DySAS Center for CPA Review

2F & 3F Mitra Building, San Pedro Street, Davao City

Tel. No. (082) 224-43-20: E-mail Address – [email protected]

Theory of Accounts John C. Frivaldo,

CPA, MBA
FINAL PRE-BOARD EXAMINATION September 28, 2009 @ 8:00 – 11:00 am
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INSTRUCTIONS: Mark the letter of your choice with a VERTICAL LINE on the answer sheet
provided. ERASURES NOT ALLOWED.

1. Which of the following statements is not true?

(a) Inventory at the end of the period reduces cost of sales for the period.
(b) Purchases returns for the period reduces cost of sales.
(c) Inventory at the beginning reduces cost of sales.
(d) Inventory at the end of the period is equivalent to unexpired expense. C

2. The balance figure in the worksheet is net income or net loss. There is net loss:
(a) if, the total of the credits exceeds the total of the debits in the income statement
columns.
(b) if, in the balance sheet columns, the total of the debits exceeds the total of the credits.
(c) if, the total of the credits is the same as the total of the debits in the income statement
columns.
(d) if, in the balance sheet columns, the total of the credits exceeds the total of the debits.D

3. When information about two different entities engaged in the same industry has been
prepared and presented in similar manner, the information exhibits the qualitative
characteristic of:
(a) Relevance (c) Consistency
(b) Reliability (d) Comparability D

4. Which statement is incorrect concerning constraints on relevant and reliable information?

(a) In achieving a balance between relevance and reliability, the overriding consideration is
how best to satisfy the economic decision making needs of users.
(b) The balance between benefit and cost is a pervasive constraint rather than a qualitative
characteristic.
(c) The cost of providing information exceeds the benefit derived from the information.
(d) In practice, a balancing or tradeoff between qualitative characteristics is often
necessary. C

5. The cost recovery method:

(a) Is used only when circumstances surrounding a sale are so uncertain that earlier
recognition is impossible.
(b) Is the most common method of accounting for real estate sales.
(c) Is similar to percentage of completion accounting.
(d) Is never acceptable under generally accepted accounting principles. A

6. A wholesale bakery would normally recognize revenue when:

(a) The product is available for sale to a customer.
(b) Cash is received from the customer.
(c) Goods are delivered to the customer.
(d) Management chooses to do so. C

7. What would be the consequence if a financial accounting standard cannot be applied

literally?
(a) The accountant exercises his professional judgment.
(b) The accountant submits the issue to arbitration.
(c) The IASC imposes a sanction.
(d) The Supreme Court renders a decision, with finality. A

8. Incomplete accounting records using only a cash book is a characteristic of:

(a) cash basis (c) single entry system
(b) accrual basis (d) double entry system C

9. Investment securities held for the purpose of retiring bonds payable shall be classified as:
(a) Current assets (c) Deferred bond liability
(b) Investments (d) Intangible assets B

10. The most conceptually appropriate method of measuring liability is to:

 (a) Discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date the liability using the market rate.
(b) Discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date financial statements are prepared
subsequent to issuance.
(c) Record as a liability the amount of cash or cash equivalent that the entity would be
required to pay to eliminate the liability in the ordinary course of business on the date of
the financial statements.
(d) Record as a liability the amount of cash or cash equivalent proceeds actually received
when a liability was incurred. A

11. Which is not a related party?

(a) Director of the entity
(b) Parent of the entity
(c) Shareholder of the entity that holds 1% stake in the entity
(d) Son of the chief executive officer of the entity C

12. An entity is preparing its financial statements for the year ended June 30, 2009. The board
of directors reviews the final draft financial statements and authorizes them for issue on
August 15, 2009. The earnings figure and key data are issued to the public on September
15, 2009. The financial statements are issued to shareholders on October 15, 2009 and
approved by shareholders on October 31, 2009. The period in respect of which the entity
would consider events after the end of reporting period in accordance with PAS 10 is from
June 30,2 009 to:
(a) august 15, 2009 (c) october 15, 2009
(b) september 15, 2009 (d) october 31, 2009 A

13. This comprise of items of income and expense that are recognized in profit or loss as
required or permitted by PFRS.
(a) Comprehensive income (c) Profit or loss
(b) Other comprehensive income (d) Retained earnings B

