Intermediate Accounting 3 Past Paper PDF

NAME: Date: Professor: Section: Score: INTERMEDIATE ACCOUNTING 3 FIRST GRADING EXAMINATION 1. According to PAS 1, an...

NAME: Date: Professor: Section: Score: INTERMEDIATE ACCOUNTING 3 FIRST GRADING EXAMINATION 1. According to PAS 1, an asset shall be classified as current when it satisfies any of the following criteria, except a. it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle b. it is held primarily for the purpose of being traded c. it is expected to be realized within twelve months after the balance sheet date d. it is cash or a cash equivalent that is restricted 2. A liability shall be classified as current when it satisfies any of the following criteria, except a. it is expected to be settled in the entity’s normal operating cycle b. it is held primarily for the purpose of being traded c. it is due to be settled within twelve months after the balance sheet date d. the entity has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. 3. If an entity expects, and has the discretion, to refinance or roll over an obligation for at least twelve months after the balance sheet date under an existing loan facility, it classifies the obligation as non-current, a. even if it would otherwise be due within a shorter period. b. even if the original term was for a period longer than twelve months c. even if an agreement to refinance, or to reschedule payments, on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue d. choices b and c 4. When an entity breaches an undertaking under a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand, (choose the incorrect statement) a. The liability is classified as current, even if the lender has agreed, after the balance sheet date and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. b. The liability is classified as current because, at the balance sheet date, the entity does not have an unconditional right to defer its settlement for at least twelve months after that date. c. The liability is classified as non-current, even if the lender has agreed, after the balance sheet date and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. d. The liability is normally classified as current; however, the liability is classified as non- current if the lender agreed by the balance sheet date to provide a period of grace ending at  least twelve months after the balance sheet date, within which the entity can rectify the breach and during that period the lender cannot demand immediate repayment. 5. Material Omissions or misstatements of items are material if they could, individually or collectively; influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on a. the peso amount and degree of financial consequence of the omission or misstatement judged in the surrounding circumstances b. the size and peso amount of the omission or misstatement judged in the surrounding circumstances c. the peso amount and nature of the omission but not the misstatement judged in the surrounding circumstances d. the size and nature of the omission or misstatement judged in the surrounding circumstances 6. Identify the incorrect statement. a. When an entity has departed from a requirement of a Standard or an Interpretation in a prior period, and that departure affects the amounts recognized in the financial statements for the current period, it shall disclose the (a) title of the Standard or Interpretation from which the entity has departed and the (b) impact of such departure. b. In the extremely rare circumstances in which management concludes that compliance with a requirement in a Standard or an Interpretation would be so misleading that it would conflict with the objective of financial statements set out in the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:(a) the title of the Standard or Interpretation in question and (b) for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation. c. Financial statements shall be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. d. PAS 1 requires an entity preparing financial statements, to make an assessment of the entity’s ability to continue as a going concern. