THEORY OF ACCOUNTS

1. Which of the following is the most likely item to result in a deferred tax asset?
(a) using straight line depreciation for the books and accelerated depreciation for tax
(b) prepayment of insurance
(c) rent received in advance
(d) point of sale revenue recognition for the books and cost recovery method of revenue
recognition for tax C

2. In annuity payments, the amount of interest which is included in each of the equal
periodical payments is:
(a) increasing. (c) equal.
(b) decreasing. (d) not determinable. B

3. An investor purchased a bond as a long-term investment on January 2. The investor’s

carrying value at the end of the first year would be highest if the bonds was purchased at a:
(a) discount and amortized by the straight-line method.
(b) discount and amortized by the effective interest method.
(c) premium and amortized by the straight-line method.
(d) premium and amortized by the effective interest method. D

4. Statement 1 A bond is a contract of debt whereby one party called the investor borrows
funds from another party called the issuer of bonds.

Statement 2 Convertible bonds are bonds issued whereby another party promises to make
payment if the borrower fails to do so.
A B C D
STATEMENT 1 TRUE TRUE FALSE FALSE
STATEMENT 2 TRUE FALSE FALSE TRUE C

5. Statement 1 Discount on bonds payable is treated as outright gain but amortized over the
life of the bonds by charging it to interest expense.

Statement 2 The common practice is to consider bond issue costs as a deferred charge and
therefore classified as other noncurrent asset.
A B C D
STATEMENT 1 TRUE TRUE FALSE FALSE
STATEMENT 2 TRUE FALSE FALSE TRUE D

6. Statement 1 Bonds issued with common stock warrants outstanding should be separated
because two securities are actually sold. It is therefore necessary that the sales price from
the sale of bonds should be allocated between the bonds and the warrants on the basis of
market value.
Statement 2 When convertible bonds are originally issued, the proceeds from the issuance
should be identified with the bonds only. Thus, the convertible bonds should be accounted
for solely as debt. Thus, the difference between the proceeds from issuance and the face
value of the bonds is treated as discount or premium on bonds payable.

A B C D
STATEMENT 1 TRUE TRUE FALSE FALSE
STATEMENT 2 TRUE FALSE FALSE TRUE A

7. Borrowing costs include:

(a) Interest on short-term and long-term borrowings
(b) Amortization of discounts or premiums relating to borrowings
(c) Finance charges in respect of finance leases
(d) Exchange differences arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs
8. Qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale. Examples are the following except:
(a) Manufacturing plants (c) Inventories routinely produced
(c) Power generating facilities (d) Investment property C

9. To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying
asset, the amount of borrowing costs eligible for capitalization on that asset should be
determined as:
(a) the actual borrowing costs incurred on that borrowing during the period only.
(b) the actual borrowing costs incurred on that borrowing during the period less any
investment income on the temporary investment of those borrowings.
(c) the estimated borrowing costs incurred on that borrowing during the period only.
(d) the estimated borrowing costs incurred on that borrowing during the period less any
investment income on the temporary investment of those borrowings. B

10. To the extent that funds are borrowed generally and used for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalization should be
determined by applying a capitalization rate to the expenditures on that asset. The
capitalization rate should be:
(a) equal to the weighted average of the borrowing costs applicable to the borrowings of
the enterprise that are outstanding during the period, other than borrowings made
specifically for the purpose of obtaining a qualifying asset.
(b) computed by including all borrowings of the parent and its subsidiaries when computing
a weighted average of the borrowing costs.
(c) equal to the weighted average of the borrowing costs for each subsidiary applicable to
its own borrowings.
(d) all of the above. D

11. Which of the following statements relating to borrowing cost do not qualify for such
capitalization?
(a) Borrowing costs applicable to the portion of land held for future development.
(b) Borrowing costs incurred while land acquired for building purposes is held with on-going
development activity.
(c) Borrowing costs incurred while land is under development.
(d) All of the statements qualify the borrowing costs for capitalization. A

12. The past service costs in a pension plan:

(a) should be charged to income in the year of the inception of the pension plan.
(b) should be funded in the year of the inception of the pension plan.
(c) represent pension cost assigned to years prior to the current balance sheet date.
(d) represent pension cost assigned to years prior to the inception of the pension plan. D

13. Benefits under a pension plan that are not contingent upon an employee’s continuing
service are:
(a) granted under a plan of defined contribution. (c) actuarially unsound.
(b) based upon terminal funding. (d) vested. D

14. The vested benefits of an employee in a pension plan represent:

(a) benefits to be paid to the retired employee in the current year.
(b) benefits to be paid to the retired employee in the subsequent year.
(c) benefits accumulated in the hands of an independent trustee.
(d) benefits that are not contingent on the employee’s continuing service of the employer. D

15. Interperiod tax allocation is not appropriate when:

(a) contingent loss is recognized for accounting purposes
(b) accelerated depreciation is used for tax purposes and the straight line method is used
for accounting purposes
(c) goodwill is amortized for the period
(d) different depreciable lives are used for machinery for tax and accounting purposes C
16. Which of the following items in a cash drawer at November 30 is not cash?
(a) money orders (c) a customer check dated December 1
(b) coins and currency (d) a customer check dated November 28 C

17. If a financial institution has cash funds in a company, which is in bankruptcy, and the
amount recoverable is estimated to be lower than the face amount, cash should be:
(a) eliminated from the balance sheet.
(b) written down to its discounted or present value.
(c) written down to estimated realizable value.
(d) stated at face amount. C

18. If the deposit is legally restricted as to withdrawal, the compensating balance related to a
long-term long is shown as:
(a) cash (c) long-term investment
(b) other asset (d) current liability C

19. Permanent differences differ from temporary differences in that:

(a) permanent differences occur more frequently than temporary differences
(b) a permanent difference cannot change its status once designated, but a temporary
difference may be reclassified in a later period
(c) permanent differences do not reverse themselves in subsequent periods
(d) permanent differences are both unusual and infrequent C

20. The basis for classifying assets as current or noncurrent is the period of time normally
elapsed from the time the accounting entity expends cash to the time it converts:
(a) inventory back into cash, or 12 months, whichever is shorter.
(b) receivables back into cash, or 12 months, whichever is longer.
(c) tangible fixed assets back into cash, or 12 months, whichever is longer.
(d) inventory back into cash, or 12 months, whichever is longer. D

21. Of the following items, the one which should be classified as current asset is:
(a) trade installment receivables normally collectible in 18 months.
(b) cash designated for the redemption of callable preferred stock.
(c) cash surrender value of a life insurance policy of which the company is beneficiary.
(d) a deposit of machinery ordered, delivery of which will be made within six months. A

22. Ted Company records all sale using the installment method of accounting. Installment sales
contracts call for 36 equal monthly cash payments. The amount of deferred gross profit
relating to collections 12 months beyond the balance sheet date should be reported in the:
(a)current liability section as a deferred revenue.
(b)noncurrent liability section as a deferred revenue.
(c) current asset section as a contra account.
(d)noncurrent asset section as a contra account. C

23. Strict adherence to the entity concept would not allow:

(a) the use of the account form of the balance sheet.
(b) the use of replacement cost as a basis of valuation on the financial statements of
branches.
(c) the capitalization of certain construction costs subsidiary companies.
(d) a parent company to take up in its books its proportionate share in its subsidiary’s
profits and losses. D

24. Which of the following is the primary elements that distinguishes accounting for
corporations from accounting for legal forms of business (such as partnership)?
(a) The entity theory relates primarily to the other forms of business organization.
(b) The corporation draws a sharper distinction in accounting for sources of capital.
(c) In a corporation, retained earnings may be reduced only by the declaration of dividends.
(d) Generally accepted accounting principles apply to corporations but have relatively little
applicability to other forms of business organizations. B
25. The accounting period convention regards the life of the entity as consisting of:
(a) a chain of one-year segments (c) the remaining corporate life of the business
(b) the entire life of the venture (d) the nature life of the owner(s) A

26. This is an assumption by accountants that a business will continue to operate indefinitely
unless specific evidences to the contrary exist, as for example, an impending bankruptcy.
(a) matching principle (c) cost principle
(b) going concern principle (d) objectivity principle B

27. Under the accounting concept of continuity, the accountant does not assume, in preparing
the financial statements, that the:
(a) firm is suffering from large and persistent losses.
(b) firm cannot fulfill existing commitments.
(c) firm operations are soon to be terminated.
(d) all of the above. D

28. A purchased patent has a remaining legal life of 15 years. It should be:
(a) expensed in the year of acquisition.
(b) amortized over 15 years regardless of the useful life.
(c) amortized over its useful life if less than 15 years.
(d) amortized over 20 years. C

