CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING MAY 2025
FINAL PREBOARD EXAMINATION

1. Which of the following is false about the Financial and Sustainability Reporting Standards Council (FSRSC)?

A. The FSRSC formed the Philippine Interpretations Committee (PIC) to assist the FSRSC in establishing
and improving financial reporting standards in the Philippines.
B. The FSRSC has full discretion in developing and pursuing the technical agenda for setting accounting
standards in the Philippines.
C. The FSRSC consists of a chairman and members who are appointed by the BOA.
D. Members of PIC are not appointed by the FSRSC.

2. Which of the following is false about the PIC and Philippine Sustainability Reporting Council (PSRC)?

A. An objective of PIC is to issue implementation guidance on PFRS.

B. Each member in PIC shall serve for a two-year term and may be re-appointed.
C. The FSRSC established the PSRC to evaluate the International Sustainability Standards Board’s (ISSB)
IFRS Sustainability Disclosure Standards for local use and to issue local interpretation and guidance.
D. An objective of the PSRC is to comment on exposure drafts of proposed sustainability disclosure standards
issued by the ISSB and other documents that may be issued for comment by the FSRSC.

3. The Continuing Professional Development is required for

A. Renewal of CPA license
B. Accreditation to practice the accountancy profession
C. Both a and b
D. Neither a nor b

4. Under the current BOA Resolution, a CPA is required to comply with how many CPD units for accreditation
to practice the accountancy profession?
A. 120
B. 100
C. 80
D. 15

5. Which of the following relates to both relevance and faithful representation?

A. Comparability
B. Feedback value
C. Neutrality
D. Free from error

6. Which of the following is true about the Revised Conceptual Framework?

A. Writeoff is the removal of all or part of an asset or liability from the statement of financial position.
B. An item is recognized in the financial statements if it meets the definition of an asset, liability, equity,
income and expense.
C. Financial capital is defined as net assets in terms of physical productive capacity.
D. Physical capital requires historical cost measurement.

7. Which of the following is false about the accounting process?

A. The debit and credit analysis normally takes place before a journal entry is made.
B. If an entity uses special journals, cash sales are recorded in the sales journal.
C. A subsidiary ledger is a listing of the components of account balances.
D. Preparation of a post-closing trial balance and reversing entries are only optional.

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8. An entity presented the following information on December 31, 2025:
Cash (including sinking fund of P550,000 to retire bonds in 2028) 1,320,000
Investment securities held for trading 1,650,000
Inventories (including goods held on consignment of P220,000) 880,000
Prepaid expenses (including cash surrender value of P55,000) 165,000
Property, plant and equipment (including land held for sale of P550,000) 11,550,000
Goodwill (solely based on skill of employees estimated by the president) 1,100,000
Total assets 16,665,000
I. Current and noncurrent presentation of assets and liabilities provide useful information when an entity
supplies goods or services within a clearly identifiable operating cycle.
II. The entity shall report total current assets at P3,740,000 on December 31, 2025.
III. The entity shall report total noncurrent assets at P11,605,000 on December 31, 2025.
A. All statements are true.
B. All statements are false.
C. Only two statements are true.
D. Only one statement is true.
9. An entity provided the following information on December 31, 2025:
Sales 19,500,000
Share of profit of associate 300,000
Other income 600,000
Decrease in inventory of finished goods 500,000
Total manufacturing cost 5,000,000
Decrease in inventory of goods in process 2,000,000
Distribution cost 3,000,000
Translation gain on foreign operations 600,000
General and administrative cost 2,500,000
Finance cost 1,600,000
Income tax expense 1,800,000
Unrealized gain in forward contract designated as cash flow hedge 400,000
Revaluation surplus 2,300,000
Cash dividend declared and paid 1,700,000
Correction of error due to overstatement of depreciation expense in 2024, net of tax 550,000
Retained earnings – January 1, 2025 6,000,000
After – tax impairment loss on assets of a business segment held for sale 350,000
After – loss operating loss of a business segment held for sale 1,000,000
I. Profit or loss includes continuing operations and discontinued operations
II. The entity shall report net income of P2,650,000 for the year 2025.
III. The entity shall report comprehensive income of P5,950,000 for the year 2025.
IV. The entity shall report retained earnings of P10,800,000 on December 31, 2025.
A. All statements are true.
B. Statements I, II and III are true.
C. Statements II and IV are true.
D. Statements III and IV are true.
10. An entity reported net income of P6,000,000 for the current year. Depreciation expense was P1,500,000 and
the gain on early retirement of bonds amounted to P450,000. The following working capital accounts changed:
Accounts receivable 1,100,000 decrease
Trading equity investment 1,600,000 increase
Inventory 730,000 decrease
Note payable – bank 1,500,000 increase
Accounts payable 1,220,000 increase
Cash dividends payable 600,000 increase
What amount of amount of net cash flow provided by operating activities should the entity report for the year?
A. 10,100,000 C. 9,100,000
B. 7,000,000 D. 8,500,000

