Quiz 2 Answers Solutions

Quiz 2, Conceptual Framework and Accounting Standards
Financial Position
MC 1 The accounts below were taken from the unadjusted trial

balance of May Company at December 31, 2019:
Cash P124,000
Equity investments at fair value through
profit or loss (at cost) 87,000
Notes receivable 92,000
Trade accounts receivable 122,000
Allowance for uncollectible accounts 6,000
Employees income tax withheld 4,000
Notes payable 150,000
Trade accounts payable 75,000
Merchandise inventory 136,000
Bonds payable 250,000
Share dividends distributable 15,000
Income tax payable 28,000
An analysis of the above accounts disclosed the following:
a. Bank overdraft of P13,000 was deducted from cash balance

b. Trade accounts receivable was net of customers’ deposit of
P7,000
c. Merchandise worth P15,000 received December 30, 2019
was included in the inventory but was not recorded as a
purchase.
d. Accounts payable was net of accounts with debit balance of
P12,000
e. A bank loan of P30,00 due December 31, 2022 was included
in the notes payable balance
f. Bonds payable that was issued in 2017 will mature in five
annual installments beginning June 1, 2020.
g. The fair value of the equity investments at December 31,
2019 was P90,000.
How much total current assets should be reported in the

statement of financial position at December 31, 2019?
a. P572,000
b. P587,000
c. P590,000
d. P602,000
Answer: C
Cash (124,000 + 13,000 see letter a) 137,000

Equity investments at fair value through
profit or loss (at cost) [see letter g] 90,000
Notes Receivable 92,000
Trade Accounts Receivable (122,000 –
6,000 + 7,000 see letter a + 12,000 see
letter d) 136,000
Merchandise Inventory 136,000
Total Current Assets 590,000
Current assets are cash, assets realizable within normal

operating cycle or within twelve months, and primarily held for
trading.
Note that offsetting is not allowed in the presentation of financial

statements. Hence, bank overdraft (a) should not be offset with
cash. It should be presented as part of liability. Note that there
is a condition before overdraft can be offset with cash.
Debit balance in AP represents cash advance to supplier or

excess payments. This should not be offset but should be
presented as part of accounts receivable.
Trade receivable is presented net of allowance for doubtful

accounts. This is not offsetting.
Equity investments at fair value through profit or loss (at cost)

[see letter g] should be presented at fair value as the name
implies.
MC 2 Use the same information in the preceding number. How much

total current liabilities should be reported on the statement of
financial position as of December 31, 2019?
a. P339,000
b. P324,000
c. P304,000
d. P234,000
Answer: B
Bank Overdraft (letter a) 13,000

Trade Accounts Payable (75,000 + 15,000
letter c + 12,000 letter d + 7,000 letter b) 109,000
Employees income tax withheld 4,000
Income tax payable 28,000
Notes Payable (150,000 – 30,000 letter e) 120,000
Bonds payable (250,000 / 5 letter f) 50,000

Current Liabilities 324,000
Current liabilities are expected to be settled within the normal

operating cycle or within twelve months.
Again, offsetting is not allowed in the presentation of financial

statements. Bank overdraft and customers’ deposit should be
presented as liability.
The Company’s excess payment to supplier should not be offset

with liability but should be presented as part of accounts
receivable.
The 15,000 merchandise was not recorded as purchase. This

means no liability was recorded.
Employees income tax withheld and Income tax payable are

always part of current liabilities.
The 30,000 is due beyond one year. Hence, it should be

presented as non-current liability.
The 50,000 bonds payable will mature within one year. It should
be presented as current liability.
MC 3 M Corp. reported the following liability balances on December

31, 2020:
10% note payable issued on October 1,

2019, maturing October 1, 2021 P2,000,000
12% note payable issued on March 1, 2019,
maturing on March 1, 2021 4,000,000
The 2020 financial statements were issued on March 31, 2021.

Under the loan agreement for the 10% note payable, the entity
has the discretion to refinance the obligation for at least twelve
months after December 31, 2020. On March 1, 2021, the entire
P4,000,000 balance of the 12% note payable was refinanced
through issuance of a long-term obligations payable lump sum.
What amount of the notes payable should be classified as
current on December 31, 2020?
a. P6,000,000
b. P4,000,000
c. P2,000,000
d. P0
Answer: B
The company has the discretion to refinance the P2 million note

payable for at least twelve months after the reporting date. It
should be presented as non-current.
The P4 million was refinanced was refinanced after the balance

sheet date. Hence, it remains a current liability as of the balance
sheet date.
MC 4 A Corp. provided the following balances on December 31, 2020.

