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Question 1Financial Accounting and Reporting

Under IFRS, which measurement basis is required for property, plant, and equipment after initial recognition?

  1. Cost model or revaluation model, applied consistently to an entire class Correct answer.
  2. Amortized cost using the effective interest method
  3. Lower of cost and net realizable value
  4. Fair value model with changes recognized in profit or loss

Explanation

IAS 16 permits an entity to choose either the cost model or the revaluation model, but the policy must be applied to an entire class of property, plant, and equipment. The fair value model with fair value changes in profit or loss is the IAS 40 investment property option, not an IAS 16 alternative.

Question 2Financial Accounting and Reporting

A company sells goods on credit with terms 2/10, n/30 and uses the gross method. The customer pays within the discount period. What is the effect of the sales discount on the seller's financial statements?

  1. It is recorded as a selling expense
  2. It increases cost of goods sold
  3. It reduces sales revenue recognized Correct answer.
  4. It is recorded as an other comprehensive income item

Explanation

Under the gross method, revenue is initially recorded at the gross invoice price and a sales discount taken by the customer is debited to a contra-revenue account, reducing net sales. It is not a cost of goods sold item or a selling expense, and it never flows to other comprehensive income.

Question 3Financial Accounting and Reporting

Which of the following best describes the purpose of the imprest system for petty cash?

  1. To allow the petty cash custodian to draw salaries from the fund
  2. To eliminate the need to record petty cash disbursements
  3. To convert petty cash into a bank demand deposit
  4. To fix the fund at a stated amount that is periodically replenished Correct answer.

Explanation

Under an imprest system the fund is established at a fixed amount, and it is replenished for exactly the total of vouchers supported by disbursements so the balance returns to the stated amount. Disbursements are still recorded, but only at replenishment, when the expense accounts are debited.

Question 4Financial Accounting and Reporting

An entity issues a three-year bond at a discount. Using the effective interest method, how does the carrying amount of the bond payable behave over its life?

  1. It decreases each period toward the face amount
  2. It increases each period toward the face amount Correct answer.
  3. It increases only in the final year
  4. It remains constant at the face amount

Explanation

Because the market rate exceeds the coupon rate when a bond is issued at a discount, interest expense each period exceeds the cash coupon, and the difference accretes the discount. The carrying amount therefore rises steadily until it equals the face amount at maturity.

Question 5Financial Accounting and Reporting

Under IFRS, which of the following costs is capitalized as part of the cost of a qualifying asset under IAS 23?

  1. Dividends declared on ordinary shares during construction
  2. Foreign exchange differences on all borrowings regardless of relation to the asset
  3. Interest on borrowings incurred after the asset is ready for its intended use
  4. Borrowing costs on general borrowings used to finance the asset, based on the capitalization rate Correct answer.

Explanation

IAS 23 requires capitalization of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset. For general borrowings, the entity applies a capitalization rate to the expenditure on the asset, and capitalization ceases when the asset is ready for its intended use.

Question 6Financial Accounting and Reporting

An entity uses the allowance method. It writes off a specific customer's account as uncollectible. What is the immediate effect of the write-off on the financial statements?

  1. Bad debt expense increases
  2. Total assets decrease
  3. Accounts receivable and the allowance both decrease by the same amount Correct answer.
  4. Net accounts receivable decrease

Explanation

A write-off under the allowance method debits the allowance for doubtful accounts and credits accounts receivable for the same amount. Gross receivables and the allowance fall equally, so net receivables, total assets, and profit or loss are unchanged.

Question 7Financial Accounting and Reporting

Which of the following items is reported in other comprehensive income rather than in profit or loss?

  1. Interest expense on lease liabilities
  2. Gain on disposal of equipment
  3. Impairment loss on goodwill
  4. Remeasurement gains and losses on a defined benefit plan Correct answer.

Explanation

Under IAS 19, remeasurements of the net defined benefit liability, including actuarial gains and losses, are recognized in other comprehensive income and are not reclassified to profit or loss. The other items listed are recognized in profit or loss.

