Catanduanes State University

COLLEGE OF BUSINESS AND ACCOUNTANCY

Virac, Catanduanes

Acctg 2 – Conceptual Framework and Accounting Standards

FINAL EXAMINATION
May 25, 2021

Name: _________________ Program / Year Level _____________ Date: ____________

Instructions: Choose the letter of the BEST answer. Strictly no erasures allowed.

Test I - Multiple Choice Questions:

1. All of the following may be included under the heading of “cash” except.
a. Currency
b. Money Market Funds
c. Checking Account Balance
d. Savings Account Balance

2. In which account are postdated checks received classified?

a. Receivables
b. Prepaid expenses
c. Cash
d. Payables

3. What is a compensating balance?

a. Savings account balances
b. Margin accounts held with broker
c. Temporary investments serving as collateral for outstanding loans
d. Minimum deposits required to be maintained in connection with a borrowing
arrangement.

4. Under which section of the balance sheet is “cash restricted for plant expansion” reported?
a. Current assets
b. Non-current assets
c. Current liabilities
d. Shareholder’s Equity

5. A cash equivalent is a short-term, highly liquid investments that is readily convertible into
known amounts of cash and
a. Is acceptable as a means to pay current liabilities
b. Has current market value that is greater than its original cost
c. Bears an interest rate that is at least equal to the prime rate of interest at the date of
liquidation
d. Is so near its maturity that it presents insignificant risk of changes in interest rates

6. In order to be classified as a cash equivalent, an investment must have a maturity date of:
a. Less than six months
b. Three to six months
c. Six to twelve months
d. Three months or less

7. Which of the statements following is true regarding receivable?

a. Trade accounts receivable are the only asset on which bad debts expense can be
incurred.
b. The sole justification for providing for doubtful accounts is conservatism.
c. Methods of estimating bad debts based upon the collectibility of accounts receivable
emphasize the income statement rather the statement of financial position.
 d. Provision for bad debt losses on trade notes receivable is usually included in
computing the balance of “Allowance for Doubtful Accounts”.

8. Which of the following accounting principles primarily supports the use of allowance for
doubtful accounts?
a. Continuity principle.
b. Full disclosure principle.
c. Matching principle.
d. Cost principle.

9. An advantage of relating a company’s bad debt experience to its accounts receivable is that
this approach:
a. Is the only generally accepted method for valuing accounts receivable.
b. Gives a reasonably accurate measurement of the amortized cost of the accounts
receivable in the statement of financial position.
c. Does not require estimates of uncollectible accounts
d. Does not require knowledge of the balance in the allowance for doubtful accounts
before adjustment for bad debt expense.

10. Bruce Cycle Shop sells a bicycle to E. Nygma, a customer who uses Express Charge (a
national credit card, but not issued by a bank). In recording this sale, Bruce Cycle Shop should
record:
a. An account receivable from E. Nygma
b. A cash receipt
c. An account receivable from Express Charge
d. A small increase in allowance for doubtful accounts

11. Theoretically, the amount of estimated future returns and allowances on credit sales should
be recorded during the period of the sale so as not to overstate sales and ending accounts
receivable. In practice, these estimates are rarely recorded because:
a. The amount of such returns and allowances tends to fluctuate too greatly from period
to period
b. There is too much uncertainty surrounding such estimates.
c. Such estimates are not allowed according to generally accepted accounting principles
d. The amount of such returns and allowances is usually not material.

12. A non-interest-bearing note receivable

a. Causes no interest revenue to be recorded
b. Includes a specified principal amount plus specified interest
c. Includes a specified principal amount but an unspecified interest amount
d. Includes an unspecified principal amount and an unspecified interest amount

13. If the combined market value of trading securities at the end of the year is less than the
market value of the same portfolio of trading securities at the beginning of the year, the
difference should be accounted for by
a. Reporting an unrealized loss in security investments in the stockholders’ equity
section of the balance sheet.
b. Reporting an unrealized loss in security investments in the income statement.
c. A footnote to the financial statements.
d. A credit to Investment in Trading Securities.

14. Significant influence as defined in PAS 28 is

a. The power to participate in the financial and operating policy decisions of the
investee but is not control or joint control over those policies.
b. Deemed to exist when the investor is exposed, or has rights, to variable returns from
its involvement with the investee and has the ability to affect those returns through its
power over the investee.
c. The contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the
parties sharing control.
d. The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
15. An entity over which the investor has significant influence is called a (an)
a. Associate
b. Subsidiary
c. Joint venture
d. Joint operation

16. An investor need not use the equity method if all the following four conditions are met,
except
a. The investor is itself a wholly owned subsidiary or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the investor not applying the equity
method.
b. The investor’s debt or equity instruments are not traded in a public market.
c. The investor filed its financial statements with a securities commission for the
purpose of issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the investor produces consolidated
financial statements available for public use that comply with PFRSs.

