Basic Accounting

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

____ 1. The responsibility to review the work of the

accountants and issue opinions as to the fairness of the
financial statements rests with
a the external auditor.
.
b the board of directors.
.
c the internal auditors.
.
d management.
.

____ 2. The __________ of a firm is primarily responsible

for the preparation of financial statements in accordance
with GAAP.
a the internal auditors.
.
b management.
.
c the external auditors.
.
 d the board of directors.
.

____ 3. Historical cost has been the valuation basis most

commonly used in accounting because of its
a timelessness.
.
b conservatism.
.
c reliability.
.
d accuracy.
.

____ 4. Which of the following elements of financial

statements is not a component of comprehensive income?
a Revenues
.
b Expenses
.
c Losses
.
d Distributions to owners
.
____ 5. Which of the following is not a purpose of the
conceptual framework of accounting?
a To provide definitions of key terms and
. fundamental concepts
b To provide specific guidelines for resolving
. situations not covered by existing accounting
standards
c To assist accountants and others in selecting
. among alternative accounting and reporting
methods
d To assist the accounting body in the standard-
. setting process

____ 6. Which of the following is not an implication of the

going-concern assumption?
a The historical cost principle is credible.
.
b Depreciation and amortization policies are
. justifiable and appropriate.
c The current/noncurrent classification of assets
. and liabilities is justifiable and significant.
d Amortizing research and development costs over
. multiple periods is justifiable and appropriate.
____ 7. According to the conceptual framework, the process
of reporting an item in the financial statements of an
entity is
a realization.
.
b recognition.
.
c matching.
.
d allocation.
.

____ 8. Conservatism is best described as selecting an

accounting alternative that
a understates assets and/or net income.
.
b has the least favorable impact on owners' equity.
.
c overstates, as opposed to understates, liabilities.
.
d is least likely to mislead users of financial
. information.

____ 9. Large business enterprises employ financial

accountants who are primarily concerned
with__________ financial reporting.
 a corporate tax
.
b management
.
c External
.
d international
.

____ 10. Financial statements issued for the use of parties

external to the enterprise are the primary responsibility of
the
a management of the enterprise.
.
b stockholders of the enterprise.
.
c independent auditors of the enterprise.
.
d creditors of the enterprise.
.

____ 11. The debit and credit analysis of a transaction

normally takes place when the
a entry is posted to a subsidiary ledger.
.
b entry is recorded in a journal.
 .
c trial balance is prepared.
.
d financial statements are prepared.
.

____ 12. A routine collection on a customer's account was

recorded and posted as a debit to Cash and a credit to
Sales Revenue. The journal entry to correct this error
would be
a a debit to Sales Revenue and a credit to Accounts
. Receivable.
b a debit to Sales Revenue and a credit to Unearned
. Revenue.
c a debit to Cash and a credit to Accounts
. Receivable.
d a debit to Accounts Receivable and a credit to
. Sales Revenue.

____ 13. Which of the following is not presented in an income

statement?
a Revenues
.
b Expenses
.
c Net income
 .
d Dividends
.

____ 14. Iowa Cattle Company uses a periodic inventory

system. Iowa purchased cattle from Big D Ranch at a cost
of P27,000 on credit. The entry to record the receipt of the
cattle would be
a Debit: Purchases (27,000); Credit: Accounts
. Payable (27,000)
b Debit: Inventory (27,000); Credit: Accounts
. Payable (27,000)
c Debit: Purchases (27,000); Credit: Cash (27,000)
.
d Debit: Inventory (27,000); Credit: Cash (27,000)
.

____ 15. Failure to record depreciation expense at the end of

an accounting period results in
a understated income.
.
b understated assets.
.
c overstated expenses.
.
d overstated assets.
 .

____ 16. Arid Company paid P1,704 on June 1, 2013, for a

two-year insurance policy and recorded the entire amount
as Insurance Expense. The December 31, 2013, adjusting
entry is
a debit Prepaid Insurance and credit Insurance
. Expense, P497.
b debit Insurance Expense and credit Prepaid
. Insurance, P497.
c debit Insurance Expense and credit Prepaid
. Insurance, P1,207.
d debit Prepaid Insurance and credit Insurance
. Expense, P1,207.

