JOSE MARIA COLLEGE

Philippine Japan Friendship Highway, Sasa, Davao City

COLLEGE OF BUSINESS EDUCATION
Pre – Review 1 Class: Theories of Accounts
2nd Semester – S.Y: 2020 -2021

Name :_ Date :_
Instructor : JOHN PAUL S. TAN, CPA, MDM, CATP

1. Which of the following equations is not true?

(a) Assets + Liabilities = Owner’s Equity
(b) Assets = Liabilities + Owner’s Equity
(c) Assets – Owner’s Equity = Liabilities
(d) Assets – Liabilities = Owner’s Equity

2. Dave started his own cheese factory on March 16, 2003. Which of the following transactions would not be
admissible in Dave’s accounting system for the month of March?
(a) On March 18, Dave purchased a cow on account for P3,000.
(b) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(c) On March 21, Dave contracted with a local radio station to run several one-minute advertising spots
during the month of April.
(d) All of the above transactions would be admissible for Dave’s accounting system in the month of March.

3. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and issuing a P6,000
note payable for the balance owed. As a result of this transaction, Jeff’s balance sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity

4. The double-entry system of accounting means that every transaction:

(a) is recorded initially on both the journal and the general ledger
(b) increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by an equal amount of debits and credits
(d) results in changes in accounts on both sides of the balance sheet

5. Which of the following statements is not correct?

(a) debits may increase assets
(b) credits may increase liabilities
(c) debits may increase liabilities
(d) credits may increase owner’s equity

6. Tony owns a store specializing in bags. Tony has just completed a transaction that caused a P12,000
increase in total assets and a P12,000 increase in liabilities. This transaction could have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note payable for the
balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note payable for
the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by P12,000

7. Dean has completed the posting process for the month of June and has prepared a trial balance in which
the debits total P11,000 and the credits total P11,100. Which of the following errors would be the most
likely candidate in causing the trial balance not to balance by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger
Pre – Review 1 Class: Theories of Accounts

8. Increase in net assets may result from:

(a) revenues
(b) expenses
(c) withdrawals
(d) all of the above are correct

9. Which of the following statements is false?

(a) Increases to owner’s capital are recorded with credits.
(b) Sales are recorded as debits.
(c) Expenses reduce owner’s capital.
(d) Expenses and dividends are both recorded as debits.

10. Zinc Company recorded office supplies as an asset account when the supplies were purchased. Failure to
make an adjusting entry reflecting the use of these supplies will result in:
(a) an understatement of assets
(b) an overstatement of owner’s equity
(c) an understatement of liabilities
(d) an understatement of owner’s equity

11. Compared to its 2001 cash basis net income, Pry Company’s 2001 accrual basis net income increased
when it:
I. declared a cash dividend in 2000 that it paid in 2001.
II. wrote off more accounts receivable balances that it reported as uncollectible accounts expense in 2001.
III. had lower accrued expenses on December 31, 2001 than on January 1, 2001.
IV. sold used equipment for cash at a gain in 2001.

12. Before 2001, Druid Company used the cash basis of accounting. As of December 31, 2001, Druid changed
to the accrual basis. Druid cannot determine the beginning balance of supplies inventory. What is the
effect of Druid’s inability to determine beginning supplies inventory on its accrual basis net income and
December 31, 2001 accrual basis owners’ equity?
12/31/2001
2001 net income owner’s equity
I. No effect No effect
II. No effect Overstated
III. Overstated No effect
IV. Overstated Overstated

13. Wide Company wants to convert its 2001 financial statements from the accrual basis of accounting to the
cash basis. Both supplies inventory and office salaries payable increased between January 1 and
December 31. To obtain 2001 cash basis net income, how should these increases be added to or
deducted from the accrual basis net income?
Supplies inventory Office salaries payable
I. Deducted Deducted
II. Deducted Added
III. Added Deducted
IV. Added Added

14. Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net
decrease during the accounting period of:
Accounts receivable Accrued expense
I. Yes Yes
II. Yes No
III. No No
IV. No Yes