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11. An entity provided the following information on December 31, 2025:
Accounts payable and accrued expenses 3,200,000
Cash dividend payable on January 15, 2026 2,800,000
8% Bonds payable 20,000,000
Discount on the bonds 2,400,000
Pretax financial income 24,000,000
Taxable income 34,000,000
The entity issued the bonds on July 1, 2025 for P17,600,000 to yield 10%. The bonds mature on June 30, 2032
and pay interest annually every June 30. The difference between pretax financial income and taxable income
is due to a P4,000,000 permanent difference and a P6,000,000 deductible temporary difference which is
expected to reverse in 2026. The income tax rate is 25% and the entity made estimated tax payments of
P3,000,000 during 2025.
I. The entity shall report total current liabilities at P6,800,000 on December 31, 2025.
II. If a liability is expected to be settled within the normal operating cycle, it is classified as current.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

12. During the current year, the entity revealed the following ordinary share transactions:
January 1 44,000 shares outstanding
February 1 Issued 56,000 previously unissued shares
May 1 Purchased 25,000 shares for the treasury
August 1 Distributed a 25 percent bonus issue
September 1 Reissued 10,000 treasury shares
December 1 Split the share 3 for 1

The entity reported net income of P9,150,000 and paid cash dividends of P915,000 to ordinary shareholders.
I. Basic EPS is calculated by dividing profit or loss attributable to ordinary equity holders of the parent
entity by the weighted average number of ordinary shares outstanding.
II. The weighted average number of ordinary shares outstanding is 305,000.
III. The entity shall report basic EPS of P27.00 for the current year.
A. All statements are true.
B. All statements are false.
C. Only statements I and II are true.
D. Only statements II and III are true.

13. On January 1, 2025, an entity reported 100,000 ordinary shares outstanding. The shareholders’ equity was
affected by the following transactions during 2025.

July 1 Issued P2,000,000, 5-year, 10% bonds at face amount. Each P1,000 bond
is convertible into 50 ordinary shares.
July 1 40,000 ordinary shares were sold.
October 1 A 10% bonus issue was declared and distributed.
December 31 Net income for 2025 was P4,000,000. The income tax rate is 25%.

I. Diluted EPS is calculated by adjusting the earnings and number of shares for the effects of dilutive
options and other dilutive potential ordinary shares.
II. The entity shall report basic EPS of P30.30 for the year 2025.
III. The entity shall report diluted EPS of P22.19 for the year 2025.
A. All statements are true.
B. All statements are false.
C. Only two statements are true.
D. Only one statement is true.

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14. The following are considered “cash”, except

A. Bills and coins

B. Cashier’s check
C. Time deposit
D. Money order

15. An entity provided the following information on December 31, 2025:

Petty cash fund 100,000
Current account – First Bank 8,000,000
Current account – Second Bank (overdraft) ( 500,000)
Money market placement – Third Bank 2,000,000
Time deposit – Fourth Bank 4,000,000
The petty cash fund included unreplenished December 2025 petty cash expense vouchers for P30,000 and an
employee check for P10,000 dated January 15, 2026. Drawn against Current account – First Bank was a
check of P300,000, recorded and dated December 20, 2025 but delivered to payee on January 3, 2026. The
Fourth Bank time deposit is set aside for land acquisition in early January 2026.

I. “Cash and cash equivalents” is a line item presented under current assets in the statement of financial
position.
II. The entity shall report cash and cash equivalents of P10,360,000 on December 31, 2025.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

16. An entity provided the following data pertaining to the cash transactions and bank account for the month of
May:

Cash balance per accounting record 1,719,000

Cash balance per bank statement 3,195,000
Bank service charge 10,000
Debit memo for the cost of printed checks delivered by the bank; the charge has not been 12,000
recorded in the accounting record
Outstanding checks 685,000
Deposit of May 30, not recorded by bank until June 1 500,000
Proceeds of a bank loan on May 30, not recorded in the accounting record, net of interest 570,000
of P30,000
Proceeds from a customer promissory note, principal amount P800,000, collected by the 810,000
bank, not taken up in the accounting record with interest
Check No. 1086 issued to a supplier, entered in the accounting record as P210,000 but 120,000
deducted in the bank statement at an erroneous amount of
Stolen check lacking an authorized signature deducted from the entity’s account by bank 80,000
in error
Customer check returned by the bank marked NSF; no entry has been made in the 77,000
accounting record to record the returned check

I. In preparing a bank reconciliation, bank reconciling items include deposit in transit and outstanding
checks.
II. In preparing a bank reconciliation, book reconciling items include credit memos and debit memos
because these transactions were not yet recorded in the accounting records of the depositor.
III. The adjusted cash in bank balance is P3,000,000 on May 30.