17. Equity investments acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate component
of equity are
a. Non-trading where a company has holdings of less than 20%.
b. Trading investments where a company has holdings of less than 20%.
c. Investments where a company has holdings of between 20% and 50%.
d. Investments where a company has holdings of more than 50%.

18. The covenants and other terms of the agreement between the issuer of bonds and the lender
are set forth in the
a. Bond indenture
b. Bond debenture
c. Registered bond
d. Bond coupon

19. When bonds are acquired at a premium and the effective interest method is used, at each
interest payment date, the interest income:
a. Remains constant
b. Is equal to the change in book value
c. Increases
d. Decreases

20. A derivative may be:

a. An asset account
b. A liability account
c. An owner equity
d. Either an asset of a liability account

21. Held-to-maturity securities are reported at

a. Acquisition cost
b. Acquisition cost plus amortization of a discount
c. Acquisition cost plus interest
d. Fair value

22. On a particular date, which of the following should be included in a company’s inventory.
a. Goods in the company’s warehouse which have been received from another company
for sale on consignment.
b. Goods sold through a sales contract the terms of which have been completed, but the
goods are being held for the customer to call for at his convenience.
c. Goods purchased and in transit FOB destination
d. Goods held for sale in the possession of an agent of the company

23. When a periodic inventory system is used:

a. Cost of goods sold is a residual amount.
 b. Ending inventory is transferred to expense and the beginning inventory is transferred
to assets.
c. Two entries must be made when goods are purchased.
d. A purchases account is not used; all inventory purchase entries are debits to the
inventory account.

24. PFRS require the selection of an inventory cost flow method which:
a. Emphasizes the valuation of inventory for statement of financial position purposes.
b. Most closely approximates LCM for the ending inventory.
c. Most clearly reflects the periodic income.
d. Matches the physical flow of goods from inventory with sales revenue.

25. Inventory should be stated at

a. Lower of cost and fair value
b. Lower of cost and net realizable value
c. Lower of cost and nominal value
d. Lower of cost and net selling price

26. 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.

27. Entity A had plantation forest that is likely to be harvested and sold in 30 years. The income
should be accounted for in the following way:
a. No income should be reported until first harvest and sale in 30 years.
b. Income should be measured annually and reported using a fair value approach that
recognizes and measures biological growth.
c. The eventual sale proceeds should be estimated and matched to the profit and loss
account over the 30-year period.
d. The plantation forest should be valued every 5 years and the increase in value should be
shown in the statement recognized gains and losses.

28. Where there is a long aging or maturation process after harvest, the accounting for such
products should be dealt with by
a. PAS 41.
b. PAS 2, Inventory.
c. PAS 16, Property, Plant & Equipment.
d. PAS 40, Investment Property.

29. Land that is related to agricultural activity is valued

a. At fair value.
b. In accordance with PAS 16, Property, Plant & Equipment or PAS 40, Investment
Property.
c. At fair value in combination with the biological asset that is being grown on the land.
d. At the resale value separate from the biological asset that has been grown on the
land.

30. Which of the following is statement incorrect?

a. The term “revenue expenditures” refers to those amounts paid out which are expected
to provide revenue in the current period or a future period.
b. An expenditure for one item which has questionable of highly uncertain future
benefit usually will be recognized as expense when incurred.
c. Subsequent to acquisition, operational assets usually are reported at cost or cost less
accumulated depreciation, depletion, or amortization.
d. A primary principle in recording and reporting operational assets other than land is
that they are recorded at cost when acquired and subsequently are reported at cost or
cost less accumulated depreciation.

31. Which of the following statements is true?

a. All operational assets are subject to either depreciation, depletion, or amortization.
 b. The matching principle does not require depreciation on an operational asset donated to
a company because no purchase cost was incurred at acquisition.
c. The only requirement an asset must meet to be considered an operational asset is that
useful life extend over one more accounting period.
d. The determination of cost is conceptually consistent between operational assets and
inventory in regard to accounting treatment of cash discounts.

32. Accounting for tangible operational assets is primarily in conformity with the:
a. Historical cost principle.
b. Historical cost principle and reporting principle.
c. Matching principle and reporting principle.
d. Matching principle and historical cost principle.

33. RY recently purchased an old building and the land on which it is located. The old building
will be demolished at a net cost of P10,000. A new building will be built on the site. The
demolition cost should be:
a. Capitalized as part of the cost of new building.
b. Capitalized as part of the cost of land.
c. Depreciated over the remaining life of the old building.
d. Written off as an extraordinary loss in the year of demolition.

