EXERCISES

Advanced Financial Accounting and Reporting

(Theory Portion)

1. At the date of partnership formation of a partnership, the amount credited to A’s capital is less than
the fair value of the property contributed. Which is the most valid reason?
a. The property contributed by A is impaired.
b. The property contributed by A has been subjected to positive asset revaluation.
c. Bonus has been given by partner A to the other partners.
d. Goodwill arising from partnership formation has been recognized.

2. How should the net profit or net loss of the partnership be divided among the partners, whether
capitalist or industrial?
a. In accordance with their capital contribution ratio.
b. In accordance with just and equitable sharing taking into account the circumstances of the
partnership.
c. Equally
d. In accordance with the partnership agreement.

3. When a new partner is admitted to an existing partnership through the purchase of a portion of
existing interest of an incumbent partner, which statement is correct?

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a. The total capital of the old and new partnership will be the same.

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b. The partnership will recognize gain or loss on the difference between the amount paid and
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capital transferred.

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c. Goodwill may be recognized by virtue of the admission.
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d. There will be increase in the total assets of the partnership equivalent to the amount paid by
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the newly admitted partner.

4. At the time of retirement, a retiring partner receives more than the amount of his capital
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contribution while the remaining partners capital increase after the retirement. Which of the
following is most valid reason?
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a. Goodwill during retirement is recognized.

b. Asset revaluation is recognized.
c. Bonus is given by retiring partner to remaining partners.
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d. Bonus is given by the remaining partners to retiring partner.

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5. At the time of partnership liquidation, which credits shall be settled first?

a. Those amount owing to third persons.
b. Those amount owing to partners other than capital contribution and share in profit.
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c. Those amount owing to partners with respect to capital contribution.

d. Those amount owing to partners with respect to share in profit.
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6. At the time of corporate liquidation, which type of corporate debts will always be fully settled?
a. Unsecured liabilities without priority
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b. Unsecured liabilities with priority

c. Fully secured liabilities
d. Partially secured liabilities

7. Which unsecured liabilities with priority of a liquidating corporation shall be settled first?
a. Liabilities for employee benefits
b. Liabilities for corporate income tax
c. Liabilities for corporate crime
d. Liabilities for quasi-delict

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8. Two entities established a business. The contractual agreement provides that the relevant activities
of the business will require unanimous consent of the two parties. The business is not incorporated
before SEC. The two entities equally own interest in the said business. How should the two
entities account for their investment?
a. Proportionate consolidation
b. Joint arrangement classified as joint operation
c. Joint arrangement classified as joint venture
d. Business combination

9. Two entities established a joint arrangement in an incorporated entity. The assets and liabilities of
entity will be in the name of the said established entity. The activities of the arrangement will be
decided by its own board of directors. The rights of the parties are limited only to the net assets of
the incorporated entity. How should the parties account for their investment?
a. Proportionate consolidation
b. Joint venture
c. Joint operation
d. Investment in trading securities

10. If the sale transaction provides for periodic installments over an extended period of time and the
collectibility of the sales price cannot be reasonably estimated, what method of revenue

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recognition is the most appropriate?

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a. Cost recovery method eH w
b. Accrual basis
c. Installment method

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d. Cash basis
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11. Under installment method of revenue recognition, which statement is true?

a. Both sales revenue and cost of goods sold are recognized at the point of sale.
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b. The related gross profit of the installments sales is deferred to those period during which cash
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will be collected.
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c. As receivables are collected, a portion of the deferred gross profit equal to the gross profit rate
times cash collected is recognized as income.
d. All of these statement are true.
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12. In installment sales, how should the deferred gross profit account be presented?
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a. Asset valuation allowance or contract-receivable account

b. Unearned revenue account
c. Equity account
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d. Income account
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13. When the outcome of a construction contract can be estimated reliably, what accounting method
shall be used by the long-term contractor for the recognition of construction revenue and
construction cost?
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a. Percentage of completion method

b. Cost recovery method
c. Zero-profit method
d. Installment method

14. When it is probable that total contract costs will exceed total contract revenue, how should
contractor account for the difference?
a. The expected loss shall be recognized as an expense immediately.
b. The expected profit shall be recognized as a profit immediately.
c. The expected loss shall be recognized as an expense taking into account the percentage of
completion as of the end of the period.
d. The expected loss shall be recognized as a profit taking into account the percentage of
completion as of the end of the period.
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15. Under IFRS 15, in which of the following instances shall an entity recognize revenue through
satisfaction of performance obligation at a point in time instead of satisfaction of performance
obligation over time?
a. The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.
b. The entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date.
d. The entity has transferred the legal title, control and physical possession of the asset at a
specific date.

16. Which of the following transactions will increase the normal balance of branch account in the
home office separate statement of financial position?
a. Return of inventory from branch to home office
b. Payment by the branch of home office’s liability
c. Receipt by the home office of credit memo from the branch
d. Collection by the home office of branch’s receivable

17. What is the main reason for the difference between the branch net income reported by the branch

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and the true branch net income computed by the home office?