Compute total noncurrent liabilities.
Accounts payable 500,000

Accrued taxes 100,000
Ordinary share capital 5,000,000
Dividends – Ordinary share 1,000,000
Dividends – Preference share 500,000
Mortgage payable (500,000 due in six
months) 4,000,000
Note payable, due January 31, 2025 2,000,000
Share premium 500,000
Preference share capital 3,000,000
Premium on note payable 200,000
Income summary – credit balance 4,000,000
Retained earnings – January 1 2,500,000
Unamortized issue on note payable 50,000
Unearned rent income 150,000
a. P5,700,000
b. P6,200,000
c. P5,500,000
d. P5,650,000
Answer: D
Mortgage payable (4,000,000 – 500,000) 3,500,000

Note payable, due January 31, 2025 2,000,000
Unamortized issue on note payable (50,000)
Premium on note payable 200,000
5,650,000
The P500,000 mortgage payable due in six months should be

presented as current.
Unamortized issue cost is a reduction from the face of the note.

Premium on note payable means the note was issued above its
face value.
MC 5 T Corp. reported the following for the year ended December 31,
2020:
Net Income P600,000

Preference share capital dividends declared 50,000
Ordinary share capital dividend declared 20,000
Unrealized holding loss, net of tax 10,000
Retained earnings, beginning balance 800,000
Ordinary share capital 400,000
Preference share capital 200,000
Accumulated Other Comprehensive Income,
Beginning Balance, net of tax 50,000
What would T. Corp report as total shareholders’ equity?
a. P1,870,000
b. P1,890,000
c. P1,970,000
d. P1,990,000
Answer: C
Ordinary share capital 400,000

Preference share capital 200,000
Retained earnings 800,000
Net Income 600,000
Preference share capital
dividends declared (50,000)
Ordinary share capital
dividend declared (20,000) 1,330,000
Accumulated Other
Comprehensive Income,
Beginning Balance, net of
tax 50,000
Unrealized holding loss,
net of tax (10,000) 40,000
1,970,000
Comprehensive Income
MC 6 P Company had the following information in 2020. Compute

comprehensive income before tax.
Sales revenue P500,000

Cost of goods sold 350,000

Operating expenses 55,000
Unrealized translation gain 20,000
Cash dividends received on the securities 2,000
a. P117,000
b. P115,000
c. P97,000
d. P20,000
Answer: A
Sales revenue 500,000

Cost of goods sold (350,000)
Operating expenses (55,000)
Unrealized translation gain (20,000)
Cash dividends received on the securities 2,000
117,000
Comprehensive income includes profit/loss and other

comprehensive income.
MC 7 F Company provided the following information for the current

year.
Disbursements for purchases P5,800,000

Increase in trade accounts payable 500,000
Decrease in merchandise inventory 200,000
What is the cost of goods sold for the current year?
a. P6,500,000
b. P6,100,000
c. P5,500,000
d. P5,100,000
Answer: A
Disbursements for purchases 5,800,000

Increase in trade accounts payable 500,000
Decrease in merchandise inventory 200,000
6,500,000
Increase in accounts payable means purchases on account.

Decrease in merchandise inventory means more goods are sold
in the current year.
MC 8 The adjusted trial balance of B Company included the following

expenses and loss accounts for the current year.
Accounting and legal fees P1,200,000

Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000
One-half of the rented premises is occupied by the sales

department. What amount should be reported as total
distribution cost?
a. P4,800,000
b. P4,000,000
c. P3,700,000
d. P3,600,000
Answer: A
Advertising 1,500,000
Freight out 800,000
Rent for office space (2,200,000/2) 1,100,000
Sales salaries and commissions 1,400,000
4,800,000
Distribution costs are expenses directly related to sales effort.
MC 9 Max Company reported the following data for the current year”
Legal and audit fees P1,700,000

Rent for office space 2,400,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing
equipment 350,000
The office space is used equally by the sales and accounting

departments. What amount should be classified as general and
administrative expenses?
a. P2,900,000
b. P3,250,000
c. P4,100,000
d. P5,000,000
Answer: A
Legal and audit fees P1,700,000

Rent for office space (2,400,000/2) 1,200,000
2,900,000
General and administrative expenses are incurred in the

administration and general operations of the business.
MC 10 All of the following components of OCI should be reclassified to

profit or loss, except
a. Gains or loss from translating the financial statements of a

foreign operation
b. Gain or loss on remeasuring debt investment at fair value
through other comprehensive income
c. The effective portion of gain or loss on hedging instrument
in a cash flow hedge
d. Gain or loss in remeasuring equity investment at fair value
through other comprehensive income
Answer: D
Unrealized gains/losses on equity investments measured at fair

value through other comprehensive income are not recycled to
profit.
Changes in Equity
MC 11 Royal Company started operations on January 1, 2020.

