Test Bank – Financial Financial Acctg 3 (fr. dean)
Cash & Cash equivalent
1.Which of the following should not be considered cash for financial reporting purposes? A. Petty cash funds and change funds B. Money orders, certified checks and personal checks C. Coin, currency and available funds D. Postdated checks and IOUs 2. Which of the following following should be considered cash? cash? A. Certificates of deposits B. Money market checking accounts C. Money market savings certificates D. Postdated checks 3. The following statements relate relate to cash. Which statement is true? true? A. The term “cash equivalent” refers to demand credit instruments such as money order and bank drafts. B. The purpose of establishing a petty cash fund is to keep enough cash on hand to cover all normal operating expenses for a period of time. C. Classification of a restricted cash balance as current or non-current should parallel the classification of the related obligation for which the cash was restricted. D. Compensating balances required by a bank should always be excluded from “cash and cash equivalent”. 4. Compensating balance agreement agreement (choose the the incorrect one) A. Reduces the amount of cash available to the borrower. B. Always involves legal restriction on the compensating cash balance. C. Increases the effective interest rate to the borrower. D. Should be disclosed in the notes to financial statements. 5. Compensating balance agreement agreement that does not legally restrict the amount of compensating compensating cash balance should be reported A. As current assets B. As noncurrent investment C. As other asset D. In the notes to financial statements 6. Cash equivalents are A. Short-term and highly liquid investments that are readily convertible into ca sh. B. Short-term and highly liquid investments that are readily convertible into ca sh with remaining maturity of three months.
C. Short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they represent insignificant risk of changes in value becaus e of changes in interest rates.. D. Short-term and highly liquid marketable equity securities. 7. Bank overdraft, if material, should be A. Reported as a deduction from the current asset section. B. Reported as a deduction from cash. C. Netted against cash and a net cash amount reported. D. Reported as a current liability. 8. All cash receipts are deposited intact and all cash disbursements are made by means of check. This internal control is known as A. Administrative control B. Imprest system C. Accounting control D. Auditing control. 9. Cash control systems are are the methods and procedures used to ensure A. That the current obligations are met. B. That excess cash does not exist. C. The safeguarding of cash. D. That unused cash is invested. 10. Entries to record the replenishment of petty pett y cash fund result in a debit to various v arious expense accounts and a credit to cash in bank. This accounting procedure typically exemplifies the A. Imprest petty cash system. B. Fluctuating petty cash system. C. Internal control. D. Administrative control. 11. What is the major purpose of an imprest petty cash fund? A. To effectively plan cash inflows and outflows B. To ease the payment of cash to vendors C. To determine honesty of the employees. D. To effectively control cash disbursements. 12. A cash over or short account A. Is generally not accepted B. Is debited when the petty cash fund proves out over. C. Is debited when the petty cash fund proves out short. D. Is a contra account to cash. 13. The payments of accounts payable made subsequent to the close of the accounting period are recorded as if they were made at the end of the current period. A. Window dressing
B. Lapping C. Kiting D. Imprest system 14. Bank reconciliation A. Is the process of transferring money in or out of a bank account. B. Requires that every transaction which will result in a cash pa yment be verified, approved and recorded before a bank check is prepared. C. Is an analysis that reflects the bank transactions made by a depositor. D. Explains the difference between the bank balance and the balance shown in the depositor’s records. 15. If the cash balance shown in a company’s accounting records is more 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. Deposits in transit. C. Outstanding checks. D. Bank charges not yet recorded by the company. 16. If the cash balance in a company’s bank statement is more 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.
17. The journal entries for a bank reconciliation A. Are taken from the balance per bank only B. May include a debit to office expense for a bank service charges. C. May include a credit to accounts receivable for an NSF check. D. May include a debit to accounts payable for an NSF check. 18. When preparing a bank reconciliation, bank credits are A. Added to the bank statement balance B. Deducted from the bank statement balance C. Added to the balance per book D. Deducted from the balance per book 19. Which of the following is a key element of internal control over a cash payments? A. Authorizing and verifying that all cash received is recorded daily. B. Requiring that all petty cash vouchers are approved by two persons. C. Making daily bank deposits. D. Periodically reconciling the cash account balance per book with the statement balance.
