Prelim Exam in E4

 Multiple Choice.  Theories

 
1. Which of the following characteristics relates to both accounting relevance and reliability?
A. verifiability                               
B.  neutrality
C.  timeliness                                  
D.  comparability

2. Which qualitative characteristics relate to the presentation of financial statements?

A.  relevance and reliability                       
B.  reliability and understandability
C.  understandability and comparability     
D.  reliability and comparability

3. Objectivity is assumed to be achieved when an accounting transaction---

A. is recorded in affixed amount of pesos
B. involves the payment or receipt of cash
C. involves an arm’s length transaction between   two independent parties
D. allocates revenue or expenses in a rational and systematic manner
 c
4. The characteristic that is demonstrated when a high degree of consensus can be secured
among independent measurers using the same measurement methods is-
A.  relevance                                         
B. verifiability
C.  understandability                             
D.  neutrality
c
5.  What is the purpose of information presented in notes to the financial statements?
A. To provide disclosure 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 financial statements
D. To present management’s responses to auditor comments
a
6.  Footnotes to the financial statements are beneficial in meeting the disclosure requirements of
financial reporting.  The footnotes should not be used to-
A. Describe significant accounting policies
B. Describe depreciation methods employed by the company
C. Describe the principles and methods peculiar to the industry in which the company
operates, when these principles methods are predominantly followed in that industry
D. Correct an improper presentation in the financial statements
d
7. Which information is not included in the “notes  to financial statements”?
A. statement of compliance with GAAP
B. statement of measurement  basis for the financial statements and accounting policies  
applied
C. supporting information for line items presented and aggregated
D.  cash flow statement
d
 

8.   In statement of cash flows, interest payments to lenders and other creditors should be
classified as cash outflows for –
A.  operating activities                      
 B.   lending  activities
C.   borrowing activities                         
D.  financing activities

9. When costs can be reasonably associated with specific products the costs should be-
A. Charged to expense in the period incurred
B. Allocated to specific products based on the best  estimate of the product processing time
C. Expensed in the period in which the related revenue is recognized
D. Capitalized and then amortized over a reasonable period
c
10. If during an accounting period an expense item has been incurred but not yet paid, the
adjusting entry would involve-
A. a liability account and an asset account
B.  an asset or contra-asset and an expense account
C. an expense account and a liability account
D. a receivable account and a revenue account
c
11. The  installation of accounting procedures for the accumulation of financial data is known as-
A. auditing                                                             
B. electronic data processing
C. financial   accounting                                         
D. accounting system
d
12. The essential characteristics of an asset include all of the following, except-
A.  the asset is the result of past  transaction or event
B. the asset provides future  economic benefit
C.  the cost of the asset can be measured  reliably
D.  the asset is tangible
d
13.  The most important information about a company generally should be disclosed in-
A.  the body of the financial statements       
B.  supplementary statements
C.  notes to the financial statements               
D. schedules

14. Income does not arise from –

A. sale of merchandise to customers
B.  rendering of services
C. use of entity resources by others
D.  issuance of ordinary share at an amount  in excess of par value
d
15.  A component of an entity is classified as a discontinued  operation
I-  When the entity has actually disposed of the operation
II-  When the operation meets the criteria to be classified as “held for sale”
A.  either I or II                                           
B.   I only
C. Neither I nor II                                           
D.  II only
A

