Answer Key For Cfas Valix

25807627 - ANSWER KEY FOR CFAS VALIX
Accountancy (National College of Business and Arts)
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CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS ANSWER:
External transaction or exchange
CHAPTER I transactions are those economic events involving

one entity and another entity.
Internal transaction are economic events
involving the entity only.
QUESTIONS:
6. When is a transaction accountable or
1. Define accounting. quantifiable?
ANSWER: ANSWER:
Accounting is a service activity. The An event is accountable or quantifiable
accounting function is to provide quantitative when it has an effect on assets, liabilities and
information, primarily financial in nature, about equity.
economic entities, that is intended to be useful in
making economic decision. 7. Explain “measuring” as a component of
accounting.
- Accounting Standards
Council
11
ANSWER:
Accounting is the art of recording, An accounting process that is the assigning
classifying and summarizing in a significant manner of peso amounts to the accountable economic
and in terms of money, transactions and events transactions and events.
which are in part at least of a financial character
and interpreting the results thereof. 8. What are the measurement bases used in
- Committee on Accounting Terminology of the accounting?
American Institute of Certified Public Accountants
ANSWER:
Accounting is the process of identifying, The measurement bases are historical cost
measuring and communicating economic and current value.
information to permit informed judgement and Historical cost is the original acquisition cost
decision by users of the information. and the most common measure of financial
transactions.
-The American Accounting Association Current value includes fair value, value in
(statement in basic accounting theory) use, fulfillment value and current cost.
2. What are the important points made in the 9. Explain “communicating” as a component
definition of accounting? of accounting.
ANSWER: ANSWER:
One- Accounting is about quantitative The process of preparing and distributing
information. accounting reports to potential users of accounting
Two- The information is likely to be information. Also the reason why accounting has
financial in nature. been called the “universal language of business”.
Three- The information should be useful
in decision making. 10. Explain recording, classifying and
summarizing in relation to the
3. Explain “identifying” as a component of communicating component of accounting.
accounting.
ANSWER:
ANSWER: Recording or journalizing is the process
Identifying is an accounting process that is of the systematically maintaining a record of all
the recognition or non-recognition of business economic business transactions after they have
activities as “accountable” events. been identified and measured.
- Classifying is the sorting or grouping of
NOTE: Not all business activities are accountable. similar and interrelated economic transaction into
their respective classes.
4. What are transactions? - Accomplished by posting to ledger.
Summarizing is the preparation of
ANSWER: financial statements which include the statement
It is the subject matter of accounting that is of financial position, income statement, statement
also called the economic activity or the of comprehensive income, statement of changes in
measurement of economic resources and economic equity and statement of cash flows.
obligations. Also classified as external and internal
transactions.
11. Explain why accounting has been called

the “universal language of business”.
5. Distinguish external transactions and
internal transactions. ANSWER:

Communication process is the reason why 18. Explain the accreditation to practice
accounting has been called the “universal language accountancy.
of business” because it distributes accounting
reports to potential users of accounting ANSWER:
information. Certified public accountants, firms and
partnerships of certified public accountants,
12. Explain accounting as an information including partners and staff members thereof, are
system. required to register with the Board of Accountancy
and Professional Regulation Commission for the
ANSWER: practice of public accountancy. The Professional
Accounting is an information system Regulation Commission upon favorable
that measures business activities, process recommendation of the Board of Accountancy shall
information into reports and communicates the issue the Certificate of Registration to practice
reports to decision makers. public accountancy which shall be valid for 3 years
and renewable every 3 years upon payment
13. What is the overall objective of required fees.
accounting?
19. What are the three main areas in the
ANSWER: practice of the accountancy profession? 22
The overall objective of accounting is to
provide quantitative financial information about a ANSWER:
business that is useful to statement users
Public Accounting
particularly owners and creditors in making
Private Accounting
economic decisions.
Government Accounting
14. Describe the accountancy profession.
20. Explain public accounting.
ANSWER: ANSWER:
R.A No. 9298 is the law regulating the It is composed of individual practitioners,
practice of accountancy in the Philippines. This is small accounting firms and large multinational
also known as the Philippine Accountancy Act of organizations that render independent and expert
2004. It has been developed as a profession financial services to the public.
attaining a status equivalent to that of law and
medicine. You must also finish a degree in Bachelor
21. What are the three kinds of services
of Science in Accountancy and pass a very difficult
offered by CPAs in the practice of public
government examination given by the Board of
accounting.
Accountancy.
ANSWER:
15. What is R.A 9298?
Auditing
Taxation
ANSWER:
Management advisory services
R.A No. 9298 is the law regulating the
practice of accountancy in the Philippines. This is
22. Explain auditing.
also known as the Philippine Accountancy Act of
2004.
ANSWER:
It is the primary service offered by most
16. What do you understand by the Board of public accounting practitioners. It is the
Accountancy? examination of financial statements by
independent certified public accountant for the
ANSWER: purpose of expressing an opinion as to the fairness
It is the body authorized by law to with which the financial statements are prepared.
promulgate rules and regulations affecting the
practice of accountancy profession in the
23. Describe the taxation service offered by
Philippines.
CPAs.
17. Explain the limitation of the practice of ANSWER:

public accountancy. It includes the preparation of annual
income tax returns and determination of tax
ANSWER: consequences of certain proposed business
A certificate of accreditation shall be endeavors. To offer this service effectively and
issued to certified public accountants in public efficiently, the public accountant must be
practice only upon showing in accordance with thoroughly familiar with the tax laws and
rules and regulations promulgated by the Board of regulations and updated with changes in taxation
Accountancy and approved by the Professional law and court cases concerned with interpreting
Regulation Commission that such registrant has taxation law.
acquired a minimum of three years of
meaningful experience in any of the areas of public
practice including taxation.
Page
19
24. Explain management advisory services.

For the renewal of CPA license and
ANSWER: accreditation of CPA to practice the accountancy
It is become increasingly important in profession.
recent years although audit and tax services are
undoubtedly the mainstay of public accountant. It 32. What is the exemption from the CPD
has no precise coverage but is used generally to requirements?
refer to services to clients on matters of
accounting, finance, business policies, organization ANSWER:
procedures, product costs, distribution and many A CPA shall be permanently exempted
other phases of business conduct and operations. from CPD requirements upon reaching the age of
65 years.
25. What are some management advisory
services offered by CPAs. 33. Distinguish accounting and auditing.
ANSWER: ANSWER:
Advice on installation of computer Accounting embraces auditing. Accounting
system is essentially constructive in nature, it ceases when
Quality control financial statements are already prepared. On the
Installation and modification of other hand, auditing is analytical. 33
accounting system “The
Budgeting work of an auditor begins when the work of the
Forward planning and forecasting accountant ends”.
Design and modification of
retirement plans 34. Distinguish accounting and bookkeeping.
Advice on mergers and
consolidations ANSWER:
Bookkeeping is procedural and largely
26. Explain private accounting. concerned with development and maintenance of
accounting records.
ANSWER: - It is the “how” of accounting
It includes maintaining of records, Accounting is conceptual.
producing the financial reports, preparing the - Concerned with the “why”, reason or
budgets and controlling and allocating the justification for any action adopted.
resources of the entity.
27. Explain government accounting. 35. Distinguish accounting and accountancy.
ANSWER: ANSWER:
It encompasses the process of analyzing, Accountancy refers to the profession of
classifying, summarizing and communicating all accounting practice.
transactions involving the receipt and disposition of Accounting is used in reference only to a
the government funds and property and particular field of accountancy such as public
interpreting the results thereof. The focus of accounting, private accounting and government
government accounting is the custody and accounting.
administration of public funds.
28. What do you understand by the Page

continuing professional development of CPAs. 20
ANSWER:
It refers to the inculcation and acquisition 36. What is financial accounting?
of advanced knowledge, skill, proficiency and
ethical and moral values after initial registration of ANSWER:
the Certified Public Accountant for assimilation into Area of accounting that emphasizes
professional practice and lifelong learning. reporting to creditors and investors. And is
concerned with the recording of business
29. What is the meaning of CPD credit units? transactions and the eventual preparation of
financial statements
ANSWER:
CPD credit units (Continuing Professional 37. What is managerial accounting?
Development) refers to the CPD credit hours
required for the renewal of CPA license and ANSWER:
accreditation of a CPA to practice the accountancy Managerial accounting is the accumulation
profession every three years. and preparation of financial reports for internal
users only.
30. How many CPD credit units are required?
ANSWER:
120 CPD credit units are required.
31. What is the purpose of the required CPD 38. What is the meaning of generally
credit units? accepted accounting principles or GAAP?
ANSWER: ANSWER:

Represents the rules, procedures, practice -To formulate and publish in the public interest
and standards followed in the preparation and accounting standards to be observed in the
presentation of financial statements. These are also presentation of financial statements and to
like laws that must be followed in financial promote their worldwide acceptance and
reporting. observance.
-To work generally for the improvement and
39. What constitute GAAP in the Philippines? harmonization of regulations, accounting standards
and procedures relating to presentation of financial
ANSWER: statements.
The Accounting standards promulgated
by the Financial Reporting Standards Council 46. What is IASB?
constitute the “highest hierarchy” of generally
accepted accounting principles in the Philippines. ANSWER:
The IASB standard-setting process includes
40. Explain the purpose of accounting in the correct order research, discussion paper.
standards. Exposure draft and accounting standard.
ANSWER: 47. What do you understand by IFRIC?
The purpose of accounting standard is to 44
identify proper accounting practices for the ANSWER:
preparation and presentation of financial The counterpart of the PIC in the United
statements. Kingdom which has already replaced SIC.
41. What do you understand about the 48. Explain why the Philippines has moved
Financial Reporting Standards Council? totally from American accounting standards
to international accounting standards.
ANSWER:
It is the standard-setting body created by ANSWER:
the Professional Regulation Commission upon Support of international accounting
recommendation of the Board of Accountancy to standards by Philippine
assist the Board of Accountancy in carrying out its organizations, such as the
powers and functions provided under R.A Act No. Philippines SEC, Board of
9298. Its main function is to establish and improve Accountancy and PICPA.
accounting standards that will be generally Increasing internalization of
accepted in the Philippines. business which has heightened
interest in a common language for
42. What is the composition of FRSC? financial reporting.
Improvement of international
ANSWER: accounting standards or removal of
It is composed of 15 members with a free choices of accounting
Chairman who had been or is presently a senior treatments.
accounting practitioner and 14 representatives. Increasing recognition of
international accounting standards
43. What do you understand about PIC and by the World Bank, Asian
IFRIC? Development Bank, and World Trade
Organization.
ANSWER:
PIC is the one that prepare interpretations 49. What do you understand by the
of PFRS for approval by the FRSC and to provide “International Financial Reporting
timely guidance on financial reporting issues not Standards”?
specifically addressed in current PFRS.
IFRIC which has already replaced the ANSWER:
Standing Interpretation Committee or SIC, it is the It is essential to achieve goal of one
counterpart of the PIC. uniform and globally accepted financial reporting
standards.
44. What do you understand about the
International Accounting Standards 50. What are collectively included in
Committee? “Philippine Financial Reporting Standards”?
ANSWER: ANSWER:
It is an independent private sector body, ω Philippine Financial Reporting
with the objective of achieving uniformity in the Standards which correspond to
accounting principles which are used by business International Financial Reporting
and other organizations for financial reporting Standards.
around the world.
The Philippine Financial Reporting
Standards are numbered the same as their
counterpart in International
Financial Reporting Standards.
ω Philippine Accounting Standards

45. What are the twin objectives of IASC? which correspond to International
Accounting Standards.
ANSWER:

The Philippine Accounting Standards are numbered Page
the same as their counterpart in International 27
Accounting Standards.
6. D
ω Philippine Interpretations which 7. A
correspond to Interpretations of the 8. A
IFRIC and the Standing 9. A
Interpretations Committee, and 10. D
Interpretations developed by the Page
Philippine Interpretations Committee. 28
PROBLEM 1-5 MULTIPLE CHOICE (IAA)

Page 21
1. A
2. C
PROBLEMS 3. D
PROBLEM 1-1 MULTIPLE CHOICE (ACP) 4. D
5. D
1. A Page 55
2. D 29
3. B
4. A PROBLEM 1-6 MULTIPLE CHOICE (IAA)
5. B 1. D
2. B
22 Page
3. D
4. A
6. D 5.A
7. B Page
8. A 30
9. D
10. D
23 Page
PROBLEM 1-2 MULTIPLE CHOICE (ACP)
1. A
2. A
3. A
4. C
5. A
Page
24
PROBLEM 1-3 MULTIPLE CHOICE (ACP)
1. D
2. D
3. D
4. A
5. D
Page
25
6. A
7. B
8. D
9. A
10. A
Page
26
PROBLEM 1-4 MULTIPLE CHOICE (IFRS)
1. C
2. A
3. B
4. C
5. B

6. What is the scope of the Revised
Conceptual Framework?
ANSWER:
ACCOUNTING STANDARDS Objective of financial reporting
CHAPTER II Qualitative characteristics of useful

financial information
Financial statements and reporting
entity
QUESTIONS: Elements of financial statements
Recognition and derecognition
1. What is the meaning of Conceptual Measurement
Framework? Presentation and disclosure
Concepts of capital and capital
ANSWER: maintenance
Conceptual Framework is a summary of the
terms and concepts that underlie the preparation
7. Explain financial reporting.
and presentation of financial statements for
external users. ANSWER: 66
It is the provision of financial information
2. What are the purposes of the Revised
about an entity to external users that is useful to
Conceptual Framework?
them in making economic decisions and for
assessing the effectiveness of the entity’s
ANSWER:
management.
To assist the International
Accounting Standards Board to
develop IFRS Standards based on 8. What is the overall objective of financial
consistent concepts. reporting?
To assist preparers of financial
statements to develop consistent ANSWER:
accounting policy when no Standard The overall objective of financial reporting
applies to a particular transaction or is to provide financial information about the
other event or where an issue is not reporting entity that is useful to existing and
yet addressed by an IFRS. potential investors, lenders and other creditors in
To assist preparers of financial making decisions about providing resources to the
statements to develop accounting entity.
policy when a Standard allows a
choice of an accounting policy. 9. What are the specific objectives of
To assist all parties to understand financial reporting?
and interpret the IFRS Standards.
ANSWER:
3. Explain the authoritative status of the To provide information useful in
Conceptual Framework. making decisions about providing
resources to the entity.
To provide information useful in
ANSWER:
assessing the cash flow prospects of
In the absence of standard or an
the entity.
interpretation that specifically applies to a
To provide information about the
transaction, management shall consider the
entity resources, claims and
applicability of the Conceptual Framework in
changes in resources and claims.
developing and applying an accounting policy that
results in information that is relevant and reliable.
10. Explain financial position.
4. Explain the “primary users” and their
ANSWER:
information needs.
Information about the entity’s economic
resources and the claims against the reporting
ANSWER:
entity. In other words, financial position comprises
These are the parties to whom general
the assets, liabilities and equity of an entity at a
purpose financial reports are primarily directed.
particular moment in time.
They cannot require reporting entities to provide
information directly to them and therefore must
11. Explain liquidity and solvency.
rely on general purpose financial reports for how
much of the financial information needed.
ANSWER:
Liquidity is the availability of cash in the
5. Explain the “other users” and their
near future to cover currently maturing obligations.
information needs.
Solvency is the availability of cash over a
long term to meet financial commitments when
ANSWER:
they fall due.
These are the users of financial
information other than the existing and potential
investors, lenders, and other creditors. They are so
called because they are parties that may find the
general purpose financial reports useful but the
reports are not directed to them primarily.
12. Explain financial performance

ANSWER: 1. C
The level of income earned by the entity 2. B
through efficient and effective use of its resources. 3. C
Also known as results of operations and is 4. B
portrayed in the income statement and statement Page
of comprehensive income.
44
13. Explain accrual accounting.
ANSWER:
1. D
Income is recognized when earned
regardless of when received and expense is 2. A
3. D
recognized when incurred regardless of when paid.
4. B
14. Explain management stewardship of the 5. B
Page
entity’s economic resources.
45
ANSWER: 77
Information about how efficiently and PROBLEM 2-4 MULTIPLE CHOICE (ACP)
effectively management has discharged its
responsibilities to use the entity’s economic 1. D
resources helps users to assess management 2. D
stewardship of those resources. 3. D
4. A
15. What are the limitations of financial 5. A
reporting? Page
46
ANSWER:
General purpose financial reports do 6. D
not and cannot provide all the 7. A
information that existing and 8. A
potential investors, lenders and other 9. A
creditors need. 10 A
These users need to consider Page
pertinent information from other 47
sources, for example, general
economic conditions, political events
and industry outlook.
General purpose financial reports are
1. A
not designed to show the value of an
2. B
entity but the reports provide
3. A
information to help the primary users
4. C
estimate the value of the entity.
5. A
General purpose financial reports are
Page
intended to provide common
48
information to users and cannot
accommodate every request for
information. 6. C
To a large extent, general purpose 7. D
financial reports are based on 8. B
estimate and judgment rather than 9. D
exact depiction. 10. D
Page Page
42 49
PROBLEMS PROBLEM 2-6 MULTIPLE CHOICE (AICPA

Adapted)
1. C
1. D 2. C
2. D 3. C
3. D Page
4. D 50
Page 4. A
43 5. A
Page
51

An item is material if knowledge of it could
reasonably affect or influence the economic
decision of the primary users of the fianncial
statements.
ACCOUNTING STANDARDS 10. Explain the new definition of materiality.
CHAPTER III ANSWER:

Information is material if ommitting,
misstating or obscuring it could reasonably be
expected be expected to influence the economic
QUESTIONS decisions that primary users of general purpose
1. What is the meaning of qualitative financial statements make on the basis of those
characteristics of financial information ? statements which provide financial information
about a specific reporting entity.
ANSWER:
These are the qualities or attributes that 11. What are the factors that may be
make financial accounting information useful to the considered in determining materiality?
users. 88
ANSWER:
2. What are fundamental qualitative The size of the item in relation to the total of
characteristics? the group to which the item belongs is tatekn into
account.
ANSWER:
The nature of the item may be inherently
It relates to the content or substance of
material because by its very nature it affects
financial information.
economic decision.
3. What are the two fundamental qualitative
12. Explain the fundamental qualitative
characteristics?
characteristics of faithful representation.
ANSWER:
ANSWER:
The fundamental qualitative
It means that the actual effects of the
characterisrics are relevance and faithful
transactions shall be properly accounted for and
representation.
reported in the financial statements.
4. Explain the most efficient and effective
13. What are the three ingredients of faithful
process of applying the fundamental
representation?
qualitative characteristics.
ANSWER: ANSWER:
The mos efficient and effective process of Completeness
applying the fundamental qualittative Neutrality
characteristics Free from error
would usually be:
First, identify an economic phenomenon 14. Explain completeness of financial
that has the potential to be useful. information.
Second, identify the type of information
about the phenomenon that would be most ANSWER:
relevant and can be faithfully represented. It is the result of the adequate disclosure
Third, determine whether the information is standard or the principle of full disclosure. It
available. includes all information necessary for a user to
understand the phenomenon being depicted,
5. Explain including all necessary descriptions and
relevance. ANSWER: explanations.
Relevance is the capacity of the
information to influence a decision. 15. What is the standard of adequate
disclosure?
6. What are the two ingredients of relevance?
ANSWER:
ANSWER: All significant and relevant information
Predictive value leading to the preparation of financial statements
Confirmatory value shall be clearly reported.
7. Explain predictive value. 16. Explain the notes to financial statements

ANSWER: in relation to completeness of financial
It can be used as an input to processes information.
employed bu users to predict future outcome.
ANSWER:
8. Explain confirmatory value. It provides narrative description or
disaggregation of the items presented in the
ANSWER: financial statements and information about items
If it provides feedback about previous that do not qualify for recognition.
evaluations.
17. Explain neutrality of financial information.
9. When is an item material?
ANSWER:
ANSWER:

It is not slanted, weighted, emphasized,de- The enhancing qualitative characteristic that
emphasized or otherwise manipulated to increase enables users to identify and understand
the probability that financial information will be similarities and dissimilarities among items.
received favorably or unfavorably by users.it is
synonymous with all-encompassing principle of
fairness.
Page 70
18. What is prudence?
26. Explain comparability within a single
ANSWER:
entity.
Exercise of care and caution when dealing
with uncertainities in the measurement process
ANSWER:
such that assets or income are not overstated and
The quality of information that allows
liabilitites or expenses are not understated.
comparisons within a single entity through time or
Neutrality is supported by the exercise of prudence.
from one accounting period to the next.
27. Explain comparability between and across
19. Explain conservatism.
entities.
ANSWER: 99
It means that when alternatives exist, the ANSWER:
alternative which has the least effect on equity The quality of information that allows
should be chosen. Conservatism means “in case of comparisons between two or more entities
doubt, record any loss and dod not record any engaged in the same industry.
gain.”
28. What is consistency?
20. Explain free from error financial
information. ANSWER:
Refers to the use of the same method for
ANSWER: the same item, either from period to period within
There are no errors or omissions in the an entity or in a single period across entities.
description of the phenomenon or transaction.
29. Distinguish consistency from
21. Explain the effect of measurement comparability.
uncertainty to usefulness of financial
information. ANSWER:
Consistency is the uniform application
ANSWER: accounting method from period to period within an
As long as the estimate is clearly and entity while comparability is the uniform
accurately described and explained, even a high application of accounting method between and
level of measurement uncertainty does not affect across entities in the same industry.
the usefulness of the financial information.
30. Explain understandability.
22. Explain the concept of substance over
form. ANSWER:
It requires that financial information must
ANSWER: be comprehensible or intelligible if it is to be most
It is not considered a separate component useful.
of faithful representation because it would be
redundant. 31. Explain verifiability.
ANSWER:
23. What are enhancing qualitative Means that different knowledgeable and
characteristics? independent observers could reach consensus,
although not necessarily complete agreement, that
ANSWER: a particular depiction is a faithful representation. It
It is intended to increase the usefulness of provides results that would be substantially
the financial information that is relevant and duplicated by measurers using the same
faithfully represented. measurement method.
24. Enumerate the four enhancing qualitative 32. Distinguish direct verification and indirect
characteristics. verification.
ANSWER: ANSWER:
Comparability Direct verification means verifying an
Understandability amount or other representation through direct
Verfiability observation, for example, by counting cash.
Timeliness Indirect verification means checking the
inputs to a model, formula or other technique and
25. Explain comparability. recalculating the inputs using the same
methodology.
ANSWER:
It is the ability to bring together for the 33. Explain timeliness.
purpose of noting points points of likeness and
difference. ANSWER:

Financial information must be available or
communicated early enough when a decision is to
be made. It enhances the truism that without
6. C
knowledge of the past, the basis for prediction will
7. A
usually be lacking and without interest in the
8. B
future, knowledge of the past is sterile.
9. D
10. B
34. Explain cost constraint on useful financial Page
information. 77
ANSWER:
A consideration of the cost incurred in PROBLEM 3-4 MULTIPLE CHOICE (IAA)
generating financial information against the benefit
to be obtained from having the information. 1. A
2. B
3. B
4. B
35. What is the rule on cost constraint? 5. B
Page 11
ANSWER: 78 0
It is important that such cost is justified by
the benefit derived from the financial information. 6. B
7. C
Page 8. C
71 9. C
10. B
PROBLEMS: Page
79
1. A
2. D 1. D
3. A 2. D
4. B 3. A
5. A 4. A
Page 5. D
72 Page
80
6. B
7. C PROBLEM 3-6 MULTIPLE CHOICE (AICPA
8. D Adapted)
9. C
10. B 1. B
Page 2. B
73 3. C
4. B
PROBLEM 3-2 MULTIPLE CHOICE (IAA) 5. A
Page
1. D 81
2. C
3. D 6. B
4. C 7. D
5. A 8. C
Page 9. A
74 10. B
Page
6. B 82
7. C
8. D PROBLEM 3-7 IDENTIFICATION (ACP)
9. C
10. A Indicate the accounting concept that is
Page defined or described.
75
1. Information that has no bearing on an
PROBLEM 3-3 MULTIPLE CHOICE (IAA) economic decision to be made is useless.
ANSWER:
1. D RELEVANCE
2. C
3. D 2. It is the ability to bring together for the
4. A purpose of noting points of likeness and
difference.
5. D
Page ANSWER:
76 COMPARABILITY

3. It requires that users have some
knowledge of the complex economic activities
of entities, the accounting process and the
technical terminology in the statements.
ANSWER:
UNDERSTANDABILITY
4. Preparers of statements should not try to

increase the usefulness of the information to
a few users to the detriment of others who
may have opposing interests.
ANSWER:
NEUTRALITY PROBLEM 3-8 TRUE OR FALSE (IAA)
5. In case of conflict between economic TRUE 1. A conceptual framework is a coherent

substance and legal form of a transaction, system of interrelated objectives and fundamentals
the economic substance shall prevail. that lead to consistent standards.
ANSWER: 11
FALSE 2. Fundamental qualitative characteristics
SUBSTANCE OVER FORM of financial accounting information are either 1
relevant or prudent.
6. Small expenditures for tools are expensed FALSE 3. An enhancing qualitative characteristic is
immediately. confirmatory value.
ANSWER: FALSE 4. A fundamental qualitative characteristic
MATERIALITY
is understandability.
7. When in doubt, recognize all losses and FALSE 5. To be a faithful representation, an
recognize gain. information must be predictive and confirmatory.
ANSWER: TRUE 6. An enhancing quality of financial
CONSERVATISM accounting information is comparability.
FALSE 7. Applying different accounting treatment
8. The information should be presented in a to similar event from period to period is violation of
manner that facilitates understanding and verifiability.
avoids erroneous implication.
TRUE 8. The idea of consistency does not mean
ANSWER: that entities cannot switch from one accounting
COMPLETENESS method to another.
FALSE 9. Financial statement users are assumed to
9. It is the capacity of the information to have no reasonable knowledge of business and
influence a decision. financial accounting matters.
ANSWER:
FALSE 10. Entities consider only quantitative
RELEVANCE factors in determining whether an item is material.
FALSE 11. Neutrality and predictive value are
10. The description and numbers or figures characteristics of relevant information.
must match what really existed or happened. FALSE 12. The tendency to recognize favorable
ANSWER: events early is an example of conservatism.
FAITHFUL REPRESENTATION FALSE 13. The Conceptual Framework focuses
primarily on the needs of internal users of financial
11. The financial statements shall be information.
accompanied by notes to financial TRUE 14. The overall objective of financial
statements. reporting is to provide information for making
ANSWER: economic decisions.
COMPLETENESS FALSE 15. Once an accounting method is adopted,
it should never be changed.
12. There are no errors or omissions in the Page
description of the phenomenon. 84
ANSWER:
FREE FROM ERRORS
13. It is the goal achieved by

consistency. ANSWER:
COMPARABILITY
14. This enhancing qualitative characteristics

implies consensus.
ANSWER:
VERIFIABILITY
15. The older the information, the less useful.

