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NAME: Date:
Professor: Section: Score:

EXERCISE 3

1. It is a systematic compilation of a group of accounts.

a. Chart of T-accounts c. Ledger
b. Trial balance d. Journal

2. A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. all of these.

3. Unearned income can best be described as an amount that is

a. collected and currently matched with expenses.
b. collected but not currently matched with expenses.
c. not collected but currently matched with expenses.
d. not collected and not currently matched with expenses.

4. The following were taken from the records of SML Co. as of December 31, 20x1:
Checks drawn but not yet issued to payees ₱120,000
Customers’ checks dated January 15, 20x2 35,000
Customers’ checks dated Dec. 31, 20x1 40,000
SML’s check dated Jan. 15, 20x2 already mailed to payee 16,000
Cash on hand 130,000
Employees’ checks representing unclaimed salaries, held by the treasurer 14,000
Petty cash fund (fully replenished) 20,000

How much of the items listed above will be included in SML’s Dec. 31, 20x1 cash?
a. 340,000
b. 260,000
c. 280,000
d. 320,000

5. Devin Co.'s cash balance in its balance sheet is ₱1,300,000, of which ₱300,000 is identified as a
compensating balance. In addition, Devin has classified cash of ₱250,000 that has been restricted for
future expansion plans as "other assets". Which of the following should Devin disclose in notes to
its financial statements?
Compensating balance Restricted cash
a. Yes Yes
b. Yes No
c. No Yes
d. No No

6. It is a report that is prepared for the purpose of bringing the balances of cash per records and per
bank statement into agreement.
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a. Bank statement
b. Check Disbursement Voucher
c. Bank reconciliation
d. Bank deposit slip

7. Entity A is preparing its November 30, 20x1 bank reconciliation statement. The following
information was determined:
 Cash balance per accounting books, Nov. 30, 20x1, ₱600,000
 Cash balance per bank statement, Nov. 30, 20x1, ₱860,000
 Credit memo, ₱380,000
 Debit memo, ₱60,000
 Deposits in transit, ₱100,000
 Outstanding checks, ₱40,000

How much is the adjusted balance of cash?

a. 840,000
b. 880,000
c. 920,000
d. 1,040,000

8. Under the allowance method of recognizing bad debts on trade accounts receivable, the effect of
writing off an account to an entity's current ratio is
a. increase
b. decrease
c. increase if the entity's current ratio is higher than 1 prior to the write-off; decrease if the entity's
current ratio is lower than 1 prior to the write-off
d. no effect

9. Howl Co. has the following information:

Days outstanding Receivable balances % uncollectible
0 – 60 180,000 1%
61 – 120 135,000 2%
Over 120 150,000 6%
Total accounts receivables 465,000  

During the year, Howl Co. wrote off ₱10,500 receivables and recovered ₱6,000 that had been written-off
in prior years. The allowance for doubtful accounts has a beginning balance of ₱3,000. How much is the
doubtful accounts expense for the year?
a. 20,000
b. 25,000
c. 15,000
d. 30,000

10. In its December 31 balance sheet, Devin Co. reported trade accounts receivable of ₱250,000 and
related allowance for uncollectible accounts of ₱20,000. What is the total amount of risk of
accounting loss related to Devin's trade accounts receivable, and what amount of that risk is off
balance-sheet risk? (Item 1) Risk of accounting loss; (Item 2) Off-balance-sheet risk
a. 0; 0
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b. 230,000; 20,000
c. 230,000; 0
d. 250,000; 20,000

11. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The current market rate published by a regulatory body.
c. The interest rate that exactly discounts the estimated future cash payments or receipts over the
expected life of the debt instrument or, when appropriate, a shorter period, to the net carrying
amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.

12. ABC Co. received the following notes receivable on January 1, 20x1:
15,00
9-month, 10% note from Alpha Company.
0
6-month, noninterest bearing note from Beta, Inc. (the effect of discounting is deemed 20,00
immaterial) 0
30,00
14%, 3-year note from Charlie Corp.
0
Market rate of interest on January 1, 20x1 10%

At what total net amount will the notes be initially recognized?

a. 65,000
b. 53,673
c. 62,357
d. 50,000

13. On March 1, 20x1, Nickelodeon Co. received a 12% note dated January 1, 20x1. Principal and
interest on the note are due on July 1, 20x1. On initial recognition, which of the following accounts
increased?
a. Prepaid interest
b. Unearned interest income
c. Interest revenue
d. Interest receivable