____ 17. On December 31 of the current year, Holmgren

Company's bookkeeper made an entry debiting Supplies
Expense and crediting Supplies on Hand for P12,600. The
Supplies on Hand account had a P15,300 debit balance on
January 1. The December 31 balance sheet showed
Supplies on Hand of P11,400. Only one purchase of
supplies was made during the month, on account. The
entry for that purchase was
a debit Supplies on Hand, P8,700 and credit Cash,
. P8,700.
b debit Supplies Expense, P8,700 and credit
 . Accounts Payable, P8,700.
c debit Supplies on Hand, P8,700 and credit
. Accounts Payable, P8,700.
d debit Supplies on Hand, P16,500 and credit
. Accounts Payable, P16,500.

____ 18. Crescent Corporation's interest revenue for 2013 was

P13,100. Accrued interest receivable on December 31,
2013, was P2,275 and P1,875 on December 31, 2012. The
cash received for interest during 2013 was
a. 1,350
b. 10,825
c. 12,700
d. 13,100

____ 19. The following balances have been excerpted from

Edwards' balance sheets:

December December
31, 2013 31, 2012
Prepaid P6,000 P7,500
Insurance
Interest 3,700 14,500
Receivable
Salaries 61,500 53,000
 Payable

Edwards Company paid or collected during 2013 the

following items:

Insurance 41,500
premiums paid
Interest 123,500
collected
Salaries paid 481,000

The insurance expense on the income statement for 2013

was
a 28,000
.
b 40,000
.
c 43,000
.
d 55,000
.

____ 20. What is the correct order of the following events in

the accounting process?

I Financial statements
 are prepared.
II Adjusting entries
are recorded.
III Nominal accounts
are closed.

a I, II, III
.
b II, I, III
.
c III, II, I
.
d II, III, I
.

____ 21. How would proceeds received in advance from the

sale of nonrefundable tickets for the Super Bowl be
reported in the seller’s financial statements published
before the Super Bowl?
a Revenue for the entire proceeds.
.
b Revenue less related costs.
.
c Unearned revenue less related costs.
.
d Unearned revenue for the entire proceeds.
 .

____ 22. On August 1, a company received cash of P9,324 for

one year’s rent in advance and recorded the transaction on
that day as a credit to rent revenue. The December 31
adjusting entry would include
a a debit to Rent Revenue for P3,885.
.
b a credit to Unearned Rent Revenue for P5,439.
.
c a debit to Unearned Rent Revenue for P3,885.
.
d a credit to Rent Revenue for P9,324.
.

____ 23. On August 1 of the current year, Kyle Company

borrowed P278,000 from the local bank. The loan was for
12 months at 9 percent interest payable at the maturity
date. The adjusting entry at the end of the fiscal year
relating to this obligation would include a
a debit to interest expense of P25,020.
.
b debit to interest expense of P10,425.
.
c credit to note payable of P10,425.
.
 d debit to interest receivable of P10,425.
.

____ 24. Carbon Company’s accounting records provided the

following information (all amounts in thousands of
pesos):

Balances Balances
12/31/2012 12/31/2013
Current Assets P240 P?
Property, Plant, and 1,600 1,700
Equipment
Current Liabilities ? 130
Long-term 580 ?
Liabilities

All assets and liabilities of the firm are reported in the

schedule above. Working capital of P92 remained
unchanged from 2012 to 2013. Net income in 2011 was
P64. No dividends were declared during 2013 and there
were no other changes in owners’ equity. Total long-term
liabilities at the end of 2013 would be
a 340
.
b 432
.
 c 580
.
d 616
.

____ 25. Which of the following characteristics may result in

the classification of a liability as current?
a Short-term obligations expected to be refinanced
. with long-term debt
b Debts to be liquidated from funds that have been
. accumulated and are reported as noncurrent
assets
c Violation of provisions of a debt agreement
.
d Obligations for advance collections that involve
. long-term deferment of the delivery of goods or
services

____ 26. Which of the following would not be reported for

capital stock in the contributed capital section of a
classified balance sheet?
a Dividends per share
.
b Shares authorized
.
c Shares issued
 .
d Shares outstanding
.

