Answer Key Week 3
Answer Key Week 3
Answer Key Week 3
Exercises/Assignments
Answer the following Problems.
Encircle all the letters except the letter of your choice.
1. All of the following correctly relate to the notes, except
a. present the breakdown of aggregated items on the face of the statement and to rectify any
inappropriate accounting policies.
b. present information about the basis of preparation of the financial statements and the
specific accounting policies used
c. disclose the information required by PFRSs that is not presented elsewhere in the
financial statements
d. provide information that is not presented elsewhere in the financial statements, but is
relevant to an understanding of any of them.
5. You are preparing the “general information” section of a notes to financial statements. Which
of the following information sources is most relevant in addition to direct inquiry with
management?
a. board of directors minutes of meetings
b. lease contract
c. general ledger
d. latest authorized articles of incorporation
6. Which is not a required disclosure?
a. the key assumption concerning the future, and other key sources of estimation uncertainty
at the balance sheet date
b. the judgment management has made in the process of applying the accounting policies
c. a and b
d. the number of the entity’s employees
7. Which of the following information should be disclosed in the summary of significant
accounting policies?
a. Refinancing of debt subsequent to end of reporting period.
b. Guarantees of indebtedness of others.
c. Criteria for determining which investments are treated as cash equivalents.
d. Adequacy of pension plan assets relative to vested benefits.
8. Which of the following facts concerning fixed assets should be included in the summary of
significant accounting policies? (Item #1) Depreciation method (Item #2) Composition
a. No, Yes b. Yes, Yes c. Yes, No d. No, No
9. Under PAS 10, these refer to those events that provide evidence of conditions that existed at
the reporting period.
a. Events after the reporting period
b. Type I events
c. Adjusting events after the reporting period
d. Non-adjusting events after the reporting period
10. Under PAS 10, these refer to those that are indicative of conditions that arose after the
reporting period.
a. Events after the reporting period
b. Type I events
c. Adjusting events after the reporting period
d. Non-adjusting events after the reporting period
14. A new drug was introduced by OBNOXIOUS HARMFUL Inc. in the market on
December 1, 20x1. OBNOXIOUS’ financial year ends on December 31, 20x1. It was the
only company that was permitted to manufacture this patented drug. The drug is used by
patients suffering from an irregular heartbeat. On March 31, 20x2, after the drug was
introduced, more than 1,000 patients died. After a series of investigations, authorities
discovered that when this drug was simultaneously used with another drug used to regulate
hypertension, the patient’s blood would clot and the patient suffered a stroke. A lawsuit for
₱100,000,000 has been filed against OBNOXIOUS Inc. The financial statements were
authorized for issuance on April 30, 20x2. Which of the following options is the appropriate
accounting treatment for this post–balance sheet event under PAS 10?
a. The entity should provide ₱100,000,000 because this is an “adjusting event” and the
financial statements were authorized to be issued after the accident.
b. The entity should disclose ₱100,000,000 as a contingent liability because it is an
“adjusting event.”
c. The entity should disclose ₱100,000,000 as a “contingent liability” because it is a present
obligation with an improbable outflow.
d. Assuming the probability of the lawsuit being decided against OBNOXIOUS Inc. is
remote, the entity should disclose it in the footnotes, because it is a nonadjusting material
event.
15. At the balance sheet date, December 31, 2005, BELIE Inc. carried a receivable from TO
DISGUISE Corporation, a major customer, at ₱10 million. The “authorization date” of
the financial statements is on February 16, 2006. TO DISGUISE Corporation declared
bankruptcy on Valentine’s Day (February 14, 2006). BELIE Inc. will
a. Disclose the fact that TO DISGUISE Corporation has declared bankruptcy in the notes.
b. Make a provision for this post–balance sheet event in its financial statements (as opposed
to disclosure in notes).
c. Ignore the event and wait for the outcome of the bankruptcy because the event took place
after the year-end.
d. Reverse the sale pertaining to this receivable in the comparatives for the prior period and
treat this as an “error” under PAS 8.
16. TITTILLATE TO TICKLE Inc. built a new factory building during 20x1 at a cost of ₱20
million. At December 31, 20x1, the net book value of the building was ₱19 million.
Subsequent to year-end, on March 15, 20x2, the building was destroyed by fire and the
claim against the insurance company proved futile because the cause of the fire was
negligence on the part of the caretaker of the building. If the date of authorization of the
financial statements for the year ended December 31, 20x1, was March 31, 20x2,
TITTILLATE. should
a. Write off the net book value to its scrap value because the insurance claim would not
fetch any compensation.
b. Make a provision for one-half of the net book value of the building.
c. Make a provision for three-fourths of the net book value of the building based on
prudence.
d. Disclose this nonadjusting event in the footnotes.