Question 8Financial Accounting and Reporting

A company uses the FIFO cost formula under IAS 2. During a period of rising prices, how does FIFO compare with weighted average cost?

  1. FIFO reports higher ending inventory and higher cost of goods sold
  2. FIFO reports higher ending inventory and lower cost of goods sold Correct answer.
  3. FIFO and weighted average report identical gross profit
  4. FIFO reports lower ending inventory and higher cost of goods sold

Explanation

When prices rise, FIFO assigns the older, cheaper costs to cost of goods sold and leaves the newer, higher costs in ending inventory. This produces higher ending inventory, lower cost of goods sold, and higher gross profit than the weighted average method.

Question 9Financial Accounting and Reporting

An entity leases equipment for four years with annual payments of P100,000 due at the beginning of each year. The incremental borrowing rate is 10%. The present value of an annuity due of 1 for four periods at 10% is 3.4869. What is the initial lease liability?

  1. P273,530
  2. P400,000
  3. P316,990
  4. P348,690 Correct answer.

Explanation

Lease payments due at the beginning of each period form an annuity due, so the initial liability is P100,000 multiplied by 3.4869, or P348,690. The first payment is made at commencement and reduces the liability immediately after initial measurement.

Question 10Financial Accounting and Reporting

Under IFRS 15, a contractor recognizes revenue over time on a construction contract. At year-end, costs incurred are P2,400,000, estimated costs to complete are P1,600,000, and the transaction price is P5,000,000. What amount of revenue is recognized to date?

  1. P3,000,000 Correct answer.
  2. P5,000,000
  3. P2,500,000
  4. P2,400,000

Explanation

Progress is measured by costs incurred divided by total expected costs: P2,400,000 divided by P4,000,000 equals 60%. Revenue recognized to date is 60% of the P5,000,000 transaction price, or P3,000,000.

Question 11Financial Accounting and Reporting

An entity acquires a trademark with a ten-year legal life but expects to use it indefinitely and can renew at negligible cost. How should the trademark be accounted for under IAS 38?

  1. Amortize over ten years
  2. Amortize over the shorter of legal and useful life
  3. Do not amortize but test for impairment annually Correct answer.
  4. Amortize over twenty years

Explanation

An intangible with an indefinite useful life is not amortized; instead it is tested for impairment annually and whenever indicators exist. Because renewal is expected at negligible cost and there is no foreseeable limit on the period of cash inflows, the useful life is indefinite.

Question 12Financial Accounting and Reporting

A company declares a 10% share dividend on its ordinary shares. What is the effect on total shareholders' equity?

  1. Total equity decreases by the par value of the shares issued
  2. Total equity increases by the par value of the shares issued
  3. Total equity increases by the fair value of the shares issued
  4. Total equity is unchanged Correct answer.

Explanation

A share dividend transfers amounts between equity accounts, typically from retained earnings to share capital and share premium, but it issues no assets and receives no consideration. Total shareholders' equity is therefore unchanged.

Question 13Financial Accounting and Reporting

At the end of the reporting period, an entity holds goods on consignment from a supplier and goods purchased with a right of return. How should the consigned goods be treated in the entity's inventory?

  1. Excluded only if the consignor has not been paid
  2. Included in inventory because the entity has physical possession
  3. Included at the consignor's cost plus a markup
  4. Excluded because the entity does not control the goods Correct answer.

Explanation

IAS 2 defines inventory by control, not by physical location. Goods held on consignment remain under the consignor's control and are reported in the consignor's inventory, so the consignee excludes them from its own inventory.

Question 14Financial Accounting and Reporting

A machine costs P5,000,000, has a residual value of P500,000, and a five-year useful life. Using the double-declining balance method, what is depreciation for the second year?

  1. P2,000,000
  2. P1,800,000
  3. P1,200,000 Correct answer.
  4. P1,600,000

Explanation

The double-declining rate is 40% (twice the 20% straight-line rate). First-year depreciation is 40% of P5,000,000, or P2,000,000, leaving a carrying amount of P3,000,000; second-year depreciation is 40% of P3,000,000, or P1,200,000.

