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SAMPLE PREBOARD
FINANCIAL ACCOUNTING THEORY
MUTIPLE CHOICE: MARK FULLY with PENCIL No. 2 the letter of your choice on the answer
sheet provided. Make the mark CLEAR but do not use too much pressure. ERASURES ARE
STRICTLY NOT ALLOWED.
1. Financial accounting is the area of accounting that emphasizes reporting to
a. Management
b. Regulatory authorities
c. Internal auditors
d. Creditors and investors
2. Comparability of financial information depends on which of the following
a. Consistency of accounting policies
b. Regular reporting periods
c. Consistency of accounting policies and regular reporting periods
d. Neither consistency nor regular reporting periods
3. The overall objective of financial reporting is to provide information
a. That is useful for decision making
b. About an entitys assets, liabilities and equity
c. About an entitys financial performance
d. That allows owners to assess management performance.
4. The term revenue recognition conventionally refers to
a. The process of identifying the transactions to be recorded as revenue in an accounting
period
b. The process of measuring and relating revenue and expenses
c. The earning process which gives rise to revenue realization
d. The process of identifying transactions that result in an inflow of assets from customers
5. Which statement is correct concerning the elements of the financial statements?
I. The elements directly related to the measurement of financial position are assets, liabilities
and equity.
II. The elements directly related to the measurement of performance are income and
expenses.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. Which of the following are internal users of an entitys financial information?
a. Board of directors
b. Shareholders in the entity
c. Holders of the entitys bonds
d. Creditors with long-term contracts with the entity.
7

The accrual basis of accounting is based primarily on


a. Conservatism and revenue realization
b. Conservatism and matching
c. Consistency and matching
d. Revenue realization and matching

8. Which accounting concept justifies the use of accruals and deferrals?


a. Going concern
b. Corporate form of organization
c. Consistency
d. Arms length transaction

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9. Which of the following is not 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 and noncurrent classification of assets and liabilities is justifiable and
significant.
d. Amortizing research and development cost over several periods is justifiable and
appropriate.
10. When economic benefits are expected to arise over several accounting periods and the
association with income can only broadly or indirectly determined, expenses are recognized on
the basis of
a. Strict matching
b. Systematic and rational allocation
c. Immediate recognition
d. Realization
11. An entity shall present a statement of changes in equity showing all of the following, except
a. Profit or loss for the period
b. Each item of income or expense recognized directly in equity as required by the standard
c. Retained earnings balance and changes therein
d. Changes in cash and cash equivalents during the period.
12. The recording phase of financial accounting covers the following steps, except which of the
following?
a. Business documents are received and prepared
b. Transactions are journalized
c. Transactions are posted to the ledger
d. Financial statements are prepared
13. Which of the following generally is considered as a limitation of the statement of financial
position?
a. The statement of financial position reflects the current value of the entity.
b. The statement of financial position reflects the instability of the peso.
c. Statement of financial position formats and classifications do not vary to reflect industry
differences.
d. Due to measurement problems, some entity resources and obligations are not reported on
the statement of financial position.
14. Which of the following statements regarding assets is not true?
a. An asset represents a probable economic benefit.
b. Assets are obtained or controlled as a result of past transactions and events.
c. Assets reported on the statement of financial position include both monetary and
nonmonetary resources.
d. Assets include costs that have not yet been matched with revenue.
15. Which of the following information is not specifically a required disclosure of PAS 1?
a. Name of the reporting entity or other means of identification, and any change in that
information from the previous year.
b. Names of major shareholders of the entity.
c. Level of rounding used in presenting the financial statements.
d. Whether the financial statements cover the individual entity or a group of entities.
16. Which one of the following is not required to be presented as minimum information on the face
of the statement of financial position?
a. Investment property
b. Investments accounted under the equity method
c. Biological assets
d. Contingent liability
17. The disclosure of accounting policies
a. May describe policies that are peculiar to the reporting companys industry.
b. Should not appear in the notes to the financial statements
c. Should not describe unusual or innovative applications of GAAP.
d. Is encouraged but not required

