AFAR May2021 1st Preboard with answer PDF

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Accountancy Review Center (ARC) of the Philippines Inc. One Dream, One Team

FIRST PREBOARD EXAMINATION ADVANCED FINANCIAL ACCOUNITNG AND REPORTING BATCH 01

BULADACO/SAGOT MAY 2021 CPALE REVIEW

INSTRUCTIONS: Select the best answer for each of the following questions. Mark only one answer for each item on the answer sheet provided. STRICTLY NO ERASURERS ALLOWED. 1.

An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on January 1, 2020 and work begins immediately. The entity concludes that the service is a single performance obligation because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer. In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service. Under PFRS 15, revenue will be recognized: A. At the fair value of the shares that are received upon completion of each weekly service B. At the fair value of the services received upon completion of each weekly service C. At the fair value of the shares that are received upon completion of each weekly service, and adjusted subsequently for the changes in the fair value of the shares received D. At the fair value of the shares or services, whichever is more observable, at the inception of the contract

2.

The adjusted balance of the loading in branch inventory represents the overvaluation of the branch’s A. Total cost of goods available for sale B. Cost of goods sold C. Ending inventory D. Beginning inventory

3.

Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings? A. The partner with the lowest vulnerability ranking, who also has the lowest loss absorption potential. B. The partner with the lowest vulnerability ranking, who also has the highest loss absorption potential. C. The partner with the highest vulnerability ratio, who also has the lowest loss absorption potential. D. The partner with the highest vulnerability ranking, who also has the highest loss absorption potential.

4.

Statement 1: A contract with a customer would not have a significant financing component if the customer has paid for the goods or services in advance and the timing of the transfer of those goods or services is at the discretion of the customer. Statement 2: An entity may recognize revenue over time if the entity’s performance does not create an asset with an alternative use and the entity has an enforceable right to payment for a certain portion of the contract. A. B. C. D.

5.

Only statement 1 is incorrect. Only statement 2 is incorrect. Both statements are correct. Neither statements is correct.

Under Article 2250 of the Civil Code, the excess after the payment of credits which enjoy preference with respect to specific property shall be: A. Considered an unsecured credit without preference B. Attached as security for satisfaction of the related credit C. Added to the property distributable to the debtor’s shareholders D. Added to the free property which the debtor may have for the payment of other credits

AFAR | FIRST PREBOARD EXAMINATION

6.

ARC – ACCOUNTANCY REVIEW CENTER

A well-known consignor consigned goods costing P =1,560,000 to be sold at a total advertised selling price of P =3,120,000. The consignee remitted P =1,447,600 to its consignor after deducting the following charges: P =52,500 cartage, = P22,500 installation and a commission equal to 20% of the sales proceeds after deducting the commission. Determine the net income of the consignor. A. 507,600 B. 516,600 C. 546,300 D. 555,840 Solution: BONUS. Remittance in the problem should be = P1,422,600. Determine the percentage of items sold over items consigned during the period.

7.

Remittance Add back Cartage Installation Net remittance after commission Add commission (20%) Proceeds from sale of goods Divided by total advertised price Percentage of units sold

1,422,600

Revenue from sale Cost of sales Purchase price (1,560,000 x 57.6%) Cartage (52,500 x 57.6%) Gross profit Installation Commission Net income

1,797,120

52,500 22,500 1,497,600 299,520 1,797,120 3,120,000 57.60%

(898,560) (30,240) 868,320 (22,500) (299,520) 546,300

A manufacturing firm has found itself in financial difficulty and may file for bankruptcy. Its statement of affairs reflects the following summarized information: Book value of assets Net realizable value of assets Total liabilities Secured claims Unsecured claims with priority

= P700,000 370,000 400,000 250,000 30,000

If the corporation owes a creditor = P9,000 secured by inventory that is expected to realize P =7,000, how much can the creditor expect to receive on this claim? A. 8,200 B. 8,500 C. 8,600 D. 9,000 Solution: Determine the:  Net free assets = 370,000 – 250,000 – 30,000 = 90,000  Unsecured claims without priority = 400,000 – 250,000 – 30,000 = 120,000 ERP = 90,000/120,000 = 75% Creditor can expect to receive 8,500 from the claims (7,000 inventory + 2,000 x 75%)

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

8.