ANSWER:
TIMELINESS
Page 83

These are the basic notions or fundamental
premises on which the accounting process is based.
Accounting assumptions are also known as
postulates. It serves as the foundations or bedrock
of accounting in order to avoid misunderstanding
but rather enhance the understanding and
usefulness of the financial statements.
6. Explain going concern assumption.
ANSWER:
CONCEPTUAL FRAMEWORK AND It means that in the absence of evidence to
the contrary, the accounting entity is viewed as
ACCOUNTING STANDARDS continuing in operation indefinitely.
CHAPTER IV 7. Explain time period assumption.
ANSWER:
QUESTIONS: It requires that the definite life of an entity
1. What is the general objective of financial is subdivided into accounting periods which are 11
statements? usually of equal length for the purpose of preparing 2
financial reports on financial position, performance
ANSWER: and cash flows.
Provide infromation about economic
resources of the reporting entity claims against the 8. Distinguish calendar year and natural
entity and changes in the economic resources business year.
claims.
ANSWER:
2. Explain a reporting period. Calendar year is a twelve – month period
that ends on December 31.
ANSWER: Natural business year is a twelve – month
Period when financial statements are period that ends on any month when the
prepared for general purpose financial reporting. business is at the lowest or experiencing
slack season.
3. Explain a reporting entity.
9. Explain monetary unit assumption.
ANSWER:
An entity that is required or chooses to ANSWER:
prepare financial statements. It can be a single An accounting principle that concern about
entity or a portion of an entity, or can comprise the valuation of transactions or event that entity
more than one entity. Reporting entity is not records in its financial statement. It has two
necessarily a legal entity. aspects, namely quantifiability and stability of the
peso.
4. Define consolidated financial statements,
unconsolidated financial statements and 10. Explain quantifiability and stability of the
combined financial statements. peso in relation to monetary assumption unit.
ANSWER: ANSWER:
Consolidated financial statements provide Quantifiability aspect means that the
information about the assets, liabilities, assets, liabilities, equity, income and
equity, income and expenses of both the expenses should be stated in terms of
parent and its subsidiaries as a single a unit of measure which is the peso in the
reporting entity. Also useful for existing and Philippines.
potential investors, lenders and other Stability of the peso assumption means that
creditors of the parent in their assessment the purchasing power of peso is stable or
of future net cash inflows to the parent. constant and that its instability is
Unconsolidated financial statements are insignificant and therefore may be ignored.
designed to provide information about the
parent’s assets, liabilities income and Page
expenses and not about those of the 93
subsidiaries. Can be useful to the existing
and potential investors lenders and other PROBLEMS:
creditors of the parent because a claim PROBLEM 4-1 MULTIPLE CHOICE
against the parent typically does not give (CONCEPTUAL FRAMEWORK)
the holder of that claim against subsidiaries.
Combined financial statements provide 1. A
financial information about the assets, 2. C
liabilities, equity income and expenses not 3. D
linked with parent and subsidiary 4. A
relationship. 5. D
Page
5. Explain underlying assumptions in the 94
preparation of financial statements.
ANSWER:

1. B In an effort to increase the subsidiary’s reported
2. D income, the parent entity purchased goods from
3. D the subsidiary at twice the normal mark up.
4. D
5. B ANSWER:
Page ACCOUNTING ENTITY
95
Page
6. B 98
7. C
8. C PROBLEM 4-5 IDENTIFICATION (IAA)
9. B
10. D Identify the assumption that is most clearly
Page violated by the accounting practice.
96
1. An entity decided to publish financial statements
PROBLEM 4-3 MULTIPLE CHOICE (AICPA only in the years when it had good news to report.
Adapted)
1. D ANSWER: 11
2. A GOING CONCERN 3
3. D
4. A 2. An entity reported inventory, property, plant and
5. B equipment and intangible assets at current value at
Page year-end.
97
ANSWER:
PROBLEM 4-4 (IAA) MONETARY UNIT ASSUMPTION
For each situation, identify the underlying
assumption involved. 3. An electronics entity owned by a proprietor
reported the cost of the proprietor’s swimming pool
1. The operations of a saving bank are being as an asset of the entity.
evaluated by the Bangko Sentral ng Pilipinas.
During the investigation, the BSP has determined ANSWER:
that numerous loans made by top management ACCOUNTING ENTITY
were unwise and have seriously endangered the
future of the saving bank. 4. An entity prepared financial statements adjusted
for changes in purchasing power.
ANSWER:
GOING CONCERN ANSWER:
MONETARY UNIT ASSUMPTION
2. The parent entity in Manila has a subsidiary in
Japan. The financial statements of the subsidiary 5. A mining entity kept no accounting records after
are translated to pesos for consolidation with the starting business. The entity is waiting until the
financial statements of the parent entity at year- mine is exhausted to determine the success or
end. failure of business.
ANSWER: ANSWER:
MONETARY UNIT ASSUMPTION GOING CONCERN
3. A machinery was imported from USA at a certain PROBLEM 4-6 IDENTIFICATION (IAA)
cost five years ago. Because of inflation, the
machinery has now a current replacement cost Identify the assumption defined or described.
which is very much higher than the historical cost.
Management would like to report the machinery at 1. An entity reported financial statements in
current replacement cost. nominal pesos that have mixed rather uniform
amount of purchasing power.
ANSWER:
MONETARY UNIT ASSUMPTION ANSWER:
MONETARY UNIT
4. An entity has experienced a drastic reduction in
revenue by reason of a long dry spell in the area 2. A multinational entity published a complete set
where the entity grows its tobacco. of financial statements at least once a year,
The management decided to wait until next year regardless of whether the financial results were
and good or bad.
present financial statements for a two-year period
rather than prepare now the traditional twelve- ANSWER:
month financial statements. TIME PERIOD
ANSWER: 3. The pesos of today can buy as much goods and

TIME PERIOD services as the pesos five years ago.
5. A subsidiary was exhibiting poor financial ANSWER:

performance for the current year. MONETARY PERIOD (HISTORICAL
COST)

6. Explain a right to produce economic
4. An accounting entity is viewed as continuing in benefit.
operation in the absence of evidence to the
contrary. ANSWER:
For potential to exist, it does not need to be
ANSWER: certain or even likely that the right will produce
GOING CONCERN economic benefits. It is only necessary that the
5. An accounting practitioner mixed personal right already exists. A right can meet the definition
accounting records with the records of the of an economic resource even if the probability that
accounting practice. it will produce economic benefit is low.
ANSWER: 7. Explain control of an economic resource.

ACCOUNTING ENTITY
Page ANSWER:
99 An entity controls an asset if it has the
present ability to direct the use of the asset and
obtain the economic benefits that flow from it. It
CONCEPTUAL FRAMEWORK AND also includes the ability to prevent others from
ACCOUNTING STANDARDS using such asset and therefore preventing others 11
CHAPTER V
from obtaining the economic benefits from the 4
asset. It may arise if an entity enforces legal rights.
8. Define a liability.
QUESTIONS:
ANSWER:
It is defined as the present obligation of an
1. Define the elements of financial
entity to transfer an economic resource as a result
statements.
of past events. The new definition clarifies that a
liability is the obligation to transfer an economic
ANSWER:
resource and not the ultimate outflow of economic
The elements of financial statements refer benefits.
to the quantitative information reported in the
financial statement of financial position and income
statement. Elements of financial statements are 9. What are the essential characterictics of a
considered as the “building blocks” from which the liability?
financial statements are constructed.
ANSWER:
2. What are the elements directly related to The essential characteristics of a liability
are:
the measurement of financial position? The entity has an obligation.
The entity liable must be identified. It is not
ANSWER: necessary that the payee or the entity to whom the
The elements that are directly related to obligation is owed be identified.
the measurement of financial position are: The obligation is to transfer an economic resource.
Asset The obligation is a present obligation that exist as a
Liability result of past event.
Equity This means that a liability is not recognized until it
is incurred.
3. What are the elements directly related to
the measurement of financial performace? 10. Explain an obligation.
ANSWER: ANSWER:
The elements that are directly related to It is a duty or responsibility that an entity
the measurement of financial performace are: has no practical ability to avoid. Obligations can
Income either be legal or constructive. It may be legally
Expense enforceable as a consequence of a binding contract
or statutory requirement.
4. Define an asset.
11. Explain transfer of economic resources.
ANSWER:
Asset is defined as a present economic
ANSWER:
resource controlled by the entity as a result of past
It may include:
events. It is a right that has the potential to
Obligation to pay cash.
produce economic benefits.
Obligation to deliver goods or noncash
resources.
5. What are the essential characteristics of
Obligation to provide services at some
an asset?
future time.
Obligation to exchange economic resources
ANSWER:
with another party on unfavorable terms.
The asset is a present economic resource.
Obligation to transfer an economic resource
The economic resource is a right that has the
if specified uncertain future event occurs.
potential to produce economic benefits.
The economic resource is controlled by the entity
12. Define income.
as a result of past events.
ANSWER:
It is defined as increases in assets or 7. B
decreases in liabilities that result in increases in 8. D
equity other than those relating to contributions 9. C
from equity holders. It encompasses both revenue 10. C
and gains. Page
111
13. Distinguish income from revenue.
ANSWER:
Income is increases in assets or decreases
in liabilities that result in increases in equity other PROBLEM 5-3 MULTIPLE CHOICE (AICPA
than those relating to contributions from equity Adapted)
holders.
1. B
Revenue arises in the course of the
ordinary regular activities and is referred to by 2. C
variety of different names including sales, fees, 3. C
interest, dividends, royalties, and rent. 4. D
5. B 11
14. Define an expense. Page 5
112
ANSWER:
Expense is defined as decreases in assets CONCEPTUAL FRAMEWORK AND
or increases in liabilities that result in decreases in ACCOUNTING STANDARDS
equity, other than those relating to distributions to
equity holders.
CHAPTER VI
15. Distinguish expenses from loss.
ANSWER: QUESTIONS:
Expenses arise in the course of ordinary
regular activities include cost of goods sold, wages 1. Explain recognition of the elements of
and depreciation. financial statements.
Losses do not arise in the course of the
ordinary regular activities and include losses ANSWER:
resulting from disasters. It is a process of capturing for inclusion in
Page the financial statement an item that meets the
107 definition of an asset, liability, equity, income or
expense.
PROBLEMS:
2. Explain the recognition criteria for the
PROBLEM 5-1 MULTIPLE CHOICE (ACP) elements of financial statements.
1. A
2. B ANSWER:
3. A It does not focus anymore on how people
4. A probable economic benefits will flow to or from the
5. B entity and that the cost can be measured reliably.
Page 3. What is derecognition?

108
ANSWER:
It is defined as the removal of all or part of
6. B a recognized asset or liability from the statement of
7. C financial position.
8. D
9. B 4. Explain the point of sale income
10. A recognition.
Page
109 ANSWER:
The basic principle of income recognition is
that income shall be recognized when earned.
PROBLEM 5-2 MULTIPLE CHOICE (Conceptual
With respect to sale of goods in the ordinary course
Framework)
of business, the point of sale is unquestionably the
point of income recognition. The reason is that it is
1. D
at the point of sale that the entity has transferred
2. D
to the buyer the significant risks and rewards of
3. D
ownership of the goods. Stated differently, legal
4. D
title to the goods passes to the buyer at the point
5. B
of sale. Moreover, it is at the point of sale that the
Page
entity has transferred control of the goods to the
110
customer.
6. A

5. What are the three applications of the measure financial asset and financial liability at
matching principle? amortized cost. The amortized cost reflects the
estimate of future cash flows discounted at a rate
ANSWER: determined at initial recognition.
The matching principle has three
applications, namely: 11. Explain fair value.
a. Cause and effect association
b. Systematic and rational allocation ANSWER:
c. Immediate recognition Fair value of an asset is the price that would
be received to sell an asset in an orderly
transaction between market
participants at measurement date.
Fair value of liability is the price that would
paid to transfer a liability in an orderly
6. Explain cause and effect association transaction between market
principle. participants at the measurement
date.
ANSWER: Fair value is an exit price or exit value.
This is actually the "strict matching concept. Fair value can be observed directly using 11
This process, commonly referred to as the market price of the asset or liability in an
matching of cost with revenue, involves the 6
active market.
simultaneous or combined recognition of revenue In cases where fair value cannot be directly
and expenses that result directly and jointly from measured, an entity can use present value of cash
the same transactions or events. flows.

Fair value is not adjusted for transaction
7. Explain systematic and rational allocation cost. The reason is that such cost is a
principle. characteristic of the transaction and not
of the asset or liability.
ANSWER:
The reason for this principle is that the cost 12. Explain value in use.
incurred will benefit future periods and that there is
an absence of a direct or clear association of the ANSWER:
expense with specific revenue. Value in use is the present value of the cash
When economic benefits are expected to arise over flows that an entity expects to derive from the use
several accounting periods and the association with of an asset and from the ultimate disposal. Value in
income can only be broadly or indirectly use does not include transaction cost on acquiring
determined, expenses are recognized on the basis the asset but includes transaction cost on the
of systematic and allocation procedures. disposal of the asset. Value in use is an exit price or
exit value.
8. Explain immediate recognition principle.
13. Explain fulfilment value.
ANSWER:
Under this principle, the cost incurred is ANSWER:
expensed outright because of uncertainty of future Fulfillment value is the present value of cash
economic benefits or difficulty of reliably that an entity expects to transfer in paying or
associating certain costs with future revenue. settling a liability.
An expense is recognized immediately: Fulfillment value does not include transaction cost
a. When an expenditure produces no on incurring a liability but includes transaction cost
future economic benefit. on fulfillment of a liability. Fulfillment value is an
b. When cost incurred does not exit price or exit value.
qualify or ceases to qualify for recognition as an
asset. 14. Explain current cost.
9. What are the two categories of ANSWER:

measurement? Current cost of an asset is the cost of an
equivalent asset at the measurement date
ANSWER: comprising the consideration paid and transaction
The Revised Conceptual Framework cost.
mentions two categories: Current cost of a liability is the consideration that
a. Historical cost would be received less any transaction cost at
b. Current value measurement date.
Similar to historical cost, current cost is also based
10. Explain historical cost. on the entry price or entry value but reflects
market conditions on measurement date.
ANSWER:
The historical cost or original acquisition 15. Explain the guideline in selecting an
cost of an asset is the cost incurred in acquiring or appropriate measurement basis.
creating the asset comprising the consideration
paid plus transaction cost. The historical cost of a ANSWER:
liability is the consideration received to incur the In selecting a measurement basis for an
liability minus transaction cost. Simply stated, asset or a liability and for the related income and
historical cost is the entry price or entry value to expense, it 1s necessary to consider the nature of
acquire an asset or to incur a liability. An the information that the measurement basis will
application of the historical cost measurement is to produce.

In most cases, no single factor will determine 5. B
which measurement basis should be selected. Page
The relative importance of each factor will depend 127
on and circumstances.
The information produced by the measurement
6. D
basis must be useful to the users of financial
7. C
statements.
8. C
To achieve this, the information must be both
9. D
relevant and faithfully represented.
10. C
Historical cost is the measurement basis most
Page
company adopted in preparing financial
128
statements.
Page Framework)
121
1. D
PROBLEM 6-1 MULTIPLE CHOICE (Conceptual 2. D
Framework) 3. D
4. D 11
1. A 5. B 7
2. B Page
3. C 129
4. B
5. D PROBLEM 6-7 IDENTIFICATION (IAA)
Page
122 Identify the principle or concept that is most
clearly violated by the accounting practice
PROBLEM 6-2 MULTIPLE CHOICE (IAA) described. Do not use any answer more than
once.
1. A
2. D 1. An entity charges the cost of new office
3. A equipment to expense in the year of purchase
4. C although the equipment is expected to help
5. C produce revenue for many years.
Page ANSWER:
123 SYSTEMATIC AND RATIONAL
ALLOCATION
PROBLEM 6-3 MULTIPLE CHOICE (AICPA 2. An entity records sales after inventory has been
Adapted) produced but before it is sold.
1. B ANSWER:
2. D INCOME RECOGNITION
3. B
4. A 3. An entity having 150 accounts payable lists each
5. B account among the liabilities in the statement of
Page financial position.
124
ANSWER:
PROBLEM 6-4 MULTIPLE CHOICE (AICPA CAUSE AND EFFECT
Adapted)
1. D 4. An entity does not report the major details about

2. C the shareholders’ equity.
3. A
4. D ANSWER:
5. A GOING CONCERN/MATERIALITY
Page
125 5. An entity follows a policy of recording an item as
an asset when the entity is in doubt whether the
item is an asset or an expense of the current
6. C
period.
7. B
8. B
ANSWER:
9. B
PRUDENCE
10. B
Page
6. The accountant of the entity keeps a detailed
126
depreciation record on every asset no matter how
small its value.
ANSWER:
1. B MATERIALITY
2. A
3. D 7. A construction firm signed a three-year contract
4. D to build a skyway connecting Alabang and

Tagaygay City. The firm immediately records the full
contract price as revenue. 6. Users have trouble making interperiod
comparisons when an entity changes accounting
ANSWER: principles from one year to the next.
INCOME RECOGNITION
ANSWER:
8. Competition has taken away much of the CONSISTENCY
business of an airline. The airline is unwilling to
report its plans to sell half of its fleet of aircraft. 7. Many users of financial statements prefer
accounting principles such as accelerated
ANSWER: depreciation that tend to state income on the “low
STANDARD ADEQUATE DISCLOSURE side”.
9. A department store changes accounting method ANSWER:
every year in order to report a higher net income CONSERVATISM
possible under accounting standards.
ANSWER:
CONSISTENCY 11
8
10. The damaged inventory of a department store 8. The entity should always report the important
is being written down. The manager bases the details about share capital, for example, the
write down on subjective opinion in order to number of shares authorized, shares issued, shares
minimize income tax. in treasury, subscribed shares and par value.
ANSWER: ANSWER:
INCOME RECOGNITION FAITHFUL REPRESENTATION
Page
130 9. An allowance for doubtful accounts is
established.
PROBLEM 6-8 IDENTIFICATION (IAA)
ANSWER:
Indicate the principle, concept or constraint CAUSE AND EFFECT ASSOCIATION
that best supports each of the following
statements. Do not use an answer more than 10. The lower of cost and net realizable value is
once. used to measure inventory.
1. An entity records a new machine at the cash ANSWER:

equivalent price paid. CONSERVATISM
Page
ANSWER: 131
PROBLEM 6-11 DISCUSSION (IAA)

2. A large entity decides that whenever an asset
has a cost of less than P10,000, the cost will be Indicate the accounting concept that is the
charged to expense even though the asset may most applicable.
benefit several accounting periods.
1. Timely financial information with predictive and
ANSWER: confirmatory value is presented.
SYSTEMATIC AND RATIONAL
ALLOCATION ANSWER:
RELEVANCE
3. The entity allocates the cost of a patent to the
accounting periods in which it helps to produce the 2. Error-free financial information is presented.
revenue.
ANSWER:
ANSWER: FREE FROM ERROR
MATCHING PRINCIPLE 3. The same accounting policies are applied from
period to period.
4. The entity estimates and records interest
expense on a 5-year noninterest-bearing not ANSWER:
payable. CONSISTENCY
ANSWER: 4. Notes to financial statements are prepared in

FAIR VALUE order to have a fair presentation.
5. Subscriptions received in advance by a magazine ANSWER:

publishing entity are treated as deferred revenue NOTES TO FINANCIAL STATEMENTS
until the magazines are published.
5. The annual depreciation is recognized.
ANSWER:
EXPENSE RECOGNITION ANSWER:
ANSWER:
6. An allowable exception to the point of sale is the
recording and reporting of inflows at the end of
production. 5. The entity included a note in the financial
statements that described a pending lawsuit
ANSWER: against the entity.
POINT OF SALE INCOME
RECOGNITION ANSWER:
7. All repair tools are expensed when purchased

even if the useful life is more than one year. REQUIRED:
ANSWER: State whether you agree or disagree with the

SYSTEMATIC AND RATIONAL financial reporting practice. Briefly explain
ALLOCATION your answer.
8. A patent is capitalized and amortized over the

period benefited. Page
135 11
ANSWER:
9
HISTORICAL COST
9. Rent paid in advance is recorded as prepaid rent

expense.
ANSWER: CONCEPTUAL FRAMEWORK AND

FULFILLMENT VALUE ACCOUNTING STANDARDS
10. Events after the end of reporting are either
adjusted or disclosed. CHAPTER VII
ANSWER: QUESTIONS:
STANDARD ADEQUATE DISCLOSURE
1. Explain presentation and disclosure as an
Page effective communication tool.
134
ANSWER:
PROBLEM 6-12 DISCUSSION (IAA) The presentation and disclosure can be an
effective communication tool about the information
An entity provided the following situations: in financial
statements.
1. The entity’s accountant increased the carrying A reporting entity communicates information about
amount of a patent from the original cost of its assets, liabilities, equity, income and expenses
P1,000,000 to the recently appraised value of by presenting and disclosing information in the
P3,000,000. financial statements.
Effective communication of information in financial
ANSWER: statements makes the information more relevant
DISAGREE, THIS IS A CASE OF FRAUD and contributes to a faithful representation of an
AND UNFAITHFULLY REPRESENTED REPORT. entity's assets liabilities, income and expenses.
Effective communication of information in financial
2. The entity paid for the personal travel of the statements also enhances the understandability
chief executive officer and charged travel expense. and
comparability of information in the financial
ANSWER: statements.
DISAGREE, THE ENTITY AND Effective communication in financial statements is
PERSONAL EXPENSES SHOULD BE supported by not duplicating information in
SEPARATED. different parts of the financial statements,
Duplication is usually unnecessary and can make
3. At the end of the current reporting period, the financial statements less understandable.
entity received an order from a customer. The
merchandise will be shipped in early next year. 2. Explain classification of assets, liabilities
Because the sale was made to a long-time and equity.
customer and the invoice was paid in the current
year, the controller recorded the sale in the current ANSWER:
year. Classification is the sorting of assets,
liabilities, equity, income and expenses on the
ANSWER: basis of shared or similar characteristics.
Classifying dissimilar assets, liabilities, equity,
4. In the middle of the current year, the entity paid income and expenses can obscure relevant
a certain amount to an insurance company for one- information, reduce understandability and
year comprehensive insurance coverage. comparability and may not provide a faithful
The entity recorded the entire expenditure as an representation of financial information.
expense in current year.

