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University of San Jose– Recoletos

THEORY OF ACCOUNTS

1. What is the new government accounting system?


a. Modified cash basis c. Accrual basis
b. Modified accrual basis d. Cash basis

2. No money shall be paid out of the National Treasury except in pursuance of an appropriation law. Consequently, a
government official who disburses government funds beyond the approved budget may be charged with
a. Graft and corruption. c. Technical malversation.
b. Irregular disbursement. d. Insubordination.

3. Which is incorrect concerning constitutional provisions related to government budgeting?


a. No law shall be passed authorizing any transfer of appropriation.
b. No money shall be appropriated for any sect, church or religious denomination.
c. Discretionary funds appropriated for particular officials shall be disbursed only for public purposes.
d. All money collected or any tax levied for a special purpose may be paid for any public purpose.

4. Which of the following statements about the ASC Conceptual Framework is false?
a. The framework is not a Statement of Financial Accounting Standards and hence does not define standards for
any particular measurement or disclosure issue.
b. The framework is concerned with general-purpose financial statements including consolidated financial
statements.
c. The framework applies to the financial statements of all commercial, industrial and business reporting
enterprises, whether in the public or private sectors.
d. In case of a conflict between a provision of the conceptual framework and that of a financial accounting
standard, the provision in the conceptual framework should prevail.

5. Which of the following should not be included in the current assets section in the balance sheet?
a. Assets which are held primarily for the purpose of being traded.
b. Cash funds restricted for the payment of salaries and wages, interest and taxes payable.
c. Assets which are expected to be realized, sold or consumed in the normal course of the operating cycle.
d. Available for sale securities which are not expected to be realized within one year from the balance sheet date.

6. Pope Company has co-signed the mortgage note on the home of its president, guaranteeing the indebtedness in the
event that the president should default. Pope Company considers the likelihood of default to be remote. How should
the guarantee be treated in Pope’s financial statements?
a. Accrued and disclosed c. Accrued only
b. Neither accrued nor disclosed d. Disclosed only

7. Which of the following information is normally not included in the notes to financial statements?
a. Supporting information for line items presented and aggregated
b. Statement of compliance with GAAP
c. Statement of measurement basis for financial statements and accounting policies
d. Statement of financial position and results of operation

8. As an alternative treatment, interest and dividends received may be classified in the cash flow statement as cash
provided by
a. Operating activities c. Financing activities
b. Investing activities d. Ordinary activities

9. AAA Company’s net income in 2005 was higher using the FIFO method than LIFO method. In what direction did the
cost of purchases move during 2005?
a. Increasing
b. Decreasing
c. Constant
d. Cannot be determined with the given information

10. As a benchmark treatment, the revaluation of property, plant and equipment should be based on
a. Fair value which is usually the market value determined by appraisal undertaken by professionally qualified
appraisers.
b. Current replacement cost.
c. Current reproduction cost.
d. Depreciated replacement cost.

11. The frequency of revaluation of property, plant and equipment depends upon the movement in the fair value of the
item of property, plant and equipment. If the property, plant and equipment experience insignificant movement in
fair value, revaluation may be sufficient if made every
a. Three to five years c. Ten years
b. Five years d. Five to ten years

12. Accounting constraints are the factors that may affect the relevance and reliability of financial accounting
information. The constraints enumerated in the conceptual framework are
a. Timeliness and materiality c. Cost benefit and materiality
b. Cost benefit and timeliness d. Timeliness, materiality and cost benefit

13. Which of the following methods of revenue recognition reflects the greatest degree of uncertainty about future
certain events?
a. Point of sale method applied to sales of a merchandising business
b. Production method for agricultural crops
c. Cost recovery method applied to installment sales contracts
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d. Percentage of completion on a construction contract

14. Extraordinary items of revenue and expenses arise from events and transaction of material effect that
a. Are clearly distinct from ordinary activities and infrequent in their occurrence.
b. Would not be reasonably expected to recur in the foreseeable future.
c. Possess a high degree of abnormality, are of a type clearly unrelated to, or are only incidentally related to the
ordinary and typical activities of the entity.
d. Are so significant in amount that their inclusion in ordinary income would distort the comparability of results of
operations.