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a. Overstatement of branch cost of goods sold for goods coming from outsiders
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b. Overstatement of branch cost of goods sold for goods coming from home office
c. Overstatement of total goods available for sale coming from home office

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d. Overstatement of branch ending inventory coming from home office
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18. Under IFRS 3, in a business combination achieved in stages, if the acquisition date fair value of
the net identifiable assets acquired is lower than the aggregate of the acquisition date fair value of
the consideration transferred by the acquirer, amount of noncontrolling interest measured at fair
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value and acquisition date fair value of acquirer’s previously held equity interest in the acquiree,
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the difference shall be accounted for by the acquirer in the consolidated financial statements as
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a. Goodwill classified as noncurrent asset not subject to amortization but subject to annual
impairment test
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b. Gain on bargain purchase to be recognized as part of profit or loss

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c. Expense as incurred
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d. Deduction directly from retained earnings

19. Which of the following items will not affect the acquisition year’s consolidated net income in a
business combination?
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a. Stock issuance cost

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b. Direct cost of business combination

c. Gain on bargain purchase
d. Amortization of difference between fair value and carrying amount of net assets of acquiree
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20. Under IAS 27, how should the parent entity account for an investment in subsidiary in the
separate financial statements?
a. Equity method
b. Fair value model
c. Cost method
d. Equity method, fair value model or cost method

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21. Under IFRS for SMEs and IFRS 10, what financial statements are required to be prepared and
presented by a parent corporation?
a. Only consolidated financial statements
b. Consolidated financial statements and combined financial statements
c. Consolidated financial statements, combined financial statements and separate financial
statements
d. Combined financial statements and separate financial statements

22. How shall direct cost of business combination be accounted for by the acquirer under the
following IFRS?

Full IFRS/IFRS 3 IFRS for SMEs

a. Expensed Part of consideration given up
b. Part of consideration given up Expensed
c. Expensed Expensed
d. Part of consideration given up Part of consideration given up

23. How shall contingent liability in relation to a business combination be accounted for by the
acquirer under the following IFRS?
Full IFRS/IFRS 3 IFRS for SMEs

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a. Accrued Disclosed only
b. Accrued Accrued

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c. Disclosed eH w Disclosed only
d. Disclosed Accrued

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24. Under IFRS 3, which of the following items may appear in the consolidated financial statements?
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a. Dividend income from subsidiary

b. Investment in subsidiary
c. Gain on bargain purchase
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d. Amortization loss of goodwill

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25. Which of the following items will affect both consolidated net income attributable to parent
shareholders and noncontrolling interest in net income?
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a. Dividend income from subsidiary

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b. Realized gain on downstream transaction

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c. Realized loss on upstream transaction

d. Gain on bargain purchase

26. Under IAS 21, foreign exchange differences arising from translating foreign currency
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denominated transaction to functional currency shall be recognized in

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a. Profit or loss
b. Other comprehensive income with reclassification adjustment
c. Retained earnings
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d. Other comprehensive income without reclassification adjustment

27. Under IAS 21, foreign currency gain or loss arising from translating foreign currency denominated
transaction to functional currency shall be recognized for which item
a. Interest expense
b. Unearned revenue
c. Accounts receivable
d. Inventory

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28. Under IAS 21, when translating foreign currency denominated transaction to functional currency,
which of the following items shall be measured in the financial statement at the exchange rate
prevailing at the end of reporting period?
a. Sales
b. Interest payable
c. Share capital
d. Prepaid asset

29. Under IAS 21, foreign exchange differences arising from translating financial statements in
functional currency to presentation currency shall be recognized in
a. Profit or loss
b. Other comprehensive income with reclassification adjustment
c. Retained earnings
d. Other comprehensive income without reclassification adjustment

30. Unrealized gain or loss on derivatives designated as fair value hedge shall be recognized in
a. Profit or loss
b. Other comprehensive income with reclassification adjustment
c. Retained earnings

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d. Other comprehensive income without reclassification adjustment

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31. Unrealized gain or loss on time value (ineffective portion) of derivatives designated as cash value
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hedge shall be recognized in

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a. Profit or loss
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b. Other comprehensive income with reclassification adjustment
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c. Retained earnings
d. Other comprehensive income without reclassification adjustment
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32. Unrealized gain or loss on intrinsic value (effective portion) of derivatives designated as cash
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value hedge shall be recognized in

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a. Profit or loss
b. Other comprehensive income with reclassification adjustment
y

c. Retained earnings
d. Other comprehensive income without reclassification adjustment
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33. Expenses of nonprofit organization shall be recorded only as deduction from

a. Temporarily restricted net assets
b. Unrestricted net assets
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c. Permanently restricted net assets

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d. Current liability

34. Last year, a nonprofit organization received a contribution with a donor restriction for educational
scholarship of members. In the current year, the nonprofit organization fully spent the said
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contribution for the intended purpose. What is the effect of this expenditure on current year’s net
assets?
a. It will increase the temporarily restricted net assets.
b. It will not affect the unrestricted net assets.
c. It will not affect the total net assets.
d. It will decrease the permanently restricted net assets.

