CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
FINANCIAL ACCOUNTING AND REFORTING THEORY
VALIX SIY VALIX ESCALA
REVISED CONCEPTUAL FRAMEWORK
1. Which statement is true about the Conceptual Framework for Financial Reporting?
a. The Conceptual Framework is not a Standard.
b. The Conceptual Framework describes the objective of financial reporting and the
concepts for general purpose financial statements.
c. In cases of conflict, the requirements of the relevant IFRS prevail over those of the
Conceptual Framework.
d. All of these statements are true about the Conceptual Framework.
2. Which is a purpose of the Conceptual Framework?
a. To assist the IASB to develop IFRS based on consistent concepts.
b. To assist preparers to develop consistent accounting policy when no standard applies
to a particular transaction or when Standard allows a choice of accounting policy
c. To assist all parties to understand and interpret the Standards
d. All of these can be considered a purpose of the Conceptual Framework.
3. Which is not a purpose of having a Conceptual Framework?
a. To enable the profession to more quickly solve emerging practical problems.
b. To provide a foundation from which to build more useful standards.
c. To enable the standard setting body to issue more useful and consistent
pronouncements over time.
d. To assist regulatory agencies in issuing rules and regulations for a particular industry.
4. The Conceptual Framework provides the foundation for Standards that
a. Contribute to transparency by enhancing international comparability and quality of
financial information.
b. Strengthen accountability of the people entrusted with the entity.
c. Contribute to economic efficiency by helping investors to identify opportunities and
risks across the world.
d. All of these are the result of Standards developed based on consistent concepts.
5. What provides "the why" or the goal and purpose of accounting?
a. Measurement and recognition concept
b. Qualitative characteristic of accounting information
c. Element of financial statements
d. Objective of financial reporting
6. The objective of financial reporting in the Conceptual Framework
a. Is the foundation for the Conceptual Framework.
b. Includes the qualitative characteristics that make accounting information useful.
c. Is not found in the Conceptual Framework.
d. All of the choices are correct regarding the objective of financial reporting.
7. Which statement is not an objective of financial reporting?
a. To provide information that is useful in investment and credit decisions.
b. To provide information about entity resources, claims against those resources and
changes those resources.
c. To provide information on the liquidation value of an entity.
d. To provide information that is useful in assessing cash flow prospects.
8. The assumption that an entity will not be sold or liquidated in the near future is known
as
a. Economic entity assumption
b. Monetary unit assumption
c. Time period assumption
d. Going concern assumption
9. Which statement is an implication of the going concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current-noncurrent classification of assets and liabilities is justifiable and
significant.
d. All of these imply the going concern assumption.
10. The economic entity assumption
a. Is inapplicable to unincorporated businesses
b. Recognizes the legal aspects of business organizations
c. Requires periodic income measurement
d. Is applicable to all forms of business organizations
11. Consolidated financial statements are prepared when a parent-subsidiary
relationship exists.
a. Economic entity assumption
b. Legal entity assumption
c. Consolidation standard
d. Neutrality
12. During the lifetime of an entity, accountants produce financial statements at arbitrary
artificial points in time in accordance with which basic accounting concept?
a. Objectivity
b. Time period assumption
c. Materiality
d. Economic entity
13. Inflation is ignored in accounting due to
a. Economic entity assumption
b. Going concern assumption
c. Monetary unit assumption
d. Periodicity assumption
14. In the Conceptual Framework, qualitative characteristics
a. Are considered either fundamental or enhancing.
b. Contribute to the decision-usefulness of financial reporting information.
c. Distinguish better information from inferior information for decision-making purposes.
d. All of the choices we correct.
15. Fundamental qualitative characteristics of accounting information are
a. Relevance and comparability
b. Comparability and consistency
c. Faithful representation and relevance
d. Neutrality and verifiability
16. Enhancing qualitative characteristics of accounting information include
a. Relevance, faithful representation and materiality
b. Comparability, understandability, timeliness and reliability
c. Faithful representation and timeliness
d. Materiality and understandability
17. When there is agreement between a measure or description and the phenomenon it
purports to represent, the information possesses which characteristic?
a. Faithful representation
b. Completeness
c. Neutrality
d. Free from error
18. The quality of faithful representation includes
a. Predictive value and confirmatory value
b. Completeness, free from error and neutrality
c. Comparability and understandability
d. Timeliness and verifiability
19. The qualitative characteristic of relevance includes
a. Predictive value and confirmatory value
b. Completeness and neutrality
c. Comparability and understandability
d. Verifiability and timeliness
20. Accounting information is considered relevant when it
a. Can be depended on to represent the economic conditions that it is intended to
represent
b. Is capable of making a difference m a decision
c. Is understandable by reasonably informed users of accounting information
d. Is verifiable and neutral
21. The underlying theme of the relevance is
a. Decision usefulness
b. Understandability
c. Reliability
d. Comparability
22. Which of the following statements about materiality is not correct?
a. An item must make a difference or it need not be disclosed.
b. Materiality is a matter of absolute size.
c. An item is material if the inclusion or omission would influence or change the
judgment of a reasonable person.
d. Materiality is a subquality of relevance.
23. What is meant by comparability when discussing financial accounting information?
a. Information has predictive and feedback value.
b. Information is reasonably free from error.
c. Information is measured and reported in a similar fashion across entities.
d. Information is timely.
24. What is meant by consistency when discussing financial accounting information?
a. Information is measured and reported in a similar fashion across points in time.
b. Information is timely.
c. Information is measured similarly across the industry.
d. Information is verifiable.
25. The enhancing quality of understandability means the information should be
understood by
a. Experts in the interpretation of financial statements
b. Users with reasonable understanding of business and economic activities
c. Financial analysts
d. CPAs
26. For information to be useful, the linkage between the users and the decisions made
is
a. Relevance
b. Reliability
c. Understandability
d. Materiality
27. According to Conceptual Framework, verifiability implies
a. Legal evidence
b. Logic
c. Consensus
d. Legal verdict
28. Proponents of historical cost ordinarily maintain that in comparison with all other
valuation alternatives for financial reporting, statements prepared using historical cost
are more
a. Verifiable
b. Relevant
c. Indicative of the entity’s purchasing power
d. Conservative
29. When an entity has started placing its quarterly financial statements on its website,
thereby reducing ample time to get information to users, the qualitative concept involved
is
a. Comparability
b. Understandability
c. Verifiability
d. Timeliness
30. The Conceptual Framework includes which constraint?
a. Prudence
b. Conservatism
c. Cost
d. All of the choices are constraints in the conceptual framework
31. Which of the following best describes the cost-benefit constraint?
a. The benefit of the information must be greater than the cost of providing it.
b. Financial information should be free from cost to users of the information.
c. Cost of providing financial information is not always evident or measurable but must
be considered.
d. All of the choices are correct.
32. Which statement is true about a reporting entity?
a. A reporting entity is an entity that is required or chooses to prepare financial
statements.
b. A reporting entity can be a single entity or a portion of that entity or can comprise
more than one entity.
c. A reporting is not necessarily a legal entity.
d. All of these statements are true about a reporting entity.
33. Which statement is true about financial statements of a reporting entity?
a. If the reporting entity comprises both the parent and its subsidiaries, the financial
statements are referred to as consolidated financial statements.
b. If the reporting entity is the parent alone, the financial statements are referred to as
unconsolidated financial statements.
c. If the reporting entity comprises two or more entities that are not linked by a parent-
subsidiary relationship, the financial statements are referred to as combined financial
statements.
d. All of these statements are true about the financial statements of a reporting entity.