15. Dee’s inventory and accounts payable balances at December 21, 2001 increased over their December 31,
2000 balances. Should these increases be added to or deducted from cash payments to supplier to arrive
at 2001 cost of goods sold?
Page 2 of 13
Pre – Review 1 Class: Theories of Accounts

Increase in inventory Increase in accounts payable

I. Added to Deducted from
II. Added to Added to
III. Deducted from Deducted from
IV. Deducted from Added to

16. The premium on a three-year insurance policy expiring on December 31, 2003 was paid in total on January
2, 2001. If the company has six-month operating cycle, then on December 31, 2001, the prepaid
insurance reported as current asset would be for:
(a) 6 months (c) 18 months
(b) 12 months (d) 24 months

17. The premium on a three-year insurance policy expiring on December 31, 2003 was paid in total on January
1, 2001. The original payment was initially debited to a prepaid asset account. The appropriate journal
entry had been recorded on December 31, 2001. The balance in the prepaid asset account on December
31, 2001 should be:
I. zero.
II. the same as it would have been if the original payment had been debited initially to an expense
account.
III. the same as the original payment.
IV. higher than if the original payment had been debited initially to an expense account.

18. The premium on a three-year insurance policy expiring on December 31, 2003 was paid in total on January
1, 2001. Assuming the original payment was recorded as a prepaid, how would the total assets and
stockholders’ equity be affected during 2001?
I. Total assets would decrease and stockholders’ equity would increase.
II. Both total assets and stockholders’ equity would decrease.
III. Both total assets and stockholders’ equity would increase.
IV. Neither total assets nor stockholders’ equity would change.

19. The premium on a four-year insurance policy expiring on December 31, 2004 was paid in total on January
1, 2001. Assuming that the original payment was recorded as a prepaid asset, the balance in the prepaid
asset account on December 31, 2002 would be:
I. lower than the balance on December 31, 2001.
II. lower than the balance on December 31, 2003.
III. the same as the balance on December 31, 2004.
IV. the same as the original payment.

20. On January 1, 2001, Style Company signed a 5-year contract enabling it to use a patented manufacturing
process beginning in 2001. A royalty is payable for each product produced, subject to a minimum annual
fee. Any royalties in excess of the minimum will be paid annually. On the contract date, Style prepaid a
sum equal to two years’ minimum annual fees. In 2001, only minimum fees were incurred. The royalty
prepayment should be reported in Style’s December 31, 2001 financial statement as:
I. as expense only. (c) a current asset and noncurrent asset.
II. a current asset and an expense. (d) a noncurrent asset.

21. Cash or Cash on Hand and In Banks on the balance sheet may include the following items:
(1) Currency or cash items on hand
(2) Deposits in foreign countries which are subject to foreign exchange restrictions
(3) Short-term placements of excess cash which can be pre-terminated
(4) Postdated checks
(5) Cash set aside for the acquisition or construction of noncurrent assets
(a) 1, 2 and 3 only (c) 1 and 3 only
(b) 2, 3 and 5 only (d) not given

22. Balances representing cash, accounts receivable, and payable denominated in other than the local currency
should be translated for consolidation at the:
(a) historical rate (c) forward rate
Page 3 of 13
Pre – Review 1 Class: Theories of Accounts

(b) spot rate (d) current rate

23. The cash balance reported in the balance sheet normally will not include:
(a) small amounts of cash (petty cash) kept on hand in the office.
(b) checks received from customers and deposited in the bank.
(c) money orders.
(d) temporary investments due in one year.

24. Which of the following is not considered cash for financial reporting purposes?
(a) petty cash funds and change funds (c) coin, currency and available funds
(b) money order and certified checks (d) postdated checks and IOUs

25. Which of the following items in a cash drawer at November 30 is not cash?
(a) money orders (c) a customer check dated December 1
(b) coins and currency (d) a customer check dated November 28

26. If a financial institution has cash funds in a company, which is in bankruptcy, and the amount recoverable
is estimated to be lower than the face amount, cash should be:
(a) eliminated from the balance sheet.
(b) written down to its discounted or present value.
(c) written down to estimated realizable value.
(d) stated at face amount.