17. DERELICT VAGRANT BUM Inc. deals extensively with foreign entities, and its
financial statements reflect these foreign currency transactions. Subsequent to the balance
sheet date, and before the “date of authorization” of the issuance of the financial
statements, there were abnormal fluctuations in foreign currency rates. DERELICT Inc.
should 18
a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse
fluctuations in foreign exchange rates.
b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in
foreign exchange rates (and not just adverse movements).
c. Disclose the post–balance sheet event in footnotes as a nonadjusting event.
d. Ignore the post–balance sheet event.
18. On January 12, 20x2, a fire at a production facility of DUB TO NAME Company
damaged a number of adjacent buildings (owned by other businesses). DUB’s insurance
policy does not cover damage to the property of others. Insurance companies for those
other businesses have billed DUB Company for the estimated cost of ₱2.4 million
required to restore the damaged buildings. DUB’s legal counsel believed that it is
reasonably possible that DUB will be held liable for damages but was uncertain as to the
amount. In its 20x1 financial statements authorized for issue on February 1, 20x2, DUB
Company should report
a. An accrued liability of ₱2,400,000
b. An accrued liability of ₱2,400,000 and necessary disclosure in the notes to financial
statements
c. Only a note disclosure is required
d. No information about the damaged buildings
19. NOTION Co. guaranteed a loan of ₱200,000 granted to IDEA Co. by a bank. At the time
when the financial statements of NOTION are being finished, it is clear that IDEA is in
financial difficulties and it is probable that NOTION will meet the guarantee. In the
financial statements, NOTION should
a. Only disclose in the notes the amount of the guarantee
b. Recognize a provision for liability of ₱200,000
c. Not recognize and need not disclose the guarantee
d. Recognize a provision for liability of ₱200,000 and also disclose in the notes to financial
statements.
20. Are the following statements in relation to compensation true or false, according to PAS
24 Related Party Disclosures?
I. Compensation includes social security contributions paid by the entity.
II. Compensation includes post-employment benefits paid on behalf of a parent of the entity
in respect of the entity.
a. False, False b. False, True c. True, False d. True, True
21. The minimum disclosures prescribed under PAS 24 are to be made separately for certain
categories of related parties. Which of the following is not among the list of categories
specified under the Standard for the purposes of separate disclosure?
a. Entities with joint control or significant influence over the entity.
b. The parent company of the entity.
c. An entity that has a common director with the entity.
d. Joint ventures in which the entity is a venturer.
22. CUPIDITY GREED Company completed the following transactions in the year to
December 31, 20x1:
I. Sold a car for P9,250 to the uncle of CUPIDITY's finance director.
II. Sold goods to the value of P12,400 to AVARICE, a company owned by the daughter of
CUPIDITY's managing director. AVARICE has no other connection with CUPIDITY.
Which transactions, if any, require disclosure in the financial statements of CUPIDITY under
PAS 24 Related Party Disclosures?
a. Neither transaction c. Transaction (2) only
b. Transaction (1) only d. Both transactions
29. APATHETIC Company has a 70% subsidiary, INDIFFERENT, Inc. and is a venturer in
IMPARTIAL, a joint venture company. During the financial year to December 31, 20x1,
APATHETIC sold goods to both companies. Consolidated financial statements are
prepared combining the financial statements of APATHETIC and INDIFFERENT. The
investment in IMPARTIAL is accounted for under the equity method. Under PAS 24
Related Party Disclosures, in the combined financial statements of APATHETIC for
20x1, disclosure is required of transactions with
a. neither INDIFFERENT nor IMPARTIAL c. IMPARTIAL only
b. INDIFFERENT only d. both INDIFFERENT and
IMPARTIAL
Answer as required.
Exercises/Assignments
Answer the following Problems.
1. EMBOSOM CHERISH Co. engages in five diversified operations namely, operations A, B,
C, D, and E. Information on these segments are shown below:
Segments Revenues Profit (loss) Assets
Additional information:
a. For internal reporting purposes, segments A and B are considered as one operating segment.
b. Segment E is considered as an operating segment for internal decision making purposes.
c. Segments C and D have similar economic characteristics and share a majority of the
aggregation criteria.
