Financial Accounting (Acccob2)

Exercises –Investment (Chapter 4) and Inventory (Chapter 5)

1. On January 1, 2019, Mirage Company acquired P4,000,000 of 12% face amount bonds for
P3,767,000 to be held as financial assets at amortized cost with a 14% effective yield.
Interest on bonds is payable annually on December 31 and the bonds mature on January
1, 2023. The effective interest method of amortization is used.

What is the carrying amount of the bond investment on December 31, 2019?
A. P3,814,380 B. P3,767,000 C. P4,000,000 D. P3,719,620

2. On January 1, 2019, Paradox Company purchased 9% bonds with a face amount of P4,000
for P3,756,000 to yield 10%.

The bonds are dated January 1, 2019, mature on December 31, 2028, and pay interest
annually on December 31. The bonds are measured at amortized cost.

What amount should be reported as interest revenue for 2019.

A. P400,000 B. P344,400 C. P360,000 D. P375,600

3. On July 1, 2019, Conair Company paid P1,198,000 for 10% bonds with a face amount of
P1,000,000 to be held as financial assets at amortized cost.

Interest is paid on June 30 and December 31. The bonds were purchased to yield 8%. The
entity used the effective interest method.

What is the carrying amount of the bond investment on December 31, 2019.
A. P1,207,900 B. P1,198,000 C. P1,195,920 D. P1,193,050

4. On January 1, 2019, Dumaguete Company purchased bonds with face amount of

P4,000,000 for P4,206,000. The business model of the entity in managing the financial asset
is to collect contractual cash flows that are solely payment of principal and interest and also
to sell the bonds in the open market.

The entity has not elected the fair value option of measuring financial asset.

The bonds mature on December 31, 2021 and pay 10% interest annually on December 31,
2019 each year with 8% effective yield.

The bonds are quoted at 95 on December 31,2019 and 90 on December 31, 2020.

4.1 What is the amount of unrealized loss should be reported as component other
comprehensive income in 2019?
A. P342,480 B. P406,000 C. P469,520 D. 0

4.2 What amount of unrealized loss should be reported as component of other

comprehensive income in 2020?
A. P473,878 B. P131,398 C. P200,000 D. 0

4.3 What amount of cumulative unrealized loss should be reported in the statement of
changes in equity on December 31, 2020?
A. P406,000 B. P606,000 C. P473,875 D. 0
4.4 What is the carrying amount of the bond investment to reported on December 31,
2020?
A. P4,206,000 B. P3,600,000 C. P3,800,000 D. P4,673,878

5. On January 1, 2019, Gelyka Company purchased 12% bonds with face amount of P5,000,000
for P5,500,000 including transaction cost P100,000. The bonds provide an effective yield of
10%.

The bonds are dated January 1, 2019 and pay interest annually on December 31 or each
year.
 The bonds are quoted at 115 on December 31, 2019.

The entity has irrevocably elected to use the fair value option.

5.1. What amount of gain from change in fair value should be reported for 2019?
A. P750,000 B. P250,000 C. P350,000 D. 0

5.2 What amount of interest income should be reported for 2019?

A. P600,000 B. P550,000 C. P660,000 D. P540,000

5.3 What is the carrying amount of the bond investment on December 31, 2019?
A. P5,750,000 B. P5,500,000 C. P5,500,000 D. P5,450.000

5.4 What total amount of income from the investment should be reported in the income
statement for 2019?
A. P540,000 B. P950,000 C. P890,000 D. P900.000

6. During 2019, Knickknack Company purchased marketable equity security to be measured at

fair value through other comprehensive income.

On December 31, 2019, the balance in the unrealized loss on these securities was P200,000

There were no security transactions during 2020. The value of the security was P5,000,000
on December 31, 2019 and the fair value as at December 31,2020 was P4,500,000. In the
statement of changes in equity for 2020, what amount should be included as cumulative
unrealized loss as component of other comprehensive income?
A. P500,000 B. P300,000 C. P200,000 D. 0

INVENTORY
7. Light Company is a wholesaler of scented candles. The activity for item number 1234
during June is presented below:
Item 1234 Units Cost per unit
1-Jun Inventory balance 6,000 20
4 Purchases 9,000 24
12 Sales 10,800
19 Purchases 14,400 26
22 Sales 11,400
29 Purchases 4,800 27

Question 1: Under the FIFO period inventory system, how much is the ending inventory of item
#1234 as of June 30?
A. P280,800 B. P278,400 C. P302,400 D. P316,800

Question 2: Under the weighted average cost periodic inventory system, how much is the
ending inventory of item #1234 at June 20?
A. P278,400 B. P294,720 C. P302,400 D. P316,800

