Prelim Exam - LUNA
Prelim Exam - LUNA
Prelim Exam - LUNA
PRELIM EXAM
1. The standard that addresses the accounting for revenues is
a. PFRS 16.
b. PFRS 18.
c. PFRS 5.
d. PFRS 15.
4. According to PAS 1, an asset shall be classified as current when it satisfies any of the following
criteria, except
a. it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle
b. it is held primarily for the purpose of being traded
c. it is expected to be realized within twelve months after the balance sheet date
d. it is cash or a cash equivalent that is restricted
5. A liability shall be classified as current when it satisfies any of the following criteria, except
a. it is expected to be settled in the entity’s normal operating cycle
b. it is held primarily for the purpose of being traded
c. it is due to be settled within twelve months after the balance sheet date
d. the entity has an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.
6. If an entity expects, and has the discretion, to refinance or roll over an obligation for at least
twelve months after the balance sheet date under an existing loan facility, it classifies the
obligation as non-current,
a. even if it would otherwise be due within a shorter period.
b. even if the original term was for a period longer than twelve months
c. even if an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the reporting period and before the financial statements are authorized for
issue
d. choices b and c
7. When an entity breaches an undertaking under a long-term loan agreement on or before the end
of the reporting period with the effect that the liability becomes payable on demand, (choose the
incorrect statement)
a. The liability is classified as current, even if the lender has agreed, after the balance sheet date
and before the authorization of the financial statements for issue, not to demand payment as
a consequence of the breach.
b. The liability is classified as current because, at the balance sheet date, the entity does not
have an unconditional right to defer its settlement for at least twelve months after that date.
c. The liability is classified as non-current, even if the lender has agreed, after the balance sheet
date and before the authorization of the financial statements for issue, not to demand
payment as a consequence of the breach.
d. The liability is normally classified as current; however, the liability is classified as non-
current if the lender agreed by the balance sheet date to provide a period of grace ending at
least twelve months after the balance sheet date, within which the entity can rectify the
breach and during that period the lender cannot demand immediate repayment.
9. In the extremely rare circumstances in which management concludes that compliance with a
requirement in a Standard or an Interpretation would be so misleading that it would conflict
with the objective of financial statements set out in the Framework, the entity shall depart from
that requirement in the manner set under PAS 1. When an entity departs from a requirement of a
Standard or an Interpretation, it shall disclose: (choose the incorrect statement)
a. that management has concluded that the financial statements present fairly the entity’s
financial position, financial performance and cash flows;
b. that it has complied with applicable Standards and Interpretations, except that it has
departed from a particular requirement to achieve a fair presentation;
c. that it has complied with other applicable standards other than those issued by FRSC or
IASB and the description of those accounting standards which the entity has complied to.
d. the title of the Standard or Interpretation from which the entity has departed, the nature of
the departure, including the treatment that the Standard or Interpretation would require, the
reason why that treatment would be so misleading in the circumstances that it would
conflict with the objective of financial statements set out in the Framework, and the treatment
adopted; and
e. for each period presented, the financial impact of the departure on each item in the financial
statements that would have been reported in complying with the requirement.
12. The ledger of SCHOLIAST COMMENTATOR Co. as of December 31, 20x1 includes the
following:
Assets
Cash 10,000
Trade accounts receivable (net of ₱10,000 credit balance in
accounts) 40,000
Held for trading securities 80,000
Financial assets designated at FVPL 30,000
Investment in equity securities at FVOCI 70,000
Investment in bonds measured at amortized cost (due in 3 years) 60,000
Prepaid assets 10,000
Deferred tax asset (expected to reverse in 20x2) 12,000
Investment in Associate 36,000
Investment property 46,000
Sinking fund 38,000
Property, plant, and equipment 100,000
Goodwill 28,000
Totals 560,000
18. The ledger of DEROGATORY DEGRADING Co. in 20x1 includes the following:
Cash 200,000
Accounts receivable 400,000
1,000,00
Inventory 0
Accounts payable 300,000
Note payable 100,000
During the audit of DEROGATORY’s 20x1 financial statements, the following were noted by the
auditor:
- Cash sales in 20x2 amounting to ₱20,000 were inadvertently included as sales in 20x1.
