prelim review

Problem

1. The balance sheet of Norman Company shows the accounts receivable balance at December 31,
2019 as follows:

Accounts receivable-trade 450,000

Allowance for doubtful accounts 9,000

During 2020, transactions relating to the accounts receivable were as follows:

Sales on account, P4, 800,000
Cash received from collections of current receivables totaled P3, 920,000, after discounts of
P80, 000 were allowed for prompt payment.
Bad accounts previously written off prior to 2019 amounting to P5,000 were recovered.
The company decided to provide P26,000 for doubtful accounts by a journal entry at the end
of the year.
Accounts receivable of P700,000 have been pledge to a local bank on a loan of P400,000
Collections of P150, 000 were made on these receivables (not included in the collections
previously given) and applied as partial payment for the loan.

Estimated realizable value of accounts receivable at December 31, 2020 was

a. 1,065,000
b. 1,060,000
c. 1,070,000
d. 1,074,000

2. Joseph Company provided some information on their financial records on December 31,2020:

Accounts receivable, January 1 P1,920,000

Collections of account receivable 6,240,000
Bad debts 200,000
Inventory, January 1 2,880,000
Inventory, December 31 2,640,000
Accounts payable, January 1 1,000,000
Accounts payable, December 31 1,500,000
Cash sales 1,200,000
Purchases 4,800,000
Gross Profit on Sales 2,160,000

What is the ending balance of accounts receivable on December 31, 2020?

a. 1,680,000
b. 2,880,000
c. 3,120,000
d. 4,080,000

3.
Joseph, Inc. sells to wholesalers on terms 2/15,net 30. Joseph has no cash sales but 50% of Joseph's
customers take advantage of the discount. Joseph uses the gross method of recording sales and
trade receivables. An analysis of Joseph's trade receivable at December 31,2020 revealed the
following:
 Age Amount Collectible
0 - 15 days 2,000,000 100%
16-30 days 1,200,000 95%
31-60 days 100,000 90%
Over 60 days 50,000 50%
3,350,000

What is the net realizable value of receivable at December 31, 2020?

a. 3,350,000
b. 3,330,000
c. 3,235,000
d. 3,255,000

4.
The following data were taken from the records of MJ Corporation for the
year ended December 31, 2020.

Sales on account 3,600,000

Notes received to settle accounts 400,000
Provision for doubtful accounts 90,000
Accounts receivable determined to be worthless 25,000
Purchases on account 3,900,000
Payments to creditors 3,200,000
Discounts allowed by creditors 260,000
Merchandise returned by customer 15,000
Collections received to settle accounts 2,450,000
Notes given to creditors in settlement of accounts 250,000
Merchandise returned to suppliers 70,000
Payments on notes payable 100,000
Discounts taken by customers 40,000
Collections received in settlement of notes 180,000

What is the net realizable value of accounts receivable on December 31, 2020?
a. 605,000
b. 890,000
c. 825,000
d. 670,000

5.
Based on the aging of its accounts receivable at December 31, 2020, Jane
Company determined that the net realizable value of the receivables that date is
P190, 000. Additional information is as follows:

Accounts receivable at 12/31/2020 220,000

Allowance for doubtful accounts
at 1/1/2020 – credit balance 32,000
Accounts written off as uncollectible at 9/30/2020 24,000

Jane’s doubtful accounts expense for the year ended December 31, 2020, is
 a. 38,000
b. 30,000
c. 26,000
d. 22,000

6.
Vick Company had the following account balances at December 31, 2020:

Accounts receivable 900,000

Allowance for doubtful accounts before any
provision for 2020 doubtful accounts expense 16,000
Credit sales for 2020 1,750,000

Vick is considering the following methods of estimating doubtful accounts expense for 2020:

· Based on credit sales at 2%

· Based on accounts receivable at 5%

What amount should Vick charge to doubtful accounts expense under each
method?

Percentage of Percentage of
Credit sales Accounts receivable
a. 51,000 45,000
b. 51,000 29,000
c. 35,000 45,000
d. 35,000 29,000

7. On the February 1, 2021, New York Corporation factored receivables with a carrying of P2,000,000
to Chicago Corporation. New York Corporation assesses a a finance charge of 3% of the
receivables and retains 5% of the receivables.

Question 1:
If the factoring is treated as a sale, what amount of loss from sale should the company report in its
2021 statement of comprehensive income for the year 2021?
a) none c) P100,000
b) P60,000 d) P160,000

Question 2:
Assume that New York Company retained significant amount of risk and rewards of ownership and
had a continuing involvement on the factored financial asset, what amount of loss from factoring
should the company recognize?
a) none c)P100,000
b) P60,000 d)P160,000
 8. Grace Company holds a portfolio of receivables with a carrying value P3,000,000 as of October 31,
2021. On November 3, 2021, Grace Company enters into a factoring agreement with Cordial
Company under which it transfers the portfolio via an assignment to Cordial Company in exchange
of P2,700,000 of cash. All sums collected from debtors are paid by Grace Comapny to Cordial
Company to a specially nominated bank accountr opened by Cordial Company. Grace Comapny
agrees to reimburse Cordial Company in cash for any shortfall between the amount collected from
the receivable in consideration of P2,700,000. Once the receivables have been repaid , any sums
collected above P2,700,000 less interest on initial payment until the date debtors pay, will be paid to
Grace Company. As of December 31, 2021, Grace Company has deposited to the account of
Cordial Company the net proceeds of P980,000 on the collection of a gross receivable of
P1,000,000, As of December 31,2021 all outstanding receivables are beyond the discount period.

What amount of receivable should grace company report in its December 31, 2021 statement of
financial position?
a. none
b. 2,000,000
c. 2,020,000
d. 3,000,000

9. On December 28, 2020, Legend Company sells a loan portfolio that has a carrying amount of
300,000 for 290,000 and provides the buyer with guarantee to compensate for any impairment
losses.

What amount of financial asset Legend Company should continue to recognize in its December 31,
2020 statement of financial position?
a. none
b. 10,000
c. 290,000
d. 300,000

10. At January 1, 2021, Josh Co. had a receivable from A Company of 400,000 that has been
outstanding for quite some time. Further investigation revealed that F Company is taking over to run
and operate the business affairs of A Company. However F Company is more than willing to
assume only 75% of A company’s obligation and pay by the end of 2022. At the time the receivable
was recognized the prevailing rate of interest for similar financial asset is 14%.

Q1. What amount should Josh report its receivable on December 31, 2021 statement of financial
position ?
a. 136,843
b. 263,157
c. 300,000
d. 400,000

Q2. How much impairment loss should be recognize related to its accounts receivable in
2021?
a. 136,843
b. 263,157
c. 300,000
d. 400,000
11. The balance of the accounts receivable was extracted from Billy Company’s unadjusted trial
balance at December 31, 2021:

Accounts receivable 1,000,000

A test of collectibility of the receivable showed that 580,000 is currently collectible and not impaired;
300,000 has been outstanding more than the required period, an objective evidence showed that
only 158,000 is considered realizable but with current fair value of 141,000; the remaining
receivable has been outstanding for 2 years objective evidence showed none of which will be
realized.

What amount should the account receivable be reported in the December 2021 statement of
financial position?
a. 291,000
b. 458,000
c. 721,000
d. 738,000

12.
The John Corporation started its business on January 1, 2020. After considering the collections
experience of other companies in the industry, John Corporation established an allowance for bad
debts estimated to be 5% of credit sales. Outstanding receivables recorded in the books of accounts
on December 31, 2020 totaled P575,000, while the allowance for bad debts account had a credit
balance of P62,500 after recording estimated doubtful account expense for December and after
writing off P12,500 of uncollectible accounts.

Further analysis of the company’s accounts showed that merchandise purchased in 2020 amounted
to P2,250,000 and ending merchandise inventory was P375,000. Goods were sold at 40% above
cost.

