DISCUSSION QUESTIONS

1. The PFRS for SMEs is Notes receivable 92,000

a. To be used in conjunction with the full PFRSs Trade accounts receivable 122,000
b. A separate (stand-alone) standard Allowance for doubtful accounts 6,000
c. Similar to the Conceptual Framework Merchandise inventory 136,000
d. All of these Notes payable 150,000
Trade accounts payable 75,000
2. In the Philippines, the SEC defines an SME as an entity (Choose Employees’ income tax withheld 4,000
the incorrect one) Bonds payable 250,000
a. With total assets between ₱3,000,000 and ₱350,000,000 or Share dividends payable 15,000
total liabilities between ₱3,000,000 and ₱250,000,000. Income tax payable 28,000
b. That is not in the process of filing its financial statements for
the purpose of issuing any class of instruments in a public Analysis of the above accounts disclosed the following:
market.  Bank overdraft of ₱13,000 was deducted from cash balance.
c. That is not a holder of secondary license issued by a  Trade accounts receivable was net of customers’ deposit of
regulatory agency. ₱7,000.
d. That is a public utility.  Merchandise worth ₱15,000 received December 30, 2017 was
included in the inventory but was not recorded as a purchase.
3. All of the following can be classified as an SME, except  Accounts payable was net of accounts with debit balance of
a. Manufacturing entity
₱12,000.
b. Merchandising entity
c. Commercial bank  A bank loan of ₱30,000 due December 31, 2019 was included in
d. Food and beverage entity the notes payable balance.
 Bonds payable which was issued in 2017 will mature in five annual
4. Which can be considered an SME? installments beginning June 1, 2018.
a. A credit union with total assets of ₱3,000,000.  Trading securities are investment in 10,000 ordinary shares with
b. A broker with total liabilities of ₱3,000,000. publish price quotation at December 31, 2017 at ₱9 per share.
c. A bank with total assets of ₱350,000,000.
d. An unlisted entity manufacturing electrical goods with total 9. How much total current assets should be reported on the
liabilities of ₱250,000,000. statement of financial position as at December 31, 2017?
a. ₱590,000 c. ₱605,000
5. What is a “significant” change in the size criteria that requires b. ₱598,000 d. ₱587,000
transition to or from the PFRS for SMEs?
a. 20% or more of the total assets or total liabilities 10. How much total current liabilities should be reported on the
b. 50% or more of the total assets or total liabilities statement of financial position as of December 31, 2017?
c. 10% or more of the total assets or total liabilities a. ₱272,000 c. ₱324,000
d. No quantitative threshold can be made because this is b. ₱289,000 d. ₱339,000
dependent on the judgment of management.
Use the following information for the next two questions:
6. An entity that meets the definition of SME shall apply the PFRS for The MORPH Corporation, an SME, presented the following multiple-
SMEs for annual period beginning step income statement and statement of retained earnings for the year
a. January 1, 2010 ended December 31, 2017, as developed by its bookkeeper who as
b. January 1, 2011 completed 12 units of accounting:
c. January 1, 2012 MORPH Corporation
d. July 1, 2010 Revenue Statement
December 31, 2017
7. All of the following are considered line items in the statement of Net sales ₱390,000
financial position of an SME, except Less: Dividends declared ₱3.50 per ordinary share 15,000
a. Biological assets carried at fair value through profit or loss Revenues ₱375,000
b. Investments in associates Less: Selling Expenses 41,600
c. Investment properties carried at cost Gross profit ₱333,400
d. Current tax assets and liabilities Less: Operating Expenses:
Interest Expense ₱ 8,200
8. Which of the following is required to be reported as line item for an Cost of goods sold
SME but not under full PFRS? 227,400
Provision for income tax 23,920
a. Inventory Net operating income
b. Property, plant and equipment ₱ 73,880
Add: Dividend revenue 3,600
c. Financial asset Less: General and administrative expense
d. Investment in joint venture 48,600
Net profit
₱ 28,880
Use the following information for the next two questions: MORPH Corporation
The accounts below were taken from the unadjusted trial balance of Retained Earnings Statement
LARGE Co., an SME, as at December 31, 2017: December 31, 2017
Beginning retained earnings ₱116,000
Cash ₱124,000 Add: net profit 28,880
Trading securities, at cost 87,000 Adjusted retained earnings ₱144,880
FAR 38MC – PFRS FOR SMES Page 1 of 2
 DISCUSSION QUESTIONS

