Theory of Accounts
Cash
1. Which of the following is considered cash?
a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
2. Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand
3. Statement 1: As a rule, an overdraft shall be classified as a current liability and not offset against current accounts with
a positive or debit balance.
Statement 2: As an exception to what is generally prescribed, if the overdraft is in a bank where there are other accounts
that have a positive balance and those accounts are sufficient to cover the overdraft, the total cash shall be shown net of
the overdraft.
a. True, True
b. True, False
c. False, True
d. False, False
7. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and
a. is acceptable as a means to pay current liabilities.
b. has a current market value that is greater than its original cost.
c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.
d. is so near its maturity that it presents insignificant risk of changes in interest rates.
8. Which of the following are important characteristics of cash equivalents as mentioned in PAS 7?
A. Short-term
B. Highly Liquid
C. Near maturity
D. Matures within 3 months or less from reporting date.
E. Related liability is short-term.
a. A, B, C, D, and E
b. Only A, B, C, D
c. Only A, B, C
d. None among A, B, C, D, and E.
10. In the case of bank reconciliations, which of the following is not likely to create a credit memo
a. Collection by the bank
b. Interest earned by the current account
c. Matured time deposits
d. Checks erroneously charged to the account.
11. Which of the following would be added to the book balance in bank reconciliation?
a. Outstanding checks
b. A check written for P50,000 entered as P5,000 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
12. NSF checks from customers returned during the month but redeposited also during the month (both return and redeposit
is recorded in the books). Imagine a proof of cash proforma.
a. Represents a debit memo which decreases the balance per book during the month.
b. Does not affect the book balance per proof of cash but should be deducted from both the book receipts and book
disbursements.
c. Represents a debit memo which decreases the balance per book of the previous month.
d. Decrease only the book disbursements as there was an excessive credit to cash as a result of the cancellation of the
payment. Receipts are not affected as the initial debit to cash is already diminished by the entry to reflect the return
of the NSF check also during the month.
13. NSF checks from customers returned the previous month and redeposited during the month (both return and redeposit
is not recorded in the books)
a. Represents a decrease in the cash per book during the month as the balance does not include the increase in cash as
a result of the redeposit during the month.
b. Does not affect the book balance during the month, per proof of cash, but should be added to the book receipts as
the debit in cash is rightfully a transaction during the month.
c. Should represent a decrease in the book balance of the previous month and a decrease in the receipts of the current
month as the related debit to cash is rightfully a transaction of the previous month.
d. Because the return and redeposit is unrecorded, the book cash balance during the month is understated, hence, such
NSF check should increase book balance during the month with corresponding increase in book receipts during the
month.
14. Cash control systems are the methods and procedures used to ensure
a. That current obligations are met.
b. That excess cash does not exist.
c. The safeguarding of cash.
d. That unused cash is invested.
15. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
Receivables
1. In recording accounts receivables, (choose the incorrect statement)
a. The amount to be recorded is the “invoice price” of the list price reduced by the trade discounts.
b. Trade discounts shall be recorded depending on whether the receivables are accounted for using the net or gross
method.
c. Trade discounts are ignored in recording the accounts receivable.
d. Accounts receivables are always considered trade receivables.
2. Statement 1: Trade receivables include notes receivable and advances to officers and employees.
Statement 2: In the gross method, sales discounts are reported as a deduction from sales.
a. True, True
b. True, False
c. False, False
d. False, True
4. Accounts receivable may be presented at net realizable value or amortized cost. Net realizable value is affected by the
following accounts. Choose the incorrect one.
a. Allowance for expected un-collectability that is an inherent risk from selling on credit is deducted from accounts
receivable.
b. Sales discounts which may be trade discount or cash discount.
c. Freight paid by the buyer under FOB destination is deducted from the accounts receivable.
d. Sales returns if merchandise is actually returned.