80% of total sales were on account. Total collections from customers, on the other hand, excluding
proceeds from cash sales, amounted to P1,500,000.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The recorded accounts receivable as of December 31, 2020 is understated by

a. P12,500 b. P412,500 c. P537,500 d. P0
2. The doubtful accounts expense for the year ended December 31, 2020 should be
a. P105,000 b. P75,000 c. P131,250 d.125,000
3. The recorded allowance for doubtful accounts receivable as of December 31, 2020 is
understated by
a. P50,000 b. P30,000 c. P56,250 d. P0
4. The net realizable value of accounts receivable as of December 31, 2020 is
a. P495,000 b. P512,500 c. P993,750 d. P875,000

13. Carla Received from a customer a one-year, P375,000 note bearing annual interest of 8%.After
holding the note for six months, Carla discounted the note at I-Bank at an effective interest rate
of 10%.
 Q1. How much should Carla receive from the bank?
a. 371,428.50
b. 384,750.00
c. 392,857.50
d. 405,000.00

Q2. If the discounting is treated as a sale, what amount of loss on discounting should
Carla recognize?
a. 0
b. 5,250
c. 9,750
d. 20,250

14. On December 31, 2021, general ledger of MArtin Company’s account receivable showed a balance
of P1,400,000. Because of continuing decrease in expected cash flows on its financial assets.
Martin Company has decided to estimate the cash flow of the outstanding receivables. The
estimates are based on the expected peso amount to be received on the outstanding receiables:
the category (age) which also includes the length and period of collectibility and time factor for
similar borrowers.

Category Amount Time Factor

A P400,000 .909
B 300,000 .826
C 250,000 .751
D 150,000 .683

Question 1 : How much should Martin Company report its account receivable in its December 31,
2021 statement of financial position?
a) P799,150 c) P1,200,000
b) P901,600 d) P1,400,000

Question 2 : What amount of loss imapairment on receivable should Martin Company recognize in
its December 31, 2021 statement of comprehensive income?
a)P200,000 c)P300,850
b)P300,000 d)P498,400

The accounts receivable subsidiary ledger of Ringo Corporation shows the following information:
Dec. 31, 2021 Invoice
Customer Account balance Date Amount
Maybe, Inc. P140,720 12/06/2021 P56,000
11/29/2021 84,720
Perhaps Co. 83,680 09/27/2021 48,000
08/20/2021 35,680
Pwede Corp. 122,400 12/08/2021 80,000
10/25/2021 42,400
Perchance Co. 180,560 11/17/2021 92,560
10/09/2021 88,000
Possibly Co. 126,400 12/12/2021 76,800
12/02/2021 49,600
Luck, Inc. 69,600 09/12/2021 69,600
Total P723,360 P723,360
 The estimated bad debt rates below are based on the Corporation’s receivable collection experience.
Age of accounts Rate
0 – 30 days 1%
31 – 60 days 1.5%
61 – 90 days 3%
91 – 120 days 10%
Over 120 days 50%

The Allowance for Doubtful Accounts had a credit balance of P14,000 on December 31, 2021, before
adjustment.

Based on the foregoing, answer the following:

15. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December
31, 2021 would include:
a. No adjusting journal entry is necessary.
b. A debit to retained earnings of P24,795.
c. A debit to doubtful accounts expense P38,795.
d. A credit to allowance for doubtful accounts of P24,795.

16. The Makopa Company’s ledger showed a balance in its cash account at December 31, 2020 of
P68,225, which was determined to consist of the following:

Petty cash fund....................................................................................P 360

Cash in Metrobank, per bank statement, with a check for P600 still outstanding...
33,675
Notes receivable in the possession of a collecting agency.................... 2,500
Undeposited receipts, including a post-dated check for P1, 050 and
a traveller’s check for P1,000............................................................. 17,800
Bond sinking fund-cash........................................................................ 12, 750
IOUs signed by employees................................................................... 495
Paid vouchers, not yet recorded........................................................... 645
Total P68, 225

17. Yoyubukai Company has a following account balance on December 31,2020

Time Deposit 500,000

Cash on hand 1,000,000
Petty Cash Fund 2,000,000
Cash in bank 1,500,000
Commercial paper with maturity of 2mos. 600,000
Post stamps unused 1,000,000
Postdated Check 4,000,000

What total amount would be reported as Cash and Cash Equivalent in December 31, 2020?
a. 10,600,000
b. 6,600,000
c. 5,600,000
d. 5,000,000
18. On December 31, 2020, Invoker Company received its bank statement. A bank reconciliation is
prepared from the following available information:

Book Balance 1,650,000

Receivable collected by the bank 500,000
Interest earned on note 50,000
Outstanding Check 202,000
Check issued by Kael Company charged to Invoker Company 10,000

What amount should be reported in the cash balance per bank statement?
a. 2,200,000
b. 1,988,000
c. 2, 150, 00
d. 1,650,000

19. On April 1, 2019, Mirror Company established an imprest petty cash fund for P10,000 by writing a
check drawn against its checking account. On April 30, 2019, the fund contained the following:

Currency and coins 3,000

Receipts for office supplies 4,000
Receipts for postage still unused 3,000
Receipts for transportation 800

On April 30, 2019, the entity wrote a check to replenish the fund. What is the amount of
replenishment under the imprest fund system?
a. 8,200
b. 6,600
c. 7,000
d. 3,000

20. The cash account of Academe Company showed a balance of P6,500,000. The bank statement did
not include a deposit of P230,000 made on the last day of the month. The bank statement showed
a collection by the bank of P34,000 and a customer’s check for P62,000 returned because it was
NSF.
A customer’s check for P35,000 was recorded on the books asP74,000.and a check written for
P79,000 was recorded as P97,000. What is the correct balance in the cash account?

a. 6,500,000
b. 6,486,000
c. 6,539,000
d. 6,662,000

21. Hamilton Company has cash in bank of $10,000, restricted cash in a separate account of $3,000,
and a bank overdraft in an account at another bank of $1,000. Hamilton should report cash of

a. $9,000.
b. $10,000.
c. $12,000.
d. $13,000.
22. The cash account shows a balance of $45,000 before reconciliation. The bank statement does not
include a deposit of $2,300 made on the last day of the month. The bank statement shows a collection
by the bank of $940 and a customer's check for $320 was returned because it was NSF. A customer's
check for $450 was recorded on the books as $540, and a check written for $79 was recorded as
$97. The correct balance in the cash account was

a. $45,512.
b. $45,548.
c. $45,728.
d. $47,848.

23. At June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank
statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but
was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed
in the bank statement at $95. The bank statement also included a credit memo for interest earned in
the amount of $35, and a debit memo for monthly service charges in the amount of $50.

What was Almond's adjusted cash balance at June 30?

a. $9,598
b. $9,961
c. $10,048
d. $10,462

24. Green Company had the following cash balances at December 31, `21 Green Company had the
following cash balances at December 31, `21:

Undeposited coins and currency $35,000

Unrestricted demand deposits 1,450,000
Company checks written (and deducted
from the demand deposits amount) but
not scheduled to be delivered until January 6, `22 180,000
Time deposits restricted for use (expected use in `22) 3,000,000

In exchange for a guaranteed line of credit, Green has agreed to maintain a minimum balance of
$150,000 in its unrestricted demand deposits account. How much should Green report as “cash” in
its December 31, `21 balance
a. 1,665,000
b. 1,515,000
c. 1,520,000
d. 1,335,000

25. The accountant for the Western Co. assembled the ff. data:
June 30 July 30
Cash account balance $15,822 $39,745
Bank statement balance 107,082 137, 817
Deposit in transit 8,201 12,800
Outstanding checks 27,718 30,112
Bank service charge 72 60
Customer’s check deposited
July 10, returned by bank on
 July 16 marked NSF, and redeposited
immediately; no entry made on books
for return or redeposit 8,250
Collection by bank of company’s notes rec. 71,815 80,900
*(recorded on books in month ff. charge or coll.)

The bank statements and the company’s cash records show these totals:

Disbursements in July per bank statement $218,373

Cash receipts in July per Western’s books 236,452
Checks written in July per Western’s books 212,529
Receipts in July per bank statement 249,108

Q1. What is the correct cash balance to be shown on Western’s balance sheet at December 31,
`20?
a. 128,835
b. 112,335
c. 120,585
d. 115,906

Q2. What is the total cash disbursement per books for the month of July `20?
a. 212,517
b. 212,541
c. 212,529
d. 218,373

Q3. What is the total cash receipt per books for the month of July `20?
a. 249,108
b. 245,537
c. 244,429
d. 236,452

26. Cotton company’s checkbook balance bat December 31,2019 was P180,000. In addition, Cotton
held the following items in its safe on that date.
Check payable to Cotton dated January 2, 2020 in payment of a sale made in December
2019, included in December 31 checkbook balance. P65,000
Check payable to Cotton deposited December 15, but returned by the bank on
December 30 stamped “DAIF”. P20,000
Check drawn on Cotton’s account, payable to a vendor, dated and recorded on
December but not yet mailed to payee as of December 31, 2019. P15,000

What is the amount shown as cash on Cotton’s December 31,2019 statement of financial position.
a. P110, 000 c.P280, 000
b. P100, 000 d. P240, 000

