BASIC ACCOUNTING

PART I - THEORIES
1. What is the objective of financial statements?
A. To prepare comparable, relevant, reliable and understandable information to
investors and creditor
B. To prepare financial statements in accordance with all applicable Standards
and Interpretations
C. To prepare a statement of financial position, an income statement, a
statement of cash flows and a statement of changes in equity
D. To provide information about the financial position, performance and changes in
financial position of an entity that is useful to a wide range of users in making economic
decisions.

Answer: D — The objective of financial statements is to provide

information about the financial position, performance and changes in financial
position of an enterprise that is useful to a wide range of users in making
economic decisions.

2. Liabilities are
A. Deferred credits
B. Any accounts with credit balances
C. Obligations to transfer ownership shares to other entities in the future
D. Present obligations arising from past events and result in an outflow of resources

Answer: D — Under the Revised Conceptual Framework, a Liability is defined as a

present obligation of an entity to transfer an economic resource as a result of past
events.

3. If the partnership agreement does not specify how profit is to be allocated, profits or losses
should be allocate
A. Equally
B. In accordance with their capital contribution
C. In proportion to the average of capital invested during the period
D. Equitable so that partners are well compensated for their time and effort

Answer: B - In accordance with their capital contribution

4. An entity shall present current and noncurrent assets and liabilities when the
A. Entity is a public utility
B. Entity is a government entity
C. Entity supplies goods or services within a clearly identifiable operating cycle
 D. Presentation based on liquidity provides reliable and more relevant information

Answer: D - Presentation based on liquidity provides reliable and more relevant

information

5. The accounting equation

A. Is used to determine the amount of liabilities owned
B. Shows the claims on the entity's assets represented by creditors and owners
C. Shows the claims on the owner's equity represented by creditors
D. Is used to determine the amount of income earned during the most recent accounting
period

Answer: B - Shows the claims on the entity's assets represented by creditors

(liability) and owners (equity).

6. General ledger serves what phase of the accounting process?

A. Reporting
B. Recording
C. Classifying
D. Summarizing

Answer: C - Classifying

7. The double entry system of accounting means that every transaction

A. Is recorded initially on both the journal and the general ledger
B. Increases one general ledger account while decreasing another
C. Affects at least two general ledger accounts and is recorded by an equal amount of
debits and credits
D. Results in changes in accounts on both sides of the balance sheet

Answer: C - Affects at least two general ledger accounts and is recorded by an

equal amount of debits and credits

8. Debits
A. Increase assets and decrease expenses, liabilities, revenue and equity
B. Increase assets and expenses and decrease liabilities, revenue and equity
C. Increase assets and equity and decrease liabilities, expenses and revenue
D. Decrease assets and expenses and increase liabilities, revenue and equity

Answer: B - Debit is the normal balance of assets and expenses; that's why it is
increased when it is debited. Liabilities, equity, and revenue are decreased when
debited because their normal balance is credit.

9. Which is the correct sequence for recording transactions and preparing financial statements?
 A. Journal, ledger, trial balance, financial statements
B. Ledger, trial balance, journal, financial statements
C. Financial statements, trial balance, ledger, journal
D. Ledger, journal, trial balance, financial statements

Answer: A - Journal, ledger, trial balance, financial statements

10. Which statement about the trial balance is incorrect?

A. A trial balance determines the equality between the total debits and credits
B. A trial balance lists all open accounts in the general ledger as of a time period
C. A trial balance proves that all amounts have been posted to the correct amounts
D. A trial balance is required in the accounting process

Answer: C - A trial balance proves that all amounts have been posted to the
correct amounts

11. Unearned revenues are recorded on a company’s balance sheet under which kind of
account?
A. Current asset
B. Owners' or stockholders' equity
C. Non-current asset
D. Liability

Answer: D — Unearned revenues are incurred when businesses or individuals

receive payment for a product or service that has yet to be delivered or provided.
Until the item is delivered, these types of transactions are marked as liabilities.

