Quezon City University

Accountancy Department
Mock Midterm Departmental Examination
INTERMIDIATE ACCOUNTING I
SY 2019-2020

Instruction: Choose the letter that corresponds to the BEST answer. There is only one BEST answer for
each question.

Part 1: Theories (1% each)

1. When should the loss on an uncollectible account receivable be recorded as an expense for
accrual accounting purposes?
a) When it is determined that an account cannot be collected.
b) In the same period in which the sale on account occurs.
c) When the balance is past due for more than 3 months.
d) When a lawyer indicates that collection efforts would cost more than the account is worth.

2. How should unearned discounts, finance charges, and interest included in the face amount of
installment accounts receivable be presented in the balance sheet?
a) As a current liability.
b) As a deduction from the related installment accounts receivable.
c) Within the net amount of installment accounts receivable.
d) As an addition to the related installment accounts receivable.

3. Which group of items listed below should be included in the cash account?
a) Silver coins, postage stamps, demand deposits, personal checks.
b) Promissory notes, demand deposits, money orders, silver coins.
c) Money orders, postdated checks, personal checks, time deposits.
d) Silver coins, money orders, demand deposits, personal checks.

4. An entity purchased shares of another entity and classified the investment as trading securities.
The entity should report these trading securities at
a) Lower of cost or market with holding gains included in earnings only to the extent of
previously recognized holding losses.
b) Lower of cost or market with holding gains and losses included in earnings.
c) Fair value, with holding gains and losses included in earnings.
d) Fair value with holding gains included in earnings only to the extent of previously recognized
holding losses.

5. Which of the following statements is false?

a) Financial reporting should provide information which is relevant to investment, credit and
public policy decisions.
b) Generally speaking, GAAP are those accounting principles with substantial authoritative
support.
c) GAAP are established to ensure the relevancy of the general-purpose financial statements to
the widespread uses of the information by external decision makers.
d) Once established, GAAP should never be changed.

6. A firm signs a major contract in December to construct custom machinery for a client. No work is
begun the current year yet the footnotes to the firm’s financial statements discuss the nature and
peso amount of the contract. This is an example of____?
a) reliability c) historical cost
b) conservatism d) full disclosure

7. Orion corporation needed a new warehouse; a contractor quoted a P1,250,000 prices to

construct it. The corporation believed that it could build the warehouse for P1,215,000 and
decided to use company employees to construct the warehouse. The final construction cost
incurred by the corporation was P1,240,000 but the asset was recorded at P1,250,000. This is in
violation of the:
a) cost principle c) time period assumption
b) matching principle d) revenue principle

8. In recording the bank balance with the book cash balance, which of the following would not cause
the bank balance shown on the bank statement to be lower than the unadjusted book balance?
a) cash on hand at the company
b) NSF checks from a customer, as reported on the bank statement

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 c) interest credited to the account by the bank
d) deposits in transit

9. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a price
for the machine. As per the terms of the sale agreement, it is FOB (free on board) contract and
the title passes to the buyer when goods are loaded into the ship at the port. When should the
revenue be recognized by the entity?
a) When the customer orders the machine
b) When the deposit is received
c) When the machine is loaded at the port
d) When the machine has been received by the customer

10. A large manufacturer of cosmetics sells merchandise to a retailer, which in turn sells the goods to
the public at large through its chain of retail outlets. The retailer purchases merchandise from the
manufacturer under a consignment contract. When should revenue from the sale of merchandise
to the retailer be recognized by the manufacturer?
a) When goods are delivered to the retailer
b) When goods are sold by the retailer
c) It will depend on the terms of delivery of the merchandise (i.e., CIF cost, insurance, and
freight or FOB)
d) It will depend on the terms of payment (i.e., cash or credit)

11. Which of the following is true regarding the comparison of managerial and financial accounting?
a) Managerial accounting is generally more precise.
b) Managerial accounting need not follow generally accepted accounting principles while
financial accounting must follow them.
c) Managerial accounting has a future focus.
d) The emphasis on managerial accounting is relevance and the emphasis on financial
accounting is timeliness.

12. Which of the following statements is true with respect to inventory accounting under IFRS?
a) Biological assets (agricultural inventory) inventory accounting is exempt from lower of cost or
net realizable value valuation
b) Specific identification can be used for all types of inventory
c) LIFO is an acceptable method for inventory valuation
d) FIFO is not an acceptable method for inventory valuation

13. Which of the following statements regarding inventory accounting system is true?
a) A disadvantage of the perpetual inventory system is that inventory amounts used for interim
reporting purposes are estimated amounts.
b) A disadvantage of the periodic inventory system is that the cost of goods sold used for
financial reporting purposes includes both the cost of inventory sold and inventory shortages.
c) An advantage of the perpetual inventory system is that the record keeping is simple.
d) An advantage of the periodic system is that it provides a continuous record of inventory.