27. Puma Company has a following cash balance at the end of the year

Cash in bank 1,000,000

Cash on hand 1,500,000
Petty cash fund 500,000
 Sinking Fund 2,000,000
Money Order 1,000,000
Manager’s Check 900,000
Certificate of deposit maturity of 3mos. 10,000,000
Treasury bill with a maturity of 6mos 10,000,000
Post dated Check 1,000,000
Savings Deposit 1,000,000
Voucher paid out of collection – not recorded 2,000,000
IOUs signed by employees 5,000,000

What amount should be reported as Cash on December 31, 2021?

a. 10,000,000
b. 9,900,000
c. 9,500,000
d. 9,000,000

28. The accountant of San Miguel Corporation is in process of preparing the company’s financial
statements for the year ended December 31, 2018. It is trying to determine the correct balance of
cash and cash equivalents to be reported as a current asset on the statement of financial position.
The ff. items are being considered.
. Balances in the Corporation accounts at the BPI bank:
> Current account 53,000
> Savings account 156,000

>Undeposited customer checks of p25, 500 (including a customer check dated January 26, 2019
for 4,000).
> Currency and coins on hand P4, 520.
>Savings account at the China Bank with the balance of p2, 500,000. This account is being cash for
future plant expansion (in 2019).
>Petty cash of P5, 000(currency of p2, 100 and unreplenished vouchers for p2, 700).
>P130, 000 in a current account at the China Bank. This represents a 10% compensation balance
for P703, 000 loans with the bank. San Miguel Corporation is legally restricted to withdraw the funds
until the loan is due in2020.
. Treasury bills:
Two-month maturity bills P100, 000
Nine-month bills 20,000
. Time deposit 90, 000

What is the correct balance of cash and cash equivalent to be reported in the current assets section
of the statement of financial position?
a.P427, 120
b.P342, 543
c.P548, 000
d.P654, 907

29. The accountant of Jenny, INC. examined the petty cash fund immediately after the close of
business, January 31, 2020, the end of the company’s natural business year. The petty cash
custodian presented the following during the count:
 Currency P2,450
Petty cash vouchers:
Postage 350
Office Supplies Exp. 1,000
Transportation Exp. 560
Computer repairs 700
Advances to office staff 1,700
A check drawn by Jenny, Inc., payable to-
The petty cash custodian 6,840
Postage stamps 450 An
employee’s check, returned by bank, marked NSF 2,000
An enveloped containing currency of p 3,780 for a gift-
For a retiring employee 3,780
P19,830

How much is the petty cash shortage or overage?

a.P4, 230
b.P5, 987
c.P6, 987
d.P6, 897

30. Delta corporation has supplied y due April 20, 2021ou with the following list of its book accounts
and cash at December 31,2020:

Checking account (compensation balance with of P15,000

No restriction) 48,000
Savings account, 2% 30,000
Certificate of deposit, 6 months, 10%, due on April 20,2021 50,000
Money market (30-day certificate), current rate, 9.75% 40,000
Payroll account 20,000
Certificate of deposit, 3 months, 10% due February 15,2021 75,000
Petty cash 1,500
Total P274,500

What should be the balance to be reported as “Cash and cash equivalents” in the December 31,
2020 statement of financial position of Delta Corporation?
a. 139,500
b. 199,500
c. 214,500
d. 274,500

31. The controller of the Red Wing Corporation is in the process of preparing the company’s 2019
financial statements. She’s trying to determine the correct balance of cash and cash equivalents to
be reported as current asset in the statement of financial position. The following items are being
considered:

Balances in the company’s accounts at First National Bank; checking P13,500, savings
P22,100
Undeposited customer checks of P5,200
Currency and coins on hand P580
 Savings account at East Bay Bank with a balance of P400,000. This account is being used
to accumulate cash for future plant expansion (2021)
P20,000 in checking account at East Bay Bank. The balance in the account represent a
20% compensating balance for a P100,000 loan with the bank. Red Wing may not withdraw
the funds until the loan is due in (2021)
Treasury bills; 2-month maturity bills totaling P15,000(purchased 2-months before maturity),
and 7-month bills totaling P20,000.

Q1. What is the correct balance of cash?

a. P41,380
b. P36,180
c. P441,380
d. P436,180

Q2. What is the correct amount for cash equivalents?

a. P35,000
b. P15,000
c. P20,000
d. P0

Q3. What is the total amount of cash and cash equivalents to be reported in the current asset
section of the 2019 statement of financial position?
a. P56,380
b. P76,380
c. P476,380
d. P456,380

Q4. What would be the classification for the P400,000 savings account at East Bay Bank?
a. Current Asset, as cash
b. Noncurrent Asset, as long-term investment
c. Current Asset, as temporary investments
d. None of the choices given

Q5. What is the classification for the P20,000 7-month treasury bills?
a. Current Asset, as cash
b. Noncurrent Asset, as long-term investment
c. Current Asset, as temporary investments
d. None of the choices given

32. On December 28, year 2, Kerr Manufacturing Co. purchased goods costing $50,000. The terms
were FOB destination. Some of the costs incurred in connection with the sale and delivery of the
goods were as follows:
Packaging for shipment $1,000 Shipping 1,500 Special handling charges 2,000 These goods were
received on December 31, year 2. In Kerr’s December 31, year 2 balance sheet, what amount of
cost for these goods should be included in inventory?
a. $54,500
b. $53,500
c. $52,000
d. $50,000
33. The following information was taken from Cody Co.’s accounting records for the year ended
December 31, year 2:
Decrease in raw materials inventory $ 15,000 Increase in finished goods inventory 35,000 Raw
material purchased 430,000 Direct labor payroll 200,000 Factory overhead 300,000 Freight-out
45,000 There was no work in process inventory at the beginning or end of the year. Cody’s year 2
cost of goods sold is
a. $895,000
b. $910,000
c. $950,000
d. $955,000

34. On December 15, year 2, Flanagan purchased goods costing $100,000. The terms were FOB
shipping point. Costs incurred by Flanagan in connection with the purchase and delivery of the
goods were as follows:
Normal freight charges $3,000 Handling costs 2,000 Insurance on shipment 500 Abnormal freight
charges for express shipping 1,200 The goods were received on December 17, year 2. What is the
amount that Flanagan should charge to inventory and to current period expense?
Inventory Current period expense
a. $3,000 $3,700
b. $5,000 $1,700
c. $5,500 $1,200
d. $6,700 $0

35. Based on a physical inventory taken on December 31, year 2, Chewy Co. determined its chocolate
inventory on a FIFO basis at $26,000 with a replacement cost of $20,000. Chewy estimated that,
after further processing costs of $12,000, the chocolate could be sold as finished candy bars for
$40,000. Chewy’s normal profit margin is 10% of sales. Under the lower of cost or market rule, what
amount should Chewy report as chocolate inventory in its December 31, year 2 balance sheet?
a. $28,000
b. $26,000
c. $24,000
d. $20,000

36. Dart Company’s accounting records indicated the following information:

Inventory, 1/1/Y2 $ 500,000 Purchases during year 2 2,500,000 Sales during year 2 3,200,000 A
physical inventory taken on December 31, year 2, resulted in an ending inventory of $575,000.
Dart’s gross profit on sales has remained constant at 25% in recent years. Dart suspects some
inventory may have been taken by a new employee. At December 31, year 2, what is the estimated
cost of missing inventory?
a. $ 25,000
b. $100,000
c. $175,000
d. $225,000
37. On January 1, year 2, Dell, Inc. contracted with the city of Little to provide custom built desks for the
city schools. The contract made Dell the city’s sole supplier and required Dell to supply no less than
4,000 desks and no more than 5,500 desks per year for two years. In turn, Little agreed to pay a
fixed price of $110 per desk. During year 2, Dell produced 5,000 desks for Little. At December 31,
year 2, 500 of these desks were segregated from the regular inventory and were accepted and
awaiting pickup by Little. Little paid Dell $450,000 during year 2. What amount should Dell
recognize as contract revenue in year 2?
a. $450,000
b. $495,000
c. $550,000
d. $605,000

38. On October 20, year 2, Grimm Co. consigned forty freezers to Holden Co. for sale at $1,000 each
and paid $800 in transportation costs. On December 30, year 2, Holden reported the sale of ten
freezers and remitted $8,500. The remittance was net of the agreed 15% commission. What
amount should Grimm recognize as consignment sales revenue for year 2?
a. $ 7,700
b. $ 8,500
c. $ 9,800
d. $10,000

