Seeds of the Nations

Review-Midterms

PART 1 THEORIES

1. Which of the following economic or business transaction will affect only the left side of the basic
accounting equation?
a. Purchase of office supplies on account
b. Additional Investment of cash by the owner
c. Receipt of cash from customer for settlement of outstanding liability
d. Rendering consulting service for cash

2. Which of the following are real accounts?

a. Rent expense, Capital, Prepaid Insurance
b. Notes Payable, Note Receivable, Fees earned, Cash
c. Accounts receivable, Salaries Expense, Commission income
d. Prepaid advertising, accumulated depreciation, unearned revenue

3. Which of the following in NOT a possible combination of journal entry?

a. Increase in asset and decrease in equity
b. Decrease in liability and decrease in equity
c. Decrease in equity and increase in liability
d. Increase in asset and increase in liability

4. Adjusting entries are necessary in order to:

a. Detect and correct an erroneously recorded transaction
b. Prove that the debit and credit totals of the trial balance is equal
c. Facilitate the preparation of Financial Statements
d. Correctly state the balances of accounts

5. A prepaid expense is NOT an:

a. Asset
b. Unexpired Cost
c. Economic Resources
d. Expired Cost

6. The objectives of financial accounting for business enterprise are based on:
a. The needs of the users of the information
b. Reporting on management’s stewardship
c. The need for conservatism
d. Generally accepted accounting principles

7. Which of the following cannot be derived from the accounting equation?

a. Assets – Liabilities = Equity
b. Assets – Equity = Liabilities
c. Liabilities + Assets = Equity
d. Equity + Liabilities = Assets

8. According to the rules of debit and credit, which of the following is correct?
a. If one liability account has been debited another liability account maybe credited for the
same transaction.
b. Increase in revenue and expenses are recorded by debit and credit respectively.
c. Revenue earned on account is recorded by debit to accounts payable and credit to a revenue
accounts.
d. An asset acquired by issuing a note requires a debit to drawing account and credit to notes
payable account.

9. Upon viewing the worksheet of Regalado Company, you found out that the total debit column of
the Income Statement is P515, 000 and the total credit column is P551 000. Which of the following
statements is correct?
a. There is a transposition error that should be corrected.
b. The company’s operation resulted to a net income
c. The company’s operation resulted to a net loss.
d. The difference represents a net income, which is extended to the debit column of the balance
sheet.
10. A prepaid expense can be best 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 currently matched with earnings

11. Which of the following statements pertains to journalizing?

a. Recording of transactions in a general journal
b. A chronological record of all the transactions of the company
c. The process of summarizing all the transactions of the firm
d. Updating the balances of various accounts

12. An accrued income can be best described as an amount:

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

13. The normal balance of an account is the:

a. Debit side of the account
b. Credit side of the accounts
c. Side represent by increase in the account balance
d. Side represent by decrease in the account balance

14. During the year, the company received an advance payment from one of its tenants. The said rent
is applicable for 18 months, which will commence on the beginning of the next accounting period.
The appropriate presentation of this advance payment in the company’s financial statement at the
end of its current accounting period is:
a. Asset – under Prepaid Rent
b. Liability – under Unearned Rent
c. Revenue – under Rent Revenue
d. Expense – under Rent Expense

15. Upon purchase of Insurance Policy for 2-year period, the company recorded the transaction by
charging the whole amount of policy purchased to appropriate asset account. At year-end, the
adjusting entry for the said transaction will include:
a. Debit to expense account for expired portion
b. Credit to asset account for unexpired portion
c. Credit to expense account for expired portion
d. Debit to asset account for expired portion

16. The company received a bill from Maynilad for the period. The bookkeeper recorded it as an
expense but no payment is made yet. What would be the effect of this transaction in the company’s
financial record?
a. Decrease in asset and decrease in Liability
b. Increase in liability and decrease in capital
c. Decrease in asset and increase in liability
d. Increase in liability and increase in capital

17. Which of the following errors would cause the trial balance to be unequal?
a. A transaction posted twice
b. A cash sales transaction was recorded correct but posted as debit to utilities expense and
credit to accounts payable
c. A cash purchase transaction was recorded correctly but posted as debit to utilities expense and
credit to accounts payable
d. A payment of P500 to a creditor was posted as debit to accounts payable and debit of
P500 to accounts receivable

18. Failure to recognize the consumption of prepaid expense will:

a. Overstate net income and asset
b. Overstate capital and understate liability
c. Understate net income and overstate asset
d. Not affect liability but overstates expenses.
 19. Statement 1: A trial balance that balances does not prove that all transactions have been recorded
or that the ledger is correct.
Statement 2: A journal provides a chronological record of transactions.
a. Only Statement 1 is true
b. Only Statement 2 is true
c. Both Statements are true
d. Both Statements are false

20. The Freight-in account

a. increases the cost of merchandise purchased.
b. is contra to the Purchases account.
c. is a permanent account.
d. has a normal credit balance.