15. Deposits in foreign countries which are subject to a foreign exchange restrictions shall be valued at
a. Current exchange rate and shown as a noncurrent asset
b. Current exchange rate and shown as a current asset
c. Historical exchange rate and shown as a noncurrent asset
d. Historical exchange rate and shown as a current asset

16. On the disposal of a foreign operation, the cumulative amount of the exchange differences deferred in the separate
component of equity relating to that foreign operation shall be recognized
a. as additional paid in capital.
b. as an adjustment to the beginning balance of retained earnings.
c. in profit or loss when the gain or loss on disposal is recognized.
d. separately as income or loss from discontinuing operations.

17. Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of
currency are
a. Financial assets and liabilities c. Nonmonetary items
b. Monetary items d. Functional currency

18. A parent need not present consolidated financial statements in certain instances. Which of the following is not one of
those instances?
a. The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its
owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the
parent not presenting consolidated financial statements.
b. The parent’s debt or equity instruments are traded in a public market.
c. The parent did not file, nor is it in the process of filing, its financial statements with the securities commission or
other regulatory organization for the purpose of issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent produces consolidated financial statements available for public use that
comply with Philippine Financial Reporting Standards.

19. The existence of significant influence is not evidenced by


a. Participation in the policy making process, including participation in decisions about dividends or other
distributions.
b. Representation in the board of directors or equivalent governing body of the investee.
c. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body.
d. Provision of essential technical information.

20. Which of the following events after the balance sheet would generally result in to an adjustment rather than
disclosure?
a. Announcing a plan to discontinue an operation, disposing of assets or setting liabilities attributable to a
discontinued operation or entering into binding agreements to sell such assets or settle such liabilities.
b. The destruction of a major production plant by fire after the balance sheet date.
c. Abnormally large changes after the balance sheet date in asset prices or foreign exchange rates.
d. Determination after the balance sheet date of the cost of assets purchased, or the proceeds from assets sold,
before the balance sheet date.

21. Depreciation of an asset begins when it is available for use, when it is in the location and condition necessary for it
to be capable of operating in the manner intended by management. Depreciation of an asset ceases when
a. the asset becomes idle.
b. the asset is retired from active use and held for disposal.
c. the asset is derecognized.
d. the asset incurs major repairs and maintenance during the year.

22. The depreciable amount of an asset is the


a. the amount of cash and cash equivalent paid or the fair value of the other consideration given to acquire an
asset at the time of its acquisition or construction.
b. is the cost of an asset, or other amount substituted for cost, less its residual value.
c. is the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated
impairment losses.
d. amount for which an asset could be exchanged between knowledgeable, willing parties in an arm ’s length
transaction.

23. Which statement is incorrect concerning the situations that would lead to a lease being classified as a finance lease?
a. The lease transfers ownership of the asset to the lessee by the end of the lease term.
b. The lessee has the option to purchase the asset at a price that is sufficiently lower than the fair value at the
date of the inception of the lease.
c. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
d. At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.

24. Which of the following is a characteristic of a change in accounting estimate?


a. It usually need not be disclosed.
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b. It does not affect the financial statements of prior periods.


c. It should be reported through the restatement of financial statements.
d. It will affect all periods following the period of change.

25. An unguaranteed residual value of a leased asset is


a. that part of the residual value which is guaranteed by the lessee or a party related to the lessee, the amount of
the guarantee being the maximum amount that could in any event become payable
b. the fair value of the leased asset at the end of the lease term
c. that portion of the residual value of the leased asset, the realization of which by the lessor is not assured or is
guaranteed solely by a party related to the lessor
d. that portion of the residual value of the leased asset, the realization of which by the lessor is not assured or is
guaranteed solely by a party related to the lessee

26. Which of the following information should be disclosed in the summary of significant accounting policies?
a. Future common share dividends are expected to approximate 60 percent of earnings.
b. Adequacy of pension plan assets.
c. Property, plant and equipment are recorded at cost with depreciation computed principally by straight-line
method.
d. Guarantees of indebtedness of others.

