TEST BANK
Theory of Accounts
Intermediate
Financial Accounting
Part 1A & Part 1B
ZEUS VERNON B. MILLAN
Chapter 1
Overview of Accounting
Chapter 1: Theory of Accounts Reviewer
Definition of Accounting
1. Accounting has been given various definitions, which of the following is not one of those
definitions
a. Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities that is intended to be useful in making
economic decisions.
b. Accounting is the art of recording, classifying, and summarizing in a significant manner and
in terms of money, transactions and events which are, in part of at least, of a financial
character and interpreting the results thereof.
c. Accounting is a systematic process of objectively obtaining and evaluating evidence
regarding assertions about economic actions and events to ascertain the degree of
correspondence between these assertions and established criteria and communicating the
results to interested users.
d. Accounting is the process of identifying, measuring, and communicating economic
information to permit informed judgment and decisions by users of information.
2. It is the first process used in accounting. It refers to the identification of events as to whether
they are recognized or not in the financial statements.
a. Identifying
b. Measuring
c. Communicating
d. Auditing
3. The following statements correctly refer to the accounting process.
I.
Measuring is the accounting process of analyzing business activities as to whether or not
they will be recognized in the books.
II.
Recognition refers to the process of including the effects of an event in the totals of the
statement of financial position or the statement of profit or loss and other comprehensive
income through memo entries.
III.
Disclosure of events in the notes to financial statement without including in the totals of
the statement of financial position or statement of profit or loss and other comprehensive
income is not an application of the recognition principle.
IV.
An accountable event is an event that has an effect on the assets, liabilities or equity of an
entity and its effect can be measured reliably.
V.
Sociological and psychological matters are within the scope of accounting.
a. I, II, III, IV, V
b. I, II, III, IV
c. IV
d. III, IV
Types of Events
4. These events involve changes in the economic resources or obligations of entities involving
other entities but do not involve transfers of resources or obligations
a. External events
c. External events other than transfers
b. Non-reciprocal transfers
d. Internal events
5. Events involving an entity and an external party.
a. External events
c. External events other than transfers
b. Non-reciprocal transfers
d. Internal events
6. Events in which an entity transfers (or receives) economic resources to (from) another entity
without directly receiving (or giving) value in exchange.
a. External events
c. External events other than transfers
b. Non-reciprocal transfers
d. Internal events
7. These events result to a sudden or unanticipated loss from fortuitous events.
a. Internal events
c. External events other than transfers
b. Non-reciprocal transfers
d. Casualty
8. Which of the following statements is true?
I.
Loss from theft should be classified as a nonreciprocal transfer
II.
Internal events are changes in economic resources by actions of other entities that do not
involve transfers of enterprise resources and obligations
III.
Nonreciprocal transfers involve the transfer of resources in only one direction, either from
an entity to other entities or from other entities to the entity.
IV.
Internal events are sudden, substantial, unanticipated reductions in enterprise resources
not caused by other entities
V.
Fire, earthquake and flood are examples of accountable events classified as internal
events.
a. I, II, III, V
b. I, III, V
c. II, III, IV, V d. I, III, IV, V
9. All of the following are events considered as exchange or reciprocal transfer, except
a. purchase of investment in equity securities
b. sale of equipment for non-interest bearing note
c. subscription on the entity’s own equity instrument
d. exchange of a note payable for an account payable
e. borrowing of money from a bank
10. All of the following are events considered as nonreciprocal transfer, except
a. declaration of cash dividends
c. payment of accounts payable
b. declaration of stock dividends
d. imposition of fines
11. All of the following are events considered as external events other than transfers, except
a. obsolescence
c. imposition of fines
b. inflation
d. vandalism
12. All of the following are events considered as internal events, except
a. Transfer of goods from work-in-process to finished goods inventory
b. flood, earthquake, fire and other “Acts of God”
c. transformation of biological assets from immature to mature
d. vandalism committed by the entity’s employees
13. Which of the following events is considered an internal event?
a. sale of inventory on account
b. provision of capital by owners
c. borrowing of money
d. conversion of raw materials into finished goods
14. Which of the following events is considered an external event?
a. production
c. payment of taxes
b. casualty loss
d. growth of biological assets
15. Which of the following events is considered an internal event?
a. theft
c. vandalism
b. contributions by owners
d. degeneration of biological assets
16. Which of the following correctly relates to accountable events?
I.
An obsolete asset which has no use was received in exchange of an existing asset. This
transaction may be classified as an exchange.
II.
An entity exchanges a non-cash asset for another non-cash asset in an exchange
transaction with commercial substance. This is a reciprocal transfer.
III.
An entity issues its shares of stocks in exchange for a non-cash asset. This is a reciprocal
transfer.
a. I
b. II
c. II, III
d. I, II, III
17. An example of income derived from a nonreciprocal transfer is
a. compensation received as damages in a successful lawsuit
b. appreciation of property
c. land acquired from a stockholder as donation
d. settlement of a liability at less than its book value
(RPCPA)
Measuring
18. Asset measurements in conventional financial statements
a. are confined to historical cost
b. are confined to historical cost and current cost
c. reflect several financial attributes
d. do not reflect output values
(RPCPA)
19. Financial statements are said to be a mixture of fact and opinion. Which of the following items
is factual?
a. cost of goods sold
c. discount on capital stock
b. retained earnings
d. patent amortization expense
(Adapted)
20. On December 31, 200A, Annod Co. decided to end its operations and dispose its assets within
three months. At December 31, 200A, the carrying amount of an investment property was less
than both its fair value and net realizable value. The fair value is greater than the net realizable
value. What is the appropriate measurement basis for the investment property in Annod’s
December 31, 200A statement of financial position?
a. Historical cost
c. Net realizable value
b. Fair value
d. Current replacement cost
Communicating
21. These are the principal means through which an entity communicates its financial information
to those outside it.
a. managerial reports
c. segment reports
b. financial statements d. directors’ statements
22. The analytical phase of accounting which significantly portrays the liquidity, solvency,
profitability of a business
a. interpreting
c. summarizing
b. recording
d. classification
(RPCPA)
Basic purpose
23. The basic purpose of accounting is
a. to provide information useful in making economic decisions
b. to provide information useful only for investors
c. to provide information regarding the economic resources controlled by an entity
d. to provide business owners, politicians, and other government officials an opportunity to
evade taxes
24. One objective of financial reporting is to provide information useful in assessing the amounts,
timing, and uncertainty of future cash flows. In regards to this objective, which of the following
is (are) correct?
I.
The emphasis on “assessing cash flow prospects” means that the cash basis is preferred
over the accrual basis of accounting.
II.
Information based on accrual accounting generally better indicates an entity’s present and
continuing ability to generate favorable cash flows than does information limited to the
financial effects of cash receipts and payments.
a. I only
b. II only
c. I and II
d. neither I nor II
25. The primary objective of financial reporting is to provide information:
a. About a firm's financing and investing activities
b. About a firm's economic resources and obligations
c. About a firm's products and services
d. Useful in predicting cash flows
(Adapted)
26. Financial accounting applies to which of the following:
a. Businesses
c. Governments
b. Non-profit organizations
d. All of these
(Adapted)
27. Stewardship reporting focuses on:
a. Showing investors what sales revenues were
b. Showing the financial statement reader just how the resources entrusted to the
management's care were managed
c. Showing employees how high their raises will be
d. Showing the financial statement reader how many shop stewards are employed
(AICPA)
28. The function of measuring and reporting information to absentee investors is called the:
a. Accounting function
c. Auditing function
b. Stewardship function
d. Management function
(AICPA)
29. The following relate to financial reporting. Choose the correct statement(s).
I.
Since financial statements are historical, they are of little use in making decisions about
the future.
II.
Financial accounting is based on the presumption that all statement users need the same
information.
III.
Financial accounting is expressly designed to measure directly the value of a business
enterprise.
a. I, III
b. II, III
c. II only
d. None
(RPCPA)
30. Financial reporting should provide all of the following information, except
a. Information that is useful to present and potential investors and creditors and other users
in making rational investment, credit, and similar decisions.
b. Information that helps present and potential investors, creditors, and other users assess
the amounts, timing, and uncertainty of prospective cash receipts from dividends or
interest and the proceeds from the sale, redemption, or maturity of securities or loans.
c. Information that is comprehensible only to accountants and auditors who have reasonable
understanding of business and economic activities and are willing to study the information
with reasonable diligence.
d. Information that clearly portrays the economic resources of an enterprise, the claims to
those resources and the effects of transactions, events, and circumstances that change its
resources and claims to those resources.
31. Apart from the monetary impact, factors of decision making include:
a. personal taste
c. environmental factors
b. social factors
d. all of these
(Adapted)
32. For the purpose of decision making:
a. accounting information provides information about future events
b. accounting information provides information about the outcomes of past decisions
c. the future is used as a guide to past estimates
d. the accountant never becomes involved in the budgeting process.
(Adapted)
Economic entities and activities
33. A business that operates to support a cause or interest is known as a
a. not-for-profit organization
c. career goal
b. sports franchise
d. private entity
34. The most common form of business organization is a
a. corporation
c. sole proprietorship
b. partnership
d. cell phone stand
(Adapted)
35. Which of the following statements are correct?
I.
The economic activities of a business enterprise increase or decrease its assets and
liabilities but never its equity.
II.
An internal event involves a transfer or exchange between two or more entities.
III.
Exchange is an economic activity which involves trading resources and obligations for other
resources or obligations.
IV.
Income recognition is a basic economic activity which involves the process of allocating
rights to the use of outputs among individuals and groups in society.
V.
An event generally is the source or cause of changes in assets, liabilities, and equity.
VI.
Investment is the process of using current inputs to increase the stock of resources
available for future output as opposed to immediately consumable output.
a. III, IV, V
b. I, II, III, V, VI
c. III, V, VI
d. II, III, VI
(RPCPA)
36. Which of the following statements correctly refer to the basic economic activities?
I.
Production is the process of converting economic resources into outputs of goods and
services that are intended to have greater utility than the required inputs.
II.
Exchange is the process of trading resources or obligations for other resources or
obligations.
III.
Consumption is the process of allocating rights to the use of output among individuals and
groups in society.
IV.
Income distribution is the process of using the final output of the production process.
V.
Savings is the process of using current inputs to increase the stock of resources available
for output as opposed to immediately consumable output.
VI.
Investment is the process by which individuals and groups set aside rights to present
consumption in exchange for rights to future consumption.
a. I, II
c. I, II, V, VI
b. I, II, III, IV
d. I, II, III, IV, V, VI
(RPCPA)
37. Whether a business is successful and thrives is determined by
a. markets.
b. free enterprise.
c. competition
d. all of these
(AICPA)
38. An effective capital allocation process
a. promotes productivity.
b. encourages innovation.
c. provides an efficient market for buying and selling securities.
d. all of these.
(AICPA)
39. A business that operates to earn money for its owners is called a(n)
a. economic entity
c. professional organization
b. for-profit business
d. owner financed business
(Adapted)
40. A free enterprise system allows businesses to
a. have their government choose their products
b. produce the goods and services they choose
c. buy goods at a discount
d. operate at a profit
(Adapted)
41. One of the disadvantages of a sole proprietorship is
a. all the profits go to the owner
c. the owner has all the risks
b. there are no lunch breaks
d. there are few regulations to follow
(Adapted)
42. A corporation is a business organization that is recognized by law to
a. pay no tax
c. have an active social life
b. have a life of its own
d. have at least 3 owners
(Adapted)
43. Those who transform ideas for products or services into real-world businesses are known as
a. profit takers b. accountants
c. entrepreneurs
d. organizers
(Adapted)
44. A business owned by two or more people is called
a. a corporation
c. a partnership
b. looking for trouble
d. venture capital
(Adapted)
45. A merchandising business
a. buys raw materials and transforms them into finished products
b. buys finished products and resells them
c. provides a service for a fee
d. all of the above
(Adapted)
46. Economic resources are the scarce means available for carrying on economic activities. The
economic resources of a business enterprises are:
a. productive resources
b. products c. money
d. all of these
(RPCPA)
47. Which of the following is not among the economic resources of a business enterprise?
a. money
b. products or output of the enterprise
c. obligations to pay money
d. ownership interest in other enterprises
(RPCPA)
48. It does not truly describe “economic value” as an element of economic resources
a. value in exchange
c. utility
b. over supply of resources
d. scarcity
(RPCPA)
Accounting information
49. Which of the following statements is correct?
I.
Accounting provides qualitative information, financial information, and quantitative
information.
II.
Qualitative information is found in the notes to the financial statements only.
III.
Accounting is considered an art because it is supported by an organized body of knowledge
IV.
Accounting is considered a science because it involves the exercise of skill and judgment.
V.
Measurement is the process of assigning numbers to objects such inventories or plant
assets and to events such as purchases or sales.
VI.
All quantitative information are also financial in nature.
VII.
The accounting process of assigning peso amounts or numbers to relevant objects and
events is known as Identification.
a. I, V
b. I, II, VI, V
c. I, II, III, IV, V
d. II, VI, V
(RPCPA)
50. Which of the following statements is incorrect?
I.
The information contained in the financial statements is obtained exclusively from the
firm’s accounting records.
II.
Financial accounting is a science rather than an art while management accounting is an art
rather than a science.
III.
Management decisions are oriented to the future whereas the decisions of external users
are oriented to the past.
IV.
Financial accounting is a branch of accounting which deals primarily with the common
needs of users while management accounting is a branch of accounting which deals
primarily with the specific needs of users.
V.
Quantitative information is always more useful than non-quantitative information for the
purpose of making economic decisions.
VI.
Financial statements are only one source of information needed by users to make rational
economic decisions.
VII.
Financial statements have the same basic purpose as financial accounting.
VIII.
Financial statements are the only source of information needed by users to make rational
economic decisions.
a. IV, VII, VIII
b. I, II, III, V, VIII
c. IV, VI, VII d. I, II, III, V, VI, VII
(RPCPA)
51. The manner in which the accounting records are organized and employed within a business is
referred to as
a. Accounting system
c. Voucher system
b. Business document
d. Special journals
(RPCPA)
52. Accounting is often called the "language of business" because
a. it is easy to understand
b. it is fundamental to the communication of financial information
c. all business owners have a good understanding of accounting principles
d. accountants in many companies share financial information
(RPCPA)
53. Accounting as an art involves the considerable use of judgment. Accountants should exercise
creative and critical thinking in solving accounting problems. In solving accounting problems,
this involves the use of imagination and insight by finding new relationships (ideas) among
items of information. It is most important in identifying alternative solutions.
a. Creative thinking
c. Professional Skepticism
b. Critical thinking
d. Wishful thinking
54. Creative skills and judgment is usually exercised in problem solving. State the correct order of
the following steps in problem solving.
I.
Selecting a solution from among the alternatives
II.
Identifying alternative solutions
III.
Recognizing a problem
IV.
Implementing the solution
V.
Evaluating the alternatives
a. III, II, IV, V, I
b. I, II, III, V, IV
c. III, II, V, I, IV d. I, II, III, VI, V
(RPCPA)
55. Critical thinking is most important in which of the following problem-solving steps?
a. Recognizing a problem
b. Identifying alternative solutions
c. Evaluating the alternatives
d. Selecting a solution from among the alternatives
(Adapted)
Basic Accounting Concepts
56. Which of the following statements is incorrect regarding accounting concepts?
a. Under the Accrual Basis of accounting, revenues are recognized when earned and
expenses are recognized when incurred, not when cash is received and disbursed.
b. Under the Going concern concept, the business entity is assumed to carry on its operations
for an indefinite period of time.
c. Under the Business entity/ Separate entity/ Entity/ Accounting entity Concept, the
business is treated separately from its owners.
d. Under the Time Period/ Periodicity/ Accounting Period concept, the life of the business is
divided into series of reporting periods.
e. Under the Cost-benefit concept, the cost of processing and communicating information
should exceed the benefits derived from it.
57. Which of the following statements is incorrect regarding accounting concepts?
a. Under the Materiality concept, items deemed material and affect decision making should
be separately disclosed.
b. Underlying assumptions are those that are mentioned in the Conceptual Framework;
Implicit assumptions are those that are not mentioned in the Conceptual Framework;
Pervasive concepts are those that affect virtually all financial statement elements and all
aspects of accounting.
c. Under the Cost/ Historical cost concept, the value of an asset is to be determined on the
basis of acquisition cost.
d. The Concept of Articulation states that all the components of a complete set of financial
statement are interrelated.
e. Under the Matching concept, revenues are matched with expenses in order to properly
determine the profit for a period.
58. Accrual accounting techniques are used to:
a. assign revenues and expenses to the appropriate accounting period.
b. record the anticipated effects of actions that may occur at a future date.
c. report the results of actions whose monetary effects are difficult to estimate.
d. allocate nonoperating revenues and expenses to the appropriate business unit.
(Adapted)
59. Accrual accounting is used because
a. cash flows are considered less important.
b. it provides a better indication of ability to generate cash flows than the cash basis.
c. it recognizes revenues when cash is received and expenses when cash is paid.
d. none of the above.
(Adapted)
60. The going concern assumption is also called
a. Periodicity
b. Entity
c. Business continuity d. Entity
61. The valuation of an assurance to receive cash in the future at present value on a business
entity’s financial statements is well-founded because of the accounting concept of:
a. Entity
b. Going concern
c. Materiality
d. Neutrality
(RPCPA)
62. Business entity produces financial statements at arbitrary points in time in accordance with
which basic accounting concept?
a. objectivity
b. periodicity
c. conservatism
d. matching
(RPCPA)
63. Treating partners’ salaries as an expense rather than as a means of allocating partnership
profits is an application of what theory?
a. proprietary theory
c. residual equity theory
b. entity theory
d. funds theory
(RPCPA)
64. Mr. Van owns a butcher shop, a restaurant, and a catering business. Separate financial
statements are prepared for each business independent of the other businesses. What
accounting principle or assumption is being applied in this situation?
a. Time period assumption
c. Full-disclosure principle
b. Separate entity assumption
d. Unit-of-measure assumption
(CGA)
65. Which of the following correctly relate to the Monetary/ Stable monetary/ Monetary Unit
concept?
I.
Assets, liabilities, equity, revenues and expenses should be stated in terms of a unit of
measure which is the peso in the Philippines
II.
The purchasing power of the peso is stable or constant and that its instability is insignificant
and therefore ignored.
a. I
b. II
c. I and II
d. None
66. An accounting (financial reporting) period may be
a. One month
b. One quarter
c. One year
d. a, b or c
67. Which of the following statements best reflects the accounting assumption of periodicity or
time period?
I.
A fiscal year begins in any month and ends in any month but covers a period of 12 months
II.
A calendar year begins on any month and ends on any month but covers a period of 12
months
III.
Technically, an accounting year is synonymous with an accounting period.
IV.
Accounting periods are usually equal in length.
a. I, II, III, IV
b. I, IV
c. I, III, IV
d. II, III, IV
68. Which of the following best reflect(s) the reason(s) why companies select accounting periods
other than a calendar year?
a. to avoid closing books during peak sales period
b. to close the books at a time when inventories and business activity are lowest
c. to conform to auditors’ request in order to reduce audit efforts and cost of counting
inventories
d. a and b
69. Most listed corporations in the Philippines have which type of accounting year?
a. fiscal year b. calendar year
c. quarterly
d. indeterminate
70. For a fiscal year ending April 30, 20x2, the period covered by the statement of profit or loss
and other comprehensive income is
a. April 1, 20x2 to April 30, 20x2
c. May 1, 20x1 to April 30, 20x2
b. April 1, 20x1 to April 30, 20x2
d. April 30, 20x1 to April 30, 20x2
71. An entity uses calendar year as its accounting period. The statement of financial position
prepared on December 31, 20x2 covers the period
a. December 31, 20x1 to December 31, 20x2
b. January 1, 20x1 to December 31, 20x2
c. January 1, 20x2 to December 31, 20x2
d. From business’ inception up to December 31, 20x2
72. Which of the following statements is incorrect regarding the basic accounting concepts?
a. Under the Consistency concept, the financial statements should be prepared on the basis
of accounting principles which are followed consistently.
b. Under the Entity theory, the accounting objective is geared toward proper income
determination. Proper matching of cost against revenue is the ultimate end. Entity theory
emphasizes the income statement. This is explained by the equation Assets = Liabilities +
Capital.
c. Under the Proprietary theory the accounting objective is directed toward proper valuation
of assets. This theory emphasizes the importance of the balance sheet. It is exemplified by
the equation Assets – Liabilities = Capital.
d. Under the Fund theory, the accounting objective is neither proper income determination
nor proper valuation of assets but the custody and administration of funds. The objective
is directed toward cash flows exemplified by the formula “cash inflows minus cash outflows
equals fund.” Government accounting and fiduciary accounting are examples of the
application of this concept.
e. Under the Residual equity theory, the accounting objective is proper valuation of assets.
This is applicable when there are two classes of stockholders, common and preferred.
Thus, the equation is Assets – Liabilities + Preference Shareholders’ Equity = Ordinary
Shareholders’ Equity.
73. Which of the following statements correctly relate to the basic features of financial
accounting?
I.
The going concern assumption is necessary for asset valuation at historical cost to have
meaning.
II.
Inexact information always makes financial statements useless for decision making.
III.
Under the residual equity theory, preference share equity is deducted from total equity to
arrive at ordinary share equity.
IV.
Materiality is always a quantitative as opposed to a qualitative concept.
a. I, III, IV
b. I, II, IV
c. I, III
d. I, II
74. The Full Disclosure Principle recognizes that the nature and amount of information included in
financial reports reflects a series of judgmental trade-offs. The trade-offs strive for
I.
Sufficient detail to disclose matters that make a difference to users
II.
Sufficient condensation to make the information understandable, keeping in mind costs of
preparing and using it
a. I
b. II
c. I and II
d. None
75. A concept that states that all the components of a complete set of financial statement are
interrelated
a. entity
c. concept of articulation
b. accounting process
d. principle of fair presentation
76. Which of the following statements are correctly stated?
I.
Under the entity theory, the major accounting effort is accounting effort is directed toward
proper valuation of assets rather income determination. What is more important is the
valuation of assets because owners are interested in the real worth of their investment.
This is expressed in accounting equation “assets - liabilities = capital”.
II.
One of the basic features of financial accounting is the direct measurement of economic
resources and obligations and changes in them in terms of money and sociological and
psychological impact.
III.
The accounting process consists of two inter-related parts – the recording phase and the
summarizing phase. The preparation of a trial balance is a step under the recording phase.
IV.
Financial accounting measurements are primarily based on prices at which economic
resources and obligations are exchanged.
V.
Owners’ equity is the excess of an enterprise’s assets over its liabilities.
VI.
The financial position and results of operations of an entity are not fundamentally related.
a. I, IV, V
b. IV, V
c. I, III, IV, V
d. III, IV, V, VI
77. Application of the full disclosure principle
a. Is theoretically desirable but not practical because the costs of complete disclosure exceed
the benefits.
b. Is violated when important financial information is buried in the notes to the financial
statements.
c. Is demonstrated by providing additional information whenever this information is deemed
relevant to the understanding of the financial statements.
d. Requires that the financial statements be consistent and comparable.
78. While making a delivery, the driver of Fastrac Courier collided with another vehicle causing
both property damage and personal injury. The party sued Fastrac for damages which could
exceed Fastrac's insurance coverage. Existence of the lawsuit was reported in the notes to
Fastrac's financial statements. What accounting principle, assumption or constraint is being
applied in this situation?
a. Full-disclosure principle
c. Matching principle
b. Conservatism constraint
d. Unit-of-measure assumption
(CGA)
79. What does the full disclosure principle require?
a. All relevant information to be disclosed in the financial statements
b. All relevant information to be disclosed in the financial statements and the notes
accompanying the financial statements
c. Sufficient information to be disclosed so that the financial statements are not misleading
d. Sufficient information to be disclosed so that the financial statements may be used for
investment and credit granting decisions
(CGA)
80. Which accounting principle charges low-cost capital items such as waste baskets directly to an
expense?
a. historical cost b. materiality c. expense recognition d. matching
(CGA)
81. The process of converting non-cash resources and rights into cash or equivalent claims to cash
is called
a. Realization b. Allocation
c. Recognition
d. Disposition
(RPCPA)
82. The body of rules that dictates that the entire profit must be recognized at the moment and
in the period of sale is called:
a. cost convention
c. realization convention
b. going concern convent
d. conservatism
(RPCPA)
83. Which statements correctly refer to the basic principles used in accounting?
a. The personal assets of the owner of a company will not appear on the company's balance
sheet because of the principle of conservatism.
b. The growing concern principle/guideline is associated with the assumption that the
company will continue on long enough to carry out its objectives.
c. An instance of application of the conservatism principle is when a very large corporation's
financial statements have the peso amounts rounded to the nearest P1,000.
d. In applying the matching principle, income is not recognized if the related expense cannot
be determined reliably.
84. Which principle/guideline requires a company's balance sheet to report its land at the amount
the company paid to acquire the land, even if the land could be sold today at a significantly
higher amount?
a. Conservatism b. Economic entity c. Monetary unit
d. Cost
(RPCPA)
85. During the lifetime of an entity accountants produce financial statements at arbitrary points
in time in accordance with which basic accounting concept?
a. Objectivity
b. Periodicity
c. Conservatism d. Matching
(RPCPA)
86. Which principle/guideline allows a company to ignore the change in the purchasing power of
the peso over time?
a. Cost
b. Economic entity c. Monetary unit d. Timeliness
87. Which principle/guideline requires the company's financial statements to have footnotes
containing information that is important to users of the financial statements?
a. Conservatism
b. Economic entity
c. Full disclosure d. Neutrality
(RPCPA)
88. Public utilities' balance sheets list the plant assets before the current assets. This is acceptable
under which accounting principle/guideline?
a. Conservatism
c. Industry practices
b. Cost
d. This is not acceptable
(RPCPA)
89. A large company purchases a P2,000 digital camera and expenses it immediately instead of
recording it as an asset and depreciating it over its useful life. This practice may be acceptable
because of which principle/guideline?
a. Cost
b. Matching
c. Materiality d. Conservatism
90. Uncertainty and risk inherent in business situations should be adequately considered in
financial reporting. This statement is an example of the concept of
a. disclosure
b. conservatism
c. completeness d. neutrality
(RPCPA)
91. Revenue generally may be recognized when:
(Item #1) The earning process is complete; (Item #2) An exchange has taken place
a. yes, no
b. no, yes
c. no, no d. yes, yes
(RPCPA)
92. Which of the following statements is correctly stated?
I.
Effects of the events on the financial position of the enterprise are measured and
represented by money amounts.
II.
The consistency principles refer to the use of original historical cost in the matching
process.
III.
An accrued expense can best be described as an amount not paid but currently matched
with earnings.
IV.
Generally, revenues should be recognized at a point when an order for a definite amount
of merchandise has been received for shipment.
V.
Accounting process is governed by generally accepted principles which reflect the
objectives and the basic features of financial accounting.
a. I, III, V
b. I, II, III, IV, V
c. I, III, IV, V
d. I, II, III, V
(RPCPA)
93. Under what principle when revenue is generally recognized and when the earning process is
virtually complete and an exchange has taken place
a. consistency b. maturing c. realization d. conservatism
(RPCPA)
94. The accounting objective or theory that is directed towards proper valuation of assets
a. Entity theory
c. Funds theory
b. Residual equity theory
d. Proprietary theory
(RPCPA)
95. A theory in financial accounting which is exemplified in the equation “Assets - Liabilities =
Capital.”
a. proprietary theory
c. residual equity theory
b. entity theory
d. fund theory
(RPCPA)
96. The following statements relate to the standard of adequate disclosure:
I.
In complying with the standard of adequate disclosure, accountants are guided by the
doctrine that more information is always better than less.
II.
Financial accounting information that meets the qualitative objectives of financial
accounting also meets the reporting standard of adequate disclosure.
III.
Adequate disclosure is concerned not only with the kind of information contained in
financial statements but also with the manner in which that information is presented.
IV.
The disclosure standard calls for financial reporting of any financial facts significant enough
to influence the judgment of an informed reader of the statements.
State whether the foregoing statements are false:
a. all of the statements are false
c. only two statements are false
b. only one statement is false d. three statements are false
(RPCPA)
97. It is the exercise of care and caution in dealing with uncertainties in measurement so as not to
overstate assets and income and not understate liabilities and expenses.
a. Completeness b. Prudence c. Faithful representation d. Neutrality
98. The general tendency toward early recognition of unfavorable events and minimization of the
amount of net assets and net income is called:
a. conservatism
b. consistency c. neutrality d. verifiability
99. When uncertainty exists, the convention of conservatism uses estimates of a conservative
nature in an attempt to ensure which of the following?
a. Assets, revenues, liabilities, and expenses are not overstated
b. Assets, revenues, liabilities, and expenses are not understated
c. Assets and revenues are not understated; liabilities and expenses are not overstated
d. Assets and revenues are not overstated; liabilities and expenses are not understated
(CGA)
Branches of Accounting
100. The process of identifying, measuring, analyzing, and communicating financial information
needed by management to plan, evaluate, and control an organization’s operations is called
a. financial accounting
c. tax accounting
b. managerial accounting
d. auditing
(AICPA)
101. A city taxes merchants for various central district improvements. Which of the following
accounting methods assist(s) in assuring that these revenues are expended legally?
(Item #1) Fund accounting; (Item #2) Budgetary accounting
a. Yes, No b. No, Yes
c. No, No
d. Yes, Yes
(AICPA)
Which of the following correctly refer to the various branches of accounting?
Government accounting deals with accounting for the national government and its
instrumentalities, focusing attention on the custody of public funds and the purpose or
purposes to which such funds are committed.
II.
Institutional accounting deals with handling of accounts managed by a person entrusted
with the custody and management of property for the benefit of another.
III.
Estate accounting deals with the handling of accounts for fiduciaries who wind up the
affairs of a deceased person.
IV.
Social responsibility accounting is the process of measuring and disclosing the performance
of firm in terms of community involvement and related criteria.
V.
Accounting Systems deals with the installation of accounting procedures for the
accumulation of financial data; includes designing of accounting forms to be used in data
gathering.
VI.
Cost accounting is the systematic recording and analysis of the costs of material, labor, and
overhead incident to production.
VII.
Fiduciary accounting is the accounting for not-for-profit entities other than the
government.
a. I, II, III, IV, V, VI, VII
c. I, III, IV, V, VI, VII
b. I, II, IV, V, VI, VII
d. I, III, IV, V, VI
102.
I.
103. Which of the following is not a characteristic of management accounting?
a. The level of detail is greater than financial accounting.
b. It must be in compliance with the IFRSs.
c. There is one primary user group.
d. It deals primarily with segments of an organization.
(AICPA)
Which of the following statements correctly refer to financial reporting and accounting?
Financial accounting is the process of identifying, measuring, analyzing, and
communicating financial information needed by management to plan, evaluate, and
control an organization's operations.
II.
Financial statements are the principal means through which financial information is
communicated to those inside an enterprise.
III.
Users of the financial information provided by an entity use that information to make
capital allocation decisions.
IV.
While objectives for financial reporting exist on an informal basis, no formal objectives
have been adopted.
V.
Financial reports in the early 21st century did not provide any information about a
company’s soft assets.
a. I, II, III, IV, V b. II, III, IV, V
c. III, IV, V
d. III
104.
I.
105. General-purpose financial statements are the products of
a. financial accounting
b. managerial accounting.
c. both financial and managerial accounting.
d. neither financial nor managerial accounting.
(Adapted)
106. The information provided by financial reporting pertains to
a. individual business enterprises, rather than to industries or an economy as a whole or to
members of society as consumers.
b. business industries, rather than to individual enterprises or an economy as a whole or to
members of society as consumers.
c. individual business enterprises, industries, and an economy as a whole, rather than to
members of society as consumers.
d. an economy as a whole and to members of society as consumers, rather than to individual
enterprises or industries.
(AICPA)
107. Financial statements in the early 2000s provide information related to
a. non-financial measurements.
b. forward-looking data.
c. hard assets (inventory and plant assets).
d. none of these.
(Adapted)
108. Which of the following statements is not an objective of financial reporting?
a. Provide information that is useful in investment and credit decisions.
b. Provide information about enterprise resources, claims to those resources, and changes to
them.
c. Provide information on the liquidation value of an enterprise.
d. Provide information that is useful in assessing cash flow prospects.
(Adapted)
109. One objective of financial reporting is to provide
a. information about the investors in the business entity.
b. information about the liquidation values of the resources held by the enterprise.
c. information that is useful in assessing cash flow prospects.
d. information that will attract new investors.
(Adapted)
110. Which of the following is true regarding the comparison of managerial to financial
accounting?
a. Managerial accounting is generally more precise.
b. Managerial accounting has a past focus and financial accounting has a future focus.
c. The emphasis on managerial accounting is relevance and the emphasis on financial
accounting is timeliness.
d. Managerial accounting need not follow generally accepted accounting principles (GAAP)
while financial accounting must follow them.
(AICPA)
111. Which of the following statements correctly relates to financial reporting?
a. Accounting standards are now less likely to require the recording or disclosure of fair value
information due to its inherent subjectivity.
b. One weakness of accrual accounting is that it does not provide a good indication of the
enterprise's present and continuing ability to generate favorable cash flows.
c. Some generally accepted accounting principles have simply been accepted as appropriate
because of their universal application rather than due to the action of an authoritative
accounting rule-making body.
d. Accounting standards are a product of careful logic or empirical findings and are not
influenced by political action.
(Adapted)
112. Which of the following incorrectly relates to financial reporting?
a. An effective process of capital allocation promotes productivity and provides an efficient
market for buying and selling securities and obtaining and granting credit.
b. Users of financial accounting statements have both coinciding and conflicting needs for
information of various types.
c. The expectations gap is caused by what the public thinks accountants should be doing and
what accountants think they can do.
d. Ethical issues in financial accounting in the Philippines are governed by the FRSC.
(Adapted)
113. Electronic data processing is
a. act of preparing a program defined as the complete plan for the solution of a problem
b. system of processing data performed by mechanical equipment such as general office
machines to increase speed and accuracy of data processing operations
c. the systematization of processing operations in a manner that will provide a rapid and
uninterrupted flow of all information needed in the conduct of the business
d. a system of accumulating, assembling and recasting transactions by the use of electronic
devices with the object of recording, analyzing and reporting their output data
(RPCPA)
114. The end product of the financial accounting process
a. financial statement
b. audit report
c. ledger
d. T-account
(RPCPA)
115. Which of the following statements is correct?
a. Accounting and bookkeeping are synonyms.
b. The process of providing financial information to external decision makers is referred to as
managerial accounting.
c. Financial statements generally include all the balance sheet, statement of profit or loss and
other comprehensive income, statement of changes in equity, statement of cash flows,
notes, and the corporate income tax return.
d. Financial accounting applies to both business and non-business organizations.
Practice of Accounting
116. The law that regulates the practice of accounting in the Philippines is the Philippine
Accountancy Act of 2004 also known as
a. R.A. No. 9298
c. R.A. No. 8299
b. R.A. No. 9892
d. R.A. Blg. 69
117. The professional regulatory board created under Republic Act No. 9298 tasked with the
supervision of the registration, licensure and practice of accountancy in the Philippines.
a. PRC
b. BOA
c. PICPA
d. FRSC
118.
a.
b.
c.
d.
The Board of Accountancy (BOA) shall be composed of
Six (6) members with a chairman for a total of six (6) individuals
chairman and six (6) members for a total of seven (7) individuals
chairman and fifteen (15) members
chairman and seventeen (17) members
119. The Commission upon the recommendation of the Board shall within ninety (90) days from
the effectivity of the IRR, create an accounting standard setting body to be known as the
a. Financial Reporting Standards Council
b. Financial Reporting Standards Committee
c. Accounting Standards Committee
d. Financial Reporting Standards Board
120.
FRSC shall be composed of
a.
b.
c.
d.
Fifteen members and a Chairman
Fourteen members with a Chairman
Fourteen members and a Chairman
Eight members and a Chairman
121.
a.
b.
c.
d.
e.
f.
All of the following are represented in the FRSC, except
Board of Accountancy (1)
Securities an d Exchange Commission (1)
Bangko Sentral ng Pilipinas (1)
Bureau of Internal Revenue (1)
An association or organization of CPAs in active public practice of accountancy (1)
None, all of the above are represented in the FRSC
122.
a.
b.
c.
d.
One of the following is not a member of the Financial Reporting Standards Council.
Philippine Institute of Certified Auditors
Commission on Audit
Bangko Sentral ng Pilipinas
Securities and Exchange Commission
123. The integrated national professional organization of Certified Public Accountants
accredited by the Board and the Commission.
a. Accredited National Professional Organization of Certified Public Accountants or APO
b. Federation of Certified Public Accountants
c. Philippine Institute of Certified Public Auditors
d. Accredited National Professional Accountants
124. The Accredited National Professional Organization of Certified Public Accountants or APO
in the Philippines is
a. Philippine Institute of Certified Public Auditors
b. Association of Certified Public Accountants in Commerce and Industry
c. Philippine Institute of Certified Public Accountants
d. Association of Certified Public Accountants in Education
125. An accountant employed in a government agency is considered to be in the
a. Practice of Public Accountancy
c. Practice in Education/Academe
b. Practice in Commerce and Industry d. Practice in the Government
126. The role of the Securities and Exchange Commission in the formulation of accounting
principles can be best described as
a. consistently primary.
b. consistently secondary.
c. sometimes primary and sometimes secondary.
d. non-existent.
(Adapted)
127. Corporations are required to submit their financial statements to the
a. FRSC
b. BOA
c. COA
d. SEC
128. Which of the following is not among the Four Sectors in the practice of accountancy as
enumerated in R.A. 9298 also known as the “Philippine Accountancy Act of 2004”?
a. Practice in Commerce and Industry c. Practice in the Government
b. Practice in Education/Academe
d. Practice in Private Accounting
129.
Most accounting positions within an organization have primarily
a. line authority
b. line and staff authority
(RPCPA)
130.
I.
II.
III.
IV.
V.
VI.
c. staff authority
d. financial authority
Which of the following statements are correct?
The first step in problem solving in accounting is to analyze the consequences of different
alternatives.
Resources are traded in the marketplace at a price because they are in limited or scarce
supply.
An internal transaction is an economic event which occurs between one entity and another
entity.
Public accountants in the Philippines are found in the public service serving local and
national government bodies.
Establishing goals, gathering information on alternatives, determining the consequences
of alternatives, and choosing a course of action involve estimates of future events.
A major focus of accounting information is on actual, historical financial events. Therefore,
recording financial transactions of an entity is of no use in establishing future relationships.
a. I, II, V
(Adapted)
b. II, V
c. II, V, VI
d. I, II, IV, V, VI
Accounting standards
131. Issuing of accounting standards is the responsibility of the
a. PICPA
b. FRSC c. AASC
d. CPE Council
132. A common set of accounting standards and procedures are called
a. financial account standards
b. generally accepted accounting principles
c. objectives of financial reporting
d. statements of financial accounting concepts
(RPCPA)
133. Accounting principles are "generally accepted" only when
a. an authoritative accounting rule-making body has established it in an official
pronouncement.
b. it has been accepted as appropriate because of its universal application.
c. both a and b.
d. neither a nor b.
(RPCPA)
134. Generally accepted accounting principles
a. include detailed practices and procedures as well as broad guidelines of general
application.
b. are influenced by pronouncements of the SEC and Regulatory Accounting Principles
c. change over time as the nature of the business environment changes.
d. all of these.
(Adapted)
135. Choose the correct statement about generally accepted accounting principles (GAAP)
a. They are laws
b. The Bureau of Internal Revenue enforces GAAP
c. Firms that do not comply with GAAP may suffer negative economic consequences.
d. GAAP in the Philippines is represented by PSAs
(RPCPA)
136. Accounting concepts are not derived from
a. Inductive reasoning
c. Pragmatism
b. Experience
d. Laws of nature
(Adapted)
137. Generally accepted accounting principles in the Philippines are represented by
a. PASs
b. PSAs
c. PFRSs
d. SFASs
Philippine Financial Reporting Standards (PFRSs) comprise:
I.
Philippine Financial Reporting Standards
II.
Philippine Accounting Standards
III.
Interpretations adopted by the Philippine Interpretations Committee (PIC)
IV.
Accounting Practice Statements and Implementation Guidance
a. I, II, III
b. I, II, III, IV
c. I and II
d. I and III
138.
139.
a.
b.
c.
d.
The Philippine Financial Reporting Standards (PFRSs) are standards adopted by the
Accounting Standards Council (ASC)
Financial Reporting Standards Committee (FRSC)
Philippine Institute of Certified Public Accountants (PICPA)
Financial Reporting Standards Council (FRSC)
140.
a.
b.
c.
d.
Application and Implementation Guidance included in PFRSs
forms part of the standards and are in themselves standards
does not form part of the standards
may or may not be integral part of the standards
are useless if the accountant is a CPA
141. When resolving accounting problems not specifically addressed by current standards, an
entity should be guided by the hierarchy of reporting standards. The correct sequence of the
hierarchy of reporting standards in the Philippines is
I. PASs, PFRSs and Interpretations
II. Conceptual Framework
III. Judgment
a. I, III, II
b. I, II, III
c. II, I, III
d. I, II
142. In the absence of a GAAP addressing a particular transaction
a. Management may use its judgment in developing a relevant and reliable accounting policy
b. Management should consider the most recent pronouncements of other standard-setting
bodies that use a similar conceptual framework to develop accounting standards, other
accounting literature and accepted industry practices
c. The entity should refer to the Conceptual Framework.
d. The entity should refer to its External Auditor.
143. The argument that practicing accountants are familiar with the significance of various
accounting problems and the feasibility of alternative solutions is an argument for establishing
generally accepted accounting principles through
a. a free-market approach
c. government regulation
b. a deductive approach
d. private sector regulation
(Adapted)
International Standards
144. Generally accepted accounting principles in the Philippines are based on
a. IFRSs issued by IASB
b. SFAS issued by FASB
c. partly (a) and (b)
d. GAAP in the Philippines are originally formulated by the FRSC and are not based on
standards issued by other standard setting bodies.
The International Accounting Standards Board (IASB)
Directly influences governmental legislation regarding accounting standards.
Develops binding pronouncements for its members.
Is composed of members from national standard setting bodies.
Establishes uniform accounting standards to eliminate reporting differences among
nations.
(Adapted)
145.
a.
b.
c.
d.
146. Approval of International Financial Reporting Standards (IFRSs) and related documents,
such as the Conceptual Framework for Financial Reporting, exposure drafts, and other
discussion documents, is the responsibility of the
a. International Accounting Standards Board
b. International Accounting Standards Committee
c. International Accounting Standards Council
d. Financial Reporting Standards Council
147. Are the following statements true or false concerning the IFRSs?
I. IFRSs set out recognition, measurement, presentation and disclosure requirements dealing
with transactions and events that are important in general and special purpose financial
statements. They may also set out such requirements for transactions and events that arise
mainly in specific industries.
II. IFRSs are based on the Conceptual Framework, which addresses the concepts underlying the
information presented in general purpose financial statements. The objective of the
Conceptual Framework is to facilitate the consistent and logical formulation of IFRSs. The
Conceptual Framework should, however, not be used as a basis for the use of judgment in
resolving accounting issues.
a. True, true
b. True, false
c. False, true
d. False, false
148.
I.
II.
III.
IV.
Which of the following statements correctly refer(s) to the IFRSs?
IFRSs are designed to apply to the general purpose financial statements and other financial
reporting of all profit-oriented entities.
Profit-oriented entities include those engaged in commercial, industrial, financial and
similar activities, whether organized in corporate or in other forms. They include
organizations such as mutual insurance companies and other mutual cooperative entities
that provide dividends or other economic benefits directly and proportionately to their
owners, members or participants.
Although IFRSs are not designed to apply to not-for-profit activities in the private sector,
public sector or government, entities with such activities may find them appropriate.
The Public Sector Committee of the International Federation of Accountants (PSC) has
issued a Guideline stating that IFRSs are applicable to government business entities. The
PSC prepares accounting standards for governments and other public sector entities, other
than government business entities, based on IFRSs.
a. I, II
b. II, III, IV
c. I, II, III
d. I, II, III, IV
149. The objectives of the International Accounting Standards Board are (choose the incorrect
statement)
a. To develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting to help
participants in the various capital markets of the world and other users of the information
to make economic decisions;
b. To promote the use and rigorous application of those standards
c. To eliminate differences between standards used by various countries
d. To work actively with national standard-setters to bring about convergence of national
accounting standards and IFRSs to high quality solutions
150. Which of the following statements is correct?
a. The term ‘financial statements’ includes a complete set of financial statements prepared
for an annual period only (excluding statements prepared for interim period), and
condensed financial statements for an interim period.
b. In some cases, IASB permitted different treatments for given transactions and events.
Usually, one treatment is identified as the ‘benchmark treatment’ and the other as the
‘allowed alternative treatment’. The financial statements of an entity may appropriately
be described as being prepared in accordance with IFRSs whether they use the benchmark
treatment or the allowed alternative treatment.
c. The IASB’s objective is to require like transactions and events to be accounted for and
reported in a like way and unlike transactions and events to be accounted for and reported
differently, both within an entity over time and among entities. Consequently, the IASB
intends to permit choices in accounting treatment. Also, the IASB has reconsidered, and
will continue to reconsider, those transactions and events for which IFRSs permit a choice
of accounting treatment, with the objective of increasing the number of those choices.
d. Standards approved by the IASB include paragraphs in bold type and plain type; those in
bold type indicate the main principles and have greater authority than those in plain type.
An individual standard should be read in the context of the objective stated in that
standard and the Preface to IFRSs.
e. Interpretations of IFRSs are prepared by the SIC to give authoritative guidance on issues
that are likely to receive divergent or unacceptable treatment, in the absence of such
guidance.
151. In the event of conflict between the International Financial Reporting Standards and the
local standards, which among the following will prevail?
a. The provisions of the Corporation Code and Tax Code will prevail
b. The rule of the Philippine Securities and Exchange Commission prevails
c. The rule of the International Accounting Standards prevails
d. The rule of local standards, laws and regulations shall prevail
(Adapted)
Are the following statements about the Norwalk Agreement true or false?
The Norwalk Agreement requires the consolidated financial statements of all listed United
States companies, starting after January 1, 2005, to be prepared in accordance with
International Accounting Standards.
II.
The Norwalk Agreement was an agreement for short-term financial reporting convergence
between the European Commission and the United States government.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
152.
I.
153. Which of the following bodies is responsible for reviewing accounting issues that are likely
to receive divergent or unacceptable treatment in the absence of authoritative guidance, with
a view to reaching consensus as to the appropriate accounting treatment?
a. International Financial Reporting Interpretations Committee (IFRIC)
b. Standards Advisory Council (SAC)
c. International Accounting Standards Board (IASB)
d. International Accounting Standards Committee Foundation (IASC Foundation)
(ACCA)
154. The International Financial Reporting Interpretations Committee (IFRIC) issues
interpretations as authoritative guidance. For which of the following should IFRIC consider
issuing an Interpretation?
I.
Narrow, industry-specific issues
II.
Newly identified financial reporting issues not specifically addressed in IFRSs
III.
Issues where unsatisfactory or conflicting interpretations have developed, or seem
likely to develop
IV.
Areas where members of the IASB cannot reach unanimous agreement
a. I, II, III
b. II, III
c. III, IV
d. II, III, IV
(ACCA)
Are the following statements true or false?
The Norwalk Agreement outlines the commitment of the IASB and FASB towards
harmonization of International and US Accounting Standards.
II.
IOSCO requires mandatory preparation of financial statements in accordance with IFRS.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
155.
I.
156. According to the Preface to International Financial Reporting Standards, which of the
following are included in the objectives of the IASB?
I. To harmonize financial reporting between IFRS and US GAAP
II. To work actively with national standard setters
III. To promote the use and rigorous application of accounting
IV. To harmonize financial reporting within the European Union
a. I, II, III
b. II, III
c. III, IV
d. II, IV
(ACCA)
157. The purpose of the International Accounting Standards Board is to
a. issue enforceable standards which regulate the financial accounting and reporting of
multinational corporations.
b. develop a uniform currency in which the financial transactions of companies throughout
the world would be measured.
c. promote uniform accounting standards among countries of the world.
d. arbitrate accounting disputes between auditors and international companies.
(Adapted)
Changes in standards
158. 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.
(RPCPA)
159.
I.
II.
III.
Identify the incorrect statement(s).
GAAP is as much a product of political action as it is of careful logic or empirical findings.
GAAP is part of the real world, and it cannot escape politics and political pressures.
Changes in GAAP are generally triggered by changes in users’ needs.
IV.
Realization is the process of converting an asset, liability or commitment into an income
statement item.
V.
Assets are always stated at historical cost on the balance sheet.
VI.
Many accounting measurements are estimates and involve approximation and judgment.
a. I, II, IV
b. IV, V
c. IV
d. I, II, III, VI
160. 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 in response to government regulations.
c. Concepts are components of theory.
d. Accounting concepts are human-made.
(RPCPA)
161. The following statements relate to the purpose/ reasons for the issuance of International
Financial Reporting Standards by IASB.
I.
The International Accounting Standards Board (IASB) is committed to narrowing
differences in Financial Reporting Standards by seeking to harmonize regulations,
accounting standards and procedures relating to the preparation and presentation of
financial statements.
II.
The IASB believes that further harmonization can best be pursued by focusing on financial
statements that are prepared for the purpose of providing information that is useful in
making economic decisions.
III.
The IASB believes that financial statements prepared for general purpose meet the
common needs of most users.
IV.
The IASB believes that US FASB Standards are not applicable in most countries other than
in the US.
a. I, II
b. I, II, IV
c. I, II, III, IV
d. I, II, III
162.
a.
b.
c.
d.
The purpose of the International Financial Reporting Standards is to
issue standards to be applied by all countries in the world.
eliminate all the differences in financial reporting between countries in the world.
promote a uniform basis of financial reporting among countries of the world.
issue enforceable standards to be applied by all international accountants.
163.
a.
b.
c.
d.
If accounting information is to be useful, it must be expressed in terms of:
non-monetary units
monetary and non-monetary units
units of consumer demand
a common denominator
Generally accepted accounting principles
Are fundamental truths or axioms that can be derived from laws of nature.
Derive their authority from legal court proceedings.
Derive their credibility and authority from general recognition and acceptance by the
accounting profession.
d. Have been specified in detail in the FRSC framework.
(Adapted)
164.
a.
b.
c.
165. The principles, which constitute the ground rules for financial reporting, are termed
“generally accepted accounting principles”. To qualify as “generally accepted,” an accounting
principle must
a. Usually guide corporate managers in preparing financial statements, which will be
understood by widely scattered stockholders
b. Guide corporate managers in preparing financial statements which will be used, for
collective bargaining agreements with trade unions.
c. Guide an entrepreneur of the choice of an accounting entity like single proprietorship
partnership or corporation
d. Receive substantial authoritative support.
(Adapted)
166. Which of the following statements is incorrect?
a. The accounting theory which explains well the accounting equation “Assets minus liabilities
equals capital” is the proprietary theory.
b. Under the entity theory, the major accounting effort is directed toward proper valuation
of assets rather than income determination.
c. Strict adherence to the entity concept would not allow a parent company to take up in it
books its proportionate share in the profits and losses of its subsidiaries.
d. Under the fund theory, assets represent prospective services to the fund, liabilities
represent restriction against assets of the fund, and invested capital represents either legal
or financial restrictions on the use of assets.
167. Financial accounting is shaped to a significant extent, by the environment, and in particular
all of the following, except
a. The many uses and users which it serves
b. The overall organization of economic activity in society
c. The characteristics and limitations of financial accounting and financial statements
d. The means of measuring economic activity
(Adapted)
168. Proper application of accounting principles is most dependent upon the
a. existence of specific guidelines.
b. oversight of regulatory bodies.
c. external audit function.
d. professional judgment of the accountant.
(Adapted)
169. Which of the following is most likely to prepare the most accurate financial forecast for a
corporate entity based on empirical evidence?
a. Investors using statistical models to generate forecasts
b. Corporate management
c. Financial analysts
d. Independent CPAs
(AICPA)
Chapter 2
The Accounting Process
Chapter 2: Theory of Accounts Reviewer
Accounting cycle
1. Which of the following represents the expanded basic accounting equation?
a. Assets = Liabilities + Common Shares + Dividends – Income – Expenses
b. Assets + Dividends + Expenses = Liabilities + Equity + Income
c. Assets – Liabilities – Dividends = Equity + Income – Expenses
d. Assets = Income + Expenses – Liabilities
2. An accounting period which is a fiscal year may be
a. One month
b. One quarter c. One year d. a, b or c
3. The basic sequence in the accounting process can best be described as:
a. Transaction, journal entry, source document, ledger account, trial balance.
b. Source document, transaction, ledger account, journal entry, trial balance.
c. Transaction, source document, journal entry, trial balance, ledger account.
d. Transaction, source document, journal entry, ledger account, trial balance.
(Adapted)
4. Which of the following statements is/are true?
I.
The listing of all of the accounts available for use in a company's accounting system is
known as the General Ledger.
II.
The term associated with "left" or "left-side" is Credit.
III.
The basic accounting equation is Assets + Liabilities = Capital.
IV.
The accounting equation should remain in balance because every transaction affects only
two accounts.
V.
The Accounting Cycle represents the steps or accounting procedures normally used by
entities to record transactions and prepare financial statement. It implements the
accounting process.
VI.
A corporation's net income and distributions to stakeholders are eventually recorded in
the income summary.
a. II, IV, V, VI
b. V
c. I, V, VI
d. I, V
5. The following comments all relate to the recording process. Which of these statements is
correct?
a. The general ledger is a chronological record of transactions.
b. The general ledger is posted from transactions recorded in the general journal.
c. The trial balance provides the primary source document for recording transactions into the
general journal.
d. Transposition is the transfer of information from the general journal to the general ledger.
(Adapted)
6. 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.
(Adapted)
7. Which of the following is not optional?
a. use of an Income Summary account
b. preparation of the Worksheet
c. making adjusting entries
d. preparation of Post-Closing Trial Balance
(RPCPA)
8. Given the dual effects of accountable events, an increase in a liability cannot possibly be
accompanied by a (an):
a. increase in asset
c. decrease in asset
b. decrease in equity
d. no effect on assets
Systems of recording
9. Which of the following statements is true?
I.
The two basic concepts or theories underlying double-entry bookkeeping are Duality and
Equilibrium
II.
The reason why expense is recorded as a debit entry to an expense account is that
expenses decrease owner’s equity.
III.
The effects of revenue and expenses upon owners’ equity explains the debit and credit
rules relating to the recording of revenue and expenses
IV.
All activities of a business are recorded in its accounting system
V.
The accounting process of determining how events affect assets, liabilities, owners’ equity,
revenue and expenses of the enterprise is called “Measuring the effects.”
a. I, II, IV
b. I, II, III
c. III, IV, V
d. I, II, III, V
(RPCPA)
10. Which of the following statements correctly relate to single-entry system?
I.
Accrual basis financial statements cannot be prepared under a single-entry bookkeeping
system
II.
Under single-entry bookkeeping system financial statements are not likely to be fairly
presented in accordance with GAAP
III.
Cash Receipts and Cash Disbursement Journals are utilized in both a single-entry
bookkeeping system and a double-entry bookkeeping system
IV.
Internal control is inadequate under a single-entry bookkeeping system
V.
Subsidiary ledger is utilized only in a double-entry bookkeeping system but not in a singleentry bookkeeping system
a. II, IV
b. II, III, IV, V
c. I, III, IV d. I, II, III, IV, V
(RPCPA)
11. The following statements relates to the double-entry system and the single-entry system.
Choose the correct statements.
I.
Merchandise inventory account is not recognized under single-entry bookkeeping
II.
Net income or loss under single entry bookkeeping is computed using an approach that
directly matches cost with revenue.
III.
Under a Double-entry system, both general and special journals are used while under
a single-entry system, only special journals are used.
IV.
Double-entry system is sometimes known as transaction approach of accounting for
assets, liabilities, equity, revenue and expenses.
V.
Double-entry system is the generally acceptable method of bookkeeping because it
offers a more accurate and more complete income measurement than single-entry.
a. I, III, V
b. I, V
c. III, IV, V
d. I, III, IV, V
(RPCPA)
12. Which of the following statements is incorrect?
a. Accrual basis financial statements may be prepared from single-entry records
b. Single-entry accounting is synonymous with cash basis accounting
c. No adjusting entries are necessary when accounting records are kept on a pure cash basis
d. Over the entire life of a business enterprise, there would be no difference between income
on a cash basis and income on an accrual basis
(RPCPA)
13. Consider the following statements.
I. The theory of debit and credit is a fundamental concept of double entry bookkeeping
II. From the accounting viewpoint, the life of the business is a series of income statements
III. From the accounting viewpoint, the life of the business is a series of balance sheets
a. true, true, true
c. false, false, true
b. true, true, false
d. true, false, true
(RPCPA)
14. The best interpretation of the word credit is the
a. offset side of an account.
c. right side of an account.
b. increase side of an account
d. decrease side of an account
(Adapted)
Books of records
15. The account may take many possible forms and accounting practice commonly uses several.
Perhaps the most useful form of the account for textbooks, problems, and examinations but
not really used in actual practice, except perhaps for memoranda or preliminary analyses is
the
a. One-sided account
c. Three-sided account
b. T-account
d. moving balance account
16. Which one of the following best expresses the primary purpose of the general journal?
a. The general journal provides an organized summary of transactions classified by type of
account
b. The general journal directly provides the data for a trial balance
c. The general journal eliminates the need for control accounts in the ledger
d. The general journal provides a continuing balance of the amount to date in each of the
temporary accounts
e. The general journal provides a chronological listing of transactions in debit-credit form
17. Choose the incorrect statement concerning special journals
a. All special journals are designed to handle only one type of transaction
b. Special journals are designed specifically to simplify the data processing tasks involved in
journalizing and posting of particular types of transactions.
c. The design of special journals is dependent upon the frequency of specific types of
transactions
d. Special journals vary in number depending upon the types of frequent transactions
recorded by the entity.
(RPCPA)
18. Which one of the following best expresses the primary purpose of the general ledger?
a. The general ledger provides a record of transactions classified by account
b. The general ledger provides a record from which the journal entries are later posted
c. The general ledger provides a listing of the dates of transactions affecting each account, in
what amounts, and the ending balances of each account
d. The general ledger eliminates the need for control accounts
e. The general ledger houses only accounts which are supported by subsidiary ledgers
19. Which of the following best defines a control account?
a. A summary account in the general ledger that is supported by detailed accounts in a
subsidiary ledger.
b. A listing of the balances in all accounts
c. An account which increases due to sale of goods or services during the normal operations
of a business
d. A chronological listing of all transactions for a specific time period
20. These are entries made at the end of the accounting period after adjustments used as means
of closing nominal accounts to a summary account and transferring the balances to equity.
a. Closing entries
c. Reclassification entries
b. Adjusting entries
d. Reversing entries
21. These are entries usually made in the next period to reverse certain adjusting entries made in
the immediately preceding accounting period.
a. Closing entries
c. Reclassification entries
b. Adjusting entries
d. Reversing entries
22. These are entries used to correct accounting errors.
a. Correcting entries
c. Reclassification entries
b. Adjusting entries
d. Reversing entries
23. These are entries that transfer an item from one account to another that more clearly describe
the nature of the item transferred.
a. Correcting entries
c. Reclassification entries
b. Adjusting entries
d. Reversing entries
24. It is the difference between the debit and the credit side of a T account.
a. normal balance
c. account balance
b. discount
d. a and c
25. The normal balance of any account is the
a. left side
c. side which increases that account
b. right side
d. side which decreases that account
(Adapted)
26. A journal is not useful for
a. closing in one place the complete effect of a transaction.
b. preparing financial statements.
c. providing a record of transactions.
d. locating and preventing errors.
27. A T account is
a. a way of depicting the basic form of an account.
b. a special account used instead of a journal.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.
(Adapted)
28. A systematic compilation of a group of accounts; also called a “book of secondary entry”
a. trial balance
b. ledger
c. worksheet
d. journal
(RPCPA)
29. A notation in a journal or ledger not intended to be incorporated in the accounts which
describes a situation/event
a. memo entry
c. reversing entry
b. correcting entry
d. adjusting entry
(RPCPA)
30. The mechanical process of recording transactions and events on the books of accounts in a
chronological sequence in accordance with established accounting rules and procedures
a. summarizing
b. reporting
c. journalization
d. classification
(RPCPA)
31. The appropriate book of account in which the receipt of a cash dividend is recorded
a. purchases journal
c. cash receipts journal
b. sales journal
d. general journal
(RPCPA)
32. Which of the following statements are correctly stated?
I.
A general journal entry having two debits and a credit is a simple entry.
II.
Account numbers are entered in the posting reference column of the two-column general
journal at the time the transactions are recorded in the journal.
III.
One of the purposes of the ledger is to record the complete effect of the transaction in
one place.
IV.
A list of all the accounts of a specific business enterprise is referred to as a ledger.
V.
When special journals are designed and adopted correctly, there is no need for the general
journal.
a. I, III, IV
b. II, V
c. II, IV
d. none
Trial balance
33. This is prepared in order to prove the equality of the debits and credits in the ledger after the
closing process.
a. Trial balance
c. chart of accounts
b. Worksheet
d. post-closing trial balance
34. The post-closing trial balance contains
a. nominal, real, and mixed accounts
b. real and nominal accounts
c. real and mixed accounts
d. real accounts only
35. Which of the following statements is true?
a. Bad debts recovered account, if having an income tax benefit, is transferred to profit or
loss summary account
b. Bill of exchange is drawn by the purchaser
c. Trial balance establishes the arithmetical accuracy of the accounting records
d. A well maintained asset need not be depreciated
e. Drawing of goods by the owner is to be debited to profit or loss summary account.
(Adapted)
36. The trial balance:
a. Is a formal financial statement.
b. Is used to prove that there are no errors in the journal or ledger.
c. Provides a listing of every account in the chart of accounts.
d. Provides a listing of the balance of each account in active use.
(Adapted)
37. Which of the following errors will be disclosed in the preparation of a trial balance?
a. Recording transactions in the wrong account.
b. Duplication of a transaction in the accounting records.
c. Posting only the debit portion of a particular journal entry.
d. Recording the wrong amount for a transaction to both the account debited and the
account credited.
