ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1

CPA Review Batch 45  May 2023 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

1. What is the proper treatment of the following for financial reporting purposes?
Customer Stale Redeemable preference shares acquired
Bank Draft post-dated disbursement 3 months prior to mandatory redemption
check check date
a. Cash Receivable Cash Cash and cash equivalent
b. Liability Cash Payable Cash and cash equivalent
c. Cash Cash Payable Investment
d. Liability Receivable Cash Cash and cash equivalent

2. Which of the following statements in relation to petty cash fund is incorrect?

a. At any given time, the sum of the cash in the petty cash fund and the total of petty cash vouchers should be
equal to the amount which the imprest petty cash fund was established.
b. If cash short/over has a debit balance at the end of the period it must be eventually closed to either an expense
account or a receivable account.
c. A credit balance in cash short/over means the sum of the currencies on hand and the petty cash vouchers is
higher that the amount which the imprest petty cash fund was initially established.
d. With the establishment of an imprest petty cash fund, one person, the custodian, is given the authority and
responsibility for issuing checks to cover minor disbursements.

3. Which of the following best explains the balance shown on the entity’s general ledger for cash in bank being higher
than the correct cash in bank balance with neither the entity nor the bank has made any errors?
a. Deposits in transit
b. Outstanding check
c. Bank service charges not yet recorded by the entity
d. Proceeds of bank loan not yet recorded by the entity

4. Consider the following reconciliation items:

i. Prior month deposits in transit.
ii. P5,400 disbursement check recorded in the books in the current month at P4,500. No corrections
had been made yet.
iii. Bank charge error in the prior month corrected in the current month
iv. Current month outstanding checks.
v. P6,800 customer collection in the prior month recorded in the books at P8,600. The error was
corrected in the current month.
vi. P9,100 disbursement in the current month recorded as P1,900. The error was detected and corrected
immediately in the current month.
vii. Proceeds of a bank loan in the current month, not yet recorded in books.
viii. Bank service charge in the prior month, recorded in the books in the current month.
In a four-column proof of cash, where the unadjusted balances per bank and per books are brought to the
adjusted/correct balances, which among the items above shall appear as a deduction from the total book
credits/disbursements column?
a. ii, v, vi
b. v, vi
c. v, viii
d. ii, v, viii

5. Consider the following reconciliation items:

i. Current month deposits in transit.
ii. P5,400 disbursement check recorded in the books in the current month at P4,500. No corrections
had been made yet.
iii. Bank charge error in the prior month corrected in the current month
iv. Current month outstanding checks.
v. P6,800 customer collection in the prior month recorded in the books at P8,600. The error was
corrected in the current month.
vi. Proceeds of a bank loan in the current month, not yet recorded in books.
vii. Bank service charge in the prior month, recorded in the books in the current month.
In the current month bank reconciliation statement, the balance per bank statement shall be higher than the
correct cash balance for which of the above items?
a. i
b. i, iii
c. iii, iv
d. iv

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

6. Westeros Corp.’s trial balance as of December 31, 2021 showed the following information:
Cash in bank – Metrobank 6,000,000
Time deposit – 90 days 2,000,000
Money market placements due on March 30, 2022 3,000,000
Cash in bank – Sipsipnget Rural Bank 500,000
Sinking fund for bonds payable 1,500,000
Petty cash fund 40,000

Additional information:
• A checks drawn and recorded against the Cash in bank – Metrobank included the following:
o P200,000 dated January 4, 2022, released on December 30, 2021
o P150,000 dated December 30, released on the same date.
o P90,000 dated December 29, 2021 released January 3, 2022
o P20,000 dated June 20, 2021, released on June 22, 2021
• The money market placements was acquired on October 1, 2021.
• Banko Sentral ng Pilipinas ordered the closure and liquidation of Sipsipnget Rural Bank, as a result, the
company expects to recover from the bank deposit the amount insured under PDIC at P200,000.
• The sinking fund for bonds payable was for bonds payable maturing on June 30, 2023.
• Petty cash fund count resulted to: P19,000 in currencies, P15,000 in unreplenished expense vouchers and
P5,000 in employee payroll checks dated December 28 endorsed to the custodian.
What is the correct cash and cash equivalents as of December 31, 2021?
a. 8,309,000 c. 8,330,000
b. 8,329,000 d. 8,334,000

7. Winterfell Company reported the following items on its December 31, 2021 trial balance:

Cash on Hand 690,000

Petty Cash fund 50,000
Cash in Bank – PNB 1,600,000
BSP Treasury bill – 120 days 900,000
Cash in Bank – BPI Time Deposit, 90 days 500,000
Cash in Bank – Rural Bank 800,000
Additional information:
• The cash on hand represents undeposited collections from customers and included the following:
o P25,000 collection check dated January 2, 2022
o P52,000 collection check dated June 3, 2021
o P50,000 money orders
o P70,000 bank certified check
o P35,000 collection check dated December 3, 2021 returned by the bank marked NSF.
• Petty cash fund count consisted of P29,000 unreplenished petty cash expense vouchers and P5,000
employee check dated January 3, 2022.
• Check drawn and recorded against Cash in Bank-PNB included a P62,000 disbursement check dated
December 30, 2021 and released on the same date.
• Cash in Bank – BPI Time Deposit was set aside for the redemption of preference shares.
• Cash in Bank – Rural Bank was set aside as payroll and travel fund.

What is the correct cash and cash equivalents as of December 31, 2021?
a. 2,999,000 c. 2,994,000
b. 2,199,000 d. 2,694,000

8. The petty cash fund of Vale Corp. had an imprest balance of P50,000. On January 31, 2021 the fund consisted of
the following items:
Currencies and coins 12,000
Employee’s IOUs 10,000
Currencies inside an envelope marked 5,000
“Collections for Thypoon Ising Relief”
Unreplenished petty cash expense vouchers 22,000

Assuming fund shall be replenished as at January 31, how much should the replenishment check be?
a. 22,000 c. 27,000
b. 32,000 d. 38,000

9. Riverland Company established a petty cash fund of P25,000. At the end of the year, the fund composed of the
following:

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

Currencies and coins 11,000

Petty cash expense vouchers:
Gasoline and oil 1,500
Office supplies 500
Office repairs and maintenance 750
Employee IOUs 1,750
Check drawn by Riverland Company payable to the custodian 7,500
Check from Charlie Ang, employee dated December 29 1,000
Check from Delia Chua, employee dated January 2 500
An envelope with a piece of paper with names of several employees
marked “Collections for Christmas Party”. Currencies inside the
envelope amounted to: 5,000
What amount of petty cash fund should be reported as of December 31, 2021?
a. 22,500 c. 19,500
b. 20,000 d. 18,500

10. Dragonstone Corp. established a petty cash fund of P40,000. At the end of the year, the fund composed of the
following:
Currencies and coins 15,600
Petty cash expense vouchers:
Gasoline and oil 5,500
Office supplies 3,800
Office repairs and maintenance 2,750
Employee IOUs 1,750
Check payable to the petty cash custodian 9,000
Check of an officer returned by the bank marked NSF 3,000
An envelope with a piece of paper with names of several employees
with corresponding amount contributed for charity. No money inside
the envelope. The contribution according to the list amounts to
3,500
What is the amount of the petty cash shortage/overage as of December 31, 2021?
a. 2,100 c. 5,100
b. 1,400 d. 5,600

11. Essos Corp provided the following data at the end of the current month:
Cash in bank balance per general ledger 2,012,000
Proceeds of bank loan 650,000
Outstanding checks, including P5,000 certified check 290,000
Undeposited collection, including P12,000 customer collection check
marked DAUD 410,000
Payment of depositors note payable charged to the account 310,000
Bank service charges 8,000
Bank charge error 64,000
Cash balance per bank statement 2,155,000
What is the correct cash in bank balance?
a. 2,344,000 c. 2,332,000
b. 2,327,000 d. 2,204,000

12. Mereen Inc. provided the following data for the purpose of reconciling the cash balance per books with the cash
balance per the bank statement as of December 31:
Cash balance per bank statement 890,000
Cash in bank balance per general ledger ?
Outstanding checks, including P9,000 certified check 124,000
Deposit in transit 205,000
December NSF checks, P25,000 of which had been redeposited and 90,000
cleared by December 28
Erroneous bank credit to Mereen Inc. for loans granted to Maureen Co. 120,000
Proceeds of note collected by the bank for Mereen Inc, net of P8,000 202,000
service charge
P75,000 disbursement check recorded in the books at: 57,000
Assuming no shortage or overage, what is the unadjusted balance per the general ledger?
a. 769,000 c. 749,000
b. 740,000 d. 741,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

13. Dorn Corp. received the bank statement for the month of December which included the following information:
Bank service charge for the month of December 15,000
Check deposited by Dorn Corp. in December but was returned by the
bank in December marked “NSF” 40,000
Proceeds of bank loan credited directly the company’s account 130,000
Additional information:
• Dorn Corp.’s records revealed that there were deposits amounting to P145,000 by the end of the month
but were not yet recorded by the bank.
• Checks written and mailed in December not yet recorded by the bank amounted to P100,000
• Customer checks for P35,000 payable to Dorn Corp. had not yet been deposited and had not been
recorded.
• The general ledger showed a bank account balance of P920,000.
Assuming no shortage or overage, what is the December 31 cash balance appearing in the December bank
statement?
a. 985,000 c. 915,000
b. 950,000 d. 965,000

14-15
Westerland Company provided the following data relating to the cash transactions and bank account for the
month of October:
Bank debit memo for October bank service charges 5,000
Deposit of October 31 not recorded by the bank until November 450,000
Outstanding checks, including certified check of P50,000 750,000
Proceeds of bank loan not yet recorded in the ledger 500,000
Proceeds from customer note collected by the bank, including P50,000
interest and net of P15,000 collection fee 435,000
A customer check had been entered in the book as P20,000 and was
erroneously credited by the bank at 200,000
A customer check was returned by the bank marked DAIF 50,000
Bank loan payments for the month directly charged against the account 100,000

14. Assuming that the correct cash in bank balance per audit is P3,000,000, what is the cash balance per the general
ledger?
a. 2,120,000 c. 2,555,000
b. 3,055,000 d. 2,220,000

15. Assuming that the correct cash in bank balance per audit is P3,000,000, what is the cash balance per the bank
statement?
a. 3,700,000 c. 3,050,000
b. 3,070,000 d. 3,430,000

16. The following information was included in the bank reconciliation for Stormlands Corp. Assume all other
reconciling items are listed below:

Check and charges returned by the bank in June including a June service charge of P5,000, P900,000; June check
issued by company for P12,000 was recorded at P21,00; Erroneous bank debit, P6,000; Service charge made by
bank in May and recorded in the books in June, P10,000; Total credits to cash in all journals during June
P800,000; Customer’s NSF check returned as bank charge in June (no entry made on book), P100,000; Customer’s
NSF check returned in May and redeposited in June (no entry made on books in either May or June),
P50,000; Customer’s NSF check in May and recorded in June, P20,000; Outstanding checks at May 31, P200,000.
What is the total outstanding check on June 30?
a. 172,000 c. 189,100
b. 178,000 d. 239,100

17. The following information was included in the bank reconciliation of Eyrie Corp. on December 31, 2021:
Total recorded company receipts for December P850,000
Credit memo for November recorded in December 60,000
Credit memo for December not yet recorded 80,000
Erroneous receipt by the company during December, no
correction was made until the following year 5,000
Erroneous bank disbursement in December corrected by
bank in December 18,000
Total receipts per bank in December 900,000
Deposit in transit, December 31 100,000
Book receipt for P20,000 in December recorded by the
company as 2,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

The total deposit in transit for November 30 is:

a. 243,000 c. 99,000
b. 193,000 d. 81,000

18. As of September 30, 2021, the general ledger of Westerlands Co. had an ending balance of P259,487. The following
data were assembled in the course of reconciling the bank balance:

The bank erroneously credited Westerlands Co. for P2,150 on September 22. During the month, the bank charged
NSF checks amounting to P2,340 of which P800 had been re-deposited on the 30th of September. The company
already accounted for both transactions while the bank has yet to take up the redeposit. Deposit in transit (including
the redeposited NSF check) for September 30 totaling P10,330. Checks outstanding as of September 30 were
P30,205. Notes collected by the bank for Westerlands Co. were P8,150 and the corresponding bank charges were
P50. Check of Easterland Company for P60,000 was charged by the bank in error for P6,000 to the account of
Westerlands Co. This error was corrected by the bank in September by crediting the account of Westerlands Co.
for P60,000. A check drawn and recorded by the company during December in payment of account of P30,000
but the check is dated October 15, 2021.

