Fundamentals of Accounting, Part 2

Multiple Choice:
1. Which of the following comes first in the accounting process?
a. Preparation of an unadjusted trial balance
b. Worksheet preparation
c. Journalizing external transactions from source documents
d. Preparation of an adjusted trial balance
2. The closing entry for Rent Expense, with a balance of P180,000 is
a. Rent Expense P 180,000
Income Summary P 180,000
b. Rent Expense P 180,000
Rent Payable P 180,000
c. Income Summary P 180,000
Rent Expense P 180,000
d. Rent Payable P 180,000
Rent Expense P 180,000
3. A form of partnership wherein all the partners are personally liable for the
partnership debts is:
a. Limited Partnership
b. Unlimited Partnership
c. General Partnership
d. Partnership at will
4. The partnership agreement is contained in the articles of partnership, an express
contract among the partners. Such an agreement ordinarily does not include
a. The allocation of income between the partners
b. The rights and duties of the partners
c. The rights and duties of the partners in the event of partnership
dissolution
d. A limitation on a partners’ liability to creditors.
5. Partner X invested into a partnership a building with a book value of P500,000
and a fair market value of P650,000. The property was mortgaged in a bank for
P200,000 which the partnership assumed. Partner X capital in the partnership as a
result of this investment is:
a. P 300,000
b. P 650,000
c. P 500,000
d. P 450,000
6. Refer to assumptions in question # 5, the journal entries in the books of the
partnership to record the investment of Partner X
is:
a. Building P 650,000
Mortgage Payable P 200,000
X, Capital 450,000
 b. Building P 500,000
Mortgage Payable P 200,000
X, Capital 300,000
c. Building P 450,000
X. Capital P 450,000
d. Building P 650,000
X. Capital P 650,000
7. Partners may invest cash and non-cash assets in the partnership. In the absence
of any agreement, the contributions of non-cash assets are valued at:
a. original cost
b. carrying value
c. fair market value
d. book value
8. Mark and Jess decided to form a partnership by investing the following assets in
July 1, 2010:
Mark Jess
Cash 75,000 200,000
Equipment 100,000 80,000
Building 300,000
The partnership agreed to assume the mortgage on the building amounting to
P250,000.
What are the capital balances of Mark and Jess on July 1, 2010?
a. P 475,000 for Mark and P 280,000 for Jess
b. P 400,000 for Mark and P 80,000 for Jess
c. P 75,000 for Mark and P 200,000 for Jess
d. P 225,000 for Mark and P 280,000 for Jess
9. The profits and losses shall be distributed to partners in conformity with
agreement.
Which of the following is not a component of the formula to distribute profit and
losses:
a. Interest on capital investments
b. Salary to partners managing the business
c. Bonus to partners for achieving the target profit
d. Interest on loans to partners
10. The partnership must exist for the common benefit or interest of the partners. In
the event the partnership incurs losses, these losses shall be:
a. divided according to partner’s agreement prepared prior distribution of
losses.
b. distributed to partners according to profit and loss sharing ratio.
c. shared even by purely industrial partners
d. divided to all partners except capitalist partners
11. Eli, Karl and Paul are partners in real estate business. Net profit for the year
2010 was P88,000. Paul is an industrial partner while Eli and Karl are capitalist
partners with an average capital of P30,000 and P20,000 respectively. The partners
agreed to share profits and losses as follows:
1. Interest of 10% on average capital balances.
2. Salaries of P2,000 to Eli, P1,000 to Karl and P3,000 to Paul.
3. Bonus of 10% of net income after bonus to Paul, the managing partner
4. Balance is to be divided equally.
Paul being a purely industrial partner:
a. is entitled to salaries only despite partnership agreement.
b. will receive salaries, bonus of 10% of net income after bonus and will
share in the balance in accordance with agreement.
c. will need to share in the loss in the event there is a loss, as he is allowed to
share in the profit when there is profit.
d. will share in profit equally with other partners regardless of partnership
agreement.
12. Referring to problem # 11, the partnership profit of P88,000 is divided as follows:
a. Eli, P 28,000; Karl, P 20,000; and Paul, P 30,000
b. Eli, P 28,000; Karl, P 26,000; and Paul, P 34,000
c. Eli, P 25,000; Karl, P 23,000; and Paul, P 40,000
d. Eli, P 30,000, Karl, P 30,000; and Paul, P 28,000

13. Which of the following is not the purpose of financial statements:

a. To show the results of management’s stewardship of the resources
entrusted to it.
b. To provide information about an entity’s assets, liabilities and equity and
changes in financial position.
c. To provide investors about results of operations covering a period.
d. To report the business ability to use its resources regardless of the
outcome and without consideration to the effects on owners’ capital.
