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 NORTHWESTERN UNIVERSITY Competency Assessment No. 3 Refresher Course in Financial Accounting Summer, School Year 2018-2019 Student Name ID No. Course & Year Score Raw: Final:

MULTIPLE CHOICE. Encircle the letter of your choice. On separate yellow sheets, provide computations, in good form, to support your answer for items that require calculations.

1. Which of the following is an investment property?
A. Properties currently developed for use as future investment property
B. Investment properties that are currently developed for use as future owner-occupied property
C. Property that is leased out to another entity under a finance lease
D. Building rented out in an operating lease where the owner provides minimal services
2. Counting Crow’s investment property has a carrying amount of P3,600,000 under the fair value model, before
adjustment. If the fair value at year-end is P3,000,000, how much should be the gain or loss on transfer if Counting
Crow would shift to cost model?
A. gain of P600,000 reported as other comprehensive income
B. loss of P600,000 reported as other loss in the income statement
C. loss of P600,000 reported in equity as decrease in revaluation surplus
D. zero
Entity A acquires a building for P1,000,000. The building is to be leased out under various operating leases. The building
has an estimated useful life of 10 years and zero residual value. Entity A uses the cost model for its property, plant and
equipment and the fair value model for its investment property. At the end of Year 1, the building is assessed to have a
fair value of P1,080,000.
3.
How much should Entity A recognize in profit or loss in relation to the building?
A. P80,000 gain on change in fair value
B. P100,000 depreciation
C. P180,000 gain on change in fair value
D. B and C
4.
In compliance with the disclosure requirements of PAS 38, the amortization of an intangible asset is recorded as a:
A. debit to retained earnings and a credit to a contra account.
B. debit to retained earnings and a credit to the intangible asset account.
C. debit to amortization expense and a credit to the intangible asset account
D. debit to amortization expense and a credit to an intangible asset contra account.
5.
Should the following fees associated with the registration of an internally developed patent be capitalized?
Legal fees
Registration fees
A.
No
No
B.
No
Yes
C.
Yes
No
D.
Yes
Yes
6.
What is proper time or time period over which to match the cost of an intangible asset with revenues if it is likely that
the benefit of the asset will last for an indefinite period?

A. Forty years

B. Fifty years

C. Immediately

D. At such time as reduction in value can be quantitatively determined.

B1

Ely Co. bought a patent from Baden Corp. on January 1, 2019, for P360,000. An independent consultant retained by Ely estimated that the remaining useful life at January 1, 2019 is 15 years. Its unamortized cost on Baden’s accounting records was P180,000; the patent had been amortized for 5 years by Baden.

7. How much should be amortized for the year ended December 31, 2019 by Ely Co.?

A. P0.

B. P18,000.

C. P24,000.

D. P36,000.

P360,000 ÷ 15 = P24,000.

Aberdeen Co. made expenditures for the following:

10,000
3,000
40,000
15,000
20,000
88,000

Cost in activities aimed at obtaining new knowledge Marketing research to study consumer tastes Cost of developing and producing a prototype model Cost of testing the prototype model for safety and environmental friendliness Cost revising designs for flaws in the prototype model Salaries of employees, consultants, and technicians involved in R&D Cost of conference for the introduction of the newly developed product including fee of a model hired as endorser Advertising to establish recognition of the newly developed product

P10,000

5,000

3,000

40,000

15,000

20,000

100,000

30,000

8.

How much is recognized as research and development expense?

A. P68,000

B. P72,000

C. P88,000

D. P94,000

Cost in activities aimed at obtaining new knowledge Cost of developing and producing a prototype model Cost of testing the prototype model for safety and environmental friendliness Cost revising designs for flaws in the prototype model Salaries of employees, consultants, and technicians involved in R&D Total research and development expense

Tokyo Enterprises has four divisions. It acquired one of them, Green Products, on January 1, 2019 for P640,000,000, and recorded goodwill of P81,200 as a result of that purchase. At December 31, 2019, Green Products had a recoverable amount of P568,000,000. The carrying value of the Company’s net assets at December 31, 2019 was P592,000,000 (including goodwill).

9.

What amount of loss on impairment of goodwill should Tokyo record in 2019?