39. The following items were included in Opal Co.’s inventory account at December 31, year 2:
Merchandise out on consignment, at sales price, including 40% markup on selling price $40,000
Goods purchased, in transit, shipped FOB shipping point 36,000 Goods held on consignment by
Opal 27,000 By what amount should Opal’s inventory account at December 31, year 2, be
reduced?
a. $103,000
b. $ 67,000
c. $ 51,000
d. $ 43,000

40. Brady Corporation values its inventory at the lower of cost or net realizable
value as required by IFRS. Brady has the following information regarding its inventory:
Historical cost $1,000 Estimated selling price 900 Estimated costs to complete and sell 50
Replacement cost 800 What is the amount for inventory that Brady should report on the balance
sheet under the lower of cost or net realizable value method?
a. $1,000
b. $ 900
c. $ 850
d. $ 750

41. Cord Builders, Inc. has consistently used the percentage-ofcompletion

method of accounting for construction-type contracts.
During year 1 Cord started work on a $9,000,000 fixedprice
construction contract that was completed in year 3. Cord’s
accounting records disclosed the following:
December 31
Year 1 Year 2
Cumulative contract costs
incurred $3,900,000 $6,300,000
Estimated total cost at
 completion 7,800,000 8,100,000
How much income would Cord have recognized on this contract
for the year ended December 31, year 2?
a. $100,000
b. $300,000
c. $600,000
d. $700,000

42. Lake Construction Company has consistently used the percentage-of-completion method of
recognizing income. During year 1, Lake entered into a fixed-price contract to construct an office
building for $10,000,000. Information relating to the
contract is as follows:
At December 31,
Year 1 Year 2
Percentage of completion 20% 60%
Estimated total cost at
completion $7,500,000 $8,000,000
Income recognized (cumulative) 500,000 1,200,000
Contract costs incurred during year 2 were
a. $3,200,000
b. $3,300,000
c. $3,500,000
d. $4,800,000

43. Pell Co.’s construction jobs, which commenced during year 2:

Project 1 Project 2
Contract price $420,000 $300,000
Costs incurred during year 2 240,000 280,000
Estimated costs to complete 120,000 40,000
Billed to customers during year 2 150,000 270,000
Received from customers during year 2 90,000 250,000

Q1. If Pell used the completed contract method, what amount of

gross profit (loss) would Pell report in its year 2 income statement?
a. $ (20,000)
b. $ 0
c. $ 340,000
d. $ 420,000

Q2. If Pell used the percentage-of-completion method, what

amount of gross profit (loss) would Pell report in its year 2 income
statement?
a. $(20,000)
b. $ 20,000
c. $ 22,500
d. $ 40,000

44. Brady Corporation values its inventory at the lower of cost or net realizable value as required by
IFRS. Brady has the following information regarding its inventory:
Historical cost $1,000
Estimated selling price 900
 Estimated costs to complete and sell 50
Replacement cost 800
What is the amount for inventory that Brady should report on the balance sheet under the lower of
cost or net realizable value method?
a. $1,000
b. $ 900
c. $ 850
d. $ 750

45. When manufacturing inventory, what is the accounting treatment for abnormal freight-in costs?
a. Charge to expense for the period.
b. Charge to the finished goods inventory.
c. Charge to raw materials inventory.
d. Allocate to raw materials, work in process, and finished goods.

46. According to the net method, which of the following items should be included in the cost of
inventory?
Freight costs Purchase discounts not taken
a. Yes No
b. Yes Yes
c. No Yes
d. No No

47. The weighted-average for the year inventory cost flow method is applicable to which of the following
inventory systems?
Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No

48. How should the following costs affect a retailer’s inventory?

Freight-in Interest on inventory loan
a. Increase No effect
b. Increase Increase
c. No effect Increase
d. No effect No effect

49. Thread Co. is selecting its inventory system in preparation for its first year of operations. Thread
intends to use either the periodic weighted-average method or the perpetual moving-average
method, and to apply the lower of cost or market rule either to individual items or to the total
inventory. Inventory prices are expected to generally increase throughout year 2, although a few
individual prices will decrease. What inventory system should Thread select if it wants to maximize
the inventory carrying amount at December 31, year 2?
Inventory method Cost or market application
a. Perpetual Total inventory
b. Perpetual Individual item
c. Periodic Total inventory
d. Periodic Individual item
50. Generally, which inventory costing method approximates most closely the current cost for each of
the following?
Cost of goods sold Ending inventory
a. LIFO FIFO
b. LIFO LIFO
c. FIFO FIFO
d. FIFO LIFO

51. Heath Co.’s current ratio is 4:1. Which of the following transactions would normally increase its
current ratio?
a. Purchasing inventory on account.
b. Selling inventory on account.
c. Collecting an account receivable.
d. Purchasing machinery for cash.

52. Under IFRS, which of the following inventory items are not valued at the lower of cost or net
realizable value?
a. Manufactured inventory items.
b. Retail inventory items.
c. Biological inventory items.
d. Industrial inventory items.

53. Reporting inventory at the lower of cost or market is a departure from the accounting principle of
a. Historical cost.
b. Consistency.
c. Conservatism.
d. Full disclosure.

54. On January 1, 2020, Abigail Company purchased marketable equity securities to be held as
“trading” for P5,000,000. The entity also paid commission, taxes and other transaction costs
amounting to P250,000. The securities had a market value of P5,600,000 on December 31, 2020.
No securities were sold during 2020. The transaction costs that would be incurred on the disposal
of the investment are estimated at P200,000. What amount of unrealized gain or loss on these
securities should be reported in 2020 income statement?
a. 550,000
b. 600,000
c. 250,000
d. 0

55. On January 1, 2021, Mae Company purchased marketable equity securities to be held as “trading”
for P3,700,000. The entity also paid commission, taxes and other transaction cost amounting to
P250, 000. The securities had market value of 4,000,000 on December 31, 2021 and the
transaction cost that would be incurred on sale is estimated at 150,000. No securities were sold
during 2021. What amount of unrealized gain or loss on these securities should be reported in the
2021 income statement?
a.P450,450 c.P300,000
b.P555,000 d.P250,000
56. Carla Company acquired a financial instrument for 3,000,000 on March 31, 2021. The financial
instrument is classified as financial asset at fair value through other comprehensive income. The
direct acquisition cost incurred amounted to 500,000. On December 31, 2021, the fair value of
instrument was 5,600,000. What gain should be recognized in other comprehensive income for the
year-ended December 31, 2021?
a.P1,780,000 c.P2,100,000
b.P2,400,000 d.P0

57. Statement of Financial position of Bert Company stated the following:

Noncurrent assets:
Financial asset at fair value 3,700,000
Shareholder’s equity:
Unrealized loss on financial asset (300,000)

The transaction cost paid by the Company was 350,000. This amount is capitalized as part of the
cost of the investment. The entity elected to measure the financial asset at fair value through other
comprehensive income. What was the historical cost of the financial asset?
a.P3,700,000 c.P3,900,000
b.P3,400,000 d.P4,000,000

58. Magnolia Corporation invested its excess cash in equity securities during 2020. The business
model for these investments is to profit from trading on price changes.
(a) As of December 31, 2020 the equity investment portfolio consisted of the following:
Investment Quantity Cost Fair Value
LJ, Inc. 1,000Shares 45,000 63,000
Polland Co. 2,000Shares 120,000 126,000
Alabang Corp. 2,000Shares 216,000 180,000
Totals 381,000 369,000

Q1. In the December 31, 2020, statement of financial position, what should be reported as carrying
amount of the investment?
a. 369,000 c. 381,000
b. 345,000 d. 405,000

Q2. In the 2020 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of 12,000
b. Unrealized loss of 12,000
c. Unrealized loss of 36,000
d. Unrealized gain of 24,000

59. During 2020, Gil Company purchased marketable equity securities to be measured at fair value
through other comprehensive income. On December 31, 2020, the balance in the unrealized loss
on these securities was P200,000. There were no security transactions during 2021. Pertinent data
on December 31, 2021 are as follows:
Security Cost Market Value
X 2,100,000 1,600,000
Y 1,850,000 2,000,000
Z 1,050,000 900,000
In the statement of changes in equity for 2021, what amount should be included as cumulative
unrealized loss as component of other comprehensive income?
a. 500,000
 b. 300,000
c. 200,000
d. 0

Solution answer b
FV 2021 4,500,000
FV 2020 4,800,000
unrealized loss OCI (300,000)

60. During 2020, Toronto Company purchased marketable equity securities as short-term investment to
be measured at fair value through other comprehensive income. The cost and market value on
December 31, 2020 were as follows:
Security Cost Market value
1,000 shares 300,000 350,000
10,000 shares 1,700,000 1,550,000
20,000 shares 3,150,000 2,950,000

