COLLEGE OF BUSINESS ADMINISTRATION ACCOUNTANCY DEPARTMENT

PRELIMINARY EXAMINATION
July 20, 2016

AC317A FINANCIAL ACCOUNTING & REPORTING 3

Instruction: Choose the letter that corresponds to the best answer. Show solutions, if
necessary, in GOOD ACCOUNTING FORM.

Theories (30%):

1. The first step in the accounting cycle is to

a. Record transactions in a journal. c. Post journal entries to general ledger accounts.
b. Analyze transactions from source documents. d. Adjust the general ledger accounts.

2. The last step in the accounting cycle is to

a. Prepare a post closing trial balance. c. Prepare financial statements.
b. Journalize and post closing entries. d. Journalize and post adjusting entries

3. In recording transactions,
a. The word debit means increase and the word credit means decrease.
b. Assets, expenses, and drawing accounts are debited for increases.
c. Liabilities, revenue, and drawing accounts are debited for increases.
d. Assets, expenses, and capital accounts are debited for increases.

4. Which of the following is not considered a book of original entry?

a. General journal c. Sales journal
b. General ledger d. Purchases journal

5. Which of the following accounts would be increased by a debit?

a. Share capital b. Notes payable c. Accounts payable d. Cash

6. An example of a nominal account and contra account is

a. Sales return b. Accum. depreciation c. Freight out d. Freight in

7. Which of the following statements regarding trial balance is incorrect?

a. A trial balance is a test of the equality of the debit and credit balances in the ledger.
b. A trial balance is a list of all the open accounts in the ledger with their balances as of a given date.
c. A trial balance proves that no errors of any kind have been made in the accounts during the accounting period.
d. A trial balance helps to localize errors within identifiable time period.

8. An adjusting entry in which a revenue is recognized before the related cash receipt occurs is called:
a. Deferral b. Nominal c. Accrual d. Special item

9. A prepaid expense can best be described as an amount

a. Paid and currently matched with earnings.
b. Paid and not currently matched with earnings.
c. Not paid and currently matched with earnings.
d. Not paid and not currently matched with earnings.

10. An unearned revenue can best be described as an amount

a. Collected and currently matched with expenses.
b. Collected and not currently matched with expenses.
c. Not collected and currently matched with expenses.
d. Not collected and not currently matched with expenses.

11. If an inventory account is understated at year-end, the effect is to

a. Overstate the net purchases.
b. Overstate the gross margin.
c. Overstate the cost of goods of available for sale.
d. Overstate the cost of goods sold.

12. Failure to record accrued salaries at the end of an accounting period results in
a. Overstated retained earnings c. Overstated revenue
b. Overstated assest d. Understated retained earnings

13. Which of the following is a counterbalancing error?

a. Understated depletion expense c. Prepaid expense adjusted incorrectly
b. Bond premium under-amortized d. Overstated depreciation expense

-1-
14. Which of the following errors will not self-correct in the next year?
a. Accrued expense not recognize at year end.
b. Accrued revenue not recognized at year-end.
c. Depreciation expense overstated for the year.
d. Prepaid expense not recognize at year-end.

15. An overstatement of ending inventory in the current period would result in income of the next period being
a. Overstated c. Correctly stated
b. Understated d. The answer cannot be determined from the information.

16. Which of the following is not an example of an accounting error?

a. Misstatement of asset, liability or equity.
b. Incorrect classification of expenditure as between expense and asset.
c. Failure to recognize accrual and deferral.
d. Recognition of gain on fully depreciated asset.

17. If accrued salaries payable is overlooked, which of the following is incorrect?

a. Salaries expense is understated.
b. Liability is understated.
c. Net income is understated.
d. Retained earnings account is overstated.

18. The Standard that provides guideline on accounting for errors, accounting policies and changes in accounting
estimates is _______________.
a. PAS 1 b. PAS 8 c. PAS 18 d. PAS 28

19. Which of the following errors could result in an overstatement of both current assets and shareholders equity?
a. An understatement of accrued sales commissions.
b. Noncurrent note receivable principal is misclassified as current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as manufacturing overhead.

20. At the end of the current year, an entity failed to accrue sales commissions during the current year but paid in the
next year. The error was not repeated in the next year. What was the effect of this error on current year-end working
capital and retained earnings balance?
a. Overstated, overstated c. No effect, no effect
b. No effect, overstated d. Overstated, no effect

21. Which of the following statements regarding accrual versus cash basis of accounting is true?
a. The cash basis is appropriate for some smaller entities especially those in the service industry.
b. The cash basis is less useful in predicting the timing and amounts of future cash flows of an entity.
c. Application of the cash basis results in an income statement reporting revenue and expenses.
d. The cash basis requires a complete set of double entry records.

