ADVANCED FINANCIAL ACCOUNTING - THEORY PORTION IAS AND IFRS

For reporting purposes, currencies are defined as

Foreign, functional and presentation

The functional currency is

The currency in which the entity primarily operates.

Which consideration would not be relevant in determining the entity’s fucntional currency?

The currency that is the most internationally acceptable for trading.

If a foreign currency exchange gain results from the effects of a change in exchange rates on an account receivable, where will the exchange gain be reported in the financial statements?

As an item of income from continuing operations.

A U.S. company contracted to purchase foreign goods. Payment in foreign currency was due one month after the goods were received at the company’s warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in the company’s favor. The resulting gain should be included in Fogg's financial statements as:

Component of income from continuing operations.

A sale of goods, denominated in a currency other than the entity's functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be included as

Transaction gain reported as a component of income from continuing operations.

An entity has several subsidiaries that operate in a hyperinflationary economy which uses the zloty as its local currency. Management wishes to show the financial statements in US dollars. Many of the operations are within countries that are not hyperinflationary and these subsidiaries use the euro as their functional currency. What currency should the entity use to present its consolidated financial statements?

The entity may use any currency

Which of the following should be considered nonmonetary?

Taxes payable

Which is incorrect regarding the acquisition method of accounting for a business combination requires all, except

Recognizing and measuring the identifiable assets acquired, the liabilities assumed and the noncontrolling interest in the acquiree at carrying amount.

Which of the following is not one of the steps in accounting for an acquisition?

Prepare proforma financial statements prior to acquisition.

What is meant by “full goodwill” method?

The recognition of goodwill which relates to the noncontrolling interest and the controlling interest

Which statement is true in relation to business combination achieved in stages?

A. The pre-existing equity interest shall be remeasured at fair value with any resulting gain or loss included in profit or loss.

How should an entity account for the incomplete information in preparing the financial statements immediately after the acquisition?

Record the uncertain items at a provisional amount measured at the date of acquisition.

Which method is acceptable to account for a business combination?

Acquisition method

An acquirer. incurred of acquisition costs related to the purchase of the net assets of an acquiree The acquisition costs should be

Expensed as incurred in the current period.

The requirements of Business Combinations apply to all of the following business combinations except for which one?

Combination between not-for-profit organizations

Which of the following statements, if any, concerning a noncontrolling interest in an acquiree is correct?

I. The value assigned to a noncontrolling interest in an acquiree must be based on the proportional share of that interest in the net assets of the acquiree.

II. The fair value per share of the noncontrolling interest in an acquiree must be the same as the fair value per share of the controlling (acquirer) interest.

Neither I nor Il.

In a business combination accounted for as an acquisition, the fair value of the identifiable net assets acquired exceeds the fair value of the consideration paid by the acquirer and the fair value of the noncontrolling interest in the acquiree. The excess fair value of net assets over investment value should be reported as

Gain.

Which one of the following assets recognized in a business combination will require that the amount recognized be amortized over future periods?

A contingent consideration asset

How should the acquirer recognize a bargain purchase in a business acquisition?

As a gain in earnings at the acquisition date

When a bargain purchase recurs in a business combination which of the following types of information must be disclosed in the period of combination?

I. The amount of gain recognized

II. The income statement line item that includes the gain

III. A description of the basis of the bargain purchase amount

I, II and III

Aye Company acquired all of the assets and liabilities of Bee Company for cash in a legal merger. Which one of the following would not be recognized by Aye Company on its books in recording the business combination?

Investment in Bee Company

Planet Company acquired controlling interest in Earth Company in a legal acquisition. Which one of the following could not be part of the entry to record the acquisition?

Debit Goodwill

Consolidated financial statements are typically prepared when one entity has a controlling financial interest in another unless

Such control is likely to be temporary.

A parent is exempted from preparing consolidated financial statements if all of the following conditions exist, except

The parent reports one class of share capital in the statement of financial position

Which of the following conditions is required to exclude a subsidiary from consolidation?

