You are on page 1of 3


Sean Companys beginning inventory at January 1, 2004 was understated by P45,500, and its ending inventory was overstated by P91,000. As a result, Sean Companys cost of goods sold for 2004 was: a. Understated by P45,500 b. Overstated by P45,500 c. Understated by P136,500 d. Overstated by P136,500 2. On January 1, 2002, Breton Company purchased for P420,000 a machine with a useful life of 10 years and no salvage value. The machine was depreciated by the double declining balance method and the carrying amount of the machine was P268,800 on December 31, 2003. Breton Company changed to the straight line method on January 01, 2004. What would be the depreciation expense on this machine for the year ended December 31, 2004? a. P 26,880 b. P 33,600 c. P 42,000 d. P 53,760 3. Brandy Corp. reports on a calendar-year basis. Its 2004 and 2005 financial statements contained the following errors: 2004 2005 Over (under) statement of ending inventory P10,000 P 4,000 Understatement of depreciation 4,000 6,000 Failure to accrue salaries at year end 8,000 12,000 As a result of the above errors, 2005 income would be: a. overstated by P4,000 b. overstated by P24,000 c. overstated by P22,000 d. overstated by P16,000 4. On January 01, 2001, Laden Company purchased a patent for P535,500. The patent is being amortized over its remaining life of 15 years expiring January 01, 2016. During 2004, Laden Company determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be reported in the Balance sheet for the patent, net of accumulated amortization on December 31, 2004? a. P 321,300 b. P 367,200 c. P 378,000 d. P 392,700 5. Effective January 2, 2005, Kincaid Co. adopted the accounting principle of expensing advertising and promotion costs as they are incurred. Previously, advertising and promotion costs applicable to future periods were recorded in prepaid expenses. Kincaid can justify the change, which was made for both financial statement and income tax reporting purposes. Kincaid's prepaid advertising and promotion costs totaled P250,000 at December 31, 2004. Assume that the income tax rate is 40 percent for 2004 and 2005. The adjustment for the effect of the change in accounting principle should result in a net charge against income in the income statement for 2005 of

a. P 0 b. P 100,000 c. P 150,000 d. P 250,000 6. On January 01, 2001, Rodney Company purchased a machine for P396,000 and depreciated it using the straight line method using an estimated useful life of 8 years with no salvage value. On January 1, 2004, Rodney Company determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of P36,000. An accounting change was made in 2001 to reflect this additional data. The accumulated depreciation for this machine should have a balance at December 31, 2004 of: a. P 219,000 b. P 231,000 c. P 240,000 d. P 264,000 7. Bart, Inc. receives subscription payments for annual (one year) subscriptions to its magazine. Payments are recorded as revenue when received. Amounts received but unearned at the end of each of the last three years are shown below: 2003 2004 2005 Unearned revenues P120,000 P150,000 P176,000 Bart failed to record the unearned revenues in each of the three years. As a result of the omission, 2005 income was: a. overstated by P146,000 b. understated by P146,000 c. understated by P26,000 d. overstated by P26,000 8. Globe Corporation offers a 3 year warranty for its products. It previously estimated warranty costs to be 2% of sales. Due to technological advance in production at the beginning of 2004, Globe Corporation now believes 1% of sales to be a better estimate of warranty costs. Warranty cost of P140,000 and P168,000 were reported in 2002 and 2003 respectively. Sales for 2004 was P8,750,000. How much should be reported in 2004 as warranty expense. a. P 87,500 b. P 154,000 c. P 175,000 d. P 241,500 9. An insurance premium of P3,600 was prepaid in 2004 covering the years 2004, 2005, and 2006. The entire amount was charged to expense in 2004. In addition, on December 31, 2005, fully depreciated machinery was sold for P6,400 cash, but the sale was not recorded until 2006. There were no other errors during 2004 or 2005, and no corrections have been made for any of the errors. Ignore income tax considerations. What is the total effect of the errors on 2005 net income? a. Net income is understated by P12,800 b. Net income is overstated by P3,600 c. Net income is understated by P1,600 d. Net income is overstated by P2,400

10. Adger Corporation purchased a machine for P150,000 on January 1, 2004. Adger will depreciate the machine using the straight-line method using a five-year period with no residual value. As a result of an error in its purchasing records, Badger did not recognize any depreciation for the machine in its 2004 financial statements. Adger discovered the problem during the preparation of its 2005 financial statements. What amount should Adger record for depreciation expense on this machine for 2005? a. P 0 b. P 30,000 c. P 37,500 d. P 60,000