CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER I
QUESTIONS:
1. Define accounting.
ANSWER:
Accounting is a service activity. The accounting
function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to
be useful in making economic decision.
- Accounting Standards Council
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events which are in part at least of a financial
character and interpreting the results thereof.
- Committee on Accounting Terminology of the American Institute
of Certified Public Accountants
Accounting is the process of identifying, measuring and
communicating economic information to permit informed
judgement and decision by users of the information.
-The American Accounting Association (statement in basic accounting
theory)
2. What are the important points made in the definition of
accounting?
ANSWER:
One- Accounting is about quantitative information.
Two- The information is likely to be financial in
nature.
Three- The information should be useful in decision
making.
3. Explain “identifying” as a component of accounting.
ANSWER:
Identifying is an accounting process that is the
recognition or non-recognition of business activities as
“accountable” events.
NOTE: Not all business activities are accountable.
4. What are transactions?
ANSWER:
It is the subject matter of accounting that is also called
the economic activity or the measurement of economic resources
and economic obligations. Also classified as external and
internal transactions.
5. Distinguish external transactions and
transactions.
ANSWER:
External transaction or exchange transactions are
those economic events involving one entity and another entity.
Internal transaction are economic events involving
the entity only.
6. When is a transaction accountable or quantifiable?
ANSWER:
An event is accountable or quantifiable when it has an
effect on assets, liabilities and equity.
7. Explain “measuring” as a component of accounting.
ANSWER:
An accounting process that is the assigning of peso
amounts to the accountable economic transactions and events.
8. What are the measurement bases used in accounting?
ANSWER:
The measurement bases are historical cost and current
value.
Historical cost is the original acquisition cost and the
most common measure of financial transactions. 11
Current value includes fair value, value in use,
fulfillment value and current cost.
9. Explain “communicating” as a component of accounting.
ANSWER:
The process of preparing and distributing accounting
reports to potential users of accounting information. Also the
reason why accounting has been called the “universal language
of business”.
10. Explain recording, classifying and summarizing in
relation to the communicating component of accounting.
ANSWER:
Recording or journalizing is the process of the
systematically maintaining a record of all economic business
transactions after they have been identified and measured.
Classifying is the sorting or grouping of similar and
interrelated economic transaction into their respective classes.
- Accomplished by posting to ledger.
Summarizing is the preparation of financial
statements which include the statement of financial position,
income statement, statement of comprehensive income,
statement of changes in equity and statement of cash flows.
-
11. Explain why accounting has been called the “universal
language of business”.
ANSWER:
Communication process is the reason why accounting
has been called the “universal language of business” because it
distributes accounting reports to potential users of accounting
information.
12. Explain accounting as an information system.
ANSWER:
Accounting is an information system that measures
business activities, process information into reports and
communicates the reports to decision makers.
internal
13. What is the overall objective of accounting?
ANSWER:
The overall objective of accounting is to provide
quantitative financial information about a business that is useful
to statement users particularly owners and creditors in making
economic decisions.
14. Describe the accountancy profession.
ANSWER:
R.A No. 9298 is the law regulating the practice of
accountancy in the Philippines. This is also known as the
Philippine Accountancy Act of 2004. It has been developed as a
profession attaining a status equivalent to that of law and
medicine. You must also finish a degree in Bachelor of Science
in Accountancy and pass a very difficult government
examination given by the Board of Accountancy.
15. What is R.A 9298?
ANSWER:
R.A No. 9298 is the law regulating the practice of
accountancy in the Philippines. This is also known as the
Philippine Accountancy Act of 2004.
16. What do you understand by the Board of Accountancy?
ANSWER:
It is the body authorized by law to promulgate rules
and regulations affecting the practice of accountancy profession
in the Philippines.
17. Explain the limitation of the practice of public
accountancy.
ANSWER:
A certificate of accreditation shall be issued to
certified public accountants in public practice only upon
showing in accordance with rules and regulations promulgated
by the Board of Accountancy and approved by the Professional
Regulation Commission that such registrant has acquired a
minimum of three years of meaningful experience in any of the
areas of public practice including taxation.
Page 19
18. Explain the accreditation to practice accountancy.
ANSWER:
Certified public accountants, firms and partnerships of
certified public accountants, including partners and staff
members thereof, are required to register with the Board of
Accountancy and Professional Regulation Commission for the
practice of public accountancy. The Professional Regulation
Commission upon favorable recommendation of the Board of
Accountancy shall issue the Certificate of Registration to
practice public accountancy which shall be valid for 3 years and
renewable every 3 years upon payment required fees.
19. What are the three main areas in the practice of the
accountancy profession?
ANSWER:
Public Accounting
Private Accounting
Government Accounting
20. Explain public accounting.
ANSWER:
It is composed of individual practitioners, small
accounting firms and large multinational organizations that
render independent and expert financial services to the public.
21. What are the three kinds of services offered by CPAs in
the practice of public accounting.
ANSWER:
Auditing
Taxation
Management advisory services
22. Explain auditing.
ANSWER:
It is the primary service offered by most public
accounting practitioners. It is the examination of financial
statements by independent certified public accountant for the
purpose of expressing an opinion as to the fairness with which
the financial statements are prepared.
23. Describe the taxation service offered by CPAs.
ANSWER:
It includes the preparation of annual income tax
returns and determination of tax consequences of certain
proposed business endeavors. To offer this service effectively
and efficiently, the public accountant must be thoroughly
familiar with the tax laws and regulations and updated with 22
changes in taxation law and court cases concerned with
interpreting taxation law.
24. Explain management advisory services.
ANSWER:
It is become increasingly important in recent years
although audit and tax services are undoubtedly the mainstay of
public accountant. It has no precise coverage but is used
generally to refer to services to clients on matters of accounting,
finance, business policies, organization procedures, product
costs, distribution and many other phases of business conduct
and operations.
25. What are some management advisory services offered by
CPAs.
ANSWER:
Advice on installation of computer system
Quality control
Installation and modification of accounting
system
Budgeting
Forward planning and forecasting
Design and modification of retirement plans
Advice on mergers and consolidations
26. Explain private accounting.
ANSWER:
It includes maintaining of records, producing the
financial reports, preparing the budgets and controlling and
allocating the resources of the entity.
27. Explain government accounting.
ANSWER:
It encompasses the process of analyzing, classifying,
summarizing and communicating all transactions involving the
receipt and disposition of the government funds and property
and interpreting the results thereof. The focus of government
accounting is the custody and administration of public funds.
28. What do you understand by the continuing professional
development of CPAs.
ANSWER:
It refers to the inculcation and acquisition of advanced
knowledge, skill, proficiency and ethical and moral values after
initial registration of the Certified Public Accountant for
assimilation into professional practice and lifelong learning.
29. What is the meaning of CPD credit units?
ANSWER:
CPD credit units (Continuing Professional
Development) refers to the CPD credit hours required for the
renewal of CPA license and accreditation of a CPA to practice
the accountancy profession every three years.
30. How many CPD credit units are required?
ANSWER:
120 CPD credit units are required.
31. What is the purpose of the required CPD credit units?
ANSWER:
For the renewal of CPA license and accreditation of
CPA to practice the accountancy profession.
32. What is the exemption from the CPD requirements?
ANSWER:
A CPA shall be permanently exempted from CPD
requirements upon reaching the age of 65 years.
33. Distinguish accounting and auditing.
ANSWER:
Accounting embraces auditing. Accounting is
essentially constructive in nature, it ceases when financial
statements are already prepared. On the other hand, auditing is
analytical.
“The
work of an auditor begins when the work of the accountant ends”.
34. Distinguish accounting and bookkeeping.
ANSWER:
Bookkeeping is procedural and largely concerned
with development and maintenance of accounting records.
- It is the “how” of accounting
Accounting is conceptual.
- Concerned with the “why”, reason or justification
for any action adopted.
35. Distinguish accounting and accountancy.
ANSWER:
Accountancy refers to the profession of accounting
practice.
Accounting is used in reference only to a particular
field of accountancy such as public accounting, private
accounting and government accounting.
Page 20
36. What is financial accounting?
ANSWER:
Area of accounting that emphasizes reporting to
creditors and investors. And is concerned with the recording of
business transactions and the eventual preparation of financial
statements
37. What is managerial accounting?
ANSWER:
Managerial accounting is the accumulation and
preparation of financial reports for internal users only.
38. What is the meaning of generally accepted accounting
principles or GAAP?
ANSWER:
Represents the rules, procedures, practice and
standards followed in the preparation and presentation of
financial statements. These are also like laws that must be
followed in financial reporting.
39. What constitute GAAP in the Philippines?
ANSWER:
The Accounting standards promulgated by the
Financial Reporting Standards Council constitute the “highest
hierarchy” of generally accepted accounting principles in the 33
Philippines.
40. Explain the purpose of accounting standards.
ANSWER:
The purpose of accounting standard is to identify
proper accounting practices for the preparation and presentation
of financial statements.
41. What do you understand about the Financial Reporting
Standards Council?
ANSWER:
It is the standard-setting body created by the
Professional Regulation Commission upon recommendation of
the Board of Accountancy to assist the Board of Accountancy in
carrying out its powers and functions provided under R.A Act
No. 9298. Its main function is to establish and improve
accounting standards that will be generally accepted in the
Philippines.
42. What is the composition of FRSC?
ANSWER:
It is composed of 15 members with a Chairman who
had been or is presently a senior accounting practitioner and 14
representatives.
43. What do you understand about PIC and IFRIC?
ANSWER:
PIC is the one that prepare interpretations of PFRS for
approval by the FRSC and to provide timely guidance on
financial reporting issues not specifically addressed in current
PFRS.
IFRIC which has already replaced the Standing
Interpretation Committee or SIC, it is the counterpart of the PIC.
44. What do you understand about the International
Accounting Standards Committee?
ANSWER:
It is an independent private sector body, with the
objective of achieving uniformity in the accounting principles
which are used by business and other organizations for financial
reporting around the world.
45. What are the twin objectives of IASC?
ANSWER:
-To formulate and publish in the public interest accounting
standards to be observed in the presentation of financial
statements and to promote their worldwide acceptance and
PROBLEMS
observance.
PROBLEM 1-1 MULTIPLE CHOICE (ACP)
-To work generally for the improvement and harmonization of
regulations, accounting standards and procedures relating to
1. A
presentation of financial statements.
2. D
3. B
46. What is IASB?
4. A
5. B
ANSWER:
Page 22
The IASB standard-setting process includes in the
correct order research, discussion paper. Exposure draft and
accounting standard. 6. D
7. B
47. What do you understand by IFRIC? 8. A
9. D
ANSWER: 10. D
The counterpart of the PIC in the United Kingdom Page 23 44
which has already replaced SIC.

48. Explain why the Philippines has moved totally from PROBLEM 1-2 MULTIPLE CHOICE (ACP)
American accounting standards to international accounting
standards. 1. A
2. A
ANSWER: 3. A
Support of international accounting standards 4. C
by Philippine organizations, such as the 5. A
Philippines SEC, Board of Accountancy and Page 24
PICPA.
Increasing internalization of business which
has heightened interest in a common PROBLEM 1-3 MULTIPLE CHOICE (ACP)
language for financial reporting.
Improvement of international accounting 1. D
standards or removal of free choices of 2. D
accounting treatments. 3. D
Increasing recognition of international 4. A
accounting standards by the World Bank, 5. D
Asian Development Bank, and World Trade Page 25
Organization.
6. A
49. What do you understand by the “International Financial 7. B
Reporting Standards”? 8. D
9. A
ANSWER: 10. A
It is essential to achieve goal of one uniform and Page 26
globally accepted financial reporting standards.
PROBLEM 1-4 MULTIPLE CHOICE (IFRS)
50. What are collectively included in “Philippine Financial
Reporting Standards”? 1. C
2. A
ANSWER: 3. B
 Philippine Financial Reporting Standards 4. C
which correspond to International Financial 5. B
Reporting Standards. Page 27
The Philippine Financial Reporting Standards 6. D
are numbered the same as their counterpart in International 7. A
Financial Reporting Standards. 8. A
9. A
 Philippine Accounting Standards which 10. D
correspond to International Accounting Page 28
Standards.
PROBLEM 1-5 MULTIPLE CHOICE (IAA)
The Philippine Accounting Standards are numbered the same as
their counterpart in International Accounting Standards.
1. A
2. C
 Philippine Interpretations which correspond to
3. D
Interpretations of the IFRIC and the Standing
4. D
Interpretations Committee, and Interpretations
5. D
developed by the Philippine Interpretations
Page 29
Committee.

Page 21 PROBLEM 1-6 MULTIPLE CHOICE (IAA)

1. D
2. B To assist preparers of financial statements to
3. D develop consistent accounting policy when
4. A no Standard applies to a particular transaction
5.A or other event or where an issue is not yet
Page 30 addressed by an IFRS.
To assist preparers of financial statements to
develop accounting policy when a Standard
allows a choice of an accounting policy.
To assist all parties to understand and
interpret the IFRS Standards.

3. Explain the authoritative status of the Conceptual

Framework.

ANSWER:
In the absence of standard or an interpretation that
specifically applies to a transaction, management shall consider
the applicability of the Conceptual Framework in developing
and applying an accounting policy that results in information 55
that is relevant and reliable.

4. Explain the “primary users” and their information needs.

ANSWER:
These are the parties to whom general purpose
financial reports are primarily directed. They cannot require
reporting entities to provide information directly to them and
therefore must rely on general purpose financial reports for how
much of the financial information needed.

5. Explain the “other users” and their information needs.

ANSWER:
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.

6. What is the scope of the Revised Conceptual Framework?

ANSWER:
Objective of financial reporting
Qualitative characteristics of useful financial
information
Financial statements and reporting entity
Elements of financial statements
Recognition and derecognition
Measurement
Presentation and disclosure
Concepts of capital and capital maintenance
CONCEPTUAL FRAMEWORK AND
7. Explain financial reporting.
ACCOUNTING STANDARDS

CHAPTER II ANSWER:
It is the provision of financial information about an
entity to external users that is useful to them in making
economic decisions and for assessing the effectiveness of the
QUESTIONS: entity’s management.

1. What is the meaning of Conceptual Framework?
ANSWER:
Conceptual Framework is a summary of the terms and
concepts that underlie the preparation and presentation of
financial statements for external users.
2. What are the purposes of the Revised Conceptual
Framework?
ANSWER:
To assist the International Accounting
Standards Board to develop IFRS Standards
based on consistent concepts.
8. What is the overall objective of financial reporting?
ANSWER:
The overall objective of financial reporting is to
provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other
creditors in making decisions about providing resources to the
entity.
9. What are the specific objectives of financial reporting?
ANSWER:
 To provide information useful in making To a large extent, general purpose financial
decisions about providing resources to the reports are based on estimate and judgment
entity. rather than exact depiction.
To provide information useful in assessing the Page 42
cash flow prospects of the entity.
To provide information about the entity
resources, claims and changes in resources PROBLEMS
and claims.
PROBLEM 2-1 MULTIPLE CHOICE (IFRS)
10. Explain financial position.
1. D
ANSWER: 2. D
Information about the entity’s economic resources and 3. D
the claims against the reporting entity. In other words, financial 4. D
position comprises the assets, liabilities and equity of an entity Page 43
at a particular moment in time.

11. Explain liquidity and solvency.

66
ANSWER:
Liquidity is the availability of cash in the near future
to cover currently maturing obligations. PROBLEM 2-2 MULTIPLE CHOICE (IFRS)
Solvency is the availability of cash over a long term to
meet financial commitments when they fall due. 1. C
2. B
3. C
4. B
Page 44

PROBLEM 2-3 MULTIPLE CHOICE (IAA)

12. Explain financial performance
1. D
ANSWER: 2. A
The level of income earned by the entity through 3. D
efficient and effective use of its resources. Also known as results 4. B
of operations and is portrayed in the income statement and 5. B
statement of comprehensive income. Page 45

13. Explain accrual accounting. PROBLEM 2-4 MULTIPLE CHOICE (ACP)

ANSWER: 1. D
Income is recognized when earned regardless of when 2. D
received and expense is recognized when incurred regardless of 3. D
when paid. 4. A
5. A
14. Explain management stewardship of the entity’s Page 46
economic resources.

ANSWER: 6. D
Information about how efficiently and effectively 7. A
management has discharged its responsibilities to use the 8. A
entity’s economic resources helps users to assess management 9. A
stewardship of those resources. 10 A
Page 47
15. What are the limitations of financial reporting?
PROBLEM 2-5 MULTIPLE CHOICE (IAA)
ANSWER:
General purpose financial reports do not and 1. A
cannot provide all the information that 2. B
existing and potential investors, lenders and 3. A
other creditors need. 4. C
These users need to consider pertinent 5. A
information from other sources, for example, Page 48
general economic conditions, political events
and industry outlook.
6. C
General purpose financial reports are not
7. D
designed to show the value of an entity but the
8. B
reports provide information to help the
9. D
primary users estimate the value of the entity.
10. D
General purpose financial reports are intended
Page 49
to provide common information to users and
cannot accommodate every request for
information. PROBLEM 2-6 MULTIPLE CHOICE (AICPA Adapted)

1. C
2. C If it provides feedback about previous evaluations.
3. C
Page 50 9. When is an item material?
ANSWER:
4. A An item is material if knowledge of it could reasonably
5. A affect or influence the economic decision of the primary users of
Page 51 the fianncial statements.

10. Explain the new definition of materiality.

ANSWER:
Information is material if ommitting, misstating or
obscuring it could reasonably be expected be expected to
influence the economic decisions that primary users of general
purpose financial statements make on the basis of those
statements which provide financial information about a specific
reporting entity.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS 11. What are the factors that may be considered in 77

CHAPTER III
determining materiality?
ANSWER:
The size of the item in relation to the total of the group
QUESTIONS to which the item belongs is tatekn into account.
The nature of the item may be inherently material
1. What is the meaning of qualitative characteristics of because by its very nature it affects economic decision.
financial information ?
ANSWER: 12. Explain the fundamental qualitative characteristics of
These are the qualities or attributes that make financial faithful representation.
accounting information useful to the users. ANSWER:
It means that the actual effects of the transactions shall
2. What are fundamental qualitative characteristics? be properly accounted for and reported in the financial
ANSWER: statements.
It relates to the content or substance of financial
information. 13. What are the three ingredients of faithful representation?

3. What are the two fundamental qualitative characteristics? ANSWER:

ANSWER:
The fundamental qualitative characterisrics are
relevance and faithful representation.
4. Explain the most efficient and effective process of applying
the fundamental qualitative characteristics.
ANSWER:
The mos efficient and effective process of applying the
fundamental qualittative characteristics
would usually be:
First, identify an economic phenomenon that has the
potential to be useful.
Second, identify the type of information about the
phenomenon that would be most relevant and can be
faithfully represented.
Third, determine whether the information is available.
Completeness
Neutrality
Free from error
14. Explain completeness of financial information.
ANSWER:
It is the result of the adequate disclosure standard or
the principle of full disclosure. It includes all information
necessary for a user to understand the phenomenon being
depicted, including all necessary descriptions and explanations.
15. What is the standard of adequate disclosure?
ANSWER:
All significant and relevant information leading to the
preparation of financial statements shall be clearly reported.

5. Explain relevance. 16. Explain the notes to financial statements in relation to

ANSWER: completeness of financial information.
Relevance is the capacity of the information to
influence a decision. ANSWER:
It provides narrative description or disaggregation of
6. What are the two ingredients of relevance? the items presented in the financial statements and information
about items that do not qualify for recognition.
ANSWER:
Predictive value 17. Explain neutrality of financial information.
Confirmatory value
ANSWER:
7. Explain predictive value. It is not slanted, weighted, emphasized,de-emphasized
or otherwise manipulated to increase the probability that
ANSWER: financial information will be received favorably or unfavorably
It can be used as an input to processes employed bu by users.it is synonymous with all-encompassing principle of
users to predict future outcome. fairness.
Page 70
8. Explain confirmatory value. 18. What is prudence?
ANSWER:
ANSWER: The quality of information that allows comparisons
Exercise of care and caution when dealing with between two or more entities engaged in the same industry.
uncertainities in the measurement process such that assets or
income are not overstated and liabilitites or expenses are not 28. What is consistency?
understated. Neutrality is supported by the exercise of prudence.
ANSWER:
19. Explain conservatism. Refers to the use of the same method for the same item,
either from period to period within an entity or in a single
ANSWER: period across entities.
It means that when alternatives exist, the alternative
which has the least effect on equity should be chosen. 29. Distinguish consistency from comparability.
Conservatism means “in case of doubt, record any loss and dod
not record any gain.” ANSWER:
Consistency is the uniform application accounting
20. Explain free from error financial information. method from period to period within an entity while
comparability is the uniform application of accounting method
ANSWER: between and across entities in the same industry.
There are no errors or omissions in the description of
the phenomenon or transaction.
30. Explain understandability. 88
21. Explain the effect of measurement uncertainty to
ANSWER:
usefulness of financial information.
It requires that financial information must be
comprehensible or intelligible if it is to be most useful.
ANSWER:
As long as the estimate is clearly and accurately
31. Explain verifiability.
described and explained, even a high level of measurement
uncertainty does not affect the usefulness of the financial
ANSWER:
information.
Means that different knowledgeable and independent
observers could reach consensus, although not necessarily
22. Explain the concept of substance over form.
complete agreement, that a particular depiction is a faithful
representation. It provides results that would be substantially
ANSWER:
duplicated by measurers using the same measurement method.
It is not considered a separate component of faithful
representation because it would be redundant.
32. Distinguish direct verification and indirect verification.

ANSWER:
23. What are enhancing qualitative characteristics?
Direct verification means verifying an amount or other
representation through direct observation, for example, by
ANSWER:
counting cash.
It is intended to increase the usefulness of the financial
Indirect verification means checking the inputs to a
information that is relevant and faithfully represented.
model, formula or other technique and recalculating the inputs
using the same methodology.
24. Enumerate the four enhancing qualitative
characteristics.
33. Explain timeliness.
ANSWER:
ANSWER:
Comparability
Financial information must be available or
Understandability
communicated early enough when a decision is to be made. It
Verfiability
enhances the truism that without knowledge of the past, the basis
Timeliness
for prediction will usually be lacking and without interest in the
future, knowledge of the past is sterile.
25. Explain comparability.

ANSWER: 34. Explain cost constraint on useful financial information.

It is the ability to bring together for the purpose of
noting points points of likeness and difference.
The enhancing qualitative characteristic that enables users to
identify and understand similarities and dissimilarities among
items.
ANSWER:
A consideration of the cost incurred in generating
financial information against the benefit to be obtained from
having the information.

