Mastery Test Answers and Questions

1. An entity needed a new warehouse and a contractor quoted a P 5,000,000 price to construct it. The entity believed that it could build the warehouse for P 4,300,000 and decided to use company employees to build it. The final construction cost incurred by the entity was P4,800,000 but the asset was recorded at P 5,000,000. What principle is violated? a. matching principle b. full disclosure c. cost principle d. separate entity 2. An entity collected in full an account receivable. Considering this transaction alone. a. equity will increase b. total assets will increase c. total assets will not be affected d. total assets will decrease 3. Posting refers to the process of transferring information from a. source documents to journals b. general ledger accounts to journals c. journals to source documents d. journals to general ledger accounts 4. What function do general ledgers serve in the accounting process? a. summarizing b. classifying c. recording d. reporting 5. Which of the following statements regarding a trial balance is incorrect? a. a trial balance proves that no errors of any kind have been made in the accounts during the accounting period. b. a trial balance is a list of all of the open accounts in the ledger with their balances as of a given date. c. a trial balance is a test of the equality of the debit and credit balances in the ledger d. a trial balance helps to localize errors within an identifiable time period 6. The consistency standard of reporting requires that a. the effect of changes in accounting upon income be properly disclosed b. accounting procedures be adopted which give a consistent rate of return c. expenses are reported as charges against the period in which they are incurred. d. gains and losses should not appear on the income statement 7. Historically, managers, investors and accountants have generally preferred that possible errors in measurements be in the direction of understatement of net income and net assets. a. conservatism b. materiality c. approximation d. application of judgment 8. Financial reports communicated after an accounting decision has been made defeat the primary purpose of which characteristics? a. conservatism/prudence b. timeliness c. materiality d. adequate disclosure 9. The entity concept means a. none of the above b. the financial affairs of a firm and its owner are always kept separate for the purpose of preparing accounts. c. accounts must be prepared for every firm d. because a firm is separated and distinct from its owners, those owners cannot have access to its assets unless the firm ceases to trade 10. Adjusting entries involve a. only capital accounts b. one real and one nominal accounts c. only nominal accounts d. only real accounts 11. Why are adjusting entries necessary? a. -transactions take place over more than one accounting period b. -to make debits equal credits c. -to correct erroneous balances in accounts d. -to close nominal accounts at year-end 12. Which of the following statements is not consistent with generally accepted accounting principle as they relate to asset valuation? a. -assets are originally recorded in the accounting records at cost to the entity b. -accountants resume that assets such as supplies, buildings and equipment will be used in the business operations rather than sold c. -accountants base asset valuation upon objective, verifiable evidence rather than on personal evaluation d. -subtracting total liabilities from total assets in the current market value of equity 13. Which of the following is an example of an adjusting entry? a. -recording the billing of customers services rendered b. -recording the purchase of supplies on account c. -recording depreciation of a truck d. -recording the payment of wages to employees 14. An adjusting entry to accrue wages incurred but not yet paid is an example of: a. -reflecting unrecorded revenue earned during an accounting period. b. -aligning recorded revenue with appropriate accounting periods c. -reflecting unrecorded expenses incurred during and accounting period d. -aligning recorded costs with appropriate accounting periods. 