QUESTIONS

1. On December 11, upon the receipt of the November bank statement, the accountant of Holidays
Company prepared the following bank reconciliation and immediately recorded the appropriate
adjusting entries:
Balance per bank statement, November 30 P 980,000
Add: Deposit in transit P 34,500
Error in recording check (P45,000 instead of 54,000) 9,000
NFS checks for the month 1,500 45,000

Less: Outstanding checks P 15,000

Erroneous bank credit 2,000
Loan proceeds including interest for November 15,500 (32,500)
Balance per books, November 30 P 992,500

The bank statement reported total receipts of P265,000 and total disbursements of P215,000 for
December. All reconciling items as of November 30 cleared the bank on December. However, the bank
erroneously debited Holidays Company P20,000 for a check that was supposed to be against the
account of Holland Company in December. Service charges for December amounted to P1,200.
Deposits in transit amounted to P42,000 while checks still outstanding amounted to P33,000 as of
December 31. The total cash credits to the cash in bank account in December is
a. P209,700
b. P211,300
c. P213,300
d. P220,300

2. At the beginning of 2018, Gingerbread Company received a four-year zero-interest-bearing P1,000

trade note. The market rate for equivalent notes was 10% at that time. Gingerbread reported this note
as a P1,000 trade note receivable on its 2018 year-end statement of financial position and P1,000 as
sales revenue for 2018. What effect did this accounting for the note have on Gingerbread’s net
earnings for 2018, 2019, 2020, and its retained earnings at the end of 2020, respectively?
a. Overstate, understate, overstate, zero
b. Overstate, understate, understate, overstate
c. Overstate, overstate, understate, understate
d. Understate, understate, understate, understate

3. On January 1, 2019, Reindeer Company reported Accounts Receivable of P1,350,000 and Allowance for
Bad Debts of P21,000. During the year, sales amounted to P4,200,000 (all on credit). Collections from
customers, including recoveries of P15,000, totaled P4,450,000, net of discounts of P7,000. Likewise,
P12,000 of the receivables were written-off. Reindeer Company uses the aging method in determining
bad debts, although it provides interim bad debts provision equal to 0.5% of gross credit sales. The
following table shows the corresponding bad debt percentage of Reindeer Company’s accounts
receivable:
A/R Balance Age Percentage of Collectability
40% 30 days or less 1%
30% 31 – 60 days 3%
15% 61 – 90 days 5%
10% 91 – 120 days 9%
5% Over 120 days 15%
The yearend adjustment to bad debts expense is
QUESTIONS

a. P5,003
b. (P5,003)
c. P4,448
d. (P4,448)

4. Which choice correctly the following statement?

Statement I: If an entity cannot distinguish the research phase from the development phase, it should
treat an expenditure on a project as if it were incurred in the research phase only and recognize an
expense accordingly.
Statement II: It is difficult to distinguish between a change in accounting estimate and a change in
estimate and a change in accounting policy, then the change is treated as a change in in estimate
and must be accounted for currently and prospectively.
Statement III: In rate circumstance, when a treatment benefits plan has attributes of both defined
benefited plan and defined contribution plan, the plan is deemed as a defined contribution plan
a. Only statement I is false
b. Only statements II is true
c. Only statements III is true
d. Only statements III is false

5. The proprietor of Patrick Company, has apprehension of possible pilerage in merchandise inventory for
December 31, 2017, he requested you to have test checks based on available information and report to him
your finding. The following data were furnished to you:

12/31/16 12/31/17
Physical inventory at cost P 450,000 P 402,000
Sales, net 4,000,000
Cost of sales 2,400,000
Accounts receivable-trade 200,000 350,000
Accounts payable – trade 500,000 420,000

Additional information
In 2017, accounts receivable of P 20,000 was written-off, total sales return were P10,0000 and puchase returns,
P 30,000. Cahs receipts from customers (after P 30,000 discounts) totaled P 6, 000,000 while cash paymemts to
trade creditors amounted to P, 4,000,000.

Assuming gross profit rate in 2017 is the same as in 2016, what is the amount of inventory shortage as of
December 31, 2017?
a. P 220,000
b. P 230,000
c. P 248,000
d. P 252,000

6. On January 2, 2016 , Modern Company a mediem – sized entity, acquired all the net assets of Acient 1.td fro
23,000,000. The identifiable net assets of Acient at the time of acqusition is P 2,000,000. The net indentifiable
net assets of Ancient had “Remaining loife of 10 years. Acient Ltd is a cash – generating unit. On December 31,
2016, the recoverable amount of Ancient Ltd was P1,360, 200
QUESTIONS

In year 2017, the business situtation improve s in the country and government policies change. As a result,
management re estimates the recoverable amount of Ancient Ltd. At the end of year 2017, teh recoverable
amount of Ancient Ltd is P1, 910. Beginning of year 2017 Modern Company had decided to chage its is
depreciation rate to 10% per annum on carrying value of the net identifiable asstes?

What amount of impairments recovery should Modern Company report its 2017 profit or loan?
a. None
b. P 396,000
c. P 440,000
d. P 686,000

7. Accrued salaries payable of 51,000 were not recorded at December 31, 2017. Office supplies on hand
of 24,000 at December 31, 2018 were erroneously treated as expense instead of supplies inventory.
Neither of these errors was discovered nor corrected. The effect of these two errors would cause
a. 2017 net income to be overstated 27,000 and 2018 net income to be understated 24,000.
b. 2017 net income and December 31, 2017 retained earnings to be understated 51,000 each.
c. 2018 net income and December 31, 2018 retained earnings to be understated 24,000 each.
d. 2018 net income to be understated 75,000 and December 31, 2018 retained earnings to be
understated 24,000.

8. On January 1, 2018, Nut Company sold to Cracker Corp. a plot of land and received a note with a face
amount of P5,778,500. The note shall be collected in six equal annual instalments starting December
31, 2018 to include interest at 8% based on the unpaid balance. The interest income reported by Nut
Company in 2019 is
a. P377,022
b. P399,264
c. P416,052
d. P422,222

9. Using the information in the preceding number, what is the carrying value of the note as of December
31, 2020?
a. P3,221,421
b. P3,521,826
c. P4,140,155
d. P4,152,693

10. Statement I: An investment of more than 50 percent of the voting stock of an investee should lead to a
presumption of significant influence over an investee.
Statement II. An impairment loss is the difference between an investment’s cost and the expected
future cash flows.
a. Statement I is true, statement II is false
b. Statement I is false, statement II is true
c. Both statements are true
d. Both statements are false

11. Which of the following equations expresses the definition of “income”?

a. Income = Gains – Losses
b. Income = Revenues + Gains
QUESTIONS

c. Income = Revenues – Expenses

d. Income = (Revenues + Gains) – (Expenses + Losses)
12. On the statement of cash flows, which of the following items will affect both financing activities and
operating activities?
a. Redemption of debt.
b. Payment of dividends.
c. Issuance of equity securities.
d. Collection of loans to other entities.

13. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Estimates are used.
b. Allowance method is used for tax purposes.
c. Improved matching of bad debt expense with revenue.
d. Determining worthless accounts under direct write-off method is difficult to do.

14. Preparing the statement of cash flows, using the indirect method, involves all of the following except
determining the
a. change in cash during the period.
b. cash collections from customers during the period.
c. changes in working capital accounts, other than cash.
d. cash provided by or used in investing and financing activities.

