Theory of Accounts Quizzer

Gloria/Moreno

Instruction: Select the best answer for each of the following items
relating to a variety of issues in financial accounting.
1

.

The International Accounting Standards Committee (IASC)
a. Directly influences governmental legislation regarding
accounting standards.
b. Develops binding pronouncements for its members.
c. Is composed of members from national standard-setting
bodies.
d. Establishes uniform accounting standards to eliminate
reporting differences among nations.

2

.

For international investors, which of the following is not a
potential benefit of a development and adoption of International
Accounting Standards (IASs)
a. Improved ability to make comparisons across enterprises.
b. Greater freedom in the flow of capital across borders.
c. Greater risk premiums for international investors.
d. Fewer competitive advantages due to varying treatments of
items affecting reported earnings.

3

.

The measurement basis most often used to report a long-term
payable representing a commitment to pay money at a
determinable future date is
a. Historical cost.
b. Current cost.
c. Net realizable value.
d. Present value of future cash flows.

4

.

In December 2004, catalogs were printed for use in a special
promotion in January 2005. The catalogs were delivered by the
printer on December 13, 2004, with an invoice for P70,000
attached. Payment was made in January 2005. The P70,000
should be reported as a deferred cost at the December 31,
2004 balance sheet date because of the
a. Matching principle.
b. Revenue recognition principle.
c. Reliability principle.
d. Cost principle.
1

Theory of Accounts Quizzer

Gloria/Moreno

5

.

Because of inexact estimates of the service life and residual
value of a plant asset, a fully depreciated asset was sold in
2004 at a material gain. This gain most likely should be
reported
a. In the other revenues and gains section of the 2004 income
statement.
b. As part of sales revenue on the 2004 income statement.
c. In the extraordinary item section of the 2004 income
statement.
d. As an adjustment to prior periods’ depreciation on the
statement of changes in equity.

6

.

Assume that employees confessed to a P200,000 inventory
theft but are not able to make restitution. How should this
material fraud be shown in the financial statements?
a. Classified as a loss and shown as a separate line item in
the income statement.
b. Initially classifies as an account receivable because the
employees are responsible for the goods. Because they
cannot pay, the loss be recognized as a write-off of
accounts receivable.
c. Included in cost of goods sold because the goods are not
on hand, losses on inventory shrinkage are ordinary, and it
would cost the least amount of attention.
d. Recorded directly to retained earnings because it is not an
income-producing item.

7

.

The assets of a liquidating enterprise should be shown on the
balance sheet at their
a. Undepreciated historical cost.
b. Fair market value.
c. Realizable value.
d. Current cost.

8

.

An enterprise with total asset of P100,000,000 and net profit of
P9,000,000 purchases staplers with an estimated useful life of
10 years for P1,000. In connection with the purchase, the
enterprise debits miscellaneous expense. This scenario is most

2

Theory of Accounts Quizzer

Gloria/Moreno

closely associated with which of the following concepts or
principles?
a.
b.
c.
d.
9

.

Materiality and going concern.
Relevance and neutrality.
Reliability and comparability.
Materiality and the balance between cost and benefit.

An objective of financial reporting is
a. Providing information useful to investors, creditors, donors,
and other users for decision making.
b. Assessing the adequacy of internal control.
c. Evaluating management results compared with standards.
d. Providing information on compliance with established
procedures.

10

.

What are the effects of an adjusting entry used to accrue
revenue from credit sales?
Assets
Liabilities
Equity
a.
Decrease No effect
Decrease
b.
Increase
No effect
Increase
c.
No effect
Decrease
Increase
d.
No effect
Increase
Decrease

11

.

A manufacturer receives an advance payment for special-order
goods that are to be manufactured and delivered within the
next year. The advance payment should be reported in the
manufacturer’s current-year balance sheet as a(an)
a. Current liability.
b. Noncurrent liability.
c. Contra asset amount.
d. Accrued revenue.

12

.

An enterprise that owns a new professional basketball team
sells season tickets to its team’s games. The season last from
November through April, with 10 games played each month. In
2001 the enterprise collected 3 million from season-ticket sales
for the 2001-2002 season. Its fiscal year-end is December 31.
Based on this information, the enterprise should
3

2001 balance sheet. adjusting. . Report a liability for unearned income of 3 million on its December 31. c. Unearned income. b. Select the term that appropriately describes this situation from the viewpoint of the enterprise. d. 2001 balance sheet. Dividends of 30. b. closing. reversing. . closing. Adjusting. Posting. 15 The purpose of an entry that contains a debit to prepaid property taxes and a credit to property tax expense is to recognize a(an) a. Retained earnings 30. Accrued income. adjusting. Posting. 16 An enterprise has made all necessary adjusting entries and is now closing its accounts for the period. adjusting. . d. reversing. c. 13 An enterprise that sprays chemicals in residences to eliminate or prevent infestation of insects requires that customers prepay for 3 months’ service at the beginning of each new quarter.Theory of Accounts Quizzer Gloria/Moreno a. Report a liability for unearned income for 2 million on its December 31. Expired cost.000 were declared and distributed during the year. Earned income. c.000 Dividends 30. Posting. b. Report income of 1 million on its 2002 income statement.000 b. Dividends 30. reversing. closing. d. posting. 4 . c. Accrued expense. b. closing. Report income of 3 million on its 2001 income statement. d. 14 The correct order of the following steps of the accounting cycle is a. Prepaid expense.000 . reversing. a. The entry to close the dividends account would be a. Prepaid expense. Prepaid income.

d. b. December 31. At the time of the original sale. 2004. Reversing entries are the exact opposite of the adjustments made in the previous period. On January 1. The customers also buy an extended warranty package. b.Theory of Accounts Quizzer Gloria/Moreno Retained earnings 30. .000 30. c. Reversing entries are identical to adjusting entries made in the previous period. Reversing entries are made at the end of the next accounting period. Monetary unit assumption. c. and claim occurs during 2003. extending the coverage for an additional 2 years to the end of 2004. . The customers have only one warranty claim during the 3-year period. . At the time of the claim in 2003.000 17 Which of the following statements is a correct description of reversing entries? a. after recording regular transactions of the period. 19 An enterprise sells a durable good to a customer on January 1. d.000 c. Going concern assumption. The company will recognize income from the sale of the extended warranty a. In years 2003 and 2004. Income Summary Dividends d. 5 . Historical cost principle.000 30. d. Dividends Income Summary 30. Revenue recognition principle. The recording of reversing entries is a mandatory step in the accounting cycle.000 30. 2002. and the customer is automatically given a 1-year warranty. the company expects to be incurred evenly over the life of the warranty contracts. 18 The practice of recording advance payments from customers as a liability is an example of applying the a. when the warranty expires. c. 2002. b.

Both the direct and indirect methods. c. . Decrease Operating or financing outflow c. No effect Financing or investing outflow d. Cost of goods sold expense and administrative expenses. Income tax expense and administrative expense. . The effect on income taxes of extraordinary items and the effect on income taxes of profit or loss from ordinary activities. d. the payment of cash dividends appears in the <List A> activities section as a <List B> of cash. Decrease Investing outflow b. Neither method. 21 Which combination below explains the impact of credit card interest incurred during the period (1) equity on the balance sheet and (2) the statement of cash flows? (2) (1) Reflected on Effect on Equity Statement of On Balance Sheet Cash flow as a (n) a. c. Operating and nonoperating data. d. No effect Operating outflow 22 A reader of a statement of cash flows wishes to analyze the major classes of gross cash receipts and gross cash payments from operating activities. . Only the indirect method. b. .Theory of Accounts Quizzer Gloria/Moreno 20 The major distinction between the multi-step and single-step income statement formats is the separation of a. Only the direct method. b. 23 In the statement of cash flows. List B Operating or investing 6 Source . Which methods of reporting cash flows from operating activities will supply that information? a. List A a.

d.Theory of Accounts Quizzer b. Operating or financing Investing or financing Investing 7 Gloria/Moreno Use Use Source . c.

As a prior-period item. Add Add b. As an extraordinary item. A decrease in inventory Subtracted from 25 In reconciling net profit on accrual basis to net cash from operating activities. . . . <List A> must be <List B> cash payments for goods along with other adjustments. formal plan to dispose in its entirety of a component of the enterprise that represents a separate major line of business that is distinct operationally and financially. what adjustment is needed to net profit because of (1) an increase during the period in prepaid expenses and (2) the periodic amortization of premium on bonds payable? (1) (2) Increase in Amortization of Premium Prepaid Expenses on Bonds Payable a.Theory of Accounts Quizzer Gloria/Moreno 24 In the determination of cost of goods sold. Add Deduct c. c. An increase in inventory Added to d. Deduct Deduct 26 An enterprise has publicly announced a detailed. List A List B a. 8 . b. Deduct Add d. As part of continuing operations. d. Which of the following is the proper treatment of the disclosures that should be made after the announcement? a. A decrease in accounts payable Added to c. As a discontinuing operations. An increase in accounts payable Added to b.

Included in the determination of net profit or loss for the current period. Reported as an adjustment to beginning retained earnings. which is most likely to be classified as an extraordinary item in the income statement? a. A gain because of the disposal of assets associated with a discontinuing operation of a business. 9 . c. d. directly following depreciation expense for the current year. Cost of goods sold for an interim period reflects only the amount of product cost applicable to sales revenue recognized in the interim period. An extraordinary loss occurring in the second quarter must be prorated over the last three interim periods of the year. Disclosed as a separate type of depreciation expense. 29 Which of the following is a unique reporting problem associated with the determination of the results of operations for an interim period? a. A loss because of adjustments of accruals on long-term contracts. Advertising and similar costs expensed in one interim period may benefit other interim periods in the same annual period. how should the enterprise report the adjustment resulting from the change in accounting policy if the alternative treatment allowed by the IASs is used? a. . In its income statement for the year. A loss because of a lawsuit that resulted from charges of patent infringement. b. Depreciation for an interim period represents an estimate. Not disclosed in the financial statements. c. c. The company had unsuccessfully defended a similar suit 5 years ago. A loss because of an expropriation of assets by a foreign government. d. b. 28 An enterprise changes its method of accounting for depreciation during the current year because it believes that the result will be a more appropriate presentation in the financial statements. .Theory of Accounts Quizzer Gloria/Moreno 27 Assuming all of the following involve material amounts. d. . b.

at all times. The type of account used for this purpose is called a(n) a. General checking account. Imprest bank account. d. b. b. Recognized equally over the second. The petty cash custodian. 10 . c. The general cashier.Theory of Accounts Quizzer Gloria/Moreno 30 An extraordinary gain in the second fiscal quarter. 33 Who is responsible. Monetary unit assumption. b. 34 Which of the following is not an appropriate procedure for controlling the petty cash fund? a. The rationale for this process is the a. an enterprise makes a specific amount of cash available in checking account for this limited purpose. c. Going concern assumption. Lockbox account. Compensating balance. The general office manager. c. The president. Recognized equally in each quarter. . c. . 31 A newly plant acquired plant asset is to be depreciated over its useful life. for the amount of petty cash fund? a. . Recognized in full in the second quarter. 32 For effective internal control over the disbursement of payroll checks. Recognized only in the annual financial statements. How should the gain be accounted for? a. by restating the first quarter. d. The petty cash custodian files receipts by category of expenditure after their presentation to the general cashier so that variations in different types of expenditures can be monitored. . d. Economic entity assumption. Materiality assumption. third and fourth quarters. d. . b.

dated and recorded in the company’s books on December 31. n/30). payable to a vendor. or the full balance is due within 30 days (2/10. I and II only. the general cashier issues a company check to the petty cash custodian. which of the following items should be included in the amount reported as cash? I. The amount of future returns can be reliably estimated. d. I only. an enterprise may recognize revenue from a sale of goods at the time of sale only if a. 2001 balance sheet. 35 On an enterprise’s December 31. No Yes 37 When a right of return exists. c. d. Neither I nor II. in payment of a sale made in December 2001. Upon receiving petty cash receipts as evidence of disbursements. II. II only. 2002 a. which of the following accounts will appear on the income statement if the net method of recording receivables is employed? Sales Discounts Sales Discounts Forfeited a. c. The petty cash custodian obtains signed receipts from each individual to whom petty cash is paid. No No d. . Yes Yes b. rather than cash. A check payable to the enterprise dated January 2. If some customers take advantage of the cash discount and others and others do not. Surprise counts of the fund are made from time to time by a superior of the petty cash custodian to determine that the fund is being accounted for satisfactorily.Theory of Accounts Quizzer Gloria/Moreno b. 11 . 2001 but not mailed until January 10. A check drawn on the enterprise’s account. to replenish the fund. 36 An enterprise offers its customers credit terms of a 2% discount if paid within 10 days. . 2002. Yes No c. b. .

. Last-in. c. b. . Recorded at fair value for the assets obtained and liabilities incurred. 39 A transferor enterprise most likely should continue to recognize a transferred financial asset if a. 12 . Reduced by the fair value of the recourse obligation. c. Accounted for as a collateralized borrowing. first-out (FIFO). LIFO FIFO c. The transferor may reacquire the asset. c. FIFO FIFO b.Theory of Accounts Quizzer Gloria/Moreno b. d. The transferor may reacquire the asset. and the reacquisition price is fair value. The buyer resells the goods. FIFO LIFO d. The transferee may sell or pledge the full fair value of the asset. LIFO LIFO 41 The cost of materials has risen steadily over the year. . c. a. 40 Which inventory pricing method generally approximates current costs for each of the following? Ending Cost of Inventory Goods Sold a. 38 If a transfer of receivables with recourse qualities to be recognized as sale. d. . Recorded at the historical cost of the assets obtained. and the asset is readily obtainable in the market. The seller believes returns will not be material. Weighted average. b. Which of the following methods of estimating the ending balance of the materials inventory account will result in the highest net profit. first –out (LIFO). the proceeds from the sale are a. assuming all other variables remain constant. First-in. d. The transferor is entitled and obligated to repurchase the asset. b. and the transferee receives a lender’s return. The seller retains the risks and rewards of ownership.

