Theory of Accounts by Millan

Chapter 1
Overview of Accounting
Chapter 1: Theory of Accounts Reviewer
Definition of Accounting
1. Accounting has been given various definitions, which of the following is
not one of those definitions
a. Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that
is intended to be useful in making economic decisions.
b. Accounting is the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions and events
which are, in part of at least, of a financial character and interpreting
the results thereof.
c. Accounting is a systematic process of objectively obtaining and
evaluating evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between these
assertions and established criteria and communicating the results to
interested users.
d. Accounting is the process of identifying, measuring, and
communicating economic information to permit informed judgment
and decisions by users of information.
2. It is the first process used in accounting. It refers to the identification of

events as to whether they are recognized or not in the financial
statements.
a. Identifying b. Measuring c. Communicating d. Auditing
3. The following statements correctly refer to the accounting process.

I. Measuring is the accounting process of analyzing business activities as
to whether or not they will be recognized in the books.
II. Recognition refers to the process of including the effects of an event in
the totals of the statement of financial position or the statement of
profit or loss and other comprehensive income through memo entries.
III. Disclosure of events in the notes to financial statement without
including in the totals of the statement of financial position or
statement of profit or loss and other comprehensive income is not an
application of the recognition principle.
IV. An accountable event is an event that has an effect on the assets,
liabilities or equity of an entity and its effect can be measured reliably.
V. Sociological and psychological matters are within the scope of
accounting.
a. I, II, III, IV, V b. I, II, III, IV c. IV d. III, IV
Types of Events
4. These events involve changes in the economic resources or obligations of
entities involving other entities but do not involve transfers of resources
or obligations
a. External events c. External events other than transfers
b. Non-reciprocal transfers d. Internal events
5. Events involving an entity and an external party.

6. Events in which an entity transfers (or receives) economic resources to

(from) another entity without directly receiving (or giving) value in
exchange.
7. These events result to a sudden or unanticipated loss from fortuitous

events.
a. Internal events c. External events other than transfers
b. Non-reciprocal transfers d. Casualty
8. Which of the following statements is true?

I. Loss from theft should be classified as a nonreciprocal transfer
II. Internal events are changes in economic resources by actions of other
entities that do not involve transfers of enterprise resources and
obligations
III. Nonreciprocal transfers involve the transfer of resources in only one
direction, either from an entity to other entities or from other entities
to the entity.
IV. Internal events are sudden, substantial, unanticipated reductions in
enterprise resources not caused by other entities
V. Fire, earthquake and flood are examples of accountable events
classified as internal events.
a. I, II, III, V b. I, III, V c. II, III, IV, V d. I, III, IV, V
9. All of the following are events considered as exchange or reciprocal

transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription on the entity’s own equity instrument
d. exchange of a note payable for an account payable
e. borrowing of money from a bank
10. All of the following are events considered as nonreciprocal transfer,

except
a. declaration of cash dividends c. payment of accounts payable
b. declaration of stock dividends d. imposition of fines
11. All of the following are events considered as external events other than
transfers, except
a. obsolescence c. imposition of fines
b. inflation d. vandalism
12. All of the following are events considered as internal events, except
a. Transfer of goods from work-in-process to finished goods inventory
b. flood, earthquake, fire and other “Acts of God”
c. transformation of biological assets from immature to mature
d. vandalism committed by the entity’s employees
13. Which of the following events is considered an internal event?

a. sale of inventory on account
b. provision of capital by owners
c. borrowing of money
d. conversion of raw materials into finished goods
14. Which of the following events is considered an external event?
a. production c. payment of taxes
b. casualty loss d. growth of biological assets
15. Which of the following events is considered an internal event?

a. theft c. vandalism
b. contributions by owners d. degeneration of biological assets
16. Which of the following correctly relates to accountable events?

I. An obsolete asset which has no use was received in exchange of an
existing asset. This transaction may be classified as an exchange.
II. An entity exchanges a non-cash asset for another non-cash asset in an
exchange transaction with commercial substance. This is a reciprocal
transfer.
III. An entity issues its shares of stocks in exchange for a non-cash asset.
This is a reciprocal transfer.
a. I b. II c. II, III d. I, II, III
17. An example of income derived from a nonreciprocal transfer is

a. compensation received as damages in a successful lawsuit
b. appreciation of property
c. land acquired from a stockholder as donation
d. settlement of a liability at less than its book value
(RPCPA)
Measuring
18. Asset measurements in conventional financial statements
a. are confined to historical cost
b. are confined to historical cost and current cost
c. reflect several financial attributes
d. do not reflect output values
(RPCPA)
19. Financial statements are said to be a mixture of fact and opinion.

Which of the following items is factual?
a. cost of goods sold c. discount on capital stock
b. retained earnings d. patent amortization expense
(Adapted)
20. On December 31, 200A, Annod Co. decided to end its operations and
dispose its assets within three months. At December 31, 200A, the
carrying amount of an investment property was less than both its fair
value and net realizable value. The fair value is greater than the net
realizable value. What is the appropriate measurement basis for the
investment property in Annod’s December 31, 200A statement of financial
position?
a. Historical cost c. Net realizable value
b. Fair value d. Current replacement cost
Communicating
21. These are the principal means through which an entity communicates
its financial information to those outside it.
a. managerial reports c. segment reports
b. financial statements d. directors’ statements
22. The analytical phase of accounting which significantly portrays the
liquidity, solvency, profitability of a business
a. interpreting c. summarizing
b. recording d. classification
(RPCPA)
Basic purpose
23. The basic purpose of accounting is
a. to provide information useful in making economic decisions
b. to provide information useful only for investors
c. to provide information regarding the economic resources controlled by
an entity
d. to provide business owners, politicians, and other government officials
an opportunity to evade taxes
24. One objective of financial reporting is to provide information useful in

assessing the amounts, timing, and uncertainty of future cash flows. In
regards to this objective, which of the following is (are) correct?
I. The emphasis on “assessing cash flow prospects” means that the cash
basis is preferred over the accrual basis of accounting.
II. Information based on accrual accounting generally better indicates an
entity’s present and continuing ability to generate favorable cash flows
than does information limited to the financial effects of cash receipts
and payments.
a. I only b. II only c. I and II d. neither I nor II
25. The primary objective of financial reporting is to provide information:

a. About a firm's financing and investing activities
b. About a firm's economic resources and obligations
c. About a firm's products and services
d. Useful in predicting cash flows
(Adapted)
26. Financial accounting applies to which of the following:

a. Businesses c. Governments
b. Non-profit organizations d. All of these
(Adapted)
27. Stewardship reporting focuses on:

a. Showing investors what sales revenues were
b. Showing the financial statement reader just how the resources
entrusted to the management's care were managed
c. Showing employees how high their raises will be
d. Showing the financial statement reader how many shop stewards are
employed
(AICPA)
28. The function of measuring and reporting information to absentee

investors is called the:
a. Accounting function c. Auditing function
b. Stewardship function d. Management function
(AICPA)
29. The following relate to financial reporting. Choose the correct

statement(s).
I. Since financial statements are historical, they are of little use in
making decisions about the future.
II. Financial accounting is based on the presumption that all statement
users need the same information.
III. Financial accounting is expressly designed to measure directly the
value of a business enterprise.
a. I, III b. II, III c. II only d. None
(RPCPA)
30. Financial reporting should provide all of the following information,

except
a. Information that is useful to present and potential investors and
creditors and other users in making rational investment, credit, and
similar decisions.
b. Information that helps present and potential investors, creditors, and
other users assess the amounts, timing, and uncertainty of prospective
cash receipts from dividends or interest and the proceeds from the
sale, redemption, or maturity of securities or loans.
c. Information that is comprehensible only to accountants and auditors
who have reasonable understanding of business and economic
activities and are willing to study the information with reasonable
diligence.
d. Information that clearly portrays the economic resources of an
enterprise, the claims to those resources and the effects of
transactions, events, and circumstances that change its resources and
claims to those resources.
31. Apart from the monetary impact, factors of decision making include:
a. personal taste c. environmental factors
b. social factors d. all of these
(Adapted)
32. For the purpose of decision making:

a. accounting information provides information about future events
b. accounting information provides information about the outcomes of
past decisions
c. the future is used as a guide to past estimates
d. the accountant never becomes involved in the budgeting process.
(Adapted)
Economic entities and activities

33. A business that operates to support a cause or interest is known as a
a. not-for-profit organization c. career goal
b. sports franchise d. private entity

34. The most common form of business organization is a
a. corporation c. sole proprietorship
b. partnership d. cell phone stand
(Adapted)
35. Which of the following statements are correct?

I. The economic activities of a business enterprise increase or decrease
its assets and liabilities but never its equity.
II. An internal event involves a transfer or exchange between two or more
entities.
III. Exchange is an economic activity which involves trading resources and
obligations for other resources or obligations.
IV. Income recognition is a basic economic activity which involves the
process of allocating rights to the use of outputs among individuals
and groups in society.
V. An event generally is the source or cause of changes in assets,
liabilities, and equity.
VI. Investment is the process of using current inputs to increase the stock
of resources available for future output as opposed to immediately
consumable output.
a. III, IV, V b. I, II, III, V, VI c. III, V, VI d. II, III, VI
(RPCPA)
36. Which of the following statements correctly refer to the basic economic
activities?
I. Production is the process of converting economic resources into
outputs of goods and services that are intended to have greater utility
than the required inputs.
II. Exchange is the process of trading resources or obligations for other
resources or obligations.
III. Consumption is the process of allocating rights to the use of output
among individuals and groups in society.
IV. Income distribution is the process of using the final output of the
production process.
V. Savings is the process of using current inputs to increase the stock of
resources available for output as opposed to immediately consumable
output.
VI. Investment is the process by which individuals and groups set aside
rights to present consumption in exchange for rights to future
consumption.
a. I, II c. I, II, V, VI
b. I, II, III, IV d. I, II, III, IV, V, VI
(RPCPA)
37. Whether a business is successful and thrives is determined by

a. markets. b. free enterprise. c. competition d. all of these
(AICPA)
38. An effective capital allocation process

a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.
(AICPA)
39. A business that operates to earn money for its owners is called a(n)
a. economic entity c. professional organization
b. for-profit business d. owner financed business
(Adapted)
40. A free enterprise system allows businesses to

a. have their government choose their products
b. produce the goods and services they choose
c. buy goods at a discount
d. operate at a profit
(Adapted)
41. One of the disadvantages of a sole proprietorship is
a. all the profits go to the owner c. the owner has all the risks
b. there are no lunch breaks d. there are few regulations to
follow
(Adapted)
42. A corporation is a business organization that is recognized by law to

a. pay no tax c. have an active social life
b. have a life of its own d. have at least 3 owners
(Adapted)
43. Those who transform ideas for products or services into real-world
businesses are known as
a. profit takers b. accountants c. entrepreneurs d. organizers
(Adapted)
44. A business owned by two or more people is called

a. a corporation c. a partnership
b. looking for trouble d. venture capital
(Adapted)
45. A merchandising business

a. buys raw materials and transforms them into finished products
b. buys finished products and resells them
c. provides a service for a fee
d. all of the above
(Adapted)
46. Economic resources are the scarce means available for carrying on
economic activities. The economic resources of a business enterprises
are:
a. productive resources b. products c. money d. all of these
(RPCPA)
47. Which of the following is not among the economic resources of a

business enterprise?
a. money
b. products or output of the enterprise
c. obligations to pay money
d. ownership interest in other enterprises
(RPCPA)
48. It does not truly describe “economic value” as an element of economic

resources
a. value in exchange c. utility
b. over supply of resources d. scarcity
(RPCPA)
Accounting information
49. Which of the following statements is correct?
I. Accounting provides qualitative information, financial information, and
quantitative information.
II. Qualitative information is found in the notes to the financial
statements only.
III. Accounting is considered an art because it is supported by an
organized body of knowledge
IV. Accounting is considered a science because it involves the exercise of
skill and judgment.
V. Measurement is the process of assigning numbers to objects such
inventories or plant assets and to events such as purchases or sales.
VI. All quantitative information are also financial in nature.
VII. The accounting process of assigning peso amounts or numbers to
relevant objects and events is known as Identification.
a. I, V b. I, II, VI, V c. I, II, III, IV, V d. II, VI, V
(RPCPA)
50. Which of the following statements is incorrect?

I. The information contained in the financial statements is obtained
exclusively from the firm’s accounting records.
II. Financial accounting is a science rather than an art while management
accounting is an art rather than a science.
III. Management decisions are oriented to the future whereas the
decisions of external users are oriented to the past.
IV. Financial accounting is a branch of accounting which deals primarily
with the common needs of users while management accounting is a
branch of accounting which deals primarily with the specific needs of
users.
V. Quantitative information is always more useful than non-quantitative
information for the purpose of making economic decisions.
VI. Financial statements are only one source of information needed by
users to make rational economic decisions.
VII. Financial statements have the same basic purpose as financial
accounting.
VIII. Financial statements are the only source of information needed by
users to make rational economic decisions.
a. IV, VII, VIII b. I, II, III, V, VIII c. IV, VI, VII d. I, II, III, V, VI, VII
(RPCPA)
51. The manner in which the accounting records are organized and
employed within a business is referred to as
a. Accounting system c. Voucher system
b. Business document d. Special journals
(RPCPA)
52. Accounting is often called the "language of business" because

a. it is easy to understand
b. it is fundamental to the communication of financial information
c. all business owners have a good understanding of accounting
principles
d. accountants in many companies share financial information
(RPCPA)
53. Accounting as an art involves the considerable use of judgment.

Accountants should exercise creative and critical thinking in solving
accounting problems. In solving accounting problems, this involves the
use of imagination and insight by finding new relationships (ideas) among
items of information. It is most important in identifying alternative
solutions.
a. Creative thinking c. Professional
Skepticism
b. Critical thinking d. Wishful thinking
54. Creative skills and judgment is usually exercised in problem solving.

State the correct order of the following steps in problem solving.
I. Selecting a solution from among the alternatives
II. Identifying alternative solutions
III. Recognizing a problem
IV. Implementing the solution
V. Evaluating the alternatives
a. III, II, IV, V, I b. I, II, III, V, IV c. III, II, V, I, IV d. I, II, III, VI, V
(RPCPA)
55. Critical thinking is most important in which of the following problem-

solving steps?
a. Recognizing a problem
b. Identifying alternative solutions
c. Evaluating the alternatives
d. Selecting a solution from among the alternatives
(Adapted)
Basic Accounting Concepts

56. Which of the following statements is incorrect regarding accounting
concepts?
a. Under the Accrual Basis of accounting, revenues are recognized when
earned and expenses are recognized when incurred, not when cash is
received and disbursed.
b. Under the Going concern concept, the business entity is assumed to
carry on its operations for an indefinite period of time.
c. Under the Business entity/ Separate entity/ Entity/ Accounting entity
Concept, the business is treated separately from its owners.
d. Under the Time Period/ Periodicity/ Accounting Period concept, the life
of the business is divided into series of reporting periods.
e. Under the Cost-benefit concept, the cost of processing and
communicating information should exceed the benefits derived from it.
57. Which of the following statements is incorrect regarding accounting

concepts?
a. Under the Materiality concept, items deemed material and affect
decision making should be separately disclosed.
b. Underlying assumptions are those that are mentioned in the
Conceptual Framework; Implicit assumptions are those that are not
mentioned in the Conceptual Framework; Pervasive concepts are those
that affect virtually all financial statement elements and all aspects of
accounting.
c. Under the Cost/ Historical cost concept, the value of an asset is to be
determined on the basis of acquisition cost.
d. The Concept of Articulation states that all the components of a
complete set of financial statement are interrelated.
e. Under the Matching concept, revenues are matched with expenses in
order to properly determine the profit for a period.
58. Accrual accounting techniques are used to:

a. assign revenues and expenses to the appropriate accounting period.
b. record the anticipated effects of actions that may occur at a future
date.
c. report the results of actions whose monetary effects are difficult to
estimate.
d. allocate nonoperating revenues and expenses to the appropriate
business unit.
(Adapted)
59. Accrual accounting is used because

a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the
cash basis.
c. it recognizes revenues when cash is received and expenses when cash
is paid.
d. none of the above.
(Adapted)
60. The going concern assumption is also called

a. Periodicity b. Entity c. Business continuity d. Entity
61. The valuation of an assurance to receive cash in the future at present

value on a business entity’s financial statements is well-founded because
of the accounting concept of:
a. Entity b. Going concern c. Materiality d. Neutrality
(RPCPA)
62. Business entity produces financial statements at arbitrary points in

time in accordance with which basic accounting concept?
a. objectivity b. periodicity c. conservatism d. matching
(RPCPA)
63. Treating partners’ salaries as an expense rather than as a means of

allocating partnership profits is an application of what theory?
a. proprietary theory c. residual equity theory
b. entity theory d. funds theory
(RPCPA)
64. Mr. Van owns a butcher shop, a restaurant, and a catering business.
Separate financial statements are prepared for each business
independent of the other businesses. What accounting principle or
assumption is being applied in this situation?
a. Time period assumption c. Full-disclosure principle
b. Separate entity assumption d. Unit-of-measure assumption
(CGA)
65. Which of the following correctly relate to the Monetary/ Stable

monetary/ Monetary Unit concept?
I. Assets, liabilities, equity, revenues and expenses should be stated in
terms of a unit of measure which is the peso in the Philippines
II. The purchasing power of the peso is stable or constant and that its
instability is insignificant and therefore ignored.
a. I b. II c. I and II d. None
66. An accounting (financial reporting) period may be

a. One month b. One quarter c. One year d. a, b or c
67. Which of the following statements best reflects the accounting
assumption of periodicity or time period?
I. A fiscal year begins in any month and ends in any month but covers a
period of 12 months
II. A calendar year begins on any month and ends on any month but
covers a period of 12 months
III. Technically, an accounting year is synonymous with an accounting
period.
IV. Accounting periods are usually equal in length.
a. I, II, III, IV b. I, IV c. I, III, IV d. II, III, IV
68. Which of the following best reflect(s) the reason(s) why companies
select accounting periods other than a calendar year?
a. to avoid closing books during peak sales period
b. to close the books at a time when inventories and business activity are
lowest
c. to conform to auditors’ request in order to reduce audit efforts and
cost of counting inventories
d. a and b
69. Most listed corporations in the Philippines have which type of

accounting year?
a. fiscal year b. calendar year c. quarterly d. indeterminate
70. For a fiscal year ending April 30, 20x2, the period covered by the
statement of profit or loss and other comprehensive income is
a. April 1, 20x2 to April 30, 20x2 c. May 1, 20x1 to April 30, 20x2
b. April 1, 20x1 to April 30, 20x2 d. April 30, 20x1 to April 30, 20x2
71. An entity uses calendar year as its accounting period. The statement of
financial position prepared on December 31, 20x2 covers the period
a. December 31, 20x1 to December 31, 20x2
b. January 1, 20x1 to December 31, 20x2
c. January 1, 20x2 to December 31, 20x2
d. From business’ inception up to December 31, 20x2
72. Which of the following statements is incorrect regarding the basic

accounting concepts?
a. Under the Consistency concept, the financial statements should be
prepared on the basis of accounting principles which are followed
consistently.
b. Under the Entity theory, the accounting objective is geared toward
proper income determination. Proper matching of cost against revenue
is the ultimate end. Entity theory emphasizes the income statement.
This is explained by the equation Assets = Liabilities + Capital.
c. Under the Proprietary theory the accounting objective is directed
toward proper valuation of assets. This theory emphasizes the
importance of the balance sheet. It is exemplified by the equation
Assets – Liabilities = Capital.
d. Under the Fund theory, the accounting objective is neither proper
income determination nor proper valuation of assets but the custody
and administration of funds. The objective is directed toward cash
flows exemplified by the formula “cash inflows minus cash outflows
equals fund.” Government accounting and fiduciary accounting are
examples of the application of this concept.
e. Under the Residual equity theory, the accounting objective is proper
valuation of assets. This is applicable when there are two classes of
stockholders, common and preferred. Thus, the equation is Assets –
Liabilities + Preference Shareholders’ Equity = Ordinary Shareholders’
Equity.
73. Which of the following statements correctly relate to the basic features
of financial accounting?
I. The going concern assumption is necessary for asset valuation at
historical cost to have meaning.
II. Inexact information always makes financial statements useless for
decision making.
III. Under the residual equity theory, preference share equity is deducted
from total equity to arrive at ordinary share equity.
IV. Materiality is always a quantitative as opposed to a qualitative
concept.
a. I, III, IV b. I, II, IV c. I, III d. I, II
74. The Full Disclosure Principle recognizes that the nature and amount of
information included in financial reports reflects a series of judgmental
trade-offs. The trade-offs strive for
I. Sufficient detail to disclose matters that make a difference to users
II. Sufficient condensation to make the information understandable,
keeping in mind costs of preparing and using it
a. I b. II c. I and II d. None
75. A concept that states that all the components of a complete set of
financial statement are interrelated
a. entity c. concept of articulation
b. accounting process d. principle of fair presentation
76. Which of the following statements are correctly stated?

I. Under the entity theory, the major accounting effort is accounting
effort is directed toward proper valuation of assets rather income
determination. What is more important is the valuation of assets
because owners are interested in the real worth of their investment.
This is expressed in accounting equation “assets - liabilities = capital”.
II. One of the basic features of financial accounting is the direct
measurement of economic resources and obligations and changes in
them in terms of money and sociological and psychological impact.
III. The accounting process consists of two inter-related parts – the
recording phase and the summarizing phase. The preparation of a trial
balance is a step under the recording phase.
IV. Financial accounting measurements are primarily based on prices at
which economic resources and obligations are exchanged.
V. Owners’ equity is the excess of an enterprise’s assets over its
liabilities.
VI. The financial position and results of operations of an entity are not
fundamentally related.
a. I, IV, V b. IV, V c. I, III, IV, V d. III, IV, V, VI
77. Application of the full disclosure principle

a. Is theoretically desirable but not practical because the costs of
complete disclosure exceed the benefits.
b. Is violated when important financial information is buried in the notes
to the financial statements.
c. Is demonstrated by providing additional information whenever this
information is deemed relevant to the understanding of the financial
statements.
d. Requires that the financial statements be consistent and comparable.
78. While making a delivery, the driver of Fastrac Courier collided with
another vehicle causing both property damage and personal injury. The
party sued Fastrac for damages which could exceed Fastrac's insurance
coverage. Existence of the lawsuit was reported in the notes to Fastrac's
financial statements. What accounting principle, assumption or constraint
is being applied in this situation?
a. Full-disclosure principle c. Matching principle
b. Conservatism constraint d. Unit-of-measure assumption
(CGA)
79. What does the full disclosure principle require?

a. All relevant information to be disclosed in the financial statements
b. All relevant information to be disclosed in the financial statements and
the notes accompanying the financial statements
c. Sufficient information to be disclosed so that the financial statements
are not misleading
d. Sufficient information to be disclosed so that the financial statements
may be used for investment and credit granting decisions
(CGA)
80. Which accounting principle charges low-cost capital items such as

waste baskets directly to an expense?
a. historical cost b. materiality c. expense recognition d. matching
(CGA)
81. The process of converting non-cash resources and rights into cash or
equivalent claims to cash is called
a. Realization b. Allocation c. Recognition d. Disposition
(RPCPA)
82. The body of rules that dictates that the entire profit must be
recognized at the moment and in the period of sale is called:
a. cost convention c. realization convention
b. going concern convent d. conservatism
(RPCPA)
83. Which statements correctly refer to the basic principles used in

accounting?
a. The personal assets of the owner of a company will not appear on the
company's balance sheet because of the principle of conservatism.
b. The growing concern principle/guideline is associated with the
assumption that the company will continue on long enough to carry out
its objectives.
c. An instance of application of the conservatism principle is when a very
large corporation's financial statements have the peso amounts
rounded to the nearest P1,000.
d. In applying the matching principle, income is not recognized if the
related expense cannot be determined reliably.
84. Which principle/guideline requires a company's balance sheet to report
its land at the amount the company paid to acquire the land, even if the
land could be sold today at a significantly higher amount?
a. Conservatism b. Economic entity c. Monetary unit d. Cost
(RPCPA)
85. During the lifetime of an entity accountants produce financial

statements at arbitrary points in time in accordance with which basic
accounting concept?
a. Objectivity b. Periodicity c. Conservatism d. Matching
(RPCPA)
86. Which principle/guideline allows a company to ignore the change in the

purchasing power of the peso over time?
a. Cost b. Economic entity c. Monetary unit d. Timeliness
87. Which principle/guideline requires the company's financial statements

to have footnotes containing information that is important to users of the
financial statements?
a. Conservatism b. Economic entity c. Full disclosure d. Neutrality
(RPCPA)
88. Public utilities' balance sheets list the plant assets before the current
assets. This is acceptable under which accounting principle/guideline?
a. Conservatism c. Industry practices
b. Cost d. This is not acceptable
(RPCPA)
89. A large company purchases a P2,000 digital camera and expenses it

immediately instead of recording it as an asset and depreciating it over its
useful life. This practice may be acceptable because of which
principle/guideline?
a. Cost b. Matching c. Materialityd. Conservatism
90. Uncertainty and risk inherent in business situations should be

adequately considered in financial reporting. This statement is an
example of the concept of
a. disclosure b. conservatism c. completeness d. neutrality
(RPCPA)
91. Revenue generally may be recognized when:

(Item #1) The earning process is complete; (Item #2) An exchange has
taken place
a. yes, no b. no, yes c. no, no d. yes, yes
(RPCPA)
92. Which of the following statements is correctly stated?

I. Effects of the events on the financial position of the enterprise are
measured and represented by money amounts.
II. The consistency principles refer to the use of original historical cost in
the matching process.
III. An accrued expense can best be described as an amount not paid but
currently matched with earnings.
IV. Generally, revenues should be recognized at a point when an order for
a definite amount of merchandise has been received for shipment.
V. Accounting process is governed by generally accepted principles which
reflect the objectives and the basic features of financial accounting.
a. I, III, V b. I, II, III, IV, V c. I, III, IV, V d. I, II, III, V
(RPCPA)
93. Under what principle when revenue is generally recognized and when
the earning process is virtually complete and an exchange has taken
place
a. consistency b. maturing c. realization d. conservatism
(RPCPA)
94. The accounting objective or theory that is directed towards proper

valuation of assets
a. Entity theory c. Funds theory
b. Residual equity theory d. Proprietary theory
(RPCPA)
95. A theory in financial accounting which is exemplified in the equation

“Assets - Liabilities = Capital.”
a. proprietary theory c. residual equity theory
b. entity theory d. fund theory
(RPCPA)
96. The following statements relate to the standard of adequate

disclosure:
I. In complying with the standard of adequate disclosure, accountants
are guided by the doctrine that more information is always better than
less.
II. Financial accounting information that meets the qualitative objectives
of financial accounting also meets the reporting standard of adequate
disclosure.
III. Adequate disclosure is concerned not only with the kind of information
contained in financial statements but also with the manner in which
that information is presented.
IV. The disclosure standard calls for financial reporting of any financial
facts significant enough to influence the judgment of an informed
reader of the statements.
State whether the foregoing statements are false:

a. all of the statements are false c. only two statements are false
b. only one statement is false d. three statements are false
(RPCPA)
97. It is the exercise of care and caution in dealing with uncertainties in

measurement so as not to overstate assets and income and not
understate liabilities and expenses.
a. Completeness b. Prudence c. Faithful representation d. Neutrality
98. The general tendency toward early recognition of unfavorable events

and minimization of the amount of net assets and net income is called:
a. conservatism b. consistency c. neutrality d. verifiability
99. When uncertainty exists, the convention of conservatism uses

estimates of a conservative nature in an attempt to ensure which of the
following?
a. Assets, revenues, liabilities, and expenses are not overstated
b. Assets, revenues, liabilities, and expenses are not understated
c. Assets and revenues are not understated; liabilities and expenses are
not overstated
d. Assets and revenues are not overstated; liabilities and expenses are
not understated
(CGA)
Branches of Accounting
100. The process of identifying, measuring, analyzing, and communicating
financial information needed by management to plan, evaluate, and
control an organization’s operations is called
a. financial accounting c. tax accounting
b. managerial accounting d. auditing
(AICPA)
101. A city taxes merchants for various central district improvements.

Which of the following accounting methods assist(s) in assuring that these
revenues are expended legally?
(Item #1) Fund accounting; (Item #2) Budgetary accounting
a. Yes, No b. No, Yes c. No, No d. Yes, Yes
(AICPA)
102. Which of the following correctly refer to the various branches of

accounting?
I. Government accounting deals with accounting for the national
government and its instrumentalities, focusing attention on the
custody of public funds and the purpose or purposes to which such
funds are committed.
II. Institutional accounting deals with handling of accounts managed by a
person entrusted with the custody and management of property for
the benefit of another.
III. Estate accounting deals with the handling of accounts for fiduciaries
who wind up the affairs of a deceased person.
IV. Social responsibility accounting is the process of measuring and
disclosing the performance of firm in terms of community involvement
and related criteria.
V. Accounting Systems deals with the installation of accounting
procedures for the accumulation of financial data; includes designing
of accounting forms to be used in data gathering.
VI. Cost accounting is the systematic recording and analysis of the costs
of material, labor, and overhead incident to production.
VII. Fiduciary accounting is the accounting for not-for-profit entities other
than the government.
a. I, II, III, IV, V, VI, VII c. I, III, IV, V, VI, VII
b. I, II, IV, V, VI, VII d. I, III, IV, V, VI
103. Which of the following is not a characteristic of management

accounting?
a. The level of detail is greater than financial accounting.
b. It must be in compliance with the IFRSs.
c. There is one primary user group.
d. It deals primarily with segments of an organization.
(AICPA)
104. Which of the following statements correctly refer to financial reporting

and accounting?
I. Financial accounting is the process of identifying, measuring,
analyzing, and communicating financial information needed by
management to plan, evaluate, and control an organization's
operations.
II. Financial statements are the principal means through which financial
information is communicated to those inside an enterprise.
III. Users of the financial information provided by an entity use that
information to make capital allocation decisions.
IV. While objectives for financial reporting exist on an informal basis, no
formal objectives have been adopted.
V. Financial reports in the early 21st century did not provide any
information about a company’s soft assets.
a. I, II, III, IV, V b. II, III, IV, V c. III, IV, V d. III
105. General-purpose financial statements are the products of

a. financial accounting
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
(Adapted)
106. The information provided by financial reporting pertains to

a. individual business enterprises, rather than to industries or an
economy as a whole or to members of society as consumers.
b. business industries, rather than to individual enterprises or an
economy as a whole or to members of society as consumers.
c. individual business enterprises, industries, and an economy as a
whole, rather than to members of society as consumers.
d. an economy as a whole and to members of society as consumers,
rather than to individual enterprises or industries.
(AICPA)
107. Financial statements in the early 2000s provide information related to

a. non-financial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.
(Adapted)
108. Which of the following statements is not an objective of financial

reporting?
a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those
resources, and changes to them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
(Adapted)
109. One objective of financial reporting is to provide

a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the
enterprise.
c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.
(Adapted)
110. Which of the following is true regarding the comparison of managerial
to financial accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a
future focus.
c. The emphasis on managerial accounting is relevance and the emphasis
on financial accounting is timeliness.
d. Managerial accounting need not follow generally accepted accounting
principles (GAAP) while financial accounting must follow them.
(AICPA)
111. Which of the following statements correctly relates to financial

reporting?
a. Accounting standards are now less likely to require the recording or
disclosure of fair value information due to its inherent subjectivity.
b. One weakness of accrual accounting is that it does not provide a good
indication of the enterprise's present and continuing ability to generate
favorable cash flows.
c. Some generally accepted accounting principles have simply been
accepted as appropriate because of their universal application rather
than due to the action of an authoritative accounting rule-making
body.
d. Accounting standards are a product of careful logic or empirical
findings and are not influenced by political action.
(Adapted)
112. Which of the following incorrectly relates to financial reporting?

a. An effective process of capital allocation promotes productivity and
provides an efficient market for buying and selling securities and
obtaining and granting credit.
b. Users of financial accounting statements have both coinciding and
conflicting needs for information of various types.
c. The expectations gap is caused by what the public thinks accountants
should be doing and what accountants think they can do.
d. Ethical issues in financial accounting in the Philippines are governed by
the FRSC.
(Adapted)
113. Electronic data processing is

a. act of preparing a program defined as the complete plan for the
solution of a problem
b. system of processing data performed by mechanical equipment such
as general office machines to increase speed and accuracy of data
processing operations
c. the systematization of processing operations in a manner that will
provide a rapid and uninterrupted flow of all information needed in the
conduct of the business
d. a system of accumulating, assembling and recasting transactions by
the use of electronic devices with the object of recording, analyzing
and reporting their output data
(RPCPA)
114. The end product of the financial accounting process

a. financial statement b. audit report c. ledger d. T-account
(RPCPA)
a. Accounting and bookkeeping are synonyms.
b. The process of providing financial information to external decision
makers is referred to as managerial accounting.
c. Financial statements generally include all the balance sheet, statement
of profit or loss and other comprehensive income, statement of
changes in equity, statement of cash flows, notes, and the corporate
income tax return.
d. Financial accounting applies to both business and non-business
organizations.
Practice of Accounting
116. The law that regulates the practice of accounting in the Philippines is
the Philippine Accountancy Act of 2004 also known as
a. R.A. No. 9298 c. R.A. No. 8299
b. R.A. No. 9892 d. R.A. Blg. 69
117. The professional regulatory board created under Republic Act No. 9298
tasked with the supervision of the registration, licensure and practice of
accountancy in the Philippines.
a. PRC b. BOA c. PICPA d. FRSC
118. The Board of Accountancy (BOA) shall be composed of

a. Six (6) members with a chairman for a total of six (6) individuals
b. chairman and six (6) members for a total of seven (7) individuals
c. chairman and fifteen (15) members
d. chairman and seventeen (17) members
119. The Commission upon the recommendation of the Board shall within
ninety (90) days from the effectivity of the IRR, create an accounting
standard setting body to be known as the
a. Financial Reporting Standards Council
b. Financial Reporting Standards Committee
c. Accounting Standards Committee
d. Financial Reporting Standards Board
120. FRSC shall be composed of

a. Fifteen members and a Chairman
b. Fourteen members with a Chairman
c. Fourteen members and a Chairman
d. Eight members and a Chairman
121. All of the following are represented in the FRSC, except

a. Board of Accountancy (1)
b. Securities an d Exchange Commission (1)
c. Bangko Sentral ng Pilipinas (1)
d. Bureau of Internal Revenue (1)
e. An association or organization of CPAs in active public practice of
accountancy (1)
f. None, all of the above are represented in the FRSC
122. One of the following is not a member of the Financial Reporting

Standards Council.
a. Philippine Institute of Certified Auditors
b. Commission on Audit
c. Bangko Sentral ng Pilipinas
d. Securities and Exchange Commission
123. The integrated national professional organization of Certified Public

Accountants accredited by the Board and the Commission.
a. Accredited National Professional Organization of Certified Public
Accountants or APO
b. Federation of Certified Public Accountants
c. Philippine Institute of Certified Public Auditors
d. Accredited National Professional Accountants
124. The Accredited National Professional Organization of Certified Public

Accountants or APO in the Philippines is
a. Philippine Institute of Certified Public Auditors
b. Association of Certified Public Accountants in Commerce and Industry
c. Philippine Institute of Certified Public Accountants
d. Association of Certified Public Accountants in Education
125. An accountant employed in a government agency is considered to be

in the
a. Practice of Public Accountancy c. Practice in Education/Academe
b. Practice in Commerce and Industry d. Practice in the Government
126. The role of the Securities and Exchange Commission in the formulation
of accounting principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
(Adapted)
127. Corporations are required to submit their financial statements to the

a. FRSC b. BOA c. COA d. SEC
128. Which of the following is not among the Four Sectors in the practice of
accountancy as enumerated in R.A. 9298 also known as the “Philippine
Accountancy Act of 2004”?
a. Practice in Commerce and Industry c. Practice in the Government
b. Practice in Education/Academe d. Practice in Private Accounting
129. Most accounting positions within an organization have primarily

a. line authority c. staff authority
b. line and staff authority d. financial authority
(RPCPA)
130. Which of the following statements are correct?

I. The first step in problem solving in accounting is to analyze the
consequences of different alternatives.
II. Resources are traded in the marketplace at a price because they are in
limited or scarce supply.
III. An internal transaction is an economic event which occurs between
one entity and another entity.
IV. Public accountants in the Philippines are found in the public service
serving local and national government bodies.
V. Establishing goals, gathering information on alternatives, determining
the consequences of alternatives, and choosing a course of action
involve estimates of future events.
VI. A major focus of accounting information is on actual, historical financial
events. Therefore, recording financial transactions of an entity is of no
use in establishing future relationships.
a. I, II, V b. II, V c. II, V, VI d. I, II, IV, V, VI

(Adapted)
Accounting standards
131. Issuing of accounting standards is the responsibility of the
a. PICPA b. FRSC c. AASC d. CPE Council
132. A common set of accounting standards and procedures are called

a. financial account standards
b. generally accepted accounting principles
c. objectives of financial reporting
d. statements of financial accounting concepts
(RPCPA)
133. Accounting principles are "generally accepted" only when

a. an authoritative accounting rule-making body has established it in an
official pronouncement.
b. it has been accepted as appropriate because of its universal
application.
c. both a and b.
d. neither a nor b.
(RPCPA)
134. Generally accepted accounting principles

a. include detailed practices and procedures as well as broad guidelines
of general application.
b. are influenced by pronouncements of the SEC and Regulatory
Accounting Principles
c. change over time as the nature of the business environment changes.
d. all of these.
(Adapted)
135. Choose the correct statement about generally accepted accounting

principles (GAAP)
a. They are laws
b. The Bureau of Internal Revenue enforces GAAP
c. Firms that do not comply with GAAP may suffer negative economic
consequences.
d. GAAP in the Philippines is represented by PSAs
(RPCPA)
136. Accounting concepts are not derived from

a. Inductive reasoning c. Pragmatism
b. Experience d. Laws of nature
(Adapted)
137. Generally accepted accounting principles in the Philippines are

represented by
a. PASs b. PSAs c. PFRSs d. SFASs
138. Philippine Financial Reporting Standards (PFRSs) comprise:

I. Philippine Financial Reporting Standards
II. Philippine Accounting Standards
III. Interpretations adopted by the Philippine Interpretations Committee
(PIC)
IV. Accounting Practice Statements and Implementation Guidance
a. I, II, III b. I, II, III, IV c. I and II d. I and III
139. The Philippine Financial Reporting Standards (PFRSs) are standards

adopted by the
a. Accounting Standards Council (ASC)
b. Financial Reporting Standards Committee (FRSC)
c. Philippine Institute of Certified Public Accountants (PICPA)
d. Financial Reporting Standards Council (FRSC)
140. Application and Implementation Guidance included in PFRSs

a. forms part of the standards and are in themselves standards
b. does not form part of the standards
c. may or may not be integral part of the standards
d. are useless if the accountant is a CPA
141. When resolving accounting problems not specifically addressed by

current standards, an entity should be guided by the hierarchy of
reporting standards. The correct sequence of the hierarchy of reporting
standards in the Philippines is
I. PASs, PFRSs and Interpretations
II. Conceptual Framework
III. Judgment
a. I, III, II b. I, II, III c. II, I, III d. I, II
142. In the absence of a GAAP addressing a particular transaction

a. Management may use its judgment in developing a relevant and
reliable accounting policy
b. Management should consider the most recent pronouncements of
other standard-setting bodies that use a similar conceptual framework
to develop accounting standards, other accounting literature and
accepted industry practices
c. The entity should refer to the Conceptual Framework.
d. The entity should refer to its External Auditor.
143. The argument that practicing accountants are familiar with the
significance of various accounting problems and the feasibility of
alternative solutions is an argument for establishing generally accepted
accounting principles through
a. a free-market approach c. government regulation
b. a deductive approach d. private sector regulation
(Adapted)
International Standards
144. Generally accepted accounting principles in the Philippines are based
on
a. IFRSs issued by IASB
b. SFAS issued by FASB
c. partly (a) and (b)
d. GAAP in the Philippines are originally formulated by the FRSC and are
not based on standards issued by other standard setting bodies.
145. The International Accounting Standards Board (IASB)

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.
(Adapted)
146. Approval of International Financial Reporting Standards (IFRSs) and

related documents, such as the Conceptual Framework for Financial
Reporting, exposure drafts, and other discussion documents, is the
responsibility of the
a. International Accounting Standards Board
b. International Accounting Standards Committee
c. International Accounting Standards Council
d. Financial Reporting Standards Council
147. Are the following statements true or false concerning the IFRSs?
I. IFRSs set out recognition, measurement, presentation and disclosure
requirements dealing with transactions and events that are important in
general and special purpose financial statements. They may also set out
such requirements for transactions and events that arise mainly in
specific industries.
II. IFRSs are based on the Conceptual Framework, which addresses the
concepts underlying the information presented in general purpose
financial statements. The objective of the Conceptual Framework is to
facilitate the consistent and logical formulation of IFRSs. The Conceptual
Framework should, however, not be used as a basis for the use of
judgment in resolving accounting issues.
a. True, true b. True, false c. False, true d. False, false
148. Which of the following statements correctly refer(s) to the IFRSs?

I. IFRSs are designed to apply to the general purpose financial
statements and other financial reporting of all profit-oriented entities.
II. Profit-oriented entities include those engaged in commercial,
industrial, financial and similar activities, whether organized in
corporate or in other forms. They include organizations such as mutual
insurance companies and other mutual cooperative entities that
provide dividends or other economic benefits directly and
proportionately to their owners, members or participants.
III. Although IFRSs are not designed to apply to not-for-profit activities in
the private sector, public sector or government, entities with such
activities may find them appropriate.
IV. The Public Sector Committee of the International Federation of
Accountants (PSC) has issued a Guideline stating that IFRSs are
applicable to government business entities. The PSC prepares
accounting standards for governments and other public sector entities,
other than government business entities, based on IFRSs.
a. I, II b. II, III, IV c. I, II, III d. I, II, III, IV
149. The objectives of the International Accounting Standards Board are

(choose the incorrect statement)
a. To develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that
require high quality, transparent and comparable information in
financial statements and other financial reporting to help participants
in the various capital markets of the world and other users of the
information to make economic decisions;
b. To promote the use and rigorous application of those standards
c. To eliminate differences between standards used by various countries
d. To work actively with national standard-setters to bring about
convergence of national accounting standards and IFRSs to high
quality solutions

a. The term ‘financial statements’ includes a complete set of financial
statements prepared for an annual period only (excluding statements
prepared for interim period), and condensed financial statements for
an interim period.
b. In some cases, IASB permitted different treatments for given
transactions and events. Usually, one treatment is identified as the
‘benchmark treatment’ and the other as the ‘allowed alternative
treatment’. The financial statements of an entity may appropriately be
described as being prepared in accordance with IFRSs whether they
use the benchmark treatment or the allowed alternative treatment.
c. The IASB’s objective is to require like transactions and events to be
accounted for and reported in a like way and unlike transactions and
events to be accounted for and reported differently, both within an
entity over time and among entities. Consequently, the IASB intends to
permit choices in accounting treatment. Also, the IASB has
reconsidered, and will continue to reconsider, those transactions and
events for which IFRSs permit a choice of accounting treatment, with
the objective of increasing the number of those choices.
d. Standards approved by the IASB include paragraphs in bold type
and plain type; those in bold type indicate the main principles and
have greater authority than those in plain type. An individual standard
should be read in the context of the objective stated in that standard
and the Preface to IFRSs.
e. Interpretations of IFRSs are prepared by the SIC to give
authoritative guidance on issues that are likely to receive divergent or
unacceptable treatment, in the absence of such guidance.
151. In the event of conflict between the International Financial Reporting

Standards and the local standards, which among the following will
prevail?
a. The provisions of the Corporation Code and Tax Code will prevail
b. The rule of the Philippine Securities and Exchange Commission
prevails
c. The rule of the International Accounting Standards prevails
d. The rule of local standards, laws and regulations shall prevail
(Adapted)
152. Are the following statements about the Norwalk Agreement true or
false?
I. The Norwalk Agreement requires the consolidated financial statements
of all listed United States companies, starting after January 1, 2005, to
be prepared in accordance with International Accounting Standards.
II. The Norwalk Agreement was an agreement for short-term financial
reporting convergence between the European Commission and the
United States government.
a. False, False b. False, True c. True, False d. True,
True
(ACCA)
153. Which of the following bodies is responsible for reviewing accounting

issues that are likely to receive divergent or unacceptable treatment in
the absence of authoritative guidance, with a view to reaching consensus
as to the appropriate accounting treatment?
a. International Financial Reporting Interpretations Committee (IFRIC)
b. Standards Advisory Council (SAC)
c. International Accounting Standards Board (IASB)
d. International Accounting Standards Committee Foundation (IASC
Foundation)
(ACCA)
154. The International Financial Reporting Interpretations Committee (IFRIC)

issues interpretations as authoritative guidance. For which of the following
should IFRIC consider issuing an Interpretation?
I. Narrow, industry-specific issues
II. Newly identified financial reporting issues not specifically addressed
in IFRSs
III. Issues where unsatisfactory or conflicting interpretations have
developed, or seem likely to develop
IV. Areas where members of the IASB cannot reach unanimous
agreement
a. I, II, III b. II, III c. III, IV d. II, III, IV
(ACCA)
155. Are the following statements true or false?

I. The Norwalk Agreement outlines the commitment of the IASB and
FASB towards harmonization of International and US Accounting
Standards.
II. IOSCO requires mandatory preparation of financial statements in
accordance with IFRS.
True
(ACCA)
156. According to the Preface to International Financial Reporting

Standards, which of the following are included in the objectives of the
IASB?
I. To harmonize financial reporting between IFRS and US GAAP
II. To work actively with national standard setters
III. To promote the use and rigorous application of accounting
IV. To harmonize financial reporting within the European Union
a. I, II, III b. II, III c. III, IV d. II, IV
(ACCA)
157. The purpose of the International Accounting Standards Board is to

a. issue enforceable standards which regulate the financial accounting
and reporting of multinational corporations.
b. develop a uniform currency in which the financial transactions of
companies throughout the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international
companies.
(Adapted)
Changes in standards
158. Choose the correct statement
a. Financial accounting is a social science and cannot be influenced by
changes in legal, political, business and social environments.
b. Financial accounting is an information system designed to provide
information primarily to internal users.
c. General-purpose financial statements must be prepared by a certified
public accountant.
d. The preparation of general-purpose financial statements is usually
based on the assumption that the primary users of the information are
external decision makers.
(RPCPA)
159. Identify the incorrect statement(s).

I. GAAP is as much a product of political action as it is of careful logic or
empirical findings.
II. GAAP is part of the real world, and it cannot escape politics and
political pressures.
III. Changes in GAAP are generally triggered by changes in users’ needs.
IV. Realization is the process of converting an asset, liability or
commitment into an income statement item.
V. Assets are always stated at historical cost on the balance sheet.
VI. Many accounting measurements are estimates and involve
approximation and judgment.
a. I, II, IV b. IV, V c. IV d. I, II, III, VI
160. Which of the following is the incorrect statement?

a. Theory can be defined as a coherent set of hypothetical, conceptual,
and pragmatic principles forming a general frame of reference for a
field of inquiry.
b. Accounting theory has developed in response to government
regulations.
c. Concepts are components of theory.
d. Accounting concepts are human-made.
(RPCPA)
161. The following statements relate to the purpose/ reasons for the
issuance of International Financial Reporting Standards by IASB.
I. The International Accounting Standards Board (IASB) is committed to
narrowing differences in Financial Reporting Standards by seeking to
harmonize regulations, accounting standards and procedures relating
to the preparation and presentation of financial statements.
II. The IASB believes that further harmonization can best be pursued by
focusing on financial statements that are prepared for the purpose of
providing information that is useful in making economic decisions.
III. The IASB believes that financial statements prepared for general
purpose meet the common needs of most users.
IV. The IASB believes that US FASB Standards are not applicable in most
countries other than in the US.
a. I, II b. I, II, IV c. I, II, III, IV d. I, II, III
162. The purpose of the International Financial Reporting Standards is to

a. issue standards to be applied by all countries in the world.
b. eliminate all the differences in financial reporting between countries in
the world.
c. promote a uniform basis of financial reporting among countries of the
world.
d. issue enforceable standards to be applied by all international
accountants.
163. If accounting information is to be useful, it must be expressed in terms

of:
a. non-monetary units
b. monetary and non-monetary units
c. units of consumer demand
d. a common denominator
164. Generally accepted accounting principles

a. Are fundamental truths or axioms that can be derived from laws of
nature.
b. Derive their authority from legal court proceedings.
c. Derive their credibility and authority from general recognition and
acceptance by the accounting profession.
d. Have been specified in detail in the FRSC framework.
(Adapted)
165. The principles, which constitute the ground rules for financial
reporting, are termed “generally accepted accounting principles”. To
qualify as “generally accepted,” an accounting principle must
a. Usually guide corporate managers in preparing financial statements,
which will be understood by widely scattered stockholders
b. Guide corporate managers in preparing financial statements which will
be used, for collective bargaining agreements with trade unions.
c. Guide an entrepreneur of the choice of an accounting entity like single
proprietorship partnership or corporation
d. Receive substantial authoritative support.
(Adapted)

a. The accounting theory which explains well the accounting equation
“Assets minus liabilities equals capital” is the proprietary theory.
b. Under the entity theory, the major accounting effort is directed toward
proper valuation of assets rather than income determination.
c. Strict adherence to the entity concept would not allow a parent
company to take up in it books its proportionate share in the profits
and losses of its subsidiaries.
d. Under the fund theory, assets represent prospective services to the
fund, liabilities represent restriction against assets of the fund, and
invested capital represents either legal or financial restrictions on the
use of assets.
167. Financial accounting is shaped to a significant extent, by the

environment, and in particular all of the following, except
a. The many uses and users which it serves
b. The overall organization of economic activity in society
c. The characteristics and limitations of financial accounting and financial
statements
d. The means of measuring economic activity
(Adapted)
168. Proper application of accounting principles is most dependent upon the

a. existence of specific guidelines.
b. oversight of regulatory bodies.
c. external audit function.
d. professional judgment of the accountant.
(Adapted)
169. Which of the following is most likely to prepare the most accurate
financial forecast for a corporate entity based on empirical evidence?
a. Investors using statistical models to generate forecasts
b. Corporate management
c. Financial analysts
d. Independent CPAs
(AICPA)
Chapter 2
The Accounting Process

Accounting cycle
1. Which of the following represents the expanded basic accounting
equation?
a. Assets = Liabilities + Common Shares + Dividends – Income –
Expenses
b. Assets + Dividends + Expenses = Liabilities + Equity + Income
c. Assets – Liabilities – Dividends = Equity + Income – Expenses
d. Assets = Income + Expenses – Liabilities
2. An accounting period which is a fiscal year may be

a. One month b. One quarter c. One year d. a, b or c
3. The basic sequence in the accounting process can best be described as:
a. Transaction, journal entry, source document, ledger account, trial
balance.
b. Source document, transaction, ledger account, journal entry, trial
balance.
c. Transaction, source document, journal entry, trial balance, ledger
account.
d. Transaction, source document, journal entry, ledger account, trial
balance.
(Adapted)
4. Which of the following statements is/are true?

I. The listing of all of the accounts available for use in a company's
accounting system is known as the General Ledger.
II. The term associated with "left" or "left-side" is Credit.
III. The basic accounting equation is Assets + Liabilities = Capital.
IV. The accounting equation should remain in balance because every
transaction affects only two accounts.
V. The Accounting Cycle represents the steps or accounting procedures
normally used by entities to record transactions and prepare financial
statement. It implements the accounting process.
VI. A corporation's net income and distributions to stakeholders are
eventually recorded in the income summary.
a. II, IV, V, VI b. V c. I, V, VI d. I, V
5. The following comments all relate to the recording process. Which of

these statements is correct?
a. The general ledger is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general
journal.
c. The trial balance provides the primary source document for recording
transactions into the general journal.
d. Transposition is the transfer of information from the general journal to
the general ledger.
(Adapted)
6. Choose the incorrect statement

a. An accounting information system is designed to collect data about
each transaction and event that should be recorded by an entity during
a reporting year
b. Posting is a transfer process which reclassifies chronological
information into account classification format in the ledger
c. In recording transactions, an external transaction is more likely to be
overlooked and not recorded than is an internal transaction.
d. A trial balance is prepared after adjusting entries are recorded but
before closing entries.
(Adapted)
7. Which of the following is not optional?

a. use of an Income Summary account
b. preparation of the Worksheet
c. making adjusting entries
d. preparation of Post-Closing Trial Balance
(RPCPA)
8. Given the dual effects of accountable events, an increase in a liability

cannot possibly be accompanied by a (an):
a. increase in asset c. decrease in asset
b. decrease in equity d. no effect on assets
Systems of recording
I. The two basic concepts or theories underlying double-entry
bookkeeping are Duality and Equilibrium
II. The reason why expense is recorded as a debit entry to an expense
account is that expenses decrease owner’s equity.
III. The effects of revenue and expenses upon owners’ equity explains the
debit and credit rules relating to the recording of revenue and
expenses
IV. All activities of a business are recorded in its accounting system
V. The accounting process of determining how events affect assets,
liabilities, owners’ equity, revenue and expenses of the enterprise is
called “Measuring the effects.”
a. I, II, IV b. I, II, III c. III, IV, V d. I, II, III, V
(RPCPA)
10. Which of the following statements correctly relate to single-entry
system?
I. Accrual basis financial statements cannot be prepared under a single-
entry bookkeeping system
II. Under single-entry bookkeeping system financial statements are not
likely to be fairly presented in accordance with GAAP
III. Cash Receipts and Cash Disbursement Journals are utilized in both a
single-entry bookkeeping system and a double-entry bookkeeping
system
IV. Internal control is inadequate under a single-entry bookkeeping system
V. Subsidiary ledger is utilized only in a double-entry bookkeeping system
but not in a single-entry bookkeeping system
a. II, IV b. II, III, IV, V c. I, III, IV d. I, II, III, IV, V
(RPCPA)
11. The following statements relates to the double-entry system and the
single-entry system. Choose the correct statements.
I. Merchandise inventory account is not recognized under single-entry
bookkeeping
II. Net income or loss under single entry bookkeeping is computed
using an approach that directly matches cost with revenue.
III. Under a Double-entry system, both general and special journals are
used while under a single-entry system, only special journals are
used.
IV. Double-entry system is sometimes known as transaction approach
of accounting for assets, liabilities, equity, revenue and expenses.
V. Double-entry system is the generally acceptable method of
bookkeeping because it offers a more accurate and more complete
income measurement than single-entry.
a. I, III, V b. I, V c. III, IV, V d. I, III, IV, V
(RPCPA)

a. Accrual basis financial statements may be prepared from single-entry
records
b. Single-entry accounting is synonymous with cash basis accounting
c. No adjusting entries are necessary when accounting records are kept
on a pure cash basis
d. Over the entire life of a business enterprise, there would be no
difference between income on a cash basis and income on an accrual
basis
(RPCPA)
13. Consider the following statements.