34. Which is within the definition of an asset under the Revised Conceptual Framework?
a. An asset is a present economic resource.
b. The economic resource is a right that has the potential to produce economic benefits.
c. The economic resource is controlled by the entity as a result of past event.
d. All of these statements define an asset.
35. Under the Revised Conceptual Framework, which of the following criteria must be
satisfied for a liability to exist?
a. The entity has an obligation.
b. The obligation is to transfer an economic resource.
c. The obligation is a present obligation that exists as a result of a past event.
d. All of these must be satisfied for a liability to exist.
36. A present obligation exists as a result of past event if
a. The entity has already obtained economic benefits.
b. The entity will have to transfer an economic resource that it would not otherwise have
to do.
c. The entity has not yet obtained economic benefits but will have to transfer economic
resource to obtain the economic benefits.
d. The entity has already obtained economic benefits and will have to transfer economic
resource that it would not otherwise have to do.
37. Which statement is not true about income and expenses?
a. Income is increase in asset or decrease in liability that results in increase in equity
other than that relating to contribution from equity holders.
b. Expense is decrease in asset ‘or increase in liability that results in decrease in equity
other than that relating to distribution to equity holders.
c. Income and expenses are the elements that relate to financial position.
d. Income encompasses revenue and gain.
38. It is the process of capturing for inclusion in the statement of financial position or the
statement of financial performance an item that meets the definition of an element of the
financial statements.
a. Recognition
b. Measurement
c. Derecognition
d. Disclosure
39. Under the Revised Conceptual Framework, what is the recognition principle?
a. It is probable that any future economic benefit associated with the item will flow to or
from the entity.
b. The item has a cost or value that can be measured with reliability.
c. It is probable that any future economic benefit will flow to or from the entity and the
element can be measured reliably.
d. Only items that meet the definition of an asset, liability, equity, income and expense
are recognized.
40. Which statement is not true about derecognition?
a. Derecognition is the removal of a recognized asset or liability from the statement of
financial position.
b. Derecognition is the removal of a recognized income or expense from the income
statement.
c. Derecognition for an asset normally occurs when the entity loses control of the
recognized asset.
d. Derecognition for a liability normally occurs when the entity no longer has a present
obligation for the recognized liability.
41. Under the Revised Conceptual Framework, the measurement bases include
a. Historical cost
b. Current value
c. Assessed value
d. Historical cost and current value
42. Which statement is true about current value measurement?
a. Fair value of an asset is the price that would be received to sell an asset in an orderly
transaction between market participants at the measurement date.
b. Value in use is the present value of the cash flows expected to be derived from the
use and ultimate disposal of an asset.
c. Fulfillment value is the present value of the cash expected to be transferred for the
payment of liability.
d. All of these statements are true about current value measurement.
43. The term “revenue recognition” conventionally refers to
a. The process of identifying transactions to be recorded as revenue in an accounting
period.
b. The process of measuring and relating revenue and expenses of an entity for in
accounting period.
c. The earning process which gives rise to revenue realization.
d. The process of identifying those transactions that result 1n an inflow of assets from
customers.
44. Revenue may be recognized
a. At the point of sale
b. During production
c. At the end of production
d. All of the choices may be acceptable for revenue recognition
45. The accounting principle of expense recognition is best demonstrated by
a. Not recognizing any expense unless some revenue is realized.
b. Associating effort with accomplishment.
c. Recognizing prepaid rent received as revenue.
d. Establishing an appropriation contingency.
46. Which of the following is not an acceptable basis for the recognition of expense?
a. Systematic and rational allocation
b. Cause and effect association
c. Immediate recognition
d. Cash disbursement
47 Which capital maintenance concept is applied to net income and other
comprehensive income
a. Financial capital
b. Physical capital
c. Financial capital for net income and physical capital for other comprehensive income
d. Physical capital for net income and financial capital for other comprehensive income
48. Financial capital is defined as the
a. Net assets or equity of an entity in monetary terms.
b. Net assets or equity of an equity in terms of physical productive capacity
c. Legal capital
d. Share capital issued and outstanding.
49. The physical capital concept requires that productive assets shall be measured at
a. Historical cost
b. Current cost
c. Lower of current cost and net realizable value
d. Net realizable value
50. Under the financial capital concept, net income occurs when
a. When the nominal amount of net assets at year-end exceeds the nominal amount of
net assets at the beginning.
b. When the physical productive capital at year-end exceeds the physical productive
capital at the beginning after excluding any distributions to and contributions from
owners
c. When the nominal amount of net assets at year-end exceeds the nominal amount of
net assets at the beginning after excluding distributions to and contributions from
owners.
d. When the physical productive capital at year-end exceeds the physical productive
capital at the beginning.
 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA
FINANCIAL ACCOUNTING AND REPORTING VALIX
SIY VALIX ESCALA SANTOS
FINANCE LEASE - LESSEE
1. On January 1, 2019, an entity leased an equipment from a lessor with the following
pertinent information:
Annual rental payable at the end of each year
500,000
Lease term 8
years Useful life of equipment
10 years
Implicit interest rate
10%
PV of an ordinary annuity of 1 for 8 periods at 10%
5.33
Present value of 1 for 8 periods at 10%
3 0.47
The entity has the option to purchase the equipment on January 1, 2027 by paying
P500,000 which is significantly less than the expected fair value of the equipment on the
option exercise date. There is reasonable certainty that the entity shall exercise the
option. On January 1, 2019, the entity incurred initial direct cost of P200,000.
1. What is the initial cost of the equipment?
a. 2,900,000
b. 3,100,000
c. 2,865,000
d. 0
2. What is the interest expense for 2019?
a. 290,000
b. 310,000
c. 266,500
d. 316,500
3. What is the lease liability 0n December 31, 2019?
a. 2,690,000
b. 2,790,000
c. 2,398,500
d. 2,848,500
4. What is the depreciation for 2019??
a. 310,000
b. 387,500
c. 290,000
d. 362,500
2. On January 1, 2019, an entity leased an equipment by making five annual payments
of P1,500,000 beginning January 1, 2019. At the end of the lease term, December 31,
2023, the entity guaranteed the residual value of the equipment at P1,000,000. The lease
qualified as a finance lease. The interest? rate implicit in the lease is 10% and present
value factors at 10% for 5 periods are 4.17 for an annuity due, 3.79 for an ordinary annuity
and 0.62 for present value of l.
1. What is the finance lease liability on December 31, 2020?
a. 4,412,500
b. 5,375,000
c. 6,062,500
d. 4,805,000
2. What is the interest expense for 2020?
a. 480,500
b. 537,500
c. 441,250
d. 606,250
3. On January 1, 2019, an entity entered into a 6-year lease with a lessor. Annual lease
payments of P1,500,000 including annual executory cost of P300,000 are payable at the
end of each year. The entity had a 12% incremental borrowing rate but the implicit
interest rate is 10% on the lease. The equipment was expected to have an estimated
useful life of 6 years. In addition, a third party had guaranteed to pay the lessor a residual
value of P500,000 at the end of the lease. The present value of an ordinary annuity of 1
for 6 years is 4.35 at 10% and 4.11 at 12%. The present value of 1 at for 6 periods is 0.56
at 10% and 0.51 at 12%. On December 31, 2019, what is the principal amount of the
lease obligation?
a. 3,796,200
b. 4,542,000
c. 4,323,840
d. 3,556,224
4. On December 31, 2019, an entity leased equipment under a finance lease. Annual
lease payments of P400,000 are due December 31 for 10 years. The useful life of the
equipment is 10 years and the interest rate implicit in the lease is 10%. The lease
obligation was recorded on December 31, 2019 at P2,700,000 and the first lease
payment was made on that date.