It may be necessary to classify components of 8. Explain the net income under the financial
equity separately if such components are subject to capital concept.
legal, regulatory and other requirements.
Thus, ordinary share capital, preference share ANSWER:
capital, share premium and retained earnings Under the financial capital concept, net
should be disclosed separately. income occurs when the nominal amount of the net
assets at the end of the year exceeds the nominal
3. Explain classification of income and amount of the net assets at the beginning of the
expenses. period, after excluding distributions to and
contributions by owners during the period."
ANSWER:
Income and expenses are classified as 9. Explain physical capital.
components of profit loss and components of other
comprehensive income. ANSWER:
The Revised Conceptual Framework has introduced Physical capital is the quantitative measure
the term Statement of financial performance to of the physical productive capacity to produce
refer to the statement of profit or loss together with goods and services.
the statement presenting other comprehensive The physical productive capacity may be based on,
income. for example, units of output per day or physical 22
The statement of profit or loss is the primary capacity of productive assets to produce goods and
source of information about an entity's financial 0
services.
performance tor the reporting period. This concept requires that productive assets be
Al income and expenses should be appropriately measured at current cost, rather than historical
classified and included in the statement of profit or cost.
loss. Productive assets include inventories and property,
However, there are certain items of income and plant and equipment.
expenses that are presented outside of profit or The current costs for these productive assets must
loss but included in other comprehensive income. be maintained in order that physical capital is also
The components of other comprehensive income maintained.
are subsequently recycled or reclassified to profit
or loss or retained earnings. 10. Explain the net income under the physical
capital concept.
4. What is aggregation?
ANSWER:
ANSWER: Under this concept, net income occurs
Aggregation is the adding together of "when the physical productive capital of the entity
assets, liabilities, equity, income and expenses that at the end of the year exceeds the physical
have similar or shared characteristics and are productive capital at the beginning of the period,
included in the same classification. also after excluding distributions to and
Aggregation makes information more useful by contributions from owners during the period.
summarizing a large volume of detail. However, Page
aggregation may conceal some of the details. 142
5. Explain capital maintenance.
Framework)
ANSWER:
The capital maintenance approach means
1. D
that net income occurs only after the capital used
2. A
from the beginning of the period is maintained.
3. C
In other words, net income is the amount an entity
4. A
can distribute to its owners and be as "well-off" at
5. D
the end of the year as at the beginning.
Page
143
6. Distinguish return on capital and return of
capital.
ANSWER: Framework)
The capital maintenance approach means
that net income occurs only after the capital used 1. A
from the beginning of the period is maintained. In 2. B
other words, net income is the amount an entity 3. A
can distribute to its owners and be as "well-off" at 4. D
the end of the year as at the beginning. 5. C
Page
7. Explain financial capital. 144
ANSWER:
Financial capital is the monetary amount of
the net assets contributed by shareholders and the
amount of the increase in net assets resulting from
earnings retained by the entity.
Financial capital is the traditional concept based on
historical cost and adopted by most entities.

When an entity's end of reporting period changes,
and financial statements are presented for a period
longer or shorter than one year, an entity shall
disclose:
a. The period covered by the financial statements.
b. The reason for using a longer or shorter period.
c. The fact that amounts presented in the financial
statements are not entirely comparable.
5. Define a statement of financial position.
ANSWER:
A statement of financial position is a formal
statement showing the three elements comprising
financial position, namely assets, liabilities and
equity.
Investors, creditors and other statement users
analyze the statement of financial position to
evaluate such factors as liquidity, solvency and the 22
need of the entity for additional financing. 1
ACCOUNTING STANDARDS 6. What are the essential characteristics of
an asset?
CHAPTER VIII ANSWER:
Assets are classified only into two, namely
current assets and noncurrent assets.
QUESTIONS: When an entity supplies go0ods or services within a
clearly identifiable operating cycle, the separate
1. What are financial statements? classification of current and noncurrent assets is a
useful information by distinguishing between net
ANSWER: assets that are continuously circulating as working
Financial statements are the means by capital from the not assets used in long-term
which the information accumulated and processed operations.
in financial accounting is periodically The operating cycle of an entity is the time
communicated to the users. between the acquisition of assets for proce8sing
The financial statements are the end product or and their realization in cash or cash equivalents.
main output of the financial accounting process. When the entity's normal operating cycle is not
Financial statements are a structured financial clearly identifiable, the duration is assumed to be
representation of the financial position and twelve months.
financial performance of an entity.
7. What are the classification of assets?
2. What are the components of financial
statements? ANSWER:
PAS 1, paragraph 66, provides that an
ANSWER: entity shall classify an asset as current when:
A complete set of financial statements a. The asset is cash or cash
comprises the following components: equivalent unless the asset is unrestricted to settle
1. Statement of financial position a liability for more than twelve months after the
2. Income statement reporting period.
3. Statement of comprehensive income b. The entity holds the asset
4. Statement of changes in equity primarily for the purpose of trading.
5. Statement of cash flows c. The entity expects to realize the
6. Notes, comprising a summary of asset within twelve months after the reporting
significant accounting, accounting policies and period.
other explanatory notes d. The entity expects to realize the
asset or intends to sell or consume it within the
3. Explain the objective of financial entity's normal operating cycle.
statements.
8. Define current assets.
ANSWER:
The objective of financial statements is to ANSWER:
provide information about the financial p0sition, any asset which can reasonably be expected
financial performance and cash flows of an entity to be sold, consumed, or exhausted through the
that is useful to a wide range of users in making normal operations of a business within the current
economic decisions. fiscal year or operating cycle or financial year.
4. What is the frequency of reporting of 9. What are the line items for current assets?
financial statements?
ANSWER:
ANSWER: Current assets are usually listed in the
Financial statements shall be presented at order of liquidity PAS 1, paragraph 54, provides
least annually. that as a minimum, the line items under current
assets are:
a Cash and cash equivalents

b. Financial assets at fair value such as PAS 1, paragraph 54, provides that as a
trading securities and other investments in quoted minimum, the face of the statement of financial
equity instruments position shall include the following line items for
c. Trade and other receivables current liabilities:
d. Inventories a. Trade and other payables
e. Prepaid expenses b. Current provisions
c. Short-term borrowing
10. Define noncurrent assets. d. Current portion of long-term debt
e. Current tax liability
ANSWER:
The caption "noncurrent assets" is a
residual definition. PAS 1, paragraph 66, simply
states that "an entity shall classify all other assets
not classified as current as
noncurrent". In other words, what is not included in
the definition of current assets is deemed excluded.
All others are classified as noncurrent assets.
16. Explain the treatment of currently
maturing long-term debt. 22
11. Identify the non-current assets.
2
ANSWER:
ANSWER: A liability which is due to be settled within
Accordingly, noncurrent assets include the twelve months after the reporting period is
following: classified as current, even if:
a. Property, plant and equipment a. The original term was for a period
b. Long-term investments longer than twelve months.
c. Intangible assets b. An agreement to refinance or to
d. Deferred tax assets reschedule payment on a long-term basis is
e. Other noncurrent assets completed after the reporting period and before the
financial statements are authorized for issue.
12. What are the essential characteristics of However, if the refinancing on a long-term basis is
a liability? completed on or before the end of the reporting
period, the refinancing is an adjusting event and
ANSWER: therefore the obligation is classified as noncurrent.
A liability has three essential characteristics:
(a) it embodies a present duty or responsibility to 17. Explain the effect of breach of covenants
one or more other entities that entails settlement on the classification of liability.
by probable future transfer or use of assets at a
specified or determinable date, on occurrence of a ANSWER:
specified event, or on demand, PAS 1, paragraph 74, provides that the
(b) the duty or responsibility obligates a particular liability is classified as current even if the lender
entity, leaving it little or no discretion to avoid the has agreed, after the reporting period and before
future sacrifice, and the statements are authorized for issue, not to
(c) the transaction or other event obligating the demand payment as a consequence of the breach.
entity has already happened This liability is classified as current because at
reporting date the borrower does not have an
13. What are the classification of liabilities? unconditional right to defer payment for at least
twelve months after the reporting period.
ANSWER: However, Paragraph 75 provides that the liability is
PAS 1, paragraph 69, provides that an entity classified as noncurrent if the lender has agreed on
shall classify a liability as current when: or before the end of reporting period to provide a
a. The entity expects to settle the grace period ending at least twelve months after
liability within the entity's normal operating cycle. the end of reporting period.
b. The entity holds the liability
primarily for the purpose of trading. 18. What are the elements comprising the
c. The liability is due to be settled equity of a corporation?
within twelve months after the reporting period.
d. The entity does not have an ANSWER:
unconditional right to defer settlement of the 1. Paid in capital or contributed capital
liability for at least twelve months after the 2. retained earnings
reporting period. 3. treasury stock
14. Define current liabilities. 19. What is the meaning of “notes to financial
statements”?
ANSWER:
current liabilities are often understood as all ANSWER:
liabilities of the business that are to be settled in Notes to financial statements provide
cash within the fiscal year or the operating cycle of narrative description or disaggregation of items
a given firm, whichever period is longer. presented in the financial statements and
information about items that do not qualify for
15. What are the line items for current recognition.
liabilities? Notes contain information in addition to that
presented in the statement of financial position,
ANSWER: income statement; statement of comprehensive

income, statement of changes in equity and 5. C
statement of cash flows. 6. A
In other words, notes to financial statements are 7. C
used to report information that does not fit into the 8. D
body of the financial statements in order to Page
enhance the understandability of the financial 171
statements.
9. A
10. A
Page
172
PROBLEM 8-8 MULTIPLE CHOICE (AICPA

Adapted)
20. Explain the two forms of statement of 1. A
financial? 2. D
3. D
ANSWER: 4. A 22
In practice, there are two customary forms 5. A 3
in presenting the statement of financial position, Page
namely: 173
a. Report form
This form sets forth the three major sections in a 6. D
downward sequence of assets, liabilities and equity. 7. D
b. Account form 8. C
As the title suggests, the presentation follows that 9. D
of an account, meaning, the assets are shown on 10. C
the left side and the liabilities and equity on the Page
right side of the statement of financial position. 174
Page
161 PROBLEM 8-9 MULTIPLE CHOICE (AICPA
Adapted)
PROBLEM 8-5 MULTIPLE CHOICE (PAS 1)
1. B 1. A
2. D 2. D
3. A 3. D
4. A 4. D
5. D 5. D
Page Page
166 175
PROBLEM 8-6 MULTIPLE CHOICE (PAS 1) PROBLEM 8-10 MULTIPLE CHOICE (IAA)
1. C
2. A 1. C
3. A 2. D
4. D 3. A
Page 4. D
167 5. B
5. A Page
6. A 176
7. A PROBLEM 8-11 MULTIPLE CHOICE (IAA)
8. A
Page 1. C
168 2. C
3. D
4. D
9. C 5. D
10. C Page
Page 177
169
6. C
PROBLEM 8-7 MULTIPLE CHOICE (IFRS) 7. D
8. B
1. D 9. C
2. C 10. B
3. C Page
4. A 178
Page
170 PROBLEM 8-12 MULTIPLE CHOICE (IAA)
1. B

2. D
3. D 4. Distinguish components of profit or loss
4. D and components of other comprehensive
5. B income.
Page ANSWER:
179 The term profit or loss is the total of income
less expenses, excluding the components of other
comprehensive income. In other words, this is the
"bottom line" in the traditional income statement.
An entity may use "net income" or "net loss" to
describe profit or loss.
5. Identify components of other

comprehensive income.
ANSWER:
Oher comprehensive income comprises
items of income and expenses including 22
reclassification adjustments that are not recognized 4
in profit or loss as required or permitted by
Philippine Financial Reporting Standards.
The components of "other comprehensive income"
include the following:
1. Unrealized gain or loss on equity
investment measured at fair value through other
comprehensive income
CONCEPTUAL FRAMEWORK AND 2. Unrealized gain or loss on debt
ACCOUNTING STANDARDS investment measured at fair value through other
CHAPTER IX 3. Gain or loss from translation of the

financial statements of a foreign operation
4. Revaluation surplus during the year.
QUESTIONS: 5. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
1. Define an income statement. 6. "Re measurements" of defined benefit
plan, including actuarial gain or loss
ANSWER: 7. Change in fair value attributable to credit
An income statement is à formal statement risk of a financial liability designated at fair value
showing the financial performance of an entity for a through profit
given period of time. or loss.
The financial performance of an entity is primarily
measured in terms of the level of income earned by 6. Explain the presentation of other
the entity through the effective and sufficient comprehensive income.
utilization of its resources.
The financial performance is also known as the ANSWER:
results of operations of the entity. PAS 1, paragraph 82A, provides that the
The transaction approach is the traditional statement of comprehensive income shall present
preparation of the income statement in conformity line items for amounts of other comprehensive
with accounting standards. income during the period classified by nature.
The line items for amounts of OCI shall be grouped
2. Explain the usefulness of an income as follows:
statement. a. OCI that will be reclassified
subsequently to profit or loss when specific
ANSWER: conditions are met.
The income statement for a period presents b. OCI that will not be reclassified
the income, expenses, gains, losses and net subsequently to profit or loss but to retained
income or loss recognized during the period, earnings.
Information about financial performance is useful in
predicting future performance and ability to 7. What are the components of other
generate future cash flows. comprehensive income that are subsequently
reclassified to profit or loss?
3. Define comprehensive income.
ANSWER:
ANSWER: OCI that will be reclassified to profit or loss
Comprehensive income is the change in a. Unrealized gain or loss on debt
equity during a period resulting from transactions investment measured at fair value through other
and other events, other than changes resulting comprehensive income.
from transactions with owners in their capacity as b. Gain or loss from translating
owners. financial statements of a foreign operation.
Accordingly, comprehensive income includes: c. Unrealized gain or loss on
a. Components of profit or loss derivative contracts designated as cash flow
b. Components of other hedge.

8. What are the components of other Goods available for sale xx
comprehensive income that are not Ending inventory (xx)
subsequently reclassified to profit or loss?
ANSWER:
OCI that will be reclassified to retained Cost of goods sold xx
earnings
a. Unrealized gain or loss on equity Gross purchases xx
investment measured at fair value through other Freight in xx
b. Revaluation surplus during the year, the Total xx
realization of the revaluation surplus is through Purchase returns,
retained earnings. allowances and discounts (xx)
c. Re measurements of defined benefit plan,
including actuarial gain or loss. Net purchases xx
d. Change in fair value attributable to credit
risk of a financial liability designated at fair value
through profit or loss.
22
5
14. What is the formula of computing the cost
9. Explain the reclassification of the of goods sold of a manufacturing entity?
components of other comprehensive income
that are not reclassified to profit or loss. ANSWER:
Cost of goods sold of manufacturing concern
ANSWER: Beginning raw materials xx
Net purchases xx
10. Explain the two options of presenting
comprehensive income. Raw materials available for use xx
Ending raw materials (xx)
ANSWER:
An entity has two options of presenting Raw materials used xx
comprehensive income, namely: Direct labor xx
1. Two statements: Factory overhead xx
a. An income statement showing the
components of profit or loss. Total manufacturing cost xx
b. A statement of comprehensive Beginning goods in process xx
income beginning with profit or loss as shown in
the income statement plus or minus the Total cost of goods in process xx
components of other comprehensive income. Ending goods in process (xx)
2. Single statement of comprehensive
income Cost of goods manufactured xx
This is the combined statement Beginning finished goods xx
showing the components of profit or loss and
components of other comprehensive income in a Goods available for sale xx
single statement. Ending finished goods (xx)
11. Identify the common sources of income. Cost of goods sold xx
ANSWER: 15. Define distribution cost.

a. Sales of merchandise to customers
b. Rendering of services ANSWER:
c. Use of entity resources Distribution costs constitute costs which are
d. Disposal of resources other than products directly related to selling, advertising and delivery
of goods to customers.
12. Identify the components of expenses. Page
198
ANSWER:
Components of expense
a. Cost of goods sold or cost of sales 16. Define administrative expense.
b. Distribution costs or selling
expenses ANSWER:
c. Administrative expenses Administrative expenses constitute cost of
d. Other expenses administering the business.
e. Income tax expenses Administrative expenses ordinarily include all
operating expenses not related to selling and cost
13. What are the formula in computing cost of goods sold.
of goods sold of a merchandising concern?
17. Define other expenses.
ANSWER:
Cost of goods sold of merchandising ANSWER:
concern Beginning inventory xx Other expenses are those expenses which
Net purchases xx are not directly related to the selling and
administrative function.

18. As a minimum, what are the line items 22. Define a statement of retained earnings.
that are reported on the face of the income
statement and statement of ANSWER:
comprehensive income? The statement of retained earnings shows
the changes affecting directly the retained earnings
ANSWER: of an entity and relates the income statement to
PAS 1, paragraph 82, provides that as a the statement of financial position.
minimum, the income statement and statement of
comprehensive income shall include the following
line items:
a. Revenue
b. Gain and loss from the de recognition of financial
asset measured at amortized cost as required by
FRS 9. 23. What are the common items that directly
affect retained earnings?
c. Finance cost ANSWER:

d. Share in income or loss of associate and joint The important data affecting the retained 22
venture accounted for using the equity method earnings that should be clearly disclosed in the
e. Gain or loss on the reclassification of financial 6
statement of retained earnings are:
asset from amortized cost to fair value profit or loss a. Profit or loss for the period
f. Gain or loss on the reclassification of financial b. Prior period errors
asset from fair value other comprehensive income c. Dividends declared and paid to
to fair value profit or loss. shareholders
g. Income tax expense d. Effect of change in accounting policy
h. A single amount comprising discontinued e. Appropriation of retained earnings
operations
i. Profit or loss for the period
24. Define a statement of changes in equity.
j. Total other comprehensive income
k. Comprehensive income for the period being the ANSWER:
total of profit or loss and other comprehensive The statement of changes in equity is a
income. basic statement that shows the movements in the
elements or components of the shareholders'
19. Explain the two forms of income equity.
statements. The statement of retained earnings is no longer a
required basic statement but it is a part of the
ANSWER: statement of changes in equity.
Functional presentation
This form classifies expenses 25. Define a statement of cash flow.
according to their function as part of cost of goods
sold, distribution costs, administrative expenses ANSWER:
and other expenses.
A statement of cash flows is a component
Natural presentation of financial statements summarizing the operating,
The natural presentation is referred investing and financing activities of an entity.
to as the nature of expense method. Under this
form, expenses are aggregated according to their In simple language, the statement of cash flows
nature and not allocated among the various provides information about the cash receipts and
functions within the entity. cash payments of an entity during a period.
An entity shall prepare a statement of cash flows
20. Which form of income statement is and present it as an integral part of the financial
required? statements for each period for which financial
statements are presented.
ANSWER: The primary purpose of a statement of cash flows is
PAS 1 does not prescribe any format.
to provide relevant information about cash receipts
Paragraph 105 simply states that because each and cash payments of an entity during a period.
method of presentation has merit for different
types of entities, management is required to select
the presentation that is reliable and more relevant. Page
199
21. What is a single statement of
comprehensive income? Problem 9-15 MULTIPLE CHOICE (PAS 1)
1. B
ANSWER: 2. C
Another option in presenting the 3. B
components of profit or loss and components of 4. B
other comprehensive income 1s to prepare a single 5. D
statement of comprehensive income, Page
Again, this single statement is the combined 211
income statement and statement of comprehensive
income, 6. A
Using the preceding data, the single statement of 7. D
comprehensive income following the "functional 8. A
presentation" may appear as follows: 9. D
10. D
Page
212 ANSWER:
A statement of cash flows is a component of
Problem 9-16 MULTIPLE CHOICE (IFRS) financial statements summarizing the operating,
1. C investing and financing activities of an entity.
2. C In simple language, the statement of cash flows
3. D provides information about the cash receipts and
4. B cash payments of an entity during a period.
5. A An entity shall prepare a statement of cash flows
Page and present it as an integral part of the financial
213 statements for each period for which financial
statements are presented.
Problem 9-17 MULTIPLE CHOICE (IAA)

1. D
2. C
3. D 2. Explain the primary purpose of a 22
4. C statement of cash flows. 7
5. B
Page ANSWER:
214 The primary purpose of a statement of cash flows
is to provide relevant information about cash
receipts and cash payments of an entity during a
6. C
period.
7. A
8. A
3. Define cash.
9. D
10. B
ANSWER:
Page
Cash includes more than just the physical
215
traditional bills and coins. Cash can include any
other currencies, as well as undeposited cheques
Problem 9-18 MULTIPLE CHOICE (IAA) and amounts in a current account.
1. C 4. Define cash equivalents.
2. B
3. A ANSWER:
4. D Cash equivalents are short-term highly
5. A liquid investments that are readily convertible to
Page known amount of cash and which are subject to an
216 insignificant risk of change in value.
Problem 9-19 MULTIPLE CHOICE (AICPA 5. What are the three classifications of cash
Adapted) flows?
1. B ANSWER:
2. B The statement of cash flows shall report
3. A cash flows during the period classified as operating,
4. D investing and financing activities.
5. D
Page 6. Explain operating activities, investing
217 activities and financing activities.
Problem 9-20 MULTIPLE CHOICE (IAA) ANSWER:

Operating activities are the cash flows derived
1. D primarily from the principal revenue producing
2. D activities of the entity.
3. C
4. A Investing activities are the cash flows derived from
5. C the acquisition and disposal of long-term assets
Page and other investments not included in cash
218 equivalent.
CONCEPTUAL FRAMEWORK AND Financing activities are the cash flows derived from
the equity capital and borrowings of the entity.
ACCOUNTING STANDARDS
CHAPTER X
7. Explain the treatment of noncash investing
and financing transactions.
ANSWER:
QUESTIONS: PAS 7, paragraph 43, provides that
investing and financing transactions that do not
1. Define a statement of cash flows.

