(1)

TRUE-FALSE—Conceptual

1. Companies should recognize revenue when it is realized and when cash is received.

2. Revenues are realized when a company exchanges goods and services for cash or
claims to cash.

3. Delayed recognition of revenue is appropriate if the sale does not represent substantial
completion of the earnings process.

4. If a company sells its product but gives the buyer the right to return it, the company
should not recognize revenue until the sale is collected.

5. Companies can recognize revenue prior to completion and delivery of the product under
certain circumstances.

6. Companies must use the percentage-of-completion method when estimates of progress

toward completion are reasonably dependable.

7. The most popular input measure used to determine the progress toward completion is
the cost-to-cost basis.

8. If the difference between the Construction in Process and the Billings on Construction in
Process account balances is a debit, the difference is reported as a current asset.

9. The Construction in Process account includes only construction costs under the
percentage-of-completion method.

10. Under the completed-contract method, companies recognize revenue and costs only
when the contract is completed.

11. The principal advantage of the completed-contract method is that reported revenue
reflects final results rather than estimates.

12. Companies must recognize a loss on an unprofitable contract under the percentage-of-
completion method but not the completed-contract method.

13. A loss in the current period on a profitable contract must be recognized under both the
percentage-of-completion and completed-contract method.

14. Under the completion-of-production basis, companies recognize revenue when agricul-
tural crops are harvested since the sales price is reasonably assured and no significant
costs are involved in product distribution.

15. The provision for a loss on an unprofitable contract may be combined with the
Construction in Process account balance under percentage-of-completion but not
completed-contract.

16. Under the installment-sales method, companies defer revenue and income recognition
until the period of cash collection.
17. The installment-sales method defers only the gross profit instead of both the sales price
and cost of goods sold.

18. Deferred gross profit is generally treated as an unearned revenue and classified as a
current liability.

19. Under the cost-recovery method, a company recognizes no revenue or profit until cash
payments by the buyer exceed the cost of the merchandise sold.

20. Companies recognize profit under the cost-recovery method only when cash collections
exceed the total cost of the goods sold.

MULTIPLE CHOICE—Conceptual

21. The revenue recognition principle provides that revenue is recognized when
a. it is realized.
b. it is realizable.
c. it is realized or realizable and it is earned.
d. none of these.

22. When goods or services are exchanged for cash or claims to cash (receivables),
revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.

23. When the entity has substantially accomplished what it must do to be entitled to the
benefits represented by the revenues, revenues are
a. earned.
b. realized.
c. recognized.
d. all of these.

24. Which of the following is not an accurate representation concerning revenue

recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted
to mean the date of delivery to customers.
b. Revenue from services rendered is recognized when cash is received or when
services have been performed.
c. Revenue from permitting others to use enterprise assets is recognized as time
passes or as the assets are used.
d. Revenue from disposing of assets other than products is recognized at the date of
sale.
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25. The process of formally recording or incorporating an item in the financial statements of
an entity is
a. allocation.
b. articulation.
 c. realization.
d. recognition.
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26. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract
on each appliance sold. Although Dot Point sells the appliances on an installment basis,
all service contracts are cash sales at the time of purchase by the buyer. Collections
received for service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.

27. Which of the following is not a reason why revenue is recognized at time of sale?
a. Realization has occurred.
b. The sale is the critical event.
c. Title legally passes from seller to buyer.
d. All of these are reasons to recognize revenue at time of sale.

28. An alternative available when the seller is exposed to continued risks of ownership
through return of the product is
a. recording the sale, and accounting for returns as they occur in future periods.
b. not recording a sale until all return privileges have expired.
c. recording the sale, but reducing sales by an estimate of future returns.
d. all of these.

29. A sale should not be recognized as revenue by the seller at the time of sale if
a. payment was made by check.
b. the selling price is less than the normal selling price.
c. the buyer has a right to return the product and the amount of future returns cannot
be reasonably estimated.
d. none of these.

30. The FASB concluded that if a company sells its product but gives the buyer the right to
return the product, revenue from the sales transaction shall be recognized at the time of sale
only if all of six conditions have been met. Which of the following is not one of these six
conditions?
a. The amount of future returns can be reasonably estimated.
b. The seller's price is substantially fixed or determinable at time of sale.
c. The buyer's obligation to the seller would not be changed in the event of theft or
damage of the product.
d. The buyer is obligated to pay the seller upon resale of the product.

31. In selecting an accounting method for a newly contracted long-term construction project,
the principal factor to be considered should be
a. the terms of payment in the contract.
b. the degree to which a reliable estimate of the costs to complete and extent of
progress toward completion is practicable.
c. the method commonly used by the contractor to account for other long-term
construc-tion contracts.
d. the inherent nature of the contractor's technical facilities used in construction.
32. The percentage-of-completion method must be used when certain conditions exist.
Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably
dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration
to be exchanged, and the manner and terms of settlement.

33. When work to be done and costs to be incurred on a long-term contract can be
estimated dependably, which of the following methods of revenue recognition is
preferable?
a. Installment-sales method
b. Percentage-of-completion method
c. Completed-contract method
d. None of these

34. How should the balances of progress billings and construction in process be shown at
reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred
expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit
balance.

35. In accounting for a long-term construction-type contract using the percentage-of-

completion method, the gross profit recognized during the first year would be the
estimated total gross profit from the contract, multiplied by the percentage of the costs
incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.

36. How should earned but unbilled revenues at the balance sheet date on a long-term
construction contract be disclosed if the percentage-of-completion method of revenue
recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the
portion of work completed.

37. The principal disadvantage of using the percentage-of-completion method of recognizing

revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable
uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue
was actually earned.
 d. none of these.
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38. One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is
a. revenue-percentage basis.
b. cost-percentage basis.
c. progress completion basis.
d. cost-to-cost basis.
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39. The principal advantage of the completed-contract method is that
a. reported revenue is based on final results rather than estimates of unperformed
work.
b. it reflects current performance when the period of a contract extends into more than
one accounting period.
c. it is not necessary to recognize revenue at the point of sale.
d. a greater amount of gross profit and net income is reported than is the case when
the percentage-of-completion method is used.

40. Under the completed-contract method

a. revenue, cost, and gross profit are recognized during the production cycle.
b. revenue and cost are recognized during the production cycle, but gross profit
recognition is deferred until the contract is completed.
c. revenue, cost, and gross profit are recognized at the time the contract is completed.
d. none of these.

41. Cost estimates on a long-term contract may indicate that a loss will result on completion
of the entire contract. In this case, the entire expected loss should be
a. recognized in the current period, regardless of whether the percentage-of-completion
or completed-contract method is employed.
b. recognized in the current period under the percentage-of-completion method, but the
completed-contract method should defer recognition of the loss to the time when the
contract is completed.
c. recognized in the current period under the completed-contract method, but the
percentage-of-completion method should defer the loss until the contract is
completed.
d. deferred and recognized when the contract is completed, regardless of whether the
percentage-of-completion or completed-contract method is employed.