The Investment in Branch A per home office books is higher than the home office account per Branch A’s books. What can a possible reason for the difference? A. Branch A forgot to record advertising expenses allocated by the home office. B. Home office was not yet notified of the collection made by Branch A on the receivables of Branch B. C. Branch recorded shipments returned to the home office twice in its books. D. Home office erroneously recorded the shipments received by Branch A as an additional investment in Branch B.

9.

The partnership of French and Fries, who shares profits and losses on a 3:2 ratio, is in the process of liquidation. On January 1, 2020, the ledger shows capital balances of French and Fries amounting to = P80,000 and P =40,000 respectively and accounts payable to third parties of = P30,000. Inventories w57.2ere sold at a loss of P =30,000, while accounts receivable of P =42,000 were collected and = P8,000 were deemed fully impaired and uncollectible. Of the total equity of French, what amount appears to be unrecoverable? A. 57,200 B. 30,800 C. 22,800 D. 4,800 Solution:

Capital balance Loss on sale of inventory Loss on write-off

French 80,000 (18,000) (4,800) 57,200

Fries 40,000 (12,000) (3,200) 24,800

10. An asset recognized for an entity’s right to recover products from a customer on settling a refund liability shall be measured considering which of the following factors: I. Former carrying amount of the product II. Expected costs to recover the product III. Potential decreases in the value of the returned products A. B. C. D.

I only I and II only I and III only I, II and III

11. The main office pays the following standard freight charges: From Branch A to B, or vice versa From Branch A to C, or vice versa From Branch B to C, or vice versa From main office to Branches A and B From main office to Branch C

= P6,000 4,500 8,000 10,000 7,000

The main office ships merchandise to Branch B and later on orders Branch B to distribute half of the same merchandise to Branch A and half to Branch C, then the difference in freight charge would be disposed as: A. 1,500 freight savings and 3,500 charged to head office B. 2,000 charged to head office C. 3,000 freight savings D. 4,000 freight savings and 1,000 charged to head office BONUS. 12. On September 1, 2020, a consignor consigned 10,000 units of inventory which costs = P12 per unit and sells for P =15 per unit. Freight charges of = P15,000 were paid by the consignee. The consignee was able to sell 6,000 units from September 1 to November 30, 2020 and incurred. On December 1, 2020, the products were marked to sell for = P13 per unit to accommodate the Christmas rush. During December, the consignee was able to sell 3,000 more units. The discounted price lasted until February 28, 2021. Consignee is entitled to a commission of 10% of the selling price of the products. For the period ending December 31, 2020, the consignor will report net loss from this consignment arrangement amounting to: A. 7,200 B. 6,000 C. 5,900 D. 5,400

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

Solution:

Revenue First sale (6,000 x P =15) Second sale (3,000 x P =13) Cost of sale (9,000 x P =13.5)* Commission (10%) Inventory write-down**

90,000 39,000 (121,500) (12,900) (1,800) (7,200)

*Purchase price + Freight *NRV is selling price less cost to sell (P =13 less = P1.3 commission = = P11.7), since inventories are carried at LCNRV. Cost of the remaining 1,000 units amounting to P =13,500 will be brought down to NRV and the consignor will record an inventory write-down of = P7,200 (P =13,500 cost versus = P11,700 NRV).

Situational Problems 13 to 15. The main office is in the process of combining the separate books of its branches Y and Z and has prepared the following condensed data from their trial balances.

Cash Receivables Inventories–January 1 Branch Y Branch Z Loading in branch inventories Fixed assets Accounts payables Long-term debt Capital stock Retained earnings–January 1 Dividends paid Home office Sales Purchases from outsiders Net shipments to branches Net shipments from main office Expenses

Main 3,200,000 4,870,000 1,120,000 1,525,000 1,465,000 (1,412,200) 5,400,000 (2,560,000) (6,500,000) (5,000,000) (3,200,000) 800,000 – (6,900,000) 9,500,000 (4,724,000) – 2,416,200

Branch Y 350,000 580,000 680,000 – – – – (1,250,000) – – – – (1,245,000) (3,500,000) 450,000 – 3,150,000 785,000