8. During January 2019, Metro Company, which maintains a perpetual inventory system,
recorded the following information pertaining to its inventory:
Units Unit Cost Total Cost Units on Hand
1/1/19 Beginning 1,000 40 40,000 1,000
1/4/19 Purchases 600 120 72,000 1,600
1/20/19 Sold 900 700
1/25/19 Purchases 400 200 80,000 1,100

Under the moving-average method, what amount should Metro report as inventory at January
31, 2019?
A. P105,000 B. P129,000 C. P132,000 D. P156,000
9. The following inventory details are available for Thompson Co.
Date Quantity Cost Total Cost
Per Unit
Jan 1, Beginning Inventory 100 P18.00 P1,800.00
Mar 4, Purchase 400 19.00 7,600.00
May 8, Purchase 800 18.25 14,600.00
Nov 3, Purchase 500 20.40 10,200.00
Merchandise Available 1,800 P34,200.00

Five-hundred units are unsold. Using the periodic weighted average method, the cost assigned to the
ending merchandise inventory is
a. P10,200
b. P9,500
c. P9,800
d. P10,500

10. The inventory details of Madison Co. for the year 2018 of May follows:
Date Quantity Cost Total Cost
Per Unit
Jan 1, Beginning Inventory 100 P18.00 P1,800.00
Mar 4, Purchase 400 19.00 7,600.00
May 8, Purchase 800 20.00 16,000.00
Nov 3, Purchase 500 21.00 10,500.00
Merchandise Available 1,800 P35,900.00

Five-hundred and seventy units are unsold. Using the FIFO (periodic) method, the cost assigned to the
ending merchandise inventory is
a. P10,800
b. P11,900
c. P11,970
d. P11,368

11. Refer to following information for Robinsons Co.

Beginning inventory 10 units @ P10 per unit
First purchase 35 units @ P11 per unit
Second purchase 40 units @ P12 per unit
Third purchase 15 units @ P13 per unit

If 83 units are sold, the value of the ending inventory under periodic FIFO would be
a. P177
b. P905
c. P219
d. P204

12. For the following inventory records of HONEWELL CO.

Beginning inventory 10 units @ p10 per unit
First purchase 35 units @ p11 per unit
First sale 20 units
Second purchase 40 units @ p12 per unit
Second sale 35 units
Third purchase 15 units @ p13 per unit

The value of the ending inventory using a perpetual inventory system with the FIFO valuation method is

a. P555
b. P495
c. P520
d. P485
13. Inventory at the end of the current period was erroneously understated. Which of the following is true
as a result of the understatement?
a. net income for the current year is overstated
b. the cost of goods sold for the current year is understated
c. equity at the end of the current year is overstated
d. net income at the end of the following year will be overstated

14. Beginning inventory totals P100,000 and ending inventory totals P140,000. Net sales totals P400,000
and cost of goods sold is P300,000. The merchandise turnover ratio will be
a. 2.25
b. 2.50
c. 3.00
d. 4.50

15. The number of days the inventory is converted into sales:

a. 144 days
b. 160 days
c. 120 days
d. 80 days

MULTIPLE CHOICE THEORIES

1. Inventories are assets (choose the incorrect one)
a. Held for sale in the ordinary course of business
b. In the process of production for sale
c. In the form of materials or supplies to be consumed in the production process or in the rendering
of services
d. Held for use in the production or supply of goods or services.

2. Inventories encompass all of the following, except

a. Merchandise purchased by a retailer
b. Land and other property not held for sale
c. Finished goods produced
d. Materials and supplies awaiting use in the production process

3. The cost of inventory encompasses all of the following except

a. Cost of purchase
b. Cost of conversion
c. Other cost incurred in bringing the inventory to its present location and condition
d. Abnormal amount of wasted material.

4. The cost of purchase of inventory does not include

a. Purchase price
b. Import duties and irrecoverable taxes
c. Freight, handling and other costs directly attributable to the acquisition of goods
d. Trade discounts, rebates and other similar items

5. The costs of conversion of inventory include all of the following, except

a. Costs directly related to the units of production, such as direct labor
b. Systematic allocation of fixed production overhead
c. Systematic allocation of variable production overhead
d. Systematic allocation of administrative overhead

6. Which of the following costs of conversion cannot be included in cost of inventory?

a. Cost of direct labor
b. Factory rent and utilities
c. Salaries of sales staff (sales department shares the building with factory)
d. Factory overhead based on normal capacity

7. Which of the following should not be taken into account when determining the cost of inventories?
a. Storage costs of part-finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward.