Accounts Receivable
20. Accounts receivable should be recognized initially at A. Face value B. Present value C. Maturity value D. Net realizable value 21. Subsequent to initial recognition, accounts receivable should be carried at A. Face value B. Net realizable value C. Maturity value D. Present value 22. Long-term notes receivable which nominally bear no interest or an interest which is unreasonably low should be recognized initially at A. Face value B. Present value C. Maturity value D. Net realizable value 23. Loans and receivable are nonderivative financial assets A. With fixed or determinable payments that are not quoted in an active market. B. With fixed or determinable payments that are quoted in an active market. C. Without fixed or determinable payments that are not quoted in an active market. D. Without fixed or determinable payments that are quoted in an active market. 24. Initially, loans and receivables are measured at A. Fair value B. Fair value plus transaction costs that are directly attributable to the acquisition. C. Maturity value. D. Maturity value plus transaction costs that are directly attributable to the acq uisition. 25. Subsequent to initial recognition, loans and receivables are measured at A. Cost B. Amortized cost using straight line method C. Amortized cost using effective interest method D. Fair value 26. Receivables denominated in a foreign currency should be A. Translated to local currency using the exchange rate at the time the receivable arise. B. Shown at face value of the foreign currency. C. Translated to local currency using the exchange rate at the balance sheet date. D. Translated to local currency using the exchange rate when the balance sheet is issued.
27. Trade receivables are classified as current assets when they are reasonably expected to be realized in cash A. Within one year B. Within the normal operating cycle. C. Within one year or within the normal operating cycle whichever is shorter. D. Within one year or within the normal operating cycle whichever is longer. 28. Nontrade receivables are classified as current assets only if they are reasonably expected to be realized in cash A. Within one year or within the normal operating cycle whichever is shorter. B. Within the normal operating cycle. C. Within one year or within the normal operating cycle whichever is longer. D. Within one year, the length of the operating cycle notwithstanding. 29. Receivables from subsidiaries and affiliates, if significant should be classified as A. Current assets B. Noncurrent assets C. Either as noncurrent or current depending on the expectation of realizing them within one year or over one year D. Intangible assets 30. If a company employs the gross method of recording accounts receivable from customers, the sales discount taken should be reported as A. Deduction from sales in the income statement B. Other expense in the income statement C. Deduction from accounts receivable in determining the net realizable value of accounts receivable. D. Sales discount forfeited in the cost of goods sold section of the income statement. 31. Assuming that the ideal measure of short-term receivables in the balance sheet is the discounte d value of cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because A. Most short-term receivables are noninterest bearing B. The allowance for uncollectible accounts includes a discount element. C. The amount of the discount is not material. D. Most receivables can be sold to a bank or factor. 32. Credit balances in accounts receivable should be classified as A. Current liability B. Part of accounts payable C. Noncurrent liability D. Deduction from accounts receivable 33. A method of estimating doubtful accounts that focuses on the income statement rather the balance sheet is the allowance method based on A. Direct writeoff
B. Aging of trade accounts receivable C. Credit sales D. Balance of accounts receivable 34. A method of estimating doubtful accounts that focuses on the income statement rather the balance sheet is the allowance method based on A. Aging of receivables B. Direct writeoff C. Gross sales D. Credit sales less sales returns and allowances 35. A company uses the allowance method of recognizing doubtful accounts. The entry to record the writeoff of a specific uncollectible account A. Affects neither net income nor working capital B. Affects neither net income nor accounts receivable C. Decreases both net income and working capital D. Decreases both net income and accounts receivable. 36. When a specific customer’s account receivable is written off as uncollectible, what will be the effect on net income under each of the following methods of recognizing bad debts expense? Allowance Direct writeoff A. None Decrease B. Decrease None C. Decrease Decrease D. None None