16. An abandoned noncurrent asset-

A. Shall be classified as held for sale
 B. Shall not  be classified as held for sale  because its carrying amount will be
recovered principally through continuing use
C. Shall be accounted for as a discontinued operation
D. Shall be treated   as a loss
B
17.  Which one of the following transactions should not be included in determining income?
A.  receipt of interest from bank accounts      
B. sale of treasury shares
C. sale of property, plant and equipment   
D. sale of product
c
18.  This means “applying a new accounting policy to transactions, other events and conditions
as if that   policy had always been applied”
A.  retrospective application              
B. retrospective restatement
C.  prospective application                  
D. prospective restatement
A
19. Conceptually, interim financial statements can be described as emphasizing
A. Timeliness over reliability
B. Reliability over relevance
C. Relevance over comparability
D. comparability over neutrality.
 a
20. It is the process of determining the monetary amounts at which the elements of the financial
statements are recognized and carried in the financial statements-
A.  measurement                                   
B.  presentation
C. recognition                                           
D. recording
A
21. Why is reclassification adjustment used when reporting other comprehensive income?
A. Adjustment made to reclassify an item of comprehensive income as another item of
comprehensive income
B. Adjustment made to avoid double counting of items
C. Adjustment made to make net income equal to comprehensive income
D. Adjustment made to adjust for the income tax effect of reporting  comprehensive income
b
22. When classifying assets as current and noncurrent for reporting  purpose--
A. The amounts at which current assets are carried and reported must reflect realizable
cash values
B. Prepayments for items such as insurance or rent are included in an “other assets” group
rather than as current assets as they will ultimately be expensed
C. The time period by which current assets are distinguished from noncurrent assets  is 
determined by the seasonal nature of the business
D. Assets are classified as current if they are reasonably expected to be realized in
cash or consumed during the normal operating cycle
D
 21. Non-trade receivables are classified as current assets only if they are reasonably expected
to be realized in cash-
A. Within one year or within the operating cycle, whichever is shorter
B. Within one year or within the operating cycle, whichever is longer
C. Within the normal  operating cycle
D. Within one year,  the length of the operating cycle notwithstanding
d
22. Which of the following is reported as interest expense?
A. pension cost Interest
B. amortization of discount of a note
C. deferred compensation plan interest
D. interest incurred to finance a software development for  internal use
 b
23. 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 share capital and payment of dividends  between the 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
C
24. PAS 24 requires disclosure of compensation of key management personnel.  Which of the
following  would not be considered “compensation” for this purpose?
A. termination benefits                                
B. reimbursement of out-pocket expense
C. share based payment                            
D. short term benefits
 
25. Which statement is false pertaining to accounting changes?
A. Retroactive treatment is not appropriate for changes in estimate because these are
normal recurring adjustments that are the natural result of the use of estimate
B. A change in reporting entity is affected by restating all prior period financial statements in
accordance with the new method of presenting the current financial statements of the
new reporting entity.
C. The effect of a change in the expected pattern of consumption of economic
benefits of a depreciable asset shall be included in the statement of retained
earnings as an adjustment of the beginning balance.
D. Accounting estimates change as new events occur, more experience is acquired, or
additional information is obtained.
C
26. Which may be considered an operating segment?
A.  Start-up operations before earning revenue
B. Corporate headquarters that earn revenue
C. Functional department
D. Postemployment benefit plans
A
 

27. Which of the following statements is true regarding accounting and reporting standards for
discontinued operations?
A. The results of the discontinued operation include only the gain or loss on disposal of the
component and not the income or loss from operating the discontinued operation
B. A recognition of an impairment loss would be necessary for a component that had
not been sold by year-end if the fair value of the component was determined to be
less than the carrying amount
C. Discontinued operations shall follow gross income on the face of the income statement
D. A component of an entity always represents the same concept as an operating segment
used in reporting disaggregated information
B

28. Which of the following should not be considered as a current asset in the statement of
Financial Position?
A. The cash surrender value of a life insurance policy carried by a corporation, the
beneficiary, on its president
B. Installment notes receivable due over 18 months in accordance with normal trade
practice
C. Prepaid taxes which cover assessments of the following operating cycle of the business
 D. Trading securities purchased by the temporary investments of cash available for current
operations
a
29.  Of the following items, the one which should be classified as a current liability is-
A. an accommodation endorsement
B.  a cash dividend declared before the statement of financial position date when the
date of record is subsequent to the statement of financial position date
C. unfunded past service cost of a pension  plan
D. dividends in arrears on cumulative preference share
b
30.  Among the shorter obligations of an entity as of December 31, reporting  date, are notes
payables with a certain bank.  These are 90 day notes, renewable for another 90 day period. 
These notes should be classified on the statement on financial position of the entity as
A.  current liabilities a.                               
B.  noncurrent liabilities
C.   deferred charges                      
D.  intermediate debt
a
 