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, five years from the balance sheet date. 7. Identify the incorrect statement. a. The final stage in the process of aggregation and classification is the presentation of condensed and classified data, which form line items on the face of the financial statements. b. PAS 1 sometimes uses the term ‘disclosure’ in a broad sense, encompassing items presented on the face of the balance sheet, statement of profit or loss and other comprehensive income, statement of changes in equity and cash flow statement, as well as in the notes. c. Applying the concept of materiality means that a specific disclosure requirement in a Standard or an Interpretation need not be satisfied if the information is not material. d. An entity shall prepare its financial statements, including cash flow information, using the accrual basis of accounting. e. PAS 1 requires an entity presenting its current year financial statements to also present its financial statements for the previous year. 8. The ledger of SCHOLIAST COMMENTATOR Co. as of December 31, 20x1 includes the following: Assets Cash 10,000 Trade accounts receivable (net of ₱10,000 credit balance in accounts) 40,000 Held for trading securities 80,000 Financial assets designated at FVPL 30,000 Investment in equity securities at FVOCI 70,000 Investment in bonds measured at amortized cost (due in 3 years) 60,000 Prepaid assets 10,000 Deferred tax asset (expected to reverse in 20x2) 12,000 Investment in Associate 36,000 Investment property 46,000 Sinking fund 38,000 Property, plant, and equipment 100,000 Goodwill 28,000 Totals 560,000 How much is the total current assets? a. 220,000 b. 180,000 c. 340,000 d. 164,000 Solution: Current assets Cash 10,000 Trade accounts receivable (40,000 + 10,000) 50,000 Held for trading securities 80,000 Financial assets designated at FVPL 30,000 Prepaid assets 10,000 Total current assets 180,000 9. The ledger of PERNICIOUS DEADLY Co. as of December 31, 20x1 includes the following: Liabilities Bank overdraft 10,000 Trade accounts payable (net of ₱10,000 debit balance in accounts) 40,000 Notes payable (due in 20 semi-annual payments of ₱4,000) 80,000 Interest payable 30,000 Bonds payable (due on March 31, 20x2) 70,000 Discount on bonds payable (30,000) Dividends payable 10,000 Share dividends payable 12,000 Deferred tax liability (expected to reverse in 20x2) 36,000 Income tax payable 44,000 Contingent liability 100,000 Reserve for contingencies 28,000 Totals 430,000 How much is the total current liabilities? a. 192,000 b. 186,000 c. 212,000 d. 178,000 Solution: Current liabilities Bank overdraft 10,000 Trade accounts payable (P20,000 + P5,000) 50,000 Notes payable (P2,000 semi-annual instalment x 2) 8,000 Interest payable 30,000 Bonds payable (due on March 31, 20x2) 70,000 Discount on bonds payable (30,000) Dividends payable 10,000 Income tax payable 44,000 Total current liabilities 192,000 10. The ledger of CALLOW IMMATURE Co. in 20x1 includes the following: Share capital 200,000 Share premium 40,000 Retained earnings, appropriated 36,000 Retained earnings, unappropriated 84,000 Revaluation surplus 60,000 Remeasurements of the net defined benefit liability (asset) - gain 30,000 Cumulative net unrealized gain on fair value changes of investment in FVOCI 46,000 Effective portion of losses on hedging instruments in a cash flow hedge 20,000 Cumulative translation loss on foreign operation 10,000 Treasury shares, at cost 26,000 How much is the total shareholders’ equity? a. 460,000 b. 440,000 c. 420,000 d. 390,000 Solution: Share capital 200,000 Share premium 40,000 Retained earnings, appropriated 36,000 Retained earnings, unappropriated 84,000 Revaluation surplus 60,000 Remeasurements of the net defined benefit liability (asset) - gain 30,000 Cumulative net unrealized gain on fair value changes of investment in FVOCI 46,000 Effective portion of losses on hedging instruments in a cash flow hedge (20,000) Cumulative translation loss on foreign operation (10,000) Treasury shares, at cost (26,000) Total shareholders' equity 440,000 Use the following information for the next two questions: 11. GUILE DECEITFULNESS Co. was incorporated on January 1, 20x1. The following were the transactions during the year: - Total consideration from share issuances amounted to ₱2,000,000. - A land and building were acquired through a lump sum payment of ₱400,000. A mortgage amounting to ₱100,000 was assumed on the land and building. - Total payments of ₱80,000 were made during the year on the mortgage assumed on the land and building, The payments are inclusive of interest amounting to ₱10,000. - Additional capital of ₱200,000 was obtained through bank loans. None of the bank loans were paid during the year. Half of the bank loans required a secondary mortgage on the land and building. - There is no accrued interest as of year-end. - Dividends declared during the year but remained unpaid amounted to ₱60,000. - No other transactions during the year affected liabilities. - Retained earnings as of December 31, 20x1 is ₱120,000. 