1. What amount should be included in current liabilities in relation to the finance lease
on December 31, 2019‘?
a. 130,000
b. 170,000
c. 230,000
d. 400,000
2. What is the interest expense for 2020?
a. 270,000
b. 230,000
c. 213,000
d. 400,000
5. At the beginning of current year, an entity entered into an 8-year finance lease for an
equipment. The entity accounted for the acquisition of the finance lease at P5,000,000
which included a P500,000 bargain purchase option. At the end of the lease, the entity
expected to exercise the bargain purchase option. The expected fair value of the
equipment is P400,000 at the end of the 10-year useful life. The straight line depreciation
is used. What amount of depreciation should be recognized for the current year?
a. 575,000
b. 460,000
c. 625,000
d. 450,000
6. At the beginning of current year, an entity entered into an 8-year lease for an
equipment. The entity accounted for the acquisition as a finance lease for P6,000,000
which included a P600,000 guaranteed residual value. At the end of the lease, the
asset will revert back to the lessor. It is estimated that the fair value of the asset at the
end of the 10-year useful life would be P400,000. The entity used the straight line
depreciation. What amount should be recognized as depreciation expense on the leased
asset for the current year?
a. 675,000
b. 700,000
c. 540,000
d. 560,000

CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
FINANCIAL ACCOUNTING AND REPORTING VALIX
SIY VALIX ESCALA SANTOS
NOTES RECEIVABLE AND LOAN IMPAIRMENT
1. On January 1, 2019, an entity sold equipment with a carrying amount of P4,800,000 in
exchange for P6,000,000 noninterest bearing note due January 1, 2022. There was no
established exchange price for the equipment. The prevailing interest rate for this note
was 10%. The present value of 1 at 10% for three periods is 0.75.
1. What amount should be reported as gain or loss on sale of equipment in 2019?
a. 1,200,000 gain
b. 2,700,000 gain
c. 300,000 gain
d. 300,000 loss
2. What amount should be reported as interest income for 2019?
a. 600,000
b. 500,000
c. 450,000
d. 400,000
3. What amount should be reported as interest income for 2020?
a. 480,000
b. 495,000
c. 528,000
d. 500,000
2. On December 31, 2019, an entity sold equipment with carrying amount of P2,000,000
in exchange for a noninterest bearing note of P5,000,000 requiring ten annual payments
of P500,000. The first payment was made on December 31, 2020. The market interest
for similar note was 12%. The present value of an ordinary annuity of 1 is 5.65 for ten
periods and 5.33 for nine periods.
1. What is the carrying amount of the note receivable on December 31, 2019?
a. 5,000,000
b. 2,825,000
c. 2,665,000
d. 4,500,000
2. What is the gain on sale of equipment to be recognized in 2019?
a. 3,000,000
b. 2,175,000
c. 825,000
d. O
3. What amount should be recognized as interest income for 2020?
a. 600,000
b. 339,000
c. 319,800
d. 261,000
4. What is the carrying amount of the note receivable on December 31, 2020?
a. 2,664,000
b. 4,500,000
c. 3,164,000
d. 2,644,800
4. Solid Bank loaned P7, 500, 000 to a borrower on January 1, 2019. The terms of the
loan were payment in full on January 1,2024 plus annual interest payment at 12%.
The interest payment was made as scheduled on January 1, 2020. However, due to
financial setbacks, the borrower was unable to make the 2021 interest payment.
The bank considered the loan impaired and projected the cash flows from the loan on
December 31, 2021.
The bank had accrued the interest on December 31, 2020 but did not continue to
accrue interest for 2021 due to the impairment of the loan.
Date of cash flow Amount projected
December 31, 2021
December 31, 2022
500,000
December 31, 2023
1,000,000
December 31, 2024
2,000,000
December 31, 2025
4,000,000
Present value of l at 12%
For one period
.89
For two periods
.80
For three periods
.71
For four periods
.64
1. What is the present value of the cash flows fi-om the loan receivable on December
31, 2021?
a. 5,225,000
b. 7,500,000
c. 5,376,000
d. 4,800,000
2. What amount should be recognized as impairment loss for 2021?
a. 2,275,000
b. 3,175,000
c. 5,225,000
d. 2,175.000
3. What amount should be reported by the bank as interest income for 2022?
a. 627,000
b. 900,000
c. 567,000
d. 0
4. What is the carrying amount of the loan receivable on December 31, 2022?
a. 5,352,000
b. 725,000
c. 5,225,000
d. 7,000,000
 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA
FINANCIAL ACCOUNTING AND REPORTING
VALIX SIY VALIX ESCALA SANTOS
REVALUATION AND IMPAIRMENT
1. An entity acquired a building on January 1, 2016 at a cost of P20,000,000. The building
had a useful life of 6 years and residual value of P2,000,000. The building was revalued
on January 1, 2019 and the revaluation revealed replacement cost of P30,000,000,
residual value of P4,000,000 and revised useful life of 8 years from the date of acquisition.
1. What is the pretax revaluation surplus on January 1, 2019?
a. 6,000,000
b. 8.000.000
c. 7,000,000
d. 5.000.000
2. What is the pretax revaluation surplus on December 31, 2019?
a. 6,000,000
b. 4,800,000
c. 2,800,000
d. 5,250,000
3. What is the annual depreciation for 2019?
a. 2,600,000
b. 3,400,000
c. 3,000,000
d. 1,400,000
2. On January 1, 2019, an entity showed land with carrying amount of P10,000,000 and
building with cost of P60,000,000 and accumulated depreciation of P1 8,000,000.
The land and building were revalued on same date and revealed the fair value of land at
P15,000,000 and the building at P70,000,000.
The original useful life of the building is 20 years and depreciation is computed on the
straight 'line. The income tax rate is 30%.
1. What is the revaluation surplus on January 1, 2019?
a. 33,000,000
b. 23,100,000
c. 28,000,000
d. 19,600,000
2. What is the revaluation surplus on December 31, 2019?
a. 33,000,000
b. 21,100,000
c. 21,450,000
d. 21,700,000
3. What is the annual depreciation for 2019?
a. 5,000,000
b. 3,500,000
c. 4,500,000
d. 3,000,000
3. On December 31, 2019, an entity had an equipment with cost of P9,000,000 and
accumulated depreciation of P3,000,000. Due to obsolescence and physical damage, the
equipment was found to be impaired. On same date, the entity determined that the
equipment had a fair value less of disposal of P4, 500, 000, discounted net cash inflows
of P4,000,000 and undiscounted net cash inflows of PS,000,000. What is the impairment
loss for 2019?
a. 1,500,000
b. 2,000,000
c. 1,000,000
d. 0
4. An entity determined that the electronics division is a cash generating unit. The entity
calculated the value in use of the division at P8,000,000. The carrying amounts of the
assets are building P5,000,000, equipment P3,000,000 and inventory P2,000,000. The
entity also determined that the fair value less cost of disposal of the building is
P4,500,000.
