FELLOWSHIP BAPTIST COLLEGE

College of Business and Accountancy

Acctg 5A: Financial Accounting Theory and Practice Part III

PRELIM EXAMINATION
Name: _____________________________________ Course & Year: _____________

Date: ____________________ Score: ______________

I. Multiple Choice. Encircle the letter of your choice. For items requiring computations, show your
solution in good form.
1. One criterion for a finance lease is that the term of the lease must equal a minimum percentage of the leased
property's estimated economic life at the inception of the lease. What is this minimum percentage?
a.51% b. 75% c. 80% d. 90%
2. Which of the following is a criterion for a lease to be classified as a capital lease in the books of a lessee?
a. The lease contains a bargain purchase option.
b. The lease does not transfer ownership of the property to the lessee.
c. The lease term is equal to 65% or more of the estimated useful life of the leased property.
d. The present value of the minimum lease payments is 70% or more of the fair market value of the
leased property.
3. Job, Inc. prepared an interest amortization table for a five-year lease payable with a bargain purchase option of

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P2,000, exercisable at the end of the lease. At the end of the five years, the balance in the leases payable column

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of the spreadsheet was zero. Job has asked Psalms, CPA, to review the spreadsheet to determine the error. Only

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one error was made on the spreadsheet. Which of the following statements represents the best explanation for this
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error?
a. The beginning present value of the lease did not include the present value of the bargain purchase

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option.
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b. Job subtracted the annual interest amount from the lease payable balance instead of adding it.
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c. The present value of the bargain purchase option was subtracted from the present value of the annual
payments.
d. Job discounted the annual payments as an ordinary annuity, when the payments actually occurred at the
beginning of each period.
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4. Esther Co. leased machinery with an economic useful life of six years. For tax purposes, the depreciable life is
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seven years. The lease is for five years, and Esther can purchase the machinery at fair value at the end of the
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lease. What is the depreciable life of the leased machinery for financial reporting?
a. Zero. b. Five years. c. Six years. d. Seven years.
5. At the inception of a capital lease, the guaranteed residual value should be:
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a. Included as part of minimum lease payments at present value.

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b. Included as part of minimum lease payments at future value.

c. Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to
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exceed estimated residual value.

d. Excluded from minimum lease payments.
6. Kings Company leased a machine from Chronicles Leasing Company. The lease qualifies as a finance lease and
requires 10 annual payments of P100,000 beginning immediately. The lease specifies an interest rate of 12% and
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a purchase option of P100,000 at the end of the tenth year, even though the machine’s estimated value on that
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date is P200,000.
Present value of an annuity due (in advance) of 1 at 12% for 10 periods 6.328
Present value of 1 at 12% for 10 periods 0.322
What amount should Kings record as lease liability at the beginning of the lease term?
a. 621,600
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b. 648,600
c. 665,000
d. 697,200
7. On January 1, 2015, Samuel Company entered into a 10-year lease for an equipment. Samuel accounted for the
acquisition as a finance lease for P4,900,000 which includes a P200,000 guaranteed residual value. At the end of
the lease, the asset will revert back to the lessor. It is estimated that the asset’s fair value at the end of its 12-year
useful life will be P100,000. Samuel regularly uses the straight line depreciation on similar asset. For the year
ended December 31,2015, what amount should Samuel recognize as depreciation expense of the leased asset?
a. 490,000
b. 400,000
c. 470,000
d. 480,000
8. On January 1, 2015, Ruth Company leased an equipment from a lessor with the following pertinent information:
Annual rental payable at the end of each year 500,000
Lease term 8 years
Useful life of equipment 10 years
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Implicit interest rate 10%

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 PV of an ordinary annuity of 1 for 8 periods at 10% 5.33
Present value of 1 for 8 periods at 10% 0.47

The entity has the option to purchase the equipment on January 1, 2023 by paying P500,000 which is significantly less
than the expected fair value of the equipment on the option exercise date. There is reasonable certainty that the entity
shall exercise the option. On January 1, 2015, the entity incurred initial direct cost of P200,000.