Question 15Financial Accounting and Reporting

Under IAS 7, which of the following is classified as a cash flow from financing activities?

  1. Cash paid to suppliers for inventory
  2. Cash paid to acquire property, plant, and equipment
  3. Cash received from issuing ordinary shares Correct answer.
  4. Interest received on a short-term investment

Explanation

Financing activities are those that change the size and composition of contributed equity and borrowings. Proceeds from issuing shares therefore belong in financing activities, while investing and operating items are classified elsewhere.

Question 16Financial Accounting and Reporting

An entity changes an accounting policy for inventory costing from weighted average to FIFO because FIFO provides more reliable information. How should the change be accounted for under IAS 8?

  1. By treating the change as a change in estimate applied prospectively
  2. Prospectively, with the cumulative effect in profit or loss
  3. By disclosing the change in the current period only
  4. Retrospectively, restating prior periods and adjusting opening retained earnings Correct answer.

Explanation

A change in accounting policy is applied retrospectively unless a transitional provision applies, so comparative amounts are restated and the cumulative effect adjusts opening retained earnings. Only a change in estimate, or a change in policy required by a new standard with transitional rules, is applied prospectively.

Question 17Financial Accounting and Reporting

A company has 100,000 ordinary shares and 10,000 cumulative preference shares with a 10% dividend rate and P100 par value. Net income is P1,500,000. What is basic earnings per share?

  1. P13.00
  2. P14.00 Correct answer.
  3. P16.00
  4. P15.00

Explanation

Cumulative preference dividends of P100,000 (10,000 shares times P100 par times 10%) are deducted from net income whether or not declared. The numerator is P1,400,000 divided by 100,000 ordinary shares, giving P14.00 per share.

Question 18Financial Accounting and Reporting

Under IFRS 9, a financial asset measured at amortized cost is assessed for impairment using the expected credit loss model. Which approach applies to trade receivables without a significant financing component?

  1. Incurred loss model recognizing losses only when default occurs
  2. Simplified approach using a lifetime expected credit loss allowance Correct answer.
  3. General three-stage model with lifetime ECL only after credit deterioration
  4. Fair value through other comprehensive income measurement

Explanation

IFRS 9 permits a simplified approach for trade receivables, contract assets, and lease receivables, requiring a loss allowance measured at an amount equal to lifetime expected credit losses. The three-stage general model applies to other financial assets, and the incurred loss model was replaced by IFRS 9.

Question 19Financial Accounting and Reporting

An entity has a defined benefit obligation with a present value of P8,000,000 and plan assets with a fair value of P7,200,000. Actuarial losses of P300,000 arose during the year. How is the actuarial loss treated?

  1. Recognized in other comprehensive income Correct answer.
  2. Recognized immediately in profit or loss
  3. Deferred and amortized over the average remaining service period
  4. Recognized as a reduction of plan assets

Explanation

IAS 19 requires remeasurements, including actuarial gains and losses, to be recognized in other comprehensive income in the period they arise. They are not reclassified to profit or loss in later periods, and the corridor amortization approach is no longer permitted.

Question 20Financial Accounting and Reporting

A company reports current assets of P4,000,000, inventory of P1,200,000, current liabilities of P2,000,000, and a bank overdraft of P300,000 that is repayable on demand. What is the quick ratio?

  1. 2.00 Correct answer.
  2. 1.40
  3. 1.22
  4. 1.74

Explanation

The quick ratio excludes inventory from current assets and includes the bank overdraft in current liabilities: (P4,000,000 minus P1,200,000) divided by (P2,000,000 plus P300,000) equals P2,800,000 divided by P2,300,000, or approximately 1.22.

Question 21Financial Accounting and Reporting

An entity uses the revaluation model for a building. On revaluation, the carrying amount increases by P500,000, of which P200,000 reverses a previously recognized impairment loss charged to profit or loss. How should the increase be recognized?