15. Which of the following is not treated as a change in accounting policy?

a. A change from cost-recovery to percentage-of-completion.
b. A change from average cost to FIFO for inventory valuation.
c. A change to a different method of depreciation for plant assets.
d. A change from full-cost to successful efforts in the extractive industry

16. Statement I: Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.
Statement II: The percentage-of-receivables approach of estimating uncollectible accounts emphasizes
matching over valuation of accounts receivable.
a. True, true
b. True, false
c. False, true
d. False, false

17. Statement I: Ideally, a company should measure receivables in terms of their present value, that is, the
discounted value of the cash to be received in the future.
Statement II: The percentage-of-sales method results in a more accurate valuation of receivables on
the balance sheet.
a. True, true
b. True, false
c. False, true
d. False, false

18. The cash in bank account of Sky, Inc. for April 2020 showed an ending balance of P129,298. Deposits in
transit on April 30 was P18,200. Outstanding checks as of April 30 were P59,435, including a P5,000
QUESTIONS

check which the bank had certified on April 27. During April, the bank charged back NSF checks in the
amount of P3,435, of which P1,835 had been redeposited by April 20. On April 23, the bank charged
Sky’s account for a P2,200 item which should have been charged against Ski, Inc., the error was not
detected by the bank. During April, the proceeds from notes collected by the bank for Sky, Inc. was
P7,548 and bank charges for this service amounted to P18. How much is the unadjusted balance per
bank on April 30?
a. P88,333
b. P95,263
c. P169,263
d. P173,663

19. Cloud Company uses the net method in accounting for its receivables. In one of its transactions on
December 15, 2019, Cloud sold merchandise with a list price of P500,000 to a client who was given a
trade discount of 20% and 15%. Credit terms were 2/10, n/30. The goods were shipped FOB
destination, freight collect. Total freight charges paid by the client amounted to P7,500. On December
20, the client returned damaged goods originally billed at P60,000. What is the net realizable value of
this receivable on December 31, 2019?
a. P272,500
b. P274,400
c. P280,000
d. P333,200

20. The Good Bank has a note receivable of P200,000 from the Micky Company that it is carrying at face
value and is due on December 31, 2025. Interest on the note payable at 9% each December 31. Micky
Company paid the interest due on December 31, 2021, but informed the bank that it would probably
miss the next two years' interest payments because of financial difficulties. After that, it expects to
resume its annual interest payments, but it would make the principal payment one year late, with
interest paid for that additional year at the time of the principal payments. How much should be
recognized as loan impairment loss in 2021? (Round off PV factors to four decimal places.)
a. P12,752
b. P19,965
c. P31,669
d. P32,812

21. Kitty Company received from a customer a one-year, P375,000 note bearing annual interest of 8%.
After holding the note for five months, Kitty Company discounted the note at an effective interest rate
of 10%. The amount received by the company from the note discounting is
a. P367,250
b. P369,600
c. P381,375
d. P388,125

22. 19. On December 31, 2018, Bryan Company sold used equipment and received a noninterest-bearing
note requiring payment of P500,000 annually for ten years. The first payment is due December 31,
2019 and the prevailing rate of interest for this type of note at date of issuance is 12%. The unearned
interest income at December 31, 2019 is
a. P2,336,000
b. P1,836,000
QUESTIONS

c. P1,536,000
d. P1,516,000

23. RDJ Corporation had accounts receivable of P100,000 at 1/1. The only transactions affecting accounts
receivable were sales of P600,000 and cash collections of P550,000. The receivable turnover is
a. 4.0
b. 4.5
c. 4.8
d. 6.0

24. Which of the following is a current asset?

a. Cash designated for the purchase of tangible fixed assets.
b. Trade installment receivables normally collectible in 20 months.
c. Investment in equity securities for the purpose of controlling the issuing company.
d. Cash surrender value of a life insurance policy of which the company is the beneficiary.

25. Happy Co. accepted delivery of merchandise which it purchased on account. As of December 31, Happy
had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on
its financial statements for December 31 would be
a. Net income was correct and current assets were understated.
b. Net income was overstated and current assets were understated.
c. Net income was understated and current liabilities were overstated.
d. Net income, current assets, and retained earnings were understated.

26. Jio, Inc. manufactures cruise ships for sale. Each ship costs approximately P25,000,000 to build and
takes 3 years to fully construct. During the time it takes to construct one cruise ship, Jio incurs
P2,400,000 in interest cost related to the construction. The interest cost is incurred evenly throughout
the construction period. During the first year of construction, Jio builds a shell that can be customized
for any purchaser according to specifications; construction during the final 2 years is all based on client
specification. The International Accounting Standards Board requires that Jio account for this interest
cost as
a. P2,400,000 is capitalized to the cruise ship.
b. P2,400,000 is recorded as interest expense as incurred.
c. P800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.
d. P800,000 incurred in 1st year is expensed as incurred; the remaining amount is capitalized to
the cruise ship

27. Long Roads sold P50,000 worth of goods and accepted the customer’s P50,000, 10%, 1-year note in
exchange. Assuming 10% approximates the market rate of return, how much interest would be
recorded for the year ending December 31 if the sale was made on June 30?
a. P0
b. P1,250
c. P2,500
d. P5,000

28. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods
sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when
inventory is valued using the average cost method?
QUESTIONS

a. Prices increased.
b. Prices decreased.
c. Prices remained unchanged.
d. Price trend cannot be determined from information given.
29. Bell Inc. took a physical inventory at the end of the year and determined that P650,000 of goods were
on hand. In addition, Bell, Inc. determined that P50,000 of goods that were in transit that were shipped
FOB shipping point were received two days after the inventory count and that the company had
P75,000 of goods out on consignment. What amount should Bell report as inventory at the end of the
year?
a. P650,000
b. P700,000
c. P725,000
d. P775,000

30. Regal Inc. reported total assets of P1,600,000 and net income of P85,000 for the current year. Regal
determined that inventory was understated by P23,000 at the beginning of the year and P10,000 at the
end of the year. What is the corrected amount for total assets and net income for the year?
a. P1,610,000 and P72,000
b. P1,610,000 and P95,000
c. P1,590,000 and P98,000
d. P1,600,000 and P85,000

31. Why are inventories stated at lower-of-cost-or-net realizable value?

a. To be conservative.
b. To permit future profits to be recognized.
c. To report a loss when there is a decrease in the future utility.
d. To report a loss when there is a decrease in the future utility below the original cost.

32. At the end of the fiscal year, Alpha Airlines has an outstanding non-cancellable purchase commitment
for the purchase of 1 million gallons of jet fuel at a price of P4.10 per gallon for delivery during the
coming summer. The company prices its inventory at the LCNRV. If the market price for jet fuel at the
end of the year is P4.50, how would this situation be reflected in the annual financial statements?
a. No impact.
b. Disclose the existence of the purchase commitment.
c. Record unrealized gains of P400,000 and disclose the existence of the purchase commitment.
d. Record unrealized losses of P400,000 and disclose the existence of the purchase commitment.

33. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used by auditors.
b. It may be used to estimate inventories for interim statements.
c. It may be used to estimate inventories for annual statements.
d. It may be used when fire or catastrophe destroys the inventory.