Inventory was accounted for by using the FIFO method. At the
beginning of 2021, Royal changed to average method. The
following information relating to inventory for years 2020 and
2019 are as follows:
2020 2019
FIFO ending inventory P360,000 P440,000
Average ending inventory 320,000 350,000
Income tax rate was 30%.
What is the amount reported in Royal’s 2021 statement of

changes in equity as an adjustment to beginning retained
earnings of 2020 (the only comparative prior presented)?
a. P28,000
b. P40,000
c. P63,000
d. P90,000
Answer: C
2019
FIFO ending inventory 440,000
Average ending inventory 350,000
Difference 90,000
Less: Income Tax (30%) (27,000)
Net Adjustment, after tax 63,000
The changes in 2019 Inventory method shall be reflected in the

beginning of 2020 Retained Earnings (presented as comparative
information) as prior period adjustments.
You may also refer to MC 14.
MC 12 This statement shows the events and transactions that took

place during a reporting period that affect equity.
a. Statement of changes in equity

b. Statement of changes in cash
c. Statement of changes in retained earnings
d. Statement of changes in investment in equity
Answer: A
The statement of changes in equity shows the events and

transactions that took place during a reporting period that affect
equity (slide 149).
MC 13 Which of the following is not a component of statement of

changes in equity?
a. Comprehensive income for the period

b. Effects of retrospective application
c. Effects of retrospective restatement
d. Effects of changes in significant estimates
Answer: D
The following are the components of statement of change in

equity (slide 150):
• Comprehensive income for the period

• For each component of equity, the effects of retrospective

application or retrospective restatement recognized in
accordance with PAS 8
• For each component of equity, a reconciliation between

the carrying amount at the beginning and the end of the
period.
MC 14 The cumulative effects of changes from FIFO to weighted

average inventory costing are reported as
a. Adjustments to the opening balance of retained earnings in

the earliest comparative period presented
b. Other operating expenses
c. Adjustment to current period statements only
d. Adjustment to current and/or prior period statements
Answer: A
You may also refer to MC 11.
MC 15 Which of the following will not appear in the reconciliation for a

component of equity?
a. Sales revenue
b. Net profit
c. Dividends
d. Share capital issued
Answer: A
For each component of equity, a reconciliation between the

carrying amount at the beginning and the end of the period,
separately (as a minimum) disclosing changes resulting from:
• profit or loss;
• other comprehensive income; and
• transactions with owners in their capacity as owners,

showing separately contributions by and distributions to
owners and changes in ownership interests in
subsidiaries that do not result in a loss of control.
Revenue will no longer appear in the statement of changes in

equity. It already forms part of profit or loss.
Cash Flows
MC 16 Arugula Company prepares its statement of cash flows using the

direct method for operating activities. For the year ended
December 31, 2019, Arugula Company reports the following
data:
Sales on account P1,300,000

Cash sales 740,000
Decrease in accounts receivable 610,000
Increase in trade notes receivable 125,000
Increase in accounts payable 72,000
Decrease in notes payable to bank 48,000
Increase in inventory 48,000
What is the amount of cash collections from customers reported

by Arugula Company for the year ended December 31, 2019?
a. P2,650,000
b. P2,525,000
c. P1,910,000
d. P1,430,000
Answer: B
Sales on account P1,300,000

Cash sales 740,000
Decrease in accounts receivable 610,000
Increase in trade notes receivable (125,000)
2,525,000
Decrease in accounts receivable means collection of sales on

account made on prior year. Increase in trade notes receivable
represents uncollected portion of sales on account in the
current year
MC 17 What is the amount of cash payments to suppliers reported by

Aragula Company for the year ended December 31, 2020?
a. P1,095,000
b. P999,000
c. P951,000
d. P855,000
Answer: C

Increase in inventory 48,000

Increase in accounts payable (72,000)
951,000
Cost of goods sold and increase in inventory constitutes

purchases for the period. The increase in accounts payable
represents amount of purchases not paid during the current
year.
MC 18 Daffodil Corporation’s statements of financial position as of

December 31, 2020 and 2019 and information relating to 2020
activities are presented below:
12/31/20 12/31/19
Cash and cash equivalents P540,000 P100,000
Accounts receivable (net) 510,000 510,000
Inventory 680,00 600,000
Equity investments through other 320,000 330,000
comprehensive income
Property, plant, and equipment 1,600,000 1,000,000
Accumulated depreciation (450,000) (450,000)
Franchise 120,000 120,000
Accumulated amortization (30,000) (20,000)
Total assets P3,290,000 P2,190,000
Accounts payable P705,000 P680,000