require use of Cash or cash equivalent shall be 6. D
excluded from the statement of cash flows. 7. D
Noncash investing and financing transactions shall) 8. B
be disclosed also where in the financial statements 9. D
either in the notes to financial statement or in a 10. B
separate schedules or in a way that provide all Page
relevant information about these transactions. 235
8. Explain the treatment of interest paid and Problem 10-11 MULTIPLE CHOICE (IFRS)
interest received in a statement of cash
flows. 1. A
2. C
ANSWER: 3. A
PAS 7, paragraph 33, provides that interest 4. A
paid and interest received shall be classified as 5. D
operating cash flows because such items enter into Page
the determination of net income or loss 236
Alternatively, interest paid may be classified as
financing cash flow because it is a cost of obtaining Problem 10-12 MULTIPLE CHOICE (IFRS) 22
financial resources. 8
Alternatively, interest received may be classified as 1. D
investing cash flow because it is a return on 2. C
investment. 3. A
For a financial institution, interest paid and interest 4. B
received are usually classified as operating cash 5. C
flows. Page
237
9. Explain the treatment of dividend received
and dividend paid in a statement of cash
flows. CONCEPTUAL FRAMEWORK AND
ANSWER:
PAS 7, paragraph 33, provides that dividend
received shall be classified as operating cash flow CHAPTER XI
because it enters into the determination of net
income. QUESTIONS:
Alternatively, dividend received may be classified 1. Define accounting policies.

as investing cash flow because it is a return on
investment. ANSWER:
PAS 7, paragraph 34, provides that dividend paid
shall be classified as financing cash flow because it Accounting policies are the specific
is a cost of obtaining financial resources. principles, bases, conventions, rules and
Alternatively, dividend paid may be classified as practices applied by an entity in preparing
operating cash flow in order to assist users to and presenting financial statements. These
determine the ability of the entity to pay dividends policies are essential for a proper
out of operating cash flows. understanding of the information contained
in the financial statements.
10. Explain the treatment of income taxes in
a statement of cash flows. 2. Define a change in accounting policy.
ANSWER: ANSWER:
PAS 7, paragraph 35, provides that cash
flows arising from income taxes shall be separately Accounting policies must be applied
disclosed as cash flows from operating activities consistently for similar transactions and
unless they can be specifically identified with events. And a change in this policy shall be
investing and financing activities. made only when: a. Required by an
Tax cash flows are often difficult to match to the accounting standard.
originating underlying transaction, so most of the The change will result to more
time all tar cash flows are classified as arising from relevant and faithfully represented
operating activities. information about the financial
Page position, financial performance and
227 cash flows of the entity.
Problem 10-10 MULTIPLE CHOICE (PAS 7) 3. Give examples of change in accounting

policy.
1. C
2. B ANSWER:
3. A
4. C Change in the method of inventory pricing
5. C from the FIFO to weighted average method.
Page Change in the method of accounting for long
234 term construction contract from cost

recovery method to percentage of more experience or subsequent
completion method. development.
The initial adoption of policy to carry assets
at revalued amount is a change in 8. How is a change in accounting estimate
accounting policy to be dealt with as reported?
revaluation.
Change from cost model to fair value model ANSWER:
in measuring investment property.
Change to a new policy resulting from the The effect of a change in accounting
requirement of a new PFRS
estimate shall be recognized
currently and prospectively by
including it in income or loss of:
(a) the period of change if the change

affects that period only, and
(b) the period changes and future periods if
the change affects both. A change in accounting
estimate shall not be accounted for by restating
amounts reported in financial statements prior 22
4. When is a change in accounting policy periods. 9
allowed?
9. Define prior period errors.
ANSWER: A change in accounting policy shall
be made only when: ANSWER:
Required by an accounting standard. Prior period errors are omissions and
misstatements in the financial statements
The change will result in more for one or more periods arising from a
relevant and faithfully represented
failure to use or misuse of reliable
information about the financial
position, financial performance and information. Errors may occur as a result of
cash flows of the entity. mathematical mistakes, mistakes in
applying accounting policies,
5. How is a change in accounting policy misinterpretation of facts, fraud or
reported? oversight.
ANSWER: 10. Explain the treatment of prior period

errors.
A change in accounting policy required by a
standard or an interpretation shall be ANSWER:
applied in accordance with the transitional
Prior period errors shall be corrected
provisions therein. If the standard or
retrospectively by adjusting the opening
interpretation contains no transitional
balances of retained earnings and affected
provisions or if an accounting policy is
assets and liabilities. An estimate may need
changed voluntarily, the change shall be revision if changes occur regarding the
applied retrospectively or retroactively. circumstances on which the estimate was
based or as a result of new information,
6. Explain the adoption of an accounting more experience or subsequent
policy in the absence of an accounting development.
standard.
Page
ANSWER: 245
In the absence of accounting standard that PROBLEM 11-11 MULTIPLE CHOICE (IFRS)
specifically applies to a transaction or event, 1.B
management shall use judgment in 2.A
selecting an applying an accounting policy 3.D
that results in information that is relevant to Page
the economic decision making needs of 251
users and faithfully represented.
4. B
7. Define a change in accounting estimate.
5. C
6. A
ANSWER:
7. D
A change in accounting estimate is a normal Page
or recurring correction or adjustment of an 252
asset or liability which is the result of the
use of an estimate. An estimate may need 8. D
revision if changes occur regarding the 9. D
circumstances on which the estimate was 10. C
based or as a result of new information, Page
253

PROBLEM 11-12 MULTIPLE CHOICE (AICPA Nonadjusting events after reporting
Adapted) period are those that are indicative of conditions
1. D that arise after the end of reporting period.
2. C
3. C 5. When are financial statements considered
4. C authorized for issue?
5. D

Page ANSWER:
254
Financial statements are authorized for
PROBLEM 11-13 MULTIPLE CHOICE (AICPA issue when the board of directors reviews the
Adapted) financial statements and authorizes them issue. In
1. D some cases, an entity is required to submit the
2. A financial statements to the shareholders for
3. D approval after the financial statements have been
4. C issued. In such cases, the financial statements are
5. A authorized for issue on the date of issue by the
Page 33
board of directors and not on the date when
255 0
shareholders approve the financial statements.
1. A
Page 262
2. B
3. D
Page
256
4. D
5. A
Page
257

ACCOUNTING STANDARDS PROBLEMS
CHAPTER XII Problem 12-1 (IFRS)
The audit of Anne Company for the year

QUESTIONS: ended December 31, 2020 was completed on
March 1, 2021.
1. Define events after the reporting period.
The financial statements were signed by the
ANSWER: managing director on March 15, 2021 and
approved by the shareholders on March 31,
PAS 10, paragraph 3, defines events 2021.
after reporting period as those events, whether
The following events have occurred:
favorable and unfavorable, that occur between the
end of reporting period and the date on which the
1. On the January 15, 2021, a customer owing
financial statements are authorized for issue. These P900,000 to Anne filed for bankruptcy.
events are also known as subsequent events.
The financial statements include an
2. What are the type of events after reporting allowance for doubtful accounts pertaining to
period? the customer only of P100,000.
ANSWER: 2. The entity’s issued share capital comprised
100,000 ordinary shares with P100 par value.
a. Adjusting events
b. Nonadjusting events The entity issued additional 25,000 shares on
March 1, 2021 at par value.
3. Explain adjusting events after reporting
period. 3. Equipment with carrying amount of
P525,000 was destroyed by fire on December
ANSWER: 15, 2020.
Adjusting events after the reporting The entity has booked a receivable of
period are those that provide evidence of P400,000 from the insurance entity.
conditions that exist at the end of reporting period.
After the insurance entity completed the
4. Explain nonadjusting events after reporting investigation on February 1, 2021, it was
period. discovered that the fire took place due to
negligence of the machine operator.
ANSWER:

As a result, the insurer’s liability was zero on 4. On December 31, 2020, Norway Company
the claim. had an account receivable from a large
customer in the amount of P3,500,000. On
REQUIRED: January 31, 2021, Norway Company was
advised by the liquidator of the said
PREPARE ADJUSTING ENTRIES ON DECEMBER customer that the customer was insolvent
31, 2020 FOR THE EVENTS AFTER REPORTING and would be unable to repay the full amount
PERIOD. owed to Norway Company. The liquidator
advised Norway Company in writing that only
PROBLEM 12-1 10% of the account receivable will be paid on
April 30, 2021.
ANNE COMPANY
REQUIRED:
1. Doubtful accounts
800,000 PREPARE ADJUSTING ENTRIES ON DECEMBER
Allowance for doubtful accounts 31, 2020 TO REFLECT THE EVENTS AFTER
REPORTING PERIOD.
800,000 PROBLEM 12-2
33
2. The issuance of additional shares on march NORWAY COMPANY 1
1, 2021 is a nonadjusting event
1. The receivable of P400,000 is a
3. Loss on claim nonadjusting event because the amount is
400,000 still fully collectible
Claim receivable
400,000 2. The change in fair value of the investments
on February 15, 2021 is a nonadjusting event
Page 263 because trading investments are measured at
fair value at every year-end.
3. Loss on litigation
3,000,000
Estimated liability
3,000,000
4. Doubtful accounts
Problem 12-2 (IFRS) 3,150,000
Allowance for doubtful accounts
(3,500,000 x 90%)
Norway Company reported that the year-end
3,150,000
is December 31, 2020 and the financial
statements are authorized for issue on March
15, 2021.
Page
1. On December 31, 2020, Norway Company 264
had a receivable of P400,000 from a customer
that is due 60 days after the end of reporting PROBLEM 12-5 MULTIPLE CHOICE (IAS 10)
period. On January 15, 2021, a receiver was
appointed for the said customer. The receiver 1. C
informed Norway that the P400,000 would be 2. A
paid in full by June 30, 2021. 3. A
4. A
2. Norway Company measured share Page
investments held for trading at fair value 266
through profit or loss. On December 31, 2020,
these investments were recorded at the PROBLEM 12-6 MULTIPLE CHOICE (IAA)
market value of P5,000,000. During the
period up to February 15, 2021, there was a 1. D
steady decline in the market value of all the 2. D
shares in the portfolio, and on February 15, 3. C
2021, the market value had fallen to 4. D
P2,000,000. 5. D
Page
3. Norway Company had reported a 267
contingent liability on December 31, 2020
related to a court case in which Norway
Company was the defendant. The case was PROBLEM 12-7 MULTIPLE CHOICE (IFRS)
not heard until the first week of February,
2021. On March 1, 2021, the judge handed 1. B
down a decision against Norway Company. 2. A
The judge determined that Norway Company 3. D
was liable to pay damages and costs totaling Page
P3,000,000. 268

d. The doubtful accounts expense
4. C recognized during the period in respect of
5. A amount due from related parties.
Page
269 5. Give examples of unrelated parties.
CONCEPTUAL FRAMEWORK AND ANSWER:
ACCOUNTING STANDARDS 1. Two entities simply because they have a
CHAPTER XIII director or key management personnel in

common.
2. Providers of finance, trade unions, public
utilities and government agencies in the
QUESTIONS: course of their normal dealings with an
entity by virtue only of those dealings.
1. Define related party.
3. A single customer, supplier, franchisor or
general agent with whom an entity transacts a
ANSWER:
significant volume of business merely by virtue of
the resulting economic dependence. 33
Related party - Parties are considered
to be related if one party has: 4. Two venturers simply because they share 2
joint control over a joint venture.
a. the ability to control the other party Page
276
b. the ability to exercise significant influence
over the other party, and PROBLEM 13-1 (AICPA Adapted)
c. joint control over the reporting entity.
Dean Company acquired 100% of Morey
2. Give examples of related parties. Company in the prior year. During the current
year, the individual entities included in their
ANSWER: financial statements the following:
1. Affiliates - meaning the parent, the
subsidiary and fellow subsidiaries.
Dean Morey
2. Associates -meaning the entities over Key officers’ salaries 750,000
which one party exercises significant influence. 500,000
Officers’ expenses 200,000
3. Venturer in a joint venture. It includes 100,000
the subsidiary or subsidiaries of the joint venture. Loans to Officers 1,250,000
500,000
4. Key management personnel - those Intercompany sales
persons having authority and responsibility for 1,500,000
planning, directing, and controlling the activities of
the entity, directly or indirectly, including any What total amount should be reported as related
executive director or nonexecutive director. party disclosures in the notes to Dean Company’s
consolidated financial statements for the current
year?
3. Explain related party disclosure. a. 1,500,000
b. 1,550,000
ANSWER: c. 1,750,000
d. 3,000,000
PAS 24, paragraph 12, requires disclosure of Loans to officers:
related party relationships where control exists Dean 1,250,00
irrespective of whether there have been 0
transactions between related parties. In other Morey 500,000
words, relationships between parents and
subsidiaries shall be disclosed regardless of Key officers' salaries:
whether there have been transactions between the Dean 750,000
related parties. Morey 500,000
Total 3,000,00
4. What are the minimum disclosure for 0
related party transactions?
page
ANSWER: 277
a. The amount of the transaction.
b. The amount of outstanding balance, PROBLEM 13-3 MULTIPLE CHOICE (PAS 24)
terms and conditions, whether secured or
unsecured, and nature of consideration to 1. D
be provided in settlement. 2. B
c. The allowance for doubtful accounts 3. C
4. D
related to the outstanding balance.
5. D

Page and variable production overhead that is incurred in
278 converting materials into finished goods.
PROBLEM 13-4 MULTIPLE CHOICE (IFRS) Other cost included in the cost of
inventories only to the extent that it is incurred
1. D bringing the inventories to their present location
2. D and condition.
3. B
4. D 4. Identify certain costs that are excluded
5. A from the cost of inventories.
Page
279 ANSWER:
6. C The following costs are excluded from the cost of

7. C inventories and recognized as expenses in the
8. B period when incurred:
9. B
Abnormal amounts of wasted
10. D
materials, labor and other 33
3
280 Page
productions costs.
Storage costs, unless necessary in
the production process prior to a
CONCEPTUAL FRAMEWORK AND further production stage.
ACCOUNTING STANDARDS Administrative overheads
Distribution or selling costs.
CHAPTER XIV 5. Explain the cost of inventories of a service
provider.
QUESTIONS:
ANSWER:
1. Define inventories.
Cost of inventories of a service provider
ANSWER: consists primarily of the labor and other costs of
personnel directly engaged in providing the service,
Inventories are assets held for sale in the including supervisory personnel and attributable
ordinary course of business, in the process of overhead.
production for such sale or in the form of materials
or supplies to be consumed in the production 6. Explain the cost formulas in determining
process or in the rendering of services. cost of inventories.
2. What are the components of cost of ANSWER:

inventories?
PAS 2, paragraph 25, expressly provides that the
ANSWER: cost of inventories shall be determined by using
either;
The cost of inventories shall comprise; (a)
a First in, first out (FIFO) method -
cost of purchase, (b) cost of conversion, and (c) assumes that “the goods first purchased are
other cost incurred in bringing the inventories to first sold” and consequently the goods
their present location and condition. remaining in the inventory at the end of the
period are those most recently purchased or
produced. In other words, the FIFO is in
accordance with the ordinary merchandising
procedure that the goods are sold in the
order they are purchased. The rules are
“first come, first sold.”
3. Explain cost of purchase, cost of conversion b Weighted average - the cost of the
and other cost included in cost of beginning inventory plus the total cost of
inventories. purchases during the period is divided by
the total units purchased plus those in the
ANSWER: beginning inventory to get a weighted
The cost of purchase of inventories average unit cost. Such weighted average
comprises the purchase price, import duties and unit cost is then multiplied by the units on
hand to derive the inventory value. In other
irrecoverable taxes, freight, handling and other
words, the average unit cost is computed by
costs directly attributable to the acquisition of
dividing the total cost of goods available for
finished goods, materials, and services. Trade
sale by the total number of units available
discounts, rebates and other similar items are for sale.
deducted in determining the cost of purchase. Cost
of conversion of inventories includes cost directly 7. Explain the specific identification of
related to the units of production such as direct determining cost of inventories.
labor. It also includes systematic allocation of fixed

ANSWER: 6. C
7. A
Specific identification means that specific 8. B
costs are attributed to identified items of inventory. 9. A
The cost of inventory is determined by simply 10. A
multiplying the units on hand by the actual unit Page
cost. PAS 2, paragraph 23, provides that this 304
method is appropriate for inventories that are
segregated for a specific project and inventories PROBLEM 14-22 MULTIPLE CHOICE (IAA)
that are not ordinarily interchangeable.
1.B
8. What is the standard in measuring 2.A
inventory in the statement of financial 3.D
position? 4.D
5. A
ANSWER: Page
305
PAS 2, paragraph 9, provides that
inventories shall be measured at the lower of cost PROBLEM 14-23 MULTIPLE CHOICE (IAA) 33
and net realizable value. The cost of inventory is 4
determined using either FIFO cost or average cost. 1. C
The measurement of inventory at the lower of cost 2. A
and net realizable value is known as LCNRV. 3. D
4. B
9. Explain net realizable value. 5. C
Page
ANSWER: 306
Net realizable value or NRV is the estimated PROBLEM 14-24 MULTIPLE CHOICE (IAA)
selling price in the ordinary course of business less
the estimated cost of completion and the estimated 1. D
cost of disposal. 2. C
3. D
10. Explain the accounting for inventory write- 4. B
down. 5. B
Page
ANSWER: 307
Accounting for inventory write-down PROBLEM 14-25 MULTIPLE CHOICE (PAS 2)

states that if the cost is lower than net realizable value,
1.C
there is no accounting problem because the inventory is 2.D
stated at cost and the increase in value is not recognized. 3.D
And if the net realizable value is lower than cost, the 4.A
inventory is measured at net realizable value. In this case, 5.C
the problem is the proper treatment of the write-down of Page
the inventory to the net realizable value. The write-down 308
of inventory to net realizable value is accounted for using
the allowance method
Page 29 1.D
2.D
3.B
4.A
PROBLEM 14-20 MULTIPLE CHOICE (PAS 5.A
2) Page
1. D 309
2. C
3. D
4. D
6.A
5. A Page 7.C
8.A
302
9.C
10. B
1. D
Page
2. A
310
3. D
4. B
5. C CONCEPTUAL FRAMEWORK AND
Page ACCOUNTING STANDARDS
303
CHAPTER XV
Cost of site preparation
QUESTIONS: Initial delivery and handling cost
Installation and assembly cost
1. Define property, plant and equipment. Professional fee
Answer: Costs of testing whether the asset is
Property, plant and equipment are tangible functioning properly.
assets that are held for use in production or supply
of goods or services, for rental to others, or for 8. Give examples of costs which are expensed
administrative purposes, and are expected to be rather than capitalized as property, plant and
used during more than one period. equipment.
Answer:
2. What are the major characteristics in Examples of cost that are expensed rather
defining property, plant and equipment? than recognized as element of cost of property,
Answer: plant and equipment are:
Accordingly, the major characteristics in the Cost of opening a new facility
definition of property, plant and equipment are: a. Cost of introducing a new product or
The property, plant and equipment are tangible service, including cost of advertising and
assets, meaning with physical substance. The promotion
property, plant and equipment are used in Cost of conducting business in a new 33
business, meaning used in production or supply of location or with a new class of customer, 5
goods or services, for rental purposes and for including cost of staff training
administrative purposes. Administration and other general overhead
The property, plant and equipment are expected to cost
be used over a period of more than one year. Initial operating loss
3. Give examples of property, plant and 9. What is the cost of the asset acquired on a
equipment. cash basis?
Answer: Answer:
Land, land improvements, building, The cost of an item of property, plant and
machinery, ship, aircraft, motor vehicle, furniture equipment is the cash price equivalent at the
and fixtures, office equipment and tools are recognition date. The cost of asset acquired on a
examples of property, plant and equipment. cash basis simply includes the cash paid plus
directly attributable costs such as freight,
4. Explain the recognition of property, plant installation cost and other cost necessary in
and equipment. bringing the asset to the location and condition for
Answer: the intended use.
An item of property, plant and equipment
shall be recognized as asset when; 10. What is the cost of an asset acquired on
it is probable that future economic benefits account subject to a cash discount?
associated with the asset will flow to the entity Answer:
the cost of the asset can be measured reliably. When an asset is acquired on account
subject to a cash discount, the cost of the asset is
5. Explain the measurement of property, equal to the invoice price minus the discount,
plant and equipment at recognition and after regardless of whether the discount is taken or not.
recognition. Cash discounts are generally considered as
Answer: reduction of cost and not as income.
An item of property, plant and equipment
that qualifies for recognition as an asset shall be 11. If an asset is acquired on the installment
measured at cost. Cost is the amount of cash or basis, the asset is recorded at what amount?
cash equivalent paid and the fair value of the other Answer:
consideration given to acquire an asset at the time When payment for item of property, plant
of acquisition or construction. and equipment is deferred beyond normal credit
terms, the cost is the cash price equivalent. In
6. What are the elements of cost of property, other words, if an asset is offered at a cash price
plant and equipment? and at an installment price, the asset shall be
Answer: recorded at the cash price. The excess of the
The cost of an item of property, plant and installment price over the cash price is treated as
equipment comprises: an interest to be amortized over the credit period.
Purchase price, including import duties and
nonrefundable purchase taxes, after 12. Discuss the accounting procedure when
deducting trade discounts and rebates. an asset is acquired through the issuance of
Cost directly attributable to bringing the share capital.
asset to the location and condition Answer:
necessary for it to be capable of operating Philippine GAAP provides that if shares are
in the manner intended by management. issued for consideration other than actual cash, the
Initial estimate of the cost of dismantling proceeds shall be measured by the fair value of the
and removing the item and restoring the consideration is received. Accordingly, where a
site on which it is located for which an entity property is acquired through the issuance of share
has a present obligation. capital, the property shall be measured at an
7. Explain directly attributable costs. amount equal to the following in the order of
Answer: priority:
Cost of employee benefit arising directly Fair value of the property received
from the construction or acquisition of the item of Fair value of the share capital
property, plant and equipment.

