Financial Accounting Exam

1. Multiple Choices: Write the letter of the correct answer before the number. STRICLY NO ERASURES.
I. THEORIES
1. Which of the following statements best described the terms “liability” ?
a. An excess of equity over current assets
b. Resources to meet financial commitments as they fall due
c. The rental interest in the assets of the entity after deducting all of its liabilities
d. A present obligation of the entity arising from past events
2. In which section of the statement of financial position should employment taxes that are due for settlement
in 15 months’ time be presented?
a. current liabilities b. current assets c. non current liabilities d. non current assets
3. An entity has a loan due for repayment in six months’ time, but the entity has the option to refinance for
repayment two years later. The entity plans to refinance this loan. In which section of the statement of financial
position should this loan presented?
a. current liabilities b. current assets c. non current liabilities d. non current assets
4. Which of the following would be classified as non current liability?
a. unearned revenue
b. mandatorily redeemable preference share
c. the currently maturing portion of long-term debt
d. accrued salaries payable to management
5. Which of the following is not a current liability?
a. income tax payable
b. one year magazine subscription received in advance
c. unearned interest income related to non interest bearing long term note receivable
d. estimated warranty liability
6. It is an event that creates a legal or constructive obligation because the entity has no other realistic
alternative but to settle the obligation.
a. obligating event b. past event c. subsequent event d. current event
7. An outflow of resources embodying economic benefits is regarded as “probable “ when?
a. the probability that the event will occur is greater than the probability that the event will not occur
b. the probability that the event will not occur is greater than the probability that the event will occur.
c. the probability that the event will occur is the same as the probability that the event will not occur
d. the probability that the event will occur is 90% likely.
8. Where the provision being measured involves a large population of items, the obligation is estimated by
“weighing” all possible outcomes by their associated probabilities. The name for this statistical method of
estimation is?
a. expected value b. present value c. current value d. extrapolation
9. A legal obligation is an obligation that is derived from all of the following, except?
a. legislation b. a contract c. other operation of law d. an established pattern of past practice

2. 10. For which of the following should a provision be recognized?
a. future operating losses
b. obligations under insurance contracts
c. reductions in fair value of financial instruments
d. obligations for plant decommissioning costs
11. It is possible asset that arises from past event and whose existence will be confirmed only by the occurrence
or nonoccurrence of one or more uncertain future events not wholly within the control of the entity.
a. Contingent asset b. Other asset c. Suspense Account d. Current asset
12. Which statement is incorrect concerning contingent liability?
a. A contingent liability is not recognized in the financial statements.
b. A contingent liability is disclosed only.
c. If the contingent liability is remote, no disclosure is required.
d. A contingent liability is both probable and measurable.
13. The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which
range means that the future event occurring is very slight?
a. Probable b. Reasonably possible c. Certain d. Remote
14. An item that is not a contingent liability is
a. Premium offer to customers for labels or box tops
b. Accommodation endorsement on customer note
c. Additional compensation that may be payable on a dispute now being arbitrated
d. Pending lawsuit
15. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and the amount can be reliably measured
d. The amount can be reliably measured
16. Which of the following is the proper accounting treatment of a contingent asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure explaining the nature of the transaction
d. A disclosure only
17. At year-end, an entity was suing a competitor for patent infringement. The award from the probable
favorable outcome could be reliably measured. The entity’s financial statements shall report the expected award
as
a. Receivable and revenue b. Receivable and reduction of patent
c. Receivable and deferred revenue d. Disclosure only
18. Contingent liabilities will or will not become actual liabilities depending on
a. Whether they are probable and measurable
b. The degree of uncertainty.
c. The present condition suggesting a liability
d. The outcome of a future event
19. Pending litigation would generally be considered
a. Nonmonetary liability b. Contingent liability c. Estimated liability d. Current liability