A. All statements are true.

B. Only statement III is true.
C. Only statements I and II are true.
D. Only statements II and III are true.
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17. On November 1, 2025, an entity established imprest petty cash fund of P40,000 by writing a check drawn
against its Philippine Bank account. The following transactions pertaining to the fund occurred:
November 20, 2025 Replenished the petty cash fund. The fund contained the following:
Currency and coins 4,000
Vouchers for petty cash expenses 28,000
Employee IOU 8,000

December 31, 2025 The petty cash fund was not replenished. The fund contained:
Currency and coins 22,000
Vouchers for petty cash expenses 7,000
Office supplies 9,000
Which of the following statements is false?
A. The major purpose of an imprest petty cash fund is to control cash disbursements.
B. The imprest petty cash system in effect adheres to the rule of disbursement by check.
C. On November 20, the entry to record the replenishment will include a credit to cash in bank of P36,000.
D. On December 31, the entry to adjust the fund will include a credit to cash short / over of P2,000.
18. On January 1, 2025, an entity purchased as an investment P5,000,000 face value 8% bonds for P4,530,000.
The bonds were purchased to yield 10% interest. The bonds pay interest annually on December 31. The
business model in managing the financial asset is to collect contractual cash flows that are solely payments of
principal and interest and to sell the bonds in the open market. The bonds were quoted at 106 on December
31, 2025 and 115 on December 31, 2026.
I. A financial asset shall be measured at fair value through profit or loss if the business model is to collect
contractual cash flows and to sell the asset in the open market as well.
II. The unrealized gain as component of OCI should be reported at P717,000 for 2025.
III. The unrealized gain as component of OCI should be reported at P1,108,700 for 2026.
A. All statements are true.
B. All statements are false.
C. Only two statements are true.
D. Only one statement is true.
19. On January 1, 2025, an entity purchased bonds with face value of P4,000,000 and a five-year term for
P3,647,000 plus transaction cost of P50,120. The bonds are purchased to yield 10% interest. The nominal
interest rate on the bonds is 8% payable annually every December 31. The bonds were purchased for the
purpose of selling prior to maturity to realize fair value changes. On December 31, 2025, the bonds were
quoted at 110.
I. The entity should recognize interest income of P320,000 for the year 2025.
II. The entity should recognize gain from change in fair value of P753,000 in profit or loss for 2025.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.
20. An entity factored with recourse, P3,000,000 of accounts receivable to Finance Company on October 31,
2025. Control was surrendered by the entity. Finance assessed a fee of 5% and retains a holdback equal to
10% of the accounts receivable. In addition, Finance charged 12% interest computed on a weighted average
time to maturity of the receivables of 30 days. The fair value of the recourse obligation is P400,000.
I. The entity received cash of P2,520,411 because of the factoring of accounts receivable
II. The entity shall recognize an initial loss of P179,589 on the factoring.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

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21. At the beginning of the current year, an entity reported allowance for doubtful accounts of P170,000. Bad
debt recoveries and bad debts written off in the current year were P30,000 and P235,000 respectively. The
allowance had been previously calculated as a percentage of net sales. It was decided however to provide for
doubtful accounts commencing with the year-end adjusting entry based on an analysis of the age of accounts
receivable. The following schedule was prepared:
Percent uncollectible
Not yet due 1,700,000 NIL
1-30 days past due 1,200,000 5
31 – 60 days past due 100,000 25
61 – 90 days past due 150,000 50
Over 90 days past due 120,000 80
Additional accounts to be written off 30,000
I. Write-off of accounts receivable shall decrease working capital.
II. The entity shall report doubtful accounts expense of P321,000.
III. The entity shall report net realizable value of accounts receivable of P3,014,000 at year-end.
A. All statements are true.
B. Only statement III is true.
C. Statements II and III are true.
D. Statements I and II are true.
22. On January 1, 2025, an entity sold goods to a customer in which the latter issued a noninterest-bearing note
requiring annual payment of P800,000 for 5 years. The first payment was made on January 1, 2025 and
succeeding payments every January 1 of each year. The prevailing interest rate for this similar note is 12%.
The present value factor of an ordinary annuity for 5 periods at 12% is 3.60 while the factor for an ordinary
annuity for 4 periods at 12% is 3.04. What is the carrying amount of the note on December 31, 2026?
A. 2,400,000
B. 2,154,701
C. 1,923,840
D. 1,916,672
23. On January 1, 2025, an entity acquired 30,000 shares of the 100,000 outstanding shares of another entity for
a total of P2,500,000. At the time of purchase, the carrying amount of the investee’s equity was P6,000,000
and its identifiable assets having a fair value greater than carrying amount at the time of acquisition were as
follows:
Carrying amount Fair Value Remaining Life
Inventory 600,000 750,000 Less than 1 year
Equipment 3,000,000 4,000,000 4 years
All inventory was sold in 2025, the investee’s net income in 2025 was P1,500,000 and paid dividends at P4
per share during 2025.
I. The entity shall recognize investment income of P450,000 for the year 2025.
II. The carrying amount of the investment is P2,710,000 on December 31, 2025.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.
24. An entity reported beginning inventory of P1,000,000, net purchases of P5,000,000 and net sales of
P7,000,000. At year – end, a fire destroyed most of the merchandise inventory of an entity. All goods were
destroyed except for partially damaged goods that normally sell for P80,000 and that had an estimated net
realizable value of P20,000 and undamaged goods that normally sell for P150,000. The gross profit rate based
on sales remained constant at 35%. What amount should be reported as estimated fire loss at year – end?
A. 1,332,500
B. 1,450,000
C. 1,272,500
D. 1,220,000

