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Name:___________________________________________

INSTRUCTIONS: Select the best answer for each of the following questions. Mark only one
answer for each item by marking the box corresponding to the letter of your choice on the
answer sheet provided. STRICTLY NO ERASURES ALLOWED.

1. Which one of the following is not required to be presented as minimum information on the
face of the statement of financial position?
a. Investment property
b. Investments accounted under the equity method
c. Biological assets
d. Contingent liabilty
2. The accrual basis of accounting is based primarily on
a.
b.
c.
d.

Conservatism and revenue realization


Conservatism and matching
Consistency and matching
Revenue realization and matching

3. The term comprehensive income


a. Must be reported on the face of the income statement.
b. Includes all changes in equity during a period except those resulting from
investments by and distributions to owners.
c. Is the net change in owners equity for the period.
d. Is synonymous with the term net income
4. Which obligations are classified as current liabilities even if they are due to be settled after
more than twelve months form the end of the reporting period?
a. Trade payables and accruals for employee and other operating cost
b. Current portion of interest- bearing liabilities
c. Bank overdrafts
d. Dividends payable
5. Which of the following terms best describes financial statements whose basis of accounting
recognizes transactions and other events when they occur?
a.
b.
c.
d.

Accrual basis of accounting


Going concern basis of accounting
Cash basis of accounting
Invoice basis of accounting

6. What is the treatment of any gain on a subsequent increase in the fair value less cost to sell
of a noncurrent asset classified as held for sale?
a. The gain shall be recognized in full.

FINANCIAL ACCOUNTING 3
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b. The gain shall not be recognized.


c. The gain shall be recognized but not in excess of the cumulative impairment
loss previously recognized.
d. The gain shall be rcognized but only in retained earnings.
7. At the end of the reporting period, an entity has a 120-day note payable outstanding. The
entity has followed the policy of replacing the note rather than repaying it over the last three
years. The entitys treasurer says that this policy is expected to continue indefinitely and the
arrangement is acceptable to the bank to which the note was issued. The proper
classification of the note in the year- end statement of financial position is
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
8. It is the change in equity during a period resulting from transactions and other events, other
than changes resulting from transactions with owners in their capacity as owners.
a. Comprehensive income.
b. Other comprehensive income.

c. Profit or loss.
d. Retained earnings.

9. Other comprehensive income includes all of the following except


a. Unrealized gain on available for sale financial asset
b. Loss from translating the financial statements of a foreign operation
c. A
ctuarial gain on defined benefit plan that is fully recognized
d. Share premium
10. What is the treatment of a change in accounting policy?
a. Retrospectively, meaning, any resulting adjustment is reported as an
adjustment to the opening balance of retained earnings.
b. Currently, meaning, any resulting adjustment is included in other
comprehensive income.
c. Currently, meaning, any resulting adjustment is included in profit or loss of the
current period.
d. Prospectively, meaning, no adjustments to prior periods are made either to the
opening balance of retained earnings or in reporting the profit or loss for the
current period because existing balances are not recalculated.
11. Prospective recognition of the effect of a change in an accounting estimate means that the
change is applied to transactions from the
a.
b.
c.
d.

Date of the change in estimate


End of the current reporting period
Beginning of the year of change
Date of issuance of financial statements

FINANCIAL ACCOUNTING 3
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12. How should exchange gains or losses resulting from foreign currency transactions be
accounted for?
a. Inluded as component of income from continuing operations for the period in
which the rate changes.
b. Included as component of other comprehensive income for the period in which
the rate changes.
c. Included in the statement of financial position as a deferred item.
d. Included in net earnings for gains, but deferred for losses.
13. Which of the following would be classified as noncurrent liability?
a. Unearned revenue
b. Mandatorily redeemable preference share
c. The currently maturing portion of long-term debt
d. Accrued salaries payable to management
14. These provide narrative description or disaggregation of items disclosed in the financial
statements and information about items that do not qualify for recognition.
a. Notes to financial statements
c. Nonfinancial reports
b. Accounting policies
d. Disclosures
15. The expenses are classified according to their function, as part of cost of sales, distribution
costs, administrative activities and other operating activities.
a. Cost of sales method
b. Nature of expense method

c. Account form
d. Report form

16. These are defined as the specific principles, bases, conventions, requirements and practices
used by an entity in preparing and presenting financial statements.
a. Contingencies and commitments
c. Nonfinancial disclosures
b. Notes to financial statements
d. Accounting policies
17. Any entity shall classify a noncurrent asset or disposal group as held for sale when
a. The carrying amount of the asset or disposal group will be recovered through a
sale transaction.
b. The carrying amount of the asset or disposal group will be recovered through
continuing use.
c. The noncurrent asset or disposal group is to be abandoned.
d. The noncurrent asset or disposal group is idle or retired from active use.
18. Working capital is
a. The group assets which enables the entity to operate profitably.
b. Capital which has been reinvested in the business.
c. Unaapropriated retained earnings.
d. Current assets less current liabilities.

