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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4501
CPA Review Batch 45  May 2023 CPA Licensure Examination
FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO
CASH & CASH EQUIVALENTS

Composition of Cash:
a. Undeposited currency and coins
b. Demand deposits deposited in checking and savings account that can be withdrawn anytime, without
advance notice
c. Undeposited negotiable checks payable to the company or bearer awaiting deposit
d. Foreign currencies converted to Philippine peso at the exchange rate as at reporting date
e. Bank drafts are commitments by banking institutions to advance funds on demand by the party
to whom the draft was directed
f. Money orders are similar to bank drafts but are drawn generally from authorized post offices or other financial
institutions.
g. Other short-term funds for current operations like:
Petty Cash Fund (Coins, bills, replenishment checks and employees’ checks)
Dividend Fund
Change Fund
Tax Fund
Interest Fund
Payroll Fund
Fund for the Acquisition of Current Assets
Cash Equivalents
Cash equivalents are short-term highly liquid investments that are readily convertible into cash and so near their
maturity that they present insignificant risk of changes in value due to changes in interest rates. Only highly liquid
investments that are acquired three months, or less than three months, before maturity can qualify as cash
equivalents such as the following:
a. Three-month commercial paper or money market instrument

b. Three-month time deposit
c. Three-month treasury bills
Valuation of Cash in the Statement of Financial Position

a. Generally valued at face amount
b. Cash in foreign currency is valued in Philippine peso using the current exchange rate as of the reporting
date
Cash in Closed Banks or in Banks having Financial Difficulty

Cash in bank or in financial institutions having financial difficulty or in bankruptcy should be shown at its
estimated realizable or recoverable value and is presented as Receivables.
Financial Statement Presentation

Cash and Cash Equivalents are the first item shown among the current assets, the details of which are presented
in the notes to financial statements.
Compensating Balance
The minimum amount to be maintained in a bank account to act as collateral for the payment of a depositor’s
loan. Its presentation in the financial statements is dependent on whether the balance is legally restricted or
unrestricted:
1. Legally restricted compensating balance if held as collateral for:
a. Short-term borrowing--Shown separately under current assets but not part of “Cash and Cash
Equivalents”. The account title, Cash Held as Compensating Balance, may be used.
b. Long-term borrowings—Shown separately as non-current asset either as Long-term Investments or
Other Assets
2. Unrestricted – Should presented as part of Cash
FINANCIAL ACCOUNTING & REPORTING - THEORIES

1. Cash equivalents are
a. Short-term and highly liquid investments that are readily convertible into cash.
b. Short-term and highly liquid investments that are readily convertible into cash with remaining
maturity of three-months.
c. Short-term and highly liquid investments that are readily convertible into cash and acquired three
months or less before maturity.
d. Short-term and highly liquid marketable equity securities.
2. A compensating balance
a. Must be included in “cash and cash equivalents”.
b. Which is legally restricted and related to a long-term loan is classified as current asset.
c. Which is legally restricted and related to a short-term loan is classified separately as current asset.
d. Which is not legally restricted as to withdrawal is classified separately as current asset.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4501
3. Which of the following is usually considered cash?

a. Certificate of deposit. c. Money market saving certificate.
b. Checking account. d. Customer’s postdate check.
4. Petty cash fund is
a. Separately classified as current asset.
b. Money kept on hand for making minor disbursements of coin and currency rather than by writing
checks.
c. Set aside for the payment of payroll.
d. Restricted cash.
5. The petty cash fund account under the Imprest fund system is debited
a. Only when the fund is created.
b. When the fund is created and every time it is replenished.
c. When the fund is created and when the size of the fund is increased.
d. When the fund is created and when the fund is decreased.
6. Which of the following statements is not true (false)?
a. Adjustment of the petty cash account is made at the end of the period to avoid understatement of
expenses and overstatement of cash.
b. Entries are made to the petty cash account to increase or decrease the size of the fund or to adjust
the balance if not replenished at year-end.
c. The Imprest petty cash system in effect adheres to the rule of disbursements by check.
d. The petty cash account is debited when the fund is replenished.
7. A cash short and over account is
a. A contra account to cash.
b. Debited when the petty cash fund proves out over.
c. Debited when the petty cash fund proves out short.
d. Not generally accepted.
8. What is the major purpose of an Imprest petty cash fund?
a. To effectively plan cash inflows and outflows.
b. To ease the payment of cash to vendors.
c. To determine the honesty of the petty cashier.
d. To effectively control cash disbursements.
9. If the cash balance shown in the company’s cash records is less than the correct cash balance and neither
the company nor the bank has made any errors, there must be
a. Outstanding checks.
b. A no-sufficient fund check returned by the bank.
c. Bank charges not yet recorded by the depositor.
d. An interest credited by the bank in the depositor’s account.
10. A bank reconciliation is
a. A formal financial statement that lists all of the bank account balances of an entity.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the difference between an entity’s cash balance as shown in the bank
statement and the cash balance as shown in the general ledger.
11. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation
which ends with adjusted cash balance?
a. Note receivable collected by bank in favor of the depositor and credited to the account of the
depositor.
b. NSF customer check.
c. Service charge.
d. Erroneous bank debit.
12. Bank reconciliation are normally prepared on a monthly basis to identify adjustments needed in the depositor’s
records and to identify bank errors. Adjustments on the part of the depositor should be recorded for
a. All items except bank errors, outstanding checks and deposits in transit.
b. Bank errors, outstanding checks and deposits in transit.
c. Book errors, bank errors, deposits in transit and outstanding checks.
d. Outstanding checks and deposits in transit.
13. Following are reconciling items in an enterprise’s bank reconciliation statement.
I. Deposits in transit
II. Company’s check for P32,500 recorded in the books for P23,500
III. Note collected by bank in behalf of the company
IV. Deposit of another company erroneously credited by bank to the company’s account
V. No sufficient fund check charged back by bank
VI. Company deposit for P32,500 recorded in the books for P23,500
Which of these adjustments would be shown as addition to the cash balance per books in order to arrive at
the correct cash balance?
a. II, III, and VI
b. II and III
c. II, V and VI
d. III and VI

14. Bank statements provide information about all of the following, except
a. Bank changes for the period.
b. Errors made by the company.
c. Checks cleared during the period.
d. No sufficient fund checks.
15. In preparing a bank reconciliation, interest paid by the bank on the depositor’s account is
a. Added to the bank balance.
b. Added to the book balance.
c. Subtracted from the bank balance.
d. Subtracted from the book balance.
FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: On December 31, 2021, the Cash and Cash Equivalents account of Partridge Company shows the
following composition:
Petty Cash Fund 5,000
Traveler’s check 10,000
Cash in Savings deposit* 104,000
Manager’s check 23,000
Postage stamps 1,000
IOUs from the officers 3,000
Bank draft in a checking account with Allied Bank 70,000
Postal Money order 20,000
Deposits segregated to pay dividends 100,000
Securities: Date Acquired Maturity Date Amount

BSP T. Bills (1yr.) 1/30/21 01/30/22 40,000
BSP T. Bills (6mos.) 11/01/21 04/01/22 30,000
MM Funds (9mos.) 12/01/21 02/28/22 50,000
*Cash in Savings deposit includes P10,000 of compensating balances. It was noted that 40% of that amount
are legally restricted as to withdrawal.
How much is the amount of Cash and Cash Equivalents to be presented in the Statement of Financial Position on
December 31, 2021?
a. 218,000 b. 238,000 c. 328,000 d. 378,000
Problem 2: Turtledoves Corporation's checkbook balance on December 31, 2021, was P8,000. In addition,
Turtledoves held the following items in its safe on December 31:
a. Check payable to Turtledoves Corporation, dated January 2, 2022, not included in
December 31 checkbook balance 2,000
b. Check payable to Turtledoves Corporation, deposited December 20, and included in
December 31 checkbook balance, but returned by bank on December 30, stamped
"NSF." The check was redeposited on January 2, 2022, and cleared on January 7, 2022. 500
c. Check payable to Turtledoves Corporation, undeposited, dated May 1, 2021, included

in December 31 checkbook balance 950
d. Check drawn on Turtledoves Corporation's account, payable to a vendor, dated and
recorded on December 31, 2021 but not mailed until January 15, 2022. 1,000
e. Check drawn on Turtledoves Corporation's account, payable to a supplier, dated
January 3, 2022, was delivered and recorded on December 30, 2021. 850
The proper amount to be shown as Cash in the SFP on December 31, 2021 is
a. 6,400 b. 9,350 c. 8,400 d. 7,350
Problem 3: The December 31, 2020 trial balance of French Company included the following accounts:
Cash on hand P 1,000,000
Petty cash fund 40,000
Cash in bank at Metrobank 2,700,000
Cash in bank at Landbank – 60-day time deposit 4,000,000
BSP treasury bills - 30 days 6,000,000
● The Cash on hand included a customer postdated check of P200,000 and a postal money order of
P80,000
● The Petty cash fund included an unreplenished petty cash vouchers for P4,000 and an employee check
for P6,000 dated January 6, 2021.
● A check for P400,000 was drawn against Metro bank account, dated January 31, 2021, delivered to
the payee and recorded December 31, 2020.
● The Landbank time deposit is set aside for the acquisition of Land to be used as a factory site.
What is the total amount of Cash and Cash Equivalents that should be reported in the Statement of Financial
Position on December 31, 2020?
a. 3,930,000 b. 9,530,000 c. 9,930,000 d. 13,930,000

Problem 4: The Drake Company’s ledger showed a balance of P363,000 in its Cash and Cash Equivalents
account on December 31, 2021, the breakdown of which is as follows:
Petty Cash Fund* 5,000
Payroll Account – BPI 60,000
Restricted foreign bank account 25,000
Treasury bill, due 3/30/22 (purchased 12/31/21) 70,000
Treasury bill, due 1/31/22 (purchased 5/1/21) 40,000
Demand deposit – PNB (overdraft) (20,000)
Cash in Bank – BDO** 90,000
Cash set aside for the acquisition of equipment to
be disbursed 4 months after reporting date 30,000
Bond Sinking Fund 45,000
DAUD/DAIF customer’s check 10,000
Cash Surrender Value 8,000
* Including expense receipts of 1,000, IOUs of 500 and Employee’s check dated December 30, 2021 of P200.
** Net of undelivered check payable to creditors of P30,000.
How much is the amount of Cash and Cash Equivalents on December 31, 2021?
a. 253,300 b. 253,500 c. 233,300 d. 283,500
Problem 5: Gold Company established a petty cash fund of P5,000 on July 1, 2020. At the end of the month, the
count of cash on hand indicated that P675.40 remained in the fund. A review of the petty cash vouchers disclosed
the following expenses had been incurred during the month:
Office supplies – P341.60 Postage – P780.00
Representation – P1,000.00 Transportation – P1,321.40
Miscellaneous – P837.60
The above information indicates that there is a

a. shortage 44.00 b. overage of 44.00 c. shortage of 1,394.80 d. overage of 1,394.80
Problem 6: If a petty cash fund of Gee Company is established in the amount of P2,500, and contains P2,000 in
cash and P450 in receipts for disbursements when it is replenished,
The journal entry to record replenishment should include credit to the following accounts
a. Petty Cash, 450 b. Petty Cash, 500 c. Cash, 450; Over/Short, 500 d. Cash, 500
Problem 7: Mild Company prepares a reconciliation of the bank and books balances on a regular monthly basis.
The December 31, 2021 reconciliation shows a balance per bank of P581,050, balance per books of P615,900,
outstanding checks of P84,300, deposits in transit of P120,000, interest earned on the bank balance of P1,250,
and service charges of P400.
How much is the correct cash in bank on December 31, 2021?

a. 616,750 b. 616,570 c. 615,100 d. 545,350
Problem 8: In preparing its August 31, 2021 bank reconciliation, Ladies Company has the following information:
Balance per bank statement, August 31, 2021 – P180, 500; Deposit in transit – P32, 500; Return of customer’s
check for insufficient funds – P6,000; Outstanding checks – P27,500; Bank service charges – P1,000.
What is the unadjusted cash balance per books at August 31, 2021?
a. 192,500 b. 185,500 c. 180,000 d. 173,500
Problem 9: Lords Company keeps all its cash in checking account. An examination of the company’s accounting
records and bank statement for the month ended December 31, 2021 revealed the following information: Cash
balance per bank statement – P846,900; Cash balance per ledger – P852,400.
A deposit of P95,000 placed in bank’s night depository on December 29, 2021 does not appear on the bank
statement. The bank statement shows that on December 26, 2021, the bank collected a note for Lords and
credited the proceeds of P93,500 to the company’s account. The proceeds included P3,500 interest, all of which
Lords earned during the current accounting period. Lords has not yet recorded the collection. Checks outstanding
on December 31, 2021 totaled P27,000.
Lords discovered that Check No. 032759 written in December 2021 for P18,300 in payment of an account had
been recorded in the company’s records as P13,800. Included with the December 31, 2021 bank statement was
an NSF check for P25,000 that Lords had received from Leaping Company on December 20, 2021. Lords has not
yet recorded the returned check. The bank statement shows a P1,500 service charge for December.
The adjustment to the cash balance as of December 31, 2021 is

a. debit to cash of 93,500 b. credit to cash of 31,000 c. debit to cash of 62,500 d. debit to cash of 62,500

Problem 10: Piper Company had the following bank reconciliation as at October 31, 2021:
Balance per bank, October 31 P420,000

Add: Deposit in Transit P 80,000
Erroneous bank debit* 15,000
Bank service charge 5,000 100,000
P520,000
Less: Outstanding checks P 70,000
Credit memo 50,000 120,000
Balance per book, Oct. 31 P400,000
* Corrected in November
All reconciling items at October 31, 2021 cleared through the bank in November. Items for November are the
following: Deposits in transit and Outstanding checks were P 40,000 and P60,000, respectively. Proceeds from
bank loan was P 20,000 and a debit memo of P8,000 are not yet recorded on the depositor’s books. Total Bank
receipts was P300,000; Total Bank disbursements was P250,000.
1. In a “four-column proof of cash statement”, what is the amount of Adjusted Cash Receipts in November?
a. 260,000 b. 275,000 c. 290,000 d. 245,000
2. In a “four-column proof of cash statement”, what is the amount of Adjusted Cash Disbursements in
November?
a. 240,000 b. 225,000 c. 237,000 d. 222,000
3. How much is the Adjusted Cash in Bank?

a. 480,000 b. 450,000 c. 445,000 d. 400,000
Problem 11: In reconciling the Cash in Bank of Drummer Company with the bank statement balance for the
month of November 2021, the following data are summarized:
Book receipts- November P800,000
Bank receipts - November 900,000
Credit memo for note collection:
October 60,000
November 75,000
Credit memo for November bank loan 100,000
Deposit in transit for October 120,000
Erroneous bank credit in November corrected in December 25,000
Erroneous bank credit in October corrected in November 50,000
Erroneous book credit in November corrected in December 5,000
Erroneous book credit in October corrected in November 10,000
Debit memo for service charge - October 6,000
Debit memo for service charge – November 8,000
Erroneous book debit – November corrected in December 20,000
Erroneous bank debit – November corrected in December 65,000
Book disbursement – November 600,000
Bank disbursement – November 700,000
Outstanding check – October 80,000
1. In a four-column “Proof of Cash Statement”, what is the adjusted amount of receipt for the month of
November?
a. 800,000 b. 825,000 c. 885,000 d. 900,000
2. In a four-column “Proof Cash Statement”, what is the adjusted amount of disbursement for the month of
November?
a. 500,000 b. 515,000 c. 597,000 d. 600,000
AUDITING PRACTICE
Significant Business Processes: Order to Cash and Purchase to Pay
(Formerly Revenue and Receipt and Purchasing and Disbursement Cycles)
PROBLEM 1: (COMPOSITION, CASH COUNT)

You were assigned to audit the cash and cash equivalents account of your audit client, Luzon Corp. for the
period ended December 31, 2020. As a result of your investigations, you were able to gather the following
from the Corp.’s trial balance:
Petty cash fund 25,000
Cash on hand – undeposited collections 1,250,000
Cash in bank – BPI Current Account No. 2099 3,780,000
Cash in bank – BDO Current Account No. 22013 (160,000)
Cash in bank – UCPB Savings Account No. 02312 3,500,000
Other Items 2,000,000

Audit notes:
1. The petty cash fund consisted of the following items as of December 31, 2020 (count date):
Currency and coins P3,800
Employees’ vales/IOUs duly supported by promissory notes signed by
employees concerned 2,500
Currencies/money in an envelope marked “collections for
Christmas Party” with names attached 5,200
Unreplenished petty cash expense vouchers 3,250
Check drawn by Luzon Corp., payable to the petty cashier 11,200
Unused postage stamps 900
Personal check of Aljun Li, officer, payable to the account of the Luzon Corp. 3,000
2. Cash on hand represents undeposited collections as of December 31, 2020 and includes the following:
a. A customer’s check for P125,000 returned by bank on December 28, 2020 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 2, 2021.
b. Another customer’s check for P56,000 dated January 5, 2021, received on December 29, 2020.
c. A customer check for P99,000 dated June 1, 2020 received on the same date, still on hand
and yet to be deposited to the bank.
d. Postal money orders and bank drafts received from customers, P100,000.
3. Included among the checks drawn by Luzon Corp. against the BPI Current Account No. 2099 and
recorded in the cash disbursement journal in December 2020 are the following:
a. Check written on December 29, 2020 dated January 2, 2021, delivered to payee on
December 29, 2020, P94,000.
b. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021,
P72,000.
c. Check dated April 1, 2020 amounting to P90,000 still outstanding by December 31, 2020 as
per the client-prepared December bank-reconciliation statement.
4. The credit balance in the BDO Current Account No. 22013 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2020.
5. The UCPB Savings Account No. 02312 has been set by the board of directors for acquisition of new
computers. This account is expected to be disbursed in the next 3 months from the balance sheet date.
6. Other items included:
a. P1.2M time deposit with BPI which was purchased on November 1, 2020 and shall mature on
November 1, 2021 (This deposit is not allowed to be pre-terminated as per the signed
agreement with the bank)
b. P500,000 money market placements purchased December 1, 2020 and shall Mature on March
1, 2021, and;
c. P200,000 investment in ordinary shares designated as FVPL, purchased on November 15,
2020, expected to be sold by February 14, 2021.
d. P100,000 investment in redeemable preference shares purchased on December 1, 2020 with
a mandatory redemption date on February 28, 2021.
Determine the audited balances of the following:
1. Petty cash fund
2. Petty cash shortage/overage
3. Cash on hand – undeposited collections
4. Total cash in banks (excluding undeposited collections) to be included as cash and cash
equivalents in the current asset section of the balance sheet
5. Total Cash and cash equivalents to be reported in the 2020 balance sheet
PROBLEM 2: (CASH COUNT)

Your petty cash count conducted on January 4, 2021 in the presence of Jon Tan, the custodian of your client,
Visayas Inc. revealed the following:
Coins and currency P 2,900
Paid vouchers:
12/27 Transportation P 550
12/27 Gasoline 420
12/28 Office Supplies 590
12/29 Postage stamps 300
12/30 Employee IOU (with promissory note) 500
1/2 Office repairs 375
1/3 Representation expense 325 3,060
Officer’s check returned by bank marked “NSF” 1,000
Check drawn by company to the order of Jon Tan 3,000
Unused postage stamps 300
12.28 Petty cash receipt voucher for the return of
a travel advance. A total travel advance of P1,500
was made in October and fully replenished in 500
November for P1,500.*

The petty cash fund had an imprest balance of P10,000 as reflected in the company’s general ledger.
*The company does not maintain a separate travel fund, instead, the company makes use of the petty cash
fund for travel expenses. After your cash count, you were able to confirm that the P500 cash was subsequently
deposited to the company’s current account.
Requirements:
1. What is the petty cash shortage?
2. What is the correct/adjusted balance of the Petty Cash Fund account as of December 31,
2020?
PROBLEM 3: (CASH COUNT)

A count of the undeposited receipts under the custody of Mr. Gor, the cashier of Macario Corp., on
September 30, 2020 showed the following composition:
Currency and coins P24,620

Unused postage and documentary stamps 220
Employee IOU’s (supported by promissory notes) 2,000
Other disbursement vouchers paid from cash receipts 1,600
Checks:
Date Payee Drawer
3-24-20 Macario Corp. Rita Co. (Customer) 2,000
9-20-20 Macario Corp. Tams Co. (Customer) 4,700
9-27-20 Macario Corp. Jonli Inc. (Customer) 3,920 **
9-30-20 MERALCO Macario Corp. 5,700
10-2-20 Macario Corp. X24E Co. (Customer) 1,500
Total per count P 44,760
**Marked NSF by the bank (replaced by the customer and redeposited on October 5)
Assuming the cashier’s accountability is P33,540 per the client’s records as of September 30:
1. What was the amount of shortage/overage on September 30?
2. What is the adjusted balance of undeposited collections as of September 30?
PROBLEM 4: (BANK RECONCILIATION; PROOF OF CASH)

You obtained the following information pertinent to the current account of Park Corp. during your examination
of its financial statements for the year ended December 31, 2020.
Audit notes:
a. November items:
● The bank statement on November 30, 2020 showed a balance of P1,872,000.
● Among the bank credits in November was customer’s note for P600,000 collected for the
account of the company which the company recorded in the cash receipts journal in December.
● Included in the November bank debits were cost of checkbooks amounting to P7,200. Likewise
included in the November bank debits was a P240,000 check which was charged by the bank
in error against Park Corp.’s account. Bank errors are usually automatically corrected the
following month.
● November deposits in transit amounted to P480,000 and outstanding checks totaling
P1,050,000, 30,000 of which has been certified by the bank in November.
● A P195,000 customer collection in November was recorded in the books at P159,000. This was
discovered and corrected in the cash receipt journal in December.
b. December items:
● The bank statement for the month of December showed total credits of P4,496,000 and total
charges of P1,724,000.
● The company’s books, on the other hand, showed total December debits of P4,413,600, total
credits of 2,443,200. The December cash balance per books was at P2,913,600.
● A December credit memo for bank loan proceeds amounted to P800,000 was among the
year-end bank credits.
● Bank debit memos for December were: No. 121 for service charges, P9,600 and No. 122 on a
customer’s returned check marked “NSF” for P144,000.
● The total bank credit and the total bank debit for the month of December both included a
P23,000 customer check. This check bounced in December but subsequently redeposited and
cleared the bank also in December. Examination revealed that the return and redeposit were
no longer recorded in the books since they will have no effect on the ending cash balance.
● A P95,000 collection check of Perk Corp. was erroneously credited by the bank to the
company’s account in December.
● On December 31, 2020 the company authorized the bank to automatically settle a P360,000
note payable to a supplier. The note matures on January 5, 2021. The company treated this
note as part of its disbursements although the bank was able to settle the note only at maturity
date.
● A check for P11,880 was recorded in the company’s cash disbursements books in December
as P118,800. This error was discovered by the company in December and the necessary
correction has already been made to the cash account in the general ledger also in December.

Requirements:
1. How much is the undeposited collections as of December 31?
2. How much is the outstanding checks as of December 31?
3. How much is the adjusted cash balance as of November 30?
4. How much is the adjusted cash balance as of December 31?
PROBLEM 5: (BANK RECONCILIATION; PROOF OF CASH)

The following information was provided by Spoon Corp. as of the fiscal year ended September 30, 2020:
August 31 September 30
Customers’ direct deposits credited by the
bank (recorded per books the following month) 55,000 72,000
Bank loan and interest payments 120,000 80,000
Customer’s NSF checks, recorded in the books the following month 15,000 6,000
Customer’s NSF check returned by the bank in September,
redeposited also in September. Examination revealed that the
company recorded the return and redeposit per books. 4,400
Undeposited collections 89,000 ?
Outstanding checks 122,000 ?
Total credits per bank statement 1,819,000
Total debits per bank statement 1,618,000
Total debits per books 1,795,000
Total credits per books 1,800,000
Additional information:
a. A P25,000 collection was erroneously recorded twice in the books in September, the company
discovered the error and corrected the same in September.
b. A P30,000 check disbursement was recorded in the books as P3,000 in August. The correction was
made in September.
c. The bank erroneously charged the company in August for a disbursement of Spin Corp. for the
amount of P40,000. The bank corrected the error in September.
d. A September collection was correctly record in the books at P21,000. This was erroneously credited
by the bank at P12,000. The error was discovered and immediately corrected by the bank also in
September.
e. The unadjusted balance per book in August was at P698,000. The unadjusted balance per bank
in September was at P785,000.
Requirements:
1. What is the correct cash in bank balance as of August 31?
2. What is the correct deposit in transit as of September 30?
3. What is the correct outstanding checks as of September 30?
4. What is the correct cash in bank balance as of September 30?
PROBLEM 6: (RAP; INTERNAL CONTROLS, TEST OF CONTROLS, SUBSTANTIVE TESTING)

1. Cash is the most inherently risky among assets in the perspective of the auditor. This is mostly associated
to the fact that cash has the highest risk of misappropriation either from within or outside the entity.
Which of the following controls most likely would reduce the risk of diversion of customer receipts by an
entity’s employees?
a. Daily deposit of cash receipts.
b. Monthly bank reconciliations.
c. Prenumbered remittance advice
d. A bank lockbox system
2. Which of the following is not consistent with the requirements of the imprest system with regard to
protecting receipts from possible loss due to misappropriation?
a. Requiring customers, where possible, to pay through checks.
b. Requiring the company’s personnel who receives the check first to automatically
restrictively endorse check collections.
c. Requiring the treasury department to prepare monthly bank reconciliation statements to
reconcile bank records against the company’s books.
d. Requesting customers, where possible, to remit payments directly to the bank.
3. Which of the following is not a universal rule for achieving strong internal control over cash receipts?
a. Separate the cash handling function, record keeping function and regular bank
reconciliation functions.
b. Decentralize the receiving of cash as much as possible.
c. Deposit each days’ cash receipts by the end of the day.
d. Where collections are made through cash and not through checks, cash receipts should be
reconciled with the prenumbered official receipt at the end of the operating day.

4. As payments are received, one mailroom employee is assigned the responsibility of prelisting check
receipts and preparing the deposit slip prior to forwarding the check receipts, the deposit slip, and the
remittance advices to accounts receivable for posting. Accounts receivable personnel refoot the deposit
slip, stamp a restrictive endorsement on the back of each check, and then forward the receipts and the
deposit slip to the treasury department. Which of the following is a reasonable assessment of internal
control on this process?
a. Internal control is adequate.
b. Internal control is inadequate because mailroom employees should not have access to cash.
c. Internal control is inadequate because treasury employees should prepare the deposit slip.
d. Internal control is inadequate because of a lack of segregation of duties.
5. Which of the following would the auditor consider to be an incompatible operation for a cashier if the
cashier receives remittances from the mailroom?
a. Posting the receipts to the accounts receivable subsidiary ledger cards.
b. Making the daily deposit at the local bank.
c. Preparing the daily deposit.
d. Endorsing the checks.
6. Which of the following is not consistent with the requirement of the imprest system with regard to
the internal control measures in handing and processing disbursements?
a. All disbursements, without exception, should be made through checks.
b. For immaterial disbursements, the company may be allowed to use undeposited
collections.
c. Documents in the voucher package (e.g., sales invoice, purchase order, receiving
reports) should be automatically cancelled once disbursement checks are signed.
d. Checks should be released immediately to the payees, preferably by the one who signed
the checks last.
7. Which of the following is a standard internal accounting control for cash disbursements?
a. Checks should be signed by the controller and at least one other employee of the
company.
b. Checks should be sequentially numbered and the numerical sequence should be
accounted for by the person preparing the bank reconciliation statement.
c. Checks and supporting documents should be marked “paid” immediately after the check is
returned with the bank statement.
d. Checks should be sent directly to the payee by the employee who prepares documents that
authorize check preparation.
8. Which of the following cash fraud activities involves the postponement of the recording of receipts and
can be well perpetrated where there is lack of segregation of duties between recordkeeping and
custodial functions?
a. Kiting
b. Lapping
c. Window dressing
d. Salami fraud
9. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by
lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme,
the auditor most likely would compare the:
a. Dates uncollectible accounts are authorized to be written off with the dates the write- offs
are actually recorded.
b. Individual bank deposits slips with the details of the monthly bank statements.
c. Daily cash summaries with the sums of the cash receipts journal entries.
d. Dates checks are deposited per bank statements with the dates remittance credits are
recorded.
10. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash.
b. Many large checks that are recorded on Mondays.
c. Frequent cash withdrawals from checking accounts.
d. Low average balance compared to high level deposits.
11. Which of the following audit procedures will likely detect or uncover kiting activities of the client?
a. Sending confirmation to banks.
b. Vouch check issuances representing disbursements to source documents.
c. Render cash count on a surprise basis.
d. Simultaneously validate bank reconciliations statements.
12. For the most effective internal control, monthly bank statements should be received directly from the
banks and reviewed by the
a. Controller.
b. Cash receipts accountant.
c. Cash disbursement accountant.
d. Internal auditor.

13. Which of the following assertions does the auditor most likely would like to validate in deciding to
render cash counts?
a. Completeness
b. Existence
c. Valuation
d. Rights and obligation
14. In rendering cash counts, the accountability shall represent:

a. The cash items only.
b. Cash items and other evidences of the use of cash such as unreplenished paid
vouchers.
c. Cash that should be on hand per collection activities of the custodian.
d. The difference between the cash balance per collection records against the valid cash items
and evidences supporting the use of cash.
15. In rendering cash counts, cash shortage results when:

a. Accountability is equal to valid cash and non-cash items.
b. Accountability is higher than valid cash and non-cash items.
c. Accountability is lower than valid cash and non-cash items.
d. Accountability is zero.
16. Which of the following is correct regarding cash counts?

a. Where the accountability is the petty cash fund balance, accommodated checks are
considered not valid support of NSF, post-dated or stale as of the count date.
b. Where the accountability is the undeposited collection balance, customer collection
checks are considered valid support even if they are NSF, post-dated or stale as of the
count date.
c. Where the accountability is the petty cash fund balance, any evidence to claim that cash
was used to pay certain disbursements (e.g. postage stamps) shall be considered valid
support.
d. Where the accountability is the undeposited collection balance, any evidence to claim
that collection was used to pay certain disbursements (e.g. postage stamps) shall be
considered valid support.
17. In validating bank reconciliation statements of the client, the auditor should trace back
outstanding checks to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
18. In validating the bank reconciliation statements of the client, the auditor should trace back the
unrecorded debits, like service charges to the:
a. Accounts payable voucher.
b. Cancelled checks returned by the bank.
c. Bank statement of the current month.
d. Cut-off bank statement of the subsequent month.
19. In preparing the bank reconciliation statement of the client, a cash in bank shortage normally
occurs when:
a. The unadjusted balance per bank is lower than the unadjusted balance per books.
b. The adjusted balance per bank is higher than the unadjusted balance per books.
c. The unadjusted balance per bank is higher than the unadjusted balance per books.
d. The adjusted balance per bank is lower than the adjusted balance per books.
20. The proof of cash statements is usually prepared by the auditor when:
a. Internal control over cash is strong and control risk is placed at the maximum.
b. Internal control over cash is weak and control risk is place at the maximum.
c. Cash balance is very significant.
d. Cash balance is very insignificant.
21. The usefulness of the standard bank confirmation request may be limited because the bank
employee who completes the form may:
a. Not believe that the bank is obligated to verify confidential information to a third
parity.
b. Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.
c. Not have access to the client’s cutoff bank statement.
d. Be unaware of all the financial relationships that the bank has with the client.
- END -

RECEIVABLES
Nature of receivables
Receivables are financial assets arising from contractual rights to receive cash or another financial asset from
another company.
Types of receivables
Trade receivables arise from the sale of merchandise or service in the ordinary course of business. This
may be evidenced by a promise to pay called Notes Receivable, or not evidenced by a promise to pay,
Accounts Receivable
Non-trade receivable are claims arising from sources other than from sale of goods and services in the
normal course of business.
Nature of note receivable

A note receivable is evidenced by a written promise to pay. The note receivable may either be interest-bearing
or non-interest-bearing. A note receivable is said to be interest bearing if it has a nominal interest rate. A note
receivable that does not have a nominal interest rate is termed as a non-interest bearing note.
Initial valuation
Accounts receivable is initially recognized when the entity becomes a party to the contractual provision of the
instrument and are initially valued at the transaction price, which is the amount an entity expects to be entitled
in exchange for the transfer of goods and services.
At the date of initial recognition notes receivable are valued at:

a. Face value if stated interest rate is equal to the prevailing market interest rate (effective interest rate or
yield rate) at initial recognition. Here the notes’ present value equals its face value.
b. Present value that is lower than the face value, if stated interest rate is lower than prevailing market
interest rate. A typical example of a note that is initially recorded at present value, which is lower than
the face value is a non-interest-bearing note. The difference between the present value and the face value
is recognized as a discount on note receivable which is amortized as interest income under the effective
interest method.
c. Present value that is higher than the face value, if stated interest rate is higher than the prevailing market
interest rate. The difference between the present value and the face value is recognized as a premium on
notes receivable which is amortized under the effective interest method.
Valuation at reporting date

Receivables are valued at amortized cost, which is the face value of the note plus the unamortized balance of
the Premium on Note Receivable or minus the unamortized balance of the Discount on Notes Receivable less any
allowance for estimated credit losses.
Presentation of receivables in the financial statements

Trade receivables are classified as current assets.
Non-trade receivables expected to be collected within 12 months from reporting date are classified as current;
while those expected to be collected beyond are classified as non-current.
Impairment of Loans and Receivables:

The impairment loss model under IFRS 9 provides for allowance for estimated credit losses (ECLs) by estimating
the probability of default by taking into account macro-economic factors. ECL is the probability-weighted estimate
of credit losses (i.e., the PV of all cash shortfalls) over the life of a financial instrument.
Lifetime ECL is the ECL that results from all possible default events over the expected life of a financial instrument.
12-month ECL is a portion of the lifetime ECL and represents the lifetime ECL resulting from a default occurring
in the 12 months after the reporting date weighted by the probability of that default occurring.
Stages in the Measurement and Recognition of Impairment

Stage 1 – Recognize the impairment loss in P/L thru an allowance account based on a 12-month ECL after
reporting period for receivables that are not credit impaired and with no significant increase in credit risk from
initial recognition
Stage 2 -- Recognize in P/L, lifetime ECL for receivables that are not credit impaired but with significant increase
in credit risk. There is a rebuttable presumption that the credit risk has increased significantly since initial
recognition if contractual payments are more than 30 days past due.
Stage 3 -- Assess individually the receivables to determine whether they are credit-impaired.
Receivable Financing
Pledging/General Assignment of Account receivable
1. Accounting for receivable is not affected, disclosure is required for the receivables pledged or assigned.
2. Recognize the proceeds of the borrowing as a liability
3. Charge interest on the carrying value of the liability
4. Any transaction cost incurred is a finance cost

RECEIVABLES
Specific Assignment of Account receivable

1. Reclassify the receivable as Receivable -Assigned
2. Recognized the proceeds of the borrowing as a liability and charge interests accordingly
3. Any transaction cost incurred is a finance cost
Factoring of Accounts receivable

1. Risks and Rewards of ownership transferred to the Buyer—treated as outright sale
2. Risks and Rewards of ownership not transferred to the Buyer – treated as borrowings
Discounting Notes Receivable

With Recourse— treated as a borrowing
Without Recourse – treated as a sale
Computation of Cash Proceeds of Notes Receivable Discounting

1. Compute for the maturity value of the note receivable = Principal + Total Interest Income
2. Compute for the discount = Maturity Value x Discount Rate x Discount Period
3. Compute for the proceeds = Maturity Value – Discount

1. Which of the following should be recorded as Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividend receivable
d. Sale of goods to a customer on account
2. Which of the following transactions will decrease the recorded accounts receivable?
a. Sale of goods on account.
b. Collection of accounts previously written off.
c. Return of goods sold to a customer on account.
d. Cash discount availed using the net method.
3. Jed Company gets 2% of the total peso balance of accounts aged as 1-60 days past due and adds this to 5%
of the total peso balance of accounts aged 61-120 days past due. The total amount computed represents the
a. amount of uncollected accounts expense for the year.
b. amount that should be added to the allowance for uncollectible accounts at year-end.
c. amount of the desired credit balance of the allowance for uncollectible accounts to be reported in the
year-end financial statements.
d. Amount to be added to the total accounts written off during the year to arrive at the desired credit
balance of the allowance account.
4. When the allowance method of recognizing uncollectible account expense is used, the entries at the time of
collection of an account that was previously written off would
a. Increase profit.
b. Increase the amortized cost of accounts receivable.
c. Decrease profit.
d. Decrease the amortized cost of accounts receivable.
5. If Courage Co. will write-off the receivable from a bankrupt customer, and the balance of the allowance before
this write-off is greater than the amount to be written off, the effect of the write-off will
a. Have no effect on total current assets
b. Reduce net income for the period
c. Reduce total current assets
d. Reduce the amount of total equity
6. On July 1 of the current year, an entity received an interest bearing, one-year note receivable, the stated
interest of which is the same as the market interest rate. The face amount of the note receivable and the
entire amount of the interest are due on June 30 of next year. On December 31 of the current year, the entity
should report in the statement of financial position
a. A zero-interest receivable
b. A deferred credit for interest applicable to next year
c. Interest receivable for the interest accruing this year
d. Interest receivable for the entire amount of the interest due on June 30 of next year
7. The amortization of the discount on note receivable
a. Increases the amount of interest received to arrive at interest income.
b. Decreases the amount of interest received to arrive at interest income.
c. Decreases the carrying value of the note receivable.
d. Increases the face value of the note receivable.
8. How would the interest-bearing note collectible in installment basis be reported in the statement of financial
position?
a. the entire carrying value is always reported as non-current asset.
b. the carrying value maybe reported as partly current and partly non-current.
c. the entire carrying value is always reported as current asset.
d. the carrying value is not reported in the statement of financial position.

RECEIVABLES
9. Ding Inc. received a three-year, non-interest-bearing note for P50,000 on January 1, 2020. The current
interest rate at that time was 15% for similar notes. The only entry made in 2020 was:
Notes Receivable 50,000
Sales 50,000
The effects of the above entry on Ding’s profits for the years 2020, 2021 and 2022 and its retained earnings
at the end of 2022, respectively shall be
a. overstated, overstated, understated, no effect
b. overstated, understated, understated, understated
c. overstated, understated, understated, no effect
d. no effect on any of these
10. Statement 1: When a note receivable is discounted on a with recourse basis, the transaction is treated as a
borrowing.
Statement 2: The amount of finance charge (interest expense) recognized on a discounting of notes receivable
is always equals to the amount of discount.
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false
11. At initial recognition, which of the following is deducted from the face value of the receivable to arrive at its
amortized cost?
a. direct origination costs.
b. direct origination fees.
c. discount on loan receivable.
d. premium on loan receivable.
12. Statement 1: The loan will have a new effective interest after effecting direct origination costs and fees.
Statement 2: The loan receivable shall be amortized using the original nominal interest.
a. only statement 1 is true
b. only statement 2 is true
c. both statements are true
d. both statements are false
13. Which of the following indicators should be present to shift the expected credit loss from stage 1 to stage 2?
a. an increase in credit risk
b. a significant increase in credit risk
c. an objective evidence of impairment
d. financial difficulties of the borrower
14. Where there is an objective evidence of impairment, the amount of interest income should be?
a. computed based on the gross carrying value of the loan.
b. computed based on the net carrying value of the loan.
c. no interest shall be recognized.
d. no correct answer.

