CHAPTER 3

Question 1

Which of the following is incorrect regarding the basic accounting equation?
1. Essentially all aspects of financial accounting, from recording to communicating financial information, involve the observance of the equality of the basic accounting equation.
2. The basic accounting equation is ‘Assests = Liabilities + Equity.’
3. The basic accounting equation is an algebraic expression. Hence, other variations or relationships can be derived from it.
4. The basic accounting equation is applicable only in basic accounting but not in higher accounting.

Answer 1

4
The basic accounting equation is applicable only in basic accounting but not in higher accounting.

Question 2

Which of the following is not essential factor in determining the existence of an asset?
1. the presence of an economic resource that resulted from past events
2. control over the economic resource
3. potential of the economic resource to produce economic benefits for the entity
4. present obligation

Answer 2

4
present obligation

Question 3

For a liability to exist, there must be a present obligation, along with the other aspects of a liability. A present obligation exist if
1. the entity has already obtained economic benefits or taken an action, and as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.
2. the entity is required by law to pay either the government or another party.
3. the entity has incurred a duty or responsibility, even if settling that duty or responsibility would not in any way require the transfer of an economic resource.
4. the entity expects to enter into a future transaction wherein the entity would not be required to pay cash or to transfer other resources.

Answer 3

1
the entity has already obtained economic benefits or taken an action, and as a consequence, the entity will or may have to transfer an economic resource that it would not otherwise have had to transfer.

Question 4

Which of the following is incorrect concerning equity?
1. It is equal to Assets minu Liabilities.
2. It is a residual amount.
3. It represents the owner’s claims against the total economic resources of the business.
4. It is different from capital, net assets or net worth.

Answer 4

4
It is different from capital, net assets or net worth.

Question 5

Which of the following is not a correct variation of the expanded accounting equation?
1. Assets = Liabilities + Equity + Income - Expenses
2. Assets - Liabilities = Equity + Income - Expenses
3. Assets + Expenses = Liabilities + Equity + Income
4. Assets = Liabilities + Equity - Income + Expenses

Answer 5

4
Assets = Liabilities + Equity - Income + Expenses

Question 6

Which of the following statements about income is incorrect?
1. It results from increases in assets or decreases in liabilities that result in increases in equity, except those that pertain to the business owner’s contribution to the business.
2. It results to profit if it is greater than expenses.
3. It cannot result from decreases in assets or increases in liabilities.
4. It results in decreases in equity.

Answer 6

4
It results in decreases in equity.

Question 7

An entity has total liabilities of Php360,000 and total equity of Php90,000. How much are the total assets?
1. 270,000
2. 450,000
3. 360,000
4. None of these

Answer 7

2
450,000

Question 8

An entity has total assets of Php360,000 and total equity of Php90,000. How much are the total liabilities?
1. 270,000
2. 450,000
3. 360,000
4. None of these

Answer 8

1
270,000

Question 9

An entity had a beginning equity of Php123,000. If the total income for the period is Php59,000, while the total expenses are Php81,000, how much is the ending balance of equity?
1. 130,000
2. 110,000
3. 101,000
4. None of these

Answer 9

3
101,000

Question 10

An entity had total liabilities of Php340,000 at the end of the year. The beginning equity is Php280,000. If during the year, the entity earned income of Php420,000 and incurred expenses of Php390,000, how much is the ending balance of total assets?
1. 560,000
2. 650,000
3. 780,000
4. 960,000

Answer 10

2
650,000

Question 11

Which of the following is not an essential element of an asset?
1. Legal ownership over the resource
2. Control over the resource
3. Past event resulting to control
4. Potential to produce economic benefits

Answer 11

1
Legal ownership over the resource

Question 12

In which of the following would you likely have an asset?
1. You own a building that you rent to various tenants. However, every time you visit the building, the security guards shoots you. So the tenants are actually remitting rentals not to shoot you but to the guards.
2. You own an old computer that is obsolete. Nobody wants to buy that computer.
3. You have clothing that do not need. However, these can be sold online as secondhand or donated to the less fortunate.
4. Your Grandma promised to give you her jewelry if you get good grades in Fist Year College. You dropped your accounting subject because you find it very difficult.