14. Which is true?

Statement 1 – Dividends paid shall be recognized in the statement of comprehensive
income.
Statement 2 – A loss on disposal of assets shall be recognized in the statement of changes in
equity.
(a) Statement 1 only (c) Both statements 1 and 2
(b) Statement 2 only (d) Neither statement 1 nor 2 D

15. How should the assets and liabilities of a disposal group classified as held for sale be shown
in the statement of financial position?
(a) The assets and liabilities shall be offset and presented as a single amount.
(b) The assets of the disposal group shall be shown separately from other assets in the
statement of financial position, and the liabilities of the disposal group shall be shown
separately from other liabilities in the statement of financial position.
(c) The assets and liabilities shall be presented as a single amount and as a deduction from
equity.
(d) There should be no separate disclosure of assets and liabilities that form part of a
disposal group. B

16. Which of the following statements regarding discontinued operations is true?

(a) The assets and liabilities of a disposal group classified as held for sale by an entity may
be offset and shown as single item in the statement of financial position of the entity.
(b) The assets and liabilities of a disposal group of an entity must be shown separately in the
asset and liabilities section of the statement of financial position of the entity and cannot
be offset.
(c) An adjustment in a subsequent period to the selling price of a component of an entity
sold must be reported as a retroactive adjustment in the prior period financial
statements of the entity in which the discontinued operation was reported.
(d) The gain or loss on disposal of a component of an entity classified as a discontinued
operation is not required to be disclosed separately from the loss from operations of the
discontinued segment. B

17. Which of the following is treated as a change in accounting policy?

I. A new accounting policy of capitalizing development costs as a project has become eligible
for capitalization for the first time.
II. A new policy resulting from the requirements of a new PFRS.
III. To provide more relevant information, items of property, plant and equipment are now
being measured at fair value, whereas they had previously been measured at cost.
IV. An entity engaging in construction contracts for the first time needs an accounting policy
to deal with this.
 (a) I, II, III and IV (c) II and III only
(b) I and II only (d) I and IV only C

18. How should the following changes be treated?

I. A change is to be made in the method of calculating the provision for uncollectible
receivables.
II. Investment properties are now measured at fair value, having previously been measured
at cost.
Change I Change II
(a) Change in accounting policy Change in accounting policy
(b) Change in accounting policy Change in accounting estimate
(c) Change in accounting estimate Change in accounting policy
(d) Change in accounting estimate Change in accounting estimate C

19. Which statement is incorrect concerning interim financial reporting?

(a) to save time and cost, enterprises often use estimates to measure inventories at interim
dates to a greater extent than at annual reporting dates
(b) depreciation and amortization for an interim period should be based only on assets
owned during the interim period
(c) the cost of planned major periodic maintenance or overhaul that is expected to occur
late in the year is not anticipated for interim purposes, unless an event has caused the
enterprise to have a legal or constructive obligation
(d) charitable contribution, employee training costs and other costs that are expected to be
incurred irregularly during the financial year should be accrued as of the interim
reporting date D

20. If annual major repairs made in the first quarter and paid for in the second quarter clearly
benefit the entire year, when should the repairs be expensed?
(a) an allocated portion in each of the last three quarters.
(b) an allocated portion in each quarter of the year.
(c) in full in the first quarter.
(d) in full in the second quarter. B

21. Which may be considered an operating segment?

(a) Start-up operations before earning revenue
(b) Corporate headquarters that earn revenue
(c) Functional department
(d) Postemployment benefit plans A

22. Two or more operating segments may be aggregated into a single operating segment if
(choose the incorrect one):
(a) The aggregation is consistent with the core principle of segment reporting.
(b) The segments have similar characteristics.
(c) The segments are similar in the nature of product or service, nature of production
process, class of customer, method of product distribution and regulatory environment.
(d) The segments have dissimilar characteristics. D

23. Bank reconciliations are needed to:

(a) be sure that all cash receipts are being used efficiently
(b) assist in determining if cash projections have been correct
(c) be sure products are not being sold below cost
(d) identify differences between cash balances reported by the company and its bank D

24. When preparing a bank reconciliation, which of the following must be done to arrive at the
correct cash balance?
(a) checks outstanding must be deducted from the balance reported by the company
(b) deposits in transit must be deducted form the balance reported by the bank
(c) checks outstanding must be added to the balance reported by the bank
(d) deposits in transit must be added to the balance reported by the bank D

