DIAGNOSTIC AFAR 2018 Question #1 An entity will primarily generate and expend cash in one primary economic environment. According to PAS 21, the effects of changes in foreign exchange rates, the correct term for the currency of this primary economic environment is the Foreign currency Presentation currency Reporting currency Functional currency Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #2 It is the allotment release by Local Government Units (LGU) or Department of Budget and Management to barangays. Internal Revenue Allotment (IRA) Subsidy - LGU Barangay Social Fund Income fro grants and donations Advanced Accounting - Government Accounting (Easy)
Question #3 All of the following are characteristics of a derivative, except It settled at a future date It requires no initial investment or an initial net investment
It is acquired for the purpose of generating a profit from short-term fluctuations in market factors Its value changes in response to the change in a specified underlying Advanced Accounting - Derivatives (Average)
Question #4 Corporation Lizzy acquired 2,000 shares of the voting stock of Corporation Lizette in the open market at P48 per share. Direct costs associated with the acquisition total of P4,000. Balance sheets of both companies on January 1, 2017, immediately after the acquisition of shares of Lizzy, are as follows: Corporation Lizzy Corporation Lizette Cash 50,000 10,000 Temporary investments 80,000 40,000 Receivables (net) 95,000 10,000 Investment in Corporation Lizette 100,000 Machinery and equipment (net) 100,000 45,000 Land 50,000 20,000 Total assets 475,000 125,000 Accounts payable 75,000 25,000 Common stock (P20 par) 250,000 50,000 Excess over par 90,000 30,000 Retained earnings 60,000 20,000 Total liabilities and SHE 475,000 125,000 The fair values of Lizzy and Lizette assets on January 1m 2017 are presented below. Liabilities of both companies are properly valued at their respective book value: Lizzy Cash Temporary investment Receivables (net) Investment in Corporation Lizette
Lizette 50,000 100,000 95,000 100,000
10,000 50,000 8,000 -
Machinery Land
110,000 100,000 555,000
40,000 30,000 138,000
The total consolidated assets must be 520,000
613,000
522,600
518,600
SOLUTION: Total consolidated assets must be the total book value of Lizzy excluding investment in Lizette, and fair market value of Lizette plus goodwill from business combination, if any. Percent of control: (2,000/50,000)/20 = 80% Cost of investment Fair value of stocks issues (2,000 x 48) Fair value of investment (138,000 - 25,000) x 80% Goodwill Total consolidated assets
96,000 90,400 5,600
Book value of the assets of Lizzy excluding investment (475,000 - 100,000) Fair value of the assets of Lizette Goodwill from the business combination Total Advanced Accounting - Consolidation After Acquisition (Difficult)
375,000 138,000 5,600 518,600
Question #5 Aliza Trading established a branch in Quezon City to distribute part of the goods purchased by it from other suppliers. Aliza ships merchandise to the branch at 20% above cost. The following account balances are taken from ledger balances of the home office and the branch: Sales Beginning inventory Purchase
Home Office 384,000 76,800 320,000
Branch 134,400 38,400
Shipment to branch Shipment from home office Operating expenses Ending inventory Calculate the combined net income. 108,800
90,880
104,960
83,200 99,840 23,040 30,720
46,080 62,720 106,080
SOLUTION: Branch net income Sales Less: Cost of sales at cost Gross profit Less: OPEX Net income Head office sales Less: Cost of sales Beginning inventory 76,800 Purchases 320,000 Shipments (83,200) End (62,720) Gross profit Less: OPEX Head Office net income Branch net income Combined net income Advanced Accounting - Home Office & Branch Accounting (Average)
134,400 89,600 44,800 23,040 21,760 384,000
250,880 133,120 46,080 87,040 21,760 108,800
Question #6 On July 1, the Joshua Company, organized a sales outlet in Cebu City. Following are the home office-branch transactions for the month of July: July 1 2
The home office transferred P250,000 to its Cebu branch. Merchandise costing the home P30 per unit was shipped to the branch at an invoice price of P40 per unit. Ten thousand units were shipped on July 2; a second order was to be filled by local suppliers. 2 Shipping costs on the above were paid as follows: By the office: P15,000 By the branch: P5,000 5 Additional merchandise was acquired by the branch from regional distributors, 5,000 units at P31 6 Display equipment was purchased by the home office, cost P360,000, and was delivered to the branch. Plant assets accounts were kept by the home office. 10 Branch sales for the period July 3-10; on account, 8,000 units at P50. 18 Branch collections on account, P320,000 25 Branch sales for the period July 11-24; on account, 5,000 units at P50 29 Cash remittance by branch to home office, P100,000 30 Monthly summary of branch cash expenses: Advertising (P4,000); Sales commission (65,000); Miscellaneous (P1,000) 31 Depreciation recorded by the home office for July included P15,000 that related to the display equipment used by the branch. Insurance on this equipment was amortized by the home office in the amount of P2,500. 31 Inventories of merchandise at the branch on July 31 included the following: From the home office (1,500 units x P40) From local suppliers (500 units x P31) Determine the correct balance of reciprocal account after recording branch net income or loss. 648,500
665,500
582,500
599,500
SOLUTION: Sales (8,000 x 50) (5,000 x 50) Cost of sales: Shipments from home office (10,000 x 40) Add: Shipping costs (15,000 + 5,000) Total Less: Cost of ending inventory (1,500/10,000 x 420,000) Purchases from outside suppliers (5,000 x 31) Less: Ending inventory (500 x 31) Gross profit Less: Operating profit Advertising Sales commissions Miscellaneous Depreciation Insurance Net income reported by the branch Cash to Cebu branch Merchandise shipped to Cebu branch (40 x 10,000) Shipping cost paid by the home office Cash remittance by Cebu branch to home office Depreciation charged to Cebu branch by the home office Insurance charged to Cebu branch by the home office Branch reported net income Balance of reciprocal accounts Advanced Accounting - Home Office & Branch Accounting (Difficult)
400,000 250,000 400,000 20,000 420,000 63,000 155,000 15,500
4,000 65,000 1,000 15,000 2,500
650,000
(357,000) (139,500) 153,500
(87,500) 66,000 250,000 400,000 15,000 (100,000) 15,000 2,500 66,000 648,500
Question #7 Jane had the following information 1. Purchased merchandises from a foreign supplier on January 20, 2016 for the Philippine peso equivalent of P60,000 and paid the invoice on April 20, 2016 at the Philippine peso equivalent of P68,000. 2. On September 1, 2016, borrowed the Philippine peso equivalent of P300,000 evidence by a note that is payable in the lenders local currency on September 1, 2017. On December 31, 2016, the Philippine peso equivalent of the principal amount was P320,000. In Janes income statement, what amount should be included as a foreign exchange loss? 22,000
20,000
4,000
28,000
SOLUTION: Loss (60,000 - 68,000) Loss (300,000 - 320,000) Total Advanced Accounting - Foreign Currency Transactions and Translations (Difficult)
8,000 20,000 28,000
Question #8 A construction entity signed a contract to build a theater over a period of two years, and with this contract also signed a maintenance contract for five years. Both contracts are negotiated as a single package and are closely interrelated to each other. The two contracts should be Segmented and considered two separate contracts Recognized under the full cost recovery method Treated differently, the building contract under the full cost recovery method and the maintenance contract under the percentage of completion method. Combined and treated as a single contract Advanced Accounting - Construction Accounting (Average)
Question #9 Kenneth Company, Inc. franchisor, entered into a franchise agreement with Orville Trading, franchisee on March 31,2013. The total franchise fee is P500,000, of which P100,000 is payable upon signing and the balance in four equal annual installments. The downpayment is refundable in the event the franchisor fails to render services and none thus far had been rendered. When Kenneth Company prepares its financial statements on March 31, 2013, the franchise fee revenue to be reported is: 100,000 0 400,000 500,000 Advanced Accounting - Franchise Accounting (Average)
Question #10 Which of the following is not objective evidence of impairment of a financial asset? Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets although the decrease cannot yet be associated with any individual financial asset. contract, such as a default or delinquency in interest or principal payments.
