Far Reviewer

FINANCIAL STATEMENTS Current and Noncurrent Classification:
PAS 1 prescribes the basis for the Assets and liabilities should be
presentation of general-purpose financial separately classified on the face of the
statements to improve comparability both balance sheet except in circumstances
with the entity's financial statements of when a liquiditybased (unclassified)
previous periods (intra-comparability) and presentation provides more reliable and
with the financial statements of other relevant information.
entities (inter-comparability).
Minimum line items in the statement of
Complete set of financial statements financial position
1. Statement of financial position a. Property, plant and equipment;
2. Statement of profit or loss and other b. Investment property;
comprehensive income c. Intangible assets;
3. Statement of changes in equity d. Financial assets (excluding amounts
4. Statement of cash flows shown under (e), (h) and (i))
5. Notes(5a) comparative information in e. Investments accounted for using the
respect of the preceding period; and equity method
6. Additional statement of financial f. Biological assets;g. Inventories;
position (required only when certain h. Trade and other receivables;i. Cash
instances occur) and cash equivalents;
j. Assets (or disposal groups) classified
Statement of Financial Position (Balance as
Sheet) – a formal statement showing the held for sale in accordance
resources (assets), obligations (liabilities), k. Trade and other payables;
and equity at a given point in time. l. Provisions;
Elements of the Statement of Financial m. Financial liabilities (excluding
Position (Balance Sheet) amounts shown under (k) and (l));
• Assets – resources by the entity as n. Liabilities and assets for current tax,
controlled a result of past events as defined in PAS 12 Income Taxes;
from which future economic benefits o. Deferred tax liabilities and deferred
are expected to flow to the entity. tax assets, as defined in PAS 12
• Liabilities – present obligations of an p. Liabilities included in disposal groups
entity arising from past events, the classified as held for sale in
settlement of which are expected to accordance with PFRS 5;
result in an outflow from the entity q. Non-controlling interests, presented
of resources embodying economic within equity; and
benefits. r. Issued capital and reserves
• Equity – the owner’s residual interest attributable
in the assets of an entity that to owners of the parent
remains after deducting its liabilities.
ASSETS CURRENT ASSETS
Recognition of Assets and Liabilities: An entity shall classify an asset as
Assets – are recognized in the balance current when:
sheet when it is probable that future 1. it expects to realize the asset or
economic benefits will flow to the entity intends to sell or consume it, in its
and the asset has a cost or value that can normal operating cycle;
be measured reliably. 2. it holds the asset primarily for the
purpose of trading;
Liabilities – are recognized in the balance 3. it expects to realize the asset within
sheet when it is probable that an outflow of twelve months after the reporting
resources embodying economic benefits will period; or
result from the settlement of a present 4. the asset is cash or a cash equivalent
obligation and the amount at which the unless the asset is restricted from
settlement will take place can be measured being exchanged or used to settle a
reliably. liability for at least twelve months
after the reporting period.
All other assets should be classified as non- b. Focuses on the preparation and
current asset. presentation of general purpose
reports known as financial
Presentation of Current Assets:
Current assets are usually listed in statements.
order of liquidity. The line items in the c. Has no precise coverage but is
current assets section are: used generally to refer to services
1. Cash and cash equivalents
to clients on matters of
accounting, finance,
2. Financial assets such as trading
business policies, organization
securities, AFS securities and
procedures, product costs,
other short term marketable
distribution and many other
securities
phases of business conduct and
3. Trade and other receivables
operations.
4. Inventories
d. Is the preparation of annual
5. Prepaid expenses
income tax returns and
determination of tax
Noncurrent Assets – a residual definition,
consequences of certain proposed
meaning these are the assets that were
not classified as current asset. The business venture.
noncurrent assets include: PPE, long-term
3. Which is incorrect concerning
investments, intangible assets and other
financial statements?
noncurrent assets. investments, intangible
a. The objective of general purpose
assets and other noncurrent assets.
financial statements is to provide
information about the financial
Quizzer 1.1 position, performance and cash
1. Accounting is flows of an enterprise that is
I. A service activity and its function is useful to a wide range of users in
to provide quantitative making economic decisions.
information, primarily financial in b. b. Financial statements also
nature, about economic entities, show the results of
that is intended to be useful in management’s stewardship of
making economic decision. the resources entrusted to it.
II. The art of recording, classifying, c. The management of an
and summarizing in a significant enterprise has the primary
manner and in terms of money, responsibility for the preparation
transactions and events which are and presentation of financial
in part at least of a financial statements.
character and interpreting the
d. Financial statements are prepared and
results thereof.
presented at least annually and are directed
III. The process of identifying,
measuring and communicating toward the specific needs of a wide range of
economic information to users.
permit informed
judgment and decision by users of 4. Financial statements portray
the information. the financial effects of
a. I, II and III b. I only c. transactions and other events by
II grouping them into broad m
only d. III only classes according to
their economic characteristics.
2. Financial accounting These broad classes are termed as
a. Is the examination of financial the
statements by an independent a. Elements of financial statements
CPA for the purpose of b. Features of accounting
expressing an opinion as to the c. Accounting constraints
fairness of the financial d. Concepts of capital and capital
statements.
5. It is the process of incorporating in Company should report in its December
the balance sheet or income 31, 2023 financial position?
statement an item that meets the a. P20,500,000
definition of an element of financial b. 23,500,000
statements. a. Recognition c. 25,000,000
b. Allocation d. 25,500,000
c. Realization
d. Summarization
10. Metlog Inc. reported the following
6. It is the process of determining the items in its December 31, 2022
monetary amounts at which the adjusted trial balance:
elements are to be recognized and Accounts payable, net of P121,000 debit
carried in the balance sheet and balance, P1,089,000; customer’s account
income statement. with credit balance, P120,000; advances
a. Measurement to employees, P45,000; unearned
b. Recognition commission income P288,000; provision
c. Reporting for warranties, P258,000; bonds payable,
d. Interpreting P5,000,000; discount on bonds payable,
P250,000; and deferred gain P100,000.
7. Which is not a current asset? What total amount of liabilities should be
a. office supplies inventory reported by Metlog in its statement of
b. petty cash (undeposited) financial position?
c. cash short-term investment a. 6,626,000
d. cash surrender value of life b. 6,726,000

c. 7,126,000
insurance
d. 7,226,000
8. Theoretically, at the date of a service
which is not immediately consumed, 11. The accounts and balances shown
the cost of such service is a (an): below were gathered from Hakdog’s
a. Accrued expense trial balance on December 31, 2022.
b. deferred revenue All adjusting entries have been
c. expense made.
d. asset
Cash and cash equivalents, P300,000;
loans and receivables, P700,000; prepaid
9. Cloud Company, a parent company
expenses P100,000; stock in trade
has reported the following current
P800,000; investment in associate
accounts in its financial records as of
P1,000,000; investment property
December 31, 2022:
P900,000; long term fund investment
Cash and cash equivalents P 3,000,000
P500,000; PPE - net P8,000,000; Patents
Loans and receivables 20,000,000
and trademarks – net P600,000; Goodwill
Inventory 2,000,000
P800,000; accounts payable P150,000;
Prepaid expenses 500,000
notes payable P300,000; unearned
Total P 25,500,000
revenues P250,000; bonds payable
P1,000,000; dividends payable P140,000;
Included in the loans and receivables is a
premium on bonds payable P100,000;
P5,000,000 loan to Panda Company, a
taxes payable 250,000; advances from
subsidiary. The loan is repayable on
shareholders P500,000.
demand but the demand feature is
primarily a form of a protection or a tax
Question 1: How much should be the
driven feature of the loan and it is the
amount of current assets on Hakdog’s
intention of both parties that the loan
December 31, 2022 balance sheet?
will remain outstanding for the
a. 1,400,000
foreseeable future. What is the correct
b. 1,700,000
amount of current assets that Cloud
c. 1,900,000
d. 2,200,000
minimum amount of the deposit that a
Question 2: How much should be the depositor agrees to maintain to guarantee
amount of current liabilities to be future credit availability.
reported in the December 31, 2022
balance sheet of Hakdog? ➢ In the case of deposits that a
a. 840,000 bank can use to offset a loan, the
b. 1,090,000 assumption is that this amount is
c. 1,450,000 legally restricted to withdrawal
d. 1,590,000 and therefore excluded from
cash, however in cases that it still
remains to be unrestricted, the
CASH AND CASH EQUIVALENTS compensating balance shall be
part of cash. If the compensating
Composition of Cash – includes cash on balance is legally restricted the
hand as well as current and other accounts following rules shall be followed:
maintained with banks such as the a. The related loan is
following: shortterm: The
a. Undeposited currency and coins compensating balance
b. Petty cash shall be part of current
c. Demand deposits assets but separately from
d. Undeposited negotiable checks cash.
e. Foreign currencies b. The related loan is
f. Bank drafts longterm: The
g. Money orders compensating balance is
h. Other short-term funds part of noncurrent assets
Valuation of Cash and Cash Equivalents as an investment.
a. Fa – Face Amount ➢ An informal agreement to
b. Cu – Current Exchange Rate maintain a minimum amount of
c. E – Estimated Realizable Value deposit will not be legally
restricted and therefore included
Financial Statement Presentation in cash.
Shown as the first item among the current
assets as one line item but the detail of TIME DEPOSITS – Bank savings account
which should be disclosed in the notes to that earns interest but not subject to
FS. immediate withdrawal or check
issuance. A notice must be submitted by
Special Items the depositor for the withdrawal of
CERTIFIED CHECKS – Checks that have been funds and interest earned shall be
accepted by the bank and where the forfeited.
drawer’s account has been debited but the
money has yet to be withdrawn by the ➢ Time deposits are excluded from
payee. The funds are now held by the bank cash because of their restriction
on behalf of the payee and the check is no on availability as funds and are
longer outstanding. classified as restricted and shall
follow these specific
BANK OVERDRAFT – presented as an classifications:
accounting liability. However, a bank a. Cash equivalents if the
overdraft that is repayable on demand that original term is 3 months
forms part of an entity’s cash management or less.
should be included as a component of cash b. Short term investments if
and cash equivalent. the original term is more
than 3 months to1 year.
COMPENSATING BALANCE AGREEMENT –
c. Long-term investments if
Part of or deposits that a bank can use to
the original term is more
offset an existing loan. However,
than 1 year.
compensating balances can also describe a
CASH EQUIVALENTS c. If a bank or financial institution
Cash equivalents are short-term highly holding the funds of the company
liquid investments that are readily is in bankruptcy or financial
convertible into cash and so near their difficulty, cash should be written
maturity that they present insignificant down to estimated realizable
risk of changes in value because of value.
changes in interest rates. d. Cash equivalents should be
measured at maturity value,
The three important characteristics for meaning face value plus interest
cash equivalents as mentioned in PAS 7
are short-term, highly liquid and near
maturity. In other words, short-term
debt instruments with low risk (also low
yield) and acquired 3 months or less
4. If material, deposits in foreign bank
from maturity date shall be considered
as cash equivalents. which are subject to foreign
exchange restriction shall be
Examples include Treasury Bills, Bonds classified
and Notes, Time Deposits, Certificate of a. Separately as current asset with
deposits and Bankers Acceptances and appropriate disclosure
Commercial Papers. b. Separately as non-current asset
with appropriate disclosure
c. Separately as current asset
Quizzer 1.2 (Cash Equivalents) without appropriate disclosure
d. Separately as non-current asset
1. An item that should be excluded from cash
without appropriate disclosure
and cash equivalents on the December 31,
2005 balance sheet of Haydee
5. Which of the following statements in
Company is
relation to the cash short or over
a. A customer’s check denominated in
account is true?
foreign currency.
a. It would be impossible to have
b. A check issued by Haydee Company on
cash shortage or overage if
December 30, 2005, but dated January employees were paid in cash
10, 2006. rather than by check
c. A P1,000,000 time deposit which
b. The entry to account for daily
matures in 4-months cash sales for which a small
d. A P100,000 balance in the company’s
amount of cash shortage existed
current account maintained as a payroll would include a debit to cash
fund. short or over account
c. If the cash short or over account
2. Which of the following is not a basic
has a debit balance at the end of
characteristic of a system of cash
the period it must be debited to
control?
an expense account
a. Use of a voucher system
d. A credit balance in a cash shorty
b. Combined responsibility for
or over account should be
handling
considered a liability because the
and recording cash
short changed customer will
c. Daily deposit of all cash received demand return of this amount.
d. Internal audits at irregular intervals
6. What happens when a petty cash is
3. Which is false concerning in use?
measurement of cash and cash
a. Expenses paid with petty cash are
equivalents?
recorded when the fund is
a. Cash is measured at face value
replenished
b. Cash in foreign currency is
measured at the current
exchange rate
b. Most small amounts are paid yearend statement of financial
from cash receipts before they position? a.
are deposited US $20,000 cash
c. Petty cash is debited when the b. Past due promissory note issued in
fund is replenished favor of the entity by the president
d. Petty cash fund is credited when c. Another entity’s P150,000 check
the fund is replenished. payable to the entity dated December
15 of the current year
7. The petty cash fund account under d. The entity’s undelivered check payable
the imprest fund system is debited to a supplier dated December 31 of
a. Only when the fund is created the
b. When the fund is created and current year
every time the fund is
replenished 11. Boggart Company had the following
c. When the fund is created and account balances on December 31,
when the size of the fund is 2021:
increased Cash in bank – current account
d. When the fund is created and 1,250,000
when Cash in bank – payroll account
the fund is decreased 250,000
Cash on hand 125,000 Cash in bank
8. Unreleased checks – restricted account for building
(checks drawn before the construction expected to be
end of reporting period but held for disbursed in 2022 750,000 Time
later delivery to creditors) deposit, purchased December 15,
a. Shall be treated as outstanding 2021 and due March 15, 2022
checks 500,000
b. Shall be restored to the cash
balance The cash on hand includes a P50,000
c. Shall be treated as outstanding check payable to Boggart Company,
checks if the date is shortly after dated January 15, 2022. What should
the end of the reporting period be reported as cash and cash
d. Shall be treated as outstanding equivalents on December 31, 2021?
checks if they are ultimately a. 1,575,000
encashed. b. 2,075,000
c. 1,625,000
9. Which of the following d. 2,175,000
is not considered a cash
equivalent? 12. Eme Company had the following
a. A three-year treasury note account balances on December 31,
maturing on May 30 of the 2021:
current year purchased by the Cash in bank P4,500,000
entity on April 15 of the current Cash on hand P250,000 Cash
year. restricted for addition to plant
b. A three-year treasury note expected to be disbursed in 2022
maturing on May 30 of the 3,200,000
current year purchased by the
entity on January 15 of the Cash in bank includes P1,200,000 of
current year. compensating balance against
c. A 90-day T-bill shortterm borrowing arrangement.
d. All of these The compensating balance is not
legally restricted as to withdrawal by
10. At the end of the current year, an Eme Company. In the December 31,
entity had various checks and papers 2021 statement of financial position,
in its safe. Which item should not be what total cash should be reported
included in cash in the current under current assets?
a. 3,550,000 Mema Company showed its
b. 4,500,000 composition as follows: Currency
c. 4,750,000 and
d. 7,950,000 coin 16,500
e. Paid vouchers
13. Aki Company shows the following Transportation 3,000
account balances in their financial Gasoline 2,000
records as of December 31, 2022: Office supplies 2,500
Postage stamps 1,500
Checking account at Chinabank Due from employees 6,000
(P20,000); Checking account at Customer’s check returned by bank and
Landbank P500,000; Payroll account marked NSF 5,000
BPI P100,000; Foreign bank Check drawn by entity to the order
accountrestricted P750,000; Postage of the petty cash custodial 13,500
stamps, P22,000; employees What is the correct amount of petty
postdated checks P30,000; IOU from cash fund for statement
president’s brother P75,000; presentation purposes?
traveler’s check P50,000; no a. 50,000
sufficient fund check P18,000; petty b. 35,000
cash fund (P16,000 in currency and c. 30,000
expense receipts for P84,000) d. 45,000
P100,000 and cashier’s check P36,000.
16. The December 31, 2021 trial balance of
What is the correct cash balance to Ferson Company includes
be reported in the balance sheet of the following accounts:
Aki Company on December 31, Petty cash fund 12,500
2022?
Current account – PNB 1,000,000
a. P582,000
Current account – Allied (overdraft)
b. P686,000
(62,500)
c. P702,000
Money market placement – BPI
d. P704,000
250,000
Time deposit – Metrobank 500,000
14. The cash account in the current
asset section of Mavis Company The petty cash fund includes
showed a balance of P555,000. It unreplenished December 2021 petty
was found to include the following cash expense vouchers for P3,750
items: and an employee check for P1,250
dated January 31, 2022.
Petty cash fund (P1,000 is in the form of
paid vouchers) P5,000; checking A check for P25,000 was drawn
account balance per bank statement against PNB current account dated
(P25,000 check is still outstanding) and recorded December 29, 2021
P255,000; undeposited receipts but mailed to payee on January 15,
(including a postdated check for P5,000) 2022.
P120,000; currencies and coins awaiting
deposit P55,000; bond sinking fund cash The Money market placement was
P100,000; check drawn by manager, acquired on Dec. 27, 2021 and will
returned by bank marked NSF P20,000. mature on February 28, 2022.
What is the correct cash balance for
Mavis Company? The Metrobank time deposit is set
a. P404,000 aside for land acquisition in early
b. P429,000 2022. What amount should be
c. P430,000 reported as cash and cash
d. P529,000 equivalents on
December 31, 2021?
15. Account of the petty cash fund of a. 1,282,500
b. 1,287,500 b. 2,120,000
c. 1,032,500 c. 2,600,000
d. 1,220,000 d. 2,720,000
17. Snow Company had the following 19. The following information is shown in the
transactions all through our the year accounting records of Brep Company:
2022 which is its first year of
operations:
Sales (90% collected in first 1,500,000