What is the cash balance appearing on the bank statement as of September 30, 2021?
a. 259,487 c. 313,612
b. 260,267 d. 373,612

19. Which of the following is statements is correct?

a. Where direct origination cost incurred in a loan is higher than the origination fee chargeable to the debtor, the
effective interest rate on the loan is higher than the nominal interest on the loan.
b. Where direct origination cost incurred in a loan is lower than the origination fee chargeable to the debtor, the
periodic amortization entry shall involve a debit to interest income.
c. Where direct origination cost incurred in loan is higher than the origination fee chargeable to the debtor, the
carrying value of the loans receivable shall decrease over time as a result of the periodic amortization.
d. Where direct origination cost incurred in a loan is lower than the origination fee chargeable to the debtor, the
periodic amortization entry shall involve a credit to the loans receivable account.

20. Which of the following is statements is correct regarding the expected credit loss model in assessing the correct
carrying value of receivables?
a. The interest income for the following period shall be based on the receivable balance net of the allowance for
credit loss if the credit loss was recognized based on 12-months expected credit loss.
b. The interest income for the following period shall be based on the receivable balance net of the allowance for
credit loss where the credit loss was based on existing objective evidence of impairment.
c. Where there is a significant increase in the credit risk at the reporting date, the expected credit loss should
assessed based on the expected default from the expected cash flows over the next twelve months.
d. All of the statements are incorrect.

21. In all of the following instances, except one, transfer of accounts receivable cannot be recorded as sale,
determine the exception.
a. The transferee cannot pledge or sell the transferred accounts receivable to another entity.
b. The transferor maintains continuing involvement on the receivables.
c. The transferor has kept effective control over the transferred accounts receivable through repurchase
agreement.
d. The transferred accounts receivable are beyond the reach of the transferor and the creditors.

22. Westeros Inc. factored an accounts receivable to a bank on a with-recourse, with-notification basis. The recourse
obligation is deemed other than insignificant. Which of the following is the proper accounting for the transaction?
a. Receivable financing should be recognized as a sale, recognizing the difference between the factoring
proceeds against the face value of the loan as outright loss on factoring.
b. Receivable financing should be recognized as a sale, recognizing the difference between the factoring
proceeds plus any factor’s holdback against the face value of the loan as interest expense.
c. Receivable financing should be recognized as a loan, recognizing the difference between the factoring
proceeds plus any factor’s holdback less the estimated recourse obligation against the face value of the loan
as outright loss on the factoring.
d. Receivable financing should be recognized as a loan, recognizing the difference between the factoring
proceeds plus any factor’s holdback against the face value of the loan as interest expense.

23. Westeros Inc. which uses the net method of recognizing cash discount recorded a P90,000 sale on account with a
term of 10/20, n/30. The amount was collected on the 21st day following the sale. The entry to record the collection
shall involve:
a. Credit to discount forfeited at P9,000.
b. Debit to cash at P90,000.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR QUIZ 1
CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

c. Credit to accounts receivable at P100,000.

d. Debit to cash at P100,000.

24. The Twins Corp.’s Trade Receivables which amounted to P4,100,000 included the following items as of December
31, 2021?
Accounts know to be worthless 50,000
Advanced payments to creditors on purchase orders 200,000
Advances to associates and subsidiaries 500,000
Customer’s accounts reporting credit balances arising
from sales returns (300,000)
Interest receivable on loans receivable 200,000
Trade accounts receivable 1,750,000
Subscriptions receivable due in 60 days 750,000
Trade accounts receivable – factored to a bank on a
“without recourse” basis 200,000
Trade notes receivable – discounted to a bank on a
“with recourse basis”, where recourse obligation is
deemed significant 150,000
Trade installment receivable due 1-18 months including
Unearned finance charge of P25,000 425,000
Trade accounts receivable from officers, due currently 75,000
Trade accounts on which post-dated checks are held 100,000
What is the correct balance of the Trade Receivables as of December 31, 2021?
a. 2,500,000 c. 2,400,000
b. 2,475,000 d. 2,375,000

25-26
Crownlands Company had the following account balances as of December 31, 2020:
Accounts Receivable P950,000
Allowance for doubtful accounts 47,500

The following is a summary of transactions that may have an effect on the accounts receivable in 2021:
Sales – all on account (5/10, 2/15, n/60) P5,335,000
Cash received from customers 5,020,000
Accounts written-off as worthless 58,000
Credit memo for sales returns (before collection) 30,000

The cash received from customers included the following:

Collections within the 10 day discount period 2,090,000
Collections within the 15 day discount period 1,068,200
Recovery of previously written-off accounts 22,000
Collections beyond cash discount period ?

25. Assuming that the company uses the gross method to account for cash discounts, what is the correct accounts
receivable balance as of December 31, 2021?
a. 1,177,000 c. 1,067,200
b. 1,045,200 d. 1,199,000

26. Assuming that the company uses the gross method to account for cash discount, what is the correct bad debt
expense for the year, assuming that there was no change in the policy of providing the required allowance for bad
debt (that is as a percentage of the outstanding receivable balance at each year-end)?
a. 47,350 c. 40,760
b. 48,450 d. 41,860

27. The following information were lifted from Lannisport records for the current year:
Accounts receivable, January 1 970,000
Allowance for doubtful accounts on January 1 100,000
Total credit sales for the year 2,500,000
Accounts collected during the year, including recovery of a 2,250,000
P45,000 previously written-off account
Cash discount taken by customers 25,000
Accounts receivable deemed to be worthless during the year 150,000
What is the adjusted balance of the accounts receivable as of December 31, 2021?
a. 1,115,000 c. 1,070,000
b. 1,160,000 d. 1,090,000

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CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

28. The following information were lifted from Iron Islands records for the current year:
Accounts receivable, January 1 790,000
Allowance for doubtful accounts on January 1 35,265
Total credit sales for the year 2,950,000
Amount collected during the year, including recovery of a 2,590,000
P24,000 previously written-off account
Cash discount taken by customers 52,000
Accounts receivable deemed to be worthless during the year 64,000
Additional information:
40% of accounts receivable balances is 60 days old and is 98% collectible. 35% is 61-120 days old and is 95%
collectible. The balance is more than 120 days old and is 90% collectible.