(Adapted)
38. An error which is disclosed by trial balance
a. account omitted from trial balance
b. journal entry not posted
c. omission of journal entry
d. error of transposition in posting one side of a journal entry
(RPCPA)
39. Which of these errors would be disclosed by the trial balance?
a. check of P95 from Pedro Cruz entered in Pedro’s account as P59.
b. selling expenses debited to the sales account.
c. credit sales of P300 entered in both the double entry account as P30.
d. a purchase of P250 was omitted entirely from the books.
(RPCPA)
40. Which of the following errors would cause unequal totals in the trial balance?
a. the firm records P2,100 received from a customer in advance of delivery of goods as a
debit of P100 to Cash and a credit of P2,100 to Sales
b. the firm fails to enter the cost of the electric current used during the month as an expense
and fails to recognize the P2,200 owed to Meralco
c. all these errors will cause unequal trial balance totals
d. none of these errors will cause unequal trial balance totals
(RPCPA)
Adjusting entries
41. Which of the following statements about adjusting entries is/are correct?
I.
Every adjusting entry impacts both a balance sheet and a statement of profit or loss and
other comprehensive income account.
II.
Every adjusting entry impacts comprehensive income.
III.
If only year-end financial reports are prepared for both external and internal users then
adjusting entries need only to be prepared once a year.
IV.
Adjusting entries are necessitated by the accrual basis accounting. If an entity uses the
pure cash basis of accounting, there is no need for adjusting entries.
a. I, II, III, IV
b. I, II, III
c. I, II, IV
d. II, III, IV
42. These are entries made at the end of the accounting period to update certain amounts so that
they reflect correct balances at the designated time.
a. Correcting entries
c. Reclassification entries
b. Adjusting entries
d. Reversing entries
43. Theoretically, adjusting entries fall into these broad classes
a. deferred items and accrued items
b. deferred items, accrued items and reclassification items
c. deferred items, accrued items and client adjustments
d. deferred items, accrued items, reclassification items, current period correcting items and
prior period correcting items
44. Deferred items consist of these types of adjusting entries
a. asset/ expense adjustments, liability/revenue adjustments, asset/revenue adjustments,
and liability/expense adjustments
b. asset/ expense adjustments and liability/revenue adjustments
c. asset/revenue adjustments and liability/expense adjustments
d. asset/liability adjustments, liability/equity adjustments, asset/ equity adjustments, asset/
expense adjustments, and liability/revenue adjustments
45. Accrued items consist of these types of adjusting entries
a. asset/ expense adjustments, liability/income adjustments, asset/income adjustments, and
liability/expense adjustments
b. asset/ expense adjustments and liability/income adjustments
c. asset/income adjustments and liability/expense adjustments
d. asset/liability adjustments, liability/equity adjustments, asset/ equity adjustments, asset/
expense adjustments, and liability/income adjustments
46. In accounting, it means to postpone or delay
a. defer
b. accrue
c. procrastinate
d. a or c
47. In accounting, it means to grow or accumulate
a. defer
b. accrue
c. germinate
d. a or c
48. Consist of adjusting entries involving data previously recorded in accounts
a. deferred items
c. procrastinated items
b. accrued items
d. a or c
49. Consist of adjusting entries relating to activity on which no data have been previously recorded
in the accounts
a. deferred items
c. procrastinated items
b. accrued items
d. a or c
50. Deferred items
a. involve the initial, or first, recording of assets and liabilities and the related revenues and
expenses or the transfer of data already recorded in asset and liability accounts to expense
and revenue accounts, respectively
b. involve the reconciling of records to conform to Mr. Auditor’s materiality threshold
c. involve the initial, or first, recording of assets and liabilities and the related revenues and
expenses
d. involve the transfer of data already recorded in asset and liability accounts to expense and
revenue accounts, respectively
51. Accrued items
a. involve the initial, or first, recording of assets and liabilities and the related revenues and
expenses or the transfer of data already recorded in asset and liability accounts to expense
and revenue accounts, respectively
b. involve the reconciling of records to conform to Mr. Auditor’s materiality threshold
c. involve the initial, or first, recording of assets and liabilities and the related revenues and
expenses
d. involve the transfer of data already recorded in asset and liability accounts to expense and
revenue accounts, respectively
52. Periodic reporting and the matching principle necessitate the preparation of
a. journal entries
c. adjusting entries
b. dramatic entries
d. no ID, no entry
53. Receiving assets before they are earned creates a liability called
a. unearned assets
c. unearned revenue
b. deferred assets
d. accrued revenue
54. Accrued expense accounts are presented as
a. Assets b. Liabilities c. Equity
d. Contra-equity accounts
55. Accrued income accounts are presented as
a. Assets b. Liabilities c. Equity
d. Contra-equity accounts
56. Employees’ taxes not yet paid to the BIR as of reporting date should be credited to which
account
a. income tax payable
c. withholding tax payable
b. output tax
d. deferred tax liability
57. Adjusting entries reversed
a. depletion adjustments
b. bad debt adjustments
(RPCPA)
c. accrued expenses
d. inventory adjustments
58. A prepaid expense
a. paid and not currently matched with earnings
b. not paid and currently matched with earnings
c. paid and currently matched with earnings
d. not paid and not matched with earnings
(RPCPA)
59. The premium on a three-year insurance policy expiring on December 31, year 3, was paid in
total on January 1, year 1. Assuming that the original payment was recorded as a prepaid asset,
how would each of the following be affected in year 3? (Item #1) Prepaid Asset; (Item #2)
Expenses
a. decrease, increase
c. no change, increase
b. decrease, no change
d. no change, no change
(Adapted)
60. The accrued balance in a revenue account represents an amount which is:
a. earned and collected
c. not earned or collected
b. earned and not collected
d. not earned but collected
(RPCPA)
61. Which one of the following assets is similar to certain current assets, but is not one?
a. Accounts receivable
b. Prepaid insurance
c. long term payment of expenses
d. short-term investment in equity security
(Adapted)
62. The premium on a three (3) year insurance policy was paid in total on January 1, 1989. Upon
payment, Prepaid Asset Account was debited. The appropriate journal entry has been
recorded on December 31, therefore the balance of Prepaid Asset Account should be:
a. higher, if the original payment had been debited initially to an expense account
b. the same as the original payment
c. the same even if the original payment had been debited initially to an expense account
d. no balance
(RPCPA)
63. An adjusting entry for revenue collected in advance, which was initially credited to a revenue
account will:
a. decrease liabilities
b. increase assets
c. decrease the balance in the revenue account
d. increase equity
Preparation of financial statements
64. These are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.
a. financial statements
c. trial balance
b. worksheet
d. management reports
65. Based on which of the following concepts, is share capital account shown on the liability side
of statement of financial position?
a. Dual-side concept
c. Cost concept
b. Money measurement concept d. Business entity concept
(Adapted)
66. While preparing the worksheet, the accountant made the following entry: Debit Income
Summary Account and Credit Inventory – beginning. This entry can be properly termed as a(n)
a. Adjusting entry
c. Closing entry
b. Reclassification entry
d. Correcting entry
67. While preparing the worksheet, the accountant made the following entry: Debit Inventory –
ending and Credit Income Summary. This entry can be properly termed as a(n)
a. Adjusting entry
c. Closing entry
b. Reclassification entry
d. Correcting entry
68. Which of the following statements is true?
I.
Another name for the balance sheet is statement of changes in financial position.
II.
The balance sheet heading will specify a Period of time.
III.
An acceptable heading for a balance sheet is:
ABC Corporation
Statement of financial position
For the Year Ended December 31, 20x1
IV.
In a manual bookkeeping system, transactions are first recorded in a trial balance.
V.
A journal entry includes the date, account titles, and amounts.
a. I and V
b. I , IV and V
c. V only
d. I, II and V
69. After the revenues for an accounting period have been determined, the costs directly or
indirectly associated with these revenues must be deducted to measure net income. This is
called
a. Income statement preparation
c. Matching process
b. Profit and loss preparation
d. Bookkeeping process
(RPCPA)
70. Totaling the columns of a columnar journal and proving the equality of the totals is called
a. totaling and balancing
c. totaling and cross footing
b. footing and cross footing
d. footing and balancing
(RPCPA)
Closing entries
71. These are entries prepared at the end of the accounting period to “zero out” all temporary
accounts in the ledger.
a. adjusting entries
c. reversing entries
b. closing entries
d. reclassification entries
72. Which of the following statements is true?
a. Equity is reduced by outside borrowings
b. When there is no change in equity, it is an indication of loss in the business
c. Nominal account refers to the exchange transactions
d. Real accounts relate to the accounts found in the post-closing trial balance
e. Bills payable is a nominal account
73. Which of the following statements is correct?
I.
The formal process by which all nominal accounts are reduced to zero and the profit or
loss is determined and transferred to an equity account is called closing entries
II.
Post-closing is the process of transferring the essential facts and figures from the book of
original entry to the ledger accounts.
III.
A trial balance taken immediately after reversing entries have been posted is designated
as a post-closing trial balance.
IV.
Adjusting entries are made at the beginning of an accounting period to bring all accounts
up to date on an accrual accounting basis so that correct financial statements can be
prepared.
V.
The chart of accounts is a list of all open accounts in the ledger and their balances.
VI.
Various amounts are transferred to the ledger from the book of original entry
a. VI
b. I, VI
c. I, III, V, VI d. all of the statements are correct
74. Amounts transferred to income summary represent
a. increases and decreases in owner`s equity
b. all the expenses of a company
c. the asset balance of a company
d. increases and decreases in owners’ equity not directly recognized in equity
75. After the closing process
a. all accounts have zero balances
b. all accounts have the prior period ending balance
c. temporary accounts have zero balances
d. all accruals and deferred items are reversed
76. Which of the following is likely to be an incorrect closing entry?
a. debit dividends, credit retained earnings
b. debit sales revenue, credit income summary
c. debit income summary, credit rent expense
d. debit income summary, credit retained earnings
(RPCPA)
77. The effect of the closing entries is to:
a. change assets
b. change liabilities
c. change retained earnings
d. change the debit balances of all accounts into credits and vice versa
(Adapted)
78. Which of the following is an example of a closing entry?
a. Posting the ending inventory balance in a perpetual inventory system
b. Transferring an amount entered in a wrong account to the appropriate account
c. Transferring the balance in the bad debt expense account to the income summary account
d. Transferring the balance in a temporary account to a contra account
Reversing entries
79. When reversing entries are made, the beginning balance of a nominal account is
a. the amount in the adjusting entry that was reversed
b. the opposite balance representing the amount in the reversing entry
c. either a debit or credit balance depending on the effect of the adjusting and reversing
entries
d. always zero regardless of whether or not a reversing entry is made
80. Which of the following adjusting entries may a reversing entry be used?
a. debit insurance expense, credit prepaid insurance
b. debit interest receivable, credit interest income
c. debit unearned rental income, credit rental income
d. debit depreciation expense, credit accumulated depreciation
(RPCPA)
Comprehensive
81. Which of the following statements are correctly stated?
I.
Every adjusting entry affects both a balance sheet and a statement of profit or loss and
other comprehensive income account.
II.
The company has earned an income for the period if a credit is needed to close the income
summary account.
III.
If a company reports profit for the year, this amount will be shown on the worksheet as a
balancing figure in the income statement debit column and in the balance sheet credit
column.
IV.
The income summary account reveals that an operating loss of P800 has been incurred.
Before closing entries are posted, the owner’s drawing account shows a balance of P460.
The entry to close the income summary account is a debit of P340 to the owner’s capital
account and a credit of P340 to the income summary account.
V.
Entering adjustments in the adjustments column of a worksheet makes it unnecessary to
record and post adjusting entries.
a. I, III
b. I, II, III
c. II, III, IV
d. I, III, IV, V
82. Which of the following statements is true?
a. Deferred charges are distinguished from prepaid expenses on the basis of the time over
which their benefits will be realized.
b. Working capital is a very useful measure because it reveals how much would be left if all
the assets were to be sold and the proceeds were used to pay all the current liabilities.
c. The normal operating cycle of a business is the average length of the time from cash
expenditure, to inventory, to sale and back to accounts receivable.
d. Retained earnings often is restricted (or appropriated) to ensure that cash will be available
for plant expansion. When retained earnings is restricted, the cash appropriated cannot be
spent.
83. Choose the correct statement
a. A worksheet is not a part of the basic accounting records of the entity
b. No adjusting entries should be necessary for the inventory account if the periodic inventory
system is used
c. Examples of accrued expenses include wages payable and depreciation expense
d. Accrued items are those of which recognition of the related revenue of expense occurs in
an accounting period after the entity pays or receives cash, respectively
84. Which of the following statements is true?
a. The income statement and the balance sheet reflect the internal events of a company; the
information included in the footnotes refers to external events only
b. A post-closing trial balance has balances in the temporary accounts
c. Income summary is a clearing or suspense account that is often used to hold the balances
of revenue and expense accounts ; its balance is closed to the retained earnings account
only
d. Financial statements cannot be prepared properly until adjusting entries are posted to the
ledger
(Adapted)
85. Which of the following statements is correct?
a. The use of a general journal implies that there is no need for special journals
b. Each subsidiary ledger has a related control account in the general journal
c. Assume a company always records deferred expenses as assets upon payment of cash, and
deferred revenues as liabilities upon receipt of cash. If this company records reversing
entries, generally only adjusting entries for accrued expenses and accrued revenues should
be reversed
d. All entries in the general journal are supported by details contained in the special journals.
86. Which of the following statements is false?
I.
The chart of accounts is a listing of the accounts presently having balances in the general
ledger.
II.
Some accounting software classifies some accounts as "income" accounts, while
accountants might refer to these accounts as "revenue" accounts.
III.
The digits of the account numbers assigned to general ledger accounts often have
significance. For example, an account number beginning with a "1" might signify that the
account is an asset account; a "6" might signify an operating expense, etc.
IV.
In addition to the standard chart of accounts for a specific industry, you will likely want to
expand and/or modify the chart of accounts to fit your business. One tool that would be
helpful in determining the accounts for your company would be your company's
organization chart.
a. I
b. I, IV
c. I, II, IV
d. II, III
(Adapted)
87. Which of the following statements is true?
I.
In a manual bookkeeping system, each amount in a journal is posted to an account.
II.
Invoices from vendors (suppliers) which are due in 30 days should be credited to Accounts
Receivable.
III.
A company's Special ledger contains all of the accounts such as Rent Expense, Supplies,
and Interest Payable.
IV.
Historically, the final step of the bookkeeper's responsibilities was to prepare a trial
balance.
V.
An internal document that is prepared to prove that the total of all the debit balances is
equal to the total of all the credit balances is a trial balance.
a. I, IV, V
b. I, II, IV, V
c. I, V
d. I, II, III, IV, V
(Adapted)
88. Which of the following statements is incorrect?
a. The post-closing trial balance is prepared immediately after all adjustments have been
journalized and posted.
b. There will be no change in the transactions that had previously been recorded in the
general journal after special journals are adopted.
c. If the balance in the income summary account is a credit balance, this means the firm has
earned profit of this amount.
d. The purpose of the income summary account is to summarize all income and expenses
during the period in one account.
89. Which of the following statements is incorrect?
a. Expense accounts usually have a debit balance and show the cost associated with
producing revenue during an accounting period.
b. Transactions often overlap accounting periods.
c. All sales journals have a single column which is posted as a debit to accounts receivables
and as a credit to sales.
d. If the accounts receivable control account agrees with the total of its subsidiary ledger,
there can be no errors in the subsidiary ledger.
90. Which of the following statements is correct?
a. If the accountant mistakenly places a revenue account balance in the balance sheet credit
column instead of the income statement credit column of the worksheet, the worksheet
columns will still balance.
b. The closing entries necessary under the periodic and perpetual inventory methods do not
differ because all expenses and revenues must be closed just the same.
c. A partnership's profit is eventually recorded in the retained earnings account.
d. If an entity’s expenses are greater than its revenue, the owner’s equity is increased.
91. Which of the following statements is incorrect?
a. The accounting cycle is in line with the application of the periodicity concept.
b. The effect of adjusting entries to accrue revenues is always an increase in assets and a
corresponding increase in equity.
c. Closing the books means charging the retained earnings account and/or applicable equity
accounts with the temporary accounts.
d. The listing of all of the accounts available for use in a company's accounting system is
known as the trial balance.
92. If debits do not equal credits, the first step to find the error is to
a. call your manager and ask for advice
b. add the debit and credit columns again
c. review the journal entries for errors
d. make correcting entries rather than adjusting entries
(Adapted)
93. If the Balance Sheet columns of the worksheet do not balance, the error is most likely to exist
in the:
a. General journal.
c. Last six columns of the work sheet.
b. General ledger.
d. First six columns of the work sheet.
(Adapted)
94. Assume an enterprise initially records prepayments in balance sheet accounts and makes
reversing entries when appropriate. Which of the following year-end adjusting entries should
be reversed?
a. The entry to record depreciation expense for the period
b. The entry to record the portion of service fees received in advance that is earned by yearend
c. The entry to record supplies used during the period
d. The entry to record service fees earned by year-end but not billed
(Adapted)
Chapter 3
The Conceptual Framework for Financial Reporting
Chapter 3: Theory of Accounts Reviewer
Purpose and status
1. What is the authoritative status of the Conceptual Framework?
a. It has the highest level of authority. In case of a conflict between the Conceptual
Framework and a Standard or Interpretation, the Conceptual Framework overrides the
Standard or Interpretation.
b. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides
the Conceptual Framework. In the absence of a Standard or an Interpretation that
specifically applies, the Conceptual Framework should be followed.
c. If there is a Standard or Interpretation that specifically applies to a transaction, it overrides
the Conceptual Framework. In the absence of a Standard or an Interpretation that
specifically applies to a transaction, management should consider the applicability of the
Conceptual Framework in developing and applying an accounting policy that will result in
information that is relevant and reliable.
d. The Conceptual Framework applies only when IASB develops new or revised Standards. An
entity is never required to consider the Conceptual Framework.
(Adapted)
2. The FRSC recognizes that in a limited number of cases there may be a conflict between the
Conceptual Framework and a Philippine Financial Reporting Standard. In those cases where
there is a conflict,
a. the requirements of the Philippine Financial Reporting Standard prevail over those of the
Conceptual Framework
b. the requirements of the Conceptual Framework prevail over those of the Philippine
Financial Reporting Standard
c. the professional judgment of the accountant should prevail and this may necessitate
disclosure in the notes.
d. the provisions of standards issued by FASB will prevail
(Adapted)
3. Financial statements are most commonly prepared in accordance with an accounting model
based on
a. Recoverable historical cost and the nominal financial capital maintenance concept
b. Recoverable historical cost and the physical capital maintenance concept
c. Fair value and the nominal financial capital maintenance concept
d. Either recoverable historical cost and fair value and either nominal financial or physical
capital concept
4. Choose the incorrect statement.
a. The IASB recognizes that governments, in particular, may specify different or additional
requirements for their own purposes. These requirements should not, however, affect
financial statements published for the benefit of other users unless they also meet the
needs of those other users.
b. In conjunction with choice (a), when there are conflicts between local legislation and the
IASB framework or standards, the framework and standards should prevail over the local
legislation.
c. Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital maintenance
concept.
d. Other models and concepts may be more appropriate in order to meet the objective of
providing information that is useful for making economic decisions although there is
presently no consensus for change. The Conceptual Framework has been developed so
that it is applicable to a range of accounting models and concepts of capital and capital
maintenance.
5. The purpose of the Philippine Conceptual Framework is to:
I.
Assist the Financial Reporting Standards Council (FRSC) in developing accounting standards
that represent generally accepted accounting principles in the Philippines
II.
Assist the Board of IASC in the development of future International Accounting Standards
and in its review of existing International Accounting Standards
III.
Assist the Board of IASC in promoting harmonization of regulations, accounting standards
and procedures relating to the presentation of financial statements by providing a basis
for reducing the number of alternative accounting treatments permitted by International
Accounting Standards;
IV.
Assist the FRSC in its review and adoption of existing International Accounting Standards
V.
Assist preparers of financial statements in applying FRSC financial reporting standards and
in dealing with topics that have yet to form the subject of an FRSC standard
VI.
Assist auditors in forming an opinion as to whether financial statements conform with
Philippine generally accepted accounting principles
VII.
Assist users of financial statements in interpreting the information contained in financial
statements prepared in conformity with Philippine generally accepted accounting
standards
VIII.
Provide those who are interested in the work of FRSC with information about its approach
to the formulation of Financial Reporting Standards.
a. I, II, III, IV
c. IV, V, VI, VII, VII
b. I, IV, V, VI, VII, VIII
d. all of the above
6. All of the following statements incorrectly refer to the Conceptual Framework except
a. The Conceptual Framework sets out the concepts that underlie the preparation and
presentation of financial statements for external and internal users.
b. The Conceptual Framework is an integral part of the Philippine Financial Reporting
Standard and hence defines standards for any particular measurement or disclosure issue.
c. The FRSC recognizes that in a limited number of cases there may be a conflict between the
framework and a Philippine Financial Reporting Standards. In those cases where there is a
conflict, the requirements of the framework prevail over those of the Philippine Financial
Reporting Standard.
d. As the FRSC will be guided by the framework in the development of future Statements and
in its review of existing Statements, the number of cases of conflict between the
framework and Philippine Financial Reporting Standards will diminish through time.
e. Unlike for the various PASs and PFRSs, the framework, as a solid foundation and a model,
will not be revised from time to time on the basis of the FRSC's experience of working with
it.
7. The Scope of the framework includes all of the following except
a. The objective of financial statements
b. The qualitative characteristics that determine the usefulness of information in financial
statements
c. The underlying and implicit assumptions governing the preparation and presentation of
financial statements
d. The definition, recognition and measurement of the elements from which financial
statements are constructed
e. Concepts of capital and capital maintenance
8. All of the following statements incorrectly refer to the Conceptual Framework except
a. The framework is concerned with all-purpose financial statements including consolidated
financial statements.
b. Financial statements are prepared and presented at least annually and are directed toward
the common and specific information needs of a wide range of users.
c. Prospectuses and computations prepared for taxation purposes are outside the scope of
the framework.
d. Financial statements may also include supplementary schedules and information based on
or derived from, and expected to be read with, such statements. Financial statements
include such items as reports by directors’ statements by the chairman, discussion and
analysis by management and similar items that may be included in a financial or annual
report.
e. The framework applies to the financial statements of all commercial, industrial and
business reporting entities, but only for the private sector.
9. An entity for which there are users who rely on its financial statements as their major source
of financial information about the entity.
a. publicly listed entity
c. reporting entity
b. publicly accountable entity
d. small or medium-sized entity
10. The primary users of financial statements under the Conceptual Framework include
I.
Existing and potential investors
II.
Employees
III.
Lenders and other creditors
IV.
Suppliers and other trade creditors
V.
Customers
VI.
Governments and their agencies
VII.
Public
VIII.
Professional accountants, including auditors
a. I, III
c. I, II, III, IV, V, VI, VII
b. I, II, III, IV, V, VI
d. all of the above
11. These refer to the providers of risk capital, including their advisers, who are concerned with
the risk inherent in, and return provided by, their investments. They need information to help
them determine whether they should buy, hold or sell. They are also interested in information
which enables them to assess the ability of the entity to pay dividends.
a. investors
c. stakeholders
b. shareholders
d. public
12. They are interested in information that enables them to determine whether their loans, and
the interest attaching to them, will be paid when due.
a. investors b. lenders
c. suppliers
d. public
13. They are interested in information that enables them to determine whether amounts owing
to them will be paid when due. They are likely to be interested in an entity over a shorter
period than lenders unless they are dependent upon the continuation of the entity as a major
customer.
a. investors b. lenders
c. suppliers
d. public
14. Which of the following statements is correct?
a. All of the information needs of users can be met by financial statements because there are
needs which are common to all users.
b. The accountant/ controller of an entity has the primary responsibility for the preparation
and presentation of the financial statements of the entity.
c. Management is also interested in the information contained in the financial statements
even though it has no access to additional management and financial information that
helps it carry out its planning, decision-making and control responsibilities.
d. Management has the ability to determine the form and content of additional information
in order to meet its own needs. The reporting of such information is within the scope of
the framework.
e. Published financial statements are based on the information used by management about
the financial position, performance and changes in financial position of the entity.
Objective of financial statements
15. The foundation of the Conceptual Framework is formed from
a. The qualitative characteristics that makes information useful to users
b. The objective of general purpose financial reporting
c. The concept of reporting entity
d. The various measurement requirements which results to fair presented financial
information
16. What is the objective of financial statements according to the Conceptual Framework?
a. To provide information about the financial position, performance, and changes in financial
position of an entity that is useful to a wide range of users in making economic decisions.
b. To prepare and present a balance sheet, an income statement, a cash flow statement, and
a statement of changes in equity.
c. To prepare and present comparable, relevant, reliable, and understandable information to
investors and creditors.
d. To prepare financial statements in accordance with all applicable Standards and
Interpretations.
(Adapted)
17. Which of the following statements correctly relates to the provisions of the Conceptual
Framework?
a. Financial statements are prepared and presented at least annually and are directed toward
the common information needs of a limited range of users.
b. Financial statements do not include items such as reports by directors, statements by the
chairman, discussion and analysis by management and similar items that may be included
in a financial or annual report.
c. The Conceptual Framework applies only to the financial statements of all commercial,
industrial and business reporting entities, which are in the private sector.
d. Special purpose financial reports, for example, prospectuses and computations prepared
for taxation purposes, are within the scope of the Conceptual Framework.
18. Which of the following statements correctly relates to the provisions of the Conceptual
Framework?
a. Financial statements do not form part of the process of financial reporting.
b. The statement of changes in financial position may be presented in a variety of ways such
as classified or unclassified statement of financial position.
c. All of the information needs of users cannot be met by financial statements.
d. The shareholders of an entity have the primary responsibility for the preparation and
presentation of the financial statements of the entity.
19. Which of the following statements incorrectly relates to the provisions of the Conceptual
Framework regarding the use of financial information by an entity’s management?
a. Management is also interested in the information contained in the financial statements
even though it has access to additional management and financial information that helps
it carry out its planning, decision-making and control responsibilities.
b. Management has the ability to determine the form and content of such additional
information in order to meet its own needs.
c. The reporting of information for internal use of management is beyond the scope of the
Conceptual Framework.
d. Published financial statements are not based on the information used by management
about the financial position, performance and changes in financial position of the entity.
20. Who has the primary responsibility for the preparation and presentation of the financial
statements of an entity?
a. shareholders
c. management
b. board of directors
d. accountant
21. The objective of financial statements is
a. to provide information about the financial position, performance and changes in financial
position of an entity that is useful to a limited range of users in making economic decisions.
b. to provide information that meets the common needs of all users
c. to provide information that meets the common needs of most users
d. to provide information about the financial position, performance and changes in financial
position of an entity that is useful for managing day-to-day operations.
22. The following statements relate to the objective of financial statements, except
a. The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.
b. Financial statements prepared for a wide range of users meet the common needs of most
users.
c. Financial statements provide all the information that users may need to make economic
decisions since they largely portray the financial effects of past events and do not
necessarily provide non-financial information.
d. Financial statements also show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it. Those users who wish to
assess the stewardship or accountability of management do so in order that they may
make economic decisions; these decisions may include, for example, whether to hold or
sell their investment in the entity or whether to reappoint or replace the management.
23. All of the following correctly relate to the provisions of the Conceptual Framework, except
a. Financial statements do not provide all the information that users may need to make
economic decisions since they largely portray the financial effects of past events and do
not necessarily provide non-financial information.
b. The economic decisions that are taken by users of financial statements require an
evaluation of the ability of an entity to generate cash and cash equivalents and of the
timing and certainty of their generation.
c. The income statement provides an incomplete picture of performance unless it is used in
conjunction with the balance sheet and the other financial statements.
d. According to the Conceptual Framework, the underlying assumptions are accrual basis of
accounting and going concern and the implicit assumptions are accounting entity,
periodicity and stable monetary concept.
24. The financial position of an entity is affected by all of the following, except
a. the economic resources it controls
b. its performance
c. its liquidity and solvency
d. its capacity to adapt to changes in the environment
e. its financial structure
25. Users are better able to evaluate an entity’s ability to generate cash and cash equivalents if
they are provided with information that focuses on the entity’s
a. financial position
c. cash flows
b. performance
d. a, b and c
26. When the going concern becomes inappropriate such as when liquidation becomes imminent,
the assets of an entity should be shown on the balance sheet at their
a. historical cost
c. fair value
b. realizable value
d. current cost
27. This information is useful in predicting future borrowing needs and how future profits and cash
flows will be distributed among those with an interest in the entity; it is also useful in predicting
how successful the entity is likely to be in raising further finance.
a. economic resources
c. liquidity and solvency
b. financial structure
d. performance
28. This information is useful in predicting the ability of the entity to meet its financial
commitments as they fall due
a. economic resources
c. liquidity and solvency
b. financial structure
d. performance
29. This information is required in order to assess potential changes in the economic resources
that an entity is likely to control in the future.
a. economic resources
c. liquidity and solvency
b. financial structure
d. performance
30. This information is useful in predicting the capacity of the entity to generate cash flows from
its existing resource base. It is also useful in forming judgments about the effectiveness with
which the entity might employ additional resources.
a. economic resources
c. liquidity and solvency
b. financial structure
d. performance
31. This information is useful in assessing an entity’s its investing, financing and operating activities
during the reporting period.
a. economic resources
c. cash flows
b. financial structure
d. performance
32. Financial statements are prepared and presented for external users by many entities around
the world. Although such financial statements may appear similar from country to country,
there are differences which have probably been caused by a variety of social, economic and
legal circumstances and by different countries having in mind the needs of different users of
financial statements when setting national requirements. These different circumstances have
led/ resulted to all of the following except
a. use of a variety of definitions of the elements of financial statements; that is, for example,
assets, liabilities, equity, income and expenses.
b. use of different criteria for the recognition of items in the financial statements and in a
preference for different bases of measurement.
c. different audit opinions resulting to various losses, litigations and differences in audit
standards
d. differences in the scope of the financial statements and the disclosures made in them.
(Adapted)
33. Nearly all users of financial statements are making economic decisions which include the
following
I.
decide when to buy, hold or sell an equity investment
II.
assess the stewardship or accountability of management
III.
assess the ability of the entity to pay and provide other benefits to its employees
IV.
assess the security for amounts lent to the entity
V.
determine taxation policies
VI.
determine distributable profits and dividends
VII.
prepare and use national income statistics
VIII.
regulate the activities of entities
State how many items are correctly included in the list.
a. 4 to 5
b. 5 to 6 c. 6 to 7
d. all items are correctly included
34. When determining how liquid a company is which ratio best provides the indication?
a. Debt to worth ratio
c. Inventory turnover
b. Dupont ratio
d. Current ratio
(Adapted)
35. Which is the best ratio indicator for the solvency of a company?
a. Cash flow to debt
c. Current ratio
b. Return of average assets
d. Debt to equity ratio
(Adapted)
36. The financial position of an entity is affected by
I. the economic resources it controls
II. its financial structure
III. its liquidity and solvency
IV. its capacity to adapt to changes
a. I, II
b. I, II, III
c. I, II, III, IV
d. II, III, IV
37. It refers to the availability of cash in the near future after taking account of financial
commitments over this period.
a. Financial structure
c. Solvency
b. Liquidity
d. Performance
38. It refers to the availability of cash over the longer term to meet financial commitments as they
fall due.
a. Financial structure
c. Solvency
b. Liquidity
d. Performance
39. The following statements relate to the objective of financial statements except
a. Information about financial structure is useful in predicting future borrowing needs and
how future profits and cash flows will be distributed among those with an interest in the
entity; it is also useful in predicting how successful the entity is likely to be in raising further
finance.
b. Information about liquidity and solvency is useful in predicting the ability of the entity to
meet its financial commitments as they fall due.
c. Information about the performance of an entity, in particular its profitability is required in
order to assess potential changes in the economic resources that it is likely to control in
the future.
d. Information about performance is useful in predicting the capacity of the entity to
generate revenues but not cash flows from its existing resource base. It is also useful in
forming judgments about the effectiveness with which the entity might employ additional
resources.
e. Information concerning changes in the financial position of an entity is useful in order to
assess its investing, financing and operating activities during the reporting period. This
information is useful in providing the user with a basis to assess the ability of the entity to
generate cash and cash equivalents and the needs of the entity to utilize those cash flows.
40. Information about financial position is primarily provided in a(n)
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity
41. Information about performance is primarily provided in a(n)
a. Statement of financial position
b. Statement of profit or loss and other comprehensive income
c. Statement of cash flows
d. Statement of changes in equity
42. Information about changes in financial position is provided in the financial statements
a. through the statement of cash flows
b. through the statement of changes in equity
c. by means of a separate statement
d. all of the above
43. The following relate to the elements of the financial statements which include (1) elements
directly related to the measurement of financial position and (2) elements directly related to
measurement of profit. Which of the following statements is correctly stated?
I.
An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity.
II.
A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic
benefits.
III.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
IV.
Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to contributions from equity participants.
V.
Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incidences of liabilities that result in decreases in equity,
other than those relating to distributions to equity participants.
a. I, II, III
b. I, II, III, IV
c. I, II, III, V d. I, II, III, IV, V
44. The future economic benefits embodied in an asset may flow to the entity in a number of ways
which include all of the following except
a. Used singly or in combination with other assets in the production of goods or services to
be sold by the entity
b. Exchanged for other assets
c. Used to settle a liability
d. Used to incur or replace an obligation with another obligation
e. Distributed to the owners of the entity
45. The settlement of a present obligation usually involves the entity giving up resources
embodying economic benefits in order to satisfy the claim of the other party .Settlement of a
present obligation may occur in a number of ways which includes all of the following except
a. Payment of cash or transfer of other assets
b. Replacement of the obligation with another obligation
c. Provision of services
d. Conversion of the obligation to asset
46. Choose the correct statement.
a. The amount at which equity is shown in the balance sheet is dependent on the
measurement of assets and liabilities.
b. Realization is the process of incorporating in the balance sheet or income statement an
item that meets the definition of an element and satisfies the criteria for recognition set
out in paragraph. It involves the depiction of the item in words and by a monetary amount
and the inclusion of that amount in the balance sheet or income statement totals.
c. Items that satisfy the recognition criteria should be recognized in the balance sheet or
income statement. The failure to recognize such items is rectified by disclosure of the
accounting policies used or by notes or explanatory material.
d. An item that meets the definition of an element should be recognized if: (a) It is probable
or reasonably possible that any future economic benefit associated with the item will flow
to or from the entity; and (b) The item has a cost or value that can be measured with
reliability.
e. In many cases, cost or value must be estimated; the use of reasonable estimates is not an
essential part of the preparation of financial statements and undermines their reliability.
47. Measurement is the process of determining the monetary amounts at which the elements of
the financial statements are to be recognized and carried in the balance sheet and income
statement. This involves the selection of the particular basis of measurement. A number of
different measurement bases are employed to different degrees and in varying combinations
in financial statements. The measurement bases enumerated in the Conceptual Framework
include all of the following except
a. Historical cost
d. Present value
b. Current cost
e. Fair Value
c. Realizable value
48. The measurement basis most commonly adopted by entities in preparing their financial
statements is
a. Historical cost
c. Present Value
b. Fair value
d. Current cost
49. According to the framework, certain assets are reported in financial statements at the amount
of cash or its equivalent that would have to be paid if the same or equivalent assets were
acquired currently. What is the name of the reporting concept?
a. Replacement cost
c. Historical cost
b. Current market value
d. Net realizable value
(AICPA)
50. Historical cost is a measurement base currently used in financial accounting. Which of the
following measurement bases is also currently used in financial accounting? (Item #1) Current
selling price; (Item #2) Discounted cash flow; (Item #3) Replacement cost
a. Yes, No, Yes
c. Yes, No, No
b. Yes, Yes, Yes
d. No, Yes, Yes
(AICPA)
51. When discussing asset valuation, the following valuation bases are sometimes mentioned:
replacement cost, exit value and discounted value. Which of these bases should be considered
a current value measure?
a. Replacement cost and exit value only
b. Replacement cost and discounted cash
c. Exit value and discounted cash flow only
d. Replacement cost, exit value, and discounted cash flow
(AICPA)
52. Four types of money prices are used in measuring resources in financial accounting. The type
which uses such concepts as present value, discounted cash flow and value in use is known as
a. Price in a current purchase exchange
b. Price in past purchase exchange
c. Price based on future exchange
d. Price in a current sale exchange
(AICPA)
53. The measurement basis most often used to report a long-term payable representing a
commitment to pay money at a determinable future date is
a. Historical cost.
c. Net realizable value.
b. Current cost.
d. Present value of future cash flows.
(AICPA)
54. The valuation basis used in conventional financial statement is
a. Replacement cost
c. Original cost
b. Fair value
d. A mixture of cost and value
(Adapted)
55. Imputing interest for certain assets and liabilities is primarily based on the concept of
a. Valuation
c. Consistency
b. Conservatism
d. Stable monetary unit
(AICPA)
56. Questions raised by external users of accounting information include:
a. Will the entity be able to repay its loans?
b. What is the entity’s earning potential?
c. Is the business in a financially sound position?
d. All of the above
(Adapted)
Underlying assumption
57. Under the Conceptual Framework, the underlying assumption is
a. Relevance and reliability
b. Concepts of capital maintenance
c. Accrual basis and going concern
d. Going concern
58. It is assumed that the entity has neither the intention nor the need to liquidate or curtail
materially the scale of its operations; if such an intention or need exists, the financial
statements may have to be prepared on a different basis and, if so, the basis used is disclosed.
a. Growing Concern
c. Cash Basis
b. Accrual Basis
d. Going Concern
59. The going concern assumption
a. means the entity will continue to exist forever
b. supports the valuation of assets using historical costs and fair values but do not support
valuation in a forced sale transaction.
c. requires that capital expenditures be immediately recognized as expense
d. is always maintained by all entities
60. The assets of a liquidating entity should be shown on the balance sheet at their
a. historical cost
c. realizable value
b. fair value
d. current cost
61. The valuation of a promise to receive cash in the future at present value on the financial
statements of a company is valid because of the accounting concept of
a. Entity
b. Materiality
c. Going concern
d. Neutrality
(Adapted)
Qualitative characteristics
62. These identify the types of information that are likely to be most useful to the existing and
potential investors, lenders and other creditors for making decisions about the reporting entity
on the basis of information in its financial report (financial information)
a. Relevance and Faithful representation
c. Qualitative characteristics
b. Fundamental qualitative characteristics
d. Pervasive constraint
63. What are qualitative characteristics of financial statements according to the Conceptual
Framework?
a. Qualitative characteristics are the attributes that make the information provided in
financial statements useful to users.
b. Qualitative characteristics are broad classes of financial effects of transactions and other
events.
c. Qualitative characteristics are nonquantitative aspects of an entity’s position and
performance and changes in financial position.
d. Qualitative characteristics measure the extent to which an entity has complied with all
relevant Standards and Interpretations.
(Adapted)
64. Under the Conceptual Framework, qualitative characteristics are sub-classified into
a. primary and secondary qualitative characteristics
b. major and minor qualitative characteristics
c. fundamental characteristics and those that enhance the usefulness of financial information
d. not sub-classified
65. Identify the fundamental qualitative characteristics under the Conceptual Framework.
I. Relevance
II. Reliability
III. Faithful representation
IV. Comparability
V. Verifiability
VI. Timeliness
VII. Understandability
a. I, II
b. I, III
c. I, II, III, IV, V, VI
d. IV, V, VI, VII
66. Identify the qualitative characteristics that enhance the usefulness of financial information.
I.
Relevance
II.
Reliability
III.
Faithful representation
IV.
Comparability
V.
Verifiability
VI.
Timeliness
VII.
Understandability
a. I, II
b. I, III
c. II, III, IV, V, VII
d. IV, V, VI, VII
67. Which of the following are ingredients of relevance under the Conceptual Framework?
I.
Predictive value
II.
Confirmatory value
III.
Timeliness
IV.
Materiality
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
68. Which of the following are ingredients of faithful representation under the Conceptual
Framework?
I.
Completeness
II.
Neutrality
III.
Free from error
IV.
Reliability
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
69. According to the Conceptual Framework, the predictive value of the income statement is
enhanced if
a. unusual, abnormal and infrequent items of income or expense are separately disclosed.
b. the transaction approach is used
c. expenses are presented according to their function
d. the multiple-step method is used
70. For this qualitative characteristic, users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information
with reasonable diligence. However, information about complex matters that should be
included in the financial statements because of its relevance to the economic decision-making
needs of users should not be excluded merely on the grounds that it may be too difficult for
certain users to understand.
a. Relevance
c. Understandability
b. Reliability
d. Comparability
71. Information has this quality when it influences the economic decisions of users by helping
them evaluate past, present or future events or confirming, or correcting, their past
evaluations.
a. Predictive Value
c. Reliability
b. Relevance
d. Understandability
72. The relevance of information is affected by its
a. Nature b. Risk
c. Materiality
d. all of these
73. It depends on the size of the item or error judged in the particular circumstances of its omission
or misstatement and provides a threshold or cut-off point rather than being a primary
qualitative characteristic which information must have if it is to be useful.
a. Materiality
b. Relevance
c. Budget
d. Variance
74. Which of the following is the pervasive constraint under the Conceptual Framework?
a. Timeliness
c. Balance between Qualitative Characteristics
b. Cost constraint
d. all of the choices
75. Comparability is sometimes sacrificed for
a. Reliability
b. Conservatism c. Objectivity d. Relevance
76. This concept defines the accountant’s area of interests and determines what information
should be included in, or excluded from the financial statements.
a. Periodicity
c. Accrual basis
b. Going concern
(Adapted)
d. Accounting entity
77. An essential quality of the information provided in financial statements is that it is readily
understandable by users. For this purpose, users are
I.
Assumed to have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information with reasonable diligence.
II.
Informed of the accounting policies employed and changes in those policies and the effects
of such changes.
a. I
b. II
c. I and II
d. Neither I nor II
(Adapted)
78. Decision makers vary widely in the types of decisions they make, the methods of decision
making they employ, the information they already possess or can obtain from other sources,
and their ability to process information. Consequently, for information to be useful there must
be a linkage between these users and the decisions they make. This link is
a. Relevance b. Reliability c. Understandability d. Materiality
(Adapted)
79. To be relevant, information should have which of the following?
a. Verifiability
c. Understandability
b. Feedback value
d. Costs and benefits
(AICPA)
80. Which of the following accounting concepts states that before a transaction is recorded,
sufficient evidence must exist to allow two or more knowledgeable individuals to reach
essentially the same conclusion about the transaction?
a. Continuity assumption c. Cost principle
b. Materiality constraint
d. Verifiability quality
81. One of the fundamental qualitative characteristics of financial statements is
a. Relevance
b. Timeliness
c. Neutrality d. Completeness
82. If, in Year 1, a company used LIFO; year 2, FIFO; and in year 3, moving average cost for
inventory valuation, which of the following assumptions, constraints, or principles would be
violated:
a. consistency
b. time period
c. matching d. comparability
83. Technically it is the quality of information that allows comparisons within a single entity
through time or from one accounting period to the next.
a. Comparability b. Consistency c. Reliability d. Uniformity
84. Objectivity is assumed to be achieved when an accounting transaction
a. Is recorded in a fixed amount of pesos
b. Involves the payment or receipt of cash
c. Involves an arms’ length transaction between two independent parties
d. Allocates revenue or expenses in a rational and systematic manner
(Adapted)
85. Which of the following situations violates the concept of faithful representation?
a. Financial statements were issued nine months late
b. Report data on segments having the same expected risks and growth rates to analysts
estimating future profits
c. Financial statements included property with a carrying amount increased to
management’s estimate of market value
d. Management reports to stockholders regularly refer to new projects undertaken, but the
financial statements never report project results
(Adapted)
86. Which statement is incorrect concerning the qualitative characteristic of relevance?
a. The relevance of information is affected by its nature and materiality.
b. To be useful, information must be relevant to the decision-making needs of users.
c. Information about financial position and past performance is frequently used as basis for
predicting future financial position and performance and other matters such as dividend
and wage payments and ability of the entity to meet its financial commitments as they fall
due.
d. The predictive and confirmatory roles of information are not interrelated.
87. Consistency is an important factor in comparability within a single entity, although the two are
not the same. The consistency standard of reporting requires that
a. Some costs should be recognized as expenses on the basis of a presumed direct association
with specific revenue.
b. Assets whose prices or utility are increased by external events other than transfers should
be retained in the accounting records at their recorded amounts until they are exchanged.
c. Historical cost should be the primary basis used in measuring inventory; intangible assets
and property, plant and equipment.
d. Changes in circumstances or in the nature of the underlying transactions should be
disclosed.
88. Financial information exhibits the characteristic of consistency when
a. Expenses are reported as charges against revenue in the period in which they are paid.
b. Accounting entities give accountable events the same accounting treatment from period
to period.
c. Gains and losses are not included on the income statement.
d. Accounting procedures are adopted which give a consistent rate of net income.
89. A company reports only its total account receivable balance in its balance sheet, as opposed
to a complete listing of its individual customer balances. This is an example of
a. Consistency b. Materiality
c. Cost/benefit
d. Conservatism
(Adapted)
90. Which of the following statements do not correctly relate to the provisions of the Conceptual
Framework?
I.
Consistency is not an important factor in comparability within single entity.
II.
Matching is an accounting concept that states that an accounting transaction should be
supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar measures and conclusions.
III.
Timeliness is an ingredient of the primary qualitative characteristic of verifiability.
IV.
Comparability of financial information between entities is the same as comparability within
a single enterprise.
V.
The responsibility for the reliability of an entity’s financial statements rests with the
management.
a. I, II, III, IV
b. I, III, IV, V
c. III, IV, V
d. V
91. The type of consistency also known as “intracomparability” or “period to period” consistency
is
a. horizontal consistency
c. vertical consistency
b. three dimensional consistency d. inter comparability
92. Which of the following is considered a pervasive constraint by the Conceptual Framework for
the Preparation and Presentation of Financial Statements?
a. Benefits/costs
b. Conservatism
c. Timeliness
d. Verifiability
93. Which of the following four statements about accounting concepts or principles are correct?
I.
The money measurement concept is that items in accounts are initially measured at their
historical cost.
II.
In order to achieve comparability it may sometimes be necessary to override the prudence
concept.
III. To facilitate comparisons between different entities it is helpful if accounting policies and
changes in them are disclosed.
IV.
To comply with the law, the legal form of a transaction must always be reflected in
financial statements.
a. I and III
b. I and IV
c. III only
d. II and III
(ACCA)
94. Which of the following statements is correct?
a. All increases in cash and accounts receivable represent revenue which increases owners’
equity.
b. The fact that an expense is recognized on the income statement indicates that an
equivalent out lay of cash has been made in the same period
c. Assets are normally recorded at cost for accounting purposes because cost is objective and
value is subjective.
d. Losses are asset expirations that are incurred voluntarily to produce revenue.
(RPCPA)
The elements of financial statements
95. When should an item that meets the definition of an element be recognized, according to the
Conceptual Framework?
a. When it is probable that any future economic benefit associated with the item will flow to
or from the entity.
b. When the element has a cost or value that can be measured with reliability.
c. When the entity obtains control of the rights or obligations associated with the item.
d. When it is probable that any future economic benefit associated with the item will flow to
or from the entity and the item has a cost or value that can be measured with reliability.
(Adapted)
96. The Conceptual Framework sets out general recognition principles of financial statement
elements which include all of the following except
a. asset recognition
c. equity recognition
b. liability recognition
d. gain recognition
97. The following statements relate to the concept of “revenue.” Which statement is not true?
a. Income determination is a technical term that refers to the process of identifying,
measuring and relating revenue and expenses during an accounting period.
b. Transactions like issuance of capital stock and payment of dividends between the business
entity and its owners cannot give rise to revenue.
c. Deferred revenue is synonymous with unrealized revenue.
d. The definition of income encompasses both revenue and gains.
(Adapted)
98. Assume that employees confessed to a P500,000 inventory theft but are not able to make
restitution. How should this material fraud be shown in the financial statements?
a. Classified as a loss and shown as a separate line item in the income statement.
b. Initially classified as an accounts receivable because the employees are responsible for the
goods. Because they cannot pay, the loss would be recognized as a write-off of accounts
receivable.
c. Included in cost of goods sold because the goods are not on hand, losses on inventory
shrinkage are ordinary, and it would cause the east amount of attention.
d. Recorded directly to retained earnings because it is not an income-producing item.
(Adapted)
99. The framework classifies gains and losses based on whether they are related to an entity's
major ongoing or central operations. These gains or losses may be classified as (Item #1)
Nonoperating; (Item #2) Operating
a. Yes, No
b. Yes, Yes
c. No, Yes d. No, No
100.
a.
b.
c.
d.
Goodwill is recognized in profit or loss under the
matching concept
systematic and rational allocation concept
immediate distribution
immediate recognition
101. According to the framework, the objectives of financial reporting for business entities are
based on
a. The need for conservatism.
b. Reporting on management's stewardship.
c. Generally accepted accounting principles.
d. The needs of the users of the information.
102. Information about economic resources controlled by the entity and its capacity to modify
these resources is useful in predicting
I.
The ability of the entity to generate cash and cash equivalents in the future.
II.
The capacity of the entity to generate cash flows from its operations.
a. I only
b. II only
c. I and II
d. Neither I nor II
103. During a period when an entity is under the direction of a particular management, financial
reporting will directly provide information about
a. Both entity performance and management performance
b. Management performance but not entity performance
c. Entity performance but not management performance
d. Neither entity performance nor management performance.
(Adapted)
104. An objective of financial reporting is
a. Providing information useful to investors, creditors, donors, and other users for decision
making.
b. Assessing the adequacy of internal control
c. Evaluating management results compared with standards.
d. Providing information on compliance with established procedures.
(Adapted)
105. Which of the following items is not listed as a major objective of financial reporting?
a. Financial reporting should provide information about entity resources, claims to those
resources, and changes in them.
b. Financial reporting should provide information useful in evaluating management’s
stewardship.
c. Financial reporting should provide information useful in investment, credit, and similar
decisions.
d. Financial reporting should provide information useful in assessing cash flow projects.
106. Which of the following is not an important characteristic or limitation of the financial
statements that accountants currently prepare?
a. The information in financial statements is expressed in units of money adjusted for
changing purchasing power.
b. Financial statements articulate with one another because measuring financial position is
related to measuring changes in financial position
c. The information in financial statements is summarized and. classified to help meet users’
needs.
d. Financial statements can be justified only if the benefits they provide exceed the costs.
(Adapted)
107. A condensed report of how the activities of a business have been financed and how the
financial resources have been used is referred to as:
a. income statement
c. statement of cash flows
b. balance sheet
d. notes
108. The recognition of periodic depreciation expense on company-owned automobiles
requires estimating both salvage or residual value, and the useful life of the vehicles. The use
of estimates in this case is an example of
a. conservatism
b. maintaining consistency
c. invoking the materiality constraint rather than the cost benefit constraint
d. providing relevant data at the expense of reliability
(Adapted)
109. Determining periodic earnings and financial position depends on measuring economic
resources and obligations and changes in them as these changes occur. This explanation
pertains to
a. Disclosure
b. Accrual basis c. Materiality d. Matching
110. According to the framework, the process of reporting an item in the financial statements
of an entity is
a. Recognition
b. Realization
c. Allocation d. Matching
111. What is the purpose of information presented in notes to the financial statements?
a. To provide disclosures required by generally accepted accounting principles.
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the totals of the financial statements.
d. To present management's responses to auditor comments.
(Adapted)
112. An entity with total assets of 100,000,000 and net profit of 9,000,000 purchases staplers
with an estimated life of 10 years for 1,000. In connection with the purchase, the entity debits
miscellaneous expense. This scenario is most closely associated with which of the following
concepts or principles?
a. Materiality and going concern.
b. Relevance and neutrality.
c. Reliability and comparability.
d. Materiality and the balance between cost and benefit
(Adapted)
113.
a.
b.
c.
d.
An entity’s revenue may result from
A decrease in an asset from primary operations
An increase in an asset from incidental transactions
An increase in a liability from incidental transactions
A decrease in a liability from primary operations
114. Which of the following is an essential characteristic of an asset?
a. The claims to an asset’s benefits are legally enforceable.
b. An asset is tangible.
c. An asset is obtained at a cost.
d. An asset provides future benefits.
(Adapted)
115. Which of the following statements is not consistent with generally accepted accounting
principles as they relate to asset valuation?
a. Assets are originally recorded in the accounting records at cost to the entity
b. Accountants assume that assets such as supplies, buildings and equipment will be used in
the business operations rather than sold
c. Subtracting total liabilities from total assets results in the current market value of equity
d. Accountants base asset valuation upon objective, verifiable evidence rather than on
personal opinion
(Adapted)
116. Which of the following would be matched with current revenues on a basis other than
association of cause and effect?
a. goodwill b. sales commission c. cost of sales d. purchases
(Adapted)
117. Some costs cannot be directly related to particular revenue but are incurred to obtain
benefits that are exhausted in the period in which costs are incurred. An example of such cost
is
a. sales commissions
c. freight in
b. sales salaries
d. prepaid insurance
(Adapted)
118.
I.
II.
III.
The basic elements of the financial position of an entity include the following:
economic resources of an entity that are recognized in conformity with GAAP
economic obligations of an entity that are recognized in conformity with GAAP
gross increases in assets or gross decreases in liabilities recognized and measured in
conformity with GAAP
IV.
the interest of owners in an entity which is the excess of an entity’ assets over its liabilities
V.
gross decreases in assets or gross increases in liabilities recognized and measured in
conformity with GAAP
a. I, II, III, IV, V
b. I, II, III, IV c. I, II, III
d. I, II, IV
119. In December 200A catalogs were printed for use in a special promotion in January 200B.
The catalogs were delivered by the printer on December 31, 200A, with an invoice for P70,000
attached. Payment was made in January 200B. The P70,000 should be reported as a deferred
cost at the December 31, 200A balance sheet because of the
a. Matching principle.
c. Reliability principle.
b. Revenue recognition principle
d. Cost principle.
(Adapted)
120. In expense recognition principle, which of the following is not an important class of
expense?
a. expenditures to acquire assets
b. expenses from non-reciprocal transfers and casualties
c. cost of assets other than products disposed of
d. decline in market prices of inventories held for sale
(Adapted)
121. Whenever costs or expenses cannot be reasonably associated with specific products but
can be associated with specific revenues, the cost should be,
a. expensed in the period in which the related revenue is recognized
b. charged to expense in the period incurred
c. allocated to specific products based on the best estimate of the production processing
time
d. capitalized an amortized over a period not to exceed 24 months
(Adapted)
122. Which of the following is expended under the systematic and rational allocation principle
of expense recognition?
a. amortization of intangible assets
c. cost of merchandise sold
b. transportation to customers
d. salesman’s commission
(Adapted)
123. A patent being amortized for a period of (10) years was found to have no future benefits
on the fifth year. The write off of the asset on the fifth year is an example of the principle of:
a. immediate recognition
c. systematic and rational allocation
b. associating cause and effect
d. realization
(Adapted)
124. Which of the following is an application of the principle of systematic and rational
allocation?
a. Depreciation of equipment c. Research and development costs.
b. Sales commissions.
d. Officers' salaries.
125. The matching concept:
a. requires that the debit is matched or posted for every credit
b. is the name applied to the process of associating expenses with revenues
c. treats all costs as being directly related to revenue generation
d. treats all costs as expenses
(Adapted)
126. Which of the following in the most precise sense, means the process of converting noncash
resources and rights into cash or claims to cash?
a. Allocation b. Recordation c. Recognition
d. Realization
(Adapted)
127. Which of the following statements conforms to the realization concept?
a. Equipment depreciation was assigned to a production department and then to product
unit costs.
b. Depreciated equipment was sold in exchange for a note receivable.
c. Cash was collected on accounts receivable.
d. Product unit costs were assigned to cost of goods sold when the units were sold.
(Adapted)
128. When a P300 asset with a six-year estimated useful life is recorded as an expense at the
date of purchase, this is an application of the:
a. matching principle
c. materiality constraint
b. cost principle
d. separate entity assumption
(Adapted)
129. Owners’ equity equals
a. capital minus liabilities c. assets minus liabilities
b. assets plus capital
d. capital minus assets
130. In addition to a statement of a financial position, statement of profit or loss and other
comprehensive income, statement of changes in equity, and statement of cash flows, a
complete set of financial statements must include
a. notes
c. net present value of expected future cash flows
b. an auditor’s opinion
d. a ten-year summary of operations
(Adapted)
131. The ratio that measures short-term solvency
a. ratio of net in income to revenue
c. return on investment
b. age or receivables
d. current ratio
(RPCPA)
132. The primary factor that distinguishes a capital expenditure from a revenue expenditure is:
a. the period in which the expenditure was made
b. the period or periods expected to be benefited
c. the account to be charged
d. the materiality of the expenditure
(RPCPA)
133. Increases in owners’ equity arise from
a. treasury stock acquisition
b. net losses for a period
c. nonreciprocal transfers to an entity from other than owners
d. transfers from a business to its owners
(RPCPA)
134. A modifying convention adopted which is deemed to increase the usefulness of the income
statement regardless of effect on the balance sheet or other financial statements
a. application of judgment by the accounting profession as a whole
b. matching
c. emphasis on income
d. conservatism
(RPCPA)
135. The total of net income and depreciation which is available for dividends, expansion of
facilities, replacement of assets and for reserve is called
a. Accounting profit
c. Economic income
b. Cash earnings
d. Gross income
(RPCPA)
136.
I.
II.
III.
Identify the correct statements.
The cash basis of accounting recognizes revenue only when cash is collected.
The practice of conservatism tends to understate rather than overstate net income.
Most assets used in operating a business are measured in terms of current cost.
IV.
Return on investment is the measurement of net income by making certain assumptions
about changes in the financial position of a business entity over its lifetime.
V.
Revenue is the difference between the selling price of a service and the cost of providing
such service.
VI.
The financial statement with a structure similar to the accounting equation is the
statement of changes in financial position.
a. I, II
b. I, II, IV, VI
c. I, II, IV, V, VI
d. all of the statements
Concepts of capital maintenance and the determination of profit
137. The concept of capital adopted by most entities in preparing their financial statements is
a. Financial concept of capital
c. A combination of (a) and (b)
b. Physical concept of capital
d. Neither (a) nor (b)
138. Framework explains both financial and physical capital maintenance concepts. Which
capital maintenance concept is applied to currently reported net income, and which is applied
to comprehensive income?
(Item #1) Currently reported profit; (Item #2) Comprehensive income
a. Financial capital, Physical capital
c. Financial capital, Financial capital
b. Physical capital, Physical capital
d. Physical capital, Financial capital
(AICPA)
139. The selection of the appropriate concept of capital by an entity should be based on the
needs of the users of its financial statements. This concept of capital should be adopted if the
users of financial statements are primarily concerned with the maintenance of nominal
invested capital or the purchasing power of invested capital.
a. Financial concept of capital
c. A combination of (a) and (b)
b. Physical concept of capital
d. Neither (a) nor (b)
140. This concept of capital should be adopted if the main concern of users is with the operating
capability of the entity.
a. Financial concept of capital
c. A combination of (a) and (b)
b. Physical concept of capital
d. Neither (a) nor (b)
141. This concept is concerned with how an entity defines the capital that it seeks to maintain.
It provides the linkage between the concepts of capital and the concepts of profit because it
provides the point of reference by which profit is measured; it is a prerequisite for
distinguishing between an entity's return on capital and its return of capital; only inflows of
assets in excess of amounts needed to maintain capital may be regarded as profit and
therefore as a return on capital.
a. Concept of capital
c. Concept of equity and performance
b. Concept of capital maintenance
d. Concept of capital and performance
142. Under this concept, a profit is earned only if the financial (or money) amount of the net
assets at the end of the period exceeds the financial ( or money) amount of net assets at the
beginning of the period, after excluding any distributions to, and contributions from, owners
during the period. It can be measured in either nominal monetary units or units of constant
purchasing power.
a. Concept of capital
c. Financial capital maintenance concept
b. Concept of capital maintenance d. Physical capital maintenance concept
143. Under this concept, a profit is earned only if the physical productive capacity ( or operating
capability) of the entity (or the resources or funds needed to achieve that capacity) at the end
of the period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.
a. Concept of capital
c. Financial capital maintenance concept
b. Concept of capital maintenance d. Physical capital maintenance concept
144. It is the residual amount that remains after expenses (including capital maintenance
adjustments, where appropriate) have been deducted from income. If expenses exceed
income, the residual amount is a net loss.
a. Equity
b. Capital
c. Profit
d. Net Gains
145. This capital maintenance concept requires the adoption of the current cost basis of
measurement.
a. Physical capital maintenance
c. Capital maintenance
b. Financial capital maintenance
d. Concept of capital
146. The particular basis of measurement financial capital maintenance concept requires the
use of
a. Historical cost
b. Current cost
c. Nominal cost
d. No particular basis
147. The principal difference between the two concepts of capital maintenance is the
a. treatment of the effects of changes in the prices of assets and liabilities of the entity
b. the basis of measurement required under each concept
c. the valuation of capital being maintained
d. treatment of excess earnings
148. Under the concept of financial capital maintenance where capital is defined in terms of
nominal monetary units, profit represents
a. the increase in nominal money capital over the period
b. the increase in that capital over the period
c. the increase in invested purchasing power over the period
d. the increase in invested purchasing power and net holding gains during the period
149. When the concept of financial capital maintenance is defined in terms of constant
purchasing power units, profit represents
a. the increase in nominal money capital over the period
b. the increase in that capital over the period
c. the increase in invested purchasing power over the period
d. the increase in invested purchasing power and net holding gains during the period
150. Under the concept of physical capital maintenance when capital is defined in terms of the
physical productive capacity, profit represents
a. the increase in nominal money capital over the period
b. the increase in physical productive capacity (or operating capability) over the period
c. the increase in invested purchasing power over the period
d. the increase in invested purchasing power and net holding gains during the period
151. Under the concept of financial capital maintenance where capital is defined in terms of
nominal monetary units, increases in the prices of assets held over the period, conventionally
referred to as holding gains, are, conceptually
a. profits but they may not be recognized as such until the assets are disposed of in an
exchange transaction
b. profits and they may be recognized as such during the period they arise
c. not profits but they may be recognized as such over the period until the assets are disposed
of in an exchange transaction
d. not profits but they may be recognized as profits only until the assets are disposed of in an
exchange transaction
152. When the concept of financial capital maintenance is defined in terms of constant
purchasing power units and prices increase during the period
a. all of the increase in the prices of assets is considered as profits
b. only that part of the increase in the prices of assets that exceeds the increase in the general
level of prices is regarded as profit
c. that part of the increase in the prices of assets that exceeds the increase in the general
level and specific level of prices is regarded as profit, the rest of the increase is not treated
as profit
d. none of the increase is treated as profit
153. The selection of the measurement bases and concept of capital, maintenance will
determine the accounting model used in the preparation of the financial statements. Different
accounting models exhibit different degrees of relevance and reliability and, as in other areas;
management must seek a balance between relevance and reliability. The Framework is
applicable to a range of accounting models and provides guidance on preparing and presenting
the financial statements constructed under the chosen model. At the present time,
a. the accounting model prescribed is Assets = Liability + Capital
b. the accounting model prescribed is Assets = Liability + Capital + Revenues – Expenses
c. the accounting model prescribed is Assets – Liability – Preference shareholders’ equity =
Ordinary shareholders’ equity
d. no particular model is prescribed
Chapter 4
Cash & Cash Equivalents
Chapter 4: Theory of Accounts Reviewer
Cash and cash equivalents
1. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s
(Adapted)
2. Which of the following may properly be included as part of cash to be reported in the December
31, 200A statement of financial position?
a. Treasury bills maturing on March 31, 200B, acquired on December 1, 200A.
b. Customer’s check dated January 1, 200B and sent to bank for deposit on December 31,
200A.
c. Shares of stocks to be sold on the first week of January 200B.
d. Preference shares with mandatory redemption and acquired three months prior to
redemption date.