27. What is the benchmark treatment of a change in accounting policy?


a. Retroactively, meaning, any resulting adjustment is reported as an adjustment to the opening balance of
retained earnings.
b. Prospectively, meaning, no adjustment is made to prior periods are made either to the opening balance of
retained earnings or in reporting the net income or loss for the current period because existing balances are not
recalculated.
c. Currently, meaning, any resulting adjustment is included in the determination of the net income or loss for the
period.
d. Retroactively, meaning, any resulting adjustment is included in equity.

28. Cash discounts permitted on purchased raw materials should be


a. added to other income, whether taken or not
b. added to other income, only if taken
c. deducted from inventory, whether taken or not
d. deducted from inventory, only if taken

29. It is a contractual agreement whereby two or more parties undertake an economic activity which is subject to joint
control.
a. Jointly controlled operation c. Partnership
b. Joint venture d. Joint undertaking

30. Virtually owned subsidiary is often to mean that the parent owns
a. 90% or more of the voting power. c. 20% or more of the voting power.
b. 51% or more of the voting power. d. 10% or more of the voting power.

31. Segment revenue is revenue in the enterprise’s income statement that is directly attributable to a segment and the
relevant portion of enterprise revenue that can be allocated on a reasonable basis to a segment, whether from sales
to external customers or from transactions with other segments of the same enterprise. Segment revenue also
includes which of the following?
a. Extraordinary items.
b. Share of income or losses of associates, joint ventures, or other investment accounted for under the equity
method only if those items are included in consolidated or total enterprise revenue.
c. Gains on sales of investments or gains on extinguishment of debt unless the segment’s operations are primarily
of a financial nature.
d. Interest or dividend income, including interest earned on advances or loans to other segments, unless the
segment’s operations are primarily of a financial nature.

32. The following statements relate to cash. Which statement is false?


a. Cash equivalents are short-term highly liquid investments that are readily convertible into cash and so near
their maturity that they represent insignificant risk of changes in value because of changes in interest rates.
b. Redeemable preferred share may qualify as a cash equivalent if purchased three months before the specified
redemption date.
c. Legally restricted compensating balances are excluded from cash but are presented as current assets if the
related loan is less than one year.
d. A six-month BSP treasury bill with remaining maturity of three months on balance sheet date may be classified
as cash equivalent provided this is disclosed.

33. Which of the following is used for sales discounts, sales returns, sales allowances and defaults?
I. Due from factor II. Recourse liability
a. I only. b. II only. c. Both I and II. d. Neither I nor II.

34. Hot Company transferred financial assets to Cold Company. The transfer meets the conditions to be accounted for
as a sale. As the transferor, Hot should do each of the following, except
a. remove all assets from the balance sheet.
b. measure all the assets received and liabilities incurred at cost.
c. recognize any gain or loss from the sale.
d. record all assets received and liabilities incurred as proceeds from the sale.

35. The government’s budget cycle consists of preparation, authorization, execution and accountability. Budget
authorization means
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a. the estimation of government revenue, the determination of budgetary priorities and activities and translation
of approved priorities and activities into expenditure levels by various agencies of the government through the
Department of Budget and Management.
b. the enactment of the general appropriation law by Congress.
c. the operational aspects of budgeting to ensure that the public funds are spent only on specific purposes for
which they are appropriated.
d. The periodic reporting by government agencies of their performance under the approved budget and the action
of the COA in assuring the fidelity of government officials by carrying out the intent of Congress in regard of
handling of receipts and expenditures in accordance with the approved budget.

36. Financing activities are


a. the principal revenue producing activities of an enterprise.
b. the acquisition and disposal of long-term assets and other investments not included in cash and cash
equivalents.
c. the activities that result in changes in the size and composition of the equity capital and borrowings of the
enterprise.
d. short-term highly investments that are readily convertible to known amounts of cash and which are subject to
an insignificant risk of changes in values.