25. If there is evidence that an impairment loss on loans and receivables has been incurred, the
amount of the loss is equal to:
(a) excess of the carrying amount of the loan receivable over the present value of the cash
flows related to the loan
(b) excess of the present value of cash flows related to the loan over the carrying amount of
the loan receivable
(c) excess of the carrying amount of the loan over the principal amount of the loan
(d) excess of the principal amount of the loan over its carrying amount A

26. Note receivable discounted with recourse should be:

(a) excluded from total receivables without disclosure of the contingent liability
(b) excluded from total receivables with disclosure of the contingent liability
(c) included in total receivables without disclosure of the contingent liability
(d) included in total receivables with disclosure of the contingent liability B
27. The valuation of a promise to receive cash in the future at present value on the financial
statements of a business entity is valid because of the accounting concept of:
(a) entity (c) going concern
(b) materiality (d) neutrality C

28. In pledging accounts receivable,

(a) accounts receivable are sold on a conditional basis; collections may be made by either
party
(b) a loan is taken on the accounts receivable with a condition that the borrower becomes
liable for the replacement of the loan if the customers fails to pay their accounts; the
lender and borrower can collect from the customer
(c) accounts receivable are transferred to they buyer on a conditional basis; it may be with
or without recourse
(d) accounts receivable are set aside as collateral for a loan; collections are made by the
borrower and receipts from such collections are normally used to pay the loan D

29. A perpetual inventory system:

(a) records the cost of goods sold at the end of the period in which the inventory is sold
(b) records purchase at the end of the period
(c) requires knowing ending inventory totals before cost of goods sold can be calculated
(d) facilitates the calculation of inventory losses from theft, spoilage, and other types of
shrinkage D

30. A company with a smaller number of very expensive inventory items may find which of the
following inventory costing methods most useful?
(a) FIFO (c) average cost
(b) LIFO (d) specific identification D

31. Regarding the choice of measurement basis used for valuing biological assets, PAS 41:
(a) Sets out several ways of measuring fair value
(b) Recommends the use of historical cost
(c) Recommends the use of current cost
(d) Recommends the use of present value A

32. An entity owns a number of herds of cattle. Where should changes in the fair value of a herd
of cattle be recognized in the financial statements?
(a) In profit or loss only
(b) In other comprehensive income only
(c) In profit or loss or other comprehensive income
(d) In the statement of cash flows only A

33. An entity has preference shares in issue. The preference shares are redeemable on
December 31, 2011. How will the preference shares and the related preference dividends be
presented in the 2009 financial statements?
Preference shares Preference dividend
(a) Noncurrent liability Deducted from equity
(b) Equity Deducted from equity
(c) Equity Finance cost
(d) Noncurrent liability Finance cost D

34. In which of the following circumstances is derecognition of a financial asset not appropriate?
(a) The contractual rights to the cash flows of the financial assets have expired.
(b) The financial asset has been transferred and substantially all the risks and rewards of
ownership of the transferred asset have also been transferred.
(c) The financial asset has been transferred and the entity has retained substantially all the
risks and rewards of ownership of the transferred asset.
(d) The financial asset has been transferred and the entity has neither retained nor
transferred substantially all the risks and rewards of ownership of the transferred asset
but the entity has lost control of the transferred asset. C

35. If as a result of change in intention, it becomes appropriate to carry a financial asset with a
fixed maturity at amortized cost rather than at fair value, any previous gain or loss that has
been recognized in equity shall be:
(a) recognized in profit or loss immediately.
(b) included in equity and amortized to profit or loss over the remaining life of the held to
maturity security using straight line method.
(c) included in equity and amortized to profit or loss over the remaining life of the held to
maturity security using the effective interest method.
(d) recognized as an adjustment of retained earnings. C

36. If in the rare circumstance that a reliable measure of fair value is no longer available, it
becomes appropriate to carry a financial asset without a fixed maturity at cost, the fair value
 carrying amount of the financial asset becomes the new cost basis and any previous gain or
loss that has been recognized directly in equity shall:
(a) remain in equity until the financial asset is sold or otherwise disposed of
(b) be recognized in earnings immediately
(c) included in retained earnings
(d) be amortized over a reasonable period to profit or loss A

37. When stock dividends of different class are received?

(a) no formal entry is made by but only a memorandum.
(b) cash is debited and dividend income is credited.
(c) A new investment account is debited and dividend income is credited.
(d) A new investment account is debited and the original investment account is credited. D