14. Dong and Kong entered into a partnership as at July 1, 2010 by investing
P125,000 and P75,000, respectively. They agreed to share in the profits and losses
in the ratio 40:60. On December 31, 2010, normal balances were as follows:
Cash P 70,000 Accounts Payable P 60,000
Accounts Receivable 67,000 Dong, Capital 125,000
Equipment 45,000 Kong, Capital 75,000
Sales Returns 5,000 Dong, Drawing 20,000
Purchases 196,000 Kong, Drawing 30,000
Operating Expenses 60,000 Sales 233,000
Inventories on December 31, 2010 were as follows: Supplies, P2,500; merchandise,
P30,000. Prepaid insurance was P950 while accrued expenses were P1,550.
Depreciation rate was 20% per year. The partners’ capital balances on December
31, 2010, after closing the profit and drawing accounts, were:
a. Dong, P 120,000 and Kong, P 70,000
b. Dong, P 104,760 and Kong, P 44,640
c. Dong, P 100,760 and Kong, P 40,640
d. Dong, P 140,760 and Kong, P 98,600
15. The partnership financial statement that serves as a basis for evaluating the
partnership ability to generate cash to be utilized in operating, investing and
financing activities of the business is:
a. Statement of Cash Flows
b. Statement of Comprehensive Income
c. Statement of Financial Position
d. Statement of Changes in Partners Equity
16. Assume that in 2009, the reported net income for Lora and Nora was 500,000
and the partners shared in the profits and losses equally. During the year, the
following errors in computing the net income were discovered:
1. Depreciation was understated by 50,000
2. Prepaid expense of 30,000 was omitted
3. Accrued expense of 10,000 was omitted
What should have been the corrected net income of the partnership Lora and Nora?
a. P 410,000
b. P 470,000
c. P 490,000
d. P 450,000
17. Financial statements are prepared using the accrual basis of accounting except:
a. Balance Sheet
b. Income Statement
c. Cash Flow Statement
d. Statement of Changes in Partners Equity
18. The statement of comprehensive income shall include the following line items
except:
a. Revenue
b. Finance Costs
c. Partners Capital and Drawing accounts
d. Operating Expenses
19. As a minimum, the face of the statement of financial position shall include the
following line items except:
a. Inventories
b. Provisions
c. Financial Liabilities
d. Profit or Loss
20. Which of the following is an example of cash flows from investing activities:
a. Receipt from investments by owners
b. Receipt from sale of property and equipment
c. Payment to owners in the form of withdrawals
d. Receipt from sale of goods and performance of services
21. The adjusted trial balance of Simon and Richard on December 31, 2010 follows:
 Debits Credits
Cash P 37,000
Accounts Receivable 80,000
Merchandise Inventory 800,000
Accrued Income 75,000
Prepaid Rent 20,000
Accounts Payable P 50,000
Notes Payable 250,000
Accrued Expense 12,000
Unearned Revenue 25,000
Simon, Capital 125,000
Richard, Capital 200,000
Sales 2,500,000
Cost of Sales 1,450,000
Salaries Expense 450,000
Rent Expense 200,000
Insurance Expense 30,000
Utilities Expense 20,000
Totals P 3,162,000 P 3,162,000
If you prepare a statement of comprehensive income for Simon and Richard for
2010, what is the net profit as of December 31?
a. P 1,050,000
b. P 300,000
c. P 350,000
d. P 1,062,000
22. If partners Simon and Richard share profits in the ratio of 30:70, what is the
share of Simon in the profit of the business for 2010?
a. P 105,000
b. P 245,000
c. P 90,000
d. P 210,000
23. The partnership total assets and total liabilities at December 31, 2010 are as
follow:
a. Total assets, P937,000 and total Liabilities, P300,000
b. Total assets, P1,012,000 and Total Liabilities, P337,000
c. Total assets, P930,000 and Total Liabilities, P300,000
d. Total Assets, P1,010,000 and total Liabilities, P330,000
24. Assume partners Simon and Richard share in the profit at the rate of 30:70 and
each one withdrew P50,000 during the year, what are the partners’ capital balances
as at December 31, 2010?
a. Simon, P 180,000 and Richard, P 395,000
b. Simon, P 230,000 and Richard, P 445,000
c. Simon, P 170,000 and Richard, P 380.000
 d. Simon, P 225,000 and Richard, P 440,000
25. The change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business of the partnership is called dissolution.
Which of the following situation will result to the dissolution of the partnership?
a. The distribution of the loss to the existing partners.
b. The withdrawal of a partner from a partnership.
c. The winding up of the partnership affairs and distribution of assets to
remaining partners.
d. The investment of additional assets to the partnership by existing partner.
26. Joann Simpas plans to invest P500,000 for a 20% interest in a partnership that
has capital of P2,000,000 after admitting Joan as a new partner.
Which of the following is correct?
a. Joann Simpas will receive a bonus of P100,000.
b. Joann Simpas capital in the partnership is P500,000.
c. The old partners will receive a bonus of P100,000.
d. The old partners’ capital in the business was P1,600,000 before admitting
Joann Simpas.
27. The effect of the withdrawal of the partner taking assets more than his capital
balance in the partnership is:
a. The withdrawing partner will receive a bonus.
b. The remaining partner/s will receive a bonus.
c. The partnership assets will remain the same after withdrawal.
d. No bonus will be given either to the withdrawing or remaining partner/s.