15. Which one of the following items least resembles a typical adjusting entry? a. -debit an asset and credit revenue b. -debit an expense and credit liability c. -debit an asset and credit liability d. -debit an revenue and credit liability 16. An adjusting entry in which a revenue is recognized before the related cash receipt occurs is called: a. -deferral b. -special item c. -accrual d. -normal 17. Which of the following best defines an accrual? a. -adjusting entries where cash flow precedes revenue or expense recognition b. -adjusting entries where revenue or expense recognition precedes cash flow c. -adjusting entries where revenue or expenses are recognized in the absences of cash flow evidence d. -adjusting entries where cash flow and revenue or expense recognition are simultaneous 18. If during an accounting period an expense item has been incurred but not yet paid, the adjusting entry would involve. a. -if during an accounting period an expense item has been incurred but not yet paid, the adjusting entry would involve. b. -an expense account and a liability account c. -an asset or contra-asset and an expense account. d. -a receivable account and a revenue account e. -a liability and account and an asset account 19. A prepaid expense can best be described as an amount a. -paid and currently matched with earnings b. -not paid and not currently matched with earnings c. -paid and not currently matched with earnings d. -not paid and currently matched with earnings 20. An accrued expense can best be described as an amount a. -paid and currently matched with earnings b. -paid and not currently matched with earnings c. -not paid and not currently matched with earnings d. -not paid and currently matched with earnings 21. An accrued revenue can best be described as an amount a. -not collected and not currently matched with income b. -collected and currently matched with expenses c. -collected and not currently matched with expenses d. -not collected and currently matched with income 22. An unearned revenue can best be describe as an amount a. -not collected and not currently matched with income. b. -collected and not currently matched with income c. -not collected and currently matched with income d. -collected and currently matched with income 23. Which of the following is true? a. The board of accountancy is the body that currently has the authority to issue pronouncements of GAAP. b. The assumption that a business will continue to operate until it can sell its assets to pay its creditors underlies the going concern concept c. Generally accepted accounting principle are man – made rules that never change d. Net assets always increase when income is recorded. 24. Which would provide conceptual support for the accrual basis of accounting and thus would necessitate the use of adjusting entries to implement the accrual basis? a. -matching principle b. -revenue realization principle c. -both revenue realization principle and matching principle. d. -revenue realization principle matching principle and periodicity assumption 25. Adjusting entries are based primarily on the accounting principles of a. Matching and monetary Unit b. Revenue realization and materiality c. Revenue realization and matching d. Matching and historical cost 26. Which of the following methods of determining bad debts expense mostly closely matches expense to revenue? a. Charging bad debts with a percentage of sales of that period. b. Charging bad debts only as accounts are written off as uncollectible c. Estimating the allowance for doubtful accounts by aging the accounts receivables d. Estimating the allowance for doubtful accounts as a percentage of accounts 27. A method of estimating bad debts that focuses on the income statement rather than the balance sheet is the allowance method based on a. -aging the trade accounts receivable b. -credit sales c. -the balance in the trade accounts receivable d. -direct write-off 28. A method of estimating uncollectible accounts that emphasize asset valuation rather than income measurement is the allowance method based on a. -gross sales b. -credit sales less return and allowance c. -direct write-off d. -aging the receivables 29. When a specific customer ‘s account receivable is written off an uncollectible, what will be the effect on net income under each of the following methods of recognizing bad debts expense? a. - allowance method=decrease direct-off method=none b. - allowance method=none direct write-off method=none c. -allowance method=decrease direct write-off method=decrease d. -allowance method=none director write-off method=decrease 30. A company uses allowance method to recognize uncollectible accounts expense. What is the effect at the time of the collection of an account previously written on each of the following accounts? a. -allowance for doubtful accounts=none Doubtful Account expense=decrease b. -allowance for doubtful accounts=increase Doubtful Account expense=none