Identify The Choice That Best Completes The Statement or Answers The Question
Identify The Choice That Best Completes The Statement or Answers The Question
Identify The Choice That Best Completes The Statement or Answers The Question
Multiple Choice
Identify the choice that best completes the statement or answers the question.
2. A company using a periodic inventory system neglected to record a purchase of merchandise on account
at yearend. This merchandise was omitted from the yearend physical count. How will these errors affect
assets, liabilities, and equity at yearend and net earnings for the year?
Assets Liabilities Equity Net Earnings
a. No effect Understate Overstate Overstate
b. No effect Overstate Understate Understate
c. Understate Understate No effect No effect
d. Understate No effect Understate Understate
7. Which of the following changes would not be accounted for using the prospective approach?
a. a change in the net realizable value of inventory
b. a change from measuring inventory from cost to lower of cost and net realizable value
c. a change from straight-line to double-declining-balance depreciation
d. a change from double-declining-balance to straight-line depreciation
9. Which of the following would not be accounted for using the retrospective approach?
a. a change from weighted-average to FIFO inventory costing
b. a change from the cost method to the revaluation method for properties with known
market values
c. a change in depreciation methods
d. a change from the fair value model to the cost model for investment properties
10. Which of the following statements is true regarding correcting errors in previously issued financial
statements prepared in accordance with International Financial Reporting Standards (IFRS)?
a. The error can be reported in the current period if it's not considered practicable to report it
prospectively.
b. The error can be reported in the current period if it's not considered practicable to report it
retrospectively.
c. Retrospective application is required with no exception.
d. none of these
B Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the
expenditure as office supplies. The error was discovered a week later.
C On December 31, 2014, inventory was understated by P112,000 due to a mistake in the physical
inventory count. The company uses the periodic inventory system.
D Three years earlier, the company recorded a 3% stock dividend (12,000 ordinary shares, PI par) as
follows:
Retained earnings 12,000
Ordinary share capital 12,000
The shares had a market price at the time of P10 per share.
E At the end of 2014, the company failed to accrue interest expense that accrued during the last four
months of 2014 on bonds payable. The bonds which were issued at face value mature in 2019. The
following entry was recorded on March 1, 2015, when the semiannual interest was paid
Interest expense 180,000
Cash 180,000
F A three-year insurance policy was purchased at the beginning of 2014 for P216,000. The full
premium was debited to insurance expense at the time.
Based on the preceding information, determine the following: (Ignore tax effects.)
11. The entry to correct the error described in item A should include a
a. Debit to equipment - P18,000.
b. Credit to retained earnings - 27,000.
c. Debit to depreciation expense - P27,000.
d. Credit to accumulated depreciation - P18,000.
12. The entry to correct the error described in item D should include a
a. Credit to share premium - P120,000.
b. Debit to retained earnings - P108,000.
c. Debit to retained earnings - P120,000.
d. Credit to ordinary share capital - P108,000.
13. The accrued interest payable account balance at December 31, 2015 should be
a. P60,000 c. P180,000
b. P120,000 d. P240,000
14. The prepaid insurance account balance at December 31, 2015 should be
a. P 0 c. P144,000
b. P72,000 d. P216,000
16. On January 4, 2013, GUYANA, INC. purchased computer hardware for P600,000. On the date of
acquisition, Guyana's management estimated that the computers would have an estimated useful life of 5
years and would have a residual value of P60,000. The company used the double declining-balance
method to depreciate the computer hardware.
In January 2014, Guyana's management realized that technological advancements had made the
computers virtually obsolete and that they would have to be replaced. Management decided to change the
estimated useful life of the computer hardware to 2 years.
2 Tonga decided to use the straight-line method of depreciation on its equipment instead of the sum-of-
the-years'-digits method. It was also decided that this asset has 10 more years of useful life as of
January 2, 2014. The equipment was purchased on January 1, 2004, at a cost of P1,100,000. On the
acquisition date, it was estimated that the equipment would have a 15-year useful life with no residual
value.
17. The entry to record the current year provision for bad debts is
a. Bad debt expense 29,600
Allowance for bad debts 29,600
b. Allowance for bad debts 29,600
Bad debt expense 29,600
c. Bad debt expense 25,600
Allowance for bad debts 25,600
d. Allowance for bad debts 25,600
Bad debt expense 25,600
18. What is the amount of depreciation on equipment for the current year?
a. P45,833 c. P13,750
b. P9,167 d. P32,083
19. How much depreciation expense was recorded by Peru in 2011, 2012, and 2013?
2011 2012 2013
a. P18,000 P28,000 P40,000
b. 36,000 36,000 36,000
c. 16,200 36,000 36,000
d. 16,200 25,200 36,000
21. Throw Company began operations on January 1, 2013. Prior to any adjustments, the retained earnings
account is reproduced below.
