SHARE-BASED PAYMENTS

A. THEORIES

1. For transactions with employees and others providing similar services, the fair value of the equity
instrument granted is measured on
a. Exercise date
b. Grant date
c. End of reporting period
d. Beginning of the year of grant

Answer: B

2. For cash settled share based payment transactions, until the liability is settled, the entity is required to
remeasure the fair value of the liability at each reporting date and at the date of settlement and any changes
in fair value are
a. Included in profit or loss
b. Included in retained earning
c. Treated as component other comprehensive income
d. Not recognized

Answer: D

3. For cash settled share-based payment transactions, an entity shall measure the goods and services received
and the liability incurred at
a. Fair value of the goods and services received
b. Fair value of the liability
c. Either fair value of the goods and services received or fair value of the liability
d. Neither fair value of the goods and services received nor fair value of the liability

Answer: B

4. These are transactions in which the entity receives goods or services as consideration for equity instruments
of the entity, including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

Answer: A

5. These are transactions in which the entity acquires goods or services by incurring liabilities to the supplier
of those goods or services for amounts that are based on the price of the entity’s shares and other equity
instruments.
a. Equity transactions
b. Cash payment transactions
c. Purchase transactions
d. Cash settled share-based payment transactions

Answer: D

6. For equity settled share-based payment transactions, the entity shall measure the goods or services received
and the corresponding increase in equity
I. At fair value of the goods or services received.
II. At fair value of the equity instruments granted, if the fair value of the goods or services
received cannot be estimated reliably.
a. I only
b. II only
c. Both I and II
 d. Neither I nor II

Answer: C

7. An entity has entered into a contract with another entity which will supply a range of services. The payment
for those services will be in cash and based upon the price of the entity’s ordinary shares on completion of
the contract. What type if share-based payment transaction does this represent?
a. Asset settled share-based payment transaction
b. Liability settled share-based payment transaction
c. Cash settled share-based payment transaction
d. Equity share-based payment transaction

Answer: C

8. The entity has issued a range of share options to employees. What type of share-based payment transaction
does this represent?
a. Asset settled share-based payment transaction
b. Liability settled share-based payment transaction
c. Cash settled share-based payment transaction
d. Equity share-based payment transaction

Answer: B

9. Which of the following statements in relation to a cash settled share-based payment transaction is true?
I. The fair value of the liability shall be remeasured at the end of each reporting period.
II. The fair value of the liability shall be remeasured at the date of settlement.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer: C

10. Which of the following statements in relation to share options granted to employees in exchange for their
services is true?
I. The services received shall be measured at the fair value of the employees’ services.
II. Fair value shall be measured at the date the options vest.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer: D

11. An entity recognizes the goods or services received or acquired in a share-based payment transaction:
a. Only when the share-based payment is cash-settled.
b. When it receives the goods or services.
c. Only when the vesting period ends.
d. Only on the date that the equity instruments are granted.

Answer: B

12. If share options (equity-settled share-based payment) granted to employees under a share-based payment
transaction vest immediately:
a. The entity defers recognition of the services rendered by the employees.
b. The entity records a liability because the employees are owed something.
c. The employees are unconditionally entitled to those share-based payments.
 d. The entity accounts for those services as they are rendered by the employee during the vesting
period.

Answer: C

13. For transactions with parties other than employees, the measurement date is:
a. Grant date
b. Exercise date
c. When the entity obtains the goods or the counterparty renders service.
d. When the warranty period for the goods or services expires.

Answer: C

14. For equity-settled share-based payment transactions, an entity measures the goods or services received:
a. Always at the fair value of the goods and services received.
b. Always at the fair value of the equity instruments issued.
c. At the cost of goods and services provided by employees and others providing similar services.
d. At the fair value of the goods or services received unless that fair value cannot be estimated
reliably, which is assumed to always be the case for transactions with an employee or others
providing similar services.

Answer: D

15. If measuring the fair value of shares (and the related goods or services received) an entity:
a. Must always use observable market prices of the entity’s own shares.
b. Uses observable market prices but only for non-employee share-based transactions.
c. Uses prices established by the entity’s directors for that type of share-based transaction.
d. Uses observable market prices, if available, and, if not available, uses other measures according to
a measurement hierarchy.

Answer: D

B. PROBLEMS

1. Artline Company granted 10,000 share options to each of its five directors on January 1, 2016. The options
vest on January 1, 2020. The fair value of each option on January 1, 2016 is P50 and it is anticipated that all
of the share options will vest on January 1, 2020. What amount should be reported as increase in expense
and equity for the year ended December 31, 2016?
a. 750,000
b. 500,000
c. 625,000
d. 125,000

Answer: C

Use the following information for questions 2 and 3

On January 1, 2016, Sarah Company granted share options to certain key employees as additional
compensation. The options were for 100,000 ordinary shares of P10 par value at an option price of P15 per
share. Market price of this share on January 1, 2016 was P20. The fair value of each share option on
January 1, 2016 is P8. The options were exercisable beginning January 1, 2016 and expire on December 1,
2017. On December 31, 2016, all share options were exercised.

2. What amount of compensation expense should be reported in 2016?

a. 800,000
b. 500,000
c. 200,000
d. 125,000
 Answer: A

3. What amount should be recognized as share premium upon exercise of the share options on December 31,
2016?
a. 1,300,000
b. 1,000,000
c. 500,000
d. 900,000

Answer: A

Use the following information for questions 4 to 6

Mae Company initiated a performance-based employee share option plan on January 1, 2016. The
performance base for the plan is net sales in the year 2018. The plan provided for share options to be
awarded to the employees as a group on the following basis:

Level Net Sales Range Options granted

1 Less than 2,500,000 10,000
2 P2, 500,000-4,999,999 20,000
3 P5, 000,000 – 10,000,000 30,000
4 More than P10, 000,000 40,000

The options become exercisable on January 1, 2019. The option exercise price is P200 per share. On
January 1, 2016, each option had a fair value of P90

The share market prices on selected dates in 2016-2018 were

January 1, 2016 250
December 31, 2016 300
December 31, 2017 350
December 31, 2018 320

Sales each year were as follows:

2016 4,500,000
2017 5,500,000
2018 7,000,000

4. What amount should be recognized as compensation expense for 2016?

a. 1,800,000
b. 2,000,000
c. 800,000
d. 600,000

Answer: D

5. What amount should be recognized as compensation expense for 2017?

a. 2,700,000
b. 1,800,000
c. 1,200,000
d. 600,000

Answer: C

6. What amount should be recognized as compensation expense for 2018?

a. 1,200,000
b. 1,800,000
c. 600,000
d. 900,000
 Answer: D

Use the following information for questions 7 to 10

On January 1, 2016, Serrano Company grated 60,000 share options to employees. The share options will
vest at the end of three years provided the employees remain in service until then. The option price is P60
and the par value per share is P50. At the date of grant, the entity concluded that the fair value of the share
options cannot be measured reliably. The share options have a life of 4 yeas which means that the share
options can be exercised within one year after vesting.

The share prices are P62 on December 31, 2016, P66 on December 31, 2017, P75 on December 31, 2018
and P85 on December 31, 2019. All share options were exercised on December 31, 2019.

7. What is the compensation expense for 2016?

a. 120,000
b. 60,000
c. 40,000
d. 30,000

Answer: C

8. What is the compensation expense for 2017?

a. 360,000
b. 240,000
c. 200,000
d. 180,000

Answer: C

9. What is the compensation expense for 2018?

a. 900,000
b. 300,000
c. 450,000
d. 660,000

Answer: D

10. What is the compensation expense for 2019?

a. 500,0000
b. 375,000
c. 600,000
d. 0

Answer: C

Use the following information for questions 11 and 12

Anna Company granted 30,000 share appreciation rights which entitled key employees to receive cash
equal to the difference between P20 and the market price of the share on the date each rights is exercised.
The service period is 2016 through 2018, and the rights are exercisable in 2019. The market price of the
share was P25 and P28 on December 31, 2016 and 2017, respectively.

11. What amount should be reported as liability under the share appreciation rights on December 31, 2017?
a. 0
b. 130,000
c. 160,000
d. 240,000
 Answer: C

12. What is compensation expense for 2017

a. 120,000
b. 150,000
c. 110,000
d. 10,000

Answer: C

Use the following information for questions 13 to 15

Barcelona Company granted 200 share appreciation rights to each of the 500 employees on January 1,
2013. The rights are due to vest on December 31, 2016 with payment being made on December 31, 2017.
Only 80% of the awards vest.