I. The theory of debit and credit is a fundamental concept of double
entry bookkeeping
II. From the accounting viewpoint, the life of the business is a series of
income statements
III. From the accounting viewpoint, the life of the business is a series of
balance sheets
a. true, true, true c. false, false, true
b. true, true, false d. true, false, true
(RPCPA)
14. The best interpretation of the word credit is the

a. offset side of an account. c. right side of an account.
b. increase side of an account d. decrease side of an account
(Adapted)
Books of records
15. The account may take many possible forms and accounting practice
commonly uses several. Perhaps the most useful form of the account for
textbooks, problems, and examinations but not really used in actual
practice, except perhaps for memoranda or preliminary analyses is the
a. One-sided account c. Three-sided account
b. T-account d. moving balance account
16. Which one of the following best expresses the primary purpose of the
general journal?
a. The general journal provides an organized summary of transactions
classified by type of account
b. The general journal directly provides the data for a trial balance
c. The general journal eliminates the need for control accounts in the
ledger
d. The general journal provides a continuing balance of the amount to
date in each of the temporary accounts
e. The general journal provides a chronological listing of transactions in
debit-credit form
17. Choose the incorrect statement concerning special journals

a. All special journals are designed to handle only one type of transaction
b. Special journals are designed specifically to simplify the data
processing tasks involved in journalizing and posting of particular types
of transactions.
c. The design of special journals is dependent upon the frequency of
specific types of transactions
d. Special journals vary in number depending upon the types of frequent
transactions recorded by the entity.
(RPCPA)
18. Which one of the following best expresses the primary purpose of the
general ledger?
a. The general ledger provides a record of transactions classified by
account
b. The general ledger provides a record from which the journal entries are
later posted
c. The general ledger provides a listing of the dates of transactions
affecting each account, in what amounts, and the ending balances of
each account
d. The general ledger eliminates the need for control accounts
e. The general ledger houses only accounts which are supported by
subsidiary ledgers
19. Which of the following best defines a control account?

a. A summary account in the general ledger that is supported by detailed
accounts in a subsidiary ledger.
b. A listing of the balances in all accounts
c. An account which increases due to sale of goods or services during the
normal operations of a business
d. A chronological listing of all transactions for a specific time period
20. These are entries made at the end of the accounting period after
adjustments used as means of closing nominal accounts to a summary
account and transferring the balances to equity.
a. Closing entries c. Reclassification entries
b. Adjusting entries d. Reversing entries
21. These are entries usually made in the next period to reverse certain
adjusting entries made in the immediately preceding accounting period.
a. Closing entries c. Reclassification entries
22. These are entries used to correct accounting errors.

a. Correcting entries c. Reclassification entries
23. These are entries that transfer an item from one account to another
that more clearly describe the nature of the item transferred.
24. It is the difference between the debit and the credit side of a T
account.
a. normal balance c. account balance
b. discount d. a and c
25. The normal balance of any account is the

a. left side c. side which increases that account
b. right side d. side which decreases that account
(Adapted)
26. A journal is not useful for

a. closing in one place the complete effect of a transaction.
b. preparing financial statements.
c. providing a record of transactions.
d. locating and preventing errors.
27. A T account is
a. a way of depicting the basic form of an account.
b. a special account used instead of a journal.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.
(Adapted)
28. A systematic compilation of a group of accounts; also called a “book of

secondary entry”
a. trial balance b. ledger c. worksheet d. journal
(RPCPA)
29. A notation in a journal or ledger not intended to be incorporated in the

accounts which describes a situation/event
a. memo entry c. reversing entry
b. correcting entry d. adjusting entry
(RPCPA)
30. The mechanical process of recording transactions and events on the
books of accounts in a chronological sequence in accordance with
established accounting rules and procedures
a. summarizing b. reporting c. journalization d. classification
(RPCPA)
31. The appropriate book of account in which the receipt of a cash

dividend is recorded
a. purchases journal c. cash receipts journal
b. sales journal d. general journal
(RPCPA)

I. A general journal entry having two debits and a credit is a simple
entry.
II. Account numbers are entered in the posting reference column of the
two-column general journal at the time the transactions are recorded
in the journal.
III. One of the purposes of the ledger is to record the complete effect of
the transaction in one place.
IV. A list of all the accounts of a specific business enterprise is referred to
as a ledger.
V. When special journals are designed and adopted correctly, there is no
need for the general journal.
a. I, III, IV b. II, V c. II, IV d. none
Trial balance
33. This is prepared in order to prove the equality of the debits and credits
in the ledger after the closing process.
a. Trial balance c. chart of accounts
b. Worksheet d. post-closing trial balance
34. The post-closing trial balance contains

a. nominal, real, and mixed accounts c. real and mixed accounts
b. real and nominal accounts d. real accounts only

a. Bad debts recovered account, if having an income tax benefit, is
transferred to profit or loss summary account
b. Bill of exchange is drawn by the purchaser
c. Trial balance establishes the arithmetical accuracy of the accounting
records
d. A well maintained asset need not be depreciated
e. Drawing of goods by the owner is to be debited to profit or loss
summary account.
(Adapted)
36. The trial balance:

a. Is a formal financial statement.
b. Is used to prove that there are no errors in the journal or ledger.
c. Provides a listing of every account in the chart of accounts.
d. Provides a listing of the balance of each account in active use.
(Adapted)
37. Which of the following errors will be disclosed in the preparation of a

trial balance?
a.Recording transactions in the wrong account.
b.Duplication of a transaction in the accounting records.
c.Posting only the debit portion of a particular journal entry.
d.Recording the wrong amount for a transaction to both the account
debited and the account credited.
(Adapted)
38. An error which is disclosed by trial balance

a. account omitted from trial balance
b. journal entry not posted
c. omission of journal entry
d. error of transposition in posting one side of a journal entry
(RPCPA)
39. Which of these errors would be disclosed by the trial balance?

a. check of P95 from Pedro Cruz entered in Pedro’s account as P59.
b. selling expenses debited to the sales account.
c. credit sales of P300 entered in both the double entry account as P30.
d. a purchase of P250 was omitted entirely from the books.
(RPCPA)
40. Which of the following errors would cause unequal totals in the trial
balance?
a. the firm records P2,100 received from a customer in advance of
delivery of goods as a debit of P100 to Cash and a credit of P2,100 to
Sales
b. the firm fails to enter the cost of the electric current used during the
month as an expense and fails to recognize the P2,200 owed to
Meralco
c. all these errors will cause unequal trial balance totals
d. none of these errors will cause unequal trial balance totals
(RPCPA)
Adjusting entries
41. Which of the following statements about adjusting entries is/are
correct?
I. Every adjusting entry impacts both a balance sheet and a statement of
profit or loss and other comprehensive income account.
II. Every adjusting entry impacts comprehensive income.
III. If only year-end financial reports are prepared for both external and
internal users then adjusting entries need only to be prepared once a
year.
IV. Adjusting entries are necessitated by the accrual basis accounting. If
an entity uses the pure cash basis of accounting, there is no need for
adjusting entries.
a. I, II, III, IV b. I, II, III c. I, II, IV d. II, III, IV
42. These are entries made at the end of the accounting period to update
certain amounts so that they reflect correct balances at the designated
time.
43. Theoretically, adjusting entries fall into these broad classes

a. deferred items and accrued items
b. deferred items, accrued items and reclassification items
c. deferred items, accrued items and client adjustments
d. deferred items, accrued items, reclassification items, current period
correcting items and prior period correcting items
44. Deferred items consist of these types of adjusting entries

a. asset/ expense adjustments, liability/revenue adjustments,
asset/revenue adjustments, and liability/expense adjustments
b. asset/ expense adjustments and liability/revenue adjustments
c. asset/revenue adjustments and liability/expense adjustments
d. asset/liability adjustments, liability/equity adjustments, asset/ equity
adjustments, asset/ expense adjustments, and liability/revenue
adjustments
45. Accrued items consist of these types of adjusting entries

a. asset/ expense adjustments, liability/income adjustments,
asset/income adjustments, and liability/expense adjustments
b. asset/ expense adjustments and liability/income adjustments
c. asset/income adjustments and liability/expense adjustments
d. asset/liability adjustments, liability/equity adjustments, asset/ equity
adjustments, asset/ expense adjustments, and liability/income
adjustments
46. In accounting, it means to postpone or delay

a. defer b. accrue c. procrastinate d. a or c
47. In accounting, it means to grow or accumulate

a. defer b. accrue c. germinate d. a or c
48. Consist of adjusting entries involving data previously recorded in

accounts
a. deferred items c. procrastinated items
b. accrued items d. a or c
49. Consist of adjusting entries relating to activity on which no data have

been previously recorded in the accounts
a. deferred items c. procrastinated items
b. accrued items d. a or c
50. Deferred items

a. involve the initial, or first, recording of assets and liabilities and the
related revenues and expenses or the transfer of data already
recorded in asset and liability accounts to expense and revenue
accounts, respectively
b. involve the reconciling of records to conform to Mr. Auditor’s
materiality threshold
c. involve the initial, or first, recording of assets and liabilities and the
related revenues and expenses
d. involve the transfer of data already recorded in asset and liability
accounts to expense and revenue accounts, respectively
51. Accrued items

a. involve the initial, or first, recording of assets and liabilities and the
related revenues and expenses or the transfer of data already
recorded in asset and liability accounts to expense and revenue
accounts, respectively
b. involve the reconciling of records to conform to Mr. Auditor’s
materiality threshold
c. involve the initial, or first, recording of assets and liabilities and the
related revenues and expenses
d. involve the transfer of data already recorded in asset and liability
accounts to expense and revenue accounts, respectively
52. Periodic reporting and the matching principle necessitate the

preparation of
a. journal entries c. adjusting entries
b. dramatic entries d. no ID, no entry
53. Receiving assets before they are earned creates a liability called
a. unearned assets c. unearned revenue
b. deferred assets d. accrued revenue
54. Accrued expense accounts are presented as

a. Assets b. Liabilitiesc. Equity d. Contra-equity accounts
55. Accrued income accounts are presented as

a. Assets b. Liabilitiesc. Equity d. Contra-equity accounts
56. Employees’ taxes not yet paid to the BIR as of reporting date should be
credited to which account
a. income tax payable c. withholding tax payable
b. output tax d. deferred tax liability
57. Adjusting entries reversed

a. depletion adjustments c. accrued expenses
b. bad debt adjustments d. inventory adjustments
(RPCPA)
58. A prepaid expense

a. paid and not currently matched with earnings
b. not paid and currently matched with earnings
c. paid and currently matched with earnings
d. not paid and not matched with earnings
(RPCPA)
59. The premium on a three-year insurance policy expiring on December

31, year 3, was paid in total on January 1, year 1. Assuming that the
original payment was recorded as a prepaid asset, how would each of the
following be affected in year 3? (Item #1) Prepaid Asset; (Item #2)
Expenses
a. decrease, increase c. no change, increase
b. decrease, no change d. no change, no change
(Adapted)
60. The accrued balance in a revenue account represents an amount

which is:
a. earned and collected c. not earned or collected
b. earned and not collected d. not earned but collected
(RPCPA)
61. Which one of the following assets is similar to certain current assets,
but is not one?
a. Accounts receivable
b. Prepaid insurance
c. long term payment of expenses
d. short-term investment in equity security
(Adapted)
62. The premium on a three (3) year insurance policy was paid in total on
January 1, 1989. Upon payment, Prepaid Asset Account was debited. The
appropriate journal entry has been recorded on December 31, therefore
the balance of Prepaid Asset Account should be:
a. higher, if the original payment had been debited initially to an expense
account
b. the same as the original payment
c. the same even if the original payment had been debited initially to an
expense account
d. no balance
(RPCPA)
63. An adjusting entry for revenue collected in advance, which was initially
credited to a revenue account will:
a. decrease liabilities
b. increase assets
c. decrease the balance in the revenue account
d. increase equity
Preparation of financial statements

64. These are the means by which the information accumulated and
processed in financial accounting is periodically communicated to the
users.
a. financial statements c. trial balance
b. worksheet d. management reports
65. Based on which of the following concepts, is share capital account

shown on the liability side of statement of financial position?
a. Dual-side concept c. Cost concept
b. Money measurement concept d. Business entity concept
(Adapted)
66. While preparing the worksheet, the accountant made the following
entry: Debit Income Summary Account and Credit Inventory – beginning.
This entry can be properly termed as a(n)
a. Adjusting entry c. Closing entry
b. Reclassification entry d. Correcting entry
67. While preparing the worksheet, the accountant made the following
entry: Debit Inventory – ending and Credit Income Summary. This entry
can be properly termed as a(n)
a. Adjusting entry c. Closing entry
b. Reclassification entry d. Correcting entry

I. Another name for the balance sheet is statement of changes in
financial position.
II. The balance sheet heading will specify a Period of time.
III. An acceptable heading for a balance sheet is:
ABC Corporation
Statement of financial position
For the Year Ended December 31, 20x1
IV. In a manual bookkeeping system, transactions are first recorded in a
trial balance.
V. A journal entry includes the date, account titles, and amounts.
a. I and V b. I , IV and V c. V only d. I, II and V
69. After the revenues for an accounting period have been determined, the
costs directly or indirectly associated with these revenues must be
deducted to measure net income. This is called
a. Income statement preparation c. Matching process
b. Profit and loss preparation d. Bookkeeping process
(RPCPA)
70. Totaling the columns of a columnar journal and proving the equality of
the totals is called
a. totaling and balancing c. totaling and cross footing
b. footing and cross footing d. footing and balancing
(RPCPA)
Closing entries
71. These are entries prepared at the end of the accounting period to
“zero out” all temporary accounts in the ledger.
a. adjusting entries c. reversing entries
b. closing entries d. reclassification entries

a. Equity is reduced by outside borrowings
b. When there is no change in equity, it is an indication of loss in the
business
c. Nominal account refers to the exchange transactions
d. Real accounts relate to the accounts found in the post-closing trial
balance
e. Bills payable is a nominal account

I. The formal process by which all nominal accounts are reduced to zero
and the profit or loss is determined and transferred to an equity
account is called closing entries
II. Post-closing is the process of transferring the essential facts and
figures from the book of original entry to the ledger accounts.
III. A trial balance taken immediately after reversing entries have been
posted is designated as a post-closing trial balance.
IV. Adjusting entries are made at the beginning of an accounting period to
bring all accounts up to date on an accrual accounting basis so that
correct financial statements can be prepared.
V. The chart of accounts is a list of all open accounts in the ledger and
their balances.
VI. Various amounts are transferred to the ledger from the book of original
entry
a. VI b. I, VI c. I, III, V, VI d. all of the statements are correct
74. Amounts transferred to income summary represent

a. increases and decreases in owner`s equity
b. all the expenses of a company
c. the asset balance of a company
d. increases and decreases in owners’ equity not directly recognized in
equity
75. After the closing process

a. all accounts have zero balances
b. all accounts have the prior period ending balance
c. temporary accounts have zero balances
d. all accruals and deferred items are reversed
76. Which of the following is likely to be an incorrect closing entry?

a. debit dividends, credit retained earnings
b. debit sales revenue, credit income summary
c. debit income summary, credit rent expense
d. debit income summary, credit retained earnings
(RPCPA)
77. The effect of the closing entries is to:

a. change assets
b. change liabilities
c. change retained earnings
d. change the debit balances of all accounts into credits and vice versa
(Adapted)
78. Which of the following is an example of a closing entry?

a. Posting the ending inventory balance in a perpetual inventory system
b. Transferring an amount entered in a wrong account to the appropriate
account
c. Transferring the balance in the bad debt expense account to the
income summary account
d. Transferring the balance in a temporary account to a contra account
Reversing entries
79. When reversing entries are made, the beginning balance of a nominal
account is
a. the amount in the adjusting entry that was reversed
b. the opposite balance representing the amount in the reversing entry
c. either a debit or credit balance depending on the effect of the
adjusting and reversing entries
d. always zero regardless of whether or not a reversing entry is made
80. Which of the following adjusting entries may a reversing entry be

used?
a. debit insurance expense, credit prepaid insurance
b. debit interest receivable, credit interest income
c. debit unearned rental income, credit rental income
d. debit depreciation expense, credit accumulated depreciation
(RPCPA)
Comprehensive
I. Every adjusting entry affects both a balance sheet and a statement of
profit or loss and other comprehensive income account.
II. The company has earned an income for the period if a credit is needed
to close the income summary account.
III. If a company reports profit for the year, this amount will be shown on
the worksheet as a balancing figure in the income statement debit
column and in the balance sheet credit column.
IV. The income summary account reveals that an operating loss of P800
has been incurred. Before closing entries are posted, the owner’s
drawing account shows a balance of P460. The entry to close the
income summary account is a debit of P340 to the owner’s capital
account and a credit of P340 to the income summary account.
V. Entering adjustments in the adjustments column of a worksheet makes
it unnecessary to record and post adjusting entries.
a. I, III b. I, II, III c. II, III, IV d. I, III, IV, V

a. Deferred charges are distinguished from prepaid expenses on the basis
of the time over which their benefits will be realized.
b. Working capital is a very useful measure because it reveals how much
would be left if all the assets were to be sold and the proceeds were
used to pay all the current liabilities.
c. The normal operating cycle of a business is the average length of the
time from cash expenditure, to inventory, to sale and back to accounts
receivable.
d. Retained earnings often is restricted (or appropriated) to ensure that
cash will be available for plant expansion. When retained earnings is
restricted, the cash appropriated cannot be spent.
83. Choose the correct statement

a. A worksheet is not a part of the basic accounting records of the entity
b. No adjusting entries should be necessary for the inventory account if
the periodic inventory system is used
c. Examples of accrued expenses include wages payable and
depreciation expense
d. Accrued items are those of which recognition of the related revenue of
expense occurs in an accounting period after the entity pays or
receives cash, respectively

a. The income statement and the balance sheet reflect the internal
events of a company; the information included in the footnotes refers
to external events only
b. A post-closing trial balance has balances in the temporary accounts
c. Income summary is a clearing or suspense account that is often used
to hold the balances of revenue and expense accounts ; its balance is
closed to the retained earnings account only
d. Financial statements cannot be prepared properly until adjusting
entries are posted to the ledger
(Adapted)

a. The use of a general journal implies that there is no need for special
journals
b. Each subsidiary ledger has a related control account in the general
journal
c. Assume a company always records deferred expenses as assets upon
payment of cash, and deferred revenues as liabilities upon receipt of
cash. If this company records reversing entries, generally only
adjusting entries for accrued expenses and accrued revenues should
be reversed
d. All entries in the general journal are supported by details contained in
the special journals.
86. Which of the following statements is false?

I. The chart of accounts is a listing of the accounts presently having
balances in the general ledger.
II. Some accounting software classifies some accounts as "income"
accounts, while accountants might refer to these accounts as
"revenue" accounts.
III. The digits of the account numbers assigned to general ledger accounts
often have significance. For example, an account number beginning
with a "1" might signify that the account is an asset account; a "6"
might signify an operating expense, etc.
IV. In addition to the standard chart of accounts for a specific industry,
you will likely want to expand and/or modify the chart of accounts to fit
your business. One tool that would be helpful in determining the
accounts for your company would be your company's organization
chart.
a. I b. I, IV c. I, II, IV d. II, III
(Adapted)

I. In a manual bookkeeping system, each amount in a journal is posted to
an account.
II. Invoices from vendors (suppliers) which are due in 30 days should be
credited to Accounts Receivable.
III. A company's Special ledger contains all of the accounts such as Rent
Expense, Supplies, and Interest Payable.
IV. Historically, the final step of the bookkeeper's responsibilities was to
prepare a trial balance.
V. An internal document that is prepared to prove that the total of all the
debit balances is equal to the total of all the credit balances is a trial
balance.
a. I, IV, V b. I, II, IV, V c. I, V d. I, II, III, IV, V
(Adapted)

a. The post-closing trial balance is prepared immediately after all
adjustments have been journalized and posted.
b. There will be no change in the transactions that had previously been
recorded in the general journal after special journals are adopted.
c. If the balance in the income summary account is a credit balance, this
means the firm has earned profit of this amount.
d. The purpose of the income summary account is to summarize all
income and expenses during the period in one account.

a. Expense accounts usually have a debit balance and show the cost
associated with producing revenue during an accounting period.
b. Transactions often overlap accounting periods.
c. All sales journals have a single column which is posted as a debit to
accounts receivables and as a credit to sales.
d. If the accounts receivable control account agrees with the total of its
subsidiary ledger, there can be no errors in the subsidiary ledger.
a. If the accountant mistakenly places a revenue account balance in the
balance sheet credit column instead of the income statement credit
column of the worksheet, the worksheet columns will still balance.
b. The closing entries necessary under the periodic and perpetual
inventory methods do not differ because all expenses and revenues
must be closed just the same.
c. A partnership's profit is eventually recorded in the retained earnings
account.
d. If an entity’s expenses are greater than its revenue, the owner’s equity
is increased.

a. The accounting cycle is in line with the application of the periodicity
concept.
b. The effect of adjusting entries to accrue revenues is always an increase
in assets and a corresponding increase in equity.
c. Closing the books means charging the retained earnings account
and/or applicable equity accounts with the temporary accounts.
d. The listing of all of the accounts available for use in a company's
accounting system is known as the trial balance.
92. If debits do not equal credits, the first step to find the error is to
a. call your manager and ask for advice
b. add the debit and credit columns again
c. review the journal entries for errors
d. make correcting entries rather than adjusting entries
(Adapted)
93. If the Balance Sheet columns of the worksheet do not balance, the
error is most likely to exist in the:
a. General journal. c. Last six columns of the work sheet.
b. General ledger. d. First six columns of the work sheet.
(Adapted)
94. Assume an enterprise initially records prepayments in balance sheet

accounts and makes reversing entries when appropriate. Which of the
following year-end adjusting entries should be reversed?
a. The entry to record depreciation expense for the period
b. The entry to record the portion of service fees received in advance that
is earned by year-end
c. The entry to record supplies used during the period
d. The entry to record service fees earned by year-end but not billed
(Adapted)
Chapter 3
The Conceptual Framework for Financial
Reporting
Purpose and status
1. What is the authoritative status of the Conceptual Framework?
a. It has the highest level of authority. In case of a conflict between the
Conceptual Framework and a Standard or Interpretation, the
Conceptual Framework overrides the Standard or Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a
transaction, it overrides the Conceptual Framework. In the absence of
a Standard or an Interpretation that specifically applies, the
Conceptual Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a
transaction, it overrides the Conceptual Framework. In the absence of
a Standard or an Interpretation that specifically applies to a
transaction, management should consider the applicability of the
Conceptual Framework in developing and applying an accounting
policy that will result in information that is relevant and reliable.
d. The Conceptual Framework applies only when IASB develops new or
revised Standards. An entity is never required to consider the
Conceptual Framework.
(Adapted)
2. The FRSC recognizes that in a limited number of cases there may be a

conflict between the Conceptual Framework and a Philippine Financial
Reporting Standard. In those cases where there is a conflict,
a. the requirements of the Philippine Financial Reporting Standard prevail
over those of the Conceptual Framework
b. the requirements of the Conceptual Framework prevail over those of
the Philippine Financial Reporting Standard
c. the professional judgment of the accountant should prevail and this
may necessitate disclosure in the notes.
d. the provisions of standards issued by FASB will prevail
(Adapted)
3. Financial statements are most commonly prepared in accordance with an

accounting model based on
a. Recoverable historical cost and the nominal financial capital
maintenance concept
b. Recoverable historical cost and the physical capital maintenance
concept
c. Fair value and the nominal financial capital maintenance concept
d. Either recoverable historical cost and fair value and either nominal
financial or physical capital concept
4. Choose the incorrect statement.

a. The IASB recognizes that governments, in particular, may specify
different or additional requirements for their own purposes. These
requirements should not, however, affect financial statements
published for the benefit of other users unless they also meet the
needs of those other users.
b. In conjunction with choice (a), when there are conflicts between local
legislation and the IASB framework or standards, the framework and
standards should prevail over the local legislation.
c. Financial statements are most commonly prepared in accordance with
an accounting model based on recoverable historical cost and the
nominal financial capital maintenance concept.
d. Other models and concepts may be more appropriate in order to meet
the objective of providing information that is useful for making
economic decisions although there is presently no consensus for
change. The Conceptual Framework has been developed so that it is
applicable to a range of accounting models and concepts of capital and
capital maintenance.
5. The purpose of the Philippine Conceptual Framework is to:

I. Assist the Financial Reporting Standards Council (FRSC) in developing
accounting standards that represent generally accepted accounting
principles in the Philippines
II. Assist the Board of IASC in the development of future International
Accounting Standards and in its review of existing International
Accounting Standards
III. Assist the Board of IASC in promoting harmonization of regulations,
accounting standards and procedures relating to the presentation of
financial statements by providing a basis for reducing the number of
alternative accounting treatments permitted by International
Accounting Standards;
IV. Assist the FRSC in its review and adoption of existing International
Accounting Standards
V. Assist preparers of financial statements in applying FRSC financial
reporting standards and in dealing with topics that have yet to form
the subject of an FRSC standard
VI. Assist auditors in forming an opinion as to whether financial
statements conform with Philippine generally accepted accounting
principles
VII. Assist users of financial statements in interpreting the information
contained in financial statements prepared in conformity with
Philippine generally accepted accounting standards
VIII. Provide those who are interested in the work of FRSC with information
about its approach to the formulation of Financial Reporting Standards.
a. I, II, III, IV c. IV, V, VI, VII, VII
b. I, IV, V, VI, VII, VIII d. all of the above
6. All of the following statements incorrectly refer to the Conceptual

Framework except
a. The Conceptual Framework sets out the concepts that underlie the
preparation and presentation of financial statements for external and
internal users.
b. The Conceptual Framework is an integral part of the Philippine
Financial Reporting Standard and hence defines standards for any
particular measurement or disclosure issue.
c. The FRSC recognizes that in a limited number of cases there may be a
conflict between the framework and a Philippine Financial Reporting
Standards. In those cases where there is a conflict, the requirements of
the framework prevail over those of the Philippine Financial Reporting
Standard.
d. As the FRSC will be guided by the framework in the development of
future Statements and in its review of existing Statements, the number
of cases of conflict between the framework and Philippine Financial
Reporting Standards will diminish through time.
e. Unlike for the various PASs and PFRSs, the framework, as a solid
foundation and a model, will not be revised from time to time on the
basis of the FRSC's experience of working with it.
7. The Scope of the framework includes all of the following except
a. The objective of financial statements
b. The qualitative characteristics that determine the usefulness of
information in financial statements
c. The underlying and implicit assumptions governing the preparation
and presentation of financial statements
d. The definition, recognition and measurement of the elements from
which financial statements are constructed
e. Concepts of capital and capital maintenance
8. All of the following statements incorrectly refer to the Conceptual

Framework except
a. The framework is concerned with all-purpose financial statements
including consolidated financial statements.
b. Financial statements are prepared and presented at least annually and
are directed toward the common and specific information needs of a
wide range of users.
c. Prospectuses and computations prepared for taxation purposes are
outside the scope of the framework.
d. Financial statements may also include supplementary schedules and
information based on or derived from, and expected to be read with,
such statements. Financial statements include such items as reports
by directors’ statements by the chairman, discussion and analysis by
management and similar items that may be included in a financial or
annual report.
e. The framework applies to the financial statements of all commercial,
industrial and business reporting entities, but only for the private
sector.
9. An entity for which there are users who rely on its financial statements as
their major source of financial information about the entity.
a. publicly listed entity c. reporting entity
b. publicly accountable entity d. small or medium-sized entity
10. The primary users of financial statements under the Conceptual

Framework include
I. Existing and potential investors
II. Employees
III. Lenders and other creditors
IV. Suppliers and other trade creditors
V. Customers
VI. Governments and their agencies
VII. Public
VIII. Professional accountants, including auditors
a. I, III c. I, II, III, IV, V, VI, VII
b. I, II, III, IV, V, VI d. all of the above
11. These refer to the providers of risk capital, including their advisers,
who are concerned with the risk inherent in, and return provided by, their
investments. They need information to help them determine whether they
should buy, hold or sell. They are also interested in information which
enables them to assess the ability of the entity to pay dividends.
a. investors c. stakeholders
b. shareholders d. public
12. They are interested in information that enables them to determine
whether their loans, and the interest attaching to them, will be paid when
due.
a. investors b. lenders c. suppliers d. public
13. They are interested in information that enables them to determine

whether amounts owing to them will be paid when due. They are likely to
be interested in an entity over a shorter period than lenders unless they
are dependent upon the continuation of the entity as a major customer.
a. investors b. lenders c. suppliers d. public

a. All of the information needs of users can be met by financial
statements because there are needs which are common to all users.
b. The accountant/ controller of an entity has the primary responsibility
for the preparation and presentation of the financial statements of the
entity.
c. Management is also interested in the information contained in the
financial statements even though it has no access to additional
management and financial information that helps it carry out its
planning, decision-making and control responsibilities.
d. Management has the ability to determine the form and content of
additional information in order to meet its own needs. The reporting of
such information is within the scope of the framework.
e. Published financial statements are based on the information used by
management about the financial position, performance and changes in
financial position of the entity.
Objective of financial statements

15. The foundation of the Conceptual Framework is formed from
a. The qualitative characteristics that makes information useful to users
b. The objective of general purpose financial reporting
c. The concept of reporting entity
d. The various measurement requirements which results to fair presented
financial information
16. What is the objective of financial statements according to the

Conceptual Framework?
a. To provide information about the financial position, performance, and
changes in financial position of an entity that is useful to a wide range
of users in making economic decisions.
b. To prepare and present a balance sheet, an income statement, a cash
flow statement, and a statement of changes in equity.
c. To prepare and present comparable, relevant, reliable, and
understandable information to investors and creditors.
d. To prepare financial statements in accordance with all applicable
Standards and Interpretations.
(Adapted)
17. Which of the following statements correctly relates to the provisions of

the Conceptual Framework?
a. Financial statements are prepared and presented at least annually and
are directed toward the common information needs of a limited range
of users.
b. Financial statements do not include items such as reports by directors,
statements by the chairman, discussion and analysis by management
and similar items that may be included in a financial or annual report.
c. The Conceptual Framework applies only to the financial statements of
all commercial, industrial and business reporting entities, which are in
the private sector.
d. Special purpose financial reports, for example, prospectuses and
computations prepared for taxation purposes, are within the scope of
the Conceptual Framework.
18. Which of the following statements correctly relates to the provisions of

a. Financial statements do not form part of the process of financial
reporting.
b. The statement of changes in financial position may be presented in a
variety of ways such as classified or unclassified statement of financial
position.
c. All of the information needs of users cannot be met by financial
statements.
d. The shareholders of an entity have the primary responsibility for the
preparation and presentation of the financial statements of the entity.
19. Which of the following statements incorrectly relates to the provisions

of the Conceptual Framework regarding the use of financial information
by an entity’s management?
a. Management is also interested in the information contained in the
financial statements even though it has access to additional
management and financial information that helps it carry out its
planning, decision-making and control responsibilities.
b. Management has the ability to determine the form and content of such
additional information in order to meet its own needs.
c. The reporting of information for internal use of management is beyond
the scope of the Conceptual Framework.
d. Published financial statements are not based on the information used
by management about the financial position, performance and
changes in financial position of the entity.
20. Who has the primary responsibility for the preparation and
presentation of the financial statements of an entity?
a. shareholders c. management
b. board of directors d. accountant
21. The objective of financial statements is

a. to provide information about the financial position, performance and
changes in financial position of an entity that is useful to a limited
range of users in making economic decisions.
b. to provide information that meets the common needs of all users
c. to provide information that meets the common needs of most users
d. to provide information about the financial position, performance and
changes in financial position of an entity that is useful for managing
day-to-day operations.
22. The following statements relate to the objective of financial

statements, except
a. The objective of financial statements is to provide information about
the financial position, performance and changes in financial position of
an entity that is useful to a wide range of users in making economic
decisions.
b. Financial statements prepared for a wide range of users meet the
common needs of most users.
c. Financial statements provide all the information that users may need
to make economic decisions since they largely portray the financial
effects of past events and do not necessarily provide non-financial
information.
d. Financial statements also show the results of the stewardship of
management, or the accountability of management for the resources
entrusted to it. Those users who wish to assess the stewardship or
accountability of management do so in order that they may make
economic decisions; these decisions may include, for example,
whether to hold or sell their investment in the entity or whether to
reappoint or replace the management.
23. All of the following correctly relate to the provisions of the Conceptual
Framework, except
a. Financial statements do not provide all the information that users may
need to make economic decisions since they largely portray the
financial effects of past events and do not necessarily provide non-
financial information.
b. The economic decisions that are taken by users of financial statements
require an evaluation of the ability of an entity to generate cash and
cash equivalents and of the timing and certainty of their generation.
c. The income statement provides an incomplete picture of performance
unless it is used in conjunction with the balance sheet and the other
financial statements.
d. According to the Conceptual Framework, the underlying assumptions
are accrual basis of accounting and going concern and the implicit
assumptions are accounting entity, periodicity and stable monetary
concept.
24. The financial position of an entity is affected by all of the following,

except
a. the economic resources it controls
b. its performance
c. its liquidity and solvency
d. its capacity to adapt to changes in the environment
e. its financial structure
25. Users are better able to evaluate an entity’s ability to generate cash
and cash equivalents if they are provided with information that focuses on
the entity’s
a. financial position c. cash flows
b. performance d. a, b and c
26. When the going concern becomes inappropriate such as when

liquidation becomes imminent, the assets of an entity should be shown on
the balance sheet at their
a. historical cost c. fair value
b. realizable value d. current cost
27. This information is useful in predicting future borrowing needs and how
future profits and cash flows will be distributed among those with an
interest in the entity; it is also useful in predicting how successful the
entity is likely to be in raising further finance.
a. economic resources c. liquidity and solvency
b. financial structure d. performance
28. This information is useful in predicting the ability of the entity to meet
its financial commitments as they fall due
29. This information is required in order to assess potential changes in the

economic resources that an entity is likely to control in the future.
30. This information is useful in predicting the capacity of the entity to

generate cash flows from its existing resource base. It is also useful in
forming judgments about the effectiveness with which the entity might
employ additional resources.
31. This information is useful in assessing an entity’s its investing,

financing and operating activities during the reporting period.
a. economic resources c. cash flows
32. Financial statements are prepared and presented for external users by
many entities around the world. Although such financial statements may
appear similar from country to country, there are differences which have
probably been caused by a variety of social, economic and legal
circumstances and by different countries having in mind the needs of
different users of financial statements when setting national
requirements. These different circumstances have led/ resulted to all of
the following except
a. use of a variety of definitions of the elements of financial statements;
that is, for example, assets, liabilities, equity, income and expenses.
b. use of different criteria for the recognition of items in the financial
statements and in a preference for different bases of measurement.
c. different audit opinions resulting to various losses, litigations and
differences in audit standards
d. differences in the scope of the financial statements and the disclosures
made in them.
(Adapted)
33. Nearly all users of financial statements are making economic decisions
which include the following
I. decide when to buy, hold or sell an equity investment
II. assess the stewardship or accountability of management
III. assess the ability of the entity to pay and provide other benefits to its
employees
IV. assess the security for amounts lent to the entity
V. determine taxation policies
VI. determine distributable profits and dividends
VII. prepare and use national income statistics
VIII. regulate the activities of entities
State how many items are correctly included in the list.
a. 4 to 5 b. 5 to 6 c. 6 to 7 d. all items are correctly
included
34. When determining how liquid a company is which ratio best provides
the indication?
a. Debt to worth ratio c. Inventory turnover
b. Dupont ratio d. Current ratio
(Adapted)
35. Which is the best ratio indicator for the solvency of a company?
a. Cash flow to debt c. Current ratio
b. Return of average assets d. Debt to equity ratio
(Adapted)
36. The financial position of an entity is affected by

I. the economic resources it controls
II. its financial structure
III. its liquidity and solvency
IV. its capacity to adapt to changes
a. I, II b. I, II, III c. I, II, III, IV d. II, III, IV
37. It refers to the availability of cash in the near future after taking
account of financial commitments over this period.
a. Financial structure c. Solvency
b. Liquidity d. Performance
38. It refers to the availability of cash over the longer term to meet
financial commitments as they fall due.
a. Financial structure c. Solvency
b. Liquidity d. Performance
39. The following statements relate to the objective of financial statements

except
a. Information about financial structure is useful in predicting future
borrowing needs and how future profits and cash flows will be
distributed among those with an interest in the entity; it is also useful
in predicting how successful the entity is likely to be in raising further
finance.
b. Information about liquidity and solvency is useful in predicting the
ability of the entity to meet its financial commitments as they fall due.
c. Information about the performance of an entity, in particular its
profitability is required in order to assess potential changes in the
economic resources that it is likely to control in the future.
d. Information about performance is useful in predicting the capacity of
the entity to generate revenues but not cash flows from its existing
resource base. It is also useful in forming judgments about the
effectiveness with which the entity might employ additional resources.
e. Information concerning changes in the financial position of an entity is
useful in order to assess its investing, financing and operating
activities during the reporting period. This information is useful in
providing the user with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to
utilize those cash flows.
40. Information about financial position is primarily provided in a(n)

a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity
41. Information about performance is primarily provided in a(n)

a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity
42. Information about changes in financial position is provided in the

financial statements
a. through the statement of cash flows
b. through the statement of changes in equity
c. by means of a separate statement
d. all of the above
43. The following relate to the elements of the financial statements which
include (1) elements directly related to the measurement of financial
position and (2) elements directly related to measurement of profit. Which
of the following statements is correctly stated?
I. An asset is a resource controlled by the entity as a result of past
events and from which future economic benefits are expected to flow
to the entity.
II. A liability is a present obligation of the entity arising from past events,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
III. Equity is the residual interest in the assets of the entity after deducting
all its liabilities.
IV. Income is increases in economic benefits during the accounting period
in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
V. Expenses are decreases in economic benefits during the accounting
period in the form of outflows or depletions of assets or incidences of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants.
a. I, II, III b. I, II, III, IV c. I, II, III, V d. I, II, III, IV, V
44. The future economic benefits embodied in an asset may flow to the
entity in a number of ways which include all of the following except
a. Used singly or in combination with other assets in the production of
goods or services to be sold by the entity
b. Exchanged for other assets
c. Used to settle a liability
d. Used to incur or replace an obligation with another obligation
e. Distributed to the owners of the entity
45. The settlement of a present obligation usually involves the entity

giving up resources embodying economic benefits in order to satisfy the
claim of the other party .Settlement of a present obligation may occur in a
number of ways which includes all of the following except
a. Payment of cash or transfer of other assets
b. Replacement of the obligation with another obligation
c. Provision of services
d. Conversion of the obligation to asset
46. Choose the correct statement.

a. The amount at which equity is shown in the balance sheet is
dependent on the measurement of assets and liabilities.
b. Realization is the process of incorporating in the balance sheet or
income statement an item that meets the definition of an element and
satisfies the criteria for recognition set out in paragraph. It involves the
depiction of the item in words and by a monetary amount and the
inclusion of that amount in the balance sheet or income statement
totals.
c. Items that satisfy the recognition criteria should be recognized in the
balance sheet or income statement. The failure to recognize such
items is rectified by disclosure of the accounting policies used or by
notes or explanatory material.
d. An item that meets the definition of an element should be recognized
if: (a) It is probable or reasonably possible that any future economic
benefit associated with the item will flow to or from the entity; and (b)
The item has a cost or value that can be measured with reliability.
e. In many cases, cost or value must be estimated; the use of reasonable
estimates is not an essential part of the preparation of financial
statements and undermines their reliability.
47. Measurement is the process of determining the monetary amounts at

which the elements of the financial statements are to be recognized and
carried in the balance sheet and income statement. This involves the
selection of the particular basis of measurement. A number of different
measurement bases are employed to different degrees and in varying
combinations in financial statements. The measurement bases
enumerated in the Conceptual Framework include all of the following
except
a. Historical cost d. Present value
b. Current cost e. Fair Value
c. Realizable value
48. The measurement basis most commonly adopted by entities in

preparing their financial statements is
a. Historical cost c. Present Value
b. Fair value d. Current cost
49. According to the framework, certain assets are reported in financial

statements at the amount of cash or its equivalent that would have to be
paid if the same or equivalent assets were acquired currently. What is the
name of the reporting concept?
a. Replacement cost c. Historical cost
b. Current market value d. Net realizable value
(AICPA)
50. Historical cost is a measurement base currently used in financial

accounting. Which of the following measurement bases is also currently
used in financial accounting? (Item #1) Current selling price; (Item #2)
Discounted cash flow; (Item #3) Replacement cost
a. Yes, No, Yes c. Yes, No, No
b. Yes, Yes, Yes d. No, Yes, Yes
(AICPA)
51. When discussing asset valuation, the following valuation bases are
sometimes mentioned: replacement cost, exit value and discounted
value. Which of these bases should be considered a current value
measure?
a. Replacement cost and exit value only
b. Replacement cost and discounted cash
c. Exit value and discounted cash flow only
d. Replacement cost, exit value, and discounted cash flow
(AICPA)
52. Four types of money prices are used in measuring resources in

financial accounting. The type which uses such concepts as present value,
discounted cash flow and value in use is known as
a. Price in a current purchase exchange
b. Price in past purchase exchange
c. Price based on future exchange
d. Price in a current sale exchange
(AICPA)
53. 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. c. Net realizable value.
b. Current cost. d. Present value of future cash flows.
(AICPA)
54. The valuation basis used in conventional financial statement is

a. Replacement cost c. Original cost
b. Fair value d. A mixture of cost and value
(Adapted)
55. Imputing interest for certain assets and liabilities is primarily based on
the concept of
a. Valuation c. Consistency
b. Conservatism d. Stable monetary unit
(AICPA)
56. Questions raised by external users of accounting information include:

a. Will the entity be able to repay its loans?
b. What is the entity’s earning potential?
c. Is the business in a financially sound position?
d. All of the above
(Adapted)
Underlying assumption
57. Under the Conceptual Framework, the underlying assumption is
a. Relevance and reliability
b. Concepts of capital maintenance
c. Accrual basis and going concern
d. Going concern
58. It is assumed that the entity has neither the intention nor the need to
liquidate or curtail materially the scale of its operations; if such an
intention or need exists, the financial statements may have to be
prepared on a different basis and, if so, the basis used is disclosed.
a. Growing Concern c. Cash Basis
b. Accrual Basis d. Going Concern
59. The going concern assumption

a. means the entity will continue to exist forever
b. supports the valuation of assets using historical costs and fair values
but do not support valuation in a forced sale transaction.
c. requires that capital expenditures be immediately recognized as
expense
d. is always maintained by all entities
60. The assets of a liquidating entity should be shown on the balance

sheet at their
a. historical cost c. realizable value
b. fair value d. current cost
61. The valuation of a promise to receive cash in the future at present

value on the financial statements of a company is valid because of the
accounting concept of
a. Entity b. Materiality c. Going concern d. Neutrality
(Adapted)
Qualitative characteristics
62. These identify the types of information that are likely to be most useful
to the existing and potential investors, lenders and other creditors for
making decisions about the reporting entity on the basis of information in
its financial report (financial information)
a. Relevance and Faithful representation c. Qualitative characteristics
b. Fundamental qualitative characteristics d. Pervasive constraint
63. What are qualitative characteristics of financial statements according

to the Conceptual Framework?
a. Qualitative characteristics are the attributes that make the information
provided in financial statements useful to users.
b. Qualitative characteristics are broad classes of financial effects of
transactions and other events.
c. Qualitative characteristics are nonquantitative aspects of an entity’s
position and performance and changes in financial position.
d. Qualitative characteristics measure the extent to which an entity has
complied with all relevant Standards and Interpretations.
(Adapted)
64. Under the Conceptual Framework, qualitative characteristics are sub-

classified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental characteristics and those that enhance the usefulness of
financial information
d. not sub-classified
65. Identify the fundamental qualitative characteristics under the

Conceptual Framework.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability
a. I, II b. I, III c. I, II, III, IV, V, VI d. IV, V, VI, VII
66. Identify the qualitative characteristics that enhance the usefulness of

financial information.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability
a. I, II b. I, III c. II, III, IV, V, VII d. IV, V, VI, VII
67. Which of the following are ingredients of relevance under the

I. Predictive value
II. Confirmatory value
III. Timeliness
IV. Materiality
a. I, II b. I, II, III c. I, II, IV d. I, II, III, IV
68. Which of the following are ingredients of faithful representation under
I. Completeness
II. Neutrality
III. Free from error
IV. Reliability
69. According to the Conceptual Framework, the predictive value of the
income statement is enhanced if
a. unusual, abnormal and infrequent items of income or expense are
separately disclosed.
b. the transaction approach is used
c. expenses are presented according to their function
d. the multiple-step method is used
70. For this qualitative characteristic, users are assumed to have a

reasonable knowledge of business and economic activities and accounting
and a willingness to study the information with reasonable diligence.
However, information about complex matters that should be included in
the financial statements because of its relevance to the economic
decision-making needs of users should not be excluded merely on the
grounds that it may be too difficult for certain users to understand.
a. Relevance c. Understandability
b. Reliability d. Comparability
71. Information has this quality when it influences the economic decisions
of users by helping them evaluate past, present or future events or
confirming, or correcting, their past evaluations.
a. Predictive Value c. Reliability
b. Relevance d. Understandability
72. The relevance of information is affected by its

a. Nature b. Risk c. Materiality d. all of these
73. It depends on the size of the item or error judged in the particular
circumstances of its omission or misstatement and provides a threshold or
cut-off point rather than being a primary qualitative characteristic which
information must have if it is to be useful.
a. Materiality b. Relevance c. Budget d. Variance
74. Which of the following is the pervasive constraint under the

a. Timeliness c. Balance between Qualitative Characteristics
b. Cost constraint d. all of the choices
75. Comparability is sometimes sacrificed for

a. Reliability b. Conservatism c. Objectivity d. Relevance
76. This concept defines the accountant’s area of interests and determines
what information should be included in, or excluded from the financial
statements.
a. Periodicity c. Accrual basis
b. Going concern d. Accounting entity
(Adapted)
77. An essential quality of the information provided in financial statements

is that it is readily understandable by users. For this purpose, users are
I. Assumed to have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the information
with reasonable diligence.
II. Informed of the accounting policies employed and changes in those
policies and the effects of such changes.
a. I b. II c. I and II d. Neither I nor II
(Adapted)
78. Decision makers vary widely in the types of decisions they make, the
methods of decision making they employ, the information they already
possess or can obtain from other sources, and their ability to process
information. Consequently, for information to be useful there must be a
linkage between these users and the decisions they make. This link is
a. Relevance b. Reliability c. Understandability d. Materiality
(Adapted)
79. To be relevant, information should have which of the following?

a. Verifiability c. Understandability
b. Feedback value d. Costs and benefits
(AICPA)
80. Which of the following accounting concepts states that before a

transaction is recorded, sufficient evidence must exist to allow two or
more knowledgeable individuals to reach essentially the same conclusion
about the transaction?
a. Continuity assumption c. Cost principle
b. Materiality constraint d. Verifiability quality
81. One of the fundamental qualitative characteristics of financial

statements is
a. Relevance b. Timeliness c. Neutrality d. Completeness
82. If, in Year 1, a company used LIFO; year 2, FIFO; and in year 3, moving
average cost for inventory valuation, which of the following assumptions,
constraints, or principles would be violated:
a. consistency b. time period c. matching d. comparability
83. Technically it is the quality of information that allows comparisons

within a single entity through time or from one accounting period to the
next.
a. Comparability b. Consistency c. Reliability d. Uniformity
84. Objectivity is assumed to be achieved when an accounting transaction

a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arms’ length transaction between two independent parties
d. Allocates revenue or expenses in a rational and systematic manner
(Adapted)
85. Which of the following situations violates the concept of faithful

representation?
a. Financial statements were issued nine months late
b. Report data on segments having the same expected risks and growth
rates to analysts estimating future profits
c. Financial statements included property with a carrying amount
increased to management’s estimate of market value
d. Management reports to stockholders regularly refer to new projects
undertaken, but the financial statements never report project results
(Adapted)
86. Which statement is incorrect concerning the qualitative characteristic

of relevance?
a. The relevance of information is affected by its nature and materiality.
b. To be useful, information must be relevant to the decision-making
needs of users.
c. Information about financial position and past performance is frequently
used as basis for predicting future financial position and performance
and other matters such as dividend and wage payments and ability of
the entity to meet its financial commitments as they fall due.
d. The predictive and confirmatory roles of information are not
interrelated.
87. Consistency is an important factor in comparability within a single

entity, although the two are not the same. The consistency standard of
reporting requires that
a. Some costs should be recognized as expenses on the basis of a
presumed direct association with specific revenue.
b. Assets whose prices or utility are increased by external events other
than transfers should be retained in the accounting records at their
recorded amounts until they are exchanged.
c. Historical cost should be the primary basis used in measuring
inventory; intangible assets and property, plant and equipment.
d. Changes in circumstances or in the nature of the underlying
transactions should be disclosed.
88. Financial information exhibits the characteristic of consistency when

a. Expenses are reported as charges against revenue in the period in
which they are paid.
b. Accounting entities give accountable events the same accounting
treatment from period to period.
c. Gains and losses are not included on the income statement.
d. Accounting procedures are adopted which give a consistent rate of net
income.
89. A company reports only its total account receivable balance in its
balance sheet, as opposed to a complete listing of its individual customer
balances. This is an example of
a. Consistency b. Materiality c. Cost/benefit d. Conservatism
(Adapted)
90. Which of the following statements do not correctly relate to the

provisions of the Conceptual Framework?
I. Consistency is not an important factor in comparability within single
entity.
II. Matching is an accounting concept that states that an accounting
transaction should be supported by sufficient evidence to allow two or
more qualified individuals to arrive at essentially similar measures and
conclusions.
III. Timeliness is an ingredient of the primary qualitative characteristic of
verifiability.
IV. Comparability of financial information between entities is the same as
comparability within a single enterprise.
V. The responsibility for the reliability of an entity’s financial statements
rests with the management.
a. I, II, III, IV b. I, III, IV, V c. III, IV, V d. V
91. The type of consistency also known as “intracomparability” or “period

to period” consistency is
a. horizontal consistency c. vertical consistency
b. three dimensional consistency d. inter comparability
92. Which of the following is considered a pervasive constraint by the

Conceptual Framework for the Preparation and Presentation of Financial
Statements?
a. Benefits/costs b. Conservatism c. Timeliness d.
Verifiability
93. Which of the following four statements about accounting concepts or

principles are correct?
I. The money measurement concept is that items in accounts are
initially measured at their historical cost.
II. In order to achieve comparability it may sometimes be necessary to
override the prudence concept.
III. To facilitate comparisons between different entities it is helpful if
accounting policies and changes in them are disclosed.
IV. To comply with the law, the legal form of a transaction must always be
reflected in financial statements.
a. I and III b. I and IV c. III only d. II and III
(ACCA)

a. All increases in cash and accounts receivable represent revenue which
increases owners’ equity.
b. The fact that an expense is recognized on the income statement
indicates that an equivalent out lay of cash has been made in the same
period
c. Assets are normally recorded at cost for accounting purposes because
cost is objective and value is subjective.
d. Losses are asset expirations that are incurred voluntarily to produce
revenue.
(RPCPA)
The elements of financial statements

95. When should an item that meets the definition of an element be
recognized, according to the Conceptual Framework?
a. When it is probable that any future economic benefit associated with
the item will flow to or from the entity.
b. When the element has a cost or value that can be measured with
reliability.
c. When the entity obtains control of the rights or obligations associated
with the item.
d. When it is probable that any future economic benefit associated with
the item will flow to or from the entity and the item has a cost or value
that can be measured with reliability.
(Adapted)
96. The Conceptual Framework sets out general recognition principles of

financial statement elements which include all of the following except
a. asset recognition c. equity recognition
b. liability recognition d. gain recognition
97. The following statements relate to the concept of “revenue.” Which

statement is not true?
a. Income determination is a technical term that refers to the process of
identifying, measuring and relating revenue and expenses during an
accounting period.
b. Transactions like issuance of capital stock and payment of dividends
between the business entity and its owners cannot give rise to
revenue.
c. Deferred revenue is synonymous with unrealized revenue.
d. The definition of income encompasses both revenue and gains.
(Adapted)
98. Assume that employees confessed to a P500,000 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 classified as an accounts receivable because the employees
are responsible for the goods. Because they cannot pay, the loss would
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 cause the east
amount of attention.
d. Recorded directly to retained earnings because it is not an income-
producing item.
(Adapted)
99. The framework classifies gains and losses based on whether they are
related to an entity's major ongoing or central operations. These gains or
losses may be classified as (Item #1) Nonoperating; (Item #2)
Operating
a. Yes, No b. Yes, Yes c. No, Yes d. No, No
100. Goodwill is recognized in profit or loss under the

a. matching concept
b. systematic and rational allocation concept
c. immediate distribution
d. immediate recognition
101. According to the framework, the objectives of financial reporting for

business entities are based on
a. The need for conservatism.
b. Reporting on management's stewardship.
c. Generally accepted accounting principles.
d. The needs of the users of the information.
102. Information about economic resources controlled by the entity and its
capacity to modify these resources is useful in predicting
I. The ability of the entity to generate cash and cash equivalents in the
future.
II. The capacity of the entity to generate cash flows from its operations.
a. I only b. II only c. I and II d. Neither I nor II
103. During a period when an entity is under the direction of a particular

management, financial reporting will directly provide information about
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance.
(Adapted)
104. 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.
(Adapted)
105. Which of the following items is not listed as a major objective of

financial reporting?
a. Financial reporting should provide information about entity resources,
claims to those resources, and changes in them.
b. Financial reporting should provide information useful in evaluating
management’s stewardship.
c. Financial reporting should provide information useful in investment,
credit, and similar decisions.
d. Financial reporting should provide information useful in assessing cash
flow projects.
106. Which of the following is not an important characteristic or limitation of

the financial statements that accountants currently prepare?
a. The information in financial statements is expressed in units of money
adjusted for changing purchasing power.
b. Financial statements articulate with one another because measuring
financial position is related to measuring changes in financial position
c. The information in financial statements is summarized and. classified
to help meet users’ needs.
d. Financial statements can be justified only if the benefits they provide
exceed the costs.
(Adapted)
107. A condensed report of how the activities of a business have been

financed and how the financial resources have been used is referred to
as:
a. income statement c. statement of cash flows
b. balance sheet d. notes
108. The recognition of periodic depreciation expense on company-owned

automobiles requires estimating both salvage or residual value, and the
useful life of the vehicles. The use of estimates in this case is an example
of
a. conservatism
b. maintaining consistency
c. invoking the materiality constraint rather than the cost benefit
constraint
d. providing relevant data at the expense of reliability
(Adapted)
109. Determining periodic earnings and financial position depends on

measuring economic resources and obligations and changes in them as
these changes occur. This explanation pertains to
a. Disclosure b. Accrual basis c. Materiality d. Matching
110. According to the framework, the process of reporting an item in the

financial statements of an entity is
a. Recognition b. Realization c. Allocation d. Matching
111. What is the purpose of information presented in notes to the financial

statements?
a. To provide disclosures required by generally accepted accounting
principles.
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the totals of the
d. To present management's responses to auditor comments.
(Adapted)
112. An entity with total assets of 100,000,000 and net profit of 9,000,000
purchases staplers with an estimated life of 10 years for 1,000. In
connection with the purchase, the entity debits miscellaneous expense.
This scenario is most closely associated with which of the following
concepts or principles?
a. Materiality and going concern.
b. Relevance and neutrality.
c. Reliability and comparability.
d. Materiality and the balance between cost and benefit
(Adapted)
113. An entity’s revenue may result from
a. A decrease in an asset from primary operations
b. An increase in an asset from incidental transactions
c. An increase in a liability from incidental transactions
d. A decrease in a liability from primary operations
114. Which of the following is an essential characteristic of an asset?

a. The claims to an asset’s benefits are legally enforceable.
b. An asset is tangible.
c. An asset is obtained at a cost.
d. An asset provides future benefits.
(Adapted)
115. Which of the following statements is not consistent with generally

accepted accounting principles as they relate to asset valuation?
a. Assets are originally recorded in the accounting records at cost to the
entity
b. Accountants assume that assets such as supplies, buildings and
equipment will be used in the business operations rather than sold
c. Subtracting total liabilities from total assets results in the current
market value of equity
d. Accountants base asset valuation upon objective, verifiable evidence
rather than on personal opinion
(Adapted)
116. Which of the following would be matched with current revenues on a

basis other than association of cause and effect?
a. goodwill b. sales commission c. cost of sales d. purchases
(Adapted)
117. Some costs cannot be directly related to particular revenue but are
incurred to obtain benefits that are exhausted in the period in which costs
are incurred. An example of such cost is
a. sales commissions c. freight in
b. sales salaries d. prepaid insurance
(Adapted)
118. The basic elements of the financial position of an entity include the
following:
I. economic resources of an entity that are recognized in conformity with
GAAP
II. economic obligations of an entity that are recognized in conformity
with GAAP
III. gross increases in assets or gross decreases in liabilities recognized
and measured in conformity with GAAP
IV. the interest of owners in an entity which is the excess of an entity’
assets over its liabilities
V. gross decreases in assets or gross increases in liabilities recognized
and measured in conformity with GAAP
a. I, II, III, IV, V b. I, II, III, IVc. I, II, III d. I, II, IV
119. In December 200A catalogs were printed for use in a special promotion
in January 200B. The catalogs were delivered by the printer on December
31, 200A, with an invoice for P70,000 attached. Payment was made in
January 200B. The P70,000 should be reported as a deferred cost at the
December 31, 200A balance sheet because of the
a. Matching principle. c. Reliability principle.
b. Revenue recognition principle d. Cost principle.
(Adapted)
120. In expense recognition principle, which of the following is not an

important class of expense?
a. expenditures to acquire assets
b. expenses from non-reciprocal transfers and casualties
c. cost of assets other than products disposed of
d. decline in market prices of inventories held for sale
(Adapted)
121. Whenever costs or expenses cannot be reasonably associated with

specific products but can be associated with specific revenues, the cost
should be,
a. expensed in the period in which the related revenue is recognized
b. charged to expense in the period incurred
c. allocated to specific products based on the best estimate of the
production processing time
d. capitalized an amortized over a period not to exceed 24 months
(Adapted)
122. Which of the following is expended under the systematic and rational
allocation principle of expense recognition?
a. amortization of intangible assets c. cost of merchandise sold
b. transportation to customers d. salesman’s commission
(Adapted)
123. A patent being amortized for a period of (10) years was found to have
no future benefits on the fifth year. The write off of the asset on the fifth
year is an example of the principle of:
a. immediate recognition c. systematic and rational allocation
b. associating cause and effect d. realization
(Adapted)
124. Which of the following is an application of the principle of systematic

and rational allocation?
a. Depreciation of equipment c. Research and development costs.
b. Sales commissions. d. Officers' salaries.
125. The matching concept:

a. requires that the debit is matched or posted for every credit
b. is the name applied to the process of associating expenses with
revenues
c. treats all costs as being directly related to revenue generation
d. treats all costs as expenses
(Adapted)
126. Which of the following in the most precise sense, means the process of
converting noncash resources and rights into cash or claims to cash?
a. Allocation b. Recordation c. Recognition d. Realization
(Adapted)
127. Which of the following statements conforms to the realization concept?

a. Equipment depreciation was assigned to a production department and
then to product unit costs.
b. Depreciated equipment was sold in exchange for a note receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold when the units
were sold.
(Adapted)
128. When a P300 asset with a six-year estimated useful life is recorded as
an expense at the date of purchase, this is an application of the:
a. matching principle c. materiality constraint
b. cost principle d. separate entity assumption
(Adapted)
129. Owners’ equity equals

a. capital minus liabilities c. assets minus liabilities
b. assets plus capital d. capital minus assets
130. In addition to a statement of a financial position, statement of profit or

loss and other comprehensive income, statement of changes in equity,
and statement of cash flows, a complete set of financial statements must
include
a. notes c. net present value of expected future cash flows
b. an auditor’s opinion d. a ten-year summary of operations
(Adapted)
131. The ratio that measures short-term solvency

a. ratio of net in income to revenue c. return on investment
b. age or receivables d. current ratio
(RPCPA)
132. The primary factor that distinguishes a capital expenditure from a

revenue expenditure is:
a. the period in which the expenditure was made
b. the period or periods expected to be benefited
c. the account to be charged
d. the materiality of the expenditure
(RPCPA)
133. Increases in owners’ equity arise from

a. treasury stock acquisition
b. net losses for a period
c. nonreciprocal transfers to an entity from other than owners
d. transfers from a business to its owners
(RPCPA)
134. A modifying convention adopted which is deemed to increase the

usefulness of the income statement regardless of effect on the balance
sheet or other financial statements
a. application of judgment by the accounting profession as a whole
b. matching
c. emphasis on income
d. conservatism
(RPCPA)
135. The total of net income and depreciation which is available for
dividends, expansion of facilities, replacement of assets and for reserve is
called
a. Accounting profit c. Economic income
b. Cash earnings d. Gross income
(RPCPA)
136. Identify the correct statements.