31. All of the following are considered line items in the statement of financial position of an SME,
except-

A. Biological asset carried at FV thru P/L

B. Investment in associate
C. Investment property carried at cost
D. Total of assets classified as held for sale

32.  All of the following are considered line items in the statement of financial position of an
Small and Medium entity, except-

A. Trade and other payables                 

B. Deferred tax liabilities
C. Financial liabilities
D. Total of liabilities included in disposal group classified as held for sale

33.  In hyperinflationary economy, statement of financial position amounts not expressed in the
measuring unit current at the end of reporting period are restated by applying-

A.  General price index

B. Specific price index
C. Both a and b
D. Either a and b

34. Which is the date of transition to IFRS for SMEs?

A. The beginning of the latest period in the most recent annual financial statements under
previous GAAP
B. The end of the latest period in the most recent annual financial statements under
previous GAAP
C. The beginning of the earliest period for which an entity presents full comparative
information under IFRS for SMEs
D. The end of the earliest period for which an entity present full comparative information
under IFRS for SMEs
35. All of the following are considered line items in the statement of financial position of an SME,
except-

A. Biological asset carried at FV thru P/L

B. Investment in associate
C. Investment property carried at cost
D. Total of assets classified as held for sale

Prelim problem IN E4
1. Palawan Company provided the following partial balances of statement of financial
position as of December 31, 2021:
Current Assets:
Cash P 250,000
Financial Assets at Fair value Thru P/L 160,000
Accounts receivable, net 427,000
Inventory 620,000
Other current assets 284,000
Total 1,741,000

Additional information:
● Cash includes P 80,000 that has been restricted for the purchase of manufacturing
equipment
● Trading securities include P 55,000 of stock that was purchased in order to give
the company significant ownership and a seat on the BODs of major supplier
● Other current assets include a P 80,000 advance to the president of the company.
No due date has been set.

Determine current assets-

a. P 1,526,000 c. P 1,686,000
b. 1,821,000 d. 1,606,000

Cash 250,000 -80,000 170,000         

Financial Assets at Fair value Thru P/L 160,000-55,000 105,000

Accounts receivable, net 427,000
Inventory 620,000
Other current assets 284,000-80,000 204,000
Total current assets         1,526,000

2. Iloilo Company provided the following partial balances of statement of financial

position as of December 31, 2020:
Current Liabilities:
Accounts payable P 68,000
Other current liabilities 40,000
Total 108,000

Additional information:
● Long term liabilities also include bonds payable of P 200,000. Of this amount,
P 50,000 represents bonds scheduled to be redeemed in 2021.
● Long-term liabilities also include a P 140,000 bank loan. On May 15, 2021, the
loan will become due on demand.
● On December 21, dividends in the amount of P 300,000 were declared to be paid
to shareholders of record on January 25. These dividends have not been
reflected in the financial statements.
 Determine the total current liabilities-
a P 548,000
b 298,000
c. P 458,000
d. 598,000
Accounts payable 68,000
Other current liabilities 40,000
Bonds payable current portion 50,000
Bank loan on demand         140,000
Dividends payable          300,000
Total current liabilities         598,000

3. Horn Company’s income statement for the year ended December 31, 2021 reported total
comprehensive income of P 8,000,000. The auditor raised questions about the following
amounts that had been included in total comprehensive income:
Unrealized loss on foreign currency translation ( 600,000)
Loss from fire ( 1,000,000)
Adjustment of profit of prior year for error in
depreciation (net of tax effect) ( 800,000)
Gain on early retirement of bonds payable 2,200,000

