1|Page

FA 1 COMPREHENSIVE

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The amount reported as "Cash" on a company's balance sheet normally should exclude
a. postdated checks that are payable to the company.
b. cash in a payroll account.
c. undelivered checks written and signed by the company.
d. petty cash.
____ 2. If the balance shown on a company's bank statement is less than the correct cash balance, and neither the
company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
____ 3. Which of the following is incorrect?
a. The operating cycle always is one year in duration.
b. The operating cycle sometimes is longer than one year in duration.
c. The operating cycle sometimes is shorter than one year in duration.
d. The operating cycle is a concept applicable both to manufacturing and retailing
enterprises.
____ 4. When the allowance method of recognizing bad debt expense is used, the entry to record the write-off of a
specific uncollectible account would decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.
____ 5. A method of estimating bad debts that focuses on the balance sheet rather than the income statement is the
allowance method based on
a. direct write-off.
b. aging the trade receivable accounts.
c. credit sales.
d. specific accounts determined to be uncollectible.
____ 6. Which of the following would not be classified as cash?
a. Personal checks
b. Travelers' checks
c. Cashiers' checks
d. Postdated checks
____ 7. In preparing a monthly bank reconciliation, which of the following items would be added to the balance
reported on the bank statement to arrive at the correct cash balance?
a. Outstanding checks
b. Bank service charge
c. Deposits in transit
d. A customer's note collected by the bank on behalf of the depositor
____ 8. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the
depositor's records and to identify bank errors. Adjustments should be recorded for
a. bank errors, outstanding checks, and deposits in transit.
b. all items except bank errors, outstanding checks, and deposits in transit.
c. book errors, bank errors, deposits in transit, and outstanding checks.
d. outstanding checks and deposits in transit.
____ 9. An analysis and aging of the accounts receivable of Shriner Company at December 31 revealed the following
data:

Accounts Receivable ................................. P450,000

Allowance for Doubtful Accounts (before adjustment).. 25,000 (cr)
Accounts estimated to be uncollectible .............. 32,000
 2|Page

The net realizable value of the accounts receivable at December 31 should be

a. P450,000.
b. P443,000.
c. P425,000.
d. P418,000.
____ 10. The following information is from the records of Prosser, Inc. for the year ended December 31, 2008.

Allowance for Doubtful Accounts, January 1, 2008 .. P 6,000 (cr)

Sales, 2008 ....................................... 2,920,000
Sales Returns and Allowances, 2008 ................ 32,000

If the basis for estimating bad debts is 1 percent of net sales, the correct amount of doubtful accounts expense
for 2008 is
a. P22,800.
b. P23,200.
c. P28,880.
d. P34,880.
____ 11. Based on the aging of its accounts receivable at December 31, Pribob Company determined that the net
realizable value of the receivables at that date is P760,000. Additional information is as follows:

Accounts Receivable at December 31 ................ P880,000

Allowance for Doubtful Accounts at January 1 ...... 128,000 (cr)
Accounts written off as uncollectible during the
year ............................................ 88,000

Pribob's doubtful accounts expense for the year ended December 31 is

a. P80,000.
b. P96,000.
c. P120,000.
d. P160,000.
____ 12. Gekko, Inc. reported the following balances (after adjustment) at the end of 2008 and 2007.

12/31/2008 12/31/2007
Total accounts receivable ................. P105,000 P96,000
Net accounts receivable ................... 102,000 94,500

During 2008, Gekko wrote off customer accounts totaling P3,200 and collected P800 on accounts written off
in previous years. Gekko's doubtful accounts expense for the year ending December 31, 2008 is
a. P1,500.
b. P2,400.
c. P3,000.
d. P3,900.
____ 13. Selected information from the accounting records of Ellison Manufacturing Company follows:

Net sales ............................................ P3,600,000

Cost of goods sold ................................... 2,400,000
Inventories at January 1 ............................. 672,000
Inventories at December 31 ........................... 576,000

What is the number of days' sales in average inventories for the year?
a. 102.2
b. 94.9
c. 87.6
d. 68.1
____ 14. Trask Corporation's checkbook balance on December 31, 2008, was P8,000. In addition, Trask held the
following items in its safe on December 31:

Check payable to Trask Corporation, dated January 2, 2009,

not included in December 31 checkbook balance ........... P2,000
Check payable to Trask Corporation, deposited December 20,
and included in December 31 checkbook balance, but
 3|Page

returned by bank on December 30, stamped "NSF." The check

was redeposited January 2, 2009, and cleared January 7 .. 400
Post-dated checks ....................................... 150
Check drawn on Trask Corporation's account, payable to a
vendor, dated and recorded December 31, but not mailed
1,000
until January 15, 2009 ..................................