Share Price
January 1, 2013 (Predetermined Price) 150
December 31, 2013 180
December 31, 2016 210
December 31, 2017 190

13. What is the accrued compensation on December 31, 2016?

a. 2,400,000
b. 4,800,000
c. 3,600,000
d. 1,200,000

Answer: B

14. What is the accrued compensation on December 31, 2016?

a. 4,000,000
b. 3,200,000
c. 1,600,000
d. 2,000,000

Answer: B

15. What is the gain on reversal of share appreciation rights to be recognized on December 31, 2017?
a. 3,200,000
b. 1,600,000
c. 2,000,000
d. 0

Answer: B

C. SOLUTIONS

1. Fair value of share options (10,000 x 5 x 50) 2,500,000

Compensation expense for 2016 (2,500,000/4) 625,000

2. Fair value of share options (100,000 x 8) 800,000

3. Option price (100,000 x 15) 1,500,000

Fair value of share options 800,000
Total consideration 2,300,000
 Par value of shares (100,000 x 10) 1,000,000
Share Premium 1,300,000

4. Fair value of share options (20,000 x 90) 1,800,000

Compensation expense for 2016 (1,800,000/3) 600,000

5. Fair value of share options (30,000 x 90) 2,700,000

Cumulative compensation for 2016 and 2017
(2,700,000/3 x 2) 1,800,000
Compensation expense recognized in 2016 (600,000)
Compensation expense in 2017 1,200,000

6. Fair value of share options (30,000 x 90) 2,700,000

Cumulative compensation for 2016 and 2017 (1,800,000)
Compensation expense in 2018 900,000

7. Market Price - December 31, 2016 62

Option Price 60
Intrinsic value per share option 2

Intrinsic value of share options (60,000 x 2) 120,000

Compensation expense for 2016 (120,000/3) 40,000

8. Intrinsic value of share options (66-60 = 6 x 60,000) 360,000

Cumulative compensation expense for 2016 and
2017 (360,000/3 x 2) 240,000
Compensation expense in 2016 (40,000)
Compensation expense in 2017 200,000

9. Intrinsic value of share options (75-60 = 15 x 60,000) 900,000

Cumulative compensation expense for 2016 and 2017 (240,000)
Compensation expense in 2018 660,000

10. Intrinsic value of share options (85-75 = 10)

Compensation expense in 2019 (60,000 x 10) 600,000

11. 30,000 x 8 = 240,000 / 3 x 2 years 160,000

12. Accrued compensation – December 31, 2017

30,000 x 8 = 240,000 / 3 x 2 years 160,000
Accrued compensation –December 31, 2016
(30,000 x 5 / 3 years) (50,000)
Compensation Expense for 2017 110,000

13. Increase in Fair Value in 2016 ( 210 – 150 = 60)

Accrued compensation – December 31, 2016
(500 x 200 x 60 x 80%) 4,800,000

14. Increase in Fair Value in 2017 (190 – 150 = 40)

Accrued compensation – December 31, 2017
(500 x 200 x 40 x 80%) 3,200,000

15. Accrued compensation – December 31, 2016 4,800,000

Accrued compensation – December 31, 2017 3,200,000
Decrease in Liability – Reversal 1,600,000

EARNINGS PER SHARE

A. THEORIES
1. It is a financial instrument or other contract that may entitle its holder to ordinary shares.
a. Ordinary share
b. Preference share
c. Equity instrument
d. Potential ordinary share

Answer: D

2. Earnings per share shall be computed on the basis of

a. Ordinary shares outstanding at the end of the year
b. Ordinary shares outstanding at the beginning of the year
c. Ordinary shares outstanding at the middle of the year
d. Average ordinary shares outstanding during the year

Answer: D

3. In computing basic earnings per share, an entity would include which of the following?
a. Dividends on nonconvertible cumulative preference shares
b. Dividends on ordinary shares
c. Interest on convertible bonds
d. Number of nonconvertible cumulative preference shares

Answer: A

4. In computing basic loss per share, the required annual preference dividend on cumulative preference shares
shall be
a. Ignored
b. Deducted from the net loss whether declared or not
c. Added to the net loss whether declared or not
d. Added to the net loss only when declared

Answer: C

5. Earnings per share shall be calculated before accounting for which of the following items?
a. Preference dividend for the period
b. Ordinary dividend
c. Taxation
d. Minority interest

Answer: B

6. The conversion of preferred stock into common requires that any excess of the par value of the common
shares issued over the carrying amount of the preferred being converted should be
a. Reflected currently in income, but not as an extraordinary item.
b. Reflected currently in income as an extraordinary item.
c. Treated as a prior period adjustment.
d. Treated as a direct reduction of retained earnings.

Answer: D

7. Convertible bonds
a. Have priority over other indebtedness.
b. Are usually secured by a first or second mortgage.
c. Pay interest only in the event earnings are sufficient to cover the interest.
d. May be exchanged for equity securities.
Answer: D
8. When convertible debt is retired by the issuer, any material difference between the cash acquisition price
and the carrying amount of the debt should be
a. Reflected currently in income, but not as an extraordinary item.
b. Reflected currently in income as an extraordinary item.
c. Treated as a prior period adjustment.
d. Treated as an adjustment of additional paid-in capital.

Answer: A

9. The conversion of preferred stock may be recorded by the

a. Incremental method.
b. Book value method.
c. Market value method.
d. Par value method.

Answer: B

10. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value
of the bonds and the fair market value of the warrants, the excess should be credited to
a. Additional paid-in capital from stock warrants.
b. Retained earnings.
c. A liability account.
d. Premium on bonds payable.

Answer: D

11. Stock warrants outstanding should be classified as

a. Liabilities.
b. Reductions of capital contributed in excess of par value.
c. Assets.
d. None of these.

Answer: D

12. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is
preferably
a. Zero.
b. Calculated by the excess of the proceeds over the face amount of the bonds.
c. Equal to the market value of the warrants.
d. Based on the relative market values of the two securities involved.

Answer: D

13. For stock appreciation rights, the measurement date for computing compensation is the date
a. The rights mature.
b. The stock’s price reaches a predetermined amount.
c. Of grant.
d. Of exercise.

Answer: D

14. Which of the following is not a characteristic of a noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.

Answer: D
 15. Under the intrinsic value method, compensation expense resulting from an incentive stock option is
generally
a. Not recognized because no excess of market price over the option price exists at the date of grant.
b. Recognized in the period of the grant.
c. Allocated to the periods benefited by the employee's required service.
d. Recognized in the period of exercise.

Answer: C

B. PROBLEMS

1. Leopoldo Company reported the following shareholders’ equity at year end:

5% cumulative preference share capital, par value
P100 per share; 25,000 shares issued and outstanding 2,500,000
Ordinary share capital, par value P35 per share;
100,000 shares issued and outstanding 3,500,000
Share premium 1,250,000
Retained Earnings 3,000,000

Dividends in arrears on the preference share amounted to P250, 000. If the entity were to be liquidated, the
Preference shareholders would receive par value plus a premium of P500, 000.

What is the book value per ordinary share?

a. 77.50
b. 75.00
c. 72.50
d. 70.00

Answer: D

Use the following information for questions 2 and 3.

Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and P1,
500,000 of 10% convertible bonds outstanding during 2016. The preferred stock is convertible into 40,000
shares of common stock. During 2016, Lerner paid dividends of $1.35 per share on the common stock and
P4.50 per share on the preferred stock. Each P1, 000 bond is convertible into 45 shares of common stock.
The net income for 2013 was P900, 000 and the income tax rate was 30%.

2. Basic earnings per share for 2016 is

a. 3.32
b. 3.63
c. 3.76
d. 4.05

Answer: D

3. Diluted earnings per share for 2016 is

a. 3.21
b. 3.37
c. 3.53
d. 3.69

Answer: C

Use the following information for questions 4 and 6.

 Kony’s Company reported the following shareholders’ equity at year end:

6% noncumulative preference’ share capital, P100 par,

Liquidation value of P105 per share 1,000,000
Ordinary share capital, P100 par 3,000,000
Retained earnings, P100 par 950,000
Preference dividends have been paid up to December 31, 2016.

4. What is the book value per ordinary share?

a. 131.70
b. 130.00
c. 129.70
d. 128.00

Answer: B

5. What amount should be recognized as ordinary shareholders’ equity?

a. 3,900,000
b. 3,000,000
c. 4,950,000
d. 1,050,000

Answer: A

6. What is the book value per preference share?

a. 100
b. 105
c. 111
d. 106

Answer: B

Use the following information for questions 7 and 8.

Globe Company reported profit before tax of P5, 800,000 and income tax expense of P1, 500,000 for the
current year. In addition, the entity paid during the year an ordinary dividend of P400, 000 and a preference
dividend of P500, 000 on the redeemable preference shares.

The entity had P1, 000,000 of P5 par value ordinary shares in issue.