8. Which of the following statements in relation to measurement of inventory is true?

I. Cost of factory management shall be included in the cost of inventory
II. Maintenance expenses for an item of equipment used in the manufacturing process shall be
included in the cost of inventory

a. I only
b. II only
c. Both I and II
d. Neither I nor II

9. Which of the following items should be included in inventory at the end of reporting period
a. Goods in transit which were purchased FOB shipping point
b. Goods in transit which were purchased FOB destination
c. Goods received from another entity on consignment
d. Goods in transit to a customer which were sold to the customer FOB shipping point
10. Merchandise shipping FOB shipping point on the last day of the year should ordinarily be included in
a. The buyer’s inventory balance
b. The seller’s inventory balance
c. Neither the buyer’s nor seller’s inventory balance
d. Bothe the buyer’s and the seller’s inventory balance.

11. Goods shipping FOB destination that are in transit at the end of the year should be included in the
inventory of the
a. Seller
b. Common Carrier
c. Buyer
d. Bank

12. Goods on consignment shall be included in the inventory of

a. The consignor but not the consignee
b. The consignee but not the consignor
c. Bothe the consignor and the consignee
d. Neither the consignor nor the consignee

13. What is the method of accounting for inventory in which the cost of goods sold is recorded each time
a sale is made?
a. Professional inventory system
b. Periodic inventory system
c. Perpetual inventory system
d. Planned inventory system

14. An entity returned merchandise purchased on account. Under a perpetual inventory system, the
amount credited in the journal entry to record the return is
a. Purchases
b. Purchase returns and allowances
c. Inventory
d. Accounts Payable

15. A discount given to a customer for purchasing a large volume of merchandise is typically referred to
as
a. Trade discount
b. Quantity discount
c. Size discount
d. Cash discount

16. Which of the following terms represents the deduction from the invoice price of purchased goods
granted by suppliers for early payment?
a. Sales discount
b. Purchase discount
c. Trade discount
d. Purchase return and allowance

17. When the current year’s ending inventory is overstated

a. The current year’s cost of goods sold is overstated
b. The current year’s total assets are understated
c. The current year’s net income is overstated
d. The next year’s net income is overstated.

18. An overstatement of ending inventory in the current period would result in income of the next period
being
a. Overstated
b. Understated
c. Correctly stated
d. The answer cannot be determined from the information given

19. Inventories shall be measured at

a. Cost
b. Net realizable value
c. Lower of cost and net realizable value
d. Higher of cost and net realizable value

20. Net realizable value is

a. Current replacement cost
b. Estimated selling price
c. Estimated selling price less estimated cost to complete
d. Estimated selling price less estimated cost to complete and estimated cost to sell.

21. Which of the following inventory method reports most closely the current cost of inventory?
a. FIFO
b. Specific Identification
c. Weighted average
d. Moving average
22. All of the following financial assets shall be measured at fair value through profit or loss, except
a. Financial assets held for trading
b. Financial assets designated on initial recognition aat fair value through profit or loss
c. Investments in quoted equity instruments
d. Financial assets at amortized cost

23. Transactions costs include

a. Fees and commission paid to agent, levies by regulatory authorities, transfer taxes and duties
b. Debt premiums or discounts
c. Financing costs
d. Internal administrative costs

24. Transactions costs that are directly attributable to the acquisition of a financial asset shall be
a. Capitalized as cost of the financial asset
b. Expensed incurred
c. Charged to retained earnings
d. Included as a component of other comprehensive income

25. If the financial asset is held for trading or if the financial asset is measured at fair value through profit
or loss, transaction costs directly attributable to the acqutiion shall be
a. Capitalized as cost of the financial asset
b. Expensed immediately when incurred
c. Deferred and amortized over a reasonable period
d. Included as component of other comprehensive income

26. It is an entity, including an unincorporated entity such as a partnership over which the investor has
significant influence and that is neither a subsidiary nor an interest in joint venture.
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund

27. When an investor uses the equity method to account for investment in ordinary shares, cash
dividends received by the investor from the investee shallb e recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s profits
c. A deduction from the investment account.
d. A deduction from the shareholders’ equity account, dividends to shareholder

28. The interest rate written on the face of bond is known as

a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate

29. To compute the price to pay for a bond, what present value concept is used?
a. Only the present value of 1 concept
b. Only the present value of an annuity of 1 concept
c. Both the present value of 1 concept and present value of an annuity of 1 concept
d. Neither the present value of 1 concept nor the present value of annuity of 1 concept

30. The effective interest method of amortizing bond discount provides for
a. Increasing amortization and increasing interest income
b. Increasing amortization and decreasing interest income
c. Decreasing amortization and increasing interest income
d. Decreasing amortization and decreasing interest income