3. 20. Under international accounting standard, the valuation method used for bonds payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance
II. PROBLEMS
1. During 2010, Day Company sold 500,000 boxes of cake mix under a new sales promotional program. Each box
contains one coupon which entitles the customer to a baking pan upon remittance of P40. Day pays P50 per pan
and P5 for handling and shipping. Day estimates that 80% of the coupons will be redeemed, even though only
300,000 coupons had been processed during 2010. What amount should Day report as a liability for
unredeemed coupons on December 31, 2010?
a. 1,000,000 b. 1,500,000 c. 3,000,000 d. 5,000,000
2. Bold Company estimates its annual warranty expense at 2% of annual set sales. The following data are
available:
Net Sales 4,000,000
Warranty liability
January 1, 2010 60,000 credit
Warranty payments during 2010 50,000 debit
What is the warranty liability on December 31, 2010?
a. 10,000 b. 70,000 c. 80,000 d. 90,000
3. Chato Company sells electrical goods covered by a one-year warranty for any defects. Of the sales of P70,
000,000 for the year, the entity estimates that 3% will have major defect, 5% will have minor defect and 92% will
have no defect.
The cost of repairs would be P5, 000,000 if all the products sold had major defect and P3,000,000 if all had
minor defect.
What amount should be recognized as a warranty provision?
a. 8,000,000 b. 5,600,000 c. 300,000 d. 190,000
4. Cobb Department Store sells gift certificates redeemable only when merchandise is purchased. These gift
certificates have an expiration date of the two years after issuance date. Upon redemption or expiration, Cobb
recognizes the unearned revenue as realized.
Information for the current year is as follows :
Unearned revenue, January 1, 2010 650,000
Gift certificates sold 2,250,000
Gift certificates redeemed 1,950,000
Expired gift certificates 100,000
Cost of goods sold 60%
On December 31,2010, what amount should be reported as unearned revenue?
a. 510,000 b. 570,000 c. 850,000 d. 950,000
5. Greene Company sells office equipment service contacts agreeing to service equipment for a two-year period.
Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are
charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over
the lives of the contracts. Additional information for the year ended December 31, 2010 is as follows:
Unearned service contract revenue at January 1 600,000
Cash receipts from service contracts sold 980,000
Service contract revenue recognized 860,000
Service contract expense 520,000
What amount should be reported as unearned service contract revenue on December 31,2010?
a. 460,000 b. 480,000 c. 490,000 d. 720,000

4. 6. Sweet Company sells equipment service contract that covers a two-year period. The sales price of each
contract is P600. Sweet’s past experience is that of total pesos spent for repairs on service contracts, 40% is
incurred evenly during the first contract year and 60% evenly durin the second contract year Sweet sold 1,000
contracts evenly throughout 2010.
In its December 31,2010 statement of financial position, what amount should Sweet reports as deferred
service revenue?
a. 540,000 b. 480,000 c. 360,000 d. 300,000
7. On the first day of each month, Ron Mortgage Company receives from Kent Company an escrow deposit of
P250,000 in an escrow account. Ron’s 2010 real estate tax is P2,800,000, payable in equal installments on the
first day of each calendar quarter. On January 1,2010, the balance in the escrow account was P300,000. On
September 30,2010, what amount should be reported as escrow liability?
a. 1,150,000 b. 450,000 c. 850,000 d. 150,000
8. On July 1,2010 , the Quezon City government issued realty tax assessment for its fiscal year ended June
30,2011. On September 1, 2010, Fang Company purchased a land in Quezon City. The purchased price was
reduced by a credit for accrued realty taxes. Fang does not record the entire year’s real estate tax obligation but
instead records tax expenses at the end of each month by adjusting prepaid real estate taxes or real estate taxes
payable as appropriate. On November 1,200, Fang paid the first of two equal installments of P600,000 for realty
taxes.
What amount of the payment should Fang record as a debit to real estate taxes payable?
a. 200,000 b. 400,000 c. 500,000 d. 600,000
9. Aubrey Company has a 12-month accounting period ending December 31. On April 1,2010, it introduced a
new contractual bonuses for the year to march 31,2011 will amount to P900,000. What amount liability for
bonuses should be recorded on December 31,2010?
a. 225,000 b. 900,000 c. 675,000 d. 0
10. On February 5,2011, an employee filed a P2,000,000 lawsuit against Steel Company for damages suffered
when one of Steel’s plant exploded on December 29,2010. Steel’s legal counsel expects the entity will probably
lose the lawsuit and estimates the loss to be P500,000. The employee has offered to settle the lawsuit out of
court for P900,000 but Steel Company will not agree to the settlement.
In its December 31,2010 statement of financial position, what amount should Steel Company report as
liability from lawsuit?
a. 2,000,000 b. 1,000,000 c. 900,000 d. 500,000
11. During 2010, Beal Company became involved in a tax dispute with the BIR. On December 31,2010, Beal’s tax
advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was
P500,000. After the 2010 financial statement were issued , Beal received and accepted a BIR settlement offer
of P550,000. What amount of accrued liability would Beal have reported in its December 31,2010 statement of
financial position?
a. 650,000 b. 550,000 c. 500,000 d. 0
12. Concord Company sells motorcycle helmets. In 2010, Concord sold 4,000,000 helmets before discovering a
significant defect in their construction. By December 31,2010, two lawsuits had been filed against Concord. The
first lawsuit which Concord has little chance of winning, is expected to be settled out of court for P1,500,000 in
January 2011. Concord ‘s attorneys think the entity has a 50-50 chance of winning the second lawsuit, which is
for P1,000,000. What is the accrued liability on December 31,2010 as a result of the lawsuit?
a. 1,500,000 b. 1,000,000 c. 2,500,000 d. 0
13. On November 5,2010, A Cute Company truck was in an accident with an auto driven by Good. Cute received
notice on January 15,2011 of a lawsuit for P700,000 damages for personal injuries suffered by Good. Cute’s
counsel believed it is probable that Good will be awarded an estimated amount in the range between P200,000
and P450,000 and no amount is a better estimate of potential liability than any other amount. Cute’s accounting

