable amount of an individual corporate asset cannot be determined unless
management has decided to dispose of the asset
d. If there is an indication that a corporate asset may be impaired, thee recoverable
amount of the cash generating unit to which the corporate asset belongs is determined
and compared with the carrying amount of the cash generating unit.
16. In the event of shutdown for a mining company, the method of depreciation will be
a. Straight line method c. Shutdown method or output method whichever is shorter
b. Output method d. None of the above
17. Exploration and evaluation expenditures are incurred
a. In extracting mineral resource and processing the resource to make it marketable or
transportable
b. When a specific area is being developed and preparations for commercial extraction
are being made
 c. When searching for an area that may warrant detailed exploration, even though the
entity has not yet obtained the legal rights to explore a specific area.
d. When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resource are not yet
demonstrable.
18. Which of the following is not part of depletable cost?
a. Intangible development cost such as drilling , tunnel and shaft
b. Acquisition cost of the mineral resource deposit
c. Exploration cost
d. Tangible equipment associated with machinery used to extract the mineral resource
19. Which of the following expenditures would never qualify as an exploration and evaluation
asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resources
d. Expenditure for activities in relation to evaluating the technical feasibility and
commercial viability of extracting a mineral resource
20. PFRS 6 applies to expenditures incurred
a. When searching for an area that may warrant detailed exploration, even though the
entity has not yeat obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resources are not yet
demonstrable.
c. When a specific area is being developed and preparations for commercial extraction
are being made
d. In extracting mineral resources and processing the resources to make it marketable or
transportable.
21. Investment property excludes
I – Property being constructed or developed on behalf of third parties
II – Property that is being redeveloped for continuing use as investment property
III – Property that is being constructed or developed for future use as an investment property
IV – Property leased to another entity under a finance lease
a. II only c. II and III only
b. I and IV only d. I, III and IV only
22. Which of the following is (are) correct if the enterprise provides ancillary services to the
occupants of a property held by the enterprise?
a. The appropriateness of classification as investment property is determined by the
significance of the services provided.
b. If the services provided are relatively insignificant component of the arrangement as a
whole (for instance, the building owner supplies security and maintenance services to
the lesses), then the enterprise treat the property as investment property
c. Where the services provided are more significant (such as the case of an owner-
managed hotel), the property should be classified as owner occupied.
d. All of the above
23. AB Corporation is preparing its consolidated financial statement. The company owns an office
building where nine out of ten floors are leased out to an affiliated company under an operating
lease, while the 10th floor is occupied by AB Corporation as its head office. What is the proper
accounting treatment for this in AB’s financial statements?
a. Nine floors are reported as Investment property while the 10th floor as Property and
Equipment
b. Nine floors are reported as Property and Equipment while the 10th floor as Investment
Property
c. The entire building is reported as Investment Property
d. The entire building is reported as Property and equipment
24. Which of the following is false with regards the measurement of transfers for investment
property?
a. When the entity uses the cost model, transfers between investment property, owner
occupied property and inventory must be made at carrying amount.
b. If an inventory is transferred to investment property that is to be carried at fair value, the
remeasurement to fair value shall be included in profit or loss.
c. If owner occupied is transferred to investment property that is to be carried at fair value,
the difference between fair value and the carrying amount of the property shall be
accounted for in the profit or loss. (Accounted for as revaluation)
d. A transfer from investment property carried at fair value to owner occupied property or
inventory shall be accounted for at fair value which becomes the deemed cost for
subsequent accounting.
25. Which of the following noncurrent assets may not be classified as investment property?
a. Land c. Machinery
b. Building d. All of them may qualify

26. On January 1, 2013, the historical balances of the land and building of TWANG COMPANY: Land:
(Cost – P20,000,000); Building : (Cost – P450,000,000; Acc. Dep’n – P75,000,000). The land and
building were appraised on June 30, 2013 and the revaluation revealed the following values :
Land: (Replacement Cost - P35,000,000); Building -(Replacement cost – P600,000,000;
Depreciated RC – P480,000,000). There were no additions or disposals during 2013. Depreciation
is computed on the straight line basis. The estimated life of the building is 15 years. The
depreciation of the building for the year ended December 31, 2013 should be
a. P35million b. P40 million c. P30 million d. P32 million
27. The revaluation surplus on December 31, 2014 will be:

28. On June 30, 2014, Carmina Company reported the following information: Equipment (cost) –
P30,000,000; Accumulated Depreciation – P10,500,000. The equipment was measured using the
cost model and depreciated on a straight line basis over 10 year period. On December 31, 2014,
the management decided to change the basis of measuring the equipment from the cost
model to revaluation model. The equipment was revalued to the fair value of P27,000,000 with
remaining useful life of 5 years. Ignore income tax. What amount should be recognized as
revaluation surplus and depreciation expense, respectively on December 31,2 015?

