FINANCIAL ACCOUNTING AND REPORTING

EASY

1. Which of the following has the highest authoritative support?

a. Interpretations of IFRIC
b. International Accounting Standards
c. Conceptual Framework of Accounting
d. International Financial Reporting Standards
2. In the annual report, where would a financial statement reader find out if the company’s
financial statements give a fair depiction of its financial position and operating results?
a. Notes to the financial statements
b. Management discussion and analysis section
c. Balance sheet
d. Auditor’s report
e. None of the options listed
3. Johnny’s Car Repair Shop started the year with total assets of P60,000 and total liabilities of
P40,000. During the year the business recorded P100,000 in car repair revenues, P55,000 in
expenses, and dividends of P10,000.
The net income reported by Johnny’s Car Repair Shop for the year was
a. P35,000.
b. P45,000.
c. P20,000.
d. P90,000.
4. The purchase of an office building by issuing long-term notes payable should be reported as a
a. cash outflow in the financing section of the statement of cash flows.
b. cash outflow in the investing section of the statement of cash flows.
c. cash outflow in the operating section of the statement of cash flows.
d. noncash investing and financing activity.
5. If beginning capital was P25,000, ending capital is P37,000, and the owner's withdrawals were
P23,000, the amount of net income or net loss for the period was:
a. net loss of P35,000
b. net income of P35,000
c. net income of P14,000
d. net loss of P14,000
6. Which accounting assumption assumes that an enterprise will continue in operation long
enough to carry out its existing objectives and commitments?
a. Monetary unit assumption
b. Economic entity assumption
c. Time period assumption
d. Going concern assumption
 7. A company purchased a POS cash register on January 1 for P5,400. This register has a useful life
of 10 years and a salvage value of P400. What would be the depreciation expense for the
second-year of its useful life using the double-declining-balance method?
a. P 500.
b. P 800.
c. P 864.
d. P1,000.
8. The difference between the balance of a plant asset account and the related accumulated
depreciation account is termed
a. market value.
b. contra asset.
c. book value.
d. liability.
9. A company began the accounting period with P50,000 in owner’s capital, ended with P75,000 in
owner’s capital, and the owner withdrew P30,000 during the period for personal use. What was
the company’s net income or loss for the period?
a. P55,000 net income
b. P30,000 net loss
c. P5,000 net loss
d. P5,000 net income
10. Working capital is a measure of
a. consistency.
b. liquidity.
c. profitability.
d. solvency.
11. Which of the following is an example of a deferral?
a. Accruing year-end wages
b. Recognizing revenues earned but not yet recorded
c. Recording prepaid rent
d. Recognizing expenses incurred but not yet recorded

AVERAGE

1. The deferred income tax liability:

a. Represents income tax payments that are deferred until future years because of
temporary differences between GAAP rules and tax accounting rules.
b. Is a contingent liability.
c. Can result in a deferred income tax asset.
d. Is never recorded.
e. Is recorded whether or not the difference between taxable income and financial
accounting income is permanent or temporary.
2. A company normally sells its products for P20 per unit, which includes a profit margin of 25%.
However, the selling price has fallen to P15 per unit. This company's current inventory consists
200 units purchased at P16 per unit. Replacement cost has now fallen to P13 per unit. Calculate
the value of inventory at the lower of cost or market.
a. P2,550.
b. P2,600.
c. P2,700.
d. P3,000.
3. A measure of profitability is the
a. current ratio.
b. debt to total assets ratio.
c. return on assets ratio.
d. working capital.