A breach of
A decline in the fair value of the asset
below its previous carrying amount Significant financial difficulty of the issuer or obligor. Advanced Accounting - Derivatives (Difficult)
Question #11 A contractor enters into a construction contract on January 1, 2011. The contractor agrees to a fixed price of P9,000 to build a bridge. The contractor's initial estimate of contract costs is P8,000. The contract expects that it will take three years to build the bridge.
The contractor has a December 31 year-end. By the end of the first year of the contract (December 31, 2011), the contractor's estimate of total costs has increased to P8,050 (costs incurred in 2011 amounted to P2,093). In 2012, the customer and contractor agree to a variation resulting in an increase in contract revenue of P200 and estimated additional contract costs of P150. At the end of 2012, costs incurred of P4,075 include P100 paid for standard materials stored at the site to be used in 2013 to complete the project. The contractor determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs. Determine the revenue for the year 2013: 2,392 2,592 2,340 4,468 Advanced Accounting - Construction Accounting (Average)
Question #12 On October 3, 2020, Mike Inc. entered into a forward contract with BPI Bank for the speculation to buy $100 to be delivered on January 30, 2021. The following direct exchange rates were provided: Spot-buying Spot-selling Forward-buying 120 days Forward-selling 120 days Forward-buying 90 days Forward-selling 90 days Forward-buying 60 days Forward-selling 60 days Forward-buying 30 days
October 3, 2020 P40 P42 41 43 42 45 46 43 42
December 31, 2020 P43 44 40 45 44 41 40 42 41
January 30, 2021 P41 44 42 42 45 44 42 41 45
Forward-selling 30 days 41 40 42 What is the net foreign currency gain (loss) to be recognized by Mike for the years ended December 31, 2020 and December 31, 2021, respectively? (P200) and P300
P200 and (P100)
P300 and (P200)
(P300) and P400
SOLUTION: 12/31/2020 forward selling 30-day rate 10/3/2020 forward selling 120-day rate Change in forward rate Forex loss
40 (43) (3) 100 (300)
1/30/2021 selling spot rate 12/31/2020 forward selling 30-day rate Change in forward rate
44 (40) 4 100 Forex gain 400 Since the forward rate increased (decreased) therefore the forward contract receivable also increased resulting to a gain (loss). Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #13 On December 31, 2017, the home office of Trisha Supply Company recorded a shipment of merchandise to its Glenda branch as follows: Glenda branch 30,000 Shipments to Glenda branch 25,000 Unrealized profit in Glenda branch inventory 4,000 Cash (for freight charges) 1,000 The Glenda branch sells 40% of the merchandise to outside entities during the rest of December 31, 2017. The books of the home office and Trisha branches are closed on December 31 of each year. On January 5, 2018, the Glenda branch
transfers half of the original shipments to the Sandy branch and the Glenda branch pays P500 freight on the shipment. At what amounts should the 60% of the merchandise remaining unsold at December 31, 2017 be included in the inventory of the Glenda branch on December 31, 2017? 15,600
15,000
17,400
18,000
SOLUTION: Shipments from home office Freight in Total available for sale Ending inventory of branch Shipments from home office Over allowance Shipments from home office at cost Freight Total available for sale at cost Ending inventory of branch at cost Advanced Accounting - Home Office & Branch Accounting (Average)
29,000 1,000 30,000 60% 18,000 29,000 (4,000) 25,000 1,000 26,000 60% 15,600
Question #14 Net assets restricted by the governing board of a non-government, not-for-profit organization are reported as part of: Unrestricted net assets Any of these, depending on the terms Temporarily restricted net assets Permanently restricted net assets Advanced Accounting - Not for Profit Organizations (Average)
Question #15 On January 1, 2016, Bartell Company sold its idle plant facility to Cooper, Inc. for P1,050,000. On this date the plant had a net book value of P735,000. Cooper paid P150,000 cash on January 1, 2016, and signed a P900,000 note bearing interest at 10%. The note was payable in three annual installments of P390,000 beginning January 1, 2017. This included interest of P90,000. Bartell appropriately accounted for the sale under the installment method. Cooper made a timely payment of the first installment on January 1, 2017. At December 31, 2017, Bartell has deferred gross profit of 270,000
153,000
180,000
225,000
SOLUTION: The total gross profit (GP) on the sale is P315,000 (selling price of P1,050,000 less depreciated cost of P735,000), and the GP rate is 30% (P315,000/P1,050,000). GP recognized in 2016 is P45,000 (30% x P150,000 down payment), and GP recognized in 2017 is P90,000 (30% x (P390,000 - P90,000)). This leaves a balance of P180,000 in deferred GP. Recognized 2016 Recognized 2017
Deferred gross profit 45,000 90,000
315,000 Total gross profit
180,000 Balance 12/31/2017 GP is recognized only on the portion of the sales price collected, not on the interest collected (P90,000). A short-cut approach is to multiply the remaining balance in installment notes receivable by the GP rate (P600,000 x 30% = P180,000). Advanced Accounting - Installment Sales (Average)
