Accounting 101 for review PDF

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CPA REVIEW SCHOOL OF THEPHILIPPINESADVANCED FINANCIAL ACCOUNTINGAND REPORTINGNumber 1 and 2A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with assessed value of P200,000 with historical cost of P1,600,000 and accumul ated depreciation of P1,200,000 A da...

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CPA REVIEW SCHOOL OF THE PHILIPPINES ADVANCED FINANCIAL ACCOUNTING AND REPORTING Number 1 and 2 A, B and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with assessed value of P200,000 with historical cost of P1,600,000 and accumulated depreciation of P1,200,000 A day after the Partnership formation, the equipment was sold for P600,000. B will contribute a land and building with carrying amount of P2, 400,000 and fair value of P3, 000,000. The Land and building are subject to a mortgage payable amounting to P600, 000 to be assumed by the partnership. The partners agreed that B will have 60% capital interest in the Partnership. The partners also agreed that C will contribute sufficient cash to the partnership. 1. What is the total agreed capitalization of the ABC Partnership? a. 3,000,000 c. 5,000,000 b. 4,000,000 d. 6,000,000 2. What is the cash to be contributed by C in the ABC Partnership? a. 1,000,000 c. 1,400,000 b. 1,200,000 d. 1,600,000

Number 3 On January 1, 2018, A, B and C formed ABC Partnership with original capital contribution of P600, 000, P1, 000,000 and P400, 000. A is appointed as managing partner. During 2018, A, b and C made additional investments of P1, 000,000, P400, 000 and P600, 000, respectively. At the end of 2018, A, B and C made drawings of P400, 000, P200, 000 and P800, 000, respectively. At the end of 2018, the partnership had a credit balance in the income summary account of P2, 100,000. The profit or loss agreement of the partners is as follows: ● ● ● ●

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10% interest on original capital contribution of the partners. Quarterly salary of P80, 000 and P20, 000 for A and B, respectively. Bonus to A equivalent to 20% of Net Income after interest and salary of all partners Remainder is to be distributed equally among the partners.

What is A’s share in Partnership profit for 2018? a. 380,000 b. 680,000 c. 1,080,000 d. 400,000 Number 4 On December 31, 2018, the statement of Financial Position of ABC Partnership provided the following data with profit or loss ratio of 5:1:4: Current assets Non Current Assets

3,000,000 4,000,000

Total Liabilities 1,000,000 A, Capital 2,200,000 B, Capital 2,400,000 C, Capital 1,400,000 On January 1, 2019, D is admitted to the partnership by investing P1, 000,000 to the Partnership for 10% capital interest. The total agreed capitalization of the new partnership is P6, 000,000. What is the capital balance of C after the admission of D to the partnership? a. 1,160,000 b. 1,640,000 c. 1,000,000 d. 1,560,000 Number 5 On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 6:1:3 of partners A, B and C respectively, revealed the following data: Cash Receivable from A Other non cash assets

2,000,000 1,000,000 4,000,000

Other Liabilities 4,000,000 Payable to B 2,000,000 Payable to C 200,000 A, Capital 1,400,000 B, Capital (1,300,000) C, Capital 700,000 On January 1, 2019, the partners decided to liquidate the partnership. All partners are legally declared to be personally insolvent. The other noncash assets were sold for P3, 000,000. Liquidation expenses amounting to P200, 000 were incurred. How much cash was received by A and B in the end of partnership liquidation? a. 500,000 b. 300,000 c. 580,000 d. 540,000 Number 6 and 7 2 | Page

On December 31, 2018, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 5:3:2 of respective partners A, B and C. showed the following information: Cash Noncash Assets

