Preliminary Examinations

I. Multiple Choice

1. Which is a logical order in the accounting cycle?

a. Posting, financial statements and unadjusted trial balance

b. Financial statements, closing entries and reversing entries

c. Financial statements, adjusting entries and recording

d. Closing entries, reversing entries and adjusting entries

2. The double entry accounting system means:

a. Each transaction is recorded with two journal entries.

b. Each item is recorded in a journal entry and then in a general ledger.

c. The dual effect of each transaction is recorded with a debit and a credit.

d. All of these are choices regarding double entry system.

3. In recording transactions:

a. The word “debit” means increase and the word “credit” means decrease

b. Assets, expenses and retained earnings are debited for increases

c. Liabilities, revenue and share capital are credited for increases

d. Assets, revenue and share capital are debited for decreases

4. The normal balance of an account is on the:

a. Debit side

b. Credit side

c. Side represented by the increase in the account balance

d. Side represented by the decrease in the account balance

5. Which is not a possible combination of a journal entry?

a. Increase in asset and increase in liability

b. Decrease in equity and increase in liability

c. Decrease liability and decrease in asset

d. Increase in asset and decrease in equity

6. A simple journal entry:

a. Consists of one debit and one credit

b. Consists of two debits and one credit

c. Consists of one debit and two credits

d. Contains more than two accounts

7. Posting:

a. Accumulates the effects of ledger entries and transfers them to the general journal.

b. Is done only for income statement activity because activity related to the statement of financial
position does not require posting.

c. Is done once every year.

d. Transfers journal entries to the ledger accounts.

8. A trial balance may prove that debits and credits are equal, except:

a. An amount could be entered in the wrong account.

b. A transaction could have been entered twice.

c. A transaction could have been omitted.

d. All of these may prove that debits and credits are equal.

9. Which of the following is not correct about an unadjusted trial balance?

a. It proves that debits and credits of equal amounts are in the ledger.

b. It is the basis for any adjustments to the account balances.

c. It supplies a listing of open accounts and their balances.

d. It proves that debits and credits were properly entered in the ledger accounts.

10. Adjusting entries effect:

a. One nominal account and one real account.

b. Two nominal accounts.

c. Two real accounts.

d. No particular combination of nominal and real account.

11. Adjusting entries:

a. Are often prepared after the statement of financial position date, but dated as of the statement of
financial position date.

b. Are necessary to enable the financial statements to conform with PFRS.

c. Include both accruals and deferrals.

d. All of the choices are correct regarding adjusting entries.

12. An adjusting entry should never include:

a. A debit to revenue and a credit to liability

b. A debit to expense and a credit to liability

c. A debit to liability and a credit to asset

d. A debit to asset and a credit to revenue

13. The adjusting entry for depreciation has the same effect as the adjusting entry for:

a. An unearned revenue

b. A prepaid expense

c. An accrued revenue

d. An accrued expense
14. If an expense has been incurred but not yet recorded, the adjusting entry would involve:

a. A liability and an asset

b. A liability and a revenue

c. An expense and an asset

d. An asset and a revenue

15. Which statement is not true about accrual and deferral?

a. An accrued expense is an amount not paid and currently matched with earnings.

b. A prepaid expense is an amount paid and not currently matched with earnings.

c. An accrued income is an amount not collected and currently matched with expenses.

d. A deferred income is an amount collected and currently matched with expenses.

16. An entity is a resort located in Palawan. The entity collects cash when guests make a reservation.
During December 2020, the entity collected P600,000 of cash and recorded the receipt by recognizing
unearned revenue. The entity had earned one-third of this amount and the other two-thirds will be
earned during January 2021. What is the impact of the adjusting entry on December 31, 2020?

a. 400,000 increase in equity

b. 200,000 decrease in liability

c. 600,000 increase in asset

d. 200,000 decrease in equity

17. An entity is a resort located in Boracay. During December 2020, PICPA held an annual conference at
the resort. The charges related to the conference totaled P4,000,000, of which 25% had been paid. The
entity failed to make the appropriate adjusting entry on December 31, 2020 for the uncollected balance.
Which of the following statements is true?

a. Equity is overstated by P3,000,000

b. Equity is understated by P1,000,000

c. Assets are understated by P3,000,000

d. Assets are overstated by P1,000,000

18. During the first year of operations, an entity recorded all purchases of supplies as assets. Supplies in
the amount of P2,000,000 were purchased. Actual year-end supplies unused amounted to P500,000.
What is the impact of the adjusting entry on supplies?