____ 27. Which of the following circumstances would require

recording an accrual for a loss contingency under current
generally accepted accounting principles?
a Event is unusual in nature and occurrence of
. event is probable
b Event is unusual in nature and event occurs
. infrequently
c Amount of loss is reasonably estimable and
. occurrence of event is probable
d Amount of loss is reasonably estimable and event
. occurs infrequently

____ 28. The following data were taken from the financial
statements of Howard Corporation for the year ended
December 31, 2020:

Net sales P120,0

00
Net income 30,000
Total assets, January 1, 400,000
2020
 Total assets, December 600,000
31, 2020

What was Howard's rate of return on assets for 2020?

a 5 percent
.
b 6 percent
.
c 20 percent
.
d 24 percent
.

____ 29. Information from Brian Company's balance sheet is

as follows:

Current assets:
Cash 1,200,0
00
Investment securities 3,750,00
0
Accounts receivable 28,800,0
00
Inventories 33,150,0
00
Prepaid expenses     600,0
 00
Total current assets 67,500,0
00
Current liabilities:
Notes payable 750,00
0
Accounts payable 9,750,00
0
Accrued expenses 6,250,00
0
Income taxes payable 250,000
Payments due within one   1,750,0
year on long-term debt 00
Total current liabilities 18,750,0
00

What is Brian's current ratio?

a 0.26 to 1
.
b 0.30 to 1
.
c 1.80 to 1
.
d 3.60 to 1
.
____ 30. Southeast Company's adjusted trial balance at
December 31, 2021, includes the following account
balances:

Common Stock, P3 par P300,0

00
Additional Paid-In Capital 400,00
0
Treasury Stock, at cost 25,000
Net Unrealized Holding Loss on Available-
For-Sale 10,000
Securities
Retained Earnings-Appropriated for
Uninsured Earthquake 75,000
Losses
Retained Earnings-Unappropriated 100,00
0

What amount should Southeast report as total owners'

equity in its December 31, 2021, balance sheet?
a 840,000
.
b 860,000
.
c 890,000
.
d 910,000
 .

____ 31. What is the effect of the collection of accounts

receivable on the current ratio and net working capital,
respectively?
a Current ratio (No effect);Net working capital (No
. effect)
b Current ratio (Increase); Net working capital
. (Increase)
c Current ratio (Increase); Net working capital (No
. effect)
d Current ratio (No effect); Net working capital
. (Increase)

____ 32. Which of the following is an appropriate computation

for return on investment?
a Net income divided by sales
.
b Net income divided by total assets
.
c Sales divided by total assets
.
d Sales divided by stockholders' equity
.
____ 33. Which of the following items would normally be
excluded from the computation of working capital?
a Advances from customers for goods that will be
. shipped three months after the balance sheet date
b The portion of long-term debt that matures six
. months after the balance sheet date and will be
paid from the regular cash account
c Prepaid insurance
.
d Cash surrender value of life insurance
.

____ 34. The balance sheet category receivables represents

claims to cash. Accounts receivable typically constitutes
the largest dollar value of receivables. An estimated
allowance for doubtful accounts should be deducted from
the gross amount of accounts receivable to arrive at the
estimated amount collectible. Plant assets are reported on
the balance sheet at their historical cost less any
accumulated depreciation. The allowance for doubtful
accounts and accumulated depreciation are both termed
contra-asset accounts. Which of the following statements
regarding these two contra-asset accounts is true?
a Both result in the valuation of their related asset
. account at net realizable value.
b Accumulated depreciation deducted from the
. related asset account shows the unallocated
 portion of the historical cost of the related
asset.
c Accumulated depreciation deducted from the
. related asset account shows the net realizable
value of the related asset.
d Accumulated depreciation deducted from the
. related asset account shows the current
replacement cost of the related asset.

____ 35. In a consolidated balance sheet, the minority interest

is reported
a as part of long-term liabilities.
.
b between liabilities and stockholders’ equity
.
c as part of stockholders’ equity.
.
d as part of long-term assets.
.

____ 36. Which of the following is not true regarding reserves

that appear in the equity section of the balance sheet of
foreign companies?
a Reserves represent cash set aside to fund capital
. projects.
b Reserves are different categories found in the
 . equity section of the balance sheet.
c The balances in reserve accounts can affect an
. entity’s legal ability to pay cash dividends.
d An extensive description of each reserve shown
. on the balance sheet is provided.

____ 37. Which of the following ratios measures short-term

solvency?
a Current ratio
.
b Creditors' equity to total assets
.
c Return on investment
.
d Total asset turnover
.

