AFAR - CUP 2019 ANSWERS

EASY

1. A partner's tax basis in a partnership is comprised of which of the following items?

I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the partnership.
A. I plus II minus III
B. I plus II plus III
C. I minus II plus III
D. I minus II minus III

2. In typical trustee accounting

a. gains and losses on the sale of assets are charged to the estate equity account.

b. unrecorded liabilities discovered by the trustee are credited to the estate equity account and credited to the liability
account.

c. liquidation expenses are charged to the estate equity account.

d. all of the above procedures are typical for trustee accounting.

3. According to Statement of Financial Accounting Standards 117, the statement of financial position of a private
university should report the excess of the university's assets over its liabilities as:
A. fund balance.
B. unrestricted and restricted fund balance.
C. retained earnings.
D. unrestricted, temporarily restricted, and permanently restricted net assets.

4. In a company with minority interest equity, how is the preferred stock call premium addressed?

a. It is recorded as a decrease in retained earnings.

b. It is recorded as an increase in retained earnings.

c. It is recorded as a decrease in additional paid-in capital.

d. It is recorded as an increase in additional paid-in capital.

5. IDENTIFICATION. It is the currency of the primary economic environment in which it operates. (FUNCTIONAL
CURRENCY)
6. Consolidated financial statements tend to be most useful for:
A. Creditors of a consolidated subsidiary.
B. Investors and long-term creditors of the parent company.
C. Short-term creditors of the parent company.
D. Stockholders of a consolidated subsidiary.

7. IDENTIFICATION. What is defined as a condition in which a company is unable to meet debts as the debts
mature? (INSOLVENCY)

8. IDENTIFICATION. In the AD Partnership, Ashley’s capital is P140,000 and Dmitri’s is P40,000 and they share income in
a 3:1 ratio,respectively. They decide to admit David to the partnership. Each of the following questions is independent of
the others. Ashley and Dmitri agree that some of the inventory is obsolete. The inventory account is decreased before
David is admitted. David invests P40,000 for a one-fifth interest. What is the amount of inventory written down?
(20,000)

9. On January 1, 2010, Lester Company purchased 70% of Stork Corporation’s P5 par common stock for P600,000. The
book value of Stork net assets was P640,000 at that time. The fair value of Stork’s identifiable net assets were the same
as their book value except for equipment that was P40,000 in

excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at?

a. P152,000. c. P80,000.

b. P177,143. d. P0.

10. The following information is available concerning America-on-line Inc. on the date the
company entered bankruptcy proceeding:

Account Balance per books

Cash P2,860

Accounts receivable 52,260

Inventory 28,000

Prepaid expenses 430

Buildings, net 59,000

Equipment, net 5,600

Goodwill 5,650

Wages payable (2,500)

Taxes payable (1,810)

Accounts payable (79,000)

Notes payable (15,150)

Common stock (72,000)

Retained earnings, Deficit 16,660

Inventory with a book value of P20,000 is security for notes of P10,000. The other notes are
secured by the equipment.

Expected realizable values of the assets are:

Accounts receivable P44,100

Inventory 18,500

Buildings 22,000

Equipment 2,000

What is the estimated deficiency to unsecured creditors?

a. P 9,000 c. P72,500

b. P65,500 d. P79,000

AVERAGE

1. In a business combination accounted for as an acquisition, how should the excess of fair value of

identifiable net assets acquired over implied value be treated?

a. Amortized as a credit to income over a period not to exceed forty years.

b. Amortized as a charge to expense over a period not to exceed forty years.

c. Amortized directly to retained earnings over a period not to exceed forty years.

d. Recognized as an ordinary gain in the year of acquisition.

2. Statement 1: The method whereby the financial statements are translated from the functional

currency into the presentation currency is known as the current/closing rate method.

Statement 2: Current/closing rate method applies to a foreign operation that records its books in

its functional currency and translates its financial statements into the parent’s reporting currency

for the purpose of consolidation.

a. True, True c. False, False

b. True, False d. False, True

3. Revenues and expenses of hospitals are recorded in the accounts of the

a. Endowment Fund. c. Plant Replacement Fund.

b. General Fund. d. Specific Purpose Fund.

4 IDENTIFICATION. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010.

Under the partial equity method, the work paper entry in 2011 to recognize the intercompany profit

in beginning inventory realized during 2011 includes a debit to Retained Earnings -P and ___________. (NCI)

5. A forward exchange contract is transacted at a discount if the current forward rate is:

a. less than the expected spot rate.

b. more than the expected spot rate.

c. less than the current spot rate.

d. more than the current spot rate.