12. Which method of income measurement is used in the preparation of the income statement?
A. Capital maintenance approach
B. Cash flow approach
C. Transaction approach
D. Income components approach

Answer: C - Transaction approach

13 An entity decided to extend the report period from a 12-month period to a 15-month period.
Which of the following is not required in case of change in reporting period?
A. The entity should disclose the period covered by the financial statements.
B. The entity should disclose the reason for using a longer period than a period of 12
months.
C. The entity should disclose that comparative amounts used in the financial statements
are not entirely comparable.
D. The entity should change the reporting period only if other similar entities in the
geographical area in which it generally operates have done so in the current year.
 Answer: D - The entity should change the reporting period only if other similar
entities in the geographical area in which it generally operates have done so in the
current year.

14. The purpose of adjusting entries is to

A. Adjust the owner's capital account for the revenue expense and withdrawal
transactions which occurred during the year
B. Adjust the balances in asset liability revenue and expense accounts for the effects of
business transactions
C. Apply the realization principle and the matching principle to transactions affecting two
or more accounting periods
D. Prepare revenue and expense accounts for recording the transactions of the next
accounting period

Answer: C - Apply the realization principle and the matching principle to

transactions affecting two or more accounting periods

15. The total number of shares the corporate charter permits the corporation to issue is called
A. Outstanding stock
B. Issued stock
C. Authorized Stock
D. Ordinary shares capital

Answer: C - Authorized Stock

16. Statement I: The accounting equation can be restated as: Assets - Equity = Liabilities.
Statement Il: Return on assets reflects the effectiveness of a company's ability to generate profit
through productive use of its assets.
A. True, True
B. True, False
C. False, True
D. False, False

Answer: A - True, True

17. X has completed the posting process for the month of June and has prepared a trial balance
in which the debits total P11,000 and the credits total P11, 100. Which of the following errors
would be the most likely candidate in causing the trial balance not to balance by P100?
A. A P100 debit was posted as P100 credit
B. P100 debit was posted the P100 credit and a P100 credit was posted as a P100 debit
C. A P50 debit was posted as P50 credit
D. The purchase of supplies and account was never posted to the general ledger
 Answer: C - A P50 debit was posted as P50 credit

18. When a company purchases property, plant, and equipment, how is it reflected on the
statement of cash flows?
A. As a source of cash in the "cash from investing activities" section
B. As a source of cash in the "cash from financing activities" section.
C. As a use of cash in the "cash from investing activities" section.
D. As a use of cash in the "cash from operating activities" section.

Answer: C - Acquisitions of property, plant and equipment are uses of cash/cash

equivalents and categorized as an investing activity. The operating activities
section of the statement of cash flows captures the inflow/outflows from business
operations, such as sales or labor expenses, rather than investments.

19. What would the journal entry be for a company that takes out a five-year, ₱100,000
business loan?
A. Debit ₱100,000 non-current asset, Credit ₱100,000 non-current liabilities
B. Debit ₱100,000 current asset, Credit ₱100,000 non-current liabilities
C. Debit ₱100,000 non-current liabilities, Credit ₱100,000 non-current assets
D. Debit ₱100,000 current liabilities, Credit ₱100,000 current assets

Answer: B - The transaction increases cash, a current asset, via a debit. It also
increases loans payable, which is a non-current liability because it is due in five
years, via a credit.

20. Which inventory valuation method reflects the most current market value for inventory on
hand?
A. Last-in-First-Out (LIFO)
B. Average Costs
C. First-in-First-Out (FIFO)
D. Specific Identification

Answer: C — The FIFO method assumes that the oldest inventory is sold first, and
inventory on hand at the end of a period is the newest. The newest purchases
reflect the most current market values.

21. Are assets on the balance sheet recorded at their estimated fair market value?
A. Yes
B. No
C. Sometimes; it's situational
D. Maybe

Answer: B - Assets are recorded at their historical cost values, which means that
they are documented at their original cost and time acquired
22. Which formula is used to calculate operating income?
A. Revenue + Direct Operating Cost = Operating Income
B. Indirect Operating Cost - Revenue = Operating Income
C. Gross Income - Operating Expenses = Operating Income
D. Gross Profit - Indirect Operating Cost = Operating Income

Answer: C - Gross Income - Operating Expenses = Operating Income.

