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Prelim Examination 2018 With Answers PDF
Prelim Examination 2018 With Answers PDF
Prelim Examination 2018 With Answers PDF
INSTRUCTIONS: Indicate the letter of your answer on the space provided before each item number
STRICTLY NO ERASURES/ALTERATIONS of answers will be allowed
Only PEN WITH PERMANENT INK will be allowed to use in this examination
1. Good Bank granted a loan to a borrower on January 1, 2017. The interest on the loan is 10% payable annually starting December
31, 2017. The loan matures in three years on December 31, 2019. Data related to the loan are:
Principal amount 5,000,000
Origination fees charged against the borrower 340,000
Direct origination cost incurred 100,000
After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on
the loan is 12%. What is the carrying value of the loan receivable on December 31, 2017?
a. 5,000,000 b. 4,760,000 c. 4,831,200 d. 4,719,200
2. Adel Bank loaned P7,500,000 to a borrower on January 1, 2015. The terms of the loan were payment in full on January 1, 2020,
plus annual interest payment at 12%. The interest payment was made as scheduled on January 1, 2016. However, due to financial
setbacks, the borrower was unable to make its 2017 interest payment. Adel Bank considers the loan impaired and projects the
cash flows from the loan as of December 31, 2017. The bank has accrued the interest at December 31, 2016, but did not continue
to accrue interest for 2017 due to the impairment of the loan. The projected cash flows are;
Date of cash flow Amount projected on December 31, 2017
December 31, 2017 500,000
December 31, 2018 1,000,000
December 31, 2019 2,000,000
December 31, 2020 4,000,000
How much is the loan impairment loss to be recognized on December 31, 2017?
a. 2,275,000 b. 3,175,000 c. 5,225,000 d. 2,175,000
3. What is the interest income to be reported by Adel Bank in 2018?
a. 627,000 b. 900,000 c. 567,000 d. 0
4. What is the carrying amount of the loan receivable on December 31, 2018?
a. 5,852,000 b. 4,725,000 c. 5,225,000 d. 7,000,000
5. On January 1, 2017, Anne Company sold land with carrying amount of P1,500,000 in exchange for a 9-month, 10% note with face
value of P2,000,000. The 10% rate properly reflects the time value of money for this type of note. On April 1, 2017, Anne Company
discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted for as conditional sale
with recognition of a contingent liability. On October 1, 2017, the maker dishonored the note receivable. Anne Company paid the
bank the maturity value of the note plus protest fee of P10,000. On December 31, 2017, Anne Company collected the dishonored
note in full plus 12% annual interest on the total amount due. What is the amount collected by Anne Company from the customer
on December 31, 2017?
a. 2,150,000 b. 2,224,800 c. 2,160,000 d. 2,214,500
6. On January 1, 2017, Care Company sold equipment with a carrying amount of P7,000,000 in exchange for P9,000,000 noninterest
bearing note due January 1, 2020. There was no established exchange price for the equipment. The prevailing interest rate for
this note on January 1, 2017 was 10%. The present value of 1 at 10% for three periods is 0.75. In the 2017 income statement,
what amount should be reported as gain or loss on sale of equipment?
a. 2,000,000 gain b. 2,250,000 gain c. 250,000 gain d. 250,000 loss
7. In the 2018 income statement, what amount should be reported as interest income?
a. 675,000 b. 742,500 c. 832,500 d. 900,000
8. On June 30, 2017, Nero Company discounted without recourse at the bank a customer's P4,000,000, 6 month, 12% note receivable
dated April 30, 2017. The bank discounted the note at a rate of 15%. Nero did not receive the proceeds from this discounted note
until July 1, 2017. What amount of loss on note discounting shall be reported in the statement of comprehensive income for the
year ended June 30, 2017?