38. A marketable equity security is transferred from its current portfolio to the noncurrent
portfolio. At the transfer date, the security’s cost exceeds its market value. What amount is
used at the transfer date to record the security in the noncurrent portfolio?
(a) Market value, regardless of whether the decline in market value below cost is considered
permanent or temporary.
(b) Market value, only if the decline in market value below cost is considered permanent.
(c) Cost, if the decline in market value below cost is considered temporary.
(d) Cost, regardless of whether the decline in market value below cost is considered
permanent or temporary. A

39. When the investor discontinues the use of the equity method because significant influence is
lost, the investment in associate retained by the investor shall be measured at:
(a) Fair value (c) Amortized cost
(b) Carrying amount (d) Original cost A

40. What should happen when the financial statements of an associate are not prepared as of
the same date as of the financial statements of the investor?
(a) The associate shall prepare financial statements for the use of the investor at the same
date as that of the investor.
(b) The financial statements of the associate prepared up to a difference date shall be used
as normal.
(c) Any major transactions between the date of the financial statements of the investor and
that of the associate shall be accounted for.
(d) As long as the gap is not greater than three months, there is no problem. A

41. An investor purchased a bond as a long-term investment on January 2. The investor’s

carrying value at the end of the first year would be highest if the bonds was purchased at a:
(a) discount and amortized by the straight line method
(b) discount and amortized by the effective interest method
(c) premium and amortized by the straight line method
(d) premium and amortized by the effective interest method D

42. The effective interest method of amortizing bond premium:

(a) Uses a constant rate of interest
(b) Is too complicated for practical use
(c) Is another name for the straight line method
(d) Is needed to determine the amount of cash to be paid to bondholders at each interest
date A

43. Investment property includes all of these, except:

(a) land held for long-term capital appreciation
(b) land held for currently undetermined use
(c) building owned by the reporting enterprise or held by a finance lessee leased out under
one or more operating leases
(d) property held for sale in the ordinary course of business or in the process of construction
for such sale D

44. PAS 40 gives a choice between two different models as the accounting policy to be used in
relation to investment property. Which of the following disclosures shall be made when the
fair value model has been adopted?
(a) Depreciation method used
(b) The amount of impairment loss recognized
(c) Useful life or depreciation rate used
(d) Net gains or losses from fair value adjustments D

45. When there is evidence that an interest in a jointly controlled entity is acquired and held
exclusively with a view to its disposal within twelve months from acquisition, the interest
shall be classified as:
(a) Held for trading
(b) Available for sale
(c) Nonmarketable financial asset
 (d) Held to maturity investment A

46. Under the proportionate consolidation, the minority interest in the venture is:
(a) Shown as deduction from the net assets
(b) Shown in the equity of the venturer
(c) Shown as part of long-term liabilities of the venturer
(d) Not included in the financial statements of the venture D

47. The entity enters into a call option contract with an investment bank on December 31, 2009.
This contract gives the entity the option to purchase 10,000 shares at P100 per share. The
option expires on April 30, 2010. The shares are trading at P100 per share on December 31,
2009, at which time the entity pays P40,000 for the call option. The P40,000 paid by the
entity to the investment bank is referred to as:
(a) Option premium (c) Strike price
(b) Notional amount (d) Intrinsic value A

48. For which type of derivative are changes in the fair value deferred and recognized as a
component of other comprehensive income?
(a) Fair value hedge (c) Operational hedge
(b) Cash flow hedge (d) Notional value hedge B

49. X Theater Corporation purchased the Y Theater and the land on which it is located. X
Theater Corporation plans to raze the building immediately and to build a new and modern
theater on the site. The cost of the Y Theater should be:
(a) written off as an extraordinary loss in the year that the theater is razed
(b) capitalized as part of the cost of the land
(c) depreciated over the period from the date of acquisition to the date of the theater is
actually razed
(d) charged to operations in the year that the theater is razed B

50. A machine with a four-year estimated useful life and an estimated fifteen percent salvage
value was acquired on January 1. Would depreciation expenses using the sum of the years’
digits method of depreciation be higher or lower than depreciation expense using the double
declining balance method of depreciation in the first and second years?
First year Second year First year Second year
(a) Higher Higher (c) Lower Higher
(b) Higher Lower (d) Lower Lower C

