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NATIONAL MOCK BOARD EXAMINATION 2017ADVANCED FINANCIAL ACCOUNTING AND REPORTINGCASE 11. Which of the following costs shall be considered as both prime costs and conversion costs? a. Supervisory salaries for manufacturing plant b taxes on manufacturing plant c. Costs of direct materials used un produ...

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NATIONAL MOCK BOARD EXAMINATION 2017 ADVANCED FINANCIAL ACCOUNTING AND REPORTING CASE 1 1.

Which of the following costs shall be considered as both prime costs and conversion costs? a. Supervisory salaries for manufacturing plant b. Property taxes on manufacturing plant c. Costs of direct materials used un production d. Employee benefits earned by machine operators in producing the firm’s product

2.

When a contract outcome cannot be estimated reliably, which action should be taken relative to recognizing revenue? A.Recognize contract revenue and costs by reference to the stage of completion of the contract at the balance sheet date. B.Recognize revenue only when it becomes possible to foresee the outcome of the contract. C. Recognize revenue only to the extent of costs incurred that it is probable will be recoverable. D.None of the above

3.

4.

When treating exchange differences, what is included in income for the period? A.Gains or losses arising when monetary items are settled at amounts different from their carrying value B.Differences arising when monetary items held at the year-end are retranslated at the closing rate C.Exchange differences arising from the translation of a foreign operation previously classified in equity D.A and B E. B and C Which of the following examples of disclosures are required under IAS 27 (Revised)? A.The entity has elected not to prepare consolidated financial statements. The entity measures its investments in subsidiaries at fair value. The fair value was determined in accordance with its quoted price in the London Stock exchange at 31 December 20X1 of 400. B.The entity has elected not to prepare consolidated financial statements. The entity measures its investments in subsidiaries at cost. The summarized financial information for the joint venture is as follows: currents assets – 100; non-current assets – 400; current liabilities – 300, non-current liabilities – 200; revenue – 1,200. C.The entity has elected not to prepare consolidated financial statements. The entity measures its investments in subsidiaries at fair value. The amount of the transactions with its Subsidiary B is 1,300. Trade receivables from Subsidiary B are 200. The borrowings from Subsidiary B amount to 1,100. D.The entity has elected not to prepare consolidated financial statements. The entity measures its investments in subsidiaries and joint ventures at cost. The entity has two subsidiaries (ABC and DEF) and one joint venture (JHG). The subsidiaries are wholly owned whereas the joint venture is owned at 50%. The activities of the subsidiaries and joint venture are real estate.

5.

6.

To which financial statements is IAS 29 applied? A.The primary statements of any entity that reports in the currency of a hyperinflationary economy B.The interim statements of any entity that reports in the currency of a hyperinflationary economy C.The cash flow statements of any entity that reports in the currency of a hyperinflationary economy D.The balance sheet of the parent entity that owns an entity located within a hyperinflationary economy PFRS 3 – Business Combinations does not apply to which of the following? I. Formation of a joint arrangement. II. Combination of entities or businesses under common control. III. Acquisition of an asset or a group of assets that constitute a business. IV. Acquisition by an investment entity of an investment in a subsidiary V. Not-for-profit organizations. a. I, II and III only

b. I, II and IV only

c. I, II, III and V only

d. I, II, III, IV and V

7.

Franchise fees received upon contract signing shall be recognized as income by the franchisor when the following conditions are met, EXCEPT: A.Substantial performance required under the contract is done B.Period of refund for any amount received under the contract has expired C. Franchise operations have earned considerable income to defray franchising expenses D.Collectability of any promissory note arising from the franchise agreement is reasonably assured

8.

Under PFRS 10, what factor/s should an investor consider in assessing whether it has de facto control over an entity? a. Voting patterns at future shareholders meetings

b. Size of the investor’s holding of voting rights relative to the size of dispersion of other vote holders c. Non-voting rights held by the investor or other vote holder 1|P

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d. All of the above. 9.