7. What amount should be reported as basic earnings per share?

a. 21.50
b. 19.00
c. 8.60
d. 7.60

Answer: A

8. What amount should be reported as basic earnings per share assuming the preference shares are
nonredeemable?
a. 29.00
b. 19.00
c. 21.50
d. 16.50

Answer: B
 9. Uno Company had 100,000 equity shares in issue on January 1, 2016. On July 1, 2016, the entity issued
20,000 new shares by way of a 1 for 5 bonus. On October 1, 2016, the entity issued 28,000 new shares for
cash at full market price. When calculating basic earnings per share, what is the average number of shares?
a. 100,000
b. 117,000
c. 148,000
d. 127,000

Answer: D

10. Soo Company provided the following information for the current year:
January 1 Shares Outstanding 200,000
April 1 2-for-1 share split 200,000
July 1 Shares issued 100,000
What is the average number of shares?
a. 400,000
b. 450,000
c. 500,000
d. 540,000

Answer: B

11. On January 1, 2016, BMW Company had 100,000 ordinary shares outstanding. During the year the
following events occurred:
March 1 2-for1 share split
June 1 Issued 30,000 additional shares
September 1 20% stock dividend
What is the weighted average number of shares outstanding for the year?
a. 276,000
b. 261,000
c. 230,000
d. 256,000

Answer: B

Use the following information for questions 12 and 13.

Wook Company had 250,000 ordinary shares outstanding on January 1, 2016.

During 2016 and 2017, the following transactions took place:

2016 March 1 Sold 24,000 shares

July 1 Issued a 20% stock dividend
October 1 Sold 16,000 shares
December 1 Purchased 15,000 shares to be held in treasury

2017 June 1 3 for 1 share split

September 1 Sold 60,000 shares

12. What is the weighted average number of shares for 2016 to be used in the earnings per share computation
for comparative financial statements at the end of 2017?
a. 980,250
b. 329,800
c. 984,000
d. 969,000

Answer: A

13. What is the weighted average number of shares for 2017 to be used in the earnings per share computation
for comparative financial statements at the end of 2017?
 a. 1,009,400
b. 1,049,400
c. 1,169,400
d. 989,400

Answer: A

Use the following information for questions 14 and 15.

Evan Company had earnings per share of P120 for the current year, before taking any dilutive securities
into consideration. No conversion or exercise of dilutive securities took place during the year. However,
possible conversion of convertible preference shares would have reduced earnings per share to P119. The
effect of possible exercise of ordinary share warrants would have reduced earnings per share by an
additional P2.

14. What is the maximum amount that should be reported as a single presentation of earnings per share?
a. 120
b. 118
c. 119
d. 117

Answer: A

15. What amount should be reported as diluted earnings per share?

a. 120
b. 121
c. 119
d. 117

Answer: D

C. SOLUTIONS

1. (10,250,000 – 2,500,000 – 250,000 – 500,000 ) / 100,000 = 70

2. 900,000 – (20,000 × $4.50)

————————————— = 4.05
200,000

3. 900,000 + (1,500,000 × .10 × .7)

———————————————— = 3.53
200,000 + 45,000 + 40,000

4. 4,950,000 – 1,000,000 – 50,000*

———————————————— = 130
30,000
*10,000 x 5

5. 4,950,000 – 1,000,000 – 50,000 = 3,900,000

6. 1,000,000 + 50,000
———————————————— = 105
10,000

7. 4,300,000
———————————————— = 21.50
200,000*
*1,000,000/5
8. 4,300,000 – 500,000 = 3,800,000 / 200,000 = 19.00

9. January 1 (100,000 + 20,000) 120,000

October 1 (28,000 x 3/12) 7,000
Average Shares 127,000

10. January 1 (200,000 x 2 x 12/12) 400,000

October 1 (100,000 x 6/12) 50,000
450,000

11. January 1 (100,000 x 2 x 1.20 x 12/12) 240,000

October 1 (30,000 x 1.20 x7/12) 21,000
261,000

12. 2016
January 1 (250,000 x 1.20 x 3 x 12/12) 900,000
March 1 (24,000 x 1.20 x 3 x 10/12) 72,000
October 1 (16,000 x 3 x 3/12) 12,000
December 1 (15,000 x 3 x 1/12) (3,750)
980,250

January 1, 2016 250,000

March 1, 2016 24,000
July 1, 2016 (20% 274,000) 54,800
October 1, 2016 16,000
December 1, 2016 (15,000)
Outstanding shares – December 31, 2016 329,800

13. January 1 (329,800 x 3 x 12/12) 989,400

September 1 (60,000 x 4/12) 20,000
1,009,400

14. The maximum amount of earnings per share is equal to the basic earnings per share

15. Basic earnings per share 120

Effect of possible conversion of preference share (1)
Effect of possible exercise of share warrants (2)
Diluted earnings per share 117
 CASH FLOW STATEMENTS

A. THEORIES

1. In a statement of cash flows using the direct method, which of the following would increase reported cash
flows from operating activities?
a. Dividends received from investments
b. Gain on sale of equipment
c. Gain on sale of a business segment
d. Sale of treasury stock

Answer: A

2. In a statement of cash flows, payments to acquire debt instruments of other entities would typically be
classified as cash outflows for
a. Financing activities.
b. Investing activities.
c. Operating activities.
d. Equity activities.

Answer: B

3. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows
from
a. Brokerage activities.
b. Financing activities.
c. Investing activities.
d. Operating activities.

Answer: B

4. When preparing a statement of cash flows using the indirect method, the amortization of trademarks should
be reported as a(n)
a. Increase in cash flows from investing activities.
b. Reduction in cash flows from investing activities.
c. Increase in cash flows from operating activities.
d. Reduction in cash flows from operating activities.

Answer: C

5. A loss on the sale of machinery in the ordinary course of business should be presented in a statement of
cash flows (indirect method) as
a. A deduction from net income.
b. An addition to net income.
c. An inflow and outflow of cash.
d. An outflow of cash.

Answer: B

6. In preparing a statement of cash flows, which of the following transactions would be considered an
investing activity?
a. Sale of a business segment
b. Issuance of bonds payable at a discount
c. Purchase of treasury stock
d. Sale of capital stock

Answer: A
7. Cash equivalents would not include short-term investments in
a. Money market funds.
b. Available-for-sale securities.
c. Commercial paper.
d. Certificates of deposit.

Answer: B

8. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be
classified as a(n)
a. Transfer activity.
b. Operating activity.
c. Investing activity.
d. Financing activity.

Answer: D

9. In a statement of cash flows, receipts from sales of property, plant, and equipment would be classified as
cash inflows from
a. Liquidating activities.
b. Operating activities.
c. Investing activities.
d. Financing activities.

Answer: C

10. A decrease in accounts receivable should be presented in a statement of cash flows (indirect method) as
a. An inflow and outflow of cash.
b. An outflow of cash.
c. A deduction from net income.
d. An addition to net income.

Answer: D

11. 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

Answer: D

12. Cash inflows from investing result from

a. Decreases in liabilities.
b. Increases in liabilities.
c. Decreases in noncash assets.
d. Increases in noncash assets.

Answer: C

13. In a statement of cash flows, proceeds from the sale of a company's own bonds or mortgages should be
classified as cash inflows from
a. Leveraging activities.
b. Operating activities.
c. Investing activities.
d. Financing activities.
 Answer: D

14. In a statement of cash flows (indirect method), an increase in inventories should be presented as
a. An inflow of cash.
b. An inflow and outflow of cash.
c. An addition to net income.
d. A deduction from net income from continuing operations.

Answer: D

15. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash
outflows for
a. Borrowing activities.
b. Operating activities.
c. Investing activities.
d. Financing activities.

Answer: B

B. PROBLEMS

1. Marco Polo Company provided the following data for the year:
Cash balance, beginning of the year 1,300,000
Cash flow from financing activities 1,000,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of the year 2,000,000
What is the cash balance at the end of current year?
a. 1,200,000
b. 1,600,000
c. 1,400,000
d. 1,700,000

Answer: A

2. Marcus Company reported revenue from customers of P7, 500,000 and provided the following data for the
current year.
Net income 6,000,000
Depreciation 900,000
Increase in accounts receivable 500,000
Decrease in inventory 4,000,000
Decrease in account payable 1,200,000
What amount of cash was received from the customers?
a. 8,000,000
b. 7,000,000
c. 6,500,000
d. 5,500,000

Answer: B

3. Toyota Company reported income tax expense of P2, 000,000 for 2016.
2016 2015
Income tax payable 1,750,000 1,400,000
Deferred tax liability 210,000 140,000

What is the amount of cash paid for income tax in 2016?

a. 2,420,000
b. 1,930,000
c. 1,650,000
d. 1,580,000

Answer: D

Use the following information for questions 4 and 5.

Bobby Company provided the following data for the current year:
Gain on sale of equipment 60,000
Proceeds from sale of equipment 100,000
Purchase of bond investment with face amount P2, 000,000 1,800,000
Amortization of bond discount 20,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury shares costing P650, 000 750,000

4. What is the net cash provided by financing activities?

a. 200,000
b. 270,000
c. 300,000
d. 370,000

Answer: D

5. What is the net cash used in investing activities?

a. 1,700,000
b. 1,760,000
c. 1,880,000
d. 1,940,000

Answer: A

Use the following information for questions 6 and 7.