  1. P500,000 in profit or loss
  2. P200,000 in profit or loss and P300,000 in other comprehensive income Correct answer.
  3. P300,000 in profit or loss and P200,000 in other comprehensive income
  4. P500,000 in other comprehensive income

Explanation

A revaluation increase is recognized in OCI, except to the extent it reverses a previous revaluation decrease or impairment that was recognized in profit or loss, which is recognized in profit or loss. Thus P200,000 goes to profit or loss and the remaining P300,000 to OCI.

Question 22Financial Accounting and Reporting

A parent owns 80% of a subsidiary. During the year the parent sold inventory to the subsidiary for P1,000,000 at a gross profit of 25% on cost, and the subsidiary still holds all of it at year-end. What consolidation adjustment is required?

  1. Recognize P200,000 of unrealized profit in the consolidated income statement
  2. Eliminate P1,000,000 of sales and no profit adjustment
  3. Eliminate P250,000 of unrealized profit from inventory and profit
  4. Eliminate P200,000 of unrealized profit from inventory and profit Correct answer.

Explanation

Gross profit of 25% on cost means cost is P800,000 and profit is P200,000 on the P1,000,000 selling price. Because the inventory remains in the group, the entire P200,000 unrealized profit is eliminated against inventory and the selling entity's profit.

Question 23Financial Accounting and Reporting

On January 1, an entity grants 1,000 share options to each of 10 employees, vesting after three years of service. The fair value of each option at grant date is P30. At the end of year 1, the entity estimates that 2 employees will leave before vesting. What is the remuneration expense for year 1?

  1. P80,000 Correct answer.
  2. P300,000
  3. P100,000
  4. P240,000

Explanation

IFRS 2 measures the expense using grant-date fair value and the number of instruments expected to vest. Expected vesting is 8 employees times 1,000 options times P30, or P240,000 total, recognized over the three-year vesting period, giving P80,000 in year 1.

Question 24Financial Accounting and Reporting

A company's defined benefit obligation increases by P600,000 due to a plan amendment that grants retroactive benefits for past service. The average remaining service period of affected employees is 10 years. Under IAS 19, how is the past service cost recognized?

  1. Recognized immediately in other comprehensive income
  2. Recognized immediately in profit or loss Correct answer.
  3. Deferred until the benefits are paid
  4. Amortized over 10 years

Explanation

IAS 19 requires past service cost to be recognized in profit or loss at the earlier of the amendment date and the date the related restructuring or termination costs are recognized. Amortization over future service is no longer permitted.

Question 25Financial Accounting and Reporting

An entity has a deferred tax asset arising from deductible temporary differences. Which condition must be satisfied before the asset is recognized under IAS 12?

  1. The temporary difference must reverse within twelve months
  2. It is probable that taxable profit will be available against which the deductible temporary difference can be utilized Correct answer.
  3. The entity must have reported taxable profit in the immediately preceding year
  4. The tax authority must have formally approved the asset

Explanation

IAS 12 recognizes a deferred tax asset only to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be used. The existence of a loss in the prior year is a rebuttable presumption requiring convincing evidence, not an absolute bar.

Question 26Financial Accounting and Reporting

Under IAS 1, which of the following must an entity present as a separate line item in its statement of financial position?

  1. Goodwill arising from a business combination
  2. Property, plant and equipment Correct answer.
  3. Deferred charges amortized over five years
  4. Prepaid insurance for the next twelve months

Explanation

IAS 1 requires separate presentation of line items that are sufficiently different in nature or function, expressly including property, plant and equipment, investment property, intangible assets, inventories and trade receivables. Goodwill is aggregated within intangible assets rather than being a mandated separate line. Prepaid insurance is normally part of trade and other receivables or prepayments.

Question 27Financial Accounting and Reporting

An entity issues 1,000 ordinary shares with a par value of P10 each at an issue price of P35 per share. What amount is credited to share premium (additional paid-in capital)?

  1. P35,000
  2. P10,000
  3. P45,000
  4. P25,000 Correct answer.

Explanation

The ordinary share capital account is credited at par (1,000 × P10 = P10,000) and the excess of the issue price over par is credited to share premium: 1,000 × (P35 − P10) = P25,000. Total proceeds of P35,000 equal share capital plus share premium.