What is the correct bad debt expense for 2021?

a. 56,952 c. 58,164
b. 60,952 d. 62,164

29. On April 1, 2021, Kingslanding Corp. sold a three-year old equipment with a carrying value of P620,000. The
company received a P1.2M note receivable, collectible in 3 equal annual installments starting March 31, 2022. The
prevailing market rate of interest for similar securities on the transaction date was at 8%. What is the correct
carrying value of the note as of December 31, 2022?
a. 727,572 c. 756,104
b. 713,306 d. 775,156

30. On September 1, 2021, Karhold Inc. sold a piece of land carried in its books at P2.25M. The company received a
P2.5M, 10% interest-bearing note, due on August 31, 2025. Interest on the note is collectible annually every August
31. The land had a prevailing market value of P2,581,000 as a result the yield rate on the security was at 9%. What
is the gain arising from sale of the land to be recorded in 2021 and the interest income to be recognized in 2022?
a. 331,000; 231,758 c. 250,000; 232,289
b. 250,000; 231, 758 d. 331,000; 232,289

31. On March 1, 2021, Harrenhall Co. sold merchandise inventories in exchange of a P900,000, 12% interest-bearing
note which shall mature at the rate of P300,000 per year starting March 1, 2022. The prevailing market rate of
interest for similar debt securities on the transaction date was at 10%. What is the amount credited to sales on
March 1, 2021 and the carrying value of the receivable as of December 31, 2021?
a. 900,000; 615,868 c. 1,014,636; 943,223
b. 930,789; 918,355 d. 944,763; 941,980

32. On July 31, 2021 Sunspear Corp. discounted a P900,000, 10%, 9-month note receivable dated March 31, 2021 to BPI
Banking Inc. The agreed upon discount rate was at 6%.
Assuming the discounting was done on a without recourse basis, what is the correct interest income to be reported
in the statement of comprehensive income for 2021?
a. 67,500 c. 30,000
b. 58,050 d. None

33. On September 1, 2021 Skyreach Corp. discounted a P1,200,000, 9%, 12-month note receivable dated June 1, 2021 to
BDO Banking Inc. The agreed upon discount rate was at 12%.
Assuming the discounting was done on a with recourse basis, and that the estimated recourse obligation which was
deemed not significant was at P20,000, what is the gain or loss to be recognized from the transaction?
a. None c. 36,720
b. 16,720 d. 56,720

34. On January 1, 2021 Kings Landing Corp. granted a P10M, 4-year loans to Reach Co. Interest at 10% is receivable on
the loan every December 31. Direct origination costs were paid by Kings Landing Corp. which resulted to the
effective rate on the loan being at 8%. Based on the current credit standing of Reach Co., Kings Landing estimated
the present value of 12-months expected credit loss at 8% was at P500,000 with probability of default at 20%.

By the end of 2022 Reach Co.’s credit risk significantly increased based on forward-looking information. The present
value of the expected life-time credit loss at 8% was at P1.5M with the probability of default at 40%. What is the
carrying value of the loans receivable as of December 31, 2022?
a. 10,062,425 c. 9,585,185
b. 9,756,653 d. 10,356,653

35. A consignor of good incurred the following in relation to a consignment arrangement with another company:
i. In-transit insurance premium for goods shipped to consignee
ii. Freight cost to deliver the goods to the consignee

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CASH AND CASH EQUIVALENTS, RECEIVABLES AND INVENTORIES

iii. Reimbursements to the consignee for freight cost it incurs to deliver the goods to consignee’s
customers
iv. Advanced commission that will be due when consignee sells the goods
v. Reimbursements to the consignee for promotional costs for the goods
Which of the above items should be included in the cost of goods out on consignment?
a. i, ii, iii and v c. ii and iii
b. i, ii, and v d. i, and ii,

36. Lower of cost or NRV valuation for inventories:

a. Results to the lowest valuation if applied to the total inventory
b. Results to the lowest valuation if applied to inventories on a per group of similar natured inventories basis
c. Results to the lowest valuation if applied to individual item of inventories
d. Must be applied to major group basis.

37. In estimating inventory ending balance under the “Retail Method”, the cost of normal spoilages, shrinkages,
shoplifting losses shall be:
a. Ignored
b. Added to cost of goods available for sale at retail price
c. Deducted from cost of goods available for sale at retail price
d. Deducted from cost of sales at retail price

38. Which of the following cost formula generally accepted under PAS 2 would generally lead to higher net income in
periods where prices decreases over time?
a. Last-in, first-out
b. First-in, first-out
c. Average
d. Specific identification

39. In estimating inventory ending balance under the “Retail Method”, special discounts granted (e.g. discounts to
employees) shall be:
a. Ignored.
b. Deducted from cost of goods available for sale at retail prices
c. Deducted from gross sales
d. Deducted from cost of sales at retail price

40. White Harbor Company purchased inventories from a supplier in Europe. The entity incurred the following costs in
relation to a purchase transaction:
Invoice price of goods purchased on March 31 (In Euro) 90,000
Cash discount if paid within 30 days 10%
Payment made on April 20 (In Euro) 81,000

The following additional items were all paid in Php

Import duties 400,000
Freight and insurance on purchases 860,000
Other handling costs relating to imports 220,000
Salaries of the receiving department 150,000
Brokerage commission paid to agents for arranging the imports 200,000
Sales commissions 450,000
After-sales warranty costs 290,000

Assuming that the exchange rates are: March 31: 1Euro = 65Php; April 20: 1Euro = 68Php
What is the correct initial cost of the inventory?
a. 7,188,000 c. 6,945,000
b. 6,988,000 d. 6,745,000

41. Torhen Square Co. provided the following information in relation to its inventory:
Cost of purchase of raw materials used in production 350,000
Storage cost of finished goods 90,000
Delivery costs to customers 40,000
Irrecoverable purchase taxes 60,000
Production labor cost 330,000
Production overhead cost 200,000
Marketing costs 120,000
General and administrative costs 50,000
Cost to transfer the goods from factor to the finished
goods warehouse 20,000

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What is the correct cost of the inventory?

