Cavite State University

Don Severino delas Alas Campus

Indang, Cavite
Midterm Examination in Financial Accounting Part 1
Multiple Choice Theory. Choose the best answer by encircling letter that pertains to the correct answer. No erasures
allowed.

1. Which is (are) true concerning the Conceptual Framework?

I. The framework sets out the concepts that underlie the preparation and presentation of financial statements for external
users.
II. The framework is not PFRS and hence does not define standard for any particular measurement or disclosure issue.
III. The framework is concerned with general-purpose financial statements including consolidated financial statements.
a. I only c. I and III
b. I and II d. I, II and III
2. Which of the following statements about the Conceptual Framework is (are) correct?
I. The Framework deals with the qualitative characteristics of financial statements.
II. The Framework normally prevails over PFRS where there is a conflict between the two.
III. The Framework deals with the objective of financial reporting.
a. I and III c. I and II
b. II and III d. I, II and III
3. The conceptual framework is intended to assist the following
a. The Financial Reporting Standards Council
b. The users
c. The preparers
d. All of the above
4. When a note is accepted to settle an open account, Note Receivable is debited for the note's

a. net realizable value.

b. maturity value.

c. face value.

d. face value plus interest.
5. The entry to record the dishonor of a note receivable assuming the payee expects eventual collection includes a debit to

a. Notes Receivable.

b. Cash.

c. Allowance for Doubtful Accounts.

d. Accounts Receivable.
6. An essential qualitative characteristic of the information provided in the financial statements is understandability. This
means that
a. Information must be relevant to the decision making needs of the users.
b. Users must be informed of the accounting policies employed in the preparation of the financial statements, any
changes in those policies and the effects of such changes.
c. Users are assumed to have a reasonable knowledge of business and economic activities and a willingness to study the
information with reasonable diligence.
d. Information must be free from material error and bias and can be depended upon by users to represent faithfully
which it purports to represent or could reasonably be expected to represent.
7. According to the Conceptual Framework, the usefulness of providing information in financial statements is subject to
the constraint of
a. Consistency
b. Materiality
c. Reliability
d. Balance between benefit and cost
8. According to the Framework, the process of recording and reporting an item in the financial statement of an entity is
a. Allocation c. Realization
b. Matching d. Recognition
9. The following definition increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decrease of liabilities that result in increases in equity, other than those relating to contributions
from equity participants’ is a formal statement of the meaning of:
a. Expenses. c. Assets.
b. Liabilities. d. Income.
10. ________ means that the accounting information for a company must be prepared in such a way as to be capable of
being compared with information from other companies in the same period and consistent with similar information for
that company in previous periods.
a. Verifiability
b. Timeliness
c. Understandability
d. Comparability
11. To be useful, accounting information must have the fundamental qualitative characteristics of:
a. comparability and relevance.
b. relevance and faithful representation.
c. materiality and understandability.
d. faithful representation and timeliness.
12. All of the following are true statements about the entity assumption EXCEPT for:
a. the entity assumption draws a sharp boundary around each entity.
b. the transactions of the business cannot be mingled with the transactions of the owner.
c. the entity assumption ensures that the business will continue indefinitely.
d. under the entity assumption, the entity is any organization that stands apart as a separate economic unit
13. Verifiability means that the information:
a. is timely.
b. is understandable.
c. must be capable of being checked for accuracy.
d. is material and relevant.
14. When preparing accounting information, understand that:
a. the auditors are primarily responsible for preparing the information.
b. the cost of disclosure should not exceed the expected benefits to the users.
c. accounting information can be produced quickly and inexpensively.
d. all information must be disclosed for a complete understanding of the underlying economic facts.
15. When a note receivable is dishonored,

a. interest revenue is never recorded.

b. bad debts expense is recorded.

c. the maturity value of the note is written off.