6. How does the investor record profits and losses from the investee's income?

I. As extraordinary gains and losses

II. As other comprehensive income

III. As discontinued operations

A. II only

B. I,III

C. II,III

D. Answer not given

7.The following data pertained to Pogi Company’s construction jobs, which commenced during 2018

PROJECT 1 PROJECT 2

Contract Price P420,000 P300,000

Cost incurred during 2018 240,000 280,000

Estimated cost to complete 120,000 40,000

Billed to customers during 2018 150,000 270,000

Received from customers during 2018 90,000 250,000

If Pogi company used the percentage of completion method, what amount of profit (loss) would Pogi

Company report in its 2018 income statement?

a. P0

b. (P20,000)

c. P40,000

d. P20,000

8. On July 1, 2013, Pinoy Company signed an agreement to operate as franchisee of International Company

for a franchise fee of P800,000. Of this amount, P300,000 was paid upon signing of the agreement and the

balance is payable in five semi-annual payments of P100,000 each beginning December 31, 2013. The notes are

non-interest bearing but the market rate of interest is 12%. The agreement provides that the down payment is

non-refundable and no future services are required of the franchisor as of December 31, 2013. (Use 2 decimal

places for present value factor). On December 31, 2013, International Company should record total income related

with franchise of :

A. P 746,260

B. P 721,000

C. P 800,000

D. P 446,260

9. IDENTIFICATION. Lovebirds Corporation sells goods on the installment basis. For the year just ended, the following
were reported:

Cost of installment sales P 525,000

Loss on repossession 13,500

Fair value of repossessed merchandise 112,500

Account defaulted 180,000

Deferred gross profit, end 108,000

How much was the collections for the year? (210,000)

10. IDENTIFICATION. The statement of affairs of GHI Company shows the following summarized balances:

Estimated gains on realization of assets P945,000

Estimated losses on realization of assets 1,695,000

Contingent assets 750,000

Current assets 100,000

Other assets 1,200,000

Liabilities 400,000

Contingent liabilities 225,000

Capital stock 1,500,000

Retained earnings (deficit) 600,000

Determine the estimated pro-rata payment on the peso to stockholders in the event of
corporate liquidation. (0.75)

DIFFICULT

1. Which of the following is the best theoretical justification for consolidated financial statements?

A. In form the companies are one entity; in substance they are separate.

B. In form the companies are separate; in substance they are one entity.

C. In form and substance, they are one entity.

D. In form and substance, they are separate.

2. IDENTIFICATION. The first step of the two-step test: if the fair value of any of the consolidated entity's reporting units
falls below the carrying amount, then the implied value of the associated _______ must be recomputed. GOODWILL

3. IDENTIFICATION. A parent can obtain control of a subsidiary by means of several separate purchases occurring over
time, a process often referred to as a __________. STEP-ACQUISITION

4. _______ transfers are the most prevalent form of intra-entity asset transaction

A. Cash

B. Receivable

C. Inventory

D. Property, plant and equipment.

5. IDENTIFICATION. Significant influence is presumed to exist at what percentage of ownership? 20-50%

6.
A summary balance sheet for the McDo, KFC, and Jollibee partnership appears below. McDo, KFC, and Jollibee
share profits and losses in a ratio of 2:3:5, respectively.

Assets

Cash $ 50,000

Inventory 62,500

Marketable securities 100,000

Land 50,000

Building-net 250,000

Total assets $ 512,500

Equities

McDo, capital $ 212,500

KFC, capital 200,000

Jollibee, capital 100,000

Total equities $ 512,500

The partners agree to admit Mang Inasal for a one-fifth interest. The fair market value of partnership land is
appraised at $100,000 and the fair market value of inventory is $87,500. The assets are to be revalued prior to
the admission of Mang Inasal and there is $15,000 of goodwill that attaches to the old partnership.

What will the profit and loss sharing ratios be after Mang Inasal’s investment?

A. 1:2:4:2. C. 3:4:6:2.

B. 2:3:5:2. D. 4:6:10:5.

6. During the fiscal year ended June 30, 2009, the city of Moorhead constructed a new courthouse which was budgeted
to cost $5,000,000. Moorhead used a capital projects fund to account for the construction activities. In July of 2008, a
bid was accepted from Diamond Construction to build the courthouse for $4,800,000. On June 15, 2009, Diamond
completed construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid Diamond all of
the amount owed, except for a 10 percentage retainage. On the statement of revenues, expenditures, and changes in
fund balance prepared for the capital projects fund for the year ended June 30, 2009, expenditures should be reported
at
A. $4,900,000.
B. $4,800,000.
C. $4,410,000.
D. $4,320,000

8. The Partnership has the following balances in their trial balance:

(1) Sales = P70,000
(2) Cost of Goods Sold = P40,000
(3) Operating Expenses = P10,000
(4) Salary allocations to partners = P13,000
(5) Interest paid to banks = P2,000
(6) Partners' withdrawals = P8,000
The partnership net income (loss) is:

a. (3,000)
b. 18,000
c. 20.000
d. 5,000

9. On November 1, 2011, Galaxy Philippines took delivery from a Thailand firm of inventory costing 225,000

bhat. Payment is due on January 30, 2012 Concurrently, Galaxy Philippines paid P2,025 cash to acquire a 90-day

call option for 225,000 Thailand bhat.

11/1/2011 12/31/2011 1/30/2012

Spot rate (market rate) P 1.20 P 1.22 P 1.23

Strike price (exercise price) 1.20 1.20 1.20

Fair value of call option P 2,025 P 4,950 P 6,750

What is the intrinsic value of the option on December 31, 2011?

a. P 4,500 c. P 450

b. P 4,950 d. P -0-

10. Makati Company buys goods from Tokyo Company of Japan, worth 2.5 million yen. The prevailing

exchange rate is P0.1302136/Yen. Makati Company settles the account 60 days later when the exchange rate is

going at P0.118376/Yen. What is the forex gain or loss of Tokyo?

a. P 29,594 gain

b. P 29,594 loss

c. 2.5 million Yen

d. P -0-