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18. In relation to a set of 2016 financial statements, an event after the reporting period event is one
that
a. Occurs before the 2016 financial statements are issued.
b. Involves uncertainty as to possible gain or loss that will ultimately be resolved in 2014 or
later.
c. Occurs after the 2016 financial statements are issued.
d. Requires an appropriate adjusting entry to be made as of the end of 2016.
19. Nonadjusting events after statement of financial position date are accounted for by
a. Adjusting the amounts recognized in the financial statements.
b. Not adjusting the amounts in the financial statements without disclosure.
c. Not adjusting the amounts in the financial statements but with appropriate disclosure.
d. Recognizing the events directly in equity.
20. Which of the following approaches to income measurement underlies financial accounting and
reporting?
a. Transaction approach
b. Economic approach
c. Valuation approach
d. Physical capital maintenance approach
21. The concept of earnings
a. Includes changes in market value of available for sale securities.
b. Includes foreign currency translation adjustments
c. Includes gains resulting from the sale of a productive asset in an arms length transaction
d. Same as comprehensive income.
22. In the absence of an accounting standard that applies specifically to a transaction, what is the
most authoritative source in developing and applying an accounting policy?
a. The requirement and guidance in the standard or interpretation dealing with similar and
related issue.
b. The definition, recognition criteria and measurement of asset, liability, income and
expense in the conceptual framework.
c. Most recent pronouncement of other standard-setting body.
d. Accounting literature and accepted industry practice.
23. Changes in accounting policy are generally reported as
a. Adjustments to prior period statements
b. Extraordinary items
c. Adjustments to current period statements only.
d. Adjustments to current and prior period statements.
24. Which statement is correct concerning comparative information?
I. Except when a standard or an interpretation permits or requires otherwise, comparative
information shall be disclosed in the respect of the previous period for all amounts reported
in the financial statements.
II. Comparative information shall be included for narrative and descriptive information when it
is relevant to an understanding of the current periods financial statements.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
25. A significant industry segment is one, which meets any of the three criteria relating to revenue,
earnings and identifiable assets. Which of the following is the percentage used to measure
each of these criteria.
a. 15 percent
b. 10 percent
c.
5 percent
d.
1 percent

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26. The sum of there portable segments sales must be at least equal to what percentage of total
company sales?
a. 100 percent
b.
75 percent
c.
65 percent
d.
50 percent
27. An entity identified four industry segments as reportable out of a total eight business
components based on identifiable asset criterion. The total company sales excluding
intersegment sales amounted to P20 million for the year, and the sum of the sales for the four
identified reportable segments is P13 million. Given these facts, the company
a. Is not required to report on a segmental basis.
b. Must disclose only the four reportable segments.
c. Must identify one or more additional segments for segmental disclosure purposes.
d. Treat all business components as reportable.
28. A chemical entity has no overseas sales. The entity produces different products from the
process. The entity sells its product to small businesses, larger national businesses and
multinational entities. The management of the entity proposed to disclose just one business
segment. Can the entity disclose just one business segment because it sells all of its products
nationally?
a. Yes, the Standard will allow the entity to disclose a single business segment.
b. No, the entity can identify three different sets of customers and should therefore disclose
information on that basis.
c. Yes, even though there are three different groups of customers, they all present the same
risks to the entity.
d. PFRS 8 on segment reporting is silent on this matter.
29. An entity is in the entertainment industry and organizers outdoor concerts in four different areas
of the world: Europe, North America, Australia, and Japan. The entity reports to the board of
directors on the basis of each of the four regions. The records show the profitability for each of
the four regions. The concerts are of two types: popular music and classical music. What is
the appropriate basis for segment reporting in this entity?
a. The segments should be reported by class of business, that is popular and classical music.
b. The segments should be reported by region, so Australia and Japan would be combined.
c. The segment information should be reported as North America and the rest of the world.
d. Segment information should be reported for each of the four different regions.
30. Which of the following statements regarding discontinued operations is true?
a. The assets and liabilities of a disposal group classified as held for sale by an entity may be
offset and shown as a single item on the statement of financial position of the entity.
b. The assets and liabilities of a disposal group of an entity must be shown separately in the
asset and liabilities sections of the statement of financial position of the entity and cannot be
offset.
c. An adjustment in a subsequent period to the selling price of a component of an entity sold
must be reported as a retroactive adjustment in the prior-period financial statements of the
entity in which the discontinued operation was reported.
d. The gain or loss on disposal of a component of an entity classified as a discontinued
operation need not be disclosed separately from the loss from operations of the
discontinued segment.
31. Which of the following is correct?
a. Discontinued operations are shown as the last category after income from continuing
operations.
b. The discontinued operations section of the income statement consists only of the gain or
loss on disposal of the discontinued component net of the tax effect.
c. The discontinued operations section of the income statement consists only of the income
or loss from operating the discontinued component net of the tax effect.
d. The discontinued operations section of the income statement consists of the income or loss
from operating the discontinued component net of the tax effect as well as the gain or loss
on disposal of the discontinued component net of the tax effect.

