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Intermediate Accounting 3 Midterm Exam Answer Key

International re;ations (National University of Kyiv-Mohyla Academy)

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COLLEGE OF BUSINESS
MANAGEMENT AND ACCOUNTANCY

INTERMEDIATE ACCOUNTING 3
MIDTERM EXAMINATION

1. In presenting a statement of financial position, an entity

a. Must make the current and noncurrent presentation
b. Must present assets and liabilities in the order of liquidity
c. Must choose either the current and noncurrent or the liquidity presentation
d. Must make the current and noncurrent presentation except when a presentation based on liquidity
provides information that is reliable and more relevant

2. The general features listed in PAS 1 includes the following

I. Fair presentation and compliance with PFRS
II. Accounting entity
III. Going concern
IV. Accrual basis of accounting
V. Consistency of presentation
VI. Materiality and aggregation
VII. Offsetting
VIII. Comparability

a. I, II, III, IV, V, VI

b. I, II, III, IV, V, VI, VII
c. I, III, IV, V, VI, VII
d. All of these

3. General purpose financial statements cater to what type of needs of users?

a. common needs c. a and b
b. specific needs d. loving and caring needs

4. All of the following components of OCI should be reclassified to profit or loss, except
a. Gain and loss arising from translating the financial statements of a foreign operation
b. Gain and loss on remeasuring debt investment at FVOCI
c. The effective portion of gain or loss on hedging instrument in a cash flow hedge
d. Gain or loss on remeasuring equity investment at FVOCI

5. The ledger of ABC Company as of December 31, 2019 includes the following:

15% Note payable 50,000

16% Bonds payable 100,000
18% Serial bonds 200,000
Interest payable -

Additional information:
ABC’s financial statements were authorized for issue on April 15, 2020.

▪ The 15% note payable was issued on January 1, 2019 and is due on January 1, 2023. The note pays annual
interest every year-end. The agreement with the lender provides that ABC shall maintain an average
current ratio of 2:1. If at any time the current ratio falls below the agreement, the note payable will become
due on demand. As of the 3rd quarter in 2019, ABC’s average current ratio is 0.50:1. Immediately, ABC
informed the lender of the breach of the agreement. On December 31, 2019, the lender gave ABC a grace
period ending on December 31, 2020 to rectify the deficiency in the current ratio. ABC promised the
creditor to liquidate some of its long-term investments in 2020 to increase its current ratio.

▪ The 16% bonds are 10-year bonds issued on December 31, 2010. The bonds pay annual interest every
year-end.

▪ The 18% serial bonds are issued at face amount and are due in semi-annual installments of ₱20,000 every
April 1 and September 30. Interests on the bonds are also due semi-annually. The last installment on the
bonds is due on September 30, 2024.

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How much is the total current liabilities?

a. 9,000
b. 100,000
c. 109,000
d. 149,000

6. ABC Company has the following information:

Inventory, beg. 120,000

Inventory, end. 192,000
Purchases 480,000
Freight-in 24,000
Purchase returns 12,000
Purchase discounts 16,800

How much is ABC’s cost of sales?

a. 402,300
b. 416,300
c. 420,300
d. 422,300

Use the following information for the next four questions:

The nominal accounts of ABC Company on December 31, 2019 have the following balances:

Accounts Dr. Cr.

Sales ₱1,045,000
Interest income 80,000
Gains 30,000
Inventory, beg. ₱80,000
Purchases 300,000
Freight-in 30,000
Purchase returns 15,000
Purchase discounts 27,000
Freight-out 25,000
Sales commission 60,000
Advertising expense 35,000
Salaries expense 350,000
Rent expense 60,000
Depreciation expense 80,000
Utilities expense 40,000
Supplies expense 30,000
Transportation and travel
expense 25,000
Insurance expense 10,000
Taxes and licenses 50,000
Interest expense 5,000
Miscellaneous expense 2,000
Loss on the sale of equipment 15,000

Additional information:
a. Ending inventory is ₱100,000.
b. Three-fourths of the salaries, rent, and depreciation expenses pertain to the sales department. The sales
department does not share in the other expenses.