The other owners do not object to the nonconsolidation and the subsidiary does not have any publicly traded debt or equity instruments.

The noncontrolling interest should be recorded at what amount?

The fair value of the shares not held by the acquirer or the proportionate share of the fair value of net identifiable assets of the acquiree

For the purpose of consolidating financial interests, a majority voting interest is deemed to be

Greater than 50% of the directly or indirectly owned outstanding voting shares of another.

Following a business combination accomplished through a legal acquisition, transactions between affiliated entities can originate with:

Both Parent Company and Subsidiary Company

A subsidiary, acquired for cash in a business combination, owned inventories with a market value different from the book value as of the date of combination. A consolidated statement of financial position prepared immediately after the acquisition would include this difference as part of

Inventories

Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?

Whether the parent carries its investment in the subsidiary using the cost method or the equity method.

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying amount of the investment normally change following a combination?

Equity method

When a parent company uses the cost method on its books to carry its investment in a subsidiary, which one of the following will be recorded by the parent on its books?

Parent's share of subsidiary's cash dividends declared.

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest equity reported on the consolidated statement of financial position?

No effect on retained earnings and a decrease in noncontrolling interest.

Which one of the following will occur on consolidated financial statements if an intercompany transaction is not eliminated.

An overstatement of sales

A parent sells goods to its subsidiary, which in turn sells the goods to an unaffiliated firm. Which of these transactions, if any, should be eliminated in the consolidating process?

Parent to subsidiary

An intercompany depreciable fixed asset transaction resulted in an intercompany gain. Which one of the following is least likely to be reflected in the consolidated financial statements prepared at the end of the period in which the intercompany transaction occurred?

Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined.

Which of the following is not a characteristic of intercompany bonds?

When bonds become intercompany, they are written off of the books of the issuing affiliate and the investing affiliate.

Which is a characteristic of a joint arrangement?

The parties are bound by a contractual arrangement which gives two or more parties joint control over the arrangement.

Two entities established a business. The contractual agreement provided that the relevant activities of the business will require unanimous consent of the two parties. The business is not incorporated before SEC. The two parties equally own interest in the said business. How should the two parties account for their investment?

Joint operation

Two entities established a joint arrangement in an incorporated entity. The assets and liabilities of the entity will be in the name of the incorporated entity. The activities of the arrangement will be decided by its own board of directors. The rights of the two parties are limited only to the net assets of incorporated entity. How should the two parties account for their investment?

Joint venture

When shall an entity recognize revenue from contracts with customers?

When or as the entity satisfies the performance obligation.

What is the accounting treatment of the transaction price when a contract with a customer has multiple performance obligations?

The transaction price shall be allocated to the different performance obligations by reference to their relative standalone selling prices.

Franchise fee revenue shall be recognized when all material services or conditions have been substantially performed or satisfied by the franchisor. Substantial performance means

All of these define substantial performance by the franchisor.

Continuing franchise fees should be recorded by the franchisor

As revenue when earned and receivable from the franchisee.

Contract revenue in construction contract comprises

The initial amount of revenue agreed in the contract, variation in contract work, claim and incentive payment.

Contract costs of a construction contract comprise all of the following, except

General administration costs for which reimbursement is not specified in the contract.

The percentage of completion of a construction is based on all of the following, except

Progress payments and advances received from customers

When it is probable that total contract costs on a fixed price contract will exceed total contract revenue, the expected loss should be

Recognized as expense immediately

In a job order cost system, the use of direct materials previously purchased usually is recorded as an increase in

Work in process control

In a job order cost system, the use of indirect materials previously purchased is recorded usually as an increase in

Factory overhead control

In a job order system, direct labor costs usually are recorded initially as an increase in

Work in process control

In a job order cost system, the application of factory overhead would usually be reflected in

Work in process control

Overapplied overhead will always result when predetermined overhead rate is employed and

Overhead incurred is less than overhead applied

Which categories are used in the statement of financial position of a nonprofit organization?

Assets, liabilities and net assets

Which classification is required for reporting of expenses by all nonprofit organizations?