51. Which is incorrect concerning recognition of government grants as income?

(a) Grants in recognition of specific expenses should be recognized as income over the
period of the related expense.
(b) Grants related to depreciable assets should be recognized as income over the periods
and in proportion to the depreciation of the related assets.
(c) Grants related to nondepreciable assets requiring fulfillment of certain conditions should
be recognized as income over the periods which bear the cost of meeting the conditions.
(d) Government grants that become receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the
enterprise with no future related costs should be recognized as an adjustment of
retained earnings. D

52. Which of the following is not specifically excluded from the purview of PAS 20?
(a) Government participation in ownership of the entity
(b) Government grant covered by PAS 41 on agriculture
(c) Government assistance provided in the form of tax
(d) Forgivable loan from the government D

53. Which of the following is a disclosure requirement under PAS 23?

I. Amount of borrowing costs capitalized during the period.
II. Segregation of assets that are “qualifying assets” from other assets in the statement of
financial position or as a disclosure in the notes to financial statements.
III. Capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.
(a) I, II and III (c) I and III only
(b) I and II only (d) I only C

54. An entity commencing a new construction project which is to be financed by borrowing. The
key dates for the current year are as follows:
March 15 Loan interest relating to the project starts to be incurred.
June 15 Technical site planning commences.
June 30 Expenditures on the project start to be incurred.
July 15 Construction work commences.
From what date can the entity commence the capitalization of borrowing costs?
(a) March 15 (b) June 15 (c) June 30 (d) July 15 C
55. The acquisition cost of equipment should include all of these, except:
(a) transportation charges (c) installation and testing costs
(b) insurance-in-transit costs (d) repair costs incurred during installation D

56. Lano Corporation’s forest land was condemned for the use as a national park.
Compensation for the condemnation exceeded the forest land’s carrying amount. Lano
purchased similar, but larger, replacement forest land for an amount greater than the
condemnation award. As a result of the condemnation and replacement, what is the net
effect on the carrying amount of forest land reported in Lano’s balance sheet?
(a) the amount is increased by the excess of the replacement forest land’s cost over the
condemnation land’s carrying amount
(b) the amount is increased by the excess of the replacement forest land’s cost over the
condemnation award
(c) the amount is increased by the excess of the condemnation award over the condemned
forest land’s carrying amount
(d) no effect, because the condemned forest land’s carrying amount is used as the
replacement forest land’s carrying amount A

57. K Corporation recently purchased a new robotics production system to produce computer
chips. The field is changing rapidly and new production processes are being developed each
year. The company should use which of the following methods of treating asset costs?
(a) straight line depreciation
(b) accelerated depreciation
(c) permanent capitalization of all costs with no depreciation
(d) record the full cost of the assets as an expense in the year of purchase B

58. Does PFRS 6 require an entity to recognize exploration and evaluation expenditure as an
asset?
(a) Yes, but only to the extent such expenditure is recoverable in future periods.
(b) Yes, but only to the extent the technical feasibility and commercial viability of extracting
the associated mineral resource have been demonstrated.
(c) Yes, but only to the extent required by the entity’s accounting policy for recognizing
exploration and evaluation asset.
(d) No, such expenditure is always expensed in profit or loss as incurred. C

59. Which is incorrect concerning the reversal of an impairment loss?

(a) The reversal of the impairment loss shall be recognized immediately as an adjustment
of the opening balance of retained earnings.
(b) The carrying amount of the asset shall be increased to its new recoverable amount.
(c) The increased carrying amount of the asset due to a reversal of an impairment loss shall
not exceed the carrying amount that would have been determined had no impairment
loss been recognized in the prior years.
(d) Any reversal of an impairment loss on a revalued asset shall be treated as a revaluation
increase. A

60. Which is irrelevant in determining a noncurrent asset’s “value in use”?

(a) The expected future cash flows from the asset
(b) The carrying amount of the asset
(c) Expectation about possible variation in the amount and timing of future cash flows
(d) The time value of money B

61. Jean Company purchased John Company at a cost that resulted in recognition of goodwill
having an expected 10-year benefit period. However, Jean plans to make additional
expenditures to maintain goodwill for a total of 20 years. What costs should be capitalized
and over how many years should they be amortized?
Costs capitalized Amortization period
(a) acquisition costs only 10 years
(b) acquisition costs only 20 years
(c) acquisition and maintenance costs 10 years
(d) acquisition and maintenance costs 20 years A

62. Broadcast rights and franchises are:

(a) Market-related
(b) Technology-related
(c) Contract-based
(d) Artistic-related C