29. On January 1, 2015, Selos Company revealed the following historical balances of land and
building: Land – P50,000,000 (cost); Building – P300,000,000 (cost); P90,000,000 (Accumulated
Depreciation); The land and building were appraised on November 1 and the replacement
costs are as follows: Land – P70,000,000 and Building – P450,000,000. There were no additions or
disposals during the year. Depreciation is computed using the straight line basis. The estimated
useful life of the building is 20 years. What is the revaluation surplus on December 31, 2015?

30. Minute Company acquired a building on January 1,2011 at a cost of P20,000,000. The building
has a useful life of 6 years and residual value of P2,000,000. The building was revalued on January
1, 2014 and the revaluation revealed replacement cost of P30,000,000 and residual value of
P4,000,000 and revised useful life of 8 years from the date of acquisition. The income tax rate is
30%. What is the revaluation surplus on December 31, 2014? Answer: P3,360,000

31. One of the cash generating units of Onerous Company is the production of liquor. At year end,
the entity believed that the assets of the cash generating unit are impaired based on an analysis
of economic indicators. The assets and liabilities of the cash generating unit at carrying amount
at year end are: Cash – P6,000,000; Accounts Receivable – 9,000,000; Allowance for doubtful
accounts – 1,500,000; Inventory – 10,500,000; PPE – 33,000,000; Accumulated Depreciation -
6,000000; Goodwill – 4,500,000; Accounts Payable – 3,000,000; Loans Payable – 1,500,000.
 The company determined that the value in use of the cash generating unit is P45,000,000.
Based on problem How much is the value of CASH, ACCOUNTS RECEIVABLE, INVENTORY and
PPE(net) AND GOODWILL after the impairment loss, respectively?

32. ) On January 1, 2014, Parram Company purchased equipment at a total cost of P6,000,000 with
a 10 year useful life and no residual value. ON January 1, 2016, the entity revalued the
equipment and it was determined that the sound value on such date is P8,000,000. On January
1, 2019, the entity decided to test the asset for impairment. It was determined that the fair value
of the equipment on such date was P2,600,000. What amount of impairment loss should be
recognized in 2019? P400,000

33. Ceasar Company reported an impairment loss of P3,000,000 in the income statement for the
year ended December 31, 2010. This loss was related to long live assets acquired on January 1,
2009 with cost of P15,000,000, useful life of 10 years and no residual value. On December 31,
2010, the entity reported the long live assets at P9,000,000 which is the fair value less cost of
disposal on such date. On December 31, 2011, the entity determined that the fair value less cost
of disposal of the impaired long assets had increased to P11,250,000. The straight line
depreciation is recorded for the impaired assets. How much is the gain on reversal of impairment
in 2011?
ANSWER: 2,625,000

34. Liza Company has four cash generating units. One CGU has been experiencing significant losses
in prior years. Thus, it becomes necessary to determine impairment for the cash generating unit.
The assets of the CGU at carrying amount at the current year end are: Cash – P10,000; Accounts
Receivable – P20,000; Inventory – P30,000; Property, Plant and Equipment – P50,000 and
Goodwill – 5,000. The entity has also determined that the fair value less cost of disposal of the
PPE is P48,000. How much is the carrying amount of CASH, AR, INVENTORY, PPE, and GOODWILL
after the impairment loss.
ANSWER: P10,000; 16,800; 25,200; 48,000; 0

35. Quirino, Inc. and its subsidiaries have provided you, their PFRS specialist, with a list of the
properties they own:
 Land held by Quirino, Inc for undetermined future use, P5,000,000
 A vacant building owned by Quirino, Inc and to be leased out under operating lease,
P20,000,000.
 A vacant lot under operating lease and lease out under operating lease, P2,000,000
 A building owned by Quirino Inc and lease out under finance lease, P1,500,000
 Machinery purchased with the intention to lease it out to other companies, P400,000
 Land held for capital appreciation – P18,500,000
 Property held by a subsidiary of Quirino Inc , a real estate firm, in the ordinary course
of its business, P30,000,000.
 Property held by Quirino Inc. for use in production, P1,000,000.
 A hotel owned by Sugo Inc., a subsidiary of Quirino Inc and for which Sugo Inc.
provides security services for its guests belongings, P50,000,000
 A building owned by Quirino Inc being leased out to Status Inc, a subsidiary of Quirino
Inc., P20,000,000
How much will be reported as investment properties in Quirino Inc and its subsidiaries
consolidated financial statement? P93,500,000