The entity sold 10,000 shares of B on January 5, 2021 for P150 per share and incurred P50,000 in
brokerage commission and taxes. What amount should be reported as loss on sale of equity
securities in 2021?
a. 200,000
b. 100,000
c. 250,000
d. 50,000

61. On January 1, 2020 Raine Company purchased 10,000 ordinary shares at P90 per share. On
December 31, 2020, the entity received 4,000 shares of the investee in lieu of cash dividend of P10
per share. On this date, the investee’s share has a quoted market price of P50 per share. What
amount should be reported as dividend income for 2020?
a. 120,000
b. 200,000
c. 20,000
d. 0

62. On January 1, 2020 Santos Company purchased 100,000 ordinary shares at

P80 per share. On September 30, 2020 the entity received 100,000 stock rights to purchase an
additional 100,000 shares at P90 per share. The stock rights had an expiration date of February 1,
2021. On September 30, 2020, each share had a market value of P114 and the stock right had a
market value of P8. What amount should be reported on September 30, 2020 as investment in
stock rights?
a. 800,000
b. 400,000
c. 100,000
d. 600,000

63. On April 1, 2020, Audi Company purchased 30% of the outstanding ordinary shares of an associate
for P4,000,000. On this date, the investee’s net assets totaled P8,000,000 and Audi Company
cannot attribute the excess of cost of the investment over the equity in the investee’s net assets to
any particular factor. The investee reported net income of P1,000,000 for 2020.
What is the maximum amount which could be included in Audi Company’s 2020 income before tax
to reflect its equity earnings of the investee?
 a. 275,000
b. 225,000
c. 300,000
d. 405,000

64. On January 1, 2020, Jarem Company purchased 40% of the outstanding ordinary shares of an
investee paying P2,560,000 when the carrying amount of the net assets of the investee equaled
P5,000,000. The difference was attributed to equipment which had a carrying amount of
P1,200,000 and a fair market value of P2,000,000, and to building with a carrying amount of
P1,000,000 and a fair market value of P1,600,000. The remaining useful life of the equipment and
building was 4 years and 12 years, respectively. During 2020, the investee reported net income of
P1,600,000 and paid dividends of P1,000,000.

What is the carrying amount of the investment in associate on December 31, 2020?
a. 2,550,000
b. 2,700,000
c. 2,800,000
d. 3,050,000

65. On July 1, 2020, North Company purchased ten-year, 8% bonds with face amount of P5,000,000
for P4,200,000 to be held as financial assets at amortized cost. The bonds mature on June 30,
2020 and pay interest semiannually on June 30 and December 31. Using the interest method, the
entity recorded discount amortization of P18,000 for the six months ended December 31, 2020.
What amount should be reported as interest income for 2020?
a. 168,000
b. 182,000
c. 200,000
d. 218,000

66. On December 31, 2020, Entity X acquired an investment for P100,000 plus a purchase commission
of P 2,000. The investment is classified as available for sale. On December 31, 2020, quoted
market price of the investment is P 100,000. If the investment were sold, a commission of P 3,000
would be paid. On December 31, 2020, the entity should recognize unrealized loss directly in equity
of
a. P 2,000 c. P 5,000
b. P 3,000 d. P 0

67. Sold bonds at 98 plus accrued interest of P8,000. The broker deducted P400 for brokerage fees
and taxes, remitting the balance. The bonds were carried at P489,000 at the time of the sale. The
correct entry for the transaction is?

a. Cash 497,600
Interest Revenue 8,000
Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 600
b. Cash 498,000
Interest Revenue 8,000
Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 1,000
c. Cash 500,000
Interest Revenue 8,000
 Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 3,000
d. Cash 498,400
Interest Revenue 8,000
Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 1,400

68. The following transactions pertain to Zinc Co.:

a. Purchased P100,000 of Kelly Co. 8% bonds at 102 plus accrued interest of
P2,000.
b. Received first semiannual interest payment.
c. Amortized P40 on the bond investment at the end of the first year.
d. Sold the bonds at 97 plus accrued interest of P1,500. The bonds were carried
at P101,500 at the time of the sale.

8. What is the entry to record the purchased of bonds?

9. What is the entry for the amortization on bond investment?

ANS: Interest Revenue 40
Investment in Kelly Co. Bonds 40

10. What is the entry for the sale of bonds?

ANS: Cash 98,500
Loss on Sale of Investments 4,500
Investment in Kelly Co. Bonds 101,500
Interest Revenue 1,500

69. On January 2, 2020, Yacca Company acquired 20% of the 400,000 shares of outstanding common
stock of Imaw Corporation for P30 per share. The purchase price was equal to Imaw’s underlying
book value. Yacca plans to hold this stock to influence the activities of Imaw.

The following data are applicable for 2020 and 2021:

2020 2021
Imaw dividends (paid Oct. 31) P 40,000 P 48,000
Imaw earnings 140,000 160,000
Imaw stock market price at year-end 32 31

On January 2, 2021, Yacca Company sold 20,000 shares of Imaw stock for P31 per share. During
2021, Imaw reported net income of P120,000, and on October 31, 2021, Imaw paid dividends of
P20,000. At December 31, 2021, after a significant stock decline, which is expected to be temporary,
Imaw’s stock was selling for P22 per share. After selling the 20,000 shares, Yacca does not expect
to exercise significant influence
over Imaw, and the shares are classified as available for sale.

Based on the above and the result of your audit, determine the following:
 1. Carrying value of Investment in Imaw as of December 31, 2020
a. P12,020,000 c. P2,420,000
b. P 2,500,000 d. P2,388,000

2. Carrying value of Investment in Imaw as of December 31, 2021

a. P2,442,400 c. P12,042,400
b. P2,612,000 d. P 2,372,000

3. Gain or loss on sale of Investment in Imaw on January 2, 2021

a. P2,390,600 loss c. P33,000 loss
b. P 9,400 gain d. P27,000 gain

4. The income from investment in BBB, Inc. in 2020 is

a. P 3,000 c. P4,000
b. P24,000 d. P 0

5. Net unrealized loss on available for sale securities as of December 31, 2021
a. P671,800 c. P639,000
b. P511,800 d. P459,000

70. On June 1, 2020, Yagura Corporation purchased as a long term investment 4,000 of the P1,000 face
value, 8% bonds of Violet Corporation. The bonds were purchased to yield 10% interest. Interest is
payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2026. Yagura uses
the effective interest method of amortization. On November 1, 2021, Yagura sold the bonds for a total
consideration of P3,925,000. Yagura intended to hold these bonds until they matured, so year-to-
year market fluctuations were ignored in accounting for bonds.

Based on the above and the result of your audit, determine the following:
(Round off present value factors to four decimal places)
1. The purchase price of the bonds on June 1, 2020 is
a. P3,645,328 c. P3,696,736
b. P3,691,132 d. P3,624,596
2. The interest income for the year 2020 is
a. P215,850 c. P212,829
b. P215,521 d. P211,612
3. The carrying value of the investment in bonds as of December 31, 2020 is
a. P3,725,919 c. P3,719,986
b. P3,649,541 d. P3,671,490
4. The interest income for the year 2021 is
a. P306,607 c. P311,218
b. P310,715 d. P304,748
5. The gain on sale of investment in bonds on November 1, 2021 is
a. P21,196 c. P 27,632
b. P80,235 d. P104,045
prelim review
Answer Section

PROBLEM

1. ANS:
B

AR Beg 450,000
Sales on account 4,800,000
Total collections (3,920k+150k) (4,070,000)
Sales discount (80,000)
AR End 1,100,000- 40,000= 1,060,000

ADA Beg 9,000

Recovery 5,000
Provision 26,000
ADA end 40,000

PTS: 1

2. ANS:
A

Inventory, January 1 P2, 880,000

Purchases 4,800,000
TGAS 7,680,000
Less: Inventory, December 31 2,640,000
Cost of sales 5,040,000
Add: Gross profit 2,160,000
Total sales 7,200,000
Less: cash sales 1,200,000
Sales on account 6,000,000
Add: Account receivable, January 1 1,920,000
Total 7,920,000
Less; Collections of Account Receivable 6,240,000
Account Receivable, December 31 1,680,000

PTS: 1

3. ANS:
C

PTS: 1

4. ANS:
X

PTS: 1

5. ANS:
 X

PTS: 1

6. ANS:
X

PTS: 1

7. ANS:
Answer: B
Amount factored P2,000,000
Less: Finance charge (P2,000,000 x 3%) P 60,000
Holdback (P2,000,000 x 5%) 100,000 160,000
Amount received P1,840,000
Add: New asset received (holdback) 100,000
Total consideration received P1,940,000
Less: Carrying value of the receivable equal to the face 2,000,000
Loss on factoring P 60,000

Answer: A

PTS: 1

8. ANS:
B
Carrying amount transferred 3,000,000
Amount collected 1,000,000
Carrying value 12/31 2,000,000

PTS: 1

9. ANS:
D
PAS 39 if the transferor retains the risk and rewards of ownership the entity shall continue to
recognize the financial asset.

