Southwestern University

Acctg. 104a Financial Accounting

MWF (6:30 pm 8:30 pm)
Midterm Exam
Test I. Review of Theories and Concepts
1. Long-term notes receivable which are zero-interest-bearing or those whose rates are
unreasonably low may be stated at
a. Face value
c. Maturity value
b. Discounted value
d. Book value
2. The interest on a non-interest bearing note is equal to
a. The excess of the face value over the present value
b. Zero
c. The excess of the market value over the present value of the note
d. The excess of the present value over the face value
3. On October 1 of the current year, an entity received a one-year note receivable bearing interest at
the market rate. The face amount of the note receivable and the entire amount of the interest are
due on September 30 of the next year. The interest receivable on December 31 of the current
year would consist of an amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its fact amount
4. On July 1, 2012, an entity obtained a two-year 8% note receivable for services rendered. At that
time, the market rate of interest was 10%. The face amount of the note and the entire amount of
interest are due on June 30, 2014. Interest receivable on December 31, 2012 is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the July 1, 2012 present value of the amount due on June 30, 2014.
d. 4% of the July 1, 2012 present value of the amount due on June 30, 2014.
5. In an entitys April 30, 2012 statement of financial position a note receivable was reported as a
noncurrent asset and accrued interest for eight months was reported as a current asset. Which of
the following terms would fit the entitys note receivable?
a. Both principal and interest are payable on August 31, 2012 and August 31, 2013
b. Principal and interest are due December 31, 2012
c. Both principal and interest are payable on December 31, 2012 and December 31, 2013.
d. Principal is due August 31, 2013, and interest is due August 31, 2012 and August 31, 2013.
6. The amortized cost of loan receivable is the amount of which
a. The loan receivable is measured initially minus principal repayment, plus or minus the
cumulative amortization of any difference between the initial amount recognized and the
principal maturity amount, minus reduction for impairment.
b. The loan receivable is measured initially minus principal repayments, plus or minus
amortization recognized and the principal maturity amount
c. The loan receivable is measured initially.
d. The loan receivable is measured initially minus principal repayment.
7. When a loan was issued by a bank for more than its face value and the entity failed to recognize
amortization for the current year, what is the effect of the error on the asset and equity,
respectively?
a. Overstated and overstated

b. Understated and understated

c. Overstated and understated
d. Understated and overstated
8. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of an account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income
9. It consists of misappropriating a collection from one customer and concealing this defalcation y
applying a subsequent collection made from another customer
a. Window dressing
c. Kiting
b. Lapping
d. Imprest system
10. Which of the following statements is incorrect?
a. A certified check is a liability of the bank certifying it.
b. A certified check will be accepted by many persons who would not otherwise accepts a
personal check.
c. A certified check is one drawn by a bank upon itself.
d. A certified check is no longer an outstanding check at year-end.
11. When interest income for the current year is more than the interest received, the loan was issued
at
a. More than face amount
b. Less than face amount
c. Face amount
d. Cannot be determined
12. The Philippine Interpretation Committee (PIC) members were appointed by the _____ and
include accountants in public practice, the academe and regulatory bodies and users of financial
statements.
a. SEC
c. BOA
b. PRC
d. FRSC
13. As regards the relationship between PFRS and the Conceptual Framework, are the following
statements true or false?
I.
The Conceptual Framework is a reporting standard.
II.
In cases of conflict, the requirements of the Conceptual Framework prevail over those of
the relevant PFRS.
Statement I
Statement II
a.
False
True
b.
True
True
c.
False
False
d.
True
False
14. The following statements pertain to the concept of income and expenses. Which statement is
incorrect?
a. The definition of expenses encompasses losses as well as those expenses that arise in the
course of the ordinary activities of the enterprise.
b. Losses represent other items that meet the definition of expenses and may or may not arise
in the course of the ordinary activities of the enterprise.
c. The definition of revenue encompasses both income and gains.
d. Gains represent other items that meet the definition of income and may or may not arise in
the ordinary course of the ordinary activities of an enterprise.