37. Fog Company, cash basis taxpayer, prepares accrual basis financial statements. In its 2005 balance sheet, Fog
Company’s deferred tax liabilities increased compared to 2004. Which of the following changes would cause this
increase in deferred tax liabilities?
I. A decrease in rent receivable III. An increase in warranty obligation
II. An increase in prepaid insurance
a. I only. b. I and II only. c. II only. d. II and III only.

38. If the payment of employees’ compensation for future absences is probable, the amount can be reasonably
estimated and the obligation relates to rights that accumulate, the compensation should be
a. accrued it attributable to employees’ services not rendered.
b. accrued if attributable to employees’ services already rendered.
c. accrued if attributable to employees’ services whether rendered or not.
d. recognized only when paid.

39. Which of the following is not considered a research and development activity?
a. Laboratory research aimed at discovery of new knowledge.
b. Design, construction and operation of pilot plant.
c. Engineering follow-through in an early phase of commercial production.
d. Conceptual formulation and design of possible product or process.

40. When a debt security is transferred from IBODI (held to maturity) to available for sale, any unrealized gain or loss
at the date of transfer shall be
a. included in retained earnings.
b. reported as a component of stockholders’ equity.
c. included in earnings.
d. reported as a component of stockholders’ equity and subsequently amortized through interest income over the
remaining life of the debt security using the effective interest method of amortization.

41. How would you describe a fixed cost?


a. It may change in total where such change is unrelated to changes in production.
b. It may change in total where such change is related to changes in production.
c. It is constant per unit change in production.
d. It may change in total where such change depends on production within the relevant range.

42. The valuation of inventories on a prime cost basis


a. would achieve the same results as direct costing.
b. would exclude all overhead from reported inventory cost.
c. Is always achieved when standard costing is adopted.
d. Is always achieved when the FIFO flow assumption is adopted.

43. Deferred tax assets appearing in the balance sheet shall be reduced by a valuation allowance if it is
a. Probable that some portion will be realized.
b. Reasonably possible that some portion will not be realized.
c. More likely than not that some portion will not be realized.
d. Likely that some portion will not be realized.

44. In arriving at the gross profit during the first year using the percentage of completion method of accounting for a
long term construction contract, the estimated total gross profit from the contract is multiplied by
a. The percentage of the cost incurred during the year to the total contract price.
b. The percentage of the cost incurred during the year to the total estimated cost.
c. The percentage of the cost incurred during the year to the total cost incurred to date.
d. The percentage of the cost incurred during the year to the unbilled portion of the total contract price.

45. Which of the following is not one of the advantages of a double entry bookkeeping system?
a. Provides assurance that all clerical errors will be revealed and corrected.
b. The complete effect of all transactions is recorded.
c. Complete accounting permits fair presentation of financial accounting information.
d. Provides more effective internal control.

46. For interim financial reporting, an expropriation gain occurring in the second quarter shall be
a. Recognized equally in the second, third and fourth quarters.
b. Recognized equally over four quarters.
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c. Recognized immediately in the second quarter.


d. Disclosed and recognized in full in the fourth quarter only.

47. When an investor uses the equity method to account for investment in common stock, the investment account will
not be affected when the investor recognizes
a. A proportionate interest in the net income of the investee.
b. Periodic amortization of the goodwill related to the purchase.
c. A stock dividend received from the investee.
d. Depreciation related to the excess of market value over the book value of the investee ’s depreciable assets at
the date of purchase by the investor.

48. Mark Company issued bonds with detachable common stock warrants. Only the warrants had a known market
value. The sum of the fair value of the warrants and the face amount of the bonds is more than the cash proceeds.
The difference is reported as
a. discount on bonds payable. c. common stock subscribed.
b. premium on bonds payable. d. additional paid in capital.

49. On January 1 of the current year, Kent Company issued bonds at a premium. Kent incorrectly used the effective
interest method instead of the straight line method of amortization. How were the following amounts, as of
December 31 of the current year affected by the error?
Bond carrying amount Retained earnings
a. Overstated Overstated
b. Understated Understated
c. Overstated Overstated
d. Understated Overstated

50. Which statement is incorrect concerning the treatment of residual value of the leased asset in the sales type lease?
a. The unearned finance income will be identical whether the residual value is guaranteed or unguaranteed.
b. The gross profit will be the same whether the residual value is guaranteed or unguaranteed.
c. The sales price includes the present value of the unguaranteed residual value.
d. The present value of the unguaranteed residual value is deducted to determine the cost of sales.