3. Bank overdrafts, if material, should be
a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.
(Adapted)
4. Deposits held as compensating balances
a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current assets.
d. none of these.
(Adapted)
5. The effect of compensating balance is
a. to provide greater security for the borrower
b. to decrease the yield on the loan to the lender
c. to increase the yield on the loan to the borrower
d. to increase the yield on the loan to the lender.
(Adapted)
6. Which of the following statements is incorrect?
a. Cash which is restricted and not available for use within one year of the reporting period
should be included in noncurrent assets.
b. Cash in a demand deposit account, being held specifically for the retirement of long-term
debts not maturing currently, should be excluded from current assets and shown as a
noncurrent investment.
c. Investments which can be liquidated at once and with little risk of loss of principal may be
classified as cash equivalent and included in the caption “Cash and Cash equivalents”
d. Compensating balances are cash amounts that are not immediately accessible by the
owner.
e. Cash and cash equivalents is always presented first in statement of financial position when
presenting current and non-current classifications.
7. Alaking received cash to be held in trust for Ambit under an escrow agreement. Such cash
should be presented in Alaking’s financial statements as
a. part of cash
b. a liability
c. an asset and a liability
d. an off-balance sheet item but disclosed in the notes
8. These are short-term, highly liquid investments that are so near their maturity that they
represent insignificant risk of changes in value due to changes in interest rates.
a. Cash and Cash equivalents
c. Treasury notes
b. Treasury bills
d. Cash equivalents
9. When the bank receives cash from a depositor, the cash should be credited to
a. Cash
c. Accounts payable
b. Cash in bank
d. Deposit liability
10.
Devin Co.'s cash balance in its balance sheet is P1,300,000, of which P300,000 is identified
as a compensating balance. In addition, Devin has classified cash of P250,000 that has been
restricted for future expansion plans as "other assets". Which of the following should Devin
disclose in notes to its financial statements?
(Item #1) Compensating balance; (Item #2) Restricted cash
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(AICPA)
11.
I.
Which of the following is/are true about "compensating balances?"
They are reserve balances maintained for emergency spending requirements.
II.
If compensating balances are legally restricted, they must be segregated on the balance
sheet.
III.
Compensating balances are overstated if "floats" are included as part of the cash.
a. II only
b. I & III
c. I, II & III
d. II & III
(Adapted)
12.
Which of the following best qualifies as a "cash equivalent?"
a. A firm's investment in "held to maturity" government treasury bonds that mature in 5 years.
b. A firm's equity investment in an unconsolidated subsidiary of a privately held firm.
c. A firm's investment in government treasury bills.
d. All of these answers.
(Adapted)
13.
Float refers to:
a. the number of days that a bank will allow a corporation to hold a negative balance in its
checking account before charging fees for the negative balance.
b. the companies bank balance in excess of its working capital needs.
c. the receivable balance on the books of the corporation.
d. checks issued but not yet paid by a bank.
(Adapted)
14.
On an entity’s December 31, 20x1 statement of financial position which of the following
items should be included in the amount reported as cash?
I.
A check payable to the enterprise, dated January 2, 20x2, in payment of a sale made in
December 20x1.
II.
A check drawn on the enterprise’s account, payable to a vendor, dated and recorded in the
company’s books on December 31, 20x1 but not mailed until January 10, 2002.
a. I only
b. II only
c. I and II only
d. Neither I nor II
(Adapted)
15.
The amount reported as "Cash" on a company's balance sheet normally should exclude
a. postdated checks that are payable to the company
b. cash in a payroll account
c. undelivered checks written and signed by the company
d. petty cash
(Adapted)
16.
Which of the following would not be classified as cash?
a. Personal checks
c. Cashier’s checks
b. Traveler’s checks
d. Postdated checks
(Adapted)
17.
On October 31, 2003, Dingo, Inc. had cash accounts at three different banks. One account
balance is segregated solely for a November 15, 2003 payment into a bond sinking fund. A
second account, used for branch operations, is overdrawn. The third account, used for regular
corporate operations, has a positive balance. How should these accounts be reported in Dingo’s
October 31, 2003 classified balance sheet?
a. The segregated account should be reported as a noncurrent asset, the regular account
should be reported as a current asset, and the overdraft should be reported as a current
liability.
b. The segregated and regular accounts should be reported as current assets, and the
overdraft should be reported as a current liability.
c. The segregated account should be reported as a noncurrent asset, and the regular account
should be reported as a current asset net of the overdraft.
d. The segregated and regular accounts should be reported as current assets net of the
overdraft.
(Adapted)
18.
Compensating balance agreements that do not legally restrict the amount of funds shown
on the balance sheet should:
a. be reported in the current asset section
b. be reported in the Long-term investment section
c. be reported in the other asset section
d. be reported in the footnotes
(Adapted)
19.
a.
b.
c.
d.
Bank overdraft
Is a debit balance in a cash in bank account.
Is offset against demand deposit account in another bank.
Which cannot be offset is classified as current liability.
Which cannot be offset is classified as non-current liability.
20.
a.
b.
c.
d.
Cash in foreign currency is valued at
Face value
Current exchange rate
Current exchange rate reduced by allowance for expected decline in peso
Estimated realizable value
21.
If material, deposit in foreign countries which are subject to foreign exchange restriction
should be shown separately as
a. Current asset with no disclosure of the restriction.
b. Non-current asset with no disclosure of the restriction.
c. Current assets with disclosure of the restriction.
d. Non-current asset with disclosure of the restriction.
Internal controls for cash
22.
In an imprest system, it is the fund set aside for small disbursements
a. Pretty cash fund
c. Payroll fund
b. Dividends fund
d. Petty cash fund
23.
When making payments to suppliers, an entity normally credits this account.
a. Cash
c. Cash in bank
b. Vouchers payable
d. Accounts payable
24.
a.
b.
c.
d.
25.
I.
II.
III.
Which of the following is least likely the purpose of preparing bank reconciliation?
to bring the cash in bank balance per books and per bank statement in agreement
as an internal control procedure for safeguarding assets
to detect fraud
to recognize items such as expenses and assets not recorded
Consider the following statements.
The voucher system refers to the complete use of the voucher check and of subsidiary
records of vouchers payable, voucher register and check register
The simplest and most satisfactory method of handling purchase discounts under the
voucher system is to deduct the purchase discount on the face of the voucher and enter
this discount in a special column in the check register
Entries in the voucher register are made in the same sequence as the numbering of the
checks – that is, in the order in which payments are made.
a. true, true, false
b. true, false, false
(RPCPA)
c. false, false, false
d. true, true, true
26.
Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
(Adapted)
The next two questions are based on the following information:
The information below was taken from the bank transfer schedule prepared during the audit of
Fox Co.’s financial statements for the year ended December 31, 2001. Assume all checks are dated
and issued on December 30, 2001.
Bank Accounts
Disbursement date
Receipt date
Check no. From
To
Per books Per bank Per books Per bank
101
National Federal
Dec. 30
Jan. 4
Dec. 30
Jan. 3
202
County
State
Jan. 3
Jan. 2
Dec. 30
Dec. 31
303
Federal American Dec. 31
Jan. 3
Jan. 2
Jan. 2
404
State
Republic
Jan. 2
Jan. 2
Jan. 2
Dec. 31
27.
Which of the following checks might indicate kiting?
a. #101 and #303.
c. #101 and #404
b. #202 and #404
d. #202 and #303
(AICPA)
28.
Which of the following checks illustrate deposits/ transfers in transit at December 31,
2001?
a. #101 and #202.
c. #202 and #404
b. #101 and #303
d. #303 and #404
(AICPA)
29.
For effective eternal control over the disbursement of payroll checks, an enterprise makes
a specific amount of cash available in a checking account for this limited purpose. The type of
account used for this purpose is called a(n)
a. General checking account
c. Lockbox account
b. Imprest bank account
d. Compensating balance
(Adapted)
30.
a.
b.
c.
d.
The principal purpose of a voucher system is to provide assurance that
All cash receipts are deposited intact in the bank
All cash disbursements are approved before a check is issued
All cash receipts are recorded in the accounting records
All purchase invoices are supported by debit memoranda
a.
b.
c.
d.
Which of the following best describes a voucher?
A supporting document prepared for each cash receipt and disbursement
A promise to pay an amount owed within a discount period
A written authorization prepared for each check written
A written record sent to a payee along with the signed check
31.
32.
A voucher system is used in connection with transactions that involve only
a. The receipt of cash
c. The purchase and sale of merchandise
b. The payment of cash
33.
d. Revenue and expense
It is the business paper which a company makes for every cash payment.
a. Check b. Voucher
c. Journal
d. Official receipt
34.
After vouchers are recorded, they are filed in an “unpaid vouchers file”
a. Numerically
c. Chronologically
b. In the order of payment d. No particular order
35.
Which of the following is not a correct way of handling a voucher system?
a. Purchases are recorded in the voucher register at gross by debiting purchases and crediting
vouchers payable.
b. Payment of purchases with discounts is recorded in the check register by debiting vouchers
payable at gross and crediting respectively cash in bank and purchase discounts.
c. In case there are purchase returns and allowances, there is no need to cancel the original
voucher and the issuance of a new one for the lower amount because adjusting entries
could later on be prepared.
d. When installments or other payments are made on an invoice, a separate voucher is
prepared for the amount of each check issued.
(Adapted)
36.
Which of the following is a key element of internal control over cash payments?
a. periodically reconciling the cash account balance on the company's books to the bank
statement balance
b. making daily bank deposits
c. requiring that all petty cash vouchers be approved by two signatures
d. authorizing and verifying that all cash received is recorded daily
(Adapted)
37.
Which is not a key element of internal control over cash receipts?
a. daily recording of all cash receipts in the accounting records
b. daily entry in a voucher register
c. immediate counting by the person opening the mail or using the cash register
d. daily deposit intact
(Adapted)
38.
This occurs when collection of receivable from one customer is misappropriated and then
concealed by applying a subsequent collection from another customer.
a. Lapping
b. Kiting
c. Window dressing
d. Fraud
39.
This occurs when cash shortage is concealed by overstating the balance of cash. This is
performed by exploiting the float period (the time it needs for a check to clear at the bank it
was drawn).
a. Lapping
b. Kiting
c. Window dressing
d. Fraud
40.
This document shows the dates of all transfers of cash among the various bank accounts.
Its primary purpose is to help auditors detect kiting.
a. Cut-off bank statement
c. Bank transfer schedule
b. Bank reconciliation
d. Proof of cash
41.
This document is a bank statement prepared a few days after month-end. Its purpose is to
help auditors verify reconciling items on the year-end bank reconciliation.
a. Cut-off bank statement c. Bank transfer schedule
b. Bank reconciliation
d. Proof of cash
42.
This refer to measures taken by management to make a business look as strong as possible
in its statement of financial position, statement of profit or loss and other comprehensive
income, and statement of cash flows. It occurs when books are not closed at year-end and
transactions in the subsequent period are deliberately recorded in current period in order to
improve the entity’s financial performance or financial ratios.
a. Lapping
b. Kiting
c. Window dressing
d. Fraud
43.
This internal control for cash requires that cash collections are deposited intact and cash
disbursements are made through check.
a. Segregation of duties
c. Imprest system
b. Voucher system
d. Bank reconciliation
Petty cash
44.
Who is responsible, at all times, for the amount of the petty cash fund?
a. The president
c. The general cashier
b. The general office manager
d. The petty cash custodian
45.
Which of the following is not an appropriate procedure for controlling the petty cash fund?
a. The petty cash custodian files receipts by category of expenditure after their presentation
to the general cashier so that variations in different types of expenditures can be monitored.
b. Surprise counts of the fund are made from time to time by a superior of the petty cash
custodian to determine that the fund is being accounted for satisfactorily.
c. The petty cash custodian obtains signed receipts from each individual to whom petty cash
is paid.
d. Upon receiving petty cash receipts as evidence of disbursements, the general cashier issues
a company check to the petty cash custodian, rather than cash, to replenish the fund.
(Adapted)
46.
Which one of the following statements is incorrect?
a. The accounting function should be separated from the custodianship of a company's assets.
b. Certain clerical personnel in a company should be rotated among various jobs.
c. The responsibility for receiving merchandise and paying for it should usually be given to one
person.
d. A company's personnel should be given well-defined responsibilities.
(Adapted)
47.
A petty cash system is designed to
a. cash checks for employees.
b. handle cash sales.
c. account for all cash receipts and disbursements.
d. pay small miscellaneous expenses.
(Adapted)
48.
In most situations, the petty cash fund is reimbursed just prior to the year end and an
adjusting entry is made to avoid
a. the overstatement of cash and the understatement of expenses.
b. the understatement of cash and the overstatement of expenses.
c. the misstatement of revenues.
d. the understatement of cash with the appropriate statement of expenses.
(Adapted)
49.
In replenishing a petty cash fund, which one of the following entries is required?
a. Debit Petty Cash, credit Cash in bank
b. Debit individual expense accounts, credit Cash in bank
c. Debit Petty Cash, credit individual expense accounts
d. Debit Cash in bank, credit Petty Cash
50.
On January 1, 20x1, UFC Co. established a petty cash fund of P400. On December 31, 20x1,
the petty cash fund was examined and found to have receipts and documents for miscellaneous
expenses amounting to P364. In addition, there was cash amounting to P44. What entry would
be required to record replenishment of the petty cash fund on December 31, 20x1?
a. Petty Cash.................................364
Cash Short and Over..............................................8
Cash in bank.......................................................356
b. Miscellaneous Expense...........364
Cash Short and Over..............................................8
Petty Cash..........................................................356
c. Miscellaneous Expense...........364
Cash Short and Over...............................................8
Cash in bank........................................................356
d. Miscellaneous Expense...........356
Cash Short and Over....................8
Cash in bank........................................................364
(Adapted)
Bank reconciliation
51.
Adjusting and correcting entries in the books of the company are necessary for
a. Book reconciling items
c. Errors committed by the bank
b. Bank reconciling items
d. a and c
52.
a.
b.
c.
d.
Bank reconciliations are normally prepared
on “as needed” basis
on a monthly basis
every time financial statements are prepared
only at year-end
53.
In preparing the bank reconciliation, certified checks should be excluded from outstanding
checks. The rationale for this treatment is
a. the bank, when certifying checks, draws the check in its account
b. the bank, when certifying checks, automatically debits the company’s account
c. the bank, when certifying checks, automatically credits the company’s account
d. the bank, when certifying checks, assumes the obligation to pay the drawee when the check
is presented for payment
54.
Unless otherwise stated, reconciling items are presumed to have been taken up in the
books or taken up by the bank
a. during the month the bank statement is prepared
b. in the immediately following month
c. in the immediately preceding month
d. in the immediately following or preceding reporting period, on a case-to-case basis
55.
In preparing the bank reconciliation using the adjusted balance method, the first item
listed in the bank reconciliation report for reconciling the balance of cash in bank per books to
the adjusted balance is the
a. balance of cash in bank per books as of the end of the month
b. balance of cash in bank per books as of the beginning of the month
c. balance of cash in bank per bank statement as of the end of the month
d. balance of cash in bank per bank statement as of the beginning of the month
56.
In preparing the bank reconciliation using the adjusted balance method, the first item
listed in the bank reconciliation report for reconciling the balance of cash in bank per bank
statement to the adjusted balance is the
a. Balance of cash in bank per books as of the end of the month
b. balance of cash in bank per books as of the beginning of the month
c. balance of cash in bank per bank statement as of the end of the month
d. balance of cash in bank per bank statement as of the beginning of the month
57.
In preparing the bank reconciliation using the adjusted balance method, errors to be
included in reconciling the balance per books to the adjusted balance include
a. only the errors committed by the company
b. only the errors committed by the bank
c. both the errors committed by the company and the bank
d. choice (c) if both errors affect the balance per books
58.
Which of the following is deducted from the cash balance per bank when computing for
the cash balance reported in the books?
a. Deposit in transit
c. Credit memo
b. Error
d. Debit memo
59.
When presenting a bank reconciliation statement prepared using the book to bank
method, which of the following is as a deduction in order to compute for the cash balance per
bank?
a. Deposit in transit
c. Credit memo
b. Error
d. Outstanding checks
60.
In reconciling a business cash book with the bank statement, which of the following items
could require a subsequent entry in the cash book?
1. Checks presented after date.
2. A check from a customer which was dishonored.
3. An error by the bank.
4. Bank charges.
5. Deposits credited after date.
6. Standing order entered in bank statement.
a. 2, 3, 4 and 6
b. 1, 2, 5 and 6 c. 2, 4 and 6
d. 1, 3 and 5
(ACCA)
61.
A bank reconciliation is
a. A formal financial statement that list all of the bank account balances of an enterprise.
b. A merger of two banks that previously were competitors.
c. A statement sent by the bank to depositor on a monthly basis.
d. A schedule that accounts for the differences between an enterprise’s cash balance as shown
on its bank statement and the cash balance shown in its general ledger.
(AICPA)
62.
If the balance shown on a company's bank statement is less than the correct cash balance,
and neither the company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
(AICPA)
63.
If the cash balance shown in a company's accounting records is less than the correct cash
balance, and neither the company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. deposits in transit.
c. outstanding checks.
d. bank charges not yet recorded by the company.
(Adapted)
64.
Which of the following statements is false?
a. Certified check is a liability of the bank certifying it.
b. Certified check will be accepted by many persons who would not otherwise accept a
personal check.
c. Certified check is one drawn by the bank upon itself.
d. Certified check should not be included in the outstanding check.
(Adapted)
65.
Bank statements provide information about all of the following except
a. checks cleared during the period
c. bank charges for the period
b. NSF checks
d. errors made by the company
(Adapted)
66.
Which of the following items would be added to the book balance on a bank reconciliation?
a. Outstanding checks
b. A check written for P63 entered as P36 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
(Adapted)
67.
In preparing a bank reconciliation, interest paid by the bank on the account is
a. added to the bank balance
c. added to the book balance
b. subtracted from the bank balance
d. subtracted from the book balance
(Adapted)
68.
In preparing a monthly bank reconciliation, which of the following items would be added
to the balance reported on the bank statement to arrive at the correct cash balance?
a. Outstanding checks
b. Bank service charge
c. Deposits in transit
d. A customer's note collected by the bank on behalf of the depositor
69.
Bank reconciliations are normally prepared on a monthly basis to identify adjustments
needed in the depositor's records and to identify bank errors. Adjustments should be recorded
for
a. bank errors, outstanding checks, and deposits in transit.
b. all items except bank errors, outstanding checks, and deposits in transit.
c. book errors, bank errors, deposits in transit, and outstanding checks.
d. outstanding checks and deposits in transit.
Proof of cash
70.
A reconciliation that includes proof of receipts and disbursements that is useful in
discovering possible discrepancies in handling cash over a certain period of time.
a. Bank statement
c. Proof of cash
b. Bank reconciliation
d. Cash requirements report
71.
A device not normally prepared on a regular basis but is a very useful tool during fraud
audits regarding defalcation of cash
a. Lapping statement
c. Proof of cash
b. Bank reconciliation
d. Cash requirements report
72.
Regarding the preparation of a proof of cash, an erroneous book credit committed in the
previous month which is corrected this month
a. is an addition to previous month's balance per books and a deduction to receipts in current
month
b. is a deduction to previous month's balance per books and a deduction to receipts in current
month
c. is an addition to current month's balance per books and a deduction to receipts in previous
month
d. is an addition to previous month's balance per bank statement and a deduction to receipts
in current month
73.
When preparing a proof of cash, the correction for an overstatement of cash in the
previous month
a. is an addition to previous month's balance per books and a deduction to receipts in current
month
b. is a deduction to previous month's cash balance and a deduction to current month's
disbursements
c. is an addition to previous month's balance per bank statement and a deduction to receipts
in current month
d. is an addition to previous month's balance per bank statement and a deduction to current
month's disbursements
74.
A proof of cash would be useful for
a. Discovering cash receipts that have not been recorded in the journal.
b. Discovering time lag in making deposits.
c. Discovering cash receipts that have been recorded but have not been deposited.
d. Discovering an inadequate separation of incompatible duties of employees.
(Adapted)
75.
Del Co. prepares a four-column bank reconciliation. Check no. 8859 was written for P5,670
on the books, but the check was written and cleared the bank for the correct amount, P6,570.
The correct treatment on the reconciliation would be:
a. on the bank side, deduct P900 from payments and add P900 to ending balance
b. on the book side, deduct P900 from payments and add P900 to ending balance
c. on the book side, add P900 to payments and deduct P900 from ending balance
d. on the bank side, add P900 to receipts and add P900 to ending balance
(Adapted)
Chapter 5
Receivables (Part 1)
Chapter 5: Theory of Accounts Reviewer
1. Receivables arising from sales to customers are best described as
a. accounts receivables c. trade receivables
b. note receivables
d. non-trade receivables
2. If a receivable account has a credit balance
a. the credit balance is offset with other receivable accounts with debit balances
b. an adjusting entry is needed to eliminate the credit balance
c. the credit balance is classified as a liability
d. b and c
3. Which of the following increases the reported receivables in the financial statements?
a. offsetting a credit balance in an account receivable
b. a credit balance in an account payable
c. adjustment to eliminate a debit balance in account payable
d. a credit balance in an allowance account
4. The category "trade receivables" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for casualties sustained.
d. none of these.
(Adapted)
5. Which of the following should be recorded in Accounts Receivable?
a. Receivables from officers
c. Dividends receivable
b. Receivables from subsidiaries d. None of these
(Adapted)
6. Which of the following is not a characteristic of receivables?
a. They have fixed or determinable payments.
b. The holder can recover substantially all of its investment (unless there has been credit
deterioration).
c. They are not quoted in an active market.
d. The holder has a demonstrated positive intention and ability to hold them to maturity.
(Adapted)
7. Which of the following is not an acceptable balance sheet presentation of receivables?
a. the allowance for bad debts is not offset against the related receivables but rather shown
in a parenthetical notation as deduction to receivables
b. trade notes receivable are combined with trade accounts receivable
c. cash advances to officers which are due after one year but within the entity’s 18-month
operating cycle, are reported as current assets
d. unearned finance charges included in the face amount of receivables are presented as
deduction from the related receivables
(Adapted)
8. These receivables are classified as current or noncurrent based on the length of the entity’s
normal operating cycle
a. accounts receivables c. trade receivables
b. notes receivables
d. nontrade receivables
9. Trade receivables are preferably presented on the face of the statement of financial position
a. as a separate line item distinguished from other receivables
b. as part of one line item, included and undistinguished from other receivables
c. as part of current assets, included and undistinguished from other assets
d. as part of one line item but distinguished from other receivables
10. Which of the following statements is incorrect regarding recognition of receivables?
a. An entity shall recognize a receivable when the entity becomes party to the contractual
provisions of the instrument
b. Trade receivables are recognized simultaneously with the recognition of related revenue
when the criteria for revenue recognition are met.
c. Non-trade receivables are recognized when contractual rights over the future cash flows
of the receivables have been established and future economic benefits are both probable
and measurable.
d. Receivables are initially recognized at fair value
11. Receivables are initially recognized at
a. fair value
c. net realizable value
b. amortized cost
d. fair value plus direct costs
12. For trade receivables, the fair value is deemed equal to the
a. exchange price between a seller and a buyer after taking into account the amount of any
trade discounts and volume rebates allowed by the entity.
b. the amount due from the buyer without adjustment for any trade discounts allowed
c. the quoted price of the receivable in an active market
d. the price in a binding sale agreement
13. The entry to be made by the seller for a P10,000 freight on a sale transaction with terms of
FOB Shipping Point, Freight Collect is
a. Freight-in
10,000
c. Freight-in
10,000
Cash
10,000
Receivable
10,000
b. Freight-out
10,000
d. No entry
Cash
10,000
14. The entry to be made by the seller for a P10,000 freight on a sale transaction with terms of
FOB Shipping Point, Freight Prepaid is
a. Payable
10,000
c. Freight-out
10,000
Cash
10,000
Cash
10,000
b. Receivable 10,000
d. Cash
10,000
Cash
10,000
Receivable
10,000
15. The entry to be made by the seller for a P10,000 freight on a sale transaction with terms of
FOB Destination, Freight Prepaid is
a. Freight-in
10,000
c. Freight-in
10,000
Cash
10,000
Receivable
10,000
b. Freight-out
10,000
d. Accounts receivable10,000
Cash
10,000
Cash
10,000
16. What is the effect upon the total assets of a business when an account receivable has been
collected?
a. increase total assets
c. no change in total assets
b. decrease total assets
d. decrease of receivable only
17. The value at which advances to subsidiaries and affiliates should be carried is
a. face amount
b. fair value
c. face amount less allowance for uncollectible accounts and impairment losses recognized
d. fair value with changes in fair values recognized in profit or loss
18. If it is known that sales are often recorded for merchandise that is shipped on approval and
available data suggests that a material proportion of such sales are returned by the customers,
a.
b.
c.
d.
loss should be recognized under the immediate recognition principle
loss should be recognized under the matching concept
these estimated future returns must be accrued
future returns are ignored
19. Material amounts of anticipated discounts and allowances should be recorded
a. in the period of sale
c. when the boss says so
b. when discounts are availed of d. they are not recorded
20. The “Allowance for sales discounts” account may be used under
a. Gross method
c. Allowance method
b. Net method
d. a or b
21. The “Allowance for sales returns” account may be used under
a. Gross method
c. Allowance method
b. Net method
d. a or b
22. If a company employs the gross method of recording accounts receivable from customers,
then sales discounts taken by customers should be
a. reported as a deduction from sales in the income statement.
b. reported as an item of "other expense" in the income statement.
c. reported as a deduction from accounts receivable in determining the net realizable value
of accounts receivable.
d. reported as sales discounts forfeited in the cost of goods sold section of the income
statement.
23. An allowance for cash discounts that is presented in the financial statements as deduction
from accounts receivable and is based on an estimate of future cash discounts expected to be
taken is an effect of
a. consistency principle
c. materiality principle
b. revenue principle
d. conservatism principle
24. Poison Company sold merchandise on credit with a list price of P70,000. Terms were 2/10,
n/30. Given the indicated sales discounts methods in the responses, which entry is correct?
a. Gross price method
Accounts receivable
63,000
Sales
63,000
b. Net price method
Accounts receivable
68,600
Sales
68,600
c. Net price method
Accounts receivable
40,000
Sales
40,000
d. Gross price method
Accounts receivable
68,600
Sales
68,600
(RPCPA)
25. The “Sales returns and allowances” account is reported as a:
a. contra-revenue account in the income statement
b. current liability on the balance sheet
c. deduction from accounts receivable on the balance sheet
d. selling expense on the income statement
26. Theoretically, the amount of estimated future returns and allowances on credit sales should
be recorded during the period of the sale so as not to overstate sales and ending accounts
receivable. In practice, these estimates are rarely recorded because:
a. the amount of such returns and allowances tends to fluctuate too greatly from period to
period.
b. there is too much uncertainty surrounding such estimates.
c. such estimates are not allowed according to generally accepted accounting principles
d. the amount of such returns and allowances is usually not material
(RPCPA)
27. The most theoretically sound method of accounting for cash discounts on credit sales is the:
a. net method
c. gross method
b. discounted price method
d. net present value
(RPCPA)
28. Which of the following is an advantage of using the net price method for recording cash
discounts on credit sales?
a. It eases communication with customers about their balances
b. It properly reflects current period sales revenue
c. It simplifies recording of sales returns and allowances
d. It requires less record keeping than the gross method
(RPCPA)
29. Which of the following affects most the valuation of an entity's receivables?
a. The rate of sales growth
b. The type of business that a firm is engaged in
c. The allowance for uncollectible accounts
d. The seasonality of a company's products
30. A credit entry to the Allowance for uncollectible account
a. increases the balance
c. neither of these answers is correct
b. increases net receivables
d. both of these answers are correct
31. Which of the following is used to calculate the actual adjustment for bad debt expense for the
period?
a. percentage of accounts receivable
c. aging
b. percentage of net credit sales
d. all of these
32. The allowance for uncollectible accounts is based on all of the following except:
a. Experience
c. Customer fortunes
b. Profitability expectancy
d. Industry expectations
33. Which of the following is a valuable investigation tool for analysis of the collectibility of a firm's
receivables?
a. Determining patterns of receivables for peers as a percentage of net credit sales.
b. An examination of any customer concentrations.
c. An analysis of the adequacy of allowances for trade discounts, and returns and allowances.
d. An aging schedule.
e. All of these
34. In practice, the deductions that would be made for estimated returns, allowances, and
discounts are rarely made because
a. they are usually deemed to be immaterial
b. GAAP does not require such allowances
c. it is always difficult to make estimates
d. such estimates are a matter of company policy
35. Under the direct method,
a. doubtful accounts are charged as an expense
b. estimates for uncollectible accounts are made periodically and an allowance is set up to
recognize such uncollectible accounts
c. an expense is recognized when it is estimated that the collection from a receivable is
deemed doubtful
d. a receivable is charged off only when it is clear that it cannot be collected
36. Doubtful accounts expense should be presented in the income statement under
a. selling expense
c. administrative expense
b. other expense
d. cost of goods sold
37. When the allowance method of recognizing uncollectible accounts is used, how would the
collection of an account previously written off affect accounts receivable and the allowance
for uncollectible accounts?
Item #1: Accounts receivable; Item #2: Allowance for uncollectible accounts
a. Increase , Decrease
c. No effect, Decrease
b. Increase, No effect
d. No effect, Increase
(AICPA)
38. Which of the following methods of determining bad debt expense does not conform with the
accrual basis of accounting nor the matching principle?
a. Charging bad debts with a percentage of net credit sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
39. Which of the following methods of determining bad debt expense best achieves the matching
concept?
a. Percentage of net credit sales
b. Percentage of ending accounts receivable
c. Aging of accounts receivable
d. Direct write-off
40. Which of the following is a generally accepted method of determining the amount of the
adjustment to bad debt expense?
a. A percentage of net credit sales adjusted for the balance in the allowance
b. A percentage of net credit sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance
41. The advantage of relating a company's bad debt expense to its credit sale is that this approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.
(AICPA)
42. Chris Co. prepares an accounts receivable aging schedule with a series of computation as
follows: 2% of the total peso balance of accounts from 1—60 days past due, plus 5% of the
total peso balance of accounts from 61—120 days past due and so on. How would you describe
the total of the, amounts determined in this series of computations?
a. it is the amount of bad debts expense for the year
b. it is the amount that should be added to the allowance for doubtful accounts at year end
c. it is the amount of the desired credit balance of the allowance for doubtful accounts to be
reported in the year-end financial statements
d. when added to the total of accounts written off during the year, this new sum is the desired
credit balance of the allowance account
(RPCPA)
43. Ismael Co. recorded a bad debt recovery using the allowance method of accounting for bad
debts. Compare (X) the working capital before the recovery with (Y), the working capital after
the recovery.
a. X equals Y
c. X is less than Y
b. X is greater than Y
d. X is equal to or less than Y
(RPCPA)
44. Mr. Golf Champ maintains the accounts receivable records, authorizes the write-off of
uncollectible accounts, issues credit memoranda to customers, and handles cash receipts from
customers. When customers are late in paying their accounts, Mr. Golf Champ often writes off
the account as uncollectible and abstracts the cash received from the customer. This fraud
should come to light if an employee other than Mr. Golf Champ.
a. reconciles the bank statement to the accounting records
b. reconciles the accounts receivable subsidiary ledger to the controlling account
c. reconciles credit memoranda for sales returns to the returned merchandise accepted by
the receiving department
d. none of the above
(RPCPA)
45. Which of the following statements is correct?
a. The net realizable value of the total amount of accounts receivable is defined as the gross
amount billed to customers less any cash and trade discounts.
b. When a specified bad debt which has already been written off is later collected, sales
revenue is increased by the amount of the recovery.
c. The primary accounting principle supporting use of the allowance for doubtful accounts is
the cost principle.
d. An estimate of bad debt expense based upon credit sales rather than total sales will likely
be more in conformity with the matching principle.
46. Which of the following methods may not be appropriate for estimating bad debt expense?
a. Individual or collective assessment of outstanding receivables
b. Percentage of outstanding accounts receivable
c. Aging of accounts receivable
d. Percentage of sales
(Adapted)
47. Which of the following statements is incorrect?
a. If the estimate of bad debt expense is made on the basis of net credit sales, an entry is
made each period to the account, "Allowance for Doubtful Accounts," without regard to
the prior balance in that account.
b. If the allowance for doubtful accounts has been underestimated, a sale of the related
receivables to a factor is more likely to result in a gain than in loss.
c. If credit terms to customers were 2/10, n/30, a two percent discount will be granted if
payment is made within 10 days of the date of sale.
d. If the estimate of the bad debt expense is made on the basis of net realizable value of the
accounts receivable the balance of the account, "Allowance for Doubtful Accounts," is
adjusted so that the adjusted balance reflects the computed amount needed to properly
value the receivables.
(RPCPA)
48. Which of the following accounting principle primarily supports the use of allowance for
doubtful accounts?
a. continuity principle
c. matching
b. full-disclosure
d. cost principle
(RPCPA)
49. The allowance method of recognizing bad debt expense can be applied in more than one way.
What two conditions must be met before the allowance method can be used?
a. bad debts must be expected and material
b. bad debts must be relevant and reliable
c. bad debts must be probable and estimable
d. bad debts must be consistent over time and the method used to estimate them must be
consistently applied
(RPCPA)
50. A company uses the allowance method to account for bad debts. Early 20x1, one of the
company's best customers went bankrupt. The customer owed for P6,570 of goods purchased
on credit. At the end of 20x1, this amount was considered uncollectible. What entry should be
made to reflect this information?
a. Loss of bad debts
6,570
Accounts receivable
6,570
b. Bad debt expense
6,570
Accounts receivable
6,570
c. Allowance for doubtful accounts
6,570
Accounts receivable
6,570
d. Loss on bad debts
6,570
Accounts receivable
6,570
(RPCPA)
51. If a company uses a percentage of receivables in computing the amount of uncollectible
accounts expense:
a. no valuation allowance will be required
b. the relationship between revenue and expenses is being stressed more than the valuation
of receivables at the balance sheet date.
c. the existing balance in the Allowance for Doubtful Accounts will be increased sufficiently
to equal the probable loss indicated by the percentage of receivables computation
d. any past-due accounts will be listed as a separate item in the balance sheet
(RPCPA)
52. Eureka Co. sells goods to Ancing, a customer who uses Swipe Credit Card. Eureka should record
this sale as:
a. an account receivable from Ancing.
b. cash receipt.
c. an account receivable from Swipe.
d. an increase in the allowance for doubtful accounts.
53. When a company decides to sell its goods on credit, it should evaluate the effect on profit of:
Item #1: Additional Revenues; Item #2: Additional Expenses
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(RPCPA)
54. An advantage of relating a company's bad debt expense to its accounts receivable is that this
approach:
a. is the only way generally accepted method for "valuing" accounts receivable.
b. gives a reasonable valuation of accounts receivable in the statement of financial position.
c. does not require estimates of uncollectible accounts.
d. does not require knowledge of the balance in the allowance for doubtful accounts before
adjustment for bad debt expense.
(AICPA)
55. At December 31, before adjusting and closing the accounts had occurred, the Allowance for
Doubtful Accounts of Wise Corporation showed a debit balance of P5,300. An aging of the
accounts receivable indicated the amount probably uncollectible to be P3,900. Under these
circumstances, a year-end adjusting entry for uncollectible accounts expense would include a:
a. debit to the Allowance for Doubtful Accounts for P1,400
b. credit to the Allowance for Doubtful Accounts for P1,400
c. debit to Uncollectible Accounts Expense, P3,900
d. debit to Uncollectible Accounts Expense, P9,200
(AICPA)
56. When the allowance method of recognizing bad debt expense is used, the entry to record the
specific write-off of a specific customers’ account
a. decreases current assets
c. has no effect on profit
b. decreases profit
d. decreases working capital
57. When the allowance method of recognizing bad debt expense is used, the entry to record the
specific write-off of an uncollectible account would decrease
a. net accounts receivable
c. profit
b. allowance for doubtful accounts
d. working capital
58. When the percentage of credit sales method is used in determining doubtful accounts, the
amount computed represents the
a. required balance
b. bad debt expense
c. bad debt expense after adjustments for write-offs, recoveries and changes in the balance
of the allowance for doubtful accounts
d. required balance after adjustments for write-offs, recoveries and changes in the balance
of the allowance for doubtful accounts
59. In its December 31 balance sheet, Devin Co. reported trade accounts receivable of P250,000
and related allowance for uncollectible accounts of P20,000. What is the total amount of risk
of accounting loss related to Devin's trade accounts receivable, and what amount of that risk
is off balance-sheet risk? (Item #1) Risk of accounting loss; (Item #2) Off-balance-sheet risk
a. 0, 0
c. 230,000, 20,000
b. 230,000, 0
d. 250,000, 20,000
(AICPA)
Chapter 6
Receivables (Part 2)
Chapter 6: Theory of Accounts Reviewer
1. Which of the following statements correctly relate to accounting for loans and receivables?
I.
Andres Company sold equipment to Bonifacio Company, taking in exchange a non-interest
bearing note, the face amount of which was in excess of the fair value of the equipment.
In a balance sheet prepared immediately after receipt of the note, Andres Company should
present the note at its face value plus the anticipated net earnings to the note.
II.
Receivables denominated in a foreign currency, when reported on the year-end statement
of financial position, should be translated to local currency at the rate of exchange at
acquisition.
III.
The collection of an account which was previously written off through the allowance
method of recognizing bad debts would affect the total current assets.
IV.
Significant amounts of installment receivables should be disclosed
V.
Under PAS 1 trade receivables should be shown separately on the face of the balance
sheet. Notes receivable may either be combined with or separated from accounts
receivable.
a. IV, V
b. II, IV, V
c. I, III, IV, V d. IV
2. Which of the following statements is incorrect regarding the initial recognition of receivables?
a. On initial recognition, the fair value of a short-term receivable may be equal to its face
amount.
b. On initial recognition, the fair value of a long-term receivable bearing a reasonable interest
rate is deemed equal to its face amount.
c. On initial recognition, the fair value of a long-term noninterest bearing receivable is
deemed equal to the present value of future cash flows from the instrument discounted
at the effective interest rate on initial recognition.
d. On initial recognition, the fair value of all interest-bearing receivables is deemed equal to
their face amount.
3. If the gross amount of receivables includes unearned interest or finance charges
a. these should be presented in the statement of financial position as liability.
b. these should be deducted in arriving at the net amount to be presented in the statement
of financial position.
c. these should be added in arriving at the net amount to be presented in the statement of
financial position.
d. these should be ignored.
4. Loans and receivables are initially recognized at
a. fair value
b. face value
c. amortized cost
d. fair value plus transaction costs that are directly attributable to the acquisition
5. Loans and receivables are measured, subsequent to initial recognition, at
a. historical cost
c. amortized cost
b. fair value
d. effective value
6. Jellyfish Co. lent P10,000 to a major supplier in exchange for a noninterest-bearing note due
in three years and a contract to purchase a fixed amount of merchandise from the supplier at
a 10% discount from prevailing market prices over the next three years. The market rate for a
note of this type is 10%. On issuing the note, Jellyfish should record
(Item #1) Deferred charge; (Item #2) Discount on note receivable
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(AICPA)
7. On July 1, 2010, a company obtained a two-year 8% note receivable for services rendered. At
that time the market rate of interest was 10%. The face amount of the note and the entire
amount of the interest are due on June 30, 2012. Interest receivable at December 31, 2010,
was
a. 5% of the face value of the note.
b. 4% of the face value of the note.
c. 5% of the July 1,2010, present value of the amount due June 30, 2012.
d. 4% of the July 1,2010, present value of the amount due June 30, 2012.
(AICPA)
8. Which of the following best describes the concept of time value of money?
a. interest is earned or incurred on debt instruments due to passage of time
b. interest is earned only on interest-bearing receivables
c. the amount debited to interest receivable is always equal to the interest income
recognized during the period
d. if no interest receivable is recognized, no interest income is also recognized
9. If the contractual cash flow from a debt instrument is due in lump sum, the appropriate
present value factor to be used is
a. PV of ₱1
c. PV of an annuity due of ₱1
b. PV of an ordinary annuity of ₱1
d. No one knows except the CPA
10. If the contractual cash flows from a debt instrument are due in installments with the first
installment due one period after initial recognition, the appropriate present value factor to be
used is
a. PV of ₱1
c. PV of an annuity due of ₱1
b. PV of an ordinary annuity of ₱1
d. Ask the auditor
11. If the contractual cash flows from a debt instrument are due in installments with the first
installment due immediately on initial recognition, the appropriate present value factor to be
used is
a. PV of ₱1
c. PV of an annuity due of ₱1
b. PV of an ordinary annuity of ₱1
d. Please don’t ask me
12. Which of the following is incorrect in relation to the concept of time value of money?
a. Present value is the exact opposite of Future value
b. If a noninterest-bearing note of ₱10,000 has a present value of ₱7,513 then the future
value of ₱7,513 is ₱10,000 using the same discount rate and period used in the present
value computation
c. If the contractual cash flows from a debt instrument are due in semi-annual installments,
the discount rate is divided by 2 and the period is multiplied by 2 in computing for the
present value factor.
d. The concept of time value of money means that the value of money decreases over time
due to inflation.
13. Which of the following is incorrect in relation to accounting for note receivables?
a. a long-term note that is interest-bearing may nonetheless be discounted if it bears an
unreasonable interest rate.
b. the unearned interest income on a noninterest-bearing note receivable represents the
total interest income to be recognized over the life of the note.
c. the present value factor using a period (‘n’) of zero is 1
d. when accounting for noninterest-bearing note, the legal form of the instrument takes
precedence over its substance
14. If “PV” is the present value of an instrument, “CF” is the future cash flows, and “PVF” is the
present value factor, then future cash flows may be computed as
a. CF = PVF + PV
c. CF = PVF ÷ PV
b. CF = PVF x PV
d. CF = PV ÷ PVF
15. What is the effective interest rate of a bond or other debt instrument measured at amortized
cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments
(i.e., similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and
interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts
through the expected life of the debt instrument or, when appropriate, a shorter period to
the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.
(Adapted)
16. Which of the following is true regarding non-interest bearing note receivables?
a. they are always discounted to their present value on initial recognition
b. they include a specified principal amount but an unspecified interest amount
c. they include a specified principal and specified interest
d. they cause no interest income to be recognized over their term
e. they include an unspecified principal and an unspecified interest
(Adapted)
17. An entity received a 15-day non-interest bearing note receivable. The entity would most likely
recognize the note on initial recognition at
a. current value
c. appraised value
b. maturity value
d. present value
(Adapted)
18. Which statement is not true?
a. Notes receivable initially should be recorded at the present value of the future cash
receipts on the date of issue.
b. All notes implicitly carry interest
c. Discount on notes receivable is a contra account frequently found with interest-bearing
notes
d. The Notes receivable dishonored account is an asset account
(Adapted)
19. On March 1, 20x1, Nickelodeon Co. received a 12% note receivable dated January 1, 20x1.
Principal and interest on the note are due on July 1, 20x1. On initial recognition, which of the
following accounts increased?
a. Prepaid interest
c. Unearned interest income
b. Interest receivable
d. Interest revenue
20. Spongebob Squarepants lent ₱2,000 to Squidward for one year at 10% interest, all due at
maturity. He insisted the terms of the transaction be formalized in promissory note. In this
situation:
a. the maturity value of the note is ₱2,000
b. Spongebob Squarepants is considered the maker of the note and records the note as an
asset in his accounting records
c. Spongebob Squarepants is considered the maker of the note and records the note as a
liability in his accounting records
d. Squidward is considered the maker of the note and records the note as a liability in his
accounting records
(Adapted)
21. Sandy Company received a 12%, 3-year note receivable that is collectible in monthly
installments in exchange for services rendered. What is the note receivable’s carrying amount
one year after initial recognition?
a. Two-thirds of the billing price
b. Less than two-thirds of the net billing price
c. The present value of remaining future cash flows discounted at the current market rate as
of year-end
d. The present value of the remaining monthly payments discounted at 12%
22. Which of the following statements regarding interest methods of allocations is not true?
a. The term “interest methods of allocation” refers both to the convention for periodic
reporting and to the several approaches to dealing with changes in estimated future cash
flows.
b. Interest methods of allocation are reporting conventions that use present value techniques
in the absence of a fresh-start measurement to compute changes in the carrying amount
of an asset or liability from one period to the next.
c. Interest methods of allocation are grounded in the notion of current cost.
d. Holding gains and losses are generally excluded from allocation systems.
(AICPA)
23. Which of the following is not an objective of using present value in accounting measurements?
a. To capture the value of an asset or a liability in the context of a particular entity.
b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture the elements that taken together would comprise a market price if one existed.
(AICPA)
24. A company received two one-year notes in payment for merchandise sold. One note has a face
amount of P6,000 and was interest-bearing at an annual rate of 18 percent. The other note
has a face amount of P7,080 and was non-interest-bearing (its implied interest rate was 18
percent)
a. The total amount of cash ultimately to be received will be more for the interest-bearing
note.
b. Both notes will cause the same total interest to be recognized.
c. The amount of interest revenue which should be recognized is more for the interestbearing note.
d. The amount which should be credited to sales revenue is more for the noninterest-bearing
note
(Adapted)
25. Gary Snail Inc., received a 3-year non-interest bearing trade note for ₱50,000 on January 1,
20x1. The current interest rate at that time was 15% for similar notes. Gary Snail recorded the
receipt of the note as follows:
(Dr) Notes receivable – trade ₱50,000
(Cr) Sales
₱50,000
The effect of this accounting for the notes receivable Gary Snail’s profit for years 20x1, 20x2 and
20x3 and retained earnings at the end of 20x3, respectively, shall to
a. overstate, overstate, understate, no effect
b. overstate, understate, understate, no effect
c. overstate, understate, understate, understate
d. no effect on any of these
(RPCPA)
Use the following data for the next three questions.
On May 1, 20x1, Bikini Bottom Co. acquired a 16%, nine-month note receivable from a customer
in settlement of an existing account receivable of P120,000. Interest and principal are due at
maturity.
26. The proper adjusting entry at December 31,20x1, with regard to this note receivable includes
a:
a. credit to Interest Revenue of ₱12,800
b. debit to Notes Receivable of ₱19,200
c. debit to Cash of ₱12,800
d. debit to Interest Receivable of ₱14,400
27. Bikini's entry to record the collection of this note at maturity includes a (assume no reversing
entries were made):
a. credit to Interest Receivable of ₱12,800
b. credit to Interest Revenue of ₱14,400
c. credit to Interest Receivable of ₱1,600
d. credit to Notes Receivable of ₱134,400
28. Bikini's entry to record the collection of this note at maturity includes a (assume reversing
entries were made):
a. credit to Interest Receivable of ₱12,800
b. credit to Interest Revenue of ₱14,400
c. credit to Interest Receivable of ₱1,600
d. credit to Notes Receivable of ₱134,400
(Adapted)
29. Chum Bucket Co. received a 60-day, 15% note for ₱3,000 on June 16. Which of the following
statements is true?
a. Chum Bucket will receive ₱3,000 plus interest of ₱450 at maturity
b. Chum Bucket should record a total receivable due of ₱3,075 on June 16
c. The principal of the note plus interest is due on August 15
d. The maturity value of this note is ₱3,000
(Adapted)
30. If a 10%, 60-day note receivable is acquired from a customer in settlement of an existing
account receivable of ₱6,000, the accounting entry for acquisition of the note will:
a. include a debit to Notes Receivable for ₱6,600
b. include a debit to Notes Receivable for ₱6,100
c. include a credit to Interest Revenue for ₱100
d. include a debit to Notes Receivable for ₱6,000 and no entry for interest
(Adapted)
31. On November 1, Plankton Corporation sold merchandise in return for a 12%, 90-day note
receivable in the amount of ₱20,000. The proper adjusting entry at December 31 (end of
Plankton's accounting period) includes a:
a. credit to Interest Revenue of ₱400
b. debit to cash of ₱400
c. debit to Interest Receivable of ₱200
d. credit to Notes Receivable of ₱600
(Adapted)
32. On May 1 of this year, a company received a one-year note receivable bearing interest at the
market rate. The face amount of the note receivable and the entire amount of the interest are
due on April 30 of next year. At December 31 of this year, the company should report on its
balance sheet:
a. no interest receivable
b. a deferred credit for interest applicable to next year
c. interest receivable for the interest accruing this year
d. interest receivable for the entire amount of the interest due on April 30 of the next year
(Adapted)
Chapter 7
Receivables (Part 3)
Chapter 7: Theory of Accounts Reviewer
1. Which of the following statements is(are) correct?
I.
The normal operating cycle of a business is disregarded when classifying nontrade
receivables as current or noncurrent.
II.
Trade receivables which are collectible beyond one year or beyond the normal operating
cycle, whichever is longer, are presented under the current assets section
III.
Nontrade receivables which are collectible beyond one year, notwithstanding the normal
operating cycle, are presented under the non-current assets section.
IV.
A financial asset and a financial liability shall be offset and the net amount presented in the
balance sheet when, and only when, an entity currently has a legally enforceable right to
set off the recognized amounts
a. I, III
b. I, III, IV
c. II, III and IV d. I, II, III and IV
2. Which of the following may be classified under loans and receivables?
a. Non-derivative equity securities which are not quoted
b. An interest acquired in a pool of assets that are not loans or receivables.
c. Non-derivative debt instrument acquired with definite payments that are not quoted.
d. An interest acquired in mutual fund.
3. In calculating the carrying amount of a loan, the lender adds to the principal
(Item #1) Direct loan origination; (Item #2) Loan origination fees costs incurred by the lender
charged to the borrower
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(AICPA)
4. Loans receivable are normally reported in the financial statements at
a. cost
c. fair value
b. proceeds extended
d. amortized cost
5. The following statements may be correctly stated as part of the acceptable accounting
principles for receivables:
I.
Accounts receivable balances should be valued at their face amounts minus, if appropriate,
allowances set up for doubtful accounts and impairment in value
II.
Receivable denominated in a foreign currency should be translated to local currency at the
rate of exchange at balance sheet date
III.
If receivables are hypothecated against borrowings, the amount of receivables involved
should be disclosed in the financial statements or notes
IV.
Unearned finance charges and interests included in the face amount of the receivables are
preferably shown as an addition to the related receivables
V.
Significant amount of installment receivables should be stated separately
a. I, II, III, IV, and V
c. I, II, III, and IV only
b. I, II, III, and V only
d. I, II, and III only
6. Which of the following is incorrect regarding the accounting for receivables?
a. The percentage-of- credit sales method is principally oriented toward achieving the best
possible matching of revenues and expenses. Aging the accounts is more oriented toward
the presentation of the correct net realizable value of the trade receivables in the
statement of financial position.
b. Impairment loss on note receivables may be recorded as a direct deduction to the impaired
asset’s account or through an allowance account.
c. Impairment testing on receivables is normally triggered by loss events.
d. Direct origination costs are deducted while direct origination fees are added to the carrying
amount of a loan receivable.
7. If a 12%, 3-month note receivable is acquired from a customer in settlement of an existing
account receivable of ₱10,000, the entry on initial recognition of the note receivable includes
a
a. debit to note receivable for ₱10,300
b. debit to note receivable for ₱11,200
c. credit to interest income for ₱300
d. debit to note receivable for ₱10,000 and no entry for interest
8. When testing loans and note receivables for impairment, the rate that should be used is
a. the current market rate as of date of impairment testing
b. the weighted average rate on the remaining term before maturity of note
c. the original effective rate of the note
d. the weighted average rate over the total life of the note
9. Immediately prior to recognition of impairment loss, the carrying amount of an impaired note
is
a. the future value of the note
b. the carrying amount of the note plus any accrued interest recorded prior to impairment
testing
c. the present value of the note discounted at the current market rate on the date of
impairment testing,
d. the total expected cash flows from the note
10. After impairment testing, the carrying amount of the impaired note is
a. the present value of the expected cash flows from the note, discounted at the original
effective rate.
b. the present value of the expected cash flows from the note, discounted at the current
market rate
c. the future value of the expected cash flows from the note
d. the amortized cost of the note ignoring impairment loss since the loss is only recognized
in profit or loss
11. After impairment testing, interest income on the impaired note is computed by
a. multiplying the present value of the note by the current market rate at year-end
b. multiplying the present value of the note by the rate used in impairment testing
c. multiplying the face value of the note by the rate used in impairment testing
d. no interest income will be recognized since the note is already impaired
12. Which of the following is not an objective evidence of impairment of a financial asset?
a. Significant financial difficulty of the issuer or obligor.
b. A decline in the fair value of the asset below its previous carrying amount.
c. A breach of contract, such as a default or delinquency in interest or principal payments.
d. Observable data indicating that there is a measurable decrease in the estimated future
cash flows from a group of financial assets although the decrease cannot yet be associated
with any individual financial asset.
(Adapted)
13. Impairment loss on financial assets may be recorded as a direct deduction to the impaired
asset’s account or through an allowance. If the entity uses an allowance account to record
impairment loss
a. the amount credited to the allowance account is equal to the impairment loss recognized
b. the amount credited to the allowance account is equal to the impairment loss recognized
if the carrying amount of the impaired financial asset immediately before impairment
testing does not include any accrued interest already recognized
c. the amount credited to the allowance account is equal to the impairment loss recognized
if the original effective interest rate is used in discounting the restructured future cash
flows from the instrument
d. in no case would the amount credited to the allowance account be equal to the
impairment loss recognized
14. Which of the following would indicate that a note receivable or other loan is impaired?
a. when it is written off
b. when it is probable that principal payments will be delayed
c. when the maker of the note experiences financial difficulties
d. when the market value of the note falls below its book value due to interest rate changes
(Adapted)
15. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can
be related objectively to an event occurring after the impairment was recognized
a. the previously recognized impairment loss shall be reversed in equity
b. the previously recognized impairment loss shall be reversed through an allowance account
c. the previously recognized impairment loss shall be reversed either directly or by adjusting
an allowance account.
d. the previously recognized impairment loss shall not be reversed in profit or loss
16. Which of the following most likely would cause an impairment loss previously recognized to
be reversed to gain in profit or loss in the current period?
a. increase in the fair value of the receivable previously impaired
b. an improvement in the debtor’s credit rating
c. increase in current market interest rates
d. an improvement in the creditor’s credit rating
17. The reversal of impairment loss
a. shall not result in a carrying amount of the financial asset that exceeds what the amortized
cost would have been had the impairment not been recognized at the date the impairment
is reversed.
b. is recognized in profit or loss without any limit
c. is recognized in directly in equity
d. causes the debtor’s credit rating to increase
18. Where (X) is equal to the recoverable amount of a financial asset on impairment reversal date,
(Y) is equal to the carrying amount of a financial asset on impairment reversal date had no
impairment loss been recognized previously, and (Z) is equal to the carrying amount of a
financial asset on reversal date. The gain on reversal of impairment, assuming X is greater than
Y, is computed as
a. X minus Y
b. Y minus Z c. X minus Z d. Z minus Y
19. The carrying value of an impaired note before recognizing a loan impairment:
a. includes accrued interest.
b. excludes accrued interest.
c. is the same as the carrying value after recognizing the impairment.
d. is less than the carrying value after recognizing the impairment.
(AICPA)
20. Which of the following describes the carrying value of an impaired note immediately following
the recognition of the impairment?
a. normal sum of the remaining cash flows to be received.
b. present value of remaining cash flows to be received, discounted at the current market
rate of interest.
c. present value of the remaining cash flows to be received, discounted at the original interest
rate implicit in the note.
d. the book value before the impairment is recognized less accrued interest.
(AICPA)
21. Derecognition is the
a. inclusion of a financial asset or financial liability in the totals of the financial statements
through a journal entry.
b. exclusion of a financial asset or financial liability in the totals of the financial statements
through a memo entry.
c. removal of a previously recognized financial asset or financial liability from an entity’s
statement of financial position.
d. removal of a previously disclosed financial asset or financial liability from an entity’s notes.
22. An agreement to transfer a financial asset to another party in exchange for cash or other
consideration, with a concurrent obligation to reacquire the asset at a future date
a. firm purchase commitment
c. recourse
b. repurchase agreement
d. notification
23. Which of the following transfers of financial assets qualifies for derecognition?
a. A sale of a financial asset where the entity retains an option to buy the asset back at its
current fair value on the repurchase date.
b. A sale of a financial asset where the entity agrees to repurchase the asset in one year for
a fixed price plus interest.
c. A sale of a portfolio of short-term accounts receivables where the entity guarantees to
compensate the buyer for any losses in the portfolio.
d. A loan of a security to another entity (i.e., a securities lending transaction).
(Adapted)
24. In which of the following circumstances is derecognition of a financial asset not appropriate?
a. The contractual rights to the cash flows of the financial assets have expired.
b. The financial asset has been transferred and substantially all the risks and rewards of
ownership of the transferred asset have also been transferred.
c. The financial asset has been transferred and the entity has retained substantially all the
risks and rewards of ownership of the transferred asset.
d. The financial asset has been transferred and the entity has neither retained nor transferred
substantially all the risks and rewards of ownership of the transferred asset. In addition,
the entity has lost control of the transferred asset.
(Adapted)
25. Which of the following is not one of the conditions that must be met if a transfer of receivables
is to be accounted for as a sale?
a. The transferred assets have been isolated from the transferor.
b. The transferor's obligation under the recourse provisions can be reasonably estimated.
c. The transferee has the right to pledge or exchange the transferred assets.
d. The transferor does not maintain effective control over the assets through an agreement
to repurchase the assets before their maturity.
(AICPA)
26. If financial assets are exchanged for cash or other consideration, but the transfer does not
meet the criteria for a sale, the transferor and the transferee should account for the
transaction as a (Item #1) Secured borrowing; (Item #2) Pledge of collateral
a. No, Yes
b. Yes, Yes
c. Yes, No
d. No, No
(AICPA)
27. Which one of the following sets correctly reflects whether the transfer of a financial asset
should be treated as a sale or as a borrowing when control over the transferred financial asset
has been surrendered and when control has not been surrendered? (Item #1) Control
Surrendered; (Item #2) Control Not Surrendered
a. Sale, Sale
c. Borrowing, Sale
b. Sale, Borrowing
d. Borrowing, Borrowing
(AICPA)
28. All but one of the following are required before a transfer of receivables can be recorded as a
sale.
a. The transferred receivables are beyond the reach of the transferor and its creditors.
b. The transferor has not kept effective control over the transferred receivables through a
repurchase agreement.
c. The transferor maintains continuing involvement.
d. The transferee can pledge or sell the transferred receivables.
(AICPA)
29. Which of the following is not an objective for each entity accounting for transfers of financial
assets?
a. To derecognize assets when control is gained.
b. To derecognize liabilities when extinguished.
c. To recognize liabilities when incurred.
d. To derecognize assets when control is given up.
(AICPA)
30. Which of the following is false?
a. A servicing asset shall be assessed for impairment based on its fair value.
b. A servicing liability shall be assessed for increased obligation based on its fair value.
c. An obligation to service financial assets may result in the recognition of a servicing asset or
servicing liability.
d. A servicing asset or liability should be amortized for a period of five years.
(AICPA)
31. Which of the following is true?
a. A debtor may not grant a security interest in certain assets to a lender to serve as collateral
with recourse.
b. A debtor may not grant a security interest in certain assets to a lender to serve as collateral
without recourse.
c. The arrangement of having collateral transferred to a secured party is known as a pledge.
d. Secured parties are never permitted to sell collateral held under a pledge.
(AICPA)
32. Larry has pledged financial assets as security for a loan from Lobster. Which of the following
statements concerning disclosure of the pledged assets is correct?
a. Larry is not required to separately disclose the assets pledged as security.
b. Larry must disclose the assets pledged as security on the face of its Balance Sheet.
c. Larry must disclose the assets pledged as security in the notes to its financial statements.
d. Larry may disclose the assets pledged as security either on the face of its Balance Sheet or
in the notes to its financial statements.
(AICPA)
33. A transferor enterprise most likely should continue to recognize a transferred financial asset if
a. The transferor may reacquire the asset, and the asset is readily obtainable in the market
b. The transferee may sell or pledge the full fair value of the asset.
c. The transferor may reacquire the asset, and the reacquisition price is fair value.
d. The transferor is entitled and obligated to repurchase the asset, and the transferee
receives a lender’s return.
(AICPA)
34. Krabby Corp. transferred financial assets to Patty, Inc. The transfer meets the conditions to be
accounted for as a sale. As a transferor, Krabby should do each of the following, except
a. Remove all assets sold from the balance sheet.
b. Record all assets received and liabilities incurred as proceeds from the sale.
c. Measure the assets received and liabilities incurred at cost.
d. Recognize any gain or loss on the sale.
(AICPA)
35. On April 9, 200A, Zyrus Co. purchased a financial asset from Dalome Co. During 200B, Zyrus
sold the financial asset to Didaco Co. at fair value. However, the sale was subject to an
agreement that Zyrus Co. should repurchase the financial asset on February 10, 200C at face
amount plus 10% interest. Which of the following statements is correct?
a. Zyrus Co. should derecognize the financial asset.
b. Zyrus Co. should continue to recognize the financial asset.
c. Didaco should recognize interest income immediately
d. Dalome Co. should recognize the financial asset.