13 . a separate entry is needed to adjust the perpetual inventory amount. b. 43 When the equity method is used to account for the investment in an associate. 42 When a perpetual inventory system is used and a difference exists between the perpetual inventory amount balance and the physical inventory count. 45 Assuming an available-for-sale financial asset that is not part of a hedge is remeasured to fair value at the balance sheet. d. 44 Derivatives that are not hedging instruments are always classified in which category of financial instruments? a. Specific identification. Which of the following demonstrates that adjusting entry? a.Theory of Accounts Quizzer Gloria/Moreno d. d. An increase in a liability account. Cost of goods sold Retained earnings appropriated for shortages. the recording of the receipt of a cash distribution from the investee will result in a. May be recognized in net profit or loss or directly in equity. Extraordinary loss due to write-down of inventory Inventory c. b. Available-for-sale financial assets. c. Inventory over and short Inventory b. An increase in a special equity account. Must be recognized in net profit or loss if the result is a loss and directly in equity if the result is a gain. d. The recognition of investment income. c. . A reduction in the investment balance. b. Must be recognized directly in equity. Extraordinary loss due to write-down of inventory Allowance for inventory shortages d. c. Must be recognized in net profit or loss. the gain or loss a. . Held-to maturity investments. . Loans and receivables originated by the enterprise. . Financial assets or liabilities held for trading.

freight costs. All costs incurred in the construction of a plant building. Proceeds obtained in the process of readying land for its intended purpose. The purchase price. should be considered as part of the asset’s cost. plant. such as form the sale of cleared timber. from excavation to completion. The costs of improvements to equipment incurred after its acquisition should be added to the asset’s cost if they increase future service potential. should be recognized immediately as income. b. c. and equipment? a.Theory of Accounts Quizzer 46 . Gloria/Moreno Which of the following is not an appropriate basis for measuring the cost of property. d. and installation costs of a productive asset should be included in the asset’s cost. 14 .

disposal of machinery Machinery b. Cash Accumulated depreciation – machinery Expense. 48 A depreciable asset has an estimated 20% residual value. 70%. No Yes d. 15 . Yes No c. 200% diminishing-balance. Cash Accumulated depreciation – machinery Income – disposal of machinery . The entry that the enterprise uses to record the sale is a. . Straight-line. At the end of the asset’s estimated useful life. . 20%. which of the following depreciation methods will result in the highest depreciation expense? a. 10%. c. . b. d. No No 49 If an enterprise employs the sum-of-the-years’-digits (SYD) method of depreciation for an asset with an estimated useful life of 4 years. Yes Yes b. for cash. Sum-of-the-years’-digits. b. prior to the end of its estimate useful life. 50 An enterprise sells a piece of machinery. c. Diminishing-balance. The sale price is less than the carrying amount of the asset on the date of sale. the accumulated depreciation will equal the original cost of the asset under which of the following depreciation methods? DiminishingSum-of-the-Years’Balance Digits (SYD) a. 25%. the percentage of the total depreciable cost that will be expensed in the third year is a.Theory of Accounts Quizzer Gloria/Moreno 47 In the years after mid-service point of a depreciable asset. d.

The automation increased the market value and productive capacity of the assemble line but did not affect its useful life. Going concern assumption. . should be . Patents. including fees of attorneys. c. Goods on consignment. Economic entity assumption.000 was invested to automate the line. 52 The amortization of the intangible assets over their useful lives is justified by the a. Cash Machinery Accumulated depreciation – machinery Expensed – disposal of machinery 51 An enterprise installed an assembly line in 1997. Trademarks. d.Theory of Accounts Quizzer Gloria/Moreno Machinery c. d. Debit the cost to the property. . and equipment account. 53 Which of the following is not considered to be an intangible asset? a. . Report it as expense in 2001. 54 The costs of start-up activities. c. b. b. plant. Allocate the cost of automation between the asset and accumulated depreciation accounts.000. Establish a separate account for the 100. 100. Proper accounting for the cost of automation should be to a. Four years later. c. b. 16 . Cash Expensed – disposal of machinery Accumulated depreciation – machinery Machinery d. Copyrights. Monetary unit assumption. Historical cost assumption. d.

If the sinking-fund assets are properly classified as noncurrent. Which of the followings defines the appropriate method of accounting for the warranty? a. . How should it be accounted for? . Expensed when incurred. 17 . Capitalized and amortized. Sales warranty. b.000. an enterprise reliably estimates that the expected cost of compensated absences resulting from short-term disability will be 100. because of the indefinite life of the business. 57 At its balance sheet date. According to the provision of the bond indenture. XYZ was to make annual deposits into a bond sinking fund (beginning December 31. On December 31. 56 A manufacturer produces a quality product for which it charges a little more than some competing items but gives its consumers a more liberal warranty policy.Theory of Accounts Quizzer Gloria/Moreno a. Tax basis. 1997. 55 On December 31. d. c. b. Capitalized. 1998) to accumulate the fund necessary to retire the bonds at their maturity. . This unused entitlement arose from employees services rendered during the period and is accumulating. The bonds carried a stated interest rate of 10% and were sold at par. d. c. Deferred credit. The product carries a 5-yaer warranty that covers both labor and material charges. 2001 balance sheet? a. Interest is payable annually on December 31. Current liability. but not amortized. Capitalized and deferred until liquidation of the business. 2001. Contra to long-term investments. XYZ issued 5-year bonds with a face amount of 1 million. Long-term liability. c. b. how should the balance of bonds payable be classified on the December 31. Recognition of a provision. Cash basis. all required interest payments and sinking-funds payments due to date had been made on schedule. d.

At the balance sheet date. b. Precollected subscriptions receivable (a deferred asset account). The purpose of this journal entry is to record a.000 should occur. 61 Because of defect discovered in its seat belts in December 2001. The average customer stays with the enterprise 8-years. c. d. Earned subscriptions revenue (a revenue account). The cost of the . . d. Liability. An expense should be recorded for 100. A direct reduction to retained earnings of 100. 58 The publisher of a popular magazine offers a special discounted price for a 3-year subscription. An unexpired expense. b. Only a disclosure should be made because recognition does not occur until the absences occur. c. An asset of 100. 59 A cable television enterprise receives deposit from customers that are refunded when service is terminated. Other revenue. an automobile manufacturer believes it is probable that it will be required to recall its products. An expired expense. Operating revenue. the amount that has already been collected but pertains to future periods is best referred to as a. . c. b. A liability. c. . 60 In performing an audit. Deferred subscriptions revenue (a liability account).000 should be recognized. d. you encounter an adjusting journal entry recorded at year-end that contains a debit to rental revenue and a credit to deferred rental revenue. How should these deposits be shown on the financial statements? a. d.000. An accrued revenue. The final decision on the recall is expected to be made in March 2002. 18 . Share capital.Theory of Accounts Quizzer Gloria/Moreno a. b. Accrued subscription revenue (an asset account).

. c. with respect to pending litigation. b.5 million and a provision of 2. The time period in which the underlying cause of action occurred. . c. the board was aware that a new law would require the enterprise to fit smoke filters to its factories within the next year. As an adjustment of the opening balance of retained earnings equal to 2. Just prior to the balance sheet date.5 million. d. As a loss of 2. Defer a provision of 1 million to 3 million depending on the applicable national accounting standards. A reliable estimate is that between 1 million and 3 million will probably be paid out. Premiums offered to customers 64 Which of the following is not a factor. Recognize a provision of 1 million to 3 million depending on the applicable national accounting standards. The probability of an unfavorable outcome. 2001 financial statements? a. Make no journal entry at this time. The enterprise should a. It should not be disclosed because it has not yet happened. b. that must be considered in determining whether a provision should be recognized? a. 62 An enterprise is subject to warranty claims. As of the balance sheet date. c.5 million.5 million.5 million. No estimated of loss within this range is most likely than any other. b. d. Disclose only a possible loss. No implementation steps have been taken. .Theory of Accounts Quizzer Gloria/Moreno recall is reliably estimated to be 2. 63 Which one of the following will usually be accounted for by recognizing a provision? a. d. 19 . A law requires an airline to overhaul its aircraft once every 3 years. As an appropriation of retained earnings of 2. the board decided to close a division. b. No such filters have been fitted. How should this information be reported in the December 31.

66 If market rates of interest rise after issuance of a bond. . the vice-president of a local bank reviews the bank’s mortgage portfolio prior to the December 31 yearend. d. and the amount involved is material. b. .Theory of Accounts Quizzer Gloria/Moreno c. Need not be disclosed. b. b. no payments have been made on any of the three mortgages. The vice-president reluctantly concludes that is probable that the full amount of principal and interest will not be collected. Interest expense recorded on the bond will rise. No accounting or disclosure of a possible loss in value is necessary. d. 67 In November 2001. c. 65 An enterprise is currently being sued by a customer. The ability to make a reliable estimate of the amount of loss. The client has incurred net losses for the past 3 years and is now experiencing serious cash flow problems. Contingency note disclosure of a possible impairment is required. . The contingent liability a. The market price of the bond will drop. The enterprise’s mangers. The number of parties involved in the litigation. with a charge directly to retained earnings. and auditors agree that the likelihood of an unfavorable rulings is remote. A reliable estimate can be made of the costs that would result from a ruling unfavorable to the enterprise. Should be disclosed by an appropriation of retained earnings. c. 20 . lawyers. a. The carrying amount of the mortgages should be reduced. c. Cash interest payments on the bond will rise. For the past 6 months. The market price of the bond will exceeds its face amount. Should be disclosed in a note. What is the impact of this conclusion on the local bank’s 2001 financial statements? a. The bank’s largest client has mortgages on buildings in three cities. Should be disclosed as a parenthetical comment in the balance sheet. d.

Cash Premium on bonds payable Bonds payable c. Interest expense will equal the cash interest payment each period. Amortized over the life of the new issue. b. 70 If bonds payable with a carrying amount equal to par value are refunded by use of a call provision. The format of the journal entry that the enterprise would use to record the issuance is a. . Recognized currently in net profit or loss as an extraordinary item. d. b. Amortized over the remaining original life of the extinguished issue.Theory of Accounts Quizzer Gloria/Moreno d. . a. Interest expense will be less than the cash interest payment each period. c. Interest expense in the earlier periods will be less than interest expense in the later periods. Cash Discount on bonds payable Bonds payable 69 If bonds are initially sold at a discount and the effective-interest method of amortization is used. c. the call premium of a refunded issue should be a. Cash Discount on bonds payable Bonds payable d. The carrying amount of the mortgages should be reduced. 21 . 68 An enterprise issues bonds with a 10% coupon rate at a time when the market interest rate on the bonds of similar risk and maturity is 15%. with a charge to the income statement. Cash Premiums on bonds payable Bonds payable b. Interest expense inn the earlier periods will be greater than interest expense in the later periods. .

Expense them in the periods bonds are converted. b. d. 72 How will net profit or loss be affected by the amortization of a premium on bonds payable? a. Interest expense is increased. Amortize them over a period not to exceed 40 years. . The procedure used by Enterprise X is a. . Exchanges debt instruments with the lender with substantially similar terms. 74 Enterprise X effects self-insurance against loss from fire by appropriating an amount of retained earnings each year equal to the amount that would otherwise be paid out as fire insurance premiums. Transfers amounts to a trust to be used to repay the obligation. Amortize them over the remaining life of the issue retired. Interest expense is decreased. Exchanges debt instruments with the lender with substantially different terms. d. Prohibited for external reporting purposes. c. Charge them to share premium in excess of the par value of the shares issued. so net profit or loss is increased. so net profit or loss is increased. 22 . so net profit or loss is decreased. . Transfers amounts in a transaction that meets the requirements of an in-substance defeasance. so net profit or loss is decreased. c. unamortized issue costs. and the costs of implementing a conversion of debt into common shares? a. b. . Interest income is increased. Recognized currently in net profit or loss. 71 An enterprise most likely may derecognize a financial liability if it a. d. c. 73 What is the preferred method of handling unamortized discount.Theory of Accounts Quizzer Gloria/Moreno d. Interest income is decreased. b.

the enterprise changed its rate of amortization from 5% and 6% to 8% and 10%. . plant and equipment (other than customer service replacement parts) were depreciated using the diminishing-balance method. Splits increase the relative carrying amount of an individual’s share holdings.Theory of Accounts Quizzer Gloria/Moreno b. for machinery and equipment. Dividends represent a transfer from retained earnings to share capital. Acceptable if eh amount is shown outside the equity section of eh balance sheet. Which note describes a change in accounting estimate? a. d. c. 23 . Extraordinary items. b. c. 75 Unlike a share split. a share dividend requires a formal journal entry in the financial accounting records because share a. c. d. 77 The following statement notes are extracts from the audited financial statements of public enterprises. nonrecourse loans . Plant and equipment are now depreciated on a straight-line basis. . The enterprise changed its amortization of capital assets based on a reassessment of the useful lives of the assets. c. 76 Changes in accounting estimates are viewed as a. Dividends are payable on the date they are declared. Normal recurring revisions. Errors in reported amounts in prior periods. Prior to 2001. b. d. Acceptable provided that fire losses are charged against the appropriation. b. Dividends increase the relative carrying amount of an individual’s share holding. the enterprise changed its method of accounting for noninterest-bearing note. Acceptable provided that fire losses are not charged against the appropriation. During the year. Accordingly. Catch-up adjustments related to amounts reported in prior periods.

first-out (LIFO) method of inventory valuation. The amount of recoverable mineral reserves. Be impracticable. b. c. pursuant to a change in an International Accounting Standard. . 2001. d. the FIFO method was used. Effective January 1. Debit retained earnings Debit accumulated depreciation-equipment Credit accumulated depreciation-equipment c. c. Debit equipment Debit accumulated depreciation-equipment Credit equipment 80 In accordance with the benchmark treatment of a change in accounting policy. Not change the resulted report. which of the following items requires that accountants estimate the effects of future conditions and events? a. a. Reduce the usefulness of prior-period statements. b. The purchase price for an acquired building. an enterprise incorrectly expensed a newly purchased piece of equipment rather than establishing an asset balance and beginning to depreciate it over the estimated useful life of the item. . d. Debit equipment Credit retained earnings Credit accumulated depreciation-equipment b. Prior to 2001. Reduce prior year’s net profit. the most likely reason for not restating prior-year financial statements is that restatement would a.Theory of Accounts Quizzer Gloria/Moreno due from employees. when an enterprise changes to the last-in. 79 In the prior accounting period. 24 . . The price of a marketable security. d. the enterprise changed to the LIFO method of inventory valuation. The physical quantity of inventory. 78 When financial statements are being prepared.