Question #16 By applying the definition provided in PAS 21, which item will be regarded as a monetary item? Inventory Property, plant and equipment
Land and buildings Accounts receivable Advanced Accounting - Foreign Currency Transactions and Translations (Easy)
Question #17 On December 1, 2016, Gary Inc. entered into a 120-day forward contract to purchase 250,000 US dollars for speculative purposes. Gary, Inc, fiscal year ends on December 31. The exchange rates are as follows: Date
Spot rate
Forward rate (3/31/10)
December 1, 2016 P45.00 December 31, 2016 46.00 January 30, 2017 45.60 March 31, 2017 45.10 How much is the forex gain or loss to be reported from this forward contract in 2017? 300,000
225,000
250,000
P45.50 46.50 45.30
350,000
SOLUTION: (46.50 - 45.10) x 250,000 = 350,000 Advanced Accounting - Foreign Currency Transactions and Translations (Difficult)
Question #18 SLEX enters into an arrangement under which it will build and operate a toll bridge. Company B is entitled to charge users for driving over the toll bridge for the period from the completion of construction until 1 million cars have driven across the bridge, at which point the concession arrangement will end. SLEX incurred a total cost of P1 billion for the construction of the toll bridge. How shall SLEX account for its infrastructure asset? It shall be classified and treated as intangible asset to be amortized on the basis of usage or unit method of 1 million cars. It shall be classified and treated as financial asset
It shall be bifurcated into intangible asset and financial asset It shall be classified and treated as intangible asset to be amortized using straight line method of presumed life of 10 years. Advanced Accounting - Joint Venture (Average)
Question #19 A construction company is in the middle of a 2 year construction contract when it receives a letter from the customer extending the contract by a year and requiring the construction company to increase its output in proportion of the number of years of the new contract to the previous contract period. This is allowed in recognizing additional revenue according to PAS 11 if Negotiations have reached an advanced stage and it is probable that the customer will accept the claim. It is probable that the customer will approve the variation and the amount of revenue arising from the variation, whether the amount of revenue can be reliably measured or not. It is probable that the customer will approve the variation and the amount of revenue arising from the variation, and the amount of revenue can be reliably measured. The contract is sufficiently advanced and it is probable that the specified performance standards will be exceeded or met. Advanced Accounting - Construction Accounting (Difficult)
Question #20 Anas Inc. granted a franchise to Mocca for the Makati area. The franchisee was to pay a franchisee of P500,000, payable in five equal annual installments starting with the payment upon signing of the agreement. The franchise was to pay monthly 3% of gross sales of the preceding month. Should the operations of the outlet prove to be unprofitable, the franchise may be canceled with whatever obligations owing Anas, Inc. in connection with the P500,000 franchise fee waived. The prevailing interest rate is 14%. The first year generated a gross sales of P2,500,000. What is the amount of unearned franchisee fee after the first year of operations? 291,400
391,400
SOLUTION:
575,000
500,000
Unearned franchise fee: p100,000 x 2.914 = P291,400 Since the franchise maybe canceled with any outstanding balance to be waived, then that amount still to be collected is considered unearned. Advanced Accounting - Franchise Accounting (Difficult)
Question #21 A parent is not required to present consolidated financial statements When the parent is wholly owned subsidiary When the parent and the subsidiary are engaged in dissimilar activities When the parent is virtually wholly owned provided parent does not obtain approval of the owners of minority interest When there is a three-month time lag in the fiscal periods of the parent and its subsidiary Advanced Accounting - Consolidation After Acquisition (Average)
Question #22 On January 2, 2017, Magnolia Ice Cream signed an agreement authorizing Trisha to operate as franchisee for an initial franchise fee P500,000 received upon signing of the agreement. Trisha commenced operations on August 1, 2017, at which date all of the initial services required of Magnolia Ice Cream had been performed at a cost of P120,000. The franchise agreement further provides that Trisha must pay a 10% monthly continuing franchising fee. Sales reported from August 1 to December 31, 2017 amounts to P400,000. What is the net income related with franchise fee to be reported by Magnolia Ice Cream in 2017? 380,000
420,000
540,000
500,000
SOLUTION: Cash received / Initial Franchise Fee 500,000 Direct cost (120,000) Gross profit on initial franchise fee 380,000 Continuing franchise fee (400,000 x 10%) 40,000 Net income 420,000 Since the franchise reported gross sales starting August, therefore as of December 31, there is substantial performance already and the initial franchise fee is recognized as revenue.