1. What is the impairment loss on building?
a. 1,000,000
b. 500,000
c. 750,000
d. 0
2. What is the impairment loss on equipment?
a. 600,000
b. 900,000
c. 450,000
d. 0
3. What is the impairment loss on inventory?
a. 400,000
b. 600,000
c. 300,000
d. 0
5. On January 1, 2019, an entity purchased equipment with cost of P10,000,000, useful
life of 10 years and no residual value. The entity used straight line depreciation. On
December 31, 2019 and December 31, 2020, the entity determined that impairment
indicators are present. There is no change in useful life or residual value.
December 31,2019
December 31, 2020
Fair value less cost of disposal 8,100,000
8,300,000
Value in use 8,550,000
8,200,000
1. What is the impairment loss for 2019?
a. 900000
b. 450,000
c. 600,000
d. 0
2. What is the gain on reversal of impairment for 2020?
a. 400,000
b. 700,000
c. 600,000
d. 0
3. What is the depreciation for 2021?
a. 1,000,000
b. 1,050,000
c. 1,025,000
d. 950,000
 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA
FINANCIAL ACCOUNTING AND REPORTING
VALIX SIY VALIX ESCALA SANTOS
BOND INVESTMENT
1. On January 1, 2019, an entity purchased as a long term investment P5,000,000 f e
value 8% bonds for P4,530,000. The bonds were purchased to yield 10% interest. The
bonds pay interest annually on December 31. The effective interest method of
amortization is used.
1. What is the interest income for 2020?
a. 500,000
b. 400,000
c. 453,000
d. 458,300
2. What is the carrying amount of the investment in bonds on December 31, 2020?
a. 5,000,000
b. 4,583,000
c. 4,477,000
d. 4,641,300
2. On January 1, 2019, an entity paid P5,990,000 for a 10% bond with face amount of
P5,000,000. Interest is payable semiannually on June 30 and December 31. The bond
was purchased to yield 8%. The effective interest method is used.
1. What is the interest income for 2019?
a. 479,200
b. 239,600
c. 500,000
d. 478,784
2. What is the carrying amount of the bond investment on December 31, 2019?
a. 5,968,784
b. 5,990,000
c. 5,979,600
d. 5,969,200
3. On January 1, 2019, an entity purchased 12% bonds With face amount of P5 000,000
for P5,500,000 including transaction cost of P100,000. The bonds provide an effective
yield of 10%. The bonds are dated January 1, 2019 and pay interest annually on
December 31 of each year. The bonds are quoted at 115 on December 31, 2019. The
entity has irrevocably elected to use the fair value option.
1. What is the carrying amount of the bond investment on December 31, 2019?
a. 5,750,000
b. 5,400,000
c. 5,500,000
d. 5,450,000
2. What amount of gain from change in fair value should be reported for 2019?
a. 750,000
b. 250,000
c. 350,000
d. O
3. What amount of interest income should be reported for 2019?
a. 600,000
b. 550,000
c. 660,000
d. 540,000
4. On January 1, 2019, an entity purchased bonds with face amount of P5, 000, 000. The
entity paid P4, 500, 000 plus transaction cost of P168, 600. The bonds mature on
December 31, 2022 and pay 6% interest annually on December 31 of each year with 8%
effective yield.
The bonds were quoted at 105 on December 31, 2019 and 110 on December 1, 2020.
The business model in managing the financial asset is to collect contractual cash flows
that ate solely payments of principal and interest and also to sell the bonds in the open
market.
The entity has not elected the fair value option.
On December 31, 2020, the entity changed the business model to collect only
contractual cash flows.
On December 31', 2021, the bonds are quoted at 115 and the market interest rate is
10%.
1. What amount of unrealized gain should be reported as component of OCI in the
statement of comprehensive income for 2019?
a. 250,000
b. 690,000
c. 507,912
d. 0
2. What amount of cumulative unrealized gain should be reported as component of OCI
in the statement of changes in equity for 2020?
a. 500,000
b. 678,545
c. 250,000
d. 875,200
3. What amount of unrealized gain should reported as component of OCI in the
statement of comprehensive income for 2020? a. 500,000
b. 250,000
c. 170,633
d. 185,200
4. What is the interest income for 2021?
a. 300,000
b. 500,000
c. 385,716
d. 369,984
5. What is the carrying amount of the investment on December 31, 2021?
a. 4,694,784
b. 4,668,600
c. 4,907,171
d. 5,750,000

CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
FINANCIAL ACCOUNTING AND REPORTING
VALIX SIY VALIX ESCALA SANTOS
 INVENTORY COST FLOW AND LCNRV
1. An entity provided the following information:
Units Unit Cost
Total Cost
Jan. 1 Beginning balance 10,000 150
1,500 000
5 Purchase 10,000
180 1 800,000
15 Sale 15,000
16 Sale return 1,000
25 Purchase 4,000 200
800 000
26 Purchase return 2,000
200 400:000
1. Under FIFO, what amount should be reported as cost of goods sold?
a. 2,220,000
b. 2,620,000
c. 2,500,000
d. 2,900,000
2. Under weighted average, what amount should be reported as ending inventory?
a. 1,345,440
b. 1,366,640
c. 1,413,360
d. 1,432,000
3. Under moving average, what amount should be reported as ending inventory?
a. 1,690,000
b. 1,390,000
c. 1,790,000
d. 1,600,000
4. Under moving average, the next sale of inventory would be priced at what cost?
a. 173 .75
b. 179.00
c. 200.00
d. 1 90.00
2. On December 31, 2019, an entity reported inventory at P3,000,000 cost and
P2,900,000 net realizable value. On December 31, 2020, the inventory was P4,000,000
at cost and P3,700,000 at net realizable value. The entity made net purchases of
P9,000,000 during 2020. What amount should be reported as cost of goods sold for 2020?
a. 8,000,000
b. 8,200,000
c. 8,450,000
d. 8,300,000
3. On December 31, 2019, an entity experienced a decline in the value of inventory
resulting in a writedown from P4,000,000 cost to P3,500,000 net realizable value. The
entity used the allowance method to record the necessary adjustment. In 2020, market
conditions have improved dramatically. On December 31, 2020, the inventory had a1 cost
of P5,000,000 and net realizable value of P4,800,000. The entity made purchases of
P20,000,000 in 2020?
1. What amount should be recognized as gain on reversal of inventory writedown in
2020?
a. 200,000
b. 300,000
c. 500,000
d. 0
2. What amount should be reported as cost of goods sold in 2020?
a. 19,000,000
b. 19,300,000
c. 18,700,000
d. 24,000,000
4. An entity reported the following information about inventory:
Cost NRV
LCNRV
Category 1:
A 2,600,000 2,800,000
2,600,000
B 1,700,000 1,600,000
1,600,000
Category 2:
c 2,000,000
1,600,000 1,600,000
D 1,900,000 1,800,000
1,800,000
1. What is the inventory measurement under LCNRV individual approach?
a. 7,600,000
b. 8,200,000
c. 7,700,000
d. 7,800,000
2. What-is the inventory measurement under the LCNRV total approach?
a. 8,200,000
b. 7,600,000
c. 7,800,000
d. 7,700,000
3. What is the inventory measurement under the LCNRV category approach?
a. 7,800,000
b. 7,700,000
c. 8,200,000
d. 7,600,000
5. On December 1, 2019, an entity entered into a commitment to purchase 100,000
barrels of aviation fuel for P55 per barrel on March 31, 2020. The entity entered into this
purchase commitment to protect itself against the volatility in the aviation fuel market. By
December 31, 2019, the purchase price of aviation fuel had fallen to P50 per barrel.