c. - allowance for doubtful accounts=increase Doubtful Account expense=decrease d. - allowance for doubtful accounts=none Doubtful Account expense=none 31. When the allowance method of recognizing bad debts expense is used, the entries at the time of collection of an account previously written-off would. a. -increase net income b. -have no effect on the allowance for doubtful accounts c. -decrease the allowance for doubtful accounts d. -have no effect on net income 32. The entry to record expired insurance is committed. This error causes a. -liabilities to be understated b. -an increase in liabilities on the balance sheet c. -liabilities to be overstated d. -assets to be overstated e. -expenses to be overstated 33. If an accountant fails to make an adjusting entry at the end of a fiscal period to record expired insurance, the omission will cause a. -total assets to be understated b. -liabilities to be overstated c. -liabilities to be understated d. -total revenues to be understated e. -total expenses to be understated 34. Proponents of historical cost ordinarily maintain that in comparison with all valuation alternatives for general financial reporting, statements prepared using historical costs are more. a. -relevant b. -reliable c. -conservative d. -Indicative of the entity’s purchasing power 35. Which of the following is not an application of accrual accounting? a. Recording advertising revenues at the time of cash payment is received b. Adjusting unearned advertising revenues to the proper balance at the end of the month c. Recording advertising revenues at the time the work is done d. Recording telephone expense when the monthly bill is received 36. Which of the following account theory justifies the use of historical cost in the preparation of financial statements? a. -relevance b. -objectivity c. -comparability d. -conservatism 37. Which is false concerning the rules of debit and credit? a. The left side of an account is always debit side and the right side always credit side b. The word “debit” means to increase and the word “credit” means to decrease c. Increases in assets and expenses are debit entries, and increases in liabilities, equity and revenue are credit entries d. The normal balance of any account appears on the side for recording increases 38. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called. a. Ledger b. Trial balance c. Journal d. Account 39. The normal balance of an account is on the a. Credit side of the account b. Debit side of the account c. Side represented by increases in the account balance d. Side represented by decreases in the account balance 40. The purchase of account equipment on account a. -will increase asset and decrease a liability b. -will increase asset and increase a liability c. -will decrease equity d. -will decrease asset and decrease liability 41. A. At the end of June 2011, the first month of operations. The following selected data were taken from the financial statements of R. Mahinay, CPA Profit for June P 39,750 Total assets of June 30 189,700 Total liabilities of June 30 20,200 Total owner’s equity at June 30 169,500 In preparing the financial statements, adjustments for the following were overlooked: a. Supplies used during June P 1,750 b. Unbilled fees earned at June 30 P 2,900 c. Depreciation equipment for June P 2,500 d. Accrued salaries at June P 1,500 How much the adjustment profit 39,750 - 1,750 - 2,500 - 1,500 + 2,900 = 36,900 42. How much is the adjusted total assets? 189,700 - 1,750 – 2,500 + 2,900 = 188,350 43. How much is the adjusted total liabilities? 20,200 + 1,500 (accrued)= 21,700 44. How much is the adjusted Owner’s Equity? 169,500 – 1,750 – 2,500 – 1,500 + 2,900= 166,650 45. Listed below is the information pertaining to the activities of the Ocean Company that require adjustments for August 31, 2019 year- end financial statements: a. Ocean Company paid P 192,000 on October 1, 2018 for one-year rental office space. On May 31, 2019, the Company paid P 450,000 advance rental of a warehouse for a period of 15 months. b. At the start of the accounting period, the unearned service revenue has a balance of P 96,000. During the year, the company received P 520,000 for services contracted for the next 18 months. At year – end, it is determined that the liability to provide future services amounted P 152,000. c. The company acquired a new equipment on June 1, 2018 at the cost of P 1,500,000, its estimated useful life is five years and salvage value is P 60,000 How much is the rent expense on August 31, 2019? 