Instruction: State whether each of the following items is to be recognized IMMEDIATELY in its entirety in

the interim period or to be SPREAD OUT over the interim periods.

1. Temporary decline in the fair value of an investment in equity securities.

2. Significant and permanent decline in the fair value of an investment in equity securities.

3. Casualty loss from typhoon.

4. Government grant received as aid for the loss incurred in item #2 above.

5. Depreciation.

6. Year-end bonuses of employees which they earn as they render service.

7. Results of discontinued operations.

8. Premium paid for a one-year insurance.

9. Regular repairs and maintenance costs.

10. Dividend income.

11. Effect of change in foreign exchange rates on foreign currency denominated liabilities.

12. Temporary decline in the value of inventories.

13. Property tax for the year.

14. Post-employment benefits.

15. Significant but temporary increase in the fair value of investment in equity securities measured at fair
value through other comprehensive income.
1. IMMEDIATELY
2. IMMEDIATELY
3. IMMEDIATELY
4. IMMEDIATELY
5. SPREAD OUT
6. SPREAD OUT
7. IMMEDIATELY
8. SPREAD OUT
9. IMMEDIATELY
10. IMMEDIATELY
11. IMMEDIATELY
12. IMMEDIATELY
13. SPREAD OUT
14. SPREAD OUT
15. IMMEDIATELY
1. Which of the following statements is incorrect?
a. Related party transactions and outstanding balances with other entities in a group are disclosed
in an entity’s financial statements.
b. Intragroup related party transactions and outstanding balances are not eliminated in the
preparation of consolidated financial statements of the group.
c. Related party relationships are a normal feature of commerce and business.
d. A related party relationship could have an effect on the profit or loss and financial position of an
entity.
e. Knowledge of related party transactions, outstanding balances and relationships may affect
assessments of an entity’s operations by users of financial statements, including assessments of
the risks and opportunities facing the entity.

2. An entity’s ability to affect the financial and operating policies of an investee is through the
presence of
I. Control
II. Joint control
III. Significant influence
a. I only b. I or III c. Any of I, II, or III d. I, II and III

3. Which of the following statements is correct?

I. The profit or loss and financial position of an entity may be affected by a related party
relationship even if related party transactions do not occur.
II. The mere existence of the relationship may be sufficient to affect the transactions of the entity
with other parties.
a. True, true b. True, false c. False, false d. False, true

4. All of the parties enumerated are related to an entity , except

a. the entity is a subsidiary, an associate, or a venture in a joint venture.
b. the party is a member of the key management personnel of the entity or its parent.
c. the party is a close member of the family of an individual having control, significant influence, or
joint control over the entity or a member of the key management personnel of the entity or its
parent.
d. the party is a post-employment benefit plan for the benefit of employees of the entity, or of any
entity that is a related party of the entity.
e. two entities simply because they have a director or other member of key management
personnel in common

5. The following relates to the transactions of MISCELLANY MIXTURE Company during 20x1:
Directors' and officers' remuneration 4,000,000
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing assistance to directors
and officers 10,000,000
Share options granted to officers 600,000
Officers' expenses on travels, representation and
entertainment subject to liquidation and reimbursement 200,000
 Loans to directors and officers 6,000,000
Sales to related entities 20,000,000

Requirements: Determine the amount of related party disclosures on MISCELLANY’s (a) separate financial
statements and (b) the group’s consolidated financial statements.

1. B
2. C
3. A
4. E
5. Solutions:
(a) Separate financial statements
Key management personnel compensation:
Directors' and officers' remuneration 4,000,000
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing assistance
10,000,000
to directors and officers
Share options granted to officers 600,000
15,000,000
Related party transactions and outstanding balances:
Loans to directors and officers 6,000,000
Sales to related entities 20,000,000
26,000,000
Total 20,500,000

Advances to officers for necessary expenses of the entity and subject to liquidation are not treated as key
management personnel compensation.

(b) Consolidated financial statements

Key management personnel compensation:
Directors' and officers' remuneration 4,000,000
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing assistance
10,000,000
to directors and officers
Share options granted to officers 600,000
15,000,000
Related party transactions and outstanding balances:
Loans to directors and officers 6,000,000
6,000,000
Total 10,500,000

Intercompany transactions and outstanding balances are eliminated in the consolidated financial
statements.
1. An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 20x3, revealed
the following:
• An opening balance of ₱1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an
annual premium of ₱3,000 on July 1, 20x2.
• A ₱3,200 annual insurance premium payment made July 1, 20x3.
• A ₱2,000 advance rental payment for a warehouse

Thrift leased for one year beginning January 1, 2004. In its December 31, 20x3 balance sheet, what
amount should Thrift report as prepaid expenses?
a. 5,200 b. 3,600 c. 2,000 d. 1,600

2. The balance in retained earnings at December 31, 2003 was ₱810,000 and at December 31, 2004
was ₱654,000. Net income for 2004 was ₱563,000. A stock dividend was declared and distributed
which increased common stock ₱225,000 and paid-in capital ₱125,000. A cash dividend was declared
and paid. The amount of the cash dividend was
a. ₱279,000. c. ₱494,000.
b. ₱369,000. d. ₱719,000.