Which of the following statements is true for defined contribution postemployment benefit plan? a. 25 . An adjustment directly to retained earnings and restatement to prior years’ statements. 82 An accounting change requiring retrospective treatment is a change in a. Presentation of pro forma comparative information. Which of the following describes a fundamental aspects of an employer’s accounting for post employment benefits provided by a defined benefit plan? a. c. d. c. The amount of benefits is not precisely determinable. d. Expense (or income) is recognized in the income statement within maximum and minimum limits. Immediate recognition in the balance sheet of the present value of the defined benefit obligation. c.Theory of Accounts Quizzer Gloria/Moreno 81 A retrospective change in an accounting change policy in the current period should accounted for in comparative reports by a. The employer and the employees are required to contribute equal amounts to the fund. A line item on the current income statement for the cumulative effect of the change. d. Changes in assets and obligations are recognized immediately. An accounting policy inseparable from a change in an accounting estimate. b. Depreciation methods from straight-line to diminishingbalance. 83 . b. . b. . 84 . d. c. The employer is required to contribute a certain amount each period based on the plan’s formula. The employer bears the risk of the plan’s investment performance. Postemployment benefits received by employees are defined by the plan’s formula. b. A provision for warranty costs. The residual value of equipment. Note disclosure only in the current period.

No unrecognized actuarial gains losses and unrecognized past service cost. Vested Current b. c. Net unrecognized actuarial gains and no past service cost. b. Vested and nonvested Current d. Intangible Operating . Vested benefits. Intangible Finance c. Additional minimum liability. Net unrecognized actuarial losses and no past service cost. . Past service cost. If the given amount of the present value of the defined benefit obligation exceeds the given amount of the fair value of plan assets. 87 An employer sponsors a defined postemployment benefit plan. . . List A List B a. Tangible Operating d. Defined benefit plan. b. Net unrecognized actuarial losses and unrecognized past service cost. Vested Future c. List A List B a. d. Vested and nonvested Future 86 An employee’s right to obtain postemployment benefits regardless of whether (s)he remains employed is known as his/her a. the defined benefit liability to be recognized in the balance sheet is greatest when the employer has a. the asset value is recognized on the lessee’s record as a(an) <List A> asset. d. 88 If a lease agreements transfers substantially all of the risks and rewards of ownership of the asset to the lessee. and the lease is referred to as a <List B> lease.Theory of Accounts Quizzer Gloria/Moreno 85 The defined postemployment benefit obligation of an enterprise includes benefit obligations to <List A> employees at <List B> salary levels. c. 26 . Tangible Finance b.

90 Which of the following statements is not true of a finance lease? a. how should the lessee account for guaranteed residual value? a. b. The enterprise may be undercapitalized. The lessor records the leased items as an asset. .Theory of Accounts Quizzer Gloria/Moreno 89 Finance and operating leases differ in that the lessor a. The day’s sales outstanding. The lease arrangement represents a form of financing. The inventory divided by average daily sales. The enterprise may be overcapitalized. . As not part of the lease contract. Obtains a use of the asset only under a finance lease. c. b. c. What conclusions can a financial analyst draw from this? a. c. c. d. 27 . . Finance the transaction through the leased asset only under a finance lease. b. . As part of minimum lease payment at future value of an annuity due. b. The lessor capitalized the net investment in the lease. c. Is using the lease as a source of financing only under an operating lease. 92 An enterprise has a high a fixed-assets turnover ratio. d. d. . d. 93 An enterprise’s receivable collection period is equal to a. As part of minimum lease payment at future value. The enterprise may have a problem with employees converting inventory to personal use. b. The inventory conversion period. d. 91 At the inception of a finance lease. The cash conversion cycle. As part of minimum lease payment at the present value. Makes rent payments that are actually installment payments constituting a payment of both principal and interest only under a finance lease. The lessee records depreciation or finance cost allowance on the leased asset. The enterprise has favorable profitability.

as well as comparative analysis of enterprises of different ages. 96 .Theory of Accounts Quizzer Gloria/Moreno 94 The times-interest-earned ratio is primarily an indication of a. Solvency. c. Inflation affects financial ratio analysis for one enterprise over time. Inflation has no impact on financial ratio analysis. Which one of the following statements best describes the asset-liability method of accounting for deferred income taxes? a. Profitability. Which combination of ratios can be used to derive return on equity? a. c. An investor has been given several financial ratios for an enterprise but none of the financial reports. The amount of deferred tax is based on the tax rates expected to be in effect during the periods in which the deferred tax liability is settled or the deferred tax asset is realized. c. The amount of deferred tax is based on tax rates in effect when temporary differences originate. Inflation affects comparative analysis of enterprise of different ages but not financial ratio analysis for one enterprise over time. earnings per share. 95 Which of the following is true about the impact of price inflation on financial ratio analysis? a. and equity multiplier. b. Liquidity. 97 . Market-to-book-value ratio and total-debt-to-total-assets ratio. total assets turnover. d. and net profit margin. Asset management. Net profit margin. b. Price-to-earnings ratio. Price-to-earnings ratio and return-on-assets ratio. b. d. . d. b. 28 . Inflation affects financial ratio analysis for one enterprise over time but not comparative analysis of enterprises of differences ages. .

Decrease in the deferred tax assets. c. 99 . Installment sale profits accounted for on the accrual basis for determining accounting profit and on a cash basis for determining taxable profit (tax loss). d. The appropriate tax rate to be reported on the income statement is the tax actually levied in that year. 29 . Advance rental receipts accounted for on the accrual basis for financial statement purpose and on cash basis for tax purposes. Recognized as an adjustment only as of enactment date of the change. When a change in the tax law or rate occurs. meaning no deferred taxes would be reported. When an enterprise reports deferred tax assets and liabilities. Increase in the deferred tax liabilities. Prepaid expenses accounted for on the accrual basis for determining accounting profit and on a cash basis for determining taxable profit (tax loss). d. b. Sum of the net changes in deferred tax assets and deferred tax liabilities. d.Theory of Accounts Quizzer Gloria/Moreno c. Use of the straight-line depreciation method for determining accounting profit and an accelerated for determining taxable profit (tax loss) b. 100 . The tax effects of temporary differences are not reported separately but are reported as adjustments to the amounts of specific asset and liabilities and the related revenues and expenses. Amount of the total tax liability. b. c. 98 . Which one of the following temporary differences will result in a deferred tax asset? a. c. Not recognized. Recognized retrospectively. Recognized as an adjustment as of the date the change is enacted or substantively enacted. the effect of the change on a deferred tax liability or asset is a. deferred tax expense or income should be disclosed equal to the a. d.

000 Utilities expense 14. 555. 525.700 1. 645. The following information is also available: Accounts Receivable Unearned Revenue Beginning of End of Year Year 120. Utilities expense 14. 1.000 d.000 from customers. Salaries & wages expense Income summary b. Utilities expense 14.000 180. During 2001.000 Income summary 14. related to salaries and wages is a.700 1.000 d. the enterprise collected 600. 675. 2001.700 The journal entry required to close the utilities expense account is a.000 0 15. Gloria/Moreno A service enterprise keeps its accounting records on a cash basis.700 1.700 1.700 1.700 1.000 b. Income summary Salaries & wages payable 103 .700 1. Salaries & wages expense Salaries & wages payable d. The required adjusting entry at December 31.000 c.000 c. Income summary 14.000 Utilities expense 14.000 30 .000 What was the amount of service revenue for the year on an accrual basis? a.Theory of Accounts Quizzer 101 . Salaries & wages payable Salaries & wages expense c. Rental revenue 14.000 b.000 102 .

000 50.000 50. The final closing entry required to ensure that current earnings are incorporated into year-end retained earnings is a.000 .000 50. Interest expense Cash 105 . 14.000 Which adjusting entry should be used at year-end to account for interest expense on the long-term debt? a.000 100. 50.000 and interest expense of 10. Also assume a 50% tax rate on corporate earnings. Interest expense Interest payable 100.000 for the current period.Theory of Accounts Quizzer Gloria/Moreno Retained earnings 104 . Income summary Retained earnings 140.000 b. Retained earnings 280.000 Assume that the enterprise reports cost of goods sold of 200. Interest payable Interest expense d.000 b.000 100. Interest expense Interest payable 100.000 c.000 31 140.

90 b.000 .000.000 of unearned revenue. Retained earnings Income summary 240. At December 31. 240. general and administrative expenses of 50. During 2001.000.000 165. b. 150 32 . of which 30. c.000 175. d.000 145. 2001. The amount of net profit for 2001 was a.000.000 An enterprise had cash receipts from sales of 175.000 d.000. the company had 40.000 12. The company’s sales revenue for 2001 would be a.000 was unearned at the end of 2001. c. If the corporate tax rate is 50%.000 during 2001. and owner withdrawals totaled 75. Income summary Retained earnings 240. assets totaled 270. interest expense of 20.000 At January 1.000 185. and net profit of 10 for the year ended. and its liabilities amounted to 120. and liabilities amounted to 171. owner investments amounted to 72. a sole proprietorship’s assets totaled 210. 107 280. 108 240.000.Theory of Accounts Quizzer Gloria/Moreno Income summary 106 . b. . 2001. the level of sales for the year just ended was a. all of which was earned in 2001. c.000 An enterprise has a 50% gross margin. At the end of 2000.000 0 6. 135 c.000.000 9. d.

c.000 140.000 166. The comparative balance sheet for an enterprise that had net profit of 150.000 33 .000 125. and paid 125. 2001 Nov.Theory of Accounts Quizzer Gloria/Moreno d. 180 109 .000 400.000 350. 2001 46.000 400. The following data are from its records: Dec. b. 110 .000 150.000 220.000 350.000 130. 154.000 214.000 A corporation reported salaries expense of 190.000 40. 2001. 30. 31.000 200.000 Payables Share Capital Retained earnings Total 80.000 of dividends during 2001 is as follows: Cash Accounts receivable Total assets 12/31/01 12/31/00 150.000 226.000 210.000 for December 2001.000 for the year ended December 31.000 180.000 90. c.000 Prepaid salaries Salaries payable a. 70.000 115. d.000 160.000 If dividends paid are treated as a cost of obtaining financial resources. d.000 140.000 170. the amount of net cash from operating activities during 2001 was a. b.

b. d.000 100 3. Gloria/Moreno The following information pertains to a checking account of an enterprise at July 31.000 5.000 1. 2001: Balance per bank statement Interest earned for July Outstanding checks Customers’ check returned for insufficient funds Deposit in transit 40.Theory of Accounts Quizzer 111 . 112 . 2001. 113 . 41.500 68.000 (500) 1.000 An internal auditor is deriving cash flow data based on an incomplete set of facts. c.000 accounts receivable at year-end resulted in a 5. 34 .000 ending balance for its allowance for uncollectible accounts and a bad debt expense of 2.000 An analysis of an enterprise’s 150.000 How much cash was collected this period? a. b. c.000 30.100 41. d.000.000 At July 31.000 42. 67. Additional data for this period follow: Net profit Accounts receivable beginning balance Allowance for bad debts beginning balance Accounts receivable written off Increase in net accounts receivable (after subtraction of allowance for bad debts) 100. the correct cash balance is a.000. Bad debt expense was 2.000 70.100 42.000 5.000 68.

