AC10&11

MIDTERM EXAMINATIONS
THEORIES:
1. According to PAS 2, the primary issue in accounting for inventories is the
determination of ____.
I. cost to be recognized as asset in the statement of financial position.
II. the amount recognized as expense in the statement of profit or loss and
other comprehensive income when the related revenues are recognized.
III. obsolete items that need to be written down to net realizable value.
IV. the point of sale where ownership is transferred from the seller to the
buyer
a. I and II
b. I, II, and III
c. I, II, and IV
d. I, II, III, and IV

2. PAS 2 Inventories shall not be applied to which of the following?

a. minor tools and spare parts
b. buildings being sold by a “buy and sell” real estate entity
c. obsolete inventory
d. assets held for use in the production or supply of goods

3. Inventories of commodity broker-traders are measured at?

a. Fair value
b. Cost
c. Net realizable value
d. Fair value less costs to sell

4. Which of the following is correct regarding the recognition of inventories?

a. Inventories are recognized only when legal title is obtained is obtained
b. Inventories are recognized only when they meet the definition of inventory
and they qualify for recognition as assets.
c. Inventories include only those that are readily available for sale in the
ordinary course of business
d. Inventories are recognized only by entities engaged in trading or
manufacturing operations.
5. Which of the following is excluded in the scope of PAS 2 on inventories?
a. Inventories of a service provider c. Manufacturing supplies
b. Construction in progress d. Raw materials

6. Which of the following would not be included in the inventory amount reported on a
company’s balance sheet?
a. Items shipped out on consignment to another company.
b. Items shipped today FOB shipping point, invoice had been mailed to the
customer.
c. Items in the receiving department of the company; returned by the customer,
invoice have been mailed
d. Items purchased from a supplier and en route directly to a customer of the
company; the term is FOB destination; invoice received but not yet paid.

7. When allocating costs to inventory produced, fixed overhead should be based upon
a. The actual use of production facilities
b. The normal capacity of production facilities
c. The highest production levels in the last three periods.
d. The lowest production levels in the last three periods.

8. The use of discount lost account implies that the recorded cost of an inventory is
a. Invoice price
b. Invoice price plus the purchase discount lost
c. Invoice price less the purchase discount taken
d. Invoice price less purchase discount allowable whether taken or not

9. The specific identification method can be used only

a. In income tax returns
b. For financial reporting purposes but not in the income tax returns
c. When the individual items in inventory are similar in terms of cost, function
and sales value
d. When the actual acquisition costs of individual units can be determined in
the accounting records

10. Which condition would most likely warrant the use of specific identification method?
a. Unit price is low
b. Inventory turnover is low
c. Inventory quantities are large
d. Inventory pricing is stable and consistent
11. During a period of steadily rising prices, which of the following methods of
measuring the costs of goods sold is likely to result in reporting the highest gross
profit?
a. FIFO
b. LIFO
c. Weighted average cost
d. Specific identification

12. When a periodic inventory system is used:

a. Two entries must be made when goods are purchased
b. Cost of goods sold is a residual amount, rather than an account
c. Ending inventory is treated as an expense and beginning inventory is treated
as an asset
d. Purchases account is not used; all inventory purchase entries are debited to
the inventory account

13. In a perpetual inventory system, an inventory flow assumption is used primarily for
determining which costs to use in
a. Recording sales revenue
b. Recording the cost of goods sold
c. Recording the purchases of inventory
d. Forecasts of future operating results, that will be used as basis for
production budget

14. The gross margin method of estimating ending inventory may be used for all the
following, except?
a. Internal as well as external interim reports
b. Internal as well external year-end reports
c. Estimate of inventory destroyed by fire or other casualty
d. Rough test of validity of an inventory cost determined under either periodic
or perpetual system

15. A major advantage of the retail inventory method is that it

a. Permits companies which use it to avoid taking an annual physical inventory
b. Gives a more accurate statement of inventory cost than other methods
c. Hides costs from customers and employees
d. Provides a method for inventory control and facilitates determination of
periodic inventory
16. Under PAS 16, property, plant and equipment include all the following, except
a. Property held for administrative purposes
b. Property used for extract of minerals, oil or natural gas
c. Property used in production or supply of goods and services
d. Biological assets related to agricultural activity and mineral rights

17. According to PAS 16 Property, plant and equipment, which of the following items
should be capitalized into the cost of property, plant and equipment?
I. Cost of excess materials resulting from a purchasing error
II. Cost of testing whether the asset works correctly
III. Initial operating losses whilst demand builds up
IV. Cost of preparing the site for installation

a. I, II
b. I, II, III
c. II, IV
d. I, II, III, IV

18. Plant assets purchased on long-term credit contracts should be accounted for at
a. The total value of the future payments.
b. The future amount of the future payments.
c. The present value of the future payments.
d. None of the above.