a. 940,000 c. 960,000
b. 900,000 d. 880,000

42. Seagard Enterprises reported inventories as of December 31, 2021 at P1,590,000. The following items were
excluded from the said amount. All sales were made at 40% gross profit based on sales.
• Merchandise received from a supplier on January 8 , 2022 with the related purchase invoice recorded on
January 5, 2022. The invoice amounting to P60,000 showed the shipment was made on December 28,
2021, FOB Destination.
• Merchandise received from a supplier on December 28, 2021, with the purchase invoice amounting to
P80,000 not yet recorded. The merchandise was located in the hands of the purchasing agent and was
marked “received on consignment”.
• A packing case containing merchandise was standing in the shipping room when the physical inventory
was taken. The merchandise was marked “Hold for shipping instructions”. The customer order was dated
December 18, 2021 but the case was shipped and the customer was invoiced at P150,000 on January 10,
2022.
• Merchandise received from a supplier on January 6, 2022 was recorded as purchase on January 7, 2022.
The invoice amounting to P70,000 was made FOB supplier’s warehouse on December 31, 2021.
• A special article, fabricated to the order of a customer was finished and in the shipping room on December
31, 2021. The customer was billed at P210,000 on that date although shipment was made only on January
4.
• Merchandise delivered to customers on December 30, 2021 invoiced at P160,000. Customer has an option
to resell the asset to the company. The agreement provides the customer a significant economic incentive
to resell the inventory at an amount higher than the original purchase price.
What is the adjusted balance of inventories?
a. 1,756,000 c. 1,686,000
b. 1,660,000 d. 1,820,000

43. Goldengrove Co. had the following year-end transactons by the end of 2021 (All sales were made at 25% gross
profit based on cost.
Purchase in transit, FOB Shipping point, excluding P5,000 freight cost 260,000
Purchase in transit, FOB Destination, excluding P8,000 freight cost 126,000
Goods received on December 30, FOB Destination including 170,000
P10,000 freight cost
Purchase in transit, Free Alongside the Vessel, including P6,000
cost to transfer the goods to the vessel, but excluding P12,000
freight to deliver the goods to the buyer 120.000
Sales in transit, FOB Destination including P10,000 freight cost 220,000
Sales in transit, FOB Shipping point including P15,000 freight cost 290,000
How much from the above items should be included in the inventory as at year end?
a. 713,000 c. 714,000
b. 719,000 d. 720,000

44. Silverhill Company delivered 800 units of a merchandise to Reach Corp. on consignment basis. Each unit having a
cost of P1,400 is set to be sold by the consignee at P2,500 each. Commission on sales as agreed upon is 20%.
Silverhill Company incurred P120,000 in freight cost to deliver the goods to the Reach Corp. Reach paid P80,000
in promotional and advertising costs related to the goods. By the end of the month, the consignee reported 200
units still on consignment and returned 40 units back to Silverhill Company, paying P10,000 in transport cost to
return the goods to Silverhill Company.
What is the consignment net income and receivable from consignee to be reported by Silverhill Company?
a. 156,000 and 1,030,000 c. 150,000 and 1,030,000
b. 236,000 and 1,110,000 d. 166,000 and 1,110,000

45-46
White Harbor Company keeps perpetual inventory records under average cost formula. The following data pertains
to its merchandise JS201 in December 2021 :
Date Rcvd Cost Issued Bal.
Dec. 1 – bal. P8.00 3,200
Dec. 5, – sale 1,600 ?
Dec. 6, – purchase 1,600 10.75 ?
Dec. 10, -purchase 4,800 11.00 ?
Dec. 15 - sale 1,000 ?
Dec. 20 – sale 1,900 ?
Dec. 25 – purchase 1,100 11.25 ?
Dec. 30 – sale 3,800 ?

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45. Assuming that the inventory had an estimated selling price at P15 per unit with cost to sell at P4.50 per unit, what
is the correct carrying value of inventories as of December 31, 2021?
a. 25,223 c. 26,200
b. 24,223 d. 25,200

46. Assuming that company uses the first-in first-out cost formula, and that the estimated selling price less cost to sell
of inventories was at P12 per unit, what is the correct carrying value of inventories as of December 31, 2021?
a. 26,675 c. 28,800
b. 25,675 d. 25,200

47. Sumerhall Co. records revealed the following information regarding its inventory as of December 31, 2021:
Finished goods inventory, cost 50,000
Finished goods inventory, estimated selling price 80,000
Finished goods inventory, estimated cost to sell 22,000
Normal profit margin 15,000
Raw materials inventory, cost 20,000
Raw materials inventory, replacement cost 18,000
What is the correct carrying value of inventories to be reported as of December 31?
a. 68,000 c. 70,000
b. 65,000 d. 61,000

48. Sandstone Corp.’s January 1, 2021 inventories had a total cost P2.1M. The allowance for write down on the
inventories to write them down to their net realizable value was at P80,000. During the year, net purchases of
merchandise was at P6,500,000. Inventories on December 31, 2021 had a cost of P2,540,000 with a net realizable
value of P2,420,000. The company’s policy is to recognize any losses on write-down as a separate expense/loss
item on the statement of comprehensive income. What is the cost of sales to be reported in the statement of
comprehensive income for 2021?
a. 5,980,000 c. 6,100,000
b. 6,180,000 d. 6,060,000

49. Castlery Rock Inc. reported on December 31, 2020 inventories at P5,500,000. The amount included inventory item
XYZ at net realizable value amounting to P1,200,000. The item was written down to the net realizable value from
its cost at P1,500,000. Due primarily to the nature of the said inventory, the same was yet to be sold by December
31, 2021. On December 31, 2021, Castlery Rock Inc. reported inventories at P6,200,000. The amount included
inventory item DEF at its cost amounting to P1,800,000. Item DEF had a net realizable value however at P1,400,000.
Moreover, because of an improvement in the market conditions surrounding the market for the inventory item XYZ
its net realizable value was ascertained to be at P1,350,000. Net purchases for the year amounted to P89,400,000.
The company’s policy is to recognized loss on inventory write-down and income from inventory recovery in the
cost of sales. Determine the correct cost of sales for 2021.
a. 88,950,000 c. 88,850,000
b. 88,700,000 d. 88,750,000

