AFAR Test Bank

1. Which of the following procedures is not a necessary step affecting a dissolution of partnership?

a. Revaluing partnership assets

b. Recognizing undistributed profit or loss share of partner at dissolution date
c. Closing of partnership books
d. Revising partners’ equity

2. In case of general partnership liquidation, which of the following credits shall be settled first by the
liquidating partner?

a. Those owing for partner’s capital contribution

b. Those owing to third persons
c. Those owing for the share in partnership profits
d. Those owing to partners for their advances to partnership

3. Which of the following transactions will not affect the total equity of a partnership?

a. Recognition of impairment loss in case of admission of a new partner by investment

b. Withdrawal by a partner
c. Admission of a new partner by purchase of existing partner’s interest below its book value
d. Retirement of an existing partner with payment of above the book value of such interest

4. A partner was admitted in an existing partnership through investment of cash equivalent to ¼ of the new
Capitalization. If the capital balance of the old partners increases, what is the most valid reason
Philippine GAAP?

a. Asset revaluation of existing partnership’s assets

b. Impairment loss of existing partnership assets
c. recognition of goodwill of existing partnership
d. Receipt of bonus from the new partner

5. Which of the following transactions will increase the normal balance of home office account in the
separate statement of the financial position of the branch?

a. Collection by the home office of branch’s receivable

b. Debit memo received from the home office
c. Credit memo issued by the home office
d. Payment by the branch of home office’s loans payable

6. In translating the financial statements of an entity from its functional currency to its different
presentation currency, which of the following statements is incorrect?

a. Income and expense accounts shall be translated at exchange rates at the dates of the transactions.
b. Resulting exchange gain or loss arising from translation shall be recognized in profit or loss.
c. Equity accounts other than retained earnings shall be translated using exchange rates at the dates
of the transactions.
d. Assets and liabilities, whether monetary or nonmonetary, shall be translated at the closing rate of
the statement of financial position.

7. When the results and financial position of an entity whose functional currency is the currency of a
hyperinflationary economy, what is the rate to be used when translating income and expense accounts
into a different currency?

a. At the closing rate at the date of the most recent statement of financial position
b. At the exchange rates at the dates of the transactions
c. At the average rate during the year
d. At the exchange rate at the beginning of the year

8. In June 2017, Ralph hospital purchased medicines from winner Pharmaceutical Co. at a cost of P5000.
Winner notified Ralph that the invoice was being cancelled, and the medicines were being donated to
Ralph. Ralph should record this donation of medicines as

a. A memorandum entry only

b. Other operating revenue of P5,000
c. A P5,000 credit to operating expenses
d. A P5,000 credit to non-operating expenses

9. Which of the following shall be properly classified as unrestricted net asset in the statement of financial
position of the non-profit educational institution?

a. Fund whose principal is require to be invested indefinitely

b. Fund designated by the board for construction of building
c. Fund which is restricted by the donor to be non-expendable for until 2020
d. Fund which is held in trust by the institution for the benefit of the different school organization

10. SUPLEX Inc. enters into an arrangement under which it will build and operate a toll bridge. Company B
is entitled to charge users for driving over the toll bridge for the period from the completion of
construction until 1 million cars have driven across the bridge, at which point the concession
arrangement will end. SUPLEX Inc. incurred a total cost of P1B for the construction of the toll bridge.
How shall SUPLEX Inc. account for its infrastructure asset?

a. It shall be classified and treated as financial asset

b. It shall be bifurcated into intangible asset and financial asset
c. It shall be classified and treated as intangible asset to be amortized using straight line method of
presumed life of 10 years.
d. It shall be classified and treated as intangible asset to be amortized on the basis of usage or unit
method of 1 million cars.

11. Under PAS 39, all of the following are characteristics of a derivative except

a. Its value changes in response to the change in a specified underlying (e.g., interest rate, financial
instrument price, commodity price, foreign exchange rate, etc.).
b. It requires no initial investment or an initial net investment that is smaller than would be required
for other types of contracts that would be expected to have a similar response to changes in market
factors.
c. It is settled at a future date.
d. It is required or incurred by the entity for the purpose of generating a profit from short-term
fluctuations in market factors.

12. Which statement is correct regarding forward contracts?

a. The party that sells the underlying asset in the contracts is said to have a long position.
b. The party that buys the underlying asset in the contract pays the seller a fee to compensate the
seller for the risk of payments.
c. These contracts are generic exchange-traded
d. Settlement is at maturity by actual delivery of the item specified in the contract, or by a net cash
settlement

13. Under IFRS a parent may exclude a subsidiary from consolidation only if all of the following conditions
exist, except

a. Its parent prepares consolidated financial statements that comply with IFRS
b. It has one class of stock
c. It does not have any debt or equity instruments publicly traded
d. It is wholly owned as its owners do not object to non-consolidation

14. A not-for profit entity has all of the following characteristics except that it will

a. Have positive fund balance

b. Not possess ownership interests like a corporation
c. Operate for purposes other than to provide goods or services
d. Receive significant contributions from providers who do not expect returns

15. A not-for-profit entity has all of the following characteristics except that it will

a. Have positive fund balance

b. Not possess ownership interests like a corporation
c. Operate for purposes other than to provide goods or service
d. Receive significant contributions from providers who do not expect returns

16. Under IFRS a parent may exclude a subsidiary from consolidation only if all of the following conditions
exist, except

a. Its parent prepares consolidated financial statements that comply with IFRS
b. It has one class of stock
c. It does not have any debt or equity instruments publicly traded
d. It is wholly owned as its owners do not object to no consolidation

17. JUMBO Corp. uses the percentage-of-completion method of revenue recognition in accounting for its
long-term construction contracts. JUMBO Corp.’s progress billings account is a

a. Revenue account
b. Non-current liability account
c. Contra current asset account
d. Contra non-current asset account

18. It is generally presumed that an entity is a variable interest entity subject to consolidation if its equity is

a. Less than 10% of total liabilities

b. Less than 50% of total assets
c. Less than 10% of total liabilities
d. Less than 25% of total assets

19. Sagip Kapatid Charities, a not-for-profit agency, receives free electricity on a continuous basis from a
local utility company. The utility company’s contribution is made subject to cancellation by the donor.
Sagip Kapatid Charities should account for this contribution as a(n)

a. Restricted revenue only.

b. Restricted revenue and an expense.
c. Unrestricted revenue only.
d. Unrestricted revenue and an expense.

20. A partnership in liquidation has converted all assets into cash and paid all liabilities. The order of
payment

a. Will have amounts owed by partners other than for capital and profits take precedence over
amounts due to partners with respect to their capital accounts.
b. Will be by any manner that is both reasonable and rational for the partnership.
c. will be according to the partners’ residual profit and loss sharing ratios.
d. Will have amounts due to partners with respect to their capital accounts take precedence over
amounts owed by partners other than for capital and profits.

21. When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest
exceeded Mill’s capital balance. Under the bonus method, the excess
a. Was recorded as goodwill.
b. Was recorded as an expense.
c. Reduced the capital balances of Yale and Lear.
d. Had no effect on the capital balances of Yale and Lear.

22. Franchise fees are properly recognized as revenue

a. when received in cash.

b. when a contractual agreement has been signed.
c. after the franchise business has begun operations.
d. after the franchiser has substantially performed its service.

23. A silent partner in a general partnership

a. Helps manage the partnership without letting those outside the partnership know this.
b. Retains unlimited liability for the debts of the partnership.
c. Both of the above is correct.
d. None of the above is correct.

24. If the Alaska Museum, a not-for-profit organization, received a contribution of historical artifacts, it
need not recognize the contribution if the artifacts are to be sold and the proceeds used to

a. Support general museum activities.

b. Acquire other items for collections.
c. Repair existing collections.
d. Purchase buildings to house collections.

25. A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an
unrecognized firm commitment, is classified as a

a. Fair value hedge.

b. Cash flow hedge.
c. Foreign currency hedge.
d. Underlying.

26. In general, an acquirer measures and accounts for assets acquired and liabilities assumed or incurred in a
business combination after the business combination has been completed in accordance with other
applicable IFRSs. However, which of the following that the International Financial Reporting Standards
3 Business Combinations (IFRS 3) specifically provides accounting requirements?

a. reacquired rights
b. contingent liabilities
c. contingent consideration
d. insurance contracts.

27. To determine whether it controls an investee an investor shall assess whether it has all the following,
except:

a. the purpose and design of the investor

b. exposure, or rights, to variable returns from its involvement with the investee
c. the ability to use its power over the investee to affect the amount of the investor's returns
d. power over the investee.

28. Which of the following is true?

a. In a joint arrangement, a single party controls the arrangement on its own.

b. An arrangement can be a joint arrangement when all of its parties have joint control of the
arrangement.
c. An entity that is a party to an arrangement shall assess whether the contractual arrangement
gives all the parties, or a group of the parties, control of the arrangement individually.
d. A party with joint control of an arrangement can prevent any of the other parties, or a group of
the parties, from controlling the arrangement.
29. IFRS 4 Insurance Contracts applies to the following except:

a. Insurance contracts
b. Product warranties issued directly by a manufacturer, dealer or retailer
c. Financial instruments that it issues with a discretionary participation feature
d. Reinsurance contracts.

30. FASB favors consolidation of two entities when

a. One acquires less than 20% equity ownership of the other.

b. One company’s ownership interest in another gives it control of the acquired company, yet the
acquiring company does not have a majority ownership in the acquired. Typically, this is in the
20%-50% interest range.
c. One acquires two thirds equity ownership in the other.
d. One gains control over the entity, irrespective of the equity percentage owned.

31. Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring Florence Company.
Michangelo will treat the $100,000 as

a. An expense for the current year.

b. A prior period adjustment to retained earnings.
c. Additional cost to investment of Florence on the consolidated balance sheet.
d. A reduction in paid-in capital.

32. Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of
Bull Company in an all-stock transaction. Picasso paid the investment bankers $35,000. Picasso will
treat the investment banker fee as:

a. An expense for the current year.

b. A prior period adjustment to retained earnings.
c. Additional goodwill the consolidated balance sheet.
d. A reduction in paid-in capital.

33. Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea
Corp developed a patent listed as an asset on Sea Corp’s books at the patent office filing cost. In
recording the combination:

a. Fair value is not assigned to the patent because the research and development costs have been
expensed by Sea Corp.
b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durrer at purchase.
c. The patent is recorded as an asset at fair market value.
d. The patent’s market value increases goodwill.

34. According to FASB Statement 141, which one of the following items may not be accounted for as an
intangible asset apart from goodwill?

a. A production backlogs.
b. A talented employee workforce.
c. Non-contractual customer relationships.
d. Employment contracts.

35. Under the Uniform Partnership Act, loans made by a partner to the partnership are treated as

a. Advances to the partnership for which interest shall be paid from the date of the advance.
b. Advances to the partnership that are carried in the partner’s capital accounts.
c. Accounts payable of the partnership for which interest is paid.
d. Advances to the partnership for which interest does not have to be paid.

36. A partner assigned his partnership interest to a third party. Which statement best describes the legal
ramifications to the assignee?

a. The assignment of the partnership interest does not entitle the assignee to partnership assets upon
a liquidation.
b. The assignment dissolves the partnership.
c. The assignee has the right to share in the management of the partnership.
d. The assignee does not become a partner but has the right to share in future partnership profits and
to receive the proper share of partnership assets upon liquidation.

37. In the Uniform Partnership Act, partners have

I. mutual agency.
II. unlimited liability.

a. I only.
b. II only.
c. I and II.
d. Neither I nor II.

38. Partnerships

a. are required to prepare annual reports.

b. are required to file income tax returns but do not pay Federal taxes.
c. are required to file income tax returns and pay Federal income taxes.
d. are not required to file income tax returns or pay Federal income taxes.

39. Langley invests his delivery van in a computer repair partnership with McCurdy. What amount should
the van be credited to Langley’s partnership capital?

a. The tax basis.

b. The fair value at the date of contribution.
c. Langley’s original cost.
d. The assessed valuation for property tax purposes.

40. A not-for-profit entity has all of the following characteristics except that it will

a. operate for purposes other than to provide goods or service at a profit.

b. have a positive fund balance.
c. not possess ownership interests like a corporation.
d. receive significant contributions from providers who do not expect returns.

41. A governmental not-for-profit entity has which of the following characteristics?

a. It must have a positive fund balance.

b. It must only operate on US soil.
c. A government can void tax regulations for the entity.
d. A government can unilaterally dissolve the entity.

42. In accounting for private, not-for-profit organizations, revenues and expenses are reported at _________
amounts and most gains and losses are reported at ___________ amounts.

a. net, gross
b. gross, net
c. gross, gross
d. net, net

43. When the temporary-use restriction on a charitable donation is satisfied, which of the following is not
reported?

a. Net assets released from restrictions in changes in temporarily restricted net assets.
b. Net assets released from restrictions on the statement of cash flows.
c. Expenses as changes in unrestricted net assets.
d. Net assets released from restrictions in changes in unrestricted net assets.

44. Under FASB not-for-profit accounting guidance, an unconditional transfer of cash or other assets to an
entity, or a settlement or cancellation of its liabilities in a voluntary, non-reciprocal transfer, is called a(n)

a. unconditional promise to give.

b. Contribution.
c. conditional promise to give.
d. residual equity transfer.

45. Which of the following statements is false?

a. The preparation of combined statements necessitates the elimination of reciprocal accounts

b. The recording of reported branch net income on the home office books represents a home office
closing entry.
c. The procedures in recording the home office and branch income accounts are essentially the same
as that of the bank reconciliation statement
d. While the branch financial statements may be prepared for internal reporting purposes, external
accounting reports reflects the activities and practices of the company as a whole.

46. At the time of liquidation of general partnership, which of the ff credits should be settled first by the
liquidating partner?

a. Liabilities of the partnership to the co-partners.

b. Liabilities of the partnership to the third person.
c. Liabilities of the partnership to the partnership.
d. Liabilities of the partnership to the family.

47. Under PFRS 15, when shall the consignor recognizes the revenue from consignment sales arrangement?

a. From the moment of the remittance of the consignee.

b. From the moment of the collection of the consignee of the sales of the products
c. From the moments the consignor delivers the goods to the consignee.
d. From the moment the consignee sells the goods to the final customer.

48. Under PFRS 15, what is the criteria before entity may recognize the incremental costs of obtaining the
contract?

a. If the entity expects to recover those costs.

b. If the entity receives the costs from the customer.
c. If the customer signs the contract with the entity.
d. If the customer violates the contract with the entity.

49. Under PFRS 15, what is the proper measurement of revenue from contract with customers if the entity
received a non-cash consideration?

a. Book value of the consideration received.

b. Historical cost of the consideration received
c. Fair value of the consideration received
d. Stand-alone selling price

50. What is the reason for the understatement of the net income reported by the branch in its separate income
statement?

A. Overstatement of cost of goods sold reported by the branch due to goods acquired from the home
office.
B. Overstatement of cost of goods sold reported by the branch due to goods acquired from the branch.
C. Overstatement of ending inventory reported by the branch due to goods acquired from the home
office.
D. Overstatement of purchases reported by the branch due to goods acquired from the home office.

51. Which of the following will increase the COGS for the year ended?

a. Increase in Raw Materials inventory during the year

b. Increase in WIP inventory during the year
c. Decrease in Raw Materials inventory during the year
d. Decrease in WIP inventory during the year
52. What is the accounting treatment of material over application or under application of factory overhead in
normal costing?

a. It shall be closed to COGS only

b. It shall be closed to expenses
c. It shall be expense when incurred.
d. It shall be closed proportionately to work in process ending inventory, finished goods inventory and
COGS.

53. A credit balance in the materials price variance indicates

a. Actual price exceeds standard price.

b. Standard price exceeds the actual price
c. Actual quantity exceeds the standard quantity.
d. Standard quantity exceeds the actual quantity

54. Which of the following method should be used if the company ends all processing at the split off point
and wants to use joint allocation method that considers the revenue-producing-ability of each product?

a. Replacement cost method

b. Approximated NRV method
c. Relative sales value method
d. Physical units method

55. What is the difference between the Weighted Average EUP and First in-First out EUP?

a. Completed proportion of WIP Beginning

b. Completed portion of WIP beginning
c. Uncompleted portion of WIP Beginning
d. Uncompleted portion of WIP ending

56. Which of the ff costs will be properly classified as prime costs?

a. Factory overhead costs and direct material costs

b. Factory overhead costs and direct labor costs
c. Direct material and direct labor costs
d. Indirect labor costs and indirect material costs

57. Which of the ff transactions will result to credit in home office account in the book of Pasig Branch?

a. Reported net loss of the Pasig branch

b. Payment by Pasig branch of home office’s liability
c. Return by Pasig branch to home office of merchandise
d. Collection by Pasig branch of Pasay branch receivable.

58. What is the accounting treatment of material net realizable value of by-product?

a. Deduction from cost of sales of main products

b. Addition to sales revenue of main products
c. Presented as other income
d. Deduction form total joint cost

59. Which of the following is a reason why a company would expand through a combination, rather than by
building new facilities?

a. A combination might provide cost advantages.

b. A combination might provide fewer operating delays
c. A combination might provide easier access to intangible assets.
d. All of the above are possible reasons that a company might choose a combination

60. A business combination in which a new corporation is created and two or more existing corporations are
combined into the newly created corporation is called a

a. Merger
b. Purchase transaction
c. Pooling-of-interest
d. Consolidation

61. A business combination occurs when a company acquires an equity interest in another entity and has

a. at least 20% ownership in the entity

b. more than 50% ownership in the entity.
c. 100% ownership in the entity
d. control over the entity, irrespective of the percentage owned

62. In a merger, which of the following will occur?

a. A merger occurs when one corporation takes over the operations of another business entity, and
the acquired entity is dissolved
b. None of the business entities will be dissolved.
c. The acquired assets will be recorded at book value by the acquiring entity
d. None of the above is correct

63. Which of the following conditions would not indicate that two business segments should be classified as a
single operating segment?

a. They have similar amounts of intersegment revenues or expenses.

b. They have a similar distribution of products.
c. They have similar production processes
d. They have similar products or services

64. An enterprise uses a branch accounting system in which it establishes separate formal accounting systems
for its home office operations and its branch office operations. Which of the following statements about
this arrangement is false?

a. The home office account on the books of a branch office represents the equity interest of the home
office in the net assets of the branch.
b. The branch office account on the books of the home office represents the equity interest of the
branch office in the net assets of the home office.
c. The home office and branch office accounts are reciprocal accounts that must be eliminated in the
preparation of the enterprise’s financial statements that are presented in accordance with GAAP.
d. Unrealized profit from internal transfers between the home office and a branch must be eliminated
in the preparation of the enterprise’s financial statements that are presented in accordance with
GAAP.

65. VERDI, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Cebu
Branch with the latter paying P600 for freight cost. Subsequently, the head office authorized Cebu Branch
to transfer the goods to Davao Branch for which the latter was billed for the P10,000 cost of the goods and
freight charge of P200 for the transfer. If the head office had shipped the goods directly to Davao Branch,
the freight charge would have been P700. The P100 difference in freight cost would be disposed of as
follows:

a. Considered as savings.
b. Charged to Davao Branch.
c. Charged to Cebu Branch.
d. Charged to the Head Office.
66. The partnership agreement is an express contract among the partners (the owners of the business). Such an
agreement generally does not include

a. A limitation on a partner’s liability to creditors.

b. The rights and duties of the partners.
c. The allocation of income between the partners.
d. The rights and duties of the partners in the event of partnership dissolution.