12. How much is the profit for the year? a. 120,000 b. 160,000 c. 180,000 d. 220,000 Retained earnings - Jan. 1, 20x1 Dividends 60,000 180,000 Profit for the year (squeeze) Dec. 31, 20x1 120,000 13. How much is the total assets as of December 31, 20x1? a. 2,410,000 b. 2,520,000 c. 2,380,000 d. 2,420,000 Asset = Liabilities + Equity Mortgage assumed on land and building 100,000 Principal payment on the mortgage (80K – 10K interest) ( 70,000) Bank loans 200,000 Dividends payable 60,000 Liabilities, Dec. 31, 20x1 290,000 Share issuances 2,000,000 Retained earnings – Dec. 31, 20x1 120,000 Equity, Dec. 31, 20x1 2,120,000 Total assets, Dec. 31, 20x1 (liabilities + equity) 2,410,000 14. The ledger of DEROGATORY DEGRADING Co. in 20x1 includes the following: Cash 200,000 Accounts receivable 400,000 Inventory 1,000,000 Accounts payable 300,000 Note payable 100,000 During the audit of DEROGATORY’s 20x1 financial statements, the following were noted by the auditor: - Cash sales in 20x2 amounting to ₱20,000 were inadvertently included as sales in 20x1. DEROGATORY recognized gross profit of ₱6,000 on the sales. - A collection of a ₱40,000 accounts receivable in 20x2 was recorded as collection in 20x1. A cash discount of ₱2,000 was given to the customer. - During January 20x2, a short-term bank loan of ₱50,000 obtained in 20x1 was paid together with ₱5,000 interest accruing in January 20x2. The payment transaction in 20x2 was inadvertently included as 20x1 transaction. How much is the adjusted working capital as of December 31, 20x1? a. 1,651,000 b. 1,014,000 c. 1,450,000 d. 1,201,000 Solution: The adjusted balance of cash is computed as follows: Cash (unadjusted) 200,000 Cash sales in 20x2 recorded as 20x1 sale (20,000) Collection of account in 20x2 recorded as 20x1 collection (40,000 account less 2,000 cash discount) (38,000) Loan payment in 20x2 recorded as 20x1 transaction 50,000 Interest payment in 20x2 recorded as 20x1 transaction 5,000 Adjusted cash balance, Dec. 31, 20x1 197,000 The adjusted balance of accounts receivable is computed as follows: Accounts receivable (unadjusted) 400,000 Collection of account in 20x2 recorded as 20x1 collection 40,000 Adjusted accounts receivable balance, Dec. 31, 20x1 440,000 The adjusted balance of inventory is computed as follows: Inventory (unadjusted) 1,000,000 Cost of cash sale in 20x2 recorded as 20x1 sale  (20,000 sale - 6,000 gross profit) 14,000 Adjusted inventory balance, Dec. 31, 20x1 1,014,000 Adjusted current assets, Dec. 31, 20x1: (197K + 440K + 1,014K) = 1,651,000 The adjusted current liabilities are computed as follows: Accounts payable 300,000 Note payable 100,000 Loan payable 50,000 Adjusted current liabilities, Dec. 31, 20x1 450,000 Working capital, Dec. 31, 20x1 = Current assets – Current liabilities Working capital, Dec. 31, 20x1 = (1,651,000 – 450,000) = 1,201,000 15. Entity A has the following information: Inventory, beg. 80,000 Inventory, end. 128,000 Purchases 320,000 Freight-in 16,000 Purchase returns 8,000 Purchase discounts 11,200 How much is Entity A’s cost of sales? a. 286,800 b. 292,800 c. 288,600 d. 268,800 Inventory, beg. 80,000 Net purchases: Purchases 320,000 Freight-in 16,000 Purchase returns (8,000) Purchase discounts (11,200) 316,800 Total goods available for sale 396,800 Less: Inventory, end. (128,000) Cost of goods sold 268,800 16. In a two-statement presentation, information on profit or loss and other comprehensive income is shown a. in two separate statements, a statement of profit or loss and a statement showing other comprehensive income. b. in two separate statements, a statement of profit or loss and an income statement. c. in two separate statements, a single-step statement and a multi-step statement.  d. in a single statement called ‚statement of comprehensive income.