34. Teena Corporation acquired two inventory items at a lump-sum cost of P50,000. The acquisition
included 3,000 units of product LF, and 7,000 units of product 1B. LF normally sells for P15 per unit,
and 1B for P5 per unit. If Teena sells 1,000 units of LF, what amount of gross profit should it recognize?
a. P1,875
b. P5,625
QUESTIONS

c. P10,000
d. P11,875

35. Dicer uses the conventional retail method to determine its ending inventory at cost. Assume the
beginning inventory at cost (retail) were P130,000 (P198,000), purchases during the current year at
cost (retail) were P685,000 (P1,100,000), freight-in on these purchases totaled P43,000, sales during
the current year totaled P1,050,000, and net markups (markdowns) were P24,000 (P36,000). What is
the ending inventory value at cost?
a. P153,164
b. P157,412
c. P156,165
d. P236,000

36. On January 4, 2019, Cashew Co. purchased 40,000 shares (40%) of the common stock of Nut Corp.,
paying P800,000. There was no goodwill or other cost allocation associated with the investment.
Cashew has significant influence over Nut. During 2019, Nut reported income of P200,000 and paid
dividends of P80,000. On January 2, 2020, Cashew sold 5,000 shares for P125,000. What was the
balance in the investment account after the shares had been sold?
a. P848,000
b. P742,000
c. P723,000
d. P761,000

37. A company buys an oil rig for P2,000,000 on January 1, 2020. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is P400,000. 10% is an appropriate interest
rate for this company. How much is the total expense recorded in 2020 as a result of this transaction?
a. P240,000
b. P200,000
c. P215,422
d. P230,844

Use the following information to answer the next three (3) items
Baby Shark Company owns a building on January 1, 2017 with historical cost of P40,000,000. The property is
depreciated over 40 years on a straight-line basis with no residual value. The entity adopts a policy of
revaluation of property. The building has so far been revalued twice at fair values as follows:
January 1, 2018 - P46,800,000
January 1, 2020 - P55,500,000

38. The revaluation surplus on January 1, 2018 is

a. P7,800,000
b. P6,800,000
c. P5,800,000
d. P4,800,000

39. The increase in revaluation surplus recognized as a component of other comprehensive income on
January 1, 2020 is
a. P15,500,000
b. P11,100,000
QUESTIONS

c. P9,900,000
d. P8,700,000

40. The revaluation surplus reported in the statement of changes in equity for the year ended December
31, 2020 is
a. P18,000,000
b. P18,200,000
c. P18,500,000
d. P18,900,000

41. Siamese Company incurred the following costs during 2020:

Quality control during commercial production, including testing of products P 58,000

Laboratory research aimed at discovery of new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastic product 26,000
Engineering follow-through in an early phase of commercial production 15,000
Adaptation of an existing capability to a particular requirement or customer's need as a part 13,000
of continuing commercial activity
Trouble-shooting in connection with breakdowns during commercial production 29,000
Searching for applications of new research findings 19,000

What is the total amount Siamese should report as research and development expense for 2020?
a. P137,000
b. P198,000
c. P169,000
d. P213,000

42. Arnold Company’s inventory at December 29, 2019 was P1,500,000 based on a physical count at cost
and before any necessary adjustments for the following:
• Merchandise costing P90,000, shipped FOB shipping point from a vendor on December 28, 2019,
was received and recorded on January 5, 2020.
• Goods in the shipping area were excluded from inventory although shipment was not made until
January 4, 2020. The goods, billed to the customer FOB shipping point on December 27, 2019 had a
cost of P120,000.

The adjustment to inventory at December 31, 2019 should be

a. Addition of P90,000
b. Addition of P120,000
c. Addition of P210,000
d. No adjustment

43. Patent G is purchased and supersedes patent C. The life of patent G is 12 years, while that of patent C
is 8 years. The cost of patent C should be
a. Amortized over 12 years
b. Amortized over 8 years
c. Amortized over 4 years
d. Written off
QUESTIONS

44. When an owner-occupied property is transferred to investment property at fair value, a decrease in
the carrying amount of the property to its fair value at the date of transfer
a. Is recognized in profit or loss at all times.
b. Is not recycled to profit or loss but directly credited to equity.
c. Is absorbed by retained earnings only if the property is accounted for under the revaluation
model.
d. Is recognized in profit or loss or, for a revalued property, charged against revaluation surplus to
the extent of its credit balance.

45. Which of the following is not relevant in determining the useful life of a long-term asset?
a. Obsolescence
b. Expected action of competitor
c. The residual value of the asset
d. The expected usage of the asset

46. Which of the following expenditures may be properly capitalized?

a. Pre-operating costs
b. Cost of normal spoilage
c. Title search and other legal costs related to a piece of property which was not acquired
d. Research costs related to a long-term asset which is giving the company a competitive
advantage

Use the following information to answer the next four (4) items
You were able to obtain the following from Mr. Kim, the accountant for Dough Company, in relation to the
company’s liabilities as of December 31, 2019:
Accounts Payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Mortgage sales payable – 10% 600,000
Mortgage sales payable – 12% 1,500,000
Bonds payable 2,000,000

The following additional information pertain to these liabilities:

I. All trade notes payable is due within six months of the balance sheet date.
II. Bank notes-payable include two separate notes payable to Pizza Bank, as follows:
a. A P300,000, 8% note issued March 1, 2015, payable on demand. Interest is payable every six
months.
b. A 1-year, P500,000, 11 ½% note issued January 2, 2019. On December 30, 2019, Dough
negotiated a written agreement with Pizza Bank to replace the note with a 2-year, P500,000,
10% note to be issued January 2, 2020. The interest was paid on December 31, 2019.
III. The 10% mortgage note was issued October 1, 2014, with a term of 10 years. Terms of the note give
the holder the right to demand immediate payment if the company fails to make a monthly interest
payment within 10 days of the date the payment is due. As of December 31, 2019, Dough is three
months behind in paying its required interest payment.
QUESTIONS

IV. The 12% mortgage note was issued May 1, 2006, with a term of 20 years. The current principal amount
due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due
April 30, 2020. The payment includes interest of P180,000.
V. The bonds payable is 10-year, 8% bonds, issued June 30, 2010. Interest is payable semi-annually every
June 30 and December 31.

Determine the following:

47. Interest payable as of December 31, 2019
a. P143,000
b. P155,000
c. P203,000
d. P215,000

48. Note payable – bank to be reported under current liabilities as of December 31, 2019
a. P0
b. P300,000
c. P500,000
d. P800,000

49. Total current liabilities as of December 31, 2019

a. P3,938,000
b. P3,950,000
c. P3,998,000
d. P4,138,000

50. Total noncurrent liabilities as of December 31, 2019

a. P1,760,000
b. P1,960,000
c. P2,560,000
d. P3,960,000

Use the following information to answer the next five (5) items
The following data were compiled prior to preparing the balance sheet of the Safari Corporation as of
December 31, 2019:
Authorized common stock, P100 par value P 4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on AFS securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation surplus 800,000
Retained earnings, unappropriated 720,000
Subscribed share capital 480,000
Subscriptions receivable (collectible beyond 1 year) 120,000
Stock warrants outstanding 200,000
QUESTIONS

Treasury stock, at cost 144,000

Unissued common stock 800,000

Compute the following:

51. Common stock issued
a. P3,056,000
b. P3,200,000
c. P3,680,000
d. P4,000,000

52. Additional paid-in capital

a. P320,000
b. P1,200,000
c. P1,320,000
d. P1,400,000

53. Retained earnings appropriated

a. P144,000
b. P400,000
c. P544,000
d. P1,000,000

54. Legal capital

a. P3,200,000
b. P3,560,000
c. P3,680,000
d. P4,000,000

55. Total stockholders’ equity

a. P6,240,000
b. P6,480,000
c. P6,640,000
d. P6,760,000

56. The occurrence that most likely would have no effect on 2019 net income is the
a. Stock purchased in 1989 deemed worthless in 2019
b. Collection in 2019 of a dividend from an investment
c. Sale in 2019 of an office building contributed by a stockholder in 2004
d. Correction of an error in the financial statements of a prior period discovered subsequent to
their issuance

57. Which of the following is a correct statement of one of the capitalization criteria?
a. The lease contains a purchase option.
b. The lease transfers ownership of the property to the lessor.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased
property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value
of the leased property.
QUESTIONS

On January 1, 2019, Corgi, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building
from Holt Warehouse Company. The following information pertains to this lease agreement.
• The agreement requires equal rental payments at the beginning of each year.
• The fair value of the building on January 1, 2019 is 4,000,000; however, the book value to Holt is
3,300,000.
• The building has an estimated economic life of 10 years, with no residual value. Corgi depreciates
similar buildings on the straight-line method.
• At the termination of the lease, the title to the building will be transferred to the lessee.
• Corgi’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure
a 10% rate of return. The implicit rate of the lessor is known by Corgi, Inc.
• The yearly rental payment includes 10,000 of executory costs related to taxes on the property.