5. Suppose an entity uses the direct write-off method, upon considering a receivable as doubtful
a. The amount of expense recognized is the same as with the allowance method.
b. Current asset is of the same sum as with the allowance method.
c. Net income is greater as compared with the allowance method.
d. Allowance for doubtful accounts is less as compared to the allowance method.
7. Using receivables as collateral for loans may be through pledging or assignment. Pledging as compared to assignments
is
a. Involves only a specific portion or a specific account and not all of the accounts receivable balance.
b. A disclosure and not necessarily a reclassification is made.
c. Equity on the receivable is on the full amount as opposed to the equity which equals the excess of the balance of the
assigned accounts and the balance of the loan.
d. Absolute sale as opposed to only the assignment of collections from receivables.
8. An entity pledged some accounts receivable to a bank in return for a loan. Which of the following is correct?
a. The bank will take the title to the accounts receivable and will return title to the entity after the loan is paid.
b. The bank cannot take the title to the accounts receivable if the entity does not repay the loan.
c. The entity will retain control of the accounts receivable.
d. The bank will assume the responsibility of collecting the accounts receivable.
12. Statement 1: When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any
credit loss.
Statement 2: For receivables sold with recourse, the seller guarantees payment to the purchaser if the
debtor fails to pay.
a. True, True
b. True, False
c. False, False
d. False, True
14. What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a
balance sheet?
a. As offset to capital
b. By means of footnotes.
c. As assets but separate from other receivables.
d. As trade notes and accounts receivable if they otherwise qualify as current assets
15. Statement 1: Generally, notes receivable is measured through the present value or the discounted value of its cash flows.
Statement 2: The present value of interest bearing notes with a realistic rate is its face value. Hence, there might be a
need to compute for present value of cash flows if the interest is unreasonably low.
Statement 3: Non-interest bearing notes are measured through the present value of cash flows unless when the noninterest
bearing notes are short-term.
a. True, True, True
b. False, True, False
c. False, True, True
d. True, False, False
16. When the stated rate of interest exceeds the effective rate, the present value of the note receivable will
a. Be less than its face value.
b. Be more than its face value
c. Be less than its carrying amount.
d. Be more than its proceeds.
17. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be
received in the future, failure to follow this practice usually does not make the balance sheet misleading because
a. most short-term receivables are not interest-bearing
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
18. Which of the following methods of determining bad debt expense does not properly match expense and revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable
under the allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance method.
d. Charging bad debts as accounts are written off as uncollectible.
19. Which of the following methods of determining annual bad debt expense best achieves the matching concept?
a. Percentage of sales
b. Percentage of ending receivables.
c. Percentage of average receivables.
d. Direct write off
20. Which of the following statements is incorrect regarding the classification of accounts and notes receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes receivable transactions is an
asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.
Practical Accounting 1
Cash
1. Delsie Co. reported the checkbook balance of P8,000,000 on December 31, 2014. In addition, the entity held the
following items in the safe on that date.
Check payable to Delsie, dated January 2, 2015 in P1,000,000
payment of a sale, not included in December 31
checkbook balance
Check payable to Delsie, deposited on December 3,000,000
2015 and included in the December 31, 2014 balance,
but returned by bank on December 30 marked as
“NSF”. The check was redeposited on January 2,
2015 and cleared on January 5, 2015.
Check drawn on Delsie account, dated and recorded 2,500,000
on December 31, 2014 but not mailed until Janaury
15, 2015
Coins and currencies on hand 800,000
Three-month money market instruments 1,500,000
2. Hanie Co. had the following bank reconciliation on June 30, 2014:
All reconciling items on June 30 cleared through the bank in July. The deposit in transit amounted to P1,000,000 and
the outstanding checks totaled P600,000 on July 31. What is the cash in bank balance per ledger on July 31, 2014?
a. 5,400,000
b. 5,350,000
c. 5,550,000
d. 4,500,000
3. Mylene Gomez is the cashier of the Panday Pokpok Company who also manages the petty cash fund. The following
are the items found in the drawer of Mylene Gomez at the end of the year?