year
Bad debt written off 60,000
Disbursements for cost and 1,200,000
expenses What is the cash balance on December
Disbursements for income 90,000 31, 2023 of Brep Company?
taxes a. 324,000
Purchases of fixed assets 400,000 b. 447,000
Depreciation of fixed`assets 80,000 c. 758,000
Proceeds from issuance of 500,000 d. 915,000
ordinary shares
Proceeds from short-term 100,000
borrowings
Payments on short term 50,000
borrowings
What is the cash balance at December

31,2022 a. 150,000
b. 170,000
c. 210,000 1. A form of business that buys raw
materials and transforms them into
d. 280,000
finished products. c. Manufacturing
d. Outsourcing
b. Merchandising
18. Fanty Company’s checkbook balance on
a. Service-oriented business
December 31, 2021 was
P2,000,000. In addition, Fanty held the
2. The business borrowed ₱1M from
following items in its sage on that date: the bank. At maturity date, the
• Check payable to Fanty, dated business pays the bank ₱1.4M to
January 2, 2021 in payment of a sale settle the loan. The ₱.4M difference
made in December 2020, not included in between the settlement amount and
December 31 book balance 800,000. • the principal (i.e., 1.4M – 1M = .4M
Check payable to Fanty, deposited difference) is recorded as c. Interest
January 15, and included in December 31 expense.
book balance, but returned by bank on d. Utilities expense.
December 30 stamped NSF. The check a. Prepaid rent.
was redeposited on January 2, 2022 and b. Notes payable.
cleared a week later.
200,000. 3. Under this concept, a business is
• Check drawn on Fanty’s account,
not expected to end its operations in
the near term.
payable to vendor, dated on December
a. Separate entity concept
31, 2021, but not yet mailed until
d. Materiality
January 10, 2022. 120,000. The amount
b. Going concern
was not included in the checkbook
c. Stable monetary unit
balance. What is the amount to be
reported as cash in December 31, 2021? 4. All of the following describe
a. 1,920,000 accounting, except
a. A service activity b. income
c. A universal language of business c. asset
b. An information system d. liability
d. An exact science rather than an art.
12. The minimum balance of an account
5. Revenues earned from rendering is zero. In accounting, a negative
services are recorded in this account. balance in an account is referred to as
a. Sales c. psychotic balance.
d. Gains a. abnormal balance.
c. Interest income b. crazy balance.
b. Service fees d. LOL balance.
6. In accounting, it means 13. Costs that are treated as assets until

the allocation of the cost of an asset the product is sold are called* c.
over the periods in which the asset is Conversion costs
used. b. Depreciation b. Period costs
d. Cost spreading d. None of these
c. Bad debts a. Product costs
a. Allocationing 14. Which of the following is incorrect
regarding profit?
7. Cash is increased through b. Profit is the excess of total income
d. a and c over total expenses.
b. a credit. d. Profit is earned if total income is less
c. ask Mama to make padala. than total expenses.
a. a debit. a. Profit is measured only indirectly
8. Which of the following statements is as an arithmetical difference. c.
correct? Profit increases equity.
b. The internal users of accounting
information include management, 15. Ben deposited P50,000 in a bank
owners and creditors. account in the name of the business.
c. The external users of accounting Which of the following is true in
information include potential and existing regards to the fundamental
investors and lenders and other accounting equation?
creditors. b. Liabilities increase by P50,000
a. Financial accounting is the branch of a. Assets increase by P50,000
accounting that deals with the specific d. Owner’s equity decreases by
needs of an entity’s management. P50,000
d. Government accounting is the branch c. Assets decrease by P50,000
of accounting that deals with the analysis
of the costs of products and services. 16. The following are decisions made
by external users except
9. Recording assets at their acquisition a. whether to hold or sell investments
cost (entry value), rather than at their net in stocks.
selling price (exit value), is in line with d. whether to obtain additional
the concept of capital from outside creditors or to
a. Single entity concept. generate it internally.
d. Matching principle. b. whether or not to extend a loan to
c. Going concern concept. the business.
b. Historical cost concept. c. whether to sell goods on credit to
the business.
10. He paid monthly rent of the office,
P9,500 17. The business renders services to
b. Debit rent expense, credit cash clients.
a. Debit cash, Credit J. Ilagan capital a. Sales
d. Debit cash, credit rent expense c. Interest income
c. Debit J. Ilagan capital, credit cash b. Service fees
d. Gain
11. The term ‘economic resource’
connotes a. equity
18. In accounting, the term a. Raw materials, work in process,
“recording” is also called d. videoing. finished goods, cost goods sold
b. communicating. d. Cost of goods sold, raw materials,
c. debiting. work in process, finished goods
a. journalizing. b. Raw materials, finished goods,
cost of goods sold, work in process
19. This includes money or its c. Work in process, finished goods,
equivalent that is readily available for raw materials, cost of goods sold
unrestricted use. c. Cash 25. It is a present obligation that has
d. Cash payable resulted from past events and has
b. Cash expense the potential to cause a transfer of
a. Money expense an economic resource in its
settlement.
20. Which of the following statements A. equity
regarding accounting is incorrect? B. asset
b. Although bookkeeping and C. liability
accounting are interrelated, they are not D. income
the same.
c. The purpose of accounting is to 26. Revenues, expenses, and
provide information that is useful in withdrawals would not appear on a(n):
making economic decisions. e. Post-closing trial balance
d. A transaction or event is recorded g. Unadjusted trial balance
in the accounting records only if it has an f. Adjusted trial balance
effect on the assets, liabilities, equity, h. Worksheet
income or expenses of the business.
a. All business transactions and events 27. Which of the following is correct
are recorded in the accounting books. concerning the qualitative
characteristics?
21. Transactions and other events are c. Information that is not capable of
recorded in the periods in which they affecting the decisions of users is
occur, not when they affect cash. d. considered irrelevant.
Consistency a. Free from error means the
c. Reporting period information contained in the financial
a. Going concern statements is perfectly accurate in all
b. Accrual basis respects.
d. The enhancing qualitative
22. A customer bought goods from your characteristics can convert non-useful
business, on credit. The customer orally information to useful information.
promised to pay the sale price next b. Neutrality means information is
week. Which of the following accounts is selected or presented with bias to
increased and therefore debited? increase the probability that the
c. Notes receivable information will be received favorably
d. Sales by the users.
b. Accounts receivable
a. Cash 28. You own a business. Your
business is engaged in buying goods
23. Which of the following is not one of at a wholesale price and reselling
the necessary processes performed in them at retail prices on Facebook.
accounting in order to provide Your business is a
information that is useful to interested a. service business.
users? c. merchandising business.
c. Recording d. monkey business
a. Identifying b. manufacturing business.
b. Summarizing
d. Counting 29. Which of the following is most likely
considered an adjusting entry?
a. The entry to record the payment of
24. Which of the following is the correct interest payable
flow of manufacturing cost?
d. The entry to record bad debts expense 37. Which of the following is most
for the period likely not considered an adjusting
c. The entry to record the purchase of entry?
equipment b. The recognition of depreciation
b. The entry to record the collection of expense for the period
accounts receivable a. The accrual of an electricity bill for
30. Under this concept, some costs are electricity used but not yet paid
initially recognized as assets and d. The entry to record the collection of
recognized only as expenses when the interest receivable
related revenue is recognized. d. c. The recognition of the used and
Matching principle unused portions of a prepaid rent
b. Historical cost concept
c. Going concern 38. Your business obtained a ₱1M
a. Separate entity concept loan from a financing company. The
financing company made you sign a
31. Which of the following credit terms contract promising to repay the loan
allow for a cash discount? d. 1/10, n/30 after a year. Which of the following
a. n/30 accounts is increased and therefore
c. n/60 credited?
b. n/eom b. Accounts receivable
c. Notes payable
32. When two debits get together, the d. Notes receivable
result is a. Accounts payable
c. multiplication.
b. deduction. 39. The most common form of
d. love and happiness. business organization is c.
a. addition. partnership.
a. corporation.
33. A controlling account can be found in d. cell phone stand
the b. sole proprietorship.
d. Income statement
c. Accounts receivable ledger 40. Which of the following statements
a. General ledger is incorrect?
b. Source documents d. Accounting education is the
branch of accounting that deals with
34. Decreases the proprietorship the teaching of accounting and
a. Additional investment related subjects in order to produce
c. Rent expense competent and responsible business
d. Initial investment professionals.
b. Service income c. Tax accounting refers to the
branch of accounting that deals with
tax computations, filing of tax
35. Which of the following credit terms returns, and tax planning.
allow for a cash discount? b. n/eom b. Internal users of financial
d. 1/10, n/30 information refer to the entity’s
c. n/60 management personnel.
a. n/30 a. Erroneous financial statements can
lead to bad financial decisions.
36. The measure of how quickly an item
can be converted into cash is referred to 41. This qualitative characteristic
as. c. Liquidity requires at least two items. a.
d. Profitability Comparability
b. Solvency d. Understandability
a. Leverage c. Verifiability
b. Timeliness
42. Which of the following appears in the
balance sheet debit column of a
worksheet?
a. Service revenue
b. Income summary b. Cost principle
c. Owner withdrawals a. Objectivity
d. Accounts payable d. Materiality
43. This represents the value of 50. These users need accounting
inventories that have been sold during information in evaluating the stability
the accounting period. i. Interest of the business in so far as their job
Expense iii. Rent expense ii. Travel security, future remuneration, and
expense career growth and opportunities are
iv. Cost of sales concerned. c. Auditors
a. Employees
44. Your business sells goods to a credit b. Creditors
customer. Which of the following d. Regulatory authorities
accounts is increased? d. All of these
b. Cost of sales 51. A business incurs total expenses of
a. Accounts receivable ₱630,000 and reports loss of
c. Sales ₱270,000. How much is the total
income?
45. The term ‘present obligation’ d. 360,000
connotes c. 380,000
A. liability a. 900,000
B. income b. 320,000
C. equity D. asset
52. This accounting process is the
46. These users need accounting recognition or nonrecognition
information in order to regulate of activities as accountable events. f.
businesses that are within the scope of Measuring
their legal authority. b. Creditors h. Reporting
c. Auditors g. Communicating
a. Employees e. Identifying
d. Government regulatory bodies or
agencies 53. Accrued revenues
d. Increase assets
47. Entity A had total assets, liabilities, a. Decrease assets
and equity of ₱150M, ₱90M and c. Decrease liabilities
₱60M, respectively, at the beginning of b. Increase liability
the period. During the period, Entity
A’s total liabilities decreased to ₱40M,
while its profit was ₱25M. There were no
other transactions or events that affected
equity during the period. How much is
Entity A’s ending total assets? d. ₱125M 54. The accounting standards that are
a. ₱75M currently used in the Philippines are
b. ₱115M referred to as the d. Juan’s GAAP.
c. ₱95M b. Philippine GAAP.
c. Filipino Accounting Standards
48. You opened up a business and (FAS).
invested ₱5M cash as the business’ a. Philippine Financial Reporting
initial capital. Which of the following Standards (PFRS).
accounts is increased and therefore
debited? 55. Which of the following relates to the
concept of consistency?
b. Owner’s equity
c. Measuring assets at their
a. Cash
acquisition cost.
d. Accounts receivable
d. Using the same accounting
c. Accounts payable
treatment for similar items from period to
period.
49. Assets should be recognized
a. Treating the business as a
initially at original acquisition costs.
separate entity from its owner.
c. Time-period assumption
b. Recording sales revenue when a 62. Sales revenue minus sales
sale occurs rather than when the sale returns and allowances and sales
price is collected. discounts equals:
a. Gross margin
56. These accounts are closed at the c. Cost of goods sold
end of the accounting period. b. Mixed b. Income from operations
accounts d. Net sales
a. Real accounts
c. Nominal accounts 63. Real accounts are presented in
d. Door accounts what formal report? b. Balance sheet
d. Worksheet
57. The “Allowance for bad debts” a. Income statement
account is a contra account of c. c. Unadjusted trial balance
Accounts receivable.
d. Equipment 64. The usefulness of information is
b. Building. assessed in terms of its c.
a. Cash. timeliness.
58. It is an economic resource controlled b. verifiability.
by the entity that has resulted from past d. size.
events and has a potential to produce a. qualitative characteristics.
economic benefits. A. income
B. equity 65. Prepaid insurance is a(n)
C. liability D. asset d. Expense
b. Liability
59. The term liability refers to a. Asset
a. The equity of an owner only c. Revenue
c. The equity of an owner and/or
creditors 66. Which of the following is one of the
d. The equity of a debtor. fundamental qualitative
b. The equity of the creditors only characteristics?
a. Comparability
60. ABC Company reports the following d. Verifiability
cost information for b. Relevance
December:Cost of goods manufactured c. Timeliness
P135,800; Finished goods inventory,
December 1 67. What is the normal balance of
P30,200; Finished goods inventory, the sales returns account? a. debit
December 31 P35,300; Work-inprocess d. none of these
inventory December 1 P22,500; Work-in- b. credit
process inventory December 31, c. zero
PP18,500; Raw materials used P25, 300;
Period Costs P50,500. Direct labor 68. This account is used to record the
incurred in December amount to 150 temporary withdrawals of the owner
percent of manufacturing overhead in during the period.
December. What is the amount of direct a. Owner’s drawing
labor incurred by ABC Company in c. Owner’s equity
December? a. P75,200 d. Interest expense
c. P63,900 b. Owner’s capital
d. P49,250
b. P39,700 69. Which of the following is not an
asset?
61. A journal designed for entering d. Salaries
only sales on account is called the e. a. Cash
Cash receipts journal b. Furniture
h. General journal c. Equipment
g. Sales journal
f. Cash payments journal 70. What is the law regulating the
practice of accountancy in the
Philippines?
d. R.A. 9892 77. The business purchases
c. R.A. 9928 inventory on account (on credit). a.
b. R.A. 9118 Cash
a. R.A. 9298 c. Accounts payable
d. Prepaid supplies
71. Which of the following would result to b. Accounts receivable
total expenses of ₱480,000?
a. Total income of ₱360,000 and profit 78. Entity A had total assets of
₱120,000 ₱120M and total liabilities of ₱80M at
b. Total income of ₱580,000 and loss of the beginning of the period. If at the
₱100,000 end of the period, total assets
d. Total income of ₱630,000 and loss of increased by
₱150,000 ₱30M, while total liabilities remained
c. Total income of ₱630,000 and profit of the same, Entity A’s total equity at
₱150,000 the end of the period would be d.
₱80M
72. Revenues earned from sales of c. ₱60M
goods are recorded in this account. a. a. ₱70M
Sales b. ₱90M
b. Service fees
c. Interest income 79. The business pays its employees
compensation for the services they
73. In conjunction with the transaction in have rendered during the period. c.
#9 above, which of the following Freight-out
accounts is also increased and a. Rent expense
therefore credited? d. Salaries expense
d. Accounts receivable b. Cost of sales or Cost of goods sold
a. Cash
b. Owner’s equity 80. At the beginning of the period, a
c. Accounts payable business has a cash balance of
₱20,000. During the period, total
74. This process refers to the reporting of cash collections and total cash
the information processed in the payments amounted to ₱100,000
accounting system to interested users. c. and ₱70,000, respectively. How
debiting. much is the ending balance of cash?
b. communicating. a. 10,000
a. journalizing. d. 70,000
d. videoing. c. 50,000
b. 30,000
75. The document authorizing the