Functional classification in the statement activities or notes to financial statements

How should a nonprofit organization report depreciation in the statement of activities?

It should be included as a decrease in unrestricted net assets.

The assets in a quasi-endowment fund should be included in which of the following classifications?

Unrestricted net assets

In the nonprofit university’s statement of cash flows for the current year, all of the following cash inflows shall be reported as operating activities, except

From a donor who stipulated that the money be invested indefinitely

What is the legal basis of the COA in prescribing the Government Accounting Manual?

Constitution of the Republic of the Philippines

The financial reporting for the National Government is under the Statutory responsibility of all the following, except

Congress of the Republic of the Philippines

What is the paramount objective of financial reporting by national and local government?

Accountability

It is the authorization issued by the Department of Budget and Management to National Government Agency to incur obligations for specified amounts contained as a legislative appropriation in the form of budget release documents.

Allotment

It is the authority issued by the DBM to an agency to pay operating expenses, purchases of materials and supplies and other authorized disbursement to through the use of Modified Disbursement System checks.

Notice of Cash Allocation

Hedge accounting is permitted for all of the following, except

Trading investment

A cash flow hedge and a hedge of a net investment are accounted for by

Recognizing gains and losses in other comprehensive income

Unrealized holding gain or loss arising from changes in fair value of derivatives designated as cash flow hedge pertaining to effective portion shall be recognized in

Other comprehensive income with reclassification adjustment

Which one of the following is a characteristic of a forecasted transaction?

Can be a hedged item in a cash flow hedge.

In a cash flow hedge, the item being hedged is measured using

The present value of expected cash inflows or outflows.

Which one of the following is not a characteristic of a foreign currency hedge?

Are all treated as fair value hedges.

When used for speculative purposes, which of the following contracts is likely to result in a foreign currency loss to the contract holder who initiated the contract?

Foreign currency forward exchange contract

A hedge to offset the risk of exchange rate changes on converting the financial statements of a foreign subsidiary to the domestic (functional) currency would be the hedge of:

A net investment in a foreign operation.

If a firm commitment denominated in a foreign currency is hedged with a forward exchange contract, which of the following statements is/are correct?

I. Even though the firm commitment is hedged, a net gain or loss can be reported.

II. As a result of hedging the firm commitment, an otherwise unrecognized asset or liability may have to be recognized.

Both I and II

On the part of the private operator, the infrastructure asset in a service concession shall be recognized as

Either financial asset or intangible asset

The private operator in a service concession shall recognize the infrastructure asset as financial asset

When the private operator has an unconditional contractual right to receive a specified amount of cash over the life of the arrangement.

A transaction denominated in a foreign currency is converted to the functional currency using

Spot rate.

Which one of the following best describes the currency in which the final consolidated financial statements are presented?

The reporting currency.

A subsidiary’s functional currency is the local currency which has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is

Weighted average exchange rate for the current year.

A U.S. entity has a subsidiary, the parent located in a foreign country. The subsidiary is essentiallya sales unit for the parent. After remeasuring the subsidiary’s financial statements from the foreign currency to in parent’s reporting currency, the parent determined that it had a loss on the remeasurement. How should the parent report the loss in its consolidated financial statements?

As income from continuing operations.

Which of the following sets shows the correct reporting of an adjustment (gain or loss) that results from translation and one that results from remeasurement of financial statements from a foreign currency to a reporting currency?

Other comprehensive income, Net income

How should the net profit or net loss of the partnership be divided among the partners, whether capitalist or industrial?

In accordance with the partnership agreement

In the absence of partnership profit agreement to the contrary, how shall industrial partner share in partnership profit?

Just and equitable share

In the absence of partnership profit agreement to the contrary, how shall the remaining partnership profit be distributed to the capitalist partners after distributing the share of industrial partner?

Based on capital contribution ratio

At the time of corporate liquidation, which of the following unsecured claims with priority shall be settled first?

Liability for employee benefits

In corporate liquidation of a closed bank, which of the following unsecured credits is classified as without priority?

Claims of bank depositors