35. What is the rule on cost constraint?

ANSWER:
26. Explain comparability within a single entity. It is important that such cost is justified by the benefit
derived from the financial information.
ANSWER:
The quality of information that allows comparisons Page 71
within a single entity through time or from one accounting
period to the next. PROBLEMS:
27. Explain comparability between and across entities.
PROBLEM 3-1 MULTIPLE CHOICE (IAA)
ANSWER:
1. A
2. D
3. A 1. B
4. B 2. B
5. A 3. C
Page 72 4. B
5. A
6. B Page 81
7. C
8. D 6. B
9. C 7. D
10. B 8. C
Page 73 9. A
10. B
Page 82
PROBLEM 3-2 MULTIPLE CHOICE (IAA)
PROBLEM 3-7 IDENTIFICATION (ACP)
1. D
2. C Indicate the accounting concept that is defined or described.
3. D
4. C 1. Information that has no bearing on an economic decision 99
5. A to be made is useless.
Page 74 ANSWER:
RELEVANCE
6. B
7. C 2. It is the ability to bring together for the purpose of noting
8. D points of likeness and difference.
9. C ANSWER:
10. A COMPARABILITY
Page 75
3. It requires that users have some knowledge of the complex
PROBLEM 3-3 MULTIPLE CHOICE (IAA) economic activities of entities, the accounting process and the
technical terminology in the statements.
1. D ANSWER:
2. C UNDERSTANDABILITY
3. D
4. A 4. Preparers of statements should not try to increase the
5. D usefulness of the information to a few users to the detriment
Page 76 of others who may have opposing interests.
ANSWER:
NEUTRALITY
6. C
7. A 5. In case of conflict between economic substance and legal
8. B form of a transaction, the economic substance shall prevail.
9. D ANSWER:
10. B SUBSTANCE OVER FORM
Page 77
6. Small expenditures for tools are expensed immediately.
ANSWER:
PROBLEM 3-4 MULTIPLE CHOICE (IAA) MATERIALITY
7. When in doubt, recognize all losses and recognize gain.
1. A ANSWER:
2. B CONSERVATISM
3. B
4. B 8. The information should be presented in a manner that
5. B facilitates understanding and avoids erroneous implication.
Page 78 ANSWER:
COMPLETENESS
6. B
7. C 9. It is the capacity of the information to influence a decision.
8. C ANSWER:
9. C RELEVANCE
10. B
Page 79 10. The description and numbers or figures must match
what really existed or happened.
PROBLEM 3-5 MULTIPLE CHOICE (IAA) ANSWER:
FAITHFUL REPRESENTATION
1. D
2. D 11. The financial statements shall be accompanied by notes
3. A to financial statements.
4. A ANSWER:
5. D COMPLETENESS
Page 80
12. There are no errors or omissions in the description of the
PROBLEM 3-6 MULTIPLE CHOICE (AICPA Adapted) phenomenon.
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
PROBLEM 3-8 TRUE OR FALSE (IAA)
TRUE 1. A conceptual framework is a coherent system of
interrelated objectives and fundamentals that lead to consistent
standards.
FALSE 2. Fundamental qualitative characteristics of financial
accounting information are either relevant or prudent.
FALSE 3. An enhancing qualitative characteristic is
confirmatory value.
FALSE 4. A fundamental qualitative characteristic is
understandability.
FALSE 5. To be a faithful representation, an information must
be predictive and confirmatory.
TRUE 6. An enhancing quality of financial accounting
information is comparability.
FALSE 7. Applying different accounting treatment to similar
event from period to period is violation of verifiability.
TRUE 8. The idea of consistency does not mean that entities
cannot switch from one accounting method to another.
FALSE 9. Financial statement users are assumed to have no
reasonable knowledge of business and financial accounting
matters.
FALSE 10. Entities consider only quantitative factors in
determining whether an item is material.
FALSE 11. Neutrality and predictive value are characteristics of
relevant information.
FALSE 12. The tendency to recognize favorable events early is
an example of conservatism.
FALSE 13. The Conceptual Framework focuses primarily on
the needs of internal users of financial information.
TRUE 14. The overall objective of financial reporting is to
provide information for making economic decisions.
FALSE 15. Once an accounting method is adopted, it should
never be changed.
Page 84
10
10
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER IV
QUESTIONS:
1. What is the general objective of financial statements?
ANSWER:
Provide infromation about economic resources of the
reporting entity claims against the entity and changes in the
economic resources claims.
2. Explain a reporting period.
ANSWER:
Period when financial statements are prepared for
general purpose financial reporting.
3. Explain a reporting entity.
ANSWER:
An entity that is required or chooses to prepare
financial statements. It can be a single entity or a portion of an
entity, or can comprise more than one entity. Reporting entity is
not necessarily a legal entity.
4. Define consolidated financial statements, unconsolidated
financial statements and combined financial statements.
ANSWER:
Consolidated financial statements provide information
about the assets, liabilities, equity, income and expenses
of both the parent and its subsidiaries as a single
reporting entity. Also useful for existing and potential
investors, lenders and other creditors of the parent in
their assessment of future net cash inflows to the parent.
Unconsolidated financial statements are designed to
provide information about the parent’s assets, liabilities
income and expenses and not about those of the
subsidiaries. Can be useful to the existing and potential
investors lenders and other creditors of the parent
because a claim against the parent typically does not
give the holder of that claim against subsidiaries.
Combined financial statements provide financial
information about the assets, liabilities, equity income
and expenses not linked with parent and subsidiary
relationship.
5. Explain underlying assumptions in the preparation of
financial statements.
ANSWER: 6. B
These are the basic notions or fundamental premises on 7. C
which the accounting process is based. Accounting assumptions 8. C
are also known as postulates. It serves as the foundations or 9. B
bedrock of accounting in order to avoid misunderstanding but 10. D
rather enhance the understanding and usefulness of the financial Page 96
statements.
6. Explain going concern assumption. PROBLEM 4-3 MULTIPLE CHOICE (AICPA Adapted)
1. D
ANSWER: 2. A
It means that in the absence of evidence to the 3. D
contrary, the accounting entity is viewed as continuing in 4. A
operation indefinitely. 5. B
Page 97
7. Explain time period assumption.
PROBLEM 4-4 (IAA)
ANSWER: For each situation, identify the underlying assumption
It requires that the definite life of an entity is involved. 11
11
subdivided into accounting periods which are usually of equal
length for the purpose of preparing financial reports on financial 1. The operations of a saving bank are being evaluated by the
position, performance and cash flows. Bangko Sentral ng Pilipinas.
During the investigation, the BSP has determined that numerous
8. Distinguish calendar year and natural business year. loans made by top management were unwise and have seriously
endangered the future of the saving bank.
ANSWER:
Calendar year is a twelve – month period that ends on ANSWER:
December 31. GOING CONCERN
Natural business year is a twelve – month period that
ends on any month when the business is at the lowest or 2. The parent entity in Manila has a subsidiary in Japan. The
experiencing slack season. financial statements of the subsidiary are translated to pesos for
consolidation with the financial statements of the parent entity at
9. Explain monetary unit assumption. year-end.
ANSWER: ANSWER:
An accounting principle that concern about the MONETARY UNIT ASSUMPTION
valuation of transactions or event that entity records in its
financial statement. It has two aspects, namely quantifiability 3. A machinery was imported from USA at a certain cost five
and stability of the peso. years ago. Because of inflation, the machinery has now a current
replacement cost which is very much higher than the historical
10. Explain quantifiability and stability of the peso in cost. Management would like to report the machinery at current
relation to monetary assumption unit. replacement cost.
ANSWER: ANSWER:
Quantifiability aspect means that the assets, liabilities, MONETARY UNIT ASSUMPTION
equity, income and expenses should be stated in
terms of a unit of measure which is the peso in 4. An entity has experienced a drastic reduction in revenue by
the Philippines. reason of a long dry spell in the area where the entity grows its
Stability of the peso assumption means that the tobacco.
purchasing power of peso is stable or constant and that The management decided to wait until next year and
its instability is insignificant and therefore may present financial statements for a two-year period rather than
be ignored. prepare now the traditional twelve-month financial statements.

Page 93 ANSWER:
TIME PERIOD
PROBLEMS:
PROBLEM 4-1 MULTIPLE CHOICE (CONCEPTUAL 5. A subsidiary was exhibiting poor financial performance for
FRAMEWORK) the current year.
In an effort to increase the subsidiary’s reported income, the
1. A parent entity purchased goods from the subsidiary at twice the
2. C normal mark up.
3. D
4. A ANSWER:
5. D ACCOUNTING ENTITY
Page 94
Page 98
PROBLEM 4-2 MULTIPLE CHOICE (IAA)
PROBLEM 4-5 IDENTIFICATION (IAA)
1. B
2. D Identify the assumption that is most clearly violated by the
3. D accounting practice.
4. D
5. B 1. An entity decided to publish financial statements only in the
Page 95 years when it had good news to report.
ANSWER: ANSWER:
GOING CONCERN The elements of financial statements refer to the
quantitative information reported in the financial statement of
2. An entity reported inventory, property, plant and equipment financial position and income statement. Elements of financial
and intangible assets at current value at year-end. statements are considered as the “building blocks” from which
the financial statements are constructed.
ANSWER:
MONETARY UNIT ASSUMPTION 2. What are the elements directly related to the measurement
of financial position?
3. An electronics entity owned by a proprietor reported the cost
of the proprietor’s swimming pool as an asset of the entity. ANSWER:
The elements that are directly related to the
ANSWER: measurement of financial position are:
ACCOUNTING ENTITY Asset
Liability
4. An entity prepared financial statements adjusted for changes Equity
in purchasing power.
3. What are the elements directly related to the measurement 12
12
ANSWER: of financial performace?
MONETARY UNIT ASSUMPTION
ANSWER:
5. A mining entity kept no accounting records after starting The elements that are directly related to the
business. The entity is waiting until the mine is exhausted to measurement of financial performace are:
determine the success or failure of business. Income
Expense
ANSWER:
GOING CONCERN 4. Define an asset.

PROBLEM 4-6 IDENTIFICATION (IAA) ANSWER:

Identify the assumption defined or described.
1. An entity reported financial statements in nominal pesos that
have mixed rather uniform amount of purchasing power.
Asset is defined as a present economic resource
controlled by the entity as a result of past events. It is a right that
has the potential to produce economic benefits.
5. What are the essential characteristics of an asset?

ANSWER:
MONETARY UNIT
2. A multinational entity published a complete set of financial
statements at least once a year, regardless of whether the
financial results were good or bad.
ANSWER:
The asset is a present economic resource.
The economic resource is a right that has the potential to
produce economic benefits.
The economic resource is controlled by the entity as a result of
past events.

ANSWER: 6. Explain a right to produce economic benefit.

TIME PERIOD
ANSWER:
3. The pesos of today can buy as much goods and services as the For potential to exist, it does not need to be certain or
pesos five years ago. even likely that the right will produce economic benefits. It is
only necessary that the right already exists. A right can meet the
ANSWER: definition of an economic resource even if the probability that it
MONETARY PERIOD (HISTORICAL COST) will produce economic benefit is low.

4. An accounting entity is viewed as continuing in operation in 7. Explain control of an economic resource.

the absence of evidence to the contrary.
ANSWER:
ANSWER: An entity controls an asset if it has the present ability
GOING CONCERN to direct the use of the asset and obtain the economic benefits
5. An accounting practitioner mixed personal accounting records that flow from it. It also includes the ability to prevent others
with the records of the accounting practice. from using such asset and therefore preventing others from
obtaining the economic benefits from the asset. It may arise if an
ANSWER: entity enforces legal rights.
ACCOUNTING ENTITY
Page 99 8. Define a liability.

CONCEPTUAL FRAMEWORK AND ANSWER:

It is defined as the present obligation of an entity to
ACCOUNTING STANDARDS transfer an economic resource as a result of past events. The new

CHAPTER V
definition clarifies that a liability is the obligation to transfer an
economic resource and not the ultimate outflow of economic
benefits.

9. What are the essential characterictics of a liability?

QUESTIONS:
ANSWER:
1. Define the elements of financial statements.
 The essential characteristics of a liability are:
The entity has an obligation. Page 108
The entity liable must be identified. It is not necessary that the
payee or the entity to whom the obligation is owed be identified.
The obligation is to transfer an economic resource. 6. B
The obligation is a present obligation that exist as a result of past 7. C
event. 8. D
This means that a liability is not recognized until it is incurred. 9. B
10. A
10. Explain an obligation. Page 109
ANSWER:
PROBLEM 5-2 MULTIPLE CHOICE (Conceptual
It is a duty or responsibility that an entity has no
Framework)
practical ability to avoid. Obligations can either be legal or
constructive. It may be legally enforceable as a consequence of a
1. D
binding contract or statutory requirement.
2. D
3. D
11. Explain transfer of economic resources. 4. D
5. B
13
13
ANSWER: Page 110
It may include:
Obligation to pay cash.
6. A
Obligation to deliver goods or noncash resources.
7. B
Obligation to provide services at some future time.
8. D
Obligation to exchange economic resources with
9. C
another party on unfavorable terms.
10. C
Obligation to transfer an economic resource if specified
Page 111
uncertain future event occurs.

12. Define income.

ANSWER:
It is defined as increases in assets or decreases in
liabilities that result in increases in equity other than those PROBLEM 5-3 MULTIPLE CHOICE (AICPA Adapted)
relating to contributions from equity holders. It encompasses
both revenue and gains. 1. B
2. C
3. C
4. D
13. Distinguish income from revenue. 5. B
Page 112
ANSWER:
Income is increases in assets or decreases in liabilities CONCEPTUAL FRAMEWORK AND
that result in increases in equity other than those relating to
contributions from equity holders.
ACCOUNTING STANDARDS
Revenue arises in the course of the ordinary regular
activities and is referred to by variety of different names
including sales, fees, interest, dividends, royalties, and rent.
CHAPTER VI
14. Define an expense.
QUESTIONS:
ANSWER:
1. Explain recognition of the elements of financial
Expense is defined as decreases in assets or increases
statements.
in liabilities that result in decreases in equity, other than those
relating to distributions to equity holders.
ANSWER:
It is a process of capturing for inclusion in the financial
15. Distinguish expenses from loss.
statement an item that meets the definition of an asset, liability,
equity, income or expense.
ANSWER:
Expenses arise in the course of ordinary regular
2. Explain the recognition criteria for the elements of
activities include cost of goods sold, wages and depreciation.
financial statements.
Losses do not arise in the course of the ordinary regular
activities and include losses resulting from disasters.
ANSWER:
Page 107
It does not focus anymore on how people probable
economic benefits will flow to or from the entity and that the
PROBLEMS: cost can be measured reliably.
PROBLEM 5-1 MULTIPLE CHOICE (ACP) 3. What is derecognition?
1. A
2. B ANSWER:
3. A It is defined as the removal of all or part of a recognized
4. A asset or liability from the statement of financial position.
5. B
4. Explain the point of sale income recognition.

ANSWER:
The basic principle of income recognition is that income
shall be recognized when earned.
With respect to sale of goods in the ordinary course of business,
the point of sale is unquestionably the point of income
recognition. The reason is that it is at the point of sale that the
entity has transferred to the buyer the significant risks and
rewards of ownership of the goods. Stated differently, legal title
to the goods passes to the buyer at the point of sale. Moreover, it
is at the point of sale that the entity has transferred control of the
goods to the customer.
5. What are the three applications of the matching principle?
ANSWER:
The matching principle has three applications, namely:
a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
6. Explain cause and effect association principle.
ANSWER:
This is actually the "strict matching concept. This
process, commonly referred to as the matching of cost with
revenue, involves the simultaneous or combined recognition of
revenue and expenses that result directly and jointly from the
same transactions or events.
7. Explain systematic and rational allocation principle.
ANSWER:
The reason for this principle is that the cost incurred
will benefit future periods and that there is an absence of a direct
or clear association of the expense with specific revenue.
When economic benefits are expected to arise over several
accounting periods and the association with income can only be
broadly or indirectly determined, expenses are recognized on the
basis of systematic and allocation procedures.
8. Explain immediate recognition principle.
ANSWER:
Under this principle, the cost incurred is expensed
outright because of uncertainty of future economic benefits or
difficulty of reliably associating certain costs with future
revenue.
An expense is recognized immediately:
a. When an expenditure produces no future
economic benefit.
b. When cost incurred does not qualify or
ceases to qualify for recognition as an asset.
9. What are the two categories of measurement?
ANSWER:
The Revised Conceptual Framework mentions two
categories:
a. Historical cost
b. Current value
10. Explain historical cost.
ANSWER:
The historical cost or original acquisition cost of an
asset is the cost incurred in acquiring or creating the asset
comprising the consideration paid plus transaction cost. The
historical cost of a liability is the consideration received to incur
the liability minus transaction cost. Simply stated, historical cost
is the entry price or entry value to acquire an asset or to incur a
liability. An application of the historical cost measurement is to
measure financial asset and financial liability at amortized cost.
The amortized cost reflects the estimate of future cash flows
discounted at a rate determined at initial recognition.
11. Explain fair value.
ANSWER:
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 transaction between
market participants at the measurement date.
Fair value is an exit price or exit value.
Fair value can be observed directly using market price
of the asset or liability in an active market.
In cases where fair value cannot be directly measured,
an entity can use present value of cash flows. 14
14
Fair value is not adjusted for transaction cost. The
reason is that such cost is a characteristic of the
transaction and not of the asset or liability.
12. Explain value in use.
ANSWER:
Value in use is the present value of the cash flows that
an entity expects to derive from the use of an asset and from the
ultimate disposal. Value in use does not include transaction cost
on acquiring the asset but includes transaction cost on the
disposal of the asset. Value in use is an exit price or exit value.
13. Explain fulfilment value.
ANSWER:
Fulfillment value is the present value of cash that an
entity expects to transfer in paying or settling a liability.
Fulfillment value does not include transaction cost on incurring a
liability but includes transaction cost on fulfillment of a liability.
Fulfillment value is an exit price or exit value.
14. Explain current cost.
ANSWER:
Current cost of an asset is the cost of an equivalent
asset at the measurement date comprising the consideration paid
and transaction cost.
Current cost of a liability is the consideration that would be
received less any transaction cost at measurement date.
Similar to historical cost, current cost is also based on the entry
price or entry value but reflects market conditions on
measurement date.
15. Explain the guideline in selecting an appropriate
measurement basis.
ANSWER:
In selecting a measurement basis for an asset or a
liability and for the related income and expense, it 1s necessary
to consider the nature of the information that the measurement
basis will produce.
In most cases, no single factor will determine which
measurement basis should be selected.
The relative importance of each factor will depend on and
circumstances.
The information produced by the measurement basis must be
useful to the users of financial statements.
To achieve this, the information must be both relevant and
faithfully represented.
Historical cost is the measurement basis most company adopted
in preparing financial statements.
Page 121
PROBLEM 6-1 MULTIPLE CHOICE (Conceptual Identify the principle or concept that is most clearly violated
Framework) by the accounting practice described. Do not use any answer
more than once.
1. A
2. B 1. An entity charges the cost of new office equipment to expense
3. C in the year of purchase although the equipment is expected to
4. B help produce revenue for many years.
5. D ANSWER:
Page 122 SYSTEMATIC AND RATIONAL ALLOCATION
2. An entity records sales after inventory has been produced but
PROBLEM 6-2 MULTIPLE CHOICE (IAA) before it is sold.

1. A ANSWER:
2. D INCOME RECOGNITION
3. A
4. C 3. An entity having 150 accounts payable lists each account
5. C among the liabilities in the statement of financial position.
Page 123
ANSWER: 15
15
PROBLEM 6-3 MULTIPLE CHOICE (AICPA Adapted) CAUSE AND EFFECT

1. B
2. D 4. An entity does not report the major details about the
3. B shareholders’ equity.
4. A
5. B ANSWER:
Page 124 GOING CONCERN/MATERIALITY

5. An entity follows a policy of recording an item as an asset

PROBLEM 6-4 MULTIPLE CHOICE (AICPA Adapted)
when the entity is in doubt whether the item is an asset or an
expense of the current period.
1. D
2. C
ANSWER:
3. A
PRUDENCE
4. D
5. A
6. The accountant of the entity keeps a detailed depreciation
Page 125
record on every asset no matter how small its value.
6. C ANSWER:
7. B MATERIALITY
8. B
9. B 7. A construction firm signed a three-year contract to build a
10. B skyway connecting Alabang and Tagaygay City. The firm
Page 126 immediately records the full contract price as revenue.

PROBLEM 6-5 MULTIPLE CHOICE (IAA) ANSWER:

INCOME RECOGNITION
1. B
2. A 8. Competition has taken away much of the business of an
3. D airline. The airline is unwilling to report its plans to sell half of
4. D its fleet of aircraft.
5. B
Page 127 ANSWER:
STANDARD ADEQUATE DISCLOSURE
6. D
7. C 9. A department store changes accounting method every year in
8. C order to report a higher net income possible under accounting
9. D standards.
10. C
Page 128 ANSWER:
CONSISTENCY
PROBLEM 6-6 MULTIPLE CHOICE (Conceptual
Framework)

1. D 10. The damaged inventory of a department store is being

2. D written down. The manager bases the write down on subjective
3. D opinion in order to minimize income tax.
4. D
5. B ANSWER:
Page 129 INCOME RECOGNITION
Page 130
PROBLEM 6-7 IDENTIFICATION (IAA)
PROBLEM 6-8 IDENTIFICATION (IAA)
Indicate the principle, concept or constraint that best
supports each of the following statements. Do not use an PROBLEM 6-11 DISCUSSION (IAA)
answer more than once.
Indicate the accounting concept that is the most applicable.
1. An entity records a new machine at the cash equivalent price
paid. 1. Timely financial information with predictive and confirmatory
value is presented.
ANSWER:
ANSWER:
RELEVANCE
2. A large entity decides that whenever an asset has a cost of less
than P10,000, the cost will be charged to expense even though 2. Error-free financial information is presented.
the asset may benefit several accounting periods.
ANSWER:
ANSWER: FREE FROM ERROR
SYSTEMATIC AND RATIONAL ALLOCATION 3. The same accounting policies are applied from period to
period.
3. The entity allocates the cost of a patent to the accounting
periods in which it helps to produce the revenue. ANSWER: 16
16
CONSISTENCY
ANSWER:
MATCHING PRINCIPLE 4. Notes to financial statements are prepared in order to have a
fair presentation.
4. The entity estimates and records interest expense on a 5-year
noninterest-bearing not payable. ANSWER:
NOTES TO FINANCIAL STATEMENTS
ANSWER:
FAIR VALUE 5. The annual depreciation is recognized.