I. The cash basis of accounting recognizes revenue only when cash is
collected.
II. The practice of conservatism tends to understate rather than overstate
net income.
III. Most assets used in operating a business are measured in terms of
current cost.
IV. Return on investment is the measurement of net income by making
certain assumptions about changes in the financial position of a
business entity over its lifetime.
V. Revenue is the difference between the selling price of a service and
the cost of providing such service.
VI. The financial statement with a structure similar to the accounting
equation is the statement of changes in financial position.
a. I, II b. I, II, IV, VI c. I, II, IV, V, VI d. all of the statements
Concepts of capital maintenance and the determination of profit

137. The concept of capital adopted by most entities in preparing their
financial statements is
a. Financial concept of capital c. A combination of (a) and (b)
b. Physical concept of capital d. Neither (a) nor (b)
138. Framework explains both financial and physical capital maintenance

concepts. Which capital maintenance concept is applied to currently
reported net income, and which is applied to comprehensive income?
(Item #1) Currently reported profit; (Item #2) Comprehensive
income
a. Financial capital, Physical capital c. Financial capital, Financial capital
b. Physical capital, Physical capital d. Physical capital, Financial capital
(AICPA)
139. The selection of the appropriate concept of capital by an entity should

be based on the needs of the users of its financial statements. This
concept of capital should be adopted if the users of financial statements
are primarily concerned with the maintenance of nominal invested capital
or the purchasing power of invested capital.
140. This concept of capital should be adopted if the main concern of users
is with the operating capability of the entity.
141. This concept is concerned with how an entity defines the capital that it
seeks to maintain. It provides the linkage between the concepts of capital
and the concepts of profit because it provides the point of reference by
which profit is measured; it is a prerequisite for distinguishing between an
entity's return on capital and its return of capital; only inflows of assets in
excess of amounts needed to maintain capital may be regarded as profit
and therefore as a return on capital.
a. Concept of capital c. Concept of equity and performance
b. Concept of capital maintenance d. Concept of capital and performance
142. Under this concept, a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial
( or money) amount of net assets at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the
period. It can be measured in either nominal monetary units or units of
constant purchasing power.
a. Concept of capital c. Financial capital maintenance concept
b. Concept of capital maintenance d. Physical capital maintenance concept
143. Under this concept, a profit is earned only if the physical productive
capacity ( or operating capability) of the entity (or the resources or funds
needed to achieve that capacity) at the end of the period exceeds the
physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the
period.
a. Concept of capital c. Financial capital maintenance concept
b. Concept of capital maintenance d. Physical capital maintenance concept
144. It is the residual amount that remains after expenses (including capital
maintenance adjustments, where appropriate) have been deducted from
income. If expenses exceed income, the residual amount is a net loss.
a. Equity b. Capital c. Profit d. Net Gains
145. This capital maintenance concept requires the adoption of the current
cost basis of measurement.
a. Physical capital maintenance c. Capital maintenance
b. Financial capital maintenance d. Concept of capital
146. The particular basis of measurement financial capital maintenance

concept requires the use of
a. Historical cost b. Current cost c. Nominal cost d. No
particular basis
147. The principal difference between the two concepts of capital

maintenance is the
a. treatment of the effects of changes in the prices of assets and
liabilities of the entity
b. the basis of measurement required under each concept
c. the valuation of capital being maintained
d. treatment of excess earnings
148. Under the concept of financial capital maintenance where capital is
defined in terms of nominal monetary units, profit represents
a. the increase in nominal money capital over the period
b. the increase in that capital over the period
c. the increase in invested purchasing power over the period
d. the increase in invested purchasing power and net holding gains
during the period
149. When the concept of financial capital maintenance is defined in terms

of constant purchasing power units, profit represents
b. the increase in that capital over the period
during the period
150. Under the concept of physical capital maintenance when capital is

defined in terms of the physical productive capacity, profit represents
b. the increase in physical productive capacity (or operating capability)
over the period
during the period
151. Under the concept of financial capital maintenance where capital is

defined in terms of nominal monetary units, increases in the prices of
assets held over the period, conventionally referred to as holding gains,
are, conceptually
a. profits but they may not be recognized as such until the assets are
disposed of in an exchange transaction
b. profits and they may be recognized as such during the period they
arise
c. not profits but they may be recognized as such over the period until
the assets are disposed of in an exchange transaction
d. not profits but they may be recognized as profits only until the assets
are disposed of in an exchange transaction
152. When the concept of financial capital maintenance is defined in terms

of constant purchasing power units and prices increase during the period
a. all of the increase in the prices of assets is considered as profits
b. only that part of the increase in the prices of assets that exceeds the
increase in the general level of prices is regarded as profit
c. that part of the increase in the prices of assets that exceeds the
increase in the general level and specific level of prices is regarded as
profit, the rest of the increase is not treated as profit
d. none of the increase is treated as profit
153. The selection of the measurement bases and concept of capital,

maintenance will determine the accounting model used in the preparation
of the financial statements. Different accounting models exhibit different
degrees of relevance and reliability and, as in other areas; management
must seek a balance between relevance and reliability. The Framework is
applicable to a range of accounting models and provides guidance on
preparing and presenting the financial statements constructed under the
chosen model. At the present time,
a. the accounting model prescribed is Assets = Liability + Capital
b. the accounting model prescribed is Assets = Liability + Capital +
Revenues – Expenses
c. the accounting model prescribed is Assets – Liability – Preference
shareholders’ equity = Ordinary shareholders’ equity
d. no particular model is prescribed
Chapter 4
Cash & Cash Equivalents

Cash and cash equivalents
1.Which of the following is not considered cash for financial reporting
purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
(Adapted)
2.Which of the following may properly be included as part of cash to be

reported in the December 31, 200A statement of financial position?
a. Treasury bills maturing on March 31, 200B, acquired on December 1,
200A.
b. Customer’s check dated January 1, 200B and sent to bank for deposit
on December 31, 200A.
c. Shares of stocks to be sold on the first week of January 200B.
d. Preference shares with mandatory redemption and acquired three
months prior to redemption date.
3.Bank overdrafts, if material, should be

a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.
(Adapted)
4.Deposits held as compensating balances

a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included
as cash.
c. if legally restricted and held against long-term credit may be included
among current assets.
d. none of these.
(Adapted)
5.The effect of compensating balance is

a. to provide greater security for the borrower
b. to decrease the yield on the loan to the lender
c. to increase the yield on the loan to the borrower
d. to increase the yield on the loan to the lender.
(Adapted)
6.Which of the following statements is incorrect?

a. Cash which is restricted and not available for use within one year of the
reporting period should be included in noncurrent assets.
b. Cash in a demand deposit account, being held specifically for the
retirement of long-term debts not maturing currently, should be
excluded from current assets and shown as a noncurrent investment.
c. Investments which can be liquidated at once and with little risk of loss
of principal may be classified as cash equivalent and included in the
caption “Cash and Cash equivalents”
d. Compensating balances are cash amounts that are not immediately
accessible by the owner.
e. Cash and cash equivalents is always presented first in statement of
financial position when presenting current and non-current
classifications.
7.Alaking received cash to be held in trust for Ambit under an escrow

agreement. Such cash should be presented in Alaking’s financial
statements as
a. part of cash
b. a liability
c. an asset and a liability
d. an off-balance sheet item but disclosed in the notes
8.These are short-term, highly liquid investments that are so near their
maturity that they represent insignificant risk of changes in value due to
changes in interest rates.
a. Cash and Cash equivalents c. Treasury notes
b. Treasury bills d. Cash equivalents
9.When the bank receives cash from a depositor, the cash should be
credited to
a. Cash c. Accounts payable
b. Cash in bank d. Deposit liability
10. Devin Co.'s cash balance in its balance sheet is P1,300,000, of which
P300,000 is identified as a compensating balance. In addition, Devin has
classified cash of P250,000 that has been restricted for future expansion
plans as "other assets". Which of the following should Devin disclose in
notes to its financial statements?
(Item #1) Compensating balance; (Item #2) Restricted cash
a. Yes, Yes b. Yes, No c. No, Yes d. No, No
(AICPA)
11. Which of the following is/are true about "compensating balances?"

I. They are reserve balances maintained for emergency spending
requirements.
II. If compensating balances are legally restricted, they must be
segregated on the balance sheet.
III. Compensating balances are overstated if "floats" are included as part
of the cash.
a. II only b. I & III c. I, II & III d. II & III
(Adapted)
12. Which of the following best qualifies as a "cash equivalent?"

a. A firm's investment in "held to maturity" government treasury bonds
that mature in 5 years.
b. A firm's equity investment in an unconsolidated subsidiary of a privately
held firm.
c. A firm's investment in government treasury bills.
d. All of these answers.
(Adapted)
13. Float refers to:

a. the number of days that a bank will allow a corporation to hold a
negative balance in its checking account before charging fees for the
negative balance.
b. the companies bank balance in excess of its working capital needs.
c. the receivable balance on the books of the corporation.
d. checks issued but not yet paid by a bank.
(Adapted)
14. On an entity’s December 31, 20x1 statement of financial position

which of the following items should be included in the amount reported as
cash?
I. A check payable to the enterprise, dated January 2, 20x2, in payment of
a sale made in December 20x1.
II. A check drawn on the enterprise’s account, payable to a vendor, dated
and recorded in the company’s books on December 31, 20x1 but not
mailed until January 10, 2002.
a. I only b. II only c. I and II only d. Neither I nor II
(Adapted)
15. The amount reported as "Cash" on a company's balance sheet

normally should exclude
a. postdated checks that are payable to the company
b. cash in a payroll account
c. undelivered checks written and signed by the company
d. petty cash
(Adapted)
16. Which of the following would not be classified as cash?

a. Personal checks c. Cashier’s checks
b. Traveler’s checks d. Postdated checks
(Adapted)
17. On October 31, 2003, Dingo, Inc. had cash accounts at three different
banks. One account balance is segregated solely for a November 15, 2003
payment into a bond sinking fund. A second account, used for branch
operations, is overdrawn. The third account, used for regular corporate
operations, has a positive balance. How should these accounts be reported
in Dingo’s October 31, 2003 classified balance sheet?
a. The segregated account should be reported as a noncurrent asset, the
regular account should be reported as a current asset, and the
overdraft should be reported as a current liability.
b. The segregated and regular accounts should be reported as current
assets, and the overdraft should be reported as a current liability.
c. The segregated account should be reported as a noncurrent asset, and
the regular account should be reported as a current asset net of the
overdraft.
d. The segregated and regular accounts should be reported as current
assets net of the overdraft.
(Adapted)
18. Compensating balance agreements that do not legally restrict the

amount of funds shown on the balance sheet should:
a. be reported in the current asset section
b. be reported in the Long-term investment section
c. be reported in the other asset section
d. be reported in the footnotes
(Adapted)
19. Bank overdraft
a. Is a debit balance in a cash in bank account.
b. Is offset against demand deposit account in another bank.
c. Which cannot be offset is classified as current liability.
d. Which cannot be offset is classified as non-current liability.
20. Cash in foreign currency is valued at

a. Face value
b. Current exchange rate
c. Current exchange rate reduced by allowance for expected decline in
peso
d. Estimated realizable value
21. If material, deposit in foreign countries which are subject to foreign

exchange restriction should be shown separately as
a. Current asset with no disclosure of the restriction.
b. Non-current asset with no disclosure of the restriction.
c. Current assets with disclosure of the restriction.
d. Non-current asset with disclosure of the restriction.
Internal controls for cash

22. In an imprest system, it is the fund set aside for small disbursements
a. Pretty cash fund c. Payroll fund
b. Dividends fund d. Petty cash fund
23. When making payments to suppliers, an entity normally credits this

account.
a. Cash c. Cash in bank
b. Vouchers payable d. Accounts payable
24. Which of the following is least likely the purpose of preparing bank
reconciliation?
a. to bring the cash in bank balance per books and per bank statement in
agreement
b. as an internal control procedure for safeguarding assets
c. to detect fraud
d. to recognize items such as expenses and assets not recorded

I. The voucher system refers to the complete use of the voucher check
and of subsidiary records of vouchers payable, voucher register and
check register
II. The simplest and most satisfactory method of handling purchase
discounts under the voucher system is to deduct the purchase discount
on the face of the voucher and enter this discount in a special column in
the check register
III. Entries in the voucher register are made in the same sequence as the
numbering of the checks – that is, in the order in which payments are
made.
a. true, true, false c. false, false, false
b. true, false, false d. true, true, true
(RPCPA)
26. Which of the following is not a basic characteristic of a system of cash

control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
(Adapted)
The next two questions are based on the following information:

The information below was taken from the bank transfer schedule prepared
during the audit of Fox Co.’s financial statements for the year ended
December 31, 2001. Assume all checks are dated and issued on December
30, 2001.
Bank Disbursement Receipt date
Accounts date
Check From To Per Per Per Per
no. books bank books bank
101 Nation Federal Dec. 30 Jan. 4 Dec. 30 Jan. 3
al
202 Count State Jan. 3 Jan. 2 Dec. 30 Dec.
y 31
303 Feder Americ Dec. 31 Jan. 3 Jan. 2 Jan. 2
al an
404 State Republi Jan. 2 Jan. 2 Jan. 2 Dec.
c 31
27. Which of the following checks might indicate kiting?

a. #101 and #303. c. #101 and #404
b. #202 and #404 d. #202 and #303
(AICPA)
28. Which of the following checks illustrate deposits/ transfers in transit at

December 31, 2001?
a. #101 and #202. c. #202 and #404
b. #101 and #303 d. #303 and #404
(AICPA)
29. For effective eternal control over the disbursement of payroll checks,
an enterprise makes a specific amount of cash available in a checking
account for this limited purpose. The type of account used for this purpose
is called a(n)
a. General checking account c. Lockbox account
b. Imprest bank account d. Compensating balance
(Adapted)
30. The principal purpose of a voucher system is to provide assurance that

a. All cash receipts are deposited intact in the bank
b. All cash disbursements are approved before a check is issued
c. All cash receipts are recorded in the accounting records
d. All purchase invoices are supported by debit memoranda
31. Which of the following best describes a voucher?

a. A supporting document prepared for each cash receipt and
disbursement
b. A promise to pay an amount owed within a discount period
c. A written authorization prepared for each check written
d. A written record sent to a payee along with the signed check
32. A voucher system is used in connection with transactions that involve
only
a. The receipt of cash c. The purchase and sale of merchandise
b. The payment of cash d. Revenue and expense
33. It is the business paper which a company makes for every cash
payment.
a. Check b. Voucher c. Journal d. Official receipt
34. After vouchers are recorded, they are filed in an “unpaid vouchers file”
a. Numerically c. Chronologically
b. In the order of payment d. No particular order
35. Which of the following is not a correct way of handling a voucher

system?
a. Purchases are recorded in the voucher register at gross by debiting
purchases and crediting vouchers payable.
b. Payment of purchases with discounts is recorded in the check register
by debiting vouchers payable at gross and crediting respectively cash
in bank and purchase discounts.
c. In case there are purchase returns and allowances, there is no need to
cancel the original voucher and the issuance of a new one for the lower
amount because adjusting entries could later on be prepared.
d. When installments or other payments are made on an invoice, a
separate voucher is prepared for the amount of each check issued.
(Adapted)
36. Which of the following is a key element of internal control over cash
payments?
a. periodically reconciling the cash account balance on the company's
books to the bank statement balance
b. making daily bank deposits
c. requiring that all petty cash vouchers be approved by two signatures
d. authorizing and verifying that all cash received is recorded daily
(Adapted)
37. Which is not a key element of internal control over cash receipts?
a. daily recording of all cash receipts in the accounting records
b. daily entry in a voucher register
c. immediate counting by the person opening the mail or using the cash
register
d. daily deposit intact
(Adapted)
38. This occurs when collection of receivable from one customer is

misappropriated and then concealed by applying a subsequent collection
from another customer.
a. Lapping b. Kiting c. Window dressing d. Fraud
39. This occurs when cash shortage is concealed by overstating the

balance of cash. This is performed by exploiting the float period (the time
it needs for a check to clear at the bank it was drawn).
40. This document shows the dates of all transfers of cash among the
various bank accounts. Its primary purpose is to help auditors detect
kiting.
a. Cut-off bank statement c. Bank transfer schedule
b. Bank reconciliation d. Proof of cash
41. This document is a bank statement prepared a few days after month-
end. Its purpose is to help auditors verify reconciling items on the year-end
bank reconciliation.
a. Cut-off bank statement c. Bank transfer schedule
b. Bank reconciliation d. Proof of cash
42. This refer to measures taken by management to make a business look

as strong as possible in its statement of financial position, statement of
profit or loss and other comprehensive income, and statement of cash
flows. It occurs when books are not closed at year-end and transactions in
the subsequent period are deliberately recorded in current period in order
to improve the entity’s financial performance or financial ratios.
43. This internal control for cash requires that cash collections are
deposited intact and cash disbursements are made through check.
a. Segregation of duties c. Imprest system
b. Voucher system d. Bank reconciliation
Petty cash
44. Who is responsible, at all times, for the amount of the petty cash fund?
a. The president c. The general cashier
b. The general office manager d. The petty cash custodian
45. Which of the following is not an appropriate procedure for controlling

the petty cash fund?
a. 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.
b. 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.
c. The petty cash custodian obtains signed receipts from each individual
to whom petty cash is paid.
d. Upon receiving petty cash receipts as evidence of disbursements, the
general cashier issues a company check to the petty cash custodian,
rather than cash, to replenish the fund.
(Adapted)
46. Which one of the following statements is incorrect?

a. The accounting function should be separated from the custodianship of
a company's assets.
b. Certain clerical personnel in a company should be rotated among
various jobs.
c. The responsibility for receiving merchandise and paying for it should
usually be given to one person.
d. A company's personnel should be given well-defined responsibilities.
(Adapted)
47. A petty cash system is designed to

a. cash checks for employees.
b. handle cash sales.
c. account for all cash receipts and disbursements.
d. pay small miscellaneous expenses.
(Adapted)
48. In most situations, the petty cash fund is reimbursed just prior to the
year end and an adjusting entry is made to avoid
a. the overstatement of cash and the understatement of expenses.
b. the understatement of cash and the overstatement of expenses.
c. the misstatement of revenues.
d. the understatement of cash with the appropriate statement of
expenses.
(Adapted)
49. In replenishing a petty cash fund, which one of the following entries is
required?
a. Debit Petty Cash, credit Cash in bank
b. Debit individual expense accounts, credit Cash in bank
c. Debit Petty Cash, credit individual expense accounts
d. Debit Cash in bank, credit Petty Cash
50. On January 1, 20x1, UFC Co. established a petty cash fund of P400. On
December 31, 20x1, the petty cash fund was examined and found to have
receipts and documents for miscellaneous expenses amounting to P364. In
addition, there was cash amounting to P44. What entry would be required
to record replenishment of the petty cash fund on December 31, 20x1?
a. Petty Cash.................................364
Cash Short and
Over..............................................8
Cash in
bank.......................................................356
b. Miscellaneous Expense...........364
Cash Short and
Over..............................................8
Petty
Cash..........................................................356
c. Miscellaneous Expense...........364
Cash Short and
Over...............................................8
Cash in
bank........................................................356
d. Miscellaneous Expense...........356
Cash Short and Over....................8
Cash in
bank........................................................364
(Adapted)
Bank reconciliation
51. Adjusting and correcting entries in the books of the company are
necessary for
a. Book reconciling items c. Errors committed by the bank
b. Bank reconciling items d. a and c
52. Bank reconciliations are normally prepared

a. on “as needed” basis
b. on a monthly basis
c. every time financial statements are prepared
d. only at year-end
53. In preparing the bank reconciliation, certified checks should be

excluded from outstanding checks. The rationale for this treatment is
a. the bank, when certifying checks, draws the check in its account
b. the bank, when certifying checks, automatically debits the company’s
account
c. the bank, when certifying checks, automatically credits the company’s
account
d. the bank, when certifying checks, assumes the obligation to pay the
drawee when the check is presented for payment
54. Unless otherwise stated, reconciling items are presumed to have been
taken up in the books or taken up by the bank
a. during the month the bank statement is prepared
b. in the immediately following month
c. in the immediately preceding month
d. in the immediately following or preceding reporting period, on a case-
to-case basis
55. In preparing the bank reconciliation using the adjusted balance

method, the first item listed in the bank reconciliation report for
reconciling the balance of cash in bank per books to the adjusted balance
is the
a. balance of cash in bank per books as of the end of the month
b. balance of cash in bank per books as of the beginning of the month
c. balance of cash in bank per bank statement as of the end of the month
d. balance of cash in bank per bank statement as of the beginning of the
month

method, the first item listed in the bank reconciliation report for
reconciling the balance of cash in bank per bank statement to the adjusted
balance is the
a. Balance of cash in bank per books as of the end of the month
b. balance of cash in bank per books as of the beginning of the month
c. balance of cash in bank per bank statement as of the end of the month
d. balance of cash in bank per bank statement as of the beginning of the
month

method, errors to be included in reconciling the balance per books to the
adjusted balance include
a. only the errors committed by the company
b. only the errors committed by the bank
c. both the errors committed by the company and the bank
d. choice (c) if both errors affect the balance per books
58. Which of the following is deducted from the cash balance per bank
when computing for the cash balance reported in the books?
a. Deposit in transit c. Credit memo
b. Error d. Debit memo
59. When presenting a bank reconciliation statement prepared using the
book to bank method, which of the following is as a deduction in order to
compute for the cash balance per bank?
a. Deposit in transit c. Credit memo
b. Error d. Outstanding checks
60. In reconciling a business cash book with the bank statement, which of
the following items could require a subsequent entry in the cash book?
1. Checks presented after date.
2. A check from a customer which was dishonored.
3. An error by the bank.
4. Bank charges.
5. Deposits credited after date.
6. Standing order entered in bank statement.
a. 2, 3, 4 and 6 b. 1, 2, 5 and 6 c. 2, 4 and 6 d. 1, 3 and 5
(ACCA)
61. A bank reconciliation is
a. A formal financial statement that list all of the bank account balances of
an enterprise.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the differences between an enterprise’s
cash balance as shown on its bank statement and the cash balance
shown in its general ledger.
(AICPA)
62. If the balance shown on a company's bank statement is less than the
correct cash balance, and neither the company nor the bank has made any
errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
(AICPA)
63. If the cash balance shown in a company's accounting records is less

than the correct cash balance, and neither the company nor the bank has
made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. deposits in transit.
c. outstanding checks.
d. bank charges not yet recorded by the company.
(Adapted)
64. Which of the following statements is false?

a. Certified check is a liability of the bank certifying it.
b. Certified check will be accepted by many persons who would not
otherwise accept a personal check.
c. Certified check is one drawn by the bank upon itself.
d. Certified check should not be included in the outstanding check.
(Adapted)
65. Bank statements provide information about all of the following except
a. checks cleared during the period c. bank charges for the period
b. NSF checks d. errors made by the company
(Adapted)
66. Which of the following items would be added to the book balance on a
bank reconciliation?
a. Outstanding checks
b. A check written for P63 entered as P36 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
(Adapted)
67. In preparing a bank reconciliation, interest paid by the bank on the

account is
a. added to the bank balance c. added to the book balance
b. subtracted from the bank balance d. subtracted from the book
balance
(Adapted)
68. In preparing a monthly bank reconciliation, which of the following

items would be added to the balance reported on the bank statement to
arrive at the correct cash balance?
a. Outstanding checks
b. Bank service charge
c. Deposits in transit
d. A customer's note collected by the bank on behalf of the depositor
69. Bank reconciliations are normally prepared on a monthly basis to

identify adjustments needed in the depositor's records and to identify bank
errors. Adjustments should be recorded for
a. bank errors, outstanding checks, and deposits in transit.
b. all items except bank errors, outstanding checks, and deposits in
transit.
c. book errors, bank errors, deposits in transit, and outstanding checks.
d. outstanding checks and deposits in transit.
Proof of cash
70. A reconciliation that includes proof of receipts and disbursements that
is useful in discovering possible discrepancies in handling cash over a
certain period of time.
a. Bank statement c. Proof of cash
b. Bank reconciliation d. Cash requirements report
71. A device not normally prepared on a regular basis but is a very useful
tool during fraud audits regarding defalcation of cash
a. Lapping statement c. Proof of cash
b. Bank reconciliation d. Cash requirements report
72. Regarding the preparation of a proof of cash, an erroneous book credit

committed in the previous month which is corrected this month
a. is an addition to previous month's balance per books and a deduction to
receipts in current month
b. is a deduction to previous month's balance per books and a deduction
to receipts in current month
c. is an addition to current month's balance per books and a deduction to
receipts in previous month
d. is an addition to previous month's balance per bank statement and a
deduction to receipts in current month
73. When preparing a proof of cash, the correction for an overstatement of
cash in the previous month
a. is an addition to previous month's balance per books and a deduction to
receipts in current month
b. is a deduction to previous month's cash balance and a deduction to
current month's disbursements
c. is an addition to previous month's balance per bank statement and a
deduction to receipts in current month
d. is an addition to previous month's balance per bank statement and a
deduction to current month's disbursements
74. A proof of cash would be useful for

a. Discovering cash receipts that have not been recorded in the journal.
b. Discovering time lag in making deposits.
c. Discovering cash receipts that have been recorded but have not been
deposited.
d. Discovering an inadequate separation of incompatible duties of
employees.
(Adapted)
75. Del Co. prepares a four-column bank reconciliation. Check no. 8859
was written for P5,670 on the books, but the check was written and
cleared the bank for the correct amount, P6,570. The correct treatment on
the reconciliation would be:
a. on the bank side, deduct P900 from payments and add P900 to ending
balance
b. on the book side, deduct P900 from payments and add P900 to ending
balance
c. on the book side, add P900 to payments and deduct P900 from ending
balance
d. on the bank side, add P900 to receipts and add P900 to ending balance
(Adapted)
Chapter 5
Receivables (Part 1)

1. Receivables arising from sales to customers are best described as
a. accounts receivables c. trade receivables
b. note receivables d. non-trade receivables
2. If a receivable account has a credit balance

a. the credit balance is offset with other receivable accounts with debit
balances
b. an adjusting entry is needed to eliminate the credit balance
c. the credit balance is classified as a liability
d. b and c
3. Which of the following increases the reported receivables in the financial

statements?
a. offsetting a credit balance in an account receivable
b. a credit balance in an account payable
c. adjustment to eliminate a debit balance in account payable
d. a credit balance in an allowance account
4. The category "trade receivables" includes

a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
(Adapted)
5. Which of the following should be recorded in Accounts Receivable?

a. Receivables from officers c. Dividends receivable
b. Receivables from subsidiaries d. None of these
(Adapted)
6. Which of the following is not a characteristic of receivables?

a. They have fixed or determinable payments.
b. The holder can recover substantially all of its investment (unless there
has been credit deterioration).
c. They are not quoted in an active market.
d. The holder has a demonstrated positive intention and ability to hold
them to maturity.
(Adapted)
7. Which of the following is not an acceptable balance sheet presentation of

receivables?
a. the allowance for bad debts is not offset against the related
receivables but rather shown in a parenthetical notation as deduction
to receivables
b. trade notes receivable are combined with trade accounts receivable
c. cash advances to officers which are due after one year but within the
entity’s 18-month operating cycle, are reported as current assets
d. unearned finance charges included in the face amount of receivables
are presented as deduction from the related receivables
(Adapted)
8. These receivables are classified as current or noncurrent based on the

length of the entity’s normal operating cycle
a. accounts receivables c. trade receivables
b. notes receivables d. nontrade receivables
9. Trade receivables are preferably presented on the face of the statement
of financial position
a. as a separate line item distinguished from other receivables
b. as part of one line item, included and undistinguished from other
receivables
c. as part of current assets, included and undistinguished from other
assets
d. as part of one line item but distinguished from other receivables
10. Which of the following statements is incorrect regarding recognition of

receivables?
a. An entity shall recognize a receivable when the entity becomes party
to the contractual provisions of the instrument
b. Trade receivables are recognized simultaneously with the recognition
of related revenue when the criteria for revenue recognition are met.
c. Non-trade receivables are recognized when contractual rights over the
future cash flows of the receivables have been established and future
economic benefits are both probable and measurable.
d. Receivables are initially recognized at fair value
11. Receivables are initially recognized at

a. fair value c. net realizable value
b. amortized cost d. fair value plus direct costs
12. For trade receivables, the fair value is deemed equal to the
a. exchange price between a seller and a buyer after taking into account
the amount of any trade discounts and volume rebates allowed by the
entity.
b. the amount due from the buyer without adjustment for any trade
discounts allowed
c. the quoted price of the receivable in an active market
d. the price in a binding sale agreement
13. The entry to be made by the seller for a P10,000 freight on a sale
transaction with terms of FOB Shipping Point, Freight Collect is
a. Freight-in 10,000 c. Freight-in 10,000
Cash 10,000 Receivable 10,000
b. Freight-out 10,000 d. No entry
Cash 10,000
transaction with terms of FOB Shipping Point, Freight Prepaid is
a. Payable 10,000 c. Freight-out 10,000
Cash 10,000 Cash
10,000
b. Receivable 10,000 d. Cash 10,000
Cash 10,000 Receivable
10,000
transaction with terms of FOB Destination, Freight Prepaid is
Cash 10,000 Receivable
10,000
b. Freight-out 10,000 d. Accounts receivable10,000
Cash 10,000 Cash
10,000
16. What is the effect upon the total assets of a business when an account
receivable has been collected?
a. increase total assets c. no change in total assets
b. decrease total assets d. decrease of receivable only
17. The value at which advances to subsidiaries and affiliates should be

carried is
a. face amount
b. fair value
c. face amount less allowance for uncollectible accounts and impairment
losses recognized
d. fair value with changes in fair values recognized in profit or loss
18. If it is known that sales are often recorded for merchandise that is
shipped on approval and available data suggests that a material
proportion of such sales are returned by the customers,
a. loss should be recognized under the immediate recognition principle
b. loss should be recognized under the matching concept
c. these estimated future returns must be accrued
d. future returns are ignored
19. Material amounts of anticipated discounts and allowances should be

recorded
a. in the period of sale c. when the boss says so
b. when discounts are availed of d. they are not recorded
20. The “Allowance for sales discounts” account may be used under
a. Gross method c. Allowance method
b. Net method d. a or b
21. The “Allowance for sales returns” account may be used under
a. Gross method c. Allowance method
b. Net method d. a or b
22. If a company employs the gross method of recording accounts

receivable from customers, then sales discounts taken by customers
should be
a. reported as a deduction from sales in the income statement.
b. reported as an item of "other expense" in the income statement.
c. reported as a deduction from accounts receivable in determining the
net realizable value of accounts receivable.
d. reported as sales discounts forfeited in the cost of goods sold section
of the income statement.
23. An allowance for cash discounts that is presented in the financial

statements as deduction from accounts receivable and is based on an
estimate of future cash discounts expected to be taken is an effect of
a. consistency principle c. materiality principle
b. revenue principle d. conservatism principle
24. Poison Company sold merchandise on credit with a list price of

P70,000. Terms were 2/10, n/30. Given the indicated sales discounts
methods in the responses, which entry is correct?
a. Gross price method
Accounts receivable 63,000
Sales 63,000
b. Net price method
Sales 68,600
c. Net price method
Sales 40,000
d. Gross price method
Sales 68,600
(RPCPA)
25. The “Sales returns and allowances” account is reported as a:

a. contra-revenue account in the income statement
b. current liability on the balance sheet
c. deduction from accounts receivable on the balance sheet
d. selling expense on the income statement
26. Theoretically, the amount of estimated future returns and allowances

on credit sales should be recorded during the period of the sale so as not
to overstate sales and ending accounts receivable. In practice, these
estimates are rarely recorded because:
a. the amount of such returns and allowances tends to fluctuate too
greatly from period to period.
b. there is too much uncertainty surrounding such estimates.
c. such estimates are not allowed according to generally accepted
accounting principles
d. the amount of such returns and allowances is usually not material
(RPCPA)
27. The most theoretically sound method of accounting for cash discounts
on credit sales is the:
a. net method c. gross method
b. discounted price method d. net present value
(RPCPA)
28. Which of the following is an advantage of using the net price method
for recording cash discounts on credit sales?
a. It eases communication with customers about their balances
b. It properly reflects current period sales revenue
c. It simplifies recording of sales returns and allowances
d. It requires less record keeping than the gross method
(RPCPA)
29. Which of the following affects most the valuation of an entity's

receivables?
a. The rate of sales growth
b. The type of business that a firm is engaged in
c. The allowance for uncollectible accounts
d. The seasonality of a company's products
30. A credit entry to the Allowance for uncollectible account

a. increases the balance c. neither of these answers is correct
b. increases net receivables d. both of these answers are correct
31. Which of the following is used to calculate the actual adjustment for
bad debt expense for the period?
a. percentage of accounts receivable c. aging
b. percentage of net credit sales d. all of these
32. The allowance for uncollectible accounts is based on all of the following
except:
a. Experience c. Customer fortunes
b. Profitability expectancy d. Industry expectations
33. Which of the following is a valuable investigation tool for analysis of

the collectibility of a firm's receivables?
a. Determining patterns of receivables for peers as a percentage of net
credit sales.
b. An examination of any customer concentrations.
c. An analysis of the adequacy of allowances for trade discounts, and
returns and allowances.
d. An aging schedule.
e. All of these
34. In practice, the deductions that would be made for estimated returns,
allowances, and discounts are rarely made because
a. they are usually deemed to be immaterial
b. GAAP does not require such allowances
c. it is always difficult to make estimates
d. such estimates are a matter of company policy
35. Under the direct method,

a. doubtful accounts are charged as an expense
b. estimates for uncollectible accounts are made periodically and an
allowance is set up to recognize such uncollectible accounts
c. an expense is recognized when it is estimated that the collection from
a receivable is deemed doubtful
d. a receivable is charged off only when it is clear that it cannot be
collected
36. Doubtful accounts expense should be presented in the income

statement under
a. selling expense c. administrative expense
b. other expense d. cost of goods sold
37. When the allowance method of recognizing uncollectible accounts is

used, how would the collection of an account previously written off affect
accounts receivable and the allowance for uncollectible accounts?
Item #1: Accounts receivable; Item #2: Allowance for uncollectible
accounts
a. Increase , Decrease c. No effect, Decrease
b. Increase, No effect d. No effect, Increase
(AICPA)
38. Which of the following methods of determining bad debt expense does
not conform with the accrual basis of accounting nor the matching
principle?
a. Charging bad debts with a percentage of net credit sales under the
allowance method.
b. Charging bad debts with an amount derived from a percentage of
accounts receivable under the allowance method.
c. Charging bad debts with an amount derived from aging accounts
receivable under the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
39. Which of the following methods of determining bad debt expense best
achieves the matching concept?
a. Percentage of net credit sales
b. Percentage of ending accounts receivable
c. Aging of accounts receivable
d. Direct write-off
40. Which of the following is a generally accepted method of determining

the amount of the adjustment to bad debt expense?
a. A percentage of net credit sales adjusted for the balance in the
allowance
b. A percentage of net credit sales not adjusted for the balance in the
allowance
c. A percentage of accounts receivable not adjusted for the balance in
the allowance
d. An amount derived from aging accounts receivable and not adjusted
for the balance in the allowance
41. The advantage of relating a company's bad debt expense to its credit
sale is that this approach
a. gives a reasonably correct statement of receivables in the balance
sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
(AICPA)
42. Chris Co. prepares an accounts receivable aging schedule with a series
of computation as follows: 2% of the total peso balance of accounts from
1—60 days past due, plus 5% of the total peso balance of accounts from
61—120 days past due and so on. How would you describe the total of
the, amounts determined in this series of computations?
a. it is the amount of bad debts expense for the year
b. it is the amount that should be added to the allowance for doubtful
accounts at year end
c. it is the amount of the desired credit balance of the allowance for
doubtful accounts to be reported in the year-end financial statements
d. when added to the total of accounts written off during the year, this
new sum is the desired credit balance of the allowance account
(RPCPA)
43. Ismael Co. recorded a bad debt recovery using the allowance method
of accounting for bad debts. Compare (X) the working capital before the
recovery with (Y), the working capital after the recovery.
a. X equals Y c. X is less than Y
b. X is greater than Y d. X is equal to or less than Y
(RPCPA)
44. Mr. Golf Champ maintains the accounts receivable records, authorizes
the write-off of uncollectible accounts, issues credit memoranda to
customers, and handles cash receipts from customers. When customers
are late in paying their accounts, Mr. Golf Champ often writes off the
account as uncollectible and abstracts the cash received from the
customer. This fraud should come to light if an employee other than Mr.
Golf Champ.
a. reconciles the bank statement to the accounting records
b. reconciles the accounts receivable subsidiary ledger to the controlling
account
c. reconciles credit memoranda for sales returns to the returned
merchandise accepted by the receiving department
d. none of the above
(RPCPA)

a. The net realizable value of the total amount of accounts receivable is
defined as the gross amount billed to customers less any cash and
trade discounts.
b. When a specified bad debt which has already been written off is later
collected, sales revenue is increased by the amount of the recovery.
c. The primary accounting principle supporting use of the allowance for
doubtful accounts is the cost principle.
d. An estimate of bad debt expense based upon credit sales rather than
total sales will likely be more in conformity with the matching principle.
46. Which of the following methods may not be appropriate for estimating
bad debt expense?
a. Individual or collective assessment of outstanding receivables
b. Percentage of outstanding accounts receivable
c. Aging of accounts receivable
d. Percentage of sales
(Adapted)

a. If the estimate of bad debt expense is made on the basis of net credit
sales, an entry is made each period to the account, "Allowance for
Doubtful Accounts," without regard to the prior balance in that
account.
b. If the allowance for doubtful accounts has been underestimated, a sale
of the related receivables to a factor is more likely to result in a gain
than in loss.
c. If credit terms to customers were 2/10, n/30, a two percent discount
will be granted if payment is made within 10 days of the date of sale.
d. If the estimate of the bad debt expense is made on the basis of net
realizable value of the accounts receivable the balance of the account,
"Allowance for Doubtful Accounts," is adjusted so that the adjusted
balance reflects the computed amount needed to properly value the
receivables.
(RPCPA)
48. Which of the following accounting principle primarily supports the use
of allowance for doubtful accounts?
a. continuity principle c. matching
b. full-disclosure d. cost principle
(RPCPA)
49. The allowance method of recognizing bad debt expense can be applied
in more than one way. What two conditions must be met before the
allowance method can be used?
a. bad debts must be expected and material
b. bad debts must be relevant and reliable
c. bad debts must be probable and estimable
d. bad debts must be consistent over time and the method used to
estimate them must be consistently applied
(RPCPA)
50. A company uses the allowance method to account for bad debts. Early
20x1, one of the company's best customers went bankrupt. The customer
owed for P6,570 of goods purchased on credit. At the end of 20x1, this
amount was considered uncollectible. What entry should be made to
reflect this information?
a. Loss of bad debts 6,570
b. Bad debt expense 6,570
c. Allowance for doubtful accounts 6,570
d. Loss on bad debts 6,570
(RPCPA)
51. If a company uses a percentage of receivables in computing the

amount of uncollectible accounts expense:
a. no valuation allowance will be required
b. the relationship between revenue and expenses is being stressed more
than the valuation of receivables at the balance sheet date.
c. the existing balance in the Allowance for Doubtful Accounts will be
increased sufficiently to equal the probable loss indicated by the
percentage of receivables computation
d. any past-due accounts will be listed as a separate item in the balance
sheet
(RPCPA)
52. Eureka Co. sells goods to Ancing, a customer who uses Swipe Credit
Card. Eureka should record this sale as:
a. an account receivable from Ancing.
b. cash receipt.
c. an account receivable from Swipe.
d. an increase in the allowance for doubtful accounts.
53. When a company decides to sell its goods on credit, it should evaluate
the effect on profit of:
Item #1: Additional Revenues; Item #2: Additional Expenses
(RPCPA)
54. An advantage of relating a company's bad debt expense to its

accounts receivable is that this approach:
a. is the only way generally accepted method for "valuing" accounts
receivable.
b. gives a reasonable valuation of accounts receivable in the statement of
financial position.
c. does not require estimates of uncollectible accounts.
d. does not require knowledge of the balance in the allowance for
doubtful accounts before adjustment for bad debt expense.
(AICPA)
55. At December 31, before adjusting and closing the accounts had
occurred, the Allowance for Doubtful Accounts of Wise Corporation
showed a debit balance of P5,300. An aging of the accounts receivable
indicated the amount probably uncollectible to be P3,900. Under these
circumstances, a year-end adjusting entry for uncollectible accounts
expense would include a:
a. debit to the Allowance for Doubtful Accounts for P1,400
b. credit to the Allowance for Doubtful Accounts for P1,400
c. debit to Uncollectible Accounts Expense, P3,900
d. debit to Uncollectible Accounts Expense, P9,200
(AICPA)
56. When the allowance method of recognizing bad debt expense is used,
the entry to record the specific write-off of a specific customers’ account
a. decreases current assets c. has no effect on profit
b. decreases profit d. decreases working capital
57. When the allowance method of recognizing bad debt expense is used,
the entry to record the specific write-off of an uncollectible account would
decrease
a. net accounts receivable c. profit
b. allowance for doubtful accounts d. working capital
58. When the percentage of credit sales method is used in determining

doubtful accounts, the amount computed represents the
a. required balance
b. bad debt expense
c. bad debt expense after adjustments for write-offs, recoveries and
changes in the balance of the allowance for doubtful accounts
d. required balance after adjustments for write-offs, recoveries and
changes in the balance of the allowance for doubtful accounts
59. In its December 31 balance sheet, Devin Co. reported trade accounts
receivable of P250,000 and related allowance for uncollectible accounts
of P20,000. What is the total amount of risk of accounting loss related to
Devin's trade accounts receivable, and what amount of that risk is off
balance-sheet risk? (Item #1) Risk of accounting loss; (Item #2) Off-
balance-sheet risk
a. 0, 0 c. 230,000, 20,000
b. 230,000, 0 d. 250,000, 20,000
(AICPA)
Chapter 6

1. Which of the following statements correctly relate to accounting for loans
and receivables?
I. Andres Company sold equipment to Bonifacio Company, taking in
exchange a non-interest bearing note, the face amount of which was in
excess of the fair value of the equipment. In a balance sheet prepared
immediately after receipt of the note, Andres Company should present
the note at its face value plus the anticipated net earnings to the note.
II. Receivables denominated in a foreign currency, when reported on the
year-end statement of financial position, should be translated to local
currency at the rate of exchange at acquisition.
III. The collection of an account which was previously written off through
the allowance method of recognizing bad debts would affect the total
current assets.
IV. Significant amounts of installment receivables should be disclosed
V. Under PAS 1 trade receivables should be shown separately on the face
of the balance sheet. Notes receivable may either be combined with or
separated from accounts receivable.
a. IV, V b. II, IV, V c. I, III, IV, Vd. IV
2. Which of the following statements is incorrect regarding the initial

recognition of receivables?
a. On initial recognition, the fair value of a short-term receivable may be
equal to its face amount.
b. On initial recognition, the fair value of a long-term receivable bearing a
reasonable interest rate is deemed equal to its face amount.
c. On initial recognition, the fair value of a long-term noninterest bearing
receivable is deemed equal to the present value of future cash flows
from the instrument discounted at the effective interest rate on initial
recognition.
d. On initial recognition, the fair value of all interest-bearing receivables
is deemed equal to their face amount.
3. If the gross amount of receivables includes unearned interest or finance

charges
a. these should be presented in the statement of financial position as
liability.
b. these should be deducted in arriving at the net amount to be
presented in the statement of financial position.
c. these should be added in arriving at the net amount to be presented in
the statement of financial position.
d. these should be ignored.
4. Loans and receivables are initially recognized at

a. fair value
b. face value
c. amortized cost
d. fair value plus transaction costs that are directly attributable to the
acquisition
5. Loans and receivables are measured, subsequent to initial recognition, at

a. historical cost c. amortized cost
b. fair value d. effective value
6. Jellyfish Co. lent P10,000 to a major supplier in exchange for a

noninterest-bearing note due in three years and a contract to purchase a
fixed amount of merchandise from the supplier at a 10% discount from
prevailing market prices over the next three years. The market rate for a
note of this type is 10%. On issuing the note, Jellyfish should record
(Item #1) Deferred charge; (Item #2) Discount on note receivable
(AICPA)
7. On July 1, 2010, a company obtained a two-year 8% note receivable for

services rendered. At that time the market rate of interest was 10%. The
face amount of the note and the entire amount of the interest are due on
June 30, 2012. Interest receivable at December 31, 2010, was
a. 5% of the face value of the note.
b. 4% of the face value of the note.
c. 5% of the July 1,2010, present value of the amount due June 30, 2012.
d. 4% of the July 1,2010, present value of the amount due June 30, 2012.
(AICPA)
8. Which of the following best describes the concept of time value of money?
a. interest is earned or incurred on debt instruments due to passage of
time
b. interest is earned only on interest-bearing receivables
c. the amount debited to interest receivable is always equal to the
interest income recognized during the period
d. if no interest receivable is recognized, no interest income is also
recognized
9. If the contractual cash flow from a debt instrument is due in lump sum,
the appropriate present value factor to be used is
a. PV of ₱1 c. PV of an annuity due of ₱1
b. PV of an ordinary annuity of ₱1 d. No one knows except the CPA
10. If the contractual cash flows from a debt instrument are due in
installments with the first installment due one period after initial
recognition, the appropriate present value factor to be used is
b. PV of an ordinary annuity of ₱1 d. Ask the auditor
11. If the contractual cash flows from a debt instrument are due in
installments with the first installment due immediately on initial
recognition, the appropriate present value factor to be used is
b. PV of an ordinary annuity of ₱1 d. Please don’t ask me
12. Which of the following is incorrect in relation to the concept of time

value of money?
a. Present value is the exact opposite of Future value
b. If a noninterest-bearing note of ₱10,000 has a present value of ₱7,513
then the future value of ₱7,513 is ₱10,000 using the same discount
rate and period used in the present value computation
c. If the contractual cash flows from a debt instrument are due in semi-
annual installments, the discount rate is divided by 2 and the period is
multiplied by 2 in computing for the present value factor.
d. The concept of time value of money means that the value of money
decreases over time due to inflation.
13. Which of the following is incorrect in relation to accounting for note

receivables?
a. a long-term note that is interest-bearing may nonetheless be
discounted if it bears an unreasonable interest rate.
b. the unearned interest income on a noninterest-bearing note receivable
represents the total interest income to be recognized over the life of
the note.
c. the present value factor using a period (‘n’) of zero is 1
d. when accounting for noninterest-bearing note, the legal form of the
instrument takes precedence over its substance
14. If “PV” is the present value of an instrument, “CF” is the future cash
flows, and “PVF” is the present value factor, then future cash flows may
be computed as
a. CF = PVF + PV c. CF = PVF ÷ PV
b. CF = PVF x PV d. CF = PV ÷ PVF
15. What is the effective interest rate of a bond or other debt instrument
measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for
similar debt instruments (i.e., similar remaining maturity, cash flow
pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash
payments or receipts through the expected life of the debt instrument
or, when appropriate, a shorter period to the net carrying amount of
the instrument.
d. The basic, risk-free interest rate that is derived from observable
government bond prices.
(Adapted)
16. Which of the following is true regarding non-interest bearing note

receivables?
a. they are always discounted to their present value on initial recognition
b. they include a specified principal amount but an unspecified interest
amount
c. they include a specified principal and specified interest
d. they cause no interest income to be recognized over their term
e. they include an unspecified principal and an unspecified interest
(Adapted)
17. An entity received a 15-day non-interest bearing note receivable. The

entity would most likely recognize the note on initial recognition at
a. current value c. appraised value
b. maturity value d. present value
(Adapted)
18. Which statement is not true?

a. Notes receivable initially should be recorded at the present value of
the future cash receipts on the date of issue.
b. All notes implicitly carry interest
c. Discount on notes receivable is a contra account frequently found with
interest-bearing notes
d. The Notes receivable dishonored account is an asset account
(Adapted)
19. On March 1, 20x1, Nickelodeon Co. received a 12% note receivable

dated January 1, 20x1. Principal and interest on the note are due on July
1, 20x1. On initial recognition, which of the following accounts increased?
a. Prepaid interest c. Unearned interest income
b. Interest receivable d. Interest revenue
20. Spongebob Squarepants lent ₱2,000 to Squidward for one year at 10%
interest, all due at maturity. He insisted the terms of the transaction be
formalized in promissory note. In this situation:
a. the maturity value of the note is ₱2,000
b. Spongebob Squarepants is considered the maker of the note and
records the note as an asset in his accounting records
c. Spongebob Squarepants is considered the maker of the note and
records the note as a liability in his accounting records
d. Squidward is considered the maker of the note and records the note as
a liability in his accounting records
(Adapted)
21. Sandy Company received a 12%, 3-year note receivable that is
collectible in monthly installments in exchange for services rendered.
What is the note receivable’s carrying amount one year after initial
recognition?
a. Two-thirds of the billing price
b. Less than two-thirds of the net billing price
c. The present value of remaining future cash flows discounted at the
current market rate as of year-end
d. The present value of the remaining monthly payments discounted at
12%
22. Which of the following statements regarding interest methods of

allocations is not true?
a. The term “interest methods of allocation” refers both to the convention
for periodic reporting and to the several approaches to dealing with
changes in estimated future cash flows.
b. Interest methods of allocation are reporting conventions that use
present value techniques in the absence of a fresh-start measurement
to compute changes in the carrying amount of an asset or liability from
one period to the next.
c. Interest methods of allocation are grounded in the notion of current
cost.
d. Holding gains and losses are generally excluded from allocation
systems.
(AICPA)
23. Which of the following is not an objective of using present value in

accounting measurements?
a. To capture the value of an asset or a liability in the context of a
particular entity.
b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture the elements that taken together would comprise a market
price if one existed.
(AICPA)
24. A company received two one-year notes in payment for merchandise

sold. One note has a face amount of P6,000 and was interest-bearing at
an annual rate of 18 percent. The other note has a face amount of P7,080
and was non-interest-bearing (its implied interest rate was 18 percent)
a. The total amount of cash ultimately to be received will be more for the
interest-bearing note.
b. Both notes will cause the same total interest to be recognized.
c. The amount of interest revenue which should be recognized is more for
the interest-bearing note.
d. The amount which should be credited to sales revenue is more for the
noninterest-bearing note
(Adapted)
25. Gary Snail Inc., received a 3-year non-interest bearing trade note for
₱50,000 on January 1, 20x1. The current interest rate at that time was
15% for similar notes. Gary Snail recorded the receipt of the note as
follows:
(Dr) Notes receivable – trade ₱50,000

(Cr) Sales ₱50,000
The effect of this accounting for the notes receivable Gary Snail’s profit for
years 20x1, 20x2 and 20x3 and retained earnings at the end of 20x3,
respectively, shall to
a. overstate, overstate, understate, no effect
b. overstate, understate, understate, no effect
c. overstate, understate, understate, understate
d. no effect on any of these
(RPCPA)
Use the following data for the next three questions.

