SGV Cup – Easy Round

16th NFJPIA National Mid-year Convention

October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

Theory of Accounts

1. In measuring the costs of purchase, you have noted that an entity bought inventory on deferred credit terms,
thus paying a price higher than it would have been under normal credit terms. How is the excess amount
treated under PAS 2, Inventories?

A. The excess is included in the cost of the inventory

B. The excess is recognized as interest expense over the period of the financing
A percentage of the excess is recognized as directly attributable to the acquisition of the
C.
inventory
D. None of the above

Answer: B. The excess is recognized as interest expense over the period of the financing

Paragraph 18 of PAS 2, Inventories emphasized that an entity may purchase inventories on deferred settlement
terms. Accordingly, when the arrangement effectively contains a financing element, that element, for example
a difference between the purchase price for normal credit terms and the amount paid, is recognized as interest
expense over the period of the financing.

Practical Accounting 1

2. During January 2012, Richard Company won a litigation award for P750, 000 which was tripled to
P2,250,000 to include punitive damages. The defendant, who is financially stable, has appealed only the
P1, 500,000 punitive damages. Richard was awarded P2, 500,000 in an unrelated suit it filed, which is
being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals.

In its 2012 financial statements, Richard should report what amount of pre-tax gain?
A. P4,750,000
B. P2,500,000
C. P2,250,000
D. P750,000

Answer: D

Richard can report a gain of P750, 000 in its 2012 income statement because this amount is already settled
on December 31, 2012. However, the remaining P 1,500,000 and the P2, 500,000 award in the unrelated
suit are only disclosed because the defendants have appealed said amounts. The realization of such income
is contingent on the outcome, which is not wholly within the entity’s control, of the appeals filed by the
defendants. Hence, said amounts are not virtually certain to be realized.

3. In December 2012, Mikyll Company began including one coupon in each package of candy that it sells and
offers a toy in exchange for P5 and 5 coupons. The toys cost P12 each and an additional P5 to deliver it to
customers. Eventually, 65% of the coupons will be redeemed. During December, Mikyll Company sold
335,000 packages of candy, 110,000 coupons were already sent for redemption of which 30,000 is still
under processing by year end.

The estimated liability in the December 31, 2012 balance sheet of Mikyll Company is

A. 330,200 B. 330,800 C. 330,400 D. 330,600

Answer: D

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

Total coupons issued 335,000

Multiply by: 65%
Coupons expected to be redeemed 217,750
Less: coupons received and processed (110,000 - 30,000) 80,000
Remaining coupons expected to be redeemed (and processed) in the future 137,750
Divide by: conversion rate toys/coupons 5
Expected number of toys to be given away 27,550
Multiply by: cost per unit (12 + 5 -5) 12
Total estimated liability 12/31/10 330,600

Practical Accounting 2

4. Under PAS 11, Construction Contracts, which of the following statements is false regarding construction
contracts?

First statement:
Contract revenue may decrease as a result of penalties arising from delays caused by the contractor in the
completion of the contract.

Second statement:
Costs incurred in securing a contract are included as part of contract costs if they can be separately
identified and measured reliably and it is probable that the contract will be obtained.

A. First statement is false.

B. Second statement is false.
C. Both statements are false.
D. None of the above.

Answer: D

Par. 12 of PAS 11, Construction Contracts, provides:

“Contract revenue is measured at the fair value of the consideration received or receivable. The
measurement of contract revenue is affected by a variety of uncertainties that depend on the outcome of
future events. The estimates often need to be revised as events occur and uncertainties are resolved.
Therefore, the amount of contract revenue may increase or decrease from one period to the next. For
example:
(a) a contractor and a customer may agree variations or claims that increase or decrease contract
revenue in a period subsequent to that in which the contract was initially agreed;
(b) the amount of revenue agreed in a fixed price contract may increase as a result of cost escalation
clauses;
(c) the amount of contract revenue may decrease as a result of penalties arising from delays caused
by the contractor in the completion of the contract…”

Par. 21 of PAS 11 provides:

“Contract costs include the costs attributable to a contract for the period from the date of securing the
contract to the final completion of the contract. However, costs that relate directly to a contract and are
incurred in securing the contract are also included as part of the contract costs if they can be separately
identified and measured reliably and it is probable that the contract will be obtained. When costs incurred
in securing a contract are recognized as an expense in the period in which they are incurred, they are not
included in contract costs when the contract is obtained in a subsequent period”

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

5. Government Agency AAA issued purchase order for the acquisition of office equipment costing P40,000.
The equipment was received with the charge invoice and was paid by check after withholding taxes of
10%. Government Agency AAA remitted a tax withheld to BIR thru a government depository bank.