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32. Compensating balance agreement (choose the incorrect one)


a. Reduces the amount of cash available to the borrower.
b. Always involves the legal restriction on the compensating cash balance.
c. Increases the effective interest rate to the borrower.
d. Should be disclosed in the notes to the financial statements.
33. Cash control systems are the methods and procedures used to ensure
a. That current obligations are met.
b. That excess cash does not exist.
c. The safeguarding of cash.
d. That unused cash is invested.
34. Which of the following is not a basic characteristic of a system of cash control?
a. Use of a voucher system
b. Combined responsibility for handling and recording cash
c. Daily deposit of all cash received
d. Internal audits at irregular intervals
35. What happens when a petty cash is in use?
a. Expenses paid with petty cash are recorded when the fund is replenished.
b. Most small amounts are paid from cash receipts before they are deposited.
c. Petty cash is debited when the fund is replenished.
d. Petty cash fund is credited when the fund is replenished
36. Which of the following is a key element of internal control over cash payments?
a. Authorizing and verifying that all cash received is recorded daily.
b. Requiring that two persons approve all petty cash vouchers.
c. Making daily bank deposits.
d. Periodically reconciling the cash account balance per book with the bank statement
balance.
37. Which of the following would be added to the book balance in bank reconciliation?
a. Outstanding checks
b. A check written for P50,000 entered as P5,000 in the accounting records
c. Interest paid by the bank
d. Deposits in transit
38. Receivables from subsidiaries and affiliates, if significant should be classified as
a. Current assets
b. Noncurrent assets
c. Either noncurrent or current assets depending on the expectation of realizing them within
one year or over one year.
d. Intangible assets
39. A discount given to a customer for purchasing a large volume of merchandise is typically
referred to as
a. Quantity discount
b. Cash discount
c. Trade discount
d. Size discount
40. Estimation of uncollectible accounts receivable based on the percentage of sales
a. Emphasizes measurement of net realizable value of accounts receivable.
b. Emphasizes measurement of bad debts expense.
c. Emphasizes measurement of total assets.
d. Is only acceptable for tax purposes.
41. Accounts receivable usually are factored
a. With recourse on a notification basis
b. Without recourse on a notification basis
c. With recourse on a nonnotification basis
d. Without recourse on a nonnotification basis

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42. If a note receivable is discounted without recourse


