Icare FAR First Preboard Examinations Batch 3 PDF

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Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone : (043) 723 8412 Gmail : icarecpareview@gmailFINANCIAL ACCOUNTING AND REPORTINGiCARE Accountancy Review 1 st Open Preboard Examination, Batch 3INSTRUCTIONS: Choose the best answer among the given choices. Policies on academic honesty ...

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No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

: (043) 723 8412 : [email protected]

FINANCIAL ACCOUNTING AND REPORTING iCARE Accountancy Review 1 st Open Preboard Examination, Batch 3 INSTRUCTIONS: Choose the best answer among the given choices. Policies on academic honesty are strictly enforced. 1. Net investment in a direct financing lease is equal to A. Cost of the asset B. Cost of the asset plus initial direct cost paid by the lessor. C. Cost of the asset minus guaranteed residual value. D. Cost of the asset plus unguaranteed residual value. 2. Which of the following statements is correct regarding initial direct costs incurred by the lessor? I. In an operating lease, initial direct costs incurred by the lessor are deferred and allocated over the lease term. II. In a direct financing lease, initial direct costs are added to the net investment in the lease. III. In a sales-type lease, initial direct costs are expensed as component of cost of goods sold. A. I only

B. II only

C. II and III

D. I, II, III

3. On January 1, 2016, Bruce Company acquired a specialized packaging machine for P6,000,000 and leased it for a period of 6 years, after which the machine is to be returned to Bruce. The guaranteed residual value of the packaging machine is P400,000. The lease term is arranged so that a return of 12% is earned by Bruce. The first lease payment is due on January 1, 2016. The PV of 1 at 12% for six periods is 0.51; PV of an annuity in advance of 1 at 12% for six periods is 4.60; and the PV of an ordinary annuity of 1 at 12% for six periods is 4.11. What is the annual lease payment required to yield the desired return? A. 1,260,000

B. 1,304,348

C. 1,410,219

D. 1,459,854

For the next three items: Wamboo Company is a dealer in machinery. On January 1, 2018, a machinery was leased to another company with the following provisions: Annual rental payable at the end of each year Lease term and useful life of machinery Cost of machinery Residual value – unguaranteed Implicit interest rate PV of an ordinary annuity of 1 for 5 periods at 12% PV of 1 for 5 periods at 12%

3,000,000 5 years 8,000,000 1,000,000 12% 3.60 0.57

At the end of the lease term on December 31, 2022, the machinery will revert to Wamboo Company. Wamboo incurred initial direct cost of P300,000 in finalizing the lease agreement.

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

: (043) 723 8412 : [email protected]

4. What amount shall be reported as gross profit on sale in 2018? A. 2,500,000 B. 3,070,000 C. 3,370,000 D. 7,700,000 5. What is the interest income for 2018? A. 926,000 B. 1,296,000

C. 1,364,400

D. 1,400,400

6. What amount should be included in non-current assets in relation to the lease on December 31, 2019? A. 5,850,832 B. 6,000,000 C. 7,902,528 D. 9,000,000 7. A right of use asset is initially measured at A. Cost B. Fair C. Current value cost

D. Present value of expected cash inflows

On January 1, 2019, Nigeria Company entered into a 10-year lease agreement with Falls Company for an office equipment. Annual lease payments of P500,000 are payable at the end of each year. The lessor expected a 10% return on the lease which is the implicit rate in the lease. The equipment is expected to have an estimated useful life of 10 years. In addition, a third party has guaranteed to pay Falls Company a residual value of P250,000 at the end of the lease term. PV of an ordinary annuity of 1 at 10% for 10 periods is 6.14 and the PV of 1 at 10% for 10 periods is 0.39. 8. What is the initial measurement of lease liability on January 1, 2019? A. 3,070,000 B. 3,167,000 C. 5,000,000 D. 5,250,000 9. What is the interest expense for 2019? A. 307,000 B. 316,700

C. 500,000

D. 525,000

10. What amount shall be reported as lease liability on December 31, 2020? A. 2,664,700 B. 2,782,675 C. 2,877,000 D. 2,984,250 11. When temporary difference will result in taxable amounts in future years A. A deferred tax asset is recognized in the current year. B. A deferred tax liability is recognized in the current year. C. A deferred tax asset may be recognized in the current year if certain conditions are met. D. A deferred tax liability may be recognized in the current year if certain conditions are met. For the next three items: Unity Company is in the first year of operations and reported pretax accounting income of P4,000,000. The entity provided the following information for the first year: Premium on life insurance of key officer Depreciation on tax return in excess of book depreciation Interest on municipal bonds Warranty expense Actual warranty repairs Bad debt expense Ending balance in allowance for bad debts Rent received in advance that will be recognized evenly over the next three years

200,000 200,000 50,000 40,000 30,000 60,000 40,000 300,000

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

: (043) 723 8412 : [email protected]