36. The following items were being considered by Green Company in determining the amount to
be classified under Investment property in accordance with IAS 40:
Building held under an operating lease (leasehold interest) and currently leased P1,000,000
out under an operating lease (Green Company intends to report the property
interest at fair value
Building under construction for future use as an investment property 1,500,000
 Building occupied by (leased to) employees (rentals paid are below market rates) 750,000
Building being constructed in behalf of Blue Company 1,125,000
Building owned by Green Company leased to Red Company (a wholly owned 875,000
subsidiary)
Machinery leased out by Green to an unrelated company under an operating 250,000
lease
The amount reported as Investment Property by Green Company in its consolidated financial
statement is

37. Cabahug Inc a real estate company, has a property included in its inventory with a cost of
P10,000,000 and net realizable value of P8,000,000 on December 31, 2012. Because of the
decline in the real estate industry, the company decided to lease out the property to a tenant
under an operating lease in 2013 when the fair value of the property was P7,000,000. How much
should be recognized in the 2013 profit or loss as a result of the transfer from inventory to
investment property if the company uses (a) cost model or (b) fair value model, respectively?
P0 and P1,000,000

38. The Conehead Company purchased an investment property on January 1, 2010 for a cost of
P220,000. The property had a useful life of 40 years and at December 31, 2012 had a fair value
of P300,000. On January 1, 2013 the property was sold for net proceeds of P290,000. What is the
gain or loss to be recognized in profit or loss for the year ended December 31, 2013 regarding
the disposal of the property if the company is using (a) cost model and (b) fair value model?
P86,500 gain and P10,000 loss

39. During 2014, Thirties Company owns and made the following:
a. Acquired in early June, Mansanitas Cellular, a mobile telcom provider. Included in the
purchase price paid by the company was P1,800,000 for Mansanitas Company’s
subscription contracts which provides personal details of its customers.
b. Thirties company acquired Thirty Five in December. Included in the purchase price was
a P525,000 payment for Thirty Five “Number” Brand. The company does not intend to sell
it but the intention was to take out the “Number” brand of the market to increase the
Thirties Company’s own “Numero” brand.
c. Thirties owns a patent named “Slowly” with a carrying amount of P450,000. On June,
Thirties Company agreed to exchange its patent for that of Global Company’s patent
named “But Surely”. The fair value of patent “But Surely” has been assessed at P750,000.
No additional monetary or non-monetary consideration has been include in the
exchange.
d. Acquired a license to use a special type of container and distinctive trademark to be
printed on it for 600 shares of Thirties Company’s P10 par value common stock selling in
the market at P80 per share. The license based on an appraisal made is worth twice as
much as the trademark, both of which may be used for 6 years.
The amount to be capitalized and presented as intangible assets by Thirties will be: P3,123,000

40. HALEY Co. incurred research and development costs in 2016 as follows:
Personnel costs of persons involved in research and development 990,000
projects
Depreciation for 2004 on above equipment 540,000
Materials used in research and development projects P810,000
Indirect costs reasonably allocable to research and development 405,000
projects
Equipment acquired that will have alternate future uses in future 5,400,000
research and development projects
Consulting fees paid to outsiders for research and development 270,000
projects
The amount of research and development costs charged to HALEY’S 20016 income
statement should be P 3,015,000
 41. Pagsanjan Company incurred costs to develop and produce a routine, low-risk computer
software product as follows:
Completion of detail program design P1,500,000
Cost incurred for coding and testing to establish technological 500,000
feasibility
Other coding costs after establishment of technological feasibility 2,500,000
Other testing costs after establishment of technological feasibility 2,000,000
Cost of producing product masters for training materials 3,000,000
Duplication of computer software and training materials from 4,000,000
product master
Packaging product 1,000,000
What amount should be capitalized as software cost subject to amortization? P7,500,000