On May 1, 20x1, Bikini Bottom Co. acquired a 16%, nine-month note
receivable from a customer in settlement of an existing account receivable
of P120,000. Interest and principal are due at maturity.
26. The proper adjusting entry at December 31,20x1, with regard to this
note receivable includes a:
a. credit to Interest Revenue of ₱12,800
b. debit to Notes Receivable of ₱19,200
c. debit to Cash of ₱12,800
d. debit to Interest Receivable of ₱14,400
27. Bikini's entry to record the collection of this note at maturity includes a
(assume no reversing entries were made):
a. credit to Interest Receivable of ₱12,800
b. credit to Interest Revenue of ₱14,400
c. credit to Interest Receivable of ₱1,600
d. credit to Notes Receivable of ₱134,400
28. Bikini's entry to record the collection of this note at maturity includes a
(assume reversing entries were made):
a. credit to Interest Receivable of ₱12,800
b. credit to Interest Revenue of ₱14,400
c. credit to Interest Receivable of ₱1,600
d. credit to Notes Receivable of ₱134,400
(Adapted)
29. Chum Bucket Co. received a 60-day, 15% note for ₱3,000 on June 16.
Which of the following statements is true?
a. Chum Bucket will receive ₱3,000 plus interest of ₱450 at maturity
b. Chum Bucket should record a total receivable due of ₱3,075 on June
16
c. The principal of the note plus interest is due on August 15
d. The maturity value of this note is ₱3,000
(Adapted)
30. If a 10%, 60-day note receivable is acquired from a customer in

settlement of an existing account receivable of ₱6,000, the accounting
entry for acquisition of the note will:
a. include a debit to Notes Receivable for ₱6,600
b. include a debit to Notes Receivable for ₱6,100
c. include a credit to Interest Revenue for ₱100
d. include a debit to Notes Receivable for ₱6,000 and no entry for interest
(Adapted)
31. On November 1, Plankton Corporation sold merchandise in return for a
12%, 90-day note receivable in the amount of ₱20,000. The proper
adjusting entry at December 31 (end of Plankton's accounting period)
includes a:
a. credit to Interest Revenue of ₱400
b. debit to cash of ₱400
c. debit to Interest Receivable of ₱200
d. credit to Notes Receivable of ₱600
(Adapted)
32. On May 1 of this year, a company received a one-year note receivable

bearing interest at the market rate. The face amount of the note
receivable and the entire amount of the interest are due on April 30 of
next year. At December 31 of this year, the company should report on its
balance sheet:
a. no interest receivable
b. a deferred credit for interest applicable to next year
c. interest receivable for the interest accruing this year
d. interest receivable for the entire amount of the interest due on April 30
of the next year
(Adapted)
Chapter 7

1. Which of the following statements is(are) correct?
I. The normal operating cycle of a business is disregarded when
classifying nontrade receivables as current or noncurrent.
II. Trade receivables which are collectible beyond one year or beyond the
normal operating cycle, whichever is longer, are presented under the
current assets section
III. Nontrade receivables which are collectible beyond one year,
notwithstanding the normal operating cycle, are presented under the
non-current assets section.
IV. A financial asset and a financial liability shall be offset and the net
amount presented in the balance sheet when, and only when, an entity
currently has a legally enforceable right to set off the recognized
amounts
a. I, III b. I, III, IV c. II, III and IV d. I, II, III and IV
2. Which of the following may be classified under loans and receivables?

a. Non-derivative equity securities which are not quoted
b. An interest acquired in a pool of assets that are not loans or
receivables.
c. Non-derivative debt instrument acquired with definite payments that
are not quoted.
d. An interest acquired in mutual fund.
3. In calculating the carrying amount of a loan, the lender adds to the

principal
(Item #1) Direct loan origination; (Item #2) Loan origination fees costs
incurred by the lender charged to the borrower
(AICPA)
4. Loans receivable are normally reported in the financial statements at

a. cost c. fair value
b. proceeds extended d. amortized cost
5. The following statements may be correctly stated as part of the

acceptable accounting principles for receivables:
I. Accounts receivable balances should be valued at their face amounts
minus, if appropriate, allowances set up for doubtful accounts and
impairment in value
II. Receivable denominated in a foreign currency should be translated to
local currency at the rate of exchange at balance sheet date
III. If receivables are hypothecated against borrowings, the amount of
receivables involved should be disclosed in the financial statements or
notes
IV. Unearned finance charges and interests included in the face amount of
the receivables are preferably shown as an addition to the related
receivables
V. Significant amount of installment receivables should be stated
separately
a. I, II, III, IV, and V c. I, II, III, and IV only
b. I, II, III, and V only d. I, II, and III only
6. Which of the following is incorrect regarding the accounting for

receivables?
a. The percentage-of- credit sales method is principally oriented toward
achieving the best possible matching of revenues and expenses. Aging
the accounts is more oriented toward the presentation of the correct
net realizable value of the trade receivables in the statement of
financial position.
b. Impairment loss on note receivables may be recorded as a direct
deduction to the impaired asset’s account or through an allowance
account.
c. Impairment testing on receivables is normally triggered by loss events.
d. Direct origination costs are deducted while direct origination fees are
added to the carrying amount of a loan receivable.
7. If a 12%, 3-month note receivable is acquired from a customer in

settlement of an existing account receivable of ₱10,000, the entry on
initial recognition of the note receivable includes a
a. debit to note receivable for ₱10,300
b. debit to note receivable for ₱11,200
c. credit to interest income for ₱300
d. debit to note receivable for ₱10,000 and no entry for interest
8. When testing loans and note receivables for impairment, the rate that
should be used is
a. the current market rate as of date of impairment testing
b. the weighted average rate on the remaining term before maturity of
note
c. the original effective rate of the note
d. the weighted average rate over the total life of the note
9. Immediately prior to recognition of impairment loss, the carrying amount
of an impaired note is
a. the future value of the note
b. the carrying amount of the note plus any accrued interest recorded
prior to impairment testing
c. the present value of the note discounted at the current market rate on
the date of impairment testing,
d. the total expected cash flows from the note
10. After impairment testing, the carrying amount of the impaired note is
a. the present value of the expected cash flows from the note, discounted
at the original effective rate.
b. the present value of the expected cash flows from the note, discounted
at the current market rate
c. the future value of the expected cash flows from the note
d. the amortized cost of the note ignoring impairment loss since the loss
is only recognized in profit or loss
11. After impairment testing, interest income on the impaired note is

computed by
a. multiplying the present value of the note by the current market rate at
year-end
b. multiplying the present value of the note by the rate used in
impairment testing
c. multiplying the face value of the note by the rate used in impairment
testing
d. no interest income will be recognized since the note is already
impaired
12. Which of the following is not an objective evidence of impairment of a

financial asset?
a. Significant financial difficulty of the issuer or obligor.
b. A decline in the fair value of the asset below its previous carrying
amount.
c. A breach of contract, such as a default or delinquency in interest or
principal payments.
d. Observable data indicating that there is a measurable decrease in the
estimated future cash flows from a group of financial assets although
the decrease cannot yet be associated with any individual financial
asset.
(Adapted)
13. Impairment loss on financial assets may be recorded as a direct

deduction to the impaired asset’s account or through an allowance. If the
entity uses an allowance account to record impairment loss
a. the amount credited to the allowance account is equal to the
impairment loss recognized
b. the amount credited to the allowance account is equal to the
impairment loss recognized if the carrying amount of the impaired
financial asset immediately before impairment testing does not include
any accrued interest already recognized
c. the amount credited to the allowance account is equal to the
impairment loss recognized if the original effective interest rate is used
in discounting the restructured future cash flows from the instrument
d. in no case would the amount credited to the allowance account be
equal to the impairment loss recognized
14. Which of the following would indicate that a note receivable or other
loan is impaired?
a. when it is written off
b. when it is probable that principal payments will be delayed
c. when the maker of the note experiences financial difficulties
d. when the market value of the note falls below its book value due to
interest rate changes
(Adapted)
15. If, in a subsequent period, the amount of the impairment loss

decreases and the decrease can be related objectively to an event
occurring after the impairment was recognized
a. the previously recognized impairment loss shall be reversed in equity
b. the previously recognized impairment loss shall be reversed through
an allowance account
c. the previously recognized impairment loss shall be reversed either
directly or by adjusting an allowance account.
d. the previously recognized impairment loss shall not be reversed in
profit or loss
16. Which of the following most likely would cause an impairment loss
previously recognized to be reversed to gain in profit or loss in the current
period?
a. increase in the fair value of the receivable previously impaired
b. an improvement in the debtor’s credit rating
c. increase in current market interest rates
d. an improvement in the creditor’s credit rating
17. The reversal of impairment loss

a. shall not result in a carrying amount of the financial asset that exceeds
what the amortized cost would have been had the impairment not
been recognized at the date the impairment is reversed.
b. is recognized in profit or loss without any limit
c. is recognized in directly in equity
d. causes the debtor’s credit rating to increase
18. Where (X) is equal to the recoverable amount of a financial asset on

impairment reversal date, (Y) is equal to the carrying amount of a
financial asset on impairment reversal date had no impairment loss been
recognized previously, and (Z) is equal to the carrying amount of a
financial asset on reversal date. The gain on reversal of impairment,
assuming X is greater than Y, is computed as
a. X minus Y b. Y minus Z c. X minus Z d. Z minus Y
19. The carrying value of an impaired note before recognizing a loan

impairment:
a. includes accrued interest.
b. excludes accrued interest.
c. is the same as the carrying value after recognizing the impairment.
d. is less than the carrying value after recognizing the impairment.
(AICPA)
20. Which of the following describes the carrying value of an impaired note
immediately following the recognition of the impairment?
a. normal sum of the remaining cash flows to be received.
b. present value of remaining cash flows to be received, discounted at
the current market rate of interest.
c. present value of the remaining cash flows to be received, discounted
at the original interest rate implicit in the note.
d. the book value before the impairment is recognized less accrued
interest.
(AICPA)
21. Derecognition is the

a. inclusion of a financial asset or financial liability in the totals of the
financial statements through a journal entry.
b. exclusion of a financial asset or financial liability in the totals of the
financial statements through a memo entry.
c. removal of a previously recognized financial asset or financial liability
from an entity’s statement of financial position.
d. removal of a previously disclosed financial asset or financial liability
from an entity’s notes.
22. An agreement to transfer a financial asset to another party in

exchange for cash or other consideration, with a concurrent obligation to
reacquire the asset at a future date
a. firm purchase commitment c. recourse
b. repurchase agreement d. notification
23. Which of the following transfers of financial assets qualifies for

derecognition?
a. A sale of a financial asset where the entity retains an option to buy the
asset back at its current fair value on the repurchase date.
b. A sale of a financial asset where the entity agrees to repurchase the
asset in one year for a fixed price plus interest.
c. A sale of a portfolio of short-term accounts receivables where the
entity guarantees to compensate the buyer for any losses in the
portfolio.
d. A loan of a security to another entity (i.e., a securities lending
transaction).
(Adapted)
24. In which of the following circumstances is derecognition of a financial

asset not appropriate?
a. The contractual rights to the cash flows of the financial assets have
expired.
b. The financial asset has been transferred and substantially all the risks
and rewards of ownership of the transferred asset have also been
transferred.
c. The financial asset has been transferred and the entity has retained
substantially all the risks and rewards of ownership of the transferred
asset.
d. The financial asset has been transferred and the entity has neither
retained nor transferred substantially all the risks and rewards of
ownership of the transferred asset. In addition, the entity has lost
control of the transferred asset.
(Adapted)
25. Which of the following is not one of the conditions that must be met if
a transfer of receivables is to be accounted for as a sale?
a. The transferred assets have been isolated from the transferor.
b. The transferor's obligation under the recourse provisions can be
reasonably estimated.
c. The transferee has the right to pledge or exchange the transferred
assets.
d. The transferor does not maintain effective control over the assets
through an agreement to repurchase the assets before their maturity.
(AICPA)
26. If financial assets are exchanged for cash or other consideration, but
the transfer does not meet the criteria for a sale, the transferor and the
transferee should account for the transaction as a (Item #1) Secured
borrowing; (Item #2) Pledge of collateral
a. No, Yes b. Yes, Yes c. Yes, No d. No, No
(AICPA)
27. Which one of the following sets correctly reflects whether the transfer
of a financial asset should be treated as a sale or as a borrowing when
control over the transferred financial asset has been surrendered and
when control has not been surrendered? (Item #1) Control Surrendered;
(Item #2) Control Not Surrendered
a. Sale, Sale c. Borrowing, Sale
b. Sale, Borrowing d. Borrowing, Borrowing
(AICPA)
28. All but one of the following are required before a transfer of
receivables can be recorded as a sale.
a. The transferred receivables are beyond the reach of the transferor and
its creditors.
b. The transferor has not kept effective control over the transferred
receivables through a repurchase agreement.
c. The transferor maintains continuing involvement.
d. The transferee can pledge or sell the transferred receivables.
(AICPA)
29. Which of the following is not an objective for each entity accounting for
transfers of financial assets?
a. To derecognize assets when control is gained.
b. To derecognize liabilities when extinguished.
c. To recognize liabilities when incurred.
d. To derecognize assets when control is given up.
(AICPA)
30. Which of the following is false?

a. A servicing asset shall be assessed for impairment based on its fair
value.
b. A servicing liability shall be assessed for increased obligation based on
its fair value.
c. An obligation to service financial assets may result in the recognition of
a servicing asset or servicing liability.
d. A servicing asset or liability should be amortized for a period of five
years.
(AICPA)
31. Which of the following is true?
a. A debtor may not grant a security interest in certain assets to a lender
to serve as collateral with recourse.
b. A debtor may not grant a security interest in certain assets to a lender
to serve as collateral without recourse.
c. The arrangement of having collateral transferred to a secured party is
known as a pledge.
d. Secured parties are never permitted to sell collateral held under a
pledge.
(AICPA)
32. Larry has pledged financial assets as security for a loan from Lobster.
Which of the following statements concerning disclosure of the pledged
assets is correct?
a. Larry is not required to separately disclose the assets pledged as
security.
b. Larry must disclose the assets pledged as security on the face of its
Balance Sheet.
c. Larry must disclose the assets pledged as security in the notes to its
d. Larry may disclose the assets pledged as security either on the face of
its Balance Sheet or in the notes to its financial statements.
(AICPA)
33. A transferor enterprise most likely should continue to recognize a

transferred financial asset if
a. The transferor may reacquire the asset, and the asset is readily
obtainable in the market
b. The transferee may sell or pledge the full fair value of the asset.
c. The transferor may reacquire the asset, and the reacquisition price is
fair value.
d. The transferor is entitled and obligated to repurchase the asset, and
the transferee receives a lender’s return.
(AICPA)
34. Krabby Corp. transferred financial assets to Patty, Inc. The transfer
meets the conditions to be accounted for as a sale. As a transferor,
Krabby should do each of the following, except
a. Remove all assets sold from the balance sheet.
b. Record all assets received and liabilities incurred as proceeds from
the sale.
c. Measure the assets received and liabilities incurred at cost.
d. Recognize any gain or loss on the sale.
(AICPA)
35. On April 9, 200A, Zyrus Co. purchased a financial asset from Dalome
Co. During 200B, Zyrus sold the financial asset to Didaco Co. at fair value.
However, the sale was subject to an agreement that Zyrus Co. should
repurchase the financial asset on February 10, 200C at face amount plus
10% interest. Which of the following statements is correct?
a. Zyrus Co. should derecognize the financial asset.
b. Zyrus Co. should continue to recognize the financial asset.
c. Didaco should recognize interest income immediately
d. Dalome Co. should recognize the financial asset.
36. On July 10, 200A, Clifton Co. purchased a financial asset from Princess
Co. During 200B, Clifton sold the financial asset to Arnold Co. at fair value.
However, the sale agreement gave Clifton Co. the option to repurchase
the financial asset in 200C at face amount plus 10% interest. Which of the
following statements is correct?
a. Clifton Co. should derecognize the financial asset.
b. Clifton Co. should continue to recognize the financial asset.
c. Arnold should derecognize the financial asset from Princess Co.
d. Princess Co. should not derecognize the financial asset.
37. Under PFRS 9 Financial Instruments, an entity shall derecognize a

financial asset when
a. the contractual rights to the cash flows from the financial asset expire
b. it transfers the financial asset and such transfer qualifies for
derecognition
c. a revenue recognition is permitted by a standard
d. a or b
38. An entity transfers a financial asset if, and only if, it

a. transfers the contractual rights to receive the cash flows of the
financial asset
b. retains the contractual rights to receive the cash flows of the financial
asset, but assumes a contractual obligation to pay the cash flows to
one or more recipients in an arrangement that meets all the conditions
required under PFRS 9 Financial Instruments
c. a or b
d. a and b
39. An entity transfers a financial asset if, and only if, it either transfers the
contractual rights to receive the cash flows of the financial asset; or
retains the contractual rights to receive the cash flows of the financial
asset, but assumes a contractual obligation to pay the cash flows to one
or more recipients in an arrangement that meets which of the following
conditions
I. If the entity is unable to collect on the financial instrument, it has no
obligation to the eventual recipient
II. The entity is prohibited from selling or pledging the financial
instrument
III. Collections obtained from the financial instrument should be remitted
to eventual recipients without material delay
IV. The entity is not entitled to reinvest cash flows from the financial
instrument, except for investments in cash or cash equivalents during
the short settlement period from the collection date to the date of
required remittance to the eventual recipients
V. Interest earned on temporary investments of collections is passed to
the eventual recipient
a. I, II, III, IV c. any of the conditions stated
b. I, III, IV, V d. all of the conditions stated above
40. If the entity transfers substantially all the risks and rewards of
ownership of the financial asset, the entity
a. shall derecognize the financial asset
b. shall derecognize the financial asset and recognize separately as
assets or liabilities any rights and obligations created or retained in the
transfer
c. shall continue to recognize the financial asset but also recognize as
liabilities any rights created or retained in the transfer
d. shall continue to recognize the financial asset
41. If the entity retains substantially all the risks and rewards of ownership
of the financial asset, the entity
a. shall derecognize the financial asset
b. shall derecognize the financial asset and recognize separately as
assets or liabilities any rights and obligations created or retained in the
transfer
c. shall continue to recognize the financial asset but also recognize as
liabilities any rights created or retained in the transfer
d. shall continue to recognize the financial asset
42. The process whereby financial assets are transformed into securities
a. equity set-off c. instrument modification
b. securitization d. instrument transformation
43. Offsetting financial assets and liabilities is permitted only when the
entity
I. Has a legally enforceable right to set off the recognized amounts
II. Intends to settle the asset and liability on a net basis, or to realize the
asset and settle the liability simultaneously
a. I b. II c. I or II d. I and II
44. Girl Co. and Boy Co. regularly engage in transactions giving rise to
both assets and liabilities in each other’s statement of financial position.
The companies thereby entered into a master netting agreement on
which a company’s payables may be offset from any receivables the
company has from the other company. At year-end, Boy Co. does not
intend to settle its receivables and liabilities on a net basis because of the
timing of cash flows. Which of the following is correct?
a. Boy Co. may present its receivables from Girl Co. and liabilities to Girl
Co. separately and at gross amounts in the financial statements
b. Boy Co. should present its receivables from Girl Co. net of any liabilities
to Girl Co.
c. If Boy Co. is reluctant in offsetting its assets and liabilities, Girl Co. may
report Boy Co. to the Securities and Exchange Commission.
d. If Boy Co. is reluctant in offsetting its assets and liabilities, Girl Co. may
report Boy Co. to the Philippine Institute of Certified Public
Accountants.
45. It is the process of using an asset as collateral security for borrowings.

It generally refers to borrowings secured by accounts receivable.
a. Factoring b. Pledging c. Discounting d. Financing
46. When accounts receivables are pledged,

a. a journal entry should be made to derecognize the accounts
receivables pledged and to record the pledge transaction. The loan
transaction should be recorded separately.
b. the accounts receivables pledged should be separately presented in
the face of the statement of financial position separate from other
receivables.
c. specific receivables are set up as collateral security for borrowings
d. the only accounting issue is that of adequate disclosure.
47. Which of the following is not a valid comparison between pledging and
assignment of accounts receivable?
a. Under pledge, all accounts receivables are set as collateral security for
borrowings; under assignment only specific receivables are set as
collateral security.
b. In pledging, the lender has limited rights to inspect the borrower’s
records to achieve assurance that the receivables do exist; in
assignment the lender will make an investigation of the specific
receivables that are being proposed for assignment and will approve
those that are deemed worthy to be held as collateral security.
c. No journal entry is made for the pledged receivables; an entry is made
for the assigned receivables.
d. Pledged accounts receivable remain the assets of the borrower and
continue to be presented in its financial statements, with appropriate
disclosure of the pledge transaction; assigned receivables are assets of
the lender/assignee but the assignment is disclosed in the financial
statements of the borrower/assignor.
e. In pledge, the amount borrowed is independent from the amount of
accounts receivables pledged; in assignment, normally only 70% to
90% of the amount of accounts receivables assigned is advanced as a
loan to the borrower.
48. The owner of the accounts receivable assigned in a notification basis is

a. assignee b. pledger c. assignor d. lender
49. If the records of an entity show a balance in a “Due from factor” or

“Factor’s holdback” account, it can be reasonably inferred that accounts
receivables have been
a. pledged b. assigned c. factored d. discounted
50. The right of the transferee (factor) of accounts receivable to seek

recovery for an uncollectible account from the transferor
a. credit risk c. recourse
b. repurchase agreement d. notification
51. When accounts receivables are factored on a “with recourse” basis,

the factoring is usually treated as
a. a secured borrowing
b. an outright sale
c. a transfer of financial asset without recognition of liability created in
the transfer.
d. derecognition of financial asset when the transferor neither transfers
nor retains substantially all the risks and rewards of ownership of the
financial asset and has not retained control. The transferor recognizes
separately as assets or liabilities any rights and obligations created in
the transfer, such as the proceeds on the factoring and the recourse
obligation.
52. Jaco Co. had ₱3 million in accounts receivable recorded on its books.
Jaco wanted to convert the ₱3 million in receivables to cash in a more
timely manner than waiting the 45 days for payment as indicated on its
invoices. Which of the following would alter the timing of Jaco's cash flows
for the ₱3 million in receivables already recorded on its books?
a. Change the due date of the invoice.
b. Factor the receivables outstanding.
c. Discount the receivables outstanding.
d. Demand payment from customers before the due date.
(AICPA)
53. 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 security 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.
54. Which of the following is used to account for probable sales discounts,
sales returns, and sales allowances? (Item #1) Due from factor; (Item
#2) Recourse liability
a. Yes, No b. Yes, Yes c. No, Yes d. No, No
(AICPA)
55. When accounts receivable are set aside as collateral security for a
loan, and the borrower continues to collect the receivables but collections
are applied to the loan, the receivables are
a. factored b. pledged c. discounted d. assigned
56. If a company usually sells its accounts receivable, it records any

factoring commission as a(n):
a. loss b. expense c. receivable d. liability
57. Accounts receivable of a company sold outright to a financing

company without recourse are said to have been
a. pledged b. factored c. assigned d. collateralized
58. Dream Theater Co. accepted a ₱5,000, 8%, 90-day note receivable for
services rendered to a client. Thirty days later Dream Theater discounted
the note at a bank at 10%. The entry to record the proceeds from sales of
the note would include a:
a. credit to notes receivable for ₱50,000
b. debit to cash for ₱51,000
c. credit to interest income for ₱33.33
d. debit to loss from discounting of note for ₱150
(Adapted)
59. A note receivable that is sold (i.e., discounted) to obtain early cash
must be:
a. retained in the accounts in the same manner as before discounting
b. reported as an extraordinary loss if it is dishonored
c. disclosed as a contingent liability if it is discounted without recourse
d. reported as sale or a loan
(Adapted)
60. When a note receivable of an entity is sold to a non-bank financial

institution on a with recourse basis before maturity, the note receivable
has been
a. pledged b. assigned c. discounted d. factored
(Adapted)
61. When a company discounts its notes receivables at a bank, the
common practice is to record the discounted notes in a(n):
a. liability account c. asset account
b. contra-asset account d. expense account
(AICPA)
62. When a company discounts its notes receivable at a bank and the
discounting is treated as secured borrowing, the discounting is recorded
in a
a. liability account c. asset account
b. contra-asset account d. expense account
63. After being held for 30 days, a 90-day, 15% interest bearing note
receivable was discounted at a bank at 18%. The proceeds received from
the bank upon discounting would be the:
a. face value less the discount at 18%
b. face value plus the discount at 18%
c. maturing value less the discount at 18%
d. maturing value plus the discount at 18%
(AICPA)
Chapter 8
Inventories
Objective and scope of PAS 2
1. According to PAS 2, the primary issue in accounting for inventories is the
determination of
I. cost to be recognized as asset in the statement of financial position.
II. the amount recognized as expense in the statement of profit or loss
and other comprehensive income when the related revenues are
recognized.
III. obsolete items that need to be written down to net realizable value.
IV. the point of sale where ownership is transferred from the seller to the
buyer
a. I and II b. I, II, III c. I, II, IV d. I, II, III, IV
2. In which of the following shall PAS 2 Inventories be applied?

a. Buildings constructed and to be sold to third parties in the ordinary
course of business under specifically negotiated construction contracts.
b. Shares of stocks held for trading
c. Animals and plants that are managed and to be sold in the ordinary
course of business
d. Inventory of a service provider consisting only of direct labor and
overhead
3. PAS 2 Inventories shall not be applied to which of the following?

a. minor tools and spare parts
b. buildings being sold by a “buy and sell” real estate entity
c. obsolete inventory
d. assets held for use in the production or supply of goods or services
4. The measurement provisions of PAS 2 Inventories do not apply to which
of the following?
I. Inventories of producers of agricultural, forest, and mineral products to
the extent that they are measured at net realizable value in
accordance with well-established practices in those industries.
II. Inventories of commodity broker-traders measured at fair value less
costs to sell.
III. Inventories of a retail store.
IV. Inventories of a service concessionaire.
a. I, II b. I, II, III c. III, IV d. I, II, III, IV
5. PAS 2 Inventories may not be applied to which of the following,?

a. inventories consisting of agricultural, mineral and forest products
b. minor spare parts, tools and lubricants
c. commodities of broker traders measured at fair value less costs to sell
d. unfinished products undergoing processing
6. Inventories of commodity broker-traders are measured at

a. fair value c. net realizable value
b. cost d. fair value less costs to sell
Recognition
7. Which of the following is correct regarding the recognition of inventories?
a. Inventories are recognized only when legal title is obtained
b. Inventories are recognized only when they meet the definition of
inventory and they qualify for recognition as assets.
c. Inventories include only those that are readily available for sale in the
ordinary course of business.
d. Inventories are recognized only by entities engaged in trading or
manufacturing operations.
8. Inventories are assets (choose the incorrect one)

a. Held for sale in the ordinary course of business.
b. In the process of production for sale.
c. In the form of materials or supplies to be consumed in the production
process or in the rendering of services.
d. Held for use in the production or supply of goods or services.
(Adapted)
9. Ownership over inventories is normally transferred to the buyer

a. when legal title to the inventories is transferred
b. when the purchase price is fully paid
c. upon shipment of the goods by the seller to the buyer
d. upon filling-up the sales order

inventories?
a. Legal title over inventories normally passes when possession over of
the goods is transferred.
b. Transfer of ownership over inventories may precede, coincide with, or
follow the transfer of physical possession of the goods.
c. Ownership over inventories may be transferred to the buyer even
when legal title to the goods is retained by the seller.
d. Transfer of ownership over inventories may coincide with or follow but
never precedes the transfer of physical possession of the goods.
11. When accounting for inventories,
a. the form of the sales contract is more important than its substance
b. the agreement between the seller and the buyer shall be considered in
determining the timing of transfer of ownership over the goods
c. the sales contract is ignored since ownership over inventories are
transferred only upon receipt of delivery by the buyer
d. a journal entry is made only upon receipt of the delivery by the
purchaser
12. Ownership over inventories is normally transferred from the seller to

the buyer
I. When the significant risks and rewards of ownership are transferred to
the buyer
II. The seller retains continuing managerial involvement to the degree
usually associated with neither ownership nor effective control over the
goods sold
III. The seller retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over the
goods sold
a. I, II b. II, III c. I, III d. I, II, III
Goods in transit
13. In accounting for inventories, which of the following statements is
incorrect?
a. In daily transactions, strict adherence to the passing of legal title is not
practicable.
b. Regardless of location, an entity shall report in its financial statements
all inventories over which it holds legal title to or has gained control of
the related economic benefits.
c. On inventory cut-off, an entity shall include in its inventory only those
goods which are on hand.
d. Goods that are in transit as of inventory cut-off date may be included
as part of inventory.
14. Identify the incorrect statement regarding goods in transit.

a. Depending on the terms of sales contract, goods in transit may form
part of the inventories of the buyer or the seller or, in rare cases, both
the buyer and the seller.
b. Accounting procedures for goods in transit are normally performed
only on inventory cut-off.
c. Goods in transit form part of the inventory of the entity who holds legal
title to the goods.
d. Accounting for goods in transit are normally performed by trading or
manufacturing entities but not by service oriented entities.
15. Who owns the goods in transit under FOB shipping point?
a. buyer b. seller c. either a or b d. none
16. Who owns the goods in transit under FOB destination?

17. Under this shipping cost agreement, freight is not yet paid upon
shipment. The carrier collects shipping costs from the buyer upon
delivery.
a. freight collect c. FOB shipping point
b. freight prepaid d. FOB destination
18. Under this shipping cost agreement, freight is paid in advance by the
seller before shipment.
19. Under this shipping cost agreement, the buyer initially pays the freight
of the goods delivered.
20. Under this agreement, the seller should pay for the freight of goods
delivered.
21. Under a freight collect shipping cost agreement, who is supposed to

pay for the freight?
22. Who should properly shoulder the freight of the goods shipped?
a. the entity who owns the goods c. the seller
b. the buyer d. the shipper
23. If the term of a sale or purchase transaction is FOB Shipping Point,

ownership is transferred
a. upon shipment of the goods
b. after production is finished
c. when the buyer receives the goods
d. either a or c
24. If the term of a purchase transaction is FOB Shipping Point, liability is

recognized
a. upon shipment of the goods
c. upon receipt of buyer of the goods shipped
d. either a or c
25. If the terms of a purchase or sale transaction is FOB Destination,

ownership is transferred
a. upon the shipment of goods
c. when the buyer receives the goods
d. either a or c
26. If the term of a purchase transaction is FOB Destination, liability is

recognized
a. upon the shipment of goods
c. upon receipt of buyer of the goods shipped
d. either a or c
27. If the term of a purchase transaction is FOB Shipping Point, Freight

collect, the party who finally shoulders the freight is the
a. buyer b. seller c. shipping company d. LBC
28. If the term of a purchase transaction is FOB Destination, Freight
collect, the party who finally shoulders the freight is the
a. buyer b. seller c. Air21 d. accountant

prepaid, the party who finally shoulders the freight is the
a. buyer b. seller c. FedEx d. auditor

prepaid, the party who initially shouldered the freight is the
a. buyer b. seller c. shipping company d. JRS
31. The entry to record the P10,000 freight paid by the buyer on a
purchase transaction with terms of FOB Shipping Point, Freight Collect is
Cash 10,000 Accounts receivable 10,000
b. Freight-out 10,000 d. Freight-in 10,000
Accounts receivable 10,000 Accounts payable 10,000
32. The entry to record the settlement of P10,000 freight on a purchase

transaction with terms of FOB Shipping Point, Freight Prepaid is
a. Accounts payable 10,000 c. Freight-in 10,000
Cash 10,000 Accounts receivable
10,000
b. Freight-in 10,000 d. Answer not given
Accounts payable 10,000
33. The entry to record the P10,000 freight paid by the buyer on a
purchase transaction with terms of FOB Destination, Freight Collect is
b. Freight-out 10,000 d. Accounts payable 10,000
Cash 10,000 Cash 10,000
34. The entry to record the settlement of P10,000 freight on a purchase

transaction with terms of FOB Destination, Freight Prepaid is
10,000
b. Freight-out 10,000 d. None
35. The entry to record the payment of P10,000 freight on a purchase

transaction with terms of FOB Destination, Freight Collect is
Cash 10,000 Accounts payable 10,000
b. Freight-out 10,000 d. Answer not given
36. On January 1, an entity ordered goods under a purchase transaction

with terms of FOB Destination, Freight Collect. The goods were received
on January 3 and freight of P10,000 was paid to the shipper. What is the
entry on January 5, when the entity settles the purchase?
a. Freight-in 10,000 c. Accounts payable 90,000
Accounts payable 100,000 Cash
90,000
Cash 110,000
b. Accounts payable 100,000 d. Freight-out 10,000
10,000
37. The entry to record the settlement of a purchase on account

amounting to P100,000 and freight of P10,000 on a purchase transaction
with terms of FOB Destination, Freight Prepaid is
90,000
Cash 110,000
b. Accounts payable 100,000 d. Freight-out 10,000
10,000
38. The entry to record the settlement of a purchase on account

amounting to P100,000 and freight of P10,000 on a purchase transaction
with terms of FOB Shipping Point, Freight Prepaid is
90,000
Cash 110,000 d. Freight-out 10,000
b. Accounts payable 110,000 Accounts receivable
10,000
Cash 110,000
39. On January 1, an entity ordered goods under a purchase transaction

with terms of FOB Shipping point, Freight Collect. The goods were
received on January 3 and freight of P10,000 was paid to the shipper.
What is the entry on January 5, when the entity settles the purchase?
100,000
Cash 100,000 d. Accounts payable 90,000
b. Accounts payable 110,000 Cash
90,000
Cash 110,000
40. When the buyer pays the freight on a sales transaction with terms of
FOB Destination, Freight Collect, the entry to record the payment for the
freight is
a. Freight-out xx c. Accounts receivable xx
Cash xx Cash xx
b. Freight-in xx d. Accounts payable xx
Cash xx Cash xx
41. When the buyer settles the freight on a sales transaction with terms of
FOB Destination, Freight Prepaid, the entry to record the payment for the
freight is
a. Freight-out xx c. Accounts payable xx
Cash xx Cash xx
b. Freight-in xx d. None of the choices
Cash xx
42. No special accounting treatment is necessary if the terms of purchase
is
a. FOB Destination, Freight Collect
b. FOB Shipping point, Freight Prepaid
c. FOB Destination, Freight Unpaid
d. FOB Shipping point, Freight Collect
Consigned goods
43. Which statement is true?
a. Until goods are sold by the consignee, the consignor includes the
goods in his/her inventory at cost, less handling and shipping costs
incurred in the delivery and consignee.
b. When goods are sold on an installment plan, the seller retains title and
continues to include them on his/her balance sheet until full payment
has been received.
c. Title to goods cannot be transferred to the buyer before shipment
occurs.
d. In accounting for inventory, economic substance should take
precedence over legal form
(Adapted)

consigned goods?
a. Consigned goods are properly included in the inventory of the
consignor and not the consignee.
b. Freight incurred by the consignor in delivering the consigned goods to
the consignee forms part of the cost of inventories
c. The consignee records consigned goods received from the consignor
through journal entries.
d. The consignor should not recognize revenue until the consigned goods
are sold by the consignee to third parties.
45. Costs of delivering consigned goods to the consignee should be

a. expensed immediately
b. capitalized and included in the inventory of the consignee
c. capitalized and included in the inventory of the consignor
d. recorded be the consignor through memo entry
Inventory financing and other terms

46. All of the following may properly be included in inventory, except
a. goods sold by an entity under a sale with repurchase agreement
b. goods pledged by an entity as security for a loan obtained
c. goods borrowed by an entity to be replaced with similar goods in the
future
d. goods transferred by an entity to another entity to be replaced with
similar goods in the future
47. Which of the following may properly be included in inventory?

a. goods sold by an entity under a sale with right of return and future
returns can be reliably estimated
b. goods sold by an entity on installment basis and possession over the
goods is transferred to the buyer but legal title is retained by the entity
to protect collectibility of the amount due
c. goods sold by an entity under a sale that qualifies as “bill and hold”
sale
d. goods sold by an entity under a sale that qualifies as “lay away sale”
and amount due from the buyer is not yet collected in full
48. It is a type of sale in which the buyer takes title and accepts billing but
delivery of the goods is delayed at the buyer’s request.
a. buy and hold sale c. cash and carry
b. lay away sale d. bill and hold
49. It is a type of sale in which goods are delivered only when the buyer
makes the final payment in a series of installments.
a. installment sale c. cash on delivery
b. lay away sale d. run away sale
50. The goods sold on a “bill and hold” sale is included in the inventory of
the
a. buyer b. seller c. either a or b d. both a and b
51. Prior to delivery, the goods sold on a “lay away” sale is included in the
inventory of the
a. buyer b. seller c. either a or b d. both a and b
52. The goods sold under a bill and hold sale are excluded from the seller’s
inventory and included in the buyer’s inventory at the time of sale when
title passes to the buyer and he accepts billing, provided which of the
following is met
a. Delivery is probable
b. Goods sold are on hand, identified, and ready for delivery to the buyer
at the time of sale
c. The buyer specifically acknowledges the deferred delivery instructions
d. The usual payment terms apply
e. All of the choices
53. The goods sold under a lay away sale is included in the seller’s
inventory until delivery is made to the buyer except when
a. the term of the sale is freight prepaid
b. the title to the goods is retained by the seller solely to protect
collectibility of the amount due
c. the purchase price is substantially paid
d. the goods are lost without the fault of the seller
Financial statement presentation

54. The line-item “inventories” presented on the face of the statement of
financial position of a manufacturing entity is composed of all of the
following, except
a. raw materials and manufacturing supplies c. finished goods
b. work-in-process d. office supplies
55. Inventories are classified on the statement of financial position as

a. current assets c. financial instruments
b. noncurrent assets d. intangible assets
56. Which of the following is not included as inventory?

a. raw materials and components c. work in-process
b. goods in-transit sold FOB destination d. long-term major spare
parts
57. In a manufacturing company, inventory that is ready for sale is called
a. raw materials c. finished goods
b. work in process d. store supplies
Inventory systems
58. The major objective of inventory accounting is
a. valuation of assets in the statement of financial position
b. proper matching of costs with related revenues
c. proper selection of appropriate cost flow formula
d. proper determination of periodic income and valuation of assets
59. Mr. Eugene Krab’s “buy and sell” business involves a large quantity of
low-valued inventory. Because of the fast turnover of inventory, it is often
impracticable to perform periodic physical count of inventory. In fact, the
cost of inventory is often approximated in Krab’s quarterly reports. Which
of the following inventory systems is most suitable for Krab’s business?
a. perpetual system c. plankton system
b. periodic system d. a or b
60. Spongebob Squarepants Co. utilizes an automated accounting system

in which Spongebob inputs the serial number of each item of inventory in
the system. This enables Spongebob to track the movement of each
inventory. Which inventory system is most likely to be used by
Spongebob?
a. perpetual system d. spatula system
b. periodic system e. a or b
c. patty system
61. The “inventory” account is updated for each purchase and sale of
inventory under this type of accounting system
a. respiratory system c. perpetual system
b. automatic system d. periodic system
62. Cost of goods sold is a residual amount under this system.

a. skeletal system c. perpetual system
b. endocrine system d. periodic system
63. Patrick Star uses the perpetual inventory system. During the period,
Patrick Star returned goods previously purchased for P300,000 to the
seller. Ten percent of the goods returned were purchased on cash basis.
Which entry is most likely to have been made to record the transaction?
a. Accounts payable 270,000 c. Accounts payable 300,000
Purchases 270,000 Purchase return
300,000
b. Accounts payable 270,000 d. Accounts payable 270,000
Inventory 300,000 Purchase returns
300,000
64. In a perpetual inventory system, an inventory flow assumption is used

primarily for determining which cost to use in:
a. recording purchases of inventory
b. recording the cost of goods sold
c. recording sales revenue
d. forecasts of future operating results
(Adapted)
65. Which of the following statements is incorrect regarding inventory
systems?
a. An entity needs to have a ledger book in order to use the perpetual
system.
b. Cost of goods sold is determined only periodically under the periodic
system, whereas, cost of goods sold can be determined at any given
time under the perpetual system.
c. Physical count is performed basically as an internal control procedure
under perpetual system, whereas, physical count must be performed
under periodic system in order to properly compute for the profit or
loss during the period.
d. Internal control is enhanced under periodic system.
66. Prior to physical count, the balance of the inventory account of an

entity using the periodic system is
a. equal to the beginning balance of inventory plus net purchases less
cost of goods sold
b. equal to the net purchases less cost of goods sold minus increase in
inventory during the period
c. equal to the beginning balance of inventory plus cost of goods sold less
net purchases
d. equal to the beginning balance of inventory
67. Prior to physical count, cost of goods sold under the periodic system is
equal to
a. net purchases plus increase in inventory during the period
b. net purchases minus increase in inventory during the period
c. net purchases plus decrease in inventory during the period
d. zero
68. The following account is affected when recording a return of inventory

to the vendor under a perpetual inventory system:
a. merchandise inventory c. accounts receivable
b. cash d. purchase returns and allowances
(Adapted)
69. A perpetual inventory system would most likely be used by a(n)

a. automobile dealership c. drugstore
b. hardware store d. convenience store
(Adapted)
70. Funk Co. is selecting its inventory system in preparation for its first
year of operations. Funk intends to use either the periodic weighted-
average method or the perpetual moving-average method, and to apply
the lower of cost or market rule either to individual items or to the total
inventory. Inventory prices are expected to generally increase throughout
20x3, although a few individual prices will decrease. What inventory
system should Funk select if it wants to maximize the inventory carrying
amount at December 31, 20x3?
(Item #1) Inventory method; (Item #2) Cost or market application
a. Perpetual, Total inventory c. Periodic, Total inventory
b. Perpetual, Individual item d. Periodic, Individual item
(Adapted)
Inventory errors under periodic system
71. If a company incorrectly includes consignment items in the ending
inventory, the net effects on the cost of goods sold and profit for the
period, respectively, are
a. Overstatement, Understatment
b. Understatement, Overstatement
c. Overstatement, overstatement
d. The next period’s account will be correct
72. When the opening balance of inventory or net purchases during the
period is overstated, profit for the period is
a. understated b. overstated c. either a or b d. no effect
73. Cost of goods sold is understated if

a. beginning inventory is overstated c. ending inventory is understated
b. net purchases is overstated d. ending inventory is
overstated
74. If ending inventory is understated, (choose the incorrect statement)

a. cost of goods sold is overstated c. net purchases is unaffected
b. profit for the year is understated d. profit for the year is overstated
75. If purchase returns is understated,

a. profit for the period is understated c. ending inventory is overstated
b. cost of goods sold is understated d. profit for the period is overstated
76. Under the periodic system, which of the following statements is

correct?
a. If purchase returns is understated, ending inventory is unaffected
b. If purchase returns is understated, cost of goods sold is understated
c. If purchase returns is understated, beginning inventory is understated
d. If purchase returns is understated, net purchases is unaffected
Measurement
77. At each reporting period, inventories are measured at
a. cost c. cost plus direct acquisition costs
b. lower of cost or NRV d. fair value less cost to sell
78. The cost of inventories includes

I. Cost of purchase
II. Costs of conversion
III. Other costs necessary in bringing the inventory in its intended
condition and location
a. I b. II c. I, II d. I, II, III
79. The purchase cost of inventories includes all of the following, except
a. purchase price
b. import duties and non-refundable taxes
c. freight cost incurred in bringing the inventory to its intended location
d. Value added taxes paid by a VAT registered payer
80. Which of the following costs is included as part of cost of inventories?

a. Abnormal amounts of wasted materials, labor or other production costs
b. Storage costs
c. Administrative overheads
d. Selling costs
e. None of the choices
81. When determining the unit cost of an inventory item, which of the
following should be included?
a. interest on loans obtained to purchase the item
b. advertising costs incurred to promote sale
c. freight cost on the item purchased
d. storage costs incurred prior to sale
82. Which of the following is least likely to be included in determining the

cost inventory?
a. Interest cost for amounts borrowed to finance the purchase of
inventory
b. Purchasing costs
c. Receiving and unpacking costs
d. Freight costs
83. Which of the following costs of conversion cannot be included in cost of

inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with
factory supervisor).
d. Factory overheads based on normal capacity.
(Adapted)
84. The cost of inventory should not include

I. Purchase price.
II. Import duties and other taxes.
III. Abnormal amounts of wasted materials.
IV. Administrative overhead.
V. Fixed and variable production overhead.
VI. Selling costs.
a. II, III, IV, V b. III, IV, VI c. I, II d. II, III, IV, V, VI
(Adapted)
85. Reporting inventory at the lower of cost or NRV is a departure from the
accounting principle of
a. Historical cost c. Conservatism
b. Consistency d. Full disclosure
86. When using the periodic inventory method, which of the following
generally would not be separately accounted for in the computation of
cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in (freight-in) for merchandise purchased during
the period
Accounting for discounts

87. Accounts such as Purchase Returns, Sales Returns, Purchase
Discounts, Freight-in and Allowance for Purchase Discounts are used in
a. Perpetual Method and Gross Method
b. Perpetual Method and Net Method
c. Periodic Method and Net Method
d. Periodic Method and Gross Method
88. The use of Allowance for Purchase Discounts account is based on
which accounting concept
a. matching c. net method
b. gross method d. periodic method
89. The Purchase Discounts Lost account is used under

a. gross method c. perpetual system
b. net method d. periodic system
90. The Purchase Discounts account is used under

a. gross method c. perpetual system
b. net method d. periodic system
91. Theoretically, the net method should be used in recording purchases.

Cash discounts not availed of is preferably presented in the statement of
profit or loss and other comprehensive income as
a. cost of goods sold c. other expense
b. finance cost d. b or c
92. Theoretically, the net method should be used in recording purchases.

Trade discounts taken is preferably presented in the statement of profit or
loss and other comprehensive income as
a. cost of goods sold c. other expense
b. operating expense d. not presented
Cost formulas
93. Generally accepted accounting principles require the selection of an
inventory cost flow method which:
a. emphasizes the valuation of inventory for balance sheet purposes
b. most closely approximates lower of cost and net realizable value for
the ending inventory
c. most clearly reflects the periodic income
d. matches the physical flow of goods from inventory with sales revenue
e. yields the most conservative amount of reported income
(Adapted)
94. All of the following correctly describe the average cost inventory cost
flow method except:
a. a moving average cost is used with a perpetual inventory system only.
b. the average cost methods are based on the view that the cost of
inventory on hand and the cost of goods sold during a period should be
representative of all purchase costs available for the period
c. a weighted-average unit cost is used with a periodic inventory system
only
d. a moving average cost is used with either a periodic or a perpetual
inventory system
(Adapted)
95. The specific identification method can be used only:

a. in income tax returns
b. for financial reporting purposes(but not in income tax returns)
c. when the individual items in inventory are similar in terms of cost,
function, and sales revenue
d. when the actual acquisition costs of individual units can be determined
from the accounting records
(Adapted)
96. The average method of cost flow assumption, when used in a

perpetual inventory system, is called
a. moving average c. simple average
b. weighted average d. b or c
97. Alcoholica Co. sells a wide variety of beverages. Because of the way
Alcoholica stores its inventory, the most recently purchased cases are
usually the ones being sold first. Given these circumstances, what flow
assumption must Alcoholica use?
a. Specific identification c. Average cost
b. FIFO d. Any assumption it wishes
(Adapted)
98. Which of the following methods of measuring the cost of goods sold
most closely parallels the actual physical flow of the merchandise?
a. LIFO b. FIFO c. Average cost d. Specific Identification
(Adapted)
99. Cost of goods sold and ending inventory is the same under a periodic
system as under a perpetual system when the entity uses
a. FIFO b. LIFO c. Weighted average d. Specific identification
100. Which inventory costing method would not be appropriate for a

manufacturer using a perpetual inventory system?
a. FIFO
b. specific identification
c. simple weighted average
d. combination of FIFO and specific identification
(Adapted)
101. When the FIFO method is used, ending inventory units are priced at
the
a. most recent price c. earliest price
b. the average price d. none of choices
(Adapted)
102. Which inventory cost flow formula is not permitted under PAS 2
Inventories?
a. Average cost b. LIFO c. FIFO d. All are permitted
103. The inventory cost flow assumption where the cost of the most recent
purchase is matched first against sales revenues is
a. FIFO b. Average c. Specific identificationd. none
104. In a period of falling prices, the inventory method that gives the lowest
possible value for ending inventory is:
a. gross profit b. FIFO c. LIFO d. weighted average
(Adapted)
105. A corporation entered into a purchase commitment to buy inventory.

At the end of the accounting period, the current market value of the
inventory was less than the fixed purchase price, by a material amount.
Which of the following accounting treatments is most appropriate?
a. Describe the nature of the contract in a note to the financial
statements, recognize a loss in the income statement, and recognize a
liability for the accrued loss
b. Describe the nature of the contract and the estimated amount of the
loss in a note to the financial statements, but do not recognize a loss
in the income statement
c. Describe the nature of the contract in a note to the financial
statements, recognize a loss in the income statement, and recognize a
reduction in inventory equal to the amount of the loss by use of a
valuation account
d. Neither describes the purchase obligation nor recognize a loss on the
income statement or balance sheet
(AICPA)
Lower of cost or net realizable value

106. Which of the following is not an acceptable basis for valuation of
certain inventories in published financial statements?
a. Historical cost
b. Current replacement cost
c. Prime cost
d. Current selling price less cost of disposal
(Adapted)
107. The original cost of an inventory item is above the replacement cost
and the net realizable value. The replacement cost is below the net
realizable value less the normal profit margin. As a result, under the lower
of cost or market method, the inventory item should be reported at the
a. Net realizable value
b. Net realizable value less normal profit margin
c. Replacement cost
d. Original cost
(Adapted)
108. Under current standards, inventories of a trading entity should be

measured at
a. Fair Value less cost to sell
b. the lower of Cost or Market, with ceiling on replacement cost
c. the lower of Cost or estimated selling price less and cost to sell
d. the lower of Cost or estimated selling price less cost of completion and
cost to sell
109. Which statement is correct concerning the valuation of inventory at

lower of cost or NRV?
I. Inventories are usually written down to net realizable value on an item
by item basis.
II. It is not appropriate to write down inventories based on a classification
of inventory, for example, finished goods or all inventories in a
particular industry or geographical segment.
a. I only b. II only c. Both I and II d. Neither I nor II
110. The costing of inventory must be deferred until the end of the
accounting period under which of the following method of inventory
valuation?
a. Moving average c. LIFO perpetual
b. Weighted average d. FIFO
111. Which inventory costing method would a company that wishes to
maximize profits in a period of rising prices use?
a. FIFO c. Weighted average
b. Peso-value LIFO d. Moving average
(AICPA)
112. Which of the following is/are true under PAS 2?

I. Inventories can only be "written down" but not "written up."
II. Inventories may be “written up” above their cost if it is clear that their
values have increased subsequent to previous write-down.
III. Storage costs is included in the cost of inventory only when storage
cost is necessary in bringing the inventory to its intended condition
and location.
a. II only b. I, II & III c. III only d. I & III
113. Which of the following are considered in determining the cost of an

item of inventory?
I. Material wasted due to a machine breakdown
II. Import duties on shipping of inventory inwards
III. Storage costs of finished goods
IV. Trade discounts received on purchase of inventory
a. I, II b. III, IV c. II, IV d. I, II, III, IV
(ACCA)
114. According to PAS 2 Inventories, which of the following costs should be

included in inventory valuations?
I. Transport costs for raw materials
II. Abnormal material usage
III. Storage costs relating to finished goods
IV. Fixed production overheads
a. I, II b. III, IV c. II, III d. I, IV
(ACCA)
115. How should import duties be dealt with when valuing inventories at the
lower of cost and net realizable value (NRV) according to PAS 2
Inventories?
a. added to cost c. deducted in arriving at NRV
b. ignored d. deducted from cost
(ACCA)
116. How should prompt payment discount not taken be dealt with when
valuing inventories at the lower of cost and net realizable value (NRV)
using the gross method?
117. How should sales staff commission be dealt with when valuing
inventories at the lower of cost and net realizable value (NRV), according
to PAS 2 Inventories?
(ACCA)
118. How should trade discounts be dealt with when valuing inventories at
the lower of cost and net realizable value (NRV) according to PAS 2
Inventories?
(ACCA)
119. Are the following statements true or false, according to PAS 2

Inventories?
I. Cost of factory management should be included in the cost of
inventory.
II. Maintenance expenses for an item of equipment used in the
manufacturing process should be included in the cost of inventory.
a. False, false b. False, true c. True, false d. True, true
(ACCA)
120. The Hetfield Company has two products in its inventory which have
costs and selling prices per unit as follows:
Product X Product Y
Selling price 200 300
Materials and conversion costs 150 180
General administration costs 30 80
Selling costs 60 70
Profit/(loss) (40) (30)
At year-end, the manufacture of items of inventory has been completed but

no selling costs have yet been incurred. According to PAS 2 Inventories, how
should Product X and Product Y carried in Hetfield's statement of financial
position, respectively?
a. NRV, NRV b. NRV, Cost c. Cost, NRV d. Cost, Cost
(ACCA)
Inventory estimation
121. A major advantage of the retail inventory method is that it
a. Permits companies which use it to avoid taking an annual physical
inventory
b. Gives a more accurate statement of inventory cost than other
methods.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination
of the periodic inventory.
(Adapted)
122. According to PAS 2 Inventories, which of the following may be used in

estimating inventory for interim period reporting?
I. Conservative, Conventional or LCM Method
II. Average Method
III. First-in, first out (FIFO) Method
a. II b. I, II c. II, III d. I, II, III
123. Which inventory costing method is most useful in estimating the

amount of inventory lost or destroyed by theft, fire, or other hazards?
a. FIFO c. gross profit method
b. average cost method d. LIFO
(Adapted)
124. Cost of goods available for sale consists of the

a. cost of beginning inventory and the cost of ending inventory.
b. cost of ending inventory and the cost of goods purchased during the
year.
c. cost of beginning inventory and the cost of goods purchased during the
year.
d. difference between the cost of goods purchased and the cost of goods
sold during the year.
125. The operating expenses section of a statement of earnings for a

merchandising company would not include
a. freight out c. cost of goods sold
b. utilities expense d. insurance expense
(Adapted)
126. If a company wrote a check for P500 for the advance payment for a
copy machine they purchased yet to be delivered the Accounts Payable
account would
a. increase c. not be affected
b. decrease d. no one knows for sure
(Adapted)
127. The cost of goods available for sale is allocated between

a. beginning inventory and ending inventory
b. beginning inventory and cost of goods on hand
c. ending inventory and cost of goods sold
d. beginning inventory and cost of goods sold
128. Which of the following statements is(are) correct?

I. To calculate cash payments for purchases, the cost of goods sold must
be known, along with the changes in inventory and accounts payable
during the period.
II. Cost of goods sold is equal to net purchases minus increase in
inventory.
III. Cost of goods sold is equal to net purchases plus increase in inventory.
a. I, II b. I, II, III c. II, III d. I, III
129. A binding agreement for the exchange of a specified quantity of

resources at a specified price on a specified future date or dates
a. purchase order c. purchase contract
b. firm commitment d. purchase committed
Chapter 9
Investments (Part 1)

Financial instruments
1. It is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
a. Debt instrument c. Financial instrument
b. Equity instrument d. a and b
2. Financial assets include

I. Cash
II. An entity’s own equity instrument
III. A contractual right or obligation to receive or pay cash or another
financial asset to or from another entity
IV. A contractual right to exchange financial assets or financial liabilities
with another entity under conditions that are potentially unfavorable to
the entity
a. I b. I, II c. I, II, III d. I, II, III, IV
3. Financial Liability is any liability that is

I. A contractual obligation to deliver cash or another financial asset to
another entity
II. A contractual obligation to exchange financial assets or financial
liabilities with another entity under conditions that are potentially
unfavorable to the entity
III. A contract that will or may be settled in the entity’s own equity
instruments and is a non-derivative for which the entity is or may be
obliged to deliver a variable number of the entity’s own equity
instruments
IV. A derivative that will or may be settled other than by the exchange of
a fixed amount of cash or another financial asset for a fixed number of
the entity’s own equity instruments.
a. I or II b. I, II, III, or IV c. I, II, and III d. I and II
4. Regarding PFRS 9, which of the following is incorrect?

a. Only equity instruments of other entities can qualify as financial
assets. The entity’s own equity instruments are not financial assets
b. The term financial instrument refers to both financial assets and
financial liabilities.
c. Equity instruments refer only to those instruments issued by a
corporation. Other types of organizations cannot issue equity
instruments.
d. The term financial instruments include a vast array of instruments,
including petty cash fund.
5. It is any contract that represents a right upon the holder to receive cash
from the issuer thereof or an obligation upon the issuer to pay cash to the
holder thereof.
a. financial asset c. debt instrument
b. equity instrument d. musical instrument
6. Under PAS 32, it refers to an instrument originated by an entity which

represents a residual interest in the entity’s net assets.
a. financial instruments c. debt instrument
b. equity instruments d. own equity instrument
7. All of the following are equity securities, except

a. share options given as compensation to employees
b. members’ shares in a cooperative
c. preference shares with mandatory redemption
d. a receivable collectible only on a pro-rata basis upon liquidation of the
issuer
8. Which of the following most likely qualify for disclosure as financial asset
in the notes?
a. undeposited collections c. treasury shares
b. inventory d. stock rights issued
9. X Co. has the following items.
I. Inventories
II. Shares of stocks issued by X Co.
III. Patent purchased from Y Co.
IV. Bonds payable
V. Accounts receivable
Which of these items is(are) considered financial asset(s)?

a. II b. II, IV, V c. II, IV d. V
10. Are there any circumstances when a contract that is not a financial
instrument would be accounted for as a financial instrument under PAS 32
and PFRS 9?
a. No. Only financial instruments are accounted for as financial
instruments.
b. Yes. Gold, silver, and other precious metals that are readily convertible
to cash are accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a commodity or
other nonfinancial item (e.g., gold, electricity, or gas) generally is
accounted for as a financial instrument if the contract can be settled
net.
d. Yes. An entity may designate any nonfinancial asset that can be
readily convertible to cash as a financial instrument.
(Adapted)
11. Which of the following assets is not a financial asset?

a. Cash.
b. An equity instrument of another entity.
c. A contract that may or will be settled in the entity’s own equity
instrument and is not classified as an equity instrument of the entity.
d. Prepaid expenses.
(Adapted)
12. The scope of PFRS 9 includes all of the following items except:
a. Financial instruments that meet the definition of a financial asset.
b. Financial instruments that meet the definition of a financial liability.
c. Financial instruments issued by the entity that meet the definition of
an equity instrument.
d. Contracts to buy or sell nonfinancial items that can be settled net.
(Adapted)
13. Which of the following is not disclosed as a financial asset?

a. cash c. sinking fund
b. equity instruments on another entity d. prepaid income tax
14. Which of the following types of instrument is best described as a

contract that evidences a residual interest in the assets of an entity after
deducting the liabilities?
a. Financial liability b. Guarantee c. Equity d. Financial
asset
15. Which of the following are classified as financial instruments in

accordance with PAS32 Financial Instruments: Presentation?
a. Patents d. Trade payables
b. Trade receivables e. b and d
c. Inventories
(ACCA)
16. Marketable securities are those investments which are:

a. for controlling another firm c. readily marketable
b. for plant expansion d. for food customer
(Adapted)
17. Assets not directly identified with the operating activities of a business
enterprise
a. inventories b. receivables c. equipment d.
investments
(Adapted)
18. Under PFRS 9, the subcategories of Financial Assets at Fair value

Through Profit or Loss (FVPL) include
I. Designated
II. Held for trading
III. Held for speculation
a. I and II b. I and III c. II and III d. I, II, and III
19. How many of the following are financial instruments

I. Cash
II. Demand and time deposits
III. Commercial paper
IV. Accounts, notes, and loans receivable
V. Accounts, notes, and loans payable
VI. Debt and equity securities.
VII. Asset backed securities such as collateralized mortgage obligations,
repurchase agreements, and securitized packages of receivables
VIII. Derivatives, including options, rights, warrants, futures contracts,
forward contracts, and swaps.
a. Seven b. Ten c. Six d. All of them
20. It is any contract that evidences a residual interest in the assets of an

entity after deducting all of its liabilities.
a. stocks instrument c. capital instrument
b. debt instrument d. equity instrument
21. Debt instruments may include

a. bonds payable c. a and b
b. investment in bonds d. callable preference shares
22. Preferred stock with a mandatory redemption date or redeemable at

the option of the holder is a(n)
a. equity instrument c. treasury share
b. debt instrument d. a or b
23. To which of the following items is PFRS 9 Financial Instruments not

applicable?
a. unquoted debt securities
b. preference shares with mandatory redemption
c. the entity’s own equity instruments
d. the entity’s own debt instruments
Initial recognition and classification

24. What is the principle for recognition of a financial asset or a financial
liability in PFRS 9?
a. A financial asset is recognized when, and only when, it is probable that
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 the financial asset.
d. A financial asset is recognized when, and only when, the entity
becomes a party to the contractual provisions of the instrument.
(Adapted)
25. The two main classifications of financial assets under PFRS 9 are
a. debt and equity instruments
b. fair value and amortized cost
c. financial assets and financial liabilities
d. FVPL and FVOCI
26. Which of the following is not a classification of financial assets under

PFRS 9?
a. Financial assets at fair value through profit or loss.
b. Financial assets at fair value through other comprehensive income
c. Financial assets at amortized cost
d. Held-to-maturity investments
27. Under PFRS 9, an entity shall classify financial assets as subsequently

measured at either amortized cost or fair value on the basis of which of
the following:
I. the entity’s business model for managing the financial assets
II. the contractual cash flow characteristics of the financial asset
a. I only b. II only c. I and II d. neither I nor II
28. A financial asset shall be measured at amortized cost if which of the

following conditions are met:
I. the asset is held within a business model whose objective is to hold
assets in order to collect contractual cash flows.
II. the contractual terms of the financial asset give rise on specified dates
to cash flows that are solely payments of principal and interest on the
principal amount outstanding.
a. I only b. II only c. I or II d. I and II
29. If the objective of an entity’s business model for managing a financial

asset is to hold the financial asset in order to collect contractual cash
flows, then the financial asset is most likely to be classified as
a. FVPL b. FVOCI c. amortized cost d. any of these
30. If the objective of an entity’s business model for managing the

financial assets is to hold financial assets in order to realize fair value
changes, then the financial asset is most likely to be classified as
a. at fair value c. at cost
b. at amortized cost d. any of these
31. If the objective of an entity’s business model is to hold financial assets
in order to collect contractual cash flows, the entity may classify the
financial assets
a. at amortized cost
b. at amortized cost provided the management can demonstrate its
ability to hold them until maturity
c. at amortized cost; however, if a significant portion of the financial
assets is sold before maturity, the remaining portion should be
reclassified
d. at amortized cost provided the fair value information and fair value
changes are disclosed in the notes
32. Regarding classification of financial assets, which of the following is

incorrect?
a. only equity securities can be classified as FVOCI
b. only debt securities can be classified as amortized cost
c. either debt or equity securities may be classified as FVPL
d. only equity securities can be designated as FVPL
33. When an entity classifies its financial assets, which of the following
statements is true?
a. debt securities may be classified as FVOCI
b. equity securities may be classified as amortized cost
c. debt or equity securities may be designated at FVPL
d. securities classified as FVOCI are always presented as noncurrent
assets
34. Loans and notes receivables are classified as financial assets

measured at
a. fair value c. cost
b. amortized cost d. lower of cost or fair value
35. The initial classification of investments in financial assets is generally

based on
a. whether the debt or equity securities are marketable or not
b. whether the debt or equity securities are current or non-current
c. the intention of management on acquiring such investments
d. the entity’s business model and contractual cash flow characteristics of
the financial asset
36. Which of the following cannot be classified as FVOCI?

a. investment in nonredeemable preference shares
b. equity securities that qualify as held for trading
c. equity securities whose quoted prices are published only during
weekdays
d. a residual interest in the net assets of another entity
37. The option to designate financial assets as FVPL and the election to
classify financial assets at FVOCI are available to an entity’s management
a. on initial recognition and subsequent thereof
b. subsequent to initial recognition only
c. on initial recognition only
d. not available
38. The option to designate financial assets at FVPL may be made if

a. the financial asset is an equity security
b. the financial asset is a debt security
c. the designation minimizes accounting mismatch
d. the entity is a corporation
39. The option to designate financial assets as FVPL and the election to
classify financial assets at FVOCI are
a. revocable
b. mandatory
c. irrevocable
d. revocable under certain circumstances described in PFRS 9
40. Regarding classifications of financial assets, which of the following is

incorrect?
a. Once a financial asset is designated as financial asset measured at
FVPL, such asset is recognized at fair value until the financial asset is
derecognized.
b. The election to classify financial assets as FVOCI is made on an
instrument-by-instrument basis
c. Once a financial asset is classified as FVOCI, all fair value changes on
the instrument is recognized in other comprehensive income
d. An entity cannot designate a financial asset at FVPL during a period it
holds investments classified as FVOCI
41. Which of the following is correct regarding classifications of financial

assets?
a. An entity cannot designate a debt security at FVPL if it otherwise
qualifies for recognition as held for trading
b. An entity cannot designate an equity security at FVPL if it otherwise
qualifies for recognition as held for trading
c. An entity cannot elect to classify an equity security at FVOCI if it
otherwise qualifies for recognition as held for trading
d. An entity can elect to classify an equity security at FVOCI even if the
security qualifies for recognition as held for trading
42. Financial assets that are neither designated to be measured at FVPL

nor qualify for recognition at amortized cost are classified as held for
trading if: (choose the incorrect statement)
a. it is acquired principally for the purpose of selling it in the near term
b. on initial recognition it is part of a portfolio of identified financial
instruments that are managed together and for which there is
evidence of a recent actual pattern of short-term profit-taking
c. it is a derivative (except for a derivative that is a financial guarantee
contract or a designated and effective hedging instrument)
d. the instrument is an equity security
43. Any investment may be accounted for by fair value through profit and
loss provided
a. It is traded in an active market. c. It is a debt instrument.
b. It is an equity instrument. d. The instrument matures within 2
years.
(AICPA)
44. Are the following statements concerning the measurement of financial

instruments after initial recognition true or false, according to PFRS 9
Financial instruments?
(1) Held-for-trading financial assets are measured at amortized cost.
(2) Debt securities to be held to maturity are measured at fair value.
Statement (1) Statement (2) Statement (1) Statement (2)
a. False False c. True False
b. False True d. True True
(ACCA)
45. Prior to January 1, 20x1 Drive Company had not held any equity
investments in other companies. On January 1, 20x1 Drive purchased 3%
of the equity shares in Putt Company with the intention of holding this
investment over the long term. The most appropriate classification of the
equity investment in Putt by Drive is
a. Designated b. FVOCI c. amortized cost d. any of these
(ACCA)
46. Iron Company acquired equity securities of Wood Company, a listed

entity, to be held as investments. Which of the following is true?
a. Iron Company is required under PFRS 9 to classify the securities at fair
value
b. Iron Company is required under PFRS 9 to classify the securities as
amortized cost
c. Iron Company is required under PFRS 9 to designate the securities to
be measured at fair value
d. Iron Company will most likely measure the securities at fair value.
However, Iron Company is not prohibited under PFRS 9 to measure the
securities at cost.
47. Which of the following is incorrect regarding the provisions of PFRS 9

