FINAL EXAMINATION

THEORY OF ACCOUNTS
1. Inventories are defined by all of the following except
a. Used in the production or supply of goods and services for administrative purposes
b. Held for sale in the ordinary course of business
c. In the process of production for such sale
d. In the form of materials or supplies to be consumed in the production process or the rendering of services
2. Which of the following should not be taken into account when determining the cost of inventories?
a. Storage costs of part- finished goods
b. Trade discounts
c. Recoverable purchase taxes
d. Import duties on shipping of inventory inward
3. Which of the following should be included in inventory?
a. Goods in transit purchased FOB destination
b. Goods received from another entity for sale on consignment
c. Goods sold to a customer which are being held for the customer to call at the customer’s convenience
d. None of these
4. Valuation of inventories requires determination of all of the following except
a. The costs to be included in inventory
b. The physical goods to be included in inventory
c. The cost of goods held on consignment from other entities
d. The cost flow assumption to be adopted
5. Which of the following costs should be included in inventory valuation?
a. Administrative costs c. Storage costs relating to finished goods
b. Abnormal material usage d. Fixed production overheads
6. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor c. Salaries of sales staff
b. Factory rent and utilities d. Factory overhead based on normal capacity
7. Which is not a mandated disclosure in relation to inventory?
a. Accounting policy adopted in measuring inventories, including the cost formula used
b. The carrying amount of each item of inventories
c. The carrying amount of inventories carried at fair value less cost of disposal
d. The amount of inventories recognized as expense during the period
8. Which is not a common disclosure for inventories?
a. Inventory composition c. Inventory financing arrangement
b. Inventory location d. Inventory cost method
9. What is consigned inventory?
a. Goods that are shipped but title transfers to the receiver.
b. Goods that are sold but payment is not required until the goods are sold
c. Goods that are shipped but title remains with the shipper
d. Goods that have been segregated for shipment to a customer
10. In accounting for sales on consignment, sales revenue and the related costs of goods sold should be recognized by
the
a. Consignor when the goods are shipped to the consignee
b. Consignee when the goods are shipped to the third party
c. Consignor when the consignee has sold the goods
d. Consignee when cash is received from the customer
11. If a material amount of inventory has been ordered through a formal purchase contract at the statement of financial
position date for future delivery at firm prices
a. This fact must be disclosed
b. Disclosure is required only if prices have declined since the date of the order
c. Disclosure is required only if prices have risen substantially
d. An appropriation of retained earnings is necessary
12. Under PAS 2, inventories shall be stated at
a. Lower of cost and fair value c. Lower of cost and nominal value
b. Lower of cost and net realizable value d. Lower of cost and net selling price
13. When inventory declines in value below original cost what is the maximum amount that the inventory can be valued
at?
a. Sales price c. Historical cost
b. Net realizable value d. Sales price reduced by estimated cost to sell
14. Why are inventories measured at LCNRV?
a. To report a loss when there is a decrease in future utility
b. To be conservative
c. To report a loss when there is a decrease in utility below the original cost
d. To permit future profit to be recognized
15. Which of the following statements is incorrect regarding LCNRV?
a. NRV is the selling price less estimated cost to complete and cost to make a sale
b. In most situations, entities price inventory on a total inventory basis
 c. One of two methods may be used to record the income effect of valuing inventory at NRV
d. Entities use an allowance account in reducing inventory at NRV
16. Which of the following attributes would not be used to measure inventory?
a. Historical cost c. Net realizable value
b. Current replacement cost d. Present value of future cash flows
17. Which method may be used to record a loss due to a price decline in the value of inventory?
a. Loss method c. Cost of goods sold method
b. Sales method d. Loss method and cost of goods sold method
18. When the cost of goods sold method is used to record inventory at NRV
a. There is direct reduction in the selling price of the inventory
b. A loss is debited directly and credited to inventory
c. Only the portion of the loss attributable to inventory sold is recorded
d. The NRV is substituted for cost and the loss is buried in cost of goods sold
19. When using the periodic system, which of the following generally would not be separately accounted for in the
computation of cost of goods sold?
a. Trade discounts applicable to purchases during the period
b. Cash discounts taken during the period
c. Purchase returns and allowance of merchandise during the period
d. Cost of transportation for merchandise purchased during the period