15. On October 31, year 2, Dingo, Inc. had cash accounts at three different banks. One account
balance is segregated solely for a November 15, year 2 payment into a bond sinking fund. A
second account, used for branch operations, is overdrawn. The third account, used for regular
corporate operations, has a positive balance. How should these accounts be reported in Dingos
October 31, year 2 classified balance sheet?
a. The segregated account should be reported as a noncurrent asset, the regular account
should be reported as a current asset, and the overdraft should be reported as a current
liability.
b. The segregated and regular accounts should be reported as current assets, and the overdraft
should be reported as a current liability.
c. The segregated account should be reported as a noncurrent asset, and the regular account
should be reported as a current asset net of the overdraft.
d. The segregated and regular accounts should be reported as current assets net of the
overdraft.
16. A method of estimating uncollectible accounts that emphasizes asset valuation rather than
income measurement is the allowance method based on
a. Aging the receivables.
c. Gross sales.
b. Direct write-off.
d. Credit sales less returns and allowances.
17. Statement I: If there is objective evidence that the receivables are impaired, an impairment loss
should be recognized.
Statement II: The amount of loss is the difference between the assets carrying amount and the
present value of estimated future cash flows discounted at the financial assets original contracted
interest rate.
a. Statement I is true
b. Statement II is true

c. Both statements are true

d. Neither statement I nor II is true

18. Under the effective interest method of amortization, the interest income is equal to
a. The state rate of interest multiplied by the face amount of the loan
b. The market rate of interest multiplied by the face amount of the loan
c. The stated rate of interest multiplied by the beginning carrying amount of the loan
d. The market rate of interest multiplied by the beginning carrying amount of the loan
19. Which of the following is the proper balance sheet presentation of receivables?
a. Trade receivables and non-trade receivables should be shown separately.
b. Non-trade receivables should be presented as current assets.
c. Trade accounts receivable and trade notes receivable should be presented separately.
d. Trade receivables and non-trade receivables which are currently collectible should be
presented as one line item as trade and other receivables.
20. Which statement is incorrect concerning the recognition principles?
a. An asset is recognized when it is probable that future economic benefits will flow to the
enterprise and the asset has a cost or value that can be measured reliably.
b. A liability is recognized when it is possible that on outflow of resources embodying
economic benefits will result from the settlement of a present obligation that can be
measured reliably.
c. Income is recognized when an increase in future economic benefits related to an
increase in asset or a decrease in a liability has arisen that can be measured reliably.
d. Expenses are recognized when a decrease in future economic benefits related to a
decrease in asset or an increase in liability has arisen that can be measured reliably.

Test II. Application of Theories and Concepts

21. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of
Deltas customers take advantage of the discount. Delta uses the gross method of recording
sales and trade receivables. An analysis of Deltas trade receivables balances at December 31,
year 2, revealed the following:
Age
0 - 15 days
16 - 30 days
31 - 60 days
Over 60 days

Amount
P100,000
60,000
5,000
2,500
P167,500

Collectible
100%
95%
90%
P500

In its December 31, year 2 balance sheet, what amount should Delta report for allowance for
discounts?
22. Fenn Stores, Inc. had sales of P1,000,000 during December 2014. Experience shown that
merchandise equaling 7% of sales will be returned within thirty days and an additional 3% will be
returned within ninety days. Returned merchandise is readily resalable. In addition, merchandise
equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount
should Fenn report for net sales in its income statement for the month of December 2014?
23. Boy Company sold a machine to Golden Corporation on January 1, 2014, for which the cash
sales price was P379,100. Golden entered into an installment sales contract with Boy, calling for
annual payments of P100,000 for five years, including interest of 10%. The first payment was due
on December 31, 2014. How much interest income should be recorded by Boy in 2015?
24. The Premiere National Bank has a note receivable of P200,000 from the Marvelous Company
that it is carrying at face value and is due on December 31, 2018. Interest on the note payable at
9% each December 31. The Marvelous Company paid the interest due on December 31, 2014,
but informed the bank that it would probably miss the next two years interest payments because
of its financial difficulties. After that, it expected to resume its annual interest payments, but it
would make the principal payment one year late, with interest paid for that additional year at the
time of the principal payments. How much should be recognized as loan impairment loss in
2014? (Round off present value factors to four decimal places).
25. The following data were taken from the records of Ali Corporation for the year ended December
31, 2014:
Sales on account
Notes received to settle accounts
Provision for doubtful accounts
Accounts receivable deemed to be worthless
Purchases on account
Payment to creditors
Discounts allowed by creditors
Merchandise returned by customer
Collections received to settle accounts
Notes given to creditors in settlement of accounts
Merchandise returned to supplies
Payment on notes payable
Discount taken by customers
Collections received in settlement of notes

3,600,000
400,000
90,000
25,000
3,900,000
3,200,000
260,000
15,000
2,450,000
250,000
70,000
100,000
40,000
180,000

What is the amortized cost of accounts receivable on December 31, 2014?