What is the entry of Government Agency AAA to record payment?

A. Accounts payable 36,000

Cash – National Treasury – MDS 36,000
B. Office equipment 40,000

Cash – National Treasury – MDS 40,000

C. Office equipment 40,000

Due to BIR 4, 000

Cash – National Treasury – MDS 36,000

D. Accounts payable 40,000

Due to BIR 4, 000

Cash – National Treasury – MDS 36,000

Answer: D

Solution:

A. Accounts payable 36,000

Cash – National Treasury – MDS 36,000

B. Office equipment 40,000

Cash – National Treasury – MDS 40,000

C. Office equipment 40,000

Due to BIR 4, 000

Cash – National Treasury – MDS 36,000

D. Accounts payable 40,000

Due to BIR 4, 000

Cash – National Treasury – MDS 36,000

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

Auditing Theory

6. The scope statement of an audit report should

a. Describe the audit objectives and tell the reader why the audit was conducted.)
b. Identify the audited activities and describe the nature and extent of auditing performed.
c. Define the standards, measures, or expectations used in evaluating audit findings.
d. Communicate the internal auditor’s evaluation of the effect of the findings on the activities
reviewed.

Answer: B

Audited activities, time period audited, related activities not audited, and the nature and extent of auditing
performed may all be appropriately included in the scope statement.

Choice (a) is incorrect. Audit objectives and the reason for conducting the audit are described in the
purpose statement. Choice (c) is incorrect. The standards, measures, or expectations used in evaluating
audit findings are attributes of findings that emerge during the review of the activities identified in the
scope statement. Choice (d) is incorrect. The internal auditor’s evaluation of the effect of the findings on
the activities reviewed is properly presented in the conclusion or results section of the audit report.

Auditing Problem

7. Altair Company sold accounts receivable without recourse for P5,300,000. Altair received P5,000,000 cash
immediately from the factor. The remaining P300,000 will be received once the factor verifies that none of
the accounts receivable is in dispute. The accounts receivable had a face amount of P6,000,000. Altair had
previously established an allowance for bad debts of P250,000 in connection with these accounts. What is
the loss on factoring to be recognized by Altair Company?

A. P700,000
B. P450,000
C. P750,000
D. P300,000

Answer: B

Sales Price P5,300,000

Carrying amount of accounts
receivable
(6,000,000 - 250,0000) 5,750,000
Loss on factoring P450,000

Average

Theory of Accounts

1. A hedged item can be any of the following except:

A. A recognized asset or liability

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16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

B. A highly probable forecast transaction

C. Held-to-maturity investment with respect to interest-rate risk or prepayment risk
D. Loans and receivables

Answer: C. Held-to-maturity investment with respect to interest-rate risk or prepayment risk

As defined in paragraph 9 of PAS 39, Financial Instruments: Recognition and Measurement, a hedged item
is an asset, liability, firm commitment, highly probable forecast transaction or net investment in a foreign
operation that (a) exposes the entity to risk of changes in fair value or future cash flows and (b) is
designated as being hedged

Choice C does not qualify as a hedged item. Paragraph 79 of PAS 39 further provides: Unlike loans and
receivables, a held-to-maturity investment cannot be a hedged item with respect to interest-rate risk or
prepayment risk because designation of an investment as held to maturity requires an intention to hold the
investment until maturity without regard to changes in the fair value or cash flows of such an investment
attributable to changes in interest rates. However, a held-to-maturity investment can be a hedged item with
respect to risks from changes in foreign currency exchange rates and credit risk.

2. Statement 1: When there is a change in an entity's functional currency of an entity, the effect of change is
accounted for prospectively.

Statement 2:Exchange differences arising on the settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition during the period or
in previous financial statements shall be recognized in profit or loss in the period in which they arise

Which of the following choices based on the statements is true?

A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

Answer: C. Both statements are correct.

Paragraph 37 of IAS 21, Effects of changes in foreign exchange, states that the effect of a change in
functional currency is accounted for prospectively. In other words, an entity translates all items into the
new functional currency using the exchange rate at the date of the change.

Paragraph 29 of IAS 21, Effects of changes in foreign exchange, states that when monetary items arise
from a foreign currency transaction and there is a change in the exchange rate between the transaction
date and the date of settlement, an exchange difference results. When the transaction is settled within the
same accounting period as that in which it occurred, all the exchange difference is recognized in that
period. However, when the transaction is settled in a subsequent accounting period, the exchange
difference recognized in each period up to the date of settlement is determined by the change in exchange
rates during each period.