A. Zero

B. P24,000,000

C. P81,200,000

D. P72,000,000

592,000 568,000 = 24,000,000

B2

Decor, Inc. is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. As of this date, the building has a carrying amount of P6,000,000, a fair value of P5,000,000 and estimated costs to sell of P200,000. At the plan commitment date, there is a backlog of uncompleted customer orders.

Decor intends to sell the manufacturing facility, but without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders.

10. How should Décor classify the manufacturing facility?

A. Included under property, plant and equipment at P6,000,000.

B. Included under property, plant and equipment at P4,800,000.

C. Classified as held for sale at P6,000,000

D. Classified as held for sale at P4,800,000

4,000,000
P1,600,000
50,000
40,000

165,000

200,000

18,000

25,000

B not available for immediate sale in its present condition; PPE at 4.8M (5M 200K) because the manufacturing facility is impaired.

On December 31, 20x1, Strike Company classified its building with a historical cost of P4,000,000 and accumulated depreciation of P2,400,000 as held for sale. All of the criteria under PFRS 5 are complied with. On that date, the land has a fair value of P1,400,000 and cost to sell of P80,000.

11.

The entry on December 31, 20x1 includes

A. a debit to building for P1,320,000

B. a credit to accumulated depreciation for P2,400,000

C. a debit to impairment loss for P280,000

D. No reclassification entry will be made on December 31, 20x1

1,320,000
2,400,000
280,000

Held for sale asset (1.4M 80K) Accumulated depreciation Impairment loss Building

The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2019, contained the following accounts.

12.

5-year Bonds Payable 8% Bond Interest Payable Notes Payable (3 months) Notes Payable (5 years) Mortgage Payable (P15,000 due currently) Salaries and Wages Payable Taxes Payable (due 3/15 of 2020)

The total non-current liabilities reported on the statement of financial position are

A. P1,865,000.

B. P1,850,000.

C. P1,965,000.

D. P1,950,000.

The next two items are based on the following:

On May 1, 2019, Payne Co. issued P300,000 of 7% bonds at 103, which are due on April 30, 2026. Twenty detachable share warrants entitling the holder to purchase for P40 one share of Payne’s ordinary shares, P15 par value, were attached to each P1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2019, the fair value of Payne’s shares was P35 per share and of the warrants was P2.

B3

13. On May 1, 2019, Payne should report bonds payable at

A. P296,640.

B. P288,000.

C. P300,000.

D. P309,000.

P300,000 × .96 = P288,000.

14. On May 1, 2019, Payne should credit Share Premium Share Warrants for

A. P9,000.

B. P12,000.

C. P21,000.

D. P12,360.

(P300,000 × .96) = P288,000; P300,000 × 1.03 = P309,000 P309,000 P288,000 = P21,000.

P24,000
15,000
30,000

On May 1, 2019, Metcalf Company leases a machine from Vollmer Corp. under an agreement which meets the criteria to be a finance lease for Metcalf. The six-year lease requires payment of P87,000 at the beginning of each year, excluding P15,000 per year executory costs that are payable directly by lessee to third parties. The incremental borrowing rate for the lessee is 10%; the lessor's implicit rate is 8% and is known by the lessee. The present value of an annuity due of 1 for six years at 10% is 4.79079. The present value of an annuity due of 1 for six years at 8% is 4.99271.

15.

Metcalf should record the leased asset at

A. P509,256.

B. P488,661.

C. P434,366.

D. P416,799.

87,000 x 4.99271 = 434,466

Presented below is pension information for Green Company for the year 2019:

Interest on plan assets Interest on vested benefits Service cost Interest on projected benefit obligation Past service cost due to increase in benefits

21,000

18,000

16.

The amount of pension expense to be reported for 2019 is

A. P93,000.

B. P69,000.

C. P60,000.

D. P45,000.

P30,000 + P21,000 + P18,000 P24,000 = P45,000.

Presented below is information related to Noble, Inc. as of December 31, 2019.