DEROGATORY recognized gross profit of ₱6,000 on the sales.
- A collection of a ₱40,000 accounts receivable in 20x2 was recorded as collection in 20x1. A cash
discount of ₱2,000 was given to the customer.
- During January 20x2, a short-term bank loan of ₱50,000 obtained in 20x1 was paid together with
₱5,000 interest accruing in January 20x2. The payment transaction in 20x2 was inadvertently
included as 20x1 transaction.
19. According to PAS 1 Presentation of Financial Statements, expenses are presented using
a. Nature of expense method
b. Function of expense method
c. a or b
d. Classified and Unclassified
25. Which of the following items is likely to be presented in the statement of comprehensive income
of a merchandising business but not of a service business?
a. Service fees c. Cost of sales
b. Salaries expense d. Income tax expense
26. A statement of comprehensive income that presents cost of sales separately from other expenses
is prepared under the
a. single-step method. c. multi-step method.
b. single-presentation. d. two-statement presentation.
27. In a two-statement presentation, information on profit or loss and other comprehensive income
is shown
a. in two separate statements, a statement of profit or loss and a statement showing other
comprehensive income.
b. in two separate statements, a statement of profit or loss and an income statement.
c. in two separate statements, a single-step statement and a multi-step statement.
d. in a single statement called “statement of comprehensive income.”
29. Under this presentation method, expenses are presented in the statement of comprehensive
income without distinctions as to their functions within the entity.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation
30. Under this presentation, expenses are classified as either operating or non-operating item. At a
minimum, cost of sales is presented separately.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation
31. In a statement of comprehensive income showing expenses according to their function, which of
the following is included in the line item “Distribution costs” or “Selling costs?”
a. Insurance expense c. Freight-in
b. Legal and accounting fees d. Advertising expense
32. In a statement of comprehensive income showing expenses according to their function, which of
the following is included in the line item “Administrative expenses?”
a. Salaries of sales personnel
b. Cost of sales
c. Freight-out
d. Legal and accounting fees
Additional information:
a. Ending inventory is ₱90,000.
b. One-fourth of the salaries, rent, and depreciation expenses pertain to the non-sales department.
The sales department does not share in the other expenses.
39. The Grand Company placed an order with The Little Company for new specialist machinery.
The order was non-cancellable once signed and Grand agreed to pay for the machinery at the
time the order was signed on 1 February 20X7. Little held the machinery to Grand's order from 1
June 20X7, the date on which it was completed. Grand commenced using the machinery on 1
August 20X7 when Little completed the installation process. The installation is not distinct. Little
had staff on standby to deal with any operating problems until the warranty period ended on 1
November 20X7. The warranty does not provide service in addition to assurance that the
machinery complies with agreed-upon specifications. Under PFRS15 Revenue, Little should
recognize the revenue from the sale of this specialist machinery on
a. 1 February 20X7 c. 1 August 20X7
b. 1 June 20X7 d. 1 November 20X7
41. In a normal sale, generally the most uncertain factor in the revenue recognition process is
a. the seller's fulfillment of its responsibility in the transaction
b. the measurability of the resource or item received by the seller
c. the realizability of the resource or item received by the seller
d. the relevance of the resource or item received by the seller
42. Which of the following methods of service revenue recognition usually would be most
appropriate for a business engaged in packing, loading, transporting and delivering freight
(where each of the processes is an input to a combined output specified by the customer)?
a. Proportional performance method (i.e., over time as the entity progresses towards the
complete satisfaction of the performance obligation)
b. Completed performance method (i.e., at a point in time when the entity completes the output
specified in the contract)
c. Specific performance method (i.e., when the customer pays for the completion of a single
specific activity)
d. Collection method (i.e., when cash is collected)
43. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a price
for the machine. As per the terms of the sale agreement, it is FOB (tree on board) contract and
the title passes to the buyer when goods are loaded into the ship at the port. When should the
revenue be recognized by the entity?
a. When the customer orders the machine.
b. When the deposit is received.
c. When the machine is loaded on the port.
d. When the machine has been received by the customer.
