Mock Exam AFAR - Mock Exam AFAR - Lecture notes 1 PDF

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____ 1. Eilert Construction Company had a contract starting April 2020, to construct a P21,000,000 building that is expected to be completed in September 2021, at an estimated cost of P19,250,000. At the end of 2020, the costs to date were P8,855,000 and the estimated total costs to complete had not...

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Mock Exam: AFAR

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1. Eilert Construction Company had a contract starting April 2020, to construct a P21,000,000 building that is expected to be completed in September 2021, at an estimated cost of P19,250,000. At the end of 2020, the costs to date were P8,855,000 and the estimated total costs to complete had not changed. The progress billings during 2020 were P4,200,000 and the cash collected during 2020 was P2,800,000. Eilert uses the percentage-of-completion method. For the year ended December 31, 2020, Eilert would recognize gross profit on the building of a. 945,000 b. 737,917 c. 805,000 d. 0

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2. Which of the following statements is incorrect? a. The acquisition analysis will determine whether any goodwill or gain on bargain purchase has arisen as a part of the business combination. b. An acquisition analysis is prepared at the acquisition date to identify the identifiable assets and liabilities of the subsidiary at fair value. c. The business combination valuation reserve is an account recorded in the subsidiary’s records. d. The acquisition analysis may include the recognition of assets and liabilities not recognized in the subsidiary’s records.

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3. Noncontrolling interest in a subsidiary should be labeled and displayed as a separate financial note to the consolidated balance sheet. a. True b. False

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4. The entity theory approach to consolidated statements states the income of the noncontrolling interests is a distribution of the total income of the consolidated entity. a. True b. False

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5. On August 5, 2020, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was P350 each. The cost of shipping the dining sets amounted to P1,800 and was paid for by Famous Furniture. On December 30, 2020, the consignee reported the sale of 15 dining sets at P850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of P300, and installation and setup costs of P390. The total profit on units sold for the consignor is a. 4,695 b. 6,045 c. 11,295 d. 9,945

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Mock Exam: AFAR

On January 1, 2020, a nonprofit organization received a P1,000,000 cash donation from a donor who stipulated that the amount should be invested indefinitely in revenue-producing investment. The deed of donation also provided that the dividend income shall be used for the acquisition of computers of the nonprofit organization. On December 31, 2020, the nonprofit organization received P100,000 cash as dividend income from the investment of the fund. On January 1, 2021, the nonprofit organization acquired a computer at the cost of P20,000 with a useful life of 5 years without residual value. ____

6. In the statement of activities of the NPO for the year ended December 31, 2020, which of the following is the proper effect of the transactions? a. Increase in temporarily restricted net assets by P100,000. b. Decrease in temporarily restricted net assets by P20,000. c. Increase in unrestricted net assets by P16,000. d. Increase in unrestricted net assets by P1,000,000.

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7. Hamilton Insurance Company issues one year, motor/vehicle insurance for a total premium of P15,000. If it was issued on January 1, 2020, how much is the earned portion for the month ended January 31, 2020? a. 14,375 b. 10,375 c. 4,175 d. 625

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8. Revenue from a contract with a customer a. cannot be recognized until a contract exists. b. is recognized even if the contract is still wholly unperformed. c. is recognized when the customer receive the rights to receive consideration. d. can be recognized even when a contract is still pending.

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9. Pete purchased 100% of the common stock of the Sanburn Company on January 1, 20X1, for P500,000. On that date, the stockholders' equity of Sanburn Company was P380,000. On the purchase date, inventory of Sanburn Company, which was sold during 20X1, was understated by P20,000. Any remaining excess of cost over book value is attributable to patent with a 20-year life. The reported income and dividends paid by Sanburn Company were as follows:

Net income Dividends paid

20X1 P80,000 10,000

20X2 P90,000 10,000

Using the full equity method, which of the following amounts are correct? a. Investment income in 20x1 (P75,000); Investment account balance in December 31, 20x1 (P565,000) b. Investment income in 20x1 (P80,000); Investment account balance in December 31, 20x1 (P570,000) c. Investment income in 20x1 (P55,000); Investment account balance in December 31, 20x1 (P555,000) d. Investment income in 20x1 (P55,000); Investment account balance in December 31, 20x1 (P545,000) ____ 10. Which of the following is a form of barter? a. Countertrade. b. Consignment. c. Forfaiting. d. Cross-border factoring. ____ 11. Hamilton Insurance Company issues one year, motor/vehicle insurance for a total premium of P15,000. If it was issued on April 5, 2020, how much is the unearned portion for the month ended April 30, 2020? a. 4,175 b. 625 c. 14,375 d. 10,625 ____ 12. In the case of hedging transactions designated as a hedge of net investment in a foreign operation, which of the following statements is correct? a. The portion of the gain or loss on the hedging instrument/derivative designated as a hedge of net investment in foreign operation that is determined to be an effective hedge shall be recognized in other comprehensive income. b. The ineffective portion of the gain or loss on the hedging instrument/derivative designated as a hedge of net investment in foreign shall be recognized in profit or loss. c. Both A and B. d. Neither A or B ____ 13. Revenue for sales-based royalty payments should be recognized a. on the date the performance obligation is satisfied. b. on the date, payment is received by the franchisor. c. on the date, the contract was signed. d. when the amount of sales can be determined NICE Online Review

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Mock Exam: AFAR

____ 14. Consider the following economic entity structure:

The direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI) are which of the following? DNCI in A INCI in A DNCI in B INCI in B Ltd Ltd Ltd Ltd I. 10% Nil 40% 6% II. 10% 14% 40% 6% III. 40% Nil 10% 6% IV. 40% Nil 10% 54% a. b. c. d.

II. III. I. IV.

____ 15. On September 1, 2018, Cano Company, a US corporation, sold merchandise to a foreign firm for 250,000 Botswana pula. Terms of the sale require payment in pula on February 1, 2019. On September 1, 2018, the spot exchange rate was P.20 per pula. On December 31, 2018, Cano’s year-end, the spot rate was P.19, but the rate increased to P.22 by February 1, 2019, when payment was received. How much should Cano report as foreign exchange transaction gain or loss as part of 2019 income? a. P7,500 gain b. P0 c. P2,500 loss d. P5,000 gain

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____ 16. Mason, Inc., is considering four alternative opportunities. Required investment outlays and expected rates of return for these investments are given below. Project A B C D

Investment Cost P200,000 350,000 570,000 390,000

IRR 12.5 14.2 16.5 10.6

The investments will be financed through 40% debt and 60% common equity. Internally generated funds totaling P1,000,000 are available for reinvestment. If the cost of capital is 11%, and Mason strictly follows the residual dividend policy, how much in dividends would the company likely pay? a. 328,000 b. 650,000 c. 430,000 d. 120,000 ____ 17. At the end of any period after acquisition, the business combination entries prepared for the assets and liabilities that were not recorded at fair value at the acquisition date and that are sold, fully depreciated or settled during the current period include: a. adjustments to the gains on the sale or expenses generated by depreciation, amortization or impairment losses, or settlement of liabilities, also recognizing the tax effects. b. adjustments to the asset or liability account, also recognizing the tax effects. c. no adjustments are required. d. adjustments to the asset and liability account and the gains on the sale or to expenses generated by depreciation, amortization or impairment losses, or settlement of liabilities, also recognizing the tax effects. ____ 18. There is no recognition of a deferred tax item in respect to goodwill because it is a residual amount and the recognition of a deferred tax item would: a. decrease the profit on consolidation. b. decrease the carrying amount of goodwill. c. increase the profit on consolidation. d. increase the carrying amount of goodwill. ____ 19. Indirect holdings called connecting affiliates involves a parent and two subsidiaries. a. True b. False

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____ 20. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for P469,000. On that date, the book value of the net assets of Set totaled P500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Inventory Land Equipment (useful life 4 years)