Advanced Accounting - Franchise Accounting (Average)
Question #23 Joshua Corporation is considering an acquisition of Pane Company. Pane has a capital structure of 50 percent debt and 50 percent equity, with a current book value of P10 million in assets. Pane’s pre-merger beta is 1.36 and is not likely to be altered as a result of the proposed merger. Joshua’s pre-merger beta is 1.02 and both it and Pane face a 40 percent tax rate. Joshua’s capital structure is 40 percent debt and 60 percent equity, and it has P24 million in total assets. The net cash flows from Pane available to Joshua’s stockholders are estimated at P4.0 million for each of the next three years and a terminal value of P19.0 million in Year 4. Additionally, new debt issued by the combined firm would yield 10 percent before-tax, and the cost of equity is estimated at 12.59 percent. Currently, the risk-free rate is 6.0 percent and the market risk premium is 5.88 percent. What is the present value (to the nearest thousand) of the Pane cash inflows to Joshua? 25,620,000 14,695,000 20,536,000 22,847,000 31,000,000 Advanced Accounting - Business Combination (Difficult)
Question #24 Abby Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed and the balance in five annual payments. The present value of the future payments, discounted at 10% is P68,234. The franchisee has the option to purchase P15,000 of equipment for P12,000. Abby has substantially provided all initial services required and collectability of the payments is reasonably assured. The amount of the revenue from franchise fees is: 90,234 93,234
115,000 25,000
SOLUTION: 25,000+68,234=93,234 Advanced Accounting - Franchise Accounting (Average)
Question #25 When disclosing information about investments in associate, PAS 28 Investment in Associates and Joint Ventures, requires separate disclosure of which of the following? I II III IV
Shares in associates in the statement of financial position Share profit or loss associates in the statement of profit or loss and other comprehensive income Share of any discontinuing operations in the statement of changes in equity Shares of changes recognized directly in the associates equity in the statement of changes in equity
I, II, III and IV I, II and III only II, III and IV only Advanced Accounting - Joint Venture (Average)
I, II and IV only
Question #26 On January 2, 2015, Mycors Inc. signed an agreement to operate as franchisee of Mang Inasal for an initial franchise fee of P2,343,750 for 10 years. Of this amount, P468,750 was paid when the agreement was signed and the balance payable in three annual payments beginning on December 31, 2015. Mycors signed a non-interest bearing note for the balance. The implicit interest rate is 18%. Assume that substantial services amounting to P730,000 had already been rendered by the franshisor and indirect costs of P53,750 have also been incurred. If collection of the note is not reasonably assured, calculate the net income. For the year ended December 31, 2015. Use PV factor 2.17. 456,026
753,900
700,150
509,776
SOLUTION: Downpayment Present value (312,500 x 2.17) IFF Less: Franchise cost Franchise profit Gross profit rate (1,095,000/1,825,000) Realized gross profit (468,750 + ((625,000 - 244,125) x 60%) Interest income Expenses Net income Advanced Accounting - Franchise Accounting (Difficult)
468,750 1,356,250 1,825,000 730,000 1,095,000 60% 509,775 244,125 (53,750) 700,150
Question #27 A manufacturing group has just acquired a controlling interest in a football club that is listed on a stock exchange. The management of the manufacturing group wishes to exclude the football club from the consolidated financial statements on the grounds that its activities are dissimilar. How should the football club be accounted for? The entity should be consolidated as there is no exemption from consolidation on the grounds of dissimilar activities. The entity should not be consolidated and should appear as an investment in the group accounts.
The entity
should not be consolidated using the purchase method but should be consolidated using equity accounting. should not be consolidated; details should be disclosed in the financial statements. Advanced Accounting - Consolidation After Acquisition (Difficult)
The entity
Question #28 BPI US is operating within US territory wherein the functional currency is the US $. However, the presentation currency of the bank is Philippine peso. The following financial position data for the year 2020 are provided: Total assets on 12/31/2020
$1,000
Total liabilities on 12/31/2020 Ordinary shares on 12/31/2020 Share premium on 12/31/2020 Retained earnings on 1/1/2020 Net income for year 2020 Dividends declared on 12/1/2020 The following additional data are provided. 1. All ordinary shares are issued on January 1, 2015. 2. The translated amount of retained earnings at Philippine peso on December 31, 2019 is P8,000. 3. The following direct exchange rates are determined:
200 300 100 200 300 100
1/1/2015 45 12/31/2019 42 12/1/2020 41 12/31/2020 43 Average rate for 2020 44 What is the translation gain (loss) to be recognized by BPI US in its Statement of Comprehensive Income for the year ended December 31, 2020? P100 gain
(P600) loss
P800 gain
(P700) loss
SOLUTION: Net income in $ Weighted average rate Net income in Peso
300 44 13,200
Dividends declared 12/1/2020 in $ Rate at the date of declaration Dividends declared in Peso
100 41 4,100
Retained earnings in Peso 1/1/2020 Net income in Peso
8,000 13,200
Dividends declared in Peso Retained earnings in Peso 12/31/2020
(4,100) 17,100
Assets in Peso (1,000 x 43) 43,000 DR Liabilities in Peso (200 x 43) 8,600 CR Ordinary shares in Peso (300 x 43) 12,900 CR Share premium in Peso 4,300 CR Retained earnings in Peso 17,100 CR Cumulative translation adjustment 100 CR The rate used of the ordinary shares and share premium was the rate at the date of declaration which was the same as the closing rate. Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #29 Personal services include Advertising, rent, insurance and gasoline Travelling, training and seminar, telephone, internet staff development Bank charges, interest, loss on foreign exchange transactions Salaries, allowances and bonuses Advanced Accounting - Government Accounting (Average)
Question #30 This serves as the covering letter in transmitting the agency's financial statements to the COA, DBM and other oversight agency. Postclosing trial balance Preclosing trial balance Statement of management responsibility
Note to the financial statements Advanced Accounting - Government Accounting (Average)
Question #31 Which of the following statements concerning the different types of hedging transactions is incorrect? In hedging transaction designated as hedge of net investment in foreign operation, unrealized holding gain or loss on hedging instrument which is considered effective portion will be recognized in other comprehensive income with reclassification adjustment to profit or loss if realized. In hedging transaction designated as fair value hedge, unrealized holding gain or loss on hedged item will be recognized in profit or loss. In hedging transaction which is undesignated, unrealized holding gain or loss on hedging instrument will be recognized in profit or loss. In hedging transaction designated as cash flow hedge, unrealized holding gain or loss on hedged item will be recognized in other comprehensive income with reclassification adjustment to profit or loss if realized. Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #32 On December 18, 2010, the statement of affairs of Paz Company, which is in bankruptcy liquidation, included the following: Assets pledged for fully secured liabilities Assets pledged for partially secured liabilities Free assets Fully secured liabilities Partially secured liabilities Unsecured liabilities with priority Unsecured liabilities without priority Compute the estimated amount to be paid to the unsecured liabilities with priority:
100,000 40,000 120,000 80,000 50,000 60,000 90,000
48,000 64,000 60,000 80,000 Advanced Accounting - Corporate Liquidation (Average)