The proper amount to be shown as cash on Trask's balance sheet at December 31, 2008, is
a. P7,600.
b. P8,000.
c. P8,600.
d. P9,750.
____ 15. Which of the following is not acceptable in estimating uncollectible accounts receivable under GAAP?
a. The estimate of uncollectible accounts is based on a percentage of sales for the period.
b. The estimate of uncollectible accounts is based on a percentage of the accounts receivable
balance at the end of a period.
c. The estimate of uncollectible accounts is based on an aging schedule.
d. No estimate of uncollectible accounts is made; accounts are written off when it is
determined they cannot be collected.
____ 16. The following information is available for Thomas Company:

Credit sales during 2008 P 50,000

Allowance for Doubtful Accounts, Dec. 31, 2007 1,800
Accounts receivable written of during 2008 1,900

As a result of a review and aging of accounts receivable, it has been determined that the Allowance for
Doubtful Accounts should show a balance of P2,100 at December 31, 2008. What amount should Thomas
record as bad debt expense for the year ended December 31, 2008?
a. P2,200.
b. P1,900.
c. P2,100.
d. P2,000.
____ 17. On December 1, 2008, Barnes Company received a P10,000, 60-day, 6% note from a customer. On December
31, 2008, the company discounted the note at the bank. The bank’s discount rate is 9%. What were the
proceeds that Barnes received from the discounting of the note?
a. P10,024.25
b. P9,700.00
c. P9,924.25
d. P10,050.00
____ 18. Accounts receivable usually are factored
a. With recourse on a notification basis.
b. Without recourse on a notification basis.
c. With recourse on a nonotification basis.
d. Without recourse on a nonotification basis.
____ 19. The gross profit method of inventory valuation is not valid when
a. there is substantial increase in the quantity of inventory during the year.
b. there is substantial increase in the cost of inventory during the year.
c. the gross margin percentage changes significantly during the year.
d. all ending inventory is destroyed by fire before it can be counted.
____ 20. Which of the following will result if the current year's ending inventory amount is understated in the cost of
goods sold calculation?
a. Cost of goods sold will be overstated.
b. Total assets will be overstated.
c. Net income will be overstated.
d. Both a and c.
____ 21. What is the maximum amount at which inventory can be valued when the goods have experienced a
permanent decline in value?
a. Historical cost
b. Sales price
c. Net realizable value
 4|Page

d. Net realizable value reduced by a normal profit margin

____ 22. A markup of 25 percent on cost is equivalent to what markup on selling price? (rounded)
a. 15 percent
b. 20 percent
c. 25 percent
d. 33 percent
____ 23. Under generally accepted accounting principles, the lower-of-cost-or-market procedure for assigning a value
to inventory can be assigned to
a. total inventory.
b. groups of similar inventory items.
c. individual inventory items.
d. all of the above.
____ 24. When valuing raw materials inventory at lower of cost or market, what is the general meaning of the term
"market"?
a. Net realizable value
b. Net realizable value less a normal profit margin
c. Current replacement cost
d. Discounted present value
____ 25. An example of an inventory accounting policy that should be disclosed is the
a. effect of inventory profits caused by inflation.
b. classification of inventory into raw materials, work in process, and finished goods.
c. identification of major suppliers.
d. method used for inventory costing.
____ 26. Hardy Company is a wholesale electronics distributor. On December 31, 2008, it prepared the following
partial income statement:

Gross sales ............................... P600,400

Sales discounts ........................... 400
Net sales ................................. P600,000
Cost of goods sold:
Beginning inventory ..................... P200,000
Net purchases ........................... 300,000

Given this information, if Hardy Company's gross margin is 30 percent of net sales, what is the correct ending
inventory balance?
a. P80,000
b. P120,000
c. P180,000
d. P500,000
____ 27. Petersen Menswear, Inc. maintains a markup of 60 percent based on cost. The company's selling and
administrative expenses average 30 percent of sales. Annual sales were P1,440,000. Petersen's cost of goods
sold and operating profit for the year are

Cost of Operating
Goods Sold Profit
a. P864,000 P144,000
b. P864,000 P432,000
c. P900,000 P108,000
d. P900,000 P432,000
____ 28. Davis Company's accounting records indicated the following information:

Inventory, 1/1/08..................................... 1,000,000

Purchases during 2008................................. 5,000,000
Sales during 2008 ..................................... 6,400,000

A physical inventory taken on December 31, 2008, revealed actual ending inventory at cost was P1,150,000.
Davis' gross profit on sales has regularly been about 25 percent in recent years. The company believes some
inventory may have been stolen during the year. What is the estimated amount of missing inventory at
December 31, 2008?
a. P50,000
 5|Page

b. P200,000
c. P350,000
d. P450,000
____ 29. On June 19, 2008, a fire destroyed the entire uninsured merchandise inventory of the Allen Merchandising
Company. The following data are available:

Inventory, January 1 .................................. P 80,000

Purchases, January 1 through June 19 .................. 560,000
Sales, January 1 through June 19 ...................... 776,000
Markup percentage on cost ............................. 25%