Louis Company reported net income of P3, 000,000 for the current year. Changes occurred in certain
accounts as follows:

Equipment 250,000 increase

Accumulated depreciation 400,000 increase
Note Payable 300,000 increase

 During the year, the entity sold equipment costing P250,000, with accumulated depreciation of
P120,000 for a gain of P50,000
 In December of the current year, the entity purchased equipment costing P500,000 with P200,000
cash and a 12% note payable of P300,000

6. In the statement of cash flows, what amount should be reported as net cash used in investing activities?
a. 20,000
b. 120,000
c. 220,000
d. 350,000

Answer: A

7. In the statement of cash flows, what amount should be reported as net cash provided by operating
activities?
a. 3,400,000
b. 3,470,000
c. 3,520,000
d. 3,570,000
 Answer: B

Use the following information for questions 8 to 11.

Island Company used the direct method to prepare the statement of cash flows. The entity had the following
cash flows during the current year:

Cash receipts from issuance of ordinary shares 4,000,000

Cash receipts from customers 2,000,000
Cash receipts from dividend on long term investments 300,000
Cash receipts from repayment of loan made to another entity 2,200,000
Cash payments for wages and other operating expense 1,200,000
Cash payments for insurance 100,000
Cash payments for dividends 200,000
Cash payments for taxes 400,000
Cash payments to purchase land 800,000
Cash balance – beginning 3,500,000

8. What is the net cash provided by operating activities?

a. 600,000
b. 400,000
c. 300,000
d. 200,000

Answer: A

9. What is the net cash provided by investing activities?

a. 2,200,000
b. 1,400,000
c. 3,000,000
d. 800,000

Answer: B

10. What is the net cash provided by financing activities?

a. 4,000,000
b. 6,000,000
c. 3,800,000
d. 6,200,000

Answer: C

11. What it the cash balance at year-end

a. 3,500,000
b. 9,300,000
c. 5,500,000
d. 5,800,000

Answer: B

Use the following information for questions 12 to 15.

Batangas Company provided the following for the current year:

Increase in long term debt 5,000,000

Purchase of treasury shares 1,000,000
Depreciation of amortization 1,500,000
Gain on sale of equipment 500,000
 Proceeds from issuance of share capital 4,000,000
Purchase of equipment for cash 7,000,000
Proceeds from sale of equipment 2,000,000
Payment of cash dividend 2,500,000
Net income 8,000,000
Increase (decrease) in working capital accounts:
Accounts receivable 2,000,000
Inventory (3,500,000)
Trade accounts and notes payable 4,000,000
Income tax payable (4500,000)
Cash balance, January 1 6,000,000

12. What is the net cash provided by operating activities?

a. 10,000,000
b. 11,000,000
c. 7,500,000
d. 8,500,000

Answer: A

13. What is the net cash used in investing activities?

a. 7,000,000
b. 5,000,000
c. 9,000,000
d. 2,000,000

Answer: B

14. What is the net cash provided by financing activities?

a. 9,000,000
b. 8,000,000
c. 5,500,000
d. 2,500,000

Answer: C

15. What is the cash balance on December 31?

a. 16,500,000
b. 10,500,000
c. 21,500,000
d. 26,500,000

Answer: A

C. SOLUTIONS

1. 1,300,000 + 1,000,000 + 400,000 – 1,500,000 = 1,200,000

2. 7,500,000 – 500,000 = 7,000,000

3. 2,000,000 + 1,400,000 – 1,750,000 + 140,000 – 210,0000 = 1,580,000

4. (380,000) + 750,000 = 370,000

5. 100,000 – 1,800,000 = (1,700,000)

6. (130,000 + 50,000) – 200,000 = (20,000)

7. 3,000,000 – 50,000 + (400,000 + 120,000) = 3,470,000

8. 2,000,000 + 300,000 – 1,200,000 – 100,000 – 400,000 = 600,000

9. 2,200,000 – 800,000 = 1,400,000

10. 4,000,000 – 200,000 = 3,800,000

11. 3,500,000 + 600,000 + 1,400,000 + 3,800,000 = 9,300,000

12. 8,000,000 – 2,000,000 + 3,500,000 + 4,000,000 – 4,500,000 + 1,500,000 – 500,000 = 10,000,000

13. (7,000,000) + 2,000,000 = (5,000,000)

14. 5,000,000 – 1,000,000 + 4,000,000 – 2,500,000 = 5,500,000

15. 6,000,000 + 10,000,000 – 5,000,000 + 5,500,000 = 16,500,000

CASH AND CASH EQUIVALENTS

A. THEORIES

1. Statement I: Companies include postdated checks and petty cash funds as cash.
Statement II: Certificates of deposit are usually classified as cash on the balance sheet.
a. Statement I is true, Statement II is false
b. Statement I is false, Statement II is true
c. Both statements are true
d. Both statements are false

Answer: D

2. Statement I: Savings accounts are usually classified as cash on the balance sheet.
Statement II: Cash equivalents are investments with original maturities of six months or less.
a. Statement I is true, Statement II is false
b. Statement I is false, Statement II is true
c. Both statements are true
d. Both statements are false

Answer: A

3. Statement I: Bank overdrafts are always offset against the cash account in the balance sheet.
Statement II: Short-term, highly liquid investments may be included with cash on the balance sheet.
a. Statement I is true, Statement II is false
b. Statement I is false, Statement II is true
c. Both statements are true
d. Both statements are false

Answer: B

4. 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.

Answer: B

5. In which account are post-dated checks received classified?

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

Answer: A

6. In which account are postage stamps classified?

a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

Answer: B
7. What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

Answer: D

8. 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. Stockholders' equity.

Answer: B

9. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts
of cash and
a. is acceptable as a means to pay current liabilities.
b. has a 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

Answer: D

10. Bank overdrafts, if material, should be

a. reported as a deduction from the current asset section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount reported.
d. reported as a current liability.

Answer: D

11. Deposits held as compensating balances

a. usually do not earn interest.
b. if legally restricted and held against short-term credit may be included as cash.
c. if legally restricted and held against long-term credit may be included among current assets.
d. none of these.

Answer: D

12. Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation?
a. Bank service charge.
b. Deposit in transit.
c. Bank interest.
d. Chargeback for NSF check.

Answer: B

13. Which of the following is not true?

a. The imprest petty cash system in effect adheres to the rule of disbursement by check.
b. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to
adjust the balance if not replenished at year-end.
c. The Petty Cash account is debited when the fund is replenished.
d. All of these are not true.

Answer: C

14. A Cash Over and Short account

 a. Is not generally accepted.
b. Is debited when the petty cash fund proves out over.
c. Is debited when the petty cash fund proves out short.
d. Is a contra account to Cash.

Answer: C

15. The journal entries for a bank reconciliation

a. Are taken from the "balance per bank" section only.
b. May include a debit to Office Expense for bank service charges.
c. May include a credit to Accounts Receivable for an NSF check.
d. May include a debit to Accounts Payable for an NSF check.

Answer: B

B. PROBLEMS

1. Consider the following: Cash in Bank – checking account of 18,500, Cash on hand of 500, Post-dated
checks received totaling 3,500, and Certificates of deposit totaling 124,000. How much should be reported
as cash in the balance sheet?
a. 18,500.
b. 19,000.
c. 22,500.
d. 136,500.

Answer: B

2. If a petty cash fund is established in the amount of $250, and contains $150 in cash and $95 in receipts for
disbursements when it is replenished, the journal entry to record replenishment should include credits to the
following accounts
a. Petty Cash, $75.
b. Petty Cash, $100.
c. Cash, $95; Cash Over and Short, $5.
d. Cash, $100.

Answer: D

3. If the month-end bank statement shows a balance of 72,000, outstanding checks are 24,000, a deposit of
8,000 was in transit at month end, and a check for 1,000 was erroneously charged by the bank against the
account, the correct balance in the bank account at month end is
a. 55,000.
b. 57,000.
c. 41,000.
d. 87,000.

Answer: B

4. In preparing its bank reconciliation for the month of April 2012, Henke, Inc. has available the following
information.
Balance per bank statement, 4/30/16 34,140
NSF check returned with 4/30/16 bank statement 450
Deposits in transit, 4/30/16 5,000
Outstanding checks, 4/30/16 5,200
Bank service charges for April 20
What should be the correct balance of cash at April 30, 2012?
a. 34,370
b. 33,940
c. 33,490
d. 33,470
 Answer: B

5. Finley, Inc.’s checkbook balance on December 31, 2012 was 42,400. In addition, Finley held the following
items in its safe on December 31.
(1) A check for 900 from Peters, Inc. received December 30, 2012, which was not included in the
checkbook balance.
(2) An NSF check from Garner Company in the amount of 1,800 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, 2013. The original deposit has been included in the December 31
checkbook balance.
(3) Coin and currency on hand amounted to 2,900.
The proper amount to be reported on Finley's balance sheet for cash at December 31, 2012 is
a. 42,600.
b. 40,800.
c. 44,400.
d. 43,550.