3,200,000 2,800,000

Total Liabilities A, Capital B, Capital C, Capital

4,000,000 200,000 1,000,000 800,000

On January 1, 2019, the partners decided to liquidate the partnership in instalment. All partners are legally declared to be personally insolvent. As of January 31, 2019, the following transaction occurred: ● Noncash assets with a carrying amount P2, 000,000 were sold and gain of P200, 000. ● Liquidation expenses for the month of January amounting to P100, 000 were paid. ● It is estimated that liquidation expenses amounting to P300, 000 will be incurred for the month of February, 2019. ● 20% of the liabilities to third persons were settled. ● Available cash was distributed to the partners. 6. What is the amount of cash received by partner C on January 31, 2019? a. 520,000 b. 480,000 c. 600,000 d. 700,000 7. What is the amount of total cash withheld on January 31, 2019? a. 1,100,000 b. 3,200,000 c. 3,500,000 d. 3,400,000 Number 8 At the date of partnership formation of ABC partnership, the amount credited to A’s capital is less than the fair market value of the property he contributed. Which of the following is the most valid reason? a. The property contributed by A is impaired. b. The property contributed by A has been subjected to positive assets revaluation. c. Bonus has been given by partner A to the other partners. d. Goodwill arising from partnership formation has been recognized. Number 9 and 10 AAA Company is bankrupt and has undergone corporate liquidation. Presented below is its statement of Financial Position before the start of liquidation: Cash 300,000 Accounts Payable 100,000 Machinery 500,000 Salaries Payable 200,000 Building 1,200,000 Income Tax Payable 300,000 3 | Page

Loan Payable Mortgage Payable Contributed Capital Deficit

400,000 500,000 800,000 (300,000)

● Liquidation expenses amounting to P600, 000 were paid. ● The loan payable is secured by the machinery with fair value of P300,000 ● The mortgage payable is secured by the building (fair value equal its book value) ● At the end of liquidation, the holder of loan payable received P340, 000. 9. What is the amount received by the holder of accounts payable at the end of liquidation? a. 85,000 b. 15,000 c. 40,000 d. 60,000 10. What is the amount of net free assets available at the end of liquidation? a. 80,000 b. 40,000 c. 120,000 d. 200,000 Number 11 In every Corporate liquidation, which of the following creditors will always fully recover their claims from a liquidating corporation? a. Unsecured creditors with priority b. Unsecured creditors without priority c. Partially secured creditors d. Fully secured creditors Number 12 It refers to the term used when the total shareholder’s equity has a negative balance. a. Deficit b. Deficiency c. Surplus d. Insufficiency Number 13 and 14 Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating entities as component for their final products of cellular phones and tablets. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the arrangement. The ordinary shares of entity C will be owned by entity A and entity B in the ratio of 60:40. At the end of the first operations of entity C, the financial statements provided the following data: Inventory 2,000,000 Accounts Payable 4,000,000 4 | Page

Land Building

6,000,000 10,000,000

Notes Payable Loan Payable Share Capital Retained Earnings Sales Revenue

2,000,000 8,000,000 2,000,000 2,000,000 10,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the assets and liabilities of Entity C: ● Entity A owns the land and incurs the loan payable of Entity C. ● Entity B owns the buildings and incurs the note payable of Entity C. ● The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their capital interest in entity C. ● The sales revenue of Entity C includes sales to entity A and Entity B in the amount of P2, 000,000 and P4, 000,000. Respectively. As the end of the first year, Entity A and Entity B were able to resell 30% and 60% of the inventory coming from entity C to third persons. 13. What is the amount of total assets to be reported by Entity A concerning its interest in entity C? a. 10,800,000 b. 6,000,000 c. 7,200,000 d. 10,000,000 14. What is the amount of sales revenue to be reported by entity A concerning its interest in Entity C? a. 4,600,000 b. 4,200,000 c. 6,000,000 d. 5,000,000 Number 15 Federal Land and SMDC establish a joint arrangement in an incorporated entity, Star Inc. The assets and liabilities of Star Inc. will be in the name of the said established entity. The activities of the arrangement will be decided by its own board of directors. The rights of federal Land and SMDC are limited only to the net assets of Star Inc. How shall SMDC accounts for its investment in Star Inc.? a. It shall be accounted for using proportionate consolidation. b. It shall be accounted for as joint venture. c. It shall be accounted for as joint operation. d. It shall be accounted for investment in trading securities. Number 16 and 17 On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated entity C by investing P6,000,000 and P4,000,000 for capital interest ratio of 60:40. The contractual agreement of the incorporating entities provided that the decisions on relevant activities on Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net assets of Entity C. The financial statements of entity C provided the following data for 2018: ● Entity C reported net income of P2, 000,000 for 2018 and paid cash dividends of P800, 000 on December 31, 2018. 5 | Page

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During 2018, Entity C sold inventory to Entity A with gross profit of P100, 000. Eighty percent of those inventories were resold by Entity A to third person during 2018 and the remainder was resold to third persons during 2019. On July 1, 2018, Entity C sold machinery to Entity B at a loss of P40, 000. At the time of sale, the machinery has remaining useful life of 2 years.