29. Protective Company was granted a patent on a product on January 15, 1992. To protect its
patent, the corporation purchased on January 2, 2001 patent on a competing product which
was originally issued on January 10, 1998. Because of its unique plant, Protective Company
does not feel the competing patent can be used in producing a product. The cost of the
competing patent should be:
(a) amortized over a maximum period of 17 years.
(b) amortized over a maximum period of 13 years.
(c) amortized over a maximum period of 8 years.
(d) expensed in 2001 C

30. Which of the following statements concerning patents is correct?

(a) legal cost incurred to successfully defend a patent should be capitalized and amortized
over the patent’s remaining useful life.
(b) legal fees and other direct costs in registering a patent should be capitalized and
amortized over 5 years.
(c) research and development contract services purchased from others and used to develop
a patent should be capitalized and amortized over the patent’s useful life.
(d) research and development costs incurred to develop a patent should be capitalized and
amortized over 17 years. A

31. What is meant by the term “FOB destination” but shipped “freight collect”?
(a) the ownership of goods purchased is vested in the buyer upon receipt and the freight
charge is paid by the seller.
(b) the ownership of goods purchased is vested in the buyer upon receipt and the freight
charge is paid by the buyer.
(c) the ownership of goods purchased is vested in the buyer upon shipment and the freight
charge is paid by the seller.
(d) the ownership of goods purchased is vested in the buyer upon shipment and the freight
charge is paid by the buyer. B

32. Freight and other handling charges on goods out on consignment are part of the cost of
goods consigned. What is its appropriate account title in the income statement prepared by
the consignor?
(a) freight-in (c) transportation out to consignees
(b) freight-out (d) transportation in to consignees C
33. An inventory determined by observation and evidenced by a listing of the actual count,
weight, or measure is called:
(a) continuous inventory. (c) physical inventory.
(b) perpetual inventory. (d) spot check inventory. C

34. A marketable equity security must have a ready market in order to be classified as current
and:
(a) be available to management for use in short run operations.
(b) be traded on a recognized national exchange.
(c) have a current market value in excess of original cost.
(d) have been owned less than one year. A

35. When the market value of a company’s current marketable securities portfolio is lower than
its cost, the difference should be:
(a) accounted for as a liability.
(b) disclosed and described in footnote to the financial statements but not accounted for.
(c) accounted for as a valuation allowance, deducted from the asset to which it relates.
(d) accounted for separately in the shareholders’ equity section of the balance sheet. C

36. A security in a current marketable securities portfolio is transferred to a noncurrent

marketable securities portfolio. The security should be transferred between the
corresponding portfolios at:
(a) the book value at date of transfer if higher than the market value at date of transfer.
(b) the market value at date of transfer, regardless of its cost.
(c) its cost, regardless of the market value at date of transfer.
(d) the lower of its cost or market value at date of transfer. D

37. Dip Company received an P8,000 advance, nonrefundable, bonus payment on a 5-year
operating lease. An acceptable accounting treatment for this lease bonus is:
(a) recognize P8,000 revenue at the end of the lease term
(b) recognize P8,000 revenue when the cash is received
(c) recognize P1,600 revenue at the end of the first year of the lease term
(d) to record an P8,000 deferred charge until the other rental payments are assured C

38. When an investor uses the equity method to account for investments in common stock, the
equity in the earnings of the investee reported on the investor’s income statement will be
affected by which of the following?
Cash dividends from investee Goodwill amortization related to purchase
(a) No Yes
(b) No No
(c) Yes No
(d) Yes Yes A

39. If a bond was sold at 108, the stated rate of interest was:
(a) equal to market rate. (c) higher than market rate.
(b) not related to market rate. (d) lower than market rate. C

40. X Company sold and issued a P100,000, 10% bond at 99. Therefore, the bond:
(a) sold at a discount because the stated interest rate was lower than the market interest
rate.
(b) was sold at a premium because the stated interest rate was higher than the yield rate.
(c) sold at a premium because the P1,000 accrued interest is added to the P100,000 face
amount.
(d) was sold for P100,000 less P1,000 of accrued interest. A
41. Y issued bonds payable with a face amount of P200,000 and a maturity date ten years from
date of issuance. If the bonds were issued at a premium, this indicated that:
(a) the effective and stated rates were the same.
(b) the effective rate of interest exceeded the stated rate.
(c) the stated rate and the market rate were the same.
(d) the stated rate of interest exceeded the effective rate. D

42. DV issued bonds payable and incurred underwriting, registration, and other issue costs,
which amounted to 2% of the maturity value of the bonds. These costs should be:
(a) combined with the discount and reported along with it.
(b) reported as an unusual or infrequent expense.
(c) recorded as expense in the period of sale.
(d) reported as a deferred charge. D

43. How is the premium or discount on bonds purchased as a temporary investment generally
reported on published financial statements?
(a) as an integral part of the cost of the asset acquired (investment) and amortized over a
period of not less than 60 months.
(b) as an integral part of the cost of the asset acquired (investment) until such time as the
investment is sold.
(c) as expense or revenue in the period the bonds are purchased.
(d) as an integral part of the cost of the asset acquired (investment) and amortized over the
period the bonds are expected to be held. B

44. An investor purchased a bond as a long-term investment on January 1. Annual interest was
received on December 31. The investor’s interest income for the year would be lowest if
the bond was purchased at:
(a) a discount. (c) par.
(b) a premium. (d) face value.
B

45. Under a finance lease that includes a bargain purchase option, how is depreciation on the
asset under lease recognized by:
Lessor Lessee
(a) not recognized depreciate over lease term
(b) not recognized depreciate over remaining life
(c) depreciate over remaining life depreciate over remaining life
(d) depreciate over remaining life not recognized B

46. The lessee measures the cost of a leased asset, and the corresponding lease liability of a
finance lease, at the:
(a) fair market value of the leased asset
(b) future value of the periodic rental payments
(c) sum of the annual cash payments to be made during the term of the lease
(d) present value of the periodic rental payments D

47. The depreciation period used by the lessee for a depreciable leased asset must be:
(a) the same period that was used by the lessor
(b) the remaining life of the asset from the lease inception
(c) the term of the lease
(d) at least the term of the lease but possibly longer D

48. Among the following types of finance leases, for the lessor, which likely recognizes the
greatest amount of revenue at inception?
(a) sales type
(b) direct financing
(c) operating
(d) among those in this list, there would be no material difference A
49. Reserves for general contingencies for general or unspecified business risks should:
(a) be accrued on the financial statements and disclosed on the notes thereto
(b) not be accrued on the financial statements but should be disclosed on the notes thereto
(c) not be accrued on the financial statements and need not be disclosed on the notes
thereto
(d) be accrued on the financial statements but need not be disclosed on the notes thereto C

50. Which is not an essential characteristic of an accounting liability?

(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
(c) The settlement of the liability requires an outflow of resources embodying economic
benefits.
(d) The liability is payable to a specifically identified payee. D

51. The principal classifications of liabilities are:

(a) current liabilities and noncurrent liabilities.
(b) current liabilities, noncurrent liabilities and deferred revenue.
(c) current liabilities and deferred revenue.
(d) noncurrent liabilities and deferred revenue. A

52. The cost of an item of property, plant and equipment that is acquired in exchange or part
exchange for a dissimilar item of property, plant and equipment is measured at the:
(a) fair value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(b) fair value of the asset received adjusted by the amount of any cash or cash equivalent
transferred
(c) book value of the asset given up adjusted by the amount of any cash or cash equivalent
transferred
(d) book value of the asset received adjusted by the amount of any cash or cash equivalent
transferred A

53. The cost of an item of property, plant and equipment acquired in a nonmonetary exchange
for a similar asset that has a similar use and similar fair value is measured at the:
(a) carrying amount of the asset given up
(b) fair value of the asset given up
(c) carrying amount of the asset received
(d) fair value of the asset received A

54. Dividends in arrears on cumulative preferred may be shown on a corporate financial

statement as a(an):
(a) footnote (c) increase in current liabilities
(b) increase in stockholders’ equity (d) increase in other liabilities A

55. Watered capital stock occurs when:

(a) shares are issued for assets other than cash (c) liabilities are overstated
(b) shares are sold at a price in excess of book value (d) assets are overstated D

56. A feature that is common to both stock split up and stock dividend is, it will:
(a) result to a reduction in the total capital of a corporation
(b) result to a reduction in the book value per share
(c) result to a transfer from the earned capital to paid in capital
(d) need to be included on a conventional statement of cash flows B
57. Cricket Corporation issued, without consideration, rights allowing stockholders to subscribe
for additional shares at an amount greater than par value but less than both market and
book values. When the rights are exercised, how are the following accounts affected?
Retained earnings APIC Retained earnings APIC
(a) Decreased Not affected (c) Decreased Increased
(b) Not affected Not affected (d) Not affected Increased D