Question #33 Kenneth Company had a Swiss franc receivable resulting from exports to Switzerland and a Mexican peso payable resulting from imports from Mexico. Kenneth recorded foreign exchange gains related to both its franc receivable and peso payable. Did the foreign currencies increase or decrease in Philippine peso value from the date of the transaction to the settlement date? Franc (Increase); Mexican Peso (Decrease) Franc (Decrease); Mexican Peso (Decrease) Franc (Increase); Mexican Peso (Increase) Franc (Decrease); Mexican Peso (Increase) Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #34 When a secured claim is not fully settled by the selling of the underlying collateral The unsettled portion is classified as an unsecured priority claim The unsettled portion remains as an unsecured priority claim. The unsettled portion remains as a secured claim The unsettled portion of the claim cannot be collected by the creditor Advanced Accounting - Corporate Liquidation (Average)
Question #35 Financial statements of non profit organization includes all of the following, except Statement of financial position Statement of activities Statement of cash flows Statement of changes in equity Advanced Accounting - Not for Profit Organizations (Easy)
Question #36 Mendiola Construction is constructing a skyscraper in the heart of town and has signed a fixed price two-year contract for P21 million with the local authorities. It has incurred the following cost relating to the contract by the end of first year: Material cost 5,000,000 Labor cost 2,000,000 Construction overhead 2,000,000 Marketing costs 500,000 Depreciation of idle plant and equipment 500,000 At the end of the first year, it has estimated cost to complete the contract, P9 million. What profit or loss from the contract should Mendiola Construction recognize at the end of the first year? 1,280,000 (9.5/18.5 x P2,500,000) 1,500,000 (9/18 x P3,000,000) (9/18 x P2,000,000) Advanced Accounting - Construction Accounting (Difficult)
1,005,000 (10/19 x P2,000,000)
1,000,000
Question #37 Dallas Motors Auto, a national autoparts chain, is considering purchasing a smaller chain, Southern Auto. Dallas Motors’s analysts project that the merger will result in incremental net cash flows of P2 million in Year 1, P4 million in Year 2, P5 million in Year 3, and P117 million in Year 4. The Year 4 cash flow includes a terminal value of P107 million. Assume all cash flows occur at the end of the year. The acquisition would be made immediately, if it is undertaken. Southern’s post-
merger beta is estimated to be 2.0, and its post-merger tax rate would be 34 percent. The risk-free rate is 8 percent, and the market risk premium is 4 percent. What is the value of Southern Auto to Dallas Motors Auto? 60,350,000 88,230,000 67,000,000 72,520,000 81,930,000 Advanced Accounting - Business Combination (Difficult)
Question #38 Lane Co., which began operations on January 1, 2017, appropriately uses the installment method of accounting. The following information pertains to Lanes operations for the year 2017: Installment sales Regular sales Cost of installment sales Cost of regular sales General and administrative expenses Collections on installment sales The deferred gross profit account in Lanes December 31, 2017 balance sheet should be 320,000
500,000
400,000
P1,000,000 600,000 500,000 300,000 100,000 200,000
150,000
SOLUTION: Under the installment method, gross profit is deferred at the time of sale and is recognized by applying the gross profit rate to subsequent cash collections. At the time of sale, gross profit of P500,000 is deferred (P1,000,000 - P500,000). The gross profit rate is 50% (P500,000 / P1,000,000). Since 2017 collections on installment sales were P200,000, gross profit of P100,000 (50% x P200,000) is recognized in 2017. This recognition of gross profit would decrease the deferred gross
profit account to a 12/31/2017 balance of P400,000 (P500,000 - P100,000). Note that regular sales, cost of regular sales, and general and administrative expenses do not affect the deferred gross profit account. Advanced Accounting - Installment Sales (Average)
Question #39 What is the principle for recognition of a financial asset or a financial liability in PAS 39? A financial asset is recognized when, and only when, the entity obtains control of the instrument and has the ability to dispose of the financial asset independent of the actions of others. A financial asset is recognized when, and only when, the entity becomes a party to the contractual provision of the instrument. A financial asset is recognized when, and only when, the entity obtains the risks and rewards of ownership of the financial assets and has the ability to dispose the financial asset. A financial asset is recognized when, and only when, it is probable that future economic benefits will flow to the entity and the cost or value of the instrument can be measure reliably. Advanced Accounting - Derivatives (Difficult)
Question #40 Abby Inc. charges an initial franchise fee of P115,000, with P25,000 paid when the agreement was signed and the balance in five annual payments. The present value of the future payments, discounted at 10% is P68,234. The franchisee has the option to purchase P15,000 of equipment for P12,000. Abby has substantially provided all initial services required and collectability of the payments is reasonably assured. The amount of the revenue from franchise fees is: 115,000 93,234 25,000 90,234 Advanced Accounting - Franchise Accounting (Average)
Question #41 Jojo, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Camiguin Branch with the latter paying P600 for freight cost. Subsequently, the head office authorized Camiguin Branch to transfer the goods to Bohol Branch for which the latter was billed for the P10,000 cost of the goods and freight charge of P200 for the transfer. If the head office had shipped the goods directly to Bohol Branch, the freight charge would have been P700. The P100 difference in freight cost would have been disposed of as follows: Charged to Camiguin Branch Charged to Bohol Branch Charged to the Head Office Considered as savings Advanced Accounting - Home Office & Branch Accounting (Average)
Question #42 Which of the following statements is (are) false? I
II III
PFRIC 12 specifies that the infrastructure to be recognized as property, plant and equipment of the operator because the contractual service arrangement does not convey the right to control the use of the public service infrastructure to the operator. The operator has access to operate the infrastructure to provide the public service on behalf of the grantor in accordance with the terms specified in the contract. Under the terms of the contractual arrangement, the operator acts as a service provider by constructing or upgrading the infrastructure used to provide a public service, and operates and maintains that infrastructure (operation services) for a specified period of time.
I and III only I and II only I only II only Advanced Accounting - Joint Venture (Average)
Question #43 PFRS 4 was introduced principally for what reason? As a response to recent scandals within the insurance industry. Because of pressure from the financial services authorities in several countries. To completely overhaul insurance accounting. To make limited improvements to the accounting for insurance accounting. Advanced Accounting - Insurance Contracts (Average)
Question #44 The Rissa Company has entered into a contract on June 1, 20X3 that requires it to issue its own ordinary shares with a value of CU250,000 on 31 May 20X6. In accordance with PAS32, Financial instruments presentation, the company should classify the contract as Embedded derivative Equity instrument Financial liability Financial asset Advanced Accounting - Derivatives (Easy)
Question #45 When the bankruptcy court grants the order for relief: The bankruptcy court confirms that the reorganization plan is fair an equitable. The court discharges the debtor except for claims provided for in the reorganization plan. The reorganization plan has been accepted by at least two-thirds in amount and over half in number of claims. Creditors may not seek payment of their claims directly from the debtor corporation.