issuance of materials from the
storeroom is the:
d. Purchase order
b. Purchase requisition
81. Accounting is described in various
a. Materials requisition
ways. Which of the following is not one of
c. Receiving report
those descriptions?
c. Accounting is the “language of
76. Which of the following is not a
business” because it is fundamental to
special journal? a. Sales journal
the communication of financial
b. Cash receipts journal
information.
c. Purchases journal
b. Accounting is a social science and a
d. Subsidiary ledger practical art.
a. Accounting is a process and a service
activity.
d. Accounting is the art of Entity A’s financial statements is
professionally stealing money and other d. 0.
evil purposes. b. ₱6,000.
a. ₱14,000.
82. The business sells goods to a c. ₱4,000.
customer who orally promises to pay for
the purchase price after 30 days. c. 89. The business sells goods to a
Accounts receivable customer who orally promises to pay
b. Inventory for the purchase price after 30 days.
a. Building b. Accounts payable
d. Owner’s capital c. Cash
a. Accounts receivable
83. When the seller is liable for shipping d. Cost of sales
costs, the payment is
recorded with a debit to: a. Delivery 90. A business purchased
expense equipment for ₱10,000 but
c. Inventory deliberately reported it as ₱100,000.
d. cash Which of the following principles is
b. Freight-in most likely not violated? c. Historical
cost
84. A decrease in the economic benefits a. Faithful representation
of a resource would be b. Free from error
treated as A. d. Materiality
assets
B. liability 91. In accounting, recording a
C. expense transaction in a debit-credit form is
D. income called
d. journalizing.
85. With special journal, summary c. identifying and analyzing.
postings of column totals are made to b. posting.
appropriate accounts a. Monthly a. journalinging.
d. On a periodic basis
b. Daily 92. This branch of accounting
c. Yearly focuses on catering to the
information needs of external users
86. The term “accrual” as used in c. Auditing
accounting means d. External accounting
b. to record an expense that is already b. Financial accounting
incurred but not yet paid. d. a and b a. Management accounting
a. to record an income that is already
earned but not yet collected. 93. The claim of the owner(s) on the total
c. to record the collection of income or assets of an entity is also called
the payment of expense. A. equity
B. income
87. Accrued revenues C. liability
d. Increase assets D. asset
c. Decrease liabilities
a. Decrease assets 94. An increase to an account is
b. Increase liability recorded
c. in the side of that account that
88. Entity A’s accounts receivable represents its normal balance.
has a balance of ₱10,000. If the a. in the debit side of that account.
related allowance for bad debts b. in the credit side of that account.
account has a balance of ₱4,000, d. beside the account.
the carrying amount of accounts
receivable in
95. It is the process of objectively evaluating evidence
and expressing an opinion regarding the
correspondence between management’s
assertions and established criteria.
d. Tax accounting
c. Accounting research
a. Accounting education
b. Auditing
96. You purchased a computer for

₱50,000 cash. To record this
transaction, which of the following accounts
will you credit? c. Owner’s capital
b. Computer equipment
a. Cash
d. Inventory
97. Which of the following users of financial

information is not considered a creditor of the
business?
c. A customer that buys goods from the entity on
credit
b. A supplier that sells goods to the entity on credit
a. A loan provider, such as a bank
d. A financing company that provides the
entity with machineries on a “rentto-own”
basis
98. The business receives billing for

electricity used during the period. Before the
bill is paid, it is initially recorded in this
account. b. Interest payable
c. Accounts payable
a. Utilities payable
d. Salaries payable
99. A business owner’s contribution to the

business results in
a. an increase in assets and an increase in income.
d. an increase in assets and an increase in owner’s
equity.
c. an increase in assets and an increase in liabilities.
b. a decrease in assets and an increase in owner’s
equity.
100. You purchased goods to be held for

sale in the ordinary course of business
activities, on cash basis. Which of the
following accounts is increased and therefore
debited? d. Inventory
c. Accounts payable
a. Cash
b. Owner’s equity
FINANCIAL ACCOUNTING AND REPORTING TEST BANK

82102017
PROBLEM 1 – STATEMENT OF FINANCIAL POSITION
The following trial balance of an entity on December 31, 2017 has been adjusted except for income tax expense.
Cash 6,000,000
Accounts receivable 14,000,000
Inventory 10,000,000
Property, plant and equipment 25,000,000
Accounts payable 9,000,000
Income tax payable 6,000,000
Preference share capital 3,000,000
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings – January 1 9,000,000
Net sales and other revenue 80,000,000
Cost of goods sold 48,000,000
Expenses 12,000,000
Income tax expense 11,000,000 __________
126,000,000 126,000,000
During the year, estimated tax payments of P5,000,000 were charged to income tax expense. The tax rate is 30% on all
types of revenue. Inventory and accounts payable included goods purchased in transit, FOB destination, costing
P500,000, and unsold goods held on consignment at year-end, costing P300,000. The perpetual system is used. The
preference share capital is redeemable mandatorily on December 31, 2018.
1. What amount should be reported as current assets on December 31, 2017?
a. 29,200,000
b. 29,700,000
c. 29,500,000
d. 30,000,000
2. What amount should be reported as current liabilities on December 31, 2017?
a. 14,200,000
b. 17,200,000
c. 12,200,000
d. 9,200,000
3. What is the net income for 2017?
a. 20,000,000
b. 14,000,000
c. 23,000,000
d. 9,000,000
4. What amount should be reported as total shareholders’ equity on December 31, 2017?
a. 40,000,000
b. 37,000,000
c. 45,000,000
d. 42,000,000
Page 2
SOLUTION - PROBLEM 1
Question 1 Answer A
Cash 6,000,000
Inventory (10,000,000 - 500,000 - 300,000) 9,200,000
Total current assets 29,200,000
Question 2 Answer C
Net sales and other revenue 80,000,000
Cost of goods sold ( 48,000,000)
Expenses ( 12,000,000)
Income before tax 20,000,000
Tax expense (30% x 20,000,000) ( 6,000,000)
Net income 14,000,000
Tax expense 6,000,000
Payment during year (5,000,000) Income tax payable 1,000,000
Accounts payable 8,200,000
Income tax payable 1,000,000
Redeemable preference 3,000,000
Total current liabilities 12,200,000
Accounts payable per book 9,000,000
Goods in transit FOB destination ( 500,000)
Goods held on consignment ( 300,000) Adjusted accounts payable 8,200,000
Question 3 Answer B
Question 4 Answer D
Ordinary share capital 15,000,000
Share premium 4,000,000
Retained earnings 23,000,000
Total shareholders’ equity 42,000,000

Retained earnings – January 1 9,000,000
Total retained earnings 23,000,000 Page 3
PROBLEM 2 - STATEMENT OF FINNACIAL POSITION
3. On December 31, 2017, an entity showed the following current assets:
Cash 500,000
Inventory 2,000,000
Cash on hand including customer postdated check of P20,000 and employee IOU of
P10,000 130,000
Cash in bank per bank statement (outstanding checks on December 31, 2017,
P70,000) 370,000
Total cash 500,000
Customers’ debit balances, net of customer deposit of P50,000 1,900,000

Allowance for doubtful accounts ( 150,000)
Sale price of goods invoiced to customers at 150% of cost on December 29, 2017 but delivered on January 5,
2018 and excluded from reported inventory 750,000
Total accounts receivable 2,500,000
1. What is the adjusted cash balance?
a. 500,000
b. 470,000
c. 430,000
d. 400,000
2. What is the net realizable value of accounts receivable?

