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INTERMEDIATE ACCOUNTING 3
FIRST GRADING EXAMINATION
1. According to PAS 1, an asset shall be classified as current when it satisfies any of the following
criteria, except
a. it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle
b. it is held primarily for the purpose of being traded
c. it is expected to be realized within twelve months after the balance sheet date
d. it is cash or a cash equivalent that is restricted
2. A liability shall be classified as current when it satisfies any of the following criteria, except
a. it is expected to be settled in the entity’s normal operating cycle
b. it is held primarily for the purpose of being traded
c. it is due to be settled within twelve months after the balance sheet date
d. the entity has an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date.
3. If an entity expects, and has the discretion, to refinance or roll over an obligation for at least
twelve months after the balance sheet date under an existing loan facility, it classifies the
obligation as non-current,
a. even if it would otherwise be due within a shorter period.
b. even if the original term was for a period longer than twelve months
c. even if an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the reporting period and before the financial statements are authorized for
issue
d. choices b and c
4. When an entity breaches an undertaking under a long-term loan agreement on or before the end
of the reporting period with the effect that the liability becomes payable on demand, (choose the
incorrect statement)
a. The liability is classified as current, even if the lender has agreed, after the balance sheet date
and before the authorization of the financial statements for issue, not to demand payment as
a consequence of the breach.
b. The liability is classified as current because, at the balance sheet date, the entity does not
have an unconditional right to defer its settlement for at least twelve months after that date.
c. The liability is classified as non-current, even if the lender has agreed, after the balance sheet
date and before the authorization of the financial statements for issue, not to demand
payment as a consequence of the breach.
d. The liability is normally classified as current; however, the liability is classified as non-
current if the lender agreed by the balance sheet date to provide a period of grace ending at
least twelve months after the balance sheet date, within which the entity can rectify the
breach and during that period the lender cannot demand immediate repayment.
Solution:
Current assets
Cash 10,000
Trade accounts receivable (40,000 + 10,000) 50,000
Held for trading securities 80,000
Financial assets designated at FVPL 30,000
Prepaid assets 10,000
Total current assets 180,000
9. The ledger of PERNICIOUS DEADLY Co. as of December 31, 20x1 includes the following:
Liabilities
Bank overdraft 10,000
Trade accounts payable (net of ₱10,000 debit balance in accounts) 40,000
Notes payable (due in 20 semi-annual payments of ₱4,000) 80,000
Interest payable 30,000
Bonds payable (due on March 31, 20x2) 70,000
Discount on bonds payable (30,000)
Dividends payable 10,000
Share dividends payable 12,000
Deferred tax liability (expected to reverse in 20x2) 36,000
Income tax payable 44,000
Contingent liability 100,000
Reserve for contingencies 28,000
Totals 430,000
Solution:
Current liabilities
Bank overdraft 10,000
Trade accounts payable (P20,000 + P5,000) 50,000
Notes payable (P2,000 semi-annual instalment x 2) 8,000
Interest payable 30,000
Bonds payable (due on March 31, 20x2) 70,000
Discount on bonds payable (30,000)
Dividends payable 10,000
Income tax payable 44,000
Total current liabilities 192,000
10. The ledger of CALLOW IMMATURE Co. in 20x1 includes the following:
Share capital 200,000
Share premium 40,000
Retained earnings, appropriated 36,000
Retained earnings, unappropriated 84,000
Revaluation surplus 60,000
Remeasurements of the net defined benefit liability (asset) - gain 30,000
Cumulative net unrealized gain on fair value changes of investment
in FVOCI 46,000
Effective portion of losses on hedging instruments in a cash
flow hedge 20,000
Cumulative translation loss on foreign operation 10,000
Treasury shares, at cost 26,000
Solution:
Share capital 200,000
Share premium 40,000
Retained earnings, appropriated 36,000
Retained earnings, unappropriated 84,000
Revaluation surplus 60,000
Remeasurements of the net defined benefit liability (asset)
- gain 30,000
Cumulative net unrealized gain on fair value
changes of investment in FVOCI 46,000
Effective portion of losses on hedging instruments in a
cash flow hedge (20,000)
Cumulative translation loss on foreign operation (10,000)
Treasury shares, at cost (26,000)
Total shareholders' equity 440,000
Retained earnings
- Jan. 1, 20x1
Dividends 60,000 180,000 Profit for the year (squeeze)
Dec. 31, 20x1 120,000
14. The ledger of DEROGATORY DEGRADING Co. in 20x1 includes the following:
Cash 200,000
Accounts receivable 400,000
Inventory 1,000,000
Accounts payable 300,000
Note payable 100,000
During the audit of DEROGATORY’s 20x1 financial statements, the following were noted by the
auditor:
- Cash sales in 20x2 amounting to ₱20,000 were inadvertently included as sales in 20x1.
