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THEORY OF ACCOUNTS
1. The ASC framework (Choose the incorrect one)
a. Sets out the concepts that underlie the preparation and presentation of
financial statements for external users.
b. Is not a Statement of Financial Accounting Standards and hence does not
define standards for any particular measurement or disclosure issue.
c. Is concerned with special purpose reports, for example, prospectuses and
computations prepared for taxation purposes.
d. Applies to the financial statements of all commercial, industrial and business
reporting enterprises, whether in the public or private sector.
2. Accounting is
I.
A service activity and its function is to provide quantitative information,
primarily financial in nature, about economic entities, that is intended to
be useful in making economic decision.
II.
The art of recording, classifying, and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least
of a financial character and interpreting the results thereof.
III.
The process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the
information.
a. I, II and III
b. I only
c. II only
d. III only
3. Financial accounting
1. Is the examination of financial statements by an independent CPA for the
purpose of expressing an opinion as to the fairness of the financial
statements.
2. Focuses on the preparation and presentation of general purpose reports
known as financial statements.
3. Has no precise coverage but is used generally to refer to services to clients
on matters of accounting, finance, business policies, organization
procedures, product costs, distribution and many other phases of business
conduct and operations.
4. Is the preparation of annual income tax returns and determination of tax
consequences of certain proposed business venture.
d. All of these
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to
verify the accounts payable transactions. You find that the company does not make use of a voucher register but
enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts
payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts
payable balance in the companys general ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances
Trade creditors, debit balances
Net
Estimated warranty on products sold
Customers deposits
Due to officers and shareholders for advances
Goods received on consignment at selling price
(offsetting debit made to Purchases)
P 1,363,000
63,000
P 1,300,000
100,000
9,000
50,000
41,000
P 1,500,000
Items
Miscellaneous debit balances prior to 2007.
No information available due to loss
of records in a fire.
Amount
P 3,000
8,000
7,000
5,000
12,000
24,000
4,000
63,000
Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this
connection, you discover an invoice from Atlas Co. of P45,000 dated December 12, 2010 marked Duplicate, which
was entered in the Purchase Journal in January 2011. Upon inquiry, you discover that the merchandise covered by
this invoice was received and sold, but the original invoice apparently has not been received.
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and
entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011.
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the
company under audit during the year 2010. These goods are included in your adjusted inventory.
1. The Accounts payable Trade balance at December 31, 2010 should be
AUDITING PROBLEMS
A. P 1,471,000
C. P 1,214,000
B. P 1,614,000
D. P 1,477,000
B. P 23,000
D. P 39,000
4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A. Miscellaneous losses if P 23,000
B. Advances to suppliers of P 24,000
C. Suppliers to debit balances of P 18,000
D. Purchases of P 21,000
Based on the above and the result of your audit, answer the following:
6. Interest payable as of December 31, 2010 is
a. P155,000
b. 143,000
c. 203,000
d. 215,000
7.The portion of the Notes payable bank to be reported under current liabilities as of December 31, 2010 is
a. P 300,000
b. 500,000
c.800,000
d. 0
8. Total current liabilities as of December 31, 2010 is
b. P 3,950,000
b. 4,138,000
c. 3,938,000
d. 3,998,000
9. BTotal noncurrent liabilities as of December 31, 2010 is
c. P1,760,000
b. 2,560,000
c. 3,960,000
d. 1,960,000
FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The companys
fiscal year runs from April 1 to March 31. The following information relates to the obligations of Feel Na Feel as of
March 31, 2010.
BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these
bonds was 12% on the date issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and
January 1. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount
5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because
A. There is likely to be other reliable external evidence to support the balances
B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment
C. This is a duplication of cutoff test
D. Accounts payable at the end of reporting period may not be paid before the audit is completed.
NOTES PAYABLE
Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in
the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010
Due Date
April 1, 2010
July 1, 2010
October 1, 2010
April 1 2011 - March 31, 2012
April 1, 2012 March 31, 2013
April 1, 2013 March 31, 2014
April 1, 2014 March 31, 2015
April 1, 2015 March 31, 2016
Problem 2
You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of
December 31, 2010.
Accounts payable
Notes payable trade
Notes payable bank
Wages and salaries payable
Interest payable
Mortgage notes payable 10%
Mortgage notes payable 12%
Bonds Payable
P 650,000
190,000
800,000
15,000
?
