I.

TRUE/FALSE

1. A ledger is where the company initially records transactions and selected other events.

2. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are
periodically closed.

3. All liability and stockholders’ equity accounts are increased on the credit side and
decreased on the debit side.

4. The first step in the accounting cycle is the journalizing of transactions and selected
other events.

5. A general journal chronologically lists transactions and other events, expressed in terms
of debits and credits to accounts.

6. Adjusting entries for prepayments record the portion of the prepayment that represents
the expense incurred or the revenue earned in the current accounting period.

7. The book value of any depreciable asset is the difference between its cost and its
salvage value.

8. The ending owner’s equity balance is reported on both the statement of changes in
equity and the balance sheet.

9. All revenues, expenses, and the drawings account are closed through the Income
Summary account.

10. Liabilities represent amounts owed to creditors.

11. An owner can invest cash or other assets of value in the business.

12. Both sides of the fundamental accounting equation must always be equal.

II. MULTIPLE CHOICE—Conceptual

13. Debit always means
a. right side of an account.
b. increase.
c. decrease.
d. none of these.

14. The double-entry accounting system means

a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. More than one of the above.

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15. When an entity pays a note payable and interest,
a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.

16. Owner’s equity is not affected by all

a. cash receipts.
b. drawings.
c. revenues.
d. expenses.

17. Which of the following criteria must be met before an event or item should be recorded for
accounting purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.

18. Which of the following is a recordable event or item?

a. Changes in managerial policy
b. The value of human resources
c. Changes in personnel
d. None of these

19. Which of the following is not an internal event?

a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.
20. An accounting record into which the essential facts and figures in connection with all
transactions are initially recorded is called the
a. ledger.
b. account.
c. trial balance.
d. none of these.

21. The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle.
22. A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing
financial statements.
c. is normally prepared three times in the accounting cycle.
d. all of these.

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23. A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. all of these.

24. Which of the following is a real (permanent) account?

a. Prepaid Insurance
b. Service Revenue
c. Accounts Receivable
d. Both Prepaid Insurance and Accounts Receivable

25. Which of the following is a nominal (temporary) account?

a. Unearned Revenue
b. Salary Expense
c. Inventory
d. L. Santos, Capital

26. Nominal accounts are also called

a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. none of these.

27. External events do not include

a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells, a flood or
earthquake.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.

28. A general journal

a. chronologically lists transactions and other events, expressed in terms of debits and
credits.
b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and
expense accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.

29. A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.

30. A journal entry to record a payment on account will include a

a. debit to accounts receivable.
b. credit to accounts receivable.
c. debit to accounts payable.
d. credit to accounts payable.

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31. A journal entry to record a receipt of rent revenue in advance will include a
a. debit to rent revenue.
b. credit to rent revenue.
c. credit to cash.
d. credit to unearned rent.

32. Adjustments are often prepared

a. after the balance sheet date, but dated as of the balance sheet date.
b. after the balance sheet date, and dated after the balance sheet date.
c. before the balance sheet date, but dated as of the balance sheet date.
d. before the balance sheet date, and dated after the balance sheet date.

33. At the time a company prepays a cost

a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. more than one of the above.

34. How do these prepaid expenses expire?

Rent Supplies
a. With the passage of time Through use and consumption
b. With the passage of time With the passage of time
c. Through use and consumption Through use and consumption
d. Through use and consumption With the passage of time

35. Recording the adjusting entry for depreciation has the same effect as recording the
adjusting entry for
a. an unearned revenue.
b. a prepaid expense.
c. an accrued revenue.
d. an accrued expense.

36. Unearned revenue on the books of one company is likely to be

a. a prepaid expense on the books of the company that made the advance payment.
b. an unearned revenue on the books of the company that made the advance payment.
c. an accrued expense on the books of the company that made the advance payment.
d. an accrued revenue on the books of the company that made the advance payment.

37. To compute interest expense for an adjusting entry, the formula is principal X rate X a
fraction. The numerator and denominator of the fraction are:
Numerator Denomintor
a. Length of time note has been outstanding 12 months
b. Length of note 12 months
c. Length of time until note matures Length of note
d. Length of time note has been outstanding Length of note

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38. Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2

39. Why are certain costs of doing business capitalized when incurred and then depreciated
or amortized over subsequent accounting cycles?
a. To reduce the income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as earned
d. To adhere to the accounting constraint of conservatism

40. When an item of expense is paid and recorded in advance, it is normally called a(n)
a. prepaid expense.
b. accrued expense.
c. estimated expense.
d. cash expense.

41. When an item of revenue or expense has been earned or incurred but not yet collected or
paid, it is normally called a(n) ____________ revenue or expense.
a. prepaid
b. adjusted
c. estimated
d. none of these

42. When an item of revenue is collected and recorded in advance, it is normally called a(n)
___________ revenue.
a. accrued
b. prepaid
c. unearned
d. cash

43. An accrued expense can best be described as an amount

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

44. If, during an accounting period, an expense item has been incurred and consumed but not
yet paid for or recorded, then the end-of-period adjusting entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.