42. Cost estimates at the end of the second year indicate a loss will result on completion of
the entire contract. Which of the following statements is correct?
a. Under the completed-contract method, the loss is not recognized until the year the
construction is completed.
b. Under the percentage-of-completion method, the gross profit recognized in the first
year must not be changed.
c. Under the completed-contract method, when the billings exceed the accumulated
costs, the amount of the estimated loss is reported as a current liability.
d. Under the completed-contract method, when the Construction in Process balance
exceeds the billings, the estimated loss is added to the accumulated costs.

43. The criteria for recognition of revenue at the completion of production of precious metals
and farm products include
 a. an established market with quoted prices.
b. low additional costs of completion and selling.
c. units are interchangeable.
d. all of these.

44. In certain cases, revenue is recognized at the completion of production even though no
sale has been made. Which of the following statements is not true?
a. Examples involve precious metals or farm equipment.
b. The products possess immediate marketability at quoted prices.
c. No significant costs are involved in selling the product.
d. All of these statements are true.
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45. For which of the following products is it appropriate to recognize revenue at the
completion of production even though no sale has been made?
a. Automobiles
b. Large appliances
c. Single family residential units
d. Precious metals
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46. When there is a significant increase in the estimated total contract costs but the increase
does not eliminate all profit on the contract, which of the following is correct?
a. Under both the percentage-of-completion and the completed-contract methods, the
estimated cost increase requires a current period adjustment of excess gross profit
recognized on the project in prior periods.
b. Under the percentage-of-completion method only, the estimated cost increase
requires a current period adjustment of excess gross profit recognized on the project
in prior periods.
c. Under the completed-contract method only, the estimated cost increase requires a
current period adjustment of excess gross profit recognized on the project in prior
periods.
d. No current period adjustment is required.

47. Deferred gross profit on installment sales is generally treated as a(n)

a. deduction from installment accounts receivable.
b. deduction from installment sales.
c. unearned revenue and classified as a current liability.
d. deduction from gross profit on sales.

48. The installment-sales method of recognizing profit for accounting purposes is acceptable
if
a. collections in the year of sale do not exceed 30% of the total sales price.
b. an unrealized profit account is credited.
c. collection of the sales price is not reasonably assured.
d. the method is consistently used for all sales of similar merchandise.

49. The method most commonly used to report defaults and repossessions is
a. provide no basis for the repossessed asset thereby recognizing a loss.
b. record the repossessed merchandise at fair value, recording a gain or loss if appropriate.
c. record the repossessed merchandise at book value, recording no gain or loss.
d. none of these.
50. Under the installment-sales method,
a. revenue, costs, and gross profit are recognized proportionate to the cash that is
received from the sale of the product.
b. gross profit is deferred proportionate to cash uncollected from sale of the product,
but total revenues and costs are recognized at the point of sale.
c. gross profit is not recognized until the amount of cash received exceeds the cost of
the item sold.
d. revenues and costs are recognized proportionate to the cash received from the sale
of the product, but gross profit is deferred until all cash is received.
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51. The realization of income on installment sales transactions involves
a. recognition of the difference between the cash collected on installment sales and the
cash expenses incurred.
b. deferring the net income related to installment sales and recognizing the income as
cash is collected.
c. deferring gross profit while recognizing operating or financial expenses in the period
incurred.
d. deferring gross profit and all additional expenses related to installment sales until
cash is ultimately collected.
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52. A manufacturer of large equipment sells on an installment basis to customers with
questionable credit ratings. Which of the following methods of revenue recognition is
least likely to overstate the amount of gross profit reported?
a. At the time of completion of the equipment (completion of production method)
b. At the date of delivery (sales method)
c. The installment-sales method
d. The cost–recovery method

53. A seller is properly using the cost-recovery method for a sale. Interest will be earned on
the future payments. Which of the following statements is not correct?
a. After all costs have been recovered, any additional cash collections are included in
income.
b. Interest revenue may be recognized before all costs have been recovered.
c. The deferred gross profit is offset against the related receivable on the balance
sheet.
d. Subsequent income statements report the gross profit as a separate item of revenue
when it is recognized as earned.

54. Under the cost-recovery method of revenue recognition,

a. income is recognized on a proportionate basis as the cash is received on the sale of
the product.
b. income is recognized when the cash received from the sale of the product is greater
than the cost of the product.
c. income is recognized immediately.
d. none of these.

55. Winser, Inc. is engaged in extensive exploration for water in Utah. If, upon discovery of
water, Winser does not recognize any revenue from water sales until the sales exceed
the costs of exploration, the basis of revenue recognition being employed is the
a. production basis.
b. cash (or collection) basis.
 c. sales (or accrual) basis.
d. cost recovery basis.

56. The deposit method of revenue recognition is used when

a. the product can be marketed at quoted prices and units are interchangeable.
b. cash is received before the sales transaction is complete.
c. the contract is short-term or the percentage-of-completion method can’t be used.
d. there are no significant costs of distribution.

57. The cost-recovery method

a. is prohibited under current GAAP due to its conservative nature.
b. requires a company to defer profit recognition until all cash payments are received
from the buyer.
c. is used by sellers when there is a reasonable basis for estimating collectibility.
d. recognizes total revenue and total cost of goods sold in the period of sale.

*58. Types of franchising arrangements include all of the following except

a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.

*59. In consignment sales, the consignee

a. records the merchandise as an asset on its books.
b. records a liability for the merchandise held on consignment.
c. recognizes revenue when it ships merchandise to the consignor.
d. prepares an “account report” for the consignor which shows sales, expenses, and
cash receipts.

*60. Some of the initial franchise fee may be allocated to

a. continuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as
revenue.

*61. Continuing franchise fees should be recorded by the franchisor

a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.

*62. Occasionally a franchise agreement grants the franchisee the right to make future
bargain purchases of equipment or supplies. When recording the initial franchise fee, the
franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the
expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase
the selling price when the franchisee subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain
purchases are made.
 d. None of these.

*63. A franchise agreement grants the franchisor an option to purchase the franchisee's
business. It is probable that the option will be exercised. When recording the initial
franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the
franchisor's investment in the purchased outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the
amount of cash paid when the option is exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain
purchase option as a reduction of the future amounts receivable from the franchisee.
d. None of these.

*64. Revenue is recognized by the consignor when the

a. goods are shipped to the consignee.
b. consignee receives the goods.
c. consignor receives an advance from the consignee.
d. consignor receives an account sales from the consignee.

(2)
MULTIPLE CHOICE—Computational

Use the following information for questions 65-68:

Seasons Construction is constructing an office building under contract for Cannon Company.
The contract calls for progress billings and payments of $930,000 each quarter. The total
contract price is $11,160,000 and Seasons estimates total costs of $10,650,000. Seasons
estimates that the building will take 3 years to complete, and commences construction on
January 2, 2012.