58. What is the amount of the minimum lease payment?

a. P181,801
b. P581,801
c. P591,801
d. P601,801

59. From the lessee's viewpoint, what type of lease exists in this case?
a. Finance lease
b. Sale-leaseback
c. Operating lease
d. Sales-type lease

60. Yancey, Inc. would record depreciation expense on this storage building in 2019 of
a. P0
b. P330,000
c. P400,000
d. P650,981

61. Mays Company has a machine with a cost of P400,000 which also is its fair value on the date the
machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an
unguaranteed residual value of P40,000. If the lessor's interest rate implicit in the lease is 12%, the six
beginning-of-the-year lease payments would be
a. P66,667
b. P78,180
c. P82,465
d. P92,361

62. If the residual value of a leased asset is guaranteed by a third party

a. It is treated by the lessee as no residual value.
b. The net investment to be recovered by the lessor is reduced.
c. The third party is also liable for any lease payments not paid by the lessee.
d. It is treated by the lessee as an additional payment and by the lessor as realized at the end of
the lease term.
QUESTIONS

63. An assumption inherent in a company’s IFRS statement of financial position is that companies recover
and settle the assets and liabilities at
a. Their reported amounts
b. Their net realizable value
c. The present value of future cash flows
d. The amount that is probable where “probable” means a level of likelihood of at least more than
50%

64. On January 1, 2019, Vlad, Inc. purchased a machine for P720,000 which will be depreciated P72,000
per year for financial statement reporting purposes. For income tax reporting, Vlad elected to expense
P80,000 and to use straight-line depreciation which will allow a depreciation deduction of P64,000 for
2019. Assume a present and future enacted income tax rate of 30%. What amount should be added to
Vlad's deferred tax liability for this temporary difference at December 31, 2019?
a. P19,200
b. P21,600
c. P24,000
d. P43,200

65. Kirk, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses
the installment (cash) basis of accounting for income tax purposes. Profits of P300,000 recognized for
books in 2017 will be collected in the following years: 2018 – 50,000; 2019 – 100,000; 2020 – 150,000.

The enacted tax rates are: 40% for 2017, 35% for 2018, and 30% for 2019 and 2020. Taxable income is
expected in all future years. What amount should be included in the December 31, 2017 statement of
financial position for the deferred tax liability related to the above temporary difference?
a. P17,500
b. P75,000
c. P92,500
d. P120,000

66. During the posting process, the accountant failed to post a P2,800 debit to the Office Supplies account.
The effect of this error will be that
a. The trial balance will not balance.
b. The error will overstate the debits listed in the journal.
c. The error will overstate the credits listed in the journal.
d. None of the above.

67. Which statement is incorrect regarding Philippine Financial Reporting Standards (PFRSs)?
a. PFRSs are designed to apply to not-for-profit activities in the private sector.
b. PFRSs are designed to apply to the general purpose financial statements and other financial
reporting of all profit-oriented entities.
c. PFRSs are based on the Framework, which addresses the concepts underlying the information
presented in general purpose financial statements.
d. PFRSs set out recognition, measurement, presentation and disclosure requirements dealing
with transactions and events that are important in general purpose financial statements.

68. One element of the objective of financial reporting is to provide

a. Information that will attract new investors.
QUESTIONS

b. Information about the investors in the business entity.

c. Information that is useful in assessing cash flow prospects.
d. Information about the liquidation values of the resources held by the enterprise.

69. Statement I: International financial reporting interpretations issued by the International Accounting
Standards Board are considered authoritative and must be followed.
Statement II: Accounting standards are now less likely to require the recording or disclosure of fair
value information due to its inherent subjectivity.
a. Both statements are true
b. Both statements are false
c. Statement I is true; statement II is false
d. Statement I is false; statement II is true

70. Which of the following statements regarding the conceptual framework is correct?
a. The framework deals with concepts of capital.
b. The framework is concerned with special purpose financial statements.
c. The framework applies to financial statements of business reporting enterprises in the private
sector but not in the public sector
d. In cases where there is conflict between the framework and a PFRS, the requirement of the
framework will prevail

71. Compared to its 2018 cash basis net income, Gavin Company’s 2018 accrual basis net income increased
when
a. It sold used inventory for cash at a loss in 2018
b. It sold used equipment for cash at a gain in 2018
c. It recorded more account sales than that of the previous year
d. It had lower accrued expenses on December 31, 2017 than on January 1, 2018.

72. Reversing entries

a. affects one real and one nominal account
b. are not allowed under International Financial Reporting Standards (IFRS)
c. change amounts reported in the financial statements of the preceding period
d. should be made if the expense or income method is used in preparing adjustments

73. The closing entries

a. are posted to the appropriate general ledger accounts
b. include closing the dividends account to income summary
c. must debit or credit one income statement account and one statement of financial position
account
d. All of these choices are correct.

74. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions
b. Provide information about enterprise resources, claims to those resources, and changes to
them
c. Provide information on the liquidation value of an enterprise
d. Provide information that is useful in assessing cash flow prospects
QUESTIONS

75. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information
b. Encourages innovation
c. Promotes productivity
d. (a) and (b)

76. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers
b. Business industries, rather than to individual enterprises or an economy as a whole or to
members of society as consumers
c. Individual business enterprises, industries, and an economy as a whole, rather than to members
of society as consumers
d. An economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries

77. Which of the following represents a form of communication through financial reporting but not
through financial statements?
a. Statement of financial position
b. President's letter
c. Income statement
d. Notes to financial statements

78. Which of the following features of an asset closely links its definition to the science of Economics?
a. An asset is controlled by an entity
b. An asset can provide future benefits to an entity
c. An asset can command a price
d. An asset is exclusively owned by an entity

79. This is the means by which a reporting entity records and stores the financial and managerial
information from its transactions or economic events so that it can retrieve and report the information
in an accounting statement
a. Accounting system
b. Bookkeeping system
c. Internal control system
d. Ledger system

80. The systematic and chronological recording of transactions and events in books of account is known as
a. Accounting
b. Bookkeeping
c. Recordkeeping
d. Auditing

81. Which one of the following is among the conditions that will qualify a situation, particular action or set
of circumstances as an accountable event?
a. It has happened or will happen within a short period of time
b. It affects an accounting element (s) either increasing and decreasing it
c. It involves an exchange of values between the business enterprise and a third party
QUESTIONS

d. It can be measured accurately in monetary terms

82. The system of bookkeeping that recognizes the two-fold effect of an accountable event is known as
a. Double-entry
b. Single-entry
c. Cash basis
d. Accrual basis

83. The system of bookkeeping whereby, as a general rule, only cash and personal accounts are recognized
and is deemed to be incomplete bookkeeping
a. Double-entry
b. Single-entry
c. Cash basis
d. Hybrid accounting
ANSWERS

1. On December 11, upon the receipt of the November bank statement, the accountant of Holidays
Company prepared the following bank reconciliation and immediately recorded the appropriate
adjusting entries:
Balance per bank statement, November 30 P 980,000
Add: Deposit in transit P 34,500
Error in recording check (P45,000 instead of 54,000) 9,000
NFS checks for the month 1,500 45,000