28. The death of a partner is one of the causes of dissolution of the partnership.
Which of the following statement is correct if this situation happens:
a. The death of the partner automatically results to liquidation of the assets of
the partnership.
b. The deceased partner is considered to have retired from the
partnership and his heirs or estate can expect to receive the amount of
his interest in the business.
c. The accounting procedure to be followed is absolutely different from the
case of the withdrawing partner.
d. If payment to the estate cannot be made immediately, the balance in the
capital account of the deceased partner will be transferred to the revenue
account of the partnership.
29. Pedro Santos owns 25% interest in a partnership that has total assets of
P1,000,000 and liabilities of P200,000 during his death. His estate demands release
of his interest as nobody from his heirs would want to be associated in the
partnership.
How much would his estate get if the partnership liquidates the assets of the
business?
a. P 200,000
b. P 250,000
c. P 200,000 plus bonus
 d. P 250,000 less bonus to other partner/s.
30. Incorporation of a partnership is another cause of dissolution of the partnership.
What is not true about the incorporation of the partnership?
a. One reason for incorporation is to secure the advantages found in a
corporate form of organization including the accumulation of greater amount of
capital.
b. If there are less than five partners, the partners will invite other
persons to become co-incorporators for there has to be five but not
more than ten (10) required incorporators in a corporation.
c. When a charter is granted recognizing a corporation, the assets and
liabilities of the partnership shall be transferred to the corporation in exchange
for the stocks of the corporation.
d. It is important that the books of the partnership be closed to determine the
net income or loss to be allocated to partners before the transfer of assets to
the corporation.
31. Assume A, B, C, D and E are partners sharing profits and losses equally. On
January 1, 2011, they decided to incorporate the partnership. The books have
already been closed on this date. Below is the balance sheet of ABCDE
Merchandising as of December 31, 2010:
Total Assets P 130,000
Total Liabilities P 30,000
Partners Equity
A, Capital P 20,000
B, Capital 20,000
C, Capital 20,000
D, Capital 20,000
E. Capital 20,000 100,000
Total Liabilities & Partners Equity P 130,000
The ABCDE Corporation has been authorized to issue 10,000 ordinary shares with
a par value of P100 each. The partners are issued a total of 1,000 shares for the net
assets. The entry to incorporate the partnership is:
a. Liabilities P 30,000
Receivable from ABCDE Corporation 100,000
Assets P 130,000
b. Assets P 130,000
Liabilities P 30,000
Ordinary Shares 100,000
c. Assets P 130,000
ABCDE Corporation P 130,000
d. Receivable from ABCDE Corporation P 130,000
Assets P 130,000
32. The process of winding up a business which normally consists of conversion of
non-cash assets into cash, payment of liabilities and distribution of remaining cash
to partners is:
 a. Partnership Dissolution
b. Termination and Realization
c. Incorporation
d. Partnership Liquidation
33. Partnership laws provide that in the distribution of cash to creditors and partners,
the first priority in the payment is:
a. Partners in respect of capital
b. Partners in respect of loans
c. Outside creditors
d. Inside creditors
34. Stanley and Mike are partners sharing profits and losses in the ratio of 60:40.
Recently they made substantial losses in the business and as a result they decided
to liquidate. Assets were sold and only P324,000 was realized to pay for liabilities
that amounted to P594,000. Their capital balance before liquidation are P414,000
for Stanley and P243,000 for Mike Stanley is personally insolvent after investing
cash to pay the unpaid creditors but Mike is solvent and willing to make additional
investments to cover his deficiency. In settlement to partners, how much cash
should Stanley receive?
a. P 127,800
b. P 19,800
c. P 30,600
d. P 126,000
35. In lump-sum liquidation method, all non-cash assets are realized and all
liabilities are settled before a single final distribution is made to partners. Which is
not included in the procedures in lump-sum liquidation?
a. Realization of non-cash assets and distribution of gain or loss on realization
to partners based on their profit and loss ratio.
b. Payment of liabilities
c. Elimination of partners’ capital deficiencies
d. None of the above.
36. At December 31, 2010, the capital balances of the partners Sera, Hera and Jora
are P80,000, P50,000 and P10,000 respectively, sharing profits and losses in the
ratio of 3:2:1. The partners decided to liquidate, and sold all non-cash assets for
P74,000 cash. After paying all the liabilities amounting to P24,000, they still have
P50,000 cash left for distribution. The share of the partners in the final settlement,
assuming Jora will invest additional amount to cover his deficiency, are as follows:
a. Sera, P 42,000; Hera, P 28,000; Jora, P 14,000
b. Sera, P 38,000; Hera, P 22,000; Jora, P 0
c. Sera, P 35,000; Hera, P 20,000; Jora, P 0
d. None of the above
37. Under the installment method of liquidation, realization of non-cash assets is
accomplished over an extended period of time.
