BASIC ACCOUNTING REVIEW

THEORY

1. Unearned rent revenue would normally appear in the statement of financial position as
A. Non-current asset
B. Current liability
C. Non-current liability
D. Current asset

2. On September 1, 2012, an entity borrowed cash and signed a two-year interest-bearing note on which
both the principal and interest are payable on September 1, 2014. How many months of accrued interest
would be included in the liability for accrued interest on December 31, 2012 and December 31, 2013?
December 31, 2012 December 31, 2013
A. 4 months 16 months
B. 4 months 4 months
C. 12 months 24 months
D. 20 months 8 months

3. The premium on a three-year insurance policy expiring on December 31, 2014 was paid in total on
January 1, 2012. If the entity has six-month operating cycle, then on December 31, 2012, the prepaid
insurance reported as a current asset would be for
A. 6 months
B. 12 months
C. 18 months
D. 24 months

4. The premium on a four-year insurance policy expiring on December 31, 2015 was paid in total on January
1, 2012. If the original payment was recorded as a prepaid asset, the balance in the prepaid asset account
on December 31, 2013 would be
A. Lower than the balance on December 31, 2012.
B. Lower than the balance on December 31, 2014.
C. The same as the balance on December 31, 2015.
D. The same as the original payment.

5. What function do accounting journals serve in the accounting process?

A. Recording
B. Classifying
C. Summarizing
D. Reporting

6. It is the presentation and classification of financial statement items on a uniform basis from one
accounting period to the next.
A. Comparable information
B. Consistency of presentation
C. Aggregation
D. Accrual basis

7. Items of dissimilar nature or function

A. Must always be presented separately in financial statements.
 B. Must not be presented separately in financial statements.
C. Must be presented separately in financial statements if those items are material.
D. Must be presented separately in financial statements even if those items are immaterial.

8. The operating cycle of an entity

A. Is the time between the acquisition of materials entering into a process and their realization in cash
or cash equivalent.
B. Causes the distinction between current and non-current items to depend on whether they will affect
cash within one year.
C. Is the period of time normally elapsed from the time the entity expends cash to the time it converts
trade receivables back into cash.
D. Is a period of one year.

9. A long-term debt that is due to be settled within twelve months after the end of the reporting period is
classified as non-current when
I. An agreement to refinance or reschedule payment on a long-term basis is completed after the
end of the reporting period and before the financial statements are authorized for issue.
II. The entity has the discretion to refinance or roll over the obligation for at least twelve months
after the end of the reporting period under an existing loan facility.

A. I only
B. II only
C. I and II
D. Neither I nor II

10. An entity uses the allowance method to recognize doubtful accounts expense. What is the effect of a
collection of an account previously written off?
A. No effect on both allowance for doubtful accounts and doubtful accounts expense.
B. No effect on allowance for doubtful accounts and decrease in doubtful accounts expense.
C. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense.
D. Increase in allowance for doubtful accounts and decrease in doubtful accounts expense.

11. Depreciation is best described as a method of

A. Asset valuation
B. Current value allocation
C. Cost allocation
D. Useful life determination

12. Which of the following statements regarding depreciation is not false?

A. An asset must be depreciated from the date of its purchase to the date of sale.
B. The annual depreciation charge shall be constant over the life of the asset.
C. The total cost of an asset must eventually be depreciated.
D. If the carrying amount of an asset is less than the residual value, depreciation is not charged.

13. Which of the following statements is the assumption on which straight line depreciation is based?
A. The operating efficiency of the asset decreases in later years.
B. Service value declines as a function of time rather than use.
C. Service value declines as a function of obsolescence rather than time.
D. Physical wear and tear are more important than economic obsolescence.
14. Which of the following types of accounts measure economic flows over a period of time?
A. Real accounts
B. Nominal accounts
C. Mixed accounts
D. Contra accounts

15. What functions do general ledgers serve in the accounting process?

A. Reporting
B. Summarizing
C. Classifying
D. Recording

16. Why are adjusting entries necessary?

A. Transactions take place over more than one accounting period.
B. To make debits equal credits
C. To close nominal accounts at year-end
D. To correct erroneous balances in accounts

17. Which one of the following items least resembles a typical adjusting entry?
A. Debit an asset and credit revenue
B. Debit an expense and credit liability
C. Debit revenue and credit liability
D. Debit an asset and credit liability

18. The allowance for doubtful accounts which appears as a deduction from accounts receivable is an
application of
A. Going concern assumption
B. Revenue recognition principle
C. Matching principle
D. Materiality constraint

19. Which of the following statements in relation to expense is false?

A. All expenses and losses are expired costs, but not all expired costs are expenses or losses.
B. All expenses decrease owner’s equity, but not all decreases in owner’s equity are expenses.
C. Expense is synonymous with expenditure.
D. Entities do not incur expenses per se but they initially acquire assets.