Accrued expenses 120,000 40,000
Notes payable to bank 325,000 -
Ordinary share capital, P10 par 800,000 700,000
Share premium 370,000 250,000
Retained earnings 950,000 490,000
Unrealized gain on equity 20,000 30,000
investments
Total liabilities and equity P3,290,000 P2,190,000
Information relating to 2020 activities:
• Total comprehensive income for the year was P690,000

• Cash dividends of P240,000 were declared and paid in
2020
• Equipment costing P400,000 and having a carrying
amount of P150,000 was sold for P150,000
• The equity investments are carried at fair value. Daffodil
did neither acquire nor dispose of any equity
investments during 2020.
• 10,000 ordinary shares were issued for P22 per share.
What is the net cash from operations in 2020?
a. P690,000
b. P925,000
c. P975,000
d. P985,000
Answer: D
Comprehensive Income (see bullet no. 1) 690,000

Unrealized Loss on Investment (Equity
investments through other comprehensive
income, 330,000 - 320,000) 10,000
Depreciation Expense (400,000 – 150,000) 250,000
Amortization Expense (30,000 – 20,000) 10,000
Increase in Inventory (680,000 – 600,000) (80,000)
Increase in Accounts Payable 25,000
Increase in Accrued Expense 80,000
985,000
Add back non-cash loss and expenses. Increase in asset reduces

cash while increase in liabilities increases cash.
Accumulated depreciation was reduced by 250,000 from the

equipment sold. Moreover, there was 250,000 depreciation
expense during the year. This brings the balance of AD to
450,000.
MC 19 What is the 2020 net cash from/used in investing activities?
a. P1,000,000
b. P895,000
c. P850,000
d. P815,000
Answer: C
Property, plant, and equipment, beg. 1,000,000

Disposal (400,000)
Property, plant, and equipment, end (1,600,000)
Cash used in investing activity (Additions) (1,000,000)
Cash from investing activity (Disposal) 150,000
Net Cash Used in Investing (850,000)
MC 20 What is the 2017 net cash from (used in) financing activities?
a. P305,000
b. P440,000
c. P455,000
d. P545,000
Answer: A
New shares issued (22 x 10,000) 220,000

Notes Payable 325,000
Dividends paid (240,000)
305,000
Notes to FS
MC 21 Which is a purpose of the notes to financial statements?
a. To present information about the basis of preparation of the

financial statements and the specific accounting policies
used
b. To disclose the information required by Philippine Financial
Reporting Standards that is not presented elsewhere in the
Financial statements
c. To provide additional information which is not presented on
the face of the financial statements but that is necessary for
a fair presentation
d. All of these can be considered a purpose of the notes to
financial statements
Answer D:
The notes must (See Slide 205):
• Present information about the basis of preparation of the

financial statements and the specific accounting policies
used;
• Disclose any information required by PFRSs that is not

presented on the face of the statement of financial
position, income statement, statement of changes in
equity, or statement of cash flows
• Provide additional information that is not presented on

the face of the statement of financial position, income
statement, statement of changes in equity, or statement
of cash flows that is deemed relevant to an
understanding of any of them.
MC 22 IAS 1 Presentation of Financial Statements suggest a normal

order for the presentation of the notes to the financial
statements. What is this normal order?
1 A statement of compliance with PFRSs

2 A summary of significant accounting policies applied
3 Supporting information or computation
4 Other disclosures
a. 1, 2, 3, 4
b. 2, 1, 3, 4
c. 3, 1, 2, 4
d. 4, 1, 3, 2
Answer: A
Notes are normally presented in the following order (slide 207):
• A statement of compliance with PFRSs
• A summary of significant accounting policies applied
• Supporting information or computation
• Other disclosures
MC 23 Under PAS 1, Statement of compliance with PFRS should be

presented first. Hence, it is usually presented in Note 1 of
Financial Statements.
If the financial statements are prepared under liquidation basis

of accounting, the company should disclose the basis, its effect
should the financial statement have been prepared on going
concern basis, and its statement of compliance with PFRS.
a. True, True
b. True, False
c. False, True
d. False, False
Answer: D
Note 1 usually provides company information. IAS 1 provides

the order or sequence of presentation and not the specific
number of Notes where the information should be presented
(slide 207).
Financial statements not prepared on a going concern basis is

not prepared in accordance with PFRS (slide 12).
MC 24 Which of the following information should be disclosed in the

summary of significant accounting policies?
a. The measurement basis (or bases) used in preparing the

financial statements
b. Schedules showing the composition of the items presented
on the face of financial statements
c. Explicit and unreserved statement of compliance with PFRS
d. The level of rounding used in presenting amounts in the
financial statements.
Answer: A
In Summary of Significant Accounting Policies, the company