14. What are the effects of direct loan origination costs and origination fees on the carrying amount of a
loan receivable?
Direct origination costs Origination fees
a. increase increase
b. decrease decrease
c. increase decrease
d. no effect no effect

15. The application of the expected credit loss (ECL) model of PFRS 9 requires the measurement of
expected credit losses in a manner that reflects reasonable and supportable information that is
available without undue cost or effort at the reporting date. Such reasonable and supportable
information does not include
a. past events.
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b. current conditions.
c. forecasts of future economic conditions.
d. All of these are included

16. When testing loans and note receivables for impairment, the rate that should be used is
a. the current market rate as of impairment testing date.
b. the weighted average rate on the remaining term of the instrument.
c. the original effective rate of the instrument.
d. the weighted average rate over the total life of the instrument.

17. The due date of a 90-day note receivable dated July 12 is

a. September 12.
b. October 9.
c. October 10.
d. October 11.

18. On January 1, 20x1, Hollycow Bank extended a 3-year, ₱1,000,000, 12% loan to Manna, Inc. at a
price that yields an effective interest rate of 10%. Principal is due at maturity but interest is due
annually every December 31.

On December 31, 20x1, it was ascertained that the loan was credit-impaired. The loan was
restructured as follows:
 Only the principal amount of ₱1,000,000 will be collected on the loan. This is due on December
31, 20x3.
 The ₱120,000 interest receivable accrued in 20x1 and future interests are waived.

How much is the impairment loss on December 31, 20x1?

a. 105,289
b. 129,091
c. 212,561
d. 328,265

19. Tremolo Co. transferred loans receivables with carrying amount and fair value of ₱200,000 to XYZ,
Inc. for cash amounting to ₱200,000. Under the terms of the transfer, Tremolo Co. is obligated to
repurchase some of the loans transferred not exceeding ₱20,000. The entry to record the transfer
includes all of the following except
a. a debit to cash for ₱200,000.
b. a credit to loans receivable of ₱200,000.
c. a credit to liability on repurchase agreement of ₱20,000.
d. a credit to loans receivable of ₱180,000.

20. According to PAS 2, inventories are measured at

a. cost.
b. fair value.
c. net realizable value.
d. lower of a and c.

21. ABC Co. purchased goods with invoice price of ₱3,000 on account on December 27, 20x1. The
related shipping costs amounted to ₱50. The seller shipped the goods on December 31, 20x1. ABC
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Co. received the goods on January 2, 20x2 and settled the account on January 5, 20x2. How much is
the capitalizable cost of the inventory purchased if the terms of the shipment are FOB shipping point,
freight prepaid?
a. 3,050 b. 3,000 c. 2,950 d. 0

22. Haze Co. provided you the following information for the purpose of determining the amount of its
inventory as of December 31, 20x1:
Goods located at the warehouse (physical count) 3,400,000
Goods located at the sales department (at cost) 15,800,000
Goods in-transit purchased FOB Destination 2,400,000
Goods in-transit purchased FOB Shipping Point 1,600,000
Freight incurred under “freight prepaid” for the
goods purchased under FOB Shipping Point 80,000
Goods held on consignment from Smoke, Inc. 1,800,000

How much is the total inventory on December 31, 20x1?

a. 25,080,000
b. 25,080,000
c. 20,880,000
d. 20,800,000

23. ABC Co. consigned goods costing ₱14,000 to XYZ, Inc. Transportation costs of delivering the goods
to XYZ, Inc. totaled ₱3,000. Repair costs for goods damaged during transportation totaled ₱1,500.
To induce XYZ, Inc. in accepting the consigned goods, ABC Co. gave XYZ, Inc. ₱2,000 representing
an advance commission. How much is the cost of the consigned goods?
a. 20,500 b. 18,500 c. 17,000 d. 14,000

24. ABC Co., a VAT payer, imported goods from a foreign supplier. Costs incurred by ABC include the
following: purchase price, excluding VAT, ₱250; import duties, ₱20; value added tax, ₱15;
transportation and handling costs, ₱5; and commission to broker, ₱2. How much is the cost of
purchase of the imported goods?
a. 292 b. 277 c. 257 d. 255

25. The following are among the transactions of ABC Co. during the year:
 Purchased goods costing ₱20,000 from XYZ, Inc. Billing was received although delivery was delayed
per request of ABC Co. The goods purchased were segregated and ready for delivery on demand.
 Purchased goods costing ₱35,000 from Alpha Corp. on a lay away sale agreement. The goods were
not yet delivered until after ABC makes the final payment on the purchase price. ABC Co. made total
payments of ₱34,920 during the year.