58. A security in a current marketable securities portfolio is transferred to a noncurrent

marketable securities portfolio. The security should be transferred between the
corresponding portfolios at:
(a) the book value at date of transfer if higher than the market value at date of transfer.
(b) the market value at date of transfer, regardless of its cost.
(c) its cost, regardless of the market value at date of transfer.
(d) the lower of its cost or market value at date of transfer. D

59. Cash dividends are usually declared on one date and payable on another subsequent date
to stockholders of record on some other intermediate date. At which of these dates has the
investor-stockholders theoretically realized income from the dividends?
(a) the date the dividend is declared
(b) the date of record
(c) the date the dividend check is mailed by the corporation
(d) the date the dividend check is received by the stockholder A

60. The equity method of accounting for an investment in the common stock of another
company should be used when the investment:
(a) is composed of common stock and it is the investor’s intent to vote the common stock.
(b) ensures a source of supply such as raw materials.
(c) enables the investor to exercise significant influence over the investee.
(d) is obtained by an exchange of stock for stock. C

61. Gains and losses arising from the retirement or disposal of an item of property, plant and
equipment should be determined as the difference between:
(a) gross disposal proceeds and the cost of the asset
(b) gross disposal proceeds and the carrying amount of the asset
(c) net disposal proceeds and the cost of the asset
(d) net disposal proceeds and the carrying amount of the asset D

62. In pledging accounts receivable,

(a) accounts receivable are sold on a conditional basis. Collections may be made by either
party.
(b) a loan is taken on the accounts receivable with a condition that the borrower becomes
liable for the replacements of the loan if the customers fail to pay their accounts. The
lender and borrower can collect from the customer.
(c) accounts receivable are transferred to the buyer on a conditional basis. It may be with
recourse or without recourse.
(d) accounts receivable are set aside as collateral for a loan. Collections are made by the
borrower and receipts from such collections are normally used to pay the loan. D

63. The equity in assigned accounts receivable account is classified on the balance sheet as:
(a) asset (c) liability
(b) contra-asset (d) disclosure D

64. What is the proper balance sheet presentation of receivables?

(a) trade receivables and nontrade receivables should be shown separately
(b) nontrade receivables should be presented as noncurrent assets
(c) trade accounts receivable and trade notes receivable should be presented separately
(d) trade receivables and nontrade receivables, which are currently collectible, should be
presented as one line item called trade and other receivables D
65. How should a gain from the sale of used equipment for cash be reported in a cash flow
statement using the indirect method?
(a) in investment activities as a reduction of the cash inflow from the sale
(b) in investment activities as a cash outflow
(c) in operating activities as a deduction from income
(d) in operating activities as a addition to income C

66. In a cash flow statement, which of the following items is reported as a cash flow from
financing activities?
I. Payments to retire mortgage notes
II. Interest payments on mortgage notes
III. Dividend payments
(a) I, II and III (c) I only
(b) II and III (d) I and III D

67. In a cash flow statement, if used equipment is sold at a gain, the amount shown as a cash
flow from investing activities equals the carrying amount of the equipment:
(a) plus the gain.
(b) plus the gain and less the amount of tax attributable to the gain.
(c) plus both the gain and the amount of tax attributable to the gain.
(d) with no addition or subtraction. A

68. Choose the correct statement.

(a) Financial accounting is a social science and cannot be influenced by changes in legal,
political, business and social environments.
(b) Financial accounting is an information system designed to provide information primarily
to internal users.
(c) General-purpose financial statements must be prepared by a certified public accountant.
(d) The preparation of general purpose financial statements is usually based on the
assumption that the primary users of the information are external decision makers. D

69. Which of the following statements is false?

(a) Financial reporting should provide information which is relevant to investment, credit
and public policy decisions.
(b) Generally speaking, GAAP are those accounting principles with substantial authoritative
support.
(c) GAAP are established to ensure the relevancy of the general-purpose financial
statements to the widespread uses of the information by external decision makers.
(d) Once established, GAAP should never be changed. D

70. Which of the following statements is true?

(a) Managers of an entity are considered to be internal decision makers.
(b) External decision makers can obtain whatever financial data they need whatever they
need it.
(c) Accounting information is prepared for and useful to only outside decision makers.
(d) The members of the Board of Directors are not “external users” of financial information,
but are “internal users” only. A

71. Choose the incorrect statement.

(a) The objective of external financial statements is to communicate the economic effects of
completed transactions and other events in the entity.
(b) General purpose financial statements were developed primarily because all outside users
have the same information needs.
(c) The double entry system of accounting has been used for centuries.
(d) The practice of accounting requires considerable professional judgment. B

72. Choose the incorrect statement.

 (a) Disclosure notes facilitate the evaluation of enterprise position and performance because
they include information which helps to explain the quality of earnings.
(b) Disclosure notes are an integral part of the financial statements.
(c) Companies often look for opportunities to smooth earnings.
(d) Accounting concepts, principles and standards are just as broad and general today as
they were sixty years ago. D

73. Which of the following is the incorrect statement?

(a) Theory can be defined as a coherent set of hypothetical, conceptual, and pragmatic
principles forming a general frame of reference for a field of inquiry.
(b) Accounting theory has developed primarily in response to government regulations.
(c) Concepts are components of theory.
(d) Accounting concepts are human made. B

74. Choose the incorrect statement.

(a) An accounting information system is designed to collect data about each transaction and
event that should be recorded by an entity during a reporting year.
(b) Posting is a transfer process which reclassifies chronological information into account
classification format in the ledger.
(c) In recording transactions, an external transaction is more likely to be overlooked and
not recorded than is an internal transaction.
(d) A trial balance is prepared after adjusting entries are recorded but before closing
entries. C

75. What is the proper treatment for an increase in short-term notes receivable when preparing
the statement of cash flows?
(a) it is not included at all since it does not represent a change in cash
(b) it is included as a positive adjustment to net income
(c) it is not included in cash flow from operating activities
(d) it is included as a negative adjustment to net income D

76. How should a gain from the sale of used equipment for cash be reported in a cash flow
statement using the indirect method?
(a) in investment activities as a reduction of the cash inflow from the sale
(b) in investment activities as a cash outflow
(c) in operating activities as a deduction from income
(d) in operating activities as a addition to income C

77. A company using a periodic inventory system 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 assets, liabilities, stockholders’ equity at year
end and net earnings for the year?
Stockholders’ Net
Assets Liabilities Equity Earnings
(a) No effect Understate Overstate Overstate
(b) No effect Overstate Understate Understate
(c) UnderstateUnderstate No effect No effect
(d) UnderstateNo effect Understate Understate C

78. At the end of 2001, Rich Company failed to accrue sales commissions during 2001 but paid
in 2002. The error was not repeated in 2002. What was the effect of this error on 2001
ending working and on 2002 ending retained earnings balance?
2001 ending 2002 ending
working capital retained earnings
(a) Overstated Overstated
(b) No effect Overstated
 (c) No effect No effect
(d) Overstated No effect D

79. Net income is understated if, in the first year, estimated salvage value is excluded from the
depreciation computation when using the:
Straight line Production
(a) Yes No
(b) Yes Yes
(c) No No
(d) No Yes B

80. On December 31, 2001, Deal Company failed to accrue the December 2001 sales salaries
that were payable on January 6, 2002. What is the effect of the failure to accrue sales
salaries on working capital and cash flows from operating activities in Deal’s 2001 financial
statement?
Cash flows from
Working capital operating activities
(a) Overstated No effect
(b) Overstated Overstated
(c) No effect Overstated
(d) No effect No effect A

81. The basic principles of interim financial reporting includes the following, except one:
(a) Inventory losses from permanent declines are recognized in the interim periods in which
the declines occur.
(b) Expenses not associated directly with revenue are recognized with revenue are
recognized in interim periods as incurred or allocated over the interim periods benefited.
(c) Gains or losses from ordinary disposals of property, gains or losses from discontinuing
operation and extraordinary gains or losses should be allocated over the interim periods.
(d) Revenues from products sold or services rendered are generally recognized for interim
reports on the same basis as for the annual period. C

82. For interim financial reporting, an inventory loss from a temporary market decline in the first
quarter which can be reasonably be expected to be restored in the fourth quarter:
(a) should be recognized as loss proportionately over four quarters.
(b) should be recognized as loss in the first quarter.
(c) should be recognized as loss in the fourth quarter.
(d) need not be recognized as loss in the first quarter. D

83. It is the disclosure or reporting of certain financial information by business segments and
geographical segments.
(a) interim reporting (c) annual reporting
(b) segment reporting (d) not given B

84. It is a distinguishable component of an enterprise that is engaged in providing products or

services within a particular economic environment and that it is subject to risks and rewards
that are different from those of other geographical segments.
(a) segment (c) geographical segment
(b) business segment (d) reportable segment C

