Test Bank – Financial Acctg 3 (fr.

dean)

Cash & Cash equivalent

1.Which of the following should not be considered cash for financial reporting purposes?
A. Petty cash funds and change funds
B. Money orders, certified checks and personal checks
C. Coin, currency and available funds
D. Postdated checks and IOUs

2. Which of the following should be considered cash?

A. Certificates of deposits
B. Money market checking accounts
C. Money market savings certificates
D. Postdated checks

3. The following statements relate to cash. Which statement is true?

A. The term “cash equivalent” refers to demand credit instruments such as money order and bank
drafts.
B. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal
operating expenses for a period of time.
C. Classification of a restricted cash balance as current or non-current should parallel the
classification of the related obligation for which the cash was restricted.
D. Compensating balances required by a bank should always be excluded from “cash and cash
equivalent”.

4. Compensating balance agreement (choose the incorrect one)

A. Reduces the amount of cash available to the borrower.
B. Always involves legal restriction on the compensating cash balance.
C. Increases the effective interest rate to the borrower.
D. Should be disclosed in the notes to financial statements.

5. Compensating balance agreement that does not legally restrict the amount of compensating
cash balance should be reported
A. As current assets
B. As noncurrent investment
C. As other asset
D. In the notes to financial statements

6. Cash equivalents are

A. Short-term and highly liquid investments that are readily convertible into cash.
B. Short-term and highly liquid investments that are readily convertible into cash with remaining
maturity of three months.
 C. Short-term and 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..
D. Short-term and highly liquid marketable equity securities.

7. Bank overdraft, if material, should be

A. Reported as a deduction from the current asset section.
B. Reported as a deduction from cash.
C. Netted against cash and a net cash amount reported.
D. Reported as a current liability.

8. All cash receipts are deposited intact and all cash disbursements are made by means of check. This
internal control is known as
A. Administrative control
B. Imprest system
C. Accounting control
D. Auditing control.

9. Cash control systems are the methods and procedures used to ensure
A. That the current obligations are met.
B. That excess cash does not exist.
C. The safeguarding of cash.
D. That unused cash is invested.

10. Entries to record the replenishment of petty cash fund result in a debit to various expense accounts
and a credit to cash in bank. This accounting procedure typically exemplifies the
A. Imprest petty cash system.
B. Fluctuating petty cash system.
C. Internal control.
D. Administrative control.

11. What is the major purpose of an imprest petty cash fund?

A. To effectively plan cash inflows and outflows
B. To ease the payment of cash to vendors
C. To determine honesty of the employees.
D. To effectively control cash disbursements.

12. A cash over or short account

A. Is generally not accepted
B. Is debited when the petty cash fund proves out over.
C. Is debited when the petty cash fund proves out short.
D. Is a contra account to cash.

13. The payments of accounts payable made subsequent to the close of the accounting period are
recorded as if they were made at the end of the current period.
A. Window dressing
 B. Lapping
C. Kiting
D. Imprest system

14. Bank reconciliation

A. Is the process of transferring money in or out of a bank account.
B. Requires that every transaction which will result in a cash payment be verified, approved and
recorded before a bank check is prepared.
C. Is an analysis that reflects the bank transactions made by a depositor.
D. Explains the difference between the bank balance and the balance shown in the depositor’s
records.

15. If the cash balance shown in a company’s accounting records is more than the correct cash balance
and neither the company nor the bank has made any errors, there must be
A. Deposits credited by the bank but not yet recorded by the company.
B. Deposits in transit.
C. Outstanding checks.
D. Bank charges not yet recorded by the company.

16. If the cash balance in a company’s bank statement is more than the correct cash balance and neither
the company nor the bank has made any errors, there must be
A. Deposits credited by the bank but not yet recorded by the company.
B. Outstanding checks
C. Bank charges not yet recorded by the company.
D. Deposits in transit.

17. The journal entries for a bank reconciliation

A. Are taken from the balance per bank only
B. May include a debit to office expense for a bank service charges.
C. May include a credit to accounts receivable for an NSF check.
D. May include a debit to accounts payable for an NSF check.

