Departmental Examination
FAR 1 (1st Year)
Theory:
1. Robbers stole from ABC Corporation 25 computers worth P 500,000. The value of the loss
should be classified as
a.
An exchange.
c.
A cost.
b.
A casualty.
d.
A nonreciprocal transfer.
2. The use of historical cost method in the preparation of financial statements is justified by
which of the following accounting theory?
a.
Conservatism.
c.
Relevance.
b.
Objectivity.
d.
Comparability.
3. Four types of money prices are used in measuring resources in financial accounting. This
type which uses such concepts as present value, discounted cash flow, net realizable value,
value in use, etc. is known as
a. Price in a current purchase exchange.
b. Price in past purchases of the enterprise.
c.
d.
Price based on future exchanges.
Price in a current sale of exchange.
4. Comparability of financial statements of a single enterprise for one date or period of time with
those of other dates or for other periods would be more informative if the following conditions
exist, except
a. The presentations are in the same form.
b. The contents of the statements are identical.
c. Accounting principles are not changed at all.
d. Change in circumstances or the nature of the underlying transactions are disclosed.
5. Gross decreases in assets or gross increases in liabilities recognized and measured in
conformity with GAAP that result from those types of profit-directed activities of an enterprise
that can change owners’ equity refer to
a. Expenses.
c. Revenue.
b. Results of operations.
d. Net income.
6. The principle 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.
7. The Generally Accepted Accounting Principles (GAAP) also apply to
a. The Board of Accountancy.
b. The Bureau of Internal Revenue.
c. The Philippine Institute of CPAs.
d. The Professional Regulation Commission
8. The issuing of accounting standards is the responsibility of the
a. PICPA.
b. Accounting Standards Council.
c. ASCP Council.
d. CPE Council.
9. One of the following is not a pervasive measurement principle.
a. Initial recording of assets and liabilities.
b. Associating cause and effect.
c. Revaluation of assets.
d. Systematic and rational allocation.
10. The use of percentage-of-completion method of accounting for long-term construction
contracts is a measurement of revenue under the
a.
Objectivity principle.
b.
Monetary principle.
c.
Cost principle.
d.
Realization principle.
11. Current assets are arranged normally on the balance sheet in the order of
a. The alphabet.
c. Valuation.
b. Liquidity.
d. Materiality.
12. The basis for classifying assets as current or non-current is the period of time normally
elapsed form the time the accounting entity expands cash to the time it converts
a. Inventory back into cash, or 12 months, whichever is shorter.
b. Receivables back into cash, or 12 months, whichever is longer.
c. Tangible fixed assets back into cash, or 12 months, whichever is longer.
d. A deposit on Machinery ordered, delivery of which will be made within six months.
13. Eloy 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. S is less than Y.
b. X is greater than Y.
d. X is equal to or less than Y.
14. Which of the following should not be considered as a current asset in the balance sheet?
a. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary,
its President.
b. Marketable securities purchased by the temporary investment of cash available for current
operations.
c. Prepaid taxes which cover assessments of the following operating cycle of the business.
d. Installment notes receivable due over 18 months in accordance with normal trade practices.
15. In a period of declining prices, the inventory cost flow method that would result in the lowest
inventory figure is
a. FIFO
c. Moving average.
b. LIFO
d. Weighted average.
16. An inventory method which is designed to approximate inventory valuation at the lower of
cost or market
a. First-in, first-out.
c. Specific identification.
b. Last-in, first-out.
d. Retail method.
17. Subnormal or obsolete goods, either under the cost, or cost or market basis should be
a. Taken up as an unrealized inventory loss.
b. Valued at bona-fide selling price less direct cost of disposition.
c. Valued by applying an inventory method by using a constant or nominal value for the
“normal” inventory level.
d. Adjusted in the cost of goods sold.
18. After being held for 30 days, a 90-day 12% note receivable is discounted at a discount rate
of 15%. The proceeds received from the bank upon discounting would be the
a. Maturity value less discount at the rate of 15% for 90 days.
b. Maturity value less discount at the rate of 15% for 60 days.
c. Face value less discount at 15% for 60 days.
d. Face value less discount at 15% for 90 days.
19. Advances by officers from corporate funds are taken up under
a. Capital stock.
c. Cash dividends.
b. Retained earnings.
d. Loans.