 Net gain(loss) P 90,000 Defined benefit obligation 3,600,000 Vested benefits 1,620,000 Plan assets (at fair value) 3,384,000

B4

17. The amount reported as the pension liability on Noble's statement of financial position at December 31, 2019 is as follows:

A. Zero.

B. P90,000.

C. P126,000.

D. P216,000.

P3,600,000 – P3,384,000 = P216,000.
On January 1, 2019, Parks Co. has the following balances:
Defined benefit obligation
Fair value of plan assets
P4,200,000
3,750,000
The discount rate is 10%. Other data related to the pension plan for 2019 are:
Service cost
Past service costs
Contributions
Benefits paid
Actual return on plan assets
Net gain on liability
P240,000
54,000
270,000
225,000
264,000
18,000
18.
The balance of the defined benefit obligation at December 31, 2019 is
A. P4,572,000.
B. P4,671,000.
C. P4,629,000.
D. P4,635,000.
P4,200,000 + P240,000 – P225,000 + (P4,200,000 × .10) – P54,000 – P18,000 = P4,671,000.
19.
The fair value of plan assets at December 31, 2019 is
A. P3,531,000.
B. P3,789,000.
C. P4,059,000.
D. P4,284,000.
P3,750,000 + P264,000 + P270,000 – P225,000 = P4,059,000.
20.
Recognition of tax benefits in the loss year due to a loss carryforward requires
A. the establishment of a deferred tax liability.
B. the establishment of a deferred tax asset.
C. the establishment of an income tax refund receivable.
D. only a note to the financial statements.

Mathis Co. at the end of 2019, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:

 Pretax financial income Estimated litigation expense Installment sales Taxable income P 500,000 1,250,000 (1,000,000) P 750,000

B5

The estimated litigation expense of P1,250,000 will be deductible in 2021 when it is expected to be paid. The gross profit from the installment sales will be realized in the amount of P500,000 in each of the next two years. The estimated liability for litigation is classified as non-current and the installment accounts receivable are classified as P500,000 current and P500,000 noncurrent. The income tax rate is 30% for all years.

21. The income tax expense in 2019 is

A. P150,000.

B. P225,000.

C. P250,000.

D. P500,000.

P3,200,000
640,000
20,000
2,140,000
P6,000,000

Income taxes payable = (P750,000 × 30%) = P225,000 Change in deferred tax liability = (P1,000,000 × 30%) = P300,000 Change in deferred tax asset = (P1,250,000 × 30%) = P375,000 P225,000 + P300,000 P375,000 = P150,000.

22.

The net deferred tax asset to be recognized is

A. P75,000.

B. P150,000.

C. P375,000.

D. P225,000.

(P1,250,000 P1,000,000) × 30% = P75,000.

23.

According to IFRS, redeemable preference shares should be

A. included with ordinary shares.

B. included as a liability.

C. excluded from the statement of financial position.

400,000

80,000

80,000

D. included as a contra item in shareholders’ equity.

On January 1, 2019, the statement of financial position of Profuse Company shows the following information:

Share capital (authorized, 10,000 shares with a par value of P400) Share premium Share premium treasury Retained earnings Shareholders’ equity

24.

On July 1, 2019, the entity reacquires 1,000 shares at P560 and immediately retires them. The entry on July 1, 2019 includes a

A. debit to Retained Earnings for P60,000

B. debit to Share Premium Issuance for P80,000

C. credit to Share Premium Retirement for P60,000

D. credit to Retained Earnings for P80,000

Share capital Share premium issuance Retained earnings Cash

560,000

3,200,000/400 = 8,000 shares issued 1/8 x 640,000 = 80,000

The shareholders’ equity of Ashley Company at July 31, 2019 is presented below:

B6

 Ordinary shares, par value P20, authorized 400,000 shares; issued and outstanding 200,000 shares Share premium Retained earnings Total P4,000,000 160,000 650,000 P4,810,000

On August 1, 2019, the board of directors of Ashley declared a 10% share dividend on ordinary shares, to be distributed on September 15th. The market price of Ashley's ordinary shares was P35 on August 1, 2019, and P38 on September 15,

2019.