What is the approximate inventory loss as a result of the fire?

a. P19,200
b. P27,200
c. P34,000
d. P58,000
____ 30. Commodity X sells for P12.00; selling expenses are P2.40; normal profit is P3.00. If the cost of Commodity
X is P7.80 and the replacement cost is P6.00, the lower of cost or market is
a. P5.40.
b. P6.00.
c. P6.60.
d. P7.80.
____ 31. Venus Inc. carries Product A in inventory on December 31 at its unit cost of P22.50. Because of a sharp
decline in demand for the product, the selling price is reduced to P24.00 per unit. Venus' normal profit margin
on Product A is P4.80, disposal costs are P3.00 per unit, and the replacement cost is P15.90. Under the rule of
lower of cost or market, Venus' December 31 inventory of Product A should be valued at a unit cost of
a. P15.90.
b. P16.20.
c. P21.00.
d. P22.50.

A company sells four products: I, II, III, and IV. The company values all inventories using the lower-of-cost-
or-market procedure. The company has consistently experienced a profit margin of 20 percent of sales and
expects this rate to hold for the future. Additional information, shown below, is available for the most recent
year as of December 31.

Original Cost to Estimated Cost Expected Selling

Product Cost Replace to Sell Prices
I P60 P70 P10 P100
II 70 90 20 120
III 80 60 10 60
IV 90 80 20 90

____ 32. See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the
reported inventory value at December 31 for one unit of Product I?
a. P60
b. P70
c. P80
d. P90
____ 33. See information regarding the four products above. Using the lower-of-cost-or-market procedure, what is the
reported inventory value at December 31 for one unit of Product IV?
a. P60
b. P70
c. P80
d. P90
____ 34. The Garrett Corporation uses the lower-of-cost-or-market method to value inventory. Data regarding the items
in work-in-process inventory are presented below.

Markers Pens Highlighters

Historical cost ................ P24,000 P18,880 P30,000
 6|Page

Selling price .................. 36,000 36,000 36,000

Estimated cost to complete ..... 4,800 4,800 6,800
Replacement cost ............... 20,800 16,800 31,800
Normal profit margin as a
percentage of selling price .... 25% 25% 10%

The value for cost to be used in the lower-of-cost-or-market comparison for the markers is
a. P20,800.
b. P23,400.
c. P24,000.
d. P31,200.
____ 35. The following information is available for the Neptune Company for the three months ended March 31 of this
year:

Inventory, January 1 .................................. P 450,000

Purchases ............................................. 1,700,000
Freight-in ............................................ 100,000
Sales ................................................. 2,400,000

The gross margin was estimated to be 25 percent of sales. What is the estimated inventory balance at March
31?
a. P350,000
b. P450,000
c. P562,500
d. P600,000
____ 36. Goods on consignment are
a. included in the consignee's inventory.
b. recorded in a consignment out account which is an inventory account.
c. recorded in a consignment in account which is an inventory account.
d. All of the above.
____ 37. Merchandise shipped FOB shipping point on the last day of the year should ordinarily be included in
a. the buyer's inventory balance.
b. the seller's inventory balance.
c. neither the buyer's nor seller's inventory balance.
d. both the buyer's and the seller's inventory balances.
____ 38. Which inventory pricing method best approximates specific identification in most manufacturing situations?
a. Activity-based costing
b. FIFO
c. Average cost
d. LIFO
____ 39. Which of the following is not true of the perpetual inventory method?
a. Purchases are recorded as debits to the inventory account.
b. The entry to record a sale includes a debit to Cost of Goods Sold and a credit to Inventory.
c. After a physical inventory count, Inventory is credited for any missing inventory.
d. Purchase returns are recorded by debiting Accounts Payable and crediting Purchase
Returns and Allowances.
____ 40. Goods in transit at year-end purchased FOB shipping point were appropriately recorded in the purchases
account but were incorrectly excluded from the ending inventory. What effect will this omission have on the
company's assets, liabilities, and retained earnings at year-end?
a. No effect, no effect, overstated
b. No effect, no effect, understated
c. Understated, no effect, overstated
d. Understated, no effect, understated
____ 41. A firm using the perpetual inventory method returned defective merchandise costing P2,000 to one of its
suppliers. The entry to record this transaction will include a debit to
a. Accounts Receivable.
b. Inventory.
c. Purchase Returns and Allowances.
d. Accounts Payable.
____ 42. The average cost method is applicable to which of the following inventory systems?
 7|Page