20. One method of estimating uncollectible accounts expense is adjusting the valuation of
account to a new balance equal to the estimated uncollectible portion of the existing accounts
receivable. Another method is
a. Estimating the percentage of probable expenses for each age group of accounts receivable.
b. The balance sheet approach.
c. The income statement approach.
d. The aging of the accounts receivable approach
21. They consist of collectibles usually arising from sales of merchandise and are valued in the
balance sheet at estimated realizable value.
a. Cash.
c. Receivables.
b. Inventories.
d. Bank drafts
22. IOU’s and postage stamps found in the company’s cash drawers should be reported as
a. Petty cash fund.
b. Cash – because they represent the equivalent of money.
c. Receivables and supplies.
d. Investment.
(rpcpa 5/87)
23.
Which of the following is part of the cash account?
a. Advances to employees.
b. Cash received after the balance sheet date.
c. Returned checks.
d. Unreleased checks which were drawn before the balance sheet date but held for later
delivery to creditors.
(rpcpa 5/88)
24.
At September 30, 1996, DEF Corporation had cash accounts at various banks. Its
account balance at ABC Bank is segregated solely for an October 15, 1996 payment into a bond
sinking fund. An account with WRS Bank, used for branch operations, is overdrawn. The
account with KLM Bank, used for regular corporate operations, has a positive balance. How
should DEF Corporation report these accounts in its September 30, 1996 classified balance
sheets?
a. The segregated and regular accounts should be reported as a current asset, and the
overdraft should be reported as a current liability.
b. 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.
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.
(rpcpa 10/96)
25.
items:
a.
b.
c.
d.
e.
a.
c.
b.
d.
Cash or cash on hand and in banks on the balance sheet may include the following
Currency or cash items on hand.
Deposits in foreign countries which are subject to foreign exchange restrictions.
Short-term placements of excess cash which can be pre-terminated.
Post-dated checks.
Cash set aside for the acquisition or construction of non-current assets.
a, b, and c only.
a and c only.
b, c, and e only.
a only.
a.
c.
b.
d.
26. Below are several items that may or may not be included in the cost of property, plant
and equipment:
 Delinquent property taxes on acquired property.
 Interest paid on money borrowed to purchase new machine.
 Expansion of storeroom space needed because of the increased output of the new
machine.
 Cost of training employees who will operate the new machine.
 Storage charges on machinery, necessitated by noncompletion of building when
machinery was delivered.
 Cost of raw material spoiled during the testing and breaking-in period of the new
machine.
 Cost of tearing down old building (already owned) in preparation for new construction.
 Insurance premium paid during first year of operation of new machine.
 Safety devices added to machine to comply with collective bargaining agreement with
employees’ union.
 Service contract paid in full covering first two years operations of the machine.
How many of the items listed above should be included in the cost of property, plant and
equipment?
Less than four items.
Six to seven items.
Four to five items.
More than seven items
27. Which type of expenditure occurs when a company constructs an annex to its office
building?
a. Rearrangement.
c. Betterment.
b. Addition.
d. Repair and maintenance.
28.
An air-conditioning unit was installed in the ambulance used by a hospital. This type of
expenditure is a (an)
a. Ordinary repair and maintenance.
c. Betterment.
b. Addition.
d. Replacement.
29.
Improvements are
a. Revenue expenditures.
b. Debited to an appropriate asset account when they increase useful life.
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.
Questions 1 thru 3 are based on the following information.
Lazer Company had the following bank reconciliation on June 30, 2004:
Balance per bank statement, June 30, 2004
3,000,000
Add: Deposit in transit
400,000
Total
3,400,000
Less: Outstanding checks
900,000
Balance per book, June 30
2,500,000
The bank statement for the month of July 2004 showed the following:
Deposits (including P 200,000 note collected for Lazer) 9,000,000
Disbursement (including P 140,000 NSF
check and P 10,000 service charge)
7,000,000
All reconciling items on June 30, 2004 cleared through the bank in July. The outstanding
checks totaled P 600,000 and the deposits in transit amounted to P 1,000,000 on July 31, 2004.
30. What is the cash balance per book on July 31, 2004? (M)
A 5,400,000
C. 5,550,000
B. 5,350,000
D. 4,500,000
Answer:
Balance per bank – June 30
3,000,000
July bank deposits
9,000,000
July bank disbursements
(7,000,000)
Balance per bank – July 31
5,000,000
July deposit in transit
1,000,000
July outstanding checks
( 600,000)
Adjusted bank balance
5,400,000
5,350,000
Balance per book – July 31 (SQUEEZED)
Note collected by bank in July
200,000
NSF check in July
( 140,000)
Service charge in July
( 10,000)
Adjusted book balance
5,400,000
The balance per book on July 31 is “squeezed” by working back from the adjusted balance.
31.
A.
C.
B.
D.
What is the amount of cash receipts per book in July 2004? (M)
9,400,000
8,600,000
9,600,000
9,800,000
32.