600,000
1,500,000
2,000,000
Amount Due
P 400,000
600,000
300,000
300,000
1,200.000
1,000,000
800,000
1,000,000
P 7,000,000
ESTIMATED WARRANTIES
Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty
liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to
P180,000. The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000.
The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows:
Warranty claims honored on 2008-2009 sales
P 180,000
Warranty claims honored on 2009-2010 sales
178,000
Total warranty claims honored
P 358,000
OTHER INFORMATION
1.
TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000
as March 31, 2010
2.
3.
MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2010
4.
DIVIDENDS
On march 15, 2010, Feel Na Feels board of directors declared a cash dividend of P0.20 per
common share and a 10% common stock dividend. Both dividends were to be distributed on April 12,
2010, to the common stockholders of record at the close of business on march 31, 2010. Data regarding
Feel Na Feel common stock are as follows:
Per Value
P 5.00 per
share
Number of shares issued and outstanding
6,000,000 shares
Market Values of Common Stock:
March 15, 2010
March 31, 2010
April 12, 2010
10 How much was received by Feel Na Feel from the bonds issued on July 1, 2008?
a. P8,852,960
b. 10,000,000
c. 10,500,000
d. 10,647,040
11 On March 31, 2010, Feel Na Feels statements of financial position would report total current liabilities
of
a. P5,286,000
b. 4,386,000
c. 5,336,000
d. 5,642,000
12. On March 31, 201, Feel Na Feels statement of financial position would report total noncurrent liabilities
of
a. P14,389.350
b. 14,352,217
c. 14,370,783
d. 14,252,960
13 In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements
assertion of.
a. Existence
c. Completeness
b. Presentation and disclosure
d. Valuation and allocation
14An auditor performs a test to determine whether all merchandise for which the client was billed was
received. The population for this test consist of all
a. Merchandiser received
c. Canceled checks
b. Vendors invoices
d. receiving reports
15. The primary audit test to determine if accounts payable are valued properly is
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet.
c. Law
d. Negligence
3. It is the voluntary administration of the property of another without
his consent.
a. Negotiorumgestio
b. Solution indebiti
c. Quasi-delict
d. Contract
4. It is a wrong committed without any pre-existing relations between
the parties.
a. Natural obligation
b. Quasi-delict
c. Quasi-contract
d. Culpa contractual
5. Unless the law or stipulation of the parties requires another
standard of care, every person obliged to give something is also
obliges to take care of it with.
a. Extra-ordinary diligence
b. Diligence of a father of a good family
c. Diligence of a good father of a family
d. Good diligence of a father of a family
6. Which of the following can be considered as a feature of a void
contract?
a. Subject to ratification
b. It exist
c. Action or defence of nullity is subject to prescription
d. Novation cannot apply
7. D entered into a contract of mortgage with X, T, the clerk of L, typed the
document. Due to Ts negligence, the document made was that of sale
instead of mortgage.
a. The remedy is annulment
b. Parties may go to court for interpretation
c. Parties may enforce their right because it is enforceable
D.Reformation of instrument is proper
8. There persons bound by contracts, except:
a. Third persons
b. Assigns
c. Heirs
d. Parties
9. Liable for the loss of the subject matter by fortuitous event.
a.
b.
c.
d.
Creditor
Debtor
Both creditor and debtor
None of them
10. S offers to sell his house to B for P100,000. B asks him if he would accept
P80,000. Which of the following is correct?
a. Because of ambiguity, both offers are terminated by operation of law.
b. Bs response is a counter-offer effectively terminating the P100,000
offer and instigating an offer for P80,000.
c. Bs response is a rejection of the P100,000 offer, and there is no offer
for P80,000 because it is too indefinite to be an offer
d. Bs response is a mere inquiry, the P100,000 offer by S is still
in force.
11. Example no. 1: G, guardian of W, sold Ws house valued P50,000 for
P37,500 or a lesion by of the value.
Example no. 2: S sold his house valued P50,000 for only P10,000 because
S did not know the true value of the house.
a. Both contracts are rescissible.
b. Only no. 1 is rescissible
c. No. 2 is voidable because there is an error or mistake.
d. Both contracts are valid and enforceable.