Which is included in the procedures followed in the installment liquidation:
 a. Realization of non-cash assets and distribution of gain or loss on realization
based on partners profit and loss ratio.
b. Payment of liquidation expenses and adjustment of unrecorded liabilities
c. Payment of liabilities to outsiders
d. All of the above
38. The assets and equities of Mona, Teresa and Lina Partnership at the end of year
ended December 31, 2010 are as follows:
Assets: Equities:
Cash P 15,000 Liabilities P 50,000
Non-cash assets 130,000 Loan from Lina 10,000
Loans to Teresa 5,000 Mona, Capital 30% 45,000
Teresa, Capital 50% 30,000
Lina, Capital 20% 15,000
Total P 150,000 P 150,000
The partner most vulnerable to partnership losses in the event of liquidation is:
a. Mona
b. Teresa
c. Lina
d. Mona and Lina equally
39. Which of the following is not an attribute of a corporation as a form of business
organization:
a. It is an artificial being with personality separate and distinct from its
individual shareholders or members.
b. It is created by mere agreement of its shareholders and therefore it
has limited existence.
c. It is created by operation of the law.
d. It has the powers, attributes and properties expressly authorized by law or
incident to its existence.
40. A corporation as a business organization has advantages and disadvantages.
Which of the following is an advantage of a corporation:
a. Share of stocks can be transferred with consent of the other shareholders.
b. There is greater degree of government control and supervision in its
operations.
c. It requires a relatively high cost of formation and operation.
d. Shareholders have limited liability.
41. Section 3 of the Corporation Code classified private corporation into stock and
non-stock corporation. Other classifications include:
a. Domestic and Foreign Corporation
b. Corporation Aggregate and Corporation Sole
c. Public and Private Corporation
d. All of the above
42. Section 14 of the Corporation Code provides that all corporations organized
under this Code shall file with the Securities and Exchange Commission articles of
incorporation duly signed and acknowledged by all incorporators, containing
substantially the following matters except as otherwise prescribed by this Code or by
special law, except the following:
a. The name of the corporation
b. The specific purpose or purposes for which the corporation is formed.
c. The manner by which profits and losses are shared among
shareholders.
d. The principal place of business and the term of existence.
43. Shares that entitle the holder to certain advantages or benefits over the holders
of ordinary shares:
a. Ordinary shares
b. Promotion shares
c. Preference shares
d. Treasury shares
44. Simple Corporation was organized on January 1, 2011 with authorized capital of
P2,000,000 divided into 200,000 shares of P10 par common stock.
How many share much be subscribed and how much is the minimum amount to be
paid?
a. 50,000 shares, P 500,000
b. 20,000 shares, P 200,000
c. 200,000 shares, P 2,000,000
d. 60,000 shares, P 600,000
45. Five partners decided to incorporate their partnership.
Which of the following situation illustrates best the minimum requirement of the law
to capital formation?
Authorized Capital Subscribed Capital Paid-in Capital
a. P 100,000 P 20,000 P 5,000
b. P 100,000 P 25,000 P 6,250
c. P 50,000 P 12,500 P 2,125
d. P 60,000 P 15,000 P 5,000
46. In the basic corporate organization structure, which of the following is the proper
officer entrusted with the authority to receive and keep the money of the corporation
and to disburse them as he may be authorized.
a. The President of the Corporation
b. The Corporate Secretary
c. The Chairman of the Board
d. The Corporate Treasurer
47. Every private corporation, stock or non-stock, is required to keep books and
records at its principal office.
Which record contains the minutes of the corporate meetings of the board of
directors and stockholders:
a. Minute Book
b. Subscription Book
c. Stock Certificate Book
d. Stock and transfer book
48. It is that portion of share capital or paid-in capital representing amounts paid by
shareholders in excess of par. It may result from transactions involving treasury
stocks, retirement of shares, donated capital, share dividends and any other “gain”
on the corporation’s own stock transactions.
a. Legal capital
b. Share premium or additional paid-in capital
c. Retained Earnings
d. Authorized capital
49. Share capital includes all types of ownership shares in a corporation.
When only one class of share issued, it must be:
a. Treasury Share
b. Ordinary Share
c. Promotion Share
d. Preference Share
50. Bright Star Corporation was incorporated on January 1, 2011 with 100,000
preference shares with par value of P20 and 200,000 ordinary shares with par value
of 25.00.
What is the entry to record the issuance for cash of 30% of ordinary shares at par
and 35% of preference shares at par?
Debit Credit
a. Cash P 2,200,000
Ordinary shares P 1,500,000
Preference shares 700,000
b. Ordinary shares P 1,500,000
Preference shares 700,000
Accounts Payable P 2,200,000
c. Ordinary shares P 1,500,000
Preference shares 700,000
Cash P 2,200,000
d. Accounts Receivable P 2,100,000
Ordinary shares P 1,500,000
Preference shares 600,000
51. Please refer to data item # 50, suppose, 50,000 shares of preference shares
were issued at P22 per share, what is the entry to record the issuance of the
preference shares on January 2, 2011?
a. Cash P 1,100,000
Preference shares P 1,000,000
Share Premium 100,000
b. Cash P 1,100,000
Preference shares P 1,100,000
c. Preference shares P 1,100,000
Accounts Payable P 1,100,000
 d. Preference shares P 1,000,000
Share Premium 100,000
Cash P 1,100,000
52. Which of the following is not a consideration for the issuance of shares:
a. Actual cash paid to the corporation.
b. Previously incurred indebtedness by the corporation
c. Tangible or intangible properties with titles retained by the
shareholders
d. Labor or services performed or actually rendered to the corporation.