DEROGATORY recognized gross profit of ₱6,000 on the sales.
- A collection of a ₱40,000 accounts receivable in 20x2 was recorded as collection in 20x1. A cash
discount of ₱2,000 was given to the customer.
- During January 20x2, a short-term bank loan of ₱50,000 obtained in 20x1 was paid together with
₱5,000 interest accruing in January 20x2. The payment transaction in 20x2 was inadvertently
included as 20x1 transaction.
Solution:
The adjusted balance of cash is computed as follows:
Cash (unadjusted) 200,000
Cash sales in 20x2 recorded as 20x1 sale (20,000)
Collection of account in 20x2 recorded as 20x1 collection
(40,000 account less 2,000 cash discount) (38,000)
Loan payment in 20x2 recorded as 20x1 transaction 50,000
Interest payment in 20x2 recorded as 20x1 transaction 5,000
Adjusted cash balance, Dec. 31, 20x1 197,000
Adjusted current assets, Dec. 31, 20x1: (197K + 440K + 1,014K) = 1,651,000
16. In a two-statement presentation, information on profit or loss and other comprehensive income
is shown
a. in two separate statements, a statement of profit or loss and a statement showing other
comprehensive income.
b. in two separate statements, a statement of profit or loss and an income statement.
c. in two separate statements, a single-step statement and a multi-step statement.
d. in a single statement called ‚statement of comprehensive income.‛
17. Under this presentation method, expenses are presented in the statement of comprehensive
income without distinctions as to their functions within the entity.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation
18. Under this presentation, expenses are classified as either operating or non-operating item. At a
minimum, cost of sales is presented separately.
a. nature of expense method
b. function of expense method
c. single-statement presentation
d. two-statement presentation
Additional information:
a. Ending inventory is ₱ 90,000.
b. One-fourth of the salaries, rent, and depreciation expenses pertain to the non-sales department.
The sales department does not share in the other expenses.
19. How much is the net purchases?
a. ₱185,000 c. ₱194,000
b. ₱176,000 d. ₱192,000
Purchases 180,000
Freight-in 10,000
Purchase returns (5,000)
Purchase discounts (9,000)
Net purchases 176,000
Freight-out 30,000
Sales commission 45,000
Advertising expense 25,000
Salaries expense (240K x 3/4) 180,000
Rent expense (30K x 3/4) 22,500
Depreciation expense (50K x 3/4) 37,500
Selling expenses/Distribution costs 340,000
24. DECORTICATE, Inc. intends to sell the manufacturing facility with its operations. Any
uncompleted customer orders at the sale date will be transferred to the buyer. The transfer of
uncompleted customer orders at the sale date will not affect the timing of the transfer of the
facility. How should DECORTICATE Co. classify the manufacturing facility?
a. Included under property, plant and equipment at ₱6,000,000.
b. Included under property, plant and equipment at ₱4,800,000.
c. Classified as held for sale at ₱6,000,000
d. Classified as held for sale at ₱4,800,000
25. DECORTICATE, Inc. 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. How should
DECORTICATE Co. classify the manufacturing facility?
a. Included under property, plant and equipment at ₱6,000,000.
b. Included under property, plant and equipment at ₱4,800,000.
c. Classified as held for sale at ₱6,000,000
d. Classified as held for sale at ₱4,800,000
B – not available for immediate sale in its present condition; PPE at 4.8M (5M – 200K) because the
manufacturing facility is impaired.
26. An entity in the power generating industry is committed to a plan to sell a disposal group that
represents a significant portion of its regulated operations. The sale requires regulatory
approval, which could extend the period required to complete the sale beyond one year. Actions
necessary to obtain that approval cannot be initiated until after a buyer is known and a firm
purchase commitment is obtained. However, a firm purchase commitment is highly probable
within one year. The disposal group has a carrying amount of ₱10,000,000 and fair value less
costs to sell of ₱10,600,000. How should the entity classify the disposal group?
a. Held for sale, ₱10.6M c. Under previous classifications, ₱10M
b. Held for sale, ₱10M d. Under previous classifications, ₱10.6M
During 20x1, the market conditions that existed at the date the asset was classified initially as held
for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that
period, FORGETIVE actively solicited but did not receive any reasonable offers to purchase the asset
and, in response, FORGETIVE reduced the price from ₱360,000 to ₱320,000. The fair value less costs
to sell on December 31, 20x1 is ₱340,000.