36. On July 10, 200A, Clifton Co. purchased a financial asset from Princess Co. During 200B, Clifton
sold the financial asset to Arnold Co. at fair value. However, the sale agreement gave Clifton
Co. the option to repurchase the financial asset in 200C at face amount plus 10% interest.
Which of the following statements is correct?
a.
b.
c.
d.
Clifton Co. should derecognize the financial asset.
Clifton Co. should continue to recognize the financial asset.
Arnold should derecognize the financial asset from Princess Co.
Princess Co. should not derecognize the financial asset.
37. Under PFRS 9 Financial Instruments, an entity shall derecognize a financial asset when
a. the contractual rights to the cash flows from the financial asset expire
b. it transfers the financial asset and such transfer qualifies for derecognition
c. a revenue recognition is permitted by a standard
d. a or b
38. An entity transfers a financial asset if, and only if, it
a. transfers the contractual rights to receive the cash flows of the financial asset
b. retains the contractual rights to receive the cash flows of the financial asset, but assumes
a contractual obligation to pay the cash flows to one or more recipients in an arrangement
that meets all the conditions required under PFRS 9 Financial Instruments
c. a or b
d. a and b
39. An entity transfers a financial asset if, and only if, it either transfers the contractual rights to
receive the cash flows of the financial asset; or retains the contractual rights to receive the
cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to
one or more recipients in an arrangement that meets which of the following conditions
I.
If the entity is unable to collect on the financial instrument, it has no obligation to the
eventual recipient
II.
The entity is prohibited from selling or pledging the financial instrument
III.
Collections obtained from the financial instrument should be remitted to eventual
recipients without material delay
IV.
The entity is not entitled to reinvest cash flows from the financial instrument, except for
investments in cash or cash equivalents during the short settlement period from the
collection date to the date of required remittance to the eventual recipients
V.
Interest earned on temporary investments of collections is passed to the eventual recipient
a. I, II, III, IV
c. any of the conditions stated
b. I, III, IV, V
d. all of the conditions stated above
40. If the entity transfers substantially all the risks and rewards of ownership of the financial asset,
the entity
a. shall derecognize the financial asset
b. shall derecognize the financial asset and recognize separately as assets or liabilities any
rights and obligations created or retained in the transfer
c. shall continue to recognize the financial asset but also recognize as liabilities any rights
created or retained in the transfer
d. shall continue to recognize the financial asset
41. If the entity retains substantially all the risks and rewards of ownership of the financial asset,
the entity
a. shall derecognize the financial asset
b. shall derecognize the financial asset and recognize separately as assets or liabilities any
rights and obligations created or retained in the transfer
c. shall continue to recognize the financial asset but also recognize as liabilities any rights
created or retained in the transfer
d. shall continue to recognize the financial asset
42. The process whereby financial assets are transformed into securities
a. equity set-off
b. securitization
c. instrument modification
d. instrument transformation
43. Offsetting financial assets and liabilities is permitted only when the entity
I.
Has a legally enforceable right to set off the recognized amounts
II.
Intends to settle the asset and liability on a net basis, or to realize the asset and settle the
liability simultaneously
a. I
b. II
c. I or II
d. I and II
44. Girl Co. and Boy Co. regularly engage in transactions giving rise to both assets and liabilities in
each other’s statement of financial position. The companies thereby entered into a master
netting agreement on which a company’s payables may be offset from any receivables the
company has from the other company. At year-end, Boy Co. does not intend to settle its
receivables and liabilities on a net basis because of the timing of cash flows. Which of the
following is correct?
a. Boy Co. may present its receivables from Girl Co. and liabilities to Girl Co. separately and
at gross amounts in the financial statements
b. Boy Co. should present its receivables from Girl Co. net of any liabilities to Girl Co.
c. If Boy Co. is reluctant in offsetting its assets and liabilities, Girl Co. may report Boy Co. to
the Securities and Exchange Commission.
d. If Boy Co. is reluctant in offsetting its assets and liabilities, Girl Co. may report Boy Co. to
the Philippine Institute of Certified Public Accountants.
45. It is the process of using an asset as collateral security for borrowings. It generally refers to
borrowings secured by accounts receivable.
a. Factoring
b. Pledging
c. Discounting
d. Financing
46. When accounts receivables are pledged,
a. a journal entry should be made to derecognize the accounts receivables pledged and to
record the pledge transaction. The loan transaction should be recorded separately.
b. the accounts receivables pledged should be separately presented in the face of the
statement of financial position separate from other receivables.
c. specific receivables are set up as collateral security for borrowings
d. the only accounting issue is that of adequate disclosure.
47. Which of the following is not a valid comparison between pledging and assignment of accounts
receivable?
a. Under pledge, all accounts receivables are set as collateral security for borrowings; under
assignment only specific receivables are set as collateral security.
b. In pledging, the lender has limited rights to inspect the borrower’s records to achieve
assurance that the receivables do exist; in assignment the lender will make an investigation
of the specific receivables that are being proposed for assignment and will approve those
that are deemed worthy to be held as collateral security.
c. No journal entry is made for the pledged receivables; an entry is made for the assigned
receivables.
d. Pledged accounts receivable remain the assets of the borrower and continue to be
presented in its financial statements, with appropriate disclosure of the pledge
transaction; assigned receivables are assets of the lender/assignee but the assignment is
disclosed in the financial statements of the borrower/assignor.
e. In pledge, the amount borrowed is independent from the amount of accounts receivables
pledged; in assignment, normally only 70% to 90% of the amount of accounts receivables
assigned is advanced as a loan to the borrower.
48. The owner of the accounts receivable assigned in a notification basis is
a. assignee b. pledger
c. assignor
d. lender
49. If the records of an entity show a balance in a “Due from factor” or “Factor’s holdback”
account, it can be reasonably inferred that accounts receivables have been
a. pledged
b. assigned
c. factored
d. discounted
50. The right of the transferee (factor) of accounts receivable to seek recovery for an uncollectible
account from the transferor
a. credit risk
c. recourse
b. repurchase agreement
d. notification
51. When accounts receivables are factored on a “with recourse” basis, the factoring is usually
treated as
a. a secured borrowing
b. an outright sale
c. a transfer of financial asset without recognition of liability created in the transfer.
d. derecognition of financial asset when the transferor neither transfers nor retains
substantially all the risks and rewards of ownership of the financial asset and has not
retained control. The transferor recognizes separately as assets or liabilities any rights and
obligations created in the transfer, such as the proceeds on the factoring and the recourse
obligation.
52. Jaco Co. had ₱3 million in accounts receivable recorded on its books. Jaco wanted to convert
the ₱3 million in receivables to cash in a more timely manner than waiting the 45 days for
payment as indicated on its invoices. Which of the following would alter the timing of Jaco's
cash flows for the ₱3 million in receivables already recorded on its books?
a. Change the due date of the invoice.
b. Factor the receivables outstanding.
c. Discount the receivables outstanding.
d. Demand payment from customers before the due date.
(AICPA)
53. Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale,
depending upon the substance of the transaction.
b. The receivables are used as collateral security for a promissory note issued to the factor by
the owner of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection
period of the receivables.
54. Which of the following is used to account for probable sales discounts, sales returns, and sales
allowances? (Item #1) Due from factor; (Item #2) Recourse liability
a. Yes, No
b. Yes, Yes
c. No, Yes
d. No, No
(AICPA)
55. When accounts receivable are set aside as collateral security for a loan, and the borrower
continues to collect the receivables but collections are applied to the loan, the receivables are
a. factored
b. pledged
c. discounted
d. assigned
56. If a company usually sells its accounts receivable, it records any factoring commission as a(n):
a. loss
b. expense
c. receivable
d. liability
57. Accounts receivable of a company sold outright to a financing company without recourse are
said to have been
a. pledged
b. factored
c. assigned
d. collateralized
58. Dream Theater Co. accepted a ₱5,000, 8%, 90-day note receivable for services rendered to a
client. Thirty days later Dream Theater discounted the note at a bank at 10%. The entry to
record the proceeds from sales of the note would include a:
a. credit to notes receivable for ₱50,000
b. debit to cash for ₱51,000
c. credit to interest income for ₱33.33
d. debit to loss from discounting of note for ₱150
(Adapted)
59. A note receivable that is sold (i.e., discounted) to obtain early cash must be:
a. retained in the accounts in the same manner as before discounting
b. reported as an extraordinary loss if it is dishonored
c. disclosed as a contingent liability if it is discounted without recourse
d. reported as sale or a loan
(Adapted)
60. When a note receivable of an entity is sold to a non-bank financial institution on a with
recourse basis before maturity, the note receivable has been
a. pledged b. assigned
c. discounted
d. factored
(Adapted)
61. When a company discounts its notes receivables at a bank, the common practice is to record
the discounted notes in a(n):
a. liability account
c. asset account
b. contra-asset account
d. expense account
(AICPA)
62. When a company discounts its notes receivable at a bank and the discounting is treated as
secured borrowing, the discounting is recorded in a
a. liability account
c. asset account
b. contra-asset account
d. expense account
63. After being held for 30 days, a 90-day, 15% interest bearing note receivable was discounted at
a bank at 18%. The proceeds received from the bank upon discounting would be the:
a. face value less the discount at 18%
b. face value plus the discount at 18%
c. maturing value less the discount at 18%
d. maturing value plus the discount at 18%
(AICPA)
Chapter 8
Inventories
Chapter 8: Theory of Accounts Reviewer
Objective and scope of PAS 2
1. According to PAS 2, the primary issue in accounting for inventories is the determination of
I.
cost to be recognized as asset in the statement of financial position.
II.
the amount recognized as expense in the statement of profit or loss and other
comprehensive income when the related revenues are recognized.
III.
obsolete items that need to be written down to net realizable value.
IV.
the point of sale where ownership is transferred from the seller to the buyer
a. I and II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
2. In which of the following shall PAS 2 Inventories be applied?
a. Buildings constructed and to be sold to third parties in the ordinary course of business
under specifically negotiated construction contracts.
b. Shares of stocks held for trading
c. Animals and plants that are managed and to be sold in the ordinary course of business
d. Inventory of a service provider consisting only of direct labor and overhead
3. PAS 2 Inventories shall not be applied to which of the following?
a. minor tools and spare parts
b. buildings being sold by a “buy and sell” real estate entity
c. obsolete inventory
d. assets held for use in the production or supply of goods or services
4. The measurement provisions of PAS 2 Inventories do not apply to which of the following?
I.
Inventories of producers of agricultural, forest, and mineral products to the extent that
they are measured at net realizable value in accordance with well-established practices in
those industries.
II.
Inventories of commodity broker-traders measured at fair value less costs to sell.
III.
Inventories of a retail store.
IV.
Inventories of a service concessionaire.
a. I, II
b. I, II, III
c. III, IV
d. I, II, III, IV
5. PAS 2 Inventories may not be applied to which of the following,?
a. inventories consisting of agricultural, mineral and forest products
b. minor spare parts, tools and lubricants
c. commodities of broker traders measured at fair value less costs to sell
d. unfinished products undergoing processing
6. Inventories of commodity broker-traders are measured at
a. fair value
c. net realizable value
b. cost
d. fair value less costs to sell
Recognition
7. Which of the following is correct regarding the recognition of inventories?
a. Inventories are recognized only when legal title is obtained
b. Inventories are recognized only when they meet the definition of inventory and they
qualify for recognition as assets.
c. Inventories include only those that are readily available for sale in the ordinary course of
business.
d. Inventories are recognized only by entities engaged in trading or manufacturing
operations.
8. Inventories are assets (choose the incorrect one)
a. Held for sale in the ordinary course of business.
b. In the process of production for sale.
c. In the form of materials or supplies to be consumed in the production process or in the
rendering of services.
d. Held for use in the production or supply of goods or services.
(Adapted)
9. Ownership over inventories is normally transferred to the buyer
a. when legal title to the inventories is transferred
b. when the purchase price is fully paid
c. upon shipment of the goods by the seller to the buyer
d. upon filling-up the sales order
10. Which of the following is incorrect regarding the accounting for inventories?
a. Legal title over inventories normally passes when possession over of the goods is
transferred.
b. Transfer of ownership over inventories may precede, coincide with, or follow the transfer
of physical possession of the goods.
c. Ownership over inventories may be transferred to the buyer even when legal title to the
goods is retained by the seller.
d. Transfer of ownership over inventories may coincide with or follow but never precedes the
transfer of physical possession of the goods.
11. When accounting for inventories,
a. the form of the sales contract is more important than its substance
b. the agreement between the seller and the buyer shall be considered in determining the
timing of transfer of ownership over the goods
c. the sales contract is ignored since ownership over inventories are transferred only upon
receipt of delivery by the buyer
d. a journal entry is made only upon receipt of the delivery by the purchaser
12. Ownership over inventories is normally transferred from the seller to the buyer
I.
When the significant risks and rewards of ownership are transferred to the buyer
II.
The seller retains continuing managerial involvement to the degree usually associated with
neither ownership nor effective control over the goods sold
III.
The seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold
a. I, II
b. II, III
c. I, III
d. I, II, III
Goods in transit
13. In accounting for inventories, which of the following statements is incorrect?
a. In daily transactions, strict adherence to the passing of legal title is not practicable.
b. Regardless of location, an entity shall report in its financial statements all inventories over
which it holds legal title to or has gained control of the related economic benefits.
c. On inventory cut-off, an entity shall include in its inventory only those goods which are on
hand.
d. Goods that are in transit as of inventory cut-off date may be included as part of inventory.
14. Identify the incorrect statement regarding goods in transit.
a. Depending on the terms of sales contract, goods in transit may form part of the inventories
of the buyer or the seller or, in rare cases, both the buyer and the seller.
b. Accounting procedures for goods in transit are normally performed only on inventory cutoff.
c. Goods in transit form part of the inventory of the entity who holds legal title to the goods.
d. Accounting for goods in transit are normally performed by trading or manufacturing
entities but not by service oriented entities.
15. Who owns the goods in transit under FOB shipping point?
a. buyer b. seller
c. either a or b
d. none
16. Who owns the goods in transit under FOB destination?
a. buyer b. seller
c. either a or b
d. none
17. Under this shipping cost agreement, freight is not yet paid upon shipment. The carrier collects
shipping costs from the buyer upon delivery.
a. freight collect
c. FOB shipping point
b. freight prepaid
d. FOB destination
18. Under this shipping cost agreement, freight is paid in advance by the seller before shipment.
a. freight collect
c. FOB shipping point
b. freight prepaid
d. FOB destination
19. Under this shipping cost agreement, the buyer initially pays the freight of the goods delivered.
a. freight collect
c. FOB shipping point
b. freight prepaid
d. FOB destination
20. Under this agreement, the seller should pay for the freight of goods delivered.
a. freight collect
c. FOB shipping point
b. freight prepaid
d. FOB destination
21. Under a freight collect shipping cost agreement, who is supposed to pay for the freight?
a. buyer
b. seller
c. either a or b
d. none
22. Who should properly shoulder the freight of the goods shipped?
a. the entity who owns the goods
c. the seller
b. the buyer
d. the shipper
23. If the term of a sale or purchase transaction is FOB Shipping Point, ownership is transferred
a. upon shipment of the goods
b. after production is finished
c. when the buyer receives the goods
d. either a or c
24. If the term of a purchase transaction is FOB Shipping Point, liability is recognized
a. upon shipment of the goods
b. after production is finished
c. upon receipt of buyer of the goods shipped
d. either a or c
25. If the terms of a purchase or sale transaction is FOB Destination, ownership is transferred
a. upon the shipment of goods
b. after production is finished
c. when the buyer receives the goods
d. either a or c
26. If the term of a purchase transaction is FOB Destination, liability is recognized
a. upon the shipment of goods
b. after production is finished
c. upon receipt of buyer of the goods shipped
d. either a or c
27. If the term of a purchase transaction is FOB Shipping Point, Freight collect, the party who finally
shoulders the freight is the
a. buyer
b. seller
c. shipping company d. LBC
28. If the term of a purchase transaction is FOB Destination, Freight collect, the party who finally
shoulders the freight is the
a. buyer
b. seller
c. Air21
d. accountant
29. If the term of a purchase transaction is FOB Shipping Point, Freight prepaid, the party who
finally shoulders the freight is the
a. buyer
b. seller c. FedEx
d. auditor
30. If the term of a purchase transaction is FOB Shipping Point, Freight prepaid, the party who
initially shouldered the freight is the
a. buyer
b. seller c. shipping company d. JRS
31. The entry to record the P10,000 freight paid by the buyer on a purchase transaction with terms
of FOB Shipping Point, Freight Collect is
a. Freight-in
10,000
c. Freight-in
10,000
Cash
10,000
Accounts receivable
10,000
b. Freight-out
10,000
d. Freight-in
10,000
Accounts receivable 10,000
Accounts payable
10,000
32. The entry to record the settlement of P10,000 freight on a purchase transaction with terms of
FOB Shipping Point, Freight Prepaid is
a. Accounts payable
10,000
c. Freight-in 10,000
Cash
10,000
Accounts receivable 10,000
b. Freight-in
10,000
d. Answer not given
Accounts payable
10,000
33. The entry to record the P10,000 freight paid by the buyer on a purchase transaction with terms
of FOB Destination, Freight Collect is
a. Freight-in
10,000
c. Freight-in
10,000
Cash
10,000
Accounts receivable 10,000
b. Freight-out
10,000
d. Accounts payable 10,000
Cash
10,000
Cash
10,000
34. The entry to record the settlement of P10,000 freight on a purchase transaction with terms of
FOB Destination, Freight Prepaid is
a. Freight-in
10,000
c. Freight-in
10,000
Cash
10,000
Accounts receivable
10,000
b. Freight-out
10,000
d. None
Accounts payable
10,000
35. The entry to record the payment of P10,000 freight on a purchase transaction with terms of
FOB Destination, Freight Collect is
a. Freight-in
10,000
c. Freight-in 10,000
Cash
10,000
Accounts payable
10,000
b. Freight-out
10,000
d. Answer not given
Accounts payable
10,000
36. On January 1, an entity ordered goods under a purchase transaction with terms of FOB
Destination, Freight Collect. The goods were received on January 3 and freight of P10,000 was
paid to the shipper. What is the entry on January 5, when the entity settles the purchase?
a. Freight-in
10,000
c. Accounts payable 90,000
Accounts payable 100,000
Cash
90,000
Cash
110,000
b. Accounts payable 100,000
d. Freight-out
10,000
Cash
100,000
Accounts receivable 10,000
37. The entry to record the settlement of a purchase on account amounting to P100,000 and
freight of P10,000 on a purchase transaction with terms of FOB Destination, Freight Prepaid is
a. Freight-in
10,000
c. Accounts payable 90,000
Accounts payable
100,000
Cash
90,000
Cash
110,000
b. Accounts payable
100,000
d. Freight-out
10,000
Cash
100,000
Accounts receivable 10,000
38. The entry to record the settlement of a purchase on account amounting to P100,000 and
freight of P10,000 on a purchase transaction with terms of FOB Shipping Point, Freight Prepaid
is
a. Freight-in
10,000
c. Accounts payable 90,000
Accounts payable 100,000
Cash
90,000
Cash
110,000 d. Freight-out
10,000
b. Accounts payable 110,000
Accounts receivable 10,000
Cash
110,000
39. On January 1, an entity ordered goods under a purchase transaction with terms of FOB
Shipping point, Freight Collect. The goods were received on January 3 and freight of P10,000
was paid to the shipper. What is the entry on January 5, when the entity settles the purchase?
a. Freight-in
10,000
c. Accounts payable 100,000
Accounts payable 90,000
Cash
100,000
Cash
100,000 d. Accounts payable 90,000
b. Accounts payable 110,000
Cash
90,000
Cash
110,000
40. When the buyer pays the freight on a sales transaction with terms of FOB Destination, Freight
Collect, the entry to record the payment for the freight is
a. Freight-out
xx
c. Accounts receivable xx
Cash
xx
Cash
xx
b. Freight-in
xx
d. Accounts payable
xx
Cash
xx
Cash
xx
41. When the buyer settles the freight on a sales transaction with terms of FOB Destination,
Freight Prepaid, the entry to record the payment for the freight is
a. Freight-out
xx
c. Accounts payable xx
Cash
xx
Cash
xx
b. Freight-in
xx
d. None of the choices
Cash
xx
42. No special accounting treatment is necessary if the terms of purchase is
a. FOB Destination, Freight Collect
b. FOB Shipping point, Freight Prepaid
c. FOB Destination, Freight Unpaid
d. FOB Shipping point, Freight Collect
Consigned goods
43. Which statement is true?
a. Until goods are sold by the consignee, the consignor includes the goods in his/her
inventory at cost, less handling and shipping costs incurred in the delivery and consignee.
b. When goods are sold on an installment plan, the seller retains title and continues to include
them on his/her balance sheet until full payment has been received.
c. Title to goods cannot be transferred to the buyer before shipment occurs.
d. In accounting for inventory, economic substance should take precedence over legal form
(Adapted)
44. Which of the following is incorrect regarding the accounting for consigned goods?
a. Consigned goods are properly included in the inventory of the consignor and not the
consignee.
b. Freight incurred by the consignor in delivering the consigned goods to the consignee forms
part of the cost of inventories
c. The consignee records consigned goods received from the consignor through journal
entries.
d. The consignor should not recognize revenue until the consigned goods are sold by the
consignee to third parties.
45. Costs of delivering consigned goods to the consignee should be
a. expensed immediately
b. capitalized and included in the inventory of the consignee
c. capitalized and included in the inventory of the consignor
d. recorded be the consignor through memo entry
Inventory financing and other terms
46. All of the following may properly be included in inventory, except
a. goods sold by an entity under a sale with repurchase agreement
b. goods pledged by an entity as security for a loan obtained
c. goods borrowed by an entity to be replaced with similar goods in the future
d. goods transferred by an entity to another entity to be replaced with similar goods in the
future
47. Which of the following may properly be included in inventory?
a. goods sold by an entity under a sale with right of return and future returns can be reliably
estimated
b. goods sold by an entity on installment basis and possession over the goods is transferred
to the buyer but legal title is retained by the entity to protect collectibility of the amount
due
c. goods sold by an entity under a sale that qualifies as “bill and hold” sale
d. goods sold by an entity under a sale that qualifies as “lay away sale” and amount due from
the buyer is not yet collected in full
48. It is a type of sale in which the buyer takes title and accepts billing but delivery of the goods is
delayed at the buyer’s request.
a. buy and hold sale
c. cash and carry
b. lay away sale
d. bill and hold
49. It is a type of sale in which goods are delivered only when the buyer makes the final payment
in a series of installments.
a. installment sale
c. cash on delivery
b. lay away sale
d. run away sale
50. The goods sold on a “bill and hold” sale is included in the inventory of the
a. buyer
b. seller
c. either a or b
d. both a and b
51. Prior to delivery, the goods sold on a “lay away” sale is included in the inventory of the
a. buyer
b. seller
c. either a or b
d. both a and b
52. The goods sold under a bill and hold sale are excluded from the seller’s inventory and included
in the buyer’s inventory at the time of sale when title passes to the buyer and he accepts billing,
provided which of the following is met
a. Delivery is probable
b. Goods sold are on hand, identified, and ready for delivery to the buyer at the time of sale
c. The buyer specifically acknowledges the deferred delivery instructions
d. The usual payment terms apply
e. All of the choices
53. The goods sold under a lay away sale is included in the seller’s inventory until delivery is made
to the buyer except when
a. the term of the sale is freight prepaid
b. the title to the goods is retained by the seller solely to protect collectibility of the amount
due
c. the purchase price is substantially paid
d. the goods are lost without the fault of the seller
Financial statement presentation
54. The line-item “inventories” presented on the face of the statement of financial position of a
manufacturing entity is composed of all of the following, except
a. raw materials and manufacturing supplies
c. finished goods
b. work-in-process
d. office supplies
55. Inventories are classified on the statement of financial position as
a. current assets
c. financial instruments
b. noncurrent assets
d. intangible assets
56. Which of the following is not included as inventory?
a. raw materials and components
c. work in-process
b. goods in-transit sold FOB destination d. long-term major spare parts
57. In a manufacturing company, inventory that is ready for sale is called
a. raw materials
c. finished goods
b. work in process
d. store supplies
Inventory systems
58. The major objective of inventory accounting is
a. valuation of assets in the statement of financial position
b. proper matching of costs with related revenues
c. proper selection of appropriate cost flow formula
d. proper determination of periodic income and valuation of assets
59. Mr. Eugene Krab’s “buy and sell” business involves a large quantity of low-valued inventory.
Because of the fast turnover of inventory, it is often impracticable to perform periodic physical
count of inventory. In fact, the cost of inventory is often approximated in Krab’s quarterly
reports. Which of the following inventory systems is most suitable for Krab’s business?
a. perpetual system
c. plankton system
b. periodic system
d. a or b
60. Spongebob Squarepants Co. utilizes an automated accounting system in which Spongebob
inputs the serial number of each item of inventory in the system. This enables Spongebob to
track the movement of each inventory. Which inventory system is most likely to be used by
Spongebob?
a. perpetual system
d. spatula system
b. periodic system
e. a or b
c. patty system
61. The “inventory” account is updated for each purchase and sale of inventory under this type of
accounting system
a. respiratory system
c. perpetual system
b. automatic system
d. periodic system
62. Cost of goods sold is a residual amount under this system.
a. skeletal system
c. perpetual system
b. endocrine system
d. periodic system
63. Patrick Star uses the perpetual inventory system. During the period, Patrick Star returned
goods previously purchased for P300,000 to the seller. Ten percent of the goods returned were
purchased on cash basis. Which entry is most likely to have been made to record the
transaction?
a. Accounts payable 270,000
c. Accounts payable 300,000
Purchases
270,000
Purchase return
300,000
b. Accounts payable 270,000
d. Accounts payable 270,000
Cash
30,000
Accounts receivable 30,000
Inventory
300,000
Purchase returns
300,000
64. In a perpetual inventory system, an inventory flow assumption is used primarily for
determining which cost to use in:
a. recording purchases of inventory
b. recording the cost of goods sold
c. recording sales revenue
d. forecasts of future operating results
(Adapted)
65. Which of the following statements is incorrect regarding inventory systems?
a. An entity needs to have a ledger book in order to use the perpetual system.
b. Cost of goods sold is determined only periodically under the periodic system, whereas, cost
of goods sold can be determined at any given time under the perpetual system.
c. Physical count is performed basically as an internal control procedure under perpetual
system, whereas, physical count must be performed under periodic system in order to
properly compute for the profit or loss during the period.
d. Internal control is enhanced under periodic system.
66. Prior to physical count, the balance of the inventory account of an entity using the periodic
system is
a. equal to the beginning balance of inventory plus net purchases less cost of goods sold
b. equal to the net purchases less cost of goods sold minus increase in inventory during the
period
c. equal to the beginning balance of inventory plus cost of goods sold less net purchases
d. equal to the beginning balance of inventory
67. Prior to physical count, cost of goods sold under the periodic system is equal to
a. net purchases plus increase in inventory during the period
b. net purchases minus increase in inventory during the period
c. net purchases plus decrease in inventory during the period
d. zero
68. The following account is affected when recording a return of inventory to the vendor under a
perpetual inventory system:
a. merchandise inventory c. accounts receivable
b. cash
d. purchase returns and allowances
(Adapted)
69. A perpetual inventory system would most likely be used by a(n)
a. automobile dealership
c. drugstore
b. hardware store
d. convenience store
(Adapted)
70. Funk Co. is selecting its inventory system in preparation for its first year of operations. Funk
intends to use either the periodic weighted-average method or the perpetual moving-average
method, and to apply the lower of cost or market rule either to individual items or to the total
inventory. Inventory prices are expected to generally increase throughout 20x3, although a
few individual prices will decrease. What inventory system should Funk select if it wants to
maximize the inventory carrying amount at December 31, 20x3?
(Item #1) Inventory method; (Item #2) Cost or market application
a. Perpetual, Total inventory
c. Periodic, Total inventory
b. Perpetual, Individual item
d. Periodic, Individual item
(Adapted)
Inventory errors under periodic system
71. If a company incorrectly includes consignment items in the ending inventory, the net effects
on the cost of goods sold and profit for the period, respectively, are
a. Overstatement, Understatment
b. Understatement, Overstatement
c. Overstatement, overstatement
d. The next period’s account will be correct
72. When the opening balance of inventory or net purchases during the period is overstated, profit
for the period is
a. understated
b. overstated
c. either a or b d. no effect
73. Cost of goods sold is understated if
a. beginning inventory is overstated
b. net purchases is overstated
c. ending inventory is understated
d. ending inventory is overstated
74. If ending inventory is understated, (choose the incorrect statement)
a. cost of goods sold is overstated
c. net purchases is unaffected
b. profit for the year is understated d. profit for the year is overstated
75. If purchase returns is understated,
a. profit for the period is understated
c. ending inventory is overstated
b. cost of goods sold is understated d. profit for the period is overstated
76. Under the periodic system, which of the following statements is correct?
a. If purchase returns is understated, ending inventory is unaffected
b. If purchase returns is understated, cost of goods sold is understated
c. If purchase returns is understated, beginning inventory is understated
d. If purchase returns is understated, net purchases is unaffected
Measurement
77. At each reporting period, inventories are measured at
a. cost
c. cost plus direct acquisition costs
b. lower of cost or NRV
d. fair value less cost to sell
78. The cost of inventories includes
I.
Cost of purchase
II.
Costs of conversion
III.
Other costs necessary in bringing the inventory in its intended condition and location
a. I
b. II
c. I, II
d. I, II, III
79. The purchase cost of inventories includes all of the following, except
a. purchase price
b. import duties and non-refundable taxes
c. freight cost incurred in bringing the inventory to its intended location
d. Value added taxes paid by a VAT registered payer
80. Which of the following costs is included as part of cost of inventories?
a. Abnormal amounts of wasted materials, labor or other production costs
b. Storage costs
c. Administrative overheads
d. Selling costs
e. None of the choices
81. When determining the unit cost of an inventory item, which of the following should be
included?
a. interest on loans obtained to purchase the item
b. advertising costs incurred to promote sale
c. freight cost on the item purchased
d. storage costs incurred prior to sale
82. Which of the following is least likely to be included in determining the cost inventory?
a. Interest cost for amounts borrowed to finance the purchase of inventory
b. Purchasing costs
c. Receiving and unpacking costs
d. Freight costs
83. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.
(Adapted)
84. The cost of inventory should not include
I.
Purchase price.
II.
Import duties and other taxes.
III.
Abnormal amounts of wasted materials.
IV.
Administrative overhead.
V.
Fixed and variable production overhead.
VI.
Selling costs.
a. II, III, IV, V
b. III, IV, VI
c. I, II
d. II, III, IV, V, VI
(Adapted)
85. Reporting inventory at the lower of cost or NRV is a departure from the accounting principle
of
a. Historical cost
c. Conservatism
b. Consistency
d. Full disclosure
86. When using the periodic inventory method, which of the following generally would not be
separately accounted for in the computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash discounts taken during the period
c. Purchase returns and allowances of merchandise during the period
d. Cost of transportation-in (freight-in) for merchandise purchased during the period
Accounting for discounts
87. Accounts such as Purchase Returns, Sales Returns, Purchase Discounts, Freight-in and
Allowance for Purchase Discounts are used in
a. Perpetual Method and Gross Method
b. Perpetual Method and Net Method
c. Periodic Method and Net Method
d. Periodic Method and Gross Method
88. The use of Allowance for Purchase Discounts account is based on which accounting concept
a. matching
c. net method
b. gross method
d. periodic method
89. The Purchase Discounts Lost account is used under
a. gross method
c. perpetual system
b. net method
d. periodic system
90. The Purchase Discounts account is used under
a. gross method
c. perpetual system
b. net method
d. periodic system
91. Theoretically, the net method should be used in recording purchases. Cash discounts not
availed of is preferably presented in the statement of profit or loss and other comprehensive
income as
a. cost of goods sold
c. other expense
b. finance cost
d. b or c
92. Theoretically, the net method should be used in recording purchases. Trade discounts taken is
preferably presented in the statement of profit or loss and other comprehensive income as
a. cost of goods sold
c. other expense
b. operating expense
d. not presented
Cost formulas
93. Generally accepted accounting principles require the selection of an inventory cost flow
method which:
a. emphasizes the valuation of inventory for balance sheet purposes
b. most closely approximates lower of cost and net realizable value for the ending inventory
c. most clearly reflects the periodic income
d. matches the physical flow of goods from inventory with sales revenue
e. yields the most conservative amount of reported income
(Adapted)
94. All of the following correctly describe the average cost inventory cost flow method except:
a. a moving average cost is used with a perpetual inventory system only.
b. the average cost methods are based on the view that the cost of inventory on hand and
the cost of goods sold during a period should be representative of all purchase costs
available for the period
c. a weighted-average unit cost is used with a periodic inventory system only
d. a moving average cost is used with either a periodic or a perpetual inventory system
(Adapted)
95. The specific identification method can be used only:
a. in income tax returns
b. for financial reporting purposes(but not in income tax returns)
c. when the individual items in inventory are similar in terms of cost, function, and sales
revenue
d. when the actual acquisition costs of individual units can be determined from the
accounting records
(Adapted)
96. The average method of cost flow assumption, when used in a perpetual inventory system, is
called
a. moving average
c. simple average
b. weighted average
d. b or c
97. Alcoholica Co. sells a wide variety of beverages. Because of the way Alcoholica stores its
inventory, the most recently purchased cases are usually the ones being sold first. Given these
circumstances, what flow assumption must Alcoholica use?
a. Specific identification
c. Average cost
b. FIFO
d. Any assumption it wishes
(Adapted)
98. Which of the following methods of measuring the cost of goods sold most closely parallels the
actual physical flow of the merchandise?
a. LIFO
b. FIFO
c. Average cost
d. Specific Identification
(Adapted)
99. Cost of goods sold and ending inventory is the same under a periodic system as under a
perpetual system when the entity uses
a. FIFO
b. LIFO
c. Weighted average d. Specific identification
100. Which inventory costing method would not be appropriate for a manufacturer using a
perpetual inventory system?
a. FIFO
b. specific identification
c. simple weighted average
d. combination of FIFO and specific identification
(Adapted)
101. When the FIFO method is used, ending inventory units are priced at the
a. most recent price
c. earliest price
b. the average price
d. none of choices
(Adapted)
102. Which inventory cost flow formula is not permitted under PAS 2 Inventories?
a. Average cost
b. LIFO
c. FIFO
d. All are permitted
103. The inventory cost flow assumption where the cost of the most recent purchase is matched
first against sales revenues is
a. FIFO
b. Average
c. Specific identification
d. none
104. In a period of falling prices, the inventory method that gives the lowest possible value for
ending inventory is:
a. gross profit b. FIFO
c. LIFO
d. weighted average
(Adapted)
105. A corporation entered into a purchase commitment to buy inventory. At the end of the
accounting period, the current market value of the inventory was less than the fixed purchase
price, by a material amount. Which of the following accounting treatments is most
appropriate?
a. Describe the nature of the contract in a note to the financial statements, recognize a loss
in the income statement, and recognize a liability for the accrued loss
b. Describe the nature of the contract and the estimated amount of the loss in a note to the
financial statements, but do not recognize a loss in the income statement
c. Describe the nature of the contract in a note to the financial statements, recognize a loss
in the income statement, and recognize a reduction in inventory equal to the amount of
the loss by use of a valuation account
d. Neither describes the purchase obligation nor recognize a loss on the income statement
or balance sheet
(AICPA)
Lower of cost or net realizable value
106. Which of the following is not an acceptable basis for valuation of certain inventories in
published financial statements?
a. Historical cost
b. Current replacement cost
c. Prime cost
d. Current selling price less cost of disposal
(Adapted)
107. The original cost of an inventory item is above the replacement cost and the net realizable
value. The replacement cost is below the net realizable value less the normal profit margin. As
a result, under the lower of cost or market method, the inventory item should be reported at
the
a. Net realizable value
b. Net realizable value less normal profit margin
c. Replacement cost
d. Original cost
(Adapted)
108.
a.
b.
c.
d.
109.
I.
II.
Under current standards, inventories of a trading entity should be measured at
Fair Value less cost to sell
the lower of Cost or Market, with ceiling on replacement cost
the lower of Cost or estimated selling price less and cost to sell
the lower of Cost or estimated selling price less cost of completion and cost to sell
Which statement is correct concerning the valuation of inventory at lower of cost or NRV?
Inventories are usually written down to net realizable value on an item by item basis.
It is not appropriate to write down inventories based on a classification of inventory, for
example, finished goods or all inventories in a particular industry or geographical segment.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
110. The costing of inventory must be deferred until the end of the accounting period under
which of the following method of inventory valuation?
a. Moving average
c. LIFO perpetual
b. Weighted average
d. FIFO
111. Which inventory costing method would a company that wishes to maximize profits in a
period of rising prices use?
a. FIFO
c. Weighted average
b. Peso-value LIFO
d. Moving average
(AICPA)
112.
I.
II.
III.
113.
I.
II.
III.
IV.
Which of the following is/are true under PAS 2?
Inventories can only be "written down" but not "written up."
Inventories may be “written up” above their cost if it is clear that their values have
increased subsequent to previous write-down.
Storage costs is included in the cost of inventory only when storage cost is necessary in
bringing the inventory to its intended condition and location.
a. II only
b. I, II & III
c. III only
d. I & III
Which of the following are considered in determining the cost of an item of inventory?
Material wasted due to a machine breakdown
Import duties on shipping of inventory inwards
Storage costs of finished goods
Trade discounts received on purchase of inventory
a. I, II
b. III, IV
c. II, IV
d. I, II, III, IV
(ACCA)
114. According to PAS 2 Inventories, which of the following costs should be included in inventory
valuations?
I.
Transport costs for raw materials
II.
Abnormal material usage
III.
Storage costs relating to finished goods
IV.
Fixed production overheads
a. I, II
b. III, IV
c. II, III
d. I, IV
(ACCA)
115. How should import duties be dealt with when valuing inventories at the lower of cost and
net realizable value (NRV) according to PAS 2 Inventories?
a. added to cost
c. deducted in arriving at NRV
b. ignored
d. deducted from cost
(ACCA)
116. How should prompt payment discount not taken be dealt with when valuing inventories at
the lower of cost and net realizable value (NRV) using the gross method?
a. added to cost
c. deducted in arriving at NRV
b. ignored
d. deducted from cost
117. How should sales staff commission be dealt with when valuing inventories at the lower of
cost and net realizable value (NRV), according to PAS 2 Inventories?
a. added to cost
c. deducted in arriving at NRV
b. ignored
d. deducted from cost
(ACCA)
118. How should trade discounts be dealt with when valuing inventories at the lower of cost
and net realizable value (NRV) according to PAS 2 Inventories?
a. added to cost
c. deducted in arriving at NRV
b. ignored
d. deducted from cost
(ACCA)
119.
I.
II.
Are the following statements true or false, according to PAS 2 Inventories?
Cost of factory management should be included in the cost of inventory.
Maintenance expenses for an item of equipment used in the manufacturing process should
be included in the cost of inventory.
a. False, false
b. False, true
c. True, false
d. True, true
(ACCA)
120. The Hetfield Company has two products in its inventory which have costs and selling prices
per unit as follows:
Product X
Product Y
Selling price
200
300
Materials and conversion costs
150
180
General administration costs
30
80
Selling costs
60
70
Profit/(loss)
(40)
(30)
At year-end, the manufacture of items of inventory has been completed but no selling costs have
yet been incurred. According to PAS 2 Inventories, how should Product X and Product Y carried in
Hetfield's statement of financial position, respectively?
a. NRV, NRV b. NRV, Cost c. Cost, NRV
d. Cost, Cost
(ACCA)
Inventory estimation
121. A major advantage of the retail inventory method is that it
a. Permits companies which use it to avoid taking an annual physical inventory
b. Gives a more accurate statement of inventory cost than other methods.
c. Hides costs from customers and employees.
d. Provides a method for inventory control and facilitates determination of the periodic
inventory.
(Adapted)
122. According to PAS 2 Inventories, which of the following may be used in estimating inventory
for interim period reporting?
I.
Conservative, Conventional or LCM Method
II.
Average Method
III.
First-in, first out (FIFO) Method
a. II
b. I, II
c. II, III
d. I, II, III
123. Which inventory costing method is most useful in estimating the amount of inventory lost
or destroyed by theft, fire, or other hazards?
a. FIFO
c. gross profit method
b. average cost method
d. LIFO
(Adapted)
124.
a.
b.
c.
Cost of goods available for sale consists of the
cost of beginning inventory and the cost of ending inventory.
cost of ending inventory and the cost of goods purchased during the year.
cost of beginning inventory and the cost of goods purchased during the year.
d. difference between the cost of goods purchased and the cost of goods sold during the
year.
125. The operating expenses section of a statement of earnings for a merchandising company
would not include
a. freight out
c. cost of goods sold
b. utilities expense
d. insurance expense
(Adapted)
126. If a company wrote a check for P500 for the advance payment for a copy machine they
purchased yet to be delivered the Accounts Payable account would
a. increase
c. not be affected
b. decrease
d. no one knows for sure
(Adapted)
127.
a.
b.
c.
d.
The cost of goods available for sale is allocated between
beginning inventory and ending inventory
beginning inventory and cost of goods on hand
ending inventory and cost of goods sold
beginning inventory and cost of goods sold
128.
I.
Which of the following statements is(are) correct?
To calculate cash payments for purchases, the cost of goods sold must be known, along
with the changes in inventory and accounts payable during the period.
II.
Cost of goods sold is equal to net purchases minus increase in inventory.
III.
Cost of goods sold is equal to net purchases plus increase in inventory.
a. I, II
b. I, II, III
c. II, III
d. I, III
129. A binding agreement for the exchange of a specified quantity of resources at a specified
price on a specified future date or dates
a. purchase order
c. purchase contract
b. firm commitment
d. purchase committed
Chapter 9
Investments (Part 1)
Chapter 9: Theory of Accounts Reviewer
Financial instruments
1. It is any contract that gives rise to a financial asset of one entity and a financial liability or equity
instrument of another entity.
a. Debt instrument
c. Financial instrument
b. Equity instrument
d. a and b
2. Financial assets include
I.
Cash
II.
An entity’s own equity instrument
III.
A contractual right or obligation to receive or pay cash or another financial asset to or from
another entity
IV.
A contractual right to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavorable to the entity
a. I
b. I, II
c. I, II, III
d. I, II, III, IV
3. Financial Liability is any liability that is
I.
A contractual obligation to deliver cash or another financial asset to another entity
II.
A contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity
III.
A contract that will or may be settled in the entity’s own equity instruments and is a nonderivative for which the entity is or may be obliged to deliver a variable number of the
entity’s own equity instruments
IV.
A derivative that will or may be settled other than by the exchange of a fixed amount of
cash or another financial asset for a fixed number of the entity’s own equity instruments.
a. I or II
b. I, II, III, or IV
c. I, II, and III
d. I and II
4. Regarding PFRS 9, which of the following is incorrect?
a. Only equity instruments of other entities can qualify as financial assets. The entity’s own
equity instruments are not financial assets
b. The term financial instrument refers to both financial assets and financial liabilities.
c. Equity instruments refer only to those instruments issued by a corporation. Other types of
organizations cannot issue equity instruments.
d. The term financial instruments include a vast array of instruments, including petty cash
fund.
5. It is any contract that represents a right upon the holder to receive cash from the issuer thereof
or an obligation upon the issuer to pay cash to the holder thereof.
a. financial asset
c. debt instrument
b. equity instrument
d. musical instrument
6. Under PAS 32, it refers to an instrument originated by an entity which represents a residual
interest in the entity’s net assets.
a. financial instruments
c. debt instrument
b. equity instruments
d. own equity instrument
7. All of the following are equity securities, except
a. share options given as compensation to employees
b. members’ shares in a cooperative
c. preference shares with mandatory redemption
d. a receivable collectible only on a pro-rata basis upon liquidation of the issuer
8. Which of the following most likely qualify for disclosure as financial asset in the notes?
a. undeposited collections c. treasury shares
b. inventory
d. stock rights issued
9. X Co. has the following items.
I.
Inventories
II.
Shares of stocks issued by X Co.
III.
Patent purchased from Y Co.
IV.
Bonds payable
V.
Accounts receivable
Which of these items is(are) considered financial asset(s)?
a. II
b. II, IV, V
c. II, IV
d. V
10. Are there any circumstances when a contract that is not a financial instrument would be
accounted for as a financial instrument under PAS 32 and PFRS 9?
a. No. Only financial instruments are accounted for as financial instruments.
b. Yes. Gold, silver, and other precious metals that are readily convertible to cash are
accounted for as financial instruments.
c. Yes. A contract for the future purchase or delivery of a commodity or other nonfinancial
item (e.g., gold, electricity, or gas) generally is accounted for as a financial instrument if
the contract can be settled net.
d. Yes. An entity may designate any nonfinancial asset that can be readily convertible to cash
as a financial instrument.
(Adapted)
11. Which of the following assets is not a financial asset?
a. Cash.
b. An equity instrument of another entity.
c. A contract that may or will be settled in the entity’s own equity instrument and is not
classified as an equity instrument of the entity.
d. Prepaid expenses.
(Adapted)
12. The scope of PFRS 9 includes all of the following items except:
a. Financial instruments that meet the definition of a financial asset.
b. Financial instruments that meet the definition of a financial liability.
c. Financial instruments issued by the entity that meet the definition of an equity instrument.
d. Contracts to buy or sell nonfinancial items that can be settled net.
(Adapted)
13. Which of the following is not disclosed as a financial asset?
a. cash
c. sinking fund
b. equity instruments on another entity d. prepaid income tax
14. Which of the following types of instrument is best described as a contract that evidences a
residual interest in the assets of an entity after deducting the liabilities?
a. Financial liability
b. Guarantee
c. Equity
d. Financial asset
15. Which of the following are classified as financial instruments in accordance with PAS32
Financial Instruments: Presentation?
a. Patents
d. Trade payables
b. Trade receivables
e. b and d
c. Inventories
(ACCA)
16. Marketable securities are those investments which are:
a. for controlling another firm
c. readily marketable
b. for plant expansion
d. for food customer
(Adapted)
17. Assets not directly identified with the operating activities of a business enterprise
a. inventories
b. receivables
c. equipment
d. investments
(Adapted)
18. Under PFRS 9, the subcategories of Financial Assets at Fair value Through Profit or Loss (FVPL)
include
I.
Designated
II.
Held for trading
III.
Held for speculation
a. I and II
b. I and III c. II and III
d. I, II, and III
19. How many of the following are financial instruments
I.
Cash
II.
Demand and time deposits
III.
Commercial paper
IV.
Accounts, notes, and loans receivable
V.
Accounts, notes, and loans payable
VI.
Debt and equity securities.
VII.
Asset backed securities such as collateralized mortgage obligations, repurchase
agreements, and securitized packages of receivables
VIII.
Derivatives, including options, rights, warrants, futures contracts, forward contracts, and
swaps.
a. Seven
b. Ten
c. Six
d. All of them
20. It is any contract that evidences a residual interest in the assets of an entity after deducting all
of its liabilities.
a. stocks instrument
c. capital instrument
b. debt instrument
d. equity instrument
21. Debt instruments may include
a. bonds payable
b. investment in bonds
c. a and b
d. callable preference shares
22. Preferred stock with a mandatory redemption date or redeemable at the option of the holder
is a(n)
a. equity instrument
c. treasury share
b. debt instrument
d. a or b
23. To which of the following items is PFRS 9 Financial Instruments not applicable?
a. unquoted debt securities
b. preference shares with mandatory redemption
c. the entity’s own equity instruments
d. the entity’s own debt instruments
Initial recognition and classification
24. What is the principle for recognition of a financial asset or a financial liability in PFRS 9?
a. A financial asset is recognized when, and only when, it is probable that future economic
benefits will flow to the entity and the cost or value of the instrument can be measured
reliably.
b. A financial asset is recognized when, and only when, the entity obtains control of the
instrument and has the ability to dispose of the financial asset independent of the actions
of others.
c. A financial asset is recognized when, and only when, the entity obtains the risks and
rewards of ownership of the financial asset and has the ability to dispose the financial
asset.
d. A financial asset is recognized when, and only when, the entity becomes a party to the
contractual provisions of the instrument.
(Adapted)
25. The two main classifications of financial assets under PFRS 9 are
a. debt and equity instruments
b. fair value and amortized cost
c. financial assets and financial liabilities
d. FVPL and FVOCI
26. Which of the following is not a classification of financial assets under PFRS 9?
a. Financial assets at fair value through profit or loss.
b. Financial assets at fair value through other comprehensive income
c. Financial assets at amortized cost
d. Held-to-maturity investments
27. Under PFRS 9, an entity shall classify financial assets as subsequently measured at either
amortized cost or fair value on the basis of which of the following:
I.
the entity’s business model for managing the financial assets
II.
the contractual cash flow characteristics of the financial asset
a. I only b. II only
c. I and II
d. neither I nor II
28. A financial asset shall be measured at amortized cost if which of the following conditions are
met:
I.
the asset is held within a business model whose objective is to hold assets in order to
collect contractual cash flows.
II.
the contractual terms of the financial asset give rise on specified dates to cash flows that
are solely payments of principal and interest on the principal amount outstanding.
a. I only b. II only
c. I or II
d. I and II
29. If the objective of an entity’s business model for managing a financial asset is to hold the
financial asset in order to collect contractual cash flows, then the financial asset is most likely
to be classified as
a. FVPL
b. FVOCI
c. amortized cost
d. any of these
30. If the objective of an entity’s business model for managing the financial assets is to hold
financial assets in order to realize fair value changes, then the financial asset is most likely to
be classified as
a. at fair value
c. at cost
b. at amortized cost
d. any of these
31. If the objective of an entity’s business model is to hold financial assets in order to collect
contractual cash flows, the entity may classify the financial assets
a. at amortized cost
b. at amortized cost provided the management can demonstrate its ability to hold them until
maturity
c. at amortized cost; however, if a significant portion of the financial assets is sold before
maturity, the remaining portion should be reclassified
d. at amortized cost provided the fair value information and fair value changes are disclosed
in the notes
32. Regarding classification of financial assets, which of the following is incorrect?
a. only equity securities can be classified as FVOCI
b. only debt securities can be classified as amortized cost
c. either debt or equity securities may be classified as FVPL
d. only equity securities can be designated as FVPL
33. When an entity classifies its financial assets, which of the following statements is true?
a. debt securities may be classified as FVOCI
b. equity securities may be classified as amortized cost
c. debt or equity securities may be designated at FVPL
d. securities classified as FVOCI are always presented as noncurrent assets
34. Loans and notes receivables are classified as financial assets measured at
a. fair value
c. cost
b. amortized cost
d. lower of cost or fair value
35. The initial classification of investments in financial assets is generally based on
a. whether the debt or equity securities are marketable or not
b. whether the debt or equity securities are current or non-current
c. the intention of management on acquiring such investments
d. the entity’s business model and contractual cash flow characteristics of the financial asset
36. Which of the following cannot be classified as FVOCI?
a. investment in nonredeemable preference shares
b. equity securities that qualify as held for trading
c. equity securities whose quoted prices are published only during weekdays
d. a residual interest in the net assets of another entity
37. The option to designate financial assets as FVPL and the election to classify financial assets at
FVOCI are available to an entity’s management
a. on initial recognition and subsequent thereof
b. subsequent to initial recognition only
c. on initial recognition only
d. not available
38. The option to designate financial assets at FVPL may be made if
a. the financial asset is an equity security
b. the financial asset is a debt security
c. the designation minimizes accounting mismatch
d. the entity is a corporation
39. The option to designate financial assets as FVPL and the election to classify financial assets at
FVOCI are
a. revocable
b. mandatory
c. irrevocable
d. revocable under certain circumstances described in PFRS 9
40. Regarding classifications of financial assets, which of the following is incorrect?
a. Once a financial asset is designated as financial asset measured at FVPL, such asset is
recognized at fair value until the financial asset is derecognized.
b. The election to classify financial assets as FVOCI is made on an instrument-by-instrument
basis
c. Once a financial asset is classified as FVOCI, all fair value changes on the instrument is
recognized in other comprehensive income
d. An entity cannot designate a financial asset at FVPL during a period it holds investments
classified as FVOCI
41. Which of the following is correct regarding classifications of financial assets?
a. An entity cannot designate a debt security at FVPL if it otherwise qualifies for recognition
as held for trading
b. An entity cannot designate an equity security at FVPL if it otherwise qualifies for
recognition as held for trading
c. An entity cannot elect to classify an equity security at FVOCI if it otherwise qualifies for
recognition as held for trading
d. An entity can elect to classify an equity security at FVOCI even if the security qualifies for
recognition as held for trading
42. Financial assets that are neither designated to be measured at FVPL nor qualify for recognition
at amortized cost are classified as held for trading if: (choose the incorrect statement)
a. it is acquired principally for the purpose of selling it in the near term
b. on initial recognition it is part of a portfolio of identified financial instruments that are
managed together and for which there is evidence of a recent actual pattern of short-term
profit-taking
c. it is a derivative (except for a derivative that is a financial guarantee contract or a
designated and effective hedging instrument)
d. the instrument is an equity security
43. Any investment may be accounted for by fair value through profit and loss provided
a. It is traded in an active market. c. It is a debt instrument.
b. It is an equity instrument.
d. The instrument matures within 2 years.
(AICPA)
44. Are the following statements concerning the measurement of financial instruments after initial
recognition true or false, according to PFRS 9 Financial instruments?
(1) Held-for-trading financial assets are measured at amortized cost.
(2) Debt securities to be held to maturity are measured at fair value.
Statement (1)
Statement (2) Statement (1)
Statement (2)
a. False
False
c. True
False
b. False
True
d. True
True
(ACCA)
45. Prior to January 1, 20x1 Drive Company had not held any equity investments in other
companies. On January 1, 20x1 Drive purchased 3% of the equity shares in Putt Company with
the intention of holding this investment over the long term. The most appropriate classification
of the equity investment in Putt by Drive is
a. Designated
b. FVOCI c. amortized cost
d. any of these
(ACCA)
46. Iron Company acquired equity securities of Wood Company, a listed entity, to be held as
investments. Which of the following is true?
a. Iron Company is required under PFRS 9 to classify the securities at fair value
b. Iron Company is required under PFRS 9 to classify the securities as amortized cost
c. Iron Company is required under PFRS 9 to designate the securities to be measured at fair
value
d. Iron Company will most likely measure the securities at fair value. However, Iron Company
is not prohibited under PFRS 9 to measure the securities at cost.
47. Which of the following is incorrect regarding the provisions of PFRS 9 Financial Instruments?
a. All equity securities held as investments, except those covered under other Standards,
shall be measured at fair value
b. Unquoted equity securities are required under PFRS 9 to be measured at cost
c. Entries to record reclassifications of financial assets are always made after a change in an
entity’s business model but never simultaneously with the change.
d. Classifications to FVOCI and financial assets designated at FVPL are irrevocable.
48. Single Plane Company acquired 30,000 equity shares, representing 5% of the issued ordinary
share capital in Two Plane Company. Two Plane's shares are listed on a Stock Exchange. In
accordance with PFRS 9 Financial Instruments, in which of the following classifications could
Single Plane's investment in the equity shares be classified?
a. FVOCI
d. a or c
b. Available for sale
e. any of these
c. FVPL
(ACCA)
49. Devin Company acquired 30,000 4% Government Bonds redeemable in 20x1 at the quoted
market price of P200. Devin has no current intention to sell the Bonds and has a policy to hold
them as investments unless certain corporate criteria are met and the bonds are sold to
maintain liquidity. In accordance with PFRS 9 Financial Instruments, which of the following is
the most appropriate classification for Devin's investment in the Government Bonds?
a. Held to maturity
c. Available for sale
b. At fair value through profit or loss
d. At amortized cost
(ACCA)
50. They represent temporary investments of funds available for current operations and are
intended to meet working capital requirements
a. receivables
c. held for trading securities
b. inventories
d. cash
51. Which of the following may be classified as receivables?
a. Financial assets designated at fair value through profit or loss;
b. Financial assets measured at fair value with fair value changes recognized in other
comprehensive income
c. Financial assets for which the holder may not recover substantially all of its initial
investment, other than because of credit deterioration.
d. Financial assets that are not derivative instruments but with fixed or determinable
payments that are not quoted in an active market.
52. Which of the following is the incorrect statement?
a. Investments classified as long-term are reclassified as short-term investments only if it is
in accordance with the entity’s business model and based on cash flow characteristics of
the financial asset.
b. If an investor company does not have significant influence in another company, it must use
either the fair value method or the cost method to account to account for that investment
in equity securities.
c. If an investor company has a controlling interest in another company, it must use either
the cost method or the fair value method to account for that investment in equity
securities in its separate financial statements.
d. The cost method is sometimes applied to investments in equity securities.
(Adapted)
53. Which of the following statements is correct regarding the accounting for financial assets?
a. The tainting provision under PAS 39 is carried over to PFRS 9.
b. Investments in unquoted equity securities are automatically measured at cost
c. The election to classify financial assets at FVOCI is available after initial recognition
d. When designating financial assets at FVPL, an entity’s management may disregard the
entity’s business model for managing financial assets and the contractual cash flow
characteristics of the instrument.
Presentation
54. Which of the following statements is the correct statement?
a. The best way to ascertain whether a marketable security is a short-term or a long-term
investment is to check with a securities dealer.
b. For balance sheet classification, a security is classified as a short-term investment if it is
readily marketable.
c. For balance sheet classification, a security is classified as a short-term investment based
on the entity’s business model and contractual cash flow characteristics of the instrument
d. All investments in FVPL are reported at book value.
(Adapted)
55. Which of the following statements is incorrect regarding presentation of financial assets?
a. The carrying amounts of each financial asset at FVPL, FVOCI, and amortized cost shall be
disclosed either in the statement of financial position or in the notes:
b. Financial assets measured at fair value through profit or loss are further disaggregated into
designated and held for trading
c. The unrealized gains and losses on changes in fair values recognized for held for trading
and designated at FVPL need not be disclosed separately in the financial statements.
d. Change in fair values of FVOCI is presented as a separate line item on the face of the
statement of profit or loss and other comprehensive income.
56. Which of the following is the correct statement?
a. Financial assets at fair value and at amortized cost are classified separately in the financial
statements.
b. The FVOCI classification includes equity and debt securities.
c. Investments in FVPL include only debt securities.
d. Increases in the fair values of FVPL and amortized cost investments always cause the
valuation account to increase.
57. Which of the following incorrectly relates to the provisions of PFRS 9?
a. All investments in equity instruments and contracts on those instruments must be
measured at fair value.
b. Only in limited circumstances may investments in equity instruments be measured at cost.
c. Unquoted equity instruments whose fair value cannot be reliably determined shall be
measured at cost.
d. Unquoted equity instruments are always measured at cost.
58. Which of the following could cause a firm's equity position to be weaker than is reflected in
the statement of financial position?
a. Holding held-to-maturity securities in a portfolio with non-amortized discounts.
b. Holding FVOCI securities in a portfolio that have unrealized losses.
c. Holding trading securities in a portfolio with unrealized gains.
d. Designating financial assets at FVPL to minimize accounting mismatch
(Adapted)
59. All of the following items may be presented in the statement of financial position under either
the current assets section or the noncurrent assets section except
a. Held for trading
c. Investments measured at amortized cost
b. Investments in FVOCI
d. b and c
Initial measurement
60. Which of the following statement is true?
a. The fair value of accounting is the most appropriate method of accounting for short-term
investments in marketable equity securities.
b. All bond investments are accounted for by the amortized cost method.
c. The carrying value of an investment in FVOCI is limited to fair value at the date of
acquisition.
d. The realized gain or loss on a short-term investment in an equity security is usually equal
to the difference between its cost and its sale price.
(Adapted)
61. Financial assets classified as FVPL are initially recognized at
a. fair value
c. fair value plus direct acquisition cost
b. cost
d. invoice cost
62. Financial assets classified as FVOCI and financial assets measured at amortized cost are initially
recognized at
a. fair value
c. fair value plus direct acquisition cost
b. cost
d. invoice cost
63. Under PFRSs, these refer to incremental costs that are directly attributable to the acquisition,
issue or disposal of a financial asset or financial liability. They would not have been incurred if
the entity had not acquired, issued or disposed of the financial instrument.
a. Transaction costs
c. Cost of equity
b. Spread cost
d. Finance cost
64. In addition to financial assets at fair value through profit or loss, which of the following
categories of financial assets is measured at fair value in the balance sheet?
a. FVOCI
b. Amortized cost investments
c. Loans and receivables.
d. Investments in unquoted equity instruments whose fair values cannot be measured
reliably
65. What is the best evidence of the fair value of a financial instrument?
a. Its cost, including transaction costs directly attributable to the purchase, origination, or
issuance of the financial instrument.
b. Its estimated value determined using discounted cash flow techniques, option pricing
models, or other valuation techniques.
c. Its quoted price, if an active market exists for the financial instrument.
d. The present value of the contractual cash flows less impairment.
(Adapted)
66. Is there any exception to the requirement to measure investments in equity securities at fair
value?
a. No. Such assets are always measured at fair value.
b. Yes. If the fair value of such assets increases above cost, the resulting unrealized holding
gains are not recognized but deferred until realized.
c. Yes. If the entity has the positive intention and ability to hold assets classified in those
categories to maturity, they are measured at amortized cost.
d. Yes. Investments in unquoted equity instruments that cannot be reliably measured at fair
value are measured at cost.
(Adapted)
67. Which of the following conditions generally exists before fair value can be used as the basis for
the valuation of financial assets held as investment?
a. management’s intention must be to dispose of the securities within one year
b. fair value must be determinable
c. fair value must approximate historical cost
d. fair value must be less than cost for each security held in the company’s marketable equity
security portfolio
e. financial assets held as investment should be valued at fair value in compliance with
current GAAP
(Adapted)
Subsequent measurement
68. Subsequent to their initial recognition, which financial assets with quoted market prices in an
active market are measured at fair value?
Financial assets designated
at FVPL
a.
Yes
b.
Yes
c.
Yes
d.