Question 28Financial Accounting and Reporting

An entity purchases equipment for P1,000,000 on account, terms n/30. Which accounting is appropriate at initial recognition under IAS 16?

  1. Record the equipment at the present value of the payment only if the deferral exceeds twelve months
  2. Record the equipment at its estimated fair value at the date the invoice is settled
  3. Record the equipment at P1,000,000 only after the invoice is paid in cash
  4. Record the equipment at P1,000,000, ignoring the financing element because payment is due within one year Correct answer.

Explanation

Under IAS 16, cost is the cash price equivalent at the recognition date, and a short credit term of 30 days is not treated as a financing arrangement. The difference between the cash price and the deferred amount is recognized as interest only when payment is deferred beyond normal credit terms. The equipment is capitalized when control passes, not when cash is paid.

Question 29Financial Accounting and Reporting

An entity's trial balance shows total debits of P850,000 and total credits of P845,000. Which of the following errors most likely explains the P5,000 difference?

  1. Failing to record a P5,000 cash purchase of inventory
  2. Recording a P2,500 purchase on account in the wrong subsidiary ledger only
  3. Posting a P5,000 debit as a credit in the same account
  4. Recording a P5,000 cash sale correctly in the cash account but omitting the credit to sales Correct answer.

Explanation

A one-sided entry, such as debiting cash without crediting sales, leaves the trial balance out of balance by the amount of the missing side, here P5,000. Errors that affect both sides equally, or that are entirely omitted, keep debits and credits equal. This is why trial balance disagreement signals a one-sided posting rather than a compensating error.

Question 30Financial Accounting and Reporting

An entity has accounts receivable of P2,000,000 and an allowance for doubtful accounts with a credit balance of P60,000 before adjustment. An aging analysis indicates that P150,000 of receivables are estimated to be uncollectible. What is the required adjusting entry to bad debt expense?

  1. Debit bad debt expense P150,000; credit allowance P150,000
  2. Debit bad debt expense P90,000; credit allowance P90,000 Correct answer.
  3. Debit bad debt expense P60,000; credit allowance P60,000
  4. Debit allowance P90,000; credit bad debt expense P90,000

Explanation

Under the aging (statement of financial position) approach, the required ending allowance is P150,000. Because the allowance already carries a P60,000 credit balance, the adjustment is P150,000 − P60,000 = P90,000, debited to bad debt expense and credited to the allowance. The existing balance is thus brought up to the desired level rather than being replaced.

Question 31Financial Accounting and Reporting

An entity uses the gross profit method to estimate inventory destroyed by fire. Beginning inventory was P400,000, purchases were P1,600,000, net sales were P2,500,000, and the historical gross profit rate is 30% of sales. What is the estimated cost of inventory destroyed?

  1. P750,000
  2. P300,000
  3. P1,000,000
  4. P250,000 Correct answer.

Explanation

Cost of goods available for sale is P400,000 + P1,600,000 = P2,000,000. Estimated cost of goods sold is 70% × P2,500,000 = P1,750,000, so estimated ending inventory is P2,000,000 − P1,750,000 = P250,000. This residual represents the inventory presumed destroyed.

Question 32Financial Accounting and Reporting

An entity acquires a patent for P2,400,000 with a remaining legal life of 12 years. The entity expects to benefit from the patent for only 8 years. Under IAS 38, what is the annual amortization charge using the straight-line method with no residual value?

  1. P300,000 Correct answer.
  2. P240,000
  3. P150,000
  4. P200,000

Explanation

IAS 38 requires amortization over the shorter of the asset's useful life and its legal life when the useful life is finite. The expected benefit period of 8 years is shorter than the 12-year legal life, so annual amortization is P2,400,000 ÷ 8 = P300,000.

Question 33Financial Accounting and Reporting

An entity reports profit before tax of P1,000,000. The tax rate is 25%. The only temporary difference is a warranty provision of P200,000 recognized in the current year but deductible when paid, and the entity expects to have sufficient taxable profit in future periods. What is the deferred tax asset to be recognized?