d. accounts receivable is debited if eventual collection is expected.
16. The stable-monetary-unit assumption:
a. ensures that accounting records and statements are based on the most reliable data available.
b. holds that the entity will remain in operation for the foreseeable future.
c. maintains that each organization or section of an organization stands apart from other organizations and individuals.
d. enables accountants to ignore the effect of inflation in the accounting records.
17. Historical cost:
a. is determined for each asset on a yearly basis.
b. is equal to the amount of cash paid less the dollar value of all non-cash consideration given in the exchange.
c. is a verifiable measure that is relatively free from bias.
d. is the amount that the business could sell the asset for.
18. The principle stating that assets acquired by the business should be recorded at their actual cost on the date of purchase
is the:
a. historical cost principle.
b. objectivity principle.
c. reliability principle.
d. stable dollar principle.
19. The relevant measure of the value of the assets of a company that is going out of business is the:
a. book value.
b. current fair market value.
c. historical cost.
d. recorded value.
20. If a company prepares its financial statements three years after the end of their accounting period, they have violated
the qualitative characteristic of :
a. understandability.
b. timeliness.
c. verifiability.
d. full disclosure.
21. Companies report accounts receivable on the balance sheet at

a. cost.

b. cash (net) realizable value.

c. gross realizable value.

d. face value.
22. When dealing with the elements of the financial statements, it is important to consider that:
a. the current portion of long-term debt is the amount due within the next year and must be disclosed separately.
b. fixed assets are short-term assets the company plans on selling in the near future.
c. cost of goods sold is a component of paid-in capital.
d. retained earnings is a long-term liability account.
23. A company uses the gross method to account for cash discounts offered to its customers. If payment is
made before the discount period expires, which of the following is correct?
a. Sales discounts is debited for the amount of discounts taken by customers.
b. Sales discounts is credited for the amount of discounts taken by customers.
c. Interest expense is debited for the amount of discounts taken by customers.
d. Accounts receivable is credited for the amount of discounts taken by customers.
24. Avryle Company does not use the allowance method to account for bad debts and instead any bad debts that
do arise are written off as bad debt expense. What problem might this create if bad debts are material?
a. Receivables likely will be understated.
b. No problems are created.
c. Receivables likely will be overstated.
d. The matching principle is violated when the write-off occurs in the same period that the receivable is
initially recorded.
25. The existing balance in Allowance for Doubtful Accounts is considered in computing bad debts expense in the

a. direct write-off method.

b. percentage of receivables basis.

c. percentage of sales basis.

d. percentage of receivables and percentage of sales basis.
26. Which of the following approaches for bad debts is best described as a balance sheet method?

a. Percentage-of-receivables basis.

b. Direct write-off method.

c. Percentage-of-sales basis.

d. Both direct write-off method and percentage-of-receivables basis.
27. The percentage-of-sales basis of estimating uncollectibles

a. produces a better estimate of cash realizable value.

b. results in a better matching of expenses with revenues.

c. emphasizes balance sheet relationships.
d. considers the existing balance in Allowance for Doubtful Accounts
28. The direct write-off method

a. is acceptable for financial reporting purposes.

b. debits Allowance for Doubtful Accounts to record write-offs of accounts.

c. shows only actual losses from uncollectible accounts.

d. estimates bad debt losses.
29. The sale of receivables by a business

a. indicates that the business is in financial difficulty.

b. is generally the major revenue item on its income statement.

c. is an indication that the business is owned by a factor.

d. can be a quick way to generate cash for operating needs.
30. Which of the following statements about Visa credit card sales is incorrect?

a. The credit card issuer makes the credit investigation of the customer.

b. The retailer is not involved in the collection process.

c. Two parties are involved.

