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Edition 2011
Problem 1-1 Multiple choice (IAA) Problem 1-2 Multiple choice (IAA)

1. Accounting is a service activity and its function is to provide 1. Generally accepted accounting principles
quantitative information, primarily financial in nature, about economic a. Are accounting adaptations based on the laws of economic
entities, that is intended to be useful in making economic decision. This science.
accounting definition is given by b. Derived their credibility and authority from legal rulings and court
a. Accounting Standards Council precedents.
b. AICPA Committee on Accounting Terminology c. Derived their credibility and authority from the national
c. American Accounting Association government through the financial reporting section of the SEC.
d. Board of Accountancy d. Derived their credibility and authority from general recognition
2. Basic purpose accounting is and acceptance by the accountancy profession.
a. To provide the information that the managers of an economic 2. Which of the following statements best describe GAAP?
entity need to control its operations. a. They have been formulated in the public sector.
b. To provide information that the creditors of an economic entity b. They have been developed on the basis of such factors as usage
can use in deciding whether to make additional loans to the and practical necessity.
entity. c. They are the same as laws within our legal system.
c. To measure the periodic income of the economic entity. d. They do not apply to small entities.
d. To provide quantitative financial information about an entity 3. Proper application of accounting principles is most dependent upon the
that is useful in making rational economic decisions. a. Existence of specific guide lines
3. Financial accounting is concerned with b. Oversight of regulatory bodies
a. General purpose reports on financial position and financial c. External audit function
performance. d. Professional judgment of the CPA
b. Specialized reports for inventory management and control. 4. The process of establishing financial accounting standards
c. Specialized reports for income tax computation and recognition. a. Is a democratic process in that a majority of practicing
d. General purpose reports on changes in stock prices and future accountants must agree with a standard before it becomes
estimates of market position. implemented
4. Financial accounting can be broadly defined as the area of accounting b. Is a legislative process based on rules promulgated by government
that prepares agencies
a. General purpose financial statements to be used by parties c. Is based solely on economic analysis of the effects each standard
internal to the entity only. will have if it is implemented
b. Financial statements to be used by investors only. d. Is a social process which incorporates political actions of various
c. General purpose financial statements to be used by both parties interested user groups as well as professional research and logic
internal and external to the entity. 5. Once an accounting standard has been established
d. Financial statements to be used primarily by the management. a. The standard is continually reviewed to see if modification is
5. Financial accounting is the area of accounting that emphasizes necessary.
reporting to b. The standard is not reviewed unless the SEC makes a complaint.
a. Management c. The task of reviewing the standard is given to the PICPA.
b. Regulatory bodies d. The principle of consistency requires that no revisions ever be
c. Internal auditors made to the standard.
d. Creditors and investors 6. As independent or external auditors, CPAs are primarily responsible for
6. Managerial accounting is the area of accounting that emphasizes on a. Preparing financial statements in conformity with GAAP
a. Reporting financial statements to external users b. Certifying the accuracy of financial statements
b. Reporting to SEC c. Expressing an opinion as to the fairness of financial statements
c. Combining accounting knowledge with an expertise in data d. Filing financial statements with the SEC
processing 7. The singularly unique function performed by independent CPAs is
d. Developing accounting information for use within an entity a. Tax preparation
7. It is the body authorized by law to promulgate rules and regulations b. Management advisory services
affecting the practice of accountancy profession in the Philippines. c. The attest function
a. Board of Accountancy d. The preparation of financial statements
b. PICPA 8. The international Accounting Standards Board was formed to
c. SEC a. Enforce IFRS in foreign countries
d. FRSC b. Develop worldwide accounting standards
8. What is the law regulating the practice of accountancy in the c. Establish accounting standards for multinational entities
Philippines? d. Develop accounting standards for countries that do not have their
a. R.A. No. 9298 own standard setting bodies
b. R.A. No. 9198 9. The international Accounting Standards Board publishes its standards in
c. R.A. No. 9928 a series of pronouncements called
d. R.A. No. 9892 a. IAS
9. It is the standard setting body in the Philippines. b. FRS
a. Accounting Standards Council c. IFRS
b. Auditing and Assurance Standards Council d. Statement of Financial Accounting Standards
c. Philippine Accounting Standards Board 10. It is a “global phenomenon” intended to bring about transparency and
d. Financial Reporting Standards Council a higher degree of comparability in financial reporting, both of which
10. The PFRS collectively include will benefit the investors and are essential to achieve the goal of one
a. PFRS corresponding to IFRS uniform and globally accepted financial reporting standards.
b. PAS corresponding to IAS a. IFRS
c. Philippine interpretations corresponding to IFRIC and SIC b. Borderless accounting
Interpretations and interpretations developed by PIC c. World trade
d. All of the above. d. Information technology
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c. The information in financial statements is summarized and

Problem 1-3 Multiple choice (assumptions) classified to help meet users’ needs
d. Financial statements can be justified only if the benefits they
1. What is the only underlying assumption mentioned in the new provide exceed the cost
Conceptual Framework for Financial Reporting?
a. Going concern Problem 1-4 Multiple choice (Conceptual Framework)
b. Accounting entity
c. Time period 1. The old framework for the Preparation and Presentation of Financial
d. Monetary unit Statements is now replaced by a complete, comprehensive and single
2. Which of the following elements best describes the term “going document called
concern”? a. Conceptual framework for financial reporting
a. When the current liabilities of an entity exceed current assets b. Conceptual framework for financial statements
b. The ability of the entity to continue in the operation for the c. Conceptual framework for business entities
foreseeable future d. Conceptual framework
c. The potential to contribute to the flow of cash and cash 2. What is the authoritative status of the conceptual framework?
equivalents to the entity a. The conceptual framework has the highest level of authority
d. The expenses of an entity exceed its income b. In the absence of a standard or an interpretation that specifically
3. Which of the following is not an implication of the going concern applies to a transaction, the conceptual framework shall be
assumption? followed
a. The historical cost principle is credible c. In the absence of a standard or an interpretation that specifically
b. Depreciation and amortization policies are justifiable and applies to a transaction, management shall consider the
appropriate applicability of the conceptual framework in developing and
c. The current and non-current classification of assets and liabilities applying an accounting policy that results in information that is
is justifiable and significant relevant and faithfully represented
d. Amortizing research and development costs over several periods d. The conceptual framework applies only when the FRSC develops
is justifiable and appropriate new or revised standards
4. The relatively stable economic, political and social environment 3. A conceptual framework should
supports a. Lead to uniformity of financial statements among entities within
a. Conservatism the same industry.
b. Materiality b. Eliminate alternative accounting principles
c. Timeliness c. Guide the PICPA in developing generally accepted auditing
d. Going concern standards
5. This accounting concept justifies the usage of accruals and deferrals d. Define the basic objectives, terms and concepts of accounting
a. Going concern 4. The purpose of the Conceptual Framework is(choose the incorrect one)
b. Materiality a. To assist the FRSC in developing accounting standards that will
c. Consistency represent GAAP in the Philippines
d. Stable monetary unit b. To assist the FRSC in its review and adoption of existing
6. The financial statements that are prepared for the business are international accounting standards
separate and distinct from the owners according to the c. To assist auditors in forming an opinion as to whether financial
a. Going concern assumption statements conform with Philippine GAAP
b. Matching principle d. To assist the Board of Accountancy in promulgating rules and
c. Economic entity assumption regulations affecting the practice of public accountancy.
d. Accounting period assumption 5. Which of the following is not a purpose of the Conceptual Framework?
7. When a parent and a subsidiary relationship exists, consolidated a. To provide definitions of key terms and fundamental concepts
financial statements are prepared in recognition of b. To provide specific guidelines for resolving situations not covered
a. Legal entity by existing accounting standards
b. Economic entity c. To assist accountants and others in selecting among alternative
c. Stable monetary unit accounting and reporting methods
d. Time period d. To assist FRSC in the standard setting process
8. Which underlying concept serves as the basis for preparing financial 6. Which is a basic purpose of the Conceptual Framework?
statements at regular intervals? I. To assist users of financial statements in interpreting the
a. Accounting entity information contained in the financial statements
b. Going concern II. To provide information to those interested in the work of the
c. Accounting period FRSC in the formulation of PFRS
d. Stable monetary unit a. I only
9. During the lifetime of an entity accountants produce financial b. II only
statements at arbitrary points in time in accordance with which c. Both I and II
accounting concept? d. Neither I nor II
a. Accrual 7. Which is true concerning the Conceptual Framework?
b. Periodicity I. The conceptual framework is concerned with general purpose
c. Unit of measure financial statements including consolidated financial statements
d. Continuity II. Special purpose financial reports, for example, prospectuses and
10. Which of the following is not an important characteristic of the financial computations prepared for taxation purposes, are within the
statements that accountants currently prepare? scope of the Conceptual Framework
a. The information in the financial statements is expressed in units a. I only
of money adjusted for chasing purchasing power. b. II only
b. Financial statements articulate with one another because c. Both I and II
measuring financial position is related to measuring changes in d. Neither I nor II
financial position 8. The Conceptual Framework is intended to establish
a. GAAP in financial reporting by entities
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b. The meaning of “present fairly in accordance with GAAP” d. Department of Finance

