NCR CUP 2: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

Elimination Round Questions and Answers

Easy
1. A not-for-profit entity has all of the following characteristics except that it will

a. operate for purposes other than to provide goods or service

b. at a profit.
c. have a positive fund balance.
d. not possess ownership interests like a corporation.
e. receive significant contributions from providers who do not
f. expect returns.

Answer: B
A not-for-profit entity operates for purposes other than to provide goods or service at a
profit, does not possess ownership interests like a corporation and receive significant
contributions from providers who do not expect returns.

2. A partnership in liquidation has converted all assets into cash and paid all liabilities. The order
of payment

a. will have amounts due to partners with respect to their capital accounts take
precedence over amounts owed by partners other than for capital and profits.
b. will be according to the partners residual profit and loss sharing ratios.
c. will have amounts owed by partners other than for capital and profits take
precedence over amounts due to partners with respect to their capital
accounts.
d. Will be by any manner that is both reasonable and rational for the partnership.

Answer: C
The order of payment upon liquidation of a partnership will have amounts owed by
partners other than for capital and profits take precedence over amounts due to
partners with respect to their capital accounts.

3. The year-end balance sheet and residual profit and loss sharing percentages for the Ara,
Belle, and Grace partnership on December 31, 2005, are as follows:

Cash P 30,000
Accounts payable P 200,000
Loan to Ara 40,000
Loan from Belle 50,000
Other assets 480,000
Ara, capital (25%) 70,000
Belle, capital (25%) 80,000
Grace, capital (50%) 150,000

The partners agree to liquidate the business and distribute cash when it becomes available. A
cash distribution plan for the Ara, Belle, and Grace partnership will show that cash available,
after outside creditors are paid, will initially go to

a. Ara in the amount of P20,000.

b. Belle in the amount of P45,000.
c. Belle in the amount of P55,000.
d. Grace in the amount of P90,000.

Answer: C
Vulnerability ranks:
Ara equity (P70,000 - P40,000)/.25 = P120,000 = 1
 Belle equity (P80,000 + P50,0000/.25 = P520,000 = 3
Grace equity (P150,000/.5) = P300,000 = 2

Assumed loss absorption:

25% 25% 50%

Ara Belle Grace Total

Equities P30,000 P130,000 P150,000 P310,000

Loss to
Eliminate (30,000) (30,000) (60,000) (120,000)
Subtotals 0 P100,000 P90,000 P190,000
Loss to
Eliminate (45,000) (90,000) (135,000)
Subtotals P55,000 P0 P55,000

4. Under IFRS a parent may exclude a subsidiary from consolidation only if all of the following
conditions exist, except

a. It is wholly or partially owned and its owners do not object to nonconsolidation.

b. It does not have any debt or equity instruments publicly traded.
c. It has one class of stock.
d. Its parent prepares consolidated financial statements that comply with IFRS.

Answer: C
The requirement is to identify the item that is not a condition to exclude a subsidiary
from consolidation under IFRS. Answer (c) is correct because it is not required that the
subsidiary have only one class of stock.

5. A silent partner in a general partnership

a. Helps manage the partnership without letting those outside the partnership know
this.
b. Retains unlimited liability for the debts of the partnership.
c. Both of the above are correct.
d. None of the above is correct.

Answer: B
A silent partner does not help manage the partnership but still has unlimited liability.

6. When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mills
interest exceeded Mills capital balance. Under the bonus method, the excess

a. Was recorded as goodwill.

b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.

Answer: C
Under bonus method, the excess payment to the retiring partner shall reduce the
capital balances of the remaining partners.

7. Franchise fees are properly recognized as revenue

a. when received in cash.

b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.
 Answer: D
Franchisors record initial franchise fees as revenue only when and as they make
substantial performance of the services they are obligated to perform and when
collection of the fee is reasonably assured.