51. Which statement is correct concerning a contingent liability?


a. A contingent liability is recognized in the financial statements
b. If the contingent liability is remote, a disclosure is required
c. A contingent liability is either probable or measurable but not both
d. A contingent liability is both probable and measurable

52. It is the quality of information that allows comparison between two or more enterprises engaged in the same
industry
a. Horizontal comparability c. Dimensional comparability
b. Consistency d. Uniformity

53. The overall principles of statement presentation include all of the following, except
a. Financial statements should be prepared on a going concern basis unless management either intends to
liquidate the enterprise or to cease trading, or has no realistic alternative but to do so
b. Each material item should be presented separately in the financial statements and immaterial amounts should
be aggregated with amounts of a similar nature or function.
c. An enterprise should prepare its financial statements, including for cash flow information, under the accrual
basis accounting
d. Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by
notes or explanatory material

54. It is the occurrence whereby the enterprise has entered into an agreement to sell substantially all of the assets of
the discontinued operation, or the enterprise’s board of directors has both approved and announced the planned
discontinuance, whichever comes earlier.
a. Approval and announcement date
b. Initial discontinuing date
c. Initial disclosure event
d. Current event

55. One of the elements of the financial statements is comprehensive income. Comprehensive income excludes changes
in equity resulting from which of the following?
a. Cash received from the issuance of common stock
b. Revaluation surplus
c. Unrealized gains and losses on available for sale securities
d. Cumulative translation adjustments

56. The currently reported net income is based on


a. Physical capital c. Both physical and financial capital
b. Financial capital d. Neither physical nor financial capital

57. Which does not require an adjusting entry on the depositor’s books?
a. Collection from a customer in the amount of P100,000 but recorded by the depositor only as P10,000
b. Deposit of another company is credited to the account of our enterprise
c. The cost of printed checks charged to the depositor’s account
d. Notification for Electronic Fund Transfers to the depositor’s account

58. Toddler Company uses the allowance method for recognizing uncollectible accounts. Ignoring deferred tax, the entry
to record the recovery and subsequent collection of a specific uncollectible account
a. Affects neither net income nor accounts receivable
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b. Decreases both net income and accounts receivable


c. Decreases net income but not accounts receivable
d. Decreases accounts receivable but not net income

59. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the date of discounting
transaction, “trade and other receivables” would be
a. Decreased by the proceeds from the discounting transaction
b. Increased by the proceeds from the discounting transaction
c. Increased by the face amount of the note
d. Decreased by the face amount of the note

60. If a company incorrectly includes consignment items as purchases and ending inventory during the current year.
The effect on next year’s net income and retained earnings is
a. Understated, understated
b. Overstated, understated
c. Understated, correctly stated
d. Overstated, correctly stated

61. The gross margin method of estimating ending inventory may be used for all of the following except
a. Internal as well as external interim reports
b. Internal as well as external year-end reports
c. Estimate of inventory destroyed by fire of other casualty
d. Rough test of the validity of an inventory cost determined under periodic or perpetual system

62. When trading securities are transferred into available for sale securities, the unrealized gain or loss at the date of
transfer shall be
a. Included in stockholder’s equity
b. Included as a component of income
c. Included in additional paid in capital
d. Included in retained earnings

63. Coco Company has a portfolio of marketable debt securities which it intends to hold to maturity. How would Coco
report unrealized gains and losses from these securities?
a. As a component of income
b. As a component of stockholder’s equity
c. Not recognize in income nor stockholder’s equity
d. Not recognize temporary gains and losses but recognize realized losses as a component of income

