Basic Accounting

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

____ 1. The responsibility to review the work of the accountants and issue opinions as to the fairness of the financial
statements rests with
a. the external auditor.
b. the board of directors.
c. the internal auditors.
d. management.
____ 2. The __________ of a firm is primarily responsible for the preparation of financial statements in accordance
with GAAP.
a. the internal auditors.
b. management.
c. the external auditors.
d. the board of directors.
____ 3. Historical cost has been the valuation basis most commonly used in accounting because of its
a. timelessness.
b. conservatism.
c. reliability.
d. accuracy.
____ 4. Which of the following elements of financial statements is not a component of comprehensive income?
a. Revenues
b. Expenses
c. Losses
d. Distributions to owners
____ 5. Which of the following is not a purpose of the conceptual framework of accounting?
a. To provide definitions of key terms and fundamental concepts
b. To provide specific guidelines for resolving situations not covered by existing accounting
standards
c. To assist accountants and others in selecting among alternative accounting and reporting
methods
d. To assist the accounting body in the standard-setting process
____ 6. Which of the following is not an implication of the going-concern assumption?
a. The historical cost principle is credible.
b. Depreciation and amortization policies are justifiable and appropriate.
c. The current/noncurrent classification of assets and liabilities is justifiable and significant.
d. Amortizing research and development costs over multiple periods is justifiable and
appropriate.
____ 7. According to the conceptual framework, the process of reporting an item in the financial statements of an
entity is
a. realization.
b. recognition.
c. matching.
d. allocation.
____ 8. Conservatism is best described as selecting an accounting alternative that
a. understates assets and/or net income.
b. has the least favorable impact on owners' equity.
c. overstates, as opposed to understates, liabilities.
d. is least likely to mislead users of financial information.
____ 9. Large business enterprises employ financial accountants who are primarily concerned with__________
financial reporting.
a. corporate tax
b. management
c. external
d. international
____ 10. Financial statements issued for the use of parties external to the enterprise are the primary responsibility of
the
a. management of the enterprise.
b. stockholders of the enterprise.
c. independent auditors of the enterprise.
d. creditors of the enterprise.
____ 11. The debit and credit analysis of a transaction normally takes place when the
a. entry is posted to a subsidiary ledger.
b. entry is recorded in a journal.
c. trial balance is prepared.
d. financial statements are prepared.
____ 12. A routine collection on a customer's account was recorded and posted as a debit to Cash and a credit to Sales
Revenue. The journal entry to correct this error would be
a. a debit to Sales Revenue and a credit to Accounts Receivable.
b. a debit to Sales Revenue and a credit to Unearned Revenue.
c. a debit to Cash and a credit to Accounts Receivable.
d. a debit to Accounts Receivable and a credit to Sales Revenue.
____ 13. Which of the following is not presented in an income statement?
a. Revenues
b. Expenses
c. Net income
d. Dividends
____ 14. Iowa Cattle Company uses a periodic inventory system. Iowa purchased cattle from Big D Ranch at a cost of
P27,000 on credit. The entry to record the receipt of the cattle would be
a. Debit: Purchases (27,000); Credit: Accounts Payable (27,000)
b. Debit: Inventory (27,000); Credit: Accounts Payable (27,000)
c. Debit: Purchases (27,000); Credit: Cash (27,000)
d. Debit: Inventory (27,000); Credit: Cash (27,000)
____ 15. Failure to record depreciation expense at the end of an accounting period results in
a. understated income.
b. understated assets.
c. overstated expenses.
d. overstated assets.
____ 16. Arid Company paid P1,704 on June 1, 2013, for a two-year insurance policy and recorded the entire amount
as Insurance Expense. The December 31, 2013, adjusting entry is
a. debit Prepaid Insurance and credit Insurance Expense, P497.
b. debit Insurance Expense and credit Prepaid Insurance, P497.
c. debit Insurance Expense and credit Prepaid Insurance, P1,207.
d. debit Prepaid Insurance and credit Insurance Expense, P1,207.
____ 17. On December 31 of the current year, Holmgren Company's bookkeeper made an entry debiting Supplies
Expense and crediting Supplies on Hand for P12,600. The Supplies on Hand account had a P15,300 debit
balance on January 1. The December 31 balance sheet showed Supplies on Hand of P11,400. Only one
purchase of supplies was made during the month, on account. The entry for that purchase was
a. debit Supplies on Hand, P8,700 and credit Cash, P8,700.
b. debit Supplies Expense, P8,700 and credit Accounts Payable, P8,700.
c. debit Supplies on Hand, P8,700 and credit Accounts Payable, P8,700.
d. debit Supplies on Hand, P16,500 and credit Accounts Payable, P16,500.
____ 18. Crescent Corporation's interest revenue for 2013 was P13,100. Accrued interest receivable on December 31,
2013, was P2,275 and P1,875 on December 31, 2012. The cash received for interest during 2013 was
a. 1,350
b. 10,825
c. 12,700
d. 13,100
____ 19. The following balances have been excerpted from Edwards' balance sheets:

December 31, 2013 December 31, 2012

Prepaid Insurance P6,000 P7,500
Interest Receivable 3,700 14,500
Salaries Payable 61,500 53,000

Edwards Company paid or collected during 2013 the following items:

Insurance premiums paid 41,500

Interest collected 123,500
Salaries paid 481,000

The insurance expense on the income statement for 2013 was

a. 28,000
b. 40,000
c. 43,000
d. 55,000
____ 20. What is the correct order of the following events in the accounting process?

I Financial statements are prepared.

II Adjusting entries are recorded.
III Nominal accounts are closed.

a. I, II, III
b. II, I, III
c. III, II, I
 d. II, III, I
____ 21. How would proceeds received in advance from the sale of nonrefundable tickets for the Super Bowl be
reported in the seller’s financial statements published before the Super Bowl?
a. Revenue for the entire proceeds.
b. Revenue less related costs.
c. Unearned revenue less related costs.
d. Unearned revenue for the entire proceeds.
____ 22. On August 1, a company received cash of P9,324 for one year’s rent in advance and recorded the transaction
on that day as a credit to rent revenue. The December 31 adjusting entry would include
a. a debit to Rent Revenue for P3,885.
b. a credit to Unearned Rent Revenue for P5,439.
c. a debit to Unearned Rent Revenue for P3,885.
d. a credit to Rent Revenue for P9,324.
____ 23. On August 1 of the current year, Kyle Company borrowed P278,000 from the local bank. The loan was for 12
months at 9 percent interest payable at the maturity date. The adjusting entry at the end of the fiscal year
relating to this obligation would include a
a. debit to interest expense of P25,020.
b. debit to interest expense of P10,425.
c. credit to note payable of P10,425.
d. debit to interest receivable of P10,425.
____ 24. Carbon Company’s accounting records provided the following information (all amounts in thousands of
pesos):

Balances 12/31/2012 Balances 12/31/2013

Current Assets P240 P?
Property, Plant, and Equipment 1,600 1,700
Current Liabilities ? 130
Long-term Liabilities 580 ?

All assets and liabilities of the firm are reported in the schedule above. Working capital of P92 remained
unchanged from 2012 to 2013. Net income in 2011 was P64. No dividends were declared during 2013 and
there were no other changes in owners’ equity. Total long-term liabilities at the end of 2013 would be
a. 340
b. 432
c. 580
d. 616
____ 25. Which of the following characteristics may result in the classification of a liability as current?
a. Short-term obligations expected to be refinanced with long-term debt
b. Debts to be liquidated from funds that have been accumulated and are reported as
noncurrent assets
c. Violation of provisions of a debt agreement
d. Obligations for advance collections that involve long-term deferment of the delivery of
goods or services
____ 26. Which of the following would not be reported for capital stock in the contributed capital section of a
classified balance sheet?
a. Dividends per share
 b. Shares authorized
c. Shares issued
d. Shares outstanding
____ 27. Which of the following circumstances would require recording an accrual for a loss contingency under
current generally accepted accounting principles?
a. Event is unusual in nature and occurrence of event is probable
b. Event is unusual in nature and event occurs infrequently
c. Amount of loss is reasonably estimable and occurrence of event is probable
d. Amount of loss is reasonably estimable and event occurs infrequently
____ 28. The following data were taken from the financial statements of Howard Corporation for the year ended
December 31, 2020:

Net sales P120,000

Net income 30,000
Total assets, January 1, 2020 400,000
Total assets, December 31, 2020 600,000

What was Howard's rate of return on assets for 2020?

a. 5 percent
b. 6 percent
c. 20 percent
d. 24 percent
____ 29. Information from Brian Company's balance sheet is as follows:

Current assets:
Cash 1,200,000
Investment securities 3,750,000
Accounts receivable 28,800,000
Inventories 33,150,000
Prepaid expenses 600,000
Total current assets 67,500,000
Current liabilities:
Notes payable 750,000
Accounts payable 9,750,000
Accrued expenses 6,250,000
Income taxes payable 250,000
Payments due within one year on long-term debt 1,750,000
Total current liabilities 18,750,000

What is Brian's current ratio?

a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.60 to 1
____ 30. Southeast Company's adjusted trial balance at December 31, 2021, includes the following account balances:
 Common Stock, P3 par P300,000
Additional Paid-In Capital 400,000
Treasury Stock, at cost 25,000
Net Unrealized Holding Loss on Available-For-Sale
Securities 10,000
Retained Earnings-Appropriated for Uninsured Earthquake
Losses 75,000
Retained Earnings-Unappropriated 100,000

What amount should Southeast report as total owners' equity in its December 31, 2021, balance sheet?
a. 840,000
b. 860,000
c. 890,000
d. 910,000
____ 31. What is the effect of the collection of accounts receivable on the current ratio and net working capital,
respectively?
a. Current ratio (No effect);Net working capital (No effect)
b. Current ratio (Increase); Net working capital (Increase)
c. Current ratio (Increase); Net working capital (No effect)
d. Current ratio (No effect); Net working capital (Increase)
____ 32. Which of the following is an appropriate computation for return on investment?
a. Net income divided by sales
b. Net income divided by total assets
c. Sales divided by total assets
d. Sales divided by stockholders' equity
____ 33. Which of the following items would normally be excluded from the computation of working capital?
a. Advances from customers for goods that will be shipped three months after the balance
sheet date
b. The portion of long-term debt that matures six months after the balance sheet date and
will be paid from the regular cash account
c. Prepaid insurance
d. Cash surrender value of life insurance
____ 34. The balance sheet category receivables represents claims to cash. Accounts receivable typically constitutes the
largest dollar value of receivables. An estimated allowance for doubtful accounts should be deducted from the
gross amount of accounts receivable to arrive at the estimated amount collectible. Plant assets are reported on
the balance sheet at their historical cost less any accumulated depreciation. The allowance for doubtful
accounts and accumulated depreciation are both termed contra-asset accounts. Which of the following
statements regarding these two contra-asset accounts is true?
a. Both result in the valuation of their related asset account at net realizable value.
b. Accumulated depreciation deducted from the related asset account shows the unallocated
portion of the historical cost of the related asset.
c. Accumulated depreciation deducted from the related asset account shows the net
realizable value of the related asset.
d. Accumulated depreciation deducted from the related asset account shows the current
replacement cost of the related asset.
____ 35. In a consolidated balance sheet, the minority interest is reported
a. as part of long-term liabilities.
 b. between liabilities and stockholders’ equity
c. as part of stockholders’ equity.
d. as part of long-term assets.
____ 36. Which of the following is not true regarding reserves that appear in the equity section of the balance sheet of
foreign companies?
a. Reserves represent cash set aside to fund capital projects.
b. Reserves are different categories found in the equity section of the balance sheet.
c. The balances in reserve accounts can affect an entity’s legal ability to pay cash dividends.
d. An extensive description of each reserve shown on the balance sheet is provided.
____ 37. Which of the following ratios measures short-term solvency?
a. Current ratio
b. Creditors' equity to total assets
c. Return on investment
d. Total asset turnover
____ 38. Information from Caine Company's balance sheet is as follows:

Current assets:
Cash P 900,000
Marketable securities 3,750,000
Accounts receivable 26,800,000
Inventories 33,150,000
Prepaid expenses 600,000
Total current assets P65,200,000
Current liabilities:
Notes payable P 1,050,000
Accounts payable 8,750,000
Accrued expenses 5,250,000
Income taxes payable 250,000
Payments due within one year on long-term debt 1,950,000
Total current liabilities P17,250,000