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45. Which of the following must be considered in estimating depreciation on an asset for an
accounting period?
a. The original cost of the asset
b. Its useful life
c. The decline of its fair market value
d. Both the original cost of the asset and its useful life.

46. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability

47. Year-end net assets would be overstated and current expenses would be understated as
a result of failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance
b. Depreciation of fixed assets
c. Accrued wages payable
d. All of these

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

a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.

49. An accrued revenue can best be described as an amount

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

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

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

51. An adjusted trial balance

a. is prepared after the financial statements are completed.
b. proves the equality of the total debit balances and total credit balances of ledger
accounts after all adjustments have been made.
c. is a required financial statement under generally accepted accounting principles.
d. cannot be used to prepare financial statements.

52. Which type of account is always debited during the closing process?
a. Drawings.
b. Expense.
c. Revenue.
d. L. Santos, Capital.

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55. Under the cash basis of accounting, revenues are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.

58. Reversing entries are

1. normally prepared for prepaid, accrued, and estimated items.
2. necessary to achieve a proper matching of revenue and expense.
3. desirable to exercise consistency and establish standardized procedures.
a. 1
b. 2
c. 3
d. 1 and 2

59. Adjusting entries that should be reversed include those for prepaid or unearned items that
a. create an asset or a liability account.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account.
d. create an asset or a liability account and were originally entered in a revenue or
expense account.

60. Adjusting entries that should be reversed include

a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a liability.
d. all of these.

III. MULTIPLE CHOICE—Computational

61. Maso Enterprise recorded journal entries for the additional investment of the owner for
P40,000, the payment of P13,000 on accounts payable, and the payment of salaries
expense of P21,000. What net effect do these entries have on owners’ equity?
a. Increase of P40,000.
b. Increase of P27,000.
c. Increase of P19,000.
d. Increase of P6,000.

62. Mune Trading recorded journal entries for the payment of P50,000 of drawings, the
P32,000 increase in accounts receivable for services rendered, and the purchase of
equipment for P21,000. What net effect do these entries have on owners’ equity?
a. Decrease of P71,000.
b. Decrease of P39,000.
c. Decrease of P18,000.
d. Increase of P11,000.

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63. Pappy Co. received cash of P13,500 on September 1, 2023 for one year’s rent in advance
and recorded the transaction with a credit to Unearned Rent. The December 31, 2023
adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, P4,500.
b. debit Rent Revenue and credit Unearned Rent, P9,000.
c. debit Unearned Rent and credit Rent Revenue, P4,500.
d. debit Cash and credit Unearned Rent, P9,000.

64. Panda Co. paid cash of P18,000 on June 1, 2023 for one year’s rent in advance and
recorded the transaction with a debit to Prepaid Rent. The December 31, 2023 adjusting
entry is
a. debit Prepaid Rent and credit Rent Expense, P7,500.
b. debit Prepaid Rent and credit Rent Expense, P10,500.
c. debit Rent Expense and credit Prepaid Rent, P10,500.
d. debit Prepaid Rent and credit Cash, P7,500.

65. Lopez Co. received P6,400 on April 1, 2023 for one year's rent in advance and recorded
the transaction with a credit to a nominal account. The December 31, 2023 adjusting entry
is
a. debit Rent Revenue and credit Unearned Rent, P1,600.
b. debit Rent Revenue and credit Unearned Rent, P4,800.
c. debit Unearned Rent and credit Rent Revenue, P1,600.
d. debit Unearned Rent and credit Rent Revenue, P4,800.

66. Gibson Co. paid P3,600 on June 1, 2023 for a two-year insurance policy and recorded the
entire amount as Insurance Expense. The December 31, 2023 adjusting entry is
a. debit Insurance Expense and credit Prepaid Insurance, P1,050.
b. debit Insurance Expense and credit Prepaid Insurance, P2,550.
c. debit Prepaid Insurance and credit Insurance Expense, P1,050
d. debit Prepaid Insurance and credit Insurance Expense, P2,550.

67. Tate Co. purchased equipment on November 1, 2023 and gave a 3-month, 9% note with
a face value of P20,000. The December 31, 2023 adjusting entry is
a. debit Interest Expense and credit Interest Payable, P1,800.
b. debit Interest Expense and credit Interest Payable, P450.
c. debit Interest Expense and credit Cash, P300.
d. debit Interest Expense and credit Interest Payable, P300.

68. Brown Co’s account balances at December 31, 2023 for Accounts Receivable and the
related Allowance for Doubtful Accounts are P460,000 debit and P700 credit, respectively.
From an aging of accounts receivable, it is estimated that P12,500 of the December 31
receivables will be uncollectible. The necessary adjusting entry would include a credit to
the allowance account for
a. P12,500.
b. P13,200.
c. P11,800.
d. P700.

