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FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance (IABF)
Accountancy and Internal Auditing Department
Financial Accounting & Reporting, Part III
Midterm Examination (Special)
Name: _____________________________________________Yr. and Section: __________________
Instructions: In the following questions, provide the best answer. Strictly no erasures. Provide solutions
when necessary.

1. If a company failed to record accrued rent income in 2013 and recognized the rent upon collection
in 2014, net income would be understated and current assets would also be understated at the end
of what year? _____________________

2. An addition to Allowance to Reduce the Inventory to NRV was charged to operations at the end of
2013. The accounting entry resulted in an
a. Overstatement of the profits of 2013.
b. Understatement of the profits of 2013.
c. Overstatement of Retained Earnings.
d. No effect on Retained Earnings.

3. Your examination disclosed that merchandise purchased for P5,000 on F.O.B Shipping point terms
was not received at yearend. Company accountant did not record the purchase and excluded that
goods from the inventory. What correction, if any, is necessary?
a. Accounts payable should be increased.
b. Inventory only should be increased.
c. Both inventory and accounts payable should be increased.
d. No correction is necessary.

4. From the following data, determine the cost of the beginning inventory:

Cost of goods sold ……………………………………… P 221,000

Purchases ……………………………………… 250,000
Purchase Returns ……………………………………… 9,000
Transportation – In ……………………………………… 5,000
Ending inventory ……………………………………… 120,000
____________________________

5. How much was the correct balance of Retained Earnings as at December 31, 2013?

Retained Earnings
Dividends Payable P75,000 Balance, 1/1/13 P159,000
Appropriation for plant expansion 15,000 Net income for 2013 86,000
Gain on sale of treasury shares 12,000
____________________________

6. A marketing company under examination suffered a substantial loss in its inventory due to a flood
that occurred after the balance sheet date. The accountant should
a. Adjust the financial statements to reflect the loss.
b. Ignore the loss since it arose after the balance sheet date.
c. Disclose the loss in the Notes to the Financial Statements.
d. None of the above.

7. For its fiscal year ended June 30, 2013, a corporation declared on July 31, 2013 a 15% cash
dividend for shareholders on record on August 31, 2013, the dividend payable on September 30,
2013. At what date did the liability for the dividend accrue? _________________________

8. What effect would the omission of accrued salaries of P750 on December 31, 2013 have,
assuming the error was not discovered until 2015? ____________________
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9. An annual non – life insurance premium of P3,000 was charged to expense when paid on May 1,
2014. An adjusting entry should be made as of September 30, 2014, the ending date of the
company’s fiscal year, to set up the Unexpired Insurance account of _______________________

10. A machine having a cash price of P30,000 was purchased on an installment plan, with a down
payment of P6,000, the balance payable in equal monthly installments for two years. As of Dec.
31, 2013, a total of P12,000 (including the down payment) plus interest of P420 has been paid on
the machine, installation charges on the machine amounted to P750. At what cost should the
machine be stated in the December 31, 2013 balance sheet? ___________________________

11. By applying the gross profit test on the following data, by how much was the estimated inventory
on Dec. 31, 2013 overstated?
Inventory ………………………………… P 250,000
Inventory, Dec. 31, 2013 (estimated by the accounting staff) ………… 320,000
Purchases, 2013 ……………………………….. 400,000
Sales, 2013 ………………………………… 600,000
Average gross profit on sales ………………………………… 40%
____________________________________

12. If equipment purchased for P10,000 on Jan. 2. 2013 (estimated life of 10 years) was charged to
Repairs and Maintenance account, by how much was the net income for the year 2013
understated? ___________________________

13. An investor bought 100 shares of stock for P12,000 and later received a 20% share dividend which
he sold at P110 per share. The sale of shares received as stock dividend was recorded as follows:
Cash ……………………. 2,200
Miscellaneous Income ………………… 2,200

With the above entry, by how much was income overstated? __________________________

14. The unadjusted trial balance of Pasay Company shows in part:

Debit Credit
Accounts Receivable ……………………….. P 144,000
Allowance for bad debts ……………………….. P 4,000
Sales ……………………….. 750,000
Sales Returns ……………………….. 8,000

To maintain the allowance for bad debts at 3% of the outstanding accounts receivable, what would
you do? ____________________________

15. In auditing a business using an incomplete method of accounting, you find that accounts
receivables on January 1, 2013 totaled P34,000. Collections from customers during the year were
P142,000, and the accounts receivables on December 31, 2013, P36,000. How much were credit
sales for 2013? _________________________________