25.
What is the amount of the debit to retained earnings as a result of the declaration and distribution of this share
dividend?
A. P400,000.
B. P700,000.
C. P760,000.
D. P500,000.
The reckoning date is date of declaration; 10% is considered “small”, so capitalized is market value 200,000 x 10% = 20,000
x 35 = 700,000
During 2019, Brad Company issued 5,000 convertible preference shares of P100 par value for P110 per share. One share
can be converted into three ordinary shares of Brad’s P25-par at the option of the preference shareholder. On December
31, 2009, when the market value of the ordinary share was P40, all of the preference shares were converted.
26.
What amount should Brad credit to ordinary share capital and share premium as a result of the conversion?
Ordinary share capital
A. P375,000
P175,000
B. P375,000
P225,000
C. P500,000
P50,000
D. P600,000
Zero
Issue price of preference shares (5,000 x 110)
Ordinary shares issued at par value (5,000 x 3 =15,000 shares x 25)
550,000
375,000
175,000
Melissa Company granted share options to its employees with a fair value of P4.5 million on January 1, 2018. The options
vest in 3 years and the options are exercisable starting January 1, 2021 until December 31, 2022.
On December 31, 2018, it was estimated that 5% of employees will leave the entity during the vesting period. This
estimate was revised to 6% during the year 2019. On December 31, 2020, employee records indicate that 90% of the
employees stayed and became entitled to the options.
27.
What would be the expense charged during the year ended December 31, 2018?
A.
P1,350,000
B.
P1,410,000
C.
P1,425,000
D.
P1,500,000

4,500,000 x 95% = 4,275,000; 4,275,000/3 = 1,425,000

Jane Company has granted 200 share appreciation rights to each of its 300 employees on January 1, 2018. The rights are due to vest on December 31, 2019, with payment being made on December 31, 2020. During 2018, the company estimated that all options would vest, although only 90% of the options actually vested.

B7

Share prices are as follows:

 Jan. 1, 2018 P20 Dec. 31, 2019 P27 Dec. 31, 2018 24 Dec. 31, 2020 30

28. How much compensation expense should be recorded for the year ended December 31, 2019?

 A. P96,000 B. P108,000 C. P120,000 D. P258,000

60,000 x (24-20) x ½ = 120,000 60,000 x (27-20) = 420,000 x 90% = 378,000 120,000 = 258,000

At December 31, 2019 and 2018, Lapham Company had 200,000 shares of ordinary shares and 20,000 shares of 5%, P100 par value cumulative preference shares outstanding. No dividends were declared on either the preferred or ordinary shares in 2019 or 2018. Net income for 2019 was P1,000,000.

29.

For 2019, basic earnings per common share amounted to

A. P4.00.

B. P4.50.

C. P4.75.

D. P5.00.

BEPS = [1,000,000 (20,000 x 5)] / 200,000 = 4.50

At December 31, 2018, Bacon Company had 1,200,000 shares of ordinary shares outstanding and P10,000,000 of 6% convertible bonds outstanding at December 31, 2018, which are convertible into 800,000 shares of ordinary shares. On September 1, 2019, an additional 400,000 shares of ordinary shares were issued. No bonds were converted into ordinary shares in 2019. The net income for the year ended December 31, 2019, was P3,750,000. The income tax rate was 30%.

30.

What should be the diluted earnings per share for the year ended December 31, 2019, rounded to the nearest centavo?

A. P1.76

B. P1.95

C. P2.04

D. P2.81

DEPS = [3,750,000 + (10,000,000 x 6% x 70%)] / [1,200,000 + (400,000 x 4/12) + 800,000] = 1.95

Helical Co. reported profits of P1,600,000 and P2,400,000 in 20x1 and 20x2, respectively. In 20x3, the following prior period errors were discovered:

Prepaid supplies in 20x1 were overstated by P80,000.

Accrued salaries payable in 20x1 were understated by P160,000.

Repairs and maintenance expenses in 20x1 amounting to P400,000 were erroneously capitalized and being depreciated over a period of 4 years.

The unadjusted balances of retained earnings are P6,400,000 and P8,800,000 as of December 31, 20x1 and 20x2, respectively.

31. How much is the correct profit in 20x1?

A. P1,006,000

B. P1,610,000

C. P1,720,000

B8

D.