5. Subscriptions received in advance by a magazine publishing ANSWER:

entity are treated as deferred revenue until the magazines are
published. 6. An allowable exception to the point of sale is the recording
and reporting of inflows at the end of production.
ANSWER:
EXPENSE RECOGNITION ANSWER:
POINT OF SALE INCOME RECOGNITION
6. Users have trouble making interperiod comparisons when an
entity changes accounting principles from one year to the next. 7. All repair tools are expensed when purchased even if the
useful life is more than one year.
ANSWER:
CONSISTENCY ANSWER:
SYSTEMATIC AND RATIONAL ALLOCATION
7. Many users of financial statements prefer accounting
principles such as accelerated depreciation that tend to state 8. A patent is capitalized and amortized over the period
income on the “low side”. benefited.

ANSWER: ANSWER:
CONSERVATISM HISTORICAL COST

9. Rent paid in advance is recorded as prepaid rent expense.

ANSWER:
FULFILLMENT VALUE

10. Events after the end of reporting are either adjusted or

8. The entity should always report the important details about disclosed.
share capital, for example, the number of shares authorized,
shares issued, shares in treasury, subscribed shares and par ANSWER:
value. STANDARD ADEQUATE DISCLOSURE

ANSWER: Page 134

FAITHFUL REPRESENTATION
PROBLEM 6-12 DISCUSSION (IAA)
9. An allowance for doubtful accounts is established.
An entity provided the following situations:
ANSWER:
CAUSE AND EFFECT ASSOCIATION
1. The entity’s accountant increased the carrying amount of a
patent from the original cost of P1,000,000 to the recently
10. The lower of cost and net realizable value is used to measure
appraised value of P3,000,000.
inventory.
ANSWER:
ANSWER:
DISAGREE, THIS IS A CASE OF FRAUD AND
CONSERVATISM
UNFAITHFULLY REPRESENTED REPORT.
Page 131
2. The entity paid for the personal travel of the chief executive
officer and charged travel expense.
ANSWER:
DISAGREE, THE ENTITY AND PERSONAL
EXPENSES SHOULD BE SEPARATED.
3. At the end of the current reporting period, the entity received
an order from a customer. The merchandise will be shipped in
early next year.
Because the sale was made to a long-time customer and the
invoice was paid in the current year, the controller recorded the
sale in the current year.
ANSWER:
4. In the middle of the current year, the entity paid a certain
amount to an insurance company for one-year comprehensive
insurance coverage.
The entity recorded the entire expenditure as an expense in
current year.
ANSWER:
5. The entity included a note in the financial statements that
described a pending lawsuit against the entity.
ANSWER:
REQUIRED:
State whether you agree or disagree with the financial
reporting practice. Briefly explain your answer.
Page 135
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER VII
QUESTIONS:
1. Explain presentation and disclosure as an effective
communication tool.
ANSWER:
The presentation and disclosure can be an effective
communication tool about the information in financial
statements.
A reporting entity communicates information about its assets,
liabilities, equity, income and expenses by presenting and
disclosing information in the financial statements.
Effective communication of information in financial statements
makes the information more relevant and contributes to a faithful
representation of an entity's assets liabilities, income and
expenses.
Effective communication of information in financial statements
also enhances the understandability and
comparability of information in the financial statements.
Effective communication in financial statements is supported by
not duplicating information in different parts of the financial
statements,
Duplication is usually unnecessary and can make financial
statements less understandable.
2. Explain classification of assets, liabilities and equity.
ANSWER:
Classification is the sorting of assets, liabilities, equity,
income and expenses on the basis of shared or similar
characteristics.
Classifying dissimilar assets, liabilities, equity, income and
expenses can obscure relevant information, reduce
understandability and comparability and may not provide a
faithful representation of financial information.
It may be necessary to classify components of equity separately
if such components are subject to legal, regulatory and other
requirements.
Thus, ordinary share capital, preference share capital, share
premium and retained earnings should be disclosed separately.
3. Explain classification of income and expenses.
ANSWER: 17
17
Income and expenses are classified as components of
profit loss and components of other comprehensive income.
The Revised Conceptual Framework has introduced the term
Statement of financial performance to refer to the statement of
profit or loss together with the statement presenting other
comprehensive income.
The statement of profit or loss is the primary source of
information about an entity's financial performance tor the
reporting period.
Al income and expenses should be appropriately classified and
included in the statement of profit or loss.
However, there are certain items of income and expenses that are
presented outside of profit or loss but included in other
comprehensive income.
The components of other comprehensive income are
subsequently recycled or reclassified to profit or loss or retained
earnings.
4. What is aggregation?
ANSWER:
Aggregation is the adding together of assets, liabilities,
equity, income and expenses that have similar or shared
characteristics and are included in the same classification.
Aggregation makes information more useful by summarizing a
large volume of detail. However, aggregation may conceal some
of the details.
5. Explain capital maintenance.
ANSWER:
The capital maintenance approach means that net
income occurs only after the capital used from the beginning of
the period is maintained.
In other words, net income is the amount an entity can distribute
to its owners and be as "well-off" at the end of the year as at the
beginning.
6. Distinguish return on capital and return of capital.
ANSWER:
The capital maintenance approach means that net
income occurs only after the capital used from the beginning of
the period is maintained. In other words, net income is the
amount an entity can distribute to its owners and be as "well-off"
at the end of the year as at the beginning.
7. Explain financial capital.
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.
8. Explain the net income under the financial capital concept.

ANSWER:
Under the financial capital concept, net income occurs
when the nominal amount of the net assets at the end of the year
exceeds the nominal amount of the net assets at the beginning of
the period, after excluding distributions to and contributions by
owners during the period."

9. Explain physical capital.

CONCEPTUAL FRAMEWORK AND
ANSWER: ACCOUNTING STANDARDS
Physical capital is the quantitative measure of the
physical productive capacity to produce goods and services.
The physical productive capacity may be based on, for example, CHAPTER VIII
units of output per day or physical capacity of productive assets
to produce goods and services.
This concept requires that productive assets be measured at QUESTIONS: 18
18
current cost, rather than historical cost.
Productive assets include inventories and property, plant and 1. What are financial statements?
equipment.
The current costs for these productive assets must be maintained ANSWER:
in order that physical capital is also maintained. Financial statements are the means by which the
information accumulated and processed in financial accounting
10. Explain the net income under the physical capital is periodically communicated to the users.
concept. The financial statements are the end product or main output of
the financial accounting process.
ANSWER: Financial statements are a structured financial representation of
Under this concept, net income occurs "when the the financial position and financial performance of an entity.
physical productive capital of the entity at the end of the year
exceeds the physical productive capital at the beginning of the 2. What are the components of financial statements?
period, also after excluding distributions to and contributions
from owners during the period. ANSWER:
Page 142 A complete set of financial statements comprises the
following components:
PROBLEM 7-1 MULTIPLE CHOICE (Conceptual 1. Statement of financial position
Framework) 2. Income statement
3. Statement of comprehensive income
1. D 4. Statement of changes in equity
2. A 5. Statement of cash flows
3. C 6. Notes, comprising a summary of significant
4. A accounting, accounting policies and other explanatory notes
5. D
Page 143 3. Explain the objective of financial statements.

PROBLEM 7-2 MULTIPLE CHOICE (Conceptual ANSWER:

Framework) The objective of financial statements is to provide
information about the financial p0sition, financial performance
1. A and cash flows of an entity that is useful to a wide range of users
2. B in making economic decisions.
3. A
4. D 4. What is the frequency of reporting of financial
5. C statements?
Page 144
ANSWER:
Financial statements shall be presented at least
annually.
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 need of the entity for additional
financing.
6. What are the essential characteristics of an asset?
ANSWER:
Assets are classified only into two, namely current
assets and noncurrent assets.
When an entity supplies go0ods or services within a clearly
identifiable operating cycle, the separate classification of current
and noncurrent assets is a useful information by distinguishing
between net assets that are continuously circulating as working
capital from the not assets used in long-term operations.
The operating cycle of an entity is the time between the
acquisition of assets for proce8sing and their realization in cash
or cash equivalents. When the entity's normal operating cycle is
not clearly identifiable, the duration is assumed to be twelve
months.
7. What are the classification of assets?
ANSWER:
PAS 1, paragraph 66, provides that an entity shall
classify an asset as current when:
a. The asset is cash or cash equivalent unless
the asset is unrestricted to settle a liability for more than twelve
months after the reporting period.
b. The entity holds the asset primarily for the
purpose of trading.
c. The entity expects to realize the asset within
twelve months after the reporting period.
d. The entity expects to realize the asset or
intends to sell or consume it within the entity's normal operating
cycle.
8. Define current assets.
ANSWER:
any asset which can reasonably be expected to be sold,
consumed, or exhausted through the normal operations of a
business within the current fiscal year or operating cycle or
financial year.
9. What are the line items for current assets?
ANSWER:
Current assets are usually listed in the order of liquidity
PAS 1, paragraph 54, provides that as a minimum, the line items
under current assets are:
a Cash and cash equivalents
b. Financial assets at fair value such as trading
securities and other investments in quoted equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
10. Define noncurrent assets.
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.
11. Identify the non-current assets.
ANSWER:
Accordingly, noncurrent assets include the following:
a. Property, plant and equipment
b. Long-term investments
c. Intangible assets
d. Deferred tax assets
e. Other noncurrent assets
12. What are the essential characteristics of a liability?
ANSWER:
A liability has three essential characteristics:
(a) it embodies a present duty or responsibility to one or more
other entities that entails settlement by probable future transfer
or use of assets at a specified or determinable date, on
occurrence of a specified event, or on demand,
(b) the duty or responsibility obligates a particular entity, leaving
it little or no discretion to avoid the future sacrifice, and
(c) the transaction or other event obligating the entity has
already happened
13. What are the classification of liabilities?
ANSWER:
PAS 1, paragraph 69, provides that an entity shall 19
19
classify a liability as current when:
a. The entity expects to settle the liability
within the entity's normal operating cycle.
b. The entity holds the liability primarily for
the purpose of trading.
c. The liability is due to be settled within
twelve months after the reporting period.
d. The entity does not have an unconditional
right to defer settlement of the liability for at least twelve months
after the reporting period.
14. Define current liabilities.
ANSWER:
current liabilities are often understood as all liabilities
of the business that are to be settled in cash within the fiscal year
or the operating cycle of a given firm, whichever period is
longer.
15. What are the line items for current liabilities?
ANSWER:
PAS 1, paragraph 54, provides that as a minimum, the
face of the statement of financial position shall include the
following line items for current liabilities:
a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability
16. Explain the treatment of currently maturing long-term
debt.
ANSWER:
A liability which is due to be settled within twelve
months after the reporting period is classified as current, even if:
a. The original term was for a period longer
than twelve months.
b. An agreement to refinance or to reschedule
payment on a long-term basis is completed after the reporting
period and before the financial statements are authorized for
issue.
However, if the refinancing on a long-term basis is completed on
or before the end of the reporting period, the refinancing is an
adjusting event and therefore the obligation is classified as
noncurrent.
17. Explain the effect of breach of covenants on the 4. D
classification of liability. Page 167

ANSWER: 5. A
PAS 1, paragraph 74, provides that the liability is 6. A
classified as current even if the lender has agreed, after the 7. A
reporting period and before the statements are authorized for 8. A
issue, not to demand payment as a consequence of the breach. Page 168
This liability is classified as current because at reporting date the
borrower does not have an unconditional right to defer payment
for at least twelve months after the reporting period. 9. C
However, Paragraph 75 provides that the liability is classified as 10. C
noncurrent if the lender has agreed on or before the end of Page 169
reporting period to provide a grace period ending at least twelve
months after the end of reporting period.
PROBLEM 8-7 MULTIPLE CHOICE (IFRS)
18. What are the elements comprising the equity of a
1. D
corporation?
2. C
3. C
20
20
ANSWER:
4. A
1. Paid in capital or contributed capital
Page 170
2. retained earnings
3. treasury stock

19. What is the meaning of “notes to financial statements”? 5. C

6. A
ANSWER: 7. C
Notes to financial statements provide narrative 8. D
description or disaggregation of items presented in the financial Page 171
statements and information about items that do not qualify for
recognition.
Notes contain information in addition to that presented 9. A
in the statement of financial position, income statement; 10. A
statement of comprehensive income, statement of changes in Page 172
equity and statement of cash flows.
In other words, notes to financial statements are used to report PROBLEM 8-8 MULTIPLE CHOICE (AICPA Adapted)
information that does not fit into the body of the financial 1. A
statements in order to enhance the understandability of the 2. D
financial statements. 3. D
4. A
5. A
Page 173

6. D
7. D
8. C
9. D
20. Explain the two forms of statement of financial? 10. C
Page 174
ANSWER:
In practice, there are two customary forms in presenting PROBLEM 8-9 MULTIPLE CHOICE (AICPA Adapted)
the statement of financial position, namely:
a. Report form 1. A
This form sets forth the three major sections in a downward 2. D
sequence of assets, liabilities and equity. 3. D
b. Account form 4. D
As the title suggests, the presentation follows that of an account, 5. D
meaning, the assets are shown on the left side and the liabilities Page 175
and equity on the right side of the statement of financial
position.
PROBLEM 8-10 MULTIPLE CHOICE (IAA)
Page 161
1. C
PROBLEM 8-5 MULTIPLE CHOICE (PAS 1) 2. D
1. B 3. A
2. D 4. D
3. A 5. B
4. A Page 176
5. D
Page 166
PROBLEM 8-11 MULTIPLE CHOICE (IAA)
PROBLEM 8-6 MULTIPLE CHOICE (PAS 1) 1. C
1. C 2. C
2. A 3. D
3. A 4. D
5. D changes resulting from transactions with owners in their capacity
Page 177 as owners.
Accordingly, comprehensive income includes:
6. C a. Components of profit or loss
7. D b. Components of other comprehensive
8. B income
9. C
10. B 4. Distinguish components of profit or loss and components
Page 178 of other comprehensive income.

PROBLEM 8-12 MULTIPLE CHOICE (IAA) ANSWER:

The term profit or loss is the total of income less
1. B expenses, excluding the components of other comprehensive
2. D income. In other words, this is the "bottom line" in the
3. D traditional income statement. An entity may use "net income" or
4. D "net loss" to describe profit or loss.
5. B
5. Identify components of other comprehensive income.
Page 179
21
21
ANSWER:
Oher comprehensive income comprises items of income
and expenses including reclassification adjustments that are not
recognized 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
2. Unrealized gain or loss on debt investment measured
at fair value through other comprehensive income.
3. Gain or loss from translation of the financial
statements of a foreign operation
4. Revaluation surplus during the year.
5. Unrealized gain or loss from derivative contracts
designated as cash flow hedge
6. "Re measurements" of defined benefit plan,
including actuarial gain or loss
7. Change in fair value attributable to credit risk of a
financial liability designated at fair value through profit
CONCEPTUAL FRAMEWORK AND or loss.
ACCOUNTING STANDARDS 6. Explain the presentation of other comprehensive income.

CHAPTER IX
QUESTIONS:
1. Define an income statement.
ANSWER:
An income statement is à formal statement showing the
financial performance of an entity for a given period of time.
The financial performance of an entity is primarily measured in
terms of the level of income earned by the entity through the
effective and sufficient utilization of its resources.
The financial performance is also known as the results of
operations of the entity.
The transaction approach is the traditional preparation of the
income statement in conformity with accounting standards.
2. Explain the usefulness of an income statement.
ANSWER:
The income statement for a period presents the income,
expenses, gains, losses and net income or loss recognized during
the period,
Information about financial performance is useful in predicting
future performance and ability to generate future cash flows.
3. Define comprehensive income.
ANSWER:
Comprehensive income is the change in equity during a
period resulting from transactions and other events, other than
ANSWER:
PAS 1, paragraph 82A, provides that the statement of
comprehensive income shall present line items for amounts of
other comprehensive income during the period classified by
nature.
The line items for amounts of OCI shall be grouped as follows:
a. OCI that will be reclassified subsequently to
profit or loss when specific conditions are met.
b. OCI that will not be reclassified
subsequently to profit or loss but to retained earnings.
7. What are the components of other comprehensive income
that are subsequently reclassified to profit or loss?
ANSWER:
OCI that will be reclassified to profit or loss
a. Unrealized gain or loss on debt investment
measured at fair value through other comprehensive
income.
b. Gain or loss from translating financial
statements of a foreign operation.
c. Unrealized gain or loss on derivative
contracts designated as cash flow hedge.
8. What are the components of other comprehensive income
that are not subsequently reclassified to profit or loss?
ANSWER:
OCI that will be reclassified to retained earnings
a. Unrealized gain or loss on equity investment
measured at fair value through other comprehensive income.
 b. Revaluation surplus during the year, the realization
of the revaluation surplus is through
retained earnings.
c. Re measurements of defined benefit plan, including
actuarial gain or loss. 14. What is the formula of computing the cost of goods sold
d. Change in fair value attributable to credit risk of a of a manufacturing entity?
financial liability designated at fair value through profit or loss.
ANSWER:
Cost of goods sold of manufacturing concern
Beginning raw materials xx
9. Explain the reclassification of the components of other Net purchases xx
comprehensive income that are not reclassified to profit or
loss. Raw materials available for use xx
Ending raw materials (xx)
ANSWER:
Raw materials used xx
10. Explain the two options of presenting comprehensive Direct labor xx
income. Factory overhead xx
22
22
ANSWER: Total manufacturing cost xx
An entity has two options of presenting comprehensive Beginning goods in process xx
income, namely:
1. Two statements: Total cost of goods in process xx
a. An income statement showing the Ending goods in process (xx)
components of profit or loss.
b. A statement of comprehensive income Cost of goods manufactured xx
beginning with profit or loss as shown in the income statement Beginning finished goods xx
plus or minus the components of other comprehensive income.
2. Single statement of comprehensive income Goods available for sale xx
This is the combined statement showing the Ending finished goods (xx)
components of profit or loss and components of other
comprehensive income in a single statement. Cost of goods sold xx

11. Identify the common sources of income. 15. Define distribution cost.

ANSWER: ANSWER:
a. Sales of merchandise to customers Distribution costs constitute costs which are directly
b. Rendering of services related to selling, advertising and delivery of goods to
c. Use of entity resources customers.
d. Disposal of resources other than products Page 198

12. Identify the components of expenses.

16. Define administrative expense.
ANSWER:
Components of expense ANSWER:
a. Cost of goods sold or cost of sales Administrative expenses constitute cost of
b. Distribution costs or selling expenses administering the business.
c. Administrative expenses Administrative expenses ordinarily include all operating
d. Other expenses expenses not related to selling and cost of goods sold.
e. Income tax expenses
17. Define other expenses.
13. What are the formula in computing cost of goods sold of
a merchandising concern? ANSWER:
Other expenses are those expenses which are not
ANSWER: directly related to the selling and administrative function.
Cost of goods sold of merchandising concern
Beginning inventory xx 18. As a minimum, what are the line items that are reported
Net purchases xx on the face of the income statement and statement of
comprehensive income?
Goods available for sale xx
Ending inventory (xx) ANSWER:
PAS 1, paragraph 82, provides that as a minimum, the
income statement and statement of comprehensive income shall
include the following line items:
Cost of goods sold xx a. Revenue
b. Gain and loss from the de recognition of financial asset
Gross purchases xx measured at amortized cost as required by FRS 9.
Freight in xx

Total xx c. Finance cost

Purchase returns, d. Share in income or loss of associate and joint venture
allowances and discounts (xx) accounted for using the equity method
e. Gain or loss on the reclassification of financial asset from
Net purchases xx amortized cost to fair value profit or loss
f. Gain or loss on the reclassification of financial asset from fair
value other comprehensive income to fair value profit or loss.
g. Income tax expense
h. A single amount comprising discontinued operations
i. Profit or loss for the period
j. Total other comprehensive income
k. Comprehensive income for the period being the total of profit
or loss and other comprehensive income.
19. Explain the two forms of income statements.
ANSWER:
Functional presentation
This form classifies expenses according to
their function as part of cost of goods sold, distribution costs,
administrative expenses and other expenses.
Natural presentation
The natural presentation is referred to as the
nature of expense method. Under this form, expenses are
aggregated according to their nature and not allocated among the
various functions within the entity.
The statement of retained earnings is no longer a required basic
statement but it is a part of the statement of changes in equity.
25. Define a statement of cash flow.
ANSWER:
A statement of cash flows is a component of financial
statements summarizing the operating, investing and financing
activities of an entity.
In simple language, the statement of cash flows provides
information about the cash receipts and cash payments of an
entity during a period.
An entity shall prepare a statement of cash flows and present it
as an integral part of the financial statements for each period for
which financial statements are presented.
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 period. 23
23
Page 199

20. Which form of income statement is required? Problem 9-15 MULTIPLE CHOICE (PAS 1)
1. B
ANSWER: 2. C
PAS 1 does not prescribe any format. 3. B
Paragraph 105 simply states that because each method of 4. B
presentation has merit for different types of entities, 5. D
management is required to select the presentation that is reliable Page 211
and more relevant.
6. A
21. What is a single statement of comprehensive income?
7. D
8. A
ANSWER:
9. D
Another option in presenting the components of profit
10. D
or loss and components of other comprehensive income 1s to
Page 212
prepare a single statement of comprehensive income,
Again, this single statement is the combined income statement
and statement of comprehensive income, Problem 9-16 MULTIPLE CHOICE (IFRS)
Using the preceding data, the single statement of comprehensive 1. C
income following the "functional 2. C
presentation" may appear as follows: 3. D
4. B
22. Define a statement of retained earnings. 5. A
Page 213
ANSWER:
The statement of retained earnings shows the changes
affecting directly the retained earnings of an entity and relates
the income statement to the statement of financial position.
Problem 9-17 MULTIPLE CHOICE (IAA)
1. D
2. C
3. D
4. C
5. B
23. What are the common items that directly affect retained Page 214
earnings?
6. C
ANSWER: 7. A
The important data affecting the retained earnings that 8. A
should be clearly disclosed in the statement of retained earnings 9. D
are: 10. B
a. Profit or loss for the period Page 215
b. Prior period errors
c. Dividends declared and paid to shareholders Problem 9-18 MULTIPLE CHOICE (IAA)
d. Effect of change in accounting policy
e. Appropriation of retained earnings 1. C
2. B
24. Define a statement of changes in equity. 3. A
4. D
ANSWER: 5. A
The statement of changes in equity is a basic statement Page 216
that shows the movements in the elements or components of the
shareholders' equity. Problem 9-19 MULTIPLE CHOICE (AICPA Adapted)
1. B ANSWER:
2. B Operating activities are the cash flows derived primarily from
3. A the principal revenue producing activities of the entity.
4. D
5. D Investing activities are the cash flows derived from the
Page 217 acquisition and disposal of long-term assets and other
investments not included in cash equivalent.
Problem 9-20 MULTIPLE CHOICE (IAA)
Financing activities are the cash flows derived from the equity
1. D capital and borrowings of the entity.
2. D
3. C 7. Explain the treatment of noncash investing and financing
4. A transactions.
5. C
Page 218 ANSWER:
PAS 7, paragraph 43, provides that investing and
financing transactions that do not require use of Cash or cash
CONCEPTUAL FRAMEWORK AND equivalent shall be excluded from the statement of cash flows. 24
24
ACCOUNTING STANDARDS Noncash investing and financing transactions shall) be disclosed
also where in the financial statements either in the notes to
CHAPTER X financial statement or in a separate schedules or in a way that
provide all relevant information about these transactions.