37. When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would A. Disclosed in the notes B. Excluded from the total receivables, with disclosure C. Excluded from the total receivables, with no disclosures D. Excluded from the total receivables and a gain or loss is recognized between the face value and the amount of borrowings. 38. If receivables are hypothecated against borrowings, the amount of receivables involved should be A. Disclosed in the notes B. Excluded from the total receivables, with disclosure C. Excluded from the total receivables, with no disclosures D. Excluded from the total receivables and a gain or loss is recognized between the face value and the amount of borrowings. 39. It is a predetermined amount withheld by a factor as a protection against customer returns, allowances and other special adjustments. A. Equity in assigned accounts B. Service charge C. Commission
D. Factor’s holdback 40. Which of the following is true when accounts receivable are factored without recourse? A. The transaction may be accounted for either as secured borrowing or sale. B. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. C. The factor assumes the risk of collectability and absorbs any credit losses in collecting the receivables. D. The financing cost should be recognized ratably over the collection period of the receivables. 41. Notes receivable discounted with recourse should be A. Included in total receivables with disclosure of contingent liability. B. Included in total receivables without disclosure of contingent liability. C. Excluded in total receivables with disclosure of contingent liability. D. Excluded in total receivables without disclosure of contingent liability. 42. Which of the following statements is correct? A. The net realizable value of the total amount of accounts receivable is defined as the gross amount billed to customers less any cash and trade discounts. B. When a specified uncollectible account which has already been written off is later collected sales revenue is increased by the amount of the recovery. C. The primary accounting principle supporting use of the allowance for doubtful account is the cost principle. D. An estimate of doubtful accounts expense based upon credit sales rather than total sales will likely be more in conformity with the matching principle. 44. Which of the following statement is true? A. Trade accounts receivable are the only asset on which doubtful accounts expense can be incurred. B. The sole justification for providing for doubtful accounts is conservatism. C. Methods of estimating doubtful accounts expense based upon the collectability of accounts receivable emphasize the income statement rather than the balance sheet. D. Provision for bad debt losses on trade receivable is usually included in computing the balance of “allowance for doubtful accounts”. 45. Which of the accounting principles primarily supports the use of allowance for doubtful accounts? A. Continuity principle B. Full-disclosure principle C. Matching principle D. Cost principle 46. The allowance method of recognizing bed debt expense can be applied is more than one way. What two conditions must be met before the allowance method can be used? A. Bad debts must be expected and material. B. Bad debts must be relevant and reliable C. Bad debts must be probable and estimable
D. Bad debts must be consistent over time and the method used to estimate them must be consistently applied. CASH & CASH EQUIVALENT
47. In connection with your audit of Mags Corporation for the year ended, December 31, 2010, you gathered the following: 1. Current account at Metrobank 2. Current account at BPI 3. Payroll account 4. Foreign bank account – restricted (in equivalent pesos) 5. Postage stamps 6. Employee’s postdated checks 7. IOU from controller’s sister 8. Credit memo from a vendor for a purchase return 9. Traveler’s check 10. NSF check 11. Money order 12. Petty cash fund ( P4,000 in currency and expense receipts for P6,000) 13. Treasury bills, due 3/3/11 (purchased 12/29/09) 14. Treasury bills, due 1/31/11 (purchased 2/1/10)
P2,000,000 ( 100,000) 500,000 1,000,000 1,000 4,000 10,000 20,000 50,000 15,000 30,000 10,000 200,000 300,000
Based on the above information and the result of your audit, compute for the cash and cash equivalent that would be reported in the December 31, 2010 balance sheet. A. P2,784,000 B. P3,084,000 C. P2,790,000 D. P2,704,000 48. In the course of your audit of the Autumn Corporation, its controller is attempting to determine the amount of cash to be reported on its December 31, 2010 balance sheet. The following information is provided: 1. Commercial savings account of P1,200,000 and a commercial checking account balance of P1,800,000 are held at PS Bank. 2. Travel advances of P360,000 for executive travel for the first quarter of the next year (employee to reimburse through salary deduction). 3. A separate cash fund in the amount of P3,000,000 is restricted for the retirement of a long term debt. 4. Petty cash fund of P10,000. 5. An IOU from a company officer in the amount of P40,000. 6. A bank overdraft of P250,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.