Fair value or stated value of the share matter of valuation. It is a matter of cost allocation
capital in recognition of the exhaustion of the useful life of
an item of property, plant and equipment. The
13. Discuss the accounting procedure when objective of depreciation is to have each period
an asset is acquired by issuing bonds benefiting from the use of the asset bear an
payable. equitable share of the asset cost.
Answer:
PFRS 9, paragraph 5.1.1, provides the asset 19. Explain the depreciation period.
acquired by issuing bonds payables measured in Answer:
the following order: The depreciable amount of an asset shall be
Fair value of bonds payable allocated on a systematic basis over the useful life.
Fair value of asset received Depreciation of an asset begins when it is available
Face amount of bonds payable for use, meaning, when the asset is in the location
and condition necessary for the intended use by
14. Discuss the accounting procedure for management. Depreciation ceases when the asset
recording an exchange. is derecognized.
Answer:
PAS 16, paragraph 24, provides that the cost 20. What is the depreciable amount?
of an item of property, plant and equipment Answer: 33
acquired in exchange for a non-monetary asset or a Depreciable amount is the cost of an asset
combination of monetary and non-monetary asset 6
or other amount substituted for cost, less the
is measured at fair value plus any cash payment. residual value. Each part of an item of property,
However, the exchange is recognized at carrying plant and equipment with a cost that is significant
amount if the exchange transaction lacks in relation to the total cost of the item shall be
commercial substance. depreciated separately.
15. What would the cost of self-constructed 21. What is residual value?
property, plant and equipment include? Answer:
Answer: Residual value is the estimated net amount
The cost of self-constructed property, plant currently obtainable if the asset is at the end of
and equipment includes: useful life. The residual value of an asset shall be
direct cost of materials reviewed at least at each financial year-end and if
direct cost of labor expectation differs from the previous estimate, the
indirect cost and incremental overhead change shall be accounted for as a change in an
specifically identifiable or traceable to the accounting estimate.
construction.
Page 22. What is the useful life of an asset?
322 Answer:
The useful life of an asset is either the
period over which an asset is expected to be
16. Explain derecognition of property, plant available for use by the entity, or the number of
and equipment. production or similar units expected to be obtained
Answer: from the asset by the entity.
Derecognition means that the cost of
property, plant and equipment together with the 23. When is the straight line method
related accumulated depreciation shall be removed adopted?
from the statement of financial position. Answer:
PAS 16, paragraph 67, provides that the carrying Under the straight line method, the annual
amount of an item of property, plant, and depreciation charge is calculated by allocating the
equipment shall be derecognized on disposal or depreciable amount equally over the number of
when no future economic benefits are expected years of useful life. It is adopted when the principal
from the use or disposal. cause of depreciation is passage of time.
17. Explain the treatment of fully depreciated 24. When is the production method adopted?
property. Answer:
Answer: The production or output method assumes
A property is said to be fully depreciated that depreciation is more a function of use rather
when the carrying amount is equal to the residual that passage of time. It is adopted if the principal
value. In such a case, the asset account and the cause of depreciation is usage.
related accumulated depreciation account are
closed and the residual value is set up in a 25. When is the diminishing balance method
separate account. However, it is not uncommon for adopted?
an entity to continue to use an asset after it has Answer:
been fully depreciated. The cost of fully The diminishing balance or
depreciated asset remaining in service and the accelerated methods provide higher depreciation in
related accumulated depreciation ordinarily shall the earlier years and lower depreciation in the later
not be removed from the accounts. Entities are years of the useful life of the asset. Thus, these
encouraged but not required to disclose fully methods result in decreasing depreciation charge
depreciated property. over the useful life. This method includes sum of
18. Define years’ digits method and double declining balance.
depreciation. Answer:
Depreciation is defined as the systematic Page 323
allocation of the depreciable amount of an asset
over the useful life. Depreciation is not so much a Problem 15-8 (IAA)

3. D
Siargao Company recently acquired two items 4. A
of equipment. 5. D
Y Acquired a press at an invoice price of Page
P3,000,000 subject to a 5% cash 334
discounts which was taken.
Problem 15-15 multiple choice (PAS 16)
Cost of freight and insurance during 1. D
shipment were P50,000 and 2. D
installation cost amounted to 3. B
P200,000. 4. A
5. C
Y Acquired a welding machine at an Page
invoice price of P2,000,000 subject to a 335
10% cash discount which was not
taken. Additional welding supplies 6. A
were acquired at a cost of P100,000. 7. B
8. B
What is the total increase in the equipment 9. D 33
account as a result of the transactions? 10. D 7
a 4,900,000 Page
b 5,000,000 336
c 5,100,000
d 5,200,000
328 Page
1. D
2. B
3. C
4. D
5. D
Page
329
Problem 15-11 multiple choice (IAA)

1. B
2. A
3. A
4. C
5. B
Page
330
Problem 15-12 multiple choice (AICPA

Adapted)
1. D
2. C
3. A
4. B
Page
331

1. A
2. C
3. D
Page
332
4. A
5. D
Page
333
Problem 15-14 multiple choice (IAA)

1. C
2. D

1. Define a government grant.
It is an assistance to government in the
form of transfer of resources to an entity in return
for part or future compliance with certain
conditions relating to operating activities of the
entity.
2. Explain the recognition and measurement

of government grant.
Government grant shall be recognized when
there is reasonable assurance that:
a. the entity will comply with the
conditions attaching to the grant.
b. the grant will be received.
Government grant shall not be recognized on a
cash basis as this is not consistent with generally
accepted accounting practice.
33
3. Explain accounting for grant in recognition
of expenses. 8
Government grants are recognized in profit
or loss on a systematic basis over the periods in
which the entity recognizes expenses for the
related costs for which the grants are intended to
compensate, which in the case of grants related to
assets requires setting up the grant as deferred
income or deducting it from the carrying amount of
the asset.
4. Explain accounting for grant related to

depreciable asset.
Grant related to depreciable asset shall be
recognized as income over the periods and in
proportion to the depreciation of the related asset.
5. Explain accounting for grant related to

nondepreciable asset requiring fulfillment of
certain conditions.
Grant related to nondepreciable asset
requiring fulfillment of certain conditions shall be
recognized as income over the periods which bear
the cost of meeting the conditions.
6. Explain accounting for grant received as

compensation for expenses or losses already
incurred.
A government grant that becomes
receivable as compensation for expenses or losses
already incurred or for the purpose of giving
immediate financial support to the entity with no
further related costs shall be recognized as income
of the period in which it becomes receivable.
7. Explain the presentation of government

grant related to asset.
It shall be presented in the statement of
financial position in either of two ways:
a. By setting the grant as deferred
income.
b. BY deducting the grant in arriving
at the carrying amount of the asset
8. Explain the presentation of government

CONCEPTUAL FRAMEWORK AND grant related to income.
Shall be presented as follows:
ACCOUNTING STANDARDS a. the grant is presented in the
CHAPTER XVI
income statement, either separately or under the
general heading “other
income”.

b. Alternatively, the grant is 4. Deferred grant income 2,000,000
deducted from the related expense. Grant income
2,000,000
9. Define government assistance. (40,000,000/20)
It is the action by government designed to
provide an economic benefit specific to an entity or
PROBLEM NO. 3:
range of entities qualifying under certain criteria.
Journal Entries in the First year:
10. What are the necessary disclosures
related to government grant?
1. Land 50,000,000
a. The accounting policy adopted for
Deferred grant income
government grant including the method of
50,000,000
presentation adopted in the financial statements.
b. The nature and extent of government
grant recognized in the financial statements and an 2. Factory/Building 80,000,000
indication of other forms of government assistance Cash
from which the entity has directly benefited. 80,000,000
c. Unfulfilled conditions and other
contingencies attaching to government assistance 3. Depreciation 3,200,000
Accumulated Depreciation 33
that has been recognized.
Page 3,200,000 9
346 (80,000,000/25 years)
4. Deferred Grant Income 2,000,000

Grant income
PROBLEM 16-1 2,000,000
(50,000,000/25 years)
PROBLEM NO. 1:
PROBLEM NO. 4:
1st year 2,000,000
2nd year 4,000,000 Cash 10,000,000
3rd year 6,000,000 Grant income 10,000,000
4th year 8,000,000
20,000,000
PROBLEM 16-2
Journal Entries- first year
Cash 30,000,000 1st year 2,000,000

Deferred grant income 2nd year 2,000,000
30,000,000 3rd year 6,000,000
10,000,000
Grant income
Journal Entries for the first year:
Environmental expenses 2,000,000
Cash 2,000,000 1. Land 12,000,000
First year (2/20 x 30,000,000) Deferred Grant Income 12,000,000
3,000,000
Second year (4/20 x 30,000,000) 2. Operation 10,000,000
6,000,000 Cash 10,000,000
Third year (6/20 x
30,000,000) 9,000,000 1st year (2/10 x 12 000 000) 2 400 000
Fourth year (8/20 x 2nd year (2/10 x 12 000 000) 2 400 000
30,000,000) 12,000,000 3rd year (6/10 x 12 000 000) 7 200 000
12 000 000
30,000,000
PROBLEM NO. 2: PROBLEM 16-4

Journal entries for first year
DEFERRED INCOME APPROACH
1. Cash 40,000,000
1. Machine 7,000,000
Cash
40,000,000
7,000,000
2. Building 50,000,000
2. Cash 1,000,000
Cash
Deferred Grant income
50,000,000
1,000,000
3. Depreciation 2,500,000
3. Depreciation
Accumulated Depreciation
Accumulated Depreciation
2,500,000
(50,000,000/20)
Cost of Machine 7,000,000

Residual value
(500,000) 1. Define borrowing costs.
Depreciable amount 6,500,000 It is defined as interest and other costs that
an entity incurs in connections with borrowing of
Annual Depreciation (6,500,000/5 years) funds.
1,300,000
2. What is a qualifying asset for purposes of
Deferred grant income 200,000 capitalization of borrowing cost?
Grant income 200,000 An asset that necessarily takes a substantial
(1,000,000/5 years) period of time to get ready for the intended use or
sale.
DEDUCTION FROM ASSET APPROACH Examples includes the ff:
a. manufacturing plant
Machine 7,000,000 b. Power generation facility
Cash c. intangible asset
7,000,000 d. Investment property.
Cash 1,000,000
Machine 3. Explain the accounting for borrowing cost. 44
1,000,000 It can be capitalized when the asset is a 0
qualifying asset and it is probable that the
Depreciation 1,100,000 borrowing cost will result to future economic
Accumulated Depreciation benefit and the cost can be measured reliably.
1,100,000 All the borrowing cost shall be expensed as
incurred.
Acquisition cost
7,000,000
Government grant 4. Explain the capitalization of borrowing cost
(1,000,000) of asset financed by specific borrowing.
Net cost If the funds are borrowed specifically for the
6,000,000 purpose of acquiring a qualifying asset, the amount
Residual Value of capitalizable borrowing cost is actual borrowing
(500,000) cost incurred during the period less any investment
income from the temporary investment of those
Depreciable amount
borrowings.
5,500,000
Annual Depreciation (5,500,000/5 years) 5. Explain the capitalization of borrowing cost

1,100,000 for asset financed by general borrowing.
If the funds are borrowed generally and
used for acquiring a qualifying asset, the amount of
PROBLEM 16-10 MULTIPLE CHOICE (PAS 20) capitalizable borrowing cost is equal to the average
carrying amount of the asset during the period
1. A multiplied by a capitalization rate or average
2. C interest rate.
3.A
4.A
6. Explain the capitalization of borrowing cost
5.D for asset financed by both specific and
Page general borrowing.
352
7. Explain commencement of capitalization of
6.D borrowing cost.
7.A The capitalization starts when all three
8.B conditions are met: expenditures are
9.A incurred, borrowing costs are incurred, and the
10.B activities necessary to prepare the asset for its
Page intended use or sale are in progress. Expenditures
353 on the asset are incurred when the prepayments
are made (payments of the instalments).
8. Explain suspension of capitalization of
1.C borrowing cost.
2.B an entity may incur borrowing costs during
3.C extended periods in which it suspends the activities
4.C necessary to prepare the asset for its intended use
5.A or sale, and that such costs are costs of holding
Page partially completed assets and do not qualify
354 for capitalization.

ACCOUNTING STANDARDS 9. Explain cessation of capitalization of
borrowing cost.
CHAPTER XVII Capitalization of borrowing cost ceases
when all the activities necessary to prepare the
qualifying assets are complete. If an asset has been

completed in parts and a completed part is capable
of being used while the construction for the other Average Capitalization (if asked) (4,400,000
part continues then the capitalization for that / 40,000,000) 11%
completed part will cease.
Interest on Specific Borrowing
10. What are the necessary disclosures (10,000,000x10%) 1,000,000
related to borrowing cost? Interest Income (100,000)
The standard requires the entity to disclose Interest on General Borrowing
the following: Borrowing cost capitalized during (5,000,000 x 11% 550,000
the accounting period; The weighted average 1,450,000
borrowing cost rate or percentage used to
determine the borrowing costs eligible for
capitalization

Page 363 1. D
2. C
3. D
HAMLET COMPANY Page
Construction Cost 368
6,000,000 44
Interest (6,000,000 x 10% x 11/12) 4. C 1
550,000 5. A
Interest Income 6. A
(80,000) 7. D
Page
6,470,000 369
CAGAYAN COMPANY
Interest Incurred (24,000,000 x 10% x 10/12) 8. D
2,000,000 9. A
Interest Income 10. C
(200,000) Page
370
1,800,000
MOSES COMPANY
Specific Borrowing (4,000,000 X 10%)
400,000
General Borrowing (750,000 X 12%)
90,000
490,000 1.C
2.B
(4,750,000-4,000,000 = 750,000- general 3.C
borrowing) 4.A
5.B
JOSHUA COMPANY Page
Average Expenditure 371
3,000,000
Specific Borrowing 6.D
(2,200,000) 7.A
General Borrowing 8.A
800,000 9.B
10.D
Specific Borrowing (2,200,000 x 10%)
Page
220,000
372
Interest Income (45,000)
General Borrowing (800,000 x 9%) 72,000

247,000
CHAPTER XVIII
ELYSEE COMPANY
Average expenditures (30,000,000 / 2)
15,000,000
Applicable Specific Borrowing
(10,000,000)
1. Define associate.
General Borrowing
Associate is simply defined as an entity over
5,000,000
which the investor has significant influence.
12% 20-year bonds issued 30,000,000
2. Define significant influence.
3,600,000
The power to participate in the financial and
8% 5-year notes payable 10,000,000
800,000 operating policy decisions of the associate
but not control or joint control over those
40,000,000
policies.
4,400,000

3. What is the practical guidance in 8. Explain the discontinuance of the equity
determining significant influence? method.
When an investor exercises significant influence An investor should discontinue the use of the
over the investee, one or more of the following equity method from the date that:
indicators is usually present:
it ceases to have significant influence but
Representation on the board of directors or retains either in part or in whole its
equivalent governing body of the investee investment or
Participation in policy-making processes, the use of the equity method is no longer
including participation in decisions about appropriate as the associate operates under
dividends or other distributions severe long-term restrictions.
Material transactions between the investor The carrying value should be regarded as
and the investee cost thereafter.
Interchange of managerial personnel
Provision of essential technical information 9. Explain the measurement of the
investment in associate when significant
influence is lost. 44
4. Explain the equity method of accounting If an investor loses significant influence over
for share investment. 2
an associate, it derecognizes that associate
The equity method is applied when a and recognizes in profit or loss the
company's ownership interest in another difference between the sum of the proceeds
company is valued at 20–50% of the stock in received and any retained interest, and the
the investee. carrying amount of the investment in the
The equity method requires the investing associate at the date significant influence is
company to record the investee's profits or lost.
losses in proportion to the percentage of
ownership.
10. What are the circumstances when the
equity method is not applicable?
5. What is the meaning of “excess of cost Another group of shareholders has majority
over carrying amount” with respect to ownership, and operate it without regard to
acquisition of share investment? the investor's views. The investor is unable
If the assets of the investee are fairly to obtain sufficient information to apply the
valued, the excess of cost. over carrying equity method. The investor is unable to
amount of the underlying net assets to obtain representation on the investee's
goodwill. board of directors.
If the excess is attributable to
undervaluation of depreciable asset, it is
amortized over the remaining life of the Page 382
depreciable asset.
6. Explain an impairment loss with respect to
an investment in associate. 1. A
If the carrying amount of an investment in 2. C
an associate or joint venture exceeds its 3. D
recoverable amount, an impairment loss is 4. B
recognized. The loss is allocated to the Page
investment as a whole and not to the 387
underlying assets of the investee that make
up the carrying amount of the investment.
7. Explain the accounting procedure if an

associate 5. B
has cumulative and noncumulative 6. D
preference shares. 7. D
In case of cumulative preferred stock, any 8. A
unpaid dividends on preferred stock are Page
carried forward to the future years and must 388
be paid before any dividend is paid to
common stockholders.
Any unpaid dividend on preferred stock for a 9. B
year is known as ‘dividends in arrears’. The 10. C
disclosure of dividends in arrears is of great Page
importance for the investors and other users 389
of financial statements.
Unlike cumulative preferred stock, unpaid PROBLEM 18-10 MULTIPLE CHOICE (AICPA
dividends on noncumulative preferred stock Adapted)
are not carried forward to the subsequent
years. If preferred stock is noncumulative 1. D
and directors do not declare a dividend 2. D
because of insufficient profit in a particular 3. C
year, there is no question of dividends in
arrears.

4. A IFRS 5 Non-current Assets Held for Sale and
Page Discontinued Operations.
390
6. Explain value in use.
Value-in-use is the net present value of the
CONCEPTUAL FRAMEWORK AND cash flows generated by an asset as it is
ACCOUNTING STANDARDS currently being used by the owner. This
CHAPTER XIX
amount may be less than the net present
value of cash flows from the highest and
best use to which an asset can be put.
7. Explain the reversal of an impairment loss.

Questions: Reversal of an impairment loss on CGU is
allocated to individual assets on a pro-rata
1. Define impairment asset. basis, but the increased carrying amount
An impaired asset is an asset that has a cannot be higher than the carrying amount
market value less than the value listed on that would have been determined (net of
the company's balance sheet. When an depreciation) without impairment loss in
asset is deemed to be impaired, it will need previous years. 44
to be written down on the company's 3
balance sheet to its current market value. 8. What is the meaning of cash generating
unit?
2. What are the internal sources of A cash-generating unit is the smallest
information that would indicate possible identifiable group of assets that generates
impairment? cash inflows that are largely independent of
the cash inflows from other assets or groups
The internal information that should be considered of assets
which may indicate impairment include:
9. Explain the allocation of impairment loss
Evidence of obsolescence or physical across the assets of a cash generating unit.
damage An impairment loss is recognized for a cash-
Changes to the asset’s use, including generating unit where the recoverable
Asset becoming idle amount of the unit is less than the carrying
Plan to discontinue or restructure the amount of the unit. The impairment loss is
operation to which the asset belongs allocated to reduce the carrying amount of
Plan to dispose of the asset before the assets of the unit on a pro rata basis,
previously expected date based on the carrying amount of each asset
Reassessing the useful life as finite rather in the unit.
than infinite
Poor performance
3. What are the external sources of

information that would indicate possible
impairment?
10. Explain impairment of a cash generating
The external information that should be considered unit with goodwill.
which may indicate impairment include:
A cash-generating unit to which goodwill has been
Decline in asset value: more so than normal allocated shall be tested for impairment at least
wear and tear annually by comparing the carrying amount of the
Changes in the entity’s environment; unit, including the goodwill, with the recoverable
technological, market, economic or legal amount of the unit:
conditions.
Increase in market interest rate, this will If the recoverable amount of the unit
affect the asset’s value in use. exceeds the carrying amount of the unit, the
Carrying amount of net assets: If this is unit and the goodwill allocated to that unit
greater than the market capital of a is not impaired
company, there may be impairment If the carrying amount of the unit exceeds
4. What is the recoverable amount of an the recoverable amount of the unit, the
asset? entity must recognize an impairment loss.
Recoverable amount is the greater of an Page
asset's fair value less costs to sell, or its 405
value in use.
Thus, the concept essentially focuses on the Problem 19-9 multiple choice (IFRS)
greatest value that can be obtained from an
asset, either by selling or using it. 1. B
2. C
5. Explain fair value less cost of disposal. 3. A
Fair value less costs to sell (FVLCS) is the 4. A
amount obtainable from the sale of the 5. B
asset in an arm's length transaction Page
between knowledgeable and willing parties, 411
less the costs of disposal. This term is
consistent with the measurement basis in 6. B

7. D less accumulated amortization. It may
8. D choose to measure the asset at fair value in
9. A rare cases when fair value can be
10. B determined by reference to an active
Page market.
412
7. Explain the measurement of cost of an
Problem 19-10 Multiple choice (IFRS) intangible asset acquired separately.
1. A The cost of a separately acquired intangible asset

2. D comprises:
3. D (a) its purchase price, including import
4. D duties and non-refundable purchase taxes,
5. D after deducting trade discounts and rebates;
Page and
413 (b) any directly attributable cost of
preparing the asset for its intended use.
CONCEPTUAL FRAMEWORK AND 8. What is the cost of an internally generated 44
ACCOUNTING STANDARDS intangible asset? 4
the cost of an internally generated
CHAPTER XX intangible asset comprises all directly
attributable costs necessary to create,
produce and prepare the asset to be
capable of operating in the manner
1. Define intangible asset intended by management.
An intangible asset is an asset that lacks
physical substance. Examples are patents, 9. What is the treatment of internally
copyright, franchises, goodwill, trademarks, generated brand, masthead, publishing title,
and trade names, as well as software. This is customer list and other item similar in
in contrast to physical assets and financial substance?
assets. Internally generated brands, mastheads,
publishing titles, customer lists and items
2. Explain “identifiability” of an intangible similar in substance shall not be recognized
asset as intangible assets.
Identifiability is the characteristic that
conceptually distinguishes other intangible Expenditure on internally generated brands,
assets from goodwill. mastheads, publishing titles, customer lists
and items similar in substance cannot be
3. Explain “control” of an intangible asset distinguished from the cost of developing
The definition of intangible asset requires the business as a whole. Therefore, such
that the intangible asset must be controlled items are not recognized as intangible
by the entity, and an entity controls an assets.
intangible asset if it has ability to obtain
economic benefits related to the asset and 10. Define the terms “research” and
can restrict others from such benefits. development”
Research and development (R&D) includes
4. Explain “future economic benefit” that activities that companies undertake to
may be derived from an intangible asset. innovate and introduce new products and
The future economic benefit embodied in an services. It is often the first stage in the
asset is the potential to contribute, directly development process. The goal is typically
or indirectly, to the flow of cash and cash to take new products and services to market
equivalents to the entity or with respect of and add to the company's bottom line.
not-for-profit entities, whether in the public
or private sector, the future economic 11. Identify the research activities.
benefits are also used to provide goods and Refers to activities that result in the creation
services in accordance with the entities' of new knowledge and/or the use of existing
objectives. knowledge in a new and creative way so as
to generate new concepts, methodologies
5. What are the two conditions that must be and understandings. This could include
presented for the recognition of an intangible synthesis and analysis of previous research
asset? to the extent that it leads to new and
creative outcomes.
An intangible asset shall be recognized if, and only
if: (a) it is probable that the expected future 12. Identify the development activities.
economic benefits that are attributable to the asset Development activities are strategies to
will flow to the entity; and gain knowledge, skills, or abilities. These are
(b) the cost of the asset can be measured reliably. specific actions, relationships, tasks, or
programs for employees.
6. Explain the initial measurement of
intangible asset. 13. Explain the accounting for research cost.
Intangible assets are measured initially at The accounting for research and
cost. After initial recognition, an entity development involves those activities that
usually measures an intangible asset at cost create or improve products or processes.