Advanced Accounting - Corporate Liquidation (Average)
Question #46 Exchange differences arising from translation of financial statement of a foreign entity are Recognized directly in retained earnings Recognized as accumulated translation adjustments in the equity section Capitalized if the differences resulted from severe devaluation of a currency Recognized as accumulated translation adjustments in profit or loss Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #47 Dorian and Donnie are partners who share profits and losses in a 2:3 ratio. The partnership will be liquidated in installments. Some noncash assets have been sold, but other assets with a book value of P126,000 remain. Liabilities are now P16,000, and liquidation expenses are expected to be P7,200. The capital balances are P92,000 for Dorian and P68,000 for Donnie. Assuming the available cash is distributed, how much is the share of Dorian? 42,800
8,000
32,000
26,800
SOLUTION: Liabilities still unpaid Capital of Dorian Capital of Donnie Total Less: Noncash assets Cash balance Less: Anticipated expenses Liabilities to be paid Available to owners
16,000 92,000 68,000 176,000 (126,000) 50,000 (7,200) (16,000) 26,800
Dorian Capital balance Liquidation loss Deficiency Cash distribution Advanced Accounting - Partnership (Difficult)
92,000 (53,280) (11,920) 26,800
Donnie 68,000 (79,920) 11,920 -
Total 320,000 133,200 26,800 (26,800)
Question #48 According to PAS 21, The effects of changes in foreign exchange rates, at which rate should an entity's noncurrent assets be translated when its functional currency figures are being translated into a different presentation currency? The spot exchange rate The average rate The historical exchange rate The closing rate Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #49 James Inc. purchased a P1 million life insurance policy on its president, of which James is the beneficiary. Information regarding the policy for the year ended December 31, 2013 follows: Cash surrender value, 1/1/13 87,000 Cash surrender value, 12/31/13 108,000 Annual advance premium paid 1/1/13 40,000 During 2013, dividends of P6,000 were applied to increase the cash surrender value of the policy. What amount should James report as life insurance expense for 2013? 21,000 13,000
19,000 40,000 Advanced Accounting - Derivatives (Average)
Question #50 Tillary Company, which began business on January 1, 2017, appropriately uses the installment sales method of accounting. The following data are available for 2017: Installment accounts receivable, December 31, 2017 Deferred gross profit, December 31, 2017 (before recognition of realized gross profit) Gross profit on sales The realized gross profit on installment sales for the year ended December 31, 2017, should be 80,000
70,000
50,000
P200,000 P140,000 40%
60,000
SOLUTION: As this is the first year of operations, all P140,000 is from 2017 sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for 2017. Therefore, the total debits to installment AR for 2017 sales (1) can be computed by dividing the deferred GP by the GP ratio, or P350,000 (P140,000/40%). Next, cash collections (2) can be calculated as: P350,000 total debits - P200,000 ending balance = P150,000 cash collections. Finally, GP realized in 2017 (3) would be 40% times cash collections of P150,000 for P60,000 GP realized. Installment AR Beg. bal. 0 150,000 (2) (1) 350,000 (3) End. bal. 200,000 Advanced Accounting - Installment Sales (Average)
Deferred GP 60,000
0 140,000
Beg. bal.
Question #51 Foreign operations that are an integral part of the operations of the entity would have the same functional currency as the entity. Where a foreign operation functions independently from the parent, the functional currency will be that of the parent determined using the guidance for determining an entitys functional currency the same as the presentation currency that of the country of incorporation Advanced Accounting - Foreign Currency Transactions and Translations (Average)
Question #52 Tillary Company, which began business on January 1, 2017, appropriately uses the installment sales method of accounting. The following data are available for 2017: Installment accounts receivable, December 31, 2017 Deferred gross profit, December 31, 2017 (before recognition of realized gross profit) Gross profit on sales The cash collections on installment sales for the year ended December 31, 2017, should be 130,000
120,000
150,000
P200,000 P140,000 40%
100,000
SOLUTION: As this is the first year of operations, all P140,000 is from 2017 sales. In the absence of any defaults and repossessions during the year, this represents the total gross profit (GP) for 2017. Therefore, the total debits to installment AR for 2017 sales (1) can be computed by dividing the deferred GP by the GP ratio, or P350,000 (P140,000/40%). Next, cash collections (2) can be calculated as: P350,000 total debits - P200,000 ending balance = P150,000 cash collections. Finally, GP realized in 2017 (3) would be 40% times cash collections of P150,000 for P60,000 GP realized. Beg. bal.
Installment AR 0 150,000
Deferred GP (2)
0
Beg. bal.
(1) 350,000 (3) End. bal. 200,000 Advanced Accounting - Installment Sales (Average)
60,000
140,000
Question #53 On January 1, 2012, Mark Company received a two-year P500,000 loan. The loan calls for payment to be made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate on January 1, 2012, was 10%. Anthony company also has a two-year P500,000 loan, but Anthony's loan carries a fixed interest rate of 10%. Mark Company does not want to bear the risk that interest rates may increase in year two of the loan. Anthony Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Anthony agrees to make Mark's interest payment in 2013 and Mark likewise agrees to make Anthony's interest payment in 2013. The two companies agree to make settlement payments, for the difference only, on December 31, 2013. The interest rate on January 1, 2013 is 12%. How much should be recognized as derivative asset at December 31, 2012? 10,000 0 8,929 9,091 Advanced Accounting - Derivatives (Difficult)
Question #54 Which of the following transactions will increase the normal balance of home office account in the separate statement of financial position of the branch? Payment by the branch of home offices loans payable Collection by the home office of branchs receivable Debit memo received from the home office Credit memo issued by the home office
Advanced Accounting - Home Office & Branch Accounting (Average)
Question #55 PSY Corporation owns 90% of the outstanding common shares of SVG Company. On January 2, 2016, office equipment that had a carrying value to SVG Company P480,000 and has a remaining life of 10 years was sold to PSY Corporation for P400,000. On the other hand, last August 31, 2017, PSY Corporation sold a second hand delivery van to SVG Company at a gain of P30,000 (remaining life of 5 years). Included in the January 1, 2017 inventory of PSY Company was merchandise inventory worth P65,000 while SVG Company had P80,000 on its December 31, 2017. These inventories came from inter-company sales and purchases. PSY Corporation included a mark-up of 25% on cost while SVG Company charged a 30% mark-upon sales. Each of the two companies has net incomes in 2016 and 2017 as follows: 2016
2017
PSY Corporation 1,200,000 1,500,000 SVG Company 900,000 1,000,000 What is the amount of the consolidated net income attributable to controlling interest in 2017? 2,377,600
2,366,350
2,369,500
2,398,350
SOLUTION: Net income of controlling interest, 2016 Net income of parent per books 2016 Share net income of subsidiary per books 2016 (900,000 x 90%) Upstream unrealized loss 2016 (80,000 x 90%) Upstream realized loss 2016 (8,000 x 90%) Upstream ending inventory 2016 (19,500 x 90%) Consolidated net income attributable to parent Net income of controlling interest, 2017
1,200,000 810,000 72,000 (7,200) (17,550) 2,057,250
Net income of parent per books 2017 Share net income of subsidiary per books 2017 (1,00,000 x 90%) Downstream unrealized gain, 8/31.2017
1,500,000 900,000 (30,000)
Downstream realized gain, 12/31/2017 Upstream realized loss 2017 (8,000 x 90%) Upstream RP beginning inventory 2017 (19,500 x 90%) Downstream UP ending inventory 2017 Consolidated net income attributable to parent Advanced Accounting - Consolidation After Acquisition (Average)