Practical Accounting 1

3. Compute for the correct cash in bank balance given the following information for Wendell Company:

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

Balance per books Php725,420

Balance in checking account 661,454
Outstanding checks 75,690
Deposit in bank closed by Central Bank 325,000
Deposit in transit 139,876
Petty cash fund (of which Php6,890 is in the form of paid
10,000
vouchers)
Bank charges not yet taken up in the books 980
Advances to employees 3,456
Bond sinking fund cash 400,000
Error in recording a check in the books. The correct amount
paid by the bank is Php7,980 instead of Php9,180 recorded in 1,200
the books, or a difference of

A. 765,240
B. 725,640
C. 755,240
D. 732,640

Answer: B

Balance per books Php725,420

Bank charges not yet taken up in the books (980)
Error in recording a check in the books. The correct amount
paid by the bank is Php7,980 instead of Php9,180 recorded in 1,200
the books, or a difference of
Correct cash in bank balance Php725,640

Balance in checking account Php661,454

Outstanding checks (75,690)
Deposit in transit 139,876
Correct cash in bank balance Php725,640

Practical Accounting 2

4. During 2011, ASG Corporation sold goods to its 80% owned subsidiary, GSA Corporation. As of
December 31, 2011, one half (1/2) of these goods were still included in GSA’s ending inventory. Reported
2011 selling expenses amounted to Php1,100,000 and Php400,000 for ASG and GSA, respectively. ASG’s
selling expense included Php50,000 freight-out costs to transfer the goods from its warehouse to GSA’s
retail store. What amount of selling expenses should be reported in ASG’s consolidated income statement?

A. Php1,500,000
B. Php1,480,000
C. Php1,475,000
D. Php1,450,000

Answer: D

ASG's selling expenses Php1,100,000

GSA's selling expenses 400,000
Total selling expenses before consolidation 1,500,000

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

Less: Freight that is considered inventoriable 50,000

Consolidated selling expenses Php1,450,000

Auditing Theory

5. Which of the following is an appropriate consideration in auditor’s selection of sample size?

a. The auditor may select a voided or cancelled document in a sample. If the document has been
properly voided, treat the item as deviation.
b. If the auditor encounters missing documents and he is unable to determine whether control has
been properly performed, replace the document with another sample item.
c. The auditor may select a voided or cancelled document in a sample. If the document has been
properly voided, replace the document with another sample item
d. If the auditor encounters missing documents and he is unable to determine whether control has
been properly performed, treat the item as deviation and replace the document with another
sample item.

Answer: C
(PSA 530, Audit Sampling)

The auditor may select a voided or cancelled document in a sample. If the document has been properly
voided, the document must be replaced with another sample item. If the auditor encounters missing
documents and he is unable to determine whether control has been properly performed, the auditor must
treat the item as deviation.

6. Fraudulent financial reporting involves intentional misstatements or omissions of amount or disclosures in

the financial statements to deceive financial statement users. Which of the following acts appropriately
involves fraudulent financial statements?

I. Manipulations, falsification or alteration of records or documents

II. Lapping of accounts receivable
III. Stealing entity’s assets such as cash, marketable securities and inventory
IV. Intentional misapplication of accounting policies

a. I and II
b. I, II , III and IV
c. I and IV
d. I, II and III

Answer: C
(PSA 240, Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements)
Fraudulent financial reporting involves intentional misstatements or omissions of amount or disclosures in
the financial statements to deceive financial statement users. This may involve:
I. Manipulations, falsification or alteration of records or documents.
II. Misrepresentation in or intentional omission of the effects of transactions from records or
documents.
III. Intentional misapplication of accounting policies

Auditing Problem

7. ABC Company leased office premises to XYZ Company for a 5-year term starting January 2, 2012 Under
the terms of the lease, rent for the first year is P200,000 and rent for years 2 through 5 is P300,000

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

annually. As an inducement to enter the lease, ABC Company waives the first six months of rental
payments. XYZ Company likewise paid a P70,000 security deposit of which 80% is refundable at the end
of the lease term. Furthermore, contingent rent equal to 2% of sales in excess of P12,000,000 shall be paid
by XYZ Company. ABC Company incurred initial direct cost of P40,000 while XYZ Company paid
P30,000 in costs in relation to the lease. In 2013, XYZ Company reported sales of P13,000,000.