4. At year-end, Jhema Company reported cash and cash equivalents, which is comprised of the
following:

Cash on hand P 500,000

Demand deposit 4,000,000
Certificate of deposit 2,000,000
Postdated customer check 300,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000

What total amount should be reported as “cash” at year end?

a. P5,000,000
b. P4,850,000
c. P7,000,000
d. P5,300,000
5. According to PAS 1, which of the following situations will require a submission of a third balance
sheet of a reporting entity as of the beginning of the earliest traceable accounting period.
I. An entity changes its method of valuation of inventory from FIFO to Weighted Average
method

II. When an entity makes a chage in a depreciation method has a material effect on current
and future years’ operations.

III. When an entity makes a correction of a material prior period error.

a. I and II
b. I and III
c. II and III
d. I, II and III

6. De Guzman Company provided the following information at year-end:

 Share capital P15,000,000
Share premium 5,000,000
Treasury shares, at cost 2,000,000
Actuarial loss on defined benefit obligation 1,000,000
Retained earnings unappropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment-credit 1,500,000

What should be reported as total shareholder’s equity?

a. P30,500,000
b. P33,000,000
c. P32,500,000
d. P31,500,000
7. Zhejiang Company reported the following date at December 31, 2017:

Net income for the year 2017 ₱3,700,000

Ordinary share, ₱100 par 2,500,000
10% bonds payable (issued on 5/31/17) 1,000,000

The bonds are convertible into ordinary shares in the ratio of 5 ordinary shares for each ₱1,000
bond. The income tax rate is 35%. What is the diluted earnings per share?

a. ₱133.90
b. ₱133.80
c. ₱132.90
d. ₱147.00
8. In which of the following instances in a commercial entity where there is a recognition of
revenue before sale?
a. A piglet is born.
b. Goods are sold in a “layaway sale”
c. Cash is received for future delivery of merchandise
d. A machinery is sold in an installment sale.
9. On January 1, 2018, Jiangsu Inc., issued ₱2,000,000 of 16% bonds at 102. Each ₱1,000 bonds
has one detachable warrant that allows the holder to purchase ten shares of ₱50 par value stock
at ₱70 per share. The bonds would have sold at 99 without warrants.

Assuming that all the warrants were exercised at a time when the market value of the stock is
₱100, how much is the total net effect on equity upon exercise of the warrants?

a. ₱1,350,000
b. ₱1,300,000
c. ₱1,400,000
d. ₱1,450,000
10. In September 2015, Hainan Corp. made a distribution of one right for each of its 120,000 shares
of outstanding ordinary share. Each right was exercisable for the purchase of 1/100 a share of
Hainan’s ₱50 variable rate preference share at an exercise price of ₱80 per share. On
 March 22, 2017, none of the rights had been exercised, and Hainan redeemed them by paying
each stockholder ₱0.10 per right. As a result of the redemption, determine the decrease in
Hainan’s retained earnings.
a. ₱10,000
b. ₱10,500
c. ₱11,000
d. ₱12,000

DIFFICULT

1. On July 1, 2017, Shandong Project (a calendar year corporation) had capitalized cost of
₱3,600,000 for a new computer software product with an economic life of 3 years. Sales from
July 1 to December 31, 2017 amounted to ₱2,000,000. It is expected that sales of software
during its three-year economic life would total ₱10,000,000. The pattern of sales is established as
₱6,000,000 in the first year, ₱2,500,000 in the second year and ₱3,500,000 in the third year. On
December 31, 2017, the software had a fair value of ₱3,000,000 and cost to sell of ₱150,000. At
how much should the computer software be reported a December 31, 2017?
a. ₱2,880,000
b. ₱2,780,000
c. ₱2,850,000
d. ₱2,950,000
2. Sichuan Company had the following information:

Net Assets Net Income

2013 1,840,000 414,000
2014 2,070,000 446,200
2015 2,185,000 331,200
2016 2,300,000 437,000
2017 2,415,000 453,100

Guangdong, Inc. is interested in determining the goodwill to be recognized in the purchase of

Sichuan Company. Guangdong measured goodwill by capitalizing average excess earnings at
40% with normal return on average net assets at 10%.

