ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  Oct 2021 CPA Licensure Examination  Preweek Lecture

ADVANCED FINANCIAL ACCOUNTING & REPORTING A. Dayag  G. Caiga  M. Ngina

AFAR PREWEEK LECTURE 2

1. Olione Co owns 100 per cent of the equity share capital of its subsidiary. Cornet Co. During the year. Olione Co sold goods to Cornet
Co for P2,400 representing cost plus 20 per cent. At the period end three quarters of the goods were still in inventory.
What is the unrealized profit for the purposes of consolidation?
a. P300 c. P400
b. P360 d. P480
Answer – (a) Cost + Profit = Selling price; 100% + 20% = 120%; Unrealised profit is (P2,400 x 20 / 120) x 3 / 4 = P300
2. Genesis Co is the sole subsidiary of Exodus Co. The cost of sales figures for 20X6 for Exodus Co and Genesis Co were P15,000,000
and P12,000,000 respectively. During 20X6 Exodus Co sold goods that had cost P3,000,000 to Genesis Co for P4,000,000. Genesis
Co has not yet sold any of these goods.
What is the consolidated cost of sales figures for 20X6?
a. P23,000,000 c. P26,000,000
b. P24,000,000 d. P27,000,000
Answer – (b) P15m + P12m + P1m – P4m =P24m
3. Grape Co is a wholly owned subsidiary of Orange Co. Inventory in the individual statements of financial position at the period end
is reported as:
P
Orange Co 120,000
Grape Co 60,000
Sales by Orange Co to Grape Co during the year were invoiced at P45,000 which included a profit to Orange Co of 25 per cent o n
cost. Two thirds of these goods were in inventory at the period end.
At What amount is inventory reported in the consolidated statement of financial position?
a. P171,000 c. P174,500
b. P172,500 d. P180,000
Answer – (c) Cost + Profit = Selling price; 100% + 25% = 125%; Unrealised profit is (25 / 125 x P45,000) x 2 / 3 = P6,000;
Inventory is therefore P120,000 + P60,000 – P6,000 = P174,000
4. Wind Co owns 80 per cent of its subsidiary, Rain Co. In December 20X1 rain Co sells inventory costing P100,000 to Wind Co for
P120,000. Draft consolidated profit attributable to the group for the year 20X1, before adjustments for unrealized profit was
P150,000. 25 per cent of the inventory remains unsold by Wind Co at 31 December 20X1.
Ignoring deferred tax what is the correct consolidated profit attributable to the group for 20X1?
a. P130,000 c. P145,000
b. P134,000 d. P146,000
Answer – (d) The unrealized profit in the unsold inventory is: (120,000 -100,000) x 25% = p5,000 of which 80% (P4,000)
is attributable to the group and 20% (P1,000) is attributable to the non-controlling interests.; Therefore the group profit
is P150,000 – P4,000 = P146,000.
5. At the year end H Co has P90,000 of inventory. Its 80 per cent owned subsidiary, S Co. has P50,000 of inventory. There are goods
in transit from S Co. to H Co with a value of P5,000. This amount does not include any unrealized profit.
What is the carrying amount of inventory in the consolidated statement of financial position?
a. P90,000 c. P140,000
b. P135,000 d. P145,000
Answer – (d) P90,000 + P50,000 = P145,000
6. Which of the following balances appears in a consolidated statement of financial position?
a. investment in subsidiary
b. subsidiary share capital
c. loans to the subsidiary from the parent
d. the parent company’s bank balance P50,000 and the subsidiary company’s bank overdraft P50,000
Answer – (d) The share capital in the consolidated statement of financial position is always that of the parent alone.
Investments in subsidiaries in the parent company’s statement of financial position cancel with subsidiary share capital
on consolidation.; Intra-group loans also cancel out.
7. On 31 December 20X0 H Co has a non-current asset that cost P94,000 and was depreciated by three years out of its life of 10 years.
On 1 January 20X1 it was sold to H Co’s 75 per cent owned subsidiary for P96,000. The subsidiary decided the non-current asset
had a remaining life of eight years.
At 31 December 20X1 what adjustment is made to non- current assets in the consolidated statement of financial position?
a. P18,200 c. P30,000
b. P27,600 d. P39,600
Answer – (b) The asset is reported in the consolidated accounts as if it hadn’t been transferred; that is at its cost of
P94,000 less four year’s depreciation (P37,600) = P56,400.; The asset is currently in S’s statement of financial position
at cost P96,000 less one year’s depreciation out of 8 – P12,000 = P84,000; Non -current assets therefore need to be
adjusted by P27,600.
8. A parent company sells inventory costing P119,000 at a mark-up of 11 per cent to a wholly owned subsidiary. At the end of the
reporting period half of this inventory remains unsold. Ignoring deferred tax which one of the following is the required
consolidation adjustment?
a. increase group inventory by P59,500 as half of the inventory remains unsold
b. no adjustment is needed because intra-group trading cancels on consolidation
c. reduce group inventory by P119,000 as the sale was not made to a third party
d. reduce group inventory by P6,545 and reduce group profits by P6,545 to eliminate the unrealized profit in
inventory
Answer – (d) The mark- up on unsold inventory is P119,000 x 11% x ½ = P6,545.; This reduces parent
company profits and therefore group profits. Inventory is reduced by the same amount.
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR Preweek 2
ReSA Batch 42 – October 2021 CPA Licensure Examination

9. Time Co acquired an 80 per cent stake in the equity share capital of Watch Co on 1 February 20X1. On acquisition, fair value
adjustments increased the value of Watch’s inventory by P19,000. None of this had been sold by 31 December 20X1 when group
accounts were being prepared. In addition, In March 20X1, Watch Co sold Time Co P47,000 of goods. All of these goods had been
sold by Time Co by 31 December 20X1. Time Co had cost of sales for the year ended 31 December 20X1 of P300,000 and Watch
Co P240,000.
What is group cost of sales for the year ending 31 December 20X1?
a. P473,000 c. P493,000
b. P492,000 d. P520,000
Answer – (a)
Time cost of sales P300,000
Watch cost of sales (11 / 12m x P240,000) P220,000
Less intra-group sales (P47,000)
P473,000
The fair value adjustment on the inventory is not included in cost of sales until the inventory is sold.
10. Snell Co purchased 100 per cent of a software business for a cost of P1,000,000. The book value of the assets acquired and fa ir
values (where these were different) were as follows.
Book value Fair value
P’000 P’000
Plant and equipment 350
Trademarks 29 45
Purchased goodwill 60
Inventories 290 310
The tax base of the assets is the same as their book value or fair value where relevant. In accordance with IFRS 3 what is the goodwill
arising on this purchase?
a. P235,000 c. P295,000
b. P271,000 d. P340,000
Answer – (c) P’000 P’000
Consideration transferred 1,000
Fair value of identifiable net assets:
Plant and equipment 350
Trade marks 45
Inventories 310
(705)
295
The goodwill already recognized by the acquires does not form part of net assets at acquisition because it is not
identifiable; that is, it is not capable of separate sale.
11. On 1 January 20X2 Big Co purchased 100 per cent of the equity shares in Small Co for P2,000,000. At that date fair value of the
identifiable net assets were as follows:
P’000
Plant and equipment 1,300
Inventory 425
Trade receivables 100
Trade payables and loans 500
The tax base of the above assets and liabilities was equal to their fair value. Small Co disclosed a contingent liability with a fair
value of P150,000 in its financial statements, liability was contingent as it was not probable that an outflow of resources would
occur. Tax revenue will be given on the P150,000 as and when it is paid. The tax rate is 30 per cent.
What amount is recognised for goodwill at 1 January 20X2?
a. P (220,000) c. P780,000
b. P675,000 d. P825,000
Answers – (c) P’000
Fair value of identifiable net assets:
(1,300 + 425 +100 -500) 1,325
Less contingent liability (150)
Add deferred tax asset (150 x 30%) 45
1,220
2,000,000 – 1, 220,000 = P780,000
In line with IFRS 3 The contingent liability is recognized as part of the fair value of assets and liabilities acquired by Big
Co. provided it is a present obligation from past events and can be reasonably estimated.
12. Layla Co purchased 100 per cent of the equity shares in Lamina Co on 31 March 20X8 for P1,500,000. The statement of financial
position of Lamina Co on 31 March 20X8 disclosed the following.
P
Goodwill 100,000
Patents 130,000
Property, plant and equipment 680,000
Current assets (400,000)
Current liabilities 1,310,000
The fair value of the property, plant and equipment of Lamina Co amounted to P710,000 on the date of purchase (tax base P690,000).
In respect of all the other items book value was equal to fair value and the tax base. The tax rate is 30 per cent. What is the goodwill
arising on the purchase of Lamina Co?
a. P190,000 c. P266,000
b. P260,000 d. P280,000
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ReSA Batch 42 – October 2021 CPA Licensure Examination

