Colegio de San Juan de Letran: The Accountancy Profession

Colegio de San Juan de Letran
College of Business Administration and Accountancy
THEORY OF ACCOUNTS
THE ACCOUNTANCY PROFESSION

1. OLIVA Company and JOSHUA Company exchanged a truck with fair value in excess of carrying
amount. In addition, OLIVA paid JOSHUA to compensate for the difference in truck fair value. As a
consequence of the exchange, OLIVA shall recognize
a) A gain equal to the difference between the fair value and carrying amount of the truck given
b) A gain determined by the proportion of cash paid to the total consideration
c) A loss determined by the proportion of cash paid to the total consideration
d) Neither a gain nor a loss
2. Which of the following is the most appropriate policy as regards the allocation of joint overhead
cost to plant and equipment constructed by the entity for own use?
a) Assign no overhead
b) Assign only variable overhead
c) Assign overhead equal to the amount that would have been assigned to production that is
curtailed because of the construction
d) Assign a proportionate share of overhead to the construction of the same basis as that used
for the assignment to normal production
3. Repayment of grant related to income shall

a) Recognized as component of other comprehensive income
b) Charged to retained earnings
c) Expenses immediately
d) Applied first against the deferred income balance and any excess shall be recognized
immediately as expense
4. Repayment of grant related to an asset shall be recorded by

a) Increasing the carrying amount of the asset if the deduction approach is used.
b) Recognizing as expense the cumulative additional depreciation that would have been
recorded to date in the absence of the grant if the deduction approach is used
c) To the extent practicable, an entity must correct a prior period error prospectively in the first
financial statement authorized for issue after the discovery.
d) When an entity discovers an error in the financial statements of a prior period, it must
immediately withdraw those financial statements and reissue them with the error corrected.
e) To the extent practicable, an entity must correct a prior period error retrospectively in the first
financial statement authorized for issue after the discovery.
5. Compared to cash basis net income for the current year, the accrual basis net income increased
when an entity
a) Paid a cash dividend in the current year.
b) Wrote off more accounts receivable than it reported as uncollectible account expense in the
current year.
c) Had lower accrued expenses at the end of the current year than at the beginning of the year.
d) Sold equipment for cash at a gain in the current year.
6. The premium on a four-year insurance policy expiring on December 31, 2019 was paid in total on
January 1, 2016. If the original payment was recorded as a prepaid asset, the balance in the
prepaid asset account on December 31, 2017 would be
a) Lower than the balance on December 31, 2016
b) Lower than the balance on December 31, 2018
c) The same as the balance on December 31, 2019.
d) The same as the original payment.
7. The current year-end physical inventory appropriately included merchandise purchased on account
that was not recorded as purchases until next year. What effect will this error have on the current
year-end assets, liabilities, retained earnings, and earnings for the year ended, respectively?
a) Understate, no effect, overstate, overstate
b) No effect, overstate, understate, understate
c) No effect, understate, overstate, overstate
d) No effect, understate, understate, overstate
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8. An entity neglected to record a purchase of merchandise on account at year end. This
merchandise was omitted from year end physical count. How would these errors affect assets,
liabilities, equity at year-end and net income for the year?
a) Understate, Understate, No effect, No effect
b) Understate, No effect, Understate, Understate
c) No effect, Understate, Overstate, Overstate
d) No effect, Overstate, Understate, Understate
9. If at the end of reporting period, an entity erroneously excluded some of goods from ending
inventory and also erroneously did not record the purchase of these goods, these errors would
cause
a) The ending inventory, cost of goods available for sale and retained earnings to be
understated.
b) The ending inventory, cost of goods sold and retained earnings to be understated.
c) No effect on net income, working capital and retained earnings.
d) Cost of goods available for sale, cost of goods sold and net income to be understated.
10. An entity neglected to record a purchase of merchandise on account at year end. This
merchandise was omitted from year end physical count. How would these errors affect assets,
liabilities, equity at year-end and net income for the year?
a) Understate, Understate, No effect, No effect
b) Understate, No effect, Understate, Understate
c) No effect, Understate, Overstate, Overstate
d) No effect, Overstate, Understate, Understate
11. Which of the following errors would result in an overstatement of both current assets and equity?
a) An understatement of accrued expenses commissions
b) Noncurrent note receivable principal is misclassified as current assets
c) Annual depreciation on manufacturing machinery is understated
d) Holiday pay expense for administrative employees is misclassified ad manufacturing
overhead.
12. At the end of the current year, special insurance costs, incurred but unpaid, were not recorded. If
these insurance costs were related to goods in process, what is the effect of the omission on
accrued liabilities and retained earnings in the current year-end, respectively?
a) No effect and no effect
b) No effect and overstated
c) Understated and No effect
d) Understated and Overstated
13. At the end of the current year, an entity failed to accrue sales commission during the current year
but paid in the nest year. The error was not repealed in the next year. What was the effect of this
error on the current year-end ending working capital and retained earnings, respectively?
a) Overstated and overstated
b) No effect and overstated
c) No effect and No effect
d) Overstated and no effect
14. The primary purpose of a statement of cash flows is

a) To provide relevant information about cash receipts and cash payments of an entity during a
period.
b) To help investors and creditors to assess the entity’s ability to generate positive future net
cash flows.
c) To disclose separately noncash transactions
d) To assess the ability of the entity to pay dividends.
15. Investing activities include

a) Cash payment to and on behalf of employees
b) Cash payment for future contract, forward contract, option contract and swap contract
c) Cash payments of amounts borrowed.
d) Cash payments by lessee for the reduction of the outstanding liability relating to a finance
lease.
16. Investing activities include

e) Cash payment to and on behalf of employees
f) Cash payment for future contract, forward contract, option contract and swap contract
g) Cash payments of amounts borrowed.
h) Cash payments by lessee for the reduction of the outstanding liability relating to a finance
lease.
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Colegio de San Juan de Letran

College of Business Administration and Accountancy

THE ACCOUNTANCY PROFESSION

3. Repayment of grant related to income shall

4. Repayment of grant related to an asset shall be recorded by

14. The primary purpose of a statement of cash flows is

15. Investing activities include

16. Investing activities include

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