20. An adjusting entry in which a revenue is recognized before the related cash receipt occurs is called
A. Deferral
B. Nominal
C. Accrual
D. Special item

21. In presenting a statement of financial position, an entity

A. Must make the current and non-current presentation.
B. Must present assets and liabilities in order of liquidity.
C. Must choose either the current and non-current or the liquidity presentation, meaning free choice of
presentation.
D. Must make the current and non-current presentation, except when a presentation based on
liquidity provides information that is reliable and more relevant.
 22. In the Philippines, the common practice is to present in the statement of financial position
A. Current assets before non-current assets, current liabilities before non-current liabilities and equity
after liabilities.
B. Non-current assets before current assets, non-current liabilities before current liabilities and equity
after liabilities.
C. Current assets before non-current assets non-current liabilities before current liabilities, and equity
after liabilities.
D. Non-current assets before current assets, current liabilities before non-current liabilities and equity
after liabilities.

23. The effects of transactions and other events on an entity’s economic resources and claims are depicted in
the periods in which those effects occur even if the resulting cash receipts and payments occur in a
different period.
A. Accrual accounting
B. Cash accounting
C. Modified cash accounting
D. Modified accrual accounting

PROBLEMS:

The following long-term receivables were reported in the December 31, 2011, statement of financial position of
BCSV Company:

Note receivable from sale of a plant asset P 3,000,000

Note receivable from Madison (CEO) 800,000

The following transactions during 2012 and other information relate to the company’s long-term receivables:

 The note receivable from sale of a plant asset dated April 1, 2011 bears interest at 12%. The note is
payable in three annual installments of P 1 Million plus interest on the unpaid balance every April 1. The
initial principal and interest payment was made on April 1, 2012.

 The note receivable from Madison is dated December 31, 2011, earns interest at 10% per annum, and is
due on December 31, 2014. The 2012 interest was received on December 31, 2012.

 A tract of land was sold by BCSV to BFN Company on July 1, 2012, for P 2 Million under an installment sale
contract. BFN signed a 4-year 11% note for P 1.4 Million on July 1, 2012, in addition to the down payment
of P 600,000. The equal annual payments of principal and interest on the note will be P 451,250 payable
on July 1 of 2013 through 2016. The land had an established cash price of P 2 Million, and its cost to BCSV
was P 1.5 Million. The collection of the installments on this note is reasonably assured.

1. THE AMOUNT REPORTED AS NON-CURRENT RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION

AT DECEMBER 31, 2011 IS… 2.8M
2. THE AMOUNT REPORTED AS CURRENT ASSETS RELATED TO THE RECEIVABLES IN THE STATEMENT OF
FINANCIAL POSITION AT DECEMBER 31, 2011 IS… 1.27M
3. THE AMOUNT TO BE REPORTED AS NON-CURRENT RECEIVABLES IN THE STATEMENT OF FINANCIAL
POSITION AT DECEMBER 31, 2012 IS… 2,902,750
4. THE CURRENT PORTION OF NOTES RECEIVABLE ON DECEMBER 31, 2012 SHOULD BE… 1,297,250
5. THE ACCRUED INTEREST RECEIVABLE ON DECEMBER 31, 2012 SHOULD BE… 257K
6. THE TOTAL INTEREST INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 SHOULD BE… 427K
Columbia Company must determine the December 31, 2012, year-end accruals for advertising and rent expenses.
A P 50,000 advertising bill was received January 10, 2013, comprising costs of P 37,500 for advertisements in
December 31, 2012 issues, and P 12,500 for advertisements in January 2013 issues of the newspaper.

A store lease, effective December 16, 2012, calls for fixed rent of P 120,000 per month, payable one month from
the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P 6,000,000 per calendar
year is payable on January 31 of the following year. net sales for 2012 were P 7,500,000.