22. c.43% An enterprise sells inventory for 80.800 At the end of September. b. 114 .Theory of Accounts Quizzer Gloria/Moreno During the past year. recoveries on bad debts previously written off were correctly recorded at 500.000 in the first year. composed as follows: Month July August September Still outstanding at the End of Credit Sales September 600 100 900 170 500 80 The percentage of receivable in the 31-to-60-day age group at the end of September is a. 1. d.000 in the third year. c. and 25.200 1. d.000.57% 48. The buyer of the inventory is a new firm with no credit history. 115 .57% 71. the amount of gross profit to be recognized in the second year is 35 . what was the amount of accounts receivable written off as uncollectible during the year? a.200 2. If the cost-recovery method of revenue recognition is used.86% 28.800 2. an enterprise has outstanding accounts receivable of 350 on third-quarter credit sales. b.700. If the beginning balance in the allowance for uncollectible accounts was 4.000 in the second year.000 that had an inventory cost of 40. The terms of the sale involve payments receivable of 10. 45.

d.000 Beginning inventory was e. h.000 45. c. 36 .000 80.000 A retail enterprise maintains a markup of 25% based on cost.000 The following amounts relate to an enterprise: Beginninh inventory Purchases Sales Gross margin 50.000 160.000 25.000 100. Amount of the total tax liability. 116 . Gloria/Moreno 0 5.000 900.000 120.000 180. f. Decrease in the deferred tax assets. d. g.000 The amount of ending inventory is a.000 15. Sum of the net changes in deferred tax assets and deferred tax liabilities. b. 60. The enterprise has the following information for 2001: Purchase of merchandise Freight-in on purchases Sales Ending inventory 690. c.000 60.000 170. b. Increase in the deferred tax liabilities.Theory of Accounts Quizzer a. 117 .

Theory of Accounts Quizzer ANSWER EXPLANATIONS 37 Gloria/Moreno .

it is usually combined with other measurement bases (attributes). Expenses should be associated with the revenues that they help to create. An affirmative vote equal to three-fourths of the IASC’s board is required to pass a standard. Letter “D” is the correct answer. 2 . they will not contribute to an inflow of economic benefits until the next period. Letter A is incorrect because the IASC has no direct influence on governmental legislation. Letter C is incorrect because the IASC is composed of members from various national professional accounting organizations. Thus. As of June 2000.1 . plant. not higher. Nevertheless. its members included accountancy bodies representing 103 countries around the world. Letter “A” is the correct answer. . The IASC’s pronouncements. Because the catalogs are still on hand at the balance sheet date. international investors will most likely require lower. The attribute used to measure a longterm receivable or payable is the present or discounted value of its future cash flows. is not binding. risk premiums. Letter “C” is the correct answer. Letter D is incorrect because the transaction is not the correction of a fundamental error in the financial statements of a prior period. they are obviously not an advantage of developing and adopting International Accounting Standards. Letter “D” is the correct answer. However. it had issued 40 standards. 3 . nationalistic tendencies. 5 . For example. such as PICPA. the value of greater uniformity in standards has been recognized. Higher risk premiums result in higher costs of equity financing. Letter B is incorrect because some inventories are measured at current (replacement) cost. given more comparable financial measurement and disclosure practices. As of 1999. Letter B is incorrect because the IASC authority is restricted to the willingness of participating and other countries to adopt its standards. Matching is the simultaneous or combined recognition of revenues and expenses resulting directly and jointly from the same transactions or other events. the cost should be deferred and matched with the revenues of the following period. Letter C is incorrect because short-term receivables and some inventories are reported at net realizable value. Letters A and B are incorrect because both increased comparability and greater freedom of international capital flows are potential benefits of the development and adoption of IASs. and equipment and most inventories. Letter A is incorrect because historical cost is used to measure property. Letter C is incorrect because reliable information is free of error and bias and is representationally faithful. however. 4 . The objective of the establishment of the IASC is to harmonize accounting standards used by member countries. and divergent reporting objectives. The measurement basis most commonly used by enterprises in the preparation of financial statements is historical cost. Hence. Letter B is incorrect because the revenue recognition principle determines the period in which revenue is recognized. Letter D is incorrect because the elimination of unfair competitive advantages created by differences in reporting standards is a potential benefit of IASs. Differences in accounting standards among countries result from variations in institutional arrangements. Letter “A” is the correct answer.

Thus. Letter D is incorrect because current cost is only appropriate when the going concern assumption is applicable and the effects of changing prices are to be measured and reported in the financial statements. they may result from nonreciprocal transactions (e.000. historical cost is abandoned for balance sheet purposes. the item should be recorded as a loss. Letter B is incorrect because the asset sold was not stock in trade. Letter D is incorrect because losses are included in the determination of net profit or loss. Expenses include losses.g. Their essential nature is the same.. sale of plant assets). and the going concern assumption is no longer valid.. Letter A is incorrect because the going concern principle relates to circumstances in which there is doubt as to the viability of the enterprise. is not consistent with the substance of the event. Thus.Income includes revenues and gains. the effect on the financial statements of expensing rather than capitalizing and depreciating the staplers is clearly not material given that they cost P1. When liquidation is imminent. recording the item as a receivable. When liquidation appears imminent. the gain on the sale of a plant asset is not an operating item and should be classified in an income statement with separate operating and nonoperating sections in the other revenues and gains section. not a qualitative characteristic. Letter “C” is the correct answer. which is the amount of cash currently obtainable by sale in an orderly disposal. gains may occur from the sale of noncurrent assets. Hence. Letter B is incorrect because no restitution will be made. In principle.000 and the enterprise has total assets of P100. the most appropriate valuation method for assets is realizable value. Letter C is incorrect because the transaction does not meet the criteria of an extraordinary item. Letter A is incorrect because a going concern should report assets at their undepreciated historical cost. and they are not treated as separate financial statement elements. The benefits should exceed the cost of information.g. Thus. reciprocal transactions (e. Their essential nature is the same. Letter D is incorrect because the transaction is not the correction of a fundamental error in the financial statements of a prior period.000. Gains may or may not occur in the course of ordinary activities. Letter C is incorrect because. . theft). wasting assets should be capitalized and depreciated. Letter “A” is the correct answer. However. For example. The net realizable value of the assets is the appropriate amount for reporting purposes. Letter “D” is the correct answer. although some inventory shrinkage is expected in the normal course of processing. and they are not treated as separate financial statement elements. The choice of treatment is not large enough to influence the decisions of financial statement users. The balance between benefit and cost is a pervasive constraint. For example. fraud is abnormal. 7 . Letter B is incorrect because an enterprise facing liquidation is expected to dispose of its assets in a “forced” or “distressed” sale and is unlikely to realize the fair value amount. 6 .000 should be followed. Losses are typically displayed separately. Specifically. then writing it off. the expedient procedure of expensing the P1. the cost of producing the information about depreciation expense over 10 years for the staplers probably is higher than the benefits of the information for decision making. Revenues occur in the course of ordinary activities. or from holding assets or liabilities. Losses may or may not occur in the course of ordinary activities. 8 .

g. the enterprise has not substantially completed what it must do to be entitled to the benefits represented by the advance payment. Letter C is incorrect because comparability is a principal qualitative characteristic. 11 . assuming that those individuals have a reasonable understanding of business and economic activities. to deliver goods or to refund the customer’s money. Thus. C. 9 . claims to those resources. Letter “A” is the correct answer. not financial reporting. and has no effect on liabilities. The delivery of goods is to take place within a year of the balance-sheet date. (b) is helpful to current and potential investors and creditors and other users in assessing the amount. which includes revenue and gains) requires that two criteria be met. However. a liability should be recognized because the entity has a current obligation arising from a past event that will require an outflow of economic benefits. Thus. Letter B is incorrect because the obligation is current. Letter C is incorrect because a contra account reduces the valuation of the related account. The objectives of financial reporting are concerned with the underlying goals and purposes of accounting and these are to provide information that (a) is useful to those making investment and credit decisions. Recognition of an element of financial statements (e. .g. timing. income is recognized when an increase in future economic benefits is associated with an increase in an asset or a decrease in a liability. Financial statements must be comparable for the same enterprise over time and also among different enterprises. Letters B. that is. Letter “A” is the correct answer. Reliability provides assurance that the information is reasonably free from error and bias and represents what it purports to represent. 10 .. It must be probable that any future economic benefit associated with the item will flow to or from the enterprise.Letter B is incorrect because relevance and reliability are two of the principal qualitative characteristics of information in financial statements. that income be earned. e. therefore. the accrual of revenue increases assets and equity. Letter D is incorrect because the payment has not met the income recognition criteria. Letter “B” is the correct answer. The journal entry to accrue revenue requires a debit to a receivable account and a credit to a revenue account. the obligation is expected to be settled in the normal course of the operating cycle or is due to be settled within 12 months. that is. Thus. increases equity. Letters A. and uncertainty of future cash flows. and the cost or value of the item must be measurable with reliability. and (c) discloses economic resources. C. and D are incorrect because assessing the adequacy of internal control. and D are incorrect because the accrual of revenue increases assets. Information is relevant if it permits users to predict the outcome of future events or confirm or correct their prior expectations.. Accordingly. free from error and bias. and providing information on compliance with established procedures are functions of internal auditing. evaluating management results compared with standards. and the receipt of future economic benefits is not sufficiently certain to merit income recognition. income. The usual procedures for income recognition. reliable information must be neutral. and the changes therein. reflect these criteria. Information is relevant if it permits users to predict the outcome of future events or confirm or correct their prior expectations.

The income recognition criteria are not met with respect to the season ticket collections until the receipt of future economic benefits is sufficiently certain. The effect of declaring and paying dividends is to reduce retained earnings.000 ÷ 6 months)].12 . Letter A is incorrect because adjusting entries are made prior to closing. 14 . Assuming an account entitled “dividends” or “dividends declared” is debited when dividends payable is credited on the declaration date. Letter D is incorrect because the entry records an unexpired cost (an asset). Letter C is incorrect because accrued income has met the recognition criteria but has not been received. Letter C is incorrect because reversing entries are made after adjustments and closing entries. Letter D is incorrect because dividends is closed directly to retained earnings by a credit. the development of a trial balance. Letter “A” is the correct answer. Letter “A” is the correct answer. The balance in this account is closed directly to retained earnings. Letter B is incorrect because the closing entry should credit dividends and debit retained earnings. Letter B is incorrect because the income is not earned. taking a postclosing trial balance (optional). Accordingly. 13 . closing. Letter “B” is correct answer. This adjusting entry defers expense recognition to the future period in which the property taxes apply. the amount receive in advance is considered a liability (unearned income) because it represents an obligation to perform a service in the future arising from a past transaction. The prepayment does not meet the income recognition criteria because the future inflow of economic benefits is not sufficiently certain given that the enterprise has not done what is required to be entitled to those benefits. the enterprise should recognize 1 million as income in 2001 [2 months x (3. 16 . 15 . The collections represent a liability (unearned income). Letter “A” is the correct answer. posting from the journals to the ledgers. An entry debiting prepaid property taxes and crediting property tax expensed is needed at the balance sheet date when prepayments are initially recorded in an expense account. statement presentation. Letters C and D are incorrect because the enterprise should report income of 1 million in 2001 and 2 million in 2002. and making reversing entries (optional). Letter D is incorrect because the customer has a prepaid expense (expense paid but not incurred). Such certainty exists with respect to collections related to the games played as of the balance sheet date.000. The remaining 2 million should be reported as a liability. Letter D is incorrect because posting is done prior to adjusting. Letter B is incorrect because the liability at the end of 2001 is 2 million. Letter “A” is the correct answer. it must be closed at the end of the period. The exterminator has not performed the related services for the customer. so the entry is a debit to retained earnings and a credit to dividends. adjustments to produce an adjusted trial balance. journalization. Letters B and C are incorrect because the entry records an asset. . The order of the steps in the accounting cycle is identification and measurement of transactions and other events required to be recognized. Thus. Letter C is incorrect because dividends is closed directly to retained earnings.

Letter C is incorrect because reversing entries are the exact opposite of the adjustments made in the previous period. given that the enterprise has not yet performed its obligations. Letter B is incorrect because the monetary unit assumption is that money is the common denominator by which economic activity is conducted and that the monetary unit provides an appropriate basis for accounting measurement and analysis. Reversing entry are made at the beginning of a period to reverse the effects of adjusting entries at the end of the preceding period. Letter “D” is the correct answer. although. Letter A is incorrect because the going concern assumption is that the business will have an indefinite life. cash payments for interest made by an enterprise . The “single step” is the one subtraction necessary to arrive at net profit or loss. It is not related to the timing of the claims. they must be the exact opposite of the adjustments made in the previous period. The single-step income statement provides one grouping for income items and one for expense items. Letter A is incorrect because the recognition of income from the sale of the extended warranty is deferred until the extended warranty period begins. Letter D is incorrect because intraperiod income tax allocation procedures must be applied to both formats. certain line items must be presented. Because warranty costs are expected to be incurred evenly over the life of the warranty contracts. Letter C is incorrect because the income should be recognized evenly over the life of the contract. Letter “D” is the correct answer. Letter “B” is the correct answer. Recording advance payment as a liability reflects a determination that the receipt of future economic benefits is not sufficiently certain to merit revenue recognition. The multiple-step income statement matches operating income and expenses separately from nonoperating items. the income should be recognized on the straight-line basis over the life of the extended warranty contract. 20 . Letter “A” is the correct answer. Letter C is incorrect because the historical cost principle reflects the practice that many assets and liabilities are accounted for and reported on the basis of acquisition price. 21 . at a minimum. Letter B is incorrect because reversing entries are made at the beginning of the next accounting period. In order for reversing entries to reverse the prior adjustments. 19 . According to IAS 7. Letters B and C are incorrect because both formats separate these items. which in turn reduces equity on the balance sheet by reducing retained earnings. Letter D is incorrect because income is recognized over the life of the warranty. Recognition of revenue occurs when the flow of future economic benefits to the enterprise is probable and such benefits are reliably measurable. They are optional entries made for the sake of convenience in recording the transactions of the period. The IASs do not require a particular income statement format. Interest incurred is classified as interest expense on the income statement. Letter A is incorrect because reversing entries are optional. Letter “B” is the correct answer.17 . including one for the results of operating activities. not at expiration. 18 .