Less: Loss on sale of land 8,000 b. ₱ (12.03) million d. ₱2.25 million

Ending retained earnings ₱136,880
15. If the entity measures its investments in associates using the
11. The correct net profit is equity method, the total carrying amount of the investments should
a. ₱43,880 c. ₱34,000 be
b. ₱39,000 d. ₱35,880 a. ₱52.03 million c. ₱42.75 million
b. ₱43.00 million d. ₱43.75 million
12. An SME company buys ten shares of securities at ₱2,000 each on
December 31, 2015. The securities are acquired to be held 16. If the entity measures its investments in associates using the
indefinitely. The fair value of the securities increases to ₱2,500 on equity model, the net amount to be recognized in profit or loss
December 31, 2016, and to ₱2,750 on December 31, 2017. On should be
December 31, 2017, the company sells the securities. Assume no a. ₱ (8.28) million c. ₱ (7.53) million
dividends are paid and that the company has a tax rate of 30%. b. ₱ (8.53) million d. ₱0.75 million
What is the amount of the reclassification adjustment for other
comprehensive income on December 31, 2017? 17. If the entity measures its investments in associates using the fair
a. ₱ (7,500) c. ₱ (5,250) value model, the net amount to be recognized in profit or loss
b. ₱5,250 d. Nil should be
a. ₱5.72 million c. ₱2.87 million
Use the following information for the next five questions . b. ₱5.47 million d. ₱4.00 million
You were engaged by ZEUS Corporation, a small and medium-sized
entity, to audit its financial statements for the year 2017. During the
course of your audit, you noted the following regarding its recent
acquisitions of investments in equity securities:

a) On January 1, 2017 the entity acquired 25 percent of the equity of

each of entities B, C and D for ₱10 million, ₱15 million and ₱28
million respectively. Transaction costs of 1 percent of the purchase
price of the shares were incurred by the entity.
b) On January 2, 2017 entity B declared and paid dividends of ₱1
million for year ended 2016.
c) On December 31, 2017 entity C declared a dividend of ₱8 million
for the year ended 2017. The dividend declared by entity C was
paid in 2018.
d) For the year ended December 31, 2017, entities B and C
recognized profit of respectively ₱5 million and ₱18 million.
However, entity D recognized a loss of ₱20 million for that year.
e) Published price quotations do not exist for the shares of entities B,
C and D. Using appropriate valuation techniques the entity
determined the fair value of its investments in entities B, C and D
at December 31, 2017 as ₱13 million, ₱29 million and ₱15
million respectively. Costs to sell are estimated at 5 percent of the
fair value of the investments.
f) The entity has no subsidiaries and therefore does not produce
consolidated financial statements.

In accordance with section 14.4 of the PFRS for SMEs, an investor

shall account for all of its investments in associates using one of the
following: (a) the cost model in paragraph 14.5, (b) the equity method in
paragraph 14.8, or (c) the fair value model in paragraph 14.9. The entity
is seeking your advice on the effect of each method on the carrying
amount of the investment and its effect on profit or loss.

QUESTIONS:
Based on the above and the result of your audit, answer the following
as of and for the year ended December 31, 2017:

13. If the entity measures its investments in associates using the cost
model, the total carrying amount of the investment should be
a. ₱40.25 million c. ₱39.25 million
b. ₱53.28 million d. ₱39.50 million

14. If the entity measures its investments in associates using the cost
model, the net amount to be recognized in profit or loss should be
a. ₱ (11.78) million c. ₱ (11.03) million
FAR 38MC – PFRS FOR SMES Page 2 of 2