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TOA ASSET - MIDTERM QUIZ

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. An entity imported machinery to install in its new factory premises before year-end. However, due to
circumstances beyond its control, the machinery was delayed by a few months but reached the factory
premises before year end. While this was happening, the entity learned from the bank that it was being
charged interest on the loan it had taken to fund the cost of the plant.

What is the proper treatment of freight and interest expense?

a. Both expenses are capitalized
b. Interest may be capitalized but freight is expensed
c. Freight can be capitalized but interest cannot be capitalized under these
circumstances.
d. Both expenses are expensed.

2. At the beginning of the current year, an entity purchased new machinery that it does not have to pay
until after three years. The total payment on maturity will include both principal and interest. The cost of
the machine would be the total payment multiplied by what time value of money concept?
a. Present value of annuity of 1
b. Present value of 1
c. Future amount of annuity of 1
d. Future amount of 1

3. Which should be classified as financial instruments?

a. Patents
b. Trade receivables
c. Inventories
d. Land and building

4. An item of property, plant and equipment shall be recognized as an asset when

I. It is possible that future economic benefits associated with the asset will flow to
the entity
II. The cost of the asset to the entity can be measured reliably
a. I only
b. II only
c. Both I and II
d. Neither I nor II

5. Costs that are expensed immediately include all of the following, except
a. Cost of opening a new facility
b. Cost of introducing a new product or service, including cost of advertising and
promotional activities
c. Cost of conducting business in a new location, including cost of staff training
d. Cost of testing whether the asset is functioning properly.
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6. If an entity is able to determine reliably the fair value of the asset received and the fair value of the asset
given up in an exchange transaction, the cost of the asset acquired is measured at
a. Fair value of asset given up
b. Fair value of asset received
c. Either the fair value of asset received or the fair value of asset given up
d. Neither the fair value of asset received nor the fair value of the asset given up

7. Which of the following is not classified as a financial instrument?

a. Convertible bond
b. Foreign currency contract
c. Warranty provisions
d. Loan receivable

8. Gains and losses arising from the derecognition of an item of property, plant and equipment shall be
determined as the difference between
a. Gross disposal proceeds and the cost of the asset
b. Gross disposal proceeds and the carrying amount of the asset.
c. Net disposal proceeds and the cost of the asset.
d. Net disposal proceeds and the carrying amount of the asset.

9. Which statement is incorrect concerning recognition of property, plant and equipment?

I. Major spare parts and servicing equipment are usually carried as inventory and
recognized as expense when consumed.

II. If the spare parts and servicing equipment can be used only in connection with an
item of property, plant and equipment and their use is expected to be irregular,
they are accounted for as property, plant and equipment and depreciated over
their useful life or useful life of the related asset, whichever is longer.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

10. Which of the following items shall not be capitalized into the cost of property, plant and equipment?
a. Cost of excess materials resulting from a purchasing error
b. Cost of testing whether the asset works correctly
c. Initial delivery and handling cost
d. Cost of preparing the site for installation

11. The advantage of relating a company’s bad debt expense to its accounts receivable is that this approach
a. Gives a reasonably correct measure of receivables in the balance sheet
b. Relates bad debts expense to the period of sale
c. Is the only generally accepted method of valuing accounts receivable
d. Makes estimates of uncollectible accounts unnecessary
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12. An entity installed a new production facility and incurred a number of expenses at the point of
installation. The entity’s accountant is arguing that most expenses do not qualify for capitalization.
Included in those expenses are initial operating losses. The initial operating losses shall be
a. Deferred and amortized over a reasonable period of time
b. Expensed and charged to the income statement
c. Capitalized as part of the cost of plant as a directly attributable cost.
d. Taken to retained earnings since it is unreasonable to present it as part of the
current year’s income statement.

13. Cost that are expensed immediately include all of the following, except
a. Cost incurred while an item capable of operating in a manner intended by
management has yet to be brought into use, or is operated at less than full
capacity
b. Initial operating loss
c. Cost of relocating or reorganizing part or all of an entity’s operation
d. Professional fee arising directly from the acquisition of an item of property, plant
and equipment

14. Major spare parts and stand by equipment which are expected to be used over a period of more than
one year shall be classified as
a. Property, plant and equipment
b. Inventory
c. Noncurrent investment
d. Expense