A company's operating income is, in other words, its income from core
operations. Operating income is calculated by subtracting operating costs from
gross income.

23. Stock that has a fixed per-share amount printed on each stock certificate is called
A. Stated value stocks
B. Fixed value stock.
C. Uniform value stock
D. Par value stock.

Answer: D - Par Value Stock

24. Total stockholders’s equity represents the

A. A claim to specific assets contributed by the owners
B. Maximum amount that can be borrowed by the enterprise.
C. A claim against a portion of the total assets of an enterprise.
D. Only the amount of earnings that have been retained in the business.

Answer: C - A claim against a portion of the total assets of an enterprise.

25. In a corporate form of business organization, legal capital is best defined as

A. The amount of capital the state of incorporation allows the company to accumulate
over its existence.
B. The par value of all capital stock issued.
C. The amount of capital the federal government allows a corporation to generate.
D. The total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.

Answer: B - The par value of all capital stock issued.

27. When a corporation issues its capital stock in payment for services, the recording the
transaction is the
A. Market value of the services received
B. Par value of the shares issued
C. Market value of the shares issued
D. None of the above
 Answer: B - Par value of the shares issued

28. The pre-emptive right of a common stockholder is the right to

A. Share proportionately in corporate assets upon liquidation.
B. Share proportionately in any new issue of stock of the same class.
C. Receive cash dividends before they are distributed to preferred stockholders
D. Exclude preferred stockholders from voting rights.

Answer: B - Share proportionately in any new issue of stock of the same class.

29. If a partner in a partnership is insolvent, the first order of preference in the distribution of his
assets are:
A. Partnership creditors
B. Partners contribution to the partnership
C. Separate creditors of the debtor
D. Pro-rata between the separate creditors of the debtor and the partnership creditor

Answer: C - Separate creditors of the debtor

30. The two main fundamental qualitative characteristics that financial information should
possess have been identified as:
A . Faithful representation
B. Timeliness
C. Relevance
D. Both a and b

Answer: D – the fundamental qualitative characteristics are relevance and faithful

representation.

PART II - PROBLEMS

31. Which of the following would result in total expenses of ₱480,000?

A. Total income of ₱360,000 and profit ₱120,000
B. Total income of ₱580,000 and loss of ₱100,000
C. Total income of ₱630,000 and profit of ₱150,000
D. Total income of ₱630,000 and loss of ₱150,000

Answer: C — Total income of ₱630,000 and profit of ₱150,000

Solution:
Squeeze
 Total Income 630,000

Expense (480,000)

Profit 150,000

32 Owner's equity for the year decreased by ₱2,000. If the owner's withdrawals exceeded
contributions during the year by ₱5,000, the net income (net loss) for the year is
A. 3,000
B. (3,000)
C. 7,000
D. (7,000)

Answer: A - The net income for the year is 3,000, and when deducted by 5,000
withdrawals which exceed the contributions, it will result in the decrease of the
owner's equity by 2,000.

33. The trial balance prepared on December 31 did not balance. Debits total was ₱159,250 and
Credits total was ₱153,200. In determining the cause of the difference, you discovered the
following errors: a credit to Cash of ₱650 was not posted; a ₱2,000 credit to be made to the
Sales account was credited to the Accounts Receivable account instead; the Wages Payable
account balance of ₱9,300 was listed in the trial balance as ₱3,900. The correct trial balance is
A. P153,200
B. P159,250
C. P160,600
D. P161,250

Answer: C - ₱160,600

Solution:
- A credit of cash amounting to 650 is deducted from the debit balance of 159,250 since it
is not posted.
- 2,000 credit to the accounts receivable is added to the debit balance of 159,250
resulting in 160,600.
- The 2,000 credit to the sales account is added to the credit balance of 153,200 and the
difference of 9,300 and 3,900 amounting to 5,400 is added to the credit balance resulting
in 160,600 as well.

34. Rumble Company uses the allowance method of accounting for uncollectible accounts.
During 2024, Rumble Company had charges to doubtful accounts expense of P80,000, wrote off
Accounts Receivable of P55,000 and collected P20,000 from previously written-off accounts.
These transactions decreased working capital by:
A. ₱0
B. ₱35,000
 C. ₱45,000
D. ₱80,000

Answer: D - ₱80,000
Only the doubtful accounts expense decreases the working capital.
The write off does not affect the working capital anymore because the effect is offsetting.