However, by March 31, 2020, when the entity took delivery of the 100,000 barrels the
price of aviation fuel had risen to PS3 per barrel.
1. What amount should be recognized as loss on purchase commitment in 2019?
a. 500,000
b. 200,000
c. 300,000
d. 0
2. What amount should be recognized as gain on purchase commitment for 2020?
a. 500,000
b. 300,000
c. 800,000
d. 0
3. What amount should be debited to purchases on March 31, 2020?
a. 5,500,000
b. 5,300,000
c. 5,000,000
d. 4,700,000
6. During the current year, an entity purchased a tract of land for P12,000,000. The entity
incurred additional cost of P3,000,000 in preparing the land for sale. Of the tract of land,
70% was subdivided into residential loss and 30% was for road and a park. The tract of
land was subdivided into residential loss as 100 Class A lots with sale price of P240,000
per lot. 100 Class B lots with sale price of P160,000 per lot, and 200 Class C lots with
sale price of P100,000 per lot. What amount of the costs should be allocated to Class A
lots?
a. 3,000,000
b. 3,750,000
c. 6,000,000
d. 4,200,000

CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
FINANCIAL ACCOUNTING AND REPORTING
VALIX SIY VALIX ESCALA
ACCOUNTING PROCESS
1. An optional step in the accounting cycle is the preparation of
a. Adjusting entries and closing entries
b. Posting to the ledger and unadjusted trial balance
c. Analyzing the transactions and joumal entries
d. Postclosing trial balance and reversing entries
2. The double entry accounting system means
a. Each transaction is recorded with two joumal entries.
b. Each item is recorded in a journal entry and then in a general ledger.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. All of these are choices regarding double entry system.
3. Nominal accounts are also called
a. Temporary accounts
b. Permanent accounts
c. Real accounts
d. Mixed Accounts
4. Real accounts include all of the following, except
a. Dividends
b. Assets
c. Liabilities
d. Equity
5. Equity is not affected by all
a. Cash receipts
b. Dividends
c. Revenue
d. Expenses
6. Revenue is
a. Impacted by debit and credit in the same way that expenses are impacted by debit
and credit.
b. A subdivision of equity, providing information about why equity increased.
c. Reported in the statement of financial position as a current item.
d. All of the choices are corrected regarding revenue.
7. Posting
a. Accumulates the effects of ledger entries and transfers them to the general journal.
b. Is done only for income statement activity because activity related to the statement of
financial position does not require posting.
c. Is done once every year.
d. Transfers journal entries to the ledger accounts.
8. A trial balance may prove that debits and credits are equal except
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 may prove that debits and credits are equal.
9. Which of the following is not correct about an unadjusted trial balance?
a. It proves that debits and credits of equal amounts are in the ledger.
b. It is the basis for any adjustments to the account balances.
c. It supplies a listing of open accounts and their balances.
d. It proves that debits and credits were properly entered in the ledger accounts.
10. Adjusting entries affect
a. One nominal account and one real account
b. Two nominal accounts
c. Two real accounts
d. No particular combination of nominal and real accounts
11. Adjusting entries
a. Are often prepared after the statement of financial position date, but dated as of the
statement of financial position date.
b. Are necessary to enable the financial statements to conform with IFRS.
c. Include both accruals and deferrals
d. All of the choices are correct regarding adjusting entries
12. An adjusting entry should never include?
a. A debit to revenue and a credit to liability
b. A debit to expense and a credit to liability
c. A debit to liability and a credit to revenue
d. A debit to expense and a credit to revenue
13. Which of the following properly describes a deferral?
a. Cash is received after revenue is earned.
b. Cash is received before revenue is earned.
c. Cash is paid after expense is incurred.
d. Cash is paid at the same time period that an expense is incurred.
14. The adjusting entry for depreciation has the same effect as the adjusting entry for
a. An unearned revenue
b. A prepaid expense
c. An accrued revenue
d. An accrued expense
15. If an expense has been incurred but not yet recorded, the adjusting entry would
involve
a. A liability and an asset
b. A liability and a revenue
c. An expense and an asset
d. An asset and a revenue
16. Which statement is not true about accrual and deferral?
a. An accrued expense is an amount not paid and currently matched with earnings.
b. A prepaid expense is an amount paid and not currently matched with earnings.
c. All accrued income is an amount not collected and currently matched with expenses.
d. A deferred income is an amount collected and currently matched with expenses.
17. Which statement best describes the purpose of closing entries?
a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To reduce the balances of temporary accounts to zero so that they may be used to
accumulate the revenue, expenses and dividends of the next period.
d. To complete the record of various transactions that were stated in a prior period.
18. The postclosing trial balance
a. Consists of statement of financial position accounts only.
b. Will balance if a transaction is joumalized and posted twice.
c. Shows that the accounting equation is in balance at the end oi the accounting period.
d. All of the choices are correct regarding the postclosing trial balance.
19. Adjusting entries that should be reversed include
a. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these adjusting entries require reversal.
20. Reversing entries apply to
a. All adjusting entries
b. All deferrals
c. All accruals
d. All closing entries
21. An entity is a resort located in Palawan. The entity collects cash when guests mike a
.reservation. During December 2019, the entity collected P600,000 of cash and recorded
the receipt by recognizing unearned revenue. The entity had earned one-third of this
amount and the other two-thirds will be earned during January 2020. What is the impact
of the adjusting entry on December 31, 2019?
a. 400,000 increase in equity
b. 200,000 decrease in liability
c. 600,000 increase in asset
d. 200,000 decrease in equity
22. An entity is a resort located in Caticlan. During December 2019, PICPA held an
annual conference at the resort. The charges related to the conference totaled
P4,000,000, of which 25% had been paid. The entity failed to make the appropriate
adjusting entry on December 31, 2019 for the uncollectible balance. Which of the
following statements is true?
a. Equity is overstated by P3,000,000
b. Equity is understated by P1,000,000
c. Assets are understated by P3,000,000
d. Assets are overstated by P1,000,000
23. During the first year of operations, an entity recorded all purchases of supplies as
assets. Store supplies in the amount of P2,000,000 were purchased. Actual year-end
store supplies amounted to P500,000. What is the impact of the adjusting entry on store
supplies?
a. Increase in net income P1,500,000
b. Increase in expenses P1,500,000
c. Decrease in store supplies P500,000
d. Decrease in accounts payable P500,000
24. An entity reported the office supplies account at the beginning of the year with a
balance of P40,000 before the reversing entry. Payments for office supplies during the
year amounted to P250,000 and were recorded as expense. A physical count at the end
of year revealed ofiice supplies costing P50,000. Reversing entries are made by the
entity. What is debited in the adjusting entry at year-end?
