CUP 1 – THEORY OF ACCOUNTS
EASY
1. Which of the following is not a PICPA Region?
a. Metro Manila c. Northern Mindanao b. Southern Tagalog d. Southern Visayas
2. Which statement is true about the IASB’s development of IFRSs? a. The IASB gives precedence to the balance sheet over Profit or Loss.
b.
The IASB gives precedence to fair value accounting over amortized cost. c. Both a and b.d. Neither a nor b.
3. Contributions from and distributions to owners are considered as income and expenses, respectively, under a. The financial capital concept
b. The physical capital concept c. Both a and b
d. Neither a nor b
4. Which of the following is the foundation of the Conceptual Framework?
a. The objective of general purpose financial reporting.
b. A reporting entity concept.
c. The qualitative characteristics of, and the constraint on, useful financial information. d. The elements of financial statements.
5. What is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the items to which the information relates in the context of an individual entity's financial report?
a.
Predictive value c. Materialityb. Confirmatory value d. Timeliness
6. In the Conceptual Framework, an enhancing qualitative characteristic is a. Predictive value c. Timeliness
b. Free from error d. Confirmatory value
7. Which of the following is (are) essential to the existence of an asset? a. Legal right c. Both a and b
b. Physical form d. Neither a nor b
8. When inventory is misstated, its presentation lacks?
a. Relevance. c. Comparability.
b. Faithful representation. d. All of the choices are correct. 9. The real accounting issue in revenue recognition is the
a. The amount of income recognized b. Type of income recognized
10. Arrange in proper sequence the five-step approach that entities will follow in recognizing revenue in accordance with IFRS 15:
I. Determine the transaction price
II. Identify the contract(s) with the customer
III. Identify the separate performance obligations in the contract
IV. Recognize revenue when (or as) each performance obligation is satisfied V. Allocate the transaction price to separate performance obligations a. I, II, III, IV and V
b. II, III, I, V and IV
c. III, II, I, V and IV d. II, III, V, I and IV
AVERAGE
1. Consumable biological assets includea. Grape vines b. Fruit trees
c. Trees from which firewood is harvested while the tree remains.
d. Trees being grown for lumber.
2. To increase consistency and comparability in fair value measurements and related disclosures, PFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value. Which of the following provides the most reliable evidence of fair value?
a. Quoted prices in active markets for identical assets that the entity can access at the measurement date.
b. Quoted prices for similar assets in active markets.
c. Quoted prices for identical or similar assets in markets that are not active. d. Inputs other than quoted prices that are observable for the asset.
3. Costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management exclude
a. Installation and assembly costs.
b. Costs of testing whether the asset is functioning properly. c. Professional fees.
d. Costs of opening a new facility.
4. If an entity has not determined that it will use the land as owner-occupied property or for short-term sale in the ordinary course of business, the land is regarded as
a. Owner-occupied. b. Held for sale.
c. Held for capital appreciation.
d. Any of the above.
5. In accordance with PFRS 13, which of the following is not relevant when measuring fair value? a. The particular asset or liability being measured.
b. For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis.
c. The market in which an orderly transaction would take place for the asset or liability. d. The entity’s intention to hold an asset or to settle or otherwise fulfill a liability.
6. Under the revaluation model, how often shall revaluations be made? a. Annually.
b. Every three or five years.
c. It depends upon the entity’s accounting policy.
d. It depends upon the changes in fair values of the items of property, plant and equipment being revalued.
7. If the cost of land includes the costs of site dismantlement, removal and restoration, that portion of the land asset is a. Depreciated in a manner that reflects the benefits to be derived from land.
b. Depreciated on a straight-line basis over the expected life of the land.
c. Depreciated over the period of benefits obtained by incurring those costs.
d. Not depreciated.
8. Which of the following is true regarding the alternative ways to apply the income approach to accounting of resources acquired through government grants?
a. Expenses will be higher and net income lower if the grant is recorded as deferred income.
b. Expenses will be higher and net income lower if the grant is accounted for as an adjustment to the asset.
c. Depreciation expense will be higher if the grant is recorded as deferred income, but net income will be the same under the two alternatives.
d. Depreciation expense will be higher if the grant is recorded as an adjustment to the asset, but net income will be the same under the two alternatives.