PTS: 1

10. ANS:
B,A
Expected cash inflow (400,000 X 75%) 300,000
P.V. .87719
Recoverable 263,157

Carrying value 400,000

P.V. 263,157
Impairment loss 136,843
 PTS: 1

11. ANS:
C

Currently collectible 580,000

FV of accounts not currently collectible 141,000
NRV of accounts receivable 721,000

PTS: 1

12. ANS:
1. A
SALES (2,250,000 - 375,000) X 1.4 = 2,625,000
ON ACCOUNT 80%
SALES ON ACCOUNT 2,100,000
COLLECTION (1,500,000)
WRITE OFF (12,500)
BALANCE 587,500
PER BOOK 575,000
UNDER 12,500

2. A
SALES ON ACCOUNT 2,100,000
5%
DOUBTFUL ACCOUNT EXP 105,000

3. B
D.A. EXPENSE 105,000
W/O 12,500
BALANCE 92,500
PER BOOK 62,500
UNDER 30,000

4. A
ADJ. AR 587,500
ALLOW 92,500
NRV 495,000

PTS: 1

13. ANS:
Q1: B
Interest (375,000 x 8%) P 30,000
Maturity Value (375,000 +30,000) P405,000
Discount (405,000 x 10% x 6/12) P 20,250
Proceeds(405,000-20,250) P384,750

Q2: B
Proceeds from discounting P384,750
Carrying value of the note:
 Principal P375,000
Interest (375T x 8% x 6/12) 15,000 390,000
Loss on discounting P 5,250

PTS: 1

14. ANS:
Answer : A
Category Amount Time Factor Fair Value
A P400,000 .909 P363,600
B 300,000 .826 247,800
C 250,000 .751 187,750
D 150,000 .683 102,450
Total P1,100,000 P901,600

Answer : D
Balance of account receivable P1,400,000
Less : Fair value of account receivable 901,600
Loss on Impairment P 498,400

PTS: 1

15. ANS:
D
(Debit) Doubtful accounts expense 24,795.20 *
(Credit) Allowance for doubtful accounts 24,795.20
* (P38,795.20 - P14,000)

PTS: 1

16. ANS:
Answer: A
Solution: cash on hand and in bank should be reported on Makopa’s balance sheet in the
amount of P50, 185, computed as follows:
Balance per ledger ...............................................................................................P 68, 225
Less: Outstanding check....................................................................P 600
Notes recievable in the possession of a collecting agency....... 2,500
Post-dated check....................................................................... 1,050
Bond sinking fund- cash ..........................................................12,750
IOUs signed by employees ...................................................... 495
Paid vouchers, not yet recorded ............................................... 645 18, 040
Cash on hand and in bank, as corrected ................................................................ P50, 185
 PTS: 1

17. ANS:
C

Time Deposit 500,000

Cash on hand 1,000,000

Petty Cash fund 2,000,000

Cash in bank 1,500,000

Commercial paper with maturity of 2mos 600,000

Total Cash and Cash equivalent 5,600,000

PTS: 1

18. ANS:
B

Solution:

Book balance 1,650,000

Add: Receivable Collected 500,000

Interest 50,000 550,000

Total 2, 200, 00

Less: Outstanding Check 202,000

Error 10,000 (212,000)

Total cash balance per bank 1,988,000

PTS: 1

19. ANS:
A
Receipts for office supplies 4,000
Receipts for postage still unused 3,000
Receipts for transportation 800
CSO 400
8,200

PTS: 1

20. ANS:
 B
Balance per book 6,500,000
collection by bank 39,000
NSF check (62,000)
book error- customer’s check (P74,00-45,000) (9,000)
book error-check written (P97,000-P79,000) 18,000
Adjusted book balance 6,486,000

PTS: 1

21. ANS:
Answer b

cash in bank of $10,000

PTS: 1

22. ANS:
Answer:b

45,000 + $940 – $320 – $90 + $18 = $45,548

PTS: 1

23. ANS:
B

Choice "b" is correct. Almond's adjusted cash balance is computed as follows:

Adjusted cash balance = Unadjusted cash balance +/- bank errors + credit memos – service charges

Adjusted cash balance = $10,012 - ($95 - $59) + $35 - $50 = $9,961

PTS: 1

24. ANS:
A
Undeposited coins and currency $35,000
Unrestricted demand deposits 1,450,000
Checks drawn and recorded but
undelivered at 12/31/14 180,000
Correct amount of cash at 12/31/14 $1,665,000

PTS: 1

25. ANS:
Q1. Answer: C
137,817 + 12,880 - 30,112= 120,585
 Q2. Answer: A
212,529 + 60 -72= 212,517

Q3.Answer: B
236,452 + 80,900 – 71,815= 245,537

PTS: 1

26. ANS:
answer: A

Book balance 180,000

Deposit in transit (65,000)

DAIF (20,000)

Outstanding check 15,000

110,000

PTS: 1

27. ANS:
B
Cash on hand 1,500,000
Cash in bank 1,000,000
Petty Cash Fund 500,000
Sinking Fund 2,000,000
Money Order 1,000,000
Managers Check 900,000
Saving Deposit 1,000,000
Voucher paid out of collection 2,000,000
Total Cash 9,900,000

PTS: 1

28. ANS:

Solution: A
Savings and current accounts- BPI bank P209, 000
(p156, 000 + p53, 000)
Undeposited customer checks (p25, 500 – p4, 000) 21,500
Currency and coins on hand 4,520
Petty cash 2,100
Two-month Treasury bills 100,000
Time deposit 90,000
Total Cash and Cash equivalent 427,120

PTS: 1
29. ANS:
Solution: A
Currency P 2,450
Petty cash vouchers
Postage 350
Office Supplies Exp. 1,000
Transportation Exp. 560
Computer repairs 700
Advances to office staff 1,700 4,310
Replenishment check 6,840
Employees NSF check 2000
Petty cash accounted 15,600
Petty cash fund per ledger (custodian accountability) (19,830)
Petty cash shortage (P4, 230)

PTS: 1

30. ANS:
C

Checking account P48,000

Savings account 30,000
Money market (30-day) 40,000
Payroll account 20,000
Certificate of deposit, due February 15,2021 75,000
Petty cash 1,500
Total cash and cash equivalent 214,500

PTS: 1

31. ANS:
Q1.ANS: A
Balance in checking account P13,500
Balance in savings account 22,100
Undeposited customer checks 5,200
Currency and coins on hand 580
Total Cash P41,380

Q2.ANS: B (Only those treasury bills acquired or purchased 3 months or less before maturity can
qualify as cash equivalents)

Q3.ANS: A
Balance in checking account P13,500
Balance in savings account 22,100
Undeposited customer checks 5,200
Currency and coins on hand 580
2-month Treasury Bills 15,000
Cash and cash equivalents P56,380

Q4.ANS: B
 Q5.ANS: C

PTS: 1

32. ANS:
(d) When the shipping terms are FOB destination, the seller bears all costs of transporting the
goods to the buyer. Therefore, the seller is responsible for the payment of packaging costs
($1,000), shipping costs ($1,500), and the special handling charges ($2,000). The only amount to
be included as the buyer’s cost of the inventory purchased is the purchase price ($50,000).

PTS: 1

33. ANS:
(b) Three computations must be performed: raw materials used, cost of goods manufactured, and
cost of goods sold.
The decrease in RM inventory is added when computing RM used because RM were used in
excess of those purchased. The increase in FG inventory is deducted when computing cost of
goods sold because it represents the portion of goods manufactured which were not sold. The
freight-out is irrelevant for this question because freight-out is a selling expense and therefore does
not affect cost of goods sold.

PTS: 1

34. ANS:
(c) Inventoriable costs include all costs necessary to prepare goods for sale. For a merchandising
concern, these include the purchase price of the goods, freight-in, insurance, warehousing, and any
costs necessary to get the goods to the point of sale. Abnormal freight and handling should be
charged to expense of the period. Therefore, the normal costs for inventory are $5,500 ($3,000 +
$2,000 + $500) and the abnormal freight of $1,200 is charged to current expense of the period.