7. The company has two certificates of deposit, each totaling P1,000,000. These certificates of deposit have maturity of 120 days. 8. Autumn has received a check dated January 2, 2011 in the amount of P150,000. 9. Autumn has agreed to maintain a cash balance of P200,000 at all times at PS Bank to ensure future credit availability. 10. Currency and coin on hand amounted to P15,000. How much will be reported as cash and cash equivalent at December 31, 2010? A. P3,025,000 B. P2,825,000 C. P2,575,000 D. P5,025,000 49. The cash account of MDG Corporation as of December 31, 2010 consists of the following: On deposit in current account with Real Bank Cash collection not yet deposited to the bank A customer’s check returned by the bank for insufficient fund A check drawn by the Vice-President of the Corporation dated January 15,2011 A check drawn by a supplier dated December 28, 2010 for goods returned by the corporation A check dated May 31, 2010 drawn by the Corporation against the Nominal Bank in payment of custom duties. Since the importation did not materialize the check was returned by the customs broker. This check was an outstanding check in the reconciliation of the Nominal Bank account. Petty cash fund of which P5,000 is in currency; P3,600 in the form of employees’ IOUs and P1,400 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31, 2010. Total Less: Overdraft with Nominal Bank secured by a chattel Mortgage on the inventories Balance per ledger
P 900,000 350,000 150,000 70,000 60,000
410,000
10,000 P1,950,000 300,000 P1,650,000
At what amount will the account “Cash” appear on the December 31, 2010 balance sheet? A. P1,315,000 B. P1,425,000 C. P1,495,000 D. P1,725,000
50. You noted in the following composition of King Baker Company’s “cash account” as of December 31, 2010 in connection with your audit: Demand deposit account Time deposit – 30 days NSF check of customer Money market placement (due June 30, 2011) Savings deposit in a closed bank IOU from employee Pension fund Petty cash fund Customer’s check dated January 1, 2011 Customer’s check outstanding for 18 months Total
P2,000,000 1,000,000 40,000 1,500,000 100,000 20,000 3,000,000 10,000 50,000 40,000 P7,760,000
Additional information follows: a. Check of P200,000 in payment of accounts payable was recorded on December 31, 2010 but mailed to suppliers on January 5,2011. b. Check of P100,000 dated January 15, 2011 in payment of accounts payable was recorded and mailed on December 31, 2010. c. The company uses the calendar year. The cash receipts journal was held open until January 15, 2011, during which time P400,000 was collected and recorded on December 31, 2010. The cash and cash equivalents to be shown on the December 31, 2010 balance sheet is: A. P3,310,000 B. P1,910,000 C. P2,910,000 D. P4,410,000 Questions 51 to 54: You were able to gather the following from the December 31, 2010 trial balance of Jg Corporation in connection with your audit of the company: Cash on hand Petty cash fund BPI current account Security Bank current account No. 01 Security Bank current account No. 02 PNB savings account PNB time deposit
P 500,000 10,000 1,000,000 1,080,000 ( 80,000) 1,200,000 500,000
Cash on hand includes the following items: a. Customer’s check for P40,000 returned by bank on December 26, 2010 due to insufficient fund but subsequently redeposited and cleared by the bank on January 8, 2011. b. Customer’s check for P20,000 dated January 2, 2011 received on December 29,2010.
c. Postal money orders received from customers, P30,000. The Petty cash fund consisted of the following items as of December 31, 2010: Currency and coins P 2,000 1,600 Employees’ vales Currency in an envelope marked “collections for charity” with names attached 1,200 Unreplenished petty cash vouchers 1,300 Check drawn by Jg Corporation, payable to the petty cashier 4,000 P10,100 Included among the checks drawn by Jg Corporation against the BPI current account and recorded in December 2010 are the following: a. Check written and dated December 29, 2010 and delivered to payee on January 2, 2011, P80,000. b. Check written on December 27, 2010, dated January 2, 2011, delivered to payee on December 29, 2010, P40,000. The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the deposit balance. These checks were still outstanding at December 31, 2010. The savings account deposit in PNB has been set aside by the board of directors for acquisition of new equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date. Determine the adjusted balances of the following: 51. Cash on hand A. P410,000 B. P530,000 C. P470,000 D. P440,000 52. Petty cash fund A. P6,000 B. P7,200 C. P2,000 D. P4,900 53. BPI current account A. P1,000,000 B. P1,120,000 C. P1,080,000 D. P1,040,000