QUESTIONS: 8. Explain the treatment of interest paid and interest

1. Define a statement of cash flows.
ANSWER:
A statement of cash flows is a component of financial
statements summarizing the operating, investing and financing
activities of an entity.
In simple language, the statement of cash flows provides
information about the cash receipts and cash payments of an
entity during a period.
An entity shall prepare a statement of cash flows and present it
as an integral part of the financial statements for each period for
which financial statements are presented.
received in a statement of cash flows.
ANSWER:
PAS 7, paragraph 33, provides that interest paid and
interest received shall be classified as operating cash flows
because such items enter into the determination of net income or
loss
Alternatively, interest paid may be classified as financing cash
flow because it is a cost of obtaining financial resources.
Alternatively, interest received may be classified as investing
cash flow because it is a return on investment.
For a financial institution, interest paid and interest received are
usually classified as operating cash flows.

9. Explain the treatment of dividend received and dividend

paid in a statement of cash flows.

2. Explain the primary purpose of a statement of cash flows.
ANSWER:
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 period.
3. Define cash.
ANSWER:
Cash includes more than just the physical traditional bills and
coins. Cash can include any other currencies, as well as
undeposited cheques and amounts in a current account.
4. Define cash equivalents.
ANSWER:
Cash equivalents are short-term highly liquid
investments that are readily convertible to known amount of
cash and which are subject to an insignificant risk of change in
value.
5. What are the three classifications of cash flows?
ANSWER:
The statement of cash flows shall report cash flows
during the period classified as operating, investing and financing
activities.
6. Explain operating activities, investing activities and
financing activities.
ANSWER:
PAS 7, paragraph 33, provides that dividend received
shall be classified as operating cash flow because it enters into
the determination of net income.
Alternatively, dividend received may be classified as investing
cash flow because it is a return on investment.
PAS 7, paragraph 34, provides that dividend paid shall be
classified as financing cash flow because it is a cost of obtaining
financial resources.
Alternatively, dividend paid may be classified as operating cash
flow in order to assist users to determine the ability of the entity
to pay dividends out of operating cash flows.
10. Explain the treatment of income taxes in a statement of
cash flows.
ANSWER:
PAS 7, paragraph 35, provides that cash flows arising
from income taxes shall be separately disclosed as cash flows
from operating activities unless they can be specifically
identified with investing and financing activities.
Tax cash flows are often difficult to match to the originating
underlying transaction, so most of the time all tar cash flows are
classified as arising from operating activities.
Page 227
Problem 10-10 MULTIPLE CHOICE (PAS 7)
1. C
2. B
3. A
4. C
5. C Change to a new policy resulting from the requirement
Page 234 of a new PFRS

6. D
7. D
8. B
9. D
10. B
Page 235

Problem 10-11 MULTIPLE CHOICE (IFRS)

4. When is a change in accounting policy allowed?
1. A
2. C ANSWER: A change in accounting policy shall be made
3. A only when:
4. A
5. D Required by an accounting standard.
Page 236
The change will result in more relevant and 25
25
faithfully represented information about the
Problem 10-12 MULTIPLE CHOICE (IFRS)
financial position, financial performance and
cash flows of the entity.
1. D
2. C
5. How is a change in accounting policy reported?
3. A
4. B
ANSWER:
5. C
Page 237
A change in accounting policy required by a standard
or an interpretation shall be applied in accordance with
CONCEPTUAL FRAMEWORK AND the transitional provisions therein. If the standard or
ACCOUNTING STANDARDS interpretation contains no transitional provisions or if
an accounting policy is changed voluntarily, the change
CHAPTER XI shall be applied retrospectively or retroactively.

6. Explain the adoption of an accounting policy in the

QUESTIONS: absence of an accounting standard.

1. Define accounting policies. ANSWER:

ANSWER: In the absence of accounting standard that specifically

Accounting policies are the specific principles, bases,
conventions, rules and practices applied by an entity in
preparing and presenting financial statements. These
policies are essential for a proper understanding of the
information contained in the financial statements.
2. Define a change in accounting policy.
ANSWER:
Accounting policies must be applied consistently for
similar transactions and events. And a change in this
policy shall be made only when: a. Required by an
accounting standard.
The change will result to more relevant and
faithfully represented information about the
financial position, financial performance and
cash flows of the entity.
applies to a transaction or event, management shall use
judgment in selecting an applying an accounting policy
that results in information that is relevant to the
economic decision making needs of users and faithfully
represented.
7. Define a change in accounting estimate.
ANSWER:
A change in accounting estimate is a normal or
recurring correction or adjustment of an asset or
liability which is the result of the use of an estimate. An
estimate may need revision if changes occur regarding
the circumstances on which the estimate was based or
as a result of new information, more experience or
subsequent development.
8. How is a change in accounting estimate reported?

3. Give examples of change in accounting policy. ANSWER:

ANSWER: The effect of a change in accounting estimate

shall be recognized currently and
Change in the method of inventory pricing from the prospectively by including it in income or loss
FIFO to weighted average method.
of:
Change in the method of accounting for long term
construction contract from cost recovery method to
(a) the period of change if the change affects that period
percentage of completion method.
only, and
The initial adoption of policy to carry assets at revalued
(b) the period changes and future periods if the change
amount is a change in accounting policy to be dealt
affects both. A change in accounting estimate shall not be
with as revaluation.
accounted for by restating amounts reported in financial
Change from cost model to fair value model in
statements prior periods.
measuring investment property.
 CHAPTER XII
9. Define prior period errors.

ANSWER:

Prior period errors are omissions and misstatements in QUESTIONS:

the financial statements for one or more periods
arising from a failure to use or misuse of reliable
information. Errors may occur as a result of
mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, fraud or
oversight.
10. Explain the treatment of prior period errors.
ANSWER:
1. Define events after the reporting period.
ANSWER:
PAS 10, paragraph 3, defines events after
reporting period as those events, whether favorable and
unfavorable, that occur between the end of reporting period and
the date on which the financial statements are authorized for
issue. These events are also known as subsequent events.

Prior period errors shall be corrected retrospectively by 2. What are the type of events after reporting period?
adjusting the opening balances of retained earnings and
affected assets and liabilities. An estimate may need ANSWER: 26
26
revision if changes occur regarding the circumstances
on which the estimate was based or as a result of new a. Adjusting events
information, more experience or subsequent b. Nonadjusting events
development.
3. Explain adjusting events after reporting period.
Page 245
ANSWER:
PROBLEM 11-11 MULTIPLE CHOICE (IFRS)
1.B Adjusting events after the reporting period are
2.A those that provide evidence of conditions that exist at the end of
3.D reporting period.
Page 251
4. Explain nonadjusting events after reporting period.
4.B ANSWER:
5.C
6.A Nonadjusting events after reporting period are
7.D those that are indicative of conditions that arise after the end of
Page 252 reporting period.

8.D 5. When are financial statements considered authorized for

9.D issue?
10.C
Page 253 ANSWER:

PROBLEM 11-12 MULTIPLE CHOICE (AICPA Adapted) Financial statements are authorized for issue when the
1. D board of directors reviews the financial statements and
2. C authorizes them issue. In some cases, an entity is required to
3. C submit the financial statements to the shareholders for approval
4. C
after the financial statements have been issued. In such cases, the
5. D
financial statements are authorized for issue on the date of issue
Page 254
by the board of directors and not on the date when shareholders
approve the financial statements.
PROBLEM 11-13 MULTIPLE CHOICE (AICPA Adapted)
1. D
2. A Page 262
3. D
4. C
5. A
Page 255

1. A
2. B
3. D
Page 256

4. D
5. A PROBLEMS
Page 257
Problem 12-1 (IFRS)

CONCEPTUAL FRAMEWORK AND The audit of Anne Company for the year ended December
ACCOUNTING STANDARDS 31, 2020 was completed on March 1, 2021.
The financial statements were signed by the managing
director on March 15, 2021 and approved by the
shareholders on March 31, 2021.
The following events have occurred:
1. On the January 15, 2021, a customer owing P900,000 to
Anne filed for bankruptcy.
The financial statements include an allowance for doubtful
accounts pertaining to the customer only of P100,000.
2. The entity’s issued share capital comprised 100,000
ordinary shares with P100 par value.
The entity issued additional 25,000 shares on March 1, 2021
at par value.
3. Equipment with carrying amount of P525,000 was
destroyed by fire on December 15, 2020.
The entity has booked a receivable of P400,000 from the
insurance entity.
After the insurance entity completed the investigation on
February 1, 2021, it was discovered that the fire took place
due to negligence of the machine operator.
As a result, the insurer’s liability was zero on the claim.
REQUIRED:
PREPARE ADJUSTING ENTRIES ON DECEMBER 31,
2020 FOR THE EVENTS AFTER REPORTING PERIOD.
PROBLEM 12-1
ANNE COMPANY
1. Doubtful accounts
800,000
Allowance for doubtful accounts
800,000
2. The issuance of additional shares on march 1, 2021 is a
nonadjusting event
3. Loss on claim
400,000
Claim receivable
400,000
Page 263
Problem 12-2 (IFRS)
Norway Company reported that the year-end is December
31, 2020 and the financial statements are authorized for issue
on March 15, 2021.
1. On December 31, 2020, Norway Company had a
receivable of P400,000 from a customer that is due 60 days
after the end of reporting period. On January 15, 2021, a
receiver was appointed for the said customer. The receiver
informed Norway that the P400,000 would be paid in full by
June 30, 2021.
2. Norway Company measured share investments held for
trading at fair value through profit or loss. On December 31,
2020, these investments were recorded at the market value of
P5,000,000. During the period up to February 15, 2021, there
was a steady decline in the market value of all the shares in
the portfolio, and on February 15, 2021, the market value
had fallen to P2,000,000.
3. Norway Company had reported a contingent liability on
December 31, 2020 related to a court case in which Norway
Company was the defendant. The case was not heard until
the first week of February, 2021. On March 1, 2021, the
judge handed down a decision against Norway Company.
The judge determined that Norway Company was liable to
pay damages and costs totaling P3,000,000.
4. On December 31, 2020, Norway Company had an account
receivable from a large customer in the amount of
P3,500,000. On January 31, 2021, Norway Company was 27
27
advised by the liquidator of the said customer that the
customer was insolvent and would be unable to repay the full
amount owed to Norway Company. The liquidator advised
Norway Company in writing that only 10% of the account
receivable will be paid on April 30, 2021.
REQUIRED:
PREPARE ADJUSTING ENTRIES ON DECEMBER 31,
2020 TO REFLECT THE EVENTS AFTER REPORTING
PERIOD.
PROBLEM 12-2
NORWAY COMPANY
1. The receivable of P400,000 is a nonadjusting event because
the amount is still fully collectible
2. The change in fair value of the investments on February
15, 2021 is a nonadjusting event 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
3,150,000
Allowance for doubtful accounts (3,500,000 x 90%)
3,150,000
Page 264
PROBLEM 12-5 MULTIPLE CHOICE (IAS 10)
1. C
2. A
3. A
4. A
Page 266
PROBLEM 12-6 MULTIPLE CHOICE (IAA)
1. D
2. D
3. C
4. D
5. D
Page 267
PROBLEM 12-7 MULTIPLE CHOICE (IFRS)
 1. B 5. Give examples of unrelated parties.
2. A
3. D ANSWER:
Page 268
1. Two entities simply because they have a director or
key management personnel in common.
4. C 2. Providers of finance, trade unions, public utilities
5. A and government agencies in the course of their
Page 269 normal dealings with an entity by virtue only of
those dealings.
CONCEPTUAL FRAMEWORK AND 3. A single customer, supplier, franchisor or general
agent with whom an entity transacts a significant volume of
ACCOUNTING STANDARDS business merely by virtue of the resulting economic dependence.

CHAPTER XIII
4. Two venturers simply because they share joint
control over a joint venture.
Page 276

QUESTIONS: PROBLEM 13-1 (AICPA Adapted)

28
28
1. Define related party. Dean Company acquired 100% of Morey Company in the
prior year. During the current year, the individual entities
ANSWER: included in their financial statements the following:
Related party - Parties are considered to be
related if one party has:
Dean Morey
a. the ability to control the other party Key officers’ salaries 750,000 500,000
Officers’ expenses 200,000 100,000
b. the ability to exercise significant influence over the Loans to Officers 1,250,000 500,000
other party, and Intercompany sales 1,500,000
c. joint control over the reporting entity.
What total amount should be reported as related party
2. Give examples of related parties. disclosures in the notes to Dean Company’s consolidated
financial statements for the current year?
ANSWER:
a. 1,500,000
1. Affiliates - meaning the parent, the subsidiary and b. 1,550,000
fellow subsidiaries. c. 1,750,000
2. Associates -meaning the entities over which one d. 3,000,000
Loans to officers:
party exercises significant influence.
Dean 1,250,000
3. Venturer in a joint venture. It includes the Morey 500,000
subsidiary or subsidiaries of the joint venture.
Key officers' salaries:
4. Key management personnel - those persons having Dean 750,000
authority and responsibility for planning, directing, and Morey 500,000
controlling the activities of the entity, directly or indirectly,
Total 3,000,000
including any executive director or nonexecutive director.
page 277

3. Explain related party disclosure. PROBLEM 13-3 MULTIPLE CHOICE (PAS 24)

ANSWER: 1. D
2. B
PAS 24, paragraph 12, requires disclosure of related 3. C
party relationships where control exists irrespective of whether 4. D
there have been transactions between related parties. In other 5. D
words, relationships between parents and subsidiaries shall be Page 278
disclosed regardless of whether there have been transactions
between the related parties. PROBLEM 13-4 MULTIPLE CHOICE (IFRS)

4. What are the minimum disclosure for related party 1. D

transactions? 2. D
3. B
ANSWER: 4. D
5. A
a. The amount of the transaction. Page 279
b. The amount of outstanding balance, terms and
conditions, whether secured or unsecured, and nature 6. C
of consideration to be provided in settlement. 7. C
c. The allowance for doubtful accounts related to the 8. B
outstanding balance. 9. B
d. The doubtful accounts expense recognized during the 10. D
period in respect of amount due from related parties. Page 280

CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XIV
QUESTIONS:
1. Define inventories.
ANSWER:
Inventories are assets held for sale in the ordinary
course of business, in the process of production for such sale or
in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
2. What are the components of cost of inventories?
ANSWER:
The cost of inventories shall comprise; (a) cost of
purchase, (b) cost of conversion, and (c) other cost incurred in
bringing the inventories to their present location and condition.
3. Explain cost of purchase, cost of conversion and other cost
included in cost of inventories.
ANSWER:
The cost of purchase of inventories comprises the
purchase price, import duties and irrecoverable taxes, freight,
handling and other costs directly attributable to the acquisition of
finished goods, materials, and services. Trade discounts, rebates
and other similar items are deducted in determining the cost of
purchase. Cost of conversion of inventories includes cost directly
related to the units of production such as direct labor. It also
includes systematic allocation of fixed and variable production
overhead that is incurred in converting materials into finished
goods.
Other cost included in the cost of inventories only to the
extent that it is incurred bringing the inventories to their present
location and condition.
4. Identify certain costs that are excluded from the cost of
inventories.
ANSWER:
The following costs are excluded from the cost of inventories
and recognized as expenses in the period when incurred:
Abnormal amounts of wasted materials,
labor and other productions costs.
Storage costs, unless necessary in the
production process prior to a further
production stage.
Administrative overheads
Distribution or selling costs.
5. Explain the cost of inventories of a service provider.
ANSWER:
Cost of inventories of a service provider consists
primarily of the labor and other costs of personnel directly
engaged in providing the service, including supervisory
personnel and attributable overhead.
6. Explain the cost formulas in determining cost of
inventories.
ANSWER:
PAS 2, paragraph 25, expressly provides that the cost of
inventories shall be determined by using either;
a First in, first out (FIFO) method - assumes that “the
goods first purchased are first sold” and consequently
the goods 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 29
29
sold in the order they are purchased. The rules are “first
come, first sold.”
b Weighted average - the cost of the beginning
inventory plus the total cost of purchases during the
period is divided by the total units purchased plus those
in the beginning inventory to get a weighted average
unit cost. Such weighted average unit cost is then
multiplied by the units on hand to derive the inventory
value. In other words, the average unit cost is computed
by dividing the total cost of goods available for sale by
the total number of units available for sale.
7. Explain the specific identification of determining cost of
inventories.
ANSWER:
Specific identification means that specific costs are
attributed to identified items of inventory. The cost of inventory
is determined by simply multiplying the units on hand by the
actual unit cost. PAS 2, paragraph 23, provides that this method
is appropriate for inventories that are segregated for a specific
project and inventories that are not ordinarily interchangeable.
8. What is the standard in measuring inventory in the
statement of financial position?
ANSWER:
PAS 2, paragraph 9, provides that inventories shall be
measured at the lower of cost and net realizable value. The cost
of inventory is determined using either FIFO cost or average
cost. The measurement of inventory at the lower of cost and net
realizable value is known as LCNRV.
9. Explain net realizable value.
ANSWER:
Net realizable value or NRV is the estimated selling
price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.
10. Explain the accounting for inventory write-down.
ANSWER:
Accounting for inventory write-down
states that if the cost is lower than net realizable value,
there is no accounting problem because the inventory is
stated at cost and the increase in value is not recognized.
And if the net realizable value is lower than cost, the
inventory is measured at net realizable value. In this case,
the problem is the proper treatment of the write-down of 5.A
the inventory to the net realizable value. The write-down Page 309
of inventory to net realizable value is accounted for using
the allowance method
6.A
Page 29 7.C
8.A
9.C
PROBLEM 14-20 MULTIPLE CHOICE (PAS 2) 10.B
1. D Page 310
2. C
3. D CONCEPTUAL FRAMEWORK AND
4. D
5. A ACCOUNTING STANDARDS

CHAPTER XV
Page 302
PROBLEM 14-21 MULTIPLE CHOICE (IFRS)

1. D
2. A QUESTIONS: 30
30
3. D
4. B 1. Define property, plant and equipment.
5. C Answer:
Page 303 Property, plant and equipment are tangible assets that
are held for use in production or supply of goods or services, for
rental to others, or for administrative purposes, and are expected
6. C to be used during more than one period.
7. A
8. B 2. What are the major characteristics in defining property,
9. A plant and equipment?
10. A Answer:
Page 304 Accordingly, the major characteristics in the definition
of property, plant and equipment are: a. The property, plant and
equipment are tangible assets, meaning with physical substance.
PROBLEM 14-22 MULTIPLE CHOICE (IAA)
The property, plant and equipment are used in business, meaning
used in production or supply of goods or services, for rental
1.B
purposes and for administrative purposes.
2.A
The property, plant and equipment are expected to be used over
3.D
a period of more than one year.
4.D
5.A
3. Give examples of property, plant and equipment.
Page 305
Answer:
Land, land improvements, building, machinery, ship,
PROBLEM 14-23 MULTIPLE CHOICE (IAA) aircraft, motor vehicle, furniture and fixtures, office equipment
and tools are examples of property, plant and equipment.
1. C
2. A 4. Explain the recognition of property, plant and equipment.
3. D Answer:
4. B An item of property, plant and equipment shall be
5. C recognized as asset when;
Page 306 it is probable that future economic benefits associated with the
asset will flow to the entity
PROBLEM 14-24 MULTIPLE CHOICE (IAA) the cost of the asset can be measured reliably.

1. D 5. Explain the measurement of property, plant and

2. C equipment at recognition and after recognition.
3. D Answer:
4. B An item of property, plant and equipment that qualifies
5. B for recognition as an asset shall be measured at cost. Cost is the
Page 307 amount of cash or cash equivalent paid and the fair value of the
other consideration given to acquire an asset at the time of
PROBLEM 14-25 MULTIPLE CHOICE (PAS 2) acquisition or construction.