What is the amount of cash disbursement per book in July (M)
A. 6,550,000
C. 7,300,000
B. 6,700,000
D. 6,850,000
Answer:
Deposits per bank statement for July
9,000,000
Note collected by bank
Deposit in transit – June 30, 2004
Deposit in transit – July 31
Cash receipt per book for July
( 200,000)
( 400,000)
1,000,000
9,400,000
Disbursement per bank statement for July
NSF check in July
Service charge in July
Outstanding checks – June 30
Outstanding checks – July 31
Cash disbursement per book for July
7,000,000
( 140,000)
( 10,000)
( 900,000)
600,000
6,550,000
Proof of the cash balance – July 31
Balance per book – June 30
Book receipts for July
Book disbursement for July
Balance per book – July 31
2,500,000
9,400,000
(6,550,000)
5,350,000
33. The following information pertains to Lucerne Corp as of December 31, 2004:
Cash balance per general ledger
258,500
Cash balance per bank statement
270,500
Checks outstanding
35,000
Bank service charge shown on December bank statement
1,000
Error made by Lucerne in recording a check
that cleared that bank in December (check was
drawn in December for P 14,500
but recorded at P 18,500)
4,000
Deposit in transit
26,000
The correct cash balance as of December 31, 2004 is
A. P 249,500
C. P 264,500
B.
P 261,500
D.
P 273,500
Cash balance per bank statement
270,500
DIT
26,000
OC
-35,000
Correct cash balance
261,500
Secrets Inc. was incorporated on January 1, 2021. The following items relate to Secrets, Inc.’s
property, plant and equipment:
Cost of land, which included an old apartment building
Delinquent property taxes assumed by Secrets, Inc.
Payments to tenants to vacate the apartment building
Cost of razing the apartment building
Architects fee for new building
Building permit for new construction
Fee for title search
Survey costs
Excavation before construction of new building
Payment to building contractor
Assessment by city for drainage project
Cost of grading and leveling
Temporary quarters for construction crew
Temporary building to house tools and materials
Cost of changes during construction to make new building more energy efficient
Interest cost on specific borrowing incurred during construction
Payment of medical bills of employees injured while inspecting building
construction
Cost of paving driveway and parking lot
Cost of installing lights in parking lot
Premium for insurance on building during construction
Cost of open house party to celebrate opening of new building
Cost of windows broken by vandals distracted by the celebration
A
.
B
.
C
.
D
.
34. What is the cost of land?
5,960,000
6,440,000
6,540,000
6,410,000
35. What is the cost of building?
A 21,740,000
.
B 21,750,000
.
C 21,790,000
.
D 21,720,000
6,160,000
60,000
40,000
80,000
120,000
80,000
50,000
40,000
200,000
20,000,000
30,000
100,000
160,000
100,000
180,000
720,000
36,000
120,000
24,000
60,000
100,000
24,000
.
On January 1, 2022, Romania Company purchased a specialized factory equipment for
cash at a purchase price of P 700,000. The company incurred P 20,000 freight cost and
handling costs of P 10,000. The company expects that it will incur dismantling cost
amounting to P 80,000 at the end of the equipment’s 5-year useful life. The prevailing
market interest rate during the transaction date was 6%.
Present value factory of 1 at 6% for five periods
Present value factory of annuity at 6% for five periods
A
.
B
.
C
.
D
.
0.747
4.212
How much is the initial cost of the equipment?
730,000
810,000
789,760
1,066,960
San Andreas Mercantile Inc., through no fault of its own, lost an entire warehouse due to an
earthquake on April 13, 2003. In preparing their insurance claim on the inventory loss, they
developed the following data: Inventory January 1, 2003, P 365,000; sales and purchases from
January 1, 2003, to April 13, 2003, P 1,300,000 and P 875,000, respectively. San Andreas
consistently reports a 30% gross profit. The estimated inventory on April 13, 2003, is:
A. P237,500.
C. P390,000.
B.
P330,000.
D.
P295,000.
Beginning inventory
Plus: Net purchases
Goods available for sale
Less: Cost of goods sold:
Net sales
Less: Estimated gross profit
$365,000
875,000
1,240,000
$1,300,000
(390,000
Estimated cost of goods sold (910,000)
Estimated ending inventory $330,000
Little's Lumberyard suffered a fire loss on November 20, 2003. The company's last physical
inventory was taken on September 30, 2003, at which time the inventory totaled $220,000.
Sales from September 30 to November 20 were $625,000 and purchases during that time were
$480,000. Little's consistently reports a 40% gross profit. The estimated inventory loss is:
A. $450,000.
C. $133,000.
B.