What is Caine's current ratio?

a. 0.26 to 1
b. 0.30 to 1
c. 1.80 to 1
d. 3.78 to 1
____ 39. A measure of profitability analysis is
a. times interest earned.
b. cash flow per share.
c. quick ratio.
d. dividend payout ratio.
____ 40. The calculation of the return on total assets ratio would use all of the following except
a. average stockholders’ equity.
b. total assets.
c. average total assets.
d. net sales.
____ 41. Simultaneous recognition of both a revenue and an expense may result from certain transactions or events. An
example of an expense so recognized may be
a. Expired portion of prepaid insurance.
b. Salespersons’ monthly salaries.
c. Transportation to customers.
d. Electricity used to light offices.
____ 42. UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging
services with Hotel Co. As of June 30, advertising commercials of P10,000 were used. However, travel and
lodging services were not provided. How should UVW account for advertising in its June 30 financial
statements?
a. Revenue and expense is recognized when the agreement is complete.
b. An asset and revenue for P10,000 is recognized.
c. Both the revenue and expense of P10,000 are recognized.
d. Not reported.
____ 43. Which of the following is an accrued liability?
a. Cash dividends payable.
b. Wages payable.
c. Rent revenue collected 1 month in advance.
d. Portion of long-term debt payable in current year.
____ 44. On January 1, 2017, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon
expects to use these cabinets for 5 years. Brecon’s 2017 multi-step income statement should include
a. One-fifth of the cabinet costs in cost of goods sold.
b. One-fifth of the cabinet costs in selling, general, and administrative expenses.
c. All of the cabinet costs in cost of goods sold.
d. All of the cabinet costs in selling, general, and administrative expenses.
____ 45. On November 1, 2017, Key Co. paid P3,600 to renew its insurance policy for 3 years and used an income
statement account to record this transaction. At December 31, 2017, Key’s unadjusted trial balance showed a
balance of P90 for prepaid insurance and P4,410 for insurance expense. What amounts should be reported for
insurance expense in Key’s December 31, 2017 financial statements?
a. 1,200
b. 1,250
c. 1,100
d. 1,010
____ 46. James Lee, M.D., keeps his accounting records on a cash basis. During 2017, Dr. Lee collected P100,000 in
fees from his patients. At December 31, 2007, Dr. Lee had accounts receivable of P20,000. At December 31,
2017, Dr. Lee had accounts receivable of P30,000, and unearned fees of P1,000. On an accrual basis, how
much was Dr. Lee’s patient service revenue for 2017?
a. 111,000
b. 109,000
c. 90,000
d. 89,000
____ 47. Bucca Warehousing Corporation bought a building at auction on June 30, 2017, for P1,000,000. On July 2,
2017, before occupying the building, Bucca sold it to a triple-A rated company for P1,200,000. Bucca
received a cash down payment of P300,000 and a first mortgage note at the market rate of interest, for the
balance. No additional payments were required until 2018. On September 1, 2017, an independent appraiser
valued the property at P1,500,000. On its 2017 income tax return, Bucca reported the sale on the installment
basis. How much gain should Bucca recognize in its income statement for the year ended December 31,
2017?
a. 0
b. 50,000
c. 200,000
d. 300,000
____ 48. Which of the following should be expensed as incurred by a franchise with an estimated useful life of 10
years?
a. Amount paid to the franchisor for the franchise.
b. Periodic payments to a company, other than the franchisor, for that company’s franchise.
c. Legal fees paid to the franchisee’s lawyers to obtain the franchise.
d. Periodic payments to the franchisor based on the franchisee’s revenues.
____ 49. On January 3, 2017, Paterson Services, Inc. signed an agreement authorizing Cobb Company to operate as a
franchisee over a 20-year period for an initial franchise fee of P50,000 received when the agreement was
signed. Cobb commenced operations on July 1, 2017, at which date all of the initial services required of
Paterson had been performed. The agreement also provides that Cobb must pay a continuing franchise fee
equal to 5% of the revenue from the franchise annually to Paterson. Cobb’s franchise revenue for 2017 was
P400,000. For the year ended December 31, 2017, how much should Paterson record as revenue from
franchise fees in respect of the Cobb franchise?
a. 70,000
b. 50,000
c. 45,000
d. 22,500
____ 50. If the balance shown on a company's bank statement is less than the correct cash balance, and neither the
company nor the bank has made any errors, there must be
a. deposits credited by the bank but not yet recorded by the company.
b. outstanding checks.
c. bank charges not yet recorded by the company.
d. deposits in transit.
Basic Accounting
Answer Section