.
a. 1,970,000
b. 1,820,000
c. 1,800,000
d. 1,950,000
3. What is the adjusted inventory?
a. 2,000,000
b. 2,375,000
c. 2,500,000
d. 2,750,000
4. What total amount of current assets should be reported?
a. 4,900,000
b. 4,830,000
c. 4,780,000
d. 4,630,000
Page 4
SOLUTION – PROBLEM 2
Question 1 Answer D
Cash on hand 130,000
Customer postdated check ( 20,000)
Employee IOU ( 10,000)
Adjusted cash on hand 100,000
Cash in bank per bank statement 370,000
Outstanding checks ( 70,000) 300,000
Adjusted cash balance 400,000
Question 2 Answer B
Customers’ debit balances 1,900,000
Customer deposit erroneously netted 50,000
Customer postdated check 20,000
Allowance for doubtful accounts ( 150,000)
Net realizable value 1,820,000
Question 3 Answer C
Inventory per book 2,000,000
Undelivered goods incorrectly excluded from inventory (750,000 / 150%) 500,000
Adjusted inventory 2,500,000
Question 4 Answer B
Cash 400,000
Accounts receivable, net of allowance 1,820,000
Advances to employee - IOU 10,000
Inventory 2,500,000

–
Page 5
PROBLEM 3 STATEMENT OF COMPREHENSIVE INCOME
An entity reported the following data for the current year:
Net sales 9,500,000

Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000
Gain from expropriation of land 500,000
Income tax 800,000
Income from discontinued operations 600,000
Unrealized gain on equity investment at FVOCI 900,000
Unrealized loss on futures contract designated as a cash flow hedge 400,000
Increase in projected benefit obligation due to actuarial assumptions 300,000
Foreign translation adjustment – debit 100,000
Revaluation surplus 2,500,000
1. What amount should be reported as income from continuing operations?
a. 3,100,000
b. 2,300,000
c. 1,800,000
d. 2,900,000
2. What net amount should recognized in other comprehensive income for the year?
a. 2,600,000
b. 3,100,000
c. 3,400,000
d. 800,000
3. What net amount in OCI should be presented as “may not be recycled to profit or loss?
a. 3,400,000
b. 2,700,000
c. 3,700,000
d. 3,100,000
4. What amount should be reported as net income?
a. 2,900,000
b. 2,300,000
c. 3,100,000
d. 2,400,000
5. What amount should be reported as comprehensive income?
a. 5,500,000
b. 2,900,000
c. 2,600,000
d. 6,100,000
PROBLEM –
Page 6
Question 1 Answer B
Net sales 9,500,000
Cost of goods sold (4,000,000)
Gross income 5,500,000
Gain from expropriation of land 500,000
Total income 6,000,000
Selling expenses 1,000,000
Administrative expenses 1,200,000
Interest expense 700,000 2,900,000
Income before tax 3,100,000
Tax expense ( 800,000)
Income from continuing operations 2,300,000
Question 2 Answer A
Unrealized loss – cash flow hedge ( 400,000)
Actuarial loss – increase in PBO ( 300,000)
Translation adjustment – debit ( 100,000)
Net gain - OCI 2,600,000
Question 3 Answer D
PROBLEM –
Actuarial loss on PBO ( 300,000)
Net amount of OCI not reclassified to profit or loss 3,100,000
Question 4 Answer A
Income from continuing operations 2,300,000
Income from discontinued operations 600,000
Question 5 Answer A
Net gain – OCI 2,600,000
Comprehensive income 5,500,000
Page 7
4 INVESTMENT IN ASSOCIATE
An entity acquired 40% of another entity’s shares on January 1, 2017 for P15,000,000. The investee’s assets and
liabilities at that date were as follows:
Carrying amount Fair value
Cash 1,000,000 1,000,000

Accounts receivable 4,000,000 4,000,000
Inventory – FIFO 8,000,000 9,000,000
Land 5,500,000 7,000,000
Plant and equipment – net 14,000,000 22,000,000
Liabilities 7,000,000 7,000,000
PROBLEM –
The plant and equipment have a 10-year remaining useful life. The inventory was all sold in 2017. The entity
sold the land in 2018 for P8,000,000 and reported a gain of P2,500,000.
The investee reported net income of P3,000,000 for 2017 and P5,000,000 for 2018. The investee paid
P1,000,000 cash dividend on December 31, 2017 and P2,000,000 on December 31, 2018.
1. What is the implied a goodwill arising from the acquisition?
a. 200,000
b. 600,000
c. 800,000
d. 400,000
2. What is the investment income for 2017?
a. 880,000
b. 480,000
c. 400,000
d. 580,000
3. What is the investment income for 2018?
a. 1,080,000
b. 2,280,000
c. 1,680,000
d. 2,880,000
4. What is the carrying amount of the investment in associate on December 31, 2018?
a. 15,360,000
b. 15,000,000
c. 16,560,000
d. 13,800,000
Page 8
Question 1 Answer B
Cash 1,000,000
PROBLEM –
Inventory 8,000,000
Land 5,500,000
Plant and equipment 14,000,000
Liabilities ( 7,000,000)
Net assets at carrying amount 25,500,000
Acquisition cost 15,000,000
Net assets acquired (40% x 25,500,000) (10,200,000)
Excess of cost 4,800,000
Attributable to inventory (9,000,000 – 8,000,000 = 1,000,000 x 40%) ( 400,000)
Attributable to plant and equipment (22,000,000-14,000,000 = 8,000,000 x 40%) ( 3,200,000)
Attributable to land (7,000,000 – 5,500,000 = 1,500,000 x 40%) ( 600,000)
Implied goodwill 600,000 s
Question 2 Answer B
Share in net income for 2017(40% x 3,000,000) 1,200,000
Amortization of excess – inventory ( 400,000)
Amortization of excess – plant and equipment (3,200,000 / 10 years) ( 320,000)
Investment income for 2017 480,000
Question 3 Answer A
Share in net income for 2018 (40% x 5,000,000) 2,000,000
Amortization of excess – plant and equipment ( 320,000)
Amortization of excess – land ( 600,000) Investment income for 2018 1,080,000
Question 4 Answer A
Acquisition cost 15,000,000
Investment income 2017 480,000
Cash dividend for 2017 (40% x 1,000,000) ( 400,000)
Investment income for 2018 1,080,000
Cash dividend for 2018 (40% 2,000,000) ( 800,000) Carrying amount – December 31, 2018
15,360,000 Page 9
5 BOND INVESTMENT AT FVOCI
An entity purchased P5,000,000 of 8%, 5-year bonds on January 1, 2017 with interest payable on June 30 and
December 31. The bonds were purchased for P5,100,000 plus transaction cost of P108,000 at an effective
interest rate of 7%.
PROBLEM –
The business model for this investment is to collect contractual cash flows and sell the bonds in the open
market. On December 31, 2017, the bonds were quoted at 106.
1. What amount of interest income should be reported for 2017?
a. 400,000
b. 200,000
c. 364,560
d. 363,940
2. What is the adjusted carrying amount of the investment on December 31, 2017?
a. 5,300,000
b. 5,171,940
c. 5,174,560
d. 5,000,000
3. What amount should be recognized in OCI in the statement of comprehensive income for 2017?
a. 300,000
b. 125,440
c. 128,060
d. 92,000
4. If the entity elected the fair value option, what total amount of income should be recognized for 2017?
a. 400,000
b. 492,000
c. 600,000
d. 200,000
28
Page
Date Interest received Interest income Amortization Carrying amount
Jan. 1, 2017 5,208,000
Jan. 30, 2017 200,000 182,280 17,720 5,190,280
Dec. 31, 2017 200,000 181,660 18,340 5,171,940
Question 1 Answer D
Interest January to June 182,280
Interest July to December 181,660
Interest income for 2017 363,940
Question 2 Answer A
Market value on December 31, 2017 (5,000,000 x 106) 5,300,000
Question 3 Answer C
Market value on December 31, 2017 5,300,000
Carrying amount December 31, 2017 (see table of amortization) 5,171,940
Unrealized gain - OCI 128,060
Question 4 Answer C
Market value on December 31, 2017 5,300,000
Acquisition cost, excluding transaction cost 5,100,000
Gain from change in fair value 200,000
Interest income (8% x 5,000,000) 400,000
Total income 600,000

PROBLEM –
Page 11
6 PROPERTY, PLANT AND EQUIPMENT
January 1, 2017, an entity disclosed the following balances:
Land 4,000,000
Land improvements 1,300,000
Buildings 20,000,000
Machinery and equipment 8,000,000
During the current year, the following transactions occurred:
* A tract of land was acquired for P2,000,000 cash as a building site.
* A plant facility consisting of land and building was acquired in exchange for 200,000 shares of the entity.
On the acquisition date, each share had a quoted price of P45 on a stock exchange. The plant facility was
carried on the seller’s books at P1,600,000 for land and P5,400,000 for the building at the exchange date.
Current appraised values for the land and the building, respectively, are P2,000,000 and P8,000,000. The
building has an expected life of forty years with a P200,000 residual value.
* Items of machinery and equipment were purchased at a total cost of P4,000,000. Additional costs incurred
were freight and unloading P100,000 and installation P300,000. The equipment has a useful life of ten years
with no residual value.
* Expenditures totaling P1,200,000 were made for new parking lot, street and sidewalk at the entity’s various
plant locations. These expenditures had an estimated useful life of fifteen years.
* Research and development costs were P1,100,000 for the year.

PROBLEM –
* A machine costing P200,000 on January 1, 2010 was scrapped on June 30, 2017. Straight line depreciation
had been recorded on the basis of a 10-year life with no residual value.
* A machine was sold for P500,000 on July 1, 2017. Original cost of the machine sold was P700,000 on
January 1, 2014, and it was depreciated on the straight line basis over an estimated useful life of eight years
and a residual value of P50,000.
1. What is the total cost of land on December 31, 2017?

b. 7,800,000
c. 7,600,000
d. 8,000,000
e. 6,800,000
2. What is the total cost of land improvements on December 31, 2017?

a. 1,200,000
b. 3,600,000
c. 1,300,000
d. 2,500,000
3. What is the total cost of buildings on December 31, 2017?

a. 28,000,000
b. 25,400,000
c. 27,200,000
d. 27,000,000
4. What is total cost of machinery and equipment on December 31, 2017?

a. 12,400,000
b. 11,500,000
c. 11,000,000
d. 11,700,000
Page
Question 1 Answer A
Land – January 1 4,000,000

Land acquired for cash 2,000,000
Land acquired by issuing shares (2/10 x 9,000,000) 1,800,000
Land – December 31 7,800,000
Quoted price of shares issued for land and building (200,000 x P45) 9,000,000
Current appraized value :
Land 2,000,000
Building 8,000,000
Total 10,000,000
The total cost of the land and building is equal to the quoted price of the shares which is allocated prorata to
the land and building based on the current appraised value.
PROBLEM –
Question 2 Answer D
Land improvements – January 1 1,300,000

Expenditures for parking lot, street and sidewalk 1,200,000
Balance – December 31 2,500,000
Question 3 Answer C
Buildings – January 1 20,000,000

Building acquired by issuing shares (8/10 x 9,000,000) 7,200,000
Balance – December 31 27,200,000
Question 4 Answer B
Machinery and equipment - January 1 8,000,000

Machinery and equipment purchased 4,000,000
Freight and unloading 100,000
Installation 300,000
Machinery scrapped ( 200,000)
Machinery sold ( 700,000)
Machinery equipment – December 31 11,500,000
32
Page
PROBLEM 7 - INCOME TAX
An entity had the following financial statement elements for which the December 31, 2017 carrying amount is
different from the December 31, 2017 tax basis:
Carrying amount Tax basis Difference
Equipment 5,500,000 4,000,000 1,500,000
Accrued liability – health care 500,000 0 500,000
Computer software cost 2,000,000 0 2,000,000
The difference between the carrying amount and tax basis of the equipment is due to accelerated depreciation
for tax purposes.
The accrued liability is the estimated health care cost that was recognized as expense in 2017 but deductible
for tax purposes when actually paid.
In January 2017, the entity incurred P3,000,000 of computer software cost. Considering the technical feasibility
of the project, this cost was capitalized and amortized over 3 years for accounting purposes. However, the
total amount was expensed in 2017 for tax purposes.
The pretax accounting income for 2017 is P15,000,000. The income tax rate is 30% and there are no deferred
taxes on January 1, 2017.
1. What amount should be reported as current tax expense for 2017?
a. 5,400,000
b. 3,600,000
c. 3,300,000
d. 5,700,000
2. What amount should be reported as total tax expense for 2017?
a. 4,500,000
b. 4,950,000
c. 4,050,000
d. 3,900,000
3. What amount should be reported as deferred tax liability on December 31, 2017?
a. 1,050,000
b. 1,200,000
c. 900,000
d. 150,000
4. What amount should be reported as deferred tax asset on December 31, 2017?
.
a. 750,000
b. 600,000
c. 150,000
d. 0
Page
Question 1 Answer B
Accounting income 15,000,000
Future taxable amount:
Equipment
Computer software (1,500,000)
Future deductible amount: (2,000,000)
Accrued liability 500,000
Taxable income 12,000,000
Current tax expense (30% x 12,000,000) 3,600,000
Question 2 Answer A
Total tax expense (30% x 15,000,000) 4,500,000
Question 3 Answer A
Deferred tax liability (30% x 3,500,000) 1,050,000
Question 4 Answer C
Deferred tax asset (30% x 500,000) 150,000

Page 15
PROBLEM 8 - BENEFIT COST
An entity provided the following pension plan information:
Projected benefit obligation – January 1 3,500,000