cash payments to calculate cost of goods sold. To convert from the cash basis (cash payments) to the accrual basis (cost of goods sold). not added to. Letter “B” is the correct answer. Letter C is incorrect because an increase in inventory must be subtracted from. Letter “B” is the correct answer. and income or expense related to financing or investing activities. and interest payment are classified as an operating or financing outflow on the statement of cash flows. and a deduction is needed in the reconciliation. Net purchases is then adjusted for the change to determine cost of goods sold. According to IAS 7. The direct format reports the major classes of operating cash receipts and cash payments as gross amounts the indirect presentation adjusts net profit or loss to the same amount of net cash from operating activities that would be determined in accordance with the direct method.that is not a financial institution may be classified on the statement of cash flows as an outflow of cash from operating or financing activities. C and D are incorrect because payment of cash dividends is a use of cash for an operating or financing activity. Letters A. dividends paid may be treated as a cash outflow from financing activities because they are a cost of obtaining resources from owners. Letter “A” is the correct answer. Letters A. Letter “D” is the correct answer. deferrals or accruals of past or future operating cash flows. thus. Letter C is incorrect because the direct method. Letter D is incorrect because the direct method reports major classes of gross cash receipts and payments from operating activities. 25 . cash payments to calculate cost of goods sold. therefore. B and C are incorrect because both the increase in prepaid expenses and amortization of premium on bonds payable require a deduction from net profit in the reconciliation. 24 . Letter A is incorrect because only the direct method supplies information about major classes of gross cash receipts and payments related to operating activities. 23 . rather than the indirect method. net profit exceeded net cash from operating activities. However. not subtracted from. Letter B is incorrect because a decrease in accounts payable must be subtracted from. . Letter D is incorrect because a decrease in inventory must be added to. An increase in prepaid expenses indicates that cash outlays for expenses exceeded the related expense incurred. cash payments. an increase in accounts payable must be added to cash payments for goods to determine net purchases. they may also be treated as operating items to help determine the enterprise’s ability to pay dividends from operating cash flows. C and D are incorrect because credit card interest charges reduce equity. The statement of cash flows may report cash flows from operating activities in either an indirect or direct format. the amortization of premium on bonds payable causes a reduction of interest expense but does not increase cash. the indirect method adjusts net profit or loss for the effects of noncash transactions. 22 . To arrive at this amount. Letters A. net profit exceeds net cash from operating activities. not added to. supplies information about major classes of gross cash receipts and payments related to operating activities. and a deduction is needed in the reconciliation. Also.

The initial disclosure event (IDE) is the earlier of entry into a binding agreement to sell substantially all of the DO’s assets or the approval and announcement by the enterprise’s governing body of a detailed. If the adjustment to the opening balance of retained earnings cannot be reasonably determined. Accordingly. Given that the benchmark treatment is not indicated. Letter A is incorrect because changes in accounting policies must be disclosed in the financial statements for the period. Extraordinary items result from events or transactions that are clearly different from ordinary activities and are not expected to recur frequently and regularly. They are not clearly distinct from ordinary activities. it is a component that the enterprise is disposing of under a single plan. Letter “B” is the correct answer. Examples are an expropriation of assets or a natural disaster. Letter “A” is the correct answer. Letter A is incorrect because the component is to be terminated (discontinued). 28 . a cumulative-effect adjustment included in the determination of current net profit or loss. In that case. Letter D is incorrect because disclosures begin with the period of the IDE. Net Profit or Loss for the Period. and Changes in Accounting Policies. and deferral raises the additional issue of how the deferred costs . Fundamental Errors. Costs and expenses other than product costs should be either changed to income in interim periods as incurred or allocated among interim periods based upon the benefits received. the change in accounting policy should be applied retrospectively. Letter B is incorrect because the benchmark treatment reports an adjustment to beginning retained earnings. 26 27 . C and D are incorrect because an extraordinary item must be clearly different from ordinary activities. the allowed alternative treatment provides for the change in accounting policy to be applied prospectively. Disclosures about a DO should be included in the financial statements beginning with period of the IDE. Pro forma comparative information also should be presented if practicable. A discounting operation (DO) is a separate major line of business or geographical operating area that is distinct for operational and reporting purposes.. In the current period. a change in depreciation methods is reported by a cumulative-effect adjustment under the allowed alternative treatment. Letter C is incorrect because the cumulative-effect on net profit or loss should be reported. they should be expensed as incurred. Furthermore. the allowed alternative treatment. formal plan of discontinuance. Letter “D” is the correct answer. otherwise. Each extraordinary item is separately disclosed. that is. is permissible unless the amount to be included in current net profit or loss is not reasonably determinable. a total may be disclosed on the income statement if the nature and amount of each item are disclosed in the notes. Letter “A” is the correct answer. 29 . Net profit or loss includes profit or loss from ordinary activities and extraordinary items. Under IAS 8. Letter C is incorrect because discontinuing operations are not extraordinary items. costs such as advertising should be deferred in an interim period if the benefits extend beyond that period. But such a determination is difficult. the benchmark treatment provides that a change in accounting policy should be applied retrospectively unless any resulting adjustments that relates to prior periods is not reasonably determinable. However. Letters B. Both are disclosed on the face of the income statement.

the dollar. A basis feature of financial accounting is that the enterprise is assumed to be a going concern in the absence of evidence to the contrary. Examples are an appropriation of assets or a natural disaster. Gains and losses similar to those that would not be deferred at year-end should not be deferred to later interim periods of the same year. Letter C is incorrect because the annual depreciation amount is an estimate. Letter “D” is the correct answer. Letter C is incorrect answer lockbox accounts are frequently used by large. Letter A is incorrect because an amount is removed from the general checking account to be used for a specific type of check. The reporting entity is assumed to have a life long enough to fulfill its objectives and commitments and therefore to depreciate wasting assets over their useful lives. The going concern concept is based on the empirical observation that many enterprises have an indefinite life. Letter A is incorrect because the economic entity assumption provides that economic activity can be identified with a particular unit of accountability. An imprest bank account is used to make a specific amount of cash available for a limited purpose. Letter B is incorrect because the only product costs appropriate to expense an interim period are the ones related to the revenue transactions recognized in the same interim period. The company rents a local post office box and authorizes a local bank to pick up the remittances mailed to that box number. the extraordinary gain should not be prorated. multi-location companies to make collections in cities within areas of heaviest customer billing. Letter C is incorrect because the materiality assumption simply implies that items of significant value may be expensed rather than capitalized and depreciated or amortized. Letter “B” is the correct answer. The account acts as a clearing account for a large volume of checks or for a specific type of check. 0Thus. Extraordinary items result from events or transactions that are clearly different from ordinary activities and are not expected to recur frequently and regularly. 32 . This approach is consistent with the way extraordinary items are handled on an annual basis. . Letters B. Letter D is incorrect because an extraordinary item is to be reported in the interim period in which it occurs rather than allocated to multiple interim periods. Letter D is incorrect because a compensating balance agreement requires a borrower to maintain a specified cash amount on deposit with the lender. C and D are incorrect because the gain should be recognized in full in the second quarter. The depreciation amount for an interim period is simply a pro rata amount of the annual estimate. many companies expense the costs as incurred even though they may benefit other interim periods in the same annual period. The difference in treatment is not large enough to influence users if the item is not material. Hence. 30 . Letter “A” is the correct answer. Extraordinary items should be disclosed separately and included in the determination of net profit for the interim period in which they occur. 31 .should be allocated among quarters. Letter B is incorrect because the monetary unit assumption provides that all transactions and events can be measured in terms of a common denominator. for instance.

the application of the net method requires a sales discount forfeited but not a sales discount account. The signed receipts provide documentation of cash transactions. 34 . The gross method accounts for receivables at their face value. It is unwise to have excessive amounts of cash readily available. The check payable to the enterprise is dated after the balance sheet date. an interest revenue account. a sales discount is recorded and classified as an offset to sales in the income statement to yield net sales. 36 . B and C are incorrect because the company’s president. B and C are incorrect because the net method requires sales discount forfeited but not sales discount account. Letter “B” is the correct answer. such as sales discount forfeited. Letter B is incorrect because surprise counts may defer fraudulent activity. 35 . the amount of the check should be included in both the amount reported as cash and the amount reported as accounts payable in the December 31. and the buyer is uncertain about the probability of return. The duties of the petty cash custodian include obtaining signed receipts for cash disbursement from the general cashier. the petty cash custodian is responsible for the petty cash fund (both cash and signed receipts) at all times. for example. the buyer may rescind the purchase for a reason stipulated in the contract. general office manager. The receipts should be canceled or mutilated after submission for reimbursement. Letter C is incorrect because requiring signed receipts is an appropriate control procedure. Letter “D” is the correct answer. The net method records receivables net of the applicable discount. Letter D is incorrect because reimbursement by company check is an appropriate control procedure. is credited at the end of discount period or when the payment is received. revenue may be recognized at the time of sale if the other . However. Letters A. 2001 balance sheet. Letters A. Letters A and C are incorrect because the check payable to the enterprise is a receivable. if the enterprise can reliably estimate future returns and recognizes a liability for returns based of experience and other pertinent information. 2001 balance sheet. so it should be included in both the amount reported as cash and the amount reported as accounts payable. One condition for recognition of revenue from the sale of goods is the transfer of the significant risks and rewards of ownership. Thus. Consequently. Accordingly. Letter D is incorrect because the check drawn on the enterprise’s account was dated and recorded in the enterprise’s books in 2001.33 . It would be appropriated for the petty cash custodian to retain the petty cash receipts because the receipts could be used for a second reimbursement. so the amount of the check should be reported as a receivable in the December 31. Control of cash requires a proper cutoff of cash receipts and cash disbursements. If the payment is not received during the discount period. and general cashier are not directly responsible for the amount of the petty cash fund. Letter “A” is the correct answer. Retention of significant risk may occur when. The check drawn on the enterprise’s account was dated and recorded in the books in 2001 but no mailed until after the financial statement date. 37 . Letter “D” is incorrect answer. Letter “A” is the correct answer. If a discount is taken.

minus ending inventory. FIFO approximates current cost for ending inventory. the transfer is accounted for as a collateralized borrowing. Letter “D” is the correct answer. the proceeds of the sale are reduced by the fair value of the recourse obligation (a new financial liability). Accordingly. Letter B is incorrect because the risks and rewards of ownership must be transferred. Cost of goods sold equals beginning inventory. If a new financial asset is created or a new financial liability is assumed. leaving the more expensive items in the ending inventory. Letter “B” is the correct answer. and the terms of this transaction in effect allow the transferee to obtain a lender’s return on the assets it receives in exchange for the transferred financial asset. cost of goods sold will be lowest when the ending inventory is highest. 38 . Letter C is incorrect because this contingency is an example of retention of significant risk. 40 . plus or minus any prior adjustment reflecting the fair value of the asset that had been reported in equity. plus purchases. When the transfer does not meet these criteria. FIFO assigns the most recent purchase prices to ending inventory and the earliest purchase prices to cost of goods sold. and LIFO approximates current cost of goods sold. Letter C is incorrect because weighted averages inventory. A transferor has not lost control and does not derecognize the financial asset if it is entitled and obligated to repurchase or redeem the asset. Letter “C” is the correct answer. the enterprise decognizes the financial assets it no longer controls. and C are incorrect because the proceeds of the sale are reduced by the fair value of the recourse obligation. when the transferee may sell or pledge the full fair value of the asset. and LIFO approximates current cost of goods sold. Thus. Letter B is incorrect because control is lost when the transferee has the ability to obtain the benefits of he asset. for example. B. Control is lost when the enterprise realizes the rights to be specified contractual benefits. periodic net profit or loss will include the difference between the carrying amount transferred and the proceeds. Letter A and C are incorrect because a financial asset should be derecognized despite the transferor’s right to reacquire if the asset is readily obtainable in the market or the price is fair value at the date of reacquisition. Letters A. When a transfer of receivable with recourse meets the criteria to be accounted for as a sale. Letter A is incorrect because LIFO yields the lowest net profit. or it surrenders the rights. 39 . the rights expire. other factors held constant. the calculation is adjusted for the fair value of the asset or liability. less expensive items are deemed to have been sold. LIFO uses the earliest acquisition costs to price the ending inventory. 41 . Ending inventory is highest under FIFO because the older. Net profit will be higher when cost of goods sold is lower. so it results in a lower net profit than FIFO.conditions for revenue recognition are also met. After derecognition. An enterprise derecognizes a financial asset if it losses control of the contractual rights the asset represents. Letters A. Letter D is incorrect because returns may be material if they can be reliably estimated. . Letter “D” is the correct answer. B and D are incorrect because FIFO approximated current cost for ending inventory. Thus.