20. When using a perpetual inventory system
a. No purchases account is used
b. A cost of goods sold account is used
c. Two entries are required to record a sale
d. All of these are correct regarding perpetual inventory system
21. The specific identification method of inventory costing
a. Eliminates all opportunity for profit manipulation
b. Matches the flow of recorded costs with the physical flow of goods
c. Can be used only with a perpetual inventory system
d. Is a violation of generally accepted accounting principles
22. Which of the inventory cost flow assumptions provides the best measure of earnings, where “best” means most
appropriate for predicting future earnings, when prices have been declining?
a. FIFO c. LIFO
b. Specific identification d. Average cost
23. An inventory method which is designed to approximate inventory valuation at the lower of cost an NRV is
a. LIFO c. Conventional retail method
b. FIFO d. Specific identification
24. This is often used for convenience for measuring inventories of large number of rapidly changing items with similar
margins for which it is impracticable to use other costing method.
a. Standard costing method c. Gross profit method
b. Retail method d. Relative sales price method
25. Which statement is not true about gross profit method?
a. It may be used to estimate inventory for interim statements
b. It may be used to estimate inventory for annual statements
c. It may be used by auditors
d. None of these
26. How is the gross profit method used as it relates to inventory valuation?
a. Verify the accuracy of the perpetual inventory records
b. Verify the accuracy of the physical inventory
c. To estimate cost of goods sold
d. To provide an inventory value of LIFO inventories
27. A major advantage of the retail inventory method is that it
a. Permits entities to avoid taking an annual physical inventory
b. Gives a more accurate measurement of inventory than other methods
c. Hides cost from customers and employees
d. Provides a method for inventory control and facilitates determination of the periodic inventory
28. What is the effect of net markups on the cost- retail ratio when using the conventional retail method?
a. Increases the cost- retail ratio c. Depends on the amount of the net markdowns
b. No effect on the cost- retail ratio d. Decreases the cost- retail ratio
29. Which of the following is not dealt with by PAS 41?
a. The accounting for biological assets
b. The initial measurement of agricultural produce harvested from biological assets
c. The processing of agricultural produce after harvesting
d. The accounting treatment of government grant received in respect of biological asset
30. Which of the following is unlikely to be used in fair value measurement of biological asset?
a. Quoted market price
b. The most recent market transaction price
c. The present value of the expected net cash flows from the asset
d. External independent valuation
31. Where should changes in the fair value of a herd of cattle be recognized in the financial statements?
a. In profit or loss c. In profit or loss or other comprehensive income
b. In other comprehensive income d. In the statement of cash flows
32. Generally speaking, biological assets relating to agricultural activity should be measured using
a. Historical cost c. A fair value approach
b. Historical cost less depreciation less impairment d. Net realizable value
33. Where there is a production cycle of more than one year for a biological asset, separate disclosure is encouraged for
a. Physical change only c. Total change in value
b. Price change only d. Physical change and price change
34. Which of the following information should be disclosed in relation to agriculture?
a. Separate disclosure of the gain or loss relating to biological assets and agricultural produce
b. The aggregate gain or loss arising on the initial recognition of biological assets and agricultural produce and from
the change in fair value less cost of disposal of biological assets
c. The total gain or loss from biological assets and agricultural produce
d. There is no requirement to disclose separately any gain or loss
35. An entity had a plantation forest that is likely to be harvested and sold in 30 years. The income should be accounted
for in which of the following way?
a. No income should be reported annually until first harvest and sale in 30 years
b. Income should be measured annually and reported using a fair value approach that recognizes and measure
biological growth
c. The eventual sale proceeds should be estimated over the 30- year period
d. The plantation forest should be valued every 5 years and the increase in value should be recognized in
comprehensive income
36. Depending on the business model for managing financial assets, an entity shall classify financial assets subsequent
to initial recognition at
a. Fair value c. Either fair value or amortized cost
b. Amortized cost d. Neither fair value nor amortized cost
37. A financial asset shall be measured subsequently at amortized cost when
I. The business model of the entity is to hold the financial asset in order to collect contractual cash flows on
specified dates.
II. The contractual cash flows are solely payments of principal and interest on the principal amount outstanding.