Fair value of plan assets – January 1 2,800,000
Pension benefits paid during the year 250,000
Current service cost for the year 1,750,000
Past service cost for the year (vesting period 5 years) 425,000
Actual return on plan assets 180,000
Contribution to the plan 1,500,000
Actuarial loss due to change in assumptions on projected benefit obligation 200,000
Discount or settlement rate 10%
1. What is the employee benefit expense for the current year?
a. 2,245,000
b. 1,905,000
c. 2,525,000
d. 1,750,000
2. What is the net remeasurement loss for the current year?
a. 200,000
b. 100,000
c. 300,000
d. 400,000
3. What is the projected benefit obligation on December 31?
a. 5,550,000
b. 5,075,000
c. 5,775,000
d. 5,975,000
4. What is the fair value of plan assets on December 31?
a. 4,480,000
b. 4,230,000
c. 4,300,000
d. 4,050,000
1. What amount should be reported as accrued benefit cost on December 31?
a. 1,745,000
b. 1,750,000
c. 1,045,000
d. 700,000
Page 16
Question 1 Answer A
Current service cost 1,750,000
Past service cost 425,000
Interest expense (10% x 3,500,000) 350,000
Interest income (10% x 2,800,000) ( 280,000
Employee benefit expense 2,245,000
Question 2 Answer C
Actual return 180,000
Interest income 280,000
Remeasurement loss on plan assets 100,000
Actuarial loss on PBO 200,000
Net remeasurement loss 300,000
Question 3 Answer D
PBO – January 1 3,500,000
Current service cost 1,750,000
Past service cost 425,000
Interest expense 350,000
Actuarial loss 200,000
Benefits paid ( 250,000
PBO – December 31 5,975,000
Question 4 Answer B
FVPA – January 1 2,800,000
Actual return 180,000
Contribution to the plan 1,500,000
Benefits paid ( 250,000
FVPA – December 31 4,230,000
Question 5 Answer A
FVPA – December 31 4,230,000
PBO – December 31 (5,975,000
Prepaid/accrued benefit cost – December 31 (1,745,000)
Page 17
PROBLEM 9 - SALES TYPE LEASE
An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a
12% return. At the end of the lease term, the equipment will revert to the lessor.
On January 1, 2017, an equipment is leased to a lessee with the following information:
Cost of equipment to the entity 3,500,000
Fair value of equipment 5,500,000
Residual value – unguaranteed 600,000
Initial direct cost 200,000
Annual rental payable in advance 900,000
Useful life and lease term 8 years
Implicit interest rate 12%
PV of 1 at 12% for 8 periods 0.40
PV of an ordinary annuity of 1 at 12% for 8 periods 4.97
PV of an annuity due of 1 at 12% for 8 periods 5.56
First lease payment January 1, 2016
1. What is the gross investment in the lease?
a. 7,800,000
b. 7,200,000
c. 6,600,000
d. 6,900,000
2. What is the net investment in the lease?
a. 5,004,000
b. 5,244,000
c. 5,500,000
d. 5,740,000
3. What is the total financial revenue?

a. 2,196,000
b. 2,796,000
c. 2,556,000
d. 1,956,000
4. What amount should be recognized as interest income for 2017?
a. 600,480
b. 492,480
c. 536,760
d. 521,280
5. What amount of cost of goods sold should be recognized in recording the lease?
a. 3,260,000
b. 3,500,000
c. 3,740,000
d. 3,460,000
Page 18
Question 1 Answer A
Gross rentals (900,000 x 8) 7,200,000
Residual value 600,000
Gross investment 7,800,000
Question 2 Answer B
PV of rentals (900,000 x 5.56) 5,004,000
PV of residual value (600,000 x .40) 240,000
Net investment 5,244,000
Question 3 Answer C
Gross investment 7,800,000
Not investment 5,244,000
Total financial revenue 2,556,000
Question 4 Answer D
Net investment – January 1, 2017 5,244,000
Advance payment on January 1, 2017 ( 900,000)
Balance – January 1, 2017 4,344,000
Interest income for 2017 (12% x 4,344,000) 521,280
Question 5 Answer D
Cost of equipment 3,500,000
PV of unguaranteed residual value ( 240,000)
Initial direct cost 200,000
Sales, excluding present value of unguaranteed residual value 5,004,000
Gross profit on sale 1,544,000

Page 19
PROBLEM 10 – EARNINGS PER SHARE
An entity reported the following information on January 1, 2017:
Ordinary share capital, P10 par, 800,000 shares 8,000,000
Preference share capital, P50 par, 50,000 shares 2,500,000
12% Bonds payable 5,000,000
The preference share capital is 10% cumulative and convertible into 100,000 ordinary shares. Dividends
on preference shares are in arrears for two years.
The 12% bonds are convertible into 80 ordinary shares for each P1,000 bond.
Unexercised share options to purchase 90,000 ordinary shares at P20 per share were outstanding at the
beginning and ending of 2017. The average market price of the ordinary share was P30 per share and
the market price on December 31, 2017 was P40 per share.
May 1 Issued 60,000 ordinary shares at P25 per share.

July 1 Purchased 100,000 ordinary shares at P15 to be held as treasury.
Oct. 1 Converted bonds with face amount of P2,000,000.
Dec. 31 The net income for 2017 was P5,000,000. The tax rate is 30%.
1. What is the amount of basic earnings per share?
a. 6.02
b. 5.26
c. 5.72
d. 5.42
2. What is the total number of potentially dilutive ordinary shares at the beginning of year?
a. 530,000
b. 500,000
c. 590,000
d. 560,000
3. What is the amount of diluted earnings per share?

a. 5.52
b. 4.20
c. 4.07
d. 3.97
Page 20
Question 1 Answer C
Preference dividend (10% x 2,500,000) ( 250,000
Net income - ordinary 4,750,000
January 1 (800,000 x 12/12) 800,000
May 1 ( 60,000 x 8/12) 40,000
July 1 (100,000 x 6/12) ( 50,000)
October 1 ( 2,000 x 80 x 3/12) 40,000
Average shares outstanding 830,000
Basic EPS (4,750,000 / 830,000)
Question 2 Answer A
Share options 90,000
Treasury shares (1,800,000 / 30) ( 60,000
Incremental ordinary shares from share options 30,000
Ordinary shares from conversion of preference shares 100,000
Ordinary shares from conversion of bonds payable (5,000 x 80) 400,000
Potential ordinary shares 530,000
Question 3 Answer C
Incremental EPS on Preference shares (250,000 / 100,000)
Interest on bonds not converted (3,000,000 x 12% x 70%) 252,000
Interest on bonds converted (2,000,000 x 12% x 9/12 x 70%) 126,000
Total interest expense 378,000
Incremental EPS on bonds (378,000 /400,000)
Net income Shares
Basic EPS 4,750,000 830,000
Share options 30,000
Diluted EPS 4,750,000 860,000
Bonds payable 378,000 360,000

Diluted EPS 5,128,000 1,220,000
Preference shares 250,000 100,000
Diluted EPS 5,378,000 1,320,000 4.07
Potential ordinary shares – bonds 400,000

Reported in basic EPS (40,000)
Reported in diluted EPS 360,000
Page 21
PROBLEM 11 – STATEMENT OF CASH FLOWS
1. An entity provided the following increases (decreases) in the statement of financial position
accounts.
Cash and cash equivalents 120,000

Available for sale securities 300,000
Accounts receivable, net -
Inventory 80,000
Long-term investments (100,000)
Plant assets 700,000
Accumulated depreciation -
Accounts payable ( 5,000)
Dividend payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Share capital, P10 par 100,000
Share premium 120,000
Retained earnings 290,000
• Net income for the current year was P790,000.
• Cash dividend of P500,000 was declared.
• Building costing P600,000 and with carrying amount of P350,000 was sold for P350,000.
• Equipment costing P110,000 was acquired through issuance of long-term debt.
• A long-term investment was sold for P135,000. There were no other transactions affecting long-
term investment.
• The shares were issued for cash.
1. What is the net cash provided by operating activities?
a. 1,160,000
b. 1,040,000
c. 920,000
d. 705,000
2. What is the net cash used in investing activities?
a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000
3. What is the net cash provided by financing activities?
a. 205,000
b. 150,000
c. 45,000
d. 20,000
Page 22
Question 1 Answer C
Net income 790,000
Increase in inventory ( 80,000)
Gain on sale of long-term investment ( 35,000)
Depreciation 250,000
Decrease in accounts payable ( 5,000)
Net cash provided – operating 920,000
Question 2 Answer A
Sale price of investment 135,000
Cost of investment sold – decrease in long-term investment (100,000)
Gain on sale of long-term investment 35,000
Net increase in accumulated depreciation -
Add accumulated depreciation on building sold (600,000 – 350,000) 250,000
Depreciation for the year 250,000
Net increase in plant assets 700,000
Add cost of building sold 600,000
Total acquisition during year 1,300,000
Equipment acquired by issuing long-term debt ( 110,000)
Cash payment for plant assets 1,190,000
Cash payment for plant assets (1,190,000)
Cash payment for available for sale securities ( 300,000)
Sale price of investment 135,000
Sale of building 350,000
Net cash used - investing (1,005,000)
Question 3 Answer A
Increase in share capital 100,000
Increase in share premium 120,000
Cash received from issue of shares 220,000
Proceeds from short-term debt 325,000
Dividend paid (340,000)
Net cash provided – financing 205,000
Dividend declared 500,000
Dividend payable (160,000)

Dividend paid 340,000
Proof
Net cash provided - operating 920,000
Net cash used – investing (1,005,000)
Net cash provided – financing 205,000
Increase in cash and cash equivalents 120,000
Page 23
PROBLEM 12 – STATEMENT OF CASH FLOWS
An entity provided the following data:
December 31, 2017 December 31, 2018
Trade accounts receivable, net of allowance 840,000 780,000
Inventory 1,500,000 1,400,000
Accounts payable 950,000 980,000
• Total sales were P12,000,000 for 2018 and P11,000,000 for 2017. Cash sales were 20% of total
sales each year. Cost of goods sold was P8,400,000 for 2018.
• Variable expenses for 2018 amounted to P1,200,000 and varied in proportion to sales. Variable
expenses had been paid 50% in the year incurred and 50% the following year.
• Fixed expenses, including P350,000 depreciation and P50,000 bad debt expense, totaled
P1,000,000 each year. Eighty percent of fixed expenses involving cash were paid in the year
incurred and 20% the following year. Each year there was a P50,000 bad debt estimate and a
P50,000 writeoff.
1. What is the cash collected from customers during 2018?
a. 12,010,000
b. 12,060,000
c. 11,960,000
d. 11,890,000
2. What is the amount of purchases for 2018?
a. 9,800,000
b. 8,300,000
c. 8,500,000
d. 8,400,000
3. What is the cash disbursed for purchases during 2018?
a. 8,500,000
b. 8,270,000
c. 8,300,000
d. 8,200,000
4. What amount of cash was disbursed for variable expenses during 2018?
a. 1,150,000
b. 1,200,000
c. 1,100,000
d. 600,000
5. What amount of cash was disbursed for fixed expenses during 2018?
a. 500,000
b. 650,000
c. 600,000
d. 500,000
Page 24
Question 1 Answer A
AR – December 31, 2017 840,000

Total sales – 2018 12,000,000
Total 12,840,000
AR – December 31, 2018 ( 780,000)
Bad debt writeoff ( 50,000)
Collections from customers – 2018 12,010,000 A
Question 2 Answer B
Inventory – December 31, 2017 1,500,000

Purchases 2018 (SQUEEZE) 8,300,000 B
Goods available for sale 9,800,000
Inventory – December 31, 2018 (1,400,000)
Cost of goods sold - 2018 8,400,000
Question 3 Answer B
Accounts payable – December 31, 2017 950,000

Purchases 2018 8,300,000
Total 9,250,000
Accounts payable – December 31, 2017 ( 980,000)
Cash disbursed for purchases 2018 8,270,000 B
Question 4 Answer A
Variable cost ratio (1,200,000 / 12,000,000) 10%
Variable expenses – 2017 (10% x 11,000,000) 1,100,000
Variable expenses 2017 paid in 2018 (50% x 1,100,000) 550,000

Variable expenses 2018 paid in 2018 (50% x 1,200,000) 600,000
Variable expenses paid in 2018 1,150,000 A
Question 5 Answer C
Fixed expenses each year 1,000,000

Depreciation ( 350,000)
Bad debt expense ( 50,000)
Cash disbursed for fixed expenses in 2018 600,000 C
END
FINALS – FINANCIAL ACCOUNTING PART 2