Rental expense to be included in XYZ Company’s 2013 income statement is

A. P288,800
B. P268,800
C. P302,200
D. P315,000

Answer: A

Solution:

Total rental payments for five years (P200,000/2) + (P300,000 x 4) P1,300,000

Divided by total years 5 years
Annual rental expense (fixed) P260,000
Contingent rent [(P13M – P12M) x 2%] 20,000
Direct cost incurred (30,000 / 5) 6,000
Non-refundable portion of security deposit (P70,000 x 20%) / 5 2,800
Total rental expense P288,800

Difficult

Theory of Accounts

1. According to PFRS 7, Financial Instruments: Disclosures, an entity that has designated a loan or receivable
(or group of loans or receivables) as at fair value through profit or loss shall disclose the following, except:

A. The maximum exposure to market risk of the loan or receivable (or group of loans
or receivables) at the reporting date
B. The amount by which any related credit derivatives or similar instruments mitigate
that maximum exposure to credit risk
C. The amount of the change in the fair value of any related credit derivatives or
similar instruments that has occurred during the period and cumulatively since the
loan or receivable was designated
D. The amount of change, during the period and cumulatively, in the fair value of the
loan or receivable (or group of loans or receivables) that is attributable to changes
in the credit risk of the financial asset determined either: (a) as the amount of
change in its fair value that is not attributable to changes in market conditions that
give rise to market risk; or (b) using an alternative method the entity believes more
faithfully represents the amount of change in its fair value that is attributable to
changes in the credit risk of the asset

Answer: A. The maximum exposure to market risk of the loan or receivable (or group of loans or
receivables) at the reporting date.

PFRS 7 par. 9:
If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through
profit or loss, it shall disclose:

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(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or receivable (or group of
loans or receivables) at the end of the reporting period.
(b) the amount by which any related credit derivatives or similar instruments mitigate that maximum
exposure to credit risk.
(c) the amount of change, during the period and cumulatively, in the fair value of the loan or
receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the
financial asset determined either:
(i) as the amount of change in its fair value that is not attributable to changes in market
conditions that give rise to market risk; or
(ii) using an alternative method the entity believes more faithfully represents the change in
its fair value that is attributable to changes in the credit risk of the asset.
Changes in market conditions that give rise to market risk include changes in an observed
(benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates.
(d) the amount of the change in the fair value of any related credit derivatives or similar instruments
that has occurred during the period and cumulatively since the loan or receivable was designated.

2. Which of the following risks is not eligible for hedge accounting under PFRS for SMEs?

A. Interest rate risk in debt instrument measured at amortized cost

B. Foreign exchange risk in debt instrument measured at amortized cost
C. Foreign exchange risk in a firm commitment
D. Interest rate risk in a firm commitment
E. Foreign exchange risk in a net investment in a foreign operation

Answer: B. Foreign exchange risk in debt instrument measured at amortized cost

Section 12.17 of PFRS for SMEs provides:

“This PFRS permits hedge accounting only for the following risks:
(a) interest rate risk of a debt instrument measured at amortized cost.
(b) foreign exchange or interest rate risk in a firm commitment or a highly probable forecast transaction.
(c) price risk of a commodity that it holds or in a firm commitment or highly probable forecast
transaction to purchase or sell a commodity.
(d) foreign exchange risk in a net investment in a foreign operation.”

Practical Accounting 1

3. Jaymar Company leases photocopying machines to customers under direct finance lease. The machines
have no residual value at the end of the lease term and the leases do not contain bargain purchase options.
On one of its leases, Jaymar Company wishes to earn 10% interest on a five year lease of photocopying
machine with a fair value of Php732, 000. How much is the total amount of interest income that Jaymar
Company will earn over the life of the lease?
A. 233,500
B. 223,500
C. 233,550
D. 232,500

Answer: A
1−(1.10)−5
732,000 = 193,100* × [ ]
0.10

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SGV Cup – Easy Round
16th NFJPIA National Mid-year Convention
October 22-25, 2013
Skylight Hotel Rizal Ave, Puerto Princesa City, Palawan

*Squeezed
Php965,500
Gross investment in the lease (193,100 × 5)
Net investment in the lease (732,000)
Interest income to be earned over the lease Php233,500

4. Given the following information, compute for the number of ordinary shares issued and outstanding as of
January 1 of Hazel Company.