MULTIPLE CHOICE

1. A
2. B
3. C
4. D
5. B
6. D
7. B
8. B
9. C
10. A
11. B
12. A
13. D
14. A
15. D
16. D
17. C
18. C
19. C
20. B
21. D
22. B
23. B
24. D
25. C
26. A
27. C
28. B
29. D
30. A
31. A
32. B
33. D
34. B
35. C
36. A
37. A
38. D
39. D
40. A
41. C
 SOL:
Transportation to customers is correct because the revenue transaction (sales of goods to customers) directly
causes the incurrence of the expense (transportation to customers).
42. B
SOL:
UVW has provided P10,000 in advertising services and has a receivable for the travel and lodging services.
43. B
SOL:
Accrued liability results from recording an expense that has been incurred but not paid. Wages payable is an
example of an expense incurred but not paid.
44. B
SOL:
One-fifth of the cabinet costs would be reported as depreciation expense in selling, general, and
administrative expenses. Four-fifths of the cabinet cost would remain capitalized as fixed assets at the end of
2017.
45. C
SOL:
Based on the information given, Key has only one prepaid insurance policy at 12/31/2017. The 3-year policy
acquired on 11/1/2017 has been in force for 2 months, so 34 months remain unexpired. Therefore, 12/31/2017
prepaid insurance is P3,400 (P3,600 x 34/36). Key must make an adjusting entry to transfer P3,310 (P3,400 -
P90) from insurance expense to prepaid insurance. This will leave the account balances at P3,400 for prepaid
insurance (P90 + P3,310) and P1,100 for insurance expense (P4,410 - P3,310). (Apparently, Key Co. records
policy payments as charges to insurance expense during the year and adjusts the prepaid insurance account at
the end of the year.)
46. B
SOL:
The following formula is used to adjust service revenue from the cash basis to the accrual basis:

Accrual basis Beg. End.

service = Cash fees + End. – Beg. + unearned – unearned
revenue collected AR AR fees fees

Therefore, Dr. Lee's patient service revenue for 2017 is P109,000 (P100,000 + P30,000 – P20,000 + P0 -
P1,000). As an alternative, T-accounts can be used.

Service revenue Acct. receivable

110,000 1/1/2017 20,000
1,000 100,00 Cash received
0
109,000 12/31/2017 110,000
30,000

Unearned revenue
0 1/1/2017
1,000
1,000 12/31/2017
47. C
SOL:
 The installment method of recognizing revenue is not acceptable for financial reporting purposes unless the
circumstances are such that the collection of the sales price is not reasonably assured. Since the property was
sold to a triple-A rated company and the value of the property is appreciating, collection can be assumed to be
reasonably assured. Therefore, the entire gain should be recognized for financial reporting purposes at the
date of sale:

Sales price – Cost of building = Gain recognized

P1,200,000 – P1,000,000 = P200,000
48. D
SOL:
The requirement is to determine which of the following outflows should be expensed as incurred by the
franchisee. Continuing franchise fees, based on revenues, should be reported as expenses when incurred.
49. A
SOL:
Initial franchise fees are recognized as revenue when all of the initial services required of the franchisor have
been substantially performed. Continuing franchise fees are reported as revenue as the fees are earned and
become receivable. In this case, since all the initial services were performed by 7/1/2017, the initial fee
(P50,000) is recognized as revenue in 2017. Also, continuing fees of P20,000 (5% x P400,000) should be
recognized. Therefore, the total franchise fee revenue to be recognized in 2017 is P70,000 (P50,000 +
P20,000).
50. D