Answer – (c) P’000 P’000

Consideration transferred 1,500
Fair value of identifiable assets
(130 + 710 + 800 -400) 1,240
Less deferred tax liability
(710 -690) x 30% (6)
(1,234)
266
13. Which of the following is NOT a business combination within the scope of IFRS 3?
a. Company W is merged into Company X.
b. Company T and Company U transfer their net assets to a newly formed entity. Company V.
c. The shareholders of Company Y and Company Z sell the shares of Company Z to Company Y.
d. An unincorporated entity transfers its net assets to a company in exchange for consideration.
Answer – (c) A business combination is a transaction or event in which an acquirer obtains control of a business.
Mergers are also business combinations.; There is no transfer of control in the case of D; the same shareholders control
Company Z before and after the transaction.
14. To which of the following transactions should acquisition accounting be applied?
I. the purchase of the net assets of the food retail division of a conglomerate company
II. the purchase of equity shares in another entity that results in the acquire having significant influence
III. the purchase of the property, plant and equipment of Company Y by Company Z on the liquidation of
Company Y.
IV. the transfer of the shares in Company V and Company W by their respective shareholders to a new
company. Company X, in return for shares in Company X.
a. I and III only c. II and III only
b. I and IV only d. III and IV only
Answer – (b) Acquisition accounting is applied only where the acquirer gains control of the acquire in a business combination; this
is not the case in situation 2.; Situation 3 is not a business combination as the transfer of PPE does not constitute the transfer of a
business. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose
of providing a return to investors.
15. Jenny Co Acquired 80 per cent of the equity share capital of Smith Co on 1 October 20X3. The consideration given was P2,000,000
in cash and 400,000 equity shares of Jenny Co. On 1 October 20X3 the market value of each Jenny Co’s shares was P3 and the fair
value of Smith Co’s net tangible assets was P2,000,000. The non-controlling interest was measured at the proportionate share of
the acquirer’s net assets. Due to poor trading conditions the goodwill arising on the acquisition of Smith Co, goodwill was
determined to be impaired by 25 per cent by the reporting date of 31 March 20X4.
What is the amount of goodwill reported in Jenny Co’s consolidated accounts at 31 March 20X4?
a. Pnil c. P900,000
b. P300,000 d. P1,200,000
P
Consideration transferred (2,000,000 + (400,000 x 3) 3,200,000
NCI share (20% x 2,000,000) 400,000
3,600,000
Fair value of net assets 2,000,000
Goodwill 1,600,000
Impairment (25%) (400,000)
Carrying amount of goodwill 1,200,000
16. On 1 July 20X5 Mole Co acquired 80 per cent of Ratty Co’s P200,000 ordinary share capital for P400,000, incurring transaction
costs of P15,000. At that date Ratty Co’s shares were trading at P2.25. At the acquisition date Ratty Co had retained earnings of
P185,000 and the book values of the net assets were approximately equal to fair value, with the exception of one building, which
had a fair value of P80,000 in excess of its carrying amount. The remaining useful life of the building was 10 years at the acquisition
date. It is the policy of the Mole Group to measure the non-controlling interest at full (fair) value, for which the share price at
acquisition is the best estimate.
What amount is recognised in profit or loss by the Mole Group in the year ended 31 June 20X6 as a result of the application of the
acquisition accounting requirements of IFRS 3?
a. P13,000 c. P35,000
b. P28,000 d. P43,000
Answer – (d) P P
Consideration transferred 400,000
Fair value of non-controlling interest (2.25 x 20,000) 45,000
Fair value of net assets:
Share capital 200,000
Retained earnings 185,000
Fair value adjustment 80,000
(465,000)
Bargain purchase (recognized in profit or loss immediately) (20,000)
Total expense recognized:
Bargain purchase 20,000
Acquisition costs 15,000
Excess depreciation (80,000 / 10) 8,000
43,000