How much of the goods purchased above will be included in ABC’s year-end inventory?
a. 55,000 b. 54,290 c. 34,920 d. 0

26. Based on the following information, how much is the cost of goods sold?
Decrease in inventory 12,000
Increase in accounts payable 16,000
Payments to suppliers 80,000

a. 108,000 b. 96,000 c. 76,000 d. 84,000

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Use the following information for the next two questions:

Miller Inc. is a wholesaler of office supplies. The activity for Model III calculators during August is
shown below:
Date Transaction Units Cost
Aug. 1 Inventory 2,000 ₱36.00
7 Purchase 3,000 37.20
12 Sales 3,600
21 Purchase 4,800 38.00
22 Sales 3,800
29 Purchase 1,600 38.60

27. If Miller Inc. uses a FIFO periodic inventory system, the ending inventory of Model III calculators at
August 31 is reported as
a. 150,080 b. 150,160 c. 152,288 d. 152,960

28. If Miller Inc. uses a FIFO cost perpetual inventory system, the ending inventory of Model III
calculators at August 31 is reported as
a. 150,080 b. 150,160 c. 152,232 d. 152,960

Use the following information for the next two questions:

Stephens Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July
is shown below:
Date Transaction Units Cost
July 1 Inventory 2,000 ₱36.00
7 Purchase 3,000 37.00
12 Sales 3,600
21 Purchase 5,000 37.88
22 Sales 3,800
29 Purchase 1,600 38.11

29. If Stephens Inc. uses the average cost method to account for inventory, the ending inventory of VTC
cameras at July 31 is reported as
a. 153,400 b. 156,912 c. 158,736 d. 159,464

30. If Stephens Inc. uses a moving average perpetual inventory system, the ending inventory of the
VTC cameras at July 31 is reported as
a. 153,400 b. 156,912 c. 158,736 d. 159,464

31. On June 19, 2002, a fire destroyed the entire uninsured merchandise inventory of Allen
Merchandising Company. The following data are available:

Inventory, January 1 .................................. ₱ 80,000

Purchases, January 1 through June 560,000
19 ..................
Sales, January 1 through June 19 ...................... 776,000
Markup percentage on cost ............................. 25%
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What is the approximate inventory loss as a result of the fire?

a. ₱19,200
b. ₱27,200
c. ₱34,000
d. ₱58,000

32. The following information is available for Torino Corp. for its most recent year:

Net sales ............................................. ₱3,600,000

Freight-in ............................................ 90,000
Purchase discounts .................................... 50,000
Ending inventory ...................................... 240,000

The gross margin is 40 percent of net sales. What is the cost of goods available for sale?
a. ₱1,680,000
b. ₱1,920,000
c. ₱2,400,000
d. ₱2,440,000

33. The Ashby Sporting Goods Store uses the retail inventory method. Information relating to the
computation of the inventory at December 31, 2002, is as follows:
Cost Retail
Inventory at January 1, 2002 .............. ₱ 32,000 ₱ 80,000
Sales ..................................... 580,000
Purchases ................................. 270,000 600,000
Freight-in ................................ 7,600
Net markups ............................... 40,000
Net markdowns ............................. 20,000

What is the ending inventory at cost at December 31, 2002, using the retail inventory method and the
FIFO cost estimation?
a. ₱43,000 c. ₱51,600
b. ₱45,000 d. ₱53,724

34. According to PFRS 9 Financial Instruments, a financial instrument is recognized

a. when the entity purchases investments in equity securities
b. when the entity becomes a party to the contractual provisions of the instrument
c. when the entity has a codified business model with an objective of holding assets in order to
collect contractual cash flows.
d. all of these

35. Financial assets are initially classified and subsequently measured on the basis of
a. the entity’s business model for managing the financial assets.
b. the contractual cash flow characteristics of the financial asset.
c. a and b
d. a or b
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36. Entity Y has operated a “hold to collect” business model for many years. Its portfolio of assets has
for many years consisted of investment grade bonds issued by utility companies. Entity Y’s
investment policies attach importance to both the yield and the stability afforded by such
investments, and result in sales only in response to significant deteriorations in the credit risk of
individual assets within the portfolio. Recently, however, there has been a wave of takeovers in the
utility sector fuelled by overseas interest in the sector. As a result, Entity Y has sold a number of the
bonds within its portfolio in response to unsolicited offers that have been made to it. Continuing
interest in this sector means that such sales are likely to continue in the future. Can Entity Y
continue to classify the unsold bonds under a held to collect business model?
a. Yes, Entity Y may continue to classify the remaining bonds under the “hold to collect” model.
b. No, Entity Y shall reclassify the remaining bonds to the “hold to sell” model.
c. No, Entity Y shall reclassify the remaining bonds to the “hold to collect and sell” model.
d. No, Entity Y must either designate the remaining bonds as FVPL or elect to classify them as
FVOCI. The amortized cost measurement is not appropriate for the remaining bonds.