a. The contingent liability may be disclosed in either a contra account to note receivable or in
the note to financial statements.
b. A liability for the note receivable discounted should be credited.
c. Note receivable should be credited.
d. The transaction should be accounted for as a borrowing as opposed to a sale.
43. Which of the following would not be reported as inventory?
a. Land acquired for resale by a real estate firm.
b. Stocks and bonds held for resale by a brokerage firm.
c. Partially completed goods held by a manufacturing firm.
d. Machinery acquired by a manufacturing firm for use in the production process.
44. The allocation of fixed production overhead to the cost of conversion is based on
a. Normal capacity of production facilities
b. Actual use of production facilities
c. Either the normal capacity or actual use of production facilities
d. Relative sales value method
45. When manufacturing inventory, what is the accounting treatment for abnormal freight in costs?
a. Charge to expense for the period.
b. Charged to finished goods inventory.
c. Charged to raw materials inventory.
d. Allocate to raw materials, work in process and finished goods.
46. Which of the following costs of conversion cannot be included in cost of inventory?
a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory).
d. Factory overhead based on normal capacity.
47. If goods shipped FOB destination is in transit at the end of the year, the goods should be
included in the inventory balance if the
a. Seller
b. Common carrier
c. Buyer
d. Bank
48. Merchandise shipped FOB shipping point on the last day of the year should be ordinarily
included in
a. The buyers inventory balance.
b. The sellers inventory balance.
c. Neither the buyers nor the sellers inventory balance.
d. Both the buyers and the sellers inventory balance.
49. When using the periodic system, which of the following generally would not be separately
accounted for in the computation of cost goods sold?
a. Trade discounts applicable to purchases during the period.
b. Cash discounts taken during the period.
c. Purchase returns and allowances.
d. Cost of transportation in for merchandise purchases.
50. An entry debiting inventory and crediting cost of goods sold would be made when
a. Merchandise is sold and the periodic system is used.
b. Merchandise is sold and the perpetual system is used.
c. Merchandise is returned and the perpetual system is used.
d. Merchandise is returned and the periodic system is used.
51. When the current years ending inventory is understated, net income of the same period
a. Would be overstated.
b. Would be understated.
c. Would not be affected
d. Cannot be determined from the information.

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52. The use of the gross profit method assumes


a. The amount of gross profit is the same as in prior years.
b. Sales and cost of goods sold have not changed from previous years.
c. Inventory values have not increased from previous years.
d. The relationship between selling price and cost of goods sold is similar to prior years.
53. An overstatement of ending inventory in Period 1 would result in income of Period 2 being
a. Overstated.
b. Understated.
c. Correctly stated.
d. The answer cannot be determined from the information given.
54. Revenue from sale of goods shall be recognized when all of he following conditions have been
satisfied, except
a. The entity has transferred to the buyer the significant risks and regards of ownership of the
goods.
b. The entity retains either continuing managerial involvement or effective control over the
goods sold.
c. The amount of revenue can be measured reliably.
d. It is probable that economic benefits will flow to the entity.
55. The gross profit method of estimating inventory would not be useful when
a. A periodic system is in use and inventories are required for interim statements.
b. Inventories have been destroyed or lost by fire, theft or other casualty.
c. There is a significant change in the mix of products being sold.
d. The relationship between gross profit and sales remains stable over time.
56. The lower of cost of NRV for inventories may be applied to total inventory, to groups of similar
items or to each item. Which application generally results in the lowest inventory amount?
a. Separately to each item
b. Total inventory
c. Groups of similar item
d. All applications result in the same amount
57. Inventory estimates will be required for the following except?
a. When interim financial statements are prepared.
b. When inventory is destroyed by typhoon or lahar flow.
c. As proof of reasonable accuracy of the physical inventory.
d. In the determination of the ending inventory to be shown on the statement of financial
position at year- end.
58. An inventory method which is designed to approximate inventory valuation at the lower of cost
or market is
a. Last-in, first-out.
b. First-in, first-out.
c. Conventional retail method.
d. Specific identification.
59. When an item of property, plant and equipment is acquired by issuing equity securities, which
is the best basis for establishing the historical cost of the acquired asset?
a. Face value of the bonds issued
b. Historical cost of the asset to the seller
c. Fair value of the asset received
d. Fair value of the bond issued
60. Under the general rule of revenue recognition, revenue is recognized when
a. Marketability and market price are assured.
b. A contractual agreement exists, and cash collection is assured.
c. The earnings process is complete, and a valid promise of payment has been received.
d. All related expenses have been incurred.

