Theory of Accounts - Reviewer
Theory of Accounts - Reviewer
2. A firm signs a major contract in December to construct custom machinery for a client. No work
is begun the current year yet the footnotes to the firm’s financial statements discuss the nature
and peso amount of the contract. This is an example of
(a) reliability (c) historical cost
(b) full disclosure (d) conservatism
3. A corporation needed a new warehouse; a contractor quoted a P250,000 prices to construct
it. The corporation believed that it could build the warehouse for P215,000 and decided to use
company employees to construct the warehouse. The final construction cost incurred by the
corporation was P240,000 but the asset was recorded at P250,000. This is in violation of the:
(a) time period assumption (c) cost principle
(b) matching principle (d) revenue principle
4. Which of the following accounting concepts best justifies the use of accruals and deferrals?
(a) Cost/benefit constraint (c) Continuity assumption
(b) Unit-measure assumption (d) Materiality constraint
5. Which of the following most clearly states the most important quality which an expenditure
must have to be recognized as an asset on the balance sheet?
(a) It must be both material and relevant
(b) It must have reasonably certain future benefit to the business.
(c) It must be a physical object
(d) It must be used in operation of the business.
7. The basic components of financial statements include (choose the incorrect one):
(a) statement of changes in equity (c) statement of retained earnings
(b) profit (loss) statement (d) statement of cash flow
8. Which of the following reconciling items would require an adjusting journal entry on the
company’s books?
(a) outstanding checks (c) deposits in transit
(b) non-sufficient funds checks (d) cash on hand
9. In recording the bank balance with the book cash balance, which of the following would not
cause the bank balance shown on the bank statement to be lower than the unadjusted book
balance?
(a) cash on hand at the company
(b) NSF checks from a customer, as reported on the bank statement
(c) interest credited to the account by the bank
(d) deposits in transit
12. An entity is a large manufacturer of machines. A major customer has placed an order for a
special machine for which it has given a deposit to the entity. The parties have agreed on a
price for the machine. As per the terms of the sale agreement, it is FOB (free on board)
contract and the title passes to the buyer when goods are loaded into the ship at the
port. When should the revenue be recognized by the entity?
(a) When the customer orders the machine
(b) When the deposit is received
(c) When the machine is loaded at the port
(d) When the machine has been received by the customer
13. A large manufacturer of cosmetics sells merchandise to a retailer, which in turn sells the goods
to the public at large through its chain of retail outlets. The retailer purchases merchandise from
the manufacturer under a consignment contract. When should revenue from the sale of
merchandise to the retailer be recognized by the manufacturer?
(a) When goods are delivered to the retailer
(b) When goods are sold by the retailer
(c) It will depend on the terms of delivery of the merchandise (i.e., CIF cost, insurance, and freight
or FOB)
(d) It will depend on the terms of payment (i.e., cash or credit)
14. When the allowance method of recognizing bad debt expense is used, the typical write off of a
specific customer’s account:
(a) has no effect on net income (c) decreases current asset
(b) decrease net income (d) decreases working capital
20. An entity shall classify a noncurrent asset or disposal group as “held for sale” when:
(a) The carrying amount of the asset or disposal group will be recovered through continuing use.
(b) The carrying amount of the asset or disposal group will be recovered through a sale transaction.
(d) The noncurrent asset or disposal group is idle or retired from active use.
21. Noncurrent asset or disposal group is classified as “held for sale” when the asset is available
for immediate sale and the sale is highly probable. For the sale to be highly probable, (choose
the incorrect one)
(a) Management must be committed to a plan to sell the asset.
(b) An active program to locate a buyer and complete the plan must have been initiated.
(c) The asset must be actively marketed for sale at a reasonable price in relation to its carrying
value.
(d) The sale is expected to qualify for recognition as a completed sale within one year from the date
of classification of the asset as “held for sale”.
(b) The liabilities of a disposal group classified as held for sale shall be presented separately from
other liabilities.
(c) The assets and liabilities a disposal group classified as held for sale shall be offset as a single
amount.
(d) An entity shall not depreciate a noncurrent asset classified as held for sale or while it is part of a
disposal group classified as held for sale.
23. What is the treatment of gain on an initial increase in the fair value less cost to sell of a
noncurrent asset classified as held for sale?
(a) The gain shall be recognized in full.
(c) The gain shall be recognized but not in excess of the cumulative impairment loss previously
recognized.