If Guangdong will purchase the Sichuan Company on January 1, 2018, determine the purchase
price of Sichuan Company.
a. ₱2,915,200
b. ₱2,916,200
c. ₱2,915,250
d. ₱2,916,250
3. Which of the following is true about accounts payable?
I. Accounts payable should not be reported at their present value.
II. When accounts payable are recorded at the net amount, a purchase discount account will be
used.
III. When accounts payable are recorded at the gross amount, a purchase discount lost account
will be used.

a. Statement I
b. Statement II
c. Statement III
d. Both II and III are true.
4. Jaime Company included the following in inventory at year-end:

Merchandise out of consignment at sale price,

including 40% markup on sales P1,400,000
Goods purchased in transit, shipped FOB shipping point 1,200,000
Goods held on consignment by Jaime 900,000

At what amount should the inventory be reduced?

a. P1,360,000
b. P1,460,000
c. P1,470,000
d. P1,370,000
5. Which of the following statements regarding derivatives is not true?
a. The derivatives should be recognized as assets and liabilities.
b. The derivatives should be reported at fair value.
c. Gains and Losses resulting from speculation should be deferred.
d. Gains and Losses from fair value hedge are reported immediately.
6. Which of the following statements is true about development cost incurred by a dot-com
company?
a. Development Costs by a dot-com company will never be capitalized.
b. Development cost is always deferred and charged against future revenue.
c. Development cost can be recognized as an intangible asset in very restrictive situations,
in case of a dot-com company, only half of the amount that it incurred can be capitalized.
d. Development cost is recorded as a component of other comprehensive income even in
the case of a dot-com company.
7. On December 31, 2016, Beijing Company signed a 5-year non-cancellable lease agreement to
lease a storage building from China Company. The following information pertains to the lease
agreement:
 The agreement requires rental payments of ₱500,000 beginning on December 31, 2014.
 The building has an estimated economic life of 12 years, with guaranteed residual value
of ₱100,000. Beijing depreciates similar buildings on a straight-line method
 At the termination of the lease, the building reverts to China Company
 The lessor’s implicit rate is 12% which is known by Beijing Company.
How much is the depreciation expense for the year 2017? (Round to the nearest hundred)
a. P395,080
b. P395,200
c. P395,000
d. P395,100
8. An entity owned 100% of another entity’s preference shares and 20% of ordinary shares. The
investee’s share capital outstanding on December 31, 2017 included P5,000,000 of 10%
cumulative preference shares and P10,000,000 of ordinary shares.

The investee reported net income of P8,000,000 for 2017. No dividend was declared for both
preference and ordinary shares in 2017. What amount should be reported as investment
income for 2017?
a. 1,500,000
b. 1,550,000
c. 1,650,000
 d. 1,700,000
9. An entity a major winery, begins construction of a new facility in Cavite. The following costs are
incurred in conjunction with the start-up activities of the new facility:

Production Equipment P8,150,000

Travel Cost of Salaried Employees 400,000
License fees 140,000
Training of Local employees for production and maintenance operations 1,200,000
Advertising costs 850,000

What portion of the organization cost should be expensed?

a. P1,200,000
b. P1,740,000
c. P1,600,000
d. P2,450,000
10. An entity operates a chain of seafood restaurants. On July 1, 2017, the entity determined that it
will need to purchase 50, 000 kilos of deluxe fish on July 1, 2018. Because of the volatile
fluctuations in the price of deluxe fish, on July 1, 2017, the entity negotiated a forward contract as
a cash flow hedge with Security Bank to purchase 50, 000 kilos of deluxe fish on July 1, 2018 at a
strike price of P50 per kilo or 2, 500,000.
This derivative forward contract provides that if the market price of deluxe fish on July 1, 2018 is
more than P50, the difference is paid by the bank to the entity.

On the other hand, if the market price on July 1, 2018 is less than P50, the entity will pay the
difference to the bank.

The market price per kilo of the deluxe fish is P55 on December 31, 2017 and P52 on July 1,
2018. What is the derivative asset or liability on December 31, 2017?
a. P250,000 asset
b. P250,000 liability
c. P300,000 asset
d. P300,000 liability