8. JUMBO Corp. uses the percentage-of-completion method of revenue recognition in

accounting for its long-term construction contracts. JUMBO Corp.s progress billings account
is a

a. Revenue account
b. Non-current liability account
c. Contra current asset account
d. Contra non-current asset account

Answer: C
In the construction industry, operating cycles for construction contracts generally
exceed one year. Therefore, the predominant practice is to classify all contract-related
assets and liabilities as current. On the balance sheet, the Construction in Progress
(CIP) account is netted with the contra account, progress billings. If CIP exceeds
billings, the excess is reported as a current asset. If billings exceed CIP, the excess is
reported as a current liability.

9. Sagip Kapatid Charities, a not-for-profit agency, receives free electricity on a continuous

basis from a local utility company. The utility companys contribution is made subject to
cancellation by the donor. Sagip Kapatid Charities should account for this contribution as a(n)

a. Unrestricted revenue only.

b. Restricted revenue only.
c. Unrestricted revenue and an expense.
d. Restricted revenue and an expense.

Answer: C
A contribution of utilities, such as electricity, as a contribution of other assets, not a
contribution of services. A simultaneous receipt and use of utilities should be
recognized as both an unrestricted revenue and an expense in the period of receipt
and use. The revenue and expense should be measured at estimated fair value. This
estimate can be obtained from the rate schedule used by the utility company to
determine rates charged to a similar customer.

10. It is generally presumed that an entity is a variable interest entity subject to consolidation if its
equity is

a. Less than 50% of total assets.

b. Less than 25% of total assets.
c. Less than 10% of total assets.
d. Less than 10% of total liabilities.

Answer: C

It is presumed that an entity with equity of less than 10% of total assets does not have
sufficient funding to finance its activities unless there is definitive evidence to the
contrary.
Average

1. Property was purchased on December 31, 2018 for 20 million baht. The general price index in
the country was 60.1 on that date. On December 31, 2020, the general price index had risen
to 240.4. If the entity operates in a hyperinflationary economy, what would be the carrying
amount in the financial statements of the property after restatement?

a. 20 million baht
b. 1.2 million baht
c. 80 million baht
d. 4.808 million baht

Answer: C
20 million x 240.4 / 60.4 = 80 million baht

2. Certain balance sheet accounts in foreign subsidiary of Cherry Company at December 31,
2018, have been stated into Philippine pesos as follows:

Stated at
Current rates Historical rates
Accounts receivable, short term 200,000 220,000
Accounts receivable, long term 100,000 110,000
Prepaid insurance 50,000 55,000
Goodwill 80,000 85,000
230,000 250,000

This subsidiarys functional currency is a foreign currency. What total amount of the preceding
items should be included in Cherrys balance sheet?

a. 430,000
b. 435,000
c. 440,000
d. 450,000

Answer: A
The foreign currency is the functional currency, so a translation method or closing rate
method is appropriate. All assets are translated at the current exchange rate of
430,000.

3. Holmes Corporation started operations on January 1, 2016 selling home appliances and
furniture sets both for cash and on installment basis. Data on the installment basis sales
operations of the Company gathered for the years ending December 31, 2016 and 2017 were
as follows:

2016 2017
Installment sales 400,000 500,000
Cost of installment basis 240,000 350,000
Cash collected on installment sales:
2014 installment sales 210,000 150,000
2015 installment sales 300,000

Additional information:
On January 5, 2018, an installment sales on 2016 was defaulted and the merchandise with an
appraised value of 5,000 was repossessed. Related installment receivable balance on
January 5, 2018 was 8,000.

Recording the repossessed merchandise at its appraised value, gain or loss on the
repossession should be:
 a. No gain or loss
b. 200 gain
c. 1,800 gain
d. 3,000 loss

Answer: B
Appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Less: Unrecovered cost:
Unpaid balance 2016 . . . . . . . . . . . . . . . . . 8,000
Less: Deferred gross profit 2010
(8,000 x 160/400) . . . . . . . . . . . . . . . . . 3,200 4,800
Gain on repossession 200

4. Langdon Inc. manufactures a product that gives rise to a by-product called Cerca. The only
costs associated with Cerca are additional processing costs of 1.00 for each unit. Langdon
accounts for Cerca sales first by deducting its separable costs from such sales and then by
deducting this net amount from the cost of sales of the major product. For the past year,
2,000 units of Cerca were produced which were sold for 3.00 each.