63. Which is incorrect regarding internal-use software?

(a) The application and development costs of internal-use software should be amortized on
the straight line basis unless another systematic and rational basis is more appropriate.
(b) Internal-use software is considered to be software that is marketed as separate product
or as part of a product or process.
 (c) The costs of testing and installing computer hardware should be capitalized as incurred.
(d) The costs of training and application maintenance should be expensed as incurred. B

64. A newly set up dot-com entity has engaged you as its financial advisor. The entity has
recently completed one of its highly publicized research and development projects and seek
your advise on the accuracy of the following statements made by one of its stakeholders.
Which is the most accurate?
(a) Costs incurred during research phase can be capitalized.
(b) Costs incurred during the development phase can be capitalized if criteria such as
technical feasibility of the project being established are met.
(c) Training costs of technicians used in research can be capitalized.
(d) Designing of jigs and tools would qualify as research activities. B

65. A particular warranty obligation is probable and the amount of the loss can be reasonably
estimated. The particular parties that will make claims under the warranty are not
identifiable. An estimated loss contingency should then be:
(a) classified as an appropriation of retained earnings
(b) neither accrued nor disclosed.
(c) disclosed but not accrued.
(d) accrued. D

66. The Board of Directors of an entity decided on December 15 of the current year to wind up
international operations in the Far East and move them to Australia. The decision was based
on a detailed formal plan of restructuring as required by PAS 37. This decision was conveyed
to all workers and management personnel at the headquarters in Europe. The cost of this
restructuring plan can be estimated reliably. How should the entity treat this restructuring in
its financial statements for the year ended December 31?
(a) Because the entity has not announced the restructuring to those affected by the
decision and thus has not raised an expectation and as no constructive obligation has
arisen, only disclose the restructuring decision and the cost of restructuring.
(b) Recognize a provision for restructuring since the board of directors has approved it and
it has been announced in the headquarters of the entity in Europe.
(c) Mention the decision to restructure and the cost involved in the chairman’s statement in
the annual report since it is a decision of the board of directors.
(d) Because the restructuring has not commenced before year-end, based on prudence,
wait until next year and do nothing in this year’s financial statements. A

67. When bonds are converted into ordinary share, the ordinary share is recorded at the carrying
value of the bonds and:
(a) gains resulting from the transaction are recognized but losses are not recognized
(b) losses resulting from the transaction are recognized but losses are not recognized
(c) both losses and gains resulting from the transaction are recognized
(d) neither gains or losses resulting from the transaction are recognized D

68. When bonds are sold at a premium:

(a) interest expense is greater than the interest payment
(b) interest expense is the same as the interest payment
(c) interest expense is less than the interest payment
(d) interest expense is unaffected by the existence of a bond premium C

69. On the first day of its fiscal year, Lessor, Inc. leased certain property at an annual rental of
P100,000 receivable at the beginning of each year for 10 years. The first payment was
received immediately. The leased property which is new had a cost of P650,000 and has an
estimated useful life of 13 years and no salvage value. Lessor’s borrowing rate is 8%. The
present value of an annuity of P1 payable at the beginning of the period at 8% for 10 years
is 7.247. Lessor had no other costs associated with this lease. Lessor should have
accounted for this lease as a sale, but it mistakenly treated the lease as an operating lease.
What was the effect on net earnings during the first year of the lease by having treated this
lease as an operating lease rather than as a sale?
(a) no effect (c) understated
(b) overstated (d) cannot be determined C

70. Which is not a requirement for classifying a lease agreement as a capital lease?
(a) ownership rights remain with the lessor
(b) the lease contains a bargain purchase option
(c) the lease term is 75% or more than the leased property’s estimated economic life
(d) the present value of the minimum lease payments is 90% or more the fair market value
of the property being leased A

71. Which of the following is the most likely item to result in a deferred tax asset?
(a) Using accelerated depreciation for tax purposes but straight line depreciation for
accounting purposes
 (b) Using the cost recovery method of recognizing construction revenue for tax purposes
but using percentage of completion method for financial reporting purposes
(c) Prepaid expense
(d) Unearned revenue D

72. The amount of income tax applicable to transactions that are not reported in the continuing
operations section of the income statement is computed:
(a) by multiplying the item by the effective income tax rate
(b) as the difference between the tax computed based on taxable income without including
the item and the tax computed based on taxable income including the item
(c) as the difference between the tax computed on the item based on the amount used for
financial reporting and the amount used in computing taxable income
(d) by multiplying the item by the difference between the effective income tax rate and the
statutory income tax rate B