16. From the following available data, determine the total cost of a new building constructed:
Construction contracted price ……………………….. P 400,000
Architect’s fee and building permit fees ……………….. 25,000
Interest paid on money borrowed within
the construction period ……………………….. 12,000
Excess of current value of building over
its construction price ……………………….. 50,000
___________________________________

17. A delivery truck acquired on Jan. 2, 2014 for P50,000 with an estimated life of five years, was sold
on June 30, 2014 for P27,000. The company’s accountant recorded the sale as follows:
Cash …………………….. 27,000
Transportation Equipment ……………….. 27,000

The above entry resulted in: ____________________________

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18. Your examination of the notes receivable for the year ended Dec. 31, 2014 showed, among others,
a 90 – day note dated Nov. 1, 2014, face value P20,000, with interest at 9%. The note was from a
stockholder in payment of his subscription to shares of the company’s capital stock. An adjustment
should be made as of December 31, 2014 to take up ________________________

19. An inventory examination resulted in the accumulation of the following information:

Physical inventory of all merchandise on the

client’s premises on Dec. 31, 2013 ………………………….. P 275,000
Goods being held on consignment by client ………………… 20,000
Goods still in transit, FOB Shipping point ………………… 15,000
Inventory items duplicated ………………………….. 3,000
Extension, footing errors (undervaluation) ………………… 4,000

The December 31, 2013 inventory should be stated at ____________________________

20. On December 31, 2015, Urbane Company sold merchandise for P3,000,000. The terms of the sale
were net 30, FOB shipping point. The merchandise was shipped on December 31, 2015, and
arrived on January 5, 2016. Due to a clerical error, the sale was not recorded until January 2016
and the merchandise sold at a 25% markup on cost was included in the inventory on December
31, 2015. What is the effect on the cost of goods sold for 2015? ___________________________

21. Wayward Company’s year-end financial statements contained the following errors:
December 31, 2014 December 31, 2015
Ending inventory P950,000 understated P800,000 overstated
Depreciation P250,000 understated

An insurance premium of P600,000 was prepaid in 2014 covering the years 2014, 2015 and 2016. The
entire amount was charged to expense in 2014. In addition, on December 31, 2015, fully depreciated
machinery was sold for P150,000 cash. Ignore income tax. What is the total effect of the errors on
retained earnings on December 31, 2015? ________________________________

Weirdo Company began operations on January 1, 2014. Financial statements for the years 2014 and
2015 contained the following errors:
2014 2015
Ending inventory 800,000 under 400,000 over
Depreciation 150,000 under
Insurance expense 50,000 over 50,000 over
Prepaid insurance 50,000 over

In addition, on December 31, 2015, a fully depreciated equipment was sold for P100,000 cash but the
sale was not recorded until 2016. Ignoring income tax, what is the total effect of the errors on:

22. Working capital on December 31, 2015? ______________________

23. Retained earnings on December 31, 2015? _______________________

Use the following information for questions 24 through 26.

The balance sheet data of Trisha Company at the end of 2011 and 2010 follow:
2011 2010
Cash P 50,000 P 70,000
Accounts receivable (net) 120,000 90,000
Merchandise inventory 140,000 90,000
Prepaid expenses 20,000 50,000
Buildings and equipment 180,000 150,000
Accumulated depreciation—buildings and equipment (36,000) (16,000)
Land 180,000 80,000
Totals P654,000 P514,000
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Accounts payable P136,000 P110,000
Accrued expenses 24,000 36,000
Notes payable—bank, long-term 80,000
Mortgage payable 60,000
Share capital-ordinary, P10 par 418,000 318,000
Retained earnings (deficit) 16,000 (30,000)
P654,000 P514,000
Land was acquired for P100,000 in exchange for ordinary shares, par P100,000, during the year; all
equipment purchased was for cash. Equipment costing P10,000 was sold for P4,000; book value of the
equipment was P8,000 and the loss was reported in net income. Cash dividends of P20,000 were charged
to retained earnings and paid during the year; the transfer of net income to retained earnings was the only
other entry in the Retained Earnings account. In the statement of cash flows for the year ended December
31, 2011, for Trisha Company:

24. The net cash provided by operating activities was ________________________

25. The net cash provided (used) by investing activities was ________________________

26. The net cash provided (used) by financing activities was ___________________________

“Jesus said to him: I am the way, and the truth, and the life. No man comes to the Father, but
by me.”
(Dicit ei Iesus ego sum via et veritas et vita. Nemo venit ad Patrem nisi per me)
John 14:6