Financial Instruments?
a. All equity securities held as investments, except those covered under
other Standards, shall be measured at fair value
b. Unquoted equity securities are required under PFRS 9 to be measured
at cost
c. Entries to record reclassifications of financial assets are always made
after a change in an entity’s business model but never simultaneously
with the change.
d. Classifications to FVOCI and financial assets designated at FVPL are
irrevocable.
48. Single Plane Company acquired 30,000 equity shares, representing 5%

of the issued ordinary share capital in Two Plane Company. Two Plane's
shares are listed on a Stock Exchange. In accordance with PFRS 9
Financial Instruments, in which of the following classifications could Single
Plane's investment in the equity shares be classified?
a. FVOCI d. a or c
b. Available for sale e. any of these
c. FVPL
(ACCA)
49. Devin Company acquired 30,000 4% Government Bonds redeemable in

20x1 at the quoted market price of P200. Devin has no current intention
to sell the Bonds and has a policy to hold them as investments unless
certain corporate criteria are met and the bonds are sold to maintain
liquidity. In accordance with PFRS 9 Financial Instruments, which of the
following is the most appropriate classification for Devin's investment in
the Government Bonds?
a. Held to maturity c. Available for sale
b. At fair value through profit or loss d. At amortized cost
(ACCA)
50. They represent temporary investments of funds available for current

operations and are intended to meet working capital requirements
a. receivables c. held for trading securities
b. inventories d. cash
51. Which of the following may be classified as receivables?

a. Financial assets designated at fair value through profit or loss;
b. Financial assets measured at fair value with fair value changes
recognized in other comprehensive income
c. Financial assets for which the holder may not recover substantially all
of its initial investment, other than because of credit deterioration.
d. Financial assets that are not derivative instruments but with fixed or
determinable payments that are not quoted in an active market.
52. Which of the following is the incorrect statement?

a. Investments classified as long-term are reclassified as short-term
investments only if it is in accordance with the entity’s business model
and based on cash flow characteristics of the financial asset.
b. If an investor company does not have significant influence in another
company, it must use either the fair value method or the cost method
to account to account for that investment in equity securities.
c. If an investor company has a controlling interest in another company,
it must use either the cost method or the fair value method to account
for that investment in equity securities in its separate financial
statements.
d. The cost method is sometimes applied to investments in equity
securities.
(Adapted)
53. Which of the following statements is correct regarding the accounting

for financial assets?
a. The tainting provision under PAS 39 is carried over to PFRS 9.
b. Investments in unquoted equity securities are automatically measured
at cost
c. The election to classify financial assets at FVOCI is available after initial
recognition
d. When designating financial assets at FVPL, an entity’s management
may disregard the entity’s business model for managing financial
assets and the contractual cash flow characteristics of the instrument.
Presentation
54. Which of the following statements is the correct statement?
a. The best way to ascertain whether a marketable security is a short-
term or a long-term investment is to check with a securities dealer.
b. For balance sheet classification, a security is classified as a short-term
investment if it is readily marketable.
c. For balance sheet classification, a security is classified as a short-term
investment based on the entity’s business model and contractual cash
flow characteristics of the instrument
d. All investments in FVPL are reported at book value.
(Adapted)
55. Which of the following statements is incorrect regarding presentation
of financial assets?
a. The carrying amounts of each financial asset at FVPL, FVOCI, and
amortized cost shall be disclosed either in the statement of financial
position or in the notes:
b. Financial assets measured at fair value through profit or loss are
further disaggregated into designated and held for trading
c. The unrealized gains and losses on changes in fair values recognized
for held for trading and designated at FVPL need not be disclosed
separately in the financial statements.
d. Change in fair values of FVOCI is presented as a separate line item on
the face of the statement of profit or loss and other comprehensive
income.
56. Which of the following is the correct statement?

a. Financial assets at fair value and at amortized cost are classified
separately in the financial statements.
b. The FVOCI classification includes equity and debt securities.
c. Investments in FVPL include only debt securities.
d. Increases in the fair values of FVPL and amortized cost investments
always cause the valuation account to increase.
57. Which of the following incorrectly relates to the provisions of PFRS 9?

a. All investments in equity instruments and contracts on those
instruments must be measured at fair value.
b. Only in limited circumstances may investments in equity instruments
be measured at cost.
c. Unquoted equity instruments whose fair value cannot be reliably
determined shall be measured at cost.
d. Unquoted equity instruments are always measured at cost.
58. Which of the following could cause a firm's equity position to be

weaker than is reflected in the statement of financial position?
a. Holding held-to-maturity securities in a portfolio with non-amortized
discounts.
b. Holding FVOCI securities in a portfolio that have unrealized losses.
c. Holding trading securities in a portfolio with unrealized gains.
d. Designating financial assets at FVPL to minimize accounting mismatch
(Adapted)
59. All of the following items may be presented in the statement of
financial position under either the current assets section or the
noncurrent assets section except
a. Held for trading c. Investments measured at amortized
cost
b. Investments in FVOCI d. b and c
Initial measurement
60. Which of the following statement is true?
a. The fair value of accounting is the most appropriate method of
accounting for short-term investments in marketable equity securities.
b. All bond investments are accounted for by the amortized cost method.
c. The carrying value of an investment in FVOCI is limited to fair value at
the date of acquisition.
d. The realized gain or loss on a short-term investment in an equity
security is usually equal to the difference between its cost and its sale
price.
(Adapted)
61. Financial assets classified as FVPL are initially recognized at

a. fair value c. fair value plus direct acquisition cost
b. cost d. invoice cost
62. Financial assets classified as FVOCI and financial assets measured at

amortized cost are initially recognized at
a. fair value c. fair value plus direct acquisition cost
b. cost d. invoice cost
63. Under PFRSs, these refer to incremental costs that are directly
attributable to the acquisition, issue or disposal of a financial asset or
financial liability. They would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument.
a. Transaction costs c. Cost of equity
b. Spread cost d. Finance cost
64. In addition to financial assets at fair value through profit or loss, which
of the following categories of financial assets is measured at fair value in
the balance sheet?
a. FVOCI
b. Amortized cost investments
c. Loans and receivables.
d. Investments in unquoted equity instruments whose fair values cannot
be measured reliably
65. What is the best evidence of the fair value of a financial instrument?
a. Its cost, including transaction costs directly attributable to the
purchase, origination, or issuance of the financial instrument.
b. Its estimated value determined using discounted cash flow techniques,
option pricing models, or other valuation techniques.
c. Its quoted price, if an active market exists for the financial instrument.
d. The present value of the contractual cash flows less impairment.
(Adapted)
66. Is there any exception to the requirement to measure investments in

equity securities at fair value?
a. No. Such assets are always measured at fair value.
b. Yes. If the fair value of such assets increases above cost, the resulting
unrealized holding gains are not recognized but deferred until realized.
c. Yes. If the entity has the positive intention and ability to hold assets
classified in those categories to maturity, they are measured at
amortized cost.
d. Yes. Investments in unquoted equity instruments that cannot be
reliably measured at fair value are measured at cost.
(Adapted)
67. Which of the following conditions generally exists before fair value can
be used as the basis for the valuation of financial assets held as
investment?
a. management’s intention must be to dispose of the securities within
one year
b. fair value must be determinable
c. fair value must approximate historical cost
d. fair value must be less than cost for each security held in the
company’s marketable equity security portfolio
e. financial assets held as investment should be valued at fair value in
compliance with current GAAP
(Adapted)
Subsequent measurement
68. Subsequent to their initial recognition, which financial assets with
quoted market prices in an active market are measured at fair value?
Financial assets Financial assets FVO Held for

designated at measured at CI trading
FVPL amortized cost securities
a. Yes Yes Yes No
b. Yes Yes No No
c. Yes No Yes Yes
d. No No No Yes
69. On November 1, 20x1, Monsters, Inc. invested ₱575,000 in short-term

marketable securities classified as held for trading. The market value of
this investment was ₱610,000 at December 31, 20x1 but had slipped to
₱595,000 by December 31, 20x2. In the financial statements prepared on
December 31, 20x1, Monster reports:
a. the investment at ₱575,000 with note disclosure of the fair value of
P610,000.
b. the investment at ₱610,000 and a ₱35,000 unrealized holding gain
included in profit or loss.
c. the investment at ₱610,000 and a ₱35,000 realized gain recognized in
the income statement.
d. the investments ₱595,000 and a ₱15,000 unrealized holding loss in
profit or loss.
(Adapted)
70. For a marketable debt securities portfolio to be held-to-maturity, which

of the following amounts should be included in the period’s profit,
assuming the entity elects the fair value option of reporting all of its
financial instruments in the portfolio?
I. Unrealized temporary losses during the period.
II. Realized gains during the period.
III. Unrealized gains during the period.
a. I only b. land lI c. II and III d. I, II, and III.
(AICPA)
71. When the fair value of an entity's portfolio of FVPL securities is lower
than its cost the difference is
a. Accounted for as liability.
b. Disclosed and described in a note to the financial statements but not
accounted for.
c. Accounted for as a valuation allowance deducted from the asset to
which it relates.
d. Accounted for as an addition in the equity section of the statement of
financial position
(Adapted)
72. Under PFRSs, if an entity designates a financial asset to be measured

at fair value, any changes in fair value are recognized in
a. Other comprehensive income. c. Profit or loss.
b. Retained earnings. d. Equity
(AICPA)
73. An entity has adopted PFRS 9 Financial Instruments. It should report

the marketable equity securities that it has classified as held for trading
at:
a. Lower of cost or market, with holding gains and losses included in
earnings.
b. Lower of cost or market, with holding gains included in earnings only to
the extent of previously recognized holding losses.
c. Fair value, with holding gains included in earnings only to the extent of
previously recognized holding losses.
d. Fair value, with holding gains and losses included in earnings.
(AICPA)
74. Which of the following statements regarding fair value is/are correct?
I. The fair value of an asset or liability is specific to the entity making the
fair value measurement.
II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair
value measurement.
a. I & II b. I & IV c. II & III d. III & IV
(AICPA)
75. Which of the following is not a valuation technique that can be used to
measure the fair value of an asset or liability?
a. Market approach. c. Income approach.
b. Impairment approach. d. Cost approach.
(AICPA)
76. Which of the following statements is incorrect regarding the inputs that
can be used to measure fair value?
I. Level I inputs are the most reliable fair value measurements and Level
III inputs are the least reliable.
II. Level III measurements are quoted prices in active markets for
identical assets or liabilities.
III. A fair value measurement based on management assumptions only (no
market data) would not be acceptable under current standards.
IV. The level in the fair value hierarchy of a fair value measurement is
determined by the level of the highest level significant input.
a. I only. b. I, II, IV. c. II, III, IV. d. I, II, III, IV.
(Adapted)
77. There are multiple active markets for a financial asset with different
observable market prices:
Market Quoted Price Transaction Costs
A ₱76 ₱5
B ₱74 ₱2
There is no principal market for the financial asset. What is the fair value of
the asset?
a. 71 b. 72 c. 74 d. 76
(Adapted)
78. The valuation allowance for a marketable equity securities portfolio
included in current assets should be a component of
a. current assets c. non-current assets
b. current liabilities d. non-current liabilities
(Adapted)
79. If marketable securities purchased for ₱500 increase in fair value to
₱800 as of the end of the fiscal year and were sold in the subsequent year
for ₱700, what method was used if the gain of ₱300 was reported in the
first year and a loss of ₱100 in the year of sale?
a. equity method c. lower of cost or market
b. fair value method d. aggregate method
(Adapted)
80. As determined at the balance sheet date, the carrying amount of the
current portfolio of marketable equity securities shall be equal to
a. acquisition value c. fair value
b. lower of cost or market value d. appraised value
(Adapted)
81. Test of marketability must be met before equity securities owned can
be properly classified as
a. long-term investments c. treasury shares
b. current assets d. loans and receivables
(Adapted)
82. Assuming a financial asset classified as FVOCI is remeasured to fair

value at the end of reporting period, the gain or loss
a. Must be recognized in net profit or loss.
b. Must be recognized directly in equity.
c. Must be recognized in other comprehensive income and accumulated
separately in equity
d. Must be recognized in profit or loss if the result is a loss and directly in
equity if the result is gain.
83. The difference between the acquisition cost and the aggregate par
value of shares acquired as investment is
a. accounted for as a deferred charge to be amortized using the straight
line method
b. accounted for as part of the initial cost and recognized in profit or loss
during the life of the investment using the effective interest method
c. accounted for as part of the initial cost and recognized in profit or loss
when the investment is impaired
d. not given special accounting

I. PFRS 9 Financial Instruments does not address the accounting for
equity instruments issued by the reporting entity. However, the holder
of such equity instruments may apply PFRS 9 to those instruments,
unless such instruments are obtained through interests in subsidiary,
associate or joint venture.
II. Investments in equity instruments that are not quoted in an active
market, and whose fair value cannot be reliably measured cannot be
classified as FVPL.
III. Designated financial assets at FVPL are acquired principally for the
purpose of selling them in the near term
IV. Trading generally reflects active and frequent buying and selling, and
financial instruments held for trading generally are used with the
objective of generating profit from short-term fluctuations in price or
dealer’s margin.
a. I, III b. I, II, III c. I, II, IV d. I, II, III, IV
85. Sanitarium Company holds equity instruments of Damage Inc., a non-

publicly listed company. The equity instruments were classified as regular
investment. Which of the following statements is correct?
a. Sanitarium should measure the asset at cost
b. Sanitarium should measure the asset at amortized cost
c. Sanitarium should carry the asset at fair value unless fair value cannot
be determined reliably
d. Either a or b
Derecognition
86. Chowder Corporation invested ₱290,000 cash in equity securities
classified as FVOCI in early December. On December 31, the quoted
market price for these securities is ₱307,000. Which of the following
statements is correct?
a. Chowder's December income statement includes a ₱17,000 gain on
investments.
b. If Chowder sells these investments on January 2 for ₱300,000, it will
report a loss of ₱7,000 in its income statement.
c. Chowder's December 31 statement of financial position reports
marketable securities at ₱290,000 and an unrealized holding gain on
investments of ₱17,000.
d. Chowder’s December 31 statement of financial position reports
marketable securities at ₱307,000 and an Unrealizable Holding Gain on
Investments of ₱7,000.
(Adapted)
87. When an investment in FVPL is sold during the year, the realized gain
or loss (assume no transaction costs) equals
a. the difference between the acquisition cost and the fair value at date
of sale.
b. the difference between the amortized cost and the fair value at the
date of sale.
c. the balance in the valuation account.
d. the fair value change experienced during the year of sale.
(Adapted)
88. Which of the following is a provision of PAS 39 that has been outlawed
by PFRS 9?
a. Painting provision
b. Provision for doubtful accounts
c. Tainting provision
d. Reclassification between financial assets
89. If a financial asset classified as FVOCI is derecognized (sold) during the

year
a. The gain on sale is recognized directly in equity
b. The cumulative unrealized gains or losses on the investment are
transferred directly to retained earnings.
c. The gain or loss on the sale does not affect profit in the year of sale
d. Profit in the year of sale is increased if the selling price exceeds the
acquisition cost of the investment.
90. Imagine that you are an auditor. During your preliminary survey, you
were informed by your client that a large portion of its investment in
FVOCI has been sold during the year. Which of the following is correct?
a. You will expect that your client’s profit for the current year is higher
than the profit last year.
b. You will expect to see a loss on sale of investment in your client’s
records
c. You will expect to see an entry made to transfer cumulative fair value
changes in the FVOCI directly to retained earnings.
d. You will expect nothing but coffee, free lunch, and long hours of AIDS
(as if doing something).
91. You are now a CPA and it is your first day on your job as an
accountant. You were asked by your client’s non-CPA staff on how to
compute for the gain or loss on sale of an investment in FVPL. You will tell
the staff that the gain or loss on sale of an FVPL is computed as
a. the difference between the net disposal proceeds and the carrying
amount of the investment on the date of sale.
b. the difference between the net disposal proceeds and the fair value of
the investment on the date of sale.
c. the difference between the net disposal proceeds and the original
acquisition cost of the investment.
d. You will tell the staff nothing because you just memorized multiple
choice questions to pass the board exams.
92. A change from the cost approach to the market approach of measuring
fair value is considered to be what type of accounting change?
a. Change in accounting estimate c. Change in valuation technique
b. Change in accounting principle d. Error correction
(AICPA)
Chapter 10

Financial assets measured at amortized cost
1. Subsequent to their initial recognition, which financial assets with quoted
market prices in an active market are measured at fair value?
Financial assets Financial Assets
at amortized with fair values
cost through profit or
loss
a Yes No
.
b Yes Yes
.
c. No Yes
d No No
.
(Adapted)
2. If the investment is measured at amortized cost, the transaction costs are

a. amortized to profit or loss using the effective interest method
b. recognized in profit or loss when the asset is derecognized or becomes
impaired
c. recognized in equity when the asset is derecognized or becomes
impaired
d. expensed immediately on acquisition date
3. An entity purchased bonds to be measured at amortized cost. The bonds

were purchased at a premium. Assume the fair value of the bonds is
volatile. Therefore:
a. less cash interest is received each year than interest revenue is
recognized.
b. the ending valuation allowance account balance will depend on ending
market value and original cost.
c. the ending valuation allowance account balance will depend on the
ending market value and original cost adjusted for amortization of
premium.
d. the carrying amount of the bonds decreases over the term of the
bonds.
4. Zoom Corporation purchased bonds at a discount in the open market as

an investment. Assume that Zoom elects the fair value option. Zoom
should account for these bonds at
a. Cost. c. Fair value.
b. Amortized cost d. Lower of cost or market.
5. For a marketable debt securities portfolio classified to be measured

subsequently at amortized cost, which of the following amounts should be
included in the period’s profit.
I. Unrealized temporary losses during the period.
II. Realized gains during the period.
III. Changes in the valuation allowance during the period.
a. Ill only. b. Il only. c. l and lI d. I, II, and III.
(AICPA)
6. Vaughn Company did not amortize the discount on its short-term bond
investment. What effect would this have on the carrying value of the
investment and on net income, respectively?
a. overstated, overstated c. understated, understated
b. understated, overstated d. no effect, no effect
(Adapted)
7. Use of the effective-interest method in amortizing bond premiums and

discounts results in
a. a greater amount of interest income over the life of the bond issue
than would result from use of the straight-line method.
b. a varying amount being recorded as interest income from period to
period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue
than would result from use of the straight-line method.
(Adapted)
8. Subsequent to initial recognition, debt instruments acquired to be held up
to their maturity are measured at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
(Adapted)
9. Solo Co. purchased ₱300,000 of bonds for ₱315,000. If Solo intends to

hold the securities to maturity, the entry to record the investment
includes
a. a debit to Held-to-Maturity Securities at ₱300,000.
b. a credit to Premium on Investments of ₱15,000.
c. a debit to Investment in bonds at amortized cost of ₱315,000.
d. none of these.
(Adapted)
10. In accounting for investments in debt securities that are classified as

trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
(Adapted)
11. Subsequent changes in fair value of financial assets measured at

amortized cost are
a. recognized in profit or loss c. recognized in equity
b. recognized in other comprehensive income d. not recognized
12. The rate appearing on the face of the bonds

a. nominal rate b. stated rate c. coupon rate
d. a, b and c
13. What is the effective interest rate of a bond or other debt instrument
measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for
similar debt instruments (i.e., similar remaining maturity, cash flow
pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash
payments or receipts through the expected life of the debt instrument
or, when appropriate, a shorter period to the net carrying amount of
the instrument.
d. The basic, risk-free interest rate that is derived from observable
government bond prices.
(Adapted)
14. Which of the following does not properly describe effective interest
rate?
a. current market rate c. imputed rate of interest
b. stated rate d. yield rate
15. The rate used in computing interest income on debt instruments

measured at amortized cost
a. nominal rate c. face rate
b. effective interest rate d. flat rate
16. The rate used in computing interest receivable on debt instruments

a. nominal rate c. fast rate
b. effective interest rate d. celeb rate
17. If the cash paid on the purchase of bonds or if the cash proceeds
received from the issuance of bonds is greater than the face amount of
the bonds, there is
a. premium b. discount c. bonds d. nothing
received from the issuance of bonds is less than the face amount of the
bonds, there is
received from the issuance of bonds is equal to the face amount of the
bonds, there is
20. When investment in term bonds measured at amortized cost are

acquired at a discount, the carrying amount of the bonds
a. increases each year
b. varies depending on the fair value of the financial asset at year-end
c. decreases each year
d. remains unchanged unless impairment loss is recognized
21. When investment in term bonds measured at amortized cost are

acquired at a discount, interest income recognized
a. increases each year
b. varies depending on the amortization table used
c. decreases each year
d. remains constant as a percentage of the face amount
22. Which of the following statements is correct regarding term bonds

classified at amortized cost acquired at a discount?
a. the carrying amount of the bonds increases but amortization decreases
each year
b. the carrying amount of the bonds, interest income and amortization
increase each year.
c. only interest income and carrying amount of bonds increase each year
d. only the carrying amount of the bonds increases each year
23. If bonds are acquired or sold in between interest payment dates

a. the transaction price necessarily includes any accrued interest
b. the cost of the investment acquired is increased by the accrued
interest
c. the gain on sale is increased by the accrued interest
d. the seller will receive the full amount of interest
Regular way purchase and sale of financial assets

24. It refers to purchase or sale of a financial asset under a contract whose
terms require delivery of the asset within the time frame established
generally by regulation or convention in the marketplace concerned.
a. normal way c. special way
b. regular way d. no way
25. Regular way purchase or sale of financial assets are accounted for
using
a. Trade date accounting c. Shadow accounting
b. Settlement date accounting d. either a or b
26. Under a regular way purchase or sale of financial assets (choose the
incorrect statement)
a. the buyer recognizes fair value changes on the financial asset between
the trade date and settlement date, except for financial assets
b. the seller recognizes only the fair value changes of FVPL and FVOCI as
of trade date; the seller does not recognize fair value changes after
trade date but before settlement date
c. trade date and settlement date accounting differs on the timing of
recognition or derecognition of financial assets bought or sold.
d. the seller recognizes fair value changes between the trade date and
settlement date only for FVPL and FVOCI but not amortized cost
27. Investments in debt securities that are neither to be sold in the near
term nor designated are initially recorded at
a. amortized cost
b. fair value.
c. fair value plus direct acquisition cost, such as brokerage and other
fees.
d. maturity value with a separate discount or premium account.
28. When an entity uses settlement date accounting for a financial asset
acquired to be subsequently measured at amortized cost,
a. the asset is recognized initially at its fair value plus direct transaction
costs on settlement date
b. the asset is recognized initially at its fair value plus direct transaction
costs on the trade date
c. the asset is recognized initially at its amortized cost on settlement date
d. the asset is recognized initially at its fair value plus direct transaction
costs either on settlement date or trade date
Reclassification
29. Which of the following is true if an entity reclassifies financial assets?
I. it shall apply the reclassification prospectively from the reclassification
date
II. it shall restate any previously recognized gains, losses or interest
a. true, true b. true, false c. false, true d. false, false
30. If an entity which uses the calendar year changes its business model
for managing financial assets on February 1, 20x1, the reclassification
date is on
a. January 1, 20x1 c. February 1, 20x2
b. January 1, 20x2 d. Any of these
31. When an investment in a debt instrument that was originally acquired

to be held up to maturity is transferred to FVOCI, the carrying amount
assigned to the FVOCI is
a. the original acquisition cost
b. the fair value at the date of transfer
c. the lower of its original acquisition cost and its fair value at the date of
transfer
d. none
32. Which of the following changes in circumstances qualifies as

reclassification under PFRS 9 Financial Instruments?
a. A derivative that was previously a designated and effective hedging
instrument in a cash flow hedge or net investment hedge no longer
qualifies as such.
b. A derivative becomes a designated and effective hedging instrument in
a cash flow hedge or net investment hedge.
c. A debt instrument previously measured at amortized cost is
reclassified as held for trading security due to a change in an entity’s
business model.
d. An equity security is classified as financial asset measured at
amortized cost due to a change in an entity’s business model.
33. You are employed as an accountant in a company. One day your

company changed its business model on managing financial instrument.
What will you do?
a. Immediately make journal entries to reclassify financial assets.
b. Make journal entries only if the boss is looking
c. Procrastinate. Go back to your facebook account. Make journal entries
next year.
d. Read the revised risk management manual, identify the effect of the
change in business model on the current classifications of financial
assets, identify which items should be reclassified and to which
classifications they will be reclassified, and then make the journal
entries before you go home.
34. Which of the following reclassifications of financial assets is permitted

under PFRS 9?
a. reclassification out of designated at FVPL to amortized cost
b. reclassification out of amortized cost to FVOCI
c. reclassification out of held for trading equity securities to amortized
cost
d. reclassification out of amortized cost to held for trading securities.
35. When investments measured at amortized cost are reclassified to

FVOCI, what amount of gain or loss is recognized in profit or loss?
a. The amount from the date of acquisition to the date of reclassification.
b. The amount from the beginning of the year of reclassification to date
of reclassification.
c. The amounts realized to date.
d. The amount from the date of acquisition the beginning of the year of
reclassification.
e. Zero
(Adapted)

a. The reported FVOCI investment balance is the original cost plus a debit
valuation allowance or minus a credit valuation allowance.
b. After a reclassification between amortized cost and held for trading,
the new carrying amount for purposes of subsequent measurement is
the fair value at reclassification date.
c. The carrying amount of a bond purchased at a premium or discount
and classified as an investment measured at amortized cost must be
adjusted each period for the amortization of the premium or discount.
d. When an investment measured at amortized cost is reclassified to held
for trading, the recognized gain or loss on reclassification date is the
change in fair value since the beginning of the year of reclassification
until the date of reclassification.
(Adapted)
37. A marketable debt security is transferred from fair value to amortized

cost. At the transfer date, the security’s carrying amount exceeds its fair
value. Assume the fair value option is not elected to report this security.
What amount is used at the transfer date to record the security in the
amortized cost category?
a. Fair value, regardless of whether the decline in market value below
cost is considered permanent or temporary.
b. Fair value, only if the decline in market value below cost is considered
permanent.
c. Cost, if the decline in market value below cost is considered
temporary.
d. Cost, regardless of whether the decline in market value below cost is
considered permanent or temporary.
(AICPA)
38. Yamaha Co. determined that the decline in the fair value of an
investment was below the carrying amount and the decline is permanent
in nature. The investment was classified as financial asset measured at
FVOCI in Yamaha's books. The accountant properly records the decrease
in fair value by including it in which of the following?
a. Other comprehensive income section of the statement of profit or loss
and other comprehensive income only.
b. Profit or loss section of the income statement and writing down the
carrying amount to FMV.
c. No accounting is required because the investment is measured at
FVOCI
d. Other comprehensive income section of the statement of profit or loss
and other comprehensive income and presenting the net cumulative
write downs of cost in equity.
Impairment
39. Impairment losses on equity securities classified as FVOCI are
a. recognized in equity only if impairment loss represents a permanent
decline in fair value
b. profit or loss
c. not recognized since changes in fair values are recognized in profit or
loss
d. not given special accounting, decreases in fair values are recognized in
other comprehensive income regardless of whether the decrease is
temporary or permanent
40. Are the following statements true or false, in accordance with PFRS7
Financial instruments: disclosures?
I. The carrying amount of amortized cost investments must be disclosed
in the statement of financial position only.
II. The amount of any impairment loss for each class of financial asset
must be disclosed in the statement of profit or loss and other
comprehensive income only.
a. False, False b. False True c. True False d. True True
(ACCA)
41. Impairment losses on equity securities measured at fair value

a. are not given special accounting treatment under PFRS 9
b. are recognized in profit or loss
c. are not recognized because changes in fair values are recognized in
profit or loss
d. are deferred in equity
42. Impairment losses on securities classified at amortized cost are

recognized in
a. profit or loss c. equity
b. other comprehensive income d. none of these
Dividends
43. Dividends received on investment in equity securities accounted for
under PFRS 9 are either treated as return of capital or return on capital.
Which of the following types of dividends are treated as return on capital?
a. Cash and property dividends
b. Share dividends
c. Liquidating dividends
d. Cash dividends received in lieu of share dividends
44. Peavey Co. owns 2% of Marshall. A property dividend by Marshall

consisted of merchandise with a fair value lower than the listed retail
price. Peavey in turn gave the merchandise to its employees as a holiday
bonus. How should Peavey report the receipt and distribution of the
merchandise in its income statement?
a. At fair value for both dividend revenue and employee compensation
expense.
b. At listed retail price for both dividend revenue and employee
compensation expense.
c. At fair value for dividend revenue and listed retail price for employee
compensation expense.
d. By disclosure only.
(AICPA)
45. Dividends received on investment in equity securities accounted for

under PFRS 9 are treated as
a. either a return of capital or return on capital depending on the
existence of significant influence
b. return on capital for all cash and property dividends received
c. return on capital for all cash and property dividends received except
those declared from pre-acquisition retained surplus
d. return on capital for all cash, property, and stock dividends
Stock rights
46. State if the following statements are true or false.
I. A derivative that is attached to a financial instrument but is
contractually transferable independently of that instrument, or has a
different counterparty, is not an embedded derivative, but a separate
financial instrument.
II. When, and only when, an entity changes its business model for
managing financial assets shall it reclassify all affected financial
assets.
47. In accordance with PFRSs, which of the following terms best describes
a compound financial instrument component of a hybrid instrument that
also includes a non-derivative host contract?
a. FVOCI c. Financial asset at amortized cost
b. An embedded derivative d. FVPL
(ACCA)
48. Under PFRS 9, stock rights are considered (choose the incorrect
statement):
a. embedded derivatives all throughout the period they are outstanding
b. derivatives
c. embedded derivatives after their declaration but prior to their issuance
d. not embedded derivatives after their issuance but prior to their
expiration date
49. The following statements correctly relate to share dividends and stock
rights from the viewpoint of the investor:
I. When stock rights are received on investment in unquoted equity
securities measured at cost, no entry is required to transfer a portion
of the cost of the original investment to a separate account for the
stock rights.
II. A stock dividend received on an investment in unquoted equity
securities measured at cost reduces the per share cost of the
investment.
III. From the date stock rights are issued until the date they expire, shares
of stock of the issuing corporation are said to sell ex-rights.
a. I b. I, II c. II, III d. I, II, III
(RPCPA)
50. If an investment in equity securities is measured at cost then

a. subsequent changes in fair values of the investment is ignored
b. stock rights received on the investment is not recognized
c. an allocation of cost is made when stock rights are received on the
investment, the allocation is based on relative fair values of the shares
and the stock rights
d. no allocation of cost is necessary if share dividends received are
different from those originally held
51. Which of the following forms a basis for the non-recognition of stock
rights received on investment in equity instruments measured at cost?
a. Assets are recognized only if they can be measured reliably and meet
the other criteria for recognition as set forth under the Conceptual
Framework. The value of stock rights received on investments in equity
securities measured at cost cannot be determined reliably.
b. There is no available allocation basis for allocating the cost of the
investment to the stock rights received because the fair value of the
investment cannot be determined.
c. PFRS 9 requires that all investments in equity securities should be
measured at fair value. If the stock rights received and the related
investment measured at cost have determinable fair values, an entity
is required to change from cost measurement to fair value
measurement. Thus, no allocation of cost is necessary. Both the stock
rights and the investment are measured at fair value.
d. All of these
Disclosure
52. Fair value measurement (choose the incorrect statement)
a. violates the going concern assumption
b. renders no special accounting for impairment losses
c. requires disclosure of information derived from sources other than
accounting records
d. is required of investments in equity instruments of other entities
e. fair value reflects the credit quality of the instrument
53. In accordance with PFRS 7, Financial Instruments: Disclosures, all of

the following would be disclosed, except
a. Policy for requiring collateral or other security due to repurchase
agreements or securities lending transactions.
b. Cash flows between the securitization special purpose entity (SPE) and
the transferor.
c. Accounting policies for measuring retained interest.
d. Description of assets or liabilities with estimable fair values.
(Adapted)
54. Which of the following types of information does PFRS 7 not require to
be disclosed about exposure to risks arising from financial instruments?
a. Qualitative and quantitative information about market risk.
b. Qualitative and quantitative information about credit risk.
c. Qualitative and quantitative information about operational risk.
d. Qualitative and quantitative information about liquidity risk.
(Adapted)
55. In accordance with PFRS7 Financial Instruments: Disclosures, which of
the following best describe 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
(ACCA)
56. In accordance with PFRS7 Financial instruments: disclosures, which of

the following best describe credit risk?
a. The risk that one party to a financial instrument will cause a financial
loss for the 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
(ACCA)
57. For what items is fair value required to be disclosed under PFRS 7?
a. All financial instruments.
b. All financial instruments, except for unquoted equity instruments that
cannot be reliably measured at fair value (and derivatives linked
thereto).
c. All financial assets and financial liabilities, except for investments in
unquoted equity instruments that cannot be reliably measured at fair
value.
d. All financial assets, except for investments in unquoted equity
instruments that cannot be reliably measured at fair value (and
derivatives linked thereto).
(Adapted)
58. In accordance with PFRS7 Financial instruments: disclosures which of

the following are components of market risk?
a. Credit risk b. Currency risk c. Interest rate risk d. b and
c
(ACCA)
59. Are the following statements about disclosures within the financial
statements true or false, according to PFRS7 Financial instruments:
Disclosures?
(1) The disclosure of quantitative data about an entity's risk exposure
shall be based upon internal information provided to key management
personnel.
(2) A maturity analysis for financial liabilities based on the expected
payment dates for those liabilities shall be disclosed.
True
(ACCA)
60. Whether recognized or unrecognized in an entity's financial

statements, disclosure of the fair values of the entity's financial
instruments is required when:
a. It is practicable to estimate those values.
b. The entity maintains accurate cost records.
c. Aggregated fair values are material to the entity
d. Individual fair values are material to the entity.
(AICPA)
61. A general disclosure on investments that should be made in the body

of the financial statements or in the accompanying notes
a. allowance for decline in value
b. material security holdings of securities of related parties
c. details of any liens or pledges as collateral on any restrictions on sales
d. all of these
(Adapted)
62. Which of the following types of information does PFRS 7 not require to
be disclosed about the significance of financial instruments?
a. Carrying amounts of categories of financial instruments.
b. Fair values of financial instruments.
c. Information about the use of hedge accounting.
d. Information about financial instruments, contracts, and obligations
under share-based payment transactions.
(Adapted)
63. Disclosure of information about the extent, nature, and terms of

financial instruments with off-balance sheet credit or market risk and
about concentrations of credit risk is required for all financial instruments.
Which of the following is defined as a financial instrument?
a. Inventory c. Deferred subscriptions revenue
b. Note payable d. A warranty payable.
(Adapted)
64. Uncertainty about the future market value of an asset is referred to as
a. price risk c. interest rate risk
b. credit risk d. exchange rate risk
(Adapted)
65. Uncertainty that the party on the other side of an agreement will abide
by the terms of the agreement is referred to as
a. price risk c. interest rate risk
b. credit risk d. exchange rate risk
(Adapted)
66. Fair value disclosure of financial instruments may be made in the:

Body of financial statements Notes to financial statements
a. No No
b. No Yes
c. Yes No
d. Yes Yes
(Adapted)
67. Disclosures about the following kinds of risks are required for most
amortized cost financial instruments.
Concentration of credit risk Market risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(Adapted)
68. What are the principal objectives of PFRS 7?

a. To provide presentation and disclosure requirements for financial
instruments.
b. To require disclosures about the significance of financial instruments
for an entity’s financial position and financial performance and
qualitative and quantitative information about exposure to risks arising
from financial instruments.
c. To set out specified balance sheet and income statement formats for
financial entities.
d. To require disclosures about an entity’s exposure to off–balance-sheet
instruments and other complex transactions.
(Adapted)
Chapter 11

1. An increase in the cash surrender value of a life insurance policy owned
by a company would be recorded by
a. Decreasing annual insurance expense.
b. Increasing investment income.
c. Recording a memorandum entry only.
d. Decreasing a deferred charge.
(AICPA)
2. In theory, cash surrender value represents

a. the excess of premium paid over annual risk
b. the amount paid to a dead key employee
c. value of cash after adjustment for inflation
d. none of these
3. Upon the death of an officer, Budoy Co. received the proceeds of a life
insurance policy held by Budoy on the officer. The proceeds were not
taxable. The policy’s cash surrender value had been recorded on Budoy’s
books at the time of payment. What amount of income should Budoy
report in its statements?
a. Proceeds received.
b. Proceeds received less cash surrender value.
c. Proceeds received plus cash surrender value.
d. None.
(AICPA)
4. Under what condition would an entity report marketable securities as a

long-term asset?
a. When the securities are classified as FVOCI but are to be sold within
the next twelve months.
b. When funds are set aside for a specific long-term purpose such as
plant expansion.
c. When the value of a firm's investment in marketable securities is less
than cost.
d. Under no circumstance.
5. Which of the following is correct regarding accounting for investments?

a. Any current or non-current investment acquired should be recorded at
“cost or market” whichever is lower on date of acquisition.
b. Allowances for decline in value of investments are not necessary to be
disclosed in the body of the financial statements or in the
accompanying notes.
c. Sinking fund assets consisting of cash and securities held for the
redemption of bonds or stocks are normally classified as investments.
d. A debt instrument may be classified as financial asset measured at
amortized cost provided the entity can demonstrate its ability to hold
the instrument up to its maturity.
6. The cash surrender value of the insurance policy on the corporation's

president would be presented on the balance sheet as:
a. cash c. long-term investment
b. marketable securities d. prepaid expense
(Adapted)
7. In January 20x1, Carlsbro Co. established a sinking fund in connection

with its issue of bonds due in 20x5. A bank was appointed as independent
trustee of the fund. At December 31, 20x1, the trustee held ₱364,000
cash in the sinking fund account, representing ₱300,000 in annual
deposits to the fund, and ₱64,000 of interest earned on those deposits.
How should the sinking fund be reported in Carlsbro's statement of
financial position at December 31, 20x1?
a. No part of the sinking fund should appear in Carlsbro's statement of
financial position.
b. ₱64,000 should appear as a current asset.
c. ₱364,000 should appear as a current asset.
d. ₱364,000 should appear as a noncurrent asset.
(Adapted)
8. Marketable equity securities held to finance the long-term future

expansion of a company should be reported on the balance sheet as:
a. funds and investments
b. operational assets
c. current assets with additional information in a footnote
d. appropriation of retained earnings
(Adapted)
9. An entity acquired 10-year bonds at a discount to be held as investments

subsequently measured at amortized cost. Six years after acquisition
date, the entity sold 80% of the investment in bonds at a premium. Which
of the following is true?
a. gain is realized on the sale
b. the remaining 20% should be reclassified
c. loss is realized on the sale
d. a or c
Chapter 12
Investments in Associates

Scope and applicability
1. PAS 28 applies to which of the following?
a. investments in associates held by a venture capital organization or
mutual fund measured at fair value through profit or loss
b. a 20% investment in preference shares
c. an interest in a partnership which gives the investor significant
influence over the partnership
d. a 60% investment in ordinary shares of another entity
2. An entity shall apply PAS 28

a. to investments which give the entity significant influence over the
investee
b. to account for investments in associates in the entity’s separate
financial statements
c. even when significant influence is lost
d. any of these
3. When investments in equity securities represent 20% to 50% interest in

the voting rights of the investee, which of the following standards most
likely would be applied?
a. PFRS 9 b. PAS 31 c. PFRS 3 d. PAS 28
4. When equity investments results to joint control, which standard shall be

applied?
5. When equity investments results to control, which standard shall be

applied?
6. In the consolidated financial statements, to which of the following

financial instruments is PFRS 9 Financial Instrument applicable?
a. investment in ordinary shares representing 51% interest
b. investment in ordinary shares representing 20% interest
c. interest in a joint venture
d. investment in preference shares representing 100% interest

a. According to PAS 28 Investments in Associates, a partnership cannot
be an associate.
b. Goodwill included in the carrying amount of an investment in an
associate is tested for impairment separately.
c. Only investments in ordinary shares can be classified as Investment in
Associate.
d. Only investments which give the investor voting rights can be
classified as Investment in Associate.
8. If ABC Corporation owns a controlling interest of 51% of the equity shares

in XYZ Co., ABC Corporation is a
a. Parent company to XYZ Co. c. Subsidiary company to XYZ Co.
b. Associate company to XYZ Co. d. Fellow subsidiary to XYZ Co.
9. It is an entity, including an unincorporated entity such as a partnership,

over which the investor has significant influence and that is neither a
subsidiary nor an interest in a joint venture.
a. association c. joint venture
b. subsidiary d. associate
10. It is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those
policies.
a. significant influenza c. significant influence
b. control d. joint control
11. It is an entity, including an unincorporated entity such as a

partnership, that is controlled by another entity (known as the parent).
a. subsidy b. associate c. joint venture d. subsidiary
12. It is the power to govern the financial and operating policies of an

entity so as to obtain benefits from its activities.
a. control b. joint control c. significant influence d.
telekineses
13. It is a contractual arrangement whereby two or more parties undertake

an economic activity that is subject to joint control.
a. partners b. joint control c. joint venture d. marriage
14. It is the contractually agreed sharing of control over an economic

activity, and exists only when the strategic financial and operating
decisions relating to the activity require the unanimous consent of the
parties sharing control (venturers).
a. control b. joint venture c. joint control d. wedding vow
15. A controlling company having subsidiaries which activities were

confined primarily to their management is:
a. an affiliate c. a majority interest
b. subsidiary d. a holding company
(Adapted)
16. PAS 28 does not require the equity method to be applied to which of
the following instance(s)?
I. When an associate is acquired and held with a view to its disposal
within twelve months of acquisition. There must be evidence that the
investment is acquired with the intention to dispose of it and that
management is actively seeking a buyer. The words ‘in the near future’
were replaced with the words ‘within twelve months’. When such an
associate is not disposed of within twelve months it must be accounted
for using the equity method as from the date of acquisition, except in
narrowly specified circumstances under PFRS 5.
II. An investor continues to have significant influence over an associate;
however, the associate is operating under severe long-term restrictions
that significantly impair its ability to transfer funds to the investor.
III. An investor holds 10% interest in an investee; however, the interest
held gives the investor significant influence over the investee.
IV. An investor presents separate financial statement in accordance with
PAS 27.
a. I and IV b. I, III, IV c. I, II, III, IV d. none
Significant influence
17. According to PAS 28 Investments in associates, which of the following
statements best describes the term 'significant influence'?
a. The holding of a significant proportion of the share capital in another
entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions
of an entity
d. The mutual sharing in the risks and benefits of a combined entity
(ACCA)
18. Significant influence is presumed to exist

a. if an investor holds, directly or indirectly (e.g. through subsidiaries),
25% or more of the voting power of the investee.
b. if an investor holds, directly or indirectly (e.g. through subsidiaries),
c. if an investor holds, directly or indirectly (e.g. through subsidiaries),
d. if an investor holds, directly or indirectly (e.g. through subsidiaries),
19. Which of the following may provide evidence of significant influence

even if the percentage of ownership interest is less than 20%?
I. Representation on the board of directors or equivalent governing body
of the investee.
II. Participation in policy-making processes, including participation in
decisions about dividends or other distributions.
III. Material transactions between the investor and the investee
IV. Interchange of managerial personnel.
V. Provision of essential technical information.
a. I, II b. I, II, III c. I, II, IV d. any of these
20. In which of the following does X have significant influence?

a. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y
and all seats on the board of directors are appointed by Y.
b. X owns 30% of the preference shares of Z Co.
c. X owns 15% of the voting shares of ABC Co., all other shares are held
in very small blocks and therefore X has representatives in the board
of directors.
d. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial
statements, the investment in Z is classified as “held for sale” in
accordance with PFRS 5.
21. In assessing whether significant influence exists, an investor shall

consider any potential voting rights held only if
a. it intends to exercise the potential voting rights
b. the potential voting rights are currently exercisable
c. a and b
d. they are not considered
22. When computing for its share in the associate’s profit or loss, an
investor shall use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential
voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation

in the financial and operating policy decisions of the investee but not
control of these decisions. Which of the following may an investor be
unable to exercise significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group
of shareholders who operate the investee without regard to the views
of the investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the
entity additional voting power or reduce another party’s voting power
over the financial and operating policies of another entity.
a. share rights c. convertible securities
b. share options d. potential voting rights
25. When assessing the existence of significant influence, which of the

following shall be considered by the investor?
a. potential voting rights that are not exercisable immediately
b. share options giving the investor the right to purchase preference
shares of the investee
c. stock rights which are exercisable immediately but the entity’s
management does not intend to exercise.
d. potential voting rights that will be received in the following accounting
period
26. Potential voting rights include all of the following except

a. share warrants and share options c. convertible preference shares
b. redeemable preference shares d. convertible bonds
Equity method
27. Investments accounted for under the equity method are initially
recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of
the equity method?
a. the investor recognizes its proportionate share in the profit or loss,
other comprehensive income, and discontinued operations of the
associate
b. dividends received are accounted for as reduction in the investment
balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss
of the associate but not in other comprehensive income and
discontinued operations.
29. Under the equity method, which of the following does not decrease the
investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
30. For investments in associates, the investor shall not

a. recognize a share in the associate’s other comprehensive income
b. recognize a share in the associate’s discontinued operations
c. recognize a share in the associate’s profit or loss
d. recognize a share in the associate’s revenue, expenses and profit
before tax
31. When computing for its share in the associate’s profit or loss, the
investor should
I. deduct one year dividends on cumulative preference shares of the
associate held by other parties and classified as equity, whether
declared or not.
II. deduct one year dividends on noncumulative preference shares of the
declared or not.
III. deduct all dividends in arrears on cumulative preference shares of the
declared or not.
IV. deduct dividends on noncumulative preference shares of the associate
held by other parties and classified as equity only when declared.
V. not deduct from profit or loss any dividends on ordinary shares before
computing for the share in the associate’s profit or loss.
a. I, IV, V b. I, IV c. II, III, V d. II, III
32. The equity method causes the balance in the investment account to
approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid
by the other company
d. original cost of the investment plus a proportionate share of
subsequent undistributed earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in
the financial statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the
investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for

under equity method over the book value of net assets acquired is
attributable to an undervalued depreciable asset and an unidentifiable
asset, which of the following statements is correct
a. The carrying amount of the investment is increased by the
proportionate share in the profits earned by the investee and
decreased by the depreciation of the interest in the undervaluation and
unaffected by the separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the
depreciation of the interest in the undervaluation and amortization of
the unidentifiable asset
c. The carrying amount of the investment is decreased by the
depreciation of the interest in the undervaluation and decreased by the
separate impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in
the undervaluation and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the
following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is
appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe
long-term restrictions that significantly impair its ability to transfer
funds to the investor
d. ownership interest of 25% acquired with an exclusive view of
subsequent disposal within 12months and accounted for under PFRS 5
36. The equity method should be applied in which of the following?

a. The investment is classified as held for sale under PFRS 5
b. The parent is exempted from presenting consolidated financial
statements.
c. The investor is an unlisted subsidiary whose parent allows it not to
apply equity method
d. The investor previously held only 10% interest but subsequently
acquires additional 10% interest in the associate.
37. Which of the following computations may properly result to the correct
balance of an investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and minus amortization of
share in undervaluation of associate’s asset
b. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, and plus amortization of
c. Beginning balance of investment plus share in associate’s profit plus
share in dividends declared by associate, and minus amortization of
d. Beginning balance of investment plus share in associate’s profit minus
share in dividends declared by associate, minus amortization of share
in undervaluation of associate’s asset, and minus separate impairment
loss on goodwill included in the carrying amount of the investment
38. Which of the following computations may properly result to the correct
amount of share in associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the
overvaluation of associate’s asset
b. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset
c. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus share in dividends declared
by associate
d. Share in profit of associate minus amortization of share in the
undervaluation of associate’s asset minus separate impairment loss on
goodwill included in the carrying amount of the investment
39. Which of the following may represent the net change in the investment
in associate account during a period?
a. Share in profit of associate minus share in dividends plus increase in
the investment in associate account
b. Share in profit of associate minus share in dividends minus increase in
the investment in associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
40. Dividends received from an investment in an associate,

a. if in the form of cash dividends, is credited to investment income
b. if in the form of share dividends, is debited to investment income
c. if in the form of cash dividends, is credited to investment account only
if the cash dividends are declared from pre-acquisition retained
earnings.
d. if in the form of share dividends, is recorded through memo entry only
41. The excess of purchase cost of an investment in associate over the fair
value of the interest acquired represents
a. goodwill that should not be amortized but tested for impairment at
least annually
b. negative goodwill that should be recognized in the investor’s profit or
loss in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
42. The excess of the fair value of the interest acquired over the purchase
cost of an investment in associate represents
a. goodwill that should not be amortized but tested for impairment at
least annually
b. negative goodwill that should be recognized in the investor’s profit or
loss in the year of acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses
significant influence over the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in
the percentage of ownership.
b. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of
that investee.
c. There is a presumption of loss of significant influence if the ownership
interest falls below 20%.
d. There is a presumption of loss of significant influence when the
associate is operating under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor.
44. Significant influence may be lost in any of the following, except

a. When an associate becomes subject to the control of a government,
court, administrator or regulator.
b. The investor is precluded, as a result of a contractual agreement, from
participating in the financial and operating policy decisions of the
investee.
c. The investor sells half of its 30% interest in an associate
d. The investor sells half of its 20% interest in an associate but retains
the voting rights on the investment sold through proxy agreement
45. Significant influence may be lost in any of the following, except

a. The investor loses its right to appoint board of directors in the
associate
b. The investor purchases additional 31% interest in the associate
c. The associate is operating under severe long-term restrictions that
significantly impair its ability to transfer funds to the investor.
d. The investor retains its 20% interest in the associate but grants its
voting rights to an unrelated party.
46. On the loss of significant influence, the investor shall do any of the
following, except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal
proceeds received and the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the
interest retained and the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
47. If an investor loses significant influence over an associate,

a. all cumulative gain or loss previously recognized in other
comprehensive income is reclassified to profit or loss.
b. any cumulative gain or loss previously recognized in other
comprehensive income is reclassified directly in equity or to profit or
loss, subject to the requirements of PAS 1.
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on
reclassification is recognized in equity.
48. If an investor’s ownership interest in an associate is reduced but

significant influence is not lost,
a. the investor should cease applying the equity method and use PFRS 9
if ownership interest is reduced below 20% or PFRS 3 and PAS 27 if
ownership interest is increased above 50%.
b. the investor shall reclassify to profit or loss or directly in equity only a
proportionate amount of the gain or loss previously recognized in other
comprehensive income.
c. the investor continues to use the equity method and since significant
influence is not lost, no adjustment is needed
d. do nothing
49. If there is any excess of the investor’s share of the net fair value of the
associate’s identifiable assets and contingent liabilities over the cost of
the investment, that is, negative goodwill, how should that excess be
treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s
share of the associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
50. The investor’s interest on the undervaluation of depreciable assets of

the associate is
a. amortized using the effective rate and deducted to investment income
recognized for the period
b. depreciated and deducted from the carrying amount of the investment
c. amortized using the effective rate and added to the carrying amount of
the investment and deducted to investment income
d. depreciated and deducted from the carrying amount of the investment
and investment income recognized for the period
51. When the equity method is used to account for the investment in an
associate, the recording of the receipt of a cash distribution from the
investee will result in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair

market value by the investor when the related investment is accounted
for under which of the following methods?
Cost Equity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
53. Which of the following statements is in accordance with the provisions

of PAS 28?
I. The income or loss on the investment in associate is computed on the
net income after tax of the associate.
II. The income or loss on the investment in associate is presented in the
statement of profit or loss and other comprehensive income after the
line item “Income Tax Expense” but before discontinued operations.
54. On January 1, 20x1, Adjacent Inc. purchased 10% of Juxtaposition Co.’s

common stock. Adjacent purchased additional shares bringing its
ownership up to 40% of Juxtaposition’s common stock outstanding on
August 1, 20x1. During October 20x1, Juxtaposition declared and paid a
cash dividend on all of its outstanding common stock. Under PAS 28, how
much income from the Juxtaposition investment should Adjacent’s 20x1
income statement report?
a. 10% of Juxtaposition’s income for January 1 to July 31, 20x1, plus 40%
of Juxtaposition’s income for August 1 to December 31, 20x1.
b. 40% of Juxtaposition’s income for August 1 to December 31, 20x1 only.
c. 40% of Juxtaposition’s 20x1 income.
d. Amount equal to dividends received from Juxtaposition.
(AICPA)
55. Which of the following statements are in accordance with PAS 28?
I. When the associate has cumulative preference shares, the investor
computes its share in the profit or loss of the investee after deducting
the preferred dividends, only when such dividends are declared.
II. When the associate has non-cumulative preference shares, the
investor computes its share in the profit or loss of the investee after
deducting the preferred dividends, whether or not such dividends are
declared
56. Bell owns 10% of the common stock of War Co. throughout the year.
War Co. has no preferred stock outstanding. Bella’s stock gives him the
right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the
corporation for the year to common stockholders
d. keep the corporation from issuing any additional stock unless he is
willing to buy 10% of the newly issued shares
(AICPA)
57. Adjustments to the carrying amount of the investment in associate

may be necessary for changes in the investor’s proportionate interest in
the investee arising from changes in the investee’s equity that have not
been recognized in the investee’s profit or loss. Which of the following
may not necessitate an adjustment to the investment in associate
account?
a. Changes in revaluation surplus of associate
b. Changes in valuation of the associate’s FVOCI securities
c. Changes in the actuarial gains and losses of the associate not
amortized through the corridor approach
d. Changes in the Allowance for doubtful accounts of the associate
58. Which of the following is correct in relation to accounting for

investments in associates?
I. Theoretically, the total market value of shares held as investment in
associate which have been subjected to a share dividend should be the
same as it was before the dividend.
II. Share dividends received on an investment in associate is accounted
for as deduction from the investment account.
III. Share dividends received on an investment in associate is generally
not accounted for.
a. I b. II c. I and III d. I, II and III
59. Which of the following statements correctly refers to the provisions of

PAS 28 Investments in Associates?
I. If an investor acquires additional shares sufficient to give him
significant influence, a retrospective adjustment should be made on
the financial statements to recognize share in profits and losses of the
investee not previously recognized.
II. No adjustment to the investment account is made when changing from
the fair value method to the equity method.
60. An investor in equity securities received cash dividends in excess of

the investor’s share of investee’s earnings subsequent to the date of the
investment. How will the investor’s investment account be affected by
those dividends for each of the following investments?
FVOCI securities Equity method investment
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease
(AICPA)
61. The investment in associate is reduced to zero when

a. the investment in associate is partly reclassified to FVPL
b. the share in the losses of the associate exceeds the share in the profits
c. at no instance should the investment be reduced to zero unless the
investment is derecognized through sale or other forms of disposal
d. the share in the losses of the associate exceeds the investor’s interest
in the associate

I. In applying Equity Method of accounting for investments in associates,
dividends received from the investee are considered a return of capital
and should be credited to stockholders’ equity of the investor.
II. A subsidiary is an affiliate that is not controlled by an enterprise
directly, or indirectly, through one or more intermediaries.
State whether the foregoing statements are correct.

a. Only I is correct c. Only II is correct
b. I and II are correct d. Neither I nor II is correct
(RPCPA)
63. The following statements relate to equity method. Choose the incorrect
statement.
a. In accounting for investments in common stock under the equity
method, sales of stock of an investee by an investor, should be
accounted for as gains or losses equal to the difference at the time of
sales between selling price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting
stock of an investee is presumed to have the ability to exercise
significant interest over the investee.
c. Under the equity method of accounting, the investments in common
stock should be shown as a single amount, and the investor’s share of
earnings or losses from its investment should ordinarily be shown in its
income statement as a single amount including the results of
discontinued operations.
d. The equity method of recording security transactions assumes a close
economic relationship between the investor and the investee. It is
used, when influential interest exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003
purchase of Anger Inc.’s common stock. On January 1, 2003, the fair
values of Anger’s FIFO inventory and land exceeded their carrying
amounts. How do these excesses of fair values over carrying amounts
affect Wrath’s reported equity in Anger’s 2003 earnings?
Inventory excess Land excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of
Reggae Corp. In 20x1, Reggae had net earnings of ₱100,000 and paid
dividends of ₱10,000. Upbeat mistakenly measured these transactions
using the cost instead of the equity method of accounting. What effect
would this have on working capital, dividend income, and net earnings,
respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
66. Select the incorrect statement.

a. The cost method of accounting for an investment in a subsidiary
recognizes the legal fact that the parent and subsidiary are one
economic unit.
b. The net cumulative unrealized gains and losses on investments in
equity securities classified as FVOCI and are accounted for under the
cost method are usually measured by the difference between cost and
current selling price.
c. Under the equity method of accounting for long-term investments in
equity securities, the investor's investment account is decreased by all
cash dividends received from the investee.
d. The equity method of accounting for long-term investments in equity
securities is based on the presumption that the investor owns a
sufficient number of the outstanding voting shares of another company
to exercise significant influence over the operating and financial
policies of the other company.
67. Which of the following statement is the correct statement?