Less: Outstanding checks P 15,000

Erroneous bank credit 2,000
Loan proceeds including interest for November 15,500 (32,500)
Balance per books, November 30 P 992,500

The bank statement reported total receipts of P265,000 and total disbursements of P215,000 for
December. All reconciling items as of November 30 cleared the bank on December. However, the bank
erroneously debited Holidays Company P20,000 for a check that was supposed to be against the
account of Holland Company in December. Service charges for December amounted to P1,200.
Deposits in transit amounted to P42,000 while checks still outstanding amounted to P33,000 as of
December 31. The total cash credits to the cash in bank account in December is
a. P209,700
b. P211,300
c. P213,300
d. P220,300

2. At the beginning of 2018, Gingerbread Company received a four-year zero-interest-bearing P1,000

trade note. The market rate for equivalent notes was 10% at that time. Gingerbread reported this note
as a P1,000 trade note receivable on its 2018 year-end statement of financial position and P1,000 as
sales revenue for 2018. What effect did this accounting for the note have on Gingerbread’s net
earnings for 2018, 2019, 2020, and its retained earnings at the end of 2020, respectively?
a. Overstate, understate, overstate, zero
b. Overstate, understate, understate, overstate
c. Overstate, overstate, understate, understate
d. Understate, understate, understate, understate

3. On January 1, 2019, Reindeer Company reported Accounts Receivable of P1,350,000 and Allowance for
Bad Debts of P21,000. During the year, sales amounted to P4,200,000 (all on credit). Collections from
customers, including recoveries of P15,000, totaled P4,450,000, net of discounts of P7,000. Likewise,
P12,000 of the receivables were written-off. Reindeer Company uses the aging method in determining
bad debts, although it provides interim bad debts provision equal to 0.5% of gross credit sales. The
following table shows the corresponding bad debt percentage of Reindeer Company’s accounts
receivable:
A/R Balance Age Percentage of Collectability
40% 30 days or less 1%
30% 31 – 60 days 3%
15% 61 – 90 days 5%
10% 91 – 120 days 9%
5% Over 120 days 15%
The yearend adjustment to bad debts expense is
ANSWERS

a. P5,003
b. (P5,003)
c. P4,448
d. (P4,448)

4. Which choice correctly the following statement?

Statement I: If an entity cannot distinguish the research phase from the development phase, it should
treat an expenditure on a project as if it were incurred in the research phase only and recognize an
expense accordingly.
Statement II: It is difficult to distinguish between a change in accounting estimate and a change in
estimate and a change in accounting policy, then the change is treated as a change in in estimate
and must be accounted for currently and prospectively.
Statement III: In rate circumstance, when a treatment benefits plan has attributes of both defined
benefited plan and defined contribution plan, the plan is deemed as a defined contribution plan
a. Only statement I is false
b. Only statements II is true
c. Only statements III is true
d. Only statements III is false

5. The proprietor of Patrick Company, has apprehension of possible pilerage in merchandise inventory for
December 31, 2017, he requested you to have test checks based on available information and report to him
your finding. The following data were furnished to you:

12/31/16 12/31/17
Physical inventory at cost P 450,000 P 402,000
Sales, net 4,000,000
Cost of sales 2,400,000
Accounts receivable-trade 200,000 350,000
Accounts payable – trade 500,000 420,000

Additional information
In 2017, accounts receivable of P 20,000 was written-off, total sales return were P10,0000 and puchase returns,
P 30,000. Cahs receipts from customers (after P 30,000 discounts) totaled P 6, 000,000 while cash paymemts to
trade creditors amounted to P, 4,000,000.

Assuming gross profit rate in 2017 is the same as in 2016, what is the amount of inventory shortage as of
December 31, 2017?
a. P 220,000
b. P 230,000
c. P 248,000
d. P 252,000

6. On January 2, 2016 , Modern Company a mediem – sized entity, acquired all the net assets of Acient 1.td fro
23,000,000. The identifiable net assets of Acient at the time of acqusition is P 2,000,000. The net indentifiable
net assets of Ancient had “Remaining loife of 10 years. Acient Ltd is a cash – generating unit. On December 31,
2016, the recoverable amount of Ancient Ltd was P1,360, 200
ANSWERS

In year 2017, the business situtation improve s in the country and government policies change. As a result,
management re estimates the recoverable amount of Ancient Ltd. At the end of year 2017, teh recoverable
amount of Ancient Ltd is P1, 910. Beginning of year 2017 Modern Company had decided to chage its is
depreciation rate to 10% per annum on carrying value of the net identifiable asstes?

What amount of impairments recovery should Modern Company report its 2017 profit or loan?
a. None
b. P 396,000
c. P 440,000
d. P 686,000

7. Accrued salaries payable of 51,000 were not recorded at December 31, 2017. Office supplies on hand
of 24,000 at December 31, 2018 were erroneously treated as expense instead of supplies inventory.
Neither of these errors was discovered nor corrected. The effect of these two errors would cause
a. 2017 net income to be overstated 27,000 and 2018 net income to be understated 24,000.
b. 2017 net income and December 31, 2017 retained earnings to be understated 51,000 each.
c. 2018 net income and December 31, 2018 retained earnings to be understated 24,000 each.
d. 2018 net income to be understated 75,000 and December 31, 2018 retained earnings to be
understated 24,000.

8. On January 1, 2018, Nut Company sold to Cracker Corp. a plot of land and received a note with a face
amount of P5,778,500. The note shall be collected in six equal annual instalments starting December
31, 2018 to include interest at 8% based on the unpaid balance. The interest income reported by Nut
Company in 2019 is
a. P377,022
b. P399,264
c. P416,052
d. P422,222

9. Using the information in the preceding number, what is the carrying value of the note as of December
31, 2020?
a. P3,221,421
b. P3,521,826
c. P4,140,155
d. P4,152,693

10. Statement I: An investment of more than 50 percent of the voting stock of an investee should lead to a
presumption of significant influence over an investee.
Statement II. An impairment loss is the difference between an investment’s cost and the expected
future cash flows.
a. Statement I is true, statement II is false
b. Statement I is false, statement II is true
c. Both statements are true
d. Both statements are false

11. Which of the following equations expresses the definition of “income”?

a. Income = Gains – Losses
b. Income = Revenues + Gains
ANSWERS

c. Income = Revenues – Expenses

d. Income = (Revenues + Gains) – (Expenses + Losses)
12. On the statement of cash flows, which of the following items will affect both financing activities and
operating activities?
a. Redemption of debt.
b. Payment of dividends.
c. Issuance of equity securities.
d. Collection of loans to other entities.

13. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Estimates are used.
b. Allowance method is used for tax purposes.
c. Improved matching of bad debt expense with revenue.
d. Determining worthless accounts under direct write-off method is difficult to do.

14. Preparing the statement of cash flows, using the indirect method, involves all of the following except
determining the
a. change in cash during the period.
b. cash collections from customers during the period.
c. changes in working capital accounts, other than cash.
d. cash provided by or used in investing and financing activities.