14. PFRS requires all of the following when classifying receivables, except
a) Indicate the receivables classified as current and noncurrent.
b) Disclose any receivables pledged as collateral.
c) Disclose all significant concentrations of credit risk arising from receivables.
d) All of the choices are required by PFRS when classifying receivables.

15. Which of the following items are true?

a) Certificates of deposit are usually classified as cash on the balance sheet.
b) Bank overdrafts are always offset against the cash account in the balance sheet.
c) Companies include postdated checks and petty cash funds as cash.
d) Short-term, highly liquid investments may be included with cash on the balance sheet.

16. Under which section of the balance sheet is "cash restricted for plant expansion" reported?
a) Current assets.
b) Non-current assets.
c) Current liabilities.
d) Stockholders' equity.

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17. What is the preferable presentation of accounts receivable from officers, employees, or affiliated
companies on a balance sheet?
a) As offsets to capital.
b) By means of footnotes only.
c) As assets but separately from other receivables.
d) As trade notes and accounts receivable if they otherwise qualify as current assets.

18. Which of the following items should not be included in the Cash caption on the balance sheet?
a) Coins and currency in the cash register
b) Checks from other parties presently in the cash register
c) Amounts on deposit in checking account at the bank
d) Postage stamps on hand

19. Which of the following concepts relates to using the allowance method in accounting for accounts
receivable?
a) Bad debt expense is an estimate that is based on historical and prospective information.
b) Bad debt expense is based on the actual amounts determined to be uncollectible.
c) Bad debt expense is an estimate that is based only on an analysis of the receivables aging.
d) Bad debt expense is management's determination of which accounts will be sent to the
attorney for collection.

20. When an entity holds between 20% and 50% of the outstanding ordinary shares of an
investee, which of the following statements applies?

a) The investor should always use the equity method to account for the investment.
b) The investor should use the equity method to account for the investment unless circumstances
indicate that it is unable to exercise significant influence over the investee.
c) The investor must use the fair value method unless it can clearly demonstrate the ability to
exercise significant influence over the investee.
d) The investor should always use the fair value method to account for the investment.

21. What is "recourse" as it relates to selling receivables?

a) The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to
pay.
b) The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to
pay
c) The obligation of the seller of the receivables to pay the purchaser in case the debtor returns
the product related to the sale.
d) The obligation of the purchaser of the receivables to pay the seller if all of the receivables are
collected.

22. Which of the following is true when accounts receivable are factored without recourse?
a) The transaction may be accounted for either as a secured borrowing or as a sale, depending
upon the substance of the transaction.
b) The receivables are used as collateral for a promissory note issued to the factor by the owner
of the receivables.
c) The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d) The financing cost (interest expense) should be recognized ratably over the collection period
of the receivables.

23. Which of the following is not true?

a) The imprest petty cash system in effect adheres to the rule of disbursement by check.
b) Entries are made to the Petty Cash account only to increase or decrease the size of the fund
or to adjust the balance if not replenished at year-end.
c) The Petty Cash account is debited when the fund is replenished.
d) All of these are not true.

24. Which of the following statements is incorrect regarding the classification of accounts and notes
receivable?
a) Segregation of the different types of receivables is required if they are material.
b) Disclose any loss contingencies that exist on the receivables.
c) Any discount or premium resulting from the determination of present value in notes
receivable transactions is an asset or liability respectively.
d) Valuation accounts should be appropriately offset against the proper receivable accounts.

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25. Of the following conditions, which is the only one that is not required if the transfer of receivables
with recourse is to be accounted for as a sale?
a) The transferor is obligated to make a genuine effort to identify those receiv¬ables that are
uncollectible.
b) The transferor surrenders control of the future economic benefits of the receivables.
c) The transferee cannot require the transferor to repurchase the receivables.
d) The transferor's obligation under the recourse provisions can be reasonably estimated.