  1. P50,000 Correct answer.
  2. P200,000
  3. P0, because the provision is not yet paid
  4. P250,000

Explanation

A warranty provision creates a deductible temporary difference of P200,000 because its carrying amount exceeds its tax base of nil. A deferred tax asset is recognized at the expected tax rate: P200,000 × 25% = P50,000, provided future taxable profit is probable. Deductibility in a later period does not prevent recognition.

Question 34Financial Accounting and Reporting

An entity has 200,000 ordinary shares outstanding for the full year. On July 1 it issued 60,000 ordinary shares for cash. What is the weighted-average number of ordinary shares for basic earnings per share under IAS 33?

  1. 245,000
  2. 230,000 Correct answer.
  3. 260,000
  4. 215,000

Explanation

Shares issued for cash are weighted from the date consideration is receivable. The 200,000 shares apply for 12 months and the 60,000 new shares apply for 6 months: 200,000 + (60,000 × 6/12) = 230,000. Shares issued at fair value are not adjusted retrospectively.

Question 35Financial Accounting and Reporting

An entity has a building carried under the cost model at P4,000,000 with accumulated depreciation of P1,000,000. It revalues the building to P4,500,000 on the same date. What is the revaluation surplus recognized in other comprehensive income?

  1. P2,500,000
  2. P0, because the building is carried under the cost model
  3. P500,000
  4. P1,500,000 Correct answer.

Explanation

The carrying amount before revaluation is P4,000,000 − P1,000,000 = P3,000,000. The revaluation surplus is the excess of the fair value over that carrying amount: P4,500,000 − P3,000,000 = P1,500,000, recognized in other comprehensive income and accumulated in equity.

Question 36Financial Accounting and Reporting

An entity has a bank loan with a carrying amount of P5,000,000 that it refinances on December 31, replacing it with a new loan repayable in five years. The entity had no unconditional right to defer settlement at the reporting date before the refinancing. How should the original loan be classified in the statement of financial position at year-end?

  1. As equity, because the obligation has been extinguished
  2. As a current liability, because the refinancing occurred on the reporting date and the original obligation was due within twelve months Correct answer.
  3. As a non-current liability, because the replacement loan is long-term
  4. As a non-current liability, because the entity intends to refinance

Explanation

IAS 1 requires classification based on the rights existing at the end of the reporting period. If the original loan was payable within twelve months and no unconditional right to defer existed before the refinancing, it is presented as current. A refinancing completed on the reporting date does not retroactively change the right at the period end.

Question 37Financial Accounting and Reporting

An entity enters into a sale and leaseback transaction. It sells equipment with a carrying amount of P1,200,000 for P1,500,000 and immediately leases it back for five years. Under IFRS 16, assuming the transfer qualifies as a sale, how is the right-of-use asset measured?

  1. At the full sale proceeds of P1,500,000
  2. At the present value of the lease payments only
  3. At the fair value of the equipment at the transaction date
  4. At the proportion of the previous carrying amount relating to the retained right of use Correct answer.

Explanation

Under IFRS 16, when the transfer qualifies as a sale, the seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the right of use it retains. Only the gain relating to the rights transferred to the buyer-lessor is recognized in profit or loss. The proceeds are not used as the measurement basis for the right-of-use asset.

Question 38Financial Accounting and Reporting

A parent owns 75% of a subsidiary. During the year the parent sold goods to the subsidiary for P800,000 at a gross profit of 25% on the selling price. At year-end, the subsidiary still held all of these goods in inventory. What is the unrealized profit to be eliminated in the consolidated financial statements?

  1. P160,000
  2. P200,000 Correct answer.
  3. P600,000
  4. P0, because the sale was at arm's length

Explanation

The unrealized profit is the gross profit on goods still held within the group: 25% × P800,000 = P200,000. This amount is eliminated from consolidated inventory and profit, with the attributable portion allocated to non-controlling interests. The direction of the sale affects the allocation to the non-controlling interest but not the amount eliminated.

