Dynamic Society of Accounting Students (DySAS)

Financial Accounting 2 Quiz bowl (Elimination Round)

Second Semester S.Y. 2011– 2012

1. In January 2009, Kris Co. made a long term-improvement to a recently leased building. The lease agreement provides for neither a transfer of
title to Kris nor a bargain purchase option. The present value of minimum lease payments is not a substantial potion of the building`s market value,
and the lease term is half of t building’s economic life. Should asset be recognized for the building and leasehold improvements?
BUILDING LEASEHOLD IMPROVEMENTS BUILDING LEASEHOLD IMPROVEMENT
A. YES YES C. YES NO
B. NO YES D. NO NO

2. Which is incorrect concerning the recognition and measurement of an intangible asset?

a. If an intangible asset is acquired separately, the cost comprises its purchase price, including import duties and taxes and any directly attributable
expenditure of preparing the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is based on its fair value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the cost is equal to its fair value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the total payments over the credit period.

3. Which statement is incorrect regarding PPE?

a. Items of PPE should be recognized as assets when it is probable that the future economic benefits associated with the asset will flow to the
enterprise and the cost of the asset can be measured reliably.
b. If an asset acquired in exchange for another asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.
c. Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset.
d. Depreciation is not recognized if the fair value of the asset exceeds its carrying amount, even if the asset’s residual value does not exceed its
carrying amount.

4. An entity imported machinery to install in its new factory before year-end. However, due to circumstances beyond its control, the machinery was
delayed by a few months but reached the factory premises before year-end. While this was happening, the entity learned from the bank that it was
being charged interest on the loan it had taken to fund the cost of the plant. What is the proper treatment of freight and interest expense under
PAS 16?
a. Both expenses should be capitalized
b. Interest may be capitalized but freight should be expressed
c. Freight charges should be capitalized but interest cannot be capitalized under these circumstances
d. Both expenses should be expensed

5. Which statement is incorrect regarding recognition of government grants as income?

a. Grants in recognition of specific expenses should be recognized as income over the period of the related expense.
b. Grants related to depreciable assets should be recognized as income over the periods and in proportion to the depreciation of the related assets.
c. Grants related to no depreciable assets requiring fulfilment of certain conditions should be recognized as income immediately after meeting the
condition.
d. A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, should be
recognized as income in the period in which it is receivable.

6. Which of the following is not considered a borrowing cost?

a. Interest on short-term and long-term borrowings
b. Finance charges in respect of finance leases
c. Dividends paid on preferred stock
d. All of the above are considered borrowing costs

7. Use of the effective interest method in amortizing a premium on bonds payable would result in
a. A constant amount of premium amortization each period over the life of the bonds
b. An increasing amount of premium amortization each period over the life of the bonds
c. A decreasing amount of premium amortization each period over the life of the bonds
d. Cannot be determined from the information given.

8. Which of the following items would be excluded from current liabilities?

a. A long-term liability callable or due on demand by the creditor even though the creditor has given no indication that the debt will be called.
b. Normal accounts payable which had been assigned by the creditor to the finance company.
c. Long-term debt callable within one year or less because the debtor violated a debt provision.
d. Short-term debt which at the discretion of the entity can be rolled over at least twelve months after the balance sheet date.

9. A temporary difference which would result in a deferred tax liability is

a. Accrual of estimated litigation loss
b. Accrual of estimated warranty cost
c. Subscriptions received in advance
d. An installment sale which is included in financial income at the time of sale and included in taxable income when collected

10. A contingent liability is

a. A liability of uncertain timing or amount.
b. A possible obligation depending on whether some uncertain future event occurs.
c. A present obligation but payment is not probable or the amount cannot be measured reliably.
d. Either b or c.

11. The management of an entity completes draft of financial statements for the year ended December 31, 2008 on February 28, 2009. On March
15, 2009, the board of directors reviews the financial statements and authorizes them for issue. The entity announces its profit and selected other
financial information on March 20, 2009. The financial statements are made available to shareholders and others on April 1, 2006. The
shareholders approved the financial statements at their annual meeting on May 10, 2009 and the approved financial statements are then filed with
SEC and BIR on May 30, 2009. For purposes of identifying events after balance sheet date, the financial statements were authorized for issue on
a. March 15, 2009 b. May 10, 2009 c. March 20, 2009 d. May 30, 2009

12. Eight-year capital lease specifies equal minimum annual lease payments. Part of this payment represents interest and part represents a
reduction in the net lease liability. The portion of the minimum lease payment in the fourth year applicable to the reduction of the net lease
liability should be
a. the same as in the third year c. less than in the fifth year
b. less than in the third year d. more than in the fifth year

13. The excess of the fair value of leased property at the inception of the lease over its cost or carrying amount should be classified by the lessor as
a. Unearned income from a sales-type lease. c. Manufacturer’s or dealer’s profit from a sales-type lease.
b. Unearned income from a direct-financing lease. d. Manufacturer’s or dealer’s profit from a direct-financing lease.