a. Increase in net income P1,500,000

b. Increase in expenses P1,500,000

c. Decrease in assets P500,000

d. Decrease in expenses P500,000

19. An entity reported prepaid supplies at the beginning of the year with a balance of P400,000 before
the reversing entry. Payments for supplies during the year amounted to P2,500,000 and were recorded
as expense. A physical count at the end of the year revealed supplies unused costing P500,000.
Reversing entries are made by the entity. What is the adjusting entry at year-end?

a. Debit Prepaid Supplies and credit Supplies Expense P100,000

b. Debit Supplies Expense and credit Prepaid Supplies P100,000

c. Debit Supplies Expense and credit Prepaid Supplies P2,400,000

d. Debit Prepaid Supplies and credit Supplies Expense P500,000

20. An entity reported wages expense of P3,500,000 for 2020. The wages payable at the beginning of
year amounted to P500,000. Wage payments during the year totaled P3,200,000. The previous year’s
adjusting entry for unpaid wages was reversed on January 1, 2020. What is the adjusting entry for
accrued wages payable on December 31, 2020?

a. Debit Wages Expense and credit Wages Payable P500,000

b. Debit Wages Expense and credit Wages Payable P300,000

c. Debit Wages Expense and credit Wages Payable P800,000

d. Debit Wages Payable and credit Wages Expense P500,000

21. Which of the following is a nominal account?

a. Prepaid insurance

b. Unearned revenue

c. Insurance expense

d. Interest receivable
22. Which of the following errors will cause an imbalance in the trial balance?

a. Omission of a transaction in the journal

b. Posting an entire journal entry twice to the ledger

c. Posting a credit of P7,200 to Accounts Payable as a credit of P7,200 to Accounts Receivable

d. Listing the balance of an account with a debit balance in the credit column of the trial balance

23. Which of the following statements is associated with the accrual basis of accounting?

a. The timing of cash receipts and disbursements is emphasized.

b. A minimum amount of record keeping is required.

c. This method is used less frequently by businesses than the cash method of accounting.

d. Revenues are recognized in the period they are earned, regardless of the time period the cash is
received.

24. An accrued expense is an expense that:

a. Has been incurred but has not been paid.

b. Has been paid but has not been incurred.

c. Has been incurred for which payment is to be made in installments.

d. Will never be paid.

25. In reviewing some adjusting entries, you observe an entry which contains a debit to Prepaid
Insurance and a credit to Insurance Expense. The purpose of this journal entry is to record a(n):

a. Accrued expense

b. Deferred expense

c. Expired cost

d. Prepaid revenue

26. An adjusting entry to record an accrued expense involves a debit to a(n):

a. Expense account and a credit to a prepaid account.

b. Expense account and a credit to cash.

c. Expense account and a credit to a liability account.

d. Liability account and a credit to an expense account.

27. The failure to properly record an adjusting entry to accrue an expense will result in an:

a. Understatement of expenses and an understatement of liabilities.

b. Understatement of expenses and an overstatement of liabilities.

c. Understatement of expenses and an overstatement of assets.

d. Overstatement of expenses and an understatement of assets.

28. Which of the following properly describes a deferral?

a. Cash is received after revenue is earned.

b. Cash is received before revenue is earned.

c. Cash is paid after expense is incurred.

d. Cash is paid in the same period that an expense is incurred.

29. An adjusting entry to allocate a previously recorded asset to expense involves a debit to an:

a. Asset account and a credit to cash

b. Expense account and a credit to cash

c. Expense account and a credit to an asset account

d. Asset account and a credit to an expense account

30. Which of the following adjusting entries will cause an increase in revenues and a decrease in
liabilities?

a. Entry to record an accrued expense

b. Entry to record an accrued revenue

c. Entry to record the consumed portion of an expense paid in advance and initially recorded as an
asset.

d. Entry to record the earned portion of revenue received in advance and initially recorded as
unearned revenue.

31. Which of the following statements about the financial statement worksheet is true?

a. Worksheet must be used to prepare formal financial statements.

b. Worksheet replaces the formal financial statements.

c. Worksheet shows the net income or net loss for the period only after formal financial statements
are prepared.

d. Worksheet is a tool that facilitates the preparation of formal financial statements.

32. Typical adjusting entries:

a. Are always triggered by the issuing of source documents.

b. Are not needed in accrual-basis accounting.

c. Are created to reflect the passage of time to the last day of the accounting period.

d. Are calculated but are never journalized and posted.

33. Recording bad debts expense leads to:

a. A reduction in an asset

b. A reduction in accounts payable

c. A reduction in an expense

d. A reduction in revenue

34. Which of the following is not one of the basic types of adjustments?

a. Prepayments

b. Depreciation

c. Owner’s withdrawal

d. Accruals
35. Accrued expenses are:

a. Another name for accounts receivable

b. Generally not due to be paid until a future period.

c. Unnecessary to record – the financial statements will be correct whether they are recorded or not.

d. Expenses from an earlier accounting period that remain unpaid in the current period.