65. At December 31, 2012, Seasons estimates that it is 30% complete with the construction,
based on costs incurred. What is the total amount of Revenue from Long-Term
Contracts recognized for 2012 and what is the balance in the Accounts Receivable
account assuming Cannon Cafe has not yet made its last quarterly payment?
Revenue Accounts Receivable
a. $3,720,000 $3,720,000
b. $3,195,000 $ 930,000
c. $3,348,000 $ 930,000
d. $3,195,000 $3,720,000

66. At December 31, 2013, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $10,800,000
due to unanticipated price increases. What is the total amount of Construction Expenses
that Seasons will recognize for the year ended December 31, 2013?
a. $8,100,000
b. $4,725,000
c. $4,792,500
d. $4,905,000
67. At December 31, 2013, Seasons Construction estimates that it is 75% complete with the
building; however, the estimate of total costs to be incurred has risen to $10,800,000
due to unanticipated price increases. What is reported in the balance sheet at December
31, 2013 for Seasons as the difference between the Construction in Process and the
Billings on Construction in Process accounts, and is it a debit or a credit?
Difference between the accounts Debit/Credit
a. $2,535,000 Credit
b. $930,000 Debit
c. $660,000 Debit
d. $930,000 Credit

68. Seasons Construction completes the remaining 25% of the building construction on
December 31, 2014, as scheduled. At that time the total costs of construction are
$11,250,000. What is the total amount of Revenue from Long-Term Contracts and
Construction Expenses that Seasons will recognize for the year ended December 31,
2014?
Revenue Expenses
a. $11,160,000 $11,250,000
b. $2,790,000 $ 2,812,000
c. $2,790,000 $ 3,150,000
d. $2,812,500 $ 2,812,500

The following information relates to questions 69 and 70.

Cooper Construction Company had a contract starting April 2013, to construct a $12,000,000
building that is expected to be completed in September 2015, at an estimated cost of
$11,000,000. At the end of 2013, the costs to date were $5,060,000 and the estimated total
costs to complete had not changed. The progress billings during 2013 were $2,400,000 and the
cash collected during 2013 was 1,600,000.

69. For the year ended December 31, 2013, Cooper would recognize gross profit on the
building of:
a. $421,667
b. $460,000
c. $540,000
d. $0

70. At December 31, 2013 Cooper would report Construction in Process in the amount of:
a. $460,000
b. $5,060,000
c. $5,520,000
d. $4,720,000

71. Hayes Construction Corporation contracted to construct a building for $3,000,000.

Construction began in 2012 and was completed in 2013. Data relating to the contract are
summarized below:
Year ended
December 31,
2012 2013
Costs incurred $1,200,000 $900,000
Estimated costs to complete 800,000 —
 Hayes uses the percentage-of-completion method as the basis for income recognition.
For the years ended December 31, 2012, and 2013, respectively, Hayes should report
gross profit of
a. $540,000 and $360,000.
b. $1,800,000 and $1,200,000.
c. $600,000 and $300,000.
d. $0 and $900,000.

72. Monroe Construction Company uses the percentage-of-completion method of

accounting. In 2013, Monroe began work on a contract it had received which provided
for a contract price of $20,000,000. Other details follow:
2013
Costs incurred during the year $9,600,000
Estimated costs to complete as of December 31 6,400,000
Billings during the year 8,800,000
Collections during the year 5,200,000
What should be the gross profit recognized in 2013?
a. $800,000
b. $10,400,000
c. $2,400,000
d. $4,000,000

Use the following information for questions 73 and 74.

In 2013, Fargo Corporation began construction work under a three-year contract. The contract
price is $3,600,000. Fargo uses the percentage-of-completion method for financial accounting
purposes. The income to be recognized each year is based on the proportion of costs incurred
to total estimated costs for completing the contract. The financial statement presentations
relating to this contract at December 31, 2013, follow:
Balance Sheet
Accounts receivable—construction contract billings $150,000
Construction in progress $450,000
Less contract billings 360,000
Costs and recognized profit in excess of billings 90,000

Income Statement
Income (before tax) on the contract recognized in 2013 $90,000

73. How much cash was collected in 2013 on this contract?

a. $150,000
b. $210,000
c. $30,000
d. $360,000

74. What was the initial estimated total income before tax on this contract?
a. $450,000
b. $480,000
c. $600,000
d. $720,000
75. Adler Construction Co. uses the percentage-of-completion method. In 2012, Adler began
work on a contract for $5,500,000 and it was completed in 2013. Data on the costs are:
Year Ended December 31
2012 2013
Costs incurred $1,950,000 $1,400,000
Estimated costs to complete 6300,000 —
For the years 2012 and 2013, Adler should recognize gross profit of
2012 2013
a. $0 $2,150,000
b. $1,290,000 $860,000
c. $1,350,000 $800,000
d. $1,350,000 $2,150,000

Use the following information for questions 76 and 77.

Gomez, Inc. began work in 2012 on contract #3814, which provided for a contract price of
$9,600,000. Other details follow:
2012 2013
Costs incurred during the year $1,600,000 $4,900,000
Estimated costs to complete, as of December 31 4,800,000 0
Billings during the year 1,800,000 7,200,000
Collections during the year 1,200,000 5,850,000
76. Assume that Gomez uses the percentage-of-completion method of accounting. The
portion of the total gross profit to be recognized as income in 2012 is
a. $600,000.
b. $800,000.
c. $2,400,000.
d. $3,200,000.

77. Assume that Gomez uses the completed-contract method of accounting. The portion of
the total gross profit to be recognized as income in 2013 is
a. $1,200,000.
b. $1,800,000.
c. $3,100,000.
d. $9,600,000.

Use the following information for questions 78 and 79.

Kiner, Inc. began work in 2012 on a contract for $12,600,000. Other data are as follows:
2012 2013
Costs incurred to date $5,400,000 $8,400,000
Estimated costs to complete 3,600,000 —
Billings to date 4,200,000 12,600,000
Collections to date 3,000,000 10,800,000

78. If Kiner uses the percentage-of-completion method, the gross profit to be recognized in
2012 is
a. $2,160,000.
b. $2,400,000.
 c. $3,240,000.
d. $3,600,000.

79. If Kiner uses the completed-contract method, the gross profit to be recognized in 2013 is
a. $2,040,000.
b. $4,200,000.
c. $2,100,000.
d. $8,400,000.

Use the following information for questions 80 and 81.

80. Horner Construction Co. uses the percentage-of-completion method. In 2012, Horner
began work on a contract for $11,000,000; it was completed in 2013. The following cost
data pertain to this contract:
Year Ended December 31
2012 2013
Cost incurred during the year $3,900,000 $2,800,000
Estimated costs to complete at the end of year 2,600,000 —
The amount of gross profit to be recognized on the income statement for the year ended
December 31, 2013 is
a. $1,600,000.
b. $1,720,000.
c. $1,800,000.
d. $4,300,000.
81. If the completed-contract method of accounting was used, the amount of gross profit to
be recognized for years 2012 and 2013 would be
2012 2013
a. $4,500,000. $0.
b. $4,300,000. $(200,000).
c. $0. $4,300,000.
d. $0. $4,500,000.