85. A sale of goods was denominated in a currency other than the entity’s functional currency.
The sale resulted in a receivable that was fixed in terms of the amount of foreign currency
that would be received. Exchange rates between the functional currency and the currency
in which the transaction was denominated changed so that a loss was incurred. This loss
should be included as a:
(a) translation loss reported as a component of income from continuing operations
(b) translation loss reported as a separate component of stockholders’ equity
(c) transaction loss reported as a component of income from continuing operations
(d) transaction loss reported as a separate component of stockholders’ equity C
86. A December 15, 2002 purchase of goods was denominated in a currency other than the
entity’s functional currency. The transaction resulted in a payable that was fixed in terms of
the amount of foreign currency, and was paid on the settlement date, January 20, 2003.
The exchange rates between the functional currency and the currency in which the
transaction was denominated changed at December 31, 2002, resulting in a loss that
should:
(a) not be reported until January 20, 2002, the settlement date
(b) be included as a separate component of stockholders’ equity at December 31, 2002
(c) be included as a deferred charge at December 31, 2002
(d) be included as a component of income from continuing operations for 2002 D

87. Cream Company contracted to purchase foreign goods. Payment in foreign currency was
due one month after the goods was received at Cream’s warehouse. Between the receipt of
goods and the time of payment, the exchange rates changed in Cream’s favor. The
resulting gain should be included in Cream’s financial statements as:
(a) component of income from continuing operations
(b) extraordinary item
(c) deferred credit
(d) separate component of stockholders’ equity A

88. A December 15, 2002 purchase of goods was denominated in a currency other than the
entity’s functional currency. The transaction resulted in a payable that was fixed in terms of
the amount of foreign currency, and was paid on the settlement date, January 20, 2003.
The exchange rates between the functional currency and the currency in which the
transaction was denominated changed between the transaction date and December 31,
2002, and again between December 31, 2002, and January 20, 2003. Both exchange rate
changes resulted in gains. The amount of the gain that should be include in the 2003
financial statements would be:
(a) the gain from December 31, 2002 to January 20, 2003
(b) the gain from December 15, 2002 to January 20, 2003
(c) the gain from December 15, 2002 to December 31, 2002
(d) zero A

89. A balance arising from the translation (foreign entity) or remeasurement (foreign
operations) of a subsidiary’s foreign currency financial statements is reported in the
consolidated income statement when the subsidiary’s functional currency is the:
(Foreign entity) Philippine peso
Foreign currency (foreign operation)
(a) No No
(b) No Yes
(c) Yes No
(d) Yes Yes B

90. The sum of income tax obligation and deferred tax expense (or benefit).
(a) income tax obligation (or refund) (c) deferred tax consequences
(b) taxable temporary difference (d) income tax expense (or benefit) D

91. The excess of taxable revenues over tax deductible expenses and exemptions for the year.
(a) taxable income (c) deferred tax asset
(b) taxable temporary difference (d) valuation allowance A

92. The future effects on income taxes, as measured by the applicable enacted tax rate and
provisions of the enacted tax law, resulting from temporary differences and operating loss
carryforwards at the end of the current year.
(a) deferred tax expense (c) deferred tax liability
(b) deferred tax consequences (d) deferred tax asset B

93. Which statement is false?

 (a) Future enacted tax rate changes are recognized under the “asset and liability” method
(SFAS/ IAS 12).
(b) Income tax payable (or the income tax liability for the period) should be computed
based upon information on the income tax return.
(c) Per SFAS/ IAS 12, income tax expense is the sum of income tax payable and the
changes in the deferred income tax and any tax valuation accounts.
(d) Temporary differences very seldom reverse (i.e. turnaround) in one or more future
accounting periods. D

94. If a company constructs a laboratory building to be used as a research and development

activity, the cost of the laboratory building is matched against earnings as:
(a) research and development expense in the period of construction.
(b) depreciation deducted as part of research and development cost.
(c) depreciation or immediate writeoff depending on company policy.
(d) an expense at such time as productive research has been obtained from the facility. B

95. A research and development activity for which the cost would be expensed as incurred is:
(a) modification of the design of a product or conceptual formulation and design of a
possible product alternative.
(b) trouble shooting in connection with breakdowns during commercial production.
(c) routine design of tools.
(d) engineering, follow-through in an early phase of commercial production. A

96. Protective Company was granted a patent on a product on January 15, 1992. To protect its
patent, the corporation purchased on January 2, 2001 patent on a competing product which
was originally issued on January 10, 1998. Because of its unique plant, Protective Company
does not feel the competing patent can be used in producing a product. The cost of the
competing patent should be:
(a) amortized over a maximum period of 17 years.
(b) amortized over a maximum period of 13 years.
(c) amortized over a maximum period of 8 years.
(d) expensed in 2001 C

97. In a period of rising prices, the use of which of the following inventory cost flow methods
would result in the highest cost of goods sold?
(a) FIFO (c) Weighted average cost
(b) LIFO (d) Moving average cost B

98. When the beginning inventory is understated, then:

(a) the cost of goods sold is understated and the profit is overstated.
(b) the cost of goods sold is overstated and the profit is overstated.
(c) the cost of goods sold is overstated and the profit is understated.
(d) the cost of goods sold is understated and the profit is understated. A

99. The retail inventory is based on the assumption that:

(a) the final inventory and the total of goods available for sale contain the same proportion
of high-cost and low-cost goods.
(b) the ratio of gross margin to sales is approximately the same each period.
(c) the ratio of cost to retail price changes at a constant rate.
(d) the proportions of markups and markdowns to selling price are the same. A

100. How is an increase in the number of shares as a result of a stock split recorded?
(a) The transaction may be recorded by a memorandum notation in the general journal.
(b) The transaction may be recorded by a memorandum notation in the common stock
account
 (c) The transaction may be recorded by a memorandum notation in the general journal and
in the common stock account.
(d) There will be a transfer from the retained earnings account to the common stock
account, the amount of which is equal to the par value of the new number of shares
resulting from the stock split. C

PRACTICAL ACCOUNTING 1

1. A corporation’s accounting records provided the following information (in 000’s):

Balances
Account 12/31/2001 12/31/2002
Current assets P 240 P ?
Property, plant and equipment 1,600 1,500
Current liabilities ? 130
Non-current liabilities 580 ?
Working capital of P92 remained unchanged from year 2001 to 2002. (Working capital is
current assets less current liabilities). Net income in year 2002 was P88. No dividends were
declared during year 2002 and there were no other changes in owners’ equity. Total long-
term liabilities at the end of year 2002 would be:
(a) P568 (b) P616 (c) P480 (d) P392 D

2. A corporation prepared financial statements each December 31. On December 31, year
2002, a P2,500 decrease in cash is reported on the statement of cash flows. If the cash
account had a balance of P12,500 at December 31, year 2002, the cash account balance at
December 31, year 2001 was:
(a) P10,000 (b) P12,500 (c) P15,000 (d) P0 C

3. S Company has the following partial bank reconciliation shown below.

Balance per bank P50,000 Balance per books P51,240
Deposit in transit 10,000 Interest earned ?
Checks outstanding 8,600 Service charge 20
NSF check 100
Adjusted balance P51,400 Adjusted balance ?
Assuming a combination entry, when the adjusting journal entry is made to record the
preceding bank reconciliation, cash should be debited for:
(a) P 0 (b) P160 (c) P120 (d) P280 B

4. F Company held the following trading securities at the end of the current reporting period:
Security Cost Market
J P60,000 P55,200
K 7,000 8,000
L 20,800 19,200
What amount should the company report on its balance sheet for net trading securities:
(a) P88,400 (b) P82,400 (c) P80,400 (d) P82,000 B

5. A company held the following short-term investments in equity securities for sale at the end
of 2002 and 2003 :
2002 2003
Security Cost Market Cost Market
M P 80,000 P 78,000 P 80,000 Sold
N 124,000 126,000 124,000 P128,000
 O 156,000 154,000 156,000 158,000
Security M was sold July 1, 2003 for P84,000. What is the realized gain or loss on July 1,
2003?
(a) P2,000 (b) P8,000 (c) P4,000 (d) P6,000 C

6. The following data relates to construction started at the beginning of the current year and
completed at the end of the year. The firm had only two interest bearing liabilities during
the year, and these were outstanding the entire year.
Average accumulated expenditures P50,000
Ending balance in construction in progress
before capitalization of interest 82,000
5% debt incurred specifically for the project 30,000
8% long-term note 90,000
Using the weighted average method, what amount of interest should be capitalized for the
current year?
(a) P6,460 (b) P3,100 (c) P5,945 (d) P3,625 D

7. A machine was purchased at an invoice price of P300,000, subject to a 2% cash discount if

paid within 10 days. Installation of the machine cost P5,000. Costs incurred in testing the
machine were P800 for the operator’s time and P1,500 for materials. The discount was lost
because of late payment of the invoice. Sales tax on invoice price, 4 percent, and
depreciation during the testing period, P2,000. The cost that should be recorded for the
machine is:
(a) P306,000 (b) P311,000 (c) P313,300 (d) P315,300 C

For items 8 and 9:

These two transactions pertain to Josh Company:
a. On January 1, 2003, a heavy-duty truck was purchased with a list price of P35,500.
Payment included P5,500 cash and a two-year non-interest bearing note of P30,000
(maturity date, December 31, 2004). A realistic interest rate for this level of risk is
12 percent. The accounting period ends December 31.
b. On January 1, 2003, a small truck was purchased and payment was made as
follows: cash, P5,000, and a one-year, 6 percent, interest-bearing note of P15,000,
maturity date December 31, 2003 (which also is the end of the accounting period).
A realistic interest rate for this level of risk is 12 percent.