3. On April 1, 2008, Ivy began operating a service proprietorship with an initial cash investment of
₱1,000. The proprietorship provided ₱3,200 of services in April and received full payment in May. The
proprietorship incurred expenses of ₱1,500 in April which were paid in June. During May, Ivy drew
₱500 against her capital account.

What was the proprietorship's income for the two months ended May 31, 2008, under the following
methods of accounting?
Cash basis Accrual basis
a. 1,200 1,200
b. 1,700 1,700
c. 2,700 1,200
d. 3,200 1,700

4. Entity Co. uses the cash basis of accounting and reported income of ₱87,000 in 20x1. The following
items were considered in the computation of the cash basis net income.

Inventory, beginning 12,000

Inventory, ending 18,000
Receivables, beginning 40,000
Receivables, ending 38,000
Payables, beginning 19,000
Payables, ending 25,000

The accrual basis income is

a. 97,000 b. 73,000 c. 89,000 d. 85,000

5. Information on an entity’s accounts is shown below:

 Current tax payable, beg. 150,000
Current tax payable, end. 400,000
Increase in deferred tax liability 60,000
Increase in deferred tax asset 20,000
Income tax paid 280,000

How much is the income tax expense for the period?

a. 530,000 b. 540,000 c. 570,000 d. 610,000

1. B
Solution:
Insurance paid on July 1, 20x3 3,200
Less: Expired portion (3,200 x 6/12) (1,600)
Prepaid - Dec. 31, 20x3 1,600
Advanced rental payment 2,000
Total prepayments - 12/31/x3 3,600

2. B ₱810,000 + ₱563,000 – (₱225,000 + ₱125,000) – X = ₱654,000

X = ₱369,000.

3. D
Solution:
Cash basis Accrual basis
Revenue 3,200 3,200
Expenses - (1,500)
Profit 3,200 1,700

4. D
Solution:
Accrual basis profit (squeeze) 85,000
Increase in inventory (6,000)
Decrease in receivables 2,000
Increase in payables 6,000
Cash basis profit 87,000

5. C
Solution:
Current tax payable
150,000 beg.
Income tax paid 280,000 530,000 Current tax expense

end. 400,000
 Income tax expense 570,000
Less: Increase in deferred tax liability (60,000)
Add: Increase in deferred tax asset 20,000
Current tax expense 530,000

1. Conn Co. reported a retained earnings balance of ₱400,000 at December 31, 20X8. In August 20X9,
Conn determined that insurance premiums of ₱60,000 for the three-year period beginning January
1, 20X8, had been paid and fully expensed in 20X8. Conn has a 30% income tax rate. What amount
should Conn report as adjusted beginning retained earnings in its 20X9 statement of retained
earnings?
a. 420,000 b. 428,000 c. 440,000 d. 442,000

2. Foy Corp. failed to accrue warranty costs of ₱50,000 in its December 31, 20X4, financial statements.
In addition, a change from straight-line to accelerated depreciation made at the beginning of 20X5
resulted in a cumulative effect of ₱30,000 on Foy's retained earnings. Both the ₱50,000 and the
₱30,000 are net of related income taxes. What amount should Foy report as prior period adjustment
in 20X5?
a. 0 b. 30,000 c. 50,000 d. 80,000

3. Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate, with interest payable at maturity. Loeb repaid each loan
on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
11/1/x1 ₱ 5,000 10/31/x2 1 Year
2/1/x2 15,000 7/31/x2 6 Months
5/1/x2 8,000 1/31/x3 9 Months

Loeb records interest expense when the loans are repaid. As a result, interest expense of ₱1,500 was
recorded in 20x2. If no correction is made, by what amount would 20x2 interest expense be understated?
a. 540 b. 620 c. 640 d. 720

The next three items are based on the following:

Declaration, Inc., is a calendar year corporation. Its financial statements for the years 20x2 and 20x1
contained errors as follows:
20x2 20x1
Ending inventory ₱1,000 understated ₱3,000 overstated
Depreciation expense ₱800 understated ₱2,500 overstated

4. Assume that the proper correcting entries were made at December 31, 20x1. By how much will 20x2
income before income taxes be overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.
5. Assume that no correcting entries were made at December 31, 20x1. Ignoring income taxes, by how
much will retained earnings at December 31, 20x2, be overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.

6. Assume that no correcting entries were made at December 31, 20x1, or December 31, 20x2, and
that no additional errors occurred in 20x3. Ignoring income taxes, by how much will working capital
at December 31, 20x3, be overstated or understated?
a. ₱0. c. ₱1,000 understated.
b. ₱1,000 overstated. d. ₱1,700 understated.