PTS: 1

35. ANS:
(c) The lower of cost or market (LCM) is used for financial reporting of inventories. The market
value of inventory is defined as the replacement cost (RC), as long as it is less than the ceiling (net
realizable value, or NRV) and more than the floor (NRV less a normal profit, or NRV – NP). In this
case, the amounts are
Ceiling: NRV = $40,000 est. sell. price – $12,000 disp. cost = $28,000 Floor: NRV – NP = $28,000 –
(10% × $40,000) $24,000 RC: $20,000 Since RC falls below the floor, the floor (NRV – NP) is the
designated market value. Once market value is designated, LCM can be determined by simply
determining the lower of cost ($26,000) or market ($24,000). Therefore, inventory is reported at
$24,000.

PTS: 1

36. ANS:
(a) The gross profit method can be used to estimate the cost of missing inventory. The first step is
to compute the cost of goods available for sale.
Beginning inventory $ 500,000 Purchases 2,500,000 Cost of goods available for sale $3,000,000
The second step is to estimate cost of goods sold based on the gross profit percentage.
 Sales $3,200,000 Estimated gross profit ($3,200,000 × 25%) (800,000) Cost of goods sold
($3,200,000 × 75%) $2,400,000 Note that a shortcut is to realize that if gross
profit is 25% of sales, cost of goods sold must be 75% of sales. The third step is to compute
estimated ending inventory.
Cost of goods available for sale $ 3,000,000 Estimated cost of goods sold (2,400,000) Estimated
ending inventory $ 600,000 Since the actual count of ending inventory at December 31 was only
$575,000, the estimated shortage in inventory is $25,000 ($600,000 – $575,000).

PTS: 1

37. ANS:
(c) Generally, goods are considered sold when legal title to the goods passes to the buyer. In
certain situations, however, the transfer of title criteria does not reflect the underlying economics of
the situation. In this situation, although transfer of legal title may not have occurred for the 500
segregated desks, the economic substance of the
transaction is that the seller no longer retains the risks of ownership. Therefore, all 5,000 desks
(including the 500 segregated and accepted desks) are considered sold in year 2, and revenue of
$550,000 is recognized (5,000 × $110). Note that the amount of cash collected ($450,000) does not
affect the amount of revenue recognized in this case.

PTS: 1

38. ANS:
(d) A consignor recognizes sales revenue from consignments when the consignee sells the
consigned goods to the ultimate customer. Sales commissions earned by the consignee ($10,000 ×
15% = $1,500) are reported as a selling expense by the consignor and are not netted against sales
revenue. Therefore, sales revenue is reported at the total selling price of $10,000 (10 × $1,000).
Note that the transportation costs ($800) do not affect sales either; one-fourth (10/40) is reflected in
cost of goods sold and three-fourths (30/40) is included in ending inventory.

PTS: 1

39. ANS:
(d) No adjustment is necessary for the goods in transit ($36,000). The goods were shipped FOB
shipping point, which means the buyer (Opal) owns the goods while in transit. Therefore, Opal
properly included these goods in 12/31/Y2 inventory. The merchandise out on consignment is
owned by the consignor (Opal) and should be included in Opal’s inventory at cost [$40,000 – (40%
× $40,000) = $24,000]. Therefore, inventory must be reduced by $16,000 for this item ($40,000 –
$24,000). The goods held on consignment ($27,000) are owned by the consignor, not Opal;
therefore, inventory must be reduced $27,000 for this item. The total reduction in inventory is
$43,000 ($16,000 + $27,000).

PTS: 1

40. ANS:
(c) The requirement is to calculate the amount that should be presented for inventory. Answer (c) is
correct because the lower of cost or net realizable value method requires net realizable value to be
calculated as the estimated selling price less estimated costs of completion and estimated costs to
sell. Therefore, the NRV is $850 ($900 – $50). The lower of cost or net realizable value is
determined by comparing the cost of $1,000 to the NRV of $850, and using the lower amount.
Inventory should be reported at $850.
 PTS: 1

41. ANS:
51. (a) The total expected income on the contract at
12/31/Y2 is $900,000 ($9,000,000 – $8,100,000). The formula
for recognizing profit under the percentage-of-completion method
is
Cost to date
×
Expected
profit
=
Profit recognized
Total expected costs to date
$6,300,000
$8,100,000 × $900,000 = $700,000
This result is the total profit on the contract in year 1 and year 2.
The year 1 profit recognized must be subtracted from $700,000 to
determine the year 2 profit. At 12/31/Y1, the total expected income
on the contract was $1,200,000 ($9,000,000 – $7,800,000).
The income recognized in year 1 was $600,000, as computed below.
$3,900,000
× $1,200,000 = $600,000
$7,800,000
Therefore, year 2 income is $700,000 less $600,000, or $100,000.

PTS: 1

42. ANS:
(b) Based on the information given, it must be assumed
that costs incurred are used to measure the extent of progress toward
project completion. At 12/31/Y1, the project was 20% complete
and total estimated costs were $7,500,000. Therefore, costs
incurred as of 12/31/Y1 were 20% of $7,500,000, or $1,500,000.
At 12/31/Y2, the project was 60% complete and total estimated
costs were $8,000,000. Therefore, costs incurred as of 12/31/Y2
are 60% of $8,000,000 or $4,800,000. The costs incurred during
year 2 were $4,800,000 less $1,500,000, or $3,300,000.

PTS: 1

43. ANS:
Q1. (a) The expected income on project 1 [$420,000 –
($240,000 + $120,000) = $60,000] is not recognized until the
project is completed under the completed contract method. However,
under the completed contract method, an expected loss on a
contract must be recognized in full in the period in which it is discovered.
Project 2 has an expected loss of ($20,000) [$300,000 -
($280,000 + $40,000)] which must be recognized immediately in
year 2.
 Q2. (b) Construction companies that use the percentage-ofcompletion
method in accounting for long-term construction
contracts usually recognize gross profit according to the cost-tocost
method.
Costs to date × Estimated profit = Gross profit to date
Total estimated costs
Pell would recognize gross profit of $40,000 on project 1
$240,000
× [$420,000 – ($240,000 + $120,000)] = $40,000
$240,000 + $120,000
Note that prior years’ gross profit need not be subtracted from
$40,000 because the project commenced during year 2. Under
both the percentage-of-completion method and the completedcontract
method, an expected loss must be recognized in full in the
period in which the expected loss is discovered. Project 2 has an
expected loss of ($20,000) [$300,000 – ($280,000 + $40,000)]
which must be recognized in full in year 2. The net gross profit
recognized on the two projects is $20,000 ($40,000 profit less
($20,000) loss.

PTS: 1

44. ANS:
(c) The requirement is to calculate the amount that
should be presented for inventory. Answer (c) is correct because
the lower of cost or net realizable value method requires net realizable
value to be calculated as the estimated selling price less estimated
costs of completion and estimated costs to sell. Therefore,
the NRV is $850 ($900 – $50). The lower of cost or net realizable
value is determined by comparing the cost of $1,000 to the NRV of
$850, and using the lower amount. Inventory should be reported
at $850.

PTS: 1

45. ANS:
(a) Any abnormal costs for freight, handling costs, and wasted material are required to be treated as
current period charges, and not a part of inventory cost. Therefore, answers (b), (c), and (d) are
incorrect.

PTS: 1

46. ANS:
(a) The cost of inventory should include all expenditures (direct and indirect) incurred to bring an
item to its existing condition and location. Freight charges are thus appropriately included in
inventory costs. Under the net purchase method, purchase discounts not taken are recorded in a
Purchase Discounts Lost account. When this method is used, purchase discounts lost are
considered a financial (i.e., “other”) expense, and are thus excluded from the cost of inventory.

PTS: 1
47. ANS:
(b) The requirement is to determine whether the weighted-average inventory method is applicable
to a periodic and/or a perpetual inventory system. The weighted-average method computes a
weighted-average unit cost of inventory for the entire period and is used with periodic records. The
moving-average method requires that a new unit of cost be computed each time new goods are
purchased and is used with perpetual records.

PTS: 1

48. ANS:
(a) The cost of inventory should include all expenditures (direct and indirect) incurred to bring an
item to its existing condition and location. Freight-in charges are thus appropriately included in
inventory costs. Interest cost shall not be capitalized for assets that are in use or ready for their
intended use in the earnings activities of the enterprise. Thus, interest on an inventory loan should
not be included in inventory (it should be expensed as incurred).