54. Cash and cash equivalents A. P2,917,200 B. P3,074,900 C. P3,052,000 D. P3,066,000 55- 56: The books of Manila’s Service, Inc., disclosed a cash balance of P687,570 on December 31, 2010. The bank statement as of December 31 showed a balance of P 547,800. Additional information that might be useful in reconciling the two balances follows: a. Check number 748 for P30,000 was originally recorded on the books as P45,000. b. A customer’s note was dishonored on December 29 (maturity date). The bank charged Manila’s account for P142,650, including a protest fee of P2,650. c. The deposit of December 24 was recorded on the books as P28, 950, but it was actually a deposit of P27,000. d. Outstanding checks totaled P98,850 as of December 31. e. There were bank service charges for December of P2,100 not yet recorded on the books. f. Manila’s account had been charged on December 26 for a customer’s NSF check for P12,960. g. Manila properly deposited P6,000 on December 3 that was not recorded by the bank. h. Receipts of December 31 for P134,250 were recorded by the bank on January 2. i. A bank memo stated that a customer’s note for P45,000 and interest of P1,650 had been collected on December 27, and the bank charged a P360 collection fee. Determine the following: 55. Adjusted cash in bank balance A. P583,200 B. P577,200 C. P589,200 D. P512,400 56. Net adjustment to cash as of December 31, 2010. A. P104,370 B. P110,370 C. P 98,370 D. P175,170 57-61: Shown below is the bank reconciliation for Metro Company for November 2010: Balance per bank, Nov. 30, 2010 Add: Deposit in transit Total Less: Outstanding checks Bank credit recorded in error Cash balance per books, Nov. 30, 2010
P150,000 24,000 P174,000 P28,000 10,000
38,000 P136,000
The bank statement for December 2010 contains the following data: Total deposits Total charges, including NSF check of P8,000 and a service charge of P400
P110,000 96,000
All outstanding checks on November 30, 2010, including the bank credit, were cleared in the bank in December 2010. There were outstanding checks of P30,000 and deposits in transit of P38,000 on December 31, 2010. Based on the above and the result of your audit, answer the following: 57. How much is the cash balance per bank on December 31, 2010? A. P154,000 B. P150,000 C. P164,000 D. P172,400 58. How much is the December receipts per book? A. P124,000 B. P 96,000 C. P110,000 D. P148,000 59. How much is the December disbursements per books? A. P96,000 B. P79,600 C. P89,600 D. P98,000 60. How much is the cash balance per books on December 31, 2010? A. P150,000 B. P170,400 C. P180,400 D. P162,000 61. The adjusted cash in bank balance as of December 31, 2010 is: A. P141,600 B. P170,400 C. P180,400 D. P162,000
ACCOUNTS RECEIVABLE
62 to 65: The adjusted trial balance of Janica Company as of December 31, 2009 shows the following:
Accounts Receivable Allowance for bad debts
Debit P1,000,000
Credit P40,000
Additional information: Cash sales of the company represents 10% of gross sales. 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms. It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at December 31, 2010. Sales returns in 2010 amounted to P400,000. All returns were from charge sales. During 2010, accounts totaling to P44,000 were written off as uncollectible, bad debt recoveries during the year amounted to P3,000. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2010 is 150% of the rate used on December 31, 2009.
62. The accounts receivable as of December 31, 2010 is A. P3,000,000 B. P 300,000 C. P 333,333 D. P2,444,000 63. The allowance for doubtful accounts as of December 31, 2010 is A. P 20,000 B. P120,000 C. P180,000 D. P146,640 64. The net realizable value of accounts receivable as of December 31, 2010 is A. P 307,340 B. P2,814,000 C. P2,874,000 D. P2,291,360 65. The doubtful accounts expense for the year 2010 is A. P181,000 B. P121,000 C. P 21,000 D. P147,640
CORRECTION OF ERRORS (prelim ay10-11)
1.
Which of the following types of errors will not self-correct in the next year? A. B. C. D.
Accrued expenses not recognized at year-end Accrued revenues that have not been collected not recognized at year-end Depreciation expense overstated for the year Prepaid expenses not recognized at year-end
2.
On December 27, 2008, Johnson Company ordered merchandise for resale from Quantum, Inc., that cost $7,000 (terms cash within 10 days). Quantum shipped the merchandise f.o.b. shipping point on December 28, 2008, and the goods arrived on January 2, 2009. The invoice was received on December 30, 2008. Johnson Company did not record the purchase in 2008 and did not include the goods in ending inventory. The effects on Johnson Company’s 2008 financial statements were A. income and owners’ equity were correct; liabilities were incorrect, assets were correct. B. income and owners’ equity were correct; assets and liabilities were incorrect. C. income, assets, liabilities, and owners’ equity were correct. D. income, assets, liabilities, and owners’ equity were incorrect.
3.
Which of the following should not be reported retroactively? A. Use of an unacceptable accounting principle, then changing to an acceptable accounting principle. B. Correction of an overstatement of ending inventory made two years ago. C. Use of an unrealistic accounting estimate, then changing to a realistic estimate. D. Change from a good faith but erroneous estimate to a new estimate.
4.
Which of the following is a counterbalancing error? A. Understated depletion expense B. Bond premium under-amortized C. Prepaid expense adjusted incorrectly D. Overstated depreciation expenses
5.
Which of the following, if discovered by James Company in the accounting period subsequent to the period of occurrence, requires the company to report the correction of an error? A. The estimate of the useful life of a depreciable asset should have been revised. B. A change from declining-balance depreciation method to straight-line method C. Capitalization of an expense D. Change in percentage of sales used for determining bad debt expense
6.