should disclose (slide 215)
• The measurement basis (or bases) used in preparing the

financial statements; and
• The other accounting policies used that are relevant to

an understanding of the financial statements.
MC 25 G Bank Inc. has total assets of P10 million and total liabilities
of P5 million. Which framework should it apply in the
preparation of financial statements?
a. Full PFRS
b. PFRS for Small and Medium-Sized Entities
c. PFRS for Small Entities
d. PFRS for Micro Entities
Answer: A
Public Entities should use Full PFRS (slide 231). Banks are
public entities since they are holder of secondary licenses issued
by BSP.
Review of Accounting Process
Recording
MC 26 A debit to an account means an increase in that account.
The double-entry system of accounting refers to the placement

of a double line at the end of a column of figures.
a. True, True
b. True, False
c. False, False
d. False, True
Answer: C
Debit increases asset and expense and decreases liability,

owners’ equity, and income.
Double-entry refers to the use of debit and credit in

bookkeeping.
MC 27 On December 3, 2020, TAC Enterprises performed cash services

of P140,000. The entry to record this transaction would include
a. a debit to Service Revenue of P140,000.

b. a credit to Accounts Receivable of P140,000.
c. a debit to Cash of P140,000.
d. a credit to Accounts Payable of P140,000.
Answer: C
The entry would be
Cash 140,000
Service Revenue 140,000
MC 28 Which of the following journal entries is recorded correctly and

in the standard format?
a Wages Expense 600

Cash 1,500
Advertising expense 900
b Wages expense 600

Cash 1,500
c Cash 1,500
Wages expense 600
d Wages expense 600

Cash 1,500
Answer: D
Debits are recorded first while Credits are indented. This applies
to both account title and amounts.
MC 29 D Corp. received a cash advance of P500,000 from a customer.

As a result of this event,
a. Assets increased by P500,000

b. Owner’s equity increased by P500,000
c. Liabilities decreased by P500,000
d. Revenue increased by P500,000
Answer: A
Receipt of cash advance will increase asset and liability by the

same amount.
MC 30 The petty cash fund is established in the amount of P5,000 and

contains P4,000 in cash and P950 in receipts for disbursements
when it is replenished. The journal entry to record
replenishment should include credit/s to the following
accounts/s
a. Petty cash, P750

b. Petty cash, P1,000
c. Cash in bank, P950; Cash over and Short, P50
d. Cash in Bank, P1,000
Answer: D
The entry to replenish petty cash fund would be
Petty Cash Fund 950

Cash Short or Over 50
Cash in Bank 1,000
MC 31 EX Company sold merchandise on credit with a list price of

P105,000 and a trade discount of 10%. Terms 2/10, n/30.
Which of the following entries is correct, given the indicated

method of accounting for cash discounts?
a Gross Price Method

Account Receivable 105,000
Sales 105,000
b Gross Price Method

Sales 92,610
c Net Price Method

Sales 94,500
d Net Price Method

Sales 92,610
Answer: D
Under the net price method, the recorded amount would be net
of trade discount and cash discount. Hence, the account
receivable and sales would be recorded at P92,610 (105,000 x
90% x 98%).
Under the gross method, the recorded amount would be net of

trade discount only. Hence, the account receivable and sales
would be recorded at 94,500 (105,000 x 90%).
MC 32 If the debit and credit totals of a trial balance were P1,200,000

and an additional entry was recorded and posted for the
purchase of P60,000 of office supplies for cash, what would be
the new debit and credit totals for the trial balance after this
entry is made?
a. P1,200,000
b. P1,260,000
c. P1,140,000
d. P1,100,000
Answer: A
Total debit and credit will not be affected. The transaction will
increase office supplies and decrease cash whose balances are
both reflected in total debit amount.
MC 33 On December 31, the ledger of RC Company consists of the

following:
Cleaning equipment P278,000

RC, Capital 200,000
Interest Payable 5,000
Office Equipment 115,000
Cleaning Supplies 26,000
Accounts Receivables 210,000
Accumulated depreciation 20,000
Cash 69,000
Salaries payable 96,000
What is the total of the credit column in a trial balance prepared

on December 31?
a. P602,000
b. P673,000
c. P678,000
d. P698,000
Answer: D

RC, Capital 200,000
Interest Payable 5,000
Accumulated depreciation 20,000
Salaries payable 96,000
698,000
Adjusting
MC 34 A law firm began November with Office Supplies of P16,000.