73. There is substantial modification of terms of an old financial liability if the gain or loss on
extinguishment is:
(a) At least 10% of the old liability (c) At least 10% of the new liability
(b) Less than 10% of the old liability (d) Less than 10% of the new liability A

74. The difference between the carrying amount of a financial liability extinguished and the
consideration given shall:
(a) Be recognized in profit or loss
(b) Be included in equity
(c) Be included in retained earnings
(d) Not be recognized A

75. Under a defined benefit pension plan:

(a) the employer agrees to make a specified contribution each period; the benefits received
by the retiree are specified
(b) the employer agrees to make a specified contribution each period; the benefits received
the retiree may vary
(c) the employer’s contribution may vary; the benefits received by the retiree are specified
(d) the employer’s contribution may vary; the benefits received by the retiree may vary C

76. Which is not a characteristic of short-term employee benefits?

(a) No actuarial assumptions are required to measure the benefit obligation.
(b) There is no possibility of any actuarial gain or loss.
(c) Short-term employee benefits include nonmonetary benefits, such as medical care,
housing, car or subsidized goods for current employees.
(d) Short-term employee benefit obligations are measured on a discounted basis. D

77. T Corporation’s retirement of its treasury shares resulted in the par value exceeding the
cost. The difference should be:
(a) debited to APIC to the extent of the credit when the stock was issued
(b) debited to retained earnings
(c) credited to APIC from previous treasury stock transactions
(d) credited to APIC relating to the same issue A

78. Which of the following best describes a possible result of treasury stock transactions of a
corporation?
(a) may directly decrease but not increase retained earnings
(b) may affect stockholders’ equity if the cost method is used instead of the par value
method
(c) may increase but not decrease reported net earnings
(d) may decrease but not increase reported net earnings A

79. For transactions with employees and others providing similar services, the fair value of the
equity instrument granted is measured on:
(a) Exercise date (c) Balance sheet date
(b) Grant date (d) Beginning of the year of grant B

80. Under PFRS 2, a cash-settled share-based payment transaction will increase which of the
following?
(a) A current asset (c) Equity
(b) A noncurrent asset (d) A liability D

81. Contributed capital consists of the following major components:

(a) legal and stated capital
(b) retained earnings and legal capital
(c) additional paid in capital and retained earnings
(d) legal capital and additional paid in capital D
82. Treasury share was acquired for cash at a price in excess of its par value. The treasury share
was subsequently reissued for cash at a price in excess of its acquisition price. Assuming
that the cost method of accounting for treasury share transactions is used, what is the effect
of the subsequent reissuance of the treasury share on each of the following?
Additional paid Retained Shareholders’ Additional paid Retained Shareholders’
capital earnings equity capital earnings equity
(a) Decrease Decrease No effect (c) Increase No effect Increase
(b) Increase Increase Increase (d) No effect No effect No effect C

83. Don Corporation’s shares of stock were disapproved for listing in the stock exchange. It sells
its stocks over the counter. It should:
(a) disclose only earnings per share on income before extraordinary items
(b) disclose earnings per share on the face of the income statement
(c) not consider options or warrants on the disclosure of earnings per share
(d) not disclose earnings per share on the face of the income statement because the shares
are not listed in the stock exchange B

84. In computing basic loss per share, the required annual preferred dividend on cumulative
preferred stock should be:
(a) ignored
(b) deducted from the net loss whether declared or not
(c) added to the net loss whether declared or not
(d) added to the net loss only when declared C

85. On January 1, 2009, Style Company signed a 5-year contract enabling it to use a patented
manufacturing process beginning in 2009. A royalty is payable for each product produced,
subject to a minimum annual fee. Any royalties in excess of the minimum will be paid
annually. On the contract date, Style prepaid a sum equal to two years’ minimum annual
fees. In 2009, only minimum fees were incurred. The royalty prepayment should be
reported in Style’s December 31, 2009 financial statement as:
(a) as expense only. (c) a current asset and noncurrent asset.
(b) a current asset and an expense. (d) a noncurrent asset. B

86. An entity uses a periodic inventory system. If the entity’s beginning inventory in the current
year is overstated, and that is the only error in the current year, then the entity’s income for
the current year would be:
(a) Understated and assets correct
(b) Understated and assets overstated
(c) Overstated and assets overstated
(d) Understated and assets understated A

