SURIGAO EDUCATION CENTER option.
Market data suggests that entity L could sell each
CPA-REVIEW PROGRAM
Financial Accounting and Reporting and Auditing Problems
Material # 6 part 1- Inventories, Biological Assets, Other
Investments, Hedging
Derivatives/Hedging and Fund and Other Investments
1. A contract traded on an exchange that allows an entity to
buy a specified commodity or a financial security at a
specified price on a specified date is
a. Interest rate swap c. Futures Contract
b. Forward Contract d. Option
2. Embedded derivatives are bifurcated or accounted for
separately when
I. On a stand-alone basis, the embedded feature meets
the definition of a derivative.
II. The combined contract is measured at fair value
through other comprehensive income.
III. The economic characteristics and risks of the
embedded derivative and the host contract are not
closely related.
a. I and II only c. I and III only
b. II and III only d. I, II and III
3. Which of the following is not a condition for hedge
accounting?
a. Formal designation and documentation of the hedging
relationship and the entity’s risk management objective
and strategy for undertaking the hedge at inception of
the hedging relationship.
b. The hedge is expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable
to the hedged risk, the effectiveness of the hedge can be
reliably measured and the hedge is assessed on an
ongoing basis and determined actually to have been
effective.
c. For cash flow hedges, a forecast transaction must be
highly probable and must present an exposure to
variations in cash flows that could ultimately affect profit
and loss.
d. The hedge is expected to reduce the entity’s net
exposure to the hedged risk, and the hedge is
determined actually to have reduced the net entity-wide
exposure to the hedged risk.
4. Which statement is incorrect regarding designation of
hedging instruments?
a. A hedging relationship is normally designated by an
entity for a hedging instrument in its entirety.
b. A proportion of the entire hedging instrument such as
50 percent of the notional amount, may be designated
as the hedging instrument in a hedging relationship.
c. A hedging relationship may be designated for only a
portion of the time period during which a hedging
instrument remains outstanding.
d. A single hedging instrument may be designated as a
hedge of more than one type of risk.
5. A hedge of the foreign currency risk of a firm commitment
is accounted for as a
a. Hedge of a net investment in a foreign operation
b. Fair value hedge
c. Cash flow Hedge
d. Either b or c.
6. Entity L entered into a call option contract on December 1,
2013. The contract gives the entity the right to purchase
100,000 shares issued by Entity M on April 1, 2014, at an
exercise price of 100 per share. The entity paid P3.00 per
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option for P4.00 on December 31, 2013. On April 1, 2014,
the fair value of each option is 10. The share price on this
date is P110. Since the share price is higher than the
exercise price, Entity L decided to exercise the option by
buying 100,000 shares at P100per share. The shares
acquired were designated as available for sale. The shares
are selling at 112 per share on December 31, 2014. In
relation to the changes in fair value of the call option and
the shares acquired, how much should be recognized in the
entity’s 2014 profit or loss and Other Comprehensive
Income?
a. Nil, P800,000.00 c. Nil,P200,000.00
b. P100,000, P1,200,000 d. P600,000, P200,000
7. In relation with the previous problem, If entity O classified
the purchased bonds as available for sale, how much
should be recognized as derivative asset on January
1,2014?
a. 75,000 c. 76,923
b. 100,000 d. Nil
8. On October 1, 2011, Madison Company invests 3,000,000
in a bond whose interest payments are linked to the price
of gold. On October 1, 2011, the derivative contract has a
fair value of 150,000. Madison Company has a business
model with the objective of trading all financial
instruments. What is the carrying value of the available for
sale investment on October 1, 2011?
a. 150,000 c. 2,850,000
b. 3,000,000 d. 3,150,000
9. On January 2, 2012, Cinderella Company enters into a
forward contract to purchase on January 2, 2014, a
specified number of barrels of oil at a fixed price. Cinderella
Company does not pay anything to enter into the forward
contract on January 2, 2012. Cinderella company does not
designate the forward contract as hedging instrument,
however the forward contract passed all the requisites for
being a hedging instrument. At the end of 2012, the fair
value of the forward contract has increased to 400,000 and
at the end of 2013 its fair value has declined to 350,000.