When will the average process costing method produce the same cost of goods manufactured as the FIFO process costing method? a. When materials are added 100% at the end of the process. b. When materials are added 100% at the beginning of the process. c. When the beg. WIP inventory and ending WIP are equal. d. When there is no beg. WIP inventory.

10.

Group A has acquired the following. Which of the following acquisitions are business combinations under IFRS 3? A.Land and a vacant building from Company B. No processes, other assets or employees are acquired. Group A does not enter into any of the contracts of Company B. B.An operating hotel, the hotel’s employees, the franchise agreement, inventory, reservations system and all “back office” operations. C.All of the outstanding shares in Biotech D, a development stage company that has a license for a product candidate. Phase I clinical trials are currently being performed by Biotech D employees. Biotech D’s administrative and accounting functions are performed by a contract employee. a. All three acquisitions are business combinations under PFRS 3. b. A and B acquisitions are business combinations under PFRS 3. c. A and C acquisitions are business combinations under PFRS 3. d. B and C acquisitions are business combinations under PFRS 3.

11.

Amounts that have been billed by the contractor but are not paid by the customer until the satisfaction of conditions specified in the contract for the payment of such amounts, or until defects have been rectified. a. Advances

12.

c. Retentions

d. Progress billings

HFR Ltd. has a 12% holding in the shares of ABC Ltd. In addition, HFR has, through one of its subsidiaries, an option to buy 13% more shares in ABC. Although the exercise price is in the money, HFR does not have the intention and the financial ability to exercise this option. a. A subsidiary

13.

b. Incentives

b. An associate

c. A join arrangement

d. None of these categories

In reporting a company that is to be liquidated, assets are shown at a. Book value

b. Historical cost

c. NRV

d. Present value using effective rate

14.

Under PFRS 15 (effective January 1, 2018), revenue from contracts with customers a. Is recognized when the customer receive the right to receive consideration b. Is recognized even if the contract is wholly unperformed c. Can be recognized even when a contract is still pending d. Cannot be recognized until a contract exists

15.

Entity A acquired Entity B. On the acquisition date, Entity B had an operating lease as a lessee with a remaining period of two years out of the original four years. Due to significant changes in the market, Entity B is paying less than what you would expect to currently pay for a similar lease. The value of the existing lease based on the current terms is 10,000 and that of a lease based on relative market terms is 13,000. How should Entity A account for this? a. Entity A should disregard this, as this is an operating lease of Entity B and no asset or liability is recognized related to operating leases. b. Entity A determines whether the terms of each operating lease in which Entity B is the lessee are favorable or unfavorable. Entity A should account for the difference between the value of the existing lease terms and the market terms in profit or loss. c. Entity A determines whether the terms of each operating lease in which Entity B is the lessee are favorable or unfavorable. Entity A should recognize an intangible asset separate from goodwill for the favorable portion of the operating lease relative to market terms. d. None of the above.

16.

A partner’s drawing account is, in substance, a. A capital account b. A contra-capital account c. A salary expense account d. A loan account (a loan from the partnership)

17.

Build Company recorded the following costs relating to the project of constructing a factory for a client: project manager costs of 1,000, costs of 1,500 to destroy an existing old factory building, costs of 500 to restore an old factory building, attributable insurance costs of 200, non-reimbursable general administration costs of 200, selling costs of 150, and reimbursable development costs of 200. Which of the following cost elements should not be included in the contract costs according to IAS 11 Construction Contracts? a. Costs relating to the destruction of an existing old factory building of 1,500 and restoration of an old factory building of 500

b. Attributable insurance costs of 200 and general administration costs of 200 2|P

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c. Costs relating to the destruction of an existing old factory building of 1,500, restoration of an old factory building of 500, and general administration costs of 200 d. General administration costs of 200 and selling costs of 150 e. General administration costs of 200, selling costs of 150, and reimbursable development costs of 200 18.