BJ Company uses a periodic inventory system. If the company’s beginning inventory in the current year is overstated, and that is the only error in the current year, then the compan y’s income for the current year will be A. understated and assets correct. B. understated and assets overstated. C. overstated and assets overstated. D. understated and assets understated.
7.
Which of the following is not an example of an accounting error, as distinguished from a change in accounting principle or change in accounting estimate? A. Misstatement of assets, liabilities, or owners’ equity B. Incorrect classification of an expenditure as between expense and an asset C. Failure to recognize accruals and deferrals D. Recognition of a gain on disposal of fully depreciated property
8.
The September 30, 2008, physical inventory of Baxter Corporation appropriately included $3,800 of merchandise purchased on account that was not recorded in purchases until October 2008. What effect will this error have on September 30, 2008, assets, liabilities, retained earnings, and earnings for the year then ended, respectively? A. Understate; no effect; overstate; overstate B. No effect; overstate; understate; understate C. No effect; understate; overstate; overstate D. No effect; understate; understate; overstate
9.
If, at the end of a period, Matthew Company erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records, these errors would cause A. no effect on the company’s net income , working capital, and retained earnings. B. the company’s cost of goods available for sale, co st of goods sold, and net income to be understated. C. the company’s ending inventory, cost of goods available for sale, and retained earnings to be understated. D. the company’s ending inventory, cost of goods sold, and retained earnings to be understated.
10.
Justin Corporation uses a periodic inventory system and neglected to record a purchase of merchandise on account at year-end. This merchandise was omitted from the year-end ph ysical count. How will these errors affect Justin’s assets, liabilities, and stockholders’ equity at year end and net earnings for the year? Stockholders’ Assets Liabilities Equity Net Earnings A. Understate Understate No effect No effect B. Understate No effect Understate Understate C. No effect Understate Overstate Overstate D. No effect Overstate Understate Understate
11.
Ending inventory for 2006 is overstated by $4,000 due to a faulty count and costing. The tax rate is 30%. Assume the same accounting methods for both financial reporting and taxes. The error is discovered late in 2008. The 2008 annual report shows the financial statements for 2006, 2007, 2008 on a comparative basis. Which of the following is correct regarding the reporting of this error in the 2008 annual report? A. A journal entry is made to report the prior period adjustment, and the 2006 2007 statements are shown corrected. B. No journal entry is needed, and the 2006 and 2007 statements are shown as they were in the 2007 annual report. C. No journal entry is needed, and the 2006 and 2007 statements are shown corrected. D. A journal entry is made to report the prior period adjustment, and the 2006 and 2007 statements are shown as they were in the 2007 annual report.
12.
The ending inventory for Wattis Company was overstated by $6,000 in 2008. The overstatement will cause Wattis Company’s A. retained earnings to be understated on the 2008 balance sheet. B. cost of goods sold to be understated on the 2009 income statement. C. cost of goods sold to be overstated on the 2008 income statement. D. 2009 balance sheet not to be misstated.
13.
Which of the following would cause income of the current period to be understated? A. Capitalizing research and development costs B. Failure to recognize unearned rent revenue C. Changing from LIFO to FIFO for merchandise inventory D. Understating estimates of asset residual values
14.
For a company with a periodic inventory system, which of the following would cause income to be overstated in the period of occurrence? A. Overestimating bad debt expense B. Understating beginning inventory C. Overstated purchases D. Understated ending inventory
15.
Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine. Payments are recorded as revenue when received. Amounts received but unearned at the end of each of the last three years are shown below: 2006 2007 2008 Unearned revenues ............. $150,000 $176,000 Barker failed to record the unearned revenues in each of the three years. As a result of the omission, 2008 income was A. overstated by $146,000. B. understated by $146,000. C. understated by $26,000.
D. overstated by $26,000.
16.
Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine. Payments are recorded as revenue when received. Amounts received but unearned at the end of each of the last three years are shown below. 2006 2007 2008 Unearned revenues ............. $120,000 $150,000 $176,000 Barker failed to record the unearned revenues in each of the three years. The entry needed to correct the above errors is A. Retained Earnings .................. 150,000 Subscription Revenues .............. 26,000 Unearned Revenues ............... 176,000 B.
C.
D.
Retained Earnings .................. Subscription Revenues .............. Unearned Revenues ...............
30,000 26,000 56,000
Subscription Revenues .............. 176,000 Unearned Revenues ...............
176,000
Subscription Revenues .............. 150,000 Retained Earnings .................. 26,000 Unearned Revenues ...............