12. What is the deferred tax liability at year-end? A. 60,000 B. 75,000 C. 90,000

D. 105,000

13. What is the deferred tax asset at year-end? A. 45,000 B. 60,000 C. 75,000

D. 105,000

14. What is the total income tax expense for the first year? A. 1,200,000 B. 1,245,000 C. 1,290,000

D. 1,335,000

15. What is the discount rate for pension plans? A. The weighted average interest rate. B. The rate of return on plan assets. C. The market yield at the end of the reporting period for high quality corporate bonds. D. The bank prime interest rate 16. The service cost component of a defined benefit plan comprises all of the following, except A. Past service cost B. Current service cost C. Net interest D. Gain or loss on plan settlement For the next three items: Efron Company provided the following information related to a defined benefit plan for 2018: Current service cost Past service cost Benefits paid Contribution to the fund

60,000 230,000 62,000 42,000

Fair value of plan assets: January 1, 2018 December 31, 2018

4,200,00 4,800,00

Defined benefit obligation January 1, 2018 December 31, 2018

4,400,00 5,000,00

Discount rate Expected rate of return

5% 7%

17. What is the employee benefits expense for the year 2018? A. 230,000 B. 280,000 C. 290,000

D. 300,000

18. What is the remeasurement gain or loss on December 31, 2018? A. 258,000 B. 258,000 loss C. 562,000 gain D. 562,000 loss gain 19. What amount should be reported as prepaid or accrued benefit cost on December 31, 2018? A. 200,000 B. 200,000 C. 300,000 D. 300,000 accrued prepaid accrued prepaid

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

: (043) 723 8412 : [email protected]

20. Flash Company granted all employees two weeks of paid vacation for each full year of employment. Unused vacation time can be accumulated and carried forward to succeeding years and will be paid at the salaries in effect when vacations are taken or when employment is terminated. There was no employee turnover in the current year. Additional information relating to the current year are as follows: Liability for accumulated vacations on January 1, 2018 350,000 Pre-2018 accrued vacations taken from January 1 to September 30, 2018, 200,000 the authorized period for vacations Vacations earned for work in 2018 adjusted to current rate 300,000 The company granted a 10% salary increase to all employees on October 1, 2018, the annual salary increase date. For the year ended December 31, 2018, what amount should be reported as vacation pay expense? A. 300,000 B. 315,000 C. 335,000 D. 45,000 21. Compensation expense resulting from a share option plan is generally A. Recognized in the period of grant. B. Recognized in the period of exercise. C. Allocated to the periods benefited by the employee’s required service. D. Allocated over the periods of the employee’s service life to retirement. 22. For share appreciation rights, the measurement date for computing compensation is the A. Date the rights mature B. Date the share reaches a predetermined amount C. Date of grant D. Date of exercise For the next three items: On January 1, 2018, La Russo Company granted 200 share options each to 1,500 employees, conditional upon the employee’s remaining in the entity’s employ during the vesting period. The share options vest at the end of a four-year period. On grant date, each share option has a fair value of P10. The par value per share is P40 and the option (or exercise) price is P50. On December 31, 2018, 100 employees have left and it is expected that on the basis of a weighted average probability, additional 200 employees will leave before the end of the four-year period. On December 31, 2019, 70 employees have actually left and it is expected that on the basis of a weighted average probability, additional 80 employees will leave before the end of the remaining vesting period. On December 31, 2020, no employees have actually left but it is expected that on the basis of a weighted average probability, 40 employees will leave before the end of the remaining vesting period. On December 31, 2021, 80 employees actually left and all of the share options are exercised on such date. 23. What is the compensation expense for 2019? A. 600,000 B. 650,000 C. 685,000

D. 1,250,000

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

24. What is the compensation expense for 2021? A. 565,000 B. 600,000 C. 650,000

: (043) 723 8412 : [email protected]

D. 685,000

25. What amount shall be credited to share premium upon exercise of the share options on December 31, 2021? A. 2,500,000 B. 5,000,000 C. 7,500,000 D. 10,000,000 For the next two items: On January 1, 2018, Bo Reum Company offered the top management share appreciation rights with the following terms: Pre-determined price Number of share appreciation rights Vesting or service period Exercise date

P50 per share 100,000 3 years January 1, 2021

The share appreciation rights are exercised on January 1, 2021. The share prices are P50, P77, P92, and P103 on January 1, 2018, December 31, 2018, December 31, 2019, and December 31, 2020, respectively. 26. What amount shall be reported as liability under share appreciation rights on December 31, 2019? A. 0 B. 900,000 C. 1,900,000 D. 2,800,000 27. What is the compensation expense for 2020? A. 1,900,000 B. 2,500,000 C. 2,800,000