18. When preparing a bank reconciliation, bank credits are

A. Added to the bank statement balance
B. Deducted from the bank statement balance
C. Added to the balance per book
D. Deducted from the balance per book

19. Which of the following is a key element of internal control over a cash payments?
A. Authorizing and verifying that all cash received is recorded daily.
B. Requiring that all petty cash vouchers are approved by two persons.
C. Making daily bank deposits.
D. Periodically reconciling the cash account balance per book with the statement balance.
Accounts Receivable

20. Accounts receivable should be recognized initially at

A. Face value
B. Present value
C. Maturity value
D. Net realizable value

21. Subsequent to initial recognition, accounts receivable should be carried at

A. Face value
B. Net realizable value
C. Maturity value
D. Present value

22. Long-term notes receivable which nominally bear no interest or an interest which is unreasonably
low should be recognized initially at
A. Face value
B. Present value
C. Maturity value
D. Net realizable value

23. Loans and receivable are nonderivative financial assets

A. With fixed or determinable payments that are not quoted in an active market.
B. With fixed or determinable payments that are quoted in an active market.
C. Without fixed or determinable payments that are not quoted in an active market.
D. Without fixed or determinable payments that are quoted in an active market.

24. Initially, loans and receivables are measured at

A. Fair value
B. Fair value plus transaction costs that are directly attributable to the acquisition.
C. Maturity value.
D. Maturity value plus transaction costs that are directly attributable to the acquisition.

25. Subsequent to initial recognition, loans and receivables are measured at

A. Cost
B. Amortized cost using straight line method
C. Amortized cost using effective interest method
D. Fair value

26. Receivables denominated in a foreign currency should be

A. Translated to local currency using the exchange rate at the time the receivable arise.
B. Shown at face value of the foreign currency.
C. Translated to local currency using the exchange rate at the balance sheet date.
D. Translated to local currency using the exchange rate when the balance sheet is issued.
27. Trade receivables are classified as current assets when they are reasonably expected to be realized in
cash
A. Within one year
B. Within the normal operating cycle.
C. Within one year or within the normal operating cycle whichever is shorter.
D. Within one year or within the normal operating cycle whichever is longer.

28. Nontrade receivables are classified as current assets only if they are reasonably expected to be
realized in cash
A. Within one year or within the normal operating cycle whichever is shorter.
B. Within the normal operating cycle.
C. Within one year or within the normal operating cycle whichever is longer.
D. Within one year, the length of the operating cycle notwithstanding.

29. Receivables from subsidiaries and affiliates, if significant should be classified as

A. Current assets
B. Noncurrent assets
C. Either as noncurrent or current depending on the expectation of realizing them within one
year or over one year
D. Intangible assets

30. If a company employs the gross method of recording accounts receivable from customers, the sales
discount taken should be reported as
A. Deduction from sales in the income statement
B. Other expense in the income statement
C. Deduction from accounts receivable in determining the net realizable value of accounts
receivable.
D. Sales discount forfeited in the cost of goods sold section of the income statement.

31. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted
value of 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 noninterest 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.

32. Credit balances in accounts receivable should be classified as

A. Current liability
B. Part of accounts payable
C. Noncurrent liability
D. Deduction from accounts receivable

33. A method of estimating doubtful accounts that focuses on the income statement rather the balance
sheet is the allowance method based on
A. Direct writeoff
 B. Aging of trade accounts receivable
C. Credit sales
D. Balance of accounts receivable

34. A method of estimating doubtful accounts that focuses on the income statement rather the balance
sheet is the allowance method based on
A. Aging of receivables
B. Direct writeoff
C. Gross sales
D. Credit sales less sales returns and allowances

35. A company uses the allowance method of recognizing doubtful accounts. The entry to record the
writeoff of a specific uncollectible account
A. Affects neither net income nor working capital
B. Affects neither net income nor accounts receivable
C. Decreases both net income and working capital
D. Decreases both net income and accounts receivable.

36. When a specific customer’s account receivable is written off as uncollectible, what will be the effect
on net income under each of the following methods of recognizing bad debts expense?
Allowance Direct writeoff
A. None Decrease
B. Decrease None
C. Decrease Decrease
D. None None

37. When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of an account previously written off would
A. Disclosed in the notes
B. Excluded from the total receivables, with disclosure
C. Excluded from the total receivables, with no disclosures
D. Excluded from the total receivables and a gain or loss is recognized between the face value
and the amount of borrowings.

38. If receivables are hypothecated against borrowings, the amount of receivables involved should be
A. Disclosed in the notes
B. Excluded from the total receivables, with disclosure
C. Excluded from the total receivables, with no disclosures
D. Excluded from the total receivables and a gain or loss is recognized between the face value and
the amount of borrowings.