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61. The term "comprehensive income" means


a. Must be reported on the face of the income statement.
b. Includes all changes in equity during a period except those resulting from investments by
and distributions to owners.
c. Is the net change in owners' equity for the period.
d. Is synonymous with the term "net income."
62. In calculating a company's accounts receivable turnover, which of the following sets of factors
would be used?
a. Net income and average accounts receivable
b. Average accounts receivable and average total assets
c. Average accounts receivable and net credit sales
d. Net credit sales and average stockholders' equity
63. Which of the following is true regarding the International Accounting Standards Board revenue
recognition principles?
a. The international standards do not address the issue of substantial completion of the
earnings process.
b. The international standards do not address the issue of revenue being realized or
realizable.
c. The international standards do not address the peculiarities of revenue recognition in
specific industries.
d. The international standards do not address the measurability of revenue prior to
recognition.
64. Goods on consignment should be included in the inventory of
a. The consignor but not the consignee.
b. Both the consignor and the consignee.
c. The consignee but not the consignor.
d. Neither the consignor nor the consignee.
65. In accounting for sales on consignment, sales revenue and the related cost of goods sold
should be recognized by the
a. Consignor when the goods are shipped to the consignee.
b. Consignee when the goods are shipped to the third party.
c. Consignor when notification is received the consignee has sold the goods.
d. Consignee when cash is received from the customer.
66. On July 1, 2016, an entity paid a P600,000 premium for a three-year property insurance policy.
Insurance expense was debited in full for P600,000. The adjusting entry on December 31,
2016 is
a. Debit prepaid insurance and credit insurance expense for P100,000.
b. Debit prepaid insurance and credit insurance expense for P500,000
c. Debit insurance expense and credit prepaid insurance for P100,000.
d. Debit insurance expense and credit prepaid insurance for P500,000.
67. An entity reported P234,000 wages expense in the 2016 income statement. The wages
payable on January 1, 2016 amounted to P18,000. An analysis of the payroll records showed
wage payments during the current year of P216,000. If a reversing entry was made on January
1, 2016, The December 31, 2016 adjusting entry was
a. Debit wages expense and credit wages payable for P18,000.
b. Debit wages expense and credit wages payable for P36,000.
c. Debit wages payable and credit wages expense for P18,000.
d. Debit wages payable and credit wages expense for P36,000.
68. Hot Company transferred financial assets to Cold Company. The transfer meets the conditions
to be accounted for as a sale. As the transferor, Hot Company should do each of the following,
except
a. Remove all assets from the statement of financial position
b. Measure all the assets received and liabilities incurred at cost
c. Recognize any gain or loss from the sale
d. Record all assets received and liabilities incurred as proceeds from the sale

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69. If there is objective evidence that the available for sale security is impaired, the cumulative loss
that had been recognized directly in equity
a. Shall not removed from equity but amortized over a reasonable period.
b. Shall not be removed from equity.
c. Shall be removed from equity and recognized in profit or loss.
d. Shall be removed from equity and recognized as an adjustment of the beginning balance
of retained.
70. When an entity reduces its interest in an investment in equity securities accounted for by the
equity method and changes in to the fair value method. What is the initial measurement of the
investment for purposes of subsequent changes in market value?
a. Carrying amount at the date of change
b. Original cost
c. Market value at the date of change
d. Market value at the date of acquisition
71. When an entity increases its interest in an investment in equity securities accounted for by the
fair value method and changes to the equity method. What is the initial carrying amount for
purposes of subsequent application of the equity method?
a. Carrying amount at the date of change
b. Market value at the date of change
c. The amount that would be reflected in the investment account had the equity method
been in use continually since the purchase of the securities.
d. Original cost of the investment
72. Which statement is true concerning stock dividends and stock rights from the viewpoint of the
investor?
a. A stock dividend received on an investment increased the per share cost of the
investment
b. The number of shares held which have been subject to a stock dividend should be more
than it was before the dividend.
c. When stock rights are received on investment shares, only a memorandum entry is made
d. From the date stock rights are issued until the date they expire, shares of stock of the
issuing corporation are said to be selling right-on
73. It is defined as property held for use in the production or supply of goods or services or for
administrative purposes; or sale in the ordinary course of business.
a. Owner-occupied property
b. Investment property
c. Business property
d. Rental property
74. An issuer of bonds is required by its bond indenture agreement to use a sinking fund for the
retirement of the bonds. Cash was transferred to the sinking fund. The sinking fund cash was
then used to purchase investments. The sinking fund
a. Increases when the investments are purchased
b. Decreases when the investments are purchased
c. Increases when revenue is earned on the investments
d. Is not affected by revenue earned on the investments
75. If the cost of ordinary repairs is capitalized as an addition to the building account during the
current year
a. Net income for the current year will be understated
b. Shareholders equity at the end of the current year will be understated.
c. Total assets at the end of the current year will not be affected.
d. Total liabilities at the end of the current year will not be affected.
76. Which of the following best describes the proper treatment of cash discounts on acquired
machinery?
a. The historical cost of the machinery is the invoice price and the discount is ignored.
b. The historical cost of the machinery is net of the discount amount regardless of whether
the discount is actually taken.
c. The historical cost of the machinery is the net discount amount only of the discount is
actually taken.
d. The historical cost of the machine is the invoice price plus the discount.