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25. An entity’s inventory on December 31, 2025 was P7,500,000 based on physical count priced at cost and before
any necessary adjustment for the following:
• Merchandise costing P550,000, shipped FOB Destination from a vendor on December 30, 2025, was
received and recorded on January 10, 2026.
• Goods in the shipping area were excluded from inventory although shipment was not made until January
4, 2026. The goods, billed to the customer FOB Shipping Point on December 27, 2025, had a cost of
P600,000.
• Included in the physical count were goods specifically segregated per sales contract with a sales price of
P1,800,000. The goods were sold at a gross profit rate of 20% on cost.
• Goods purchased from a vendor, FOB Shipping Point, were shipped on December 28, 2025. The goods
were received the entity on January 6, 2026. The goods had a cost of P240,000.
What amount should the entity report as inventory on December 31, 2025?
A. 7,390,000
B. 7,150,000
C. 6,840,000
D. 6,600,000
26. An entity imported machinery to be installed in the new factory premises before year-end. What is the proper
treatment of freight and interest on the loan to fund the cost of machinery?

A. Both freight and interest are capitalized

B. Interest may be capitalized but freight is expensed
C. Freight is capitalized but interest cannot be capitalized
D. Both freight and interest are expensed
27. On January 1, 2025, an entity acquired a new building for P80,000,000. The building had an estimated useful
life of 25 years and residual value of P5,000,000. Depreciation was computed on a straight-line basis. On
January 1, 2027, the entity replaced the old roof with a permanent tile roof costing P10,000,000. The cost of
the old roof was P7,500,000. The new roof did not change the residual value but was considered a betterment.
I. The accumulated depreciation on December 31, 2026 is P6,000,000.
II. The depreciation expense for the year 2027 is P3,134,783.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.
28. An entity acquired new machinery and the following items were analyzed in computing the initial cost:
Invoice price of the machinery 1,400,000
Cash discount available but not taken on purchase 20,000
Freight paid on the new machinery 40,000
Cost of removing the old machinery 15,000
Installation cost of the new machinery 50,000
Testing cost before the machinery was put into regular operation including
P10,000 in wages of the regular machinery operator 30,000
Loss on premature retirement of the old machinery 5,000
Estimated cost of manufacturing similar machinery including overhead 1,300,000
The machine has a useful life of 5 years and was put into use on January 1, 2025. The entity used the double
declining balance method of depreciation. On January 1, 2027, the entity decided to change to the straight-
line method of depreciation and the revised total useful life of the asset is 10 years. Which of the following
statements is true?
A. Change in useful life and change in depreciation method are changes in accounting policies.
B. The initial cost of the machine is P1,515,000.
C. The depreciation expense for the year 2027 is P67,500
D. The accumulated depreciation on December 31, 2026 is P953,600.

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29. On January 1, 2025, an entity acquired a building for P10,000,000. The building had a useful life of 20 years
and no residual value. On January 1, 2027, the entity decided to use the revaluation model and the fair value
on such date was P12,000,000. On December 31, 2029, the entity sold the building for P11,000,000. Which
of the following statements is false?

A. Revaluation surplus is a component of other comprehensive income.

B. On January 1, 2027, the entity shall recognize revaluation surplus of P3,000,000.
C. On December 31, 2029 before the disposal, the revaluation surplus is P2,500,000.
D. The gain on disposal of the building in 2029 is P3,500,000.

30. On January 1, 2025, an entity acquired property consisting of ten identical freehold detached houses each with
separate legal title including the land which it is built for P100,000,000, 20% of which is attributable to the
land. The units have a useful live of 40 years. The following costs are also incurred on the same date:
• Nonrefundable transfer taxes not included in the purchase price 10,000,000
• Legal costs directly attributable to the purchase 5,000,000
• Reimbursement to the previous owner for prepaying nonrefundable property taxes
for the six-month period ending June 30, 2025 150,000
• Advertising campaign 600,000
• Opening function to celebrate new business 250,000
On June 30, 2025, the entity paid local property taxes of P300,000 for the year ending June 30, 2026. The
entity used one of the ten units to accommodate administration and staff and other nine units are rented out to
independent parties under an operating lease. On December 31, 2025, the fair value of each unit is
P15,000,000.
I. If the entity elected to use the cost model for investment property, depreciation of the investment
property for the year 2025 is P2,587,500.
II. If the entity elected to use the fair value model for investment property, the gain from change in fair
value in profit or loss for the year 2025 is P20,000,000.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

31. An entity has a building with a carrying amount of P25,000,000 and land to be sold in the ordinary course of
business costing P6,000,000. Due to change in use, the entity decided to reclassify both assets as investment
property, and the assets are to be carried at fair value. The fair value of the building and land are P32,000,000
and P9,000,000 respectively. What amount should be recognized in revaluation surplus and profit or loss
respectively because of the reclassification?
A. Revaluation surplus, 0; Profit or loss, P10,000,000
B. Revaluation surplus, P7,000,000; Profit or loss, P3,000,000.
C. Revaluation surplus, P3,000,000; Profit or loss, P7,000,000.
D. Revaluation surplus, P10,000,000; Profit or loss, 0.