Problem 1: The following Receivables as of December 31, 2021 were taken from the books of Gandia Company:
Trade installment receivable due in 18 months, including unearned interest of P15,000 P725,000
Receivables from the officers 200,000
Claims against shipping company, due in 15 months 120,000
Past due trade accounts receivables 600,000
Customer’s NSF check returned by bank 80,000
Advances to employees 25,000
Receivable from customers arising from the sale of goods 750,000
Interest receivable on bonds 150,000
Interest receivable on notes 45,000
Other trade accounts receivable – unassigned 240,000
Subscriptions receivable for ordinary shares due in 24 months 1,000,000
Trade accounts receivable - assigned 550,000
Trade accounts on which post-dated check is held 290,000
Deposit made by a customer for the rent of the warehouse for 2 years 140,000
Trade accounts known to be worthless 30,000
1. How much is the amount of the trade receivables to be reported on the December 31, 2021 financial
statements?
a. 2,200,000 b. 2,530,000 c. 3,220,000 d. 3,630,000
2. The beginning balance of Ganda Inc.’s allowance for bad debt is P56,500. If Ganda Inc. estimates that 5% of
the outstanding balance of its trade receivable is uncollectible, how much is Ganda’s bad debt expense in
2021?
a. 122,000 b. 125,000 c. 132,500 d. 134,500

RECEIVABLES
Problem 2: On January 1, 2021, Boss Company’s accounts receivable has an outstanding balance of P500,000.
Below are the transactions during 2021:
Total Sales including cash sales of P500,000 P8,000,000
Account receivable written-off 60,000
Total Sales returns, of which P30,000 pertains to sales made on cash basis 80,000
Amount received from credit customers 5,100,000
Sales discount and allowances granted 70,000
Amounts received representing recovery, not included in the P5,100,000 above 120,000
What is the amortized cost of the accounts receivable on December 31, 2021, assuming that the company’s policy
is to provide 5% allowance based on outstanding balance?
a. 2,470,000 b. 2,584,000 c. 2,973,500 d. 3,087,500
Problem 3: Leon Company has an accounts receivable balance of P500,000 and Allowance for Bad Debts of
P48,000 as of December 31, 2020. Below are transactions recorded by the company in 2021:
Credit sales during the year P 3,120,000
Total accounts collected from customers during the year 3,020,160
Accounts written off as uncollectible 42,000
Recoveries of accounts written off in the previous year 2,160
An aging of accounts receivable on December 31, 2021 is shown below:
% to the Total Probability
Age group Account Receivable Balance of Collection
Less than 60 days 60% 99%
Between 61 and 120 days 22 88
Between 121 and 180 days 15 45
Over 180 days 3 20
1. The adjusted balance of gross accounts receivable is
a. 560,000 b. 562,160 c. 570,000 d. 604,160
2. The balance of allowance for bad debts as of December 31, 2021 is
a. 77,484 b. 77,324 c. 77,784 d. 77,544
3. The bad debt expense for the year 2021 is
a. 69,324 b. 69,624 c. 69,664 d. 69,124
Problem 4: You are given the following data for Heart Company:
Cash Credit Total
Cost of sales P 500,000 P 4,500,000 P 5,000,000
Cash received from customers 650,000 5,850,000 6,500,000
Inventories were marked to sell as follows: Cash sales, 30% above cost and credit sales at 40% above cost, all
of which are deemed collectible. The balance of accounts receivable at the end of the year was
a. 1,475,000 b. 1,350,000 c. 450,000 d. 125,000
Problem 5: On January 1, 2021, Ex Company sold its equipment with an original cost of P1,000,000 and an
accumulated depreciation of P400,000 and received a cash of P200,000 and a 4-year, 3%, P500,000 note to be
collected on December 31, 2024. Interest is to be collected at the end of each year. Effective interest on the note
on this date is 5%.
1. How much is the gain (loss) on sale of equipment?
a. (63,240) b. 52,460 c. 64,540 d. (135,460)
2. How much is the interest income for the period ended December 31, 2022?
a. 23,227 b. 23,638 c. 24,070 d. 24,524
Problem 6: Wise Inc. sold its building on March 31, 2020. The building has an estimated useful life of 5 years
with an original cost of P15,000,000 and carrying value of P9,500,000 at the date of sale. Wise received a
P12,000,000, 3-year non-interest bearing note to be collected in equal annual installment of P4,000,000 every
March 31 of each year starting 2021. There is no available fair value for the building but on March 31, 2020,
effective interest for similar note was at 6%. On December 31, 2021, effective interest increased to 7%.
1. How much is the interest income for the period ended December 31, 2021?
a. 641,522 b. 267,302 c. 440,014 d. 490,391
2. How much is the current portion of the note receivable as of December 31, 2021?
a. 3,559,986 b. 3,648,986 c. 3,889,996 d. 4,000,000
Problem 7: On January 1, 2021, Arc Company received a 10%, P14,000,000 note, collectible in installment plus
interest every December 31 of each year until December 31, 2025. The note is be collected as follows:
December 31, 2021 P 4,000,000
December 31, 2022 3,500,000
December 31, 2023 3,000,000
December 31, 2024 2,500,000
December 31, 2025 1,000,000
The effective interest rates on January 1, 2021 and December 31, 2021 were 14% and 15%, respectively.

RECEIVABLES
1. How much is the present value of the note when received on January 1, 2021?
a. 12,921,826 b. 12,098,192 c. 11,326,352 d. 10,226,392
2. How much is the carrying value of the note on December 31, 2021?
a. 13,330,882 b. 11,512,041 c. 9,330,882 d. 8,391,939
3. How much of the carrying value of the note receivable is reported as non-current as of December 31, 2022?
a. 6,137,206 b. 3,346,414 c. 6,002,891 d. 3,129,324
Problem 8: On October 31, 2021, Ingrid Corp. had the following transactions:
• Obtained a P500,000, 6-month loan from Citibank, discounted at 12%. The company pledged P600,000 of its
accounts receivable as a security for the loan.
• Factored P1,000,000 of accounts receivable without recourse on a notification basis with Nice Finance
Company. Nice Finance charged a factoring fee of 5% of the amount of the receivable factored and withheld
10% of the receivable factored.
What is amount of the cash received from the financing of the receivables and the amount of loss recognized
respectively?
a. 1,320,000; 50,000 b. 1,320,000; 150,000 c. 1,420,000; 50,000 d. 1,420,000; 150,000
AUDITING PRACTICE
Significant Business Process: Order to Cash (Formerly Revenue and Receipt Cycle)
PROBLEM 1: (GL AND SL RECONCILIATION AND AGING OF RECEIVABLES)

In line with your audit of Harry Corp.’s receivable balances as of December 31, 2020, the client’s
accountant provided you the following SL to GL reconciliation:
Balance per Subsidiary Ledger P3,890,000

a. Charge for consignment sales, goods delivered on December 5, 2020. Consignee’s
response to inquiry indicated that 40% of goods are still unsold. All sales were made at 40%
GP based on Sales. Commission rate as agreed upon is at 20% based on selling price. (140,000)
b. Charge for deliveries on December 29, goods still in-transit under FOB Shipping Point term 39,000
c. Charge for deliveries on December 30,2020, goods still in-transit under FOB Destination term (18,000)
d. Charge for goods delivered on January 2, 2021 but is covered by a bill and hold
agreement with a customer, contract completed in December 2020 (20,000)
e. Subscriptions receivable from shareholders due March 2, 2021 80,000
f. Deposits on long-term contracts 500,000
g. Credit balance in customer accounts (44,000)
h. Credit memos for merchandise returns for invoice originally dated August 10 (12,000)
i. Portion of an October 10 outstanding invoice to a customer, expected to be returned by the (6,000)
customer.
j. Cash advances to an affiliated company 200,000
k. Write-off of a receivable from customer who recently declared bankruptcy. Outstanding
invoices were dated April 5 (P60,000), and July 20, 2020 (P75,000) (135,000)
Balance per General Ledger P4,334,000
The client’s accountant also provided you the following aging of accounts receivable, along with the
company’s policy of providing allowance for doubtful accounts:
Age Amount % Uncollectible
Current (60 days) P1,550,000 -
1-60 days past due 1,100,000 5%
61-120 days past due 740,000 10%
More than 120 days past due 500,000 20%
All sales were made under the terms 10/30, n/60. The company estimates based on past experience that 30%
of the accounts that are still current (60 days) will probably be paid within the discount period over the next
year, and another 2% of the accounts that are still current (60 days) is a fair estimate for customer returns.
The company has not recorded any bad debt expense for the year. During the year, however, it had a P23,500
recovery of a previously written-off account and a P135,000 write-off of uncollectible accounts (see
reconciliation above).
Requirements:
1. What is the correct balance of the accounts receivable – trade?
2. What is the carrying value/amortized cost of the accounts receivable–trade?
3. What is the correct bad debt expense for the year assuming that the allowance for doubtful
accounts had a balance of P105,700 as of January 1, 2020?

RECEIVABLES
PROBLEM 2: (CONFIRMATION OF RECEIVABLES AND AGING OF RECEIVABLES)

You are assigned to audit Bonifacio Inc. for the year ended June 30, 2020. Prior to any adjustments, you were
able to extract the following balances from the client’s records:
Accounts receivable, control account P221,250
Allowance for doubtful accounts (7,500)
Amortized cost P213,750
Accounts receivable, subsidiary records:
60 days old and below P110,625
61 – 120 days 66,375
> 120 days 51,750
Credit balance (7,500)
Total P221,250
The credit balance in the accounts receivable represents collection from a customer whose account had been
written off as uncollectible in the previous year. Upon investigation, the only entry made by the client upon
the recovery was a debit to cash and a credit to accounts receivable.
Certain Accounts Receivable balances were circularized/confirmed as of June 30, 2020 and the
following exceptions/replies have not been disposed of as at the date of your examination.
Custom Balances Comments from Customers Audit Findings
Alpha P4,000 This balance for the invoice Bonifacio Inc. received the mailed
dated June 5, 2020 was paid check on July 2, 2020.
on June 29, 2020.
Beta 13,800 The balance for the invoice Bonifacio Inc. erroneously credited
dated June 1 was offset by our accounts payable for P13,800 to record
June 10, shipment of tires. the purchase of tires.
Charlie 16,600 The above balance for the The payment was credited to customer
invoice dated April 20 has Delta’s subsidiary records.
been paid.
Delta 20,000 The records show a bigger A new confirmation was mailed.
balance, please check. All outstanding invoices to Delta are
dated June.
Echo 11,600 We do not owe Bonifacio Inc. The shipment costing P8,000 was made
anything as the goods were on June 29, 2020 and the goods were
received July, 2020, FOB included in recording the June 30, 2020
Destination. inventory summary.
Foxtrot 14,000 Our deposit of P18,000 Bonifacio Inc. had previously
should cover this balance credited the deposit to sales.
The P14,000 balance was for a June
shipment.
Juliet 6,000 Amount is okay. Since this is Goods costing P4,400 were
on consignment, we will remit appropriately included in Bonifacio
payment upon selling the Inc.’s inventory. The amount is
goods. included in the “below 60 days”
receivables.
Hotel 1,200 CM No. 8118 cancels this The CM dated April 30, 2020 was
balance. recorded by Bonifacio Inc. in July 2020.
The amount is for an April
15 sales invoice.
India 22,400 No reply on the 2 sets of Upon your recommendation, the
confirmation letters sent. management agreed to write-off this
receivable. The amount is for an invoice
dated May 19, 2019.
Based on your discussions with the client, the following estimated rates are appropriate for computing the
uncollectible accounts:
60 days and below 2%
61 to 120 days 10%
More than 120 days 20%
Requirements:
1. What is the adjusted balance of accounts receivable?
2. What is the required allowance for bad debts as of June 30?
3. Assuming that there were no other entries affecting the allowance account during the fiscal year, how
much is the bad debt expense?
PROBLEM 3: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION
On January 1, 2020, YZA Inc. extended a loan to ABC Corp. amounting to P1,000,000 and received a three-
year, 6% note. The note calls for annual interest to be paid each December 31, beginning 2020. The company
incurred origination costs amounting to ?. The company charged ABC P80,000 as origination fees. As a
result, the yield on the loan was at 8%. According to the company’s initial estimates, based on ABC Corp.’s
good financial standing, there is neither a 12-month expected credit loss (ECL) nor a lifetime expected credit
loss. Furthermore, the probability of default (PD) is 0%.

RECEIVABLES
Required:
1. What is the amount of the origination cost incurred by YZA on January 1, 2020 in relation to
the loans receivable?
2. What is the amortized cost of the loan as of December 31, 2021 and the corresponding interest income
for the year ended December 31, 2021?
PROBLEM 4: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION

On January 1, 2020, YZA Inc. extended a loan to ABC Corp. amounting to P1,000,000 and received a three-
year, 6% note, with a yield rate at 8% on this date. The note calls for annual interest to be paid each December
31. Based on the company’s initial estimates on initial recognition date, the present value of the 12-months
expected credit loss discounted at 8% is P100,000. The probability of default is at 12%.
At the end of 2020, there was no evidence of significant increase in credit risk, the receivable is determined
to have a “low credit risk”, and there were no changes in the initial estimate of the 12-month expected
credit loss.
On December 31, 2021, the interest for the period was collected. On this date, based on available forward-
looking information, there is evidence that there was a significant increase in credit risk, thus, the
entity had to change its basis of calculating loss allowance from a 12-month expected credit loss to a lifetime
expected credit loss. The present value of the lifetime expected credit loss discounted at 8% is at P400,000.
The probability of default is at 20%.
On December 31, 2022, due to the financial crisis ABC is experiencing, the entity was not able to collect the
receivables at maturity date and that only P600,000 of the principal and interest due on December 31, 2022
will be collected. The amount is expected to be collected in two equal installments on December 31, 2023
and December 31, 2024. After reviewing all available evidence on December 31, 2022, it was determined
that the receivable is credit-impaired and that impairment loss should be recognized.
Required:
1. What is the initial carrying value of the loans receivable and how much is the bad expense/credit loss
that should be immediately recognized?
2. What is the carrying value of the loans receivable as of December 31, 2021 and the amount of the
bad debt expense/credit loss that should be recognized in 2021?
3. What is the impairment loss in 2022?

1. Which of the following is not a significant process in the conventional revenue/receipt transaction cycle
of a company in the merchandising industry?
a. Order processing.
b. Voucher preparation.
c. Billing.
d. Customer remittance acceptance.
2. While understanding the client revenue/receipt cycle, as part of his audit planning activities, the auditor
learned that the client has no system of approving customer orders in terms of the potential customer’s
credit worthiness, what will be a possible implication of this information in the auditor’s substantive test
audit program?
a. Increase substantive test procedure focusing on existence of receivables.
b. Decrease extent of substantive test procedures focusing on valuation assertion on
receivables.
c. Increase the number of customer accounts to be confirmed.
d. Obtain more persuasive evidence that focus on the valuation assertion on receivables.
3. What financial statement assertion would an auditor deemed affected by the possibility of delivery errors
due to the lack of appropriate internal control in the delivery of goods (e.g. delivery to the wrong
customer, delivery of erroneous goods etc.)
a. Completeness of Sales and AR
b. Occurrence of Sales and Existence of AR
c. Measurement of Sales and Valuation of AR
d. Completeness of Sales and Existence of AR
4. To achieve good internal control, which department should perform the activities of matching
shipping documents with sales orders and preparing daily sales summaries?
a. Billing
b. Shipping
c. Credit
d. Sales order
5. Which of the following procedures most likely would not be an internal control designed to reduce the
risk of errors in the billing process?
a. Comparing control totals for shipping docs with corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing & mathematical accuracy of sales
invoices.
c. Matching shipping documents with approved sales orders before invoice preparation.
d. Reconciling the control totals for sales invoices with the AR subsidiary ledger.

RECEIVABLES
6. While testing the effectiveness of internal control over the billing process, the auditor discovered that the
controls were not consistently observed as there were instances where sales entries based on sales
invoices were not supported by delivery receipts, what will be a possible implication of this TOC findings
to the auditor’s substantive test audit program?
a. Decrease substantive test procedure focusing on existence on receivables.
b. Increase extent of substantive test procedures focusing on valuation assertion on
receivables.
c. Increase the number of customer accounts to be confirmed.
d. Obtain more persuasive evidence that focus on the valuation assertion on receivables.
7. The auditor, upon examining controls over the billing process, observed that the pre-numbering of the
delivery receipts is not monitored as evident in the review by the auditor of the December sales journal
entries and its supporting documents (sales invoice, customer orders and delivery receipt). Which of the
following may be a valid conclusion as a result of this audit observation?
a. There may be possible unbilled deliveries which affect the completeness assertion of AR
and Sales.
b. There may be possible fictitious deliveries which affect the existence/occurrence
assertion of AR and Sales.
c. There may be possible unbilled deliveries which affect the valuation assertion of AR and
Sales.
d. There may be possible fictitious deliveries which affect the completeness assertion of AR
and Sales.
8. Which of the following audit procedures would an auditor most likely perform to test controls relating
to management’s assertion concerning the completeness of sales transactions?
a. Verify that extensions and footings on the entity’s sales invoices and monthly
customer statements have been recomputed.
b. Inspect the entity’s reports of prenumbered shipping documents that have been
recorded in the sales journal.
c. Compare the invoice prices on prenumbered sales invoices to the entity’s authorized
price list.
d. Inquire about the entity’s credit granting policies and the consistent application of
credit checks.
9. A client suspects that certain subsidiary ledger postings of collections from customers were posted to
wrong customer subsidiary account balances, which of the following internal controls most likely lead to
the detection of such posting error?
a. Daily sales summaries are compared to daily postings to the accounts receivable ledger.
b. Each sales invoice is supported by a pre-numbered shipping document.
c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d. Sending of monthly statement of accounts to customers.
10. The most likely result of ineffective internal controls in the sales cycle is that
a. Fictitious transactions could be recorded, causing an understatement of revenues and an
overstatement of receivables.
b. Irregularities in recording transactions in the subsidiary accounts could delay the
shipment of goods.
c. Omission of shipping documents could go undetected, causing an understatement of
inventory.
d. Final authorization of credit memos by personnel in the sales department could permit
an employee defalcation scheme.
11. An auditor noted that the accounts receivable department is separate from other accounting activities.
Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced
monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent
accounts after one year or sooner, if a bankruptcy or other unusual circumstance is involved. Credit
memoranda are pre-numbered and must correlate with receiving reports. Which of the following areas
could be viewed as an internal control weakness of the above organization?
a. Write-offs of delinquent accounts
b. Credit approvals
c. Monthly aging of receivables
d. Handling of credit memos
12. Which of the following procedures concerning accounts receivable would an auditor most likely perform
to obtain evidential matter in support of an assessed level of control risk below the maximum level?
a. Observing an entity’s employee prepare the schedule of past due accounts receivable.
b. Sending confirmation requests to an entity’s principal customers to verify the existence
of accounts receivable.
c. Inspecting an entity’s analysis of accounts receivable for unusual balances.
d. Comparing an entity’s uncollectible accounts payable to actual uncollectible accounts
receivable.
13. In designing the audit program for Accounts Receivables and Sales, the auditor acknowledges that there
is a higher risk of , thus should design audit procedures that shall focus on validating ______
assertion/s?
a. Overstatement; Completeness and Existence/Occurrence
b. Understatement; Existence/Occurrence and Valuation
c. Understatement; Completeness and Valuation
d. Overstatement; Existence/Occurrence and Valuation

RECEIVABLES
14. Sending accounts receivable confirmation letters to the client’s customers is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence and rights
b. Completeness and valuation
c. Completeness and rights
d. Existence and valuation
15. Which of the following is correct regarding the use of Accounts Receivable confirmation letter?
a. A positive confirmation request is necessary where audit risk assessment over receivables is
low and that the auditor expects little or no misstatement in receivables.
b. A negative confirmation request provides the more persuasive evidence regarding existence
and rights assertion over receivables.
c. A blank confirmation request is useful when an account balance is suspected to be
overstated.
d. When a confirmation reply is received from the customer through the client, such a reply
should be considered invalid.
16. Which of the following statements about receivables confirmation is correct?
a. Under positive confirmation, the customer is request to confirm the accuracy of the balance
stated or state in what respect he disagrees.
b. The receivables’ confirmation has to take place immediately after the year-end.
c. Confirmation letters are sent by the auditor on the audit firm’s headed notepaper.
d. The confirmation provides assurance as to the valuation of receivable balances.
17. What actions should the auditor take if a reply to a positive confirmation request letter for a material
amount is not received from the customer within two or three weeks of being sent out?
a. Qualify the audit opinion due to lack of sufficient and appropriate evidence.
b. Send out a second request to the customer
c. Inform the entity’s internal audit department.
d. Qualify the audit opinion due to material misstatement in the financial statement.
18. As part of auditing the company’s revenue/receipt cycle, the auditor decided to render a sales cut- off by
tracing entries several days before and after the balance sheet date from the company’s sales journal to
the source documents which include the sales order, the sales invoice and the delivery receipt. Which of
the following is correct regarding the sales cut-off procedures?
a. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding completeness assertion of receivables.
b. Vouching entries several days before and after the balance sheet date to the source
documents is necessary to gather evidence regarding valuation assertion of receivables.
c. Vouching entries several days before the balance sheet date to the source documents is
necessary to gather evidence regarding existence assertion of receivables.
d. Vouching entries several days after the balance sheet date to the source documents is
necessary to gather evidence regarding the existence assertion of receivables.
19. Cut-off tests designed to detect credit sales made after the end of the year that have been
recorded in the current year provide assurance about management’s assertion of:
a. Existence
b. Rights and obligations
c. Valuation and allocation
d. Completeness
20. Tracing shipping documents to pre-numbered sales invoice provides evidence that , which
provides evidence about assertion over receivables.
a. No duplicate shipments or billings occurred; Existence.
b. Shipments to customers were properly invoiced; Completeness.
c. All goods ordered by customer were shipped.; Completeness.
d. All pre-numbered sales invoices were accounted for; Existence.
21. During an audit of the accounts receivable function, you found that the accounts receivable turnover rate
had fallen from 7 to 4 times over the last three years. What is the most likely cause of the decrease and
which financial statement assertion would this observation be relevant to in preparing the audit program
for substantive testing for receivables.
a. An increase in the discount offered for early payment; valuation.
b. A more liberal credit policy; valuation.
c. A change form net 30 to net 25; existence.
d. Greater cash sales; existence.
22. Which of the following most likely would give the most assurance concerning the valuation
assertion of accounts receivable?
a. Vouching amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios with industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.
23. The auditors’ analysis of the clients aged accounts receivable schedule is consistent with the
auditor’s objective of validating client’s receivable assertion on:
a. Existence
b. Completeness
c. Rights and obligation
d. Valuation
- END -

INVENTORIES
Definition of inventories -these are assets that are (1) Held for sale in the normal course of business, or (2)
In the process of production for such sale, or (3) In the form of materials or supplies to be consumed in the
production process or in rendering of services
Measurement of inventories
A. Initial measurement – inventories are initially measured at historical cost, which includes all costs of
purchase, costs of conversion and other costs incurred in bringing the inventories to their present location
and condition.
The following are excluded from the cost of inventories:

a. Abnormal amounts of wasted materials, labor, or other production costs
b. Storage costs, unless these costs are necessary in the production process prior to a further production
stage
c. Administrative overheads that do not contribute to bringing inventories to their present location and
condition, and
d. Selling costs
B. Measurement at Reporting Date- should be measured at the lower of cost and net realizable value.
The net realizable value is the estimated selling price in the course of the business less the estimated cost
of completion and the estimated costs necessary to make the sale. Inventories are usually written down
to net realizable value on an individual basis. However, in the circumstance where items of inventory
relate to the same product line, have similar purposes and uses, and are produced and marketed in the
same geographical area, the group of similar items basis may be more appropriate. Whichever basis is
used shall be consistently applied.
Materials and other supplies held for use in the production of inventories are not written down below cost
if the finished products in which they will be incorporated are expected to be sold at cost or above cost.
However, when a decline in the price of materials indicates that the cost of the finished products exceeds
net realizable value, the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realizable value. (PAS
2 par. 32)
If there is clear evidence of an increase in net realizable value because of change in economic condition
the amount of the previous write-down should be reversed. The amount of reversal should not exceed
the original amount of write-down that was recognized previously.
The cost formulas for inventory:

The cost of inventory that are not ordinarily interchangeable and goods or services produced and segregated
for specific projects shall be assigned using specific identification of their individual costs. The cost of
inventories that are ordinarily interchangeable shall be assigned by using the FIFO or weighted average
method. An entity shall use the same cost formula for all inventories having a similar nature and use.
Establishment of the year-end inventory – a physical count is done at reporting date. Included in the
physical count are inventories owned and controlled by the enterprise that are in good, usable and salable
condition. Items to consider are:
a. Merchandise in transit – if the term of shipment is shipping point, include as inventory of the buyer but if
the term is destination, include as inventory of the seller.
b. Goods on consignment – include as inventory of the consignor.
c. Sales on approval – include as inventory of the seller
d. Special sales contract:
1. Product-financing (Sale with a buyback agreement) – also known as a park sale because the seller
parks (transfers) its inventory in the buyer’s premises thru sales contract that clearly specifies to
purchase back the same inventory over a specified period of time at a specified amount. Include as
inventory of the seller.
2. Sale but buyer is given the right to return –considered as sale if all the following conditions are met:
(a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale, (b) the
buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent
on resale of the product, (c) the buyer’s obligation to the seller would not be changed in the event of
theft or physical destruction or damage of the product, (d) the buyer acquiring the product for resale
has economic substance apart from that provided by the seller, (e) the seller does not have significant
obligations for future performance , and (f) the amount of future returns can be reasonably estimated.
3. Installment sales – goods should be considered sold or removed from inventory, even though legal
title has yet to pass to the buyer.
e. Segregated goods – mere segregation does not exclude such inventory, however, if the segregation is
due to sales contract such as special order, such inventory is excluded in the inventory of the seller.

INVENTORIES
Inventory Estimation Methods:

When inventory items cannot be physically counted because they may have been lost or when these are
presented in the interim financial statements, the value of the inventory may be estimated using the following
methods:
1. Gross Profit Method – The estimated cost of ending inventory is computed as follows:
Beginning Inventory Pxxx
Add Net Purchases xxx
Cost of Goods Available for Sale Pxxx
Less Estimated Cost of Goods Sold:
If GP is Based on Sales: (Sales - Sales Returns) x (100% - GP%)
If GP is Based on Cost: (Sales – Sales Returns) / (100% + GP%) xxx
Estimated Cost of Ending Inventory Pxxx
2. Retail Inventory Method

The retail method is often used in the retail industry for measuring inventories of large numbers of
rapidly changing items with similar margins for which it is impracticable to use other costing methods.
The cost of inventory is determined by reducing the sales value of the inventory by the appropriate
percentage of gross margin. The estimated cost of ending inventory is computed as follows:
Cost Retail FIFO Average

Cost Ratio Cost Ratio
Beginning Inventory Pxxx Pxxx
Purchases xxx xxx
Freight-in xxx
Purchase Returns (xxx) (xxx)
Purchase Allowances (xxx)
Purchase Discounts (xxx)
Additional Mark-ups, Net of Mark-up Cancellations xxx
Markdowns, Net of Markdown Cancellations (xxx)
Departmental Transfers In xxx xxx
Departmental Transfers Out (xxx) (xxx)
Totals, Excluding Beginning Inventory Pxxx Pxxx xx%
Total Cost of Goods Available for Sale Pxxx Pxxx xx%
Sales Less Sales Returns only (xxx)

Employee Discounts (xxx)
Normal Losses (xxx)
Ending Inventory Pxxx
Multiply by Cost ratio xx%
Estimated Ending Inventory at Cost Pxxx

1. Which of the following would be considered as inventoriable cost?
a. Foreign exchange differences arising from acquisition of inventories using a foreign currency
b. Storage cost necessary on goods which are still in process
c. Import duties and refundable purchase taxes
d. Abnormal amounts of wasted materials, labor and overhead
2. Which of the following would not be reported as inventory?
a. Goods out on consignment
b. Goods in transit sold under FOB Destination
c. Goods in transit purchased under FOB Seller
d. Goods purchased under a buyback agreement
3. Which of the following is true about consigned inventory?
a. Goods that are shipped, and title has transferred to the receiver
b. Goods that are sold, but payment is not required until the goods are sold
c. Goods that are shipped, but title remains with the shipper
d. Goods that have been segregated for shipment to a customer
4. Freight and other handling charges incurred in the transfer of goods from consignor to consignee are
a. Considered Expense on the part of the consignee
b. Considered Expense on the part of the consignor
c. Inventoriable by the consignee
d. Inventoriable by the consignor
5. Which of the following would result to a decrease in accounts receivable in the books of the seller and a
decrease in accounts payable in the books of the buyer in a sales transaction on account?
a. FOB Destination, freight prepaid
b. FOB Destination, freight collect
c. FOB Shipping point, freight prepaid
d. FOB Shipping point, freight collect

INVENTORIES
6. The use of a “Purchase Discount Lost” account implies that the recorded cost of a purchased inventory is the
a. invoice price.
b. invoice price plus the purchase discount lost.
c. invoice price less the purchase discount taken.
d. invoice price less the purchase discount allowable whether taken or not.
7. When using the moving average method of inventory valuation, a new unit cost must be computed after
each
a. Sales on account
b. Purchase and Sale of inventory
c. Purchase of inventory
d. Cash Sale
8. Which of the following cost formulas will report the highest net income in periods of inflation?
a. Fist-in first-out
b. Moving average
c. Weighted average
d. Last-in last-out
9. Inventories should be measured at
a. Cost or net realizable value, whichever is higher
b. Cost or fair value less cost to sell, whichever is lower
c. Lower of cost or net realizable value, item by item
d. Lower of cost or net realizable value, by classification
10. Net realizable value (NRV) is computed as
a. Estimated selling price less estimated cost to sell
b. Estimated selling price less estimated cost to complete
c. Estimated selling price less estimated cost to complete and estimated cost to sell
d. Estimated selling price less estimated cost to complete, estimated cost to sell and normal
profit margin
11. Which of the following is true about direct method of accounting for write-down of cost of inventories to net
realizable value?
a. Inventories shall be stated at cost
b. Inventories shall be stated at net realizable value
c. A loss on inventory write-down and allowance account are recognized
d. Any write-down of inventories to NRV decreases Cost of Goods Sold
12. Which will not require inventory estimation?
a. Inventory destroyed by a major fire incident in the production facility
b. Proof of the reasonable accuracy of the physical inventory count
c. Interim financial reporting
d. Annual financial reporting
13. What is the treatment of inventory normal spoilage under the FIFO retail method?
a. Included in the computation of cost ratio
b. Deducted from sales
c. Deducted from goods available for sale at cost
d. Deducted from goods available for sale at retail
14. The retail inventory method includes all of the following in the calculation of the goods available for sale at
both cost and retail. Which should be added for the purpose of computing the cost ratio?
a. Departmental transfer-credit
b. Purchase returns
c. Departmental transfer-debit
d. Abnormal shortage
15. The retail inventory method includes all of the following in the calculation of the goods available for sale at
both cost and retail, except:
a. Freight in
b. Purchase returns
c. Departmental transfer-in
d. Abnormal shortage
16. The cost ratio computed under FIFO retail inventory method includes
a. Net markups but not markdowns
b. Net markdowns but not markups
c. Net markups and markdowns for purchases only
d. Net markups and markdowns for both purchases and opening stock
17. To produce an inventory valuation which approximates the lower of cost or market using the conventional
retail inventory method, the computation of the ratio of cost to retail should
a. Include markups but not markdowns.
b. Include markups and markdowns.
c. Ignore both markups and markdowns.
d. Include markdowns but not markups.
18. What will be the effect if the current year’s ending inventory amount is understated?
a. Cost of goods sold will be understated.
b. Gross profit will be understated.
c. Net income will be overstated.
d. Retained earnings will be overstated.

INVENTORIES
Problem 1: The inventories on hand at December 31, 2021 of Santa Claus Company were valued at cost
amounting to P700,000. Mark-up on sales is 25%. Consigned goods were still 50% unsold as of December 31,
2021.The following items were excluded from these inventories:
1. Purchased goods in transit, shipped FOB Shipping point. Invoice price was P30,000. Freight costs P3,000.
2. Goods sold to Rudolf Company shipped FOB destination, Sales price was P40,000. Freight costs P4,000.
The goods were received by Rudolf on December 31, 2021.
3. Goods out on consignment to Reindeer Company, Sales price was P50,000.
4. Goods purchased costing P30,000, in transit “Free Along Side” on December 31, 2021 and arrived in
Santa Claus Company’s premises on January 2, 2022.
5. Goods costing P15,000 ordered from a supplier on December 26, 2021 shipped “Cost, Insurance and
Freight” on December 28, but had not been received by the end of December.
How much is the correct cost of inventories to be reported in Santa Claus’s Statement of Financial Position on
December 31, 2021?
a. 774,750 b. 778,750 c. 793,750 d. 796,750
Problem 2: Bella Company is selling a variety of products. The following items were included in its inventory
balance of P850,000 as of December 31, 2021:
1. An appliance costing P10,000 was sold on an instalment basis through credit card on December 10,
2021. It was delivered to the customer on the same day. The legal title has been transferred upon sale.
2. A motorcycle vehicle costing P90,000 was sold for P180,000 on an instalment basis (not through credit
card) on December 10, 2021. It was delivered to the customer on the same day and the company’s
experience suggests that full payment on instalment sales is reasonably assured/probable.
3. The entity sold goods worth P150,000 (costing P80,000) under a “lay away” sales arrangement at year-
end. Payments are to be made on a monthly basis for 12 months.
4. A specialized and customized product, fabricated to order for a particular customer, was completed at a
total cost of P65,000 and in the shipping room on December 31. Although it was shipped on January 5,
2022, the customer was billed on December 31, 2021.
5. Bella launched and sold a new product in the market on December 25, 2021. The contract provides that
the customers have 30 days to try the product without any commitment to pay. The total sales
recognized was P250,000 while cost of sales was P225,000. As of year-end, none of the customers
returned nor confirmed their purchases.
6. In the shipping room was a product costing P25,000 when the physical count was taken. It was marked
“Hold for shipping instructions”. The customer order was dated December 15, but the product was
shipped and the customer billed on January 4, 2022. (This arrangement was specifically requested by
the customer)
7. Goods costing P65,000 were sold for P100,000 and delivered to a customer on December 29, 2021. The
sales transaction has a repurchase agreement which requires the entity to buy back the inventory on
January 15, 2022.
8. Goods costing P35,000 were sold for P50,000 and were delivered to a customer on December 30, 2021.
The repurchase agreement which states that the entity has an obligation to repurchase the asset at the
customer’s request at a price that is lower than the original selling price of the asset on January 30, 2022.
The agreement also provides the customer a significant economic incentive to exercise that right.
How much is the correct amount of inventory that should report in its Statement of Financial Position on December
31, 2021?
a. 660,000 b. 750,000 c. 800,000 d. 840,000
Problem 3: The following items were reported as inventories by Sleigh Company as of December 31, 2021:
Goods purchased FAS, excluding cost alongside the vessel of P3,000
and cost of shipment of P5,000 P100,000
Goods purchased, in transit, shipped FOB Seller 250,000
Selling price of goods sold, in transit, shipped FOB Buyer 100,000
Goods held on consignment 20,000
Selling price of goods out on consignment 50,000
Freight paid on goods out on consignment 3,000
Storage cost of goods completed 60,000
Freight paid on goods sold 2,000
Unused office supplies 5,000
Goods purchased with a buyback agreement 50,000
Assuming all sales were made at 20% gross profit based on sales, how much is the total correct amount of
inventories as of December 31, 2021?
a. 523,000 b. 528,000 c. 478,000 d. 592,000

INVENTORIES
Problem 4: On October 1, 2021, Belen Company consigned 50 freezers at a unit cost of P15,000 to King Company
and to be sold for P20,000 each. Belen paid P20,000 in transportation cost. On December 31, 2021, King
reported the sale of 25 freezers and the return of 10 units. Cost paid by the consignee on the returned units was
P4,000. The amount due to consignor was remitted on the same date. Commission rate as agreed upon was
15%.
How much inventory on consignment and net income related to the sold units should Belen report on December
31, 2021?
a. 225,000; 36,000 b. 231,000; 36,000 c. 235,000; 40,000 d. 375,000; 44,000
Problem 5: The following data are found in the accounting records of Joy Company for the year ended 2021:
UNITS UNIT COST TOTAL COST
January 1 Inventory on hand 200 P3,000 P 600,000
April 3 Purchase 300 3,200 960,000
July 1 Purchase 300 3,300 990,000
October 1 Purchase 200 3,400 680,000
December 26 Purchase 200 3,500 700,000
Total 1,200 P3,930,000
The company sold 400 units on June 25 and 500 units on December 10.
What is the weighted average cost of the inventory on December 31, 2021?
a. 920,000 b. 982,500 c. 990,000 d. 1,310,000
Problem 6: During January 2021, Argon Company recorded the following information pertaining to its inventory:
UNITS UNIT COST TOTAL COST
Jan. 1 balance 20,000 P 10 P 200,000
Jan. 15 sales 15,000
Jan. 18 purchase 20,000 11 220,000
Jan. 20 purchase 15,000 12 180,000
Jan. 30 purchases 14,000 15 210,000
1. Using FIFO method, how much is the cost of inventory on January 31, 2021?
a. 240,000 b. 260,000 c. 280,000 d. 282,000
2. Using the moving average method, how much is the cost of inventory on January 31, 2021?
a. 240,000 b. 260,000 c. 280,000 d. 300,000
Problem 7: Nyx Company had determined its December 31, 2021 inventory on a FIFO basis at P 410,000. Nyx
records losses that result from applying the lower of cost or net realizable value. Below are data pertinent to its
inventory:
Estimated selling price P 400,000
Normal Profit margin 60,000
Estimated disposal costs 20,000
Current replacement cost 260,000
How much loss should Nyx recognize at December 31, 2021?

a. 0 b. 30,000 c. 10,000 d. 90,000
Problem 8: The Aphrodite Company uses the lower of cost or net realizable value inventory. Data regarding its
work-in-process inventory are presented below:
Beauty Desire
Historical cost P24,000 P18,800
Selling price 36,000 21,800
Estimated cost to complete 4,800 3,500
Estimated cost to sell 2,000 1,900
Replacement cost 20,800 16,800
Normal profit margin as a percentage of selling price 25% 25%
What amount should be reported as ending inventory using the LCNRV individual approach?
a. 45,600 b. 40,400 c. 42,800 d. 48,000
Problem 9: On September 30, 2021, a fire at Uranus Company’s only warehouse caused severe damages to its
entire inventory. Based on recent history, Uranus has a gross profit of 25% on cost. The following information
is available from Uranus’s records for the nine months ended September 30, 2021:
Inventory, January 1, 2020 was P300,000; Net Purchases was P4,200,000 and Net sales was P3,540,000. A
physical inventory disclosed usable damaged goods which Uranus estimates can be sold for P 50,000.
Using the gross profit method, what is the estimated cost of merchandise lost by the fire?
a. 1,618,000 b. 1,668,000 c. 1,845,000 d. 1,795,000

INVENTORIES
Problem 10: On December 30, 2021, a flood destroyed the goods in process inventory and half the raw materials
inventory of the Carol Company. Finished goods inventory were not damaged. A physical inventory taken after
the flood disclosed the following:
Raw materials P35,000

Finished goods P175,000
The accounting records of Carol showed the following transactions:
Raw Materials, 1/1/21 P65,000

Goods in process, 1/1/21 180,000
Finished goods, 1/1/21 272,000
Sales (up to December 30) 1,400,000
Raw materials purchases 100,000
Direct labor cost 230,000
Manufacturing overhead cost 150% of direct labor
Gross profit rate (on sales) 40%
1. How much is the amount of inventories as of December 31, 2021 before the flood?
a. 245,000 b. 352,000 c. 428,000 d. 445,000
2. How much is the cost of sales for the year ended December 31, 2021 (under the direct method of recognizing
inventory write-down)?
a. 740,000 b. 780,000 c. 807,000 d. 982,000
Problem 11: The records of Lady Inc. revealed the following information on November 30, 2021:
COST RETAIL
Inventory, Jan 1 P841,798 P1,044,736
Purchases 5,730,480 8,152,760
Freight in 110,000
Freight out 420,000
Sales 6,544,040
Purchase returns 54,860 76,804
Sales allowance 51,000
Purchase allowance 36,572 -
Sales returns 111,000
Sales discounts 44,400
Purchase discounts 31,000
Normal shrinkages 101,000
Normal shoplifting losses 200,000
Discount granted to employees 31,000
Departmental transfer in 51,000 78,000
Departmental transfer out 71,000 95,000
Mark up 423,946
Net mark down 353,946
Mark up cancelation 90,000
Mark down cancelation 70,000
a. Purchases included goods with retail price of P46,520 from High Company shipped on November 29, 2021
terms FOB shipping point. The goods were still in transit as of December 2, 2021.
b. Sales included goods shipped to Happy Incorporated, terms FOB destination, on November 30, 2021 and
received on December 3, 2021. The retail price of the goods was P63,800.
A disastrous fire completely destroyed the inventory on December 1, 2021. (Round off the Cost-To-Retail ratio
into 2 decimal places e.g 12.12%).
1. How much is the amount of inventory using average method?

a. 1,650,849 b. 1,651,039 c. 1,688,682 d. 1,715,365
2. How much is the amount of inventory using FIFO method?

a. 1,650,849 b. 1,651,039 c. 1,688,682 d. 1,715,365

INVENTORIES
AUDITING PRACTICE
Significant Business Processes: Plan to Inventory, Purchase to Pay and Order to Cash
(Formerly Production/Conversion, Revenue & Receipt and Purch. & Disbursement Cycles)
PROBLEM 1: (RECOGNITION/DERECOGNITION; MEASUREMENT)
Presented below is a list of items that may or may not be reported as inventory in a company’s December 31,
balance sheet:
a. Cost of goods held on consignment P900,000
b. Goods sold on installment basis at selling price 300,000
c. Invoice price of goods in transit, sold FOB shipping point 360,000
d. Invoice price of goods in transit, sold FOB destination 600,000
e. Selling price of goods sold to a customer, for which the company has signed
an agreement to repurchase at selling price plus interest. 900,000
f. Selling price of goods sold under a “bill and hold
agreement”. As such, goods are still on hand as the company awaits
shipping instructions from the customer. 360,000
g. Invoice price of goods in transit, purchased FOB shipping point 200,000
h. Invoice price of goods in transit, purchased FOB destination point 600,000
i. Import duties and non-refundable taxes on goods purchased in item g. 49,000
j. Freight charges on goods purchased in item g. 24,000
k. Freight charges on goods sold 30,000
l. Cost of insurance while in -transit on the goods purchased in item g. 8,000
m. Raw materials on which the company has started production, but which are not
completely processed 840,000
n. Factory labor costs incurred on item m. 150,000
o. Factory overhead costs incurred on item m. 120,000
p. Interest cost incurred for inventories that are routinely manufactured 120,000
q. Costs identified with units completed but not yet sold 780,000
r. Cost to transfer finished goods from factory to finished goods warehouse 30,000
s. Costs incurred to advertise goods held for resale 60,000
t. Costs of goods in the display cabinets of stores (for display only) 15,000
u. Materials on hand not yet placed into production 1,050,000
v. Office and store supplies 30,000
w. Factory supplies 60,000
x. Sales price of goods out on consignment 1,000,000
y. Freight charges on goods delivered on consignment related to item x. 120,000
z. Temporary investment in stocks and bonds for resale for short-term profit 1,500,000
Audit Notes:
a. All sales were made at 40% gross profit based on Sales.
b. Confirmation with consignees (in item x) indicates that as of December 31, one-thirds of the goods had
already been sold to third-party customers.
How much of these items would typically be reported as inventory in the financial statements?
PROBLEM 2: (SALES CUT-OFF)
You are engaged to perform an audit of the accounts of Patron Company for its first year of operations ending
December 31, 2020. You have observed the taking of the physical inventory of the company on December 30,
2020. As a result, all goods delivered on or before December 30, 2020 were excluded from the physical count.
An excerpt of the company’s trial balance revealed the following information:
Accounts receivable P527,000
Inventory, physical count 327,000
Sales 5,749,000
Purchases 2,125,000
The following were the sales invoices recorded in the sales journal several days before and several days after
December 31, 2020. All purchases were correctly recorded.
DECEMBER 2020 SALES JOURNAL ENTRIES
Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20122 14,500 8,200 December 27, 2020 FOB Destination
20123 3,000 2,000 December 28, 2020 FOB Shipping Point, in Transit
20124 25,000 15,000 December 29, 2020 Shipped to consignee, 60% unsold by
consignee as per consignee report.
Commission at 10% of sales.
20125 7,000 4,600 December 30, 2020 FOB Destination, in Transit
20126 12,000 8,000 December 31, 2020 FOB Buyer’s Warehouse, in Transit
20127 8,000 4,000 December 31, 2020 Free Alongside the Vessel, in Transit
20128 4,000 2,400 January 2, 2021 FOB Shipping Point

INVENTORIES
JANUARY 2021 SALES JORNAL ENTRIES

Invoice # Selling Price Cost Date of Shipment Freight term and other remarks
20129 6,000 3,800 December 30, 2020 FOB Destination, in Transit
20130 8,000 5,800 December 31, 2020 FOB Shipping Point, in Transit
20131 7,600 4,800 January 2, 2021 FOB Shipping Point
20132 9,600 6,200 January 2, 2021 Under bill and hold agreement
executed in 2020
What are the adjusted balances of the following?