37. Dawn Co. had the following portfolio of securities at the end of its first year of operations:
Year-End
Security Classification Cost Fair Value
A Held for Trading ₱18,000 ₱23,000
B Held for Trading ₱25,000 ₱27,000

The year-end adjusting entry would most likely include a

a. ₱11,000 net debit to gain.
b. ₱7,000 net credit to a fair value adjustment account.
c. ₱7,000 net debit to held for trading securities.
d. ₱5,000 net credit to loss.

38. There are multiple active markets for a financial asset with different observable market prices:
Market Quoted Price Transaction Costs
A 76 5
B 74 2

There is no principal market for the financial asset. What is the fair value of the asset?
a. 71 b. 72 c. 74 d. 76

39. On January 1, 2002, Young Co. paid ₱500,000 for 20,000 shares of Montana Co.'s ordinary shares
and classified these shares as held for trading securities. Young does not have the ability to exercise
significant influence over Montana. Montana declared and paid a dividend of ₱.50 a share to its
stockholders during 2002. Montana reported net income of ₱260,000 for the year ended December
31, 2002. The fair value of Montana Co.'s stock on December 31, 2002 is ₱27 per share. What is the
net asset amount (which includes both investments and any related market adjustments)
attributable to the investment in Montana that will be included on Young's balance sheet at
December 31, 2002?
a. 530,000 b. 540,000 c. 569,000 d. 579,000

40. Martin Co. purchased the following portfolio of held for trading securities during 2002 and
reported the following balances at December 31, 2002. No sales occurred during 2002. All declines
are considered to be temporary.
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Security Cost Fair Value at 12/31/02

X ₱ 80,000 ₱ 82,000
Y 140,000 132,000
Z 32,000 28,000

The carrying value of the portfolio at December 31, 2002, on Martin Co.'s balance sheet would be
a. 222,000 b. 240,000 c. 242,000 d. 252,000

41. Martin Co. purchased the following portfolio of fair value through other comprehensive income
securities during 2002 and reported the following balances at December 31, 20x2. No sales occurred
during 20x2. All declines are considered to be temporary.
Security Cost Fair Value at 12/31/02
X ₱ 80,000 ₱ 82,000
Y 140,000 132,000
Z 32,000 28,000

Martin Co. should report what amount related to the securities transactions in its 20x2 profit or loss?
a. 0 c. 10,000 unrealized loss
b. 2,000 unrealized loss d. 12,000 unrealized loss

42. It is a bond that gives the holder the right to exchange the par amount of the bond for ordinary
shares of the issuer at some fixed ratio during a particular period.
a. convertible bond c. extendible bond
b. exchangeable bond d. optimus prime bond

Use the following information for the next two questions:

On January 1, 20x1, Gina Co. acquired 10%, ₱4,000,000 bonds for ₱3,807,853. The principal is due on
January 1, 20x4 but interest is due annually. The yield rate on the bonds is 12%.

43. How much is the interest income recognized in 20x1?

a. 456,942 b. 463,776 c. 471,429 d. 400,000

44. How much is the carrying amount of the investment on December 31, 20x1?
a. 3,807,853 b. 3,864,795 c. 3,928,571 d. 4,000,000

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. acquired 14%, ₱1,000,000 bonds for ₱1,099,474. The principal is due on
December 31, 20x3 but interest is due annually starting December 31, 20x1. The effective interest rate on
the bonds is 10%. The bonds are classified as investment measured at amortized cost.