$238,000.
D.
$325,000.
Beginning inventory
Plus: Net purchases
Goods available for sale
Less: Cost of goods sold:
Net sales
Less: Estimated gross profit
Estimated cost of goods sold
Estimated ending inventory
$220,000
480,000
700,000
$625,000
(250,000)
(375,000)
$325,000
In an annual audit of Tristan John Company, you find that a physical inventory on December 31,
2004, showed merchandise with a cost of P 440,000 was on hand at that date. You also find the
following transactions near the dosing date.
1. A special machine, fabricated to order for a customer casting 15,000, was finished and
specifically segregated in the back part of the shipping room on December 31, 2004. The
customer was billed on that date and the machine excluded from inventory although it was
shipped on January 4, 2006.
2. Merchandise costing P 3,000 was received on January 3, 2005, and the related purchase
invoice recorded January 5. The invoice showed the equipment was made on December 29,
2004, f.o.b. destination.
3. A packing case containing a product costing P 34,000 was standing in the shipping room
when the physical inventory was taken. It was not included in the inventory because it was
marked "hold for shipping instructions". Your investigation revealed that the customer's order
was dated December 18, 2004 but that the case was shipped and the customer billed on
January 10, 2005.
4. Merchandise received on January 6, 2005, costing P 6,000 was entered in the purchase
journal on January 3, 2005. The invoice showed shipment was made f.o.b. supplier
warehouse on December 31, 2004.
5. Merchandise costing P 7,000 was received on December 28, 2004, and the invoice was not
recorded. You located it in the hands of the purchasing agent and it was marked on
consignment.
The amount of inventory that should appear on the balance sheet at December 31, 2004 is
A. 480,000
C. 487,000
B.
495,000
D.
502,000
Per Physical count
440,000
Excluded inventory in shipping room
34,000
Merchandise shipped FOB supplier warehouse
6,000
Correct inventory, December 31, 2004
480,000
40. Jensen Company uses a perpetual inventory system. The following purchases and sales were
made during the month of May:
Date
Activity
Description
May 1
Balance
100 units at $10 per unit
May 9
Purchase 200 units at $10 per unit
May
Sale
190 units
16
May
Purchase 150 units at $12 per unit
21
May
Sale
120 units
29
If Jensen Company uses the first-in, first-out (FIFO) method of inventory valuation, the May
31 inventory would be
A. $1,400
C. $1,493
B.
$1,460
D.
$1,680
Answer (D) is correct. The FIFO assumption is that the first units purchased are the first sold, so the
ending inventory consists of the most recent units purchased. Thus, ending inventory consists of
140 units (100 beginning balance + 200 purchased - 190 sold + 150 purchased - 120 sold) from
the May 21 purchase of 150 units. Its value is $1,680 ($12 x 140). Under FIFO, the inventory
value is the same regardless of whether the inventory system is perpetual or periodic.
Answer (A) is incorrect because $1,400 is the value under periodic LIFO. Answer (B) is
incorrect because $1,460 is the value under perpetual LIFO. Answer (C) is incorrect
because $1,493 is the value under the weighted-average method.
41. Thomas Engine Company is a wholesaler of marine engine parts. The activity of carburetor
2642J during the month of March is presented below.
Date
Balance or Transaction Units Unit Cost Unit Sales Price
March 1
Inventory
3,20
$64.30
$86.50
0
4 Purchase
3,40
64.75
87.00
0
14
Sales
3,60
87.25
0
3,50
66.00
87.25
0
28
Sales
3,45
88.00
0
If Thomas uses a first-in, first-out perpetual inventory system, the total cost of the inventory
for carburetor 2642J at March 31 is
A. $196,115
C. $201,300
B.
$197,488
25
D.
Purchase
$263,825
Answer (C) is correct. The company began March with 3,200 units in inventory at $64.30 each. The
March 4 purchase added 3,400 additional units at $64.75 each. Under the FIFO assumption, the
3,600 units sold on March 14 were the oldest units. That sale eliminated all of the 3,200 units
priced at $64.30 and 400 of the units priced at $64.75, leaving an inventory of 3,000 units at
$64.75 prior to the March 25 purchase. On March 25, 3,500 units were acquired at $66. The
3,450 units sold on March 28 were the 3,000 remaining units priced at $64.75 and 450 units
priced at $66. Therefore, the ending inventory consists of 3,050 units at $66 each, or $201,300.
Note that the answer would have been the same under the periodic FIFO method.
Answer (A) is incorrect because $196,115 is the answer under the periodic LIFO method.