53. There are two methods of accounting for share capital authorization and
issuance, namely: the journal entry method and the memorandum method. The
difference between the two methods lies:
a. In the computation of the share premium when the shares are sold at a
price higher than the par value
b. In the entries pertaining to the authorization and issuance of share capital
c. In the computation of a share discount when the shares are sold at a price
lower that the par value
d. None of the above
54. Assume Blue Water Corporation was authorized to issue 4,000 shares of
ordinary shares with a par value of P100 per share for a total price of P400,000. In
the journal entry method of accounting for share capital, the entry to record the
authorization for the issuance of share capital is:
a. Unissued Ordinary Shares P 400,000
Authorized Ordinary Shares P 400,000
b. Subscription Receivable P 400,000
Subscribed Ordinary Shares P 400,000
c. Cash P 400,000
Subscription Receivable P 400,000
d. Subscribed Ordinary Shares P 400,000f
Unissued Ordinary Shares P 400,000
55. Treasury stocks are shares of stocks which have been issued and fully paid for,
but subsequently reacquired by the issuing corporation for the following reasons.
Which is not the reason for the treasury stock transactions:
a. To support the employee stock compensation plans
b. To improve the stock market price by decreasing the supply of shares
c. To increase the par value of the shares covered by the Treasury stock
d. To avoid takeover by an outside party
56. Treasury stock should be shown on the statement of financial position as:
a. A current asset
b. A current liability
c. An investment asset
d. A reduction of the corporation’s shareholders’ equity
57. The Income Summary account of a partnership is closed to partners’ drawing
account or partners capital account, while for a corporation, Income Summary
account is closed to
a. Capital stock
b. Additional Paid-In capital
c. Retained Earnings
d. Treasury Stock
58. Treasury Stocks are shares of stocks which have been issued and fully paid but
subsequently reacquired by the issuing corporation either by purchase, redemption,
donation or through other lawful means.
Which is not the reason for the purchase of treasury stocks:
a. To support employee stock compensation plans.
b. To increase the par value of the ordinary shares as well as the
preference shares.
c. To avoid takeover by an outside party.
d. To improve the stock market price by decreasing the supply of shares.
59. A corporation may issue shares in exchange for legal, accounting or other
services s related to the formation of the corporation.
Which of these cost is not related to the formation of the corporation?
a. Incorporation fees and share issuance fees
b. Legal fees for the preparation of the articles of incorporation
c. Underwriting fees and commissions and cost of underwriting the issue
d. Professional fees of accountant to handle books of accounts when the
corporation is already operational.
60. Jetson Company issued 50,000 shares of P20 par value ordinary shares at P24
per share. A year after, Jetson Company reacquired 10,000 shares of its own stock
at P30 per share in order to avoid possible corporate takeover by outsiders. Using
cost method of accounting for treasury stock, the entry to record the acquisition is
a. Cash P 300,000
Treasury Stock P 300,000
b. Treasury Stock P 300,000
Cash P 300,000
c. Treasury Stock P 200,000
Share Premium – Treasury 100,000
Cash P 300,000
d. Treasury Stock P 300,000
Share Premium - Treasury P 100,000
Cash 200,000
61. Contributions from shareholders are recorded at the fair market value of the
items received. If the donation is in the form of the shares of the corporation, what
particular account is credited once the shares are reissued?
a. Ordinary share account
b. Treasury stock account
c. Donated capital or share premium account
 d. Preference share account
62. The donated shares are essentially treasury stock which can be issued at any
price. The sale of these donated shares increases assets and shareholders’ equity.
Assume that the 1,000 donated shares with par value of P100 were reissued at P80
per share, the entry to record the reissuance of the shares is:
a. Cash P 80,000
Donated Capital P 80,000
b. Cash P 100,000
Donated Capital P 100,000
c. Cash P 80,000
Treasury Stock P 80,000
d. Treasury Stock P 100,000
Donated Capital P 100,000
63. The donated asset increases the total assets and shareholders’ equity of the
company by the fair market value of the asset received. If the donated asset is in the
form the company’s own shares of stock, the receipt of the donated 500 ordinary
shares, P100 par value, is recorded by:
a. A journal entry debiting asset account and crediting the shareholders’ equity
account.
b. A journal entry debiting ordinary share account of P50,000 and crediting
donated capital, P50,000.
c. A journal entry debiting treasury stock account and crediting donated capital
account.
d. A memorandum entry “Received 500 ordinary shares as donation.”
64. Retained earnings represent the component of the shareholder’s equity arising
from retention of assets generated from the profit-directed activities of the
corporation. The distribution of earnings to shareholders from the unrestricted
retained earnings are called dividends which can be in the form of:
a. Cash
b. Properties
c. Shares of stock
d. All of the above
65. A distribution of income to shareholders that is payable in the form of non-cash
assets is called property dividends. Property dividends are charged to retained
earnings at:
a. Fair market value of the assets declared as property dividends.
b. Cost or book value of non-cash assets distributed.
c. All of the above.
d. None of the above.