19. An improvement made to an old machine increased its fair market value and its
production capacity by 25% without extending the machine’s useful life. The cost
of the improvement preferably should be?
a. Expensed
b. Capitalized
c. Recorded as a loss
d. Recorded as a liability

20. Technical or commercial obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Expiry date of related lease of the asset
d. Improvement in production or change in market demand for output of the
asset
21. Any renovating or remodeling costs incurred to put a building purchased in a
condition suitable for its intended use is a:

Capital Expenditure Revenue Expenditure

a. Yes No
b. No Yes
c. Yes Yes
d. No No

22. In an exchange transaction with commercial substance, JUJUTSU Co. received

equipment with a fair value equal to the carrying amount of other assets given
up. JUJUTSU also contributed cash. As a result of the exchange, JUJUTSU
recognized:

a. A loss equal to the cash given up.

b. A loss determined by the proportion of cash paid to the total transaction
value.
c. A gain determined by the proportion of cash paid to the total transaction
value.
d. Neither a gain nor loss.

23. A principal objection to the straight-line method of depreciation is that it

a. Provides for the declining productivity of an aging asset.
b. Ignores variations in the rate of use of asset.
c. Tends to result in a constant rate of return on a diminishing investment base.
d. Gives smaller periodic write-off than decreasing charge methods.

24. Government grant shall be recognized when there is reasonable assurance that
a. The entity will comply with the conditions of the grant
b. The grant will be received
c. The entity will comply with the conditions of the grant and the grant will be
received
d. The grant must have been received.

25. Construction of a qualifying asset is started on April 1, 2021 and finished on

December 1, 2021. The fraction used to multiply an expenditure made on April 1,
2021 to find weighted-average accumulated expenditures is
a. 8/8 b. 8/12 c. 9/12 d. 11/12
26. Under PAS 23, capitalization of borrowing costs is suspended
a. when there is temporary delay that is a necessary part of the process of
getting an asset ready for its intended use
b. during a period where substantial technical and administrative work is being
performed
c. during extended periods of suspension of active development of a
qualifying asset
d. when the construction of the asset is completed

27. Changes in residual value or estimated quantity of mineral reserves are

a. changes in accounting estimates accounted for prospectively.
b. changes in accounting estimates accounted for retrospectively.
c. changes in accounting policy accounted for prospectively.
d. changes in accounting policy accounted for retrospectively.

28. Which of the following is not a disclosure required by PFRS 6?

a. Information about commercial reserve quantities.
b. Accounting policies for exploration and evaluation expenditures, including
the recognition of exploration and evaluation assets.
c. The amounts of assets, liabilities, income and expense, and operating and
investing cash flows arising from the exploration for and evaluation of
mineral resources.
d. Information that identifies and explains the amounts recognized in the
financial statements arising from the exploration for and evaluation of
mineral resources.

29. In case of downward revaluation of an asset, which is revalued for the first time,
the account to be debited is
a. Property, plant and equipment
b. Revaluation reserve
c. Profit or loss account
d. General reserve

30. Which of the following is not an indication of possible asset impairment?

a. Significant decrease or decline in the market value of the asset
b. Evidence of obsolescence or physical damage of an asset
c. Evidence that the economic performance of an asset will be worse than
expected
d. The use of accelerated method of depreciation of the asset
PROBLEMS:
31. ITADORI COMPANY incurred the following costs relating to acquisition of
inventories for the year ended December 31, 2021:

Materials 350,000
Irrecoverable purchase taxes 30,000
Abnormal amounts of wasted materials, labor or
other production costs 30,000
Storage costs of finished goods 90,000
Delivery to customers 20,000
Labor 120,000
Administrative overheads unrelated to production 15,000
Variable production overhead 50,000
Factory administrative costs 15,000
Fixed production costs 40,000
Cartage in 8,000
Cartage out 12,000

In the current assets section of ITADORI’s December 31, 2021 statement of financial
position, what total amount should be shown as inventories?

a. 589,000 b. 625,000 c. 598,000 d. 578,000

ANSWER: C
32. FUSHIGURO INC. reported inventory on December 31, 2021 at P6,000,000 based on
a physical count at cost and before any necessary year-end adjustments relating to
the following:
 Included in the physical count were goods billed to a customer FOB shipping
point on December 30, 2021. These goods had a cost of P135,000 and were
picked up by the carrier on January 7, 2022.
 Goods shipped FOB shipping point on December 28, 2021 from a vendor to the
entity were received on January 4, 2022. The invoice cost was P300,000.

