THEORY OF ACCOUNTS

1. Which is not the characteristic of using IFRS?

A. Transparency

B. Lowering operational risks

C. Comparability

D. Financial improvement

 2. Which is not the step of developing IFRS in the process?

 A. The IASB and Staff set an agenda of possible issues to be addressed by IFRS.

B. A discussion paper (DP) is prepared only for IASC committee review.

C. After considering all comments and additional proposals to its DP, the board may issue an exposure draft (ED)

 D. IASB may publish a final IFRS to be considered for adoption in the various jurisdictions

 3.      Which one is incorrect?

  Full IFRS IFRS for SMEs

A Always amortize goodwill and indefinite-life
intangibles.  not be amortized
B Borrowing costs on qualifying assets must be
capitalized. Other borrowing costs are
expensed.
C Research costs are expensed. Development
costs must be capitalized and amortized if
criteria are met.
D Residual value, useful life and depreciation
method are reviewed annually as part of
impairment tests.
An intangible with an indefinite life shall
All borrowing costs are expensed when
incurred.
Research and development costs are
expensed when incurred.
Residual value, useful life and depreciation
method are reviewed only if there is an
indication of related asset impairment.

 4. Which are two of the conditions that must be met before revenue is to be recognized under IFRS?

A. Persuasive evidence of an arrangement exists, Product or service is able to be delivered

B. Product or service is able to be delivered, Collectability is reasonably assured

C. Persuasive evidence of an arrangement exists, The market of the products or services are well regulated

D. Seller’s price to the buyer is fixed or determinable, Collectability is reasonably assured

 5. Which following statement about fair value is not correct?

A. FV are relevant because they reflect conditions relating to economic resources and obligations, under which
financial statement users will make decisions

B. FV are neutral because they are unbiased

C. Have predictive value because they help predict future cash flows of interest to investors in valuing equity

D. FV can not be consistency, but enhance timely, because they reflect the same type of information every period

 Suggested Answers:

1. B; 2. B; 3. A; 4. D; 5. D

AUDIT OF INVESTMENTS

Question No. 1 is based on the following data: On January 2, 2005, Jack Company purchased 40,000 shares of
Water stock at P100 per share.  Brokerage fees amounted to P120,000.  A P5 dividend per share of Water stock had
been declared on December 15, 2004 to be paid on March 31, 2005 to stockholders of record on January 31, 2005. 
No other transactions occurred in 2005 affecting the investment in Water.

1.  The cost of investment

a.  4,120,000              b.  4,000,000               c.  3,920,000                d.  3,800,000

Question No. 2 is based on the following data: On April 1, 2005, Zeth Company purchased 40% of the
outstanding common stock of Blarke Company for P10,000,000.  On that date, Blarke’s net assets were P20,000,000
and Zeth cannot attribute the excess of cost of its investment in Blarke over its equity in Blarke’s net assets to any
particular factor.  Amortization shall be over a period of 20 years.  Blarke’s net income is P5,000,000.  Zeth plans to
retain its investment in Blarke indefinitely.  Zeth accounts for its investment in Blarke by the equity method.

2.  The  amount   which  could be included in Zeth’s income to reflect the share in net income of Blarke

a.  1,400,000              b.  1,500,000               c.  2,000,000                d.  1,850,000

Question No. 3 is based on the following data: On January 1, 2005, Kim Company purchased 30% interest in Paul
Company for P2,500,000.  On this date, Paul’s stockholders’ equity was P5,000,000.  The carrying amount of Paul’s
identifiable net assets approximated fair values, except for land whose fair value exceeded its carrying amount by
P2,000,000.  Paul reported net income of P1,000,00 for 2005 and paid no dividends.  Kim accounts for its investment
under the equity method.

3.  Carrying amount of the investment in the balance sheet of Kim as at December 31, 2005

a.  2,100,000             b.  2,200,000               c.  2,800,000                d.  2,760,000

Question No. 4 is based on the following data: Sam Inc. bought 40% of Adams Corporation’s outstanding
common stock on January 1, 2005 for P4,000,000.  The carrying amount of Adams’ net assets at the purchase date
totaled P9,000,000.  Fair values and carrying amounts were the same for all items except for plant and inventory, for
which fair values exceeded their carrying amounts by P900,000 and P100,000, respectively.  The plant has an 18-
year life.  All inventory was sold during 2005.  During 2005, Adams reported net income of P1,200,000 and paid a
P200,000 cash dividend.

4.  Sam’s share in the net income of Adams

a.  480,000                  b.  420,000                  c.  360,000                   d.  320,000

Question No. 5 is based on the following data: On July 1, 2005, Miller Company purchased 25% of Wall
Corporation’s common stock and no goodwill resulted from the purchase.  Miller appropriately carries this investment
at equity and the balance in Miller’s investment account was P1,900,000 at December 31, 2005.  Wall reported net
income of P1,200,000 for the year ended December 31, 2005 and paid dividend totaling P480,000 during 2005.