67. A partnership records a partner’s investment of assets in the business at

a. The market value of the assets invested.

b. A special value set by the partners.
c. The partner’s book value of the assets invested.
d. Any of the above, depending upon the partnership agreement

68. When property other than cash is invested in a partnership, at what amount should the noncash property
be credited to the contributing partner’s capital account?

a. Fair value at the date of recognition.

b. Contributing partner’s original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner’s tax basis

69. When property other than cash is invested in a partnership, at what amount should the noncash property
be credited to the contributing partner’s capital account?

a. Fair value at the date of contribution.

b. Contributing partner’s original cost.
c. Assessed valuation for property tax purposes.
d. Contributing partner’s tax basis.

70. Four individuals who were previously sole proprietors form a partnership. Each partner contributes
inventory and equipment for use by the partnership. What basis should the partnership use to record the
contributed assets?

a. Inventory at the lower of FIFO cost or market.

b. Inventory at the lower of weighted-average cost or market.
c. Equipment at each proprietor’s carrying amount.
d. Equipment at fair value.

71. The goodwill and bonus methods are two means of adjusting for differences between the net book value
and the fair value of partnerships when new partners are admitted. Which of the following statement about
these methods is correct?

a. The bonus method does not revalue assets to market values.

b. The bonus method revalues assets to market values.
c. Both methods result in the same balances in partner capital accounts.
d. Both methods result in the same total value of partner capital accounts, but the individual capital
accounts vary.

72. In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1,
respectively. The bonus method was used to record Colter’s admittance as a new partner. What ratio
would be used to allocate, to Adel and Brick, the excess of Colter’s contribution over the amount credited
to Colter’s capital account?

a. Adel and Brick’s new relative capital ratio.

b. Adel and Brick’s new relative profit and loss ratio.
c. Adel and Brick’s old capital ratio.
d. Adel and Brick’s old profit and loss ratio.
73. If the partnership agreement does not specify how income is to be allocated, profits should be allocated

a. Equally.
b. In proportion to the weighted-average of capital invested during the period.
c. Equitably so that partners are compensated for the time and effort expended on behalf of the
partnership
d. In accordance with an established ratio

74. The result of acquiring control of one or more enterprises by another enterprise or the uniting of interest
of two or more enterprises.

a. Business combinations.
b. Merger.
c. Business consolidation.
d. Pooling of interests.

75. Financial reporting by nonbusiness organizations should provide information useful in

a. Making resource allocation decisions.

b. Assessing services and the ability to continue to provide services.
c. Assessing management stewardship and performance.
d. All of the answers are correct.

76. Stockholders of one company give up their stock in exchange for the stock of the other company, they
continue to be stockholders, but now in the expanded entity.

a. None of these.
b. Leverage of trading on equity.
c. Acquisition method of recording a combination.
d. Pooling of interests.

77. A business combination accounted for by the pooling of interest method

a. Records direct acquisition costs as part of the cost of investment.

b. Reports results of operations only for the period in which the combination occurs.
c. After the combination, carries the balance sheet amounts at fair market value.
d. Reports results of operations for the period in which the combination occurs as though the
enterprises had been combined at the beginning of the period

78. For the past several years, Mozza Co. has invested in the common stock of Chedd Co. Mozza currently
owns approximately 13% of the total of Chedd’s outstanding voting common stock. Recently,
managements of the two companies have discussed a possible combination of the two entities. If they do
decide to combine, the resulting combination should be accounted for as a

a. Pooling of interests.
b. Part purchase, part pooling.
c. Purchase.
d. Joint venture.

79. PDC Corp. acquired 100% of the outstanding common stock of Sea Corp. in a purchase transaction. The
cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The
general guidelines for assigning amounts to the inventories acquired provide for

a. Raw materials to be valued at original cost.

b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to
complete and costs to disposal.
c. Finished goods to be valued at replacement cost.
d. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable
profit allowance.
80. Which of the following most accurately describes the position taken by current generally accepted
accounting principles?

a. Both pooling of interests and the purchase method are still permitted under certain circumstances.
b. The purchase method results in the assets of the acquired company being recognized on the
acquiring company's balance sheet at their fair value at the date of acquisition.
c. Goodwill may arise as a result of a business acquisition accounted for as a pooling of interests. S,
S&S
d. The purchase method requires a business acquisition transaction to be structured to meet twelve
very specific criteria required by generally accepted accounting principles

81. On January 1, 2019, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal
to the book value of the stock. The carrying amounts of Scarp’s assets and liabilities approximated their
fair values, except that the carrying amount of its building was more than fair value. In preparing Prim’s
2019 consolidated income statement, which of the following adjustments would be made?

a. Depreciation expense would be decreased and goodwill amortization would be recognized.

b. Depreciation expense would be increased and goodwill amortization would be recognized.
c. Depreciation expense would be decreased and no goodwill amortization would be recognized.
d. Depreciation expense would be increased and no goodwill amortization would be recognized.

82. Goodwill arising from a business combination should

a. Be expensed in the year of acquisition.

b. Not be amortized as it is an asset.
c. Be amortized over its economic life.
d. Be written off after 40 years.

83. On January 1 of this year, Ent Co. acquired Idiary Co. in a business combination accounted for as a
purchase. Idiary sponsors a single-employer defined benefit pension plan. At the date of the combination,
the following data were available:

Projected benefit obligation P5,000,000

Fair value of plan assets 4,000,000
Accumulated benefit obligation 4,500,000
Unrecognized net transition obligation 600,0000
Unrecognized prior service cost 200,000
Prepaid pension cost 100,000

The allocation of the purchase price should be based on which of the following?

a. The only allocation related to the pension plan will be P100,000 for prepaid pension cost.
b. An allocation must be made to liabilities for the transition net obligation, prior service cost, and
net loss.
c. A liability must be recognized for the excess of the projected benefit obligation over plan assets.
d. A liability must be recognized for the excess of the accumulated benefit obligation over plan
assets.

84. Under PFRS 15, what account will be presented by the entity in its statement of financial position where a
customer has paid an amount of consideration prior to the entity performing by transferring the related
good or service to the customer?

a. Contract asset
b. Contract receivable
c. Contract liability
d. Contract revenue

85. PFRS 15 provides that where a contract with a customer has multiple performance obligations, an entity
will allocate the transaction price to the performance obligations in the contract by reference to their
relative standalone selling prices. However, if a standalone selling price is not directly observable, the
entity will need to estimate it. PFRS 15 suggests the following various methods to estimate the standalone
selling price of each performance obligation, except

a. Net Realizable Value Approach

b. Adjusted Market Assessment Approach
c. Expected Cost Plus A Margin Approach
d. Residual Approach

86. Under Installment Method of recognition of gross profit from Installment Sales, what is the proper
classification of deferred gross profit in the entity’s statement of financial position?

a. Deferred Revenue Account

b. Deferred Cost Account
c. Unearned Revenue Account
d. Contra-Installment Receivable Account

87. What method shall be employed by a franchisor in the recognition of gross profit from initial franchise fee
when its payment is deferred but the probability of its collection is reasonably assured?

a. Installment basis
b. Cost recovery basis
c. Accrual basis
d. Zero profit basis

88. Which of the following will decrease the cost of goods sold during the period?

a. Increase in finished goods inventory during the period

b. Decrease in work-in-process during the period
c. Increase in total manufacturing cost during the period
d. Decrease in raw materials inventory during the period

89. In a statement of affairs, assets pledged for partially secured creditors are

a. Included with assets pledged for fully secured creditors

b. Offset against partially secured creditors
c. Included with free assets
d. Disregarded

90. On a statement of financial affairs, a company’s assets should be valued at

a. Historical cost
b. Net realizable value, if lower than historical cost
c. Net realizable value, I higher than historical cost
d. Net realizable value, whether higher or lower than historical cost

91. In a statement of financial affairs, assets are classified

a. According to whether they are pledged with particular creditors

b. As current or noncurrent
c. As monetary or nonmonetary
d. As operating or nonoperating

92. It is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the
assets and obligations for the liabilities relating to the arrangement

a. Joint asset
b. Joint entity
c. Joint operation
d. Joint venture

93. It is the joint arrangement that involves the establishment of a corporation in which each party has an
equity interest in the net assets of the corporation

a. Joint venture
b. Joint operation
c. Either joint venture or joint operation
d. Neither joint venture or joint operation

94. The installment method of recognizing profit for accounting purposes is acceptable if

a. Collections in the year of sale do not exceed 30% of the total sales price
b. An unrealized profit account is credited
c. Collection of the sales price is not reasonably assured
d. The method is consistently used for all sales of similar merchandise

95. Under the cost-recovery method, no revenue is recognized until

a. Collections are equal to the amount of cost of goods sold

b. Collections are less than the cost of goods sold
c. The selling price is collected
d. All of the above
(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

Quick Notes in AFAR *NOTES:

 To transfer the depreciable asset, it should be in net amount.
 To transfer the accounts receivable to the new book, it should not be in net
I. PARTNERSHIP amount.
 ₱3000  PURPOSE: To engage other party
PARTNERSHIP FORMATION  The juridical personality of the partnership arises from the meeting of minds.
VALUATION: Partnership by Estoppel – legally binding the partnership but no formal
agreement
1. Cash – Face Value Limited Partnership – two or more general partners and one or more limited
2. Land, Depreciable Asset, & NCA partners
a. Agreed Value Particular Partnership – single transaction
b. Fair Value
c. Appraised Value
PARTNERSHIP OPERATION
d. Carrying Value/Book Value
3. Liabilities – are considered assumed if the problem is silent 1. Salaries
4. Inventory – Lower of Cost and Net Realizable Value (LCNRV)  This could be fractional year
5. Capital  Given, regardless of the result of operation
5.1. Bonus Method
5.2. Investment/Withdrawal Method 2. Interest
 This could be in fractional year
BONUS METHOD  Given, regardless whether there is profit or loss
(*The problem is silent) (*Use the salary/interest ratio if the problem states that the amount to be
1. There would be a transfer of capital. distributed to the partners is up to the extent of profit only or the profit is
2. There is no recognition of goodwill. distributed based on the priority.)
3. The total asset and capital will remain unchanged.
3. Bonus
INVESTMENT/WITHDRAWAL  This is given if there is a profit only
 Bonus is not always given if there is profit
1. Agreed Capital is more than Unadjusted Capital = Investment
2. Agreed Capital is less than Unadjusted Capital = Withdrawal CASE 1: Net Income of ₱500000 before salaries of ₱55000, interest of
₱13000, and bonus of 15%
ADJUSTING ENTRIES
(*Use contra-asset)
B=
1. Building – Carrying Value: ₱10M, Agreed Value: ₱15M
Accumulated Depreciation ₱5M
B=
Capital ₱5M