Question 39Financial Accounting and Reporting

An entity has a defined benefit obligation of P10,000,000 and plan assets of P9,200,000 at year-end. During the year, the net defined benefit liability increased by P300,000 due to a remeasurement loss on the obligation. Under IAS 19, how is this remeasurement loss recognized?

  1. Directly in retained earnings as a prior period adjustment
  2. In profit or loss as part of employee benefit expense
  3. As a reduction of the service cost in the current period
  4. In other comprehensive income, with no subsequent reclassification to profit or loss Correct answer.

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognized in other comprehensive income. These amounts are not subsequently reclassified to profit or loss, although they may be transferred within equity. Only service cost and net interest are recognized in profit or loss.

Question 40Financial Accounting and Reporting

An entity's financial statements are authorized for issue on March 31, Year 2. On February 10, Year 2, before the statements were authorized, a customer owing P900,000 was declared insolvent; the receivable arose from a sale made in November Year 1 and had been assessed as fully collectible at December 31, Year 1. Under IAS 10, how should the entity treat this event in its December 31, Year 1 financial statements?

  1. Recognize the write-off directly in retained earnings as a prior period error correction
  2. Recognize the event as an adjusting event by increasing the allowance for doubtful accounts at December 31, Year 1 Correct answer.
  3. Disclose the event only in the interim statements for the period ending March 31, Year 2
  4. Disclose the event only in the notes, leaving the December 31, Year 1 receivable carrying amount unchanged

Explanation

IAS 10 requires adjusting treatment when an event after the reporting period provides evidence of conditions that existed at the end of the reporting period. The customer's insolvency confirms that the receivable was already impaired at December 31, Year 1, so the allowance and impairment loss must be recognized in that year's statements rather than merely disclosed.

Question 41Advanced Financial Accounting and Reporting

Under IFRS, how is a non-controlling interest initially measured in a business combination when the acquirer elects the fair value option?

  1. At the proportionate share of the acquiree's identifiable net assets
  2. At the nominal value of the NCI shares outstanding
  3. At the fair value of the NCI's equity interest at the acquisition date Correct answer.
  4. At the acquirer's carrying amount of the acquiree's net assets

Explanation

IFRS 3 permits a choice for each business combination: measure NCI either at its proportionate share of identifiable net assets or at fair value at the acquisition date. Under the fair value option, the NCI is measured at fair value, which may include a control premium or discount and increases goodwill.

Question 42Advanced Financial Accounting and Reporting

In a business combination, acquisition-related costs such as finder's fees and advisory fees are generally treated how?

  1. Capitalized as part of the consideration transferred
  2. Deducted from goodwill in the consolidated statement
  3. Deferred and amortized over the earnout period
  4. Recognized as expenses in the periods incurred Correct answer.

Explanation

Under IFRS 3 and ASC 805, acquisition-related costs are expensed as incurred rather than included in the consideration transferred. Only the fair value of equity interests issued and direct consideration to former owners is capitalized. This rule prevents acquirers from inflating goodwill with transaction costs.

Question 43Advanced Financial Accounting and Reporting

A parent owns 80% of a subsidiary. During the year, the subsidiary sold goods to the parent at a profit of P50,000, and 40% of these goods remain in the parent's ending inventory. What is the unrealized profit to be eliminated in the consolidated financial statements?

  1. P50,000
  2. P40,000
  3. P20,000 Correct answer.
  4. P10,000

Explanation

Only the profit on goods still held within the group is unrealized and must be eliminated. Here 40% of P50,000, or P20,000, remains in ending inventory. The remaining P30,000 is realized through sale to external parties and is not eliminated.

Question 44Advanced Financial Accounting and Reporting

Under IAS 21, an entity's functional currency is best described as which of the following?

  1. The currency in which the entity presents its financial statements
  2. The currency that minimizes translation gains and losses
  3. The currency of the country where the entity is legally incorporated
  4. The currency of the primary economic environment in which the entity operates Correct answer.