26. Based on the information:

Credit sales
Collections on accounts receivable during the year
Cash sales
Unadjusted balance in Allowance for doubtful accounts
Sales returns and allowance for credit sales
Accounts receivable, beginning of the year

1,720,000
1,700,000
8,100,000
500 debit
40,000
140,000

If bad debts are estimated to be 1 % of ending accounts receivable, in the adjusting entry to
recognize bad debts, you would debit bad debt expense for?
27. On May 9, 2011, Paul Corp. sold merchandise with a list price of P150,000 to Camry account.
Paul allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was
made F.O.B shipping point. Paul prepaid P6,000 of delivery costs for Camry as an
accommodation. What amount should Camry remit to Paul as full payment on May 24, 2011?
Use the problem for questions 28 & 29:
Oops! You Break My Heart Company provided the following transactions affecting accounts receivable
during the year ended December 31, 2015:
Sales (cash and credit)
Cash received from credit customers, all of whom took advantage
of the discount feature of the entity's credit terms 4/10, n/30
Cash received from cash customers
Accounts receivable written off as worthless
Credit memorandum issued to credit customers for sales returns
and allowances
Cash refunds given to cash customers for sales returns and
allowances
Recoveries on accounts receivable written off as uncollectible in
prior periods (not included in cash amount stated above)

5,900,00
0
3,024,00
0
2,100,00
0
50,000
250,000
20,000
80,000

The following balances were taken from the January 1, 2015 statement of financial position:
Accounts receivable
Allowance for bad debts

P900,000
120,000

The entity provided for net uncollectible account losses by crediting allowance for bad debts for 1.75% of
net credit sales for the current period.
28. What is the adjusted balance of accounts receivable on December 31, 2015?
29. What is the balance of allowance for bad debts after adjustment on December 31, 2015?
30. On January 1, 2014, Threepeater Co. equipment costing P380,000 with accumulated
depreciation of P160,000 on the date of sale. Threepeater received as consideration for the sale,

a P400,000 non-interest bearing note, due January 1, 2017. There were no established exchange
price for the equipment and the note had no ready market. The prevailing rate of interest for a
note of this type at January 1, 2014 was 10% and 12% on December 31, 2014. In Threepeaters
2014 income statement, how much should be included for interest income?
31. The following information was included in the bank reconciliation for Ryan, Inc. for June. Assume
all other reconciling items are listed.
Checks and charges recorded by bank in June, including a June
service charge of P600
Service charge made by bank in May and recorded in the books in June
Total of credits to Cash in all journals during June
Customers NSF check returned as a bank charge in June (no
entry made on books)
Customers NSF check returned in May and redeposited in June (no entry
Made on books in either May or June)
Outstanding checks at June 30
Deposit in transit at June 30

P344,200
400
396,040
2,000
5,000
265,200
12,000

What was the total outstanding checks at the beginning of June?

32. The following items were included as cash in the books of Gotch Co.:
Checking account at Security Bank
Checking account at BPI
Checking account at CityTrust used for payment of salaries
Postage stamps
Employees' postdated check
I.O.U from an employee
A check marked "DAIF"
Postal money order
Petty cash fund (P324 in expense receipts)
Certificate of deposit with BPI
A gold ring surrendered as security by a customer who lost his wallet
(at market value)

(1,200)
5,335
5,500
107
2,300
200
1,250
500
500
5,000
1,500

The correct amount that should be reported as cash is

33. Pops Co. established a P3,000 petty cash fund. You found the following items in the fund:
Cash and currency
P1,683.80
Expense vouchers
829.80
Advance to salesman
200.00
IOU from employee
300.00
In the entry to replenish the fund, what amount should be debited to Cash Short or Over?
Bonus Question (5 pts).
Southwestern University was founded, when?

Successful and unsuccessful people do not vary greatly in their abilities. They vary in their desires to
reach their potential.John Maxwell