32. An entity purchased a trademark and incurred the following costs:

Purchase price 2,000,000
Nonrefundable value added tax 100,000
Training of personnel on the use of new trademark 140,000
Research expenditures associated with the purchase of the new trademark 480,000
Legal cost incurred to register the new trademark 210,000
Administrative salaries 240,000
Which of the following statements is false?
A. Intangible assets are initially measured at cost.
B. Under full IFRS, an entity must choose either the cost model or the revaluation model for each class of
intangible asset.
C. The initial cost of the trademark is P2,310,000.
D. Under full IFRS, intangible assets are classified as with finite life only.

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33. On January 1, 2025, a patent was acquired for P3,000,000 with a useful life of 10 years. On December 31,
2026, because of reduced demands for certain products protected by the patent, a possible impairment may
have occurred. The expected future cash flows from the patent from December 31, 2027 to December 31,
2029 were P40,000 for each period. The discount rate is 10% and the PV of an ordinary annuity of 1 at 10%
for 3 periods is 2.49. What is the carrying amount of the patent on December 31, 2026 after considering any
impairment?
A. 3,000,000
B. 2,400,000
C. 99,900
D. 120,000

34. On January 1, 2020, an entity planted trees on its land. The entity purchased the land in 2018 at a cost of
P3,000,000. The trees were considered bearer plants and had accumulated cost of P1,500,000 on December
31, 2024. By January 1, 2025, the trees matured and were expected to bear produce for a period of 5 years.
By December 31, 2025, the trees produced fruits with fair value less cost of disposal at P150,000. There was
no harvest in 2025 but on December 31, 2026, these fruits were harvested with fair value less cost of disposal
of P250,000. These fruits remained unsold on December 31, 2026.

I. Under IFRS, bearer plants and agricultural produce not harvested are classified as biological assets.
II. On December 31, 2025, the entity shall recognize biological assets at P1,350,000.
III. On December 31, 2026, the entity shall recognize inventory at P250,000.

A. All statements are true.

B. All statements are false.
C. Only two statements are true.
D. Only one statement is true.

35. An entity constructed a building costing P28,000,000 on the mine property. The estimated residual value will
not benefit the entity and will be ignored for purposes of computing depreciation. The building has an
estimated life of 10 years. The total estimated recoverable output from the mine is 500,000 tons. The entity
extracted 100,000 tons each year during the first and second year of operations. However, during the third
year, a shutdown occurred and there was no output. During the fourth year, production resumed and the entity
extracted 100,000 tons.
I. The entity shall recognize no depreciation for the third year.
II. The entity shall recognize depreciation of P4,900,000 for the fourth year.
A. Statements I and II are true.
B. Only statement II is true.
C. Only statement I is true.
D. Statements I and II are false.
36. On December 31, 2025, an entity classified as held for sale an equipment with a carrying amount of
P10,000,000. On this date, the equipment is expected to be sold for P9,200,000 with disposal cost of P400,000.
On December 31, 2026, the equipment had not been sold and management after considering its options
decided to place back the equipment into operations. On December 31, 2026, the equipment is expected to be
sold at P8,600,000 with disposal cost at P100,000, and with carrying amount of P8,000,000 if the equipment
was not classified as held for sale. Which of the following is false?

A. Noncurrent assets or disposal groups that are classified as held for sale are measured at the lower of
carrying amount and fair value less costs of disposal.
B. Non-current assets or disposal groups that are classified as held for sale are not depreciated.
C. The impairment loss in 2025 is P1,200,000.
D. The loss on reclassification in 2026 is P300,000.

37. A prepaid expense can be best described as an amount

A. Paid and currently matched with earnings
B. Paid and not currently matched with earnings
C. Not paid and currently matched with earnings
D. Not paid and not currently matched with earnings
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38. How should an entity calculate the net proceeds to be received from the bond issuance?
A. Discount the bonds at the market rate of interest
B. Discount the bonds at the market rate of interest and deduct bond issue cost
C. Discount the bonds at the stated rate of interest
D. Discount the bonds at the stated rate of interest and deduct bond issue cost
39. Debt issue cost
A. Is included in the measurement of debt measured at fair value through profit or loss
B. Will effectively decrease the market rate of interest
C. Will effectively increase the market rate of interest
D. Is amortized using the straight-line method over the life of the bonds
40. On January 1, 2025, an entity issued 9% bonds payable with face amount of P6,000,000, which mature on
January 1, 2035. The bonds were issued for P5,634,000 to yield 10%. Interest is payable annually on
December 31 and the entity uses the interest method of amortization. On December 31, 2026, entity retired
the bonds at 98. Which of the following is false?
A. Any discount amortization will increase the carrying amount of a financial liability.
B. The entity shall recognize interest expense of P563,400 in 2025.
C. The entity shall recognize interest expense of P565,740 in 2026.
D. The loss on early retirement of bonds in 2026 is P343,140.
41. On January 1, 2025, an entity had an overdue 10% note payable at P6,000,000 and accrued interest of
P600,000. As a result of the restructuring agreement on January 1, 2025, the creditor agreed to forgive accrued
interest of P600,000, reduce the principal to P4,000,000, reduce the interest rate to 6% and interest is payable
every December 31, and extend the maturity date of the note to December 31, 2027. The entity paid P350,000
as an arrangement fee to the creditor. The prevailing market rate of interest for similar note is 14%. On January
1, 2025, the present value of the new liability based on 10% is P3,598,000 and the present value of the new
liability based on 14% is P3,237,000. What amount of gain on modification of terms should the entity report
in 2025?
A. 2,652,000
B. 3,002,000
C. 3,363,000
D. 3,013,000
42. An entity operates a customer loyalty program. The entity grants loyalty points for goods purchased. The
loyalty points can be used by the customers in exchange for goods of the entity. The points have no expiration
date. During 2025, the entity issued 100,000 points and expected that 80% of these points shall be redeemed.
The stand-alone selling price of the points granted is P2,000,000. In 2025, the entity sold goods to customers
for a consideration of P14,000,000 based on stand-alone selling price. In 2025, 30,000 points are redeemed.
In 2026, 85% of the points are expected to be redeemed and 15,900 points are redeemed.
I. The revenue from the redemption of points in 2025 is P656,250.
II. The revenue from the redemption of points in 2026 is P288,750.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.
43. In 2025, an entity began selling notebook computers that carried a three-year warranty against defects. The
entity projected the estimated warranty cost as a percentage of sales: first year of warranty, 4%, second year
of warranty, 8%, and third year of warranty, 10%. Sales in 2025 and 2026 were P8,000,000 and P9,000,000
respectively. Actual warranty repairs in 2025 and 2026 are P600,000 and P700,000 respectively. Sales and
warranty repairs are made evenly during the year. The entity tested the accuracy of the warranty liability on
December 31, 2026.
I. The adjusted warranty expense for the year 2026 is P2,300,000.
II. The adjusted warranty liability on December 31, 2026 is P2,440,000.