c. The objectives and concepts for use in developing standards of 8. These users need information on trends and recent developments
financial accounting and reporting where an entity makes substantial contribution to the local economy
d. The hierarchy of sources of GAAP providing employment and using local suppliers.
9. As regards the relationship between PFRS and the Conceptual a. The public
Framework. Which of the following statements is true? b. Governments and their agencies
I. The Conceptual Framework is a reporting standard c. Finance entities
II. In case of conflict, the requirements of the conceptual framework d. Private entities
prevail over those of the relevant PFRS. 9. Which statement is correct in relation to information needs?
a. I only I. Information that meets the needs of specified primary users is
b. II only likely to meet the needs of other users, such as employees,
c. Both I and II customers, governments and their agencies, and the public
d. Neither I nor II II. The management is also interested in financial information but it
10. The conceptual framework deals with(choose the incorrect one) need not rely on general purpose financial reports because it can
a. The objective of financial reporting access additional information internally
b. The qualitative characteristics of useful financial information a. I only
c. The definition, recognition and measurement of the elements b. II only
from which financial statements are constructed c. Both I and II
d. GAAP d. Neither I nor II
10. The existing and potential investors
Problem 1-5 Multiple Choice (users of information) I. Are interested in information which enables them to assess the
ability of the entity to pay dividends
1. The primary users of financial information include II. Need information to help them determine whether they should
I. Existing and potential investors buy or sell
II. Existing and potential lenders and other creditors a. I only
III. User group such as employees, customers, government and their b. II only
agencies, and the public c. Both I and II
a. I only d. Neither I nor II
b. I and II only
c. I and III only Problem 1-6 Multiple Choice (Financial Reporting)
d. I, II, and III
2. Which of the following is an internal user of an entity’s financial 1. What is the objective of financial reporting?
information? a. To provide information about the financial position, financial
a. Board of Directors performance and changes in financial position of an entity
b. Shareholder in the equity b. To prepare and present a statement of financial position, an
c. Holder of the entity’s bonds income statement, a statement of comprehensive income, a
d. Creditor with long term contracts with the entity statement of cash flows and a statement of changes in owners’
3. These users require information on risk and return provided by their equity
investment c. To provide financial information about an entity that is useful to
a. Investors existing and potential investors, lenders and other creditors in
b. Employees making decisions about providing resources to the entity
c. Lenders d. To prepare financial statements in accordance with all applicable
d. Customers standards and interpretations
4. These users are interested in information about the profitability and 2. The primary focus of financial reporting has been on meeting the needs
stability of the entity in order to assess the ability to provide of which of the following groups?
remuneration, retirement benefits and employment opportunities. a. Managers of an entity
a. Customers b. Existing and potential investors, lenders and other creditors
b. The public c. National and local taxing authorities
c. Government and their agencies d. Independent CPAs
d. Employees 3. The overall objective of financial reporting is to provide information
5. These users are interested in information that enables them to assess a. That is useful for decision making
whether their loans, the related interest thereon, and other amounts b. About an entity’s assets, liabilities and equity
owing to them will be paid when due c. About an entity’s financial performance during a period
a. Lenders and other creditors d. That allows owners no assess management performance
b. Borrowers 4. The objective of financial reporting are based on
c. Trade creditors a. The need for conservatism
d. Owners b. Reporting on management’s stewardship
6. These users are interested in information about the continuance of an c. GAAP
entity, especially when they have a long term involvement with or are d. The needs of the users of information
dependent on the entity. 5. Which of the following is not a major objective of financial reporting?
a. Customers a. Financial reporting shall provide information about entity
b. Employees resources, claims to those resources and changes in them
c. Trade unions b. Financial reporting shall provide information useful in evaluating
d. Suppliers management’s stewardship
7. These users are interested in information in order to regulate the c. Financial reporting shall provide information useful in investment,
activities of an entity, determine taxation policies and a basis for credit and similar decision
national statistics. d. Financial reporting shall provide information useful in assessing
a. Governments and other agencies cash flow prospects
b. Major organization of users 6. Which of the following is not normally an objective of financial
c. BIR reporting?
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a. To provide information about an entity’s assets and claims against a. Predictive value and confirmatory value
those assets b. Predictive value, confirmatory value and timeliness
b. To provide information that is useful in assessing an entity’s c. Predictive value, confirmatory value and materiality
sources and uses of cash d. Predictive value, confirmatory value, timeliness and materiality
c. To provide information that is useful in lending and investing 5. Which statement is incorrect concerning materiality?
decisions a. Information is material if its omission or misstatement could
d. To provide information about an entity’s liquidation value influence the economic decisions the users make
7. Which of the following statements best describes the term “financial b. Materiality depends on the relative size of the item or error
position”? judged in the particular circumstances of its omission or
a. The net income and expenses of an entity misstatement
b. The financial assets less financial liabilities c. Materiality is a fundamental and qualitative characteristic rather
c. The potential to contribute to the flow of cash and cash than a threshold or cut off point in determining useful information
equivalents to the entity d. Materiality depends on professional judgment because no
d. The assets, liabilities and equity of an entity threshold limit is defined in the conceptual framework
8. Which statement is true in relation to financial position? 6. Which of the following is the best description for “faithful
I. Information about financial position can help users to assess the representation” in relation to information to financial statements?
entity’s liquidity, solvency and its need for additional financing a. Influence on the economic decisions of users
II. Information about priorities and payment requirements of b. Inclusion of degree of caution
existing claims can help users to predict how future cash flows will c. Freedom from material error
be distributed among those with a claim against the entity d. Comprehensibility to users
a. I only 7. The ingredients for faithful representation are
b. II only a. Completeness and neutrality
c. Both I and II b. Completeness and free from error
d. Neither I nor II c. Completeness, neutrality and free from error
9. The effects of transactions and other events on an entity’s economic d. Completeness, neutrality, free from error and conservatism
resources and claims are depicted in the periods in which those effects 8. Which of the following qualitative characteristics of financial
occur even if the resulting cash receipts and payments occur in a information requires that information shall not be biased in favor of
different period. one group of users to the detriment of others?
a. Accrual accounting a. Relevance
b. Cash accounting b. Free from error
c. Modified accrual accounting c. Completeness
d. Modified cash accounting d. Neutrality
10. Which of the following statements in relation to the limitation of 9. In the event of conflict between the economic substance of a
financial reporting is incorrect? transaction and its legal form, the economic substance shall prevail
a. General purpose financial reports do not and cannot provide all of a. Form over substance
the information that primary users need b. Substance over form
b. General purpose financial reports are designed to show the value c. Relevance
of the reporting entity d. Completeness
c. General purpose financial reports are intended to provide 10. It is the exercise of care and caution in dealing with uncertainties in
common information to users measurement so as not to overstate assets and income and not
d. Financial reports are largely based on estimate and judgment understate liabilities and expenses
rather than exact depiction a. Completeness
b. Prudence
Problem 1-7 Multiple Choice (Qualitative characteristics) c. Faithful representation
d. Neutrality
1. What are qualitative characteristics of financial information?
a. Qualitative characteristics are the attributes that make the Problem 1-8 Multiple Choice (enhancing qualities)
information provided in financial statements useful to the user
b. Qualitative characteristics are broad classes of financial effects of 1. The enhancing qualitative characteristics of financial information are
transactions and other events a. Comparability and understandability
c. Qualitative characteristics are non-qualitative aspects of the b. Verifiability and timeliness
entity’s financial position and performance and changes in c. Comparability, understandability, and verifiability
financial position d. Comparability, understandability, verifiability and timeliness
d. Qualitative characteristics measure the extent to which the entity
has complied with all relevant standards and interpretations Problem 3-1 Multiple choice (ACP)
2. The “fundamental” qualitative characteristics are
a. Relevance and faithful representation 1. Which of the following shall not be considered cash for financial
b. Relevance, faithful representation and materiality reporting purposes?
c. Relevance and reliability a. Petty cash funds and change funds
d. Faithful representation and materiality b. Money orders, certified checks and personal checks
3. What is the meaning of relevance? c. Coin, currency and available funds
I. The capacity of the information to make a difference in the d. Postdated checks and IOUs
decisions made by users 2. Which of the following is usually considered cash?
II. The financial reports represent economic phenomena or a. Certificate of deposit
transactions in words and numbers b. Checking account
a. I only c. Money market savings deposit
b. II only d. Postdated checks
c. Both I and II 3. To be reported as cash and cash equivalents, the cash item must be
d. Neither II nor II a. Unrestricted in use for current operations
4. The ingredients of relevant financial information are b. Available for the purchase of property, plant and equipment
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c. Set aside for liquidation of long term debt b. A check issued by the entity on December 27 of the current year
d. Deposited in bank but dated July 15 next year
4. Cash equivalents are c. Time deposit which matures in one year
a. Short term and highly liquid investments that are readily d. A customer’s check denominated in a foreign currency
convertible to cash 4. Which of the following statements is incorrect?
b. Short term and highly liquid investments that are readily a. The accounting function should be separated from the
convertible to cash with remaining maturity of 3 months custodianship of assets
c. Short term and highly liquid investments that are readily b. Certain clerical personnel should be rotated among various jobs
convertible to cash and acquired 3 months before maturity c. The responsibility for receiving merchandise and paying for it
d. Short term and highly liquid marketable equity securities should be given to one person
5. All of the following can be classified as cash and cash equivalents, d. An entity’s personnel should be given well-defined responsibilities
except? 5. At the end of the current year, an entity had cash accounts at 3 banks.
a. Redeemable preference shares acquired and due in 60 days One account is segregated solely for the payment into a bond sinking
b. Commercial papers held and due for repayment in 90 days fund. A second account used for branch operations is overdrawn. The
c. Equity investments third account used for regular corporate operations, has a positive
d. A bank overdraft balance. How should these accounts be reported?
6. Which is false concerning measurement of cash and cash equivalents? a. The segregated account should be reported as a noncurrent asset,
a. Cash is measured at face value the regular account should be reported as current asset, and the
b. Cash in foreign currency is measured at the current exchange rate overdraft account should be reported as current liability
c. If a bank or financial institution holding the funds of the entity is b. The segregated and regular account should be reported as current
in bankruptcy or financial difficulty, cash shall be written down to assets, and the overdraft should be reported as current liability
estimate realizable value c. The segregated account should be reported as a noncurrent asset,
d. Cash equivalents shall be measured at maturity value, meaning and the regular account should be reported as current asset net
face value plus interest of overdraft
7. If material, deposits in foreign bank which are subject to foreign d. The segregated account and regular account should be reported
exchange restriction shall be classified as current asset net of overdraft
a. Separately as current asset, with appropriate disclosure
b. Separately as noncurrent asset with appropriate disclosure Problem 3-3 Multiple choice (IAA)
c. Be written off as an extraordinary loss
d. As part of cash and cash equivalents 1. The internal control feature that is specific to petty cash is
8. Bank overdraft a. Separation of duties
a. Is a debit balance in a cash in bank account b. Assignment of responsibilities
b. Is offset against demand deposit account in other bank c. Proper authorization
c. Which cannot be offset is classified as current liability d. Imprest system
d. Which cannot be offset is classified as noncurrent liability 2. What is the major purpose of an imprest petty cash fund?
9. A compensating balance a. To effectively plan cash inflows and outflows
a. Must be included in cash and cash equivalents b. To ease the payment of cash to vendors
b. Which is legally restricted and related to a long term loan is c. To determine the honesty of the petty cashier
classified as current asset d. To effectively control cash disbursements
c. Which is legally restricted and related to a short term loan is 3. The petty cash fund account under the imprest fund system is debited
classified separately as noncurrent asset a. Only when the fund is created
d. Which is not legally restricted and related as to withdrawal is b. When the fund is created and every time it is replenished
classified separately as current asset c. When the fund is created and when the size of the fund increases
10. Which means “that the check has been merely drawn and recorded but d. When the fund is created and when the fund is decreased
not yet given to the payee at the end of the reporting period”? 4. What happens when a petty cash is in use?
a. Undelivered check a. Expenses paid with petty cash are recorded when the fund is
b. Postdated check delivered replenished
c. Stale check b. Most small amounts are paid from cash receipts before they are
d. Outstanding check deposited
c. Petty cash is debited when the fund is replenished
Problem 3-2 Multiple choice (IAA) d. Petty cash is credited when the fund is replenished
5. When a petty cash fund is used, which of the following is true?
1. Which is not considered as a cash equivalent? a. The balance of the petty cash fund shall be reported in the
a. A 3 year treasury note statement of financial position as a long term investment
b. A 3 year treasury note acquired 3 months before maturity b. The petty cashier’s summary of petty cash payments serves as a
c. A 90 day treasury bill journal entry that is posted to the appropriate general ledger
d. A 60 day money market placement account
2. At the end of the current year, an entity had various checks and papers c. The reimbursement of the petty cash fund shall be credited to the
in its safe. Which item should not be included in its cash account in the cash account
current year-end statement of financial position? d. Entries that include a credit to the cash fund shall be recorded at
a. US $20,000 cash the time the payments from the petty cash fund are made
b. Past due promissory note issued in favor of the entity by its 6. In reimbursing the petty cash fund, which of the following is true?
President a. Cash is debited
c. Another entity’s P150,000 check payable to the entity dated b. Petty cash is debited
December 15 of the current year c. Petty cash is credited
d. The entity’s undelivered check payable to a supplier dater d. Expense accounts are debited
December 31 of the current year 7. If the petty cashier pays a certain amount for a transportation out of an
3. Which item should be excluded from cash and cash equivalents? imprest petty cash, the journal entry shall include
a. The minimum cash balance in the entity’s current account which a. Credit to cash
is maintained to avoid service charges b. Credit to petty cash
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c. Debit to transportation and credit to petty cash b. A certified check will be accepted by many persons who would
d. No journal entry is made not otherwise accept a personal check
8. Petty cash fund is c. A certified check is one drawn by a bank upon itself
a. Separately classified as current asset d. A certified check should not be included in the total outstanding
b. Money kept on hand for making minor disbursements of coin and checks
currency rather than by writing checks 6. If the balance shown on an entity’s bank statement is less than the
c. Set aside for the payment of payroll correct cash balance and neither the entity nor the bank has made any
d. Restricted cash errors, there must be
9. Which of the following statements in relation to accounting for petty a. Deposits credited by the bank but not yet recorded by the entity
cash fund is false? b. Outstanding checks
a. Each disbursement from petty cash shall be supported by a petty c. Deposits in transit
cash voucher d. Bank charges not yet recorded by the entity
b. The creation of a petty cash fund requires a journal entry to 7. If the cash balance shown on an entity’s accounting records is less than
reflect the transfer of fund out of the general cash account the correct cash balance and neither the entity nor the bank has made
c. At any time, the sum of the petty cash fund and the total of petty any mistakes, there must be
cash vouchers shall equal the amount for which the imprest petty a. Deposits credited by the bank but not yet recorded by the entity
cash fund was established b. Outstanding checks
d. With the establishment of an imprest petty cash fund, one person c. Deposits in transit
is given the authority and responsibility for issuing checks to cover d. Bank charges not yet recorded by the entity
minor disbursements 8. Which will not require an adjusting entry on the depositor’s books?
10. Which of the following statements in relation to the cash short or over a. NSF check from customer
account is true b. Check in payment of account payable amounting to 50,000 is
a. It would be impossible to have cash shortage or overage if the recorded by the depositor as 5,000
employees were paid in cash rather than in check c. Deposit of another entity is credited by the bank to the account of
b. The entry to account for daily cash sales for which a small amount the creditor
of cash shortage existed would include a debit to cash short or d. Bank service charge
over account 9. Bank reconciliations are normally prepared on a monthly basis to
c. If the cash short or over account has a debit balance at the end of identify adjustments needed in the depositor’s records and to identify
the period it must be debited to an expense account bank errors. Adjustments on the part of the depositor shall be recorded
d. A credit balance in a cash short or over account shall be for
considered a liability because the short changed customer will a. Bank errors, outstanding checks and deposits in transit
demand return of this amount b. All items except bank errors, outstanding checks and deposits in
transit
c. Book errors, bank errors, outstanding checks and deposits in
Problem 4-1 Multiple choice (IAA) transit
d. Outstanding checks and deposits in transit
1. A bank reconciliation is 10. Which statement is true?
a. A formal financial statement that lists all of the bank account a. Bank service charge will cause the cash balance per ledger to be
balances of an entity higher than that reported in bank, all other things being equal
b. A merger of two banks that previously were competitors. b. Outstanding checks will cause the cash balance per ledger to be
c. A statement sent by the bank to depositor on a monthly basis greater than that reported in bank, all other things being equal
d. A schedule that accounts for the differences between an entity’s c. An error made by a bank by charging an amount to the
cash balance as shown on its bank statement and the cash depositor’s account requires correcting entry in the depositor’s
balance shown in its general ledger own records
2. Which of the following items must be added to the cash balance per d. The cash amount shown in the statement of financial position
ledger in preparing a bank reconciliation which ends with adjusted cash must be the balance reported in the bank statement
balance?
a. Note receivable collected by bank in favor of the depositor and Problem 6-1 Multiple choice (ACP)
credited to the account of the depositor
b. NSF customer check 1. Trade receivables are classified as current and noncurrent if they are
c. Service charge reasonably expected to be collected
d. Erroneous bank debit a. Within one year
3. Which of the following must be deducted from the bank statement b. Within the normal operating cycle
balance in preparing a bank reconciliation which ends with adjusted c. Within one year or within the operating cycle, whichever is
cash balance? shorter.
a. Deposit in transit d. Within one year or within the operating cycle, whichever is
b. Outstanding check longer.
c. Reduction of loan charged to the account of the depositor 2. Nontrade receivables are classified as current assets only if they are
d. Certified check reasonably expected to be realized in cash
4. In preparing monthly bank reconciliation, which of the following items a. Within one year or within the operating cycle, whichever is
would be added to the balance per bank statement to arrive at the shorter.
correct cash balance? b. Within one year or within the operating cycle, whichever is
a. Outstanding checks longer.
b. Bank service charge c. Within the normal operating cycle
c. Deposits in transit d. Within one year, the length of the operating cycle
d. A customer’s note collected by the bank on behalf of the notwithstanding
depositor 3. Which is true concerning presentation of receivables in the statement
5. Which of the following statements is false? of financial position?
a. A certified check is a liability of the bank certifying it a. Trade receivables and nontrade receivables re shown separately
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b. Trade accounts receivable and trade notes receivable shall be 3. A method of estimating doubtful accounts that emphasizes asset
presented separately valuation rather than income measurement is the allowance method
c. Nontrade receivables are presented as noncurrent assets based on
d. Trade receivables and nontrade receivables which are currently a. Aging the accounts receivable
collectible shall be presented as one line item called “trade and b. Direct write off
other receivables” c. Gross sales
4. Assuming that the ideal measure of short-term receivables in the d. Credit sales less returns and allowances
statement of financial position is the discounted value of the cash to be 4. The advantage of relating an entity’s bad debt experience to its
received in the future, failure to follow this practice usually does not accounts receivable is that this approach
make the statement of financial position misleading because a. Gives a reasonably correct measurement of accounts receivable in
a. Most short-term receivables are not interest bearing the statement of financial position
b. The allowance for doubtful accounts includes a discount element b. Relates bad debt loss to the period of sale
c. The amount of discount is not material c. Is the only generally accepted method for measuring accounts
d. Most receivables can be sold to a bank or factor receivable
5. Credit balances in accounts receivable shall be classified as d. Makes estimates of uncollectible accounts necessary
a. Current liabilities 5. When allowance method of recognizing doubtful accounts is used, the
b. Part of accounts payable entry to record the write off of a specific account would
c. Long term liabilities a. Decrease both accounts receivable and the allowance for doubtful
d. Deduction from accounts receivable accounts
6. Accounts receivable shall be measured initially at b. Decrease accounts receivable and increase allowance for doubtful
a. Face value accounts
b. Present value c. Increase both accounts receivable and the allowance for doubtful
c. Maturity value accounts
d. Current value d. Increase accounts receivable and decrease allowance for doubtful
7. Long term notes receivable which nominally bear no interest or an accounts
interest which is unreasonably low shall be recognized initially at 6. An entity uses the allowance method for recognizing doubtful accounts.
a. Face value The entry to record the write off of a specific uncollectible account
b. Present value a. Affects neither net income nor working capital
c. Maturity value b. Affects neither net income nor accounts receivable
d. Current value c. Decreases both net income and working capital
8. Receivables from subsidiaries shall be classified as d. Decreases both net income and accounts receivable
a. Current assets 7. When the allowance method of recognizing bad debt expense is used,
b. Noncurrent assets the entries at the time of collection of an account previously written off
c. Either as current or noncurrent depending on the expectation of would
realizing them within one year or over one year a. Decrease the allowance for doubtful accounts
d. Partly current and partly noncurrent b. Increase net income
9. Where the operating cycle extends beyond one year because of normal c. Have no effect on allowance for doubtful accounts
credit terms as in the case of installment sales of household appliances d. Have no effect on net income
a. It is proper to classify the entire receivables as current assets with 8. An entity uses allowance method to recognize doubtful accounts
disclosure of the amount not realizable within one year, if expense. What is the impact of a collection of an account previously
material. written off?
b. The entire receivables are shown as noncurrent assets. a. No effect on both ADA and DAE
c. The portion due in one year is shown as current and the balance b. No effect on ADA and decrease in DAE
as noncurrent c. Increase in ADA and no effect on DAE
d. The receivables are not recognized d. Increase in ADA and decrease on DAE
10. In the case of long term installments receivables where a major portion 9. When a specific customer’s account receivable is written off as
of the receivables would be collected beyond the normal operating uncollectible, what will be the effect on net income?
cycle a. No effect under both allowance method and direct write off
a. The entire receivables are shown as current without disclosure of method
the amount not currently due. b. Decrease under both allowance method and direct write off
b. The entire receivables are shown as noncurrent method
c. Only the portion currently due is shown as current and the c. No effect under allowance method and decrease under direct
balance as noncurrent write off method
d. The receivables are not recognized d. Decrease under allowance method and no effect under direct
write off method
Problem 6-2 Multiple choice (AICPA Adapted) 10. When an account receivable aging schedule is prepared, a series of
computations is made to determine the estimated uncollectible
1. Which method of recording bad debt loss is consistent with accrual accounts. The resulting amount from this aging schedule
accounting? a. When added to the total accounts written off during the year is
a. Allowance method desired credit balance of the ADA at year end
b. Direct write off method b. Is the amount of DAE for the year
c. Percent of sales method c. Is the amount that should be added to the beginning ADA to get
d. Percent of accounts receivable method the DAE for the year
2. A method of estimating bad debts that focuses on the income d. Is the amount of desired credit balance of the ADA to be reported
statement rather than the statement of financial position is the at year end
allowance method based on
a. Direct write off Problem 6-3 Multiple choice (IAA)
b. Aging the trade accounts receivable
c. Credit sales 1. Which of the following methods of determining DAE does not match
d. The balance in trade accounts receivable expense and revenue?
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a. Charging DAE with a percentage of sales under allowance method c. Increase the accounts receivable balance and increase net income
b. Charging DAE with a percentage of accounts receivable under d. Decrease the accounts receivable balance and decrease net
allowance method income
c. Charging DAE with an amount derived from aging of accounts
receivable under allowance method
d. Charging DAE as accounts that are written off as uncollectible Chapter 7
2. Which of the following methods of determining DAE most closely Problem 7-1 (AICPA Adapted)
matches expense with revenue? 1. On October 1 of the current year, an entity received a one-year note
a. Charging DAE only as accounts are written off as uncollectible receivable bearing interest at the market rate. The face amount of the
b. Charging DAE with a percentage of sales for that period note receivable and the entire amount of the interest are due on
c. Estimating the ADA as a percentage of accounts receivable September 20 of next year. The interest receivable account on
d. Estimating the ADA by aging of accounts receivable December 31 of the current year would consist of an amount
3. When the allowance method of recognizing DAE is used, the ADA would representing
decrease when
a. Specific accounts receivable is collected a. Three months of accrued interest income
b. Account previously written off is collected b. Nine months of accrued interest income
c. Account previously written off becomes collectible
d. Specific uncollectible account is written off d. The excess at October 1 of the present value of the note
4. When comparing the allowance method of accounting for bad debts receivable over its face value.
with the direct write off method, which of the following statements is
true? 2. On June 1 of the current year, an entity received a one-year note
a. The direct write off method is exact and also better illustrates the receivable bearing interest at the market rate. The face amount of the
matching principle note receivable and the entire amount of the interest are due on
b. The allowance method is less exact but it better illustrates the June 30 of next year. The interest receivable account would show a
matching principle balance on
c. The direct write off method is theoretically superior
d. The direct write off method requires two separate entries to write A .July 1 but not December 31 of the current year
off an uncollectible account b. December 31 but not July 1 of the current year
5. Which of the following is not acceptable in estimating uncollectible c. July 1 and December of the current year
accounts receivable? d. Neither July 1 nor December 31 of the current year
a. The estimate of uncollectible accounts is based on a percentage of
sales for the period 3. On August 15 of the current year, an entity sold goods for which it
b. The estimate of uncollectible accounts is based on a percentage of received a note bearing the market rate of interest of that date. The
the accounts receivable at the end of a period four-month note was dated July 15 of the current year. Note principal,
c. The estimate of uncollectible accounts is based on an aging together with all interest, is due November 15 of the current year
schedule .When the note was recorded on august 15, which of the following
d. No estimate of uncollectible accounts is made but accounts are accounts increased?
written off when it is determined that the accounts cannot be a. Unearned discount
collected b .Interest receivable
6. Estimation of uncollectible accounts receivable based on percentage of c. Prepaid Interest
sales d. Interest revenue
a. Emphasizes measurement of the net realizable value of accounts 4. On July 1 of the current year, an entity received a one year note
receivable receivable bearing interest at the market rate. The face amount of the
b. Emphasizes measurement of DAE note receivable and the entire amount of the interest are due on June
c. Emphasizes measurement of total assets 30 of the current year, the entity should report in its statement of
d. Is acceptable only for tax purposes financial position
7. When allowance method of recognizing DAE is used, the entry to a. A deferred credit for interest applicable to next year
record the write off of a specific uncollectible account would decrease b. No interest receivable
a. Allowance for doubtful accounts c. Interest receivable for the entire amount of the interest due on June 30 next
b. Net income year
c. Net realizable value of accounts receivable d. Interest receivable for the interest accruing this year
d. Working capital 5. On July 1 of the current year, an entity received a one-year note
8. The entry debiting accounts receivable and crediting allowance for receivable bearing interest at the market rate. The face amount of the
doubtful accounts would be made when note receivable and the entire amount of the interest are due in one
a. A customer pays its account balance year. When the note receivable was recorded on July 1, which of the
b. A customer defaults on its account following was debited?
c. A previously defaulted customer pays its outstanding balance I. Interest Receivable
d. Estimated uncollectible receivables are too low II. Unearned discount on note receivable
9. A debit balance in the allowance for doubtful accounts
a. Should never occur a. I only
b. Is always the result of management not providing large enough b. Both I and II
allowance in order to manage earnings c. Neither I nor II
c. May occur before the end of period adjustment for uncollectible d.II only
accounts
d. May exist even after the end of period adjustment for 6. On July1 of the current year, an entity obtained a two-year 8% note
uncollectible accounts receivable for services rendered. At that time, market rate was 10%.The
10. When the direct write off method of recognizing DAE is used, the entry face value of the note and the entire amount of interest are due on the
to write off a specific customer account would date of maturity. Interest receivable on December 31 of the current
a. Increase net income year was
b. Have no effect on net income a. 5% of the face value of the note
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b. 4% of the face of the note c. A breach of contract, such as a default or delinquency in