What amount of forward loss should Cinderella Company
recognize at the end of year 2013?
a. None c. 50,000
b. 350,000 d. 400,000
10. On October 1, 2014, Extreme Company buys an option
contract that enables it to purchase 20,000 shares of A
company at 30 per share at any time in the next six
months. At the time the contract is completed the market
price A Company shares is 29 per share. At December 31,
2014, A company shares are selling at 31 per share. If
Extreme Company paid 520,000 to buy the option contract,
what amount of derivative asset should be initially
recognized on October 1, 2014?
a. None b. 20,000 c. 40,000 d. 520,000
11. Based on number 10, If Extreme company paid 20,000,
what paid 20,000, what is the time value of the derivative
instrument at the time the contract is completed?
a. None b. 10,000 c. 20,000 d. 30,000
12. Based on number 10, if the derivative has a time value of
money of 12,000 on December 31, 2014, what amount of
gain or loss should the company recognize related to
derivative asset in the statement of comprehensive
income?
a. None b. 12,000 c. 40,000 d. 52,000
13. If the contract was exercised on March 31, 2015 when the each September 1 beginning 2014, with the last deposit
shares of A company are selling at 31.50 per share, what being made on September 1, 2021?
amount should the equity investment be initially recorded? a. P1,063,660 c. P1,148,750
a. 580,000 c. 600,000 b. P574,660 d. P620,630
b. 620,000 d. 630,000
22. If P10,000 is deposited annually starting on January 1, 2014
Problem (Sinking Fund)- The following information is and it earns 8%, what will the balance be on December 31,
available concerning the Mauro Corporation’s sinking fund 2021?
transactions in 2014. There is no trustee. a. P106,366 c. P114,875
January 1 Established a sinking fund to retire an b. P57,466 d. P62,063
outstanding bond issue by contributing
P425,000. 23. If a company wishes to accumulate P20,000,000 by May 1,
January 15 Purchased securities for P400,000. 2022 by making 8 equal annual deposits beginning May 1,
July 30 Sold securities originally costing P48,000 for 2014 to a fund paying 8% interest compounded annually.
P45,000. What is the required amount of each deposit?
December 31 Collected dividends and interest on remaining a. P1,880,300 c. P1,741,023
securities in the amount of P49,000; the b. P3,480,319 d. P3,222,532
securities had a market value of P360,000 at
this time. Investment Property Section
14. The sinking fund balance on December 31, 2014 is
a. P479,000 c. 474,000 24. Under PAS 40 Investment property, which of the following
b. P471,000 d. P442,000 additional disclosures must be made when an entity
chooses the cost model as its accounting policy for
Problem (Life Insurance)- Candle Park has life insurance investment property?
policies on its officer’s lives. Annual premiums amount to P5, a. The fair value of the property
000. At the end of 2014, cash surrender value of the policies b. The present value of the property
totaled P18, 200. Dividends received by Candle from the c. The net realizable value of the property
Insurance Company amounted to P500. The insurance expense d. The value in use of the property
recognized by Candle Park in 2014 was P3, 500.
15. What was the amount of cash surrender value of these 25. The following properties fall under the definition of
policies on January 1, 2014? investment property, except?
a. 14,200 c. 16,200 a. Land held for capital appreciation
b. 17,200 d. 10,200 b. Property occupied by an employee paying market rent.
c. Land held for a currently undetermined use
Problem (numbers 16-23)- (Amount of Investment d. A building owned by an entity and leased out under an
Computation)- Use 8% as the effective rate for the following operating lease.
questions: (Note: Use four decimal places for future value e. All of the foregoing falls under the definition of
factors/ present value factors) investment property.
16. What amount should be deposited in a bank account today
to grow to 3,000,000 three years from today? 26. Which of the following is classified as investment property?
a. P3,779,100 c P2,381,400 a. Owner-occupied property
b. P9,739,200 d. P7,731,300 b. Property that is being constructed or developed for
future use as investment property.