No
Financial assets measured at
amortized cost
Yes
Yes
No
No
FVOCI
Yes
No
Yes
No
Held for trading
securities
No
No
Yes
Yes
69. On November 1, 20x1, Monsters, Inc. invested ₱575,000 in short-term marketable securities
classified as held for trading. The market value of this investment was ₱610,000 at December
31, 20x1 but had slipped to ₱595,000 by December 31, 20x2. In the financial statements
prepared on December 31, 20x1, Monster reports:
a. the investment at ₱575,000 with note disclosure of the fair value of P610,000.
b. the investment at ₱610,000 and a ₱35,000 unrealized holding gain included in profit or
loss.
c. the investment at ₱610,000 and a ₱35,000 realized gain recognized in the income
statement.
d. the investments ₱595,000 and a ₱15,000 unrealized holding loss in profit or loss.
(Adapted)
70. For a marketable debt securities portfolio to be held-to-maturity, which of the following
amounts should be included in the period’s profit, assuming the entity elects the fair value
option of reporting all of its financial instruments in the portfolio?
I.
Unrealized temporary losses during the period.
II.
Realized gains during the period.
III.
Unrealized gains during the period.
a. I only b. land lI
c. II and III
d. I, II, and III.
(AICPA)
71. When the fair value of an entity's portfolio of FVPL securities is lower than its cost the
difference is
a. Accounted for as liability.
b. Disclosed and described in a note 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 as an addition in the equity section of the statement of financial position
(Adapted)
72. Under PFRSs, if an entity designates a financial asset to be measured at fair value, any changes
in fair value are recognized in
a. Other comprehensive income. c. Profit or loss.
b. Retained earnings.
d. Equity
(AICPA)
73. An entity has adopted PFRS 9 Financial Instruments. It should report the marketable equity
securities that it has classified as held for trading at:
a. Lower of cost or market, with holding gains and losses included in earnings.
b. Lower of cost or market, with holding gains included in earnings only to the extent of
previously recognized holding losses.
c. Fair value, with holding gains included in earnings only to the extent of previously
recognized holding losses.
d. Fair value, with holding gains and losses included in earnings.
(AICPA)
74. Which of the following statements regarding fair value is/are correct?
I.
The fair value of an asset or liability is specific to the entity making the fair value
measurement.
II.
Fair value is the price to acquire an asset or assume a liability.
III.
Fair value includes transportation costs, but not transaction costs.
IV.
The price in the principal market for an asset or liability will be the fair value measurement.
a. I & II
b. I & IV
c. II & III
d. III & IV
(AICPA)
75. Which of the following is not a valuation technique that can be used to measure the fair value
of an asset or liability?
a. Market approach.
c. Income approach.
b. Impairment approach.
d. Cost approach.
(AICPA)
76. Which of the following statements is incorrect regarding the inputs that can be used to
measure fair value?
I.
Level I inputs are the most reliable fair value measurements and Level III inputs are the
least reliable.
II.
Level III measurements are quoted prices in active markets for identical assets or liabilities.
III.
A fair value measurement based on management assumptions only (no market data)
would not be acceptable under current standards.
IV.
The level in the fair value hierarchy of a fair value measurement is determined by the level
of the highest level significant input.
a. I only.
b. I, II, IV.
c. II, III, IV.
d. I, II, III, IV.
(Adapted)
77. There are multiple active markets for a financial asset with different observable market prices:
Market
Quoted Price Transaction Costs
A
₱76
₱5
B
₱74
₱2
There is no principal market for the financial asset. What is the fair value of the asset?
a. 71
b. 72
c. 74
d. 76
(Adapted)
78. The valuation allowance for a marketable equity securities portfolio included in current assets
should be a component of
a. current assets
c. non-current assets
b. current liabilities
d. non-current liabilities
(Adapted)
79. If marketable securities purchased for ₱500 increase in fair value to ₱800 as of the end of the
fiscal year and were sold in the subsequent year for ₱700, what method was used if the gain
of ₱300 was reported in the first year and a loss of ₱100 in the year of sale?
a. equity method
c. lower of cost or market
b. fair value method
d. aggregate method
(Adapted)
80. As determined at the balance sheet date, the carrying amount of the current portfolio of
marketable equity securities shall be equal to
a. acquisition value
c. fair value
b. lower of cost or market value
d. appraised value
(Adapted)
81. Test of marketability must be met before equity securities owned can be properly classified as
a. long-term investments
c. treasury shares
b. current assets
d. loans and receivables
(Adapted)
82. Assuming a financial asset classified as FVOCI is remeasured to fair value at the end of reporting
period, the gain or loss
a. Must be recognized in net profit or loss.
b. Must be recognized directly in equity.
c. Must be recognized in other comprehensive income and accumulated separately in equity
d. Must be recognized in profit or loss if the result is a loss and directly in equity if the result
is gain.
83. The difference between the acquisition cost and the aggregate par value of shares acquired as
investment is
a. accounted for as a deferred charge to be amortized using the straight line method
b. accounted for as part of the initial cost and recognized in profit or loss during the life of
the investment using the effective interest method
c. accounted for as part of the initial cost and recognized in profit or loss when the
investment is impaired
d. not given special accounting
84. Which of the following statements is correct?
I.
PFRS 9 Financial Instruments does not address the accounting for equity instruments
issued by the reporting entity. However, the holder of such equity instruments may apply
PFRS 9 to those instruments, unless such instruments are obtained through interests in
subsidiary, associate or joint venture.
II.
Investments in equity instruments that are not quoted in an active market, and whose fair
value cannot be reliably measured cannot be classified as FVPL.
III.
Designated financial assets at FVPL are acquired principally for the purpose of selling them
in the near term
IV.
Trading generally reflects active and frequent buying and selling, and financial instruments
held for trading generally are used with the objective of generating profit from short-term
fluctuations in price or dealer’s margin.
a. I, III
b. I, II, III
c. I, II, IV
d. I, II, III, IV
85. Sanitarium Company holds equity instruments of Damage Inc., a non-publicly listed company.
The equity instruments were classified as regular investment. Which of the following
statements is correct?
a. Sanitarium should measure the asset at cost
b. Sanitarium should measure the asset at amortized cost
c. Sanitarium should carry the asset at fair value unless fair value cannot be determined
reliably
d. Either a or b
Derecognition
86. Chowder Corporation invested ₱290,000 cash in equity securities classified as FVOCI in early
December. On December 31, the quoted market price for these securities is ₱307,000. Which
of the following statements is correct?
a. Chowder's December income statement includes a ₱17,000 gain on investments.
b. If Chowder sells these investments on January 2 for ₱300,000, it will report a loss of ₱7,000
in its income statement.
c. Chowder's December 31 statement of financial position reports marketable securities at
₱290,000 and an unrealized holding gain on investments of ₱17,000.
d. Chowder’s December 31 statement of financial position reports marketable securities at
₱307,000 and an Unrealizable Holding Gain on Investments of ₱7,000.
(Adapted)
87. When an investment in FVPL is sold during the year, the realized gain or loss (assume no
transaction costs) equals
a. the difference between the acquisition cost and the fair value at date of sale.
b. the difference between the amortized cost and the fair value at the date of sale.
c. the balance in the valuation account.
d. the fair value change experienced during the year of sale.
(Adapted)
88. Which of the following is a provision of PAS 39 that has been outlawed by PFRS 9?
a. Painting provision
b. Provision for doubtful accounts
c. Tainting provision
d. Reclassification between financial assets
89. If a financial asset classified as FVOCI is derecognized (sold) during the year
a. The gain on sale is recognized directly in equity
b. The cumulative unrealized gains or losses on the investment are transferred directly to
retained earnings.
c. The gain or loss on the sale does not affect profit in the year of sale
d. Profit in the year of sale is increased if the selling price exceeds the acquisition cost of the
investment.
90. Imagine that you are an auditor. During your preliminary survey, you were informed by your
client that a large portion of its investment in FVOCI has been sold during the year. Which of
the following is correct?
a. You will expect that your client’s profit for the current year is higher than the profit last
year.
b. You will expect to see a loss on sale of investment in your client’s records
c. You will expect to see an entry made to transfer cumulative fair value changes in the FVOCI
directly to retained earnings.
d. You will expect nothing but coffee, free lunch, and long hours of AIDS (as if doing
something).
91. You are now a CPA and it is your first day on your job as an accountant. You were asked by
your client’s non-CPA staff on how to compute for the gain or loss on sale of an investment in
FVPL. You will tell the staff that the gain or loss on sale of an FVPL is computed as
a. the difference between the net disposal proceeds and the carrying amount of the
investment on the date of sale.
b. the difference between the net disposal proceeds and the fair value of the investment on
the date of sale.
c. the difference between the net disposal proceeds and the original acquisition cost of the
investment.
d. You will tell the staff nothing because you just memorized multiple choice questions to
pass the board exams.
92. A change from the cost approach to the market approach of measuring fair value is considered
to be what type of accounting change?
a. Change in accounting estimate
c. Change in valuation technique
b. Change in accounting principle
d. Error correction
(AICPA)
Chapter 10
Investments (Part 2)
Chapter 10: Theory of Accounts Reviewer
Financial assets measured at amortized cost
1. Subsequent to their initial recognition, which financial assets with quoted market prices in an
active market are measured at fair value?
Financial assets
Financial Assets with fair
at amortized cost
values through profit or
loss
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
(Adapted)
2. If the investment is measured at amortized cost, the transaction costs are
a. amortized to profit or loss using the effective interest method
b. recognized in profit or loss when the asset is derecognized or becomes impaired
c. recognized in equity when the asset is derecognized or becomes impaired
d. expensed immediately on acquisition date
3. An entity purchased bonds to be measured at amortized cost. The bonds were purchased at a
premium. Assume the fair value of the bonds is volatile. Therefore:
a. less cash interest is received each year than interest revenue is recognized.
b. the ending valuation allowance account balance will depend on ending market value and
original cost.
c. the ending valuation allowance account balance will depend on the ending market value
and original cost adjusted for amortization of premium.
d. the carrying amount of the bonds decreases over the term of the bonds.
4. Zoom Corporation purchased bonds at a discount in the open market as an investment.
Assume that Zoom elects the fair value option. Zoom should account for these bonds at
a. Cost.
c. Fair value.
b. Amortized cost
d. Lower of cost or market.
5. For a marketable debt securities portfolio classified to be measured subsequently at amortized
cost, which of the following amounts should be included in the period’s profit.
I.
Unrealized temporary losses during the period.
II.
Realized gains during the period.
III.
Changes in the valuation allowance during the period.
a. Ill only. b. Il only.
(AICPA)
c. l and lI
d. I, II, and III.
6. Vaughn Company did not amortize the discount on its short-term bond investment. What
effect would this have on the carrying value of the investment and on net income,
respectively?
a. overstated, overstated
c. understated, understated
b. understated, overstated
d. no effect, no effect
(Adapted)
7. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result from
use of the straight-line method.
(Adapted)
8. Subsequent to initial recognition, debt instruments acquired to be held up to their maturity
are measured at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
(Adapted)
9. Solo Co. purchased ₱300,000 of bonds for ₱315,000. If Solo intends to hold the securities to
maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at ₱300,000.
b. a credit to Premium on Investments of ₱15,000.
c. a debit to Investment in bonds at amortized cost of ₱315,000.
d. none of these.
(Adapted)
10. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
(Adapted)
11. Subsequent changes in fair value of financial assets measured at amortized cost are
a. recognized in profit or loss
c. recognized in equity
b. recognized in other comprehensive income
d. not recognized
12. The rate appearing on the face of the bonds
a. nominal rate
b. stated rate
c. coupon rate
d. a, b and c
13. What is the effective interest rate of a bond or other debt instrument measured at amortized
cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments
(i.e., similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and
interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts
through the expected life of the debt instrument or, when appropriate, a shorter period to
the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.
(Adapted)
14. Which of the following does not properly describe effective interest rate?
a. current market rate
c. imputed rate of interest
b. stated rate
d. yield rate
15. The rate used in computing interest income on debt instruments measured at amortized cost
a. nominal rate
c. face rate
b. effective interest rate
d. flat rate
16. The rate used in computing interest receivable on debt instruments measured at amortized
cost
a. nominal rate
c. fast rate
b. effective interest rate
d. celeb rate
17. If the cash paid on the purchase of bonds or if the cash proceeds received from the issuance
of bonds is greater than the face amount of the bonds, there is
a. premium
b. discount
c. bonds
d. nothing
18. If the cash paid on the purchase of bonds or if the cash proceeds received from the issuance
of bonds is less than the face amount of the bonds, there is
a. premium
b. discount
c. bonds
d. nothing
19. If the cash paid on the purchase of bonds or if the cash proceeds received from the issuance
of bonds is equal to the face amount of the bonds, there is
a. premium
b. discount
c. bonds
d. nothing
20. When investment in term bonds measured at amortized cost are acquired at a discount, the
carrying amount of the bonds
a. increases each year
b. varies depending on the fair value of the financial asset at year-end
c. decreases each year
d. remains unchanged unless impairment loss is recognized
21. When investment in term bonds measured at amortized cost are acquired at a discount,
interest income recognized
a. increases each year
b. varies depending on the amortization table used
c. decreases each year
d. remains constant as a percentage of the face amount
22. Which of the following statements is correct regarding term bonds classified at amortized cost
acquired at a discount?
a. the carrying amount of the bonds increases but amortization decreases each year
b. the carrying amount of the bonds, interest income and amortization increase each year.
c. only interest income and carrying amount of bonds increase each year
d. only the carrying amount of the bonds increases each year
23. If bonds are acquired or sold in between interest payment dates
a. the transaction price necessarily includes any accrued interest
b. the cost of the investment acquired is increased by the accrued interest
c. the gain on sale is increased by the accrued interest
d. the seller will receive the full amount of interest
Regular way purchase and sale of financial assets
24. It refers to purchase or sale of a financial asset under a contract whose terms require delivery
of the asset within the time frame established generally by regulation or convention in the
marketplace concerned.
a. normal way
c. special way
b. regular way
d. no way
25. Regular way purchase or sale of financial assets are accounted for using
a. Trade date accounting
c. Shadow accounting
b. Settlement date accounting
d. either a or b
26. Under a regular way purchase or sale of financial assets (choose the incorrect statement)
a. the buyer recognizes fair value changes on the financial asset between the trade date and
settlement date, except for financial assets measured at amortized cost
b. the seller recognizes only the fair value changes of FVPL and FVOCI as of trade date; the
seller does not recognize fair value changes after trade date but before settlement date
c. trade date and settlement date accounting differs on the timing of recognition or
derecognition of financial assets bought or sold.
d. the seller recognizes fair value changes between the trade date and settlement date only
for FVPL and FVOCI but not amortized cost
27. Investments in debt securities that are neither to be sold in the near term nor designated are
initially recorded at
a. amortized cost
b. fair value.
c. fair value plus direct acquisition cost, such as brokerage and other fees.
d. maturity value with a separate discount or premium account.
28. When an entity uses settlement date accounting for a financial asset acquired to be
subsequently measured at amortized cost,
a. the asset is recognized initially at its fair value plus direct transaction costs on settlement
date
b. the asset is recognized initially at its fair value plus direct transaction costs on the trade
date
c. the asset is recognized initially at its amortized cost on settlement date
d. the asset is recognized initially at its fair value plus direct transaction costs either on
settlement date or trade date
Reclassification
29. Which of the following is true if an entity reclassifies financial assets?
I.
it shall apply the reclassification prospectively from the reclassification date
II.
it shall restate any previously recognized gains, losses or interest
a. true, true
b. true, false c. false, true d. false, false
30. If an entity which uses the calendar year changes its business model for managing financial
assets on February 1, 20x1, the reclassification date is on
a. January 1, 20x1
c. February 1, 20x2
b. January 1, 20x2
d. Any of these
31. When an investment in a debt instrument that was originally acquired to be held up to maturity
is transferred to FVOCI, the carrying amount assigned to the FVOCI is
a. the original acquisition cost
b. the fair value at the date of transfer
c. the lower of its original acquisition cost and its fair value at the date of transfer
d. none
32. Which of the following changes in circumstances qualifies as reclassification under PFRS 9
Financial Instruments?
a. A derivative that was previously a designated and effective hedging instrument in a cash
flow hedge or net investment hedge no longer qualifies as such.
b. A derivative becomes a designated and effective hedging instrument in a cash flow hedge
or net investment hedge.
c. A debt instrument previously measured at amortized cost is reclassified as held for trading
security due to a change in an entity’s business model.
d. An equity security is classified as financial asset measured at amortized cost due to a
change in an entity’s business model.
33. You are employed as an accountant in a company. One day your company changed its business
model on managing financial instrument. What will you do?
a. Immediately make journal entries to reclassify financial assets.
b. Make journal entries only if the boss is looking
c. Procrastinate. Go back to your facebook account. Make journal entries next year.
d. Read the revised risk management manual, identify the effect of the change in business
model on the current classifications of financial assets, identify which items should be
reclassified and to which classifications they will be reclassified, and then make the journal
entries before you go home.
34. Which of the following reclassifications of financial assets is permitted under PFRS 9?
a. reclassification out of designated at FVPL to amortized cost
b. reclassification out of amortized cost to FVOCI
c. reclassification out of held for trading equity securities to amortized cost
d. reclassification out of amortized cost to held for trading securities.
35. When investments measured at amortized cost are reclassified to FVOCI, what amount of gain
or loss is recognized in profit or loss?
a. The amount from the date of acquisition to the date of reclassification.
b. The amount from the beginning of the year of reclassification to date of reclassification.
c. The amounts realized to date.
d. The amount from the date of acquisition the beginning of the year of reclassification.
e. Zero
(Adapted)
36. Choose the incorrect statement.
a. The reported FVOCI investment balance is the original cost plus a debit valuation allowance
or minus a credit valuation allowance.
b. After a reclassification between amortized cost and held for trading, the new carrying
amount for purposes of subsequent measurement is the fair value at reclassification date.
c. The carrying amount of a bond purchased at a premium or discount and classified as an
investment measured at amortized cost must be adjusted each period for the amortization
of the premium or discount.
d. When an investment measured at amortized cost is reclassified to held for trading, the
recognized gain or loss on reclassification date is the change in fair value since the
beginning of the year of reclassification until the date of reclassification.
(Adapted)
37. A marketable debt security is transferred from fair value to amortized cost. At the transfer
date, the security’s carrying amount exceeds its fair value. Assume the fair value option is not
elected to report this security. What amount is used at the transfer date to record the security
in the amortized cost category?
a. Fair value, regardless of whether the decline in market value below cost is considered
permanent or temporary.
b. Fair value, only if the decline in market value below cost is considered permanent.
c. Cost, if the decline in market value below cost is considered temporary.
d. Cost, regardless of whether the decline in market value below cost is considered
permanent or temporary.
(AICPA)
38. Yamaha Co. determined that the decline in the fair value of an investment was below the
carrying amount and the decline is permanent in nature. The investment was classified as
financial asset measured at FVOCI in Yamaha's books. The accountant properly records the
decrease in fair value by including it in which of the following?
a. Other comprehensive income section of the statement of profit or loss and other
comprehensive income only.
b. Profit or loss section of the income statement and writing down the carrying amount to
FMV.
c. No accounting is required because the investment is measured at FVOCI
d. Other comprehensive income section of the statement of profit or loss and other
comprehensive income and presenting the net cumulative write downs of cost in equity.
Impairment
39. Impairment losses on equity securities classified as FVOCI are
a. recognized in equity only if impairment loss represents a permanent decline in fair value
b. profit or loss
c. not recognized since changes in fair values are recognized in profit or loss
d. not given special accounting, decreases in fair values are recognized in other
comprehensive income regardless of whether the decrease is temporary or permanent
40. Are the following statements true or false, in accordance with PFRS7 Financial instruments:
disclosures?
I.
The carrying amount of amortized cost investments must be disclosed in the statement of
financial position only.
II.
The amount of any impairment loss for each class of financial asset must be disclosed in
the statement of profit or loss and other comprehensive income only.
a. False, False
b. False True
c. True False
d. True True
(ACCA)
41. Impairment losses on equity securities measured at fair value
a. are not given special accounting treatment under PFRS 9
b. are recognized in profit or loss
c. are not recognized because changes in fair values are recognized in profit or loss
d. are deferred in equity
42. Impairment losses on securities classified at amortized cost are recognized in
a. profit or loss
c. equity
b. other comprehensive income
d. none of these
Dividends
43. Dividends received on investment in equity securities accounted for under PFRS 9 are either
treated as return of capital or return on capital. Which of the following types of dividends are
treated as return on capital?
a. Cash and property dividends
b. Share dividends
c. Liquidating dividends
d. Cash dividends received in lieu of share dividends
44. Peavey Co. owns 2% of Marshall. A property dividend by Marshall consisted of merchandise
with a fair value lower than the listed retail price. Peavey in turn gave the merchandise to its
employees as a holiday bonus. How should Peavey report the receipt and distribution of the
merchandise in its income statement?
a. At fair value for both dividend revenue and employee compensation expense.
b. At listed retail price for both dividend revenue and employee compensation expense.
c. At fair value for dividend revenue and listed retail price for employee compensation
expense.
d. By disclosure only.
(AICPA)
45. Dividends received on investment in equity securities accounted for under PFRS 9 are treated
as
a. either a return of capital or return on capital depending on the existence of significant
influence
b. return on capital for all cash and property dividends received
c. return on capital for all cash and property dividends received except those declared from
pre-acquisition retained surplus
d. return on capital for all cash, property, and stock dividends
Stock rights
46. State if the following statements are true or false.
I.
A derivative that is attached to a financial instrument but is contractually transferable
independently of that instrument, or has a different counterparty, is not an embedded
derivative, but a separate financial instrument.
II.
When, and only when, an entity changes its business model for managing financial assets
shall it reclassify all affected financial assets.
a. true, true
b. true, false c. false, true d. false, false
47. In accordance with PFRSs, which of the following terms best describes a compound financial
instrument component of a hybrid instrument that also includes a non-derivative host
contract?
a. FVOCI
c. Financial asset at amortized cost
b. An embedded derivative
d. FVPL
(ACCA)
48. Under PFRS 9, stock rights are considered (choose the incorrect statement):
a. embedded derivatives all throughout the period they are outstanding
b. derivatives
c. embedded derivatives after their declaration but prior to their issuance
d. not embedded derivatives after their issuance but prior to their expiration date
49. The following statements correctly relate to share dividends and stock rights from the
viewpoint of the investor:
I.
When stock rights are received on investment in unquoted equity securities measured at
cost, no entry is required to transfer a portion of the cost of the original investment to a
separate account for the stock rights.
II.
A stock dividend received on an investment in unquoted equity securities measured at cost
reduces the per share cost of the investment.
III.
From the date stock rights are issued until the date they expire, shares of stock of the
issuing corporation are said to sell ex-rights.
a. I
b. I, II
c. II, III
d. I, II, III
(RPCPA)
50. If an investment in equity securities is measured at cost then
a. subsequent changes in fair values of the investment is ignored
b. stock rights received on the investment is not recognized
c. an allocation of cost is made when stock rights are received on the investment, the
allocation is based on relative fair values of the shares and the stock rights
d. no allocation of cost is necessary if share dividends received are different from those
originally held
51. Which of the following forms a basis for the non-recognition of stock rights received on
investment in equity instruments measured at cost?
a. Assets are recognized only if they can be measured reliably and meet the other criteria for
recognition as set forth under the Conceptual Framework. The value of stock rights
received on investments in equity securities measured at cost cannot be determined
reliably.
b. There is no available allocation basis for allocating the cost of the investment to the stock
rights received because the fair value of the investment cannot be determined.
c. PFRS 9 requires that all investments in equity securities should be measured at fair value.
If the stock rights received and the related investment measured at cost have determinable
fair values, an entity is required to change from cost measurement to fair value
measurement. Thus, no allocation of cost is necessary. Both the stock rights and the
investment are measured at fair value.
d. All of these
Disclosure
52. Fair value measurement (choose the incorrect statement)
a. violates the going concern assumption
b. renders no special accounting for impairment losses
c. requires disclosure of information derived from sources other than accounting records
d. is required of investments in equity instruments of other entities
e. fair value reflects the credit quality of the instrument
53. In accordance with PFRS 7, Financial Instruments: Disclosures, all of the following would be
disclosed, except
a. Policy for requiring collateral or other security due to repurchase agreements or securities
lending transactions.
b. Cash flows between the securitization special purpose entity (SPE) and the transferor.
c. Accounting policies for measuring retained interest.
d. Description of assets or liabilities with estimable fair values.
(Adapted)
54. Which of the following types of information does PFRS 7 not require to be disclosed about
exposure to risks arising from financial instruments?
a. Qualitative and quantitative information about market risk.
b. Qualitative and quantitative information about credit risk.
c. Qualitative and quantitative information about operational risk.
d. Qualitative and quantitative information about liquidity risk.
(Adapted)
55. In accordance with PFRS7 Financial Instruments: Disclosures, which of the following best
describe the risk that an entity will encounter if it has difficulty in meeting obligations
associated with its financial liabilities?
a. Liquidity risk
b. Credit risk
c. Financial risk
d. Payment risk
(ACCA)
56. In accordance with PFRS7 Financial instruments: disclosures, which of the following best
describe credit risk?
a. The risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation
b. The risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities
c. The risk that the fair value associated with an instrument will vary due to changes in the
counterparty's credit rating
d. The risk that an entity's credit facilities will be withdrawn due to cash flow sensitivities
(ACCA)
57. For what items is fair value required to be disclosed under PFRS 7?
a. All financial instruments.
b. All financial instruments, except for unquoted equity instruments that cannot be reliably
measured at fair value (and derivatives linked thereto).
c. All financial assets and financial liabilities, except for investments in unquoted equity
instruments that cannot be reliably measured at fair value.
d. All financial assets, except for investments in unquoted equity instruments that cannot be
reliably measured at fair value (and derivatives linked thereto).
(Adapted)
58. In accordance with PFRS7 Financial instruments: disclosures which of the following are
components of market risk?
a. Credit risk
b. Currency risk
c. Interest rate risk
d. b and c
(ACCA)
59. Are the following statements about disclosures within the financial statements true or false,
according to PFRS7 Financial instruments: Disclosures?
(1) The disclosure of quantitative data about an entity's risk exposure shall be based upon
internal information provided to key management personnel.
(2) A maturity analysis for financial liabilities based on the expected payment dates for those
liabilities shall be disclosed.
a. False, False
b. False, True
c. True, False d. True, True
(ACCA)
60. Whether recognized or unrecognized in an entity's financial statements, disclosure of the fair
values of the entity's financial instruments is required when:
a. It is practicable to estimate those values.
b. The entity maintains accurate cost records.
c. Aggregated fair values are material to the entity
d. Individual fair values are material to the entity.
(AICPA)
61. A general disclosure on investments that should be made in the body of the financial
statements or in the accompanying notes
a. allowance for decline in value
b. material security holdings of securities of related parties
c. details of any liens or pledges as collateral on any restrictions on sales
d. all of these
(Adapted)
62. Which of the following types of information does PFRS 7 not require to be disclosed about the
significance of financial instruments?
a. Carrying amounts of categories of financial instruments.
b. Fair values of financial instruments.
c. Information about the use of hedge accounting.
d. Information about financial instruments, contracts, and obligations under share-based
payment transactions.
(Adapted)
63. Disclosure of information about the extent, nature, and terms of financial instruments with
off-balance sheet credit or market risk and about concentrations of credit risk is required for
all financial instruments. Which of the following is defined as a financial instrument?
a. Inventory
c. Deferred subscriptions revenue
b. Note payable
d. A warranty payable.
(Adapted)
64. Uncertainty about the future market value of an asset is referred to as
a. price risk
c. interest rate risk
b. credit risk
d. exchange rate risk
(Adapted)
65. Uncertainty that the party on the other side of an agreement will abide by the terms of the
agreement is referred to as
a. price risk
c. interest rate risk
b. credit risk
d. exchange rate risk
(Adapted)
66. Fair value disclosure of financial instruments may be made in the:
Body of financial statements Notes to financial statements
a. No
No
b. No
Yes
c. Yes
No
d. Yes
Yes
(Adapted)
67. Disclosures about the following kinds of risks are required for most amortized cost financial
instruments.
Concentration of credit risk Market risk
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
(Adapted)
68. What are the principal objectives of PFRS 7?
a. To provide presentation and disclosure requirements for financial instruments.
b. To require disclosures about the significance of financial instruments for an entity’s
financial position and financial performance and qualitative and quantitative information
about exposure to risks arising from financial instruments.
c. To set out specified balance sheet and income statement formats for financial entities.
d. To require disclosures about an entity’s exposure to off–balance-sheet instruments and
other complex transactions.
(Adapted)
Chapter 11
Investments (Part 3)
Chapter 11: Theory of Accounts Reviewer
1. An increase in the cash surrender value of a life insurance policy owned by a company would
be recorded by
a. Decreasing annual insurance expense.
b. Increasing investment income.
c. Recording a memorandum entry only.
d. Decreasing a deferred charge.
(AICPA)
2. In theory, cash surrender value represents
a. the excess of premium paid over annual risk
b. the amount paid to a dead key employee
c. value of cash after adjustment for inflation
d. none of these
3. Upon the death of an officer, Budoy Co. received the proceeds of a life insurance policy held
by Budoy on the officer. The proceeds were not taxable. The policy’s cash surrender value had
been recorded on Budoy’s books at the time of payment. What amount of income should
Budoy report in its statements?
a. Proceeds received.
b. Proceeds received less cash surrender value.
c. Proceeds received plus cash surrender value.
d. None.
(AICPA)
4. Under what condition would an entity report marketable securities as a long-term asset?
a. When the securities are classified as FVOCI but are to be sold within the next twelve
months.
b. When funds are set aside for a specific long-term purpose such as plant expansion.
c. When the value of a firm's investment in marketable securities is less than cost.
d. Under no circumstance.
5. Which of the following is correct regarding accounting for investments?
a. Any current or non-current investment acquired should be recorded at “cost or market”
whichever is lower on date of acquisition.
b. Allowances for decline in value of investments are not necessary to be disclosed in the
body of the financial statements or in the accompanying notes.
c. Sinking fund assets consisting of cash and securities held for the redemption of bonds or
stocks are normally classified as investments.
d. A debt instrument may be classified as financial asset measured at amortized cost provided
the entity can demonstrate its ability to hold the instrument up to its maturity.
6. The cash surrender value of the insurance policy on the corporation's president would be
presented on the balance sheet as:
a. cash
c. long-term investment
b. marketable securities
d. prepaid expense
(Adapted)
7. In January 20x1, Carlsbro Co. established a sinking fund in connection with its issue of bonds
due in 20x5. A bank was appointed as independent trustee of the fund. At December 31, 20x1,
the trustee held ₱364,000 cash in the sinking fund account, representing ₱300,000 in annual
deposits to the fund, and ₱64,000 of interest earned on those deposits. How should the sinking
fund be reported in Carlsbro's statement of financial position at December 31, 20x1?
a. No part of the sinking fund should appear in Carlsbro's statement of financial position.
b. ₱64,000 should appear as a current asset.
c. ₱364,000 should appear as a current asset.
d. ₱364,000 should appear as a noncurrent asset.
(Adapted)
8. Marketable equity securities held to finance the long-term future expansion of a company
should be reported on the balance sheet as:
a. funds and investments
b. operational assets
c. current assets with additional information in a footnote
d. appropriation of retained earnings
(Adapted)
9. An entity acquired 10-year bonds at a discount to be held as investments subsequently
measured at amortized cost. Six years after acquisition date, the entity sold 80% of the
investment in bonds at a premium. Which of the following is true?
a. gain is realized on the sale
b. the remaining 20% should be reclassified
c. loss is realized on the sale
d. a or c
Chapter 12
Investments in Associates
Chapter 12: Theory of Accounts Reviewer
Scope and applicability
1. PAS 28 applies to which of the following?
a. investments in associates held by a venture capital organization or mutual fund measured
at fair value through profit or loss
b. a 20% investment in preference shares
c. an interest in a partnership which gives the investor significant influence over the
partnership
d. a 60% investment in ordinary shares of another entity
2. An entity shall apply PAS 28
a. to investments which give the entity significant influence over the investee
b. to account for investments in associates in the entity’s separate financial statements
c. even when significant influence is lost
d. any of these
3. When investments in equity securities represent 20% to 50% interest in the voting rights of
the investee, which of the following standards most likely would be applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
4. When equity investments results to joint control, which standard shall be applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
5. When equity investments results to control, which standard shall be applied?
a. PFRS 9
b. PAS 31
c. PFRS 3
d. PAS 28
6. In the consolidated financial statements, to which of the following financial instruments is PFRS
9 Financial Instrument applicable?
a. investment in ordinary shares representing 51% interest
b. investment in ordinary shares representing 20% interest
c. interest in a joint venture
d. investment in preference shares representing 100% interest
7. Which of the following statements is correct?
a. According to PAS 28 Investments in Associates, a partnership cannot be an associate.
b. Goodwill included in the carrying amount of an investment in an associate is tested for
impairment separately.
c. Only investments in ordinary shares can be classified as Investment in Associate.
d. Only investments which give the investor voting rights can be classified as Investment in
Associate.
8. If ABC Corporation owns a controlling interest of 51% of the equity shares in XYZ Co., ABC
Corporation is a
a. Parent company to XYZ Co.
c. Subsidiary company to XYZ Co.
b. Associate company to XYZ Co.
d. Fellow subsidiary to XYZ Co.
9. It is an entity, including an unincorporated entity such as a partnership, over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.
a. association
c. joint venture
b. subsidiary
d. associate
10. It is the power to participate in the financial and operating policy decisions of the investee but
is not control or joint control over those policies.
a. significant influenza
c. significant influence
b. control
d. joint control
11. It is an entity, including an unincorporated entity such as a partnership, that is controlled by
another entity (known as the parent).
a. subsidy
b. associate
c. joint venture
d. subsidiary
12. It is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
a. control
b. joint control c. significant influence
d. telekineses
13. It is a contractual arrangement whereby two or more parties undertake an economic activity
that is subject to joint control.
a. partners
b. joint control
c. joint venture
d. marriage
14. It is the contractually agreed sharing of control over an economic activity, and exists only when
the strategic financial and operating decisions relating to the activity require the unanimous
consent of the parties sharing control (venturers).
a. control
b. joint venture
c. joint control
d. wedding vow
15. A controlling company having subsidiaries which activities were confined primarily to their
management is:
a. an affiliate
c. a majority interest
b. subsidiary
d. a holding company
(Adapted)
16. PAS 28 does not require the equity method to be applied to which of the following instance(s)?
I.
When an associate is acquired and held with a view to its disposal within twelve months of
acquisition. There must be evidence that the investment is acquired with the intention to
dispose of it and that management is actively seeking a buyer. The words ‘in the near
future’ were replaced with the words ‘within twelve months’. When such an associate is
not disposed of within twelve months it must be accounted for using the equity method
as from the date of acquisition, except in narrowly specified circumstances under PFRS 5.
II.
An investor continues to have significant influence over an associate; however, the
associate is operating under severe long-term restrictions that significantly impair its ability
to transfer funds to the investor.
III.
An investor holds 10% interest in an investee; however, the interest held gives the investor
significant influence over the investee.
IV.
An investor presents separate financial statement in accordance with PAS 27.
a. I and IV
b. I, III, IV
c. I, II, III, IV d. none
Significant influence
17. According to PAS 28 Investments in associates, which of the following statements best
describes the term 'significant influence'?
a. The holding of a significant proportion of the share capital in another entity
b. The contractually agreed sharing of control over an economic entity
c. The power to participate in the financial and operating policy decisions of an entity
d. The mutual sharing in the risks and benefits of a combined entity
(ACCA)
18. Significant influence is presumed to exist
a. if an investor holds, directly or indirectly (e.g. through subsidiaries), 25% or more of the
voting power of the investee.
b. if an investor holds, directly or indirectly (e.g. through subsidiaries), 51% or more of the
voting power of the investee.
c. if an investor holds, directly or indirectly (e.g. through subsidiaries), 100% or more of the
voting power of the investee.
d. if an investor holds, directly or indirectly (e.g. through subsidiaries), 20% or more of the
voting power of the investee.
19. Which of the following may provide evidence of significant influence even if the percentage of
ownership interest is less than 20%?
I.
Representation on the board of directors or equivalent governing body of the investee.
II.
Participation in policy-making processes, including participation in decisions about
dividends or other distributions.
III.
Material transactions between the investor and the investee
IV.
Interchange of managerial personnel.
V.
Provision of essential technical information.
a. I, II
b. I, II, III
c. I, II, IV
d. any of these
20. In which of the following does X have significant influence?
a. X owns 30% of the voting shares of ABC Co., the other 60% is held by Y and all seats on the
board of directors are appointed by Y.
b. X owns 30% of the preference shares of Z Co.
c. X owns 15% of the voting shares of ABC Co., all other shares are held in very small blocks
and therefore X has representatives in the board of directors.
d. X owns 80% of Y, and Y owns 40% of Z. In Y’s separate financial statements, the investment
in Z is classified as “held for sale” in accordance with PFRS 5.
21. In assessing whether significant influence exists, an investor shall consider any potential voting
rights held only if
a. it intends to exercise the potential voting rights
b. the potential voting rights are currently exercisable
c. a and b
d. they are not considered
22. When computing for its share in the associate’s profit or loss, an investor shall use
a. its present ownership interest
b. its present ownership interest adjusted for the effect of any potential voting rights
c. the potential voting rights percentage
d. the effective interest rate
23. According to PAS 28, significant influence is the investor’s participation in the financial and
operating policy decisions of the investee but not control of these decisions. Which of the
following may an investor be unable to exercise significant influence?
a. participation in policy making process
b. material intercompany transactions
c. majority ownership of the investee concentrated among a small group of shareholders
who operate the investee without regard to the views of the investor
d. technological dependency
(Adapted)
24. Under PAS 28, these refer to instruments, which if exercised, give the entity additional voting
power or reduce another party’s voting power over the financial and operating policies of
another entity.
a. share rights
c. convertible securities
b. share options
d. potential voting rights
25. When assessing the existence of significant influence, which of the following shall be
considered by the investor?
a. potential voting rights that are not exercisable immediately
b. share options giving the investor the right to purchase preference shares of the investee
c. stock rights which are exercisable immediately but the entity’s management does not
intend to exercise.
d. potential voting rights that will be received in the following accounting period
26. Potential voting rights include all of the following except
a. share warrants and share options
c. convertible preference shares
b. redeemable preference shares
d. convertible bonds
Equity method
27. Investments accounted for under the equity method are initially recognized at
a. cost
b. fair value
c. fair value plus direct acquisition cost
d. cost plus or minus share in profit or loss of associate
28. Which of the following does not correctly relate to the application of the equity method?
a. the investor recognizes its proportionate share in the profit or loss, other comprehensive
income, and discontinued operations of the associate
b. dividends received are accounted for as reduction in the investment balance
c. share dividends are not accounted for
d. the investor accounts only its proportionate share in the profit or loss of the associate but
not in other comprehensive income and discontinued operations.
29. Under the equity method, which of the following does not decrease the investment account?
a. share in associate’s loss
b. amortization of undervaluation of asset
c. amortization of overvaluation of asset
d. share in dividends declared by the associate
30. For investments in associates, the investor shall not
a. recognize a share in the associate’s other comprehensive income
b. recognize a share in the associate’s discontinued operations
c. recognize a share in the associate’s profit or loss
d. recognize a share in the associate’s revenue, expenses and profit before tax
31. When computing for its share in the associate’s profit or loss, the investor should
I.
deduct one year dividends on cumulative preference shares of the associate held by other
parties and classified as equity, whether declared or not.
II.
deduct one year dividends on noncumulative preference shares of the associate held by
other parties and classified as equity, whether declared or not.
III.
deduct all dividends in arrears on cumulative preference shares of the associate held by
other parties and classified as equity, whether declared or not.
IV.
deduct dividends on noncumulative preference shares of the associate held by other
parties and classified as equity only when declared.
V.
not deduct from profit or loss any dividends on ordinary shares before computing for the
share in the associate’s profit or loss.
a. I, IV, V
b. I, IV
c. II, III, V
d. II, III
32. The equity method causes the balance in the investment account to approximate:
a. original cost of the investment
b. market value of the investment
c. original cost of the investment minus any dividends declared and paid by the other
company
d. original cost of the investment plus a proportionate share of subsequent undistributed
earnings of the investee company.
(Adapted)
33. How is goodwill arising on the acquisition of an associate dealt with in the financial
statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss.
d. Goodwill is not recognized separately within the carrying amount of the investment.
(Adapted)
34. If the excess of the acquisition cost of an investment accounted for under equity method over
the book value of net assets acquired is attributable to an undervalued depreciable asset and
an unidentifiable asset, which of the following statements is correct
a. The carrying amount of the investment is increased by the proportionate share in the
profits earned by the investee and decreased by the depreciation of the interest in the
undervaluation and unaffected by the separate impairment of the unidentifiable asset
b. The carrying amount of the investment is increased by the depreciation of the interest in
the undervaluation and amortization of the unidentifiable asset
c. The carrying amount of the investment is decreased by the depreciation of the interest in
the undervaluation and decreased by the separate impairment on the unidentifiable asset.
d. Investment income is decreased by the depreciation of the interest in the undervaluation
and amortization of the unidentifiable asset
35. The equity method is most likely not applicable to which of the following?
a. ownership interest of 2%, 2 out of 7 of the BOD of the associate is appointed by the investor
b. ownership interest of 40%
c. ownership interest of 20% but the associate is operating under severe long-term
restrictions that significantly impair its ability to transfer funds to the investor
d. ownership interest of 25% acquired with an exclusive view of subsequent disposal within
12months and accounted for under PFRS 5
36. The equity method should be applied in which of the following?
a. The investment is classified as held for sale under PFRS 5
b. The parent is exempted from presenting consolidated financial statements.
c. The investor is an unlisted subsidiary whose parent allows it not to apply equity method
d. The investor previously held only 10% interest but subsequently acquires additional 10%
interest in the associate.
37. Which of the following computations may properly result to the correct balance of an
investment in associate account at year-end?
a. Beginning balance of investment plus share in associate’s profit minus share in dividends
declared by associate, and minus amortization of share in undervaluation of associate’s
asset
b. Beginning balance of investment plus share in associate’s profit minus share in dividends
declared by associate, and plus amortization of share in undervaluation of associate’s asset
c. Beginning balance of investment plus share in associate’s profit plus share in dividends
declared by associate, and minus amortization of share in undervaluation of associate’s
asset
d. Beginning balance of investment plus share in associate’s profit minus share in dividends
declared by associate, minus amortization of share in undervaluation of associate’s asset,
and minus separate impairment loss on goodwill included in the carrying amount of the
investment
38. Which of the following computations may properly result to the correct amount of share in
associate’s profit or loss for the period?
a. Share in profit of associate minus amortization of share in the overvaluation of associate’s
asset
b. Share in profit of associate minus amortization of share in the undervaluation of associate’s
asset
c. Share in profit of associate minus amortization of share in the undervaluation of associate’s
asset minus share in dividends declared by associate
d. Share in profit of associate minus amortization of share in the undervaluation of associate’s
asset minus separate impairment loss on goodwill included in the carrying amount of the
investment
39. Which of the following may represent the net change in the investment in associate account
during a period?
a. Share in profit of associate minus share in dividends plus increase in the investment in
associate account
b. Share in profit of associate minus share in dividends minus increase in the investment in
associate account
c. Share in profit of associate minus share in dividends
d. Share in profit of associate plus share in dividends
40. Dividends received from an investment in an associate,
a. if in the form of cash dividends, is credited to investment income
b. if in the form of share dividends, is debited to investment income
c. if in the form of cash dividends, is credited to investment account only if the cash dividends
are declared from pre-acquisition retained earnings.
d. if in the form of share dividends, is recorded through memo entry only
41. The excess of purchase cost of an investment in associate over the fair value of the interest
acquired represents
a. goodwill that should not be amortized but tested for impairment at least annually
b. negative goodwill that should be recognized in the investor’s profit or loss in the year of
acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
42. The excess of the fair value of the interest acquired over the purchase cost of an investment
in associate represents
a. goodwill that should not be amortized but tested for impairment at least annually
b. negative goodwill that should be recognized in the investor’s profit or loss in the year of
acquisition.
c. negative goodwill that should be deferred and amortized
d. goodwill that is not required to be accounted for separately
43. Equity method shall cease to be applied only when the investor loses significant influence over
the associate. Which of the following is not true?
a. The loss of significant influence can occur with or without a change in the percentage of
ownership.
b. An entity loses significant influence over an investee when it loses the power to participate
in the financial and operating policy decisions of that investee.
c. There is a presumption of loss of significant influence if the ownership interest falls below
20%.
d. There is a presumption of loss of significant influence when the associate is operating
under severe long-term restrictions that significantly impair its ability to transfer funds to
the investor.
44. Significant influence may be lost in any of the following, except
a. When an associate becomes subject to the control of a government, court, administrator
or regulator.
b. The investor is precluded, as a result of a contractual agreement, from participating in the
financial and operating policy decisions of the investee.
c. The investor sells half of its 30% interest in an associate
d. The investor sells half of its 20% interest in an associate but retains the voting rights on the
investment sold through proxy agreement
45. Significant influence may be lost in any of the following, except
a. The investor loses its right to appoint board of directors in the associate
b. The investor purchases additional 31% interest in the associate
c. The associate is operating under severe long-term restrictions that significantly impair its
ability to transfer funds to the investor.
d. The investor retains its 20% interest in the associate but grants its voting rights to an
unrelated party.
46. On the loss of significant influence, the investor shall do any of the following, except
a. measure at fair value any investment retained in the former associate.
b. recognize gain or loss for the difference between the net disposal proceeds received and
the carrying amount of the investment sold
c. recognize gain or loss for the difference between the fair value of the interest retained and
the carrying amount of the previous interest held
d. account for the discontinuance of equity method retrospectively.
47. If an investor loses significant influence over an associate,
a. all cumulative gain or loss previously recognized in other comprehensive income is
reclassified to profit or loss.
b. any cumulative gain or loss previously recognized in other comprehensive income is
reclassified directly in equity or to profit or loss, subject to the requirements of PAS 1.
c. no adjustment to the investment account is necessary
d. the investment should be reclassified and any gain or loss on reclassification is recognized
in equity.
48. If an investor’s ownership interest in an associate is reduced but significant influence is not
lost,
a. the investor should cease applying the equity method and use PFRS 9 if ownership interest
is reduced below 20% or PFRS 3 and PAS 27 if ownership interest is increased above 50%.
b. the investor shall reclassify to profit or loss or directly in equity only a proportionate
amount of the gain or loss previously recognized in other comprehensive income.
c. the investor continues to use the equity method and since significant influence is not lost,
no adjustment is needed
d. do nothing
49. If there is any excess of the investor’s share of the net fair value of the associate’s identifiable
assets and contingent liabilities over the cost of the investment, that is, negative goodwill, how
should that excess be treated?
a. It should be included in the carrying amount of the investment.
b. It should be written off against retained earnings.
c. It should be included as income in the determination of the investor’s share of the
associate’s profit or loss for the period.
d. It should be disclosed separately as part of the investor’s equity.
(Adapted)
50. The investor’s interest on the undervaluation of depreciable assets of the associate is
a. amortized using the effective rate and deducted to investment income recognized for the
period
b. depreciated and deducted from the carrying amount of the investment
c. amortized using the effective rate and added to the carrying amount of the investment
and deducted to investment income
d. depreciated and deducted from the carrying amount of the investment and investment
income recognized for the period
51. When the equity method is used to account for the investment in an associate, the recording
of the receipt of a cash distribution from the investee will result in
a. The recognition of investment income.
b. A reduction in the investment balance.
c. An Increase in a liability account.
d. An increase in special equity account.
52. Stock dividends on common stock should be recorded at their fair market value by the investor
when the related investment is accounted for under which of the following methods?
Cost
Equity
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
(AICPA)
53. Which of the following statements is in accordance with the provisions of PAS 28?
I.
The income or loss on the investment in associate is computed on the net income after tax
of the associate.
II.
The income or loss on the investment in associate is presented in the statement of profit
or loss and other comprehensive income after the line item “Income Tax Expense” but
before discontinued operations.
a. I
b. II
c. I and II
d. Neither I nor II
54. On January 1, 20x1, Adjacent Inc. purchased 10% of Juxtaposition Co.’s common stock.
Adjacent purchased additional shares bringing its ownership up to 40% of Juxtaposition’s
common stock outstanding on August 1, 20x1. During October 20x1, Juxtaposition declared
and paid a cash dividend on all of its outstanding common stock. Under PAS 28, how much
income from the Juxtaposition investment should Adjacent’s 20x1 income statement report?
a. 10% of Juxtaposition’s income for January 1 to July 31, 20x1, plus 40% of Juxtaposition’s
income for August 1 to December 31, 20x1.
b. 40% of Juxtaposition’s income for August 1 to December 31, 20x1 only.
c. 40% of Juxtaposition’s 20x1 income.
d. Amount equal to dividends received from Juxtaposition.
(AICPA)
55. Which of the following statements are in accordance with PAS 28?
I.
When the associate has cumulative preference shares, the investor computes its share in
the profit or loss of the investee after deducting the preferred dividends, only when such
dividends are declared.
II.
When the associate has non-cumulative preference shares, the investor computes its
share in the profit or loss of the investee after deducting the preferred dividends, whether
or not such dividends are declared
a. true, true
b. true, false
c. false, true
d. false, false
56. Bell owns 10% of the common stock of War Co. throughout the year. War Co. has no preferred
stock outstanding. Bella’s stock gives him the right to
a. be paid 10% of the firm’s profits in cash each year
b. receive dividends equal to 10% of the par value each year
c. receive dividends equal to 10% of the total dividends paid by the corporation for the year
to common stockholders
d. keep the corporation from issuing any additional stock unless he is willing to buy 10% of
the newly issued shares
(AICPA)
57. Adjustments to the carrying amount of the investment in associate may be necessary for
changes in the investor’s proportionate interest in the investee arising from changes in the
investee’s equity that have not been recognized in the investee’s profit or loss. Which of the
following may not necessitate an adjustment to the investment in associate account?
a. Changes in revaluation surplus of associate
b. Changes in valuation of the associate’s FVOCI securities
c. Changes in the actuarial gains and losses of the associate not amortized through the
corridor approach
d. Changes in the Allowance for doubtful accounts of the associate
58. Which of the following is correct in relation to accounting for investments in associates?
I.
Theoretically, the total market value of shares held as investment in associate which have
been subjected to a share dividend should be the same as it was before the dividend.
II.
Share dividends received on an investment in associate is accounted for as deduction from
the investment account.
III.
Share dividends received on an investment in associate is generally not accounted for.
a. I
b. II
c. I and III
d. I, II and III
59. Which of the following statements correctly refers to the provisions of PAS 28 Investments in
Associates?
I.
If an investor acquires additional shares sufficient to give him significant influence, a
retrospective adjustment should be made on the financial statements to recognize share
in profits and losses of the investee not previously recognized.
II.
No adjustment to the investment account is made when changing from the fair value
method to the equity method.
a. I
b. II
c. I and II
d. Neither I nor II
60. An investor in equity securities received cash dividends in excess of the investor’s share of
investee’s earnings subsequent to the date of the investment. How will the investor’s
investment account be affected by those dividends for each of the following investments?
FVOCI securities
Equity method investment
a.
No effect
No effect
b.
Decrease
No effect
c.
No effect
Decrease
d.
Decrease
Decrease
(AICPA)
61. The investment in associate is reduced to zero when
a. the investment in associate is partly reclassified to FVPL
b. the share in the losses of the associate exceeds the share in the profits
c. at no instance should the investment be reduced to zero unless the investment is
derecognized through sale or other forms of disposal
d. the share in the losses of the associate exceeds the investor’s interest in the associate
62. Consider the following statements.
I.
In applying Equity Method of accounting for investments in associates, dividends received
from the investee are considered a return of capital and should be credited to
stockholders’ equity of the investor.
II.
A subsidiary is an affiliate that is not controlled by an enterprise directly, or indirectly,
through one or more intermediaries.
State whether the foregoing statements are correct.
a. Only I is correct
c. Only II is correct
b. I and II are correct
d. Neither I nor II is correct
(RPCPA)
63. The following statements relate to equity method. Choose the incorrect statement.
a. In accounting for investments in common stock under the equity method, sales of stock of
an investee by an investor, should be accounted for as gains or losses equal to the
difference at the time of sales between selling price and carrying amount of the stock sold.
b. The general rule is that an investor owning 20% or more of the voting stock of an investee
is presumed to have the ability to exercise significant interest over the investee.
c. Under the equity method of accounting, the investments in common stock should be
shown as a single amount, and the investor’s share of earnings or losses from its
investment should ordinarily be shown in its income statement as a single amount
including the results of discontinued operations.
d. The equity method of recording security transactions assumes a close economic
relationship between the investor and the investee. It is used, when influential interest
exists.
(RPCPA)
64. Wrath Co. uses the equity method to account for its January 1, 2003 purchase of Anger Inc.’s
common stock. On January 1, 2003, the fair values of Anger’s FIFO inventory and land
exceeded their carrying amounts. How do these excesses of fair values over carrying amounts
affect Wrath’s reported equity in Anger’s 2003 earnings?
Inventory excess
Land excess
a.
Decrease
Decrease
b.
Decrease
No effect
c.
Increase
Increase
d.
Increase
No effect
(AICPA)
65. On May 1, 20x1, Upbeat Company acquired 30% of the voting stock of Reggae Corp. In 20x1,
Reggae had net earnings of ₱100,000 and paid dividends of ₱10,000. Upbeat mistakenly
measured these transactions using the cost instead of the equity method of accounting. What
effect would this have on working capital, dividend income, and net earnings, respectively?
a. overstate, overstate, overstate
b. no effect, understate, understate
c. no effect, overstate, understate
d. understate, understate, understate
(RPCPA)
66. Select the incorrect statement.
a. The cost method of accounting for an investment in a subsidiary recognizes the legal fact
that the parent and subsidiary are one economic unit.
b. The net cumulative unrealized gains and losses on investments in equity securities
classified as FVOCI and are accounted for under the cost method are usually measured by
the difference between cost and current selling price.
c. Under the equity method of accounting for long-term investments in equity securities, the
investor's investment account is decreased by all cash dividends received from the
investee.
d. The equity method of accounting for long-term investments in equity securities is based
on the presumption that the investor owns a sufficient number of the outstanding voting
shares of another company to exercise significant influence over the operating and
financial policies of the other company.
67. Which of the following statement is the correct statement?
a. At the acquisition date of a long-term investment, the entry would be the same whether
the investor uses PFRS 9 or the equity method under PAS 28.
b. Under PAS 27, an investment in a subsidiary is shown as an asset, while under the equity
method, it is shown as part of equity.
c. Long-term investments are classified as long-term only because they are not readily
marketable.
d. Long-term investments in equity securities are written down only when there has been a
material and apparently permanent decline in the market value of the investment below
its cost.
e. Impairment losses on investments in associates are not accounted for under PAS 28.
68. The following statements relate to the accounting for investments in equity instruments.
I.
Whenever an investment in marketable equity securities does not qualify for accounting
using the equity method, the investor is required to recognize as dividend income cash
dividends received from the investee.
II.
The cost measurement for equity investments is permitted in separate financial
statements.
III.
An investor may still be able to exercise significant influence over an investee, even if the
investment is less than 20% of the voting stock of the investee.
IV.
No adjustment to the investment account is made when changing from the equity to the
fair value measurement, or vice versa.
a. I, II
b. I, II, III
c. I, III
d. I, II, IV
69. In its financial statements, Musang, Inc. uses the cost measurement of accounting for its 15%
ownership of Kalinga Coffee Co. At December 31, 20x1, Musang has a receivable from Kalinga
Coffee. How should the receivable be reported in Musang’s December 31, 20x1 statement of
financial position?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in Kalinga Coffee, without
separate disclosure.
c. 85% of the receivable should be reported separately, with the balance offset against
Kalinga Coffee’s payable to Musang.
d. The total receivable should be offset against Kalinga Coffee’s payable to Musang, without
separate disclosure.
(AICPA)
70. When the equity method is used to account for investments in common stock, which of the
following affects the investor’s reported investment income?
Equipment amortization related to purchase Cash dividends from investee
a.
Yes
Yes
b.
No
Yes
c.
No
No
d.
Yes
No
(AICPA)
71. Google Co. received a cash dividend from a common stock investment. Should Google report
an increase in the investment account if it has classified the stock as FVOCI or uses the equity
method of accounting?
FVOCI
Equity
a.
No
No
b.
Yes
Yes
c.
Yes
No
d.
No
Yes
(AICPA)
72. Bliss Co. uses the equity method to account for its investment in Nirvana, Inc. common stock.
How should Bliss record a 2% stock dividend received from Nirvana?
a. As dividend revenue at Nirvana's carrying value of the stock.
b. As dividend revenue at the market value of the stock.
c. As a reduction in the total cost of Nirvana stock owned.
d. As a memorandum entry reducing the unit cost of all Nirvana stock owned.
(AICPA)
73. Which of the following investments in an associate is not within the scope of PAS 28
Investments in associates?
a. An associate held by a subsidiary and measured at cost
b. An associate held by a venture capital organization and measured at cost
c. An associate held by a venture capital organization and measured at fair value with changes
in fair value recognized in profit or loss
d. An associate held by a subsidiary and measured at fair value with changes in fair value
recognized in profit or loss
(ACCA)
74. Fretboard Company equity accounts for its 40% interest in Fingerboard Company.
Fingerboard's financial statements include the following:
Revenue
₱ 600,000
Cost of sales
(250,000)
350,000
Operating expenses
(285,000)
65,000
Tax
( 20,000)
₱ 45,000
Are the following statements true or false, according to PAS 28 Investments in associates?
1) Fretboard's consolidated revenue should include ₱240,000 in respect of Fingerboard.
2) Fretboard's consolidated profit before tax should include ₱26,000 in respect of Fingerboard.
Statement (1) Statement (2)
a.
False
False
b.
False
True
c.
True
False
d.
True
True
(ACCA)
75. An investor must apply the requirements of PAS 36 in determining whether it is necessary to
recognize any impairment loss in the investment in an associate. How is the impairment test
carried out?
a. The goodwill is separated from the rest of the investment and is impairment tested
individually.
b. The entire carrying amount of the investment is tested for impairment under PAS 36 by
comparing its recoverable amount with its carrying amount.
c. The carrying value of the investment should be compared with its market value.
d. The recoverable amounts of all investments in associates should be assessed together to
determine whether there has been an impairment on all investments.
(Adapted)
76. What accounting method should be used for an investment in an associate where it is
operating under severe long-term restrictions - for example where the government of a
company has temporary control over the associate?
a. PFRS 9 should be applied.
b. The equity method should be applied if significant influence can be exerted.
c. The associate should be shown at cost.
d. Proportionate consolidation should be used.
(Adapted)
77. If the investor ceases to have significant influence over an associate, how should the
investment be treated?
a. It should still be treated using equity accounting.
b. It should be treated in accordance with PFRS 9.
c. The investment should be frozen at the date at which the investor ceases to have
significant influence.
d. The investment should be treated at cost.
(Adapted)
78. When significant influence is achieved from additional purchase of shares resulting to an
increase in ownership interest,
a. the change to equity method is treated retrospectively, “catch up” adjustments shall be
made in order to restate the accounts to what their balances should be had equity method
been used all along.
b. the previous investment is measured at acquisition-date fair value and any difference
between this amount and the previous carrying amount is recognized immediately in profit
or loss.
c. PAS 28 and PFRS 3 requires that the investment account be adjusted for any share in cash
dividends declared by the investee in previous periods that were recognized as income.
d. the previous investment is measured at acquisition-date fair value and any difference
between this amount and the previous carrying amount is recognized immediately in profit
or loss or other comprehensive income, as appropriate.
79. Profits and losses resulting from “upstream” and “downstream” transactions between an
investor and an associate are
a. recognized in the investor’s financial statements through proportionate consolidation,
meaning the investor recognizes its share in the sale and cost of sales recorded by the
associate
b. recognized in the investor’s financial statements only to the extent of unrelated investors’
interests in the associate.
c. recognized in the investor’s financial statements only to the extent of related investors’
interests in the associate.
d. not recognized in the investor’s financial statements
80. Under PAS 28, profits and losses resulting from ‘upstream’ and ‘downstream’ transactions
between an investor and an associate
a. must be eliminated to the extent of the investor’s interest in the associate.
b. must be eliminated to the extent of the unrelated interest over the associate
c. must be recognized in full after adjustment for the increases or decreases in beginning
inventory
d. not recognized
81. Under PAS 28, adjustments to share in profit or loss of an associate may differ if the transaction
is “downstream” or “upstream.” Which of the following statements is true?
I.
Jack Co. owns 20% interest in Old Man, Inc. During the year Old Man sold magic beans to
Jack. This is an upstream transaction.
II.
Goldilocks Co. owns 20% interest in Papa Bear, Inc. During the year Goldilocks purchased
porridge from Papa Bear. This is a downstream transaction.
a. true, true
b. true false
c. false, true
d. false, false
82. Daddeh Co. owns 20% interest in Bebeh Co. During the year, Daddeh sold inventory to Bebeh
at 20% gross profit. As of year-end Bebeh still holds 100% of the inventory. How much share
in the profit from the transaction will Daddeh recognize for the year? Assume income tax rate
of 30%.
a. 14%
b. 80%
c. 2.8%
d. none
83. Under PAS 28, it refers to the carrying amount of the investment in the associate under the
equity method together with any long-term interests that in substance, form part of the
investor’s net investment in the associates.
a. investment in associate
c. interest in ownership
b. interest in the associate
d. none
84. Which of the following may not be included in interest in associate when determining the
threshold in recognizing share in losses of associate?
a. investment in preference shares of associate
b. long-term, unsecured, advances to the associate
c. trade receivables from the associate
d. investment in associate
85. Losses recognized under the equity method in excess of the investor’s investment in ordinary
shares are applied to the other components of the investor’s interest in the associate
a. in the order of their seniority
b. in the reverse order of their seniority
c. in the order of priority in liquidation
d. in no particular order
86. After the investor’s interest in the associate is reduced to zero, additional losses are provided
for, and a liability is recognized, only to the extent that the investor has incurred
a. legal or constructive obligations
b. made payments on behalf of the associate
c. a or b
d. further losses are not recognized
87. If the associate subsequently reports profits, the investor resumes recognizing its share of
those profits
a. only after its share of the profits equals the share of losses not recognized
b. only after its share of the profits equals the share of losses previously recognized
c. only if there are no outstanding legal or constructive obligation incurred on behalf of the
associate
d. a or b
88. How is goodwill arising from investments in associates accounted for?
a. Included in the carrying amount of the investment and not amortized but tested separately
for impairment at least annually.
b. Not accounted for separately; however, presented as a separate asset in the investor’s
separate financial statements.
c. Included in the carrying amount of the investment and the entire investment in associate
is tested for impairment under PAS 36.
d. Recognized as a separate asset either in the group financial statements or in the separate
financial statements but not amortized.