c. 5% of the present value of the note
d. 4% of the present value of the note
7. An entity uses the instalment sales method to recognize revenue.
Customers pay the instalment notes in24 equal monthly amounts which
include 12% interest. What is the instalment notes receivable balance
six months after the sale?
a. 75% of the original sales price
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted at 12%.
d. Less than present value of the remaining monthly payments discounted at 12%.
8. The interest on a noninterest bearing not equal to
a. The excess of the face value over present value
b. The excess of present value over the face value
c. The excess of the market value over the present value of the note
d. Zero
interest or principal payment.
d. The lender, for economic or legal reason relating to the
borrower’s financial difficulty, grants to the borrower a
concession that the lender would not otherwise consider.
5. If there is evidence that an impairment loss on loan receivable
has been incurred, the loss is equal to the
a. Excess of the carrying amount of the loan receivable over
the present value of cash flows related to the loan.
b. Excess of the present value of cash flow related to the loan
over carrying amount of the loan receivable .
c. Excess of the carrying amount of the loan over the principal
amount of the loan.
d. Excess of the principal amount of the loan over its carrying
amount.

9. Accounting for interest in a noninterest bearing note receivable is an Chapter 9

example of what aspect of accounting theory? Problem 9-1
a. Matching 1. If accounts receivable are pledged against borrowings, the amount of accounts
b. Verifiability receivable pledged should be
c. Substance over form a. Excluded from the total receivable with disclosures
d. Form over substance b. Excluded from the total receivable without disclosures
c. Included from the total receivable with disclosures
10. An entity a seven year zero interest bearing note on February 1, 2012 in d. Included from the total receivable without disclosures
exchange for property sold. There was no established exchange price
for the property and the note has no ready market. The prevailing rate 2. It is a financing arrangement whereby one party formally transfers its right to
of interest for a note of this type was 7% on February 1, 2012, 6% on accounts receivable to another party n consideration for a loan.
December 31; 2012.What interest rate should be used to calculate the a. Pledge
interest revenue from this transaction for the year ended December 31, b. Assignment
2012 and 2013 respectively? c. Factoring
a. 0% and 0% d. Discounting
b. 7% and 7%
c.7% and 9% 3. It is a financing arrangement that is usually done on a “without recourse.
d.6% and 9% notification basis”
a. Pledge
Chapter 8 b. Assignment
Problem 8-1 c. Factoring
1. The “amortized cost” of loan receivable is the amount at which d. Discounting
a. loan receivable is measured initially minus principal repayment, plus or minus
the cumulative amortization of any difference between the initial amount 4. The equity of the assignor in assigned accounts is equal to
recognized and the principal maturity amount, minus reduction for impairment. a. Assigned accounts receivable
b. The loan receivable is measured initially minus principal repayment, plus or b. Bank loan balance
minus the cumulative amortization of any difference between the initial amount c. Assigned accounts receivable minus bank loan balance
recognized and the initial maturity amount. d. Bank loan balance minus assigned accounts receivable
c. The loan receivable is measured initially
d. The loan receivable is measured initially minus principal repayment 5. When accounts receivable are factored
a. Accounts receivable should be credited
2. In calculating the carrying amount of the loan receivable, the b. Payable to factor is credited
lender adds to the principal. c. A contingent liability is ordinary created
I. Direct origination cost d. The factoring is accounted for as a borrowing
II. Indirect origination cost
III. Origination fee charged to borrower 6. It is a predetermined amount withheld by a factor as a protection against
customer returns, allowances and other special adjustments.
a. I only a. Equity in assigned
b. I and II only b. Service charge
c. I and III only c. Factor’s holdback
d. I,II and III d. Loss on factoring
3. Subsequent to initial recognition, a loan receivable shall be
measured at 7. If a note receivable is discounted with recourse
a. Cost a. A contingent liability does not exist
b. Amortized cost using the straight line method b. Note receivable discounted should be credited
c. Amortized cost using the effective interest method c. Liability for note receivable discounted should be credited
d. Fair value d. Note receivable must be credited
4. Which of the following is not objective evidence of impairment of 8. A note receivable bearing a reasonable interest rate is sold to a bank with
financial asset? recourse. The note receivable discounted account was appropriately credited. The
a. Significant financial difficulty of the issuer or obligor. note receivable discounted account should be reported as
b. A decline in the fair value of the asset below its previous a. Contra asset account for the proceeds from the discounting
carrying amount. transaction
b. Contra asset account for the face amount of the note
 Page 10 of 34

c. Liability account for the proceeds from the discounting transaction c. The face value of the note
d. Liability account for the face of the note d. The maturity value of the note

9. If the note receivable is discounted without recourse 7. Which of the following is used to account for the probable sales discount, sales
a. The contingent liability may disclosed in either a contra account to returns and sales allowances?
note receivable or in a note to the financial statement I. Due from factor
b. Liability for note receivable discounted should be credited II. Recourse liability
c. Note receivable should be credited
d. The transaction should be accounted for as a borrowing as opposed a. I only
to a sale b. II only
c. Both I and II
10. Notes receivable discounted with recourse should be d. Neither I nor II
a. Excluded from total receivable without disclosure of the contingent e.
liability 8.A 90-day 15% interest bearing note receivable is sold to a bank with recourse
b. Excluded from total receivable with disclosure of the contingent after being held for 60-days. The proceeds are calculated using a 12% interest rate.
liability The note receivable has been
c. Included from total receivable without disclosure of the contingent I. Discounted
liability II. Pledged
d. Included from total receivable with disclosure of the contingent
liability a. I only
b. II only
Problem 9-2 c. Both I and II
1.The practice of realizing cash from trade receivable prior to maturity date is d. Neither I nor II
widespread. A term which is not associated with this practice is
a. Hypothecation 9.A note receivable bearing a reasonable interest rate is sold to a bank with
b. Factoring recourse. At the date of the discounting, note receivable discounted account
c. Defalcation should be
d. Discounting a. Decreased by the net proceeds from discounting
b. Increased by the net proceeds from discounting
2. Which of the following is a method to generate cash from accounts receivable? c. Increased by the face amount of the note
I. Assignment d. Decreased by the face amount of the note
II. Factoring
10. After being held for 30-days, a 120-day interest bearing note receivable was
a. I only discounted at a bank at 15%. The amount received from the bank is equal to
b. II only a. Maturity value less discount at 12%
c. Both I and II b. Maturity value less discount at 15%
d. Neither I nor II c. Face value less discount at 12%
e. d. Face value less discount at 15%
3.If receivable are hypothecated against borrowings, the amount of receivable
involved should be Problem 9-3
a. Disclosed in the notes 1.An entity factored its accounts receivable without recourse with a bank. The
b. Excluded from the total receivable with disclosure entity cash as a result of this transaction which is best described as
c. Excluded from the total receivable with no disclosure a. Bank loan collateralized by the entity’s accounts receivable
d. Excluded from the total receivable and a gain or loss is recognized between the b. Bank loan to be repaid by the proceeds from the entity’s accounts
face value and the amount of borrowings receivable
c. Sale of the entity’s accounts receivable to the bank with the risk of uncollectible
4. When the accounts receivable of an entity are sold outright to another entity accounts retained by the entity
which normally buys accounts receivable, the accounts receivable have been d. Sale of the entity’s accounts receivable to the bank with the risk of uncollectible
a. Pledged accounts retained by the bank
b. Assigned 2. If Financial asset are exchanged for cash and other consideration but the
c. Factored transfer does not meet the criteria for the sale, the transferor and the transferee
d. Collateralized should account for the transaction as
I. Secured Borrowing
5. Which of the following statement is true when receivables are factored without II. Pledged of collateral
recourse?
a. The transaction may be accounted for either as a secured borrowing or sale, a. I only
depending upon the substance of the transaction b. II only
b. The receivable are used as collateral for the promissory note issued to the factor c. Both I and II
by the owner of the receivables d. Neither I nor II
c. The factor assumes the risk of the collectibility and absorbs any credit lose in 3.All but one of the following are required before a transfer of receivable can be
collecting the receivables. recorded as a sale.
d. The financing cost should be recognized rateably over the collection period of a. The transferred receivable are beyond the reach of the transferor
the receivable and its creditor
b. The transferor has not kept effective control over the transferred
6. A 90-day 15% interest bearing note receivable is sold to a bank without recourse receivable through a repurchased agreement
after being held for 60-days. The proceeds are calculated using 12% interest rate. c. The transferor maintains continuing involvement
The amount credited to note receivable at the date of the discounting transaction d. The transferee can pledge or sell the transferred receivable
would be 4. An entity transferred financial asset to another entity. The transfer meets the
a. The sae as the cash proceeds condition to be accounted as sale. The transferor should do each of the following
b. Less than the face value of the note except
 Page 11 of 34

a. Remove all asset sold from the statement f financial position 8. Variable production overheads are allocated to each unit of production
b. Record all asset received and liabilities incurred as proceeds from the on the basis of
sale a. Normal capacity of the production facilities
c. Measure the asset received and liabilities incurred at cost b. Actual use of the production facilities
d. Recognize any gain or loss on the sale c. Either the normal capacity or the actual use of production
5. Which of the following is not an objective in accounting for transfer of financial facilities, whichever is appropriate
asset? d. Neither the normal nor the actual use of production facilities
a. To derecognized asset when control is gained. 9. The inventories of a service provider may simply be described as
b. To derecognized liability when extinguished a. Work in progress
c .To recognized liability when incurred b. Unbilled services
e. To derecognized asset when control is given c. Billed services
d. Service inventory
10. The cost of inventory of a service provider include which of the
Chapter 10 following
Problem 10-1 (PAS 2) I. Labor and other cost of personnel directly engaged in
1. Inventories are defined as providing the service.
I. Asset held for sale in the ordinary course of business, in the II. Compensation of supervisor directly engaged in providing
process of production for such sale, or in the form of the service.
materials or supplies to be consumed in the production III. Attributable overhead incurred in providing the service.
process or in the rendering of services.
II. Asset held for sale, in the process of production, or in the a. I only
form of materials or supplies to be consumed in the b. II and II only
production process. c. I and III only
III. Tangible asset held for sale in the ordinary course of d. I, II and III
business, in the process of production, or in the form of
materials or supplies to be consumed in the production Problem 10-2 (IAA)
process or in the rendering of services. 1. Which term represent the deduction from the invoice price of
purchased goods granted by supplier for early payment?
a. I only a. Sales discount
b. II only b. Purchased discount
c. III only c. Trade discount
d. I, II and III d. Purchased return and allowance
2. The total cost of inventory is sum of 2. A discount given to a customer for purchasing a large volume of
a. Cost of purchased and cost of conversion. merchandise is typically referred to as
b. Direct cost, indirect cost and other cost. a. Trade discount
c. Cost of purchased, cost of conversion and other cost incurred in b. Quantity discount
bringing the inventory to the present location and condition. c. Size discount
d. Cost of conversion and other cost incurred in bringing the d. Cash discount
inventory to the present location and condition. 3. When determining the unit cost of an inventory item, which of the
3. The cost of purchase of inventory does not include following should not be included?
a. Purchase price a. Interest on loan obtained to purchase the item
b. Import duties and irrecoverable taxes b. Commission paid when purchased
c. Freight, handling cost and other cost directly attributable to the c. Labor cost of the item when manufactured
acquisition of goods d. Depreciation of plant equipment used in manufacturing the item
d. Trade discount, rebates and other similar item 4. What is the method of accounting for inventories in which the cost of
4. The cost of conversion of inventories include all of the following, except goods sold is recorded each time a sale is made?
a. Costs directly related to the units of production, such as direct a. Professional inventory system
labor b. Periodic inventory system
b. Systematic allocation of fixed production overhead c. Perpetual inventory system
c. Systematic allocation of variable production overhead d. Planned inventory system
d. Systematic allocation off administrative overhead 5. An entity returned merchandise purchased on account. Under a
5. Fixed production overhead include all the following except perpetual inventory system, the account credited in the journal entry to
a. Indirect material and indirect labor record the return is
b. Depreciation of factory building a. Purchases
c. Maintenance of factory equipment b. Purchase return and allowances
d. Cost of factory management and administration c. Inventory
6. The allocation of fixed factory overhead to the cost of the conversion d. Accounts payable
is based on 6. Which of the following is not true of the perpetual inventory method?
a. Normal capacity of the production facilities a. Purchase are recorded as debit to the inventory account
b. Actual use of the production facilities b. The entity to record a sale includes a debit to cost of goods sold
c. Either the normal capacity or actual use of the production and credit to inventory
facilities c. After a physical inventory count, inventory is credited for any
d. Relative sales value missing inventory
7. How should unallocated fixed overhead costs be treated? d. Purchase returns are recorded by debiting accounts payable and
a. Allocated to finished goods and cost of goods sold crediting purchased return and allowances
b. Allocated to raw materials, goods in process and finished goods 7. An entry debiting inventory and crediting cost of goods sold would be
c. Recognized as expense in the period incurred made when
d. Allocated to goods in process, finished goods and cost of goods a. Merchandise is sold and the periodic inventory method is used
sold b. Merchandise is sold and the perpetual inventory method is used
c. Merchandise is returned and the perpetual method is used
 Page 12 of 34