16. What is the investment income to be reported by Entity a for the year ended December 31, 2018? a. 1,206,000 b. 1,212,000 c. 1,188,000 d. 1,194,000 17. What is the balance of Investment in Entity C to be reported by Entity B on December 31, 2018? a. 4,492,000 b. 4,482,000 c. 4,476,000 d. 4,496,000 Number 18 and 19 On January 1, 2018, an entity sold a car to a customer at a price of P400, 000 with a production cost of P300, 000. It is the entity’s policy to employ instalment method to recognize gross profit from instalment sales. At the time of sale, the entity received cash amounting to 25% of the selling price and old car with trade in allowance of P50, 000. The said old car has fair value of P150, 000. The customer issued a 5 year note for the balance to be payable in equal annual instalments every December 31 starting 2018. The notes payable is interest bearing with 10% rate due on the remaining balance of the note. The customer was able to pay the first annual instalment and corresponding interest due. However, after the payment of the second interest due, the customer defaulted on the second annual instalment which resulted to the repossession of the car sold with appraised value of P110, 000. On December 31, 2019, the repossesses car was resold for P140, 000 after reconditioning cost of P10, 000. 18. What is the entity’s realized gross profit for the year ended December 31, 2018? a. 50,000 b. 120,000 c. 108,000 d. 128,000 19. What is the loss on repossession for the year ended December 31, 2019? a. 30,000 b. 20,000 c. 10,000 d. 40,000 Number 20

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If the sale transaction provides for periodic instalments over an extended period of time and the collectability of the sales price cannot be reasonably estimated. What method of revenue recognition is the most appropriate? a. Cost recovery method b. Accrual basis c. Instalment method d. Cash basis Number 21 and 22 On January 1, 2018, an entity granted a franchise agreement to a franchisee. The contract provided that the franchise shall pay an initial franchise fee of P500, 000 and on-going payment of Royalties equivalent to 8% of the sales of the franchisee. On January 1, 2018, the franchisee paid Down payment of P200, 000 and issued a 3-year non-interest bearing note for the balance payable in three equal annual instalments starting December 31, 2018. The note has present value of P240, 183 with effective interest rate of 12% On June 30, 2018, the entity completed the performance obligation of the franchise at a cost of P325, 146. Aside from that, the entity incurred indirect cost P22, 009. The franchise started operation on July 1, 2018 and reported sales revenue amounting to P50, 000 for the year ended December 31, 2018. The franchisee paid the first instalment on its due date. 21. If the collection of the note receivable is reasonably assured, what is the gross profit to be recognized by the entity for the year ended December 31, 2018 in relation to the initial franchise fee? a. 66,028 b. 44,014 c. 22,009 d. 88,037 22. If the collection of the note receivable is reasonably assured, what is the net income to be reported by the entity for the year ended December 31.2018? a. 98,850 b. 94,850 c. 70,028 d. 92,037 Number 23 Under IFRS 15, in which of the following instances shall an entity recognize revenue through satisfaction of performance obligation at a point in time instead of satisfaction of performance obligation overtime? a. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. b. The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. c. The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. d. The entity has transferred the legal title, control physical possession of the asset at a specific date. 7 | Page

Number 24, 25 and 26 On January 1, 2018, BBB Company started the construction of a building at a fixed contract price of P2, 000,000. On the same date, the customer paid a mobilization fee equal to 5% of contract price that will be deductible from the first billing. The outcome of construction contract cannot be estimated reliably During 2018, the entity billed the customer equivalent to 30% of the contract price. During 2019, the entity billed again the customer amounting to 20% of the contract price. During 2020, the entity billed again the customer amounting to 40% of the contract price. The remaining billing was made at the year of completion of the project. The entity made collection from the customer at the end of 2018,2019 and 2020, in the amount of P240,000, P900,000 and P360,000, respectively. The entity provided the following data concerning the direct costs related to the said project: 2018 2019 2020 Cumulative costs incurred at year-end 720,000 1 600,000 1 740,000 Remaining estimated costs to complete at year-end 1,680,000 500,000 100,000 24. What is the realized gross profit for the year ended December 31, 2019? a. 100,000 b. 400,000 c. 300,000 d. 0 25. What is the excess of construction in progress over progress billings or excess of progress billings over construction in progress on December 31, 2020? a. 60,000 excess billings b. 160,000 excess billings c. 40,000 excess construction in progress d. 100,000 excess construction in progress 26. What is the balance of accounts receivable on December 31, 2020? a. 300,000 b. 200,000 c. 240,000 d. 100,000 Number 27 When it is possible that total contract costs will exceed total contract revenue, how shall the long-term contractor account for the difference? a. The expected loss shall be recognized as an expense immediately. b. The expected profit shall be recognized as a profit immediately. c. The expected loss shall be recognized as an expense taking into account the percentage of completion as the end of the period. 8 | Page