Periodic Perpetual
a. Yes Yes
b. Yes No
c. No Yes
d. No No
____ 43. Which of the following inventory costing methods reports most closely the current cost of inventory on the
balance sheet?
a. FIFO
b. Specific identification
c. Weighted average
d. LIFO
____ 44. Assume that a company records purchases net of discount. If the company bought merchandise valued at
P10,000 on credit terms 3/15, net 30, the entry to record a payment for half of the purchase within the
discount period would include a debit to
a. Accounts Payable for P4,850 and a credit to Cash for P4,850.
b. Accounts Payable for P5,000 and a credit to Cash for P5,000.
c. Accounts Payable for P4,850 and to Interest Expense for P150, and a credit to Cash for
P5,000.
d. Accounts Payable for P5,000 and to Interest Revenue for P150 and to Cash for P5,000.
____ 45. Barlow Company's Accounts Payable balance at December 31, 2008, was P1,800,000 before considering the
following transactions:

• Goods were in transit from a vendor to Barlow on December 31, 2008. The invoice
price was P100,000, and the goods were shipped FOB shipping point on December
29, 2008. The goods were received on January 4, 2009.
• Goods shipped to Barlow FOB shipping point on December 20, 2008, from a vendor
were lost in transit. The invoice price was P50,000. On January 5, 2009, Barlow filed
a P50,000 claim against the common carrier.

In its December 31, 2008, balance sheet, Barlow should report Accounts Payable of
a. P1,950,000.
b. P1,900,000.
c. P1,850,000.
d. P1,800,000.

Stephens Inc. is a wholesaler of photography equipment. The activity for the VTC cameras during July is
shown below:

Balance/
Date Transaction Units Cost
July 1 Inventory 2,000 P36.00
7 Purchase 3,000 37.00
12 Sales 3,600
21 Purchase 5,000 37.88
22 Sales 3,800
29 Purchase 1,600 38.11

____ 46. See information for Stephens Inc. above. If Stephens Inc. uses the average cost method to account for
inventory, the ending inventory of VTC cameras at July 31 is reported as
a. P153,400.
b. P156,912.
c. P158,736.
d. P159,464.
____ 47. During the year, The Hill Company purchased P1,920,000 of inventory. The cost of goods sold for the year
was P1,800,000 and the ending inventory at December 31 was P360,000. What was the inventory turnover for
the year?
a. 5.0
b. 5.3
c. 6.0
 8|Page

d. 6.4

Purchases and sales during a recent period for Coleman, Inc. were:

Purchases During the Period Sales During the Period

1st Purchase 500 units @ P2 1st Sale 600 units @ P7
2nd Purchase 1,000 units @ P3 2nd Sale 750 units @ P8
3rd Purchase 500 units @ P4 3rd Sale 500 units @ P9
4th Purchase 500 units @ P5 4th Sale 500 units @ P10
2,500 units 2,350 units

Beginning inventory was 100 units at P1 each.

____ 48. See information for Coleman, Inc.above. Given this information, what is the ending inventory if the periodic
FIFO costing alternative is used?
a. P400
b. P500
c. P1,250
d. P3,100
____ 49. The following information is available for Hudson Company:

Disbursements for purchases ........................... P290,000

Increase in trade accounts payable .................... 25,000
Decrease in merchandise inventory ..................... 10,000

Cost of goods sold was

a. P325,000.
b. P305,000.
c. P275,000.
d. P255,000.
____ 50. Gordon Company's inventory at June 30, 2008, was P75,000 based on a physical count of goods priced at
cost, and before any necessary year-end adjustment relating to the following:

• Included in the physical count were goods billed to a customer FOB shipping point
on June 30, 2008. These goods had a cost of P1,500 and were picked up by the
carrier on July 10, 2008.
• Goods shipped FOB destination on June 28, 2008, from a vendor to Gordon were
received on July 3, 2008. The invoice cost was P2,500.

What amount should Gordon report as inventory on its June 30, 2008, balance sheet?
a. P73,500
b. P74,000
c. P75,000
d. P76,500
____ 51. In a business combination, goodwill is defined as the excess of cost over the
a. fair value of assets acquired.
b. fair value of assets acquired less the liabilities assumed.
c. book value of assets acquired less the liabilities assumed.
d. net book value of assets acquired.
____ 52. When a company purchases land with a building on it and immediately tears down the building so that the
land can be used for the construction of a plant, the costs incurred to tear down the building should be
a. amortized over the estimated time period between the tearing down of the building and the
completion of the plant.
b. expensed as incurred.
c. added to the cost of the plant.
d. added to the cost of the land.
____ 53. A company is constructing an asset for its own use. Construction began in 2007. The asset is being financed
entirely with a specific new borrowing. Construction expenditures were made in 2007 and 2008 at the end of
each quarter. The total amount of interest cost capitalized in 2008 should be determined by applying the
interest rate on the specific new borrowing to the
 9|Page

a. total accumulated expenditures for the asset in 2008.

b. average accumulated expenditures for the asset in 2008.
c. average expenditures for the asset in 2008.
d. total expenditures for the asset in 2008.
____ 54. If a company constructs a laboratory building to be used as a research and development facility, the cost of the
laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained from
the facility.
____ 55. The Oscar Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum
price of P180,000. At the time of acquisition, Oscar paid P12,000 to have the assets appraised. The appraisal
disclosed the following values:

Land .................................................. P120,000

Buildings ............................................. 80,000
Equipment ............................................. 40,000

What cost should be assigned to the land, buildings, and equipment, respectively?
a. P64,000, P64,000, and P64,000
b. P90,000, P60,000, and P30,000
c. P96,000, P64,000, and P32,000
d. P120,000, P80,000, and P40,000
____ 56. Peterson, Inc. purchased a machine under a deferred payment contract on December 31, 2007. Under the
terms of the contract, Peterson is required to make eight annual payments of P140,000 each beginning
December 31, 2008. The appropriate interest rate is 8 percent. The purchase price of the machine is
a. P1,389,190.
b. P1,120,000.
c. P868,900.
d. P804,530.
____ 57. Marburg Manufacturing Company purchased a machine on January 2, 2008. The invoice price of the machine
was P40,000, and the vendor offered a 2 percent discount for payment within ten days. The following
additional costs were incurred in connection with the machine:

Transportation-in .................................... P1,200

Installation cost .................................... 700
Testing costs prior to regular operation ............. 550

If the invoice is paid within the discount period, Marburg should record the acquisition cost of the machine at
a. P41,650.
b. P41,100.
c. P40,400.
d. P39,200.
____ 58. On June 30, 2008, Hi-Tech Inc. purchased for cash at P50 per share all 150,000 shares of outstanding
common stock of Skicraft Company. Skicraft's balance sheet at June 30, 2008, showed net assets with a book
value of P6,000,000. The fair value of Skicraft's property, plant, and equipment on June 30, 2008, was
P800,000 in excess of its book value. What amount, if any, will be recorded by Hi-Tech as goodwill on the
date of purchase?
a. P0
b. P700,000
c. P800,000
d. P1,500,000
____ 59. On July 31, 2008, Cleveland Company purchased for P4,000,000 cash all of the outstanding common stock of
Gem Company when Gem's balance sheet showed net assets of P3,200,000. Gem's assets and liabilities had
fair values different from the book values as follows:

Book Value Fair Value

Property, plant, and equipment,
net ........................... P5,000,000 P5,750,000
 10 | P a g e

Other assets .................... 500,000 0

Long-term debt .................. 3,000,000 2,800,000

As a result of the transaction, what amount will be shown as goodwill in the July 31, 2008, consolidated
balance sheet of Cleveland Company and its wholly owned subsidiary, Gem Company?
a. P350,000
b. P250,000
c. P750,000
d. P800,000
____ 60. Jazz company started construction on a building on January 1 of this year and completed construction on
December 31 of the same year. Jazz had only two interest notes outstanding during the year, and both of these
notes were outstanding for all 12 months of the year. The following information is available:

Average accumulated expenditures ..................... P250,000

Ending balance in construction in progress
before capitalization of interest .................. 360,000
6 percent note incurred specifically for the project . 150,000
9 percent long-term note ............................. 500,000

What amount of interest should Jazz capitalize for the current year?
a. P15,000
b. P18,000
c. P22,500
d. P27,900
____ 61. A company made the following cash expenditures on a self-constructed building begun January 1 of the
current year:

January 1 ............................................ P50,000

June 1 ............................................... 60,000
December 1 ........................................... 90,000

The building is still under construction at year-end. What is the amount of the average accumulated
expenditures for the purpose of capitalizing interest?
a. P87,500
b. P92,500
c. P100,000
d. P200,000
____ 62. Which of the following most accurately describes the position taken by generally accepted accounting
principles regarding the accounting for the costs of drilling dry wells in the oil and gas industry?
a. Only the successful efforts method may be used.
b. Only the full cost method may be used.
c. Both the successful efforts and full-cost methods may be used.
d. Neither the successful efforts method nor the full cost method may be used pending the
development by the Securities and Exchange Commission of its own approach to
accounting for the costs of drilling dry wells.
____ 63. Order backlogs are an example of which general category of intangible asset that should be recognized
separately according to current generally accepted accounting principles?
a. Marketing-related
b. Customer-related
c. Artistic-related
d. Contract-based
____ 64. Which of the following ordinarily would be treated as a revenue expenditure rather than a capital
expenditure?
a. Repair and maintenance on buildings.
b. The replacement of a major component of a building.
c. An addition to an existing building.
d. Rearrangement costs that are identifiable, material, and are expected to provide
discernable future benefits.
____ 65. In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits method, which
of the following must be known about the asset?
 11 | P a g e