1. Sales
2. Accounts Receivable
3. Inventories
PROBLEM 3: (SALES AND PURCHASES CUT-OFF)

You have been engaged to audit Sputnik Company for the year ended December 31, 2020. The Company sells at
30% gross profit based on sales price. Portions of the client’s sales and purchases accounts for the calendar
year 2020 follow:
Sales
DECEMBER SALES JOURNAL
Date Reference Amount Date Reference Amount
12/31 Closing entry 5,313,000 Balance Forwarded 4,910,000
12/26 SI # 706 90,000
12/27 SI # 707 60,000
12/28 SI # 708 80,000
12/28 SI # 709 50,000
12/31 SI # 710 40,000
12/31 SI # 711 45,000
12/31 SI # 712 38,000
P 5,313,000 P 5,313,000
JANUARY SALES JOURNAL
1/02/21 SI # 713 120,000
1/02 SI # 714 52,000
1/03 SI # 715 60,000
1/05 SI # 716 40,000
Purchases
DECEMBER PURCHASES JOURNAL
Balance forwarded P 2,200,000 12/31 Closing entry P 2,735,000
12/28 RR # 903 100,000
12/30 RR # 905 110,000
12/31 RR # 906 150,000
12/31 RR # 907 175,000
P 2,735,000 P 2,735,000
JANUARY PURCHASES JOURNAL
1/02/21 RR # 908 89,000
1/02 RR # 909 100,000
1/02 RR # 910 76,000
1/03 RR # 911 95,000
1/04 RR # 912 75,000
NOTE: ‘RR’ is Receiving Report and ‘SI’ is Sales Invoice

You observed the physical inventory count in the warehouse on December 31, 2020 and were satisfied that it
was properly taken. Per cut-off tests, the last sales invoice with actual shipment of goods was No. 711
and the last receiving report used was No. 908 (for which goods were physically received). The
following additional information were gathered:
1. Included in the physical inventory were goods purchased and received on receiving report No. 904 but
the corresponding invoice document was received on January 3, 2021. Cost is P76,000.
2. In the warehouse on December 31, 2020, were goods covered by the sales invoice No. 706. Since the
customer has already advanced the payment for these goods, these were no longer included in the
physical inventory count.

INVENTORIES
3. The company uses the railroad facilities of PNR for its purchases or sales shipments. On the evening of
December 31, 2020, there were cars on the Sputnik Company siding:
a. Car No. 1 was unloaded on January 2, 2021 and received per receiving report No. 906.
b. Car No. 2 was unloaded on January 3, 2021 and received per receiving report No. 910.
c. Car No. 3 was loaded and sealed on December 31, 2020 and was switched off the company’s
siding on January 2, 2021. These goods were billed per sales invoice No. 708.
d. Car No. 4 was loaded and sealed on December 31, 2020 and was switched off the company’s
siding on January 2, 2021. The sales price was P120,000. This order was covered by sales invoice
No. 713.
(Hint: Since these goods are inside the corresponding cars on the count date, none of these were included
in the physical count)
4. On December 31, 2020, there were goods in transit to a customer in Naga. The goods were billed on sales
invoice No. 710 and the terms were FOB Naga.
5. In transit to Sputnik on December 31, 2020 were goods received per receiving report No. 909. The freight
of P8,000 was properly deducted from the gross purchase price P100,000.
6. In transit to Sputnik on December 31, 2020 were goods acknowledged per receiving report no. 911. The
freight of P5,000 was paid by the supplier. The supplier’s invoice shows a total price of P95,000 which
appropriately included the freight charge.
7. Included in the physical inventory count were unsalable items because they were exposed to rain while
they were in transit to Sputnik in November. The invoice cost for the goods which were shipped FOB Seller
was P40,000. These can be sold at an NRV of P5,000.
Requirements:
1. What is the adjusted balance of sales?
2. What is the adjusted balance of purchases?
3. What is the net adjustment to accounts receivable account?
4. What is the net adjustment to accounts payable?
5. What is the net adjustment to inventory?
6. What is the net adjustment to the net income?
PROBLEM 4: (ANAYTICAL PROCEDURE: INVENTORY ESTIMATION – GP METHOD)

ABC Corp. lost considerable part of its inventory due to a fire on October 31. As the auditor, you were
requested to make an estimate as to the total damages in inventories caused by the fire. Upon inquiry and
inspection of records you ascertained the following:
Merchandise inventory, January 1 P120,000
Cash Payments to suppliers from January 1 to October 31 900,000
Purchases returns and allowances (all on account) 46,000
Transportation in 20,000
Customer collections from January 1 to October 31 946,000
Sales returns (all on account) 40,000
Sales allowance (all on account) 20,000
Sales discount (customer cash discounts) 50,000
Special discounts (employee discounts) 24,000
Merchandise not damaged by fire on October 31 48,000
Net realizable value of inventories damaged by fire 4,000
Accounts payable, January 1 130,000
Accounts payable, October 31 60,000
Accounts receivable, January 1 150,000
Accounts receivable, October 31 190,000
Requirements:
1. Using the gross profit method, what was the estimated loss in inventory due to the fire assuming that
the gross profit rate is 30% based on sales?
2. Using the gross profit method, what was the estimated loss in inventory due to the fire assuming that
the gross profit rate is 25% based on cost?
PROBLEM 5: (BS MEASUREMENT – LOWER OF COST OR NRV)

Octagon Inc., a manufacturing company, had the following info. about its inventories as of December 31, 2020:
Finished Goods Inventory:
Item Cost Selling Price Cost to Sell
A P500,000 P1,000,000 20% of Sales Price
B 1,200,000 1,500,000 30% of Sales Price
C 800,000 1,200,000 10% of Sales Price
Work-in-process Inventory:
Direct Cost to Selling Price
Item Materials Direct Labor Overhead Complete upon Completion
A P30,000 P50,000 P25,000 P50,000 P200,000
B 45,000 65,000 40,000 60,000 250,000
C 75,000 25,000 80,000 40,000 240,000

INVENTORIES
Raw Materials Inventory: Finished Goods A: Raw Materials Inventory: Finished Goods B:
Replacement
Replacement
Item Cost cost
Item Cost cost
RM B-01 P80,000 P100,000
RM A-01 P120,000 P125,000
RM B-02 105,000 98,000
RM A-02 95,000 90,000
RM B-03 110,000 100,000
Raw Materials Inventory: Finished Goods C:
Replacement
Item Cost cost
RM C-01 P175,000 P170,000
RM C-02 40,000 45,000
Required:
1. What is the correct carrying value of finished goods inventory?
2. What is the correct carrying value of work-in process inventories?
3. What is the correct carrying value of raw materials inventories?
4. Assuming the direct write-off method is used to account for inventory write-down, how much should be
recognized in the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?
5. Assuming allowance method is used and assuming that the beginning balance of the allowance for inventory
write-down has a balance of P130,000, (FG – P60,000; WIP – P70,000; RM – 0), how much should be
recognized in the profit/loss as a result of the lower of cost or net realizable value valuation of inventories?
1. When the auditor reviews the client’s production/conversion cycle, which will he consider to be an irrelevant
process?
a. Production planning.
b. Materials, labor and OH requisition.
c. Cost accounting.
d. Order processing.
2. Which of the following questions would not be appropriate for an internal control questionnaire involving
inventories?
a. Are daily productions based on approved production orders?
b. Are disbursement vouchers approved before payment?
c. Are goods stored in locked storage areas and are access to the store room limited to authorized
personnel only?
d. Are there independent, periodic comparisons of inventory records with goods on hand?
3. The auditor, while understanding internal control over production/conversion cycle, noted that the client has
no production planning policy in place and that you have noted that most of the time the client had ran- over-
production, what is the possible implication of this information to the auditors planned substantive testing
audit program?
a. The auditor should schedule inventory count procedures at year-end in validating existence and
completeness assertion on inventories.
b. The auditor should schedule inventory count at an interim date in validating existence and
completeness’ assertion on inventories.
c. The auditor should plan to perform more extensive audit procedure to validate the valuation
assertion on inventories.
d. The auditor maybe allowed to heavily rely on analytical procedures, such as the use of inventory
estimation procedures in validating the valuation assertion on inventories.
4. What is the possible implication and which financial statement assertion would be affected if there is no
appropriate internal control policy regarding the authorization/approval of requisition of materials, labor and
overhead to be placed in production?
a. May lead to unauthorized production which may affect the existence assertion of inventories.
b. May lead to wastages which in turn may affect the valuation assertion of inventories.
c. May lead to pilferage/theft which in turn may affect the completeness assertion of inventories.
d. May lead to erroneous cost allocation which in turn may affect the valuation assertion.
5. Which of the following most likely would be an internal control procedure designed to detect errors and
irregularities concerning the custody of inventories?
a. Periodic reconciliation of work-in-process with job cost sheets.
b. Segregation of functions between general accounting and cost accounting.
c. Independent comparisons of finished goods records with counts of goods on hand.
d. Approval of inventory journal entries by bookkeeper.

INVENTORIES
6. The auditor, while reviewing cost accounting records, noted that there has been a recurring entry to close
over-applied overhead cost to cost of sales, work-in process inventory and finished goods inventories, what
is the possible implication of this observation to the auditor’s substantive testing audit program?
a. The auditor should determine, where applicable, that any over-applied overhead cost has been
closed to the appropriate accounts at year-end for all production during the year to ensure no
material misstatement in the valuation assertion for inventories.
b. The auditor should determine, where applicable, that any over-applied overhead cost has been
closed to the appropriate account at year-end for all production during the year to ensure no
material misstatement in the existence assertion for inventories.
c. Independent comparisons of finished goods records with counts of goods on hand to ensure no
material misstatement in the existence and completeness assertions for inventories.
d. Perform purchases and sales cut-of procedures at year-end to ascertain whether goods are
appropriately included in the records at year-end to ensure no material misstatements in the
existence and completeness assertions for inventories.
7. Which of the following internal control procedures most likely would be used to maintain accurate inventory
records?
a. Perpetual inventory records are periodically compared with the current cost of individual inventory
items.
b. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
c. Requisitions, receiving reports and purchase orders are independently matched before payment
is approved.
d. Periodic inventory counts are used to adjust the perpetual records.
8. An essential procedural control to ensure the accuracy of the recorded inventory quantities is:
a. Performing a gross profit test.
b. Testing inventory extension.
c. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with
inventory policy.
d. Establishing cut-off for goods received and shipped.
9. A client maintains perpetual inventory records in both quantities and pesos. If the assessed level of control
risk is high, an auditor would probably
a. Increase the extent of test of controls of the inventory cycle.
b. Request the client to schedule the physical inventory at the end of the year.
c. Insist that the client perform physical counts on inventories several times during the year.
d. Apply gross profit tests to ascertain the reasonableness of physical counts.
10. Which of the following is correct regarding an auditor’s findings while performing sales and purchases cut-off
in line with auditing a merchandising client’s inventories?
a. Goods received on or before the count date included in the physical count but is purchased on a
“sale with repurchase agreement” terms shall understate inventories as of the balance sheet date.
b. Goods delivered on or before the count date on an FOB shipping point, excluded from the physical
count, still in-transit as of the balance sheet date shall understate inventories as of the balance
sheet date.
c. Goods received after the count date included in the physical count but is purchased on a “bill and
hold agreement” terms shall overstate inventories as of the balance sheet date.
d. Goods delivered on or before the count date excluded in the physical count but are still in transit
as of the balance sheet date on an FOB destination term shall understate inventories as of the
balance sheet date.
11. Which of the following is incorrect regarding the conduct of the physical count of inventories?
a. The best timing for observing physical count of inventories is at year-end.
b. The primary responsibility of the independent auditor with regard inventory physical count is to
observe the conduct of the physical count done by the client personnel.
c. The auditor may decide to perform test-count on inventories as part of his substantive test
procedure.
d. The auditor traces test-counts noted during his count observation to the client’s inventory
summary and records in support of the existence assertion.
12. While observing a client’s annual physical inventory, an auditor noticed that certain test counts made were
higher than the recorded quantities in the client’s perpetual records. This situation could be the result of the
client’s failure to record
a. Purchase discounts.
b. Purchase returns
c. Sales
d. Sales returns.
13. To gain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would
_____________. This procedure is necessary to audit ___________ assertion over inventories.
a. Trace inventory tags to items listed in the inventory listing schedule; Completeness.
b. Trace Inventory tags to items listed in the receiving reports and vendor invoices; Existence.
c. Vouch items listed in the inventory schedule to inventory tags and the auditor’s recorded count
sheet, Existence.
d. Vouch items listed in the receiving reports and vendors’ invoices to the inventory listing schedule;
Completeness.

INVENTORIES
14. Which of the following procedures carried out at an inventory count by an auditor is a test primarily for
overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.
b. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
c. Check that inventories held at third party locations are included in the count.
d. Agree items appearing in the inventory summary prepared by the client after the inventory count
to the test counts done the by the auditor.
15. Which of the following procedures carried out at an inventory count by an auditor is a test primarily for
overstatement of inventory?
a. Agree items that have been test-counted to inventory sheets.
b. Identify slow-moving obsolete inventory items.
c. Ensure completeness of sequence of pre-numbered inventory sheets at the conclusion of the
count.
d. Check that inventory held at third party locations is included in the count.
16. To measure how effectively an entity employs it resources, an auditor calculates inventory turnover by
dividing average inventory into cost of goods sold, this analytical procedure information is most helpful/useful
in assessing which of the following financial statement assertion on inventories?
a. Existence
b. Rights
c. Valuation
d. Completeness
17. You were assigned to audit a client’s inventory for the period ended December 31, 2020. After your review of
the internal control over inventories, you have ascertained that they were effective, thus, internal control risk
was maintained at below the maximum level. You decided, as a substantive test procedure, to simply test the
reasonableness of the reported inventory balance by performing inventory estimation using the gross profit
method. Which of the following is correct, if there is a material difference between the amount of the estimated
inventory and the inventory per books?
a. The auditor should propose to the client to adjust the books to equal the result of the analytical
procedure-inventory estimation.
b. The auditor should issue a qualified opinion due to the material misstatement in the inventory
and indicate in the audit report the extent of the material misstatement.
c. The auditor should extend further the audit procedure by rendering additional test of details of
account balance and transactions to ascertain the source of the material misstatement
d. The auditor should propose to the client that an audit adjustment is necessary and if the client is
not willing to make the necessary adjustment, consider the possible implication of the material
misstatement to the type of audit opinion you will issue
18. An auditor most likely would make inquiries from the production and sales personnel concerning possible
obsolete or slow-moving inventory to support management’s financial assertion of:
a. Valuation
b. Rights and obligations
c. Existence
d. Occurrence
19. Which of the following auditing procedures most likely would provide assurance about a manufacturing entities
inventory valuation?
a. Testing the entity’s computation of standard overhead rates.
b. Obtaining confirmation of inventories pledged under loan agreements.
c. Reviewing shipping and receiving cut-off procedures for inventories
d. Tracing test counts to the entity’s inventory listing.
20. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most
likely relates to the auditor’s objective to obtain evidence about the financial statement assertions regarding
inventory:
a. Rights and obligation c. Existence
b. Valuation d. Completeness
21. PAS 2 requires that inventories be valued at lower of cost or net realizable value as at the balance sheet date.
Which of the following shall be the auditor’s best source of corroborating evidence to determine the
reasonableness of the client’s estimate of the net realizable value?
a. Vouching client estimates to the last sales invoices for finished goods inventory sold and supplier’s
purchase invoices for raw materials purchased.
b. Benchmarking by comparing client estimates against industry’s current prices for similar
inventories.
c. Tracing test counts noted during the physical count of inventories to the client’s inventory
summary.
d. Subsequent events review.
22. When auditing inventories, an auditor would least likely verify that:
a. The financial statement presentation of inventories is appropriate
b. Damaged goods and obsolete items have been properly accounted for
c. All inventories owned by the client are on hand by the time of the count.
d. The client has used proper inventory pricing.
- END -

PROPERTY, PLANT & EQUIPMENT

Property, Plant and Equipment (PPE) – (PAS 16) are tangible assets that are;
a) Are held for use in the production or supply of goods and services, for rental to others, or for
administrative purposes; and
b) Are expected to be used during more than one accounting period.
Measurement at Initial Recognition - At Cost, the components of which are:
a) Purchase price, including import duties and non-refundable purchase taxes, after deducting trade
discounts and rebates.
b) Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable
of operating in the manner intended by management; and
c) The initial estimate of the costs of dismantling and removing the item and restoring the site on which it
is located.
Purchase Price of PPE Depending on the Mode of Acquisition
a) Cash Purchase – purchase price is the amount of cash that is paid
b) Purchase on Account with Available Cash Discount – purchase price is the invoice price less cash discount
whether taken or not
c) Purchase under Deferred Payment Plan – purchase price is the cash equivalent prince
d) Acquisition by Issuance of Equity Securities – purchase price is the fair value of the PPE acquired
e) Acquisition by Donation – PPE is valued at their fair values
f) Acquisition through Non-Monetary Exchange – PPE is valued at follows:
1. Transaction with Commercial Substance:
Fair Value of the old asset Pxxx
Cash Paid xxx or
Cash Received (xxx)
Valuation of New Asset Pxxx
2. Transaction Lacking of Commercial Substance:

Carrying Value of the old asset Pxxx
Cash Paid xxx or
Cash Received (xxx)
Pxxx
Examples of Directly Attributable Costs
a. Costs of site preparation
b. Initial delivery and handling costs
c. Installation and assembly costs
d. Costs of testing whether the asset is functioning
*Note that under the PAS/IAS 16 amendment (Proceeds before intended use) effective for annual periods
beginning or after January 1, 2022, any proceeds from selling items produced while bringing an asset to the
location and condition necessary for it to be capable of operating in the manner intended by management is
prohibited from being deducted from the cost of an item of property, plant and equipment. Instead, an entity
recognizes the proceeds from selling such items and the cost of producing those items, in the profit or loss.
Subsequent Costs of Property Plant and Equipment-examples are replacements of parts, inspection
costs, repairs and maintenance costs. These subsequent costs are capitalized when the asset recognition
criteria are met, and the cost of the replaced part are derecognized. Below are indicators that the subsequent
costs are to be capitalized:
• An extension in asset’s estimated life;
• An increase in output capacity;
• A substantial improvement in product quality or service potential, and
• Significant reduction in previously assessed operating costs
Depreciation – is the systematic allocation of the depreciable amount of an asset over its useful life.
Depreciation Method Computation of Annual Depreciation
Straight Line (Cost – Salvage Value)/Total Economic Life in Years
Sum-of-the-Years’ Digits (Cost – Salvage Value) x Estimated Useful Life, Beg of Year
(n) (n + 1)
2
Double-Declining Balance (Cost – Accumulated Depreciation, Beg) x 2/Total Life in Years
150% Declining-Balance (Cost – Accumulated Depreciation, Beg) x 1.5/Total Life in Years
Valuation at Reporting Date – a choice of either the Cost Model or the Revaluation Model:
Cost Model- the class of PPE shall be carried at cost less accumulated depreciation any accumulated
impairment loss
Revaluation Model- the class of PPE shall be carried at revalued amount less any subsequent accumulated
depreciation and subsequent accumulated impairment losses
Gain or Loss on Derecognition
This is the difference between the net disposal proceeds and the carrying amount of the asset at date of
disposal.


1. Which among the following is not to be classified as Property, plant and equipment?
a. Property not subject to depreciation or depletion, such as land used for plant site
b. Property subject to depreciation, such as building used for administrative purposes
c. Property subject to amortization, such as franchise acquired to obtain rights
d. Property subject to depletion, such as timber, oil and mining lands
2. Which is not chargeable to LAND?

a. Attorney’s fee and any other expenditure for establishing clean title
b. Broker’s commission and fees for the title transfer
c. Cost of survey by engineers
d. Expenditure for fence, water system, sidewalk and pavement
3. The following charges are capitalizable to land account, EXCEPT
a. Payments to tenants to induce them to vacate the premises to pave the way for the
construction of a new building
b. Buyer-assumed mortgages and encumbrances like property taxes
c. Special assessments for local improvement which benefit the property
d. Costs of clearing, grading and filling
4. Donation of property, plant and equipment made by a shareholder should be recorded at fair value and a
corresponding credit to
a. Income account taken to profit or loss
b. Unearned income from government grant
c. Donated capital taken to equity
d. Retained earnings unappropriated
5. For assets acquired on credit or by installment, the cost or fair value is equal to
a. Cash purchase price c. Installment price
b. Invoice price d. List price
6. If the non-monetary exchange transaction lacks commercial substance or the fair value of neither the asset
received nor the asset given up is not reliably measurable, its cost is measured at
a. Net realizable value c. Fair value
b. Carrying amount of the asset given up d. Future value
7. Statement I: Borrowing costs incurred in acquiring, producing or constructing a qualifying asset are
capitalized as part of the qualifying asset
Statement II: A qualifying asset is an asset that necessarily takes substantial period of time to get ready
for its intended USE or SALE.
a. True, true c. False, true
b. True, false d. False, false
8. If the qualifying asset is financed by GENERAL borrowings, the capitalizable borrowing cost is equal to
a. Actual borrowing costs incurred
b. Total expenditures on the asset multiplied by a capitalization rate
c. (Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
costs), whichever is higher
d. (Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
costs), whichever is lower
9. The depreciation method used where the usage of the asset varies considerably from period to period and
the service life is more of a function of use than passage of time
a. Straight-line method c. Sum of years’ digits method
b. Units of production method d. Declining balance method
10. A depreciation method that provides higher depreciation expense during the early years of the asset life
a. Sum of years’ digits method c. Service hours method
b. Straight-line method d. Units of production method
11. If there is a change from sum of years’ digits to straight line method
a. The accumulated depreciation is adjusted to its appropriate balance through retained
earnings based on the straight-line method
b. The accumulated depreciation is adjusted to its appropriate balance through net income
based on the straight-line method
c. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the remaining life using the straight-line method
d. The accumulated depreciation balance is not adjusted but the remaining book value is
allocated over the original life using the straight-line method
12. Under PAS 16, the useful life of an item of PPE should be reviewed periodically and if estimates are materially
different from previous estimates, the depreciation charges should be adjusted for the
a. Prior periods only c. Future periods only
b. Current period only d. Current and, if affected, future periods


Problem 1: On January 1, 2022, Hydrogen Company purchased several machineries that will be used in the
production of goods at a purchase price of P1,000,000. Hydrogen Company paid import duties of P10,000 and
non-refundable purchase taxes of P5,000. Hydrogen Company also incurred a P30,000 installation and assembly
cost. Hydrogen Company expects that it will incur dismantling cost amounting to P132,275 at the end of its 5-
year useful life. The prevailing market interest rate during the transaction date was 12%.
The present value factor of P1 at 12% for 5 periods is at 0.567
The present value factor of ordinary annuity at 12% for 5 periods is at 3.6048
How much should the Machineries be initially recognized?

a. 1,045,000 b. 1,177,275 c. 1,120,000 d. 1,521,825
Problem 2: On March 1, 2022, Helium Company purchased an equipment from a local dealer under the terms of
3/15, n/30 for P3,000,000. Helium Company paid installation costs of P14,000. In addition, Helium Company paid
advertising and promotional expense amounting to P 20,000 and incurred initial operating losses of P 12,000.
Helium Company paid the account on March 16, 2022.
How much is the cost of Equipment to be recorded at the date of acquisition?

a. 2,924,000 b. 3,015,000 c. 2,925,000 d. 3,014,000
Problem 3: Lithium Corporation purchased a new Machine on November 1, 2022. A P2,000 down payment was
made and two annual installments of P4,000 each are to be made beginning November 1, 2023. The machine
has no cash price equivalent but the prevailing interest rate for this type of note is 10%. The present value of P1
at 10% for 2 periods is 0.8264 while the present value of ordinary annuity at 10% for 2 periods is 1.7355.
The amount to be capitalized as cost of the Machine on November 1, 2022 would be

a. 10,000 b. 8,942 c. 6,942 d. 8,000
Problem 4: Bery Company acquired Land from Abe Company which will be used as a plant site in exchange for
20,000 newly issued shares of Bery’s ordinary shares. At the date of acquisition, the Bery’s ordinary shares had
a par value of P20 per share and a fair value of P30 per share. The fair value of the Land was P 500,000 when
Abe Company acquired this 2 years ago.
How much is the initial cost of the newly acquired Land?

a. 40,000 b. 500,000 c. 600,000 d. 200,000
Problem 5: Below are the data relative to Boron’s asset that was exchanged for a new asset:
Old Equipment
Book Value Fair Value Cash Paid
With Commercial Substance 75,000 85,000 15,000
Lacking Commercial Substance 50,000 75,000 7,000
1. In the transaction that has commercial substance, Boron will record

Equipment at: Gain or (loss) of:
a. 90,000 0
b. 100,000 10,000
c. 75,000 (5,000)
d. 90,000 10,000
2. In the transaction that lacks commercial substance, Boron will record
Equipment at: Gain or (loss) of:
a. 57,000 0
b. 75,000 25,000
c. 82,000 25,000
d. 50,000 0
Problem 6: Oxygen Company constructed its own factory building. The company had a P1,000,000, two-year
12% loan specifically obtained to finance the asset construction. The construction began on January 1, 2019 and
the building was completed on October 31, 2020. Expenditures on the building were made as follows:
January 1, 2019 800,000 March 1,2020 600,000
April 30, 2019 300,000 September 30,2020 400,000
November 1, 2019 600,000
Oxygen Company has the following outstanding loans:
General borrowings:
10% note issued prior to construction of the new building, term, 10 years, P3,000,000.
15% note issued prior to construction of the new building, term, 15 years, P2,000,000.
1. How much is the capitalized interest in 2020?

a. 235,200 b. 243,200 c. 282,240 d. 291,840
2. How much is the initial cost of the Building?

a. 3,067,200 b. 3,114,240 c. 3,075,200 d. 3,123,840

Problem 7: On April 1, 2021, Fluorine Company acquired an equipment worth P2,500,000 for its operations. The
equipment has an estimated useful life of 10 years with P300,000 residual value. It’s the company’s policy to
depreciate all equipment using the SYD method.
1. How much is the depreciation expense for the year 2022?

a. 300,000 b. 370,000 c. 360,000 d. 420,455
2. How much is the accumulated depreciation on December 31, 2022 assuming the method is double declining
balance method?
a. 875,000 b. 800,000 c. 770,000 d. 704,000
Problem 8: On January 1, 2019, Neon Company acquired an equipment worth P2,050,000 for its operations.
The equipment has an estimated useful life of 8 years and an estimated salvage value of P50,000. It’s the
company’s policy to depreciate all equipment using the straight-line basis. On January 1, 2021, Neon Company
revised the total useful life of the equipment to be 5 years from the date of acquisition.
What amount of depreciation expense should the company recognize in 2022?

a. 500,000 b. 300,000 c. 310,000 d. 516,667
Problem 9: On June 1, 2020, Sodium Mining Company purchased a mineral mine for P2,000,000 with removal
ore estimates at 1,000,000 tons. Sodium expects to extract 10,000 tons per month. The property has an
estimated value of P200,000 after the ore has been extracted. Sodium Mining Company incurred P280,000 in
exploration and evaluation costs in establishing the technical feasibility and commercial viability of the property
and P220,000 of intangible development costs (cost of constructing tunnels, sinking mine shafts, etc.) to
preparing the property for ore extraction.
Sodium Mining Company also purchased a new equipment on the same date costing P1,500,000 with a useful life
of 8 years. However, after all the resources are removed, the equipment will be of no use and will be sold for
P150,000. During 2020, 60,000 tons were extracted and sold. The company is using the straight-line method.
1. What is the amount of the 2020 total depletion?

a. 150,000 b. 108,000 c. 161,000 d. 138,000
2. What is the amount of the 2020 depreciation expense?

a. 81,000 b. 168,750 c. 98,438 d. 84,375
Problem 10: On January 1, 2016, Magnesium Company purchased a machinery for P600,000, with an estimated
economic useful life of 12 years. Straight line method of depreciation was used. On December 31, 2019, it was
properly determined that the estimated fair value less cost of disposal was P235,000 while the value in use was
P240,000. On January 1, 2022, the recoverable amount of the asset was P250,000.
1. How much is the impairment loss on December 31, 2019?

a. 0 b. 110,000 c. 165,000 d. 160,000
2. How much is the maximum recoverable amount/limit on recovery on January 1, 2022?

a. 120,000 b. 70,000 c. 180,000 d. 250,000
3. How much impairment recovery should be reported on January 1, 2022?

a. 50,000 b. 70,000 c. 120,000 d. 0
4. Assuming the recoverable value on January 1, 2022 to be P330,000, how much is the recovery from
impairment and revaluation surplus, respectively, on January 1, 2022 using the cost model?
a. 120,000; 150,000 b. 120,000; 0 c. 120,000; 30,000 d. 150,000; 0
5. Assuming the recoverable value on January 1, 2022 is P330,000, how much is the recovery from impairment
and revaluation surplus, respectively, on January 1, 2022 using the revaluation model?
a. 120,000; 150,000 b. 120,000; 0 c. 120,000; 30,000 d. 150,000; 0
AUDITING PRACTICE
Significant Business Process: Acquire to Retire (Formerly Investing Cycle)
PROBLEM 1: (COMPREHENSIVE: INITIAL AND BS MEASUREMENT)
Braid Corp. started business on January 1, 2019, by purchasing two equipment having the following list prices:
Equipment A P800,000
Equipment B 750,000
These equipment were acquired under credit term of 10/10, n/30. The company failed to pay within the discount
period. The assets were recorded at the total amount paid. Since the date of purchase, the company has charged
depreciation at 20% on the balance of the asset account at the end of each year. The amount of depreciation
computed on each year has been credited directly to the asset account. Moreover, all purchases since the
inception of the operations have been debited to the equipment account. Cash proceeds from the disposal of
equipment were credited to the same account.

All the Equipment were estimated to have a useful life of 5 years and were supposed to be depreciated under the
straight-line method. Salvage value on all equipment is estimated at 10% of the correct initial cost.
Your first-time audit of the equipment account in 2021 revealed the following information:
• On March 31, 2019, Equipment C was purchased on an installment basis at total installment price of
P1,080,000. The installment contract called for 12 monthly payments of P90,000. The equipment had a
cash price of P850,000. Freight and handling charges including insurance while in transit amounting to
P30,000 was incurred and charged as outright expense. The company recorded Equipment C at the total
installment price.
• On June 30, 2020, Equipment D was purchased by paying P400,000 cash down-payment and issuing
P1,200,000 note payable due at P400,000 annually thereafter. The company incurred P60,000 in
installation cost and is estimated to incur P69,202 in dismantling cost upon its retirement. The market
rate of interest on this date was at 12%. The company recorded the equipment at P1.6M and charged the
installation cost to expense.
• On September 30, 2020, Equipment E was acquired in exchange of a parcel of land located. The equipment
had a fair value of P920,000. The land had a carrying value of P1.4M and a fair market value of P1.5M.
Cash amounting to P580,000 was received from the exchange. Future cash flows related to the assets
exchanged are considered significant. The company recorded the equipment at the book value of the land
given up net of the cash received.
• On March 30, 2021, Equipment B was traded for Equipment F, which had a cash price of P1,050,000. The
company paid P500,000 in the trade-in transaction. The company recorded the trade-in by debiting the
equipment account for the cash payment.
• On July 1, 2021, Equipment C was sold for P500,000. The company incurred cost to sell on the machinery
amounting to P8,000. The equipment account was credited for the net cash received.
Requirements:
1. What is the gain or loss on exchange on September 30, 2020?
2. Assuming that the exchange on September 30, 2020, was considered with no commercial substance, how
much should the equipment be initial recognized and how much is the gain or loss should be recognized?
3. What is the gain or loss on the trade-in on March 30, 2021?
4. What is the gain or loss on the disposal of Equipment C on July 1, 2021?
5. How much is the total depreciation expense for the year ended December 31, 2021?
6. What is the total carrying value of all the equipment as of December 31, 2021?
PROBLEM 2: (COMPREHENSIVE: INITIAL AND BS MEASUREMENT)
Information pertaining to Extraction Corporation’s property, plant and equipment for 2021 is presented below:
Account Balances on January 1, 2021

Debit Credit
Land P3,000,000
Building 4,800,000
Accumulated depreciation P1,277,261
Machinery and equipment 3,200,000
Accumulated depreciation 1,200,000
Automotive equipment 2,800,000
Accumulated depreciation 2,100,000
Depreciation methods used and useful lives of the different classes are as follows:
Building – 150% declining balance; 25 years
Machinery and equipment – Straight-line; 12 years
Automotive equipment – Sum-of-year’s-digits; 8 years
The salvage values of the assets are estimated at 10% of cost. All assets were acquired at the beginning of 2016.
Transactions during 2021:
On January 1, the company purchased a new automotive equipment for P800,000 cash and traded-in an old
automotive equipment with an original cost of P500,000. The new car has a cash price of P900,000; market
value of trade-in is not known.
On June 30, a machine with an original cost of P500,000, was totally destroyed by fire. Extraction Corporation
recovered P200,000 from its insurance company.
On July 1, a replacement machinery and equipment were acquired in exchange of 10,000 shares of the company’s
own ordinary shares (P50 par value). The new machinery and equipment had a cash price of P550,000. Additional
costs of P5,000 for freight and P25,000 for installation were incurred.

Requirements:
1. What is the gain or loss on the trade-in on January 1?
2. How much impairment loss should be recognized from the machinery on June 30?
3. What is the correct depreciation expense for 2021 of the following PPE items:
a. Building
b. Machinery and equipment
c. Automotive equipment
4. What is the correct carrying values as of December 31, 2021 of the following PPE items:
a. Building
b. Machinery and equipment
c. Automotive equipment
PROBLEM 3: (COST MODEL: IMPAIRMENT LOSS)
The Kit Corp. is assessing one of its factories for impairment as of December 31, 2021 due to a competitor
launching a more superior product rivaling the product line being produced by the factory. The factory produces
one of the company’s product lines and is considered a separate cash generating unit from the rest of its other
factories. The assets in the factory included the Land (Cost: P1M); Building (Cost: P6M) and an Equipment (ABC)
(Cost: P2M) which were acquired in January of 2018 (when the product line has been launched). Another
Equipment (DEF) (Cost: P3M) was acquired in January of 2020 (when the product line was expanded). The
building had a useful life of 20 years while the equipment were estimated to have a useful life of 10 years. Assets
are being depreciated under the straight-line method to zero residual value.
Individual cash flows related to each asset comprising the factory cannot be ascertained thus you suggested that
the company treat the factory as a single cash generating unit for the purpose of applying PAS 36, Impairment
of assets. A cash generating unit as defined by the said standards is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.
As a result of the introduction of a more superior product by the competitor, the client ascertained that the product
being currently produced by the factory can now only generate cash flows for the company for the next five years,
after which the assets in the factory can be disposed for a total of lump-sum of P1.4M. The following presents the
estimates of the said cash flows (pre-tax):
Year Revenues Expense, excluding

Depreciation
2022 P4,200,000 P1,680,000
2023 3,800,000 1,910,000
2024 3,200,000 2,050,000
2025 2,400,000 1,610,000
2026 1,300,000 800,000
The fair value of the group of assets net of estimated disposition costs was determined to be P6.5M. The prevailing
pre-tax discount rate appropriate for this analysis is 6% while post-tax discount rate is at 8%.
Requirements:
1. What is the value in use of the group of assets?
2. How much is the recoverable amount of the group of assets?
3. How much is the impairment loss?
4. Assuming that the land had a fair market value less cost to sell at P1.2M what is the carrying value of the
building after impairment loss recognition?
PROBLEM 4: (REVALUATION MODEL)
Seth Company acquired a machine on January 1, 2018, at a cost of P1,500,000. It was expected to have a useful
economic life of 10 years. The comany uses the straight-line method in depreciating its machinery and equipment
and reports on a calendar year basis.
On December 31, 2021, the machine was appraised as having a gross replacement cost of P2,700,000. Seth
applies the revaluation model in valuing this class of property, plant, and equipment after its initial recognition.
Requirements:
1. How much is the depreciation expense in 2022?
2. How much is the balance of the revaluation surplus account on December 31, 2022, assuming that the
company uses the “Piecemeal basis” of transferring the revaluation surplus to retained earnings?
3. What is the carrying value of the machine on December 31, 2022?
4. Assuming that the machinery was sold on December 31, 2023, at P1,400,000, what is the gain or loss to
be recognized in the profit or loss for 2023 and how much revaluation surplus should be transferred as a
“lump-sum” to retained earnings?
5. Assuming that the fair market value of the equipment is P2.45M on December 31, 2021, what is the
balance of the revaluation surplus on December 31, 2022, if the “Piecemeal basis” of transferring the
revaluation surplus to retained earnings is adopted?

PROBLEM 5: (IMPAIRMENT WITH SUBSEQUENT REVALUATION)

On December 31, 2021, Spencer Corp. tested its building for impairment. Data pertinent to the building on this
date were as follows:
Original cost P24,000,000

Accumulated depreciation as at January 1, 2021 6,000,000
Selling price 12,200,000
Estimated cost to make the sale 600,000
Annual net cash flows from the asset's continued use 2,249,328
Remaining useful life as at the beginning of the year 9 years
Method of depreciation Straight-line
Salvage value Negligible
Prevailing pre-tax discount rate as of 12/31/2021 10%
On December 31, 2023, the company adopted the revaluation model for its building which has fair market value
of P13.2M as of this date.
Requirements:
1. How much impairment loss is recognized in 2021?
2. How much is the depreciation expense recognized in 2022?
3. How much gain on recovery is recognized in 2023 income statement?
4. How much is the depreciation expense recognized in 2024 under the revaluation model?
5. What is the balance of the revaluation surplus as of December 31, 2024?
6. How much is the depreciation expense recognized in 2024 had the cost model been used in valuing the
property?
PROBLEM 6: (REVALUATION WITH SUBSEQUENT IMPAIRMENT)
Holmes Co. purchased a building on January 1, 2018, for P6,000,000. The same had an expected useful life of
10 years. Straight-line depreciation method is used. On December 31, 2021, the asset was appraised as having
a sound value (depreciated replacement cost) of P5,400,000. On December 31, 2024, as a result of an evidence
of a possible impairment, the asset was tested for possible impairment based on its current recoverable amount
at P1,200,000 with a revised remining useful life of only two years.
Requirements:
1. How much is credited to the revaluation surplus as a result of the revaluation in 2021?
2. What is the correct depreciation to be recognized in 2022?
3. How much is the impairment loss to be recognized for the year ended December 31, 2024?
4. What is the depreciation expense in 2025?