____ 38. Information from Caine Company's balance sheet is

as follows:

Current assets:
Cash P
900,000
  Marketable securities 3,750,00
0
  Accounts receivable 26,800,0
00
  Inventories 33,150,0
00
  Prepaid expenses 600,00
0
  Total current assets P65,200,
000
Current liabilities:
  Notes payable P
1,050,00
0
  Accounts payable 8,750,00
0
  Accrued expenses 5,250,00
0
  Income taxes payable 250,000
  Payments due within one year 1,950,0
on long-term debt 00
  Total current liabilities P17,250,
000

What is Caine's current ratio?

a 0.26 to 1
.
b 0.30 to 1
.
 c 1.80 to 1
.
d 3.78 to 1
.

____ 39. A measure of profitability analysis is

a times interest earned.
.
b cash flow per share.
.
c quick ratio.
.
d dividend payout ratio.
.

____ 40. The calculation of the return on total assets ratio

would use all of the following except
a average stockholders’ equity.
.
b total assets.
.
c average total assets.
.
d net sales.
.
____ 41. Simultaneous recognition of both a revenue and an
expense may result from certain transactions or events.
An example of an expense so recognized may be
a Expired portion of prepaid insurance.
.
b Salespersons’ monthly salaries.
.
c Transportation to customers.
.
d Electricity used to light offices.
.

____ 42. UVW Broadcast Co. entered into a contract to

exchange unsold advertising time for travel and lodging
services with Hotel Co. As of June 30, advertising
commercials of P10,000 were used. However, travel and
lodging services were not provided. How should UVW
account for advertising in its June 30 financial
statements?
a Revenue and expense is recognized when the
. agreement is complete.
b An asset and revenue for P10,000 is recognized.
.
c Both the revenue and expense of P10,000 are
. recognized.
d Not reported.
 .

____ 43. Which of the following is an accrued liability?

a Cash dividends payable.
.
b Wages payable.
.
c Rent revenue collected 1 month in advance.
.
d Portion of long-term debt payable in current year.
.

____ 44. On January 1, 2017, Brecon Co. installed cabinets to

display its merchandise in customers’ stores. Brecon
expects to use these cabinets for 5 years. Brecon’s 2017
multi-step income statement should include
a One-fifth of the cabinet costs in cost of goods
. sold.
b One-fifth of the cabinet costs in selling, general,
. and administrative expenses.
c All of the cabinet costs in cost of goods sold.
.
d All of the cabinet costs in selling, general, and
. administrative expenses.
____ 45. On November 1, 2017, Key Co. paid P3,600 to renew
its insurance policy for 3 years and used an income
statement account to record this transaction. At December
31, 2017, Key’s unadjusted trial balance showed a balance
of P90 for prepaid insurance and P4,410 for insurance
expense. What amounts should be reported for insurance
expense in Key’s December 31, 2017 financial
statements?
a 1,200
.
b 1,250
.
c 1,100
.
d 1,010
.

____ 46. James Lee, M.D., keeps his accounting records on a

cash basis. During 2017, Dr. Lee collected P100,000 in
fees from his patients. At December 31, 2007, Dr. Lee had
accounts receivable of P20,000. At December 31, 2017,
Dr. Lee had accounts receivable of P30,000, and unearned
fees of P1,000. On an accrual basis, how much was Dr.
Lee’s patient service revenue for 2017?
a 111,000
.
b 109,000
 .
c 90,000
.
d 89,000
.

____ 47. Bucca Warehousing Corporation bought a building at

auction on June 30, 2017, for P1,000,000. On July 2,
2017, before occupying the building, Bucca sold it to a
triple-A rated company for P1,200,000. Bucca received a
cash down payment of P300,000 and a first mortgage note
at the market rate of interest, for the balance. No
additional payments were required until 2018. On
September 1, 2017, an independent appraiser valued the
property at P1,500,000. On its 2017 income tax return,
Bucca reported the sale on the installment basis. How
much gain should Bucca recognize in its income
statement for the year ended December 31, 2017?
a 0
.
b 50,000
.
c 200,000
.
d 300,000
.
____ 48. Which of the following should be expensed as
incurred by a franchise with an estimated useful life of 10
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.