12. B Company bought out a competitor. C Corporation, with a stipulation that
C Corporation should not thereafter engage in any business in the Philippines
unless consented to and approved by B Company.
a. The stipulation is defective but subject to ratification.
b. The stipulation is valid because the parties are free to enter into any
stipulation, terms and conditions such as this one.
c. The stipulation is unenforceable as there was no showing that the sale
was done in writing.
d. The stipulation is void because it is contrary to public policy.
13. Which of the following is not valid?
a. Mutual promise to marry entered into orally
b. Sale of immovable property orally entered into.
c. One of the parties in a contract is incapable of giving consent
d. Mortgagor of an immovable cannot alienate it without the
mortgagees consent.
14. D forced C to execute a promissory note.
a. Contract is rescissble because the contract is fraudlert
b. The contract is void
c. C cannot demand payment from D because the
unenforceable
contract
is
D. P300
8. Wasting Resource Co. has annual credit sales of P4 million. Its average collection
period is 40 days and bad debts are 5% of sales. The credit and collection
manager is considering instituting a stricter collection policy, whereby bad debts
would be reduced to 2% of total sales, and the average collection period would
fall to 30 days. However, sales would also fall by an estimated P500,000
annually. Variable costs are 60% of sales and the cost of carrying receivables is
12%. Assuming a tax rate of 35% and 360 days a year, the incremental change in
the profitability of the company if stricter policy would be implemented would be
a. Zero as the positive and negative effects offset each other.
b. A reduction in net income by P70,000.
c. A reduction in net income by P38,350.
d. A reduction in net income by P35,400.
Use the following information for questions 9-10.
Terry Corporation had net income of $200,000 and paid dividends to common
stockholders of $40,000 in 2002. The weighted average number of shares outstanding
in 2002 was 50,000 shares. Terry Corporation's common stock is selling for $60 per
share on the New York Stock Exchange.
9. Terry Corporation's price-earnings ratio is
a. 3.8 times.
b. 15 times.
c. 18.8 times.
d. 6 times.
10. Terry Corporation's payout ratio for 2002 is
a. $4 per share.
b. 25%.
c. 20%.
d. 12.5%.
11. Phranklin Pharms Inc. purchases merchandise from a company that gives sales
terms of 2/15, net 40. Phranklin Pharms has gross purchases of $800,000 per year.
What is the maximum amount of costly trade credit Phranklin could get, assuming
they abide by the suppliers credit terms? (Assume a 360-day year.)
a. $87,111.20
b. $32,666.70
c. $54,444.50
d.
$52,266.67
12. Crest Co. has the opportunity to increase annual sales by P1 million by selling to
new riskier customers. It has been estimated that uncollectible expenses would be
15% and collection costs 5%. The manufacturing and selling costs are 70% of
sales and corporate tax is 35%. If it pursues this opportunity, the after tax profit
will
a. Increase by P35,000.
c. Increase by P65,000.
b.
Increase by P97,500. d.
Remain the same.
13. A firm currently sells $500,000 annually with 3% bad debt losses. Two alternative
policies are available. Policy A would increase sales by $500,000, but bad debt
losses on additional sales would be 8%. Policy B would increase sales by an
additional $120,000 over Policy A and bad debt losses on the additional $120,000
of sales would be 15%. The average collection period will remain at 60 days (6
turns per year) no matter the decision made. The profit margin will be 20% of
sales and no other expenses will increase. Assume an opportunity cost of 20%.
What should the firm do?
A. Make no policy change.
B. Change to only Policy A.
C. Change to Policy B (means also taking Policy A first).
D. All policies lead to the same total firm profit, thus all policies are equal.
14. The NPV and IRR methods give
A. the same decision (accept or reject) for any single investment
B. the same choice from among mutually exclusive investments
C. different rankings of projects with unequal lives
D. the same rankings of projects with different required investments
15. What is the proper preparation sequencing of the following budgets?
a.
b.
c.
d.