d. Merchandise is returned and periodic method is used 7. Theoretically, cash discount permitted on purchased raw materials
8. Which of the following items should be included in inventory at the should be
end of reporting period? a. Added to other income, whether taken or not
a. Goods in transit which were purchased FOB shipping point b. Added to other income, only if taken
b. Goods in transit which were purchased FOB destination c. Deducted from inventory, whether taken or not
c. Goods received from another entity on consignment d. Deducted from inventory, only if taken
d. Goods in transit to a customer which were sold to a customer 8. When using the periodic system, which of the following generally would
FOB shipping point not be separately accounted for in the computation of cost of goods
9. Cost of goods sold is equal to sold?
a. The cost of inventory at the end of a period plus net purchases a. Trade discount applicable to purchases
minus the cost of inventory at the beginning of a period. b. Cash discount taken during the period
b. The cost of inventory at the beginning of the period minus net c. Purchase returns and allowances during the period
purchase plus cost of inventory at the end of the period d. Cost of transportation in for merchandise purchased during the
c. The cost of inventory at the beginning of the period plus net sale period
minus the cost of inventory at the end of the period 9. Which is not acceptable basis in measuring inventories?
d. The cost if inventory at the beginning of the period plus net a. Historical cost
purchases minus the cost of inventory at the end of a period b. Net realizable value
10. An exemption to the general rule that the cost should be charged to c. Prime cost
expense in the period incurred is d. Fair value less cost to sell
a. Commission incurred in connection with sale of inventory 10. The valuation of inventory on a prime cost basis
b. General and administrative fixed cost in connection with the a. Would achieve the same result as direct costing
purchase of inventory b. Would exclude all overhead from reported inventory cost
c. Interest cost or financing of inventories that are routinely c. Is always achieved when standard costing is adopted
manufactured in large quantities on a repetitive basis d. Is always achieved when the FIFO cost flow assumption is adopted
d. Factory overhead cost incurred on a product manufactured but
not sold during the current period Problem 10-4 (IFRS)
1. Which of the following should not be taken into account when
Problem 10-3 (AICPA Adapted) determining the cost of inventories?
1. The use of a purchase discount lost account implies that the cost of a a. Storage cost of part finished goods
purchased inventory item is the b. Trade discount
a. Invoice price c. Recoverable purchase taxes
b. List price d. Import duties on shipping of inventory inward
c. Invoice price less the purchase discount taken 2. Which of the following costs should be included in inventory valuation?
d. Invoice price less the purchase discount allowable whether taken a. Administrative costs
or not taken b. Abnormal material usage
2. The use of a purchase discount account implies that the cost of a c. Storage costs relating to finished goods
purchased inventory item is the d. Fixed production overhead
a. Invoice price 3. Which of the following statement in relation to costing of inventory is
b. List price true?
c. Invoice price less the purchase discount taken I. Cost of factory management shall be included in the cost of
d. Invoice price less the purchase discount allowable whether taken inventory.
or not taken II. Maintenance expenses for an item of equipment used in the
3. In a periodic inventory system, the beginning inventory is manufacturing process shall be included in the cost of
a. Net purchases minus cost of goods sold inventory.
b. Net purchases minus ending inventory
c. Total goods available for sale minus net purchases a. I only
d. Total goods available for sale minus cost of goods sold b. II only
4. An entity paid in transit insurance premium for consignment goods c. Both I and II
shipped to a consignee. In addition , the entity advanced part of the d. Neither I nor II
commission that will be due when the consignee sells the goods. What 4. Which of the following would not be reported as inventory?
amount should be included by the entity as part of the cost? a. Land acquired for resale by a real state firm
I. Insurance premium b. Shares and bonds held for resale by brokerage firm
II. Advanced commission c. Partially completed goods held by a manufacturing entity
d. Machinery acquired by a manufacturing entity for use in the
a. I only production process
b. II only 5. Which of the following costs of conversion cannot be included in cost of
c. Both I and II inventory?
d. Neither I nor II a. Cost of direct labor
5. Goods on consignment are included in the inventory of b. Factory rent and utilities
a. The consignor but not the consignee c. Salaries of sales staff (sales department shares the building with
b. Both the consignor and the consignee factory)
c. The consignee but not the consignor d. Factory overhead based on normal capacity
d. Neither the consignee nor the consignor 6. The cost of inventories does not include
6. Freight and other handling charges incurred in the transfer of goods a. Salaries of factory staff
from the consignor to consignee are b. Storage cost necessary in the production process before a further
a. Expense on the part of the consignor production stage.
b. Expense on the part of the consignee c. Abnormal amount of wasted materials and distribution costs.
c. Inventoriable by the consignor d. Irrevocable purchase taxes
d. Inventoriable by the consignee
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7. Costs that are incurred in bringing the inventories to their present d. At the time of sale along with an offset to revenue of the liability
location and condition are capitalized as cost of inventories and these of the same amount for the possibility of the return
include 5. “Bill and hold” sales, in which delivery is delayed at the buyer’s request
a. Cost of designing products for specific customers but the buyer assumes title and accepts invoicing, shall be recognized
b. Abnormal amount of wasted material, laborand production cost when
c. Storage cost not necessary in the production process before a. The buyer makes an order
further production stage b. The seller starts manufacturing the goods
d. Distribution cost c. The title has been transferred but the goods are kept on the
8. Inventories encompass all of the following, except seller’s premises.
a. Merchandise purchased by a retailer d. It is probable that the delivery will be made ,payment term s have
b. Land and other property not held for sale been established and the buyer has acknowledge the delivery
c. Finished goods purchased instruction.
d. Materials and supplies awaiting use in the production process
9. A property developer must classify properties that it holds for sale in
the ordinary corse of business as
a. Inventory Chapter 11
b. Property, plant and equipment Problem 11-1 (PAS 2)
c. Financial asset 1.Inventories shall be measured at
d. Investment property
10. Consumable stores or supplies to be consumed in the production a. Cost
process are reported as b. Net realizable value
a. Inventories c. Lower of cost and net realizable value
b. Property, plant and equipment d. Lower of cost and market
c. Investment property
d. Intangible assets 2. The cost of inventories shall be measured using

Problem 10-5 (IFRS) a. FIFO

1. Which of the following situation would indicate that “risk and reward” b. Average method
of ownership have been transferred to the buyer and therefore c. LIFO
revenue should be recognized? d. Either FIFO or average method
a. When the seller retains an obligation for unsatisfactory
performance not covered by normal warranty provision. 3. Net realizable value is
b. When the receipt of revenue from a particular sale is contingent
on the derivation of revenue by the buyer from its sale of the a. Current replacement cost
goods as in consignment. b. Estimated selling price
c. When the goods are shipped subject to installation and the c. Estimated selling price less estimated cost to complete
installation is a significant part of the contract which has not yet d. Estimated selling price less estimated cost to complete less estimated cost to
been completed by the seller. sell
d. When the buyer has a right ti return the goods or right to seek a
refund and the seller can reliably estimate the future returns 4. Inventories are usually written down to net realizable value
based on past experience and other relevant factor.
2. An entity is a large manufacturer of machines. A major customer has a. item by item
placed an order for a special machine for which it has given a deposit to b. By classification
the entity. The parties have agreed on a price for the machine. As per c. By total
terms of the sale agreement, it is FOB or free on board contract and the d. by segment
title passes to the buyer when goods are loaded into the ship at the
port. What should revenue be recognized by the entity? 5.The amount of any write down of inventory to net realizable value and all losses
a. When the customer orders the machine of inventory should be
b. When the deposit is received
c. When the machine is loaded at the port a. Recognized as operating expense in the period write down or loss occurs.
d. When the machine has been received by the customer b. Recognized as other expense in the period write down or loss occurs.
3. A large manufacturer of cosmetics sell merchandise to a retailer, which c. Recognized as component of cost of sales in the period the write down or loss
in turn sell the goods to the public at large through its chain of retail occurs.
outlets. The retailer purchases merchandise from the manufacturer d. Deferred until the related inventory is sold.
under consignment contract. When should revenue from the sale of
merchandise to the retailer be recognized by the manufacturer? 6. When inventory declines in value below original cost, what is the maximum
a. When goods are delivered to the retailer amount that the inventory can be valued at?
b. When goods are sold by the retailer
c. It will depend on the terms of delivery of the merchandise , for a. Sales price
example, CIF or FOB b. Net realizable value
d. It will depend n the terms of payment c. Historical cost
4. A new entity manufacturing and selling consumable products has come d. Sales price reduced by estimated cost to sell
out with an offer to refund the cost of purchase within one month
after the sale if the customer is not satisfied with the product. When 7. Lower of cost and net realizable value as it applies to inventory is best
should the entity recognize the revenue? described as the
a. When goods are sold to the customers
b. After one month of sale a. reporting of the loss when there is a decrease in the future utility below the
c. Only if goods are not returned by the customers after the period original cost.
of one month b. Method of determining cost of goods sold
c. Assumption to determine inventory flow
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d. Change in inventory value to net realizable value b. Fair value less cost to sell
c. Cost
8. How should sales staff commission be dealt with when valuing inventories at d. Net realizable value
the lowerof cost and net realizable value?
6. When agricultural crops have been harvested or mineral ores have been
a. Added to cost extracted and a sale is assured under a forward contract or government
b. Ignored guarantee, such inventories are measured at
c. Deducted in arriving at net realizable value
d. Deducted from cost a. Net realizable value
b. Cost
9. How should trade discount be dealt with when valuing inventories at the lower c. Standard cost
ofcost and the net realizable value? d. Relative sale price

a. Added to cost 7. The credit balance that arises when a loss on a purchase commitment is
b. Ignored recognized should be
c. Deducted in arriving at net realizable value
d. Deducted from cost a. Presented as a current liability
b. Subtracted from ending inventory
10. How should prompt payment discount to be dealt with when valuing c. Presented as an appropriation of retained earnings
inventories at the lower of cost and net realizable value? d. Presented in the income statement

a. Added to cost 8.An example of an inventory accounting policy that should be disclosed is
b. Ignored
c. Deducted in arriving at net realizable value a. Effect of inventory profit caused by inflation
d. Deducted from cost b. Classification of inventory into raw materials, work in process and finished
goods.
Problem11-2 (PAS 2) c. Identification of major supplies
1.This cost formula assumes that the items of the inventory that were purchased d. Method used for inventory costing
or produced first and sold first and consequently the items remaining in inventory
at the end of the period are those most recently purchased or produced. 9. Which is not a mandated disclosures in relation to inventory?

a. FIFO a. Accounting policy adopted in measuring inventories, including the cost formula
b. LIFO used
c. Weighted average b. The carrying amount of each item of inventories
d. Moving average c. The carrying amount of inventories carried at fair value less cost to sell
2. under the weighted average cost formula, the cost of each item is determined d. The amount of inventories recognized as expense during the period
from
10. Which is not a required disclosure in relation to inventory?
I. Weighted average of the cost of similar items at the beginning of a period and
the cost of similar items at the end of the period. a. The amount of any write down of inventories recognized as expense
b. The amount of any reversal of write down of inventories
II. Weighted average of the cost of similar items at the beginning of a period and c. The circumstances or events that led to the reversal of a write down of
the cost of similar items purchased or produced during the period. inventories.
d. The fair value less cost to sell of inventories pledged as security for liabilities.
a.I only
b. II only Problem11-3 (AICPA Adapted)
c. Either I or II 1.Which of the following inventory method measures most closely the current
d. Neither I nor II cost of inventory?

3. The weighted average method may be calculated a. FIFO

b. Specific Identification
I. On a periodic basis c. Weighted Average
II. As each shipment is received depending upon the circumstances of the entity. d. LIFO

a.I only 2. Which inventory cost flow assumption would consistently result in the highest
b. II only income in a period of sustained inflation?
c. Both I and II
d. Neither I nor II a. FIFO
b. LIFO
4. The costing of inventory must be deferred until the end of the reporting under c. Weighted average
which of the following method of inventory valuation? d. Specific Identification

a. Moving Average 3. In a period of falling prices, the use of which inventory cost flow method would
b. Weighted Average typically result in the highest cost of goods sold?
c. LIFO perpetual
d. FIFO perpetual a. FIFO
b. LIFO
5. Commodities of broker-trader are measured at c. Weighted average
d. Special Identification
a. Fair value
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4. In a period of rising prices, the inventory cost allocation method that tends to b. Biological activity
result in the lowest reported net income is c. Economic activity
d. Development activity
a. LIFO
b. FIFO 3. Biological asset are measured at
c. Moving average a. Cost
d. Weighted average b. Lower of course or net realizable value
c. Net realizable value
5. Which inventory cost flow assumption provides the best measure of earnings, d. Fair value less cost to sell
where “best” means most appropriate for predicting future earnings, when prices
have been declining? 4. Agricultural produce is measured at
a. Fair value
a. FIFO b. Fair value less cost to sell at the point of harvest
b. Specific identification c. Net realizable value
c. LIFO d. Net realizable value less normal profit margin
d. Average cost
5. It is the harvested product of an entity’s biological assets.
6. Cost of goods sold is the same under a periodic system as under a perpetual a. Agricultural
system when an entity uses b. Agricultural produce
c. Harvest
a. FIFO d. Product
b. LIFO
c. Weighted average 6. Agricultural activity result in which of the following type of asset?
d. Specific identification a. Biological asset only
b. Agricultural produce only
7. The specific identification method of inventory costing c. Both biological asset and agricultural produce
d. Neither biological asset nor agricultural produce
a. Eliminates all opportunity for profit manipulation
b. Matches the flow of recorded costs with physical flow of goods 7. Agricultural activity includes all of the following except
c. Can be used only with a perpetual inventory system a. Raising livestock
d. Is a violation of generally accepted accounting principle b. Perennial cropping
c. Acquaculture
8. The inventory cost was lower using FIFO than LIFO. If there is no beginning d. Ocean fishing
inventory, what direction did the cost of purchase move during the period?
8. Biological transformation results from asset changes through all of the
a. Up following, except
b. Down a. Growth
c. Steady b. Degeneration
d. Cannot be determined c. Procreation
d. Production of agricultural produce
9. Which of the following attribute would not be used to measure inventory?
9. An active market is a market were all of the following conditions exist,
a. Historical cost except
b. Current replacement cost a. Willing buyers and sellers can normally be found at anytime
c. Net realizable value b. Prices are available to the public
d. Present value of future cash flows c. The items traded are homogeneous
d. The items traded are heterogeneous
10. When a portion of inventory has been pledged as security for a loan
10. Which of the following costs should not be included in cost sell?
a. The value of the inventory pledged should be deducted from the debt a. Commissions to brokers and dealers
b. An equal amount of retained earnings should be appropriated. b. Levies by regulatory agencies
c. The fact should be disclosed but the amount of current asset should not be c. Transfer taxes and duties
affected d. Transport cost
d. The cost of the pledged inventory should be transferred from current asset to
noncurrent asset Problem 12-2 (IFRS)
1. Generally speaking, biological assets relating to agricultural activity
shall be measured using
a. Historical cost
Chapter 12 b. Historical cost less depreciation less impairment
Problem 12-1 (PAS 41) c. Fair value approach
1. Biological assets are d. Net realizable value
a. Living animals only
b. Living plants only 2. An entity had a plantation forest that is likely to be harvested and sold
c. Both living animals and living plants in 30years. The income shall be accounted for in which of the
d. Neither living animals and living plants following?
a. No income shall be reported annually until first harvest and sale in
2. It is the management by an entity of the biological transformation and 30 years
harvest of biological assets for sale or for conversion into agricultural b. Income shall be measured annually and reported using a fair value
produce or into additional biological asset. approach that recognizes and measures biological growth
a. Agricultural activity
 Page 16 of 34

c. The eventual sale proceeds shall be estimated and matched to the A. The fair value less cost to sell at point of harvest
profit and loss account over the 30-year period B. The historical value
d. The plantation forest shall be measured every 5-years and the C. The historical cost less accumulated impairment losses
increase in value shown in the statement of comprehensive D. Market value
income
Problem 12-3 (IFRS)
3. Which of the following statement in relation to agricultural produce is 1. Which of the following is not dealt with by PAS 41?
true? a. The accounting for biological asset
I. In all case, an entity shall measure agricultural produce at b. The initial measurement of agricultural produce harvested from the entity
the point of harvest at fair value less cost to sell. c. The processing of agricultural produce after harvesting
II. The fair value of agricultural produce at the point of harvest d. The accounting treatment of government grant received in respect of biological
can always be measured reliably. asset