22. Under the cash basis of accounting,

a. Revenue is recorded when earned.
b. Accounts receivable would appear in the statement of financial position.
c. Depreciation of assets having an economic life of more than one year is not recognized.
d. The matching principle is ignored.

23. Total net income over the life of an entity is

a. Higher under the cash basis than under the accrual basis.
b. Lower under the cash basis than under the accrual basis.
c. The same under the cash basis as under the accrual basis.
d. Not susceptible to measurement.

24. Incomplete accounting records using only a cash book is a characteristic of

a. Cash basis b. Accrual basis c. Single entry system d. Double entry system

25. Compared to cash basis net income for the current year, an entitys accrual basis net income increased when it
a. Declared a cash dividend in the prior year that it paid in the current year.
b. Wrote off more accounts receivable than it reported as uncollectible accounts expense in the current year.
c. Had lower accrued expenses on December 31 of the current year that on January 1.
d. Sold used equipment for cash at a gain in the current year.

26. The premium on a 3-year insurance policy is expiring on December 31, 2019 was paid in total on January 1, 2017. If
the entity has six-month operating cycle, then December 31, 2017, the prepaid insurance reported as a current asset
would be for
a. 6 months b. 12 months c. 18 months d. 24 months

For Nos. 27 to 30, identify the following accounts defined below:

a. Accrued expense b. Deferred income c. Accrued income d. Prepaid expense

27. These are expenses paid in advance but not yet incurred.
28. These are expenses incurred but not yet paid
29. These are revenue received but not yet earned.
30. These are revenue earned but not yet received

-2-
Problems (70%)

31. A law firm began November with Office Supplies of P16,000. During the month, the firm purchased supplies of
P29,000. At November 30, supplies on hand total P21,000. The adjusting entry at November 30 will result in
supplies expense of
a. P21,000 b. P24,000 c. P29,000 d. P45,000

32. A business received cash of P30,000 in advance for service that will be provided later. The cash received entry debited
Cash and credited Unearned Revenue for P30,000. At the end of the period, P11,000 is still unearned. The adjusting
entry for this situation is
a. debit Unearned Revenue and credit Revenue for P19,000.
b. debit Unearned Revenue and credit Revenue for P11,000.
c. debit Revenue and credit Unearned Revenue for P19,000.
d. debit Revenue and credit Unearned Revenue for P11,000.

33. On November 1, 2016, Blue Company paid P36,000 to renew its insurance policy for three years. At
December 31, 2016, Blues unadjusted trial balance showed a balance of P900 for Prepaid Insurance and P44,100 for
Insurance Expense. What amount should be reported for Prepaid Insurance and Insurance Expense, respectively in
Blues 2016 financial statements?
a. P33,000 and P12,000 c. P34,000 and P12,000
b. P34,000 and P11,000 d. P34,900 and P10,100

34. At December 31, 2016, the unadjusted trial balance shows Office Supplies of P60,000 and Office Supplies Expense of
P101,000. The December 31 adjusting entry debited Office Supplies Expense of P17,000. After the December
adjusting entries have been posted, what is the correct balance in the Office Supplies account on December 31, 2016?
a. P118,000 b. P84,000 c. P77,000 d. P43,000

35. Green Company collected P12,350 in interest during 2016. Green showed P1,850 in interest receivable on its
December 31, 2016 statement of financial position and P5,300 on December 31, 2015. How much is the Interest
Revenue reported on Greens statement of comprehensive income for 2016?
a. P14,200 b. P12,350 c. P8,900 d. P3,450

36. White Company recorded accrued salaries of P25,000 at December 31, 2015. During 2016, White Company paid
salaries of P872,000. Unpaid salaries at December 31, 2016 amounted to P34,000. White prepares adjustments only
at December 31, and also reversing entries on January 1. The balance of Salaries Expense account that would
appear in the post-closing trial balance at December 31, 2016 is
a. P0 b. P847,000 c. P872,000 d. P881,000

37. Black Corporation paid P24,900 in insurance premiums during 2016. Black showed P3,600 in Prepaid Insurance on
its December 31, 2015 statement of financial position and P4,500 on December 31, 2016. The Insurance Expense on
the statement of comprehensive income for 2016 was
a. P16,800 b. P24,000 c. P25,800 d. P33,000

Refer to this case for Nos. 38 to 40.

Yellow Company sells service contracts for personal computers. The service contracts are for one-year, two-year, or
three-year period. All sales are for cash and all receipts are credited to Unearned Service Contracts Revenue. This
account had a balance of P144,000 at December 31, 2016 before year-end adjustments.

Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of
P36,000 at December 31, 2016. Service contracts still outstanding at December 31, 2016 expire as follows:

During 2017 - P30,000

During 2018 - 045,000
During 2019 - 020,000

38. What amount should be reported as Unearned Service Contract Revenue in Yellow Companys December 31, 2016
statement of financial position?
a. P49,000 b. P59,000 c. P95,000 d. P108,000

39. How much should be reported as Service Contract Revenue in Yellows statement of comprehensive income for the
year ended December 31, 2016?
a. P36,000 b. P49,000 c. P95,000 d. P108,000

40. How much is the gross profit for the period December 31, 2016?
a. P14,200 b. P13,000 c. P12,000 d. P11,000

41. On December 31, 2015, Utilities Expense for the year as reported in the statement of comprehensive income is
P117,000. The statement of financial position as of December 31, 2015 reported accrued utilities expense of P9,000.
Total payments for utilities during 2016 were P108,000. The Company appropriately made a reversing entry for
utilities at January 1, 2016. The correct adjusting entry at December 31, 2016 includes
a. A debit to Utilities Expense for P9,000.
b. A credit to Utilities Expense for P9,000.
c. A debit to Utilities Payable for P18,000.
d. A credit to Utilities Payable for P18,000

-3-
42. During 2017, Grow Company discovered that the ending inventories reported on its financial statements were
incorrect by the following amounts: 2015 P60,000 understated; 2016 P75,000 overstated. Grow Company uses
the periodic inventory system to ascertain year-end quantities that converted to peso amounts using the FIFO cost
method. What is the effect of the errors on 2016 profit
a. P60,000 overstated c. P135,000 overstated
b. P60,000 understated d. P135,000 understated

43. On January 1, 2015, Plow Corporation acquired a machine at a cost of P200,000. It was depreciated on the straight-
line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was
recognized in Plows 2015 financial statements. The oversight was discovered during the preparation of Plows 2016
financial statements. What is the required balance of accumulated depreciation at December 31, 2016?
a. P40,000 b. P80,000 c. P120,000 d. P0

Refer to this case for Nos. 44 to 47

The December 31 year-end financial statements of Crow Company contained the following errors:

December 31, 2015 December 31, 2016

Ending inventory P30,000 under P27,000 over
Depreciation expense 6,000 under

Insurance premiums of P22,500 were paid in 2015 covering years 2015, 2016 and 2017. The entire amount was
charged to Prepaid Insurance in 2015. Likewise, on December 31, 2016, a fully depreciated machinery was sold for
P48,000 but the cash sale was credited to Sales on the same date. There were no other errors during 2015 and 2016
and no correcting entries were made for any of these errors. Ignore income tax consideration.

44. What is the total effect of the errors on the 2015 profit? (Disregard sign)
a. P16,500 b. P23,000 c. P13,500 d. P43,500

45. What is the total effect of the errors on the 2016 profit? (Disregard sign)
a. P72,000 b. P64,500 c. P48,000 d. P34,500

46. What is the effect in Crows working capital at December 31, 2016?
a. P27,000 b. P7,500 c. P42,000 d. P19,500

47. What is the total effect of the errors on Crows Retained Earnings Balance at December 31, 2016?
a. P16,500 b. P64,500 c. P27,000 d. P48,000

48. Blow Industries showed profit before income taxes of P250,000 on December 31, 2016. On your year-end verification
of the accounts, you discovered the following:
a. P100,000 worth of merchandise was purchased in 2016 and included in the ending inventory. However, the
purchase was recorded only in 2017.
b. A merchandise shipment valued at P150,000 was properly recorded as purchases at year-end. Since the
merchandise was still at the port area, they were inadvertently omitted from the inventory balance at December
31, 2016.
c. The Company records sales inclusive of value added tax (VAT) and charges sales upon remittance to the BIR. VAT
for December 2016 amounting to P50,000 was remitted to the BIR in January 2017.
d. Rental of P30,000 on an equipment, applicable for six months, was received on November 1, 2016. The entire
amount was reported as income upon receipt.
e. Insurance premium covering the period from July 1, 2016 to July 1, 2018, amounting to P120,000 was paid and
recorded as expense in July 2016. The Company did not make any adjustment at the end of the year.

What is the correct profit before income taxes for the year 2016?
a. P300,000 b. P310,000 c. P320,000 d. P330,000

Refer to this case for Nos. 49 to 51

Profit for Claw Company for the years 2015 and 2016 is shown below. A review of the accounts, however, disclosed
the following errors:

2015 2016
Profit P246,500 P312,500
Inventory understatement at year-end 25,000
Computer purchased at year-end charged to expense (10-year life) 40,000
Merchandise purchased on account recorded as liability but not
included in inventory 50,000
Unearned rent received taken into income 18,000
Accrued taxes unrecorded 30,000

49. The adjusting entry to be recorded to correct unearned rent received that is taken into income includes
a. A debit to Unearned Rent c. A debit to Rent Income
b. A debit to Rent Receivable d. A debit to Accrued Rent