64. Kart Corporation’s 2005 dividend income included only part of the dividend received from its Fey Corporation
investment. The dividend reduced Kart’s carrying amount for its Fey investment. This reflects that Kart accounts for
its investment by the
a. Equity method, and its carrying amount exceeded the proportionate share of Fey’s market value
b. Cost method, and only a portion of Fey’s 2005 dividend represents earnings before Kart’s acquisition
c. Cost method, and only a portion of Fey’s 2005 dividend represents earnings after Kart’s acquisition
d. Cost method, and the 2005 dividend received by Kart was a return of its investment

65. Which statement is true concerning stock dividends and stock rights from the viewpoint of the investor?
a. A stock dividend received on an investment increased the per share cost of the investment
b. The number of shares held which have been subject to a subject to a stock dividend should be more than it was
before the dividend.
c. When stock rights are received on investment shares, only a memorandum entry is made
d. From the date stock rights are issued until the date they expire, shares of stock of the issuing corporation are
said to be selling right-on

66. A jointly controlled entity involves


I. The use of the assets and other resources of the venture rather than the establishment of a corporation,
partnership or other legal entity.
II. The establishment of a corporation, partnership or other legal entity in which each venturer has an interest.
III. The joint control and often the joint ownership of assets contributed to the joint venture or assets acquired
by the joint venture.
a. I only c. III only
b. II only d. I, II and III

67. It is defined as property held for use in the production or supply of goods or services or for administrative purposes;
or sale in the ordinary course of business.
a. Business property c. Owner-occupied property
b. Investment property d. Rental property

68. 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 (choose the incorrect one)
a. 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.
b. Remove the cost of the damaged portion and related accumulated depreciation.
c. Depreciate the cost of the refurbished portion of the building using its useful life or the useful life of the building,
whichever is shorter.
d. 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.

69. The cash and noncash contributions of a venturer to the jointly controlled entity should be appropriately described in
the financial statements of the venturer as
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a. Investment in jointly controlled entity


b. Investment in joint venture
c. Available for sale financial asset with determinable market value
d. Available for sale financial asset with indeterminable market value

70. The cost of an item of property, plant and equipment that is acquired through the issuance of capital stock or bonds
payable is measured at
a. The fair value of the property received
b. The fair value of the capital stock or bonds payable issued
c. Par value of capital stock or face value of bonds payable issued
d. Cost of the asset to its owner

71. What is the benchmark presentation of grant related to income?


a. By setting the grant as deferred income.
b. By deducting the grant from the cost of the asset in arriving at the carrying amount.
c. The grant is presented in the income statement, either separately or under the general heading “other income”.
d. The grant is deducted from related expense.

72. 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 the demolition.
c. The contemplated future use of the parking lot.
d. The intention of management for the property when the building was acquired.

73. The factors considered in determining the useful life of an asset include all of the following, except
a. Expected usage of an asset
b. Expected physical wear and tear
c. Technical or commercial obsolescence
d. Residual value

74. Which of the following statements is the assumption on which straight-line depreciation is based?
a. The operating efficiency of the asset decreases in later years
b. Service value declines as a function of time rather than use
c. Service value declines as a function of obsolescence rather than time
d. Physical wear and tear are more important than economic obsolescence

75. A machine with a 5-year estimated useful life and an estimated 10% residual value was acquired on January 1,
2003. The machine was depreciated using the sum of year’s digit method. On December 31, 2005, the book value
would equal
a. Original cost less residual value multiplied by 3/15
b. Original cost multiplied by 3/15
c. Depreciable cost multiplied by 3/15 plus residual value
d. Depreciable cost multiplied by 12/15

76. The events and changes in circumstances that lead to impairment of assets may be classified as external and
internal sources of information. Which of the following is an external source?
a. Significant change in the technological, market, legal or economic environment of the business in which the
asset is employed.
b. Evidence of obsolescence or physical damage of an asset
c. Significant change in the manner or extent in which the asset is used with an adverse effect on the enterprise
d. Evidence that the economic performance of an asset will be worse than expected

77. The estimates of future cash flows in calculating value in use should include
a. Future cash flows relating to restructuring to which the enterprise is not yet committed
b. Projections of cash outflows necessarily incurred to generate the cash inflows from the continuing use of the
asset
c. Future capital expenditure that will improve the asset beyond the standard of performance originally assessed
d. Income tax receipts and payments