____ 49. On January 3, 2017, Paterson Services, Inc. signed an

agreement authorizing Cobb Company to operate as a
franchisee over a 20-year period for an initial franchise
fee of P50,000 received when the agreement was signed.
Cobb commenced operations on July 1, 2017, at which
date all of the initial services required of Paterson had
been performed. The agreement also provides that Cobb
must pay a continuing franchise fee equal to 5% of the
revenue from the franchise annually to Paterson. Cobb’s
franchise revenue for 2017 was P400,000. For the year
ended December 31, 2017, how much should Paterson
record as revenue from franchise fees in respect of the
Cobb franchise?
a 70,000
 .
b 50,000
.
c 45,000
.
d 22,500
.

____ 50. 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.
.

Basic Accounting
Answer Section

MULTIPLE CHOICE

1. A
2. B

3. C

4. D

5. B

6. D

7. B

8. B

9. C

10. A

11. B

12. A

13. D

14. A

15. D
16. D

17. C

18. C

19. C

20. B

21. D

22. B

23. B

24. D

25. C

26. A

27. C

28. B

29. D
30. A

31. A

32. B

33. D

34. B

35. C

36. A

37. A

38. D

39. D

40. A

41. C
SOL:
Transportation to customers is correct because the
revenue transaction (sales of goods to customers) directly
causes the incurrence of the expense (transportation to
customers).
42. B
SOL:
UVW has provided P10,000 in advertising services and
has a receivable for the travel and lodging services.

43. B
SOL:
Accrued liability results from recording an expense that
has been incurred but not paid. Wages payable is an
example of an expense incurred but not paid.

44. B
SOL:
One-fifth of the cabinet costs would be reported as
depreciation expense in selling, general, and
administrative expenses. Four-fifths of the cabinet cost
would remain capitalized as fixed assets at the end of
2017.

45. C
SOL:
Based on the information given, Key has only one prepaid
insurance policy at 12/31/2017. The 3-year policy
acquired on 11/1/2017 has been in force for 2 months, so
34 months remain unexpired. Therefore, 12/31/2017
prepaid insurance is P3,400 (P3,600 x 34/36). Key must
make an adjusting entry to transfer P3,310 (P3,400 - P90)
from insurance expense to prepaid insurance. This will
leave the account balances at P3,400 for prepaid
insurance (P90 + P3,310) and P1,100 for insurance
expense (P4,410 - P3,310). (Apparently, Key Co. records
policy payments as charges to insurance expense during
the year and adjusts the prepaid insurance account at the
end of the year.)

46. B
SOL:
The following formula is used to adjust service revenue
from the cash basis to the accrual basis:

Accrual Beg. End.

basis
service = Cash + E – Be + unea – unearn
fees nd g. rned ed
.
revenue collec A A fees fees
ted R R
Therefore, Dr. Lee's patient service revenue for 2017 is
P109,000 (P100,000 + P30,000 – P20,000 + P0 - P1,000).
As an alternative, T-accounts can be used.

Service Acct.
revenue receivable
110, 1/1/20 20,0
000 17 00
1, 100, Cash
00 000 received
0
109, 12/31/ 110,
000 2017 000
30,0
00

Unearned
revenue
0 1/1/201
7
1,00
0
1,00 12/31/2
0 017
47. C
SOL:
The installment method of recognizing revenue is not
acceptable for financial reporting purposes unless the
circumstances are such that the collection of the sales
price is not reasonably assured. Since the property was
sold to a triple-A rated company and the value of the
property is appreciating, collection can be assumed to be
reasonably assured. Therefore, the entire gain should be
recognized for financial reporting purposes at the date of
sale:

Sales – Cost of = Gain

price building recogniz
ed
P1,200 – P1,000,0 = P200,00
,000 00 0

48. D
SOL:
The requirement is to determine which of the following
outflows should be expensed as incurred by the
franchisee. Continuing franchise fees, based on revenues,
should be reported as expenses when incurred.

49. A
SOL:
Initial franchise fees are recognized as revenue when all
of the initial services required of the franchisor have been
substantially performed. Continuing franchise fees are
reported as revenue as the fees are earned and become
receivable. In this case, since all the initial services were
performed by 7/1/2017, the initial fee (P50,000) is
recognized as revenue in 2017. Also, continuing fees of
P20,000 (5% x P400,000) should be recognized.
Therefore, the total franchise fee revenue to be recognized
in 2017 is P70,000 (P50,000 + P20,000).

50. D