What is the adjusted total comprehensive income ? (NI/CI + other CI)

a P 8,000,000 c. P 9,400,000
b 8,800,000 d. 7,200,000

Comprehensive income 8,000,000

Adjustment of profit of prior year   800,000 part of RE
Total CI 8,800,000
4. One of Clarice’s production plants is located on the shores of Lake Taal. The lake has
been rising for a number of years, and the company has installed dikes to prevent flooding. The
dikes are currently operating at or near capacity. Weather forecasters have predicted that the
lake will rise another 8 inches this coming summer. If this occurs, significant damage will likely
result from stressing the dikes beyond capacity. Clarion Company estimated a
P 4,000,000 to P 6,000,000 amount of loss should the flooding will not be prevented.
a. An accrued liability of P 4,000,000 only
b. An accrued liability of P 5,000,000 only
c. An accrued liability of P 6,000,000 only
d. Only a note disclosure is required
d

5. The following information for the current year is provided by Santa Company:

Sales - P 5,000,000; Cost of Sales- P 2,800,000; Foreign translation adjustment- credit-

P 400,000; Selling expense - P 700,000; Unusual and infrequent gain – P400,000;
Correction of inventory error- P 200,000; General and administrative expenses- P
600,000; income tax expense- P 150,000; gain on sale of investment- P 50,000;
Proceeds from sale of land at cost- P 800,000; Dividends- P 300,000; and unrealized
gain on trading securities.- P 30,000.

How much should be reported as income from continuing operations?

a. P 1,200,000 c. P 1,600,000
b. 1,230,000 d. 2,000,000

Sales 5M
COS (2.8 M)
SE (700,000)
Unusual /Frequent gain 400,000
GAE (600,000)
Income tax exp (150,000)
Unrealized gain- TS 30,000
Gain on sales of invest 50,000
Income fr Cont 1,230,000

6. On October 1, 2021, Acme Fuel Corporation sold 100,000 gallons of heating oil to Karn
Co. at P 3 per gallon. Fifty thousand gallons were delivered on December 15, 2021, and the
remaining 50,000 gallons were delivered on January 15, 2022. Payment terms were: 50% due
on October 1, 2019, 25% due on first delivery, and the remaining 25% due on second delivery.

What amount of revenue should Acme recognize from this sale during 2021?
a. P 75, 000
b. P150,000
c. P225,000
d. P300,000
Sales revenue = 50,000 x P 3 = P 150,000

7.Brownies Company is completing the preparation of its draft financial statements for the year
ended December 31, 2021. The financial statements are authorized for issue on March 31,
2022.
On March 15, there was a major decline of investments worth P 30,000.
On March 24, a dividend of P 1,500,000 was declared and a contractual profit share
payment of P 350,000 was made, both based on the profit for the year ended December
31, 2021.
On February 1, a customer went into liquidation having owned the entity P 500,000 for
the past 5 months. No allowance had been made against this debt in the draft financial
statements
 What amount should be recognized in the profit or loss for the year ended December 31,
2021 to reflect adjusting events after the end of reporting period.
a. P 880,000 c. P 850,000
b. 380,000 d. 580,000
Answer
Profit share payment 350,000
Bad debt 500,000
Adjusting event 850,000

8. Steven Corporation, a publicly owned corporation, assesses performance and makes

operating decisions using the following information for its reportable segments:
Total revenues P 7,680,000
Total profit and loss 406,000

Included in the total profit and loss are intersegment profits of P 61,000. In addition,
Steven has P 5,000 of common costs for its reportable segments that are not allocated in
reports used internally. For purposes of segment reporting, Steven should report
segment profit of-
a. P 350,000 c. P 411,000
b. 345,000 d. 406,000

9.On December 1, 2021, Greer Co. committed to a plan to dispose of its Hart business
component’s assets. The disposal meets the requirements to be classified as discontinued
operations. On that date, Greer estimated that the loss from the disposition of the assets would
be P 700,000 and Hart’s 2021 operating losses were P 200,000. Disregarding income taxes,
what net gain (loss) should be reported for discontinued operations in Greer’s 2021 income
statement?
a. P 0 c. P(700,000)
b. P(200,000) d. P(900,000)

Net gain (loss)= 700,000 + 200,000= (900,000)

10. On January 2, 2021, Chocolate Company intends to sell its building with a carrying value
of
P 5,000,000 but based on a test of impairment the said building has a fair value of
P 4,500,000, but will continue to use the asset until the construction of a new building is
completed. The current building has a remaining useful life of 10 years.