a. 80,000 b. 240,000 c. 28,000 d. 52,000
9. Huy Company's allowance for uncollectible accounts was P250,000 at the end of 2017 and P160,000 at the end of 2016. For the
year ended December 31, 2017, Huy reported doubtful accounts expense of P130,000 in its income statement. Recoveries of
previously written off accounts during 2017 amounted to P20,000. What amount did Huy debit to the appropriate account in 2017
to write off actual uncollectible accounts?
a. 40,000 b. 60,000 c. 80,000 d. 50,000
11. On December 31, 2017, the accounts receivable control account of Love Company had a balance of P8,200,000. An analysis of the
accounts receivable showed the following:
Subscription receivable due in 30 days 2,200,000
Advance payments to creditors on purchase orders 400,000
Advances to affiliated entities 1,000,000
Interest receivable on bonds 400,000
Trade accounts receivable – unassigned 2,000,000
Customer's accounts reporting credit balances arising from sales returns ( 600,000)
Trade accounts receivable – assigned (Finance Company's equity in
assigned accounts is P500,000) 1,500,000
Trade installments receivable due 1-18 months, including unearned
finance charge of P50,000 850,000
Trade accounts receivable from officers, due currently 150,000
Trade accounts on which post dated checks are held (no entries were
made on receipts of checks) 200,000
Accounts known to be worthless 100,000
Total 8,200,000
========
The correct balance of trade accounts receivable on December 31, 2017 is
a. 4,650,000 b. 4,700,000 c. 4,150,000 d. 4,050,000
12. D Corporation's checkbook balance on December 31, 2017 was P1,500,000. In addition, D held the following items in its safe on
December 31, 2017
• A check for P200,000 form M Corporation received December 1, 2017, dated January 5, 2018, which was not included in
the checkbook balance.
• An NSF check from C Company in the amount of P100,000 that had been deposited at the bank, but was returned for lack
of sufficient funds on December 29. The check was to be redeposited on January 3, 2018. The original deposit has been
included in the December 31, checkbook balance.
• Coin and currency on hand amounted to P350,000.
• An unrecorded money order for P500,000.
• Company checks that have been written and recorded amounting to P600,000.
What is the amount to be reported as cash on December 31, 2017?
a. 2,250,000 b. 2,450,000 c. 1,650,000 d. 2,850,000
13. On January 1, 2017, Jazz Corporation needed cash to meet operating needs. Joseph factored P4,000,000 of accounts receivable
to a bank. Joseph maintains allowance for doubtful accounts of P150,000 on this receivable balance. The bank withheld 10% of
the total accounts receivable as protection against sales returns and allowances and charged a 20% service fee. What is the loss
on this factoring transaction that Joseph will recognize in its income statement?
a. 650,000 b. 800,000 c. 1,050,000 d. 950,000
14. On December 31, 2017, Lea Company received two P2,000,000 notes receivable from customers in exchange for services rendered.
On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The
first note, made under customary trade terms, is due in nine months and the second note is due in five years. The market interest
rate for similar notes on December 31, 2017 was 8%. The PV of 1 at 8% due in nine months is 0.944, and the PV of 1 at 8% due
in 5 years is 0.68. On December 31, 2017, what carrying amount should be reported for the two notes receivable?
a. 3,248,000 b. 3,494,400 c. 3,360,000 d. 3,564,000
15. On January 1, 2017, Epal Company established a petty cash fund of P100,000. On December 31, 2017, the petty cash fund was
examined and found to have receipts and documents for miscellaneous general expenses amounting to P81,200. In addition, there
was cash amounting to P15,000. What is the amount of petty cash shortage or overage?
a. 3,800 overage c. 18,800 shortage
b. 3,800 shortage d. 18,800 overage
16. On July 7, 2017, Ging Corporation received its bank statement for the month ending June 30. The statement showed a P104,750
balance while the cash account balance on June 30 was P17,500. In reconciling the balances, the auditor discovered the following:
a. The June 30 collections were recorded on the books but were not deposited until July.
b. The bank charged the company P10,950 for a DAUD (Drawn Against Uncollected Deposit) check of a customer.