A. All statements are true. C. Only statement I is true.

B. All statements are false. D. Only statement II is true.
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44. An entity sold gift certificates worth P8,000,000 to customers in exchange for future delivery of its product.
The certificates are nonrefundable and the entity determined that the expected value of breakage is
P1,200,000. During the year, the entity redeemed gifts certificates worth P5,100,000. What amount of
breakage revenue should the entity report for the current year?

A. 765,000
B. 900,000
C. 1,200,000
D. 0

45. Disclosure usually is not required for

A. Contingent loss that is probable and not measurable
B. Contingent gain that is probable and measurable
C. Contingent loss that is remote and measurable
D. Contingent loss that is possible and measurable

46. Which of the following is false about share capital and share issue cost?
A. If shares are issued for noncash consideration, they are measured at the fair value of consideration.
B. Any share issue costs incurred is recognized as an expense.
C. Any subscription receivable currently collectible is presented as part of current assets.
D. Contributed capital includes issued share capital and share premium.

47. On January 1, 2025, an entity was incorporated with the following authorized capitalization:
Ordinary share capital, no par, P100 stated value 20,000,000
Preference share capital, 10%, P50 par 10,000,000
During 2025, the entity issued 100,000 ordinary shares at P120 per share and 80,000 preference shares at P60
per share. On December 20, 2025, subscriptions for 15,000 preference shares were received at P100 per share.
The subscribed shares are to be paid for on January 20, 2026. Net income for the year 2025 is P6,000,000.
What amount of total shareholder’s equity should the entity report on December 31, 2025?
A. 24,300,000
B. 22,800,000
C. 54,300,000
D. 52,800,000

48. An entity had the following shareholders’ equity as of January 1, 2025:

Share capital - ordinary, P5 par value, 400,000 shares issued 2,000,000
Share premium – ordinary (from original issue) 1,200,000
Retained earnings 1,300,000
During 2025, the following transactions occurred in chronological order:
• Repurchased 8,000 shares to be held as treasury at a price of P30 per share.
• 1,600 treasury shares were reissued at P25 per share.
• 1,000 treasury shares were reissued at P27 per share.
• 1,200 treasury shares were reissued at P35 per share
• Net income for the year is P800,000
I. On December 31, 2025, unappropriated retained earnings should be reported at P2,089,000.
II. On December 31, 2025, total share premium should be reported at P1,206,000.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

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49. On December 31, 2025, an entity has 100,000 shares of P200 par value, 6%, preference shares and 300,000
ordinary shares of P50 par value outstanding. The preference shares were issued at P250 per share in 2024
and a preference share is convertible into 2 ordinary shares. On January 15, 2026, all preference shares were
converted. Which of the following statements is false?

A. Conversion of preference shares into ordinary shares does not affect total shareholder’s equity.
B. Because of the conversion, the increase in the ordinary share capital account is P10,000,000.
C. Because of the conversion, the increase in share premium – ordinary share is P15,000,000.
D. Because of the conversion, the gain in profit or loss for 2026 is P15,000,000.
50. An entity reported retained earnings of P8,000,000 on January 1, 2025. The entity provided the following
information during 2025:
Income before tax 4,000,000
Prior period error – understatement of 2024 depreciation before tax 500,000
Cumulative decrease in income from change in inventory valuation method before tax 800,000
Dividend declared 1,500,000
Appropriation due to purchase of treasury shares 700,000
Income tax rate is 25%. What amount should be reported as total retained earnings on December 31, 2025?
A. 7,825,000
B. 8,525,000
C. 9,225,000
D. 8,900,000
51. An entity provided the following information on December 31, 2025:
Ordinary share capital, P20 par value 8,000,000
Preference share capital, 6%, P100 par value, cumulative and participating 2,000,000
Preference dividends have been in arrears for 2023 and 2024. On December 31, 2025, the entity would like
to declare dividend in which the ordinary shareholders will receive P1,248,000. What total amount of dividend
must be declared to achieve this goal?
A. 1,680,000
B. 1,800,000
C. 1,608,000
D. 2,400,000

52. On December 31, 2025, an entity issued 5,000 ordinary shares of P100 par as share dividend. The market
value on the date of declaration is P150. The entity reported ordinary share capital outstanding at a total par
value of P2,000,000. What amount is debited to retained earnings because of the dividend declaration?