Others
89. Investments in associates are normally classified in the statement of financial position as
a. current assets
b. noncurrent assets c. fair value
d. equity account
90. The investor’s share in the associate’s revaluation surplus is
a. recognized in the investor’s equity together with the investor’s revaluation surplus
b. recognized in the investor’s property, plant and equipment with separate disclosure
c. recognized in the investor’s retained earnings with separate disclosure
d. not recognized
91. What should happen when the financial statements of an associate are not prepared to the
same date as the investor’s accounts?
a. The associate should prepare financial statements for the use of the investor at the same
date as those of the investor.
b. The financial statements of the associate prepared up to a different accounting date will
be used as normal.
c. Any major transactions between the date of the financial statements of the investor and
that of the associate should be accounted for.
d. As long as the gap is not greater than three months, there is no problem.
(Adapted)
92. Preparation of consolidated financial statements is primarily based on the:
a. time period assumption
d. cost/benefit constraint
b. full-disclosure principle
e. separate entity assumption
c. cost principle
(Adapted)
93. The reporting dates of the investor and its associate should not differ by more than
a. one month
b. two months c. three months
d. six months
94. When the accounting policies used by the investor and the associate do not match
a. PAS 28 requires appropriate adjustments to the associate’s financial statements to
conform them to the investor’s accounting policies for reporting like transactions and
other events in similar circumstances.
b. PAS 28 does not require appropriate adjustments to the associate’s financial statements
to conform them to the investor’s accounting policies for reporting like transactions and
other events in similar circumstances when it was not practicable to use uniform
accounting policies
c. PAS 28 requires the entity to discontinue the use of the equity method
d. In no instance should the accounting policies used by the investor and the associate be
different.
95. When financial statements of an associate used in applying the equity method are prepared
as at the end of the reporting period that is different from that of the investor,
a. the difference must be no greater than three months
b. the difference must be no greater than twelve months
c. the difference must be compensated by an interim financial statement
d. no difference must exist
96. When an entity elects to prepare separate financial statements, it shall account for its
investment in associates
a. at cost
c. using the equity method
b. in accordance with PFRS 9
d. any of these
Chapter 13
Agriculture
Chapter 13: Theory of Accounts Reviewer
Objective and scope
1. According to PAS 41 this refers to the management by an entity of the biological
transformation of biological assets for sale, into agricultural produce, or into additional
biological assets.
a. Agricultural activity
c. Biological transformation
b. Agricultural management
d. Biological activity
2. Agricultural activity covers a diverse range of activities. Such diverse range of activities have
common features which includes all of the following except
a. Capability to change
c. Recognition of change
b. Management of change
d. Measurement of change
3. It is the detachment of produce from a biological asset or the cessation of a biological asset’s
life processes.
a. Harvest
b. Death
c. Decease
d. Cultivation
4. When there is a long aging or maturation process after harvest, the accounting for such
products should be dealt with by
a. PAS 41
b. PAS 2
c. PAS 16
d. PAS 40
5. According to PAS41 Agriculture, which of the following would be classified as a product that is
the result of processing after harvest?
a. Cotton
b. Wool
c. Bananas
d. Cheese
(ACCA)
6. Which of the following items would be classified as agricultural produce, according to PAS41
Agriculture?
a. Tree
b. Bush
c. Butter
d. Apple
(ACCA)
7. According to PAS41 Agriculture, which of the following items would be classified as biological
assets?
I.
Oranges
II.
Chickens
III.
Eggs
IV.
Trees
a. I, II
b. III, IV
c. II, IV
d. I, IV
(ACCA)
8. Are the following statements about classification according to PAS 41 Agriculture true or false?
I.
Sugar should be classified as agricultural produce.
II.
Wool should be classified as agricultural produce.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
9. Which of the following is not dealt with by PAS 41?
a. The accounting for biological assets.
b. The initial measurement of agricultural produce harvested from the entity’s biological
assets.
c. The processing of agricultural produce after harvesting.
d. The accounting treatment of government grants received in respect of biological assets.
(Adapted)
10. Which of the following is correct regarding the applicability of PAS 41?
a. PAS 41 applies to biological assets and agricultural produce at the point of harvest even if
they do not relate to agricultural activities.
b. PAS 41 applies to unconditional government grant related to biological assets measured at
cost.
c. PAS 41 applies to land on which tree recognized as biological assets are planted.
d. PAS 41 applies to living plants and animals only when such items relate to agricultural
activity.
11. PAS 41 applies to which of the following when they relate to agricultural activity
I.
Biological assets
II.
Agricultural produce after the point of harvest
III.
Agricultural produce at the point of harvest
IV.
An unconditional government grant related to a biological asset measured at its fair value
less costs to sell
V.
An unconditional government grant related to a biological asset measured at cost land
related to agricultural activity
VI.
Intangible assets related to agricultural activity
a. I, II, IV
b. I, III, IV
c. I, II, III, IV, V d. I, II, IV, VI
12. According to PAS 41 this refers to the harvested product of the entity’s biological assets.
a. biological produce
c. agricultural produce
b. agricultural products d. biological assets
13. It is a living animal or plant
a. biological product
c. agricultural product
b. biological asset
d. mutant assets
14. It comprises the processes of growth, degeneration, production, and procreation that cause
qualitative or quantitative changes in a biological asset.
a. agricultural activity
c. genetic mutation
b. biological activity
d. biological transformation
15. Agricultural activity covers a diverse range of activities which includes all of the following
except
a. processing of grapes into wine by a vintner who has grown the grapes.
b. raising livestock, forestry, and annual or perennial cropping
c. cultivating orchards and plantations
d. floriculture and aquaculture (including fish farming).
16. Agricultural activity may include
a. ocean fishing
c. animal hunting in the forest
b. deforestation
d. fish pond operation
Initial and subsequent measurement
17. According to PAS41 Agriculture, which of the following criteria must be satisfied before a
biological asset can be recognized in an entity's financial statements?
I.
The entity controls the asset as a result of past events
II.
It is probable that economic benefits relating to the asset will flow to the entity
III.
An active market for the asset exists
IV.
The asset forms a homogenous biological group
a. I, II
b. I, II, IV
c. I, II, III
d. I, II, III, IV
(ACCA)
18. Biological assets and agricultural produce are initially recognized at
a. cost
c. fair value less costs to sell
b. fair value
d. lower of cost or fair value less costs to sell
19. According to PAS41 Agriculture, which of the following expenses would be classified as costs
to sell when valuing biological assets and agricultural produce?
I.
Commissions to brokers
II.
Transport costs
III.
Transfer taxes and duties
IV.
Advertising costs
a. I, II, III
b. III, IV
c. I, III
d. I, III, IV
(ACCA)
20. Regarding the choice of measurement basis used for valuing biological assets, PAS 41
a. Sets out several ways of measuring fair value.
b. Recommends the use of historical cost.
c. Recommends the use of current cost.
d. Recommends the use of present value.
(Adapted)
21. Where the fair value of the biological asset cannot be determined reliably, the biological asset
is measured at
a. Cost.
b. Cost less accumulated depreciation.
c. Cost less accumulated depreciation and accumulated impairment losses.
d. Net realizable value.
22. Generally speaking, biological assets relating to agricultural activity should be measured using
a. Historical cost.
b. Historical cost less depreciation less impairment.
c. A fair value approach.
d. Net realizable value.
(Adapted)
23. Which of the following values is unlikely to be used in fair value measurement of a biological
asset?
a. Quoted price in a market.
b. The most recent market transaction price.
c. The present value of the expected net cash flows from the asset.
d. External independent valuation.
(Adapted)
24. The Plants Vs. Zombies Company owns a number of herds of cattle. Where should changes in
the fair value of a herd of cattle recognized in the financial statements, according to PAS 41
Agriculture?
a. In profit or loss only
b. In other comprehensive income only
c. In profit or loss or other comprehensive income
d. In the statement of cash flows only
(ACCA)
25. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income
should be accounted for in which of the following way?
a. No income should reported annually until first harvest and sale in 30 years
b. Income should be measured annually and reported using a fair value approach that
recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit and loss
account over the 30 year period.
d. The plantation forest should be valued every 5 years and the increase in value should be
shown in the statement of recognized gains and losses
(Adapted)
26. When agricultural produce is harvested, the harvest should be accounted for by using PAS 2
Inventories, or another applicable PFRS. For the purpose of that Standard, cost at the date of
harvest is deemed to be
a. the fair value less cost to sell at point of harvest.
b. the historical cost of the harvest.
c. the historical cost less accumulated impairment losses.
d. market value.
27. A gain or loss arising on the initial recognition of a biological asset and from a change in the
fair value less costs to sell of a biological asset should be included in
a. The net profit or loss for the period.
b. The statement of recognized gains and losses.
c. A separate revaluation reserve.
d. A capital reserve within equity.
(Adapted)
28. Land that is related to agricultural activity is valued
a. At fair value.
b. In accordance with PAS 16, Property, Plant and Equipment, or PAS 40, Investment Property
c. At fair value in combination with the biological asset that is being grown on the land.
d. At the resale value separate from the biological asset has been grown on the land.
(Adapted)
29. Which of the following costs are not included in costs to sell?
a. Commissions to brokers and dealers.
b. Levies by regulatory agencies.
c. Transfer taxes and duties.
d. Transport and other costs necessary to get the assets to a market.
30. In relation to PAS 41, which of the following is the least desirable choice of income recognition?
a. Recognition of income during production
b. Recognition of income when a sale occurs
c. Recognition of income only when cash is collected
d. Recognition of income when production is completed
Government grants
31. An unconditional government grant related to a biological asset that has been measured at
fair value less cost to sell should be recognized as
a. Income when the grant becomes receivable.
b. A deferred credit when the grant becomes receivable.
c. Income when the grant application has been submitted.
d. A deferred credit when the grant has been approved.
(Adapted)
32. Under PAS 41, which of the following statements is untrue?
a. Contract prices are not necessarily relevant in determining fair value, and the fair value of
a biological asset or agricultural produce is not adjusted because of the existence of a
contract.
b. An unconditional government grant related to a biological asset measured at FVLCS shall
be recognized in profit or loss when, and only when, the government grant becomes
receivable.
c. A conditional government grant related to a biological asset measured at FVLCS, including
a government grant that requires an entity not to engage in specified agricultural activity,
shall be recognized in profit or loss when the conditions attaching to the government grant
are met.
d. If the terms of a conditional grant allow part of it to be retained according to the time that
has elapsed, the entity recognizes that part in profit or loss only upon fulfillment of the
condition.
33. If the terms of a conditional government grant allow part of the grant to be retained according
to the time that has elapsed, the entity recognizes income from grant
a. using the straight line method
b. only when the condition is fulfilled
c. in full as time passes
d. using the effective interest method
34. If a government grant is conditional on certain events, then the grant should be recognized as
a. Income when the conditions attaching to the grant are met.
b. Income when the grant has been approved.
c. A deferred credit when the conditions attached to the government grant are met.
d. A deferred credit when the grant is approved.
(Adapted)
Disclosures
35. Where there is a production cycle of more than one year for a biological asset, PAS 41
encourages separate disclosure of the
a. Physical change only.
c. Total change in value
b. Price change only
d. a and b
36. Which of the following is a required disclosure under PAS 41?
a. a quantified description of each group of biological assets, distinguishing between
consumable and bearer biological assets
b. a quantified description of each group of biological assets, distinguishing between mature
and immature biological assets
c. the amount of change in fair value less costs to sell included in profit or loss due to physical
changes and due to price changes.
d. the depreciation method used if an entity measures biological assets at their cost less any
accumulated depreciation and any accumulated impairment losses
e. a, b and c
37. Which of the following information should be disclosed under PAS 41?
a. Separate disclosure of the gain or loss relating to biological assets and agricultural produce.
b. The aggregate gain or loss arising on the initial recognition of biological assets and
agricultural produce and the change in fair value less cost to sell of biological assets.
c. The total gain or loss from biological assets, agricultural produce, and from changes in fair
value less cost to sell of biological assets.
d. There is no requirement in the Standard to disclose separately any gains or losses.
(Adapted)
38. These refer to those that are to be harvested as agricultural produce or sold as biological
assets.
a. consumable biological assets c. agricultural produce
b. bearer biological assets
d. biological assets
39. The following relate to consumable biological assets
I.
livestock intended for the production of meat
II.
livestock held for sale
III.
trees from which firewood is harvested while the tree remains
IV.
crops such as maize and wheat
V.
trees being grown for lumber
VI.
VI fish in farms
a. IV, V, VI
b. II, IV, V, VI
c. I, II, IV, V, VI
d. all of these
40. These biological assets are not agricultural produce but, rather, are self-regenerating.
a. consumable biological assets
c. agricultural produce
b. bearer biological assets
d. biological assets
41. The following relate to bearer biological assets
I.
livestock from which milk is produced
II.
grape vines
III.
fruit trees
IV.
trees from which firewood is harvested while the tree remains
V.
trees being grown for lumber
VI.
fish in farms
a. I, II, III, IV b. II, IV, V, VI
c. I, II, III, IV, V
d. all of these
42. These are biological assets that have attained harvestable specifications (for consumable
biological assets) or are able to sustain regular harvests (for bearer biological assets).
a. mature biological assets
c. harvestable biological assets
b. immature biological assets
d. completely mutated biological assets
Chapter 14
Property, Plant and Equipment (Part 1)
Chapter 14: Theory of Accounts Reviewer
Objective and scope
1. PAS 16 shall be applied to which of the following
a. land held for future plant site
b. building not used in normal operations but is being leased out under operating lease
c. equipment held for sale under PFRS 5
d. biological assets related to agricultural activity
2. The principal issues in the accounting for property, plant and equipment include which of the
following?
I.
The recognition of the assets.
II.
The determination of carrying amounts and the depreciation charges and impairment
losses to be recognized in relation to assets recognized.
III.
The complex computation of revaluation surplus.
a. I, II
b. I, III
c. III
d. I, II, III
Recognition principles
3. Which of the following is not a major characteristic of a plant asset?
a. Possesses physical substance
c. Acquired for use
b. Acquired for resale
d. Yields services over a number of years
(AICPA)
4. Which of these is not a major characteristic of a plant asset?
a. Possesses physical substance
b. Acquired for use in operations
c. Yields services over a number of years
d. All of these are major characteristics of a plant asset.
(AICPA)
5. Property, plant & equipment has all of the following characteristics except:
a. They are intended for use in operating activities, and are not acquired for sale in the
ordinary course of business.
b. They are classified as noncurrent tangible assets
c. Their service potential normally diminishes with use.
d. They don't typically make up a large part of a corporation's operating assets.
6. Which of the following statements is consistent with the provisions of PAS 16?
I.
If fair value can be measured reliably, an entity may carry all items of property, plant and
equipment of a class at a revalued amount, which is the fair value of the items at the date
of the revaluation less any subsequent accumulated depreciation and accumulated
impairment losses.
II.
An entity is required to determine the depreciation charge separately for each significant
part of an item of property, plant and equipment.
III.
An entity is required to measure the residual value of an item of property, plant and
equipment as the amount it estimates it would receive currently for the asset if the asset
were already of the age and in the condition expected at the end of its useful life.
IV.
An entity is required to begin depreciating an item of property, plant and equipment when
it is available for use and to continue depreciating it until it is derecognized, even if during
that period the item is idle.
a. I, II
b. I, II, IV
c. I, II, III
d. I, II, III, IV
7. Which of the following statements is inconsistent with the provisions of PAS 16?
a. An entity is required to derecognize the carrying amount of an item of property, plant and
equipment that it disposes of on the date the criteria for the sale of goods would be met.
b. An entity is required to derecognize the carrying amount of a part of an item of property,
plant and equipment if that part has been replaced and the entity has included the cost of
the replacement in the carrying amount of the item.
c. An entity cannot classify as revenue a gain it realizes on the disposal of an item of property,
plant and equipment
d. An entity is required to measure the residual value of an item of property, plant and
equipment as the amount it estimates it would receive in the future for the asset if the
asset were already of the age and in the condition expected at the end of its useful life.
8. Accounting recognition should be given to some or all of the gain realized on a nonmonetary
exchange of plant assets except
a. when the exchange is one with no commercial substance and no cash is involved and that
no impairment losses are needed to be recognized.
b. where the assets exchanged are dissimilar and additional cash is paid
c. where the assets exchanged are dissimilar and additional cash is received
d. when the exchange is one with no commercial substance whether or not there is cash
involved and that no impairment losses are needed to be recognized.
9. The cost of land most likely does not include
a. costs of grading, filling, draining, and clearing.
b. costs of removing old buildings.
c. costs of improvements with unlimited useful lives.
d. special assessments.
10. When the fair value of the non-monetary asset exchanged in a transaction with commercial
substance is indeterminable, the non-monetary asset received will be valued at
a. fair value of asset given up adjusted for cash received or given
b. fair value of asset received
c. fair value of asset received adjusted for cash received or given
d. carrying amount of asset given up adjusted for cash received or given
11. Decrease in equity arise from
a. transfers from an entity to its owners
b. investments in an entity by its owners
c. non-reciprocal transfers to an entity from other than owners
d. upward valuation of property, plant and equipment
(RPCPA)
12. Which of the following terms best describes the removal of an asset from an entity's statement
of financial position?
a. Derecognition b. Impairment c. Write-off
d. Depreciation
13. If a corporation purchases a lot and building and subsequently tears down the building and
uses the property as a parking lot, the proper accounting treatment of the cost of the building
would depend on
a. the significance of the cost allocated to the building in relation to the combined cost of the
lot and building.
b. the length of time for which the building was held prior to its demolition.
c. the contemplated future use of the parking lot.
d. the non-financial asset’s highest and best use determined from the perspective of market
participants, even if the entity intends a different use or intends not to use the nonfinancial asset.
(AICPA)
14. Accounting for tangible operational assets is primarily in conformity with the:
a. historical cost principle
b. historical cost principle and reporting principle
c. matching principle and reporting principle
d. matching principle
e. matching principle and historical cost principle
(Adapted)
15. Are the following statements regarding the cost of an asset true or false, according to PAS16
Property, plant and equipment?
(1) The cost includes cash equivalents paid to acquire an asset.
(2) The cost includes the fair value of any non-monetary consideration given to acquire an
asset.
a. False False
b. False True c. True False
d. True True
(ACCA)
16. The debit for a non-refundable sales tax properly levied and paid on the purchase of machinery
preferably would be a charge to
a. the machinery account.
b. a separate deferred charge account.
c. miscellaneous tax expense (which includes all taxes other than those on income).
d. accumulated depreciation--machinery.
(AICPA)
17. Small tools and containers used repeatedly for more than a year are classified on the balance
sheet as
a. current assets b. fixed assets
c. deferred charges d. investments
(AICPA)
18. Hotel California Corporation recently purchased Eagles Hotel and the land on which it is
located with the plan to tear down the Eagles Hotel and build a new luxury hotel on the site.
The cost of the Eagles Hotel should be
a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn
down.
b. written off as an extraordinary loss in the year the hotel is torn down.
c. capitalized as part of the cost of the land.
d. capitalized as part of the cost of the new hotel.
(AICPA)
19. Which of the following statements are correct per PAS16 Property, plant and equipment?
I.
Assets are depreciated even if their fair value exceeds their carrying amount
II.
Land and buildings are accounted for separately, even when acquired together
III.
A non-current asset acquired as the result of an exchange of assets is not recognized
IV.
A gain on disposal of a non-current asset is classified as revenue
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
(ACCA)
20. Plant assets may properly include:
a. property held for investment purposes.
b. land held for possible use as a future plant site.
c. self-constructed assets currently in use.
d. idle equipment awaiting sale
e. deposits on machinery purchased and not yet received
21. According to PAS16 Property, plant and equipment, which of the following items should be
capitalized into the cost of property, plant and equipment?
I.
Cost of excess materials resulting from a purchasing error
II.
Cost of testing whether the asset works correctly
III.
Initial operating losses whilst demand builds up
IV.
Cost of preparing the site for installation
a. I, II
b. I, II, III
c. II, IV
d. I, II, III, IV
(ACCA)
22. Capitalizable make-ready cost related to a new machine does not include:
a. restoration costs related to the machine
b. installation costs related to the machine
c. taxes related to the machine during the make-ready period
d. depreciation on the machine during the make-ready period
(Adapted)
23. Under the principles of PAS16 Property, plant and equipment, which of the following should
be included in the cost of an item of property, plant and equipment?
I.
Initial delivery and handling costs
II.
Apportioned general overhead costs
III.
Costs of training staff on the new asset
IV.
Installation and assembly costs
a. I, II, IV
b. I, IV
c. II, IV
d. I, II, III, IV
(ACCA)
24. Plant assets purchased on long-term credit contracts should be accounted for at
a. the total value of the future payments.
b. the future amount of the future payments.
c. the present value of the future payments.
d. none of these.
(AICPA)
25. The cost of land typically includes the purchase price and all of the following costs except
a. grading, filling, draining, and clearing costs.
b. street lights, sewers, and drainage systems cost included in special assessment
c. private driveways and parking lots.
d. assumption of any liens or mortgages on the property.
(AICPA)
26. Property, plant and equipment items which are subject to any provision for depreciation or
reduction in value, should be valued in the balance sheet by adding to the actual price paid
any expenses incidental to its acquisition. Which of the following cost items might be included
in such incidental expenses and are to be capitalized as part of machinery?
Cost items
I. installation
II. cost delivery and handling
III. cost site preparation
IV. professional fees
Item 1
Item 2
Item 3
Item 4
a.
yes
yes
yes
yes
b.
yes
yes
yes
no
c.
yes
no
yes
no
d.
no
yes
no
no
(Adapted)
27. NBA Co. exchanged merchandise that cost ₱24,000 and normally sold for ₱36,000 for a new
delivery truck with a list price of ₱40,000. The delivery truck should be recorded on NBA's
books at
a. 24,000. b. 30,000.
c. 36,000.
d. 40,000.
(AICPA)
28. When a plant asset is acquired by issuance of common stock (ordinary shares), the cost of the
plant asset is properly measured by the
a. par value of the stock.
c. book value of the stock.
b. stated value of the stock.
d. market value of the stock.
(AICPA)
29. When a closely held corporation issues preferred stock for land, the land should be recorded
at the
a. total par value of the stock issued.
b. total book value of the stock issued.
c. total liquidating value of the stock issued.
d. fair market value of the land.
(AICPA)
30. Fire insurance on building being constructed is an example of:
Capital expenditure
Revenue expenditure
a.
yes
no
b.
no
yes
c.
no
no
d.
yes
yes
(Adapted)
31. Any renovating or remodeling costs incurred to put a building purchased in a condition suitable
for its intended use is a:
Capital expenditure Revenue expenditure
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(RPCPA)
32. If the land acquired has a building that should be demolished, any amount received as salvage
from the removal of the building should be:
a. credited to the building account
c. credited to the land account
b. treated as income
d. adjusted to prior years
33. A company purchased land with a building on it and immediately tears down the building so
that the land can be used for the construction of a plant. Which of the following should not be
charged to the land account?
a. title examination and surveying fees
b. allocation of cost of payment to tenants to vacate premises
c. property taxes accruing during the period of plant construction.
d. costs for grading, clearing, and draining the property.
34. Bianca Corp., a closely held corporation, acquired a used machine by issuing 15,000 shares
(par value ₱1.00 per share) of its own common stock. The stock has a market value of ₱1.40
per share based on a recent sale of 100 shares. The machine was carried on the vendor’s books
at ₱12,000, and was determined to have a fair market value of ₱17,000. What is the amount
at which Bianca should record the machine on its books?
a. 21,000
b. 17,000
c. 15,000
d. 12,000
(RPCPA)
35. Which of the following is not a necessary characteristic for an item to be classified as property,
plant and equipment?
a. used in operations of the business
c has a useful life beyond one year
b. not acquired for resale
d. subject to depreciation
36. Land was purchased to be used as the site for the construction of a plant. A building on the
property was sold and removed by the buyer so that construction on the plant could begin.
The proceeds from the sale of the building should be
a. classified as other income.
b. deducted from the cost of the building.
c. netted against the costs to clear the land and expensed as incurred.
d. netted against the costs to clear the land and amortized over the life of the plant.
(AICPA)
37. Plant assets may properly include
a. deposits on machinery not yet received.
b. idle equipment awaiting sale.
c. land held for possible use as a future plant site.
d. none of these.
(AICPA)
38. Accounting recognition should be given to some or all of the gain realized on a nonmonetary
exchange of plant assets except where
a. the assets exchanged are similar and additional cash is paid.
b. the assets exchanged are similar and additional cash is received.
c. the assets exchanged are dissimilar and additional cash is paid.
d. the assets exchanged are dissimilar and additional cash is received.
e. the exchange transaction lacks commercial substance
(AICPA)
39. For a nonmonetary exchange of plant assets, accounting recognition should not be given to
a. a loss when the assets exchanged are similar.
b. a gain when the assets exchanged are dissimilar.
c. a gain when the exchange lacks commercial substance.
d. part of a gain when the assets exchanged are similar and cash is received.
(AICPA)
40. When an entity is the recipient of a donated asset from other than a shareholder, the account
credited may be a(n)
a. paid-in capital account. c. deferred revenue account.
b. income account.
d. all of these.
(AICPA)
41. Noun Co. and Nameword Co. exchanged similar plots of land with fair values in excess of
carrying amounts in an exchange transaction that lacks commercial substance. In addition,
Noun received cash of less than 10% of the total consideration received from Nameword to
compensate for the difference in land values. As a result of the exchange, Noun should
recognize:
a. A gain equal to the difference between the fair value and the carrying amount of the land
given up.
b. A gain in an amount determined by the ratio of cash received to total consideration.
c. A loss in an amount determined by the ratio of cash received to total consideration.
d. Neither a gain nor a loss.
(AICPA)
42. Adverb Co. and LY Co. exchanged similar trucks with fair values in excess of carrying amounts
in an exchange with commercial substance. In addition, Adverb paid LY to compensate for the
difference in truck values. As a consequence of the exchange, Adverb recognizes:
a. A gain equal to the difference between the fair value and carrying amount of the truck
given up.
b. A gain determined by the proportion of cash received to the total consideration.
c. A loss determined by the proportion of cash received to the total consideration.
d. Neither a gain nor a loss.
(AICPA)
43. In an exchange transaction with commercial substance, DEADLOCK STANDSTILL Co. received
equipment with a fair value equal to the carrying amount of other assets given up. Deadlock
also contributed cash. As a result of the exchange, Deadlock recognized:
a. A loss equal to the cash given up.
b. A loss determined by the proportion of cash paid to the total transaction value.
c. A gain determined by the proportion of cash paid to the total transaction value.
d. Neither gain nor loss.
(AICPA)
44. E.G. Co. exchanged similar nonmonetary assets with Example Co. and no cash was exchanged.
The carrying amount of the asset surrendered by E.G. exceeded both the fair value of the asset
received and Example's carrying amount of that asset. E.G. should: (assume exchange has
commercial substance)
a. Recognize the difference between the carrying amount of the asset it surrendered and the
fair value of the asset it surrendered as a loss.
b. Recognize the difference between the carrying amount of the asset it surrendered and the
fair value of the asset it received as a gain.
c. Recognize the difference between the carrying amount of the asset it surrendered and the
carrying amount of the asset it received as a loss.
d. Recognize no gain or loss.
(AICPA)
45. Adjective Co. and Relating 2 Company exchanged assets with equal fair values. The retail price
of the asset that Adjective gave up is less than the retail price of the asset received. What gain
or loss should Adjective Co. recognize on the nonmonetary exchange?
a. A gain or loss is not recognized.
b. A gain equal to the difference between the retail prices of the asset received and the asset
foregone.
c. A gain equal to the difference between the retail price and the cost of the asset received.
d. A gain or loss equal to the difference between the fair value and the cost of the asset given
foregone.
(AICPA)
46. Theoretically, which of the following costs incurred in connection with a machine purchased
for use in a company's manufacturing operations would be capitalized?
I.
Insurance on machine while in transit
II.
Testing and preparation of machine for use
a. Yes, Yes
b. Yes, No
c. No, Yes
d. No, No
(AICPA)
47. Which of the following is not an example of fixed asset?
a. plant and machinery
c. royalty
b. land and building
d. molds and dies
48. Discounts given for early payment of credit purchases of operational assets should be:
a. recorded as interest expense at purchase date.
b. capitalized as a cost of the asset acquired and subsequently allocated to depreciation
expense.
c. recorded as interest revenue at purchase date.
d. deducted from the invoice price when determining the cost of the asset
(Adapted)
49. Apportionment of the purchase price in a lump-sum acquisition of different assets may be
based on all the following except?
a. carrying amount of the assets to the seller
b. relative fair values
c. tax assessment values
d. appraised values
(Adapted)
50. Which of the following is least likely to be classified in property, plant and equipment?
a. land improvements
c. leasehold improvements
b. land
d. idle land
51. When land and building are acquired for a lump sum price and the building is demolished, the
materials salvaged from the building that were used in the construction of a new building
should be
a. Ignored when the demolition costs, net of actual sale proceeds of salvaged materials, are
capitalized as cost of the new building.
b. Included as income from continuing operations.
c. Added to the cost of the new building.
d. Deducted from the cost of the land and added to the cost of the building
52. Pronoun Co. exchanged similar nonmonetary assets with Substitute-4-Noun Co. No cash was
exchanged. The carrying amount of the asset surrendered by Pronoun Co. exceeded both the
fair value of the asset received and Substitute-4-Noun Co.’s carrying amount of the asset.
Pronoun Co. should recognize the difference between the carrying amount of the asset
surrendered and
a. The fair value of the asset received as a loss
b. The fair value of the asset received as a gain
c. Pronoun Co.’s. carrying amount of the asset received, as a loss
d. Pronoun Co.’s. carrying amount of the asset received, as again
(AICPA)
53. I.E. Co. recently purchased the That-Is Hotel and the land on which it is located. The plans are
to demolish the That-Is Hotel and to build a new luxury hotel on the site. I.E. Co. should account
for the total purchase cost of the That-Is Hotel as follows:
a. capitalize it as part of the cost of the new hotel.
b. depreciate it over the period from the acquisition until the Majestic is torn down.
c. allocate between the land and the That-Is Hotel building, then charge the allocated cost of
the That-Is Hotel building to loss.
d. capitalized it as part of the cost of the land.
(Adapted)
54. What is the general principle of capitalizing costs to property, plant and equipment?
a. All costs which will provide a benefit beyond one year are capitalized.
b. Only depreciable costs are capitalized.
c. All cost associated with the acquisition or construction of a plant asset are capitalized.
d. All cost incurred to bring the asset to its intended condition and location are capitalized.
e. All costs relevant to the acquisition and long-term maintenance of a plant asset are
capitalized.
(Adapted)
55. The amount of nonrefundable sales tax paid on the purchase of machinery (an operational
asset) should be debited to a:
a. machinery account.
b. accumulated depreciation account.
c. tax expense (which includes all taxes other than income tax) account.
d. separate deferred charge account
(Adapted)
56. Discounts available for early payment of liabilities on purchases of operational assets should:
a. be capitalized as part of the cost of the asset, whether taken or not, and subsequently
included as depreciation expense.
b. be recorded and reported as a contra account to the related liability account.
c. not be capitalized as cost of the asset whether taken or not.
d. be given no recognition until taken or until the discount period has expired; if not taken,
the discounts should be added to the cost of the asset.
(Adapted)
57. Assets received in donation from other than the government should
a. be depreciated based on the market value at the time of the donation.
b. be depreciated based on their book value at the time of the donation.
c. should not be depreciated.
d. be expensed upon receipt.
(Adapted)
58. Acoustic Company needed a new warehouse and a contractor quoted a ₱5,000,000 price to
construct it. Acoustic believed that it could build the warehouse for ₱4,300,000 and decided
to use company employees to build it. The final construction cost incurred by Acoustic was
₱4,800,000 but the asset was recorded at ₱5,000.000. What principle is this a violation of?
a. Cost principle
c. Matching principle
b. Separate entity
d. Full disclosure
(Adapted)
59. Which of the following should not be classified as property, plant and equipment?
a. Building used as a factory
b. Land used in ordinary business operations
c. A truck held for resale by an automobile dealership
d. Land improvement, such as parking lots and fences
(ACCA)
60. A characteristic of property, plant, and equipment is that it is
a. intangible.
b. used in the operations of a business.
c. held for sale in the ordinary course of the business.
d. not currently used in the business but held for future use.
(ACCA)
61. On November 1, 2010, a company purchased a new machine that it does not have to pay for
until November 1, 2012. The total payment on November 1, 2012, will include both principal
and interest. Assuming interest at a 10% rate, the cost of the machine would be the total
payment multiplied by what time value of money concept?
a. Present value of annuity of ₱1.
c. Future amount of annuity of ₱1.
b. Present value of ₱1.
d. Future amount of ₱1.
(AICPA)
62. Stings Co. recently purchased an old building and the land on which it is located. The old
building will be demolished at a net cost of ₱10,000. A new building will be built on the site.
The demolition cost should be:
a. capitalized as part of the cost of the new building
b. capitalized as part of the cost of the land
c. depreciated over the remaining life of the old building
d. written off as an extraordinary loss in the year of the demolition
(Adapted)
Chapter 15
Property, Plant and Equipment (Part 2)
Chapter 15: Theory of Accounts Reviewer
1. Under PAS 16 Property, plant and equipment, which of the following costs relating to noncurrent assets should be capitalized?
I.
Replacement of a building's roof every 15 years
II.
Maintenance of an asset on a three-monthly basis
III.
Installation and assembly costs
IV.
Replacement of small spare parts annually
a. I, III
b. I, III, IV
c. I, II, III
d. I, II, III, IV
(ACCA)
2. Which of the following statements correctly relate to accounting for property, plant and
equipment?
I.
If property, plant and equipment are stated at current valuation, the financial position and
progress of an entity will be more realistically portrayed.
II.
If land and building are purchased for a lump sum price, the broker’s commission should
be apportioned between the land and the building.
III.
The price paid for a plant asset is actually a prepayment of an expense.
IV.
Treating a capital expenditure as an expense may overstates profit in the year after this
action was taken.
V.
If a fully depreciated asset with no residual value continues to be used, management can
continue to provide for depreciation.
a. II, III, V
b. I, II, III, IV c. II, III, V
d. I, II, III, IV, V
3. A plant asset acquired by issuance of ordinary shares is properly measured at the
a. Par value of the shares c. Carrying amount of the asset given
b. Stated value of the shares
d. Fair value of the asset received
4. RESTIVE UNEASY Cooperative recently replaced all the tires in two of its trucks at a very
insignificant amount. This cost should be accounted for
a. as an increase in the cost of the trucks
b. as repair and maintenance expense
c. as an intangible asset
d. as a reduction in the accumulated depreciation of the trucks
(Adapted)
5. The following statements relate to accounting for property, plant and equipment. Choose the
incorrect statement.
a. Accumulated depreciation is a contra account to an asset reported in the property, plant
and equipment section of the statement of financial position.
b. Improvements to leased facilities are included under property, plant and equipment as
long as the amount is not material and if the terms of the lease extend over a long period
of time, otherwise, the amount maybe shown among deferred charges or other assets.
c. When a unit of property is retired or disposed of by sale, trade, scrapping and removal or
abandonment, its cost is credited to the appropriate property account; the related
accumulated depreciation is removed and any gain or loss adjusted for salvage value and
cost of disposition is reported in the statement of profit or loss and other comprehensive
income.
d. Assets subject to depreciation may take the form of buildings, machinery and equipment,
furniture, improvements to leased facilities, bookplates, fruit trees and breeding animals
for which the fair value cannot be determined.
6. An old building formerly occupied by ABC Company was replaced. The loss on the retirement
of the old building should
a. not be capitalized but treated as an expense
b. not be capitalized but treated as a loss
c. be capitalized and included in the cost of the land
d. be capitalized and included in the cost of the new building
7. Which of the following statements are correctly stated?
I.
Property, plant and equipment are permitted to be revalued in response to inflation.
II.
Residual value is ignored when computing for depreciation in the earlier years of an asset’s
life when the depreciation method used is the double declining balance.
III.
Cost of building would include expenditures for service equipment and fixtures made a
permanent part of the structure.
IV.
Cost inefficiencies on self-constructed assets whether due to temporary idle capacity,
industrial dispute or other causes, should not be included as part of the cost of asset.
V.
When used property is acquired, the actual cost in cash or equivalent is generally the
proper basis for depreciation, regardless of the previous history of the property, unless the
entity uses the revaluation method.
a. III, V b. I, II, IV
c. I, II, IV, V
d. I, II, III, IV, V
8. Which of the following correctly relate(s) to accounting for property, plant and equipment?
I.
Devin Co.’s building with an estimated useful life of 20 years was constructed on a land
leased for a term of 15 years. The cost of the building should be depreciated over 20 years,
the life of the building.
II.
Vaughn Company acquired a site for the construction of a new plant. The title examination
fees, surveying fees and property taxes accruing during the period of plant construction
should be charged to the land account of the company.
III.
At the time Meagan Corp became a subsidiary of Andre Corp., Meagan switched
depreciation of its plant assets from the straight-line method of depreciation to the sumof-the-year digits method used by Andre. As to Meagan, this change is a change in
reporting entity.
IV.
Functional depreciation is the wear and tear, deterioration and decay, and damage,
reducing the usefulness of the asset.
V.
Revaluation surplus in property is an element constituting shareholders’ equity.
a. IV, V
b. II, IV, V
c. II, III, IV, V
d. V
9. The sale of a depreciable asset resulting in a gain, indicates that the proceeds from the sale
were
a. greater than cost
c. less than carrying amount
b. greater than carrying amount d. less than cost
10. Improvements are
a. revenue expenditures
b. debited to an appropriate asset account when they do not increase useful life but improves
efficiency beyond the state or condition originally intended by management
c. debited to an appropriate asset account when they do not increase useful life
d. debited to accumulated depreciation when they do not increase useful life
(AICPA)
11. In order for a cost to be capitalized (capital expenditure), the following must be present:
a. The useful life of an asset must be increased.
b. The quantity of assets must be increased.
c. The quality of assets must be increased beyond the condition originally intended by
management.
d. Any one of these.
(AICPA)
12. An improvement made to a machine increased its fair value and its production capacity by 25%
above the condition originally intended by management but without extending the machine's
useful life. The cost of the improvement should be
a. expensed.
b. debited to accumulated depreciation.
c. capitalized in the machine account.
d. allocated between accumulated depreciation and the machine account.
(AICPA)
13. Which of the following is a capital expenditure?
a. Payment of an account payable
c. Payment of income taxes
b. Retirement of bonds payable
d. None of these
(AICPA)
14. Which of the following is not a capital expenditure?
a. Repairs that maintain an asset in operating condition
b. An addition
c. A betterment
d. A replacement
(AICPA)
15. When a plant asset is sold for less than its carrying amount
a. cash received plus accumulated depreciation plus loss on disposal equals the original cost
b. original cost minus accumulated depreciation equals cash received minus loss on disposal
c. carrying amount of the asset plus loss on disposal equals cash received
d. cash received plus accumulated depreciation minus loss on disposal equals the original
cost
16. The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale
were
a. less than current market value.
c. greater than carrying amount.
b. greater than cost.
d. less than carrying amount.
(AICPA)
17. Burnham Corp.'s forestland was condemned for use as a national park. Compensation for the
condemnation exceeded the forestland's carrying amount. Burnham purchased similar, but
larger, replacement forest land for an amount greater than the condemnation award. As a
result of the condemnation and replacement, what is the net effect on the carrying amount of
forestland reported in Burnham 's balance sheet?
a. The amount is increased by the excess of the replacement forestland's cost over the
condemned forestland's carrying amount.
b. The amount is increased by the excess of the replacement forestland's cost over the
condemnation award.
c. The amount is increased by the excess of the condemnation award over the condemned
forestland's carrying amount.
d. No effect, because the condemned forestland's carrying amount is used as the
replacement forestland's carrying amount.
(AICPA)
18. A building suffered uninsured fire damage. The damaged portion of the building was
refurbished with higher quality materials. The cost and related accumulated depreciation of
the damaged portion are identifiable. To account for these events, the owner should:
a. Reduce accumulated depreciation equal to the cost of refurbishing.
b. Record a loss in the current period equal to the sum of the cost of refurbishing and the
carrying amount of the damaged portion of the building.
c. Capitalize the cost of refurbishing and record a loss in the current period equal to the
carrying amount of the damaged portion of the building.
d. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.
(AICPA)
19. Choose the correct statement about the accounting treatment for special one-time
assessments made by local governments requiring a firm to pay for improvements including
streetlights, sewers and other infrastructure.
a. They are capitalized but not depreciated
b. If probable and estimable, they are expensed when determinable
c. They are expensed as incurred
d. They are capitalized and depreciated over their useful life
(Adapted)
20. An enterprise installed an assembly line in 20x1. Four years later, ₱100,000 was spent in
rearranging the line to promote efficiency. The rearrangement but did not affect the assembly
line’s useful life. Proper accounting for the cost of the automation should be to
a. Report it as an expense
b. Establish a separate account for the ₱100,000.
c. Allocate the cost of automation between the asset and accumulated depreciation
accounts.
d. Debit to asset account.
(Adapted)
21. Choose the correct statement.
a. An operational asset received in exchange for ordinary shares issued by the buyer should
be recorded at the par value of the securities issued if the cash price of the asset is not
known.
b. Sales tax paid upon acquisition of an operational asset should be expensed because such
amounts are usually immaterial with respect to the cost of the acquired asset.
c. Purchased operational assets acquired on a long-term payment plan should be recorded
at full cost (including interest and financing charges) only if the cost cannot be estimated
by the purchaser.
d. A primary principle in recording and reporting operational assets is that they are recorded
at cost when acquired and subsequently are reported at cost or cost less accumulated
depreciation.
(Adapted)
22. Which of the following statement is true?
a. All operational assets are subject to either depreciation, depletion, or amortization.
b. The matching principle does not require depreciation on an operational asset donated to
a company because no purchase cost was incurred at acquisition.
c. The only requirement an asset must meet to be considered an operational asset is that its
useful life extend over more than one accounting period.
d. The determination of cost is conceptually consistent between operational assets and
inventory in regard to the accounting treatment of cash discounts.
(Adapted)
23. Which of the following is not an appropriate basis for measuring the cost of property, plant,
and equipment?
a. The purchase price, freight costs, and installation costs of a productive asset should be
included in the asset’s cost.
b. Proceeds obtained in the process of readying land for its intended purpose, such as from
the sale of cleared timber, should be recognized immediately as income.
c. The cost of improvement to equipment incurred after the equipment is placed in the
location and condition originally intended by management is generally expensed out
rightly.
d. All necessary costs incurred in the construction of a plant building, from excavation to
completion, should be considered as part of the asset’s cost
24. When a plant asset is sold for less than its carrying amount:
a. cash received plus accumulated depreciation plus gain on disposal equals the original cost.
b. cash received plus accumulated depreciation minus loss on disposal equals the original
cost.
c. cost of the asset minus loss on disposal equals cash received.
d. original cost minus accumulated depreciation equals cash received plus loss on disposal.
Depreciation methods
25. Depreciation
a. is an allocation of the cost of property, plant and equipment over the time period of
usefulness, in a systematic and rational manner.
b. is a process of recognizing the decreasing value of an asset over time.
c. is a cash expense.
d. expense of ₱2,000 reflects a ₱2,000 increase in liquid funds.
26. Choose the best description of depreciable amount.
a. minimum carrying amount
c. residual value
b. carrying amount
d. initial cost less residual value
27. An entity acquired an asset with an estimated useful life of 20 years and a 10% residual value.
At the end of the asset’s useful life, the accumulated depreciation will be equal to the original
cost of the asset under which of the following depreciation methods?
Double-declining
Sum-of-the-years’ Digits
Straight-line Method
a. Yes
Yes
Yes
b. Yes
Yes
No
c. No
Yes
Yes
d. No
No
No
(Adapted)
28. Obsolescence of a depreciable asset may be caused by
a. Technological changes
b. Improvement in production method
c. Change in market demand for the product or service output
d. Legal or other restrictions
e. (a), (b), (c) and (d) above
29. An entity installed a new production facility and incurred a number of expenses at the point of
installation. The entity’s accountant is arguing that most expenses do not qualify for
capitalization. Included in those expenses are initial operating losses. These should be
a. Deferred and amortized over a reasonable period of time.
b. Expensed and charged to the income statement.
c. Capitalized as part of the cost of the plant as a directly attributable cost.
d. Taken to retained earnings since it is unreasonable to present it as part of the current year’s
income statement.
(Adapted)
30. Choose the incorrect statement.
a. Land and an old building thereon are purchased with the intent to build a new and better
structure. Upon demolition of the old structure, the total purchase price plus the
demolition cost should be included as land.
b. When an operational asset (such as land or buildings) is purchased, any unpaid property
taxes (for the period prior to the purchase date) that are paid by the purchaser should be
recorded as part of the cost of the asset.
c. An operational asset purchased on credit for ₱2,000, terms 2/20, n/30, should be recorded
at ₱1,960 even though payment is made after the discount period.
d. If operational assets are acquired in exchange for bonds, issued by the buyer, the assets
should be capitalized at the fair value of the operational assets received or the fair value
of the bonds, whichever is more reliably determinable.
(Adapted)
31. Which of the following statements is true?
I.
Depreciation expense shown on a company's income statement is always equal to the
depreciation expense on the company's income tax return.
II.
The purpose of depreciation is to have the balance sheet report the current value of an
asset.
III.
Depreciation expense reflects an allocation of an asset's original cost rather than an
allocation based on the economic value that is being consumed.
IV.
An asset's useful life is the same as its physical life.
V.
One company might depreciate a new computer over three years while another company
might depreciate the same model of computer over five years...and both companies are
right.
VI.
Depreciation expense is shown on the income statement in order to achieve accounting's
matching principle.
a. III, V, VI
b. I, III, VI
c. III, IV, V, VI d. V, VI
32. Which of the following depreciation methods is not an accelerated method?
a. Double declining balance
c. Sum-of-the-years’ digits
b. Straight line
d. 150% declining balance
33. An entity acquired an asset for a purchase price of ₱100,000. Necessary installation costs
incurred amounted to ₱2,000. It was estimated that the asset has a 4-year useful life and after
that it can be sold at ₱10,000. Cost of uninstalling the asset is estimated at ₱1,000. If the
company uses the sum-of-the-years’ digits method, the depreciation expense in the third year
is computed as
a. 10% multiplied by ₱102,000
c. 20% multiplied by ₱92,000
b. 20% multiplied by ₱93,000
d. 20% multiplied by ₱102,000
(Adapted)
34. A depreciable asset has an estimated 15% residual value. Under which of the following
methods, properly applied, would the accumulated depreciation equal the original cost at the
end of the asset’s estimated useful life?
Straight-line
Double-declining balance
a. Yes
Yes
b. Yes
No
c. No
Yes
d. No
No
(AICPA)
35. An entity operates a chain of hotels and is proposing to stop depreciating the hotel equipment
and expense the cost of replacement each year. The entity should:
a. Not capitalize groups of assets and expense the replacement cost
b. Not capitalize groups of assets and expense them
c. Capitalize groups of assets but not depreciate them
d. Capitalize all assets with a useful life of more than one year and depreciate them
(ACCA)
36. An entity manufactures components for the car industry and uses self-made tools, which it
continually develops. Costs of tooling are depreciated over four years and the tools are
manufactured in its one factory, where 4% of the space is allocated to development. The
factory depreciation charge should:
a. Be allocated on the basis of the value of the tools compared with the factory output to the
cost of the tooling
b. Be allocated on the basis of 1% per year for four years to the cost of the tooling
c. Not be allocated to the cost of the tooling
d. Be allocated on the basis of 4% per annum and added to the cost of the tooling
37. An entity has a policy of revaluing its PPE. An asset cost ₱15M on January 1, 20x8, has a useful
life of 15 years and is depreciated on a straight-line basis to a zero residual value. The value of
the asset at December 31, 20x8 was ₱14.5M. At December 31, 20x9, the market value of the
asset was ₱12.5M. The accounting entry at 31 December 20x9 would be:
a. Depreciation ₱1.04M to income statement, fall in value of ₱0.5M charged to revaluation
reserve and ₱0.46M to the income statement
b. Depreciation ₱1.04M to income statement, fall in value of ₱0.96M charged to revaluation
reserve
c. Depreciation ₱1M to income statement, fall in value of ₱0.5M charged to revaluation
reserve and ₱0.5M to the income statement
d. Depreciation ₱1M to income statement, fall in value of ₱0.96M to the income statement
(ACCA)
38. A graph is set up with "depreciation expense" on the vertical axis and "time" on the horizontal
axis. Assuming linear relationships, how would the lines for straight-line and sum-of-the-years'digits depreciation expense, respectively, be drawn on this graph?
Straight-line
SYD
a. Vertically
Sloping down to the right.
b. Vertically
Sloping up to the right.
c. Horizontally
Sloping down to the right.
d. Horizontally
Sloping up to the right.
39. Under the composite method, the composite
a. rate is the total cost divided by the total annual depreciation
b. rate is the total annual depreciation divided by the total depreciable cost
c. life is the total cost divided by the total annual depreciation
d. life is the total depreciable cost divided by the total annual depreciation.
40. The composite depreciation method
a. is applied to a group of homogenous assets
b. is an accelerated method of depreciation
c. does not recognize gain or loss on the retirement of specific assets in the group
d. excludes salvage value from the base of the depreciation calculation
(AICPA)
41. Under what conditions will the service hours and productive output methods of depreciation
result in the same depreciation expense for a particular year?
a. When the total estimated service hours and production in units are the same.
b. When the ratio of actual service hours to productive output for the year is the same as the
ratio of the estimates used in their respective depreciation rates.
c. When salvage value is zero.
d. The two methods cannot produce the same depreciation expense amount for any given
year.
(Adapted)
42. Which of the following are correctly stated regarding the accounting for property, plant and
equipment?
I.
In special instances, when inflation has been a major factor, property, plant and equipment
are permitted to be revalued based on index numbers or on an appraisal performed by an
independent expert or specialist.
II.
The sum of the year’s digit method always results in larger total depreciation than does
the straight line method.
III.
Composite depreciation method does not recognize gain or loss on retirement of a single
asset in the group.
IV.
Depreciation is the process of periodically writing down an asset to arrive at its fair market
value.
V.
Depreciation accounting automatically provides the cash required to replace plant assets
as they wear out.
a. I, II, III, V
b. I, II, III
c. I, III
d. II, III
43. The use of the double-declining balance method
I.
results in a decreasing charge to depreciation expense.
II.
means salvage value is not deducted in computing the depreciation base.
III.
means the carrying amount should not be reduced below salvage value.
a. I, II, and III
b. I, II
c. I, III
d. none
44. Which of the following statements best describes 'residual value'?
a. The estimated net amount currently obtainable if the asset were at the end of its useful
life
b. The present value of estimated future cash flows expected to arise from the continuing
use of the asset and from its ultimate disposal
c. The amount at which the asset could be exchanged between knowledgeable, willing
parties in an arm's length transaction
d. The amount of cash or cash equivalents that could currently be obtained by selling the
asset in an orderly disposal
(ACCA)
45. Which of the following terms best describes the cost (or an amount substituted for cost) of an
asset less its residual value?
a. Revalued amount
c. Recoverable amount
b. Carrying amount
d. Depreciable amount
(ACCA)
46. The carrying amount of an asset is defined as
a. Cost minus residual value
b. Cost minus accumulated depreciation minus accumulated impairment losses
c. Cost minus residual value minus accumulated depreciation
d. Estimated fair market value
47. Which of the following statements best describes the carrying amount of an asset?
a. The cost (or an amount substituted for cost) of the asset less its residual value
b. The amount at which the asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment losses
c. The higher of the asset's net selling price and its value in use
d. The fair value of the asset at the date of a revaluation less any subsequent accumulated
impairment losses
(ACCA)
48. Which of the following statements best describes the term 'depreciation'?
a. The systematic allocation of an asset's cost less residual value over its useful life
b. The removal of an asset from an entity's statement of financial position
c. The amount by which the recoverable amount of an asset exceeds its carrying amount
d. The amount by which the carrying amount of an asset exceeds its recoverable amount
(ACCA)
49. Which of the following terms best describes the systematic allocation over its useful life of the
cost of an asset, or other amount substituted for cost, less its residual value?
a. Depreciation
b. Derecognition c. Impairment
d. Value in use
(ACCA)
50. Which of the following terms best describes the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date?
a. Fair value
b. Value in use c. Residual value d. Realizable value
(ACCA)
51. Which of the following statements regarding depreciation is true, according to PAS16 Property,
plant and equipment?
a. An asset must be depreciated from the date of its purchase to the date of sale
b. The annual depreciation charge should be constant over the life of the asset
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than the residual value, depreciation is not charged
(ACCA)
52. The straight-line method of depreciation is based on the assumption that
a. The operating efficiency of the asset decreases in the later years.
b. Service value declines as a function of time rather than of use.
c. Service value declines as a function of obsolescence rather than of time.
d. Physical wear and tear are more important than economic obsolescence.
(AICPA)
53. A principal objection to the straight-line method of depreciation is that it
a. Gives smaller periodic write-offs than decreasing charge methods.
b. Ignores variations in the rate of asset use.
c. Provides for the declining productivity of an aging asset.
d. Tends to result in a constant rate of return on a diminishing investment use.
(RPCPA)
54. The straight-line method of depreciation is not appropriate for
a. A company that is neither expanding nor contracting its investments in equipment because
it is replacing equipment as the equipment is required.
b. Equipment on which the amount of maintenance and repairs increase substantially with
age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment that is used consistently every period.
(RPCPA)
55. Which of the following statements correctly relate to accounting for depreciation?
I.
The best theoretical support for using an accelerated depreciation method is that expenses
should be allocated in a certain manner so that earnings will be equalized.
II.
When partial use of a building under construction can be identified with an income
producing center and the corresponding cost can be ascertained, the related depreciation
should be allocated to that operation.
III.
One of the reasons for recording depreciation is to have proper matching of costs and
revenues.
IV.
The periodic expense associated with the use of land is called depreciation expense.
V.
Plant assets with a nominal cost may be charged to expense when acquired.
a. II, III, V
b. I, II, III, V
c. II, III, IV, V d. I, II, III, IV, V
56. An asset has a nine-year useful life and is to be depreciated under the sum-of-the-years’ digits
method. The annual depreciation expense would be the same as that under the straight line
depreciation method in
a. the third year in the life of the asset
b. the fifth year of the life of the asset
c. the seventh year of the life of the asset
d. the ninth year of the life of the asset
(Adapted)
57. Which of the following is not under time-factor method depreciation?
a. straight line
c. declining balance
b. SYD method
d. productive output
58. Depreciation which arises from obsolescence or inadequacy to perform efficiently is called:
a. periodic
b. physical
c. normal
d. functional
59. The depreciation method that provides higher depreciation expense in the early years and
lower charges in the late years is
a. SYD
c. units of production and hours of use method
b. straight line
d. FIFO
60. Which of the following is an economic factor related to the service life of a long-lived asset?
a. obsolescence
c. decay
b. wear and tear
d. casualties
61. A and B companies purchase identical equipment having an estimated service life of 5 years
with no residual value. A uses the straight-line depreciation method; B uses the sum-of-theyears-digits method. Assuming that the companies are identical in all other respects:
a. if both companies keep the asset for five years, B company’s 5-year total for depreciation
expense will be greater than A company’s 5-year total.
b. if the asset is sold after three years, A company is more likely to report a gain on the
transaction than B company.
c. A company’s depreciation expense will be higher during the first year than B company’s.
d. A company’s net income will be lower during the 4th year than B company’s.
(Adapted)
62. Which statement(s) is(are) correct?
I.
Depreciation on units of property, plant and equipment that are reserved or standby
should not be continued
II.
Art collections should not be depreciated on a systematic and rational basis over the life
of the asset irrespective of the earnings of the entity
a. true, true
b. true, false
c. false, true
d. false, false
63. The highest amount of depreciation will usually be recorded in the last year of an asset’s life
when using:
a. straight line b. SYD
c. double-declining balance d. either b or c
64. Which of the following depreciation methods usually results in paying the lowest taxes in the
early years of an assets life?
a. SYD
c. straight line
b. double declining balance
d. units of production method
65. Which of the following is/are true about straight-line depreciation?
I.
With constant pre-depreciation income, it leads to an increasing rate of return over time.
II.
It ignores loss of productivity and increased maintenance costs over time.
III.
It leads to higher taxes in later years compared to accelerated depreciation methods.
a. I, II & III
b. I & III
c. II & III
d. I & II
66. An asset is estimated to have a total life of 8 years. Its acquisition cost is ₱16,000 and a residual
value of ₱4,000. The firm follows the double declining method of depreciation. In the second
year, the rate of depreciation for the firm's asset is closest to
a. 25%
b. 17%
c. 9.5%
d. 12.5%
67. With respect to depreciation methods, which of the following is true?
I.
Accelerated depreciation methods lead to higher depreciation expense over time.
II.
The Straight-line method causes higher taxes in later years compared with the accelerated
depreciation methods.
III.
Accelerated methods are preferred for tax reasons.
a. III only
b. II & III
c. I & III
d. II only
68. An analysis of an entity's financial statements indicates that the average age of its assets is
declining. This could be due to which of the following?
I.
The entity is acquiring new assets with longer depreciable lives.
II.
The entity's capital expenditures are outpacing depreciation.
III.
The entity is not using its assets as intensively as it should.
IV.
The entity is operating in its maturity phase.
a. I & IV
b. I & II
c. I, II, III & IV d. III & IV
*Hint: Average age of assets can be computed using any of the following:
i.
Average age: (Accumulated depreciation ÷ Depreciation expense) = x years
ii.
Relative age: (Accumulated depreciation ÷ Total cost of depreciable assets) = % of age
iii.
Average depreciable life: (Total depreciable amount ÷ Depreciation expense) = x years
69. All of the following are attributes of depreciation except
a. depreciation stays on the statement of financial position as long as the asset is owned by
the entity.
b. depreciation provides funds for replacement of an asset.
c. depreciation is the allocation of the cost of an asset over its useful life.
d. the purpose of depreciation is to charge against operations, by means of allocation, the
cost of an asset.
70. Which of the following statements is incorrect?
a. The term "revenue expenditures" refers to those amounts paid out which are expected to
provide revenue in the current period or a future period.
b. Expenditure for one item which has questionable or highly uncertain future benefit usually
will be recognized as expense when incurred.
c. Subsequent to acquisition, operational assets usually are reported at cost or cost less
accumulated depreciation, depletion, or amortization.
d. A primary principle in recording and reporting operational assets is that they are recorded
at cost when acquired and subsequently are reported at cost or cost less accumulated
depreciation.
(Adapted)
71. A machine with a 4-year estimated useful life and an estimated 15% residual value was
acquired on January 1. Would depreciation expense using the sum-of-the-year's-digit method
be higher or lower than depreciation expense using the double-declining-balance-method in
the first and second years?
First year
Second year
a.
Higher
Higher
b.
Higher
Lower
c.
Lower
Higher
d.
Lower
Lower
(AICPA)
72. An exchange of assets with no cash exchanged:
a. records the cost of the asset received at the book value of the asset given.
b. records the asset received at the fair value of the asset given.
c. culminates to an earning process.
d. results in recognition of a loss or gain of each party.
(Adapted)
73. A primarily theoretical objection to the straight-line method of depreciation is that it:
a. gives a lower periodic expense than the accelerated method over the life of the asset.
b. recognizes the declining productivity of the asset.
c. ignores variation in the rate of the asset use among periods.
d. tends to result in a constant rate of return on a diminishing investment base.
(AICPA)
74. Periodic depreciation expense is primarily the result of applying the:
a. revenue principle
c. systematic and rational allocation
b. full-disclosure
d. matching
75. All of the following are causes of depreciation except:
a. obsolescence of the asset
c. wear and tear from operational use
b. inadequacy of the assets
d. decline in current market value of the asset
(AICPA)
76. Accounting for depreciation primarily:
a. is an accounting process which allocates long-lived asset cost to appropriate accounting
periods.
b. is used to indicate a decline in market value of a long-lived asset.
c. is a process of asset valuation for balance sheet purposes.
d. applies only to long-live intangible assets.
(AICPA)
77. Which of the following items relevant to the depreciation of an asset can be negative?
a. residual value
c. useful life
b. depreciable amount
d. carrying amount subsequent to acquisition
(AICPA)
78. Which depreciation method is particularly appropriate where: (a) obsolescence is not the
primary factor, (b) actual use can be accounted for, and (c) the service life in units of use can
be
estimated
reliably?
a. SYD
c. Productive output
b. Double declining balance
d. Straight line
(AICPA)
79. Which is not an objection to the use of the straight-line method of depreciation?
a. It may not satisfactorily match expense with revenue, depending on the asset.
b. It tends to ignore obsolescence as a major source of decline in economic value.
c. It does not recognize the investment characteristics of the ownership of operational assets.
d. It generally results in the lowest earnings.
(Adapted)
80. The following statements relate to functional depreciation
I.
Inadequacy may arise when there is no future demand for the product that the depreciable
asset produces or from the availability of a new depreciable asset that can perform for the
same function at a substantially lower cost.
II.
Obsolescence results when an asset is no longer suitable for the size of the company’s
operations.
a. True, true
b True, false
c. False, true
d. False, false
81. A method that excludes residual value from the base for the depreciation calculation is
a. SYD
c. productive output
b. Double declining balance
d. straight line
(AICPA)
82. An enterprise is depreciating an asset with a 5-year useful life. It cost ₱100,000 and has no
residual value. If the <List A> method is used, depreciation expense in the second year will be
<List B>.