39. It is a predetermined amount withheld by a factor as a protection against customer returns,

allowances and other special adjustments.
A. Equity in assigned accounts
B. Service charge
C. Commission
 D. Factor’s holdback

40. Which of the following is true when accounts receivable are factored without recourse?
A. The transaction may be accounted for either as secured borrowing or sale.
B. The receivables are used as collateral for a promissory note issued to the factor by the owner of
the receivables.
C. The factor assumes the risk of collectability and absorbs any credit losses in collecting the
receivables.
D. The financing cost should be recognized ratably over the collection period of the receivables.

41. Notes receivable discounted with recourse should be

A. Included in total receivables with disclosure of contingent liability.
B. Included in total receivables without disclosure of contingent liability.
C. Excluded in total receivables with disclosure of contingent liability.
D. Excluded in total receivables without disclosure of contingent liability.

42. Which of the following statements is correct?

A. The net realizable value of the total amount of accounts receivable is defined as the gross amount
billed to customers less any cash and trade discounts.
B. When a specified uncollectible account which has already been written off is later collected sales
revenue is increased by the amount of the recovery.
C. The primary accounting principle supporting use of the allowance for doubtful account is the
cost principle.
D. An estimate of doubtful accounts expense based upon credit sales rather than total sales
will likely be more in conformity with the matching principle.

44. Which of the following statement is true?

A. Trade accounts receivable are the only asset on which doubtful accounts expense can be
incurred.
B. The sole justification for providing for doubtful accounts is conservatism.
C. Methods of estimating doubtful accounts expense based upon the collectability of accounts
receivable emphasize the income statement rather than the balance sheet.
D. Provision for bad debt losses on trade receivable is usually included in computing the
balance of “allowance for doubtful accounts”.

45. Which of the accounting principles primarily supports the use of allowance for doubtful accounts?
A. Continuity principle
B. Full-disclosure principle
C. Matching principle
D. Cost principle

46. The allowance method of recognizing bed debt expense can be applied is more than one way. What
two conditions must be met before the allowance method can be used?
A. Bad debts must be expected and material.
B. Bad debts must be relevant and reliable
C. Bad debts must be probable and estimable
 D. Bad debts must be consistent over time and the method used to estimate them must be
consistently applied.

CASH & CASH EQUIVALENT

47. In connection with your audit of Mags Corporation for the year ended, December 31, 2010, you
gathered the following:

1. Current account at Metrobank P2,000,000

2. Current account at BPI ( 100,000)
3. Payroll account 500,000
4. Foreign bank account – restricted (in equivalent pesos) 1,000,000
5. Postage stamps 1,000
6. Employee’s postdated checks 4,000
7. IOU from controller’s sister 10,000
8. Credit memo from a vendor for a purchase return 20,000
9. Traveler’s check 50,000
10. NSF check 15,000
11. Money order 30,000
12. Petty cash fund ( P4,000 in currency and expense receipts for P6,000) 10,000
13. Treasury bills, due 3/3/11 (purchased 12/29/09) 200,000
14. Treasury bills, due 1/31/11 (purchased 2/1/10) 300,000

Based on the above information and the result of your audit, compute for the cash and cash
equivalent that would be reported in the December 31, 2010 balance sheet.
A. P2,784,000
B. P3,084,000
C. P2,790,000
D. P2,704,000

48. In the course of your audit of the Autumn Corporation, its controller is attempting to determine the
amount of cash to be reported on its December 31, 2010 balance sheet. The following information is
provided:

1. Commercial savings account of P1,200,000 and a commercial checking account balance of

P1,800,000 are held at PS Bank.
2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee
to reimburse through salary deduction).
3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term
debt.
4. Petty cash fund of P10,000.
5. An IOU from a company officer in the amount of P40,000.
6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its
cash receipts. At the present time, the company has no deposits at this bank.
 7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of
deposit have maturity of 120 days.
8. Autumn has received a check dated January 2, 2011 in the amount of P150,000.
9. Autumn has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure
future credit availability.
10. Currency and coin on hand amounted to P15,000.