D. 5,300,000

28. If the qualifying asset is financed by general borrowing, the capitalizable borrowing cost is equal to A. Actual borrowing cost incurred B. Actual borrowing cost incurred minus any investment income from the temporary investment of the borrowing. C. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost, whichever is lower. D. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost, whichever is higher. 29. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is equal to A. Actual borrowing cost incurred. B. Actual borrowing cost incurred up to completion of asset. C. Actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of the borrowing. D. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing cost incurred up to completion of asset minus any investment income from the temporary investment of the borrowing, whichever is lower. For the next three items: Oakley Company had loans outstanding during 2018 and 2019:

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

Specific construction loan General loan

: (043) 723 8412 : [email protected]

2,000,000 10% 25,000,000 12%

The company began the self-construction of a new building on January 1, 2018 and the building was completed on December 31, 2019. Expenditures during 2018 and 2019 were: January 1, 2,000,000 2018 June 30, 2018 4,000,000 November 1, 3,000,000 2018 July 1, 2019 1,000,000 30. What is the cost of the new building on December 31, 2018? A. 9,000,000 B. 9,500,000 C. 9,200,000 D. 9,300,000 31. What is the cost of the new building on December 31, 2019? A. 10,000,000 B. 11,660,000 C. 11,700,000 D. 11,500,000 32. What is the interest expense for 2019? A. 3,000,000 B. 2,040,000 C. 1,840,000 D. 0

33. At the beginning of 2018, JD Company received a grant of P6,000,000 from the Indian government to compensate for massive losses incurred because of a recent tsunami. The grant was made for the purpose of giving immediate financial support to the company. It will take the company two years to reconstruct the structures destroyed by the tsunami. What amount of grant income should be recognized in 2018? A. 6,000,000 B. 3,000,000 C. 1,500,000 D. 0 For the next two items: Jay Company received a government grant of P600,000 related to depreciable asset acquired on January 1, 2018 for P6,600,000. This grant was deducted from the cost of the asset with a useful life of 10 years and residual value of P500,000. On January 1, 2020, the grant became fully repayable due to non-compliance with conditions. 34. What is the depreciation for 2018? A. 600,000 B. 610,000 C. 550,000 D. 660,000 35. What is the depreciation for 2020? A. 610,000 B. 780,000 C. 730,000 D. 600,000 36. An entity shall measure a non-current asset or disposal group classified as held for sale at A. Its carrying amount. B. Fair value less cost to sell.

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TSIY/RSORIANO

No. 125 Brgy. San Sebastian Lipa City, Batangas, Philippines Mobile : 0927 283 8234 Telephone Gmail

C. Lower of carrying amount and fair value less cost to sell.

: (043) 723 8412 : [email protected]

D. Higher of carrying amount and fair value less cost to sell.

37. An entity manufactures and sells household products. The entity experienced losses associated with the small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of the entity’s operations. The entity decided to sell the small appliance group. What is the earliest point at which the entity shall report the small appliance group as a discontinued operation? A. When the entity classified it as held for sale. B. When the entity receives an offer for the segment. C. When the entity first sells any of the assets of the segment. D. When the entity sells the majority of the assets of the segment. For the next three items: On June 1, 2018, Starr Company had an equipment with a cost of P10,000,000 and accumulated depreciation of P7,500,000. On the same date, the entity classified the equipment as held for sale and decided to sell it within one year. The equipment had an estimated selling price of P2,000,000 and a remaining useful life of 4 years. It is estimated that selling cost associated with the disposal of the equipment will be P200,000. On December 31, 2018, the estimated selling price of the equipment had increased to P2,300,000 with estimated cost of disposal of P250,000. 38. What amount of impairment loss should be recognized on June 1, 2018? A. 700,000 B. 500,000 C. 300,000 D. 0 39. What amount should be recognized as gain on reversal of impairment on December 31, 2018? A. 700,000 B. 512,500 C. 250,000 D. 0 40. Assuming the estimated selling price of the equipment on December 31, 2018 had increased to P2,800,000 with estimated cost of disposal of P200,000, what amount should be recognized as gain on reversal of impairment on December 31, 2018? A. 1,062,500 B. 962,500 C. 800,000 D. 700,000 Misua Company, a parent company, approved on December 1, 2017 a plan to sell a subsidiary. The sale is expected to be completed on March 31, 2018. The year-end is December 31, 2017 and the financial statements were approved on March 1, 2018. The subsidiary had net assets with carrying amount of P10,000,000 including goodwill of P500,000 on December 31, 2017. The subsidiary made a loss of P1,000,000 during the first quarter of 2018 and is expected to make further loss of P500,000 up to the date of sale. At the date of approval of the financial statements, the company was in negotiation for the sale of the subsidiary but no contract had been signed. The company expected to sell the subsidiary for P9,500,000 and to incur cost to dispose of P2,000,000. The value-inuse of the subsidiary was estimated to be P11,000,000. 41. On December 31, 2017, what is the measurement of the subsidiary which is considered as a disposal group classified as held for sale? A. 11,000,000 B. 10,000,000 C. 9,500,000 D. 7,500,000

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