21. If a purchaser using a perpetual inventory system pays the transportation costs, then the
a. Merchandise Inventory account is increased.
b. Merchandise Inventory account is not affected.
c. Freight-out account is increased.
d. Delivery Expense account is increased.

22. The credit terms offered to a customer by a business firm were 2/10, n/30, which means
a. the customer must pay the bill within 10 days.
b. the customer can deduct a 2% discount if the bill is paid between the 10th and 30th day from
the invoice date.
c. the customer can deduct a 2% discount if the bill is paid within 10 days of the invoice
date.
d. two sales returns can be made within 10 days of the invoice date and no returns
thereafter.

23. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods are in transit.
d. no one has legal title to the goods until they are delivered.

24. It is not true that current assets are assets that a company expects to
a. realize in cash within one year.
b. sell within one year.
c. use up within one year.
d. acquire within one year.

25. The operating cycle of a company is the average time that is required to go from cash to
a. sales in producing revenues.
b. cash in producing revenues.
c. inventory in producing revenues.
d. accounts receivable in producing revenues.

26. Which statement is incorrect concerning the Framework?

A. The Framework is not a PFRS and therefore does not define standard for any particular
measurement or disclosure issue.
B. The Framework is concerned with general purpose financial statements including consolidated
financial statements.
C. In cases of conflict, the requirements of the Framework prevail over those of the relevant
PFRS.
D. The Framework applies to the financial statements of all commercial, industrial and business
reporting entities, whether in public or private sector.

27. What is the basic purpose of the Framework?

i. To assist FRSC in developing accounting standards those represent GAAP in the Philippines.
ii. To assist FRSC in reviewing and adopting existing international accounting standards.
iii. To assist preparers of financial statements in applying accounting standards and in dealing with
topics those have yet to form the subject of accounting standards.
 A. I and II only
B. I and III only
C. II and III only
D. I, II and III

28. These users are interested in information about the continuance of an entity, especially when they
have a long-term involvement with or are dependent on the entity.

A. Customers
B. Employees
C. Trade unions
D. Suppliers

29. Which statement is true in relation to the objective of financial statements?

i. Financial statements meet the common and specific needs of most users.
ii. Financial statements provide all of the information that users may need to make economic
decisions since they largely portray the financial effects of past events and do not
necessarily provide nonfinancial information.
iii. Financial statements show the results of the stewardship of management or the
accountability of management for the resources entrusted to it.
A. I and II only
B. I and III only
C. II and III only
D. III only

30. Information has the quality of relevance when

i. It influences the economic decisions of users by helping them evaluate past, present or future
events or confirming or correcting their past evaluations.
ii. It is free from bias and error and can be depended upon by users to represent faithfully that which
it either purports to represent or could reasonably be expected to represent.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

31. Which statement is incorrect concerning materiality?

A. Information is material if its omission or misstatement could influence the economic decision of
users taken on the basis of the financial statements.
B. Materiality depends on the absolute size of the item or error judged in the particular
circumstances of its omission or misstatement.
C. Materiality provides a threshold or cutoff point for useful information rather than being a
primary qualitative characteristic.
D. Materiality of items depends on their individual or collective influence on the economic
decision of users.

32. Technically, this arises in the course of the ordinary regular activities of an entity and is referred
to by a variety of different names including sales, interest, dividends, royalties and rent.

A. Income
B. Gain
C. Profit
D. Revenue
 33. Which is the correct sequence for recording transactions and preparing financial statements?

A. Journal, ledger, trial balance, financial statements

B. Ledger, trial balance, journal, financial statements
C. Financial statements, trial balance, ledger, journal
D. Ledger, journal, trial balance, financial statements

34. Which financial statement covers a period of time?

A. Statement of financial position

B. Income statement
C. Statement of cash flows
D. Both income statement and statement of cash flows

35. It is the accounting device that is used to store the recorded monetary information from the
entity’s transactions and events.

A. Account
B. Journal
C. Ledger
D. Source document

36. Double entry system means

A. Only two accounts are affected by each transactions recording.

B. A transaction is recorded twice, once in the journal and the other in the ledger.
C. For every asset increased, a revenue or liability must also be increased.
D. At least two accounts are affected by each transaction recording.

