Answer Key.

MULTIPLECHOICE
 1.B
2.A
3.C
4.D
5.D
6.B
7.B
8.B
9.A
10.E
11.C
12.C
13.C
14.B
15.B
16.D
17.C
18.B
19.C
20.B

ESSAY with STRAIGHT PROBLEMS

1. What is Accounting? What is its main purpose?

Answer:
Accounting is an art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least of financial character, and interpreting the
results thereof. Its main purpose is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic decisions, in making
reasoned  choices among alternative courses of action

2. What are Financial Statements? What is the objective of Financial Statements?

Financial Statements are the quantitative reflections of the economic resources, capital, debt and
performance of any business enterprises. The objective of financial statements is to provide information
about the financial position, performance and changes in financial position of an enterprise that is useful
to a wide range of users in making economic decisions." Financial statements should be understandable,
relevant, reliable and comparable.
 3. A construction firm signed a three-year contract to build a skyway connecting Alabang and Tagaytay
City. The firm immediately records the full contract price as revenue. What principle/concept of
accounting is most clearly violated?
Answer:
The principle/concept that has been violated is the revenue recognition principle/accrual concept.
Under this principle, revenue is recognized when it is earned regardless of the timing to which it will be
received. It is a requirement therefore in recognizing a revenue that services have already been rendered
regardless of payment. In the instant case, there is no service that has been rendered yet, therefore it is
improper to recognized revenue under the accrual concept.

4. ABRA COMPANY reported that the following changes in account balances during the current year:
Increase
Assets 8,900,000
Liabilities 2,700,000
Share capital 6,000,000
Share premium 600,000
Except for a P1,300,000 dividend payment and the year's earnings, there were no changes in retained
earnings for the year. What is the net income for the current year?

Solution: Capital Maintenance Approach

Net Changes in Equity Php6,200,000

Additional Investment Php(6,600,000)

Dividend Declared Php1,300,000

Net Income: Php900,000.

 5. The following information shows the changes in the account balances of VISAYAS INC.
during 20x1.
Increase (Decrease)
Cash 260,000
Accounts receivable (2,288,000)
Allowance for bad debts (312,000)
Inventory 2,080,000
Investment in associate 1,820,000
property, plant and equipment 2,860,000
Accumulated depreciation 1,040,000
Accounts payable 2,340,000
Bonds payable (1,820,000)
Discount on bonds payable (390,000)
Share capital 2,340,000
Share premium 260,000
Revaluation surplus 2,340,000
Treasury shares 208,000

Cash dividends declared during 20x1 amounted to P260,000, share dividends

declared amounted to P520,000, and appropriations of retained earnings for the
retirement of bonds amounted to P130,000. How much is the profit (loss) for the
year?

Solution: Capital Maintenance Approach

Net Changes in Equity Php3,094,000
Additional Investment (Php2,600,000)
Withdrawals Php 260,000
Increase in Treasury Shares Php 208,000
Net Income Php 962,000
Revaluation Surplus ( Php 2,340,000)
Net Loss Php 1,378,000.00
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