Book Value P100,000 75,000 125,000

Fair Value P120,000 85,000 165,000

The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. During 20X1, Promo reported net income of P200,000, and Set had a net income of P100,000. What is consolidated net income if Promo recognizes income from Set using the full equity method? a. 270,000 b. 300,000 c. 242,000 d. 249,000 ____ 21. The process of preparing consolidated financial statements requires that: a. adjusting journal entries be recorded in the ledger accounts of the subsidiaries only. b. accruals of expenses and revenues are recorded directly into the retained earnings account of the parent entity. c. adjusting journal entries be recorded in the ledger accounts of the parent only. d. no adjustments are made to the individual financial statements or ledger accounts of the entities in the group. ____ 22. Non-controlling interest in a subsidiary entity is entitled to a share of the following items:

Subsidiary’s equity at the acquisition date Changes in the subsidiary’s equity since the acquisition date Changes in the subsidiary’s equity of the current period a. b. c. d.

I Yes

II Yes

III Yes

IV Yes

Yes

No

No

Yes

No

Yes

No

Yes

I. III. IV. II.

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____ 23. On January 1, 20X1, Promo, Inc. purchased 70% of Set Corporation for P469,000. On that date, the book value of the net assets of Set totaled P500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities had book values equal to their fair values except as follows:

Inventory Land Equipment (useful life 4 years)

Book Value P100,000 75,000 125,000

Fair Value P120,000 85,000 165,000

The remaining excess of cost over book value was allocated to a patent with a 10-year useful life. During 20X1, Promo reported a net income of P200,000, and Set had a net income of P100,000. What income from subsidiary did Promo include in its net income if Promo uses the simple equity method? a. 42,000 b. 33,000 c. 100,000 d. 70,000 ____ 24. It refers to the checking account being used by a national government agency for legally restricted expenditures approved by General Appropriation Act and is not being used for cash fund for which the national government agency has been granted fiscal autonomy to use. a. Local Current Account, Bangko Sentral ng Pilipinas b. Local Current Account, Development Bank of the Philippines c. Modified Disbursement System, Regular d. Local Current Account, Land Bank of the Philippines ____ 25. Hamilton Insurance Company issues one year, motor/vehicle insurance for a total premium of P15,000. If it was issued on January 1, 2020, how much is the earned portion for the month ended December 31, 2020? a. 14,375 b. 10,375 c. 625 d. 4,175 ____ 26. Transactions between businesses of different countries, the amounts for receivables and payables are typically denominated in the local currency of either the buying entity or the selling entity. a. False b. True ____ 27. Which of the following will reduce average production costs following a merger? a. A vertical merger. b. A conglomerate merger. c. Net operating losses of an acquired firm. d. The existence of economies of scale.

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____ 28. The benefits of direct foreign investment by multinational corporations include all of the following except a. Improved international understanding. b. Improved earnings opportunities. c. Easier access to scarce resources. d. More expropriation opportunities. ____ 29. The business combination valuation entries are used to recognize: a. the fair value adjustments for assets and liabilities that were recorded in the subsidiary’s accounts at acquisition date based on carrying amounts different from fair value. b. all of the options are correct. c. the fair value of the liabilities not recorded in the subsidiary’s accounts at the acquisition date. d. the fair value of the assets not recorded in the subsidiary’s accounts at the acquisition date. ____ 30. On August 5, 2020, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was P350 each. The cost of shipping the dining sets amounted to P1,800 and was paid for by Famous Furniture. On December 30, 2020, the consignee reported the sale of 15 dining sets at P850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of P300, and installation and setup costs of P390. The total profit on units sold for the consignor is a. 11,295 b. 6,045 c. 4,695 d. 9,945 ____ 31. A letter of credit is a(n) a. Letter by a buyer or seller of goods that credit is due to the other party for defective or returned goods. b. A bank gives credit references. c. A letter is documenting a line of credit on which a customer may draw at its bank d. Engagement by a financial institution to pay drafts or other demands for payment for its customer. ____ 32. Dissolution of a partnership is the change in the relation of partners caused by any partner ceasing to be associated in the carrying on. Which of the following is not an automatic cause of the dissolution of the partnership? a. Incurring partnership loss b. Admission of a new partner c. Death of a partner. d. Retirement of a partner ____ 33. The fair value option for liabilities permits recognition of gains and losses due to changes in the market values. a. False b. True