How much will be reported as cash and cash equivalent at December 31, 2010?
A. P3,025,000
B. P2,825,000
C. P2,575,000
D. P5,025,000

49. The cash account of MDG Corporation as of December 31, 2010 consists of the following:

On deposit in current account with Real Bank P 900,000

Cash collection not yet deposited to the bank 350,000
A customer’s check returned by the bank for insufficient fund 150,000
A check drawn by the Vice-President of the Corporation
dated January 15,2011 70,000
A check drawn by a supplier dated December 28, 2010 for
goods returned by the corporation 60,000
A check dated May 31, 2010 drawn by the Corporation
against the Nominal Bank in payment of custom duties.
Since the importation did not materialize the check was
returned by the customs broker. This check was an
outstanding check in the reconciliation of the Nominal Bank
account. 410,000
Petty cash fund of which P5,000 is in currency; P3,600 in the
form of employees’ IOUs and P1,400 is supported by
approved petty cash vouchers for expenses all dated prior
to closing of the books on December 31, 2010. 10,000
Total P1,950,000
Less: Overdraft with Nominal Bank secured by a chattel
Mortgage on the inventories 300,000
Balance per ledger P1,650,000

At what amount will the account “Cash” appear on the December 31, 2010 balance sheet?
A. P1,315,000
B. P1,425,000
C. P1,495,000
D. P1,725,000
50. You noted in the following composition of King Baker Company’s “cash account” as of December
31, 2010 in connection with your audit:

Demand deposit account P2,000,000

Time deposit – 30 days 1,000,000
NSF check of customer 40,000
Money market placement (due June 30, 2011) 1,500,000
Savings deposit in a closed bank 100,000
IOU from employee 20,000
Pension fund 3,000,000
Petty cash fund 10,000
Customer’s check dated January 1, 2011 50,000
Customer’s check outstanding for 18 months 40,000
Total P7,760,000

Additional information follows:

a. Check of P200,000 in payment of accounts payable was recorded on December 31, 2010 but
mailed to suppliers on January 5,2011.
b. Check of P100,000 dated January 15, 2011 in payment of accounts payable was recorded and
mailed on December 31, 2010.
c. The company uses the calendar year. The cash receipts journal was held open until January 15,
2011, during which time P400,000 was collected and recorded on December 31, 2010.

The cash and cash equivalents to be shown on the December 31, 2010 balance sheet is:
A. P3,310,000
B. P1,910,000
C. P2,910,000
D. P4,410,000

Questions 51 to 54: You were able to gather the following from the December 31, 2010 trial balance
of Jg Corporation in connection with your audit of the company:

Cash on hand P 500,000

Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 ( 80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P40,000 returned by bank on December 26, 2010 due to insufficient
fund but subsequently redeposited and cleared by the bank on January 8, 2011.
b. Customer’s check for P20,000 dated January 2, 2011 received on December 29,2010.
 c. Postal money orders received from customers, P30,000.

The Petty cash fund consisted of the following items as of December 31, 2010:
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity”
with names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Jg Corporation, payable to the petty cashier 4,000
P10,100

Included among the checks drawn by Jg Corporation against the BPI current account and recorded in
December 2010 are the following:
a. Check written and dated December 29, 2010 and delivered to payee on January 2, 2011,
P80,000.
b. Check written on December 27, 2010, dated January 2, 2011, delivered to payee on December
29, 2010, P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of
the deposit balance. These checks were still outstanding at December 31, 2010.

The savings account deposit in PNB has been set aside by the board of directors for acquisition of
new equipment. This account is expected to be disbursed in the next 3 months from the balance sheet
date.

Determine the adjusted balances of the following:

51. Cash on hand

A. P410,000
B. P530,000
C. P470,000
D. P440,000

52. Petty cash fund

A. P6,000
B. P7,200
C. P2,000
D. P4,900

53. BPI current account

A. P1,000,000
B. P1,120,000
C. P1,080,000
D. P1,040,000
54. Cash and cash equivalents
A. P2,917,200
B. P3,074,900
C. P3,052,000
D. P3,066,000

55- 56: The books of Manila’s Service, Inc., disclosed a cash balance of P687,570 on December 31,
2010. The bank statement as of December 31 showed a balance of P 547,800. Additional information
that might be useful in reconciling the two balances follows:

a. Check number 748 for P30,000 was originally recorded on the books as P45,000.
b. A customer’s note was dishonored on December 29 (maturity date). The bank charged Manila’s
account for P142,650, including a protest fee of P2,650.
c. The deposit of December 24 was recorded on the books as P28, 950, but it was actually a deposit
of P27,000.
d. Outstanding checks totaled P98,850 as of December 31.
e. There were bank service charges for December of P2,100 not yet recorded on the books.
f. Manila’s account had been charged on December 26 for a customer’s NSF check for P12,960.
g. Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
h. Receipts of December 31 for P134,250 were recorded by the bank on January 2.
i. A bank memo stated that a customer’s note for P45,000 and interest of P1,650 had been collected
on December 27, and the bank charged a P360 collection fee.