44. A company manufacturing and selling consumable products has come out with an offer to
refund the cost of purchase within one month of sale if the customer is not satisfied with the
product. When should the company recognize the revenue?
a. When goods are sold to the customers.
b. After one month of sale.
c. Only if goods are not returned by the customers after the period of one month.
d. At the time of sale along with an offset to revenue for the refund liability for the products
expected to be returned.
45. A computer chip manufacturing company sells its products to its distributors for onward sales
to the ultimate customers. Due to frequent fluctuations in the market prices for these goods, the
company has a “price protection” clause in the distributor agreement that entitles it to raise
additional billings in case of upward price movement, Another clause in the distributor’s
agreement is that the company can at any lime reduce its inventory by buying back goods at the
cost at which it sold the goods to the distributors. Distributors pay for the goods within 60 days
from the sale of goods to them. When should the company recognize revenue on sale of goods to
the distributors?
a. When the goods are sold to the distributors.
b. When the distributors pay to the company the cost of the goods.
c. When goods are sold to the distributors provided estimated additional revenue is also
booked under the “protection clause” based on past experience,
d. When the distributors sell goods to the ultimate customers and there is no uncertainty with
respect to the “price protection” clause or the buyback of goods.
46. An entity manufactures and sells standard machinery. One of the conditions in the sale contract
is that installation of machinery will be undertaken by the entity. During December of the
current year, the entity received a special onetime contract from a customer to manufacture,
install and maintain customized machinery. It is the first time the entity will be producing this
kind of machinery, and it is expecting numerous changes that would need to be made to the
machine after the installation is completed, which one period is described in the contract of sale
as the “maintenance period.” The maintenance services are an input to a combined output
specified in the contract. The total cost of making the changes during the maintenance period
cannot be reasonably estimated at the time of the installation. Costs incurred are not recoverable
if, during the maintenance period, the machinery is discovered as non-compliant with agreed-
upon specifications and the non-compliance is beyond remediation. The customer shall signify
its acceptance of the machinery at the end of the maintenance period. When should revenue
from the sale of the special machine most likely be recognized?
a. When the machinery is produced.
b. When the machinery is produced and delivered.
c. When the installation is complete
d. When the maintenance period as per the contract of sale expires.
Real estate:
Parking lot (leased to Day Co.) 300,000
Other:
Trademark (at cost, less accumulated
amortization) 25,000
435,00
Total investments
0
Lake owns 1% of Kar and 30% of Aub. The Day lease, which commenced on January 1, 20x1, is for
ten years, at an annual rental of ₱48,000. In addition, on January 1, 20x1, Day paid a nonrefundable
deposit of ₱50,000, as well as a security deposit of ₱8,000 to be refunded upon expiration of the lease.
The trademark was licensed to Barr Co. for royalties of 10% of sales of the trademarked items.
Royalties are payable semiannually on March 1 (for sales in July through December of the prior
year), and on September 1 (for sales in January through June of the same year).
During the year ended December 31, 20x3, Lake received cash dividends of ₱1,000 from Kar, and
₱15,000 from Aub, whose 20x3 net incomes were ₱75,000 and ₱150,000, respectively. Lake also
received ₱48,000 rent from Day in 20x3 and the following royalties from Barr:
March 1 September 1
20x2 3,000 5,000
20x3 4,000 7,000
Barr estimated that sales of the trademarked items would total ₱20,000 for the last half of 20x3.
48. In Lake’s 20x3 income statement, how much should be reported for dividend revenue?
a. 16,000
b. 2,400
c. 1,000
d. 150
49. In Lake’s 20x3 income statement, how much should be reported for royalty revenue?
a. 14,000
b. 13,000
c. 11,000
d. 9,000
50. In Lake’s 20x3 income statement, how much should be reported for rental revenue?
a. 43,000
b. 48,000
c. 53,000
d. 53,800
ANSWER