List A
List B
a. Sum-of-years’ digits
20,000
b. Sum-of-years’ digits
40,000
c. 200% diminishing balance
16,000
d. 200% diminishing balance
24,000
(Adapted)
83. In the years after mid-service point of a depreciable asset, which of the following depreciation
methods will result in the highest depreciation expense?
a. Sum-of-the-years’-digits.
c. 200% diminishing-balance
b. Diminishing-balance
d. Straight-line
(Adapted)
84. If an enterprise employs the sum-of-the-years’ digits (SYD) method of depreciation for an asset
with an estimated useful life of 4 years, the percentage of the total depreciable cost that will
be expensed in the third year is
a. 10%
b. 25%
c. 20%
d. 70%
(Adapted)
85. The following statements relate to depreciation accounting, choose the incorrect one
a. Depreciation, normally, should not be recognized on property, plant and equipment
construction period or while new equipment is undergoing testing and breaking in until
such assets are capable of being used
b. When partial use of the asset, during construction can be identified with an incomeproducing center and the corresponding cost can be ascertained, the related depreciation
should he allocated to that operation.
c. Depreciation should not be continued on units of property, plant and equipment that are
reserved or standby, or idle either temporarily or for an extended period.
d. When used property is acquired, the actual cost in cash or equivalent is generally the
proper basis for depreciation, regardless of the previous history of the property
86. A plant facility has an originally estimated physical life equal to 15 years. As a result of
accelerated usage, it is now estimated that the physical life will be reduced by 3 years. The
depreciation rate applied to this facility need not be changed if the depreciation method used
is
a. SYD
b. Double declining balance
c. Units of output or hours of use method
d. Straight line method
e. The rate should be changed under all of these methods
87. A machine with a 4-year useful life and a 15% salvage value was acquired on January 1, 20x2.
The increase in accumulated depreciation for 20x3 using the double-declining balance method
would be
a. initial cost x 85% x 50%
c. initial cost x 50%
b. initial cost x 85% x 50% x 50% d. initial cost x 50% x 50%
88. Accumulated depreciation, as used in accounting, represents.
a. funds set aside to replace assets.
b. earnings retained in the business that will be used to purchase another operational asset
when the related asset becomes fully depreciated.
c. the allocation of the cost of a depreciable asset recognized in profit or loss during the
period.
d. the portion of the asset’s cost that is written off as an expense since the acquisition date.
89. Which of the following statements is most likely not correct?
a. Periodic allocations of acquisition cost, made on a systemic and rational basis, are
recognized as current expense in conformity with the matching principle.
b. Depreciation accounting is a process of valuation, not of allocation.
c. At acquisition, tangible, operational assets are recorded at cost on the basis of the cost
principle.
d. Subsequent to acquisition, tangible operational assets that have a limited life are reported
at the cost recognized at acquisition date less accumulated allocations of such cost.
90. Depreciation is a variable (as opposed to fixed) expense if the depreciation method used for
reporting purposes is:
a. declining balance
c. straight line
b. units-of-production
d. SYD
91. Which of the following methods permits total depreciation on a plant asset to exceed
depreciable cost?
a. Straight-line
b. Declining balance
c. Sum of year's digits
d. No acceptable depreciation method
e. All acceptable methods if salvage value is not zero
(Adapted)
92. Choose the incorrect statement concerning the half-year convention as it applies to
depreciation.
a. It can be used only for tax purposes.
b. It adds a year to the class life of the asset for tax purposes.
c. It reduces the accelerated nature of the deduction.
d. It results in depreciation rate equal to the straight-line rate based on class life in the first
year of the asset's life.
(AICPA)
93. For each succeeding period, the units-of-production method of depreciation usually
recognizes an amount of depreciation expense that is:
a. constant
b. varying
c. increasing d. decreasing
94. Which method of depreciation results in periodic depreciation expense that may fluctuate
from one period to the next, but not necessarily in a steadily upward or downward direction?
a. SYD
c. straight line
b. output or service hours d. declining balance
95. Which of the following is/are advantages of accelerated methods of depreciation?
I.
They implicitly recognize the loss of productivity and increased maintenance costs over
time.
II.
They allow deferral of taxes compared to the straight-line method, thus making more cash
available for current operations.
III.
The lower depreciation charges in later years compensate for the greater uncertainty in
future revenues.
a. I & III
b. II only
c. I, II & III
d. I & II
96. An end-of-period adjustment for depreciation of fixed assets is necessary
a. for proper statement of profit
b. to be consistent with the matching principle
c. to recognize the expense of using fixed assets
d. all of these answers are correct
97. Depreciation expense for fixed assets is recorded
a. for each period the asset is in use
b. as a liability until the asset is sold
c. at the end of each period during the asset's useful life
d. when the asset is sold
98. Changes in depreciation methods, useful lives, and residual values
a. are changes in accounting estimates accounted for prospectively
b. are changes in accounting estimates accounted for retrospectively
c. are changes in accounting policies accounted for prospectively
d. does not affect previously recognized expenses, as well as future expenses
99. If there is a change in useful life, depreciation method, or residual value
a. the accountant should compute first the carrying amount of the asset as of the beginning
of the period of change; thereafter, the carrying amount is allocated over the remaining
revised useful life using the new depreciation method or revised residual value
b. the accountant should compute the carrying amount of an asset as if the new depreciation
method, revised useful life or revised residual value had been used all along
c. the accountant is in for very complex accounting computations and should consult her
college instructor first before doing anything
d. there should be no changes in useful lives, depreciation methods, or residual values
because once selected or determined, they are irrevocable, according to accountant’s
standards
Revaluation model
100. An entity owns a fleet of company cars and executive vehicles, and has other property and
equipment in order to service the fleet. It decided to revalue some of its property, plant and
equipment. Which one of the following options complies with PAS 16?
a. Revalue only those parts of the fleet that have increased in value
b. Revalue only the cars and not the executive vehicles
c. Revalue only one-half of each class of property, plant and equipment
d. Revalue an entire class of property, plant and equipment
(ACCA)
101. In case of downward revaluation of an asset, which is revalued for the first time, the
account to be debited is
a. fixed asset account
c. profit or loss account
b. revaluation reserve
d. general reserve
102. An entity has a policy of revaluing its PPE. An asset cost ₱5M on January 1, 20x1 and has a
useful life of five years and is depreciated on a straight-line basis to a zero residual value. The
value of the asset at December 31, 20x1 was ₱3.8M. The fall in value will be accounted for as
follows:
a. Depreciation ₱1M and fall in value of ₱200,000 both to the income statement
b. Depreciation ₱1M and fall in value of ₱200,000 both to the reserves
c. Depreciation ₱1M to income statement and fall in value of ₱200,000 to the reserves
d. Depreciation ₱1M to the income statement and fall in value of ₱200,000 ignored until
there is a revaluation surplus
(ACCA)
103. Appraisal value is:
a. the revalued amount of property, plant and equipment determined by recognized
specialists or authorities
b. the value per appraisal computed by deducting observed depreciation from appraised
value
c. computed by deducting historical cost from appraised value
d. the excess of sound value over net book value
104. When revalued amounts are to be incorporated in the financial statements the following
requirements are to be observed:
I.
the appraisal must be made only by a recognized specialist independent of the company
which owns the property
II.
depreciation to be charged to operations should be based on cost only
III.
the revaluation surplus should be presented on the face of statement of financial position
under equity as a separate line item in accordance with the minimum line items under PAS
1
IV.
certain required disclosures should be made in the financial statements
V.
the appraisal should cover all property, plant and equipment items
a. I, II, III, IV, and V
c. I, III and IV only
b. I, III, IV and V only
d. IV only
105. Which of the following incorrectly relate(s) to the accounting for property, plant and
equipment?
I.
Sum of the years’ digits method is one of the accelerated methods of depreciation that
provides higher depreciation expense in the early years and lower charges in the late years.
II.
Mortgage or liens on property, plant and equipment need not be disclosed in the financial
statements or notes.
III.
Any property, plant and equipment that is idle or abandoned and remains in the property,
plant and equipment account should be revalued if this results in increasing their carrying
values.
IV.
Depreciation of appraised properties charged to operations shall be based on the
appraised values and it should be computed from the date of appraisal.
V.
An entity may be allowed to, revalue its property, plant and equipment if their current
value is substantially more than their cost provided the company adheres to the provisions
of PAS
a. I, IV and V
b. I, IV
c. II, III
d. II, III, V
106. When an appraised property is retired, the revaluation surplus pertaining to such asset
may be handled
a. revaluation surplus which can be subsequently transferred to unappropriated retained
earnings
b. revaluation surplus which can be subsequently transferred to other appraised property not
retired
c. revaluation surplus which can be subsequently transferred to other properties not
revalued
d. revaluation surplus which cannot be subsequently transferred to unappropriated retained
earnings
(RPCPA)
107. The value per appraisal or the value computed by deducting observed depreciation from
replacement cost is called
a. revaluation surplus
c. sound value
b. appraisal value
d. replacement cost
108. Internet Protocol-IP, Inc. owns a fleet of over 100 cars and 20 ships. It operates in a capitalintensive industry and thus has significant other property, plant, and equipment that it carries
in its books. It decided to revalue its property, plant, and equipment. The company’s
accountant has suggested the alternatives that follow. Which one of the options should
Internet Protocol-IP, Inc. select in order to be in line with the provisions of PAS 16?
a. Revalue only one-half of each class of property, plant, and equipment, as that method is
less cumbersome and easy compared to revaluing all assets together.
b. Revalue an entire class of property, plant, and equipment.
c. Revalue one ship at a time, as it is easier than revaluing all ships together.
d. Since assets are being revalued regularly, there is no need to depreciate.
(Adapted)
109. Under PAS 16, revaluation of property, plant and equipment to appraised value is an
acceptable alternative to historical cost provided certain requirements are complied with.
Which of the following is not one of the requirements?
a. the appraisal should be made by a competent and independent specialist once a year at
each end of reporting period.
b. depreciation to be charged to operations should be based on appraised values or its
equivalent
c. the revaluation surplus should be presented in equity
d. appropriate disclosures should be made in the financial statements
(Adapted)
110. PAS 16 requires that revaluation surplus resulting from initial revaluation of property,
plant, and equipment should be treated in one of the following ways. Which of the four options
mirrors the requirements of PAS 16?
a. Credited to retained earnings as this is an unrealized gain.
b. Released to the income statement an amount equal to the difference between the
depreciation calculated on historical cost vis-à-vis revalued amount.
c. Deducted from current assets and added to the property, plant, and equipment.
d. Debited to the class of property, plant, and equipment that is being revalued and credited
to a reserve captioned “revaluation surplus,” which is presented under “equity.”
(Adapted)
111. Which of the following is correct regarding the revaluation model as it is applied to PPE?
a. When the revaluation model is used, depreciation ceases.
b. The appropriate basis for revaluation is replacement cost without any adjustment
whatsoever.
c. When replacement cost is used, observed depreciation should first be deducted to arrive
at the depreciated replacement cost.
d. Observed depreciation is determined through a very complex computation.
112.
I.
II.
The following statements correctly relate to the revaluation model.
Revaluation should be made for an entire class of PPE and not made selectively.
Revaluation should be made simultaneously for all items of PPE within a class. Revaluation
on a rolling basis is permitted so long as revaluation is completed within a short period.
III.
If fair values are volatile, revaluation should be made on an annual basis. If not, revaluation
may be made every 3 to 5 years.
IV.
Revalued amounts are required under PAS 16 to be determined by independent
professionals.
a. II, III
b. I, II, III
c. II, III, IV
d. I, II, III, IV
113.
a.
b.
c.
d.
Revaluation surplus may be computed as
Replacement cost minus Carrying amount
Appraised value or Depreciated replacement cost minus Carrying amount
Replacement cost minus Observed depreciation
Accumulated depreciation divided by Historical cost multiplied by Replacement cost
114. When the asset being revalued has no residual value, observed depreciation may be
computed as
a. Replacement cost minus Carrying amount
b. Appraised value or Depreciated replacement cost minus Carrying amount
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by Replacement cost
115. When the asset being revalued has a residual value, observed depreciation may be
computed as
a. Replacement cost minus Carrying amount
b. Accumulated depreciation divided by Depreciable amount multiplied by Depreciable
amount of replacement cost
c. Replacement cost minus Observed depreciation
d. Accumulated depreciation divided by Historical cost multiplied by Replacement cost
116. When there is a change in useful life as a result of revaluation,
a. the computation of revaluation surplus is affected by a series of adjustments and complex
computations
b. only the computation for observed depreciation is affected
c. the revised useful life is disregarded when computing for revaluation surplus and
subsequent depreciation
d. the computation of revaluation surplus is unaffected, observed depreciation is computed
in the same way as if there was no change in useful life
117. When the revalued asset is depreciable,
a. a portion of the revaluation surplus is periodically transferred to retained earnings through
profit or loss.
b. a portion of the revaluation surplus may be periodically transferred directly to retained
earnings.
c. no portion should be transferred periodically to retained earnings unless the asset is
derecognized.
d. revaluation surplus is presented in equity and must be transferred only to retained
earnings when the revalued asset is derecognized.
118. A long-term asset currently has a carrying amount of ₱45,000 and a salvage value of
₱5,000. It was acquired 3 years ago at a cost of ₱75,000. If the firm uses straight-line
depreciation, how many more years is the asset expected to be in service?
a. 5 years
b. 4 years
c. 6 years
d. 7 years
Disclosure
119. Which of the following disclosures must be made under PAS16 Property, plant and
equipment?
I.
The existence and amounts of restrictions on title
II.
A narrative discussion of future capital expenditure plans
III.
The disposal proceeds of each major asset sold in the period
IV.
The measurement bases used for determining the gross carrying amount
a. I, IV
b. I, II, IV
c. I, III, IV
d. I, II, III, IV
(ACCA)
120.
a.
b.
c.
d.
Which of the following is a required disclosure under PAS 16?
the description of each item of PPE, their nature, and the purpose of their acquisition.
the depreciation methods used unless the PPE is measured under revaluation model
lapsing schedule
all of these
121.
a.
b.
c.
d.
All of the following are required disclosure under PAS 16, except?
accounting policies and estimates of useful lives and residual value
reconciliation of carrying amounts at the beginning and end of the year
commitments related to items of property, plant, and equipment
changes in fair values of assets measured under cost model
Chapter 16
Depletion of Mineral Resources
Chapter 16: Theory of Accounts Reviewer
1. PFRS 6 is applied to which of the following?
a. the search for mineral resources before the entity has obtained legal rights to explore in a
specific area.
b. the search and evaluation of mineral resources, agricultural produce, and biological assets
prior to commencement of actual production
c. the search for mineral resources after the entity has obtained legal rights to explore in a
specific area.
d. the development of mineral resources after the entity has in fact established the existence
of mineral deposits in an area.
2. PFRS 6 applies to expenditures incurred
a. When searching for an area that may warrant detailed exploration, even though the entity
has not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resource is not yet
demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are
being made.
d. In extracting mineral resources and processing the resource to make it marketable or
transportable.
(Adapted)
3. PFRS 6
a. shall be applied by all entities adopting full PFRSs
b. shall be applied only by entities engaged in agricultural activity
c. temporarily exempts entities in applying some provisions in PAS 8
d. when adopted, shall replace PAS 16
4. It refers to the activities geared towards the search for mineral resources after the entity has
obtained legal rights to explore in a specific area
a. exploration and evaluation
c. probe and investigation
b. development
d. adventure and conquest
5. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as assets?
a. Yes, but only to the extent such expenditure is recoverable in future periods.
b. Yes, but only to the extent the technical feasibility and commercial viability of extracting
the associated mineral resource have been demonstrated.
c. Yes, but only to the extent required by the entity’s accounting policy for recognizing
exploration and evaluation assets.
d. No, such expenditure is always expensed in profit or loss as incurred.
(Adapted)
6. Which of the following is incorrect in relation to the provisions of PFRS 6?
a. Exploration and evaluation expenditures start to be incurred only after the legal right to
explore a specific area is obtained.
b. Exploration and evaluation expenditures cease to be incurred when the existence of
reserves is in fact established.
c. PFRS 6 permits entities to develop their own accounting policy for exploration and
evaluation assets based entirely on management’s judgment.
d. Although PFRS 6 permit entities to develop their own accounting policy, the management
of an entity should comply with the provision of PAS 8 on hierarchy of standards when
developing accounting policy for exploration and evaluation of mineral resources.
7. What is an entity required to consider in developing accounting policies for exploration and
evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and
related issues.
b. The definitions, recognition criteria, and measurement concepts for assets, liabilities,
income, and expenses in the Conceptual Framework.
c. Recent pronouncements of standard-setting bodies, accounting literature, and accepted
industry practices.
d. Whether the accounting policy results in information that is relevant and reliable.
(Adapted)
8. Expenditures incurred after the existence of reserves is in fact established in a specific area
but before commencement of commercial production are called
a. exploration and evaluation expenditures
b. development expenditures
c. extraction costs
d. cost of drilling rig foundation and sewers
9. Which of the following is in accordance with the provisions of PFRS 6?
a. PFRS 6 applies even before an entity has obtained legal rights to explore in a specific area.
b. Exploration and evaluation expenditures start to be incurred only before the legal right to
explore a specific area is obtained.
c. Exploration and evaluation expenditures start to be incurred when the existence of
reserves is in fact established.
d. PFRS 6 permits entities to develop their own accounting policy for exploration and
evaluation assets which results in relevant and reliable information based entirely on
management’s judgment.
10. Under PFRS 6, exploration and evaluation assets shall be initially measured at
a. cost
b. fair value
c. amortized cost
d. any of these
11. Which of the following correctly relates to the provisions of PFRS 6?
I.
Exploration and evaluation assets shall be measured at cost, fair value, or amortized cost,
whichever is more appropriate.
II.
Exploration and evaluation assets are exploration and evaluation expenditures recognized
as assets in accordance with the entity’s accounting policy. Nothing in PFRS 6 overrides the
accounting policy developed by an entity.
III.
After recognition, an entity shall apply either the cost model or the revaluation model to
the exploration and evaluation assets.
IV.
After recognition, an entity shall apply either the cost model or the fair model to the
exploration and evaluation assets.
a. II, III
b. I, II, III
c. I, III, IV
d. I, II, III, IV
12. Under PFRS 6, an entity may change its accounting policies for exploration and evaluation
expenditures
a. If the change is required or permitted under the standards
b. If the change is required or permitted under the standards and not prohibited by a relevant
regulation
c. if the change makes the financial statements more relevant and no less reliable, or more
reliable and no less relevant.
d. If the change makes the financial statements more relevant or more reliable
13. Is an entity ever required or permitted to change its accounting policy for exploration and
evaluation expenditures?
a. Yes, entities are required to change their accounting policy for these expenditures if the
change would result in more useful information for users of financial statements.
b. Yes, entities are free to change accounting policy for these expenditures as long as the
selected policy results in information that is relevant and reliable.
c. Yes, but only if the change makes the financial statements more relevant to the economic
decision-making needs of users and no less reliable, or more reliable and no less relevant
to those needs.
d. No, entities would be permitted to change accounting policy only on adoption of a new or
revised Standard that replaces the existing requirements in PFRS 6.
(Adapted)
14. According to PFRS 6, an entity shall classify exploration and evaluation assets as
a. tangible or intangible according to the nature of the assets
b. depreciable or non-depreciable according to the nature of the assets
c. exploration and development
d. movable or immovable
15. An exploration and evaluation asset
a. shall be measured initially and subsequently at cost less any accumulated depreciation and
impairment loss but shall not be measured at revalued amount.
b. shall never be subsequently restated at revalued amount
c. shall continue to be classified as such until commercial production commences.
d. shall no longer be classified as such when the technical feasibility and commercial viability
of extracting a mineral resource are demonstrable.
16. These assets are physically consumed and are irreplaceable.
a. consumable
c. wasting assets (natural resources)
b. bearer
d. a or c
17. The cost of natural resources include
I.
acquisition costs
II.
exploration costs to the extent that they are capitalized in accordance with an entity’
accounting policy
III.
intangible development costs
IV.
restoration or decommissioning costs.
a. I, II
b. I, II, III
c. I, II, IV
d. I, II, III, IV
18. Which of the following expenditures would never qualify as an exploration and evaluation
asset?
a. Expenditure for acquisition of rights to explore.
b. Expenditure for exploratory drilling.
c. Expenditures related to the development of mineral resources.
d. Expenditure for activities in relation to evaluating the technical feasibility and commercial
viability of extracting a mineral resource.
(Adapted)
19. Which measurement model applies to exploration and evaluation assets subsequent to initial
recognition?
a. The cost model.
c. either a or b
b. The revaluation model.
d. The recoverable amount model.
(Adapted)
20. Which of the following facts or circumstances would not trigger a need to test an evaluation
and exploration asset for impairment?
a. The expiration - or expected expiration in the near future -of the period for which the entity
has the right to explore in the specific area, unless the right is expected to be renewed.
b. The absence of budgeted or planned substantive expenditure on further exploration and
evaluation activities in the specific area.
c. A decision to discontinue exploration and evaluation activities in the specific area when
those activities have not led to the discovery of commercially viable quantities of mineral
resources.
d. Lack of sufficient data to determine whether the carrying amount of the exploration and
evaluation asset is likely to be recovered in full from successful development or by sale.
(Adapted)
21. Tangible development costs (tangible equipment costs) costs
a. are accounted for under PFRS 6
b. are capitalized as cost of natural resource and depreciated over the economic life of the
natural resource
c. are not capitalized as cost of natural resource but capitalized as equipment and
depreciated separately.
d. are development costs with no physical substance but nevertheless treated as part of
wasting asset because of the application of substance over form
22. Tangible development (equipment) costs are sub-classified into movable or immovable for
purposes of subsequent depreciation. Which of the following statements is correct?
I.
Movable tangible equipment costs such as heavy equipment used from one extracting site
to another are depreciated separately over their useful life.
II.
Immovable tangible equipment costs such as drilling rig foundation are depreciated
separately over their useful life or the life of the resource, whichever is shorter.
III.
If the useful life of the immovable tangible equipment is shorter than the economic life of
the mine, units-of-production method should be used to depreciate the equipment’s cost.
IV.
If the useful life of the immovable tangible equipment is longer than the economic life of
the mine, no depreciation is recognized during a period where there are no extraction
activities.
a. I, II
b. III, IV
c. I, II, IV
d. I, II, III, IV
23. Depletion is normally computed using
a. straight line
c. units-of-production
b. SYD
d. any of these
24. The depletion charge for each period
a. is expensed immediately
b. shall form part of operating expense when the extracted goods are sold
c. shall initially form part of the cost of inventory and charged to expense when the inventory
is sold.
d. shall be presented in the statement of financial position until mineral resources are fully
depleted
25. Changes in residual value or estimated quantity of mineral reserves are
a. changes in accounting estimates accounted for prospectively.
b. changes in accounting estimates accounted for retrospectively.
c. changes in accounting policy accounted for prospectively.
d. changes in accounting policy accounted for retrospectively.
26. Liquidating dividends received by a shareholder in a wasting asset corporation
a. are return to capital and thus treated as reduction to investment account
b. are return of capital and thus treated as income
c. are return on capital and thus treated as income
d. are return of capital and thus treated as reduction to investment account
27. Provisions for restoration and decommissioning costs
a. are recognized only when the entity incurs legal obligation
b. are recognized only when the entity incurs present obligation
c. are recognized as a separate asset if the entity incurs present obligation
d. are recognized as part of the cost of an asset only if the entity has legal obligation.
28. Which of the following is correct regarding the accounting for provisions for decommissioning
and restoration costs?
I.
The amount of decommissioning or restoration costs to be included as part of the cost of
an asset is the fair value of the estimated liability as of initial recognition.
II.
The provision shall be the best estimate of the expenditure required to settle the present
obligation.
III.
The fair value of the obligation for restoration and decommissioning cost is recorded under
“Asset retirement obligation” (ARO) with a corresponding debit to the related asset for the
same amount.
IV.
Periodic unwinding of the discount on the liability recognized for the decommissioning or
restoration cost shall be recognized in profit or loss as a finance cost as it occurs.
V.
Periodic unwinding of the discount on the liability does not affect depletion or depreciation
recognized for the period.
a. I, II, III
b. I, II, IV
c. I, II, III, IV
d. I, II, III, IV, V
29. In the full cost method, oil firms:
a. are required to expense all oil-drilling costs resulting in dry holes.
b. must expense drilling costs which result in productive oil wells.
c. can capitalize all oil-drilling costs.
d. shall not reduce costs below their recoverable amounts
30. For charging depreciation, on which of the following assets is depletion method adopted?
a. plant and machinery
c. patents
b. goodwill
d. wasting assets
31. Which of the following incorrectly refer to accounting for property, plant and equipment?
I.
Land improvements should never be depreciated since they are attached to the land.
II.
The cost of original installation of a machine should be credited to a machinery account.
III.
Natural resources are generally recorded at cost, including the cost of exploration and
development.
IV.
In calculating depletion for a period, the residual value of acquired land containing an ore
deposit should be deducted from the total purchase price.
V.
If property, plant and equipment are stated at current valuation, the financial position and
progress of an enterprise will be more realistically portrayed. The impression that the
company is more profitable than what it really is, is avoided.
a. III, IV, V
b. I, II, V
c. II, III, IV, V
d. I, II
32. Development costs are divided into tangible equipment and intangible development costs. The
intangible development costs are generally considered as part of the depletion base while
tangible equipment are normally not included in the depletion base.
I.
Tangible equipment that can be moved and be used from one site to another should be
depreciated over their useful life or the life of the wasting asset whichever is shorter.
II.
Tangible equipment that cannot be moved and does not have alternative use (cannot be
used from one site to another) should be depreciated over their useful life or the life of the
wasting asset whichever is shorter.
a. True, true
b. True, false
c. False, true d. False, false
33. Development costs represent
a. the price paid to obtain the property right to search and find an undiscovered natural
resource
b. the costs incurred in extracting or exploiting the natural resource
c. the costs incurred in locating the natural resource that can be economically extracted
d. the costs incurred to bring back the wasting asset to its natural state after extraction has
occurred
(AICPA)
34. Which of the following models may be applied by entities for the measurement after
recognition of exploration and evaluation assets, in accordance with PFRS6 Exploration for and
evaluation of mineral resources?
a Cost
d. Present value
b. Revaluation
e. a or b
c. Realization
(ACCA)
35. Does PFRS6 Exploration for and evaluation of mineral resources apply to the following types of
expenditure?
I.
The extraction and processing of mineral resources for transport to market.
II.
The commercial review of possible areas for mineral extraction before bidding for the legal
rights to explore a specific area.
a. No, no
b. No, Yes
c. Yes, No
d. Yes, yes
36. The Strider Company is involved in the exploration for mineral resources. Its policy is to
recognize exploration assets and measure them initially at cost. It is currently exploring a new
gas field in Ruritania. The exploration license for the new Ruritanian gas field is about to expire
and Strider is now preparing to undertake an impairment review. Strider reports its financial
performance as 'Mineral Production' and 'Energy Trading' in its financial statements in
accordance with PFRS8 Operating segments. The Mineral Production segment comprises two
cash-generating units – 'oil production' and 'gas production'. In accordance with PFRS 6
Exploration for and evaluation of mineral resources, what is the highest level at which the
impairment test can be undertaken?
a. A cash-generating unit based on the assets in the Ruritanian gas field
b. Gas production cash-generating unit
c. Oil production and gas production cash-generating units combined
d. A cash-generating unit at The Strider Company level
(ACCA)
37. Which of the following is not a disclosure required by PFRS 6?
a. Information about commercial reserve quantities.
b. Accounting policies for exploration and evaluation expenditures, including the recognition
of exploration and evaluation assets.
c. The amounts of assets, liabilities, income and expense, and operating and investing cash
flows arising from the exploration for and evaluation of mineral resources.
d. Information that identifies and explains the amounts recognized in the financial
statements arising from the exploration for and evaluation of mineral resources.
(Adapted)
38. Under which of the following methods is depreciation computed in the same way as depletion
is computed?
a. Straight-line
c. Double-declining-balance
b. Sum-of-the-years-digits
d. Productive-output
Chapter 17
Government Grants
Chapter 17: Theory of Accounts Reviewer
Scope
1. PAS 20 applies to which of the following?
a. accounting for government grants under hyperinflationary economies
b. tax benefits such as income tax holidays, investment tax credits, accelerated depreciation
allowances and reduced income tax rates
c. government participation in the ownership of the entity
d. government grants related to biological assets measured at fair value less costs to sell.
e. The benefit of a government loan at a below-market rate of interest.
2. Under PAS 20, it is action by government designed to provide an economic benefit specific to
an entity or range of entities qualifying under certain criteria. It does not include benefits
provided only indirectly through action affecting general trading conditions, such as the
provision of infrastructure in development areas or the imposition of trading constraints on
competitors.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
3. Under PAS 20, these are assistance by government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity. They exclude those which cannot reasonably have a value placed upon
them and transactions with government which cannot be distinguished from the normal
trading transactions of the entity.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
4. Which of the following is not a term used as substitute for government grants?
a. subsidies
c. premiums
b. subventions
d. income tax holiday
5. Which of the following may not form a valid basis for the accounting for government grants?
a. cost principle
c. full disclosure
b. matching
d. comparability
6. Which of the following is not specifically excluded from the purview of PAS 20?
a. Government participation in ownership of the entity.
b. Government grant covered by PAS 41.
c. Government assistance provided in the form of tax benefits.
d. Forgivable loan from the government.
(Adapted)
7. Which of the following statements incorrectly relate to the scope of PAS 20?
a. PAS 20 shall be applied in accounting for, and in the disclosure of, government grants and
in the disclosure of other forms of government assistance.
b. PAS 20 shall be applied in accounting for, and in the disclosure of, government grants and
other forms of government assistance.
c. PAS 20 does not deal with the special problems arising in the accounting for government
grants in financial statements reflecting the effects of changing prices or in supplementary
information of a similar nature.
d. PAS 20 does not deal with government assistance that is provided for an entity in the form
of benefits that are available in determining taxable profit or tax loss, or are determined or
limited on the basis of income tax liability. Examples of such benefits are income tax
holidays, investment tax credits, accelerated depreciation allowances and reduced income
tax rates.
e. PAS 20 does not deal with government participation in the ownership of the entity and
government grants covered by PAS 41 Agriculture.
Recognition
8. When shall an entity recognize government grants?
a. when there is reasonable assurance that the entity will comply with the conditions
attaching to grants
b. when the grants are received
c. when there is reasonable assurance that the grants will be received
d. a and c
9. In relation to the accounting for government grants, which of the following is true?
a. The receipt of a grant is of itself provides conclusive evidence that the conditions attaching
to the grant have been or will be fulfilled.
b. Government assistance that qualify as government grants are disclosed but not accounted
for under PAS 20.
c. Government assistance that do not qualify as government grants are accounted for and
disclosed under PAS 20.
d. Government grants, including non-monetary grants at fair value, shall not be recognized
until there is reasonable assurance that the entity will comply with the conditions attaching
to them and the grants will be received
10. Which of the following are considered characteristics of a recognized government grant?
I.
An economic benefit received from the government
II.
Direct benefits is specific to the recipient entity
III.
With measurable value
IV.
Received or receivable in return for past or future compliance with attached condition
V.
There is reasonable assurance that the recipient entity will comply to the attached
conditions and that the grant will be received.
VI.
Direct recognition in equity.
a. I, II, III
b. I, II, III, IV
c. I, II, III, IV, V
d. all of these
11. Under PAS 20, this refers to government, government agencies and similar bodies whether
local, national or international.
a. Government
c. Internal Revenue Services
b. Regulatory agencies
d. Securities Commission
12. Under PAS 20, these are government grants whose primary condition is that an entity
qualifying for them should purchase, construct or otherwise acquire long-term assets.
Subsidiary conditions may also be attached restricting the type or location of the assets or the
periods during which they are to be acquired or held.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
13. Under PAS 20, these are government grants other than those related to assets.
a. Government assistance
c. Grants related to assets
b. Government grants
d. Grants related to income
14. Which of the following is a government grant related to asset?
a.
b.
c.
d.
Cash received to defray costs already incurred by an entity.
Financial aid received from the government to compensate for casualty losses incurred
Cash received to aid an entity in its “clean and green” program
Land received from government with the condition that a building should be constructed
on it.
15. Which of the following is a government grant related to income?
a. Cash received from the government to be used in acquiring equipment.
b. Land received from government with the condition that a building should be constructed
on it.
c. Marketing advice received from a government agency.
d. Financial aid received from the government to compensate for casualty losses incurred
16. Monetary grants are measured at the
a. amount of cash received
b. the fair value of amount receivable
c. carrying amount of loan payable to government for which repayment is forgiven
d. discount on loan payable to government at a below-market rate of interest.
e. any of these
17. Non-monetary grants are measured at the
a. fair value of non-monetary asset received
b. at nominal amount or zero, plus direct costs incurred in preparing the asset for its intended
use
c. amount of cash received
d. a or b
18. A donated fixed asset received as government grant for which the fair value has been
determined should be recorded as a debit to fixed asset and a credit to
a. retained earnings
c. deferred income
b. additional paid-in capital
d. other income
19. Under PAS 20, these are loans which the lender undertakes to waive repayment of under
certain prescribed conditions.
a. Non-derivative financial assets with fixed or determinable payments
b. Waivable loans
c. Agricultural loans
d. Forgivable loans
20. A forgivable loan from government is treated as a government grant when
a. there is reasonable assurance that the entity will meet the terms for forgiveness of the
loan.
b. the loan is forgiven
c. there is reasonable assurance that the loan will not be repaid in the future
d. under no circumstance
21. The benefit of a below-market rate of interest loan from the government is measured
a. as the fair value of the loan at date of grant
b. as the amount needed to settle the liability at maturity
c. as the difference between the initial carrying amount of the loan determined in accordance
with PFRS 9 and the proceeds received.
d. as the difference between the initial carrying amount of the loan determined in accordance
with PFRS 9 and the present value of the loan.
22. Which approach is used to account for government grants?
a. Capital approach
c. Gentle approach
b. Romantic approach
d. Income approach
23. Which of the following is correct regarding the recognition of government grants?
a. Government grants shall be recognized in equity on a systematic basis over the periods in
which the entity recognizes as expenses the related costs for which the grants are intended
to compensate.
b. Government grants shall be recognized in profit or loss immediately on grant date.
c. Government grants shall be recognized in profit or loss on a systematic basis over the
periods in which the entity recognizes as expenses the related costs for which the grants
are intended to compensate.
d. Government grants shall be recognized immediately in equity on grant date.
24. Which of the following is the least desirable accounting procedure for government grants?
a. Government grants are recognized immediately in profit or loss if the related costs for
which the grants are intended to compensate have already been incurred.
b. Government grants are initially deferred if the related costs for which the grants are
intended to compensate are not yet incurred.
c. Government grants are not immediately recognized in profit or loss but rather amortized
to profit or loss as the costs for which the grants are intended to compensate are being
incurred.
d. Government grants are recognized in profit or loss on a receipts basis.
25. Which of the following is not applied when accounting for government grants?
a. matching
c. cash basis accounting
b. accrual accounting
d. income recognition
26. The use of cash basis of accounting to account for government grants is permitted
a. only if no basis existed for allocating a grant to periods other than the one in which it was
received.
b. only if there is no reasonable assurance that the entity will comply with the conditions
attached to the grant.
c. only if, at initial recognition, there is no reasonable basis that the grant will be received
d. under no circumstance
27. Which of the following is an acceptable accounting procedure for government grants?
I.
Income from government grant is recognized in the period the costs or expenses related
to the government grant are recognized.
II.
Grants related to depreciable assets are usually recognized in profit or loss over the periods
and in the proportions in which depreciation expense on those assets is recognized.
III.
Grants related to non-depreciable assets are recognized in profit or loss as depreciation
expense is recognized on a related depreciable asset for which the grant was received.
IV.
A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity with
no future related costs shall be recognized in profit or loss in the period in which it becomes
receivable.
V.
Grants in the form of tax benefits are recognized in profit or loss when the related deferred
tax liability reverses.
a. I, II
b. II, III, IV
c. I, II, III, IV d. I, II, III, IV, V
28. Which of the following grants shall be recognized in profit or loss immediately?
a. The government makes a grant to a start-up entity writing teaching software for children
with learning difficulties. The purpose of the grant is to help with general financing on start
up, and there are no further conditions attaching to the grant.
b. The area where an entity operates was struck by a super-typhoon. Various properties were
destroyed. Accordingly, the entity received ₱10M as financial aid.
c. A manufacturing entity sets up a plant in an area of high unemployment. A grant of ₱4
million is receivable if it continues to employ at least 100 people over a period of four years.
It is highly probable it will do so. ₱2 million of the grant is to be received immediately and
a further ₱2 million is receivable in four years’ time.
d. a and b
29. Which of the following grants shall be recognized in profit or loss periodically as the related
costs are incurred?
a. An agricultural research entity is given land that belonged to the government to set up a
new laboratory and to investigate new farming methods.
b. Free technical advice is provided by the government to help an export entity to market its
new technology in North America.
c. A local government made public improvements in the area where an entity operates. The
public improvements increased business in the area since it became more accessible to
customers. Also, the value of land in the area increased.
d. An entity operating in an economic zone was awarded a tax holiday of 5 years in the
condition that the entity should continue to operate for at least 10 years and that it should
employ only residents from the area.
30. In relation to a benefit included in the term 'government assistance', are the following
statements true or false according to PAS20 Government grants and government assistance?
I.
The provision of infrastructure in developing areas is a benefit.
II.
The imposition of trading constraints on competitors is a benefit.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
31. PAS 20 shall be applied in accounting for, and in the disclosure of, government grants and in
the disclosure of other forms of government assistance. In the case of a nonmonetary grant,
which of the following accounting treatments is prescribed by PAS 20?
a. Record the asset at replacement cost and the grant at a nominal value.
b. Record the grant at a value estimated by management.
c. Record both the grant and the asset at fair value of the nonmonetary asset.
d. Record only the asset at fair value; do not recognize the fair value of the grant.
(Adapted)
32. An unrestricted grant received from the government to support enterprise fund operations
should be reported as
a. Contributed capital.
c. Revenue
b. Income.
d. Revenues and expenditures.
(AICPA)
33. To induce MONARCHY “KING, QUEEN, OR EMPEROR” Co. to do business in Baguio City, the
City government donated a factory site to the company. The donation may be reflected in the
books of Monarchy at
a. cost of titling the site
c. current market value
b. nominal value
d. either a, b or c
(AICPA)
34. ARISTOCRACY County owned an idle parcel of real estate consisting of land and a factory
building. Aristocracy gave title to this realty to ARISTOCRAT Co. as an incentive for Aristocrat
to establish manufacturing operations in the County. Aristocrat paid nothing for this realty,
which had a fair market value of ₱250,000 at the date of the grant. Aristocrat should record
this nonmonetary transaction as a
a. memo entry only.
b. credit to deferred income for ₱250,000.
c. credit to income for ₱250,000.
d. credit to donated capital for ₱250,000.
(AICPA)
35. A plant site donated by a township to a manufacturer that plans to open a new factory should
be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. “b” but alternatively, the entity may use “a”
d. not recorded
(AICPA)
36. An entity donated land to a municipality for a park. The acquisition cost of the land was
₱75,000, and the revalued carrying amount at the time of the donation was ₱200,000 as
determined by a professional appraiser. If the enterprise has adopted the allowed alternative
treatment for measurement of property, plant, and equipment subsequent to initial
recognition, the journal entry to record the disposition of the land is
a. Land
75,000
Deferred income
75,000
b. Land
125,000
Revaluation surplus
125,000
Revaluation surplus
125,000
Income
125,000
Expense
75,000
Land
75,000
c. Expense
200,000
Revaluation surplus
125,000
Land
200,000
Retained earnings
125,000
d. Donation expense
200,000
Land
75,000
Income
125,000
37. On January 1, 20x1, DEMOCRACY “RULE BY THE PEOPLE” Company commenced trading to
provide key skills education facilities in a region identified for technology development. Also
on January 1, 20x1, the company received two grants from its government for setting up its
operations in this location:
Grant (a) – was paid to give financial assistance for start-up costs already incurred.
Grant (b) – was paid to subsidize the costs of purchasing computer software over the five-year
period.
The company is almost certain to keep the facilities operational for the next five years. The
company's accounting year end is December 31. Are the following statements concerning
recognition of the income from the two government grants true or false, according to PAS 20
Government grants and government assistance?
(1) Income from Grant (a) should be recognized in full on receipt in 20x1.
(2) Income from Grant (b) should be recognized in full at the end of 5 years.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
Presentation
38. REPUBLIC “PEOPLE ELECT” Company purchased a major new piece of machinery for ₱10
million on January 1, 20x1. It will depreciate this machinery on a straight line basis over its
useful life of 10 years, assuming a zero residual value. Also on January 1, 20x1 the company
received a government grant of ₱1 million to help finance this machinery.
According to PAS20 Government grants and government assistance, which, if either, of the
following methods would be an acceptable treatment of this machinery and the related
government grant in the company's statement of financial position at December 31, 20x1?
Method 1
Non-current asset
Cost
9,000,000
Depreciation
900,000
Carrying amount 8,100,000
Deferred income
900,000
Method 2
Non-current asset
Cost
10,000,000
Depreciation
1,000,000
Carrying amount
9,000,000
a. Method 1 only
b. Method 2 only
(ACCA)
c. Neither method
d. Method 1 or Method 2
39. In the case of grants related to an asset, which of these accounting treatments (balance sheet
presentation) is prescribed by PAS 20?
a. Record the grant at a nominal value in the first year and write it off in the subsequent year.
b. Either set up the grant as deferred income or deduct it in arriving at the carrying amount
of the asset.
c. Record the grant at fair value in the first year and take it to income in the subsequent year.
d. Take it to the income statement and disclose it as an extraordinary gain.
(Adapted)
40. In the case of grants related to income, which of these accounting treatments is prescribed by
PAS 20?
a. Credit the grant to “general reserve” under shareholders’ equity.
b. Present the grant in the income statement as “other income”’ or as a separate line item,
or deduct it from the related expense.
c. Credit the grant to “retained earnings” on the balance sheet.
d. Credit the grant to sales or other revenue from operations in the income statement.
(Adapted)
Repayment of government grants
41. Which of the following statements are correct according to PAS20 Government grants and
government assistance?
I.
Any adjustment needed when a government grant becomes repayable is accounted for as
a change in accounting estimate
II.
In respect of loans from the government at an interest rate of 0%, an interest charge should
be made periodically in profit or loss
III.
Where conditions apply to a government grant, it should only be recognized when there is
reasonable assurance that the conditions will be met
IV.
A government grant should not be recognized until it is received in cash
a. I, III
b. I, II, III
c. I, III, IV
d. I, II, III, IV
(ACCA)
42. Which of the following statements is true?
a. A donated machinery equipment for which the fair value has been determined and for
which installation costs were incurred should be measured at its carrying amount on the
books of the donee plus installation cost incurred.
b. Donations of property, plant and equipment received from shareholders should be
recorded at the fair value of the donated asset.
c. A donated fixed asset received as government grant and for which the fair value has been
determined should be recorded as a debit to fixed asset and credit to other income.
d. A government grant that becomes repayable is accounted for retrospectively.
Disclosure
43. Which of these disclosures is not required by PAS 20?
a. The accounting policy adopted for government grants, including methods of presentation
adopted in the financial statements.
b. Unfulfilled conditions and other contingencies attaching to government assistance.
c. The names of the government agencies that gave the grants along with the dates of
sanction of the grants by these government agencies and the dates when cash was
received in case of monetary grants.
d. The nature and extent of government grants recognized in the financial statements and an
indication of other forms of government assistance from which the entity has directly
benefited.
(Adapted)
Chapter 18
Borrowing Costs
Chapter 18: Theory of Accounts Reviewer
Scope
1. Which of the following is the core principle under PAS 23?
a. Borrowing costs incurred in the acquisition, construction or production of a qualifying asset
is expensed. Alternatively, such borrowing costs may be capitalized.
b. Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset form part of the cost of that asset. Other borrowing costs are
recognized as an expense.
c. Borrowing costs that are directly attributable to the acquisition, construction or production
of a qualifying asset form part of the cost of that asset. Alternatively, such borrowing costs
are recognized as an expense.
d. Borrowing costs that are directly attributable to the acquisition, construction or production
of any long-lived asset form part of the cost of that asset. Alternatively, such borrowing
costs are recognized as an expense.
2. PAS 23 may be applied to which of the following?
a. actual or imputed cost of equity and interest expense on callable preference shares.
b. interest expense incurred on borrowings taken to finance the acquisition of qualifying
assets measured at fair value
c. borrowing costs incurred related to the production of inventories that are manufactured
in large quantities on a repetitive basis.
d. interest expense incurred on financial liabilities measured at amortized cost under the
effective interest method.
3. These refer to interest and other costs incurred by an entity in connection with the borrowing
of funds.
a. borrowed costs
c. borrowing costs
b. interest income
d. cost of qualifying asset
4. Borrowing costs subject to accounting under PAS 23 include all of the following except
a. interest expense calculated using the effective interest method
b. interest expense incurred on finance leases
c. exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
d. interest expense incurred on redeemable preference shares
e. all of these may be subject to accounting under PAS 23
5. It is an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale.
a. qualified asset
c. Nine-nine asset
b. qualifying asset
d. deferred asset
6. Which of the following assets may not qualify as a qualifying asset?
a. Inventories
b. Property, plant and equipment
c. Investment property measured under the fair model
d. Intangible assets
7. Which of the following may qualify as a qualifying asset?
a. Financial assets
b. Inventories that are produced over a short period of time.
c. Assets that are ready for their intended use or sale when acquired
d. Assets that are routinely manufactured or produced in large quantities on a repetitive
basis.
e. Biological asset measured at cost
8. Which of the following may qualify as a qualifying asset?
a. 100-storey building purchased from a contractor
b. Titanic ship that took 100 years to construct, purchased from a retail store
c. Movie that takes 10 years to shoot
d. Building that takes 3 years to construct, to be classified as investment property under fair
value model
e. Fish balls
9. Which of the following may not be considered a “qualifying asset” under PAS 23?
a. A power generation plant that normally takes two years to construct.
b. An expensive private jet that can be purchased from a local vendor.
c. A toll bridge that usually takes more than a year to build.
d. A ship that normally takes one to two years to complete.
(Adapted)
10. What type of borrowing costs is eligible for capitalization under PAS 23?
a. avoidable borrowing costs
b. non-avoidable borrowing costs
c. non-payable borrowing costs
d. either a or b
11. Which of the following principles supports the capitalization of interest?
a. Conservatism
b. Matching
(CGA)
c. Full-disclosure
d. Relevance
12. Borrowing costs can be capitalized as part of the asset under PAS 23 when
a. They are a qualifying asset and the entity has opted for the benchmark treatment under
PAS 23.
b. They are a qualifying asset; the entity has opted for the allowed alternative treatment
under PAS 23, but it is not probable that they will result in future economic benefits to the
entity.
c. They are a qualifying asset; the entity has opted for the allowed alternative treatment
under PAS 23, and it is probable that they will result in future economic benefits to the
entity, but the costs cannot be measured reliably.
d. They are a qualifying asset; the entity has opted for the allowed alternative treatment
under PAS 23, and it is probable that they will result in future economic benefits to the
entity, but the costs cannot be measured reliably.
e. The borrowing costs are directly attributable to the acquisition, construction or production
of a qualifying asset. Other borrowing costs are recognized as expense in the period in
which the entity incurs them.
(Adapted)
Recognition
13. Under PAS 23, the capitalization of borrowing costs as part of the cost of a qualifying asset
commences on the date when which of the following conditions is met?
a. The entity incurs expenditures for the asset
b. The entity incurs borrowing costs
c. It undertakes activities that are necessary to prepare the asset for its intended use or sale
d. all of these
14. Which of the following statements regarding the provisions of PAS 23 is not true?
a. Borrowing costs eligible for capitalization are those that would have been avoided if the
expenditure on the qualifying asset had not been made.
b. Expenditures on a qualifying asset include only those expenditures that have resulted in
payments of cash, transfers of other assets, or the assumption of interest-bearing
liabilities.
c. Expenditures are reduced by any progress payments received and grants received in
connection with the asset.
d. The average carrying amount of the asset during a period, excluding borrowing costs
previously capitalized, is the expenditures to which the capitalization rate is applied in that
period.
15. Which of the following costs may not be eligible for capitalization as borrowing costs under
PAS 23?
a. Interest on bonds issued to finance the construction of a qualifying asset.
b. Amortization of discounts or premiums relating to borrowings that qualifies for
capitalization.
c. Imputed cost of equity.
d. d Exchange differences arising from foreign currency borrowings to the extent they are
regarded as an adjustment to interest costs pertaining to a qualifying asset.
(Adapted)
16. In which of the following instances is an entity not permitted under PAS 23 to capitalize
borrowing costs?
a. Prior to the start of physical construction but where technical and administrative work are
being performed.
b. During the period of actual physical construction.
c. During the period when an asset is being held but no production or development is being
made.
d. a and c
17. Capitalization of borrowing costs
a. Shall be suspended during temporary periods of delay.
b. May be suspended only during extended periods of delays in which active development is
delayed.
c. Should never be suspended once capitalization commences.
d. Shall be suspended only during extended periods of delays in which active development is
delayed.
(Adapted)
18. Which of the following is true according to PAS 23?
I.
There is no limit on the capitalization of borrowing costs for as long as the amount
capitalized does not exceed the actual borrowing costs incurred during the period.
II.
All borrowing costs on general borrowings taken to finance the construction of a qualifying
asset `may be capitalized, even if the borrowing costs are unavoidable.
a. True, true
b. True, false
c. False, true
d. False, false
19. Under PAS 23, capitalization of borrowing costs is suspended
a. when there is temporary delay that is a necessary part of the process of getting an asset
ready for its intended use
b. during a period where substantial technical and administrative work is being performed
c. during extended periods of suspension of active development of a qualifying asset
d. when the construction of the asset is completed
20. Under PAS 23, an entity shall cease capitalizing borrowing costs when
a. substantially all the activities necessary to prepare the qualifying asset for its intended use
or sale are complete.
b. the physical construction of the asset is complete even though routine administrative work
might still continue
c. only minor modifications are all that are outstanding
d. any of these
21. Capitalization of borrowing costs is permitted during the period activities necessary to prepare
the asset for its intended use or sale are being undertaken. Which of the following is not among
the necessary activities?
a. Technical and administrative work prior to the start of physical construction such as
obtaining permits to construct.
b. Actual physical construction.
c. Negotiation is being made with a government official regarding his fair share so the
construction can begin.
d. Merely holding asset when no production or development is being made.
22. Activities necessary in preparing a qualifying asset for its intended use or sale encompasses
more than physical construction. Which of the following is a necessary activity which is not
physical construction?
a. excavation in preparation for the construction of a structure’s foundation
b. survey of land prior to actual construction
c. obtaining permit to start construction and performing technical planning
d. preparing PERT, Gantt Chart or CPM before construction of a small public toilet
23. In which of the following may capitalization of borrowing costs not be suspended?
a. Construction is delayed in order to give pavements and other cemented structures time to
fully harden.
b. Construction of a bridge is delayed due to high levels of water which is common at the
construction site.
c. Construction is delayed; however, substantial technical and administrative work is being
performed.
d. The foreman lost his arm due to an accident at the construction site.
e. The capitalization of borrowing costs is not suspended in any of these.
24. In which of the following may capitalization of borrowing costs be suspended?
a. The accountant lost his calculator and cannot account for the costs of snacks of workers
consisting of banana-Q and sago.
b. Mr. Politician’s daughter is wed and all contractors and workers were invited.
c. Construction is temporarily delayed due to a typhoon.
d. Construction is delayed because the contractor spent the entire construction fund at the
beer house; it would take up a very long period to put up the lost fund.
25. The borrowing costs from specific borrowings that are eligible for capitalization is computed
as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average expenditures
d. Total borrowings minus average expenditures multiplied by capitalization rate
26. The borrowing costs from general borrowings that are eligible for capitalization may be
computed as
a. Interest expense minus investment income
b. Investment income minus interest expense
c. Capitalization rate multiplied by average carrying amount of qualifying asset
d. Total borrowings minus average expenditures multiplied by capitalization rate
27. A company is constructing an asset for its own use. Construction began in 20x1. The asset is
being financed entirely with a specific new borrowing. Construction expenditures were made
in 20x1 and 20x2 at the end of each quarter. The total amount of interest cost capitalized in
20x2 should be determined by applying the interest rate on the specific new borrowing to the
a. total accumulated expenditures for the asset in 20x1 and 20x2.
b. average accumulated expenditures for the asset in 20x1 and 20x2.
c. average expenditures for the asset in 20x2.
d. total expenditures for the asset in 20x2.
(AICPA)
28. Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
a. Assets under construction for an enterprise's own use.
b. Assets intended for sale or lease that are produced as discrete projects.
c. Assets financed through the issuance of long-term debt.
d. Assets not currently undergoing the activities necessary to prepare them for their intended
use.
(AICPA)
29. Assets that qualify for interest cost capitalization include
a. assets under construction for a company's own use.
b. assets that are ready for their intended use in the earnings of the company.
c. assets that are not currently being used because of excess capacity.
d. All of these assets qualify for interest cost capitalization.
(AICPA)
30. When computing the amount of interest cost to be capitalized, the concept of "avoidable
interest" refers to
a. the total interest cost actually incurred.
b. a cost of capital charge for stockholders' equity.
c. that portion of total interest cost which would not have been incurred if expenditures for
asset construction had not been made.
d. that portion of average accumulated expenditures on which no interest cost was incurred.
31. The period of time during which interest must be capitalized ends when
a. the asset is substantially complete and ready for its intended use.
b. no further interest cost is being incurred.
c. the asset is abandoned, sold, or fully depreciated.
d. the activities that are necessary to get the asset ready for its intended use have begun.
(AICPA)
32. Which of the following statements is true regarding capitalization of interest?
a. Interest cost capitalized in connection with the purchase of land to be used as a building
site should be debited to the land account and not to the building account.
b. The amount of interest cost capitalized during the period should not exceed the actual
interest cost incurred.
c. When excess borrowed funds from general borrowings not immediately needed for
construction are temporarily invested, any interest earned should be offset against interest
cost incurred when determining the amount of interest cost to be capitalized.
d. The minimum amount of interest to be capitalized is determined by multiplying a weighted
average interest rate by the amount of average accumulated expenditures on qualifying
assets during the period.
(AICPA)
33. Construction of a qualifying asset is started on April 1 and finished on December 1. The fraction
used to multiply an expenditure made on April 1 to find weighted-average accumulated
expenditures is
a. 8/8.
b. 8/12.
c. 9/12.
d. 11/12.
(AICPA)
34. When funds are borrowed to pay for construction of assets that qualify for capitalization of
interest, the excess funds not needed immediately may be temporarily invested in interestbearing securities. Interest earned on these temporary investments should be
a. offset against interest cost to be capitalized
b. used to reduce the cost of assets being constructed.
c. multiplied by an appropriate interest rate to determine the amount of interest to be
capitalized.
d. recognized as revenue of the period.
(AICPA)
35. Interest cost that is capitalized should
a. be written off over the remaining term of the debt.
b. be accumulated in a separate deferred charge account and written off equally over a 40year period.
c. not be written off until the related asset is fully depreciated or disposed of.
d. none of these.
(AICPA)
36. During 2002, TIER ROW Co. constructed machinery for its own use and for sale to customers.
Machines sold to customers are manufactured in large quantities on a repetitive basis. Bank
loans financed the construction of these assets, both during and after construction were
complete. How much of the interest incurred should be reported as interest expense in the
2002 income statement?
Interest incurred for machinery
Interest incurred for machinery
constructed for own use
held for sale
a. All interest incurred
All interest incurred
b. All interest incurred
Interest incurred after completion
c. Interest incurred after completion Interest incurred after completion
d. Interest incurred after completion
All interest incurred
(Adapted)
37. It is permissible to capitalize interest on
a. assets that are not being used in earning activities of the entity and that are not undergoing
the activities necessary to get them ready for such use.
b. assets manufactured in large quantities on a repetitive basis
c. assets that are already are in use or are ready for their intended use in the earning activities
on the entity.
d. assets under construction.
38. The following statements relate to the cost of self-constructed assets
I.
Direct cost of materials and labor as well as indirect costs and incremental overhead
specifically identifiable and traceable to the construction shall be capitalized.
II.
Financing costs attributable to a long-term construction project that are incurred up to
the completion of construction are to be included in the gross carrying amount of the
asset to which they relate
III.
Cost inefficiencies, whether due to temporary idle capacity, industrial disputes or other
causes, should be included as part of the cost of the asset
a. True, true, true
c. True, true, false
b. True, false, true
d. True, false, false
39. After determining which items on the balance sheet properly comprise the basis of interest
capitalization for operational assets under construction, the interest calculation is based on
the:
a. accumulated borrowing used only for the construction.
b. accumulated expenditures on qualifying assets as of the start of the construction period.
c. average accumulated expenditures on qualifying assets during the construction period.
d. accumulated expenditures on qualifying assets as of the end of the construction period.
40. The interest capitalization period for a self-constructed asset begins when certain conditions
are met. Which of the following is not one of these conditions?
a. Activities necessary to get the asset ready for its intended use actually are in progress.
b. Qualifying expenditures for the asset have actually been made.
c. Interest cost has actually been incurred.
d. Liabilities, such as trade payables or accruals, are incurred in connection with the asset.
41. Which of the following costs generally would be capitalized to property, plant, and equipment
account?
a. Interest on debt incurred to purchase the item
b. Property taxes relating to periods after acquisition
c. Import duties incurred on purchase
d. Freight-out
(Adapted)
42. An entity imported machinery to install in its new factory premises before year-end. However,
due to circumstances beyond its control, the machinery was delayed by a few months but
reached the factory premises before year-end. While this was happening, the entity learned
from the bank that it was being charged interest on the loan it had taken to fund the cost of
the plant. What is the proper treatment of freight and interest expense under PAS 16?
a. Both expenses should be capitalized.
b. Interest may be capitalized but freight should be expensed.
c. Freight charges should be capitalized but interest cannot be capitalized under these
circumstances.
d. Both expenses should be expensed.
(Adapted)
43. A firm decides to capitalize the interest expenditure on a large, building construction project,
instead of expensing it. This ________ its debt-to-equity ratio.
a. has an ambiguous effect on
c. decreases
b. leaves unaffected
d. increases
(Adapted)
44. According to PAS23 Borrowing costs, which of the following assets could be treated as
qualifying assets for the purpose of capitalizing interest costs?
I.
Investment property
II.
Investments in financial instruments
III.
Inventory of finished goods produced over a short period of time
IV.
Power generation facilities
a. I, II, III
b. I, III, IV
c. I, II, IV
d. I, IV
(ACCA)
45. According to PAS23 Borrowing costs, which of the following statements about the
capitalization of borrowing costs as part of the cost of a qualifying asset is true?
a. If funds come from general borrowings, the amount to be capitalized is based on the
weighted average cost of borrowing
b. Capitalization always continues until the asset is brought into use
c. Capitalization always commences as soon as expenditure of the asset is incurred
d. Capitalization always commences as soon as interest on relevant borrowings is being
incurred
(ACCA)
46. The following events take place: An entity buys some land on December 1. Planning permission
is obtained on January 31. Payment for the land is deferred until February 1. The entity takes
out a loan to cover the cost of the land and the construction of the building on February 1. Due
to adverse weather conditions there is a delay in starting the building work for six weeks and
work does not commence until March 15. Capitalization of borrowing costs will start on
a. December 1
b. January 1
c. February 1
d. March 15
(ACCA)
47. If the acquisition or construction of a qualifying asset has been financed partly through specific
and partly through general borrowings, then when computing for the borrowing costs eligible
for capitalization
a. the capitalization rate shall be multiplied to the average expenditures during the year
b. the capitalization rate shall be multiplied to the average carrying amount of the qualifying
asset financed through specific borrowings
c. the capitalization rate shall be multiplied to the average carrying amount of the qualifying
asset financed through general borrowings
d. the borrowing costs are treated as incurred on general borrowings only
48. Which of the following statements is true in relation to PAS 23?
I.
The capitalization rate is computed as the ratio of borrowing costs incurred on general
borrowings over total general borrowings.
II.
The borrowing cost to be capitalized during the period should exceed the actual borrowing
costs incurred for that period.
a. True, true
b. True, false
c. False, true
d. False, false
49. Which of the following is not a disclosure requirement under PAS 23?
a. Accounting policy adopted for borrowing costs.
b. Amount of borrowing costs capitalized during the period.
c. Segregation of assets that are “qualifying assets” from other assets on the balance sheet
or as a disclosure in the footnotes to the financial statements.
d. Capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.
(Adapted)
Chapter 19
Investment Property
Chapter 19: Theory of Accounts Reviewer
Scope
1. PAS 40 shall be applied to which of the following?
a. biological assets related to agricultural activity
b. inventories held for sale in the ordinary course of business
c. mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
d. building that is vacant but is held to be leased out under one or more operating leases
2. A factory is in the process of being constructed on behalf of the government. The property
should be accounted for under
a. PAS 20
b. PAS 16
c. PAS 40
d. PAS 11
3. A new office building used by an insurance entity as its head office which was purchased
specifically in the center of a major city in order to exploit its capital gains potential. The
property should be accounted for under
a. PAS 20
b. PAS 16
c. PAS 40
d. PAS 11
4. The applicable PFRS/PAS for a property being constructed or developed for future use as
investment property is
a. PAS 2, Inventories, until construction is complete and then it is accounted for under PAS
40, Investment Property.
b. PAS 40, Investment Property.
c. PAS 11, Construction Contracts, until construction is complete and then it is accounted for
under PAS 40, Investment Property.
d. PAS 16, Property, Plant, and Equipment, until construction is complete and then it is
accounted for under PAS 40, Investment Property.
(Adapted)
5. Which of the following statements best describe 'owner-occupied property', according to
PAS40 Investment property?
a. Property held for sale in the ordinary course of business
b. Property held for use in the production and supply of goods or services
c. Property held to earn rentals
d. Property held for administrative purposes
e. b and d
(ACCA)
Recognition and derecognition
6. Which of the following would be reported as Investment Property?
a. Property that is being constructed or developed for future use as owner-occupied
property.
b. Property that is leased to another entity under a finance lease.
c. Owned-occupied property awaiting sale.
d. Property available for lease.
7. Which of the following would not be reported as investment property?
a. Property owned by the entity and leased out under one or more operating leases.
b. Property held by the entity under finance lease to be leased out under one or more
operating leases
c. Real estate held for an undetermined future use.
d. Property owned by the entity and leased out to another entity under a finance lease.