27. How should FORGETIVE Co. classify the property in its 20x1 annual financial statements?
a. Held for sale, ₱320,000 c. PPE, ₱340,000
b. Held for sale, ₱340,000 d. PPE, ₱400,000
B 340,000, the fair value less costs to sell, which is lower than the carrying amount of P360,000.
28. During 20x2, the market conditions deteriorate further, and the asset is not sold by December 31,
20x2. FORGETIVE Co. believes that the market conditions will improve and has not further
reduced the price of the asset. The fair value less costs to sell on December 31, 20x2 is ₱300,000. If
the property was not classified as held for sale in 20x1, its carrying amount by this time would
have been ₱350,000.
a. Held for sale, ₱300,000 c. PPE, ₱300,000
b. Held for sale, ₱320,000 d. PPE, ₱350,000
C – The asset is reclassified back to PPE at the lower of recoverable amount (i.e., 300,000) and the
carrying amount adjusted for depreciation not recognized during the asset was classified as held for sale
(i.e., 350,000).
29. WAYFARER TRAVELER Co. is preparing its December 31, 20x1, current year financial
statements. A land included in WAYFARER’s property, plant and equipment that did not
qualify as held for sale as of December 31, 20x1 was actually sold on January 5, 20x2. The
financial statements were authorized for issue on March 1, 20x2. On December 31, 20x1,
WAYFARER has total current assets of ₱9,000,000. Not included in this amount is the fair value
less costs to sell of the land amounting to ₱1,000,000. How much is the total current assets
current in WAYFARER’s December 31, 20x1 financial statements?
a. ₱8,000,000 c. ₱10,000,000
b. ₱9,000,000 d. ₱11,000,000
B – The event is disclosed only as a non-adjusting event after the reporting period.
30. On December 31, 20x1, STRIDENT HARSH-SOUNDING Co. classified its building with a
historical cost of ₱4,000,000 and accumulated depreciation of ₱2,400,000 as held for sale. All of
the criteria under PFRS 5 are complied with. On that date, the land has a fair value of ₱1,400,000
and cost to sell of ₱80,000. The entry on December 31, 20x1 includes
a. a debit to building for ₱1,320,000
b. a credit to accumulated depreciation for ₱2,400,000
c. a debit to impairment loss for ₱280,000
d. No reclassification entry will be made on December 31, 20x1
C
Jan. 1, Held for sale asset (1.4M – 80K) 1,320,000
20x1
Accumulated depreciation 2,400,000
Impairment loss 280,000
Building 4,000,000
31. On December 31, 20x1, OBSTINACY STUBBORNESS Co. classified its building with a carrying
amount of ₱1,600,000 and fair value less cost to sell of ₱1,320,000 as held for sale.
The building was not sold in 20x2. However, the exception to the one-year requirement was met. On
December 31, 20x2, the fair value less cost to sell of building is ₱1,240,000.
The building was not sold in 20x3. However, the exception to the one-year requirement was still
met. On December 31, 20x3, the fair value less cost to sell of building increased to ₱1,680,000. How
much is the gain on reversal of impairment to be recognized on December 31, 20x3?
a. 440,000
b. 360,000
c. 280,000
d. 0
B 360,000, limited to the total impairment losses recognized in previous years (1,240,000 - 1,600,000
original carrying amount)
INSOUCIANT Co. entity estimates that the fair value less costs to sell of the disposal group amounts
to ₱52,000,000.
32. How would the reduction in the value of the assets on classification as held for sale be treated in
the financial statements?
a. The entity recognizes a loss of ₱4.4M immediately before classification as held for sale and
then recognizes an impairment loss of ₱7.6M.
b. The entity recognizes an impairment loss of ₱12 million.
c. The entity recognizes an impairment loss of ₱7.6M.
d. The entity recognizes a loss of ₱12M immediately before classifying the disposal group as
held for sale.