‛ 17. Under this presentation method, expenses are presented in the statement of comprehensive income without distinctions as to their functions within the entity. a. nature of expense method b. function of expense method c. single-statement presentation d. two-statement presentation 18. Under this presentation, expenses are classified as either operating or non-operating item. At a minimum, cost of sales is presented separately. a. nature of expense method b. function of expense method c. single-statement presentation d. two-statement presentation Use the following information for the next five questions: The nominal accounts of Rommel SP Corp. on December 31, 20x1 have the following balances: Accounts Dr. Cr. Sales ₱739,000 Interest income 45,000 Gains 15,000 Inventory, beg. ₱ 65,000 Purchases 180,000 Freight-in 10,000 Purchase returns 5,000 Purchase discounts 9,000 Freight-out 30,000 Sales commission 45,000 Advertising expense 25,000 Salaries expense 240,000 Rent expense 30,000 Depreciation expense 50,000 Utilities expense 25,000 Supplies expense 15,000 Transportation and travel expense 15,000 Insurance expense 10,000 Taxes and licenses 60,000 Interest expense 5,000 Miscellaneous expense 3,000 Loss on the sale of equipment 5,000 Additional information: a. Ending inventory is ₱ 90,000. b. One-fourth of the salaries, rent, and depreciation expenses pertain to the non-sales department. The sales department does not share in the other expenses. 19. How much is the net purchases? a. ₱185,000 c. ₱194,000 b. ₱176,000 d. ₱192,000 Purchases 180,000 Freight-in 10,000 Purchase returns (5,000) Purchase discounts (9,000) Net purchases 176,000 20. How much is the ‚change in inventory‛ in 20x1? a. ₱90,000 increase c. ₱25,000 decrease b. ₱65,000 decrease d. ₱25,000 increase Inventory, beg. 65,000 Inventory, end. 90,000 Change in inventory – increase (25,000) 21. How much is the cost of goods sold? a. ₱151,000 c. ₱169,000 b. ₱95,000 d. ₱127,000 Net purchases 176,000 Less: Net increase in inventory (25,000) Cost of sales 151,000 22. How much is the total selling expense? a. ₱420,000 c. ₱180,000 b. ₱260,000 d. ₱340,000 Freight-out 30,000 Sales commission 45,000 Advertising expense 25,000 Salaries expense (240K x 3/4) 180,000 Rent expense (30K x 3/4) 22,500 Depreciation expense (50K x 3/4) 37,500 Selling expenses/Distribution costs 340,000 23. How much is the total general and administrative expense? a. 280,000 c. 330,000 b. 320,000 d. 208,000 Salaries expense (240K x 1/4) 60,000  Rent expense (30,000 x 1/4) 7,500 Depreciation expense (50K x 1/4) 12,500 Utilities expense 25,000 Supplies expense 15,000 Transportation and travel expense 15,000 Insurance expense 10,000 Taxes and licenses 60,000 Miscellaneous expense 3,000 Administrative expenses 208,000 Use the following information for the next two questions: DECORTICATE PEEL, Inc. is committed to a plan to sell a manufacturing facility and has initiated actions to locate a buyer. As of this date, the building has a carrying amount of ₱6,000,000, a fair value of ₱5,000,000 and estimated costs to sell of ₱200,000. At the plan commitment date, there is a backlog of uncompleted customer orders. 24. DECORTICATE, Inc. intends to sell the manufacturing facility with its operations. Any uncompleted customer orders at the sale date will be transferred to the buyer. The transfer of uncompleted customer orders at the sale date will not affect the timing of the transfer of the facility. How should DECORTICATE Co. classify the manufacturing facility? a. Included under property, plant and equipment at ₱6,000,000. b. Included under property, plant and equipment at ₱4,800,000. c. Classified as held for sale at ₱6,000,000 d. Classified as held for sale at ₱4,800,000 D (5,000,000 fair value – 200,000 costs to sell) = 4,800,000 25. DECORTICATE, Inc. intends to sell the manufacturing facility, but without its operations. The entity does not intend to transfer the facility to a buyer until after it ceases all operations of the facility and eliminates the backlog of uncompleted customer orders. How should DECORTICATE Co. classify the manufacturing facility? a. Included under property, plant and equipment at ₱6,000,000. b. Included under property, plant and equipment at ₱4,800,000. c. Classified as held for sale at ₱6,000,000 d. Classified as held for sale at ₱4,800,000 B – not available for immediate sale in its present condition; PPE at 4.8M (5M – 200K) because the manufacturing facility is impaired. 