176,000
17. Koppell Co. made the following errors in counting its year-end physical inventories: 2006 .................................. $ 60,000 overstatement 2007 .................................. 108,000 understatement 2008 .................................. 90,000 overstatement As a result of the above undetected errors, 2008 income was A. understated by $18,000. B. overstated by $198,000. C. overstated by $18,000. D. understated by $198,000. 18.
Badger Corporation purchased a machine for $150,000 on January 1, 2007. Badger will depreciate the machine using the straight-line method using a five-year period with no residual value. As a result of an error in its purchasing records, Badger did not recognize any depreciation for the machine in its 2007 financial statements. Badger discovered the problem during the preparation of its 2008 financial statements. What amount should Badger record for depreciation expense on this machine for 2008? A. $0 B. $30,000 C. $37,500
D. $60,000
19. Koppell Co. made the following errors in counting its year-end physical inventories: 2006 $ 60,000 overstatement 2007 ................................... 108,000 understatement 2008 ................................... 90,000 overstatement The entry to correct the accounts at the end of 2008 is A. Retained Earnings ................... 48,000 Cost of Goods Sold .................. 42,000 Inventory ........................ 90,000
20.
B. Retained Earnings ................... Cost of Goods Sold .................. Inventory ........................
18,000 72,000
C. Inventory .......................... Cost of Goods Sold ............... Retained Earnings ...............
90,000
D. Cost of Goods Sold .................. Retained Earnings ................ Inventory ........................
198,000
90,000
18,000 72,000
108,000 90,000
April Company showed income before income tax of P6,500,000 on December 31, 2009. During the year-end verification of the transactions of the compan y, the following errors are discovered: P1,000,000 worth of merchandise was purchased in 2009 and included in the ending inventory. However, the purchase was recorded only in 2010. A merchandise shipment valued at P1,500,000 was properly recorded as purchase at yearend. Since the merchandise was still at the port area, it was inadvertently omitted from the inventory balance at December 31, 2009. Advertising for December 2009, amounting to P500,000, was recorded when payment was made by the firm in January, 2010. Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2009. The entire amount was reported as income upon receipt. Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting to P200,000 was paid and recorded as expense on July 31, 2009. The company did not make any adjustment at the end of the year.
The corrected income before tax for 2009 should be A. P6,900,000 B. P6,400,000 C. P6,500,000 D. P6,300,000
21.
June Company failed to recognize accruals and prepayments since the inception of its business three years ago. The earnings before tax, accrual and prepayments at the end of the current year are Earnings before tax Prepaid insurance Accrued wages Rent revenue collected in advance Interest receivable
P1,400,000 20,000 25,000 30,000 50,000
The corrected earnings before tax should be A. P1,385,000 B. P1,415,000 C. P1,400,000 D. P1,375,000 22.
Universal Company had the following financial statement information:
Revenue Expenses Net income
Total assets Total liabilities Total owners’ equity
2010 P1,350,000 980,000 370,000
2009 P1,000,000 650,000 350,000
12/31/2010 P1,570,000
12/31/2009 P1,050,000 500,000 350,000 P1,070,000 P 700,000
Universal failed to record P120,000 of accrued wages at the end of 2009. The wages were recorded and paid in January 2010. The correct accruals were made on December 31, 2010. What is the corrected net income for 2009? A. P230,000 B. P350,000 C. P470,000 D. P250,000 23.
What is the corrected net income for 2010? A. P490,000 B. P370,000 C. P250,000 D. P430,000
24.
The corrected total liabilities on December 31, 2009 should be A. P470,000
B. P230,000 C. P400,000 D. P500,000 25.
The corrected total owners’ equity on December 31, 2010 should be A. P1,070,000 B. P1,190,000 C. P1,010,000 D. P 950,000
26.
Cola Company reported a retained earnings balance of P4,000,000 at January 1, 2009. Cola determined that insurance premiums of P900,000 for the three-year period beginning January 1,2008, had been paid and fully expensed in 2008. The entity has a 30% income tax rate. What amount should Cola report as corrected beginning retained earnings in its 2009 statement of retained earnings? A. P3,400,000 B. P4,420,000 C. P4,600,000 D. P3,580,000
27.
Victory Company’s statements for 2008 and 2009 included errors as follows: Year Ending Inventory Depreciation 2008 P200,000 understated P50,000 understated 2009 P300,000 overstated P90,000 overstated
How much should retained earnings be retroactively adjusted at January 1, 2010? A. P260,000 increase B. P260,000 decrease C. P410,000 decrease D . P210,000 decrease 28.