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 70. Garcia Co. received cash of P18,000 on August 1, 2023 for one year's rent in advance
and recorded the transaction with a credit to Rent Revenue. The December 31, 2023
adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, P7,500.
b. debit Rent Revenue and credit Unearned Rent, P10,500.
c. debit Unearned Rent and credit Rent Revenue, P7,500.
d. debit Cash and credit Unearned Rent, P10,500.

71. Starr Co. loaned P90,000 to another entity on December 1, 2023 and received a 3-month,
8% interest-bearing note with a face value of P90,000. What adjusting entry should Starr
make on December 31, 2023?
a. Debit Interest Receivable and credit Interest Revenue, P1,800.
b. Debit Cash and credit Interest Revenue, P600.
c. Debit Interest Receivable and credit Interest Revenue, P600.
d. Debit Cash and credit Interest Receivable, P1,800.

Use the following information for questions 72 and 73:

A company receives interest on a P30,000, 8%, 5-year note receivable each April 1. At
December 31, 2022, the following adjusting entry was made to accrue interest receivable:
Interest Receivable ............................................................ 1,800
Interest Revenue .................................................... 1,800
72. Assuming that the company does not use reversing entries, what entry should be made
on April 1, 2023 when the annual interest payment is received?
a. Cash .................................................................................. 600
Interest Revenue .................................................... 600
b. Cash .................................................................................. 1,800
Interest Receivable ................................................ 1,800
c. Cash .................................................................................. 2,400
Interest Receivable ................................................ 1,800
Interest Revenue .................................................... 600
d. Cash .................................................................................. 2,400
Interest Revenue .................................................... 2,400
73. Assuming that the company does use reversing entries, what entry should be made on
April 1, 2023 when the annual interest payment is received?
a. Cash .................................................................................. 600
Interest Revenue .................................................... 600
b. Cash .................................................................................. 1,800
Interest Receivable ................................................ 1,800
c. Cash ................................................................................. 2,400
Interest Receivable ................................................ 1,800
Interest Revenue .................................................... 600
d. Cash .................................................................................. 2,400
Interest Revenue ..................................................... 2,400

74. Big-Mouth Frog Co. had revenues of P200,000, expenses of P120,000, and dividends of
P30,000. When Income Summary is closed to Owner’s Equity, the amount of the debit or
credit to Owner’s Equity is a
a. debit of P50,000.
b. debit of P80,000.

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 c. credit of P50,000.
d. credit of P80,000.

75. Lane Co. has an incentive commission plan for its salesmen, entitling them to an additional
sales commission when actual quarterly sales exceed budgeted estimates. An analysis
of the account "incentive commission expense" for the year ended December 31, 2023,
follows:
Amount For Quarter Ended Date Paid
P40,000 December 31, 2022 January 23, 2023
36,000 March 31, 2023 April 24, 2023
39,000 June 30, 2023 July 19, 2023
43,000 September 30, 2023 October 22, 2023
The incentive commission for the quarter ended December 31, 2023, was P42,000. This
amount was recorded and paid in January 2024. What amount should Lane report as
incentive commission expense for 2023?
a. P158,000.
b. P118,000.
c. P160,000.
d. P200,000.

Use the following information for questions 76 through 78:

The income statement of Dolan Corporation for 2023 included the following items:
Interest revenue P65,500
Salaries expense 85,000
Insurance expense 7,600
The following balances have been excerpted from Dolan Corporation's balance sheets:
December 31, 2023 December 31, 2006
Accrued interest receivable P9,100 P7,500
Accrued salaries payable 8,900 4,200
Prepaid insurance 1,100 1,500

76. The cash received for interest during 2023 was

a. P56,400.
b. P63,900.
c. P65,500.
d. P67,100.

77. The cash paid for salaries during 2023 was

a. P89,700.
b. P80,300.
c. P80,800.
d. P93,900.

78. The cash paid for insurance premiums during 2023 was
a. P6,500.
b. P6,100.
c. P8,000.
d. P7,200.

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Use the following information for questions 79 through 81:
Olsen Company paid or collected during 2023 the following items:
Insurance premiums paid P 10,400
Interest collected 33,900
Salaries paid 120,200

The following balances have been excerpted from Olsen's balance sheets:
December 31, 2023 December 31, 2022
Prepaid insurance P 1,200 P 1,500
Interest receivable 3,700 2,900
Salaries payable 12,300 10,600

79. The insurance expense on the income statement for 2023 was
a. P7,700.
b. P10,100.
c. P10,700.
d. P13,100.

80. The interest revenue on the income statement for 2023 was
a. P27,300.
b. P33,100.
c. P34,700.
d. P40,500.

81. The salary expense on the income statement for 2023 was
a. P97,300.
b. P118,500.
c. P121,900.
d. P143,100.

82. At the end of 2023, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, P25,000.
2. Expired insurance, P2,200 (originally recorded as prepaid insurance).
3. Interest payable, P6,000.
4. Rental revenue receivable, P10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that
may be reversed is (are)
a. Entry No. 3.
b. Entry No. 4.
c. Entries No. 3 and No. 4.
d. Entries No. 2, No. 3, and No. 4.

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