42. Eagle Company discloses the following items that it had recorded in its intangible assets section
during 2014:
 1/1/2014 – Purchased franchise (8 yrs life) - P3,500,000
 8/1/2014 – Purchased patent A (18 yr useful life) - 1,560,000
 9/1/2014 – Purchased patent B (25 yr useful life) - 1,560,000
 10/30/2014 – Purchased copyright (20 year life) - 4,500,000
The amortization expense for the year 2014 will be:
43. On January 1, 2015, Alyana Company acquired a trademark for P3,000,000. The trademark has
eight years remaining in the legal life. It is anticipated that the trademark will be renewed in the
future indefinitely without a problem. On December 31, 2015, the trademark is assessed for
impairment. Because of a decline in economy, the trademark is expected to generate cash
flows of just P120,000 annually. The useful life of the trademark extend beyond the foreseeable
horizon. The appropriate discount rate is 6%. What amount should be recognized as impairment
loss on trademark? P1,000,000

44. XRAY Company is considering the purchase of YANKS Company, whose balance sheet as of
December 31, 2016 as follows:
Current Assets P800,000 Current Liabilities P600,000
Fixed Assets, net 1,100,000 Long Term Liabilities 700,000
Other Assets 700,000 Common Stock 850,000
Retained Earnings 450,000
The fair value of the current assets is P1,100,000 because of the undervaluation of inventory. The
normal rate of return on the net assets for the industry is 15% and the average expected annual
earnings of YANKS Company is P300,000. Assuming that the excess earnings continue for the next five
years and XRAY follows the years multiple of excess earnings approach of computing goodwill, how
much would XRAY be willing to pay for the net assets of YANKS? P1,900,000

45. The owners of Majayjay Company are planning to sell the business to new interests. The
cumulative net earnings for the past 5 years was P9,500,000. The current value of net assets of
Majayjay Company was P20,000,000. Goodwill is determined by capitalizing average earnings
at 8%. What is the amount of goodwill? P3,750,000

46. An entity purchases a trademark and incurs the following costs in connection with the
trademark:
One time trademark purchase price P100,000
Nonrefundable taxes 5,000
Training sales personnel on the use of the new trademark 7,000
Research expenditures associated with the purchase of the new trademark 24,000
Legal costs incurred to register the trademark 10,500
Salaries of the admin personnel 12,000
Assuming that the trademark meets all of the applicable initial asset recognition criteria,
the entity should recognized an asset in the amount of: P115,500
47. Dade Company purchased a patent on January 1, 2003 for P120,000. The patent had a
remaining useful life of 10 years at that date. In January of 2004, Dade successfully defends the
patent at a cost of P54,000, extending the patent’s life to 12/31/15. What amount of
amortization expense would Dade record in 2004? P13,500
48. Toledo Mining Company constructed a building costing P2,800,000 on the mine property. Its
estimated residual value will not benefit the company and will be ignored for purpose of
computing depreciation. The building has an estimated life of 10 years. The total estimated
recoverable units is 500,000 tons. The company’s production of the first four years of operations
was: 1st year – 100,000 tons; 2nd year – 100,000 tons; 3rd year – shut down, no output; 4th year –
100,000 tons. What is the depreciation for the fourth year? P490,000
49. Nestle Corporation, one of the largest mining company, paid P20,000,000 to the local
government for the right to explore and extract mineral resources in an area of interest. The
following were incurred related to exploration and evaluation of activities of the entity: Total
exploration costs – P7,000,000; Evaluation costs – P3,000,000. Result of the study revealed that
the total estimated mineral resources is 10,000,000 tons. Nestle Company started its commercial
production in year 2014. The company produced 1,200,000 tons in 2014. What is the amount of
amortization on the capitalized intangible exploration and evaluation cost for the year 2014?
P3,600,000

50. (Exploration) Sylvia Company had the following transactions concerning its resource property:
 It paid P5,400,000 in 2007 for property containing natural resources of 2,000,000 tons.
 The estimated cost of restoring the land after the resources are exhausted is P450,000.
 The land will have a value of P650,000 after it is restored for suitable use.
 Development costs, such as drilling and road construction, amounted to P2,500,000.
 Buildings, such as bunk houses and mess hall were constructed for P1,500,000.
 Development costs and buildings should be included in the account Mine Improvements.
 Operations began on January 1, 2008 and resources removed totaled 600,000 tons in 2008.
 During 2009, a discovery was made indicating that available resources after 2009 will total
1,875,000 tons.
 Because of a strike, only 400,000 tons were mined in 2009.
How much is the depletion for 2008 and 2009? P1,560,000 and P640,000
 PROVISIONS
CONTINGENT LIABILITY
CONTINGENT ASSET
• PROVISION
- Is an existing liability of uncertain timing or uncertain amount
- It can be estimated liability or loss contingency. It is probable and measurable.
- EXAMPLES – WARRANTIES; ENVIRONMENTAL CONTAMINATION; DECOMISSIONING OR
ABANDONMENT COSTS; COURT CASES; GUARANTEE