24. Noncurrent asset classified as for rental to others shall be presented in the statement of
financial position as:
(a) Current asset
(c) Noncurrent investment
(b) The assets of the disposal group shall be shown separately from other assets in the statement
of financial position, and the liabilities of the disposal group shall be shown separately from
other liabilities in the statement of financial position.
(c) The assets and liabilities shall be presented as a single amount and as a deduction from equity.
(d) There should be no separate disclosure of assets and liabilities that form part of a disposal
group.
26. An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the
criteria to be classified as held for sale. At the end of the reporting period, the subsidiary has
not yet been sold, and six months have passed since its acquisition. How will the subsidiary be
valued in the statement of financial position at the date of the first financial statements after
acquisition?
(a) At fair value
(b) At the lower of its cost and fair value less cost to sell
27. An entity classified a noncurrent asset accounted for under the cost model as held for sale on
December 31, 2009. Because no offers were received at an acceptable price, the entity
decided on July 1, 2010 not to sell the asset but to continue to use it. In accordance with PFRS
5, the asset shall be measured on July 1, 2010 at:
(a) The lower of its carrying amount and its recoverable amount
(c) The higher of its carrying amount on the basis that is had never been classified as held for sale
and its recoverable amount
(d) The lower of its carrying amount on the basis that it had never been classified as held for sale
and its recoverable amount
32. Which of the following is not reversed at the start of the new accounting period?
(a) expense paid in advance that is debited to the expense account at the time of payment
(b) doubtful accounts computed using the aging schedule
(c) income earned but not yet recorded because was not yet received
(d) rent collected in advance and credited to a nominal account
33. In the equation, “Assets + Expenses = Liabilities + Revenue + Capital”, the expenses and
revenues are:
(a) contra asset and contra liability accounts, respectively, that assist analysis of the financial
progress of the firm
(b) incorrectly stated because their signs are reversed, i.e., both are contra items that should have
negative signs in the formula
(c) adjustments to capital that are postponed until the end of a specific accounting period to
determine their net effect on capital for that period
(d) incorrectly included in the formula because “Assets = Liabilities + Capital”
35. Which of the following is not an accurate statement regarding the rules of debit and credit in
recording revenue and expense transactions?
(a) revenue increases owner’s equity; since increases in owner’s equity are recorded by credits,
revenue is recorded by a credit
(b) expenses decreases owner’s equity; since decreases in owner’s equity are recorded by debits,
expenses are recorded by debits
(c) in recording revenue transactions, we debit the assets received and credit the revenue account
(d) expenses used up assets; since decreases in assets are recorded by credits, expenses are
recorded by credits to the expense account
36. Consider the following:
I. increase an asset VI. decrease owner’s equity
II. decrease an asset VII. increase a revenue
III. increase a liability VIII. decrease a revenue
IV. decrease a liability IX. increase an expense
V. increase owner’s equity X. decrease an expense
Using the above, if an asset account is debited, what are the five possible corresponding
credits?
(a) I, IV, VI, VIII, IX (c) I, III, V, VII, IX
(b) II, IV, VI, VIII, X (d) II, III, V, VII, X
39. Under the accrual basis of accounting, if cash is received prior to the sale, then:
(a) revenue is recognized when the cash is received
(b) a liability is recognized when cash is received
(c) a liability is removed from the system when the cash is received
(d) revenue is removed from the system when the services have been performed or the goods have
been delivered
40. If there is an objective evidence that AFS is impaired, the cumulative loss that had been
recognized in other comprehensive income:
(a) Shall be amortized over a reasonable period
(b) Shall remain unpaid until the financial asset is disposed of
(c) Shall be recognized in profit or loss
(d) Shall be recognized as an adjustment of the beginning balance of retained earnings
41. A net unrealized loss on an entity’s portfolio of AFS equity securities shall be reflected in the
current financial statements as:
(a) Direct reduction of retained earnings
(b) Current loss resulting from holding equity securities
(c) Footnote or parenthetical disclosure only
(d) Component of other comprehensive income
42. What should happen when the financial statements of an associate are not prepared as of the
same date as of the financial statements of the investor?
(a) The associate shall prepare financial statements for the use of the investor at the same date as
that of the investor.
(b) The financial statements of the associate prepared up to a different date shall be used as
normal.
(c) Any major transactions between the date of the financial statements of the investor and that of
the associate shall be accounted for.
(d) As long as the gap is not greater than 3 months, there is no problem.
43. When an investor purchases sufficient ordinary shares to gain significant influence over the
investee, what is the proper accounting treatment of any excess of cost over book value
acquired?
(a) The excess remains in the investment account until it is sold.