Binfathi Group acquired an 80% interest in Entity B. The consideration for the 80% interest in Entity B was P36,000 in shares in Binfathi and P12,000 in cash. To issue the shares, Binfathi incurred a cost of P2,000 and incurred costs of P1,400 associated with legal fees and the valuation of Entity B. The fair value of the net assets of Entity B amounted to P64,000. How should Binfathi account for this acquisition? a. Binfathi shall book a gain (negative goodwill) through profit or loss of 3,200 related to the acquisition, recognize expenses of 1,400 and deduct from equity 2,000 relative to the cost of issuing the shares. b. Binfathi shall book goodwill as an asset of 200. c. Binfathi shall book a gain (negative goodwill) through profit or loss of 1,200 and recognize the costs of legal fees of 1,400 as expenses in profit or loss. d. Binfathi shall book a gain (negative goodwill) though profit or loss of 3,200 and recognize expenses of 3,400, relative to the costs of issuing shares, paying legal fees and performing the valuation of Entity B, in profit or loss.

19.

Under the cost recovery method of revenue recognition (assuming properly disclosed in the notes to FS), a. Income is recognized immediately b. Income is recognized on a proportionate basis as the cash is received on the sale of the product c. Income is recognized when the cash received from sale of the product is lower than the cost of the product d. Income is recognized when the cash received from sale of the product is higher than the cost of the product

20.

With which of the following disclosure requirements should an entity comply, according to IAS 11, Construction Contracts (Select the incorrect item)? a. The amount of contract revenue recognized as revenue in the period b. The methods used to determine the stage of completion of contracts in progress c. Advances received in cash at the balance sheet date, for each material contract d. The methods used to determine the contract revenue recognized in the period

21.

The “Home Office” ledger account in the accounting records of a branch is best described as: a.

An equity account

b. A revenue account

c.

A liability account

d.

A deferred income account

22.

The consideration transferred in the business combination was P55,000. Transaction costs amount to P1,000. The fair value of the acquiree’s net assets at the acquisition date was P63,000. The acquirer has not yet decided whether to measure the 20% non-controlling interest (NCI) in the acquiree at the NCI’s proportionate share of the fair value of the acquiree’s net assets, which is P12,600, or at the NCI’s fair value, which is P13,000. Does the choice of measuring the NCI impact the determination of goodwill at the acquisition date? a. No, the accounting policy choice for NCI does not impact goodwill at the acquisition date. b. Yes, it does. If the acquirer values the NCI at its proportionate share of the fair value of the acquired business, the goodwill amounts to P4,600; if the acquirer values the NCI at its fair value, then the goodwill amounts to P5,000. c. Yes, it does. If the acquirer values the NCI at its proportionate share of the fair value of the acquired business, the goodwill amounts to P5,600; if the acquirer values the NCI at its fair value, then the goodwill amounts to P6,000. d. No, it does not. However, the accounting policy choice for NCI impacts the fair value of the acquiree’s net assets. If the acquirer values the NCI at its proportionate share of the fair value of the acquired business, the acquiree’s net assets amount to P63,000; if the acquirer values the NCI at its fair value, then the acquiree’s net assets amount to P63,400.

23.

In partnership liquidation, the final cash distribution to the partners should be made in accordance with a. Partners’ profit and loss ratio b. Balances of the partners’ capital accounts c. Ratio of capital contributions by the partners d. Ratio of capital contributions less withdrawals by the partners

24.

Entity A had several business acquisitions during the reporting period and after the reporting period. Entity A will disclose, among other information, the following:    

The name and a description of the acquiree The acquisition date The percentage of voting equity interests acquired The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree

a. These disclosures shall be done for each business combination that occurred in the reporting period only, but are not required for business combinations that occurred after the end of the reporting period. b. These disclosures shall be done for each material business combination that occurred both in the reporting period and after the end of the reporting period, but before the financial statements are authorized for issue. The information is disclosed in aggregate for individually immaterial business combinations.

c. These disclosures are optional for each business combination that occurred both in the reporting period and after the end of the reporting period, but before the financial statements are authorized for issue. 3|P

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d. These disclosures shall be done for each business combination that occurred both in the reporting period and after the end of the reporting period, but before the financial statements are authorized for issue.