Debit Credit Balance
01/01/13 - - 0
12/31/13 Profit for the year - 1,200,000 1,200,000
08/31/14 Dividends paid 400,000 - 800,000
12/31/14 Profit for the year - 1,500,000 2,300,000
The company failed to properly recognize accruals and prepayments. Selected accounts revealed the
following information:
2013 2014
Prepaid expenses P80,000 P60,000
Accrued expenses 25,000 40,000
Unearned income 110,000 50,000
Accrued income 70,000 100,000
What is the adjusted balance of Throw Company’s retained earnings at December 31, 2014?
a. P2,355,000 c. P2,385,000
b. P2,370,000 d. P2,570,000
22. On January 1, 2014 Cheese Company acquired and installed an oil rig. The was acquired at its fair value
of P20,000,000 and the company incurred a total P2,000,000 to install and prepare the asset for its
intended use. The estimated useful life of the rig is 10 years and after which the company has an
obligation to dismantle immediately. Initial estimate of the cash outflow to dismantle the rig is P500,000.
The discount rate is 10%. On January 1, 2016 Cheese Company revised the estimate to dismantle the rig
to P700,000.
What is the carrying value of the oil rig immediately after the revised estimate was accounted for?
a. P17,600,000 c. P17,754,216
b. P17,660,916 d. P17,847,516
23. What is the carrying value of the oil rig on January 1, 2017 immediately after the revised estimate was
accounted for?
a. P17,600,000 c. P17,754,216
b. P17,660,916 d. P17,847,516
24. What is balance of the revaluation surplus on January 1, 2017 immediately after the change in the
estimate of demolition cost was recognized?
a. P987,429 c. P1,143,152
b. P1,090,061 d. P1,245,784
25. DESULTORY UNPLANNED Co. uses a calendar period for its financial reporting. Its current financial
statements are authorized for issue on March 1, 20x1. DESULTORY’s events after the reporting period
are those events that occur
a. from January 1, 20x1 to March 1,20x1
b. from December 31,20x1 to March 1,20x1
c. from January 1,20x0 to March 1,20x1
d. from January 1,20x0 to March 1,20x1
26. Which of the following events requires an adjustment to the current year’s financial statements?
a. Errors discovered after the reporting period and after the financial statements are
authorized for issue.
b. Significant decline in the fair value of financial assets measured at fair value through
profit or loss.
c. A change in the estimate of warranty obligation due to changes in circumstances occurring
after the reporting period but did not exist as of the end of the reporting period.
d. The sale of inventory which provides information regarding the inventory’s net realizable
value as of the end of the reporting period.
27. A new drug named “EEE” was introduced by Genius Inc. in the market on December 1, 2005. Genius
Inc.’s financial year ends on December 31, 2005. It was the only company that was permitted to
manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On
March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of
investigations, authorities discovered that when this drug was simultaneously used with “BBB,” a drug
used to regulate hypertension, the patient’s blood would clot and the patient suffered a stroke. A lawsuit
for P100,000,000 has been filed against Genius Inc. The financial statements were authorized for issuance
on April 30, 2006. Which of the following options is the appropriate accounting treatment for this post-
balance sheet event under IAS 10?
a. The entity should provide P100,000,000 because this is an “adjusting event” and the
financial statements were authorized to be issued after the accident
b. The entity should disclose P100,000,000 as a contingent liability because it is an
“adjusting event.”
c. The entity should disclose P100,000,000 as a “contingent liability" because it is a present
obligation with an improbable outflow.
d. Assuming the probability of the lawsuit being decided against Genius Inc. is remote, the
entity should disclose it in the footnotes, because it is a nonadjusting material event.
28. At the balance sheet date, December 31, 2005, ABC Inc. carried a receivable from XYZ, a major
customer, at P10 million. The “authorization date” of the financial statements is on February 16, 2006.
XYZ declared bankruptcy on Valentine’s Day (February 14, 2006). ABC Inc. will
a. Disclose the fact that XYZ has declared bankruptcy in the footnotes,
b. Make a provision for this post-balance sheet event in its financial statements (as opposed
to disclosure in footnotes).
c. Ignore the event and wait for the outcome of the bankruptcy because the event took place
after the year-end.
d. Reverse the sale pertaining to this receivable in the comparatives for the prior period and
treat this as an “error” under IAS 8.
29. Excellent Inc. built a new factory building during 2005 at a cost of P20 million. At December 31, 2005,
the net book value of the building was P19 million. Subsequent to year-end, on March 15, 2006, the
building was destroyed by fire and the claim against the insurance company proved futile because the
cause of the fire was negligence on the part of the caretaker of the building. If the date of authorization of
the financial statements for the year ended December 31, 2005, was March 31, 2006, Excellent Inc.
should
a. Write off the net book value to its scrap value because the insurance claim would not fetch
any compensation.
b. Make a provision for one-half of the net book value of the building.
c. Make a provision for three-fourths of the net book value of the building based on
prudence.
d. Disclose this nonadjusting event in the footnotes.
30. International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. Subsequent to the balance sheet date, and before the “date of authorization” of the
issuance of the financial statements, there were abnormal fluctuations in foreign currency rates.
International Inc. should
a. Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations
in foreign exchange rates.
b. Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in
foreign exchange rates (and not just adverse movements).
c. Disclose the post-balance sheet event in footnotes as a nonadjusting event.
d. Ignore the post-balance sheet event.