17. If P1,000,000 is put in a savings account today, what c. Property that is leased to another entity under a
amount will be available three years from now? finance lease.
a. P1,259,700 c. P793,800 d. A building owned by the entity and leased out under
b. P3,246,400 d. 2,577,100 one or more operating leases.

18. If P900,000 is put in a savings account today, what amount 27. On December 31, 2014, Dolphin’s investment in real
will be available six years from now? property has a carrying value of 3,600,000 under the fair
a. P900,000 x 0.6302 c.P900,000 x 0.6302 x 0.9259 value model, before considering market value adjustment.
b. P900,000 x 1.08 x 1.4693 d. P900,000 x (1.08 + 1.4693) If the fair market value at December 31, 2014 is
3,000,000,how much shouldbe the gain or loss on transfer
19. What amount will be in a bank account three years from if Dolphin company would shift to the cost model?
now if P500,000 is invested each year for four years with a. Gain of 600,000 reported as other comprehensive
the first investment to be made today? income
a. P1,656,050 c. 1,788,534 b. Loss of 600,000 reported as other loss in the income
b. P2,433,300 d. 2,253,050 statement
c. Loss of 600,000 reported in equity as decrease in
20. What amount should an individual have in a bank account revaluation surplus
today before withdrawal if P200,000 is needed each year d. Zero
for four years with the first withdrawal to be made today
and each subsequent withdrawal at one-year intervals? Use the following information for next two numbers- On
(The balance in the bank account should be zero after the January 2, 2014, Mighty Company converted its occupied
fourth withdrawal.) property to investment property that is to be carried at fair
a. P613,140 c. P662,420 value. The carrying value of the property in the company’s book
b. P715,400 d. P901,220 is P4, 000,000.

21. What will be the balance on September 1, 2021 in a fund

which is accumulated by making P100,000 annual deposits
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28. Assuming the fair value of the property on the date 34. A consignee paid the freight costs for goods shipped from a
transfer or conversion is P3, 800,000, Mighty Company consignor. The freight costs are to be deducted from the
should recognize consignee’s payment to the consignor when the
a. an impairment loss of P200, 000 in the profit or loss consignment goods are sold. Until the consignee sells the
b. a P200,000 deferred loss as an asset goods, the freight costs should be included in the
c. a P200, 000 unrealized loss in the shareholders’ equity consignee’s
d. a P4, 000,000 cost of the investment property a. Cost of Goods sold c. Freight out
b. Selling Expenses d. Accounts Receivable
29. Assuming the fair value of the property on the date of
transfer or conversion is P4, 400,000, Mighty Company 35. Which is incorrect concerning the Maritime term CIF (cost,
should recognize insurance, freight)?
a. a P400,000 unrealized gain in the profit or loss a. The buyer agrees to pay in a lump sum the cost of
b. a P400, 000 revaluation surplus in the shareholders’ goods, insurance and freight charge.
equity b. The seller must deliver the goods to the carrier and pay
c. a P400, 000 unrealized gain in the liability section for the cost of loading only
d. a P400, 000 direct credit to accumulated profits and c. The seller must deliver the goods to the carrier and pay
losses for the cost of loading and cost of shipment
30. Sheriz Company and its subsidiaries provided the following d. Title passes to the buyer upon delivery of the goods to
properties owned by the group. the carrier
Land held for undetermined future use 1,000,000
Vacant building to be leased out under Practical Accounting 1 and Auditing Problems
an operating lease 2,000,000
Property held for use in production 4,000,000 Problem 1 - Mulford Corporation uses a periodic inventory
Property held by a subsidiary, a real state system and a fiscal year ending September 30, 2012. Mulford
firm, in the ordinary course of business 3,000,000 correctly reported inventory on hand costing 980,000. During
Building owned by subsidiary and for the fiscal year ending September 30, 2013, Mulford recorded
which the subsidiary provides security and purchases of 5,700,000. A physical count on September 30,
maintenance services to the lessees 2,500,000 2013 revealed that goods costing 1,260,000 were on hand. The
Land leased to a subsidiary under an operating following material events occurred between September 25 and
lease 1,500,000 October 7, 2013:
Equipment leased to an unrelated party  An invoice for goods costing P276,000 was received and
under an operating lease 500,000 recorded on September 29. The goods arrived on October
Building under construction for use as investment 2. The supplier shipped the goods FOB destination on
property 3,500,000 September 27.