Branch Z 680,000 950,000 760,000 – – – – (950,000) – – – – (1,675,000) (2,750,000) 145,000 – 2,475,000 365,000

Additional information: a. Home office consistently bills its two branches at a 25% markup on cost. b. Branch Y returned merchandise on December 29, 2020. This was still in transit as of year-end, and the main office has not yet recorded this in its books. c. Branch Z failed to record the following: • Debit memo of the home office representing expenses allocated by the main office for its promotional activities during the year • Credit memo from Branch Y representing cash collected by Branch Y on its accounts receivable amounting to = P250,000; the collection was subject to a two percent prompt payment discount and the home office was already notified of this transaction. d. Per physical count on December 28, 2020, inventories amounted to = P1,560,000 for main office, = P 1,785,000 for Branch Y (at billed price) and = P840,000 for Branch Z (at billed price). The count provides that inventories of Branch Y and Z still have = P125,000 and = P40,000 from outside vendors, respectively. In the main office’s external financial statements, determine the: 13. Cost of sales. A. 8,506,800 B. 8,674,800 C. 8,730,800 D. 8,954,800

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

14. Net income. A. 589,000 B. 813,000 C. 869,000 D. 1,037,000 15. Total assets. A. 19,529,000 B. 19,697,000 C. 19,249,000 D. 19,473,000 Solution: 13 – Cost of sales a.

Determine the cost of sales per separate books.

Inventories–January 1 Purchases from outsiders Net shipments to branches Net shipments from main office Unrecorded shipment returns at cost* Inventories–December 31** Cost of sales

Main 1,120,000 9,500,000 (4,724,000) – 224,000 (1,784,000) 4,336,000

Branch Y 680,000 450,000 – 3,150,000 – (1,505,000) 2,775,000

Branch Z 760,000 145,000 – 2,475,000 – (840,000) 2,540,000

*This represents the cost equivalent of the difference in branch Y per main office books and home office account per branch books, and the difference between net shipments to branches per main office books and the net shipments from main office per the two branches’ books. Inventories are carried in the main office books at cost. **Remember that the inventories of the main office should include the shipment in transit. Also, the shipment in transit should be removed in the amount of the inventories of Branch Y (as provided in item d) at the billed price of = P280,000, since the count happened on December 28 and the shipment was made the day after. b.

Determine the overvaluation in branches’ cost of sales Loading in branch per books Overvaluation on unrecorded shipment in transit Overvaluation in branch ending inventories Branch Y [(1,505,000 – 125,000) x 25/125] Branch Z [(840,000 – 40,000) x 25/125]

c.

1,412,200 (56,000) (276,000) (160,000) 920,200

Determine the cost of sales to be reported. Combined COS per books Overvaluation Combined COS per external financial statements

14 – Net income

Sales Sales discount (item C) Cost of sales Expenses Per trial balance Unrecorded debit memo by Branch Z* Combined net income

Combined 13,150,000 (5,000) (8,730,800) (3,566,200) (35,000) 813,000

9,651,000 (920,200) 8,730,800

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

*A reconciliation of reciprocal accounts will reveal:

Reciprocal account Unrecorded transactions Debit memo (squeezed) Collections by Branch Y Adjusted balance

Main office books 1,465,000

Branch Z books 1,675,000

1,465,000

35,000 (245,000) 1,465,000

15 – Total assets Solution A:

Cash (3,200,000 + 350,000 + 680,000) Receivables (4,870,000 + 580,000 + 950,000) Unrecorded credit memo from Branch Y Inventories Main office Branch Y (1,505,000 – 276,000) Branch Z (840,000 – 160,000) Fixed assets Total assets

Combined 4,230,000 6,400,000 (250,000) 1,784,000 1,229,000 680,000 5,400,000 19,473,000

Solution B: Combined 4,760,000 6,500,000 5,000,000 3,200,000 813,000 (800,000) 19,473,000

Accounts payable Long-term det Capital stock Retained earnings Combined net income Dividends paid Total assets