78. Which of the following should be expensed as incurred by the franchisee for a franchise with an estimated useful life
of twenty years?
a. Amount paid to the franchisor for the franchise
b. Payment to a company, other than the franchisor, for that company’s franchise
c. Legal fees to the franchisee’s lawyers to obtain the franchise
d. Periodic payments to the franchisor based on the franchisee’s revenue

79. On December 31, 2004, Bite Company had capitalized costs for a new computer software product with an economic
life of five years. Sales for 2005 were 25 percent of expected total sales of the software. The pattern of future sales
cannot be estimated reliably. At December 31, 2005, the software had a net realizable value equal to 90% of the
capitalized cost. What percentage of amortization expense should be recorded by Bite Company for 2005?
a. 30% b. 25% c. 20% d. 22%

80. An outflow of resources embodying economic benefits is regarded as “probable” when


a. The probability that the event will not occur is greater than the probability that the event will occur
b. The probability that the event will occur is equal to the probability that the event will not occur
c. The probability that the event will occur is greater than the probability that the event will not occur
d. The probability the event will occur is 90% likely

81. The market price of a bond issued at a premium is the present value of its principal amount at the market rate of
interest
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a. Plus the present value of all future interest payments at the market rate of interest.
b. Plus the present value of all future interest payments at rate of interest stated on the bond.
c. Less the present value of all future interest payments at the market rate of interest.
d. Less the present value of all future interest payments at rate of interest stated on the bond.

82. Which statement is incorrect concerning a finance lease on the part of the lessor?
a. Lessors shall recognize assets held under a finance lease in their balance sheets and present them as receivable
at an amount equal to the net investment in the lease.
b. The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the
lessor’s net investment in the finance lease.
c. Manufacturer or dealer lessors shall recognize selling profit or loss in the period, in accordance with the policy
followed by the entity for outright sales.
d. The sales revenue recognized at the commencement of the lease term by a manufacturer or dealer lessor is
equal to the fair value of the asset, or, if higher, the present value of the minimum lease payments.

83. Which of the following statements is true pertaining to sale and leaseback transaction?
a. If the sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying
amount should be immediately recognized as income.
b. If the sale and leaseback transaction results in a finance lease, any excess of carrying amount over the sales
proceeds should be immediately recognized as loss.
c. If the sale and leaseback transaction results in an operating lease, any excess of sales proceeds over the
carrying amount should not be immediately recognized as income.
d. If the sale and leaseback transaction results in an operating lease and the sales price is above fair value, the
excess over fair value is deferred and amortized over the life of the leased asset.

84. Which is incorrect concerning the recognition and measurement of a defined benefit plan?
a. The expense recognized for a defined benefit plan is not necessarily the amount of contribution due for the
period.
b. The defined benefit plan must be fully funded.
c. Actuarial assumptions are required to measure the obligation and expense and there is a possibility of actuarial
gains and losses.
d. The obligation is measured on a discounted basis.

85. Which is correct concerning actuarial gains and losses?


I. Actuarial gains and losses comprise of experience adjustments and the effects of changes in actuarial
assumptions.
II. Actuarial gains and losses are recognized as an increase or decrease of benefit expense in full.
III. Actuarial gains and losses may result from increases or decreases in either the present value of defined
benefit obligation or the fair value of any related plan assets.
a. I and II only. b. I and III only. c. II and III only. d. I, II and III.

86. When treasury stock is purchased for more than the par value, what accounts should be debited?
a. Additional paid in capital for the purchase price
b. Treasury stock for the purchase price
c. Treasury stock for the par value and additional paid in capital for the excess of purchase price over the par
value
d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value

87. Which of the following statements is false?


a. No reference need be made to donated treasury stock since the acquisition of such stock does not restrict
retained earnings.
b. A loss from sale of treasury stock should be charged to additional paid in capital from treasury stock and then
retained earnings.
c. Treasury shares should be shown as a deduction, at cost, from total stockholder’s equity.
d. Treasury shares should be shown as a deduction, at cost from total stockholder’s equity, and the restriction on
retained earnings occasioned by their acquisition must also be stated.