What is the initial cost of the equipment?

a. 2,900,000
b. 3,100,000
c. 2,865,000
d. 0
9. What is the interest expense for 2015?
a. 290,000
b. 310,000
c. 266,500
d. 316,500
10. What is the lease liability on December 31, 2015?
a. 2,690,000
b. 2,790,000
c. 2,398,500
d. 2,848,500
11. What is the depreciation for 2015?
a. 310,000
b. 387,500
c. 290,000
d. 362,500

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12. The general ledger trial balance of Ibay Company includes the following accounts on December 31, 2014:

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Inventory, including inventory expected in the ordinary course of

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operations to be sold beyond 12 months amounting to P700,000
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Trade receivables 1,200,000
Prepaid insurance 80,000

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Listed investments held for trading purposes at fair value 200,000
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Financial assets at fair value through OCI 800,000
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Cash 300,000
Deferred tax asset 150,000
Bank overdraft 250,000
What amount should be reported as total current assets on December 31, 2014?
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a. 2,780,000
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b. 2,530,000
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c. 3,580,000
d. 2,080,000
13. Sy Company’s accounting records provided the following information:
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1/1/2015 12/31/2015
Current assets 240,000 ?
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Property, plant and equipment 1,600,000 1,700,000

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Current liabilities ? 130,000

Noncurrent liabilities 580,000 ?
All assets and liabilities of the entity are reported at year-end. Working capital of P92,000 remained unchanged
from 2014 to 2015. Net income in 2015 was P64,000. No dividends were declared during 2015 and there were no
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other changes in owners’ equity. What amount should be reported as noncurrent liabilities on December 31,
2015?
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a. 340,000
b. 432,000
c. 580,000
d. 616,000
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14. Lopez Company reported operating expenses in two categories: distribution and general and administrative. The
adjusted trial balance on December 31, 2015 included the following expenses and loss accounts:
Accounting and legal fees 1,200,000
Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

One half of the rented premise is occupied by the sales department.

What amount should be reported as total distribution costs?
a. 4,800,000
b. 4,000,000
c. 3,700,000
d. 3,600,000
15.source
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 a. Are confined to historical cost
b. Are confined to historical cost and current cost
c. Reflect several financial attributes
d. Do not reflect output value
16. When discussing asset valuation, valuation bases such as replacement cost, exit value and discounted cash flow
are mentioned. Which of these bases should be considered a current value measure?
a. Replacement cost and exit value
b. Replacement cost and discounted cash flow
c. Exit value and discounted cash flow
d. Replacement cost, exit value and discounted cash flow
17. Which of the following statements is not consistent with GAAP in relation to asset valuation?
a. Assets are originally recorded at cost
b. Accountants assume that assets such as supplies, buildings, and equipment will be used in the business
operations rather than sold.
c. Subtracting total liabilities from total assets results in the current market value of an entity.
d. Accountants base asset valuation upon objective and verifiable evidence rather than on personal opinion.
18. Which is incorrect concerning recognition of revenue?
a. Revenue from rendering of services shall be recognized by reference to the stage of completion of the
transaction at the end of reporting period.
b. Interest revenue shall be recognized on a time proportion basis that does not take into account the
effective yield on the asset.
c. Royalty revenue shall be recognized on an accrual basis in accordance with the substance of the relevant
agreement.
d. Dividend revenue shall be recognized when the shareholder’s right to receive payment is established.
19. In which of the following examples of real estate transactions would the seller not transfer the usual risks and
rewards of ownership?
I. The buyer can compel the seller to repurchase the property.

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II. The seller guaranties the return of the buyer’s investment.

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III. The seller is required to support operations of the buyer and will be reimbursed on a cost plus 5%