8. How much is the total cost of the two trucks upon purchase on January 1, 2003?
(a) P55,500 (b) P49,416 (c) P38,916 (d) P48,612 D

9. How much is the total interest expense for 2003?

(a) P4,670 (b) P1,800 (d) P6,084 (d) P4,574 D

10. Dely Company is offering one toy shovel for 15 box tops of its cereal. Year-to-date sales
have been off, and it is hoped that this offer will stimulate demand. Each shovel set costs
the company P3. The following data are available for the last three months of 2003:
Shovel sets Box tops
Boxes of purchased by redeemed by
Month cereal sold the company customers
October 21,000 880 12,000
November 24,000 1,083 16,005
December 33,000 1,697 20,745
It is estimated that only 70% of the box tops will be redeemed. The cereal sells for P2.50
per box. How much is the inventory of shovel sets at December 31, 2003?
(a) P 0 (b) P942 (c) P 1,230 (d) P1,980 C

11. Adverse financial and operating circumstances warrant that Solid Company undergo a quasi-
reorganization at December 31, 2002. The following information may be relevant in
accounting for the quasi-reorganization.
a. Inventory with a cost of P2,150,000 is currently recorded in the accounts at its market
value of P2,000,000.
 b. Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000 net of
accumulated depreciation.
c. A creditor agrees to extend the maturity date of a loan for five years, although interest
as originally stated must continue to be paid.
d. Individual stockholders contribute P5,000,000 to create additional paid-in capital to
facilitate the reorganization. No new shares of stock are issued, although control of a
majority of the company’s outstanding stock passes to the company’s creditors.
e. The par value of the common stock is reduced from P25 to P15.
Immediately before those events, the stockholders’ equity section appears as follows:
Common stock (P25 par value, 100,000 shares
authorized and outstanding) 2,500,000
Additional paid in capital 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000

After the quasi-organization, the additional paid in capital should have a balance of:
(a) 3,250,000 (b) 3,100,000 (c) 4,750,000 (d) 7,750,000 A

12. On January 1, 2002, ABC Company offered its chief executive officers, stock appreciation
rights with the following terms:
Predetermined price P100 per share
Number of shares 10,000 shares
Service period – 3 years 2002, 2003 and 2004
Exercise date December 31, 2004
The stock appreciation rights are exercised on December 31, 2004. The quoted price of the
ABC stock is as follows: P118 on December 31, 2002, P112 on December 31, 2004, and
P124 on December 31, 2004. ABC Company should record 2004 compensation expense at:
(a) P160,000 (b) P60,000 (c) P80,000 (d) P20,000 A

13. The following accounts are taken from the ledger of Angel Eyes Company for the year 2002:
Retained Earnings Appropriated for Contingencies
Debit Credit
Jan. 1 Balance 100,000
Dec. 31 50,000
Retained Earnings Appropriated for Treasury Stock
July 1 30,000 Jan. 1 Balance 70,000
April 1 20,000
Unappropriated Retained Earnings
April 1 Appropriated for Jan. 1 Balance 500,000
purchase of July 1 Treasury stock
treasury stock 20,000 reissuance 30,000
Oct. 31Preferred div. 50,000 Dec. 31 Net income 200,000
31 Stock dividend
on common
stock 100,000
Dec. 31 Appropriated
for conting. 50,000
How much is the retained earnings for the year ended December 31, 2002?
(a) P250,000 (b) P510,000 (c) P610,000 (d) P720,000 D

14. On June 30, 2002, Miller Company purchased 30% of the outstanding common stock of Rex
Company for P15,000,000. At that time, Rex Company’s net assets amounted to
P40,000,000. The level of investment is sufficient to provide Miller significant influence over
 the activities of Rex. The difference between the purchase price and the underlying book
value of Rex’s net asses is due to the following:
1. Land is undervalued of P2,000,000.
2. Depreciable assets with a 10-year remaining life are worth P3,000,000 more than the
book value.
3. Goodwill is determined to exist for any remaining difference between cost and book
value. Goodwill is estimated to have a useful life of 15 years from the date of the stock
purchase.
Rex Company reported net income of P20,000,000 for the year 2002 and paid cash
dividends of P5,000,000 on December 31, 2002. What amount should be reported by Miller
Company as investment in Rex Company on December 31, 2002?
(a) P16,405,000 (b) P16,500,000 (c) P16,310,000 (d) P16,400,000 A

15. Alberto Ramos has the following transactions in the stock of Marinduque Mining Company:
a. On January 7, 1991, Ramos purchased 200 shares of P100 par value common stock at
P110 per share.
b. The company was expanding and, as of March 4, 1992, issued to Ramos 200 rights,
each of which will permit him to purchase one-fourth share of common stock at par. The
bid price of the stock on March 1, 1992 was P140. There was no quoted price for the
rights.
c. Ramos was advised that he would “loss out on his other stock if he did not pay in the
money for the rights.” He, therefore, paid for the new shares on April 1, 1992, charging
the payment to his investment account. Since he felt that he had been assessed by the
company, he credited the dividends (10% in December of each year) to the investment
account until the debit was fully offset.
d. On December 24, 1996, Ramos received a 50% stock dividend from the company. He
made no entry for this dividend because he expected to sell the shares received. He did
sell them on January 5, 1997 for P160 per share. He credited income with the proceeds.
e. On December 9,1997, the stock was split on a 2 for 1 basis and the new shares were
issued as no par shares. Ramos found that each new share was worth P5 more than the
P110 per share which he had paid for his original stock, so he debited investment with
the additional shares received at P110 per share and credited income.
f. On June 10,1998, Ramos sold one-half of his stock at P92 per share. He credited the
proceeds to the investment account.
How much is the balance of the investment after the sale on June 30, 1998? (Assume the
use of the weighted average cost)
(a) P5,000 (b) P9,000 (c) P18,000 (d) P22,000 B

For items 16 and 17:

Noble Corporation is in the process of negotiating a loan for expansion purposes. The
books and records have never been audited and the bank has requested that an audit be
performed.
During the course of the audit, the following facts were determined:
(a) An analysis of collections and losses on accounts receivable during the past two years
indicates a drop in anticipated losses due to bad debts. After consultation with
management, it was agreed that the loss experience rate on sales should be reduced
from the recorded 2% to 1% beginning with the year ended December 31, 2002. The
sales for 2001 and 2002 are P900,000 and P1,000,000 respectively.
(b) An analysis of marketable securities revealed that this investment portfolio consisted
entirely of short-term investments in marketable equity securities that were acquired in
2001. The total market valuation and cost for these investments as of the end of each
year were as follows:
Cost Market
 December 31, 2001 78,000 81,000
December 31, 2002 78,000 62,000
(c) The merchandise inventory at December 31, 2001 was overstated by P4,000 and the
merchandise inventory at December 31, 2002 was overstated by P6,100.
(d) On January 2, 2001, equipment costing P12,000 (estimated life of 10 years and residual
value of P1,000) was incorrectly charged to operating expenses. Noble records
depreciation on the straight line method.
In 2002, fully depreciated equipment (with no residual value) that originally cost
P17,500 was sold as scrap for P2,500. Noble credited the proceeds of P2,500 to
property, plant and equipment.
(e) An analysis of 2001 operating expenses revealed that Noble charged to expense a three-
year insurance premium of P2,700 on January 15, 2001.
(f) The common stock account on December 31, 2002 shows a balance of P260,000. It
was found out that the authorized common stock consists of 50,000 shares with par
value of P10 per share, of which 20,000 shares are issued and outstanding.
(g) Unadjusted balances of net income per book as of 2001 and 2002 are P195,000 and
P220,000, respectively.