50. Dragonstone Corp. had the following inventory items in its records as of December 31, 2021:
Group A Group B Group C
Cost NRV Cost NRV Cost NRV
Pink 9,200 10,000 Green 2,100 1,800 Yellow 5,300 7,000
Red 5,300 4,800 Aquamarine 4,800 3,500 Lime 1,800 1,500
Maroon 6,000 5,400 Blue 7,000 7,400 Brown 9,400 8,700
Fuschia 8,000 8,200 Indigo 6,000 5,200 Ivory 11,500 11,200

What is the correct carrying value of inventories under the lower of cost or NRV valuation item per item basis and
per group basis respectively?
a. 71,500 and 75,200 c. 71,200 and 74,400
b. 71,600 and 74,300 d. 71,100 and 74,500

51. Winterfell Corp. lost all its inventory on hand due to a fire on October 31. As the auditor, you were requested to
make an estimate as to the total damages in inventories caused by the fire. Upon inquiry and inspection of records
you ascertained the following:
Merchandise inventory, January 1 P120,000
Purchases, January 1 to October 31 830,000
Purchases returns and allowances 10,000
Transportation in 20,000
Sales, January 1 to October 31 1,146,000
Sales returns 40,000
Sales allowance 20,000

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Sales discount 50,000

Employee discounts 24,000
Normal spoilages, at sales price 20,000
Purchase in transit on October 31, FOB Shipping point,
recorded as purchases in October 48,000
Sales in transit on October 31, FOB Destination
recorded as sales in October 50,000
Using the gross profit test, what was the estimated loss in inventory due to the fire assuming that the gross profit
rate is 30% based on sale?
a. 190,000 c. 107,000
b. 142,000 d. 92,000

52. The records of Slovak Inc. revealed the following information on September 30, 2021:
Cost Retail
Inventory, beginning 372,000 620,000
Purchases 2,910,000 4,452,000
Transportation in 55,060
Sales 4,872,000
Purchase return 27,000 45,000
Sales allowance 125,500
Purchase allowance 18,500
Sales returns 355,000
Sales discounts 322,250
Purchase discounts 15,960
Normal breakages 50,500
Discounts granted to employees 75,500
Departmental transfer credit 135,500 175,000
Departmental transfer debit 125,500 165,000
Mark ups 325,000
Mark downs 283,000
Mark up cancellations 75,000
Mark down cancellations 40,000
The company reported inventories per a physical count conducted on September 30 at P212,000. You ascertained
that the count conducted was adequately made by the client. (HINT: round percentages to 2 decimal points). What
is the total cost of inventory shortage under the average cost formula and conservative cost formula, respectively?
a. 35,650 and 23,620 c. 35,650 and 24,220
b. 39,660 and 23,620 d. 39,660 and 24,220

53. On December 31, 2021, the cash account of Albania Corporation shows the following composition:

Petty cash fund (P12,400 in currencies and coins, P15,500 in petty cash expense vouchers), P30,000; Cash in bank
(payroll fund), P2,000,000; Travel fund, P150,000; Interest and dividend fund, P250,000; Tax fund, P120,000; Cash in
bank (current account), P3,000,000; Certificate of deposit (90-day term), P1,000,000; Certificate of deposit (180-day
term), P1,500,000; Cash in foreign bank-restricted, P500,000; Money market fund (60 days), P500,000; Money market
fund (6 months). P900,000; Customer’s check dated January 15, 2022, P60,000; Customer’s check dated December
30, 2021 returned by the bank for lack of funds, P40,000 (yet to be redeposited); A 30-day BSP treasury bill,
P1,000,000; A 3-year treasury bill acquired three months prior to maturity, P1,200,000; Sinking fund cash,
P800,000; Preferred Redemption fund, P400,000; Contingent fund, P300,000; Pension fund, P200,000; Fund for
the acquisition of long lived assets, P500,000; Traveler’s check, P60,000; and Cashier’s checks, P100,000.

What is the correct cash and cash equivalents balance to be reported by Albania Corporation on December 31, 2021?
a. 8,810,000 c. 9,410,000
b. 8,212,400 d. 9,392,400

54. On December 31, 2021, Aruba Co.’s Cash account balance per ledger of P3,689,000 includes:

Demand deposit, P1,500,000; Certificate of deposit-30 days, P500,000; NSF check of customer, P20,000; Money
Market Placement (due date: January 31, 2022 – purchase date: July 31, 2021), P1,000,000; Savings deposit in closed
bank, P50,000; IOU from an employee, P30,000; Pension fund, P400,000; Petty cash fund (P5,400 in currencies,
P2,000 in officer’s check dated January 2, 2022, P2,500 in petty cash expense vouchers), P10,000; Customer’s check
dated December 30, 2021, P89,000; Customer’s check dated January 31, 2022, P60,000; Customer’s check outstanding
for 18 months, P30,000.

Additional information:

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• Check of P400,000 in payment of an accounts payable was recorded against the Demand deposit account on
December 31, 2021, but was mailed to creditors on January 15, 2022.
• Check of P50,000 dated January 2, 2022 in payment of accounts payable was recorded against the Demand
deposit account and mailed on December 31, 2021.

How much “Cash and Cash equivalents” should be shown on the December 31, 2021 balance sheet?
a. 2,546,400 c. 2,160,400
b. 2,450,400 d. 2,544,400

Items 55-56:
On April 1, 2021, Burma Inc. established a petty cash fund for P40,000 by writing a check drawn against the general checking
account. On April 30, the fund contained the following:

Currency and coins, P12,000; Paid vouchers for: office supplies-P13,000, transportation-P4,500, gas and oil-P2,500 repairs
and maintenance-P2,400; Employee paycheck endorsed to the petty cash fund custodian, P5,000.

55. What is the amount of shortage of overage?

a. None c. 1,600
b. 600 d. 5,600

56. Assuming, April 30 is the fiscal year-end, what is the adjusted balance of the petty cash fund account?
a. 12,600 c. 17,600
b. 17,000 d. 12,000

Items 57-59
The following information was provided by Cambodia Inc. as of the fiscal year ended July 31, 2021:
June 30 July 31
Note receivable collection by the bank 200,000 250,000
Note payable payment by the bank 120,000 80,000
Undeposited collections 450,000 ?
Outstanding checks 180,000 ?
Total credits per bank statement 1,955,000
Total debits per bank statement 1,655,000
Total debits per books 1,795,000
Total credits per books 1,800,000

Additional information:
• A P100,000 disbursements was erroneously recorded twice in the books in June, this was discovered and corrected
in July.
• A P50,000 customer collection check was recorded in the books as P5,000 in July.
• The bank erroneously credited the company P80,000 in June for a deposit made by Cambodian Inc. The bank
corrected the error in July.
• A customer NSF check amounting to P16,000 was returned by the bank in July. This was immediately replaced by
the customer and was therefore redeposited also in July. The company did not record the return and redeposit
anymore in the books.
• The unadjusted balance per book in June was at P495,000. The unadjusted balance per bank in June was at
P485,000.