a. At the acquisition date of a long-term investment, the entry would be
the same whether the investor uses PFRS 9 or the equity method
under PAS 28.
b. Under PAS 27, an investment in a subsidiary is shown as an asset,
while under the equity method, it is shown as part of equity.
c. Long-term investments are classified as long-term only because they
are not readily marketable.
d. Long-term investments in equity securities are written down only when
there has been a material and apparently permanent decline in the
market value of the investment below its cost.
e. Impairment losses on investments in associates are not accounted for
under PAS 28.
68. The following statements relate to the accounting for investments in

equity instruments.
I. Whenever an investment in marketable equity securities does not
qualify for accounting using the equity method, the investor is required
to recognize as dividend income cash dividends received from the
investee.
II. The cost measurement for equity investments is permitted in separate
III. An investor may still be able to exercise significant influence over an
investee, even if the investment is less than 20% of the voting stock of
the investee.
IV. No adjustment to the investment account is made when changing from
the equity to the fair value measurement, or vice versa.
a. I, II b. I, II, III c. I, III d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of
accounting for its 15% ownership of Kalinga Coffee Co. At December 31,
20x1, Musang has a receivable from Kalinga Coffee. How should the
receivable be reported in Musang’s December 31, 20x1 statement of
financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in
Kalinga Coffee, without separate disclosure.
c. 85% of the receivable should be reported separately, with the balance
offset against Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable
to Musang, without separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in

common stock, which of the following affects the investor’s reported
investment income?
Equipment amortization related to purchase Cash dividends from
investee
a. Yes Yes
b. No Yes
c. No No
d. Yes No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment.
Should Google report an increase in the investment account if it has
classified the stock as FVOCI or uses the equity method of accounting?
FVOCI Equity
a. No No
b. Yes Yes
c. Yes No
d. No Yes
(AICPA)
72. Bliss Co. uses the equity method to account for its investment in
Nirvana, Inc. common stock. How should Bliss record a 2% stock dividend
received from Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock
owned.
(AICPA)
73. Which of the following investments in an associate is not within the

scope of PAS 28 Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at
cost
c. An associate held by a venture capital organization and measured at
fair value with changes in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with
changes in fair value recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard
Company. Fingerboard's financial statements include the following:
Revenue ₱ 600,000
Cost of sales (250,000)
350,000
Operating expenses (285,000)
65,000
Tax ( 20,000)
₱ 45,000
Are the following statements true or false, according to PAS 28 Investments

in associates?
1) Fretboard's consolidated revenue should include ₱240,000 in respect of
Fingerboard.
2) Fretboard's consolidated profit before tax should include ₱26,000 in
respect of Fingerboard.
Statement (1) Statement (2)
a. False False
b. False True
c. True False
d. True True
(ACCA)
75. An investor must apply the requirements of PAS 36 in determining

whether it is necessary to recognize any impairment loss in the
investment in an associate. How is the impairment test carried out?
a. The goodwill is separated from the rest of the investment and is
impairment tested individually.
b. The entire carrying amount of the investment is tested for impairment
under PAS 36 by comparing its recoverable amount with its carrying
amount.
c. The carrying value of the investment should be compared with its
market value.
d. The recoverable amounts of all investments in associates should be
assessed together to determine whether there has been an
impairment on all investments.
(Adapted)
76. What accounting method should be used for an investment in an

associate where it is operating under severe long-term restrictions - for
example where the government of a company has temporary control over
the associate?
a. PFRS 9 should be applied.
b. The equity method should be applied if significant influence can be
exerted.
c. The associate should be shown at cost.
d. Proportionate consolidation should be used.
(Adapted)
77. If the investor ceases to have significant influence over an associate,

how should the investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor
ceases to have significant influence.
d. The investment should be treated at cost.
(Adapted)
78. When significant influence is achieved from additional purchase of
shares resulting to an increase in ownership interest,
a. the change to equity method is treated retrospectively, “catch up”
adjustments shall be made in order to restate the accounts to what
their balances should be had equity method been used all along.
b. the previous investment is measured at acquisition-date fair value and
any difference between this amount and the previous carrying amount
is recognized immediately in profit or loss.
c. PAS 28 and PFRS 3 requires that the investment account be adjusted
for any share in cash dividends declared by the investee in previous
periods that were recognized as income.
d. the previous investment is measured at acquisition-date fair value and
any difference between this amount and the previous carrying amount
is recognized immediately in profit or loss or other comprehensive
income, as appropriate.
79. Profits and losses resulting from “upstream” and “downstream”

transactions between an investor and an associate are
a. recognized in the investor’s financial statements through proportionate
consolidation, meaning the investor recognizes its share in the sale
and cost of sales recorded by the associate
b. recognized in the investor’s financial statements only to the extent of
unrelated investors’ interests in the associate.
c. recognized in the investor’s financial statements only to the extent of
related investors’ interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and
‘downstream’ transactions between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the
associate.
b. must be eliminated to the extent of the unrelated interest over the
associate
c. must be recognized in full after adjustment for the increases or
decreases in beginning inventory
d. not recognized
81. Under PAS 28, adjustments to share in profit or loss of an associate

may differ if the transaction is “downstream” or “upstream.” Which of the
following statements is true?
I. Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man
sold magic beans to Jack. This is an upstream transaction.
II. Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year
Goldilocks purchased porridge from Papa Bear. This is a downstream
transaction.
a. true, true b. true false c. false, true d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh
sold inventory to Bebeh at 20% gross profit. As of year-end Bebeh still
holds 100% of the inventory. How much share in the profit from the
transaction will Daddeh recognize for the year? Assume income tax rate
of 30%.
a. 14% b. 80% c. 2.8% d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the
associate under the equity method together with any long-term interests
that in substance, form part of the investor’s net investment in the
associates.
a. investment in associate c. interest in ownership
b. interest in the associate d. none
84. Which of the following may not be included in interest in associate

when determining the threshold in recognizing share in losses of
associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s
investment in ordinary shares are applied to the other components of the
investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero,

additional losses are provided for, and a liability is recognized, only to the
extent that the investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
87. If the associate subsequently reports profits, the investor resumes

recognizing its share of those profits
a. only after its share of the profits equals the share of losses not
recognized
b. only after its share of the profits equals the share of losses previously
recognized
c. only if there are no outstanding legal or constructive obligation
incurred on behalf of the associate
d. a or b
88. How is goodwill arising from investments in associates accounted for?

a. Included in the carrying amount of the investment and not amortized
but tested separately for impairment at least annually.
b. Not accounted for separately; however, presented as a separate asset
in the investor’s separate financial statements.
c. Included in the carrying amount of the investment and the entire
investment in associate is tested for impairment under PAS 36.
d. Recognized as a separate asset either in the group financial
statements or in the separate financial statements but not amortized.
Others
89. Investments in associates are normally classified in the statement of
financial position as
a. current assets b. noncurrent assets c. fair value d. equity
account
90. The investor’s share in the associate’s revaluation surplus is

a. recognized in the investor’s equity together with the investor’s
revaluation surplus
b. recognized in the investor’s property, plant and equipment with
separate disclosure
c. recognized in the investor’s retained earnings with separate disclosure
d. not recognized
91. What should happen when the financial statements of an associate are
not prepared to the same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the
investor at the same date as those of the investor.
b. The financial statements of the associate prepared up to a different
accounting date will be used as normal.
c. Any major transactions between the date of the financial statements of
the investor and that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no
problem.
(Adapted)
92. Preparation of consolidated financial statements is primarily based on

the:
a. time period assumption d. cost/benefit constraint
b. full-disclosure principle e. separate entity assumption
c. cost principle
(Adapted)
93. The reporting dates of the investor and its associate should not differ
by more than
a. one month b. two months c. three months d. six months
94. When the accounting policies used by the investor and the associate
do not match
a. PAS 28 requires appropriate adjustments to the associate’s financial
statements to conform them to the investor’s accounting policies for
reporting like transactions and other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s
financial statements to conform them to the investor’s accounting
policies for reporting like transactions and other events in similar
circumstances when it was not practicable to use uniform accounting
policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and
the associate be different.
95. When financial statements of an associate used in applying the equity

method are prepared as at the end of the reporting period that is different
from that of the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
96. When an entity elects to prepare separate financial statements, it shall

account for its investment in associates
a. at cost c. using the equity method
b. in accordance with PFRS 9 d. any of these
Chapter 13
Agriculture

Objective and scope
1. According to PAS 41 this refers to the management by an entity of the
biological transformation of biological assets for sale, into agricultural
produce, or into additional biological assets.
a. Agricultural activity c. Biological transformation
b. Agricultural management d. Biological activity
2. Agricultural activity covers a diverse range of activities. Such diverse

range of activities have common features which includes all of the
following except
a. Capability to change c. Recognition of change
b. Management of change d. Measurement of change
3. It is the detachment of produce from a biological asset or the cessation of

a biological asset’s life processes.
a. Harvest b. Death c. Decease d. Cultivation
4. When there is a long aging or maturation process after harvest, the

accounting for such products should be dealt with by
a. PAS 41 b. PAS 2 c. PAS 16 d. PAS 40
5. According to PAS41 Agriculture, which of the following would be classified

as a product that is the result of processing after harvest?
a. Cotton b. Wool c. Bananas d. Cheese
(ACCA)
6. Which of the following items would be classified as agricultural produce,

according to PAS41 Agriculture?
a. Tree b. Bush c. Butter d. Apple
(ACCA)
7. According to PAS41 Agriculture, which of the following items would be

classified as biological assets?
I. Oranges
II. Chickens
III. Eggs
IV. Trees
a. I, II b. III, IV c. II, IV d. I, IV
(ACCA)
8. Are the following statements about classification according to PAS 41

Agriculture true or false?
I. Sugar should be classified as agricultural produce.
II. Wool should be classified as agricultural produce.
a. False, False b. False, True c. True, False d. True, True
(ACCA)
9. Which of the following is not dealt with by PAS 41?
a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the
entity’s biological assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants received in respect of
biological assets.
(Adapted)
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the
point of harvest even if they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological
assets measured at cost.
c. PAS 41 applies to land on which tree recognized as biological assets
are planted.
d. PAS 41 applies to living plants and animals only when such items
relate to agricultural activity.
11. PAS 41 applies to which of the following when they relate to

agricultural activity
I. Biological assets
II. Agricultural produce after the point of harvest
III. Agricultural produce at the point of harvest
IV. An unconditional government grant related to a biological asset
measured at its fair value less costs to sell
V. An unconditional government grant related to a biological asset
measured at cost land related to agricultural activity
VI. Intangible assets related to agricultural activity
a. I, II, IV b. I, III, IV c. I, II, III, IV, V d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s
biological assets.
a. biological produce c. agricultural produce
b. agricultural products d. biological assets
13. It is a living animal or plant

a. biological product c. agricultural product
b. biological asset d. mutant assets
14. It comprises the processes of growth, degeneration, production, and

procreation that cause qualitative or quantitative changes in a biological
asset.
a. agricultural activity c. genetic mutation
b. biological activity d. biological transformation
15. Agricultural activity covers a diverse range of activities which includes

all of the following except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
16. Agricultural activity may include

a. ocean fishing c. animal hunting in the forest
b. deforestation d. fish pond operation
Initial and subsequent measurement

17. According to PAS41 Agriculture, which of the following criteria must be
satisfied before a biological asset can be recognized in an entity's
financial statements?
I. The entity controls the asset as a result of past events
II. It is probable that economic benefits relating to the asset will flow to
the entity
III. An active market for the asset exists
IV. The asset forms a homogenous biological group
a. I, II b. I, II, IV c. I, II, III d. I, II, III, IV
(ACCA)
18. Biological assets and agricultural produce are initially recognized at

a. cost c. fair value less costs to sell
b. fair value d. lower of cost or fair value less costs to sell
19. According to PAS41 Agriculture, which of the following expenses would

be classified as costs to sell when valuing biological assets and
agricultural produce?
I. Commissions to brokers
II. Transport costs
III. Transfer taxes and duties
IV. Advertising costs
a. I, II, III b. III, IV c. I, III d. I, III, IV
(ACCA)
20. Regarding the choice of measurement basis used for valuing biological
assets, PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined
reliably, the biological asset is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment
losses.
d. Net realizable value.
22. Generally speaking, biological assets relating to agricultural activity

should be measured using
a. Historical cost.
b. Historical cost less depreciation less impairment.
c. A fair value approach.
d. Net realizable value.
(Adapted)
23. Which of the following values is unlikely to be used in fair value

measurement of a biological asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle.
Where should changes in the fair value of a herd of cattle recognized in
the financial statements, according to PAS 41 Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold
in 30 years. The income should be accounted for in which of the following
way?
a. No income should reported annually until first harvest and sale in 30
years
b. Income should be measured annually and reported using a fair value
approach that recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the
profit and loss account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase
in value should be shown in the statement of recognized gains and
losses
(Adapted)
26. When agricultural produce is harvested, the harvest should be

accounted for by using PAS 2 Inventories, or another applicable PFRS. For
the purpose of that Standard, cost at the date of harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and
from a change in the fair value less costs to sell of a biological asset
should be included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
28. Land that is related to agricultural activity is valued

a. At fair value.
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40,
Investment Property
c. At fair value in combination with the biological asset that is being
grown on the land.
d. At the resale value separate from the biological asset has been grown
on the land.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable
choice of income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that
has been measured at fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
32. Under PAS 41, which of the following statements is untrue?

a. Contract prices are not necessarily relevant in determining fair value,
and the fair value of a biological asset or agricultural produce is not
adjusted because of the existence of a contract.
b. An unconditional government grant related to a biological asset
measured at FVLCS shall be recognized in profit or loss when, and only
when, the government grant becomes receivable.
c. A conditional government grant related to a biological asset measured
at FVLCS, including a government grant that requires an entity not to
engage in specified agricultural activity, shall be recognized in profit or
loss when the conditions attaching to the government grant are met.
d. If the terms of a conditional grant allow part of it to be retained
according to the time that has elapsed, the entity recognizes that part
in profit or loss only upon fulfillment of the condition.
33. If the terms of a conditional government grant allow part of the grant
to be retained according to the time that has elapsed, the entity
recognizes income from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant

should be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government
grant are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a
biological asset, PAS 41 encourages separate disclosure of the
a. Physical change only. c. Total change in value
b. Price change only d. a and b
36. Which of the following is a required disclosure under PAS 41?
a. a quantified description of each group of biological assets,
distinguishing between consumable and bearer biological assets
b. a quantified description of each group of biological assets,
distinguishing between mature and immature biological assets
c. the amount of change in fair value less costs to sell included in profit or
loss due to physical changes and due to price changes.
d. the depreciation method used if an entity measures biological assets at
their cost less any accumulated depreciation and any accumulated
impairment losses
e. a, b and c
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and
agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of
biological assets and agricultural produce and the change in fair value
less cost to sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and
from changes in fair value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any
gains or losses.
(Adapted)
38. These refer to those that are to be harvested as agricultural produce or

sold as biological assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
39. The following relate to consumable biological assets

I. livestock intended for the production of meat
II. livestock held for sale
III. trees from which firewood is harvested while the tree remains
IV. crops such as maize and wheat
V. trees being grown for lumber
VI. VI fish in farms
a. IV, V, VI b. II, IV, V, VI c. I, II, IV, V, VI d. all of these
40. These biological assets are not agricultural produce but, rather, are
self-regenerating.
a. consumable biological assets c. agricultural produce
b. bearer biological assets d. biological assets
41. The following relate to bearer biological assets

I. livestock from which milk is produced
II. grape vines
III. fruit trees
IV. trees from which firewood is harvested while the tree remains
V. trees being grown for lumber
VI. fish in farms
a. I, II, III, IVb. II, IV, V, VI c. I, II, III, IV, V d. all of these
42. These are biological assets that have attained harvestable

specifications (for consumable biological assets) or are able to sustain
regular harvests (for bearer biological assets).
a. mature biological assetsc. harvestable biological assets
b. immature biological assets d. completely mutated biological assets
Chapter 14
Property, Plant and Equipment (Part 1)
Objective and scope
1. PAS 16 shall be applied to which of the following
a. land held for future plant site
b. building not used in normal operations but is being leased out under
operating lease
c. equipment held for sale under PFRS 5
d. biological assets related to agricultural activity
2. The principal issues in the accounting for property, plant and equipment
include which of the following?
I. The recognition of the assets.
II. The determination of carrying amounts and the depreciation charges
and impairment losses to be recognized in relation to assets
recognized.
III. The complex computation of revaluation surplus.
a. I, II b. I, III c. III d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance c. Acquired for use
b. Acquired for resale d. Yields services over a number
of years
(AICPA)
4. Which of these is not a major characteristic of a plant asset?

a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
(AICPA)
5. Property, plant & equipment has all of the following characteristics

except:
a. They are intended for use in operating activities, and are not acquired
for sale in the ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating
assets.
6. Which of the following statements is consistent with the provisions of PAS

16?
I. If fair value can be measured reliably, an entity may carry all items of
property, plant and equipment of a class at a revalued amount, which
is the fair value of the items at the date of the revaluation less any
subsequent accumulated depreciation and accumulated impairment
losses.
II. An entity is required to determine the depreciation charge separately
for each significant part of an item of property, plant and equipment.
III. An entity is required to measure the residual value of an item of
property, plant and equipment as the amount it estimates it would
receive currently for the asset if the asset were already of the age and
in the condition expected at the end of its useful life.
IV. An entity is required to begin depreciating an item of property, plant
and equipment when it is available for use and to continue
depreciating it until it is derecognized, even if during that period the
item is idle.
a. I, II b. I, II, IV c. I, II, III d. I, II, III, IV
7. Which of the following statements is inconsistent with the provisions of

PAS 16?
a. An entity is required to derecognize the carrying amount of an item of
property, plant and equipment that it disposes of on the date the
criteria for the sale of goods would be met.
b. An entity is required to derecognize the carrying amount of a part of an
item of property, plant and equipment if that part has been replaced
and the entity has included the cost of the replacement in the carrying
amount of the item.
c. An entity cannot classify as revenue a gain it realizes on the disposal of
an item of property, plant and equipment
d. An entity is required to measure the residual value of an item of
property, plant and equipment as the amount it estimates it would
receive in the future for the asset if the asset were already of the age
and in the condition expected at the end of its useful life.
8. Accounting recognition should be given to some or all of the gain realized

on a nonmonetary exchange of plant assets except
a. when the exchange is one with no commercial substance and no cash
is involved and that no impairment losses are needed to be
recognized.
b. where the assets exchanged are dissimilar and additional cash is paid
c. where the assets exchanged are dissimilar and additional cash is
received
d. when the exchange is one with no commercial substance whether or
not there is cash involved and that no impairment losses are needed to
be recognized.
9. The cost of land most likely does not include

a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with unlimited useful lives.
d. special assessments.
10. When the fair value of the non-monetary asset exchanged in a

transaction with commercial substance is indeterminable, the non-
monetary asset received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
11. Decrease in equity arise from
a. transfers from an entity to its owners
b. investments in an entity by its owners
c. non-reciprocal transfers to an entity from other than owners
d. upward valuation of property, plant and equipment
(RPCPA)
12. Which of the following terms best describes the removal of an asset
from an entity's statement of financial position?
a. Derecognition b. Impairment c. Write-off d. Depreciation
13. If a corporation purchases a lot and building and subsequently tears

down the building and uses the property as a parking lot, the proper
accounting treatment of the cost of the building would depend on
a. the significance of the cost allocated to the building in relation to the
combined cost of the lot and building.
b. the length of time for which the building was held prior to its
demolition.
c. the contemplated future use of the parking lot.
d. the non-financial asset’s highest and best use determined from the
perspective of market participants, even if the entity intends a
different use or intends not to use the non-financial asset.
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity

with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or
false, according to PAS16 Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration
given to acquire an asset.
a. False False b. False True c. True False d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on
the purchase of machinery preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those
on income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are
classified on the balance sheet as
a. current assets b. fixed assets c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the
land on which it is located with the plan to tear down the Eagles Hotel and
build a new luxury hotel on the site. The cost of the Eagles Hotel should
be
a. depreciated over the period from acquisition to the date the hotel is
scheduled to be torn down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property,
plant and equipment?
I. Assets are depreciated even if their fair value exceeds their carrying
amount
II. Land and buildings are accounted for separately, even when acquired
together
III. A non-current asset acquired as the result of an exchange of assets is
not recognized
IV. A gain on disposal of a non-current asset is classified as revenue
(ACCA)
20. Plant assets may properly include:

a. property held for investment purposes.
b. land held for possible use as a future plant site.
c. self-constructed assets currently in use.
d. idle equipment awaiting sale
e. deposits on machinery purchased and not yet received
21. According to PAS16 Property, plant and equipment, which of the

following items should be capitalized into the cost of property, plant and
equipment?
I. Cost of excess materials resulting from a purchasing error
II. Cost of testing whether the asset works correctly
III. Initial operating losses whilst demand builds up
IV. Cost of preparing the site for installation
a. I, II b. I, II, III c. II, IV d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not

include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of
the following should be included in the cost of an item of property, plant
and equipment?
I. Initial delivery and handling costs
II. Apportioned general overhead costs
III. Costs of training staff on the new asset
IV. Installation and assembly costs
a. I, II, IV b. I, IV c. II, IV d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be

accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the
following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special
assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision
for depreciation or reduction in value, should be valued in the balance
sheet by adding to the actual price paid any expenses incidental to its
acquisition. Which of the following cost items might be included in such
incidental expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
III. cost site preparation
IV. professional fees
Item 1 Item 2 Item 3 Item 4
a. yes yes yes yes
b. yes yes yes no
c. yes no yes no
d. no yes no no
(Adapted)
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold
for ₱36,000 for a new delivery truck with a list price of ₱40,000. The
delivery truck should be recorded on NBA's books at
a. 24,000. b. 30,000. c. 36,000. d. 40,000.
(AICPA)
28. When a plant asset is acquired by issuance of common stock (ordinary

shares), the cost of the plant asset is properly measured by the
a. par value of the stock. c. book value of the stock.
b. stated value of the stock. d. market value of the stock.
(AICPA)
29. When a closely held corporation issues preferred stock for land, the
land should be recorded at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
(AICPA)
30. Fire insurance on building being constructed is an example of:

Capital expenditure Revenue expenditure
a. yes no
b. no yes
c. no no
d. yes yes
(Adapted)
31. Any renovating or remodeling costs incurred to put a building

purchased in a condition suitable for its intended use is a:
Capital expenditure Revenue expenditure
a. no yes
b. yes no
c. no no
d. yes yes
(RPCPA)
32. If the land acquired has a building that should be demolished, any
amount received as salvage from the removal of the building should be:
a. credited to the building account c. credited to the land account
b. treated as income d. adjusted to prior years
33. A company purchased land with a building on it and immediately tears

down the building so that the land can be used for the construction of a
plant. Which of the following should not be charged to the land account?
a. title examination and surveying fees
b. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by

issuing 15,000 shares (par value ₱1.00 per share) of its own common
stock. The stock has a market value of ₱1.40 per share based on a recent
sale of 100 shares. The machine was carried on the vendor’s books at
₱12,000, and was determined to have a fair market value of ₱17,000.
What is the amount at which Bianca should record the machine on its
books?
a. 21,000 b. 17,000 c. 15,000 d. 12,000
(RPCPA)
35. Which of the following is not a necessary characteristic for an item to

be classified as property, plant and equipment?
a. used in operations of the business c has a useful life beyond one year
b. not acquired for resale d. subject to depreciation
36. Land was purchased to be used as the site for the construction of a
plant. A building on the property was sold and removed by the buyer so
that construction on the plant could begin. The proceeds from the sale of
the building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of
the plant.
(AICPA)
37. Plant assets may properly include

a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.
(AICPA)
38. Accounting recognition should be given to some or all of the gain

realized on a nonmonetary exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
39. For a nonmonetary exchange of plant assets, accounting recognition

should not be given to
a. a loss when the assets exchanged are similar.
b. a gain when the assets exchanged are dissimilar.
c. a gain when the exchange lacks commercial substance.
d. part of a gain when the assets exchanged are similar and cash is
received.
(AICPA)
40. When an entity is the recipient of a donated asset from other than a
shareholder, the account credited may be a(n)
a. paid-in capital account. c. deferred revenue account.
b. income account. d. all of these.
(AICPA)
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair
values in excess of carrying amounts in an exchange transaction that
lacks commercial substance. In addition, Noun received cash of less than
10% of the total consideration received from Nameword to compensate
for the difference in land values. As a result of the exchange, Noun should
recognize:
a. A gain equal to the difference between the fair value and the carrying
amount of the land given up.
b. A gain in an amount determined by the ratio of cash received to total
consideration.
c. A loss in an amount determined by the ratio of cash received to total
consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in
excess of carrying amounts in an exchange with commercial substance. In
addition, Adverb paid LY to compensate for the difference in truck values.
As a consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying
amount of the truck given up.
b. A gain determined by the proportion of cash received to the total
consideration.
c. A loss determined by the proportion of cash received to the total
consideration.
d. Neither a gain nor a loss.
(AICPA)
43. In an exchange transaction with commercial substance, DEADLOCK

STANDSTILL Co. received equipment with a fair value equal to the
carrying amount of other assets given up. Deadlock also contributed cash.
As a result of the exchange, Deadlock recognized:
a. A loss equal to the cash given up.
b. A loss determined by the proportion of cash paid to the total
transaction value.
c. A gain determined by the proportion of cash paid to the total
transaction value.
d. Neither gain nor loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and
no cash was exchanged. The carrying amount of the asset surrendered by
E.G. exceeded both the fair value of the asset received and Example's
carrying amount of that asset. E.G. should: (assume exchange has
commercial substance)
a. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it
surrendered and the fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it
surrendered and the carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal
fair values. The retail price of the asset that Adjective gave up is less than
the retail price of the asset received. What gain or loss should Adjective
Co. recognize on the nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset
received and the asset foregone.
c. A gain equal to the difference between the retail price and the cost of
the asset received.
d. A gain or loss equal to the difference between the fair value and the
cost of the asset given foregone.
(AICPA)
46. Theoretically, which of the following costs incurred in connection with a

machine purchased for use in a company's manufacturing operations
would be capitalized?
I. Insurance on machine while in transit
II. Testing and preparation of machine for use
(AICPA)
47. Which of the following is not an example of fixed asset?

a. plant and machinery c. royalty
b. land and building d. molds and dies
48. Discounts given for early payment of credit purchases of operational

assets should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated
to depreciation expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the
asset
(Adapted)
49. Apportionment of the purchase price in a lump-sum acquisition of

different assets may be based on all the following except?
a. carrying amount of the assets to the seller
b. relative fair values
c. tax assessment values
d. appraised values
(Adapted)
50. Which of the following is least likely to be classified in property, plant

and equipment?
a. land improvements c. leasehold improvements
b. land d. idle land
51. When land and building are acquired for a lump sum price and the
building is demolished, the materials salvaged from the building that were
used in the construction of a new building should be
a. Ignored when the demolition costs, net of actual sale proceeds of
salvaged materials, are capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the
building
52. Pronoun Co. exchanged similar nonmonetary assets with Substitute-4-

Noun Co. No cash was exchanged. The carrying amount of the asset
surrendered by Pronoun Co. exceeded both the fair value of the asset
received and Substitute-4-Noun Co.’s carrying amount of the asset.
Pronoun Co. should recognize the difference between the carrying
amount of the asset surrendered and
a. The fair value of the asset received as a loss
b. The fair value of the asset received as a gain
c. Pronoun Co.’s. carrying amount of the asset received, as a loss
d. Pronoun Co.’s. carrying amount of the asset received, as again
(AICPA)
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is
located. The plans are to demolish the That-Is Hotel and to build a new
luxury hotel on the site. I.E. Co. should account for the total purchase cost
of the That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is
torn down.
c. allocate between the land and the That-Is Hotel building, then charge
the allocated cost of the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant

and equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset
are capitalized.
d. All cost incurred to bring the asset to its intended condition and
location are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a
plant asset are capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of

machinery (an operational asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
56. Discounts available for early payment of liabilities on purchases of

operational assets should:
a. be capitalized as part of the cost of the asset, whether taken or not,
and subsequently included as depreciation expense.
b. be recorded and reported as a contra account to the related liability
account.
c. not be capitalized as cost of the asset whether taken or not.
d. be given no recognition until taken or until the discount period has
expired; if not taken, the discounts should be added to the cost of the
asset.
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
58. Acoustic Company needed a new warehouse and a contractor quoted a

₱5,000,000 price to construct it. Acoustic believed that it could build the
warehouse for ₱4,300,000 and decided to use company employees to
build it. The final construction cost incurred by Acoustic was ₱4,800,000
but the asset was recorded at ₱5,000.000. What principle is this a
violation of?
a. Cost principle c. Matching principle
b. Separate entity d. Full disclosure
(Adapted)
59. Which of the following should not be classified as property, plant and
equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
60. A characteristic of property, plant, and equipment is that it is

a. intangible.
b. used in the operations of a business.
c. held for sale in the ordinary course of the business.
d. not currently used in the business but held for future use.
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it

does not have to pay for until November 1, 2012. The total payment on
November 1, 2012, will include both principal and interest. Assuming
interest at a 10% rate, 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. c. Future amount of annuity of ₱1.
b. Present value of ₱1. d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it
is located. The old building will be demolished at a net cost of ₱10,000. A
new building will be built on the site. The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)
Chapter 15
Property, Plant and Equipment (Part 2)

1. Under PAS 16 Property, plant and equipment, which of the following costs
relating to non-current assets should be capitalized?
I. Replacement of a building's roof every 15 years
II. Maintenance of an asset on a three-monthly basis
III. Installation and assembly costs
IV. Replacement of small spare parts annually
a. I, III b. I, III, IV c. I, II, III d. I, II, III, IV
(ACCA)
2. Which of the following statements correctly relate to accounting for

property, plant and equipment?
I. If property, plant and equipment are stated at current valuation, the
financial position and progress of an entity will be more realistically
portrayed.
II. If land and building are purchased for a lump sum price, the broker’s
commission should be apportioned between the land and the building.
III. The price paid for a plant asset is actually a prepayment of an
expense.
IV. Treating a capital expenditure as an expense may overstates profit in
the year after this action was taken.
V. If a fully depreciated asset with no residual value continues to be used,
management can continue to provide for depreciation.
a. II, III, V b. I, II, III, IV c. II, III, V d. I, II, III, IV, V
3. A plant asset acquired by issuance of ordinary shares is properly
measured at the
a. Par value of the shares c. Carrying amount of the asset given
b. Stated value of the shares d. Fair value of the asset received
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its
trucks at a very insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
5. The following statements relate to accounting for property, plant and

equipment. Choose the incorrect statement.
a. Accumulated depreciation is a contra account to an asset reported in
the property, plant and equipment section of the statement of financial
position.
b. Improvements to leased facilities are included under property, plant
and equipment as long as the amount is not material and if the terms
of the lease extend over a long period of time, otherwise, the amount
maybe shown among deferred charges or other assets.
c. When a unit of property is retired or disposed of by sale, trade,
scrapping and removal or abandonment, its cost is credited to the
appropriate property account; the related accumulated depreciation is
removed and any gain or loss adjusted for salvage value and cost of
disposition is reported in the statement of profit or loss and other
comprehensive income.
d. Assets subject to depreciation may take the form of buildings,
machinery and equipment, furniture, improvements to leased facilities,
bookplates, fruit trees and breeding animals for which the fair value
cannot be determined.
6. An old building formerly occupied by ABC Company was replaced. The

loss on the retirement of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building

I. Property, plant and equipment are permitted to be revalued in
response to inflation.
II. Residual value is ignored when computing for depreciation in the
earlier years of an asset’s life when the depreciation method used is
the double declining balance.
III. Cost of building would include expenditures for service equipment and
fixtures made a permanent part of the structure.
IV. Cost inefficiencies on self-constructed assets whether due to
temporary idle capacity, industrial dispute or other causes, should not
be included as part of the cost of asset.
V. When used property is acquired, the actual cost in cash or equivalent
is generally the proper basis for depreciation, regardless of the
previous history of the property, unless the entity uses the revaluation
method.
a. III, V b. I, II, IV c. I, II, IV, V d. I, II, III, IV, V
8. Which of the following correctly relate(s) to accounting for property, plant
and equipment?
I. Devin Co.’s building with an estimated useful life of 20 years was
constructed on a land leased for a term of 15 years. The cost of the
building should be depreciated over 20 years, the life of the building.
II. Vaughn Company acquired a site for the construction of a new plant.
The title examination fees, surveying fees and property taxes accruing
during the period of plant construction should be charged to the land
account of the company.
III. At the time Meagan Corp became a subsidiary of Andre Corp., Meagan
switched depreciation of its plant assets from the straight-line method
of depreciation to the sum-of-the-year digits method used by Andre. As
to Meagan, this change is a change in reporting entity.
IV. Functional depreciation is the wear and tear, deterioration and decay,
and damage, reducing the usefulness of the asset.
V. Revaluation surplus in property is an element constituting
shareholders’ equity.
a. IV, V b. II, IV, V c. II, III, IV, V d. V
9. The sale of a depreciable asset resulting in a gain, indicates that the

proceeds from the sale were
a. greater than cost c. less than carrying amount
b. greater than carrying amount d. less than cost
10. Improvements are

a. revenue expenditures
b. debited to an appropriate asset account when they do not increase
useful life but improves efficiency beyond the state or condition
originally intended by management
c. debited to an appropriate asset account when they do not increase
useful life
d. debited to accumulated depreciation when they do not increase useful
life
(AICPA)
11. In order for a cost to be capitalized (capital expenditure), the following

must be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally
intended by management.
d. Any one of these.
(AICPA)
12. An improvement made to a machine increased its fair value and its
production capacity by 25% above the condition originally intended by
management but without extending the machine's useful life. The cost of
the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine
account.
(AICPA)
13. Which of the following is a capital expenditure?
a. Payment of an account payable c. Payment of income taxes
b. Retirement of bonds payable d. None of these
(AICPA)
14. Which of the following is not a capital expenditure?

a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal
equals the original cost
b. original cost minus accumulated depreciation equals cash received
minus loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash
received
d. cash received plus accumulated depreciation minus loss on disposal
equals the original cost
16. The sale of a depreciable asset resulting in a loss indicates that the
proceeds from the sale were
a. less than current market value. c. greater than carrying
amount.
b. greater than cost. d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park.
Compensation for the condemnation exceeded the forestland's carrying
amount. Burnham purchased similar, but larger, replacement forest land
for an amount greater than the condemnation award. As a result of the
condemnation and replacement, what is the net effect on the carrying
amount of forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's
cost over the condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's
cost over the condemnation award.
c. The amount is increased by the excess of the condemnation award
over the condemned forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is
used as the replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the
building was refurbished with higher quality materials. The cost and
related accumulated depreciation of the damaged portion are identifiable.
To account for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of
refurbishing and the carrying amount of the damaged portion of the
building.
c. Capitalize the cost of refurbishing and record a loss in the current
period equal to the carrying amount of the damaged portion of the
building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying
amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for
special one-time assessments made by local governments requiring a firm
to pay for improvements including streetlights, sewers and other
infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later,

₱100,000 was spent in rearranging the line to promote efficiency. The
rearrangement but did not affect the assembly line’s useful life. Proper
accounting for the cost of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated
depreciation accounts.
d. Debit to asset account.
(Adapted)
21. Choose the correct statement.

a. An operational asset received in exchange for ordinary shares issued
by the buyer should be recorded at the par value of the securities
issued if the cash price of the asset is not known.
b. Sales tax paid upon acquisition of an operational asset should be
expensed because such amounts are usually immaterial with respect
to the cost of the acquired asset.
c. Purchased operational assets acquired on a long-term payment plan
should be recorded at full cost (including interest and financing
charges) only if the cost cannot be estimated by the purchaser.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are
reported at cost or cost less accumulated depreciation.
(Adapted)
22. Which of the following statement is true?

a. All operational assets are subject to either depreciation, depletion, or
amortization.
b. The matching principle does not require depreciation on an operational
asset donated to a company because no purchase cost was incurred at
acquisition.
c. The only requirement an asset must meet to be considered an
operational asset is that its useful life extend over more than one
accounting period.
d. The determination of cost is conceptually consistent between
operational assets and inventory in regard to the accounting treatment
of cash discounts.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the
cost of property, plant, and equipment?
a. The purchase price, freight costs, and installation costs of a productive
asset should be included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended
purpose, such as from the sale of cleared timber, should be recognized
immediately as income.
c. The cost of improvement to equipment incurred after the equipment is
placed in the location and condition originally intended by
management is generally expensed out rightly.
d. All necessary costs incurred in the construction of a plant building,
from excavation to completion, should be considered as part of the
asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal
equals the original cost.
b. cash received plus accumulated depreciation minus loss on disposal
equals the original cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received
plus loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the
time period of usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
26. Choose the best description of depreciable amount.

a. minimum carrying amount c. residual value
b. carrying amount d. initial cost less residual value
27. An entity acquired an asset with an estimated useful life of 20 years

and a 10% residual value. At the end of the asset’s useful life, the
accumulated depreciation will be equal to the original cost of the asset
under which of the following depreciation methods?
Double-declining Sum-of-the-years’ Digits Straight-line
Method
a. Yes Yes Yes
b. Yes Yes No
c. No Yes Yes
d. No No No
(Adapted)
28. Obsolescence of a depreciable asset may be caused by

a. Technological changes
b. Improvement in production method
c. Change in market demand for the product or service output
d. Legal or other restrictions
e. (a), (b), (c) and (d) above
29. 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. These should 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 the 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.
(Adapted)

a. Land and an old building thereon are purchased with the intent to build
a new and better structure. Upon demolition of the old structure, the
total purchase price plus the demolition cost should be included as
land.
b. When an operational asset (such as land or buildings) is purchased,
any unpaid property taxes (for the period prior to the purchase date)
that are paid by the purchaser should be recorded as part of the cost
of the asset.
c. An operational asset purchased on credit for ₱2,000, terms 2/20, n/30,
should be recorded at ₱1,960 even though payment is made after the
discount period.
d. If operational assets are acquired in exchange for bonds, issued by the
buyer, the assets should be capitalized at the fair value of the
operational assets received or the fair value of the bonds, whichever is
more reliably determinable.
(Adapted)

I. Depreciation expense shown on a company's income statement is
always equal to the depreciation expense on the company's income
tax return.
II. The purpose of depreciation is to have the balance sheet report the
current value of an asset.
III. Depreciation expense reflects an allocation of an asset's original cost
rather than an allocation based on the economic value that is being
consumed.
IV. An asset's useful life is the same as its physical life.
V. One company might depreciate a new computer over three years while
another company might depreciate the same model of computer over
five years...and both companies are right.
VI. Depreciation expense is shown on the income statement in order to
achieve accounting's matching principle.
a. III, V, VI b. I, III, VI c. III, IV, V, VI d. V, VI
32. Which of the following depreciation methods is not an accelerated

method?
a. Double declining balance c. Sum-of-the-years’ digits
b. Straight line d. 150% declining balance
33. An entity acquired an asset for a purchase price of ₱100,000.

Necessary installation costs incurred amounted to ₱2,000. It was
estimated that the asset has a 4-year useful life and after that it can be
sold at ₱10,000. Cost of uninstalling the asset is estimated at ₱1,000. If
the company uses the sum-of-the-years’ digits method, the depreciation
expense in the third year is computed as
a. 10% multiplied by ₱102,000 c. 20% multiplied by ₱92,000
b. 20% multiplied by ₱93,000 d. 20% multiplied by ₱102,000
(Adapted)
34. A depreciable asset has an estimated 15% residual value. Under which
of the following methods, properly applied, would the accumulated
depreciation equal the original cost at the end of the asset’s estimated
useful life?
Straight-line Double-declining balance
a. Yes Yes
b. Yes No
c. No Yes
d. No No
(AICPA)
35. An entity operates a chain of hotels and is proposing to stop

depreciating the hotel equipment and expense the cost of replacement
each year. The entity should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and
depreciate them
(ACCA)
36. An entity manufactures components for the car industry and uses self-
made tools, which it continually develops. Costs of tooling are depreciated
over four years and the tools are manufactured in its one factory, where
4% of the space is allocated to development. The factory depreciation
charge should:
a. Be allocated on the basis of the value of the tools compared with the
factory output to the cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of
the tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of
the tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on
January 1, 20x8, has a useful life of 15 years and is depreciated on a
straight-line basis to a zero residual value. The value of the asset at
December 31, 20x8 was ₱14.5M. At December 31, 20x9, the market value
of the asset was ₱12.5M. The accounting entry at 31 December 20x9
would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M
charged to revaluation reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M
charged to revaluation reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged
to revaluation reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the
income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and
"time" on the horizontal axis. Assuming linear relationships, how would
the lines for straight-line and sum-of-the-years'-digits depreciation
expense, respectively, be drawn on this graph?
Straight-line SYD
a. Vertically Sloping down to the right.
b. Vertically Sloping up to the right.
c. Horizontally Sloping down to the right.
d. Horizontally Sloping up to the right.
39. Under the composite method, the composite

a. rate is the total cost divided by the total annual depreciation
b. rate is the total annual depreciation divided by the total depreciable
cost
c. life is the total cost divided by the total annual depreciation
d. life is the total depreciable cost divided by the total annual
depreciation.
40. The composite depreciation method

a. is applied to a group of homogenous assets
b. is an accelerated method of depreciation
c. does not recognize gain or loss on the retirement of specific assets in
the group
d. excludes salvage value from the base of the depreciation calculation
(AICPA)
41. Under what conditions will the service hours and productive output
methods of depreciation result in the same depreciation expense for a
particular year?
a. When the total estimated service hours and production in units are the
same.
b. When the ratio of actual service hours to productive output for the year
is the same as the ratio of the estimates used in their respective
depreciation rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense
amount for any given year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for
I. In special instances, when inflation has been a major factor, property,
plant and equipment are permitted to be revalued based on index
numbers or on an appraisal performed by an independent expert or
specialist.
II. The sum of the year’s digit method always results in larger total
depreciation than does the straight line method.
III. Composite depreciation method does not recognize gain or loss on
retirement of a single asset in the group.
IV. Depreciation is the process of periodically writing down an asset to
arrive at its fair market value.
V. Depreciation accounting automatically provides the cash required to
replace plant assets as they wear out.
a. I, II, III, V b. I, II, III c. I, III d. II, III
43. The use of the double-declining balance method

I. results in a decreasing charge to depreciation expense.
II. means salvage value is not deducted in computing the depreciation
base.
III. means the carrying amount should not be reduced below salvage
value.
a. I, II, and III b. I, II c. I, III d. none
44. Which of the following statements best describes 'residual value'?

a. The estimated net amount currently obtainable if the asset were at the
end of its useful life
b. The present value of estimated future cash flows expected to arise
from the continuing use of the asset and from its ultimate disposal
c. The amount at which the asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
d. The amount of cash or cash equivalents that could currently be
obtained by selling the asset in an orderly disposal
(ACCA)
45. Which of the following terms best describes the cost (or an amount
substituted for cost) of an asset less its residual value?
a. Revalued amount c. Recoverable amount
b. Carrying amount d. Depreciable amount
(ACCA)
46. The carrying amount of an asset is defined as

a. Cost minus residual value
b. Cost minus accumulated depreciation minus accumulated impairment
losses
c. Cost minus residual value minus accumulated depreciation
d. Estimated fair market value
47. Which of the following statements best describes the carrying amount
of an asset?
a. The cost (or an amount substituted for cost) of the asset less its
residual value
b. The amount at which the asset is recognized in the statement of
financial position after deducting any accumulated depreciation and
accumulated impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any
subsequent accumulated impairment losses
(ACCA)
48. Which of the following statements best describes the term

'depreciation'?
a. The systematic allocation of an asset's cost less residual value over its
useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its
carrying amount
d. The amount by which the carrying amount of an asset exceeds its
recoverable amount
(ACCA)
49. Which of the following terms best describes the systematic allocation
over its useful life of the cost of an asset, or other amount substituted for
cost, less its residual value?
a. Depreciation b. Derecognition c. Impairment d. Value in
use
(ACCA)
50. Which of the following terms best describes the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date?
a. Fair value b. Value in use c. Residual value d. Realizable value
(ACCA)
51. Which of the following statements regarding depreciation is true,

according to PAS16 Property, plant and equipment?
a. An asset must be depreciated from the date of its purchase to the date
of sale
b. The annual depreciation charge should be constant over the life of the
asset
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than the residual value,
depreciation is not charged
(ACCA)
52. The straight-line method of depreciation is based on the assumption

that
a. The operating efficiency of the asset decreases in the later years.
b. Service value declines as a function of time rather than of use.
c. Service value declines as a function of obsolescence rather than of
time.
d. Physical wear and tear are more important than economic
obsolescence.
(AICPA)
53. A principal objection to the straight-line method of depreciation is that

it
a.Gives smaller periodic write-offs than decreasing charge methods.
b.Ignores variations in the rate of asset use.
c.Provides for the declining productivity of an aging asset.
d.Tends to result in a constant rate of return on a diminishing investment
use.
(RPCPA)
54. The straight-line method of depreciation is not appropriate for

a. A company that is neither expanding nor contracting its investments in
equipment because it is replacing equipment as the equipment is
required.
b. Equipment on which the amount of maintenance and repairs increase
substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment that is used consistently every period.
(RPCPA)
55. Which of the following statements correctly relate to accounting for

depreciation?
I. The best theoretical support for using an accelerated depreciation
method is that expenses should be allocated in a certain manner so
that earnings will be equalized.
II. When partial use of a building under construction can be identified with
an income producing center and the corresponding cost can be
ascertained, the related depreciation should be allocated to that
operation.
III. One of the reasons for recording depreciation is to have proper
matching of costs and revenues.
IV. The periodic expense associated with the use of land is called
depreciation expense.
V. Plant assets with a nominal cost may be charged to expense when
acquired.
a. II, III, V b. I, II, III, V c. II, III, IV, V d. I, II, III, IV, V
56. An asset has a nine-year useful life and is to be depreciated under the
sum-of-the-years’ digits method. The annual depreciation expense would
be the same as that under the straight line depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
d. the ninth year of the life of the asset
(Adapted)
57. Which of the following is not under time-factor method depreciation?

a. straight line c. declining balance
b. SYD method d. productive output
58. Depreciation which arises from obsolescence or inadequacy to perform

efficiently is called:
a. periodic b. physical c. normal d. functional
59. The depreciation method that provides higher depreciation expense in

the early years and lower charges in the late years is
a. SYD c. units of production and hours of use method
b. straight line d. FIFO
60. Which of the following is an economic factor related to the service life
of a long-lived asset?
a. obsolescence c. decay
b. wear and tear d. casualties
61. A and B companies purchase identical equipment having an estimated

service life of 5 years with no residual value. A uses the straight-line
depreciation method; B uses the sum-of-the-years-digits method.
Assuming that the companies are identical in all other respects:
a. if both companies keep the asset for five years, B company’s 5-year
total for depreciation expense will be greater than A company’s 5-year
total.
b. if the asset is sold after three years, A company is more likely to report
a gain on the transaction than B company.
c. A company’s depreciation expense will be higher during the first year
than B company’s.
d. A company’s net income will be lower during the 4th year than B
company’s.
(Adapted)
62. Which statement(s) is(are) correct?

I. Depreciation on units of property, plant and equipment that are
reserved or standby should not be continued
II. Art collections should not be depreciated on a systematic and rational
basis over the life of the asset irrespective of the earnings of the entity
63. The highest amount of depreciation will usually be recorded in the last
year of an asset’s life when using:
a. straight line b. SYD c. double-declining balance d. either b
or c
64. Which of the following depreciation methods usually results in paying

the lowest taxes in the early years of an assets life?
a. SYD c. straight line
b. double declining balance d. units of production method
65. Which of the following is/are true about straight-line depreciation?

I. With constant pre-depreciation income, it leads to an increasing rate of
return over time.
II. It ignores loss of productivity and increased maintenance costs over
time.
III. It leads to higher taxes in later years compared to accelerated
depreciation methods.
a. I, II & III b. I & III c. II & III d. I & II
66. An asset is estimated to have a total life of 8 years. Its acquisition cost
is ₱16,000 and a residual value of ₱4,000. The firm follows the double
declining method of depreciation. In the second year, the rate of
depreciation for the firm's asset is closest to
a. 25% b. 17% c. 9.5% d. 12.5%
67. With respect to depreciation methods, which of the following is true?

I. Accelerated depreciation methods lead to higher depreciation expense
over time.
II. The Straight-line method causes higher taxes in later years compared
with the accelerated depreciation methods.
III. Accelerated methods are preferred for tax reasons.
a. III only b. II & III c. I & III d. II only
68. An analysis of an entity's financial statements indicates that the

average age of its assets is declining. This could be due to which of the
following?
I. The entity is acquiring new assets with longer depreciable lives.
II. The entity's capital expenditures are outpacing depreciation.
III. The entity is not using its assets as intensively as it should.
IV. The entity is operating in its maturity phase.
a. I & IV b. I & II c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i. Average age: (Accumulated depreciation ÷ Depreciation expense) = x
years
ii. Relative age: (Accumulated depreciation ÷ Total cost of depreciable
assets) = % of age
iii. Average depreciable life: (Total depreciable amount ÷ Depreciation
expense) = x years
69. All of the following are attributes of depreciation except

a. depreciation stays on the statement of financial position as long as the
asset is owned by the entity.
b. depreciation provides funds for replacement of an asset.
c. depreciation is the allocation of the cost of an asset over its useful life.
d. the purpose of depreciation is to charge against operations, by means
of allocation, the cost of an asset.

a. The term "revenue expenditures" refers to those amounts paid out
which are expected to provide revenue in the current period or a future
period.
b. Expenditure for one item which has questionable or highly uncertain
future benefit usually will be recognized as expense when incurred.
c. Subsequent to acquisition, operational assets usually are reported at
cost or cost less accumulated depreciation, depletion, or amortization.
d. A primary principle in recording and reporting operational assets is that
they are recorded at cost when acquired and subsequently are
reported at cost or cost less accumulated depreciation.
(Adapted)
71. A machine with a 4-year estimated useful life and an estimated 15%
residual value was acquired on January 1. Would depreciation expense
using the sum-of-the-year's-digit method be higher or lower than
depreciation expense using the double-declining-balance-method in the
first and second years?
First year Second year
a. Higher Higher
b. Higher Lower
c. Lower Higher
d. Lower Lower
(AICPA)
72. An exchange of assets with no cash exchanged:

a. records the cost of the asset received at the book value of the asset
given.
b. records the asset received at the fair value of the asset given.
c. culminates to an earning process.
d. results in recognition of a loss or gain of each party.
(Adapted)
73. A primarily theoretical objection to the straight-line method of

depreciation is that it:
a. gives a lower periodic expense than the accelerated method over the
life of the asset.
b. recognizes the declining productivity of the asset.
c. ignores variation in the rate of the asset use among periods.
d. tends to result in a constant rate of return on a diminishing investment
base.
(AICPA)
74. Periodic depreciation expense is primarily the result of applying the:

a. revenue principle c. systematic and rational allocation
b. full-disclosure d. matching
75. All of the following are causes of depreciation except:

a. obsolescence of the asset c. wear and tear from operational use
b. inadequacy of the assets d. decline in current market value of the
asset
(AICPA)
76. Accounting for depreciation primarily:
a. is an accounting process which allocates long-lived asset cost to
appropriate accounting periods.
b. is used to indicate a decline in market value of a long-lived asset.
c. is a process of asset valuation for balance sheet purposes.
d. applies only to long-live intangible assets.
(AICPA)
77. Which of the following items relevant to the depreciation of an asset

can be negative?
a. residual value c. useful life
b. depreciable amount d. carrying amount subsequent to acquisition
(AICPA)
78. Which depreciation method is particularly appropriate where: (a)

obsolescence is not the primary factor, (b) actual use can be accounted
for, and (c) the service life in units of use can be estimated reliably?
a. SYD c. Productive output
b. Double declining balance d. Straight line
(AICPA)
79. Which is not an objection to the use of the straight-line method of

depreciation?
a. It may not satisfactorily match expense with revenue, depending on
the asset.
b. It tends to ignore obsolescence as a major source of decline in
economic value.
c. It does not recognize the investment characteristics of the ownership
of operational assets.
d. It generally results in the lowest earnings.
(Adapted)
80. The following statements relate to functional depreciation

I. Inadequacy may arise when there is no future demand for the product
that the depreciable asset produces or from the availability of a new
depreciable asset that can perform for the same function at a
substantially lower cost.
II. Obsolescence results when an asset is no longer suitable for the size of
the company’s operations.
a. True, true b True, false c. False, true d. False, false
81. A method that excludes residual value from the base for the
depreciation calculation is
a. SYD c. productive output
b. Double declining balance d. straight line
(AICPA)
82. An enterprise is depreciating an asset with a 5-year useful life. It cost

₱100,000 and has no residual value. If the <List A> method is used,
depreciation expense in the second year will be <List B>.
List A List B
a. Sum-of-years’ digits 20,000
b. Sum-of-years’ digits 40,000
c. 200% diminishing balance 16,000
d. 200% diminishing balance 24,000
(Adapted)
83. In the years after mid-service point of a depreciable asset, which of the
following depreciation methods will result in the highest depreciation
expense?
a. Sum-of-the-years’-digits. c. 200% diminishing-balance
b. Diminishing-balance d. Straight-line
(Adapted)
84. 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, the
percentage of the total depreciable cost that will be expensed in the third
year is
a. 10% b. 25% c. 20% d. 70%
(Adapted)
85. The following statements relate to depreciation accounting, choose the

incorrect one
a. Depreciation, normally, should not be recognized on property, plant
and equipment construction period or while new equipment is
undergoing testing and breaking in until such assets are capable of
being used
b. When partial use of the asset, during construction can be identified
with an income-producing center and the corresponding cost can be
ascertained, the related depreciation should he allocated to that
operation.
c. Depreciation should not be continued on units of property, plant and
equipment that are reserved or standby, or idle either temporarily or
for an extended period.
d. When used property is acquired, the actual cost in cash or equivalent
is generally the proper basis for depreciation, regardless of the
previous history of the property
86. A plant facility has an originally estimated physical life equal to 15

years. As a result of accelerated usage, it is now estimated that the
physical life will be reduced by 3 years. The depreciation rate applied to
this facility need not be changed if the depreciation method used is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was
acquired on January 1, 20x2. The increase in accumulated depreciation for
20x3 using the double-declining balance method would be
a. initial cost x 85% x 50% c. initial cost x 50%
b. initial cost x 85% x 50% x 50% d. initial cost x 50% x 50%
88. Accumulated depreciation, as used in accounting, represents.

a. funds set aside to replace assets.
b. earnings retained in the business that will be used to purchase another
operational asset when the related asset becomes fully depreciated.
c. the allocation of the cost of a depreciable asset recognized in profit or
loss during the period.
d. the portion of the asset’s cost that is written off as an expense since
the acquisition date.
89. Which of the following statements is most likely not correct?
a. Periodic allocations of acquisition cost, made on a systemic and
rational basis, are recognized as current expense in conformity with
the matching principle.
b. Depreciation accounting is a process of valuation, not of allocation.
c. At acquisition, tangible, operational assets are recorded at cost on the
basis of the cost principle.
d. Subsequent to acquisition, tangible operational assets that have a
limited life are reported at the cost recognized at acquisition date less
accumulated allocations of such cost.
90. Depreciation is a variable (as opposed to fixed) expense if the

depreciation method used for reporting purposes is:
a. declining balance c. straight line
b. units-of-production d. SYD
91. Which of the following methods permits total depreciation on a plant

asset to exceed depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
92. Choose the incorrect statement concerning the half-year convention as

it applies to depreciation.
a. It can be used only for tax purposes.
b. It adds a year to the class life of the asset for tax purposes.
c. It reduces the accelerated nature of the deduction.
d. It results in depreciation rate equal to the straight-line rate based on
class life in the first year of the asset's life.
(AICPA)
93. For each succeeding period, the units-of-production method of

depreciation usually recognizes an amount of depreciation expense that
is:
a. constant b. varying c. increasing d. decreasing
94. Which method of depreciation results in periodic depreciation expense

that may fluctuate from one period to the next, but not necessarily in a
steadily upward or downward direction?
a. SYD c. straight line
b. output or service hours d. declining balance
95. Which of the following is/are advantages of accelerated methods of

depreciation?
I. They implicitly recognize the loss of productivity and increased
maintenance costs over time.
II. They allow deferral of taxes compared to the straight-line method, thus
making more cash available for current operations.
III. The lower depreciation charges in later years compensate for the
greater uncertainty in future revenues.
a. I & III b. II only c. I, II & III d. I & II
96. An end-of-period adjustment for depreciation of fixed assets is
necessary
a. for proper statement of profit
b. to be consistent with the matching principle
c. to recognize the expense of using fixed assets
d. all of these answers are correct
97. Depreciation expense for fixed assets is recorded

a. for each period the asset is in use
b. as a liability until the asset is sold
c. at the end of each period during the asset's useful life
d. when the asset is sold
98. Changes in depreciation methods, useful lives, and residual values

a. are changes in accounting estimates accounted for prospectively
b. are changes in accounting estimates accounted for retrospectively
c. are changes in accounting policies accounted for prospectively
d. does not affect previously recognized expenses, as well as future
expenses
99. If there is a change in useful life, depreciation method, or residual

value
a. the accountant should compute first the carrying amount of the asset
as of the beginning of the period of change; thereafter, the carrying
amount is allocated over the remaining revised useful life using the
new depreciation method or revised residual value
b. the accountant should compute the carrying amount of an asset as if
the new depreciation method, revised useful life or revised residual
value had been used all along
c. the accountant is in for very complex accounting computations and
should consult her college instructor first before doing anything
d. there should be no changes in useful lives, depreciation methods, or
residual values because once selected or determined, they are
irrevocable, according to accountant’s standards
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has
other property and equipment in order to service the fleet. It decided to
revalue some of its property, plant and equipment. Which one of the
following options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the

first time, the account to be debited is
a. fixed asset account c. profit or loss account
b. revaluation reserve d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on
January 1, 20x1 and has a useful life of five years and is depreciated on a
straight-line basis to a zero residual value. The value of the asset at
December 31, 20x1 was ₱3.8M. The fall in value will be accounted for as
follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income
statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to
the reserves
d. Depreciation ₱1M to the income statement and fall in value of
₱200,000 ignored until there is a revaluation surplus
(ACCA)
103. Appraisal value is:

a. the revalued amount of property, plant and equipment determined by
recognized specialists or authorities
b. the value per appraisal computed by deducting observed depreciation
from appraised value
c. computed by deducting historical cost from appraised value
d. the excess of sound value over net book value
104. When revalued amounts are to be incorporated in the financial

statements the following requirements are to be observed:
I. the appraisal must be made only by a recognized specialist
independent of the company which owns the property
II. depreciation to be charged to operations should be based on cost only
III. the revaluation surplus should be presented on the face of statement
of financial position under equity as a separate line item in accordance
with the minimum line items under PAS 1
IV. certain required disclosures should be made in the financial
statements
V. the appraisal should cover all property, plant and equipment items
a. I, II, III, IV, and V c. I, III and IV only
b. I, III, IV and V only d. IV only
105. Which of the following incorrectly relate(s) to the accounting for

I. Sum of the years’ digits method is one of the accelerated methods of
depreciation that provides higher depreciation expense in the early
years and lower charges in the late years.
II. Mortgage or liens on property, plant and equipment need not be
disclosed in the financial statements or notes.
III. Any property, plant and equipment that is idle or abandoned and
remains in the property, plant and equipment account should be
revalued if this results in increasing their carrying values.
IV. Depreciation of appraised properties charged to operations shall be
based on the appraised values and it should be computed from the
date of appraisal.
V. An entity may be allowed to, revalue its property, plant and equipment
if their current value is substantially more than their cost provided the
company adheres to the provisions of PAS
a. I, IV and V b. I, IV c. II, III d. II, III, V
106. When an appraised property is retired, the revaluation surplus

pertaining to such asset may be handled
a. revaluation surplus which can be subsequently transferred to
unappropriated retained earnings
b. revaluation surplus which can be subsequently transferred to other
appraised property not retired
c. revaluation surplus which can be subsequently transferred to other
properties not revalued
d. revaluation surplus which cannot be subsequently transferred to
unappropriated retained earnings
(RPCPA)
107. The value per appraisal or the value computed by deducting observed
depreciation from replacement cost is called
a. revaluation surplus c. sound value
b. appraisal value d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It
operates in a capital-intensive industry and thus has significant other
property, plant, and equipment that it carries in its books. It decided to
revalue its property, plant, and equipment. The company’s accountant
has suggested the alternatives that follow. Which one of the options
should Internet Protocol-IP, Inc. select in order to be in line with the
provisions of PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment,
as that method is less cumbersome and easy compared to revaluing all
assets together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships
together.
d. Since assets are being revalued regularly, there is no need to
depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to

appraised value is an acceptable alternative to historical cost provided
certain requirements are complied with. Which of the following is not one
of the requirements?
a. the appraisal should be made by a competent and independent
specialist once a year at each end of reporting period.
b. depreciation to be charged to operations should be based on appraised
values or its equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. PAS 16 requires that revaluation surplus resulting from initial

revaluation of property, plant, and equipment should be treated in one of
the following ways. Which of the four options mirrors the requirements of
PAS 16?
a. Credited to retained earnings as this is an unrealized gain.
b. Released to the income statement an amount equal to the difference
between the depreciation calculated on historical cost vis-à-vis
revalued amount.
c. Deducted from current assets and added to the property, plant, and
equipment.
d. Debited to the class of property, plant, and equipment that is being
revalued and credited to a reserve captioned “revaluation surplus,”
which is presented under “equity.”
(Adapted)
111. Which of the following is correct regarding the revaluation model as it
is applied to PPE?
a. When the revaluation model is used, depreciation ceases.
b. The appropriate basis for revaluation is replacement cost without any
adjustment whatsoever.
c. When replacement cost is used, observed depreciation should first be
deducted to arrive at the depreciated replacement cost.
d. Observed depreciation is determined through a very complex
computation.
112. The following statements correctly relate to the revaluation model.