d. The expected loss shall be recognized as a profit taking into account the percentage of completion as of the end of the period. Number 28 When the outcome of a construction contract cannot be estimated reliably, what accounting method shall be used by the long term constructor for the recognition of construction revenue and construction cost? a. Percentage of completion method b. Cost recovery method c. Instalment method d. Accrual basis Number 29 and 30 Siargao Company set up a branch in a province. The entity and its branch provided the following data for the second year of branch operation: Home Office Branch Sales revenue to outside customer 2,000,000 1,000,000 Beginning inventory 100,000 60,000 Purchases from outside supplier 800,000 200,000 Shipment to branch 400,000 Shipment from home office 500,000 Ending Inventory 160,000 100,000 Operating expenses 300,000 80,000 ● ● ●

The home office to branch mark-up based on cost is 25% this year and last year 20% of the beginning inventory of the branch came from outside supplier. 24% of the ending inventory of the branch came from the last year’s shipment from the home office while 50% of the ending inventory of the branch came from current year’s shipment from the home office.

29. What is the net income reported by the branch in its separate income statement for the current year? a. 260,000 b. 248,000 c. 228,000 d. 190,000 30. What is the ending inventory to be reported by entity in its combined statement of financial position? a. 256,000 b. 230,000 c. 260,000 d. 245,000 Number31 What is the main reason for the difference between the branch’s net income reported by the branch and the true branch’s net income computed by the home office? a. Because of overstatement of branch’s cost of sales for goods coming from outsiders. 9 | Page

b. Because of overstatement of branch’s cost of sales for goods coming from home office. c. Because of overstatement of total goods available for sale coming from home office. d. Because of overstatement of branch’s ending inventory coming from home office. Number 32 Under IFRS 3, in a business combination achieved in stages, if the acquisition date fair value of the net of the acquisition date amounts of the identifiable assets acquired and the liabilities of the acquire is lower than the aggregate of the (1) acquisition date fair value of the consideration transferred by the acquirer; (2) amount of non controlling interest measured at fair value or proportionate share; and (3) acquisition date fair value of acquirer’s previously held equity interest in the acquire, the difference shall be accounted for by the acquirer in its consolidated financial statement as a. Goodwill classified as noncurrent asset not subject to amortization but subject to annual impairment test b. Gain on bargain purchase to be recognized as part of profit or loss c. expense as incurred d. deduction directly to retained earnings Number 33 and 34 Entity A acquired the net assets of entity B by issuing 10,000 ordinary shares with par value of P20 and bonds payable with face amount of P1, 000,000. The bonds are classified as financial liability at amortized cost. At the time of acquisition, the ordinary Share is publicly quoted at P40 per share. On the other hand, the bonds payable are trading at 110. Entity A paid P20, 000 share issuance costs and P40, 000 bond issue costs . Entity A also paid P80, 000 acquisition related costs and P60, 000 indirect costs of business combination. Before the date of acquisition, Entity A and Entity B reported the following data: Entity A Entity B Current assets 2,000,000 1,000,000 Noncurrent assets 4,000,000 2,000,000 Current liabilities 400,000 800,000 Noncurrent liabilities 600,000 1,000,000 Ordinary shares 1,000,000 400,000 Share premium 2,400,000 600,000 Retained earnings 1,600,000 200,000 At the time of acquisition, the current assets of Entity A have fair value of P2, 400,000 while the noncurrent assets of Entity B have fair value of P2, 600,000. On the same date, the current liabilities of entity B have fair value of P1, 200,000 while the noncurrent liabilities of entity A have fair value of P1, 000,000. 33. What is the good...