50. The corrected profit for 2015 is

a. P332,500 b. P336,500 c. P382,500 d. P282,500

51. The corrected profit for 2016 is

a. P235,500 b. P205,500 c. P265,500 d. P285,500

-4-
52. Gasoline Company reported revenue of P2,700,000 in its cash basis income statement for the year ended
December 31, 2016. Additional information were as follows:

Accounts receivable, December 31, 2015 P700,000

Accounts receivable, December 31, 2016 1,100,000

How much should Gasoline report revenue for 2016 under accrual basis?
a. P2,700,000 b. P3,100,000 c. P2,300,000 d. P3,500,000

53. Wander Company reported revenue of P6,125,000 under the accrual basis for the year ended 2016. Additional
information were made available:

Accounts receivable, December 31, 2015 P1,250,000

Accounts receivable, December 31, 2016 1,375,000

Under the cash basis, how much should Wander Company report as revenue for 2016?
a. P6,000,000 b. P6,125,000 c. P6,250,000 d. P6,325,000

54. Kerosene Company reported total purchases of P2,700,000 in its accrual basis financial statement on
December 31, 2016. Additional information revealed the following:

Accounts payable, January 1, 2016 P600,000

Accounts payable, December 31, 2016 800,000

Under the cash basis, how much is the total purchases for 2016?
a. P2,300,000 b. P2,500,000 c. P2,700,000 d. P2,900,000

55. Under the accrual basis, rental income of Diesel Company for the calendar year 2016 is P600,000. Additional
information regarding rental income are presented below:

Unearned rental income, January 1, 2016 P50,000

Unearned rental income, December 31, 2016 75,000
Accrued rental income, January 1, 2016 30,000
Accrued rental income, December 31, 2016 40,000

How much is the cash received from the rent for the year ended December 31, 2016?
a. P570,000 b. P585,000 c. P615,000 d. P630,000

56. Hardy Boys acquires copyrights from authors, paying advance royalties in some cases and in others, paying royalties
within 30 days of year-end. Hardy Boys reported royalty expense of P375,000 for the year ended December 31, 2016.
The following data are included in the corporations December 31 balance sheet:

2015 2016
Prepaid royalties P60,000 P50,000
Royalties payable 75,000 90,000

What amount represents cash paid for royalties for the period ended December 31, 2016?
a. P300,000 b. P325,000 c. P350,000 d. P375,000

57. The following information was obtained from the incomplete records of Tanker relative to its operating expenses:

2015 2016
Total payments made P670,000
Total operating expenses 690,000
Prepaid operating expenses P120,000 ?
Accrued operating expenses 230,000 190,000

What is the balance of Prepaid Operating Expense at December 31, 2016?

a. P60,000 b. P120,000 c. P180,000 d. P240,000

Refer to this case for Nos. 58 to 63

Horn Corporation maintains its financial records on the cash basis of accounting. Interested in securing a long-term
loan from its regular bank, the Company requests you to convert its cash basis profit or loss data to the accrual basis.
You are provided with the following data covering 2015, 2016, and 2017.

2015 2016 2017

Cash receipts from sales
on 2015 sales P295,000 P160,000 P300,000
on 2016 sales 355,000 90,000
on 2017 sales 408,000
Cash payments for expenses
on 2015 expenses 185,000 67,000 25,000
on 2016 expenses (a) 40,000 160,000 55,000
on 2017 expenses (b) 45,000 218,000

a. Prepayments of 2016 expenses

b. Prepayments of 2017 expenses

-5-
Under cash basis, how much should be reported as:
58. Revenue for 2015 a. P295,000 b. P515,000 c. P798,000 d. P70,000
59. Expense for 2016 a. P225,000 b. P272,000 c. P298,000 d. P500,000
60. Profit for 2017 a. P243,000 b. P500,000 c. P70,000 d. P298,000

Under accrual basis, how much should be reported as

61. Revenue for 2017 a. P755,000 b. P445,000 c. P408,000 d. P700,000
62. Expense for 2016 a. P290,000 b. P277,000 c. P263,000 d. P255,000
63. Profit for 2015 a. P478,000 b. P190,000 c. P145,000 d. P750,000

Refer to this case for Nos. 64 to 65

The following data relate to store equipment of Progress Company for 2016:

December 31, 2015 December 31, 2016

Store Equipment Cost P1,450,000 P1,750,000
Accumulated Depreciation 580,000 600,000

Store Equipment costing P300,000 was sold for P210,000 resulting in a gain of P30,000.

64. How much is the depreciation expense on store equipment for 2016?
a. P100,000 b. P140,000 c. P180,000 d. P220,000

65. How much should be reported as additions to the cost of Store Equipment?
a. P600,000 b. P460,000 c. P180,000 d. P240,000

end

What you are, is what you have been;

what youll be, is what you do now.
Anonymous

@acct_jpt

-6-