35. A business incurs total expenses of P630,000 and reports loss of P270,000. How much is
the total income?
A. ₱900,000
B. ₱320,000
C. ₱360,000
D. ₱380,000

Answer: C - ₱360,000

Solution:
Squeeze
Total Income 360,000

Total Expense (630,000)

Loss 270,000

36. At the start of the period, a business has a total assets of ₱500,000 and total liabilities of
₱300,000. During the period, the business earned total income of ₱1,000,000 and incurred total
expenses of ₱640,000. No additional investments or withdrawals were made by the owner. How
much is the total equity at the end of the period?
A. ₱480,000
B. ₱520,000
C. ₱560,000
D. ₱640,000

Answer: C — ₱560,000

Solution:
Total Assets 500,000

Total Liabilities (300,000)

Total Equity, Beg. 200,000

Income 1,000,000

Expense (640,000)
 Total Equity, End 560,000

37. A business has ending total assets of ₱480,000 ending total liabilities of ₱100,000 and
beginning equity of ₱280,000. If the total expenses for the period amount to ₱200,000, how
much is the total income?
A. ₱300.000
B. ₱340,000
C. ₱280,000
D. ₱420,000

Answer: A - ₱300,000

Solution:
Total Assets 480,000

Total Liabilities (100,000)

Total Equity, End 380,000

Equity, Beg. (280,000)

Profit 100,000

Expense 200,000

Total Income 300,000

38. A business has ending total assets of ₱680,000, ending total liabilities of ₱320,000 and
beginning equity of ₱480,000. If the total income for the period amount to ₱560,000, how much
is the total expenses?
A. ₱680,000
B. ₱560,000
C. ₱480,000
D. ₱420,000

Answer: A - ₱680,000

Solution:
Total Assets 680,000

Total Liabilities (320,000)

Total Equity, End 360,000

Equity, Beg. (480,000)

 Loss 120,000

Add: Expense 560,000

Total Income 680,000

39. Anna, Bea and Carlo have interests in ABC Partnership. Partnership income for the year is
300,000. The partnership agreement specifies that Anna is to receive an annual salary of
200,500, Bea is to receive an annual salary of 45,500, and Carlo is to receive an annual salary
of 150,000. Any remaining income or loss is to be divided between the three partners in a 1:1:2
ratio.

Salaries are to be fully implemented. Partnership income allocated to Carlo is:

A. ₱102,000
B. ₱182,500
C. ₱150,000
D. ₱157,500

Answer: A - ₱102,000

Solution:
Carlo’s Salary ₱150,000
* Share of Carlo on loss after salaries are deducted (48,000)
Carlo’s Partnership Income. ₱102,000

*Partnership Income. 300,000

Anna’s Salary. (200,500)
Bea’s Salary. (45,500)
Carlo’s Salary. (150,000)
Loss. (96,000)

Loss Allocation 96,000 x 2/4 = (48,000)

40. Rosa, Karen, and Nina have interests in the XYZ Partnership. Partnership income for the
year is 350,000. The partnership agreement specifies that partnership income is to be allocated
as follows: salaries of 100,000 to Rosa, 50,000 to Karen, and 50,000 to Nina; a bonus of 20% of
partnership income, after deducting salaries and bonus, to Karen, and the remainder allocated
equally between the three partners.

Karen bonus for the year is:

A. ₱37,500
B. ₱30,000
C. ₱25,000
D. ₱27,500
 Answer: C - ₱25,000

Solution:
B = Bonus to Karen
B = (350,000 - 200,000 - B) × 20%
В = 30,000 - 0.2B
1.20B = 30,000
В = 25,000

41. The movements in Baron's capital account are as follows:

Baron’s Capital

₱50,000 Beginning
May 1 withdrawal ₱45,000 ₱15,000 Aug 31 additional investment
₱12,000 Nov 30 additional investment

Ending balance ₱32,000

What is the weighted average capital balance of Baron's capital account?