Problem 16 to 18. After completing the purpose for which the partnership was established, Blow, Plow, and Glow voted to dissolve their partnership and liquidate by selling its other assets. A balance sheet and the residual profit and loss sharing percentages are as follows: Cash Blow, loan Other assets

= P

2,200,000 300,000 2,200,000

Total assets

= P

4,700,000

Accounts payable Plow, loan Glow, loan Blow, capital (30%) Plow, capital (50%) Glow, capital (20%) Total liabilities and equity

= P

= P

2,000,000 1,000,000 100,000 1,060,000 (50,000) 590,000 4,700,000

Situation 1 – Assume that other assets were sold as follows: (1) half at a markup of 20% above its carrying amount, and (2) one-fourth at a discount of 75% of its carrying amount. Further, proceeds were used to settle ninety per cent of the accounts payable for P =1,700,000. Situation 2 – Assume that Partner Plow invested P =30,000 from his excess personal assets to cure a portion of his deficiency. Partner Blow received = P148,000. Situation 3 - Assume that Plow’s capital deficit and Glow’s capital credit after the first distribution amounted to = P160,000 and = P198,000, respectively after the partnership incurred liquidation expenses of = P20,000 and net losses on sale. The partnership settled 75% of the accounts payable at face value. 16. Under the third situation, how much is the total unpaid liabilities of the partnership after available cash was distributed to all partners? A. 500,000 B. 1,155,000 C. 1,405,000 D. 1,505,000

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

17. Under the first situation, at the first distribution, Glow received payment for his capital balance at an amount of: A. 461,500 B. 501,500 C. 516,500 D. 561,500 18. Under the second situation, how much is the combined losses from sale and write-off? A. 1,970,000 B. 2,000,000 C. 2,040,000 D. 2,070,000 Solution: 16 – Situation 3 Since Plow’s capital balance is still a deficit even after the distribution, it means that no distributions were made out of his capital, and he only suffered losses from liquidation. Plow (50,000) (10,000) (100,000) (160,000)

Capital prior to liquidation Share in liquidation expense Share in net losses on sale (squeezed) Deficit after first distribution

Hence, the losses on sale incurred by the entire partnership was P =200,000 (100,000/50%). Next, let’s determine the amount distributed to Partner Glow. Glow Capital prior to liquidation 590,000 Share in liquidation expense (4,000) Share in net losses on sale (40,000) Capital distribution (squeezed) (348,000) Capital after first distribution 198,000 If Partner Glow received cash out from his capital, that means all his loans were also paid out. Hence, total cash distributed to Partner Glow would be = P448,000. Next, we determine the amount distributed to Partners Blow and Plow. We first compare the net interest of Glow versus the cash distributed to get his share in the net loss and absorption of deficit. We distribute the difference of = P242,000 using the profit or loss ratio to determine the cash payments to other partners.

Net interest Net loss Cash payments

Blow 760,000 (363,000) 397,000

Plow 950,000 (605,000) 345,000

Then, we determine the total liabilities.

Unpaid AP to third parties (25%) Unpaid loan from Plow (1,000,000 – 345,000) Unpaid liabilities

Glow 500,000 655,000 1,155,000

Glow 690,000 (242,000) 448,000

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ARC – ACCOUNTANCY REVIEW CENTER

AFAR | FIRST PREBOARD EXAMINATION

17 – Situation 1 a.

Determine available cash for distribution. Cash, beginning Proceeds from sale of other assets First half (1,100,000*1.20) Second half (550,000 x 25%) Actual payment of liabilities Cash withheld for remaining liabilities

2,200,000 1,320,000 137,500 (1,700,000) (200,000) 1,757,500

b.

Compare with net interest of partners in the partnership. Net interest of partners amount to = P2,400,000 (capital and loans). Total loss is P =642,500.

c.

Determine cash payments to partners.

Net interest Total loss (642,500) Cash payments

Blow 760,000 (192,750) 567,250

Plow 950,000 (321,250) 628,750

Glow 690,000 (128,500) 561,500

If Glow received = P561,500, this shall be first applied to his P =100,000 loans. The remainder of = P461,500 will be charged for his capital balance.

18 – Situation 2 First compare the cash received by Blow versus its net interest. The difference will be grossed up to determine the total loss and will be allocated to ot...