FINANCIAL ACCOUNTING 3
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19. Which of the following elements is not a component of comprehensive income?


a. Revenue
b. Expenses

c. Losses
d. Distributions to owners

20. It is the total of income less expenses, excluding the components of other comprehensive
income.
a. Comprehensive income.
b. Profit or loss.

c. Accounting income.
d. Economic income.

21. A change in the measurement basis is


a.
b.
c.
d.

A change in accounting estimate


A change in accounting policy
A correction of an error
Not an accounting change

22. If the fair value less cost to sell is lower than the carrying amount of a noncurrent asset
classified as held for sale, the difference is
a. Not accounted for
c. Charged to depreciation
b. Accounted for as an impairment loss. d. Debited to retained earnings
23. Which of the following statements best describes the term going concern
a. When current liabilities of an entity to continue in operation for assets
b. The ability of the entity to continue in operation for the foreseeable future
c. The potential to contribute to the flow of cash and cash equivalents to the
entity
d. The expenses of an entity exceed its income
24. When it is difficult to distinguish between a change in estimate and a change in accounting
policy, an entity shall
a. Treat the entire change as a change in estimate with appropriate disclosure.
b. Apportion on a reasonable basis the relative amounts of change in estimate
and the change in accounting policy and treat each one accordingly.
c. Treat the entire change as a change in accounting policy.
d. Ignore it in the year of the change and then wait for the following year to see
how the change develops and then treat it accordingly.
25. It is an adjustment of the carrying amount of an asset or a liability or the amount of the
periodic consumption of an asset that results from the assessment of the present status and
expected future benefit and obligation associated with the asset and liability.
a. Change in accounting estimate

c. Correction of a prior period error

FINANCIAL ACCOUNTING 3
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b. Change in accounting policy

d. Change in reporting entity

Problem
26. On January 1, 2011, Bray Company purchased for 240,000 a machine with a useful life of
ten years and no salvage value. The machine was depreciated by the double-declining
balance method and the carrying amount of the machine was 153,600 on December 31,
2012. Bray changed retroactively to the straight line method on January 1, 2013. Bray can
justify the change. What should be the depreciation expense on this machine for the year
ended December 31, 2013?
a.

15, 360

c. 24,000

b.

19,200

d. 30,720

27. An analysis of Burma Companys liabilities disclosed the following


Accounts payable, after deducting debit balances
In suppliers accounts amounting to P100,000
4,000,000
Accrued expenses
1,500,000
Credit balances of customers accounts
500,000
Stock dividend payable
1,000,000
Claims for increase in wages and allowance by
Employees of the company, covered in a
pending lawsuit
400,000
Estimated expenses in redeeming prize coupons
Presented by customers
600,000
How much should be presented as total current liabilities on the balance sheet?
a.
6,700,000
b.
6,600,000
c.
7,100,000
d.
7,700,000
28. On July 2013, Vince Carter is committed to a plan to sell a disposal group that represents a
significant portion of its regulated operations. The sale requires regulatory approval, which
could extend the period required to complete the sale beyond one year. Actions necessary to
obtain that approval cannot be initiated until after a buyer is known and a firm purchase
commitment is obtained. However, a firm purchase commitment is highly probable within
one year. The non current assets of disposal group have a carrying value of P5,000,000 and
liabilities of P1,000,000. The assets total fair value as of December 31,2013 of the disposal
group is P4,800,000. If the sale is completed within one year, the estimated cost to sell is
P200,000, but if the sale will exited beyond one year, the present value of the estimated
cost to sell is P180,000.
If the sale will extend beyond one year, what amount of non current asset should Vince
Carter report its held for sale property at December 31,2013?
a.
3,600,000
b.
3,620,000
c.
4,000,000
d.
4,620,000