Answer: C

6. In preparing its August 31, 2012 bank reconciliation, Bing Corp. has available the following information:
Balance per bank statement, 8/31/16 18,650
Deposit in transit, 8/31/16 3,900
Return of customer's check for insufficient funds, 8/30/16 600
Outstanding checks, 8/31/16 2,750
Bank service charges for August 100
At August 31, 2012, Bing's correct cash balance is
a. 19,800.
b. 19,200.
c. 19,100.
d. 17,500.

Answer: A

7. Tresh, Inc. had the following bank reconciliation at March 31, 2016:
Balance per bank statement, 3/31/16 37,200
Add: Deposit in transit 10,300
47,500
Less: Outstanding checks 12,600
Balance per books, 3/31/16 34,900
Data per bank for the month of April 2016 follow:
Deposits 43,700
Disbursements 49,700
All reconciling items at March 31, 2016 cleared the bank in April. Outstanding checks at April 30, 2016
totaled 6,000. There were no deposits in transit at April 30, 2016. What is the cash balance per books at
April 30, 2012?
a. 25,200
b. 28,900
c. 31,200
d. 35,500

Answer: A

8. Prang Company had the following balances on December 31, 2016:

Cash in checking account 350,000
 Cash in money market account 750,000
Treasury bill purchased November 1, 2016
Maturing January 31, 2017 3,500,000
Time deposit purchased December 1, 2016
Maturing March 31, 2017 4,000,000

What amount should be reported as cash and cash equivalents on December 31, 2016?
a. 1,100,000
b. 3,850,000
c. 4,600,000
d. 8,600,000

Answer: C

9. At year-end, Lean Company reported cash and cash equivalents which comprised of the following:
Cash on hand 500,000
Demand deposit 4,000,000
Certificate of deposit 2,000,000
Postdated customer check 300,000
Petty cash fund 50,000
Traveler’s check 200,000
Manager’s check 100,000
Money order 150,000
What amount should be reported as “cash” at year-end?
a. 7,000,000
b. 4,800,000
c. 6,800,000
d. 5,000,000

Answer: D

10. Lawrence Company has cash in bank of 22,000, restricted cash in a separate account of 4,000, and a bank
overdraft in an account at another bank of 2,000. Lawrence should report cash of
a. 20,000.
b. 22,000.
c. 25,000.
d. 26,000

Answer: B

11. The cash account shows a balance of 90,000 before reconciliation. The bank statement does not include a
deposit of 4,600 made on the last day of the month. The bank statement shows a collection by the bank of
1,880 and a customer's check for 640 was returned because it was NSF. A customer's check for 900 was
recorded on the books as 1,080, and a check written for 158 was recorded as 194. The correct balance in the
cash account was
a. 91,024.
b. 91,096.
c. 91,456.
d. 95,696.

Answer: B

Use the following information for questions 12 to 13.

Everlasting Company reported the following information at the current year-end:

 Share investment of P1,000,000 that are very actively traded in the stock market,
 Government treasury bills of P2, 000,000 with a 10-year term but purchased on December 31 at
which time they had two months to go until maturity.
  Cash of P3, 400,000 in the form of coin, currency, saving account and checking account.
 Commercial papers of P1, 500,000 with term of nine months but purchased on December 31 at
which time they had three months to go until maturity.

12. What total amount should be reported as cash?

a. 3,400,000
b. 4,900,000
c. 4,400,000
d. 5,400,000

Answer: A

13. What total amount should be reported as cash equivalents?

a. 2,000,000
b. 1,500,000
c. 3,500,000
d. 4,500,000

Answer: C

Use the following information for questions 14 to 15.

In preparing the bank reconciliation for the month of December, Horse Company provided the following
data:

Balance per bank statement 3,800,000

Deposit in transit 520,000
Amount erroneously credited by bank to Horse’s account 40,000
Bank service charge for December 5,000
NSF Check 50,000
Outstanding checks ` 675,000

14. What is adjusted cash in bank?

a. 3,685,000
b. 3,645,000
c. 3,600,000
d. 3,605,000

Answer: D

15. What is the unadjusted cash in bank balance per book?

a. 3,550,000
b. 3,660,000
c. 3,610,000
d. 3,655,000

Answer: B

C. SOLUTIONS

1. 18,500 + 500 = 19,000.

2. 250 – 150 = 100.

3. 72,000 – 24,000 + 8,000 + 1,000 = 57,000.

4. 34,140 + 5,000 – 5,200 = 33,940.

5. 42,400 + 900 – 1,800 + 2,900 = 44,400.

6. 18,650 + 3,900 – 2,750 = 19,800.

7. 37,200 + 43,700 – 49,700 = 31,200 (4/30 balance per bank)

31,200 – 6,000 = 25,200.

8. 350,000 + 750,000 + 3,500,000 = 4,600,000

9. 500,000 + 4,000,000 + 50,000 + 200,000 + 100,000 + 150,000 = 5,000,000

10. 22,000

11. 90,000 + 1,880 – 640 – 180 + 36 = $91,016.

12. 3,400,000

13. 2,000,000 + 1,500,000 = 3,500,000

14. 3,800,00 + 520,000 – 675,000 – 40,000 = 3,605,000

15. 3,605,000 + 5,000 + 50,000 = 3,660,000

ACCOUNTS RECEIVABLE

A. THEORIES

1. Which of the following is a generally accepted method of determining the amount of the adjustment to bad
debt expense?
a. A percentage of sales adjusted for the balance in the allowance
b. A percentage of sales not adjusted for the balance in the allowance
c. A percentage of accounts receivable not adjusted for the balance in the allowance
d. An amount derived from aging accounts receivable and not adjusted for the balance in the
allowance

Answer: B

2. The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this
approach
a. gives a reasonably correct statement of receivables in the balance sheet.
b. best relates bad debt expense to the period of sale.
c. is the only generally accepted method for valuing accounts receivable.
d. makes estimates of uncollectible accounts unnecessary.

Answer: A

3. Which of the following methods of determining bad debt expense does not properly match expense and
revenue?
a. Charging bad debts with a percentage of sales under the allowance method.
b. Charging bad debts with an amount derived from a percentage of accounts receivable under the
allowance method.
c. Charging bad debts with an amount derived from aging accounts receivable under the allowance
method.
d. Charging bad debts as accounts are written off as uncollectible.

Answer: D

4. What is the normal journal entry for recording bad debt expense under the allowance method?
a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts

Answer: C

5. The category "trade receivables" includes

a. Advances to officers and employees.
b. Income tax refunds receivable.
c. Claims against insurance companies for casualties sustained.
d. None of these

Answer: D

6. Which of the following should be recorded in Accounts Receivable?

 a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these

Answer: D

7. Why do companies provide trade discounts?

a. To avoid frequent changes in catalogs.
b. To induce prompt payment.
c. To easily alter prices for different customers.
d. Both a. and c.

Answer: D

8. Of the approaches to record cash discounts related to accounts receivable, which is more theoretically
correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. All three approaches are theoretically correct.

Answer: A

9. Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.

Answer: D

10. How can accounting for bad debts be used for earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of sales recorded as bad debt expense.
c. Using an aging of the accounts receivable balance to determine bad debt expense.
d. Reversing previous write-offs.

Answer: B

11. All of the following are problems associated with the valuation of accounts receivable except for
a. Uncollectible accounts.
b. Returns.
c. Cash discounts under the net method.
d. Allowances granted.

Answer: C

12. The accounting for cash discounts and trade discounts are
a. The same.
b. Always recorded net.
c. Not the same.
d. Tied to the timing of cash collections on the account.

Answer: C

13. If a company employs the gross method of recording accounts receivable from customers, then sales
discounts taken should be reported as
a. A deduction from sales in the income statement.
 b. An item of "other expense" in the income statement.
c. A deduction from accounts receivable in determining the net realizable value of accounts
receivable.
d. Sales discounts forfeited in the cost of goods sold

Answer: A

14. Trade discounts are

a. Not recorded in the accounts; rather they are a means of computing a price.
b. Used to avoid frequent changes in catalogues.
c. Used to quote different prices for different quantities purchased.
d. All of the above.

Answer: D

15. When a customer purchases merchandise inventory from a business organization, she may be given a
discount which is designed to induce prompt payment. Such a discount is called a(n)
a. Trade discount.
b. Nominal discount.
c. Enhancement discount.
d. Cash discount.