45. How much is the carrying amount of the investment on December 31, 20x2?
a. 1,000,000 b. 1,036,364 c. 1,069,421 d. 1,044,312

46. Assume that half of the investment was sold on January 1, 20x2 for ₱480,000. Transaction costs
incurred on the sale amounted to ₱15,000. How much is the gain (loss) on the sale?
a. (54,711) b. (39,711) c. 16,341 d. (69,711)

47. On May 1, 20x1, Solna Co. acquired ₱100,000 face amount, 10% bonds dated January 1, 20x1 at 102.
The purchase price excludes interest. How much is the initial carrying amount of the investment?
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a. 102,000 b. 99,500 c. 98,667 d. 105,333

48. According to PFRS 9, which of the following represents a cessation of a financial asset’s impairment
accounting?
a. Reclassification of the financial asset from Amortized cost to FVPL
b. Reclassification of the financial asset from FVPL to Amortized cost
c. Reclassification of the financial asset from Amortized cost to FVOCI
d. Reclassification of the financial asset from FVOCI to Amortized cost

Use the following information for the next two questions:

On December 29, 20x2 (trade date), Jared Co. enters into a contract to sell a financial asset for its current
fair value of ₱4,040 to Hera Co. The asset was acquired one year earlier for ₱4,000 and its carrying
amount on December 29, 20x2 is ₱4,000. On December 31, 20x2 (financial year-end), the fair value of the
asset is ₱4,024. On January 4, 20x3 (settlement date), the fair value is ₱4,052.

49. If the financial asset sold was classified as held for trading security and the sale is accounted for
under the trade date accounting, the entry on December 29, 20x2 in Jared’s books will include
a. a ₱4,000 credit to the “Held for trading securities” account.
b. a ₱40 debit to unrealized gain.
c. a ₱4,000 debit to a receivable account.
d. No entry will be made on this date.

50. If the financial asset sold was classified as held for trading security and the sale is accounted for
under the settlement date accounting, the entry on December 29, 20x2 in Jared’s books will include
a. a credit to “Held for trading securities” for ₱4,000.
b. a credit to “Unrealized gain” for ₱40.
c. a ₱4,000 debit to a receivable account.
d. No entry will be made on this date

51. On August 31, 2002, Stiggins Company purchased the following equity securities and irrevocably
elected to measure them at fair value through other comprehensive income:
Fair Value
Security Cost December 31, 2002
D ₱ 96,000 ₱ 84,000
E 152,000 158,000
F 162,000 146,000

On December 31, 2002, Stiggins reclassified its investment in security F from fair value through other
comprehensive income to held for trading securities. What total amount of loss on reclassification
should be included in Stiggins' income statement for the year ended December 31, 2002?
a. 0 b. 16,000 c. 22,000 d. 28,000

52. On January 1, 20x1, Skid Row Co. acquired ₱2,000,000 face amount, 10% bonds for ₱1,903,927. The
bonds were measured at amortized cost. The principal is due on January 1, 20x4 but interest
payments are due annually every December 31. The effective interest rate is 12%. On December 31,
20x2, the investee entered into a corporate rehabilitation program resulting in the extension of the
maturity of the bonds to January 1, 20x6. Skid Row sees this as a loss event. Skid Row estimates that
only the face amount of the bonds will be collected, in lump-sum, on January 1, 20x6. There is no
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interest receivable as of December 31, 20x2. The current market rate on December 31, 20x2 is 14%.
How much is the impairment loss recognized on December 31, 20x2?
a. 223,734
b. 483,914
c. 540,726
d. 0

53. Which of the following is not considered an “other long-term investment?”

a. Sinking fund
b. Preference share redemption fund
c. Contingency fund
d. Tax fund

54. On January 1, 20x1, Halilikaw Co. makes a one-time contribution of ₱1,000,000 to a sinking fund
that earns compounded interest of 12% per annum. Relevant future value factors are as follows:
FV of ₱1 @ 12%, n=10………………………………………….. 3.10585
FV of an ordinary annuity of ₱1 @ 12%, n=10……………....17.54874
FV of an annuity due of ₱1 @ 12%, n=10............................... 19.65458

How much sinking fund balance could Halilikaw Co. expect to accumulate in 10-years’ time?
a. 1,287,892
b. 3,105,850
c. 17,548,740
d. 19,654,580

55. Derivatives are obtained

a. to be used as hedging instrument to manage some kind of risk.
b. for speculation.
c. either a or b
d. neither a nor b

56. According to PFRS 7, it is the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market prices (other than those arising from interest rate risk or
currency risk), whether those changes are caused by factors specific to the individual financial
instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
a. Interest rate risk
b. Currency risk
c. Credit risk
d. Other price risk

57. ABC Co. does printing jobs for various customers. On January 1, 20x1, ABC Co. forecasted the
purchase of 1,000 reams of paper in the next quarter. The expected purchase date is on April 15,
20x1.