26. An entity in the power generating industry is committed to a plan to sell a disposal group that represents a significant portion of its regulated operations. The sale requires regulatory  approval, which could extend the period required to complete the sale beyond one year. Actions necessary to obtain that approval cannot be initiated until after a buyer is known and a firm purchase commitment is obtained. However, a firm purchase commitment is highly probable within one year. The disposal group has a carrying amount of ₱10,000,000 and fair value less costs to sell of ₱10,600,000. How should the entity classify the disposal group? a. Held for sale, ₱10.6M c. Under previous classifications, ₱10M b. Held for sale, ₱10M d. Under previous classifications, ₱10.6M B – The exceptions to the “1-yr. requirement” are met. Use the following information for the next two questions: In 20x1, FORGETIVE CREATIVE Co. classified a property as held for sale. The carrying amount prior to classification is ₱400,000 while fair value less cost to sell is ₱360,000. The property is being sold at ₱360,000. During 20x1, the market conditions that existed at the date the asset was classified initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During that period, FORGETIVE actively solicited but did not receive any reasonable offers to purchase the asset and, in response, FORGETIVE reduced the price from ₱360,000 to ₱320,000. The fair value less costs to sell on December 31, 20x1 is ₱340,000. 27. How should FORGETIVE Co. classify the property in its 20x1 annual financial statements? a. Held for sale, ₱320,000 c. PPE, ₱340,000 b. Held for sale, ₱340,000 d. PPE, ₱400,000 B 340,000, the fair value less costs to sell, which is lower than the carrying amount of P360,000. 28. During 20x2, the market conditions deteriorate further, and the asset is not sold by December 31, 20x2. FORGETIVE Co. believes that the market conditions will improve and has not further reduced the price of the asset. The fair value less costs to sell on December 31, 20x2 is ₱300,000. If the property was not classified as held for sale in 20x1, its carrying amount by this time would have been ₱350,000. a. Held for sale, ₱300,000 c. PPE, ₱300,000 b. Held for sale, ₱320,000 d. PPE, ₱350,000 C – The asset is reclassified back to PPE at the lower of recoverable amount (i.e., 300,000) and the carrying amount adjusted for depreciation not recognized during the asset was classified as held for sale (i.e., 350,000). 29. WAYFARER TRAVELER Co. is preparing its December 31, 20x1, current year financial statements. A land included in WAYFARER’s property, plant and equipment that did not qualify as held for sale as of December 31, 20x1 was actually sold on January 5, 20x2. The financial statements were authorized for issue on March 1, 20x2. On December 31, 20x1, WAYFARER has total current assets of ₱9,000,000. Not included in this amount is the fair value less costs to sell of the land amounting to ₱1,000,000. How much is the total current assets current in WAYFARER’s December 31, 20x1 financial statements? a. ₱8,000,000 c. ₱10,000,000  b. ₱9,000,000 d. ₱11,000,000 B – The event is disclosed only as a non-adjusting event after the reporting period. 30. On December 31, 20x1, STRIDENT HARSH-SOUNDING Co. classified its building with a historical cost of ₱4,000,000 and accumulated depreciation of ₱2,400,000 as held for sale. All of the criteria under PFRS 5 are complied with. On that date, the land has a fair value of ₱1,400,000 and cost to sell of ₱80,000. The entry on December 31, 20x1 includes a. a debit to building for ₱1,320,000 b. a credit to accumulated depreciation for ₱2,400,000 c. a debit to impairment loss for ₱280,000 d. No reclassification entry will be made on December 31, 20x1 C Jan. 1, Held for sale asset (1.4M – 80K) 1,320,000 20x1 Accumulated depreciation 2,400,000 Impairment loss 280,000 Building 4,000,000 31. On December 31, 20x1, OBSTINACY STUBBORNESS Co. classified its building with a carrying amount of ₱1,600,000 and fair value less cost to sell of ₱1,320,000 as held for sale. The building was not sold in 20x2. However, the exception to the one-year requirement was met. On December 31, 20x2, the fair value less cost to sell of building is ₱1,240,000. The building was not sold in 20x3. However, the exception to the one-year requirement was still met. On December 31, 20x3, the fair value less cost to sell of building increased to ₱1,680,000. How much is the gain on reversal of impairment to be recognized on December 31, 20x3? a. 440,000 b. 360,000 c. 280,000 d. 0 B 360,000, limited to the total impairment losses recognized in previous years (1,240,000 - 1,600,000 original carrying amount) Use the following information for the next four questions: On December 31, 20x1, INSOUCIANT CAREFREE Co. plans to dispose of a group of its assets. Information on these assets is shown below: Carrying amount on Dec. Carrying amount as 31, 20x1 before remeasured immediately classification as held for before classification as sale held for sale Inventory 9,600,000 8,800,000 Investment in FVOCI 7,200,000 6,000,000 Investment property (at cost model) 22,800,000 22,800,000 PPE (at cost model) 18,400,000 16,000,000 Goodwill 6,000,000 6,000,000 Total 64,000,000 59,600,000 INSOUCIANT Co. entity estimates that the fair value less costs to sell of the disposal group amounts to ₱52,000,000. 