Bills
Coins
Denomination Number of Rolls Loose
(50 pieces to a roll)
P 10 2 7
5 4 6
1 4 0
Checks
IOUs
Maker Date Amount
Art Jorge, Janitor December 19, 2014 P 700
Rene Tilaoc, Clerk December 21, 2014 500
Peter Chuchay, Clerk December 23, 2014 300
Additional Items:
The company uses an imprest fund system where petty cash fund is maintained at P18,000.
There were undeposited collections worth P2,000
The following envelopes marked “unclaimed” were found opened and empty:
- Tony Cuesta P665
- Gloria Bustamante 495
The petty cash fund included un-replenished petty cash vouchers of P10,000. The cash on hand included a customer
check of P200,000 received on December 15, 2014 but dated January 15, 2015. The sinking fund is restricted for the
payment of bond payable that is due on July 31, 2015. What amount of cash and cash equivalent should be reported on
December 31, 2014?
a. 8,840,000
b. 5,840,000
c. 6,840,000
d. 5,340,000
5. Green Co. reported the following information at the end of the year:
Investment in securities of P1,500,000. These securities are ordinary share investments in entities that are
traded in the Philippine Stock Exchange. As a result, the shares are very actively traded in the market.
Investment securities of P2,000,000. These securities are government treasury bills. The treasury bills have a
1-year term and purchased on December 31, at which time they had three months to go until they mature.
Cash of P2,500,000 in the form of coin, currency, savings account, petty cash and checking account.
Investment securities of P300,000. These securities are commercial paper or short-term IOUs from other
entities. The term of the paper is nine months and they were purchased in December 31 at which time they had
four months to go until they mature.
6. Lomi Co. had the following account balances on December 31, 2014:
The cash in bank included a compensating balance of P250,000 against short-term borrowing and is not legally
restricted as to withdrawal. What amount should be reported as cash under current assets on December 31, 2014?
a. 3,450,000
b. 3,550,000
c. 5,250,000
d. 5,350,000
7. Margaret Co. provided the following information for the month of October:
8. Hamilton Company has cash in bank of $10,000, restricted cash in a separate account of $3,000, and a bank overdraft
in an account at another bank of $1,000. Hamilton should report cash of
a. $9,000.
b. $10,000.
c. $12,000.
d. $13,000.
9. If a petty cash fund is established in the amount of $250, and contains $150 in cash and $95 in receipts for disbursements
when it is replenished, the journal entry to record replenishment should include credits to the following accounts
a. Petty Cash, $75.
b. Petty Cash, $100.
c. Cash, $95; Cash Over and Short, $5.
d. Cash, $100.
10. In preparing its bank reconciliation for the month of April 2007, Gregg, Inc. has available the following information.
Balance per bank statement, 4/30/07 $39,
NSF check returned with 4/30/07 bank statement 450
Deposits in transit, 4/30/07 5,000
Outstanding checks, 4/30/07 5, 200
Bank service charges for April 20
11. Tanner, Inc.’s checkbook balance on December 31, 2007 was $21,200. In addition, Tanner held the following items in
its safe on December 31.
(1) A check for $450 from Peters, Inc. received December 30, 2007, which was not included in the checkbook
balance.
(2) An NSF check from Garner Company in the amount of $900 that had been deposited at the bank, but was
returned for lack of sufficient funds on December. The check was to be redeposited on January 3, 2008. The
original deposit has been included in the December 31 checkbook balance.
(3) Coin and currency on hand amounted to $1,450.
The proper amount to be reported on Tanner's balance sheet for cash at December 31, 2007 is
a. $21,300.
b. $20,400.
c. $22,200.
d. $21,750.