P1,060,000

20x1
20x2
1,600,000
2,400,000
Corrections - (over) understatement:
(a)
Overstatement of 20x1 prepaid assets
(80,000)
80,000
(b)
Understatement of 20x1 accrued salaries
(160,000)
160,000
(c.1) Expenses erroneously capitalized
(400,000)
-
(c.2) Depreciation recognized on repair costs
(400,000 ÷ 4)
100,000
100,000
(540,000)
340,000
Correct profits
1,060,000
2,740,000
32. How much is the correct retained earnings in 20x1?
A. P5,806,000
B. P5,520,000
C. P5,860,000
D. P5,420,000
20x1
20x2
6,400,000
8,800,000
Net effect of errors on retained earnings:
20x1: (540,000)*
(540,000)
20x2: 340,000 + (540,000)*
(200,000)
5,860,000
8,600,000
*Amounts represent the net effect of errors in profits. See item 32.
33.
On January 15, 20x3 while finalizing its 20x2 financial statements, Diana Co. discovered that depreciation expense
recognized in 20x1 is overstated by P1,600,000. Ignoring income tax, the entry to correct the prior period error
includes
A. a debit to depreciation expense for P1,600,000
B. a debit to retained earnings for P1,600,000
C. a credit to depreciation expense for P1,600,000
D. a debit to accumulated depreciation for P1,600,000
(Dr.) Accum. Dep’n. 1.6M; (Cr.) Retained earnings 1.6M
On April 1, 2019, Ivy began operating a service proprietorship with an initial cash investment of P1,000. The
proprietorship provided P3,200 of services in April and received full payment in May. The proprietorship incurred
expenses of P1,500 in April which were paid in June. During May, Ivy drew P500 against her capital account.
34.
What was the proprietorship's income for the two months ended May 31, 2019, under the following methods of
accounting?
Cash basis
Accrual basis
A.
P1,200
P1,200
B.
P1,700
P1,700
C.
P2,700
P1,200
D.
P3,200
P1,700
Cash basis
Accrual basis
Revenue
3,200
3,200
Expenses
-
(1,500)
Profit
3,200
1,700

B9

Entity Co. uses the cash basis of accounting and reported income of P87,000 in 20x1. The following items were considered in the computation of the cash basis net income.

Inventory, beginning
Inventory, ending
Receivables, beginning
Receivables, ending
Payables, beginning
Payables, ending
P12,000
18,000
40,000
38,000
19,000
25,000
35.
The accrual basis income is
A. P97,000
B. P73,000
C. P89,000
D. P85,000
Accrual basis profit (squeeze)
Increase in inventory
Decrease in receivables
Increase in payables
Cash basis profit
85,000
(6,000)
2,000
6,000
87,000
The following information is available for Acequia Company for 20X2:
Disbursements for purchases
Decrease in merchandise inventory
P700,000
50,000
20,000
36.
Costs of goods sold for 20X2 was
A. P770,000.
B. P730,000.
C. P670,000.
D.
P630,000.
P700,000 + P50,000 + P20,000 = P770,000.
The following changes in account balances of the Martello Company during the current year are presented below:
Increase
Assets
P3,560,000
Liabilities
1,080,000
Share capital
2,400,000
240,000

There were no changes in retained earnings other than for a dividend declaration and payment of P520,000.

37. What is the net income for the current year?

A. P360,000

B. P920,000

C. P1,960,000

D. P2,480,000

Increase in assets

3,560,000

B10

 Increase in liabilities Net increase Add: Dividends Total Less: Increase in capital: Ordinary shares Additional paid in capital Net income (1,080,000) 2,480,000 520,000 3,000,000 2,400,000 240,000 2,640,000 360,000

38. Conceptually, interim financial statements can be described as emphasizing

A. Timeliness over faithful representation

B. Faithful representation over relevance

C. Relevance over comparability

D. Comparability over verifiability

39. Sweetie Company adopts the calendar year as its reporting period and published interim financial statements for the quarter ended September 30, 2019. Which of the following financial statements does not bear a correct date or period?

A. Statement of financial position as of September 30, 2019 and as of December 31, 2018

B. Statement of financial position as of September 30, 2019 and as of September 30, 2018

C. Income statement for the quarter ended September 30, 2019 and for the quarter ended September 30, 2018

D. Income statement for the nine months ended September 30, 2019 and for the nine months ended September 30,

2018

Exodus Corporation incurs costs unevenly throughout the financial year. Advertising costs of P2 million were incurred in February 2019, and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to be around P30 million per year based on sales of P300 million. Total sales for the quarter ended March 31, 2019 were P70 million.

40.

What costs should be included for the quarter ended March 31, 2019?

A. P9.5 million

B. P8.0 million

C. P7.5 million

D. P9.0 million

2 + 10% X 70 = 9.0

End of Examinations

B11