32. How would the reduction in the value of the assets on classification as held for sale be treated in the financial statements? a. The entity recognizes a loss of ₱4.4M immediately before classification as held for sale and then recognizes an impairment loss of ₱7.6M. b. The entity recognizes an impairment loss of ₱12 million. c. The entity recognizes an impairment loss of ₱7.6M. d. The entity recognizes a loss of ₱12M immediately before classifying the disposal group as held for sale. A Step #1: 59.6M – 64M = 4.4M Impairment loss; Step #2: 52M – 59.6M = 7.6 Additional impairment loss 33. How much is the carrying amount of the inventory after classification of the disposal group as held for sale? a. 8,800,000 b. 7,950,576 c. 7,899,324 d. 7,765,391 A 8,800,000 - Carrying amount as remeasured immediately before classification as held for sale. (See also solutions below) 34. How much is the carrying amount of the Investment property (at cost model) after classification of the disposal group as held for sale? a. 22,800,000 b. 21,859,794 c. 21,786,665 d. 20,766,298 B (Refer to solutions below) 35. How much is the carrying amount of the PPE (at cost model) after classification of the disposal group as held for sale? a. 16,000,000 b. 15,780,740 c. 15,340,206 d. 15,211,612 C Fair value less costs to sell 52,000,000 Carrying amount as remeasured immediately before classification as held for sale 59,600,000 Additional impairment loss on initial classification under PFRS 5 (7,600,000) Allocation to goodwill 6,000,000 Impairment loss to be allocated to the other assets 1,600,000 The excess is allocated to the other assets pro rata based on their carrying amounts as follows: Allocation of Assets Carrying amt. Fraction Impairment Loss Inventory N/A N/A N/A Investment in FVOCI N/A N/A N/A IP – cost 22,800,000 22.8/38.8 (940,206) PPE – cost model 16,000,000 16/38.8 (659,794) 38,800,000 (1,600,000) The carrying amount after allocation of impairment loss is: Inventory 8,800,000 Investment in FVOCI 6,000,000 Investment property (at cost model) (22.8M – 940,206) 21,859,794 PPE (at cost model) (16M – 659,794) 15,340,206 Goodwill - Total 52,000,000 36. On December 31, 20x1, INGENIOUS NATURAL Co. classified its building with a carrying amount of ₱1,600,000 and fair value less costs to sell of ₱1,320,000 as held for sale. Impairment loss of ₱280,000 was recognized on that date. The building has a remaining useful life of 4 years and it was depreciated using the straight-line method. As of December 31, 20x2, the building was not yet sold and management decided not to sell the building anymore. The fair value less cost to sell of the building on December 31, 20x2 is ₱1,240,000 while the value in use is ₱1,220,000. How much is the carrying amount of the building upon reclassification back to property, plant and equipment? a. 1,220,000 b. 1,320,000 c. 1,240,000 d. 1,200,000 D a. Carrying amount adjusted for depreciation not recognized (1.6M x ¾) = 1.2M; b. Recoverable amount = 1.240M the higher of FVLCS and VIN  Measurement = 1.2M - the lower of a and b above 37. On December 31, 20x1, INIMICAL UNFRIENDLY Co. entered into an agreement to sell a component. On that date, INIMICAL estimated the gain from the disposal to be made in 20x2 at ₱2,000,000 and the operating losses prior to the date of sale to be ₱1,200,000. As a result of the  sale, the component’s operations and cash flows will be eliminated from the entity’s operations and the entity will not have any significant continuing post-sale involvement in the component’s operations. Accordingly, the component was classified as held for sale and discontinued operations. The component’s actual operating losses in 20x1 and 20x2 were ₱2,800,000 and ₱2,600,000, respectively, and the actual gain on disposal of the component in 20x2 was ₱1,600,000. INIMICAL’s income tax rate is 30%. Any income tax benefit is expected to be realizable. There were no other temporary differences