• CONTINGENT LIABILITY
-It is a possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain future
events not wholly within the company’s control.
- It is a present obligation that arises from past event and it is either probable or
measurable but not both.
 RECOGNITION
PROVISION CONTINGENT LIABILITY CONTINGENT ASSET
(RECOGNIZED) (DISCLOSE/NOT) (DISCLOSE OR NOT)
YES – (IF VIRTUALLY DISCLOSE - (IF NOT
VIRTUALLY CERTAIN CERTAIN AND MEASURABLE)
MEASURABLE)
PROBABLE (MORE YES – (IF PROBABLE DISCLOSE – (IF DISCLOSURE ONLY
THAN 50% OR MORE AND MEASURABLE) PROBABLE BUT NOT
LIKELY THAN NOT) MEASURABLE)
POSSIBLE (50% OR DISCLOSE ONLY NO DISCLOSURE
LESS LIKELY TO
OCCUR)
REMOTE (10% OR NO DISCLOSURE NO DISCLOSURE
LESS LIKELY TO
OCCUR OR VERY
SLIGHT
OCCURRENCE)
 MEASUREMENT OF PROVISION

GENERAL RULE BEST ESTIMATE – THE AMOUNT THE ENTITY TO PAY TO SETTLE THE
OBLIGATION

BEST ESTIMATE: SINGLE MOST LIKELY OUTCOME ADJUSTED FOR THE EFFECT OF OTHER POSSIBLE
OUTCOME OUTCOMES
BEST ESTIMATE: RANGE MIDPOINT OF THE RANGE IS USED
OF POSSIBLE OUTCOMES
BEST ESTIMATE: LARGE WEIGHTING OF ALL POSSIBLE OUTCOMES – EXPECTED VALUE METHOD
POPULATION OF ITEMS
ADDITIONAL MEASUREMENT AND GUIDANCE FOR
PROVISION
RISKS AND UNCERTAINTIES ADD THE ESTIMATED RISKS AND UNCERTAINTIES
PRESENT VALUE OF ADJUST THE PROVISION AT PRESENT VALUE – DISCOUNT RATE SHOULD BE AT PRE
OBLIGATION TAX
FUTURE EVENTS INCLUDE IF THERE IS SUFFICIENT EVIDENCE IT WILL OCCUR.
EXPECTED DISPOSAL OF GAIN FROM DISPOSAL - EXLUDED
ASSET
REIMBURSEMENT NOT NETTED AGAINST LIABILITY, RECOGNIZED AS SEPARATE ITEM WHEN IT IS
VIRTUALLY CERTAIN
CHANGES IN PROVISION YES. INCLUDED
USE OF PROVISION PROVISION FOR A SPECIFIC LIABILITY SHOULD NOT BE USED FOR ANOTHER
LIABILITY
FUTURE OPERATING LOSSES NO PROVISION
ONEROUS CONTRACT A CONTRACT WHERE COST EXCEEDS THE BENEFITS – AN EXAMPLE OF PROVISION
 PROVISION - RESTRUCTURING
• An estimated liability incurred due to termination of line of business;
termination of one of the business location; change in management
structure or fundamental reorganization of the entity.

• Recognize PROVISION if the TWO CONDITIONS ARE MET:

1. THE ENTITY HAS A DETAILED FORMAL PLAN FOR THE
RESTRUCTURING
2. THE ENTITY HAS RAISED VALID EXPECTATION OF RESTRUCTURING
FOR THOSE AFFECTED.

• ONLY DIRECT EXPENSE RELATED TO RESTRUCTURING. Exclude the

amount of cost of relocating continuing staff; marketing or investment
in new system or distribution network.
 PROVISION - DECOMMISSIONING
• An obligation to dismantle, remove or restore an item of PPE as
required by law or contract.

• Liability provision should be at PRESENT VALUE with adjustment every

year to Interest Expense to reflect the time value of money adjustment
of the liability.

• Changes in liability provision is allowed

• Decrease in Liability – decrease the cost of the asset
• Increase in Liability – added to the cost of the asset