FINANCIAL ACCOUNTING 3
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29. Chester Company was a development stage enterprise from its inception on September 1,
2009 to December 31, 2010. The following information was taken from Chesters accounting
records for the period:
Net sales
5,400,000
Cost of sales
4,000,000
Selling, general and administrative expenses
1,600,000
Research and development costs
1,200,000
Interest expense
400,000
For the period September 1, 2009 to December 31, 2010, what amount should Chester
report as net loss?
a.
1,800,000
b.
1,400,000
c.
600,000
d.
200,000
30. Athan Companys draft financial statements showed the profit before tax for the year ended
December 31, 2011 at P9,000,000. The board of directors authorizec the financial
statements for issue on March 20, 2012. A fire occured at one of Athans site on January 15,
2012 with resulting damage costing P7,000,000, only P4,000,000 of which is covered by
insurance. The repairs will take place and be paid for in April 2012. The P4,000,000 claim
from the insurance entity will however be received on February 14, 2012. What amount
should be reported as profit before tax in Athans financial statements?
a. 13,000,000
b. 9,000,000
c. 2,000,000
d. 6,000,000
31. The following information pertains to Alena Company on December 31 of the current year:
Property, plant and equipment
35,000,000
Accounts receivable
20,000,000
Prepaid insurance
2,500,000
Short-term note payable
3,000,000
Cash
5,000,000
Bonds payable
40,000,000
Total assets
101,500,000
Land
20,000,000
Accounts payable
8,000,000
Allowance for doubtful accounts
1,000,000
Merchandise inventory
13,000,000
Available for sale securities to be held indefinitely
7,000,000
Wages payable
2,000,000
Total liabilities
56,000,000
Premium on bonds payable
3,000,000
The December 31 working capital is
a.
46,500,000
b.
33,500,000
c.
26,500,000
d.
35,500,000
32. During 2013, Orca Corp. decided to change from LIFO method of inventory valuation to the
weighted-average method. Inventory balances under each method were as follows:

FIFO

FINANCIAL ACCOUNTING 3
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Weighted-Average

January 1, 2013

71,000

December 31, 2013

79,000

77,000
83,000

Orcas income tax rate is 30%.

According to SFAS 154, in its 2013 financial statements, what amount should
as the cumulative effect of this accounting change?

a.

2,800

c. 4,200

b.

4,000

d.

Orca report

33. On December 1, 2013 Richard co. acquired through foreclosure a property comprising land
and building that it intends to sell. However, Richard does not intend to transfer the property
of a buyer until after it completes renovations to increase the propertys sales value. As of
December 31, 2013, Richard has paid a total amount of P100,000 for the partial renovation
of the property and the property is currently selling at P7,600,000.
In its December 31, 2013 balance sheet, Richard co. should report its held for sale property
at
a.
0
b.
7,000,000
c.
7,100,000
d.
7,600,000
34. Karylle Companys trial balance of income statement accounts for the year ended December
31, 2010 included the following:
Sales
6,000,000
Cost of sales
2,400,000
Administrative expenses
600,000
Loss on sale of equipment
360,000
Commissions to salespersons
400,000
Interest revenue
200,000
Freight out
120,000
Loss on earthquake damage
400,000
Bad debt expense
120,000
4,400,000
6,200,000
Finished goods inventory:
January 1
4,000,000
December 31
3,600,000
Karylle Company shall report income from continuing operations at
a.
2,200,000
b.
1,800,000
c.
1,430,000
d.
1,170,000
35. The following information was taken from Kay Companys accounting records for the year
ended December 31, 2010:

FINANCIAL ACCOUNTING 3
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Increase in raw materials inventory


150,000
Decrease in finished goods inventory
350,000
Raw materials purchased
4,300,000
Direct labor payroll
2,000,000
Factory overhead
3,000,000
Freight out
450,000
There was no work in process inventory at the beginning or end of the year. Kays 2010 cost
of goods sold is
a.
9,500,000
b.
9,650,000
c.
9,750,000
d.
9,950,000
36. On January 1, 2010, Taft Co. purchased a patent for 714,000. The patent is being amortized
over its remaining legal life of fifteen years expiring on January 1, 2024. During 2013, Taft
determined that the economic benefits of the patent would not last longer than ten years
from the date of acquisition. What amount should be reported in the balance sheet for the
patent, net of accumulated amortization, at December 31, 2013?
a.