A. 500,000
B. 750,000
C. 250,000
D. 0

53. Adverse financial and operating circumstances warrant that an entity should undergo quasi-reorganization.
The following data are presented below:
Share capital, P25 par value, 200,000 shares outstanding 5,000,000
Share premium 1,500,000
Retained earnings (deficit) (2,500,000)
To accomplish the quasi-reorganization, inventory and plant assets were reduced by P500,000 and P1,700,000
respectively. What is the reduction in share capital to implement the quasi-reorganization?
A. 4,700,000
B. 2,500,000
C. 3,200,000
D. 0

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54. Which of the following other comprehensive income may be reclassified to profit or loss?
A. Revaluation surplus
B. Fair value changes of equity investment measured at fair value through other comprehensive income
C. Remeasurements of a defined benefit plan
D. Translation loss on foreign operation

55. An entity reported the following shareholder’s equity on December 31, 2025:
5% cumulative and participating preference share capital, par value P100 2,500,000
Ordinary share capital, par value P30 3,750,000
Share premium 2,250,000
Retained earnings 4,000,000
Preference dividends are in arrears for 2 years. If the entity was to be liquidated, the preference shareholders
would receive par value plus a premium of P500,000. What is the book value per ordinary share?
A. 57.00
B. 215.00
C. 217.00
D. 192.00

56. On January 1, 2025, an entity granted 50,000 share options to employees. The share options vest at the end
of three years provided the employees remain in service until then. The option price is P60 and the par value
is P50. At the date of grant, the fair value of the share options cannot be measured reliably. The share options
have a life of 4 years. The share prices are P63 on December 31, 2025, P66 on December 31, 2026, P74 on
December 31, 2027 and P80 on December 31, 2028. All share options were exercised on December 31, 2028.
I. The compensation expense for 2025 is P50,000.
II. The compensation expense for 2026 is P200,000.
III. The compensation expense for 2027 is P500,000.
IV. The compensation expense for 2028 is P1,000,000.
A. All statements are true.
B. Only three statements are true.
C. Only two statements are true.
D. Only one statement is true.

57. On January 1, 2025, an entity signed a five-year noncancellable lease for equipment. The terms of the lease
called for the following:
Annual lease payment at the end of each year, starting December 31, 2025 1,000,000
Useful life of the machine 10 years
Price of purchase option that is certain to be exercised 100,000
Initial direct cost paid by the entity 200,000
Cash incentive paid by the lessor to entity to induce entity to accept contract 90,000
Entity’s incremental borrowing rate 9%
Present value of an ordinary annuity of 1 for 9% at 5 periods 3.89
Present value of 1 for 9% at 5 periods 0.65
The entity uses the straight-line method to depreciate all its plant assets. The implicit rate in the lease is
unknown. Which of the following is true?
A. The initial cost of the right of use asset is P4,155,000.
B. The depreciation for the year 2025 is P813,000.
C. The lease liability on December 31, 2025 should be reported at P3,310,950.
D. Under IFRS, lessees shall apply the lease capitalization criteria to recognize an asset and a liability.

58. An entity leased property for a period of 10 years. Lease payment dates coincide with the end of the reporting
period. How is the lease liability presented in the statement of financial position at the end of the second year?
A. Partly current liability, partly noncurrent liability
B. Entirely current liability
C. Entirely noncurrent liability
D. Entirely noncurrent asset

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59. At the beginning of current year, an entity signed a ten-year noncancelable lease agreement to lease a storage
building to a lessee under a sales type lease. The agreement required equal rental payments at the end of each
year. The fair value of the building at the inception of the lease was P4,612,500. However, the carrying amount
of the building was P3,690,000. The building had an estimated economic life of 10 years with no residual
value. At the termination of the lease, the title to the building shall be transferred to the lessee. The lessor set
the annual rental to insure a 10% rate of return. The implicit rate is known to the lessee. The present value an
ordinary annuity of 1 at 10% for 10 periods is 6.15.

I. The annual rental is P750,000.

II. At the beginning of the year, the total financial revenue is P2,887,500.
III. The gross income for the year is P922,500.

A. All statements are true

B. Only statements I and III are true.
C. Only statement III is true.
D. Only statements II and III are true.

60. On January 1, 2025, an entity sold equipment with a remaining useful life of 10 years and immediately leased
it back for 5 years. The sale price, fair value and carrying amount of the equipment are P11,400,000,
P10,000,000 and P9,000,000 respectively. The implicit rate in the lease is 10%. The rights retained by the
seller – lessee is 22.74% of the fair value of the asset.