66. Corporation reduces the par or stated value of its share capital and issue
additional shares to its shareholders through the practice referred to as share split.
The par or stated value per share will decrease with the corresponding increase in
the number of authorized, issued and outstanding shares.
Which is not the reason behind share split:
 a. To adjust the market price of the company’s shares to a level where more
individuals can afford to invest in the stock.
b. To earn the patronage of shareholders by increasing the number of
shares held without necessarily increasing the value of the stocks.
c. To spread the shareholder base by increasing the number of outstanding
shares.
d. To benefit existing shareholders by allowing them to take advantage of an
imperfect adjustment following the split.
67. A corporation may issue both preference and ordinary shares. Preference
shares enjoy preference as to dividends which means that when the board of
directors declares cash dividends, preference shares are entitled to dividends before
ordinary shares receive any distribution. Which feature of the preference shares
entitles the holders only to the payment of current dividends only, if and when
dividends are declared, to the extent of the preference rate, before the ordinary
shareholders are paid:
a. Cumulative and non-participating
b. Cumulative and participating
c. Non-cumulative and participating
d. Non-cumulative and non-participating
68. UI, a premier educational institution in Iloilo City, has the following selected
accounts in its shareholders’ equity:
10% Preference Shares, P500 par, authorized 5,000 shares,
3,000 shares issued and outstanding P 1,500,000
Ordinary shares, P1,000 par, authorized 10,000 shares,
5,000 shares issued and outstanding 5,000,000
Retained Earnings 1,000,000
The board failed to declare dividends during the first two years of operations and the
current year’s performance gave reason to the board to declare dividends of
P500,000.
What should be the dividends per share if preference shares are non-cumulative
and non-participating?
a. P 83 for Preference Shares; P 50 for Ordinary Shares
b. P 50 for Preference Shares; P 83 for Ordinary Shares
c. P 50 for Preference Shares; P 70 for Ordinary Shares
d. P 70 for Preference Shares; P 50 for Ordinary Shares
69. A corporation may be required by law to set aside a portion of the retained
earnings for specified purposes or the Board of Directors may voluntarily designate
a portion of retained earnings for future contingencies or other purposes. This
portion of the retained earnings set aside for future contingencies and not available
for dividend declaration is recorded by:
a. Debit to Appropriated Retained Earnings and Credit to Retained Earnings
b. Debit Retained Earnings and Credit to Appropriated Retained Earnings
c. Debit Retained Earnings and Credit Unappropriated Retained Earnings
 d. Debit Unappropriated Retained Earnings and Credit Appropriated Retained
Earnings
70. A retained earnings statement is normally divided into two sections:
Appropriated section and Unappropriated section.
Which of the following items is not included in the appropriated section of the
Statement of the Retained Earnings:
a. Beginning balance
b. Any additions or deductions during the period
c. Correction of prior period error
d. Ending balance
71. Retained earnings balance of ABC Corporation at the beginning of the year is
P5,000,000. During the year, ABD earned revenues of P10,000,000 and incurred
operating expenses of P6,500,000. Also during the year, a dividend of P1,000,000
were declared and paid, leaving the cash balance of P800,000 for the following
year’s operations.
What is the year-end balance in retained earnings after payment of dividends?
a. P 800,000
b. P 7,500,000
c. P 6,700,000
d. P 5,000,000
72. A statement that shows the significant changes in shareholders’ equity and
should be reported in the period in which they occur:
a. Statement of Comprehensive Income
b. Statement of Financial Position
c. Statement of Changes in Shareholders’ Equity
d. Statement of Changes in Partners’ Equity
73. Perfect Love Corporation had 500,000 ordinary shares issued and outstanding
on January 1, 2010. During the year, Perfect Love took the following actions:
June 30 Declared a 3-for-1 share split, when their fair market Value of the share was
P50 per share November 30 Declared a P1 per share cash dividend. If Perfect Love
prepares statement of changes in shareholders’ equity for 2010, what amount
should Perfect Love report as dividends?
a. P 500,000
b. P 1,500,000
c. P 300,000
d. P 450,000
74. Book value per share is the amount that would be paid on each share if the
corporation is liquidated.
Which of the following statements is not true about the book value per share?
a. When only a single class of share is outstanding, the book value is
computed by dividing the total shareholders’ equity by the number of share
outstanding.
 b. When both preference and ordinary shares are outstanding, ordinary
shares have the first priority in the distribution of assets upon corporate
liquidation than preference shares.
c. The preference share has the right to receive assets equal to the par value
or a larger stated liquidation value per share.
d. The book value per share of the preference share is the sum of its
liquidation value, if applicable, plus any current and dividends in arrears
divided by the number of ordinary share outstanding.