428,400

c. 504,000

b.

489,600

d. 523,600

37. Joseph Company acquired 100% of Jostine Company prior to 2011. During 2011, the
individual entities included in their financial statements the following:
Joseph
Jostine
Key officers salaries
750,000
500,000
Officers expenses
200,000
100,000
Loan to officers
1,250,000
500,000
Intercompany sales
1,500,000
What total amount should be reported as related party disclosures in the notes to Josephs
2011 consolidated financial statements?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000
38. The following errors were discovered in the course of examination of the Arlene
Companys financial records:
Year 2012 wages payable for 34,000 was not recorded
Accrued vacation pay for the year 2012 for 62,500 was not recorded
because the bookkeeper never learned that you had to do it
Insurance for 12 months period purchased on Nov. 1, 2012 was
charged to expense in the amount of 37,200 because the amount of
the check is about the same every year
What is the net effect of the above errors on the January 1, 2013 accumulated profits?
A. 59,300 over
B. 65,500 over
C. 96,500 over

FINANCIAL ACCOUNTING 3
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D. 127,500 over
39. Lowe Company had the following gains during 2010:
Foreign currency transaction gain due to major devaluation
700,000
Gain from expropriation of asset
1,000,000
What amount should Lowe report as extraordinary gain in its 2010 income statement?
a.
1,700,000
b.
1,000,000
c.
700,000
d.
0
40. Vien Lang Company carried a provision of P2,000,000 in its draft financial statements on
December 31, 2011 in relation to an unresolved court case. On January 31, 2012, when the
financial statements on December 31, 2011 had not yet been authorized for issue, the case
was settled and the court decided the final total damages payable by Vien Lang to be
P2,800,000. What amount should be adjusted on December 31, 2011 in relation to this
event?
a. 2,800,000
b. 2,000,000
c. 800,000
d. 0
41. The following items were among those that were reported on Lee Companys income
statement for the year ended December 31, 2010:
Legal and audit fees
1,700,000
Rent for office space
2,400,000
Interest on inventory loan
2,100,000
Loss on abandoned data processing equipment used in
operations
350,000
The office space is used equally by Lees sales and accounting departments.
What amount of the above-listed items should be classified as general and administrative
expense in the income statement?
a.
2,900,000
b.
3,250,000
c.
4,100,000
d.
5,000,000
42. Vane Companys trial balance of income statement accounts for 2010 included the following:
Debit
Credit
Sales
5,750,000
Cost of sales
2,400,000
Administrative expenses
700,000
Loss on sale of equipment
100,000
Sales commissions
500,000
Interest revenue
250,000
Freight out
150,000
Loss on early retirement of long-term debt
200,000
Uncollectible accounts expense
150,000
4,200,000
6,000,000
Finished goods inventory
January 1
4,000,000
December 31
3,600,000
In Vanes 2010 income statement, what amount should be reported as cost of goods
manufactured?

FINANCIAL ACCOUNTING 3
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a.
b.
c.
d.

2,000,000
2,150,000
2,800,000
2,950,000

43. During 2011, Ely G. Company was sued by a competitor for P5,000,000 for infringement of a
patent. Based on the advice of the entiys legal counsel, Ely G. Company accrued the sum of
P3,000,000 as a provision in its financial statements for the year ended December 31, 2011.
Subsequently, on March 15, 2012, the Supreme court decided in favor of the party alleging
infringement of the patent and ordered the defendant to pay the aggrieved party a sum of
P3,500,000.
The financial statements were prepared by the entitys management on February 15, 2012
and approved by the board of directors on March 31, 2011.
What amount should be recognized as accrued liability on December 31, 2011?
a. 5,000,000
b. 3,500,000
c. 3,000,000
d. 1,500,000
44. Brock Company reports operating expenses in two categories: selling and general
administrative expenses. The adjusted trial balance at December 31, 2010 included the
following expenses and loss accounts:
Accounting and legal fees
1,200,000
Advertising
1,500,000
Freight out
800,000
Interest
700,000
Loss on sale of long-term investment
300,000
Officers salaries
2,250,000
Rent for office space
2,200,000
Sales salaries and commissions
1,400,000
One-half of the rented premises is occupied by the sales department. Brocks total selling
expenses for 2010 should be
a.
4,800,000
b.
4,000,000
c.
3,700,000
d.
3,600,000
45. Thorpe Companys income statement for the year ended December 31, 2010 reported net
income of P7,410,000. The auditor raised questions about the following amounts that had
been included in net income:
Unrealized loss on available for sale securities
(540,000)
Gain on early retirement of bonds payable
2,200,000
Adjustment of profit of prior year for error in depreciation (net of
tax effect)
(750,000)
Loss from fire
(1,400,000)
The loss from fire was an infrequent but not an unusual occurrence in Thorpes line of
business. Thorpes 2010 income statement should report net income at
a.
6,500,000
b.
6,610,000
c.
8,160,000
d.
8,700,000