15. What is the principle for the recognition of a financial asset or a financial liability?
a. A financial asset is recognized when, and only when, it is probable the future
economic benefits will flow to the entity and the cost or value of the instrument can
be measured reliably.
b. A financial asset is recognized when, and only when, the entity obtains control of
the instrument and has the ability to dispose of the financial asset independent of
the actions of others.
c. A financial asset is recognized when, and only when, the entity obtains the risks
and rewards of ownership of the financial asset and has the ability to dispose of
the financial asset.
d. A financial asset is recognized when, and only when, the entity becomes a party
to the contractual provision of the instrument

16. It is any contract that evidences residual interest in the assets of an entity after deducting all of its
liabilities,
a. Equity instrument
b. Debt instrument
c. Loan and receivable
d. Financial asset with indeterminable fair value
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17. When an item of property, plant and equipment is acquired by issuing shares, which of the following is
the best basis for establishing the historical cost of the acquired asset?
a. Historical cost of the asset to the seller
b. Historical cost of a similar asset acquired in another transaction by the buyer
c. Fair value of the asset received or the fair value of the shares issued, whichever is
more readily determinable
d. Historical cost of the asset is zero since noncash is paid in the acquisition

18. It is any contract that gives rise to both financial asset of one entity and a financial liability or equity
instrument of another entity.
a. Financial Instrument
b. Equity instrument
c. Debt instrument
d. Derivative instrument

19. Which of the following best describes the risk that an entity will encounter if it has difficulty in meeting
obligations associated with its financial liabilities?
a. Liquidity risk
b. Credit risk
c. Financial risk
d. Payment risk

20. When the payment for item property, plant and equipment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payments shall be recognized as
a. Interest expense of the current year
b. Component of cost of the property, plant and equipment
c. Interest expense over the credit period
d. Interest expense over the life of the asset

21. What are the conditions for offsetting financial assets and financial liabilities?
a. A legal right to offset
b. A legal right of offset and an intention to settle net or simultaneously.
c. The existence of clearing mechanism or other market mechanism for net
settlement and an expectation of net settlement
d. A netting agreement and an expectation of net settlement.

22. Equity instruments include all of the following, except

a. Ordinary shares
b. Preference shares
c. Warrants or options that allow the holder to purchase a fixed number of ordinary
shares of the issuing entity in exchange for a fixed amount of cash or another
financial asset.
d. Corporate bonds and other debt instruments issued by the entity.
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23. Which is incorrect concerning acquisition of an item of property, plant and equipment by self-
construction?
a. The cost of self-constructed asset is determined using the same principles as for
an acquired asset.
b. Any internal profit is eliminated in arriving at the cost of self-constructed asset.
c. The cost of abnormal amount of wasted material, labor and other resources
incurred in the production of self-constructed asset is included in the cost of the
asset.
d. The cost of normal amount of wasted material, labor and other resources incurred
in the production of self constructed asset is included in the cost of the asset.

24. The cost of an item of property, plant and equipment comprises all of the following, except
a. Purchase price
b. Import duties and non refundable purchase taxes
c. Any cost directly attributable in bringing the asset to the location and condition for
its intended use
d. Initial estimate of the cost of dismantling and removing the item and restoring the
site, the obligation for which the entity does not incur when the item was acquired

25. Which of the following best describes credit risk?

a. The risk that one party to a financial instrument will cause a financial loss for other
party by failing to discharge an obligation.
b. The risk that an entity will encounter difficulty in meeting obligations associated
with financial liabilities.
c. The risk that the fair value associated with an instrument will vary due to changes
in the counterparty’s credit rating.
d. The risk that an entity’s credit facilities will be withdrawn due to cash flow
sensitivities.

26. Which of the following statements in relation to the cost of an asset is true?
I. The cost includes cash equivalent paid to acquire an asset
II. The cost includes the fair value of any nonmonetary consideration given to
acquire an asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

27. A preference share that provides for a mandatory redemption on a specific date or at the option of the
holder is
a. A financial asset
b. A financial liability
c. An equity instrument
d. Neither a financial liability nor an equity instrument
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28. If the present value of a note issued in exchange for a plant asset is less than its face amount, the
difference shall be
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

29. A financial liability is any liability that is a contractual obligation

I. To deliver cash or other financial asset to another entity
II. To exchange financial instruments with another entity under conditions that art
potentially unfavorable
a. I only
b. II only
c. Both I and II
d. Neither I or II

30. A financial asset is any asset that is (choose the incorrect one)
a. Cash
b. A contractual right to receive cash or another financial asset from another entity
c. A contractual right to exchange financial instruments with another entity under
conditions that are potentially unfavorable.
d. An equity instrument of another entity

31. An entity has issued the following two types of financial instrument to raise capital:
- Convertible bonds which are redeemable for cash in five years time. The holders have the
right to request the issue of a fixed number of new ordinary shares in lieu of cash. The
holders have not yet indicated whether they will exercise the right to receive the new ordinary
shares.