during the year. What single, post-tax amounts should be reported for discontinued operations in INIMICAL’s comparative 20x2 and 20x1 income statements, respectively? a. (1,960,000), (700,000) b. (560,000), (1,960,000) c. (650,000), (1,950,000) d. (700,000), (1,960,000) D 20x2: (1,600,000 – 2,600,000) x 70% = (700,000) 20x1: (-2,800,000 x 70%) = (1,960,000) 38. On April 30, 20x1, ABROGATE ABOLISH Co. approved a plan to dispose of a component of its operations. The disposal meets the requirements for classification as discontinued operations. From January 1 to April 30, 20x1, the component earned operating profit of ₱400,000 and from May 1 to December 31, 20x1, the segment suffered operating losses of ₱200,000. The net assets of the component has a carrying amount of ₱32,000,000 as of April 30, 20x1. The fair value less costs to sell of the component is ₱26,000,000. Additional estimated disposal loss includes severance pay of ₱220,000 and employee relocation costs of ₱100,000, both of which are directly associated with the decision to dispose of the segment. ABROGATE’s income tax rate is 30%. Any income tax benefit is expected to be realizable. There were no other temporary differences during the year. How much is the profit (loss) from discontinued operations to be reported in ABROGATE's statement of profit or loss and other comprehensive income for the year ended December 31, 20x1? a. 4,564,000 b. 4,060,000 c. 4,340,000 d. 4,284,000 D Solution: Operating profit – January 1 to April 30, 20x1 400,000 Operating loss – May 1 to December 31, 20x1 (200,000) Impairment loss (32M – 26M) (6,000,000) Severance pay (220,000) Employee relocation costs (100,000) Total (6,120,000) Multiply by: 1 minus Tax rate 70% Loss for the period from discontinued operations (4,284,000) 39. You are a CPA. Your client asked you for an advice regarding the items that are presented as other comprehensive income. You will tell your client to refer to which of the following standards? a. PAS 1 b. PFRS 1 c. PFRS 15 d. PAS 8 40. Non-current assets held for sale and discontinued operations are accounted for under a. PFRS 4. b. PAS 41. c. PFRS 5. d. PFRS 8. 41. Non-current assets are presented as current items in the statement of financial position a. only when they are expected to be sold within 12 months from the end of reporting period. b. only if they are actually sold after the reporting period but before the date of authorization of the financial statements for issue. c. only when they qualify as held for sale assets under PFRS 5. d. never presented as current items. 42. A noncurrent asset classified as held for sale in accordance with PFRS 5 has not been sold after a year. The asset shall continue to be presented as held for sale under PFRS 5 if a. the delay is due to events beyond the entity’s control b. the entity remains committed to its plan to sell the asset c. the noncurrent asset is actually sold after the reporting period but before the financial statements were authorized for issue. d. a and b 43. Which of the following statements is true regarding the accounting treatment of costs to sell under PFRS 5? a. Costs to sell are added to the fair value when determining the measurement basis for an asset held for sale b. Costs to sell are never discounted because held for sale assets should be sold within one year c. Costs to sell are discounted if it is expected that the sale will be made beyond one year. d. a and c 44. According to PFRS 5, gains and losses on remeasurement of assets held for sale are a. recognized in profit or loss b. recognized in other comprehensive income c. recognized only for impairment losses d. not recognized 45. Which of the following is included in profit from continuing operations? a. extraordinary items c. other comprehensive income  b. discontinued operations d. income tax expense Use the following information for the next two questions: VISAGE APPEARANCE Co. is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer. As of this date, the building has a carrying amount of ₱5,000,000, a fair value of ₱6,000,000 and estimated costs to sell of ₱200,000. 