Explanation

IAS 21 defines functional currency as the currency of the primary economic environment in which the entity operates, determined by factors such as sales prices, competitive forces, and financing. Presentation currency is a separate choice and may differ from the functional currency. Legal incorporation location is only one indicator and is not determinative.

Question 45Advanced Financial Accounting and Reporting

A foreign subsidiary's functional currency is the Philippine peso, but its books are kept in US dollars. In translating for consolidation, how are exchange differences on translation treated?

  1. Adjusted against retained earnings directly without recycling
  2. Recognized in other comprehensive income and reclassified on disposal Correct answer.
  3. Recognized as an adjustment to the cost of the investment
  4. Recognized in profit or loss as they arise

Explanation

When the functional currency differs from the recording currency, translation differences arising from restating into the functional currency are recognized in other comprehensive income. These cumulative differences are reclassified to profit or loss on disposal of the foreign operation. This follows IAS 21's translation reserve mechanics.

Question 46Advanced Financial Accounting and Reporting

Which of the following best describes the accounting for a finance lease under IFRS 16 from the lessee's perspective?

  1. The lessee capitalizes the asset but records no corresponding liability
  2. The lessee recognizes a right-of-use asset and a lease liability at the present value of lease payments Correct answer.
  3. The lessee records only the periodic lease payments as rent expense
  4. The lessee recognizes the leased asset only if ownership transfers at the end of the term

Explanation

IFRS 16 requires lessees to recognize a right-of-use asset and a lease liability measured at the present value of future lease payments for almost all leases. The single lessee model removes the former operating versus finance lease distinction for lessees. Subsequent measurement involves depreciation of the asset and interest on the liability.

Question 47Advanced Financial Accounting and Reporting

An entity has a defined benefit obligation with a present value of P5,000,000 and plan assets at fair value of P4,400,000. What amount is presented as the net defined benefit liability?

  1. P0
  2. P600,000 Correct answer.
  3. P5,000,000
  4. P4,400,000

Explanation

The net defined benefit liability is the excess of the present value of the defined benefit obligation over the fair value of plan assets. Here P5,000,000 minus P4,400,000 equals P600,000. If plan assets exceeded the obligation, a net defined benefit asset would arise subject to the asset ceiling.

Question 48Advanced Financial Accounting and Reporting

Which of the following is the correct treatment of a change in accounting estimate under IAS 8?

  1. Reported as a prior period error adjustment in retained earnings
  2. Disclosed only in the notes without affecting the financial statements
  3. Applied prospectively by recognizing the effect in the current and future periods Correct answer.
  4. Applied retrospectively with restatement of prior periods

Explanation

IAS 8 requires changes in accounting estimates to be applied prospectively, affecting the current period and, where relevant, future periods. Prior periods are not restated because the change results from new information, not an error. This distinguishes estimates from changes in accounting policy, which are generally retrospective.

Question 49Advanced Financial Accounting and Reporting

An entity discovers that depreciation was understated by P200,000 in the prior year due to a calculation error, and the amount is material. How should this be corrected?

  1. As a prior period adjustment restating the comparative figures Correct answer.
  2. Prospectively over the remaining useful life of the asset
  3. Through other comprehensive income in the current year
  4. By adjusting only the current year's depreciation expense

Explanation

A material error discovered after the reporting period is corrected as a prior period adjustment under IAS 8, with retrospective restatement of comparatives. The correction is not spread prospectively because it is not a change in estimate. The opening retained earnings and affected comparatives are restated.

Question 50Advanced Financial Accounting and Reporting

Under IAS 36, when should an entity test goodwill for impairment?

  1. Only upon disposal of the cash-generating unit
  2. Annually, and whenever there is an indication of impairment Correct answer.
  3. Only when there is an indication of impairment
  4. Every reporting period end regardless of indicators, including interim periods

Explanation

IAS 36 requires goodwill acquired in a business combination to be tested for impairment annually, and also whenever events or changes in circumstances indicate possible impairment. Unlike other assets, the annual test is mandatory even absent indicators. The test compares the carrying amount of the cash-generating unit to its recoverable amount.