- Preference shares with no fixed date for redemption. The preference shares are redeemable
for cash at any time in the future at the option of the issuer. The issuer must give 6 months
written notice of its intention to redeem the preference shares and no notice yet been given.

In accordance with PAS 32, what is the appropriate classification for such financial instrument?
Convertible bonds Preference shares
a. Compound instrument Equity instrument
b. Financial liability Compound instrument
c. Equity instrument Equity instrument
d. Financial liability Compound instrument

32. The cost of an item of property, plant and equipment that is acquired in exchange for combination of
monetary and nonmonetary asset is measured at the
a. Fair value of the asset given up plus the amount of any cash and cash equivalent
transferred.
b. Fair value of the asset received plus the amount of any cash and cash equivalent
transferred.
c. Book value of the asset given up plus the amount of any cash and cash
equivalent transferred.
d. Book value of the asset received plus the amount of any cash and cash
equivalent transferred.
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33. How are the proceeds from issuing a compound instrument allocated between the liability and equity
components?
a. First, liability component is measured at fair value, and then the remainder of the
proceeds is allocated to the equity component.
b. First, the equity component is measured at fair value, and then the remainder of
the proceeds is allocated to the liability component.
c. First, the fair values of both the equity component and the liability component are
estimated. Then the proceeds are allocated to the liability and equity components
based on the relation between the estimated fair values.
d. The equity component is measured at its intrinsic value. The liability component is
measured at the par amount less the intrinsic value of the equity component.

34. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and taxes
c. Freight, handling and other cost directly attributable to acquisition
d. Trade discount, rebate and other similar item

35. The residual value of an intangible asset should be presumed zero, unless
I. There is a commitment by a third party to purchase the asset at the end of its useful life.
II. There is an active market for the asset and residual value can be determined by reference to that
market and it is probable that such market will exist at the end of the asset’s useful life.
a. Both I and II b. Neither I nor II c. II only d. I only

36. Trade receivables are classified as current assets when they are reasonably expected to be collected
a. Within one year
b. Within the normal operating cycle
c. Within one year or within the normal operating cycle whichever is shorter
d. Within one year or within the normal operating cycle whichever is longer

37. Operating losses incurred during the start up years of a new business should be
a. Accounted for and reported like the operating losses of any other business
b. Written off directly against retained earnings
c. Capitalized as a deferred charge and amortized over 5 years.
d. Capitalized as an intangible asset and amortized over 5 years.

38. A lessee incurred costs to construct office space in a leased warehouse. The
estimated useful life of the office is 10 years. The remaining term of the
nonrenewable lease is 15 years. The cost should be
a. Capitalized as leasehold improvement and depreciated over 15 years.
b. Capitalized as leasehold improvement and depreciated over 10 years.
c. Capitalized as leasehold improvement and expensed in the year in which the lease expires
d. Expensed as incurred

39. Which of the following factors should not be considered in estimating the useful life of
intangible asset?
a. Legal, regulatory or contractual provision
b. Expected action by competitors or potential competitors
c. Residual value
d. Typical product life cycle of the asset
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40. Installments receivable arising from sales of household appliances should be

classified as
a. Current assets
b. Noncurrent assets
c. Current assets; however, the amount not realizable within one year should be disclosed, if material
d. None of these

41. Net realizable value is

a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost to sell

42. The inventories of a service provider may simply be described as

a. Work in progress c. Unbilled receivables
b. Billed receivables d. Deferred costs

43. Credit balances in accounts receivable should be classified as

a. Current liability
b. Part of accounts payable
c. Noncurrent liability
d. Deduction from accounts receivable

44. Identifiable intangible assets include all of the following, except

a. Computer software c. Franchise
b. Trademark d. Goodwill

45. The following statements relate to cash. Which statement is true?

a. The term “cash equivalent” refers to demand credit instruments such as money order and bank
drafts.
b. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time.
c. Classification of a restricted cash balance as current or noncurrent should parallel the classification
of the related obligation for which the cash was restricted.
d. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”.