Requirements:
57. What is the correct deposit in transit as of July 31?
a. 240,000 c. 317,000
b. 301,000 d. 285,000

58. What is the correct outstanding checks as of July 31?

a. 281,000 c. 381,000
b. 365,000 d. 385,000

59. What is the correct cash in bank balance as of July 31?

a. 865,000 c. 765,000
b. 805,000 d. 705,000

60. Cash denominated in foreign currency shall be translated to Philippine peso using
a. Closing rate c. Historical rate
b. Average rate d. Passing rate

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61. Significant deposits in a foreign bank subject to foreign exchange restriction should be classified
a. As cash and cash equivalents with appropriate disclosure
b. As non-trade receivables with appropriate disclosure
c. As held-to-maturity securities with appropriate disclosure
d. As part of noncurrent assets with appropriate disclosure

Items 62-63
The following summarizes the transactions recorded in the Accounts receivable-trade account of Egypt Corporation:
Accounts Receivable – Trade
Jan. 1 balance, net of credit Receipts from customers, incl.
P9,000 balance P106,000 overpayment of P10,000 P1,240,000
Charge sales 1,250,000 Write offs 7,000
Charge for consignment sales 25,000 Merchandise returns 5,500
Shareholders subscriptions 60,000 Sales discount 3,000
Recovery of prev. write-offs 5,000 Collections on carrier claims 2,000
Refunds to customers w/credit Collection on subscription 45,000
balances 5,000
Deposit on contract 50,000
Claim against common carrier
for shipping damages 5,000
IOUs from employees 1,000
Cash advance to affiliate 50,000
Advance to supplier 10,000

Audit notes:
• It was ascertained that half of the adjusted outstanding accounts receivable-trade balance are still currently
collectible. The term of sale is 5/30, n/60. Based on past experience, a 25% of customers whose accounts are still
current normally pay within the discount period.

• 30% of the adjusted accounts receivable-trade is 60 days past due and is expected to be only 90% collectible.

• 20% of the adjusted accounts receivable-trade balance is more than 120 days past due and is expected to be 50%
collectible.

62. What is the correct accounts receivable – trade balance?

a. 125,000 c. 124,500
b. 131,500 d. 119,500

63. What is the amortized cost of the accounts receivable –trade?

a. 108,315 c. 111,272
b. 107,537 d. 110,500

64. On January 1, 2021, Finland Inc.’s Trade receivables has an outstanding balance of P50,000. Below are the
transactions in its receivables and other related accounts during 2021:

Sales on account, P720,000; Accounts receivable written off due to impairment, P5,000; Notes receivable to settle
accounts, P80,000; Sales returns, P3,000; Cash collections from on account customers, P494,000; Sales discount
forfeited, P8,000; Collection on notes receivables, P36,000; Provision for future returns and discounts on outstanding
receivables, P7,000; Allowance for doubtful accounts, end P21,000.

What is the carrying value of the accounts receivable on December 31, 2021?
a. 196,000 c. 168,000
b. 204,000 d. 176,000

65. On December 31, 2021, France Company’s general ledger of its account receivable showed an outstanding balance
of P2,100,000. Below is summary of the aging schedule of the said general ledger:
Classification Balance % of collectability
1-60 days P1,000,000 100%
61-120 days 400,000 90%
121-180 days 300,000 80%
181-360 days 200,000 70%
More than one year* 200,000 10%
* Half of more than one year receivables are deemed worthless, thus has to be further written off.

What is the net book value of receivables as of December 31, 2021?

a. 2,100,000 c. 1,750,000
b. 2,000,000 d. 1,650,000

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66. Germany Corp. has a total receivable of P15,000,000. The company sells to 2 general sets of customers –
wholesalers and retailers. The company has 5 major wholesalers and several retailers. The details of the receivable
balance per the subsidiary ledger is as follows:
Wholesalers:
Aye P2,100,000
Bee 1,500,000
See 3,400,000
Dee 1,250,000
Eee 900,000

Retailers 5,850,000

The company ascertained that the P125,000 from the receivables from Aye is impaired; P200,000 from the receivables
from See is impaired and P90,000 from the receivables from Dee is impaired. The receivables from Bee and Eee were
not impaired. Furthermore a composite rate of 5% is considered appropriate to measure the impairment on receivables
from retailers.

What is the total impairment on the receivables?

a. 415,000 c. 707,500
b. 292,500 d. none

67. In your audit of Guatemala Company the year 2021, you concluded that the allowance for doubtful accounts should
be adjusted to equal the estimated amount required based on aging of the accounts as of December 31. During
your audit, you were able to gather the following data:
Allowance for doubtful accounts, Jan 1, 2021 P600,000
Provision for doubtful accounts during 2021 (3% of 10M Sales) 300,000
Bad debts written-off in 2021 375,000
Recovery of bad debts written-off during 2021 100,000
Estimated doubtful accounts per aging of accounts on December 31, 2021 400,000
Accounts receivable, December 31, 2021 2,375,000

What is the correct doubtful accounts expense for the year 2021?
a. 375,000 c. 175,000
b. 300,000 d. 75,000

68. A credit balance in accounts receivable that resulted from overpayments, advance payments, and returns from
customers should be classified as (CUSTOMERS’ CREDIT BALANCE)
a. A current liability c. A contra asset
b. A long-term liability d. A note disclosure

69. When a note receivable is dishonored, it is debited to

a. Accounts receivable at face value
b. Accounts receivable at face value plus interest and other charges
c. Dishonored note receivable at face value
d. Dishonored note receivable at face value plus interest and other charges

70. The amount of account receivable is included in total receivables with appropriate disclosures when
a. Pledged (Yes); Assigned (Yes); Factored-without recourse (Yes)
b. Pledged (Yes); Assigned (Yes); Factored-without recourse (No)
c. Pledged (Yes); Assigned (No); Factored-with recourse (No)
d. Pledged (No); Assigned (No); Factored-with recourse (No)

71. Note receivable discounted with recourse, where recourse obligation is significant should be
a. Excluded from total receivables without disclosure
b. Excluded from total receivables with disclosure of
c. Included in total receivables without disclosure
d. Included in total receivables with disclosure

72. The inventory on hand at December 31, 2021 of Panama Inc. is valued at a cost of P247,800. Mark-up on costs for
all sales is at 30%. The following items were not included in the inventory amount:
• Goods sold to Peru Company, under terms FOB destination, invoiced for P23,400. The company incurred P1,000
freight charges to deliver the goods. The goods are in transit.
• Purchased goods in transit, terms FOB shipping point. Invoice price at P48,000. Freight cost, P3,000.
• Goods out on consignment to Paraguay Company, sales price, P36,400. Shipping cost of P2,000. According to
the consignee’s report 40% of the units on consignment has already been sold.