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ReSA Batch 42 – October 2021 CPA Licensure Examination
17. Rainbow Co acquired a controlling interest in Cloud Co on 1 August 20X4, recognizing goodwill of P210,000 on acquisition. The
benefit of the goodwill was expected to last for 10 years from the acquisition date, however increased competition mean that
goodwill was determined to be impaired by 15 per cent at 31 July 20X6.
What amount is recognized in profit or loss in the year ended 31 July 20X6 in respect of goodwill?
a. P21,000 c. P31,500
b. P28,350 d. P46,200
Answer – (c) Goodwill is not amortised but instead tested for impairment annually. The expense to profit or loss is
therefore the impairment charge of 15% x P210,000 = P31,500.
18. Amber Co acquired 80 per cent of the voting shares in Jade Co on 1 January 20X5. At that date Jade Co issued share capital of
100,000 equity shares. The consideration for the share issue was 25,000 shares in Amber Co.On 1 January 20X5, Amber Co’s shares
had a fair value of P3.20 each and Jade Co’s shares had a fair value of P1.80 each. Amber Co paid legal fees of P10,000 in resp ect
of the acquisition. According to IFRS 3 Business Combinations what is the amount of the consideration transferred?
a. P80,000 c. P144,000
b. P90,000 d. P154,000
Answer – (a) The consideration transferred is the fair value of the shares in amber Co (25,000 x P3.20). Transaction
costs, such as the legal fees, are not included in the amount of consideration, but treated as expenses. (IFRS 3 (32)
and (37) (53))
19. Snow Co acquired 100 per cent of the equity shares of Flake Co in 20X7. At the acquisition date the carrying amount of net assets
in Snow Co’s financial statements included a deferred tax liability of P75,500. At the acquisition date, fair value adjustments were
made to increase the carrying amount of Flake’s plant and equipment by P70,000 and decrease the carrying amount of a warranty
provision by P20,000. Warranty costs are given tax relief when paid. Assuming that the tax rate is 20 per cent, what is the adjusted
deferred tax liability of Flake Co at the acquisition date for consolidation purpose?
a. P57,500 c. P85,500
b. P65,500 d. P93,500
Answer – (d) P
Deferred tax liability – book value 75,500
Deferred tax on FV adjustment to plant and equipment (70,000 x 20%)
- increases deferred tax liability 14,000
Deferred tax on FV adjustment to warranty provision (20,000 x 20%)
- decreases deferred tax asset 4,000
93,500
20. Which accounting standard relevant to group accounting specifically requires disclosures that enable users to evaluate the financial
effects of adjustments recognised in the current reporting period that relate to acquisition that occurred in the current or previous
reporting periods?
a. IFRS 3 c. IFRS 11
b. IFRS 10 d. IFRS 12
Answer - (a) IFRS 3 contains disclosure requirements relating to business combinations (including the effect of
adjustments as a result of the application of the acquisition method); all other disclosure in relation to group accounting
is included within IFRS 12.
21. In accordance with IFRS 10 Consolidated Financial Statements in which of the following situations does the investor have power
over its investee?
I. Company Apple holds 40 per cent of the voting shares in Company Banana and has an option to acquire a
further 20 per cent of the voting shares at any tie without restriction. The options are considered to be
substantive.
II. Company Cherry holds 25 per cent of the voting shares in Company Damson and has a contractual right t
make decisions about Company Damson’s core profit-making operations.
a. I only c. both I and II
b. II only d. neither I nor II
Answer - (c) Company Apple has substantive rights over 60 per cent of voting shares in Company Banana (it holds
40% of the shares and has options that can be exercised without restriction over a further 20%). Therefore, it has
power over Company Banana. Company Cherry has the current ability to direct the relevant activities of Company
Damson (the activities that significantly affect its returns) through the contractual agreement. This gives Company
Cherry power regardless of voting rights.
22. Feldspar Co owns 45 per cent of the voting rights in Mineral Co. Eleven other investors each hold 5 per cent of the voting rights in
Mineral Co. Under a shareholder agreement. Feldspar Co has the right to appoint, reassign and remove five out of the six members
of the management of Minera Co. This shareholder agreement cannot be changed without a 90 per cent majority vote of the
shareholders. To date, Feldspar Co has never exercised its right to appoint, reassign or remove management. Based only on the
information above, is Feldspar Co likely to control Mineral Co, according to IFRS 10 Consolidated Financial Statements?
a. no, because Feldspar Co does not have a majority of the voting rights in Mineral Co
b. no, because Feldspar Co does not actually exercise power over the management of Mineral Co
c. yes, because the shareholder agreement gives Feldspar Co the power to direct the relevant activities of
Mineral Co
d. yes, because Feldspar Co has the largest percentage of the voting rights; no other investor even has the 20 per
cent holding necessary to give significant influence
Answer - (c) Although Feldspar Co does not have a majority of voting rights, it has the power to direct the
relevant activities of Mineral Co. The fact that it has not yet actually exercised that power is irrelevant it has
the ability to do so.
23. Dorstone Co has over 100 shareholders and holds several equity investments in other companies, some of them substantial. The
business of Dorstone Co is to provide investment management services to its shareholders. It acquires funds from its shareholders
to provide them with investment income (dividends and interest) and capital appreciation of their investment. Dorstone Co holds
51 per cent of the voting shares in another entity, Ragstone Co. According to IFRS 10 Consolidated Financial Statements, how
should Dorstone Co account for its investment in Ragstone Co?
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a. It should consolidate the assets, liabilities, income and expenses of Ragstone Co on a line-by-line basis.
b. It should measure the investment in Ragstone Co at fair value and recognise changes in fair value in
profit or loss.
c. It should measure the investment in Ragstone Co at fair value and recognise changes in fair value in other
comprehensive income.
d. It should measure the investment in Ragstone Co at cost plus 51 per cent of the post-acquisition retained
earnings and should include 51 per cent of post-acquisition profits in profit or loss.
Answer (b) On the basis of the information provided, Dorstone Co is an investment entity. IFRS 10 requires that a parent that is
an investment entity measures its investment at fair value which changes in fair value recognized in profit or loss in accordance
with IFRS 9 Financial Instruments.
24. Bingley Co acquired a 75 per cent interest in the P250,000 equity share capital of Shipley Co on 1 August 20X6, paying consideration
of P980,000 and incurring acquisition costs of P25,000. The net assets of Shipley Co at the acquisition date had a carrying amount
of P1.1m and the fair value of land was P150,000 in excess of its book value. The non-controlling interest is measured as a
proportion of the fair value of Shipley Co’s net assets. What journal entry is required to recognise the acquisition of Shipley Co in
the consolidated financial statements assuming that Bingley Co has correctly recognized its investment.
P P
a. Debit Goodwill 67,500
Debit Share capital 250,000
Debit Reserves 850,000
Debit Business Combination reserve 150,000
Credit Non – controlling interest 312,500
Credit Investment in Shipley Co 1,005,000
b. Debit Goodwill 42,500
Debit Share capital 250,000
Debit Reserves 850,000
Debit Business Combination reserve 150,000
Credit Non – controlling interest 312,500
Credit Investment in Shipley Co 980,000
c. Debit Goodwill 42,500
Debit Share capital 250,000
Debit Reserves 850,000
Debit Business Combination reserve 150,000
Credit Non – controlling interest 312,500
Credit Cash/Bank 980,000
d. Debit Goodwill 67,500
Debit Share capital 250,000
Debit Reserves 850,000
Debit Business Combination reserve 150,000
Credit Non – controlling interest 312,500
Credit Investment in Shipley Co 980,000
Credit Cash/Bank 25,000
Answer – (b)
Consideration P 980,000
NCI (25% x P1,250,000) __312,500
Consideration Transferred P1,292,500
Less: Net assets of acquire:
Share capital P 250,000
Reserves (1,100,000 – 250,000) 850,000
Fair value adjustment 150,000 (1,250,000)
Goodwill P 42,500

Therefore the acquisition journal is:

Debit Goodwill 42,500
Debit share capital 250,000
Debit Reserves 850,000
Debit Business Combination reserve 150,000
Credit Non-controlling interest 312,500
Credit Investment in Shipley Co 980,000
25. Trench Co holds a 90 per cent equity investments in Hill Co and has done for a number of years. In the year ended 31 December
20X6, Hill Co sold goods to Trench Co for P450,000, charging a mark up of 25 per cent. At the year end, a quarter of these go ods
were still in Trench’s warehouse. In the individual financial statements of Trench Co, cost of sales is reported as P1,950,000 and in
the individual financial statements of Hill Co, it is reported as P1,340,000. What is consolidated cost of sales in the year ended 31
December 20X6?
a. P2,817,500 c. P2,868,125
b. P2,862,500 d. P3,020,000
Answer – (b) P
Trench cost of sales 1,950,000
Hill cost of sales 1,340,000
Intercompany sales (450,000)
Unrealised profit (25% x P450,000 x 25 / 125%) 22,500
Consolidated cost of sales 2,862,500

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26. Which of the following statements are correct?