ABC Co. expects that the price of paper will fluctuate because of the upcoming elections. Thus, on
January 1, 20x1, ABC Co. enters into a forward contract to purchase 1,000 reams of paper at a forward
rate of ₱600 per ream. If the market price on April 15, 20x1 is more than ₱600, ABC Co. shall receive the
difference from the broker. On the other hand, if the market price is less than ₱600, ABC Co. shall pay
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the difference to the broker. The forward contract will be settled net on April 15, 20x1. The discount rate
is 10%.

If the price of paper is ₱700 per ream on March 31, 20x1, how much is the derivative asset (liability) to
be recognized in ABC Co.’s first quarter financial statements?
a. 100,000 asset
b. 100,000 liability
c. 98,772 asset
d. 98,772 liability

Use the following information for the next three questions:

On March 1, 20x1, ABC Co. sold inventory to a foreign company for FC 1,000,000 (FC means foreign
currency) when the spot exchange rate is FC 40: ₱1. The payment is due on April 1, 20x1.

ABC Co. is concerned about the possible fluctuation in exchange rates, so on this date, ABC Co. entered
into a forward contract to sell FC 1,000,000 for ₱25,000 to a broker. According to the terms of the
forward contract, if FC 1,000,000 is worth less than ₱25,000 on April 1, 20x1, ABC Co. shall receive from
the broker the difference; if it is worth more than ₱25,000, ABC Co. shall pay the broker the difference.

58. If the exchange rate on April 1, 20x1 is FC35: ₱1, how much is the net cash settlement?
a. 3,571 receipt
b. 3,571 payment
c. 4,231 receipt
d. 4,231 payment

59. If the exchange rate on April 1, 20x1 is FC50: ₱1, how much is the net cash settlement?
a. 5,000 payment
b. 5,000 receipt
c. 6,223 payment
d. 6,223 receipt

60. If the exchange rate on March 31, 20x1 is FC45: ₱1, how much is the fair value of the interest rate
swap?
a. 3,000 asset
b. 3,000 liability
c. 2,778 asset
d. 2,778 liability

61. Tuba Co. enters into a “receive variable, pay fixed” interest swap on January 1, 20x1 for a notional
amount of ₱1,000,000. Under the terms of the contract, if the current rate increases above 12% (i.e.,
the set rate), Tuba Co. shall receive the excess interest. If the current rate falls below 12%, Tuba Co.
shall pay the deficiency. Swap payment shall be made on December 31, 20x2. The current rates are
as follows:
Jan. 1, 20x1……………………………12%
Jan. 1, 20x2……………………………15%

How much is the net cash settlement on December 31, 20x2?

a. 30,0000 payment
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b. 30,000 receipt
c. 26,087 payment
d. 26,087 receipt

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. obtained a five-year, ₱1,000,000 variable-rate loan with interest payments
due at each year-end and the principal due on December 31, 20x5.

As protection from possible fluctuations in current market rates, ABC Co. enters into an interest rate
swap for the whole principal of the loan. Under the agreement, ABC Co. shall receive variable interest
and pay fixed interest based on a fixed rate of 8%. Swap payments shall be made at each year-end.

The following are the current market rates:

Jan. 1, 20x1 8%
Jan. 1, 20x2 9%
Jan. 1, 20x3 12%

62. How much is the fair value of the interest rate swap on December 31, 20x1? (Indicate whether it is a
derivative asset or liability.)
a. 32,397 asset
b. 32,397 liability
c. 46,884 asset
d. 53,223 liability

63. How much is the fair value of the interest rate swap on December 31, 20x2? (Indicate whether it is a
derivative asset or liability.)
a. 83,294 asset
b. 83,294 liability
c. 96,073 asset
d. 102,932 liability

64. According to PAS 28, investments in associates are accounted for

a. at fair value.
b. using the equity method.
c. using the asset method.
d. at cost.

The next three questions are based on the following information:

Grant, Inc. acquired 30% of South Co.’s voting stock for ₱200,000 on January 2, 20x2. Grant’s 30%
interest in South gave Grant the ability to exercise significant influence over South’s operating and
financial policies. During 20x2, South earned ₱80,000 and paid dividends of ₱50,000. South reported
earnings of ₱100,000 for the six months ended June 30, 20x3, and ₱200,000 for the year ended December
31, 20x3. On July 1, 20x3, Grant sold half of its stock in South for ₱150,000 cash. South paid dividends of
₱60,000 on October 1, 20x3.