5. year ends on December 31, and the 2010 financial statements were issued on March 1,2011. What amount of
loss should Cute accrue on December 31,2010?
a. 450,000 b. 200,000 c. 325,000 d. 0
14. In may 2010, Casco Company filed suits against Wayne Company seeking P1,900,000 damages for patent
infringement. A court verdict in November 2010 awarded Caso P1,500,000 in damages, but Wayne’s appeal is
not expected to be decided before 2011. Caso’s counsel believed it is probable that Caso will be successful
against Wayne for an estimated amount in the range between P800,000 and P1,100,000, with P1M considered
the most likely amount. What amount should Caso record as income from the lawsuit for the year ended
December 31,2010?
a. 1,500,000 b. 1,100,000 c. 1,000,000 d. 0
15. During 2010, Micer Company filed against West Company seeking damages for patent infringement. On
December 31,2010, Micer’s legal counsel believed that it was probable that Micer would be successful against
West for an estimated amount of P1,500,000. In March 2011, Micer was awarded P1M and received full
payment thereof. In Micer’s 2010 financial statements issued February 2011, how should this award be
reported?
a. As a receivable and revenue of P1M
b. as a receivable and deferred revenue of P1M
c. as a disclosure of a contingent asset of P1M
d. as a disclosure of contingent asset of P1,500,0000
16. Soree Company had the following long term debt:
Sinking fund, maturing in installments 2,200,000
Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000
What is the total amount of serial bonds?
a. 3M b. 4M c. 4.8M d. 7M
17. Polo Company had the following long term debt:
Bonds maturing in installments secured by machinery 1M
Bonds maturing on a single date secured by realty 1.8M
Collateral trust bonds 2M
What is the total amount of Debenture bonds?
a. 2M b. 1M c. 1.8M d. 0
18. On April 1,2010, Greg Company issued at 99 plus accrued interest, 2000 of its 8%, P1000 face
val ue bonds. The bonds are dated January 1,2010 mature on January 1,2020 and pay interest on January 1 and
July 1. Greg paid bond issue cost of P70,000. From the bond issuance, what is the net cash received by Greg
Company?
a. 2,020,000 b. 1,980,000 c. 1,950,000 d. 1,910,000
19. On March 1,2010, Candy Company issued at 103 plus accrued interest 4000 of its 9%, P1000 face value
bonds. The bonds are dated January 1,2010 and mature on January 1,2020. Interest is payable semi annually on
January 1 and July 1. Candy paid issue cost of P200,000. What is the net cash received from the bond issuance?
a. 4,320,000 b. 4,180,000 c. 4,120,000 d. 3,980,000
20. On November 1,2010, Mason Company issued P8M of its 10-year, 8% term bonds dated October 1,2010. The
bonds were sold to yield 10% with total proceeds of P7M plus accrued interest. Interest is paid every april 1 and
October 1. What should Mason report for accrued interest payable in its December 31,2010 statement of
financial position?
a. 175,000 b. 160,000 c. 116,667 d. 106,667
21.On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of P1,200,000,
bearing interest at 12%, and payable in three equal annual principal payments of P400,000. On this date, the

6. bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At
December 31, 2007, Looper should record accrued interest payable of
a. P48,000. b. P44,000. c. P32,000. d. P29,334.
22.Included in Sauder Corp.'s liability account balances at December 31, 2006, were the following:
7% note payable issued October 1, 2006, maturing September 30, 2007 P250,000
8% note payable issued April 1, 2006, payable in six equal annual
installments of P150,000 beginning April 1, 2007 600,000
Sauder 's December 31, 2006 financial statements were issued on March 31, 2007. On January 15,
2007, the entire P600,000 balance of the 8% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on March 10, 2007, Sauder consummated a
noncancelable agreement with the lender to refinance the 7%, P250,000 note on a long-term basis,
on readily determinable terms that have not yet been implemented. On the December 31, 2006
balance sheet, the amount of the notes payable that Sauder should classify as short-term obligations
is
a. P175,000. b. P125,000. c. P50,000. d. P0.
23.Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are
paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:
12/31/06 12/31/07
Employee advances 12,000 18,000
Accrued salaries payable 65,000 ?
Salaries expense during the year 650,000
Salaries paid during the year (gross) 625,000
At December 31, 2007, what amount should Barr report for accrued salaries payable?
a. P90,000.
b. P84,000.
c. P72,000.
d. P25,000.
24.Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year,
two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract
revenues. This account had a balance of P480,000 at December 31, 2006 before year-end adjustment. Service
contract costs are charged as incurred to the service contract expense account, which had a balance of
P120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:
During 2007 During 2008 During 2009
P100,000 P160,000 P70,000
What amount should be reported as unearned service contract revenues in Dexter's December 31,
2006 balance sheet?
a. P360,000.
b. P330,000.
c. P240,000.
d. P220,000.
25.Utley Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the
year stamps are sold to licensees. Utley's past experience indicates that only 80% of the stamps sold
to licensees will be redeemed. Utley's liability for stamp redemptions was P7,500,000 at December
31, 2005. Additional information for 2006 is as follows:

7. Stamp service revenue from stamps sold to licensees P5,000,000
Cost of redemptions 3,400,000
If all the stamps sold in 2006 were presented for redemption in 2007, the redemption cost would be
P2,500,000. What amount should Utley report as a liability for stamp redemptions at December 31,
2006?
a. P9,100,000.
b. P6,600,000.
c. P6,100,000.
d. P4,100,000
.
26.During 2006, Blass Co. introduced a new product carrying a two-year warranty against defects. The
estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second
12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2006
and 2007 are as follows:
Actual Warranty
Sales Expenditures
2006 P 800,000 P12,000
2007 1,000,000 30,000
P1,800,000 P42,000
At December 31, 2007, Blass should report an estimated warranty liability of
a.P0. b.P10,000. c.P30,000. d.P66,000.
27. On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of P1,000,000 and a stated
interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%.
Table values are:
Present value of 1 for 8 periods at 6% ..................................................... .627
Present value of 1 for 8 periods at 8% ..................................................... .540
Present value of 1 for 16 periods at 3% ................................................... .623
Present value of 1 for 16 periods at 4% ................................................... .534
Present value of annuity for 8 periods at 6% ........................................... 6.210
Present value of annuity for 8 periods at 8% ........................................... 5.747
Present value of annuity for 16 periods at 3%......................................... 12.561
Present value of annuity for 16 periods at 4%......................................... 11.652
The issue price of the bonds is
a. P883,560. b. P884,820. c. P889,560. d. P999,600.
28.Limeway Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2007 on January 1, 2007. The
bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%.
What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a. P5,000,000
b. P5,216,494
c. P5,218,809
d.P5,217,308
29.Amstop Company issues P20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued interest.
The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the
total cash received on the issue date?