a. I only c. Either I nor II

b. II only d. Both I and II
38. Debt investments not held for collection are reported at
a. Amortized cost c. The lower of amortized cost or fair value
b. Fair value d. Net realizable value
39. Debt investments that meet the business model and contractual cash flow tests are reported at
a. Net realizable value c. Amortized cost
b. Fair value d. The lower of amortized cost or fair value
40. Entities are required to measure financial assets based on all of the following except
a. The business model for managing financial assets
b. Whether the financial asset is a debt or equity investment
c. The contractual cash flow characteristics of the financial asset
d. All of the choices are PFRS requirements

PRACTICAL ACCOUNTING PROBLEMS 1

PROBLEM 1
Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 statement of
financial position
Goods out on consignment at another company’s store 800,000
Goods sold on installment basis 100,000
Goods purchased FOB shipping point that are in transit at December 31 120,000
Goods purchased FOB destination that are in transit at December 31 200,000
Goods sold to another company , for which our company has signed an agreement to
repurchase at a set price that covers all costs related to the inventory 300,000
Goods sold where large returns are predictable 280,000
Goods sold FOB shipping point that are in transit December 31 120,000
Freight charges on goods purchased 80,000
Factory labor costs incurred on goods still unsold 50,000
Interest cost incurred for inventories that are routinely manufactured 40,000
Cost incurred to advertise goods held for resale 20,000
Materials on hand not yet placed into production 350,000
Office supplies 10,000
Raw materials on which the company has started production, but which are not completely
processed 280,000
Factory supplies 20,000
Goods held on consignment from another company 450,000
Costs identified with units completed but not yet sold 260,000
Goods sold FOB destination that are in transit at December 31 40,000
Temporary investment in stocks and bonds that will be resold in the near future 500,000
1. How much of these items would typically be reported as inventory in the financial statements?
a. 2,300,000 b. 2,000,000 c. 2,260,000 d. 2,220,000
PROBLEM 2
In connection with your study of the Alcala Manufacturing Company, you reviewed its inventory as of December 31, 2014
and found the following items:
(a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory
was taken. It was not included in the inventory because it was marked “Hold for shipping instructions”. The customer’s
order was dated December 18 but the case was shipped and the customer billed on January 10, 2015.
(b)Merchandise costing P600,000 was received on December 28, 2014 , and the invoice was recorded. The invoice was
in the hands of the purchasing agent; it was marked “on consignment”.
(c) Merchandise received on January 6, 2015, costing P700,000 was entered in purchase register on January 7. The
invoice showed shipment was made FOB shipping point on December 31, 2014. Because it was not on hand during the
inventory count, it was not included.
(d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room
on December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory
although it was shipped January 4, 2015.
(e) Merchandise costing P200,000 was received on January 6, 2015, and the related purchase invoice was recorded
January 5. The invoice showed the shipment was made on December 29, 2014, FOB destination.
(f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of
the goods on that date. The merchandise was included in inventory because Alcala still holds legal title. Historical
experience suggests that full payment on installment sale is received approximately 99% of the time.
(g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because
the sale was accompanied by a purchase agreement requiring Alcala to buy back the inventory on February 2015.
2. How much of these items should be included in the inventory balance at December 31, 2014?
a. 1,300,000 b.800,000 c. 1,650,000 d. 1,050,000
PROBLEM 3
On October 1, 2014, Acme Company sold P100,000 gallons of heating oil to Karn Company at P30 per gallon. Fifty
thousand gallons were delivered on December 15, 2014, and the remaining 50,000 gallons were delivered on January 15,
2015. Payment terms were: 50% due on October 1, 2014, 25% on the first delivery and the remaining 25% due on the
second delivery.
3. What amount of revenue should Acme recognize from the sale during 2014?
a. 3,000,000 b. 1,500,000 c. 2,250,000 d. 750,000
PROBLEM 4
Altis Company sells one product which it purchases from various suppliers. The trial balance on December 31, 2014
included the following accounts:
Sales (100,000 units at P150) 15,000,000
Sales discount 1,000,000
Purchases 9,300,000
Purchase discount 400,000
The inventory purchases during 2014 were as follows:
Units Unit cost Total cost
Beg inventory, Jan 1 20,000 60 1,200,000
Purchases, quarter ended March 31 30,000 65 1,950,000
Purchases, quarter ended June 30 40,000 70 2,800,000
Purchases, quarter ended September 30 50,000 75 3,750,000
Purchases, quarter ended December 31 10,000 80 800,000
150,000 10,500,000
Altis’ accounting policy is to report inventory in its financial statements at the LCNRV. Cost is determined under the FIFO
method.
Altis has determined that on December 31, 2014, the replacement cost of its inventory was P70 per unit and the net
realizable value was P72 per unit. The normal profit margin is P10 per unit.
4. What should Altis report as cost of goods sold for 2014?
a. 6,500,000 b. 6,300,000 c. 6,700,000 d. 6,900,000
PROBLEM 5
A flood recently destroyed many of the financial records of Yakal Company. The entity uses an average cost inventory
valuation system.
Yakal makes a physical count at the end of each month in order to determine monthly ending inventory value.