a. I only 2.Land that is related to agricultural activity is measured

b. II only a. At fair value
c. Both I and II b. In accordance with PAS 16, Property, plant and equipment ,or PAS 40,
d. Neither I nor II Investment property
c. At fair value in combination with the biological asset that is being grown on
4. Regarding the choices of measurement basis used for valuing biological the land.
assets, PAS 41 d. At the resale value separate from the biological asset that is being grown on the
a. Sets out several ways of measuring fair value land.
b. Recommends the use of historical cost
c. Recommends the use of current cost 3. An unconditional government grant related to a biological asset that has been
d. Recommends the use of present value measured at fair value less cost to sell shall be recognized
a. Income when grant become receivable
5. Where the fair value of the biological asset cannot be determined b. A deferred credit when the grant become receivable
reliably, the biological asset shall be measured at c. Income when the grant application has been submitted
a. Cost d. A deferred credit when the grant has been approved
b. Cost less accumulated depreciation
c. Cost less accumulated depreciation less accumulated impairment 4.If the government grant related to a biological asset ,the grant shall be
losses recognized as
d. Net realizable value a. Income when the condition attaching to the grant are met
b. Income when the grant has been approved
6. Which of the following is unlikely to be used in fair value c. A deferred credit when the conditions attached to the government grant are
measurement? met
a. Quoted price in a market d. A deferred credit when the grant is approved
b. The most recent market transaction price 5. Where there is a production cycle of more that one year for a biological asset,
c. The present value of the expected net cash flows from the asset PAS 41 encourages separate disclosure of the
d. External independent valuation a. Physical change only
b. Price change only
7. A gain or loss arising on the initial recognition of a biological asset and c. Total change in value
from a change in the fair value less to sell of a biological asset shall be d. Physical change and price change
included in
a. Profit or loss for the period 6.An entity owns a herd of cattle. Where should changes in the fair value of a herd
b. Other comprehensive income of cattle be recognized in the financial statement
c. A separate revaluation reserve a. In profit o loss only
d. An appropriation reserve b. In other comprehensive income
c. In profit or loss or other comprehensive income
8. Where thre ia a long aging or maturation process after harvest, the d. In the statement of cash flow only
accounting for such products shall be dealt with
a. PAS 41, agriculture 7.All the following criteria must be satisfied before a biological asset can be
b. PAS 2, inventories recognized in an entity’s financial statement, except
c. PAS16, Property, plant and equipment a. The entity controls the asset as a result of past event.
d. PAS 40, Investment property b. It is probable that future economic benefits relating to the asset will flow to the
entity
9. Which of the following information shall be disclosed in relation to c. An active market for the asset exist
agricultural activity? d. The fair value or cost of the asset can be measured reliably
a. Separate disclosure of the gain or loss relating to biological asset
and agricultural produce 8.All of the following would be classified as biological asset, except?
b. The aggregate gain or loss arising on the initial recognition of the a. Dairy cattle
biological asset and agricultural produce and from the change in b. Chickens
fair value less cost to sell of biological asset c. Eggs
c. The total gain or loss from biological asset, agricultural produce d. Trees
and from changes in fair value less cost to sell of the biological
asset 9.Which of the following would be classified as agricultural produce?
d. There is no requirement to disclose separately any gain or loss a. Tree
b. Bush
10. When agricultural produce is harvested, the harvest shall be accounted c. Butter
for by using PAS 2, Inventories, or another application PFRS. For the d. Apple
purpose of that standard, cost at the date of harvest is deemed to be
 Page 17 of 34

10. Which of the following would be classified as a production that is the result of f. Levies by regulatory agencies
processing after harvest? g. Transfer taxes and duties
a. Cotton h. Transport cost
b. Wool
c. Bananas Problem 12-2 (IFRS)
d. Cheese 11. Generally speaking, biological assets relating to agricultural activity
shall be measured using
e. Historical cost
Chapter 12 f. Historical cost less depreciation less impairment
Problem 12-1 (PAS 41) g. Fair value approach
11. Biological assets are h. Net realizable value
e. Living animals only
f. Living plants only 12. An entity had a plantation forest that is likely to be harvested and sold
g. Both living animals and living plants in 30years. The income shall be accounted for in which of the
h. Neither living animals and living plants following?
e. No income shall be reported annually until first harvest and sale in
12. It is the management by an entity of the biological transformation and 30 years
harvest of biological assets for sale or for conversion into agricultural f. Income shall be measured annually and reported using a fair value
produce or into additional biological asset. approach that recognizes and measures biological growth
e. Agricultural activity g. The eventual sale proceeds shall be estimated and matched to the
f. Biological activity profit and loss account over the 30-year period
g. Economic activity h. The plantation forest shall be measured every 5-years and the
h. Development activity increase in value shown in the statement of comprehensive
income
13. Biological asset are measured at
e. Cost 13. Which of the following statement in relation to agricultural produce is
f. Lower of course or net realizable value true?
g. Net realizable value III. In all case, an entity shall measure agricultural produce at
h. Fair value less cost to sell the point of harvest at fair value less cost to sell.
IV. The fair value of agricultural produce at the point of harvest
14. Agricultural produce is measured at can always be measured reliably.
e. Fair value
f. Fair value less cost to sell at the point of harvest e. I only
g. Net realizable value f. II only
h. Net realizable value less normal profit margin g. Both I and II
h. Neither I nor II
15. It is the harvested product of an entity’s biological assets.
e. Agricultural 14. Regarding the choices of measurement basis used for valuing biological
f. Agricultural produce assets, PAS 41
g. Harvest e. Sets out several ways of measuring fair value
h. Product f. Recommends the use of historical cost
g. Recommends the use of current cost
16. Agricultural activity result in which of the following type of asset? h. Recommends the use of present value
e. Biological asset only
f. Agricultural produce only 15. Where the fair value of the biological asset cannot be determined
g. Both biological asset and agricultural produce reliably, the biological asset shall be measured at
h. Neither biological asset nor agricultural produce e. Cost
f. Cost less accumulated depreciation
17. Agricultural activity includes all of the following except g. Cost less accumulated depreciation less accumulated impairment
e. Raising livestock losses
f. Perennial cropping h. Net realizable value
g. Acquaculture
h. Ocean fishing 16. Which of the following is unlikely to be used in fair value
measurement?
18. Biological transformation results from asset changes through all of the e. Quoted price in a market
following, except f. The most recent market transaction price
e. Growth g. The present value of the expected net cash flows from the asset
f. Degeneration h. External independent valuation
g. Procreation
h. Production of agricultural produce 17. A gain or loss arising on the initial recognition of a biological asset and
from a change in the fair value less to sell of a biological asset shall be
19. An active market is a market were all of the following conditions exist, included in
except e. Profit or loss for the period
e. Willing buyers and sellers can normally be found at anytime f. Other comprehensive income
f. Prices are available to the public g. A separate revaluation reserve
g. The items traded are homogeneous h. An appropriation reserve
h. The items traded are heterogeneous
18. Where thre ia a long aging or maturation process after harvest, the
20. Which of the following costs should not be included in cost sell? accounting for such products shall be dealt with
e. Commissions to brokers and dealers e. PAS 41, agriculture
 Page 18 of 34

f. PAS 2, inventories 7.All the following criteria must be satisfied before a biological asset can be
g. PAS16, Property, plant and equipment recognized in an entity’s financial statement, except
h. PAS 40, Investment property a. The entity controls the asset as a result of past event.
b. It is probable that future economic benefits relating to the asset will flow to the
19. Which of the following information shall be disclosed in relation to entity
agricultural activity? c. An active market for the asset exist
e. Separate disclosure of the gain or loss relating to biological asset d. The fair value or cost of the asset can be measured reliably
and agricultural produce
f. The aggregate gain or loss arising on the initial recognition of the 8.All of the following would be classified as biological asset, except?
biological asset and agricultural produce and from the change in a. Dairy cattle
fair value less cost to sell of biological asset b. Chickens
g. The total gain or loss from biological asset, agricultural produce c. Eggs
and from changes in fair value less cost to sell of the biological d. Trees
asset
h. There is no requirement to disclose separately any gain or loss 9.Which of the following would be classified as agricultural produce?
a. Tree
20. When agricultural produce is harvested, the harvest shall be accounted b. Bush
for by using PAS 2, Inventories, or another application PFRS. For the c. Butter
purpose of that standard, cost at the date of harvest is deemed to be d. Apple
E. The fair value less cost to sell at point of harvest
F. The historical value 10. Which of the following would be classified as a production that is the result of
G. The historical cost less accumulated impairment losses processing after harvest?
H. Market value a. Cotton
b. Wool
Problem 12-3 (IFRS) c. Bananas
1. Which of the following is not dealt with by PAS 41? d. Cheese
a. The accounting for biological asset
b. The initial measurement of agricultural produce harvested from the entity
c. The processing of agricultural produce after harvesting Chapter 13
d. The accounting treatment of government grant received in respect of biological Problem 13-1 (IAA)
asset 1.Which will not require an estimate of inventory?
a.Inventory destroyed by typhoon
2.Land that is related to agricultural activity is measured b.Proof of the reasonable accuracy of the physical count
a. At fair value c. Interim financial statement are prepared
b. In accordance with PAS 16, Property, plant and equipment ,or PAS 40, d.Determination of the ending inventory to be reported in the statement of
Investment property financial position at year end
c. At fair value in combination with the biological asset that is being grown on
the land. 2.How is the gross profit method used as it relates to inventory valuation?
d. At the resale value separate from the biological asset that is being grown on the a.To verify the accuracy of the perpetual inventory record
land. a.To verify the accuracy of the physical inventory
c.To estimate the cost of goods sold
3. An unconditional government grant related to a biological asset that has been d.To provide an inventory value under FIFO
measured at fair value less cost to sell shall be recognized
a. Income when grant become receivable 3.If the gross profit rate is based on sales, the cost of sales is computed as
b. A deferred credit when the grant become receivable a.Net sales times cost ratio
c. Income when the grant application has been submitted b.Gross sales times cost ratio
d. A deferred credit when the grant has been approved c.Net sales divided by sales ratio
d.Gross sales divided sales ratio
4.If the government grant related to a biological asset ,the grant shall be
recognized as 4. If the gross profit rate is based on cost, the cost of sales is computed as
a. Income when the condition attaching to the grant are met a.Net sales times cost ratio
b. Income when the grant has been approved b.Net sales divide by sales ratio
c. A deferred credit when the conditions attached to the government grant are c.Gross sales times cost ratio
met d.Gross sales divided by sales ratio
d. A deferred credit when the grant is approved
5. Where there is a production cycle of more that one year for a biological asset, 5.The gross margin method of estimating ending inventory may be used for all of
PAS 41 encourages separate disclosure of the the following , except
a. Physical change only a.Internal as well as external interim reports
b. Price change only b.Internal as well as external year end reports
c. Total change in value c.Estimate of inventory destroyed by fire or other casualty
d. Physical change and price change d.Dough test either periodic or perpetual system

6.An entity owns a herd of cattle. Where should changes in the fair value of a herd
of cattle be recognized in the financial statement
a. In profit o loss only
b. In other comprehensive income
c. In profit or loss or other comprehensive income
d. In the statement of cash flow only
Problem 13-2 (AICPA Adapted)
1.A major advantage of the retail inventory method is that it
a.Permits companies which use it to avoid taking an annual physical inventory
b.Gives a more accurate statement on inventory cost than other methods
c.Hides cost from customer and employees
d. Provides a method for inventory control and facilitates determination of the
periodic inventory
 Page 19 of 34

2.When the conventional retail inventory method is used, markdowns are ignored a. Noncurrent asset
in the computation of thee cost to retail ratio because b. Property, Plant and Equipment
a. There may be no mark downs in a given year c. Current asset
b. This tends to give a better approximation of the lower of cost or market d. Intangible asset
c. Mark pups are also ignored
d. This tends to result in the showing of a normal profit margin in a period when 7. An increase in the cash surrender value of a life insurance policy owned
no markdown goods have been sold. by an entity would be recorded by
a. Increasing annual insurance expense
3. To produce an inventory valuation which approximates the lower of cost or b. Increasing investment income
market using the retail inventory method, the computation of the ratio of cost to c. Memorandum Entry only
retail should d. Decreasing annual insurance expense
a. Include mark-ups but not markdowns
b. Include mark-ups and markdowns 8. Upon the death of an officer, an entity received the proceeds of a life
c. Ignore both mark-ups and markdown insurance held by the entity on the officer. The policy’s cash surrender
d. Include markdown but not mark-ups value had been recorded by the entity at the time of payment. What
amount of revenue should the entity report in the income statement?
4. If a conservative retail inventory methods is used , which of the following a. Proceeds received
calculations would include or exclude net markdowns? b. Proceeds received less cash surrender value
Cost ratio Ending inventory at retail c. Proceeds received plus cash surrender value
a.Include Include d. Zero
b. Include Exclude
c. Exclude Include 9. If the sinking fund is used to purchase securities, the sinking fund
d. Exclude Exclude a. Increases when revenue is earned on the securities
b. Decreases when the securities are purchased
5. The retail inventory method include which of the following in the calculation of c. Decreases when revenue is earned on the securities
the goods available for sale at both cost and retail? d. Is not affected by revenue earned on the securities
a. Freight in
b. Purchase return 10. An independent trustee holds cash in the sinking fund account
c. Mark-ups representing the annual deposit to the fund and interest earned on
d. Markdowns these deposits. How should the sinking fund be classified in the
statement of financial position?
a. The entire balance in the sinking fund is classified as current
asset
CHAPTER 19 b. The entire balance in the sinking fund is classified as
PROBLEM 19 – 1 noncurrent asset
1. Which is not a current fund? c. The cash in the sinking fund is classified a current asset
a. Petty Cash Fund d. The accumulated deposits only are shown as non current
b. Payroll fund investment
c. Sinking fund
d. Tax fund

2. Which is not a noncurrent fund? CHAPTER 20

a. Insurance fund
b. Dividend fund Problem 20 – 1
c. Plant Expansion fund
d. Preferred stock redemption fund 1. It is a financial instrument that derives its value from un “underlying”
such as share price, exchange rate or interest rate.
3. It is set aside in anticipation of future acquisition of additional property,
plant, and equipment. a. Derivative
a. Replacement fund b. Financial asset
b. Insurance fund c. Financial liability
c. Contingency fund d. Equity instrument
d. Plant Expansion fund
2. All the following are characteristics of a derivative, except
4. Investment in long term funds shall be carried at the
a. Amount of cash a. It is acquired or incurred by the entity for the purpose of
b. Amount of cash plus cost of securities and other asset in generating a profit from short – term fluctuations in market
fund. factors.
c. Amount of securities and other assets in the fund. b. Its value changes in response to the change in the specified
d. Amount of cash plus the cost of the securities adjusted for underlying
any discount or premium amortization and other asset in c. It requires no initial investment or a small initial net
fund. investment.
d. It is settled at future date.
5. Interest in life insurance contract shall be carried at
a. NIL
b. Face of policy
c. Total amount of insurance premium paid
d. Cash surrender value 3. The characteristic of a derivative include (choose the incorrect one)

6. Cash surrender value is classified as

 Page 20 of 34

a. The value of the derivative changes in response to the 1. Which of the following is not a distinguishing characteristic of a
change in an “underlying” variable derivative?
b. A derivative has no notional amount
c. The derivative require either no initial net investment or a a. Terms that require or permit net settlement
little net investment than would be required for other types b. Must be “highly effective” throughout its life
of contracts that have a similar response to changes in c. No initial net investment
market factors. d. An underlying and a notional amount
d. The derivative is settled at a future date by a net cash
payment. 2. Derivatives are financial instruments that derive their value from
changes in benchmark based on any of the following, except
4. An example of a “notional” is
a. Share price
a. Numbers of barrels of oil b. Mortgage and currency rate
b. Interest rate c. Commodity price
c. Currency swap d. Discount on accounts receivable
d. Share price
3. The basic purpose of derivative financial instruments is to manage
5. Which of the following is an underlying some kind of risk such as all of the following, except

a. A credit rating a. Share price movement

b. A security price b. Interest rate variation
c. An average daily temperature c. Currency fluctuation
d. All of the above could be underlyings d. Uncollectibility of accounts receivable