On December 31, 2009, Blue Company sold merchandise forP750,000 to Red Company. The terms of the sale were net 30, F.O.B shipping point. The merchandise was shipped on December 31, 2009, and arrived at Red on January 5, 2010. Due to a clerical error, the sale was not recorded until January 2010 and the merchandise sold at a 25% markup on cost was included in Blue’s inventory at December 31, 2009. As a result, Red’s cost of goods sold for the year ended December 31, 2009 was A. Understated by P750,000 B. Understated by P600,000 C. Understated by P150,000 D. Correctly stated
29.
June Company began operations on January 1, 2008. Financial statements for the years
2008 and 2009 contained the following errors:
Ending inventory Depreciation Insurance expense Prepaid insurance
2008 P800,000 under 150,000 under 50,000 over 50,000 under
2009 P400,000 over
50,000 under
In addition, On December 31, 2009, a fully depreciated equipment was sold for P100,00 cash but the sale was not recorded until 2010. Ignoring income tax, what is the total effect of the errors on Net income for 2008? A. P700,000 under B. P700,000 over C. P650,000 under D. P650,000 over 30.
Net income for 2009? A. P1,350,000 under B. P1,350,000 over C. P1,150,000 under D. P1,150,000 over
31.
Working capital on December 31, 2009? A. P300,000 under B. P300,000 over C. P400,000 under D. P400,000 over
32.
Retained earnings on December 31, 2009? A. P1,150,000 over B. P 700,000 under C. P 450,000 over D. P 450,000 under
33.
RDG Company reported an Accumulated profits balance of P400,000 at December 31, 2009. In August 2010, RDG Company determined that insurance premiums of P75,000 for the three-year period beginning January 1, 2009 had been paid and fully expensed in 2009. RDG has a 32% income tax rate. A. P366,000 B. P425,000 C. P434,000 D. P450,000
34.
Dale Company’s beginning inventory at January 1, 2009 was understated by P26,000 and its ending inventory was overstated by P52,000. As a result Dale’s cost of goods for 2009 was A. P26,000 understated
B. P26,000 overstated C. P78,000 understated D. P78,000 overstated 35.
The following errors were discovered in the course o f examination of the Sun Company’s financial records:
Year 2009 wages payable for P34,000 was not recorded. Accrued vacation pay for the year 2009 for P62,500 was not recorded because the bookkeeper “never learned that you had to do it”. Insurance for a 12-month period purchased on November 1, 2009 was charged to expense in the amount of P37,200 because “the amount of the check is about the same every year”.
What is the net effect of the above errors on the January 1, 2010 accumulated profits? A. P59,300 over B. P65,500 over C. P96,500 over D. P127,500 over 36.
Moon Company has determined its 2008 and 2009 net income figures to be P1,150,000 and P1,100,000, respectively. In a first time audit of t he company’s financial statements, you determine the following errors: a. Merchandise inventory was incorrectly determined: P50,000 overstatement for 2008 and P150,000 overstatement for 2009.
b. Revenue received in advance in 2008 of P250,000 was credited to a revenue account when received. Of the total, P50,000 was earned in 2008, P120,000 was earned in 2009 and the remainder will be earned in 2010. c. P120,000 gain on sale of plant assets in 2009 was erroneously credited to Accumulated Profits and Losses. What is the corrected net income for the year 2009? A. P 900,000 B. P1,120,000 C. P1,190,000 D. P1,240,000 37.
Green Company reported an Accumulated Profits and Losses balance of P300,000 at December 31, 2009. In June 2010, Green discovered that merchandise costing P100,000 had not been included in inventory in its 2009 financial statements. Green has 32% tax rate. What amount should Green report as adjusted beginning Accumulated Profits and Losses On January 1, 2010?
A. B. C. D. 38.
P232,000 P300,000 P368,000 P400,000
On December 30, 2009, Red Company sold merchandise for P75,000 to White Company. The terms of the sale were n/30, FOB shipping point. The merchandise was shipped on December 31, 2009, and arrived at White Co. on January 2, 2010. Due to a clerical error, the sale was not recorded until January 2010 and the merchandise, sold at a 25% markup on cost, was included in Red’s inventory at December 31, 2009. As a result, Red’s cost of goods sold f or the year ended December 31, 2009 was A. Understated by P15,000 B. Understated by P60,000 C. Understated by P75,000 D. Correctly stated