The core accounting rule in this area is that
expenditures be charged to expense as 1. D
incurred. ... Testing products and processes. 2. D
Modifying formulas, products, or processes. 3. A
4. C
14. Explain the accounting for development 5. B
cost. Page
The accounting for research and 439
development involves those activities that
create or improve products or processes.
6. D
The core accounting rule in this area is that
7. B
expenditures be charged to expense as
8. B
incurred
9. D
10. D
15. What are the criteria for the recognition
Page
of development cost as an intangible asset?
440
There is an option to defer the development

expenditure and carry it forward as an intangible PROBLEM 20-10 MULTIPLE CHOICE (IAA)
44
asset if the following criteria are met:
1. D 5
there is a clearly defined project 2. C
expenditure is separately identifiable 3. C
the project is commercially viable 4. D
the project is technically feasible Page
project income is expected to outweigh cost 441
resources are available to complete the
project 5. A
Page 6. D
429 7. D
8. A
Page
PROBLEM 20-7 MULTIPLE CHOICES (PAS 36) 442
1. D
9. A
2. C
10. C
3. D
Page
4. D
443
Page
433
1. D
5. D
2. B
6. D
3. D
7. D
4. D
8. D
Page 5. A
434 Page
444
9. D
10. D
ADAPTED)
Page 1. A
435 2. B
3. B
PROBLEM 20-8 MULTIPLE CHOICE (PAS 38) 4. A
Page
1. C 445
2. B
3. D
4. A
Page
436
5. D
6. A
5. A 7. B
6. D 8. C
7. A Page
8. D 446
Page
437
9. B
10. A
9. B Page
10. B 447
Page
438

CONCEPTUAL FRAMEWORK AND managed hotel. Therefore, such properties
ACCOUNTING STANDARDS will be covered in IAS 16
CHAPTER XXI 5. What is the treatment of property

leased to an affiliate?
Answer:
The property which is leased to, the Parent
TOPIC QUESTIONS Co. by a Subsidiary Co. or vice versa, will
1. Define an investment property. not be treated as Investment Property in
Answer: the consolidated financial statements,
It defines as a property (land or building or both) instead it will be treated as Owner-occupied
held by the owner or rented by the lessee under Property under IAS 16, because the property
finance lease, to earn rentals or for capital is under owner-occupied use from the Group
appreciation. perspective.
These are lands and building, because they are However, the property will remain
non-movable property. Investment Property in the individual
financial statements of the entity who owns
2. Define an owner-occupied property. it.
Answer: 44
These are land held by an owner for use in the 6. When is an investment property 6
production or supply of goods or services or recognized?
administrative purposes; or sale in the ordinary A property will be recognized as Investment
course of business. Property if it meets the following criteria:
The definition of Investment Property
3. Give examples of investment property. If future economic benefits are probable to
Answer: flow to the entity
Examples of investment property are the following: Its cost is reliably measurable.
Land held for long-term appreciation in 7. Explain the initial measurement of
value, rather than for short term sale in the investment property?
ordinary course of business; Answer:
Land whose future use is undeterminable. If The Investment Property is initially measured
future use is not yet determined, land is at Cost including Transaction Costs. The cost of
assumed to be held for capital appreciation; Investment Property includes:
A building owned or held under a finance Purchase Price and
lease and leased out under an operating Any directly related cost such as
lease (professional or legal charges, property
transfer taxes & any other transaction costs)
4. What is the treatment of property that
is partly investment and partly owner- 8. What is the measurement of investment
occupied? property subsequent to initial
Answer: recognition?
If a property is being under dual-use i.e. property Answer:
contains a part of the property which is held for Any expenditure upon Investment Property, during
rental earnings or capital appreciation and another the life of Investment Property will be recognize in
part which is held for use in the production, supply the carrying amount of investment property, if such
of goods/services, or for use in administration. Such expense results in increase in economic benefits of
property will be accounted for as: the investment property that would obtain
If both portions are separable i.e. (could be otherwise.
sold or leased out separately under finance Any other expense to maintain the Investment
lease), then entity should account for each Property will be treated as expense in the
portion on individual basis under relevant statement of profit or loss.
IAS The entity has two options to account for the
If both portions are not separable i.e. (could Investment Property at reporting date;
not be sold or leased out separately under Cost Model
finance lease), the property will be treated Fair Value Model
as Investment Property only,
if an immaterial part of such property 9. Explain the cost model and fair value
is held for use in the production, supply of model of measuring investment
goods/services or for use in administration. property.
Answer:
Investment property should not include Ancillary The entity has two options to account for the
Services (Meals, Cleaning, Security, Utilities, and Investment Property at reporting date;
Maintenance services). If in case of a certain Cost Model
property, an entity provides ancillary services to Fair Value Model
the occupants of a property, the entity shall apply Whichever model is chosen; it should be applied
the following: for all the Investment Properties held by the entity.
The property will be Investment Property, if Cost Model:
quantum of the services is immaterial or The entity which chooses Cost model to account for
insignificant. For example, security or its Investment Property after initial recognition, will
maintenance services. measure the investment Property as per Cost
The property will not be Investment Model rules prescribed in IAS 16 i.e. Cost less
Property, if quantum of the services is Accumulated Depreciation Less Accumulated
material or significant. For example, owner- impairment loss.

Fair Value Model: Page
The entity which chooses Fair Value model to 466
account for its Investment Property after initial
recognition, will measure the investment Property
5. C
at Fair Value.
6. D
Under fair vale model, the investment
7. D
property will be measured at fair value on
8. A
reporting date.
Page
Any change (increase or decrease) in the
467
fair value of investment property at
reporting date, will be reported to the
statement of profit or loss. 9. A
Investment property under fair value model 10. D
is not depreciated.
Page468
10. Explain the fair value of investment.
Answer: Problem 21-9 Multiple Choice (PAS 40)
The fair value of the investment property is 1. B
determined as per the requirements of IFRS 13; 2. A 44
however, the entity should also consider the 3. D
following points; 4. A 7
The fair value should be determined as per 5. A
the current condition of the investment Page
property, in the current market conditions. 469
If in exceptional circumstances, the fair
value of a certain investment property is not
determinable and alternative reliable CONCEPTUAL FRAMEWORK AND
measurements (discounted cash flows) are ACCOUNTING STANDARDS
also not available, then entity should
measure such investment property under
cost model till the date of disposal and
CHAPTER XXII
residual value of such property will assumed
to be zero. TOPIC QUESTIONS
If the fair value of an investment property
being constructed is not available, and 1. Define biological assets, agricultural
entity estimates that the fair value of such produce and harvest.
property will be determinable upon its Answer:
completion, then in such circumstances Biological assets are living animals and living
entity should account for the investment plants.
property being constructed under cost Agricultural produce is the harvested product of the
model until entity’s biological assets.
Its fair value becomes available or Harvest is the detachment of produce from a
Construction work is finished biological asset or the cessation of a biological
Page asset’s life processes.
429 Examples of biological assets, agricultural produce,
and products that are the result of processing after
Problem 21-7 Multiple choice (PAS 40) harvest;
1. C (1) sheep to wool to yarn or carpets;
2. D (2) dairy cattle to milk to cheese;
3. D (3) bushes to leaf to tea or cured tobacco;
4. B (4) fruit trees to picked fruit to processed fruit.
5. A
Page 2. What is an agricultural activity?
463 Answer:
Agricultural activity is the management by an
6. C entity of the biological transformation and harvest
7. B of biological assets for sale, or for conversion into
8. A agricultural produce, or into additional biological
Page assets.
464
3. Explain biological transformation.
9.A Answer:
10. A Biological transformation comprises the processes
Page of growth, degeneration, production, and
465 procreation that cause qualitative or quantitative
changes in a biological asset.
Problem 21-8 Multiple Choice (IFRS)

1. C
2. A
3. D
4. Explain the recognition of biological asset
4. A and agricultural produce.
Answer:

An entity should recognize a biological asset or Animals related to recreational activities shall be
agriculture produce when, and only when: accounted for in accordance with PAS16, PPE,
the entity controls the asset as a result of because any recreational activities are not an
past events; agricultural activity.
it is probable that future economic benefits Page
will flow to the entity; and 484
the fair value or cost of the asset can be
measured reliably. Problem 22-10 Multiple Choice (PAS 41)
1. B
5. Explain the initial measurement of 2. A
biological asset. 3. D
Answer: 4. C
Biological assets should be measured on initial 5. D Page
recognition and at subsequent reporting dates at 493
fair value less costs to sell, unless fair value cannot
be reliably measured.
6. Explain the measurement of agricultural

produce as it grows and once harvested. 44
Answer: 6. D
Agricultural produce should be measured at fair 7. D 8
value less costs to sell at the point of harvest. 8. B
Because harvested produce is a marketable 9. B
commodity, there is no 'measurement reliability' 10. D Page
exception for produce. A gain on initial recognition 494
of agricultural produce at fair value should be
included in profit or loss for the period in which it Problem 22-11 Multiple Choice (IFRS)
arises. All costs related to biological assets that are 1. D
measured at fair value are recognized as expenses 2. D
when incurred, other than costs to purchase 3. B
biological assets. 4. C
5. C
7. Define bearer plant. Page
Answer: 495
Bearer plant is a living plant that:
- Is used in the production or supply of agricultural 6. A
produce 7. B
- Is expected to bear produce for more than one 8. C
period, and 9. C
- Has a remote likelihood of being sold as 10. B
agricultural produce, except for incidental scrap Page
sales. 496
8. Explain the treatment of bearer plant. Problem 22-12 Multiple Choice (IFRS)
Answer: 1. B
If an entity grows plants both to bear produce and 2. C
for sale as living plants or agricultural produce, 3. A
apart from incidental scrap sales, it must continue 4. B
to account for those plants at fair value less costs 5. A
to sell in their entirety (for example, trees that are Page
cultivated for their lumber as well as their fruit). 497
Before bearer plants are placed into production (i.e.
before they reach maturity and bear fruit) they
should be measured at accumulated cost.
CHAPTER XXIII
9. Explain the treatment of bearer animals.
Answer:
The bearer plants as property, plant and equipment
(PPE) per IAS16 allows the preparer to value the
bearer plants at cost, less subsequent depreciation
or impairment or at a revalued amount. 1. Explain the meaning of a provision.
No additional disclosure requirements were added Answer:
specifically for bearer plants. In general, the bearer Provision is an existing liability of uncertain
plants do not generate cash flows independently of timing or amount.
the land, and may therefore be seen together with
the land as a cash-generating unit. The impairment 2. What are the three conditions necessary
test would then also take place at the level of the for the recognition of a provision as a
cash-generating unit (thus bearer plants and land it liability?
is situated on). Answer:
The three conditions necessary for the recognition
10. Explain the treatment of animal-related of a provision as a liability are the following:
recreational activities. a. The entity has a present obligation, legal or
Answer: constructive, as a result of a past event.

b. It is probable that an outflow of resources
embodying economic benefits would be required to 6. Define a contingent liability.
settle the obligation. Answer:
c. The amount of the obligation can be measured A contingent liability is a liability that may
reliably. occur depending on the outcome of an uncertain
future event. A contingent liability is recorded if the
3. Define a legal obligation and constructive contingency is likely and the amount of the liability
obligation. can be reasonably estimated. The liability may be
Answer: disclosed in a footnote on the financial statements
A legal obligation is an obligation arising unless both conditions are not met.
from a contract legislation or other perspective of
law. While, a constructive obligation exists when 7. Distinguish a contingent liability from a
the entity from an established pattern of practice or provision.
stated policy has created a valid expectation that it Answer:
will accept certain responsibilities. An entity recognizes a provision if it is
probable that an outflow of cash or other economic
4. What is the measurement of a provision? resources will be required to settle the provision. If
Answer: an outflow is not probable, the item is treated as a
A provision is measured at the amount that contingent liability. 44
the entity would rationally pay to settle the
obligation at the end of the reporting period or to 9
transfer it to a third party at that time. 8. Explain the treatment of a contingent
5. Discuss briefly each of the following in liability.
connection with measurement of a provision. Answer:
Answer: A contingent liability shall not be recognized
a. Risks and uncertainties in the financial statements but shall be disclosed
Risk describes variability of outcome. only. But, if a contingent liability is remote, no
However, uncertainty does not justify the creation disclosure is necessary.
of excessive provision or a deliberate
overstatement of liabilities.
9. Define a contingent asset.
Answer:
b. Present value of obligation
Contingent asset is a possible asset that
When the effect of the time value of money
arises from past event and whose existence will be
is material, the amount of provision shall be the
confirmed only by the occurrence or nonoccurrence
present value of the expenditure expected to be
of one or more uncertain future events not wholly
settle the obligation.
within the control of the entity.
c. Future events
Future events that affect the amount
10. Explain the treatment of a contingent
required to settle an obligation shall be reflected in
asset.
the amount of a provision where there is a
Answer:
sufficient evidence that they will occur.
Contingent asset should not be recognized -
but should be disclosed where an inflow of
d. Expected disposal of assets
economic benefits is probable. When the realization
Gains from expected disposal of assets shall
of income is virtually certain, then the related asset
not be taken into account in measuring a provision.
is not contingent asset and its recognition is
In other words, any cash inflows from disposal are
appropriate.
treated separately from the measurement of the
Page
provision.
509
e. Reimbursements
Problem 23-10 Multiple Choice (PAS 37)
The reimbursement shall be treated as a
1. B
separate asset and not netted against the
2. D
estimated liability for the provision.
3. D
4. C
f. Changes in provisions
Page
The provision shall be reveresed if it is no
516
longer probable that an outflow of economic
benefits would be required to settle the obligation.
5. A
g. Use of provision 6. A
If an expenditure is charged against a 7. C
provision that was originally recognized for another 8. A
purpose, that would camouflage the impact of two Page
different events. 517
h. Future operating losses 9.C

A provision for operating losses is not 10. D
recognized because a past event creating a present Page
obligation has not occured. 518
i. Onerous contract Problem 23-11 Multiple Choice (PAS 37)

If an entity has an onerous contract, the 1. D
present obligation under the contract shall be 2. D
recognized and measured as a provision. 3. C

Page and Bonds payable.
519
6. Define an equity instrument.
4. A Answer:
5. C An equity instrument is any contract that
Page evidences a residual interest in the assets of an
520 entity after deducting all of the liabilities.
Problem 23-12 Multiple Choice (IAA) 7. What is the guideline in determining

1. D whether a financial instrument is a financial
2. D liability or an equity instrument?
3. D Answer:
4. A
5. C 8. Explain a redeemable preference share.
Page Answer:
521 Redeemable preference shares are a type
of preference share. A company issues them to
6. D shareholders and later redeems them. This means
7. D the company can buy back the shares at a later
55
8. B date. 0
9. B
10. B 9. Explain the accounting for a compound
Page financial instrument.
522 Answer:
A compound financial instrument, such as a
Problem 23-13 Multiple Choice (IAA) convertible bond, is split into equity and liability
1. C components. When the instrument is issued, the
2. A equity component is measured as the difference
3. D between the fair value of the compound
4. D instrument and the fair value of the liability
5. D component.
Page
523 10. Explain the accounting for bonds payable
issued with share warrants and convertible
CONCEPTUAL FRAMEWORK AND bonds.
Answer:
ACCOUNTING STANDARDS Share warrants attached to a bond may be
CHAPTER XXIV
detachable or nontachable. Wheather detachable
or nondetachable, the warrants have a value and
therefore shall be accounted for separately. While,
convertible bonds give the holder the right to
convert their bondholdings into share capital of the
1. Define a financial instrument.
issuing entity whithin a specified period of time.
Answer:
Page
A financial instrument is any contract that
532
gives rise to both a financial asset of one entity and
a financial liability or equity instrument of another
entity. Problem 24-3 Multiple Choice (PAS 32)
1. D
2. C
2. Define a financial asset.
3. C
Answer:
4. B
A financial asset is a liquid asset that gets
5. B
its value from a contractual right or ownership
Page
claim.
534
3. Give example of financial asset.
6. D
Answer:
7. A
Cash, stocks, bonds, mutual funds, and bank
8. D
deposits are all are examples of financial assets.
9. C
10. B
4. Define a financial Page
liability. Answer: 535
A financial liability is any liability that is a
ontractual obligation to deliver cash or other
Problem 24-4 Multiple Choice (IFFRS)
financial asset to another entity and also to
1. A
exchange financial instruments with another entity
2. B
under conditions that are potentially unfavorable.
Page
536
5. Give examples of financial liability.
Answer:
3. D
Some examples of financial liability are: Trade
4. C
accounts payable, Notes payable, Loans payable
5. D

Page 6. Explain deductible temporary differences.
537 Answer:
Expenses and losses are deductible for tax
1. A purposes is the current period but deductible for
2. D accounting purposes in future periods. (a)
3. B Accelerated depreciation for accounting purposes.
4. A (b) Prepaid expenses has already been deducted on
5. A a cash basis in determining taxable income of the
Page current period.
538
7. Explain a deferred tax liability.
Answer:
Deferred tax liability is the amount of
income tax payable in the future periods with
CONCEPTUAL FRAMEWORK AND respect to a taxable temporary difference.
Moreover, a deferred tax liability arises when
ACCOUNTING STANDARDS accounting income is higher than taxable income
CHAPTER XXV
because of future taxable amount.
55
8. Give examples of temporary differences resulting 1
to higher accounting income than taxable income.
Answer:
Topic Questions
Revenues and gains are included in
accounting income of the current period but
1. What entities are required to report deferred tax
deductible for accounting purposes in future
asset or liability?
periods.
Answer:
Expenses and losses are deductible for tax
Deferred tax accounting is applicable to all
purposes is the current period but
entities, whether public or nonpublic entities. A
deductible for accounting purposes in future
public entity is an entity: (a) whose equity and debt
periods.
securities are traded in a stock exchange or over-
the-counter market and (b) whose equity or debt
9. Explain a deferred tax asset.
securities are registered with Securities and
Answer:
Exchange Commission in preparation for sale of
PAS 12, paragraph 24, provides that a
securities.
deferred tax asset shall be recognized for all
deductible temporary differences and operating
2. Explain accounting income and taxable income.
loss carryforward when it is probable that taxable
Answer:
income will be available against which the deferred
Accounting income or financial income is
tax asset can be used. In other words, a deferred
the net income for the period before deducting
tax asset is the deferred tax consequence
income tax expense. While Taxable income is the
attributable to a future deductible amount and
income for the period determined in accordance
operating loss carryforward.
with the rules established by the taxation
authorities upon which income taxes are payable or
10. Give examples of temporary differences
recoverable.
resulting to higher taxable income than accounting
income.
3. Explain permanent differences.
Answer:
Answer:
Revenue and gains are included in taxable
Permanent differences are items of revenue
income of current period but are included in
and expense which are included in either
accounting income of future periods. For
accounting income or taxable income but will never
example, rent received in advance is
be included in the other. Actually, permanent
taxable at the time of receipt but deferred in
differences pertain to nontaxable revenue and
future periods for accounting purposes.
nondeductible expenses. Moreover, permanent
Expenses and losses are deducted from
differences do not give rise to differed tax asset
accounting income of current period but are
and liability because they have no future tax
deductible for tax purposes in future
consequences.
periods. For example, doubtful accounts are
deducted from accounting income but are
4. Explain temporary differences.
deductible for tax purposes when proved
Answer:
worthless in future period.
Temporary differences are items of income
and expenses which are included in both
11. Explain current tax asset and current tax
accounting income and taxable income but at
liability.
different time periods. In addition, it gives rise
Answer:
either to a deferred tax liability or deferred tax
If the amount of tax already paid for the
asset.
current period exceeds the amount actually
payable for the period, the excess is recognized as
5. Explain taxable temporary differences.
a current tax asset. While a current tax liability is
Answer:
the current tax expense or the amount of income
Taxable temporary difference is the
tax actually payable. This is classified as current
temporary difference that will result in future
liability.
taxable amount in determining taxable income of
future periods.
12. Explain the statement presentation of current
tax asset and current tax liability.

Answer:
A current tax liability or current tax asset 3. Explain the recognition and measurement of
shall be measured using the tax rate that has been short-term employee benefits.
enacted and effective at the end of the reporting Answer:
period. fairly straightforward because there are no
actuarial assumptions. There is no possibility of
13. Explain the statement presentation of deferred actuarial gain or lose because short-term employee
tax asset and deferred tax liability. benefits are measured on an undiscounted basis.
Answer:
A deferred tax liability or deferred tax asset 4. Define post-employment benefits.
shall be measured using the tax rate that has been Answer:
enacted by the end of the reporting period and are employee benefits, other than
expected to apply to the period when the asset is termination benefits and short-term employee
realized or the liability is settled. benefits, which are payable after completion of
employment.
14. Explain the measurement of current tax asset

and current tax liability. 5. Explain fully a defined contribution plan.
Answer: Answer: 55
The current tax liability or current tax asset a postemployment benefit plan under which
is measured at 30% but the deferred tax liability or 2
an entity pays fixed contributions into a separate
deferred tax asset is measured using the new entity known as the fund. The contribution is
enacted tax rate of 25%. definite but the benefit is indefinite.
15. Explain the measurement of deferred tax asset 6. Explain fully a defined benefit plan.
and deferred tax liability. Answer:
Answer:
simply defined as a postemployment plan
PAS 12, paragraph 70, provides that other than s defined contribution plan. Under a
deferred tax liability is presented as noncurrent defined benefit plan, an entity’s obligation is to
liability and deferred tax asset is presented as provide the agreed benefit to employees. The
noncurrent asset. Moreover, a deferred tax asset or benefit is definite but the contribution is indefinite.
deferred tax liability shall not be discounted.
Page
7. Explain accounting for a defined contribution
549 plan.
Answer:
Problem 25-5 Multiple Choice (PAS 12) straightforward because the obligation of
1. A the entity is determined by the amount contributed
2. B for each period.
3. B
4. A 8. Explain the components of a defined benefit
5. C cost.
Page Answer:
552 PAS 19, paragraph that an entity shall
recognize the following components of defined
6. A benefits cost.
7. C 1. Service cost which comprises:
8. B Current service cost
9. A Past service cost
10. A Any gain or loss on plan settlement
Page 2. Net interest
553 3. Remeasurements which comprises:
Remeasurements od plan assets
CONCEPTUAL FRAMEWORK AND Remeasurements of defined benefits
obligation
ACCOUNTING STANDARDS Remeasurements of the effect of assets
CHAPTER XXVI
ceiling
9. Explain plan assets and actual return on plan

assets.
Answer:
1. Define employee benefits. plan assets comprise assets held by a long-
Answer: term benefit fund and qualifying insurance policy.
employee benefits are all forms of The components of actual return on plan assets
consideration given an entity in exchange for include the following:
service rendered by employees or for termination Interest, dividend and other income derived
of employment. from the plan assets.
Realized and unrealized gains and losses on
2. Define short-term employee benefits. the plan assets.
Answer:
are employee benefits other than 10. Explain the remeasurement of plan assets.
termination benefits which are expected to be Answer:
settled wholly within twelve months after the end the difference between actual return on plan
of annual reporting period in which the employee assets and interest income on plan assets.
render the related service.