a. Its acquisition cost

b. Its estimated salvage value
c. Its estimated useful life
d. All the above must be known.
____ 66. Which of the following statements is the assumption on which straight-line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.
____ 67. A method that ignores salvage value in the early years of the asset’s life in calculating periodic depreciation
expense is the
a. productive-output method.
b. group composite method.
c. sum-of-the-years'-digits method.
d. double-declining-balance method.
____ 68. Which of the following reasons provides the best theoretical support for accelerated depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in a manner that "smooths" earnings.
c. Repairs and maintenance costs will probably increase in later periods, so depreciation
should decline.
d. Accelerated depreciation provides easier replacement because of the time value of money.
____ 69. On January 1 Stockton Company acquired a machine with a four-year useful life. Stockton estimates the
salvage value of the machine will be equal to ten percent of the acquisition cost. The company is debating
between using either the double-declining-balance method or the sum-of-the-years'-digits method of
depreciation. Comparing the depreciation expense for the first two years computed using these methods, the
depreciation expense for the double-declining-balance method (compared to the sum-of-the-years'-digits
method) will match which of the patterns shown below?

First Second
Year Year
a. Lower Lower
b. Lower Higher
c. Higher Lower
d. Higher Higher
____ 70. A depreciable asset has an estimated 15 percent salvage value. At the end of its estimated useful life, the
accumulated depreciation would equal the original cost of the asset under which of the following depreciation
methods?

Productive- Sum-of-the- Double-

Output Years'-Digits Declining-Balance
a. Yes No No
b. No No No
c. No Yes No
d. Yes Yes Yes
____ 71. When assets are exchanged at a loss in an exchange lacking commercial substance, the basis of the new asset
is usually
a. the list price of the new asset.
b. the book value of the old asset plus any cash paid on the trade-in.
c. the fair market value of the new asset.
d. Either b or c.
____ 72. Jordan Company exchanged a used autograph-signing machine with Rodman Company for a similar machine
with less use. Jordan's old machine originally cost P50,000 and had accumulated depreciation of P40,000, as
well as a market value of P40,000, at the time of the exchange. Rodman's old machine originally cost P60,000
and at the time of the exchange had a book value of P30,000 and a market value of P32,000. Rodman gave
Jordan P8,000 cash as part of the exchange. The exchange lacked commercial substance. Jordan should record
the cost of the new machine at
a. P8,000.
b. P10,000.
c. P16,000.
 12 | P a g e

d. P32,000.
____ 73. On June 30, 2008, a fire in Oak Company's plant caused the total loss of a production machine. The machine
was being depreciated at P20,000 annually and had a carrying amount of P160,000 at December 31, 2007. On
the date of the fire, the fair value of the machine was P220,000, and Pine received insurance proceeds of
P200,000 in October 2008. In its income statement for the year ended December 31, 2008, what amount
should Oak recognize as a gain or loss on disposition?
a. P0
b. P20,000 loss
c. P40,000 gain
d. P50,000 gain
____ 74. On January 1, 2006, Kalos Co. purchased a new machine for P2,500,000. The new machine has an estimated
useful life of five years and the salvage value was estimated to be P250,000. Kalos uses the sum-of-the-years'-
digits method of depreciation. The amount of depreciation expense for 2008 is
a. P450,000.
b. P600,000.
c. P666,667.
d. P750,000.
____ 75. On January 1, 2008, Carson Company purchased equipment at a cost of P570,000. The equipment was
estimated to have a useful life of five years and a salvage value of P60,000. Carson uses the sum-of-the-
years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2010?
a. P340,000
b. P408,000
c. P456,000
d. P510,000
____ 76. In January, Hunter Corporation entered into a contract to acquire a new machine for its factory. The machine,
which had a cash price of P300,000, was paid for as follows:

Down payment .......................................... P 30,000

Note payable in 10 equal monthly installments ......... 240,000
1,000 shares of Hunter common stock with an agreed 50,000
value of P50 per share ..............................
Total ................................................. P320,000

Prior to the machine's use, installation costs of P8,000 were incurred. The machine has an estimated useful
life of ten years and an estimated salvage value of P10,000. What should Hunter record as depreciation
expense for the first year under the straight-line method?
a. P29,800
b. P30,000
c. P31,000
d. P31,800
____ 77. A truck that cost P8,000 was originally being depreciated over four years using the straight-line method with
no salvage value. If after one year, it was decided that the truck would last an additional four years (or a total
of five years), the second year's depreciation would be
a. P2,000.
b. P1,000.
c. P1,500.
d. P2,500.
____ 78. On January 1, 2007, Herschel Locks Corporation purchased drilling equipment for P11,500. The equipment
has an estimated useful life of four years and a salvage value of P200. Given this information, if Herschel uses
the sum-of-the-years'-digits method of depreciation and then trades the equipment for new equipment with a
fair market value of P16,000 on December 31, 2008, and pays P8,000 cash in the exchange, assuming the
exchange has commercial substance, the new equipment should be recorded at
a. P16,000.
b. P12,475.
c. P11,590.
d. P8,110.
 13 | P a g e