1.C 6. What are the elements of cost of property, plant and

2.D equipment?
3.D Answer:
4.A The cost of an item of property, plant and equipment comprises:
5.C Purchase price, including import duties and
Page 308 nonrefundable purchase taxes, after deducting trade
discounts and rebates.
PROBLEM 14-26 MULTIPLE CHOICE (IFRS) Cost directly attributable to bringing the asset to the
location and condition necessary for it to be capable of
1.D operating in the manner intended by management.
2.D Initial estimate of the cost of dismantling and removing
3.B the item and restoring the site on which it is located for
4.A which an entity has a present obligation.
7. Explain directly attributable costs.
Answer:
Cost of employee benefit arising directly from the
construction or acquisition of the item of property, plant and
equipment.
Cost of site preparation
Initial delivery and handling cost
Installation and assembly cost
Professional fee
Costs of testing whether the asset is functioning
properly.
8. Give examples of costs which are expensed rather than
capitalized as property, plant and equipment.
Answer:
Examples of cost that are expensed rather than
recognized as element of cost of property, plant and equipment
are:
Cost of opening a new facility
Cost of introducing a new product or service, including
cost of advertising and promotion
Cost of conducting business in a new location or with a
new class of customer, including cost of staff training
Administration and other general overhead cost
Initial operating loss
9. What is the cost of the asset acquired on a cash basis?
Answer:
The cost of an item of property, plant and equipment is
the cash price equivalent at the recognition date. The cost of
asset acquired on a cash basis simply includes the cash paid plus
directly attributable costs such as freight, installation cost and
other cost necessary in bringing the asset to the location and
condition for the intended use.
10. What is the cost of an asset acquired on account subject
to a cash discount?
Answer:
When an asset is acquired on account subject to a cash
discount, the cost of the asset is equal to the invoice price minus
the discount, regardless of whether the discount is taken or not.
Cash discounts are generally considered as reduction of cost and
not as income.
11. If an asset is acquired on the installment basis, the asset
is recorded at what amount?
Answer:
When payment for item of property, plant and
equipment is deferred beyond normal credit terms, the cost is the
cash price equivalent. In other words, if an asset is offered at a
cash price and at an installment price, the asset shall be recorded
at the cash price. The excess of the installment price over the
cash price is treated as an interest to be amortized over the credit
period.
12. Discuss the accounting procedure when an asset is
acquired through the issuance of share capital.
Answer:
Philippine GAAP provides that if shares are issued for
consideration other than actual cash, the proceeds shall be
measured by the fair value of the consideration is received.
Accordingly, where a property is acquired through the issuance
of share capital, the property shall be measured at an amount
equal to the following in the order of priority:
Fair value of the property received
Fair value of the share capital
Fair value or stated value of the share capital
13. Discuss the accounting procedure when an asset is
acquired by issuing bonds payable.
Answer:
PFRS 9, paragraph 5.1.1, provides the asset acquired by
issuing bonds payables measured in the following order:
Fair value of bonds payable
Fair value of asset received
Face amount of bonds payable
14. Discuss the accounting procedure for recording an
exchange.
Answer:
PAS 16, paragraph 24, provides that the cost of an item
of property, plant and equipment acquired in exchange for a non-
monetary asset or a combination of monetary and non-monetary
asset is measured at fair value plus any cash payment. However,
the exchange is recognized at carrying amount if the exchange
transaction lacks commercial substance.
15. What would the cost of self-constructed property, plant
and equipment include?
Answer:
The cost of self-constructed property, plant and
equipment includes:
direct cost of materials
direct cost of labor 31
31
indirect cost and incremental overhead specifically
identifiable or traceable to the construction.
Page 322
16. Explain derecognition of property, plant and equipment.
Answer:
Derecognition means that the cost of property, plant
and equipment together with the related accumulated
depreciation shall be removed from the statement of financial
position.
PAS 16, paragraph 67, provides that the carrying amount of an
item of property, plant, and equipment shall be derecognized on
disposal or when no future economic benefits are expected from
the use or disposal.
17. Explain the treatment of fully depreciated property.
Answer:
A property is said to be fully depreciated when the
carrying amount is equal to the residual value. In such a case, the
asset account and the related accumulated depreciation account
are closed and the residual value is set up in a separate account.
However, it is not uncommon for an entity to continue to use an
asset after it has been fully depreciated. The cost of fully
depreciated asset remaining in service and the related
accumulated depreciation ordinarily shall not be removed from
the accounts. Entities are encouraged but not required to disclose
fully depreciated property.
18. Define depreciation.
Answer:
Depreciation is defined as the systematic allocation of
the depreciable amount of an asset over the useful life.
Depreciation is not so much a matter of valuation. It is a matter
of cost allocation in recognition of the exhaustion of the useful
life of an item of property, plant and equipment. The objective of
depreciation is to have each period benefiting from the use of the
asset bear an equitable share of the asset cost.
19. Explain the depreciation period.
Answer:
The depreciable amount of an asset shall be allocated
on a systematic basis over the useful life. Depreciation of an
asset begins when it is available for use, meaning, when the asset
is in the location and condition necessary for the intended use by
management. Depreciation ceases when the asset is
derecognized.
20. What is the depreciable amount?
Answer:
Depreciable amount is the cost of an asset or other
amount substituted for cost, less the residual value. Each part of
an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be
depreciated separately.
 2. A
21. What is residual value? 3. A
Answer: 4. C
Residual value is the estimated net amount currently 5. B
obtainable if the asset is at the end of useful life. The residual Page 330
value of an asset shall be reviewed at least at each financial year-
end and if expectation differs from the previous estimate, the Problem 15-12 multiple choice (AICPA Adapted)
change shall be accounted for as a change in an accounting
estimate. 1. D
2. C
22. What is the useful life of an asset? 3. A
Answer: 4. B
The useful life of an asset is either the period over Page 331
which an asset is expected to be available for use by the entity,
or the number of production or similar units expected to be Problem 15-13 multiple choice (PAS 16)
obtained from the asset by the entity. 1. A
2. C
23. When is the straight line method adopted? 3. D
Answer: Page 332 32
32
Under the straight line method, the annual depreciation
charge is calculated by allocating the depreciable amount
4. A
equally over the number of years of useful life. It is adopted
5. D
when the principal cause of depreciation is passage of time.
Page 333
24. When is the production method adopted?
Answer:
The production or output method assumes that Problem 15-14 multiple choice (IAA)
depreciation is more a function of use rather that passage of 1. C
time. It is adopted if the principal cause of depreciation is usage. 2. D
3. D
25. When is the diminishing balance method adopted? 4. A
Answer: 5. D
The diminishing balance or accelerated Page 334
methods provide higher depreciation in the earlier years and
lower depreciation in the later years of the useful life of the Problem 15-15 multiple choice (PAS 16)
asset. Thus, these methods result in decreasing depreciation 1. D
charge over the useful life. This method includes sum of years’ 2. D
digits method and double declining balance. 3. B
Page 323 4. A
5. C
Problem 15-8 (IAA) Page 335

Siargao Company recently acquired two items of equipment. 6. A

 Acquired a press at an invoice price of P3,000,000 7. B
subject to a 5% cash discounts which was taken. 8. B
9. D
Cost of freight and insurance during shipment were 10. D
P50,000 and installation cost amounted to P200,000. Page 336

 Acquired a welding machine at an invoice price of

P2,000,000 subject to a 10% cash discount which
was not taken. Additional welding supplies were
acquired at a cost of P100,000.

What is the total increase in the equipment account as a

result of the transactions?

a 4,900,000
b 5,000,000
c 5,100,000
d 5,200,000
Page 328

Problem 15-10 multiple choice (PAS 16)

1. D
2. B
3. C
4. D
5. D
Page 329

Problem 15-11 multiple choice (IAA)

1. B
 CONCEPTUAL FRAMEWORK AND 33
33
ACCOUNTING STANDARDS

CHAPTER XVI
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.

3. Explain accounting for grant in recognition of expenses.

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 4. Deferred grant income 2,000,000
carrying amount of the asset Grant income 2,000,000
(40,000,000/20)

PROBLEM NO. 3:
8. Explain the presentation of government grant related to
income. Journal Entries in the First year:
Shall be presented as follows:
a. the grant is presented in the income 1. Land 50,000,000
statement, either separately or under the general Deferred grant income 50,000,000
heading “other income”.
b. Alternatively, the grant is deducted from the 2. Factory/Building 80,000,000
related expense. Cash 80,000,000

9. Define government assistance. 3. Depreciation 3,200,000

It is the action by government designed to provide an Accumulated Depreciation 3,200,000
economic benefit specific to an entity or range of entities (80,000,000/25 years)
qualifying under certain criteria.
4. Deferred Grant Income 2,000,000 34
34
10. What are the necessary disclosures related to government Grant income 2,000,000
grant? (50,000,000/25 years)
a. The accounting policy adopted for government grant
including the method of presentation adopted in the financial PROBLEM NO. 4:
statements.
b. The nature and extent of government grant Cash 10,000,000
recognized in the financial statements and an indication of other Grant income 10,000,000
forms of government assistance from which the entity has
directly benefited.
c. Unfulfilled conditions and other contingencies PROBLEM 16-2
attaching to government assistance that has been recognized.

Page 346 1st year 2,000,000

2nd year 2,000,000
3rd year 6,000,000
PROBLEM 16-1 10,000,000

PROBLEM NO. 1:
Journal Entries for the first year:
1st year 2,000,000
2nd year 4,000,000 1. Land 12,000,000
3rd year 6,000,000 Deferred Grant Income 12,000,000
4th year 8,000,000
20,000,000 2. Operation 10,000,000
Cash 10,000,000
Journal Entries- first year
1st year (2/10 x 12 000 000) 2 400 000
Cash 30,000,000 2nd year (2/10 x 12 000 000) 2 400 000
Deferred grant income 30,000,000 3rd year (6/10 x 12 000 000) 7 200 000
12 000 000
Deferred grant income
Grant income
PROBLEM 16-4
Environmental expenses 2,000,000
Cash 2,000,000
First year (2/20 x 30,000,000) 3,000,000 DEFERRED INCOME APPROACH
Second year (4/20 x 30,000,000) 6,000,000
1. Machine 7,000,000
Third year (6/20 x 30,000,000) 9,000,000
Cash 7,000,000
Fourth year (8/20 x 30,000,000) 12,000,000
30,000,000
2. Cash 1,000,000
Deferred Grant income 1,000,000
PROBLEM NO. 2:
3. Depreciation
Journal entries for first year
Accumulated Depreciation
1. Cash 40,000,000
Cost of Machine 7,000,000
Deferred grant income 40,000,000
Residual value (500,000)
Depreciable amount 6,500,000
2. Building 50,000,000
Cash 50,000,000
Annual Depreciation (6,500,000/5 years) 1,300,000
3. Depreciation 2,500,000
Deferred grant income 200,000
Accumulated Depreciation 2,500,000
Grant income 200,000
(50,000,000/20)
(1,000,000/5 years)
DEDUCTION FROM ASSET APPROACH 4. Explain the capitalization of borrowing cost of asset
financed by specific borrowing.
Machine 7,000,000 If the funds are borrowed specifically for the purpose of
Cash 7,000,000 acquiring a qualifying asset, the amount of capitalizable
borrowing cost is actual borrowing cost incurred during the
Cash 1,000,000 period less any investment income from the temporary
Machine 1,000,000 investment of those borrowings.

Depreciation 1,100,000 5. Explain the capitalization of borrowing cost for asset

Accumulated Depreciation 1,100,000 financed by general borrowing.
If the funds are borrowed generally and used for
Acquisition cost 7,000,000 acquiring a qualifying asset, the amount of capitalizable
Government grant (1,000,000) borrowing cost is equal to the average carrying amount of the
Net cost 6,000,000 asset during the period multiplied by a capitalization rate or
Residual Value (500,000) average interest rate.
Depreciable amount 5,500,000
6. Explain the capitalization of borrowing cost for asset
Annual Depreciation (5,500,000/5 years) 1,100,000 financed by both specific and general borrowing.
35
35
PROBLEM 16-10 MULTIPLE CHOICE (PAS 20) 7. Explain commencement of capitalization of borrowing
cost.
1. A The capitalization starts when all three conditions are
2. C met: expenditures are incurred, borrowing costs are incurred,
3.A and the activities necessary to prepare the asset for its intended
4.A use or sale are in progress. Expenditures on the asset are
5.D incurred when the prepayments are made (payments of the
Page 352 instalments).

6.D 8. Explain suspension of capitalization of borrowing cost.

7.A an entity may incur borrowing costs during extended
8.B periods in which it suspends the activities necessary to prepare
9.A the asset for its intended use or sale, and that
10.B such costs are costs of holding partially completed assets and do
Page 353 not qualify for capitalization.

PROBLEM 16-11 MULTIPLE CHOICE (IFRS)

9. Explain cessation of capitalization of borrowing cost.
1.C
Capitalization of borrowing cost ceases when all the
2.B
activities necessary to prepare the qualifying assets are complete.
3.C
If an asset has been completed in parts and a completed part is
4.C
capable of being used while the construction for the other part
5.A
continues then the capitalization for that completed part will
Page 354
cease.

CONCEPTUAL FRAMEWORK AND 10. What are the necessary disclosures related to borrowing
ACCOUNTING STANDARDS cost?
The standard requires the entity to disclose the

CHAPTER XVII following: Borrowing cost capitalized during

the accounting period; The weighted average borrowing cost rate
or percentage used to determine the borrowing costs eligible for
capitalization
1. Define borrowing costs. Page 363
It is defined as interest and other costs that an entity
incurs in connections with borrowing of funds.
HAMLET COMPANY
2. What is a qualifying asset for purposes of capitalization of Construction Cost 6,000,000
borrowing cost? Interest (6,000,000 x 10% x 11/12) 550,000
An asset that necessarily takes a substantial period of Interest Income (80,000)
time to get ready for the intended use or sale. 6,470,000
Examples includes the ff:
a. manufacturing plant CAGAYAN COMPANY
b. Power generation facility Interest Incurred (24,000,000 x 10% x 10/12) 2,000,000
c. intangible asset Interest Income (200,000)
d. Investment property. 1,800,000

MOSES COMPANY
3. Explain the accounting for borrowing cost. Specific Borrowing (4,000,000 X 10%) 400,000
It can be capitalized when the asset is a qualifying asset General Borrowing (750,000 X 12%) 90,000
and it is probable that the borrowing cost will result to future 490,000
economic benefit and the cost can be measured reliably.
All the borrowing cost shall be expensed as incurred. (4,750,000-4,000,000 = 750,000- general borrowing)

JOSHUA COMPANY
Average Expenditure 3,000,000
Specific Borrowing (2,200,000) 1. Define associate.
General Borrowing 800,000 Associate is simply defined as an entity over which the
investor has significant influence.
Specific Borrowing (2,200,000 x 10%) 220,000
Interest Income (45,000) 2. Define significant influence.
General Borrowing (800,000 x 9%) 72,000 The power to participate in the financial and operating
247,000 policy decisions of the associate but not control or joint
control over those policies.
ELYSEE COMPANY
Average expenditures (30,000,000 / 2) 15,000,000 3. What is the practical guidance in determining significant
Applicable Specific Borrowing (10,000,000) influence?
General Borrowing 5,000,000
When an investor exercises significant influence over the
12% 20-year bonds issued 30,000,000 3,600,000 investee, one or more of the following indicators is usually
8% 5-year notes payable 10,000,000 800,000 present:
40,000,000 4,400,000
Representation on the board of directors or equivalent
Average Capitalization (if asked) (4,400,000 / 40,000,000) 11% governing body of the investee 36
36
Participation in policy-making processes, including
Interest on Specific Borrowing participation in decisions about dividends or other
(10,000,000x10%) 1,000,000 distributions
Interest Income (100,000) Material transactions between the investor and the
Interest on General Borrowing investee
(5,000,000 x 11% 550,000 Interchange of managerial personnel
1,450,000 Provision of essential technical information

PROBLEM 17-8 MULTIPLE CHOICE (PAS 23)

4. Explain the equity method of accounting for share
1. D investment.
2. C The equity method is applied when a company's
3. D ownership interest in another company is valued at 20–
Page 368 50% of the stock in the investee.
The equity method requires the investing company to
4. C record the investee's profits or losses in proportion to
5. A the percentage of ownership.
6. A
7. D 5. What is the meaning of “excess of cost over carrying
Page 369 amount” with respect to acquisition of share investment?
If the assets of the investee are fairly valued, the excess
of cost. over carrying amount of the underlying net
8. D
assets to goodwill.
9. A
If the excess is attributable to undervaluation of
10. C
depreciable asset, it is amortized over the remaining life
Page 370
of the depreciable asset.

6. Explain an impairment loss with respect to an investment

in associate.
If the carrying amount of an investment in an associate
or joint venture exceeds its recoverable amount, an
impairment loss is recognized. The loss is allocated to
PROBLEM 17-9 MULTIPLE CHOICE (IFRS) the investment as a whole and not to the underlying
assets of the investee that make up the carrying amount
1.C of the investment.
2.B
3.C 7. Explain the accounting procedure if an associate
4.A has cumulative and noncumulative preference shares.
5.B In case of cumulative preferred stock, any unpaid
Page 371 dividends on preferred stock are carried forward to the
future years and must be paid before any dividend is
6.D paid to common stockholders.
7.A Any unpaid dividend on preferred stock for a year is
8.A known as ‘dividends in arrears’. The disclosure of
9.B dividends in arrears is of great importance for the
10.D investors and other users of financial statements.
Page 372 Unlike cumulative preferred stock, unpaid dividends on
noncumulative preferred stock are not carried forward
to the subsequent years. If preferred stock is
CONCEPTUAL FRAMEWORK AND noncumulative and directors do not declare a dividend
because of insufficient profit in a particular year, there
ACCOUNTING STANDARDS is no question of dividends in arrears.

CHAPTER XVIII 8. Explain the discontinuance of the equity method.

An investor should discontinue the use of the equity method need to be written down on the company's balance sheet
from the date that: to its current market value.

it ceases to have significant influence but retains either
in part or in whole its investment or
the use of the equity method is no longer appropriate as
the associate operates under severe long-term
restrictions.
The carrying value should be regarded as cost
thereafter.
9. Explain the measurement of the investment in associate
when significant influence is lost.
If an investor loses significant influence over an
associate, it derecognizes that associate and recognizes
in profit or loss the difference between the sum of the
proceeds received and any retained interest, and the
carrying amount of the investment in the associate at
the date significant influence is lost.
10. What are the circumstances when the equity method is
not applicable?
Another group of shareholders has majority ownership,
and operate it without regard to the investor's views.
The investor is unable to obtain sufficient information
to apply the equity method. The investor is unable to
obtain representation on the investee's board of
directors.
Page 382
PROBLEM 18-9 MULTIPLE CHOICE (PAS 28)
1. A
2. C
3. D
4. B
Page 387
2. What are the internal sources of information that would
indicate possible impairment?
The internal information that should be considered which may
indicate impairment include:
Evidence of obsolescence or physical damage
Changes to the asset’s use, including
Asset becoming idle
Plan to discontinue or restructure the operation to which
the asset belongs
Plan to dispose of the asset before previously expected
date
Reassessing the useful life as finite rather than infinite
Poor performance
37
37
3. What are the external sources of information that would
indicate possible impairment?
The external information that should be considered which may
indicate impairment include:
Decline in asset value: more so than normal wear and
tear
Changes in the entity’s environment; technological,
market, economic or legal conditions.
Increase in market interest rate, this will affect the
asset’s value in use.
Carrying amount of net assets: If this is greater than the
market capital of a company, there may be impairment
4. What is the recoverable amount of an asset?
Recoverable amount is the greater of an asset's fair
value less costs to sell, or its value in use.
Thus, the concept essentially focuses on the greatest
value that can be obtained from an asset, either by
selling or using it.

5. Explain fair value less cost of disposal.

5. B Fair value less costs to sell (FVLCS) is the amount
6. D obtainable from the sale of the asset in an arm's length
7. D transaction between knowledgeable and willing parties,
8. A less the costs of disposal. This term is consistent with
Page 388 the measurement basis in IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations.

6. Explain value in use.

9. B
Value-in-use is the net present value of the cash flows
10. C
generated by an asset as it is currently being used by the
Page 389
owner. This amount may be less than the net present
value of cash flows from the highest and best use to
PROBLEM 18-10 MULTIPLE CHOICE (AICPA Adapted) which an asset can be put.
1. D 7. Explain the reversal of an impairment loss.
2. D Reversal of an impairment loss on CGU is allocated to
3. C individual assets on a pro-rata basis, but the increased
4. A carrying amount cannot be higher than the carrying
Page 390 amount that would have been determined (net of
depreciation) without impairment loss in previous
CONCEPTUAL FRAMEWORK AND years.
ACCOUNTING STANDARDS 8. What is the meaning of cash generating unit?

CHAPTER XIX A cash-generating unit is the smallest identifiable group

Questions:
1. Define impairment asset.
An impaired asset is an asset that has a market value
less than the value listed on the company's balance
sheet. When an asset is deemed to be impaired, it will
of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or
groups of assets
9. Explain the allocation of impairment loss across the assets
of a cash generating unit.
An impairment loss is recognized for a cash-generating
unit where the recoverable amount of the unit is less
than the carrying amount of the unit. The impairment
loss is allocated to reduce the carrying amount of the
 assets of the unit on a pro rata basis, based on the
carrying amount of each asset in the unit.
10. Explain impairment of a cash generating unit with
goodwill.
4. Explain “future economic benefit” that may be derived
from an intangible asset.
The future economic benefit embodied in an asset is the
potential to contribute, directly or indirectly, to the flow
of cash and cash equivalents to the entity or with
respect of not-for-profit entities, whether in the public
or private sector, the future economic benefits are also
used to provide goods and services in accordance with
the entities' objectives.

A cash-generating unit to which goodwill has been allocated 5. What are the two conditions that must be presented for
shall be tested for impairment at least annually by comparing the the recognition of an intangible asset?
carrying amount of the unit, including the goodwill, with the
recoverable amount of the unit: An intangible asset shall be recognized if, and only if: (a) it is
probable that the expected future economic benefits that are
If the recoverable amount of the unit exceeds the attributable to the asset will flow to the entity; and
carrying amount of the unit, the unit and the goodwill (b) the cost of the asset can be measured reliably.
allocated to that unit is not impaired 38
38
If the carrying amount of the unit exceeds the 6. Explain the initial measurement of intangible asset.
recoverable amount of the unit, the entity must Intangible assets are measured initially at cost. After
recognize an impairment loss. initial recognition, an entity usually measures an
Page 405 intangible asset at cost less accumulated amortization. It
may choose to measure the asset at fair value in rare
Problem 19-9 multiple choice (IFRS) cases when fair value can be determined by reference to
an active market.
1. B
2. C 7. Explain the measurement of cost of an intangible asset
3. A acquired separately.
4. A
5. B The cost of a separately acquired intangible asset comprises:
Page 411 (a) its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade
6. B discounts and rebates; and
7. D (b) any directly attributable cost of preparing the asset
8. D for its intended use.
9. A
10. B 8. What is the cost of an internally generated intangible
Page 412 asset?
the cost of an internally generated intangible asset
comprises all directly attributable costs necessary to
Problem 19-10 Multiple choice (IFRS)
create, produce and prepare the asset to be capable of
operating in the manner intended by management.
1. A
2. D
9. What is the treatment of internally generated brand,
3. D
masthead, publishing title, customer list and other item
4. D
similar in substance?
5. D
Internally generated brands, mastheads, publishing
Page 413
titles, customer lists and items similar in substance shall
not be recognized as intangible assets.
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS Expenditure on internally generated brands, mastheads,
publishing titles, customer lists and items similar in

CHAPTER XX substance cannot be distinguished from the cost of

developing the business as a whole. Therefore, such
items are not recognized as intangible assets.