I. Revaluation should be made for an entire class of PPE and not made
selectively.
II. Revaluation should be made simultaneously for all items of PPE within
a class. Revaluation on a rolling basis is permitted so long as
revaluation is completed within a short period.
III. If fair values are volatile, revaluation should be made on an annual
basis. If not, revaluation may be made every 3 to 5 years.
IV. Revalued amounts are required under PAS 16 to be determined by
independent professionals.
a. II, III b. I, II, III c. II, III, IV d. I, II, III, IV
113. Revaluation surplus may be computed as

a. Replacement cost minus Carrying amount
b. Appraised value or Depreciated replacement cost minus Carrying
amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by
Replacement cost
114. When the asset being revalued has no residual value, observed
depreciation may be computed as
b. Appraised value or Depreciated replacement cost minus Carrying
amount
Replacement cost
115. When the asset being revalued has a residual value, observed
depreciation may be computed as
b. Accumulated depreciation divided by Depreciable amount multiplied
by Depreciable amount of replacement cost
Replacement cost
116. When there is a change in useful life as a result of revaluation,

a. the computation of revaluation surplus is affected by a series of
adjustments and complex computations
b. only the computation for observed depreciation is affected
c. the revised useful life is disregarded when computing for revaluation
surplus and subsequent depreciation
d. the computation of revaluation surplus is unaffected, observed
depreciation is computed in the same way as if there was no change in
useful life
117. When the revalued asset is depreciable,

a. a portion of the revaluation surplus is periodically transferred to
retained earnings through profit or loss.
b. a portion of the revaluation surplus may be periodically transferred
directly to retained earnings.
c. no portion should be transferred periodically to retained earnings
unless the asset is derecognized.
d. revaluation surplus is presented in equity and must be transferred only
to retained earnings when the revalued asset is derecognized.
118. A long-term asset currently has a carrying amount of ₱45,000 and a

salvage value of ₱5,000. It was acquired 3 years ago at a cost of ₱75,000.
If the firm uses straight-line depreciation, how many more years is the
asset expected to be in service?
a. 5 years b. 4 years c. 6 years d. 7 years
Disclosure
119. Which of the following disclosures must be made under PAS16
Property, plant and equipment?
I. The existence and amounts of restrictions on title
II. A narrative discussion of future capital expenditure plans
III. The disposal proceeds of each major asset sold in the period
IV. The measurement bases used for determining the gross carrying
amount
a. I, IV b. I, II, IV c. I, III, IV d. I, II, III, IV
(ACCA)
120. Which of the following is a required disclosure under PAS 16?

a. the description of each item of PPE, their nature, and the purpose of
their acquisition.
b. the depreciation methods used unless the PPE is measured under
revaluation model
c. lapsing schedule
d. all of these
121. All of the following are required disclosure under PAS 16, except?
a. accounting policies and estimates of useful lives and residual value
b. reconciliation of carrying amounts at the beginning and end of the year
c. commitments related to items of property, plant, and equipment
d. changes in fair values of assets measured under cost model
Chapter 16
Depletion of Mineral Resources

1. PFRS 6 is applied to which of the following?
a. the search for mineral resources before the entity has obtained legal
rights to explore in a specific area.
b. the search and evaluation of mineral resources, agricultural produce,
and biological assets prior to commencement of actual production
c. the search for mineral resources after the entity has obtained legal
rights to explore in a specific area.
d. the development of mineral resources after the entity has in fact
established the existence of mineral deposits in an area.
2. PFRS 6 applies to expenditures incurred

a. When searching for an area that may warrant detailed exploration,
even though the entity has not yet obtained the legal rights to explore
a specific area.
b. When the legal rights to explore a specific area have been obtained,
but the technical feasibility and commercial viability of extracting a
mineral resource is not yet demonstrable.
c. When a specific area is being developed and preparations for
commercial extraction are being made.
d. In extracting mineral resources and processing the resource to make it
marketable or transportable.
(Adapted)
3. PFRS 6
a. shall be applied by all entities adopting full PFRSs
b. shall be applied only by entities engaged in agricultural activity
c. temporarily exempts entities in applying some provisions in PAS 8
d. when adopted, shall replace PAS 16
4. It refers to the activities geared towards the search for mineral resources
after the entity has obtained legal rights to explore in a specific area
a. exploration and evaluation c. probe and investigation
b. development d. adventure and conquest
5. Does PFRS 6 require an entity to recognize exploration and evaluation

expenditure as assets?
a. Yes, but only to the extent such expenditure is recoverable in future
periods.
b. Yes, but only to the extent the technical feasibility and commercial
viability of extracting the associated mineral resource have been
demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy
for recognizing exploration and evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
(Adapted)
6. Which of the following is incorrect in relation to the provisions of PFRS 6?

a. Exploration and evaluation expenditures start to be incurred only after
the legal right to explore a specific area is obtained.
b. Exploration and evaluation expenditures cease to be incurred when the
existence of reserves is in fact established.
c. PFRS 6 permits entities to develop their own accounting policy for
exploration and evaluation assets based entirely on management’s
judgment.
d. Although PFRS 6 permit entities to develop their own accounting
policy, the management of an entity should comply with the provision
of PAS 8 on hierarchy of standards when developing accounting policy
for exploration and evaluation of mineral resources.
7. What is an entity required to consider in developing accounting policies
for exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations
dealing with similar and related issues.
b. The definitions, recognition criteria, and measurement concepts for
assets, liabilities, income, and expenses in the Conceptual Framework.
c. Recent pronouncements of standard-setting bodies, accounting
literature, and accepted industry practices.
d. Whether the accounting policy results in information that is relevant
and reliable.
(Adapted)
8. Expenditures incurred after the existence of reserves is in fact established

in a specific area but before commencement of commercial production
are called
a. exploration and evaluation expenditures
b. development expenditures
c. extraction costs
d. cost of drilling rig foundation and sewers
9. Which of the following is in accordance with the provisions of PFRS 6?

a. PFRS 6 applies even before an entity has obtained legal rights to
explore in a specific area.
b. Exploration and evaluation expenditures start to be incurred only
before the legal right to explore a specific area is obtained.
c. Exploration and evaluation expenditures start to be incurred when the
existence of reserves is in fact established.
d. PFRS 6 permits entities to develop their own accounting policy for
exploration and evaluation assets which results in relevant and reliable
information based entirely on management’s judgment.
10. Under PFRS 6, exploration and evaluation assets shall be initially

measured at
a. cost b. fair value c. amortized cost d. any of these
11. Which of the following correctly relates to the provisions of PFRS 6?

I. Exploration and evaluation assets shall be measured at cost, fair value,
or amortized cost, whichever is more appropriate.
II. Exploration and evaluation assets are exploration and evaluation
expenditures recognized as assets in accordance with the entity’s
accounting policy. Nothing in PFRS 6 overrides the accounting policy
developed by an entity.
III. After recognition, an entity shall apply either the cost model or the
revaluation model to the exploration and evaluation assets.
IV. After recognition, an entity shall apply either the cost model or the fair
model to the exploration and evaluation assets.
a. II, III b. I, II, III c. I, III, IV d. I, II, III, IV
12. Under PFRS 6, an entity may change its accounting policies for
exploration and evaluation expenditures
a. If the change is required or permitted under the standards
b. If the change is required or permitted under the standards and not
prohibited by a relevant regulation
c. if the change makes the financial statements more relevant and no
less reliable, or more reliable and no less relevant.
d. If the change makes the financial statements more relevant or more
reliable
13. Is an entity ever required or permitted to change its accounting policy

for exploration and evaluation expenditures?
a. Yes, entities are required to change their accounting policy for these
expenditures if the change would result in more useful information for
users of financial statements.
b. Yes, entities are free to change accounting policy for these
expenditures as long as the selected policy results in information that
is relevant and reliable.
c. Yes, but only if the change makes the financial statements more
relevant to the economic decision-making needs of users and no less
reliable, or more reliable and no less relevant to those needs.
d. No, entities would be permitted to change accounting policy only on
adoption of a new or revised Standard that replaces the existing
requirements in PFRS 6.
(Adapted)
14. According to PFRS 6, an entity shall classify exploration and evaluation

assets as
a. tangible or intangible according to the nature of the assets
b. depreciable or non-depreciable according to the nature of the assets
c. exploration and development
d. movable or immovable
15. An exploration and evaluation asset

a. shall be measured initially and subsequently at cost less any
accumulated depreciation and impairment loss but shall not be
measured at revalued amount.
b. shall never be subsequently restated at revalued amount
c. shall continue to be classified as such until commercial production
commences.
d. shall no longer be classified as such when the technical feasibility and
commercial viability of extracting a mineral resource are
demonstrable.
16. These assets are physically consumed and are irreplaceable.

a. consumable c. wasting assets (natural resources)
b. bearer d. a or c
17. The cost of natural resources include

I. acquisition costs
II. exploration costs to the extent that they are capitalized in accordance
with an entity’ accounting policy
III. intangible development costs
IV. restoration or decommissioning costs.
18. Which of the following expenditures would never qualify as an

exploration and evaluation asset?
a. Expenditure for acquisition of rights to explore.
b. Expenditure for exploratory drilling.
c. Expenditures related to the development of mineral resources.
d. Expenditure for activities in relation to evaluating the technical
feasibility and commercial viability of extracting a mineral resource.
(Adapted)
19. Which measurement model applies to exploration and evaluation

assets subsequent to initial recognition?
a. The cost model. c. either a or b
b. The revaluation model. d. The recoverable amount model.
(Adapted)
20. Which of the following facts or circumstances would not trigger a need
to test an evaluation and exploration asset for impairment?
a. The expiration - or expected expiration in the near future -of the period
for which the entity has the right to explore in the specific area, unless
the right is expected to be renewed.
b. The absence of budgeted or planned substantive expenditure on
further exploration and evaluation activities in the specific area.
c. A decision to discontinue exploration and evaluation activities in the
specific area when those activities have not led to the discovery of
commercially viable quantities of mineral resources.
d. Lack of sufficient data to determine whether the carrying amount of
the exploration and evaluation asset is likely to be recovered in full
from successful development or by sale.
(Adapted)
21. Tangible development costs (tangible equipment costs) costs

a. are accounted for under PFRS 6
b. are capitalized as cost of natural resource and depreciated over the
economic life of the natural resource
c. are not capitalized as cost of natural resource but capitalized as
equipment and depreciated separately.
d. are development costs with no physical substance but nevertheless
treated as part of wasting asset because of the application of
substance over form
22. Tangible development (equipment) costs are sub-classified into

movable or immovable for purposes of subsequent depreciation. Which of
the following statements is correct?
I. Movable tangible equipment costs such as heavy equipment used from
one extracting site to another are depreciated separately over their
useful life.
II. Immovable tangible equipment costs such as drilling rig foundation are
depreciated separately over their useful life or the life of the resource,
whichever is shorter.
III. If the useful life of the immovable tangible equipment is shorter than
the economic life of the mine, units-of-production method should be
used to depreciate the equipment’s cost.
IV. If the useful life of the immovable tangible equipment is longer than
the economic life of the mine, no depreciation is recognized during a
period where there are no extraction activities.
a. I, II b. III, IV c. I, II, IV d. I, II, III, IV
23. Depletion is normally computed using

a. straight line c. units-of-production
b. SYD d. any of these
24. The depletion charge for each period

a. is expensed immediately
b. shall form part of operating expense when the extracted goods are
sold
c. shall initially form part of the cost of inventory and charged to expense
when the inventory is sold.
d. shall be presented in the statement of financial position until mineral
resources are fully depleted
25. Changes in residual value or estimated quantity of mineral reserves

are
a. changes in accounting estimates accounted for prospectively.
b. changes in accounting estimates accounted for retrospectively.
c. changes in accounting policy accounted for prospectively.
d. changes in accounting policy accounted for retrospectively.
26. Liquidating dividends received by a shareholder in a wasting asset

corporation
a. are return to capital and thus treated as reduction to investment
account
b. are return of capital and thus treated as income
c. are return on capital and thus treated as income
d. are return of capital and thus treated as reduction to investment
account
27. Provisions for restoration and decommissioning costs

a. are recognized only when the entity incurs legal obligation
b. are recognized only when the entity incurs present obligation
c. are recognized as a separate asset if the entity incurs present
obligation
d. are recognized as part of the cost of an asset only if the entity has
legal obligation.
28. Which of the following is correct regarding the accounting for

provisions for decommissioning and restoration costs?
I. The amount of decommissioning or restoration costs to be included as
part of the cost of an asset is the fair value of the estimated liability as
of initial recognition.
II. The provision shall be the best estimate of the expenditure required to
settle the present obligation.
III. The fair value of the obligation for restoration and decommissioning
cost is recorded under “Asset retirement obligation” (ARO) with a
corresponding debit to the related asset for the same amount.
IV. Periodic unwinding of the discount on the liability recognized for the
decommissioning or restoration cost shall be recognized in profit or
loss as a finance cost as it occurs.
V. Periodic unwinding of the discount on the liability does not affect
depletion or depreciation recognized for the period.
a. I, II, III b. I, II, IV c. I, II, III, IV d. I, II, III, IV, V
29. In the full cost method, oil firms:

a. are required to expense all oil-drilling costs resulting in dry holes.
b. must expense drilling costs which result in productive oil wells.
c. can capitalize all oil-drilling costs.
d. shall not reduce costs below their recoverable amounts
30. For charging depreciation, on which of the following assets is depletion

method adopted?
a. plant and machinery c. patents
b. goodwill d. wasting assets
31. Which of the following incorrectly refer to accounting for property,

plant and equipment?
I. Land improvements should never be depreciated since they are
attached to the land.
II. The cost of original installation of a machine should be credited to a
machinery account.
III. Natural resources are generally recorded at cost, including the cost of
exploration and development.
IV. In calculating depletion for a period, the residual value of acquired land
containing an ore deposit should be deducted from the total purchase
price.
V. If property, plant and equipment are stated at current valuation, the
financial position and progress of an enterprise will be more
realistically portrayed. The impression that the company is more
profitable than what it really is, is avoided.
a. III, IV, V b. I, II, V c. II, III, IV, V d. I, II
32. Development costs are divided into tangible equipment and intangible
development costs. The intangible development costs are generally
considered as part of the depletion base while tangible equipment are
normally not included in the depletion base.
I. Tangible equipment that can be moved and be used from one site to
another should be depreciated over their useful life or the life of the
wasting asset whichever is shorter.
II. Tangible equipment that cannot be moved and does not have
alternative use (cannot be used from one site to another) should be
depreciated over their useful life or the life of the wasting asset
whichever is shorter.
33. Development costs represent

a. the price paid to obtain the property right to search and find an
undiscovered natural resource
b. the costs incurred in extracting or exploiting the natural resource
c. the costs incurred in locating the natural resource that can be
economically extracted
d. the costs incurred to bring back the wasting asset to its natural state
after extraction has occurred
(AICPA)
34. Which of the following models may be applied by entities for the
measurement after recognition of exploration and evaluation assets, in
accordance with PFRS6 Exploration for and evaluation of mineral
resources?
a Cost d. Present value
b. Revaluation e. a or b
c. Realization
(ACCA)
35. Does PFRS6 Exploration for and evaluation of mineral resources apply
to the following types of expenditure?
I. The extraction and processing of mineral resources for transport to
market.
II. The commercial review of possible areas for mineral extraction before
bidding for the legal rights to explore a specific area.
a. No, no b. No, Yes c. Yes, No d. Yes, yes
36. The Strider Company is involved in the exploration for mineral

resources. Its policy is to recognize exploration assets and measure them
initially at cost. It is currently exploring a new gas field in Ruritania. The
exploration license for the new Ruritanian gas field is about to expire and
Strider is now preparing to undertake an impairment review. Strider
reports its financial performance as 'Mineral Production' and 'Energy
Trading' in its financial statements in accordance with PFRS8 Operating
segments. The Mineral Production segment comprises two cash-
generating units – 'oil production' and 'gas production'. In accordance with
PFRS 6 Exploration for and evaluation of mineral resources, what is the
highest level at which the impairment test can be undertaken?
a. A cash-generating unit based on the assets in the Ruritanian gas field
b. Gas production cash-generating unit
c. Oil production and gas production cash-generating units combined
d. A cash-generating unit at The Strider Company level
(ACCA)
37. Which of the following is not a disclosure required by PFRS 6?

a. Information about commercial reserve quantities.
b. Accounting policies for exploration and evaluation expenditures,
including the recognition of exploration and evaluation assets.
c. The amounts of assets, liabilities, income and expense, and operating
and investing cash flows arising from the exploration for and
evaluation of mineral resources.
d. Information that identifies and explains the amounts recognized in the
financial statements arising from the exploration for and evaluation of
mineral resources.
(Adapted)
38. Under which of the following methods is depreciation computed in the

same way as depletion is computed?
a. Straight-line c. Double-declining-balance
b. Sum-of-the-years-digits d. Productive-output
Chapter 17
Government Grants

Scope
1. PAS 20 applies to which of the following?
a. accounting for government grants under hyperinflationary economies
b. tax benefits such as income tax holidays, investment tax credits,
accelerated depreciation allowances and reduced income tax rates
c. government participation in the ownership of the entity
d. government grants related to biological assets measured at fair value
less costs to sell.
e. The benefit of a government loan at a below-market rate of interest.
2. Under PAS 20, it is action by government designed to provide an
economic benefit specific to an entity or range of entities qualifying under
certain criteria. It does not include benefits provided only indirectly
through action affecting general trading conditions, such as the provision
of infrastructure in development areas or the imposition of trading
constraints on competitors.
a. Government assistance c. Grants related to assets
b. Government grants d. Grants related to income
3. Under PAS 20, these are assistance by government in the form of

transfers of resources to an entity in return for past or future compliance
with certain conditions relating to the operating activities of the entity.
They exclude those which cannot reasonably have a value placed upon
them and transactions with government which cannot be distinguished
from the normal trading transactions of the entity.
4. Which of the following is not a term used as substitute for government

grants?
a. subsidies c. premiums
b. subventions d. income tax holiday
5. Which of the following may not form a valid basis for the accounting for
government grants?
a. cost principle c. full disclosure
b. matching d. comparability
6. Which of the following is not specifically excluded from the purview of PAS
20?
a. Government participation in ownership of the entity.
b. Government grant covered by PAS 41.
c. Government assistance provided in the form of tax benefits.
d. Forgivable loan from the government.
(Adapted)
7. Which of the following statements incorrectly relate to the scope of PAS

20?
a. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance.
b. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and other forms of government assistance.
c. PAS 20 does not deal with the special problems arising in the
accounting for government grants in financial statements reflecting the
effects of changing prices or in supplementary information of a similar
nature.
d. PAS 20 does not deal with government assistance that is provided for
an entity in the form of benefits that are available in determining
taxable profit or tax loss, or are determined or limited on the basis of
income tax liability. Examples of such benefits are income tax holidays,
investment tax credits, accelerated depreciation allowances and
reduced income tax rates.
e. PAS 20 does not deal with government participation in the ownership
of the entity and government grants covered by PAS 41 Agriculture.
Recognition
8. When shall an entity recognize government grants?
a. when there is reasonable assurance that the entity will comply with the
conditions attaching to grants
b. when the grants are received
c. when there is reasonable assurance that the grants will be received
d. a and c
9. In relation to the accounting for government grants, which of the following

is true?
a. The receipt of a grant is of itself provides conclusive evidence that the
conditions attaching to the grant have been or will be fulfilled.
b. Government assistance that qualify as government grants are
disclosed but not accounted for under PAS 20.
c. Government assistance that do not qualify as government grants are
accounted for and disclosed under PAS 20.
d. Government grants, including non-monetary grants at fair value, shall
not be recognized until there is reasonable assurance that the entity
will comply with the conditions attaching to them and the grants will
be received
10. Which of the following are considered characteristics of a recognized

government grant?
I. An economic benefit received from the government
II. Direct benefits is specific to the recipient entity
III. With measurable value
IV. Received or receivable in return for past or future compliance with
attached condition
V. There is reasonable assurance that the recipient entity will comply to
the attached conditions and that the grant will be received.
VI. Direct recognition in equity.
a. I, II, III b. I, II, III, IV c. I, II, III, IV, V d. all of these
11. Under PAS 20, this refers to government, government agencies and
similar bodies whether local, national or international.
a. Government c. Internal Revenue Services
b. Regulatory agencies d. Securities Commission
12. Under PAS 20, these are government grants whose primary condition is
that an entity qualifying for them should purchase, construct or otherwise
acquire long-term assets. Subsidiary conditions may also be attached
restricting the type or location of the assets or the periods during which
they are to be acquired or held.
13. Under PAS 20, these are government grants other than those related
to assets.
14. Which of the following is a government grant related to asset?

a. Cash received to defray costs already incurred by an entity.
b. Financial aid received from the government to compensate for casualty
losses incurred
c. Cash received to aid an entity in its “clean and green” program
d. Land received from government with the condition that a building
should be constructed on it.
15. Which of the following is a government grant related to income?

a. Cash received from the government to be used in acquiring
equipment.
b. Land received from government with the condition that a building
should be constructed on it.
c. Marketing advice received from a government agency.
d. Financial aid received from the government to compensate for casualty
losses incurred
16. Monetary grants are measured at the

a. amount of cash received
b. the fair value of amount receivable
c. carrying amount of loan payable to government for which repayment is
forgiven
d. discount on loan payable to government at a below-market rate of
interest.
e. any of these
17. Non-monetary grants are measured at the

a. fair value of non-monetary asset received
b. at nominal amount or zero, plus direct costs incurred in preparing the
asset for its intended use
c. amount of cash received
d. a or b
18. A donated fixed asset received as government grant for which the fair
value has been determined should be recorded as a debit to fixed asset
and a credit to
a. retained earnings c. deferred income
b. additional paid-in capital d. other income
19. Under PAS 20, these are loans which the lender undertakes to waive
repayment of under certain prescribed conditions.
a. Non-derivative financial assets with fixed or determinable payments
b. Waivable loans
c. Agricultural loans
d. Forgivable loans
20. A forgivable loan from government is treated as a government grant

when
a. there is reasonable assurance that the entity will meet the terms for
forgiveness of the loan.
b. the loan is forgiven
c. there is reasonable assurance that the loan will not be repaid in the
future
d. under no circumstance
21. The benefit of a below-market rate of interest loan from the

government is measured
a. as the fair value of the loan at date of grant
b. as the amount needed to settle the liability at maturity
c. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the proceeds received.
d. as the difference between the initial carrying amount of the loan
determined in accordance with PFRS 9 and the present value of the
loan.
22. Which approach is used to account for government grants?

a. Capital approach c. Gentle approach
b. Romantic approach d. Income approach
23. Which of the following is correct regarding the recognition of

government grants?
a. Government grants shall be recognized in equity on a systematic basis
over the periods in which the entity recognizes as expenses the related
costs for which the grants are intended to compensate.
b. Government grants shall be recognized in profit or loss immediately on
grant date.
c. Government grants shall be recognized in profit or loss on a systematic
basis over the periods in which the entity recognizes as expenses the
related costs for which the grants are intended to compensate.
d. Government grants shall be recognized immediately in equity on grant
date.
24. Which of the following is the least desirable accounting procedure for
government grants?
a. Government grants are recognized immediately in profit or loss if the
related costs for which the grants are intended to compensate have
already been incurred.
b. Government grants are initially deferred if the related costs for which
the grants are intended to compensate are not yet incurred.
c. Government grants are not immediately recognized in profit or loss but
rather amortized to profit or loss as the costs for which the grants are
intended to compensate are being incurred.
d. Government grants are recognized in profit or loss on a receipts basis.
25. Which of the following is not applied when accounting for government
grants?
a. matching c. cash basis accounting
b. accrual accounting d. income recognition
26. The use of cash basis of accounting to account for government grants
is permitted
a. only if no basis existed for allocating a grant to periods other than the
one in which it was received.
b. only if there is no reasonable assurance that the entity will comply with
the conditions attached to the grant.
c. only if, at initial recognition, there is no reasonable basis that the grant
will be received
d. under no circumstance
27. Which of the following is an acceptable accounting procedure for

government grants?
I. Income from government grant is recognized in the period the costs or
expenses related to the government grant are recognized.
II. Grants related to depreciable assets are usually recognized in profit or
loss over the periods and in the proportions in which depreciation
expense on those assets is recognized.
III. Grants related to non-depreciable assets are recognized in profit or
loss as depreciation expense is recognized on a related depreciable
asset for which the grant was received.
IV. A government grant that becomes receivable as compensation for
expenses or losses already incurred or for the purpose of giving
immediate financial support to the entity with no future related costs
shall be recognized in profit or loss in the period in which it becomes
receivable.
V. Grants in the form of tax benefits are recognized in profit or loss when
the related deferred tax liability reverses.
a. I, II b. II, III, IV c. I, II, III, IV d. I, II, III, IV, V
28. Which of the following grants shall be recognized in profit or loss

immediately?
a. The government makes a grant to a start-up entity writing teaching
software for children with learning difficulties. The purpose of the grant
is to help with general financing on start up, and there are no further
conditions attaching to the grant.
b. The area where an entity operates was struck by a super-typhoon.
Various properties were destroyed. Accordingly, the entity received
₱10M as financial aid.
c. A manufacturing entity sets up a plant in an area of high
unemployment. A grant of ₱4 million is receivable if it continues to
employ at least 100 people over a period of four years. It is highly
probable it will do so. ₱2 million of the grant is to be received
immediately and a further ₱2 million is receivable in four years’ time.
d. a and b
29. Which of the following grants shall be recognized in profit or loss

periodically as the related costs are incurred?
a. An agricultural research entity is given land that belonged to the
government to set up a new laboratory and to investigate new farming
methods.
b. Free technical advice is provided by the government to help an export
entity to market its new technology in North America.
c. A local government made public improvements in the area where an
entity operates. The public improvements increased business in the
area since it became more accessible to customers. Also, the value of
land in the area increased.
d. An entity operating in an economic zone was awarded a tax holiday of
5 years in the condition that the entity should continue to operate for
at least 10 years and that it should employ only residents from the
area.
30. In relation to a benefit included in the term 'government assistance',

are the following statements true or false according to PAS20
Government grants and government assistance?
I. The provision of infrastructure in developing areas is a benefit.
II. The imposition of trading constraints on competitors is a benefit.
(ACCA)
31. PAS 20 shall be applied in accounting for, and in the disclosure of,
government grants and in the disclosure of other forms of government
assistance. In the case of a nonmonetary grant, which of the following
accounting treatments is prescribed by PAS 20?
a. Record the asset at replacement cost and the grant at a nominal value.
b. Record the grant at a value estimated by management.
c. Record both the grant and the asset at fair value of the nonmonetary
asset.
d. Record only the asset at fair value; do not recognize the fair value of
the grant.
(Adapted)
32. An unrestricted grant received from the government to support
enterprise fund operations should be reported as
a. Contributed capital. c. Revenue
b. Income. d. Revenues and expenditures.
(AICPA)
33. To induce MONARCHY “KING, QUEEN, OR EMPEROR” Co. to do business

in Baguio City, the City government donated a factory site to the
company. The donation may be reflected in the books of Monarchy at
a. cost of titling the site c. current market value
b. nominal value d. either a, b or c
(AICPA)
34. ARISTOCRACY County owned an idle parcel of real estate consisting of

land and a factory building. Aristocracy gave title to this realty to
ARISTOCRAT Co. as an incentive for Aristocrat to establish manufacturing
operations in the County. Aristocrat paid nothing for this realty, which had
a fair market value of ₱250,000 at the date of the grant. Aristocrat should
record this nonmonetary transaction as a
a. memo entry only.
b. credit to deferred income for ₱250,000.
c. credit to income for ₱250,000.
d. credit to donated capital for ₱250,000.
(AICPA)
35. A plant site donated by a township to a manufacturer that plans to

open a new factory should be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. “b” but alternatively, the entity may use “a”
d. not recorded
(AICPA)
36. An entity donated land to a municipality for a park. The acquisition cost
of the land was ₱75,000, and the revalued carrying amount at the time of
the donation was ₱200,000 as determined by a professional appraiser. If
the enterprise has adopted the allowed alternative treatment for
measurement of property, plant, and equipment subsequent to initial
recognition, the journal entry to record the disposition of the land is
a Land 75,00
. 0
Deferred 75,000
income
b Land 125,0
. 00
Revaluation 125,000
surplus
Revaluation 125,0
surplus 00
Income 125,000
Expense 75,00
0
Land 75,000
c Expense 200,0
. 00
Revaluation 125,0
surplus 00
Land 200,000
Retained 125,000
earnings
d Donation expense 200,0
. 00
Land 75,000
Income 125,000
37. On January 1, 20x1, DEMOCRACY “RULE BY THE PEOPLE” Company

commenced trading to provide key skills education facilities in a region
identified for technology development. Also on January 1, 20x1, the
company received two grants from its government for setting up its
operations in this location:
Grant (a) – was paid to give financial assistance for start-up costs already
incurred.
Grant (b) – was paid to subsidize the costs of purchasing computer software
over the five-year period.
The company is almost certain to keep the facilities operational for the next
five years. The company's accounting year end is December 31. Are the
following statements concerning recognition of the income from the two
government grants true or false, according to PAS 20 Government grants
and government assistance?
(1) Income from Grant (a) should be recognized in full on receipt in 20x1.
(2) Income from Grant (b) should be recognized in full at the end of 5 years.
(ACCA)
Presentation
38. REPUBLIC “PEOPLE ELECT” Company purchased a major new piece of
machinery for ₱10 million on January 1, 20x1. It will depreciate this
machinery on a straight line basis over its useful life of 10 years,
assuming a zero residual value. Also on January 1, 20x1 the company
received a government grant of ₱1 million to help finance this machinery.
According to PAS20 Government grants and government assistance, which, if

either, of the following methods would be an acceptable treatment of this
machinery and the related government grant in the company's statement of
financial position at December 31, 20x1?
Method 1 Method 2
Non-current asset Non-current asset
Cost 9,000,000 Cost 10,000,000
Depreciation 900,000 Depreciation 1,000,000
Carrying amount 8,100,000 Carrying amount 9,000,000
Deferred income 900,000
a. Method 1 only c. Neither method

b. Method 2 only d. Method 1 or Method 2
(ACCA)
39. In the case of grants related to an asset, which of these accounting

treatments (balance sheet presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in
the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at
the carrying amount of the asset.
c. Record the grant at fair value in the first year and take it to income in
the subsequent year.
d. Take it to the income statement and disclose it as an extraordinary
gain.
(Adapted)
40. In the case of grants related to income, which of these accounting

treatments is prescribed by PAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the income statement as “other income”’ or as a
separate line item, or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the
income statement.
(Adapted)
Repayment of government grants

41. Which of the following statements are correct according to PAS20
Government grants and government assistance?
I. Any adjustment needed when a government grant becomes repayable
is accounted for as a change in accounting estimate
II. In respect of loans from the government at an interest rate of 0%, an
interest charge should be made periodically in profit or loss
III. Where conditions apply to a government grant, it should only be
recognized when there is reasonable assurance that the conditions will
be met
IV. A government grant should not be recognized until it is received in
cash
a. I, III b. I, II, III c. I, III, IV d. I, II, III, IV
(ACCA)

a. A donated machinery equipment for which the fair value has been
determined and for which installation costs were incurred should be
measured at its carrying amount on the books of the donee plus
installation cost incurred.
b. Donations of property, plant and equipment received from
shareholders should be recorded at the fair value of the donated asset.
c. A donated fixed asset received as government grant and for which the
fair value has been determined should be recorded as a debit to fixed
asset and credit to other income.
d. A government grant that becomes repayable is accounted for
retrospectively.
Disclosure
43. Which of these disclosures is not required by PAS 20?
a. The accounting policy adopted for government grants, including
methods of presentation adopted in the financial statements.
b. Unfulfilled conditions and other contingencies attaching to government
assistance.
c. The names of the government agencies that gave the grants along
with the dates of sanction of the grants by these government agencies
and the dates when cash was received in case of monetary grants.
d. The nature and extent of government grants recognized in the
financial statements and an indication of other forms of government
assistance from which the entity has directly benefited.
(Adapted)
Chapter 18
Borrowing Costs

Scope
1. Which of the following is the core principle under PAS 23?
a. Borrowing costs incurred in the acquisition, construction or production
of a qualifying asset is expensed. Alternatively, such borrowing costs
may be capitalized.
b. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of
that asset. Other borrowing costs are recognized as an expense.
c. Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of
that asset. Alternatively, such borrowing costs are recognized as an
expense.
d. Borrowing costs that are directly attributable to the acquisition,
construction or production of any long-lived asset form part of the cost
of that asset. Alternatively, such borrowing costs are recognized as an
expense.
2. PAS 23 may be applied to which of the following?

a. actual or imputed cost of equity and interest expense on callable
preference shares.
b. interest expense incurred on borrowings taken to finance the
acquisition of qualifying assets measured at fair value
c. borrowing costs incurred related to the production of inventories that
are manufactured in large quantities on a repetitive basis.
d. interest expense incurred on financial liabilities measured at amortized
cost under the effective interest method.
3. These refer to interest and other costs incurred by an entity in connection

with the borrowing of funds.
a. borrowed costs c. borrowing costs
b. interest income d. cost of qualifying asset
4. Borrowing costs subject to accounting under PAS 23 include all of the
following except
a. interest expense calculated using the effective interest method
b. interest expense incurred on finance leases
c. exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.
d. interest expense incurred on redeemable preference shares
e. all of these may be subject to accounting under PAS 23
5. It is an asset that necessarily takes a substantial period of time to get

ready for its intended use or sale.
a. qualified asset c. Nine-nine asset
b. qualifying asset d. deferred asset
6. Which of the following assets may not qualify as a qualifying asset?

a. Inventories
b. Property, plant and equipment
c. Investment property measured under the fair model
d. Intangible assets
7. Which of the following may qualify as a qualifying asset?

a. Financial assets
b. Inventories that are produced over a short period of time.
c. Assets that are ready for their intended use or sale when acquired
d. Assets that are routinely manufactured or produced in large quantities
on a repetitive basis.
e. Biological asset measured at cost
8. Which of the following may qualify as a qualifying asset?

a. 100-storey building purchased from a contractor
b. Titanic ship that took 100 years to construct, purchased from a retail
store
c. Movie that takes 10 years to shoot
d. Building that takes 3 years to construct, to be classified as investment
property under fair value model
e. Fish balls
9. Which of the following may not be considered a “qualifying asset” under

PAS 23?
a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
(Adapted)
10. What type of borrowing costs is eligible for capitalization under PAS
23?
a. avoidable borrowing costs
b. non-avoidable borrowing costs
c. non-payable borrowing costs
d. either a or b
11. Which of the following principles supports the capitalization of interest?

a. Conservatism c. Full-disclosure
b. Matching d. Relevance
(CGA)
12. Borrowing costs can be capitalized as part of the asset under PAS 23
when
a. They are a qualifying asset and the entity has opted for the benchmark
treatment under PAS 23.
b. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, but it is not probable that they will
result in future economic benefits to the entity.
c. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will
result in future economic benefits to the entity, but the costs cannot be
measured reliably.
d. They are a qualifying asset; the entity has opted for the allowed
alternative treatment under PAS 23, and it is probable that they will
result in future economic benefits to the entity, but the costs cannot be
measured reliably.
e. The borrowing costs are directly attributable to the acquisition,
construction or production of a qualifying asset. Other borrowing costs
are recognized as expense in the period in which the entity incurs
them.
(Adapted)
Recognition
13. Under PAS 23, the capitalization of borrowing costs as part of the cost
of a qualifying asset commences on the date when which of the following
conditions is met?
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
c. It undertakes activities that are necessary to prepare the asset for its
intended use or sale
d. all of these
14. Which of the following statements regarding the provisions of PAS 23 is

not true?
a. Borrowing costs eligible for capitalization are those that would have
been avoided if the expenditure on the qualifying asset had not been
made.
b. Expenditures on a qualifying asset include only those expenditures
that have resulted in payments of cash, transfers of other assets, or
the assumption of interest-bearing liabilities.
c. Expenditures are reduced by any progress payments received and
grants received in connection with the asset.
d. The average carrying amount of the asset during a period, excluding
borrowing costs previously capitalized, is the expenditures to which the
capitalization rate is applied in that period.
15. Which of the following costs may not be eligible for capitalization as
borrowing costs under PAS 23?
a. Interest on bonds issued to finance the construction of a qualifying
asset.
b. Amortization of discounts or premiums relating to borrowings that
qualifies for capitalization.
c. Imputed cost of equity.
d. d Exchange differences arising from foreign currency borrowings to the
extent they are regarded as an adjustment to interest costs pertaining
to a qualifying asset.
(Adapted)
16. In which of the following instances is an entity not permitted under PAS
23 to capitalize borrowing costs?
a. Prior to the start of physical construction but where technical and
administrative work are being performed.
b. During the period of actual physical construction.
c. During the period when an asset is being held but no production or
development is being made.
d. a and c
17. Capitalization of borrowing costs

a. Shall be suspended during temporary periods of delay.
b. May be suspended only during extended periods of delays in which
active development is delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended periods of delays in which
active development is delayed.
(Adapted)
18. Which of the following is true according to PAS 23?

I. There is no limit on the capitalization of borrowing costs for as long as
the amount capitalized does not exceed the actual borrowing costs
incurred during the period.
II. All borrowing costs on general borrowings taken to finance the
construction of a qualifying asset `may be capitalized, even if the
borrowing costs are unavoidable.
a. True, true b. True, false c. False, true d. False,
false
19. Under PAS 23, capitalization of borrowing costs is suspended

a. when there is temporary delay that is a necessary part of the process
of getting an asset ready for its intended use
b. during a period where substantial technical and administrative work is
being performed
c. during extended periods of suspension of active development of a
qualifying asset
d. when the construction of the asset is completed
20. Under PAS 23, an entity shall cease capitalizing borrowing costs when
a. substantially all the activities necessary to prepare the qualifying asset
for its intended use or sale are complete.
b. the physical construction of the asset is complete even though routine
administrative work might still continue
c. only minor modifications are all that are outstanding
d. any of these
21. Capitalization of borrowing costs is permitted during the period

activities necessary to prepare the asset for its intended use or sale are
being undertaken. Which of the following is not among the necessary
activities?
a. Technical and administrative work prior to the start of physical
construction such as obtaining permits to construct.
b. Actual physical construction.
c. Negotiation is being made with a government official regarding his fair
share so the construction can begin.
d. Merely holding asset when no production or development is being
made.
22. Activities necessary in preparing a qualifying asset for its intended use
or sale encompasses more than physical construction. Which of the
following is a necessary activity which is not physical construction?
a. excavation in preparation for the construction of a structure’s
foundation
b. survey of land prior to actual construction
c. obtaining permit to start construction and performing technical
planning
d. preparing PERT, Gantt Chart or CPM before construction of a small
public toilet
23. In which of the following may capitalization of borrowing costs not be

suspended?
a. Construction is delayed in order to give pavements and other
cemented structures time to fully harden.
b. Construction of a bridge is delayed due to high levels of water which is
common at the construction site.
c. Construction is delayed; however, substantial technical and
administrative work is being performed.
d. The foreman lost his arm due to an accident at the construction site.
e. The capitalization of borrowing costs is not suspended in any of these.
24. In which of the following may capitalization of borrowing costs be

suspended?
a. The accountant lost his calculator and cannot account for the costs of
snacks of workers consisting of banana-Q and sago.
b. Mr. Politician’s daughter is wed and all contractors and workers were
invited.
c. Construction is temporarily delayed due to a typhoon.
d. Construction is delayed because the contractor spent the entire
construction fund at the beer house; it would take up a very long
period to put up the lost fund.
25. The borrowing costs from specific borrowings that are eligible for
capitalization is computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average expenditures
d. Total borrowings minus average expenditures multiplied by
capitalization rate
26. The borrowing costs from general borrowings that are eligible for
capitalization may be computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average carrying amount of qualifying
asset
d. Total borrowings minus average expenditures multiplied by
capitalization rate
27. A company is constructing an asset for its own use. Construction began
in 20x1. The asset is being financed entirely with a specific new
borrowing. Construction expenditures were made in 20x1 and 20x2 at the
end of each quarter. The total amount of interest cost capitalized in 20x2
should be determined by applying the interest rate on the specific new
borrowing to the
a. total accumulated expenditures for the asset in 20x1 and 20x2.
b. average accumulated expenditures for the asset in 20x1 and 20x2.
c. average expenditures for the asset in 20x2.
d. total expenditures for the asset in 20x2.
(AICPA)
28. Which of the following assets do not qualify for capitalization of

interest costs incurred during construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete
projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare
them for their intended use.
(AICPA)
29. Assets that qualify for interest cost capitalization include

a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the
company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
(AICPA)
30. When computing the amount of interest cost to be capitalized, the

concept of "avoidable interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if
expenditures for asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest
cost was incurred.
31. The period of time during which interest must be capitalized ends
when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended
use have begun.
(AICPA)
32. Which of the following statements is true regarding capitalization of

interest?
a. Interest cost capitalized in connection with the purchase of land to be
used as a building site should be debited to the land account and not
to the building account.
b. The amount of interest cost capitalized during the period should not
exceed the actual interest cost incurred.
c. When excess borrowed funds from general borrowings not immediately
needed for construction are temporarily invested, any interest earned
should be offset against interest cost incurred when determining the
amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by
multiplying a weighted average interest rate by the amount of average
accumulated expenditures on qualifying assets during the period.
(AICPA)
33. Construction of a qualifying asset is started on April 1 and finished on

December 1. The fraction used to multiply an expenditure made on April
1 to find weighted-average accumulated expenditures is
a. 8/8. b. 8/12. c. 9/12. d. 11/12.
(AICPA)
34. When funds are borrowed to pay for construction of assets that qualify
for capitalization of interest, the excess funds not needed immediately
may be temporarily invested in interest-bearing securities. Interest
earned on these temporary investments should be
a. offset against interest cost to be capitalized
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of
interest to be capitalized.
d. recognized as revenue of the period.
(AICPA)
35. Interest cost that is capitalized should

a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off
equally over a 40-year period.
c. not be written off until the related asset is fully depreciated or
disposed of.
d. none of these.
(AICPA)
36. During 2002, TIER ROW Co. constructed machinery for its own use and
for sale to customers. Machines sold to customers are manufactured in
large quantities on a repetitive basis. Bank loans financed the
construction of these assets, both during and after construction were
complete. How much of the interest incurred should be reported as
interest expense in the 2002 income statement?
Interest incurred for machinery Interest incurred for
machinery
constructed for own use held for sale
a. All interest incurred All interest
incurred
b. All interest incurred Interest incurred after
completion
c. Interest incurred after completion Interest incurred after
completion
d. Interest incurred after completion All interest incurred
(Adapted)
37. It is permissible to capitalize interest on

a. assets that are not being used in earning activities of the entity and
that are not undergoing the activities necessary to get them ready for
such use.
b. assets manufactured in large quantities on a repetitive basis
c. assets that are already are in use or are ready for their intended use in
the earning activities on the entity.
d. assets under construction.
38. The following statements relate to the cost of self-constructed assets

I. Direct cost of materials and labor as well as indirect costs and
incremental overhead specifically identifiable and traceable to the
construction shall be capitalized.
II. Financing costs attributable to a long-term construction project that
are incurred up to the completion of construction are to be included in
the gross carrying amount of the asset to which they relate
III. Cost inefficiencies, whether due to temporary idle capacity, industrial
disputes or other causes, should be included as part of the cost of the
asset
a. True, true, true c. True, true, false
b. True, false, true d. True, false, false
39. After determining which items on the balance sheet properly comprise
the basis of interest capitalization for operational assets under
construction, the interest calculation is based on the:
a. accumulated borrowing used only for the construction.
b. accumulated expenditures on qualifying assets as of the start of the
construction period.
c. average accumulated expenditures on qualifying assets during the
d. accumulated expenditures on qualifying assets as of the end of the
40. The interest capitalization period for a self-constructed asset begins

when certain conditions are met. Which of the following is not one of
these conditions?
a. Activities necessary to get the asset ready for its intended use actually
are in progress.
b. Qualifying expenditures for the asset have actually been made.
c. Interest cost has actually been incurred.
d. Liabilities, such as trade payables or accruals, are incurred in
connection with the asset.
41. Which of the following costs generally would be capitalized to property,

plant, and equipment account?
a. Interest on debt incurred to purchase the item
b. Property taxes relating to periods after acquisition
c. Import duties incurred on purchase
d. Freight-out
(Adapted)
42. 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 under PAS 16?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed.
c. Freight charges should be capitalized but interest cannot be capitalized
under these circumstances.
d. Both expenses should be expensed.
(Adapted)
43. A firm decides to capitalize the interest expenditure on a large,

building construction project, instead of expensing it. This ________ its
debt-to-equity ratio.
a. has an ambiguous effect on c. decreases
b. leaves unaffected d. increases
(Adapted)
44. According to PAS23 Borrowing costs, which of the following assets

could be treated as qualifying assets for the purpose of capitalizing
interest costs?
I. Investment property
II. Investments in financial instruments
III. Inventory of finished goods produced over a short period of time
IV. Power generation facilities
a. I, II, III b. I, III, IV c. I, II, IV d. I, IV
(ACCA)
45. According to PAS23 Borrowing costs, which of the following statements

about the capitalization of borrowing costs as part of the cost of a
qualifying asset is true?
a. If funds come from general borrowings, the amount to be capitalized is
based on the weighted average cost of borrowing
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset
is incurred
d. Capitalization always commences as soon as interest on relevant
borrowings is being incurred
(ACCA)
46. The following events take place: An entity buys some land on
December 1. Planning permission is obtained on January 31. Payment for
the land is deferred until February 1. The entity takes out a loan to cover
the cost of the land and the construction of the building on February 1.
Due to adverse weather conditions there is a delay in starting the building
work for six weeks and work does not commence until March 15.
Capitalization of borrowing costs will start on
a. December 1 b. January 1 c. February 1 d. March
15
(ACCA)
47. If the acquisition or construction of a qualifying asset has been

financed partly through specific and partly through general borrowings,
then when computing for the borrowing costs eligible for capitalization
a. the capitalization rate shall be multiplied to the average expenditures
during the year
b. the capitalization rate shall be multiplied to the average carrying
amount of the qualifying asset financed through specific borrowings
c. the capitalization rate shall be multiplied to the average carrying
amount of the qualifying asset financed through general borrowings
d. the borrowing costs are treated as incurred on general borrowings only
48. Which of the following statements is true in relation to PAS 23?

I. The capitalization rate is computed as the ratio of borrowing costs
incurred on general borrowings over total general borrowings.
II. The borrowing cost to be capitalized during the period should exceed
the actual borrowing costs incurred for that period.
49. Which of the following is not a disclosure requirement under PAS 23?
a. Accounting policy adopted for borrowing costs.
b. Amount of borrowing costs capitalized during the period.
c. Segregation of assets that are “qualifying assets” from other assets on
the balance sheet or as a disclosure in the footnotes to the financial
statements.
d. Capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.
(Adapted)
Chapter 19
Investment Property
Scope
1. PAS 40 shall be applied to which of the following?
a. biological assets related to agricultural activity
b. inventories held for sale in the ordinary course of business
c. mineral rights and mineral reserves such as oil, natural gas and similar
non-regenerative resources.
d. building that is vacant but is held to be leased out under one or more
operating leases
2. A factory is in the process of being constructed on behalf of the

government. The property should be accounted for under
3. A new office building used by an insurance entity as its head office which
was purchased specifically in the center of a major city in order to exploit
its capital gains potential. The property should be accounted for under
4. The applicable PFRS/PAS for a property being constructed or developed

for future use as investment property is
a. PAS 2, Inventories, until construction is complete and then it is
accounted for under PAS 40, Investment Property.
b. PAS 40, Investment Property.
c. PAS 11, Construction Contracts, until construction is complete and then
it is accounted for under PAS 40, Investment Property.
d. PAS 16, Property, Plant, and Equipment, until construction is complete
and then it is accounted for under PAS 40, Investment Property.
(Adapted)
5. Which of the following statements best describe 'owner-occupied

property', according to PAS40 Investment property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services
c. Property held to earn rentals
d. Property held for administrative purposes
e. b and d
(ACCA)
Recognition and derecognition

6. Which of the following would be reported as Investment Property?
a. Property that is being constructed or developed for future use as
owner-occupied property.
b. Property that is leased to another entity under a finance lease.
c. Owned-occupied property awaiting sale.
d. Property available for lease.
7. Which of the following would not be reported as investment property?

a. Property owned by the entity and leased out under one or more
operating leases.
b. Property held by the entity under finance lease to be leased out under
one or more operating leases
c. Real estate held for an undetermined future use.
d. Property owned by the entity and leased out to another entity under a
finance lease.
8. A property will be classified as investment property if

a. it is leased under a finance lease
b. the owner-occupied portion is significant
c. the entity provides relatively insignificant ancillary services (security,
janitorial services) to the occupants of the property
d. it is rented out to a subsidiary and consolidated financial statements
are prepared
9. Investment properties are initially recognized at cost which comprises

purchase price and any directly attributable expenditure. Which of the
following may be treated as direct costs of acquisition and, therefore,
increases the cost to be initially recognized for the investment property?
a. Professional fees for legal services and property transfer taxes.
b. Start-up costs
c. Operating losses incurred before the investment property achieves the
planned level of occupancy
d. Abnormal amounts of wasted material, labor or other resources
incurred in constructing or developing the property
10. Which of the following is an investment property?

a. Properties currently being developed for sale
b. Investment properties that are currently being developed for future
use as owner-occupied property
c. Property that is leased out to another entity under a finance lease
d. Building rented out in an operating lease where the owner provides
minimal services
11. All of the following will not qualify as investment property, except?
a. Machineries that are held for lease
b. Hotels or motels
c. An agricultural land purchased for appreciation purposes
d. Equipment purchased for an indeterminate purpose
12. In accounting for investment property,

I. The cost model used for property, plant, and equipment is the same as
the cost model used for investment property.
II. The revaluation model used for property, plant, and equipment is the
same as the fair value model used for investment property.
13. Under PAS 40, in determining the fair value of an investment property,
which of following should not be considered?
a. contingent rent c. furniture included in rented property
b. future capital expenditure d. air-conditioning in a rental building
14. The fair value of an investment property excludes which of the

following?
a. prepaid or accrued operating lease income
b. equipment made an integral part of the property
c. future costs of day-to-day servicing of the asset
d. elevator in a building that is replaced every after 10 years.
15. Identify the correct statements from the following.