During the month, the firm purchased supplies of P29,000. At
November 30, supplies on hand total P21,000. The adjusting
entry at November 30 will result in supplies expense of
a. P21,000
b. P24,000
c. P29,000
d. P45,000
Answer: B
Office Supplies, beg. 16,000

Purchases 29,000
Office Supplies, beg. (21,000)
24,000
MC 35 At December 31, 2010, the unadjusted trial balance shows

Office Supplies of P60,000 and Office Supplies Expense of
P101,000. The December 31 adjusting entry debited Office
Supplies Expense of P17,000. After the December adjusting
entries have been posted, what is the correct balance in the
Office Supplies account on December 31, 2019?
a. P118,000
b. P84,000
c. P77,000
d. P43,000
Answer: D
Office Supplies, unadjusted 60,000

Office Supplies Expense (17,000)
43,000
MC 36 Yellow Company sells service contracts for personal computers.

The service contracts are for one-year, two-year, or three-year
period. All sales are for cash and all receipts are credited to
Unearned Service Contracts Revenue. This account had a
balance of P144,000 at December 31, 2020 before year-end
adjustment.
Service contract costs are charges as incurred to the Service

Contract Expense account, which had a balance of P36,000 at
December 31, 2020.
Service contracts still outstanding at December 31, 2020 expire

as follows:
During 2021 P30,000

During 2022 45,000
During 2023 20,000
What amount should be reported as Unearned Service Contract

Revenue in Yellow Company’s December 31, 2020 statement of
financial position?
a. P49,000
b. P59,000
c. P95,000
d. P108,000
Answer: C
Service Contract that will expire

During 2021 P30,000
During 2022 45,000
During 2023 20,000
95,000
MC 37 On July 1, DSS paid P80,000 to ARC for 4 months’ rent

beginning July 1. Prepaid Rent was debited for the full amount.
If financial statements are prepared on July 31, the adjusting
entry to be made by DSS is
a. Debit Rent Expense, P80,000; Credit Prepaid Rent, P20,000.

b. Debit Prepaid Rent, P20,000; Credit Rent Expense, P20,000.
c. Debit Rent Expense, P20,000; Credit Prepaid Rent, P20,000.
d. Debit Rent Expense, P80,000; Credit Prepaid Rent, P80,000.
Answer: C
Journal entry would be
Rent Expense 20,000

Prepaid Rent 20,000
80,000/4 = 20,000 rent per month
MC 38 On January 1, 2020, F Company sold a tract of land. F Company

received a non-interest bearing note for P4,500,000 due on
December 31, 2022 in exchange for the land. There is no readily
available fair value for the land, but the current market rate of
interest for comparable notes is 8%. How much is the interest
revenue for 2020?
a. P0, the note is non-interest bearing

b. P285,780
c. P308,642
d. P360,000
Answer: B
Interest revenue for 2020 is the function of carrying value and

effective interest rate of 8%.
= Face Value of the note x PV Factor x Effective Interest Rate

= 4,500,000 x 1.08^-3 x 8%
= 285,780
MC 39 Based on physical inventory taken on December 31, 2020, C

Corp. determined its chocolate inventory on a FIFO basis at
P26,000. C corp. determined that, after further processing costs
of P12,000, the chocolate could be sold as finished candy bars
for P40,000. C Corp.’s normal profit margin is 10% of sales. After
adjustment for the write-down of inventory, how much should
C Corp. report as chocolate inventory on its December 31, 2020
statement of financial position?
a. P26,000
b. P28,000
c. P36,000
d. P38,000
Answer: A
Inventory should be presented at lower of cost or net realizable

value. The cost is P26,000. The net realizable value is 28,000
(40,000 – 12,000).
MC 40 As of December 31, 2019, Z Corp. owns machinery and

equipment with a cost of P2,400,000 and accumulated
depreciation of P864,000. It has a useful life of 10 years with an
estimated salvage value of 10% based on its cost. The company
uses straight line method of depreciation.
On September 1, 2020, it acquired a machinery on installment

basis. The total installment price is P959,264 and is payable five
equal annual installments beginning September 1, 2020. The
company issued a non-interest bearing note in lieu of the
machinery. There is no established price for the machinery. The
prevailing market rate of interest for similar securities on the
transaction date was at 10%. The new machinery has an
estimated useful life of 10 years with an estimated salvage value
of 10% based on its cost. What is the depreciation expense for
the 2020?
a. P288,000
b. P264,000
c. P266,667
d. P240,000
Answer: D
Depreciation of the old machine is
= Depreciable Cost / Useful Life

= 2,400,000 x 90% / 10
= 216,000
Partial Depreciation of the new machine is
= Depreciable Cost / Useful Life x Months used