14. Each of the following is a correct statement of one of the criteria for finance lease?
a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of theleased property.
d. The minimum lease payments (excluding executory costs) equals or exceeds 90% of the fair value of the leased property

15. Which of the following expenditures would never qualify as an exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resources
d. Expenditure for activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource

16. Which of the following statements are correct and incorrect concerning the reversal of an impairment loss?
(1) The increased carrying amount of the asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been
determined ad no impairment loss been recognized in the prior years.
(2) An impairment loss recognized for goodwill shall nt be reversed in a subsequent period.
(3) The reversal of the impairment loss shall recognized immediately as an adjustment of the opening balance of retained earnings.
(4) The carrying amount of the asset shall be increased to the new recoverable amount.
Statement 1 Statement 2 Statement 3 Statement 4
a. False True True True
b. True False False True
c. True True False True
d. True False True False

17. Depreciation is computed on the original cost without deducting the estimated salvage value under which of the following depreciation method
Double-Declining Balance Productive-Output Double-Declining Balance Productive-Output
a. No No c. Yes Yes
b. No Yes d. Yes No

18. Which of the following statements is the assumption on which straight-line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

19. When the carrying amount of a revalued asset is decreased as a result of a revaluation, the decrease should be charged to...
a. Expense c. Retained Earnings
b. Revaluation Surplus d. Revaluation surplus first, if any, then,remaining balance to expense

20. This creates a legal or constructive obligation that results in an enterprise having no realistic alternative to settling the obigation is known as..
a. Obligation Event b. Restructuring c. Onerous Contract d. Provision

Problems
1. For the year ended December 31.2009 Everlasting Company reported a current tax liability of 2,190,000. Selected information for 2009 is as
follows:
Interest income on government bonds 700,000
Depreciation claimed on tax in excess of depreciation per book 1,300,000
Warranty Expense on the accrual basis 600,000
Actual Warranty expenditures 300,000
Tax rate 30%
The accounting income subject to tax should be
a. 9,000,000 b. 8,300,000 c. 8,900,000 d. 7,300,000

2. Total Income tax expense for 2009 should be

a. 2,700,000 b.2,490,000 c. 2,670,000 d.2,390,000

3. Janna Mining Company constructed a building costing P3,800,000.00 on the mine property. The estimated residual value will not benefit the
entity and will be ignored for purposes of computing depreciation. The building has an estimated useful life of 10 years. The total estimated
recoverable output from the mine is 1,000,000 tons. The entity’s production of the first four years of operation was:
First year 200,000 tons
Second year 200,000 tons
Third year Shut down, no output
Fourth Year 200,000 tons

What is the depreciation for the first year?

a. 760,000 b. 380,000 c. 336,000 d. 890,000

4. What is the Depreciation for the third year?

a.0 b. 285,000 c. 215,000 d.280,000

5. What is the depreciation for the fourth year?

a. 490,000 b.760,000 c. 665,000 d.485,000

Use the following information for numbers 6-8

MRC Company has determined that its fine china division is a cash-generating unit. The carrying amounts of the assets at December 31, 2013 are as
follows:
Factory P476,000
Land 204,000
Equipment 170,000
Goodwill 50,000
The value in use of the division was P710,000. The fair value less cost to sell the land is P180,000.
6. The initial amount of the impairment loss to be allocated to the land account is
a. P31,733 b. P33,600 c. P43,067 d. P45,600
7. Carrying amount of the Factory account after the initial and subsequent allocation of the impairment loss
a. P388,000 b. P388,720 c. P390,526 d. P397,600

8. The total amount of impairment loss absorbed by the Equipment account is

a. P28,000 b. P30,526 c. P33,600 d. P35,104

Question 9-12
On January 1, 2010, DIAS COMPANY issued 3-year, 4000 convertible bonds at face value of P1000 per bond. Interest is to be paid annually in
arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder's option, into 200 P2 par value ordinary shares at any time to
maturity. On the date of issuance, the prevailing market interest rate for similar debt without the conversion privilege was 9%. On the same date,
the market price of one ordinary share was P3. The bonds were convertd on December 31, 2011.
The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for 3 periods 2.67301 2.53130
Present value of an annuity due of 1 for 3 periods 2.83339 2.75911