6. An agreement between two parties to exchange a specified amount of 4. Uncertainty that the party on the other side of an agreement will abide
a commodity, security or foreign currency on a specified date in the by the terms of the agreement is referred to as
future with the price or exchange rate being set now is referred to as
a. Price risk
a. Interest rate swap b. Credit risk
b. Forward contract c. Interest rate risk
c. Futures contracts d. Exchange rate risk
d. Option
5. Which risk is inherent in an interest rate swap agreement?
7. A contract, traded on an exchange, that allows an entity to buy a
specified quantity of a commodity or a financial security at a specified I. The risk of exchanging a lower interest rate for a higher
price on a specified future date is referred to as interest rate

a. Interest rate II. The risk of nonperformance by the counterparty to the

b. Forward contract agreement.
c. Futures contracts
d. Option a. I only
b. II only
8. A contract giving the owner the right, but not the obligation, to buy or c. Both I and II
sell an asset at a specified price any time during a specified period in d. Neither I nor II
the future is known as
6. In exchange for the right inherent in an option contract, the owner of
a. Interest rate the option will typically pay a price
b. Forward contract
c. Futures contracts a. Only when a call option is exercised.
d. Option b. Only when a put option is exercised.
9. Which is incorrect concerning an option? c. When either a call option or a put option is exercised.
d. At the time the option is received regardless of whether the
a. A call option is a right to purchase an asset at a specified option is exercised or not.
price during a definite period at some future time.
b. A put option is the right to sell an asset at a specified price 7. Which type of contract is unique in that it protects the owner against
during a definite period at some future time. unfavorable movement in the price or rate while allowing the owner to
c. An option is a right and not an obligation to purchase or sell benefit from favorable movement?
an asset.
d. An option requires no payment. a. Interest rate swap
b. Forward contract
10. Derivatives are measure at c. Futures contract
d. Option
a. Fair value
b. Cost 8. An entity enters into a call option contract with an investment house at
c. Fair value less cost to sell the end of the current year. This contract gives the entity the option to
d. Higher between fair value and cost purchase a certain number shares at an option price per share. The
option expires next year. At the end of the current year, the entity pays
a certain amount for the call option. The amount paid by the entity to
Problem 20 – 2 the investment house is referred to as
 Page 21 of 34

a. Option premium 5. Under PAS 39, an embedded derivative shall be separated from the
b. Notional amount host contract when (choose the incorrect one).
c. Strike price
d. Intrinsic value a. The economic characteristics and risks of the host contract
and the embedded derivative are not closely related.
9. If the price of the underlying is greater than the strike or exercise price, b. A separate instrument with the same terms as the
the call option is embedded feature would meet the definition of a derivative.
c. The host contract is within the scope of PFRS 9.
a. At the money d. The host contract is not measured at fair value through
b. In the money profit or loss.
c. On the money
d. Out of the money

10. Which information should be disclosed in relation to derivative Chapter 21

contracts?
Problem 21 – 1
a. Fair value only
b. Notional only 1. Property , plant and equipment are tangible items that
c. Both fair value and notional
d. Neither fair value nor notional I. Are held for use in production or supply of goods and
services, for rental to others or for administrative purposes.
II. Are expected to be used during more than one period.
Problem 20 – 3
a. I only
1. It is a component of a combined or “hybrid” contract that also includes b. II only
a nonderivative host contract with the effect that some of the cash c. Both I and II
flows of the combined contract vary in a way similar to a stand – alone d. Neither I nor II
derivative.
2. Which is not an essential characteristic of property, plant and
a. Derivative equipment?
b. Embedded derivative
c. Separate financial instrument a. The property, plant and equipment are tangible assets.
d. Host contract b. The property, plant and equipment are used in production
or supply of goods and services, for rental purposes and for
2. Financial instruments sometimes contain features that separately meet administrative purposes.
the definition of a derivative instrument. These features are classified c. The property, plant and equipment are expected to be used
as over a period of more than one year.
d. The property, plant and equipment are subject to
a. Swaps depreciation.
b. Notional amounts
c. Embedded derivative instruments
d. Underlyings 3. An item of property, plant and equipment shall be recognized as an
asset when
3. The process of bifurcation
I. It is probable that future economic benefits associated with
a. Protects an entity from loss by entering into a transaction. the asset will flow to the entity
b. Includes entering into an agreement between two
counterparties to exchange cash flows over a specified II. The cost of the asset to the entity can be measured reliably.
period of time in the future.
c. Is the interaction of the price or rate with an associated a. I only
asset or liability. b. II only
d. Separates an embedded derivative from host contract. c. Both I and II
d. Neither I nor II
4. Under PFRS 9, which statement is correct concerning an embedded
derivative? 4. Major spare parts and standby equipment which are expected to be
used over a period of more than one year shall be classified as
I. If the host contract is a financial asset within the scope of
PFRS 9, the embedded derivative is not separated. a. Property, plant and equipment
II. The host contract in its entirety is measured at fair value or b. Inventory
amortized cost depending on the entity’s business model for c. Noncurrent investment
managing financial assets. d. Expense

a. I only 5. Which statement is correct concerning recognition of property, plant

b. II only and equipment?
c. Both I and II
d. Neither I nor II I. Most spare parts and servicing equipment are usually
carried as inventory and recognized as expense when
consumed.
 Page 22 of 34

II. If the spare parts and the servicing equipment can be used b. Fair value
only in connection with an item of property, plant and c. Value in use
equipment and their use is expected to be irregular, they are d. Discounted value
accounted for as property, plant, and equipment and are
depreciated over their useful life or useful life of the related 2. The cost of an item of property, plant and equipment that is acquired in
asset, whichever is shorter. exchange for a combination of monetary and nonmonetary asset is
measured at
a. I only
b. II only a. Fair value of the asset given up plus the amount of any cash
c. Both I and II or cash equivalent transferred.
d. Neither I nor II b. Fair value of the asset received plus the amount of any cash
or cash equivalent transferred
6. Under the cost model, subsequent to initial recognition as an asset, an c. Carrying amount of the asset given plus the amount of any
item of property, plant and equipment shall be carried at cash or cash equivalent transferred.
d. Carrying amount of the asset received plus the amount of
a. Cost any cash equivalent transferred.
b. Revalued amount
c. Cost less accumulated depreciation and any accumulated 3. The cost of an item of property, plant and equipment acquired in a
impairment loss nonmonetary exchange is measured at the
d. Revalued amount less accumulated depreciation and any
accumulated impairment loss. a. Carrying amount of the asset given up
b. Fair value of the asset given up
7. The cost of an item of property, plant and equipment comprises all of c. Carrying amount of the asset received
the following, except d. Fair value of the asset received

a. Purchase price 4. If an entity is able to determine reliably the fair value of the asset given
b. Import duties and nonrefundable purchase taxes up and the fair value of the asset received in an exchange transaction,
c. Any cost directly attributable in bringing the asset to the the cost of the asset acquired is measure at
location and condition for its intended use
d. Initial estimate of the cost of dismantling and removing the a. Fair value of asset given up
item and restoring the site, the obligation for which the b. Fair value of asset received
entity does not incur when the item was acquired c. Either the fair value of asset received or fair value of asset
given up
8. Cost directly attributable to bringing the asset to the location and d. Neither the fair value of asset received nor the fair value of
condition for its intended use include all of the following, except asset given up.

a. Cost of employee benefit not arising directly from the 5. If an item of property, plant and equipment is acquired in exchange for
construction and acquisition of property, plant and a nonmonetary asset and the exchange lacks commercial substance,
equipment the cost of the asset acquired is measured at
b. Cost of site preparation
c. Initial delivery and handling cost a. Fair value of the asset given up
d. Installation and assembly cost b. Fair value of the asset received
c. Carrying amount of the asset given up
9. Costs that are expensed immediately include all of the following, except d. Carrying amount of the asset received

a. Cost of opening a new facility 6. Which is incorrect concerning acquisition of an item of property, plant
b. Cost of introducing a new product or service , including cost and equipment by self – construction?
of advertising and promotional activities
c. Cost of conducting business in a new location, including cost a. The cost of self – constructed asset is determined using the
of staff training same principles as for an acquired asset
d. Cost of testing whether the asset is functioning properly b. Any internal profit is eliminated in arriving at the cost of self
– constructed asset
10. Costs that are expensed immediately include all of the following, except c. The cost of abnormal amount of wasted material, labor and
other resources incurred in the cost of the asset.
a. Cost incurred while an item capable of operating in a d. The cost of normal amount wasted material, labor and
manner intended by management has yet to be brought into resources incurred in the production of self – constructed
use, or operated at led then capacity asset are included in the cost of the asset.
b. Initial operating loss
c. Cost of relocating or reorganizing part or all of an entity’s 7. Which of the following terms best described the removal of an asset
operations from an entity’s statement of financial position?
d. Professional fee arising directly from the acquisition of an
item of property, plant and equipment a. Derecognition
b. Impairment
Problem 21 – 2 c. Writeoff
d. Depreciation
1. It is the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal t the end of its 8. The carrying amount of an item of property, plant and equipment shall
useful life or expects to incur when settling a liability. be recognized

a. Entity – specific value I. On disposal

 Page 23 of 34

learned from the bank that it was being charged interest on the loan it
II. When no future economic benefits are expected from the had taken to fund the cost of the plant.
use or disposal of the asset
What is the proper treatment of freight and interest expense?

a. Both expenses are capitalized.

a. I only b. Interest may be capitalized but freight is expense
b. II only c. Freight is capitalized but interest cannot be capitalized
c. Either I or II under this circumstances
d. Neither I nor II d. Both expenses are expensed

9. Gains and losses arising from the derecognition of an item of property, 5. Which of the following statement in relation to the cost of an asset is
plant and equipment shall be determined as the difference between true?

a. Gross disposal proceeds and the cost of the asset I. The cost includes cash equivalents paid to acquire an asset
b. Gross disposal proceeds and the carrying amount of the
asset II. The cost includes the fair value of any nonmonetary
c. Net disposal proceeds and the cost of the asset consideration given to acquire an asset
d. Net disposal proceeds and the carrying amount of the asset.

10. Entities are encouraged to disclose all of the following information in a. I only
relation to property, plant and equipment, except b. II only
c. Both I and II
a. The carrying amount of temporarily idle property, plant and d. Neither I nor II
equipment.
b. The gross carrying amount of fully depreciated property, Problem 21 – 4
plant and equipment still in use.
c. The carrying amount of the property, plant and equipment 1. The cost of an item of property, plant and equipment comprises its
classified as held for sale. purchase price, import duties and nonrefundable purchase taxes, and
d. The fair value of property, plant and equipment that is not
materially different from carrying amount when the cost a. The implied interest on the debt to finance the purchase
model is used. b. The fair value of any non cash asset surrendered to acquire
the asset
Problem 21- 3 c. The estimated residual value of the asset
d. All directly attributable costs necessary to bring the asset to
1. Which of the following items shall not be capitalized into the cost of the location and condition for its intended use
property, plant and equipment?
2. When an item of property, plant and equipment is acquired by issuing
a. Cost of excess materials resulting from purchasing error. shares, which of the following is the best basis for establishing the
b. Cost of testing whether the asset works correctly. historical cost of the acquired asset?
c. Initial delivery or handling cost.
d. Cost of preparing the site for installation. a. Historical cost of the asset to the seller
b. Historical cost of the similar asset acquired in another
2. At the beginning of the current year, an entity purchased new transaction by the buyer
machinery that it does not have to pay until after three years. The total c. Fair value of the asset received or the fair value of the
payment on maturity will include both principal and interest. The cost shares issued, whichever is more readily determinable
of the machine would be the total payment multiplied by what time d. Historical cost of the asset is zero since noncash is paid in
value money concept? the acquisition.

a. Present value of annuity 1 3. When plant asset is acquired by deferred payment, which of the
b. Present value of 1 following conditions generally does not indicate the need to consider
c. Future amount of annuity of 1 the imputation of interest in the transaction price?
d. Future amount of 1
a. The interest rate stated on the deferred obligation is
3. An entity installed a new production facility and incurred a number of significantly different from current market interest rate.
expenses at the point of installation. The entity’s account is arguing the b. The cash price of the plant asset is significantly different
most expenses do not qualify for capitalization. Included on those from the deferred obligation assumed by the buyer of the
expenses are initial operating losses. The initial operating losses shall be asset.
c. The instrument representing the deferred obligation is
a. Deferred and amortized over a reasonable period of time. noninterest bearing.
b. Expense and charge to the income statement. d. The face amount of the instrument representing the
c. Capitalized as part as the cost of plant as directly deferred obligation is equal to the market value of the plant
attributable cost. asset exchanged.
d. Taken to retained earnings since it is unreasonable to
present it as part of the current year’s income statement. 4. When payment for item of property , plant equipment is deferred
beyond normal credit terms , the difference between the cash price
4. An entity imported machinery to install in its new factory premises equivalent and the total payments shall be recognized as
before year – end. However, due to circumstances beyond its control,
the machinery was delayed by a few months but reached the factory a. Interest expense of the current year
premises before year – end. While this was happening, the entity b. Component of cost of the property, plant and equipment
 Page 24 of 34

c. Interest expense over the credit period c. Government donation

d. Interest expense over the life of the asset d. Government aid

5. If the present value of a note issued in exchange for a plant asset is less 2. Government grants shall be recognized when there is reasonable
than its face amount, the difference shall be assurance that

a. Included in the cost of asset I. The entity will comply with the conditions attaching them.
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset II. The grants will be received.
d. Included in interest expense in the year of issuance
a. I only
6. An entity purchased a plant asset under a deferred payment contract. b. II only
The agreement was to pay P10, 000 per year for five years. The plant c. Both I and II
asset shall be measured at d. Neither I nor II
3. These are government grants whose primary condition is that an entity
a. P50, 000 qualifying for them shall purchase, construct or otherwise acquire long-
b. P50, 000 plus imputed interest term assets.
c. Present value of P10, 000 annuity for five years at an
imputed interest a. Grants related to assets
d. Present value of P10, 000 annuity for five years discounted b. Grants related to income
at the bank prime interest rate c. Government gift
d. Government appropriation
7. An entity purchased a plant asset under a deferred payment contract.
The agreement was to pay P10, 000 at the time of purchased and P10, 4. What is the acceptable approach in accounting for government grants?
000 at the end of each of the next five years. The plant asset is
measured initially at a. Government grants shall be recognized as income on a
systematic basis over the periods in which the entity
a. The present value of P10, 000 ordinary annuity for five years recognized as expenses the related costs for which the
b. P60, 000 grants are intended to compensate.
c. P60, 000 plus imputed interest b. Government grants shall be credited directly to retained
d. P60, 000 less imputed interest capital.
8. A donated plant asset for which the fair value has been determined, c. Government grants shall be credited directly to retained
and for which directly attributable costs were incurred, shall be earnings.
recorded at an amount equal to d. Government grants shall be included in other
comprehensive income.
a. Directly attributable costs incurred.
b. Fair value and directly attributable costs incurred. 5. Which incorrect concerning recognition of government grant as
c. Carrying amount and directly attributable costs incurred. income?
d. Carrying amount.
a. Grants in recognition of specific expenses shall be
9. Donated equipment for which the fair value has been determined shall recognized as income over the period of the related
be recorded as a debit to the appropriate equipment account and a expense.
credit to b. Grants related to depreciable assets shall be recognized as
income over the periods and in proportion to the
a. Other comprehensive income depreciation of the related assets.
b. Retained earnings c. Grants related to non-depreciable assets requiring
c. Share capital fulfillment of certain condition shall be recognized as income
d. Income over the periods which bear the costs of meeting the
conditions.
10. Which of the following is the most appropriate policy as regards the d. Government grants that become receivable as
allocation of joint overhead cost to plant and equipment constructed by compensation for expenses or losses already incurred shall
the entity for its own use? be recognized as an adjustment of retained earnings.

a. Assign no overhead. 6. Repayment of grant related to income shall be

b. Assign only variable overhead.
c. Assign overhead equal to the amount that would have been a. Recognized as component of other comprehensive income
assigned to production that is curtailed because of the b. Charged to retained earnings
construction. c. Expensed immediately
d. Assign a proportionate share of overhead to the d. Applied first against the deferred income balance and any
construction on the same basis as that used for the excess shall be recognized immediately as an expense.
assignment to normal production.
7. Which of the following statements concerning a repayment of grant
Problem 22 – 1 Multiple choice (PAS 20) related to an asset is true?