= 800,000 * 90% /10 x 4 / 12
= 24,000
The new machine was purchase on September 1, 2020. It was

used for four months from September 1, 2020 to December 31,
2020.
Cost of the new machine is computed as follows
= Installment x PV Factor
= 959,264/5 x (((1-(1+10%)^-4)/10%)+1)
= 191852.80 x 4.169865446
= 800,000
Note that the installment is payable at the date of purchase.
Total depreciation is
= Depreciation (Old + New)

= 216,000 + 24,000
= 240,000
MC 41 Only three adjustments appear in the adjustments column of a

worksheet for X Company: (1) to record P15,000 depreciation of
office equipment; (2) to record the use of P12,000 office supplies;
and (3) to record accrued interest on notes payable of P2,800. If
the trial balance column totals are P729,000, what are the totals
of the adjusted trial balance columns?
a. P741,000
b. P744,000
c. P746,800
d. P758,800
Answer: C
Total of the Trial balance column 729,000

Depreciation of office equipment 15,000
Accrued Interest 2,800
746,800
Adjusting entry on the use office supplies will increase office

supplies expense and decrease office supplies. Both accounts
are on the debit side of the trial balance.
MC 42 The trial balance prepared at December 31 did not balance.

Debit total was P159,200, and credit total was P153,200. In
determining the cause of the difference, you discovered the
following errors: a credit to Cash of P650 was not posted; a
P2,000 credit to be made to Sales account was credited to the
Account Receivable account instead; the Wages Payable account
balance of P9,300 was listed in the trial balance as P3,900. What
it the correct trial balance total?
a. P160,650
b. P160,600
c. P159,250
d. P153,200
Debit Total 159,250

Unposted Credit to Cash (650)
Credit to sale which was Credited to Accounts 2,000
Receivable
160,600
Alternatively,
Credit Total 153,200

Credit to Sale 2,000
Wages Payable account 5,400
160,600
Completing
MC 43 In Pine Corp.’s worksheet, the income statement column reflects

P58,000 Debit and P48,000 Credit; the balance sheet column
reflects P34,000 Debit and P44,000 Credit. How much is the net
income (loss) for the period?
a. P48,000 income
b. P10,000 income
c. P48,000 loss
d. P10,000 loss
Answer: D
Excess debit in the income statement column represents loss.

MC 44 The income statement of the month of Kleen Enterprises

contains the following information.
Revenues P7,000
Expenses
Wages Expense P2,000
Rent Expense 1,000
Supplies Expense 300
Advertising Expense 200
Insurance Expense 100
Total Expense 3,600
Net Income 3,400
The entry to close the revenue account includes a
a. debit to Income Summary for P3,400.

b. credit to Income Summary for P3,400.
c. debit to Income Summary for P7,000.
d. credit to Income Summary for P7,000.
Answer: D
The entry would be
Revenues 7,000
Income Summary 7,000
Revenue has credit balance. It will be debited to close the

account.
MC 45 Income Summary has a credit balance of P120,000 in J Co. after

closing revenues and expenses. The entry to close Income
Summary is
a. credit Income Summary P120,000, debit J, Capital

P120,000.
b. credit Income Summary P120,000, debit J Drawing
P120,000.
c. debit Income Summary P120,000, credit J Drawing
P120,000.
d. debit Income Summary P120,000, credit J Capital
P120,000.
Answer: D
Income summary with credit balance will be debited to close the

account.
MC 46 White Company recorded accrued salaries of P25,000 at

December 31, 2018. During 2019, White Company paid salaries
of P872,000. Unpaid salaries at December 31, 2019 amounted
to P34,000. White prepares adjustments only at December 31,
and also reversing entries on January 1. The balance of the
Salaries Expense account that would appear in the post-closing
trial balance at December 31, 2019 is
a. P0
b. P847,000
c. P872,000
d. P881,000
Answer: A
After closing entries, nominal account would have zero balance.
MC 47 Accounts appearing in the trial balance of XO Company as of

June 30 are listed below
Cash P290,000 Accum. Depreciation 810,000

Equipment 1,620,000 Accounts Receivable 310,000
Capital 1,100,000 Advertising Expense 15,000
Drawing 210,000 Service Revenue 480,000
Other expenses 190,000 Accounts Payable 245,000
No adjusting entry has yet been made to record depreciation

expense of P27,000 for the month of June. What is the total of
the credit column in a post-closing trial balance prepared on
June 30?
a. P2,220,000
b. P2,247,000
c. P2,452,000
d. P2,662,000
Answer: A
Accounts Payable 245,000

