Chapter 49

PFRS for Small and Medium-sized Entities (SMEs)

Chapter 49: Multiple choice – Computational (For classroom instruction purposes)

Statement of changes in equity and Statement of income and retained earnings
1. An SME has the following information:
Retained earnings, Jan. 1 2,400
Transactions during the year:
Revenues 5,000
Dividend income 800
Operating and other expenses 3,200
Dividends declared 350

Additional information:
 During the year, the SME changed the cost flow formula for its inventories from the
FIFO method to the weighted average method. Information on the effects of the change
is shown below:
FIFO Average
Jan. 1 3,200 2,600
Dec. 31 5,300 6,400
 It was found out that depreciation in the previous period has been overstated by
₱1,200.

If the SME opts to present a statement of income and retained earnings, the bottom line in
the statement shows an amount equal to
a. 2,600 b. 2,850 c. 4,550 d. 4,050

Financial instruments
Use the following information for the next three questions:
On January 1, 20x0, an entity acquires a bond for ₱1,000, incurring transaction costs of ₱70.
Interest of ₱80 is receivable annually, in arrears, over the next five years starting December
31, 20x0. The bond has a mandatory redemption of ₱1,200 on December 31, 20x4.

2. How much is the initial carrying amount of the bond?

a. 1,070 b. 930 c. 1,000 d. 1,200

3. How much is the interest income in 20x0? (round-off interest rate to two decimal places)
a. 73 b. 84 c. 92 d. 87

4. How much is the carrying amount of the bond on December 31, 20x0?
a. 998 b. 1,093 c. 1,074 d. 1,104
Use the following information for the next three questions:
On January 1, 20x0, an entity issues a bond for ₱900, incurring transaction costs of ₱50.
Interest of ₱40 is payable annually, in arrears, over the next five years starting December
31, 20x0. The bond has a mandatory redemption of ₱1,100 on December 31, 20x4.

5. How much is the initial carrying amount of the bond?

a. 850 b. 950 c. 800 d. 900

6. How much is the interest expense in 20x0? (round-off interest rate to two decimal
places)
a. 94 b. 81 c. 87 d. 93

7. How much is the carrying amount of the bond on December 31, 20x0? (round-off
interest rate to two decimal places)
a. 981 b. 1,003 c. 934 d. 891

Use the following information for the next three questions:

Fact pattern
An SME sells a group of its accounts receivable with carrying amount of ₱1,000,000 and
fair value of ₱1,020,000 to a bank for ₱850,000. The SME continues to handle collections
from the debtors on behalf of the bank, including sending monthly statements, and the
bank pays the entity a market-rate fee for servicing the receivables. The entity is obliged to
remit promptly to the bank any and all amounts collected, but it has no obligation to the
bank for slow payment or non-payment by the debtors.

8. How much of the receivables are derecognized?

a. 1,000,000 b. 850,000 c. 1,020,000 d. 0

9. How much is gain or loss on derecognition?

a. 20,000 b. 170,000 c. 150,000 d. 0

10. Use the fact pattern from the preceding problem except that the SME has agreed to buy
back from the bank any receivables for which the debtor is in arrears as to principal or
interest for more than 120 days. The effect of the transaction is
a. derecognition of receivable
b. recognition of loss equal to ₱150,000
c. non-derecognition of receivable but a liability is recognized for the ₱850,000 cash
receipt.
d. a and b

Investment in associates
Use the following information for the next two questions:
On January 1, 20x1, an SME acquires 20% interest in the equity of another entity for
₱100,000. The interest acquired gives the SME significant influence over the investee.
During the period, the investee reports profit of ₱30,000 and declares dividends of
₱10,000. The fair value of the investment on December 31, 20x1 is ₱110,000. The entity
uses the PFRS for SMEs.

11. Which acceptable accounting model results to the highest carrying amount of the
investment as of December 31, 20x1?
a. Cost model c. Fair value model
b. Equity model d. None of these

12. Which acceptable accounting model results to the highest investment income
recognized in profit or loss in 20x1?
a. Cost model c. Fair value model
b. Equity model d. None of these

Leases
Use the following information for the next two questions:
SME Co. entered into a 5-year operating lease with Lessor, Inc. Annual lease is ₱360,000.
However, subsequent lease payments shall be increased taking into consideration the effect
of general inflation. The consensus forecast by local banks is that the general price level
index, as published by the government, will increase by an average of 10% annually over
the next five years.

13. How much is the rent expense recognized by SME Co. in the second year of the lease?
a. 439,567 b. 435,600 c. 396,000 d. 360,000

14. How much is the rent income recognized by Lessor Inc. in the third year of the lease?
a. 439,567 b. 479,106 c. 435,600 d. 479,160

Use the following information for the next four questions:

SME Co. entered into a 3-year operating lease with Lessor, Inc. Annual lease is ₱100,000.
The lease contract contains a provision for an annual increase in the rent equal to 5%. The
additional rentals are not related to general inflation.