2. Accounts Receivable – Cost: ₱10000, NRV: ₱9000 B=

Capital ₱1000
Allowance for Doubtful Accounts ₱1000 B = ₱56, 347.83

Page | 1 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

CASE 2: Net Income of ₱100000 before salaries of ₱5000, interest of ₱3000, and 2. Admission by Purchase with Revaluation
bonus of 10% Two Steps to be followed:
 Determined the asset revaluation
B=  Distribute the interest to the buying partner

B= TCC TAC Bonus / UVA / OVA

*TAC=TCC *TAC>TCC *TAC<TCC
0 + −
B=

B = ₱12,000 Purchase Price ₱xx

Divided by: New Interest of New Partner xx
*NOTES: Advances made by the partnership to a partner are included in capital Adjusted Capital xx
interest but shall not affect the capital balance of a partner. Add: Unadjusted xx
Undervalued Asset (UVA) xx
PROFIT RATIO LOSS RATIO Multiply: Percentage %
1. Profit Ratio, Loss Ratio   _ xx
2. Profit Ratio, Profit Ratio  x _ Add: Capital xx
3. Original Capital Ratio, Loss ratio x  _ xx
4. Original Capital Ratio, Original Capital Ratio x x _ Multiply: (100% - New Partner %) xx
₱xx
EXAMPLE ON HOW TO COMPUTE THE AVERAGE CAPITAL:
1. 1/1 ₱1000 × 6/12 = ₱ 500 2. ₱500 × 12/12 = ₱500 RETIREMENT
7/1 800 × 3/12 = 200 100 × 9/12 = 75 1. Compute the capital balance before retirement
10/1 1500 × 3/12 = 375 (200) × 3/12 = (50) a. Capital balance
₱1075 ₱525 b. Share in net income/net loss
c. Drawings
*NOTE: d. Additional investment
 P/L = Silent  Original Capital e. Revaluation of UVA
 Interest = Silent  Average Capital f. Revaluation of OVA
 Net income after interest and salary but before bonus g. Condonation of the partnership liability/receivable of your debtor
Formula: Net Income – Total Interest – Total Salary = Bonus
2. Settlement is more than Capital Interest = Bonus to the retiring partner
PARTNERSHIP DISSOLUTION If the Settlement is less than Capital Interest = Bonus to the remaining
- Change in numbers of partners. partner

1. Admission by Purchase without Revaluation

 Silent
PARTNERSHIP LIQUIDATION
 Personal transactions 1. Lump-sum Liquidation – single distribution
 Total asset and capital will remain unchanged 2. Installment Liquidation – “piece meal”
 Purchase price is ignored

Page | 2 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

STEPS IN LUMP SUM LIQUIDATION  If A received ₱35500, how much was given to J?
1. Realization of Non-cash Asset (Profit/Loss)
2. Payment of liabilities and liquidation expense A G J Total
Priority 1 ₱ -0- ₱30000 ₱ -0- ₱ 30000
Liability ₱xx Capital ₱xx Priority 2 -0- 10000 15000 25000
Cash ₱xx Cash ₱xx NPP 35500 14200 21300 71000
₱35500 ₱54200 ₱36300 ₱126000
3. Elimination of deficiencies
4. Distribution
SAFE PAYMENTS Capital Beginning ₱xx
1. Determine the capital interest Gain/Loss +/- xx
INSTALLMENT LIQUIDATION Maximum Possible Loss - xx
2. Deduct the Maximum Possible
Cash beginning ₱xx Loss Elimination Deficiency - xx
Add: Proceed xx 3. Absorb deficiency Condonation +/- xx
Minus: Liabilities xx Total 4. Distribute Cash Distribution ₱xx
Liquidation Expense xx Total
Distribution ₱xx
II. CORPORATE LIQUIDATION
Maximum Possible Loss (MPL):  Three (3) years to liquidate
 The extinguishment of juridical personality happens in dissolution
1. Unsold Non-cash Asset ₱xx
2. Anticipated Liquidation Expense (future LE) xx Unpaid
VALUATION:
₱xx
1. Asset – Fair Value
2. Liabilities – Maturity Value (Principal + Interest)
CASH PRIORITY PROGRAM
*(Receive cash-given)
CLASSIFICATION (Statement of Affairs):
1. Determine the capital interest 1. ASSETS
2. Compute loss absorption balance (LAB): Capital Interest ÷ P/L Ratio  Assets Pledge with Fully Secured Creditors
3. Equalize the LAB – deduct the second highest from the highest until equal  Assets Pledge with Partially Secured Creditors
4. Distribution: Difference in LAB × P/L Ratio  Free Assets  assets that are not originally pledge to any liabilities
When to use Cash Priority Program? 2. LIABILITIES
- When the problem says, what amount should be distributed to the partners  Fully Secured Liabilities
 Partially Secured Liabilities
EXAMPLE:  Unsecured Liabilities with Priority
* Salaries
A G J * Taxes
Capital Interest ₱100000 ₱ 80000 ₱ 75000 * Administrative Expense (Liquidation Expense)
P/L % ÷ 50% ÷ 20% ÷ 30% * Customer Deposit
LAB ₱200000 ₱400000 ₱250000  Unsecured Liabilities without Priority (no collateral)
Priority 1 _______ 150000 _______
₱200000 ₱250000 ₱250000
Priority 2 _______ 50000 50000 Percentage of Recovery (POR) =
₱200000 ₱200000 ₱200000

Page | 3 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

3. OWNER’S EQUITY DEFICIENCY / CAPITAL A = L + C SHE, beginning ₱xx

 Capital  Cash, end  LNL  SHE, end Net (loss) / Profit xx
 ANR Estate Equity ₱xx
NET FREE ASSETS TOTAL UNSECURED CREDITORS
(NFA) WITHOUT PRIORITY (TULi-w/o)
1. Excess of APTFSL ₱xx 1. Excess of PSL ₱xx III. INSTALLMENT SALES
over PSL xx ₱xx over APTPSL xx ₱xx
2. Free Asset xx 2. UL w/o Priority xx TYPES OF SALES
TFA xx TULi w/o ₱xx
3. Loss UL with Priority xx 1. REGULAR SALES 2. INSTALLMENT SALES
Net Free Asset ₱xx  Cash Sales  Cost Recovery
 Credit Sales  Gross Profit Realization
ESTIMATED DEFICIENCY (ED):  Use the accrual  Installment Method
ED = TULi – NFA or ED = TULi w/o × (1 – POR) method *all are prescribed by the standard

ED: A = L + C GP from Sale of Repossessed Merchandise* ₱xx

SHE beginning ₱xx GP on Regular Sales (Regular Sales – Cost of Regular Sales) xx
Estimated net loss (xx) RGP on Installment Sales:
Accrued interest (xx) 2017 2017
Liquidation expense (xx) 2015 DGP to RGP xx
EED ₱ xx  +/− 2017 2016
2016 (Collection × GPR) xx
*NOTE: Statement of Realization  no cash 2017 (Collection × GPR) xx
Total RGP ₱xx
STATEMENT OF REALIZATION AND LIQUIDATION Less: Expenses (Loss on Repossession and
1. Assets to be realized (ATBR) 3. Assets realized (AR) Loss/Expense from write-off) (xx)
 Noncash Assets, beginning  PPE – net proceeds NET INCOME 2017 ₱xx
2. Assets acquired (AA) / ↑ on Asset  Receivables – collection
 Interest Receivable  Inventory – cost of sales *Sales ₱ xx
 Accounts Receivable 4. Assets not realized (ANR) Less: Cost of Sales:
7. Liabilities liquidated (LL)  Noncash Asset, ending Fair Value of Repossessed Merchandise ₱xx
8. Liabilities not liquidated (LNL) 5. Liabilities to be liquidated (LTBL) Reconditioning Cost xx (xx)
 Ending balance of the liabilities 6. Liabilities assumed (LA) / ↑ in Liabilities GP from Sale of Repossessed Merchandise ₱ xx
9. Supplementary charges / Expenses  Accrued Expenses
 Cost of Sales  Accounts Payable Fair Value of Repossessed Merchandise ₱xx
 Accrued Expenses 10. Supplementary credits / Revenue Reconditioning Cost xx
 Sales Net Purchases xx
11. NET INCOME / GAIN  Accrued Interest Income Estimated Selling Price ₱xx
12. NET LOSS / LOSS (*If silent, after)