A. ₱26,000
B. ₱8,000
C. ₱86,000
D. ₱30,500

Answer: A - ₱26,000

Solution:

Balances Months Weighted

Outstanding / Average
Total Months in a
Year

Beginning Balance ₱50,000 12/12 ₱50,000

May 1 withdrawal ₱45,000 8/12 (₱30,000)

August 31 additional investment ₱15,000 4/12 ₱5,000

November 30 additional ₱12,000 1/12 ₱1,000

investment
 WEIGHTED AVERAGE CAPITAL BALANCE ₱26,000

42. LM company received cash of P77,400 on September 1 2022 for 1 year's rent in advance
and recorded the transaction with the credit to a nominal account. The December 31 2022
adjusting entry is
A. Dr Rent revenue; Cr Unearned rent P25,800
B. Dr Unearned rent; Cr Rent revenue P25,800
C. Dr Rent revenue; Cr Unearned rent P51,600
D. Dr Unearned rent; Cr Rent revenue P51,600

Answer: C - Dr Rent revenue; Cr Unearned rent P51,600

Solution:
The whole P77,400 is credited to a nominal account (Rent Revenue). At the end of the
reporting period, only months of September to December should have a record of Rent
Revenue. The remaining balance is unearned revenue, computed as:

P77,400 x 8/12 = P51,600 Unearned Revenue (Cr.)

43. The partnership contract for the JJ and FJ Partnership provided that JJ is to receive an
annual salary of P120,000, FJ is to receive an annual salary of P80,000, and the remaining
profit or loss is to be divided equally between the two partners. Net income of the JJ and FJ
Partnership for the year ended December 31, 2020 was P180,000. The closing entry for net
income on December 31, 2020 is a debit to Income Summary for P180,000 and credits to JJ
Capital and FJ Capital, respectively of:
A. ₱108,000 and ₱72,000
B. ₱90,000 and ₱90,000
C. ₱120,000 and ₱80,000
D. ₱110,000 and ₱70,000

Answer: D - ₱110,000 and ₱70,000

Solution:
JJ FJ Total

Salary Allowances 120,000 80,000 200,000

Remainder (180,000-200,000) (10,000) (10,000) (20,000)

Share of partners in profit 110,000 70,000 180,000

44. On December 1, 20x1, Eva and Fe formed a partnership, agreeing to share profits and
losses in the ratio of 2:3, respectively. Eva invested a parcel of land that cost him P25,000, Fe
invested P30,000 cash. The land was sold for P50,000 on the same date, three hours after
formation of the partnership. How much should be the capital balance of Eva right after
formation?
A. ₱25,000
B. ₱30,000
C. ₱60,000
D. ₱50,000

Answer: D - ₱50,000
Fair value of land P50.000

45. An entity provided the following information at year - end:

Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Share premium 1,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares at cost - ordinary 500,000
Dividends 700,000
Retained earnings - beginning 1,00,000
What total shareholders’ equity should be reported at year-end?
A. ₱8,000,000
B. ₱8,500,000
C. ₱8,800,000
D. ₱8,700,000

Answer: A - ₱8,000,000

Solution:
Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Share premium 1,000,000
Less: Treasury shares (500,000)
Retained earnings - ending
Retained earnings - beginning 1,000,000
Sales 10,000,000
Less: Total expenses (7,800,000)
Less: Dividends (700,000) 2,500,000
Total shareholder’s equity 8,000,000

46. On March 1, 20x5, Jake and Cess formed a partnership with each contributing the following
assets:
Jake Cess
 Cash 300,000 700,000

Machinery 250,000 750,000

Building - 2,250,000

Furniture and Fixture 100,000 -

The building is subject to a mortgage loan of ₱800,000, which is to be assumed by the

partnership agreement that Jake and Cess share profits and losses and 70%, respectively. On
March 1, 20x5 the balance in Cess capital account should be:
A. ₱3,700,000
B. ₱3,140,000
C. ₱3,050.000
D. ₱2,900,000

Answer: D - ₱2,900,000

Solution:
Cess

Cash 700,000

Machinery 750,000

Building 2,250,000

Total Asset Invested 3,700,000

Less: Mortgage Loan (800,000)