27. If the deposit is legally restricted as to withdrawal, the compensating balance related to a long-term long is
shown as:
(a) cash (c) long-term investment
(b) other asset (d) current liability

28. Each of the following measures strengthens internal control over cash receipts except:
(a) the use of a voucher system.
(b) preparation of a daily listing of all checks received through the mail.
(c) the deposit of cash receipts intact in the bank on a daily basis.
(d) the use of cash registers.

29. 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

30. The following statements relate to the petty cash fund. Which statement is true?
(a) The amount of coins and currency in the petty cash fund is the same before the fund is reimbursed as
it is afterwards.
(b) Entries to record the replenishment of the imprest petty cash fund result in debit to various expense
accounts and a credit to the petty cash funds.
(c) At any time, the sum of the cash in the petty cash fund and the total petty cash vouchers should equal
the amount for which the imprest petty cash fund was established.
(d) Under the imprest petty cash system, it is not necessary to adjust unreplenished petty cash expenses
at end of the year.

31. An enterprise should prepare a cash flow statement and should present it as:
(a) supplementary financial statement.
(b) note to financial statement.
(c) supporting schedule for amount appearing as cash and cash equivalent.
(d) integral part of the enterprise’s basic financial statements.

32. Cash flows in the cash flow statement are:

Page 4 of 13
Pre – Review 1 Class: Theories of Accounts

(a) inflows of cash and cash equivalents.

(b) outflows of cash and cash equivalents.
(c) inflows and outflows of cash.
(d) inflows and outflows of cash and cash equivalents.

33. Cash receipts from issuing shares and other equity instruments are:
(a) cash inflows from investing activities. (c) cash inflows from financing activities.
(b) cash outflows for investing activities. (d) cash outflows for financing activities.

34. In a cash flow statement, interest payments to lenders and other creditors should be classified as:
(a) operating activities. (c) lending activities.
(b) borrowing activities. (d) financing activities.

35. In a cash flow statement, alternatively interest received and dividend received may be classified as cash
flow from:
(a) operating activities. (c) financing activities.
(b) investing activities. (d) revenue activities.

36. How should a gain from the sale of used equipment for cash be reported in a cash flow statement using
the indirect method?
(a) in investment activities as a reduction of the cash inflow from the sale
(b) in investment activities as a cash outflow
(c) in operating activities as a deduction from income
(d) in operating activities as a addition to income

37. In a cash flow statement, which of the following items is reported as a cash flow from financing activities?
I. Payments to retire mortgage notes
II. Interest payments on mortgage notes
III. Dividend payments
(a) I, II and III (c) I only
(b) II and III (d) I and III

38. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash flow from
investing activities equals the carrying amount of the equipment:
(a) plus the gain.
(b) plus the gain and less the amount of tax attributable to the gain.
(c) plus both the gain and the amount of tax attributable to the gain.
(d) with no addition or subtraction.

39. In a cash flow statement, which of the following would increase reported cash flows from operating
activities using the direct method?
(a) dividends received from investments
(b) gain on sale of equipment
(c) gain on early retirement of bonds
(d) change from straight-line to accelerated depreciation

40. ABC Company’s accounts receivable decreased from the beginning to the end of the year. In the
company’s cash flow statement, the cash collected from customers would be:
(a) sales revenue plus accounts receivable at the beginning of the year.
(b) sales revenue plus the decrease in accounts receivable from beginning to the end of the year.
(c) sales revenue less the decrease in accounts receivable from beginning to the end of the year.
(d) the same as sales revenue.
41. The following statements relate to the financial statements. Which is not?
(a) The purpose of financial statements is to provide information about the financial position, performance
and cash flows of an enterprise that is useful to management in making economic decisions.
Page 5 of 13
Pre – Review 1 Class: Theories of Accounts

(b) 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
nonfinancial information.
(c) Financial statements also show the results of the stewardship of management, or the accountability of
the management for the resources entrusted to it,
(d) The management of an enterprise has the primary responsibility for the preparation and presentation
of the financial statements of the enterprise.