MARCH 22, 2010
1. Earnings per share disclosures are required only for

a. companies with complex capital structures.
b. companies that change their capital structures during the reporting period.
c. public companies.
d. private companies.
2. In computing the earnings per share of common stock, noncumulative preferred dividends not declared
should be
a. deducted from the net income for the year.
b. added to the net income for the year.
c. ignored.
d. deducted from the net income for the year, net of tax.
3. Which earnings per share computation should be reported on the face of the income statement?
Basic EPS Diluted EPS

a. Yes Yes
b. Yes No
c. No Yes
d. No No
4. When computing earnings per share on common stock, dividends on cumulative, nonconvertible
preferred stock should be
a. deducted from net income only if the dividends were declared or paid in the current period.
b. deducted from net income regardless of whether the dividends were not paid or declared
in the period.
c. deducted from net income only if net income is greater than the dividends. d. ignored.
5. In calculating diluted earnings per share, which of the following should not be considered?
a. The weighted average number of common shares outstanding
b. The amount of dividends declared on cumulative preferred shares
c. The amount of cash dividends declared on common shares
d. The number of common shares resulting from the assumed conversion of debentures
outstanding
6. What is the correct treatment of a stock dividend issued in mid year when computing the
weightedaverage number of common shares outstanding for earnings per share purposes?
a. The stock dividend should be weighted by the length of time that the additional number of
shares are outstanding during the period.
b. The stock dividend should be included in the weighted-average number of common shares
outstanding only if the additional shares result in a decrease of 3 percent or more in earnings
per share.
c. The stock dividend should be weighted as if the additional shares were issued at the
beginning of the year.
d. The stock dividend should be ignored since no additional capital was received.
7. The EPS computation that is forward-looking and based on assumptions about future transactions is a.
diluted EPS.
b. basic EPS.
c. continuing operations EPS.
d. extraordinary EPS.
8. When computing diluted earnings per share, stock options are

a. recognized only if they are dilutive.
b. recognized only if they are antidilutive.
c. recognized only if they were exercised.
d. ignored.
9. Of the following, select the incorrect statement concerning earnings per share.
a. During periods when all income is paid out as dividends, earnings per share and dividends per
share under a simple capital structure would be identical.
b. Under a simple capital structure, no adjustment to shares outstanding is necessary for a
stock split on the last day of the fiscal period.
c. During a period, changes in stock issued or reacquired by a company may affect earnings per
share.
d. During a loss period, the amount of loss attributed to each share of common stock should be
computed.
10. In applying the treasury stock method of computing diluted earnings per share, when is it appropriate to
use the average market price of common stock during the year as the assumed repurchase price? a.
Always
b. Never
c. When the average market price is higher than the exercise price
d. When the average market price is lower than the exercise price
11. Earnings per share information should be reported for all of the following except a. continuing
operations.
b. extraordinary gain.
c. net income.
d. cash flows from operating activities.
12. When using the if-converted method to compute diluted earnings per share, convertible securities
should be
a. included only if antidilutive.
b. included only if dilutive.
c. included whether dilutive or not.
d. not included.
13. The if-converted method of computing EPS data assumes conversion of convertible securities at the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).
14. According to Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," how do firms identify reportable segments? a. By geographic
regions
b. By product lines
c. By industry classification
d. By designations used inside the firm
15. On February 1, Shoemaker Corporation entered into a firm commitment to purchase specialized
equipment from the Okazaki Trading Company for ¥80,000,000 on April 1. Shoemaker would like to
reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars by April 1, but
Shoemaker is not sure which direction the exchange rate may move. What type of contract would
protect Shoemaker from an unfavorable movement in the exchange rate while allowing them to benefit
from a favorable movement in the exchange rate? a. Interest rate swap
b. Forward contract
c. Call option
d. Put option
16. Which of the following tests may be used to determine if an industry segment of an enterprise is a
reportable segment under FASB Statement No. 131?
a. Its revenue (both from external customers and internal segments) is equal to or greater
than 10 percent of total revenue (external and internal).
b. The absolute value of its operating profit is equal to or greater than 10 percent of the total of
the operating profit for all segments that reported profits (or the total of the losses for all
segments that reported losses).
c. The segment contains 10 percent or more of the combined assets of all operating segments.
d. All of the above.
17. In considering interim financial reporting, how does APB Opinion No. 28 conclude that such reporting
should be viewed?
a. As reporting for a basic accounting period
b. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary
c. As a "special" type of reporting that need not follow generally accepted accounting principles
d. As reporting for an integral part of an annual period
18. A company enters into a futures contract with the intent of hedging an account payable of DM400,000
due on December 31. The contract requires that if the U.S. dollar value of DM400,000 is greater than
$200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S.
dollar value is less than $200,000, the company will receive the difference. Which of the following
statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of exchange rate
changes on the U.S. dollar value of the Deutsche mark payable.
b. The futures contract is a contract to buy Deutsche marks at a fixed price.
c. The futures contract is a contract to sell Deutsche marks at a fixed price.
d. The contract obligates the company to pay if the value of the U.S. dollar increases.
19. A company enters into a futures contract with the intent of hedging an expected purchase of some
equipment from a German company for DM400,000 on December 31. The contract requires that if the
U.S. dollar value of DM800,000 is greater than $400,000 on December 31, the company will receive the
difference. Alternatively, if the U.S. dollar value is less than $400,000, the company will pay the
difference. Which of the following statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of exchange rate
changes on the U.S. dollar value of the Deutsche mark commitment.
b. The futures contract exceeds the amount of the commitment and thus hedges movements in
the Deutsche mark exchange rate.
c. The futures contract is a contract to sell Deutsche marks at a fixed price.
d. The extra DM400,000 would be accounted for as a speculative investment.
20. A company enters into an interest rate swap in order to hedge a $5,000,000 variable-rate loan. The loan
is expected to be fully repaid this year on June 10. The contract requires that if the interest rate on April
30 of next year is greater than 11%, the company receives the difference on a principal amount of
$5,000,000. Alternatively, if the interest rate is less than 11%, the company must pay the difference.
Which of the following statements is correct regarding this contract?
a. The swap agreement effectively hedges the variable interest payments.

b. The timing of the swap payment matches the timing of the interest payments and, therefore,
the variable interest payments are hedged.
c. The timing of the swap payment does not match the timing of the interest payments and,
therefore, the variable interest payments are not hedged.
d. This swap represents a fair value hedge.
Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2008. This
contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option
expires on April 30, 2008. WSM shares are trading at $100 per share on January 2, 2008, at which time
Hall pays $100 for the call option.
21. The call option would be recorded in the accounts of Hall as

a. an asset.
b. a liability.
c. a gain.
d. would not be recorded in the accounts (memorandum entry only).
22. Assume that the price of the WSM shares has risen to $120 per share on March 31, 2008, and the Hall is
preparing financial statements for the quarter ending March 31. As regards this option, Hall, Inc., would
report which of the following? a. A $20,000 realized gain.
b. A $20,000 unrealized gain.
c. A deferred gain of $19,900.
d. Nothing would be reported in the financial statements or the notes thereto.
23. The 1,000 shares of WSM stock in this contract is referred to as

a. the collateral.
b. the notional amount.
c. the option premium.
d. the derivative.
24. Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2008. This contract
gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on
April 30, 2008. WSM shares are trading at $100 per share on January 2, 2008, at which time Hall pays
$400 for the call option. The $400 paid by Hall, Inc., to Bennett Investment is referred to as a. the option
premium.
b. the notional amount.
c. the strike price.
d. the intrinsic value.
25. Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2008. This contract
gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on
April 30, 2008. WSM shares are trading at $100 per share on January 2, 2008, at which time Hall pays
$100 for the call option. Assume that the price per share of WSM stock is $120 on April 30, 2008, and
that the time value of the option has not changed. In order to settle the option contract, Hall, Inc., would
most likely
a. pay Bennett Investment $20,000.
b. purchase the shares of WSM at $100 per share and sell the shares at $120 per share to
Bennett.
c. receive $20,000 from Bennett Investment.
d. receive $400 from Bennett Investment.
26.Wolverine Corporation purchased a machine for $132,000 on January 1, 2005, and depreciated it by the
straight-line method using an estimated useful life of eight years with no salvage value. On January 1,
2008, Wolverine determined that the machine had a useful life of six years from the date of acquisition
and will have a salvage value of $12,000. A change in estimate was made in 2008 to reflect these
additional data. What amount should Wolverine record as the balance of the accumulated depreciation
account for this machine at December 31, 2008? a. $73,000
b. $77,000
c. $320,000
d. $352,000
27. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of each of
the last three years are shown below:
2006 2007 2008

Unearned revenues ............. $120,000 $150,000 $176,000
Barker failed to record the unearned revenues in each of the three years. As a result of the omission,
2008 income was
a. overstated by $146,000.
b. understated by $146,000.
c. understated by $26,000.
d. overstated by $26,000.
28. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of each of
the last three years are shown below.
2006 2007 2008
Unearned revenues ............. $120,000 $150,000 $176,000
Barker failed to record the unearned revenues in each of the three years. The entry needed to correct
the above errors is
a. Retained Earnings .................. 150,000 Subscription

Revenues .............. 26,000
Unearned Revenues ............... 176,000
b. Retained Earnings .................. 30,000 Subscription
Revenues .............. 26,000
c. Subscription Revenues .............. 176,000
d. Subscription Revenues .............. 150,000
Retained Earnings .................. 26,000
29. Koppell Co. made the following errors in counting its year-end physical inventories:
2006 .................................. $ 60,000 overstatement

2007 .................................. 108,000 understatement
2008 .................................. 90,000
overstatement
As a result of the above undetected errors, 2008 income was

a. understated by $18,000.
b. overstated by $198,000.
c. overstated by $18,000.
d. understated by $198,000.
30. Badger Corporation purchased a machine for $150,000 on January 1, 2007. Badger will depreciate the
machine using the straight-line method using a five-year period with no residual value. As a result of an
error in its purchasing records, Badger did not recognize any depreciation for the machine in its 2007
financial statements. Badger discovered the problem during the preparation of its 2008 financial
statements. What amount should Badger record for depreciation expense on this machine for 2008? a.
$0
b. $30,000
c. $37,500
d. $60,000
31. Koppell Co. made the following errors in counting its year-end physical inventories:
2006 ................................... $ 60,000 overstatement

2007 ................................... 108,000 understatement 2008
................................... 90,000 overstatement
The entry to correct the accounts at the end of 2008 is
a. Retained Earnings ................... 48,000 Cost

of Goods Sold .................. 42,000
Inventory ........................ 90,000
b. Retained Earnings ................... 18,000 Cost
of Goods Sold .................. 72,000
Inventory ........................ 90,000
c. Inventory .......................... 90,000
Cost of Goods Sold ............... 18,000
Retained Earnings ............... 72,000
d. Cost of Goods Sold .................. 198,000
Retained Earnings ................
108,000 Inventory ........................
90,000
32. On December 31, 2008, Prince Company appropriately changed to the FIFO cost method from the
weighted-average cost method for financial statement and income tax purposes. The change will result
in a $700,000 increase in the beginning inventory at January 1, 2008. Assuming a 40 percent income tax
rate and that no comparative financial statements for prior years are reported, the cumulative effect of
this accounting change reported for the year ended December 31, 2008, is a. $700,000.
b. $350,000.
c. $420,000.
d. $280,000.
33. On January 2, 2006, McKell Company acquired machinery at a cost of $640,000. This machinery was
being depreciated by the double-declining-balance method over an estimated useful life of eight years,
with no residual value. At the beginning of 2008, McKell decided to change to the straight-line method
of depreciation. Ignoring income tax considerations, the cumulative effect of this accounting change is a.
$0.
b. $120,000.
c. $130,000.
d. $280,000.
34. On January 1, 2005, Grayson Company purchased for $240,000 a machine with a useful life of ten years
and no salvage value. The machine was depreciated by the double-declining-balance method, and the
carrying amount of the machine was $153,600 on December 31, 2006. Grayson changed to the
straightline method on January 1, 2007. Grayson can justify the change. What should be the
depreciation expense on this machine for the year ended December 31, 2008? a. $15,360
b. $19,200
c. $24,000
d. $30,720
35. Tyson Company bought a machine on January 1, 2006, for $24,000, at which time it had an estimated
useful life of eight years, with no residual value. Straight-line depreciation is used for all of Tyson's
depreciable assets. On January 1, 2008, the machine's estimated useful life was determined to be only
six years from the acquisition date. Accordingly, the appropriate accounting change was made in 2008.
Tyson's income tax rate was 40 percent in all the affected years. In Tyson's 2005 financial statements,
how much should be reported as the cumulative effect on prior years because of the change in the
estimated useful life of the machine? a. $0
b. $1,200
c. $2,000
d. $2,800
36. On January 1, 2005, Carnival Shipping bought a machine for $1,500,000. At that time, this machine had
an estimated useful life of six years, with no salvage value. As a result of additional information, Carnival
determined on January 1, 2008, that the machine had an estimated useful life of eight years from the
date it was acquired, with no salvage value. Accordingly, the appropriate accounting change was made
in 2008. How much depreciation expense for this machine should Carnival record for the year ended
December 31, 2008, assuming Carnival uses the straight-line method of depreciation? a. $125,000
b. $150,000
c. $187,500
d. $250,000
37. Coombs, Inc. is a calendar-year corporation whose financial statements for 2007 and 2008 included
errors as follows:
Ending Depreciation
Year Inventory Expense

2007 $30,000 overstated $25,000 overstated 2008 $10,000
understated $ 8,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at December
31, 2007, or December 31, 2008. Ignoring income taxes, by how much should Coombs' retained
earnings be retroactively adjusted at January 1, 2009? a. $27,000 increase
b. $27,000 decrease
c. $7,000 decrease
d. $3,000 decrease
38. A change from an accelerated depreciation method to the straight-line depreciation method should be
accounted for as a
a. change in accounting estimate.
b. change in accounting estimate effected by a change in accounting principle. c.
correction of an error.
d. a prior period adjustment.
39. A change in the unit depletion rate would be accounted for as a

a. correction of an accounting error.
b. change in accounting principle.
c. change in accounting estimate.
d. change in accounting estimate effected through a change in accounting principle.
40. Which of the following statements is not correct?

a. A change from an inappropriate accounting principle to a proper one should be accounted
for as an accounting error.
b. A change from an inappropriate accounting principle to a proper one should be
accounted for as a change in accounting principle.
c. A change from an inappropriate accounting principle to a proper one should be accounted
for retrospectively.
d. A change from an inappropriate accounting principle to a proper one may require an
adjustment to beginning retained earnings for the earliest year reported.
41. Which of the following would not be accounted for as a change in accounting principle?
a. Change from the first-in, first-out method to the last-in, first-out method of inventory
pricing
b. Change from the last-in, first-out method to the first-in, first-out method of inventory
pricing
c. Change from completed-contract accounting to percentage-of-completion
d. Change from straight-line method to accelerated method of depreciation
42. In 2008, a company changed from the FIFO method of accounting for inventory to LIFO. The company;s
2007 and 2008 comparative financial statements will reflect which method or methods?
2007 2008
a. LIFO LIFO
b. LIFO FIFO
c. FIFO FIFO
d. LIFO either LIFO or FIFO
43. In 2008, a company changed from the LIFO method of accounting for inventory to FIFO. The company’s
2007 and 2008 comparative financial statements will reflect which method or methods?
2007 2008 a.
LIFO LIFO
b. FIFO FIFO
c. LIFO FIFO
d. LIFO either LIFO or FIFO
44. Which of the following is characteristic of a change in accounting estimate?