Answer (B) is incorrect because $197,488 is the answer under the LIFO method using the
$64.75 cost of the March 4 purchase (instead of the beginning inventory cost). Answer (D)
is incorrect because $263,825 is based on the $86.50 selling price at March 1, not the cost
of the items.
42. Dahlgren Company began operation on January 1, 2004. On December 31, 2004, Dahlgren
provided for uncollectible accounts based on 5% of annual credit sales. On January 1, 2005,
Dahlgren changed its method of determining its allowance for uncollectible accounts to the
percentage of accounts receivable. The rate of uncollectible accounts was determined to be
15% of the ending accounts receivable balance. In addition, Dahlgren wrote off all accounts
receivable that were over 1 year old. The following additional information relates to the years
ended December 31, 2004 and 2005.
2005
2004
Credit sales
8,000,000 6,000,000
Collections
(including
collections
on 6,950,000 4,500,000
recovery)
Accounts written off
70,000
None
Recovery in accounts previously written off
20,000
None
What is the provision for uncollectible accounts for the year ended December 31, 2005?
A. 125,000
C. 400,000
B.
122,000
D.
72,000
Allowance – 1/1
Recovery
Provision (Squeeze)
Total
300,000
20,000
125,000
445,000
Writeoff
Required allowance – 12/31 (15% x 2,500,000)
70,000
375,000
43. The following accounts were abstracted from Pika Co.’s unadjusted trial balance at December
31, 2001:
Debit
Credit
Accounts receivable
$2,000,000
Allowance for uncollectible accounts
16,000
Net credit sales
$6,000,000
Pika estimates that 3% of the gross accounts receivable will become uncollectible. After
adjustment at December 31, 2001, the allowance for uncollectible accounts should have a
credit balance of (E)
A. $180,000 C.
$44,000
B.
$164,000
D.
$60,000
REQUIRED: The ending balance in the allowance for uncollectible accounts.
DISCUSSION: (D) The allowance for uncollectible accounts at year-end should have a
credit balance of $60,000. This amount is equal to the $2,000,000 of accounts receivable
multiplied by the 3% that is estimated to become uncollectible.
Answer (A) is incorrect because $180,000 is equal to 3% of net credit sales. Answer (B) is
incorrect because $164,000 equals 3% of net credit sales minus the unadjusted balance in
the allowance account. Answer (C) is incorrect because $44,000 equals 3% of accounts
receivable minus the unadjusted balance in the allowance account.
44. The following data were taken from the records of Asinas Corporation for the year ended
December 31, 2004:
Sales on account
50,000,000
Notes received to settle accounts
5,000,000
Provision for doubtful accounts expense
1,500,000
Accounts receivable determined to be worthless
500,000
Purchases on account
40,000,000
Payments to creditors
25,000,000
Discounts allowed by creditors
1,000,000
Merchandise returned by customer
2,000,000
Collections received to settle accounts
30,000,000
Notes given to creditors in settlement of accounts
3,000,000
Merchandise returned to suppliers
2,500,000
Payments on notes payable
1,000,000
Discounts taken by customers
4,000,000
Collections received in settlement of notes
3,000,000
What is the balance of accounts receivable on December 31, 2004?
A. 10,500,000
C. 8,500,000
B. 9,500,000
D. 7,500,000
Sales
Notes received
Writeoff of worthless accounts
Sales return
Collections
50,000,000
( 5,000,000)
( 500,000)
( 2,000,000)
(30,000,000)
Sales discounts
AR
( 4,000,000)
8,500,000
45. On June 1, 1989, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt
allowed trade discounts of 30% and 20%. Credit terms were 2/15, n/40 and the sale was made
FOB shipping point. Pitt prepaid $200 of delivery costs for Burr as an accommodation. On
June 12, 1989, Pitt received from Burr a remittance in full payment amounting to
a. $2,744
c. $2,944
b.
$2,912
d.
$3,112
REQUIRED: The amount of the full payment.
DISCUSSION: (C) A trade discount is a means of establishing a price for a certain quantity,
for a particular class of customers, or to avoid having to reprint catalogs whenever prices
change. Neither the buyer nor the seller reflects trade discounts in the accounts. Assuming
that the 30% discount is applied first, the initial discount is $1,500 (30% x $5,000). And the
second discount is $700 [20% x ($5,000 – $1,500)]. Hence, the base price is $2,800. (If
both discounts apply, it make no difference which is taken first.) Because the buyer paid
within the discount period, the cash equivalent price is $2,744 (98% x $2,800). Given that
the goods were shipped FOB shipping point, title passed when they were delivered to the
hipper, and the buyer is responsible for payment of delivery costs. Accordingly, the full
amount owed by the buyer was $2,944 ($2,744 + $200 delivery costs).