26. Which of the following items are false?

i. A manufacturing concern would report the cost of units only partially processed as
inventory in the balance sheet.
ii. Both merchandising and manufacturing companies normally have multiple inventory
accounts.
iii. When using a perpetual inventory system, freight charges on goods purchased are
debited to Freight-In.
iv. If a supplier ships goods f.o.b. destination, title passes to the buyer when the supplier
delivers the goods to the common carrier.
v. If ending inventory is understated, then net income is understated.
vi. If both purchases and ending inventory are overstated by the same amount, net income
is not affected.

a) ii,iii,iv c) iii,iv,v
b) i,ii,iii d) i,v,vi

27. The accountant for the Pryor Sales Company is preparing the income statement for 2019 and the
balance sheet at December 31, 2019. Pryor uses the periodic inventory system. The January 1,
2020 merchandise inventory balance will appear
a) only as an asset on the balance sheet.
b) only in the cost of goods sold section of the income statement.
c) as a deduction in the cost of goods sold section of the income statement and as a current
asset on the balance sheet.
d) as an addition in the cost of goods sold section of the income statement and as a current
asset on the balance sheet.

28. Any investment may be accounted for at fair value through profit and loss when
a) It is traded in an active market
b) It is an equity instrument
c) It is a debt instrument
d) The instrument matures within 2 years.

29. In no case can "market" in the lower-of-cost-or-market rule be more than

a) estimated selling price in the ordinary course of business.
b) estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal.
c) estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal and an allowance for an approximately normal profit margin.
d) estimated selling price in the ordinary course of business less reasonably predictable costs of
completion and disposal, an allowance for an approximately normal profit margin, and an
adequate reserve for possible future losses.

30. When an investor uses the equity method to account for an investment in ordinary shares and the
fair value option of reporting financial assets is not elected after the date of acquisition. the
investment account of the investor would
a) Be increased by its share of the earnings of the investee but would not be affected by its
share of the losses of the investee.
b) Be increased by its share of the earnings of the investee and decreased by its share of the
losses of the investee.
c) Not be affected by its share of the earnings or losses of the investee.
d) Not be affected by its share of the earnings of the investee but would be decreased by its
share of the losses of the investee.

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Part II: Problem Solving (2% each)

31. Romina Company reported the checkbook balance on December 31, 2015 at P8,000,000. In
addition, the entity held the following items in the safe on that date:

 Check payable to the entity, dated January 2, 2016 in payment of

a sale, not included in December 31 check book balance 1,000,000
 Check payable to the entity, deposited December 15 and included
in December 31 checkbook balance, but returned by bank on
December 30 stamped “NSF”. The check was redeposited on
January 2, 2016 and cleared on January 5, 2016 3,000,000
 Check drawn on the entity’s account, dated and recorded on
December 31, 2015 but not mailed until January 15, 2016 2,500,000
 Coins and currencies on hand 800,000
 Three-month money market instruments 1,500,000

What is the correct amount of “cash” on December 31, 2015?

a) 7,500,000
b) 9,300,000
c) 8,300,000
d) 9,800,000

32. Kadenang Ginto Inc. reported the following accounts receivable on December 31, 2019:

Customer A 1,000,000
Customer B 1,500,000
Customer C 2,000,000
Customer D 2,500,000
All other accounts receivable not individually significant 3,500,000

Kadenang Ginto Inc. determined that Customer A receivable is totally impaired and Customer B
receivable is impaired by P700,000. The other receivables from Customers C and D are not
considered impaired. The entity determined that a composite rate of 10% is appropriate to
measure impairment on the remaining accounts receivable. What is the total impairment loss of
accounts receivable for 2019?
a) 2,500,000 c) 1,050,000
b) 2,050,000 d) 2,750,000

33. Cobra Inc. reported current receivables on December 31, 2019 which consisted of the following:

Trade accounts receivable 930,000

Allowance for uncollectible accounts 20,000
Claim against shipper for goods lost in transit in November 2019 30,000
Selling price of unsold goods sent by the entity on consignment at 130% of cost
and not included in the ending inventory 260,000
Security deposit on lease of warehouse used for storing inventories 300,000

What is the correct total of current net receivables on December 31, 2019?
a) 1,500,000
b) 1,200,000
c) 1,240,000
d) 940,000

34. On December 31, 2015, Ibarra Corp. received two P2,000,000 notes receivable from customers.
On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3%
and payable at maturity. The first note, made under customary trade terms, is due in nine months
and the second note is due in five years. The market interest rate for similar notes on December
31, 2015 was 8%. The PV of 1 at 8% due in nine months is .944, and the PV of 1 at 8% due in 5
years is .68. On December 31, 2015, what total carrying amount should be reported for the two
notes receivable?
a) 3,248,000
b) 3,494,400
c) 3,360,000
d) 3,564,000