33. How much is the carrying amount of the inventory after classification of the disposal group as
held for sale?
a. 8,800,000
b. 7,950,576
c. 7,899,324
d. 7,765,391
A 8,800,000 - Carrying amount as remeasured immediately before classification as held for sale. (See also
solutions below)
34. How much is the carrying amount of the Investment property (at cost model) after classification
of the disposal group as held for sale?
a. 22,800,000
b. 21,859,794
c. 21,786,665
d. 20,766,298
35. How much is the carrying amount of the PPE (at cost model) after classification of the disposal
group as held for sale?
a. 16,000,000
b. 15,780,740
c. 15,340,206
d. 15,211,612
C
The excess is allocated to the other assets pro rata based on their carrying amounts as follows:
Allocation of
Assets Carrying amt. Fraction Impairment Loss
Inventory N/A N/A N/A
Investment in FVOCI N/A N/A N/A
IP – cost 22,800,000 22.8/38.8 (940,206)
PPE – cost model 16,000,000 16/38.8 (659,794)
38,800,000 (1,600,000)
36. On December 31, 20x1, INGENIOUS NATURAL Co. classified its building with a carrying
amount of ₱1,600,000 and fair value less costs to sell of ₱1,320,000 as held for sale. Impairment
loss of ₱280,000 was recognized on that date. The building has a remaining useful life of 4 years
and it was depreciated using the straight-line method.
As of December 31, 20x2, the building was not yet sold and management decided not to sell the
building anymore. The fair value less cost to sell of the building on December 31, 20x2 is ₱1,240,000
while the value in use is ₱1,220,000.
How much is the carrying amount of the building upon reclassification back to property, plant and
equipment?
a. 1,220,000
b. 1,320,000
c. 1,240,000
d. 1,200,000
D
a. Carrying amount adjusted for depreciation not recognized (1.6M x ¾) = 1.2M;
b. Recoverable amount = 1.240M the higher of FVLCS and VIN
Measurement = 1.2M - the lower of a and b above
37. On December 31, 20x1, INIMICAL UNFRIENDLY Co. entered into an agreement to sell a
component. On that date, INIMICAL estimated the gain from the disposal to be made in 20x2 at
₱2,000,000 and the operating losses prior to the date of sale to be ₱1,200,000. As a result of the
sale, the component’s operations and cash flows will be eliminated from the entity’s operations
and the entity will not have any significant continuing post-sale involvement in the component’s
operations. Accordingly, the component was classified as held for sale and discontinued
operations.
The component’s actual operating losses in 20x1 and 20x2 were ₱2,800,000 and ₱2,600,000,
respectively, and the actual gain on disposal of the component in 20x2 was ₱1,600,000. INIMICAL’s
income tax rate is 30%. Any income tax benefit is expected to be realizable. There were no other
temporary differences during the year.
What single, post-tax amounts should be reported for discontinued operations in INIMICAL’s
comparative 20x2 and 20x1 income statements, respectively?
a. (1,960,000), (700,000)
b. (560,000), (1,960,000)
c. (650,000), (1,950,000)
d. (700,000), (1,960,000)
38. On April 30, 20x1, ABROGATE ABOLISH Co. approved a plan to dispose of a component of its
operations. The disposal meets the requirements for classification as discontinued operations.
From January 1 to April 30, 20x1, the component earned operating profit of ₱400,000 and from May 1
to December 31, 20x1, the segment suffered operating losses of ₱200,000.
The net assets of the component has a carrying amount of ₱32,000,000 as of April 30, 20x1. The fair
value less costs to sell of the component is ₱26,000,000. Additional estimated disposal loss includes
severance pay of ₱220,000 and employee relocation costs of ₱100,000, both of which are directly
associated with the decision to dispose of the segment. ABROGATE’s income tax rate is 30%. Any
income tax benefit is expected to be realizable. There were no other temporary differences during
the year.
How much is the profit (loss) from discontinued operations to be reported in ABROGATE's
statement of profit or loss and other comprehensive income for the year ended December 31, 20x1?
a. 4,564,000
b. 4,060,000
c. 4,340,000
d. 4,284,000
D
Solution:
Operating profit – January 1 to April 30, 20x1 400,000
Operating loss – May 1 to December 31, 20x1 (200,000)
Impairment loss (32M – 26M) (6,000,000)
Severance pay (220,000)
Employee relocation costs (100,000)
Total (6,120,000)
Multiply by: 1 minus Tax rate 70%
Loss for the period from discontinued operations (4,284,000)
39. You are a CPA. Your client asked you for an advice regarding the items that are presented as
other comprehensive income. You will tell your client to refer to which of the following
standards?
a. PAS 1
b. PFRS 1
c. PFRS 15
d. PAS 8
40. Non-current assets held for sale and discontinued operations are accounted for under
a. PFRS 4.
b. PAS 41.
c. PFRS 5.
d. PFRS 8.