42. The following statements relate to the principles of statement presentation, except:
(a) The financial statements should present fairly the financial position, performance and cash flows of an
enterprise.
(b) The financial statements should be based on historical cost rather than market value.
(c) A balance sheet should classify cash to distinguish between cash on hand, petty cash fund, cash in
bank and cash equivalent.
(d) Offsetting of receivables and payable balances with the same person is allowed if a right of offset exists
or if separate settlement of those balances is expected.

43. Which of the following statements is correct about the principles of statement presentation?
(a) Financial statements are prepared on a liquidating concern with appropriate disclosure.
(b) Technically, offsetting applies to reporting of assets net of valuation.
(c) An enterprise should prepare its financial statements, except for cash flow information, under the
accrual basis of accounting.
(d) The financial statements should present fairly only the financial position and performance of an
enterprise because, anyway, the cash flows are not very significant in making decisions.

44. The overall principles of statement presentation include (choose the incorrect one):
(a) The financial statements should present fairly the financial position, performance and cash flows of the
enterprise.
(b) Management should select and apply accounting policies that are in conformity with ASC standards.
(c) An enterprise should prepare its financial statements in accordance with the cash basis of accounting.
(d) Financial statements should be prepared on a going concern basis.

45. Interim financial statements are usually made for a period of:
(a) one month (c) six months
(b) three months (d) twelve months

46. Financial statements must be prepared:

(a) monthly (c) semi-annually
(b) quarterly (d) yearly

47. Technically, offsetting in financial statements is accomplished when:

(a) the allowance for doubtful accounts is deducted from accounts receivable.
(b) the accumulated depreciation is deducted from property, plant and equipment.
(c) the total liabilities are deducted from total assets to arrive at net assets.
(d) gains or losses from disposal of noncurrent assets are reported by deducting from the proceeds the
carrying amount of the assets and the relating selling cost.

48. These portray the financial effects of transactions and other events by grouping them into broad classes
according to their economic characteristics.
(a) financial reports (c) interim statements
(b) financial statements (d) audit reports
49. The basic components of the financial statements do not include:
(a) balance sheet (c) statement of cash flows
(b) income statement (d) statement of cost of goods sold

50. The basic components of financial statements include (choose the incorrect one):
(a) statement of changes in equity (c) statement of retained earnings
(b) statement of recognized gains and losses (d) cash flow statement
Page 6 of 13
Pre – Review 1 Class: Theories of Accounts

51. The purpose of accounting is:

(a) to provide comprehensive financial information about a business or other economic entity.
(b) to provide comprehensive reports on the debits and credits.
(c) to interpret the results of operations of a business entity.
(d) to classify the business transactions of a business entity.

52. The principles, which constitute the ground rules for financial reporting, are termed as generally accepted
accounting principles. To qualify as generally accepted, an accounting principle:
(a) must guide corporate managers in the preparation of financial statements which should be understood
by widely scattered stockholders.
(b) must guide corporate managers in the preparation of financial statements which will be used in making
collective bargaining agreements with trade unions.
(c) must guide entrepreneurs in the choice of investments.
(d) must receive substantial authoritative support from the public and the members of the profession.

53. The opinions and pronouncements of the ASC of the PICPA provide the highest authoritative
pronouncements on accounting principles. The authority of these opinions rests upon their:
(a) rules and regulations of the SEC (c) integrity of the board
(b) management and their internal accounting staff. (d) opinions of authors.

54. The basic assumptions or fundamental propositions concerning the economic, political and sociological
environment in which accounting must operate are called:
(a) accounting postulates (c) accounting theories

(b) accounting principles (d) accounting opinions

55. In accounting, those standards and practices that have won acceptance because of their logic and proven
usefulness are referred to as:
(a) accounting dogmas (c) accounting procedures

(b) accounting principles (d) accounting theories

56. An accounting entity is created whenever there is a need to understand the economic and financial
activities of:
(a) an economic unit (c) a partnership

(b) a financial unit (d) a single proprietorship

57. Strict adherence to the entity concept would not allow:

(a) the use of the account form of the balance sheet.