In the consolidated statement of financial position of Sheriz  An invoice for goods costing 183,000 was received and
Company and its subsidiaries, what total amount should be recorded on September 28. The supplier shipped the goods
reported as investment property? FOB shipping point on September 26. The receiving report
a. 6,000,000 c. 5,500,000 indicates that Mulford received the goods on October 1.
b. 8,000,000 d. 9,000,000 36. The correct amount of purchases to be reported in
Mulford’s balance sheet at September 30, 2013 should be
Inventory Section a. 5,700,000 c. 5,517,000
b. 5,424,000 d. 5,241,000
31. Which two of the following should be taken into account 37. The correct amount of inventory to be reported in
when determining the cost of inventories per PAS 2 Mulford’s balance sheet at September 30, 2013 should be
inventories? a. 260,000 c. 1,443,000
I - Storage costs of part finished goods b. 1,536,000 d. 1,719,000
II- Trade Discounts
III- Recoverable purchase taxes Problem 2- Sherlock Inc is an importer and wholesaler of
IV- Administrative Costs cellphone accessories. Its merchandise is purchased from
a. I and II c. II and III number of suppliers and is warehoused until sold to customers.
b. III and IV d. I and IV In conducting your audit of Sherlock’s financial statements for
the year ended December 31, 2012, you determined that the
32. PAS 2 (inventories) applies to all inventories , except internal control system is functioning effectively. You observed
a. work in progress arising under construction contracts, the physical count of inventory on November 30, 2012. The
including directly related service contracts following information are obtained from Katrina’s accounting
b. Financial Instruments records:
c. biological assets related to agricultural activity and Sales for 11 months ended November 30 3,400,000
agricultural produce at the point of harvest. Sales for the year ended December 31 3,840,000
d. All of the above Purchases for 11 months ended November 30 2,700,000
Purchases for the year ended December 31 3,200,000
33. Net Realizable value of inventories may fall below cost for a Inventory, January 1 350,000
number of reasons including: Inventory, November 30 (per physical count) 380,000
I. Product Obsolescence Your audit disclosed the following information:
II. Physical deterioration of inventories  Shipments received in unsalable condition and excluded
III. An increase in the expected replacement costs of from physical inventory. Also, there were returns not
the inventory. recorded because no credit memos were received from
IV. An increase in the estimated costs of completion vendors.
a. I, II and IV only c. II, III and IV only Total at November 30 4,000
b. I,III and IV only d. I and III only Total during December 31 2,000

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 Deposit made with vendor and charged to spoilage or wastage occurred. Each unit of finished goods
purchases in October. The goods contains one unit of raw materials.
were shipped in January 2013 8,000 d. Inventories are stated at cost are as follows:
 Deposit made with vendor and charged to  Raw materials- according to the FIFO method
Purchases in November 29 and were  Direct Labor- At an average rate determined by
included in the physical inventory as correlating total direct labor cost with effective
goods in transit 22,000 production during the period.
 Shipments received in November and included  Manufacturing overhead – at an applied rate of 150%
in the physical count at November 30 but of direct labor cost.