Capital Balance of Cess 2,900,000

47. Compute for the company's purchase returns and allowances given the following:
Cost of Goods sold ₱9,000
Beginning Inventory ₱6,000
Ending inventory ₱10,000
Gross Purchases ₱14,500

A. ₱2,500
B. ₱1,250
C. ₱1,500
D. ₱1,750

Answer: C - ₱1,500
 Solution:
Gross Purchase ₱14,500

Beg. Inventory 6,000

Ending inventory (10,000)

Total 10,500

Cost of Goods Sold (9,000)

Purchase returns and allowance ₱1,500

48. Van Company started its business operation on January 1, 2024. The company's trial
balance as of January 31, 2024 included the following: Purchases ₱60,000; Purchase returns
and allowances ₱3,000; Freight in ₱4,500; Freight out ₱5,000; Ending inventory ₱12,000.
Compute the Cost of Goods Sold.

A. ₱49,500
B. ₱47,500
C. ₱48,000
D. ₱52,000

Answer: A – ₱49,500

Solution:
Purchase ₱60,000

Purchase returns and allowances (3,000)

Freight 4,500

Total Goods Available for Sale 61,500

Ending inventory (12,000)

Cost of Goods Sold ₱49,500

49. Nine and Risa partners who share profits and losses in the ratio of 60%: 40% respectively.
Nine’s salary is ₱60,000 and ₱30,000 for Risa. The partners are also paid interest on their
average capital balances. In 20x5, Nine received P30,000 of interest and Risa, ₱12,000. The
profit and loss allocation is determined after deductions for the salary and interest payments. If
Risa’s share in the residual income (income after deducting salaries and interest) was ₱60,000
in 20x5, what was the total partnership income?
 A. ₱192,000
B. ₱282,000
C. ₱345,000
D. ₱387,000

Answer: B - ₱282,000

Solution:
Nine Risa Total

Salary 60,000 30,000 90,000

Interest 30,000 12,000 42,000

Balance 60,000 150,000*

282,000
*60,000/40% = 150,000

50. On April 5, 2024, Gabriel Company purchased merchandise with a list price of ₱125,000.
The merchandise is subject to a trade discount of 5%, 7% and with credit terms of 2/10; n/30.
How much is the amount to be debited to Purchases?
A. ₱110,438.50
B. ₱118,750.00
C. ₱116,250.00
D. ₱110,437.50

Answer: D – ₱110,437.50

Solution:
List Price – Trade Discount = Invoice Price
125,000 x 95% x 93%= 110,437.50

51. If Gabriel makes payment on April 12, how much is the cash discount?
A. ₱2,208.75
B. ₱108,228.75
C. ₱110,437.50
D. ₱110,438.50

Answer: A – ₱2,208.75

Solution:
110,437.50 x 2% = 2,208.75
52. While preparing the 2024 trial balance, Myko Company’s accountant committed the
following errors: omission of the prepaid rent account amounting to P4,000; understatement of
the inventory account by P72,000; overstatement of the sales account by P1,500; accounts
receivables totaling to P123,000 was included in the trial balance as P213,000; accounts
payable totaling to P153,000 was included as P135,000; discount on bonds payable was
included as a credit rather than as a debit, P1,500; Revenue expenditures of P35,000 was
erroneously capitalized to furniture and fixtures. The difference between the debit and credit
amounts in Myko Company’s trial balance is

A. ₱2,500
B. ₱26,000
C. ₱7,500
D. ₱27,500

Answer: D. ₱27,500

53. Cara Company provided the following information for the current year:

January 1 December 31
Current assets 700,000 ?
Property, plant and equipment 3,000,000 4,000,000
Current liabilities ? 300,000
Noncurrent liabilities 1,000,000 ?

Working capital P600,000 remained unchanged

Net income for the current year was P400,000
No dividends were declared during the year and there were no other changes in
shareholder’s equity.

What amount of current assets on December 31?