What amount should be reported as inventory by FUSHIGURO on December 31,

2021?

a. 5,875,000 b. 6,000,000 c. 6,175,000 d. 6,300,000

Answer: D

Physical count 6,000,000

Good in transit purchased FOB shipping point 300,000
Total inventory 6,300,000

The goods billed to a customer are properly included in inventory because the term is FOB
shipping point and the goods are delivered January 7, 2021.

33. During 2021, KUGISAKI COMPANY signed a noncancelable contract to purchase 500
sacks of rice at Php900 per sack with delivery to be made in 2022. On December 31,
2021, the price of rice had fallen to Php850 per sack. On May 9, 2022, KUGISAKI
accepts delivery of rice when the price is Php880 per sack.

What amount of recovery of loss on purchase commitment should KUGISAKI

recognize on May 9, 2022?

a. 10,000 b. 15,000 c. 25,000 d. NIL

Answer: B

12/31/2021 Loss on purchase commitment 25,000

Estimated liability on purchase commitment 25,000

5/9/2022 Purchases 440,000

Estimated liability on purchase commitment 25,000
Accounts payable 450,000
Gain on recovery on purchase commitment 15,000
34. GOJOU SATORU CORP. had the following amounts under retail inventory method:

Cost Retail
Beginning inventory 3,600 5,000
Purchases 100,000 200,000
Freight in 20,000
Purchase returns 6,000 7,500
Purchase discounts 1,290
Departmental transfer in 8,000 10,000
Abnormal shortage 4,000 5,500
Net markups 18,000
Net markdowns 2,800
Total goods available for sale 120,310 217,200

Additional information:
Sales 72,000 Sales returns 1,500
Sales discounts 3,000 Employee discounts
2,500
Normal spoilage 2,000

How much is the estimated cost of inventory under FIFO?

a. 78,210 b. 142,200 c. 77,755 d. 217,200

Answer: A
116,710
Cost ratio = =55 %
212,200

Total goods available for sale at retail 217,200

Less: Sales 72,000
Sales returns (1,500)
Normal spoilage 2,000
Employee discount 2,500 (75,000)
Ending inventory at retail 142,200
Multiply by cost ratio 55%
Ending inventory at cost 78,210
35. YAGA TECH. prepared a budget in relation to its sales on account and cash sales
during July to August:

June July August

Sales on account 1,800,000 1,840,000 1,900,000
Cash sales 180,000 200,000 260,000

All merchandise is marked up to sell at invoice cost plus 20%. Merchandise inventory at
the beginning of each month is 30% of that month's projected cost of goods sold. What
is the amount of anticipated purchases for July?
a. 1,632,000
b. 2,076,000
c. 1,700,000
d. 1,730,000

Answer: D

Cost of goods sold:

June (1,980,000 / 120%) 1,650,000

July (2, 040,000 / 120%) 1,700,000
August (2,160,000 / 120%) 1,800,000

Inventory – July 1 (30% x 1,700,000) 510,000

Purchases (SQUEEZE) 1,730,000
Goods available for sale 2,240,000
Inventory – July 31 (30% x 1,800,000) ( 540,000)
Cost of goods sold - July 1,700,000

The amount of purchases for July is computed by working back from the cost of goods sold.
36. SUKUNA COMPANY has the following property items at December 31, 2021:

Land which at the date of acquisition is not intended

for any specific use in the future 1,000,000
Land held for future plant site 2,000,000
Building being leased out under operating lease 8,000,000
Building being leased out under finance lease 2,500,000
Equipment being leased out under operating lease 1,500,000
Land and building acquired under finance leases being
being used by SUKUNA as its general headquarters 9,200,000
Condominium building that is being constructed intended
for sale in the ordinary course of business 5,200,000
Building being leased out under operating lease, an insignificant
portion is used for administrative purposes 6,000,000
Hotel building owned which significant services
are provided to the guests 7,000,000

In SUKUNA’s December 31, 2021 statement of financial position, what total

amount should be shown as Property, Plant and Equipment?