____ 79. Pastel Co. purchased a patent on January 1, 2005, for P714,000. The patent was being amortized over its
remaining legal life of 15 years expiring on January 1, 2020. During 2008, Pastel determined that the
economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount
should be charged to patent amortization expense for the year ended December 31, 2008?
a. P47,600
b. P71,400
c. P81,600
d. P142,800
____ 80. Monier Carpet traded cleaning equipment with a cost of P17,000 and accumulated depreciation of P3,250 for
new equipment with a fair market value of P11,500. Assuming the exchange lacks commercial substance,
Monier should record the new equipment at
a. P14,750.
b. P13,750.
c. P11,500.
d. P7,500.
____ 81. During 2003, Volvo Machine Company spent P352,000 on research and development costs for an invention.
This invention was patented on January 2, 2004, at a nominal cost that was expensed in 2004. The patent has
a legal life of 17 years and an estimated useful life of 8 years. In January 2008, Volvo paid P32,000 for legal
fees in a successful defense of the patent. Amortization for 2008 should be
a. P2,462.
b. P8,000.
c. P32,000.
d. P52,000.
____ 82. Bunker Construction Company recently exchanged an old truck, which cost P108,000 and was one-third
depreciated, and paid P70,000 cash for a used crane having a current fair value of P130,000. Assuming the
exchange has commercial substance, at what amount should the crane be recorded on the books of Bunker?
a. P70,000
b. P108,000
c. P130,000
d. P142,000
____ 83. In January 2008, Vance Mining Corporation purchased a mineral mine for P7,200,000 with removable ore
estimated by geological surveys at 4,320,000 tons. The property has an estimated value of P720,000 after the
ore has been extracted. Vance incurred P2,160,000 of development costs preparing the property for the
extraction of ore. During 2008, 540,000 tons were removed and 480,000 tons were sold. For the year ended
December 31, 2008, Vance should include what amount of depletion in its cost of goods sold?
a. P720,000
b. P810,000
c. P960,000
d. P1,080,000
____ 84. In 2007, Newman Company paid P1,000,000 to purchase land containing a total estimated 160,000 tons of
extractable mineral deposits. The estimated value of the property after the mineral has been removed is
P200,000. Extraction activities began in 2008, and by the end of the year, 20,000 tons had been recovered and
sold. In 2009, geological studies indicated that the total amount of mineral deposits had been underestimated
by 25,000 tons. During 2009, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion
rate per ton (rounded to the nearest cent) in 2009?
a. P4.24
b. P4.32
c. P4.85
d. P5.19
____ 85. In January 2008, Bevis Company exchanged an old machine, with a book value of P156,000 and a fair value
of P160,000, and paid P40,000 cash for a similar used machine having a fair value of P200,000. The exchange
lacked commercial substance. At what amount should the machine acquired in the exchange be recorded on
Bevis' books?
a. P156,000
b. P196,000
c. P200,000
d. P204,000
 14 | P a g e

____ 86. Ellis Construction Company recently exchanged an old truck, which cost P108,000 and was one-third
depreciated, and paid P70,000 cash for a similar truck having a current fair value of P130,000. The exchange
lacked commercial substance. At what amount should the truck be recorded on the books of Ellis?
a. P70,000
b. P108,000
c. P130,000
d. P142,000
____ 87. On July 1, Phoenix Corporation, a calendar-year company, received a condemnation award of P150,000 as
compensation for the forced sale of a plant located on company property that stood in the path of a new
highway. On this date, the plant building had a depreciated cost of P75,000 and the land cost was P25,000. On
October 1, Phoenix purchased a parcel of land for a new plant site at a cost of P62,500. Ignoring income
taxes, Phoenix should report in its income statement for the year ended December 31 a gain of
a. P0.
b. P12,500.
c. P37,500.
d. P50,000.
____ 88. A company owns a piece of land that originally cost P10,000 and has a fair market value of P8,000. It is
exchanged along with P5,000 cash for another piece of land having a fair value of P13,000. The exchange had
commercial substance. The proper journal entry to record this transaction is
a. Land (new)........................ 15,000
Land (old)...................... 10,000
Cash ........................... 5,000
b. Land (new) ....................... 13,000
Loss on Exchange ................. 2,000
Land ........................... 10,000
Cash ........................... 5,000
c. Land (new)........................ 18,000
Land (old) ..................... 10,000
Cash ........................... 5,000
Gain on Exchange ............... 3,000
d. Land (new)........................ 13,000
Retained Earnings ................ 2,000
Land (old)...................... 10,000
Cash ........................... 5,000
____ 89. The impairment test for an intangible asset with a definite life compares the
a. fair value of the asset to its book value.
b. sum of the undiscounted cash flows expected to be generated by the asset to its book
value.
c. sum of the discounted cash flows expected to be generated by the asset to its fair value.
d. sum of the undiscounted cash flows expected to be generated by the asset to its fair value.
____ 90. From the following, select the most appropriate basis for the valuation of a new investment when properties
or services are exchanged for stock.
a. The par or stated value of the stock received
b. The book value of the property or services exchanged
c. The fair market value of the stock received
d. Either b or c, whichever is more clearly determinable
____ 91. For which type of investments would unrealized increases and decreases be recorded directly in an owners'
equity account?
a. Equity method securities
b. Available-for-sale securities
c. Trading securities
d. Held-to-maturity securities
____ 92. If the combined market value of trading securities at the end of the year is less than the market value of the
same portfolio of trading securities at the beginning of the year, the difference should be accounted for by
a. reporting an unrealized loss in security investments in the stockholders' equity section of
the balance sheet.
b. reporting an unrealized loss in security investments in the income statement.
c. a footnote to the financial statements.
d. a credit to Investment in Trading Securities.
____ 93. Which of the following is true?
 15 | P a g e