7. Bren Co.'s beginning inventory at January 1, 20x3, was understated by ₱26,000, and its ending
inventory was overstated by ₱52,000. As a result, Bren's cost of goods sold for 20x3 was
a. Understated by ₱26,000. c. Understated by ₱78,000.
b. Overstated by ₱26,000. d. Overstated by ₱78,000.

The next three items are based on the following:

The bookkeeper of Latsch Company, which has an accounting year ending December 31, made the
following errors:
 A ₱1,000 collection from a customer was received on December 29, 20x0, but not recorded until the
date of its deposit in the bank, January 4, 20x1.
 A supplier's ₱1,600 invoice for inventory items received in December 20x0 was not recorded until
January 20x1. (Inventories at December 31, 20x0 and 20x1, were stated correctly, based on physical
count.)
 Depreciation for 20x0 was understated by ₱900. In September 20x0, a ₱200 invoice for office
supplies was charged to the Utilities Expense account. Office supplies are expensed as purchased.
 December 31, 20x0, sales on account of ₱3,000 were recorded in January 20x1.

Assume that no other errors have occurred and that no correcting entries have been made. Ignore income
taxes.

8. Profit for 20x0 was

a. Understated by ₱500. c. Overstated by ₱2,500.
b. Understated by ₱2,100. d. Neither understated nor overstated.

9. Assume the same facts as above. Working capital at December 31, 20x0, was
a. Understated by ₱3,000. c. Understated by ₱1,400.
b. Understated by ₱500. d. Neither understated or overstated.

10. Assume the same facts as above. Total assets at December 31, 20x0, were
a. Overstated by ₱2,500. c. Understated by ₱2,500.
b. Overstated by ₱2,100. d. None of the above.

1. B 400,000 + [(60,000 x 2/3) x 70%] = 428,000

2. C 50,000 – the correction for the prior period error. The change from straight-line to accelerated
depreciation is a change in accounting estimate that should be accounted for prospectively.

3. A
Solution:
The correct interest expense in 20x2 is computed as follows:
(5,000 x 12% x 10/12) 500
(15,000 x 12% x 6/12) 900
(8,000 x 12% x 8/12) 640
Correct interest expense - 20x2 2,040

Correct interest expense - 20x2 2,040

Interest expense recognized 1,500
Understatement 540
4. A
Solution:
Ending inventory - 20x2 1,000
Depreciation expense - 20x2 (800)
Understatement 200

The counter-balancing error in 20x1 does not affect the 20x2 profit because proper correcting entries
were made on December 31, 20x1.

5. C
Solution:
Effect on profit (over) under statement:
Errors on: 20x1 20x2
Ending inventory - 20x1 (3,000) 3,000
Ending inventory - 20x2 1,000
Depreciation expense - 20x1 2,500
Depreciation expense - 20x2 (800)
(500) 3,200

Effect on profit - 20x1 (500)

Effect on profit - 20x2 3,200
Effect on R/E, 20x2 - understatement 2,700

6. A The working capital on December 31, 20x3 is not affected because all of the counter-balancing
errors would have counter-balanced already as of this point. Errors on depreciation do not affect
working capital.

7. C
Solution:
 Effect on COGS -
(over)/understatement
Understatement in beg. Inventory 26,000
Overstatement in end. Inventory 52,000
Net effect on COGS – understatement 78,000

8. A
Solution:
Effect on profit (over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on profit - understatement 500

9. C
Solution:
Effect on working capital (over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation -
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on working capital - understatement 1,400

10. D
Solution:
Effect on total assets
(over)/understatement
Unrecorded collection -
Unrecorded purchases (Inventory is
properly stated) -
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales (Unrecorded
accounts receivable) 3,000
Net effect on total assets - understatement 2,100
Instruction: State whether the following events are adjusting or non-adjusting events after the reporting
period. All events took place after the end of the reporting period but before the financial statements are
authorized for issue

1. The entity guarantees the debt of another entity.

2. Settlement of a contingent event at an amount below the provision recognized as at the end of
the reporting period.

3. Major acquisition of a competitor company.

4. The actual sale of noncurrent assets held for sale provides information on the asset’s fair value
less costs to sell as at the end of the reporting period.

5. The resolution of a contingent event which provides evidence of the entity’s obligation to pay
bonus to a key management personnel for the services he has rendered during the reporting period.

6. The conditions under PFRS 5 Non-current Assets Held for Sale and Discontinued Operations for
classifying a noncurrent asset or disposal group as held for sale are met.

7. Change in income tax rate.

8. The discovery that the accumulated patent amortization is understated.

9. A board resolution to change the depreciation method used for buildings.

10. Adoption and announcing of a formal plant to close a business segment.

1. NON-ADJUSTING
2. ADJUSTING
3. NON-ADJUSTING
4. ADJUSTING
5. ADJUSTING
6. NON-ADJUSTING
7. NON-ADJUSTING
8. ADJUSTING
9. NON-ADJUSTING
10. NON-ADJUSTING