excluding those that are held for trading. Moreover. 45 . Letter “C” is the correct answer. Regardless of intent. Letter A is incorrect because. 43 . Financial assets or liabilities held for trading are intended to result in profits from short-term changes in prices or dealer’s margins. when the equity method is used. Letter “A” is the correct answer. Remeasurement to fair value of financial assets and liabilities that are not part of a hedge results in recognition of a gain or loss in net profit or loss if the items are held for trading. this classification excludes loans and receivables originated by the enterprise. the enterprise must have a positive intent and ability to hold such investments to maturity. Letters C and D are incorrect because the investment account is credited. under specific identification. in the latter case. the credit should be to inventory. . Derivatives are also deemed to be held for trading unless they are designated and effective as hedging instruments. goods. 42 . shoplifting. Letter C is incorrect because loans and receivables originated by the enterprise result from providing money. 44 . The carrying amount is subsequently adjusted to recognized the profit or losses of the associate after the date of acquisition. When the equity method is used. or services directly to the debtor. Available-for-sale and held-for-trading financial assets are measured at fair value unless they do not have quoted market prices in an active market and their fair values cannot be reliably measured. the accumulated remeasurement gain or loss is included in net profit or loss when the asset is disposed of or is impaired. a financial asset is held for trading if it is included in the portfolio with a recent pattern of short-term profit taking. However. and faulty record keeping. any appropriation of retained earnings would also have tom involve the unappropriated retained earnings account. Letter D is incorrect because. Dividends received from the investee are recorded as a reduction of the investment account. Letter D is incorrect because available-for-sale financial assets are those that do not fall within one of the other classifications. The result is a higher cost of goods sold and lower net profit than under FIFO. breakage. Letter “A” is the correct answer. although the debit to cost of goods sold is acceptable. investment income (loss) is recognized for the investee’s share of eh profits or losses of the associate. it is not an extraordinary item. This amount is reported as an adjustment of cost of goods sold or as an other expense on the income statement. Also. however. Dividends received from an associate reduce the carrying amount. the investment is initially recorded at cost on the enterprise’s books. the newest (most expensive) items are not necessarily in the ending inventory. Letter B us incorrect because held-to-maturity investment have fixed or determinable payments and a fixed maturity. The entry to record the write-down is a debit to inventory and short and a credit to inventory. Reasons include normal and expected shrinkage. Letters B and C are incorrect because a difference between a physical count and a perpetual inventory balance is common. Letter “B” is the correct answer. A gain or loss on an available-for-sale financial asset may be recognized in net profit or loss when it arises or directly in equity through the statement of changes in equity. Thus.Letter D is incorrect because.

accordingly. Letter C is incorrect because subsequent expenditures are added to the carrying amount of an item of PPE if it is probable that. They should be treated as reduction in the price of the land. B and C are incorrect because the SYD. At the end of the estimated useful life of a depreciable asset. costs of removing the assets and restoring the site. the cost of land includes the cost of obtaining the land and readying it for its intended use. 46 . B and C are incorrect because. such as sum-of-the-years’-digits. Letters A. Accelerated depreciation in methods. future economic benefits will exceed the originally assessed standard of performance. at the end of the estimated useful life of a depreciable asset. installation. 48 . Letter A is incorrect because the purchase price. These decreasing charge methods will therefore charge lower depreciation costs in the later years of the asset’s life than straight-line method. plant and equipment (PPE) that meet the recognition criteria are initially measured at cost. For the third year. for example. the amount of the depreciable cost that is expensed each year is the remaining useful life at the beginning of that year divided by the sum of the years of useful life. Under the SYD method. The cost includes the purchase price (minus trade discounts and rebates. etc. freight costs. improve output quality. Letters A. as a result. Letter D is incorrect because the costs of construction should be included as part of the asset’s cost. and 200% diminishing-balance methods accelerate recognition of depreciation. plus purchase taxes) and the directly attributable costs of bringing the assets to working condition for their intended use. Directly attributable costs include site preparation. but it is inappropriate to recognized the proceeds related to site preparation immediately as income. Letter “B” is the correct answer. Periodic diminishing-balance depreciation is calculated without regard to residual value. 47 . Letter “C” is the correct answer. regardless of the depreciation method used. Letter “D” is the correct answer. but the asset is not depreciated below its residual value. diminishing-balance.Letters A. The chosen accounting policy should then be applied to all available-for-sale financial assets not part of a hedging relationship. architects’ and engineers’ fees. B and D are incorrect because an enterprise should choose either immediate recognition of remeasurement gain or loss in net profit or loss or recognition directly in equity. diminishing-balance. or reduced operating costs. because of an extended useful life. and 200% diminishing-balance. 49 . The SYD method uses a depreciable asset base equal to cost minus residual value. regardless of the depreciation method used. the amount of the accumulated depreciation should equal to the depreciable cost (original cost – estimated residual value). and installation costs of a productive asset are included in the asset’s cost. the amount of the accumulated depreciation should equal the depreciable cost (original cost – estimated residual value). the portion expensed is 20% [2 ÷ (1 + 2 +3 +4)]. Letter A is incorrect because 10% is the amount expensed in the last year. which charges the same amount to depreciation expense each year. initial delivery and handling. Letter “D” is the correct answer. charge higher depreciation costs in the early year of the asset’s life and lower depreciation costs in the later years. Items of property. .

Letter B is incorrect because 25% is the percentage expensed each year under
the straight-line method.
Letter D is incorrect because 70% is the total amount expensed in the first 2
years.
50

.
Letter “A” is the correct answer.
The cash account is debited for the amount of the sale proceeds. The machinery
account and the related accumulated depreciation account is eliminated by a
credit and a debit, respectively. Because the sale price was less than the
carrying amount of the asset on the date of sale, a loss on disposal should be
recognized as an expense of the income statement.
Letter B is incorrect because a loss on disposal should be recognized as an
expense of the income statement.
Letter C is incorrect because accumulated deprecation should be debited.
Letter D is incorrect because an expense and accumulated depreciation should
be debited.

51

.
Letter “D” is the correct answer.
Subsequent expenditure are added to the carrying amount of an item of PPE if it
is probable that, as a result, future economic benefits will exceed the originally
assessed standard of performance, for example, because of an extended useful
life, improved output quantity or quality, or reduced operating costs.
Letter A is incorrect because the cost should be capitalized.
Letter B is incorrect because the same account should be used.
Letter C is incorrect because allocation is not an accepted procedure.

52

.
Letter “B” is the correct answer.
Unless stated otherwise, every business is assumed to be going concern that
will continue operating indefinitely. As a result, liquidation values are not
important because it is assumed that the enterprise is not going to be liquidated
in the near future. If an enterprise is not a going concern, its intangible assets
would be presented in the balance sheet at liquidation values, not at historical
cost reduced by amortization.
Letter A is incorrect because the economic entity assumption is that every
enterprise is a separate entity and that it affairs are separate from those of its
owners.
Letter C is incorrect because the monetary unit assumption provides that all
transactions and events can be measured in terms of money as a common
denominator.
Letter D is incorrect because the historical cost principle is applied because cost
is the most objective and reliable measure.

53

.
Letter “A” is the correct answer.
IAS 38, Intangible Assets, defines an intangible asset as “an identifiable
nonmonetary asset without physical substance held for use in the production or
supply of goods or services, for rental to others, or for administrative purposes.”
Inventory is a tangible asset. Thus, goods on consignment are not intangible
assets.
Letters B, C and D are incorrect because patents, copyrights, and trademarks
are intangible assets.

54

.
Letter “D” is the correct answer.
Expenditures on start-up activities are expensed when incurred unless they are
included in the cost of an item of property, plant and equipment. They include
the cost of establishing a new legal entity, such as legal and secretarial costs;
pre-opening costs of an enterprise’s new business facility; and the pre-opening

costs of new operations, products, or processes.
Letters A, B and C are incorrect because start-up costs are expensed when
incurred.
55

.
Letter “A” is the correct answer.
A current liability is an obligation that expected to be settled within the normal
operating cycle or is due to be settled within 12 months of the balance sheet
date. Any other liability is noncurrent. Some current liabilities are included in the
working capital employed in the normal operating cycle, e.g., trade payables
and accrued employee operating costs. Current liabilities not settled within the
normal operating cycle include the current part of interest-bearing debt,
dividends, income taxes, and bank overdrafts. Thus, the bonds payable should
be classified as current because they are due to be settled within 12 months.
Under the IASs, the classification of the sinking-fund assets is irrelevant to the
classification of the bond payable.
Letter B is incorrect because the bonds should be classified as a current liability.
Letter C is incorrect because offsetting assets and liabilities is rarely acceptable.
Letter D is incorrect because the bonds are a liability and should not be put in
an ambiguous category such as deferred credits.

56

.
Letter “B” is the correct answer.
A provision is a liability of uncertain timing and amount. A liability is a present
obligation arising from past events, the settlement of which is expected to
result in an outflow of resources embodying economic benefits. Whether a past
event result in a present obligation is usually clear. Thus, it is clear from the
circumstances that the enterprise’s sale of goods without warranty is an
obligating event that resulted in a present obligation for the issuance of
warranty costs. Recognition of provisions is appropriate when the enterprise has
a legal or constructive present obligation resulting from a past event (called an
obligating event), it is probable that an outflow of economic benefits will be
necessary to settle the obligation, and its amount can be reliably estimated.
Assuming that the amount of warranty costs can be reliably estimated (although
they are uncertain in timing and amount compared with a trade payable, for
example) and that the outflow is probable (in these circumstances, “more likely
than not”), the enterprise’s contractual present obligation should result in
recognition of a provision.
Letter A is incorrect because the cash basis calls for recognizing warranty
expense as labor and materials are expended to satisfy the warranty.
Letter C is incorrect because the sales warranty method is appropriate for
situations when a warranty is sold separately from the product.
Letter D is incorrect because the method of accounting for warranties for tax
purposes is the cash basis. The cash basis is unacceptable for accounting
purposes because it violates the matching principle.

57

.
Letter “B” is the correct answer.
Short-term employee benefits expected to be paid as a result of service
rendered during the period ordinarily should be recognized as an expense and a
liability (accrued expense). For short-term compensated absences, the timing of
recognition depends on whether the benefits accumulate. If the benefits for
compensated absences accumulate, the expected cost of short-term absences
is recognized when services are rendered that increase the employees,
entitlement to future compensated absences. The obligation is recognized
whether it is vesting (the employee is entitled to a cash payment for an unused
entitlement upon leaving the enterprise) or not vesting. The amount should not
be discounted. It equal s the additional amount expected to be paid as a result
of the unused accumulated entitlement at the balance sheet date. Hence, the

enterprise should debit expense and credit liability for 100,000 because the
entitlement accumulates and the employees have rendered services during the
period that increase their future entitlement.
Letter A is incorrect because recognition occurs at the time of the absences if
the benefits are not accumulating.
Letter C is incorrect because a liability rather than an asset is recognized.
Letter D is incorrect because the expense is recognized in the income
statement.
58

.
Letter “B” is the correct answer.
Income, which includes revenue and gains, is recognized in the income
statement when an increase in future economic benefits related to an increase
in an asset or a decrease in a liability can be reliably measured. Revenue is
recognized (reported as revenue) in the period in which recognition criteria are
met; therefore, when it is received in advance, the amount applicable to future
periods is deferred. This deferral reflects the uncertainty of the reliable
measurement of the future economic benefits. The uncertainty arises because
the enterprise still must satisfy an obligation to perform in the future before it is
entitled to the future economic benefits. The amount received in advance is
considered a liability because it represents a present obligation arising from a
past event. Accordingly, deferred or unearned revenue is an amount that has
been received but that has not met the recognition criteria for revenue.
Letter A is incorrect because an accrued revenue is revenue that has met the
recognition criteria but has not been received.
Letter C is incorrect because the revenue will be recognized in future periods
when forthcoming issues of the magazine are published and distributed to the
subscribers.
Letter D is incorrect because there is no such thing as a precollected receivable.
Precollected revenue is deferred revenue, which is an amount received that has
not met the recognition criteria (classified as a liability). A subscription
receivable (an asset) would arise from accrued revenue, which is revenue not
yet received.

59

.
Letter “D” is the correct answer.
Liabilities are present obligations arising from past events, the settlement of
which is expected to result in an outflow or resources embodying economic
benefits. Customers’ deposits must be returned or credited to their accounts.
The deposits should therefore be recorded as liabilities.
Letter A and B are incorrect because deposits meet the definition of liabilities,
not revenue. Revenue is income that arises in the ordinary activities of the
enterprise. Income is an increase in economic benefits in the form of inflows or
enhancement of assets or decreases of liabilities that result in an increase in
equity (excluding transactions with owners).
Letter C is incorrect because deposits are liabilities, not equity items. The equity
of an enterprise is the residual interest in the assets of the enterprise that
remains after deducting its liabilities.

60

.
Letter “D” is the correct answer.
A deferred revenue is a revenue item that has been received but has not met
the recognition criteria. The journal entry described in the question is an
adjusting entry to transfer an amount from the revenue account to a liability
(deferred revenue) account. The initial collection of cash in advance from the
tenant was apparently recorded by a credit to revenue. An adjusting entry is
therefore required at year-end to transfer any remaining amount that does not
qualify for revenue recognition.