a. Office supplies expense P10,000
b. Office supplies P10,000
c. Office supplies expense P240,000
d. Office supplies P50,000
25. An entity reported wages expense of P1,100,000 for 2019. The wages payable at the
beginning of year amounted to P100, 000. Wage payments during the year totaled P950,
000. The previous year’s adjusting entry for unpaid wages was reversed on January 1,
2020. What 1s the adjusting entry for accrued wages payable on December 31, 2019?
a. Debit wages expense and credit wages payable P950,000
b. Debit wages expense and credit wages payable P150,000
c. Debit wages expense and credit wages payable P250,000
d. Debit wages expense and credit wages payable P150,000
26. Prepare the indicated adjusting entries from the following adjusted and unadjusted
trial balances at year-end:
Unadjusted Adjusted
Cash 70,000
70,000
Accounts receivable 190,000
200,000
Art supplies 85,000
35,000
Prepaid insurance 33,000
25,000
Printing equipment 600,000
600,000
Accumulated depreciation 270,000
355,000
Accounts payable 50,000
50,000
Interest payable
2,000
Note payable 50,000
50,000
Unearned service revenue 70,000
56,000
Salaries payable
15,000
Share capital 100,000
100,000
Retained earnings 45,000
45,000
Service revenue 586,000
610,000
Salaries expense 100,000
115,000
Insurance expense
8,000
Interest expense 3,000 5,000
Depreciation expense
85,000
Art supplies expense 50,000
100,000
Rent expense 40,000
40,000
Total 1,171,000 1,171,000
1,283,000 1,283,000
27. An entity provided the following; December 31 trial unadjusted balance:
Cash 185,000
Accounts receivable 320,000
Allowance for doubtful accounts 7,000
Inventory, December 31 800,000
Prepaid insurance 51,000
Equipment 840,000
Accumulated depreciation 350,000
Note payable 280,000
Share capital 806,000
Retained earnings 100,000
Sales 6,000,000
Cost of goods sold 4,080,000
Sales salaries-expense 500,000
Advertising expense 67,000
Administrative salaries expense 650,000
Office expense 50,000
1. Bad debt expense is estimated to be P15,000.
2. Equipment is depreciated on a 7-year life.
3. Insurance expired during the year P25,000.
4. Interest accrued on note payable P3 5,000.
5. Sales salaries accrued P24,000.
6. Advertising paid in advance P10,000.
7. Office supplies on hand P15,000 charge to office expense when purchased.
Required:
1. Prepare adjusting and closing entries.
2. What adjusting entries should be reversed at the beginning of next accounting period.

CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
FINANCIAL ACCOUNTINGAND REPORTING
VALIX SIY VALIX ESCALA SANTOS
NONCURRENT ASSET HELD FOR SALE
1. An entity accounted for noncurrent assets using the cost model. On July 1, 2019, the
entity classified an equipment as held for sale. At that date, the carrying amount was
P5,000,000, the fair value was estimated at P3,500,000 and the cost of disposal at
P100,000. On December 31, 2019, the equipment was sold for net proceeds of
P2,500,000. .
1. What amount should be reported as an impairment loss for 2019‘?
a. 1,600,000
b. 2,500,000
c. 1,500,000
d. 900,000
2. What amount should be reported as loss on disposal for 2019?
a. 1,500,000
b. 2,500,000
c. 1,600,000
d. 900,000
2. An entity purchased an equipment for P5,000,000 on January 1, 2019. The equipment
had a useful life of 5 years with no residual value. On December 31, 2019, the entity
classified the equipment as held for sale. On such date, the fair value less cost of disposal
of the equipment was P 3,500,000.
On December 31, 2020, the entity believed that the criteria for classification as held for
sale can no longer be met. Accordingly, the entity decided not to sell the equipment but
to continue to use it. On December 31, 2020, the fair value less cost of disposal of the
equipment was P2,700,000.
1. What is the carrying amount of the equipment on December 31, 2019 before
classification as held for sale?
a. 5,000,000
b. 4,000,000
c. 3,500,000
d. 4,500,000
2. What amount of impairment loss should be recognized in 2019?
a. 1,500,000
b. 1,000,000
c. 500,000
d. 0
3. What amount should be included in profit or loss in 2020 as a result of the
reclassification of the equipment to property, plant and equipment?
a. 800,000 gain
b. 800,000 loss
c. 300,000 gain
d. 300,000 loss
4. What is the carrying amount of the equipment on December 31, 2021?
a. 2,700,000
b. 1,800,000
c. 2,000,000
d. 3,000,000
3. An entity accounted for land using the revaluation model. On October 1, 2019 the entity
classified a land as held for sale. At that date, the carrying amount of the land was
P5,000,000 and the balance in the revaluation surplus was P1,500,000. At the same date,
the fair value of e land was estimated at P5, 500, 000. The estimated cost of disposal is
P100, 000.
On December 31, 2019, the fair value less cost of disposal of the land did not change.
On October 1, 2020, the land was sold for P7, 000, 000
1. What is the impairment loss in 2019?
a. 100,000
b. 500,000
c. 400,000
d. 0
2. What amount should be reported as gain on disposal of land in 2020?
a. 1,600,000
b. 1,500,000
c. 3,600,000
d. 3,500,000
3. What amount of OCI is reclassified to retained earnings in 2020?
a. 1,500,000
b. 2,000,000
c. 500,000
d. 0
DISCONTINUED OPERATION
4. An entity is diversified with nationwide interests in commercial real estate development,
banking, mining and food distribution. The food distribution division was deemed to be
inconsistent with the long-term direction of the entity On October 1, 2019, the board of
directors voted to approve the disposal of this division. The sale is expected to occur in
August 2019.
The food distribution had the following revenue and expenses in 2019: January 1 to
September 30, revenue of P35,000,000 and expenses of P25,000,000; October 1 to
December 31, revenue of P10,000,000 and expenses of P12,000,000. The carrying
amount of the division assets on December 31, 2019 was P50,000,000 and the
recoverable amount was estimated to be P48,000,000. The sale contract required the
entity to terminate certain employees incurring an expected termination cost of
P1,000,000 to be paid by December 15, 2020. The income tax rate is 30%. What amount
should be reported as income from discontinued operations for 2018?
a. 5,000,000
b. 4,200,000
c. 3,500,000
d. 5,600,000
5. On July 1, 2019, an entity decided to discontinue its Electronics Division, a separately
identifiable component of business. On December 31, 2019, the division has not been
completely sold. However, negotiations for the final and complete sale are progressing in
a positive manner and it is probable that the disposal will be completed within a year.
Analysis of the records for the year disclosed the following data relative to the Electronics
Division:
Operating loss for 2019 8,000,000
Loss on disposal of some Electronics Division assets during 2019 500,000
Expected operating loss in 2020 preceding final disposal 1,000,000
Expected gain in 2020 on disposal of division 2,000,000
What amount should be reported as pretax loss from discontinued operation in 2019?
a. 8,000,000
b. 8,500,000
c. 9,500,000
d. 7, 500, 000
OPERATING SEGMENT
6. An entity identified the following segments for the current year:
Segment Revenue Profit Assets
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,000,000 575,000 5,500,000
F 2,000,000 525,000 3,000,000
What are the reportable segments?
a. Segments A, B and C
b. Segments A, B, C and D
c. Segments A, B, C, D and E
d. Segments A, B, C, D, E and F
7. An entity reported the following segment profit or loss for the current year:
Segment 1 7,000,000 profit
Segment 2 3,000,000 profit
Segment 3 4,000,000 loss
Segment 4 1,000,000 profit
Segment 5 500,000 loss
What are the reportable segments?
a. Segments 1, 2, 3, 4 and 5
b. Segments 1 and 2
c. Segments 1, 2 and 3
d. Segments 1, 2, 3 and 4
8. An entity reported revenue of P50,000,000, excluding intersegment sales of
P10,000,000, expenses of P47,000,000 and net income of P3,000,000 for the current
year. Expenses included payroll costs of P15,000,000. The combined assets of all
segments totaled P45,000,000.