a. 15,000,000 b. 16,500,000 c. 19,700,000 d. 22,000,000

ANSWER: C

Land held for future plant site 2,000,000

Equipment being leased out under operating lease 1,500,000
Land and building acquired under finance leases being
being used by SUKUNA as its general headquarters 9,200,000
Hotel building owned which significant services
are provided to the guests 7,000,000
Total Property, Plant and Equipment 19,700,000
37. On January 1, 2021, MAKI ZENIN CORP. traded an old equipment for a newer
model. Data before the trade in are as follows:

Old equipment:
Cost 350,000
Accumulated depreciation 120,000
Average published retail value 60,000

New equipment:
List price 400,000
Cash price without trade in 340,000
Cash price with trade in 270,000

How much is the cost of the equipment to be recognized by MAKI ZENIN CORP.?
a. 340,000 b. 270,000 c. 400,000 d. 230,000

38. Refer to #37. How much is the gain or loss on trade in to be recorded by MAKI
ZENIN CORP.?
a. 160,000 gain c. 70,000 gain
b. 160,000 loss d. 70,000 loss

ANSWER in #37: A

ANSWER in #38: B
 For numbers 39-40, please refer to the problem below:
On January 1, 2021, TODOU INC. began construction of a martial arts dojo to be
used in his operations. The dojo was finished on September 30, 2022. Expenditures
on the project were as follows:
January 1, 2021 200,000
September 1, 2021 300,000
December 31, 2021 300,000
March 31, 2022 300,000
September 30, 2022 200,000

TODOU borrowed Php 750,000 on a construction loan at 12% interest on January 1,

2021. This loan was outstanding throughout the construction period. The company
had Php 4,500,000 in 9% bonds payable outstanding in 2021 and 2022.
39. How much is the capitalizable borrowing cost for 2021?
a. 48,000 c. 60,000
b. 42,000 d. 36,000

40. How much is the capitalizable borrowing cost for 2022?

a. 104,625 c. 87,875
b. 86,805 d. 67,500
ANSWER in #37: D

ANSWER in #38: B

2021
2022
2022
41. INUMAKI CORP. purchased a bulldozer on January 1, 2021, for Php 102,750. At the
time of purchase, the bulldozer was estimated to have a life of six years and a
salvage value of Php 6,750. In 2023, INUMAKI determined that the bulldozer had a
total useful life of seven years and a residual value of Php 4,500.

If INUMAKI uses the straight-line method of depreciation, what will be the

depreciation expense for the bulldozer for 2023?
a. 16,000 c. 9,464
b. 13,250 d. 8,000

ANSWER: B

2021
2022

2023

42. NANAMI KENTO INC. purchased machinery on June 1, 2021. The following
information regarding this asset and its acquisition is available.

Cost 3,300,000
Residual value 300,000
Estimated useful life 5 years
Estimated service hours 60,000 hours
Estimated units of output 50,000 units

If NANAMI KENTO uses the SYD method, what will be the depreciation expense for
the bulldozer for 2021 and 2022, respectively? (Round off answer to whole
numbers).
a. 500,000 and 900,000 c. 583,333 and 883,334
b. 1,000,000 and 800,000 d. 416,667 and 466,667

ANSWER: C
SYD {5 x [(5+1)/2]} = 15
2021 [(3,300,000 – 300,000) x 5/15 x 7/12] 583,333

2022 [(3,300,000 – 300,000) x 5/15 x 5/12] 416,667

[(3,300,000 – 300,000) x 4/15 x 7/12] 466,667
 Total depreciation expense for 2022 883,334
43. Refer to #42. Assuming NANAMI KENTO used double declining balance method,
how much is the accumulated depreciation for 2021 and 2022, respectively?
a. 1,320,000 and 1,848,000 c. 1,320,000 and 1,782,000

b. 770,000 and 1,782,000 d. 1,012,000 and 1,782,000

ANSWER: B
200% Declining Rate = 200%/5 years = 40%

Date Depreciatio Accumulate Book

n d Value
Depreciation
6/1/2021 3,300,000
12/31/2021 (3,300,000 x 40% x 7/12) 770,000 770,000 2,530,000
12/31/2022 (2,530,000 x 40%) 1,012,000 1,782,000 1,518,000

44. Refer to #42. Assuming NANAMI KENTO used units of output method. NANAMI
KENTO used 10,001 hours and 13,408 hours on 2021 and 2022 respectively. They
also produced 12,094 units and 16,121 units of products for 2021 and 2022
respectively. How much is the book value of the machinery for 2021 and 2022,
respectively?