8. a.P19,400,000 b.P20,450,000 c.P19,700,000 d.P19,100,000
30.Houghton Company issues P10,000,000, 6%, 5-year bonds dated January 1, 2007 on January 1, 2007. The
bonds pays interest semiannually on June 30 and December 31. The bonds are issued to yield 5%.
What are the proceeds from the bond issue?
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
a.P10,000,000
b.P10,432,988
c.P10,437,618
d.P10,434,616
31.Benton Company issues P10,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued interest.
The bonds are dated January 1, 2007, and pay interest on June 30 and December 31. What is the
total cash received on the issue date?
a.P9,700,000 b.P10,225,000 c.P9,850,000 d.P9,550,000
32.The December 31, 2006, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2015 P1,000,000
Unamortized premium on bonds payable 27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1 and December
31 of each year. Eddy uses straight-line amortization. On March 1, 2007, Eddy retired P400,000 of
these bonds at 98 plus accrued interest. What should Eddy record as a gain on retirement of these
bonds? Ignore taxes.
a.P18,800. b.P10,800. c.P18,600. d.P20,000.
33.On January 1, 2001, Gonzalez Corporation issued P4,500,000 of 10% ten-year bonds at 103. The bonds are
callable at the option of Gonzalez at 105. Gonzalez has recorded amortization of the bond premium
on the straight-line method (which was not materially different from the effective-interest method).
On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez repurchased
P1,000,000 of the bonds in the open market at 96. Gonzalez has recorded interest and amortization
for 2007. Ignoring income taxes and assuming that the gain is material, Gonzalez should report this
reacquisition as
a. a loss of P49,000.
b. a gain of P49,000.
c. a loss of P61,000.
d. a gain of P61,000.
34.The 10% bonds payable of Klein Company had a net carrying amount of P570,000 on December 31, 2006.
The bonds, which had a face value of P600,000, were issued at a discount to yield 12%. The
amortization of the bond discount was recorded under the effective-interest method. Interest was
paid on January 1 and July 1 of each year. On July 2, 2007, several years before their maturity, Klein
retired the bonds at 102. The interest payment on July 1, 2007 was made as scheduled. What is the
loss that Klein should record on the early retirement of the bonds on July 2, 2007? Ignore taxes.
a.P12,000. b.P37,800. c.P33,600. d.P42,000.
35.The 12% bonds payable of Keane Co. had a carrying amount of P832,000 on December 31, 2006. The bonds,
which had a face value of P800,000, were issued at a premium to yield 10%. Keane uses the effective-interest
method of amortization. Interest is paid on June 30 and December 31. On June 30, 2007,
several years before their maturity, Keane retired the bonds at 104 plus accrued interest. The loss on
retirement, ignoring taxes, is

9. a. P0. b. P6,400. c. P9,920. d.P32,000.
36.Axlon Company issues P10,000,000 face value of bonds at 96 on January 1, 2006. The bonds are dated
January 1, 2006, pay interest semiannually at 8% on June 30 and December 31, and mature in 10
years. Straight-line amortization is used for discounts and premiums. On September 1, 2009,
P6,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be
recognized on the called bonds on September 1, 2009?
a. P600,000 loss
b. P272,000 loss
c. P360,000 loss
d. P453,333 loss
37.Goebel Company issues P5,000,000 face value of bonds at 96 on January 1, 2006. The bonds are dated
January 1, 2006, pay interest semiannually at 8% on June 30 and December 31, and mature in 10
years. Straight-line amortization is used for discounts and premiums. On September 1, 2009,
P3,000,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be
recognized on the called bonds on September 1, 2009?
a.P300,000 loss
b.P136,000 loss
c.P180,000 loss
d.P226,667 loss
38.On July 1, 2007, Pryce Co. issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds are
dated April 1, 2007 and mature on April 1, 2017. Interest is payable semiannually on April 1 and
October 1. What amount did Pryce receive from the bond issuance?
a.P1,015,000 b.P1,000,000 c.P990,000 d.P965,00
39.On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of P3,000,000, which mature on
January 1, 2017. The bonds were issued for P3,405,000 to yield 8%, resulting in bond premium of P405,000.
Gomez uses the effective-interest method of amortizing bond premium. Interest is payable annually on
December 31. At December 31, 2007, Gomez's adjusted unamortized bond premium should be
a.P405,000. b.P377,400. c.P364,500. dP304,500.
40.On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of P5,000,000, which mature on July 1,
2015. The bonds were issued for P4,695,000 to yield 10%, resulting in a bond discount of P305,000.
Kitel uses the effective-interest method of amortizing bond discount. Interest is payable annually on
June 30. At June 30, 2007, Kitel's unamortized bond discount should be
a.P264,050. b.P255,000. c.P244,000. d.P215,000.
end

10. Answer Key in Acctg. 5
I. Theories
1. D
2. A
3. C
4. B
5. B
6. A
7. A
8. A
9. D
10. D
11. A
12. D
13. C
14. A
15. A
16. D
17. D
18. D
19. B
20. D
II. Problems
1. B
2. D
3. C
4. C
5. D
6. B
7. B
8. B
9. C
10. D
11. C
12. A
13. C
14. D
15. D
16. B
17. D
18. C
19. D
20. B
21. C
22. D
23. A
24. B
25. C
26. D
27. A
28. C
29. C
30. C
31. C
32. C
33. B
34. B
35. B
36. B
37. B
38. A
39. B
40. A