Page | 4 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

Installment Sales ₱xx Beginning Inventory ₱xx

Cost of Sales (xx) Net Purchases xx
Deferred Gross Profit ₱xx Freight-in xx
Repossessed Merchandise xx
Installment Accounts Receivable ₱xx Reconditioning Cost xx
Unsecured Cost xx TGAS ₱xx
Deferred Gross Profit ₱xx Ending Inventory (New + Unsold RM + RC) xx
Cost of Sales (Regular/Installment/Repossessed Merchandise) ₱xx
EXAMPLE:
Fair Value of Repossessed Merchandise* ₱70 TRADE-IN & SALE OF REPOSSESSED MERCHANDISE:
Less: Unrecovered Cost: Down payment – Cash ₱xx
IAR/Repossessed Account Down payment – FV of Trade-in xx
(Receivable Defaulted/Unpaid Balance) ₱100 Collection, net of interest xx
Less: Deferred Gross Profit (20) (80) Collection ₱xx
LOSS (UC > FV of Repossessed Merchandise) ₱(10) Multiply: Gross Profit Ratio xx
Realized Gross Profit ₱xx
ENTRIES: Gross Profit from Sale of Repossessed Merchandise xx
1. Reposs. Mdse. – FV ₱70 3. Cash ₱___ Total Realized Gross Profit ₱xx
DGP 20 IAR ₱___ Loss (FV of Reposs. Mdse. – Unrecovered Cost) (xx)
Loss 10 NET INCOME ₱xx
IAR ₱100 4. DGP ₱___
RGP ₱___ TRADE-IN:
2. Expenses ₱80 Installment Sales ₱xx
DGP (20%) 20 *Gain/Loss  P/L Fair Value of Trade-in xx
IAR ₱200 **DGP  Contra receivable account Trade-in Allowance (xx)
write-off Adjusted Installment Sales ₱xx
Cost of Sales (xx)
(20%) IAR 2016 DGP 2016 GROSS PROFIT ₱xx
Beginning ₱100 Collection ₱50 RGP ₱10 Beginning ₱20
RA 30 DGP on RA 6 Adjusted Installment Sales ₱xx
WO 5 DGP on WO 1 Down payment – Cash (xx)
End ₱ 15 End ₱3 Fair Value of Trade-in (xx)
CV of Receivable ₱xx
IAR 2017 DGP 2017
AIS ₱___ Collection ₱___ RGP ₱__ Beginning ₱__ Installment Sales ₱xx
RA ___ DGP on RA __ Trade-in Allowance (xx)
WO ___ DGP on WO __ Collectibles ₱xx
End ₱___ End ₱ _

Page | 5 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

IV. LONG TERM CONSTRUCTION CONTRACTS (IAS 11) COMPUTATION OF ADJUSTED PRICE BILLING (APB):
Contract Price ₱xx
1. PERCENTAGE OF COMPLETION METHOD + EC (↑ in certain cost) xx
- outcome can be estimated reliably − DC (↓ in certain cost) xx
- if the problem is silent − Penalty Clause (due to late turnover) xx
1.1. INPUT MEASURE (Cost to Cost) + IP (due to early turnover) xx
Cost Incurred To Date ÷ Total Cost +/− Modification / Change Order / Variation xx
1.2. OUTPUT MEASURE ADJUSTED PRICE BILLING (CP = APB) ₱xx
Total Units Prod. ÷ Total Units Expected Prod.
2. COST RECOVERY METHOD YEAR 1 YEAR 2 YEAR 3
- outcome cannot be estimated reliably CITD ₱xx ₱xx ₱xx
+ PTD-LTD xx xx xx
CONTRACT RETENTION CIP ₱xx ₱xx ₱xx
 receivables − APB xx xx xx
 does not the an income element (Due to)/Due from ₱xx ₱xx ₱xx = 0 → CIP @
 reduces collection ↓ ↓ the end of the
 PRO-FORMA ENTRY: Liability Asset year of contract.
Cash ₱xx
Contract Retention xx CONSTRUCTION IN PROGRESS:
Accounts Receivable ₱xx (1) If Profit: Contract Price × Percentage of Completion = CIP
 UPON COMPLETION OF PROJECT: (2) If Loss: [(CP × POC) – LTD × (1 − POC)] = CIP
Cash ₱xx (3) [(TC × POC) – LTD] = CIP
Contract Retention ₱xx
MOBILIZATION FEE ENTRIES:
 no income element 1.) Construction in Progress ₱xx
 PRO-FORMA ENTRY: Various Accounts ₱xx
Cash ₱xx
Advances from Customers ₱xx 2.) Accounts Receivable ₱xx
Progress Billings ₱xx
COMPUTATION OF COST INCURRRED TO DATE (CITD):
(1.) Direct Materials ₱xx 3.) Cash ₱xx
+ (2.) Direct Labor xx Accounts Receivable ₱xx
+ (3.) Overhead xx 4.) COC ₱xx
+ (4.) Depreciation of Construction Equipment (*Idle = Expense) xx Construction in Progress xx
+ (5.) Any reimbursable Cost xx Construction Revenue ₱xx
+ (6.) xx
+ (7.) Borrowing Cost (Qualifying Asset) xx 5.) Accounts Receivable ₱xx
*Specific = IE – II; **General = (AI × C) × CR Progress Billings ₱xx
+ (8.) Unused Supplies / Materials without Alternative Use xx 6.) Progress Billings ₱xx
+ (9.) Incidental Income from Sale excess over Scrap Materials xx Construction in Progress ₱xx
COST INCURRED TO DATE ₱xx

Page | 6 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

COMPUTATION OF ADJUSTED CONTRACT PRICE: COMPUTATION OF DUE FROM / (DUE TO) CUSTOMER – Y2:
Contract Price ₱xx Year 1 Billings ₱xx
Variable Price xx Year 2 Billings xx
Bonus xx Mobilization Fee (xx)
Adjusted Contract Price ₱xx Year 1 Collection [(Y1B × customer payment % of amount billed) ×
(100% - Retention Fee %)] (xx)
COMPUTATION OF CIP: Year 2 Collection [(Y2B × customer payment % of amount billed) ×
(100% - Retention Fee %)] (xx)
Cost Incurred to Date ₱xx Due from / (Due to) Customers – Y2 ₱xx
Realized Gross Profit – to date xx
Construction in Progress ₱xx
V. IAS 18 – REVENUE
COMPUTATION OF REALIZED GROSS PROFIT – CURRENT YEAR: CRITERIA TO RECOGNIZE REVENUE:
ST ND
1 YEAR 2 YEAR LAST YEAR 1. Receivables (*silent)
Contract Price ₱xx ₱xx ₱xx - reasonably assured
CITD (Prior Year + Current Year) ₱xx ₱xx ₱xx
Estimated Costs xx xx xx 2. Cash as Down Payment (*silent)
Total Costs (₱xx) (₱xx) (₱xx) - nonrefundable
Total Estimated Gross Profit ₱xx ₱xx ₱xx
Multiply: Percentage of Completion % % % 3. Franchise Revenue
Total Realized Gross Profit – To Date ₱xx ₱xx ₱xx - substantial performance
Realized Gross Profit – Prior Year (+/−) xx xx xx
Realized Gross Profit – Current Year ₱xx ₱xx ₱xx NOTE:
 These conditions shall meet to recognize revenue.
 IFRS 15 Contingent Franchise Fee = IAS 18 Continuing Franchise Fee
COMPUTATION OF CIP, net of PB (ZPM/CRM):
CASE 1 CASE 2 CASE 3
Cost Incurred To Date ₱xx ₱xx ₱xx
R   x
Total Estimated Gross Profit X (₱xx) (₱xx)
C  x  
Multiply: Percentage of Completion -_ 100% 100%
F   
Total Realized Gross Profit – To Date ₱-0- (₱xx) (₱xx)
₱xx ₱xx ₱xx
IFF = Revenue IFF = Deferred Cash ₱xx
Progress Billings (PY + CY) (xx) (xx) (xx)
Revenue NR xx
Construction in Progress, net of PB ₱+/− ₱+/− ₱-0-
Discount ₱xx
Franchise Revenue xx
Deferred Revenue xx
RECOGNITION OF REVENUE
 over time EXCEPTION TO THE RULE:
 at a point in time  Down payment still considered as revenue if the DP is nonrefundable and
DP represents fair measure of services already rendered.

Page | 7 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

CASE 1 CASE 4
R  – Interest Bearing (Accrual Method) R x – Non-interest Bearing
C  C 
F  F 
Revenue (IFF) ₱xx Down Payment ₱xx
Cost of Sales (Direct Cost for Initial Services) (xx) Collection, net of interest income xx
Gross Profit ₱xx Total Collection ₱xx
Continuing Franchise Fee (Sales × %) xx Multiply: Gross Profit Ratio (GP ÷ Revenue) *REVENUE = DP + PV %
Interest Income (Face Amount × Interest Rate × ?/12) xx Realized Gross Profit ₱xx
Expense (IC for IS + IC for CS + DC for SC) (xx) Continuing Franchise Fee xx
NET INCOME ₱xx Interest Income (PV × IR × ?/12) xx
Expenses (xx)
CASE 2 NET INCOME ₱xx
R x – Non-interest Bearing (Installment Method)
C  TOTAL REVENUE OF THE FRANCHISOR
F  Down payment ₱xx
Collection xx
Down Payment – Cash ₱xx CFF xx
Collection during the period xx Interest Income xx
Total Collection ₱xx TR-F ₱xx
Multiply: Gross Profit Ratio (GP ÷ Revenue) *REVENUE = IFF %
Realized Gross Profit ₱xx TOTAL REVENUE FROM F.F.
Continuing Franchise Fee xx Down payment ₱xx
Collection xx
Interest Income xx
CFF xx
Expenses (xx) TR from FF ₱xx
NET INCOME ₱xx

CASE 3 VI. HOME OFFICE AND BRANCH ACCOUNTING

R  – Non-interest Bearing BP − Cost = AFOBI
C  Beginning Inventory:
F  Home Office* ₱xx ₱xx ₱xx (GPR-PY)
Outsider xx xx -
Revenue (DP + PV) ₱xx Shipment, net* SFHO STB xx (GPR-CY)
Cost of Sales (xx) Purchases (NP) xx xx -
Gross Profit ₱xx Freight in xx xx -_
Continuing Franchise Fee xx Total Goods Available for Sale ₱xx ₱xx ₱xx
Ending Inventory:
Interest Income (PV × IR × ?/12) xx
Home Office* (xx) (xx) (xx)
Expenses (xx) Outsider (xx) (xx) (xx)
NET INCOME ₱xx Cost of Goods Sold ₱xx ₱xx ₱xx RGP

Page | 8 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

*NOTE:
 Beginning Inventory – HO
(a) In transit – prior year
(b) Freight Charges
 Ending Inventory – HO
(a) In transit – current year (SFHO is < its true amount)
(b) Freight Charges