15. How much is the balance of rent payable at the end of the first year of the lease?
a. 5,083 b. 5,938 c. 5,632 d. 0

16. How much is the balance of rent receivable at the end of the second year of the lease?
a. 5,094 b. 5,234 c. 5,167 d. 0

17. How much is the rent expense recognized by SME Co. in the second year of the lease?
a. 105,083 b. 105,000 c. 110,250 d. 150,000

18. How much is the rent income recognized by Lessor Inc. in the third year of the lease?
a. 105,083 b. 110,250 c. 115,763 d. 151,763

Provisions and contingencies

Use the following information for the next two questions:
An SME provides one-year warranty for the products it sells. During the period, the SME
made total sales of 5,000 units. It was estimated that 80% of the units sold may not have
any defects, 12% may have minor defects and 8% may have major defects. A major defect
requires repair costs of ₱100 while a minor defect requires repair costs of ₱20. Actual
repair costs incurred for defective units sold during the year amounted to ₱10,000.

19. How much warranty provision is recognized at year-end?

a. 42,000 b. 52,000 c. 58,000 d. 68,000

20. How much is the warranty expense for the period?

a. 42,000 b. 52,000 c. 68,000 d. 58,000

Revenue
Use the following information for the next two questions:
An SME sells goods in exchange for a ₱340,000 note receivable in two years’ time. The cash
sale price of the goods is ₱280,992. The gross profit rate based on cost on the transaction is
30%. Other operating expenses amounted to ₱50,000.

21. How much is the sale revenue recognized by the SME?

a. 340,000 b. 280,992 c. 64,844 d. 334,156

22. How much is the profit (loss) of the SME?

a. 14,844 b. (14,844) c. 46,988 d. 42,944

Impairment of assets
23. On December 31, 20x1, an SME tests for impairment an equipment which was acquired
8 years ago for ₱1,600,000. The equipment has an originally estimated useful life of 15
years and residual value of ₱100,000.

The fair value of the equipment on December 31, 20x1 is ₱700,000. Costs to sell are
estimated at ₱20,000. The SME makes the following cash flow projections for value in
use computation. The pre-tax discount rate is 12%. Cash flows are expected to occur at
the end of each year.
Year Net cash flows
20x2 180,000
20x3 167,400
20x4 155,682
20x5 144,784
20x6 134,649
20x7 125,224
20x8 116,458

How much is the impairment loss?

a. 110,485 b. 112,746 c. 72,460 d. 65,250
Income tax
Use the following information for the next four questions:
An SME has a pretax profit of ₱18,000 in 20x1. The following were the transactions during
the period.
 A warranty provision of ₱3,000 has been recognized for goods sold during the period.
The amount recognized as a provision is not deductible for tax purposes until it is
actually paid or used.
 Interest receivable of ₱1,000 has been recognized on a note. The interest is taxable only
when actually collected.
 On January 1, 20x1, the SME acquired an equipment for ₱200,000. The asset is being
depreciated on a straight-line basis over 10 years. For tax purposes, the asset is
depreciated over 4 years on a straight-line basis (accelerated tax depreciation).
 Any tax losses are permitted to be carried forward as tax deduction in future periods.
However, the SME expects to use only 40% of any tax losses within the permitted carry
forward period.
 The currently enacted tax rate is 35% while the substantially enacted tax rate for 20x2
and future periods is 30%.
 The SME made quarterly income tax payments during the period for a total of ₱50,000.
 There are no temporary differences as at the beginning of the period.

24. How much is the current tax asset (liability) as of December 31, 20x1?
a. (4,000) b. 6,000 c. (40,000) d. 50,000

25. How much is the deferred tax asset as of December 31, 20x1?
a. 1,050 b. 2,450 c. 3,900 d. 2,100

26. How much is the deferred tax liability as of December 31, 20x1?
a. 9,300 b. 10,850 c. 8,700 d. 9,000

27. How much is the income tax expense as of December 31, 20x1?
a. 6,300 b. 3,600 c. 4,600 d. 0

Use the following information for the next three questions:

An SME reports pretax profit of ₱280,000. The tax rate is 30%. The pretax profit reflects
the following:
 Interest income of ₱30,000 that is subject to final tax.
 Entertainment expense of ₱25,000 that is not tax deductible.
 A ₱10,000 bad debt expense, of which ₱8,000 pertain to worthless receivables actually
written off and the remaining ₱2,000 pertain to estimated allowance for other
receivables. Only worthless receivables actually written off are tax deductible.
 Depreciation of ₱75,000. However, the tax deductible depreciation (accelerated) is
₱100,000.

28. How much is the current tax expense?

a. 82,500 b. 75,600 c. 83,600 d. 78,300
29. How much is the deferred tax expense (benefit)?
a. 23,000 b. (6,900) c. (23,000) d. 6,900

30. How much is the income tax expense?

a. 82,500 b. 75,600 c. 83,600 d. 78,300