16. How much is the corrected net income for 2001?

(a) P203,700 (b) P184,100 (c) P212,400 (d) P203,500 A

17. How much is the corrected net income for 2002?

(a) P203,700 (b) P184,100 (c) P212,400 (d) P203,500 C

18. Free Company is a large merchandising firm engaged in the retail sales of widgets. Its sole
supplier at the present time is Might Company. Might’s list price to retailers is P20 per
dozen widgets. However, discounts may be offered on the following bulk purchases:
Quantity purchased Percent of Discount
Below 10 dozens 0%
10 to 20 dozens 8%
21 to 30 dozens 10%
Over 30 dozens 15%
During July, Free purchased 30 dozen widgets from Might with terms of 5/10, n/30. How
much is the sales discount that Free should recognize if collection is made by Might within
the discount period?
(a) none (b) P27 (c) P60 (d) P87 A

19. Brown Corporation, a calendar-year taxpayer, was organized and actively began operations
on January 2, 2003 and incurred the following costs:
Legal fees to obtain corporate charter P40,000
Commission paid to underwriter 25,000
Other stock issue costs 10,000
Brown wishes to amortize its organizational costs over the shortest period allowed for tax
purposes. In 2003, what amount should Brown deduct for the amortization of
organizational expenses?
(a) P8,000 (b) P7,500 (c) P5,000 (d) P4,000 A

20. In December 2002, West Company exchanged an old packing machine, which cost
P120,000 and was 50% depreciated, for a similar used machine and paid a cash difference
of P16,000. The market value of the old packaging machine was determined to be P70,000.
For the year ended December 31, 2002, what amount of gain should West recognize on this
exchange?
(a) P 0 (b) P16,000 (c) P50,000 (d) P10,000 A

21. Elf Company prepared the following reconciliations of its pretax financial statement income
to taxable income for the year ended December 31, 2000, its first year of operations:
Pretax financial income P1,600,000
 Nontaxable interest received ( 50,000)
Long-term loss accrual in excess of
deductible amount 100,000
Depreciation in excess of financial
statement income ( 250,000)
Taxable income P1,400,000
Assume the income tax is 32%, what amount should Elf report as income tax expense –
current portion of its 2000 income statement?
(a) P416,000 (b) P448,000 (c) P496,000 (d) P512,000 B

22. Case Company is determining the amount of its pretax financial income for 2002 by making
adjustment to taxable income from the company’s 2002 income tax return. The tax return
indicates taxable income of P380,000, on which a tax liability of P121,600 has been
recognized (P380,000 x 32% = P121,600). Following is a list of items that may be required
to determine pretax financial income from the amount of taxable income:
a. Accelerated depreciation for income tax purposes was P134,000; straight line
depreciation on these assets is P80,000.

b. Goodwill amortization of P45,000 was not included as a deduction in the tax return, but
may be deducted in the income statement.
c. Several expenses were included in the income tax return on an estimated basis. These
items will be in the income statement at the same amount but are subject to change if
new information in the future indicates that the original estimates were inaccurate.
d. Interest on treasury bills was not included in the tax return. During the year, P24,700
was received on theses investments.
Case’s pretax financial income amounts to:
(a) P458,700 (b) P389,000 (c) P359,700 (d) P413,700 D

23. Style Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditors to relieve its financial stress. Style has a P2,500,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Style Company in the
form of 200,000 shares of common stock valued at P12 per share. The par value of
common is P10 per share. How much is the gain from the debt restructuring?
(a) P500,000 (b) P100,000 (c) P400,000 (d) P 0 D

24. The following data were obtained from the actuarial valuation reports of Sight Company on
January 1, 2002:
Actuarial accrued liability P5,000,000
Actuarial value of plan assets 4,600,000
Current service cost for 2002 500,000
Experience adjustment gain 300,000
Contribution to the plan in 2002 450,000
Interest on unfunded actuarial liability 10%
Remaining working lives of employees 15 years
What is the retirement benefits expense for the year ended December 31, 2002?
(a) P450,000 (b) P520,000 (c) P700,000 (d) P480,000 B

25. Webb Company implemented a defined benefit plan for its employees on January 1, 2002.
During 2002 and 2003, Webb’s contributions fully funded the plan. The following data are
provided for 2004 and 2005:
2005 estimated 2004 actual
Projected benefit obligation, 12/31 P7,500,000 P7,000,000
Accumulated benefit obligation, 12/31 5,200,000 5,000,000
Plan assets at fair value 6,750,000 6,000,000
Projected benefit obligation
in excess of plan assets 750,000 1,000,000
 Retirement benefit expense 900,000 800,000
Employer’s contribution ? 500,000

What amount should Webb Company contribute in order to report an accrued liability for
retirement benefit cost of P200,000 in its December 31, 2005 balance sheet?
(a) P1,000,000 (b) P700,000 (c) P600,000 (d) P500,000 A

26. Paradise Co. purchased two lots of Enrich Company stock, as follows:
Shares Cost per share
1991 100 P120
1992 120 150
In 1993, a 25% stock dividend was received. Because Paradise needed cash, it sold at
P130 per share all the 55 shares received as stock dividend. The gain realized on the
shares sold, on the first-in, first-out basis, was:
(a) P1,150 (b) P1,870 (c) P7,150 (d) 2,450 B

For items 27 and 28:

The Metro Company acquired stock of North Star Company, as follows:

Shares Cost
1991 100 P11,000
1992 150 18,000
In 1993, Metro Company received 250 rights to buy North Star stock at par (P100). Five
rights are required to buy one new share. At issue date, market values were: stock ex-
rights, P120, and rights, P5 each. One hundred fifty rights were exercised, the remaining
rights were sold later at P5 each.

27. Using the FIFO basis, the cost of the new shares acquired through the exercise of rights
was:
(a) P3,000 (b) P3,680 (c) P4,160 (d) P4,320 B

28. The sales of the remaining rights resulted in:

(a) No gain nor loss (b) P20 gain (c) P42 loss (d) P35 gain B

For items 29 and 30:

Bagong Sikat had the following investment transactions in the capital stock of Masaya, Inc.:

Jan.5 Bought 400 common shares, par P100, at P88 per share.
June 15 Received 10% stock dividend.
Aug 31 Received P4 cash dividend for each share of stock.
Oct. 10 Received stock rights to buy one new share at P135 for every 5 shares held.
Market value of right, P4; market value of stock ex-right, P156.

29. The unit cost of the stock after the stock dividend on June 15 is:
(a) P 75 (b) P 85 (c) P 90 (d) P 80 D

30. After receipt of the stock rights on October 10, the unit cost per share is:
(a) P 78 (b) P 80.50 (c) P 82 (d) P 81.50 A
31. On April 1, 2002, Mighty Company established an imprest petty cash fund for P10,000 by
writing a check drawn against its general checking account. On April 30, the fund contained
the following:
Currency and coins P3,000
Receipts for office supplies 4,000
Receipts for postage (still unused) 2,000
Receipts for transportation 600
On April 25, the company wrote a check to replenish the fund. What is the amount of
overage?
(a) none (b) P600 (c) P400 (d) P200 A

32. A manufacturing company has a total raw materials purchases of P3,500,000 during its first
year of operations of which only 45% were unused at the end of the year. What is the
factory cost if prime cost is P2,505,500 and conversion cost of P1,403,100?
(a) P2,978,100 (b) P3,328,100 (c) P3,905,600 (d)P4,080,500 B

33. A’s Jewelers made only two purchases during the period:
a. P14,000 from S’s Jewels, purchased on 2/10, terms FOB shipping point; total
freight P169.
b. P16,500 from X, Inc., purchased on 2/21/, terms FOB destination; total freight,
P115.

In addition, A’s Jewelers made two sales during the period:

a. P15,000 sold to Frank on 2/18, terms FOB shipping point; total freight P98.
b. P15,500 sold to Heist on 2/27, terms FOB destination; total freight, P195.
What is the total freight charges to expenses for the period?
(a) P169 (b) P284 (c) P364 (d) cannot be determined C

34. K Company is considering to buy the Tyr Clothing Company and assembles the following
information relative to the company being acquired on December 31, 2003:
Per Book Adjusted
Assets P6,108,000 P5,700,000
Goodwill 960,000 960,000
P7,068,000 P6,660,000
Liabilities P2,625,000 P2,625,000
Common stock 2,300,000 2,300,000
Retained earnings 2,143,000 1,735,000
P7,068,000 P6,660,000
Retained earnings – 1/1/2001 P1,833,000 P1,519,000
Add: Net income for 2001,
2002 and 2003 1,534,000 1,440,000
Total P3,367,000 P2,959,000
Less: Dividends 1,224,000 1,224,000
Retained earnings – 12/31/2001 P2,143,000 P1,735,000
The average earnings in excess of the normal rate of 10% are capitalized at 15% in
determining goodwill. What is the amount of goodwill?
(a) P1,150,000 (b) P510,000 (c) P172,500 (d) P3,200,000 A

For items 35 to 36:

Lift Company started investing its surplus cash during 2003 and the entries relating thereto
were recorded under the investment account. The ledger details were reproduced below:
Particulars Date Ref. Debit Credit
Balance
Investment in Live – 500 shares 2/14 CV P120,000 P - P120,000
 Investment in Life – 600 shares 2/20 CV 150,000 - 270,000
Cash dividend – Live 2/28 CR - 10,000 260,000
Sale of Life – 200 shares 3/1 CR - 45,000 215,000
Receipt of Live stock dividend –
offsetting credit to retained earnings4/30 JV 11,000 - 226,000
Sale of Live – 400 shares 9/15 CR - 98,000 128,000
Sale of Live – 100 shares 10/12 CR - 23,000 105,000
Cash dividend – Live 10/25 CR - 4,500 100,500
From the stock exchange, the Live dividends were analyzed as follows:
Dates
Kind Declared Record Payment Rate
Cash 1/15 2/15 2/28 P20 per share
Stock 4/1 4/20 4/30 10%
Cash 9/1 9/30 10/10 P30 per share

35. How much is the dividend income?

(a) P10,000 (b) P16,500 (c) P26,500 (d) P14,500 B

36. How much is the adjusted balance of the investment account?

(a) P110,000 (b) P120,000 (c) P117,000 (d) P127,000 A

37. How much is the gain or loss on the sale of 200 shares of Life equity shares?
(a) P5,000 (b) (P5,000) (c) P3,000 (d) (P3,000) B

38. How much is the gain or loss on the sale of 100 shares of Live equity shares?
(a) P3,000 (b) (P3,000) (c) P1,182 (d) (P1,182) A

39. How much is the gain or loss on the sale of 400 shares of Live equity shares?
(a) P18,000 (b) (P18,000) (c) P6,000 (d) (P6,000) C

40. R Corp.’s income statement for the year ended December 31, 2002 shows the following:
Income before income tax and extraordinary item P1,260,000
Gain on life insurance coverage – included 140,000
Extraordinary item – loss due to earthquake damage 420,000
R’s tax rate for 2002 is 32%. How much should be reported as the provision for income tax
in R’s 2002 income statement?
(a) P224,000 (b) P268,800 (c) P358,400 (d) P403,200 C

41. Unity Corp. prepared the following reconciliation between pretax accounting income and
taxable income for the year ended December 31, 2002:
Pretax accounting income P1,500,000
Taxable income ( 900,000)
Difference P 600,000
Analysis of difference:
Interest on money market funds P 150,000
Excess of tax depreciation over book
depreciation 450,000
P 600,000
Unity’s effective income tax rate for 2002 is 32%. The depreciation difference will reverse
in equal amounts over the next three years at an enacted tax rate of 32%. In Unity’s 2002
income statement, what amount should be reported as the current portion of its provision
for income taxes?
(a) P288,000 (b) P432,000 (c) P480,000 (d) P528,000 A

42. Bugoy’s checkbook balance at December 31, 2002 was P50,000. In addition, Bugoy had the
following items in its safe on that date:
  Check payable to Bugoy, dated December 31, 2002, in payment of
a sale made in December 2002 not included in December 31 checkbook balance,
P20,000.
 Check payable to Bugoy, deposited December but returned by
bank on December 30 marked NSF. The deposit and the return were both reflected
in the checkbook, P5,000.
 Check drawn on Bugoy’s account, payable to a vendor, dated
December 30 but not mailed to payee as of December 31, 2002. The check of
P3,000 is not yet recorded.
The proper amount to be shown as cash on Bugoy’s balance sheet at December 31, 2002 is:
(a) P48,000 (b) P65,000 (c) P68,000 (d) P70,000 D

43. The cash account of Isle Corporation has a balance of P96,000 on December 31, 2002.
Your review of the cash transactions recorded in December revealed the following:
 Cash receipts included customer’s checks for P4,000 dated
January 10, 2003.
 Cash disbursements included:
Check of P10,000 payable to Ace Company. The check, dated December 23,
had not been paid by the bank as of December 31.
Check of P7,000 payable to King Company. The check was dated December
29 but still undelivered as of December 31.
What is the correct cash balance at December 31, 2002?
(a) P75,000 (b) P89,000 (c) P99,000 (d) P109,000 C

44. Style Company is experiencing financial difficulty and is negotiating debt restructuring with
its creditors to relieve its financial stress. Style has a P2,500,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Style Company in the
form of 200,000 shares of common stock valued at P12 per share. The par value of
common is P10 per share. How much is the gain from the debt restructuring?
(a) P500,000 (b) P100,000 (c) P400,000 (d) P 0 D

45. On December 31, 2000, Fire Company was experiencing financial difficulties and entered
into a debt restructuring agreement with the creditor. The creditor restructured the
obligation as follows:
a. Reduced the principal note payable from P5,000,000 to P4,500,000.
b. Forgave P600,000 of accrued interest.
c. Extended the maturity date from December 31, 2000 to December 31, 2003.
d. Reduced the interest from 12% to 10%. Interest was payable annually on December
31, 2001, 2002 and 2003.
Fire should report loss on debt restructuring of:
(a) P250,000 (b) P850,000 (c) P500,000 (d) P 0 D

46. The following information was taken from the books of Prim Company for 2002:
Gross sales P 2,400,000
Inventory, December 31, 2002 180,000
Purchases 1,800,000
Freight-in 6,000
Sales returns and allowances 72,000
Purchase discounts 22,000
Operating expenses 545,000
Gross margin sales 30%
The cost of goods available for sale during 2002 was:
(a) P1,800,000 (b) P1,809,600 (c) P2,328,000 (d) None of these B

47. The following information is available from Belle Company’s 2003 accounting records:
Purchases P 530,000
Purchase discounts 10,000
 Beginning inventory 160,000
Ending inventory 215,000
Freight out 40,000
Belle’s cost of goods sold is:
(a) P465,000 (b) P475,000 (c) P505,000 (d) P585,000 A

48. On January 2, 2002, Delta Company purchased a franchise with a useful life of 10 years for
P100,000. An additional franchise fee of 3% of franchise operation revenues must be paid
each year to the franchisor. Revenues from franchise operations amounted to P800,000
during 2002. In its December 31, 2002 balance sheet, what amount should Delta report as
an intangible asset – franchise?
(a) P66,000 (b) P87,600 (c) P90,000 (d) P100,000 C

49. A business broker is attempting to value the Delicious fast food franchise. Average earnings
over the last 6 years have been P79,200 and are relatively stable. The original investment
was P288,000, and the current fair value of the net identifiable assets is P492,000. What is
the amount of implied goodwill if the average earnings rate in this industry is 10%
investment?
(a) P79,200 (b) P300,000 (c) P288,000 (d) P792,000 B

50. Pina Company prepares monthly income statements. A physical inventory is taken only at
year-end; hence, month-end inventories must be estimated. All sales are made on account.
The rate of markup on cost is 50%. The following information relates to the month of
November:
Accounts receivable, November 1 P102,000
Accounts receivable, November 30 153,000
Collection of accounts receivable during November 255,000
Inventory, November 1 183,600
Purchases of inventory during November 163,200
The estimated cost of the November 30 inventory is:
(a) P122,400 (b) P142,800 (c) P193,800 (d) P224,400 B

51. On December 31, 2000, Expressive Corporation had a fire which completely destroyed the
goods in process inventory. The inventory data were:
January 1 December 31
Finished goods P280,000 P200,000
Goods in process 200,000 ?
Raw materials 60,000 120,000
Supplies 8,000 20,000
Data for 2000 were:
Sales P600,000
Purchases 200,000
Freight-in 20,000
Direct labor 160,000
Factory overhead – 50% of direct labor
Average gross profit rate 30%
What is the cost of goods in process inventory on December 31, 2000 which were destroyed
by fire?
(a) P420,000 (b) P340,000 (c) P400,000 (d) P260,000 D

52. On July 1, 2002, Rey purchased P1,000,000 of West Company’s 8% bonds due at July 1,
2012. Rey expects to hold the bond until maturity. The bonds, which pay interest
semiannually on January 1 and July 1, were purchased for P875,000 to yield 10%. In its
income statement for the year ended December 31, 2002, Rey should report interest
income at:
(a) P35,000 (b) P40,000 (c) P43,750 (d) P50,000 C
53. On July 1, 2002, Roger Co. paid P1,198,000 for 10% 20-year bonds with a face amount of
P1,000,000. Interest is paid on December 31 and June 30. The bonds were purchased to
yield 8%. Roger uses the effective interest method to recognize interest income from
investment. What should be reported as carrying amount of the bonds in Roger’s December
31, 2002 balance sheet?
(a) P1,207,000 (b) P1,198,000 (c) P1,195,920 (d) P1,193,050 C

54. On January 1, 2002, Clay Company leased a new machine form Saxe Corporation. The
following data relate to the lease transaction at the inception of the lease:
Lease term 10 years
Annual rental payable at beginning of each lease year P50,000
Useful life of machine 15 years
Implicit interest rate 10%
Present value of an annuity of P1 in advance for 10
periods at 10% 6.76
Present value of an annuity of P1 in arrears for 10
periods at 10% 6.15
Fair value of the machine P400,000
The lease has no renewal option, and the possession of the machine reverts to Saxe when
the lease terminates. At the inception of the lease, Clay should record a lease liability of:
(a) P400,000 (b) P338,000 (c) P307,500 (d) P 0 D