82. Remington Construction Company uses the percentage-of-completion method. During

2012, the company entered into a fixed-price contract to construct a building for
Sherman Company for $18,000,000. The following details pertain to the contract:
At December 31, 2012 At December 31, 2013
Percentage of completion 25% 60%
Estimated total cost of contract $13,500,000 $15,000,000
Gross profit recognized to date 1,125,000 1,800,000
The amount of construction costs incurred during 2013 was
a. $9,000,000.
b. $5,625,000.
c. $3,375,000.
d. $1,500,000.

Use the following information for questions 83 and 84.

Eilert Construction Company had a contract starting April 2013, to construct a $18,000,000
building that is expected to be completed in September 2014, at an estimated cost of
$16,500,000. At the end of 2013, the costs to date were $7,590,000 and the estimated total
costs to complete had not changed. The progress billings during 2013 were $3,600,000 and the
cash collected during 2013 was $2,400,000. Eilert uses the percentage-of-completion method.

83. For the year ended December 31, 2013, Eilert would recognize gross profit on the
building of
a. $0.
b. $632,500.
c. $690,000.
d. $810,000.

84. At December 31, 2013, Eilert would report Construction in Process in the amount of
a. $8,280,000.
b. $7,590,000.
c. $7,080,000.
d. $690,000.

85. Hiser Builders, Inc. is using the completed-contract method for a $8,400,000 contract
that will take two years to complete. Data at December 31, 2013, the end of the first year, are as
follows:
Costs incurred to date $3,840,000
Estimated costs to complete 4,920,000
Billings to date 3,600,000
Collections to date 3,000,000
The gross profit or loss that should be recognized for 2013 is
a. $0.
b. a $360,000 loss.
c. a $180,000 loss.
d. a $158,400 loss.

Use the following information for questions 86 through 88.

Gorman Construction Co. began operations in 2013. Construction activity for 2013 is shown
below. Gorman uses the completed-contract method.
Billings Collections Estimated
Contract Through Through Costs to Costs to
Contract Price 12/31/13 12/31/13 12/31/13 Complete
1 $3,200,000 $3,150,000 $2,600,000 $2,150,000 —
2 3,600,000 1,500,000 1,000,000 820,000 $1,880,000
3 3,300,000 1,900,000 1,800,000 2,250,000 1,200,000

86. Which of the following should be shown on the income statement for 2013 related to
Contract 1?
a. Gross profit, $450,000
b. Gross profit, $1,000,000
c. Gross profit, $1,050,000
d. Gross profit, $600,000

87. Which of the following should be shown on the balance sheet at December 31, 2013
related to Contract 2?
 a. Inventory, $680,000
b. Inventory, $820,000
c. Current liability, $680,000
d. Current liability, $1,500,000

88. Which of the following should be shown on the balance sheet at December 31, 2013
related to Contract 3?
a. Inventory, $200,000
b. Inventory, $350,000
c. Inventory, $2,100,000
d. Inventory, $2,250,000

(3)

89. Oliver Co. uses the installment-sales method. When an account had a balance of
$11,200, no further collections could be made and the dining room set was repossessed. At that
time, it was estimated that the dining room set could be sold for $3,200 as repossessed, or for
$4,000 if the company spent $400 reconditioning it. The gross profit rate on this sale was 70%.
The gain or loss on repossession was a
a. $7,840 loss.
b. $8,000 loss.
c. $800 gain.
d. $240 gain.

90. Spicer Corporation has a normal gross profit on installment sales of 30%. A 2011 sale
resulted in a default early in 2013. At the date of default, the balance of the installment
receivable was $40,000, and the repossessed merchandise had a fair value of $22,500.
Assuming the repossessed merchandise is to be recorded at fair value, the gain or loss
on repossession should be
a. $0.
b. a $5,500 loss.
c. a $5,500 gain.
d. a $12,500 loss.

91. Fryman Furniture uses the installment-sales method. No further collections could be
made on an account with a balance of $36,000. It was estimated that the repossessed
furniture could be sold as is for $10,800, or for $12,600 if $600 were spent reconditioning
it. The gross profit rate on the original sale was 40%. The loss on repossession was
a. $9,600.
b. $9,000.
c. $24,000.
d. $25,200.

92. Melton Company sold some machinery to Addison Company on January 1, 2012. The
cash selling price would have been $758,160. Addison entered into an installment sales
contract which required annual payments of $200,000, including interest at 10%, over
five years. The first payment was due on December 31, 2012. What amount of interest
income should be included in Melton's 2013 income statement (the second year of the
contract)?
 a. $20,000
b. $63,398
c. $40,000
d. $55,816

93. Carperter Company has used the installment method of accounting since it began
operations at the beginning of 2013. The following information pertains to its operations for
2013:
Installment sales $ 2,100,000
Cost of installment sales 1,470,000
Collections of installment sales 840,000
General and administrative expenses 210,000
The amount to be reported on the December 31, 2013 balance sheet as Deferred Gross
Profit should be
a. $ 252,000.
b. $ 378,000.
c. $ 504,000.
d. $1,260,000.

94. Daily, Inc. appropriately used the installment method of accounting to recognize income
in its financial statement. Some pertinent data relating to this method of accounting
include:
2012 2013
Installment sales $750,000 $900,000
Cost of sales 450,000 630,000
Gross profit $300,000 $270,000
Collections during year:
On 2012 sales 150,000 150,000
On 2013 sales 180,000
What amount to be realized gross profit should be reported on Daily’s income statement
for 2013?
a. $99,000
b. $114,000
c. $132,000
d. $162,000

95. Sutton Company sells plasma-screen televisions on an installment basis and

appropriately uses the installment-sales method of accounting. A customer with an
account balance of $2,800 refuses to make any more payments and the merchandise is
repossessed. The gross profit rate on the original sale is 40%. Sutton estimates that the
television can be sold as is for $875, or for $1,050 if $70 is spent to refurbish it. The loss
on repossession is
a. $1,925.
b. $1,120.
c. $ 805.
d. $ 700.

Use the following information for questions 96-98.

During 2012, Vaughn Corporation sold merchandise costing $3,000,000 on an installment basis
for $4,000,000. The cash receipts related to these sales were collected as follows: 2012,
$1,600,000; 2013, $1,400,000; 2014, $1,000,000.

96. What is the rate of gross profit on the installment sales made by Vaughn Corporation
during 2012?
a. 75%
b. 60%
c. 40%
d. 25%

97. If expenses, other than the cost of the merchandise sold, related to the 2012 installment
sales amounted to $180,000, by what amount would Vaughn’s net income for 2012
increase as a result of installment sales?
a. $ 220,000
b. $ 355,000
c. $ 400,000
d. $1,420,000

98. What amount would be shown in the December 31, 2013 financial statement for realized
gross profit on 2012 installment sales, and deferred gross profit on 2012 installment
sales, respectively?
a. $350,000 and $750,000
b. $650,000 and $350,000
c. $750,000 and $250,000
d. $350,000 and $250,000

Use the following information for questions 99 – 101.