I. The consolidated statement of profit or loss and other comprehensive income should include dividends
paid by subsidiaries to the parent company.
II. The consolidated statement of profit or loss and other comprehensive income should not include dividends
paid by subsidiaries to the parent company.
III. The parent company should not include its share of dividends received from subsidiaries in its individual
company statement of profit or loss and other comprehensive income.
IV. The parent company should include its share of dividends received from subsidiaries in its individual
company statement of profit or loss and other comprehensive income.
a. I and III only c. II and III only
b. I and IV only d. II and IV only
Answer – (d) The parent company should include dividends received from subsidiaries in its profit or loss as this is valid
income for it as an individual company. The consolidated profit or loss should not include dividends paid by
subsidiaries. They are intra-group items.
27. Company X transfers an asset that originally cost of P10,000 to its wholly owned subsidiary Company Y in 20X1. The transfer price
was P13,000. Both companies charge straight-line depreciation at 10 per cent per annum. A full year’s charge is made in the year
of acquisition and none in the year of disposal. Company X had owned the asset for five years prior to the period in which the asset
was transferred. Ignoring the effects of deferred tax, what is the net adjustment required to group profit in 20X1?
a. P300 c. P7,700
b. P1,300 d. P8,000
Answer – (c) The net carrying amount at disposal was: 10,000 – (5 x 1,000) = P5,000. Unrealised profit on the transaction was:
13,000 – 5,000 = P8,000. Depreciation based on the transfer price is P1,300, overstated by P300 (this is the difference between
the depreciation charged in Company X and that charged in Company Y). The net reduction of group profit is therefore: 8,000 –
300 = P7,700
28. On 1 January 20X2 Bubble Co purchased 100 per cent of the equity shares in Squeak Co. At that date it was considered that plant
owned by Squeak with a net carrying amount (book value) of P120,000 had a fair value of P150,000. Squeak Co and Bubble Co
both estimate the remaining useful life of the plant to the six years (residual value Pnil) and use the straight-line method of
depreciation. The tax rate is 30 per cent. Which of the following is the correct journal for the consolidation adjustment in respect
of depreciation at 31 December 20X2?
P P
a. Debit Depreciation expense 5,000
Credit Accumulated depreciation 5,000
Debit Deferred tax liability 1,500
Credit Goodwill 1,500
b. Debit Depreciation expense 5000
Credit Accumulated depreciation 5,000
Debit Deferred tax liability 1,500
Credit Income tax expense 1,500
c. Debit Depreciation expense 25,000
Credit Accumulated depreciation 25,000
Debit Deferred tax liability 7,500
Credit Goodwill 7,500
d. Debit Depreciation expense 25,000
Credit Accumulated depreciation 25,000
Debit Deferred tax liability 7,500
Credit Income tax expense 7,500
Answer – (b) P
Depreciation charge for Squeak Co (120,000 / 6) 20,000
Group depreciation charge (150,000 / 6) 25,000
Additional depreciation charge 5,000
Deferred tax (5,000 x 30%) 1,500
The increase in depreciation reduces group profit therefore the income tax expense of the group is reduced. Goodwill
is not affected by subsequent depreciation of a fair value adjustment.
29. On 1 September 20X2 a parent sold inventory with a cost of P60,000 to a subsidiary for P80,000. At the period and of 31 December
20X2 all of the inventory transferred was held by the subsidiary. The tax rate is 30 per cent. Which of the following journals
represent the correct entries that would be required in the consolidation worksheet?
a. Debit Sales 80,000
Debit Income tax expense 6,000
Credit Cost of sales 60,000
Credit Deferred tax liability 6,000
Credit Inventory 20,000
b. Debit Cost of sales 80,000
Debit Deferred tax asset 6,000
Credit Sales 60,000
Credit Income tax expense 6,000
Credit Inventory 20,000
c. Debit Sales 80,000
Debit Deferred tax asset 6,000
Credit Cost of sales 60,000
Credit Income tax expense 6,000
Credit Inventory 20,000
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d. Debit Cost of sales 80,000
Debit Income tax expense 6,000
Credit Sales 60,000
Credit Deferred tax liability 6,000
Credit Inventory 20,000
Answer – (c) Sales and cost of sales are adjusted so that they show only transactions with third parties. Inventory is
adjusted to original cost to the group. As a profit on sale has been eliminated income tax expense is reduced and a
deferred tax asset recognised (as the tax base of the inventory is greater than its carrying amount to the group.
30. Which of the following statements concerning the presentation of non-controlling interest in the consolidated statement of profit
or loss and other comprehensive income is correct?
a. Only profits attributable to the group appear in the consolidated statement of profit or loss and other
comprehensive income.
b. The non-controlling interest share of profit after tax is separately disclosed as a line item above the group
profit before tax for the period.
c. Total profit or loss for the year is allocated between profit or loss attributable to owners of the parent
and profit or loss attributable to non- controlling interests.
d. The non- controlling interest share of profit after tax is shown as a line item and deducted from total profit
for the period, so that the last line in the consolidated statement of profit or loss and other comprehensive
income is profit or loss attributable to the group.
Answer – (c) The full results of the subsidiary are included within the consolidated statement of profit or loss and other
comprehensive income in order to show the total profit or loss and total comprehensive income for the period. Profit or loss for
the period and total comprehensive income for the period is then allocated between that attributable to owners of the parent
and that attributable to non-controlling interests.
31. Which of the following statements is correct?
a. Non-controlling interests are presented in the statement of financial position, within liabilities.
b. The non-controlling interest in net assets may be measured at its fair value at the reporting date.
c. If a subsidiary sells an asset to its parent company, the non-controlling interest in profit is adjusted for any
unrealized profit.
d. The carrying amount of the non-controlling interest is adjusted for its share of any unrealised profit made on
intercompany sales.
Answer – (c) IAS 1 requires that non-controlling interests are presented within equity, separately from the equity of the parent.
Where the non-controlling interest is measured as fair value, this measurement applies only at the acquisition date subsequently
the balance increases or decreases by the NCI share of post-acquisition movements in reserves. This is unlikely to equate to fair
value at any reporting date subsequent to acquisition. Adjustment to the NCI for unrealized profits on intercompany sales (of
both inventory and assets) is only made if the subsidiary is the seller.
32. Talbot Co purchased 80 per cent of the equity share capital of Perkins Co on 1 January 20X2. On 31 December 20X2 Perkins Co
sold an item of non- depreciable plant with a net carrying amount of P120,000 to Talbot Co for P150,000. The profit for the year
in the financial statements of Perkins Co at 31 December 20X2 was P2,000,000. The tax rate is 30 per cent. What is the non-
controlling interest in consolidated profit?
a. P394,000 c. P1,970,000
b. P395,800 d. P1,979,000
Answer – (b) P
NCI share of profit for the year (20% x P2,000,000) 400,000
NCI share of unrealized profit on disposal of plant (20% x P30,000) (6,000)
NCI share of reduction in deferred tax liability due to
elimination of unrealized profit and so reduction in
carrying amount of plant (20% x P30,000 x 30%) 1,800
395,800
33. IFRS 12 prescribes the disclosure requirements in respect of investments in subsidiaries, associates and joint arrangements. Which
of the following disclosures is NOT required by IFRS 12 in consolidated financial l statements?
a. significant judgments and assumption in determining that one entity has control of another
b. details of each material associate including its name and the principal location of its business
c. the nature and extent of significant restrictions on the ability of a joint venture to pay a dividend to an
investor
d. an explanation of the nature of intragroup transactions and amounts of any eliminated unrealized
profits at the reporting date
Answer – (d) Details of intragroup transactions are not required.
34. In which of the following situations does the investing company have significant influence over its investee?
I. An investor company holds 18 per cent of the shares in Company Y and has a representative on the board
of Company Y. More than half of Company Y’s sales are made to the investor company.
II. An investor company holds 40 per cent of the equity shares in Company Z. It has not sent a representative
to the board meeting of Company Z since acquiring the shares. The remaining 60 per cent of shares are
held in equal part by four unrelated entities.
a. I only c. both I and II
b. II only d. neither I nor II
Answer – (c) Significant influence is the power to take part in the financial and operating policies of another entity. The
investor in Company Z does not exercise this power, however, it does exist by virtue of the 40 per cent shareholding and
therefore there is significant influence. The investor in Company Y has too small a shareholding for significant influence
to be presumed, however it does have a representative on the board of Company Y and there are material transactions
between investor and investee. These are indicators of significant influence.