Answer: D

B. PROBLEMS

1. Wellington Corp. has outstanding accounts receivable totaling 1.27 million as of December 31 and sales on
credit during the year of 6.4 million. There is also a debit balance of 3,000 in the allowance for doubtful
accounts. If the company estimates that 1% of its net credit sales will be uncollectible, what will be the
balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?
a. 12,700.
b. 15,700.
c. 61,000.
d. 67,000.

Answer: C

2. At the close of its first year of operations, December 31, 2012, Ming Company had accounts receivable of
1,080,000, after deducting the related allowance for doubtful accounts. During 2012, the company had
charges to bad debt expense of 180,000 and wrote off, as uncollectible, accounts receivable of 80,000.
What should the company report on its balance sheet at December 31, 2012, as accounts receivable before
the allowance for doubtful accounts?
a. 1,340,000
b. 1,180,000
c. 980,000
d. 880,000

Answer: B

3. AG Inc. made a 5,000 sale on account with the following terms: 1/15, n/30. If the company uses the net
method to record sales made on credit, how much should be recorded as revenue?
a. 14,700.
b. 14,850.
c. 15,000.
d. 15,150.

Answer: B
 4. Before year-end adjusting entries, Dunn Company's account balances at December 31, 2016, for accounts
receivable and the related allowance for uncollectible accounts were 1,200,000 and 90,000, respectively.
An aging of accounts receivable indicated that 125,000 of the December 31 receivables are expected to be
uncollectible. The net realizable value of accounts receivable after adjustment is
a. 1,165,000.
b. 1,075,000.
c. 985,000.
d. 1,110,000.

Answer: B
Use the following information for questions 5 to 6

A trial balance before adjustments included the following:

Debit Credit
Sales 850,000
Sales returns and allowance 28,000
Accounts receivable 86,000
Allowance for doubtful accounts 1,520

5. If the estimate of uncollectibles is made by taking 2% of net sales, the amount of the adjustment is
a. 13,400.
b. 16,440.
c. 17,000.
d. 19,480.

Answer: B

6. If the estimate of uncollectibles is made by taking 10% of gross account receivables, the amount of the
adjustment is
a. 7,080.
b. 8,600.
c. 8,448.
d. 10,120.

Answer: A

7. Lankton Company has the following account balances at year-end:

Accounts receivable 80,000
Allowance for doubtful accounts 4,800
Sales discounts 3,200
Lankton should report accounts receivable at a net amount of
a. 72,000.
b. 75,200.
c. 76,800.
d. 80,000.

Answer: B

8. On the December 31, 2016 balance sheet of Vanoy Co., the current receivables consisted of the following:
Trade accounts receivable 60,000
Allowance for uncollectible accounts (2,000)
Claim against shipper for goods lost in transit (November 2016) 3,000
Selling price of unsold goods sent by Vanoy on consignment
at 130% of cost (not included in Vanoy 's ending inventory) 26,000
Security deposit on lease of warehouse used for storing
some inventories 30,000
Total 117,000
At December 31, 2016, the correct total of Vanoy's current net receivables was
a. 61,000.
 b. 87,000.
c. 91,000.
d. 117,000.

Answer: A

9. Ace Co. prepared an aging of its accounts receivable at December 31, 2016 and determined that the net
realizable value of the receivables was 600,000. Additional information is available as follows:
Allowance for uncollectible accounts at 1/1/16—credit balance 68,000
Accounts written off as uncollectible during 2016 46,000
Accounts receivable at 12/31/16 650,000
Uncollectible accounts recovered during 2016 10,000
For the year ended December 31, 2016, Ace's uncollectible accounts expense would be
a. 50,000.
b. 46,000.
c. 32,000.
d. 18,000.

Answer: D

10. For the year ended December 31, 2016, Dent Co. estimated its allowance for uncollectible accounts using
the year-end aging of accounts receivable. The following data are available:
Allowance for uncollectible accounts, 1/1/16 84,000
Provision for uncollectible accounts during 2016
(2% on credit sales of 3,000,000) 60,000
Uncollectible accounts written off, 11/30/16 69,000
Estimated uncollectible accounts per aging, 12/31/16 104,000
After year-end adjustment, the uncollectible accounts expense for 2016 should be
a. 69,000.
b. 60,000.
c. 104,000.
d. 89,000.

Answer: D

11. Nan Co.'s allowance for uncollectible accounts was 190,000 at the end of 2016 and 180,000 at the end of
2016. For the year ended December 31, 2016, Nan reported bad debt expense of 26,000 in its income
statement. What amount did Nan debit to the appropriate account in 2016 to write off actual bad debts?
a. 10,000
b. 16,000
c. 26,000
d. 36,000

Answer: B

12. On January 1, 2016, Lynn Company borrows 2,000,000 from National Bank at 11% annual interest. In
addition, Lynn is required to keep a compensatory balance of 200,000 on deposit at National Bank which
will earn interest at 5%. The effective interest that Lynn pays on its 2,000,000 loan is
a. 10.0%.
b. 11.0%.
c. 11.5%.
d. 11.6%.

Answer: D

13. If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to
what effective annual rate of interest (assuming a 360-day year)?
a. 1%
b. 12%
 c. 18%
d. 30%

Answer: C

14. During the year, Kiner Company made an entry to write off a 16,000 uncollectible account. Before this
entry was made, the balance in accounts receivable was 200,000 and the balance in the allowance account
was 18,000. The net realizable value of accounts receivable after the write-off entry was
a. 200,000.
b. 198,000.
c. 166,000.
d. 182,000.

Answer: D

15. Shelton Company has the following account balances at year-end:

Accounts receivable 120,000
Allowance for doubtful accounts 7,200
Sales discounts 4,800
Shelton should report accounts receivable at a net amount of
a. 108,000.
b. 112,800.
c. 115,200.
d. 120,000.

Answer: B

C. SOLUTIONS

1. (6,400,000 × .01) –3,000 = 61,000.

2. 1,080,000 + (180,000 – 80,000) = 1,180,000.

3. 15,000 × (1 – .01) = 14,850.

4. 1,200,000 – 125,000 = 1,075,000

5. (850,000 – 28,000) × .02 = 16,440.

6. (86,000 × .10) – 1,520 = 7,080.

7. 80,000 – 4,800 = 75,200.

8. 60,000 – 2,000 + 3,000 = 61,000.

9. Allowance for Doubtful Acct. balance 68,000 + 10,000 – 46,000 = 32,000 (before bad debt expense)
650,000 – 600,000 – 32,000 = 18,000 (bad debt expense).

10. 104,000 – 84,000 + 69,000 = 89,000.

11. 180,000 + 26,000 – 190,000 = 16,000.

12. 2,000,000 × .11 = 220,000

200,000 × (.11 – .05) = 12,000
Interest 232,000
232,000 ÷ $2,000,000 = .116 = 11.6%.

13. .01 × 360 ÷ 20 = 18%.

 14. (200,000 – 16,000) – (18,000 – 16,000) = 182,000.

15. 120,000 – 7,200 = 112,800.

NOTES RECEIVABLE

A. THEORIES

1. Statement I: Companies record and report long-term notes receivable at the present value of the cash they
expect to collect.
Statement II: When the stated rate of interest exceeds the effective rate, the present value of the note
receivable will be less than its face value.
a. Statement I is true, Statement II is false
b. Statement I is false, Statement II is true
c. Both statements are true
d. Both statements are false

Answer: A

2. Statement I: Notes receivable are generally reported as noncurrent assets.

Statement II: Recognition of a recourse liability will make a loss on sale of receivables larger than it would
otherwise have been.
a. Statement I is true, Statement II is false
b. Statement I is false, Statement II is true
c. Both statements are true
d. Both statements are false

Answer: B

3. At the beginning of 2016, Gannon Company received a three-year zero-interest-bearing 1,000 trade note.
The market rate for equivalent notes was 8% at that time. Gannon reported this note as a 1,000 trade note
receivable on its 2016 year-end statement of financial position and 1,000 as sales revenue for 2016. What
effect did this accounting for the note have on Gannon's net earnings for 2016, 2017, 2018, and its retained
earnings at the end of 2018, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these

Answer: D

4. Which of the following statements is incorrect regarding the classification of accounts and notes
receivable?
a. Segregation of the different types of receivables is required if they are material.
b. Disclose any loss contingencies that exist on the receivables.
c. Any discount or premium resulting from the determination of present value in notes receivable
transactions is an asset or liability respectively.
d. Valuation accounts should be appropriately offset against the proper receivable accounts.