41. Non-current assets are presented as current items in the statement of financial position
a. only when they are expected to be sold within 12 months from the end of reporting period.
b. only if they are actually sold after the reporting period but before the date of authorization of
the financial statements for issue.
c. only when they qualify as held for sale assets under PFRS 5.
d. never presented as current items.
42. A noncurrent asset classified as held for sale in accordance with PFRS 5 has not been sold after a
year. The asset shall continue to be presented as held for sale under PFRS 5 if
a. the delay is due to events beyond the entity’s control
b. the entity remains committed to its plan to sell the asset
c. the noncurrent asset is actually sold after the reporting period but before the financial
statements were authorized for issue.
d. a and b
43. Which of the following statements is true regarding the accounting treatment of costs to sell
under PFRS 5?
a. Costs to sell are added to the fair value when determining the measurement basis for an
asset held for sale
b. Costs to sell are never discounted because held for sale assets should be sold within one year
c. Costs to sell are discounted if it is expected that the sale will be made beyond one year.
d. a and c
44. According to PFRS 5, gains and losses on remeasurement of assets held for sale are
a. recognized in profit or loss
b. recognized in other comprehensive income
c. recognized only for impairment losses
d. not recognized
46. VISAGE Co. has an intention to transfer ownership of a building to a buyer after it vacates the
building. How should VISAGE Co. classify the headquarters building?
a. Included under property, plant and equipment at ₱5,000,000.
b. Included under property, plant and equipment at ₱5,800,000.
c. Classified as held for sale at ₱5,000,000
d. Classified as held for sale at ₱5,800,000
C 5,000,000 lower of carrying amount and fair value less costs sell
47. VISAGE Co. will continue to use the building until the construction of a new headquarters is
completed. How should VISAGE Co. classify the headquarters building?
a. Included under property, plant and equipment at ₱5,000,000.
b. Included under property, plant and equipment at ₱5,800,000.
c. Classified as held for sale at ₱5,000,000
d. Classified as held for sale at ₱5,800,000
48. PERAMBULATE STROLL Co. is a commercial leasing and finance company. As of year-end,
PERAMBULATE holds equipment that is available either for sale or lease. PERAMBULATE is
not yet decided whether to sell or to lease the equipment. The equipment has a carrying amount
of ₱1,000,000, fair value of ₱1,200,000 and costs to sell of ₱50,000. How should PERAMBULATE
Co. classify the equipment?
a. Inventory, ₱1,000,000 c. Held for sale, ₱1,150,000
b. Investment property, ₱1,250,000 d. Held for sale, ₱1,000,000
49. In Baer Food Co.’s 20x3 single-step income statement, the section titled ‚Revenues‛ consisted of
the following:
A
Solution:
Net sales revenue 187,000
Interest revenue 10,200
Adjusted total revenues 197,200
50. During 20x4, Lopez Corporation disposed of Pine Division, a major component of its business.
Lopez realized a gain of ₱500,000, net of taxes, on the sale of Pine's assets. Pine's operating
losses, net of taxes, were ₱600,000 in 2004. How should these facts be reported in Lopez's
income statement for 2004?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. 600,000 loss 500,000 gain
b. 100,000 loss 0
c. 0 100,000 loss
d. 500,000 gain 600,000 loss
“A fool shows his annoyance at once, but a prudent man overlooks an insult.” (Proverbs 12:16)
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PROBLEM-SOLVING
1. The movements in the cash account of NONCHALANT COOL Co. during 20x2 are shown
below.
Cash
beg. 200
Sales 6,000 3,800 Purchases
Interest income 20 1,200 Operating expenses
Rent income 270 30 Interest expense
Dividend income 40 70 Income taxes
Held for trading securities 800 100 Investment in FVOCI
Sale of old building 520 1,100 Purchase of equipment
Collection of non-trade note 60 130 Loan granted to employee
Proceeds from loan with a bank 1,600 240 Payment of loan borrowed
Issuance of shares 970 200 Reacquisition of shares
90 Dividends
3,520 end.
Requirement: Prepare the statement of cash flows of NONCHALANT COOL Co. for the year ended
December 31, 20x2. (Use Option 1 in classifying cash flows from operating activities.)
1. Solution:
NONCHALANT COOL Company
Statement of cash flows
For the year ended December 31, 20x2
“give thanks in all circumstances; for this is God’s will for you in Christ Jesus.” - (1
Thessalonians 5:18)
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