Sales revenue and cost of goods sold from the main product were 500,000 and 400,000
respectively. Compute the gross margin after considering the by-product sales and costs.

a. 96,000
b. 100,000
c. 104,000
d. 106,000

Answer: C
500,000 - (400,000 - 4,000) = 104,000

5. On January 1, 2018, Augustus Company sold land that cost 60,000 for 80,000, receiving a
note bearing interest at 10%. The note will be paid in three annual installments of 32,170
starting on December 31, 2018. Because collection of the note is very uncertain, Colt will use
the cost recovery method. How much revenue (profit from sale and interest) from this sale
should Colt recognize in 2018?

a. 0
b. 6,000
c. 8,000
d. 20,000

Answer: A
Under the cost recovery method, no income is recognized on a sale until the cost of
the item sold is recovered through cash receipts. All cash receipts, both interest and
principal portions are applied first to the cost of the items sold. Then, all subsequent
receipts are reported as revenue. Because all costs have been recovered, the
recognized revenue after the cost recovery represents income (interest and realized
gross profit). This method is used only when the circumstances surrounding a sale are
so uncertain that earlier recognition is impossible.

6. Watson Corp. (a Philippine-based company) sold parts to a foreign customer on December 1,

2017, with payment of 10 million foreign currencies to be received on March 31, 2018. The
following exchange rates apply:
Forward rate
Dates Spot Rate (for 3/31/2018)
December 1, 2017 0.0035 0.0034 (4 months)
December 31, 2017 0.0033 0.0032 (3 month)
March 31, 2018 0.0038 N/A
 Watsons incremental borrowing rate is 12%. The present value factor for three months at an
annual rate of interest of 12% (1% per month) is 0.9706. Assuming that Watson entered into
no forward contract, how much foreign exchange gain or loss should it report on its 2017
income statement with regard to this transaction?

a. 5,000 gain
b. 3,000 gain
c. 2,000 loss
d. 1,000 loss

Answer: C
No forward contract, therefore, only the sale transaction:
(0.0035 - 0.0033 = 0.0002 loss x 10 million foreign currencies = 2,000 loss)

7. The Milky Way Company owns 75% of The Andromeda Company. On December 31, 2018,
the last day of the accounting period, Andromeda sold to Milky Way a noncurrent asset for
200,000. The assets original cost was 500,000 and on December 31, 2018 its carrying
amount in Andromedas books was 160,000. The groups consolidated statement of
financial position has been drafted without any adjustments in relation to this noncurrent
asset.

Under PAS 27 Consolidated and separate financial statements, what adjustments should be
made to the consolidated statement of financial statement figures for retained earnings and
non-controlling interest?

Retained earnings Non-controlling interest

a. Increase by 225,000 Increase by 75,000
b. Increase by 300,000 No change
c. Reduce by 30,000 Reduce by 10,000
d. Reduce by 40,000 No change

Answer: C
Upstream sales:
Selling price of non-current asset 200,000
Less: Book/carrying value, date of sale 160,000
Gain on intercompany sale 40,000

Incidentally, the eliminating entries (assuming books are already closed) would be as
follows:
Retained earnings - Parent (75% x 40,000) 30,000
Non-controlling interest (25% x 40,000) 10,000
Noncurrent asset 40,000

The profit on intragroup assets are to be eliminated in full. Only the group share of the
profits of the subsidiary are taken to group retained earnings.
This is because the subsidiary sold the asset to the parent. This gain is not realized
from a group perspective per PFRS 10 and must be removed in full. It is then allocated
between the shareholders of the subsidiary, in the form of retained earnings (group
share of the gain) and the non-controlling interest.
8. If the Alaska Museum, a not-for-profit organization, received a contribution of historical
artifacts, it need not recognize the contribution if the artifacts are to be sold and the proceeds
used to

a. Support general museum activities.

b. Acquire other items for collections.
c. Repair existing collections.
d. Purchase buildings to house collections.