Determine the following:

55. Adjusted cash in bank balance

A. P583,200
B. P577,200
C. P589,200
D. P512,400

56. Net adjustment to cash as of December 31, 2010.

A. P104,370
B. P110,370
C. P 98,370
D. P175,170

57-61: Shown below is the bank reconciliation for Metro Company for November 2010:

Balance per bank, Nov. 30, 2010 P150,000

Add: Deposit in transit 24,000
Total P174,000
Less: Outstanding checks P28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2010 P136,000
 The bank statement for December 2010 contains the following data:

Total deposits P110,000

Total charges, including NSF check of P8,000
and a service charge of P400 96,000

All outstanding checks on November 30, 2010, including the bank credit, were cleared in the bank in
December 2010.

There were outstanding checks of P30,000 and deposits in transit of P38,000 on December 31, 2010.

Based on the above and the result of your audit, answer the following:

57. How much is the cash balance per bank on December 31, 2010?
A. P154,000
B. P150,000
C. P164,000
D. P172,400

58. How much is the December receipts per book?

A. P124,000
B. P 96,000
C. P110,000
D. P148,000

59. How much is the December disbursements per books?

A. P96,000
B. P79,600
C. P89,600
D. P98,000

60. How much is the cash balance per books on December 31, 2010?
A. P150,000
B. P170,400
C. P180,400
D. P162,000

61. The adjusted cash in bank balance as of December 31, 2010 is:
A. P141,600
B. P170,400
C. P180,400
D. P162,000
ACCOUNTS RECEIVABLE

62 to 65: The adjusted trial balance of Janica Company as of December 31, 2009 shows the following:

Debit Credit
Accounts Receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
 Cash sales of the company represents 10% of gross sales.
 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms.
 It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2010.
 Sales returns in 2010 amounted to P400,000. All returns were from charge sales.
 During 2010, accounts totaling to P44,000 were written off as uncollectible, bad debt recoveries
during the year amounted to P3,000.
 The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding
accounts receivable at year end. The required percentage at December 31, 2010 is 150% of the
rate used on December 31, 2009.

62. The accounts receivable as of December 31, 2010 is

A. P3,000,000
B. P 300,000
C. P 333,333
D. P2,444,000

63. The allowance for doubtful accounts as of December 31, 2010 is

A. P 20,000
B. P120,000
C. P180,000
D. P146,640

64. The net realizable value of accounts receivable as of December 31, 2010 is
A. P 307,340
B. P2,814,000
C. P2,874,000
D. P2,291,360

65. The doubtful accounts expense for the year 2010 is

A. P181,000
B. P121,000
C. P 21,000
D. P147,640
CORRECTION OF ERRORS
(prelim ay10-11)

1. Which of the following types of errors will not self-correct in the next year?

A. Accrued expenses not recognized at year-end

B. Accrued revenues that have not been collected not recognized at year-end
C. Depreciation expense overstated for the year
D. Prepaid expenses not recognized at year-end

2. On December 27, 2008, Johnson Company ordered merchandise for resale from Quantum, Inc.,
that cost $7,000 (terms cash within 10 days). Quantum shipped the merchandise f.o.b. shipping
point on December 28, 2008, and the goods arrived on January 2, 2009. The invoice was
received on December 30, 2008. Johnson Company did not record the purchase in 2008 and did
not include the goods in ending inventory. The effects on Johnson Company’s 2008 financial
statements were
A. income and owners’ equity were correct; liabilities were incorrect, assets
were correct.
B. income and owners’ equity were correct; assets and liabilities were
incorrect.
C. income, assets, liabilities, and owners’ equity were correct.
D. income, assets, liabilities, and owners’ equity were incorrect.

3. Which of the following should not be reported retroactively?

A. Use of an unacceptable accounting principle, then changing to an
acceptable accounting principle.
B. Correction of an overstatement of ending inventory made two years ago.
C. Use of an unrealistic accounting estimate, then changing to a realistic
estimate.
D. Change from a good faith but erroneous estimate to a new estimate.

4. Which of the following is a counterbalancing error?

A. Understated depletion expense
B. Bond premium under-amortized
C. Prepaid expense adjusted incorrectly
D. Overstated depreciation expenses

5. Which of the following, if discovered by James Company in the accounting period subsequent to
the period of occurrence, requires the company to report the correction of an error?
A. The estimate of the useful life of a depreciable asset should have been
revised.
B. A change from declining-balance depreciation method to straight-line
method
C. Capitalization of an expense
D. Change in percentage of sales used for determining bad debt expense
6. BJ Company uses a periodic inventory system. If the company’s beginning inventory in the
current year is overstated, and that is the only error in the current year, then the company’s
income for the current year will be
A. understated and assets correct.
B. understated and assets overstated.
C. overstated and assets overstated.
D. understated and assets understated.