1. Which of the following is an internal control weakness related to factory equipment?
a. Checks issued in payment of purchases of equipment are not signed by the controller
b. All purchases of equipment are required to be made by the department in need of the equipment
c. Factory equipment replacements are generally made when estimated useful lives, as indicated in
depreciation schedules, have expired
d. Proceeds from sales of fully depreciated equipment are credited to other income.
2. You are auditing Red Corp. for the first time and has observed that the entity has few property and equipment
transactions during the year, as the auditor assigned to audit PPE, you should render a:
a. complete review of the related internal controls and perform test of the controls on which the entity
relies.
b. complete review of the related internal controls and perform analytical review tests to verify current-
year additions to property and equipment.
c. preliminary review of the related internal controls and perform an extensive substantive test of
opening balances and current-year property and equipment transactions.
d. preliminary review of the related internal controls and perform extensive tests of current-year
property and equipment transactions.
3. When auditing investing cycle related account balances (PPE, Intangibles and other Non-current Assets), the
auditor acknowledges that there is a higher risk of ___________, therefore shall develop an audit program
that shall focus on _______________ assertions.
a. Overstatement; Completeness and valuation
b. Overstatement; Existence, rights and valuation
c. Understatement; Completeness and valuation
d. Understatement; Existence, rights and valuation

4. When auditing current year PPE transactions, the auditor shall request a schedule of property additions for
the year and a schedule of repairs and maintenance expanse for the year. The audit procedure of analyzing
the schedule of property additions is designed primarily to provide evidence in support of the audit proposition
that _________, which is consistent with validating __________ assertion.
a. All expenditures for fixed assets have been recorded in the proper period; Completeness of PPE.
b. All capital expenditures have been properly authorized and are in fact capitalizable under PFRS;
Existence and Rights of PPE.
c. All noncapitalizable expenditures have been properly expensed; Occurrence of Repairs and
Maintenance Expense.
d. All qualified capitalizable expenditures under PFRS for fixed assets have been in fact capitalized;
Completeness of PPE.
5. When auditing current year PPE transactions, the auditor shall request a schedule of property additions for
the year and a schedule of repairs and maintenance expense for the year. The audit procedure of analyzing
the repairs and maintenance accounts is designed primarily to provide evidence in support of the audit
proposition that _________, which is consistent with validating __________ assertion.
a. All expenditures for fixed assets have been recorded in the proper period; Existence & Rights of PPE.
b. All capital expenditures have been properly authorized and are in fact capitalizable under PFRS;
Existence and Rights of PPE.
c. All noncapitalizable expenditures have been properly expensed; Occurrence of Repairs and
Maintenance Expense.
d. All expenditures for fixed assets have been capitalized; Occurrence of Repairs and Maintenance
Expense.
6. In violation of company policy, Red Corp. erroneously capitalized the cost of routinary repairs and
maintenance on factory equipment. The auditor examining Red Corp.’s financial statements would be most
likely detect this when ________. This procedure is designed to audit _______ assertion on PPE.
a. Discussing capitalization policies with the company’s controller; Existence.
b. Examining maintenance expense accounts; Completeness.
c. Physical inspection of factory equipment during ocular inspection; Completeness.
d. Examining the major repairs and overhaul work orders supporting items capitalized during the
year; Existence.
7. Red Corp. misclassified an equipment replacement as repairs expense, this would most likely be detected by
an internal control that provides for:
a. Segregation of duties of employees in the accounts payable department.
b. Independent verification of invoices for disbursements recorded as equipment.
c. Authorization by the board of directors of significant acquisitions.
d. Investigation of variance within a formal capital budgeting system.
8. In testing for unrecorded retirements of equipment, an auditor most likely would ___________. This is
consistent with auditing ____________ assertion on PPE.
a. Select items of PPE from the records and then locate them during the plant tour; Existence.
b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated
equipment; Completeness.
c. Inspect items of equipment observed during the plant tour and then trace them to the equipment
subsidiary ledger; Existence.
d. Scan the general journal for unusual equipment additions and excessive debits to repairs and
maintenance accounts; Completeness.
9. Which procedure would an auditor least likely perform in obtaining evidence about valuation of PPE?
a. Inspecting acquisition documents to support the initial cost of the asset
b. Recomputing the depreciation based on the company’s depreciation policy and ascertaining the
reasonableness of the depreciation policy used.
c. Physical inspection of PPE for possible evidence of physical obsolescence or damage.
d. Confirming ownership and corroborating transactions through inquiries with the management.
10. In testing the reasonableness of the client’s depreciation policy, which of the following will be the least likely
source of evidence?
a. Industry practice in depreciating and amortizing PPE.
b. Schedule of depreciation computation in the past years with prior years PPE roll forward analysis.
c. Subsequent events.
d. Confirming ownership and corroborating transactions through inquiries with the management.
11. In testing reasonableness of a client’s depreciation policy, an auditor may conclude that depreciation charges
maybe have been understated if he or she notes:
a. Large amounts of fully depreciated assets.
b. Continuous trade-ins of relatively new assets.
c. Excessive recurring losses on retired assets.
d. Insured values greatly in excess of book values.
12. The auditor is most likely to seek information from the plant manager with respect to the ____________,
this is relevant for auditing the _____________ assertion for PPE.
a. Adequacy of the provision for depreciation; valuation.
b. Appropriateness of physical inventory observation procedures; existence.
c. Existence of obsolete machinery; valuation.
d. Deferral of procurement of certain necessary insurance coverage; existence.
- END -

INTANGIBLE ASSETS
INTANGIBLE ASSET – is a long-term asset that is non-monetary in nature and without physical existence. It
arises from contractual or other legal rights. The benefits the entity derives from the asset may be in the form of
the sale of certain products or some cost savings. An intangible asset must be identifiable, meaning it can be sold
or transferred without selling the entire business.
Measurement at Initial Recognition - The intangible asset is initially recognized and recorded at cost. The
cost of an identifiable intangible asset includes all directly attributable costs incurred to develop or acquire the
asset; plus, other incidental costs necessary to prepare the asset for its intended use. The purchase price depends
upon how the intangible asset is acquired as follows:
By purchase – the purchase price including any import duties and non-refundable purchase taxes and
any directly attributable expenditure on preparing the asset for its intended use. Directly attributable
costs include:
a) Cost of employee benefits directly from bringing the asset to its working condition
b) Professional fees arising from bringing the asset to its working condition
c) Cost of testing whether the asset is functioning properly. Any trade discounts and rebates are
deducted in arriving at the cost.
By a deferred plan beyond normal credit terms – the cash price equivalents (the cash price or the
present or discounted value for a non-interest long term liability). The difference of the cash price
and the total amount of payments is recognized as interest expense over the term of the credit period.
By the issuance of equity instruments – the fair market value of the instruments, which is equal to
the fair market value of the intangible.
By way of a government grant - The entity may choose to recognize both the intangible asset and the
grant initially at fair value or at a nominal value plus any expenditure that is directly attributable to
preparing the asset for its intended use.
By part of a business combination – the fair market value on the date of acquisition. The fair
market value is equal to the following.
• if there is an active market – quoted market price which is usually the current bid price.
• If there is no active market – the amount, which would have been paid by the company in an
arm’s length transaction between knowledgeable and willing parties (by discounting estimated
cash flows from the intangible asset).
If the fair market value of the intangible asset in a business combination cannot be measured reliably,
the asset is not recognized as a separate intangible but is included within the over-all cost of the
purchased goodwill.
By exchange – the cost of the intangible asset is measured at the fair market value unless the transaction
lacks commercial substance. If the exchange lacks the necessary commercial substance, the
intangible asset is measured at the carrying value of the asset given up.
Internally generated intangible – are the cost that can be directly attributed or allocated on a
reasonable and consistent basis to creating, producing and preparing the asset for its intended use.
The cost includes the following:
• cost of materials and services used or consumed in generating the intangible asset.
• Salaries and wages and other employment related cost of personnel directly engaged in
generating the asset.
• Expenditure that is directly attributable to generating the asset such as fees to register a legal
right and amortization of patents and licenses that are used to generate the asset.
• Overhead that are necessary to generate the asset and that can be allocated on a reasonable and
consistent basis to the asset.
Measurement subsequent to acquisition: An entity shall choose either the cost model or the revaluation
model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other
assets in its class shall also be accounted for using the same model, unless there is no active market for those
assets.
Cost model – after initial recognition, the intangible asset shall be carried at its cost less any accumulated
amortization and any accumulated impairment losses.
Revaluation model – after initial recognition, an intangible asset shall be carried at a revalued amount,
being its fair value at the date of revaluation less any subsequent accumulated amortization and any
accumulated impairment losses.
Amortization – the amortizable amount of an intangible asset that has finite life should be allocated on a
systematic basis over the best estimate of its useful life. The intangible assets with indefinite lives are not
amortized but are tested for impairment at least annually. The method of amortization shall reflect the pattern
in which the future economic benefits from the asset are expected to be consumed by the entity. If the pattern
cannot be determined reliably, the straight- line method is used. The residual value of an intangible asset shall
be presumed to be zero, unless a third party is committed to buy the intangible asset at the end of its useful life
or unless there is an active market. Any change in the method of amortization or life of an intangible should be
treated as a change in estimate.

INTANGIBLES
Useful Life –An intangible asset shall be regarded by the entity as having an indefinite useful life when there is
no foreseeable limit to the period over which the asset is expected to generate net cash flows for the entity.
However, IFRS for SMEs considers all intangible assets to have finite useful life, and if a private entity is unable
to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be 10 years.
Review of Amortization period and amortization method If there has been a significant change in the
expected pattern of economic benefits from the asset or a change in the amortization period, the amortization
method should be changed to reflect the changed pattern and/or the revised remaining life of the asset. Such
changes should be accounted for as changes in accounting estimates in accordance with the accounting standard
IAS 8 Accounting Policies, Changes in Estimates and Errors, by adjusting the amortization charge for the current
and future periods.
Subsequent cost – Subsequent expenditures incurred can only be capitalized if the expenditure increases the
future economic benefits of the asset beyond its original assessed standard of performance. This increase in
standard of performance includes extension of useful life, increase in revenue capacity, or the capability to reduce
expenses. Any other subsequent costs expenditure should be recognized as an expense in the period incurred.
Specific guidelines on specific intangibles
Patent- an exclusive right granted by the government to an inventor enabling him to control the manufacture,
sale or other use of his invention for a specified period of time. The cost of a purchased patent should be amortized
over its legal life (20 years) or useful life, whichever is shorter.
The cost of a developed patent (the cost should include only the licensing and other related legal fees in securing
the patent rights) should be amortized over its legal life or useful life, whichever is shorter.
If a competitive patent was acquired to protect the old patent, the competitive patent should be amortized over
the remaining life of the old patent.
Legal fees and other costs of successfully prosecuting or defending a patent should be charged outright as an
expense. Any cost of unsuccessful litigation on patent should also be charged outright as an expense and the
carrying amount of the old patent is derecognized.
Copyright – exclusive right granted by the government to the author, composer or artist enabling to publish
sell or otherwise benefit from his literacy, musical and artistic work.
The cost should be amortized over the periods benefitted by it or legal life whichever is shorter.
Franchise – an exclusive right granted by the franchisor (government or private companies) to a franchisee to
use the property or the rights (trademark, patent and process of the franchisor).
If the franchise has a definite period – it should be amortized over the definite period (not exceeding 20 years)
or useful life whichever is shorter. If the franchise has an indefinite life – it is not amortized but should however
be reviewed for impairment at each reporting date.
Trademark/trade name/brand name – is a symbol, sign, slogan or name used to mark a product to distinguish
it from other products. The cost of the intangible should include
a. When purchased –the purchase price or the cash price equivalents.
b. When developed –the expenditures required to establish including filing fees, registry fees and other
expenses incurred in securing the trademark.
The legal life of a trademark or trade name or brand name is 10 years and maybe renewed for periods
of 10 years each – R.A. No. 8293). The cost of a trademark is not amortized but subject to test of
impairment at least annually as a result of the almost automatic renewal. Trademark may be properly
classified as an intangible asset with an indefinite life. However, if its life is no longer considered
indefinite, it should be amortized over its remaining useful life.
Goodwill - Only a purchased goodwill (external) should be recognized as an asset. Developed (internal) goodwill
should be charged outright as an expense. Subsequent costs related to the goodwill should be charged
immediately against income. The cost of goodwill is not amortized because its useful life is indefinite. However,
goodwill shall be tested for impairment at least annually or more frequently if events or changes in
circumstances indicate a possible impairment. The amount of goodwill impairment is determined by comparing
the recoverable amount for the cash-generating unit (CGU) to which the goodwill belongs against the carrying
value of the cash-generating unit to which the goodwill belongs.
• If the recoverable amount of the CGU exceeds the carrying value of the CGU, the CGU and the goodwill
allocated to that unit shall be regarded as not impaired.
• If the carrying amount of the CGU exceeds the recoverable amount of the unit, the company must
recognize an impairment loss.
Research – an activity undertaken to discover new knowledge that will be useful in developing new product or
that will result in significant improvement of existing product. Examples of these are:
1. laboratory research aimed at obtaining or discovering new knowledge
2. searching for application of research findings and other knowledge
3. conceptual formulation and design of possible product or process alternative, and
4. testing in search for product or process alternative.
Development: is the application of research findings or other knowledge to a plan or design for the production
of new or substantially improved material, device, product, process, system, and prior to the commencement
of commercial production. Examples of these are:
1. design, construction and testing of pre-production prototype and model
2. design of tools, jigs, molds and dies involving new technology
3. design, construction and operation of a pilot plant that is not of a scale economically feasible to the
enterprise for commercial production, and
4. design, construction and testing of a chosen alternative for new or improved product or process.

INTANGIBLES
The standard allows recognition of an intangible asset during the development phase, provided
the enterprise can demonstrate all of the following:
a. Technical feasibility of completing the intangible asset so that it will be available for use or sale
b. Its intention to complete the intangible asset and either use it or sell it.
c. Its ability to use or sell the intangible asset
d. The mechanism by which the intangible asset will generate probable future economic benefits.
e. The availability of adequate technical, financial and other resources to complete the development and to
use or sell the intangible asset, and
f. The entity’s ability to reliably measure the expenditures attributable to the intangible asset during its
development.
If the company cannot distinguish the research phase from the development phase, the company treats the expenditure
as if it was incurred in the research phase only.
Internally Developed Computer Software- the cost incurred on the research stage in creating the software
should be charged outright to expense when incurred until a technological feasibility has been established for
the product. Technological feasibility is established when a company has produced either a detailed program
design of the software or a working model. After establishing technological feasibility, the cost of software
to be capitalized should include the costs of coding and testing and the cost to produce the product
masters.
The cost of the computer software should be allocated based on the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. If such pattern cannot be determined reliably,
the straight-line method is used.
Purchased Software:
a. If it is for sale – should be treated as an inventory
b. If it is held for licensing or rental to others - recognized as an intangible asset
c. If it is to be used and is an integral part to the hardware – treated as part of the hardware and capitalized
as property, plant and equipment.
Reversal of impairment loss for an Individual Asset
The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined (net of amortization or depreciation)
had no impairment loss been recognized for the asset in prior years.
A reversal of an impairment loss for an asset other than goodwill shall be recognized immediately in profit or
loss, unless the asset is carried at revalued amount. A reversal of impairment loss on a revalued asset is
credited directly to equity under the heading revaluation surplus. However, to the extent that an impairment
loss on the same revalued asset was previously recognized in profit or loss, a reversal of that impairment loss
is also recognized in profit or loss.

1. Under PAS 38, which of the following is not part of the definition of intangible assets
a. Identifiable non-monetary assets
b. Controlled by the enterprise
c. Future economic benefits
d. With physical substance
2. It is the systematic allocation of the cost of the intangible asset, less any residual value, as an expense over
the asset’s useful life
a. Amortization c. Bifurcation
b. Impairment d. Realization
3. Legal fees in the registration of patent rights were incurred by an entity at the beginning of the year. Towards
the end of the year, legal fees were incurred in successfully defending the entity’s patent rights. What is the
proper treatment of these legal fees?
a. Both legal fees are capitalized.
b. Both legal fees are expensed in the period incurred.
c. Legal fees in the registration are capitalized while legal fees in the patent defense are
expensed.
4. Intangible assets with indefinite useful lives are
a. Amortized over a period of twenty years.
b. Amortized over a period of twenty years and must be tested for impairment at least
annually.
c. Not amortized, but must be tested for impairment at least annually.
d. Not amortized and need not be tested for impairment.
5. The residual value of an intangible asset with a finite useful life shall be assumed to be zero unless:
Statement I: There is a commitment by a third party to purchase the asset at the end of its useful life
Statement II: There is an active market for the asset and it is probable that such a market will exist at
the end of the asset’s useful life.
a. Only statement I is true
b. Only statement II is true
c. Both statements are false
d. Both statements are true.

INTANGIBLES
6. Which of the following statements is false regarding Patent?

a. If the patent is acquired by purchase, then its capitalizable cost includes purchase price and other
incidental costs
b. If the patent is internally developed, the related R&D expenditures are expensed as incurred; the
capitalizable cost includes only licensing and legal fees incurred in securing the patent rights.
c. Legal fees and other costs of successfully defending a patent are capitalized as patent cost.
d. Patent should be amortized over its legal life or useful life, whichever is shorter.
7. Which of the following statements is false regarding Franchise?
a. Franchise agreement may be made between the government and private entities.
b. The cost of franchise includes the lump-sum payment and all legal fees and expenses incurred in
connection with the franchise acquisition (initial franchise fee)
c. The required periodic or continuing franchise fee should be expensed in the period incurred
d. Franchise should be amortized over contract term or useful life, whichever is longer
8. Which of the following statements is false regarding Goodwill?
a. Internally developed goodwill is not recognized as an intangible asset
b. Purchased goodwill arising from business combination is recognized as an asset
c. Impairment loss recognized on goodwill shall not be reversed in a subsequent period.
d. Goodwill should be amortized over its useful life but not to exceed 20 years
9. Which of the following statements is false regarding Trademark?
a. It is a symbol, sign, name, or logo or other distinctions given to companies for exclusive use
b. The legal life of the trademark in the Philippines is for a non-renewable term for 10 years.
c. The trademark with an indefinite life is not amortized but tested regularly for impairment
d. Cost of successfully defending a trademark in courts are expensed outright
10. Which of the following statements is false regarding Research and Development (R&D) costs?
a. Research activity is the original and planned investigation undertaken with the prospect of gaining new
scientific or technical knowledge and understanding on a project
b. Development is the application of research findings or other knowledge to a plan or design for the
production of new product prior to the start of commercial production
c. Research cost is recognized as an outright expense in all cases
d. Development cost is recognized as an outright expense in all cases

Problem 1: Peso Company incurred P100,000 of research and development costs to develop a product for which
a patent was granted on January 1, 2020. Legal fees and other costs associated with the registration of the patent
totaled P300,000. The patent is being amortized over its legal life. On July 1, 2022, Peso Company won and paid
legal fees of P80,000 for the successful defense of the patent against an infringement lawsuit filed by Dollar
Company.
1. How much is the amortization expense for the year 2020?

a. 5,000 b. 20,000 c. 15,000 d. 30,000
2. How much is the carrying value of the patent on December 31, 2022?
a. 255,000 b. 262,500 c. 248,800 d. 335,000
3. How much is the total expenses for the year 2022?

a. 15,000 b. 80,000 c. 95,000 d. 87,500
4. How much is the total expenses for the year 2022 assuming Peso Company did not win the lawsuit?
a. 80,000 b. 87,500 c. 262,500 d. 350,000
Problem 2: On December 31, 2021, Chile Company had three existing patents as shown in the table below.
Date Acquired Cost Useful Life
Patent C March 1, 2017 P150,000 8 years
Patent L January 1, 2020 P200,000 10 years
Patent P July 1, 2020 P72,000 5 years
During 2022, Chile Company had the following transactions and assessments pertaining to its patents:
• Due to the emerging competition relating to the product being manufactured in Patent C, it is expected that the
right will be useful only in 2022 and 2023.
• On June 30, 2022, the company unsuccessfully attempted to defend its rights to Patent P. Legal fees of P15,000
were incurred in this action. The asset was immediately derecognized in the books.
The company’s policy is to take full year amortization in the year of acquisition and no amortization in the year
of derecognition using the straight-line method. The company reports on a calendar-year basis.
How much is the total amortization expense for the year 2022?
a. 28,125 b. 48,125 c. 49,688 d. 51,725

INTANGIBLES
Problem 3: Colombia Company incurred P1,500,000 (P400,000 in 2019 and P1,100,000 in 2020) to develop a
computer software product, P500,000 of which was expensed before technological feasibility was established in
early 2020. Based on the pattern of consumption of economic benefit from the computer software, the product
will earn future revenues of P4,000,000 over its 5-year life, as follows: 2020 – P1,000,000; 2021 – P1,000,000;
2022 – P800,000; 2023 – P800,000; and 2024 – P400,000.
How much is the total expenses for the year 2020?
a. 250,000 b. 350,000 c. 300,000 d. 750,000
Problem 4: Cuba Corporation provided the following information regarding its Research CUP192 for the year
2022:
Research CUP192 is for a research project which consists of the following charges:
Salaries of research staff P18,000
Patent acquired solely for the use in the project 12,000
Special Equipment acquired and useful for various similar research activities 10,000
Patent acquired for use in several research projects including CUP192 16,000
The Equipment and Patents have been found to be useful for approximately five years. You have further
discovered that both Patents and the Equipment were acquired at the beginning of 2022.
How much should be recognized as research and development expense for the year 2022?
a. 56,000 b. 18,000 c. 35,200 d. 0
AUDITING PRACTICE
PROBLEM 1: (INTANGIBLES AND OTHER ASSETS)

Army of the Dead Corp. provided you with the following data:
1. Lease prepayments (6 months rent paid in advance) 60,000
2. Cost of equipment obtained under a finance lease 700,000
3. Internally generated brands and mastheads 670,000
4. Separately purchased publishing titles 230,000
5. Internally generated customer list 520,000
6. Purchased recipes and secret formulas from a previous competitor 840,000
7. Costs incurred in the formation of the corporation including pre-operating costs and 900,000
operating losses during the start-up of the business.
8. Employee training costs incurred which enhanced their competencies in the
specialized industry which the company belongs 950,000
9. Massive advertising costs and promotional campaigns to launch the company, thus
enhancing the company’s position in the industry 1,400,000
10. Goodwill that is internally generated 300,000
11. Total acquisition cost of a business (FMV of identifiable net assets at P9,500,000) 10,300,000
12. Cost of testing in search/discovery of product alternatives (new knowledge) 165,000
13. Design, construction, and testing of preproduction prototypes and models 223,000
14. Routine, on-going, continuing efforts to refine, enrich, or otherwise, improve upon
the qualities of an existing product 400,000
15. Research and development cost in creating a patented technology 840,000
16. Cost incurred to acquire legal rights and in securing the patent for item 25 270,000
17. Costs of successful legal suit to protect the patent 230,000
18. Cost of purchasing a patent from an inventor 420,000
19. Initial franchise fees 540,000
20. Continuing franchise fees 200,000
21. Cost of purchasing a copyright 900,000
22. Cost of developing a trademark 61,000
23. Computer software for a computer-controlled machine that cannot operate without
that specific software (e.g. an operating system/software of a computer facility) 220,000
24. Hardware components of the computer facility 780,000
25. Stand-alone or application computer software 370,000
Requirement:
How much is the total intangible assets, including goodwill?
PROBLEM 2: (INTERNALLY GENERATED INTANGIBLES)

Una Inc., a manufacturer of plastic materials useful for various textile company, expended P2,050,000 in research
and development costs which resulted to a new formula which makes its plastic products more environmentally
friendly and biodegradable. The patent related to the “know how” was approved and granted by the government
in late December of 2016 after payment of the necessary legal and processing fees of P840,000. The company
estimates that it would be able to benefit from the formula for 8 years, after which competitors would have come
up with the same formula.

INTANGIBLES
On January 1, 2019, Una Inc. spent P270,000 to acquire a related patent which successfully extended the life of
original patent for additional 4 years.
On January 1, 2020 the company successfully defended the patent for a total legal fee of P175,000.
By the end of 2021, however, the company determined that with the competitor launching a more superior
product, the patent had been impaired. The company estimates that the remaining net cash flows from the
patent shall be P115,210 for the next five years, the revised remaining useful life. The appropriate market rate
of interest was 8% at this time.
Requirements:
1. What is the amortization expense in each year?
a. 2017
b. 2018
c. 2019
d. 2020
e. 2021
2. What is the recoverable value of the patent at the end of 2021?
3. What is the impairment loss to be recognized in the 2021 income statement?
4. What is the amortization expense in 2022?
PROBLEM 3: (INTERNALLY GENERATED INTANGIBLES)
The Oval Inc. is engaged in developing a computer software for various industries. Below are the various
expenditures incurred related to this project:
Salaries and wages of programmers doing research incurred in 2020 P845,000

Professional fees paid to outside consultants assisting in various 280,000
research activities 2020 and 2021
Application of research findings including expenses related to the project
to complete the detailed program design (cost to establish technical 313,000
feasibility of the computer software) in late 2020
Expenses related to the project after the completion of the detailed
program design (after technological feasibility has been established) in 330,000
early 2021 but before software is available for production (e.g. cost of
coding and testing the product master)
Engineering follow-through during the early stage of the software 42,000
commercial production
Other production costs to prepare the software for sale in 2020 (e.g. 223,000
cost of duplicating the product master)
Additional data for 2021:

Sales for the year P2,000,000
Portion of goods available for sale that were sold during year 60%
Determine the following:

1. Total amount related to the development of computer software that should be expensed when incurred
2. Amount to be capitalized as software development cost subject to amortization
3. Cost of sales in 2021 if the computer software will benefit the company for 3 years, after which a more
superior software would have been created rendering the developed software obsolete.
PROBLEM 4: (INITIAL AND BS MEASUREMENT)
The following information pertains to Might Company’s intangible assets:

a. On January 1, 2020, the company signed an agreement to operate as a franchise of Memory Inc., for an
initial franchise fee of P3,000,000. Of the amount, P600,000 was paid when the agreement was signed
and the balance payable in 4 annual equal payments at the beginning of each year starting 2021. The
agreement provides that the down payment is not refundable and that no future services are required of
the franchisor. The implicit rate for similar loans was 14%. The agreement provides for a 5% continuing
franchise fee based on the revenue of the franchisee. Might Company had a total revenues of P18M in
2020. The company further estimates that the net future cash flows from continued use of the franchise
is at P250,000 annually.
b. A trademark with a fair market value of P1,000,000 was acquired in exchange of a non-monetary asset
with a carrying value of P600,000 on January 1, 2018. P500,000 Cash was paid on the exchange which
was considered to be with commercial substance. Expenditures of P326,400 were incurred on July 1,
2020 for successfully defending the trademark. By the end of 2018 and 2019, for the remaining life of
the trademark, the future net annual cash flows were estimated at P200,000. By the end of 2020,
however, the estimate had been revised to P80,000 because of a recent technological development in
the industry.
c. The prevailing market rate of interest were at 9%, 9.5% and 10% at the end of 2018, 2019 and 2020,
respectively.

INTANGIBLES
Requirements:
Case 1
Assuming that the intangible assets had the following definite lives from date of acquisition: Franchise, 10
years; Trademark, 10 years,
1. What is the carrying value of the franchise at the end of 2020?
2. What is the carrying value of the trademark at the end of 2020?
3. Total combined expenses form the two intangible assets to be recognized in 2020?
Case 2
Assuming that the intangible assets had the following lives from date of acquisition: Franchise, indefinite;
Trademark, Indefinite,
1. What is the carrying value of the franchise at the end of 2020?
2. What is the carrying value of the trademark at the end of 2020?
3. Total combined expenses from the two intangible assets to be recognized in 2020?
PROBLEM 5: (GOODWILL - BS MEASUREMENT)
Power Corporation has several cash generating units (CGUs). As of December 31, 2020, the demand for the
products produced by one of its CGUs substantially declined thus, the CGU was tested for impairment. The
following were made available for the said testing:
December 31,2020 Carrying Value
Factory Equipment P1,750,000
Office Equipment 1,475,000
Building 2,725,000
Goodwill 500,000
The expected annual net cash flows from the CGU are expected to be at P1,252,282 for its remaining 5-year
useful life. The fair value less cost to sell of the CGU was P5,250,000. (Assume a prevailing rate of interest at
8%)
Required:
1. What is the recoverable value of the cash generating unit?
2. What is the impairment loss on the cash generating unit?
3. What is the carrying value of the building after the impairment loss recognition?
4. If the factory equipment has a recoverable amount of P1,600,000 and the office equipment has a
recoverable value of P1,400,000, what is the carrying value of the Building after the impairment loss?
PROBLEM 6: (SUBSTANTIVE TESTING)

1. Examining documentation of the purchase of intangible assets vouched from accounting records is consistent
with the auditor’s objective of validating the management’s assertion of
a. Valuation and completeness
b. Existence and completeness
c. Valuation and rights/obligation
d. Rights/obligation and existence
2. In auditing intangible assets, an auditor most likely would review or recompute amortization and determine
whether the amortization period is reasonable in support of management’s financial statement assertion of:
a. Valuation
b. Existence
c. Completeness
d. Rights and obligation
- END -

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4506C
INVESTMENT PROPERTY & OTHER INVESTMENTS

Investment Property – is defined as
Property (land or building or part of a building or both) held (by the owner or the lessee under a finance
lease) to earn rentals or for capital appreciation or both, rather than for;
a) use in the production or supply of goods or services or administrative purposes (owner occupied); or
b) used by employees whether they pay or not pay rent
c) sale in the ordinary course of business (Inventory)
d) property that is leased to others under finance lease
Examples of investment property
A. Land held for long-term appreciation rather than for short-term sale in the ordinary course of business
B. Land held for currently undetermined future use.
C. A building owned by the entity (or a right-of-use asset relating to a building held by the entity) and lease out
under one or more operating leases
D. A building that is vacant, but held to be leased out under one or more operating leases
E. Property that is being constructed or developed for future use as investment property
Measurement and Recognition
An investment property shall be measured initially at cost. Transaction costs shall be included in the initial
measurement.
a. The cost of a purchased investment property comprises its purchase price and any directly attributable
expenditure. Direct attributable expenditure of investment property includes professional fees for legal
services, property transfer taxes and other transaction costs.
b. The cost of a self-constructed investment property is its cost at the date when the construction is completed.
c. If payment for an investment property is deferred, its cost is the cash price equivalent. The difference
between this amount and the total payment is recognized as interest expense over the period of credit.
d. One or more property may be acquired in exchange for a non-monetary asset or assets, or a combination of
monetary and non-monetary assets. The cost of such an investment property is measured at fair value unless
(a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received
nor the asset given up is reliably measurable, in which case, the acquired asset is measured at the carrying
amount of the asset given up.
The Cost of an Investment Property is not Increased By:
o Start-up costs (unless they are necessary to bring the property to the condition necessary for it to be capable
of operating in the manner intended by management).
o Operating losses incurred before the investment property achieves the planned level of occupancy, or
o Abnormal amounts of wasted material, labor or other resources incurred in constructing or developing the
property.
Measurement at Reporting Date
An entity must choose as its accounting policy either a cost model or fair value model and shall apply this policy
to all of its investment property.
Cost model
After initial recognition, an entity that chooses the cost model shall measure all of its investment property at cost
less accumulated depreciation less any impairment losses. Where the cost model is followed, the fair value of
the property should be disclosed.
Fair value model
Fair value is defined as the amount for which the property could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. Fair value will normally be obtainable by reference to current prices on an
active market for similar properties in the same location and condition as the property under review. In the
absence of such an active market, information from variety of sources may have to be consistent, including: (a)
current prices on an active market for properties of a different nature, condition or location, adjusted to reflect
those differences and (b) discounted cash flow projections based on reliable estimates of future cash flows. If it
becomes impossible to measure fair value reliably, the cost-based-policy should be adopted and retained until
the property is disposed of.
The fair value policy requires the enterprise to revalue its investment properties each year, any gain or loss being
included in the net profit or loss for the period.
If an entity has previously measured an investment property at fair value, it shall continue to measure the
property at fair value until disposal (or until the property becomes owner-occupied property or the entity begins
to develop the property for subsequent sale in the ordinary course of business) even if comparable market
transactions become less frequent or market prices become less readily available.
After initial recognition, an entity that chooses the cost model shall measure all of its investment property in
accordance with PAS 16’s requirements for that model, other than those that meet the criteria to be classified as
held for sale.
Transfer to or from Investment Property Classification - it should only be made when there is a change in
use, evidenced by:
(a) Commencement of owner-occupation [transfer from Investment Property to Property, Plant and
Equipment (PPE)].
(b) Commencement of development with a view to sale (transfer from Investment Property to Inventories).
(c) End of owner-occupation (transfer from PPE to Investment Property).
(d) Commencement of an operating lease to another party (transfer from Inventories to Investment
Property).
(e) End of construction or development (transfer from PPE to Investment Property).

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4506C
INVESTMENT PROPERTY AND OTHER INVESTMENTS
Transfer under the fair value model

1. Investment property becomes owner-occupied property – a transfer should be made from investment
property to owner-occupied property at the commencement of owner-occupation. Where the investment
property has been carried at fair value, the fair value at the date of transfer becomes the deemed cost for
subsequent accounting under PAS 16.
2. Investment property is to be developed for sale – a transfer should be made from investment property
to inventory at the date of commencement of development with a view to sale. Where the investment
property has been carried at fair value, the fair value at the date of transfer becomes the deemed cost for
subsequent accounting under PAS 2.
3. Owner-occupied property becomes investment property – a transfer should be made from owner-
occupied property to investment property when owner-occupation ceases. If the investment property is to
be carried at fair value, PAS 16 is applied up to the date of transfer. The excess of the fair value over carrying
shall be taken to Revaluation Surplus, unless there was an impairment loss recognized for the same property
in prior years, thus a portion of the increase is recognized in profit or loss and any excess recognized as
revaluation surplus for that property.
4. Property held as inventory becomes investment property – If the investment property is to be held at
fair value, any difference between the fair value and previous carrying amount at the date of transfer is
recognized in profit or loss.
Transfer under the cost model
Where an entity has a policy of carrying investment property at cost less depreciation (the cost model), properties
are transferred in the same way and under the same circumstances as described on the above transfers.
However, such transfers do not change the carrying amount of the property transferred, that is, no revaluation
gains or losses arise, nor they change the cost of the property for measurement or disclosure purposes.
Two specific situations where transfers do not take place

• Investment property sold without development – where an investment property is to be disposed of without
development, there has been no change in use and the property is not transferred to inventory. Instead it is
retained in investment property until disposal or until it is otherwise derecognized (PAS 40 par. 58).
• Investment property developed for continuing future use as investment property – if an investment property
is to be developed for continued future use as an investment property it is also retained in investment property
and is not transferred to inventory or to owner-occupied property. It is because there has been no change
of use (PAS 40 par 58).
IFRS for SMEs Full IFRS
Investment property whose fair value can be measured Accounting policy choice between fair value and cost is
reliably without undue cost or effort must be measured applied to all investment property.
at fair value through profit or loss. All other investment
property is accounted for as property, plant and
equipment using the cost-depreciation model.
Mixed-used property should be separated between Portions of the property are only accounted separately if
investment property and property, plant and equipment, they could be sold (or leased under a finance lease)
except where to do so would entail undue cost or effort. separately.
When the fair value of investment property is no longer An entity may only account for investment property at
available without undue cost or effort, the investment cost in exceptional cases, where an entity first acquires an
property becomes property, plant and equipment. This investment property (or when an existing property first
is a change in circumstances, hence does not constitute becomes investment property after a change in use), and
a change in accounting policy. the fair value of the property cannot be reliably
determined on continuing basis.
Fund Investment
A. Fund Investment:
When a Fund Investment is created for a specific purpose or purposes, the Investment account is debited
and credited to cash or non-cash asset or any other account being issued. Any income earned and realized
by the fund or investment should be recognized directly as debit to the investment and credit to the
corresponding income from investment account. Any cost or expenses necessary or related to the
investment is a direct charge against the income and investment accounts.
B. Investment in Life Insurance (Cash surrender Value)
Cash surrender value of life insurance – is the amount to be paid by the insurance company upon surrender
and cancellation of the life insurance policy. Insurance companies usually allow a portion of accumulated
premiums to build up as a savings plan, when the policy is cancelled; the savings plan or cash surrender
value is returned to the insured. The cash surrender value of life insurance increases from year to year and
is stated in the policy. Any increase in the cash surrender value account will be debited to this account with
a corresponding credit to the life insurance expense account. Any cash dividend that may be received from
the insurance company should be recognized as a reduction to the life insurance expense account.

1. Which of the following items is an example of investment property?
A. Property that is leased to another entity under a finance lease.
B. Property held for short-term sale in the ordinary course of business.
C. Property that is being constructed or developed on behalf of third parties.
D. Property that is being constructed or developed for future use as investment property.

2. Which statements best describe ‘owner-occupied property’ under PAS 40, Investment Property?
A. Property held to earn rentals.
B. Property held for administrative purposes.
C. Property held for sale in the ordinary course of business.
D. Property held for use in the production and supply of goods and services.
A. A and B. B. A and D C. B and D. D. C and D
3. Which of the following would not be reported as investment property?
A. Real estate held for an undetermined future use.
B. Property held by the entity and leas out under one or more operating leases.
C. Property owned by the entity and leased out under one or more operating leases.
D. Property owned by the entity and leased out to another entity under a finance lease.
4. When an owner-occupied property is transferred to investment property at fair value, a decrease in the
carrying amount of the property to its fair value at the date of transfer
A. is carried directly to equity.
B. is absorbed by retained earnings.
C. is recognized in profit and loss at all times.
D. is recognized in profit and loss, or, for a revalued property, charged against the revaluation surplus
to the extent of its credit balance.
5. In case of property held under an operating lease and classified as investment property, the entity
A. has to use the fair value model only.
B. has the choice between the cost model and the fair value model.
C. has to account for the investment property under the cost model only.
D. needs only to disclose the fair value and can use the cost model under PAS 38.
6. Which of the following generally provides the best evidence of fair value of an investment property?
A. Discounted cash flow projections based on reliable estimates of future cash flows.
B. Current prices for properties of a different nature or subject to different conditions.
C. Current prices in an active market for similar property in the same location and condition.
D. Recent prices on less active markets with adjustments to reflect the changes in economic conditions.
7. Which of the following will not indicate change in use of the property and therefore will trigger transfer to or
from investment property classification?
A. Start of owner occupation
B. End of owner occupation
C. Start of development with a view to sale.
D. Entity decides to sell an investment property without development.
8. A gain arising from a change in the fair value of an investment property for which an entity has opted to use
the fair value model is recognized in
A. net profit or loss for the year.
B. general reserve in the shareholders’ equity.
C. valuation reserve in the stockholders’ equity.
D. none of the above.
9. A gain or loss arising from a change in the fair value of investment property shall
A. not be recognized in the accounts.
B. be recognized directly to equity in the period in which it arises.
C. be recognized in the profit or loss for the period in which it arises.
D. be recognized as an adjustment to retained earnings at the beginning of the year.
10. Transfers from investment property to property, plant and equipment are appropriate
A. when there is change of use.
B. based on the entity’s discretion.
C. only when the entity adopts the fair value model under IAS 38.
D. the entity can never transfer property into another classification on the balance sheet once it is
classified as investment property.