(b) the use of replacement cost as a basis of valuation on the financial statements of branches.

(c) the capitalization of certain construction costs subsidiary companies.

(d) a parent company to take up in its books its proportionate share in its subsidiary’s profits and losses.

58. Which of the following is the primary elements that distinguishes accounting for corporations from
accounting for legal forms of business (such as partnership)?
(a) The entity theory relates primarily to the other forms of business organization.

(b) The corporation draws a sharper distinction in accounting for sources of capital.

Page 7 of 13
Pre – Review 1 Class: Theories of Accounts

(c) In a corporation, retained earnings may be reduced only by the declaration of dividends.

(d) Generally accepted accounting principles apply to corporations but have relatively little applicability to
other forms of business organizations.

59. The accounting period convention regards the life of the entity as consisting of:
(a) a chain of one-year segments (c) the remaining corporate life of the business

(b) the entire life of the venture (d) the nature life of the owner(s)

60. This is an assumption by accountants that a business will continue to operate indefinitely unless specific
evidences to the contrary exist, as for example, an impending bankruptcy.
(a) matching principle (c) cost principle

(b) going concern principle (d) objectivity principle

61. In analyzing a company’s financial statements, which financial statement would a potential investor
primarily use to assess the company’s profitability?
(a) balance sheet (c) statement of retained earnings
(b) income statement (d) cash flow statement

62. As a minimum, information to be presented on the face of the income statement are as follows, except:
(a) extraordinary items (c) net income or loss for the period
(b) provisions (d) finance costs

63. This capital concept considers the all price changes affecting assets and liabilities in the measurement of
net income. Accordingly, capital is equal to the net assets of the enterprise valued at current cost, rather
than historical cost.
(a) physical capital (c) capital maintenance approach
(b) financial capital (d) net assets approach

64. This method is simple to apply in many smaller enterprises. Expenses are aggregated in the income
statement such as depreciation, purchases of materials, transportation costs, wages and salaries, and
advertising costs.
(a) functional analysis (c) cost of sales method
(b) nature of expense analysis (d) matching principles method

65. These are income or expenses that arise from events or transactions that are clearly distinct from the
ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly.
(a) extraordinary items (c) changes in accounting estimates
(b) ordinary items (d) changes in accounting policies

66. A transaction that is material in amount, unusual in nature, but not infrequent in occurrence, should be
presented separately as:
(a) component of income from continuing operations, but not net of applicable income tax.
(b) component of income from continuing operations, net of applicable income tax.
(c) extraordinary item, net of applicable income tax.
(d) prior period adjustment, but not net of applicable income tax.
67. The amounts of revenues, expenses and net income or loss from ordinary activities attributable to a
discontinuing operation and the related income tax expense are shown:
(a) as extraordinary items.
(b) as part of the continuing operation.
(c) separately in juxtaposition with the continuing operation.
(d) as gain or loss from discontinuing operation.

Page 8 of 13
Pre – Review 1 Class: Theories of Accounts

68. These are errors discovered in the current period that such significance that the financial statements of
one or more prior periods can no longer be considered to have been reliable at the date of their issue.
I. Fundamental errors
II. Prior period adjustments
(a) I (b) II (c) I, II (d) not given

69. These are specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing
and presenting financial statements.
(a) accounting principles (c) accounting estimates
(b) accounting assumptions (d) accounting policies

70. The net income or loss for the period comprises the following components, each of which should be
disclosed on the face of the income statement:
I. Income or loss from ordinary activities
II. Extraordinary items
III. Fundamental errors
(a) I and II (b) I and III (c) II and III (d) I, II and III

71. A consideration in determining the useful life of an intangible asset is not the:
(a) legal, regulatory or contractual provision
(b) initial acquisition
(c) expected action of competitors
(d) effect of obsolescence, demand, competition and other economic factor

72. Indicate which one of these statements is true.

(a) Since intangible assets lack physical substance, they need to be disclosed only in the notes to the
financial statements.
(b) Goodwill should be reported as a contra account in the stockholders’ equity section.
(c) Totals of major classes of assets can be shown in the balance sheet, with asset details disclosed in the
notes to the financial statements.
(d) Intangible assets are typically combined with plant assets and natural resources and then shown in
property, plant and equipment section.