d. The retailer receives cash more quickly than it would from individual customers on account.
31. Which of the following might be classified as a cash equivalent?
a. Cash in a checking account.
b. 30-day treasury bill.
c. Money orders waiting to be deposited.
d. 120-day treasury bill.
32. An internal control system is designed to do all but which of the following?
a. Promote operational efficiency.
b. Safeguard assets.
c. Encourage adherence to company policies.
d. Assure the promotion of the most qualified employees.
33. The replenishment of a petty cash fund might include which of the following?
a. A debit to cash.
b. A debit to petty cash.
c. A debit to office supplies expense.
d. A credit to petty cash.
34. In a bank reconciliation, deposits outstanding are:
a. Subtracted from the bank balance.
b. Added to the book balance.
c. Added to the bank balance.
d. Subtracted from the book balance.
35. In a bank reconciliation, NSF checks are:
a. Subtracted from the bank balance.
b. Added to the book balance.
c. Added to the bank balance.
d. Subtracted from the book balance.
Problems: Solve for the requirement in each problem. Encircle the letter of your answer. Use worksheet for your solution.
No solution, no credit points.

Problem 1
The cash account in the current assets section of the balance sheet of Amazing Company consists of:
Bond sinking fund cash 1,500,000
Checking account in Mabuhay Bank (A P320,000 check 3,155,000
is still outstanding per bank statement)
Currency and coins awaiting deposit 1,135,000
Deposit in a bank closed by BSP 500,000
Petty cash fund (of which P10,000 in is the form of paid vouchers) 50,000
Receivables from officers and employees 175,000
6,515,000
The correct cash balance for the balance sheet is:
a. 4,440,000
b. 4,330,000
c. 4,830,000
d. 5,830,000

Problem 2
Raj Corporation's checkbook balance on December 31, 2015 was P5,000,000. In addition, Raj held the following items in
its safe on that date:
Check payable to Raj, dated January 2, 2016 in payment of a sale made in December 2015, not included in December 31
checkbook balance
Check payable to Raj, deposited December 15 and included in December 31 checkbook balance "NSF". The check was
redeposited on January 2, 2016 and cleared on January 9, 2016
Check drawn on Raj's account, payable to a vendor, dated and recorded in Raj's books on December 31, but not mailed
until January 10, 2016
The proper amount to be shown as "cash" on Raj's balance sheet at December 31, 2015 is
a. 4,800,000
b. 5,300,000
c. 6,500,000
d. 6,800,000

Problem 3
The following information pertains to Mars Company at December 31, 2015:
Bank statement balance 1,000,000
Checkbook balance 1,400,000
Deposit in transit 500,000
Outstanding checks 100,000
In Mars' December 31, 2015 balance sheet, cash should be reported at
a. 900,000m
b. 1,000,000
c. 1,400,000
Balance per book 1,000,000
Bank charges 2,500
Outstanding checks 237,500
Deposit in transit 312,500
Costumer note collected by bank 375,500
Interest on costumer note 15,000
Costumer check returned NSF 62,500
Depositor's note charged to account 250,000
d. 1,500,000

Problem 4
In your audit of Luzviminda Company as of December 31, 2015, you gathered the ff:

The correct cash balance amounts to

a. 1,000,000
b. 1,012,500
c. 1,075,500
d. 1,150,000

Problem 5
The cash account in the ledger of Kamote Company shows a balance of P1,652,000 at September 30, 2015. The bank
statement, however, shows a balance of P2,090,000 at the same date. The only reconciling items consist of a bank service
charge of P2,000, a large number of outstanding checks tatoaling P590,000 and a deposit in transit. What is the deposit in
transit in the September 30, 2015 bank reconciliation?
a. 150,000
b. 440,000
c. 154,000
d. 591,000

Problem 6
Reconciliation of Coco Company's bank account at May 31, 2015 is:
Balance per bank statement 2,100,000
Deposits outstanding 300,000
Checks outstanding (30,000)
Correct cash balance 2,370,000

Balance per book 2,372,000

Bank service charge (2,000)
Correct cash balance 2,370,000

June data are as follows:

Bank Book
Check recorded 2,300,000 2,360,000
Deposits recorded 1,620,000 1,800,000
Collection by bank (P400,000 note plus interest) 420,000
NSF Check returned with June 30 statement 10,000
Balances 1,830,000 1,810,000
The checks outstanding on June 30, 2015 amount to
a. 30,000
b. 90,000
c. 60,000
d. 0

Problem 7
Pearl Company had the following bank reconciliation on June 30, 2015
Balance per bank statement, June 30 3,000,000
Add: Deposit in transit 400,000
Total 3,400,000
Less outstanding checks 900,000
Balance per book, June 30 2,500,000

The bank statement for the month of July 2015 showed the following:
Deposits (including P200,000 note collected for Pearl) 9,000,000
Disbursements (including P140,000 NSF check and P10,000 service charge) 7,000,000

All reconciling items on June 30, 2015 cleared through the bank in July. The outstanding checks totaled P600,000 and the
deposits in transit amounted to P1,000,000 on July 31, 2015.
7.1 What is the cash balance per book on July 31, 2015
a. 5,400,000
 b. 5,350,000
c. 5,550,000
d. 4,500,000
7.2 What is the amount of cash receipts per book in July 2015?
a. 9,400,000
b. 9,600,000
c. 8,600,000
d. 9,800,000
7.3 What is the amount of cash disbursements per book in July 2015?
a. 6,550,000
b. 6,700,000
c. 7,300,000
d. 6,850,000

Problem 8
Foxy Company had the following information relating to its accounts receivable:
Accounts receivable at 12/31/2014 1,300,000
Credit sales for 2015 5,400,000
Collections from costumers for 2015, excluding recovery 4,750.00
Accounts written off 9/30/2015 125,000
Collections of accounts written off in prior year(costumer credit was not reestablished) 25,000
Estimated uncollectible receivables per aging of receivables at 12/31/2015 165,000

On December 31, 2015, the balance of accounts receivable, before allowance for doubtful accounts should be
a. 1,825,000
b. 1,850,000
c. 1,950,000
d. 1,990,000

Problem 9
T-Rex Company had the following information relating to its accounts receivable at December 31, 2014, and for the year
ended December 31, 2015:
1,200,00
Accounts receivable at 12/31/2014 0
Allowance for doubtful accounts at 12/31/2014 60,000
5,300,00
Credit sales for 2015 0
4,650,00
Collections from costumers for 2015 0
Accounts written off 9/30/2015 75,000
Estimated uncollectible receivables per aging 110,000
of receivables at 12/31/2015

9.1 At December 31, 2015, T-Rex's allowance for doubtful accounts should be
a. 135,000
b. 125,000
c. 110,000
d. 95,000
9.2 At December 31, 2015, T-Rex's accounts receivable, before allowance for doubtful accounts, should be
a. 1,850,000
 b. 1,835,000
c. 1,815,000
d. 1,775,000

Problem 10
Springville Corporation had the following accounts receivable and allowance for uncollectible accounts at the end of 2015
before any expense adjustment:
Accounts receivable 12,000,000
Allowance for uncollectible accounts 800,000

Sales in 2015 totaled P80,000,000 (8% of sales were for cash), and writeoffs of costumer accounts totalled P600,000.
Allowance for uncollectible accounts is estimated to be 2% of trade receivables. What is the balance in the allowance
account at the beginning of 2015?
a. 1,400,000
b. 1,160,000
c. 200,000
d. 800,000

Problem 11
Word Company estimates its uncollectible accounts expense to be 2% of credit sales. Word's credit sales for 2015 were
P10,000,000. During 2015, Word wrote off P180,000 of uncollectible accounts. Word's allowance for uncollectible
accounts had a P150,000 balance on January 1, 2015. In its 2015 income statement, what amount should be Word report
as uncollectible accounts expense?
a. 230,000
b. 200,000
c. 180,000
d. 170,000