37. Which of the following best defines an accrual?

A. Adjusting entries where cash flows precedes revenue or expense recognition

B. Adjusting entries where revenue or expense recognition precedes cash flow
C. Adjusting entries where cash flow and revenue or expense recognition are simultaneous
D. Adjusting entries where revenue and expenses are recognized in the absence of cash flow

PART 2. PROBLEMS
1. April, the owner of a Law Firm, rendered professional service to a client at a total fee of P75, 000.
He received cash of P25, 000 and a 45-day promissory notes for the balance. What would be the
effect of this transaction in the owner’s capital and liability accounts?
a. Increase capital by P75, 000; Increase liability by P50,000
b. Increase capital by P25, 000; Increase liability by P50,000
c. Increase capital by P25,000; no effect in liability
d. Increase capital by P75,000; no effect in liability

2. Punongbayan Accounting Firm began its operations on February 14, 2013 with office supplies of
P16000. During the month, the firm purchase supplies worth P29000. On February 28, office
supplies on hand totaled to P21000. Supplies Expense for the period is:
a. P 21,000
b. P 29, 000
c. P 45, 000
d. P 24, 000
Use the following information for questions 3-9.
The following items are taken from the financial statements of ARAL KA MABUTI Company for the year
ending December 31, 2008:

Accounts payable ........................................................................................................ $ 18,000

Accounts receivable ...................................................................................................... 11,000
Accumulated depreciation – equipment ..............................................................28,000
Advertising expense..................................................................................................... 21,000
Cash ..................................................................................................................................... 15,000
Cerner, Capital (1/1/08) .......................................................................................... 102,000
Cerner, Drawing ............................................................................................................. 14,000
Depreciation expense ................................................................................................... 12,000
Insurance expense ........................................................................................................... 3,000
Note payable, due 6/30/09 ....................................................................................... 70,000
Prepaid insurance (12-month policy) ...................................................................... 6,000
Rent expense .................................................................................................................... 17,000
Salaries expense ............................................................................................................. 32,000
Service revenue ............................................................................................................ 133,000
Supplies ................................................................................................................................ 4,000
Supplies expense.............................................................................................................. 6,000
Equipment ...................................................................................................................... 210,000
3. What is the company’s net income for the year ending December 31, 2008?
a. $133,000
b. $42,000
c. $28,000
d. $12,000

4. What is the balance that would be reported for owner’s equity at December 31, 2008?
a. $102,000
b. $130,000
c. $144,000
d. $158,000

5. What are total current assets at December 31, 2008?

a. $26,000
b. $32,000
c. $36,000
d. $218,000

6. What are total current liabilities at December 31, 2008?

a. $18,000
b. $70,000
c. $88,000
d. $0

7. What are total long-term liabilities at December 31, 2008?

a. $0
b. $70,000
c. $88,000
d. $90,000

8. What is total liabilities and owner’s equity at December 31, 2008?

a. $176,000
b. $190,000
c. $218,000
d. $232,000

9. If the economic obligations of a business amount to P696,000 and its residual interest amounts to
P385,000, what is the amount of economic resources of the business?
a. P1,081,000
b. P 311,000
c. P1,392,000
d. P 770,000

10. The economic resources of a business amount to P920,000 and its economic obligation amount to
P476,000, what would be its residual interest?
a. P1,396,000
b. P 444,000
c. P 440,400
d. P1,936,000
 11. If the economic resources of business amount to P1,500,000 and its residual interest amounts to
P998,000, what is the amount of its economic obligations?
a. P 520,000
b. P 502,000
c. P2,498,000
d. P2,948,000

12. The following are selected transactions from the book of Analyze Mo Lang Company:
I. The company purchased photocopying machine worth P50 000; P 20 000 was paid in cash
and the balance by issuing a 60- day, 10% note.
II. Purchased office supplies, P 2500 on account of which P500 were unused at the end of the
year.
III. Received P 60 000 from a customer for service rendered

What will be the effect of the above transactions to Analyze Mo Lang Company’s Statement of Financial
Position?
Assets Liabilities Capital
a. Increased by 90 500, Increase by P 32 500 , Increase by 58 000
b. Increase by P 92 500, Increase by 32 500, Increase by 60 000
c. Increase by P 110 500, Increase by P 52 500 , Increase by P 58 000
d. Increase by P 112 500, Increase by P 52 500, Increase by P 60 000

13. John, the Accountant of XYZ Co. failed to recognize the following:
 Accrued utilities of 2530
 Service fee earned but not yet received 5100
 Supplies consumption of 1550
 Payment of fire insurance for the next accounting period 1200
 Owner’s additional investment of 3000
What would be the effect of above omissions in the net income of the company?
a. Overstatement by 180
b. Overstatement by 3000
c. Understatement by 1020
d. Overstatement by 1020

14. The Statement of Financial Position of Maniwala Ka Na May Forever Company shows a capital
balance of 360 000, which is equal to 1/3 of its total assets. How much is the total liabilities?
a. 720 000
b. 120 000
c. 480 000
d. 1 080 000