Answer: B
An entity need not recognize the contributions of works of art and historical artifacts if
the collection is held for public exhibition rather than financial profit, cared for and
preserved, and, if sold, the proceeds are used to acquire other items for collections.

9. A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an
unrecognized firm commitment, is classified as a

a. Fair value hedge.

b. Cash flow hedge.
c. Foreign currency hedge.
d. Underlying.

Answer: A
A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized
asset or liability or firm commitment.

10. Planet Company acquired a 70% interest in the Star Company in year 1. For the year ended
December 31, year 2, Star reported net income of 80,000. During year 2, Planet sold
merchandise to Star for 10,000 at a profit of 2,000. The merchandise remained in Stars
inventory at the end of year 2. For consolidation purposes what is the non-controlling
interests share of Stars net income for year 2?

a. 23,400
b. 24,000
c. 24,600
d. 26,000

Answer: B
Because Planet owns 70% interest in Star, the non-controlling interest in star is 30%.
Therefore, the non-controlling interests share in Stars net income of 80,000 is
30% 80,000 = 24,000. Planets sale of merchandise to Star for 10,000 will be
eliminated on the consolidated worksheet, and Planets income will be reduced by the
intercompany profit of 2,000. This will not affect the non-controlling interests share
of income because it was a downstream sale from the parent to the subsidiary and is
eliminated by the parent.
Difficult

1. In general, an acquirer measures and accounts for assets acquired and liabilities assumed or
incurred in a business combination after the business combination has been completed in
accordance with other applicable IFRSs. However, which of the following that the International
Financial Reporting Standards 3 Business Combinations (IFRS 3) specifically provides
accounting requirements?

a. reacquired rights
b. contingent liabilities
c. contingent consideration
d. insurance contracts.

Answer: D
Paragraph 17 of IFRS 3 Business Combinations provide one of the two exceptions of
which insurance contracts are covered by IFRS 4 Insurance Contracts.

2. The governing board of Hirap Hospital, a nonprofit hospital affiliated with a religious
organization, acquired 100 BaMI Company bonds for P103,000 on June 30, 2016.

The bonds pay interest on June 30 and December 30. On December 31, 2016, interest of
P3,000 was received from BaMI, and the fair value of the BaMI bonds was P105,000. The
governing board acquired the BaMI bonds with cash which was unrestricted, and it classified
the bonds as trading securities at December 31, 2016, since it intends to sell all of the bonds
in January 2017. As a result of the investment in BaMI bonds, what amount should be included
in revenue, gains, and other support on the statement of operations for the year ended
December 31, 2016?

a. P0
b. P3,000
c. P2,000
d. P5,000

Answer: D
According to the AICPA Audit and Accounting Guide, Health Care Organizations,
unrealized gains on trading securities should be included as part of the amount
reported for revenue, gains, and other support on the statement of operations. These
unrealized gains are included in the performance indicator. Likewise, unrestricted
revenues from interest and dividends are included as part of the amount reported for
revenue, gains, and other support on the statement of operations. Therefore, Hirap
Hospital should report both the P3,000 of interest revenue and the P2,000 unrealized
holding gain (P105,000 less P103,000) in the amount reported for revenue, gains, and
other support on its statement of operations for the year ended December 31, 2016.

3. To determine whether it controls an investee an investor shall assess whether it has all the
following, except:

a. the purpose and design of the investor

b. exposure, or rights, to variable returns from its involvement with the investee
c. the ability to use its power over the investee to affect the amount of the investor's
returns
d. power over the investee.