7. In a statement of comprehensive income prepared using the single-step approach (nature of expense method),
how much is presented as ‘change in inventory’? (increase)/decrease
a. (288,000)
b. 288,000
c. (20,000)
d. 20,000

8. In a statement of comprehensive income prepared using the single-step approach (nature of expense method),
how much is presented as total expenses?
a. 1,055,000
b. 1,075,000
c. 787,000

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COLLEGE OF BUSINESS
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d. 772,000

9. In a statement of comprehensive income prepared using the multi-step approach (function of expense
method), how much is presented as distribution costs?
a. 398,500
b. 487,500
c. 467,500
d. 512,500

10. In a statement of comprehensive income prepared using the multi-step approach (function of expense
method), how much is presented as administrative expenses?
a. 297,500
b. 302,500
c. 287,500
d. 279,500

11. An entity is committed to a plan to sell a manufacturing facility in its present condition and classifies the facility
as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the
property identifies environmental damage not previously known to exist. The entity is required by the buyer to
make good the damage, which will extend the period required to complete the sale beyond one year. However,
the entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly
probable. The manufacturing facility has a carrying amount of ₱10,000,000 and fair value less costs to sell of
₱10,600,000. How should the entity classify the manufacturing facility?
a. Held for sale, ₱10.6M c. PPE, ₱10M
b. Held for sale, ₱10M d. PPE, ₱10.6M

12. Under the indirect method, the cash flow from operating activities is determined by adjusting the reported
profit by (choose the incorrect statement)
a. adding back non-cash expenses
b. adding back decreases in operating assets
c. deducting decreases in operating liabilities
d. adding back increases in operating assets

13. Under the indirect method, the cash flow from operating activities is determined by adjusting the reported
profit by (choose the incorrect statement)
a. deducting non-cash income
b. deducting increases in operating assets
c. deducting decreases in nonoperating liabilities
d. deducting gains on sale of nonoperating assets

14. When preparing a statement of cash flows using the direct method, amortization of patent is
a. shown as an increase in cash flows from operating activities.
b. shown as a reduction in cash flows from operating activities.
c. included with supplemental disclosures of noncash transactions.
d. not reported in the statement of cash flows or related disclosures.

15. Which of the following statements regarding cash equivalents is correct?

a. A one-year Treasury note could not qualify as a cash equivalent.
b. All investments meeting the PFRS 9 Financial Instruments criteria must be reported as cash equivalents.
c. The date a security is purchased determines its "original maturity" for cash equivalent classification
purposes.
d. Once established, management's policy for classifying items as cash equivalents cannot be changed.

16. Using the indirect method, cash flows from operating activities would be increased by which of the following?
a. Gain on sale of investments
b. Increase in prepaid expenses
c. Decrease in accounts payable
d. Decrease in accounts receivable

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Use the following information for the next three questions:

The movements in the cash account of ABC Company during 2019 are shown below.
Cash
beg. 400
Sales 12,000 7,600 Purchases
Interest income 40 2,400 Operating expenses
Rent income 540 60 Interest expense
Dividend income 80 140 Income taxes
Sale of held for trading securities 1,600 200 Investment in FVOCI
Sale of old building 1,040 2,200 Purchase of equipment
Collection of non-trade note 120 260 Loan granted to employee
Proceeds from loan with a bank 3,200 480 Payment of loan borrowed
Issuance of shares 1,940 400 Reacquisition of shares
180 Dividends
7,040 end.

17. How much is the cash flows from operating activities?

a. 4,600
b. 4,840
c. 5,040
d. 4,060

18. How much is the cash flows from investing activities?

a. (1,500)
b. 1,500
c. 1,240
d. (1,240)

19. How much is the cash flows from financing activities?

a. 4,800
b. (4,800)
c. 4,240
d. 4,080

Use the following information for the next four questions:

ABC Company had the following information during 2019:
Accounts receivable, January 1, 2019 2,400
Accounts receivable, December 31, 2019 1,600
Sales on account and cash sales 32,000
Bad debts expense 800
Accounts payable, January 1, 2019 1,400
Accounts payable, December 31, 2019 800
Cost of sales 16,000
Increase in inventory 3,600

Operating expenses on accrual basis 4,880

Increase in accrued payables for operating expenses 1,640
Decrease in prepaid operating expenses 1,560

Property, plant, and equipment, January 1, 2019 7,200

Property, plant, and equipment, December 31, 2019 10,800

Additional information:
• There were no write-offs of accounts receivable during the year.
• Equipment with an accumulated depreciation of ₱800 was sold during the year for ₱480 resulting to a gain on
sale of ₱60.