Answer (A) is incorrect because $2,744 does not include the delivery costs. Answer (B) is
incorrect because $2,912 assumes that the delivery costs are part of the list price. It also
ignores the cash discount. Answer (D) is incorrect because $3,112 assumes that the
delivery costs are part of the list price. It also ignores the cash discount, but adds back the
delivery costs.
46. The following information relates to Jay Co.’s accounts receivable for 1992:
Accounts receivable, 1/1/92
$ 650,000
Credit sales for 1992
2,700,000
Sales returns for 1992
75,000
Accounts written off during 1992
40,000
Collections from customers during 1992
2,150,000
Estimated future sales returns at 12/31/92
50,000
Estimated uncollectible accounts at 12/31/92
110,000
What amount should Jay report for accounts receivable, before allowances for sales returns
and uncollectible accounts, at December 31, 1992?
a. $1,200,000
c. $1,085,000
b.
$1,125,000
d.
$925,000
REQUIRED: The year-end balance in accounts receivable.
DISCUSSION: (C) The $1,085,000 ending balance in accounts receivable is equal to the
$650,000 beginning debit balance, plus debits for $2,700,000 of credit sales, minus credits
for $2,150,000 of collections, $40,000 of accounts written off, and $75,000 of sales returns.
The $110,000 of estimated uncollectible receivables and the $50,000 of estimated sales
returns are not relevant because they affect the allowance accounts but not gross accounts
receivable.
47. Delta, Inc. sells to wholesalers on terms of 2/15, net 30. Delta has no cash sales but 50% of
Delta’s customers take advantage of the discount. Delta uses the gross method of recording
sales and trade receivables. An analysis of Delta’s trade receivables balances at December 31,
1993, revealed the following:
Age
Amount Collectible
0 – 15 days
$100,000
100%
16 – 30 days
60,000
95%
31 – 60 days
5,000
90%
Over 60 days
2,500
$500
$167,500
In its December 31, 1993 balance sheet, what amount should Delta report for allowance for
discounts?
a. $1,000
c. $1,675
b.
$1,620
d.
$2,000
REQUIRED: The amount to be reported as an allowance for discounts.
DISCUSSION: (A) The allowance for discounts should include an estimate of the expected
discount based on the eligible receivables. According to the analysis, receivables equal to
$100,000 are still eligible. Base on past experience, 50% of the customers take advantage
of the discount. Thus, the allowance should be $1,000 [$100,000 x 50% x 2% (the discount
percentage)].
Answer (B) is incorrect because $1,620 assumes that 50% of all collectible amounts are
eligible for the discount. Answer (C) is incorrect because $1,675 assumes that 50% of the
total gross receivables are eligible for the discount. Answer (D) is incorrect because $2,000
assumes 100% of eligible customers will take the discount
48. On December 1, 1995, Money Co. gave Home Co. a $200,000, 11% loan. Money paid
proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee.
Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, 1996.
The repayments yield an effective interest rate of 11% at a present value of $200,000 and
12.4% at a present value of $194,000. What amount of income from this loan should Money
report in its 1995 income statement?
A. $0
C. $2,005
B.
$1,833
D.
$7,833
REQUIRED: The amount of income from the loan at year-end.
DISCUSSION: (C) Under the effective-interest method, the effective rate of interest is
applied to the net book value of the receivable to determine the interest revenue. Therefore,
interest revenue from the loan, for the month of December, equals $2,005 ($194,000 x
12.4% x 1/12).
Answer (A) is incorrect because one month’s interest should be accrued. Answer (B) is
incorrect because $1,833 is the accrued interest receivable, which equals the face value
times the nominal rate for the period ($200,000 x 11%x 1/12). Answer (D) is incorrect
because $7,833 equals the $6,000 origination fee plus the accrued interest receivable of
$1,833
49. On July 1, 1989, Jay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10%
note receivable for the entire sales price. This note is payable in two equal installments of
$50,000 plus accrued interest on December 31, 1989 and December 31, 1990. On July 1,
1990, Kay discounted the note at an interest rate of 12%. Kay’s proceeds from the discounted
note were
A. $48,400
C. $50,350
B.
$49,350
D.