(b) The excess is immediately expensed in the period in which the investment is made.
(c) The excess is amortized over the time period that is reasonable in the light of the underlying
cause of the excess.
(d) The excess is charged to retained earnings at the time the investor resells the
investment.
44. Land, building and equipment should be reported on the balance sheet at their cost, less
accumulated depreciation, unless:
(a) some obsolescence is known to have occurred
(b) some of the property still on hand were written down pursuant to a quasi-organization
(c) the amount of insurance carried on the property is well in excess of its book value
(d) not given
45. Dave started his own cheese factory on March 16, 2003. Which of the following transactions
would not be admissible in Dave’s accounting system for the month of March?
(a) On March 18, Dave purchased a cow on account for P3,000.
(b) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(c) On March 21, Dave contracted with a local radio station to run several one-minute advertising
spots during the month of April.
(d) All of the above transactions would be admissible for Dave’s accounting system in the month of
March.
46. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and issuing
a P6,000 note payable for the balance owed. As a result of this transaction, Jeff’s balance
sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity
49. Tony owns a store specializing in bags. Tony has just completed a transaction that caused a
P12,000 increase in total assets and a P12,000 increase in liabilities. This transaction could
have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note payable for
the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note
payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000
50. Dean has completed the posting process for the month of June and has prepared a trial
balance in which the debits total P11,000 and the credits total P11,100. Which of the following
errors would be the most likely candidate in causing the trial balance not to balance by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger
57. Tangible goods used in the productive process and directly related to the products being
manufactured are called:
(a) factory supplies. (c) raw materials.
(b) finished goods. (d) goods in process. C
59. Slow-moving and obsolete inventory items should be priced for balance sheet purposes at:
(a) retail inventory price.
(b) cost or market, whichever is lower.
(c) moving average.
(d) at an amount not in excess of possible realizable value. D
60. Subnormal or obsolete goods, either under the cost or the lower of cost or market basis:
(a) should be taken up an unrealized inventory loss.
(b) should be valued at bona-fide selling price less direct cost of disposition.
(c) should be valued by applying an inventory method that uses a constant or nominal value for the
normal inventory level.
(d) should be adjusted in the cost of goods sold. B
61. Merchandise which a trader contracted to purchase but which was not delivered or
identified in the year should:
(a) not be included in the inventory.
(b) be included in the inventory at cost.
(c) be included in the inventory at its probable retail value.
(d) be included in the inventory at a normal price. A
63. When equipment held under an operating lease is subleased by the original lessee, the
original lessee would account for the sublease as:
(a) operating lease (c) direct financing lease
(b) sales-type lease (d) capital lease A
64. Equal monthly rental payments for a particular lease should be charged to rental expense
by the lessee for which of the following?
Capital Operating Capital Operating
lease lease lease lease
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes D
65. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental
payments should be:
(a) allocated between a reduction in the liability for leased asset and depreciation expense
(b) allocated between a reduction in the liability for leased asset and interest expense
(c) recorded as a reduction in the liability for leased asset
(d) recorded as rental expense D
66. Where the balance sheet indicates that a portion of property, plant and equipment the
related accumulated depreciation pertains to equipment leased to customers, it is evident that
the:
(a) operating method of accounting is used for the lease
(b) financing method of accounting is used for the lease
(c) lessor has violated GAAP
(d) lessor is using the income tax method of accounting for the lease A
67. A 20-year property lease, classified as an operating lease, provides for a 10% increase in
annual payments every five years. In the 6th year compared to the 5th year, the lease will cause
the following expenses to increase:
Rent Interest Rent Interest
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes C
72. Some obligations that are due to be repaid within the next operating cycle and expected to
be refinanced or “rolled over” should be classified as noncurrent:
(a) If the refinancing or “rolling over” is at the discretion of the enterprise and the refinancing
agreement has been reached before the issuance of the statements.
(b) If the refinancing or “rolling over” is at the discretion of the enterprise regardless of whether a
refinancing agreement has been reached or not before the issuance of the statements.
(c) If the refinancing or “rolling over” is not at the discretion of the enterprise.
(d) Subject to no conditions. A
75. If the pattern in which the economic benefits from the asset are consumed cannot be
predicted reliably, the method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years’ digits A
77. Which of the following is not considered in estimating the useful life of intangible assets?
(a) expected usage of the asset by the enterprise
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d) level of maintenance expenditure required to obtain the future economic benefit from the
asset C
84. Dave started his own cheese factory on March 16, 2003. Which of the following
transactions would not be admissible in Dave’s accounting system for the month of March?