87. How many of the following transactions would appear on the statement of cash flows or in
its subschedules?
I. Sold and issued new shares of common stock, P30,000.
II. Purchased a new machine and paid for it in full by issuing company’s own common
stock.
III. Purchased land for cash, P20,000.
IV. Sales revenue, P500,000.
(a) One (b) Two (c) Three (d) Four C

88. Which statement is true for gains and losses from capital asset sales?
(a) They do not affect cash and are excluded from the statement of cash flows.
(b) They are included in cash flows from operating activities.
(c) They are included in cash flows from investing activities.
(d) They are included in cash flows from financing activities. C

89. An acquirer shall at the acquisition date recognize goodwill acquired in a business
combination as an asset. Goodwill shall be accounted for as which of the following?
(a) Recognize as an intangible asset and amortize over its useful life
(b) Write off against retained earnings
(c) Recognize as an intangible asset and impairment test when trigger event occurs
(d) Recognize as an intangible asset and annually impairment test or more frequently if
impairment is indicated D

90. In a business combination, any “gain on bargain purchase” shall:

(a) Be recognized in profit or loss
(b) Be recognized in other comprehensive income
(c) Be recognized in retained earnings
(d) Not be recognized A

91. A subsidiary was acquired for cash in a business combination on January 1, 2009. The
purchase price exceeded the fair value of identifiable net assets. The acquired company
 owned equipment with a market value in excess of the carrying amount as of the date of
combination. A consolidated balance sheet prepared on December 31, 2009, would:
(a) report the unamortized portion of the excess of the market value over the carrying
amount of the equipment as part of goodwill
(b) report the unamortized portion of the excess of the market value over the carrying
amount of the equipment as part of property, plant and equipment
(c) report the excess of the market value over the carrying amount of the equipment as part
of property, plant and equipment
(d) not report the excess of the market value over the carrying amount of the equipment
because it would be expensed as incurred B

92. Which of the following terms best describes the financial statements of a parent in which the
investments are accounted for on the basis of the direct equity interest?
(a) Single financial statements
(b) Combined financial statements
(c) Separate financial statements
(d) Consolidated financial statements C

93. In translating the financial statements of foreign operation, income and expenses are
translated at:
(a) Closing rate
(b) Average rate
(c) Exchange rate at the date of transaction
(d) Forward rate C

94. Initially, a foreign currency transaction shall be recognized by applying to the foreign
currency amount:
(a) The spot exchange rate at the date of transaction
(b) The closing rate at the end of reporting period
(c) The average exchange rate during the year
(d) The spot rate at the date of the settlement of the transaction A

95. How should the balance of progress billings and construction in progress be shown in
reporting dates prior to the completion of a long-term contract?
(a) progress billings as deferred income, construction in progress as a deferred expense
(b) progress billings as income, construction in progress as inventory
(c) net, as a current asset if debit balance and current liability if credit balance
(d) net, as income from construction if credit balance, and loss from construction if debit
balance C

96. A construction entity signed a contract to build a theater over a period of two years, and
with this contract also signed a maintenance contract for five years. Both contracts are
negotiated as a single package and are closely interrelated to each other. The two contracts
should be:
(a) Combined and treated as a single contract
(b) Segmented and considered two separate contracts
(c) Recognized under the full cost recovery method
(d) Treated differently – the building contract under the full cost recovery method and the
maintenance contract under the percentage of completion method A

97. In job order costing, what journal entry should be made for the return to the storekeeper of
direct materials previously issued to the factory for use on a particular job?
(a) debit materials and credit factory overhead
(b) debit materials and credit work in process
(c) debit purchase returns and credit work in process
(d) debit work in process and credit materials B

98. The FIFO process costing method will produce the same cost of goods manufactured as the
average method if:
(a) The goods produced are homogenous in nature
(b) There are no lost units
(c) There is no beginning inventory
(d) Beginning and ending inventories are equal C

99. The President may contract or guarantee foreign loans on behalf of the Republic of the
Philippines with the prior concurrence of:
(a) Monetary Board
(b) Monetary Board and subject to such limitations as may be provided by law
(c) Congress of the Republic of the Philippines
(d) Supreme Court and subject to such limitations as may be provided by law B

100. This term represents the allotment by Central Office to its Regional Office.
(a) Special allotment
(b) Regular allotment
(c) Suballotment
(d) Allotment device C

* end of the examination – theory of accounts *