By examining various documents, the following data are gathered:

Ending inventory at July 31 60,000 units
Total cost of units available for sale in July 1,452,100
Cost of goods sold during July 1,164,100
Cost of beginning inventory, July 1 4.00 per unit
Gross profit on sale for July 935,900
July purchases
Units Unit cost Total cost
July 5 55,000 5.10 280,500
July 11 53,000 5.00 265,000
July 15 45,000 5.50 247,500
July 16 47,000 5.30 249,100
200,000 1,042,100
5. What is the cost of the inventory on July 31?
a. 288,000 b. 410,000 c. 312,600 d. 240,000
PROBLEM 6
Lingayen Mart uses the average retail inventory method. The following information is available for the current year.
Cost Retail
Beg inventory 1,100,000 2,200,000
Purchases 15,800,000 26,300,000
Freight in 400,000
Purchase returns 600,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 400,000 800,000
Net markups 600,000
Net markdowns 900,000
Sales 24,700,000
Sales returns 350,000
Sales discounts 200,000
Employee discounts 600,000
Loss from breakage 50,000
6. If the inventory at retail based on physical count at December 31, 2014 is P1,700,000, the estimated inventory
shortage is
a. 780,000 b.793,929 c. 755,709 d. 0
PROBLEM 7
The owner of Calasiao Inc. suspects that the staff is committing theft. You are to determine whether or not this is true.
Your investigations revealed the following;
 Physical inventory, taken December 31, 2014 under you observation showed that cost was P265,000 and net
realizable value, P244,000. The inventory on January 1, 2014 showed cost of P390,000 and net realizable value
of P375,000. It is the corporation’s practice to value inventory at LCNRV. Any loss between cost and NRV is
included in other expenses.
 The average gross profit rate was 40% of net sales.
 The accounts receivable as of January 1, 2014 were P135,000. During 2014, accounts receivable written off
amounted to P10,000. Accounts receivable as of December 31, 2014 were P375,000.
 Outstanding purchase invoices amounted to P300,000 at the end of 2014. At the beginning of 2014, they were
P375,000.
 Receipts from customers during 2014 amounted to P3,000,000.
 Disbursements to merchandise creditors amounted to P2,000,000.
7. The amount of inventory shortage as of December 31, 2014 is
a. 106,000 b. 175,000 c. 100,000 d. 0
PROBLEM 8
Salve Company is engaged in raising dairy livestock. Information regarding its activities relating to the dairy livestock is as
follows:
Carrying amount on January 1, 2014 5,000,000
Increase due to purchases 2,000,000
Gain arising from change in fair value less cost to sell attributable to price change 400,000
Gain arising from change in fair value less cost to sell attributable to physical change 600,000
Decrease due to sales 850,000
Decrease due to harvest 200,000
8. What is the carrying amount of the biological asset on December 31, 2014?
a. 6,950,000 b. 6,000,000 c. 8,000,000 d. 7,150,000
PROBLEM 9
Honey Company has a herd of 10 2- year old animal on January 1, 2014. One animal aged 2.5 years was purchased on
July 1, 2014 for P108, and one animal was born on July 1, 2014. No animals were sold or disposed of during the year.
The fair value less cost to sell per unit is as follows:

2- year old animal on January 1 100

2.5- year old animal on July 1 108
New born animal on July 1 70
2- year old animal on December 31 105
2.5- year old animal on December 31 111
Newborn animal on December 31 72
3- year old animal on December 31 120
0.5 year old animal on December 31 80
9. What is the fair value of the biological assets on December 31, 2014?
a. 1,400 b. 1,320 c. 1440 d. 1,360
10. What is the gain from change in fair value of biological assets that should be recognized in 2014?
a. 222 b.292 c. 237 d. 55
PROBLEM 10
JKL Company acquired an equity investment a number of years ago for P3,000,000 and classified it as at fair value
through other comprehensive income. On December 31, 2013, the cumulative loss recognized in other comprehensive
income was P400,000 and the carrying amount of the investment was P2,600,000.
On December 31, 2014, the issuer of the equity instrument was in severe financial difficulty and the fair value of the equity
investment had fallen to P1,200,000.
What cumulative amount of unrealized loss should be reported as component of other comprehensive income in the
statement of changes in equity for the year ended December 31, 2014?
a. 1,400,000 b. 1,800,000 c. 1,000,000 d. 0
PROBLEM 11
MNO Company had trading and nontrading investments held throughout 2013 and 2014. The nontrading investments are
measured at fair value through other comprehensive income. The investments had a cost of P3,000,000 for trading and
P3,000,000 for nontrading. The investments had the following fair value at year-end:
Trading Nontrading
December 31, 2013 4,000,000 3,200,000
December 31, 2014 3,800,000 3,700,000
1. What amount of unrealized gain or loss should be reported in the income statement for 2014?
a. 200,000 gain b. 200,000 loss c. 300,000 gain d. 300,000 loss
2.What amount of cumulative unrealized gain or loss should be reported as component of other comprehensive income in
the statement of changes in equity on December 31, 2014?
a. 500,000 gain b. 500,000 loss c. 700,000 gain d.700,000 loss
PROBLEM 12
During 2013, PQR Company purchased 80,000 shares for P60 per share. The investment was classified as trading
investment. During the year, the entity sold 20,000 shares for P70 per share. On December 31, 2013, the market price per
share is P56. What net amount of gain or loss should be recognized for 2013?
a. 320,000 loss b. 200,000 gain c. 240,000 loss d. 40,000 loss
PROBLEM 13
On January 1, 2013, AAA company acquired P4,000,000 of 12% face value bonds at P3,767,000 to be held as financial
assets at amortized cost with a 14% effective yield. Interest on bonds is payable annually on December 31 and the bonds
mature on January 1, 2017. The effective interest method of amortization is used. What is the carrying amount of the
investment on December 31, 2013?
a. 3,814,380 b. 3,767,000 c. 4,000,000 d. 3,719,620
PROBLEM 14
On July 1, 2013, BBB Company purchased P5, 000, 000 face amount, 8% bonds for P4, 615, 000 to yield 10% per year to
be held as financial assets at amortized cost. The bonds pay interest semiannually on January 1 and July 1. On
December 31, 2013, what amount should be reported as interest receivable?
a. 184, 600 b. 250, 000 c. 230, 750 d. 200, 000
PROBLEM 15
On January 1, 2013, CCC Company purchased P5, 000, 000 face value 8% bonds for P4, 562, 000 to be held as financial
assets at amortized cost. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2019 and
pay interest annually on December 31. The interest method of amortization is used. What is the carrying amount of the
bond investment on December 31, 2014?
a. 4,680, 000 b. 4, 662, 000 c. 4, 618, 000 d. 4,562, 000
PROBLEM 16
On January 1, 2013, DDD Company purchased P5, 000, 000 face value bonds with stated 12% interest. The bonds
mature in 10 years and pay interest annually every December 31. The bonds are acquired to yield a 14% interest. The
present value of an ordinary annuity of 1 for 10 periods is 5.605 at 12% and 5.216 at 14%. What ist he market price of the
bonds?
a. 4, 478,400 b. 5, 521, 600 c. 4, 439, 500 d. 5, 560, 500
PROBLEM 17
On January 1, 2013, EEE Company purchased serial bonds with face value of P5, 000, 000 and stated interest at 12%.
The stated interest is payable annually on December 31. The bonds are acquired to have an effective yield at 10%. The
bonds mature at annual installment of P1, 250, 000 every December 31.
Present value of 1 at 10% for one period 0.9091
Present value of 1 at 10% for two periods 0.8264
Present value of 1 at 10% for three periods 0.7513
Present value of 1 at 10% for four periods 0.6830
What is the market price of the serial bonds on acquisition date?
a. 5, 2017, 430 b. 5, 090, 960 c. 5, 545, 460 d. 5, 000, 000