2,000 (7,200) 17,550 (16,000) 2,366,250
Question #56 Which of these considerations would not be relevant in determining the entity's functional currency? The currency in which finance is generated The currency in which receipts from operating activities are retained The currency that influences the costs of the entity The currency that is the most internationally acceptable for trading Advanced Accounting - Foreign Currency Transactions and Translations (Easy)
Question #57 With respect to the cost a business acquisition, PFRS 3 requires cost(total consideration) to be allocated Based on recoverable amounts Based on fair values To the assets based on their carrying values Based on original costs Advanced Accounting - Business Combination (Easy)
Question #58 Bucca Warehousing Corporation bought a building at auction on June 30, 2017, for P1,000,000. On July 2, 2017, before occupying the building, Bucca sold it to a triple-A rated company for P1,200,000. Bucca received a cash down payment of P300,000 and a first mortgage note at the market rate of interest, for the balance. No additional payments were required until 2018. On September 1, 2017, an independent appraiser valued the property at P1,500,000. On its 2017 income tax return, Bucca reported the sale on the installment basis. How much gain should Bucca recognize in its income statement for the year ended December 31, 2017? 300,000 0 200,000 50,000
SOLUTION: The installment method of recognizing revenue is not acceptable for financial reporting purposes unless the circumstances are such that the collection of the sales price is not reasonably assured. Since the property was sold to a triple-A rated company and the value of the property is appreciating, collection can be assumed to be reasonably assured. Therefore, the entire gain should be recognized for financial reporting purposes at the date of sale: Sales price Cost of building P1,200,000 P1,000,000 Advanced Accounting - Installment Sales (Average)
= =
Gain recognized P200,000
Question #59 The following transactions were incurred for the year by the Company: 1. Transfer of P13,000 merchandise to an agency to establish a working fund. 2. Receipt of sales orders from the agency, P130,000. 3. Collection of agency accounts by the home office, P91,000. 4. Home office disbursements representing agency expenses, P11,700. 5. Replenishment of the agency working fund upon receipt of expense vouchers for P5,850.
6. Cost of goods sold identified with the agency sales, P93,600. How much is the net income traceable to the agency? 36,400
18,850
(72,150)
5,850
SOLUTION: Agency sales receipts Cost of sales Gross profit Expenses (11,700 + 5,850) Net income of the agency Advanced Accounting - Home Office & Branch Accounting (Average)
130,000 (93,600) 36,400 (17,550) 18,850
Question #60 A construction contractor has a fixed price contract for P100,000 to construct a building (the project).The contractor's initial estimate of total contract costs is P60,000. It will take two years to construct the building.At the end of the first year of the project (31 December 2013) the contractor has incurred costs of P20,000 on the contract, including P2,000 on cement that is held offsite. The entity's estimate of total contract costs has stayed the same.The contractor determines the stage of completion of the construction contract by reference to the proportion that costs incurred for work performed to date bear to the estimated total costs. Determine the expenses for the year 2013: 18,000 20,000 33,333 13,333 Advanced Accounting - Construction Accounting (Average)
Question #61 Jinkee Corp. has been undergoing liquidation since January 1. As of March 31, its condensed statement of realization and liquidation is presented below: Assets: Assets to be realized Assets acquired Assets realized Assets not realized Liabilities: Liabilities liquidated Liabilities not liquidated Liabilities to be liquidated Liabilities assumed Revenues and Expenses: Supplementary charges/debits Supplementary credits The net gain (loss) for the three-month period ending March 31 is: 750,000 425,000 250,000 (325,000) Advanced Accounting - Corporate Liquidation (Difficult)
1,375,000 750,000 1,200,000 1,375,000 1,875,000 1,700,000 2,250,000 1,625,000 3,125,000 2,800,000
Question #62 If the foreign operation reports in the currency of a hyperinflationary economy, assets, liabilities income and expenses shall be translated at Forward rate Average rate Closing rate Exchange rate on the date of transaction Advanced Accounting - Foreign Currency Transactions and Translations (Easy)
Question #63 It is the currency of the primary economic environment in which the entity operates. Functional currency Local currency Foreign currency Presentation currency Advanced Accounting - Foreign Currency Transactions and Translations (Easy)
Question #64 The recognition of unrealized gain or loss on the measurement of the financial assets and insurance liabilities as a component of other comprehensive income is described in insurance parlance as fair value accounting hedge accounting shadow accounting Advanced Accounting - Insurance Contracts (Average)
current value accounting
Question #65 Below is the unadjusted trial balance of Elmer Corporation at December 31, 2015 Debit
Credit
Cash 2,500 Installment accounts receivable, 2014 20,000 Installment accounts receivable, 2015 70,000 Inventory, December 31, 2015 100,000 Other assets 248,500 Accounts payable - trade 25,000 Unrealized gross profit, 2013 10,000 Unrealized gross profit, 2014 43,000 Unrealized gross profit, 2015 50,000 Capital stock 300,000 Retained earnings 40,000 Gain on repossession 3,000 Operating expenses 25,000 Total 466,000 466,000 Cost of goods sold had been uniform over the years at 60% of sales. Elmer Corporation adopts perpetual inventory procedures. On installment sales, the corporation charges installment accounts receivable and credits inventory gross profit accounts. Repossessions of merchandise have been made during the 2015 due to some customers failure to pay maturing installments. Analysis of these transactions were summarized as follows: Inventory Unrealized gross profit, 2013 Unrealized gross profit, 2014 Installment accounts receivable, 2013 Installment accounts receivable, 2014 Gain on repossession
3,750 400 1,200 1,000 3,000 1,350
The repossessed merchandise was unsold at December 31, 2015. It was ascertained that they were booked upon repossession at original costs. A fair valuation of these items would be a sale price of the repossessed merchandise at P5,000 after incurring costs of reconditioning of P2,500 and cost to dispose them in the market at P250. The realized gross profit on 2015 sales was: 22,000
28,000
68,000
62,000
SOLUTION: 50,000/.40 = 125,000 - 70,000 = 55,000 x 40% = 22,000 Advanced Accounting - Installment Sales (Difficult)
Question #66 When the outcome of the construction contract can be estimated reliably, which of the following accounting treatment is proper? When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognized as an expense immediately without reference to the stage of completion of the contract activity at the end of the reporting period. The construction costs shall be deferred without reference to the stage of completion of the contract activity at the end of the reporting period. The construction revenue shall be recognized only to the extent of contract costs incurred that it is probable will be recoverable. The balance construction in progress account will be equal to cumulative construction revenue recognized even if it is probable that total contract costs will exceed total contract revenue. Advanced Accounting - Construction Accounting (Average)
Question #67 On January 2, 2017, Diversified Enterprises signed a franchise agreement with DTSI Company for an initial franchise fee of P92,500. Of this amount DTSI paid P17,500 upon the signing of the franchise contract and the balance is payable in four annual payments of P18,750 starting December 31, 2017. DTSI issued 12% interest-bearing notes for the balance. Collection of the notes are not reasonably assured.