35. It refers to the newest system adopted by the Commission on Audit for the analyzing, classifying,
summarizing and communicating all transactions that are involved in the receipt and disbursement
of all government funds and properties, and interpreting the results thereof.
a. New government accounting system
b. Government accounting manual
c. Fund accounting
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36. Which of the following cash in bank accounts is used by national government agencies for
disbursement?
a. Cash Treasury/Agency Deposit Regular
b. Cash – Modified Disbursement System – Regular
c. Cash in Bank Land Bank of the Philippines
d. Cash in Bank Bangko Sentral ng Pilipinas

37. Which of the following cash in bank accounts is used by national government agencies for cash
remittances to Bureau of Treasury?
a. Cash Treasury/Agency Deposit Regular
b. Cash – Modified Disbursement System – Regular
c. Cash in Bank Land Bank of the Philippines
d. Cash in Bank Bangko Sentral ng Pilipinas

38. The receipt of notice of cash allocation by a national government agency shall be credited by the
said agency to
a. Cash – Modified Disbursement System – Regular
b. Cash Treasury/Agency Deposit Regular
c. Subsidy income from national government

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d. Advances from national government

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39. IFRS 4 defines this as the process wherein an insurer shall assess at the end of each reporting
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period whether its recognised insurance liabilities are adequate, using current estimates of future
cash flows under its insurance contracts.

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a. Income adequacy test
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b. Asset adequacy test

c. Expense adequacy test
d. Liability adequacy test
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40. If the liability adequacy test shows that that the carrying amount of its insurance liabilities is
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inadequate in the light of the estimated future cash flows, the entire deficiency shall be recognized
and presented in
y

a. Other comprehensive income

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b. Profit or loss
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c. Directly to retained earnings

d. Share premium
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41. The Philippine government granted a concession arrangement to a contractor which will construct
the mass train transportation and will be authorized to operate it for a period of 50 years. The
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arrangement provides that the contractor receives a right or a license to charge users of the public
service but there is no unconditional right to receive cash because the amounts will be contingent
on the extent that the public uses the service. How should the contractor account for the
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infrastructure asset?
a. Property, plant and equipment
b. Financial asset at fair value
c. Financial asset at amortized cost
d. Intangible asset

42. If the under or over applied factory overhead is significant, it shall be closed to
a. Cost of goods sold only
b. Finished goods and cost of goods sold proportionately
c. Work in process, finished goods and cost of goods proportionately
d. Raw materials, work in process, finished goods, and cost of goods sold proportionately

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43. In job order costing, normal rework cost which is attributable to a specific job shall be
a. Expensed as incurred
b. Charged or capitalized to that particular job.
c. Closed to factory overhead account.
d. Debited to work in process account.

44. What is the only reason for the difference between the equivalent unit of production computed
under average process costing and FIFO process costing?
a. Completed portion in beginning work in process inventory
b. Incomplete portion in beginning work in process inventory
c. Completed portion in ending work in process inventory
d. Incomplete portion in ending work in process inventory

45. In a manufacturing company, which of the following product costs shall be considered as prime
cost but not conversion cost?
a. Insurance while in transit of the direct materials
b. Utility cost of the factory
c. Salary of the factory workers
d. Creditable value added tax

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46. In a manufacturing company, which of the following product costs shall be considered as

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conversion cost but not prime cost?
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a. Irrecoverable import duties of direct materials

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b. Employee benefits of factory worker
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c. Foreign exchange difference on inventory loan
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d. Amortization cost of the patent covering a machinery used for production

47. It is a product costing system generally used in just-in-time inventory environment. This costing
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system delays the costing process until the production of goods is completed by eliminating the
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detailed tracking of cost throughout the production system and preparing journal entries only at
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trigger points.
a. Backflush costing
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b. Standard costing
c. Normal costing
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d. Traditional costing
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48. This method of service department cost allocation is also called sequential method that allocates
the costs of some service departments to other service departments, but once a service
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department’s costs have been allocated, no subsequent costs are allocated back to it.
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a. Direct method
b. Reciprocal method
c. Step-down method
d. Bottom-top method
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49. Under Standard Costing, direct material price variance shall be appropriately computed using
a. Actual direct materials used
b. Actual direct materials purchased
c. Actual direct materials wasted
d. Actual direct materials converted to work in process

50. Under Standard Costing, if the actual direct labor hours exceed the standard direct labor hours, the
journal entry to record the incurring of direct labor cost will result to
a. Debit to labor efficiency variance
b. Credit to labor rate variance
c. Credit to labor efficiency variance
d. Debit to labor rate variance
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 ANSWER

1. C 11. D 21. A 31. A 41. D

2. D 12. A 22. A 32. B 42. C
3. A 13. A 23. A 33. B 43. B
4. B 14. A 24. C 34. B 44. A
5. A 15. D 25. B 35. B 45. A
6. C 16. C 26. A 36. B 46. D
7. A 17. B 27. C 37. A 47. A
8. B 18. A 28. B 38. C 48. C
9. B 19. A 29. B 39. D 49. B
10. C 20. D 30. A 40 B 50. A

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