FREIGHT FREIGHT
PREPAID COLLECT

EXAMPLE:
Freight Charges
Home Office to Branch 1 ₱10
Branch 1 to Branch 2 5
Home Office to Branch 2 (4)
(Excess Freight) Expenses ₱11

 Net Income @ Billed Price  Reported Net Income (Branch)

 Net Income @ Cost  True Net Income (Home Office)
 COGS @ BP – COGS @ Cost + Net Income @ BP = Realized Gross Profit
EXAMPLE *ENTRIES
Net Income reported by the branch ₱xx ₱ 87
Unrecorded expenses of branch:
 Depreciation (xx) (5)
 Allocation of expense (xx) (2)
Net Income that should have reported ₱xx ₱ 80 #11
Realized Gross Profit xx 20 #12
True Net Income ₱xx ₱100

Page | 9 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

EQUITY METHOD – CV P/L

BP (Reported) Cost (True/Correct)
Purchase Price ₱xx Investment Income ₱+
Sales ₱xx ₱xx
Transaction Cost xx Impairment Loss (−)
Cost of Goods Sales (xx) (xx)
Investment Income xx P/L ₱xx
Gross Profit ₱xx ₱xx
Dividend xx
Expenses (xx) (xx)
Impairment Loss (xx)
Net Income ₱xx ₱xx
CV of Investment ₱xx
AFOBI HO
*NOTE: The fair value method is applicable only for trading securities.
RGP Beginning 1. 100 – 80 = 20
Shipment 2. 100 × 20% = 20
End 3. 100 × 25/125 = 20 TYPES OF BUSINESS COMBINATION
4. 80 × 25% = 20
1. ASSET ACQUISITION (100% Ownership)
1.1. Statutory Merger  A + B = A/B
VII. BUSINESS COMBINATION (IFRS 3) & CONSOLIDATED
1.2. Statutory Consolidation  A + B = C
F.S. (IFRS 10)
2. STOCK ACQUISITION  A + B = AB (Parent – Subsidiary)
BUSINESS COMBINATION 2.1. Fully Owned
 is a transaction where the acquirer obtains control over the net assets of 2.2. Partially Owned
the acquiree.

OWNERSHIP ACCOUNT TITLE METHOD ACCOUNTING METHOD

51% to 100% Investment in Subsidiary Cost / Equity / Fair Value  IFRS 3 – Acquisition Method (*OLDPurchase Method)
20% to 50% Investment in Associate Equity
1% to 19% FA @ FVPL/FVOCI Cost / FV Disclose the following:
1) Determine the acquirer
COST METHOD – CV P/L 2) Determine the acquisition date
Purchase Price ₱xx Impairment Loss ₱(−)  The acquisition date is the measurement date, and you have within
Transaction Cost xx Dividend Income + 1 year from the balance sheet date to adjust the fair value of those
Impairment Loss (xx) P/L ₱xx assets and liabilities
CV of Investment ₱xx  The net assets of the subsidiary can be adjusted within 1 year from
the acquisition date
FAIR VALUE METHOD – CV P/L 3) Recognize and measure identifiable assets, identifiable liabilities, and
non-controlling interest (*The pre-existing goodwill of subsidiary is
Purchase Price ₱xx Unrealized Gain ₱+
Unrealized Gain xx Unrealized Loss (−)
ignored.)
Unrealized Loss (xx) Dividend Income + 4) Measure and recognize goodwill or gain
CV of Investment ₱xx Transaction Co (−)
P/L ₱xx

Page | 10 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

FORMULAS EXAMPLE:
Share Premium from issuance ₱ 50
Share Premium from original issuance 30
CTIR 100

ENTRY:
Share Premium ₱50
Share Premium 30
SIC 20
Cash/Payable ₱100

PRESENTATION OF NCI
* × PHI% = ₱xx 1. FV of NCI / Full Goodwill
 If the fair value is unknown compute the implied fair value
FORMULA:
EXAMPLE:
Purchase Price ₱1000 NA@BV – 12/31 ₱xx
NA@BV (SHE) (700) Net Income (xx)
Excess ₱ 300 Dividend xx 2. Proportionate Share / Relevant Share / Interest in the Net Asset of Subsidiary
OVA (50) NA@BV – BC ₱xx (INAS)
UVA (100) FORMULA:
Goodwill ₱ 250 FV of Net Assets × NCI% = INAS

Purchase Price ₱1000 NA@BV – BC ₱700 CONTROL PREMIUM (CP)

NA@FV (squeezed) (750) UVA 100 1. It must be included in the purchase price
Goodwill ₱ 250 OVA (50) 2. Excluded in computing NCI
3. It affects goodwill or gain
NA@FV ₱750
CONTINGENT CONSIDERATION PAYABLE (CCP)
ACQUISITION RELATED COST 1. If the information existed already as of the acquisition date, any adjustment to
1. Direct Cost  expense fair value would affect the goodwill or gain.
2. Indirect Cost  expense CTIR Keywords: 2. If the information is related to target profit or target market price, any
3. Cost to Issue or Register (CTIR)  SEC adjustment goes to P/L and it does not affect the goodwill or gain.
 Based on priority:  Stock
3.1. Share Premium from  Share NOTE: Adjustment to goodwill should be applied retrospectively.
issuance; *SME
 Documentary Stamp Tax
3.2. Share Premium from − Direct Cost is capitalized / capitalizable
original issuance; − NCI is measured using proportionate
3.3. Debit to Stock Issuance − Goodwill goes to parent
Cost − Goodwill is subject to amortization (10 years)

Page | 11 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

EXAMPLE: Case 4 [CP of ₱300000 is included]

(100%) (80%) (20%)
Case 1
TOTAL Purchase Price NCI
(100%) (80%) (20%)
Fair Value of Subsidiary ₱1200000 ₱1000000 ₱ 200000
TOTAL Purchase Price NCI
Net Assets @ FV (1000000) (800000) (200000)
Fair Value of Subsidiary ₱1700000 ₱1300000 ₱ 400000 FV
Goodwill ₱ 200000 ₱ 200000 ₱ -0-
Net Assets @ FV (1000000) (800000) (200000)
Goodwill ₱ 700000 ₱ 500000 ₱ 200000
₱200000 vs.
Impairment Loss ₱50000 ₱35714 (5/7) ₱14286 (2/7) 
*If the problem is silent, use the FV.
Case 5
The FV of NCI should not lower of INAS.
(100%) (80%) (20%)
FV INAS TOTAL Purchase Price NCI
₱400000 vs. Fair Value of Subsidiary ₱ 900000 ₱ 700000 ₱ 250000
 Net Assets @ FV (1000000) (800000) (200000)
Goodwill ₱(100000) ₱ (100000) ₱ -0-

Case 2 [CP = ₱300000] NOTE: Gain is never allocated. It goes to Parent.

(100%) (80%) (20%)
TOTAL Purchase Price NCI 01/01/17 12/31/17
Fair Value of Subsidiary ₱1550000 ₱1300000 ₱ 250000 Purchase Price ₱1000000 ₱1000000
Net Assets @ FV (1000000) (800000) (200000) Net Assets @ Fair Value (700000) (800000)
Goodwill ₱ 550000 ₱ 500000 ₱ 50000 Goodwill ₱ 300000 ₱ 200000
Goodwill on December 31, 2017 = ₱200000
₱200000 vs.  Goodwill on January 1, 2017 = ₱200000

Case 3 CONSOLIDATED FINANCIAL STATEMENT (*At the date of business

(100%) (80%) (20%) combination)
TOTAL Purchase Price NCI
Fair Value of Subsidiary ₱1250000 ₱1000000 ₱ 250000 TOTAL ASSETS:
Net Assets @ FV (1000000) (800000) (200000) Total Assets of Parent @ BV ₱xx
Goodwill ₱ 250000 ₱ 200000 ₱ 50000 Total Assets of Subsidiary @ FV xx
Goodwill xx
Purchase Price (Cash/NCA) (xx)
₱200000 vs.  Direct Cost (xx)
*If, paid Indirect Cost (xx)
CTIR (xx)
Total Assets ₱xx

Page | 12 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

TOTAL LIABILITIES: 2. SUBSIDIARY – SHE

Ordinary Share – Subsidiary ₱xx
Total Liabilities of Parent @ BV ₱xx
Share Premium – Subsidiary xx
Total Liabilities of Subsidiary @ FV xx
Retained Earnings – Subsidiary xx
CPP xx
Investment in Subsidiary ₱xx
Purchase Price (Liabilities) xx
NCI xx
Direct Cost xx
*If, unpaid Indirect Cost xx 3. OVA, UVA, & GOODWILL
CTIR xx Equipment ₱xx
Total Liabilities ₱xx Inventory xx
Goodwill xx
TOTAL SHAREHOLDER’S EQUITY: Investment in Subsidiary ₱xx
SHE of Parent @ BV ₱xx NCI xx
NCI xx 4. AMORTIZATION OF IMPAIRMENT LOSS
on BPO ₱xx Operating Expense ₱xx
Gain  on PHI xx PPE, net ₱xx
on CCP xx xx
Purchase Price (Stocks @FV) xx Impairment Loss ₱xx
Direct Cost (xx) Goodwill ₱xx
*Paid/ Indirect Cost (xx)
Unpaid CTIR (xx) Cost of Sales ₱xx
Total Assets ₱xx Inventory ₱xx

CONTROL PREMIUM 5. INTERCOMPANY SALES & PURCHASES

 Additional investment Sales ₱xx
 Part of purchase price Cost of Sales ₱xx
 Affects goodwill/(gain)
6. UPEI
 Ignored in computing NCI
Cost of Sales ₱xx
PURCHASE PRICE
Inventory ₱xx
 Cash
 Noncash 7. RPBI
 Liability Retained Earnings – Parent ₱xx
 Stock NCI (up) xx
Cost of Sales ₱xx
WORKING PAPER ELIMINATING ENTRIES
1. DIVIDEND RECEIVED *Ending Inventory ₱xx NOTE:
Dividend Income ₱xx Multiply: GPR of Seller % CONSO COS NI INVENTORY
UPEI – 20x6 ₱xx UPEI + − −
NCI (partially) xx RPBI – 20x7 ₱xx RPBI − + Ignored
Dividend Declare – Subsidiary ₱xx

Page | 13 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

EXAMPLE: Intercompany Sale of Equipment

Sales ₱ 70
CV [₱90-(₱90/10) ×3)] (63)
Gain ₱ 7

SELLER BUYER W.P.E.E.