During 2012, Martin Corporation sold merchandise costing $2,800,000 on an installment basis
for $4,000,000. The cash receipts related to these sales were collected as follows: 2012,
$1,600,000; 2013, $1,400,000; 2014, $1,000,000.

99. What is the rate of gross profit on the installment sales made by Martin Corporation
during 2012?
a. 30%
b. 40%
c. 60%
d. 70%

100. If expenses, other than the cost of the merchandise sold, related to the 2012 installment
sales amounted to $160,000, by what amount would Martin’s net income for 2012
increase as a result of installment sales?
a. $1,440,000
b. $ 480,000
c. $ 360,000
d. $ 320,000

101. What amount would be shown in the December 31, 2013 financial statements for
realized gross profit on 2012 installment sales, and deferred gross profit on 2012
installment sales, respectively?
a. $420,000 and $300,000
 b. $780,000 and $420,000
c. $300,000 and $900,000
d. $420,000 and $900,000

Use the following information for questions 102 and 103.

Coaster manufactures and sells logging equipment. Due to the nature of its business, Coaster is
unable to reliably predict bad debts. During 2012, Coaster sold equipment costing $3,600,000
for $5,400,000. The terms of the sale were 20% down, with equal payments due quarterly over
the next 3 years. All payments for 2012 were made on schedule. Round answers to two places.

102. Assuming that Coaster uses the installment method of accounting for its installment
sales, what amount of realized gross profit will Coaster report in its income statement for
the year ended December 31, 2012?
a. $2,520,000
b. $1,680,000
c. $ 840,000
d. $ 554,400

103. Assuming that Coaster uses the cost-recovery method of accounting for its installment
sales, what amount of realized gross profit will Coaster report in its income statement for
the year ended December 31, 2013?
a. $0
b. $ 360,000
c. $ 475,200
d. $1,440,000

104. On January 1, 2013, Shaw Co. sold land that cost $420,000 for $560,000, receiving a
note bearing interest at 10%. The note will be paid in three annual installments of
$225,190 starting on December 31, 2013. Because collection of the note is very
uncertain, Shaw will use the cost-recovery method. How much revenue from this sale
should Shaw recognize in 2013?
a. $0
b. $42,000
c. $56,000
d. $140,000

*105. On April 1, 2013 Weston, Inc. entered into a franchise agreement with a local business-
man. The franchisee paid $300,000 and gave a $200,000, 8%, 3-year note payable with
interest due annually on March 31. Weston recorded the $500,000 initial franchise fee as
revenue on April 1, 2013. On December 30, 2013, the franchisee decided not to open an
outlet under Weston's name. Weston canceled the franchisee's note and refunded
$160,000, less accrued interest on the note, of the $300,000 paid on April 1. What entry
should Weston make on December 30, 2013?
a. Loss on Repossessed Franchise......................................... 160,000
Cash......................................................................... 160,000
b. Loss on Repossessed Franchise......................................... 148,000
Cash......................................................................... 148,000
c. Loss on Repossessed Franchise......................................... 348,000
Cash......................................................................... 148,000
Notes Receivable..................................................... 200,000
 d. Revenue from Franchise Fees............................................. 500,000
Interest Income........................................................ 12,000
Cash......................................................................... 148,000
Notes Receivable..................................................... 200,000
Revenue from Repossessed Franchise................... 140,000

*106. On January 1, 2013 Dairy Treats, Inc. entered into a franchise agreement with a
company allowing the company to do business under Dairy Treats's name. Dairy Treats had
performed substantially all required services by January 1, 2013, and the franchisee paid the
initial franchise fee of $700,000 in full on that date. The franchise agreement specifies that the
franchisee must pay a continuing franchise fee of $60,000 annually, of which 20% must be
spent on advertising by Dairy Treats. What entry should Dairy Treats make on January 1, 2013
to record receipt of the initial franchise fee and the continuing franchise fee for 2013?
a. Cash.................................................................................... 760,000
Franchise Fee Revenue........................................... 700,000
Revenue from Franchise Fees................................. 60,000
b. Cash.................................................................................... 760,000
Unearned Franchise Fees........................................ 760,000
c. Cash.................................................................................... 760,000
Franchise Fee Revenue........................................... 700,000
Revenue from Franchise Fees................................. 48,000
Unearned Franchise Fees........................................ 12,000
d. Prepaid Advertising.............................................................. 12,000
Cash.................................................................................... 760,000
Franchise Fee Revenue........................................... 700,000
Revenue from Franchise Fees................................. 60,000
Unearned Franchise Fees........................................ 12,000

*107. Wynne Inc. charges an initial franchise fee of $1,380,000, with $300,000 paid when the
agreement is signed and the balance in five annual payments. The present value of the
future payments, discounted at 10%, is $818,808. The franchisee has the option to
purchase $180,000 of equipment for $144,000. Wynne has substantially provided all
initial services required and collectibility of the payments is reasonably assured. The
amount of revenue from franchise fees is
a. $ 300,000.
b. $1,082,808.
c. $1,118,808.
d. $1,380,000.

Use the following information for questions 108 and 109.

On May 1, 2013, TV Inc. consigned 80 TVs to Ed's TV. The TVs cost $360. Freight on the
shipment paid by Ed’s TV was $800. On July 10, TV Inc. received an account sales and
$17,200 from Ed's TV. Thirty TVs had been sold and the following expenses were deducted:
Freight $800
Commission (20% of sales price) ?
Advertising 520
Delivery 280

*108. The total sales price of the TVs sold by Ed's TV was
 a. $20,500.
b. $21,500.
c. $21,850.
d. $23,500.

*109. The inventory of TVs will be reported on whose balance sheet and at what amount?
Balance Sheet of Amount of Inventory
a. TV Inc. $18,500
b. TV Inc. $18,000
c. Ed's TV $18,500
d. Ed's TV $18,000

(4)
MULTIPLE CHOICE—CPA Adapted

110. According to the FASB's conceptual framework, the process of reporting an item in the
financial statements of an entity is
a. recognition.
b. realization.
c. allocation.
d. matching.

111. Green Construction Co. has consistently used the percentage-of-completion method of
recognizing revenue. During 2012, Green entered into a fixed-price contract to construct
an office building for $16,000,000. Information relating to the contract is as follows:
At December 31
2012 2013
Percentage of completion 15% 45%
Estimated total cost at completion $12,000,000 $12,800,000
Gross profit recognized (cumulative) 800,000 1,920,000
Contract costs incurred during 2013 were
a. $3,840,000.
b. $3,960,000.
c. $4,200,000.
d. $5,760,000.

112. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of
recognizing income. In 2012, Bruner started work on a $28,000,000 construction contract that
was completed in 2013. The following information was taken from Bruner's 2012 accounting
records:
Progress billings $8,800,000
Costs incurred 8,400,000
Collections 5,600,000
Estimated costs to complete 16,800,000
What amount of gross profit should Bruner have recognized in 2012 on this contract?
a. $2,800,000
b. $1,866,667
c. $1,400,000
 d. $933,333

113. During 2012, Gates Corp. started a construction job with a total contract price of
$7,000,000. The job was completed on December 15, 2013. Additional data are as
follows:
2012 2013
Actual costs incurred $2,700,000 $3,050,000
Estimated remaining costs 2,700,000 —
Billed to customer 2,400,000 4,600,000
Received from customer 2,000,000 4,800,000
Under the completed-contract method, what amount should Gates recognize as gross
profit for 2013?
a. $450,000
b. $625,000
c. $950,000
d. $1,250,000

114. Hogan Farms produced 1,200,000 pounds of cotton during the 2013 season. Hogan
sells all of its cotton to Ott Co., which has agreed to purchase Hogan's entire production
at the prevailing market price. Recent legislation assures that the market price will not
fall below $.70 per pound during the next two years. Hogan's costs of selling and
distributing the cotton are immaterial and can be reasonably estimated. Hogan reports
its inventory at expected exit value. During 2013, Hogan sold and delivered to Ott
900,000 pounds at the market price of $.70. Hogan sold the remaining 300,000 pounds
during 2014 at the market price of $.72. What amount of revenue should Hogan
recognize in 2013?
a. $630,000
b. $648,000
c. $840,000
d. $864,000

115. Braun, Inc. appropriately uses the installment-sales method of accounting to recognize
income in its financial statements. Some pertinent data relating to this method of accounting
include:
2012 2013
Installment sales $750,000 $720,000
Cost of installment sales 570,000 504,000
Gross profit $180,000 $216,000

Rate of gross profit 24% 30%

Balance of deferred gross profit at year end:

2012 $108,000 $ 36,000
2013 198,000
Total $108,000 $234,000
What amount of installment accounts receivable should be presented in Braun's
December 31, 2013 balance sheet?
a. $720,000
b. $810,000
c. $780,000
 d. $866,666

116. Hartz Co., which began operations on January 1, 2013, appropriately uses the
installment-sales method of accounting. The following information pertains to Hartz's
operations for the year 2013:
Installment sales $2,000,000
Regular sales 800,000
Cost of installment sales 1,200,000
Cost of regular sales 480,000
General and administrative expenses 160,000
Collections on installment sales 480,000
The deferred gross profit account in Hartz's December 31, 2013 balance sheet should
be
a. $192,000.
b. $320,000.
c. $608,000.
d. $800,000.

117. On January 1, 2012, Orton Co. sold a used machine to King, Inc. for $700,000. On this
date, the machine had a depreciated cost of $490,000. King paid $100,000 cash on
January 1, 2012 and signed a $600,000 note bearing interest at 10%. The note was
payable in three annual installments of $150,000 beginning January 1, 2013. Orton
appropriately accounted for the sale under the installment method. King made a timely
payment of the first installment on January 1, 2013 of $260,000, which included interest
of $60,000 to date of payment. At December 31, 2013, Orton has deferred gross profit of
a. $140,000.
b. $132,000.
c. $120,000.
d. $102,000.

118. Piper Co. began operations on January 1, 2013 and appropriately uses the installment
method of accounting. The following information pertains to Piper's operations for 2013:
Installment sales 2,400,000
Cost of installment sales 1,440,000
General and administrative expenses 240,000
Collections on installment sales 1,100,000
The balance in the deferred gross profit account at December 31, 2013 should be
a. $440,000.
b. $660,000.
c. $520,000.
d. $960,000.

119. Moon Co. records all sales using the installment method of accounting. Installment sales
contracts call for 36 equal monthly cash payments. According to the FASB's conceptual
framework, the amount of deferred gross profit relating to collections 12 months beyond
the balance sheet date should be reported in the
a. current liabilities section as a deferred revenue.
b. noncurrent liabilities section as a deferred revenue.
 c. current assets section as a contra account.
d. noncurrent assets section as a contra account.

120. Crane, Inc. is a retailer of home appliances and offers a service contract on each
appliance sold. Crane sells appliances on installment contracts, but all service contracts
must be paid in full at the time of sale. Collections received for service contracts should
be recorded as an increase in a
a. deferred revenue account.
b. sales contracts receivable valuation account.
c. stockholders' valuation account.
d. service revenue account.
121. The Person Company purchased a jewel polishing machine for P360,000 on January 1,
2017 and received a government grant of P50,000 towards the capital cost. Company policy is
to treat the grant as a reduction in the cost of the asset. The machine was to be depreciated on
a straight-line basis over 8 years and was estimated to have a residual value of P5,000 at the
end of this period. Under PAS 20, what should be the depreciation expense in respect of the
machine for the year ended December 31, 2017?
a. P38,750
b. P76,250
c. P44,375
d. P38,125

122. Which of the following statements is true concerning acquisition of an item of property,
plant and equipment by self-construction?
a. The self-constructed asset is determined using the same principles for an acquired asset.
b. An internal profit is eliminated in arriving the cost of self-constructed asset.
c. The cost of abnormal amount of wasted material is not included in the cost of the asset.
d. All of the statements are true.

123. The cost of an item of property, plant and equipment that is acquired in exchange for
combination of monetary and nonmonetary asset is measured at the
a. Fair value of the asset given plus cash payment
b. Fair value of the asset received plus cash payment
c. Carrying amount of the asset given up plus cash payment
d. Carrying amount of the asset received plus the cash payment

124. Major spare parts and standby equipment which are expected to be used over a period of
more than one year shall be classified as
a. Property, plant and equipment
b. Inventory
c. Noncurrent investment
d. Expense

125. In an exchange of PPE with commercial substance

a. Gain or loss is recognized entirely
b. A gain or loss is computed by comparing the fair value of the asset received with the fair
value of the assets given up
c. Only gain should be recognized
d. Only loss should be recognized

126. Bernie Company made the following expenditures relating to its plant assets during 2018:

Partial Replacement P42,000

Major improvement to the electrical wiring system 196,000
Continuing and frequent repair 120,000

As a result of the improvement to the electrical wiring system future economic benefit will flow to
the enterprise. How much should be changed to repairs and maintenance expense?
a. P120,000
b. P138,000
c. P162,000
d. P258,000
127. On January 2, 2018, Protein Company purchased a transportation equipment costing
P2,400,000. The new asset has an estimated useful life of 8 years with no salvage value.
Protein Company depreciates this type of asset using the straight-line method. On January 2,
2020, Protein determined that the machine had a useful life of 6 years from the date of
acquisition with no salvage value. As a result of the change in the estimated useful life of the
asset, what is the carrying value of the transportation equipment as of December 31, 2020?
a. P1,200,000
b. P1,350,000
c. P1,500,000
d. P1,800,000

128. Which of the following principles best describes the conceptual rationale for the methods of
matching depreciation expense with revenues?
a. Associating cause and effect
b. Systematic and rational allocation
c. Immediate recognition
d. Partial recognition