46. A research and development activity for which the cost should be expensed as
incurred is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototypes and models
c. Trouble shooting in connection with breakdowns during commercial production
d. Periodic design changes to existing products

47. The following expenditures should be expensed when incurred, except

a. Advance payment for delivery of goods or rendering of services
b. Relocation costs
c. Advertising and promotion costs
d. Organization and other start up costs
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48. Research is
I. Original and planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
II. Application of research finding or other knowledge to a plan or design for the production of new or
substantially improved material, device, product, process, system or service, prior to the
commencement of commercial production or use.

a. I only b. II only c. Both I and II d. Neither I nor II

49. Which one of the following is not part of cash and cash equivalents?
a. Three-month BSP treasury bill
b. Petty cash fund
c. Three-month money market instrument
d. Equity securities

50. The appropriate method of amortizing intangible asset is best described by which of
the following?
a. The straight line method, unless the pattern in which the asset’s economic benefits are consumed
by the enterprise can be determined reliably.
b. The double declining balance in all circumstances
c. Management can make a subjective amount of periodic amortization without regard to any
particular method
d. The straight line method in all circumstances

51. The best definition of useful life of an intangible asset is

a. The legal life of the intangible.
b. The period over which management believes the intangible asset will contribute to the revenue-
producing process.
c. Twenty years.
d. The period over which the cost of the asset can be deducted for income tax purposes.

52. In the case of long-term installments receivable (real estate installment sales) where
a major portion of the receivables will be collected beyond the normal operating cycle
a. The entire receivables are classified as current without disclosure of the amount not currently due
b. The entire receivables are classified as noncurrent
c. Only the portion currently due is classified as current and the balance as noncurrent
d. The entire receivables are classified as current with disclosure of the amount not currently due

53. In accordance with the new international accounting standard, which statement is
correct?
I. Intangible assets with finite life are amortized over their useful life.
II. Intangible assets with indefinite life are not amortized but tested for impairment at least annually.
a. I only b. II only c. Both I and II d. Neither I nor II

54. Which is incorrect concerning the recognition and measurement of an intangible

asset?
a. If an intangible asset is acquired separately, the cost comprises its purchase price, including import duties
and taxes and any directly attributable expenditure of preparing the asset for its intended use.
b. If an intangible asset is acquired in a business combination that is an acquisition, the cost is based on its fair
value at the date of acquisition.
c. If an intangible asset is acquired free of charge or by way of government grant, the cost is equal to its fair
value.
d. If payment for an intangible asset is deferred beyond normal credit terms, its cost is equal to the total
payments over the credit period.
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55. The payments of accounts payable made subsequent to the close of the
accounting period are recorded as if they were made at the end of the current
period.
a. Window dressing b. Kiting c. Lapping d. Imprest system

56. Which of the following statements is false?

a. Not all items included in cash constitute legal tender.
b. Cash may be offset against a liability if the deposit of funds in restricted account clearly constitutes
the legal discharge of the liability.
c. Legally restricted bank deposit held as compensating balances should be segregated from the
cash account and reported under a separate caption.
d. One-year BSP treasury bills with remaining maturity of three months on balance sheet date may
be shown as part of “cash and cash equivalents” provided this is disclosed.

57. Which statement is incorrect concerning internally generated intangible asset?

a. To assess whether an internally generated intangible asset meets the criteria for recognition, an
enterprise classifies the generation of the asset into a research phase and a development phase.
b. The cost of an internally generated asset comprises all directly attributable costs necessary to
create, produce and prepare the asset for its intended use.
c. Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance should not be recognized as intangible assets.
d. Internally generated goodwill may be recognized as an intangible asset.

58. Which of the following is not a method of computing goodwill?

a. Capitalize excess earnings.
b. Discount the excess earnings for a limited number of years.
c. Capitalize total average earnings and subtract the fair value of net assets.
d. All of these are methods of computing goodwill.

59. The proper accounting for the costs incurred in creating computer software products
is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expense when incurred until technological feasibility has been
established for the product.
c. Charge research and development expense only if the computer software has alternative future
use.
d. Capitalize all costs as incurred until a detailed program design or working model is created.

60. If a company constructs a laboratory building to be used as a research and

development facility, the cost of the laboratory building is matched against earnings
as
a. Research and development expense in the period of construction
b. Depreciation deducted as part of research and development cost
c. Depreciation or immediate writeoff depending on company policy
d. An expense at such time as productive research has been obtained from the facility