46. VISAGE Co. has an intention to transfer ownership of a building to a buyer after it vacates the building. How should VISAGE Co. classify the headquarters building? a. Included under property, plant and equipment at ₱5,000,000. b. Included under property, plant and equipment at ₱5,800,000. c. Classified as held for sale at ₱5,000,000 d. Classified as held for sale at ₱5,800,000 C 5,000,000 lower of carrying amount and fair value less costs sell 47. VISAGE Co. will continue to use the building until the construction of a new headquarters is completed. How should VISAGE Co. classify the headquarters building? a. Included under property, plant and equipment at ₱5,000,000. b. Included under property, plant and equipment at ₱5,800,000. c. Classified as held for sale at ₱5,000,000 d. Classified as held for sale at ₱5,800,000 A – not available for immediate sale in its present condition 48. PERAMBULATE STROLL Co. is a commercial leasing and finance company. As of year-end, PERAMBULATE holds equipment that is available either for sale or lease. PERAMBULATE is not yet decided whether to sell or to lease the equipment. The equipment has a carrying amount of ₱1,000,000, fair value of ₱1,200,000 and costs to sell of ₱50,000. How should PERAMBULATE Co. classify the equipment? a. Inventory, ₱1,000,000 c. Held for sale, ₱1,150,000 b. Investment property, ₱1,250,000 d. Held for sale, ₱1,000,000 A – Sale is not highly probable 49. In Baer Food Co.’s 20x3 single-step income statement, the section titled ‚Revenues‛ consisted of the following: Net sales revenue 187,000 Results from discontinued operations: Loss from discontinued component Z including loss on disposal of ₱1,200 16,400 Less: Tax benefit 4,000 (12,400) Interest revenue 10,200 Gain on sale of equipment 4,700 Cumulative change in 20x1 and 20x2 income due to change in depreciation method (net of ₱750 tax effect) 1,500 Total revenues 191,000 In the revenues section of the 20x3 income statement, Baer Food should have reported total revenues of a. 197,200 b. 215,400 c. 203,700 d. 201,900 A Solution: Net sales revenue 187,000 Interest revenue 10,200 Adjusted total revenues 197,200 50. During 20x4, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of ₱500,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were ₱600,000 in 2004. How should these facts be reported in Lopez's income statement for 2004? Total Amount to be Included in Income from Results of Continuing Operations Discontinued Operations a. 600,000 loss 500,000 gain b. 100,000 loss 0 c. 0 100,000 loss d. 500,000 gain 600,000 loss C (600,000 loss – 500,000 gain) = 100,000 loss “A fool shows his annoyance at once, but a prudent man overlooks an insult.” (Proverbs 12:16) - END PROBLEM-SOLVING 1. The movements in the cash account of NONCHALANT COOL Co. during 20x2 are shown below. Cash beg. 200 Sales 6,000 3,800 Purchases Interest income 20 1,200 Operating expenses Rent income 270 30 Interest expense Dividend income 40 70 Income taxes Held for trading securities 800 100 Investment in FVOCI Sale of old building 520 1,100 Purchase of equipment Collection of non-trade note 60 130 Loan granted to employee Proceeds from loan with a bank 1,600 240 Payment of loan borrowed Issuance of shares 970 200 Reacquisition of shares 90 Dividends 3,520 end. Requirement: Prepare the statement of cash flows of NONCHALANT COOL Co. for the year ended December 31, 20x2. (Use Option 1 in classifying cash flows from operating activities.) 1. Solution: NONCHALANT COOL Company Statement of cash flows For the year ended December 31, 20x2 Cash flows from operating activities Cash receipts from customers 6,000 Cash receipts for interest income 20 Cash receipts for rent income 270 Cash receipts for dividend income 40 Cash paid to suppliers (3,800) Cash paid for operating expenses (1,200) Cash generated from operations 1,330 Interest paid (30) Income taxes paid (70) Cash receipt from sale of held for trading securities 800 Net cash from operating activities 2,030 Cash flows from investing activities Cash payment for acquisition of investment in FVOCI (100) Cash receipt from sale of old building 520 Cash payment for acquisition of equipment (1,100) Cash receipt from collection of loan granted 60 Cash payment for loan granted (130) Net cash used in investing activities (750) Cash flows from financing activities Cash proceeds from loan borrowed 1,600 Cash payment for loan borrowed (240) Cash proceeds from issuance of share capital 970 Cash payment for acquisition of treasury shares (200) Cash payment for dividends (90) Net cash from financing activities 2,040 Net increase in cash and cash equivalents 3,320 Cash and cash equivalents, beginning 200 Cash and cash equivalents, end 3,520 “give thanks in all circumstances; for this is God’s will for you in Christ Jesus.” - (1 Thessalonians 5:18) - END -