25.

Under the installment method of revenue recognition, when interest is charged, each cash collection made after the sale is composed of: a. Cost and profit b. Cost and interest c. Interest and profit d. Cost, interest and profit

26.

Entity A acquired Entity B, which is a material business combination, during the reporting period. Among the assets acquired, trade accounts receivable were provisionally accounted for at fair value of 1,736. Which of the following information shall be provided additionally to the fair value amount of the trade accounts receivable? Select all that apply. I. II. III. IV.

Entity A does not need to disclose any further information. Entity A must disclose that the fair value of the accounts receivable was determined provisionally. Entity A must disclose the nominal value of the accounts receivable. Entity A must disclose the amount of the contractual cash flows that it does not expect to collect.

a. 27.

I, II, III and IV

b. I, II and III only

c.

II, III and IV only

d.

I and II only

Which of the following is/are false? I. When estimating the outcome of cost-plus contracts, it is necessary to be able to predict the total costs, past and future, in order to assess the final profit, and also to make accurate assessments of the stage of completion that has been reached at the balance sheet date. II. In the case of a service provider, inventories (essentially their work in progress) should include profit margins and non-attributable overheads. a.

I only

b. II only

c.

I and II

d.

Both are True

28.

In partnership liquidation, the final cash distribution to the partners should be made in accordance with a. Partners’ profit and loss ratio b. Balances of the partners’ capital accounts c. Ratio of capital contributions by the partners d. Ratio of capital contributions less withdrawals by the partners

29.

In preparing the combined financial statements of the home office and its various branches: a. Both reciprocal and nonreciprocal accounts are combined b. Both reciprocal and nonreciprocal accounts are eliminated c. Reciprocal accounts are eliminated but nonreciprocal accounts are combined d. Reciprocal accounts are combined but nonreciprocal accounts are eliminated

30.

The goodwill resulting from the acquisition of Entity C by Entity B amounts to 50,000. Which disclosures does Entity B provide relating to the goodwill? Select all that apply. I. II. III.

Entity B shall describe the factors that make up the goodwill to be recognized. Entity B shall disclose the total amount of goodwill deductible for tax purposes. Entity B shall disclose the amortization period of goodwill for tax purposes. a. I, II and III

b. I and II only

c.

I and III only

d.

I only

CASE 2 Queen Consolidated Inc.(QCI), a listed company, has 45 million shares on issue (QCI shares experience high trade volumes) and operates in three (3) business segments: real estate business, airline operations and finance business operating in the Philippines (nationwide) with an annual revenue of approximately P120 million (M) and net assets (book value) of approximately P300 M. QCI has 4 directors, quarterly reporting (as required for listed entities) and a December 31 annual year-end reporting date. On the other hand, STAR LAB Inc. (SLI) is a listed company and has 600 million shares on issue (SLI shares experience medium to high trade volumes). SLI operates in the Philippines in two business segments: on-line real estate advertising and home loans. The home loans business operates in two geographic locations within the country which are monitored separately for internal reporting purposes. SLI has annual revenue of approximately P30 M and net assets (book value) of approximately P201 M with 3 directors and a year-end reporting date of June 30. Both QCI and SLI prepare PFRS compliant financial statements. On April 1, 2016, QCI agrees to issue 30 million ordinary shares as consideration for the acquisition of 100% of the issued shares of SLI. As a result, the existing shareholders of SLI will take a 40% ownership interest in the combined entity. The

published price of QCI s ordinary shares as at that date is P28.50 per share. The published price of SLI s ordinary shares as at that date is P1.50 per share. 4|P

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On May 1, 2016, QCI acquires 100% of the issued capital of SLI in exchange for 30 million QCI shares. The published price of QCI’s ordinary shares as at that date is P30 per share. The published price of SLI’s ordinary shar...