5 million. The enterprise could avoid the future expenditure by its future actions. Letter A is incorrect because the criteria for recognition of a provision have been met. including a reliable estimate of the range of eh obligation. Letter C is incorrect because the loss is not deferred. Recognition of provisions is appropriate when the enterprise has a legal or constructive present obligation resulting from a past event (called an obligating event). no part of the appropriation of retained earnings. for example. Letters A. Letter D is incorrect because. the . and its amount can be reliably estimated. 64 . If it arose after the after the date of the financial statements. Letter B is incorrect because such an adjustment is appropriate for fundamental errors and changes in accounting policies (under the benchmark treatments). 61 . . Letter A is incorrect because the time period in which the obligatory event occurred is relevant. Letter “D” is the correct answer.Letter A is incorrect because an accrued revenue has met the recognition criteria but has not yet been received. Consequently. Recognition of provisions is appropriate when the enterprise has a legal or constructive present obligation resulting from a past event (called an obligating event). a provision should be recognized. Thus. Letter C is incorrect because an appropriation of a retained earnings is permissible although not required. Letter B is incorrect because the loss is probable. the amount recognized should be the best estimate of the expenditures required to settle the obligation. if the enterprise has prior experience with such offers or information about the experience of eh similar enterprises. the same accounting treatment is applied whether a claim is brought by an individual or in a class action suit. Moreover. a reliable estimate of the obligation should be feasible. a provision may not be recognized in those statements. Letters B and C are incorrect because the entry concerns a revenue rather than an expense transaction. the amount within the reliable estimate of the range of the obligation that will be recognize will vary from country to country. Furthermore. but the enterprise must still recognize a loss and a provision. 62 . However. the enterprise can usually establish that it has a legal present obligation resulting from a past event and that an outflow of economic benefits is probable. if the loss is probable and can be reliably estimated. Moreover. the company must recognize a loss and a liability for 2. it is accrued. Letter “D” is the correct answer. and its amount can be reliably estimated. 63 . When premiums are offered to customers. Moreover. upon redemption of coupons. The journal entry described indicates that collection has been made. it should be recognize by a charge to income. For example. B and C are incorrect because no obligating event has occurred. Letter “D” is the correct answer. A provision is a liability of uncertain timing or amount. A provision is a liability of uncertain timing or amount. it is probable that an outflow of economic benefits will be necessary to settle the obligation. The number of parties involved in the litigation is irrelevant. it is probable that an outflow of economic benefits will be necessary to settle the obligation. Letter “A” is the correct answer. Letters B and C are incorrect because a provision is not recognizes unless it is probable that an outflow of a resources embodying economic benefits will be required to settle a present obligation arising from a past event.

Letter “C” is the correct answer. The market price of the bonds at any moment in its terms equal the present value of the future cash payments discounted at the market rate of interest at that time. Bonds payable is credited for the face amount. Letter C is incorrect because the cash interest payment is determined by the contractual terms of the bond. Letter B is incorrect because the interest expense equals the carrying amount of the liability times the market rate of interest at the time of issuance. is impaired if its carrying amount at the balance sheet date exceeds its estimated revocable amount. Letter B is incorrect because bonds sold with coupon rates below the market rate on comparable bonds are sold at a discount. Letter D is incorrect because the discount on bonds payable should be debited. Letter “A” is the correct answer. the effective yield on the bonds will equal the market rate. such as lender’s mortgage receivable. which are unaffected by market interest rate changes. Letter “D” is the correct answer. Letter A is incorrect because the entry for the issuance of bonds at a premium requires a credit to a premium account.amount of eh obligation should be capable of reliable estimation. A financial asset. The difference between the face amount of the issued bonds and the cash received is debited to the discount on bonds payable. 66 . the loss should be included in net profit or loss. B and D are incorrect because the contingent liability is required to be neither recognized nor disclosed. the present value decreases. when the market rate exceeds the contract rate. the market price of eh bond will decrease. As the discount is . Letter “C” is the correct answer. the bond will sell at a discount so that the effective yield will equal the market rate. Letter “A” is the correct answer. B and C are incorrect because the carrying amount should be reduced. and the charge should be included in net profit or loss. The carrying amount of the asset should be reduced to its estimated recoverable amount directly or by crediting an allowance account. As the market rate increases. 67 . 65 . The loss equals the difference between then carrying amount and the present value of the expected future cash flows discounted at the original effective interest rate. Bonds sold with coupon rates below the market rate on comparable bonds are sold at a discount from the face amount. Letter D is incorrect because. If it is probable that all amounts due on such a held-to-maturity investment (a financial asset carried at amortize cost) cannot be collected. Hence. Interest expense equals the carrying amount of he liability at the beginning of eh period times the effective interest rate. 68 . The interest expense is therefore unaffected by changes in the market rate subsequent to bond issuance. which will be below the face amount reflected in bonds payable. Thus. The carrying amount of the liability equals the face amount of the bond minus the discount. A contingent liability includes a present obligation for which an outflow of resources embodying economic benefits is not probable. Letters A. 69 . Cash will be debited for the amount received. Letters A. A contingent liability is not recognized but is disclosed unless the possibility of the outflow is remote.

debit bond premium. and credit cash paid. the debit balances of unamortized bond discount. 71 . The reason is that the effective rate is higher than the nominal rate. The difference between the carrying amount and the amount paid should be included in net profit or loss for the period.amortize over the life of eh bond. this item should be reflected as reductions in the share premiums in excess of par account. B and C are incorrect because these amounts are not expensed. Letter “A” is the correct answer. Letter “D” is the correct answer. An enterprise should remove a financial liability from its balance sheet only when it is extinguished. Thus. 73 . the amortization of a premium on bonds payable reduces the interest expense. for example. the interest expense increases over the term of the bond. Letter “C” is the correct answer. 72 . Letter C is incorrect because an extraordinary item is income or an expense arising from events or transactions that are clearly distinct from the ordinary activities of the enterprise and are not expected to recur frequently or regularly. Letter B is incorrect because interest expense will increase over the term of the bonds. the carrying mount increases. The conversion of debt into common shares is ordinarily based upon the carrying amount of the debt at the time of issuance. and conversion costs should be considered reductions in the net carryings amount at the time of conversion. The excess of the interest expense over the cash payment is the amount of discount amortize each period. Derecognition of a financial liability (or a part thereof) occurs only by means of extinguishment. Letters C and D are incorrect because interest income is not affected by the amortization of a premium on bonds payable. Letter “D” is the correct answer. Letters C and D are incorrect because interest expense exceeds the cash interest payment when bonds are issued at a discount. each reduces the amount at which the shares are issued. Consequently. when the respected discounted cash flows differ by at least 10%. 74 . An extinguishment or derecognition of the old debt and the recognition of new debt occurs when the borrower and lender exchange debt instruments with substantially different terms. The entry is to debit interest expense. Letters A and B are incorrect because the excess of the reacquisition price over the net carrying amounts of the old bonds is recognized in full in net profit or loss for the period. unamortized issue costs. when the creditor is paid. Letter B is incorrect because the amortization of a premium on bonds payable reduces interest expense. Letter B is incorrect because the terms should be substantially different. In effect. 70 . Letters A. thereby increasing net profit or loss. Because the carrying amount is based on all related accounts. . This condition is satisfied only when the debtors pay the creditors or legally released from primary responsibility either by the creditor or through the legal process. Consequently. Letter “B” is the correct answer. Letters A and D are incorrect because payment to a third party such as a trust (also known as an in-substance defeasance) does not by itself extinguish the obligation absent a legal release. that is.

77 . Letter D is incorrect because the procedure is acceptable only if the appropriation is shown within the equity section of the balance sheet. Letter C is incorrect because fire losses may never be charged against the appropriation of retained earnings. Changes in accounting estimates are normal and recurring. and inventory obsolescence. A change in accounting estimate is a normal. are usually payable on a date different from declaration date. Letter C is incorrect because catch-up adjustments to prior reported amounts are retroactive. are a necessary part of preparing financial statements. they inevitable change as new events occur and as additional experience and information are obtained. cash. it is accounted for prospectively. .. additional experience. However. additional experience. Letter C is incorrect because dividends. Letter A is incorrect because an appropriation of retained earnings for selfinsurance is permissible. When altered conditions require a change in estimate. residual values.Accrual of an expense prior to the occurrence of the event for which an enterprise is self-insured should not be permitted. recurring revision resulting from changes in circumstances. Letter “D” is the correct answer. e. 75 . a change in the estimate of a service lives of depreciable assets is a change in accounting estimate. In other words. when a fire loss occurs. if the change affects both the current and future periods. The effect of a change in estimate is included in the determination of net profit or loss in the period of change and in future periods. Letter C is incorrect because changing an accounting an accounting method due to a change in an IAS is a change in a accounting policy. uncollectible accounts. Letter “D” is the correct answer. a change in accounting estimate should be reflected in the financial statements prospectively. The purpose of a share dividend is to provide evidence to the shareholders of their interest in accumulated earnings without distribution of cash or other property. Letter A is the correct answer. This rules hold because the fair value of the property diminishes only if the event actually occurs. warranty costs. subsequent events. the entry appropriating retained earnings is revised. new information. whether of shares. services lives. Share dividends are typically accounted for by a transfer from retained earnings at fair value. Thus. Letter B is incorrect because a change from diminishing-balance depreciation to straight-line depreciation is a change in acconting policy.g. and the loss is charge against income of the period of loss and not against retained earnings. or property. Letters A and B are incorrect because share dividends and share splits have no effect on total equity or on the carrying amount of an individual shareholder’s investment. But an appropriation of retained earnings is acceptable to disclose the self-insurance policy if. Accounting estimates. Is neither a fundamental error nor an extraordinary item. Changes in accounting estimates are accounted for prospectively. or subsequent events. They are responses to new information. or changes in circumstances. 76 . Letter A is incorrect because extraordinary items are clearly distinct from ordinary activities and not expected to recur frequently or regularly. Letter B is incorrect because changes in accounting estimates are not errors.

Although some estimation of the correct amount may be required. or not change prior year’s net profit. service lives and residual values of depreciable assets. Letter B is incorrect because this entry is the reverse of the correct entry. comparative information is restated. Restatement may be impracticable for a change to LIFO because determining the LIFO inventory valuation retroactively may not be feasible. No estimate is required. Examples of items for which estimates are necessary are uncollectible receivables. Letter B is incorrect because the price of a marketable security can be ascertained with certainty. periods benefited by a deferred cost. Preparing financial statements requires estimating the effects of future events. a change to LIFO may result in no recognition of the effect of the change on prior periods. Letter “A” is the correct answer. The benchmark treatment of fundamental errors requires retrospective treatment. Letter B is incorrect because prior-period and current statements would be more comparable if the latter were restated. statements. Letter “C” is the correct answer. the estimates will not depend on future conditions and events but on current conditions and measurement methods. Information concerning the composition of inventory throughout the history of the entity. 78 . Changes in estimates used in accounting are necessary consequences of periodic presentations of financial statements. Retained earnings must be credited because the error understated net profit or overstated net loss in the prior period. Letter “A” is the correct answer. as well as all individual unit prices. The resulting adjustment is to the opening balance of retained earnings for the earliest period presented. inventory obsolescence. Letter D is incorrect because accumulated depreciation and retained earnings should be credited. warranty costs. To correct the fundamental error. increase. Accordingly. According to the benchmark treatment. usually cannot be reconstructed. The resulting adjustment is to the opening balance of retained earnings for the earliest period presented.Letter D is incorrect because a change from FIFO to LIFO inventory valuation is a change in accounting policy. Letter D is incorrect because the physical quantity of inventory as of the balance sheet date can be measured. Letter C is incorrect because retained earnings should be credited. If practicable. a change in accounting policy is applied retrospectively unless any adjustment relating to prior periods is not reasonably determinable. According to the benchmark treatment. 79 . No estimate is required. and recoverable mineral reserves. Letter D is incorrect because restatement could reduce. 81 . Letter A is incorrect because the purchase price for an acquired building can be calculated with certainty. If practicable. Letter “A” is the correct answer. the enterprise must debit the equipment for its cost and credit accumulated depreciation for the depreciation expense appropriate for the first year of the estimated useful life. Letter B is incorrect because reporting the cumulative effect is allowed alternative treatment for a change in an accounting policy. Letter C is incorrect because restatement is likely to change reported results. a change in accounting policy is applied retrospectively unless any adjustment relating to prior periods is not reasonably determinable. comparative information is restated. 80 . .

and specifies how contributions are to be determined. The resulting adjustment is to the opening balance of retained earnings for the earliest period presented. Letters A. Letter “A” is the correct answer. . the benefits defined in the plan. returns on investment. It equals the DBO adjusted for unrecognized actuarial gains and losses and past service cost. The measurement of a postemployment benefit obligation includes estimates of future salary increases. the post employment benefits received by employees are defined by the plan’s formula. The total benefit to be provided in the form of deferred payments is not precisely determinable and can only be estimated based on the plan’s benefit formula and relevant future events. the benefits arising from any constructive obligation beyond the terms of the plan. Letter B is the correct answer. Letter B is incorrect because the employees bear the risk of the plan’s investment performance.Letter C is incorrect because this answer describes one of the requirements under the allowed alternative treatment for a change in an accounting policy. 84 . If practicable. 85 . employees have the benefit of gain and risk of loss. Letter D is incorrect because equal contributions are not required for a defined contribution plan. Letters A and D are incorrect because each is a change in estimate that is accounted for on a prospective basis (in the future). Letter C is incorrect because under a defined a benefit plan. A change in depreciation method is reported as a change in accounting policy. Postemployment benefits depend only on contributions. Letter C is incorrect because a standard method (not a range) is used to measure the expense (income) recognized in the income statement. They are recognized on a systematic and gradual basis over subsequent accounting periods. comparative information is restated. minus the fair value of plan assets at the balance sheet date. Such events include how long the employee and survivors live. According to the benchmark treatment. Letter D is incorrect because the defined benefit liability is recognized. a change in an accounting policy is applied retrospectively unless any adjustment relating to prior periods is not reasonably determinable. but it does not affect the existence of the obligation. Letter C is incorrect because if distinguishing between a change in estimate and a change in accounting policy is difficult. and levels of compensation. All changes ultimately will be recognized except to the extent they may be offset by subsequent changes. B and D are incorrect because the defined postemployment benefits includes both vested and nonvested benefits and is calculated at future levels. Letter “B” is the correct answer. provides an account for each participant. Letter D is incorrect because a change in an accounting policy qualifying for retrospective application requires an adjustment to retained earnings. and estimates of future changes in state benefits that affect the level of plan benefits. years of service rendered. Letter “C” is the correct answer. the change is accounted for as a change in estimate and properly disclosed. 82 . The possibility that nonvested projected benefits will not vest is a factor in the measurement of the DBO. many of which are not controllable by the employer. 83 . and allocated forfeitures of the other participants’ benefits. A defined contribution plan provides benefits in exchange for services. Thus. Letter A is incorrect because certain changes in the defined benefit obligation and in the value of plan assets are recognized as they occur.