15. Which of the following is not treated as a change in accounting policy?

a. A change from cost-recovery to percentage-of-completion.
b. A change from average cost to FIFO for inventory valuation.
c. A change to a different method of depreciation for plant assets.
d. A change from full-cost to successful efforts in the extractive industry

16. Statement I: Trade discounts are used to avoid frequent changes in catalogs and to alter prices for
different quantities purchased.
Statement II: The percentage-of-receivables approach of estimating uncollectible accounts emphasizes
matching over valuation of accounts receivable.
a. True, true
b. True, false
c. False, true
d. False, false

17. Statement I: Ideally, a company should measure receivables in terms of their present value, that is, the
discounted value of the cash to be received in the future.
Statement II: The percentage-of-sales method results in a more accurate valuation of receivables on
the balance sheet.
a. True, true
b. True, false
c. False, true
d. False, false

18. The cash in bank account of Sky, Inc. for April 2020 showed an ending balance of P129,298. Deposits in
transit on April 30 was P18,200. Outstanding checks as of April 30 were P59,435, including a P5,000
ANSWERS

check which the bank had certified on April 27. During April, the bank charged back NSF checks in the
amount of P3,435, of which P1,835 had been redeposited by April 20. On April 23, the bank charged
Sky’s account for a P2,200 item which should have been charged against Ski, Inc., the error was not
detected by the bank. During April, the proceeds from notes collected by the bank for Sky, Inc. was
P7,548 and bank charges for this service amounted to P18. How much is the unadjusted balance per
bank on April 30?
a. P88,333
b. P95,263
c. P169,263
d. P173,663

19. Cloud Company uses the net method in accounting for its receivables. In one of its transactions on
December 15, 2019, Cloud sold merchandise with a list price of P500,000 to a client who was given a
trade discount of 20% and 15%. Credit terms were 2/10, n/30. The goods were shipped FOB
destination, freight collect. Total freight charges paid by the client amounted to P7,500. On December
20, the client returned damaged goods originally billed at P60,000. What is the net realizable value of
this receivable on December 31, 2019?
a. P272,500
b. P274,400
c. P280,000
d. P333,200

20. The Good Bank has a note receivable of P200,000 from the Micky Company that it is carrying at face
value and is due on December 31, 2025. Interest on the note payable at 9% each December 31. Micky
Company paid the interest due on December 31, 2021, but informed the bank that it would probably
miss the next two years' interest payments because of financial difficulties. After that, it expects to
resume its annual interest payments, but it would make the principal payment one year late, with
interest paid for that additional year at the time of the principal payments. How much should be
recognized as loan impairment loss in 2021? (Round off PV factors to four decimal places.)
a. P12,752
b. P19,965
c. P31,669
d. P32,812

21. Kitty Company received from a customer a one-year, P375,000 note bearing annual interest of 8%.
After holding the note for five months, Kitty Company discounted the note at an effective interest rate
of 10%. The amount received by the company from the note discounting is
a. P367,250
b. P369,600
c. P381,375
d. P388,125

22. 19. On December 31, 2018, Bryan Company sold used equipment and received a noninterest-bearing
note requiring payment of P500,000 annually for ten years. The first payment is due December 31,
2019 and the prevailing rate of interest for this type of note at date of issuance is 12%. The unearned
interest income at December 31, 2019 is
a. P2,336,000
b. P1,836,000
ANSWERS

c. P1,536,000
d. P1,516,000

23. RDJ Corporation had accounts receivable of P100,000 at 1/1. The only transactions affecting accounts
receivable were sales of P600,000 and cash collections of P550,000. The receivable turnover is
a. 4.0
b. 4.5
c. 4.8
d. 6.0

24. Which of the following is a current asset?

a. Cash designated for the purchase of tangible fixed assets.
b. Trade installment receivables normally collectible in 20 months.
c. Investment in equity securities for the purpose of controlling the issuing company.
d. Cash surrender value of a life insurance policy of which the company is the beneficiary.

25. Happy Co. accepted delivery of merchandise which it purchased on account. As of December 31, Happy
had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on
its financial statements for December 31 would be
a. Net income was correct and current assets were understated.
b. Net income was overstated and current assets were understated.
c. Net income was understated and current liabilities were overstated.
d. Net income, current assets, and retained earnings were understated.

26. Jio, Inc. manufactures cruise ships for sale. Each ship costs approximately P25,000,000 to build and
takes 3 years to fully construct. During the time it takes to construct one cruise ship, Jio incurs
P2,400,000 in interest cost related to the construction. The interest cost is incurred evenly throughout
the construction period. During the first year of construction, Jio builds a shell that can be customized
for any purchaser according to specifications; construction during the final 2 years is all based on client
specification. The International Accounting Standards Board requires that Jio account for this interest
cost as
a. P2,400,000 is capitalized to the cruise ship.
b. P2,400,000 is recorded as interest expense as incurred.
c. P800,000 is capitalized to the cruise ship; the remaining amount is expensed as incurred.
d. P800,000 incurred in 1st year is expensed as incurred; the remaining amount is capitalized to
the cruise ship

27. Long Roads sold P50,000 worth of goods and accepted the customer’s P50,000, 10%, 1-year note in
exchange. Assuming 10% approximates the market rate of return, how much interest would be
recorded for the year ending December 31 if the sale was made on June 30?
a. P0
b. P1,250
c. P2,500
d. P5,000

28. Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods
sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when
inventory is valued using the average cost method?
ANSWERS

a. Prices increased.
b. Prices decreased.
c. Prices remained unchanged.
d. Price trend cannot be determined from information given.
29. Bell Inc. took a physical inventory at the end of the year and determined that P650,000 of goods were
on hand. In addition, Bell, Inc. determined that P50,000 of goods that were in transit that were shipped
FOB shipping point were received two days after the inventory count and that the company had
P75,000 of goods out on consignment. What amount should Bell report as inventory at the end of the
year?
a. P650,000
b. P700,000
c. P725,000
d. P775,000

30. Regal Inc. reported total assets of P1,600,000 and net income of P85,000 for the current year. Regal
determined that inventory was understated by P23,000 at the beginning of the year and P10,000 at the
end of the year. What is the corrected amount for total assets and net income for the year?
a. P1,610,000 and P72,000
b. P1,610,000 and P95,000
c. P1,590,000 and P98,000
d. P1,600,000 and P85,000

31. Why are inventories stated at lower-of-cost-or-net realizable value?

a. To be conservative.
b. To permit future profits to be recognized.
c. To report a loss when there is a decrease in the future utility.
d. To report a loss when there is a decrease in the future utility below the original cost.

32. At the end of the fiscal year, Alpha Airlines has an outstanding non-cancellable purchase commitment
for the purchase of 1 million gallons of jet fuel at a price of P4.10 per gallon for delivery during the
coming summer. The company prices its inventory at the LCNRV. If the market price for jet fuel at the
end of the year is P4.50, how would this situation be reflected in the annual financial statements?
a. No impact.
b. Disclose the existence of the purchase commitment.
c. Record unrealized gains of P400,000 and disclose the existence of the purchase commitment.
d. Record unrealized losses of P400,000 and disclose the existence of the purchase commitment.

33. Which statement is not true about the gross profit method of inventory valuation?
a. It may be used by auditors.
b. It may be used to estimate inventories for interim statements.
c. It may be used to estimate inventories for annual statements.
d. It may be used when fire or catastrophe destroys the inventory.