P1
1. Mankayan Company uses the first-in, first-out retail method of inventory
valuation. The following information is available:
Beginning inventory
Purchases
Net markups
Net markdowns
Sales
Cost
P 2,500,000
13,500,000
Retail
4,000,000
16,000,000
3,000,000
1,000,000
15,000,000
Cost
Market_
10,000,000
10,000,000
10,000,000
10,000,000
Security
Market_value
X
3,500,000
Y
7,500,000
Z
6,000,000
Cost
4,000,000
6,000,000
8,000,000
What amount of dividend revenue should Ilocos report in its 2005 income
statement?
a. 3,300,000
b. 5,300,000
c. 3,500,000
d. 2,500,000
8. Data pertaining to dividends from Vigan Companys common stock
investments for the year 2005 follow:
What amount should Vigan report as dividend income in its 2005 income
statement?
a. 6,200,000
b. 4,200,000
c. 3,000,000
d. 5,000,000
9. Caoayan Company owns 1,000,000 shares of Suyo Companys 5,000,000
shares of P50 par, 10% cumulative, nonparticipating preferred stock and
500,000 shares (2%) of Suyos common stock. During 2005 Suyo declared
and paid dividends of P40,000,000 on preferred stock. No dividends had
been declared or paid during 2004. In addition, Caoayan received a 15%
common stock dividend from Suyo when the quoted market price of common
stock was P100. What amount should Caoayan report as dividend income in
its 2005 income statement?
a. 15,500,000
b. 20,000,000
c. 10,000,000
d. 8,000,000
10. On January 2, 2005, Narvacan Company acquired 100,000 shares of
ABC Company common stock for a total consideration of P6,000,000. On
October 1, 2005, Narvacan received from ABC a preferred stock dividend of
one share for every 10 common shares held. On this date, the market price
of ABC common is P75 per share and the ABC preferred, P50 per share.
Narvacan Company should report its investment in ABC Company preferred
stock at
a. 500,000
b. 750,000
c. 375,000
d.
0
11. Candon Company owns 100,000 shares of the outstanding common stock
of Bantay Company which has several hundred thousand shares publicly
traded. These 100,000 shares were purchased in 2002 for P100 per share.
On December 1, 2005, Bantay Company distributed 100,000 rights to
Candon. Candon was entitled to buy one new share of Bantay common stock
for P100 and five of these rights. On December 1, 2005, each share of stock
had a market value of P135 ex-right and each right had market value of P15.
On December 31, 2005, Candon exercised all rights. What cost should be
recorded for each new share that Candon acquired by exercising the rights?
a. 150
b. 100
c. 135
d. 15
12. Tagudin Company invested in stocks of Kaunlaran Company as follows:
2003
2004
4,000,000
7,000,000
6,000,000
None
In its income statement for the year ended December 31, 2005, how much
should Laoag report as income from this investment?
a. 2,250,000
b. 1,950,000
c.
d.
700,000
600,000
P2
4.
A. Option A
B. Option B
C. Option C
D. Option D
5. Windsor Corporation owns 75 percent of Elven Corporation's outstanding
common stock. Elven, in turn, owns 15 percent of Windsor's outstanding
common stock. What percent of the dividends paid by Windsor is reported as
dividends declared in the consolidated retained earnings statement?
A. None
B. 100 percent
C. 85 percent
D. 75 percent
6.
A. Option A
B. Option B
C. Option C
D. Option D
Refer to the above information. What is each partner's tax basis in the Jones
and Smith partnership?
7. Consolidated net income may include the parent's separate operating income
plus the parent's share of the subsidiary's reported net income:
A. plus the unrealized profit on upstream intercompany sales of inventory
made during the current year.
B. plus the profit realized this year from upstream intercompany sales of
inventory made last year.
C. plus unrealized profit on downstream intercompany sales of inventory
made during the current year.
D. minus the parent's share of profit realized this year from upstream
intercompany sales of inventory made last year.
Based on the preceding information, in the entry in August to record the sale of
the 2,000 units:
A. Cost of Goods Sold will be debited for $70,000.
B. Inventory will be credited for $85,000.
C. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be
credited for $15,000.
D. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be
credited for $67,000.
12. On December 31, 2009, Rudd Company acquired 80 percent of the common
stock of Wilton Company. At the time, Rudd held land with a book value of
$100,000 and a fair value of $260,000; Wilton held land with a book value of
$50,000 and fair value of $600,000. Using the parent company theory, at what
amount would land be reported in a consolidated balance sheet prepared
immediately after the combination?
A. $550,000
B. $590,000
C. $700,000
D. $860,000