65. Before income taxes, what amount should Grant include in its 20x2 income statement as a result of
the investment?
a. 15,000
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b. 24,000
c. 50,000
d. 80,000

66. In Grant’s December 31, 20x2 balance sheet, what should be the carrying amount of this
investment?
a. 200,000
b. 209,000
c. 224,000
d. 230,000

67. In its 20x3 income statement, what amount should Grant report as gain from the sale of half of its
investment?
a. 24,500
b. 30,500
c. 35,000
d. 45,500

68. On January 1, 20x1, APPRISE Co. acquired 50,000 newly issued shares of INFORM, Inc. at ₱40 per
share. Before the acquisition, INFORM had 100,000 ordinary shares outstanding. INFORM reported
profit of ₱900,000 in 20x1. How much is APPRISE Co.’s share in INFORM’s profit?
a. 450,000
b. 300,000
c. 333,333
d. 0

69. AUSTERE Co. owns 20% of SEVERE, Inc.’s ordinary shares. SEVERE also has outstanding
redeemable preference shares with dividend rate of 6% and aggregate par value of ₱8,000,000.
During the year, SEVERE reported profit of ₱4,000,000 and declared ₱150,000 cash dividend to
preference shareholders. How much is AUSTERE’s share in the profit of SEVERE?
a. 704,000
b. 800,000
c. 512,000
d. 770,000

70. On January 1, 20x1, Red Co. acquired 50,000 out of the 300,000 total outstanding shares of Pepper,
Inc. for ₱1,200,000. On December 31, 20x1, Red Co. held bonds issued by Pepper that are convertible
into 30,000 ordinary shares. The bonds are convertible anytime. Pepper does not have any other
outstanding convertible bonds aside from those held by Red. Pepper reported profit of ₱6,600,000
and declared and paid cash dividends of ₱300,000 for the year. Pepper’s shares are quoted at ₱46
per share on Dec. 31, 20x1. What amount of investment in Pepper shares is reported in Red Co.’s
Dec. 31, 20x1 statement of financial position?
a. 2,250,000
b. 2,278,332
c. 2,300,000
d. 2,727,120
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71. SKEPTICAL Co. owns 20% of the ordinary shares of QUESTIONING, Inc. The records of
SKEPTICAL as of December 31, 20x1 show the following information before any necessary year-
end adjustments.

Investment in associate ₱ 800,000

Trade accounts receivable – QUESTIONING 1,200,000
Investment in preference shares – QUESTIONING 400,000
Advances to associate – QUESTIONING 200,000
Loans receivable, secured - QUESTIONING 480,000

SKEPTICAL’s results operations were as follows:

Year Profit (Loss)
20x1 (5,600,000)
20x2 (2,000,000)
20x3 (400,000)
20x4 4,000,000

Additional information:
 In 20x3, SKEPTICAL incurred constructive obligation of ₱480,000 in favor of QUESTIONING and
made payments of ₱320,000 on behalf of QUESTIONING.

In relation to the investment in QUESTIONING shares, what amounts should SKEPTICAL Co. report
in its statement of profit or loss in the following years?
20x1 20x2 20x3 20x4
a. (1,120,000) (280,000) (800,000) 600,000
b. (1,120,000) (400,000) (800,000) 600,000
c. (1,120,000) (280,000) 0 800,000
d. (800,000) 0 0 800,000

72. Enter Co. determined the following information for the purpose of testing its investment in
associate for impairment:
Carrying amount of investment (including ₱100,000 goodwill) 1,600,000
Fair value less costs of disposal (FVLCD) 1,440,000
Value in use (VIU) 1,380,000

How much is the impairment loss?

a. 160,000 b. 220,000 c. 60,000 d. 0

73. Recover Co. has the following assets:

Land used as plant site 50,000
Land and building classified as “held for sale assets” 780,000
Building used as office 500,000
Building rented out under an operating lease 420,000
Equipment being sold in the ordinary course of business 330,000
Office furniture 24,000
Fixtures and signage 10,000
Machinery 12,000
Automobiles (used by company officers) 350,000
Delivery trucks (used by the shipping department) 420,000
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Computers 70,000
Aircraft rented out to various clients 690,000
Dairy cattle (held to produce milk that is sold to customers) 10,000
Harvested milk 3,000
Apple trees (held to bear fruits that are sold to customers) 6,000
Harvested apples 2,000

How much is the total of assets classified as property, plant and equipment?
a. 2,132,000 c. 2,142,000
b. 2,126,000 d. 2,148,000

74. On January 2, 2004, Pine Corp. replaced its boiler with a more efficient one. The following
information was available on that date:
Purchase price of new boiler ₱120,000
Carrying amount of old boiler 5,000
Fair value of old boiler 3,000
Installation cost of new boiler 10,000

The old boiler was sold for ₱3,000. What amount should Pine capitalize as the cost of the new boiler?
a. ₱130,000. c. ₱125,000.
b. ₱122,000. d. ₱120,000.