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46. The following data pertains to Caticlan Company on December 31, 2010:
Cash, including sinking fund of P500,000 with trustee
2,000,000
Notes receivable (P200,000 pledged)
1,200,000
Accounts receivable unassigned
3,000,000
Accounts receivable assigned
800,000
Notes receivable discounted
700,000
Equity of assignee in accounts receivable assigned
500,000
Inventory, including P600,000 cost of goods in transit purchased
FOB destination. The goods were received on January 3, 2007
2,800,000
Allowance for doubtful accounts
100,000
How
a.
b.
c.
d.

much current assets should be shown in the balance sheet on December 31, 2010?
7,900,000
8,000,000
7,400,000
7,700,000

47. Ginger Company is completing the preparation of its draft financial statements for the year
ended December 31, 2011. The financial statements are authorized for issue on March 31,
2012. On March 15, 2012, a dividend of P1,750,000 was declared annd a contactual profit
share payment of P350,000 was made, both based on the profit for the year ended
December 31, 2011. On February 1, 2012, a customer went into liquidation having owed the
entiy P340,000 for the past 5 months. No allowance had been made against this debt in the
draft financial statements. On March 20, 2012, a manufacturing plant was destroyed by fire
resulting in a financial loss P2,600,000.
What total amount should be recognized in profit or loss for the year ended December 31,
2011 to reflect adjusting events after the end of reporting period?
a. 1,750,000
b. 3,290,000
c. 2,600,000
d. 690,000
48. Allisson corp. reported pretax incomes of P505,000 and P387,000 for the years ended
December 31,2012 and 2013, respectively. However, the auditor noted that the following
errors had been made:
Sales for 2012 included amounts of P191,000 which had been received in cash
during 2012, but for which the related goods were shipped in 2013. Title did
not pass to the buyer until 2013.
The inventory on December 31,2012 was understated by P43,200
The companys accountant, in recording interest expense entry on an annual
basis:
Interest expense
75,000
Cash
75,000
The bonds have a face value of P1,250,000 and pay a nominal interest
rate of 6%. They were issued at a discount of P75,000 on January 1,2012
to yield an effective interest rate of 7%.

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Ordinary repairs to equipment had been erroneously charged to the


Equipment account during 2012 and 2013. Repairs of P42,500 and P47,000
had been incurred in 2012 and 2013, respectively. In determining depreciation
charges, Allisson applies a rate of 10% to the balance in the Equipment
account at the end of the year.
What
a.
b.
c.
d.

is the corrected pretax income for 2013?


488,992
480,042
484,292
575,392

49. The trial balance of Brazil Company reflected the following liability account balances on
December 31, 2010:
Accounts payable
5,000,000
Bonds payable, due December 30, 2011
10,000,000
Premium on bonds payable
500,000
Deferred tax liability
2,500,000
Dividends payable
4,500,000
Income tax payable
1,500,000
Note payable bank
4,000,000
The bank note payable matures on June 30, 2011. On March 1, 2011, the entire balance of
the bank payable was refinanced on a long-term basis. Brazils financial statements were
issued on March 31, 2011.
In its December 31, 2010, Brazil Company should report current liabilities at
a.
21,500,000
b.
24,000,000
c.
25,500,000
d.
28,000,000
50. Oak Co. offers a three-year warranty on its products. Oaks previously estimated warranty
cost to be 2% of sales. Due to a technological advance in production at the beginning of
2013, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty
costs of 80,000 and 96,000 were reported in 2011 and 2012, respectively. Sales for 2013
were 5,000,000. What amount should be disclosed in Oaks 2013 financial statements as
warranty expense?
a.

50,000

c. 100,000

b.

88,000

d. 138,000

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