8. A property will be classified as investment property if
a. it is leased under a finance lease
b. the owner-occupied portion is significant
c. the entity provides relatively insignificant ancillary services (security, janitorial services) to
the occupants of the property
d. it is rented out to a subsidiary and consolidated financial statements are prepared
9. Investment properties are initially recognized at cost which comprises purchase price and any
directly attributable expenditure. Which of the following may be treated as direct costs of
acquisition and, therefore, increases the cost to be initially recognized for the investment
property?
a. Professional fees for legal services and property transfer taxes.
b. Start-up costs
c. Operating losses incurred before the investment property achieves the planned level of
occupancy
d. Abnormal amounts of wasted material, labor or other resources incurred in constructing
or developing the property
10. Which of the following is an investment property?
a. Properties currently being developed for sale
b. Investment properties that are currently being developed for future use as owneroccupied property
c. Property that is leased out to another entity under a finance lease
d. Building rented out in an operating lease where the owner provides minimal services
11. All of the following will not qualify as investment property, except?
a. Machineries that are held for lease
b. Hotels or motels
c. An agricultural land purchased for appreciation purposes
d. Equipment purchased for an indeterminate purpose
12. In accounting for investment property,
I.
The cost model used for property, plant, and equipment is the same as the cost model
used for investment property.
II.
The revaluation model used for property, plant, and equipment is the same as the fair value
model used for investment property.
a. true, true
b. true, false c. false, true
d. false, false
13. Under PAS 40, in determining the fair value of an investment property, which of following
should not be considered?
a. contingent rent
c. furniture included in rented property
b. future capital expenditure
d. air-conditioning in a rental building
14. The fair value of an investment property excludes which of the following?
a. prepaid or accrued operating lease income
b. equipment made an integral part of the property
c. future costs of day-to-day servicing of the asset
d. elevator in a building that is replaced every after 10 years.
15. Identify the correct statements from the following.
I.
Investment property may be valued subsequent to initial recognition using the cost model
or the revaluation model.
II.
Depreciable properties measured under the revaluation model are subject to depreciation.
III.
Depreciable investment properties measured under the fair value model are not subject
to depreciation.
IV.
The fair value of a property classified as investment property measured under the fair value
model is required to be determined more frequently than the fair value of a property
measured under the revaluation model.
a. I, II, III, IV
b. II, III, IV
c. III, IV
d. III
16. An entity has a factory, which due to a decline in activity, is no longer required and is now
classified as held for sale. Which of the following is correct?
a. The property may be classified as investment property if there is commencement of
development with view to sale.
b. The property should be measured using cost model or fair value model but not both.
c. The property should still be depreciated if the property is measured under fair value model.
d. The property is classified as held for sale and is not an investment property.
17. An agricultural land is purchased for its investment potential. Planning permission has not been
obtained for building constructions of any kind. Which of the following is correct?
a. the property should be classified as PPE
b. the property may be classified as investment property because of the lack of permission
c. the property may be classified as investment property despite the lack of permission
d. the property should be classified initially as investment property pending the receipt of
permission; after the receipt of permission, the property should be classified as PPE.
18. A gain arising from a change in the fair value of an investment property for which an entity has
opted to use the fair value model is recognized in
a. Profit or loss for the year.
b. General reserve in the shareholders’ equity.
c. Valuation reserve in the shareholders’ equity.
d. None of the above.
(Adapted)
19. Which of the following terms best describes property held to earn rentals or for capital
appreciation?
a. Freehold property
c. Owner-occupied property
b. Leasehold property
d. Investment property
(ACCA)
20. How does the fair value model differ from the revaluation model?
a. Increases in carrying amount above a cost-based measure are recognized in equity
b. Changes in fair value are recognized through profit or loss
c. a and b
d. neither a nor b
21. Select the correct statement.
a. A leasing company should treat all of its assets used in providing lease services as
investment property
b. Investment properties that are to be disposed of without further development are treated
as investment property until they are derecognized
c. All investment properties held for capital appreciation will be classified as held for sale in
the long run
d. Investment properties being re-developed as investment properties on behalf of third
parties are investment properties
22. The distinguishing characteristic that identifies an investment property from other assets of
an entity is?
a. Changes in fair value of the asset is charged to profit or loss
b. The property do not derive cash flows separate from other entities
c. Generates separately identifiable cash flows from other assets of the entities
d. Earns rental as part of the ordinary operation of the entity
23. Which is not correct?
a. The entire asset is classified as property, plant and equipment if the portion devoted to
investment property is insignificant
b. If the portions of a building held partly for lease and partly for administrative use cannot be
sold separately, the entire property is classified as owner-occupied if the portion used for
administrative use is more significant.
c. If services provided to the occupants of a building is significant in relation to the whole
arrangement, the building is classified as investment property
d. Only the property interest in an asset acquired through a finance lease is classified as
investment property and not the property itself
24. Property interest held by the lessee under an operating lease may be classified and accounted
for:
a. As investment property at fair value
b. As property, plant and equipment at cost model
c. As intangible asset at cost
d. Either a or b
25. The initial cost of a property interest in an operating lease classified as investment property
shall be:
I.
The fair value of the property interest
II.
The present value of the minimum lease payments to the operating lease
a. I only
c. Whichever is lower between I and II
b. II only
d. Whichever is higher between I and II
26. Regarding property interest in an operating lease, which of the following can be classified as
investment property?
a. Property interest in an operating lease that has no reliably determinable fair value
b. Property interest in an operating lease wherein the underlying premises is currently used
by the owner for its regular operation
c. Property interest in an operating lease that is held for appreciation by the lessee or wherein
the underlying premises is held for sub-lease by the lessee
d. Neither a, b nor c
27. Which of the following investment property will have a changed classification in the
Consolidated Financial Statements?
a. Investment properties that are intended by management to be disposed of
b. Investment properties wherein owner occupation commenced during the period
c. Investment properties that are leased out to affiliates or subsidiaries in the consolidated
group
d. Investment properties leased out to equity method investees
(Adapted)
28. Which is correct regarding the fair value model for investment property?
a. Investment properties are initially measured as cost; subsequently, they are measured at
fair value, any fluctuations in fair value are recognized as revaluation in equity similar to
the revaluation model of property, plant and equipment
b. Investment properties are initially measured at fair value, any subsequent changes in fair
value are recognized in profit or loss
c. Change of policy from the fair value model to the cost model is least likely to happen
d. Investment properties are initially recognized at fair value, any subsequent changes in fair
value are recognized as revaluation in equity
29. Which of the following circumstances demonstrate a change from owner-occupied property
to investment property?
a. Commencement of development with a view to sale
b. End of re-development of the investment property for use as investment property
c. Commencement of owner occupation
d. End of use of property for administrative purposes to be leased in one or more operating
leases.
30. Which is incorrect regarding reclassification of investment properties?
a. Under the cost model, the carrying amount of the property when classified as investment
property is the deemed cost of the investment property
b. Under the fair value model, any difference in fair value and the carrying amount of an
inventory classified as investment property is recognized in profit or loss
c. The fair value of an investment property measured under the fair value model that is
reclassified to owner-occupied property at cost model is considered the cost of the owner
occupied property
d. When an owner occupied property under the revaluation model is reclassified to
investment property at cost model, the difference between the carrying amount of the
owner-occupied property and its fair value at the time of reclassification is included in
profit or loss
31. Select the incorrect statement.
a. Investment properties are intended for long-term appreciation while held for sale assets
are non-current assets held for immediate disposal
b. When the fair value of an investment property becomes indeterminable, the fair value
model is foregone
c. Investment property is held for appreciation or incidental operations while owneroccupied property is directly employed in the operations of the entity
d. Investment properties are not held for sale, inventories are held for sale in the ordinary
course of business
32. Which of the following properties fall under the definition of investment property and
therefore within the scope of PAS 40 Investment property?
I.
Land held for long-term capital appreciation
II.
Property occupied by an employee paying market rent
III.
Property being constructed on behalf of third parties
IV.
A building owned by an entity and leased out under an operating lease
a. I, II
b. II, IV
c. I, IV
d. II, III, IV
33. Investment property is initially recognized at
a. cost
b. fair value
c. fair value plus transaction cost
d. cost if the entity follows the cost method; fair value if the entity follows the fair value
method
34. The initial cost of a property interest held under a finance lease and classified as an investment
property shall be
a. the fair value of the property
b. the present value of the minimum lease payments
c. the lower of the fair value of the property and the present value of the minimum lease
payments
d. the fair value of the property or the present value of the minimum lease payments at the
option of the entity
35. Which of the following generally provides the best evidence of fair value for an investment
property?
a. Discounted cash flow projections based on reliable estimates of future cash flows.
b. Recent prices on less active markets with adjustments to reflect changes in economic
conditions.
c. Current prices for properties of a different nature or subject to different conditions.
d. Current prices on an active market for similar property in the same location and condition.
36. When a property interest in an operating lease is classified as investment property?
a. The use of the fair value model becomes compulsory only for similar property interests
b. The use of the fair value model becomes compulsory for all investment properties
c. The use of the fair value model becomes the priority for all investment properties
d. Either a and c
37. IRK ANNOY Co.’s investment in real property has carrying value of ₱1,000,000 under the fair
value model, before adjustment. If the fair market value at end of the year is ₱800,000, how
much should be the gain or loss on transfer if Irk would shift to cost model?
a. gain of ₱200,000 reported as other comprehensive income
b. loss of ₱200,000 reported as other loss in the income statement
c. loss of ₱200,000 reported in equity as decrease in revaluation surplus
d. none
(Adapted)
38. Which of the following does not indicate change in use of the property and therefore precludes
transfers to or from investment property classification?
a. Start of owner occupation
b. End of owner occupation
c. Start of development with a view to sale
d. Entity decides to sell an investment property without development.
39. Under PAS40 Investment property, which of the following additional disclosures must be made
when an entity chooses the cost model as its accounting policy for investment property?
a. The fair value of the property
b. The present value of the property
c. The value in use of the property
d. The net realizable value of the property
(ACCA)
40. PAS40 Investment property gives a choice between two different models as the accounting
policy to be used in relation to investment property. Which of the following disclosures should
be made when the fair value model has been adopted?
a. Depreciation methods used
b. The amount of impairment losses recognized
c. Useful lives or depreciation rates used
d. Net gains or losses from fair value adjustments
(ACCA)
41. In case of property held under an operating lease and classified as investment property
a. The entity has to account for the investment property under the cost model only.
b. The entity has to use the fair value model only.
c. The entity has the choice between the cost model and the fair value model.
d. The entity needs only to disclose the fair value and can use the cost model under PAS 38.
(Adapted)
42. An investment property is derecognized when
a. It is disposed to a third party.
b. It is permanently withdrawn from use.
c. No future economic benefits are expected from its disposal.
d. in any of these
(Adapted)
43. Derecognition of investment property will not be required when
a. it becomes the subject of an operating lease
b. it is sold
c. it becomes the subject of a sale and leaseback deal
d. it becomes the subject of finance lease
44. An entity has a factory that has been shut down for a year due to various reasons, including
worker unrest and strike. The entity plans to sell this factory. It should
a. Classify the factory as investment property.
b. Classify the factory as property held for sale if all the requirements of PFRS 5 Non-current
Assets Held for Sale and Discontinued Operations are met.
c. Classify the factory as property, plant, and equipment under PAS 16.
d. Write off the net book value and disclose that fact in the footnotes to the financial
statements.
(Adapted)
45. Transfers from investment property to property, plant, and equipment are appropriate
a. When there is change of use.
b. Based on the entity’s discretion.
c. Only when the entity adopts the fair value model under PAS 38.
d. The entity can never transfer property into another classification on the balance sheet
once it is classified as investment property.
(Adapted)
Disclosure
46. Which of the following is not a required disclosure involving investment property?
a. The accounting model followed for investment property
b. Whether property interests under operating leases are classified as investment properties
c. The depreciation method used for investment property measured under the fair value
model
d. Criteria to distinguish investment property from owner-occupied property when there is
classification difficulty
47. Which is not a disclosure under the cost model for investment property?
a. The depreciation rates used
b. The fair value of the investment property
c. The net gain or loss from fair value adjustments
d. The depreciation methods used
Chapter 20
Intangible Assets
Chapter 20: Theory of Accounts Reviewer
Objective and scope
1. Which of the following may PAS 38 be applied to?
a. goodwill acquired in a business combination
b. rights arising from exploration and evaluation assets
c. computer software held for sale in the ordinary course of business
d. leasehold improvements
e. web site costs
2. PAS 38 does not apply to all of the following, except
a. receivables without physical substance
b. intangible assets classified as assets held for sale
c. insurer’s contractual rights under insurance contracts
d. assets arising from employee benefits
e. right to utilize another entity’s business concept
3. It is an identifiable non-monetary asset without physical substance.
a. intangible asset
c. ghost asset
b. financial asset
d. dream asset
4. PAS 38 states that an asset meets the identifiability criterion in the definition of an intangible
asset when it:
I.
is separable, i.e., capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related
contract, asset or liability
II.
arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
a. I
b. II
c. I or II
d. none
5. All of the following are essential characteristics of an intangible asset, except
a. Identifiability
c. Future economic benefits
b. Control
d. Subject to amortization
6. Which of the following is one of the essential characteristics of an intangible asset?
a. used in business
c. identifiable
b. subject to amortization d. monetary
7. The definition of an intangible asset
a. requires an intangible asset to be used in business
b. requires an intangible asset to provide future economic benefits through increased
revenues
c. requires an intangible asset to be identifiable to distinguish it from goodwill.
d. requires an intangible asset to be without physical substance, whether the asset is
monetary or not.
8. An asset that cannot be sold, transferred, licensed, rented, or exchanged separately is called
a. goodwill
c. unidentifiable
b. intangible
d. no such thing
9. Which of the following items may qualify for recognition as intangible asset?
a. Market and technical knowledge
b. Employees’ skills developed from training
c. Specific managerial or technical talent
d. Market share and customer loyalty
e. None of these
10. Future economic benefits from an intangible asset may be obtained in various ways which
include
a. restricting others from the use of the asset
b. enjoyment of legal enforceability
c. reduced operating costs
d. separability through transferable right
11. Which of the following is not true regarding control over an intangible asset?
a. An entity controls an asset if the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to those
benefits.
b. The capacity of an entity to control the future economic benefits from an intangible asset
would normally stem from legal rights that are enforceable in a court of law. In the absence
of legal rights, it is more difficult to demonstrate control.
c. Legal enforceability of a right is a necessary condition for control because without it an
entity cannot be able to control the future economic benefits from the asset.
d. Control may be acquired from contractual rights such as rights arising from franchises and
non-competition agreements.
12. Regarding an asset that contains both intangible and tangible components, which of the
following statements is incorrect?
a. the entity uses its judgment on how to classify the asset
b. the asset is classified as property, plant and equipment if the intangible component forms
an integral part of the tangible asset
c. the entire asset is classified as property, plant and equipment if the intangible component
is necessary for the tangible asset to operate
d. the entire asset is classified as intangible asset if the tangible component is necessary for
the intangible asset to operate.
13. Which item listed below does not qualify as an intangible asset?
a. Computer software.
c. Copyrights that are protected.
b. Registered patent.
d. Notebook computer.
(Adapted)
Financial statement presentation
14. The line item intangible asset presented on the face of the statement of financial position
normally includes which of the following items?
a. goodwill
b. leasehold improvements
c. operating software costs
d. significant application software costs
e. all of these
15. Which of the following is not an acceptable financial statement presentation for intangible
assets?
a. Intangible assets accounted for under PAS 38 shall be presented separately from Goodwill.
b. Intangible assets accounted for under PAS 38 are aggregated and presented as one line
item under the heading “Intangible assets” or “Other intangible assets” in the statement
of financial position. The breakdown of the line item is disclosed in the notes.
c. Goodwill is presented separately in a statement of financial position under a line item
described as “Goodwill.”
d. Goodwill is aggregated with other intangible assets and the breakdown is provided in the
notes.
Recognition
16. An intangible asset shall be recognized if management can demonstrate that:
I.
the item meets the definition of intangible asset
II.
it is probable that the expected future economic benefits will flow to the entity
III.
the cost of the asset can be measured reliably.
IV.
the entity becomes a party to the contractual provisions of the intangible asset
V.
the fair value of the intangible asset can be reliably determined
a. I, II, III
b. I, II, III, IV c. I, II, III, IV, V
d. I, II, V
17. At initial recognition, an intangible asset shall be measured
a. at cost
c. at fair value plus direct acquisition costs
b. at fair value
d. any of these
18. Measurement of cost depends on how the intangible asset is acquired. Intangible assets may
be acquired through:
I.
Separate acquisition
II.
Acquisition as part of a business combination
III.
Acquisition by way of a government grant
IV.
Exchanges of assets
V.
Internal generation
a. I, II, III, IV
b. I, V
c. I only
d. any of these
19. When an intangible asset is separately acquired through purchase, which of the following is
incorrect?
a. trade discounts and rebates are deducted from the purchase price whether taken or not
b. any directly attributable cost of preparing the asset for its intended use forms part of initial
cost
c. if settlement is deferred, the intangible asset is recognized at its cash price equivalent, any
difference between this amount and future payments is recognized as interest expense
d. trade discounts and rebates are deducted from the purchase price only when taken
20. MYTHICAL Co. acquired an intangible asset from IMAGINARY Co. during the year. Which of the
following costs incurred by Mythical should not be included as initial cost of the intangible
asset purchased?
a. fees of Mr. Programmer in installing the software purchased
b. fees of Mr. Auditor in auditing the system prior to closing the purchase contract
c. costs of testing the new system whether it is functioning properly
d. advertising costs for the new product that will be produced using the newly acquired
software
21. SPLICE Co. acquired an intangible asset from 2UNITE Co. during the year. Which of the
following costs should be included as initial cost of the intangible asset purchased?
a. costs of training Mrs. Old Baket, the designated employee to operate the newly acquired
asset
b. allocation of administration and other general overhead costs
c. rebates on the invoice price not taken
d. non-refundable sales taxes paid on the purchase
22. SVELTE Co. acquired an intangible asset from SLENDER Co. during the year. All of the following
costs incurred by Svelte related to the newly acquired asset should be expensed immediately,
except
a. initial operating losses incurred while demand for the asset’s output builds up
b. modifications to the intangible asset after it was put to the operating condition originally
intended by Svelte
c. costs incurred while the asset capable of operating in the manner intended by
management has yet to be brought into use
d. salvage proceeds from samples produced during testing
23. The cost of intangible asset acquired in a business combination is its
a. fair value at the acquisition date
b. purchase cost
c. lower of cost or fair value
d. fair value less costs to sell at acquisition date
24. Which of the following provides the most reliable estimate of the fair value of an intangible
asset?
a. quoted market price in an active market
b. price in a binding sale agreement
c. present value of future cash flows
d. any of these
25. If no active market exists for an intangible asset, which of the following is true?
I.
its fair value is the amount that the entity would have paid for the asset, at the acquisition
date, in an arm’s length transaction between knowledgeable and willing parties, on the
basis of the best information available.
II.
Its fair value may be determined by discounting estimated future net cash flows from the
asset
a. True, true
b. True, false
c. False, true d. False, false
26. Intangible assets acquired by way of government grant may be initially recognized at
a. fair value
b. nominal amount
c. zero
d. any of these
27. During the year, ENDEAVOR Co. received an intangible asset from 2TRY Co. in an exchange
transaction with commercial substance. Which of the following statements is true?
a. Endeavor measures the intangible asset received at the fair value of the intangible asset
given up minus cash paid
b. Endeavor recognizes gain or loss on the exchange for the difference between the fair value
of the asset received and the carrying amount of the asset received
c. If Endeavor cannot determine the fair value of the asset received, it shall measure the
intangible asset received using the fair value of the intangible asset given up.
d. Endeavor recognizes gain or loss on the exchange for the difference between the fair value
of the asset given up and the carrying amount of the asset given up, regardless of whether
cash is received or paid
28. During the year, ZENITH Co. received an intangible asset from HIGHEST POINT Co. in an
exchange transaction that lacks commercial substance. Which of the following statements is
incorrect?
a. Zenith should measure the asset received at the carrying amount of the asset given up
b. Zenith should not recognize any gain or loss on the sale unless cash is paid on the exchange
c. Zenith should measure the asset received at an amount equal to the difference between
the initial cost of the asset given up and its related accumulated amortization
d. Zenith should not recognize any gain or loss on the sale regardless of whether cash is
received or paid.
29. To assess whether an internally generated intangible asset meets the criteria for recognition,
an entity classifies the generation of the asset into research phase and development phase.
Which of the following statements is true?
a. If an entity cannot distinguish the research phase from the development phase, the entity
treats expenditures as if they were incurred in the development phase only.
b. Expenditures incurred in the research phase shall be recognized as expense when incurred.
c. An intangible asset may be recognized for expenditures incurred in research phase.
d. An in-process research and development (R&D) project acquired as part of a business
combination is expensed if a component is research.
30. Which of the following transactions may not give rise to recognition of an intangible asset?
a. HEARTY Co. acquired SINCERE Co. in a business combination. Among the items acquired is
an R&D project composed mainly of expenditures incurred by Sincere in research phase.
b. Expenditures incurred in development phase that meet all of the conditions for recognition
as intangible asset
c. Expenditures incurred in research phase for an invention that is highly viable
d. Registration and legal fees for a patent filed with the IPO.
31. Which of the following is included in research and development expense for a period?
a. The total cost of a building with useful life of 25 years acquired during the year to be used
in various research and development projects
b. Depreciation on a building used for research and development
c. The cost incurred during the year to ensure quality control for existing production
processes
d. The cost incurred during the year for research activities performed for another entity.
(Adapted)
32. Intangible assets have all of the following characteristics, except:
a. their ownership confers rights, but no physical substance.
b. they have no physical substance.
c. they are relatively long-lived.
d. they provide benefits to current operations only.
(AICPA)
33. Which of the following statements is correct?
a. Some intangible assets convey exclusive rights which are represented only by tangible
physical substance.
b. Intangible assets used in the operation of a business are always long term.
c. The process of recording the expiration of the economic benefits of an intangible asset is
called depletion.
d. Intangible assets are obtained in two ways: acquisition from an external source or
internally developed.
(AICPA)
34. Which of the following statements is true?
a. The only cost of an internally developed patent that should be capitalized as patent cost
are legal fees and other registration costs.
b. An identifiable tangible asset developed internally is never recognized in the accounts as
an asset.
c. Intangible assets usually have a residual value that must be considered in the amortization
of cost.
d. An intangible asset is usually amortized by a credit to an income account.
(Adapted)
35. For some purposes, assets are classified as identifiable and unidentifiable. Which of the
following is an unidentifiable asset?
a. cash in bank
c. goodwill
b. patent
d. prepaid insurance
(Adapted)
36. Goodwill should properly appear on the financial statements of an entity which:
a. has purchased another entity
b. consistently operates profitably
c. consistently reports above-normal profits
d. meets all of the conditions regarding legal goodwill.
(AICPA)
37. Costs incurred by a company that developed its own goodwill internally should be :
a. capitalized and amortized as the company profits increased.
b. capitalized and amortized over the useful life of the goodwill.
c. expensed when incurred as a current operating expense.
d. capitalized and amortized over a period not to exceed 40 years.
(AICPA)
38. According to PAS 38 Intangible assets, the recognition criteria for an intangible asset include
which of the following conditions?
a. It must be measured at cost
b. Its cost can be measured reliably
c. It is probable that future economic benefits will arise from its use
d. It is an integral part of the business
e. b and c
(ACCA)
39. Which of the following items qualify as an intangible asset under PAS 38?
a. Advertising and promotion on the launch of a huge product.
b. College tuition fees paid to employees who decide to enroll in an executive M.B.A. program
at Harvard University while working with the company.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
(Adapted)
40. Which of the following assets typically are amortized?
Patents
Trademarks
a.
No
No
b.
Yes
Yes
c.
No
Yes
d.
Yes
No
(AICPA)
41. The creative chief executive of a corporation who is personally responsible for numerous
inventions and innovations is not reported as an asset on the corporation's statement of
financial position. The accounting principle/guideline that prevents the corporation for
reporting this person as an asset is
a. Conservatism
b. Cost
c. Going concern d. Materiality
(AICPA)
42. What is the proper time or time period over which to match the cost of an intangible asset
with revenues if it is likely that the benefit of the asset will last for an indefinite period?
a. Forty years
b. Fifty years
c. Immediately
d. At such time as reduction in value can be quantitatively determined.
(AICPA)
43. Which of the following expenditures qualifies for asset capitalization?
a. Cost of materials used in prototype testing
b. Costs of testing a prototype and modifying its design
c. Salaries of engineering staff developing a new product
d. Legal costs associated with obtaining a patent on a new product
(AICPA)
44. Which of the following statements is correct concerning start-up costs?
a. Costs of start-up activities, including organization costs, should be expensed as incurred.
b. Costs of start-up activities, including organization costs, should be capitalized and
expensed only if an impairment exists.
c. Costs of start-up activities, including organization costs, should be capitalized and
amortized on a straight-line basis over the lesser of the estimated economic life of the
company, or 60 months.
d. Costs of start-up activities should be capitalized and amortized on a straight-line basis over
the lesser of the estimated economic life of the company, or 60 months, while organization
cost should be expensed as incurred.
(AICPA)
45. Which of the following incorrectly relate(s) to accounting for long-lived assets?
I.
Goodwill arising from a consolidation which appears among the assets on the consolidated
balance sheet of a parent company and its only subsidiary shows that the subsidiary was
acquired at a price that was less than the underlying book value of its tangible assets.
II.
Provisions for renewal or extension may alter a specified limit on useful life of intangible
assets thus affecting the amortization amount.
III.
Amortization policy on intangible assets should be continually evaluated to determine
whether later events and circumstances necessitate revision of estimates of useful lives.
IV.
Costs to develop a product or process to be patented may form part of the costs of patents.
V.
To be consistent, amortization policy of intangible assets should not be evaluated often
even if later events and circumstances warrant revised estimates of useful lives.
a. IV, V
b. II, III
c. II, III, IV
d. I, IV, V
46. Goodwill arising from a business combination should:
a. be expensed in the year of acquisition
b. be amortized over its economic life
c. not be amortized but tested for impairment at least annually
d. be written off after (40) years or (20) years depending on the GAAP adopted
(AICPA)
47. Accounting for intangible assets involves the same kind of problem as accounting for other
long-lived assets, such as:
a. accounting after acquisition (amortization)
b. accounting if the values decline substantially & permanently
c. determining an initial carrying amount
d. all of these
(AICPA)
48. Improvements to leased facilities are included under property, plant and equipment if:
Material in amount
Terms extend over long period
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(AICPA)
49. Which of the following is not a required characteristics for an item to be classified as an
intangible asset?
a. lack of physical substance
b. ownership confers some exclusive right, privilege or competitive advantage
c. estimated life should not exceed forty years
d. provide future benefits by enhancing revenues or reducing costs
(AICPA)
50. The following statements relate to intangible assets:
I.
All intangible assets have no physical existence, but not all assets having no physical
existence are intangible assets.
II.
Under current accounting practice, intangible assets are classified into those with finite
useful lives such as patents and those with indefinite useful lives such as trademark.
III.
IV.
Research and development costs must be expended for financial reporting purposes in the
year in which the costs are incurred even though the costs may provide benefits to future
periods.
Only when intangible assets are acquired from other entities can they be recognized as
assets.
State whether the foregoing statements are false.
a. All the statements are false.
c. Only two statements are false.
b. Only one statement is false.
d. Three statements are false.
51. Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. generally expensed as incurred.
d. expensed only if they have a limited life.
(AICPA)
52. The cost of an intangible asset includes all of the following except
a. purchase price.
c. other incidental expenses.
b. legal fees.
d. all of these
(AICPA)
53. Are the following statements true or false, according to PAS 38 Intangible assets?
1) The cost of an asset should include the amount of any cash or cash equivalents paid to
acquire the asset.
2) The cost of an asset should include non-cash consideration measured at fair value.
a. False False
b. False True
c. True False
d. True True
(ACCA)
Subsequent measurement
54. Subsequent to initial recognition, an intangible asset may be measured using
a. cost model or revaluation model
c. cost model only
b. cost model or fair value model
d. either a or b
55. The revaluation model may be used for an intangible asset
a. which has an active market
b. whose fair value can be determined reliably through a valuation technique such as
discounted future cash flows
c. which has an active market and a residual value
d. the revaluation model is applicable only to items of PPE but not to intangible assets
56. Which of the following factors should not be considered in determining the useful life of an
intangible asset?
a. Legal, regulatory, or contractual provisions.
b. Expected action of competitors.
c. Provisions for renewal or extension of life.
d. Initial cost
(AICPA)
57. Which of the following is not considered in estimating the useful life of intangible assets?
a. effects of obsolescence, demand and competition
b. the salvage value of the asset
c. the service life expectancies of individuals or groups of employees
d. expected actions of competitors
(AICPA)
58. Factors considered in determining an intangible asset’s useful life include all of the following
except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life
d. the amortization method used.
(AICPA)
59. Amortization of intangible assets results primarily from the application of the:
a. matching principle
c. cost principle
b. full-disclosure
d. revenue principle
(Adapted)
60. Once recognized, intangible assets can be carried at
a. Cost less accumulated amortization.
b. Cost less accumulated amortization and less accumulated impairment losses.
c. Revalued amount without deduction for accumulated amortization.
d. Cost plus a notional increase in fair value since the intangible asset is acquired.
(Adapted)
61. Amortization of an intangible asset is usually recorded as a:
a. debit to retained earnings and a credit to a contra account.
b. debit to retained earnings and a credit to the intangible asset account.
c. debit to retained earnings and a credit to a contra account.
d. debit to amortization expense and a credit to a contra account.
(AICPA)
62. Which of the following methods of cost allocation cannot be used for intangible assets?
a. Declining balance
c. Units of production
b. Revenue method
d. Effective interest method
63. Which of the following methods of cost allocation can be used for intangible assets?
a. straight line
c. units-of-production
b. revenue method
d. any of these
64. Under PAS 38, the default cost allocation method for intangible assets is?
a. revenue method
c. SYD
b. straight line
d. no default method
65. JOCUND Co. has an intangible asset, which it estimates will have a useful life of 10 years, while
MERRY Co. has goodwill, which has an indefinite life. Which company should report
amortization in its financial statements?
JOCUND MERRY
JOCUND
MERRY
a. Yes
Yes
c. No
Yes
b. Yes
No
d. No
No
(AICPA)
66. According to PAS 38 Intangible assets, which of the following criteria are relevant in
determining the useful life of an intangible asset?
a. obsolescence
d. residual value
b. amortization period
e. a and c
c. expected usage
(ACCA)
67. According to PAS 38, the residual value of an intangible asset is presumed
a. equal to fair value in active market
b. equal to the amount the third party wants to buy
c. equal to a conservative estimation
d. zero
68. In accordance with generally accepted accounting principles, which of the following methods
of amortization is normally recommended for intangible assets?
a. SYD
c. units of production
b. straight-line
d. double declining balance
(AICPA)
69. On January 1, 20x1, an intangible asset with a thirty-five year estimated useful life was
acquired. On January 1, 20x6, a review was made of the estimated useful life and it was
determined that the intangible asset had an estimated useful life of forty-five more years. As
a result of the review
a. The original cost at January 1, 20x6 should be amortized over a fifty-year life.
b. The original cost at January 1, 20x1 should be amortized over the remaining thirty-year life.
c. The unamortized cost at January 1, 20x6 should be amortized over a forty-year life.
d. The unamortized cost at January 1, 20x6 should be amortized over a thirty-five year life.
(AICPA)
70. A brand name that was acquired separately should initially be recognized, according to PAS 38
Intangible assets, at
a. recoverable amount
c. fair value
b. either cost or fair value at the choice of the acquirer
d. cost
(ACCA)
71. Which of the following should be expensed as incurred on a franchise with an estimated useful
life of ten years?
a. Amount paid to the franchisor for the franchise.
b. Periodic payments to a company, other than the franchisor, for that company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
d. Periodic payments to the franchisor based on the franchisee’s revenues.
(AICPA)
72. Are the following statements true or false, according to PAS 38 Intangible assets?
1) Intangible assets acquired in a business combination should only be recognized if they have
already been recognized by the entity being acquired.
2) Intangible assets acquired in a business combination should not be recognized separately
from goodwill.
a. False False
b. False True c. True False d. True True
(ACCA)
73. A change in the amortization method or amortization rate for an intangible asset is accounted
for:
a. prospectively
b. retrospectively
c. currently d. gracefully
74. Which of the following factors influence(s) the Brand strength of a company?
I. Customer loyalty
II. Statutory protection
III. Brand Management by the company
a. I, II
b. I
c. II
d. I, II, III
75. Which of the following is not specifically an identifiable intangible asset?
a. Kina Rogers franchise
c. secret formula for a Krabby Patty
b. secret processes
d. goodwill
76. Are the following statements true or false, according to PAS 38 Intangible assets?
1) Intangible assets cannot be treated as having an indefinite useful life.
2) Intangible assets with a finite useful life should be measured at cost and tested annually
for impairment.
a. False False
b. False True
c. True False
d. True True
(ACCA)
77. According to PAS 38 Intangible assets, amortization of an intangible asset with a finite useful
life should commence when
a. it is first recognized as an asset
b. it is available for use
c. it is probable that it will generate future economic benefits
d. the costs can be identified with reasonable certainty
(ACCA)
78. Are each of the following factors relevant, according to PAS 38 Intangible assets, in
determining the annual amortization expense on an intangible asset?
I.
The cost.
II.
The amortization method.
a. Not relevant, Not relevant
c. Relevant, Not relevant
b. Not relevant, Relevant
d. Relevant, Relevant
(ACCA)
79. Which of the following is not a long-term investment?
a. shares held to exert influence on another entity
b. land held for speculation
c. trademarks
d. cash surrender value of life insurance
(Adapted)
80. Which of the following would not be included in research and development expense for
APATHETIC Co. for current period?
a. The portion of plant assets, devoted completely to research for APATHETIC, which is
amortized in the current period.
b. The cost of materials used in conducting research for APATHETIC during the current period.
c. Cash paid by APATHETIC to INDIFFERENT Co. for research performed by INDIFFERENT Co.
for APATHETIC in the current period.
d. The cost of labor incurred by APATHETIC in conducting research for UNCONCERNED Co.
during the current period.
(Adapted)
81. Which of these statements about research and development expenditure are correct?
1. If certain conditions are satisfied, research and development expenditure must be
capitalized.
2. One of the conditions to be satisfied if development expenditure is to be capitalized is that
the technical feasibility of the project is reasonably assured.
3. If capitalized, development expenditure must be amortized over a period not exceeding
five years.
4. The amount of capitalized development expenditure for each project should be reviewed
each year. If circumstances no longer justify the capitalization, the balance should be
written off over a period not exceeding five years.
5. Development expenditure may only be capitalized if it can be shown that adequate
resources will be available to finance the completion of the project and all other conditions
are also met.
a. 2 and 5
b. 3, 4 and 5
c. 2, 3 and 5
d. 1, 2 and 3
(Adapted)
82. Which of the following is a true statement concerning research and development (R&D) costs?
a. All R&D costs, without exception, must be charged to expense when incurred.
b. R&D costs can only be amortized over a life of 40 years or more.
c. Almost any treatment is acceptable for handling R&D costs.
d. Financial statements must disclose total R&D costs charged to expense in the period
(Adapted)
83. Total research and development expense for CUNNING, Inc. would include which of the
following items:
I.
Depreciation on CUNNING, Inc. property, plant and equipment used in CUNNING, Inc.'s
development projects
II.
Amortization of CUNNING, Inc. patents used in CUNNING, Inc.'s research
III. Resources paid by CUNNING, Inc. for SLY Co.'s research efforts performed for CUNNING,
Inc. research and development projects
IV.
CUNNING, Inc. cost of research performed for CLEVER Corporation's research and
development projects
V.
CUNNING, Inc. costs of internal development efforts which culminated in a patent granted
to CUNNING, Inc.
VI.
Overhead costs allocated to CUNNING Inc.’s research and development efforts which took
the place of another CUNNING, Inc. activities
VII. Costs to train CUNNING, Inc. employees to run machines used in ongoing production.
These machines had earlier been developed by CUNNING, Inc.
a. I, II, III
b. I, II, III, IV, V
c. I, II, III, V, VI
d. all of these
(Adapted)
84. A newly set up dot-com entity has engaged you as its financial advisor. The entity has recently
completed one of its highly publicized research and development projects and seeks your
advice on the accuracy of the following statements made by one of its stakeholders. Which
one is it?
a. Costs incurred during the “research phase” can be capitalized.
b. Costs incurred during the “development phase” can be capitalized if criteria such as
technical feasibility of the project being established are met.
c. Training costs of technicians used in research can be capitalized.
d. Designing of jigs and tools qualify as research activities.
(Adapted)
85. Which of the following is an example of activities that would typically be excluded in research
and development costs?
a. Design, construction, and testing of preproduction prototypes and modes.
b. Laboratory research aimed at discovery of new knowledge.
c. Quality control during commercial production, including routine testing of products.
d. Testing in search for, or evaluation of, product or process alternatives.
(AICPA)
86. Which of the following is a research and development cost?
a. Development or improvement of techniques and processes.
b. Offshore oil exploration that is the primary activity of a company.
c. Research and development performed under contract for others.
d. Market research related to a major product for the company.
(AICPA)
87. HEARTY Company and WARM-SINCERE Company were combined in a purchase transaction.
HEARTY was able to acquire WARM-SINCERE at a bargain price. The sum of the market or
appraised values of identifiable assets acquired less the fair value of liabilities assumed
exceeded the cost to HEARTY. After revaluing noncurrent assets to zero, there was still some
"negative goodwill." Proper accounting treatment by HEARTY is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
(AICPA)
88. Goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.
(AICPA)
89. Which of the following research and development related costs should be capitalized and
amortized over current and future periods?
a. Research and development general laboratory building which can be put to alternative
uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research project
currently in process
(AICPA)
90. Which of the following principles best describes the current method of accounting for research
and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
(AICPA)
91. How should research and development costs be accounted for, according to PAS 38?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality of
the amounts involved.
d. Must be expensed in the period incurred unless development costs incurred qualify under
the recognition criteria set forth under PAS 38.
92. Which of the following costs should be excluded from research and development expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing
stage
(AICPA)
93. If a company constructs a laboratory building to be used as a research and development
facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from
the facility.
(AICPA)
94. What is the proper time or time period over which to match the cost of an intangible asset
with revenues if it is likely that the benefit of the asset will last for a determinate but very long
period of time?
a. Forty years.
b. Fifty years.
c. Shorter of legal life and useful life
d. At such time as diminution in value can be quantitatively determined.
(Adapted)
95. How should research and development costs be accounted for according to current standards?
a. Must be capitalized when incurred and then amortized over their estimated useful lives.
b. Must be expensed in the period incurred unless contractually reimbursable.
c. May be either capitalized or expensed, when incurred, depending upon the facts
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
research expenditure will have significant future benefits.
(AICPA)
96. The current trend in the accounting treatment for research and development costs is to
a. Capitalize all costs as assets when incurred and amortize when revenue are earned.
b. Treat all costs as current expenses as incurred.
c. Capitalize selectively, and predetermine the conditions that would require capitalization
as well as those that would be written off as current expenses.
d. Accumulate all costs in a special intangible asset account until a determination can made
as to the degree of future benefits.
(AICPA)
97. Research and development costs, under prevailing practice, may be accounted for as follows:
a. Research and development costs related to successful projects should be capitalized;
others expensed.
b. Research and development costs related to unsuccessful projects should be capitalized;
others expensed.
c. Research and development costs should be expensed as incurred.
d. Research and development costs should be allocated between successful and unsuccessful
projects.
e. Research and development costs, whether related to successful or unsuccessful projects,
should be capitalized.
(AICPA)
98. An activity that would be expensed currently as research and development costs is the
a. Testing in search for or evaluation of product or process alternatives.
b. Adaptation of an existing capability to a particular requirement or customer’s need as a
part of continuing commercial activity.
c. Legal work in connection with patent applications or litigation, and the sale or licensing of
patents.
d. Engineering follow-through in an early phase of commercial production.
(AICPA)
99. Which of the following expenses can be capitalized?
I.
Research costs incurred in developing a new medicine.
II. Purchase of intangibles for R&D activities which have alternative future uses.
III.
Salaries of research personnel.
a. II only
b. I & II
c. III only
d. none of them
100. Are the following statements true or false, according to PAS 38 Intangible assets?
(1) Expenditure during the research phase of a project may sometimes be capitalized as an
intangible asset.
(2) Expenditure during the development phase of a project may sometimes be capitalized as
an intangible asset.
a. False False
b. False True c. True False d. True True
(ACCA)
101. Are the following statements in relation to development true or false, according to PAS 38
Intangible assets?
(1) The products being developed should have already been put into commercial production
or use.
(2) Development involves the application of research findings.
a. False False
b. False True
c. True False
d. True True
(ACCA)
102.
a.
b.
c.
d.
e.
Which of the following is not considered as research and development costs?
Testing in search for product alternatives
Legal work on patent application
Modification of design of a process
Searching for application of new research findings
The design of tools, molds and dies involving new technology.
103. According to PAS 38, which of the following is true for an acquiring company in connection
with in-process research and development held by an acquired company at the date of
acquisition?
a. The amount that has been spent on these projects is expensed, but any value in the project
in excess of the amount spent is capitalized by the acquiring company.
b. The value of in-process research and development is capitalized because the acquiring
company has a clear vision of its value.
c. In-process research and development is still research and development and the value is
always expensed by the acquiring company.
d. The value of in-process research and development is expensed unless it has a direct
connection with a product or asset owned by the acquiring company.
(Adapted)
104. AJAR Airline purchased airline gate rights at SLIGHTLY OPEN International Airport for
₱2,000,000 with a legal life of five years. However, AJAR has the ability and right to extend the
rights every ten years for an indefinite period of time. Over what period of time should AJAR
amortize the gate rights?
a. 5 years.
c. 40 years.
b. 15 years
(AICPA)
d. The rights should not be amortized.
105. The following statements relate to accounting for intangible assets. Choose the incorrect
statement.
a. Because it has an indefinite life, a trademark need not be amortized.
b. If a company purchases a competing patent to ensure revenue-generating capability of a
previously owned patent, the cost of the purchased patent should be expensed at the time
of purchase.
c. The process of assigning the cost of an intangible asset to operations in a systematic and
rational manner is called amortization.
d. Goodwill may represent the excess of the cost of an acquired company over the sum of
the fair values assigned to identifiable assets acquired less liabilities assumed.
106.
I.
II.
Consider the following statements and state whether they are correctly stated or not.
Goodwill is recorded by accountants only if it is purchased.
A copyright’s legal life is 30 years and it gives its owner protection against writings and
literary productions being reproduced illegally.
a. I
b. II
c. I and II
d. neither I nor II
107. A patent purchased from another entity which had held it for 3 years should be amortized
over
a. the asset’s remaining useful life, not to exceed 37
b. any number not to exceed to 40
c. 17 years
d. the asset’s remaining useful life, not to exceed 17
(Adapted)
108. Which of the following intangible assets should be amortized over the periods of estimated
benefit?
a. research and development costs related to a successful product
b. goodwill arising from the purchase of an existing business
c. costs incurred in organizing a corporation
d. patent right purchased from an inventor
(AICPA)
109. In a case of a patent infringement suit, the suit may be either successful or lost. The results
of the legal decision are accounted for as follows:
a. if successful, debit the cost of the lawsuit to patent expense.
b. if lost, debit the cost of the lawsuit to extraordinary loss.
c. if lost, write the balance in the patent account.
d. after recognizing the results of the lawsuit as an expense, amortize the remaining balance
in the patent occur over its remaining economic life.
(Adapted)
110. A purchased patent has a remaining legal life of 15 years. It should be
a. Expensed in the year of the acquisition.
b. Amortized over 15 years regardless of its useful life.
c. Amortized over its useful life if less than 15 years.
d. Not amortized.
(AICPA)
111. A corporation which incurs costs in defending a patent in an infringement suit should:
a. expense currently the costs of all suits.
b. capitalize only the costs of unsuccessful suits.
c. capitalize only the costs of successful suits.
d. capitalize the cost of all such suits.
(Adapted)
112. Should the following fees associated with the registration of an internally developed patent
be capitalized? (Item#1) Legal fees; (Item#2) Registration fees
a. No, No
b. No, Yes
c. Yes, No
d. Yes, Yes
(AICPA)
113. Which of the following statements concerning patents is correct?
a. Legal costs incurred to successfully defend an internally developed patent should be
expensed immediately in the period incurred.
b. Legal fees and other direct costs incurred in registering a patent should be capitalized and
amortized on a straight-line basis over a five-year period.
c. Research and development contract services purchased from others and used to develop
a patented manufacturing process should be capitalized and amortized over the patent’s
economic life.
d. Research and development costs incurred to develop a patented item should be
capitalized and amortized on a straight-line basis over seventeen years.
(AICPA)
114. Which of the following amounts incurred in connection with a trademark should be
capitalized?
Cost of successful defense
Registration fees
a.
no
yes
b.
yes
no
c.
no
no
d.
yes
yes
(AICPA)
115. Which of the following should not be capitalized as part of the cost of an internally
developed patent?
a. costs to develop the product or process to be patented
b. patent registration fees
c. legal fees incurred in successfully defending a patent infringement suit.
d. legal fees associated with registration of the patent
e. a and c
(AICPA)
116. The cost of purchasing patent rights for a product that might otherwise have seriously
competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product
whose market would have been impaired by competition from the newly patented
product.
(AICPA)
117. Inventor Corporation was granted a patent on a product on January 1, 20x1. To protect its
patent, the corporation purchased on January 1, 2x10 a patent on a competing product which
was originally issued on January 10, 20x6. Because of its unique plant, Inventor Corporation
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 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 11 years.
d. expensed in 2x10.
(AICPA)
118. Plaintiff, Inc. went to court this year and successfully defended its patent from
infringement by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
(AICPA)
119. Which of the following is not an intangible asset?
a. Trade name
d. Copyrights
b. R&D expense
e. No answer
c. Franchise
(AICPA)
120. Which of the following intangible assets should not be amortized?
a. Copyrights
c. Perpetual franchises
b. Customer lists
d. No answer
(AICPA)
121. Under current PFRSs, when a patent is amortized, the credit is made to
a. the patent account.
b. an accumulated amortization account.
c. a deferred credit account.
d. an expense account.
(Adapted)
122. Which of the following confers exclusive right to conduct business in a particular territory
a. trademark
b. franchise
c. patent
d. copyright
(Adapted)
123. An exclusive right or privilege received by a business or individual to perform certain
business functions or use certain products or services is referred to as:
a. patents
b. copyright
c. franchise
d. none of these
124. If a franchise becomes worthless prior to the end of its estimated useful life, the
unamortized balance in the franchise account should be written off as a(n):
a. impairment loss
c. prior period adjustment
b. operating expense
d. change in estimate
(Adapted)
125. Which of the following statements is incorrect?
a. An intangible asset acquired by issuance of ordinary shares should generally be valued at
the fair value of the intangible asset.
b. Amortization of intangible assets involves an adjusting entry that should not be reversed
in the next accounting period.
c. An unidentifiable asset developed internally is never recognized in the accounts as an
asset.
d. All annual payments made by a franchisee to the franchiser for assistance should be
capitalized as part of the cost of the franchise.
(Adapted)
126. A franchise should be classified on the balance sheet as a (n):
a. operational asset
c. intangible asset
b. deferred charge
d. current asset
(Adapted)
127. Which of the following cost related to computer software is capitalized to an intangible
asset account?
a. Cost to duplicate discs and manuals for sale
b. Development costs preceding technological feasibility
c. Coding and testing costs incurred after technological feasibility but before completing the
product master
d. Cost of customer service
(Adapted)
128. If a business purchased a new computer system software which forms an integral part of
a machine, the account to be debited is
a. machine
c. intangible asset
b. computer building
d. Bill Gates
129. OUTLANDISH and STRANGE are rival firms which are similar in size and scope of operations.
OUTLANDISH has decided not to capitalize but expense software development costs in Year 1.
STRANGE on the other hand, has decided to capitalize a similar amount of development costs,
to be amortized over 5 years. Which of the following is/are true over the next 5 years?
I.
STRANGE will show higher equity than OUTLANDISH
II.
The difference in STRANGE's assets and OUTLANDISH's assets will be lower in Year 3 than
in Year 2.
III.
The total tax deductions due to the development costs are equal for the two firms.
IV.
After technological feasibility, all software development costs can be capitalized under PAS
38.
a. III only
b. II & III
c. I & II
d. I, II, III, IV
130.
a.
b.
c.
d.
Which of the following costs can be capitalized?
drilling costs for oil wells
public relations costs to develop goodwill
research and development
internally developed brand
131. Accounting rules differentiate research and development activities from activities not
considered research and development. Which one of the following is not considered a
research and development activity?
a. Periodic design changes to existing products.
b. Testing in search of product processing alternatives.
c. Modification of the design of a process.
d. Laboratory research intended for the discovery of a new product.
132. On January 1, 20x1, Joca purchased equipment for use in developing a new product. Joca
uses the straight-line depreciation method. The equipment could provide benefits over a 10year period. However, the new product development is expected to take five years, and the
equipment can be used only for this project. Joca 's 20x1 expense equals:
a. The total cost of the equipment.
One-fifth of the cost of the equipment.
c. One-tenth of the cost of the equipment.
d. Zero.
(AICPA)
b.
Disclosures
133. Which of the following disclosures is not required by PAS 38?
a. Useful lives of the intangible assets.
b. Reconciliation of carrying amount at the beginning and the end of the year.
c. Contractual commitments for the acquisition of intangible assets.
d. Fair value of similar intangible assets used by its competitors.
(Adapted)
134. All of the following are required disclosures for intangible assets except
a. Whether the useful lives are indefinite or finite and, if finite, the useful lives or the
amortization rates used
b. Amortization methods used for intangible assets with finite useful lives
c. Gross carrying amount and any accumulated amortization (aggregated with accumulated
impairment losses) at the beginning and end of the period
d. A reconciliation of the carrying amount at the beginning and end of the period showing
increases and decreases to intangible assets and related accumulated amortization and
accumulated impairment loss.
e. Net carrying amount of intangible assets. Accumulated amortization is not required to be
disclosed because periodic amortization is deducted directly from the related asset
account.
Chapter 21
Impairment of Assets
Chapter 21: Theory of Accounts Reviewer
1. PAS 36 applies to which of the following assets?
a. Inventories.
c. Assets held for sale.
b Financial assets.
d. Property, plant, and equipment.
2. PAS 36 Impairment of assets should be applied in accounting for the impairment of which of
the following types of asset?
a. Assets arising from construction contracts
b. Non-current assets held for sale
c. Investment properties measured at fair value
d. Non-current assets measured at cost
3. PAS 36 applies to all of the following assets, except
a. Intangible assets
b. Property, plant and equipment measured under revaluation surplus
c. Investment property measured at fair value
d. Investment in associates
4. Which of the following conditions must exist in order for an impairment loss to be recognized?
I.
The carrying amount of the long-lived asset is less than its fair value.
II.
The carrying amount of the long-lived asset is not recoverable.
a. I only. b. II only.
c. Both I and II.
d. Neither I nor II.
(Adapted)
5. A cash-generating unit is:
a. any group of assets that has independent cash flows
b. the smallest group of assets that generates independent cash flows from continuing use
c. any group of assets which forms part of the management reporting structure
d. a reporting segment
6. Estimates of future cash flows would normally cover projections over a maximum of:
a. eight years
b. 12 years
c. five years d. 20 years
(ACCA)
7. When deciding upon the discount rate to be used, which factors should not be taken into
account?
a. Risks specific to the asset which future cash flow estimates have not been adjusted
b. Corporate lending rates
c. Cost of capital
d. Risks which relate to the asset for which future cash flow estimates have been adjusted
(ACCA)
8. Value in use is:
a. the discounted present value of future cash flows arising from use of the asset and from
its disposal
b. the realizable value
c. the carrying amount
d. the higher of an asset's fair value less costs of disposal and its market value
9. Which impairment losses should never be reversed?
a. Loss on a cash generating unit
c. Loss on leases
b. Loss on property, plant and equipment
d. Loss on goodwill
(ACCA)
10. Under PAS 36, an asset is impaired if the asset’s
a. fair value is less than carrying amount
b. carrying amount exceeds fair value
c. recoverable amount exceeds carrying amount
d. carrying amount is greater than recoverable amount.
11. If fair value less costs of disposal is higher than value in use
a. the asset is impaired
b. the asset is not impaired
c. there is no need to compute for carrying amount
d. the recoverable amount is the fair value less costs of disposal
12. If there is no reason to believe that an asset’s value in use materially exceeds its fair value less
costs of disposal
a. the asset is not impaired
b. there is no need to compute for carrying amount
c. the recoverable amount is the value in use
d. there is no need to determine future cash flows
13. The asset is not impaired if
a. carrying amount exceeds recoverable amount
b. fair value is way above value in use
c. recoverable amount is less than the carrying amount
d. carrying amount is less than recoverable amount
14. Goodwill should be tested for value impairment at which of the following levels?
a. Each identifiable long-term asset. c. Each acquisition unit.
b. Each reporting unit.
d. Entire business as a whole.
(AICPA)
15. After an impairment loss is recognized, the adjusted carrying amount of the cash-generating
unit shall be its new accounting basis. Which of the following statements about subsequent
reversal of a previously recognized impairment loss is correct?
a. It is prohibited to reverse impairment loss on goodwill allocated to a cash-generating unit
b. It is required when the reversal is considered permanent.
c. It must be disclosed in the notes to the financial statements.
d. It is encouraged, but not required.
(AICPA)
16. Property, plant, and equipment must be reviewed for impairment when which of the following
events occurs?
a. A significant change in the asset's estimated useful life occurs
b. The costs of constructing the asset are less than the budgeted amount
c. A current period operating loss occurs
d. Investing activities produce a negative cash flow
(Adapted)
17. Which of the following regarding goodwill is correct?
a. Goodwill should be amortized over a five-year period.
b. Goodwill should be amortized over its expected useful life.
c. Goodwill should be recorded and never adjusted.
d. Goodwill should be recorded and periodically evaluated for impairment.
(AICPA)
18. Goodwill should be tested periodically for impairment
a. For the entity as a whole.
b. At the subsidiary level.
c. At the industry segment level.
d. At the operating segment level or one level below.
(AICPA)
19. Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the period
benefited.
d. not be amortized.
(AICPA)
20. A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the present value of expected future net cash flows.
b. carrying amount and its fair value less costs of disposal.
c. fair value and the expected future net cash flows.
d. recoverable amount and carrying amount
21. If the fair value less costs of disposal cannot be determined
a. The asset is not impaired.
b. The recoverable amount is the value-in-use.
c. The net realizable value is used.
d. The carrying value of the asset remains the same.
(Adapted)
22. If assets are to be disposed of
a. The recoverable amount is the fair value less costs of disposal.
b. The recoverable amount is the value-in-use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
(Adapted)
23. Which of the following is the best evidence of a fixed asset’s fair value less costs of disposal?
a. An asset that is trading in an active market.
b. The price in a binding sale agreement.
c. Information available that determines the disposal value of the asset in an arm’s length
transaction.
d. d The carrying value of the asset.
(Adapted)
24. When calculating the estimates of future cash flows, which of the following cash flows should
not be included?
a. Cash flows from disposal.
b. Income tax payments.
c. Cash flows from the sale of assets produced by the asset.
d. Cash outflows on the maintenance of the asset.
(Adapted)
25. An impairment loss that relates to an asset that has been revalued upwards should be
recognized in
a. Profit or loss.
b. Revaluation surplus that relates to the revalued asset.
c. Opening retained profits.
d. Any reserve in equity.
(Adapted)
26. Goodwill should be tested for impairment
a. If there is an indication of impairment.
c. Every five years.
b. Annually.
d. On the acquisition of a subsidiary.
(Adapted)
27. Where part of the cash-generating unit is disposed of, the goodwill associated with the
element disposed of
a. Shall be written off to the income statement entirely.
b. Shall not be included in the calculation of gain or loss on disposal.
c. Shall be included in the calculation of gain or loss on disposal.
d. Shall be written off against retained profits.
(Adapted)
28. When impairment testing a cash-generating unit, any corporate assets, such as the head office
business or computer equipment, should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets or parent’s assets and impairment tested along with
that cash-generating unit.
d. Not be allocated to cash-generating units.
(Adapted)
29. When allocating an impairment loss, such a loss should reduce the carrying amount of which
asset first?
a. Property, plant, and equipment.
c. Goodwill.
b. Intangible assets.
d. Current assets.
(Adapted)
30. Which of the following impairment losses should never be reversed?
a. Loss on property, plant, and equipment.
b. Loss on goodwill.
c. Loss on a business segment.
d. Loss on inventory.
(Adapted)
31. Is an entity required to perform the impairment test of goodwill specifically at the end of the
reporting period?
a. Yes, performing impairment testing during the period increases the risk that all information
existing at the reporting date may not be considered.
b. No, the entity can perform impairment testing any time during the year for as long as the
interval between each impairment testing should not exceed one year.
c. No, the entity can perform impairment testing any time during the year for as long as the
interval between each impairment testing should not fall below one year.
d. Yes, however, if there is any indication of impairment during the year, the entity should
not defer the testing to the end of reporting period.
32. Under PAS 36 Impairment of assets, which of the following statements best describes 'value in
use'?
a. The present value of estimated future cash flows expected to arise from the continuing
use of an asset and from its ultimate disposal
b. The amount of cash or cash equivalents that could currently be obtained by selling an asset
in an orderly disposal
c. The net amount which an entity expects to obtain for an asset at the end of its useful life
d. The amount at which an asset could be exchanged between knowledgeable, willing parties
in an arm's length transaction
33. Under PAS 36 Impairment of assets, which of the following terms best describes the higher of
an asset's fair value less costs of disposal and its value in use?
a. Recoverable amount
c. Depreciable amount
b. Revalued amount
d. Carrying amount
34. Under PAS36 Impairment of assets, are the following statements relating to an active market
true or false?
(1) Willing buyers and sellers are usually found.
(2) Prices are available to the public.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
35. Under PAS36 Impairment of assets, which of the following statements best describes the term
'impairment loss'?
a. The removal of an asset from an entity's statement of financial position
b. The amount by which the carrying amount of an asset exceeds its recoverable amount
c. The systematic allocation of an asset's cost less residual value over its useful life
d. The amount by which the recoverable amount of an asset exceeds its carrying amount
(ACCA)
36. According to PAS36 Impairment of assets, which of the following are relevant in determining
a non-current asset's 'value in use'?
I.
The expected future cash flows from the asset
II.
The carrying amount of the asset
III.
The future annual depreciation expense in respect of the asset
IV.
The time value of money
a. I, II, III
b. II, III, IV
c. I, IV
d. I, II, IV
37. An entity is considering whether to apply an impairment test to an individual asset or to the
cash-generating unit to which that asset belongs. Are the following statements true or false,
according to PAS36 Impairment of assets?
I.
If the individual asset does not generate cash inflows that are largely independent of those
from other assets, then the cash-generating unit should be identified.
II.
If the individual asset generates an insignificant proportion of the cash inflows of the entity
as a whole, then the cash-generating unit should not be identified.
a. False, False
b. False, True
c. True, False
d. True, True
(ACCA)
38. The HAVOC DEVASTATION Co. has determined that it needs to recognize an impairment loss
on each of two non-current assets; plant and land. The relevant amounts are as follows:
Plant
Land
Original cost
₱700,000
₱1,400,000
Previous revaluations
Nil
₱ 450,000
Existing carrying amount
₱700,000
₱1,850,000
Impairment loss to be recognized
in year
₱200,000
₱ 300,000
According to PAS36 Impairment of assets, how should each of the impairment losses be
recognized?
Plant
Land
a. In profit or loss
In profit or loss
b. In profit or loss
In other comprehensive income
c. In other comprehensive income
In profit or loss
c. In other comprehensive income
In other comprehensive income
(ACCA)
39. On January 1, 20x2 AMIABLE FRIENDLY Company acquired a non-current asset with an
estimated useful life of 8 years for ₱320,000. Non-current assets are accounted for under the
cost model and depreciation is charged by the straight-line method.
On January 1, 20x7 an impairment review identified an impairment loss of ₱10,000 and the
remaining useful life was revised to four years. Are the following statements true or false,
according to PAS 36 Impairment of assets?
(1) Future depreciation expenses should be measured by reference to the carrying amount after
deducting the impairment loss.
(2) Future depreciation expenses should be measured by reference to the new estimate of the
remaining useful life.
a. False, False
(ACCA)
b. False, True
c. True, False
d. True, True
40. In testing a cash generating unit (CGU) for impairment the bottom-up test means that
a. Goodwill can be allocated to the CGU and an impairment loss has occurred if the
recoverable amount of the CGU’s less than the carrying amount, plus the allocated
goodwill.
b. Goodwill can be allocated to the CGU’s and an impairment loss occurred if the recoverable
amount of the CGU is less than its carrying amount, excluding the allocated goodwill
c. Goodwill can be allocated to the COG and an impairment loss has occurred if the
recoverable amount of the CGU is more than the carrying amount.
d. Goodwill can be allocated to the CGU and an impairment loss has occurred if the
recoverable amount of the CGU is more than its carrying amount.
(Adapted)
41. Select the incorrect statement regarding impairments on investment properties.
a. Investment properties under the fair value model are not subject to impairment
b. Impairments of investment properties under the cost model is recognized in profit or loss
c. Compensation from third parties for investment properties that was impaired or lost shall
be recognized in profit or loss when the compensation becomes receivable and not offset
with the amount of loss
d. Reversal of impairment on investment properties under the cost model are never reversed
42. Which of the following analysis on asset impairment is most likely to have been made by a
CPA? (where: RA = recoverable amount; FVLCS = fair value less costs of disposal; VIN = value
in use; CA = carrying amount; IL = impairment loss)
a. if “FVLCS > CA,” then, “IL = 0”
b. if “FVLCS < VIN,” then, IL = > 0”
c. if “FVLCS > VIN,” then, “RA = FVLCS,” now, if “CA > RA,” then “IL = RA – CA”
d. if “FVLCS > VIN,” then, “RA = VIN,” now, if “CA < RA,” then “IL = RA – CA”
43. Ampersand “&” Co. determines that a printing press used in its operations has suffered a
permanent impairment in value because of technological changes. An entry to record the
impairment should
a. recognize an extraordinary loss for the period
b. include a credit to the equipment accumulated depreciation account
c. include a credit to the equipment account
d. not be made if the equipment is still being used.
(AICPA)