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____ 34. Which of the following statements about the benefits and costs of mergers is correct? a. The shareholders of acquiring firms substantially benefit from successful takeovers. b. Both shareholders of the acquiring firm and the target firm are required to receive positive returns. c. The shareholders of target firms not acquired substantially benefit. d. The shareholders of target firms that are acquired substantially benefit. ____ 35. Which of the following statements are incorrect with regards to pre-acquisition entries prepared after the acquisition date? a. reverse the transfers between pre-acquisition equity accounts and changes in the investment account that happen in the current period. b. include the pre-acquisition entry prepared at acquisition date adjusted for the effects of all the transfers between pre-acquisition equity accounts and changes in the investment account up to the beginning of the current period. c. are adjusted for the changes in the investment account recognized by the parent in the subsidiary. d. are adjusted for transfers between post- acquisition equity accounts. ____ 36. Changes in equity in the previous periods up to the beginning of the current period that must be identified for the step 2 NCI entry do not include: a. dividends paid/declared. b. changes in retained earnings, adjusted for the impact of BCVR entries on the opening balance of retained earnings. c. changes in share capital. d. transfers to/from reserves. ____ 37. As used in government budgeting, it comprises all the functions and activities devoted to the accomplishment of a major purpose for which a government entity is established a. Budget b. Object c. Program d. Project ____ 38. Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of P320,000. At the acquisition date, the net fair value of Jane Limited’s assets, liabilities, and contingent liabilities was P250,000, including goodwill with a carrying amount of P20,000. The company tax rate is 30%. The unrecorded amount of goodwill that must be recognized on the consolidation worksheet is: a. 90,000 b. 50,000 c. 70,000 d. 15,000

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____ 39. On January 1, 2018, the Department of Public Works and Highways (DPWH) received a P10,000,000 appropriation from the national government for the acquisition of machinery. On February 1, 2018, DPWH received the allotment from the Department of Budget and Management. On March 1, 2018, DPWH entered into a contract with CAT Inc. for the acquisition of the machinery with a price of P8,000,000. On April 1, 2018, DPWH received the Notice of Cash Allocation from the Department of Budget and Management net of 1% withholding tax for income tax of supplier and 5% withholding of Final Tax on VAT of supplier. On May 1, 2018, CAT Inc. delivered the machinery to DPWH. On June 1, 2018, DPWH paid the obligation to CAT Inc. On July 1, 2018, DPWH remitted the withheld income tax and final VAT to BIR. What is the journal entry on March 1, 2018? a. No entry but just posting of ORS (Obligation Request and Status) to appropriate RAOD b. Debit Machinery P8,000,000 and credit Accounts Payable P8,000,000 c. No entry but just posting to appropriate RAPAL and RAOD d. No entry but just posting to appropriate RAPAL ____ 40. The converged standard on revenue recognition a. simplifies revenue recognition practices across entities and industries. b. recognizes and measures revenue based on changes in assets and liabilities c. increases the complexity of financial statement preparation d. reduces the number of disclosures required for revenue reporting. ____ 41. The role of the agent in a Principal-Agent relationship is to a. provide the goods or services for a customer b. arrange for the principal to provide goods or services to a customer. c. market the principal goods and services to prospective customers d. develop and maintain the goodwill of the principal’s customers ____ 42. On January 1, 2020, Red Cross Inc., a non-profit organization, received a P10M cash donation from Richy Rich who stipulated that the amount should be invested indefinitely in revenue-producing investment. The deed of donation also provides that the dividend income shall be used for the acquisition of computers of the NPO. On December 31, 2020, Red Cross Inc. received P200,000 cash as dividend income from the investment of the fund. On January 1, 2021, Red Cross Inc. acquired a personal computer at the cost of P50,000 with a useful life of 5 years without residual value. How shall the cash flows be reported in NPO’s Statement of Cash Flows for the year ended December 31, 2021? a. Cash disbursements for financing activities by P10,000,000. b. Cash disbursements for inv...