1. These represent assistance by government in the form of transfers of I. The repayment of grant related to an asset shall be recorded
resources to an entity in return for past or future compliance with by increasing the carrying amount of the asset.
certain conditions relating to the operating activities of the entity.
II. The cumulative additional depreciation that would have
a. Government grants been recognized to date in the absence of the grant shall be
b. Government assistance recognized immediately as an expense.
 Page 25 of 34

a. I only a. Grant related to asset

b. II only b. Grant related to income
c. Both I and II c. Government gift
d. Neither I nor II d. Government appropriation

8. It is an action by a government designed to provide an economic 4. Government grant in recognition of specific costs is recognized as
benefit specific to an entity or a range of entities qualifying under income
certain criteria.
a. Over the same period as the relevant expense.
a. Government grant b. Immediately.
b. Government assistance c. Over a maximum of 5 years using straight line.
c. Government takeover d. Over a maximum of 5 years using a sum of digits.
d. Subvention
5. Government grant related to depreciable asset is usually recognized as
9. Government assistance includes all the following, except income

a. Free technical advice a. Immediately

b. Provision of guarantee b. Over the useful life of the asset using straight line.
c. Government procurement policy that is responsible for a c. Over the useful life of the asset using sum of years’ digits.
portion of the entity’s sales. d. Over the useful life of the asset and in proportion to the
d. Improved irrigation water system for the benefit of an entire depreciation of the asset.
local community
6. Government grant related to nondepreciable asset that requires
10. In relation to a benefit included in the term “government assistance”, fulfilment of certain condition
which of the following statements is true?
a. Should not be recognized as income
I. The provision of infrastructure in developing areas is a b. Should be recognized as income immediately.
benefit. c. Should be recognized as income over 40 years.
d. Should be recognized as income over the periods which
II. The imposition of trading constraints on competitors is a bear the cost of meeting the conditions.
benefit.
7. A government grant that becomes receivable as compensation for
a. I only expenses or losses already incurred or for the purpose of giving
b. II only immediate financial support to the entity with no future related costs
c. Both I and II should be recognized as income
d. Neither I nor II
a. When received.
b. Of the period on which it become receivable.
c. Over a maximum of 5 years using straight line
d. Over a maximum of 10 years using straight line.

8. Which of the following statement is true relating to a government

CHAPTER 22 grant?
Problem 22 – 1
1. This represents assistance by government in the form of transfer of I. Receipt of a grant does not itself provide conclusive
resources to an entity in return for past or future compliance with evidence that the conditions attaching to the grant have
certain conditions relating to the operating activities of the entity. been or will be fulfilled.

a. Government grant II. Government grant shall not be recognized on a cash basis as
b. Government assistance this is not consistent with GAAP.
c. Government donation
d. Government aid a. I only
b. II only
2. Government grant shall be recognized when there is reasonable c. Both I and II
assurance that d. Neither I nor II

I. The entity will comply with the conditions attaching to the 9. Repayment of grant related to income shall be
grant.
a. Recognized as component of other comprehensive income.
II. The grant will be received. b. Charged to retained earnings.
c. Expensed immediately.
a. I only d. Applied first before the deferred income balance and any
b. II only excess shall be recognized immediately as an expense.
c. Both I and II
d. Neither I nor II 10. Which of the following statements concerning a repayment of grant
related to an asset is true?
3. This is government grant whose primary condition is that an entity
qualifying for the grant shall purchase, construct or otherwise acquire I. The repayment of grant related to an asset shall be recorded
long – term asset. by increasing the carrying amount of the asset.
 Page 26 of 34

a. Record the asset at replacement cost and the grant at the

II. The accumulated additional depreciation that would have nominal value.
recognized to date in the absence of the grant shall be b. Record the grant at value estimated by management.
recognized immediately as an expense. c. Record both the grant and the asset at fair value of the
nonmonetary asset.
a. I only d. Record only the asset at fair value and not recognize the fair
b. II only value of the grant.
c. Both I and II
d. Neither I nor II 2. In the case of grant related to an asset, which of the following
accounting treatment is prescribed?
Problem 22 – 2
a. Record the grant at a nominal value in the first year and
1. Government grant excludes which of the following form of government write it off in the subsequent year.
assistance? b. Either set up the grant as deferred income or deduct it in
arriving at the carrying amount of the asset.
I. Government assistance that cannot reasonably have a value c. Record the grant at fair value in the first year and take it to
placed upon it. income in the subsequent year.
II. Transaction with government that cannot be distinguished d. Take it to the income statement and disclose it as an
from the normal trading transaction of the entity. extraordinary gain.

a. I only 3. In the case of grant related to income, which of the following

b. II only accounting treatment is prescribed?
c. Both I and II
d. Neither I nor II a. Credit the grant to “general reserve” under shareholders’
equity.
2. It is an action by the government designed to provide an economic b. Present the grant in the income statement as “other
benefit specific to an entity or a range of entities qualifying under income” or as separate line item, or deduct it from the
certain criteria.. related expense.
c. Credit the grant to retained earnings.
a. Government grant d. Credit the grant to sales or other revenue from operations in
b. Government assistance the income statement.
c. Government takeover
d. Subvention 4. Which disclosure is not required in relation to government grant?

3. Government assistance includes all the following, except a. The accounting policy adopted for government grant
including method of presentation adopted in the financial
a. Free technical advice statement.
b. Provision of guarantee b. Unfulfilled conditions and other contingencies attaching to
c. Government procurement policy that is responsible for a government assistance.
portion of the entity’s sales. c. The name of the government agency that gave the grant
d. Improved irrigation water system for the benefit of an entire along with the date of sanction of the grant by the
local community. government agency and the date when cash was received in
case of monetary grant.
d. The nature and extent of government grant recognized in
4. In relation to a benefit included in the term “government assistance”, the financial statement and an indication of other form of
which of the following statement is true? government assistance from which the entity has directly
benefited.
I. The provision of infrastructure in developing areas is a
benefit. 5. At the beginning of the current year, an entity received two
II. The imposition of trading constraints on competitors is a government grants, namely Grant one to give financial assistance to the
benefit. entity for start – up costs already incurred, and Grant two to subsidize
the cost of purchasing computer software over a 5 – year period. The
a. I only entity is almost certain to keep its facilities operational for the next 5
b. II only years. Which of the following statements concerning recognition of
c. Both I and II income from the two government grants is true?
d. Neither I nor II
I. Income from grant one should be recognized in full on
5. A forgivable loan from government or the benefit of a government loan receipt in the current year.
at NIL or below market interest rate is accounted for as
II. Income from grant two should be recognized in full at the
a. Government grant only end of 5 years.
b. Government grant assistance only
c. Both government grant and government assistance a. I only
d. Neither government grant nor government assistance b. II only
c. Both I and II
Problem 22 – 3 d. Neither I nor II

1. In the case of a nonmonetary grant, which of the following accounting

treatment is prescribed?
 Page 27 of 34

CHAPTER 23
2. Which of the following cost may not be eligible for capitalization as
Problem 23 – 1 borrowing cost?

1. Borrowing costs are defined as a. Interest on bonds issued to finance the construction of a
qualifying asset.
a. Interest expense calculated using the effective interest b. Amortization of discount or premium relating to borrowings
method. that qualify for capitalization,
b. Finance charges in respect of finance leases. c. Imputed cost of equity.
c. Exchange differences arising from foreign currency d. Exchange difference arising from foreign currency
borrowing to the extent that they are regarded as an borrowings to the extent the exchange difference is
adjustment to interest cost. regarded as an adjustment to interest cost pertaining to a
d. Interest and other costs that an entity incurs in connection qualifying asset,
with borrowing of funds.
3. Capitalization of borrowing cost
2. Which of the following statement is true concerning capitalization of
borrowing cost? a. Shall be suspended during temporary period of delay
b. May be suspended only during extended period of delay in
I. If the borrowing is directly attributable to a qualifying asset, which active development is delayed.
the borrowing cost is required to be capitalized as cost of c. Shall never be suspended once capitalization commences.
the asset. d. Shall be suspended only during extended period of delay I
which active development is delayed.
II. If the borrowing is not directly attributable to a qualifying
asset, the borrowing cost shall be expensed as incurred. 4. Which of the following is a disclosure requirement in relation to
borrowing costs?
a. I only
b. II only I. Amount borrowing costs capitalized during the period.
c. Both I and II II. Segregation of assets that are”qualifying asset” from other
d. Neither I nor II asset in the statement of financial position or as a disclosure
in the note to financial statements.
3. For purposes of capitalization of borrowing cost, which of the following III. Capitalization rate used to determine the amount of
is not a qualifying asset? borrowing costs eligible for capitalization.

a. Manufacturing plant a. I, II and III

b. Power generation facility b. I and II only
c. Investment property c. I and III only
d. Asset that is ready for the intended use or sale d. I only

4. If the qualifying asset is financed by specific borrowing, the 5. An asset is being constructed for an entity’s own use. The asset has
capitalizable borrowing cost is equal to been financed with a specific new borrowing. The interest cost incurred
during the construction period as a result of expenditures for the asset
a. Actual borrowing cost incurred is
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset a. Interest expense in the construction period
minus any investment income from the temporary b. A prepaid asset to be written off over the estimated useful
investment of the borrowing life of the asset
d. Zero c. A part of a historical cost of acquiring the asset to be
allocated over the estimated useful life of the asset.
5. If the qualifying is financed by general borrowing, the capitalizable d. A part of the historical cost acquiring the asset to be
borrowing is equal to allocated over the term of the borrowing used to finance the
construction of the asset.
a. Actual borrowing cost incurred
b. Total expenditures on the asset multiplied by a capitalization 6. When computing the amount of the interest cost to be capitalized, the
rate concept “avoidable interest refers to
c. Average expenditures on the asset multiplied by a
capitalization rate or actual borrowing cost incurred, a. Total interest cost actually incurred
whichever is lower b. A cost of a capital charge for shareholders’ equity
d. Average expenditures on the asset multiplied by a c. The portion of total interest cost which would not have been
capitalization rate or actual borrowing cost incurred, incurred if expenditures for asset construction had not been
whichever is higher made.
d. That portion of average accumulated expenditures on which
Problem 23 – 2 no interest cost was incurred.

1. Which of the following may not be considered a “qualifying asset”? 7. Which of the following assets could be treated as qualifying asset for
purposes of capitalizing borrowing costs?
a. A power generation plant that normally take two years to
construct. a. Investment property
b. An expensive private jet that can be purchased from a local b. Investment in financial instrument
vendor
c. A toll bridge that usually takes more than a year to build
 Page 28 of 34

c. Inventories that are manufactured or produced in large 2. An entity purchased land to be used as the site for the construction of a
quantity on repetitive basis and take a substantial period of plant. Timber was cut from the building site so construction of the plant
time to get ready for use or sale. could begin. The proceeds from the sale of the timber should be
d. Biological asset.
a. Classified as income
8. Which of the following statements about the capitalization of b. Netted against the cost to clear the land and expensed as
borrowing costs as part of the cost of a qualifying asset is true? incurred.
c. Deducted from the cost of the plant.
a. If funds come from general borrowings, the amount to be d. Deducted from the cost of the land.
capitalized is based on the weighted average amount of
expenditure. 3. If an entity purchases a lot and building and subsequently tears down
b. Capitalization always continues until the asset is brought the building and uses the property as a parking lot, the proper
into use. accounting treatment of the cost of the building would depend on
c. Capitalization always commences as soon as expenditure of
the asset is incurred. a. The significance of the cost allocated to the building in
d. Capitalization always commences as soon as interest on relation to the combined cost of the land and the building.
relevant borrowings is being incurred. b. The length of time for which the building was held prior to
its demolition.
9. Which of the following is required for borrowing cost incurred that are c. The contemplated future use of the parking lot.
directly attributable to the construction of a qualifying asset? d. The intention of management for the property when the
building was acquired.
I. Recognized as an expense in the period incurred
4. Land was purchased to be used as the site for the construction of the
II. Capitalized as part of the cost of the asset. plant. A building on the property was sold and removed by the buyer so
that construction on the plant could begin. The proceeds from the sale
a. I only of the building should be
b. II only
c. Either I or II a. Netted against the cost to clear the land and expensed as
d. Neither I nor II incurred.
b. Netted against the cost to clear the land and amortized over
10. An entity is commencing a new construction project which is to be the life of the plant.
financed by borrowing. The key dates for the current year are as c. Deducted from the cost of the land.
follows: d. Classified as other income.

May 15 Loan interest relating to the projects starts to be incurred. 5. An entity’s forest land was condemned for use as a national park.
June 15 technical site planning commences Compensation for the condemnation exceeded the forest land’s
June 30 Expenditure on the project starts to incurred. carrying amount. The entity purchase similar, but larger, replacement
July 15 construction work commences. forest land foe an amount greater than the condemnation award.

From what date can the entity commence the capitalization of the borrowing As a result of condemnation and replacement, what is the net effect on the
costs? carrying amount of forest land reported in the entity’s statement of financial
position?
a. May 15
b. June 15 a. The amount is increased by the excess of the replacement
c. July 30 forest land’s cost over the condemned land’s carrying
d. July 15 amount.
b. The amount is increased by the excess of the replacement
forest land’s cost over the condemnation award.
c. The amount is increased by the excess of the condemnation
award over the condemned forest land’s carrying amount.
CHAPTER 24 d. No effect, because the condemned forest land’s carrying
amount is use as the replacement forest land’s carrying
Problem 24 - 1 amount.

1. When an entity acquire land with a building on it and immediately tears

down the building so that land can be used for the construction of a Problem 24 – 2
plant, the cost incurred to tear down the building should be
1. The cost of the building usually includes all of the following except
a. Expensed as incurred
b. Added to the cost of the plant a. Any renovation or remodelling cost incurred to put the
c. Added to the cost of the land building purchased in a condition for its intended use.
d. Amortized over the estimated time period between the b. Cost of excavation.
tearing down of the building and the completion of the c. Expenditure for service equipment and fixture made a
plant. permanent part of the structure.
d. Cost incurred to have existing building removed to make
room for construction of new building.

2. The cost of land usually includes all of the following except

a. Commission related to acquisition

 Page 29 of 34

b. Property tax after date of acquisition assumed by the 9. An improvement made to a machine increased its fair value and its
purchaser. production capacity by 25% without extending the machine’s useful
c. Property tax to date of acquisition assumed by te purchaser. life. The cost of the improvement should be
d. Cost survey.
a. Expensed
3. The term “betterment” refers to b. Debited to accumulated depreciation
c. Capitalized in the machine account
a. As expenditure made for new facilities which increase d. Allocated between accumulated depreciation and the
“capacity”. machine account
b. Expenditure made to restore “capacity” after abandonment
or retirement. 10. An entity incurred cost to modify its building and to rearrange its
c. An expenditure made to improve existing facilities by production line. As a result, an overall reduction in production cost is
increasing “capacity”. expected. However, the modification did not increase the building’s
d. An expenditure made to help insure continuity of service market value and the rearrangement did not extend the production
capacity. line’s life. Should the building modification cost and the production line
rearrangement cost be capitalized?
4. Which type of expenditure occurs when an entity installs a higher
capacity boiler to heat its plant? a. Only the building modification cost should be capitalized.
b. Only the production line rearrangement cost should be
a. Rearrangement capitalized.
b. Ordinary repair and maintenance c. Both the building modification cost and production line
c. Addition rearrangement cost should br capitalized.
d. Betterment d. The building modification cost and production line
rearrangement cost should be expensed.
5. A building suffered uninsured fire damages. The damaged portion of
the building was refurbished with higher quality materials. The cost and
related accumulated depreciation of the damaged portion are
identifiable. To account for these events, the entity should CHAPTER 25

a. Capitalized the cost of refurbishing and record a loss in the Problem 25 – 1

current period equal to the carrying amount of the damaged
portion of the building. 1. Which of the following statements best describes the term
b. Capitalized the cost of refurbishing by adding the cost to the “depreciation”?
carrying amount of the building
c. Record a loss in the current period equal to the cost of a. The systematic allocation of an asset’s cost less residual
refurbishing and continue to depreciate the original cost of value over its useful life
the building. b. The removal of an asset from an entity’s statement of
d. Record a loss in the current period equal to the sum of the financial position
cost of refurbishing and the carrying amount of the c. The amount by which the recoverable amount of an asset
damaged portion of the building. exceeds its carrying amount
d. The amount by which the carrying amount of an asset
6. Which of the following cost relating to noncurrent assets should not be exceeds its recoverable amount.
capitalized?
2. Carrying amount is the
a. Replacement of a building’s roof every 15 years
b. Cost of site preparation a. Cost of an asset or the amount substituted for cost in the
c. Installation and assembly cost financial statements, less its residual value.
d. Replacement of small spare parts annually. b. Amount of cash or cash equivalent paid or the fair value of
the other consideration given to acquire an asset at the time
7. Which of the following would ordinarily be treated as revenue of its acquisition or construction.
expenditure rather than a capital expenditure? c. Net amount which the entity expects to obtain for an asset
at the end of its useful life after deducting the expected
a. Cost of servicing and overhaul to restore or maintain the costs of disposal.
originally assessed standard of performance. d. Amount at which an asset is recognized in the statement of
b. The replacement of a major component of building financial position after deducting any accumulated
c. An addition to an existing building depreciation and accumulated impairment loss.
d. Cost of improvement that is expected to provide discernible
future benefit 3. Which of the following statements is incorrect with respect to
depreciation?
8. Which of the following expenditures may properly be capitalized?
a. The depreciable amount of item of property, plant and
a. Expenditure for massive advertising campaign equipment shall be allocated on a systematic basis over its
b. Insurance on plant during construction useful life
c. Research development related to a long – term asset which b. The depreciation method used shall not reflect the pattern
is giving the entity a competitive market advantage in which the asset’s economic benefits are consumed by the
d. Title search and other legal costs related to a piece of entity.
property which was not acquired c. The depreciation charge for each period shall be recognized
as an expense unless it is included in the carrying amount of
another asset.
 Page 30 of 34

d. The estimation of the useful life of an item of property, plant

and equipment is a matter of judgement based on the a. Expected usage of the asset
experience of the entity with similar asset. b. Expected physical wear and tear
c. Changes or improvements in production or change in
4. All of the following factors are considered in determining the useful life the market demand for the product output of the asset
of an asset, except d. Expiry date of related lease of the asset.

a. Expected usage of the asset Problem 25 – 2

b. Expected physical wear and tear
c. Technical obsolescence 1. Which of the following terms best describes the cost or an amount
d. Residual value substituted for cost of an asset less its residual value?