$51,700
Answer (D) is correct. Following the receipt of the $50,000 plus accrued interest on December 31,
1989, the remaining balance was $50,000. Because the second installment is due 1 year after
the first, the interest attributable to this balance is $5,000 ($50,000 principal x 10% x 1 year). On
July 1, 1990, the $55,000 maturity value ($50,000 note + $5,000 interest) is discounted at 12%
for the remaining 6 months of the term of the note. The discount fee charged would be $3,300
($55,000 maturity value x 12% x 6/12). The net proceeds are equal to the $55,000 maturity
value minus the $3,300 discount fee, or $51,700.
$50,000 x 10% x 1 year = $5,000 interest
$55,000 x 12% x 6/12= $3,300 discount fee
Answer (A) is incorrect because $48,400 results from charging a discount fee for a full year.
Answer (B) is incorrect because $52,640 assumes the nominal interest rate is also 12%.
Answer (C) is incorrect because $52,250 assumes the discount rate is also 10%.
50. Holder Co. has an 8% note receivable dated June 30, 1999 in the original amount of $300,000.
Payments of $100,000 in principal plus accrued interest are due annually on July 1, 2000, 2001
and 2002. In its June 30, 2001 balance sheet, what amount should Holder report as a current
asset for interest on the note receivable?
A. $0
C. $16,000
B. $8,000
D. $24,000
REQUIRED: The amount reported as a current asst for interest on a note receivable.
DISCUSSION: (C) Current assets are those reasonably expected to be realized in cash,
sold, or consumed during the longer of the operating cycle of a business or 1 year. Given
that the date of the balance sheet is 6/30/01, the interest to be paid on the next day, 7/1/01,
should be classified as a current asset.
Answer (A) is incorrect because $16,000 of interest is reported as a current asset. Answer
(B) is incorrect because $8,000 is the interest to be earned in 2002. Answer (D) is incorrect
because $24,000 is the interest earned in 2000.
51. On November 1, 2001, Love Co. discounted with recourse at 10% a 1-year, noninterest-bearing
$20,500 note receivable maturing on January 31, 2002. What amount of contingent liability for
this note must Love disclose in its financial statements for the year ended December 31, 2001?
(E)
A. $0
C. $20,333
B.
$20,000
D.
$20,500
REQUIRED: The amount to be disclosed in the financial statements for a contingent liability.
DISCUSSION: (D) When a note receivable is discounted with recourse, the discounting
firm is responsible for the full amount of the note ($20,500) if the receivables are not paid.
Consequently, this amount should be disclosed in the footnotes.
Answer (A) is incorrect because a footnote should disclose the full potential liability.
Answers (B) and (C) are incorrect because Love may be responsible for the full amount of
the note ($20,500).
52. Punn Co. has been forced into bankruptcy and liquidated. Unsecured claims will be paid at the
rate of $0.30 on the dollar. Mega Co. holds a noninterest-bearing note receivable from Punn in
the amount of $50,000, collateralized by machinery with a liquidation value of $10,000. The total
amount to be realized by Mega on this note receivable is
A. $25,000
C. $15,000
B.
$22,000
D.
$10,000
REQUIRED: The amount to be realized from a liquidation claim.
DISCUSSION: (B) The $50,000 note receivable is secured by the extent of $10,000. The
remaining $40,000 is unsecured, and Mega will be paid on this claim at the rate of $0.30 on
the dollar.
Secured claim
$10,000
Unsecured ($40,000 x 0.30)
12,000
$22,000
Answer (A) is incorrect because $25,000 equals 30% of the note receivable plus the
liquidation value of the collateral [($50,000 x 0.30) + $10,000]. Answer (C) is incorrect
because $15,000 is the amount that would be realized if not collateral had been pledged
(0.30 x $50,000). Answer (D) is incorrect because $10,000 is the liquidation value of the
collateral.
53. Jayne Corp. discounted its own $50,000, 1-year note at a bank, at a discount rate of 12%, when
the prime rate was 10%. In reporting the note of Jayne’s balance sheet prior to the note’s
maturity, what rate should Jayne use for the accrual of interest?
A. 10.0%
C. 12.0%
B.
10.7%
D.
13.6%
REQUIRED: The effective rate of interest on a discounted not.
DISCUSSION: (D) The note had a face value of $50,000. The proceeds from discounting
the note were $44,000 [$50,000 – ($50,000 x 0.12 x 1 year)]. Thus, Jayne paid $6,000
interest ($50,000 – $44,000) on $44,000 for 1 year. The effective interest rate was thus
13.6% ($6,000 $44,000).
Answers (A), (B), and (C) are incorrect because the rate used for the accrual of interest is
the effective interest rate.
54. On July 1, 2004, Lee Company sold goods in exchange for P2,000,000, 8-month, non-interestbearing note receivable. At the time of the sale, the note’s market rate of interest was 12%.