Problem 1: Sydney Company has the following property items on December 31, 2021:
Land held for long-term capital appreciation P3,000,000
Land held for currently undetermined future use 4,000,000
Building owned and leased out under operating lease 2,000,000
Equipment being leased out under operating lease 1,000,000
Building that is being constructed for future use as investment property 3,500,000
Condominium building that is being constructed intended for sale in the
ordinary course of business 4,500,000
Land subdivided into smaller lots intended for sale in the ordinary course
of business 5,000,000
Building that houses materials for use in construction activities 3,800,000
Building being used for administrative purposes 4,300,000
Hotel building for which significant services are provided to the guests 5,200,000
How much should be classified as Investment Properties on December 31, 2021?
a. 12,500,000 b. 13,500,000 c. 18,700,000 d. 17,700,000

Problem 2: On January 1, 2021, Athens Company purchased an investment property at a total cost of
P2,000,000, including transaction costs of P50,000. On October 1, 2021, the fair value of the property increased
to P2,400,000. On December 31, 2021, the fair value of the property was P2,300,000. Semi-annual rent to be
received from the property is P20,000 starting January 3, 2021. The property has a useful life of 20 years.
Estimated cost to sell on December 31, 2021 was P10,000.
1. If the company uses the cost model, what amount shall be presented in the Statement of Financial Position on
December 31, 2021?
a.2,090,000 b. 1,900,000 c. 2,300,000 d. 1,950,000
2. If the company uses the cost model, what amount (net) shall be presented in the Statement of Comprehensive
Income for the year ended December 31, 2021?
a.100,000 b. 340,000 c. 60,000 d. 360,000
3. If the company uses the fair value model, what amount shall be presented in the Statement of Financial Position
on December 31, 2021?
a.2,090,000 b. 1,900,000 c. 2,300,000 d. 1,950,00
4. If the company uses the fair value model, what amount (net) shall be presented in the Statement of
Comprehensive Income for the year ended December 31, 2021?
a.100,000 b. 340,000 c. 60,000 d. 360,000
Problem 3: On January 1, 2020, Beijing Company, which uses the fair value model, purchased an investment
property at a cost of P50,000,000. On December 31, 2020, the fair value of the property was P60,000,000. The
fair value of the property on December 31, 2021 was P55,000,000. On December 31 2021, the property was
reclassified to property, plant and equipment.
How much is the revaluation surplus that should be recognized upon transfer to PPE?
a. 0 b. 50,000,000 c. 55,000,000 d. 60,000,000
Problem 4: London Company has a building with a carrying value of P2,400,000 as of May 31, 2020. On June
1, 2020, the company decided to convert the plant asset to investment property to be carried at Fair Value.
1. If the fair value of the building on the date of transfer is 2.6M, the transfer would result to a recognition of
a. 200k Gain to P/L b. 200k Revaluation Surplus c. 2.4M Investment Property d. 2.6M Building
2. If the fair value of the building on the date of transfer is 2.2M, the transfer would result to a recognition of
a. 200k Loss taken to P/L b. 200k Loss taken to OCI c. 2.4M Investment Property d. 2.2M Building
Problem 5: On January 2, 2019, Rio Company tested its Building classified as property, plant and equipment for
impairment. The test revealed the following data: Recoverable value wasP5,500,000; Carrying value was
P8,000,000 and the remaining useful life was 10 years.
On January 2, 2021, Rio Company decided to convert this building into an investment property that is to be
carried at fair value. The fair value of the building was P7,000,000 on the date of transfer.
What amount of gain or loss should be recognized in its Profit or Loss on the date of transfer?
a. 0 b. 600,000 c. 2,000,000 d. 2,600,000
Problem 6: The following information relates to non-current investments placed in trust by Tokyo Company as
required by the underwriter of its bonds:
Bond sinking fund, January 1, 2021 P2,250,000
Additional investments to the sinking fund during 2021 450,000
Dividend revenue on equity securities 75,000
Interest revenue on debt securities 150,000
Administration cost 25,000
Carrying value of bonds payable 3,000,000
What amount should be reported as bond sinking fund on its December 31, 2021 Statement of Financial Position?
a. 2,925,000 b. 2,900,000 c. 2,875,000 d. 2,700,000
Problem 7: On January 1, 2016, Paris Company purchased a P4,000,000 ordinary life insurance policy on its
president. Additional data for the year 2019 are: Cash surrender value, January 1, P 200,000; Cash surrender
value, December 31, P220,000; Annual insurance premium paid on January 1, 2019, P80,000; Dividend received
on August 1, P 10,000. Paris Company is the beneficiary under the life insurance policy.
What amount of life insurance expense should be reported for the year ended December 31, 2019?
a. 50,000 b. 60,000 c. 70,000 d. 80,000
Problem 8: In 2018, America Company insured the life of its president for P5,000,000, with America as the
beneficiary. Information regarding this policy for 2021 is as follows:
Cash surrender value, January 1 P100,000
Annual premium paid on January 1 200,000
Dividends earned on the policy 20,000
The dividends were applied to increase the cash surrender value.
If the life insurance expense reported by the company in 2021 was P160,000, how much is the cash surrender
value on December 31?
a. 120,000 b. 140,000 c. 160,000 d. 200,000

Problem 9: Brisbane Corporation insured the life of its president for P4,000,000, the corporation being the
beneficiary of an ordinary life policy. The monthly premium is P6,000 payable every first day of the month. The
policy is dated January 1, 2014, and carries the following cash surrender values:
End of Policy Year Cash Surrender Value
2014 -
2015 -
2016 25,200
2017 30,000
2018 39,600
2019 50,400
The corporation follows the calendar year as its fiscal period. The president dies on October 31, 2019 and the
policy is collected on December 1, 2019. How much is the gain on life insurance settlement?
a. 3,913,600 b. 3,939,400 c. 3,951,400 d. 4,000,000
AUDITING PRACTICE
PROBLEM 1: (INVESTMENT CLASSIFICATION – COMPREHENSIVE)
Given below is a list of securities and other assets that may qualify as investment:
Bonds of another company quoted in an active market. Business model of the company is to
hold debt securities for short- term profits. 100,000
Bonds of another company quoted in an active market. Business model of the company has
an objective to hold the financial asset to collect contractual cash-flows which are primarily in
the form of principal and interests. Moreover, the entity has elected to apply the fair value
option to eliminate accounting mismatch 50,000
Bonds of another company quoted in an active market. Business model has an objective to
hold the financial asset to collect contractual cash-flows which are primarily in the form of
principal and interests. It has also an objective to sell financial assets as opportunity arises.
Moreover, the entity has elected to apply the fair value option to eliminate accounting
mismatch 70,000
Bonds of another company quoted in an active market. Business model of the company has
an objective of collecting contractual cash- flows from the bonds which are primarily in the
form of interests and principal. 500,000
Bonds of another company quoted in an active market. Business model has an objective to
collect contractual cash flows which are primarily in the form of principal and interest. It also
has an objective to sell financial assets for financial flexibility purposes. 450,000
Ordinary shares of another company where no control nor significant influence exists. The
company irrevocably elected to report gains or losses in the profits/losses P100,000
Ordinary shares of another company where no control nor significant influence exists. The
company irrevocably elected to report gains or losses in the other comprehensive
income/losses 150,000
20% interest in Ordinary shares of another company quoted in an active market held to
generate short-term profits 500,000
51% interest in Preference shares of another company quoted in an active market held to
generate short-term profits 400,000
50% interest in Ordinary shares of another company quoted in an active market 300,000
51% interest in Ordinary shares of another company quoted in an active market 500,000
Equity securities of the company quoted in an active market reacquired with an intention of
reissuance in latter period for short-term profit 500,000
Real property held for resale in the ordinary course of business 500,000
Real property held for speculation purposes 700,000
Real property held as a current factory site 1,000,000
Real property of a manufacturing business being leased out to another party under operating
lease 900,000
Land held for undetermined future use 800,000
Land held to be used as a future plant site 400,000
Real property being developed as an investment property 300,000
5-storey office building leased out to third parties where the owner provides ancillary services
such as maintenance and security services to lessees. The ancillary services are considered
insignificant in relation to the lease agreement as a whole. 1,500,000
10-storey building (with each floor having equal floor size), 2 floors are used for
administrative offices while the rest are being leased out to third parties 1,600,000
Owner-managed hotel building 1,200,000
Hotel building managed by an independent third-party where significant cash flows from hotel
is essentially through rentals derived from the third party 800,000
1. How much is to be categorized as financial asset at fair value through profits or losses?
2. How much is to be categorized as financial asset at fair value through other comprehensive income?
3. How much is to be categorized as investment at amortized cost?
4. How much is to be categorized as investment in associate?
5. How much is to be categorized as investment in subsidiary?
6. How much is to be categorized as investment property?

PROBLEM 2: (INVESTMENT IN DEBT SECURITY)

Magtalas Corp. acquired P2,000,000 face value bonds on March 31, 2020, at P2,188,955. The 10 year, 14%
bonds which are dated January 1, 2013 pays annual interest every December 31 and were acquired by the
company with the intention of generating income on a short-term basis from the fluctuations of the value of the
securities. The prevailing rate of interest of similar security on the same date is at 12%. Included in the lump-
sum amount paid were broker’s fees and commissions amounting to P30,000. Interests collected at year-end
were credited to the appropriate interest income account. The prevailing market rate of interest at year-end
was at 10%, thus the market value of the bonds is at ___________.
Requirements:
1. What is the fair market value of the bonds as of December 31, 2020?
2. What is the unrealized holding gain or loss to be recognized in the company’s income statement for the
year?
3. What is the investment account balance as of December 31, 2020?
4. How much is the correct interest income to be recognized for the year 2020?
5. Assuming the investments were sold on July 1, 2021 at P2,050,000 what is the realized gain or loss from
the sale?
David Corp. acquired a three-year, 10% bonds with a face value of P5,000,000 on January 1, 2020. The bonds
which pay annual interest every December 31 had a 12% prevailing interest rate on the date of acquisition. The
company had a business model of holding debt securities for the collection of contractual cash flows and to sell
the securities for financial flexibility purposes. The present value factor of P1 at 10%, ordinary annuity, for 3
periods is at 2.486852 while the present value factor of P1 at 10% for 3 periods is at 0.751315. The present value
factor of 1 at 12%, ordinary annuity, for 3 periods is 2.40183127 while the present value factor of P1 at 12% for
3 periods is at 0.71178. On December 31, 2020, the prevailing interest for similar securities is at 11%, thus the
fair market value of the bonds is at P4,914,374. On March 31, 2021, P2M face value bonds were sold at
P2,250,000. The applicable amortization schedule follows:
Nominal Effective
Date (P*Nom. Rate) (CV*Eff. Rate) Amortization Balance
1/1/2020 4,759,817
12/31/2020 500,000 571,178 71,178 4,830,995
12/31/2021 500,000 579,719 79,719 4,910,714
12/31/2022 500,000 589,286 89,286 5,000,000
Requirements:
1. What is the unrealized holding loss to be recognized in the balance sheet as of December 31, 2020?
2. What is the correct interest income to be reported in the 2020 income statement?
3. Carrying value of the investment as of December 31, 2020?
4. How much is the correct realized gain or loss on sale of the investment in 2021?
Esguerra Corp. reported an investment in financial asset at amortized cost based on the business model with an
objective of collecting contractual cash flows, amounting to P10,507,569 as of December 31, 2020, and an
interest income for the year ended December 31, 2020, at P1,200,000. The three-year, 12% bonds, which
were acquired on January 1, 2020, had a face value of 10M. The bonds were purchased at their prevailing
interest rate of 10% and pays interest semi-annually every June 30 and December 31.
Records reveal that the company accounted for the investment transaction as follows:
1/1/2020 Investment at amortized cost 10,507,569
Cash 10,507,569
To record acquisition of bonds.
6/30/2020 Cash 600,000
Interest income 600,000
To record receipt of interest.
12/31/2020 Cash 600,000
Interest income 600,000
To record receipt of interest.
60% of the investment was sold on December 31, 2020, at 110 prompting the company to shift from a business
model of holding the securities primarily to collect contractual cash flow to a business model with an objective of
holding the securities for short-term profit purposes (financial asset at amortized cost to financial asset at fair
value through profit/losses). The company is yet to record the said disposal and shift of business model. Bonds
were quoted at 115 by the end of 2021.
The applicable amortization schedule of any excess of acquisition cost over the investments’ face value follows:
Nominal Effective
Date (P*Nom. Rate) (CV*Eff. Rate) Amortization Balance
1/1/20 10,507,569
6/30/20 600,000 525,378 74,622 10,432,948
12/31/20 600,000 521,647 78,353 10,354,595
6/30/21 600,000 517,730 82,270 10,272,325
12/31/21 600,000 513,616 86,384 10,185,941
6/30/22 600,000 509,297 90,703 10,095,238
12/31/22 600,000 504,762 95,238 10,000,000

Requirements:
1. What is the adjusted gain or loss on partial disposal of the investment in 2020?
2. How much is the unrealized holding gain or loss to be reported in the 2020 Statement of Comprehensive
Income?
3. How much is the unrealized holding gain or loss to be reported in the 2021 Statement of Comprehensive
Income?
4. Assuming that the change in business model resulted to transferring investment to financial asset at fair
market value through other comprehensive income/losses instead, what is the unrealized holding gain/loss
to be reported in the statement of financial position (SHE section) as of December 31, 2021?
PROBLEM 5: (INVESTMENT IN EQUITY SECURITY)
JACK CORP. presented the following breakdown of its investment in financial assets at fair value as of December
31, 2021, year-end audit.:
Financial assets at fair value through profit or loss (Trading Securities):
No. of Shares Original Cost FMV as of 12/31/2021
Wan ordinary shares 15,000 P750,000 P825,000
Too preference shares 10,000 600,000 650,000
Poor preference shares 20,000 1,400,000 800,000
Financial assets at fair value through other comprehensive income (Available for Sale):
No. of Shares Original Cost FMV as of 12/31/2021
Five ordinary shares 50,000 P1,250,000 P1,500,000
Seeks ordinary shares 20,000 1,000,000 900,000
Your investigation of the accounts revealed the following information:
Shares
Acquisition Originally Original FMV as of FMV as of
Investee date Acquired designation 12/31/2019 12/31/2020
Wan 06/01/2019 20,000 FVPL P1,050,000 P1,145,000
Too 11/01/2019 10,000 FVPL 750,000 700,000
Tri 02/01/2019 25,000 FVOCI 800,000 700,000
Poor 06/30/2019 20,000 FVOCI 1,300,000 1,200,000
Five 09/20/2019 50,000 FVOCI 1,125,000 1,375,000
Seeks 01/22/2019 20,000 FVOCI 1,040,000 980,000
a. The cost of all the securities included P1/share broker’s fees and commissions.
b. The company sold 5,000 shares of Wan ordinary shares on February 1, 2021 at P60 per share.
c. Tri ordinary shares, which were acquired at P35 per share (including P1 broker’s fees and commissions), were
sold on March 31, 2021 at P30 per share.
d. The company had originally intended of holding the investment in Poor preference shares as financial asset
at fair value through other comprehensive income. However, due to the continuing decrease in the value of
the investment, the company decided to reclassify the same as financial asset trough profit or loss during the
current year 2021. Investment in Poor was deemed impaired at the end of 2021.
Required:
1. What is the realized gain on partial sale of Wan trading securities to be recognized in the profit or loss in
2021?
2. What is the realized loss on sale of Tri ordinary shares to be recognized in the profit or loss in 2021?
3. How much is the impairment loss to be recognized in the profit or loss in 2021?
4. How much is the unrealized holding loss to be reported in the profit or loss in 2021?
5. How much is the unrealized holding gain or (loss) to be reported in the balance sheet as of December 31,
2021?
6. How much is the correct financial asset at fair value through profit or loss to be reported as of
December 31, 2021?
7. How much is the correct financial asset at fair value through other comprehensive income to be
reported as of December 31, 2021?
PROBLEM 6: (INVESTMENT IN EQUITY SECURITY)

Black Corporation purchased on January 2, 2021 for P20 per share, 300,000 White Inc. ordinary shares. On
this date, White Inc.’s shares issued and outstanding totaled 1,000,000 shares and its net assets had a book
value of P16M. The excess of acquisition cost over book value acquired was attributed to the understatement of
White’s identifiable asset without definite useful life of P800,000and White’s depreciable asset with a remaining
useful life of 5 years of P1,200,000. By the end of 2021, White Inc. declared P800,000 cash dividends and
reported a total comprehensive income amounting to P2,000,000, which is net of an unrealized holding loss
amounting to P500,000.
Requirements:
1. How much investment income should be reported in Black Corporation’s profit or loss?
2. What is the carrying value of Black’s investment as of December 31, 2021?
3. Assuming that White Inc. issued additional 200,000 shares at P30 per shares to other stockholders early in
January of 2022, what shall be the total gain or loss on dilution to be recognized in the 2022 profit or loss?
4. Assuming that Black Corporation sold 120,000 of its investment in White Corporation at P30 per share, how
much is the total gain on cessation to be recognized in the 2022 profit or loss?

PROBLEM 7: (INVESTMENT PROPERTY)

Akio Corporation acquired on January 1, 2020 a real property classified as an investment property. The acquisition cost
was P10,000,000 and has an estimated life of 10 years. The company also paid for a finder’s fee and commissions for
P500,000.
The investment property was appraised at P12,500,000 on December 31, 2020 and P11,000,000 on December 31,
2021.
Case 1: Assuming that the company uses the Fair value Method
1. How much should the investment property be presented in the 2020 statement of financial position?
2. How much is the gain/loss to be recognized in the 2020 income statement?
3. How much should the investment property be presented in the 2021 statement of financial position?
4. How much is the gain/loss to be recognized in the 2021 income statement?
5. Assuming that the real property was reclassified as owner-occupied property on June 30, 2022, when the fair
value of the investment was at P10M, how much should the property be initially recognized at date of transfer
and how much is the gain or loss to be recognized?
6. Assuming the real property was sold on June 30, 2022 at P10M, how much is the realized gain/loss on the
disposal?
Case 2: Assuming that the company uses the Cost Method
1. How much should the investment property be presented in the 2020 balance sheet?
2. How much should the investment property be presented in the 2021 balance sheet?
3. Assuming that the real property was reclassified as owner-occupied property on June 30, 2022, when the fair
value of the investment was at P10M, how much should the property be initially recognized upon transfer and
how much gain/loss from reclassification should be recognized?
4. Assuming the real property was disposed on June 30, 2022 at P10M, how much is the realized gain/loss on the
disposal?
PROBLEM 8: (INTERNAL CONTROLS AND SUBSTANTIVE TESTING)

1. A company holds bearer bonds as short-term investments. Responsibility for the custody of these bonds and for the
submission of coupons for periodic interest collections probably should be delegated to the ____________ while the
responsibility for future purchase and sale decisions along with periodic review of the investment activities should
be delegated to ___________.
a. Chief accountant; Investment committee of the board of directors.
b. Internal auditor; Board of Directors
c. Cashier; Corporate controller
d. Treasurer; Investment committee of the board of directors.
2. If an auditor is unable to inspect and count a client’s investment securities until after the balance sheet date, the
bank, where the securities are held in a safe deposit box, should be asked to
a. Verify any differences between the contents of the box and the balances in the client’s
subsidiary ledger.
b. Provide a list of securities added to and removed from the box between the balance
sheet date and the security count date.
c. Confirm that there has been no access to the box between the balances sheet date and
the security count date.
d. Count the securities in the box so the auditor will have an independent direct verification.
3. An auditor who physically examines securities should insist that the client representative be present to
a. Detect fraudulent securities
b. Lend authority to the auditor’s directives.
c. Acknowledge the receipt of securities returned
d. Coordinate the return of securities to the proper location
4. In establishing the existence and ownership of a long-term investment in the form of publicly traded stock (held as
financial asset at fair value through other comprehensive income/losses), an auditor should:
a. Correspond with the investee company to verify the number of shares owned.
b. Inspect unaudited financial statements of the investee company
c. Refer to the market quotations of the investee company’s shares.
d. Inspect the securities either on hand or those with other independent custodians or confirm the number of
shares owned that are held by an independent custodian
5. Which of the following would provide the best form of evidence pertaining to the annual valuation of a long-term
investment in which the independent auditor’s client owns a 30% voting interest?
a. Market quotations of the investee company’s shares
b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company
6. Which of the following would provide the best form of evidence pertaining to the annual valuation of a long-term
investment in which the independent auditor’s client owns a 10% voting interest?
a. Market quotations of the investee company’s shares
b. Current fair value of the investee company’s assets
c. Historical cost of the investee company’s assets
d. Audited financial statements of the investee company
7. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the
reasonableness of the
a. Completeness of recorded investment income.
b. Classification between current and noncurrent portfolios.
c. Valuation of marketable equity securities.
d. Existence of unrealized gains or losses in the portfolio.
- END -

GOVERNMENT GRANT & AGRICULTURE

Government Grants – are assistance by the government in the form of transfer of resources to an entity in
return for past or future compliance with certain conditions relating to the operating activities of the entity.
They include outright cash support, subsidies, compensation, financial assistance for construction of assets.
Recognition criteria for Grants:

PAS 20 requires that government grants, including non-monetary grants, shall not be recognized until there
is reasonable assurance that
a. The entity will comply with the conditions attaching to them, and
b.The grants will be received
The accounting standard requires that “government grants shall be recognized as income over the period
necessary to match with the related costs which they are intended to compensate, on a systematic basis. They
shall not be credited directly to shareholders’ interests”
Types of grants:
a) Grants related to income – normally have their related costs and expenses. These grants are taken to
profit or loss in the same period as the relevant costs or expenses are incurred.
But a government grant which is in the form of immediate financial support and has no further related
costs to be incurred shall be recognized in profit or loss in the period when the entity qualifies to receive
it.
A forgivable loan from the government is treated as a government grant when there is reasonable
assurance that the entity will meet the terms of forgiveness of the loan.
If an entity receives a government loan at a below market rate of interest, the loan is a financial liability
that shall be recognized and measured in accordance with PAS 39. The benefit of the loan at a below
market rate of interest is treated as a government grant. This benefit is measured as the difference
between the initial carrying amount of the loan (measured at fair value) and the proceeds.
Some government grants take the form of a non-monetary assets, such as land or other resources, for
the use of the entity. The non-monetary asset and the grant should be measured both at fair value. An
alternative course is to measure both the non-monetary asset and the grant at nominal value.
b) Grants related to Assets - these are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term assets. Subsidiary
conditions may also be attached restricting the type or location of the assets, or the periods during which
they are to be acquired or held.
A government grant that relates to a depreciable long-term asset shall be similarly be allocated
systematically to profit or loss over the period to match it with the related depreciation cost of the asset.
Such government grants, including non-monetary grant at fair value, shall be presented in the statement
of financial position either;
➢ By setting up the grant as deferred income, or
➢ By deducting the grant in arriving at the carrying amount of the asset
Grants in the form of Rights to Access Natural Resources – some government assistance takes the form of
rights to access natural resources, such as water rights, timber rights, airport landing rights, etc. PAS 38
Intangible assets “in some cases, intangible asset may be acquired free of charge, or nominal consideration,
by way of government grant. This may happen when a government transfers or allocates to an entity intangible
assets such as airport landing rights, licenses to operate radio or television stations, import licenses or quotas
or rights to access other restricted resources. In accordance with PAS 20, an entity may choose to recognize
both the intangible asset and the grant initially at fair value. If the entity chooses not to recognize the asset
initially at fair value, the entity recognizes the asset at nominal value plus any expenditure that is directly
attributable to preparing the asset for its intended use
Grants that Become Repayable – a government grant received by an entity may become repayable to the
Government, and this is normally due to the entity failing to meet the specified conditions of the grant. In
such cases, the grant repayable shall be accounted for as a change in accounting estimate. Repayment of
grant related to income shall be applied first against any unamortized deferred credit set up in respect of the
grant, and any remaining balance of the repayment shall be charged to profit or loss. The procedure to
recognize a repayment of grant related to asset depends on how the grant had previously been presented; as
follows:
a) If the grant had been netted off against the carrying amount of the related asset, then the repayment
shall be recorded by increasing the carrying amount of the asset; and
b) If the grant had been credited to deferred income, then the repayment shall be first be set off against the
unamortized deferred income

GOVERNMENT GRANTS & AGRICULTURE
AGRICULTURE
Biological assets – living plants and animals
Agricultural produce – the harvested product of the entity’s biological assets.
Biological transformation – relates to the processes of growth, degeneration and production and procreation
that cause quantitative or qualitative changes in a biological asset.
(1) Asset changes through
a) Growth (increase in quantity or improvement in quality of an animal or plant)
b) Degeneration (a decrease in the quantity or deterioration in quality of an animal or plant) or
c) Procreation (creation of additional living animals or plants;
(2) Production of agricultural produce such as latex, tea leaf, wool, and milk.
Agricultural activity - is the management by an entity of the biological transformation and harvest of biological
assets for sale or for conversion into agricultural produce, or into additional biological assets, such as the
following:
a. Raising livestock e. Floriculture
b. Annual of perennial cropping f. Cultivating
c. Cultivating orchards and plantation g. Forestry
d. Aquaculture (including fish farming)
A group of biological assets - is an aggregation of similar living animals or plants.
Harvest – is the detachment of produce from a biological asset or the cessation of a biological asset’s life
processes.
Examples of biological assets, agricultural produce, and products that are the result of processing after harvest:
Agricultural Products That Are The Result
Biological Assets Produce Of Processing After Harvest
Sheep Wool Yarn, carpet
Trees in a timber plantation Logs Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugar cane Harvested cane sugar
Tobacco plants Picked leaves Cured tobacco
Fruit trees Picked fruit Processed fruit
Tea bushes Picked leaves Tea
Grape vines Picked leaves Wine
Oil palms Picked fruit Palm oil
Rubber trees Harvested latex Rubber products
Some plants, for example, tea bushes, grape vines, oil palms, and rubber trees, usually meet the definition of
a bearer plant and are within the scope of IAS 16. However, the produce growing on bearer plants, for example,
tea leaves, grapes, oil palm fruit and latex, is within the scope of IAS 41.
Recognition
An entity shall recognize a biological asset or agricultural produce when and only when:
a. The entity controls the asset as a result of past events.
b. It is probable that future economic benefits associated with the asset will flow to the entity, and
c. The fair value or cost of the asset can be measured reliably.
Measurement
Biological asset - shall be measured on initial recognition and at each balance sheet date at its Fair Value less
estimated point of sale costs. If the fair value cannot be measured reliably, it shall be measured at cost less any
accumulated depreciation and any impairment losses. Once the fair value of the biological asset becomes reliably
measurable, the entity shall measure at its fair value less estimated point of sale costs.
Agricultural produce harvested from entity’s biological assets – shall be measured at its fair value less
estimated point of sale costs at the point of harvest and classified as Inventories.
Point of sale costs include the following
a. commission to brokers and dealers
b. levies by regulatory agencies and commodity exchanges
c. transfer taxes and duties
Gains and losses
Gain or loss arising on initial recognition of a biological asset at fair value less estimated point of sale costs and
from a change in fair value less estimated point of sale costs of a biological asset shall be included in profit or
loss for the period in which it arises.
A loss may arise on initial recognition of a biological asset, because costs to sell are deducted in determining fair
value less costs to sell of a biological asset. A gain may arise on initial recognition of a biological asset, such as
when a calf is born.
Bearer plants –
Bearer Plants are within the scope of PAS 16. PAS 41 will apply to any agricultural produce growing on a bearer
plant. PAS 20 will now apply to government grants related to bearer plants.
Plants that are cultivated for agricultural produce, such as timber crop cultivation, are not bearer plants. Similarly,
rubber trees cultivated for wood, rather than for latex production, are not bearer plants.

Definition of a BEARER - a living plant that:

o is used in the production or supply of agricultural produce;
o is expected to bear produce for more than one period; and
o has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
All of the above criteria need to be met for a biological asset to be considered a bearer plant.
Grape vines, sugar cane and bamboo are bearer plants while annual crops and other plants that are held solely
to be harvested as agricultural produce like maize, wheat and soya, as well as trees grown for lumber are not
bearer plants. Bearer animals will continue to be accounted for under PAS 41.
Separating bearer plants from their agricultural produce – these are treated as 2 separate assets. The bearer
plant using PAS 16 and the agricultural produce before harvest under PAS 41.
Bearer plants will be subject to all of the recognition and measurement requirements of PAS 16:
• Before maturity, bearer plants will be measured at their accumulated cost, similar to the accounting
treatment for a self-constructed item of plant and equipment before it is ’available for use’.
• After the bearer plants mature, entities will have a policy choice to measure the bearer plants using
either the cost model or the revaluation model.
If the presumption that fair value can be reliably measured is rebutted on initial recognition, paragraph 30 of PAS
41 permits an entity to measure a biological asset at its cost less any accumulated depreciation until fair value
becomes reliably measurable.
Entities will have the option to apply PAS 16’s cost model or revaluation model to subsequently measure bearer
plants.
Elements of Cost on Bearer Plants (PAS 16):
Are accounted for in the same way as self-constructed items of Property, plant and equipment before they are in
the location and condition necessary to be capable of operating in the manner intended by management. The
costs that are included in the cultivation of bearer plants (such as oil palms and rubber trees) would typically
include:
1. land preparation (including land improvements that are capitalized as land cost) such as field roads, irrigation
and drainage development, construction of contours, bunds and fences, etc.
2. planting materials such as seedlings, cover crops, and other supplies
3. fertilizers, chemicals and other inputs
4. direct labor
5. supervision and other maintenance costs including sub-contractors’ costs
6. plantation overheads
7. borrowing costs to the extent that they are incurred and capitalized only during the immature period
Bearer plants are depreciated and entities needs to assess whether there are indicators that a bearer plant is
impaired at the end of each reporting period. If such indicator exists, an impairment loss will be recognized if the
carrying value is lower than the bearer asset’s recoverable amount (being the higher of the asset’s fair value less
costs of disposal and its value in use).

1. If a government entity provides an interest free loan to a company and the company accounts for the grant
using the deferred revenue approach,
a. no interest expense will be recorded.
b. the interest element is initially recorded as Discount on Notes Payable.
c. the interest element is amortized to Deferred Grant Revenue over the term of the loan.
d. All of these answer choices are correct.
2. Which of the following is not true with regard to the accounting for government grants?
a. Assets may be recorded at fair value or nominal cost.
b. Companies may use either the capital or income approach to account for the asset and the grant.
c. Companies may apply the income approach either by recording the grant as deferred revenue or as
an adjustment to the asset.
d. None of these answer choices are correct.
3. The account Deferred Grant Revenue is classified as
a. a separate component of shareholders' equity.
b. a non-current liability.
c. other income and expense.
d. Revenue.
4. Which of the following is true regarding the alternative ways to apply the income approach to accounting of
resources acquired through government grants?
a. expenses will be higher and net income lower if the grant is recorded as deferred revenue.
b. expenses will be higher and net income lower if the grant is accounted for as an adjustment to the
asset.
c. depreciation expense will be higher if the grant is recorded as deferred revenue, but net income will
be the same under the two alternatives.
d. depreciation expense will be higher if the grant is recorded as an adjustment to the asset, but net
income will be the same under the two alternatives.

5. Biological assets are:

a. Living animals only c. Both living animals and living plants
b. Living plants only d. Neither living animals nor living plants
6. Biological assets are measured at
a. Cost
b. Lower of cost or net realizable value
c. Net realizable value
d. Fair less estimated point of sale cost
7. Agricultural produce is measured at
a. Fair value
b. Fair value less estimated point of sale cost at the point of harvest
d. Net realizable value less normal profit margin
8. Changes in fair value of a biological asset or an agricultural produce are
a. Ignored
b. Include in profit or loss of the current period
c. Included in equity
d. Included in retained earnings
9. Which of the following costs are not included in point-of-sale costs?
a. Commissions to brokers and dealers
b. Levies by regulatory bodies
c. Transfer taxes and duties
d. Transport and other costs necessary to get the asset to a market
10. Where the fair value of biological assets cannot be determined reliably, the biological assets should be
measured at
a. Cost
b. Cost less accumulated depreciation
d. Cost less accumulated depreciation and accumulated impairment losses
11. Which statement is incorrect concerning biological assets?
a. Biological assets are living animals and living plants
b. Agricultural activity is the management by an entity of the biological transformation of biological assets
into agricultural produce or additional biological assets
c. Biological assets are measured at fair value less estimated point of sale costs
d. Agricultural produce is measured at fair value less estimated point of sale cost at the point of harvest
less normal profit margin
12. Where there is a production cycle of more than one year, PAS 41, encourages separate disclosure of the
a. Physical change only
b. Price change only
c. Total change in value
d. Physical change and price change
13. When agricultural produce is harvested, the harvest should be accounted for by using IAS 2, or another
applicable IFRS. Cost at the point of harvest is deemed to be
a. Its fair value less estimated point of sale cost
b. The historical cost of the harvest
c. The historical cost less accumulated impairment losses
d. The market values
14. A gain or loss arising on the initial recognition of a biological asset and from a change in the fair value less
estimated point of sale costs of a biological assets shall be included in
a. The profit or loss for the period
b. The statement of recognized gains or losses
c. A separate revaluation reserves
d. A capital reserve within equity

Problem 1: On January 2, 2020, the local government of Manila promised Circus Company P500,000 subsidy if
it clears up the pollution in the river near its factory in the next two years. Circus Company incurred P300,000
during 2020 and expects to incur the same cost in 2021.
By what amount should the profit or loss in 2020 of Circus Company be affected by the above transactions?
a. Not affected b. 50,000 decrease c. 250,000 increase d. 300,000 decrease
Problem 2: On January 2, 2020 the government granted and transferred a land to Jaguar Company for a nominal
consideration of P10,000. The market value of the land on this date was P10,000,000. The condition attached
to the grant was for Jaguar Company to clean up the water pollution in the river for 10 years.
1. If Jaguar Company elects to measure the land at the nominal value, what amount of deferred income should
be recognized on January 2, 2020?
a. None b. 10,000 c. 9,990,000 d. 10,000,000
2. If Jaguar Company elects to measure the land at its fair value, what amount of deferred income should Jaguar
Company recognize on January 2, 2020?
a. None b. 10,000 c. 9,990,000 d. 10,000,000

Problem 3: On January 1, 2021, Pal Company received a P1,800,000 cash from the government with the
condition that the entity should purchase a building that will be used as a school for its employee’s children. The
entity immediately acquired the building costing P5,000,000 specifically identified by the government. The
estimated useful life of the building was 20 years using the straight-line method.
1. Assuming the grant is treated as a deferred income, how much is the deferred income from government grant
on December 31, 2021?
a. 1,800,000 b. 1,710,000 c. 90,000 d. 0
2. Assuming the grant is treated as a deduction from the gross carrying amount of the asset, how much is the
deferred income from government grant on December 31, 2021?
a. 1,800,000 b. 1,710,000 c. 90,000 d.
Problem 4: On January 2, 2020, Tripod Company receives a government loan of P2,000,000 paying a coupon
interest of 2% per year. The loan is repayable at the end of year 5. Tripod Company’s borrowing cost is 8% per
annum. The below-market interest is provided by the government to enable Tripod Company to bear cost of 2%
per annum on the nominal value of the loan.
What amount of income from grants should Tripod Company recognized on December 31, 2020?
a. 81,6790 b. 88,203 c. 95,260 d. 102,881
Problem 5: The following information are made available by Wind Farms for its biological assets at December
31, 2021:
Price of the assets in an active market P 4,500,000
Estimated dealer’s commission 50,000
Estimated finance cost and income tax 20,000
Transport and other costs expected to be incurred
to bring the assets to the market 60,000
At what amount should the biological assets be recognized on December 31, 2021?
a. 4,500,000 b. 4,450,000 c. 4,390,000 d. 4,370,000
Problem 6: Fortune Company purchased dairy cattle for P300,000 on July 1, 2020. Cost of transporting the
cattle back to the company’s farm was P3,000 and the seller would have to incur similar transportation cost if it
were to sell the cattle in the auction/active market, in addition to cost auctioneer’s fees of 2% of sales price.
On December 31, 2020, the fair value of the biological asset had increased to P500,000 (that is, the market price
including the auctioneer’s fees of P10,000 and transportation cost of P5,000).
1. What amount of gain or loss should Fortune Company recognize as a result of change in fair value on December
31, 2020 assuming the Dairy cattle were purchased at the auction area/active market on July 1 2020?
a. 191,000 b. 194,000 c. 196,000 d. 200,000
2. What amount of gain or loss should the Company recognize as a result of change in fair value on December
31, 2020 assuming the Dairy cattle were purchased at the seller's farm on July 1 2020?
a. 191,000 b. 194,000 c. 196,000 d. 200,000
Problem 7: Sulfur Company has the following information pertaining to its biological assets:
A herd of 100, 2-year-old animals was held at January 1, 2021. Ten animals aged 2.5 years were purchased on
July 1, 2021 for P5,400, and ten animals were born on July 1, 2021. No animals were sold or disposed of during
the period. Per unit estimated fair values less cost to sell were as follows:
2.0-year old animal at January 1, 2021 P5,000

Newborn animal at July 1, 2021 3,500
2.5-year old animal at July 1, 2021 5,400
Newborn animal at December 31, 2021 3,600
0.5-year old animal at December 31, 2021 4,000
1. How much is the increase in the fair value of the biological assets due to price change?
a. None b. 25,000 c. 26,500 d. 27,500
2. How much is the increase in the fair value of the biological assets due to physical change?
a. 75,000 b. 79,500 c. 110,000 d. 118,500

Problem 8: The following information pertains to the living plant and agricultural produce of Iron Company. On
January 1, 2020, the cost of the living plant was P20,000,000 with an estimated useful life of 10 years. The
company is using the straight-line method of depreciation. As of December 31, 2020, Iron Company determines
the following:
Fair value of the fruits before the harvest on December 31, 2020 P5,000,000
Estimated cost to sell of the fruit 100,000
Estimated cost to sell of the living plant 500,000
With the assistance of valuation experts, Iron Company determines that the fair value of the living plant including
the fruit as of December 31, 2020 is P26,000,000.
1. How much is the carrying value of the living plant on December 31, 2020 under PAS 16?
a. 18,000,000 b. 20,000,000 c. 20,500,000 d. 25,400,000
2. How much is the carrying value of the living plant on December 31, 2020 under PAS 41?
a. 18,000,000 b. 20,000,000 c. 20,500,000 d. 25,400,000
Problem 9: The following information are based on the biological assets of Agri-farm Company. The following
costs were incurred from 1/1/17, the time the biological assets were cultivated up to the time of initial commercial
harvest, December 31, 2021:
Direct labor costs (50% incurred in 2017, 20% incurred in 2018 and
10% each incurred in 2019, 2020 and 2021) P 700,000
Costs of seedlings (incurred in 2017) 60,000
Costs of fertilizers and chemicals (incurred during the first two years) 40,000
Depreciation of farm equipment & plantation overheads (incurred evenly) 400,000
As of December 31, 2022, the estimated fair value of the combined assets (living plants and the fruits) is
P3,000,000. The estimated fair value of the fruits bearing on the plants is P400,000. The estimated costs to sell
are P100,000 and P20,000 for the living plants and the fruits, respectively. The estimated useful life of the living
plants is 10 years with a residual value of P20,000. The company is using the straight-line method of depreciation.
1. Assuming the living plants are considered as bearer plants, how much is the depreciation expense for the year
2022 in relation to the bearer plants?
a. 0 b. 80,000 c. 118,000 d. 150,000
2. Assuming the living plants are considered as bearer plants, what amount should be assigned to agricultural
produce on December 31, 2022?
a. 0 b. 380,000 c. 2,500,000 d. 2,880,000
3. Assuming the living plants did not meet the criteria to be qualified as bearer plants, what amount should be
recognized as an expense for the year 2021?
a. 0 b 80,000 c. 118,000 d. 150,000
- END -

DISCONTINUED OPERATIONS & NONCURRENT ASSET HELD FOR SALE

DISCONTINUED OPERATIONS
Discontinued operation is a component of an entity that either has been disposed of or is classified as held for
sale and:
a. represents a major line of business or geographical area of operation;
b. is part of a single coordinated plan to dispose of a separate major line of business or geographical area of
operations; or
c. is a subsidiary acquired exclusively with a view to resale.
Disclosure of Discontinued Operation:
a. a single amount in the statement of comprehensive income comprising the total of:
1. the post-tax profit or loss of discontinued operation; and
2. the post-tax gain or loss recognized on the measurement to fair value less cost to sell, or the disposal of
assets or disposal group(s) constituting the discontinued operation.
b. an analysis of the single amount in the statement of comprehensive income into:
1. the revenue, expenses and pre-tax profit or loss of the discontinued operations;
2. the related income tax expense as required by PAS 12
3. the gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the
assets or disposal group(s) constituting the discontinued operation; and
4. the related income tax expense as required by PAS 12
Non-Current Assets Held for Sale:
Classification as Held for Sale – PFRS 5 prescribed that “an entity shall classify a non-current asset (or disposal
group) as held for sale if its carrying amount will be recovered principally through a sale transaction rather
than through continuing use.
A Non-current Asset Held for Sale may be a single asset or may constitute a disposal group. PFRS 5 defines
a disposal group as 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.
Criteria for Classification: - to meet the classification requirement, the asset (or the disposal group) must be
available for immediate sale in its present condition, subject only to terms that are usual and customary
for sales of such assets (or disposal group), and the sale must be highly probable. Highly probable is
defined in the standard as “significantly more likely than probable”.
For sale to be highly probable, the appropriate level of management must be committed to a plan to sell
the asset (or disposal group), and an active program to locate a buyer and complete the plan must have
been initiated. The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value. The sale shall be expected to qualify for recognition as completed sale
within one year from the date of classification, except for circumstances beyond the control of
management.
Measurement of Non-current Assets (or Disposal Groups) Held for Sale
a) An entity shall measure a non-current asset (or disposal group) classified as held for sale at the lower of its
carrying amount and fair value less cost to sell and recognize impairment loss when fair value less cost
to sell is lower
b) An entity shall measure a non-current asset (or disposal group) classified as held for distribution to owners
at the lower of its carrying amount and fair value less costs to distribute.
c) A newly acquired asset (or disposal group) meeting the criteria to be classified as held for sale shall be
measured on initial recognition at the lower of its carrying amount had it not been so classified and fair value
less cost to sell. Hence if the asset (of disposal group) is acquired as part of a business combination, it shall
be measured at fair value less cost to sell.
d) When the sale is expected to occur beyond one year, the entity shall measure the cost to sell at their present
value. Any increase in the present value of the costs to sell that arises from the passage of time shall be
presented in profit or loss as a financing cost.
e) Immediately before the initial classification of the asset (or disposal group) as held for sale, the carrying
amounts of the asset (or all the assets and liabilities in the group) shall be measured in accordance with
applicable IFRSs.
Measurement at Reporting Date
Depreciation ceases
Recognition of impairment losses and Reversals:
a) an entity shall recognize an impairment loss for any initial or subsequent write-down of the asset (or
disposal group) to fair value less costs to sell.
b) an entity shall recognize a gain for any subsequent increase in fair value less cost to sell of an asset,
but not to exceed the cumulative impairment loss that has been recognized
Change from Noncurrent Asset Held for Sale to Noncurrent Asset Held for Distribution to Owners - it
is possible that an entity may change its plan to sell a non-current asset or disposal group after it has been
classified as held for sale. If a change in plan occurs, it is most likely to be caused by events or circumstances
beyond the control of the entity rather than by its own revocation. A change in plan to sell may also occur
when the criteria for classification are no longer met.
PFRS 5 clarifies that if an entity reclassifies an asset (or disposal group) directly from being held for sale to
being held for distribution to owners, or directly from being held for distribution to owners to being held for
sale, then the change in classification is considered a continuation of the original plan of disposal.