Fin Act 1 – Financial Accounting & Reporting, Part 1
Preliminary Examination
By: Prof. Davey C. Medidas, CPA, MBA Page 2
c. A paid check for P12,150 was entered incorrectly in the cash disbursement journal as P21,150.
d. Outstanding checks as of June 30 totaled P177,200.
The amount of undeposited collections on June 30 should be
a. 266,400 b. 88,000 c. 91,900 d. 89,200
17. On July 5, 2017, Ring Corporation received its bank statement for the month ending June 30. The statement showed a P209,500
balance while the cash account balance on June 30 was P35,000. In reconciling the balances, the auditor discovered that:
✔ The June 30 collections of P176,000 were recorded on the books but were not deposited until July.
✔ The bank service charges for the month of June totaled P3,000.
✔ A paid check for P24,300 was entered incorrectly in the cash payments journal as P34,200.
What is the total outstanding checks at June 30, 2017?
a. 75,400 b. 343,600 c. 363,400 d. 353,500
20. Receivables may be classified as trade or non-trade by the source of origin of the receivables or as current or noncurrent by the
expected timing of cash inflow. Which of the following statements in relation to the classification for receivables is true?
a. Trade receivables are claims arising from sale of merchandise or services in the ordinary course of business
operations, except those supported by formal promises to pay in the form of notes
b. Receivables arising from the ordinary transactions of the business which may be reasonable expected to be
realized in cash within the operating cycle or one year whichever is shorter, are classified as current assets
c. Nontrade receivables are classified as current assets only of they are reasonable expected to be realized into
cash within the normal operating cycle or one year, whichever is longer
d. Non trade receivables are classified as current assets only if they are reasonable expected to be realized
into cash within one year, the length of the operating cycle notwithstanding
24. When the normal operating cycle of the business extends beyond one year because of long credit terms, as in the case of certain
installments receivables, in which such accounts are an integral part of working capital, it is properly to classify
a. The receivables collectible within one year as current and those beyond one year as non current
b. The entire receivables as current assets, however the amount not realizable within one year should be
disclosed, if material
c. The entire receivables as current assets, however the amount not realizable within one year should be disclosed, whether
material or not
d. The entire receivables as noncurrent assets
25. In the case of long term installment receivables (real estate installments sales) where a major portion of the receivables will be
collected beyond the normal operating cycle of the business
a. The entire receivables are classified as current without disclosure of the amount not currently due
b. The entire receivables are classified as non current
c. Only the portion currently due is classified as current and the balance as non current
d. The entire receivables are classified as current with disclosure of the amount not currently du
26. Which statement is correct
I. Receivables for officers, directors and employees for goods sold or services rendered in the ordinary course of business are
considered current if proper control is exercised in granting credit and the accounts are currently collectible.
III. Credit balances in accounts receivable should be classified as current liabilities unless these can properly be offset against
debit balances
a. Statement 1 Only b. Statement 2 only c. Both statements d. Neither statement
28. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be
a. Reported as deduction from sales in the income statement
b. Reported as an item of other expense in the income statement
c. Reported as deduction accounts receivable in determining the net realizable of accounts receivable
d. Reported as sales discounts forfeited in the cost of goods sold section of the income statement
29. Which of the following statements is true if the company employs the net price method of recording receivables?
a. The company records the total invoice price both the A/R and sales accounts at the time of sale as if no cash discount
were involved
b. Sales discount taken are deducted from sales on the income statement to determine net sales
c. The amount of cash discount is reflected in the accounting records only when the discount is taken
d. The amount of cash discount is reflected in the accounting records only when the discount is not taken