20. How much is the cash receipts from customers?

a. 38,200
b. 37,400
c. 35,400
d. 32,800

21. How much is the cash payments to suppliers?

a. 19,000
b. 20,200

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COLLEGE OF BUSINESS
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c. 22,000
d. 23,400

22. How much is the cash payments for operating expenses?

a. 1,680
b. 4,800
c. 4,960
d. 8,080

23. How much is the cash payments for acquisition of property, plant, and equipment?
a. 3,600
b. 4,820
c. 4,080
d. 4,940

24. ABC Company has the following information as of December 31, 2019:
Jan. 1 Dec. 31
Accounts receivable 100,000 250,000
Allowance for bad debts 15,000 20,000
Net credit sales 850,000
Bad debt expense 60,000
Recoveries 20,000

How much is the total cash receipts from customers during the period?
a. 970,000
b. 879,000
c. 907,000
d. 897,000

25. ABC Company has the following information as of December 31, 2019:
Jan. 1 Dec. 31
Accounts receivable 16,000 20,000
Allowance for bad debts (400) (1,000)
Prepaid rent 3,840 3,200
Accounts payable 6,800 8,800

ABC reported profit of ₱8,800 for the year, after depreciation expense of ₱200, gain on sale of equipment of ₱240,
and restructuring and other provisions expense of ₱400. None of the provisions recognized during the period
affected cash.

How much is the cash flows from operating activities?

a. 4,800
b. 5,600
c. 8,800
d. 8,400

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Use the following information for the next three questions:

Information on ABC Company’s financial position and performance as of December 31, 2019 and 2018 are
presented below.

ABC Company
Statement of financial position
As of December 31, 2019
ASSETS 2019 2018
Current assets
Cash and cash equivalents 1,000,000 600,000
Held for trading securities 480,000 -
Accounts receivable – net 1,520,000 1,240,000
Rent receivable 100,000 40,000
Inventory 2,000,000 3,600,000
Prepaid insurance 200,000 160,000
Total current assets 5,300,000 5,640,000
Noncurrent assets
Investment in bonds 360,000 340,000
Buildings 10,000,000 4,000,000
Accumulated depreciation (800,000) (800,000)
Goodwill 360,000 400,000
Total noncurrent assets 9,920,000 3,940,000
TOTAL ASSETS 15,220,000 9,580,000
LIABILITIES AND EQUITY
Current liabilities
Accounts payable 480,000 320,000
Unearned rent 80,000 120,000
Insurance payable 240,000 180,000
Dividends payable 920,000 480,000
Income tax payable 60,000 140,000
Short-term loan payable - 200,000
Total current liabilities 1,780,000 1,440,000
Noncurrent liabilities
Bonds payable 4,000,000 4,000,000
Discount on bonds (380,000) (400,000)
Deferred tax liability 60,000 40,000
Total noncurrent liabilities 3,680,000 3,640,000
TOTAL LIABILITIES 5,460,000 5,080,000
Equity
Share capital 8,000,000 4,000,000
Retained earnings 1,760,000 500,000
TOTAL EQUITY 9,760,000 4,500,000
TOTAL LIABILITIES AND EQUITY 15,220,000 9,580,000

ABC Company
Statement of profit or loss
For the year ended December 31, 2019
Sales 20,000,000
Cost of sales (12,000,000)
Gross income 8,000,000
Rent income 1,800,000
Interest income 80,000
Insurance expense (400,000)
Bad debts expense (60,000)
Interest expense (400,000)
Loss on sale of building (160,000)
Unrealized gain on investment 80,000
Other expenses (4,800,000)
Profit before tax 4,140,000
Income tax expense (1,200,000)
Profit for the year 2,940,000

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COLLEGE OF BUSINESS
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Additional information:
• During 2019, ABC purchased held for trading securities for ₱400,000. The fair value of the shares on December
31, 2019 is ₱480,000.
• The allowance for doubtful accounts has balances of ₱80,000 and ₱40,000 as of December 31, 2019 and 2018,
respectively.
• During 2019, ABC sold an old building with historical cost of ₱3,200,000 for ₱1,040,000.
• ABC inadvertently included depreciation expense in the “Other expenses” line item.
• There were no acquisitions or disposals of investment in bonds during the period.
• During 2019, ABC issued shares with an aggregate par value of ₱4,000,000 for ₱4,000,000 cash.