34. Teena Corporation acquired two inventory items at a lump-sum cost of P50,000. The acquisition
included 3,000 units of product LF, and 7,000 units of product 1B. LF normally sells for P15 per unit,
and 1B for P5 per unit. If Teena sells 1,000 units of LF, what amount of gross profit should it recognize?
a. P1,875
b. P5,625
ANSWERS

c. P10,000
d. P11,875

35. Dicer uses the conventional retail method to determine its ending inventory at cost. Assume the
beginning inventory at cost (retail) were P130,000 (P198,000), purchases during the current year at
cost (retail) were P685,000 (P1,100,000), freight-in on these purchases totaled P43,000, sales during
the current year totaled P1,050,000, and net markups (markdowns) were P24,000 (P36,000). What is
the ending inventory value at cost?
a. P153,164
b. P157,412
c. P156,165
d. P236,000

36. On January 4, 2019, Cashew Co. purchased 40,000 shares (40%) of the common stock of Nut Corp.,
paying P800,000. There was no goodwill or other cost allocation associated with the investment.
Cashew has significant influence over Nut. During 2019, Nut reported income of P200,000 and paid
dividends of P80,000. On January 2, 2020, Cashew sold 5,000 shares for P125,000. What was the
balance in the investment account after the shares had been sold?
a. P848,000
b. P742,000
c. P723,000
d. P761,000

37. A company buys an oil rig for P2,000,000 on January 1, 2020. The life of the rig is 10 years and the
expected cost to dismantle the rig at the end of 10 years is P400,000. 10% is an appropriate interest
rate for this company. How much is the total expense recorded in 2020 as a result of this transaction?
a. P240,000
b. P200,000
c. P215,422
d. P230,844

Use the following information to answer the next three (3) items
Baby Shark Company owns a building on January 1, 2017 with historical cost of P40,000,000. The property is
depreciated over 40 years on a straight-line basis with no residual value. The entity adopts a policy of
revaluation of property. The building has so far been revalued twice at fair values as follows:
January 1, 2018 - P46,800,000
January 1, 2020 - P55,500,000

38. The revaluation surplus on January 1, 2018 is

a. P7,800,000
b. P6,800,000
c. P5,800,000
d. P4,800,000

39. The increase in revaluation surplus recognized as a component of other comprehensive income on
January 1, 2020 is
a. P15,500,000
b. P11,100,000
ANSWERS

c. P9,900,000
d. P8,700,000

40. The revaluation surplus reported in the statement of changes in equity for the year ended December
31, 2020 is
a. P18,000,000
b. P18,200,000
c. P18,500,000
d. P18,900,000

41. Siamese Company incurred the following costs during 2020:

Quality control during commercial production, including testing of products P 58,000

Laboratory research aimed at discovery of new knowledge 68,000
Testing for evaluation of new products 24,000
Modification of the formulation of a plastic product 26,000
Engineering follow-through in an early phase of commercial production 15,000
Adaptation of an existing capability to a particular requirement or customer's need as a part 13,000
of continuing commercial activity
Trouble-shooting in connection with breakdowns during commercial production 29,000
Searching for applications of new research findings 19,000

What is the total amount Siamese should report as research and development expense for 2020?
a. P137,000
b. P198,000
c. P169,000
d. P213,000

42. Arnold Company’s inventory at December 29, 2019 was P1,500,000 based on a physical count at cost
and before any necessary adjustments for the following:
• Merchandise costing P90,000, shipped FOB shipping point from a vendor on December 28, 2019,
was received and recorded on January 5, 2020.
• Goods in the shipping area were excluded from inventory although shipment was not made until
January 4, 2020. The goods, billed to the customer FOB shipping point on December 27, 2019 had a
cost of P120,000.

The adjustment to inventory at December 31, 2019 should be

a. Addition of P90,000
b. Addition of P120,000
c. Addition of P210,000
d. No adjustment

43. Patent G is purchased and supersedes patent C. The life of patent G is 12 years, while that of patent C
is 8 years. The cost of patent C should be
a. Amortized over 12 years
b. Amortized over 8 years
c. Amortized over 4 years
d. Written off
ANSWERS

44. When an owner-occupied property is transferred to investment property at fair value, a decrease in
the carrying amount of the property to its fair value at the date of transfer
a. Is recognized in profit or loss at all times.
b. Is not recycled to profit or loss but directly credited to equity.
c. Is absorbed by retained earnings only if the property is accounted for under the revaluation
model.
d. Is recognized in profit or loss or, for a revalued property, charged against revaluation surplus to
the extent of its credit balance.

45. Which of the following is not relevant in determining the useful life of a long-term asset?
a. Obsolescence
b. Expected action of competitor
c. The residual value of the asset
d. The expected usage of the asset

46. Which of the following expenditures may be properly capitalized?

a. Pre-operating costs
b. Cost of normal spoilage
c. Title search and other legal costs related to a piece of property which was not acquired
d. Research costs related to a long-term asset which is giving the company a competitive
advantage

Use the following information to answer the next four (4) items
You were able to obtain the following from Mr. Kim, the accountant for Dough Company, in relation to the
company’s liabilities as of December 31, 2019:
Accounts Payable P 650,000
Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Mortgage sales payable – 10% 600,000
Mortgage sales payable – 12% 1,500,000
Bonds payable 2,000,000

The following additional information pertain to these liabilities:

I. All trade notes payable is due within six months of the balance sheet date.
II. Bank notes-payable include two separate notes payable to Pizza Bank, as follows:
a. A P300,000, 8% note issued March 1, 2015, payable on demand. Interest is payable every six
months.
b. A 1-year, P500,000, 11 ½% note issued January 2, 2019. On December 30, 2019, Dough
negotiated a written agreement with Pizza Bank to replace the note with a 2-year, P500,000,
10% note to be issued January 2, 2020. The interest was paid on December 31, 2019.
III. The 10% mortgage note was issued October 1, 2014, with a term of 10 years. Terms of the note give
the holder the right to demand immediate payment if the company fails to make a monthly interest
payment within 10 days of the date the payment is due. As of December 31, 2019, Dough is three
months behind in paying its required interest payment.
ANSWERS

IV. The 12% mortgage note was issued May 1, 2006, with a term of 20 years. The current principal amount
due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due
April 30, 2020. The payment includes interest of P180,000.
V. The bonds payable is 10-year, 8% bonds, issued June 30, 2010. Interest is payable semi-annually every
June 30 and December 31.

Determine the following:

47. Interest payable as of December 31, 2019
a. P143,000
b. P155,000
c. P203,000
d. P215,000

48. Note payable – bank to be reported under current liabilities as of December 31, 2019
a. P0
b. P300,000
c. P500,000
d. P800,000

49. Total current liabilities as of December 31, 2019

a. P3,938,000
b. P3,950,000
c. P3,998,000
d. P4,138,000

50. Total noncurrent liabilities as of December 31, 2019

a. P1,760,000
b. P1,960,000
c. P2,560,000
d. P3,960,000

Use the following information to answer the next five (5) items
The following data were compiled prior to preparing the balance sheet of the Safari Corporation as of
December 31, 2019:
Authorized common stock, P100 par value P 4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on AFS securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation surplus 800,000
Retained earnings, unappropriated 720,000
Subscribed share capital 480,000
Subscriptions receivable (collectible beyond 1 year) 120,000
Stock warrants outstanding 200,000
ANSWERS

Treasury stock, at cost 144,000

Unissued common stock 800,000

Compute the following:

51. Common stock issued
a. P3,056,000
b. P3,200,000
c. P3,680,000
d. P4,000,000

52. Additional paid-in capital

a. P320,000
b. P1,200,000
c. P1,320,000
d. P1,400,000

53. Retained earnings appropriated

a. P144,000
b. P400,000
c. P544,000
d. P1,000,000

54. Legal capital

a. P3,200,000
b. P3,560,000
c. P3,680,000
d. P4,000,000

55. Total stockholders’ equity

a. P6,240,000
b. P6,480,000
c. P6,640,000
d. P6,760,000

56. The occurrence that most likely would have no effect on 2019 net income is the
a. Stock purchased in 1989 deemed worthless in 2019
b. Collection in 2019 of a dividend from an investment
c. Sale in 2019 of an office building contributed by a stockholder in 2004
d. Correction of an error in the financial statements of a prior period discovered subsequent to
their issuance

57. Which of the following is a correct statement of one of the capitalization criteria?
a. The lease contains a purchase option.
b. The lease transfers ownership of the property to the lessor.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased
property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value
of the leased property.
ANSWERS

On January 1, 2019, Corgi, Inc. signs a 10-year non-cancelable lease agreement to lease a storage building
from Holt Warehouse Company. The following information pertains to this lease agreement.
• The agreement requires equal rental payments at the beginning of each year.
• The fair value of the building on January 1, 2019 is 4,000,000; however, the book value to Holt is
3,300,000.
• The building has an estimated economic life of 10 years, with no residual value. Corgi depreciates
similar buildings on the straight-line method.
• At the termination of the lease, the title to the building will be transferred to the lessee.
• Corgi’s incremental borrowing rate is 11% per year. Holt Warehouse Co. set the annual rental to insure
a 10% rate of return. The implicit rate of the lessor is known by Corgi, Inc.
• The yearly rental payment includes 10,000 of executory costs related to taxes on the property.