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basis.
a. I only
b. II only
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c. I, II and III
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d. I and II only
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20. The financial statements are authorized for issue

a. When the board of directors reviews the financial statements and authorizes them for issue.
b. When the financial statements are made available to shareholders
c. When the shareholders approve the financial statements at their annual meeting
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d. When the approved financial statements are filed with a regulatory body
21. Adjusting events after reporting period include all of the following, except
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a. The settlement of a court case after the issuance of the financial statements that confirms that the
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entity has a present obligation

b. Bankruptcy of a customer occurring between the end of the reporting period and the date of issuance of
financial statements
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c. Determination after the reporting period and before the issuance of the statements of the cost of asset
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purchased before the end of the reporting period

d. The discovery of fraud or errors between the end of the reporting period and the date of issuance of financial
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statements
22. Which of the following events after the reporting period would require adjustments of the accounts before
issuance of the financial statements?
a. Loss of plant as a result of fire
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b. Change in the quoted market price of financial asset held as an investment

c. Loss on an uncollectible account receivable resulting from a customer’s major flood loss
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d. Loss on a lawsuit the outcome of which was deemed uncertain at year-end

23. The worksheet for an entity consisted of five pairs of debit and credit columns. The amount of one item appeared
in both the credit column of the income statement section and the debit column of the statement of the financial
position section. What is this item?
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a. Net income for the period

b. Beginning inventory
c. Cost of goods sold
d. Net loss for the period
24. Reversing entries
a. Impact the income statement only
b. Impact the statement of financial position and the income statement
c. Are not allowed under International Financial Reporting Standards
d. Change amounts reported in the financial statements of the preceding period
25. Which of the following is not required minimum disclosure about related party transaction?
a. The amount of related party transaction
b. The amount of the outstanding balance and the terms and conditions including guarantee
c. The amount of similar transaction with unrelated parties to establish that comparable related party
transaction has been entered at arm’s length
d. Provision for doubtful debt related to the outstanding balance
26. Which of the following is not a method of disclosing pertinent information?
a. was
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b. Parenthetical explanation
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 c. Cross reference and contra item
d. All of these are methods of disclosing pertinent information
27. An entity must present additional line items in a statement of financial position when
a. Such presentation is relevant to an understanding of the entity’s financial position
b. Such presentation is a generally accepted practice in the sector in which the entity operates.
c. Such presentation is required by the tax authorities
d. Such presentation is relevant to an understanding of the entity’s financial performance
28. The statement of financial position provides a basis for all of the following, except
a. Computing rate of return
b. Evaluating the capital structure
c. Determining the increase in cash due to operations
d. Assessing the liquidity and financial flexibility
29. All of the following are a component of other comprehensive income, except
a. Foreign currency translation adjustment
b. Unrealized gain and loss on financial asset held for trading
c. Deferred gain and loss on derivative financial instruments
d. Change in revaluation surplus
30. Separate line items in an analysis of expenses by nature include
a. Purchases of materials, transport costs, employee benefits, depreciation, extraordinary items
b. Purchases of materials, distribution costs, administrative costs, employee benefits, depreciation, taxes
c. Depreciation, purchases of materials, transport costs, employee benefits and advertising costs
d. Cost of sales, administrative costs, transport costs and distribution costs
31. What is the purpose of reporting comprehensive income?
a. To report changes in equity due to transactions with owners
b. To report a measure of overall entity performance
c. To replace net income with a better measure
d. To combine income from continuing operations with income from discontinued operations

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32. The income statement would help in which of the following tasks?

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a. Evaluate the liquidity of an entity

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b. Evaluate the solvency of an entity
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c. Estimate the amount, timing and uncertainty of future cash flows
d. Estimate future financial flexibility

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33. Which type of account is always debited during the closing process?
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a. Dividends
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b. Expense
c. Revenue
d. Retained earnings
34. The purpose of the International Accounting Standards Board is to
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a. Issue enforceable accounting standards

b. Develop a uniform currency
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c. Develop a single set of high-quality IFRS

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d. Arbitrate accounting disputes between auditors and international entities

35. What is the possible danger if politics plays too big a role in developing IFRS?
a. Financial reporting standards are not truly generally accepted
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b. Individuals may influence the standards

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c. User groups become active

d. The IASB delegates its authority to elect officials
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36. IFRIC Interpretation

a. Are considered authoritative and must be followed
b. Cover newly identified financial reporting issues not specifically addressed
c. Cover issues where unsatisfactory or conflicting interpretations have developed
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d. All of these are correct regarding IFRIC Interpretations