a. Requires the reporting of pro forma amounts for prior periods
b. Does not affect the financial statements of prior periods
c. Never needs to be disclosed
d. Should be reported by retrospectively adjusting the financial statements for all years reported,
and reporting the cumulative effect of the change in income for all preceding years as an
adjustment to the beginning balance of retained earnings for the earliest year reported.
45. Which of the following is characteristic of a change in accounting principle?

a. Requires the reporting of pro forma amounts for prior periods
b. Does not affect the financial statements of prior periods
c. Never needs to be disclosed
d. Should be reported by retrospectively adjusting the financial statements for all years reported,
and reporting the cumulative effect of the change in income for all preceding years as an
adjustment to the beginning balance of retained earnings for the earliest year reported
46. When a firm changed its method of accounting for inventory from LIFO to FIFO in 2008, it decided that
the 2008 financial statements should be shown comparatively with the 2007 results.
Which of the following statements concerning reporting the change in the retained earnings statement
is correct?
a. No direct change to retained earnings is needed since earnings for both years have been
adjusted to reflect the change.
b. Only the January 1, 2007, retained earnings balance is reported at a different amount to
reflect the effects of the change in earnings.
c. Only the January 1, 2008, retained earnings balance is reported at a different amount to
reflect the effects of the change in earnings.
d. Both the January 1, 2007, and January 1, 2008, retained earnings balances are reported
at different amounts to reflect the effects of the change in earnings before those
respective dates.
47. A change in the estimated useful life of a building
a. is not allowed by generally accepted accounting principles.
b. affects the depreciation on the building beginning with the year of the change.
c. must be handled as a retroactive adjustment to all accounts affected, back to the year of the
acquisition of the building.
d. creates a new account to be recognized on the income statement reflecting the difference in
net income up to the beginning of the year of the change.
48. Which of the following types of errors will not self-correct in the next year?
a. Accrued expenses not recognized at year-end
b. Accrued revenues that have not been collected not recognized at year-end
c. Depreciation expense overstated for the year
d. Prepaid expenses not recognized at year-end
49. On December 27, 2008, Johnson Company ordered merchandise for resale from Quantum, Inc., that cost
$7,000 (terms cash within 10 days). Quantum shipped the merchandise f.o.b. shipping point on
December 28, 2008, and the goods arrived on January 2, 2009. The invoice was received on December
30, 2008. Johnson Company did not record the purchase in 2008 and did not include the goods in ending
inventory. The effects on Johnson Company’s 2008 financial statements were
a. income and owners’ equity were correct; liabilities were incorrect, assets were correct.
b. income and owners’ equity were correct; assets and liabilities were incorrect.
c. income, assets, liabilities, and owners’ equity were correct.
d. income, assets, liabilities, and owners’ equity were incorrect.
50. Which of the following should not be reported retroactively?

a. Use of an unacceptable accounting principle, then changing to an acceptable accounting principle.
b. Correction of an overstatement of ending inventory made two years ago.
c. Use of an unrealistic accounting estimate, then changing to a realistic estimate.
d. Change from a good faith but erroneous estimate to a new estimate.
51. Which of the following is a counterbalancing error?

a. Understated depletion expense
b. Bond premium under-amortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expenses
52. Which of the following, if discovered by James Company in the accounting period subsequent to the
period of occurrence, requires the company to report the correction of an error?
a. The estimate of the useful life of a depreciable asset should have been revised.
b. A change from declining-balance depreciation method to straight-line method
c. Capitalization of an expense
d. Change in percentage of sales used for determining bad debt expense
53. BJ Company uses a periodic inventory system. If the company’s beginning inventory in the current year is
overstated, and that is the only error in the current year, then the company’s income for the current
year will be
a. understated and assets correct.
b. understated and assets overstated.
c. overstated and assets overstated.
d. understated and assets understated.
ANS: A DIF: Medium OBJ: LO 5
TOP: AICPA FN-Measurement MSC: AACSB Analytic
54. Which of the following is not an example of an accounting error, as distinguished from a change in
accounting principle or change in accounting estimate?
a. Misstatement of assets, liabilities, or owners’ equity
b. Incorrect classification of an expenditure as between expense and an asset
c. Failure to recognize accruals and deferrals
d. Recognition of a gain on disposal of fully depreciated property
55. The September 30, 2008, physical inventory of Baxter Corporation appropriately included $3,800 of
merchandise purchased on account that was not recorded in purchases until October 2008. What effect
will this error have on September 30, 2008, assets, liabilities, retained earnings, and earnings for the
year then ended, respectively?
a. Understate; no effect; overstate; overstate
b. No effect; overstate; understate; understate
c. No effect; understate; overstate; overstate
d. No effect; understate; understate; overstate
56. If, at the end of a period, Matthew Company erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its accounting records,
these errors would cause
a. no effect on the company’s net income, working capital, and retained earnings.
b. the company’s cost of goods available for sale, cost of goods sold, and net income to be
understated.
c. the company’s ending inventory, cost of goods available for sale, and retained earnings to
be understated.
d. the company’s ending inventory, cost of goods sold, and retained earnings to be
understated.
57. Justin Corporation uses a periodic inventory system and neglected to record a purchase of merchandise
on account at year-end. This merchandise was omitted from the year-end physical count. How will these
errors affect Justin’s assets, liabilities, and stockholders’ equity at year-end and net earnings for the
year?
Stockholders’
Assets Liabilities Equity Net Earnings a.

Understate Understate No effect No effect
b. Understate No effect Understate Understate

c. No effect Understate Overstate Overstate
d. No effect Overstate Understate Understate
58. Ending inventory for 2006 is overstated by $4,000 due to a faulty count and costing. The tax rate is 30%.
Assume the same accounting methods for both financial reporting and taxes. The error is discovered late
in 2008. The 2008 annual report shows the financial statements for 2006, 2007, 2008 on a comparative
basis.
Which of the following is correct regarding the reporting of this error in the 2008 annual
report? a. A journal entry is made to report the prior period adjustment, and the 2006 2007
statements are shown corrected.
b. No journal entry is needed, and the 2006 and 2007 statements are shown as they were in
the 2007 annual report.
c. No journal entry is needed, and the 2006 and 2007 statements are shown corrected.
d. A journal entry is made to report the prior period adjustment, and the 2006 and 2007
statements are shown as they were in the 2007 annual report.
59. The ending inventory for Wattis Company was overstated by $6,000 in 2008. The overstatement will
cause Wattis Company’s
a. retained earnings to be understated on the 2008 balance sheet.
b. cost of goods sold to be understated on the 2009 income statement.
c. cost of goods sold to be overstated on the 2008 income statement.
d. 2009 balance sheet not to be misstated.
60. Which of the following would cause income of the current period to be understated?
a. Capitalizing research and development costs
b. Failure to recognize unearned rent revenue
c. Changing from LIFO to FIFO for merchandise inventory
d. Understating estimates of asset residual values
61. For a company with a periodic inventory system, which of the following would cause income to be
overstated in the period of occurrence? a. Overestimating bad debt expense
b. Understating beginning inventory
c. Overstated purchases
d. Understated ending inventory
62. Young Corporation decided to change its depreciation policy by (1) changing from double-
decliningbalance depreciation, and (2) changing the estimated useful life on all automobiles used in the
business from five years to four years.
Which of the following is correct concerning these two changes?

a. Both are changes in accounting principle
b. Both are changes in accounting estimate

c. One is an error correction, and one is change in accounting principle
d. One is a change in estimate effected through a change in accounting principle, and one is a
change in estimate
A retailing firm changed from LIFO to FIFO in 2008. Inventory valuations for the two methods appear
below:
1/1/2007 1/1/2008 1/31/2008
FIFO $ 10,000 $ 20,000 $ 25,000
LIFO 7,000 16,000 18,000
Purchases in 2007 and 2008 were $60,000 in each year.

63. Choose the following:
1. The correct amount in the 2008 entry to record the accounting principle change
2. Whether the entry affects 2008 earnings or is recorded as an adjustment to retained earnings (RE)
3. The 2008 cost of goods sold
a. $4,000 RE $55,000
b. $7,000 RE $58,000
c. $4,000 Earnings $55,000
d. $7,000 Earnings $58,000
64. In the comparative 2007 and 2008 income statements, what amounts would be shown for cost of goods
sold?
2007 2008
a. $50,000 $58,000
b. $51,000 $55,000
c. $50,000 $55,000
d. $51,000 $58,000
65. In 2008, a company discovered that $10,000 of equipment purchased on January 1, 2005, was expensed
in full. The equipment has a ten-year life, no residual value, and should have been depreciated on the
straight-line basis. The error is corrected. As a result, the comparative 2007 and 2008 financial
statements will show what amounts as adjustments to the beginning balances of retained earnings
dated:
1/1/2007 1/1/2008
a. $7,000 $7,000
b. $8,000 $ -0-
c. $ -0- $7,000
d. $8,000 $7,000
66. A company mistakenly expensed a $100,000 machine purchased January 1, 2005. The machine has no
salvage value and is expected to provide benefits for five years. The error was discovered in 2008. The
company shows two years of comparative statements in its December 31 annual reports. In the
company’s 2007 and 2008 reports shown comparatively, what amounts would be shown as adjustments
to the respective retained earnings balances?
2007 2008
a. $60,000 $40,000
b. $ -0- $40,000
c. $60,000 $ -0-
d. $60,000 $20,000
67. Adams Company decides a the beginning of 2008 to adopt the FIFO method of inventory valuation. The
company had been using the LIFO method for financial and tax reporting since it inception on January 1,
2006. The profit-sharing agreement was in place for all years prior to the year of change, 2008.
Payments under this agreement are not an inventoriable cost.
Which of the following statements regarding the accounting for the profit-sharing agreement in
connection with the change from LIFO to FIFO is correct?
a. The effects of the change in accounting principle on the profit-sharing agreement must be
treated retrospectively.
b. The effects of the change in accounting principle on the profit-sharing agreement

should be reported only in the period in which the change in accounting principle was
made.
c. It would be impracticable to determine the effect on the profit-sharing agreement as a
result of the change in accounting principle.
d. There would be no effect on the profit-sharing agreement as a result of the change in
accounting principle.
68. Which of the following is not a justification for a change in depreciation methods?
a. A change in the estimated useful life of an asset as a result of unexpected obsolescence.
b. A change in the pattern of receiving the estimated future benefits from an asset.
c. To conform to the depreciation method prevalent in a particular industry.
d. A change in the estimated future benefits from the asset.
69. Western Company purchased some equipment on January 2, 2005, for $24,000. The company used
straight-line depreciation based on a ten-year estimated life with no residual value. During 2008,
management decided that this equipment could be used only three more years and then would be
replaced with a technologically superior model. What entry should the company make as of January 1,
2008, to reflect this change? a. No entry.
b. Debit a Prior Period Adjustment account for $4,800 and credit accumulated depreciation for $4,800.
c. Debit Retained Earnings for $4,800 and credit accumulated depreciation for $4,800.
d. Debit Depreciation Expense for $4,800 and credit Accumulated Depreciation for $4,800.
70. Draper Corp. leased a new building and land from Baylor Leasing Inc. for 25 years. At the inception of the
lease the building and land have fair market values of $200,000 and $25,000, respectively. The building
has an expected economic life of 30 years. Which of the following statements is correct regarding
Draper's treatment of the lease?
a. Draper should treat the lease as a capital lease even though there is no bargain
purchase option and no automatic transfer of ownership at the termination of the lease.
b. Draper should treat the lease as a capital lease only if there is either a bargain purchase
option or an automatic transfer of ownership at the termination of the lease.
c. Draper should treat the lease as a capital lease provided that the land and building are
recorded in separate asset accounts and accounted for separately.
d. Draper should treat the lease as a capital lease only if Baylor treats the transaction as a
leveraged lease.
71. Which of the following would be considered an executory cost?

a. Minimum lease payments.
b. Interest expense incurred.
c. Bargain purchase option.
d. Maintenance costs.
72. If the residual value of a leased asset is greater than the amount guaranteed by the lessee
a. the lessee pays the lessor for the difference.
b. the lessee recognizes a gain at the end of the lease term.
c. the lessee has no obligation related to the residual value.
d. the lessee pays the lessor for the difference.
73. Which of the following is true regarding the lease term?
a. The lease term does not include all periods covered by bargain renewal options.
b. The lease term includes all periods for which failure to renew imposes a penalty
sufficiently high that the lessee probably will renew.
c. The lease term may extend beyond the date a bargain purchase option becomes
exercisable.
d. The lease term does not include all periods representing renewals or extensions of the
lease at the lessor's option.
74. From the standpoint of the lessee, the minimum lease payment includes all of the following except a.
the guaranteed residual value.
b. the lessee's obligation to pay executory costs.
c. the bargain purchase option.
d. any payment that the lessee must make upon failure to extend or renew the lease.
75. Which of the following is (are) not correct regarding disclosure requirements lessees?
I. For capital leases, future minimum lease payments in the aggregate and for each of
the succeeding five years must be disclosed.
II. For operating leases with initial or remaining lease terms in excess of one year, future
minimum rental payments in the aggregate and for each of the five succeeding fiscal
years must be disclosed.
III. For capital leases, future minimum lease payments for each of the succeeding five
years must be disclosed.
IV. For operating leases with initial or remaining lease terms in excess of one year, future
minimum lease payments for each of the five succeeding fiscal years must be
disclosed.
a. I only.
b. II only.
c. Both I and II.
d. Both III and IV.
76. Which of the following is not a required disclosure for lessors?