75. The shareholders’ equity section of the Holy Family Corporation’s statement of
financial position shows the following:
10% Cumulative Non-participating Preference shares, P100 par,
20,000 shares authorized, 10,000 shares outstanding P 1,000,000
Ordinary shares, P1,000 par, 10,000 shares authorized,
5,000 shares outstanding 5,000,000
Share Premium – Preference 50,000
Share Premium – Ordinary 200,000
Retained Earnings 600,000
Total Shareholders’ Equity P 6,850,000
Assume that preference share has a liquidation value of P120 and dividends are in
arrears for two years. The Preference book value per share is:
a. P 150
b. P 1,500
c. P 100
d. P 1,000
76. Using the same information in #75, the ordinary book value per share is:
a. P 1,000
b. P 2,000
c. P 1,070
d. P 170
77. Merchandising and manufacturing companies earns revenues by selling goods.
Merchandising business buys a product that is ready for resale while manufacturing
business buys raw materials and process them into finished goods and sells to
customers. The main difference between the two is:
a. The way inventory is acquired for resale.
b. The manner goods are delivered to customers in the market.
c. The method of pricing the merchandise.
d. None of the above.
78. One of the essential elements of manufacturing costs is the manufacturing
overhead. This includes all manufacturing costs that cannot be classified as direct
materials or direct labor.
Which of the following is not a major classification of this cost:
a. Indirect materials and supplies.
b. Indirect labor costs.
c. Other indirect manufacturing costs.
 d. None of above.
79. This manufacturing inventory account gives the cost of goods that are in the
manufacturing process but are not yet complete at the end of the accounting period.
It consists of partly finished products at the end of accounting period.
a. Raw materials inventory
b. Factory Supplies inventory
c. Finished goods inventory
d. Work in Process inventory
80. The direct labor account is debited
a. When related labor costs are transferred into the Work in Process
Inventory account.
b. At the end of the payroll period when employees are paid.
c. When a new factory employee begins work.
d. When the goods manufactured are completed.
81. Innovation Manufacturing has work in process inventory of 50,000 units at the
end of its accounting period. Direct material cost related to the 50,000 units is
P465,000 while direct labor cost is P38,900. It also has 20,000 units of finished
goods inventory. Direct material applied to the 20,000 units is P247,900 while direct
labor cost is P22,850. Total manufacturing costs incurred during the year is:
Direct Materials P 2,540,000
Direct Labor 228,600
Manufacturing overhead 685,800
Assume manufacturing overhead is applied to the inventories based on percentage
of direct material costs, how much is the total cost of work in process and finished
goods inventory?
a. P 617,900 for work in process inventory and P 339,300 for finished goods
inventory
b. P 465,000 for work in process inventory and P 247,900 for finished goods
inventory
c. P 629,450 for work in process inventory and P 337,683 for finished
goods inventory
d. P 125,550 for work in process inventory and P 66,933 for finished goods
inventory
82. Using the same data as above and assume manufacturing overhead is applied
to the inventories based on percentage of direct labor costs, how much is the cost of
work in process and finished goods inventory?
Work in Process Inventory Finished Goods Inventory
a. P 629,450 P 337,683
b. P 620,600 P 339,300
c. P 630,000 P 340,000
d. P 120,000 P 70,000
83. This is one of most important financial statements in manufacturing concern
which shows total manufacturing costs related to the products completed during the
period. This statement is also called the manufacturing statement.
 a. Statement of Comprehensive Income
b. Statement of Cost of Goods Sold
c. Statement Changes in Financial Position
d. Statement of Cost of Goods Manufactured
84. In addition to the year-end statement of financial position and statement of
comprehensive income, the management of Jaro Iloilo Corporation required the
accountant to prepare the statement of cost of goods manufactured. In 2010,
P361,920 of raw materials were purchased. Operating cost data and inventory
account balances for 2010 follow:
Direct Labor (10,430 hours at P9.50 per hour) P 99,085
Plant Supervision 42,500
Indirect Labor (20,280 hours at P6.25 per hour) 126,750
Factory Insurance 8,100
Factory Utilities 29,220
Depreciation – Factory Building and Equipment 109,000
Manufacturing supplies 9,460
Repairs and Maintenance - Factory 14,980
Selling and Administrative Expenses 76,480
Raw Materials Inventory, Jan. 2010 26,490
Work in Process Inventory, Jan. 1, 2010 101,640
Finished Goods Inventory, Jan. 1, 2010 148,290
Raw Materials Inventory, Dec. 31, 2010 24,910
Work in Process Inventory, Dec. 31, 2010 100,400
Finished Goods Inventory, Dec. 31, 2010 141,100
How much is the total cost of direct materials used during the year?
a. P 360,000
b. P 340,000
c. P 388,400
d. P 363,500
85. How much is total manufacturing cost for the year 2010?
a. P 802,595
b. P 800,000
c. P 904,235
d. P 803,835
86. How much is the cost of goods manufactured during the year?
a. P 803,300
b. P 803,835
c. P 811,025
d. P 810,000
87. How much is the total cost of goods sold?
a. P 800,000
b. P 805,000
c. P 811,025
d. P 810,000
88. The worksheet for manufacturing company is basically the same as that for a
merchandising company except:
a. Beginning finished goods inventory being a component of cost of goods
sold is extended to the debit side of the income statement columns while the
ending finished goods inventory to the credit column.
b. That the worksheet for manufacturing company includes a pair of
columns for cost of goods manufactured.
c. All nominal accounts are extended to the income statement columns of the
worksheet.
d. All real accounts are extended to the balance sheet columns of the
worksheet.