Is the actual return is higher than interest
income, the difference is a remeasurement
gain.
1. A
If the actual return is less than the interest
2. B
income, the difference is a remeasurement
3. A
loss.
4. B
Page
11. Explain the remeasurement of projected benefit 581
obligation.
Answer: 5. D
the recognition of actuarial gain and 6. C
actuarial loss. Actuarial gain and loss are changes 7. A
in the present value of the projected benefit 8. A
obligation resulting from experience adjustments Page
and the effects of changes in actuarial occurred. 582
12. Explain fair value of plan assets.
Answer:
the source of fund set aside in meeting
future benefit payments. 55
3
13. Explain projected benefit obligation.
1. D
Answer:
2. D
higher than the estimated amount, there is
3. D
an actuarial loss. If the actual benefit obligation is
4. D
lower than the estimated amount, there in an
5. C
actuarial gain.
Page
583
14. Define other long-term employee benefits.
Answer:
all employee benefits other than short-term 6. D
employee benefits, postemployment benefits and 7. C
termination benefits. In other words, other long- 8. C
term employee benefits are empl0yee benefits 9. A
which are not expected to be settles wholly within 10. B
twelve months after the end of annual reporting Page
period in which the employees render the related 584
service.
Problem 26-10 Multiple Choice (IAA)
15. Define termination benefits. 1. C
Answer: 2. B
employee benefits provided in exchange for 3. B
the termination of an employee’s employment as a 4. A
result of either: 5. B
An entity’s decision to terminate an Page
employee’s employment before the normal 585
retirement date.
An employee’s decision to accept an offer of CONCEPTUAL FRAMEWORK AND
benefits in exchange for the termination of
employment. ACCOUNTING STANDARDS
573
Page
CHAPTER XXVII
1. C
1. What is the meaning of earnings per share?
2. D
ANSWER:
3. A
Earnings per share is the amount
4. C
attributable to every ordinary share outstanding
Page
during the period.
578
2. Explain the uses of earnings per share.
5. D ANSWER:
6. A Uses of earnings per share are;
7. A (1) a determinant of the market price of ordinary
8. A share, thus indicating the attractiveness of the
Page ordinary share as an investment,
579 (2) a measure of performance of management in
conducting operations,
Problem 26-7 Multiple Choice (IFRS) (3) the basis of dividend policy of an entity.
1. A
2. C 3. What are the two presentations of earnings per
3. D share?
4. C ANSWER:
Page
580

The two presentations of earnings per share basic earnings per share or decreases basic loss
are; per share. In this case, the potential ordinary
(1) basic earnings per share, shares are considered as anti-dilutive and therefore
(2) diluted earnings per share. ignored in computing diluted earnings per share.
4. Explain the presentation of earnings per share in 11. Explain the treatment of convertible bond
the income statement. payable in computing diluted earnings per share.
ANSWER: ANSWER:
An entity shall present on the face of the The computation of diluted earnings per
income statement the basic and diluted earnings share assumes that the bond payable is converted
per share for income or loss from continuing into ordinary share. Adjustments shall be made
operations. An entity that reports a discontinued both to net income and to the number of ordinary
operation shall disclose the basic and diluted shares outstanding. The net income is adjusted by
amounts per share for the discontinued operation adding back the interest expense on the bond
either on the face of the income statement or in payable, net of tax. The number of ordinary shares
the notes to the statements. An entity shall present outstanding is increased by the number of ordinary
basic and diluted earnings per share even if the shares that would have been issued upon
amounts are negative, for example, basic loss per conversion of the bond payable.
share. 55
12. Explain the treatment of convertible preference 4
share in computing diluted earnings per share.
5. Explain the formula for the computation of basic ANSWER:
earnings per share. If there is a convertible preference share,
ANSWER: the computation of diluted earnings per share also
Basic earnings per share=net assumes that the preference share is converted
income/ordinary shares outstanding into ordinary share. The net income is not reduced
The net income is equal to the amount after anymore by the amount of preference dividend.
deducting dividends on preference share. The number of ordinary shares outstanding is
increased by the number of ordinary shares that
6. What is the treatment of preference dividend in would have been issued upon conversion of the
computing basic earnings per share? preference share.
ANSWER:
If the preference share is cumulative, the 13. Define share options and share warrants.
preference dividend for the current year only id ANSWER:
deducted from the net income, whether such Share options are granted to employees
dividend is declared or not. If the preference share enabling them to acquire ordinary shares of the
is noncumulative, the preference dividend for the entity at a specified price during a definite period
current year is deducted from net income only if of time. Share warrants are granted to shareholders
there is declaration. If there is a significant change enabling them to acquire ordinary shares of the
in the ordinary shares capital during the year, the entity at a specified price during a definite period
weighted average number of ordinary shares
of time.
outstanding during the period should be used as
By definition, options and warrants have no cash
denominator.
yield but they derive their value from the right to
obtain ordinary shares at a specified price that is
7. Explain the formula for the computation of basic usually lower than the prevailing market price.
loss per share. Options and warrants are dilutive if the exercise
ANSWER: price or option price is less than the average
If the preference share is cumulative, the market price of the ordinary shares.
preference dividend is added to the net loss to get
total loss to the ordinary shareholders. However, if 14. Explain the treasury share method of
the preference share is noncumulative, the computing incremental ordinary shares.
preference dividend is ignored because presumably
ANSWER:
there is no declaration since there is a net loss.
The treasury share method is used to
simplify the computation of increment ordinary
8. Define a potential ordinary share. shares that are assumed to be issued for no
ANSWER: consideration as a result of options and warrants.
Potential ordinary share is a financial
instrument or other contract that may entitle the 15. Explain diluted loss per share.
holder to ordinary shares. ANSWER:
If the entity has a net loss, only the basic
9. What are the three major types of potential loss per share is computed and reported. The
ordinary shares? diluted loss per share is the same as the basic loss
ANSWER: per share but not reported anymore.
Three major types of potential ordinary Page
shares are dilution, anti-dilution and 599
10. Define dilution and anti-dilution.
ANSWER: Problem 27-11 Multiple Choice (PAS 33)
Dilution arises when the inclusion of the
1. D
potential ordinary shares decreases the basic
earnings per share or increases the basic loss per 2. B
share. In this case, the potential ordinary shares 3. C
are dilutive securities. Anti-dilution arises when the 4. D
inclusion of the potential ordinary shares increases 5. D

Page 5. What are the components of an interim financial
605 report?
ANSWER:
6. A Components of an interim financial report
7. A are;
8. B (1) condensed statement of financial position,
9. C (2) condensed statement of comprehensive
10. C income, (3) condensed statement of changes in
Page equity,
606 (4) condensed statement of cash flows,
(5) selected explanatory notes.
Problem 27-12 Multiple choice (IAA)
1. C 6. Explain compliance of interim financial report
2. C with PFRS.
3. B ANSWER:
4. B PAS 34, paragraph 19, provides that if an
5. C entities interim financial report is in compliance
Page with Philippine Financial Reporting Standard. An
607 entity shall not describe an interim financial reports 55
5
CONCEPTUAL FRAMEWORK AND as complying with PFRS unless it complies with all
of the requirements of each applicable Philippine
ACCOUNTING STANDARDS Financial Reporting Standard.
CHAPTER XXVIII 7. Give examples of selected explanatory notes to

accompany interim financial report.
ANSWER:
Examples of selected explanatory notes are;
1. Explain interim financial reporting.
(a) write down of inventories to net realizable value
ANSWER:
and the reversal of such a write down,
Interim financial reporting means the
(b) recognition of a loss from the impairment of
preparation and presentation of financial
property, plant and equipment and intangible
statements for a period of less than one year.
assets and the reversal of such an impairment loss,
(c) the reversal of any provision for restructuring,
2. Is it require to prepare interim financial reports?
(d) acquisitions and disposal of items of property,
ANSWER:
plant and equipment,
Yes, PAS 34 prescribes the minimum content
(e) commitments for the purchase of property,
of an interim financial report and the principles for
plant and equipment,
recognition and measurement in complete or
(f) litigation settlements,
condensed financial statements for an interim
(g) corrections of prior period errors in previously
period. Publicly traded entities are encouraged to
reported financial data,
provide interim financial reports at least
(h) changes in the economic circumstances that
semiannually and such reports are to be made
affect fair value of financial assets and financial
available not later than 60 days after the end of
liabilities,
interim period.
(i) any debt default or any breach of a debt
covenant that has not been corrected
3. Explain the frequency of interim reporting.
subsequently,
ANSWER:
(j) related party transaction,
PAS 34 does not mandate which entities are
(k) changes in the classification of financial assets,
required to publish interim financial reports, how
(l) contingent liabilities and contingent assets.
frequently, or how soon after the end of an interim
period.
8. Explain the presentation of interim financial
Interim financial reports may be presented
statements on a comparative basis.
monthly, quarterly or semiannually.
ANSWER:
The presentation of interim financial
4. Explain interim reporting under Philippine
statements on a comparative basis are composed
jurisdiction.
of statement of financial position, income
ANSWER:
statement, statement of comprehensive income,
The Securities and Exchange Commission statement of changes in equity and statement of
and Philippine Stock Exchange requires entities cash flows.
covered by the reportorial requirements of Revised
Securities Act to file quarterly interim financial
9. What are the basic principles in the preparation
reports within 45 days after the end of each of the
and presentation of interim financial statements?
first three quarters.
ANSWER:
The SEC also requires entities covered by the Rules
Basic principles are;
on Commercial Papers and Financing Act to file
(1) PAS 34, paragraph 28, provides that an entity
quarterly financial reports within 45 days after each
shall apply the same accounting policies in the
quarter end.
interim financial statements as are applied in the
Entities that provide interim financial reports in
annual financial statements,
conformity with Philippine Financial Reporting
(2) revenues from products sold or services
Standards shall conform to the recognition,
rendered are generally recognized for interim
measurement and disclosure requirements set out
reports on the same basis as for the annual reports,
in the standard.
(3) cost and expense are recognized as incurred in
an interim period,

(4) paragraph 21 provides that if the business is
highly seasonal, in addition to the current interim
period financial statements, the entity is
encouraged to disclosed financial information,
CHAPTER XXIX
(5) paragraph 41 provides that the preparation of TOPIC QUESTIONS
interim financial reports generally requires a
greater use of estimation than annual financial 1. What are the characteristics of an economic
reports. environment indicating hyperinflation?
Answer:
Hyperinflation is indicated by characteristics
of the economic environment of a country which
include but are not limited to the following
The general population prefers to keep its
wealth nonmonetary assets or in relatively
stable foreign currency. Accordingly,
amounts held in local currency are
immediately invested in nonmonetary
assets or stable foreign currency to maintain
purchasing power. 55
10. Explain the treatment of a change in The general population regards monetary
accounting policy in interim financial reporting. 6
amounts not in terms of local currency but
ANSWER: in terms of a relatively stable foreign
PAS 34, paragraph 43, provides that a currency
change in accounting policy shall be reflected by Sales and purchases on credit take place at
restating the financial statements of prior interim prices that compensate for the expected
periods of the current year and the comparable loss of purchasing power during the credit
interim periods of the financial year. The objective period even if the period is short.
of this requirement is to ensure that a single Interest rates, wages and prices are linked
accounting policy is applied to a particular class of to a price index.
transaction throughout the entire financial year. The cumulative rate over 3 years is
Page approaching or exceeds 100 %.
621
2. Explain the financial reporting in a
hyperinflationary economy.
Problem 28-11 Multiple choice (IFRS) Answer:
1. D PAS 29, paragraph 8, provides that the
2. B financial statements of an entity that reports in the
3. B currency of a hyperinflationary economy, whether
4. D they are based on historical cost approach or a
5. D current cost approach, shall be stated in terms of
Page the measuring unit current at the end of reporting
626 period. Presentation of the information required
under PAS 29 as a supplement to understated
6. C financial statements is not permitted. The
7. D restatement of financial statements of an entity
8. A that reports in the currency of a hyperinflationary
9. B economy is accomplished by means of constant
10. B peso accounting.
Page
627 3. Explain monetary and nonmonetary items.
Answer:
PAS 21 defines monetary items as money
Problem 28-12 Multiple Choices (AICPA
held and assets and liabilities to be received or
Adapted)
paid in fixed or determinable amount of money. The
1. B
essential feature of a monetary item is a right to
2. D
receive or an obligation to deliver a fixed or
3. A
determinable amount of money. In simple
4. C
language, monetary items refer to cash and assets
5. D
that represent a fixed amount of pesos to be
Page
received, or obligations that represent a fixed
628
amount of pesos to be paid.
Nonmonetary items, by the process of
6. D exclusion, may be defined as those items
7. B that cannot be classified as monetary. These
8. A items are so called nonmonetary because
9. D their peso amounts reported in the financial
10. B statements differ from the amounts that are
Page ultimately realizable or payable. The
629 essential feature of a nonmonetary item is
the absence of a right to receive or an
CONCEPTUAL FRAMEWORK AND obligation to deliver a fixed or determinable
amount of money.
ACCOUNTING STANDARDS 4. What is the formula for restatement?
Answer:

Index number at end of reporting period / 5. C
Index number on acquisition date x Historical cost Page
645
5. What are the procedures for restating financial
statements in a hyperinflationary economy?
6. A
Answer:
7. A
The items in the financial statements are
8. C
classified into monetary and nonmonetary.
9. D
Monetary items are not restated because these are
10. A
already expressed in terms of the monetary unit
Page
current at the end of reporting period.
646
Nonmonetary items are restated by
applying the general price index from the
date of acquisition to the end of reporting CONCEPTUAL FRAMEWORK AND
period. Some nonmonetary items that are ACCOUNTING STANDARDS
carried at amounts current at end of
reporting period, such as net realizable
value and fair value are no longer restated.
CHAPTER XXX
Some nonmonetary items are carried at 55
amount current at date other than TOPIC QUESTIONS 7
acquisition date, for example, property, 1. Define first time adopter.
plant and equipment are revalued. In such Answer:
case, the carrying amounts are restated A first time adopter is an entity that
from the date of revaluation. presents for the first time its financial statements in
All items in the income statement are conformity with Philippine Financial Reporting
restated by applying the change in the Standards. In other words, an entity is considered
general price index from the dates when the first time adopter when for the first time such
items of income and expenses were initially entity makes an explicit and unreserved statement
recorded. However, for practical purposes, that its general purpose financial statements
the average index may be used. comply with Philippine Financial Reporting
The general purchasing power gain or loss is Standards.
computed on monetary items. The gain or
loss on purchasing power is included in 2. Define first PFRS financial statements.
profit or loss. Answer:
The restated amount of property, plant and The first PFRS financial statements are the
equipment, goodwill and other intangible first annual statements in which an entity adopts
asset is reduced when it exceeds the PFRS by an explicit and unreserved statement of
recoverable amount. compliance with PFRS.
Any revaluation surplus recognized
previously is eliminated. 3. What are the conditions in order that financial
Retained earnings would be the balancing statements presented by an entity would qualify as
figure in the restated statement financial first PFRS financial statements?
position. Answer:
When comparative statements are Financial statements presented by an entity
prepared, the monetary items of the in the current year would qualify as first PFRS
preceding year are expressed in terms of financial statements under the following conditions:
the index number at the end of the current When an entity presented its most recent previous
year. financial statements:
Page Under national GAAP inconsistent with PFRS in all
638 respects.
In conformity with PFRS in all respects but
Problem 29-7 Multiple Choice (IFRS) these statements did not contain an explicit
1. D and unreserved statement of compliance
2.C with PFRS.
3.A Containing an explicit statement of
4.D compliance with some but not all PFRS.
5.A Under national GAAP with a reconciliation of
Page selected figures to amounts determined
643 under PFRS.
When an entity prepared financial
6.A statements in the previous period under
7.C PFRS but the financial statements were for
8.D internal use only.
9.A When an entity prepared financial
10. A statements in the previous period under
Page PFRS for consolidation purposes without
644 preparing a complete set of financial
statements.
Problem 29-8 Multiple Choice (AICPA When an entity did not present financial
Adapted) statements in the previous period.
1. B
2. A 4. Explain the date of transition to PFRS.
3. D Answer:
4. D

The date of transition to PFRS refers to the 5. C
beginning of the earliest period for which an entity 6. D
presents full comparative information under PFRS 7. D
in its first PFRS financial statements. The date of Page
transition to PFRS depends on two factors, namely: 653
a. The date of adoption of PFRS.
b. The number of years of comparative information
8. C
that an entity decides to present together with the
9. D
financial statements in the year of adoption.
10. D
Page
5. Define an opening PFRS statement of financial
654
position.
Answer:
An opening PFRS statement of financial CONCEPTUAL FRAMEWORK AND
position is the statement of financial position ACCOUNTING STANDARDS
prepared by a first time adopter а on the date of
transition to PFRS. The opening PFRS statement of
financial position is the starting point for
CHAPTER XXXI
accounting in accordance with PFRS. 55
8
6. What are the requirements in preparing an QUESTIONS
opening PFRS statement of financial position?
Answer: 1. Define a share-based compensation plan.
In preparing the opening statement of Answer:
financial position, an entity is required to: A share-based compensation plan is a
a. Recognize all assets and liabilities required by compensation arrangement established by
PFRS. the entity whereby the entity’s employees
b. Derecognize assets and liabilities not permitted shall receive equity shares in exchange for
by PFRS. their services or the entity incurs liabilities
c. Reclassify items that it recognized under to the employees in amounts based on the
previous GAAP as one type of asset, liability or price of its shares.
equity but a different type of asset, liability or 2. Explain the two share-based compensation
equity under PFRS. plans.
d. Measure all recognized assets and liabilities in
compliance with PFRS. Answer:
The two share-based compensation plans are the
7. How should a first time adopter recognize the following:
adjustments required to present an opening PFRS a. Equity settled- The entity issues equity
statement of financial position? instruments in consideration for services
Answer: received, for example, share options.
Any adjustments required to present an b. Cash settled- The entity incurs a liability
opening PFRS statement of financial position should for services received and the liability is
be recognized in retained earnings or if based on the entity’s equity
appropriate, in another component of equity. instruments, for example, share
8.What are the first PFRS financial statements appreciation rights.
prepared by a first time adopter?
Answer: 3. What are share options?
If the entity adopts PFRS for the first time in Answer:
the current year, its first PFRS financial statements Share options are granted to officers and
include the following: key employees to enable them to acquire
1. Three statements of financial position at the end shares of the entity during a specified
of current year, at the end of prior year and at the period upon fulfilment of certain conditions
date of transition to PFRS at a specified price. These are typically
2. Two statements of comprehensive income for granted to officers and key employees as
the current year and prior year part of their remuneration package, in
3. Two separate income statements for the current addition to a cash salary and other
year and prior year. employment benefits.
4. Two statements of changes in equity for the 4. Explain briefly the fair value method of
current year and prior year. measuring compensation arising from share
5. Two statements of cash flows for the current year options.
and prior year. Answer:
6. Notes to financial statements including Fair value method means that the
comparative information. compensation is equal to the fair value of
Page the share options on the date of grant.
651
5. Explain the accounting procedure if an
Problem 30-1 Multiple Choice (IFRS) entity cancels or settles share options during
1. B the vesting period.
2. C
3. C Answer:
4. B PFRS 2, paragraph 28, provides that if an
Page entity cancels or settles a grant of share
652 options during the vesting period, the
entity

shall account for the cancelation or
settlement as an acceleration of vesting.
5. D
6. B
6. Explain fully a cash settled share-based
7. A
payment transaction.
8. C
Answer: Page
Cash settled share-based transaction is 670
when the entity incurs a liability for services
received and the liability is based on the 9. C
entity’s equity instruments, for example, 10. D
share appreciation rights. Page
671
7. Distinguish cash settled share-based
payment transaction from an equity settled PROBLEM 31-8 MULTIPLE CHOICE (IFRS)
share-based transaction. 1. B
Answer: 2. D
In cash settled share-based transaction, the 3. C
entity incurs a liability for services received 4. D
and the liability is based on the entity’s 55
5. C
equity instruments, while in equity settled Page 9
share-based transaction, the entity issues 672
equity instruments in consideration for
services received. CONCEPTUAL FRAMEWORK AND
8. What is a share appreciation ACCOUNTING STANDARDS
right? Answer:
Share appreciation right entitles the
CHAPTER XXXII
employee to a cash payment equal to the
increase in the price of a given number of
shares over a given period. QUESTIONS
1. Define noncurrent asset and a disposal
9. Distinguish a share appreciation right from group.
a share option. Answer:
Answer: Noncurrent asset is may be an individual
Like a share option, a share appreciation asset, like land and building, or a disposal
right is viewed as compensation for services group, while a disposal group is a group of
rendered. assets to be disposed of, by sale or
Unlike in a share option, the entity shall otherwise, together as a group in a single
recognize a liability because a share transaction, and liabilities directly
appreciation right is actually an obligation associated with those assets that will be
on the part of the entity to pay cash in the transferred in the transaction.
future on exercise date.
2. When is a noncurrent asset classified as
10. Explain the recognition and measurement held for sale?
of compensation arising from share Answer:
appreciation right. PFRS 5, paragraph 6, provides that a
Answer: noncurrent asset is classified as held for
The recognition of compensation includes the sale if the carrying amount will be recorded
following: principally through a sale transaction rather
a. If the share appreciation right vests than through continuing use.
immediately, the compensation is
recognized immediately. 3. What are the conditions for classification
b. If the share appreciation right does not as held for sale?
vest until the employee completes a Answer:
definite vesting period, the The conditions for classification as held for sale are
compensation is recognized over the the following:
vesting period. The asset or disposal group is available for
The measurement of compensation states that the immediate sale in the present condition.
compensation is based on the fair value of the In other words, the current condition of the
liability at the reporting date and shall be asset should be adequate to be effectively
measured at every year-end until it is finally ” sold as seen”.
settled. The sale must be highly probable.
Page
665 4. What is the meaning of “highly probable”?
Answer:
PROBLEM 31-7 MULTIPLE CHOICE (PFRS 2) For sale to be highly probable, the following
1. B conditions must be met:
2. A Management must be committed to a plan
3. B to sell the asset or disposal group.
4. A An active program to locate a buyer and
Page complete the plan must have been initiated.
669

The sale is expected to be a “completed PFRS 5, paragraph 38, provides that if the
sale” within one year from the date of noncurrent asset is a disposal group
classification as held for sale. classified as held for sale, the assets and
The asset or disposal group must be actively liabilities of the group shall be presented
marketed for sale at a sale price that is separately and cannot be offset as a single
reasonable in relation to the fair value. amount.
Actions required to complete the plan Page
indicate that it is unlikely that the plan will 681
be significantly changed or withdrawn.
PROBLEM 32-4 MULTIPLE CHOICE (PFRS 5)
5. Explain the measurement of noncurrent 1. A
asset classified as held for sale. 2. A
Answer: 3. D
PFRS 5, paragraph 15, provides that an 4. C
entity shall measure a noncurrent asset or Page
disposal group classified as held for sale at 684
the lower of carrying amount or fair value
less cost of disposal. 5. A
6. B 66
6. Explain the write-down of the noncurrent 7. C 0
asset to fair value less cost of disposal. 8. A
Answer: Page
If the fair value less cost of disposal is lower 685
than carrying amount of the asset or
disposal group, the write-down to fair value
9. B
less cost of disposal is treated as an
10. C
impairment loss.
Page
If the noncurrent asset is a disposal group,
686
the impairment loss is apportioned across
the assets based on carrying amount.
7. Explain the treatment of a subsequent

increase in fair value less cost of disposal
relating to an asset classified as held for CONCEPTUAL FRAMEWORK AND
sale. Answer:
If subsequently there is an increase in the ACCOUNTING STANDARDS
CHAPTER XXXIII
fair value less cost of disposal, PFRS 5,
paragraph 21, provides that an entity shall
recognize a gain but not in excess of any
impairment loss previously recognized.
QUESTIONS
8. What is the treatment of abandoned
noncurrent asset or disposal group? 1. Define a discontinued operation.
Answer: Answer:
PFRS 5, paragraph 13, provides that an Discontinued operations are an accounting
entity shall not classify as held for sale a term that refers to parts of a company's core
noncurrent asset or disposal group that is to business or product line that have been divested or
be abandoned. shut down. Discontinued operations are reported
on the income statement separately from
continuing operations.
9. Explain the treatment of a change in
classification of a noncurrent asset classified 2. Give examples of discontinued operation.
as held for sale. Answer:
Answer: Selling by a diversified entity of a major
PFRS 5, paragraph 27, provides that the division that represents the entity's only
entity shall measure the noncurrent asset activities in the electronics industry.
that ceases to be classified as held for sale Selling by a meat packing entity of
at the lower between: controlling interest in a furniture entity.
➢ Carrying amount of the asset on the basis Selling by a communications entity of all its
that the asset had not been classified as radio stations.
held for sale. A conglomerate is engaged in commodity
➢ Recoverable amount at the date of the business, real estate, manufacturing and
subsequent decision not to sell. construction business.
10. Explain the presentation of noncurrent 3. Explain the presentation of a discontinued

asset classified as held for sale in the operation in the income statement.
statement of financial position. Answer:
Answer: Provides that an entity shall disclose a
single amount comprising the total of post-tax

profit or loss recognized on the measurement to 4. C
fair value less to cost of disposal or on the disposal 5. B
of the assets or disposal group constituting the Page
discontinued operation. 707
4. Explain the presentation of a discontinued

operation in the statement of financial position.
Answer: ACCOUNTING STANDARDS
CHAPTER XXXV
Provides that the assets of the component shall be
presented as a single amount under current assets
and the liabilities of the component shall be
presented as a single amount under current
liabilities.
The assets and liabilities of the component cannot QUESTIONS
be offset against the other.
1. What is the core principle of segment
5. What are the disclosures about discontinued reporting?
operation. Answer:
Answer: core principle of segment reporting states 66
The amount of revenue, expenses and that an entity shall disclose information to
enable users of financial statements to
1
income or loss attributable to the
discontinued operation during the current evaluate the nature and financial effects of
period and the related income tax. the business activities in which it engages
An impairment loss is recognized when the and the economic environments in which it
fair value less cost of disposal of the operates.
discontinued operation is lower than the
carrying amount of the net assets. 2. Explain briefly segment reporting.
Any gain or loss from the actual disposal of Answer:
the assets and settlement of the liabilities of is the disclosure of certain financial
a discontinued operation. information about the products and services
The termination cost of employees and and an entity produces and the
other costs which are directly incurred as a geographical areas in which an entity
result of the discontinuance. operates.
Page
693 3. What is the scope of PFRS 8?
Answer:
IFRS 8 applies to the financial statements of
any entity whose debt or equity instruments
are traded in a public market or who is
1. D
seeking to issue any class of instruments in
2. A
a public market.
3. D
Page

697
4. A
5. A 4. Define an operating segment.
Page Answer:
698 an operating segment can generally be
thought of as a distinguishable component
ADAPTED)
1. C
2. C
3. A
4. B
5. C
Page
699

of an entity that is engage in business
activities which generates revenue and
CONCEPTUAL FRAMEWORK AND incur expenses.
CHAPTER XXXIV
5. Define a chief operating segment.
Answer:
Operating segments are components of an
entity about which separate financial
PROBLEM 34-5 MULTIPLE CHOICE (IFRS) information is available that is evaluated
1. B regularly by the chief operating decision
2. C maker in deciding how to allocate resources
3. D and in assessing performance.
Page
706 6. What are the quantitative thresholds in
identifying reportable segments?
Answer:
If the total external revenue reported by
operating segments constitutes less than
75% of the total revenue, additional
operating segments shall
be identified as reportable segments until at
least 75% of the entity's revenue is included
in reportable segments.