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35. A bank granted a 10-year loan to a borrower in the amount of P1,500,000 with stated interest rate
of 6%. Payments are due monthly and are computed to be P16,650. The bank incurred P40,000
of direct loan origination cost and f,000 of indirect loan origination cost. In addition, the bank
charged the borrower a 4-point nonrefundable loan origination fee. What is the carrying amount of
the loan receivable to be reported initially by the bank?
a) 1,440,000
b) 1,480,000
c) 1,500,000
d) 1,520,000

36. Boruto Inc. reported inventory on December 31, 2019 at P6,000,000 based on a physical count at
cost and before any necessary year-end adjustments relating to the following:

• Included in the physical count were goods billed to a customer FOB shipping point on
December 30, 2019. These goods had a cost of P125,000 and were picked up by the
carrier on January 7, 2020.
• Goods shipped FOB shipping point on December 28, 2019 from a vendor to the entity
was received on January 4, 2020. The invoice cost was P300,000.

What amount should be reported as inventory on December 31, 2019?

a) 5,875,000
b) 6,000,000
c) 6,175,000
d) 6,300,000

37. On December 31, 2015, an entity provided the following information:

Cost Retail

Inventory, January 1 735,000 1,015,000

Purchases 4,165,000 5,775,000
Additional markup - 210,000

Sales for the year totaled P5,500,000. Markdown amounted to P100,000. Under the approximate
lower of average cost or NRV retail method, what is the inventory on December 31, 2015?
a) 1,050,000 c) 994,000
b) 1,400,000 d) 980,000

38. An entity budgeted the following sales.

June July August

Sales on account 1,800,000 1,840,000 1,900,000

Cash sales 180,000 200,000 260,000

All merchandise is marked up to sell at invoice cost plus 20%. Merchandise inventory at the
beginning of each month is 30% of that month's projected cost of goods sold. What is the amount
of anticipated purchases for July?
a) 1,632,000 c) 1,700,000
b) 2,076,000 d) 1,730,000

39. At the beginning of the current year, YouDoNote Company acquired 200,000 ordinary shares of
Universal Company for P900,000. At the time of purchase, Universal Company had outstanding
800,000 shares with carrying amount of P36,000,000.

The following events took place during the year.

 Universal Company reported net income of P1,800,000 for the current year.
 YouDoNote Company received from Universal Company a dividend of P0.75 per share.
 The market value of Universal Company share had temporarily declined to P40/share.

YouDoNote Company has elected irrevocably to measure the investment at fair value through
other comprehensive income.

What is the carrying amount of investment at year-end?

a) 9,000,000 b) 9,300,000
a. 8,000,000 c) 9,450,000

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Use the following information for questions 40 and 43

An entity began operations on January 1, 2013. From 2013 to 2015, the entity provided for doubtful
accounts based on 5% of annual credit sales. On January 1, 2016, the entity changed the method of
determining the allowance for doubtful accounts using an aging schedule.

In addition, the entity writes off all accounts receivable that are over 1 year old. The following information
relates to the years ended December 31, 2013, 2014, 2015 and 2016:

2016 2015 2014 2013

Credit sales 15,000,000 9,500,000 8,000,000 6,000,000

Collections excluding recovery 11,700,000 8,200,000 6,700,000 4,500,000
Accounts written off during year 200,000 120,000 80,000 None
Recovery of accounts written off 90,000 40,000 25,000 None

Days Account Outstanding Amount Probability of Collection

Less than 16 days 3,000,000 98%

Between 16 and 50 days 1,500,000 80%
Between 51 and 100 days 1,200,000 75%
Between 101 and 200 days 800,000 50%
Between 201 and 365 days 400,000 20%
Over 365 days – to be written off 100,000 0%

40. What was the allowance for doubtful accounts on January 1, 2016?
a) 1,175,000 c) 1,240,000
b) 1,040,000 d) 975,000

41. What amount should be reported as allowance for doubtful accounts on December 31, 2016?
a) 1,380,000 c) 2,420,000
b) 1,480,000 d) 1,060,000

42. What amount should be reported as doubtful accounts expense for 2016?
a) 550,000 c) 450,000
b) 750,000 d) 200,000

43. What is the net realizable value of accounts receivable on December 31,2016?
a) 6,900,000 c) 5,520,000
b) 7,000,000 d) 5,620,000

Use the following information for questions 44 and 46

An entity sells a new product. During a move to a new location, the inventory records for the product were
misplaced. The bookkeeper has been able to gather some data for the purchases and sales records. The
July purchases are as follows:
Units Unit cost Total cost

July 5 10,000 65 650,000

10 12,000 70 840,000
15 15,000 60 900,000
25 14,000 55 770,000

On July 31, 17,000 units were on hand. The sales for July amounted to P6,000,000 or 60,000 units at
P100 per unit. Roshe Company has always used a perpetual FIFO inventory costing system. Gross profit
on sales for July was P2,400,000.