the lease is a rental arrangement and is called an operating lease. the lease is treated as a finance lease because the transaction is in essence an installment purchase. the lease is a finance lease.e. the lease should be accounted for as a salepurchase. Leases. Letter A is incorrect because past service cost relates to benefits for employee service provided prior to the adoption or amendment of a defined benefit plan. 89 . Whether benefits have vested affects the measurement of the employer’s defined benefit obligation but not its existence. 87 . minus unrecognized past service cost. a finance lease. Letter “B” is the correct answer. years of service. or age. such as level of compensation. Letter B is incorrect because a defined benefit plan provides a defined benefit based on one or more factors. the employer does not recognize an additional minimum liability. Letter A is incorrect because the lessee obtains use of the asset. Letters C and D are incorrect because if it transfer substantially all of the risks and rewards of ownership.. the lessor provides financing for an installment peurchase. In effect.86 . Vested benefits are those earned postemployment benefits owed to an employee that are not contingent upon the employee’s continued service. Moreover. Letter “A” is the correct answer. If this amount is negative. IAS 38. Accordingly. Letter “C” is the correct answer. The amount of the defined benefit liability recognized equal the present value of the defined benefit obligation at the balance sheet date. vesting affects the accounting for past service cost. The issues in all leases is whether the risks and rewards of ownership have been transferred from the lessor to the lessee. Letter D is incorrect because net unrecognized actuarial gains increase the liability. When a lease agreement transfers the risks and rewards of ownership of the asset to the lessee. if so. if the excess of the DBO over the fair value of the plan assets is constant. and lessee’s payments include both principal and interest components. A lease is a rental or sub-purchase arrangement between a lessor (the owner or seller of the property) and a lessee ( the renter or purchaser). and the present value of future refunds from the plan or reductions in future contributions. plus (minus) unrecognized actuarial gains (losses). . Intangible Assets. net unrecognized actuarial gains will increase the liability. Letter B is incorrect because net unrecognized actuarial losses decrease the liability. specifically does not apply to leases that are within the scope of IAS 17. A finance lease is therefore regarded as a tangible asset. the lessee records a depreciable asset and liability. Letter D is incorrect because under IAS 19. minus the fair value of plan assets at the balance sheet date. Letter B is incorrect because the recorded asset is a tangible asset. 88 . Letter “A” is the correct answer. Thus. If the risks and rewards of ownership have not transferred. Net unrecognized actuarial losses and unrecognized past service cost decrease the liability. unrecognized past service cost. Moreover. Letter C is incorrect because net unrecognized actuarial losses and unrecognized past service cost decrease the liability. Past service cost is amortized as an expense over the average period until the benefits are vested. it represents such an asset is the sum of unrecognized actuarial losses. i.

it cannot afford to buy enough fixed assets. Letter “B” is the correct answer. If no bargain purchase option exists. Letters B and C are incorrect because the guaranteed residual must be discounted to present value. Letter C is incorrect because the lessee records depreciation on the leased asset under a finance lease. the minimum lease payments equal the sum of the minimum payments payable over the lease term and any amounts guaranteed by the lessee or by a party related to the lessee. Letter “C” is the correct answer. 91 . Hence. The lessee records and depreciates the leased item under a finance lease. the lessor removes the leased item from the books and records lease payments receivable regardless of whether the lessor is a manufacturer or a dealer. . The fixed-assets turnover ratio equals net sales divided by net fixed assets. or that it uses fixed assets efficiently. the lease agreement represents a form of financing. Letter A is incorrect because the inventory conversion period (days of inventory) is the average time required to covert materials into finished goods and then to sell them. the lessor recognizes a net receivable equal to the net investment in the lease: gross investment (minimum lease payments from the lessor’s perspective plus unguaranteed residual value) minus unearned finance income.Letter B is incorrect because the lessee uses the lease as a source of financing under a finance lease. Letter C is incorrect because the lessee makes payments to the lessor. Letter “C” is the correct answer. Letter A is incorrect because under a finance lease. 93 . Letter D is incorrect because guaranteed residuals are part of the lease contract. that is. 92 . it is also called the receivables collection period. When a transaction meets the criteria of a finance lease. and the amount of time in one period does not necessarily bear any relationship to the other. A higher ratio indicates either that the enterprise is undercapitalized. This process is separate from the accounting for the lease obligation. 90 . the leased asset is being purchased when a lease meets the criteria for capitalization. It measures the efficiency of asset management. Letter “A” is the correct answer. The day’s sales outstanding (days or receivables) may be stated as the accounts receivable balance divided by average credit sales per day or as days in the year divided by the receivables turnover. Letter A is incorrect because the ratio may indicate undercapitalization. The lessee’s minimum lease payments include required payments (excluding contingent rent and costs for services and taxes to be paid by and reimbursed to the lessor) during the lease term and the amount of a bargain purchase option. Thus. This process typically occurs before the receivables collection period. Letter B is incorrect because fluctuations in inventory do not affect fixed-assets turnover. The lessee records a finance lease as an asset and liability at the inception of the lease at the fair value of the leased property (not to exceed the present value of the minimum lease payments). not an operating lease. It is the average time required to convert the enterprise’s receivables into cash. Letter D is incorrect because the fixed-assets turnover ratio is not a profitability indicator. Letter D is incorrect because in essence.

Net profit is also distorted because of inflation’s impact on depreciation expense and inventory costs. This result is obtained because the total assets and sales factors cancel in the multiplication of the three ratios. It estimates the time between when the enterprise makes payments and when it receives cash inflows. Letter D is incorrect because profitability ratios measure operating results. This result is the basic DU Pont equation. A DTA or DTL is measured at the rates expected to apply when it is realized or settled. the current ratio. Letter A is incorrect because inflation badly distorts balance sheets. 95 .g. The net profit margin equals the net profit available to common shareholders divided by sales.Letter B is incorrect because the cash conversion cycle equals the inventory conversion period. Letter “D” is the correct answer. In the extended DU Pont equation. a DTA or DTL is measured based on the average rates expected to apply in the . Inflation therefore impairs the comparability of financial statement items. and the net profit margin do not provide information about the carrying amount of common equity. and profits. If different rates apply to different taxable profit levels. Letter “C” is the correct answer. The extended Du Pont equation gives the return on common equity. Because balance sheet amounts are expressed in terms of money.. the return on assets is multiplied by the leverage factor. indicate the relationship of current asset to current liabilities. based on tax laws and rate enacted or substantively enacted as of balance sheet date. the total assets turnover equals sales divided by total assets. it is a measure of debt-paying capacity (solvency). Letter C is incorrect because the price-to-earnings ratio and the return-on-assets ratio do not provide information about carrying amount of common equity. depreciation charges. EPS. Letter “B” is the correct answer. and the product of these two ratios is the return on assets. Letter B is incorrect because the price-to-earnings ratio. inventory costs. Thus. Letter D is incorrect because the inventory divided by the sales per day is the inventory conversion period (days of inventory). 97 . 94 . Letter C is incorrect because asset management ratios indicate how effectively the enterprise is using its assets. plus the receivables collection period. minus the payable deferred period (average time between resource purchases and payment of cash for them). also called the equity multiplier (total assets ÷ common equity at carrying amount). 96 . e. historical cost amounts for different periods measured in units representing different levels of purchasing power. Letters B and D are incorrect because inflation affects any financial ratio analysis involving comparisons of prior-period with current-period monetary amounts. Inflation is the diminution over time of the purchasing power of money. The times-interest-earned ratio equals net profit before taxes and interest divided by the interest. Letter A is incorrect because the market-to-carrying-amount ratio and the totaldebt-to-total-assets ratio do not provide any information about net profit available to shareholders. It measures the extent to which operating profit can decline before the enterprise is unable to meet its annual interest cost. Letter B is incorrect because liquidity ratios. whether for the same enterprise overtime or for enterprise of differing ages. Letter “A” is the correct answer.

For example. and a tax would be due in the year of receipt. Because the tax is paid prior to recording accounting profits. The financial statement would show no income and no related tax expense because the rental payments apply to future periods. A deferred tax asset records deferred tax consequences attributable to deductible temporary differences and carryforwards. Advance rental receipts accounted for on the accrual basis for determining accounting profit and on cash basis for determining taxable profit (tax loss) would give rise to a deferred tax asset. which does not support the calculation and reporting of deferred income tax.periods when the TDs are expected to reverse. the taxation authorities. 98 . In some countries. B and D are incorrect because a change in tax law or rates should be recognized as an adjustment as of the date the change is enacted or substantively enacted. based on tax laws and rates enacted or substantively enacted as of the balance sheet date. based on tax laws and rates enacted or substantively enacted as of the balance sheet date. Letter “B” is the correct answer. however. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. Letters A. Letter D is incorrect because this statement describes the nonallocation or flowthrough approach. Letter “C” is the correct answer. would show the rent as income when the cash was received. . it represents an asset that will be recognized as an expense when income is finally recorded. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. The tax rate or tax base may vary with the manner of recovery or settlement. The tax return. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. governmental announcements of laws and rates have the substantive effect of actual enactment. Letter D is incorrect because recognizing prepaid expenses earlier on the tax return than on the financial statements (a situation akin to the accelerated deprecation of fixed assets) gives rise to a deferred tax liability. For example. Letter B is incorrect because recognizing installment income on the financial statements but not the tax return results in a taxable temporary difference. which recognizes that future taxability and deductibility are important factors in the valuation of individual assets and liabilities. 99 . Letter “C” is the correct answer. recovered from. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. 100 . one tax rate may apply if an asset is sold immediately and another may apply if it is to be recovered through continued use. A DTA or DTL is measured at the rates expected to apply when it is realized or settled. A current tax liability or asset for the current and prior periods is the amount to be paid to. Letter C is incorrect because this statement describes the net-of-tax method. Letter A is incorrect because this statement describes the deferred method of accounting for deferred income taxes. Letter A is incorrect because using an accelerated depreciation method for determining taxable profit (tax loss) results in a deferred tax liability.

. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letter “C” is the correct answer. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter “B” is the correct answer.000).000. . This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. .000]. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense.0 .000 + 40.000 unearned revenue + 60. The payable is also recognized in the current period. Interest expense equals the face amount of the debt multiplied by the interest rate and the fraction of the year the debt was outstanding [ 1. after-tax net income credited to retained earnings equals 140. For example. Letter “D” is the correct answer. . For example. Letter “D” is the correct answer. The normal balance of an expense account is a debit. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. . an expense account is credited in a closing entry. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. The debt was issued on July 1 and has been outstanding for only 6 months. 0r 185. the adjusting entry should be Interest expense 50. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Thus. Current period pretax net income equals 280. .000 increase in accounts receivable).000 (750.000 [(1.000 depreciation – 10. 5) x 280. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense.000 – 30. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letter “D” is the correct answer.000 .000 (600. 6 months’ interest is accrued and expensed in the current period. The sales revenue earned in 2001 equals 2001 cash receipts minus any receipt in 2001 for which the revenue has not yet been earned. . Letter “B” is the correct answer.000 Interest payable 50.000 administrative expenses).000 interest – 200.000 CGS – 60. Letter “A” is the correct answer.000 (175. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. plus the revenue earned from cash receipts in 2000.000 sales – 200. The amount of service revenue for the year on an accrual basis is equals 645. Because interest is payable on July 1. Letter “B” is the correct answer.000 x 10% x (6÷12) = 50. therefore.101 102 103 104 105 106 107 108 Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year..000]. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences.000 cash collected – 15. the reduction in a deferred tax asset or an increase in . All income statement account balances are closed either to a summary account (such as income summary or revenue and expense summary) or to retained earnings. For example. Thus.

the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. Letter “B” is the correct answer. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. . This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. For example. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. . This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. . Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities.109 110 111 112 113 a deferred tax liability increases deferred tax expense. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. For example. . Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letter “B” is the correct answer. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. . Letter “B” is the correct answer. For example. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter “B” is the correct answer. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. For example. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. . the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. Letter “B” is the correct answer. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. For example. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences.

The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense.114 115 116 117 Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. . Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. Letter “B” is the correct answer. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. For example. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter “B” is the correct answer. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. Letter “B” is the correct answer. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. . For example. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. Letter D is incorrect because the total tax liability includes both the correct and deferred tax expense or income for the year. . This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. Letters A and C are incorrect because the deferred tax expense or income is equal to the sum of the net changes in the deferred tax assets and deferred tax liabilities. The deferred tax expense or income disclosed is the sum of the net changes in the deferred tax assets and deferred tax liabilities. . For example. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. the reduction in a deferred tax asset or an increase in a deferred tax liability increases deferred tax expense. Letter “B” is the correct answer. This amount is the deferred tax expense or income relating to the origination or reversal of temporary differences. . For example.