34. Capitalization of construction period interest is based primarily upon the:

a. Comparability principle.
b. Matching principle.
c. Full-disclosure principle.
d. Revenue principle.

35. Which of the following items relevant to the depreciation of an asset can be negative?
a. Residual value
b. Depreciable cost
c. Useful life
d. Cost subsequent to acquisition

36. Which of the following statements is incorrect?

a. Companies should always offset interest revenue against interest cost when determining
the amount of interest to be capitalized as part of the construction cost of assets.
b. When land with an old building is purchased as a future building site, the cost of
removing the old building is part of the cost of the new building.
c. If a nonmonetary exchange lacks commercial substance, and cash is received, a partial
gain or loss is recognized.
d. Avoidable interest is the amount of interest cost that a company could theoretically avoid
if it had not made expenditures for the asset.

37. The cost of land does not include

a. Cost of grading, filling, draining, and clearing.
b. Cost of removing old buildings.
c. Cost of improvements with limited lives.
d. Special assessments.

38. Historical cost is the basis advocated for recording the acquisition of property, plant, and
equipment for all the following reasons except
a. At the date of acquisition, cost reflects fair value.
b. Property, plant and equipment items are always acquired at their original historical cost.
c. Historical cost involves actual transactions and, as such, is the most reliable basis.
d. Gains and losses should not be anticipated but should be recognized when the asset is
sold.

39. Historical cost is the basis advocated for recording the acquisition of property, plant, and
equipment for all the following reasons except
a. At the date of acquisition, cost reflects fair value.
b. Property, plant and equipment items are always acquired at their original historical cost.
 c. Historical cost involves actual transactions and, as such, is the most reliable basis.
d. Gains and losses should not be anticipated but should be recognized when the asset is
sold.

40. Cotton Hotel Corporation recently purchased Emporia Hotel and the land on which it is
located with the plan to tear down the Emporia Hotel and build a new luxury hotel on the site.
The cost of Emporia Hotel should be
a. Depreciated over the period from acquisition to the date the hotel is scheduled to be tron
down.
b. Written off as a loss in the year the hotel is torn down.
c. Capitalized as part of the cost of the land.
d. Capitalized as part of the cost of new hotel.

Test II - Discussion Questions:

41-45: What is the general criterion used to decide whether an expenditure should be included
in the cost of property, plant, and equipment rather than being expensed?

46-50: When several assets are purchased for a single lump sum, what is the principle used for
cost apportionment? Why it is necessary to apportion the cost?

51-55: Distinguish between the “cost model” and “fair value” model of accounting for
investment property.

56-60: What are the criteria for classifying non-current assets (or disposal groups) as held for
sale?

61-75: A fitness club gives clients free month after they have paid for eleven months.
Approximately half of their clients remain with the club long enough to take advantage of this
offer? (15 points)

Required:

a. Define the term “liability.” Then explain whether the free month offer results in a liability
for the fitness club.
b. Explain what makes a liability “current.” Then explain whether the free month results in
a current liability for the fitness club.
c. Define the term “contingent liability.” Then explain whether the free month results in a
contingent liability for the fitness club.

76-82: Fix Company sells its bonds at a premium and applies the effective-interest method in
amortizing the premium. Will the annual interest expense increase or decrease over the life of
the bonds? Explain. (7 points)

Test III – Matching Type Questions: (83-90)

Match the following terms with the appropriate definitions.

Terms

a. Ordinary share
b. Preference share
c. Preference share, nonparticipating
d. Par value share
e. Preference share, cumulative
f. No par share
g. No par, stated value share
h. Share purchased on credit

Definitions

83. The basic issue of share.

84. Share on which dividends in arrears must be paid before current dividends can be paid.
85. No par share with an assigned “value”, but not usually specified in the charter.
86. Share with specified differences from the basic share.
87. Share with a minimum “value” always specified in the charter.
88. Subscribed share.
89. Share that is limited to a specified dividend rate per year.
90. Share that has no minimum amount that must be paid in at first sale.

Test IV – Identification Questions: (91-100)

Each numbered item below changes the amount of shareholders’ equity.

Required:

Identify which category of shareholders’ equity is affected by each item and briefly explain
how it is affected.

91. Donation of a plant site to the company.

92. Purchased treasury share (cost method).
93. Declaration of cash dividend payable next period.
94. Unrealized loss on investment in securities available for sale.
95. Sale of additional ordinary shares of the corporation.
96. Sold the company’s ordinary shares on credit.
97. Corrected an accounting error (expense) from a prior period.
98. Restricted retained earnings by making an entry equal to the cost of treasury share
purchased.
99. Exchanged the corporation’s ordinary shares for land.
100. Investor tendered their convertible preferred share for the ordinary shares of the
corporation.