recorded as December purchases 30,000 43. The raw materials inventory as of December 31, 2007
 Due to carelessness of the receiving a. 1,976,000 c. 936,000
department, a December shipment was b. 1,352,000 d. 897,800
damaged by rain. These goods were later
sold at cost in December 40,000 44. The work in process inventory as of December 31,2007 is
Based on the preceding information, determine the following: a. 1,780,000 c. 1,885,565
38. Adjusted net purchases b. 1,751,294 d. 1,776,000
a. up to November 30: 2,666,000; up to December 31,
3,190,000 45. The finished goods inventory as of December 31,2007 is
b. Up to November 30: 2,700,000; up to December 31, a. 3,352,000 c. 3,553,130
3,164,000 b. 3,334,000 d. 3,284,588
c. up to November 30: 2,696,000; up to December 31,
3,186,000 46. The cost of goods sold for the year ended December
d. Up to November 30: 2,704,000; up to December 31, 31,2007 is
3,184,000 a. 16,897,000 c. 15,857,000
39. Cost of Goods sold for 11 months ended November 30, b. 16,568,304 d. 16,875,000
2012
a. 2,688,000 c. 2,666,000 47. In a manufacturing company, which of the following audit
b. 2,670,000 d. 2,692,000 procedures would give the least assurance of the valuation
40. Gross profit ratio for 11 months ended November 30, 2012 of inventory at the audit date?
a. 21.58% c. 20.94% a. Testing the computation of standard overhead rates.
b. 21.47% d. 20.82% b. Examining paid vendors’ invoices.
41. Gross profit for the month of December 2012 c. Reviewing direct labor rates
a. 92,136 c. 91,236 d. Obtaining information of inventories pledged under
b. 83,760 d. 88,000 loan agreements
42. Estimated inventory at December 31, 2012
a. 491,760 c. 456,000 Problem- Kubica uses the perpetual inventory system,
b. 490,000 d. 455,120 Kubica’s inventory transactions for August 2011 were as
follows: (note: n/a means not applicable)
Problem 3- During your audit of records of the ADB Month Explanation Units Unit price Amount
Corporation for the year ended December 31, 2007,the Aug 1 Beg. Invty 20 4.00 80.00
following facts were disclosed: Aug 7 Purchases 10 4.20 42.00
Raw Materials inventory, 1/1/2007 P 720,200 Aug 10 Purchases 20 4.30 86.00
Raw Material purchases 5,232,800 Aug 12 Sales 15 ? ?
Direct Labor 6,300,000 Aug 16 Purchases 20 4.60 92.00
Manufacturing overhead applied (150% of Aug 20 Sales 40 ? ?
direct labor) 9,450,000 Aug 28 Sales Returns 3 ? ?
Finished goods inventory, 1/1/2007 1,240,000
Selling Expenses 8,112,800 48. Using this information, assume that Kubica uses the FIFO
Administrative expenses 7,377,200 cost flow method and that the sales returns relate to the
Your Examination disclosed the following additional August 20 sales. The sales returns should be costed back
information: into inventory at what unit cost?
a. Purchases of Raw materials a. 4.00 c. 4.20
Month Units Unit price Amount b. 4.30 d. 4.60
1/1-2/28 55,000 17.76 976,800 49. Assuming that, Kubica uses the weighted average cost flow
3/1-4/30 45,000 20.00 900,000 method, the August 12 sales should be costed at what unit
5/1-6/30 25,000 19.60 490,000 cost?
July-August 35,000 20.00 700,000 a. 4.16 c. 4.07
Sept–Oct 45,000 20.40 918,000 b. 4.06 d. 4.00
Nov-Dec 60,000 20.80 1,248,000
b. Data with respect to quantities are as follows: Biological Assets Section-
Units 50. Green Thumb Company had a plantation that is likely to be
Explanation 1/1/2007 12/31/2007 harvested and sold in 30 years. The income should be
Raw Materials 35,000 ? accounted for in the following way:
Work in Process a. No income should be reported until first harvest and
(80% completed) 0 25,000 sale in 30 years.