7. Which of the following is not an example of an accounting error, as distinguished from a change
in accounting principle or change in accounting estimate?
A. Misstatement of assets, liabilities, or owners’ equity
B. Incorrect classification of an expenditure as between expense and an asset
C. Failure to recognize accruals and deferrals
D. Recognition of a gain on disposal of fully depreciated property

8. The September 30, 2008, physical inventory of Baxter Corporation appropriately included
$3,800 of merchandise purchased on account that was not recorded in purchases until October
2008. What effect will this error have on September 30, 2008, assets, liabilities, retained
earnings, and earnings for the year then ended, respectively?
A. Understate; no effect; overstate; overstate
B. No effect; overstate; understate; understate
C. No effect; understate; overstate; overstate
D. No effect; understate; understate; overstate

9. If, at the end of a period, Matthew Company erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its accounting
records, these errors would cause
A. no effect on the company’s net income, working capital, and retained
earnings.
B. the company’s cost of goods available for sale, cost of goods sold, and net
income to be understated.
C. the company’s ending inventory, cost of goods available for sale, and
retained earnings to be understated.
D. the company’s ending inventory, cost of goods sold, and retained earnings
to be understated.

10. Justin Corporation uses a periodic inventory system and neglected to record a purchase of
merchandise on account at year-end. This merchandise was omitted from the year-end physical
count. How will these errors affect Justin’s assets, liabilities, and stockholders’ equity at year-
end and net earnings for the year?
Stockholders’
Assets Liabilities Equity Net Earnings
A. Understate Understate No effect No effect
B. Understate No effect Understate Understate
C. No effect Understate Overstate Overstate
D. No effect Overstate Understate Understate
11. Ending inventory for 2006 is overstated by $4,000 due to a faulty count and costing. The tax rate
is 30%. Assume the same accounting methods for both financial reporting and taxes. The error is
discovered late in 2008. The 2008 annual report shows the financial statements for 2006, 2007,
2008 on a comparative basis.
Which of the following is correct regarding the reporting of this error in the 2008 annual report?
A. A journal entry is made to report the prior period adjustment, and the 2006
2007 statements are shown corrected.
B. No journal entry is needed, and the 2006 and 2007 statements are shown as
they were in the 2007 annual report.
C. No journal entry is needed, and the 2006 and 2007 statements are
shown corrected.
D. A journal entry is made to report the prior period adjustment, and the 2006
and 2007 statements are shown as they were in the 2007 annual report.

12. The ending inventory for Wattis Company was overstated by $6,000 in 2008. The overstatement
will cause Wattis Company’s
A. retained earnings to be understated on the 2008 balance sheet.
B. cost of goods sold to be understated on the 2009 income statement.
C. cost of goods sold to be overstated on the 2008 income statement.
D. 2009 balance sheet not to be misstated.

13. Which of the following would cause income of the current period to be understated?
A. Capitalizing research and development costs
B. Failure to recognize unearned rent revenue
C. Changing from LIFO to FIFO for merchandise inventory
D. Understating estimates of asset residual values

14. For a company with a periodic inventory system, which of the following would cause income to
be overstated in the period of occurrence?
A. Overestimating bad debt expense
B. Understating beginning inventory
C. Overstated purchases
D. Understated ending inventory

15. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of
each of the last three years are shown below:
2006 2007 2008
Unearned revenues ............. $150,000 $176,000

Barker failed to record the unearned revenues in each of the three years. As a result of the
omission, 2008 income was
A. overstated by $146,000.
B. understated by $146,000.
C. understated by $26,000.
 D. overstated by $26,000.

16. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of
each of the last three years are shown below.
2006 2007 2008
Unearned revenues ............. $120,000 $150,000 $176,000

Barker failed to record the unearned revenues in each of the three years. The entry needed to
correct the above errors is
A. Retained Earnings .................. 150,000
Subscription Revenues .............. 26,000
Unearned Revenues ............... 176,000

B. Retained Earnings .................. 30,000

Subscription Revenues .............. 26,000
Unearned Revenues ............... 56,000

C. Subscription Revenues .............. 176,000

Unearned Revenues ............... 176,000

D. Subscription Revenues .............. 150,000

Retained Earnings .................. 26,000
Unearned Revenues ............... 176,000

17. Koppell Co. made the following errors in counting its year-end physical inventories:
2006 .................................. $ 60,000 overstatement
2007 .................................. 108,000 understatement
2008 .................................. 90,000 overstatement

As a result of the above undetected errors, 2008 income was

A. understated by $18,000.
B. overstated by $198,000.
C. overstated by $18,000.
D. understated by $198,000.

18. Badger Corporation purchased a machine for $150,000 on January 1, 2007. Badger will
depreciate the machine using the straight-line method using a five-year period with no residual
value. As a result of an error in its purchasing records, Badger did not recognize any depreciation
for the machine in its 2007 financial statements. Badger discovered the problem during the
preparation of its 2008 financial statements. What amount should Badger record for depreciation
expense on this machine for 2008?
A. $0
B. $30,000
C. $37,500
 D. $60,000

19. Koppell Co. made the following errors in counting its year-end physical inventories:
2006 $ 60,000 overstatement
2007 ................................... 108,000 understatement
2008 ................................... 90,000 overstatement

The entry to correct the accounts at the end of 2008 is

A. Retained Earnings ................... 48,000
Cost of Goods Sold .................. 42,000
Inventory ........................ 90,000

B. Retained Earnings ................... 18,000

Cost of Goods Sold .................. 72,000
Inventory ........................ 90,000

C. Inventory .......................... 90,000

Cost of Goods Sold ............... 18,000
Retained Earnings ............... 72,000

D. Cost of Goods Sold .................. 198,000

Retained Earnings ................ 108,000
Inventory ........................ 90,000

20. April Company showed income before income tax of P6,500,000 on December 31, 2009.
During the year-end verification of the transactions of the company, the following errors are
discovered:
 P1,000,000 worth of merchandise was purchased in 2009 and included in the ending
inventory. However, the purchase was recorded only in 2010.
 A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-
end. Since the merchandise was still at the port area, it was inadvertently omitted from the
inventory balance at December 31, 2009.
 Advertising for December 2009, amounting to P500,000, was recorded when payment was
made by the firm in January, 2010.
 Rental of P300,000 on an equipment, applicable for six months, was received on November
1, 2009. The entire amount was reported as income upon receipt.
 Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting to
P200,000 was paid and recorded as expense on July 31, 2009. The company did not make
any adjustment at the end of the year.

The corrected income before tax for 2009 should be

A. P6,900,000
B. P6,400,000
C. P6,500,000
D. P6,300,000
21. June Company failed to recognize accruals and prepayments since the inception of its
business three years ago. The earnings before tax, accrual and prepayments at the end of
the current year are

Earnings before tax P1,400,000

Prepaid insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000

The corrected earnings before tax should be

A. P1,385,000
B. P1,415,000
C. P1,400,000
D. P1,375,000

22. Universal Company had the following financial statement information:

2010 2009
Revenue P1,350,000 P1,000,000
Expenses 980,000 650,000
Net income 370,000 350,000

12/31/2010 12/31/2009
Total assets P1,570,000 P1,050,000
Total liabilities 500,000 350,000
Total owners’ equity P1,070,000 P 700,000

Universal failed to record P120,000 of accrued wages at the end of 2009. The wages were
recorded and paid in January 2010. The correct accruals were made on December 31, 2010.

What is the corrected net income for 2009?

A. P230,000
B. P350,000
C. P470,000
D. P250,000

23. What is the corrected net income for 2010?

A. P490,000
B. P370,000
C. P250,000
D. P430,000

24. The corrected total liabilities on December 31, 2009 should be

A. P470,000
 B. P230,000
C. P400,000
D. P500,000

25. The corrected total owners’ equity on December 31, 2010 should be
A. P1,070,000
B. P1,190,000
C. P1,010,000
D. P 950,000

26. Cola Company reported a retained earnings balance of P4,000,000 at January 1, 2009. Cola
determined that insurance premiums of P900,000 for the three-year period beginning
January 1,2008, had been paid and fully expensed in 2008. The entity has a 30% income tax
rate.

What amount should Cola report as corrected beginning retained earnings in its 2009
statement of retained earnings?
A. P3,400,000
B. P4,420,000
C. P4,600,000
D. P3,580,000

27. Victory Company’s statements for 2008 and 2009 included errors as follows:
Year Ending Inventory Depreciation
2008 P200,000 understated P50,000 understated
2009 P300,000 overstated P90,000 overstated

How much should retained earnings be retroactively adjusted at January 1, 2010?