A. ₱300,000
B. ₱900,000
C. ₱600,000
D. ₱450,000

Answer: B - ₱900,000
Current assets - December 31 900,000 (squeeze)
Current liabilities - December 31 300,000
Working capital - December 31 600,000
54. Marsh and Mallow agreed to form a partnership. The partnership agreement stipulates the
following:
● Initial capital of ₱260,000.
● A 40:60 interest in the equity of the partnership.

Marsh and Mallow contributed ₱90,000 and ₱170,000 cash, respectively. How much is the
additional investment (withdrawal of investment)that the partners will provide in order to bring
the capital balance equal to their respective interest in the equity of partnership?
A. ₱170,000 (₱90,000)
B. ₱104,000 (₱156,000)
C. ₱156,000 (₱104,000)
D. ₱14,000 (₱14,000)

Answer: D - ₱14,000 (₱14,000)

Solution:

Marsh Mallow

Actual contribution ₱90,000 ₱170,000

Required capital balances ₱104,000 ₱156,000

TOTAL ₱14,000 (₱14,000)

55. Michigan owns 100 shares of Arden Corp., a publicly traded company, which Michigan
purchased on Jan 1 Year 1 for 20,000. On January 1, Year 3, Arden declared a 2-for-1 stock
split when the fair market value of the stock was 120 per share. Immediately following the split,
the FMV of Arden stock was 62 per share. On February 1 Year 3, Michigan had his broker
specifically sell the 80 shares of Arden Corp. stock received in the split when the FMV of the
stock was 65 per share. What is the basis of the 80 shares of Arden sold?
A. ₱4,000
B. ₱15,000
C. ₱8,000
D. ₱10,000

Answer: D - ₱10,000

Solution:
20,000 / 80 shares = 250 basis per share
250 / 2 = 125 basis per share after stock split
125 x 80 = 10,000
56. If during the accounting period the assets increased by 14,000, and equity increased by
4,000, then how did liabilities change?
A. Increased by 10,000
B. Increased by 4,000
C. Decreased by 4,000
D. Decreased by 10,000

Answer: A - Increased by 10,000

Solution:
Asset (Increased) = 14,000
Less: Equity (Increased) = 4,000
Total Liabilities = 10,000 Increased

57. Rall Company acquires patents rights from other enterprises and pays advance royalties in
some cases, and in others, royalties are paid within ninety days after year-end. The following
data are included in Rall’s December 31 balance sheets:

January 1 December 31

Prepaid royalties ₱55,000 ₱80,000

Royalties payable ₱45,000 ₱75,000

During 20x3, Rall remitted royalties of ₱300,000. In its income statement for the year ended
December 31, 20x3, Rall should report royalty expense of

A. ₱295,000
B. ₱305,000
C. ₱310,000
D. ₱330,000

Answer: B - ₱305,000

Solution:

Prepaid royalties–beginning ₱55,000

Royalties payable–ending ₱75,000

Payments for royalties ₱300,000

Prepaid royalties–ending (₱80,000)

Royalties payable–beginning (₱45,000)

 Royalties expense ₱305,000

58. At the end of the accounting period, the business had 4,500 of office supplies on hand. At
the beginning of the period, the amount of supplies on hand was 3,000. If the business
purchased 12,000 of office supplies during the year, what amount of office supplies were used
during the year?
A. ₱16,500
B. ₱14,250
C. ₱10,500
D. ₱9,750

Answer: C - ₱10,500

Solution:
Supplies on Hand 3,000
Office Supplies 12,000
Total 15,000
Less: Office Supplies on Hand (4,500)
Total 10,500

59. If during the accounting period the assets decreased by 10,000, and equity increased by
2,000, then how did liabilities change?
A. Increased by 12,000
B. Increased by 8,000
C. Decreased by 12,000
D. Decreased by 8,000

Answer: C - Decreased by 12,000

Solution:
Asset (Decreased) = 10,000
Add: Equity (Increased) = 2,000
Total Liabilities = 12,000 Decreased

60. Assets total 100,000 and liabilities total 20,000. What is the equity of the business?
A. ₱80
B. ₱800
C. ₱8,000
D. ₱80,000

Answer: D - ₱80,000

Solution:
Assets - Liabilities = Equity
100,000 - 20,000 = 80,000