I. Investment property may be valued subsequent to initial recognition
using the cost model or the revaluation model.
II. Depreciable properties measured under the revaluation model are
subject to depreciation.
III. Depreciable investment properties measured under the fair value
model are not subject to depreciation.
IV. The fair value of a property classified as investment property
measured under the fair value model is required to be determined
more frequently than the fair value of a property measured under the
revaluation model.
a. I, II, III, IV b. II, III, IV c. III, IV d. III
16. An entity has a factory, which due to a decline in activity, is no longer

required and is now classified as held for sale. Which of the following is
correct?
a. The property may be classified as investment property if there is
commencement of development with view to sale.
b. The property should be measured using cost model or fair value model
but not both.
c. The property should still be depreciated if the property is measured
under fair value model.
d. The property is classified as held for sale and is not an investment
property.
17. An agricultural land is purchased for its investment potential. Planning

permission has not been obtained for building constructions of any kind.
Which of the following is correct?
a. the property should be classified as PPE
b. the property may be classified as investment property because of the
lack of permission
c. the property may be classified as investment property despite the lack
of permission
d. the property should be classified initially as investment property
pending the receipt of permission; after the receipt of permission, the
property should be classified as PPE.
18. A gain arising from a change in the fair value of an investment

property for which an entity has opted to use the fair value model is
recognized in
a. Profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. None of the above.
(Adapted)
19. Which of the following terms best describes property held to earn
rentals or for capital appreciation?
a. Freehold property c. Owner-occupied property
b. Leasehold property d. Investment property
(ACCA)
20. How does the fair value model differ from the revaluation model?
a. Increases in carrying amount above a cost-based measure are
recognized in equity
b. Changes in fair value are recognized through profit or loss
c. a and b
d. neither a nor b
21. Select the correct statement.

a. A leasing company should treat all of its assets used in providing lease
services as investment property
b. Investment properties that are to be disposed of without further
development are treated as investment property until they are
derecognized
c. All investment properties held for capital appreciation will be classified
as held for sale in the long run
d. Investment properties being re-developed as investment properties on
behalf of third parties are investment properties
22. The distinguishing characteristic that identifies an investment property

from other assets of an entity is?
a. Changes in fair value of the asset is charged to profit or loss
b. The property do not derive cash flows separate from other entities
c. Generates separately identifiable cash flows from other assets of
the entities
d. Earns rental as part of the ordinary operation of the entity
23. Which is not correct?

a. The entire asset is classified as property, plant and equipment if the
portion devoted to investment property is insignificant
b. If the portions of a building held partly for lease and partly for
administrative use cannot be sold separately, the entire property is
classified as owner-occupied if the portion used for administrative use
is more significant.
c. If services provided to the occupants of a building is significant in
relation to the whole arrangement, the building is classified as
investment property
d. Only the property interest in an asset acquired through a finance
lease is classified as investment property and not the property itself
24. Property interest held by the lessee under an operating lease may be
classified and accounted for:
a. As investment property at fair value
b. As property, plant and equipment at cost model
c. As intangible asset at cost
d. Either a or b
25. The initial cost of a property interest in an operating lease classified
as investment property shall be:
I. The fair value of the property interest
II. The present value of the minimum lease payments to the operating
lease
a. I only c. Whichever is lower between I and II
b. II only d. Whichever is higher between I and II
26. Regarding property interest in an operating lease, which of the

following can be classified as investment property?
a. Property interest in an operating lease that has no reliably
determinable fair value
b. Property interest in an operating lease wherein the underlying
premises is currently used by the owner for its regular operation
c. Property interest in an operating lease that is held for appreciation
by the lessee or wherein the underlying premises is held for sub-lease
by the lessee
d. Neither a, b nor c
27. Which of the following investment property will have a changed

classification in the Consolidated Financial Statements?
a. Investment properties that are intended by management to be
disposed of
b. Investment properties wherein owner occupation commenced during
the period
c. Investment properties that are leased out to affiliates or subsidiaries in
the consolidated group
d. Investment properties leased out to equity method investees
(Adapted)
28. Which is correct regarding the fair value model for investment
property?
a. Investment properties are initially measured as cost; subsequently,
they are measured at fair value, any fluctuations in fair value are
recognized as revaluation in equity similar to the revaluation model of
property, plant and equipment
b. Investment properties are initially measured at fair value, any
subsequent changes in fair value are recognized in profit or loss
c. Change of policy from the fair value model to the cost model is least
likely to happen
d. Investment properties are initially recognized at fair value, any
subsequent changes in fair value are recognized as revaluation in
equity
29. Which of the following circumstances demonstrate a change from

owner-occupied property to investment property?
a. Commencement of development with a view to sale
b. End of re-development of the investment property for use as
investment property
c. Commencement of owner occupation
d. End of use of property for administrative purposes to be leased in one
or more operating leases.
30. Which is incorrect regarding reclassification of investment properties?

a. Under the cost model, the carrying amount of the property when
classified as investment property is the deemed cost of the investment
property
b. Under the fair value model, any difference in fair value and the
carrying amount of an inventory classified as investment property is
recognized in profit or loss
c. The fair value of an investment property measured under the fair value
model that is reclassified to owner-occupied property at cost model is
considered the cost of the owner occupied property
d. When an owner occupied property under the revaluation model is
reclassified to investment property at cost model, the difference
between the carrying amount of the owner-occupied property and its
fair value at the time of reclassification is included in profit or loss
31. Select the incorrect statement.

a. Investment properties are intended for long-term appreciation while
held for sale assets are non-current assets held for immediate disposal
b. When the fair value of an investment property becomes
indeterminable, the fair value model is foregone
c. Investment property is held for appreciation or incidental operations
while owner-occupied property is directly employed in the operations
of the entity
d. Investment properties are not held for sale, inventories are held for
sale in the ordinary course of business
32. Which of the following properties fall under the definition of investment
property and therefore within the scope of PAS 40 Investment property?
I. Land held for long-term capital appreciation
II. Property occupied by an employee paying market rent
III. Property being constructed on behalf of third parties
IV. A building owned by an entity and leased out under an operating lease
a. I, II b. II, IV c. I, IV d. II, III, IV
33. Investment property is initially recognized at

a. cost
b. fair value
c. fair value plus transaction cost
d. cost if the entity follows the cost method; fair value if the entity follows
the fair value method
34. The initial cost of a property interest held under a finance lease and
classified as an investment property shall be
a. the fair value of the property
b. the present value of the minimum lease payments
c. the lower of the fair value of the property and the present value of the
minimum lease payments
d. the fair value of the property or the present value of the minimum
lease payments at the option of the entity
35. Which of the following generally provides the best evidence of fair
value for an investment property?
a. Discounted cash flow projections based on reliable estimates of future
cash flows.
b. Recent prices on less active markets with adjustments to reflect
changes in economic conditions.
c. Current prices for properties of a different nature or subject to different
conditions.
d. Current prices on an active market for similar property in the same
location and condition.
36. When a property interest in an operating lease is classified as

investment property?
a. The use of the fair value model becomes compulsory only for similar
property interests
b. The use of the fair value model becomes compulsory for all investment
properties
c. The use of the fair value model becomes the priority for all investment
properties
d. Either a and c
37. IRK ANNOY Co.’s investment in real property has carrying value of
₱1,000,000 under the fair value model, before adjustment. If the fair
market value at end of the year is ₱800,000, how much should be the
gain or loss on transfer if Irk would shift to cost model?
a. gain of ₱200,000 reported as other comprehensive income
b. loss of ₱200,000 reported as other loss in the income statement
c. loss of ₱200,000 reported in equity as decrease in revaluation surplus
d. none
(Adapted)
38. Which of the following does not indicate change in use of the property
and therefore precludes transfers to or from investment property
classification?
a. Start of owner occupation
b. End of owner occupation
c. Start of development with a view to sale
d. Entity decides to sell an investment property without development.
39. Under PAS40 Investment property, which of the following additional

disclosures must be made when an entity chooses the cost model as its
accounting policy for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
(ACCA)
40. PAS40 Investment property gives a choice between two different

models as the accounting policy to be used in relation to investment
property. Which of the following disclosures should be made when the fair
value model has been adopted?
a. Depreciation methods used
b. The amount of impairment losses recognized
c. Useful lives or depreciation rates used
d. Net gains or losses from fair value adjustments
(ACCA)
41. In case of property held under an operating lease and classified as

investment property
a. The entity has to account for the investment property under the cost
model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value
model.
d. The entity needs only to disclose the fair value and can use the cost
model under PAS 38.
(Adapted)
42. An investment property is derecognized when

a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. in any of these
(Adapted)
43. Derecognition of investment property will not be required when

a. it becomes the subject of an operating lease
b. it is sold
c. it becomes the subject of a sale and leaseback deal
d. it becomes the subject of finance lease
44. An entity has a factory that has been shut down for a year due to
various reasons, including worker unrest and strike. The entity plans to
sell this factory. It should
a. Classify the factory as investment property.
b. Classify the factory as property held for sale if all the requirements of
PFRS 5 Non-current Assets Held for Sale and Discontinued Operations
are met.
c. Classify the factory as property, plant, and equipment under PAS 16.
d. Write off the net book value and disclose that fact in the footnotes to
the financial statements.
(Adapted)
45. Transfers from investment property to property, plant, and equipment

are appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model under PAS 38.
d. The entity can never transfer property into another classification on
the balance sheet once it is classified as investment property.
(Adapted)
Disclosure
46. Which of the following is not a required disclosure involving investment
property?
a. The accounting model followed for investment property
b. Whether property interests under operating leases are classified as
investment properties
c. The depreciation method used for investment property measured
under the fair value model
d. Criteria to distinguish investment property from owner-occupied
property when there is classification difficulty
47. Which is not a disclosure under the cost model for investment
property?
a. The depreciation rates used
b. The fair value of the investment property
c. The net gain or loss from fair value adjustments
d. The depreciation methods used
Chapter 20
Intangible Assets

Objective and scope
1. Which of the following may PAS 38 be applied to?
a. goodwill acquired in a business combination
b. rights arising from exploration and evaluation assets
c. computer software held for sale in the ordinary course of business
d. leasehold improvements
e. web site costs
2. PAS 38 does not apply to all of the following, except

a. receivables without physical substance
b. intangible assets classified as assets held for sale
c. insurer’s contractual rights under insurance contracts
d. assets arising from employee benefits
e. right to utilize another entity’s business concept
3. It is an identifiable non-monetary asset without physical substance.

a. intangible asset c. ghost asset
b. financial asset d. dream asset
4. PAS 38 states that an asset meets the identifiability criterion in the

definition of an intangible asset when it:
I. is separable, i.e., capable of being separated or divided from the entity
and sold, transferred, licensed, rented or exchanged, either individually
or together with a related contract, asset or liability
II. arises from contractual or other legal rights, regardless of whether
those rights are transferable or separable from the entity or from other
rights and obligations.
a. I b. II c. I or II d. none
5. All of the following are essential characteristics of an intangible asset,

except
a. Identifiability c. Future economic benefits
b. Control d. Subject to amortization
6. Which of the following is one of the essential characteristics of an

intangible asset?
a. used in business c. identifiable
b. subject to amortization d. monetary
7. The definition of an intangible asset

a. requires an intangible asset to be used in business
b. requires an intangible asset to provide future economic benefits
through increased revenues
c. requires an intangible asset to be identifiable to distinguish it from
goodwill.
d. requires an intangible asset to be without physical substance, whether
the asset is monetary or not.
8. An asset that cannot be sold, transferred, licensed, rented, or exchanged

separately is called
a. goodwill c. unidentifiable
b. intangible d. no such thing
9. Which of the following items may qualify for recognition as intangible

asset?
a. Market and technical knowledge
b. Employees’ skills developed from training
c. Specific managerial or technical talent
d. Market share and customer loyalty
e. None of these
10. Future economic benefits from an intangible asset may be obtained in

various ways which include
a. restricting others from the use of the asset
b. enjoyment of legal enforceability
c. reduced operating costs
d. separability through transferable right
11. Which of the following is not true regarding control over an intangible
asset?
a. An entity controls an asset if the entity has the power to obtain the
future economic benefits flowing from the underlying resource and to
restrict the access of others to those benefits.
b. The capacity of an entity to control the future economic benefits from
an intangible asset would normally stem from legal rights that are
enforceable in a court of law. In the absence of legal rights, it is more
difficult to demonstrate control.
c. Legal enforceability of a right is a necessary condition for control
because without it an entity cannot be able to control the future
economic benefits from the asset.
d. Control may be acquired from contractual rights such as rights arising
from franchises and non-competition agreements.
12. Regarding an asset that contains both intangible and tangible

components, which of the following statements is incorrect?
a. the entity uses its judgment on how to classify the asset
b. the asset is classified as property, plant and equipment if the
intangible component forms an integral part of the tangible asset
c. the entire asset is classified as property, plant and equipment if the
intangible component is necessary for the tangible asset to operate
d. the entire asset is classified as intangible asset if the tangible
component is necessary for the intangible asset to operate.
13. Which item listed below does not qualify as an intangible asset?
a. Computer software. c. Copyrights that are protected.
b. Registered patent. d. Notebook computer.
(Adapted)
Financial statement presentation

14. The line item intangible asset presented on the face of the statement
of financial position normally includes which of the following items?
a. goodwill
b. leasehold improvements
c. operating software costs
d. significant application software costs
e. all of these
15. Which of the following is not an acceptable financial statement

presentation for intangible assets?
a. Intangible assets accounted for under PAS 38 shall be presented
separately from Goodwill.
b. Intangible assets accounted for under PAS 38 are aggregated and
presented as one line item under the heading “Intangible assets” or
“Other intangible assets” in the statement of financial position. The
breakdown of the line item is disclosed in the notes.
c. Goodwill is presented separately in a statement of financial position
under a line item described as “Goodwill.”
d. Goodwill is aggregated with other intangible assets and the breakdown
is provided in the notes.
Recognition
16. An intangible asset shall be recognized if management can
demonstrate that:
I. the item meets the definition of intangible asset
II. it is probable that the expected future economic benefits will flow to
the entity
III. the cost of the asset can be measured reliably.
IV. the entity becomes a party to the contractual provisions of the
intangible asset
V. the fair value of the intangible asset can be reliably determined
a. I, II, III b. I, II, III, IVc. I, II, III, IV, V d. I, II, V
17. At initial recognition, an intangible asset shall be measured

a. at cost c. at fair value plus direct acquisition costs
b. at fair value d. any of these
18. Measurement of cost depends on how the intangible asset is acquired.

Intangible assets may be acquired through:
I. Separate acquisition
II. Acquisition as part of a business combination
III. Acquisition by way of a government grant
IV. Exchanges of assets
V. Internal generation
a. I, II, III, IV b. I, V c. I only d. any of these
19. When an intangible asset is separately acquired through purchase,

which of the following is incorrect?
a. trade discounts and rebates are deducted from the purchase price
whether taken or not
b. any directly attributable cost of preparing the asset for its intended use
forms part of initial cost
c. if settlement is deferred, the intangible asset is recognized at its cash
price equivalent, any difference between this amount and future
payments is recognized as interest expense
d. trade discounts and rebates are deducted from the purchase price only
when taken
20. MYTHICAL Co. acquired an intangible asset from IMAGINARY Co. during
the year. Which of the following costs incurred by Mythical should not be
included as initial cost of the intangible asset purchased?
a. fees of Mr. Programmer in installing the software purchased
b. fees of Mr. Auditor in auditing the system prior to closing the purchase
contract
c. costs of testing the new system whether it is functioning properly
d. advertising costs for the new product that will be produced using the
newly acquired software
21. SPLICE Co. acquired an intangible asset from 2UNITE Co. during the
year. Which of the following costs should be included as initial cost of the
intangible asset purchased?
a. costs of training Mrs. Old Baket, the designated employee to operate
the newly acquired asset
b. allocation of administration and other general overhead costs
c. rebates on the invoice price not taken
d. non-refundable sales taxes paid on the purchase
22. SVELTE Co. acquired an intangible asset from SLENDER Co. during the
year. All of the following costs incurred by Svelte related to the newly
acquired asset should be expensed immediately, except
a. initial operating losses incurred while demand for the asset’s output
builds up
b. modifications to the intangible asset after it was put to the operating
condition originally intended by Svelte
c. costs incurred while the asset capable of operating in the manner
intended by management has yet to be brought into use
d. salvage proceeds from samples produced during testing
23. The cost of intangible asset acquired in a business combination is its

a. fair value at the acquisition date
b. purchase cost
c. lower of cost or fair value
d. fair value less costs to sell at acquisition date
24. Which of the following provides the most reliable estimate of the fair
value of an intangible asset?
a. quoted market price in an active market
b. price in a binding sale agreement
c. present value of future cash flows
d. any of these
25. If no active market exists for an intangible asset, which of the following
is true?
I. its fair value is the amount that the entity would have paid for the
asset, at the acquisition date, in an arm’s length transaction between
knowledgeable and willing parties, on the basis of the best information
available.
II. Its fair value may be determined by discounting estimated future net
cash flows from the asset
26. Intangible assets acquired by way of government grant may be initially

recognized at
a. fair value b. nominal amount c. zero d. any of these
27. During the year, ENDEAVOR Co. received an intangible asset from
2TRY Co. in an exchange transaction with commercial substance. Which
of the following statements is true?
a. Endeavor measures the intangible asset received at the fair value of
the intangible asset given up minus cash paid
b. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset received and the carrying amount
of the asset received
c. If Endeavor cannot determine the fair value of the asset received, it
shall measure the intangible asset received using the fair value of the
intangible asset given up.
d. Endeavor recognizes gain or loss on the exchange for the difference
between the fair value of the asset given up and the carrying amount
of the asset given up, regardless of whether cash is received or paid
28. During the year, ZENITH Co. received an intangible asset from
HIGHEST POINT Co. in an exchange transaction that lacks commercial
substance. Which of the following statements is incorrect?
a. Zenith should measure the asset received at the carrying amount of
the asset given up
b. Zenith should not recognize any gain or loss on the sale unless cash is
paid on the exchange
c. Zenith should measure the asset received at an amount equal to the
difference between the initial cost of the asset given up and its related
accumulated amortization
d. Zenith should not recognize any gain or loss on the sale regardless of
whether cash is received or paid.
29. To assess whether an internally generated intangible asset meets the

criteria for recognition, an entity classifies the generation of the asset into
research phase and development phase. Which of the following
statements is true?
a. If an entity cannot distinguish the research phase from the
development phase, the entity treats expenditures as if they were
incurred in the development phase only.
b. Expenditures incurred in the research phase shall be recognized as
expense when incurred.
c. An intangible asset may be recognized for expenditures incurred in
research phase.
d. An in-process research and development (R&D) project acquired as
part of a business combination is expensed if a component is research.
30. Which of the following transactions may not give rise to recognition of
an intangible asset?
a. HEARTY Co. acquired SINCERE Co. in a business combination. Among
the items acquired is an R&D project composed mainly of expenditures
incurred by Sincere in research phase.
b. Expenditures incurred in development phase that meet all of the
conditions for recognition as intangible asset
c. Expenditures incurred in research phase for an invention that is highly
viable
d. Registration and legal fees for a patent filed with the IPO.
31. Which of the following is included in research and development

expense for a period?
a. The total cost of a building with useful life of 25 years acquired during
the year to be used in various research and development projects
b. Depreciation on a building used for research and development
c. The cost incurred during the year to ensure quality control for existing
production processes
d. The cost incurred during the year for research activities performed for
another entity.
(Adapted)
32. Intangible assets have all of the following characteristics, except:

a. their ownership confers rights, but no physical substance.
b. they have no physical substance.
c. they are relatively long-lived.
d. they provide benefits to current operations only.
(AICPA)

a. Some intangible assets convey exclusive rights which are represented
only by tangible physical substance.
b. Intangible assets used in the operation of a business are always long
term.
c. The process of recording the expiration of the economic benefits of an
intangible asset is called depletion.
d. Intangible assets are obtained in two ways: acquisition from an
external source or internally developed.
(AICPA)

a. The only cost of an internally developed patent that should be
capitalized as patent cost are legal fees and other registration costs.
b. An identifiable tangible asset developed internally is never recognized
in the accounts as an asset.
c. Intangible assets usually have a residual value that must be
considered in the amortization of cost.
d. An intangible asset is usually amortized by a credit to an income
account.
(Adapted)
35. For some purposes, assets are classified as identifiable and

unidentifiable. Which of the following is an unidentifiable asset?
a. cash in bank c. goodwill
b. patent d. prepaid insurance
(Adapted)
36. Goodwill should properly appear on the financial statements of an

entity which:
a. has purchased another entity
b. consistently operates profitably
c. consistently reports above-normal profits
d. meets all of the conditions regarding legal goodwill.
(AICPA)
37. Costs incurred by a company that developed its own goodwill internally
should be :
a. capitalized and amortized as the company profits increased.
b. capitalized and amortized over the useful life of the goodwill.
c. expensed when incurred as a current operating expense.
d. capitalized and amortized over a period not to exceed 40 years.
(AICPA)
38. According to PAS 38 Intangible assets, the recognition criteria for an

intangible asset include which of the following conditions?
a. It must be measured at cost
b. Its cost can be measured reliably
c. It is probable that future economic benefits will arise from its use
d. It is an integral part of the business
e. b and c
(ACCA)
39. Which of the following items qualify as an intangible asset under PAS
38?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an
executive M.B.A. program at Harvard University while working with the
company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
(Adapted)
40. Which of the following assets typically are amortized?

Patents Trademarks
a. No No
b. Yes Yes
c. No Yes
d. Yes No
(AICPA)
41. The creative chief executive of a corporation who is personally

responsible for numerous inventions and innovations is not reported as an
asset on the corporation's statement of financial position. The accounting
principle/guideline that prevents the corporation for reporting this person
as an asset is
a. Conservatism b. Cost c. Going concern d. Materiality
(AICPA)
42. What is the proper time or time period over which to match the cost of
an intangible asset with revenues if it is likely that the benefit of the asset
will last for an indefinite period?
a. Forty years
b. Fifty years
c. Immediately
d. At such time as reduction in value can be quantitatively determined.
(AICPA)
43. Which of the following expenditures qualifies for asset capitalization?

a. Cost of materials used in prototype testing
b. Costs of testing a prototype and modifying its design
c. Salaries of engineering staff developing a new product
d. Legal costs associated with obtaining a patent on a new product
(AICPA)
44. Which of the following statements is correct concerning start-up costs?

a. Costs of start-up activities, including organization costs, should be
expensed as incurred.
b. Costs of start-up activities, including organization costs, should be
capitalized and expensed only if an impairment exists.
c. Costs of start-up activities, including organization costs, should be
capitalized and amortized on a straight-line basis over the lesser of the
estimated economic life of the company, or 60 months.
d. Costs of start-up activities should be capitalized and amortized on a
straight-line basis over the lesser of the estimated economic life of the
company, or 60 months, while organization cost should be expensed as
incurred.
(AICPA)
45. Which of the following incorrectly relate(s) to accounting for long-lived

assets?
I. Goodwill arising from a consolidation which appears among the assets
on the consolidated balance sheet of a parent company and its only
subsidiary shows that the subsidiary was acquired at a price that was
less than the underlying book value of its tangible assets.
II. Provisions for renewal or extension may alter a specified limit on useful
life of intangible assets thus affecting the amortization amount.
III. Amortization policy on intangible assets should be continually
evaluated to determine whether later events and circumstances
necessitate revision of estimates of useful lives.
IV. Costs to develop a product or process to be patented may form part of
the costs of patents.
V. To be consistent, amortization policy of intangible assets should not be
evaluated often even if later events and circumstances warrant revised
estimates of useful lives.
a. IV, V b. II, III c. II, III, IV d. I, IV, V
46. Goodwill arising from a business combination should:

a. be expensed in the year of acquisition
b. be amortized over its economic life
c. not be amortized but tested for impairment at least annually
d. be written off after (40) years or (20) years depending on the GAAP
adopted
(AICPA)
47. Accounting for intangible assets involves the same kind of problem as
accounting for other long-lived assets, such as:
a. accounting after acquisition (amortization)
b. accounting if the values decline substantially & permanently
c. determining an initial carrying amount
d. all of these
(AICPA)
48. Improvements to leased facilities are included under property, plant

and equipment if:
Material in amount Terms extend over long
period
a. no yes
b. yes no
c. no no
d. yes yes
(AICPA)
49. Which of the following is not a required characteristics for an item to
be classified as an intangible asset?
a. lack of physical substance
b. ownership confers some exclusive right, privilege or competitive
advantage
c. estimated life should not exceed forty years
d. provide future benefits by enhancing revenues or reducing costs
(AICPA)
50. The following statements relate to intangible assets:

I. All intangible assets have no physical existence, but not all assets
having no physical existence are intangible assets.
II. Under current accounting practice, intangible assets are classified into
those with finite useful lives such as patents and those with indefinite
useful lives such as trademark.
III. Research and development costs must be expended for financial
reporting purposes in the year in which the costs are incurred even
though the costs may provide benefits to future periods.
IV. Only when intangible assets are acquired from other entities can they
be recognized as assets.
State whether the foregoing statements are false.

a. All the statements are false. c. Only two statements are false.
b. Only one statement is false. d. Three statements are false.
51. Costs incurred internally to create intangibles are

a. capitalized.
b. capitalized if they have an indefinite life.
c. generally expensed as incurred.
d. expensed only if they have a limited life.
(AICPA)
52. The cost of an intangible asset includes all of the following except
a. purchase price. c. other incidental expenses.
b. legal fees. d. all of these
(AICPA)

Intangible assets?
1) The cost of an asset should include the amount of any cash or cash
equivalents paid to acquire the asset.
2) The cost of an asset should include non-cash consideration measured
at fair value.
(ACCA)
Subsequent measurement
54. Subsequent to initial recognition, an intangible asset may be measured
using
a. cost model or revaluation model c. cost model only
b. cost model or fair value model d. either a or b
55. The revaluation model may be used for an intangible asset

a. which has an active market
b. whose fair value can be determined reliably through a valuation
technique such as discounted future cash flows
c. which has an active market and a residual value
d. the revaluation model is applicable only to items of PPE but not to
intangible assets
56. Which of the following factors should not be considered in determining

the useful life of an intangible asset?
a. Legal, regulatory, or contractual provisions.
b. Expected action of competitors.
c. Provisions for renewal or extension of life.
d. Initial cost
(AICPA)
57. Which of the following is not considered in estimating the useful life of
intangible assets?
a. effects of obsolescence, demand and competition
b. the salvage value of the asset
c. the service life expectancies of individuals or groups of employees
d. expected actions of competitors
(AICPA)
58. Factors considered in determining an intangible asset’s useful life

include all of the following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.
(AICPA)
59. Amortization of intangible assets results primarily from the application

of the:
a. matching principle c. cost principle
b. full-disclosure d. revenue principle
(Adapted)
60. Once recognized, intangible assets can be carried at

a. Cost less accumulated amortization.
b. Cost less accumulated amortization and less accumulated impairment
losses.
c. Revalued amount without deduction for accumulated amortization.
d. Cost plus a notional increase in fair value since the intangible asset is
acquired.
(Adapted)
61. Amortization of an intangible asset is usually recorded as a:

a. debit to retained earnings and a credit to a contra account.
b. debit to retained earnings and a credit to the intangible asset account.
c. debit to retained earnings and a credit to a contra account.
d. debit to amortization expense and a credit to a contra account.
(AICPA)
62. Which of the following methods of cost allocation cannot be used for
intangible assets?
a. Declining balance c. Units of production
b. Revenue method d. Effective interest method
63. Which of the following methods of cost allocation can be used for
intangible assets?
a. straight line c. units-of-production
b. revenue method d. any of these
64. Under PAS 38, the default cost allocation method for intangible assets
is?
a. revenue method c. SYD
b. straight line d. no default method
65. JOCUND Co. has an intangible asset, which it estimates will have a
useful life of 10 years, while MERRY Co. has goodwill, which has an
indefinite life. Which company should report amortization in its financial
statements?
JOCUND MERRY JOCUND MERRY
a. Yes Yes c. No Yes
b. Yes No d. No No
(AICPA)
66. According to PAS 38 Intangible assets, which of the following criteria

are relevant in determining the useful life of an intangible asset?
a. obsolescence d. residual value
b. amortization period e. a and c
c. expected usage
(ACCA)
67. According to PAS 38, the residual value of an intangible asset is

presumed
a. equal to fair value in active market
b. equal to the amount the third party wants to buy
c. equal to a conservative estimation
d. zero
68. In accordance with generally accepted accounting principles, which of

the following methods of amortization is normally recommended for
intangible assets?
a. SYD c. units of production
b. straight-line d. double declining balance
(AICPA)
69. On January 1, 20x1, an intangible asset with a thirty-five year

estimated useful life was acquired. On January 1, 20x6, a review was
made of the estimated useful life and it was determined that the
intangible asset had an estimated useful life of forty-five more years. As a
result of the review
a. The original cost at January 1, 20x6 should be amortized over a fifty-
year life.
b. The original cost at January 1, 20x1 should be amortized over the
remaining thirty-year life.
c. The unamortized cost at January 1, 20x6 should be amortized over a
forty-year life.
d. The unamortized cost at January 1, 20x6 should be amortized over a
thirty-five year life.
(AICPA)
70. A brand name that was acquired separately should initially be
recognized, according to PAS 38 Intangible assets, at
a. recoverable amount c. fair value
b. either cost or fair value at the choice of the acquirer d. cost
(ACCA)
71. Which of the following should be expensed as incurred on a franchise

with an estimated useful life of ten years?
a. Amount paid to the franchisor for the franchise.
b. Periodic payments to a company, other than the franchisor, for that
company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
d. Periodic payments to the franchisor based on the franchisee’s
revenues.
(AICPA)

Intangible assets?
1) Intangible assets acquired in a business combination should only be
recognized if they have already been recognized by the entity being
acquired.
2) Intangible assets acquired in a business combination should not be
recognized separately from goodwill.
(ACCA)
73. A change in the amortization method or amortization rate for an

intangible asset is accounted for:
a. prospectively b. retrospectively c. currently d.
gracefully
74. Which of the following factors influence(s) the Brand strength of a

company?
I. Customer loyalty
II. Statutory protection
III. Brand Management by the company
a. I, II b. I c. II d. I, II, III
75. Which of the following is not specifically an identifiable intangible

asset?
a. Kina Rogers franchise c. secret formula for a Krabby Patty
b. secret processes d. goodwill

Intangible assets?
1) Intangible assets cannot be treated as having an indefinite useful life.
2) Intangible assets with a finite useful life should be measured at cost
and tested annually for impairment.
a. False False b. False True c. True False d. True
True
(ACCA)
77. According to PAS 38 Intangible assets, amortization of an intangible

asset with a finite useful life should commence when
a. it is first recognized as an asset
b. it is available for use
c. it is probable that it will generate future economic benefits
d. the costs can be identified with reasonable certainty
(ACCA)
78. Are each of the following factors relevant, according to PAS 38

Intangible assets, in determining the annual amortization expense on an
intangible asset?
I. The cost.
II. The amortization method.
a. Not relevant, Not relevant c. Relevant, Not relevant
b. Not relevant, Relevant d. Relevant, Relevant
(ACCA)
79. Which of the following is not a long-term investment?

a. shares held to exert influence on another entity
b. land held for speculation
c. trademarks
d. cash surrender value of life insurance
(Adapted)
80. Which of the following would not be included in research and

development expense for APATHETIC Co. for current period?
a. The portion of plant assets, devoted completely to research for
APATHETIC, which is amortized in the current period.
b. The cost of materials used in conducting research for APATHETIC
during the current period.
c. Cash paid by APATHETIC to INDIFFERENT Co. for research performed
by INDIFFERENT Co. for APATHETIC in the current period.
d. The cost of labor incurred by APATHETIC in conducting research for
UNCONCERNED Co. during the current period.
(Adapted)
81. Which of these statements about research and development

expenditure are correct?
1. If certain conditions are satisfied, research and development
expenditure must be capitalized.
2. One of the conditions to be satisfied if development expenditure is to
be capitalized is that the technical feasibility of the project is
reasonably assured.
3. If capitalized, development expenditure must be amortized over a
period not exceeding five years.
4. The amount of capitalized development expenditure for each project
should be reviewed each year. If circumstances no longer justify the
capitalization, the balance should be written off over a period not
exceeding five years.
5. Development expenditure may only be capitalized if it can be shown
that adequate resources will be available to finance the completion of
the project and all other conditions are also met.
a. 2 and 5 b. 3, 4 and 5 c. 2, 3 and 5 d. 1, 2 and 3
(Adapted)
82. Which of the following is a true statement concerning research and

development (R&D) costs?
a. All R&D costs, without exception, must be charged to expense when
incurred.
b. R&D costs can only be amortized over a life of 40 years or more.
c. Almost any treatment is acceptable for handling R&D costs.
d. Financial statements must disclose total R&D costs charged to expense
in the period
(Adapted)
83. Total research and development expense for CUNNING, Inc. would
include which of the following items:
I. Depreciation on CUNNING, Inc. property, plant and equipment used in
CUNNING, Inc.'s development projects
II. Amortization of CUNNING, Inc. patents used in CUNNING, Inc.'s
research
III. Resources paid by CUNNING, Inc. for SLY Co.'s research efforts
performed for CUNNING, Inc. research and development projects
IV. CUNNING, Inc. cost of research performed for CLEVER Corporation's
research and development projects
V. CUNNING, Inc. costs of internal development efforts which culminated
in a patent granted to CUNNING, Inc.
VI. Overhead costs allocated to CUNNING Inc.’s research and development
efforts which took the place of another CUNNING, Inc. activities
VII. Costs to train CUNNING, Inc. employees to run machines used in
ongoing production. These machines had earlier been developed by
CUNNING, Inc.
a. I, II, III b. I, II, III, IV, V c. I, II, III, V, VI d. all of these
(Adapted)
84. A newly set up dot-com entity has engaged you as its financial advisor.
The entity has recently completed one of its highly publicized research
and development projects and seeks your advice on the accuracy of the
following statements made by one of its stakeholders. Which one is it?
a. Costs incurred during the “research phase” can be capitalized.
b. Costs incurred during the “development phase” can be capitalized if
criteria such as technical feasibility of the project being established are
met.
c. Training costs of technicians used in research can be capitalized.
d. Designing of jigs and tools qualify as research activities.
(Adapted)
85. Which of the following is an example of activities that would typically

be excluded in research and development costs?
a. Design, construction, and testing of preproduction prototypes and
modes.
b. Laboratory research aimed at discovery of new knowledge.
c. Quality control during commercial production, including routine testing
of products.
d. Testing in search for, or evaluation of, product or process alternatives.
(AICPA)
86. Which of the following is a research and development cost?

a. Development or improvement of techniques and processes.
b. Offshore oil exploration that is the primary activity of a company.
c. Research and development performed under contract for others.
d. Market research related to a major product for the company.
(AICPA)
87. HEARTY Company and WARM-SINCERE Company were combined in a

purchase transaction. HEARTY was able to acquire WARM-SINCERE at a
bargain price. The sum of the market or appraised values of identifiable
assets acquired less the fair value of liabilities assumed exceeded the
cost to HEARTY. After revaluing noncurrent assets to zero, there was still
some "negative goodwill." Proper accounting treatment by HEARTY is to
report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
(AICPA)
88. Goodwill may be

a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.
(AICPA)
89. Which of the following research and development related costs should
be capitalized and amortized over current and future periods?
a. Research and development general laboratory building which can be
put to alternative uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular
research project currently in process
(AICPA)
90. Which of the following principles best describes the current method of
accounting for research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
(AICPA)
91. How should research and development costs be accounted for,

according to PAS 38?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon
the materiality of the amounts involved.
d. Must be expensed in the period incurred unless development costs
incurred qualify under the recognition criteria set forth under PAS 38.
92. Which of the following costs should be excluded from research and
development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the
manufacturing stage
(AICPA)
93. 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(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has
been obtained from the facility.
(AICPA)
94. What is the proper time or time period over which to match the cost of
an intangible asset with revenues if it is likely that the benefit of the asset
will last for a determinate but very long period of time?
a. Forty years.
b. Fifty years.
c. Shorter of legal life and useful life
d. At such time as diminution in value can be quantitatively determined.
(Adapted)
95. How should research and development costs be accounted for

according to current standards?
a. Must be capitalized when incurred and then amortized over their
estimated useful lives.
b. Must be expensed in the period incurred unless contractually
reimbursable.
c. May be either capitalized or expensed, when incurred, depending upon
the facts
d. Must be expensed in the period incurred unless it can be clearly
demonstrated that the research expenditure will have significant
future benefits.
(AICPA)
96. The current trend in the accounting treatment for research and
development costs is to
a. Capitalize all costs as assets when incurred and amortize when
revenue are earned.
b. Treat all costs as current expenses as incurred.
c. Capitalize selectively, and predetermine the conditions that would
require capitalization as well as those that would be written off as
current expenses.
d. Accumulate all costs in a special intangible asset account until a
determination can made as to the degree of future benefits.
(AICPA)
97. Research and development costs, under prevailing practice, may be

accounted for as follows:
a. Research and development costs related to successful projects should
be capitalized; others expensed.
b. Research and development costs related to unsuccessful projects
should be capitalized; others expensed.
c. Research and development costs should be expensed as incurred.
d. Research and development costs should be allocated between
successful and unsuccessful projects.
e. Research and development costs, whether related to successful or
unsuccessful projects, should be capitalized.
(AICPA)
98. An activity that would be expensed currently as research and
development costs is the
a. Testing in search for or evaluation of product or process alternatives.
b. Adaptation of an existing capability to a particular requirement or
customer’s need as a part of continuing commercial activity.
c. Legal work in connection with patent applications or litigation, and the
sale or licensing of patents.
d. Engineering follow-through in an early phase of commercial
production.
(AICPA)
99. Which of the following expenses can be capitalized?

I. Research costs incurred in developing a new medicine.
II. Purchase of intangibles for R&D activities which have
alternative future uses.
III. Salaries of research personnel.
a. II only b. I & II c. III only d. none of them

Intangible assets?
(1) Expenditure during the research phase of a project may sometimes be
capitalized as an intangible asset.
(2) Expenditure during the development phase of a project may
sometimes be capitalized as an intangible asset.
(ACCA)
101. Are the following statements in relation to development true or false,

according to PAS 38 Intangible assets?
(1) The products being developed should have already been put into
commercial production or use.
(2) Development involves the application of research findings.
a. False False b. False True c. True False d. True
True
(ACCA)
102. Which of the following is not considered as research and development

costs?
a. Testing in search for product alternatives
b. Legal work on patent application
c. Modification of design of a process
d. Searching for application of new research findings
e. The design of tools, molds and dies involving new technology.
103. According to PAS 38, which of the following is true for an acquiring
company in connection with in-process research and development held by
an acquired company at the date of acquisition?
a. The amount that has been spent on these projects is expensed, but
any value in the project in excess of the amount spent is capitalized by
the acquiring company.
b. The value of in-process research and development is capitalized
because the acquiring company has a clear vision of its value.
c. In-process research and development is still research and development
and the value is always expensed by the acquiring company.
d. The value of in-process research and development is expensed unless
it has a direct connection with a product or asset owned by the
acquiring company.
(Adapted)
104. AJAR Airline purchased airline gate rights at SLIGHTLY OPEN

International Airport for ₱2,000,000 with a legal life of five years.
However, AJAR has the ability and right to extend the rights every ten
years for an indefinite period of time. Over what period of time should
AJAR amortize the gate rights?
a. 5 years. c. 40 years.
b. 15 years d. The rights should not be amortized.
(AICPA)
105. The following statements relate to accounting for intangible assets.

Choose the incorrect statement.
a. Because it has an indefinite life, a trademark need not be amortized.
b. If a company purchases a competing patent to ensure revenue-
generating capability of a previously owned patent, the cost of the
purchased patent should be expensed at the time of purchase.
c. The process of assigning the cost of an intangible asset to operations
in a systematic and rational manner is called amortization.
d. Goodwill may represent the excess of the cost of an acquired company
over the sum of the fair values assigned to identifiable assets acquired
less liabilities assumed.
106. Consider the following statements and state whether they are correctly
stated or not.
I. Goodwill is recorded by accountants only if it is purchased.
II. A copyright’s legal life is 30 years and it gives its owner protection
against writings and literary productions being reproduced illegally.
a. I b. II c. I and II d. neither I nor II
107. A patent purchased from another entity which had held it for 3 years
should be amortized over
a. the asset’s remaining useful life, not to exceed 37
b. any number not to exceed to 40
c. 17 years
d. the asset’s remaining useful life, not to exceed 17
(Adapted)
108. Which of the following intangible assets should be amortized over the
periods of estimated benefit?
a. research and development costs related to a successful product
b. goodwill arising from the purchase of an existing business
c. costs incurred in organizing a corporation
d. patent right purchased from an inventor
(AICPA)
109. In a case of a patent infringement suit, the suit may be either

successful or lost. The results of the legal decision are accounted for as
follows:
a. if successful, debit the cost of the lawsuit to patent expense.
b. if lost, debit the cost of the lawsuit to extraordinary loss.
c. if lost, write the balance in the patent account.
d. after recognizing the results of the lawsuit as an expense, amortize the
remaining balance in the patent occur over its remaining economic life.
(Adapted)
110. A purchased patent has a remaining legal life of 15 years. It should be

a. Expensed in the year of the acquisition.
b. Amortized over 15 years regardless of its useful life.
c. Amortized over its useful life if less than 15 years.
d. Not amortized.
(AICPA)
111. A corporation which incurs costs in defending a patent in an

infringement suit should:
a. expense currently the costs of all suits.
b. capitalize only the costs of unsuccessful suits.
c. capitalize only the costs of successful suits.
d. capitalize the cost of all such suits.
(Adapted)
112. Should the following fees associated with the registration of an

internally developed patent be capitalized? (Item#1) Legal fees;
(Item#2) Registration fees
a. No, No b. No, Yes c. Yes, No d. Yes, Yes
(AICPA)
113. Which of the following statements concerning patents is correct?

a. Legal costs incurred to successfully defend an internally developed
patent should be expensed immediately in the period incurred.
b. Legal fees and other direct costs incurred in registering a patent
should be capitalized and amortized on a straight-line basis over a five-
year period.
c. Research and development contract services purchased from others
and used to develop a patented manufacturing process should be
capitalized and amortized over the patent’s economic life.
d. Research and development costs incurred to develop a patented item
should be capitalized and amortized on a straight-line basis over
seventeen years.
(AICPA)
114. Which of the following amounts incurred in connection with a

trademark should be capitalized?
Cost of successful defense Registration fees
a. no yes
b. yes no
c. no no
d. yes yes
(AICPA)
115. Which of the following should not be capitalized as part of the cost of
an internally developed patent?
a. costs to develop the product or process to be patented
b. patent registration fees
c. legal fees incurred in successfully defending a patent
infringement suit.
d. legal fees associated with registration of the patent
e. a and c
(AICPA)
116. The cost of purchasing patent rights for a product that might otherwise
have seriously competed with one of the purchaser's patented products
should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the
purchaser's product.
d. amortized over the remaining estimated life of the original patent
covering the product whose market would have been impaired by
competition from the newly patented product.
(AICPA)
117. Inventor Corporation was granted a patent on a product on January 1,

20x1. To protect its patent, the corporation purchased on January 1, 2x10
a patent on a competing product which was originally issued on January
10, 20x6. Because of its unique plant, Inventor Corporation does not feel
the competing patent can be used in producing a product. The cost of the
competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2x10.
(AICPA)
118. Plaintiff, Inc. went to court this year and successfully defended its
patent from infringement by a competitor. The cost of this defense
should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
(AICPA)
119. Which of the following is not an intangible asset?

a. Trade name d. Copyrights
b. R&D expense e. No answer
c. Franchise
(AICPA)
120. Which of the following intangible assets should not be amortized?

a. Copyrights c. Perpetual franchises
b. Customer lists d. No answer
(AICPA)
121. Under current PFRSs, when a patent is amortized, the credit is made to
a. the patent account.
b. an accumulated amortization account.
c. a deferred credit account.
d. an expense account.
(Adapted)
122. Which of the following confers exclusive right to conduct business in a

particular territory
a. trademark b. franchise c. patent d. copyright
(Adapted)
123. An exclusive right or privilege received by a business or individual to
perform certain business functions or use certain products or services is
referred to as:
a. patents b. copyright c. franchise d. none of
these
124. If a franchise becomes worthless prior to the end of its estimated

useful life, the unamortized balance in the franchise account should be
written off as a(n):
a. impairment loss c. prior period adjustment
b. operating expense d. change in estimate
(Adapted)

a. An intangible asset acquired by issuance of ordinary shares should
generally be valued at the fair value of the intangible asset.
b. Amortization of intangible assets involves an adjusting entry that
should not be reversed in the next accounting period.
c. An unidentifiable asset developed internally is never recognized in the
accounts as an asset.
d. All annual payments made by a franchisee to the franchiser for
assistance should be capitalized as part of the cost of the franchise.
(Adapted)
126. A franchise should be classified on the balance sheet as a (n):

a. operational asset c. intangible asset
b. deferred charge d. current asset
(Adapted)
127. Which of the following cost related to computer software is capitalized

to an intangible asset account?
a. Cost to duplicate discs and manuals for sale
b. Development costs preceding technological feasibility
c. Coding and testing costs incurred after technological feasibility but
before completing the product master
d. Cost of customer service
(Adapted)
128. If a business purchased a new computer system software which forms

an integral part of a machine, the account to be debited is
a. machine c. intangible asset
b. computer building d. Bill Gates
129. OUTLANDISH and STRANGE are rival firms which are similar in size and
scope of operations. OUTLANDISH has decided not to capitalize but
expense software development costs in Year 1. STRANGE on the other
hand, has decided to capitalize a similar amount of development costs, to
be amortized over 5 years. Which of the following is/are true over the next
5 years?
I. STRANGE will show higher equity than OUTLANDISH
II. The difference in STRANGE's assets and OUTLANDISH's assets will be
lower in Year 3 than in Year 2.
III. The total tax deductions due to the development costs are equal for
the two firms.
IV. After technological feasibility, all software development costs can be
capitalized under PAS 38.
a. III only b. II & III c. I & II d. I, II, III, IV
130. Which of the following costs can be capitalized?

a. drilling costs for oil wells
b. public relations costs to develop goodwill
c. research and development
d. internally developed brand
131. Accounting rules differentiate research and development activities

from activities not considered research and development. Which one of
the following is not considered a research and development activity?
a. Periodic design changes to existing products.
b. Testing in search of product processing alternatives.
c. Modification of the design of a process.
d. Laboratory research intended for the discovery of a new product.
132. On January 1, 20x1, Joca purchased equipment for use in developing a

new product. Joca uses the straight-line depreciation method. The
equipment could provide benefits over a 10-year period. However, the
new product development is expected to take five years, and the
equipment can be used only for this project. Joca 's 20x1 expense equals:
a. The total cost of the equipment.
b. One-fifth of the cost of the equipment.
c. One-tenth of the cost of the equipment.
d. Zero.
(AICPA)
Disclosures
133. Which of the following disclosures is not required by PAS 38?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the
year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors.
(Adapted)
134. All of the following are required disclosures for intangible assets except
a. Whether the useful lives are indefinite or finite and, if finite, the useful
lives or the amortization rates used
b. Amortization methods used for intangible assets with finite useful lives
c. Gross carrying amount and any accumulated amortization (aggregated
with accumulated impairment losses) at the beginning and end of the
period
d. A reconciliation of the carrying amount at the beginning and end of the
period showing increases and decreases to intangible assets and
related accumulated amortization and accumulated impairment loss.
e. Net carrying amount of intangible assets. Accumulated amortization is
not required to be disclosed because periodic amortization is deducted
directly from the related asset account.
Chapter 21
Impairment of Assets
1. PAS 36 applies to which of the following assets?
a. Inventories. c. Assets held for sale.
b Financial assets. d. Property, plant, and equipment.
2. PAS 36 Impairment of assets should be applied in accounting for the

impairment of which of the following types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
d. Non-current assets measured at cost
3. PAS 36 applies to all of the following assets, except

a. Intangible assets
b. Property, plant and equipment measured under revaluation surplus
c. Investment property measured at fair value
d. Investment in associates
4. Which of the following conditions must exist in order for an impairment

loss to be recognized?
I. The carrying amount of the long-lived asset is less than its fair value.
II. The carrying amount of the long-lived asset is not recoverable.
a. I only. b. II only. c. Both I and II. d. Neither I nor II.
(Adapted)
5. A cash-generating unit is:

a. any group of assets that has independent cash flows
b. the smallest group of assets that generates independent cash flows
from continuing use
c. any group of assets which forms part of the management reporting
structure
d. a reporting segment
6. Estimates of future cash flows would normally cover projections over a

maximum of:
a. eight years b. 12 years c. five years d. 20 years
(ACCA)
7. When deciding upon the discount rate to be used, which factors should
not be taken into account?
a. Risks specific to the asset which future cash flow estimates have not
been adjusted
b. Corporate lending rates
c. Cost of capital
d. Risks which relate to the asset for which future cash flow estimates
have been adjusted
(ACCA)
8. Value in use is:

a. the discounted present value of future cash flows arising from use of
the asset and from its disposal
b. the realizable value
c. the carrying amount
d. the higher of an asset's fair value less costs of disposal and its market
value
9. Which impairment losses should never be reversed?

a. Loss on a cash generating unit c. Loss on leases
b. Loss on property, plant and equipment d. Loss on goodwill
(ACCA)
10. Under PAS 36, an asset is impaired if the asset’s

a. fair value is less than carrying amount
b. carrying amount exceeds fair value
c. recoverable amount exceeds carrying amount
d. carrying amount is greater than recoverable amount.
11. If fair value less costs of disposal is higher than value in use
a. the asset is impaired
b. the asset is not impaired
c. there is no need to compute for carrying amount
d. the recoverable amount is the fair value less costs of disposal
12. If there is no reason to believe that an asset’s value in use materially

exceeds its fair value less costs of disposal
a. the asset is not impaired
b. there is no need to compute for carrying amount
c. the recoverable amount is the value in use
d. there is no need to determine future cash flows
13. The asset is not impaired if

a. carrying amount exceeds recoverable amount
b. fair value is way above value in use
c. recoverable amount is less than the carrying amount
d. carrying amount is less than recoverable amount
14. Goodwill should be tested for value impairment at which of the

following levels?
a. Each identifiable long-term asset. c. Each acquisition unit.
b. Each reporting unit. d. Entire business as a whole.
(AICPA)
15. After an impairment loss is recognized, the adjusted carrying amount

of the cash-generating unit shall be its new accounting basis. Which of the
following statements about subsequent reversal of a previously
recognized impairment loss is correct?
a. It is prohibited to reverse impairment loss on goodwill allocated to a
cash-generating unit
b. It is required when the reversal is considered permanent.
c. It must be disclosed in the notes to the financial statements.
d. It is encouraged, but not required.
(AICPA)
16. Property, plant, and equipment must be reviewed for impairment when
which of the following events occurs?
a. A significant change in the asset's estimated useful life occurs
b. The costs of constructing the asset are less than the budgeted amount
c. A current period operating loss occurs
d. Investing activities produce a negative cash flow
(Adapted)
17. Which of the following regarding goodwill is correct?

a.Goodwill should be amortized over a five-year period.
b.Goodwill should be amortized over its expected useful life.
c.Goodwill should be recorded and never adjusted.
d.Goodwill should be recorded and periodically evaluated for
impairment.
(AICPA)
18. Goodwill should be tested periodically for impairment

a. For the entity as a whole.
b. At the subsidiary level.
c. At the industry segment level.
d. At the operating segment level or one level below.
(AICPA)
19. Purchased goodwill should

a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense
over the period benefited.
d. not be amortized.
(AICPA)
20. A loss on impairment of an intangible asset is the difference between

the asset’s
a. carrying amount and the present value of expected future net cash
flows.
b. carrying amount and its fair value less costs of disposal.
c. fair value and the expected future net cash flows.
d. recoverable amount and carrying amount
21. If the fair value less costs of disposal cannot be determined

a. The asset is not impaired.
b. The recoverable amount is the value-in-use.
c. The net realizable value is used.
d. The carrying value of the asset remains the same.
(Adapted)
22. If assets are to be disposed of

a. The recoverable amount is the fair value less costs of disposal.
b. The recoverable amount is the value-in-use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
(Adapted)
23. Which of the following is the best evidence of a fixed asset’s fair value
less costs of disposal?
a. An asset that is trading in an active market.
b. The price in a binding sale agreement.
c. Information available that determines the disposal value of the asset in
an arm’s length transaction.
d. d The carrying value of the asset.
(Adapted)
24. When calculating the estimates of future cash flows, which of the
following cash flows should not be included?
a. Cash flows from disposal.
b. Income tax payments.
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.
(Adapted)
25. An impairment loss that relates to an asset that has been revalued
upwards should be recognized in
a. Profit or loss.
b. Revaluation surplus that relates to the revalued asset.
c. Opening retained profits.
d. Any reserve in equity.
(Adapted)
26. Goodwill should be tested for impairment

a. If there is an indication of impairment. c. Every five years.
b. Annually. d. On the acquisition of a subsidiary.
(Adapted)
27. Where part of the cash-generating unit is disposed of, the goodwill
associated with the element disposed of
a. Shall be written off to the income statement entirely.
b. Shall not be included in the calculation of gain or loss on disposal.
c. Shall be included in the calculation of gain or loss on disposal.
d. Shall be written off against retained profits.
(Adapted)
28. When impairment testing a cash-generating unit, any corporate

assets, such as the head office business or computer equipment, should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets or parent’s assets and
impairment tested along with that cash-generating unit.
d. Not be allocated to cash-generating units.
(Adapted)
29. When allocating an impairment loss, such a loss should reduce the
carrying amount of which asset first?
a. Property, plant, and equipment. c. Goodwill.
b. Intangible assets. d. Current assets.
(Adapted)
30. Which of the following impairment losses should never be reversed?

a. Loss on property, plant, and equipment.
b. Loss on goodwill.
c. Loss on a business segment.
d. Loss on inventory.
(Adapted)
31. Is an entity required to perform the impairment test of goodwill

specifically at the end of the reporting period?
a. Yes, performing impairment testing during the period increases the risk
that all information existing at the reporting date may not be
considered.
b. No, the entity can perform impairment testing any time during the year
for as long as the interval between each impairment testing should not
exceed one year.
c. No, the entity can perform impairment testing any time during the year
for as long as the interval between each impairment testing should not
fall below one year.
d. Yes, however, if there is any indication of impairment during the year,
the entity should not defer the testing to the end of reporting period.
32. Under PAS 36 Impairment of assets, which of the following statements

best describes 'value in use'?
a. The present value of estimated future cash flows expected to arise
from the continuing use of an asset and from its ultimate disposal
b. The amount of cash or cash equivalents that could currently be
obtained by selling an asset in an orderly disposal
c. The net amount which an entity expects to obtain for an asset at the
end of its useful life
d. The amount at which an asset could be exchanged between
knowledgeable, willing parties in an arm's length transaction
33. Under PAS 36 Impairment of assets, which of the following terms best
describes the higher of an asset's fair value less costs of disposal and its
value in use?
a. Recoverable amount c. Depreciable amount
b. Revalued amount d. Carrying amount
34. Under PAS36 Impairment of assets, are the following statements

relating to an active market true or false?
(1) Willing buyers and sellers are usually found.
(2) Prices are available to the public.
True
(ACCA)
35. Under PAS36 Impairment of assets, which of the following statements

best describes the term 'impairment loss'?
a. The removal of an asset from an entity's statement of financial position
b. The amount by which the carrying amount of an asset exceeds its
recoverable amount
c. The systematic allocation of an asset's cost less residual value over its
useful life
d. The amount by which the recoverable amount of an asset exceeds its
carrying amount
(ACCA)
36. According to PAS36 Impairment of assets, which of the following are

relevant in determining a non-current asset's 'value in use'?
I. The expected future cash flows from the asset
II. The carrying amount of the asset
III. The future annual depreciation expense in respect of the asset
IV. The time value of money
a. I, II, III b. II, III, IV c. I, IV d. I, II, IV
37. An entity is considering whether to apply an impairment test to an
individual asset or to the cash-generating unit to which that asset
belongs. Are the following statements true or false, according to PAS36
Impairment of assets?
I. If the individual asset does not generate cash inflows that are largely
independent of those from other assets, then the cash-generating unit
should be identified.
II. If the individual asset generates an insignificant proportion of the cash
inflows of the entity as a whole, then the cash-generating unit should
not be identified.
True
(ACCA)
38. The HAVOC DEVASTATION Co. has determined that it needs to

recognize an impairment loss on each of two non-current assets; plant
and land. The relevant amounts are as follows:
Plant Land
Original cost ₱700,000 ₱1,400,000
Previous revaluations Nil ₱ 450,000
Existing carrying amount ₱700,000 ₱1,850,000
Impairment loss to be recognized
in year ₱200,000 ₱ 300,000
According to PAS36 Impairment of assets, how should each of the

impairment losses be recognized?
Plant Land
a. In profit or loss In profit or loss
b. In profit or loss In other comprehensive
income
c. In other comprehensive income In profit or loss
c. In other comprehensive income In other comprehensive income
(ACCA)
39. On January 1, 20x2 AMIABLE FRIENDLY Company acquired a non-

current asset with an estimated useful life of 8 years for ₱320,000. Non-
current assets are accounted for under the cost model and depreciation is
charged by the straight-line method.
On January 1, 20x7 an impairment review identified an impairment loss of

₱10,000 and the remaining useful life was revised to four years. Are the
following statements true or false, according to PAS 36 Impairment of
assets?
(1) Future depreciation expenses should be measured by reference to the

carrying amount after deducting the impairment loss.
(2) Future depreciation expenses should be measured by reference to the
new estimate of the remaining useful life.
True
(ACCA)
40. In testing a cash generating unit (CGU) for impairment the bottom-up
test means that
a. Goodwill can be allocated to the CGU and an impairment loss has
occurred if the recoverable amount of the CGU’s less than the carrying
amount, plus the allocated goodwill.
b. Goodwill can be allocated to the CGU’s and an impairment loss
occurred if the recoverable amount of the CGU is less than its carrying
amount, excluding the allocated goodwill
c. Goodwill can be allocated to the COG and an impairment loss has
occurred if the recoverable amount of the CGU is more than the
carrying amount.
d. Goodwill can be allocated to the CGU and an impairment loss has
occurred if the recoverable amount of the CGU is more than its
carrying amount.
(Adapted)
41. Select the incorrect statement regarding impairments on investment

properties.
a. Investment properties under the fair value model are not subject to
impairment
b. Impairments of investment properties under the cost model is
recognized in profit or loss
c. Compensation from third parties for investment properties that was
impaired or lost shall be recognized in profit or loss when the
compensation becomes receivable and not offset with the amount of
loss
d. Reversal of impairment on investment properties under the cost model
are never reversed
42. Which of the following analysis on asset impairment is most likely to

have been made by a CPA? (where: RA = recoverable amount; FVLCS =
fair value less costs of disposal; VIN = value in use; CA = carrying
amount; IL = impairment loss)
a. if “FVLCS > CA,” then, “IL = 0”
b. if “FVLCS < VIN,” then, IL = > 0”
c. if “FVLCS > VIN,” then, “RA = FVLCS,” now, if “CA > RA,” then “IL = RA
– CA”
d. if “FVLCS > VIN,” then, “RA = VIN,” now, if “CA < RA,” then “IL = RA –
CA”
43. Ampersand “&” Co. determines that a printing press used in its
operations has suffered a permanent impairment in value because of
technological changes. An entry to record the impairment should
a. recognize an extraordinary loss for the period
b. include a credit to the equipment accumulated depreciation account
c. include a credit to the equipment account
d. not be made if the equipment is still being used.
(AICPA)

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Chapter 1

2. It is the first process used in accounting. It refers to the identification of

3. The following statements correctly refer to the accounting process.

5. Events involving an entity and an external party.

6. Events in which an entity transfers (or receives) economic resources to

7. These events result to a sudden or unanticipated loss from fortuitous

8. Which of the following statements is true?

9. All of the following are events considered as exchange or reciprocal

10. All of the following are events considered as nonreciprocal transfer,

13. Which of the following events is considered an internal event?

15. Which of the following events is considered an internal event?

16. Which of the following correctly relates to accountable events?

17. An example of income derived from a nonreciprocal transfer is

19. Financial statements are said to be a mixture of fact and opinion.

24. One objective of financial reporting is to provide information useful in

25. The primary objective of financial reporting is to provide information:

26. Financial accounting applies to which of the following:

27. Stewardship reporting focuses on:

28. The function of measuring and reporting information to absentee

29. The following relate to financial reporting. Choose the correct

30. Financial reporting should provide all of the following information,

32. For the purpose of decision making:

Economic entities and activities

35. Which of the following statements are correct?

37. Whether a business is successful and thrives is determined by

38. An effective capital allocation process

40. A free enterprise system allows businesses to

42. A corporation is a business organization that is recognized by law to

44. A business owned by two or more people is called

45. A merchandising business

47. Which of the following is not among the economic resources of a

48. It does not truly describe “economic value” as an element of economic

50. Which of the following statements is incorrect?

52. Accounting is often called the "language of business" because

53. Accounting as an art involves the considerable use of judgment.

54. Creative skills and judgment is usually exercised in problem solving.

55. Critical thinking is most important in which of the following problem-

Basic Accounting Concepts

57. Which of the following statements is incorrect regarding accounting

58. Accrual accounting techniques are used to:

59. Accrual accounting is used because

60. The going concern assumption is also called

61. The valuation of an assurance to receive cash in the future at present

62. Business entity produces financial statements at arbitrary points in

63. Treating partners’ salaries as an expense rather than as a means of

65. Which of the following correctly relate to the Monetary/ Stable

66. An accounting (financial reporting) period may be

69. Most listed corporations in the Philippines have which type of

72. Which of the following statements is incorrect regarding the basic

76. Which of the following statements are correctly stated?

77. Application of the full disclosure principle

79. What does the full disclosure principle require?

80. Which accounting principle charges low-cost capital items such as

83. Which statements correctly refer to the basic principles used in

85. During the lifetime of an entity accountants produce financial

86. Which principle/guideline allows a company to ignore the change in the

87. Which principle/guideline requires the company's financial statements

89. A large company purchases a P2,000 digital camera and expenses it

90. Uncertainty and risk inherent in business situations should be

91. Revenue generally may be recognized when:

92. Which of the following statements is correctly stated?

94. The accounting objective or theory that is directed towards proper