Problem 12
The unadjusted trial balance of Ultra Company at December 31, 2015, included the
following accounts:
Debit Credit
Allowance for doubtful accounts 16,000
Sales 7,225,000
Sales return 125,000

Ultra estimates its uncollectible receivables at 2% of net sales. For 2015, Ultra should report doubtful accounts expense of
a. 158,000
b. 144,500
c. 142,000
d. 126,000

Problem 13
Ruth Company received from a costumer a one-year P500,000 note bearing annual interest of 8%. After holding the note
for six months, Ruth discounted the note at Regional Bank at an effective interest rate of 10%. What amount of cash dis
Ruth receive from the bank?
a. 540,000
b. 523,810
c. 513,000
d. 495,238

Problem 14
Apec Company accepted from a costumer P1,000,000 face amount, 6-month, 8% note dated April 15, 2015. On the same
date Apec discounted the note at Union Bank at a 10% discount rate. How much cash should Apec receive from the bank
on April 15, 2015?
a. 1,040,000
b. 990,000
c. 988,000
d. 972,000

Problem 15
On June 30, 2015, Line Company discounted at the bank a costumer's P6,000,000, 6-month, 10% note receivable dated
April 30, 2015. The bank discounted the note at 12% . Line's proceeds from this discounted note amounted to
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

Problem 16
National Bank grants a 10-year loan to Adobo Company in the amount of P1,500,000 with a stated interest rate of 6%.
Payments are due monthly and are computed to be P16,650. National Bank incurs P40,000 of direct loan origination cost
and P20,000 of indirect loan origination cost. In addition, National Bank charges Adobo a 4-point nonrefundable loan
origination fee.
16.1 National Bank, the lender, has a carrying amount of
a. 1,440,000
b. 1,480,000
c. 1,500,000
d. 1,520,000
16.2 Adobo, the borrower, has a carrying amount of
a. 1,440,00
b. 1,480,000
c. 1,500,000
d. 1,520,000

Problem 17
On December 31, 2015, Core Company sold using equipment and received a noninterst- bearing note requiring payment
of P500,000 annually fro ten years. The first payment is due December 31, 2016 and the prevailing rate of interest for this
type of note at date of issuance is 12%. Present value factors are as follows:
Present value of 1 at 12% for 10 periods 0.322
Present value of ordinary annuity of 1 at 12% for 10 periods 5.65
In its December 31, 2005 balance sheet, Core should report the carrying amount of the note at
a. 1,610,000
b. 2,175,000
c. 2,825,000
d. 5,000,000

Problem18
On December 30, 2015, Chegg Company sold a machine to Door Company in exchange for a noninterest bearing note
requiring ten annual payments of P100,000. Door made the first issuance was 8%. Information on present value factors is:
Period Present value of Present value of ordinary
1 at 8% annuity of 1 at 8%
9 0.50 6.25
10 0.46 6.71

In its December 31, 2015 balance sheet, what amount should Chegg report as note receivable?
a. 450,000
b. 460,000
c. 625,000
d. 671,000

Problem 19
Venus Company sold some machinery to the Pluto Company on January 1, 2014, for which the cash selling price was
P7,582,000. Pluto entered into an installment sales contract with Venus at an interest rate of 10%. The contract required
payments of P2,000,000 a year over five years with the first payment due on December 31, 2014. What amount of interest
income, if any, should be included in Venus' 2015 statement using the "interest method"?
a. 1,000,000
b. 634,000
c. 758,200
d. 0

Problem 20
Enchong Company's account balances at December 31 for Accounts Receivable and Allowance for Doubtful Accounts
were P1,400,000 and P70,000 (credit balance), respectively. An aging of accounts receivable indicated that P128,000 are
expected to become uncollectible. The amount of the adjusting entry for bad debts at December 31 is

a. P128,000.

b. P58,000.

c. P198,000.

d. P70,000.

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GOD BLESS FUTURE CPAs