1. WHAT IS THE TOTAL ACCRUED LIABILITIES THAT SHOULD BE REPORTED BY THE COMPANY IN ITS
STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2012? 172,500

Canada Company has the following three loans payable scheduled to be repaid in February of next year. The
company’s accounting year ends on December 31.

 The company intends to repay Loan 1 for P 100,000 when it comes due in February. In the following
October, the company intends to get a new loan which is 80% of the previous loan from the same bank.

 The company intends to refinance Loan 2 for P 150,000 when it comes due in February. The refinancing
agreement for P 180,000, will be signed in April, after the financial statements for this year have been
authorized for issue.

 The company intends to refinance Loan 3 for P 200,000 before comes due in February. The actual
refinancing for P 175,000, took place in January, before the financial statements for this year have been
authorized for issue.

7. AS OF DECEMBER 31 OF THIS YEAR, THE TOTAL CURRENT LIABILITIES TO BE REPORTED IN THE

COMPANY’S STATEMENT OF FINANCIAL POSITION SHOULD BE… 450K
8. AS OF DECEMBER 31 OF THIS YEAR, THE TOTAL NON-CURRENT LIABILITIES TO BE REPORTED IN THE
COMPANY’S STATEMENT OF FINANCIAL POSITION SHOULD BE… 0

The following selected information pertains to Alaska Company:

Cash, December 31, 2011 P 65,000

Accounts receivable, December 31, 2011 95,000
Collections from customers in 2012 1,050,000
Capital, December 31, 2011 190,000
Total assets, December 31, 2011 375,000
Cash investment, July 1, 2012 25,000
Total assets, December 31, 2012 505,000
Cash, December 31, 2012 100,000
Accounts receivable, December 31, 2012 180,000
Withdrawals made during 2012 55,000
Total liabilities, December 31, 2012 205,000

1. HOW MUCH NET INCOME SHOULD ALASKA REPORT IN ITS INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 2012? 140K

NY Company has used the accrual basis of accounting for several years. A review of the records, however, indicates
that some revenues and expenses have been handled on a cash basis because of errors made by an inexperienced
bookkeeper. Income statements prepared by the bookkeeper reported P 870,000 net income for 2011 and P
1,110,000 net income for 2012. Further examinations of the records reveals that the following items were handled
improperly.

 Rent was received from a tenant in December 2011. The amount, P 30,000, was recorded as income at
that time even though the rental pertained to 2012.

 Wages payable on December 31 have been consistently omitted from the records of that date and have
been entered as expenses when paid in the following year. the amounts of accruals recorded in this
manner were:
December 31, 2010 P 33,000
December 31, 2011 36,000
December 31, 2012 28,200

 Invoices for office supplies purchased have been charged to expense accounts when received. Inventories
of supplies on hand at the end of each year have been ignored, and no entry has been made for them.
December 31, 2010 P 39,000
December 31, 2011 28,200
December 31, 2012 42,600

9. WHAT IS THE CORRECTED NET INCOME FOR THE YEAR 2011? 826,200
10. WHAT IS THE CORRECTED NET INCOME FOR THE YEAR 2012? 1,162,200

Cavite Company was incorporated on January 1, 2010. In preparing the financial statements for the year ended
December 31, 2012, the entity used the following original cost and useful life for the property, plant, and
equipment:

Original cost Economic life Acquisition date

Building P 15 Million 15 years Mar. 31, 2010
Machine 10.5 Million 10 years Aug. 31, 2011
Furniture 6 million 8 years May 31, 2012

On January 1, 2013, the entity determined that the remaining life is 10 years for the building, 7 years for the
machine and 5 years for the furniture. The entity used the straight line method of depreciation with no salvage
value.

1. WHAT IS THE TOTAL ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2012? 4,587,500

2. WHAT IS THE TOTAL DEPRECIATION FOR 2013? 3,637,500

Golden Pavilion Company purchased a machine on July 1, 2013 for P 750,000. The machine had a useful life of 10
years with salvage value of P 42,000. During 2016, it became apparent that the machine would become
uneconomical after December 31, 2020. And that the machine would have no salvage value.

1. WHAT IS THE CHARGE FOR DEPRECIATION IN 2016? 114,600

END