9. Which statement is incorrect regarding presentation of exploration and evaluation assets?
a. An entity shall classify exploration and evaluation assets as tangible or intangible according to the nature of the assets acquired and apply the classification consistently.
b. Some exploration and evaluation assets are treated as intangible (eg drilling rights), whereas others are tangible (eg vehicles and drilling rigs).
c. To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is part of the cost of the intangible asset.
d. Using a tangible asset to develop an intangible asset changes a tangible asset into an intangible asset.
10. Which statement is incorrect regarding changes in the measurement of an existing decommissioning and similar liability that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or a change in the discount rate, if the related asset is measured using the cost model?
a. Changes in the liability shall be added to, or deducted from, the cost of the related asset in the current period. b. The amount deducted from the cost of the asset shall not exceed its carrying amount.
c. If a decrease in the liability exceeds the carrying amount of the asset, the excess shall be recognized immediately in profit or loss.
d. If the adjustment results in an addition to the cost of an asset, the entity shall test the asset for impairment by estimating its recoverable amount, and shall account for any impairment loss, in accordance with PAS 36.
DIFFICULT
1. An entity provides security services to local businesses. The security services take the form of the physical presence of guard dogs and their handlers, who are employees of the entity, at the clients’ premises. Which statement is correct?
a. The dogs are biological assets (living animals) and are accounted for in accordance with PAS 41. b. The dogs are inventories and are accounted for in accordance with PAS 2.
c. The dogs are investment properties and are accounted for in accordance with PAS 40.
d. The salary payable to the dog handlers as they perform services for the entity constitutes employee benefits.
2. Which statement is incorrect regarding the fair value hierarchy in PFRS 13?
a. To increase consistency and comparability in fair value measurements and related disclosures, PFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value.
b. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
c. Adjustments to arrive at measurements based on fair value, such as costs to sell when measuring fair value less costs to sell, shall be taken into account when determining the level of the fair value hierarchy within which a fair value measurement is categorized.
d. The fair value hierarchy prioritizes the inputs to valuation techniques, not the valuation techniques used to measure fair value.
3. Which statement is incorrect regarding changes in the measurement of an existing decommissioning and similar liability that result from changes in the estimated timing or amount of the outflow of resources embodying economic benefits required to settle the obligation, or a change in the discount rate, if the related asset is measured using the revaluation model?
a. Changes in the liability alter the revaluation surplus or deficit previously recognized on that asset.
b. A decrease in the liability shall be recognized in other comprehensive income and increase the revaluation surplus within equity, except that it shall be recognized in profit or loss to the extent that it reverses a revaluation deficit on the asset that was previously recognized in profit or loss.
c. An increase in the liability shall be recognized in profit or loss, except that it shall be recognized in other comprehensive income and reduce the revaluation surplus within equity to the extent of any credit balance existing in the revaluation surplus in respect of that asset.
d. In the event that a decrease in the liability exceeds the carrying amount that would have been recognized had the asset been carried under the cost model, the excess shall be recognized immediately in other comprehensive income.
4. In accordance with PIC Q&A No. 2011-04, the following are generally treated as deduction to equity, except a. Underwriting fees
b. Newspaper publication fees
c. SEC registration fees for new shares
d. Stock exchange listing fees
5. In accordance with PIC Q&A No. 2012-02, the costs incurred in relation to demolition (or the physical tearing down) of the old building to give way for the construction of the replacement building should preferably be
a. Expensed.
b. Capitalized as part of the cost of land. c. Capitalized as land improvements.
6. An entity is the operator in a service concession arrangement. The terms of the arrangement require the operator to construct a hospital within 3 years and to maintain and operate the hospital for 47 years (ie years 4–50) subject to certain restrictions set by the grantor (government). The terms of the arrangement also require the operator to transfer the hospital to the grantor at the end of year 50 for no consideration. The hospital must be operational at the end of year 50 when the arrangement ends. The terms of the arrangement limit the price that the operator can bill its patients for hospital services. Because the prices are regulated by the grantor and the hospital is located in an area of low population density, the grantor will also pay the operator P25,000,000 each year that it operates the hospital. The operator accounts for its rights to receive income under the service concession arrangement as:
a. An intangible asset.
b. Two separate omponents—a financial asset and an intangible asset.
c. A financial asset. d. None of the above.