1. What is the minimum amount of sales to a major customer?
a. 5,000,000
b. 4,000,000
c. 4,500,000
d. 6,000,000
2. What is the minimum amount of external revenue to be disclosed by reportable
segments?
a. 30,000,000
b. 45,000,000
c. 33,750,000
d. 37,500,000
9. An entity and its divisions reported the following for the current year:
Sales to unaffiliated customers 40 000 000
Intersegment sales of products similar to those sold to unaffiliated customers
113,000,000
Interest earned on loans to other operating segments 1 000 000
The entity and all of its divisions are engaged solely in manufacturing operations. To
qualify reportable segment, the segment revenue should at least be what amount?
a. 5,300,000
b. 4,100,000
c. 5,200,000
d. 4,000,000
INTERIM REPORTING
10. An entity provided the following information for the first quarter:
Loss from typhoon 800,000
Insurance for the calendar year 200,000
Loss on inventory writedown 100,000
Property taxes for the calendar year 500,000
Advertising of a new product 300,000
Depreciation expense for the year 600,000
Year-end bonuses to employees 1,200,000
Ordinary repairs to equipment 150,000
What total amount of expenses should be reported in the first quarter?
a. 1,975,000
b. 1,675,000
c. 1,750,000
d. 2,350,000
11. An entity reported P950,000 net income for the quarter ended September 30, 2019
which included the following after-tax items:
A P600,000 expropriation gain realized in May 2019 was allocated equally to the-
second, third and fourth quarters of 2019.
A P150,000 cumulative effect loss resulting from' a change in inventory valuation
method was recognized on August 31, 2019.
In addition, the entity paid P480,000 on February 1, 2019, for 2019 calendar-year real
property tax. Of this amount, P120,000 was allocated to the third quarter of 2019.
What is the net income for the quarter ended September 30, 2019?
a. 1,150,000
b. 1,100,000
c. 500,000
d. 900,000
12. A calendar-year corporation had the following income before tax provision and
estimated effective annual tax rates for the first three quarters:
Quarter Income before income tax Effective
annual tax rate
First 5,000,000 30%
Second 8,000,000 30%
Third 7,000,000 25%
What is the income tax provision in the interim income statement for the third quarter?
a. 1,750,000
b. 2,100,000
c. 1,100,000
d. 5,000,000
 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA
FINANCIAL ACCOUNTING AND REPORTING
VALIX SIY VALIX ESCALA SANTOS
PAS 38 - INTANGIBLE ASSETS
1. Which of the following is a criterion that must be met for an item to be recognized as
an intangible asset other than goodwill? a. The fair value can be measured reliably.
b. The item is part of an activity aimed at gaining new scientific or technical knowledge.
c. The item is expected to be used in the production or supply of goods or services.
d. The item is nonmonetary, identifiable and lacks physical substance
2. Which of the following does not qualify as an intangible asset?
a. Computer software
b. Registered patent
c. Copyright that is protected
d. Notebook computer
3. Which of the following items would qualify as an intangible asset?
a. Advertising and promotion on the launch of huge product
b. College tuition fees paid to employees who decide to enroll m an executive MBA
program at Harvard University while working with the entity.
c. Operating losses during the initial stages of the project.
d. Legal costs paid to intellectual property lawyers to register a patent.
4. Which disclosure is not required with respect to intangible assets?
a. Useful life of the intangible asset
b. Reconciliation of carrying amount at the beginning and the end of the year
c. Contractual commitment for the acquisition of intangible asset
d. Fair value of similar intangible asset used by competitors
5. What valuation methods are used for intangible assets?
a. Cost model and fair value model
b. Revaluation model and fair value model
c. Cost model and fair value through profit or loss model
d. Cost model and revaluation model
6. An entity that acquired an intangible asset may use the revaluation model for
subsequent measurement only when
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset.
7. Which statement is true concerning internally generated intangible asset?
a. The cost of an internally generated asset comprises all directly attributable costs
necessary to create, produce and prepare the asset for the intended use.
b. Internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance shall not be recognized as intangible assets.
c. Internally generated goodwill shall not be recognized as an intangible asset.
d. All of these statements are true,
8. The cost of an internally generated asset includes all of the following, except
a. Cost of materials and services used in generating the intangible asset.
b. Compensation costs of personnel directly engaged in generating the asset.
c. Fees to register a legal right.
d. Expenditure on training staff to operate the asset.
9. Under current accounting practice, intangible assets are classified as
a. Amortizable or unamortizable.
b. Limited life or indefinite life.
c. Specifically identifiable or goodwill type.
d. Legally restricted or goodwill type.
10. An intangible asset is regarded as having an indefinite useful life when.
a. There is no forseeable limit to the period over which the asset is expected to
generate net cash inflows to the entity.
b. There is a forseeable limit to the period over which the asset is expected to generate
net cash inflows to the entity.
c. The useful life of the intangible asset arises from contractual right.
d. The useful life of the intangible asset arises from legal right.
11. Entities should evaluate indefinite life intangible assets at least annually for
a. Recoverability
b. Amortization
c. Impairment
d. Estimated useful life
12. Which intangible asset should not be amortize?
a. Copyright
b. Customer list
c. Perpetual franchise
d. All of these intangible assets should be amortized.
13. What is the appropriate method of amortizing intangible asset?
a. The straight line method unless the pattern in which the asset’s economic benefits
are consumed by the entity can be determined reliably.
b. The double declining balance in all circumstances
c. A subjective amount of periodic amortization without regard to any particular method
d. The straight line method in all circumstances
14. Amortization of an intangible asset with a finite useful life shall commence when
a. It 18 first recognized as an asset
b. It 15 probable that it will generate future economic benefits
c. It 13 available for the intended use
d. The cost can be measured with reasonable certainty.
15. Which statement describes the appropriate accounting for intangible asset with finite
useful life?
a. The cost of the asset is not amortized but is periodically tested for impairment
b. The cost of the asset is amortized over the useful life and the asset is never tested for
impairment
c. The cost of the asset is amortize over 40 ears a reasonable period
d. The cost of the asset is amortized over the useful life and the asset is periodically
tested for impairment when there is an indication of impairment
16. Intangible assets with indefinite life are tested for impairment
a. Quarterly at the quarterly reporting date
b. Annually at the annual reporting date
c. Biannually at the reporting date
d. There are no guidelines defining when intangible assets are tested for impairment
17. The major problem of' accounting for intangible asset is determining
a. Fair value
b. Separability
c. Residual value
d. Useful life
18. One factor that is not considered in determining the useful life of an intangible asset
is
a. Residual value
b. Provision for renewal or extension
c. Legal life
d. Expected action of competitors
19. Factors in determining the useful life of an intangible asset include all, except
a. The expected use of the asset.
b. Any legal or contractual provision that may limit the useful life.
c. Any provision for renewal or extension of the legal life.
d. The amortization method used.