12. Sandy, Inc. had the following bank reconciliation at March 31, 2007:
Balance per bank statement, 3/31/07 $37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding checks 12,600
Balance per books, 3/31/07 $34,900
13. The following information was included in the bank reconciliation for Bayani Company for October and November of
2015:
Checks and charges recorded by bank in November, including a November service charge of P4,000 totaled
P550,000.
Service charge made by bank in October and recorded on the books in November, P2,500.
Total of credits to cash in all journals during November, P620,000.
Customer’s NSF check returned as a bank charge in November (no entry made on books), P20,000.
Customer’s NSF check returned in October and redeposited in November (no entry made on books in either
October or November), P40,000.
Outstanding checks at October 31, 2015 that cleared in November, P230,000.
Deposits in transit at November 30, P300,000.
14. Tamano, Corporation’s checkbook balance on December 31, 2015 was P1,500,000. In addition, Tamano held the
following items in its safe on December 31.
A check for P200,000 from Larry Corporation received December 1, 2015, dated January 5, 2016, which
was not included in the checkbook balance.
An NSF check from Lorelei Company in the amount of P100,000 that had been deposited at the bank, but
was returned for lack of sufficient funds on December 29. The check was to be redeposited on January 3,
2016. The original deposit has been included in the December 31 checkbook balance.
Coin and currency on hand amounted to P350,000.
An unrecorded money order for P500,000.
Company checks that have been written and recorded amounting to P600,000.
The proper amount to be reported on Tamano's statement of financial position for cash at December 31, 2015 is
a. 2,250,000
b. 2,450,000
c. 1,650,000
d. 2,850,000
15. The cash account of ABC Co. on December 31, 2018 has a balance of P127,600 and it consists of the following:
16. If a petty cash fund is established in the amount of P2,500 and contains P2,000 in cash and P450 in receipts for
disbursements when it is replenished. The journal entry to record replenishment will include a credit to
a. Petty Cash, P450
b. Petty Cash, P500
c. Cash, P450; Cash Over and Short, P50.
d. Cash, P500.
17. Shown below is the bank reconciliation for XYZ Co. for the month of November:
The bank statement for the month of December contains the following data:
All outstanding checks on November 30 (including the bank credit) were cleared n the bank in December.
There were outstanding checks of P15,000 and deposit in transit of P19,000 on December 31.
Receivables
1. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective
annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
c. 18%
d. 30%
2. At the close of its first year of operations, December 31, 2007, Linn Company had accounts receivable of $540,000,
after deducting the related allowance for doubtful accounts. During 2007, the company had charges to bad debt expense
of $90,000 and wrote off, as uncollectible, accounts receivable of $40,000. What should the company report on its
balance sheet at December 31, 2007, as accounts receivable before the allowance for doubtful accounts?
a. $670,000
b. $590,000
c. $490,000
d. d. $440,000
3. Before year-end adjusting entries, Bass Company's account balances at December 31, 2007, for accounts receivable and
the related allowance for uncollectible accounts were $600,000 and $45,000, respectively. An aging of accounts
receivable indicated that $62,500 of the December 31 receivables are expected to be uncollectible. The net realizable
value of accounts receivable after adjustment is
a. $582,500.
b. $537,500.
c. $492,500.
d. $555,000.
4. The following information is available for Colombia Co. relative to 2011 operations:
What is the balance of the accounts receivable balance at December 31, 2011?
a. P82,000
b. P62,000
c. P20,000
d. P146,000
6. Holtzman Corporation had a 1/1/07 balance in the Allowance for Doubtful Accounts of $10,000. During 2007, it wrote
off $7,200 of accounts and collected $2,100 on accounts previously written off. The balance in Accounts Receivable
was $200,000 at 1/1 and $240,000 at 12/31. At 12/31/07, Holtzman estimates that 5% of accounts receivable will prove
to be uncollectible. What is Bad Debt Expense for 2007?
a. $2,000.
b. $7,100.
c. $9,200.
d. $12,000.