Cash ₱70 Equipment ₱70 Gain ₱7
Acc. Dep. 27 Cash ₱70 Equipment 20
Equipment ₱90 Acc. Dep. ₱27
Gain 7
Dep. Exp. ₱9 Dep. Exp. ₱10 Acc. Dep. ₱1
Acc. Dep. ₱9 Acc. Dep. ₱10 Dep. Exp. ₱1
*(₱70/7=₱10) *(RG thru amortization:
₱7/7=₱1)

UNREALIZED GAIN
Gain ₱7
Equipment ₱7
*(it depends upon the Selling Price)

YEAR 2 YEAR 3
Unrealized RE ₱7
NO ENTRY
Gain Equipment ₱7
Realized Acc. Dep. ₱2 RE ₱5
EXAMPLE: Intercompany Sale of Inventory Gain Dep. Exp. ₱1 Dep. Exp. ₱1
Sales ₱1000 Ending Inventory (1000×50%) ₱500 RE 1 Gain 4
Cost of Sales (700) GPR × 30%
Gross Profit ₱300 UPEI (12/31/16) ₱150
Ending Inventory % × 50% EXAMPLE: Intercompany Sale of Land
UPEI ₱150 RPBI (01/01/17) ₱150 Land (selling price) - ₱100
CL - 80
Working Paper Eliminating Entries Sale to third party - 150
DOWN UP
UPEI: COS ₱xx COS ₱xx
Inventory ₱xx Inventory ₱xx YEAR 1 YEAR 2 YEAR 3 Recorded – Subsidiary ₱50
UG ₱(20) -0- -0- Not yet recorded 20
RPBI: RE, beg. ₱xx RE, beg. ₱xx RG -0- -0- ₱20 ₱70
COS ₱xx NCI xx
COS ₱xx

Page | 14 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

FORMULAS: Gross Profit – Parent ₱xx

Gross Profit – Subsidiary xx
Non-controlling Interest, beginning ₱xx Unrealized Profit in Ending Inventory (UPEI) (xx)
Non-controlling Interest – Net Income xx Realized Profit in Beginning Inventory (RPBI) xx
Dividend Share (xx) Amortization of Undervalued Assets (xx)
Non-controlling Interest, end ₱xx Amortization of Overvalued Assets xx
Consolidated Gross Profit ₱xx
Retained Earnings – Parent ₱xx
Consolidated Net Income – Parent xx Operating Expense – Parent ₱xx
Dividend – Parent (xx) Operating Expense – Subsidiary xx
Consolidated Retained Earnings ₱xx Realized Loss (thru depreciation/amortization) xx
Realized Gain (thru depreciation/amortization) (xx)
Ordinary Share – Parent ₱xx
Impairment Loss xx
Share Premium – Parent xx
Amortization of Undervalued Assets xx
Consolidated Retained Earnings xx
Amortization of Overvalued Assets (xx)
Non-controlling Interest xx
Consolidated Operating Expense ₱xx
Consolidated Shareholder’s Equity ₱xx
Inventory – Parent @ BV ₱xx
Shareholder’s Equity, end ₱xx
Inventory – Subsidiary @ BV xx
Net Income of Subsidiary (xx)
Undervalued Inventory xx
Dividend of Subsidiary xx
Overvalued Inventory (xx)
Shareholder’s Equity at book value ₱xx
Amortization of Undervalued Assets – Inventory (xx)
Overvalued Assets (OVA) (xx)
Amortization of Overvalued Assets – Inventory xx
Undervalued Assets (UVA) xx
Unrealized Profit in Ending Inventory (UPEI) (xx)
Net Assets at fair value ₱xx
Consolidated Inventory ₱xx
Sales – Parent ₱xx
Consolidated Net Income attributable to Parent ₱xx
Sales – Subsidiary xx
Non-controlling Interest in Net Income xx
Intercompany Sales & Purchases at Selling Price (xx)
Consolidated Net Income ₱xx
Consolidated Sales ₱xx
Cost of Sales – Parent ₱xx
Cost of Sales – Subsidiary xx VIII. JOB ORDER COSTING
Intercompany Sales & Purchases at Selling Price (xx)
Unrealized Profit in Ending Inventory (UPEI) xx Predetermine OH Rate = Based on BUDGETED
Realized Profit in Beginning Inventory (RPBI) (xx) Spoilage vs. Defect
Amortization of Undervalued Assets xx no use can be reworked
Amortization of Overvalued Assets (xx)
Consolidated Cost of Sales ₱xx *Charged to all
Consolidated Sales ₱xx - add allowance (unit cost) Loss – add – FOH control account
Consolidated Cost of Sales (xx) *Charged to specific job (actual)
Consolidated Gross Profit ₱xx - deduct allowance

Page | 15 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

ALLOCATION OF COST IX. JUST IN TIME

 DIRECT METHOD
TRIGGER POINTS:
Service Provided to Machining Assembly  Purchase 
by  Production
Quality Control 262500 87500  Completion 
Maintenance 120000 80000  Sale 
382500 167500
GOALS:
 STEP-DOWN 1. Eliminating any production process that does not add value
2.
*Benefit provided ranking table (Company Policy)
*Based on the service department which has the highest cost
JOURNAL ENTRIES:
QC Maintenance Machining Assembly
 Purchase
350000 200000 400000 300000
QC (350000) 70000 210000 70000 Raw and In Process ₱xx
Maintenance ___-___ (270000) 162000 108000 Accounts Payable ₱xx
-0- -0- 772000 478000 Conversion Cost ₱xx
*Once the OH cost of the service department becomes exhausted, do not Various Accounts ₱xx
allocate other cost to the service department
 Completion
 RECIPROCAL METHOD Finished Goods ₱xx
Raw and In Process ₱xx
QC Maintenance Machining Assembly Conversion Cost xx
Quality Control - 20% 60% 20%
Maintenance 25% - 45% 30%
 Sales
Quality Control = 350000 + 0.25M Cost of Sales ₱xx
Maintenance = 200000 + 0.20QC Substitute Finished Goods ₱xx
QC = 350000 + 71053 = 421053 Cost of Sales ₱xx
M = 200000 + 0.20(421053) = 284211 Raw and In Process ₱xx
Conversion Cost xx
QC Maintenance Machining Assembly
350000 200000 400000 300000  75% were sold
(421053) 84211 252632 84211 Cost of Sales ₱xx
71053 (284211) 127894 85263 Finished Goods xx
-0- -0- 780527 469474 Conversion Cost ₱xx
Raw and In Process xx

Page | 16 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

X. JOINT COSTING DL
AHAR
Joint Cost ₱xx Rate DLRV
Less: NRV of By-product (xx)  if, inventoriable/ AHSR
Remaining Joint Cost ₱xx material
AHSR
TREATMENT OF BY-PRODUCT Efficiency DLEV
SHSR
1. Upon sale or realization
- recorded as other income, if the by-product is immaterial.
2. Upon production or inventoriable XII. FOREIGN EXCHANGE (IAS)
- the NRV of by-product is deducted from the total joint cost
1. Foreign Currency Transaction
ALLOCATION OF REMAINING 2. Foreign Exchange Translation
1. PHYSICAL 3. Hedging of FOREX Risk
1.1. Physical measure such as gallon/kilogram
1.2. Units produce  EXCHANGE RATE – This is the ratio of exchange between two currencies.
1.3. Weighted average units produce  SPOT RATE – Rate for immediate delivery.
2. MONETARY  CLOSING RATE – This is the spot rate at Balance Sheet date.
2.1. Sales value at split-off also known as relative market value  FUNCTIONAL CURRENCY – Currency of primary economic environment
2.2. Net realizable value at split-off in which the entity operates.
2.3. Hypothetical/approximated/estimated at split-off also known as
 What is the primary driver of functional currency? – SALES
adjusted market value
Assets & Liabilities Closing Rate
TWO TYPES OF COST FOR THE JOINT PRODUCT Shareholder’s Equity Historical Rate
1. Joint Cost Share or Allocated Joint Cost Revenue & Expenses Average [Computation: (B+E)/2 ]
2. Traceable Cost or Additional Processing Cost Spot Rate (Theory)

XI. STANDARD COSTING FOREX TRANSACTION: Importation

DM (Hedge Item) (Hedging Instrument)
BUYING OF INVENTORY BUYING OF F.C.
AQAP
1. ER↑ = Forex Loss [100] 3. FR↑ = Forex Gain [80] = [20]
Purchased DMPV
2. ER↓ = Forex Gain 4. FR↓ = Forex Loss
AQSP
FOREX TRANSACTION: Exportation
AQSP
Used DMUV SELLER OF MERCHANDISE SELLER OF F.C.
SQSP 5. ER↑ = Forex Gain 7. FR↑ = Forex Loss
6. ER↓ = Forex Loss 8. FR↓ = Forex Gain