20. The residual value of intangible asset with a finite life is assumed zero, except when
a. There is a commitment by a third party to purchase the asset at the end of the useful
life.
b. There is an active market for the asset at the end of the useful life.
c. There we commitment by a third party to purchase the asset at the end of useful life
or there is an active market for the asset at the end of useful life.
d. There are no exceptions
21. Goodwill may be recorded when
a. It is identified within an entity
b. One entity acquires another in a business combination
c. The fair value of assets exceeds cost
d. An entity has exceptional customer relations.
22. Which intangible asset should be reported as a separate line item?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
23. Which statement accurately describes the appropriate accounting for goodwill?
a. It should be recorded at cost and amortized over 40-year period
b. It should be recorded at cost and amortized over a 10-year period
c. It should be recorded at cost and tested for impairment every three years
d. It should be recorded at cost and not amortized but tested for impairment on an
annual basis and more often if certain events occur
24. Goodwill should be tested for impairment at which of the following levels?
a. Each reporting unit
b. Each acquisition unit
c. Each identifiable long-term asset
d. Entire business as a whole
25. An entity has determined that fair value of cash generating unit exceeds the carrying
amount. Which statement is true concerning the impairment of the CGU?
a. Impairment is not indicated and no additional analysis is necessary.
b. Goodwill should be written down as impaired.
c. The assets and liabilities should be valued to determine if there has been impairment
of goodwill
d. Goodwill should be tested at the entity level.
26. When a patent is amortized, the credit is usually made to
a. The patent account
b. An accumulated amortization account
c. An accumulated depreciation account
d. An expense account
27. A patent should be amortized over
a. Twenty years
b. The useful life
c. The useful life or twenty years, whichever is longer
d. The useful life or twenty years, whichever is shorter
28 When an entity successfully defended a patent from infringement by a competitor,
the cost of litigation should be charged to a. Patent and amortized over the legal life of
the patent.
b. Legal fees and amortized over five years or less.
c. Expense of the period.
d. Patent and amortized over the remaining useful life of the patent.
29. The cost of purchasing rights for a product that might otherwise have seriously
competed with one of the purchaser’s patented products should be
a. Charged off in the current period.
b. Amortized over the legal life of the purchased patent.
c. Added to factory overhead and allocated to production of the purchaser’s product.
d. Amortized over the remaining useful life of the patent for the product whose market
would have been impaired by competition from the newly patented product.
30. Copyright should be amortized over
a. The legal life
b. The life of the creator plus fifty years
c. Twenty years
d. The useful life or legal life, whichever is shorter.
31. Which of the following should be expensed incurred by the franchisee?
a. Amount paid to the franchisor for the franchise
b. Payment to an entity other than the franchisor for that entity’s franchise
c. Legal fees paid to the franchisee’ s lawyers to obtain the franchise
d. Periodic payments to the franchisor based on the franchisee’s revenue
32. Which statement is true about development cost?
a. Development cost must be expensed.
b. Development cost is always deferred and expensed against future revenue.
c. Development cost may be capitalized as an intangible asset in very restrictive
situations.
d. Development cost is recorded as component of other comprehensive income.
33. Which statement is true when an entity has recently completed a research and
development project?
a. Costs incurred during the research phase can be capitalized
b. Costs incurred during the development phase can be capitalized if criteria such as
technical feasibility of the projects are met. c. Training costs of technicians used in
research can be capitalized
d. Designing of jigs and tools qualify as research activities.
34. Which best describes the current method of a counting for R and D?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense.
35. Which is not one of the criteria for development costs to be capitalized?
a. The entity has sufficient financial resources to complete the project.
b. The entity intends to complete the project and either use or sell the intangible asset.
c. The entity can reliably identify the research costs incurred to bring the project to
economic feasibility.
d. The project has achieved technical feasibility.
36. How should research and development costs be accounted for?
a. Capitalized when incurred and then amortized over the estimated useful life.
b. Expensed in the period incurred.
c. Either capitalized or expensed depending upon materiality.
d. Expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future use or unless contractually reimbursable.
37. Which of the following research and development related costs should be
capitalized and depreciated over current and future periods?
a. Laboratory building for various alternative future uses
b. Inventory used for specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased to aid a research project currently in process
38. Which research and development costs should be capitalized and amortized?
a. Labor and material costs incurred in building a prototype model.
b. Cost of testing equipment that will also be used in another separate research and
development project scheduled to begin next year
c. Administrative salaries allocated to research and development
d. Research findings purchased from another entity.
39. If an entity constructs a laboratory building to be used as a research and
development facility, the cost of the building is matched against earnings as
a. Research and development expense in the period of construction.
b. Depreciation deducted as part of research and development expense.
c. Depreciation or immediate writeoff depending on accounting policy.
d. An expense at such time as productive development has been obtained from the
facility.
40. A research and development activity for which the cost should be expensed is
a. Engineering follow-through in early phase of commercial production
b. Design, construction, and testing of preproduction prototype and model
c. Trouble shooting in connection with breakdown during commercial production
d. Periodic design changes to existing product
41. Which of the following costs should be excluded from research and development
expense?
a. Modification of the design of a product
b. Acquisition of R and D equipment for use in current project only
c. Cost of marketing research for a new product
d. Engineering activity to advance the design of product to the manufacturing stage
42. Which of the following would be considered research and development?
a. Routine effort to refine an existing product
b. Periodic alteration to existing production line
c. Marketing research to promote a new product
d. Construction of prototype
43. Which of the following costs should not be capitalized?
a. Cost of equipment to be used on current and future research project
b. Engineering cost incurred to advance the product to full production stage
c. Cost incurred to life a patent
d. Cost of testing prototype before economic feasibility has been demonstrated
44. The accounting for costs incurred in creating computer software is to
a. Capitalize all costs until the software is sold.
b. Charge research and development expensed when incurred until technological
feasibility has been established for the product.
c. Charge research and development expense if the computer software has alternative
future use. d. Capitalize all costs as incurred until a detailed program design or model is
created.
45. Which statement is incorrect regarding internal use software?
a. The application and development costs of internal use software should be amortized
on the straight line basis unless another systematic and rational basis is more
appropriate.
b. Internal use software is considered to be software that is marketed as a separate
product.
c. The costs of testing and installing computer hardware should be capitalized.
d. The costs of training and application maintenance should be expensed when
incurred.
46. Which statement is true regarding the proper accounting treatment of software
costs?
a. Preliminary costs should be expensed as incurred.
b. Application and development cost should be capitalized.
c. Postimplementation costs should be expensed as incurred.
d. All of these statements are true about software cost
47. Which statement is true about computer software?
a. Computer software is classified as a technology-based intangible asset.
b. Computer software purchased for resale 18 treated as inventory.
c. Computer software purchased as an integral part of a computer controlled machine
should be treated as property, plant and equipment
d. All of these statements are true about computer software
48. Start-up costs including legal and state fees incurred to organize a new entity should
be
a. Capitalized and never amortized.
b. Capitalized and amortized over 40 years.
c. Capitalized and amortized over 5 years.
d. Expensed as incurred.
49. Operating losses incurred during the start-up years of a new business should be
a. Accounted for and reported like operating losses of any other business.
b. Written off directly against retained earnings.
c. Capitalized as a deferred charge and amortized over five years.
d. Capitalized as an intangible asset and amortized over twenty years.
50. Intangible assets are reported in the statement of financial position
a. With an accumulated amortization account
b. Under property, plant and equipment
c. As a separate line item
d. All of these are allowed in presenting intangible assets