Change from Noncurrent Asset Held for Sale to Property, Plant and Equipment
When the entity reclassifies a non-current asset (or disposal group) as held for sale or as held for distribution
back to property, plant and equipment classification, the property, plant and equipment shall be measured at
the lower of:
a) Its carrying amount before the asset (or disposal group) was classified as held for sale or as held for
distribution to owners, adjusted for any depreciation, amortization or revaluations that would have been
recognized had the asset (or disposal group) not been classified as held for sale or as held for distribution
to owners, and
b) Its recoverable amount at the date of the subsequent decision not to sell or distribute the asset.The entity
shall include any required adjustment to the carrying amount of a non-current asset that ceases to be
classified as held for sale or as held for distribution to owners in profit or loss from continuing operations
in the period in which the criteria for classification are no longer met.
Presentation of Non-Current Asset or Disposal Group Held for Sale – an entity shall present a non-
current asset classified as held for sale and the assets of the disposal group classified as held for sale,
separately from other assets in the statement of financial position. The liabilities of a disposal group classified
as held for sale shall be presented separately from other liabilities in the statement of financial position. Those
assets and liabilities shall not be offset and presented as a single amount. The major classes of assets and
liabilities classified as held for sale shall be separately disclosed either on the face of the statement of financial
position or in the notes. An entity shall present separately any cumulative income or expense recognized
directly in equity relating to a non-current asset (or disposal group) classified as held for sale.

1. An entity shall classify a noncurrent asset or disposal group as “held for sale” when the carrying amount of
the asset will be recovered
a. Principally through a sales transaction.
b. Partially through a sales transaction.
c. Principally through continuing use.
d. Through any form of disposal; either through a sales transaction, retirement from active use or
abandonment.
2. A component of an entity is classified as “Held for Sale” when the component is available for immediate sale
and the sale is highly probable. Which of the following statements is incorrect when considering a sale to be
highly probable?
a. Management is committed to a plan to sell the component.
b. Active program to locate a buyer is initiated.
c. The component is marketed for sale at a price that is higher than its market price.
d. The sale is expected to qualify as a completed sale within one year from the date of classification
as “held for sale”.
3. At a minimum, the results of a discontinued operation, net of tax, shall be presented
a. As a single amount on the face of the income statement or statement of comprehensive income
with no details disclosed in the notes to the FS.
b. As a single amount on the face of the income statement or statement of comprehensive income
with appropriate disclosure of the details in the notes to the FS.
c. Side by side with continuing operations with details for revenues and expenses attributable to
the discontinued operation shown on the face of the income statement or the statement of
comprehensive income.
d. In the notes to the financial statements only
4. An entity shall measure a noncurrent asset or disposal group held for sale at
a. Adjusted carrying amount.
b. Fair value less cost to sell.
c. Lower of carrying amount and fair value less cost to sell.
d. Higher of carrying amount and fair value less cost to sell.
5. An entity shall recognize any subsequent increase in fair value less cost to sell of a non-current asset or
disposal group classified as held for sale as
a. A deferred gain as component of other comprehensive income.
b. A deferred gain as component of equity.
c. A gain in profit or loss without limitation.
d. A gain in profit or loss but not in excess of the cumulative impairment loss previously recognized.
6. If the fair value less cost to sell is higher than the carrying amount of a non-current asset classified as held
for sale, the difference is
a. Not accounted for.
b. Accounted for as an impairment loss.
c. Deferred gain as a component of equity.
d. Gain to be recorded in profit or loss.

7. Which of the following statements pertaining to the requirements of IFRS 5 is valid?

I. Depreciation and Amortization for the asset cease while it is classified as held for sale.
II. To be classified as an asset held for sale, the sale must be expected to be completed within 12 months
from the balance sheet date.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
8. An entity classified a noncurrent asset as held for sale on December 31, 2020. Because no offers were received
at an acceptable price, the entity decided on July 1, 2021 not to sell the asset, but to continue to use it. In
accordance with IFRS 5, the asset should be measured on July 1, 2021 at
a. The lower of its carrying amount and its recoverable amount.
b. The higher of its carrying amount and its recoverable amount.
c. The lower of its carrying amount on the basis that it had never been classified as held for sale and
its recoverable amount.
d. The higher of its carrying amount on the basis that it had never been classified as held for sale and
its recoverable amount.

PROBLEM 1: On May 1, 2020 Mercury Company approved a plan to dispose of a business segment. It is expected
that the sale will occur on March 1, 2021. On December 31, 2020, the carrying amount of the net assets of the
segment was P2,000,000 and the estimated fair value was P1,800,000. During 2020, the company paid employee
severance and relocation costs of P100,000 as a direct result of discontinued operation. Income tax rate is 30%.
The revenues and expenses of the discontinued segment during 2020 were:
Revenues Expenses
January 1 to April 30 2,000,000 1,500,000
May 1 to December 31 900,000 700,000
How much will be reported as Discontinued Operation for the year 2020?
a. 280,000 b. 420,000 c. 490,000 d. 400,000
PROBLEM 2: On September 1, 2020, Venus Company approved a formal plan to sell a business segment. The
segment reported revenues and expenses of P3,000,000 and P1,600,000, respectively during 2020. On December
31, 2020, the carrying value of the segment was P8,000,000 and the estimated recoverable value was
P7,700,000. During the year 2021, the segment has yet to be disposed of. Throughout the year 2021, the
segment reported revenues of P1,300,000 and expenses of P900,000. The estimated recoverable value of the
segment on December 31, 2021 is P8,400,000. Income tax rate is 35%.
How much will be reported as Discontinued Operation for the year 2021?
a. 260,000 b. 455,000 c. 400,000 d. 715,000
PROBLEM 3: Earth Company has several operating divisions. On November 30, 2021, the company sold one of
its divisions that qualifies as a separate component according to IFRS 5. On this date, the net assets of the
division had a book value of P800,000. The division was sold for P850,000 and incurred a disposal cost of P22,500.
During the period January 1, 2021 through November 30, 2021, the segment had total revenues of P4,500,000
and total selling and administrative expenses of P4,080,000. Income tax rate is 30%. Earth Company generated
pre-tax profits of P2,000,000 from its continuing operations.
How much is the single amount reported as Discontinued operations in Earth’s Profit or Loss Statement for the
year 2021?
a. 447,500 b. 397,500 c. 313,250 d. 1,713,250
PROBLEM 4: Mars Corporation has two business segments, Segment A and Segment B. Segment A’s business
operation is continuing. Segment B met the criteria to be classified as “Held for Sale”. Mars Corporation was able
to dispose segment B on September 1, 2021. Net proceeds from the sale totaled P20,000,000 while the segment’s
carrying value on September 1, 2021 was P18,000,000.
The following pertains to the results of the operation of Segment A & B during 2021:
Segment A Segment B
January 1- Dec 31, 2021 January 1- Aug 31, 2021
Revenues 25,000,000 12,000,000
Selling and general expenses 15,000,000 15,000,000
Income tax rate (35%)
1. How much shall be presented as Discontinued operations on the face of the Income Statement for 2021?
a. 1,950,000 b. 1,000,000 c. 3,000,000 d. 650,000
2. How much shall be presented as Profit or Loss on the face of the Income Statement for the year 2021?
a. 6,500,000 b. 4,550,000 c. 1,950,000 d. 5,850,000

PROBLEM 5: On January 1, 2021, Jupiter Company classified a property as non-current asset held for sale. At
that time, the asset’s carrying amount was P64,000. The estimated fair value was P48,000 and estimated cost to
sell was P3,800. The property is depreciated using the straight-line method with a remaining useful life of 10
years.
1. What would be the initial valuation of the non-current asset held for sale on January 1, 2019?
a. 64,000 b. 48,000 c. 44,200 d. 51,800
2. What amount of impairment loss should Jupiter Company recognize at the date the asset was reclassified as
held for sale?
a. 24,000 b. 19,800 c. 16,000 d. 4,200
3. How much should the non-current asset held for sale be reported in the Statement of Financial Position on
December 31, 2021?
a. 64,000 b. 44,200 c. 57,600 d. 39,780
PROBLEM 6: Mars Company classified its building as non-current asset held for sale with a cost of P4,000,000
and accumulated depreciation of P3,100,000 on October 1, 2020. The company commits to a plan to sell the
building by February 1, 2021. On October 1, 2020, the building has an estimated selling price of P800,000, and
it is estimated that selling costs associated with the disposal of the building will be P80,000. On December 31,
2020, the estimated selling price of the building has increased to P1,200,000, with estimated selling costs at
P120,000.
What amount of gain should Mars Company recognize on December 31, 2020 related to the asset held for sale?
a. 0 b. 180,000 c. 220,000 d. 360,000
PROBLEM 7: On January 1, 2021, Neptune Company classified a hotel property as non-current asset held for
sale. Immediately before the classification as held for sale, the carrying amount of the property is P400,000,000
(cost of P500,000,000 and accumulated depreciation of P 100,000,000). The hotel is depreciated on the straight-
line method with a useful life of 50 years. The estimate of the fair value less cost to sell on this date is
P350,000,000. On December 31, 2021, no buyer could be identified. On this date, management concluded that
the criteria for classification could not be met. The estimate of the fair value less cost to sell was revised to
P340,000,000 while the value in use at that time was estimated at P 380,000,000.
1. What amount of impairment loss should Neptune Company recognize at the date the asset was classified as
held for sale?
a. 50,000,000 b. 100,000,000 c. 150,000,000 d. 0
2. How much should be taken to profit or loss on the date the asset was reclassified back to property plant and
equipment?
a. 30,000,000 b. 50,000,000 c. 100,000,000 d. 0
3. How much is the depreciation expense for 2022 after the asset was reclassified back to property, plant and
equipment?
a. 10,000,000 b. 8,974,359 c. 8,717,949 d. 9,743,590
- END -

TRADE PAYABLES, PROVISIONS & OTHER CURRENT LIABILITIES

PROVISION - An existing liability of uncertain timing or uncertain amount. The liability does exist on balance
sheet date but the amount is indefinite, and so an estimate is done, or the date the obligation is due and in
some cases the payee cannot be determined. The provision is recognized in the financial statement because
it meets the liability recognition criteria.
a. Recognition of provision – the following conditions must be met:
1. The enterprise has a present obligation, legal or constructive, as a result of a past event.
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.
3. The amount of the obligation can be measured reliably. The amount of the obligation is still considered to
have been measured reliably even if this is a product of estimation.
Measurement of the provision –The Standard requires that “the amount recognized as a provision shall be the
best estimate of the expenditure required to settle the present obligation at the end of the accounting reporting
period”. The best estimate is:
• If the provision is paid after reporting date but before the issue date of the financial statements, the
provision is to be measured at reporting date equal to the amount subsequently paid.
• If a single obligation is being measured, the amount of the provision is the most likely outcome.
• If the provision being measured involves a large population of items, the provision is measured by
weighting all possible outcomes by their associated possibilities (a statistical sampling called expected
value)
• Where there is a continuous range of possible outcomes and each point in that range is as likely as
any other, the provision is measured at midpoint of the range.
• Where the effect of the time value of money is material, the amount of a provision is the present
value of the expenditures expected to be required to settle the obligation. The discount rate shall be
a pre-tax rate that reflects current market assessments of the time value of money and the risks
specific to the liability.
Reimbursements – where some or all of the expenditures required to settle a provision is expected to be
reimbursed by another party, the reimbursement shall be recognized when, and only when, it is virtually
certain that reimbursement will be received when the entity settles the obligation. The reimbursement shall
be treated as a separate asset. The amount recognized for the reimbursement shall not exceed the amount
of the provision. The reimbursement receivable shall not be offset with the provision. However, in the
statement of comprehensive income, the expense relating to a provision may be presented net of the amount
recognized for a reimbursement, if they relate to the same event and are recognized in the same period.
Common types of provisions
a. Warranty provision – a warranty (product guarantee) is a promise made by a seller to a buyer to make
good a deficiency of quantity, quality, or performance in a product. Warranties and guarantees entail
future cost which is indefinite as to amount, due date, and even the identity of the customer, but is
probable in most cases. Companies should recognize this liability in the accounts if they can reasonably
estimate it. The estimated amount of the liability includes all the costs the company will incur after sale
and delivery that are incident in the correction of defects or deficiencies required under the warranty
provision. Two types of warranty.
1. Assurance-type warranty - companies do not record a separate performance obligation. It is
nothing more than a quality guarantee that the good or service is free from defects at the point of
sale. The total obligation pertinent to the sales made during the period should be expensed in the
period the goods are sold or the services are performed. The estimated amount of liability includes
all the costs that the company will incur after the sale due to the correction of defects or deficiencies
required under the warranty provisions. The actual costs incurred when actual repairs are performed
are recognized as a payment of the liability that was previously recognized.
2. Service-type warranty – A warranty is sometimes sold separately from the product. In most
cases, service-type warranty provides the customer a service beyond fixing defects existed at the
time of sale. Companies should recognize a separate performance obligation (Unearned Warranty
Revenue) from the sale of the warranty contract then recognize the revenue proportionately on the
estimated incurrence of the expected costs.
b. Consideration Payable - companies often make payments (provide consideration) to their customers
as part of a revenue arrangement. Consideration paid or payable may indicate discounts, volume rebates,
free products, or services.
b. Legal Provision - entities must consider the following factors, among others, in determining whether
to record a liability with respect to pending or threatened litigation and actual or possible claims and
assessments.
a) The time period in which the underlying cause of action occurred
b) The probability to make a reasonable estimate of the amount of loss
c. Environmental Provision – estimate to clean up existing toxic waste, restoration of land and the
eventual decommissioning of an asset
d. Onerous Contract – the unavoidable costs of meeting the contract exceeds the economic benefits
expected to be received

CONTINGENCIES
a. Contingent liability – is a
1. possible obligation that arises from past event and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the enterprise.
2. It is a present obligation that arises from past event but is not recognized because it is not probable
that an outflow of resources embodying economic benefits will be required to settle the obligation or
3. It is a present obligation that arises from past event but is not recognized because the amount of the
obligation cannot be measured reliably.
b. Contingent asset – is a possible asset that arises from past event and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control
of the enterprise.
Accounting for contingent liabilities and contingent assets
Likelihood of an Outflow of Resources: Contingent Liabilities Contingent Assets
Virtually certain (therefore, not contingent) Recognize* Recognize*
Probable Recognize* Disclose by note
Possible Disclose by note No disclosure
Remote No disclosure No disclosure
*These are no longer contingent, they are liabilities or assets
Degrees of probability – PAS 37 recognizes four degrees of probability for contingencies but it gives no
guidance as to the meaning of the terms. One possible interpretation could be:
Virtually certain probability above 95%
Probable probability above 50% and up to 95%
Possible probability of 5% and up to 50%
Remote probability below 5%
Short-term employee benefits:
a) Wages, salaries and social security contributions.
1. Short-term compensated absences (such as paid annual leave and paid sick leave) where the absences
are expected to occur within twelve months after the end of the period in which the employees render
the related employee service.
2. Profit-sharing and bonuses payable within twelve months after the end of the period in which the
employees render the related service, and
3. Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for
current employees.
Short-Term Employee Benefits – Recognition and Measurement
When an employee has rendered service to an entity during an accounting period, the entity shall recognize the
undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.
a) As a liability (accrued expense), after deducting any amount already paid. If the amount already paid
exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset
(prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future
payments or a cash refund; and
b) As an expense, unless another standard requires or permits the inclusion of the benefits in the cost of an
asset (example, PAS 2 inventories and PAS 16 property, plant and equipment).
An entity shall recognize the expected cost of short-term employee benefits in the form of compensated absences
as follows:
a) In the case of accumulating compensated absences, when the employees render service that increases
their entitlement to future compensated absences, and
b) In the case of non-accumulating compensated absences, when the absences occur.
Accumulating compensated absences are those that are carried forward and can be used in future periods if the
current period’s entitlement is not used in full. Accumulating compensated absences may be vesting (in other
words, employees are entitled to a cash payment for unused entitlement on leaving the entity) or non-vesting
(when employees are not entitled to a cash settlement for unused entitlement on leaving). An obligation arises,
as employees render service that increases their entitlement to future compensated absences. The obligation
exists, and is recognized, even if the compensated absences are non-vesting, although the possibility that
employees may leave before they use an accumulated entitlement affects the measurement of that obligation.
Accordingly, the obligation shall be recognized even if the compensated absences are non-vesting.

1. Which of the following is a characteristic of a current liability but not a non-current liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods or services.
c. Settlement is expected within the normal operating cycle, or within 12 months after reporting date.
d. Transaction or other events creating the liability has already occurred.
2. Among the short-term obligations of Lance Company as of December 31, the statement of financial position
date, are notes payable of P250,000 with the Madison National Bank. These are 90-day notes, renewable for
another 90-day period. These notes should be classified on the statement of financial position of Lance
Company as
a. current liabilities. c. non-current liabilities
b. deferred charges. d. intermediate debt

3. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting
principles.
c. obligations to transfer ownership shares to other entities in the future.
d. present obligations arising from past events resulting in an outflow of resources.
4. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due
in four years.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds due in eight months has been refinanced by a two-year bond as of the end of reporting period.
5. Share dividends distributable should be classified on the
a. income statement as an expense.
b. statement of financial position as an asset.
c. statement of financial position as a liability.
d. statement of financial position as an item of equity.
6. Of the following items, which should not be classified a current liability?
a. Three bonds maturing in 11 months.
b. Sales taxes payable.
c. 5 months note payable, refinance on a long-term basis as of year-end.
d. Unearned revenues.
7. Which of the following should be included in the current liability section of the statement of financial position?
a. Trade notes payable due in 15 months
b. Long-term, zero-interest-bearing notes payable
c. Security deposits from a customer for a five-year contract.
d. All of these answer choices are included
8. Which of the following is a current liability?
a. Preference dividends in arrears
b. A dividend payable in the form of additional shares.
c. A cash dividend payable to preference shareholders
9. Which of the following is not considered a characteristic of a liability?
a. Present obligation.
b. Arises from past events.
c. Results in an outflow of resources.
d. Liquidation is reasonably expected to require use of existing resources classified as current assets.
10. What is the classification of a debt that is callable by the creditor?
a. Non-current liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a non-current liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a non-current
liability.
d. Current liability.
11. A company has not declared a dividend on its cumulative preference shares for the past three years. What is
the required accounting treatment in this situation?
a. Record a liability for the cumulative amount of preference share dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current year's dividends only.
d. No disclosure or recognition is required.
12. A company is legally obligated for the costs associated with the retirement of a long-lived asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the activities itself.
d. only when the obligation arises at the outset of the asset’s use.
13. Information available prior to the issuance of the financial statements indicates that it is probable that, at the
date of the financial statements, a company has a present obligation related to product warranties. The amount
of the expense involved can be reasonably estimated. Based on the above facts, the estimated warranty expense
should be
a. accrued. c. neither accrued nor disclosed
b. disclosed but not accrued. d. classified as an appropriation of retained earnings
14. A company has a provision whose amount can only be reasonably estimated within a range of outcomes. No
single amount within the range is a better estimate than any other amount. The amount to accrue should be
a. zero. c. the minimum of the range
b. the mid-point of the range. d. the maximum of the range
15. Which of the following best describes the accounting for assurance-type warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

16. In a service-type warranty, warranty revenue is

a. recognized in the year of sale.
b. not recognized.
c. recognized only in the last year of the warranty period.
d. recognized over the warranty period.
17. A liability for compensated absences such as vacations, for which it is expected that employees will be paid,
should
a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.
18. Which of the following is the proper way to report a probable contingent asset?
a. As an accrued amount.
b. As a deferred revenue.
c. As an accounts receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.
19. Provisions are liabilities which are accrued because the likelihood of an unfavorable outcome is
a. virtually certain.
b. greater than 50%.
c. at least 75%.
d. possible.
20. Examples of contingent assets include all of the following, except:
a. Unrealized gain on the sale of investments.
b. Pending lawsuit with a favorable outcome.
c. Tax refund disputed by the government but with a possible favorable outcome.
d. Promise of land to be donated by city as an enticement to move manufacturing facilities.
21. All of the following are true regarding the presentation of current liabilities in the statement of financial
position, except
a. The non-current liabilities section follows the current liabilities section.
b. Current liabilities may be listed in order of maturity, in descending order of magnitude or in the order
of liquidity preference.
c. Current liabilities are generally recorded at their full maturity values.
d. Current liabilities should not be offset against the assets that will be used to liquidate them.
22. Which of the following is not an acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied for their liquidation
d. Showing current liabilities in order of liquidation preference.

Problem 1: Lavender Company had the following information as of December 31, 2021:
Notes payable arising from a 3-year bank loans, due on December 31,
2022, on which assets valued at P1,000,000 have been pledge as collateral 1,800,000
Accounts payable, net of debit balances of P100,000 1,160,000
Trade notes payable due in 14 months 360,000
Salaries payable 240,000
Phil health, and PAG-IBIG payable 25,000
SSS payable 16,000
Employees income tax withheld 25,000
Bonus and profit sharing payable 120,000
Liability for income taxes 300,000
Cash dividends payable 120,000
Share dividend payable 150,000
Dividend in arrears on preference shares 200,000
Estimated liability for damages 130,000
How much should Lavender report as current liabilities on its December 31, 2021 statement of financial position?
a. 3,936,000 b. 4,036,000 c. 4,396,000 d. 4,487,000
Problem 2: A customer has sued Hill Company for P250,000 because of the injuries sustained by the customer’s
child in November 2021 while in the premises of the company. Legal counsel opines that it is probable that the
lawsuit will be settled between P100,000 and P250,000, with the following likely outcome: 20% to be settled at
P100,000; 45% to be settled at P200,000 and 35% to be settled at P250,000. The legal counsel also stated that
the company can pay up to a maximum of P250,000.
How should the Company report this event in its financial statement?
a. A lability of P183,333 and a disclosure of a contingent liability of P66,667.
b. A liability of P197,500 and a recognition of a contingent asset of P52,500 in the statement of financial
position.
c. A liability of P250,000.
d. A disclosure of a contingent liability of P52,500 and a recognition of a provision of P197,500.

Problem 3: Main Corporation, a manufacturer of cleaning products, is preparing its annual financial statements
as of December 31, 2021. Because of a recently proven health hazard in one of its cleaning products, the
government has clearly indicated its intention of ordering the company to recall all of the hazardous cleaning
products that were sold in the last three months. The mgmt. estimates that this recall would cost P5,800,000.
What accounting recognition, if any, should be accorded this situation?
a. No recognition.
b. Note disclosure only.
c. Expense of P5,800,000 and a liability of P5,800,000.
d. Expense of P5,800,000, and a retained earnings restriction of P5,800,000.
Problem 4: In March 2021, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May
2021, no claims had yet been asserted against Kirk. However, Kirk's management and legal counsel concluded
that it was possible but not probable that Kirk would be held responsible for negligence, and that P4,000,000
would be a reasonable estimate of the damages. Kirk's P5,000,000 comprehensive public liability policy contains
a P400,000 deductible clause.
In Kirk's December 31, 2020 financial statements, in which the auditor has completed his field work in April 2021,
how should this casualty be reported?
a. As a note disclosure for a possible liability of P4,000,000.
b. As an accrued liability of P400,000.
c. As a note disclosure for a possible liability of P400,000.
d. No note disclosure nor accrual is required for 2020 because the event occurred in 2021.
Problem 5: Eastern Company has an obligation to restore the land at the end of its ground-moving activities.
The provision is increased every year by the portion of the land that has been damaged. On December 31, 2021,
the value of the expected future amounts required to restore the portion of the land damaged to date is estimated.
The following information is provided: Balance as of January 1, 2021 (present value of the estimated future
reconstruction costs), P3,000,000; Present value of estimated future reconstruction cost on December 31, 2021
for damages incurred to date, P3,670,000; Applicable discount rate, 9%.
What is the additional provision that should be recognized in 2021 in relation to the damage made on the land?
a. None b. 270,000 c. 400,000 d. 670,000
Problem 6: Beginning year 2021, the Drunken Company began marketing a new beer called “Drunk”. Each bottle
of beer sells for P30. To help promote the product, management is offering a special beer mug to each customer
for every 20 bottles of Drunk. Drunken estimates that out of the 300,000 bottles of Drunk sold during 2021, only
30% of the bottles will be redeemed. For the year 2021, 5,000 beer mugs were purchased by the company at a
total cost of P140,000. These 5,000 mugs have a total sales value of P200,000. A total of 4,000 mugs were
distributed to the customers during 2021.
How much is the balance of unearned premium at the end of 2021?
a. 14,000 b. 15,688 c. 19,608 d. 20,118
Problem 7: Echo Company sells office equipment contracts agreeing to service equipment for a two-year period.
Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are
charged to service contract expense as incurred. Revenue from service contract is recognized as earned over the
lives of the contracts. Additional information for the year ended December 31, 2021 is as follows:
Unearned service contract revenue, January 1, 2021 P600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
What amount should Echo report as unearned service contract revenue at December 31, 2021?
a. 460,000 b. 480,000 c. 490,000 d. 720,000
Problem 8: Pan Company has 35 employees who work 8 hours a day and are paid on an hourly basis. On
January 1, 2020, the company began a program of granting its employees 10 days of paid vacation each year.
Vacation days earned in 2020 may first be taken on January 1, 2021. Information relative to these employees
are as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2020 P45.00 10 0
2021 46.00 10 8
2022 47.00 10 10
1. How much is the compensated absences (compensation expense) reported in its statement of comprehensive
income in 2022?
a. 132,160 b. 124,960 c. 266,000 d. 268,800
2. What is the balance of liability for compensated absences at the end of 2022?
a. 235,200 b. 252,000 c. 157,920 d. 132,160

AUDITING PRACTICE
Significant Business Process: Purchase to Pay; Hire to Retire
(Formerly Purchasing and Disbursements; Payroll Cycles)
PROBLEM 1: (SFP PRESENTATION: CURRENT VS. NON-CURRENT LIABILITIES)
The following is an excerpt from Cavite Corporation’s trial balance in relation to your audit of its financial
statements as of and for the period ended December 31, 2021:
Cash in bank, net of a P26,000 bank overdraft (no right of offset) P654,000
Accounts receivable, net of a P44,000 credit balance (no right of offset) 217,000
Accounts payable, net of a P37,500 debit balance in a suppliers’ account (no right of offset) 873,500
Accrued operating expenses 110,000
Salaries payable – basic pay 236,600
SSS, Philhealth and PAG-IBIG payable 53,100
Withholding tax payable 36,600
Salaries payable - accrued compensated absences and bonuses 67,800
Provisions/estimated liability for warranties 101,600
Provisions/estimated liability from environmental damages, expected to be settled in 2022 56,000
Provisions/estimated liability from pending litigation cases, expected to be settled in 2023 (at
present value and adjusted for risk adjustment premium) 120,000
Current income tax payable 104,500
Output VAT, net of P25,500 Input VAT 43,500
Deferred tax liability, net of a P59,000 deferred tax asset (no right of offset) 33,500
Cash dividends payable 50,000
Share dividends payable 70,000
12% Serial bonds payable, due P50,000 semi-annually every March 1 and September 1.
Interests are also payable semi-annually. Final serial payment due on September 1, 2027. 500,000
Accrued interest on serial bonds payable ?
Cash advances from shareholders with an indefinite term 120,000
Financial liability at amortized cost (Notes payable – bank) due 3/31/2022 (See Note below) 200,000
Financial liability at fair market value 150,000
Audit note: On December 31, 2021, the company entered into an agreement with the bank to refinance the
liability by extending the maturity of the note for another year, that is up to March 31, 2023.
Requirements: Determine the following:
1. Total current liabilities
2. Total non-current liabilities
PROBLEM 2: (SFP PRESENTATION: CURRENT VS. NONCURRENT; PROVISIONS)
You were assigned to review the work done by your audit associate who was assigned to do the wrap-up
procedures in line with the completion of the audit of your client Pangasinan Corp. as of and for the period ended
December 31, 2021. The financial statements of Pangasinan Corp. were approved for issuance by the BOD on
April 15, 2022. Determine the treatment of the following based on the associate’s audit notes:
Audit notes:
1. The company had a P5M bank loan due on December 31, 2026. A debt covenant requires the company
to maintain a working capital ratio of 2:1 as at the balance sheet date, otherwise the bank loan becomes
due and demandable. As of December 31, 2021, the company has a working capital ratio of 1.75:1, thus,
is in violation of the debt covenant. On December 31, 2021, however, the bank agreed to provide the
company a waiver (grace period) of up to June 30, 2022, to bring back working capital to the required
2:1. The bank will not be demanding payment on the loan during the said grace period.
2. The company had another P4M bank loan due March 31, 2022 (currently maturing obligation). The
company having a right to refinance the liability as of December 31, 2021, exercised such right by issuing
a P3M, 4-year bonds payable on March 31, 2022 the proceeds of which was used directly to pay out the
currently maturing obligation. The remaining balance of the bank loan that was due was settled from the
company’s working capital.
3. A P2M bank loan due on February 1, 2022 (currently maturing obligation) was refinanced on February 1,
2022 by entering into a 10%, P2M, 2-year bank loan, the proceeds of which was used to fully settle the
P2M loan. The right to refinance the obligation was obtained on February 1 upon obtaining the 10%, P2M
loan.
4. On December 31, the company is a defendant in a pending lawsuit filed by an employee claiming a
wrongful termination in 2021. The lawyers, in response to a letter of audit inquiry, stated that it is
probable (more likely than not) that the company will pay damages between P500,000 to P1,000,000,
with P800,000 as the best estimate.
5. On November 1, 2021, the company entered into a non-cancellable purchase commitment with Olongapo
Inc. to acquire 10,000 units of a specific product at P100 per unit fixed price. The purchase commitment
is to be executed on May 1, 2022. On December 31, 2021, because of a significant decline in the demand
for Olongapo’s products, the net realizable value of the product decreased to P70 per unit. A contract
termination fee was agreed upon for an amount of P400,000.

6. On December 2, 2021, the company guaranteed a P2M bank loan of a key officer due on March 31, 2022.
On the due date, the officer failed to settle the obligation due to a financial distress, thus the bank invoked
the guarantee and is now demanding payment of the loan from Pangasinan Corp.
7. On December 30, Pangasinan Corp. acquired a right to operate an oil rig for total cash price of
P10,000,000. Pangasinan Corp. however has an obligation to decommission the said oil rig after its 5-
year estimated useful life. The estimated decommissioning cost to be incurred is at P2,000,000. The
prevailing risk-free interest rate is 6%. The management estimates that a 10% risk adjustment premium
is appropriate given the long-term nature of the future asset retirement obligation.
8. On December 5, 2020, Pangasinan Corp. initiated a lawsuit against La Union Inc. seeking a P2 million in
damages from patent infringement. The lawyers are under the impression that the company will more
likely than not, win the case with the damages being sought to be awarded to Pangasinan Corp.
Requirement:
Determine the implication of each case on Pangasinan Corp.’s 2021 LTL, CL, Disclosure Requirements.
PROBLEM 3: (PURCHASES CUT-OFF)

You are conducting a purchase cut-off test pertinent to your audit of the financial statements of Laguna Inc. as
of and for the period ended December 31, 2021.
You have observed the taking of the physical inventory on December 29, 2021. As taken, the physical inventory
included only merchandise received through December 29. The purchases ledger balance was P760,000 while the
accounts payable ledger balance was P143,000. The inventory summary shows a total of P78,000.
Below are the purchase journal entries several days before and after the balance sheet date:
Shipment Receipt of Invoice
RR No. F.O.B. Terms Date Goods Date No. Amount
December, 2021
22102 Shipping point 12-24-21 12-30-21 9176 P3,100
22103 On consignment 12-24-21 12-31-21 0010 5,800
22104 Sale with buy-back agreement- Note a 12-24-21 12-29-21 1307 10,000
22105 Shipping point 12-26-21 01-02-22 6609 6,900
22106 Destination 12-26-21 12-31-21 6610 4,200
22107 FOB Buyer 12-26-21 01-03-22 0481 7,500
22108 FOB Buyer 12-27-21 12-30-21 3671 2,900
22110 Shipping point 1-2-22 1-4-22 6098 3,500
January, 2022
22111 Destination 12-26-21 1-2-22 7611 6,800
22112 Shipping point 12-27-21 1-3-22 7711 4,600
22113 Destination 12-27-21 12-29-21 9001 7,700
22114 FOB Seller 12-28-21 1-2-22 8345 2,050
22115 On consignment 12-28-21 1-3-22 4678 3,150
22116 FOB Buyer’s warehouse 12-29-21 1-3-22 9981 5,950
22117 Bill and hold agreement (see note b) 1-2-22 1-5-22 7263 6,100
22118 Shipping point 1-2-22 1-5-22 5666 8,050
Audit notes:
a. RR No. 22104 were for goods covered by a “sale with buyback agreement” with the seller. The Company
shall advance the purchase price on January 2 with the seller to buyback the said goods at the same price
plus 12% in annual interest, 3 months later.
b. RR No. 22109 were for goods received on 12-29-21 and are included in the physical count but the purchase
invoice documents were yet to be received from the supplier. The invoice amount is P9,200 and were
shipped under FOB Destination term.
c. The bill and hold agreement covering goods received under RR 22117 was executed on December 29, 2021
and therefore is already a valid purchase as of December.
Requirements: Adjusted balances as of December 31, 2021, of:
1. Accounts payable
2. Inventory
PROBLEM 4: (GL/SL RECONCILIATION; CASH-DISBURSEMENTS CUT-OFF)
You are auditing Negros Occidental Corporation’s current liability accounts as of December 31, 2021. The following
schedule of liabilities was presented to you by the company’s accountant:
Accounts payable P3,360,000
Accrued operating expense 62,000
Audit note:
a. General Ledger – Subsidiary Ledger Reconciliation
The accountant likewise provided you the following reconciliation of accounts payable control account
and subsidiary ledger balances:
Balance per control account (General ledger) P3,360,000
Purchase Invoice for goods received on January 5, 2022 350,000

Purchase invoice on goods still in transit as of

December 31, 2021, term FOB supplier’s warehouse. 300,000
Cost of goods received on December 29, 2021. Purchase
invoice documents received only in January, 2022 (150,000)
Payments to supplier via a check that was dated January 2, 2022 and
was released on December 30, 2021 (220,000)
Payments to supplier via a check that was dated December 30, 2021
and was released on January 2, 2022 340,000
Payments to supplier via a check that was dated December 30, 2021
and was released on the same date. (200,000)
Purchase returns (30,000)
Debit balance on a suppliers’ account 80,000
Balance per subsidiary ledgers P3,830,000
b. Cash Disbursements Cut-Off (Search for Unrecorded Liabilities)
The following is a summary of entries made before and after the balance sheet date on the cash
disbursement journal of Negros Occidental Corporation:
Entry date Voucher Description Amount Account Charged
Reference (Debited)
12-18-2021 12 - 200 Lawyers’ fee for December. P35,000 Professional fees
12-26-2021 12 - 203 Fire insurance, 12/1/2021 48,000 Prepaid insurance
to 11/30/2022
12-28-2021 12 – 215 Fee for building maintenance for 24,000 Repairs and maintenance
the month of December expense
01-03-2022 1–1 CPA’s retainer’s fee for 46,000 Professional fees
December
01-04-2022 12 – 214 December electricity bill 62,000 Accrued Operating
Expense
01-05-2022 1–2 Medical services for employees 52,000 Medical expense
in 2021
01-06-2022 1–3 Payroll 12/22/2021 to 1/6/2022
(12 work days, 5 days in
January) 84,000 Salaries and wages
0112-2022 1–4 Royalties in December 39,000 Royalty expense
Jan. 14, 1–5 Repairs services on factory 19,000 Repairs and maintenance
2022 equipment in January expense
Required:
1. What is the adjusted balance of the accounts payable account?
2. What is the correct accrued expenses as of December 31?
PROBLEM 5: (PROVISION: ASSURANCE-TYPE WARRANTIES)

During 2020, Bulacan Company introduced a two-year warranty program on its main product. The warranty
program provides the customer an assurance that the product will function as intended (assurance-
type warranties) because it complies with agreed-upon specifications. The company does not
normally sell warranty services on its products and the customer has no option to purchase the
warranty service separately. Best estimates based on industry practice, indicated that 40% of unit sales will
be returned in the year of sale and an additional 30% of unit sales will be returned the next year following the
year of sale. The company further estimates that P120 in labor and materials costs shall be spent on each unit
covered by the warranty program.
Sales and actual warranty expenditures for 2020 and 2021 were as follows:
Year Sales Sales in Units Actual warranty costs
2020 P7,200,000 6,000 P151,200
2021 9,750,000 7,500 409,500
Requirements:
1. How much is the warranty expense and estimated warranties liability balances in 2021?
2. Assuming that: (a) warranty program is only for one year; (b) best estimates indicate that 70% of unit
sales shall be returned; and (c) from the amount paid in 2021, P302,800 was for 2020 product
warranties, what is the warranties expense and estimated warranties liability bal. in 2021?
3. Assuming that: (a) warranty program is only for one year, and (b) best estimates indicate that 70% of
unit sales shall be returned for warranty program, what is the warranties expense and estimated
warranties liability balances in 2021?
PROBLEM 6: (SERVICE -TYPE WARRANTIES)

Batangas Inc. is a manufacturer and a distributor of a specialized environmentally friendly air-conditioning system
for commercial use. It sells its products with a two-year warranty for repairs and maintenance. The warranty
service is in addition to the assurance that the product complies with agreed-upon specifications
(service-type warranties). For the year-ended December 31, 2021 the company reported total sales at
P40,000,000. Cost of sales was at P9,500,000 while cost related to the warranty services amounted to P800,000.
Your audit investigation revealed that each air-conditioning unit could be sold without the warranty service at
P45,000 while the two-year warranty service contract can be sold separately at P5,000.

