Re SA B42 AFAR Final PB Exam Questions Answers Solutions PDF

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ReSA The Review School of Accountancy ADVANCED FINANCIAL ACCOUNTING & REPORTING Final Pre-Board Examination

27 September 2021 1:00 P.M.– 4:00 P.M.

MULTIPLE CHOICE INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by shading the box corresponding to the letter of your choice on the sheet provided. STRICTLY NO ERASURES ARE ALLOWED. Use pencil no. 2 only. Use the following information for question 1 and 2: CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x4, just before the admission of DD, show the following balances: Cash …………………………………………………………………………………………………………………… P 6,800 Accounts receivable …………………………………………………………………………… 14,200 Merchandise inventory ……………………………………………………………………… 20,000 Accounts payable …………………………………………………………………………………… 8,000 CC, capital ………………………………………………………………………………………………… 33,000 It is agreed that for purposes of establishing CC’s interest the following adjustments shall be made: a. An allowance for doubtful accounts of 3% of accounts receivable is to be established. b. The merchandise inventory is to be valued at P23,000. c. Prepaid salary expenses of P600 and accrued rent expense of P800 are to be recognized. 1. DD is to invest sufficient cash to obtain a 1/3 interest in the partnership. CC’s adjusted capital before the admission of CC: a. P28,174 c. P35,374 b. P35,347 d. P36,374 2. The amount of cash investment by DD: a. P11,971 c. b. P14,087 d.

P17,687 P18,487

3. A vertical combination occurs when one entity acquires another entity which has the following characteristic(s)? a. The acquiree purchases the acquirer’s outputs b. The acquiree is a competitor of the acquirer c. The acquiree supplies raw materials to the acquirer d. Either a. or c. 4. Which of the following is not a business combination? a. Statutory amalgamation b. Joint venture c. A company's purchase of 100% of another company's net assets d. A company's purchase of 80% of another company's voting shares 5. A parent buys 32 percent of a subsidiary in one year and then buys an additional 40 percent in the next year. In a step acquisition of this type, the original 32 percent acquisition should be a. maintained at its initial value. b. adjusted to its equity method balance at the date of the second acquisition. c. adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded. d. adjusted to fair value at the date of the second acquisition with a resulting adjustment to additional paid-in capital. 6. CC, PP, and AA, accountants agree to form a partnership and to share profits in the ratio of 5:3:2. They also agreed that AA is to be allowed a salary of P28,000, and that PP is to be guaranteed P21,000 as his share of the profits. During the first year of operation, income from fees are P180,000, while

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expenses total, P96,000. What amount of net income should be credited to each partner’s capital account? a. CC, P28,000; PP, P16,800; AA, P11,200 b. CC, P25,000; PP, P21,000; AA, P38,000 c. CC, P24,000; PP, P22,000; AA, P38,000 d. CC, P25,000; PP, P21,000; AA, P39,000 7. The capital accounts for the partnership of LL and MM at October 31, 20x5 are as follows: LL, capital ………………………………………………………………………………………………………………… P 80,000 MM, capital ………………………………………………………………………………………………………………… 40,000 P 120,000 The partners share profits and losses in the ratio of 3:2 respectively. The partnership is in desperate need of cash, and the partners agree to admit NN as a partner with one-third in the capital and profits and losses upon his investment of P30,000. Immediately after NN’s admission, what should be the capital balances of LL, MM and NN respectively, assuming bonus is to be recognized? a. P50,000; P50,000; P50,000. c. P66,667; P33,333; P50,000. b. P60,000; P60,000; P60,000. d. P68,000; P32,000; P50,000. 8. On June 30, 20x5, the condensed balance sheet for the partnership of DD, FF, and GG, together with their respective profit and loss sharing percentages was as follows: Assets, net of liabilities ……………………………………………………………………… P320,000 DD, capital (50%) ……………………………………………………………………………………………… P160,000 FF, capital (30%) ……………………………………………………………………………………………… 96,000 GG, capital (20%) ……………………………………………………………………………………………… __64,000 P320,000 DD decided to retire from the partnership and by mutual agreement is to be paid P180,000 out of partnership funds for his interest. Total goodwill or adjustment in assets implicit in the agreement is to be recorded. After DD’s retirement, what are the capital balances of the other partners? FF GG FF GG a. P 84,000 P56,000 c. P108,000 P72,000 b. 102,000 68,000 d. 120,000 80,000 9. A balance sheet for the partnership of KK, LL, and MM, who share profits 2:1:1 respectively, shows the following balances just before liquidation: Cash Other Assets Liabilities KK, Capital P48,000 P238,000 P80,000 P88,000