Answer: C

5. On October 1 of the current year, an entity received a one-year note receivable bearing interest at the
market rate. The face amount of the note receivable and the entire amount of the interest are due on
 September 30 of next year. The interest receivable on December 31 of the current year would consist of an
amount representing
a. Three months of accrued interest income
b. Nine months of accrued interest income
c. Twelve months of accrued interest income
d. The excess on October 1 of the present value of the note receivable over its face amount

Answer: A

6. On July 1 of the current year, an entity obtained a two-year 8% note receivable for services rendered. At
that time, the market rate of interest was 10%. The face amount of the note and the entire amount of interest
are due on the date of maturity. Interest receivable on December 31 of the current year is
a. 5% of the face amount of the note
b. 4% of the face amount of the note
c. 5% of the present value of the note
d. 4% of the present value of the note

Answer: B

7. An entity uses the installment sales method to recognize revenue. Customers pay the installment notes in 24
equal monthly amounts which include 12% interest. What is the installment notes receivable balance six
months after the sale?
a. 75% of the original sales price.
b. Less than 75% of the original sales price
c. The present value of the remaining monthly payments discounted at 12%
d. Less than the present value of the remaining monthly payments discounted at 12%

Answer: C

8. What is imputed interest?

a. Interest based on the stated interest rate
b. Interest based on the implicit interest rate
c. Interest based on the average interest rate
d. Interest based on the bank prime interest rate

Answer: B

9. Accounting for the interest in a noninterest bearing note receivable is an example of what aspect of
accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Form over substance

Answer: C

10. Notes receivable is recorded at its:

a. Face value
b. Fair market value
c. Preset value
d. Maturity value

Answer: A

11. The entry to record the dishonor of a note includes a debit to:
a. Allowance for doubtful accounts
b. Loss on notes receivable
c. Bad debts expense
d. Accounts Receivable
 Answer: D

12. On July 1 of the current year, an entuty received a one-year note receivable bearing interest at the market
rate. The face amount of the notes receivable and the entire amount of the interest are due in one year. The
interest receivable account would show a balance on
a. July 1 but not on December 31
b. December 31 but not July 1
c. July 1 and December 31
d. Neither July 1 nor December 31

Answer: B
13. On July 1 of the current year, an entity received one-year note receivable bearing interest at the market rate.
The face amount of the note receivable and the entire amount of the interest are due in one year. When the
note receivable was recorded on July 1, which of the following was debited?
I. Interest receivable
II. Unearned discount on note receivable
a. I only
b. Both I and II
c. Neither I nor II
d. II only

Answer: C

14. On August 15, an entity sold goods for which it received a note bearing the market rate of interest on that
date. The four-month note was dated July 15. Note principal, together with all interest, is due November 15.
When the note was recorded on August 15, which of the following accounts increased?
a. Unearned discount
b. Interest receivable
c. Prepaid interest
d. Interest revenue

Answer: B

15. On July 1 of the current year, an entity received one-year note receivable bearing interest at the market rate.
The face amount of the note receivable and the entire amount of the interest are due on June 30 of next
year. On December 31 of the current year, the entity should report in the statement of financial position
a. A deferred credit for interest applicable to next year
b. No interest receivable
c. Interest receivable for the entire amount of the interest due on June 30 of next year
d. Interest receivable for the interest accruing in the current year

Answer: D

B. PROBLEMS

Use the following information for questions 1 and 2

Glass Company has an 8% note receivable dated June 30, 2016, in the original amount of 1,500,000.
Payments of 500,000 in principal plus accrued interest are due annually on July 1, 2017, 2018 and 2019.

1. What is the balance of notes receivable on July 1, 2017?

a. 1,500,000
b. 1,000,000
c. 500,000
d. 0

Answer: B
 2. In June 30, 2018 statement of financial position, what amount should be reported as current asset for
interest on the note receivable?
a. 120,000
b. 40,000
c. 80,000
d. 0

Answer: C

Use the following information for questions 3 to 6

On December 31, 2016, Park Company sold used equipment with carrying amount of 2,000,000 in
exchange for a noninterest bearing note of 5,000,000 requiring ten annual payments of 500,000. The first
payment was made on December 31, 2017. The market interest for similar note was 12%. The present value
of an ordinary annuity of 1 at 12% is 5.65 for ten periods and 5.33 for nine periods.

3. What is the carrying amount of the note receivable on December 31, 2016?
a. 5,000,000
b. 2,285,000
c. 2,665,000
d. 4,500,000

Answer: B

4. What is the gain on sale of equipment to be recognized in 2016?

a. 3,000,000
b. 2,175,000
c. 825,000
d. 0

Answer C

5. What amount should be recognized as interest income for 2017?

a. 600,000
b. 339,000
c. 319,800
d. 300,000

Answer: B

6. What is carrying amount of the note receivable on December 31, 2017?

a. 2,664,000
b. 4,500,000
c. 2,825,000
d. 2,325,000

Answer: A

Use the following information for questions 7 to 9

Gabaldon Company is a dealer in equipment. On December 31, 2016, the entity sold an equipment in
exchange for noninterest bearing note requiring five annual payments of 500,000. The first payment was
made on December 31, 2017. The market interest for similar notes was 8%. The PV of 1 at 8% for 5
periods is .68 and the PV of an ordinary annuity of 1 at 8% for 5 periods is 3.99

7. On December 31, 2016, what is the carrying amount of the note receivable?
a. 2,500,000
b. 1,995,000
 c. 1,700,000
d. 1,495,000

Answer: B

8. What amount of interest income should be reported for 2017?

a. 505,000
b. 101,000
c. 159,600
d. 119,600

Answer: C

9. What is the carrying amount of the note receivable on December 31, 2017?
a. 1,654,600
b. 2,000,000
c. 2,154,600
d. 1,495,000

Answer: A

Use the following information for questions 10 and 11

On January 1, 2016 Qatar Company sold equipment with a carrying amount of 4,800,000 in exchange for a
6,000,000 noninterest bearing note due January 1, 2019. There was no established exchange price for the
equipment. The prevailing rate of interest for a note of this type on January 1, 2016 was 10%. The present
value of 1 at 10% for three periods is 0.75.

10. What amount should be reported as interest income for 2016?

a. 90,000
b. 450,000
c. 500,000
d. 600,000

Answer: B

11. What amount should be reported as gain or loss on sale of equipment?

a. 300,000 loss
b. 300,000 gain
c. 1,200,000 gain
d. 2,700,000 gain

Answer: A

Use the following information for questions 12 and 13

Makati Company sold an equipment with a carrying amount of 800,000, receiving a noninterest-bearing
note due in three years with a face amount of 1,000,000. There is no established market value for the
equipment. The interest rate on similar obligations is estimated at 12%. The present value of 1 at 12% for
three periods is .712.

12. What amount should be reported as gain or loss on sale of equipment?

a. 200,000 gain
b. 200,000 loss
c. 88,000 gain
d. 88,000 loss

Answer: D
13. What amount should be reported as interest income for first year?
a. 288,000
b. 120,000
c. 96,000
d. 85,440

Answer: D

14. Love Company sold a piece of machinery with a list price of 1,600,000 to Heartbreak Company at the
beginning of current year. Heartbreak Company issued a noninterest bearing note of 1,700,000 due in one
year. Love Company normally sells this type of machinery for 90% of list price. What amount shoukd be
recorded as interest revenue for the current year?
a. 100,000
b. 260,000
c. 160,000
d. 0

Answer: B

15. Claire Company purchased from Marielle Company a 2,000,000, 8% five-year note that required five equal
annual year-end payments of 500,900. The note was discounted to yield a 9% rate to Claire Company. At
the date of purchase, Claire Company recorded the note at the present value of 1,948,500. What is the total
interest revenue earned by Claire Company over the life of its note?
a. 504,500
b. 556,000
c. 800,000
d. 900,000

Answer: B

C. SOLUTIONS

1. 1,500,000 – 500,000 = 1,000,000

2. 1,000,000 x 8% = 80,000

3. 5,000,000 – 2,825,000 (5,000,000 x 5.65) = 2,175,000

4. 2,825,000 – 2,000,000 = 825,000

5. 12% x 2,825,000 = 339,000

6. 5,000-000 – 500,000 4,500,000

2,175,000 – 339,000 (1,836,000)
2,664,000

7. 500,000 x 3.99 = 1,995,000

8. 8% x 1,995,000 = 159,600

9. 2,500,00 – 500,000 2,000,000

2,500,000 – 1,995,000 – 159,600 (345,400)
1,654,600

10. 6,000,000 – 4,500,000* (*6,000,000 x.75) = 1,500,000

11. 4,500,000 – 4,800,000 = (300,000)

 12. 712,000* - 800,000 = (88,000) *1,000,000 x .712

13. 12% x 712,000 = 85,440

14. 1,700,000 – 1,440,00* (*1,600,000 x 90%) = 260,000

15. 2,504,500* - 1948,500 = 556,000

RECEIVABLE FINANCING AND IMPAIRMENT

A. THEORIES

1. It is a predetermined amount withheld by a factor as protection against customer returns, allowances and
other special adjustments.
a. Equity in assigned accounts
b. Service charge
c. Factor’s holdback
d. Loss on factoring

Answer: C

2. When account receivable are factored

a. Accounts receivable shall be credited
b. Payable to factor is credited
c. A contingent liability is ordinarily created
d. The factoring is accounted for as borrowing