Requirements:
1. What is the correct revenue from sales of air-conditioning units to be reported in the 2021 SCI?
2. What is the correct revenue from warranty services to be reported in the 2021 SCI and the correct
unearned revenue in the 2021 SFP (assume sales were made evenly throughout the year)?
3. What is the correct unearned revenue from warranty services to be reported in the 2021 SFP (assume
all sales were made at the beginning of 2021)?
PROBLEM 7: (UNEARNED INCOME FROM CUSTOMER AWARD CREDITS/POINTS)

Rizal Inc. provides one customer loyalty award credit/point for every P100 sale of its product. Each loyalty point
is equivalent to P5 which can be used to further purchase Rizal Inc.’s products. For the year ended, December
31, 2021 the company reported total sales at P25M.
Your examination revealed that the company does not recognize the award credit separately. Goods purchased
by customers through their exercise of customer loyalty points are simply recognized as promotional expense at
the cost of products redeemed. Further investigation revealed that 30% of the customer loyalty credits/points
awarded during the year has already been exercised by the end of the year.
Requirements:
1. Assuming that each customer loyalty award credit/point has a fair market value of P4 per point, what is
the balance of the unearned income from customer award credits/points as of Dec. 31, 2021?
2. Assuming that the fair market value of the customer loyalty award credit/point cannot be reasonably
ascertained, and the entity estimates that 40% of the award credits will ultimately expire, what is the
balance of the unearned income from customer loyalty award as of December 31, 2021?
PROBLEM 8: (COMPENSATED ABSENCES; PROFIT-SHARING BONUS)

You were assigned to audit the following accrued expenses of your client, Iloilo Inc. as of December 31, 2021:
Accrued salaries for compensated absences 2,632,500
Accrued salaries for profit-sharing bonus 809,367
Audit notes:
A. The accrued salaries for compensated absences were the accrued liability as of December 31, 2020. The
company is yet to make the necessary adjustment for the current year.
The company has 100 employees (assumed to have been employed throughout 2020 and 2021). The
company provides its employees 15 day-paid sick leave and 15 day-paid vacation leaves for every
operating year. The company’s policy on sick leave and vacation leave allows each employee to carry
over accumulated leaves for the current period over the next two years only, thereafter it shall expire.
The 2020 balance comprise of 1,050 days from 2019 and 3,000 from 2020.
By the end of 2021, 3,300 vacation and sick leave days were exercised by the employees. 960 of these
leaves were from 2019. Salary rates in 2021 increased by 20%.
B. Accrued salaries for profit-sharing bonus is 10% of the net income after bonus and after 30% tax. Income
used to compute for the bonus per books was before any adjustments from audit note A.
Requirements:
1. Accrued salaries for compensated absences.
2. Accrued salaries for profit-sharing bonus.

1. You were assigned to audit Cebu Corporation’s (a textile manufacturing company) liability accounts, which of
the following is generally incorrect regarding the usual direction of auditing liabilities account balances and
transactions?
A. Auditing non-trade liabilities such as financial liabilities at amortized cost balances (e.g., bonds
payable) arising from financing cycle, a non-routinary transaction cycle, would seldom involve
compliance testing or test of controls but would rather require direct substantive testing.
B. Auditing trade liabilities arising from purchasing and disbursement cycle, a routinary transaction cycle,
would generally require test of controls first (where risk assessment procedures allow, that is control
risk assessed at below the maximum) before less extensive substantive testing.
C. Auditing trade liabilities arising from purchasing and disb. cycle, a routinary transaction cycle, would
usually require test of controls first before substantive testing where control risk is assessed at the
maximum level.
D. Notwithstanding the result of risk assessment procedure, a non-trade liability such as financial liability
at amortized cost, is usually being audited through direct substantive testing which usually involve
test of detail of transaction.
2. The following are the relevant processes in the purchasing and disbursement cycle in the financial statements
auditor’s perspective, except:
A. Requisitioning.
B. Purchase Order Processing
C. Billing.
D. Voucher preparation.

3. The auditor observed, while understanding a client’s requisitioning process, that there is no systematic and
formal policy in place for inventory purchase requests as a result, there is a risk of either understocking or
overstocking inventories, what is the possible implication of this audit observation to the planned substantive
testing?
A. The auditor should focus more on possible understocking of inventories since this might have a greater
impact on existence assertion over inventory balances.
B. Where there is a higher risk of overstocking inventories, the auditor should reduce the extent of audit
procedure in validating year-end valuation assertion on inventories.
C. If higher risk of overstocking inventories is observed, the auditor should plan to gather more
persuasive evidence regarding the year-end valuation assertion on inventories
D. If higher risk of understocking inventories is observed, the auditor should plan to gather more
persuasive evidence regarding the year-end completeness assertion on inventories
4. The auditor observed while understanding of the client’s internal control over the purchasing function of a
client, that there are no appropriate controls in place to prevent purchasing officers from conniving with
suppliers in purchasing merchandise under unfavorable terms. Which financial statements assertion is mostly
affected by this audit planning observation?
A. Existence and obligation assertions on trade payables.
B. Existence and rights assertions on inventories
C. Valuation of trade payables
D. Valuation of inventories
5. Which of the following is incorrect regarding the control objectives in receiving goods purchased?
A. The receiving department anticipates goods to be received based on “blind” / “blank” purchase orders.
B. The primary control objective in the receiving department is to ensure that goods received are
physically inspected and counted.
C. Another control objective in the receiving department is to ensure that goods received are what are
actually ordered from the suppliers.
D. The manifestation of the performance of control in the receiving department is the accomplishment
of the pre-numbered receiving report.
6. Comparing the documents in the voucher package including suppliers’ sales invoice, purchase order from
purchasing department and receiving reports from receiving department has an objective of ________ and
is the responsibility of _________.
A. Ensuring that all payments being authorized are for valid purchases; Treasury department.
B. Ensuring that only valid purchases and liabilities are to be requested payment of; Accounting
(Accounts payable) department.
C. Ensuring that only valid purchases and liabilities are to be requested payment of; treasury
department.
D. Ensuring that all valid purchases and liabilities are being requested payment of; purchasing
department.
7. The accounts payable department receives the purchase order to prepare the accounts payable voucher, this
will involve the accomplishment of the following except
A. Comparing the invoice price to the purchase order price.
B. Ensuring that the purchase had been properly authorized.
C. Ensuring that the goods had been received by the party requesting them.
D. Comparing the quantity ordered to the quantity received.
8. For effective internal control, the accounts payable department generally should
A. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed.
B. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized
employee.
C. Obliterate the quantity ordered on the receiving department copy of the purchase order.
D. Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
9. A client erroneously posted a large purchase twice in a supplier’s subsidiary ledger. Which of the following
internal accounting control measures would be most likely to detect this error in a timely and efficient manner,
assuming that posting to the ledger was done correctly?
A. Footing the purchases journal.
B. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.
C. Tracing control totals from the purchases journal to the total subsidiary ledger accounts.
D. Sending written quarterly confirmations to all vendors.
10. Which of the following is not an acceptable internal control measure in the disbursement cycle?
A. Agreeing documents in the voucher package to ensure that checks are issued only for valid liabilities.
B. Use of checks for all disbursements, without exceptions.
C. Cancellation of supporting documents after the cancelled checks are received from the bank together
with the monthly bank statements.
D. Immediate check release immediately by the personnel who signs the check last in the treasury
department.
11. In designing the audit program for Accounts Payables and Purchases, the auditor acknowledges that there is
a higher risk of ___________, thus should design audit procedures that shall focus on validating
___________ assertion/s?
A. Overstatement; Completeness and Existence/Occurrence
B. Understatement; Existence/Occurrence and Valuation
C. Understatement; Completeness and Valuation
D. Overstatement; Existence/Occurrence and Valuation

12. The auditor wants to obtain evidence in support to the financial statement assertion of completeness of
purchase transactions and the corresponding accounts payable balance. The auditor would most likely do
which of the following substantive test procedure?
A. Trace back journal entries to the purchases journal to the supplier’s sales invoice and shipping
documents and receiving reports.
B. Trace the approved purchases orders to the receiving reports.
C. Send accounts payable confirmation letter to a sample of suppliers who has relatively significant
account balances outstanding as of the balance sheet date.
D. Trace the receiving reports to the supplier sales invoices, then to the entries in the purchases journal.
13. As part of auditing the company’s purchasing/disbursement cycle, the auditor decided to render a purchases
cut-off by vouching entries several days before and after the balance sheet date, December 31, from the
company’s purchases journal to the source documents, which include the purchase order, the sales invoice of
the supplier and the receiving report. Which is correct regarding the purchases cut-off procedures?
A. December entries are traced back to the source documents to gather evidence regarding the existence
assertion over payables; January entries are traced back to the source documents to gather evidence
regarding the completeness assertion over payables.
B. December entries are traced back to the source documents to gather evidence regarding the
completeness assertion over payables; January entries are traced back to the source documents to
gather evidence regarding the existence assertion over payables.
C. December entries are traced back to the source documents to gather evidence regarding the valuation
assertion over payables; January entries are traced back to the source documents to gather evidence
regarding the existence assertion over payables.
D. December and January entries are traced back to the source documents to gather evidence regarding
the valuation assertion over payables.
14. Which of the following procedures would an auditor most likely do to perform search for unrecorded liabilities
and which financial statement assertion is mostly validated by the procedure?
A. Vouching a sample of entries in the purchases journal just before year end to the unmatched receiving
report file which is consistent in gathering evidence about the existence assertion of the recorded
liabilities.
B. Comparing a sample of purchase orders issued just after year-end with the year-end accounts payable
entries which is consistent in gathering evidence about the completeness of the recorded liabilities.
C. Scanning the cash disbursements entries recorded just after year-end for indications of unusual
transactions which is consistent in gathering evidence about the existence of the recorded liabilities.
D. Vouching a sample of cash disbursements recorded just after year-end to receiving reports and
supplier’s invoices which is consistent in gathering evidence about the completeness of the recorded
liabilities.
15. An auditor decided to render circularization/confirmation of trade payable balance as of December 31, 2021
which of the following is appropriate, if the auditor wants to gather evidence to validate the completeness
assertion over trade payables?
A. Send confirmation letters to selected supplier accounts with significant balances as of December 31,
2021.
B. Send confirmation letters to selected supplier accounts with outstanding balances as of December 31,
2021 regardless of the amount involved.
C. Send confirmation letters, preferably blank confirmation letters, to suppliers whether with outstanding
balance or not as of December 31, 2021 as long as the client had transacted with them in the past.
D. Send confirmation letters to selected suppliers account with significant balances as of December 31,
2020 (prior year).
16. You are auditing the December 31, 2021, accounts payable balance of one of your firm’s divisions. The division
controller’s office has provided you with a schedule listing the creditors and the amount owed to each at
December 31, 2021. Which of the following audit procedures would be your best choice for determining that
no individual account payable has been omitted from the schedule, and which financial statement assertion
would this procedure validate?
A. Send confirmation requests to a randomly selected sample of creditors listed on the schedule;
completeness.
B. Send confirmation requests to creditors that are listed on the schedule but not listed on the
corresponding December 31, 2020 (prior year), schedule; existence.
C. Examine support for selected January 2022 payments to creditors, ascertaining that those relating to
2021 are not on the schedule; existence.
D. Examine support for selected January 2021 payments to creditors, ascertaining that those relating to
2021 are on this schedule; completeness.
17. Which of the following audit procedures would most likely be appropriate to gather evidence about valuation
assertion on the estimated liability for warranties?
A. Inquire about the company policy in determining warranty provisions and develop a separate
computation of the warranties expense and estimated warranty liability based on the policy of the
company.
B. Vouch actual warranty costs incurred to supporting documents such as repair and work orders.
C. Vouch goods received from customers to the original sales invoice to determine whether such goods
being returned are covered by the warranty program.
D. Inquire about the company’s policy in determining warranty provisions and determine the
reasonableness of the estimation policy by comparing with industry experience, historical experience
and/or subsequent events.
- END -

CPA Review Batch 45  October 2023 CPA Licensure Examination
FINANCIAL LIABILITY AT AMORTIZED COST,

OTHER NONCURRENT LIABILITIES & DEBT RESTRUCTURING
BONDS PAYABLE/NOTES PAYABLE/LOANS PAYABLE
Bonds/Notes/Loans issued at a Discount (Proceeds < Face Value; Effective Interest > Nominal Interest)
- discount is a transaction loss (amount received/proceed is lower than the amount to be paid/face value)
to be amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is added to the related expense – INTEREST EXPENSE
Interest Expense xxx
Discount on Bonds Payable xxx
- as a result of the amortization, the interest expense recognized in the income statement is higher than
the interest paid and/or accrued. The difference is the amount of amortization.
- Correct interest is computed as: (Carrying value of Bonds * Effective interest*Time)
- Nominal interest is computed as: (Face value of Bonds * Nominal interest*Time)
Bonds/Notes/Loans issued at a Premium (Proceeds > Face Value; Effective Interest < Nominal Interest)
- premium is a transaction gain (amount received/proceed is higher than the amount to be paid/face value)
to be amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is deducted from the related expense – INTEREST EXPENSE
Premium on Bonds Payable xxx
Interest Expense xxx
- as a result of the amortization, the interest expense recognized in the income statement is lower than the
interest paid/accrued. The difference is the amount of premium amortization.
Direct Transaction Costs (e.g. Bond Issue Costs) – are deducted from net cash proceeds, thus in the process
are deducted from premium or added to discount on bonds payable (after which a new effective interest rate
shall be computed)
Retirement of Bonds/Notes/Loans – if bonds are retired prior to their maturity dates, gain or loss shall be
recognized in the profit or loss (difference between the retirement price and updated amortized cost of the
bonds plus accrued interest, where applicable)
Accrued Interest – in accounting for bond issuance and retirement, consider inclusion of accrued interest
specifically if bonds were issued or retired in between interest payment dates.
CONVERTIBLE BONDS
1. ISSUANCE – Proceeds from the issuance of Convertible Bonds should be allocated between the debt
component (bonds payable) and the equity component (Share Premium form Bond Conversion Privilege)
using the RESIDUAL APPROACH. To wit, the pro-forma entry to record issuance is:
Cash XX
Discount on Bonds Payable XX (or)
Premium on Bonds Payable XX
Bonds Payable at Face Amount XX
Share Premium from Bonds Conversion Privilege XX
2. CONVERSION – If Convertible bonds are converted into ordinary shares, the carrying value of the bonds
(updated amortized bonds payable) shall be cancelled out. The difference between the carrying value of
the bonds and the aggregate par value of the converted shares shall be credited to share premium
account. To wit, the pro-forma entry to record the conversion is:
Alternative 1
Bonds Payable XX
Premium on Bonds Payable XX (or)
Discount on Bonds Payable XX
Ordinary Shares XX
Share Premium XX
3. EARLY RETIREMENT – If Convertible bonds are retired prior to maturity date, the retirement price shall
be allocated between the Bonds and the equity component, consistent with how the original issue price
was allocated (Residual Approach). The difference between the retirement price allocated to the debt
component and the carrying value of the bonds payable shall be recognized in the income statement,
while the difference between the retirement price allocated to the equity component and the original share
premium from bond conversion privilege shall be credited to share premium account.
DEBT RESTRUCTURING
Debt Restructuring – is a situation in which “the creditor for economic or legal reasons related to the debtor’s
financial difficulties grants a concession to the debtor that it would not otherwise consider. Types of
Restructuring:

FINANCIAL LIABILITY at AMORTIZED COST, OTHER NONCURRENT LIABILITIES & DEBT RESTRUCTURING
Asset Swap - transfer of non-cash asset to fully settle a payable. This type of restructuring usually recognizes
a gain on troubled debt restructuring as the difference between the carrying amount of the liability and the fair
value of the non-cash asset given up. A gain or loss on the disposal of the non-cash asset is likewise recognized
for the difference between the non-cash asset’s fair value and its carrying amount.
Equity Swap – a debtor that grants an equity interest to the investor, as the full payment for a liability must
recognize a gain on troubled debt restructuring as the difference between the fair value of the total equity
interests and the carrying amount of the liability being settled. A share premium is recognized as the
difference between the equity interest’s fair value and its par value.
Modification of Terms – This type of restructuring may or may not recognize a gain on troubled-debt restructuring.
If the modification is considered substantial, the carrying value of the original financial liability is derecognized;
and the gain on troubled debt restructuring is recognized as the difference between the total carrying amount
of the old liability and the present value of the future payments of the new loan discounted at the current
effective interest rate at date of modification.
For the modification to be considered substantial, the total carrying amount of the old liability shall be compared
with the present value of the future payments of the new loan discounted using the original effective interest
rate of the liability. If the difference between the two is at least 10% of the total carrying amount of the old
liability, then the modification is substantial and the old liability is deemed extinguished.
Concessions may involve a reduction of the interest rate, forgiveness of unpaid interest; or a moratorium on
interest payments for a period of time. Maturity value concessions may involve an extension of the maturity
date or a reduction in the amount to be repaid at maturity.

1. The covenants and other terms of the agreement between the bond issuer and the lender are set forth in the
a. bond indenture. c. registered bond.
b. bond debenture. d. bond coupon.
2. The term used for bonds that are unsecured as to principal is
a. junk bonds. c. indebenture bonds.
b. debenture bonds. d. callable bonds.
3. Bonds for which the owners’ names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
4. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate only.
b. nominal rate only.
c. stated rate only.
d. coupon rate, nominal rate, or stated rate.
5. The rate of interest actually earned by bondholders is called the
a. stated rate only.
b. yield rate only.
c. effective rate only.
d. effective, yield or market rate.
6. Real, Inc. issued a 10-year bonds with a maturity amount of P2,000,000. If the bonds were issued at a
premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided (the same).
d. no necessary relationship exists between the two rates.
7. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense
is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
8. If bonds are issued between interest payment dates, the entry on the books of the issuing corporation could
include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
9. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1,
the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

10. Bond issuance costs, including the printing costs and legal fees associated with the issuance, should be
a. expensed in the period when the debt is issued.
b. recorded as a reduction in the carrying value of bonds payable.
c. accumulated in a deferred charge account and amortized over the life of the bonds.
d. reported as an expense in the period the bonds mature or are retired.
11. The amortization of a premium on bonds payable
a. decreases the balance of the bonds payable account.
b. increases the amount of interest expense reported.
c. increases the carrying amount of the bond.
d. increases the cash payment to bondholders.
12. An extinguishment of bonds payable, which were originally issued at a premium, is made by the purchase of
these bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
13. A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation
is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay
the bank P800,000 each year for 10 years. Which of the following statements is correct?
a. The balance of mortgage payable at a given statement of financial position date will be reported as
a non-current liability.
b. The balance of mortgage payable will remain constant over the 10-year period.
c. The amount of interest expense will decrease each period the loan is outstanding, while the portion
of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
14. A debt instrument with no ready market is exchanged for property whose fair value is currently not
determinable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed interest rate.
b. it should not be recorded on the books of either party until the fair value of the property becomes
evident.
c. the board of directors of the entity receiving the property should estimate a value for the property
that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be assigned to
the property.
15. When a note is issued for property, goods, or services, the present value of the note may be measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
16. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to
be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar
items or from current fair value of the note.
17. A discount on notes payable is charged to interest expense
a. equally over the life of the note. c. using the effective-interest method
b. only in the year the note is issued. d. only in the year the note matures
18. In a debt extinguishment in which the debt is continued with modified terms and the carrying value of the
debt is more than the fair value of the debt,
a. a loss should be recognized by the debtor.
b. a new effective-interest rate must be computed.
c. a gain should be recognized by the debtor.
d. no interest expense should be recognized in the future.
19. In a debt extinguishment in which the debt is settled by a transfer of assets with a fair value less than the
carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement. c. a loss on the settlement
b. a gain on the settlement. d. none of the choices is correct
20. Long-term debt that matures within one year and is to be converted into shares should be reported
a. as a current liability.
b. in a special section between liabilities and equity.
c. as part current and part non-current.
d. as non-current if the refinancing agreement is completed by the end of the year.
21. The modification of debt terms helps a debtor in trouble. The creditor can grant a borrower concession to
ensure the highest possible collection on the loan. Which can be used by the creditor as modification of terms?
I. Reduction of interest to be paid in the future
II. Reduction or condonement of any unpaid interest
III. Extension of maturity date
IV. Reduction of the principal amount of the debt
a. I, II and III only. c. II, III and IV only
b. I, III and IV only. d. I, II, III, IV


Problem 1: On October 1, 2020 Mack Corporation issued 5%, 10-year bonds with a face value of P1,000,000 at
108 (a annual 4% yield). Interest is paid on October 1 and April 1.
1. Bond interest expense for the year ended December 31,2020 amounted to
a. 10,800 b. 12,500 c. 13,500 d. 21,600
2. Bond interest expense for the year ended December 31,2021 amounted to
a. 29,615 b. 43,064 c. 64,595 d. 32,264
3. If P100,000 face value bonds were retired on March 1,2020 for a total amount of P103,000, plus accrued
interest, the gain or loss on the early extinguishment of the bonds is
a. 4,108 gain b. 4,018 loss c. 6,101 gain d. 6,101 loss
4. If P100,000 face value bonds were retired on March 1,2020 for a total amount of P103,000, the gain or loss
on the early extinguishment of the bonds is
a. 4,018 gain b. 4,018 loss c. 6,101 gain d. 6,101 loss
Problem 2: On January 1, 2018, Trader Company issued its 8%, 4-year convertible debt instrument with a face
amount of P6,000,000 for P5,900,000. Interest is payable every December 31 of each year. The debt instrument
is convertible into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 10%.
PV of 10% for an ordinary annuity of P1 after 4 periods 3.169865
PV of 10% after 4 interest periods 0.683013
1. How much should the liability component be initially valued?

a. 5,619,616 b. 5,701,578 c. 5,791,735 d. 5,890,909
2. How much should the equity component be initially valued?

a. 1998,422 b. 280,387 c. 108,265 d. 9,091
3. What is the amount of interest expense for the year ended December 31, 2019?
a. 561,962 b. 570,157 c. 579,173 d. 589,091
4. Assuming the bonds were all converted on September 1, 2020, how much is credited to Share Premium in
Excess of par?
a. 1,000,000 b. 890,904 c. 857,846 d. 1,138,233
5. Assuming that the bonds were not converted on September 1, 2020, instead, these were pre-terminated at
104 plus accrued interest. On this date, the bonds if not convertible has a quoted price of 101. How much is the
loss on early extinguishment of the bonds and how much is the net decrease in the total shareholders’ equity
balance as a result of the pretermination?
a. 202,154; 180,000 b. 382,154; 290,387 c. 202,154; 280,387 d. 382,154; 180,000
Problem 3: Ozone Company owed P 2,000,000 plus P180,000 of accrued interest to Disco Bank which is due to
be paid on December 31, 2022. During 2022, Ozone’s business deteriorated because of faltering regional
economy. On December 31, 2022, Disco Bank agreed to accept an old machine and cancel the entire debt. The
machine has a cost of P3,900,000, accumulated depreciation of P2,210,000, and a fair value of P1,900,000.
How much should Ozone Company report in its profit or loss as a result of the financial liability’s derecognition?
a. 0 b. 280,000 c. 210,000 d. 490,000
Problem 4: Ali Company is experiencing financial difficulty and is negotiating for a troubled- debt restructuring
agreement with its creditors. Ali Company has a P6,000,000 note payable to Top Bank. Top bank accepted Ali
Company’s 200,000 ordinary shares with a fair value and par value per share of P24 and P 20, respectively.
What is the amount of gain on debt restructuring to be reported in Ali’s profit or loss as a result of the
restructuring?
a. 0 b. 800,000 c. 1,200,000 d. 2,000,000
Problem 5: Chaka Company’s 10% note payable to Khan Bank of P8,000,000 and an accrued interest of P800,000
as of December 31, 2022 were overdue. On December 31, 2022, Khan Bank agreed to the following restructuring
agreement:
• Reduce the principal obligation to P 6,000,000.
• Waive the P 800,000 accrued interest.
• Extend the maturity date to December 31, 2024.
• Annual interest of 8% of the new principal is to be paid on December 31, 2023 and 2024.
• The prevailing market interest rate on December 31, 2022 is 12%.
• Present value of P1 at 10% for 2 periods is 0.8264. Present value of an ordinary annuity of P1 at 10%
for 2 periods is 1.7355.
• Present value of P1 at 8% for 2 periods is 0.8573. Present value of an ordinary annuity of P1 at 8% for
2 periods is 1.7833.
• Present value of P1 at 12% for 2 periods is 0.7972. Present value of an ordinary annuity of P1 at 12%
for 2 periods is 1.6901.
How much is the gain on debt restructuring?
a. 2,208,560 b. 3,205,552 c. 2,800,216 d. 3,008,560

AUDITING PRACTICE
Significant Business Process: Other Business Process – Financing Cycle
PROBLEM 1: (FINANCIAL LIABILITY AT AMORTIZED COST)

Nueva Ecija Corporation had the following financial liabilities issued in 2021:
a. On January 2, the company issued a 5-year, 10%, P2M financial liability at FMV, as it intends to generate
short-term profit from interest rates fluctuations in the market. The financial liability was issued at
P1,855,809 consistent with the prevailing market rate of interest on the date of issue which was 12%.
The prevailing market rate of interests were at 11% and 10.5% on December 31, 2021 and 2022,
respectively.
b. On January 2, the company issued a 3-year, P5M, non-interest-bearing note for a piece of land with a fair
value on this date of P3,756,574. The effective interest rate under these terms was at 10%.
c. On March 31, the company issued a 1-year, 12%, P2.5M notes payable for the acquisition of the company’s
merchandise inventory, which has a cash purchase price of P2.5M.
d. On June 30, the company purchased an equipment with a fair market value of P2,486,852 and issued a
P3M, non-interest-bearing note. The note is payable at P1M annually starting June 30, 2022. The effective
interest rate on the transaction was at 10%.
Requirements:
1. How much is the interest expense for 2021 and 2022?
2. What is the carrying value of each financial liability and how should each be presented in the 2021
statement of financial position (current vs noncurrent)?
PROBLEM 2: (FINANCIAL LIABILITY AT AMORTIZED COST)

Pampanga Company issued a three-year bond dated March 1, 2021 with a face value of P2,000,000. These bonds
have a coupon rate of 12% payable semi-annually every March 1 and September 1. The prevailing market rate
of interest on the date the bonds were issued was at 10%.
The entries per books were: 3/1: Debit to Cash and credit to Bonds Payable for the total proceeds; 9/1 Debit to
Interest expense and credit to Cash at P120,000. No amortization nor accruals were made at year-end.
Required: Compute for the following:
1. The understatement(overstatement) in the profit or loss for the year ended December 31, 2021.
2. The understatement (overstatement) in total liabilities on December 31, 2021.
3. Assuming all the bonds were reacquired on April 30, 2022, for P2,100,000, what is the gain or loss on the
early retirement of the bonds.
PROBLEM 3: (COMPOUND INSTRUMENT – BONDS WITH WARRANTS)

On January 1, 2021, Leyte Corp. issued 1,000 of its January 1, 2016, 12%, 10 year, P1,000 face value bonds
with detachable stock warrants at P1,220,000. Each bond, which pays interests every January 1 carried 5
detachable warrants which entitle the holder to acquire one share of Leyte Corp.’s P50 par value ordinary shares
for every warrant at a specified option price of P55 per share. Immediately after the issuance, the prevailing
market rate of interest was at 10% and the market value of a warrant was P30.
1. What is the equity component of the compound instrument?
2. What is the balance of the bonds payable as of December 31, 2022?
3. How much is the interest expense in 2022?
4. What is the credit to share premium assuming that 80% of the warrants issued with bonds were exercised
in 2023?
- END -

LEASES
LESSEE
Finance lease model - At the commencement of the lease, a lessee shall recognize a right-of-use asset and a
lease liability.
Operating lease model (IFRS 16 par 5) provides that a lessee is permitted to make an accounting policy to
apply the operating lease model. Under the operating lease model, the lessee does not recognize an asset and
lease liability. The lessee may or may not use the operating lease model if the lease is short-term (has a term of
12 months or less) or if the underlying asset is of low value. The lessee shall recognize the lease payments as an
expense in either a straight-line basis over the lease term or another systematic basis. The accounting standard
does not provide a quantitative threshold as to the amount of a low value lease. Low value asset is a matter of
professional judgment. Low-value underlying assets include personal computers, office equipment and office
furniture.
Initial Measurement:
Right-of-use asset is measured at cost. The cost should comprise:
1. The amount of the initial measurement of the lease liability
2. Any lease payments made at or before the commencement date, less any lease incentives received
3. Any initial direct costs incurred by the lessee and
4. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset,
restoring the site on which it is located or restoring the asset to the condition required by the terms and
conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation
for those costs either at the commencement date or as a consequence of having used the underlying asset
during a particular period.
Lease liability is measured at the present value of the lease payments that are not paid at that date. The lease
payments shall be discounted using the interest implicit in the lease, if that rate can be readily determined. If
that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate. At the
commencement date, the lease payments included in the measurement of the lease liability comprise the following
payments for the right to use the underlying asset during the lease term that are not paid at the commencement
date.
1. Fixed payments (including in-substance fixed payments less any lease incentives receivable (such as payment
by the lessor to the lessee associated with a lease or the reimbursement or assumption by the lessor of the
costs of the lessee.
2. Variable lease payments that depend on an index or rate, initially measured using the index or rate as at the
commencement date (example, payments linked to a consumer price index, payments linked to a benchmark
interest rate (such as LIBOR) or payments that vary to reflect changes in market rental rates).
3. Amounts expected to be payable by the lessee under residual value guarantees,
4. the exercise price of a purchase option if the lessee is reasonably certain to exercise that option and
5. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Subsequent measurement
Right-of-use asset (under the cost model) is measured at cost less any accumulated depreciation and impairment
loss. The lessee shall apply normal depreciation policy for right-of-use asset. The lessee shall depreciate the right-
of-use asset over the useful life of the underlying asset under the following condition (a) the lease transfers
ownership of the underlying asset to the lessee at the end of the lease term, and (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.
Lease liability – the lease liability should be measured increasing the amount to reflect interest on the lease
liability, reducing the carrying amount to reflect the lease payments and remeasuring the carrying amount to
reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.
Lease Modification
A lessee shall account for a lease modification as a separate lease if both
a. The modification increases the scope of the lease by adding the right to use one or more underlying assets;
and
b. The consideration for the lease increases by an amount commensurate with the stand-alone price for the
increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of
the particular contract.
For a lease modification that is not accounted for as a separate lease, at the effective date of the lease modification
a. a lessee shall account for the remeasurement of the lease liability by decreasing the carrying amount of the
right-of-use asset to reflect the partial or full termination of the lease for lease modifications that decreases
the scope of the lease.
b. The lessee shall recognize in the profit or loss any gain or loss relating to the partial or full termination of the
lease
c. Making a corresponding adjustment to the right-of-use asset for all other lease modifications.

LEASES
LESSOR
At the commencement date, the lessor shall classify the lease as either an operating lease of finance lease. A
lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership
of an underlying asset. A lease is an operating lease if it does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset. Examples of situations that individually or in combination would
normally lead to a lease classified as an operating lease.
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term
2. The lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower
than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception
date, that the option will be exercised
3. The lease term is for the major part of the economic life of the underlying asset even if title is not transferred
4. At the inception date, the present value of the lease payments amounts to at least substantially all of the
fair value of the underlying asset and
5. The underlying asset is of such a specialized nature that only the lessee can use it without major
modification
Indicators of situations that could also lead to a lease being classified as a finance lease are:
1. If the lessee can cancel the lease, the lessor’s losses associated with the cancelation are borne by lessee
2. Gains or losses from the fluctuation in the fair value of the residual value accrue to the less and
3. The lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent
Initial measurement
At the commencement date, the lessor shall recognize assets held under finance lease in its statement of financial
position and present them as a receivable at an amount equal to the net investment in the lease. The lessor shall
use the interest rate implicit in the lease to measure the net investment in the lease. In the case of a sublease,
if the interest rate implicit in the sublease cannot be readily determined, an intermediate lessor may use the
discount rate used for the head lease (adjusted for any initial direct costs associated with the sublease) to measure
the net investment in the sublease Initial direct cost, other than those incurred by manufacturer or dealer lessors,
are included in the initial measurement of the net investment in the lease and reduce the amount of income
recognized over the lease term.
At the commencement date, the lease payments included in the measurement of the net investment in the lease
comprise the following payments for the right to use the underlying asset during the lease term that are not
received at the commencement date:
1. Fixed payments (including in-substance fixed payments less any lease incentives.
2. Variable lease payments that depend on an index or rate, initially measured using the index or rate as at the
commencement date.
3. Any residual value guarantees provided by the lessor by the lessee, a party related to the lessee or a third
unrelated to the lessor that is financially capable of discharging the obligation under the guarantee
4. The exercise price of a purchase option if the lessee is reasonably certain to exercise the option
5. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to
terminate the lease.
Manufacturer or Dealer lessors
At the commencement date, lessor shall recognize the following for each of its finance leases:
1. Revenue being the fair value of the underlying asset or if lower, the present value of the lease payments
accruing to the lessor, discounted using a market rate of interest
2. The cost of sale being the cost, or carrying amount if different, of the underlying asset less the present
value of the unguaranteed residual value and
3. Selling profit or loss (being the difference between revenue and the cost of sale
Subsequent measurement
A lessor shall recognize finance income over the lease term, based on a pattern reflecting a constant periodic rate
of return on the lessor’s net investment in the lease.
Lease modification
A lessor shall account for a modification to a finance lease as a separate lease if both
1. The modification increases the scope of the lease by adding the right to use one or more underlying
assets and
2. The consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances
of the particular contract
For a modification to a finance lease that is not accounted for as a separate lease, a lessor shall account for the
modification as follows:
a. If the lease would have been classified as an operating lease had the modification been in effect at the
inception date, the lessor shall:
1. Account for the lease modification as a new lease from the effective date of the modification and
2. Measure the carrying amount of the underlying asset as the net investment in the lease immediately before
the effective date of the lease modification
b. Otherwise, the lessor shall apply the requirements of IFRS 9
Operating leases (lessor)
A lessor shall recognize lease payments from operating leases as income on either a straight-line basis or another
systematic basis. The lessor shall apply another systematic basis if that basis is more representative of the pattern
in which benefit from the use of the underlying asset is diminished.

LEASES
1. A lessor shall recognize costs, including depreciation, incurred in earning the lease income as an expense.
2. The lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount of the
underlying asset and recognize those costs as and expense over the lease term on the basis as the
lease income.
3. The depreciation policy for depreciable underlying assets subject to operating leases shall be consistent with
the lessor’s normal depreciation policy for similar assets.
4. A lessor shall apply IAS 36 to determine whether an underlying asset subject to an operating lease is
impaired and to account for any impairment loss identified.
5. A manufacturer or dealer lessor does not recognize any selling profit on entering into an operating lease
because it is not the equivalent of a sale.
6. A lessor shall account for a modification to an operating lease as a new lease from the effective date of the
modification considering any prepaid or accrued lease payments relating to the original lease as part of the
lease payments for the new lease
Sale and Leaseback Transactions
Transfer of the asset is a sale
a. The seller-lessee shall measure the right-of-use asset arising from the leaseback at the proportion of the
previous carrying amount of the asset that relates to the right of use retained by the seller-lessee. Accordingly,
the seller-lessee shall recognize only the amount of any gain or loss that relates to the rights transferred to
the buyer-lessor.
b. The buyer-lessor shall account for the purchase of the asset applying applicable standards and for the lease
applying the lessor accounting requirements.
If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if
payments for the lease are not at market rates, an entity shall make the following adjustments to measure the
sales proceeds at fair value.
a. Any below-market terms shall be accounted for as a prepayment of lease payments; and
b. Any above-market terms shall be accounted for as additional financing provided by the buyer-lessor to the
seller-lessee.
The entity shall measure any potential adjustment required on the basis of the more readily determinable of:
a. The difference between the fair value of the consideration for the sale and the fair value of the asset; and
b. The difference between the present value of the contractual payments for the lease and the present value of
payments for the lease at market rates.
Transfer of the asset is not a sale
1. The seller-lessee shall continue to recognize the transferred asset and shall recognize a financial
liability equal to the transfer proceeds. It shall account for the financial liability under PFRS 9.
2. The buyer-lessor shall not recognize the transferred asset and shall recognize a financial asset equal
to the transferred proceeds. It shall account for the financial asset under PFRS 9

1. When the lease is qualified for exception and is recognized as an operating lease, the lessee shall recognize
rent expense during the period:
I. Any contingent rent payments (payable) during the period based on rental agreement.
II. Straight-line amortization of total rental payments over the useful life of the asset
III. Straight-line amortization of total rental payments over the lease term
IV. Amortization of any lease bonus over the useful life of the asset
V. Amortization of any lease bonus over the lease term
a. II, IV & V only b. II, IV & V only c. I, IV & V only d. II, III & V only
2. Which statement characterizes an operating lease?
a. Depreciation and interest expense are recorded by the lessee
b. Depreciation and rental revenue are recorded by the lessor
c. Lease rental liability is recorded in the books of the lessee
d. Title of the underlying asset is transferred from the lessor to the lessee
3. The lessee may apply the operating lease model under what condition?
a. Short-term lease only
b. Low value lease only
c. Short-term lease or low value lease and the company apply the exception
d. Under all circumstances
4. Which of the following is not included in the lease liability of the lessee at inception of the lease when
payment is made at the end of each year?
a. the present value of the residual value guaranteed by a third party.
b. the discounted value of the initial lease payment.
c. the present value of the bargain purchase option.
d. the discounted value of the variable payment.
5. Which of the following is not included in the initial cost of the right of use asset (ROUA)?
a. Initial direct cost paid by the lessee.
b. The present value of the expected dismantling cost at the end of lease term.
c. The discounted value of any residual value guaranteed by the lessee.
d. Any lease incentives granted by the lessor to lessee.

LEASES
6. In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease or useful life whichever is
earlier.
b. an unguaranteed residual value and depreciate over the term of the lease or useful life whichever is
longer
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.
7. A lessee with a finance lease containing a purchase option should depreciate the leased asset over the?
a. life of the asset or the term of the lease, whichever is shorter.
b. life of the asset or the term of the lease, whichever is longer.
c. assets useful life when the option is certain to be exercised by the lessee
d. term of the lease when the option is certain to be exercised by the lessee
8. If there is a transfer of title of the leased asset at the end of the lease term but no option price is available
or is certain on the same asset, the depreciation shall be computed using?
a. lease term c. lease term or useful life, whichever is shorter
b. asset’s estimated useful life d. lease term or useful life, whichever is longer
9. If the lease contract specifies a guaranteed residual value at the end of the lease term and the fair value of
the asset is less than the guaranteed residual value, any difference is:
a. is not recognized by the lessee nor the lessor.
b. is recognized by the lessor as a loss.
c. is recognized by the lessee as a loss.
d. Is disclosed only by the lessee in its financial statement.
10. Gross investment in the lease is equal to?
a. The lease payments under a finance lease of the lessor
b. Present value of lease payments under a lessor’s finance lease and any unguaranteed residual value.
c. Present value of the lease payments under a finance lease of the lessor
d. Sum of the lease payments receivable by a lessor under a finance lease and any unguaranteed
residual value accruing to the lessor.
11. Net investment in a direct financing lease is equal to
a. Fair value of the leased asset
b. Fair value of the leased asset plus initial cost paid by the lessor
c. Fair value of the leased asset minus the amount of guaranteed residual value
d. Fair value of the leased asset plus the amount of unguaranteed residual value
12. Which statement characterized a sales type lease?
a. The lessor recognizes only interest revenue over the useful life of the asset
b. The lessor recognizes only interest revenue over the term of the lease
c. The lessor recognizes a dealer’s profit and interest revenue over the lease term.
d. The lessor recognizes a dealer’s profit at the commencement of the lease and interest revenue over
the term of the lease
13. In a sales-type lease, how would the amount of gross profit be affected when the residual value is
unguaranteed?
a. Decrease b. Increase c. Not affected d. Not determinable
14. An entity sold a building at a gain and simultaneously leased back the building. If the lease was reported as
a finance lease at the time of sale and leaseback, the gain should be?
a. The difference of total FV and CV.
b. The difference of total selling price and CV.
c. The difference of allocated FV and CV using the FV approach.
d. The difference of the FV of rights transferred to the lessor and CV of rights transferred by the lessee.
15. Statement 1: In a sale-leaseback transaction, the lessee shall recognize gain or loss on sale-leaseback
transaction equals to the difference of selling price and carrying value of the asset.
Statement 2: The lessee shall recognize right-of-use asset equals to the present value of the lease liability at
inception of the sale-leaseback transaction.
a. Only statement 1 is true c. Both statements are true
b. Only statement 2 is true d. Both statements are false
16. In a sale and leaseback transaction, any excess of fair value over the carrying amount of the asset shall?
a. Recognized entirely in profit or loss immediately.
b. Recognized entirely in other comprehensive income.
c. Recognized partly in profit or loss immediately.
d. Recognized partly in other comprehensive income.

Problem 1: On January 1, 2023, Shantel Inc. entered a lease contract of machinery to another entity and properly
classified the lease as operating lease (applying the exception of PFRS 16 as low value asset). The machinery
with a carrying value of P1,000,000 and remaining useful life of 10 years will be rented for a monthly lease rental
of P20,000 for the first two years and will be adjusted accordingly every two years (six-year lease term).
Furthermore, the escalation clause section of the contract calls for 10% increase in annual rental fee every two
years, this escalation will be effected on rentals for year 2025 and every two years thereafter. The lessor, being
so affectionate with the lessee, granted a free rent period for a period of six months. Rental payment starts on
the month of July 2023. Agreement between parties also states that 2% of annual revenue from use of the
machine or 20% of net income will be paid as additional rent whichever is lower.