55. On December 31, 2002, Day Company leased a new machine from Parr with the following
pertinent information:
Lease term 6 years
Annual rental payable at beginning of each lease year P50,000
Useful life of the machine 8 years

Day’s increment borrowing rate 15%

Implicit interest rate in lease (known by Day) 12%
Present value of an annuity of P1 in advance for 6
periods at:
12% 4.61 15% 4.35
The lease is renewable, and the machine reverts to Parr at the termination of the lease.
The cost of the machine on Parr’s accounting records is P375,500. At the inception of the
lease, Day should record a lease liability of:
(a) P375,500 (b) P230,500 (c) P217,500 (d) P 0 B

56. On February 5, 2001, an employee filed a P2,000,000 lawsuit against Steel Company for
damages suffered when one of Steel’s plants exploded on December 29,2000. Steel’s legal
counsel expects the company will lose the lawsuit and estimates the loss to be between
P500,000 and P1,000,000. The employee has offered to settle the lawsuit out of court for
P900,000, but Steel will not agree to the settlement. In its December 31, 2000 balance
sheet, what amount should Steel report as liability from lawsuit?
(a) P2,000,000 (b) P1,000,000 (c) P900,000 (d) P500,000 D

57. Sony Corporation sells color TV sets with a three-year repairs warranty. The sales price for
each set is P10,000. The average expense of repairing a set is P500. Research has shown
that 3% of all sets sold are repaired in the first year, 6% in the second year, and 11% in
the third year. The number of sets sold were as follows:
2000 500 units
2001 1,000 units
 2002 2,000 units
Total payments for repairs associated with the warranties were: 2000, P20,000; 2001,
P70,000; and 2002, P150,000. Under the accrual approach, how much is the estimated
liability for warranties on December 31, 2002?
(a) P350,000 (b) P240,000 (c) P50,000 (d) P110,000 D

58. On December 31, 2002, Zee Company has an equipment with the following cost and
accumulated depreciation:
Equipment P9,000,000
Accumulated depreciation 3,000,000
Due to obsolescence and physical damage, the equipment is found to be impaird. On
December 31, 2002, Zee has determined the following:
Fair value of the equipment P4,500,000
Value in use of the equipment 4,000,000
Zee Company should report an impairment loss for the year 2002 at:
(a) P1,500,000 (b) P2,000,000 (c) P500,000 (d) P 0 A

59. During December 2002, Bob Company determined that there had been a significant
decrease in market value of its equipment used in its manufacturing process. At December
31, 2002, Bob compiled the information below:
Original cost of equipment P5,000,000
Accumulated depreciation 3,000,000
Expected undiscounted net future cash inflows
related to the continued use and eventual
disposal of the equipment 1,750,000
Fair value of the equipment 1,250,000
What is the amount of impairment loss that should be reported on Bob’s income statement
for the year ended December 31, 2002?
(a) P3,250,000 (b) P3,750,000 (c) P750,000 (d) P250,000 C

60. An aging of X Company’s accounts receivable on December 31, 2000 reveals the following
information:
Under 30 days P800,000
31-60 days 160,000
61-120 days 120,000
121-180 days 80,000
Over 180 days 40,000
Based on past experience, the company believes that the following uncollectible
percentages are appropriate:
Under 30 days 2%
31-60 days 5%
61-120 days 15%
121-180 days 30%
Over 180 days 60%
The allowance for doubtful accounts on December 31, 2000 has a debit balance of P20,000
before adjustment. The doubtful accounts expense for 2000 is:
(a) P90,000 (b) P80,000 (c) P110,000 (d) P70,000 C

61. Presented below pertains to Next Corporation:

Assigned a nonnotification basis accounts receivable of P400,000 to Liquid Finance
under the following terms:
Cash advance 80% Commission 5%
Interest on cash advance 12%
 Issued a credit memo to a customer whose account was assigned for returned
merchandise, P10,000.
Collected P300,000 of the assigned accounts, less 2% discount. These collections were
remitted to Liquid Finance in payment for the interest due for one month and for the
cash advance.
How much is applicable to the principal or cash advance out of the collections that were
remitted by the Liquid Finance?
(a) P294,000 (b) P290,800 (c) P300,000 (d) P296,800 B

62. The following information is taken from the financial statement of Rocky Company:
2003 2002
Accounts receivable P310,000 P340,000
Inventory 980,000 920,000
Accounts payable 190,000 260,000
Accrued expenses 200,000 140,000
Deferred tax liability 50,000 30,000
The income statement for the year ended December 31, 2003 shows the following among
others:
Net income P1,060,000
Depreciation 120,000
Amortization of patent 40,000
Gain on sale of land 100,000
What is the cash flow from operating activities for 2003?
(a) P1,120,000 (b) P1,100,000 (c) P1,000,000 (d) P1,320,000 B

63. Fancy Company reported P1,750,000 of net income in 2003. Expenses reported in the
determination of this income included the following:
Salaries P2,000,000
Cost of sales 4,000,000
Interest 500,000
Depreciation and amortization 1,270,000
Income tax (none of which are deferred) 4,000,000

All sales are made for cash, expenses, other than depreciation and amortization, were paid
in cash and the balance of inventory was unchanged during the year.
What is the cash provided by operating activities during using the indirect method?
(a) P3,020,000 (b) P480,000 (c) P1,750,000 (d) P3,520,000 A

64. Marie Company provides the following information:

Dec. 31, 2002 Dec. 31, 2003
Accrued interest payable P100,000 P125,000
Depreciation 182,000 190,000
Prepaid expenses 8,000 13,000
Net income for 2003 1,620,000
What is the cash provided by operating activities during 2003 using the indirect method?
(a) P1,648,000 (b) P1,830,000 (c) P1,810,000 (d) P1,790,000 B

Items 65 to 67:

The differences in Beal Inc.’s balance sheet accounts at December 31, 2003 and 2002 are
presented below:
Increase (Decrease)
Assets
Cash and cash equivalents P 120,000
Short-term investments 300,000
Accounts receivable, net -
 Inventory 80,000
Long-term investments ( 100,000)
Plant assets 700,000
Accumulated depreciation _ ________
P 1,100,000
Liabilities and Stockholders’ Equity
Accounts payable and accruals (P 5,000)
Dividends payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Common stock, P10 par 100,000
Additional paid in capital 120,000
Retained earnings 290,000
P 1,100,000
The following additional information relates to 2003:
 Net income was P790,000.
 Cash dividends of P500,000 were declared.
 Building costing P600,000 and having a 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 investments.
 10,000 shares of common stock were issued for P22 a share.
In Beal’s 2003 statement of cash flows:

65. Net cash provided by operating activities was:

(a) P1,160,000 (b) P1,040,000 (c) P920,000 (d) P705,000 C

66. Net cash used in investing activities was:

(a) P1,005,000 (b) P1,190,000 (c) P1,275,000 (d) P1,600,000 A

67. Net cash provided by financing activities was:

(a) P20,000 (b) P45,000 (c) P150,000 (d) P205,000 D

68. In 2003, a tornado completely destroyed a building belonging to Hole Corp. The building
cost P100,000 and had accumulated depreciation of P48,000 at the time of the loss. Hole
received a cash settlement from the insurance company and reported an extraordinary loss
of P21,000. In Hole’s 2003 statement of cash flows, the net change reported in the cash
flows from investing activities section should be a:
(a) P10,000 increase
(b) P21,000 decrease
(c) P31,000 increase
(d) P52,000 decrease C

69. On April 1, 1995, Lane Corporation issued P1,500,000 of 10% nonconvertible bonds at 104
which are due on March 31, 2008. Each P1,000 bond was issued with 40 detachable stock
warrants, each of which entitled the bondholder to purchase, for P50, one share of Lane
common stock, P25 par. On April 1. 1995, the market value of Lane’s common stock was 40
per share and the market value of each warrant was 4. What amount of the proceeds from
the bond issue should Lane record as an stockholders’ equity?
(a) 1,500,000 (b) 240,000 (c) 60,000 (d) 0 B

70. On January 2, 1995, Morey Corporation granted Dean, its president, 20,000 stock
appreciation rights for past services. Those rights are exercisable immediately and expire on
January 1, 1998. On exercise, Dean is entitled to receive cash for the excess of the stock’s
market price on the exercise date over the market price on the grant date. Dean did not
exercise any of the rights during 1995. the market price of Morey’s stock was 30 on January
2, 1995 and 45 on December 31, 1995. As a result of the stock appreciation rights, Morey
should recognize compensation expense for 1995 of:
(b) 0 (b) 100,000 (c) 300,000 (d) 600,000 C