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35. The share capital of Summer Co at 31 December 20X1 was 50,000,000 ordinary shares. This is analyzed as follows: Class ‘A’ ordinary
share: 30 million shares issued at P30,000,000; Cass ‘B’ ordinary shares: 20 million shares issued at P20,000,000. Each ‘A’ share
carries one vote whereas each ‘B’ share carries two votes. Winter Co acquires the following interest in Summer Co on 31 December
20X1: Class ‘A’ P1 ordinary shares: P16,000,000; Class ‘B’ P1 ordinary shares: P9,000,000. Winter Co has other subsidiaries and
must produce consolidated financial statements. Which of the following options correctly describes the accounting treatment of
the investment in Sumer Co in the consolidated financial statements?
a. Summer Co is accounted for as an associate.
b. Summer Co is accounted for as 50 per cent owned subsidiary.
c. Summer Co is accounted for as subsidiary with a non-controlling interest of 51.5 per cent.
d. As the value of shares held in Summer Co equals 50 per cent by issued value of Summer Co share capital,
the investment is not accounted for as an associate or a subsidiary.
Answer – (a) Winter Co has 25 / 50 = 50% by value of Summer share capital, but 34 / 70 = 48.6% by voting
rights in Summer Co. Therefore assuming that possession of 48.6 per cent of the votes in Summer Co would
allow the exercise of significant influence. Summer Co would be treated as an associate.
36. Fudge Co holds an 80 per cent interest in the equity share capital of Vanilla Co, and a 30 per cent interest in the equity share capital
of Chocolate Co. During the year Fudge Co sold goods to Chocolate Co for P80,000. Extracts from the financial statements are as
follows:
Fudge Co Vanilla Co Chocolate Co
P P P
Revenue 500,000 300,000 100,000
What amount is reported as revenue in the consolidated statement of profit or loss?
a. P770,000 c. P830,000
b. P800,000 d. P900,000
Answer – (b) P
Fudge 500,000
Vanilla 300,000
800,000
Consolidated revenue does not include revenue from the associate therefore the revenue balance is not adjusted for the
sale of goods to Chocolate
37. Denny Co is an investing entity that prepares consolidated financial statements. It has an investment in the equity share capital of
Edwin Co. Which of the following statements referring to this situation is correct?
a. If Denny Co controls the operating and financial policies of Edwin Co, then Edwin Co cannot be an associate
of Denny Co.
b. If Denny Co owns more than 20 per cent but less than 50 per cent of the equity shares in Edwin Co. then
Edwin Co is definitely an associate of Denny Co.
c. If Edwin Co is an associate of Denny Co, then any amounts payable by Edwin Co to Denny Co are eliminated
when preparing the consolidated statement of financial position
d. If Edwin Co is an associate of Denny Co the consolidated statement of profit or loss and other
comprehensive income includes the group share of Edwin Co’s other comprehensive income.
Answer – (d) If Denny Co owns more than 20 per cent but less than 50 per cent of the equity shares in Edwin Co, then
Denny Co is presumed to have significant influence over Edwin Co, however, this is not definitely the case, if there are
indicators that suggest otherwise. If Denny Co controls the operating and financial policies of Edwin Co, this suggests
that the relationship is one of parent – subsidiary rather than parent – associate. With the exception of the group share
of unrealized profits, transactions and balances between a parent and its associate are not eliminated when preparing
consolidated financial statements.
38. South Group, in addition to its other holdings, acquired a 35 per cent stake in the P100,000 share capital of Soldier Co for P50,000.
This was acquired four years ago when Soldier Co’s retained earnings were P22,000. At the year end of 31 December 20X1 Soldier
Co paid a dividend of P6,000 that South Group has not accounted for yet. The reserves of South Group and Soldier Co at 31
December 20X1 are P300,000 and P90,000 respectively. What are the consolidated retained earnings of South Group at 31
December 20X1?
a. P323,800 c. P329,800
b. P325,900 d. P333,600
Answer – (b) P
South Group retained earnings 300,000
Share of dividend (35% of P6,000) 2,100
Share of Soldier post-acquisition earnings
(35% x (90,000 – 22,000) 23,800
Group reserves 325, 900
39. In accordance with IAS 1 Presentation of Financial Statements which of the following does a parent company have to disclose as a
line item in the consolidated statement of profit or loss in respect of its associates?
a. share of revenue c. share of interest payable
b. share of profit after tax d. Share of profit before tax
Answer – (b) Other disclosures are required in the notes to the financial statements but not in the consolidated
statement of profit or loss and other comprehensive income.
40. Boot Co has a 66 per cent holding in Shoe Co and a 25 per cent holding in Sandal Co. Boot Co sold goods with a value of P15,0 00
to each of Shoe Co and Sandal Co. Boot Co had revenue of P88,000 and the other two companies P20,000 each in the year. What
is consolidated revenue?
a. P83,000 c. P93,000
b. P86,200 d. P98,000

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Answer – (c)
Boot Co 88,000
Less sales to Shoe Co (15,000)
Add Shoe Co 20,000
93,000
Shoe Co is a subsidiary so 100 per cent of its revenue is included in the group figure. Sandal Co is an associate so
its revenue does not feature in the group figure. There is cancellation of intra-group transactions between the
parent company and its subsidiaries but not its associates.
41. Maximus Group acquired 25 per cent of Brooks Co on 1 February 20X4. In the years ended 31 January 20X5 and 20X6. Brooks Co
reported profits of P540,000 and 620,000. When preparing the financial statements for the year ended 31 January 20X6, what
consolidation adjustment is required to reflect Brooks Co’s profits?
a. Debit investment in associate 290
Credit Group retained earnings 290
b. Debit investment in associate 290
Credit Share of profit or loss of associate (SPL) 290
c. Debit investment in associate 290
Credit Share of profit or loss of associate (SPL) 155
Credit Group retained earnings 135
d. Debit Group retained earnings 290
Credit investment in associate 135
Credit Share of profit or loss of associate (SPL) 155
Answer – (c) In its simplest form, an investment in associate is carried at cost plus the group share of post- acquisition
profits. The cost of the investment is already represented in the parent company’s individual financial statements and
therefore the purpose of the consolidation adjustment is to recognize post acquisition profits attributable to group –
here 25% x (P540,000 + P620,000) = P290,000. Profits attributable to the group that relate to the year are credited to
the statement of profit or loss (and in line with other profits for the year accumulate in retained earnings in the
statement of financial position) and profits attributable to the group that relate to previous years are credited directly
to retained earnings.
42. Spiral Group acquired 40 per cent of Ribbon Co on 1 October 20X6 at accost of P1,400,000. At this date the fair value of Ribb on
Co’s net assets was P20,000 higher than book value due to understand inventory. During the year ended 30 September 20X7,
Ribbon Co reported profits after tax of P230,000 and other comprehensive income P80,000. All inventory held by Ribbon Co at the
acquisition date was sold during the year and the company paid a dividend of P100,000. What is the carrying amount of the
investment in Ribbon Co in the consolidated statement of financial position of Spiral at 30 September 20X7?
a. P1,476,000 c. P1,516,000
b. P1,484,000 d. P1,524,000
Answer – (a) P
Cost of investment 1,400,000
Share of post acquisition profits 40% (230,000-20,000) 84,000
Share of post acquisition OCI 40% x 80,000 32,000
Less share of dividend paid 40% x P100,000 (40,000)
1,476,000
Post – acquisition profits are reduced to reflect the fact that the fair value of inventories was P20,000 higher than
carrying value on the acquisition date. The profit made by Ribbon Co when these inventories were sold is therefore
P20,000 higher than it would have been if the profit were calculated based on fair value.
43. Monty Co acquired 30 per cent of the share capital of Tiger Co for P75,000 on 1 July 20X8. This resulted in Monty Co having j oint
control over Tiger Co. During the year to 30 June 20X9 Tiger Co made a profit after tax of P270, 000 and paid a dividend of P50,000.
What amount will appear in the consolidated statement of financial position of Monty Co at 30 June 20X9 in respect of its
investment in Tiger Co?
a. P75,000 c. P141,000
b. P81,000 d. P156,000
Answer – (c) P
Cost of investment 75,000
Share of post-acquisition retained earnings
((270,000 – 50,000 x 30%) 66,000
141,000
44. Pear Co holds a 40 per cent investment in an associate, Apple Co. At 1 April an investment in associate balance of P60,000 is
recognized in the consolidated statement of financial position. In the year ended 31 March 20X3 the associate incurred a loss of
P200,000. In the year ended 31 March 20X4 the associate made a profit of P100,000. What amount is recognized as investment in
associate in the consolidated statement of financial position?
31 March 20X3 31 March 20X4
a. P(20,000) P40,000
b. P(20,000) P20,000
c. P nil P20,000
d. P80,000 P40,000
Answer – (c) P
Investment in associate 1.4X2 60,000
At 31.3X3: Share of loss (200,000 x 40%) (80,000)
20,000
At 31.3X4: Share of profit (100,000 x 40%) 40,000
20,000
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At 31 March 20X3 the investment can only be written down to zero but before subsequent profits can be recognised
the loss not recognised (from 31.3X3) must be offset.
45. Pine Co has a 30 per cent investment in an associate. Acorn Co. During the period ended 30 June 20X2 Acorn Co sold goods costing
P120,000 to Pine Co for P150,000. All of the inventory transferred is held by Pine Co at 30 June 20X2. The profit for the period in
the financial statements of Acorn Co is P250,000. The tax rate is 30 per cent. In accordance with IAS 28 Investments in Associates
and Joint Ventures what amount is reported in the consolidated statement of profit or loss in the year ended 30 June 20X2 as
‘share of profit or loss of associate’?
a. P54,000 c. P68,700
b. P66,000 d. P75,000
Answer – (c) P
Share of profit (250,000 x 30%) 75,000
Share of unrealized profit after tax (21,000* x 30%) (6,300)
68,700
*Unrealised profit
Profit on intragroup sales 30,000
Tax at 30% (9,000)
Post tax profit 21,000
46. Beeston Co has a subsidiary and also owns 40 per cent of the equity shares in Attenborough Co. During the year ended 31
December 20X2 Beeston Co sold inventory costing P25,000 to Attenborough Co for P30,000. At 31 December 20X2 all this inventory
was still held by Attenborough Co. The tax rate is 30 per cent. Which of the following represents the adjustment that is made in
the consolidation worksheet?
P P
a. Debit Share of profit or loss of associate 1,400
Credit Investment in associate 1,400
b. Debit Share of profit or loss of associate 3,500
Credit Investment in associate 3,500
c. Debit Share of profit or loss associate 2,000
Debit Deferred tax 600
Credit Investment in associate 2,000
Credit Income tax expense 600
d. Debit Cost of sales 2,000
Debit Deferred tax 600
Credit Inventory 2,000
Credit Income tax expense 600
Answer – (a) Only the investor’s share of the unrealized profit, net of deferred tax, is eliminated: P1,400 (40% x 5,000 x 70%).
47. White Co holds 50 per cent of the equity shares in Back Co. The remaining shares are held equally by Pink Co and Red Co. A contract
between White, Pink and Red stipulates that a 75 per cent majority is required in a vote to make decisions about the relevant
activities of Back Co. Which of the following statements best describes the relationship between White Co and Black Co.?
a. Black Co is not an associate of White Co because there is no evidence of significant influence.
b. Black Co is jointly controlled by White Co, Red Co and Pin Co because these parties are bound by a
contractual arrangement.
c. White Co controls Black Co because it has the greatest shareholding in Black Co and no decision can be
passed without White’s consent.
d. White Co does not jointly control Black Co because it could achieve the necessary 75 per cent majority of
votes by joining with either Red Co or Pink Co.
Answer – (d) Joint control only exists where there is a contractual agreement between parties and the unanimous
consent of the controlling parties is required in order to make decisions about relevant activities. Since White Co could
join with either Red Co or Pink Co to make decisions, there is no unanimous consent and this is not a joint arrangement.
White Co does not control Black Co because its vote can be blocked by Red Co and Pink Co opposing it.
White Co is assumed to have significant influence over Black Co by virtue of its 50 per cent shareholding.
48. Which of the following transactions is NOT within the scope of IFRS 15 Revenue from Contracts with Customers?
a. the sale of a non-controlling equity shareholding owned by a retailer
b. the sale of an investment property owned by a manufacturing company
c. the sale of an extended warranty by a manufacturer of electrical goods
d. an agreement licensing another party to use an anti-virus package created by software designer
The sale of a non-financial asset, such as investment property or plant, and equipment, falls within the scope of IFRS 15.
Contracts relating to financial instruments and group interests are, however, out of scope.
49. The following transactions were incurred in December 20x5. How much should the company recognize as revenue for that month?
P
1.12.20x5 Goods provided to a customer on a sale or return basis. The customer has 35,500
confirmed that 50 per cent of these goods were sold on to a third party
during December.
15.12.20x5 Goods sold including servicing fees for 4 months from 16 December. The 10,000
fair value of the goods is P10,000 and the fair value of 4 months’ servicing
fee is P2,500.
31.12.20x5 Goods sold and delivered to customer. The invoiced amount is payable in 30,000
three equal instalments of P10,000 on 1 January. 1 February and 1 March
20x6.
An appropriate discount rate, where appropriate is 1 per cent per month. Other than the amounts payable in instalments all debts
have been paid.
a. P55,704 c. P73,454
b. P56,000 d. P73,750