A. P260,000 increase
B. P260,000 decrease
C. P410,000 decrease
D . P210,000 decrease

28. On December 31, 2009, Blue Company sold merchandise forP750,000 to Red Company. The
terms of the sale were net 30, F.O.B shipping point. The merchandise was shipped on
December 31, 2009, and arrived at Red on January 5, 2010. Due to a clerical error, the sale
was not recorded until January 2010 and the merchandise sold at a 25% markup on cost was
included in Blue’s inventory at December 31, 2009.

As a result, Red’s cost of goods sold for the year ended December 31, 2009 was
A. Understated by P750,000
B. Understated by P600,000
C. Understated by P150,000
D. Correctly stated

29. June Company began operations on January 1, 2008. Financial statements for the years
 2008 and 2009 contained the following errors:

2008 2009
Ending inventory P800,000 under P400,000 over
Depreciation 150,000 under
Insurance expense 50,000 over 50,000 under
Prepaid insurance 50,000 under

In addition, On December 31, 2009, a fully depreciated equipment was sold for P100,00 cash
but the sale was not recorded until 2010. Ignoring income tax, what is the total effect of the
errors on Net income for 2008?
A. P700,000 under
B. P700,000 over
C. P650,000 under
D. P650,000 over

30. Net income for 2009?

A. P1,350,000 under
B. P1,350,000 over
C. P1,150,000 under
D. P1,150,000 over

31. Working capital on December 31, 2009?

A. P300,000 under
B. P300,000 over
C. P400,000 under
D. P400,000 over

32. Retained earnings on December 31, 2009?

A. P1,150,000 over
B. P 700,000 under
C. P 450,000 over
D. P 450,000 under

33. RDG Company reported an Accumulated profits balance of P400,000 at December 31, 2009. In
August 2010, RDG Company determined that insurance premiums of P75,000 for the three-year
period beginning January 1, 2009 had been paid and fully expensed in 2009. RDG has a 32%
income tax rate.
A. P366,000
B. P425,000
C. P434,000
D. P450,000

34. Dale Company’s beginning inventory at January 1, 2009 was understated by P26,000 and its
ending inventory was overstated by P52,000. As a result Dale’s cost of goods for 2009 was
A. P26,000 understated
 B. P26,000 overstated
C. P78,000 understated
D. P78,000 overstated

35. The following errors were discovered in the course of examination of the Sun Company’s
financial records:

 Year 2009 wages payable for P34,000 was not recorded.

 Accrued vacation pay for the year 2009 for P62,500 was not recorded because the
bookkeeper “never learned that you had to do it”.
 Insurance for a 12-month period purchased on November 1, 2009 was charged to expense in
the amount of P37,200 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, 2010 accumulated profits?
A. P59,300 over
B. P65,500 over
C. P96,500 over
D. P127,500 over

36. Moon Company has determined its 2008 and 2009 net income figures to be P1,150,000 and
P1,100,000, respectively. In a first time audit of the company’s financial statements, you
determine the following errors:

a. Merchandise inventory was incorrectly determined: P50,000 overstatement for 2008 and
P150,000 overstatement for 2009.

b. Revenue received in advance in 2008 of P250,000 was credited to a revenue account when
received. Of the total, P50,000 was earned in 2008, P120,000 was earned in 2009 and the
remainder will be earned in 2010.

c. P120,000 gain on sale of plant assets in 2009 was erroneously credited to Accumulated
Profits and Losses.

What is the corrected net income for the year 2009?

A. P 900,000
B. P1,120,000
C. P1,190,000
D. P1,240,000

37. Green Company reported an Accumulated Profits and Losses balance of P300,000 at December
31, 2009. In June 2010, Green discovered that merchandise costing P100,000 had not been
included in inventory in its 2009 financial statements. Green has 32% tax rate.

What amount should Green report as adjusted beginning Accumulated Profits and Losses On
January 1, 2010?
 A. P232,000
B. P300,000
C. P368,000
D. P400,000

38. On December 30, 2009, Red Company sold merchandise for P75,000 to White Company. The
terms of the sale were n/30, FOB shipping point. The merchandise was shipped on December 31,
2009, and arrived at White Co. on January 2, 2010. Due to a clerical error, the sale was not
recorded until January 2010 and the merchandise, sold at a 25% markup on cost, was included in
Red’s inventory at December 31, 2009.

As a result, Red’s cost of goods sold for the year ended December 31, 2009 was
A. Understated by P15,000
B. Understated by P60,000
C. Understated by P75,000
D. Correctly stated