a. Total of minimum sublease rentals to be received in the future under noncancelable subleases.
b. Unearned interest revenue
c. Unguaranteed residual values accruing to the benefit of the lessor.
d. A general description of the lessor's leasing arrangements.
77. In order for a lease to be considered a finance (or capital) lease, international accounting standards
require that a lease agreement
a. transfers substantially all risks and rewards incident to ownership of an asset to the lessee.
b. contains a provision requiring transfer of title to the lessee by the end of the lease term.
c. provides that the term of the lease contract be longer than one year.
d. provides for a bargain purchase option.
78. State Repairs acquires equipment under a noncancelable lease at an annual rental of $45,000, payable in
advance for five years. After five years, there is a bargain purchase option of $75,000. The appropriate
interest rate is 12 percent. What is the total present value of the lease and the first year's interest
expense? a. $224,234 and $21,508
b. $224,234 and $26,908
c. $204,771 and $21,508
d. $204,771 and $19,173
79. Stockton, Inc. leased machinery with a fair value of $250,000 from Layton Machine Co. on December 31,
2008. The contract is a six-year noncancelable lease with an implicit interest rate of 10 percent. The
lease requires annual payments of $50,000 beginning December 31, 2008. Stockton appropriately
accounted for the lease as a capital lease. Stockton's incremental borrowing rate is 12 percent. Assuming
the present value of an annuity due of 1 for 6 years at 10 percent is 4.7908 and the present value of an
annuity due of 1 for 6 years at 12 percent is 4.6048, what is the lease liability that Stockton should report
on the balance sheet at December 31, 2008? a. $189,540
b. $200,000
c. $230,240
d. $239,540
80. Baxter Company leased equipment to Fritz Inc. on January 1, 2008. The lease is for an eight-year period
expiring December 31, 2015. The first of eight equal annual payments of $900,000 was made on January
1, 2005. Baxter had purchased the equipment on December 29, 2007, for $4,800,000. The lease is
appropriately accounted for as a sales-type lease by Baxter. Assume that the present value at January 1,
2008, of all rent payments over the lease term discounted at a 10 percent interest rate was $5,280,000.
What amount of interest revenue should Baxter record in 2009 (the second year of the lease period) as a
result of the lease? a. $490,000
b. $480,000
c. $438,000
d. $391,800
81. Jordan Co. leased a machine on December 31, 2008. Annual payments under the lease are $110,000
(which includes $10,000 annual executory costs) and are due on December 31 each year, for a ten-year
period. The first payment was made on December 31, 2008, and the second payment was made on
December 31, 2009. According to the agreement, the lease payments are discounted at 10 percent over
the lease term. Assume the present value of minimum lease payments at the inception of the lease and
before the first annual payment was $615,000 and Jordan appropriately classified the lease as a capital
lease. What is the lease liability Jordan should report in its December 31, 2009, balance sheet? a.
$466,500
b. $515,000
c. $534,150
d. $576,500
82. Aerotech Inc., a dealer in machinery and equipment, leased equipment to Quality Products on July 1,
2008. The lease is appropriately accounted for as a sale by Aerotech and as a purchase by Quality. The
lease is for a ten-year period (the useful life of the asset) expiring June 30, 2018. The first of ten equal
annual payments of $250,000 was made on July 1, 2008. Aerotech had purchased the equipment for
$1,337,500 on January 1, 2008, and established a list selling price of $1,687,500 on the equipment.
Assume that the present value at July 1, 2008, of the rent payments over the lease term discounted at
12 percent (the appropriate interest rate) was $1,582,500. What is the amount of profit on the sale and
the amount of interest income that Aerotech should record for the year ended December 31, 2008? a.
$245,000 and $94,950
b. $245,000 and $79,950
c. $350,000 and $79,950
d. $350,000 and $94,950
83. On January 1, 2008, Shak, Inc. signed a noncancelable lease for a sneaker shining machine. The machine
has an estimated useful life of nine years. The term of the lease is a six-year term with title passing to
Shak at the end of the lease. The agreement called for annual payments of $40,000 starting at the end of
the first year. Assume aggregate lease payments were determined to have a present value of $200,000,
based on implicit interest of 12 percent. What amount of interest expense should Shak report in its 2008
income statement from this lease transaction? a. $0
b. $16,000
c. $24,000
d. $33,333
84. Epson Distributing leased a machine for a period of eight years, contracting to pay $200,000 at the
beginning of the lease term on December 31, 2008, and $200,000 annually on December 31 for each of
the next seven years. The present value of the eight rent payments over the lease term, appropriately
discounted at 10 percent, is $1,174,000. On its December 31, 2009, balance sheet, Epson should report a
liability under capital lease of a. $871,400.
b. $876,600.
c. $974,000.
d. $1,091,400.
85. Slice Company manufactures equipment that they sell or lease. On December 31, 2008, Slice leased
equipment to Hook Company for a five-year period after which ownership of the leased asset will be
transferred to Hook. The lease calls for equal annual payments of $50,000, due on December 31 of each
year. The first payment was made on December 31, 2008. The normal sales price of the equipment is
$220,000, and cost is $176,000. For the year ended December 31, 2008, what amount of income should
Slice report from the lease transaction? a. $10,000
b. $30,000
c. $44,000
d. $74,000
86. On March 1, 2008, Sturdy Corp. became the lessee of new equipment under a noncancelable six-year
lease. The total estimated economic life of this equipment is ten years. The fair value of this equipment
on March 1, 2008, was $100,000. The lease does not meet the criteria for classification as a capital lease
with respect to transfer of ownership of the leased asset, or bargain purchase option, or lease term.
Nevertheless, Sturdy must classify this lease as a capital lease if, at inception of the lease, the present
value of the minimum lease payments (excluding executory costs) is equal to at least a. $67,500.
b. $75,000.
c. $90,000.
d. $100,000.
87. On December 31, 2008, Gephardt Enterprises leased equipment from B & B Equipment Rental. Pertinent
lease transaction data are as follows:
• The estimated seven-year useful equipment life coincides with the lease term.
• The first of the seven equal annual $200,000 lease payments was paid on December 31, 2008.
• B & B's implicit interest rate of 12 percent is known to Gephardt.
• Gephardt's incremental borrowing rate is 14 percent.
• Present values of an annuity of 1 in advance for seven periods are 5.11 at 12 percent and
4.89 at 14 percent.
Gephardt should record the equipment on the books

at a. $1,400,000.
b. $1,022,000.
c. $978,000.
d. $0.
88. On January 1, 2008, Collins Company leased a warehouse to Cuthbert under an operating lease for ten
years at $80,000 per year, payable the first day of each lease year. Collins paid $36,000 to a real estate
broker as a finder's fee. The warehouse is depreciated at $20,000 per year. During 2008, Collins incurred
insurance and property tax expense totaling $15,000. Collins' net rental income for 2008 should be a.
$9,000.
b. $41,400.
c. $44,000.
d. $45,000.
89. On January 1, Twix Company as lessee signed a ten-year noncancelable lease for a machine with annual
payments of $60,000. The first payment was also made on January 1. Twix appropriately treated this
transaction as a capital lease. The ten lease payments have a present value of $405,000 at January 1,
based on implicit interest of 10 percent. For the first year, Twix should record interest expense of a. $0.
b. $6,000.
c. $34,500.
d. $40,500.
90. Hazard Inc. manufactures equipment that is sold or leased. On December 31, 2008, Hazard leased
equipment to Robards for a five-year period expiring December 31, 2013, at which date ownership of
the leased asset will be transferred to Robards. Equal $40,000 payments under the lease are due on
December 31 of each year. The first payment was made on December 31, 2008. Collectibility of the
remaining lease payments is reasonably assured, and Hazard has no material cost uncertainties. The
normal sales price of the equipment is $154,000 and cost is $120,000. For the year ended December 31,
2008, how much income should Hazard recognize from the lease transaction? a. $46,000
b. $40,000
c. $34,000
d. $28,000
91. On January 1, Gregory Company signed a ten-year noncancelable lease for a new machine, requiring
$40,000 annual payments at the beginning of each year. The machine has a useful life of 15 years, with
no salvage value. Title passes to Gregory at the lease expiration date. Gregory uses straight-line
depreciation for all of its plant assets. Aggregate lease payments have a present value on January 1 of
$252,000, based on an appropriate rate of interest. For the first year, Gregory should record
depreciation (amortization) expense for the leased machine at a. $40,000.
b. $25,200.
c. $16,800.
d. $14,133.
92. On December 1, 2008, Blake Inc. signed an operating lease for a warehouse for ten years at $24,000 per
year. Upon execution of the lease, Blake paid $48,000 covering rent for the first two years. How much
should be shown in Blake's income statement for the year ended December 31, 2008, as rent expense?
a. $0
b. $2,000
c. $24,000
d. $48,000
93. On December 31, 2008, Cooke Company leased a machine under a capital lease for a period of ten years,
contracting to pay $100,000 on signing the lease and $100,000 annually on December 31 of the next
nine years. The present value at December 31, 2008, of the ten lease payments over the lease term
discounted at 10 percent was $676,000. At December 31, 2009, Cooke's total capital lease liability is a.
$486,000.
b. $518,000.
c. $533,600.
d. $607,960.
94. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should
be
a. allocated between interest expense and depreciation expense.
b. allocated between a reduction of the liability for leased assets and interest expense.
c. recorded as a reduction in the liability for leased assets.
d. recorded as a rental expense.
95. In a lease that is recorded as a direct financing lease by the lessor, unearned revenue
a. should be amortized over the period of the lease using the interest method.
b. should be amortized over the period of the lease using the straight-line method. c.
does not arise.
d. should be recognized in full at the inception of the lease.
96. Generally accepted accounting principles require that certain lease agreements be accounted for as
purchases. The theoretical basis for this treatment is that a lease of this type
a. effectively conveys substantially all of the rights and risks incident to the ownership of the
property.
b. is an example of form over substance.
c. provides the use of the lease asset to the lessee for a limited period of time.
d. must be recorded in accordance with the concept of cause and effect.
Marshall, Inc., leased equipment to Gadsby Company on January 1, 2008. The lease is for a five-year
period ending January 1, 2013. The first equal annual payment of $1,200,000 was made on January 1,
2008. The cash selling price of the equipment is $5,174,552, which is equal to the present value of the
lease payments at 8%. Marshall purchased the equipment for $4,300,000.
97. Marshall should account for this lease as

a. an operating lease.
b. a direct-financing lease.
c. a sale-type lease.
d. leveraged lease.
98. For 2008, Marshall should report interest revenue of

a. $317,964.
b. $344,000.
c. $413,964.
d. $517,455.
99. On January 1, 2008, Larsen Corporation sold a machine to Parson Corporation and simultaneously leased
it back for ten years. The following information is available regarding the lease:
Estimated remaining useful life at December 31, 2007 10 years
Sales price $ 90,000
Carrying value at December 31, 2007 $ 52,500
Annual rental under leaseback $ 14,600
Interest rate implicit in the lease 10%
Present value of the lease rentals $ 89,711
($14,600 for 10 years at 10%)
How much profit should Larsen recognize on January 1, 2008, on the sale of the machine?
a. $0.
b. $37,211
c. $90,000
d. $37,500
100. On January 2, 2008, Boston Corporation entered into a 10-year noncancelable lease requiring year-end
payments of $60,000. The incremental borrowing rate for Boston is 10%. The lessor’s implicit rate (which
is known by Boston) is 12%. The lease contains no transfer of title or bargain purchase option provisions.
The leased property has an estimated economic life of 12 years. At what amount should the lease be
capitalized by Boston? a. $0
b. $339,012
c. $368,676
d. $600,000

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FINANCIAL STATEMENTS Current and Noncurrent Classification:

d. cash surrender value of life b. 6,726,000

Sales (90% collected in first 1,500,000

What is the cash balance at December

6. In accounting, it means 13. Costs that are treated as assets until

75. The document authorizing the

96. You purchased a computer for

97. Which of the following users of financial

98. The business receives billing for

99. A business owner’s contribution to the

100. You purchased goods to be held for

FINANCIAL ACCOUNTING AND REPORTING TEST BANK

PROBLEM 1 – STATEMENT OF FINANCIAL POSITION

1. What amount should be reported as current assets on December 31, 2017?

2. What amount should be reported as current liabilities on December 31, 2017?

3. What is the net income for 2017?

Accounts receivable 14,000,000

Inventory (10,000,000 - 500,000 - 300,000) 9,200,000

Total current assets 29,200,000

Net sales and other revenue 80,000,000

Cost of goods sold ( 48,000,000)

Income before tax 20,000,000

Tax expense (30% x 20,000,000) ( 6,000,000)

Net income 14,000,000

Tax expense 6,000,000

Payment during year (5,000,000) Income tax payable 1,000,000

Accounts payable 8,200,000

Income tax payable 1,000,000

Redeemable preference 3,000,000

Total current liabilities 12,200,000

Accounts payable per book 9,000,000

Goods in transit FOB destination ( 500,000)

Goods held on consignment ( 300,000) Adjusted accounts payable 8,200,000

Net income 14,000,000

Ordinary share capital 15,000,000

Share premium 4,000,000

Retained earnings 23,000,000

Total shareholders’ equity 42,000,000

Net income 14,000,000

Total retained earnings 23,000,000 Page 3

PROBLEM 2 - STATEMENT OF FINNACIAL POSITION

3. On December 31, 2017, an entity showed the following current assets:

Customers’ debit balances, net of customer deposit of P50,000 1,900,000

1. What is the adjusted cash balance?

2. What is the net realizable value of accounts receivable?

3. What is the adjusted inventory?

4. What total amount of current assets should be reported?

Cash on hand 130,000

Customer postdated check ( 20,000)

Employee IOU ( 10,000)

Adjusted cash on hand 100,000

Cash in bank per bank statement 370,000

Outstanding checks ( 70,000) 300,000

Adjusted cash balance 400,000

Customers’ debit balances 1,900,000

Customer deposit erroneously netted 50,000

Customer postdated check 20,000

Accounts receivable 1,970,000

Allowance for doubtful accounts ( 150,000)