30. Accounts receivable are to be reported at net realizable value. Which of the following statements is true?
I. The direct write off method for uncollectible accounts does not provide for matching of current revenues with related
expenses
II. The use of the direct write off method is unacceptable under GAAP
a. True, True b. True, False c. False, True d. False, false
31. When the allowance method of recognizing uncollectible accounts is used, the entry to record the write off of a specific account
would
a. Decrease both accounts receivable and net income
b. Increase the allowance for doubtful accounts and decrease net income
c. Decrease accounts receivable and increase the allowance for uncollectible accounts
d. Decrease both the accounts receivable and the allowance for doubtful accounts
32. When the direct write off of recognizing bad debts is used, the entry to write off a specific customer account would
a. Increase net income
b. Has no effect on net income
c. Decrease the accounts receivable balance and decreases net income
d. Increase the accounts receivable balance and decreases net income
33. Bank reconciliations are normally prepared on a monthly basis to identify adjustments in the depositor’s records and to identify
errors. Adjustments should be recorded by the depositor for
a. Bank errors, outstanding checks and deposits in transits
b. All items, except bank errors, outstanding checks and deposits in transits
c. Book errors and bank errors
d. Bank service charges, NSF checks, outstanding checks and deposits in transit
35. Usually if the petty cash fund is not replenished just prior to year end and an appropriate adjusting entry is not made
a. A complete audit is necessary
b. The petty cash account should be returned to the company
c. Expenses will be overstated and cash will be understated
d. Cash will be overstated and expenses will be understated
38. The petty cash fund account under the imprest system is debited
a. Only when the fund is created
b. When the fund is created and every time it is replenished
c. When the fund is created and when the size of the fund is increased
d. When the fund is created and when the fund is deceased
39. The following statements pertain to accounting for petty cash fund. Which statement is false?
a. Each disbursement from petty cash should be supported by a petty cash voucher
b. The creation of a petty cash fund requires a journal entry to reflect the transfer of fund out of the general cash account
c. At any time, the sum of the cash in the petty cash fund and the total of petty cash vouchers should equal the amount
for which the imprest system was established
d. With the establishment of an imprest petty cash fund, one person is given authority and responsibility for
issuing checks to cover minor disbursements
40. In the record of JMS Company for the year 2018, you concluded that the allowance for doubtful accounts should be adjusted to
equal the estimated amount required based on aging of accounts as of December 31. the following information are available:
Allowance for doubtful accounts 600,000
Provisions for doubtful accounts during 2017 (3% of 10M Sales) 300,000
Bad debts written off during 2017 375,000
Recovery of bad debts written off during 2017 100,000
Estimated doubtful accounts per aging of accounts on 12/31/2018 400,000
Accounts Receivable, December 31, 2018 2,375,000
What is the correct doubtful account expense for the year 2018
a. 375,000 b. 300,000 c. 175,000 d. 75,000
41. Using the information on item 40, what is the correct net book value of the receivables?
a. 2,375,000 b. 1,775,000 c. 2,000,000 d. 1,975,000
42. XP Company granted an 8%, 3 year P6,000,000 loan to VON Company on January 1, 2018. the interest is payable every
December 31. XP incurred P520, 600 of direct origination cost but an origination fee of 200,000 was charged against VON
Company. The effective rate on the loan as a result of origination fee and cost is now 6%. What is the carrying value of the loan
on January 1, 2018?
a. P5,800,000 b. 6,320,000 c. 6,000,000 d. 6,320,600
43. Using information on item 42, what is the carrying value of the loan on December 31, 2019 in XP Company’s book?
a. P6,000,000 b. 6,219,836 c. 6,113,026 d. 6,320,600
45. Accounts Receivable for Tarsier Company at December 31, 2018 showed a balance of P1,500,000. The allowance for
uncollectible accounts had a P45,000 debit balance. Sales during the year totaled P12,500,000. an aging analysis shows that
P75,000 of the outstanding accounts receivable are deemed worthless. The uncollectible account expense for 2018
a. P120,000 b. P45,000 c. P30,000 d. P75,500
***END OF EXAMINATION***
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