44. What was the cost of the inventory on July 31?

a) 3,600,000 c) 770,000
b) 1,670,000 d) 950,000

45. What was the cost of inventory on July 1?

a) 1,390,000 c) 950,000
b) 2,400,000 d) 760,000

46. What is the number of units available on July 1?

a) 34,000 c) 10,000
b) 26,000 d) 9,000

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47. On January 1, 2019, Lynn Company borrows P2,000,000 from National Bank at 11% annual
interest. In addition, Lynn is required to keep a compensatory balance of P200,000 on deposit at
National Bank which will earn interest at 5%. The effective interest that Lynn pays on its
P2,000,000 loan is
a. 10.0%. c) 11.5%.
b) 11.0%. d) 11.6%.

48. Lawrence Company has cash in bank of P22,000, restricted cash in a separate account of
P4,000, and a bank overdraft in an account at another bank of P2,000. Lawrence should report
cash of
a) P20,000. c) P25,000.
b) P22,000. d) P26,000.

49. If a petty cash fund is established in the amount of P250, and contains P150 in cash and P95 in
receipts for disbursements when it is replenished, the journal entry to record replenishment
should include credits to the following accounts
a) Petty Cash, P75.
b) Petty Cash, P100.
c) Cash, P95; Cash Over and Short, P5.
d) Cash, P100

50. Equestrain Roads accepted a customer's P50,000 zero-interest-bearing six-month note payable
in a sales transaction. The product sold normally sells for P46,000. If the sale was made on June
30, how much interest revenue from this transaction would be recorded for the year ending
December 31?
a) P0. c) P4,000.
b) P2,000. d) P5,000.

51. Sun Inc. factors P3,000,000 of its accounts receivables without recourse for a finance charge of
5%. The finance company retains an amount equal to 10% of the accounts receivable for
possible adjustments. Sun estimates the fair value of the recourse liability at P115,000. What
would be recorded as a gain (loss) on the transfer of receivables?
a) Loss of P150,000. c) Loss of P565,000.
b) Gain of P265,000. d) Loss of P115,000.

52. Moon Inc. factors P2,000,000 of its accounts receivables with recourse for a finance charge of
4%. The finance company retains an amount equal to 8% of the accounts receivable for possible
adjustments. Moon estimates the fair value of the recourse liability at P200,000. What would be
the debit to Cash in the journal entry to record this transaction?
a) P2,000,000.
b) P1,920,000.
c) P1,760,000.
d) P1,560,000.

53. Saturn Inc assigns P3,000,000 of its accounts receivables as collateral for a P2 million loan with a
bank. The bank assesses a 3% finance fee and charges interest on the note at 6%. What would
be the journal entry to record this transaction?
a. Debit Cash for P1,940,000, debit Finance Charge for P60,000, and credit Notes payable for
P2,000,000.
b. Debit Cash for P1,940,000, debit Finance Charge for P60,000, and credit Accounts
Receivable for P2,000,000.
c. Debit Cash for P1,940,000, debit Finance Charge for P60,000, debit Due from Bank for
P1,000,000, and credit Accounts Receivable for P3,000,000.
d. Debit Cash for P1,820,000, debit Finance Charge for P180,000, and credit Notes Payable for
P2,000,000.

54. On January 1, 2019, Comforter Company sold equipment with a carrying amount of P800,000 to
Cold Company. As payment, Cold gave Comforter Company a P1,200,000 note. The note
bears an interest rate of 5% and is to be repaid in three annual installments of P400,000
(plus interest on the outstanding balance). The first payment was received on December 31,
2019. The market price of the equipment is not reliably determinable. The prevailing rate of
interest for notes of this type is 10%

The interest income to be recognized in 2020 is

a) P40,000 c) P69,587
b) P74,708 d) P109,735

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Use the following information for questions 55 through 56.
Transactions for the month of June were:

Purchases Sales
June 1 (balance) 1,200 @ P3.20 June 2 900 @ P5.50
3 3,300 @ 3.10 6 2,400 @ 5.50
7 1,800 @ 3.30 9 1,500 @ 5.50
15 2,700 @ 3.40 10 600 @ 6.00
22 750 @ 3.50 18 2,100 @ 6.00
25 300 @ 6.00

55. Assuming that perpetual inventory records are kept in dollars, the ending inventory on a FIFO
basis is
a) P6,165.
b) P6,240.
c) P6,435.
d) P6,705.