Finished Goods 15,000 40,000 b. Income should be measured annually and reported
Sales 205,000 units using a fair value approach that recognizes and
c. Raw materials are issued at the beginning of the measures biological growth.
manufacturing process. During the year, no returns,

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 c. The eventual sale proceeds should be estimated and July 1, 2010
matched to the profit and loss account over the 30 1 year old 3,000
year period. January 1, 2010:
d. The plantation forest should be valued every five years 1 year old 3,000
and the increase in value should be shown in the 2-year old 4,000
statement of gains and losses. The entity has had problems during the year. Contaminated
milk was sold to customers. As a result, milk consumption has
51. When agricultural produce is harvested, the harvest should gone down. The entity’s business is spread over different parts
be accounted for by using PAS 2- Inventories or another of the country. The only region affected by the contamination
applicable Philippine accounting standard. For PAS 41, cost and were healthy. The entity feels that it cannot measure the
at the date of harvest is deemed to be fair value of the cows in the region because of the problems
a. Its fair value less estimated point of sale costs at point created by the contamination. There are 600 cows and 200
of harvest heifers in the Batangas farm and all these animals had been
b. The historical cost of the harvest purchased on January 1, 2010.
c. The historical cost less accumulated depreciation 54. What is the fair value of biological assets on January 1,
d. Market value 2010?
a. 9,300,000 c. 9,600,000
52. All of the following are classified as agricultural produce, b. 8,400,000 d. 7,200,000
except? 55. What is the fair value of the biological Assets purchased on
a. Sugar c. Wool July 1, 2010?
b. Cotton d. Milk a. 2,250,000 c. 3,000,000
e. all of these b. 3,750,000 d. 3,375,000
56. What is the fair value of biological assets on December 31,
53. Which of the following information should be disclosed 2010?
under PAS 41? a. 14,550,000 c. 15,750,000
a. Separate disclosure of the gain or loss relating to b. 15,225,000 d. 11,850,000
biological assets and agricultural produce. 57. What is the increase in fair value of biological Assets on
b. The aggregate gain or loss arising on the initial December 31, 2010?
recognition of biological assets and agricultural a. 3,000,000 c. 5,250,000
produce and the change in fair value less cost to sell of b. 4,950,000 d. 6,150,000
biological assets. 58. What is the increase in fair value of biological assets due to
c. The total gain or loss from biological assets, physical change?
agricultural produce and from changes in fair value less a. 1,260,000 c. 1,740,000
cost to sell of biological assets. b. 3,000,000 d. 1,440,000
d. There is no requirement in the Standard to disclose
separately any gains or losses. 59. Elisha Company is a producer of coffee. On December 31,
2012, the entity has harvested coffee beans costing P3,
Problem 1- Farmland Company produces milk on its 000, 000 and with fair value less cost to sell of P3, 500, 000
farms. The entity produces 20% of the community’s milk that is at the point of harvest. Because of long aging and
consumed. Farmland Company owns 5 farms and had a stock of maturation process after harvest, the harvested coffee
2,100 cows and 1,050 heifers. The farms produce 800,000 beans were still on hand on December 31, 2013. On such
kilograms of milk a year and the average inventory held is date, the fair value less cost to sell is P3,900,000 and the
15,000 kilograms of milk. However, on December 31, 2010, the net realizable value is P3,200,000. What is the
entity is currently holding 50,000 kilograms of milk in powder. measurement of the coffee beans inventory on December
On December 31, 2010, the herds are: 31, 2013?
Purchased on or Before January 1, 2010 a. 3,000,000 c. 3,500,000
3 years old 2,100 cows b. 3,200,000 d. 3,900,000
Purchased on January 1, 2010 60. The following pertains to Smile Company’s biological
2 years old 300 heifers assets:
Purchased on July 1, 2010 Price of the asset in the market 5,000
1.5 years old 750 heifers Estimated commissions to brokers
No animals were born or sold during the current year. The unit and dealers 500
fair value less cost to sell is as follows: Estimated transport and other costs necessary
to get asset to the market 300
December 31, 2010: Selling price in a binding contract to sell 5,200
1 Year old 3,200 The entity’s biological assets should be valued at
2 Year old 4,500 a. 4,700 b. 4,500 c. 4,400 d. 4,200
1.5 year old 3,600
3 year old 5,000

Answer key:

1 7 13 19 25 31 37 43 49 55
2 8 14 20 26 32 38 44 50 56
3 9 15 21 27 33 39 45 51 57
4 10 16 22 28 34 40 46 52 58
5 11 17 23 29 35 41 47 53 59
6 12 18 24 30 36 42 48 54 60

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