(e) On March 18, Dave purchased a cow on account for P3,000.
(f) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(g) On March 21, Dave contracted with a local radio station to run several one-minute advertising
spots during the month of April.
(h) All of the above transactions would be admissible for Dave’s accounting system in the month of
March. C
85. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and
issuing a P6,000 note payable for the balance owed. As a result of this transaction, Jeff’s
balance sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity A
88. Tony owns a store specializing in bags. Tony has just completed a transaction that caused
a P12,000 increase in total assets and a P12,000 increase in liabilities. This transaction could
have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note payable for
the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note
payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000 B
89. Dean has completed the posting process for the month of June and has prepared a trial
balance in which the debits total P11,000 and the credits total P11,100. Which of the following
errors would be the most likely candidate in causing the trial balance not to balance by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger C
92. Zinc Company recorded office supplies as an asset account when the supplies were
purchased. Failure to make an adjusting entry reflecting the use of these supplies will result in:
(a) an understatement of assets
(b) an overstatement of owner’s equity
(c) an understatement of liabilities
(d) an understatement of owner’s equity B
BPS/EPS
93) Under PAS 33, EPS disclosures are required for
I. Entities whose ordinary shares or potential ordinary shares are publicly traded.
II. Entities that are in the process of issuing ordinary shares in the public market.
a. I only b. II only c. Both I and II d. Neither I nor II
94) Under PAS 33, which of the following statements about an ordinary share is true?
I. An ordinary share is an equity instrument that is superior to all other classes of equity
instrument.
II. A potential ordinary share is a financial instrument or other contract that may entitle its holder
to ordinary shares.
a. I only b. II only c. Both I and II d. Neither I nor II
subordinate
95) Which of the following statements is true?
I. Earnings per share amounts should not be presented if they are negative, i.e. loss per share.
II. Earnings per share amounts calculated for discontinued operations should be presented.
a. I only b. II only c. Both I and II d. Neither I nor II
96) When computing diluted EPS for an entity with a complex capital structure, what
is the denominator in the computation?
a. Number of ordinary shares outstanding at year-end
b. Weighted average number of ordinary shares outstanding
c. Weighted number of ordinary shares outstanding plus all other potentially antidilutive
securities.
d. Weighted average number of ordinary shares outstanding plus all other potentially dilutive
securities
101) In determining earnings per share, interest expense, net of applicable income
taxes, on convertible debt which is dilutive should be
a. Added back to net income for diluted earnings per share.
b. Deducted from net income for basic earnings per share and ignored for diluted earnings per
share.
c. Deducted from net income for both basic earnings per share and diluted earnings per
share.
d. Added back to net income for basic earnings per share, and ignored for diluted earnings per
share.
103) For a company that has only ordinary share outstanding , total shareholder’s
equity divided by the number of shares outstanding represents the:
a. return on
equity
c. stated value per share
b. book value per
share d. price-
earnings ratio
104) A company with a simple capital structure for purposes of computing earnings
per share would include which of the following in the computation of earnings per share?
a. potentially dilutive securities
b. dividends on ordinary share
c. dividends on nonconvertible cumulative preferred stock
d. number of shares of nonconvertible cumulative preferred stock
Sharebased
105) The entity has issued a range of share options to employees. In accordance with
PFRS 2, what type of share-based payment transaction does this represent?
a. Equity-settled share-based payment transaction
b. Asset-settled share-based payment transaction
c. Cash-settled share-based payment transaction
d. Liability-settled share-based payment transaction
106) In accordance with PFRS2, how should an entity recognize the change in the fair
value of the liability in respect of a cash-settled share-based payment transaction?
a. Should not recognize in the financial statements but disclose in the notes thereto
b. Should recognize in the statement of changes in equity
c. Should recognize in profit or loss
d. Should recognize in other comprehensive income
107) A cash-settled share-based payment shall give rise to an increase in which of the
following?
a. A current
asset
c. Equity
b. A noncurrent
asset
d. A liability
108) An entity has entered into a contract with another entity. The latter will supply the
former with a range of services. The payment for those services will be in cash and based upon
the price of former’s ordinary shares on completion of the contract. In accordance with PFRS 2,
what type of share-based payment transaction does this represent?
a. Asset-settled share-based payment transaction
b. Cash-settles share-based payment transaction
c. Liability-settled share-based payment transaction
d. Equity-settled share-based payment transaction
109) If share-based payment transaction provides that employees have the right to
choose the settlement whether in cash or shares, the entity is deemed to have issued
a. An equity instrument
b. A liability instrument
c. A compound financial instrument
d. Either an equity instrument or liability instrument but not both
110) Under PFRS 2 share – based Payment, the method that must be used to
measure employee stock options and other payments given to employees in the form of equity
securities, is:
a. Initial
cost
c. Fair value
b. Discounted cash flows d.