56. Assuming that perpetual inventory records are kept in units only, the ending inventory on an
average-cost basis, rounded to the nearest dollar, is
a) P6,144.
b) P6,357.
c) P6,435.
d) P6,483.

Use the following information for questions 57 through 58

RF Company had January 1 inventory of P150,000 when it adopted dollar-value LIFO. During the year,
purchases were P900,000 and sales were P1,500,000. December 31 inventory at year-end prices was
P215,040, and the price index was 112.

57. What is RF Company’s ending inventory?

a) P150,000.
b) P192,000.
c) P197,040.
d) P215,040.

58. What is RF Company’s gross profit?

a) P642,000.
b) P647,040.
c) P665,190.
d) P1,302,960.

59. Groh Co. recorded the following data pertaining to raw material X during January 2012:

Units
Date Received Cost Issued On Hand
1/1/12 Inventory P4.00 3,200
1/11/12 Issue 1,600 1,600
1/22/12 Purchase 4,000 P4.70 5,600

The moving-average unit cost of X inventory at January 31, 2012 is

a) P4.35.
b) P4.42.
c) P4.50.
d) P4.70.

60. On January 1, 2020 Julia Company purchased marketable equity securities to be held as
“trading” for P500,000. The entity also paid transaction cost amounting to P20,000. The securities
had a market value of P550,000 on December 31, 2020 and the transaction cost that would be
incurred on sale is estimated at P10,000. What amount of unrealized gain or loss on these
securities should be reported in the 2020 income statement?
a) 50,000 gain
b) 50,000 loss
c) 30,000 gain
d) 40,000 gain

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 61. During 2020, Poland Company purchased marketable equity securities as a trading investment.
For the year ended December 31, 2020, the entity recognized an unrealized loss of P230,000.
There were no security transactions during 2021. The entity provided the following information on
December 31, 2021:

Security Cost Market Value

A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000

In the 2021 income statement, what amount should be reported as unrealized gain or loss?
a) Unrealized gain of P100,000
b) Unrealized loss of P100,000
c) Unrealized loss of P130,000
d) Unrealized gain of P130,000

Use the following information for questions 62 through 65

2016
Jan. 1 – Christopher Company purchases 20,000 shares of Bay Company, P100 par, at P110 per share.

Mar. 1 – Bay Company issued rights to Christopher Company, each by permitting the purchase of ¼
share at par. No entry was made. The bid price of the share was 14- and there was no quoted price for
the rights.

Apr. 1 – Christopher Company paid for the new shares charging the payment to the investment account.
Since Christopher Company felt that it had been assessed by Bay Company, the dividends received from
Bay Company in 2016 and 2017 were credited to the investment account until the debit for the payment
of the new share was fully offset.

Dec. 31 – Christopher Company received annual dividend of P250,000 from Bay Company.

2017
Dec. 31 – Christopher Company received annual dividend of P250,000 from Bay Company.

2018
Jan. 31 - Christopher Company received 50% stock dividend from Bay Company. On the same date, the
shares received as stock dividend were sold at P160 per share and the proceeds were credited to
income.

Dec. 31 – The shares of Bay Company were split 2 for 1. Christopher Company found that each new
share was worth P5 more than the P110 paid for the original shares. Accordingly, Christopher Company
debited the investment account with the additional shares received at P110 per share and credited
income.

2019
Jun. 30 – Christopher Company sold ½ of the investment at P92 per share and credited the proceeds to
the investment account.

62. What is the balance of the investment on December 31, 2019 as it was kept by Christopher
Company?
a) 3,150,000 c) 2,200,000
b) 2,650,000 d) 4,950,000

63. Using the average method, what is the correct balance of the investment on December 31, 2019?
a) 2,200,000 c) 900,000
b) 1,800,000 d) 0

64. What is the net adjustment to retained earnings on December 31, 2019?
a) 3,650,000 debit c) 3,650,000 credit
b) 3,150,000 debit d) 3,150,000 credit

65. What amount of gain on sale of investment should be reported in 2019?

a) 1,400,000 c) 2,500,000
b) 1,100,000 d) 1,900,000

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