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• Inventories sold at P26,000 to Portugal Inc. with right of repurchase after 3 months at the same price plus 12%
interest.
What is the correct balance of the inventories as of December 31, 2021?
a. 346,800 c. 354,000
b. 344,800 d. 354,800

Items 73-74
Paraguay Inc. reported on December 31, 2020 inventories at P5,100,000. The amount included inventory item XYZ at net
realizable value amounting to P1,200,000. The item was written down to the net realizable value from its cost at P1,600,000.
Due primarily to the nature of the said inventory, the same was yet to be sold by December 31, 2021. On December 31, 2021,
Paraguay Inc. reported inventories at P6,400,000. The amount included inventory item DEF at its cost amounting to
P1,800,000. Item DEF had a net realizable value however at P1,350,000. Moreover, because of an improvement in the
market conditions surrounding the market for the inventory item XYZ its net realizable value was ascertained to be at
P1,500,000. Net purchases for the year amounted to P89,400,000.

73. The company’s policy is to recognized loss on inventory write-down and income from inventory recovery in the
cost of sales. Determine the correct cost of sales for 2021.
a. 88,250,000 c. 87,800,000
b. 88,100,000 d. 88,650,000

74. The company’s policy is to recognized loss on inventory write-down and income from inventory recovery as
separate line item in the statement (other income/loss) . Determine the correct cost of sales for 2021.
a. 88,250,000 c. 87,800,000
b. 88,100,000 d. 88,650,00

75. The following information summarizes Puerto Rico Corp.’s (consignor) transaction/s with Costa Rica Inc.
(consignee) for the three months ended September 30, 2021:
Goods delivered to Costa Rica Inc. on consignment 15,000
Selling price of goods on consignment P900/ unit
Cost of goods before delivery P400/ unit
Freight cost from Puerto Rico to Costa Rica, paid by Costa Rica P300,000
Advertising costs incurred and paid by Puerto Rico P25,000
Goods sold by Costa Rica to customers 9,000 units
Freight cost from Costa Rica to customers, paid by Costa Rica P45,000
Goods returned by Costa Rica to Puerto Rico 2,000
Freight cost on returned goods, paid by Costa Rica P20,000
Commission on sales 20%

What is the correct balance of the receivable from consignee and the net income of Puerto Rico Corp. in relation
to the consignment transactions?
a. 6,135,000 and 2,590,000 c. 6,115,000 and 2,570,000
b. 6,115,000 and 2,595,000 d. 6,135,000 and 2,615,000

76. On December 31, 2021, a typhoon damaged a warehouse of Malta Corporation. The entire company and many
accounting records stored in the warehouse were completely destroyed. Although the inventory was not insured,
a portion could be sold for scrap. Through the use of microfilmed records, the following data were gathered:

Inventory, January 1, P450,000; Purchases, P2,160,000; Cash sales, P273,600; Cash received on collection of accounts
receivable, P2,520,000; Accounts receivable-January 1; P210,000; Accounts written off due to impairment, P9,600;
Recovery of receivable impairment recognized last year, P3,600; Accounts receivable-December 31, P342,000; Sales
returns, P36,000; Sales discounts, P14,400; Purchase returns, P60,000; Purchase discounts, P12,000; Freight in,
P21,600; Salvage value of damaged inventory, P90,000 while an undamaged inventory that were marked to sell at
P150,000 were recovered. Gross profit percentage on sales, 32%.

How much is the value of inventory loss?

a. 313,872 c. 361,872
b. 339,840 d. 364,320

77. The records of Slovak Inc. revealed the following information on September 30, 2021:
Cost Retail
Inventory, beginning 372,000 620,000
Purchases 2,910,000 4,452,000
Transportation in 55,060
Sales 4,872,000
Purchase return 27,000 45,000

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Sales allowance 125,500

Purchase allowance 18,500
Sales returns 355,000
Sales discounts 322,250
Purchase discounts 15,960
Normal breakages 50,500
Discounts granted to employees 75,500
Departmental transfer credit 135,500 175,000
Departmental transfer debit 125,500 165,000
Mark ups 325,000
Mark downs 283,000
Mark up cancellations 75,000
Mark down cancellations 40,000

The company reported inventories per a physical count conducted on September 30 at P212,000. You ascertained that
the count conducted was adequately made by the client. (HINT: round percentages to 2 decimal points). What is the total
cost of inventory shortage under the average cost formula and conservative cost formula, respectively?
a. 35,650 and 23,620 c. 35,650 and 24,220
b. 39,660 and 23,620 d. 39,660 and 24,220

78. Which of the following is a characteristic of a perpetual inventory system?

a. Inventory purchases are debited to a Purchases account.
b. Inventory records are not kept for every item.
c. Cost of goods sold is recorded with each sale.
d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

79. If a company uses the periodic inventory system, what is the impact on net income and current ratio of including
goods in transit f.o.b. shipping point in purchases, but not ending inventory?
a. Overstate net income and overstate current ratio
b. Understate net income and understate current ratio.
c. No effect on net income and understate current ratio
d. Not sufficient information to determine effect on net income or current ratio

80. During 2021 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the
merchandise early in 2022. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the
proceeds to Carne. In 2022 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.
On whose books should the cost of the inventory appear at the December 31, 2021 balance sheet date?
a. Carne Corporation
b. Nolan Corporation
c. Norwalk Bank
d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

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Suggested Answers and Solutions

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