26. How much is the net cash flows from (used in) operating activities?
a. (6,000,000)
b. 6,000,000
c. 6,600,000
d. (7,600,000)

27. How much is the net cash flows from (used in) investing activities?
a. (8,160,000)
b. 8,460,000
c. (9,200,000)
d. 8,160,000

28. How much is the net cash flows from (used in) financing activities?
a. (2,560,000)
b. 2,560,000
c. (2,960,000)
d. 2,960,000

29. ABC Company’s cash balances as of December 31, 2019 and 2018 were ₱7,040,000 and ₱400,000 respectively.
ABC’s December 31, 2019 statement of cash flows reported net cash used in investing activities of ₱1,500,000
and net cash from financing activities of ₱4,080,000.

How much is the net cash flows from (used in) operating activities?
a. (4,060,000)
b. 4,060,000
c. 4,600,000
d. (4,600,000)

30. During 2019, ABC Company decided to change from the Average cost formula for inventory valuation to the
FIFO cost formula. Inventory balances under each method were as follows:
Average FIFO
January 1 4,000,000 4,800,000
December 31 8,000,000 8,400,000

Income tax rate is 30%. What is the net cumulative effect of the accounting change in ABC’s opening retained
earnings balance?
a. 400,000 increase c. 280,000 increase
b. 560,000 decrease d. 560,000 increase

31. On January 1, 2014, ABC Company acquired an equipment for ₱4,000,000. The equipment will be depreciated
using the straight-line method over 20 years. The estimated residual value is ₱400,000.

In 2019, following a reassessment of the realization of the expected economic benefits from the equipment, ABC
changed its depreciation method to sum-of-the-years digits (SYD). The remaining useful life of the asset is
estimated to be 4 years and the residual value is changed to ₱200,000. How much is the depreciation expense in
2019?
a. 1,160,000 b. 1,140,000 c. 1,233,560 d. 1,110,669

Use the following information for the next two questions:

On January 10, 2020, prior to the authorization of ABC Company’s December 31, 2019 financial statements for
issue, the accountant of ABC received a bill for an advertisement made in the month of December 2019 amounting
to ₱1,600,000. This expense was not accrued as of December 31, 2019.

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32. The correcting entry, if the books are still open, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
d. a credit to retained earnings for ₱1,600,000

33. The correcting entry, if the books are already closed, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
d. a credit to retained earnings for ₱1,600,000

34. On January 15, 2020 while finalizing its 2019 financial statements, ABC Company discovered that depreciation
expense recognized in 2018 is overstated by ₱1,600,000. Ignoring income tax, the entry to correct the prior
period error includes
a. a debit to depreciation expense for ₱1,600,000
b. a debit to retained earnings for ₱1,600,000
c. a credit to depreciation expense for ₱1,600,000
d. a debit to accumulated depreciation for ₱1,600,000

Use the following information for the next four questions:

ABC Company reported profits of ₱4,000,000 and ₱8,000,000 in 2018 and 2019, respectively. In 2020, the
following prior period errors were discovered:
• The inventory on December 31, 2018 was understated by ₱200,000.
• An equipment with an acquisition cost of ₱1,200,000 was erroneously charged as expense in 2018. The
equipment has an estimated useful life of 5 years with no residual value. ABC provides full year depreciation in
the year of acquisition.

The unadjusted balances of retained earnings are ₱8,800,000 and ₱16,800,000 as of December 31, 2018 and 2019,
respectively.

35. How much is the correct profit in 2018?

a. 7,560,000
b. 5,610,000
c. 4,760,000
d. 5,160,000
36. How much is the correct profit in 2019?
a. 7,560,000
b. 5,160,000
c. 5,720,000
d. 5,610,000

37. How much is the correct retained earnings in 2018?

a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000

38. How much is the correct retained earnings in 2019?

a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000

39. What is the second item presented in the notes to financial statements?
a. Statement of compliance with PFRS
b. Supporting information for items presented in the financial statements
c. Summary of significant accounting policies
d. Other disclosures, including contingent liabilities, unrecognized contractual commitments and nonfinancial
disclosures

40. Which of the following are disclosed in the notes under the significant accounting policies section?
a. The breakdown of inventory into raw materials, work in process and finished goods.
b. The methods of depreciation used by the entity.
c. A brief description of the nature of the entity’s business and the address of its home office.
d. All of these

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