Answer: A
 Paragraph B.2 of the Appendices to IFRS 10, Consolidated Financial Statements, states
on how to assess and determine whether an investor controls an investee on which it
has all the following:
(a) power over the investee;
(b) exposure, or rights, to variable returns from its involvement with the investee;
and
(c) the ability to use its power over the investee to affect the amount of the investor's
returns.

4. On January 1, 2016, Kaloka Corp. purchased all of Taranta Corp.s common stock for
P1,200,000. On that date, the fair values of Tarantas assets and liabilities equaled their
carrying amounts of P1,320,000 and P320,000, respectively. During 2016, Taranta paid cash
dividends of P20,000. Selected information from the separate balance sheets and income
statements of Kaloka and Taranta as of December 31, 2016, and for the year then ended
follows:
Kaloka Taranta
Balance sheet accounts
Investment in subsidiary P1,320,000 --
Retained earnings 1,240,000 560,000
Total stockholders equity 2,620,000 1,120,000
Income statement accounts
Operating income 420,000 200,000
Equity in earnings of Sharp 140,000 --
Net income 400,000 140,000

In Kalokas December 31, 2016 consolidated balance sheet, what amount should be reported
as total retained earnings?

a. P1,240,000
b. P1,360,000
c. P1,380,000
d. P1,800,000

Answer: A
When the equity method of accounting is used, the parent companys retained
earnings will be equal to the consolidated retained earnings balance. It can be
determined that the equity method is being followed because the account Equity in
earnings of Taranta appears in the parents income statement. In addition it is
important to note that the balance sheet accounts presented are dated as of the end of
the year; therefore, the parent companys retained earnings of P1,240,000, should
already include all income statement balance account adjustments. Thus, no additional
income amounts will need to be added to the P1,240,000 retained earnings balance, in
order to determine the total retained earnings balance.

5. Which of the following is true?

a. In a joint arrangement, a single party controls the arrangement on its own.

b. An arrangement can be a joint arrangement when all of its parties have joint control
of the arrangement.
c. An entity that is a party to an arrangement shall assess whether the contractual
arrangement gives all the parties, or a group of the parties, control of the
arrangement individually.
d. A party with joint control of an arrangement can prevent any of the other
parties, or a group of the parties, from controlling the arrangement.

Answer: D
Answer A is incorrect because in a joint arrangement, no single party controls the
arrangement on its own.
 Answer B is incorrect because an arrangement can be a joint arrangement even
though not all of its parties have joint control of the arrangement.
Answer C is incorrect because an entity that is a party to an arrangement shall assess
whether the contractual arrangement gives all the parties, or a group of the parties,
control of the arrangement collectively.

6. The following condensed balance sheet is presented for the partnership of Erwin and Levi,
who share profits and losses in the ratio of 60:40, respectively:

Other Assets 450000

Erwin, Loan 20000
470000
Accounts
Payable 120000
Erwin, Capital 195000
Levi, Capital 155000
470000

The partners have decided to liquidate the partnership. If the other assets are sold for
P385,000, what amount of the available cash should be distributed to Erwin?

a. P136,000
b. P156,000
c. P159,000
d. P195,000

Answer: A

This situation represents a simple liquidation since all assets are distributed at one
point in time rather than in installments. In a simple liquidation all of the noncash
assets are sold and the proceeds from their sale are compared to their book value to
compute the gain or loss. The gain or loss on the assets is then distributed to the
partners accounts before any of the cash is distributed. The partner loan should not
be considered a noncash asset for the purpose of determining gain or loss, thus, Erwin
is responsible to the partnership for the repayment of the entire amount of the loan.
The repayment of the loan reduces that partners (Erwin) distribution as follows:

Partner balances
before liquidation Erwin Levi Total
Loan (debit) P(20,000) -- P(20,000)
Capital (credit) 195,000 P155,000 350,000
Net balances P175,000 P155,000 P330,000
Loss on sale of other assets (450 385) 39,000 26,000 (65,000)
Cash available for partners P136,000 P129,000 P265,000
Cash available for credits 120,000
Total cash from sale of noncash assets $385,000

7. IFRS 4 Insurance Contracts applies to the following except:

a. Insurance contracts
b. Product warranties issued directly by a manufacturer, dealer or retailer
c. Financial instruments that it issues with a discretionary participation feature
d. Reinsurance contracts.