a. 2,574,360 and 1,607,100 c. 1,692,900 and 1,607,100

b. 725,640 and 1,692,900 d. 967,260 and 2,574,100

ANSWER: A

Date Depreciatio Accumulate Book

n d Value
Depreciation
6/1/2021 3,300,000
12/31/2021
[(3,300,000 – 300,000)/50,000 x 12,094 units] 725,640 725,640 2,574,360
12/31/2022
[(3,300,000 – 300,000)/50,000 x 16,121 units] 967,260 1,692,900 1,607,100
 For numbers 45-47, please refer to the problem below:
(Please use PV factors at EIGHT decimal places, final answers AT WHOLE
NUMBERS)

On July 1, 2021, NORITOSHI CORP. purchased the rights of to a mine containing

mineral resources for Php 120,000,000. Total costs of exploration and intangible
development costs incurred was Php 6,000,000.

NORITOSHI is mandated by the Philippine Mining Act of 1995 to restore to restore

the site after 4 years. Based on most reliable measurement, the amount of
restoration cost is Php 10,000,000 and current market-based discount rate is 12%.

On the same date, NORITOSHI acquired movable and immovable tangible

equipment. The movable tangible equipment amounted to Php 6,000,000 while the
immovable tangible equipment costs Php 9,000,000.

Geologists estimate that the total units estimated to be extracted is 12,000,000. It

is estimated that, on the average, 1,500,000 will be extracted each year during the
useful life of the wasting assets.

The movable equipment has a useful life of 6 years while the immovable equipment
has an estimated useful life of 5 years. Actual units extracted in 2021 and 2022
were 1,600,000 and 1,400,000 respectively.

45. How much is the depletion in 2021?

a. 18,133,333 c. 16,800,000
b. 17,647,357 d. 16,847,357

46. How much is total depreciation of the mining equipment in 2021?

a. 1,000,000 c. 2,200,000
b. 1,800,000 d. 2,800,000

47. How much is the interest expense in 2021?

a. 762,622 c. 1,588,795
 b. 854,136 d. NIL

ANSWERS: 45. B 46. D 47. A

2021

2021

immovable equipment

2021

* Immovable equipment [EUL of equipment (5 years) < EUL of wasting asset (12M
tons/1.5M average tons per year = 8 years)
Total depreciation for 2021 (1,000,000 + 1,800,000) 2,800,000 (D)
Question 3
48. On January 1, 2021, NISHIMIYA INC. revalued its delivery equipment with a cost of
Php 12,000,000, acquired 4 years ago with an estimated useful life of 20 years and
has been estimated to have a replacement cost of Php 14,000,000. The delivery
equipment is estimated to have a remaining useful life of 25 years as of January 1,
2021.

On January 1, 2023, the delivery equipment was sold at net proceeds of Php
10,000,000.

How much is the gain (loss) on sale and total revaluation surplus to be closed to
retained earnings in 2023, respectively?

a. 304,000 and 1,576,000 c. 600,000 and 1,600,000

b. (304,000) and 1,472,000 d. (600,000) and 1,728,000

ANSWER: A

Delivery equipment
49. On January 1, 2021, GAKUGANJI CORP. acquired machinery with a cost of Php
2,300,000 with an estimated useful life of 10 years and estimated salvage value of
Php 200,000. On January 1, 2022, based on objective, the machinery was found to
have been impaired. The machinery has a recoverable amount of Php 1,847,000
with an estimated useful residual value of Php 200,000.

How much is the impairment loss in 2022, assuming GAKUGANJI used revaluation
model on measuring machinery?

a. 210,000 c. 183,000
b. 244,000 d. 243,000

ANSWER: D

50. MAHITO CORP. determined that the electronics division is a cash generating unit.
The entity calculated the value in use of the division at Php 8,000,000. The carrying
amounts of the assets are building at Php 5,000,000; equipment at Php 3,000,000
and inventories at Php 2,000,000. MAHITO also determined that the fair value less
cost of disposal of the building is Php 4,500,000
What is the impairment loss allocated on equipment?

a. 500,000 c. 300,000
b. 900,000 d. NIL

ANSWER: B
Carrying amount of CGU (5M+3M+2M) 10,000,000
Recoverable amount of CGU 8,000,000
Impairment loss 2,000,000
Impairment loss specifically identified on building
(4.5M – 5M) (500,000)
Impairment loss allocated to equipment and inventories 1,500,000
Allocated to equipment (1.5M x 3M/5M) 900,000

THE END