Page | 17 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

ENTRIES: A = L + C
$ 10M $ 8M $ 2M
BUYING OF INVENTORY BUYING OF F.C.
× ₱1 × ₱1 × ₱0.5
Purchases ₱xx FCR ₱xx ₱ 10M = ₱ 8M + ₱ 1M + ₱ 1M Translation Adjustment
Accounts Payable ₱xx FCP (fixed) ₱xx Credit
$ 10M $ 8M $ 2M
Forex Loss ₱xx FCR ₱xx
× ₱1 × ₱1 × ₱2
Accounts Payable ₱xx Forex Gain ₱xx
₱ 10M = ₱ 8M + ₱ 4M + ₱ 2M Translation Adjustment
Accounts Payable ₱xx Forex Loss ₱xx Debit
Forex Gain ₱xx FCR ₱xx
NA, ending @ CR > NA, ending @ RF = Translation Adjustment Credit
Accounts Payable ₱xx FCP (fixed) ₱xx NA, ending @ CR < NA, ending @ RF = Translation Adjustment Debit
Cash ₱xx Cash xx
FCR ₱xx NA, beg. OS × HR ₱xx
RE, beg. xx (translated amount)
SELLER OF MERCHANDISE SELLER OF F.C. Net Income @ Average xx
Accounts Receivable ₱xx FCR (fixed) ₱xx Dividend @ SR (xx)
Sales ₱xx FCR ₱xx NA, end @ RF ₱xx
Accounts Receivable ₱xx Forex Loss ₱xx QUOTATION:
Forex Gain ₱xx FCP ₱xx 1. DIRECT – Foreign Currency to Philippine Peso
2. INDIRECT – Philippine Peso to Foreign Currency
Forex Loss ₱xx FCP ₱xx
Accounts Receivable ₱xx Cash xx
SPOT RATE:
FCR (fixed) ₱xx
1. BUYER – Selling Spot Rate / Offer Rate / Asking
FOREX TRANSLATION 2. SELLER – Buying Spot Rate / Bid Rate
 only reflected in consolidated FS
FIRM COMMITMENT
 an Other Comprehensive Income component
(1) The hedge is perfect when the company acquired a forward contract for
OCI: the same amount of the same currency in which the firm commitment is
1. Forex Translation (IAS 21) (2) Under perfect hedging, the amount of forex gain from hedging instrument
2. Effective Portion of Cash Flow Hedge (IFRS 7/9) is equal to firm commitment as liability
3. Revaluation Surplus (IAS 16) (3) The amount of forex loss from hedging instrument is equal to firm
4. Remeasurement G/L related to employee benefit (IAS 19R) commitment as asset
5. Estimated Unrealized G/L on FA at FVTOCI (IFRS 7/9) (4) TYPES OF FIRM COMMITMENT
6. Risk  G/L on credit risk for financial liability designated to P/L 4.1. Sales Commitment
4.2. Purchase Commitment
RECLASSIFIED TO P/L: (5) The asset sold or purchased is recorded at the date of settlement based
1. Forex Translation on the forward rate on the date of commitment
2. Effective portion of Cash Flow Hedge

Page | 18 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

THREE HEDGE RELATIONSHIP XIII. ACCOUNTING OF NPO (AICPA)

(1) Fair Value Hedge
- Hedges of exposure to the changes in value of a recognized asset/liability or COMPUTATION:
unrecognized firm commitment
- If the problem is silent, use the FVH Gross Patient Service Revenue ₱xx
Charity Care (xx)
(2) Cash Flow Hedge Amount Charge / Billed to Customers ₱xx
- Hedges of probable forecasted transactions or the variability in the cash flow Contractual Adjustment (PHILHEALTH, MEDICARE) (xx)
of a recognized asset or liability Discount to Hospital Employees (xx)
(3) Net Investment Hedge Net Patient Service Revenue ₱xx
- Hedges of the net investment in a foreign operation
STATEMENT OF ACTIVITIES
OPTIONS
 Contracts that are right and not obligation to buy or sell commodities at a
 Shows contractual adjustment
certain price  This is collectible at third party payor
 This is always favorable on the part of the holder (1) For Hospitals (contra-revenue account)

 If it is gain or in the money, exercise the option Contractual Adjustment ₱xx

 If it is out of the money, do not exercise the option Accounts Receivable ₱xx
 Call option is on the part of the buyer
 Put option is on the part of the seller (2) For Schools (contra-revenue account)
Expenditure for student ₱xx
CALL OPTION: Accounts Receivable ₱xx
Market Price = Strike Price  AT THE MONEY
Market Price > Strike Price  IN THE MONEY (UG) CONTRIBUTED MATERIALS, SERVICES, & FACILITIES
Market Price < Strike Price  OUT OF THE MONEY − Unrestricted funds
PUT OPTION: (1) Inventory ₱xx
Market Price = Strike Price  AT THE MONEY Contribution Revenue ₱xx
Market Price > Strike Price  IN THE MONEY
Market Price < Strike Price  OUT OF THE MONEY (2) Salaries ₱xx
Contribution Revenue ₱xx
SPLIT ACCOUNTING
CFH Intrinsic Value – Unrealized Gain OCI (3) Rent Expense ₱xx
Time Value – Gain/Loss P/L Contribution Revenue ₱xx

FVH Intrinsic Value – Unrealized Gain P/L OTHER OPERATING REVENUE

Time Value – Gain/Loss P/L − Unrestricted funds
Cash ₱xx
NON-SPLIT ACCOUNTING
Other Operating Revenue* ₱xx
CFH Intrinsic Value – Unrealized Gain OCI
*EXAMPLE OF OTHER OPERATING REVENUE
FVH Intrinsic Value – Unrealized Gain P/L  Proceeds from cafeteria
 Proceeds from parking lots

Page | 19 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

FINANCIAL STATEMENTS GOVERNMENT ACCOUNTING MANUAL (GAM)

(1) STATEMENT OF ACTIVITIES  Under GAM, entity shall not maintain regular agency book and national
 Amount of changes in each of the three classes of net assets government book
(a) Changes in Unrestricted Net Assets  GAM supersedes NGAS effective January 1, 2016
(b) Changes in Temporary Restricted Net Assets implemented in 2002
(c) Changes in Permanently Restricted Net Assets  Commission on Audit has exclusive authority to define the scope of audit

(2) BALANCE SHEET

COMPONENTS OF GENERAL PURPOSE FINANCIAL STATEMENTS
 Assets, Liabilities, Net Assets
 Three types of Net Assets: (1) Statement of Financial Position
(a) Unrestricted Net Assets (2) Statement of Financial Performance
(b) Temporary Restricted Net Assets (3) Statement of Changes in Net Assets / Equity
(c) Permanently Restricted Net Assets (4) Statement of Cash Flow
 The restricted cash and investment are prescribed separately (5) Statement of Comparison of Budget and Actual Amounts
(6) Notes to the financial statements, comprising a summary of significant
 All securities are valued at fair value
accounting policies and other explanatory notes
(3) STATEMENT OF CASH FLOW
 Restricted whether temporary/permanent (FINANCING) BOOKS OF ACCOUNTS & REGISTRIES
 Quasi-endowment  unrestricted (OPERATING)
1. JOURNALS
 Receipts of donation to purchase PPE (Inflow: INVESTING)
a. General Journal
 Cash outflow to purchase PPE (FINANCING)
b. Cash Receipts Journal
 Term endowment  Temporary (FINANCING) c. Cash Disbursement Journal
 Pure endowment  Permanent (FINANCING) d. Check Disbursement Journal
(4) STATEMENT OF FUNCTIONAL EXPENDITURE 2. LEDGERS
 Specifically for Voluntary Health and Welfare Organization (NGOs) a. General Ledgers
b. Subsidiary Ledgers
XIV. GOVERNMENT ACCOUNTING
REGISTRIES
PHASES OF BUDGETARY PROCEDURE
(1) RROR – Registries of Revenue and Other Receipts
1. PREPARATION AND PRESENTATION (2) RAPAL – Registry of Appropriation and Allotments
− Submission of budget of the expenditure (3) RAOD – Registries of Allotments, Obligation and Disbursements
(4) RBUD – Registries of Budget, Utilization and Disbursements
2. BUDGET AUTHORIZATION
− Enactment by the congress of the General Appropriation Act
CLASSIFICATION OF RAOD & RBUD
3. BUDGET EXECUTION AND OPERATION
− Release of revenue allotment  PS – Personnel Services
 MOE – Maintenance and Other Operating Expenses
4. BUDGET ACCOUNTABILITY  FE – Financial Expenses
− Liquidation of expenditure and audit conducted by Commission on Audit  CO – Capital Outlay

Page | 20 CPA Review School of the Philippines – Batch 82

(REVIEWER: Dr. Rodiel C. Ferrer, CPA, MBA, DBA, PhD CAR, CMA)

NOTICE OF CASH ALLOCATION (NCA)

 Issued by Department of Budget and Management (DBM) to an agency
authorizing the latter to disburse by checks

(1) RECEIPT OF NCA

Cash – MDS, Regular ₱xx
Subsidy from National Government ₱xx
*Net of 5% final VAT and 1% creditable income tax

(2) UNUSED NCA

Subsidy from National Government ₱xx
Cash – MDS, Regular ₱xx

ACCOUNTING FOR DISBURSEMENTS

1. Net Payroll Advances to Disbursing Officer
Advances for Payroll ₱xx
Cash – MDS, Regular ₱xx MESSAGE TO THE READERS
2. Payable to Officers and Employees and to set up salary deductions
Magandang buhay sa inyo mga ka-reviewee!
Salaries and Wages – Regular ₱xx
PERA xx Ang notes na ito ay hango sa mga itinuro ni Sir Ferrer (*one of my fave
Due to BIR ₱xx reviewer). Kung sakaling may mapansin man kayo na kulang o mali ay kayo
Due to GSIS xx na lang ang magkusang magtama nito. Hindi naman perpekto ang pagkaka-
type nito, tulad ko (*ansabe!?).
Due to Pag-IBIG xx
Due to PhilHealth xx Nawa ay makatulong ito sa inyong pag-aaral. Fighting! Ipaglaban natin
Due to Officers and Employees xx ang ating pangarap. May the odds be in our favor. God bless us all! ^_^
3. Remittance of Salary Deductions Sincerely,
Due to GSIS ₱xx LFA
Due to Pag-IBIG xx
Due to PhilHealth xx “For whatever is born of God overcomes the world.
Cash – MDS, Regular ₱xx And this is the victory that has overcome the world – our FAITH.”
1 JOHN 5:4
4. Liquidation of Advances for Payroll
Due to Officer and Employees ₱xx
Advances for Payroll ₱xx

Page | 21 CPA Review School of the Philippines – Batch 82