36. Accrued revenues are:

a. Credited to accounts receivable

b. Another name for accounts payable

c. Unnecessary to record – the financial statements will be correct whether they are recorded or not.

d. Earned in this period but not yet recorded.

37. The journal entry to record depreciation:

a. Credit depreciation expense

b. Debit accumulated depreciation

c. Debit depreciation expense

d. Debit equipment

38. The adjusted trial balance is used for:

a. Preparing the formal financial statements.

b. Preparing adjusting entries.

c. Preparing the general ledger.

d. Preparing the general journal.

39. Suppose a restaurant pays P48,000 to rent a building for the next six months. At the end of the first
month, the adjusting entry would include:

a. A debit to Rent Expense for P6,000

b. A credit to Prepaid Rent for P8,000

c. A debit to Prepaid Rent for P8,000

d. A credit to Rent Expense for P6,000

40. Suppose a banquet hall received a P5,000 deposit on February 1 for a wedding reception to be held
on June 15 of the same year. Assuming the financial reporting date of the banquet hall is June 30, which
of the following statements is true?

a. Balance sheet would show an Unearned Revenue amount of P5,000 for this situation.

b. Income statement would show Rental Revenue of P5,000 for this situation.

c. No journal entry would be made on February 1 for the P5,000 deposit since it is not yet earned on
February 1.

d. Balance sheet would show an Unearned Revenue amount of P5,000, and the income statement
would show Rental Revenue of P5,000 for this situation.

41. The last step in the financial statement worksheet is to calculate the:

a. Net income

b. Total revenues

c. The adjusted trial balance totals

d. Total expenses

42. Suppose a hotel has an Accounts Receivable of P50,000 at the end of the year and, based on
experience, estimates that 2% of this amount will be uncollectible. Which of the following statements is
true at year end?

a. Bad debts expense would be credited for P1,000

b. Allowance for doubtful accounts would be credited for P1,000

c. Bad debts expense would be debited for P500

d. Allowance for doubtful accounts would be debited for P1,000

43. A restaurant had P100 of cleaning supplies on hand at the beginning of the accounting period and
purchased P600 of cleaning supplies during the period. A physical inventory count showed P200 of
cleaning supplies on hand at the end of the period. The adjusting entry for supplies inventory at the end
of the period would be:
a. Dr. Supplies inventory 500; Cr. Supplies expense 500

b. Dr. Supplies expense 500; Cr. Supplies inventory 500

c. Dr. Supplies expense 600; Cr. Supplies inventory 600

d. Dr. Supplies inventory 200; Cr. Supplies expense 200

44. Which of the following statements about Accumulated Depreciation account is true?

a. Owner’s equity account shown on the balance sheet.

b. Liability account shown on the balance sheet.

c. Contra-asset account shown on the balance sheet.

d. Expense account shown on the income statement.

45. Land held for sale is reported on this statement:

a. Statement of Financial Performance

b. Statement of Owner’s Equity

c. Statement of Cash Flows

d. Statement of Financial Position

46. An accrual is:

a. An expense relating to next year and already paid in current year.

b. An expense relating to the current year and paid within current year.

c. An expense relating to next year but not paid in current year.

d. An expense relating to the current year but not paid in current year.

47. The need to provide accruals and prepayments in the double entry system arises from the:

a. Matching concept

b. Going concern concept

c. Prudence concept
d. Duality concept

48. Which of the following is not true?

a. An accrual is a current liability; a prepayment is a current asset.

b. An accrual is a liability; a prepayment is a non-current asset.

c. An accrual is an amount owing at the end of a period; a prepayment is an amount paid in advance.

d. An accrual is a liability; a prepayment is an asset.

49. The debtors balance in the books of a sole trader at the year end is P35,000. Of this amount, 2,500
will never be paid as the debtor has been declared bankrupt. The sole trader estimates that he should
allow a provision of 2% of debtors for further bad debts. The provision for bad debts already appearing
in the trial balance is 750. The debtors figure shown under current assets on the year-end statement of
financial position would be:

a. 31,850

b. 32,500

c. 31,750

d. 34,300

50. The purpose of providing for depreciation in the statement of financial performance is to:

a. Ensure a charge is made against revenue for the amount of a non-current asset used up in achieving
that revenue.

b. Reflect the duality concept.

c. Reflects the net realizable value of the asset in the statement of financial position.

d. Ensure funds are available to purchase new assets to replace those disposed of.