5.  The acquisition cost of Investment in the books of Miller on July 1

a.  1,720,000              b.  2,020,000               c.  1,870,000                d.  2,170,000

Question Nos. 6 to 8 are based on the following data: Grand Company acquired 30% of South Company’s voting
stock for P2,000,000 on January 1, 2005.  Grand’s 30% interest in South gave Grand the ability to exercise significant
influence over South’s operating and financial policies.  During 2005, South earned P800,000 and paid dividends of
P500,000.  South reported earnings of P1,000,000 for the six months ended June 30, 2006 and P2,000,000 for the
year ended December 31, 2006.  On July 1, 2006, Grand sold half of its stock in South for P1,500,000 cash.  South
paid dividends of P600,000 on October 1, 2006.

6.  The  amount   to  be  included  in  the  2005 income statement of Grand as a result of the Investment

a.  150,000                  b.  240,000                  c.  500,000                   d.  800,000

7.  The  carrying amount of the investment in the balance sheet of Grand as at December 31, 2005

a.  2,000,000               b.  2,090,000c.  2,240,000                   d.  2,300,000

8.  The gain on sale of investment on June 30, 2006

a.  245,000                  b.  305,000                  c.  350,000                   d.  455,000

Question No. 9 is based on the following data: On January 1, 2003, Bart Company acquired as a long-term
investment for P7,000,000 a 40% common stock interest in Hall Corporation when the fair value of Hall’s net assets
was P17,500,000. Hall Corporation reported the following net losses:

2003                                5,000,00

2004                                7,000,000

2005                                8,000,000

2006                                4,000,000

On January 1, 2005, Bart Company made cash advances of P2,000,000 to Hall Corporation.  On December 31,
2006, it is not expected that Bart Company will provide further financial support for Hall Corporation.

26.  The amount of loss from investment to be reported in Bart Company’s income statement for 2006

a.  1,600,000               b.  4,000,000               c.  1,000,000                d.  600,000

****************

Suggested Answers:
 1. c
2. b
3. c
4. b
5. c
6. b
7. b
8. b
9. c

ACCOUNTING FOR BONDS

Below are some questions on accounting for long-term notes and bonds.

1. Bond X and bond Y both are issued by the same company. Each of the bonds has a
maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest while
bond Y pays 9% interest. The current market rate of interest is 8%. Which of the following
is correct?
 
A. Both bonds sell for the same amount.
B. Bond X sells for more than bond Y.
C. Bond Y sells for more than bond X.
D. Both bonds sell at a discount.
 2. On January 1, 2011, Legion Company sold $200,000 of 10% ten-year bonds. Interest is
payable semiannually on June 30 and December 31. The bonds were sold for $177,000,
priced to yield 12%. Legion records interest at the effective rate. Legion should report bond
interest expense for the six months ended June 30, 2011, in the amount of: 
A. $8,850
B. $10,000
C. $10,620
D. $12,000
3. On June 30, 2011, Hardy Corporation issued $10 million of its 8% bonds for $9.2
million. The bonds were priced to yield 10%. The bonds are dated June 30, 2011, and
mature on June 30, 2018. Interest is payable semiannually on December 31 and July 1. If
the effective interest method is used, by how much should the bond discount be reduced for
the 6 months ended December 31, 2011? 
A. $32,000
B. $40,000
C. $46,000
D. $60,000
4. On January 1, 2011, an investor paid $291,000 for bonds with a face amount of
$300,000. The contract rate of interest is 8% while the current market rate of interest is
10%. Using the effective interest method, how much interest income is recognized by the
investor in 2012 (assume annual interest payments and amortization)? 
A. $23,280.
B. $25,140.
C. $29,100.
D. $29,610.
 5. Cramer Company sold 5-year, 8% bonds on October 1, 2011. The face amount of the
bonds was $100,000, while the issue price was $102,000. Interest is payable on April 1 of
each year. The fiscal year of Cramer Company ends on December 31. How much interest
expense will Cramer Company report in its December 31, 2011, income statement (assume
straight-line amortization)? 
A. $2,000.
B. $1,900.
C. $1,778.
D. $2,040.
 6. On April 1, 2011, Austere Corporation issued $300,000 of 10% bonds at 105. Each
$1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to
purchase one share of common stock for $17. On that date, the market value of the common
stock was $15 per share and the market value of each warrant was $2. Austere should
record what amount of the proceeds from the bond issue as an increase in liabilities? 
A. $285,000
B. $300,000
C. $315,000
D. $0
Suggested Answers:

1. c
2. c
3. d
4. d
5. b
6. b