On January 2, 2021, Chocolate Company should classify the building as-

a. Property, plant and equipment valued at P 4,500,000
b. property, plant and equipment at P 5,000,000
c. Non-current asset held for sale and valued at P 4,500,000
d. Non-current asset held for disposal and valued at P 5,000,000
A

11. Rox Company

reported that its financial position did not change during the current year. The general price
index was 120 on January 1 and 300 on December 31.
 Cash P 550,000 Accounts payable P 3,000,000
Notes receivable 1,000,000 Bonds payable 1,000,000
Trading securities 800,000 Share capital 5,000,000
Inventory 5,000,000 Retained earnings 1,000,000
Land 2,700,000

What is the purchasing power gain or loss for the current year?
a. P 2,550,000 gain c. P 3,750,000 gain
b. 2,550,000 loss d. 3,750,000 loss

Monetary Assets
Cash 500,000
NR 1,000,000 1,500,000
Monetary liabilities
AP 3,000,000
BP 1,000,000 4,000,000
Net monetary liabilities 2,500,000
Restated net monetary liabilities 300/120 x 2,500,000 6,250,000
Net monetary liability at cost 2,500,000
Gain on purchasing power 3,750,000 C

For nos. 12-14

London Company was formed on January 1, 2021. The entity reported the following data
pertaining to the first year of operation.
Inventory Jan. 1 1,000,000
Purchases 3,100,000
Inventory- December 31 900,000
Land 800,000
Equipment (10 years life) 1,000,000
Accumulated depreciation (100,000)

Current cost information on December 31, 2021:

Cost of goods sold at average current cost P 3,500,000
Inventory 1,000,000
Land 1,500,000
Equipment 1,600,000

12. How much is the realized holding gain on cost of sales in accordance
with current cost accounting
a. P 0 c. P 500,000
b. 200,000 d. 300,000

Ave. Current cost 3,500,000

Historical cost 3,200,000 1M +3.1M - 900
Realized holding gain 300,000

13. How much is the reported unrealized holding gain on inventory for
2021?
a. P 0 c. P 300,000
b. 100,000 d. 1,000,000

Current cost- inventory 1,000,000

Historical cost 900,000
Unrealized holding gain 100,000 B

14. How is the unrealized holding gain on the equipment to be reported in

2021?
 a. P 30,000 c. P 570,000
b. 540,000 d. 700,000

Equipment (10 years life)            1,000,000

Accumulated depreciation            (100,000)
      Equipment - net     900,000
Equipment -CC (1.6-160k)   1,440,000     1,600,000/10yrs = 160,000
Unrealized holding gain   540,000

15. Z & T Company

reported the following assets and liabilities:

Cash P 2,000,000
Financial assets held for trading 1,600,000
Financial assets at amortized cost 5,000,000
Inventories 780,000
Prepaid interest 40,000
Advances to employees 50,000
Sinking fund at fair value 6,000,000
Cash surrender value 75,000
Good will 230,000
Cash dividend payable 125,000
Accrued expenses 70,000
Advances from customers 53,000
Bonds payable 8,000,000
Deferred revenue 63,000
Ordinary share 4,500,000

Based on the above data, compute:

Monetary assets
a. P 7,090,000 c. P 7,879,000
b. 7,165,000 d. 7,870,000

Cash 2,000,000
FA- amortized cost 5,000,000
Advances to employees 50,000
Prepaid interest 40,000
Cash surrender value 75,000
Total monetary assets 7,165,000