1. Define intangible asset
An intangible asset is an asset that lacks physical
substance. Examples are patents, copyright, franchises,
goodwill, trademarks, and trade names, as well as
software. This is in contrast to physical assets and
financial assets.
2. Explain “identifiability” of an intangible asset
Identifiability is the characteristic that conceptually
distinguishes other intangible assets from goodwill.
3. Explain “control” of an intangible asset
The definition of intangible asset requires that the
intangible asset must be controlled by the entity, and an
entity controls an intangible asset if it has ability to
obtain economic benefits related to the asset and can
restrict others from such benefits.
10. Define the terms “research” and development”
Research and development (R&D) includes activities
that companies undertake to innovate and introduce
new products and services. It is often the first stage in
the development process. The goal is typically to take
new products and services to market and add to the
company's bottom line.
11. Identify the research activities.
Refers to activities that result in the creation of new
knowledge and/or the use of existing knowledge in a
new and creative way so as to generate new concepts,
methodologies and understandings. This could include
synthesis and analysis of previous research to the extent
that it leads to new and creative outcomes.
12. Identify the development activities.
 Development activities are strategies to gain 4. C
knowledge, skills, or abilities. These are specific 5. B
actions, relationships, tasks, or programs for employees. Page 439

13. Explain the accounting for research cost. 6. D

The accounting for research and development involves 7. B
those activities that create or improve products or 8. B
processes. The core accounting rule in this area is that 9. D
expenditures be charged to expense as incurred. ... 10. D
Testing products and processes. Modifying formulas, Page 440
products, or processes.
PROBLEM 20-10 MULTIPLE CHOICE (IAA)
14. Explain the accounting for development cost.
The accounting for research and development involves 1. D
those activities that create or improve products or 2. C
processes. The core accounting rule in this area is that 3. C
expenditures be charged to expense as incurred 4. D
Page 441
15. What are the criteria for the recognition of development 39
39
cost as an intangible asset?
5. A
6. D
There is an option to defer the development expenditure and
7. D
carry it forward as an intangible asset if the following criteria are
8. A
met:
Page 442
there is a clearly defined project
expenditure is separately identifiable 9. A
the project is commercially viable 10. C
the project is technically feasible Page 443
project income is expected to outweigh cost
resources are available to complete the project PROBLEM 20-11 MULTIPLE CHOICE (IFRS)
Page 429 1. D
2. B
PROBLEM 20-7 MULTIPLE CHOICES (PAS 36) 3. D
4. D
1. D 5. A
2. C Page 444
3. D
4. D PROBLEM 20-12 MULTIPLE CHOICE (AICPA
Page 433 ADAPTED)
1. A
5. D 2. B
6. D 3. B
7. D 4. A
8. D Page 445
Page 434

9. D
10. D
Page 435 5. D
6. A
7. B
PROBLEM 20-8 MULTIPLE CHOICE (PAS 38)
8. C
Page 446
1. C
2. B
3. D 9. B
4. A 10. A
Page 436 Page 447

5. A CONCEPTUAL FRAMEWORK AND

6. D ACCOUNTING STANDARDS
7. A
8. D
Page 437 CHAPTER XXI
9. B
10. B TOPIC QUESTIONS
Page 438 1. Define an investment property.
Answer:
PROBLEM 20-9 MULTIPLE CHOICE (IFRS) It defines as a property (land or building or both) held by the
owner or rented by the lessee under finance lease, to earn rentals
1. D or for capital appreciation.
2. D
3. A
These are lands and building, because they are non-movable
property.
2. Define an owner-occupied property.
Answer:
These are land held by an owner for use in the production or
supply of goods or services or administrative purposes; or sale in
the ordinary course of business.
3. Give examples of investment property.
Answer:
Examples of investment property are the following:
Land held for long-term appreciation in value, rather
than for short term sale in the ordinary course of
business;
Land whose future use is undeterminable. If future use
is not yet determined, land is assumed to be held for
capital appreciation;
A building owned or held under a finance lease and
leased out under an operating lease
4. What is the treatment of property that is partly
investment and partly owner-occupied?
Answer:
If a property is being under dual-use i.e. property contains a part
of the property which is held for rental earnings or capital
appreciation and another part which is held for use in the
production, supply of goods/services, or for use in
administration. Such property will be accounted for as:
If both portions are separable i.e. (could be sold or
leased out separately under finance lease), then entity
should account for each portion on individual basis
under relevant IAS
If both portions are not separable i.e. (could not be sold
or leased out separately under finance lease), the
property will be treated as Investment Property only, if
an immaterial part of such property is held for use in
the production, supply of goods/services or for use in
administration.
Investment property should not include Ancillary Services
(Meals, Cleaning, Security, Utilities, and Maintenance services).
If in case of a certain property, an entity provides ancillary
services to the occupants of a property, the entity shall apply the
following:
The property will be Investment Property, if quantum
of the services is immaterial or insignificant. For
example, security or maintenance services.
The property will not be Investment Property, if
quantum of the services is material or significant. For
example, owner-managed hotel. Therefore, such
properties will be covered in IAS 16
5. What is the treatment of property leased to an affiliate?
Answer:
The property which is leased to, the Parent Co. by a
Subsidiary Co. or vice versa, will not be treated as
Investment Property in the consolidated financial
statements, instead it will be treated as Owner-occupied
Property under IAS 16, because the property is under
owner-occupied use from the Group perspective.
However, the property will remain Investment Property
in the individual financial statements of the entity who
owns it.
6. When is an investment property recognized?
A property will be recognized as Investment Property if it meets
the following criteria:
The definition of Investment Property
If future economic benefits are probable to flow to the
entity
Its cost is reliably measurable.
7. Explain the initial measurement of investment property?
Answer:
The Investment Property is initially measured
at Cost including Transaction Costs. The cost of Investment
Property includes:
Purchase Price and
Any directly related cost such as (professional or legal
charges, property transfer taxes & any other transaction
costs)
8. What is the measurement of investment property
subsequent to initial recognition?
Answer:
Any expenditure upon Investment Property, during the life of
Investment Property will be recognize in the carrying amount of
investment property, if such expense results in increase in
economic benefits of the investment property that would obtain
otherwise.
Any other expense to maintain the Investment Property will be
treated as expense in the statement of profit or loss.
The entity has two options to account for the Investment 40
40
Property at reporting date;
Cost Model
Fair Value Model
9. Explain the cost model and fair value model of measuring
investment property.
Answer:
The entity has two options to account for the Investment
Property at reporting date;
Cost Model
Fair Value Model
Whichever model is chosen; it should be applied for all the
Investment Properties held by the entity.
Cost Model:
The entity which chooses Cost model to account for its
Investment Property after initial recognition, will measure the
investment Property as per Cost Model rules prescribed in IAS
16 i.e. Cost less Accumulated Depreciation Less Accumulated
impairment loss.
Fair Value Model:
The entity which chooses Fair Value model to account for its
Investment Property after initial recognition, will measure the
investment Property at Fair Value.
Under fair vale model, the investment property will be
measured at fair value on reporting date.
Any change (increase or decrease) in the fair value of
investment property at reporting date, will be reported
to the statement of profit or loss.
Investment property under fair value model is not
depreciated.
10. Explain the fair value of investment.
Answer:
The fair value of the investment property is determined as per
the requirements of IFRS 13; however, the entity should also
consider the following points;
The fair value should be determined as per the current
condition of the investment property, in the current
market conditions.
If in exceptional circumstances, the fair value of a
certain investment property is not determinable and
alternative reliable measurements (discounted cash
flows) are also not available, then entity should
measure such investment property under cost model till
the date of disposal and residual value of such property
will assumed to be zero.
If the fair value of an investment property being
constructed is not available, and entity estimates that
the fair value of such property will be determinable
upon its completion, then in such circumstances entity
should account for the investment property being
constructed under cost model until
Its fair value becomes available or Construction work is
finished
Page 429
 3. Explain biological transformation.
Problem 21-7 Multiple choice (PAS 40) Answer:
1. C Biological transformation comprises the processes of growth,
2. D degeneration, production, and procreation that cause qualitative
3. D or quantitative changes in a biological asset.
4. B
5. A
Page 463

6. C
7. B 4. Explain the recognition of biological asset and agricultural
8. A produce.
Page 464 Answer:
An entity should recognize a biological asset or agriculture
produce when, and only when:
9.A
the entity controls the asset as a result of past events;
10. A
it is probable that future economic benefits will flow to
Page 465
the entity; and
the fair value or cost of the asset can be measured 41
41
reliably.
Problem 21-8 Multiple Choice (IFRS)
1. C 5. Explain the initial measurement of biological asset.
2. A Answer:
3. D Biological assets should be measured on initial recognition and
4. A at subsequent reporting dates at fair value less costs to sell,
Page 466 unless fair value cannot be reliably measured.

5. C 6. Explain the measurement of agricultural produce as it

6. D grows and once harvested.
7. D Answer:
8. A Agricultural produce should be measured at fair value less costs
Page 467 to sell at the point of harvest. Because harvested produce is a
marketable commodity, there is no 'measurement reliability'
9. A exception for produce. A gain on initial recognition of
10. D agricultural produce at fair value should be included in profit or
Page468 loss for the period in which it arises. All costs related to
biological assets that are measured at fair value are recognized
Problem 21-9 Multiple Choice (PAS 40) as expenses when incurred, other than costs to purchase
1. B biological assets.
2. A
3. D 7. Define bearer plant.
4. A Answer:
5. A Bearer plant is a living plant that:
Page 469 - Is used in the production or supply of agricultural produce
- Is expected to bear produce for more than one period, and
- Has a remote likelihood of being sold as agricultural produce,
CONCEPTUAL FRAMEWORK AND except for incidental scrap sales.
ACCOUNTING STANDARDS
8. Explain the treatment of bearer plant.
CHAPTER XXII Answer:
If an entity grows plants both to bear produce and for sale as
living plants or agricultural produce, apart from incidental scrap
TOPIC QUESTIONS sales, it must continue to account for those plants at fair value
less costs to sell in their entirety (for example, trees that are
1. Define biological assets, agricultural produce and harvest. cultivated for their lumber as well as their fruit).
Answer: Before bearer plants are placed into production (i.e. before they
Biological assets are living animals and living plants. reach maturity and bear fruit) they should be measured at
Agricultural produce is the harvested product of the entity’s accumulated cost.
biological assets.
Harvest is the detachment of produce from a biological asset or 9. Explain the treatment of bearer animals.
the cessation of a biological asset’s life processes. Answer:
Examples of biological assets, agricultural produce, and products The bearer plants as property, plant and equipment (PPE) per
that are the result of processing after harvest; IAS16 allows the preparer to value the bearer plants at cost, less
(1) sheep to wool to yarn or carpets; subsequent depreciation or impairment or at a revalued amount.
(2) dairy cattle to milk to cheese; No additional disclosure requirements were added specifically
(3) bushes to leaf to tea or cured tobacco; for bearer plants. In general, the bearer plants do not generate
(4) fruit trees to picked fruit to processed fruit. cash flows independently of the land, and may therefore be seen
together with the land as a cash-generating unit. The impairment
2. What is an agricultural activity? test would then also take place at the level of the cash-generating
Answer: unit (thus bearer plants and land it is situated on).
Agricultural activity is the management by an entity of the
biological transformation and harvest of biological assets for 10. Explain the treatment of animal-related recreational
sale, or for conversion into agricultural produce, or into activities.
additional biological assets. Answer:
Animals related to recreational activities shall be accounted for established pattern of practice or stated policy has created a valid
in accordance with PAS16, PPE, because any recreational expectation that it will accept certain responsibilities.
activities are not an agricultural activity.
Page 484 4. What is the measurement of a provision?
Answer:
Problem 22-10 Multiple Choice (PAS 41) A provision is measured at the amount that the entity
1. B would rationally pay to settle the obligation at the end of the
2. A reporting period or to transfer it to a third party at that time.
3. D 5. Discuss briefly each of the following in connection with
4. C measurement of a provision.
5. D Page 493 Answer:
a. Risks and uncertainties
Risk describes variability of outcome. However,
uncertainty does not justify the creation of excessive provision
or a deliberate overstatement of liabilities.
6. D
7. D b. Present value of obligation
8. B When the effect of the time value of money is material,
9. B the amount of provision shall be the present value of the 42
42
10. D Page 494 expenditure expected to be settle the obligation.
c. Future events
Future events that affect the amount required to settle
Problem 22-11 Multiple Choice (IFRS)
an obligation shall be reflected in the amount of a provision
1. D
where there is a sufficient evidence that they will occur.
2. D
3. B
d. Expected disposal of assets
4. C
Gains from expected disposal of assets shall not be
5. C
taken into account in measuring a provision. In other words, any
Page 495
cash inflows from disposal are treated separately from the
measurement of the provision.
6. A
7. B
e. Reimbursements
8. C
The reimbursement shall be treated as a separate asset
9. C
and not netted against the estimated liability for the provision.
10. B
Page 496
f. Changes in provisions
The provision shall be reveresed if it is no longer
Problem 22-12 Multiple Choice (IFRS) probable that an outflow of economic benefits would be required
1. B to settle the obligation.
2. C
3. A g. Use of provision
4. B If an expenditure is charged against a provision that
5. A was originally recognized for another purpose, that would
Page 497 camouflage the impact of two different events.

CONCEPTUAL FRAMEWORK AND h. Future operating losses

A provision for operating losses is not recognized
ACCOUNTING STANDARDS because a past event creating a present obligation has not

CHAPTER XXIII occured.

1. Explain the meaning of a provision.
Answer:
Provision is an existing liability of uncertain timing or
amount.
2. What are the three conditions necessary for the
recognition of a provision as a liability?
Answer:
The three conditions necessary for the recognition of a provision
as a liability are the following:
a. The entity has a present obligation, legal or constructive, as a
result of a past event.
b. It is probable that an outflow of resources embodying
economic benefits would be required to settle the obligation.
c. The amount of the obligation can be measured reliably.
3. Define a legal obligation and constructive obligation.
Answer:
A legal obligation is an obligation arising from a
contract legislation or other perspective of law. While, a
constructive obligation exists when the entity from an
i. Onerous contract
If an entity has an onerous contract, the present
obligation under the contract shall be recognized and measured
as a provision.
6. Define a contingent liability.
Answer:
A contingent liability is a liability that may occur
depending on the outcome of an uncertain future event. A
contingent liability is recorded if the contingency is likely and
the amount of the liability can be reasonably estimated. The
liability may be disclosed in a footnote on the financial
statements unless both conditions are not met.
7. Distinguish a contingent liability from a provision.
Answer:
An entity recognizes a provision if it is probable that an
outflow of cash or other economic resources will be required to
settle the provision. If an outflow is not probable, the item is
treated as a contingent liability.
8. Explain the treatment of a contingent liability.
Answer:
 CHAPTER XXIV
A contingent liability shall not be recognized in the
financial statements but shall be disclosed only. But, if a
contingent liability is remote, no disclosure is necessary.

9. Define a contingent asset.

Answer:
Contingent asset is a possible asset that arises from past
event and whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain future
events not wholly within the control of the entity.
1. Define a financial instrument.
Answer:
A financial instrument is any contract that gives rise to
both a financial asset of one entity and a financial liability or
equity instrument of another entity.

10. Explain the treatment of a contingent asset. 2. Define a financial asset.

Answer: Answer:
Contingent asset should not be recognized - but should A financial asset is a liquid asset that gets its value from
be disclosed where an inflow of economic benefits is probable. a contractual right or ownership claim.
When the realization of income is virtually certain, then the
related asset is not contingent asset and its recognition is 3. Give example of financial asset.
appropriate. Answer:
Page 509 Cash, stocks, bonds, mutual funds, and bank 43
43
deposits are all are examples of financial assets.
Problem 23-10 Multiple Choice (PAS 37)
1. B 4. Define a financial liability.
2. D Answer:
3. D A financial liability is any liability that is a ontractual
4. C obligation to deliver cash or other financial asset to another
Page 516 entity and also to exchange financial instruments with another
entity under conditions that are potentially unfavorable.
5. A
6. A 5. Give examples of financial liability.
7. C Answer:
8. A Some examples of financial liability are: Trade accounts
Page 517 payable, Notes payable, Loans payable and Bonds payable.

9.C 6. Define an equity instrument.

10. D Answer:
Page 518 An equity instrument is any contract that evidences a
residual interest in the assets of an entity after deducting all of
Problem 23-11 Multiple Choice (PAS 37) the liabilities.
1. D
2. D 7. What is the guideline in determining whether a financial
3. C instrument is a financial liability or an equity instrument?
Page 519 Answer:

4. A 8. Explain a redeemable preference share.

5. C Answer:
Page 520 Redeemable preference shares are a type of preference
share. A company issues them to shareholders and later redeems
Problem 23-12 Multiple Choice (IAA) them. This means the company can buy back the shares at a later
1. D date.
2. D
3. D 9. Explain the accounting for a compound financial
4. A instrument.
5. C Answer:
Page 521 A compound financial instrument, such as a convertible
bond, is split into equity and liability components. When
the instrument is issued, the equity component is measured as
6. D
the difference between the fair value of the compound
7. D
instrument and the fair value of the liability component.
8. B
9. B
10. B 10. Explain the accounting for bonds payable issued with
Page 522 share warrants and convertible bonds.
Answer:
Share warrants attached to a bond may be detachable or
Problem 23-13 Multiple Choice (IAA)
nontachable. Wheather detachable or nondetachable, the
1. C
warrants have a value and therefore shall be accounted for
2. A
separately. While, convertible bonds give the holder the right to
3. D
convert their bondholdings into share capital of the issuing entity
4. D
whithin a specified period of time.
5. D
Page 532
Page 523
Problem 24-3 Multiple Choice (PAS 32)
CONCEPTUAL FRAMEWORK AND 1. D
ACCOUNTING STANDARDS 2. C
3. C
4. B taxable income but at different time periods. In addition, it gives
5. B rise either to a deferred tax liability or deferred tax asset.
Page 534
5. Explain taxable temporary differences.
6. D Answer:
7. A Taxable temporary difference is the temporary
8. D difference that will result in future taxable amount in
9. C determining taxable income of future periods.
10. B
Page 535 6. Explain deductible temporary differences.
Answer:
Problem 24-4 Multiple Choice (IFFRS) Expenses and losses are deductible for tax purposes is
1. A the current period but deductible for accounting purposes in
2. B future periods. (a) Accelerated depreciation for accounting
Page 536 purposes. (b) Prepaid expenses has already been deducted on a
cash basis in determining taxable income of the current period.
3. D
7. Explain a deferred tax liability.
4. C
5. D
Answer: 44
44
Deferred tax liability is the amount of income tax
Page 537
payable in the future periods with respect to a taxable temporary
difference. Moreover, a deferred tax liability arises when
1. A accounting income is higher than taxable income because of
2. D future taxable amount.
3. B
4. A 8. Give examples of temporary differences resulting to higher
5. A accounting income than taxable income.
Page 538 Answer:
Revenues and gains are included in accounting income
of the current period but deductible for accounting
purposes in future periods.
Expenses and losses are deductible for tax purposes is
CONCEPTUAL FRAMEWORK AND the current period but deductible for accounting
ACCOUNTING STANDARDS purposes in future periods.

CHAPTER XXV 9. Explain a deferred tax asset.

Topic Questions
1. What entities are required to report deferred tax asset or
liability?
Answer:
Deferred tax accounting is applicable to all entities,
whether public or nonpublic entities. A public entity is an entity:
(a) whose equity and debt securities are traded in a stock
exchange or over-the-counter market and (b) whose equity or
debt securities are registered with Securities and Exchange
Commission in preparation for sale of securities.
2. Explain accounting income and taxable income.
Answer:
Accounting income or financial income is the net
income for the period before deducting income tax expense.
While Taxable income is the income for the period determined
in accordance with the rules established by the taxation
authorities upon which income taxes are payable or recoverable.
3. Explain permanent differences.
Answer:
Permanent differences are items of revenue and
expense which are included in either accounting income or
taxable income but will never be included in the other. Actually,
permanent differences pertain to nontaxable revenue and
nondeductible expenses. Moreover, permanent differences do
not give rise to differed tax asset and liability because they have
no future tax consequences.
4. Explain temporary differences.
Answer:
Temporary differences are items of income and
expenses which are included in both accounting income and
Answer:
PAS 12, paragraph 24, provides that a deferred tax asset
shall be recognized for all deductible temporary differences and
operating loss carryforward when it is probable that taxable
income will be available against which the deferred tax asset can
be used. In other words, a deferred tax asset is the deferred tax
consequence attributable to a future deductible amount and
operating loss carryforward.
10. Give examples of temporary differences resulting to higher
taxable income than accounting income.
Answer:
Revenue and gains are included in taxable income of
current period but are included in accounting income of
future periods. For example, rent received in advance is
taxable at the time of receipt but deferred in future
periods for accounting purposes.
Expenses and losses are deducted from accounting
income of current period but are deductible for tax
purposes in future periods. For example, doubtful
accounts are deducted from accounting income but are
deductible for tax purposes when proved worthless in
future period.
11. Explain current tax asset and current tax liability.
Answer:
If the amount of tax already paid for the current period
exceeds the amount actually payable for the period, the excess is
recognized as a current tax asset. While a current tax liability is
the current tax expense or the amount of income tax actually
payable. This is classified as current liability.
12. Explain the statement presentation of current tax asset and
current tax liability.
Answer:
A current tax liability or current tax asset shall be
measured using the tax rate that has been enacted and effective
at the end of the reporting period.
13. Explain the statement presentation of deferred tax asset and
deferred tax liability.
Answer:
A deferred tax liability or deferred tax asset shall be
measured using the tax rate that has been enacted by the end of
the reporting period and expected to apply to the period when
the asset is realized or the liability is settled.
5. Explain fully a defined contribution plan.
Answer:
a postemployment benefit plan under which an entity
pays fixed contributions into a separate entity known as the fund.
The contribution is definite but the benefit is indefinite.

6. Explain fully a defined benefit plan.

14. Explain the measurement of current tax asset and current tax Answer:
liability. simply defined as a postemployment plan other than s
Answer: defined contribution plan. Under a defined benefit plan, an
The current tax liability or current tax asset is measured entity’s obligation is to provide the agreed benefit to employees.
at 30% but the deferred tax liability or deferred tax asset is The benefit is definite but the contribution is indefinite.
measured using the new enacted tax rate of 25%.
7. Explain accounting for a defined contribution plan.
15. Explain the measurement of deferred tax asset and deferred Answer:
tax liability. straightforward because the obligation of the entity is
Answer: determined by the amount contributed for each period. 45
45
PAS 12, paragraph 70, provides that deferred tax
liability is presented as noncurrent liability and deferred tax asset 8. Explain the components of a defined benefit cost.
is presented as noncurrent asset. Moreover, a deferred tax asset Answer:
or deferred tax liability shall not be discounted. PAS 19, paragraph that an entity shall recognize the
Page 549 following components of defined benefits cost.
1. Service cost which comprises:
Problem 25-5 Multiple Choice (PAS 12) Current service cost
1. A Past service cost
2. B Any gain or loss on plan settlement
3. B 2. Net interest
4. A 3. Remeasurements which comprises:
5. C Remeasurements od plan assets
Page 552 Remeasurements of defined benefits obligation
Remeasurements of the effect of assets ceiling
6. A
7. C 9. Explain plan assets and actual return on plan assets.
8. B Answer:
9. A plan assets comprise assets held by a long-term benefit
10. A fund and qualifying insurance policy. The components of actual
Page 553 return on plan assets include the following:
Interest, dividend and other income derived from the
plan assets.
CONCEPTUAL FRAMEWORK AND Realized and unrealized gains and losses on the plan
ACCOUNTING STANDARDS assets.

CHAPTER XXVI 10. Explain the remeasurement of plan assets.