Accumulated Depreciation (810,000 + 27,000) 837,000
Capital (1,100,000 -210,000 + 480,000 -
190,000 – 15,000 -27,000) 1,138,00
2,220,000
MC 48 Jay Company prepares reversing entries at the beginning of the

accounting period. Which of the following adjusting entries
prepared by Jay will be reversed?
a. The entry to take up the expired portion of the insurance

premium paid in advance
b. The entry to take up the earned portion of rent collected in
advance
c. The entry to take up the unused supplies at the end of the
period
d. The entry to provide doubtful account expense
Answer: C
Those adjusting entries for accruals and deferrals (that set up

an asset/liability) may be reversed.
MC 49 Which of the following year-end adjusting entries should be

reversed?
a. The adjusting entry to record inventory at year-end

b. The adjusting entry to record the portion of rental received
in advance that is unearned at year-end
c. The adjusting entry to record doubtful accounts
d. The adjusting entry to record amortization of patent
Answer: B
Those adjusting entries for accruals and deferrals (that set up

an asset/liability) may be reversed.
MC 50 On December 13, P Corp. received a P350,000 check from Mike

M Company for services to be performed in the future. The
bookkeeper for Pitts Company incorrectly debited Cash for
P350,000 and credited Accounts Receivable for P350,000. The
amounts have been posted to the ledger. To correct this entry,
the bookkeeper should
a. debit Cash P350,000 and credit Unearned Service Revenue

P350,000.
b. debit Accounts Receivable P350,000 and credit Unearned
Service Revenue P350,000.
c. debit Accounts Receivable P350,000 and credit Cash
P350,000.
d. debit Accounts Receivable P350,000 and credit Service
Revenue P350,000.
Answer: B
Correct entry
Cash 350,000
Unearned Service Revenue 350,000
Per Books
Cash 350,000
Accounts Receivable 350,000
Correcting Entry
Accounts Receivable 350,000

Unearned Service Revenue 350,000
The correcting entry would set up Unearned Service Revenue

and remove Accounts Receivable.

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Quiz 2, Conceptual Framework and Accounting Standards

MC 1 The accounts below were taken from the unadjusted trial

An analysis of the above accounts disclosed the following:

a. Bank overdraft of P13,000 was deducted from cash balance

How much total current assets should be reported in the

Cash (124,000 + 13,000 see letter a) 137,000

Current assets are cash, assets realizable within normal

Note that offsetting is not allowed in the presentation of financial

Debit balance in AP represents cash advance to supplier or

Trade receivable is presented net of allowance for doubtful

Equity investments at fair value through profit or loss (at cost)

MC 2 Use the same information in the preceding number. How much

Bank Overdraft (letter a) 13,000

Bonds payable (250,000 / 5 letter f) 50,000

Current liabilities are expected to be settled within the normal

Again, offsetting is not allowed in the presentation of financial

The Company’s excess payment to supplier should not be offset

The 15,000 merchandise was not recorded as purchase. This

Employees income tax withheld and Income tax payable are

The 30,000 is due beyond one year. Hence, it should be

MC 3 M Corp. reported the following liability balances on December

10% note payable issued on October 1,

The 2020 financial statements were issued on March 31, 2021.

The company has the discretion to refinance the P2 million note

The P4 million was refinanced was refinanced after the balance

MC 4 A Corp. provided the following balances on December 31, 2020.

Accounts payable 500,000

Mortgage payable (4,000,000 – 500,000) 3,500,000

The P500,000 mortgage payable due in six months should be

Unamortized issue cost is a reduction from the face of the note.

Net Income P600,000

What would T. Corp report as total shareholders’ equity?

Ordinary share capital 400,000

MC 6 P Company had the following information in 2020. Compute

Sales revenue P500,000

Cost of goods sold 350,000

Sales revenue 500,000

Comprehensive income includes profit/loss and other

MC 7 F Company provided the following information for the current

Disbursements for purchases P5,800,000

What is the cost of goods sold for the current year?

Disbursements for purchases 5,800,000

Increase in accounts payable means purchases on account.

MC 8 The adjusted trial balance of B Company included the following

Accounting and legal fees P1,200,000

One-half of the rented premises is occupied by the sales

Distribution costs are expenses directly related to sales effort.

Legal and audit fees P1,700,000

The office space is used equally by the sales and accounting

Legal and audit fees P1,700,000

General and administrative expenses are incurred in the

MC 10 All of the following components of OCI should be reclassified to

a. Gains or loss from translating the financial statements of a

Unrealized gains/losses on equity investments measured at fair

MC 11 Royal Company started operations on January 1, 2020.

Income tax rate was 30%.

What is the amount reported in Royal’s 2021 statement of

The changes in 2019 Inventory method shall be reflected in the

You may also refer to MC 14.

MC 12 This statement shows the events and transactions that took

a. Statement of changes in equity

The statement of changes in equity shows the events and