a. Trading securities can be classified as current or noncurrent depending on management's

intent.
b. Held-to-maturity securities should not be classified as current under any circumstance.
c. Trading securities should not be classified as current under any circumstance.
d. Available-for-sale securities can be classified as current or noncurrent depending on
management's intent.
____ 94. Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July 2008. The
following January, Shaver announced a P100,000 net income for 2008 and declared a cash dividend of P.50
per share on its 100,000 shares of outstanding common stock. The Northwick Company dividend revenue
from Shaver Corp. in January 2008 would be
a. P0.
b. P2,500.
c. P5,000.
d. P10,000.
____ 95. Martin Co. purchased the following portfolio of available-for-sale securities during 2008 and reported the
following balances at December 31, 2008. No sales occurred during 2008. All declines are considered to be
temporary.

Security Cost Market Value at 12/31/05

X P 80,000 P 82,000
Y 140,000 132,000
Z 32,000 28,000

Martin Co. should report what amount related to the securities transactions in its 2008 income statement?
a. P0
b. P2,000 unrealized loss
c. P10,000 unrealized loss
d. P12,000 unrealized loss
____ 96. In March of 2007, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for P450,000 and
classified the shares as available-for-sale securities. The market value of these shares had declined to
P300,000 by December 31, 2007. Moon changed the classification of these shares to trading securities in June
of 2008 when the market value of this investment in McMahon's stock had risen to P345,000. How much
should Moon include as a loss on transfer of securities in its determination of net income for 2008?
a. P0
b. P45,000
c. P105,000
d. P150,000
____ 97. In January 2008, Henry Corporation acquired 20 percent of the outstanding common stock of Davis Company
for P1,120,000. This investment gave Henry the ability to exercise significant influence over Davis. The book
value of the acquired shares was P840,000. The excess of cost over book value was attributed to an
identifiable intangible asset that was undervalued on Davis' balance sheet and that had a remaining useful life
of ten years. For the year ended December 31, 2008, Davis reported net income of P252,000 and paid cash
dividends of P56,000 on its common stock. What is the proper carrying value of Henry's investment in Davis
at December 31, 2008?
a. P1,080,800
b. P1,092,000
c. P1,131,200
d. P1,181,600
____ 98. Edwards Company began business in February of 2007. During the year, Edwards purchased the three trading
securities listed below. On its December 31, 2007, balance sheet, Edwards appropriately reported a P4,000
credit balance in its Market Adjustment--Trading Securities account. There was no change during 2008 in the
composition of Edward's portfolio of trading securities. Pertinent data are as follows:

Market Value
Security Cost December 31, 2008
A P120,000 P126,000
B 90,000 80,000
C 160,000 157,000
P370,000 P363,000
 16 | P a g e

What amount of loss on these securities should be included in Edward's income statement for the year ended
December 31, 2008?
a. P0
b. P3,000
c. P7,000
d. P11,000
____ 99. During 2007, Barney Company purchased marketable equity securities as a short-term investment and
classified them as trading securities. The cost and market value at December 31, 2007, were as follows:

Market Value
Security Cost December 31, 2007
X 200 shares P 8,400 P 10,200
Y 2,000 shares 51,000 45,900
Z 4,000 shares 94,500 88,500
P153,900 P144,600

Barney sold 1,000 shares of Company Y stock on March 16, 2008, for P25 per share, incurring P1,200 in
brokerage commissions and taxes. On the sale, Barney should report a realized loss of
a. P0.
b. P500.
c. P850.
d. P1,700.
____ 100. When an enterprise increases its interest in an investment in equity securities accounted for by the fair value
method, and changes to the equity method, what is the initial carrying value for purposes of subsequent
application of the equity method?
a. Book value at the date of the change
b. Original cost plus or minus the net market value change since acquisition
c. Market value at the date of the change
d. The amount that would be reflected in the investment account had equity method been in
use continually since the purchase of the securities.