I. The initial cost of the right of use asset is P2,274,000.

II. The gain on the right transferred to the buyer – lessor is P772,600.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

61. An entity reported pretax accounting income of P9,000,000 for the current year which included the following
items of income and expense:
Donation to political parties - nondeductible 1,500,000
Depreciation – 20% 1,600,000
Annual leave expense 600,000
Rent revenue 1,300,000
The income tax rate is 25%. For tax purposes, the depreciation rate is 25%, the annual leave paid is P800,000
and the rent received is P1,000,000. Which of the following statements is false?

A. The taxable income for the year is P9,600,000

B. The financial income subject to tax is P7,500,000
C. The current tax expense is P2,400,000.
D. The total tax expense is P2,625,000.

62. An entity reported the following information for the year 2025:
Deferred tax liability – January 1, 2025 600,000
Taxable income for the year 2025 5,000,000
Cumulative future taxable amounts on December 31, 2025 3,500,000
Cumulative future deductible amounts on December 31, 2025 1,500,000
The tax rate is 25% and the entity did not recognize any deferred tax asset on January 1, 2025. Which of the
following is false?
A. The income tax payable on December 31, 2025 is P1,250,000.
B. The deferred tax asset on December 31, 2025 is P100,000.
C. The total tax expense for the year 2025 is P1,150,000.
D. Deferred tax assets and deferred tax liabilities shall be presented as noncurrent.

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63. An entity reported the following information pertaining to its defined benefit plan for the year 2025:
Fair value of plan assets – January 1 4,000,000
Projected benefit obligation – January 1 5,000,000
Service cost 800,000
Discount rate 5%
Actual return on plan assets 350,000
Actuarial loss on PBO due to change in actuarial assumptions 700,000
Contribution to the plan 950,000
Benefits paid to retirees 550,000
I. The fair value of plan assets on December 31, 2025 is P4,750,000.
II. The projected benefit obligation on December 31, 2025 is P4,800,000.
A. All statements are true.
B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.
64. An entity prepares quarterly interim financial reports. The entity sells electrical goods and normally 5% of
customers claim on their warranty. The provision in the first quarter was calculated at 5% of sales to date
which amounted to P10,000,000. However, in the second quarter, a design fault was found and warranty
claims were expected to be 10% for the whole year. Sales for the second quarter amounted to P15,000,000.
What amount of warranty expense should be reported in the second quarter?
A. 2,000,000
B. 1,250,000
C. 1,500,000
D. 750,000
65. Which of the following statements about major customer disclosure is false?
A. A major customer is defined as one providing revenue which amounts to 10% or more of the combined
segment revenue of all operating segments.
B. The identities of major customers need not be disclosed.
C. The entity shall disclose the total amount of revenue from major customers.
D. The entity shall disclose the identity of the segment reporting the revenue from major customers.
66. Under IFRS for SMEs, all are basic financial instruments, except
A. Cash
B. Accounts receivable
C. A passive interest in nonputtable ordinary shares of another entity
D. An interest in nonputtable ordinary shares where the investee is classified as an associate of the entity
67. A complete set of financial statements of a small entity using PFRS for Small Entities shall include all the
following, except
A. Statement of comprehensive income
B. Statement of financial position
C. Statement of changes in equity
D. Statement of cash flows

68. At the beginning of the current year, SME Company acquired 25%% of the ordinary shares of an investee for
P5,000,000 plus transaction cost of P200,000. Published price quotations exist for the investment in associate.
The investee recognized a net income of P2,000,000 for the current year and paid dividends of P500,000
during the year. The fair value of the investment is P4,000,000 at year-end and the disposal cost is estimated
at P100,000.
I. If the entity elected to use the fair value model, the fair value change in profit or loss is P1,100,000.
II. If the entity elected to use the equity method, the impairment loss is P1,575,000.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

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69. At the beginning of the year, an SME acquired 30% of the ordinary shares of an investee for P6,000,000 plus
transaction cost of P300,000. The SME used the cost model to account for the investment in associate. There
is no published price quotation for the investment in associate. The investee recognized net income of
P2,500,000 for the current year and paid dividends of P600,000 during the year. The fair value of the
investment is P5,000,000 at year-end and the cost of disposal is estimated at P300,000.

I. The entity shall recognize share in the net income of investee of P750,000 for the current year.
II. The entity shall recognize impairment loss of P1,600,000 for the current year.

A. All statements are true.

B. All statements are false.
C. Only statement I is true.
D. Only statement II is true.

70. An SME provided the following assets on December 31, 2025:

Cash on hand 500,000
Cash in bank 2,000,000
Accounts receivable 1,500,000
Notes receivable 1,000,000
Loan receivable from employee – fixed term 100,000
Loan receivable from associate – on demand 1,800,000
Investment in nonputtable ordinary shares 400,000
Investment in convertible preference shares 600,000
Investment in bonds 1,200,000
Investment in associate 1,400,000
Inventory 1,300,000
Property, plant and equipment 4,000,000
Intangible assets 700,000
Deferred tax asset 300,000
What total amount should be reported as basic financial assets?
A. 7,300,000
B. 9,100,000
C. 8,500,000
D. 9,900,000

END

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