15. Feine Company sells merchandise on account for P2,000 to Tang Company with credit terms of
2/10, n/30. Tang Company returns P300 of merchandise that was damaged, along with a check to
settle the account within the discount period. What entry does Feine Company make upon receipt
of the check?
a. Cash .................................................................................... 1,700
Accounts Receivable .................................................. 1,700
b. Cash .................................................................................... 1,666
Sales Returns and Allowances............................................ 334
Accounts Receivable .................................................. 2,000
c. Cash .................................................................................... 1,666
Sales Returns and Allowances............................................ 300
Sales Discounts................................................................... 34
Accounts Receivable .................................................. 2,000
d. Cash .................................................................................... 1,960
Sales Discounts................................................................... 40
Sales Returns and Allowances ................................... 300
Accounts Receivable .................................................. 1,700

16. A credit sale of P800 is made on April 25, terms 2/10, n/30, on which a return of $50 is granted on
April 28. What amount is received as payment in full on May 4?
a. P735 c. P800
b. P784 d P750

17. Bagong Buhay, Pakabait ka Na’s Market recorded the following events involving a recent purchase
of merchandise:
 Received goods for P50,000, terms 2/10, n/30.
Returned P1,000 of the shipment for credit.
Paid P250 freight on the shipment, terms FOB shipping point
Paid the invoice within the discount period.
As a result of these events, the company’s merchandise inventory

a. increased by P48,020.
b. increased by P49,250.
c. increased by P48,265.
d. increased by P48,270.

18. Last Na Ending Inventory is P 100 000, which is ½ of the beginning inventory and is 1/5 of total
purchases, what is the cost of sale?
a. 600 000
b. 700 000
c. 100 000
d. 500 000

19. Refer to the previous question. If the company’s policy is to sell at 150% of cost, how much is the
gross profit?
a. 900 000
b. 600 000
c. 700 000
d. 300 000

Additional Probs:
1. Cole Company has sales revenue of P39,000, cost of goods sold of P24,000 and operating
expenses of P9,000 for the year ended December 31. Cole's gross profit is
a. P30,000.
b. P15,000.
c. P6,000.
d. P0.

2. Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3,
for 6,000, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. Logan
uses a perpetual inventory system. The entry on August 10 for Logan Company is
a. Accounts Payable................................................................ 6,000
Cash............................................................................. 6,000
b. Accounts Payable................................................................ 5,880
Cash............................................................................. 5,880
c. Accounts Payable................................................................ 6,000
Purchase Returns and Allowances............................... 120
Cash............................................................................. 5,880
d. Accounts Payable.............................................................. 6,000
Merchandise Inventory............................................... 120
Cash............................................................................ 5,880

3. Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and
the terms of the shipment were FOB shipping point. Cartier uses a perpetual inventory system. Cartier
would have the following entry regarding the shipping charges:
a. There is no entry on Cartier's books for this transaction.
b. Freight Expense................................................................... 400
Cash........................................................................... 400
c. Freight-out........................................................................... 400
Cash........................................................................... 400
d. Merchandise Inventory...................................................... 400
Cash........................................................................... 400

4. In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by

crediting
a. Purchases.
b. Purchase Returns.
c. Purchase Allowance.
d. Merchandise Inventory.

5. On October 4, 2008, Terry Corporation had credit sales transactions of P2,800 from merchandise
having cost P1,900. The entries to record the day's credit transactions include a
a. debit of P2,800 to Merchandise Inventory.
b. credit of P2,800 to Sales.
c. debit of P1,900 to Merchandise Inventory.
 d. credit of P1,900 to Cost of Goods Sold.

6. Which of the following accounts is not closed to Income Summary?

a. Cost of Goods Sold
b. Merchandise Inventory
c. Sales
d. Sales Discounts

7. In the Clark Company, sales were P480,000, sales returns and allowances were $30,000, and cost
of goods sold was $288,000. The gross profit rate was
a. 64%.
b. 36%.
c. 40%.
d. 60%.

8. Net sales is sales less

a. sales discounts.
b. sales returns.
c. sales returns and allowances.
d. sales discounts and sales returns and allowances.

9. In the balance sheet, ending merchandise inventory is reported

a. in current assets immediately following accounts receivable.
b. in current assets immediately following prepaid expenses.
c. in current assets immediately following cash.
d. under property, plant, and equipment.

10. Cost of goods available for sale is computed by adding

a. freight-in to net purchases.
b. beginning inventory to net purchases.
c. beginning inventory to purchases and freight-in.
d. beginning inventory to cost of goods purchased.

END OF Handout

For I know the plans I have for you,” declares the LORD,

“11 

“plans to prosper you and not to harm you,

plans to give you hope and a future.”
– Jeremiah 29:11

“33 
But seek FIRST his kingdom and his righteousness,
and ALL these things will be given to you as well.”
– Matthew 6:33

“The greatest mistake you can make in life

is to be continually fearing
you can make one.”
- Elbert Hubbard