Selling price
111) Many shares and most share options are not traded in an active market.
Therefore, it is often difficult to arrive at a fair value of the equity instruments being issued.
Which of the following option valuation techniques should not be used as a measure of fair
value in the first instance?
a. Black – Scholes
model c. Monte –
Carlo model
b. Binomial
model
d. Intrinsic value
112) It is the difference between the fair value of the shares to which the counterparty
has the right to subscribe and the price the counterparty is required to pay for those shares.
a. fair
value
c. Market value
b. Intrinsic
value
d. Book value
115) For cash settled share-based payment transactions, an entity shall measure the
goods or services received and the liability incurred at the
a. Fair value of the liability
b. Fair value of the goods and services received
c. Either the fair value of the goods or services received or the fair value of the liability
d. Neither the fair value of the goods or services received nor the fair value of the liability
SHE
117) Under IFRIC 17, a property dividend declared before the end of the reporting
period should be recognized as liability at the end of the reporting period at
a. Carrying amount of the asset to be distributed
b. Fair value of the asset on the date of declaration
c. Fair value of the asset at the end of reporting period
d. Fair value of the asset at the date of distribution
119) Gains and losses on the purchase and resale of treasury stock may be only be
reflected in
a. Paid-in capital accounts
b. Paid-in capital and retained earnings accounts
c. Income, paid-in capital and retained earnings
d. Income and paid-in capital accounts
122) When stock rights are exercised, how much should be treated as total proceeds
from the issuance of shares?
a. only the consideration received
b. The total of the consideration received and the amount previously recorded for the stock rights
c. the amount previously recorded for the stock rights
d. The total par value of the shares
127) An entity issued what is called a “12% stock dividend” on its share capital. At
what amount per share, if any, should retained earnings be reduced for this transaction?
a. Zero because no entry is made
b. Par value
c. Market value at the declaration
d. Market value at the date of issuance
128) The peso amount of total shareholders’ equity remains the same when there is
a. Issuance of preference share in exchange for convertible debentures
b. Issuance of nonconvertible bonds with share warrants
c. Declaration of a stock dividend
d. Declaration of a cash dividend
Income taxes
129) Justification for the method of determining periodic deferred tax expense is based
on the concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in the calculation of periodic expense
c. Recognition of asset and liability
d. Consistency of tax expense measurement with the actual tax planning strategies.
132) Under PAS 12 Income Taxes, deferred tax assets and liabilities are measured at
the tax rates that:
a. Applied at the beginning of the reporting period
b. At the end of the reporting period
c. At the rates that prevail at the reporting date
d. Are expected to apply when the asset or liability is settled
Benefits
141) Which of the following is not one of the six components of pension expense (or
part of a component)?
a. Initial transition asset
b. Amortization of unrecognized gain or loss
c. Expected return on plan assets
d. Growth (interest cost) in PBO/ABO since the beginning of the period
143) Under which category should lump sum benefit of 1% of the final salary for each
year of service and actuarial gains be accounted for?
a. Lump sum benefits should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined benefit plans.
b. Lump sum benefit should be accounted for under short term employee benefits
Actuarial gains should be accounted for under defined benefit plans.
c. Lump sum benefit should be accounted for under defined benefit plans
Actuarial gains should be accounted for under defined contribution plans
d. Lump sum benefit should be accounted for under short term employee benefits
Actuarial gains should be accounted for under defined contribution plans
145) In a rare circumstance, when a retirement benefit plan has attributes of both
defined contribution and defined benefit plan, it is deemed
a. Defined contribution plan
b. Define benefit plan
c. Neither a defined contribution nor a defined benefit plan
d. Both defined contribution and defined benefit plan
149) An employer’s obligation for postretirement health benefits that are expected to be
provided to an employee must be fully accrued by the date the
a. Employee is fully eligible for benefits
b. Employee retires
c. Benefits are utilized
d. Benefits are paid
150) For a defined benefit pension plan, the discount rate used to calculate the
projected benefit obligation is determined by the
Expected return on plan asset Actual return on plan asset
a. yes yes
b. no no
c. yes no
d. no yes