LEASES
The summary of total revenue and expenses reported by Landers from use of the machine in 2023 and 2024
were:
2023 2024
Total revenues P3,000,000 P3,450,000
Total expenses (2,870,000) (2,925,000)
Net Income P130,000 P525,000
1. How much is the total rent expense (lessee) and rent income (lessor) in 2023?
a. 349,800 b. 313,800 c. 240,000 d. 213,400
2. How much is the balance of rent payable (prepaid rent) and rent receivable (unearned rent) at the end of
2023, assuming that the required contingent rent was paid on December 31 of each year?
a. P124,800 rent payable and P124,800 rent receivable
b. P119,600 rent payable and P119,600 rent receivable
c. P134,400 prepaid rent and P134,400 of unearned rent
d. P129,600 rent payable and P129,600 of unearned rent
Problem 2: On January 1, 2023, Nikko Corporation entered into three-year nonrenewable lease, commencing
on that date, for office equipment, the office equipment qualifies for company’s policy as a low value asset and
made the following payments to Nathan Company:
Bonus to obtain lease P 60,000
First years rent 210,000
Second to last year’s rent 100,000
*The contract includes four (4) months of free rent on first year.
1. How much is the rent expense of Nikko Corporation in its statement of comprehensive income for year 2023?
a. 100,000 b. 120,000 c. 126,667 d. 133,333
2. How much is the balance of prepaid rent (rent payable) in its statement of financial position as of December
31, 2023?
a. 96,667 b. 76,667 c. 26,667 d. 6,667
Problem 3: On January 1, 2023, Tagaytay Company enters into a ten-year lease of floor building. The building
has estimated useful life of 20 years. Lease payments are P1,500,000 per year all payable at the beginning of
each year. To obtain the lease, Tagaytay Company incurs initial direct cost of P700,000, of which P300,000 relates
to payment to a former tenant occupying that floor of the building and P200,000 relates to a commission paid to
the real estate agent that arrange the lease and the P200,000 pertains to improvements made in the lease
premises. As an incentive to Tagaytay Company for entering the lease, the lessor agrees to reimburse to Tagaytay
Company the amount of P200,000 for leasehold improvements made in the leased property and an additional
free rent for two months in the first year. Tagaytay guarantees a residual value of P500,000 at the end of lease
term. The rate implicit in the lease is 10%.
1. How much is the initial cost of the right-of-use asset recognized by Tagaytay Co. at inception of the lease?
a. 10,181,543 b. 10,331,307 c. 10,831,307 d. 10,972,694
2. How much is the depr. expense in 2023 and carrying value of the right-of-use asset as of Dec. 31, 2023?
a. P1,033,131 and P9,798,177 c. P968,054 and P9,213,489
b. P983,131 and P9,348,177 d. P1,047,269 and P9,925,425
3. How much is the balance of lease liability as of December 31, 2023?

a. 8,780,852 b. 8,980,852 c. 9,631,752 d. 9,714,438
Problem 4: On January 1, 2023, Amada Company leased a building with a useful life of 8 years from Isabella
Company. The lease term is for a period of 6 years. The annual rental is P2,000,000 payable every December 31
of each year starting 2023. Amada Company incurred and paid P600,000 cost directly associated with the contract
of lease. A P300,000 lease incentive was received by Amada Company at the commencement of the lease in form
of reimbursement from the P600,000 paid by Amada. Amada Company has the option to purchase the building
at the end of the lease term at P500,000 and it is reasonably certain that the option will be exercised. The implicit
rate is 10%. The building is estimated to have P800,000 of residual value at the end of lease term and P700,000
at the end of its useful life.
1. What is the amount of interest expense to be reported by Amada in its December 31, 2022 statement of
comprehensive income?
a. 668,124 b. 694,382 c. 789,203 d. 899,276
2. What is the amount of depreciation to be charged against the profit or loss in 2023 and the carrying value of
the right-of-use asset at the end of 2023?
a. P1,074,095 and P8,218,664 c. P1,074,095 and P7,877,299
b. P1,415,460 and P7,877,299 d. P1,415,460 and P8,218,664
3. What is the balance of the lease liability as of December 31, 2023?

a. 8,992,758 b. 7,892,034 c. 6,681,238 d. 5,349,361

LEASES
Problem 5: The following information pertains to a leased contract entered into by Gatlabayan Company, lessee,
on January 1, 2023: Lease term, 5 years, useful life of the leased asset, 20 years; Annual rental payable at year-
end, P800,000 and the implicit rate is 10%.
The lease contract contains an option for Gatlabayan Company to extend for another 5 years but at the
commencement of the lease, the exercise of the option is not reasonably certain, however on January 1, 2026,
the lessee decided to extend the lease term by another 5 years. However, the annual rental at the start of the
6th year (extended term) will be P1,000,000 and the new implicit rate is 8%.
1. What is the new amount of lease liability on January 1, 2026?

a. 3,312,127 b. 3,992,710 c. 4,437,694 d. 4,849,717
2. What is the interest expense in its December 31, 2026 profit or loss?
a. 138,843 b. 387,977 c. 355,016 d. 319,417
3. What is the amount of depreciation to be reported in the Dec. 31, 2026 profit or loss?
a. 467,434 b. 584,293 c. 667,763 d. 934,868
4. What is the carrying amount of the right of use asset on December 31, 2026?
a. 1,213,052 b. 3,461,289 c. 4,006,576 d. 4,674,339
Problem 6: On January 1, 2023, Erico Corporation (lessor) enters into a ten-year lease of equipment to Krish
Corporation (lessee). The building has estimated useful life of 20 years. Lease payments are P380,000 per year
all payable at the beginning of each year. The fair value of the leased asset on this date P3,076,322. The rate
implicit in the lease is 6%. Erico paid P62,598 of direct cost to effect the lease. Implicit rate after the initial direct
costs is 5.5%. Erico Guaranteed a residual value of P200,000.
1. How much is the amount of interest income should Erico recognized in its December 31, 2023 SCI?
a. 111,968 b. 125,942 c. 139,186 d. 151,741
2. How much is the balance of lease receivable as of December 31, 2023?

a. 3,138,920 b. 2,910,661 c. 2,669,847 d. 2,415,789
Problem 7: Solemn Corporation offers leasing alternative to its customer who do not have the necessary funds
or financing available for outright purchase. The data relative to a typical lease offered to Saint Badyang Company
are as follows:
a. The lease is initiated on January 1, 2023. Payments of P560,000 are due on every January 1 for the
duration of the lease term starting 2023.
b. The non-cancellable fixed portion of the lease term is 10 years. The estimated useful life of the asset is
12 years. The rate implicit on the lease is 12 percent.
c. The leased portion of the building is expected to have residual value of P200,000 at the end of 10 years
which the lessee has guaranteed.
d. The assets cost in the book of the lessor is P2,400,000.
1. How much gross profit should Emma recognized at inception of the lease?
a. 1,549,506 b. 1,485,112 c. 1,208,215 d. 1,143,820
2. How much is the amount of interest income should Solemn recognized in its December 31, 2023 SCI?
a. 365,786 b. 342,480 c. 417,744 d. 432,986
3. How much is the balance of lease receivable as of December 31, 2023?

a. 3,048,215 b. 3,414,000 c. 3,196,480 d. 2,952,858
Problem 8: On January 1, 2023, El Nido Company sold an equipment with a remaining life of 8 years and leased
it back for 5 years. The following information pertains to the sale and leaseback transaction:
Selling price 5,000,000
Carrying value as of 1/1/23 3,000,000
Annual rent payable at the end of each year 800,000
Implicit rate of interest 8%
PV factor of ordinary annuity of 1 at 8% for 5 periods 3.9927100
1. If the fair value of the equipment at the time of sale is P5,000,000, what amount of gain or loss from rights
transferred should El Nido recognized?
a. 400,000 b. 722,333 c. 1,277,664 d. 2,000,000
a. 400,000 b. 451,458 c. 548,538 d. 1,000,000
a. 1,500,000 b. 1,097,080 c. 90,2916 d. 600,000
- END -

INCOME TAXES
When a company prepares its tax return for a particular year, the revenues and expenses (and losses) included
on the return are, by and large, the same as those reported on the company's statement of comprehensive
income for the same year. However, in some instances tax laws and financial accounting standards differ. The
reason they differ is that the fundamental objectives of financial reporting and those of taxing authorities are not
the same.
Financial accounting standards are established to provide useful information to investors and creditors. The
government through its tax authority, on the other hand, is primarily concerned with raising public revenues in a
socially acceptable manner and, frequently, with influencing the behavior of taxpayers. In pursuing the latter
objective, the government uses tax laws to encourage activities it deems desirable, such as investment in
productive assets, and to discourage activities it deems undesirable, such as violations of laws.
As consequence of differences between IFRS and tax rules is that tax payments frequently occur in years different
from when the revenues and expenses that cause the taxes are generated.
Methods of Accounting for Deferred Tax

DEFERRAL METHOD – the original amount set aside for deferred tax is retained without alteration for subsequent
changes in tax rate. The deferral method does not keep the deferred tax amount up to date as tax rates change,
and is thus generally held to be inferior to the liability method.
The liability method - the deferred tax balance is adjusted as tax rates changes, thus maintaining the amount
at the actual liability expected to arise. It is subdivided into:
The original IAS permitted a free choice of either the deferral method or liability method and the focus was on
the profit or loss. The revised version of the standards prohibits the use of the deferral method. It requires
application of the liability method that focuses on the statement of financial position (known as the balance
sheet liability method).
LIABILITY METHOD
1) Income Statement Liability method – it focuses on the differences between taxable profit and accounting
profit (timing differences).
Timing differences – these are differences between accounting profits and taxable profits that arise because
the period in which some items of income and expenses are included in accounting profits does not coincide with
the period in which they are included in taxable profits. These differences arise because accounting profits are
determined by accounting standards, such as those of the IAS or IFRS, whereas taxable profits are governed by
tax laws, which set out the basis for the computation of income tax payable. It shall be emphasized that for timing
differences to arise, the items of income and expenses must differ only with respect to the periods in which they
are included. The total of each income or expense item included in accounting profits and taxable profits will
eventually be the same. Therefore, the central characteristic of timing differences is that they originate (arise) in
one or more periods, and reverse (or turnaround) in one or more subsequent periods. Timing differences give
rise to tax effects that are carried forward to one or more subsequent future periods so and accounting entry or
entries should be made to reflect these differences between accounting profits and taxable profits.
Permanent differences – these are the differences between taxable profits and accounting profits for a period
that originate in the current period but are not capable of reversal (or turnaround) in one or more subsequent
future periods. They relate to items of income that are tax-free and items of expenses that are disallowed for
income tax purposes. The permanent differences arise because the items of income or expenses are either
included in accounting profits without a corresponding inclusion in taxable profit. Permanent differences do not
give rise to tax effects in one or more future periods as they are not capable of reversal or turnaround. They do
not normally pose an accounting issue. With their presence, the tax expense in a period may be high or low
compared to the profit before taxation, but there are no accounting entries to be made. IAS 12 do not permit an
entity to correct for the distortion of the effective tax expense rate caused by such permanent difference.
There is a deferred tax asset on timing difference when:
• The amount of revenue recognized for taxation exceeds the amount of revenue recognized for financial
purposes; or
• The amount of expense recognized for financial purposes exceeds the amount of expense recognized for
taxation purposes.
There is a deferred tax liability on timing difference when:
• The amount of expense recognized for taxation purposes exceeds the amount recognized for financial
purposes; or
• The amount of revenue for financial purposes exceeds the amount recognized for taxation purposes.
2) Balance Sheet Liability method – the calculation is made by reference to difference between balance sheet
values and tax values of assets and liabilities (temporary differences). Temporary differences are defined in IAS
12 as differences between the carrying amount of an asset or liability and its tax base. The temporary difference
is used because ultimately all differences between the carrying amount of assets and liabilities and their tax bases
will reverse.

INCOME TAXES
The deferred tax is calculated by reference to the tax base of an asset or liability. The tax base is the amount
attributed to the asset or liability for tax purposes.
The tax base of an asset is therefore the amount that will be deductible for tax purposes against any future
taxable benefits derived from the asset. If the benefits will not be taxable, the tax base of the asset is equal to
its carrying amount.
The tax base of a liability is the carrying amount less any amount that will be deductible for tax purposes in
respect of that liability in future periods. In the case of revenue received in advance, the tax base of the resulting
liability is it’s carrying amount, less any amount of the revenue that will not be taxable in future periods.
The difference between the tax base of an asset or liability and its carrying value is described as a temporary
difference:
• If the carrying value of an asset exceeds the tax base, tax on the difference is taxable temporary
• difference (deferred tax liability).
• If the carrying value of an asset is less than the tax base, tax on the difference is a deductible temporary
difference (deferred tax asset).
• If the carrying value of a liability exceeds the tax base, tax on the difference is a deductible temporary
difference (deferred tax asset).
• If the carrying value of a liability is less than the tax base, tax on the difference is a taxable temporary
difference (deferred tax liability).
Measurement
1. Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to
be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting period.
2. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting period.
3. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are
measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in
which the temporary differences are expected to reverse.
4. The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that
would follow from the manner in which the entity expects, at the end of the reporting period, to recover or
settle the carrying amount of its assets and liabilities.

1. Assuming a 25% statutory tax rate applies to all years involved, which of the following situations will give
rise to reporting a deferred tax liability on the balance sheet?
I. A revenue is deferred for financial reporting purposes but not for tax purposes.
II. A revenue is deferred for tax purposes but not for financial reporting purposes.
III. An expense is deferred for financial reporting purposes but not for tax purposes.
IV. An expense is deferred for tax purposes but not for financial reporting purposes.
a. Items II only b. Items I & II only c. Items II & III only d. Items I & IV only
2. Which of the following is a temporary difference classified as a revenue or gain that is taxable after it is
recognized in financial income?
a. Subscriptions received in advance.
b. Prepaid royalty received in advance.
c. Sales accounted for on the accrual basis for financial reporting purposes and on the installment (cash)
basis for tax purposes.
d. Interest received on government obligations.
3. Which of the following temporary differences results in a deferred tax asset in the year the temporary
difference originates?
I. Accrual for product warranty liability.
II. Subscriptions received in advance.
III. Prepaid insurance expense.
a. I and II only b. II only c. III only d. Items I & III only
4. Which of the following is not considered a permanent difference?
a. Interest received on government obligations.
b. Fines resulting from violating the law.
c. Percentage depletion of natural resources.
d. Share-based compensation expense.
5. When a change in tax rate is enacted into law, its effect on existing deferred income tax accounts should be
a. handled retroactively in accordance with the guidance related to changes in accounting standards.
b. considered, but it should only be recorded in the accounts if it reduces a deferred tax liability or
increases a deferred tax asset.
c. reported as an adjustment to tax expense in the period of change.
d. applied to all temporary or permanent differences that arise prior to the date of the enactment of the
tax rate change, but not subsequent to the date of the change.

INCOME TAXES
6. Tax rates other than the current tax rate may be used to calculate the deferred income tax amount on the
statement of financial position if
a. it is probable that a future tax rate change will occur.
b. it appears likely that a future tax rate will be greater than the current tax rate.
c. the future tax rates have been enacted or substantially enacted.
d. it appears likely that a future tax rate will be less than the current tax rate.
7. Which of the following differences would result in future taxable amounts?
a. Revenues or gains that are taxable before they are recognized in financial income.
b. Expenses or losses that are deductible after they are recognized in financial income.
c. Expenses or losses that are deductible before they are recognized in financial income.
d. Revenues or gains that are recognized in financial income but are never included in taxable income.
8. A temporary difference that would result in a deferred tax asset is
a. accrued warranty expense.
b. accrual commission income.
c. interest revenue on government bonds.
d. excess of tax depreciation over financial accounting depreciation.
9. The current income tax expense (CITE) is:
a. taxable income multiplied by future enacted tax rate.
b. financial income multiplied by current tax rate.
c. taxable income multiplied by current tax rate.
d. financial income multiplied by future enacted tax rate.
10. The total income tax expense (TITE) is the:
a. the sum of current income tax expense and deferred tax liability
b. the difference of current income tax expense and deferred tax expense.
c. the difference of deferred tax liability and deferred tax asset
d. the current income tax expense plus increase in deferred tax liability less increase in deferred tax
asset
11. According to PAS 12, deferred tax assets and liabilities should be reported in the financial statement:
a. as noncurrent asset and noncurrent liability.
b. always net in current asset or net current liability.
c. as current and noncurrent depending on the order of liquidity or maturity.
d. as current and noncurrent assets and liabilities depending on the balance sheet classification of the
related tax basis of the temporary difference.
12. Thunder Company’s financial reporting basis of its plant assets exceeded the tax basis because it uses a
different method of reporting depreciation for financial reporting purposes and tax purposes. If there is no
other temporary differences, Thunder should report a:
a. current tax asset.
b. deferred tax asset.
c. current tax payable.
d. deferred tax liability
13. Which of the following is true regarding reporting deferred taxes in the financial statements?
a. deferred tax assets and liabilities may be classified as noncurrent only.
b. deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
c. deferred tax assets and liabilities are classified as current and noncurrent based on their expiration
date.
d. deferred tax assets are netted with deferred tax liabilities to arrive at one amount presented on the
financial statements.

Problem 1: Bolinao Company reported pretax income of P6,200,000 for the year ended December 31, 2023. The
company record shows the following differences:
Tax depreciation in excess of book depreciation (2027 expected reversal) P200,000
Fines and penalties 75,000
Proceeds from life insurance policy upon death of an officer* 340,000
Interest revenue on bank deposits 125,000
Impairment loss on goodwill 34,000
Provision for litigation expected to settle in 2024 and 2025 in equal amounts 140,000
Installment sales recognized in the book to be collected 60% in 2024 and 40% in 2025 400,000
*The beneficiary of the insurance policy is Bolinao Company
Tax rate is 25% in 2023 and in the future. Payments in previous quarters totaled P310,000.
1. How much is the total income tax expense for the year 2023?
a. 1,471,000 b. 1,461,000 c. 1,456,000 d. 1,450,000
2. How much is the income tax payable?

a. 1,036,000 b. 1,146,000 c. 1,446,000 d. 1,456,000
3. Assume that tax rate for years 2024 is 23% and 2025 and onwards is 24% as enacted by the congress. How
much is the deferred tax asset and deferred tax liability as of December 31, 2023, respectively?
a. 150,000 & 35,000 b. 35,000 & 150,000 c. 93,600 & 80,900 d. 80,900 & 93,600

INCOME TAXES
Problem 2: Torete Corporation’s income statement for the year ended December 31, 2023, shows pretax income
of P3,555,000. The following are treated differently on the tax return and in the accounting records:
Tax Return Book records
Rent income P 120,000 P 70,000
Depreciation 280,000 200,000
Unrealized gain – PL -- 75,000
Royalties received -- 100,000
Entertainment and recreational expense 450,000 560,000
Tax expense (payment of taxes in previous quarters) ? 340,000
Premiums on officer’s life insurance* -- 90,000
*the Corporation is the beneficiary of the insurance policy of the officer.
1. Assume that Torete’s tax rate for 2023 is 25%, what is the amount of income tax payable for 2023?
a. 340,000 b. 387,500 c. 547,500 d. 573,750
2. Assume that Sinayang Ka tax rate for 2022 is 25%, what is the total income tax expense for 2022?
a. 887,500 b. 913,750 c. 573,750 d. 547,500
Problem 3: Krabers Incorporated’s partial income statement after its first year of operation is as follows:
Income before income taxes P3,750,000
Income tax expense
Current P1,035,000
Deferred 90,000 1,125,000
Net Income P2,625,000
Krabers uses straight-line method of depreciation for financial reporting purposes and accelerated depreciation
method for tax purposes. The amount charged to depreciation expenses on its book this year was P1,500,000.
No other differences existed between book income and taxable income except for the amount of depreciation.
Assuming a 30% tax rate, what amount was deducted for depr. on the company’s tax return for the current year?
a. 1,200,000 b. 1,425,000 c. 1,500,000 d. 1,800,000
Problem 4: Benson Co. at the end of 2023, its first year of operation, prepared reconciliation between pretax
financial income and taxable income as follows:
Pretax financial income P400,000
Estimated litigation expense 1,000,000
Installment sales (800,000)
Taxable income P600,000
The estimated litigation expenses of P1,000,000 will be deductible in 2024 and 2025 in equal amounts when it is
expected to be paid. The gross profit from installment sales will be realized in the amount of P500,000 and
P300,000 each of the next two years. The income tax rate is 25% in 2023, 24% in 2024 and 23% in 2025 as
enacted by the congress.
1. How much is the deferred tax liability at year end?

a. 192,000 b. 189,000 c. 184,000 d. 180,000
2. How much is the deferred tax asset at year end?

a. 230,000 b. 235,000 c. 240,000 d. 245,000
Problem 5: On January 2, 2023, Jonald Company acquired from the stock exchange 20,000 shares of Jhobs
Company at the prevailing market price of P60 per share. Jonald Company has designated the shares as equity
investment at Fair value through Other Comprehensive Income. On December 31, 2023 the shares of Jhobs are
selling at P68 per share. On July 1, 2023, Jonald Company paid P300,000 for one year insurance that will expire
on June 30, 2024. The current year income tax rate is 32% while the future tax rate is 30%.
What amount of deferred tax expense (savings) should the Jonald Co. disclose in its 2022 comprehensive income?
a. 45,000 b. 51,200 c. 48,000 d. 93,000
Problem 6: Lyra Company issued a convertible bond on January 1, 2023, that matures in five years. The bond
can be converted into ordinary shares at any time. Lyra has calculated that the liability and the equity components
of the bond are P3,000,000 for the liability component and P1,000,000 for the equity component, giving a total
amount of the bond of P4,000,000. The interest rate of the bond is 6% and local tax legislation allows a tax
deduction for the interest paid in cash.
What amount of deferred tax should be reported in the profit or loss at the time the bonds were issued? (Tax rate
is 32%.)
a. None b. 320,000 c. 960,000 d. 1,200,000
- END -

POST-EMPLOYMENT BENEFITS
POST EMPLOYMENT BENEFITS
Post-employment benefits – are defined as employee benefits (other than termination benefits) that are
payable after the completion of employment or upon retirement.
Post-employment benefit plans – are formal or informal arrangements under which an entity provides post-
employment benefits for one or more employees.
TYPES OF PENSION PLANS:

Pension plan may be a state or government plan or an employer plan. A state plan is one that is administered
by the state or government, such as the plan administered by the Social Security System. An employer plan is
one that is sponsored by the employer.
Pension plan may be contributory or noncontributory. A contributory pension plan is one both the employer
and employee contribute. A noncontributory pension plan is one in which the cost of the plan is paid solely by
the employer; the employee does not contribute to the plan.
Pension plan may be unfunded, partly funded or fully funded. When funded, the contributions are paid to a
separate entity (fund). This entity is tasked to manage the plan’s assets, with the goal of maximizing their
earnings potential.
Pension plan may be a defined contribution plan or a defined benefit plan. A defined contribution plan defines
theamount to be contributed to the plan based on a formula that uses employee compensation as its basis of
calculation. The benefits to be received by the employees will depend on the total amount contributed plus the
earnings on it. A defined benefit plan defines the benefits to be received by employees upon retirement. The
contributions to the plan depend on the defined benefits.
Definitions relating to the net defined benefit liability (asset)

The net defined benefit liability (asset) is the deficit or surplus, adjusted for any effect of limiting a
net defined benefit asset to the asset ceiling. The deficit or surplus is
1. The present value of the defined benefit obligation less
2. The fair value of plan assets (if any)
The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan
or reduction in future contributions to the plan.
The present value of a defined benefit obligation is the present value, without deducting any plan assets, of
expected payments required to settle the obligation resulting from employee service in the current and prior
periods.
The plan assets – are assets held by a long-term benefit fund and qualifying insurance.
The conditions for assets held by a long-term benefit fund are:
a) the assets are held by an entity, the fund itself, that is legally separate from the reporting entity
b) the assets are available to pay only employee benefits
c) the assets are not available to the reporting entity’s own creditors even in bankruptcy and
d) the assets cannot be return to the reporting entity or can be returned to the reporting entity if the remaining
assets of the fund are sufficient to meet all employee benefit obligations or the assets are returned to the
reporting entity to reimburse it for employee benefits already paid.
Qualifying insurance policy – is an insurance policy issued by the insurer that is not a related party of the
reporting entity and the proceeds of the policy can be used only to pay employee benefits and are not available
to the reporting entity’s own creditors even in bankruptcy. The proceed of the policy cannot be paid to the
reporting entity, except
a) When the proceeds represent surplus asset not needed for the policy to pay employee benefits.
b) When the proceeds are returned to the reporting entity to reimburse it to employee benefits already paid.
Plan assets are remeasured at fair value. The fair value is the amount for which an asset could be exchanged
ora liability settled between knowledgeable and willing parties in an arm’s length transaction. Plan assets do
not include unpaid contributions due from the reporting entity to the fund as well as any nontransferable
financial instruments issued by the entity and held by the fund. Plan assets are reduced by any liabilities of the
fund that do not relate to employee benefits.
SERVICE COST COMPRISES:

a) Current service cost which is the increase in the present value of the defined benefit obligation resulting
fromemployee service in the current period.
b) Past service cost which is the change in the present value of defined benefit obligation for employee service
in prior periods, resulting from a plan amendment (the introduction or withdrawal of , or changes to, a defined
benefit plan) or a curtailment ( a significant reduction by the entity in the number of employees covered
by a plan); and
c) Any gain or loss on settlement which the amount of loss (gain) whenever the amount of settlement is not
equals to the carrying value of obligation distinguished.

NET INTEREST COST

Net interest on the net defined benefit liability (asset) is the change during the period in the net defined liability
(asset) that arises from the passage of time. Net interest cost is the difference of interest income and interest
expense.
a) Interest income = Beginning FV of plan asset x discount rate
b) Interest expense = Beginning Defined benefit Obligation x discount rate
Remeasurement of the net defined benefit liability (asset) comprises:

1. Actuarial gains and losses
2. The return on plan assets, excluding amounts included in the net interest on the net defined
liability (asset); and
3. Any change in the effect of the asset ceiling, excluding amounts included in net interest on the
net defined liability (asset)
Actuarial gains and losses - are changes in the present value of the defined benefit obligation resulting from
experience adjustments and the effect of changes in actuarial assumptions. Experience adjustments are
adjustments from the differences between the previous actuarial assumptions and what has actually occurred.
Actuarial assumptions are the entity’s best estimate of the variables that will determine the ultimate cost of
providing postemployment benefits. Actuarial assumptions comprise of demographic and financial assumptions.
Causes of actuarial gains and losses are the following

1. Unexpectedly high or low rates of employee turnover, early retirement or mortality or of increases in
salaries,benefits or medical costs.
2. The effect of changes in estimates of future employee turnover, early retirement or mortality or of
increasesin salaries, benefits or medical costs.
3. The effect of changes in discount rates; and
4. Differences between the actual return on plan assets and the expected return on plan assets.
Actuarial gains and losses do not include changes in the present value of the defined benefit obligation because
of the introduction, amendment, curtailment or settlement of the benefit plan. Such changes result in past service
cost or gains and losses on settlement.
Return on plan assets – the components of return on plan assets include the following:
1. interest, dividends and other revenue derived from the plan assets
2. realized and unrealized gains or losses on the plan assets
The following shall be deducted in determining the return on plan assets

1. Any costs of managing the plan assets or costs of managing investments
2. Any tax payable by the plan itself or any tax on investment income
The return on plan assets is fully recognized as a “remeasurement” and accounted for as component of other
comprehensive income. The amount of remeasurement is equal to the actual return on plan assets minus the
interest income on the fair value of the plan asset at the beginning of the reporting period. Such remeasurement
is included in other comprehensive income without subsequent recycling or reclassification to profit or loss.
Settlement – is a transaction that eliminates all further legal or constructive obligations for part or all of the
benefits provided under a defined benefit plan. The gain or loss on settlement is the difference between the
settlement price and the present value of the defined benefit obligation on the date of settlement. The settlement
price includes any plan assets transferred and any payments made directly by the entity in connection with the
settlement. Any gain or loss on settlement is fully recognized and included in service cost in the computation
of employee benefit expense.
Defined Contribution plan: Is a post-employment benefit plan under which an entity pays fixed contributions
into a separate entity and will have no legal or constructive obligation to pay further contributions if the fund does
not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods.
Defined Contribution Plan recognition and measurement:
An entity should recognize the contribution payable to defined contribution plan in exchange for service rendered
by an employee during a period:
a) as a liability (accrued expense) after deducting any contributions already paid. If the contribution already
paid exceeds the contribution due for service before the balance sheet date, an entity shall recognize that
excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example a reduction
in future payments or a cash refund.
b) As an expense, unless another standard requires or permits the inclusion of the contribution in the cost of
an asset (PAS 2 for inventories and PAS 16 for PPE).
Defined Benefit Plans: Accounting for defined benefit plans is complex because actuarial assumptions are
required to measure the obligation and the expense and there is a possibility of actuarial gains and losses.
Moreover, the obligations are measured on a discounted basis because they may be settled many years after
theemployees render the related service.
Recognition and measurement:
Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an entity,
and sometimes its employees, into an entity, or fund, that is legally separate from the reporting entity and
fromwhich the employee benefits are paid. The payment of benefits when they fall due depends not only on
the financial position and the investment performance of the fund but also on an entity’s ability (and willingness)

to make good any shortfall in the fund’s assets. Therefore, the entity is, in substance, underwriting the actuarial
andinvestment risks associated with the plan. Consequently, the expense recognized for a defined benefit plan
is notnecessarily the amount of the contribution due for the period.
Accounting steps for defined benefits are as follows:

A) Using actuarial techniques to make a reliable estimate of the amount of benefit that employees have earned
in return for their service in the current and prior periods. This requires an entity to determine how much benefit
is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic
variables and financial variables.
Demographic variables or assumptions deal with matters such as:

a) mortality, both during and after retirement
b) rates of employee turnover, disability and early retirement
c) the proportion of plan members with dependents who will be eligible for benefits, and
d) claim rates under medical plans
Financial variables or assumptions deal with items such as:

a) the discount rate
b) future salary and benefit levels
c) future medical costs, including where material, the cost of administering claims and benefit payments, and
d) the expected rate of return on plan assets.
B) Discount the benefit using the Projected Unit Credit Method in order to determine the present value of
thedefined benefit obligation and the current service cost.
An entity discounts the whole of a post-employment benefit obligation, even if part of the obligation falls due
within twelve months of the balance sheet date.
C) Determine the fair value of any plan assets

D) Where a plan has been introduced or changed, determine the resulting past service cost.
E) Where a plan has been curtailed or settled, determine the resulting gain or loss.
Where an entity has more than one defined benefit plan, the entity applies these procedures for each material
plan separately.
Projected Unit Credit Method (sometimes known as the accrued benefit method pro-rated on service or as
thebenefit/years of service method) sees each period of service as giving rise to an additional unit of benefit
entitlement and measures each unit separately to build up the final obligation.
Balance sheet account for a defined benefit plan:

Pension liability is the net total amount of the following
1. the present value of the defined benefit obligation at the balance sheet date
2. minus the fair value at the balance sheet date of plan assets (if any) out of which the obligations are to
besettled directly.
However, if the result of the above computation is negative (surplus), an entity shall measure the resulting asset
(Pension Asset) at the lower of
a) the negative amount, and
b) the present value of any economic benefits available in the form of refunds from the plan or reductions
in future contributions to the plan.
Composition of the defined benefit cost.

1. Service cost which includes, current service cost, past service cost and any gain or loss on settlement
2. Net interest expense or income – interest on the beginning defined benefit obligation and interest on the
beginning plan asset. The rate to be used is the settlement rate or discount rate.
3. Remeasurement which comprise of the following: (a) actuarial gain and loss (b) actual return on plan
assetless interest income on the plan asset, and (c) any change in the asset ceiling.
Past service cost - is the change in the present value of defined benefit obligation for employee service in prior
periods resulting from plan amendment or curtailment. Plan amendment includes introduction of defined benefit
plan or changes to an existing defined benefit plan. Plan curtailment is a significant reduction by the entity in
thenumber of employees covered by the defined benefit plan. Curtailment may arise from an isolated event,
such as (a) closing of a plant (b) discontinuance of an operation, and (c) termination or suspension of a plan.
Past servicecosts whether vested or unvested shall be recognized outright as an expense

1. Statement 1: Employers are at risk with defined-benefit plans because they must contribute enough to
meetthe cost of benefits that the plan defines.
Statement 2: The interest expense component of pension expense in the current period is computed by
multiplying the discount rate by the beginning balance of the defined benefit obligation.
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false

2. Which of the following is not a component of benefit (pension) expense?

a. Current service cost
b. Past service cost
c. Actuarial loss on defined benefit obligation due to changes in actuarial assumption.
d. Amount of benefits paid to retirees on scheduled date
3. In accordance with PAS19R, which of the following is reported in profit or loss?
a. Actuarial loss on defined benefit obligation.
b. Actuarial gain on plan assets.
c. Interest in the effect of asset ceiling.
d. Increase in defined benefit obligation due to changes in actuarial assumption.
4. It is the present value of any economic benefits available in the form of future refunds from the plan
orreduction in future contributions to the plan.
a. asset surplus
b. asset benefit
c. asset ceiling
d. asset cancellation
5. Which of the following items affect both the balance of defined benefit obligation and the FV of plan asset?
a. total service recognized in comprehensive income during the period.
b. contributions made during the period.
c. the amount of net interest costs recognized during the period.
d. payments of benefits made to retirees during the period.
6. Which of the following will result to a surplus?
a. Defined benefit obligation at the end is higher than the FV of plan asset at the end.
b. FV of plan asset at the end is lower than the defined benefit obligation at the end.
c. Defined benefit obligation at the end is lower than the FV of plan asset at the end.
d. FV of plan asset at the end is equal to the defined benefit obligation at the end.
7. The total change in the effect of asset ceiling:
a. shall reported in other comprehensive income as benefit expense.
b. shall reported in profit or loss as benefit expense.
c. shall reported in comprehensive income as benefit expense.
d. shall reported in the statement of financial position as prepaid benefit expense.
8. When asset ceiling is lower than the defined benefit asset (surplus) at the end of the period:
a. The amount reported in the statement of financial position as prepaid pension asset is the asset
ceiling.
b. The amount reported in the statement of financial position as prepaid pension asset is the surplus.
c. The amount reported in the statement of financial position as prepaid pension asset is the
difference of the FV of plan asset and defined benefit obligation at the end of the period.
d. No amount is reported as prepaid pension asset in the statement of financial position.

Problem 1: Kirk Company has a define contribution plan that covers its existing employees. The terms of the
plan require Kirk to contribute 4% of the annual employee salaries to the retirement plan each year. The payroll
shows the annual salaries and contributions made as follows:
Year Gross Payroll Contributions made
2022 P8,200,000 P298,000
2023 9,700,000 478,000
1. How much is the benefit expense in 2023 profit or loss?

a. 298,000 b. 328,000 c. 388,000 d. 478,000
2. How much is the balance of prepaid benefit expense (accrued benefit expense) as of December 31, 2023?
a. 60,000 prepaid b. 90,000 accrued c. 60,000 accrued d. 90,000 prepaid
Problem 2: Mobile Company encourages its employees older than 60 years old to extend their employment with
the entity by promising a lump sum benefit equal to 2% of final salary for each year of service they remain
employed by the entity after their 60th birthday provided they remain employed until they are 65, at which time,
in accordance with local laws, employees are required to retire. The benefit is payable to the employees on
retirement. There are three (3) employees entitled for the benefit whose 60th birthday is on January 1, 2023.
Their salary rates for the year ended December 31, 2023 is P1,200,000.
In 2023 and 2024, the entity made the following assumptions:

• Employee salary rate should increase by 5% compounded each year.
• The rate of return on high-quality corporate bonds is 10%.
• The employee salary rate for 2024 is P1,260,000.
1. How much is the current service cost in 2023 profit or loss?

a. 39,850 b. 43,835 c. 47,820 d. 87,670
2. Assuming that at the beginning of 2025, the management increased the benefit rate to 3% as a result of plan
amendment. How much is the past service cost?
a. 48,219 b. 72,327 c. 87,516 d. 120,546

Problem 3: On January 1, 2023, Mariana Company reported the fair value of plan assets at P7,200,000 and
defined benefit obligation at P6,500,000. Transactions affecting the balances for the current year are as follows:
Current service cost P1,250,000

Past service cost 500,000
Contribution to the plan 1,750,000
Benefits paid to retirees 1,500,000
Actual return on plan assets 750,000
Decrease in defined benefit obligation due to changes in actuarial assumption 200,000
Rate of return on high-quality corporate bonds 10%
Rate of return on government bonds 12%
1. How much is the balance of the FV of plan asset as of December 31, 2023?
a. 8,170,000 b. 8,200,000 c. 8,230,000 d. 8,410,000
2. How much is the balance of the Defined benefit Obligation as of December 31, 2023?
a. 7,200,000 b. 7,400,000 c. 7,600,000 d. 7,800,000
3. How much is the benefit expense reported in its profit or loss in 2023?
a. 2,050,000 b. 1,820,000 c. 1,680,000 d. 1,450,000
4. How much is the benefit expense (gain) reported in other comprehensive income in 2023?
a. 230,000 b. (230,000) c. (70,000) d. 70,000
5. What amount of net defined benefit asset (liability) is reported in its December 31, 2023 statement of financial
position?
a. 570,000 asset b. 610,000 asset c. 630,000 asset d. 1,000,000 asset
Problem 4: The following relates to the defined benefit pension plan for the year ending December 31, 2023:
January 1 December 31
Fair value of Plan assets P4,200,000 P5,000,000
Present value of benefit obligation 4,000,000 4,500,000
Net defined benefit asset P200,000 P500,000
Asset ceiling 100,000 300,000
Effect of asset ceiling P 100,000 P200,000
The following were provided in 2023:

Current service cost P250,000
Contribution to the plan 650,000
Benefits paid 450,000
Rate on high quality corporate bonds 12%
1. How much is the benefit expense reported in its profit or loss in 2023?
a. 238,000 b. 226,000 c. 286,000 d. 304,000
2. How much is the benefit expense (gain) reported in other comprehensive income in 2023?
a. 404,000 b. 416,000 c. 212,000 d. 112,000
- END -

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4501

CPA Review Batch 45  May 2023 CPA Licensure Examination

CASH & CASH EQUIVALENTS

a. Three-month commercial paper or money market instrument

Valuation of Cash in the Statement of Financial Position

Cash in Closed Banks or in Banks having Financial Difficulty

Financial Statement Presentation

FINANCIAL ACCOUNTING & REPORTING - THEORIES

Page 1 of 10 0915-2303213  www.resacpareview.com

3. Which of the following is usually considered cash?

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FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Securities: Date Acquired Maturity Date Amount

c. Check payable to Turtledoves Corporation, undeposited, dated May 1, 2021, included

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The above information indicates that there is a

How much is the correct cash in bank on December 31, 2021?

The adjustment to the cash balance as of December 31, 2021 is

Page 4 of 10 0915-2303213  www.resacpareview.com

Balance per bank, October 31 P420,000

3. How much is the Adjusted Cash in Bank?

PROBLEM 1: (COMPOSITION, CASH COUNT)

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PROBLEM 2: (CASH COUNT)

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PROBLEM 3: (CASH COUNT)

Currency and coins P24,620

PROBLEM 4: (BANK RECONCILIATION; PROOF OF CASH)

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PROBLEM 5: (BANK RECONCILIATION; PROOF OF CASH)

PROBLEM 6: (RAP; INTERNAL CONTROLS, TEST OF CONTROLS, SUBSTANTIVE TESTING)

Page 8 of 10 0915-2303213  www.resacpareview.com

Page 9 of 10 0915-2303213  www.resacpareview.com

14. In rendering cash counts, the accountability shall represent:

15. In rendering cash counts, cash shortage results when:

16. Which of the following is correct regarding cash counts?

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Nature of note receivable

At the date of initial recognition notes receivable are valued at:

Valuation at reporting date

Presentation of receivables in the financial statements

Impairment of Loans and Receivables:

Stages in the Measurement and Recognition of Impairment

Page 1 of 9 0915-2303213  www.resacpareview.com

Specific Assignment of Account receivable

Factoring of Accounts receivable

Discounting Notes Receivable

Computation of Cash Proceeds of Notes Receivable Discounting

FINANCIAL ACCOUNTING & REPORTING - THEORIES

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FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Page 3 of 9 0915-2303213  www.resacpareview.com

Page 4 of 9 0915-2303213  www.resacpareview.com

PROBLEM 1: (GL AND SL RECONCILIATION AND AGING OF RECEIVABLES)

Balance per Subsidiary Ledger P3,890,000

Page 5 of 9 0915-2303213  www.resacpareview.com

PROBLEM 2: (CONFIRMATION OF RECEIVABLES AND AGING OF RECEIVABLES)

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PROBLEM 4: LOANS RECEIVABLE – FINANCING CONCERN/EXPECTED CREDIT LOSS RECOGNITION