7. Explain the 75% threshold in identifying is defined as a single external customer
reportable segments. providing revenue which amounts to 10% or
Answer: more of an entity’s external revenue.
At least 75 per cent of the total external
revenue of the entity must be reflected by 15. Explain the major customer disclosure.
the identified reportable segment, if this is Answer:
not the case the entity will be required the entity shall disclose the fact of reliance
to identify additional reportable on major customers, the total amount of
segments until at least 75 per cent of the revenue from major customers and the
total external revenue of the entity is identity of the segment or segments
reflected by reportable. reporting the revenue.
Page
8. Enumerate the information to be disclose 717
for each reportable segment.
Answer: PROBLEM 35-5 MULTIPLE CHOICE (AICPA
An entity shall disclose the following for each ADAPTED)
reportable operating segment:
General information about the operating 1. B
segment 2. D 66
Information about profit or loss, including 3. D 2
specified revenue and expenses included in 4. C
the measure of profit or loss Page
Information about segment assets and 720
segment liabilities and the basis of
measurement 5. B
Reconciliation of the totals of segment 6. C
revenue, segment profit or loss, segment 7. D
assets, segment liabilities and other 8. D
material segment items to corresponding Page
items in the entity’s financial statements 721
9. Explain the disclosure about general
9. B
information.
10. D
Answer:
Page
722
10. Explain the disclosure about profit or loss
for each reportable segment.
Answer: PROBLEM 35-6 (IFRS)
an entity shall disclose for each reportable
segment measure of profit or loss, total 1. B
assets and total liabilities, also disclose a 2. C
measure of profit or loss under all 3. B
circumstances 4. D
5. B
Page
11. What are the entity-wide disclosure? 723
Answer:
are additional information that is required to
be disclose by all entities if such information
is not provided as part of the reportable
segment information
12. What is the entity-wide disclosure about
product and services? ACCOUNTING STANDARDS
CHAPTER XXXVI
Answer:
an entity shall disclose the revenue from
external customers for each product and
services
1. Explain the initial measurement of financial
13. What is the entity-wide disclosure about asset.
geographical areas? Answer:
Answer: an entity shall measure a financial asset at a
an entity shall disclose the following fair value plus, in the case of financial asset
geographical information: not at fair value through profit or loss,
(1) revenue from external customers in the entity’s transaction cost that are directly attribute to
country of domicile, and in all foreign operations in the acquisition of financial asset
total
(2) separate disclosure of material revenue from 2. Explain the subsequent measurement of
external customers in an individual foreign country financial asset.
Answer:
14. What is major customer? Where assets are measured at fair value,
Answer: gains and losses are either recognized
entirely in profit or loss (fair value through
profit or loss, FVTPL), or recognized in other

comprehensive income (fair value through 10. Explain derecognition of equity
other comprehensive income, FVTOCI). investment at fair value through other
3. What are the financial asset measured Answer:
at fair value through profit or loss? Page
Answer: 733
Financial asset held for trading or popularly
known as “trading securities”
All other investment in quoted equity CHAPTER 36-5
instruments
1.D
Debt investment that are irrevocably
2.D
designated on initial recognition as at fair
3.C
value through profit or loss
4.D
All debt investment that do not satisfy the
5.A
requirements for measurement at amortized
Page
cost and at fair value through other
736
4. Explain financial asset held for trading. 6.B

7.C 66
Answer:
are debt and equity securities that are 8.B 3
purchased with the intent of selling them in 9.C
the “near term” or very soon 10.D
Page
5. Explain measurement of equity investment 737
at fair value through other comprehensive
income. CONCEPTUAL FRAMEWORK AND
Answer:
All equity investments in scope of IFRS 9 are
to be measured at fair value in the
statement of financial position,
with value changes recognized in profit or
CHAPTER
loss, except for those equity investments for
which the entity has elected to
present value changes in 'other
XXXVII
comprehensive income'. 1. Define Fair Value.
ANSWER:
6. Explain measurement of debt investment Fair value refers to an “exit price” or market
at amortized cost. price under current market conditions at
Answer: measurement rate. It is also the price in an orderly
the business model is to collect contractual transaction and agreed upon by market
cash flow if the contractual cash flows are participants.
solely payments of principal and interest, in
such case, the financial asset shall be 2. What is an orderly transaction?
measured at amortized cost ANSWER:
An orderly transaction is a transaction that
allows for normal marketing activities that are
usual and customary.
3. Explain Market Participants.

7. Explain measurement of debt investment ANSWER:
at fair value through other comprehensive Market participants are those buyers and
income. sellers transacting business in the principal market
Answer: for an asset or liability. These participants are
independent or unrelated parties, have reasonable
8. Explain the treatment of unrealized gain or understanding of the transaction and are willing or
loss on financial at fair value. motivated to do and enter into a transaction to buy
Answer: and sell the item.
Securities that are held-for-trading are
recorded on the balance sheet at their fair 4. Define active market.
value, and the unrealized gains and ANSWER:
losses are recorded on An active market is a market that regularly
the income statement. Therefore, the experiencing high transaction volumes.
increase or decrease in the fair value of
held-for-trading securities impacts the 5. Define principal market.
company's net income and its earnings-per- ANSWER:
share (EPS) A principal market is the market with the
greatest volume and level of activity for the asset
9. Explain the derecognition of equity or liability.
investment at fair value through other
comprehensive income. 6. Define most advantageous market.
Answer: ANSWER:
Most advantageous market is the market
that maximizes the amount that would be received

to sell the asset or minimizes the amount that 5.C
could be paid to transfer the liability. 6.A
7. Explain the valuation premise in measuring fair 7.B
value. 8.A
ANSWER: Page
In determining the fair value of an asset or a 744
liability, an entity may refer to information that is
directly observable or readily available. The fair
9.B
value shall not be adjusted for transaction cost.
10.B
If location is a characteristic of an asset, the fair
Page
value shall be adjusted for transport cost that
745
would be incurred to transport the asset from its
current location to the principal or most
advantageous market. CONCEPTUAL FRAMEWORK AND
8. Explain highest and best use of an asset.
ANSWER:
The highest and best use of the asset might
CHAPTER
66
XXXVIII
provide maximum value either on a stand-alone
basis, or as a group in with other asset and liability. 4
9. Explain the three valuation techniques in
measuring fair value.
ANSWER: 1. Define revenue and income.
The three valuation techniques that can be ANSWER:
used to measure fair value: Revenue is income in the ordinary course of
Market approach – this approach uses prices business activities.
and relevant information for market Income is increase in economic benefit
transactions for identical and comparable during the accounting period in the form of an
asset. inflow or enhancement of asset or decrease in
Income approach – this income approach liability that results in an increase of equity, other
focuses on converting future amounts into than contribution from equity participants.
discounted cash flows.
Cost approach-this approach relies on the 2. What is the core principle of revenue
current replacement cost to replace the recognition?
asset with a comparable asset. ANSWER:
Revenue is recognized in a manner that
depicts the transfer of good and service to a
10. Explain the fair value hierarchy.
customer and the revenue reflects the
ANSWER:
consideration to which an entity expects to be
The fair value hierarchy or evidence of fair
entitled.
value is enumerated as follows:
Level 1 is quoted prices for identical items in
3. What is the five-step model in recognizing
active, liquid and visible market such as
revenue?
stock exchanges. This quoted price provides
ANSWER:
the most reliable evidence of fair value and
An entity that recognizes revenue in
shall be used without adjustment.
accordance with the core principle should apply the
Level 2 is observable either directly or
following five-step model:
indirectly information for similar items in
Step 1 Identify the contract with the customer
active or inactive markets, such as two
Step 2 Identify the performance obligation in the
similarly situated buildings in a downtown
contract
real estate market.
Step 3 Determine the transaction price
Level 3 are unobservable inputs to be used
Step 4 Allocate the transaction price to the
in situations where markets don’t exist or
performance obligations in the contract
are illiquid such as the present credit cases.
Step 5 Recognize revenue when or as the entity
At this point, fair market valuation becomes
satisfies a performance obligation
highly subjective. Unobservable inputs are
usually developed by the entity using the
4. Define a contract.
best available information from the entity’s
ANSWER:
own data.
A contract is an agreement between two or
more parties that creates enforceable rights and
The fair value hierarchy gives the highest priority
obligations in a contract.
to quoted prices (unadjusted) in active markets for
5. What are the criteria for recognizing a contract
identical assets or liabilities (Level 1), and the
with a customer?
lowest priority to unobservable inputs(Level3)
ANSWER:
Page
The parties to the contract have approved
742
the contract in writing, orally or in accordance with
customary business practice, rights and obligations
1.B of the parties in the contract can be identified,
2.A payment terms in the contract can be identified,
3.D the contract has commercial substance and the
4.D collection of the consideration is probable.
Page
743 6. Define a performance obligation.

ANSWER: The following criteria must be met for the
A performance obligation is a promise to recognition of revenue in a bill and hold
deliver a good or service in a contract with arrangement:
customer. a. The customer has requested for the
arrangement.
7. Define a transaction price. b. The product must be identified separately as
ANSWER: belonging to the customer.
The transaction price is the amount of c. The product must be ready for physical transfer
consideration in a contract to which an entity to the customer anytime.
expects to be entitled in exchange for transferring d. The entity cannot have the ability to use the
good or service to a customer. product or to direct it to another customer.
15. Explain the customer loyalty program.

ANSWER:
8. Explain the allocation of the transaction price to The customer loyalty program builds to
multiple performance obligations. have a brand loyalty, it was designed to reward
ANSWER: customers for past purchases. If the customer buys
The transaction price is allocated to each good and services, the entity grants the customer
performance obligation on the basis of relative award credits often described as “points”. The 66
stand-alone selling price of each good or service. entity can redeem the “points” by distributing to 5
This stand-alone selling price is the price that the the customer free or discounted goods or services.
entity would sell a promised good or service A customer may be required to accumulate to
separately to a customer. specified minimum number of award credits or
“points” before they can have redeemed.
9. When is revenue recognized? Page
ANSWER: 760
The transaction price is allocated to each
performance obligation on the basis of relative 1.D
stand-alone selling price of each good or service. 2.D
3.B
10. Explain the revenue recognition at a point in 4.D
time or over time. 5.D
ANSWER: Page
The entity shall recognize revenue at a point 767
of time when the customer has the significant risks
and rewards of ownership, when the customer has
legal title to the asset and when the entity has the 6.A
right to receive payment for the asset and for 7.D
which the customer is obliged to pay. 8.A
The entity shall also recognize revenue when the 9.B
entity has an enforceable right to receive payment 10.C
for performance completed on date. For example, Page
constructing a specialized asset that only the 768
customer can use or constructing an asset in
accordance with customer order. 1.B
2.C
11. Explain the recognition of a sale with a right of 3.B
return. 4.C
ANSWER:
The entity shall recognize a sale with the Page
769
right return when the revenue equal to the total
_
sale price less the sale price of the expected return
and when a recover asset and the corresponding
reduction of cost of goods sold equal to the cost of
the expected return.
12. Define consignment.

ANSWER:
Consignment is a method of marketing
goods in which the entity called the consignor CONCEPTUAL FRAMEWORK AND
transfers physical possession of certain goods to a ACCOUNTING STANDARDS
dealer or distributor called the consignee that sells
the goods on behalf of the consignor.
CHAPTER XXXIX
13. Define bill and hold arrangement.
ANSWER:
Bill and hold arrangement is a contract 1. Define a lease under the new lease standard.
under which an entity bills a customer for a product Answer:
but the entity retains possession of the product. A lease is defined as a contract or part of a
contract that conveys the right to use the
14. What are the criteria for the recognition of underlying asset for a period of time in exchange
revenue in a bill and hold arrangement. for consideration.
ANSWER:

2. Explain the finance lease model on the part of Typically, low value underlying assets
the lessee. include personal computers, office furniture and
Answer: equipment.
IFRS 16, paragraph 22, provides that at the
commencement date, a lessee shall recognize a 8. Define a finance lease.
right of use asset and lease liability. Answer:
This simply means that a lessee is A finance lease is defined as a lease that
required to initially recognize a right of use asset transfers substantially all of the risks and rewards
for the right to use the underlying asset over the incidental to ownership of an underlying asset.
lease term and lease liability for the obligation to
make payments. 9. What are the components of the cost of right of
All leases shall be accounted for by the use of asset?
lessee as a finance lease under the new lease Answer:
standard. The cost of right of use of asset comprises:
a. The present value of lease payments
3. Define underlying asset, lessee and lessor. b. Lease payments made to lessor such
Answer: as lease bonus, less any incentive
The underlying asset is the subject of a received.
lease for which the right to use that asset has been c. Initial direct costs incurred by the 66
provided by the lessor to the lessee. lease
The lessee is the entity that obtains the 6
d. Estimate of cost of dismantling and
right to use an underlying asset for a period of time restoring the underlying asset for
in exchange for consideration. which the lease has a present
The lessor is the entity that provides the obligation.
right to use an underlying asset for a period of time
in exchange for consideration. 10. Explain the depreciation of right of use of
asset?
4. Explain the operating lease model on the part of Answer:
the lessee. The lessee shall apply normal depreciation
Answer: policy for right of use of asset.
IFRS 16, paragraph 5, provides that a lessee IFRS 16, paragraph 32, provides that the
is permitted to make an accounting policy election lessee shall depreciate the right of use asset over
to apply the operating lease accounting and not the useful life of the underlying asset under the
recognize an asset and lease liability in two following conditions:
optional exemptions. a. The lease transfers ownership of the
a. Short-term lease underlying asset to the lessee at the
b. Low value lease end of lease term.
b. The lessee is reasonably certain to
5. What are the two conditions in order that a exercise a purchase option.
lessee may apply the operating lease model? If there is no transfer of ownership to the lessee or
Answer: if the purchase option is not reasonably certain to
Stated differently, a lessee may or may not be exercised, the lessee shall depreciate the right
apply the operating lease accounting if the lease is of use asset over the shorter between the useful
short-term or if the underlying asset is of low value. life of the asset and the lease term.
6. Explain short-term lease. 11. Explain the measurement of lease liability.
Answer: Answer:
A short-term lease as a lease is defined as The lessee shall measure the lease liability
that has a term of 12 months or less at the at the present value of lease payments.
commencement date of the lease. The lease payments shall be discounted
A lease that contains a purchase option using the interest rate implicit in the lease desired
is not a short-term lease. by the lessor.
If the implicit interest rate cannot be
readily determined, the incremental borrowing rate
of the lessee is used.
7. Explain a low value lease.

Answer: 12. What are the components of lease payments?
Low value asset is a matter of Answer:
professional judgement. Components of lease payments
The lease shall assess the value of an a. Fixed lease payments or periodic
underlying asset based on the value of asset when rental
it is new regardless of the age of the asset being b. Variable lease payments
leased. c. Exercise price of a purchase option if
A lease of an underlying asset does not the lessee is reasonably certain to
qualify as a low value lease if the nature of the exercise the option
asset is such that the asset is typically not of low d. Amount expected to be payable by
value when new. the lessee under a residual value
For example, a lease of car would not guarantee
qualify as low value lease because a new car would e. Termination penalties if the lease
typically not be of low value. term reflects the exercise of a
termination option.

13. When is a lease classified as finance lease or 2.D
operating lease on the part of lessor? 3.A
Answer: 4.D
Whether a lease is a finance lease or an 5.C
operating lease depends on the substance of the Page
transaction rather than the form of the contract. 792
Under IFRS 16, paragraph 63, among
others, any of the following situations would
1.C
normally lead to a lease being classified as a
2.C
finance lease:
3.C
a. The lease transfers ownership of the
4.B
underlying asset to the lessee at the
Page
end of the lease term.
793
b. The lessee has an option to purchase
the asset at a price which is
expected to be sufficiently lower
than the fair value at the date the
option becomes exercisable.
At the inception of the lease, it is reasonably 66
certain the option will be exercised.
c. The lease term is for the major part 7
of the economic life of the underlying
asset even if title is not transferred.
Under USA GAAP, major part means at least 75% of
the economic life of an asset.
d. The present value of the lease
payments amounts to substantially
all of the fair value of the underlying
asset at the inception of the lease.
Under USA GAAP, substantially all means at least
90% of the fair value of the underlying asset.
14. What are the two classifications of finance

lease on the part of the lessor?
Answer:
On the part of the lessor, a finance lease is either:
a. Direct financing lease
b. Sales type lease
15. Distinguish direct financing lease from sale type

lease.
Answer:
A direct financing lease recognizes only
interest income while a sales type lease recognizes
interest income and gross profit on sale.
The main distinction between the two is
the presence or absence of a manufacturer or
dealer profit or loss.
Page
785
1.A
2.C
3.A CONCEPTUAL FRAMEWORK AND
4.D ACCOUNTING STANDARDS
5.A
790
Page
CHAPTER XXXX
6.D
7.A 1. Define a decommissioning liability.
8.A Answer:
9.B IFRIC 1 defines decommissioning liability as
10.C an obligation to dismantle, remove and restore an
Page item of property, plant and equipment as required
791 by law or contract.
1.D 2. What is the treatment of a decommissioning

liability?

Answer: 9. What is the classification of members’ shares in
The decommissioning liability is capitalized cooperative entities?
as cost of the property and initially recognized at Answer:
present value. Member’s share in cooperative entities may
be classified as equity or liability depending on the
3. Explain the treatment of a change in the terms and conditions of the financial instrument.
decommissioning liability.
Answer: 10. What are the conditions necessary to classify
a. A decrease in decommissioning members’ shares in cooperative entities as equity?
liability is deducted from the cost of Answer:
the asset. Members’ shares in cooperative entities are
b. An increase in decommissioning classified as equity if the members did not have a
liability is added to the cost at the right to request for redemption under either of the
asset. following conditions:
a. If the entity has an unconditional
4. What is a distribution of noncash asset to right to refuse redemption of the
owners? members’ shares.
Answer: b. If the redemption is unconditionally
The distribution of noncash asset to owners prohibited by law, regulation or the 66
is actually payment of property dividend to entity’s charter.
shareholders. 8
Page
802
5. Explain the measurement of the dividend
payable as a result of distribution of noncash asset
CHAPTER 40-6
to owners.
1.B
Answer:
2.A
IFRIC 17, paragraph 11, provides that an
3.A
entity shall measure a liability to distribute noncash
4.C
asset as a dividend to its owner at the fair value of
Page
the asset to be distributed
807
The dividend payable is initially
recognized at the fair value of the noncash asset on
the date of declaration ad is increased or CHAPTER 40-7
decreased as a result of the change in fair value of 1.A
the asset at year-end and date of settlement. 2.A
3.C
6. Explain the measurement of noncash asset to be 4.B
distributed to owners. Page
Answer: 808
Paragraph 15A of PFRS 5 provides that an
entity shall measure a noncurrent asset classified CHAPTER 40-8
for distribution to owners at the lower of carrying 1.A
amount and fair value less cost to distribute. 2.B
Accordingly, if the fair value less cost to 3.C
distribute is lower than the carrying amount of the 4.D
asset at the end of the reporting period, the 5.A
difference is accounted for as impairment loss. Page
809
7. Explain the measurement of equity instrument
issued to extinguish a financial liability.
Answer:
IFRIC 19 provides that the equity instrument
issued to extinguish a financial liability shall be
measured at the following amounts in the order of
priority:
a. Fair value of equity instrument
issued
b. Fair value of liability extinguished
c. Carrying amount of liability
extinguished
8. What is the presentation of the gain or loss on

extinguishment of a financial liability by issuing
equity instrument?
Answer:
The difference between the carrying amount
of the financial liability and initial measurement of
the equity instrument shall be recognized as a gain
or loss on extinguishment.
The gain or loss on extinguishment shall be
reported as a separate line item in the income
statement.

Answer Key For Cfas Valix

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Accountancy (National College of Business and Arts)

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CHAPTER I transactions are those economic events involving

11. Explain why accounting has been called

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17. Explain the limitation of the practice of ANSWER:

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28. What do you understand by the Page

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ω Philippine Accounting Standards

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PROBLEM 1-5 MULTIPLE CHOICE (IAA)

PROBLEM 1-2 MULTIPLE CHOICE (ACP)

PROBLEM 1-3 MULTIPLE CHOICE (ACP)

PROBLEM 1-4 MULTIPLE CHOICE (IFRS)

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CHAPTER II Qualitative characteristics of useful

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PROBLEMS PROBLEM 2-6 MULTIPLE CHOICE (AICPA

PROBLEM 2-2 MULTIPLE CHOICE (IFRS)

CHAPTER III ANSWER:

7. Explain predictive value. 16. Explain the notes to financial statements

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4. Preparers of statements should not try to

5. In case of conflict between economic TRUE 1. A conceptual framework is a coherent

13. It is the goal achieved by

14. This enhancing qualitative characteristics

15. The older the information, the less useful.

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CHAPTER IV 7. Explain time period assumption.

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ANSWER: 3. The pesos of today can buy as much goods and

5. A subsidiary was exhibiting poor financial ANSWER:

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ANSWER: 7. Explain control of an economic resource.

13. Distinguish income from revenue.

Page 3. What is derecognition?

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9. What are the two categories of ANSWER:

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1. D 4. An entity does not report the major details about

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1. An entity records a new machine at the cash ANSWER:

PROBLEM 6-11 DISCUSSION (IAA)

ANSWER: 4. Notes to financial statements are prepared in

5. Subscriptions received in advance by a magazine ANSWER:

7. All repair tools are expensed when purchased

ANSWER: State whether you agree or disagree with the

8. A patent is capitalized and amortized over the

9. Rent paid in advance is recorded as prepaid rent

ANSWER: CONCEPTUAL FRAMEWORK AND

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5. Define a statement of financial position.

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PROBLEM 8-8 MULTIPLE CHOICE (AICPA

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