1. Define employee benefits.
Answer:
employee benefits are all forms of consideration given
an entity in exchange for service rendered by employees or for
termination of employment.
2. Define short-term employee benefits.
Answer:
are employee benefits other than termination benefits
which are expected to be settled wholly within twelve months
after the end of annual reporting period in which the employee
render the related service.
3. Explain the recognition and measurement of short-term
employee benefits.
Answer:
fairly straightforward because there are no actuarial
assumptions. There is no possibility of actuarial gain or lose
because short-term employee benefits are measured on an
undiscounted basis.
4. Define post-employment benefits.
Answer:
are employee benefits, other than termination benefits
and short-term employee benefits, which are payable after
completion of employment.
Answer:
the difference between actual return on plan assets and
interest income on plan assets.
Is the actual return is higher than interest income, the
difference is a remeasurement gain.
If the actual return is less than the interest income, the
difference is a remeasurement loss.
11. Explain the remeasurement of projected benefit obligation.
Answer:
the recognition of actuarial gain and actuarial loss.
Actuarial gain and loss are changes in the present value of the
projected benefit obligation resulting from experience
adjustments and the effects of changes in actuarial occurred.
12. Explain fair value of plan assets.
Answer:
the source of fund set aside in meeting future benefit
payments.
13. Explain projected benefit obligation.
Answer:
higher than the estimated amount, there is an actuarial
loss. If the actual benefit obligation is lower than the estimated
amount, there in an actuarial gain.
14. Define other long-term employee benefits.
Answer:
all employee benefits other than short-term employee
benefits, postemployment benefits and termination benefits. In
other words, other long-term employee benefits are empl0yee
benefits which are not expected to be settles wholly within CONCEPTUAL FRAMEWORK AND
twelve months after the end of annual reporting period in which
the employees render the related service. ACCOUNTING STANDARDS
15. Define termination benefits.
Answer:
CHAPTER XXVII
employee benefits provided in exchange for the
termination of an employee’s employment as a result of either:
An entity’s decision to terminate an employee’s 1. What is the meaning of earnings per share?
employment before the normal retirement date. ANSWER:
An employee’s decision to accept an offer of benefits in Earnings per share is the amount attributable to every
exchange for the termination of employment. ordinary share outstanding during the period.
Page 573
2. Explain the uses of earnings per share.
Problem 26-6 Multiple Choice (PAS 19) ANSWER:
1. C Uses of earnings per share are;
2. D (1) a determinant of the market price of ordinary share, thus
3. A indicating the attractiveness of the ordinary share as an
4. C investment, 46
46
Page 578 (2) a measure of performance of management in conducting
operations,
(3) the basis of dividend policy of an entity.
5. D
6. A 3. What are the two presentations of earnings per share?
7. A ANSWER:
8. A The two presentations of earnings per share are;
Page 579 (1) basic earnings per share,
(2) diluted earnings per share.
Problem 26-7 Multiple Choice (IFRS)
1. A 4. Explain the presentation of earnings per share in the income
2. C statement.
3. D ANSWER:
4. C An entity shall present on the face of the income
Page 580 statement the basic and diluted earnings per share for income or
loss from continuing operations. An entity that reports a
Problem 26-8 Multiple Choice (PAS 19) discontinued operation shall disclose the basic and diluted
1. A amounts per share for the discontinued operation either on the
2. B face of the income statement or in the notes to the statements.
3. A An entity shall present basic and diluted earnings per share even
4. B if the amounts are negative, for example, basic loss per share.
Page 581

5. D 5. Explain the formula for the computation of basic earnings per

6. C share.
7. A ANSWER:
8. A Basic earnings per share=net income/ordinary shares
Page 582 outstanding
The net income is equal to the amount after deducting dividends
on preference share.

6. What is the treatment of preference dividend in computing

Problem 26-9 Multiple Choice (PAS 19) basic earnings per share?
1. D ANSWER:
2. D If the preference share is cumulative, the preference
3. D dividend for the current year only id deducted from the net
4. D income, whether such dividend is declared or not. If the
5. C preference share is noncumulative, the preference dividend for
Page 583 the current year is deducted from net income only if there is
declaration. If there is a significant change in the ordinary shares
6. D capital during the year, the weighted average number of ordinary
7. C shares outstanding during the period should be used as
8. C denominator.
9. A
10. B 7. Explain the formula for the computation of basic loss per
Page 584 share.
ANSWER:
If the preference share is cumulative, the preference
Problem 26-10 Multiple Choice (IAA) dividend is added to the net loss to get total loss to the ordinary
1. C shareholders. However, if the preference share is noncumulative,
2. B the preference dividend is ignored because presumably there is
3. B no declaration since there is a net loss.
4. A
5. B 8. Define a potential ordinary share.
Page 585 ANSWER:
 Potential ordinary share is a financial instrument or 4. D
other contract that may entitle the holder to ordinary shares. 5. D
Page 605
9. What are the three major types of potential ordinary shares?
ANSWER: 6. A
Three major types of potential ordinary shares are 7. A
dilution, anti-dilution and 8. B
9. C
10. Define dilution and anti-dilution. 10. C
ANSWER: Page 606
Dilution arises when the inclusion of the potential
ordinary shares decreases the basic earnings per share or Problem 27-12 Multiple choice (IAA)
increases the basic loss per share. In this case, the potential 1. C
ordinary shares are dilutive securities. Anti-dilution arises when 2. C
the inclusion of the potential ordinary shares increases basic 3. B
earnings per share or decreases basic loss per share. In this case, 4. B
the potential ordinary shares are considered as anti-dilutive and 5. C
therefore ignored in computing diluted earnings per share. Page 607
47
47
11. Explain the treatment of convertible bond payable in CONCEPTUAL FRAMEWORK AND
computing diluted earnings per share. ACCOUNTING STANDARDS
ANSWER:
The computation of diluted earnings per share assumes
that the bond payable is converted into ordinary share. CHAPTER XXVIII
Adjustments shall be made both to net income and to the number
of ordinary shares outstanding. The net income is adjusted by
adding back the interest expense on the bond payable, net of tax. 1. Explain interim financial reporting.
The number of ordinary shares outstanding is increased by the ANSWER:
number of ordinary shares that would have been issued upon Interim financial reporting means the preparation and
conversion of the bond payable. presentation of financial statements for a period of less than one
year.
12. Explain the treatment of convertible preference share in
computing diluted earnings per share. 2. Is it require to prepare interim financial reports?
ANSWER: ANSWER:
If there is a convertible preference share, the Yes, PAS 34 prescribes the minimum content of an
computation of diluted earnings per share also assumes that the interim financial report and the principles for recognition and
preference share is converted into ordinary share. The net measurement in complete or condensed financial statements for
income is not reduced anymore by the amount of preference an interim period. Publicly traded entities are encouraged to
dividend. The number of ordinary shares outstanding is provide interim financial reports at least semiannually and such
increased by the number of ordinary shares that would have been reports are to be made available not later than 60 days after the
issued upon conversion of the preference share. end of interim period.

13. Define share options and share warrants.
ANSWER:
Share options are granted to employees enabling them
to acquire ordinary shares of the entity at a specified price during
a definite period of time. Share warrants are granted to
shareholders enabling them to acquire ordinary shares of the
entity at a specified price during a definite period of time.
By definition, options and warrants have no cash yield but they
derive their value from the right to obtain ordinary shares at a
specified price that is usually lower than the prevailing market
price. Options and warrants are dilutive if the exercise price or
option price is less than the average market price of the ordinary
shares.
14. Explain the treasury share method of computing incremental
ordinary shares.
ANSWER:
The treasury share method is used to simplify the
computation of increment ordinary shares that are assumed to be
issued for no consideration as a result of options and warrants.
15. Explain diluted loss per share.
ANSWER:
If the entity has a net loss, only the basic loss per share
is computed and reported. The diluted loss per share is the same
as the basic loss per share but not reported anymore.
Page 599
Problem 27-11 Multiple Choice (PAS 33)
1. D
2. B
3. C
3. Explain the frequency of interim reporting.
ANSWER:
PAS 34 does not mandate which entities are required to
publish interim financial reports, how frequently, or how soon
after the end of an interim period.
Interim financial reports may be presented monthly, quarterly or
semiannually.
4. Explain interim reporting under Philippine jurisdiction.
ANSWER:
The Securities and Exchange Commission and
Philippine Stock Exchange requires entities covered by the
reportorial requirements of Revised Securities Act to file
quarterly interim financial reports within 45 days after the end of
each of the first three quarters.
The SEC also requires entities covered by the Rules on
Commercial Papers and Financing Act to file quarterly financial
reports within 45 days after each quarter end.
Entities that provide interim financial reports in conformity with
Philippine Financial Reporting Standards shall conform to the
recognition, measurement and disclosure requirements set out in
the standard.
5. What are the components of an interim financial report?
ANSWER:
Components of an interim financial report are;
(1) condensed statement of financial position,
(2) condensed statement of comprehensive income, (3)
condensed statement of changes in equity,
(4) condensed statement of cash flows,
(5) selected explanatory notes.
6. Explain compliance of interim financial report with PFRS.
ANSWER:
PAS 34, paragraph 19, provides that if an entities
interim financial report is in compliance with Philippine
Financial Reporting Standard. An entity shall not describe an
interim financial reports as complying with PFRS unless it
complies with all of the requirements of each applicable
Philippine Financial Reporting Standard.
statements of prior interim periods of the current year and the
comparable interim periods of the financial year. The objective
of this requirement is to ensure that a single accounting policy is
applied to a particular class of transaction throughout the entire
financial year.
Page 621

7. Give examples of selected explanatory notes to accompany Problem 28-11 Multiple choice (IFRS)
interim financial report. 1. D
ANSWER: 2. B
Examples of selected explanatory notes are; 3. B
(a) write down of inventories to net realizable value and the 4. D
reversal of such a write down, 5. D
(b) recognition of a loss from the impairment of property, plant Page 626
and equipment and intangible assets and the reversal of such an
impairment loss, 6. C
(c) the reversal of any provision for restructuring, 7. D
(d) acquisitions and disposal of items of property, plant and 8. A 48
48
equipment, 9. B
(e) commitments for the purchase of property, plant and 10. B
equipment, Page 627
(f) litigation settlements,
(g) corrections of prior period errors in previously reported
Problem 28-12 Multiple Choices (AICPA Adapted)
financial data,
1. B
(h) changes in the economic circumstances that affect fair value
2. D
of financial assets and financial liabilities,
3. A
(i) any debt default or any breach of a debt covenant that has not
4. C
been corrected subsequently,
5. D
(j) related party transaction,
Page 628
(k) changes in the classification of financial assets,
(l) contingent liabilities and contingent assets.
6. D
8. Explain the presentation of interim financial statements on a 7. B
comparative basis. 8. A
ANSWER: 9. D
The presentation of interim financial statements on a 10. B
comparative basis are composed of statement of financial Page 629
position, income statement, statement of comprehensive income,
statement of changes in equity and statement of cash flows. CONCEPTUAL FRAMEWORK AND
9. What are the basic principles in the preparation and
ACCOUNTING STANDARDS
presentation of interim financial statements?
ANSWER:
Basic principles are;
CHAPTER XXIX
(1) PAS 34, paragraph 28, provides that an entity shall apply the
TOPIC QUESTIONS
same accounting policies in the interim financial statements as
are applied in the annual financial statements,
1. What are the characteristics of an economic environment
(2) revenues from products sold or services rendered are
indicating hyperinflation?
generally recognized for interim reports on the same basis as for
Answer:
the annual reports,
Hyperinflation is indicated by characteristics of the
(3) cost and expense are recognized as incurred in an interim
economic environment of a country which include but are not
period,
limited to the following
(4) paragraph 21 provides that if the business is highly seasonal,
The general population prefers to keep its wealth
in addition to the current interim period financial statements, the
nonmonetary assets or in relatively stable foreign
entity is encouraged to disclosed financial information,
currency. Accordingly, amounts held in local currency
(5) paragraph 41 provides that the preparation of interim
are immediately invested in nonmonetary assets or
financial reports generally requires a greater use of estimation
stable foreign currency to maintain purchasing power.
than annual financial reports.
The general population regards monetary amounts not
in terms of local currency but in terms of a relatively
stable foreign currency
Sales and purchases on credit take place at prices that
compensate for the expected loss of purchasing power
during the credit period even if the period is short.
Interest rates, wages and prices are linked to a price
index.
The cumulative rate over 3 years is approaching or
exceeds 100 %.

2. Explain the financial reporting in a hyperinflationary

10. Explain the treatment of a change in accounting policy in
economy.
interim financial reporting.
Answer:
ANSWER:
PAS 29, paragraph 8, provides that the financial
PAS 34, paragraph 43, provides that a change in
statements of an entity that reports in the currency of a
accounting policy shall be reflected by restating the financial
hyperinflationary economy, whether they are based on historical 2.C
cost approach or a current cost approach, shall be stated in terms 3.A
of the measuring unit current at the end of reporting period. 4.D
Presentation of the information required under PAS 29 as a 5.A
supplement to understated financial statements is not permitted. Page 643
The restatement of financial statements of an entity that reports
in the currency of a hyperinflationary economy is accomplished 6.A
by means of constant peso accounting. 7.C
8.D
3. Explain monetary and nonmonetary items. 9.A
Answer: 10.A
PAS 21 defines monetary items as money held and Page 644
assets and liabilities to be received or paid in fixed or
determinable amount of money. The essential feature of a Problem 29-8 Multiple Choice (AICPA Adapted)
monetary item is a right to receive or an obligation to deliver a 1. B
fixed or determinable amount of money. In simple language, 2. A
monetary items refer to cash and assets that represent a fixed 3. D
amount of pesos to be received, or obligations that represent a 4. D
fixed amount of pesos to be paid. 5. C 49
49
Nonmonetary items, by the process of exclusion, may Page 645
be defined as those items that cannot be classified as
monetary. These items are so called nonmonetary
6. A
because their peso amounts reported in the financial
7. A
statements differ from the amounts that are ultimately
8. C
realizable or payable. The essential feature of a
9. D
nonmonetary item is the absence of a right to receive or
10. A
an obligation to deliver a fixed or determinable amount
Page 646
of money.
4. What is the formula for restatement?
Answer: CONCEPTUAL FRAMEWORK AND
Index number at end of reporting period / Index number ACCOUNTING STANDARDS
on acquisition date x Historical cost

5. What are the procedures for restating financial statements in a

hyperinflationary economy?
Answer:
The items in the financial statements are classified into
monetary and nonmonetary.
Monetary items are not restated because these are already
expressed in terms of the monetary unit current at the end of
reporting period.
Nonmonetary items are restated by applying the general
price index from the date of acquisition to the end of
reporting period. Some nonmonetary items that are
carried at amounts current at end of reporting period,
such as net realizable value and fair value are no longer
restated.
Some nonmonetary items are carried at amount current
at date other than acquisition date, for example,
property, plant and equipment are revalued. In such
case, the carrying amounts are restated from the date of
revaluation.
All items in the income statement are restated by
applying the change in the general price index from the
dates when the items of income and expenses were
initially recorded. However, for practical purposes, the
average index may be used.
The general purchasing power gain or loss is computed
on monetary items. The gain or loss on purchasing
power is included in profit or loss.
The restated amount of property, plant and equipment,
goodwill and other intangible asset is reduced when it
exceeds the recoverable amount.
Any revaluation surplus recognized previously is
eliminated.
Retained earnings would be the balancing figure in the
restated statement financial position.
When comparative statements are prepared, the
monetary items of the preceding year are expressed in
terms of the index number at the end of the current
year.
Page 638
Problem 29-7 Multiple Choice (IFRS)
1. D
CHAPTER XXX
TOPIC QUESTIONS
1. Define first time adopter.
Answer:
A first time adopter is an entity that presents for the
first time its financial statements in conformity with Philippine
Financial Reporting Standards. In other words, an entity is
considered first time adopter when for the first time such entity
makes an explicit and unreserved statement that its general
purpose financial statements comply with Philippine Financial
Reporting Standards.
2. Define first PFRS financial statements.
Answer:
The first PFRS financial statements are the first annual
statements in which an entity adopts PFRS by an explicit and
unreserved statement of compliance with PFRS.
3. What are the conditions in order that financial statements
presented by an entity would qualify as first PFRS financial
statements?
Answer:
Financial statements presented by an entity in the
current year would qualify as first PFRS financial statements
under the following conditions:
When an entity presented its most recent previous financial
statements:
Under national GAAP inconsistent with PFRS in all respects.
In conformity with PFRS in all respects but these
statements did not contain an explicit and unreserved
statement of compliance with PFRS.
Containing an explicit statement of compliance with
some but not all PFRS.
Under national GAAP with a reconciliation of selected
figures to amounts determined under PFRS.
When an entity prepared financial statements in the
previous period under PFRS but the financial
statements were for internal use only.
When an entity prepared financial statements in the
previous period under PFRS for consolidation purposes
 without preparing a complete set of financial
statements.
When an entity did not present financial statements in
the previous period.
4. Explain the date of transition to PFRS.
Answer:
The date of transition to PFRS refers to the beginning
of the earliest period for which an entity presents full
comparative information under PFRS in its first PFRS financial
statements. The date of transition to PFRS depends on two
factors, namely:
a. The date of adoption of PFRS.
b. The number of years of comparative information that an entity
decides to present together with the financial statements in the
year of adoption.
5. Define an opening PFRS statement of financial position.
Answer:
An opening PFRS statement of financial position is the
statement of financial position 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 accounting in
accordance with PFRS.
6. What are the requirements in preparing an opening PFRS
statement of financial position?
Answer:
In preparing the opening statement of financial position,
an entity is required to:
a. Recognize all assets and liabilities required by PFRS.
b. Derecognize assets and liabilities not permitted by PFRS.
c. Reclassify items that it recognized under previous GAAP as
one type of asset, liability or equity but a different type of asset,
liability or equity under PFRS.
d. Measure all recognized assets and liabilities in compliance
with PFRS.
7. How should a first time adopter recognize the adjustments
required to present an opening PFRS statement of financial
position?
Answer:
Any adjustments required to present an opening PFRS
statement of financial position should be recognized in retained
earnings or if appropriate, in another component of equity.
8.What are the first PFRS financial statements prepared by a first
time adopter?
Answer:
If the entity adopts PFRS for the first time in the current
year, its first PFRS financial statements include the following:
1. Three statements of financial position at the end of current
year, at the end of prior year and at the date of transition to
PFRS
2. Two statements of comprehensive income for the current year
and prior year
3. Two separate income statements for the current year and prior
year.
4. Two statements of changes in equity for the current year and
prior year.
5. Two statements of cash flows for the current year and prior
year.
6. Notes to financial statements including comparative
information.
Page 651
Problem 30-1 Multiple Choice (IFRS)
1. B
2. C
3. C
4. B
Page 652
5. C
6. D
7. D
Page 653
8. C
9. D
10. D
Page 654
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXI
QUESTIONS
1. Define a share-based compensation plan. 50
50
Answer:
A share-based compensation plan is a compensation
arrangement established by the entity whereby the
entity’s employees shall receive equity shares in
exchange for their services or the entity incurs liabilities
to the employees in amounts based on the price of its
shares.
2. Explain the two share-based compensation plans.
Answer:
The two share-based compensation plans are the
following:
a. Equity settled- The entity issues equity instruments
in consideration for services received, for example,
share options.
b. Cash settled- The entity incurs a liability for
services received and the liability is based on the
entity’s equity instruments, for example, share
appreciation rights.
3. What are share options?
Answer:
Share options are granted to officers and key employees
to enable them to acquire shares of the entity during a
specified period upon fulfilment of certain conditions at
a specified price. These are typically granted to officers
and key employees as part of their remuneration
package, in addition to a cash salary and other
employment benefits.
4. Explain briefly the fair value method of measuring
compensation arising from share options.
Answer:
Fair value method means that the compensation is equal
to the fair value of the share options on the date of
grant.
5. Explain the accounting procedure if an entity cancels or
settles share options during the vesting period.
Answer:
PFRS 2, paragraph 28, provides that if an entity cancels
or settles a grant of share options during the vesting
period, the entity shall account for the cancelation or
settlement as an acceleration of vesting.
6. Explain fully a cash settled share-based payment
transaction.
Answer:
Cash settled share-based transaction is when the entity
incurs a liability for services received and the liability is
based on the entity’s equity instruments, for example,
share appreciation rights.
7. Distinguish cash settled share-based payment transaction
from an equity settled share-based transaction.
Answer:
In cash settled share-based transaction, the entity incurs
a liability for services received and the liability is based
on the entity’s equity instruments, while in equity
settled share-based transaction, the entity issues equity
instruments in consideration for services received.
Noncurrent asset is may be an individual asset, like land
and building, or a disposal group, while a disposal
group is a group of assets to be disposed of, by sale or
otherwise, together as a group in a single transaction,
and liabilities directly associated with those assets that
will be transferred in the transaction.

8. What is a share appreciation right?
Answer:
Share appreciation right entitles the employee to a cash
payment equal to the increase in the price of a given
number of shares over a given period.
2. When is a noncurrent asset classified as held for sale?
Answer:
PFRS 5, paragraph 6, provides that a noncurrent asset is
classified as held for sale if the carrying amount will be
recorded principally through a sale transaction rather
than through continuing use.