LL, Capital P62,000

MM, Capital P56,000

In the first month of liquidation, P128,000 was received on the sale of certain assets. Liquidation expenses of P4,000 were paid, and additional liquidation expenses of P3,200 are anticipated before liquidation is completed. Creditors were paid P22,400. Available cash is distributed to the partners. The cash to be received by each partner based on the above data: (Q1-20) a. KK, P56,600; LL, P28,300; MM, P28,300 b. KK, P86,000; LL, P61,000; MM, P55,000 c. KK, P29,400; LL, P32,700; MM, P26,700 d. KK, P88,000; LL, P62,000; MM, P56,000 10. Second City Bank holds a P50,000 note secured by a building owned by Desk Drawer Software, which has filed for bankruptcy under the Insolvency Law. If the property has a book value of P60,000 and a fair market value of P45,000, what is the best way to describe the note held by Second City Bank? The bank has: (Q1-17) a. A secured claim of P50,000 b. An unsecured claim of P50,000 c. A secured claim of P45,000 and an unsecured claim of P5,000 d. A secured claim of P5,000 and an unsecured claim of P45,000

AFAR – FINAL PRE-BOARD EXAMINATION (BATCH 42)

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11.Which of the following describes the impact on consolidated financial statements of upstream and downstream transfers? a. No difference exists in consolidated financial statements between upstream and downstream transfers. b. Downstream transfers affect the computation of the non-controlling interest’s share of the subsidiary’s income but upstream transfers do not. c. Upstream transfers affect the computation of the non-controlling interest’s share of the subsidiary’s income but downstream transfers do not. d. Downstream transfers can be ignored because the parent company makes them. 12. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. In the year of the downstream sale. II. Over the period of time the subsidiary uses the land. III. In the year the subsidiary sells the land to an unrelated party. a. I c. III b. II d. I or II 13. A joint arrangement is established by three parties in which A owns 50% voting rights while B and C each own 25% voting rights of that arrangement. The terms of the contract among A, B and C state that a minimum of 75% voting rights are needed to exercise the control over the arrangement. This joint arrangement is: a. Joint Control c. Business Combination b. No Joint Control d. Statutory Consolidation 14. Trial balances for the home office and the branch of the Helen Company show the following accounts on December 31, 20x7. The home office policy of billing the branch for merchandise is 20% above cost. Home Office Branch Allowance for overvaluation of branch merchandise P 10,800 Shipments to branch 24,000 Purchases (outsiders) P 7,500 Shipments from home office 28,800 Merchandise inventory, January 1, 2012 45,000 What part of the branch inventory as of January 1, 20x7 represents purchases from outsiders and what part represents goods acquired from the home office? Outsiders Home Office a. P12,000 P33,000 b. P16,500 P28,500 c. P15,000 P30,000 d. P 9,000 P36,000 15. Charito Corporation retails merchandise through its home office store and through a branch store in a distant city. Separate ledgers are maintained by the home office and the branch. The branch store purchases merchandise from the home office (at 120% of home office cost), as well as from outside suppliers. Selected information from the December 31, 20x9 trial balances of the home office and branch is as follows:

Sales Shipments to branch Purchases Inventory, January 1, 20x9 Shipments from home office Expenses Branch inventory allowance

Home Office P 120,000 16,000 70,000 40,000 28,000 7,200

AFAR – FINAL PRE-BOARD EXAMINATION (BATCH 42)