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77. Which of the following is accounted for under PAS 41


a. Sausages, cured hams
b. Processed fruit
c. Apples
d. Sugar
78. Which of the following is not used by an entity as a basis for the fair value of a biological asset
when an active market does not exist?
a. Market prices for similar assets with adjustment to reflect differences
b. Price in a binding sale contract
c. The most recent market transaction price, provided that there has not been a significant
change in economic circumstances between the date of that transaction and the end of the
reporting period.
d. Sector benchmarks
79. If the qualifying asset is financed by general borrowings, the capitalizable borrowing cost is
equal to
a. Actual borrowing cost incurred.
b. Total expenditures on the asset multiplied by a capitalization rate.
c. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
cost incurred, whichever is lower.
d. Average expenditures on the asset multiplied by a capitalization rate or actual borrowing
cost incurred, whichever is higher.
80. What is the benchmark presentation of grant related to income?
a. By setting the grant as deferred income
b. By deducting the grant from the cost of the asset in arriving at the carrying amount
c. The grant is presented in the income statement, either separately or under the general
heading other income
d. The grant is deducted from related expense
81. As a benchmark treatment, the revaluation of property, plant and equipment should be based
on
a. Fair value, which is usually the market value determined by appraisal undertaken by
professionally qualified appraisers.
b. Current replacement cost.
c. Current reproduction cost..
d. Depreciated replacement cost
82. A company using the group depreciation method for its delivery trucks retired one of the trucks
after the average service life of the group was reached. Cash proceeds were received from a
salvage company. The net carrying amount of these group asset accounts would be decreased
by the
a. Original cost of the truck.
b. Original cost of the truck less the cash proceeds.
c. Cash proceeds received.
d. Cash proceeds received and original cost of the truck.
83. In recording the trade of one asset for another, which of the following accounts is usually
debited?
a. Accumulated Depreciation-Old Asset
b. Cash
c. Gain on Exchange of Asset
d. None of the above
84. Which is not within the definition of an intangible asset?
a. Held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes.
b. Identifiable nonmonetary asset without physical substance
c. A resource controlled by an enterprise as a result of past events
d. A resource from which future economic benefits are expected to flow to the enterprise.