What are the reportable segments?
a. A, B, C, D and E
b. A, B and E
c. A and B as one segment and E
d. A and B as one segment, E, and C and D as one segment
2. SORDID DIRTY Co. is preparing its year-end financial statements and has identified the
following operating segments:
Inter-
External segment Total
Segments revenues revenues revenues Profit Assets
6. Alexander Company has three business segments with the following information:
One Two Three
Sales to P8,000,000 P4,000,000 P6,000,000
outsiders
Intersegment 600,000 1,000,000 1,400,000
transfers
Interest income 400,000 500,000 600,000
– outsiders
Interest income
– intersegment 300,000 400,000 500,000
loans
What is the minimum amount of revenue that each of those segments must have to be
considered reportable?
a. P1,950,000 c. P2,250,000
b. P2,100,000 d. P2,370,000
7. In preparing its segment-reporting schedule, the Lorna Corporation has developed the
following information for each of its 5 segments:
Segment Revenue Expenses
1 P1,400,000 P800,000
2 1,200,000 1,300,000
3 900,000 750,000
4 1,500,000 1,900,000
5 500,000 220,000
Total P5,500,000 P4,970,000
The reportable business segment(s) using the segment result test is (are)
a. Segment 1, 2, 3, 4 & 5
b. Segment 1, 2, 3 & 4
c. Segment 1, 3 & 5
d. Segment 1, 3, 4 & 5
8. Louie Corporation and its division are engaged solely in manufacturing. The following
data pertain to the industries in which operations were conducted for current year:
Segment Operating Profit (Loss)
1 P8,000,000
2 2,000,000
3 (1,300,000)
4 3,000,000
5 (1,000,000)
In its segment information, which is (are) reportable segment/s?
a. Segments 1, 2, 3, 4 & 5
b. Segments 1, 2, 3 & 4
c. Segments 1,2 & 4
d. Segments 3 & 5
11. Operating segments that may be aggregated are those which exhibit similar economic
characteristics and are similar in the following, except
a. the nature of the products and services, their production processes, and distribution
methods
b. the type or class of customer for their products and services
c. their financial position, financial performance, and cash flows
d. regulatory environment
13. Disclosures for major customer shall be provided if revenues from transactions with a single
external customer amount to
a. 10% or more of the entity’s external revenues.
b. 10% or more of the entity’s external and internal revenues.
c. 75% or more of the entity’s external revenues.
d. 75% or more of the entity’s external and internal revenues.
15. OBLITERATE TO ERASE Co. included interest expense in its determination of segment
profit, which OBLITERATE's chief financial officer considered in determining the segment's
operating budget. OBLITERATE is required to report the segment's financial data under
PFRS 8. Which of the following items should OBLITERATE disclose in reporting segment
data? (Item #1) Interest expense; (Item #2) Segment revenues
a. No, No b. No, Yes c. Yes, No d. Yes, Yes
(AICPA)
20. Which of the following may not be considered as the chief operating decision maker of an
entity?
a. Chief Executive Officer (CEO) c. Chief Operating Officer (COO)
b. Executive Committee d. Shareholders
21. The following are required under PFRS 8 Operating Segments to disclose segment
information in its financial statements.
I. entities whose equity or debt securities are publicly traded
II. entities that are in the process of issuing equity or debt securities in public securities
markets
III. entities whose securities are not publicly traded or not in the process of issuing securities
to the public.
a. I and II b. I only c. II only d. None of these
22. A non-publicly listed entity may be required to comply with PFRS 8 Operating Segment if
a. the entity is a subsidiary whose parent is a listed entity or in the process of issuing
securities to the public even in the entity’s individual (separate) financial statements
b. the entity has a foreign operation
c. at least majority of its revenues comes from intercompany transactions
d. it discloses segment information in its general-purpose financial statements
23. In financial reporting for segments of a business enterprise, which of the following should be
taken into account in computing the amount of an industry segment's identifiable assets?
(Item #1) Accumulated depreciation; (Item #2) Marketable securities valuation allowance
a. No, No b. No, Yes c. Yes, Yes d. Yes, No
(AICPA)
25. An entity shall report separately information about each operating segment that:
I. Management deems relevant to external users
II. Meets the quantitative thresholds
a. I b. I or II c. II d. neither I nor II
27. Which of the following tests may be used to determine if an operating segment of an entity is
a reportable segment under the provision of PFRS 8 regarding quantitative thresholds?
a. Its revenue (both from external customers and internal segments) is equal to or greater
than 10 percent of total revenue (external and external).
b. The absolute value of its operating profit or loss is equal to or greater than 10 percent of
the higher of the total of the operating profit for all segments that reported profits and the
total of the losses for all segments that reported losses.
c. The segment contains 10 percent or more of the combined assets of all operating
segments.
d. All of the above.
28. SUBJUGATE CONQUER Corporation sells 5 different types of products. The company is
divided for internal reporting purposes into 5 different divisions based on these 5 different
product lines. The company should prepare the note disclosure for disaggregated information
based upon
a. the 5 types of products.
b. the 5 different divisions.
c. the materialty of each product line based on the revenue or operating profits generated by
each product line or the assets utilized by each product line.
d. the geographic areas in which the 5 products are sold.
(Adapted)