P

Branch 60,000 11,000 30,000 19,200 12,000 -

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Additional information: • The entire difference between the shipment account is due to the practice of billing the branch at cost plus 20%. • The December 31, 20x9 inventories are P40,000 and P20,000 for the home office and the branch, respectively. (The branch purchased 16% of its ending inventory from outside suppliers.) • Branch beginning and ending inventories include merchandise acquired from the home office as well as from outside suppliers. Merchandise acquired from home office is inventoried at 120% of home office cost. Compute the: Overvaluation of Adjusted Cost of Goods Sold Branch Net Income a. P 4,400 P 50,200 b. 2,800 10,600 c. 7,200 15,000 d. 4,400 12,200 16. The Boy George Company acquired the net assets of the Girl Conrad Company on January 1, 20x9, and made the following entry to record the purchase: Current Asset……………………………………………………………………………… 100,000 Equipment ……………………………………………………………………………………… 150,000 Land …………………………………………………………………………………………………… 50,000 Buildings ……………………………………………………………………………………… 300,000 Goodwill ………………………………………………………………………………………… 100,000 Liabilities ……………………………………………………………… 80,000 Common stock, P 1 par …………………………………… 100,000 Paid-in capital in excess of par ………… 520,000 Assuming, that additional shares would be issued on January 1, 20x9 to compensate for any fall in the value of Boy George common stock below P16 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20x9. The fair price of the shares on January 1, 20x9 was P10. What is the additional number of shares issued on January 1, 20x9 to compensate for any fall in the value of the stock? a. 160,000 c. 60,000 b. 100,000 d. 10,000 17. Using the same information in No. 16, what is the amount of paid-in capital in excess of par on January 1, 20x9 immediately after the additional shares were issued? a. P520,000 c. P420,000 b. P460,000 d. No effect. 18. Corin, a private limited company, has acquired 100% of Coal, a private limited company, on January 1, 20x8. The fair value of the purchases consideration was 10 million ordinary shares of P1 of Corin, and the fair value of the net assets acquired was P7 million. At the time of the acquisition, the value of the ordinary shares of Corin and the net assets of Coal were only provisionally determined. The value of the shares of Corin (P11 million) and the net assets of Coal (P7.5 million) on January 1, 20x8, were finally determined on November 30, 20x8. However, the directors of Corin have seen the value of the company decline since January 1, 20x8, and as of February 1, 20x9, wish to change the value of the purchase consideration to P9 million. What value should be placed on the purchase consideration and assets of Coal as at the date of acquisition? a. Purchase consideration P10 million, net asset value P7 million. b. Purchase consideration P11 million, net asset value P7.5 million. c. Purchase consideration P9 million, net asset value P7.5 million. d. Purchase consideration P11 million, net asset value P7 million. 19. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded 1. on the subsidiary's books. 2. on the parent's books. 3. on the consolidated statements workpaper. a. 1 c. 3 b. 2 d. Both 2 and 3

AFAR – FINAL PRE-BOARD EXAMINATION (BATCH 42)

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20. Other not-for-profit entity" (ONPO) provide three financial statements. Which of the following is NOT one among them? a. A statement of functional expenses c. A statement of activities b. A statement of financial position d. A statement of cash flows 21.Voluntary health and welfare organizations must present a. A separate statement showing expenses by both function and natural classification. b. A separate statement showing expenses by function. c. A separate statement showing expenses by natural classification. d. Expenses by natural classification in the statement of activities. e. None of the above. 22. Partial satisfaction of a multiple performance obligation is reported on the statement of financial position as a. contract liability. c. contract asset. b. receivable. d. unearned service revenue. 23.Philippine based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates? Direct Exchange Rate Indirect Exchange Rate Increases Decreases Increases Decreases a. NA NA NA NA b. Loss Gain Gain Loss c. Loss Gain NA NA d. Gain Loss Loss Gain Items 24 and 25 are based on the following items: 24. Bell Corporation purchases all of the outstanding stock of Stockdon Corporation for P220,000 in cash on January 1, 2020. On the purchase date, Stockdon Corporation has the following condensed balanced sheet: Assets Liabilities and Equity Cash P 60,000 Liabilities P 150,000 Inventory 40,000 Common stock, P10 par 100,000 Land 120,000 Paid-in capital in Building (net) 180,000 excess of par 50,000 _________ Retained earnings 100,000 Total Assets P 400,000 Total Liab. & Equity P 400,000 An excess of book value over cost is attributable to the building, which is currently overstated on Stockdon’s books. All other assets and liabilities have book values equal to fair values. The building has an estimated 10-year life with no salvage value. The trial balances of the two companies on December 31, follows: Bell Cash P 180,000 Inventory 60,000 Land 120,000 Building (net) 600,000 Investment in Stockdon Corp. 220,000) Accounts payable ( 405,000) Common stock, P3 par ( 300,000) Common stock, P10 par Paid-in capital in excess of par ( 180,000) Retained earnings, January 1, 2020 ( 255,000) Sales ( 210,000) Cost of goods sold 120,000 Other expenses 45,000 Dividends declared ____5,000 Total P -0Compute the consolidated net income on December 31, 2020: a. P 43,000 c. P 95,000 b. P 45,000 d. P293,000 25. The consolidated retained earnings on December 31, 2020: a. P293,000 c. P355,000 b. P295,000 d. P395,000

AFAR – FINAL PRE-BOARD EXAMINATION (BATCH 42)

2020, appear as

P

Stockdon 143,000 30,000 120,000 162,000 ( 210,000)