73. If a company reports goodwill as an intangible asset on its books, what is the one thing you know with
certainty?
(a) The company is a valuable company worth investing in.
(b) The company has a well-established brand name.
(c) The company purchased another company.
(d) The goodwill will generate a lot of positive business for the company for many years to come.

74. Which is not an intangible asset?

(a) manufacturing licenses (c) secret processes and formulaes
(b) noncompetition agreement (d) organizational costs

75. Which is not unidentifiable intangible asset?

(a) patent (c) copyright
(b) franchise (d) goodwill

76. If the pattern in which the economic benefits from the asset are consumed cannot be predicted reliably,
the method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years digit

77. Intangible assets should be carried (benchmark treatment):

(a) gross cost
(b) fair value on balance sheet date
(c) revalued amount minus accumulated amortization and accumulated impairment losses
Page 9 of 13
Pre – Review 1 Class: Theories of Accounts

(d) cost minus accumulated impairment losses and accumulated amortization

78. Which of the following is not considered in estimating the useful life of intangible assets?
(a) expected usage of the asset by the enterprise
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d) level of maintenance expenditure required to obtain the future economic benefit from the asset

79. The cost of purchasing patent rights for a product that might otherwise have seriously competed with the
purchaser’s patented product 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 useful life of the patent for the product whose market would have been
impaired by competition from the newly patented product.

80. A purchased patent has a remaining legal life of 15 years. It should be:
(a) expensed in the year of acquisition.
(b) amortized over 15 years regardless of the useful life.
(c) amortized over its useful life if less than 15 years.
(d) amortized over 20 years.

81. The test of marketability must be met before securities owned can be properly classified as:
(a) long-term investments. (c) current assets.
(b) debentures. (d) treasury stock.

82. A marketable equity security must have a ready market in order to be classified as current and:
(a) be available to management for use in short run operations.
(b) be traded on a recognized national exchange.
(c) have a current market value in excess of original cost.
(d) have been owned less than one year.

83. When the market value of a company’s current marketable securities portfolio is lower than its cost, the
difference should be:
(a) accounted for as a liability.
(b) disclosed and described in footnote 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 separately in the shareholders’ equity section of the balance sheet.

84. A security in a current marketable securities portfolio is transferred to a noncurrent marketable securities
portfolio. The security should be transferred between the corresponding portfolios at:
(a) the book value at date of transfer if higher than the market value at date of transfer.
(b) the market value at date of transfer, regardless of its cost.
(c) its cost, regardless of the market value at date of transfer.
(d) the lower of its cost or market value at date of transfer.
85. Cash dividends are usually declared on one date and payable on another subsequent date to stockholders
of record on some other intermediate date. At which of these dates has the investor-stockholders
theoretically realized income from the dividends?
(a) the date the dividend is declared
(b) the date of record
(c) the date the dividend check is mailed by the corporation
(d) the date the dividend check is received by the stockholder

86. The equity method of accounting for an investment in the common stock of another company should be
used when the investment:
Page 10 of 13
Pre – Review 1 Class: Theories of Accounts

(a) is composed of common stock and it is the investor’s intent to vote the common stock.
(b) ensures a source of supply such as raw materials.
(c) enables the investor to exercise significant influence over the investee.
(d) is obtained by an exchange of stock for stock.

87. When an investor uses the equity method to account for investments in common stock, the equity in the
earnings of the investee reported on the investor’s income statement will be affected by which of the
following?
Cash dividends from investee Goodwill amortization related to purchase

(a) No Yes

(b) No No

(c) Yes No

(d) Yes Yes

88. How should a gain from the sale of treasury stock be reflected on the financial statements if the cost
method of recording treasury stock transactions is in use?
(a) as an ordinary revenue, shown on the earnings statement

(b) as paid in capital from treasury stock transactions

(c) as an increase in the equity for common stock

(d) as an addition to retained earnings

89. Which of the following best describes a possible result of treasury stock transactions of a corporation?
(a) may directly decrease but not increase retained earnings

(b) may affect stockholders’ equity if the cost method is used instead of the par value method

(c) may increase but not decrease reported net earnings

(d) may decrease but not increase reported net earnings

90. How is an increase in the number of shares as a result of a stock split recorded?
(a) The transaction may be recorded by a memorandum notation in the general journal.