192,000/ 12 = 16,000 16,000 x 11 = 176,000 (Asset) 16,000 x 1 = 16,000 (Expense) 176,000 + 90,000 = Or Start from October 1, 2018 End to August 31, 2019 Consume 11 months 266,000 46. How much is the prepaid expense on August 31,2019? 450,000 / 15 = 30,000 (Monthly) 30,000 x 3 = 90,000 (Asset) 30,000 x 12 = 360,000(Expense) 360,000 + 16,000 = Or Start from June 2019 End to August 31, 2019 Consume 3 Months 376,000 47. How much is the service revenue on August 31, 2019? 520,000 + 96,000 = 616,000 – 152,000 = 464,000 48. How much is the depreciation expense on August 31, 2019? 1,500,000 – 60,000 = 1,440,000/ 5 = 288,000 49. How much is the Book value of new equipment on August 31, 2019? 288,000 / 12 = 24,000 (Monthly) 24,000 x 15 = 1,500,000(COA) – 360,000 = 1,140,000 50. Joven Company reported the following balances for the year ended December 31, 2019 Total assets 920,400 Total liabilities 368,000 Owner’s equity 552,400 Net Income 331,440 The following are the omissions/ errors made in arriving at the above-stated balances: a. b. c. d. e. f. g. Omission of prepaid insurance 56,000 (ASSET) Omission of accrued salaries 17,200 (liabilities) (OE) Omission of unearned rental income 24,000 (liabilities) Omission of accrued interest receivable 7,000 (Liabilities) (Asset) Accounts receivable was debited instead of notes receivable 20,000 () Computer purchase was charge to expense 59,000 (ASSET) (OE) A debit entry in accounts payable for P 8,700 was incorrectly posted as debit to accounts payable, P 6,900 and credit to cash 6,900 (asset) How much is the adjustment total asset? 920,400 + 56,000 + 59,000 = 1,305,400 + 5,200 8,700 – 6,900 = 1,800 7,000 – 1,800 = 5,200 1,040,600 51. How much is the adjustment total liabilities? 368,000 + 24,000 + 17,200 - 1,800 = 407,400 52. How much is the adjustment total owner’s equity? 552,400 + 59,000 + 56,000 – 24,000 + 17,200 - 7,000= 633,200 53. How much is the adjusted net income? 331,440 412,240 54. Letty Bartolome Company handles the advertising and promotions of various clients all on credit, terms of 90 days. Its adjusted trial balance on December 31, 2018, end of its fiscal year of operation showed among others; Accounts receivable P 2,000,000 Among the transactions for the year 2019 are the following: a. Professional service rendered on account P 5,000,000 b. Total collections of previous and current accounts P 2,000,000 Mr. Manolito Edano, the accountant adopted a policy of providing bad debts at 1% of the outstanding accounts receivable at the end of each year How much is the balance outstanding receivable account as of December 31,2019? 5,000,000 55. The provision for bad debts account should be adjusted and be increased at the end of December 31, 2019 by how much? 5,000,000 x 0.01 50,000 56. An analysis of Jay Macan Company’s Unadjusted prepaid expense account at December 31, 2019 revealed the following: - An opening balance at P 15,000 of Jay Macan’s comprehensive insurance policy. Jay Macan paid an annual premium of P 30,000 on July 1, 2018 - A P 32,000 annual insurance premium payment made July 1, 2019 - A P 20,000 advance rental payment for a warehouse leased for one year beginning January 1, 2020 In its December 31, 2019 balance sheet, what amount should jay Macan report as prepaid expenses? 32,000 x 6 (months)/ 12= 16,000 + 20,000 = 36,000 57. Danica Company must determine the December 31, 2019 year – end accruals for advertising and rent expenses. A P5,000 advertising bill was received January 7, 2020. It related to cost of P3,750 for advertisements in December 2019 Issues of the newspaper. A store lease, effective December 16, 2018 calls for fixed rent of P12,00 per month, payable one month form the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P3,000,000, per calendar year is payable on January 31 of the following year. Net sales for 2019 were P5,500,000. In its December 31, 2019 balance sheet, Dance should report accrued liabilities of 134,750 58. The income statement for Leonora Lao Company included the following revenues and expenses for 2019: Fees Earned P 1,030,000 Salaries Expense 447,000 Insurance Expense 85,000 Interest Expense 52,000 Below are related balance sheet account balance at year end for 2019 and 2018 2019 2018 78,000 Unearned fees 66,000 27,000 Salaries payable 33,000 12,000 Prepaid insurance 0 0 Interest payable 8,000 How much is the amount paid for salaries? 447,000 + 33,000 – 27,000 = 453,000 59. How much is the amount paid for insurance? 85,000 + 12,000 = 97,000 60. How much is the amount paid for interest? 52,000 + 8,000 = 60,000