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1.12.20X5 35,500 x (control of the asset is not transferred to the customer on 17,750
delivery, as the goods can be returned. Revenue is recognised when
control transfers, i.e. when goods are sold to third party)
15.12.20X5 (10,000 / 12,500 x 10,000) + ((2,500 / 12,500 X 10,000) / 4 x ½) (the 8,250
transaction price is allocated to performance obligations based on
their fair values)
31.12.20X5 P10,000 X 3 30,000
56,000
50. A construction company entered into a contract on 1 January 20x5 to build a factory on behalf of a manufacturer. The performance
obligation within the contract is determined to be satisfied over time. The total contract price was P2.8 million. At 31 December
20x5 the contract was certified as 35 per cent complete. Costs incurred during the year were P740,000 and costs to complete are
estimated at P1.4 million. P1 million has been billed to the customer but not yet paid.
What amounts are recognized in respect of this contract in the statement of financial position of the construction company as at
31 December 20x5?
a. a receivable of P1,000,000
b. a contract asset of P1,000,000
c. a receivable of P1,000,000 and a contract asset of P20,000
d. a receivable of P1,000,000 and a contract liability of P20,000
Dr Receivable 1,000,000
Cr Contract liability 20,000
Cr Revenue recognized in year (35% x P2.8m) 980,000
IFRS 15 only allows the recognition of the revenue insofar as the performance obligation is satisfied. As a higher amount has
been billed to the customer, the balance is a liability that represents a payment promise received from a customer before a
performance obligation (or part of) has been delivered.
P 1,000,000 is a receivable rather than a contract asset because it is an unconditional right to receive compensation.
51. Step 1 of the IFRS 15 five-step model requires the contract with the customer to the identified. IFRS 15 is applied only if a contract
has specific attributes. To which one of the following contracts is IFRS 15 NOT applied?
a. an oral contract with a customer to deliver goods at a specified price with payment on delivery
b. a contract to deliver goods to a customer that entitles the customer to return the goods in exchange for a
full refund
c. a contract to receive payment from a corporate customer to invest in continued research and
development. Exactly how the money is spent is at the discretion of the recipient
d. A contract with a customer that operates in a region that is suffering severe economic recession meaning
that at the inception of the contract only 90 per cent of the contract price is expected to be received from
the customer
A contract may be oral, written or implied and must be between an entity and its customer. The
contract must:
• be approved by the parties to it
• have commercial substance
• identify each parties’ rights and payment terms.
In addition, it must be likely that the entity will collect consideration that is entitle led to (although
this may be subject to a price concession, as in cases B and D).
In the case of C, although the contract is with a customer, that customer is not acting in the
capacity of customer within the context of the contract. This is because the payment to be made
is not in exchange for goods or services.
52. Newmarket Co’s revenue as shown in its draft statement of profit or loss for the year ended 31 December 20X9 is P27 million. This
includes:
• P8 million for vehicles sold on 31 December 20X9. Included in the selling price and as part of a New Year offer, Newmarket
Co provided the purchasers of these vehicles with a two-year servicing agreement free of charge. The standalone selling
price of the two-year servicing agreements provided would be P2million.
• P4 million collected on behalf of Aintree Co. Newmarket Co acts as an agent for Aintree Co and receives a 10 percent
commission on all sales, which is included in the P4 million.
What amount of revenue should be recognised in the statement of profit or loss of Newmarket Co for the year ended 31 December
20X9 (Ignore the time value of money.)
a. P21,400,000 c. P25,000,000
b. P21,800,000 d. P25,400,000
Revenue per draft profit or loss 27,000
Servicing costs (2m /2m + 8m) x 8m) (1,600)
Agency collections (4,000)
Agency commission (4,000 x 10%) 400
21,800
The P8million for vehicles is apportioned between the vehicles themselves and the servicing agreements based
on the standalone prices of each. No revenue is recognized in respect of servicing agreements because the
agreements have not commenced at the reporting date.
53. In which of the following contracts can a single performance obligation be identified?
a. a contract to provide a mobile phone handset and 12 months ‘network services
b. a contract to manufacture and deliver 5 customised machines at regular intervals over a period of
10months
c. a contract to transfer a software licence and perform a customized installation service in order that the
software interfaces with the customer’s existing software applications
d. a contract to provide goods to a customer: the seller has historically provided maintenance services for no
additional consideration to this customer, although the written contract does not include this promise