(b) The transaction may be recorded by a memorandum notation in the common stock account

(c) The transaction may be recorded by a memorandum notation in the general journal and in the common
stock account.

(d) There will be a transfer from the retained earnings account to the common stock account, the amount
of which is equal to the par value of the new number of shares resulting from the stock split.

91. An item of property, plant and equipment should be recognized as an asset when:
III. It is probable that future economic benefits associated with the asset will flow to the
enterprise.

Page 11 of 13
Pre – Review 1 Class: Theories of Accounts

IV. The cost of the asset to the enterprise can be measured reliably.
(a) I only (c) both I and II
(b) II only (d) neither I nor II

92. Which statement is false concerning recognition of property, plant and equipment?
(a) Most spare parts and servicing equipment are usually carried as inventory and recognized as expense
when consumed.
(b) If the spare parts and servicing equipment can be used only in connection with an item of property,
plant and equipment and their use is expected to be irregular, they are accounted for as property,
plant and equipment and are depreciated over their useful life or useful life of the related asset,
whichever is longer.
(c) An aircraft and its engines need to be treated as separate depreciable assets if they have different
useful lives.
(d) Property, plant and equipment may be acquired for safety and environmental reasons in order for the
enterprise to obtain future economic benefits from its other assets.

93. As a benchmark treatment, subsequent to initial recognition as an asset, an item of property, plant and
equipment should be carried at:
(a) cost
(b) revalued amount
(c) cost less any accumulated depreciation and any accumulated impairment loss
(d) revalued amount less any accumulated depreciation and any accumulated impairment loss

94. Directly attributable costs include all of the following except:

(a) cost of site preparation, initial delivery, handling and installation
(b) professional fees such as for architects and engineers
(c) estimated cost of dismantling and removing the asset and restoring the site, to the extent that it is
recognized as a provision
(d) initial operating losses incurred prior to an asset achieving planned performance

95. When payment for item of property, plant and equipment is deferred beyond normal credit terms, the
difference between the cash price equivalent and the total payments should be recognized as:
(a) interest expense of the current year
(b) component of cost of the property, plant and equipment
(c) interest expense over the credit period
(d) interest expense over the life of the asset

96. The cost of an item of property, plant and equipment that is acquired in exchange or part exchange for a
dissimilar item of property, plant and equipment is measured at the:
(a) fair value of the asset given up adjusted by the amount of any cash or cash equivalent transferred
(b) fair value of the asset received adjusted by the amount of any cash or cash equivalent transferred
(c) book value of the asset given up adjusted by the amount of any cash or cash equivalent transferred
(d) book value of the asset received adjusted by the amount of any cash or cash equivalent transferred

97. The cost of an item of property, plant and equipment acquired in a nonmonetary exchange for a similar
asset that has a similar use and similar fair value is measured at the:
(a) carrying amount of the asset given up
(b) fair value of the asset given up
(c) carrying amount of the asset received
(d) fair value of the asset received

98. Gains and losses arising from the retirement or disposal of an item of property, plant and equipment
should be determined as the difference between:
(a) gross disposal proceeds and the cost of the asset
(b) gross disposal proceeds and the carrying amount of the asset
(c) net disposal proceeds and the cost of the asset

Page 12 of 13
Pre – Review 1 Class: Theories of Accounts

(d) net disposal proceeds and the carrying amount of the asset

99. An item of property, plant and equipment that is retired from active use and held for disposal is carried at
its:
(a) carrying amount
(b) net realizable value
(c) carrying amount or net realizable value, whichever is lower
(d) carrying amount or net realizable value, whichever is higher

100. If a company 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 intention of the management for the property when the building was acquired

Page 13 of 13