PTS: 1

49. ANS:
24. (a) To maximize its inventory carrying amount at December 31, year 2, Thread should use the
perpetual moving-average method with the lower of cost or market rule applied to the total
inventory. First, when using the perpetual moving-average method, the cost of sales throughout the
year are determined using the average cost of purchases up to the time of the sale. On the other
hand, under the periodic weighted-average method, the cost of each item is the weighted-average
of all units purchased during the year. During a period of rising prices, the perpetual moving-
average method results in a lower cost of goods sold and a higher ending inventory because the
cost of items sold throughout the year is the average of the earlier, lower prices. Second, the
application of the lower of cost or market rule to the total inventory will result in a higher ending
inventory because market values lower than cost are offset against market values higher than cost.

PTS: 1

50. ANS:
(a) The inventory costing method which most closely approximates the current cost for cost of
goods sold is LIFO, while the method which more accurately reflects ending inventory is FIFO.
Under LIFO, the most recent purchases are assumed to be the first goods sold; thus, cost of goods
sold contains relatively current costs. On the other hand, since FIFO assumes that the goods from
beginning inventory and the earliest purchases are sold first, the ending inventory is made up of
more recent purchases and thus represents a more current value.

PTS: 1

51. ANS:
(b) The formula to compute the current ratio is
The following entries would be recorded when inventory is sold on account:
Since the selling price (increase to AR) is normally higher than the cost of the merchandise sold
(decrease to merchandise inventory) the sale would normally cause a net increase in current
assets, and therefore, a net increase in the current ratio. When the existing current ratio is greater
than one, increases of equal amounts to the numerator
 (inventory, a component of current assets) and denominator (accounts payable, a component of
current liabilities) will reduce the ratio. When an account receivable is collected, cash (a current
asset) is increased by the same amount that accounts receivable (another current asset) is
decreased. Thus, the transaction has no impact on the current ratio. When machinery (a noncurrent
asset) is purchased for cash (a current asset), there is a decrease in the current ratio.

PTS: 1

52. ANS:
(c) The requirement is to identify the inventory items that are not valued at the lower of cost or net
realizable value under IFRS. Answer (c) is correct because biological inventory items are valued at
fair value less the cost to sell at the point of harvest.

PTS: 1

53. ANS:
(a) SFAC 5 establishes five different attributes on which assets can be measured. The attribute
used should be determined by the nature of the item and the relevance and reliability of the attribute
measured. The five attributes are historical cost, current cost, current market value, net realizable
value, and present value. Historical cost is defined as the amount of cash, or its equivalent, paid to
acquire an asset. Reporting inventory at lower of cost or market is a departure from the historical
cost principle as the inventory could potentially be carried at the market value if lower. Although,
reporting inventory at lower of cost or market does not create a departure from conservatism as this
method carries at inventory the lowest or most conservative value. The use of LCM does not violate
the principle of consistency either, as it would be reported on this basis continually. Finally the use
of LCM would not violate the principle of full disclosure as its use would be discussed in the
footnotes.

PTS: 1

54. ANS:
B
SOLUTION:
Market Value 5,600,000
Initial 5,000,000
Unrealized gain 600,000

PTS: 1

55. ANS:
answer: C

FV 4,000,000
Acquisition cost – Trading 3,700,000
Unrealized gain – included in profit and loss 300,000

The transaction cost that would be incurred in sale are ignored because the financial asset
held for trading is measured at fair value and not at fair value less cost of disposal.

PTS: 1
56. ANS:
answer: C

Fair value 5,600,000

Acquisition cost (3,000,000 + 500,000) (3,500,000)
unrealized gain- OCI 2,100,000

PTS: 1

57. ANS:
answer: D

Financial asset at fair value 3,700,000

Unrealized loss on financial asset 300,000
4,000,000

PTS: 1

58. ANS:
Q1. A
1. Trading Securities, at Fair Value
Answer: A 369,000

Q2.B
Fair Value, December 31, 2020 369,000
Acquisition Cost 381,000
Unrealized loss 12,000 B

PTS: 1

59. ANS:

Solution answer b
FV 2021 4,500,000
FV 2020 4,800,000
unrealized loss OCI (300,000)

PTS: 1

60. ANS:
C
Solution answer c
SP (net) 1,450,000
Original cost 1,700,000
Loss 250,000

PTS: 1

61. ANS:
B
Solution answer b
 4,000 x 50 = 200,000

PTS: 1

62. ANS:
A
Solution answer a
Stock Dividend 100,000 x 8 = 800,000

PTS: 1

63. ANS:
B
Solution answer b
1,000,000 x 30% x 9/12 = 225,000

PTS: 1

64. ANS:
B

PTS: 1

65. ANS:
D

PTS: 1

66. ANS:
ANS: A
P100,000 + 2,000 = P102,000 – P100,000 = 2,000 (unrealized loss)

PTS: 1

67. ANS:
ANS: A
P500,000x.98 = P490,000+8,000-400 = P497,600 (Cash received)
P500,000x.98 = P490,000-400 = P489,600 – P489,000 = P600 (Gain)

PTS: 1

68. ANS:
1. ANS: Investment in Kelly Co. Bonds 102,000
Interest Revenue 2,000
Cash 104,000

PTS: 1

69. ANS:
SOLUTION:
QUESTION 1.C
 Acquisition cost (400,000 x 20% x P30) 2,400,000
Dividends received(P40,000 x 20%) (8,000)
Investment income (P140,000 x 20%) 28,000
Carrying value, 12/31/2020 P2,420,000

QUESTION 2.A
Carrying value, 12/31/2020 (see no. 1) P2,420,000
Dividends received (P48,000 x 20%) (9,600)
Investment income (P160,000 x 20%) 32,000
Carrying value, 12/31/2021 P2,442,400

QUESTION 3.B
Sales proceeds (20,000 x P31) P620,000
Less carrying value of investment sold
(P2,442,400 x 20/80) 610,600
Gain on sale of investment P 9,400

QUESTION 4.A
Dividend income (P20,000 x 15%*) P3,000
* [20% - (20,000/400,000 x 100%)]

QUESTION 5.B
Carrying value, 12/31/2020 P2,442,400
Less carrying value of investment sold 610,600
Carrying value, 12/31/2021 - before reclassification 1,831,800
Fair value of AFS, 12/31/2021 [(80,000 - 20,000) x P22] 1,320,000
Unrealized loss on AFS P 511,800

PTS: 1

70. ANS:
SOLUTION:

QUESTION 1.A
PV of principal (P4,000,000 x 0.5568) P2,227,200
PV of interest [(P4,000,000 x 4%) x 8.8633] 1,418,128
Purchase price P3,645,328

QUESTION 2.C
June 1 to Nov. 30 (P3,645,328 x 10% x 6/12) P182,266
Dec. 1 to Dec. 31 (P3,667,594a x 10% x 1/12) 30,563
Total interest income for 2020 . P212,829

Computation of carrying value,12/1/2020:

Carrying value, 6/1/2020 P3,645,328
Add discount amortization,
6/1/2020 to 11/30/2020:
Effective interest (P3,645,468 x 10% x 6/12) P182,266
Nominal interest (P4,000,000 x 8% x 6/12) 160,000 22,266
Carrying value, 12/1/2020 P3,667,594
QUESTION 3.D
Carrying value, 12/1/2020 (see no. 2) P3,667,594
Add discount amortization,
12/1/2020 to 12/31/2020:
Effective interest (P3,667,594 x 10% x 1/12) P30,563
Nominal interest (P4,000,000 x 8% x 1/12) 26,667 3,896
Carrying value, 12/31/2020 P3,671,490

QUESTION 4.A
Jan. 1 to May 31 (P3,667,594 x 10% x 5/12) P152,816
June 1 to Nov. 1 (P3,690,974b x 10% x 5/12) 153,791
Total interest income for 2021 P306,620

Computation of carrying value,6/1/2021:

Carrying value, 12/1/2020 P3,667,594
Add discount amortization,
12/1/2020 to 5/31/2021
Effective interest (P3,667,594 x 10% x 6/12) P183,380
Nominal interest (P4,000,000 x 8% x 6/12) 160,000 23,380
Carrying value, 6/1/2021 P3,690,974

QUESTION 5.B
Total proceeds P3,925,000
Less accrued interest (P4,000,000 x 8% x 5/12) 133,333
Sales proceeds 3,791,667
Less carrying value, 11/1/2021 (see below) 3,711,432
Gain on sale on investment in bonds P 80,235

Computation of carrying value,11/1/2021:

Carrying value, 6/1/2021 (see no. 4) P3,690,974
Add discount amortization,
6/1/2021 to 11/1/2021
Effective interest (P3,690,974 x 10% x 5/12) P153,791
Nominal interest (P4,000,000 x 8% x 5/12) 133,333 20,468
Carrying value, 11/1/06 P3,711,432

PTS: 1