9. Distinguish a share appreciation right from a share option. 3. What are the conditions for classification as held for sale?
Answer: Answer:
Like a share option, a share appreciation right is viewed The conditions for classification as held for sale are the
as compensation for services rendered. following:
Unlike in a share option, the entity shall recognize a The asset or disposal group is available for immediate 51
51
liability because a share appreciation right is actually an sale in the present condition.
obligation on the part of the entity to pay cash in the In other words, the current condition of the asset
future on exercise date. should be adequate to be effectively
” sold as seen”.
10. Explain the recognition and measurement of The sale must be highly probable.
compensation arising from share appreciation right.
Answer: 4. What is the meaning of “highly probable”?
The recognition of compensation includes the following: Answer:
a. If the share appreciation right vests immediately, For sale to be highly probable, the following conditions must be
the compensation is recognized immediately. met:
b. If the share appreciation right does not vest until Management must be committed to a plan to sell the
the employee completes a definite vesting period, asset or disposal group.
the compensation is recognized over the vesting An active program to locate a buyer and complete the
period. plan must have been initiated.
The measurement of compensation states that the compensation The sale is expected to be a “completed sale” within
is based on the fair value of the liability at the reporting date and one year from the date of classification as held for sale.
shall be measured at every year-end until it is finally settled. The asset or disposal group must be actively marketed
Page 665 for sale at a sale price that is reasonable in relation to
the fair value.
PROBLEM 31-7 MULTIPLE CHOICE (PFRS 2) Actions required to complete the plan indicate that it is
1. B unlikely that the plan will be significantly changed or
2. A withdrawn.
3. B
4. A 5. Explain the measurement of noncurrent asset classified as
Page 669 held for sale.
Answer:
5. D PFRS 5, paragraph 15, provides that an entity shall
6. B measure a noncurrent asset or disposal group classified
7. A as held for sale at the lower of carrying amount or fair
8. C value less cost of disposal.
Page 670
6. Explain the write-down of the noncurrent asset to fair
9. C value less cost of disposal.
10. D Answer:
Page 671 If the fair value less cost of disposal is lower than
carrying amount of the asset or disposal group, the
PROBLEM 31-8 MULTIPLE CHOICE (IFRS) write-down to fair value less cost of disposal is treated
as an impairment loss.
1. B
2. D If the noncurrent asset is a disposal group, the
impairment loss is apportioned across the assets based
3. C
4. D on carrying amount.
5. C
Page 672

CONCEPTUAL FRAMEWORK AND

ACCOUNTING STANDARDS
7. Explain the treatment of a subsequent increase in fair

CHAPTER XXXII value less cost of disposal relating to an asset classified as

held for sale.
Answer:
If subsequently there is an increase in the fair value less
QUESTIONS cost of disposal, PFRS 5, paragraph 21, provides that an
1. Define noncurrent asset and a disposal group. entity shall recognize a gain but not in excess of any
Answer: impairment loss previously recognized.
8. What is the treatment of abandoned noncurrent asset or Selling by a diversified entity of a major division that
disposal group? represents the entity's only activities in the electronics
Answer: industry.
PFRS 5, paragraph 13, provides that an entity shall not Selling by a meat packing entity of controlling interest
classify as held for sale a noncurrent asset or disposal in a furniture entity.
group that is to be abandoned. Selling by a communications entity of all its radio
stations.
A conglomerate is engaged in commodity business, real
9. Explain the treatment of a change in classification of a estate, manufacturing and construction business.
noncurrent asset classified as held for sale.
Answer: 3. Explain the presentation of a discontinued operation in the
PFRS 5, paragraph 27, provides that the entity shall income statement.
measure the noncurrent asset that ceases to be classified Answer:
as held for sale at the lower between: Provides that an entity shall disclose a single amount
 Carrying amount of the asset on the basis that the asset comprising the total of post-tax profit or loss recognized on the
had not been classified as held for sale. measurement to fair value less to cost of disposal or on the
 Recoverable amount at the date of the subsequent disposal of the assets or disposal group constituting the
decision not to sell. discontinued operation.
52
52
10. Explain the presentation of noncurrent asset classified as 4. Explain the presentation of a discontinued operation in the
held for sale in the statement of financial position. statement of financial position.
Answer: Answer:
PFRS 5, paragraph 38, provides that if the noncurrent Provides that the assets of the component shall be presented as a
asset is a disposal group classified as held for sale, the single amount under current assets and the liabilities of the
assets and liabilities of the group shall be presented component shall be presented as a single amount under current
separately and cannot be offset as a single amount. liabilities.
Page 681 The assets and liabilities of the component cannot be offset
against the other.
PROBLEM 32-4 MULTIPLE CHOICE (PFRS 5)
1. A 5. What are the disclosures about discontinued operation.
2. A Answer:
3. D The amount of revenue, expenses and income or loss
4. C attributable to the discontinued operation during the
Page 684 current period and the related income tax.
An impairment loss is recognized when the fair value
5. A less cost of disposal of the discontinued operation is
6. B lower than the carrying amount of the net assets.
7. C Any gain or loss from the actual disposal of the assets
8. A and settlement of the liabilities of a discontinued
Page 685 operation.
The termination cost of employees and other costs
which are directly incurred as a result of the
9. B
discontinuance.
10. C
Page 693
Page 686

PROBLEM 33-7 MULTIPLE CHOICE (IFRS)

1. D
2. A
3. D
Page 697

4. A
5. A
CONCEPTUAL FRAMEWORK AND Page 698
ACCOUNTING STANDARDS
PROBLEM 33-8 MULTIPLE CHOICE (AICPA

CHAPTER XXXIII ADAPTED)

1. C
2. C
QUESTIONS 3. A
4. B
1. Define a discontinued operation. 5. C
Answer: Page 699
Discontinued operations are an accounting term that
refers to parts of a company's core business or product line that CONCEPTUAL FRAMEWORK AND
have been divested or shut down. Discontinued operations are
reported on the income statement separately from continuing ACCOUNTING STANDARDS
operations.

2. Give examples of discontinued operation.

CHAPTER XXXIV
Answer:
PROBLEM 34-5 MULTIPLE CHOICE (IFRS)
1. B
2. C
3. D
Page 706
4. C
5. B
Page 707
CONCEPTUAL FRAMEWORK AND
ACCOUNTING STANDARDS
CHAPTER XXXV
QUESTIONS
1. What is the core principle of segment reporting?
Answer:
core principle of segment reporting states that an entity
shall disclose information to enable users of financial
statements to evaluate the nature and financial effects of
the business activities in which it engages and the
economic environments in which it operates.
2. Explain briefly segment reporting.
Answer:
is the disclosure of certain financial information about
the products and services and an entity produces and
the geographical areas in which an entity operates.
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 seeking to issue any class of
instruments in a public market.
4. Define an operating segment.
Answer:
an operating segment can generally be thought of as a
distinguishable component of an entity that is engage in
business activities which generates revenue and incur
expenses.
5. Define a chief operating segment.
Answer:
Operating segments are components of an entity about
which separate financial information is available that is
evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in
assessing performance.
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 reportable
segments.
Answer:
At least 75 per cent of the total external revenue of the
entity must be reflected by the identified reportable
segment, if this is not the case the entity will be
required to identify additional reportable segments until
at least 75 per cent of the total external revenue of the
entity is reflected by reportable.
8. Enumerate the information to be disclose for each
reportable segment.
Answer:
An entity shall disclose the following for each reportable
operating segment:
General information about the operating segment
Information about profit or loss, including specified
revenue and expenses included in the measure of profit
or loss
Information about segment assets and segment
liabilities and the basis of measurement
Reconciliation of the totals of segment revenue,
segment profit or loss, segment assets, segment
liabilities and other material segment items to
corresponding items in the entity’s financial statements
53
53
9. Explain the disclosure about general information.
Answer:
10. Explain the disclosure about profit or loss for each
reportable segment.
Answer:
an entity shall disclose for each reportable segment
measure of profit or loss, total assets and total
liabilities, also disclose a measure of profit or loss
under all circumstances
11. What are the entity-wide disclosure?
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?
Answer:
an entity shall disclose the revenue from external
customers for each product and services
13. What is the entity-wide disclosure about geographical
areas?
Answer:
an entity shall disclose the following geographical
information:
(1) revenue from external customers in the entity’s country of
domicile, and in all foreign operations in total
(2) separate disclosure of material revenue from external
customers in an individual foreign country
14. What is major customer?
Answer:
is defined as a single external customer providing
revenue which amounts to 10% or more of an entity’s
external revenue.
15. Explain the major customer disclosure.
Answer:
the entity shall disclose the fact of reliance on major
customers, the total amount of revenue from major
customers and the identity of the segment or segments
reporting the revenue.
Page 717
PROBLEM 35-5 MULTIPLE CHOICE (AICPA
ADAPTED)
1. B
2. D
3. D
4. C
Page 720
 6. Explain measurement of debt investment at amortized
5. B cost.
6. C Answer:
7. D the business model is to collect contractual cash flow if
8. D the contractual cash flows are solely payments of
Page 721 principal and interest, in such case, the financial asset
shall be measured at amortized cost
9. B
10. D
Page 722

PROBLEM 35-6 (IFRS)

7. Explain measurement of debt investment at fair value
through other comprehensive income.
1. B
Answer:
2. C
3. B
8. Explain the treatment of unrealized gain or loss on
4. D
financial at fair value.
5. B
Page 723
Answer: 54
54
Securities that are held-for-trading are recorded on the
balance sheet at their fair value, and the unrealized
gains and losses are recorded on the income statement.
Therefore, the increase or decrease in the fair value of
held-for-trading securities impacts the company's
net income and its earnings-per-share (EPS)
CONCEPTUAL FRAMEWORK AND
9. Explain the derecognition of equity investment at fair
ACCOUNTING STANDARDS value through other comprehensive income.

CHAPTER XXXVI Answer:

10. Explain derecognition of equity investment at fair value

through other comprehensive income.
1. Explain the initial measurement of financial asset. Answer:
Answer: Page 733
an entity shall measure a financial asset at a fair value
plus, in the case of financial asset not at fair value
through profit or loss, transaction cost that are directly CHAPTER 36-5
attribute to the acquisition of financial asset
1.D
2.D
2. Explain the subsequent measurement of financial asset.
3.C
Answer:
4.D
Where assets are measured at fair value, gains and
5.A
losses are either recognized entirely in profit or loss
Page 736
(fair value through profit or loss, FVTPL), or
recognized in other comprehensive income (fair value
through other comprehensive income, FVTOCI). 6.B
7.C
3. What are the financial asset measured at fair value 8.B
through profit or loss? 9.C
Answer: 10.D
Financial asset held for trading or popularly known as Page 737
“trading securities”
All other investment in quoted equity instruments CONCEPTUAL FRAMEWORK AND
Debt investment that are irrevocably designated on
initial recognition as at fair value through profit or loss ACCOUNTING STANDARDS
All debt investment that do not satisfy the requirements
for measurement at amortized cost and at fair value
through other comprehensive income
CHAPTER XXXVII
4. Explain financial asset held for trading. 1. Define Fair Value.
Answer: ANSWER:
are debt and equity securities that are purchased with Fair value refers to an “exit price” or market price
the intent of selling them in the “near term” or very under current market conditions at measurement rate. It is also
soon the price in an orderly transaction and agreed upon by market
participants.
5. Explain measurement of equity investment at fair value
through other comprehensive income. 2. What is an orderly transaction?
Answer: ANSWER:
All equity investments in scope of IFRS 9 are to An orderly transaction is a transaction that allows for
be measured at fair value in the statement of financial normal marketing activities that are usual and customary.
position, with value changes recognized in profit or
loss, except for those equity investments for which the 3. Explain Market Participants.
entity has elected to present value changes in 'other ANSWER:
comprehensive income'. Market participants are those buyers and sellers
transacting business in the principal market for an asset or
liability. These participants are independent or unrelated parties,
have reasonable understanding of the transaction and are willing 1.B
or motivated to do and enter into a transaction to buy and sell the 2.A
item. 3.D
4.D
4. Define active market. Page 743
ANSWER:
An active market is a market that regularly 5.C
experiencing high transaction volumes. 6.A
7.B
5. Define principal market. 8.A
ANSWER: Page 744
A principal market is the market with the greatest
volume and level of activity for the asset or liability.
9.B
10.B
6. Define most advantageous market.
Page 745
ANSWER:
Most advantageous market is the market that
maximizes the amount that would be received to sell the asset or CONCEPTUAL FRAMEWORK AND 55
55
minimizes the amount that could be paid to transfer the liability. ACCOUNTING STANDARDS
7. Explain the valuation premise in measuring fair value.
ANSWER:
In determining the fair value of an asset or a liability, an
entity may refer to information that is directly observable or
CHAPTER XXXVIII
readily available. The fair value shall not be adjusted for
transaction cost. 1. Define revenue and income.
If location is a characteristic of an asset, the fair value shall be ANSWER:
adjusted for transport cost that would be incurred to transport the Revenue is income in the ordinary course of business
asset from its current location to the principal or most activities.
advantageous market. Income is increase in economic benefit during the
accounting period in the form of an inflow or enhancement of
8. Explain highest and best use of an asset. asset or decrease in liability that results in an increase of equity,
ANSWER: other than contribution from equity participants.
The highest and best use of the asset might provide
maximum value either on a stand-alone basis, or as a group in 2. What is the core principle of revenue recognition?
with other asset and liability. ANSWER:
Revenue is recognized in a manner that depicts the
9. Explain the three valuation techniques in measuring fair value. transfer of good and service to a customer and the revenue
ANSWER: reflects the consideration to which an entity expects to be
The three valuation techniques that can be used to entitled.
measure fair value:
Market approach – this approach uses prices and 3. What is the five-step model in recognizing revenue?
relevant information for market transactions for ANSWER:
identical and comparable asset. An entity that recognizes revenue in accordance with
Income approach – this income approach focuses on the core principle should apply the following five-step model:
converting future amounts into discounted cash flows. Step 1 Identify the contract with the customer
Cost approach-this approach relies on the current Step 2 Identify the performance obligation in the contract
replacement cost to replace the asset with a comparable Step 3 Determine the transaction price
asset. Step 4 Allocate the transaction price to the performance
obligations in the contract
10. Explain the fair value hierarchy. Step 5 Recognize revenue when or as the entity satisfies a
ANSWER: performance obligation
The fair value hierarchy or evidence of fair value is
enumerated as follows: 4. Define a contract.
Level 1 is quoted prices for identical items in active, ANSWER:
liquid and visible market such as stock exchanges. This A contract is an agreement between two or more parties
quoted price provides the most reliable evidence of fair that creates enforceable rights and obligations in a contract.
value and shall be used without adjustment. 5. What are the criteria for recognizing a contract with a
Level 2 is observable either directly or indirectly customer?
information for similar items in active or inactive ANSWER:
markets, such as two similarly situated buildings in a The parties to the contract have approved the contract
downtown real estate market. in writing, orally or in accordance with customary business
Level 3 are unobservable inputs to be used in situations practice, rights and obligations of the parties in the contract can
where markets don’t exist or are illiquid such as the be identified, payment terms in the contract can be identified, the
present credit cases. At this point, fair market valuation contract has commercial substance and the collection of the
becomes highly subjective. Unobservable inputs are consideration is probable.
usually developed by the entity using the best available
information from the entity’s own data. 6. Define a performance obligation.
ANSWER:
The fair value hierarchy gives the highest priority to quoted A performance obligation is a promise to deliver a good
prices (unadjusted) in active markets for identical assets or or service in a contract with customer.
liabilities (Level 1), and the lowest priority to unobservable
inputs(Level3) 7. Define a transaction price.
Page 742 ANSWER:
 The transaction price is the amount of consideration in can redeem the “points” by distributing to the customer free or
a contract to which an entity expects to be entitled in exchange discounted goods or services.
for transferring good or service to a customer. A customer may be required to accumulate to specified
minimum number of award credits or “points” before they can
have redeemed.
Page 760
8. Explain the allocation of the transaction price to multiple
performance obligations. 1.D
ANSWER: 2.D
The transaction price is allocated to each performance 3.B
obligation on the basis of relative stand-alone selling price of 4.D
each good or service. This stand-alone selling price is the price 5.D
that the entity would sell a promised good or service separately Page 767
to a customer.

9. When is revenue recognized? 6.A

ANSWER: 7.D
The transaction price is allocated to each performance 8.A
obligation on the basis of relative stand-alone selling price of 9.B 56
56
each good or service. 10.C
Page 768
10. Explain the revenue recognition at a point in time or over
time.
1.B
ANSWER:
2.C
The entity shall recognize revenue at a point of time
3.B
when the customer has the significant risks and rewards of
4.C
ownership, when the customer has legal title to the asset and
Page 769
when the entity has the right to receive payment for the asset and
_
for which the customer is obliged to pay.
The entity shall also recognize revenue when the entity has an
enforceable right to receive payment for performance completed
on date. For example, constructing a specialized asset that only
the customer can use or constructing an asset in accordance with
customer order.

11. Explain the recognition of a sale with a right of return.

ANSWER: CONCEPTUAL FRAMEWORK AND
The entity shall recognize a sale with the right return ACCOUNTING STANDARDS
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 CHAPTER XXXIX
of the expected return.

12. Define consignment.
ANSWER:
Consignment is a method of marketing goods in which
the entity called the consignor transfers physical possession of
certain goods to a dealer or distributor called the consignee that
sells the goods on behalf of the consignor.
13. Define bill and hold arrangement.
ANSWER:
Bill and hold arrangement is a contract under which an
entity bills a customer for a product but the entity retains
possession of the product.
14. What are the criteria for the recognition of revenue in a bill
and hold arrangement.
ANSWER:
The following criteria must be met for the recognition
of revenue in a bill and hold arrangement:
a. The customer has requested for the arrangement.
b. The product must be identified separately as belonging to the
customer.
c. The product must be ready for physical transfer to the
customer anytime.
d. The entity cannot have the ability to use the product or to
direct it to another customer.
15. Explain the customer loyalty program.
ANSWER:
The customer loyalty program builds to have a brand
loyalty, it was designed to reward customers for past purchases.
If the customer buys good and services, the entity grants the
customer award credits often described as “points”. The entity
1. Define a lease under the new lease standard.
Answer:
A lease is defined as a contract or part of a contract that
conveys the right to use the underlying asset for a period of time
in exchange for consideration.
2. Explain the finance lease model on the part of the lessee.
Answer:
IFRS 16, paragraph 22, provides that at the
commencement date, a lessee shall recognize a right of use asset
and lease liability.
This simply means that a lessee is required to
initially recognize a right of use asset for the right to use the
underlying asset over the lease term and lease liability for the
obligation to make payments.
All leases shall be accounted for by the lessee as a
finance lease under the new lease standard.
3. Define underlying asset, lessee and lessor.
Answer:
The underlying asset is the subject of a lease for which
the right to use that asset has been provided by the lessor to the
lessee.
The lessee is the entity that obtains the right to use an
underlying asset for a period of time in exchange for
consideration.
The lessor is the entity that provides the right to use
an underlying asset for a period of time in exchange for
consideration.
4. Explain the operating lease model on the part of the lessee.
Answer:
IFRS 16, paragraph 5, provides that a lessee is
permitted to make an accounting policy election to apply the
operating lease accounting and not recognize an asset and lease
liability in two optional exemptions.
a. Short-term lease
b. Low value lease
5. What are the two conditions in order that a lessee may apply
the operating lease model?
Answer:
Stated differently, a lessee may or may not apply the
operating lease accounting if the lease is short-term or if the
underlying asset is of low value.
6. Explain short-term lease.
Answer:
A short-term lease as a lease is defined as that has a
term of 12 months or less at the commencement date of the
lease.
A lease that contains a purchase option is not a
short-term lease.
7. Explain a low value lease.
Answer:
Low value asset is a matter of professional
judgement.
The lease shall assess the value of an underlying
asset based on the value of asset when it is new regardless of the
age of the asset being leased.
A lease of an underlying asset does not qualify as a
low value lease if the nature of the asset is such that the asset is
typically not of low value when new.
For example, a lease of car would not qualify as low
value lease because a new car would typically not be of low
value.
Typically, low value underlying assets include
personal computers, office furniture and equipment.
8. Define a finance lease.
Answer:
A finance lease is defined as a lease that transfers
substantially all of the risks and rewards incidental to ownership
of an underlying asset.
9. What are the components of the cost of right of use of asset?
Answer:
The cost of right of use of asset comprises:
a. The present value of lease payments
b. Lease payments made to lessor such as lease
bonus, less any incentive received.
c. Initial direct costs incurred by the lease
d. Estimate of cost of dismantling and restoring
the underlying asset for which the lease has a
present obligation.
10. Explain the depreciation of right of use of asset?
Answer:
The lessee shall apply normal depreciation policy for
right of use of asset.
IFRS 16, paragraph 32, provides that the lessee shall
depreciate the right of use asset over the useful life of the
underlying asset under the following conditions:
a. The lease transfers ownership of the underlying
asset to the lessee at the end of lease term.
b. The lessee is reasonably certain to exercise a
purchase option.
If there is no transfer of ownership to the lessee or if the
purchase option is not reasonably certain to be exercised, the
lessee shall depreciate the right of use asset over the shorter
between the useful life of the asset and the lease term.
11. Explain the measurement of lease liability.
Answer:
The lessee shall measure the lease liability at the
present value of lease payments.
The lease payments shall be discounted using the
interest rate implicit in the lease desired by the lessor.
If the implicit interest rate cannot be readily
determined, the incremental borrowing rate of the lessee is used.
12. What are the components of lease payments?
Answer:
Components of lease payments
a. Fixed lease payments or periodic rental
b. Variable lease payments
c. Exercise price of a purchase option if the
lessee is reasonably certain to exercise the 57
57
option
d. Amount expected to be payable by the lessee
under a residual value guarantee
e. Termination penalties if the lease term
reflects the exercise of a termination option.
13. When is a lease classified as finance lease or operating lease
on the part of lessor?
Answer:
Whether a lease is a finance lease or an operating lease
depends on the substance of the transaction rather than the form
of the contract.
Under IFRS 16, paragraph 63, among others, any of
the following situations would normally lead to a lease being
classified as a finance lease:
a. The lease transfers ownership of the
underlying asset to the lessee at the end of the
lease term.
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 certain the option
will be exercised.
c. The lease term is for the major part 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
 CONCEPTUAL FRAMEWORK AND
1.A ACCOUNTING STANDARDS

CHAPTER XXXX
2.C
3.A
4.D
5.A
Page 790
1. Define a decommissioning liability.
6.D Answer:
7.A IFRIC 1 defines decommissioning liability as an
8.A obligation to dismantle, remove and restore an item of property,
9.B plant and equipment as required by law or contract.
10.C
Page 791 2. What is the treatment of a decommissioning liability?
Answer:
The decommissioning liability is capitalized as cost of
1.D the property and initially recognized at present value.
2.D
3.A 58
58
3. Explain the treatment of a change in the decommissioning
4.D liability.
5.C Answer:
Page 792 a. A decrease in decommissioning liability is
deducted from the cost of the asset.
1.C b. An increase in decommissioning liability is
2.C added to the cost at the asset.
3.C
4.B 4. What is a distribution of noncash asset to owners?
Page 793 Answer:
The distribution of noncash asset to owners is actually
payment of property dividend to shareholders.

5. Explain the measurement of the dividend payable as a result

of distribution of noncash asset to owners.
Answer:
IFRIC 17, paragraph 11, provides that an entity shall
measure a liability to distribute noncash asset as a dividend to its
owner at the fair value of the asset to be distributed
The dividend payable is initially recognized at the
fair value of the noncash asset on the date of declaration ad is
increased or decreased as a result of the change in fair value of
the asset at year-end and date of settlement.

6. Explain the measurement of noncash asset to be distributed to

owners.
Answer:
Paragraph 15A of PFRS 5 provides that an entity shall
measure a noncurrent asset classified for distribution to owners
at the lower of carrying amount and fair value less cost to
distribute.
Accordingly, if the fair value less cost to distribute is
lower than the carrying amount of the asset at the end of the
reporting period, the difference is accounted for as impairment
loss.

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.
9. What is the classification of members’ shares in cooperative
entities?
Answer:
Member’s share in cooperative entities may be
classified as equity or liability depending on the terms and
conditions of the financial instrument.

10. What are the conditions necessary to classify members’

shares in cooperative entities as equity?
Answer:
Members’ shares in cooperative entities are classified
as equity if the members did not have a right to request for
redemption under either of the following conditions:
a. If the entity has an unconditional right to
refuse redemption of the members’ shares.
b. If the redemption is unconditionally prohibited
by law, regulation or the entity’s charter.
Page 802
59
59
CHAPTER 40-6
1.B
2.A
3.A
4.C
Page 807

CHAPTER 40-7
1.A
2.A
3.C
4.B
Page 808

CHAPTER 40-8
1.A
2.B
3.C
4.D
5.A
Page 809