129. Lennon Company purchased a depreciable asset for P200,000. The estimated salvage
value is P10,000, and the estimated useful life is 10,000 hours. Lennon used the asset for 1,100
hours in the current year. The activity method will be used for depreciation. What is the
depreciation expense on this asset?
a. P19,000
b. P20,900
c. P22,000
d. P190,000

130. A plant asset has a cost of P24,000 and a salvage value of P6,000. The asset has a three-
year life. If depreciation in the third year amounted to P3,000, which depreciation method was
used?
a. Straight-line
b. Declining-balance
c. Sum-of-the-years'-digits
d. Cannot tell from information given

131. On December 31, 2016, Aethan C. revalued its machinery with a cost of P8,000,000,
accumulated depreciation of P2,000,000, and an estimated useful life of 20 years has been
estimated to have a replacement cost of P15,000,000. On January 2, 2019, the machinery was
sold at net proceeds of P10,000,000. What is the revaluation surplus on December 31, 2016?
a. P1,750,000
b. P3,750,000
c. P5,250,000
d. P7,000,000

132. ON January 1, 2016, Jan Co. revalued it machinery with a cost of P12,000,000, acquired 4
years ago with an estimated useful life of 20 years and has been estimated to have a
replacement cost of P14,000,000. The machinery is estimated to have a remaining useful life of
25 years as of January 1, 2016. On January 2, 2018, the machinery was sold at net proceeds of
P10,000,000. How much is the depreciation expense in 2016?
a. P400,000
b. P448,000
c. P480,000
d. P560,000

133. Entities are encouraged to disclose all of the following in relation to property, plant and
equipment, except:
a. The carrying amount of temporarily idle property, plant and equipment
b. The gross carrying amount of fully depreciated property, plant and equipment still in use.
c. The carrying amount of property, plant and equipment classified as held for sale.
d. The fair value of property, plant and equipment that is not materially different from carrying
amount when the cost model is used.

134. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair value. The
retail price of that car that Vik gave up is less than the retail price of the clothes received. What
profit should Vik recognize for the nonmonetary exchange?
a. A profit is not recognized
b. A profit equal to the difference between the retail price of the clothes received and the car.
c. A profit equal to the difference between the retail price and the cost of the car.
d. A profit equal to the difference between the fair value and the carrying amount of the car.

135. Depletion expense

a. is usually part of cost of goods sold.
b. includes tangible equipment costs in the depletion base.
c. excludes intangible development costs from the depletion base.
d. excludes restoration costs from the depletion base.

(5)

136. In January 2017, Jenn Mining Corporation purchased a mineral mine for P4,200,000 with
removable ore estimated by geological surveys at 2,500,000 tons. The property has an
estimated value of P400,000 after the ore has been extracted. Jenn incurred P1,150,000 of
development costs preparing the property for the extraction of ore. During 2017, 340,000 tons
were removed and 300,000 tons were sold. For the year ended December 31, 2017, Jenn
should include what amount of depletion in its cost of goods sold?
a. P516,800
b. P456,000
c. P594,000
d. P673,200

137. If the qualifying asset is financed by specific borrowing, the capitalizable borrowing cost is
equal to
a. Actual borrowing cost incurred
b. Actual borrowing cost incurred up to completion of asset
c. Actual borrowing cost incurred up to completion of asset minus any investment income from
the temporary investment of the borrowing.
d. Zero

138. Faith, Inc. has a fiscal year ending April 30. On May 1, 2018, Faith borrowed P10,000,000
at 15% to finance construction of its own building. Repayments of the loan are to commence on
the month following completion of the building. During the year ended, April 30, 2019,
expenditures for the partially completed structure totaled P6,000,000. These expenditures were
incurred evenly throughout the year. Interest earned on the unexpended portion of the loan
amount to P400,000 for the year. How much should be shown as capitalized interest on Faith’s
financial statements at April 30, 2019?
a. None
b. P50,000
c. P450,000
d. 1,100,000

Use the following information for the next two questions:

On January 1, 20x1, Entity A had the following general borrowings. A part of the proceeds was
used to finance the construction of a qualifying asset:
Principal
12% bank loan (1.5 years) ₱ 1,000,000
10% bank loan (3-year) 8,000,000

Expenditures made on the qualifying asset were as follows:

Jan. 1 ₱ 5,000,000
March 1 4,000,000
August 31 3,000,000
December 1 2,000,000

Construction was completed on December 31, 20x1.

139. How much borrowing costs are capitalized to the cost of the constructed qualifying asset?
a. 1,045,000 c. 1,026,667
b. 971,111 d. 920,000

140. How much is the cost of the qualifying asset on initial recognition?
a. 13,010,000 c. 14,920,000
b. 15,045,000 d. 14,971,111

141. During 2016, Belardo Corporation constructed and manufactured certain assets, and
incurred the following interest costs in connection with those activities:

Interest costs incurred on warehouse constructed for Belardo’s own use 20,000
Special-order machine for sale to unrelated customer 9,000
Inventories routinely manufactured, produced on a repetitive basis 7,000

All of these assets required an extended period of time for completion. Assuming the effect of
interest capitalization is material, what is the total amount of interest cost to be capitalized>
a. 0
b. 20,000
c. 29,000
d. 36,000

142. In which of the following instances is the capitalization of borrowing costs under PAS 23
would most likely be suspended?
a. Construction is temporarily stopped for the curing of concrete.
b. Active development is stopped to give time for the engineers to reevaluate a design flaw.
c. The construction of a bridge is disrupted by troubled waters.
d. The construction of a building is discontinued because it is condemned by the government.
The resumption of development is uncertain.

143. Expenditures on a qualifying asset include only those that have resulted in the following,
except:
a. Payments of cash
b. Transfers of other assets
c. Purchases on account
d. The assumption of interest-bearing liabilities

144. Which of the following would not be reported as investment property?

a. Property owned by the entity and leased out under one or more operating leases.
b. Property held by the entity to be leased out under one or more operating leases
c. Real estate held for an undetermined future use.
d. Property owned by the entity and leased out to another entity under a finance lease.

145. A property is classified as investment property if

a. it is leased out under a finance lease.
b. the owner-occupied portion of the property is significant.
c. the entity provides relatively insignificant ancillary services (e.g., security, janitorial services,
and the like) to the occupants of the property.
d. it is rented between a parent entity and a subsidiary and consolidated financial statement are
prepared for the group.

146. On January 1, 2016, Rachel Company leased a building from Gold Company for the
purpose of letting out to tenants. The lease is properly classified as finance lease under PAS 17.
The fair value of the building on January 1 and December 31 is P3.5 million and P4 Million,
respectively. The present value of the minimum lease payment computed based on the implicit
interest rate of 12% is P3.2 million. What amount should be the amount to be recorded by
Rachel Company on January 1, 2016 as investment property?
a. P4 Million
b. P3.2 Million
c. P3.5 Million
d. P3 Million

Use the following information for the next three questions:

Blatche Company completed the construction of a shopping mall at the end of 2014 for a
total cost of P200 million. The mall has an estimated economic life of 25 years. The mall was
constructed for the purpose of earning rentals by letting out space in the shopping mall to
tenants. An independent valuation expert was used by the company to fair value the shopping
mall at the end of 2015 and 2016 were P240 million and P230 million, respectively.