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85. Under GAAP, intangible assets acquired in a basket purchase which represents the acquisition
of an entire business should be
a. Valued by allocating the total purchase price according to the relative fair values of all
assets acquired, regardless of whether the assets are separately tradeable or contract
based.
b. Valued by allocating the total purchase price according to the relative fair values only of
intangible assets that are separately tradable or contract based.
c. Valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being recognized as goodwill.
d. Valued by recording separately traded and contract based intangible assets at their
individual fair values with any unallocated purchase price being expensed in the year of
acquisition.
86. Goodwill should be recorded in the accounting records only when
a. It is purchase from another company.
b. It can be established that a defined benefit or advantage has resulted to a firm from some
item such as a good name, capable staff or reputation.
c. It is acquired through the purchase of another business entity.
d. A firm reports above normal earnings for five or more consecutive years.
87. Which of the following is correct?
a. The fair value of internally generated intangible assets should be estimated and recorded
on the books of the entity that developed the assets even in the absence of a business
acquisition.
b. The fair value of internally generated intangible assets may be estimated but should not
be recorded on the books or displayed on the financial statements of the entity.
c. Managers may value their own companies and recognize goodwill in the company
accounts even though an entity has not been acquired in a business acquisition.
d. Goodwill should be recognized in the accounts whenever the value of the firm increases
based on current market prices of the firms ordinary share capital.
88. Which statement is incorrect concerning useful life of an intangible asset?
a. An intangible asset is regarded as having an indefinite useful life when there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows
for the entity.
b. The useful life of an intangible asset arising from contractual or other legal rights should not
exceed the period of those rights but may be shorter depending on the period over which
the asset is expected to be used by the entity.
c. If the rights are conveyed for a limited term that can be renewed, the useful life should
include the renewal period only if there is evidence to support renewal by the entity without
significant cost.
d. There is a rebuttable presumption that the useful life of an intangible asset cannot exceed
twenty years from the date the asset is available for use.
89. The cost of purchasing a patent for a product that might otherwise have seriously competed
with the purchasers patented product should be
a. Expensed 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 purchasers 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.
90. Which of the following does not meet the definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary.
b. An obligation to provide goods or services in the future.
c. A note payable with no specified maturity date.
d. An obligation that is estimated amount.
91. Estimated liabilities are disclosed in financial statements by
a. A footnote to the statements
b. Showing the amount among the liabilities but not extending it to the liability total
c. An appropriation of retained earnings
d. Appropriately classifying them as regular liabilities in the statement of financial position.

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PAGE 12

92. Gomez Corporation, a manufacturer of household paints, is preparing annual financial


statements at December 31, 2016. Because of a recently proven health hazard in one of its
paints, the government has clearly indicated its intention of having Gomez recall all cans of this
paint sold in the last six months. The management of Gomez estimates that this recall would
cost P800,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of P800,000 and liability of P800,000
d. Appropriation of retained earnings of P800,000
93. The issue price of the bonds does not depend on the
a. Face value of the bonds.
b. Riskiness of the bond.
c. Method used to amortize the bond discount or premium.
d. Effective interest rate.
94. Bonds usually sell at a discount when
a. Investors are willing to invest in the bonds at the stated interest rate.
b. Investors are willing to invest in the bonds at rates that are lower than the stated
interest rate.
c. Investors are willing to invest in the bonds only at rates that are higher than the stated
interest rate.
d. A capital gain is expected.
95. Accrued interest on bonds that are sold between interest dates
a. Is ignored by both the seller and the buyer.
b. Increases the amount a buyer must pay to acquire the bonds.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount a buyer must pay to acquire the bonds.
96. Adelle Company neglected to amortize the discount on outstanding ten-year bonds payable.
What is the effect of the failure to record discount amortization on interest expense and bond
carrying value, respectively?
a. Understate; overstate
b. Overstate; overstate
c. Understate; understate
d. Overstate; understate
97. Direct cost incurred by the lessor in an operating lease should be
a. Expensed
b. Capitalized and amortized as expense over the lease term.
c. Capitalized and amortized as expense over the life of the asset.
d. Capitalized and deferred until the last year of the lease.
98. At the inception of a finance lease, the guaranteed residual value should be
a. Included as part of minimum lease payments at present value
b. Included as part of minimum lease payments at future value
c. Excluded from minimum lease payments
d. Included as part of minimum lease payments to the extent that the guaranteed residual
value is expected to exceed the estimated residual value
99. In computing depreciation of a leased asset, the lessee should subtract
a. A guaranteed residual value and depreciate over the term of the lease.
b. An unguaranteed residual value and depreciate over the term of the lease.
c. A guaranteed residual value and depreciate over the life of the asset.
d. An unguaranteed residual value and depreciate over the life of the asset.
100.A deferred tax liability is computed using
a. The current tax law, regardless of the enacted future tax law
b. Expected future tax law, regardless of whether this expected law has been enacted
c. Current tax law, unless enacted future tax law is different
d. Either current or expected future law, regardless of whether the expected law has been
enacted
--END-st

1 PB-TA