89. One of the most significant items in the balance sheet is cash. To measure
liquidity of the business, there is a need to compare the amount of cash with other
financial statement data. This type of analysis compares an item or financial
relationship within a company in the current year with the same item or relationship
in one or more prior years:
a. Industry averages
b. Intercompany basis
c. Intracompany basis
d. None of the above
90. Various tools are used to evaluate the significance of financial statement data.
Which technique evaluates financial statement data that expresses each item in a
financial statement in terms of a percent of the base amount?
a. Horizontal analysis
b. Ratio analysis
c. Vertical analysis
d. None of the above
91. This type of ratio analysis measures the company’s ability to collect from credit
sales. It indicates the number of times that the average balance of accounts
receivable is collected during the period.
a. Average age of receivable
b. Account Receivable Turnover
c. Quick ratio
d. Acid test ratio
92. This tool measures the relationship between profit and ordinary shareholders’
investment in the company. This rate may be higher or lower than the return on total
assets, depending on how judiciously management has combined debt and
preference share with ordinary share in financing the company’s resources.
a. Price-Earnings Ratio
b. Return on total assets
c. Return on Ordinary Equity
d. Debt to Total Assets Ratio
93. The following information was taken from the books of Crest Merchandising for
the year ending December 31, 2010:
 Cash P 130,000
Marketable Securities 60,000
Accounts Receivable:
January 1 156,000
December 31 214,000
Merchandise Inventory:
January 1 252,000
December 31 186,000
Current Liabilities 240,000
Cost of Goods Sold 3,000,000
Credit Sales 5,000,000
The firm’s creditors are constantly monitoring the liquidity position of the business to
ensure that obligations are paid as they mature. Using the above information, what
is the firms working capital that is necessary to finance the firm’s cash conversion
cycle?
a. P 250,000
b. P 358,000
c. P 360,000
d. P 350,000
94. Another important tool that tells whether the firm could pay all its current
obligations even if none of the inventories is sold is the quick ratio. Using above
information, what is the firm’s quick ratio in 2010?
a. 70%
b. 1.68
c. 0.60:1
d. None of the above
95. This is a measure of the number of times the firm holds it average level of
inventory during the period and a high rate of turnover indicates relative ease in
selling inventory. Using the above information in problem # 93, what is the Inventory
turnover for the year 2010?
a. 13.70 times
b. 10 times
c. 14.2 times
d. 10.5 times
96. Another tool that provides a rough approximation of the average times it takes
the firm to collect receivables is the average age of receivables. Still using the same
information as above, how long does it take for the firm to collect it receivables?
a. Approximately 10 days
b. Average of 16 days
c. Average of 13 to 14 days
d. Not less than 20 days
97. Juan dela Cruz, the accountant, is analyzing the earnings performance of the
Megan Transport Corporation. He has gathered the following data from Megan
financial statements and from a report of the closing market prices of shares:
Profit for 2010 P 743,000
Preference dividends declared in 2010 60,000
Ordinary dividends declared December 31, 2010 620,000
Number of Megan ordinary shares outstanding:
January 1, 2010 1,100,000 shares
December 31, 2010 1,300,000 shares
Market price per ordinary share on December 31, 2010 P 15
Because of the reported profit in 2010, the Ordinary shareholders believed they
should be well compensated for their investment in the transport business, thus,
prompting the Accountant to compute for the basic earnings per ordinary share.
Considering the data gathered above, what should be the BEPS as demanded by
the ordinary shareholders?
a. P 0.46
b. P 0.57
c. P 1.00
d. P 0
98. Another investor wants to measure how valuable his investment in the transport
business. He believes that maintaining his investment in the transport firm would
eventually provide him better yield in the future thus he is even willing to pay high
price for the given corporate earnings.
What is the Price-Earnings Ratio in December 31, 2010 in case an investor would
ask for it?
a. P 25.00
b. P 20.00
c. P 26.31
d. P 28.32
99. Dividend yield is the ratio of dividends per share to the share’s market price.
This ratio measures the percentage of a market value that is returned annually as
dividends. This indication of the cash payout rate on an investment allows a
shareholders and potential shareholders to compare interest rates on certificates of
deposit, corporate bonds, and other securities with this measure of return on
ordinary share. Using above information, what is the dividend yield on Megan
Transport for 2010?
a. 3.18%
b. 3.00%
c. 2.50%
d. 3.50%
100. Another ratio of profitability measures the percentage of the firm’s assets
financed by shareholders. The higher this ratio, the smaller the risk that the
company will be unable to meet its obligations when due. This ratio is known as:
a. Price-earnings ratio
b. Equity Ratio
c. Debt to total assets ratio
d. Return on total assets