88. If the stock dividend is less than twenty percent, it is considered as a small stock dividend and the market value of
the shares is debited to retained earnings. The resulting “additional paid-in capital” is credited on the
a. Date of record c. Date of issuance
b. Date of declaration d. Date of payment

89. In computing diluted earnings per share, the method of recognizing the use of the proceeds that would be obtained
upon the exercise of options and warrants is the
a. Treasury stock method c. Common share conversion method
b. Diluted method d. Potential common share method

90. Earnings per share computation determines all of the following except
a. It is the basis of dividend policies of the company
b. It is a determinant of the market price of common stock, thus indicating the attractiveness of the common stock
as an investment.
c. It is the amount that would be paid on each share assuming the company is liquidated and the amount available
to stockholders is exactly the amount reported as stockholder’s equity.
d. It is a measure of performance of management in conducting operations.

91. Compared to its 2005 cash basis net income, Paloma Company’s 2005 accrual basis net income decreased when it
a. Had lower accrued expenses on December 31, 2005 than on January 1, 2005.
b. Had higher prepaid expenses on December 31, 2005 than on January 1, 2005.
c. Had lower unearned income on December 31, 2005 than on January 1, 2005.
d. Had higher unearned income on December 31, 2005 than on January 1, 2005
9

92. A company changed from an accounting principle that is not generally accepted to one that is generally accepted.
The proper treatment of the effect of the change should be
a. A change in accounting policy and reported in the retained earnings statement as an adjustment of the opening
balance
b. A prior period error and reported in the retained earnings statement as an adjustment of the opening balance.
c. A change in accounting policy and reported in the income statement as component of income from continuing
operations
d. A change in accounting estimate and treated currently and prospectively

93. The primary purpose of the cash flow statement is


a. To provide relevant information about cash receipts and cash payments of an enterprise during a period.
b. To help investors, creditors and other users to assess the enterprises ability to generate positive future net cash
flows
c. To disclose separately noncash investing and financing activities
d. To assess the ability of the enterprise to pay dividends to stockholders.

94. An entity for which there are users who rely on the entity’s general purpose financial statements for information that
will be useful to them for making decisions about the allocation of resources is known as
a. Subsidiary c. Parent
b. Business combination d. Reporting entity

95. Costs directly attributable to a purchase business combination include


a. Professional fees paid to accountants, legal advisers, valuers and other consultants to effect the combination
b. Costs of arranging and issuing financial liabilities to effect a business combination
c. Costs of issuing equity securities to effect a business combination
d. General administrative costs

96. Exchange differences arising from translation of financial statements of a foreign operation that is integral to the
operations of the reporting enterprise are accounted for as
a. Component of income from continuing operations
b. Component of income from discontinued operation
c. Component of stockholder’s equity
d. Component of retained earnings

97. What is the proper treatment by the lessor of the residual value of an asset when there is a transfer of title at the
end of the lease item?
a. The residual value is added to the total minimum lease payments to compute for gross investment
b. The present value of the residual value is added to the present value of the total minimum lease payments to
compute for the net investment in the lease
c. The residual value is ignored for gross investment and net investment computations
d. The residual value is deducted from the cost of the asset to compute for the cost of sales

98. The percentage of completion method of accounting for long-term construction contract is preferable when
a. Estimates of costs to complete and extent of progress toward completion are reasonably dependable
b. The collectibility of progress billings from the customer is reasonably assured
c. A contractor is involved in numerous projects
d. The contract is of a relatively short duration

99. In computing the current periods manufacturing cost per equivalent unit, the FIFO method of process costing
considers current period costs
a. Plus cost of ending work in process
b. Less cost of beginning work in process
c. Plus cost of beginning work in process
d. Less cost of ending work in process

100. XYZ Company has a probable loss that can only be reasonable estimated within a range of outcome. No single
amount within a range is a better estimate than any other amount. The loss accrual should be
a. Zero c. The midpoint of the range
b. The maximum of the range d. The minimum of the range

END