7. Examples of when an entity has transferred substantially all the risks and rewards of ownership of transferred financial asset do not include
a. An unconditional sale of a financial asset.
b. A sale of a financial asset together with an option to repurchase the financial asset at its fair value at the time of repurchase.
c. A sale of a financial asset together with a put or call option that is deeply out of the money
d. A sale of a financial asset together with a total return swap that transfers the market risk exposure back to the entity.
8. Which statement is incorrect when an entity, in the course of its ordinary activities, routinely sells items of property, plant and equipment that it has held for rental to others?
a. The entity shall transfer such assets to inventories at their carrying amount when they cease to be rented and become held for sale.
b. The proceeds from the sale of such assets shall be recognized as revenue in accordance with PAS 18.
c. PFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories.
d. The difference between the net disposal proceeds and the carrying amount of the item is recognized as other income in profit or loss.
9. Losses recognized using the equity method in excess of the entity’s investment in ordinary shares are applied first to which of the following?
a. Preference shares
b. Trade receivables c. Long-term receivables d. Secured loans
10. The directors of The Rangimoe Company decided at a board meeting on 28 February 2014 that a major machine tool should be sold. Trade magazines reported recent transactions in non-current assets of a similar age at P500,000, but the board decided that the asking price should be P750,000. The board also decided that as a program of repairs to the tool needed to be carried out, an agent should not be contracted with for the sale of the item until the repairs were completed, which was on 31 May 2014.
On 31 July 2014 the board agreed to reduce the asking price to P500,000. A deal was agreed with a buyer on 31 August 2014 and completion of the sale took place on 30 November 2014.
In accordance with PFRS5 Non-current assets held for sale and discontinued operations, the asset should be classified as held for sale on
a. 28 February 2014 b. 31 May 2014
TIE BREAKER
1. If the selling price of inventory that has been written down to net realisable value in a prior period, subsequently recovers, the:
a. previous amount of the write-down can be reversed;
b. carrying amount of the inventory cannot be adjusted; c. value adjustment can be recognised immediately in equity;
d. adjustment must be recognised in a ‘provision for future inventory write-downs’ account.
2. Under PAS 2 Inventories, items of inventory that are used by business enterprise as components in a self-constructed property asset are required to be:
a. aggregated into the ‘cost of goods sold’ expense in the period in which the items are used; b. expensed directly into equity in the period in which the items are used;
c. capitalised and depreciated;
d. added to a ‘property construction’ provision account.
3. Which of the following costs are not included in the costs to sell? a. Commissions to brokers and dealers
b. Levies by regulatory agencies c. Transfer taxes and duties
d. Transport and other costs necessary to get the assets to a market
4. Where there is a production cycle of more than one year, PAS 41 requires separate disclosure of the a. Physical change only.
b. Price change only. c. Both a and b
d. Neither a nor b
5. PAS 41 requires an entity to provide a quantified description of each group of biological assets distinguishing between a. Consumable and bearer biological assets
b. Mature and immature biological assets c. Both a and b
d. Neither a nor b
6. Revenue should be measured at
a. Fair value of the consideration received or receivable
b. Cost of the consideration received or receivable c. Amount of cash received or receivable
d. Book value of the consideration received or receivable
7. Which of the following is not part of the cost of a property, plant and equipment? a. Purchase price of the asset, excluding taxes that are recoverable
b. Directly attributable costs of bringing the asset to working condition for its intended use
c. Administration and other general overhead costs
d. All of the above are part of the cost of a PPE
8. Costs directly attributable to bringing the asset to the location and condition for its intended use include all of the following, except
a. Costs of employee benefits not arising directly from the construction and acquisition of property, plant and equipment
d. Installation, assembly and testing costs
9. Plant assets purchased on long-term credit contracts should be accounted for at a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
10. When a balance is carried in an ‘asset revaluation surplus’ account in relation to an asset that has been derecognized, it is acceptable under PAS 16 Property, Plant and Equipment, to:
a. transfer the balance to ‘share capital’ account;
b. transfer the balance to retained earnings;
c. recognize the balance in profit or loss of the period in which the asset was derecognized; d. transfer the balance to a provision account for future asset revaluations.