Answer: A

3. It is a financing arrangement that is usually done on “without recourse, notification basis”.

a. Pledge
b. Assignment
c. Factoring
d. Discounting

Answer: A

4. It is a financing arrangement whereby one party formally transfers its rights to accounts receivable to
another party in consideration for a loan.
a. Pledge
b. Assignment
c. Factoring
d. Discounting

Answer: B

5. If accounts receivable are pledged against borrowing, the amount of accounts receivable pledged shall be
a. Excluded from total receivables with disclosure
b. Excluded from total receivables without disclosure
c. Included in total receivables with disclosure
d. Included in total receivables without disclosure

Answer: C

6. Why would an entity sell accounts receivable to another entity?

a. To improve the quality of its credit granting process
 b. To limit its legal liability
c. To accelerate access to amount collected
d. To comply with customers agreements

Answer: C

7. If a note receivable is discounted with recourse

a. A contingent liability does not exist.
b. Note receivable discounted is credited.
c. Liability for note receivable discounted is credited.
d. Note receivable must be credited.
Answer: C

8. Which of the following is a method to generate cash from accounts receivable?

I. Assignment
II. Factoring
a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer: C

9. The practice of realizing cash from trade receivables prior to maturity date is widespread. A term which is
not associated with this practice is
a. Hypothecation
b. Factoring
c. Defalcation
d. Pledging

Answer: C

10. When the accounts receivable of an entity are sold outright to a bank which normally buys accounts
receivable, the accounts receivable have been
a. Pledged
b. Assigned
c. Factored
d. Collateralized

Answer: C

11. Which of the following is used to account for probable sales discounts, sales returns and sales allowances?
a. Due from factor
b. Recourse liability
c. Both due from factor and recourse liability
d. Neither due from factor nor recourse liability

Answer: A

12. If receivables are hypothecated against borrowings, the amount of receivables involved should be
a. Disclosed in the notes
b. Excluded from the total receivables with disclosure
c. Excluded from the total receivables with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face amount and
the amount borrowings

Answer: A
 13. After being held for 40 days, a 120-day 12% interest bearing note receivable was discounted at a bank at
15%. What is the formula for the proceeds received from the bank?
a. Maturity value less the discount at 12%
b. Maturity value less the discount at 15%
c. Face value less the discount at 12%
d. Face value less the discount at 15%

Answer: B

14. A 90-day 15% interest-bearing note receivable is sold to a bank with recourse after being held for 30 days.
The proceeds are calculated using a 12% interest rate. The note receivable has bee
a. Discounted
b. Discounted and pledged
c. Discounted and assigned
d. Factored

Answer: A

15. Which of the following is not an objective in accounting for transfer of financial asset?
a. To derecognize asset when control is gained
b. To derecognize liability when extinguished
c. To recognize liability when incurred
d. To derecognize asset when control is given up

Answer: A

B. PROBLEMS

1. Sun Company assigned 4,000,000 of accounts receivable as collateral for a 2,000,000 6% loan with a bank.
The entity also paid a finance fee of 5% on the transaction upfront. What amount should be recorded as a
gain or loss on the transfer of account receivable?
a. 200,000 loss
b. 100,000 loss
c. 240,000 gain
d. 0

Answer: D

Use the following information for questions 2 and 3

Athena Company factored 6,000,000 of account receivable to a finance entity at the end of the current year.
Control was surrendered by Athena Company. The factor assessed a fee of 3% and retained a holdback
equal to 5% of the account receivable. In addition, the factor charged 15% interest computed on a weighted
average time to maturity of the accounts receivable of 54 days.

2. What is the amount of cash initially received from the factoring?

a. 5,296,850
b. 5,386,850
c. 5,476,850
d. 5,556,850

Answer: B

3. If all accounts are collected, what is the cost of factoring the accounts receivable?
a. 313,150
b. 180,000
c. 433,150
d. 613,150
 Answer: A

Use the following information for questions 4 and 5

Hera Company factored 750,000 of account at year end. Control was surrendered. The factor accepted the
accounts receivable subject to recourse for nonpayment. The factor assessed a fee of 2% and retained a
holdback equal to 4% of the account receivable. In addition, the factor charged 12% interest computed on a
weighted average time to maturity of 51 days. The fair value of the recourse obligation is 15,000.
4. What is the amount of cash initially received from the factoring?
a. 692,425
b. 720,000
c. 722,425
d. 705,000

Answer: A

5. Assuming all accounts receivable are collected, what is the cost of factoring the accounts receivable?
a. 15,575
b. 15,000
c. 27,575
d. 42,575

Answer: C

Use the following information for questions 6 and 7

Persephone Company factored without recourse 2,000,000 of accounts receivable with a bank. The finance
charge is 3%, and 5% was retained to cover sales discounts, sales returns and sales allowances.

6. What amount of cash was received on the sale of accounts receivable?

a. 1,940,000
b. 1,900,000
c. 1,840,000
d. 2,000,000

Answer: C

7. What amount should e recognized as loss on factoring?

a. 100,000
b. 160,000
c. 60,000
d. 0

Answer: C

Use the following information for questions 8 and 9

On July 1, 2016, Lee Company sold goods in exchange for 2,000,000, 8-month, noninterest bearing note
receivable. At the time of the sale, the market rate of interest was 12%. The entity discounted the note at
10% on September 1, 2016?

8. What is the cash received from discounting?

a. 1,940,000
b. 1,938,000
c. 1,900,000
d. 1,880,000

Answer: C

9. What is the loss on note receivable discounting?

 a. 100,000
b. 75,000
c. 25,000
d. 0

Answer: A

Use the following information for questions 10 and 11

Cupid Company accepted from a customer 1,000,000 face amount, 6-month, 8% note dated April 15, 2016.
On the same date, the entity discounted the note without recourse at a 10% discount rate.

10. What amount of cash was received from the discounting?

a. 1,040,000
b. 990,000
c. 988,000
d. 972,000

Answer: C

11. What is the loss on note receivable discounting?

a. 50,000
b. 40,000
c. 52,000
d. 12,000

Answer: D

Use the following information for questions 12 and 13

On June 30, 2016, Aphrodite Company discounted at the bank a customer 6,000,000, 6-month, 10% note
receivable dated April 30, 2016. The bank discounted the note at 12% without recourse.

12. What is the amount received from the note receivable discounting?
a. 5,640,000
b. 5,760,000
c. 6,048,000
d. 6,174,000

Answer: C

13. What is the loss on note receivable discounting?

a. 252,000
b. 152,000
c. 52,000
d. 48,000

Answer: C

14. On August 1, 2016, Poseidon Company’s 5,000,000 one-year non-interest-bearing note due July 31, 2017
was discounted at BDO Bank at 10.8%. The entity used the straight line method of amortizing the discount.
What is the carrying amount of the note payable on December 31, 2016?
a. 5,000,000
b. 4,775,000
c. 4,685,000
d. 4,460,000

Answer: C

15. On November 1, 2016, Hades Company discounted with recourse at 10% a one-year, noninterest bearing,
2,050,000 note receivable maturing on January 31, 2017. The discounting of the note receivable s
 accounted for as a conditional sale with recognition of a contingent liability. What amount of contingent
liability for this note must be disclosed in the financial statements for the year ended December 31, 2016?
a. 2,050,000
b. 2,000,000
c. 2,033,333
d. 0

Answer: A

C. SOLUTIONS

1. No gain or loss is recognized

2. Account receivable 6,000,000

6,000,000 x 5% (300,000)
6,000,000 x 3% (180,000)
6,000,000x 15% x 54/365 (133,150)
5,386,850

3. 180,000 + 133,150 = 313,150

4. Account receivable 750,000

750,000 x 4% (30,000)
750,000 x 2% (15,000)
750,000 x 12% x 51/365 (12,575)
692,425

5. 15,000 + 12,575 = 27,575

6. Account receivable 2,000,000

2,000,000 x 3% (60,000)
2,000,000 x 5% (100,000)
1,840,000

7. 60,000

8. 2,000,000 – 100,000* = 1,900,000 *2,000,000 x 10% x 6/12

9. 1,900,000 – 2,000,000 = (100,000)

10. Principal 1,000,000

1,000,000 x 8% x 6/12 40,000
1,040,000 x 10% x 6/12 (52,000)
988,000

11. 988,000 – 1,000,000 = (12,000)

12. Principal 6,000,000

6,000,000 x 10% x 6/12 300,000
6,300,000 x 12% x 4/12 (252,000)
6,048,000

13. Principal 6,000,000

6,000,000 x 10% x 2/12 (100,000)
6,100,000

6,048,000 – 6,100,000 = (52,000)

14. 5,000,000 – 540,000* = 4,460,000 *5,000,000 x 10.8%

15. The contingent liability is equal to the principal of face value of the note receivable discounted.