The down-payment is not refundable; it represents the actual cost of initial services provided by Diversified before formal signing. However, additional substantial services have yet to be performed by Diversified. During 2017 additional direct franchise cost of P45,750 and indirect cost of P15,000 were incurred by Diversified. It is also agreed that DTSI will pay continuing franchise fee at 3% of its gross sales revenue. The franchise outlet commenced business operations on October 1, 2017 and its gross sales totaled P600,000 by year-end. The net income recognized by Diversified from the DTSI franchise in 2017 is 36,812.50
37,150
19,312.50
16,590
SOLUTION: Journal entry upon signing of franchise contract Cash Notes receivable Franchise revenue Unearned franchise revenue Installment sales Installment cost Gross profit Gross profit % Initial franchise fee Realized gross profit (18,750 x 39%) Continuing franchise fees (600,000 x 3%) Interest revenue (75,000 x 12%) Direct cost Indirect cost Net income Advanced Accounting - Franchise Accounting (Average)
17,500 75,000 17,500 75,000 75,000 45,750 29,250 39% 17,500,000 7,312.50 18,000 9,000 (17,500) (15,000) 19,312.50
Question #68 Congressional authorization in the form of a law to make payments out of the public treasury for specific purposes after compliance with certain conditions: Allotment Appropriations Budgeting Obligation Advanced Accounting - Government Accounting (Average)
Question #69 Jim Builders reports under PAS 11, and constructed a new subdivision during 2013 and 2014 under contract with Cactus Development Co. Relevant data are summarized below: Contract amount Costs
2013 2014 Gross profit 2013 2014 Contract billings 2013 2014 The Company uses the cost recovery method under PAS 11 to recognize revenue. What would be the journal entry SDH would use to record revenue in 2014? (DR) Accounts receivable 1,500,000 (CR) Revenue for long-term contracts 1,500,000 (DR) Costs of construction 2,000,000 (DR) Gross profit 1,000,000 (CR) Revenue for long-term contracts 3,000,000
P3,000,000 1,200,000 600,000 800,000 400,000 1,500,000 1,500,000
(DR) Construction-in-progress 1,200,000 (DR) Costs of construction 600,000 (CR) Revenue for long-term contracts 1,800,000 (DR) Construction-in-progress 400,000 (DR) Costs of construction 600,000 (CR) Revenue for long-term contracts 1,000,000 Advanced Accounting - Construction Accounting (Average)
Question #70 Dickie Corporation contracted to build a building for Dickson Company. The contract price was P500,000 and Dickie estimated that construction costs would total P420,000. The construction period lasted until September 1, 2015. Costs during the each period, estimated total cost of the product at the end of the year, billings and cash collected during the year were as follows: 2015 2016 2017 Cost during the period 105,000 195,000 125,000 Estimated or actual total costs 420,000 425,000 425,000 Billings during the period 100,000 150,000 250,000 Cash collected during the period 80,000 140,000 260,000 The amount of gross profit recognized in 2016 using the percentage of completion method must be: 32,942.50
80,000
36,500
20,000
SOLUTION: Contract price Total estimated costs Estimated gross profit Percentage of completion ((105,000 + 195,0000)/425,000) Gross profit realized to date Less: Gross profit realized prior year Contract price
500,000 425,000 75,000 70.59% 52,942.50 500,000
Total estimated cost Estimated gross profit prior year Percent of completion (105,000/420,000) Gross profit realized 2015 Advanced Accounting - Construction Accounting (Difficult)
(420,000) 80,000 25%
(20,000) 32,942.50
Question #71 Electricity companies A and B (involved in electricity sales but not distribution) jointly establish a power generation entity (Company C) to build and operate a power plant. Companies A and B each have a 50% ownership interest in Company C, which is structured as a corporation. The incorporation enables the separation of Company C from Companies A and B and, as a consequence, the assets and liabilities held in Company C are the assets and liabilities of Company C. The contractual arrangement between the parties does not specify that the parties have rights to the assets or obligations for the liabilities of Company C. However, the parties also enter into an off-take agreement requiring the following: 1. Companies A and B agree to purchase all the power generated by Company C in a ratio of 50:50. Company C cannot sell any of the output to third parties, unless this is approved by companies A and B. Because the purpose of the arrangement is to provide companies A and B with power they require, such sales to third parties are expected to be uncommon and not material. 2. The price of the power sold to companies A and B is set forth in the off-take agreement at a level that is designed to cover the costs of production and administrative expenses incurred by company . The arrangement is intended to operate at a break-even level. What is the proper classification of this joint arrangement? It is classified as joint operation because PFRS 11 provides that in case of doubt, a joint arrangement shall be classified as joint operation instead f joint venture. It is classified as joint venture because the arrangement is established through a separate vehicle, an incorporated entity Company C. It is classified as joint venture because the incorporation enables the separation of Company C from Companies A and B and, as a consequence, the assets and liabilities held in Company C on the assets and liabilities of Company C. It is classified as joint operation because the off-take agreement reflects the exclusive dependence of Company C upon Companies A and B for the generation of cash flows and the rights of Company A and B to all of the economic benefits of the assets of Company C.
Advanced Accounting - Joint Venture (Average)