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A performance obligation is distinct if the customer can benefit from the good or service on its own or with
other resources readily available to them and the seller’s promise to transfer the good or service is separately
identifiable from other promises in the contract. A promise to transfer goods or services is separately
identifiable if the seller does not provide a significant service of integrating the good or service with others
promised in the contract , the good or service does not significantly modify of customize another good or
service promised in the contract or the good or service is not highly dependent on other goods or services in
the contract.
In C, the provision of the licence is highly dependent on the customized installation service. Therefore, these
are not separately identifiable promises/distinct performance obligations. The contract therefore represents
a single performance obligation.
In all other cases each good or service provide is separately identifiable and does not rely on or is not
integrated with, other promises in the contract.
54. On 25 June 20X9 Cambridge Co received an order from a new customer, Circus Co. for products with a sales value of P900,000.
Circus Co enclosed a deposit with the order of P90,000.
On 30 June 20X9 Cambridge Co had not completed credit checks on Circus Co and had not despatched any goods. Cambridge Co
is considering the following possible entries for this transaction in its financial statements for the year ended 30 June 20X9.
(i) Create a trade receivable for P810,000.
(ii) Include P90,000 in revenue for the year.
(iii) Recognise P90,000 as a contract liability.
(iv) Include P900,000 in revenue for the year.
(v) Do not include anything in revenue for the year
According to IFRS 15 Revenue from Contracts with Customers, how should Cambridge Co record this transaction in its financial
statements for the year ended 30 June 20X9?
a. (i) and (iv) only c. (ii) and (v) only
b. (ii) and (iv) only d. (iii) and (v) only
No sale has taken place as control of the goods has not been transferred, but Cambridge Co must recognize a contract liability
to reflect the fact that it is has received P90,000 prior to transferring goods to its customer
55. Coldwear Co entered into a 12-month contract to sell costs to a fashion retailer on 1 October 20X5. The contract specified a price
of P200 per cost, which would be reduced to P175 per cost if a minimum of 400 were purchased in the year. During the first six
months of the contract, the retailer purchased 150 costs and Coldwear Co determined that this level of demand would continue
into the second half of the year. In May 20X6, due to a famous singer wearing one of the costs, demand increased considerably ,
and the retailer purchased a further 500 costs in total between 1 April 20X6 and 30 September 20X6.
What revenue from the contract should Coldwear Co recognize in its financial statements for the years ended 31 March 20X6 and
20X7?
Y/e 31 March 20X6 Y/e 31 March 20X7
a. P26,250 P87,500
b. P30,000 P83,750
c. P30,000 P87,500
d. P30,000 P100,000
Variable consideration is included in the transaction price only if it is highly probable that a significant amount will not be
reversed. In the first six months it is not expected that more than 400 coats will be sold to the retailer and therefore a significant
reversal of revenue is not highly probable. First half sales (P200 X 150) are P30,000 as the price reduction is not highly probable.
In the second six months of the contract an unexpected increase in units sold means that the price reduction is triggered.
The revenue recognized in this period include an adjustment to revenue recognized in the first half of the contract
P’000
Second half sales (P175 x 500) P 87,500
Adjustment to first half sales (P25 x 150) ( 3,750)
Revenue P 83,750
56. Wood Designs Co enters into a contract on 1 July 20X5 to make and deliver furniture to a hotel chain in two years’ time, when a
new hotel is due for completion. Wood Designs Co offers its customer the opportunity to pay P6,000,000 on delivery or P5,144,000
at the inception of the contract on 1 July 20X5. The customer pays the lower amount immediately. The interest rate implicit in the
contract is 8 per cent and Wood Design Co’s incremental borrowing rate is 7 per cent.
What contract liability is recognized in Wood Design Co’s financial statements in the year ended 30 June 20X6?
a. P5,144,000 c. P5,555,520
b. P5,504,000 d. P6,000,000
The transaction includes a significant financing component that benefits Wood Designs Co. On 1 July 20X5, the cash advance is
recognized by Wood Designs Co as a contract liability. Over the year to 30 June 20X6, in accordance with IFRS 15 the contract
liability balance accrues interest at Wood Designs Co’s incremental borrowing rate (the rate that reflects the credit
characteristics of the party receiving financing).
P’000
Contract liability (1 July 20X5) 5,144
Interest at 7% 360
Contract liability (30 June 20X6) 5,504
57. Company W enters into a contract with Company X to deliver goods with a fair value of P350,000. The contract stipulates that
Company X pays for these goods through the provision of services with a fair value of P370,000.
Company Y enters into a contract with Company Z to deliver 1000 scented candies at a unit price of P20. At the inception of t he
contract, as an incentive. Company Y provides company Z with a P500 credit against future contracts for the purchase of scented
candies. What amount of revenue is recognised by Company W and Company Y in respect of these contracts?
Company W Company Y
a. P350,000 P19,500
b. P350,000 P20,000
c. P370,000 P19,500
d. P370,000 P20,000
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Non-cash consideration is measured at its fair value if this can be reasonably estimated. Consideration payable to a customer
(including vouchers, coupons and credits) is accounted for as a reduction of transaction price.
58. Smeaton Catering Equipment Co (SCE) enters into a contract with a customer on 18 August 20X5 to deliver a commercial grade
mixer, mincer and blender. The contract price is P2,200, payable in six months. SCE regularly sells the mincer and blender to
customers in a bundle, priced at P1200. It also sells each item individually, priced as follows:
Mixer P1,000
Mincer P1,100
Blender P900
SCE’s incremental six-month borrowing rate is 5 per cent.
How much of the P2,200 transaction price is allocated to the mixer?
a. P698 c. P952
b. P733 d. P1,000
P2,200 is payable in 6 months’ time. IFRS 15 does not require a separate financing component to be accounted for if the period
of time between the transfer of goods and payment of consideration is 12 months or less.
As mincers and blenders are regularly sold in a bundle which a discount equal to that in the contract the full P800 discount (P
1,000 + P1,100 + P,900 – P2,200) is allocated to the mincer and blender. Therefore, the transaction price allocated to the mixer
is the same as its standalone selling price.
59. 1Fonesell Co enters into a contract on 1 September 20X5 to conduct telephone marketing activities on behalf of a customer. The
contract has a price of P8,000 and requires Fonesell Co to contact 10,000 households over a period of six months in order to
acquire about buying habits and promote its customer. The customer is invoiced equal amounts three months and six months
after the commencement of the contract By Fonesell Co’s year-end of 31 December 20X5 it has contacted 3,500 of the 10,000
customers.
What amounts does Fonesell Co recognise in its financial statements in the year ended 31 December 20X5?
a. revenue of P4,000 and a receivable of P4,000
b. revenue of P4,000 and a contract liability of P4,000
c. revenue of P2,800, a receivable of P4,000 and a contract asset of P1,200
d. revenue of P2,800, a receivable of P4,000 and a contract liability of P1,200
Revenue should be recognized as the contract progresses using either input or output methods. Time elapsed (as opposed to
hours worked on contract) is not an appropriate method to assets progress. The number of calls made as a proportion of all calls
is an appropriate output method and therefore 35 per cent of revenue is recognized. As the amount invoiced exceeds the
performance obligation that has been satisfied, a contract liability is also recognized.
60. Archibald Co has a number of three-year contracts with hauliers to provide maintenance and servicing of vehicles. Revenue from
the contracts is recognised over time in accordance with IFRS 15 Revenue from Contracts with Customers. Which of the following
disclosures is NOT required by IFRS 15 in respect of these contracts?
a. when Archibald Co satisfies its performance obligations in respect of the contracts.
b. revenue from maintenance and service contracts disaggregated by customer location.
c. revenue recognised in the period that was included in the opening contract liabilities balance
d. the transaction price that is allocated to unsatisfied performance obligations at the reporting date
IFRS 15 requires that revenue from contracts with customers is disaggregated by categories that depict how the nature, amount,
timing and uncertainty of revenue and cash flows are affected by economic factors. This may include disaggregation by
geographical location of customer, however, there is no requirement to provide this information if the underlying disclosure
requirement is not met through the provision of this information.
61. On 1 October 20X5, Dater Co tendered for and won an 18-month contract to provide data management services to a customer.
The contract began on 1 November 20X5. The following costs have been incurred by Dater Co in the year ended 31 December
20X5 in relation to the contract
P’000
Production of tender brochure 12
External legal fees in relation to drafting of contracts with customer 15
Allocation of staff coasts to tendering process 18
Staff hours spent working on the customer’s data management 83
The contract is priced in order to recover all costs of obtaining the contract.
What amount is recognized by Dater Co in profit of loss in the year ended 31 December 20X5 in respect of the contract?
a. P83,000 c. P101,000
b. P98,000 d. P110,000
Incremental costs of obtaining the contract are the production of the tender brochure and the legal fees. These are capitaliz ed
if expected to be recovered. In this case recovery is expected through the pricing of the contract. These costs are amortised over
the life of the contract.
P’000
Capitalised Costs
Production of tender brochure 12
External legal fees 15
27
Expensed costs
Allocation of staff costs to tendering process 18
Staff hours spent working on contract 83
Amortisation of capitalized costs 27 x 6 / 18 27
110
62. In which of the following circumstances is a provision recognised in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets in the financial statements for the year ended 31 December 20X2?
I. An entity is planning to refurbish its head office in February 20X3. It is anticipated that the refurbishment
will cost P200,000.