147. If Blatche Company opted to use the cost model to measure the shopping mall, how much
should be recognized in profit or loss in 2016 as a result of the fair value changes?
a. P46,000,000
b. P10,000,000
c. P30,000,000
d. P0
148. If Blatche Company opted to use the cost model to measure the shopping mall, how much
is the carrying amount of the shopping mall to be reported in its statement of financial position
as of December 31, 2016?
a. P23 M
b. P192 M
c. P200 M
d. P184 M

149. If Blatche Company opted to use the fair value model to measure the shopping mall, how
much is the carrying amount of the shopping mall to be reported in its statement of financial
position as of December 31, 2016?
a. P23 M
b. P192 M
c. P200 M
d. P184 M

150. Which of the following statement is incorrect in determining the fair value of an investment
property?
a. An entity shall determine the fair value of investment property by deducting transaction cost
that may be incurred upon disposal.
b. The fair value of investment property shall reflect market conditions at the end of the reporting
period.
c. If an office is leased on a furnished basis, the fair value of the office generally includes fair
value of the furniture because the rental income relate to the furnished office.
d. The fair value of investment property excludes prepaid or accrued operating lease income.

151. On December 31, 20x1, DECAPITATE BEHEAD Co. decided to lease out under operating
lease one of its buildings that was previously used as office space. The building has an original
cost of ₱12,000,000 and accumulated depreciation of ₱8,000,000 as of January 1, 20x1. Annual
depreciation is ₱400,000. DECAPITATE Co. uses the fair value model for investment property.
The fair value of the building on December 31, 20x1 is ₱6,000,000. The entry to record the
transfer of the building to investment property includes a
a. credit to gain on reclassification for ₱2,000,000.
b. credit to revaluation surplus for ₱2,000,000.
c. debit to building for ₱12,000,000.
d. credit to revaluation surplus for ₱2,400,000.

152. Costs incurred internally to create intangibles are

a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.

153. How should research and development costs be accounted for?

a.Must be capitalized when incurred and then amortized over their estimated useful lives.
b.Must be expensed in the period incurred.
c.May be either capitalized or expensed when incurred, depending upon the materiality of the
amounts involved.
d.Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future uses or unless contractually reimbursable.
154. Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance

155. Maris Corporation acquired a patent on May 1, 2018. Maris paid cash of P25,000 to the
seller. Legal fees of P1,000 were paid related to the acquisition. What amount should be debited
to the patent account?
a. P1,000
b. P24,000
c. P25,000
d. P26,000

156. Lopez Corp. incurred P420,000 of research and development costs to develop a product
for which a patent was granted on January 2, 2022. Legal fees and other costs associated with
registration of the patent totaled P80,000. On March 31, 2017, Lopez paid P120,000 for legal
fees in a successful defense of the patent. The total amount capitalized for the patent through
March 31, 2017 should be
a. P200,000.
b. P500,000.
c. P540,000.
d. P620,000.

157. Riley Co. incurred the following costs during 2017:

Modification to the formulation of a chemical product P160,000
Trouble-shooting in connection with breakdowns during commercial
production 150,000
Costs of marketing research for new product 200,000
Seasonal or other periodic design changes to existing products 185,000
Laboratory research aimed at discovery of new technology 215,000
In its income statement for the year ended December 31, 2017, Riley should report research
and development expense of
a. P575,000.
b. P725,000.
c. P415,000.
d. P335,000.

158. A company acquires a patent for a drug with a remaining legal and useful life of six years
on January 1, 2015 for P1,200,000. The company uses straight-line amortization for patents. On
January 2, 2017, a new patent is received for a timed-release version of the same drug. The
new patent has a legal and useful life of twenty years. The least amount of amortization that
could be recorded in 2017 is
a. P200,000.
b. P40,000.
c. P54,545.
d. P60,000.

159. What is the impairment of an asset?

a. A fall in the market value of an asset so that the recoverable amount is less than carrying
amount.
b. A decline in value of an asset so that the recoverable amount is more than carrying amount.
c. An allocation of cost over the useful life of an asset.
d. A change in the estimated useful life of an asset.

160. Marcus Company operates an oil platform in the sea. Marcus Company has provided the
amount of P10,000,000 for the financial costs of the restoration of the seabed, which is the
present value of such costs. Marcus Company has received an offer to buy the oil platform for
P16,000,000 and the disposal costs would be P2,000,000. The value-in-use of the oil platform is
approximately P24,000,000 before the restoration costs. The carrying value of the oil platform is
P20,000,000. What amount of impairment loss should Marcus recognize related to the oil
platform?
a. None
b. P4,000,000
c. P6,000,000

Use the following information for the next two questions:

Coward Company purchased a building on January 1, 2020 for a total of P10,000,000. The
building has been depreciated using the straight-line method with a 25-year useful life and no
residual value. As of January 1, 2024, Coward is evaluating the building for possible
impairment. The building has a remaining useful life of 15 years and is expected to generate
cash inflows of P450,000 per year. The estimated recoverable amount of the building on
January 1, 2024 is P5,310,000.

161. How much if the impairment loss that should be recognized on January 1, 2024?
a. None
b. P2,100,000
c. P3,090,000
d. P5,200,000

162. What is the amount of depreciation to be recognized in year 2024?

a. P340,000
b. P354,000
c. P400,000
d. P560,000

163. Factor Company’s cash generating unit has been assessed for impairment and it has been
determined that the unit has incurred an impairment loss of P240,000. The carrying amounts of
the assets were as follows:

Building P6,000,000
Equipment 2,000,000
Land 3,500,000
Fittings 2,500,000

The cash generating unit has not recorded any amount of goodwill. What amount of impairment
loss should be allocated to the building?
a. P50,000
b. P62,500
c. P87,500
d. P102,857

164. Which of the following statements is true concerning reversal of an impairment loss?
I. The increased carrying amount of the asset due to a reversal of an impairment loss shall not
exceed the carrying amount that would not have been determined had no impairment loss been
recognized in the prior years.
II. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

165. On January 1, 2017, an entity purchased equipment with cost of P10,000,000, useful life of
10 years and no residual value. The entity used straight line depreciation. On December 31,
2017 and December 31, 2018, the entity determined that impairment indicators are present.
There is no change in useful or residual value.
December 31, 2017 December 31, 2018
Fair Value Less cost of disposal P8,100,000 P8,300,000
Value in use 8,550,000 8,200,000

Which of the following is included in preparing the entry on December 31, 2018?
a. Debit to Impairment loss for the amount of P250,000.
b. Debit to Revaluation Surplus for the amount of P700,000.
c. Credit to Gain on Reversal for the amount of P400,000.
d. Debit to Depreciation expense for the amount of P1,000,000.