Answer: B
 IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions, Contingent
Liabilities and Contingent Assets are the applicable standards for product warranties
issued directly by a manufacturer, dealer or retailer.

8. HARLEY QUINN Hospital, a nonprofit affiliated with a religious group, reported the following
information for the year ended December 31, 2011:

Gross patient service revenue at the hospitals full established rates 980,000
Bad debts expense 10,000
Contractual adjustment with the third-party payors 115,000
Allowance for discounts to hospital employees 15,000

On the hospitals statement of operations for the year ended December 31, 2011, what
amount should be reported as net patient service revenue?

a. P840,000
b. P865,000
c. P850,000
d. P955,000

Answer: C

Health Care Organizations, provides that for contractual adjustments and discounts is
recognized on the accrual basis and deducted from gross patient service revenue to
determine net patient revenue. Bad debts expense is reported as an operating
expense, not as a contra to gross patient service revenue.
Thus,

Gross patient service revenue 980,000

Contractual adjustments (115,000)
Allowance for discounts - employees (15,000)
Net Patient Service Revenue 850,000

9. Matatalo Tayo Ventures operates a branch in Cebu City. Selected accounts taken from the
May 31, 2016 statements of Matalo Tayo and its branch follow:

Home Office Branch

Sales P380,000 P353,000
Shipments to branch 150,000 -
Shipments to branch-loading 39,500 -

Inventory, June 1, 2015 24,000 16,000

Purchases 300,000 60,000

Shipments from home office - 187,500

Inventory, May 31, 2016 28,000 20,700

The branch ending inventory included items costing P8,700 that were acquired from outside
suppliers. What is the realized markup on branch merchandise that would be recognized by the
home office?

a. P39,500
b. P37,500
c. P37,100
d. P39,100
 Answer: C
Shipments to branch-loading/allowance for
overvaluation of merchandise before adjustments 39,500
Allowance for overvaluation of ending inventory (after
adjustment): (20,700-8,700)x25/125* (2,400)
Realized mark up on branch merchandise 37,100

*Since there are no shipments in transit and there was no error in recording shipments,
therefore, the shipments from office account was correctly recorded, so, to compute
for the billing price would be: 187,500/150,000 = 25%. Markup on cost would be 25%

10. Zero, Inc. was involved in two default and repossession cases during the year:

I. A refrigerator was sold to Sweet Sixteen for P 18,000, including a 35% mark up on selling
price. Sweet made a down payment of 20%, four of the remaining 16 equal payments, and
then defaulted on further payments. The refrigerator was repossessed, at which time
the fair value was determined to be P 6,000.
II. An oven that cost P 12,000 was sold to Teen Eighteen for P 16,000 on the installment
basis. Teen made a down payment of P 2,400 and paid P 800 a month for six months, after
which he defaulted. The oven was repossessed and the estimated value at the time of
repossession was determined to be P 7,500.

What is the gain or loss on repossession that Zero, Inc. must report for financial reporting
purposes?

a. P1,100 loss
b. P1,020 loss
c. P 900 gain
d. P 120 loss

Answer: B
In Case A, the loss on repossession is computed as follows:
Fair value of repossessed merchandise P 6,000
Less: Unrecovered cost
(P18,000 - 3,600 - (900* x 4)) x 65% 7,020
Loss on repossession P 1,020
*Remaining equal payments (P18,000 x 80%) / 16 = P900
In Case B, there is a gain on repossession of P900. It is not reported in the financial
statements as the repossessed merchandise should be carried at the lower of cost or
net realizable value.