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II. On 15 December the board of an entity decided to close down a division of its business. On 18 December
the details were approved by the board and customers were notified. On 20 December redundancy notices
were sent to staff.
III. Under new legislation an entity is required to install improved sound proofing in all its factories by 31
March 20X3. The entity will be fined if it does not comply with the legislation by this date. At 31 December
20X2 the entity has not made the requires improvements.
a. II only c. I and III only
b. III only d. II and III only
A constructive obligation exists at 31 December 20X2 as the decision has been communicated to customers and employees. A
valid expectation that the division will be closed has been created. There is no obligation at 31 December 20X2 in respect of the
new legislation (a legal obligation to pay for sound proofing only exists when it has actually been installed and money is owned
to the fitter the factories could be sold before that happens) or the planned refurbishment.
63. In accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets which of the following is recognized as a
provision?
a. the costs of a major refit required in three years’ time
b. electricity costs owing estimated by reference to the bill for the previous quarter
c. an amount for gods received but for which have not been invoiced by the supplier
d. the expected costs of meeting warranty claims from customers in relation to sales made
No provision can be made for A as there is no obligation. B and C are liabilities rather than provisions.
64. Wade Co. operates in the mining sector. It markets itself as a sector leader in managing the environmental impact f mining and
has announced publicly that it is committed to supporting the regeneration of land that is impacted by its activities. In June 20X4,
as a result f a fire resulting from Wade Co’s operations, a fragile ecosystem close to a Wade Co mine was damaged.
Which of the following statements is correct in respect of the financial statements for the year ended 31 July 20X4?
a. Wade Co has no present obligation to make good the damage to the land and should not provide for
associated costs.
b. Wade Co has a contingent liability resulting from a possible obligation and should disclose this in its
financial statements.
c. Wade Co has a legal present obligation to make good the damage to the land and should make a provision
for associated costs.
d. Wade Co has a constructive present obligation to make goods the damage to the land and should make
a provision for associated costs.
A constructive present obligation arises where there is a valid expectation in other parties that an entity will discharge an
obligation. Here as a result of Wade’s marketing activities, the public would expect the company to make good the damage it
has caused.
65. In which of the following circumstances is a provision recognized in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets in the financial statements for the year ended 30 September 20X6?
I. the direct costs of a major management restructuring that is due to take place from 1 December 20X6 (the
restructuring was announced publicly on 15 September 20X6)
II. warranty costs expected to be incurred in the future as a result of sales in the year ended 30 September
20X7
III. Retraining costs to be incurred due to the management restructuring
Reliable estimates of costs can be made in all cases.
a. I only c. I and III only
b. II only d. II and III only
Direct costs of a management restructuring that has been announced publicly are provided for. The public announcement
creates a constructive obligation.
Warranty costs are not provided for as they relate to sales that have not yet taken place i.e. there is no past event. Retraining
costs are not provided for as there is no present obligation to provide these costs.
66. Which combination of the following options best describes the effects of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets?
I. It ensures that a provision is always recognised where there is a present obligation arising from a past
event.
II. It ensures that adequate disclosure is provided to allow users to understand uncertainty and subjectivity
behind recognized provisions.
III. It ensures that the definition of liabilities in the IASB’s Conceptual Framework is reflected.
IV. It ensures that the most prudent possible view of provisions is taken by companies.
a. I and II only c. II and III only
b. I and IV only d. II and IV only
A provision is not always recognized when there is a present obligation arising from a past event. Further conditions of
recognition are that payment is probable and the provision can be reliably measured.
IAS 37 does not take an especially prudent view of liabilities. It requires that a provision is measured at its expected value rather
than worst-case value. It also requires that a provision is not recognized if an expected outflow of economic benefits is anything
less than probable.
67. IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out disclosure requirements for provisions when they have
been recognized.
In what circumstance is an entity exempt from providing full disclosure?
a. when the entity believe that disclosure would result in competitive disadvantage
b. if the provision relates to a dispute between the entity and one of its former employees
c. if full disclosure would seriously prejudice the position of the entity in a dispute with another party
d. if the entity expects to recover substantially all of any loss through insurance or other form of
reimbursement

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If the directors of the company decide that disclosure of the facts relating to a provision would be seriously prejudicial to its
business then a detailed disclosure need not be given. However, the provision should still be recognized and the general nature
of the dispute disclosed.
68. Mulroon Co, a publishing company, is being sued for P1,000,000 in a libel action in respect of a book published in January 20X0.
On 31 October 20X0, the end of the reporting period, the directors believed that the claim had a 20 per cent chance of success.
On 30 November 20X0, the date the accounts were approved, the directors believed that the claim had a 30 percent chance of
success.
In the financial statements at 31 October 20X0 what amount should be recognized in respect of this claim?
a. Pnil c. P300,000
b. P200,000 d. P1,000,000
A provision is only made if a transfer of economic benefits is probable. Probable is defined as “more likely than not”, that is,
over 50 per cent.
69. A customer brought a legal action against Jammit Co in June 20X6. Jammic Co has engaged a legal team to defend the action. At
31 December 20X6 the legal team advise there is a 60 per cent probability that Jammit Co will have to pay damages of P500,000.
Legal fees amount to P32,000, half of which has been paid by Jammit Co.
What amounts are recognized by Jammit Co. in its statement of financial position at 31 December 20X6?
a. a provision of P316,000
b. a provision of P516,000
c. a provision of P300,000 and accrual of P16,000
d. a provision of P500,000 and accrual of P16,000
There is a legal obligation and payment is probable, therefore a provision is made. This is made for the best estimate of the
amount payable, which is P500,000. Legal fees payable are a liability, however, they are an accrual rather than a provision a s
there is no uncertainty attached.
70. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements is correct?
a. Contingent assets and contingent liabilities are always disclosed in the financial statements.
b. Contingent liabilities are accrued and contingent assets are disclosed in the financial statements.
c. Contingent liabilities are either accrued or disclosed and contingent assets are disclosed in the financial
statements.
d. Contingent liabilities are usually disclosed and contingent assets are sometimes disclosed in the financial
statements.
Contingent liabilities are disclosed unless the likelihood of their occurrence is remote: contingent assets are disclosed only when
probable to arise.

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