51. Before month-end adjustments are made, the January 31 trial balance of Rose Consulting contains
revenue of P27,900 and expense of P17,340. Adjustments are necessary for the following items:

- Portion of prepaid rent applicable to January; 2,700

- Depreciation for January; 1,440

- Portion of fees collected in advance earned in January; 3,300

- Fees earned in January, not yet billed to customers; 1,950

Net income for January is:

a. P 10,560

b. P 17,070

c. P 7,770

d. Some other amount

52. The CPA firm auditing Mahogany Street Recording Studios found that total owner’s equity was
understated and liabilities were overstated. Which of the following errors could have been the cause?

a. Making the adjustment entry for depreciation expense twice.

b. Failure to record interest accrued on a note payable.

c. Failure to make the adjusting entry to record revenue that had been earned but not yet billed to
clients.

d. Failure to record the earned portion of fees received in advance.

53. A company’s adjusting entry for prepaid insurance is a debit to insurance expense for P600. If the
policy had a six-month duration, how much did it cost originally?

a. P 100

b. P 600

c. P 3,600

d. Cannot be determined from the information given.

54. Which of the following types of adjusting entries is most likely to involve human judgment?

a. Uncollectible receivables

b. Prepaid expenses

c. Deferred revenues

d. Closing entries

55. Which of the following errors will cause a trial balance to be out of balance?

a. A debit to Office Equipment is incorrectly debited to Office Supplies.

b. Forgot to journalize a transaction.

c. Forgot to post a journal entry to the ledger.

d. A credit was posted to an account as a debit.

56. A company’s weekly payroll of P7,500 is paid every Friday. There are five days in a pay period.
Assume that the last day of the month falls on Wednesday. Which of the following is the required
adjusting entry?

a. Debit Unpaid Salaries and credit Salaries Payable for P4,500

b. Debit Salaries Expense and credit Salaries Payable for P4,500

c. Debit Salaries Expense and credit Salaries Payable for P3,000

d. Debit Salaries Payable and credit Salaries Expense for P4,500

57. At the end of the current accounting period, Jimmy Company failed to record utilities consumed
during the period. Jimmy will be billed for the utilities during the next accounting period. As a result,
current period assets, liabilities, equity, and net income, respectively, are:

a. Overstated, overstated, correct, correct

b. Correct, understated, overstated, overstated

c. Overstated, understated, overstated, overstated,

d. Overstated, understated, correct, correct,

58. At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was
omitted. Which of the following statements is true?

a. Owner’s equity at the end of the year was overstated.

b. Salary expense for the year was overstated.

c. The total liabilities at the end of the year was overstated.

d. Net income for the year was understated.

59. At the end of the fiscal year, N Company omitted the usual adjusting entry for depreciation on
equipment. Which of the following statements is true?

a. Total assets will be understated at the end of the current year.

b. The balance sheet, income statement, and statement of owner’s equity will be misstated for the
current year.

c. Expenses will be overstated at the end of the current year.

d. Net income will be understated for the current year.

60. If the adjusting entry is not made for unearned revenues, the result will be:

a. Overstate assets and understate liabilities

b. Overstate liabilities and understate revenue

c. Understate net income and overstate owner’s equity

d. Understate owner’s equity and overstate revenue

II. Problems

The following are the transactions of Poleng Salon (all in Philippine Peso):

April 4 Assets invested by Poleng are: cash, 10,000; supplies, 1,250; office equipment, 7,500.
1500AR

April 4 Paid three months’ rent on a lease rental contract, 4,500.

April 4 Paid the premium on property and casualty insurance policies for the year, 1,800.

April 5 Rendered services on account, 1,500. --

April 6 Received cash from clients as an advance payment for services to be provided, 3,000.
April 7 Purchased additional office furniture on account from Dorian Company, 1,800.

April 8 Received cash from clients on account, 800.

April 11 Paid cash for newspaper advertisement, 120.

April 12 Paid Dorian Company for debt incurred on April 7. -800

April 15 Recorded services provided on account, 2,250.

April 15 Paid part-time receptionist for two-weeks salary, 400.

April 15 Recorded cash from cash clients for fees earned, 3,175.

April 18 Paid cash for supplies, 750.

April 22 Recorded services provided on account, 1,100.

April 22 Recorded cash from cash clients for fees earned, 1,850.

April 25 Received cash from clients on account, 1,600.

April 28 Paid telephone bill for April, 130. 400

April 29 Recorded services provided on account, 1,000.

April 30 Paid part-time receptionist for two-week’s salary, 400.

Adjustments:

a. Insurance expired in April, 150.

b. Ending supplies on hand, 1,020.

c. Depreciation for the office equipment in April, 500. -

d. Rent expired in April, 1,500.

e. Earned 2,000 of services that were previously paid for on April 6.

Determine the balance in the adjusted Financial Statements for the following: (5 points each)

1. Net Income or Loss

2. Total Assets

3. Total Liabilities

4. Total Owner’s Equity (including Net Income or Loss)

5. Ending Cash balance