March 1 Issued 15,000 ordinary shares

May 1 Purchased 3,000 ordinary shares to be held as treasury shares
June 1 Split ordinary share 2 for 1
August 1 Issued 2,000 ordinary shares
December 1 Issued 4% bonus issue

The weighted average number of shares to be used in the calculation of basic earnings per share is 189,107.
A. 166,400
B. 96,000
C. 80,000
D. 70,000

Answer: C

January 1 80,000* × 2 × 1.04 × 12/12 = 166,400

March 1 15,000 × 2 × 1.04 × 10/12 = 26,000
May 1 (3,000) × 2 × 1.04 × 8/12 = (4,160)
August 1 2,000 × 1.04 × 5/12 = 867
Weighted average number of shares to be
189,107
used in the calculation of BEPS

*Squeezed

Practical Accounting 2

5. AA Company acquired 60% of outstanding common stock of BB Company on May 1, 2011, at a total cost
of Php2,730,000. Details of BB’s equity accounts at the acquisition date were as follows:

Common stock Php100,000

Retained earnings 2,400,000

All of BB’s asset and liabilities had fair values equal to book values as of the acquisition date, except for
patents which had a fair value of Php900,000 and a book value of Php200,000. The patents have a
remaining life of 5 years as of the acquisition date.

For 2011, BB had the following earnings and dividends:

January 1 to May 1 to
April 30 December 31
Net income Php250,000 Php550,000
Dividends paid 150,000 600,000

How much is the non-controlling interests’ share in the net income of BB?

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Answer: Php182,667

Net income of BB from May 1 to December 31, 2011 Php550,000

Amortization of excess of fair value over the book value of patents
Php700,000/5 years × 8/12 93,333
Adjusted net income 456,667
Share of non-controlling interests 40%
Share of non-controlling interests in the net income of BB Php182,667

6. BRG Corporation has issued 100 preference shares, which are classified as equity. The preference shares
give their holders a right to a preferential dividend in priority to the payment of any dividend to the holders
of ordinary shares. Upon liquidation of BRG, the holders of the preference shares are entitled to receive out
of the assets available for distribution the amount of Php30 per share in priority to the holders of ordinary
shares. The holders of the preference shares do not have any further rights on liquidation. PQS Corporation
acquires all ordinary shares of BRG. The acquisition gives PQS control of BRG. The acquisition-date fair
value of the preference shares is Php438,000 whereas the proportionate share of BRG’s recognized
amounts of the identifiable net assets that is attributable to the preference shares is Php395,000. Which of
the following statements is true on the measurement of non-controlling interests under
PFRS 3R, Business Combinations?

A. PQS may opt to measure the preference shares either at their acquisition-date fair value or
their proportionate share in BRG’s recognized amounts of the identifiable net assets.
B. PQS can only measure the preference shares at their proportionate share in the BRG’s
recognized amounts of the identifiable net assets.
C. PQS can only measure the preference shares at their acquisition-date fair value.
D. BRG may opt to measure the preference shares either at their acquisition-date fair value
or their proportionate share in PQS’s recognized amounts of the identifiable net assets.

Answer: C

Par. 19 of PFRS 3, Business Combinations, provides:

“For each business combination, the acquirer shall measure at the acquisition date components of non-
controlling interests in the acquiree that are present ownership interests and entitle their holders to a
proportionate share of the entity's net assets in the event of liquidation at either:
(a) fair value; or
(b) the present ownership instruments' proportionate share in the recognized amounts of the
acquiree's identifiable net assets.

All other components of non-controlling interests shall be measured at their acquisition-date fair values,
unless another measurement basis is required by PFRSs.”

The non-controlling interests that relate to BRG’s preference shares do not qualify for the measurement
choice in paragraph 19 of PFRS 3 because they do not entitle their holders to a proportionate share of the
entity’s net assets in the event of liquidation. The acquirer measures the preference shares at their
acquisition-date fair value of Php438,000.

Source: Improvements to IFRSs (May 2010)

Auditing Theory

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SGV Cup – Easy Round
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7. Which of the following explanations suggests the least amount of relative risk stemming from a failure to
compare a purchase order to an approved price list?

a. The comparison is not required by company policy.

b. The vendor is one used often by the company.
c. The director of the purchasing department approved the purchase order.
d. A temporary employee processed the purchase order.

Answer: D. A temporary employee processed the purchase order.

“A” is incorrect. If employees are not required to consult an approved price list, the company risks buying
at too great a price.
“B” is incorrect. Even if the company regularly buys from this vendor, there is no assurance that the price is
reasonable unless the purchase order is compared to the approved price list.
“C” is incorrect. The director should have required the purchase order to be compared to the approved price
list before approving it. Otherwise, the purchase price may exceed the approved price.
“D” is correct. The relative risk of loss to the company would be lower if a temporary employee were
responsible for the error. This suggests an isolated incident, as the employee will not be able to repeat the
error once he or she has left the purchasing department. However, the error should still be reported to
management.

(Sawyer’s Certified Internal Auditor Reviewer)

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