9. The liability component of the convertible debt is

a. P4,000,000 b. P3,696,232 c. P1,600,000 d. P3,730,242

10. The equity component of the convertible debt is

a. P303,768 b. P1,973,621 c. P1,600,000 d. P2,400,000

11. The Interest expense to be reported on Dias Company`s Income statement for the year ended December 31,2011,is.
a. P101,000 b. P110,107 c. P 240,000 d. P 341,000

12. The entry to record a bond conversion on December 31, 2011 should include a credit to share premium- issuance of
a. P2,289,893 b. P2,400,000 c. P2,593,661 d. P0

Use the following information for numbers 13-16.

On November 20, 2012 Sunshine Company received an inquiry from Moonlight Company asking if it was interested to lease its construction
equipment. The carrying amount of the construction equipment was P12,400,000 which approximates its fair value at this time. Because of the
offer, Sunshine Company is contemplating on leasing the equipment for 6 years the equipment’s useful life and would like to have a 9% return rate
over the term of the lease. Initial direct costs for this contract was computed at P80,000. At the end of the lease term, Sunshine Company
estimates the residual value of the equipment to be P200,000.

On November 26, 2012, Moonlight Company sent a proposal in which it agrees with the conditions initially conveyed by Sunshine Company.
Moonlight Company suggested that the commencement date be on January 1, 2013 and that the annual rentals be scheduled every December 31,
starting on December 31, 2013. Furthermore, Moonlight Company communicated that it will only guarantee 70% of the residual value computed
by Sunshine Company.

On December 8, 2012, the lease agreement between Sunshine Company and Moonlight Company was signed.
PVF of P1 @ 9% for 6 periods 0.596
PVF of OA @ 9% for 6 periods 4.486
PVF of an AD @ 9% for 6 periods 4.890
13. What is the annual rental to be received by Sunshine Company?
a. P2,535,083 b. P2,745,555 c. P2,755,417 d. P2,763,388

14. What is the interest income in 2014 to be recognized by Sunshine Company?

a. P976,300 b. P977,188 c. P975,583 d. P996,130

15. What is the lease liability reported by Moonlight Company as of December 31, 2014?
a. P9,605,292 b. P9,026,181 c. P8,926,902 d. P6,889,090

16. What is the depreciation expense for 2013?

a. P2,040,704 b. P2,050,707 c. P2,060,124 d. P2,074,037
Use the following information for numbers 17 – 20.
On January 1, 2010, Viola Corporation contracted with Mega Construction Company to construct a building for P40,000,000 on land that Viola
purchased several years ago. The contract provides that Viola is to make five payments in 2010, with the last payment scheduled for the date of
completion. The building was completed on December 31, 2010.
Viola made the following payments during 2010:
January 1 P4,000,000
March 31 8,000,000
June 30 12,200,000
September 30 8,800,000
December 31 7,000,000_
Total P40,000,000
Viola had the following debt outstanding at December 31, 2010:
a.) A 12%, 4-year note dated January 1, 2010, with interest compounded quarterly. Both principal and interest are payable on
December 31, 2013. This loan relates specifically to the building project. P17,000,000
b.) A 10%, 10-year note dated December 31, 2006, with simple interest; interest payable annually on December 31 12,000,000
c.) A 12%, 5-year note dated December 31, 2008, with simple interest; interest payable annually on December 31 14,000,000
The following present and future value factors are taken from the present and future value tables:
3% 12%
Future value of 1 for:
4 periods 1.12551 1.57352
16 periods 1.60471 6.13039
Present value of 1 for:
4 periods 0.88849 0.63552
16 periods 0.62317 0.16312

17. What is the average accumulated expenditures in 2010?

a. P3,333,333 b. P18,300,000 c. P20,000,000 d. P40,000,000

18. What is the total avoidable interest cost in 2010?

a. P2,277,710 b. P2,184,040 c. P2,280,960 d. P2,466,070

19. What is the amount of interest that should be capitalized in 2010?

a. P2,184,040 b. P2,466,070 c. P5,013,670 d. P2,277,710

20. Viola’s income statement for 2010 should include interest expense of
a. P5,013,680 b. P2,735,960 c. P2,277,710 d. P0

“CPA’s are not born….

…they are made”

Thank you for your cooperation and God Bless.