75. Carter Company acquired three machines for ₱202,000 in a package deal. The three assets together
had a book value of ₱160,000 on the seller's books. The three machines had the following fair values
(book values are given in parentheses):
Machine 1: ₱60,000 (₱40,000)
Machine 2: ₱80,000 (₱50,000)
Machine 3: ₱100,000 (₱70,000)

The three assets should be individually recorded at a cost of (rounded to the nearest peso)
Machine 1 Machine 2 Machine 3
a. ₱40,000 ₱53,333 ₱66,667
b. ₱50,000 ₱62,500 ₱87,500
c. ₱40,000 ₱50,000 ₱70,000
d. ₱50,500 ₱67,333 ₱84,167

76. Old Room Co. purchased land and building for a lump-sum price of ₱48,000,000. The existing
building will be demolished and a new building will be constructed. Old Room incurred the
following additional costs:
Title guarantee 80,000
Option paid for the land and old building acquired 24,000
Payments to tenants to vacate premises 48,000
Cost of razing the old building 240,000
Construction cost of new building (completed) 34,000,000

 Some salvaged wood planks from the demolition were used as wall panels in the new building. Old
Room estimates that the salvaged wood planks have a fair value of ₱120,000. The other salvaged
materials were sold for ₱60,000.
 The old building is unusable and has an insignificant fair value.
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How much are the allocated costs of the land and the new building?
Land New building
a. 46,104,000 34,180,000
b. 46,140,000 34,810,000
c. 46,640,000 33,780,000
d. 48,152,000 34,180,000

77. FEEBLE Co. exchanged equipment with WEAK, Inc. Pertinent data are shown below:
FEEBLE Co. WEAK, Inc.
Equipment 4,000,000 8,000,000
Accumulated depreciation 800,000 3,200,000
Carrying amount 3,200,000 4,800,000
Fair value ? 4,400,000
Cash paid by FEEBLE to WEAK 600,000 600,000

In FEEBLE’s books, what amounts are recognized for the following?

Equipment Gain (Loss)
a. 5,000,000 1,200,000
b. 4,400,000 600,000
c. 3,800,000 1,200,000
d. 3,400,000 (600,000)

Use the following information for the next three questions:

Altitude Company purchased a plot of land for ₱2,000,000 as a plant site. There was a small office
building on the plot, conservatively appraised at ₱700,000 which the company will continue to use with
some modification and renovation.

The renovation had plans drawn for a factory and received bids for its construction. It rejected all bids
and decided to construct the plant itself. Below are listed additional items that management feels
should be included in the property, plant and equipment accounts:
Materials and supplies 3,000,000
Excavation 100,000
Labor on construction 2,500,000
Cost remodeling office building 200,000
Legal cost on conveying land 10,000
Imputed interest on corporation own money
used during construction 120,000
Cash discounts on materials purchased, not taken 60,000
Supervision by management 70,000
Compensation insurance premium for workers 20,000
Clerical and other expenses related to construction 30,000
Paving of streets & sidewalks, not included in blueprint 40,000
Plans and specifications 140,000
Payment for claim for injuries not covered by insurance 25,000
Legal cost of injury claim 15,000
Saving on construction 200,000

78. The land should be reported at

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a. 1,310,000 c. 1,350,000
b. 1,300,000 d. 1,410,000

79. The office building should be reported at

a. 1,050,000 c. 70,000
b. 900,000 d. 850,000

80. The factory building should be reported at

a. 5,720,000 c. 5,800,000
b. 5,920,000 d. 5,600,000

BONUS QUESTION:
81. It is not clear who invented the concept of present value – it is argued that many have contributed
in the development of this concept. Which of the following has least contributed in the
formalization and popularization of the concept of present value?
a. Leonardo of Pisa (a.k.a. Fibonacci) - Liber Abaci (1202)
b. Irving Fisher – The Rate of Interest (1907)
c. Eugene L. Grant – Principles of Engineering Economy (1930)
d. Julian Felipe – music (1898); José Palma – lyrics (1899) – Lupang Hinirang (“Chosen Land”)

“We want each of you to show this same diligence to the very end, so that what you hope for may
be fully realized.” (Hebrews 6:11)

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