7. Marley Company received a seven-year zero-interest-bearing note on February 22, 2007, in exchange for property it
sold to O’Rear Company. There was no established exchange price for this property and the note has no ready market.
The prevailing rate of interest for a note of this type was 7% on February 22, 2007, 7.5% on December 31, 2007, 7.7%
on February 22, 2008, and 8% on December 31, 2008. What interest rate should be used to calculate the interest
revenue from this transaction for the years ended December 31, 2007 and 2008, respectively?
a. 0% and 0%
b. 7% and 7%
c. 7% and 7.7%
d. 7.5% and 8%
8. On December 31, 2007, Eller Corporation sold for $75,000 an old machine having an original cost of $135,000 and a
book value of $60,000. The terms of the sale were as follows:
$15,000 down payment
$30,000 payable on December 31 each of the next two years
The agreement of sale made no mention of interest; however, 9% would be a fair rate for this type of transaction. What
should be the amount of the notes receivable net of the unamortized discount on December 31, 2007 rounded to the
nearest dollar? (The present value of an ordinary annuity of 1 at 9% for 2 years is 1.75911.)
a. $52,773.
b. $67,773.
c. $60,000.
d. $105,546.
9. Henry Co. assigned $400,000 of accounts receivable to Easy Finance Co. as security for a loan of $335,000. Easy
charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month,
Henry collected $110,000 on assigned accounts after deducting $380 of discounts. Henry accepted returns worth
$1,350 and wrote off assigned accounts totaling $2,980.
The amount of cash Henry received from Easy at the time of the transfer was
a. $301,500.
b. $327,000.
c. $328,300.
d. $335,000.
11. On February 1, 2007, Norton Company factored receivables with a carrying amount of $300,000 to Koch Company.
Koch Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this
transaction, you are to determine the amount of loss on sale to be reported in the income statement of Norton Company
for February.
Assume that Norton factors the receivables on a without recourse basis. The loss to be reported is
a. $0.
b. $9,000.
c. $15,000.
d. $24,000.
12. Assume that Norton factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,500.
The loss to be reported is
a. $9,000.
b. $10,500.
c. $15,000.
d. $25,500.
13. Mortonson Corporation factored, with recourse, $300,000 of accounts receivable with Huskie Financing. The finance
charge is 3%, and 5% was retained to cover sales discounts, sales returns, and sales allowances. Mortonson estimates
the recourse obligation at $7,200. What amount should Mortonson report as a loss on sale of receivables?
a. $ -0-.
b. $9,000.
c. $16,200.
d. d. $31,200.
14. Nottingham Corporation had accounts receivable of $100,000 at 1/1. The only transactions affecting accounts
receivable were sales of $900,000 and cash collections of $850,000. The accounts receivable turnover is
a. 6.0.
b. 6.6
c. 7.2
d. 9.0
15. On the December 31, 2007 balance sheet of Yount Co., the current receivables consisted of the following:
Trade accounts receivable $ 75,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November 2007) 3,000
Selling price of unsold goods sent by Yount on consignment
at 130% of cost (not included in Yount 's ending inventory) 26,000
Security deposit on lease of warehouse used for storing
some inventories 30,000
At December 31, 2007, the correct total of Yount 's current net receivables was
a. 76,000
b. 102,000
c. 106,000
d. 132,000
16. On June 1, 2007, Watt Corp. loaned Hall $300,000 on a 12% note, payable in five annual installments of $60,000
beginning January 2, 2008. In connection with this loan, Hall was required to deposit $3,000 in a zero-interest-bearing
escrow account. The amount held in escrow is to be returned to Hall after all principal and interest payments have been
made. Interest on the note is payable on the first day of each month beginning July 1, 2007. Hall made timely payments
through November 1, 2007. On January 2, 2008, Watt received payment of the first principal installment plus all
interest due. At December 31, 2007, Watt's interest receivable on the loan to Hall should be
a. $0.
b. $3,000.
c. $6,000.
d. $9,000.
-end-