5. The production method of depreciation results in a. Revalued amount

b. Carrying amount
a. Constant charge over the life of the asset c. Recoverable amount
b. Decreasing charge over the life of the asset d. Depreciable amount
c. Increasing charge over the life of the asset
d. Variable charge based on the expected use or output of the 2. Which of the following best describes “residual value”?
asset
a. The estimated net amount currently obtainable if the
6. Which is incorrect concerning the residual value of an item of property, asset is at the end of its useful life.
plant and equipment? b. The present value of estimated future cash flows
expected to arise from the continuing use of the asset
a. The depreciable amount is determined after deducting the and from its ultimate disposal.
residual value of the asset. c. The amount at which the asset could be exchanged
b. In practice, the residual value of an asset is often between knowledgeable and willing parties in an arm’s
insignificant and therefore immaterial in the calculation of length transaction.
the depreciable amount. d. The amount of cash or cash equivalents that could
c. The residual value of an asset may increase to an amount currently be obtained by selling the asset in an orderly
equal to or greater than the asset’s carrying amount. disposal.
d. The residual value of an asset shall be reviewed at least at
each financial year – end and if expectations differ from 3. Which of the following statements is true?
previous estimate, the change shall be accounted for as a
change in accounting policy. a. Assets are depreciated even if their fair value exceeds
their carrying amount.
7. The useful life of an item of property, plant and equipment shall be b. Land and buildings are not accounted for separately
reviewed at least at each financial year – end and if expectations are when acquired together.
significantly different from previous estimate, the depreciation charge c. A noncurrent asset acquired as the result of an
for the exchange of assets is not recognized.
d. A gain on disposal of a noncurrent asset is classified as
a. Current period only shall be adjusted revenue.
b. Future period only shall be adjusted
c. Prior periods shall be adjusted 4. Which of the following statements regarding depreciation is true?
d. Current and future periods shall be adjusted
a. An asset must be depreciated from the date of its
8. The depreciation method applied to property, plant and equipment purchase to the date of sale.
shall be reviewed at least at each financial year – end and if there has b. The annual depreciation charge shall be constant over
been a significant change in the expected pattern of economic benefits the life of the asset.
from those assets, the change c. The total cost of an asset must eventually be
depreciated.
a. Shall be accounted for as a change in accounting policy d. If the carrying amount of an asset is less than the
b. Shall not be recognized residual value, depreciation is not charged.
c. Shall be accounted for as a change in accounting
estimate 5. An entity bought a private jet for the use of its top – ranking officials.
d. Shall be accounted for as a correction of a fundamental The private jet can be depreciated either using a composite useful life
error or useful lives of its major components. It is expected to be used over a
period of 7 years. The engine of the jet has a useful life of 5 years. The
9. Useful life of an item of property, plant and equipment is private jet’s tires are replaced every 2 years. The private jet shall be
depreciated using the straight line method over
I. The period of time over which an asset is expected to be
used by the entity. a. 7 years composite useful life.
II. The number of production or similar units expected to be b. 5 years useful life for the engine, 2 years useful life for
obtained from the asset by the entity. the tires, and 7 years useful life applied to the balance
cost of the jet.
a. I only c. 2 years useful life based on conservatism, the lowest
b. II only useful life of all the parts of the jets.
c. Both I and II d. 5 years useful life based on a simple average of the
d. Neither I nor II useful lives of all major components of the jet.

10. Technical or commercial obsolescence arises from Problem 25 – 3

 Page 31 of 34

a. The accumulated depreciation is adjusted to its

1. Depreciation is best described as a method of appropriate balance through retained earnings based
on the straight line method.
a. Asset valuation b. The accumulated depreciation is adjusted to its
b. Current value allocation appropriate balance through net income based on the
c. Cost allocation straight line method.
d. Useful life determination c. The accumulated depreciation is not adjusted but the
remaining carrying amount is allocated over the
2. Which of the following depreciation methods is not based on the remaining useful life using the straight line method.
passage of time? d. The accumulated depreciation is not adjusted but the
remaining carrying amount is allocated over the
a. Sum of units or output method original useful life using the straight line method.
b. Sum of years’ digits
c. Declining balance 9. An entity acquired equipment and used the straight line depreciation
d. Straight line with a useful life of 15 years and no residual value. After 4 years of
using the asset, the entity estimated that the remaining life of
3. In which of the following depreciation methods is residual value not a equipment was six years with no residual value. How should this
factor in determining depreciation charge in early years of the asset’s change be accounted for?
life?
a. Revising future depreciation annually to equal the
a. Straight line original cost divided by six.
b. Service hours b. Revising future depreciation annually to equal the
c. Productive output carrying amount after 4 years divided by six.
d. Declining balance c. Disclosing the effect of the change on each year’s
earnings, but maintaining depreciation as originally
4. Which of the following depreciation methods is not appropriate for determined.
situations involving a large number of similar items, each having a d. Revising future depreciation annually to equal the
small peso cost? depreciable amount divided by six.

a. Inventory method 10. An addition that is an integral part of an older asset normally would be
b. Retirement method depreciated over
c. Replacement method
d. Composite method a. The useful life of the addition
b. The useful life of the addition or the original asset
5. Which of the following statements is incorrect concerning the whichever is shorter
depreciation methods? c. The useful life of the original asset
d. Either the useful life of the addition or the original
a. Under the output method, the cost per unit of asset, as a matter of professional judgement
production is constant.
b. The straight line method is particularly appropriate Problem 25 – 4
where the asset is expected to decline in usefulness as
a function of time and the expected use pattern of the 1. Which of the following statements s the assumption on which straight
asset is fairly constant over time. line depreciation is based?
c. The sum of years’ digits method provides for a
decreasing depreciation charge. a. The operating efficiency of the asset decreases in later
d. First – year depreciation under the double declining years.
balance method is computed as the depreciable b. Service value declines as a function of time rather than
amount multiplied by double the straight line rate. use.
c. Service value declines as a function of obsolescence
6. What factor must be present under the production method of rather than time.
depreciation? d. Physical wear and tear are more important than
economic obsolescence.
a. Total units to be produced can be estimated
b. Production is constant over the life of the asset 2. The straight line depreciation is not appropriate for
c. Repair costs increase with use
d. Obsolescence is exected a. An entity that is neither expanding nor contracting its
investment in equipment because it is replacing
7. In order to calculate the depreciation of an asset for the third year equipment as the equipment depreciates.
using the sum of years’ digits method, which of the following must be b. Equipment on which repairs and maintenance increase
known about the asset? substantially with age.
c. Equipment with useful life that is not affected by the
a. Acquisition cost amount of use.
b. Residual value d. Equipment used consistently every period.
c. Useful life
d. All must be known 3. A principal objection to the straight line method of depreciation is that
it
8. If there is a change in double declining balance to straight line method
a. Provides for the declining productivity of an aging
asset
b. Ignores variation in the rate of asset use
 Page 32 of 34

c. Tends to result in a constant rate of return on a 10. An entity using the composite depreciation method for its fleet of
diminishing investment base trucks, cars and campers retired one of its trucks and received cash
d. Gives smaller periodic writeoff than a deceasing charge from a salvage entity. The net carrying amount of these composite
method assets would be decreased by

4. In which of the following situations is the production method of a. Cash proceeds received and original cost of the truck.
depreciation most appropriate? b. Cash proceeds received.
c. Original cost of the truck less the cash proceeds.
a. An asset’s service potential declines with use d. Original cost of the truck.
b. An asset’s service potential declines with passage of
time
c. An asset is subject to rapid obsolescence
d. An asset incurs increasing repairs and maintenance CHAPTER 26
with use
Problem 26 – 1
5. Which of the following reasons provides the best theoretical support
for accelerated depreciation? 1. The most common method of computing depletion for accounting
purposes is the
a. Assets are more efficient in early years and initially
generate more revenue. a. Percentage depletion method
b. Expenses should be allocated in a manner that b. Decreasing charge method
“smooths” earnings. c. Straight line
c. Repair and maintenance costs would probably increase d. Production method
significantly in later periods so depreciation should
decline. 2. Depletion expense
d. Accelerated depreciation provides earlier replacement
because of the ime value of money. a. Is usually part of cost of goods sold
b. Includes tangible equipment cost in the depletable cost.
6. A depreciable asset has an estimated 15 % residual value. At the end of c. Excludes intangible development cost from the depletable
its estimated useful life, the accumulated depreciation would equal the cost
original cost of the asset under which of the following depreciation d. Excludes restoration cost from the depletable cost.
methods?
3. Information needed to compute a depletion charge per unit includes
I. Straight line the
II. Output method
a. Estimated total amount of resources available for removal.
a. I only b. Amount of resources removed during the period.
b. II only c. Cumulative amount of resources removed.
c. Both I and II d. Amount of resources sold during the period.
d. Neither I nor II
4. Which of the following most accurately describes the generally
7. A machine with a five - year estimated useful life and an estimated 10 % accepted accounting principle regarding the accounting for the costs of
residual value was acquired at the beginning of the current year. At the drilling dry wells in the oil and gas industry?
end of the fourth year, accumulated depreciation, using the sum of the
years’ digits method, would be a. Only the successful method may be used.
b. Only the full cost method may be used.
a. Original cost less residual value multiplied by 1/15. c. Both the successful effort and full cost methods may be
b. Original cost less residual value multiplied by 14/15. used.
c. Original cost multiplied by 14/15 d. Neither the successful effort nor the full cost method may
d. Original cost multiplied by 1/15 be used pending the promulgation by the securities and
exchange commission of its own approach to accounting for
8. Which of the following uses straight line depreciation? the costs of drilling dry wells.

I. Group depreciation 5. Which type of expenditure is included in the term “exploration and
II. Composite depreciation evaluation” of mineral resources.

a. I only I. The extraction and the processing of mineral resources for

b. II only transport to market.
c. Both I and II II. The commercial review of possible areas for mineral
d. Neither I and II extraction before bidding for the legal rights to explore a
specific area.
9. The composite depreciation method
a. I only
a. Is applied to a group of homogenous assets b. II only
b. Is an accelerated method of depreciation c. Either I or II
c. Does not recognise gain or loss on the retirement of a d. Neither I nor I
single asset in the group
d. Excludes residual value from the base of the Problem 26 – 2
depreciation calculation
1. Exploration and evaluation expenditures are incurred
 Page 33 of 34

I. Fair value which is usually the market value of an item of

a. When searching for an area that may warrant detailed property, plant and equipment.
exploration, even though the entity has not yet obtained the II. Depreciated replacement cost, in the absence of fair value.
legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been a. I only
obtained, but the technical feasibility and commercial b. II only
viability of extracting a mineral resource is not yet c. Both I and II
demonstrable. d. Neither I nor II
c. When specific area is being developed and preparations for
commercial extraction are being made. 2. When there is no evidence of market value because of the specialized
d. In extracting mineral resource and processing the resource nature of the plant and equipment and because these items are rarely
to make it marketable or transportable. sold, the estimate of fair value is equal to

2. Does PFRS 6 require an entity to recognize exploration and evaluation a. Replacement cost
expenditure are an asset? b. Depreciated replacement cost
c. Net realizable value
a. Yes, but only to the extent such expenditure is recoverable d. Present value of cash inflows from the use of the asset.
in future periods.
b. Yes, but only to the extent the technical feasibility and 3. What is the treatment of the accumulated depreciation on the date of
commercial viability of extracting the associated mineral revaluation?
resource have been demonstrated.
c. Yes, but only to the extent required by the entity’s I. Restated proportionately with the change in the gross
accounting policy for recognizing exploration and evaluation carrying amount of the asset so that the carrying amount
asset. after revaluation equals the revalued amount.
d. No, such expenditure is always expensed in profit or loss as II. Eliminated against the gross carrying amount of the asset
incurred. and the net amount to the restated revalued amount of the
asset.
3. Which of the following expenditures would never qualify as an
exploration and evaluation asset? a. I only
b. II only
a. Expenditure for acquisition of rights to explore. c. Either I or II
b. Expenditure for exploratory drilling. d. Neither I nor II
c. Expenditures related to the development of mineral
resource. 4. For items of property, plant and equipment with insignificant changes
d. Expenditures for activities in relation to evaluating the in the fair value, revaluations are necessary
technical feasibility and commercial viability of extracting
the mineral. a. Five years
b. Ten years
4. Which measurement model applies to exploration and evaluation asset c. Three to five years
subsequent to initial recognition? d. Five to ten years
5. When an asset’s carrying amount is increased as an result of a
a. The cost model. revaluation, the increase shall be credited to
b. The revaluation model.
c. Either the cost model or the revaluation model. a. Revaluation surplus as component of other comprehensive
d. The recoverable amount method. income
b. Revaluation surplus as a component of profit or loss
5. Which of the following facts or circumstances would not trigger a need c. Retained earnings
to test an evaluation and exploration asset for impairment? d. Deferred income

a. The expiration of the period for which the entity has the 6. When an asset’s carrying amount is decreased as a result of a
right to explore in the specific area, unless the right is revaluation, the decreased shall be
expected to be renewed.
b. The absence of budgeted or planned substantive a. Recognized in profit or loss
expenditure on further exploration and evaluation activities b. Charged to retained earnings
in the specific area. c. Recognized in other comprehensive income
c. A decision to discontinue exploration and evaluation d. Charged to revaluation surplus
activities in the specific area when those activities have not
led to the discovery of commercially viable quantities of 7. When the revaluation surplus is realized because of the use of the asset
mineral resources. by the entity or disposal of the asset, it may be transferred directly to
d. Lack of sufficient data to determine whether the carrying
amount of the exploration and evaluation asset is unlikely to a. Retained earnings
be recovered in full from successful development or by sale. b. Income
c. Share capital
d. Share premium
CHAPTER 27
8. If a depreciable property is revalued at the middle of the current year,
Problem 27 – 1 how is the depreciation expense for the year (assuming the entity has a
calendar year – end) determined?
1. What is the “revalued amount” of property, plant and equipment?
 Page 34 of 34

a. Depreciation for the year is based on the average of the

depreciation based on cost and on revalued amount
b. Depreciation for the entire year is based on cost
c. Depreciation for the entire year is based on the revalued
amount
d. Depreciation for the first half of the year is based on cost
and the second half on revalued amount.

9. An entity owns a fleet of cars and ships. The entity decided to revalue
its property, plant and equipment. Which of the following statement is
true?

a. Revalue only one – half of each class of property, plant and

equipment.
b. Revalue an entire class of property, plant and equipment
c. Revalue one ship at a time as it is easier than revaluing all
ships together
d. Since asset are being revalued regularly, there is no need to
depreciate

10. The revaluation surplus resulting from initial revaluation of an item of

property, plant and equipment shall be

a. Credited to retained earnings

b. Released to the income statement at an amount equal to
the difference between the depreciation calculated on
historical cost vis – a – vis revalued amount
c. Deducted from current assets and added to the property,
plant and equipment
d. Credited to “revaluation surplus” as a component of
comprehensive income