What amount did Lee receive when it discounted the note at 10% on September 1, 2004?
A. 1,940,000
C. 1,900,000
B.
1,938,000
D.
1,880,000
Principal 2,000,000
Less: Discount (2,000,000 x 10% x 6/12 100,000
Net proceeds
1,900,000
The note is noninterest-bearing. Therefore, the maturity value is equal to the principal or
face value of the note.
The note is dated July 1, 2004 and it was discounted on September 1, 2004 and therefore, 2
months already expired. Since the term of the note is 8 months, the unexpired term is 6
months.
55. The sale of an office equipment resulting in a gain indicates that the proceeds from the sale
were
a. Less than current market value.
c. Greater than book value.
b. Greater than cost.
d. Less than book value.
RPCPA 10/86
56. 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 book value.
b.
Greater than cost.
d.
Less than book value.
57. Depreciation, in accounting, is better considered as
a. Drop in the resale value of an asset at some time after its acquisition.
b. Physical deterioration through wear and tear, abuse and passage of time.
c. Decline in price of an equipment, machinery and building.
d. Apportionment of the purchase price on an asset over its economic life.
e. Loss of value of specific long-lived asset.
RPCPA 10/78
58. The system of reporting fixed assets at depreciated value based on cost in spite of substantial
appreciation in market value is an application of
a. Money-measuring-unit assumption.
c. Matching assumption.
b. Revenue recognition assumption.
d. Going-concern assumption.
RPCPA 10/74
Physical depreciation vs. Functional depreciation
59. Depreciation which arises from obsolescence or inadequacy to perform efficiently is called
a. Periodic.
c. Normal.
b.
Physical.
d.
Functional.
60. They represent the distillation of the effects of environment characteristics on the financial
accounting process and could also serve as a foundation for other accounting principles that are
based on the same environment characteristics.
a. Basic financial statements.
c. Basic elements of financial accounting.
b.
Basic features of financial accounting.
d.
Objectives of financial accounting
61. The term “matching costs and revenues” means that
a. All costs should be allocated to accounting periods on the basis of the effect on net revenue.
b. Costs which can be associated directly with specific revenue should be carried forward in
the balance sheet until the associated revenue is recognized.
c. Costs should be carried forward to future accounting periods if they have not resulted in
revenue during the current accounting period.
d.
If costs are charged off as expenses in the accounting period when they are actually
incurred, they will be matched properly with revenues earned during that accounting period
62. The principles that guide the recording, measuring and communicating process of financial
accounting
a. Broad operating principles.
c. Pervasive principles.
b.
Detailed principles.
d.
Qualitative principles.
63. The qualitative aspect of information that provides results that would substantially be duplicated
by independent measures using the same measurement methods is referred to as
a. Verifiability.
c. Comparability.
b.
Consistency.
d.
Understandability.
64. The consistency standard of reporting requires that
a. Accounting procedures be adopted which given a consistent rate of return.
b. Extraordinary gains and losses should not appear on the income statement.
c. The effect of changes in accounting upon income be properly disclosed.
d. Expenses be reported as charges against the period in which they are incurred.
e.
The reports should be submitted monthly if they are prepared monthly, or annually if they
are prepared on a yearly basis
65. Costs of which are to be regarded as applicable to the inventory in which is determined by
adding the unit prices of all purchases and dividing by the number of purchase is known as
a. Weighted-average method.
c. Simple-average method.
b.
Moving-average method.
d.
Gross profit method
66. The best method of inventory valuation for a dealer of jewelry is
a. Specific identification.
c. Base-stock method.
b.
Last invoice price.
d.
Weighted-average method.
67. Discounting a note receivable is a way to
a. All of these.
c. Update an account.
b.
Collect on a note.
d.
Increase interest revenue.
68. Under the direct write-off method, an actual write-off of specific customer’s accounts
a. Has not effect on net income.
c. Decreases net assets.
b.
Decreases net income.
d.
Decreases working capital.
69. 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.
b. Decreases net income.
c. Has not effect on net income.
d.
Decreases working capital.
The following statements relate to cash
 The term “cash equivalent” refers to demand credit instruments such as money order
and bank drafts.
 The purpose of establishing a petty cash fund is to keep enough cash on hand to cover
all normal operating expenses of the business for a period of time.
 Classification of a restricted cash balance as current or noncurrent should parallel the
classification of the related purpose or obligation for which cash was restricted.
 Compensation balances required by a bank should always be excluded from the “cash”
classification on the balance sheet.
a. All the statements are false.
c. Only two statements are false.
b.
Only one of the statements is false.
d.
Three statements are false