58. What is the amount of the minimum lease payment?

a. P181,801
b. P581,801
c. P591,801
d. P601,801

59. From the lessee's viewpoint, what type of lease exists in this case?
a. Finance lease
b. Sale-leaseback
c. Operating lease
d. Sales-type lease

60. Yancey, Inc. would record depreciation expense on this storage building in 2019 of
a. P0
b. P330,000
c. P400,000
d. P650,981

61. Mays Company has a machine with a cost of P400,000 which also is its fair value on the date the
machine is leased to Park Company. The lease is for 6 years and the machine is estimated to have an
unguaranteed residual value of P40,000. If the lessor's interest rate implicit in the lease is 12%, the six
beginning-of-the-year lease payments would be
a. P66,667
b. P78,180
c. P82,465
d. P92,361

62. If the residual value of a leased asset is guaranteed by a third party

a. It is treated by the lessee as no residual value.
b. The net investment to be recovered by the lessor is reduced.
c. The third party is also liable for any lease payments not paid by the lessee.
d. It is treated by the lessee as an additional payment and by the lessor as realized at the end of
the lease term.
ANSWERS

63. An assumption inherent in a company’s IFRS statement of financial position is that companies recover
and settle the assets and liabilities at
a. Their reported amounts
b. Their net realizable value
c. The present value of future cash flows
d. The amount that is probable where “probable” means a level of likelihood of at least more than
50%

64. On January 1, 2019, Vlad, Inc. purchased a machine for P720,000 which will be depreciated P72,000
per year for financial statement reporting purposes. For income tax reporting, Vlad elected to expense
P80,000 and to use straight-line depreciation which will allow a depreciation deduction of P64,000 for
2019. Assume a present and future enacted income tax rate of 30%. What amount should be added to
Vlad's deferred tax liability for this temporary difference at December 31, 2019?
a. P19,200
b. P21,600
c. P24,000
d. P43,200

65. Kirk, Inc. uses the accrual method of accounting for financial reporting purposes and appropriately uses
the installment (cash) basis of accounting for income tax purposes. Profits of P300,000 recognized for
books in 2017 will be collected in the following years: 2018 – 50,000; 2019 – 100,000; 2020 – 150,000.

The enacted tax rates are: 40% for 2017, 35% for 2018, and 30% for 2019 and 2020. Taxable income is
expected in all future years. What amount should be included in the December 31, 2017 statement of
financial position for the deferred tax liability related to the above temporary difference?
a. P17,500
b. P75,000
c. P92,500
d. P120,000

66. During the posting process, the accountant failed to post a P2,800 debit to the Office Supplies account.
The effect of this error will be that
a. The trial balance will not balance.
b. The error will overstate the debits listed in the journal.
c. The error will overstate the credits listed in the journal.
d. None of the above.

67. Which statement is incorrect regarding Philippine Financial Reporting Standards (PFRSs)?
a. PFRSs are designed to apply to not-for-profit activities in the private sector.
b. PFRSs are designed to apply to the general purpose financial statements and other financial
reporting of all profit-oriented entities.
c. PFRSs are based on the Framework, which addresses the concepts underlying the information
presented in general purpose financial statements.
d. PFRSs set out recognition, measurement, presentation and disclosure requirements dealing
with transactions and events that are important in general purpose financial statements.

68. One element of the objective of financial reporting is to provide

a. Information that will attract new investors.
ANSWERS

b. Information about the investors in the business entity.

c. Information that is useful in assessing cash flow prospects.
d. Information about the liquidation values of the resources held by the enterprise.

69. Statement I: International financial reporting interpretations issued by the International Accounting
Standards Board are considered authoritative and must be followed.
Statement II: Accounting standards are now less likely to require the recording or disclosure of fair
value information due to its inherent subjectivity.
a. Both statements are true
b. Both statements are false
c. Statement I is true; statement II is false
d. Statement I is false; statement II is true

70. Which of the following statements regarding the conceptual framework is correct?
a. The framework deals with concepts of capital.
b. The framework is concerned with special purpose financial statements.
c. The framework applies to financial statements of business reporting enterprises in the private
sector but not in the public sector
d. In cases where there is conflict between the framework and a PFRS, the requirement of the
framework will prevail

71. Compared to its 2018 cash basis net income, Gavin Company’s 2018 accrual basis net income increased
when
a. It sold used inventory for cash at a loss in 2018
b. It sold used equipment for cash at a gain in 2018
c. It recorded more account sales than that of the previous year
d. It had lower accrued expenses on December 31, 2017 than on January 1, 2018.

72. Reversing entries

a. affects one real and one nominal account
b. are not allowed under International Financial Reporting Standards (IFRS)
c. change amounts reported in the financial statements of the preceding period
d. should be made if the expense or income method is used in preparing adjustments

73. The closing entries

a. are posted to the appropriate general ledger accounts
b. include closing the dividends account to income summary
c. must debit or credit one income statement account and one statement of financial position
account
d. All of these choices are correct.

74. Which of the following statements is not an objective of financial reporting?

a. Provide information that is useful in investment and credit decisions
b. Provide information about enterprise resources, claims to those resources, and changes to
them
c. Provide information on the liquidation value of an enterprise
d. Provide information that is useful in assessing cash flow prospects
ANSWERS

75. How does accounting help the capital allocation process attract investment capital?
a. Provides timely, relevant information
b. Encourages innovation
c. Promotes productivity
d. (a) and (b)

76. The information provided by financial reporting pertains to

a. Individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers
b. Business industries, rather than to individual enterprises or an economy as a whole or to
members of society as consumers
c. Individual business enterprises, industries, and an economy as a whole, rather than to members
of society as consumers
d. An economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries

77. Which of the following represents a form of communication through financial reporting but not
through financial statements?
a. Statement of financial position
b. President's letter
c. Income statement
d. Notes to financial statements

78. Which of the following features of an asset closely links its definition to the science of Economics?
a. An asset is controlled by an entity
b. An asset can provide future benefits to an entity
c. An asset can command a price
d. An asset is exclusively owned by an entity

79. This is the means by which a reporting entity records and stores the financial and managerial
information from its transactions or economic events so that it can retrieve and report the information
in an accounting statement
a. Accounting system
b. Bookkeeping system
c. Internal control system
d. Ledger system

80. The systematic and chronological recording of transactions and events in books of account is known as
a. Accounting
b. Bookkeeping
c. Recordkeeping
d. Auditing

81. Which one of the following is among the conditions that will qualify a situation, particular action or set
of circumstances as an accountable event?
a. It has happened or will happen within a short period of time
b. It affects an accounting element (s) either increasing and decreasing it
c. It involves an exchange of values between the business enterprise and a third party
ANSWERS

d. It can be measured accurately in monetary terms

82. The system of bookkeeping that recognizes the two-fold effect of an accountable event is known as
a. Double-entry
b. Single-entry
c. Cash basis
d. Accrual basis

83. The system of bookkeeping whereby, as a general rule, only cash and personal accounts are recognized
and is deemed to be incomplete bookkeeping
a. Double-entry
b. Single-entry
c. Cash basis
d. Hybrid accounting