37. Basic steps in the recording process include all of the following , except
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a. Transfer the journal information to the appropriate account in the statement of financial position.
b. Analyze each transaction for its effect on the accounts.
c. Enter the transaction information in a journal.
d. All of the choices are correct regarding the basic steps in the recording process.
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38. Adjustments are often prepared

a. After the statement of financial position date but dated as of that date.
b. After the statement of financial position date and dated after that date.
c. Before the statement of financial position date but dated as of that date.
d. Before the statement of financial position date and dated after that date.
39. What is the objective of financial reporting?
a. To provide information that is useful in making investing and credit decisions.
b. To provide information that is useful to management.
c. To provide information about those investing in the entity.
d. All of these are objectives of financial reporting.
40. The statement of financial position information is useful for all of the following, except
a. Assessing risk
b. Evaluating liquidity
c. Evaluating financial flexibility
d. Determining free cash flows
41. Which of the following equations expresses the definition of “income”?
a. was
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b. Income equals revenue plus Gains minus Expenses and Losses
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 c. Income equals Revenue plus Gains
d. Income equals Gains minus Losses
42. Which of the following would appear first in a statement of retained earnings?
a. Net income
b. Prior period error
c. Cash dividends
d. Share dividends
43. All of the following components of other comprehensive income are reclassified subsequently to profit or loss, except
a. Unrealized gain on available for sale financial asset
b. Gain from translating financial statements of a foreign operation
c. Actuarial gain on projected benefit obligation
d. Unrealized gain on futures contract designated of cash flow hedge.
44. The full disclosure principle is best described by which of the following?
a. All information related to an entity’s business and operating objectives is required to be disclosed
b. Information about each account appearing in the statements is to be included in the notes.
c. Enough information should be disclosed in the financial statements so a person wishing to invest in the
shares of the company can make a profitable decision.
d. Disclosure of any financial facts significant enough to influence the judgment of an informed reader.
45. Which of the following components of OCI will be reclassified to profit or loss when specific conditions are met?
a. Changes in revaluation surplus
b. Remeasurements of defined benefit plan
c. Gains and losses from investments classified as available for sale
d. Gains and losses attributable to credit risk of a financial liability designated at FVPL.
46. Application of full disclosure principle
a. Is theoretically desirable but not practical because the costs of complete disclosure exceed the benefits
b. Is violated when important financial information is buried in the notes to statements
c. Is demonstrated by the use of supplementary information presenting the effects of changing prices.

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d. Requires that the financial statements must be consistent and comparable.

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47. Which is incorrect concerning recognition of revenue?

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a. Revenue from rendering of services shall be recognized by reference to the stage of completion of the
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transaction at the end of reporting period.
b. Interest revenue shall be recognized on a time proportion basis that does not take into account the

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effective yield on the asset.
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c. Royalty revenue shall be recognized on an accrual basis in accordance with the substance of the relevant
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agreement.
d. Dividend revenue shall be recognized when the shareholder’s right to receive payment is established.
48. In which of the following examples of real estate transactions would the seller not transfer the usual risks and rewards
of ownership?
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IV. The buyer can compel the seller to repurchase the property.
V. The seller guaranties the return of the buyer’s investment.
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VI. The seller is required to support operations of the buyer and will be reimbursed on a cost plus 5%
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basis.
a. I only
b. II only
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c. I, II and III
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d. I and II only
49. Lourdes Company recorded the following events and transactions during 2015:
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 Depreciation for 2013 was found to be understated by P 300,000.

 A litigation settlement resulted in a loss of P250,000.
 The inventory of December 31, 2013 was overstated by P400,000.
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 The entity disposed of a recreational division at a loss of P500,000.

 The income tax rate is 30%
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What is the effects of these events and transactions on the 2015 income from continuing operations?
a. 750,000 250,000+ 500,000= 750000* 70%=525,000
b. 525,000
c. 735,000
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d. 455,000
50. What is the purpose of information presented in notes to the financial statements?
a. To provide disclosures required by generally accepted accounting principles.
b. To correct improper presentation in the financial statements.
c. To provide recognition of amounts not included in the totals of the financial statements.
d. To present management's responses to auditor comments.
End! 

Instructor: Cherry Mae M. dela Vida, CPA

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