( 100,000) ( 50,000) ( 100,000) ( 40,000) 35,000 10,000 ___________ P -0-

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Items 26 and 27 are based on the following information: Income statement information for the year 20x6 for Perfect Corporation and its 60% owned subsidiary, Seven Corporation, is as follows: Perfect Seven Sales …………………………………………………… P900,000 P350,000 Cost of Sales………………………………… 400,000 250,000 Gross profit ……………………………… P500,000 P100,000 Operating expenses ………………… 250,000 50,000 Seven’s net incomes ……………… P50,000 Perfect’s separate income…… P250,000 Intercompany sales for 20x6 are upstream (from Seven to perfect) and total P100,000. Perfect’s December 31, 20x5 and December 31, 20x6 inventories contain unrealized profits of P5,000 and P10,000, respectively. 26. The Consolidated cost of sales for 20x6: a. P 545,000 c. P 555,000 b. 550,000 d. 560,000 27. The profit attributable to Equity Holders of parent or CNI Contributable to Controlling Interests for 20x6: a. P 277,000 c. P 282,000 b. 280,000 d. 305,000 Items 28 and 29 are based on the following information: Silver Corporation is a 90% owned subsidiary to Proto Corporation acquired several years ago at book value equal to fair value. For the years 20x5 and 20x6, Proto and Silver report the following: 20x5 20x6 Proto’s separate income……… P300,000 P400,000 Silver’s net income………………… 80,000 60,000 The only intercompany transaction between Proto and Silver during 20x5 and 20x6 was the January 1, 20x5 of land. The land had a book value of P20,000 and was sold intercompany for P30,000, its appraised value at the time of sale. 28. If the land was sold by proto to Silver (downstream sales) and that Silver still owns the land at December 31, 20x6, compute the Profit Attributable to Equity Holders of Parent or CNI Attributable to Controlling Interests for 20x5 and 20x6: 20x5 20x6 20x5 20x6 a. P363,000 P454,000 c. P372,000 P460,000 b. 362,000 454,000 d. 362,000 460,000 29. Except that the land was sold by Silver to Proto (upstream sales) and proto still owns the land at December 31, 20x6, compute the Profit Attributable to Equity Holders of Parent or CNI Attributable to Controlling Interests for 20x5 and 20x6: 20x5 20x6 20x5 20x6 a. P363,000 P454,000 c. P370,000 P460,000 b. 362,000 454,000 d. 363,000 460,000 30. LL Corporation owns a foreign subsidiary with 2,600,000 local currency units (LCU) of property, plant, and equipment before accumulated depreciation on December 31, 20x4 of this amount. 1,700,000 LCU were acquired in 20x2 when the rate of exchange was 1.5 LCU = P1, and 900,000 LCU were acquired in 20x3 when the rate of exchange was 1.6 LCU = P1. The rate of exchange in effect on December 31, 20x4, was 1.9 LCU = P1. The weighted average of exchange rates that were in effect during 20x4 was 1.8 LCU = P1. Assuming that the property, plant, and equipment are depreciated using the straightline method over a 10-year period with no salvage value. How much depreciation expense relating to the foreign subsidiary’s property, plant, and equipment should be charged in LL’s statement of income for 20x4?

AFAR – FINAL PRE-BOARD EXAMINATION (BATCH 42)

ReSA: The Review School of Accountancy a. b. c. d.

Functional Currency – LCU P144,444 P144,444 P169,583 P169,583

Page 7 of 23 Functional Currency is Peso P169,583 P144,444 P144,444 P169,583

31. On January 1, 20x4, PP Company formed a foreign subsidiary. On February 15, 20x4, PP’s subsidiary purchased 100,000 local currency units (LCU) of inventory. Of the original inventory purchased on February 15, 20x4, 25,000 LCU made up the entire inventory on December 31, 20x4. The exchange rates were 2.2 LCU= P1 from January 1, 20x4, to June 30, 20x4, and 2 LCU = P1 from July 1, 20x4, to December 31, 20x4. The December 31, 20x4, inventory balance for PP’s foreign subsidiary should be restated in pesos in the amount of: Functional Currency – LCU Functional Currency is Peso a. P12,500 P11,364 b. P12,500 P12,500 c. P11,364 P12,500 d. P11,364 P11,364 32. Which of the following is true of the financial statement presentation of gains/losses from cash flow hedges and fair value hedges? Cash flow hedge Fair value hedge gains/losses are reported in: gains/losses are reported in: a. current earnings Other Comprehensive Income b. current earnings current earnings c. Other Comprehensive Income current earnings d. Other Comprehensive Income Other Comprehensive Income 33. A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year is the appropriate exchange rate for translating a. b. c. d.

Wages Expense Yes Yes No No

Wages Payable Yes No Yes No

34. In preparing the financial statements of the home off...