Answer 12

3
You have clothing that you do not need. However, these can be sold online as secondhand or donated to the less fortunate.

Question 13

Which of the following is not an essential element to a liability?
1. Present obligation
2. Past event resulting to a present oligation
3. Potential to cause the transfer of an economic resource
4. Intention to obligate oneself in the future

Answer 13

4
Intention to obligate oneself in the future

Question 14

A liability does not result from
1. a contract that an entity has entered into.
2. an intention to acquire assets in the future.
3. a legal obligation resulting from a requirement of the law.
4. a past practice that has created valid expectation on others that the entity will accept and discharge certain responsibilities.

Answer 14

2
an intention to acquire assets in the future.

Question 15

An entity obtained a loan. What is the effect of this transaction on the entity’s financial statements elements?
1. Total assets increased
2. Total liabilities increased
3. Total equity increased
4. 1 and 2

Answer 15

4
1 and 2

Question 16

Which financial statement element is defined as a residual amount?
1. Asset
2. Liability
3. Equity
4. Income

Answer 16

3
Equity

Question 17

The claims of creditors on the assets of an entity are also called
1. assets.
2. liabilities.
3. equity.
4. income.

Answer 17

2
liabilities.

Question 18

Which of the following is correct about income and expenses?
1. Income decreases equity, while expenses increases equity.
2. Income plus expenses equals profit or loss.
3. Income is increases in assets or decreases in liabilities, while expenses are decreases in assets or increases in liabilities.
4. Income includes investments by the owner to the business, while expenses include distributions by the business to the owner.

Answer 18

3
Income increases in assets or decreases in liabilities, while expenses are decreases in assets or increases in liabilities.

Question 19

Which financial statement element is defined in terms of changes in assets and liabilities?
1. income.
2. expenses.
3. equity.
4. 1 and 2

Answer 19

3
equity

Question 20

Which of the following increases equity?
1. incurring a liability
2. income
3. incurring a loss
4. 2 and 3

Answer 20

2
income

Question 21

Which of the following is not a correct variation of the basic accounting equation?
1. Assets = Liabilities + Equity
2. assets - Liabilities = Equity
3. Assets - Equity = Liabilities
4. Assest + Liabilities = Equity

Answer 21

4
Assets + Liabilities = Equity

Question 22

Which of the following is an essential aspect in the definition of a liability?
1. a present right over the economic benefits that the economic resource may produce
2. potential of the economic resource to produce economic benefits for the entity
3. a present obligation that may arise from a future event
4. potential of the present obligation to cause a transfer of an economic resource from the entity

Answer 22

4
potential of the present obligation to cause a transfer of an economic resource from the entity

Question 23

You acquired a cellphone through a monthly installment plan. according to your contract, you are required to return the cellphone to the supplier if you miss out on two installment payments. Upon signing the contract, the supplier gave you the cellphone. You immediately took photographs of your face and uploaded them to the internet. Which of the following statements is true?
1. The cellphone becomes your asset only after you have fully paid the installment price.
2. The cellphone is already your asset because you control the economic benefits from it. Legal ownership is nor a necessary criterion when determining the existence of an asset - control is!
3. The cellphone is te supplier’s asset until you have fully paid the installment price.
4. The cellphone looks nice but the selfie is not.

Answer 23

2
The cellphone is already your asset because you control the economic benefits from it. Legal ownership is not a necessary criterion when determining the existence of an asset - control is!

Question 24

Upon taking possession of the cellphone in #3 above, you will record it as
1. an asset and a liability.
2. an asset and euity.
3. an asset only.
4. To be recorded only upon full payment of the purchase price.

Answer 24

1
an asset and a liability.

Question 25

Several months before your birthday, you repeatedly posted on Facebook that you will be throwing a party. You invited all your classmates, neighbors, strangers, friends and “netizens” from all over the world to come. On your birthday, you will be obligated to throw a party because of a
1. legal obligation.
2. constructive obligation.
3. Facebook post.
4. life event.

Answer 25

2
constructive obligation

Question 26

An expense could not possibly result
1. in a decrease in equity.
2. from an increase in asset.
3. from an increase in liabilities.
4. from a decrease in asset.

Answer 26

2
from an increase in asset.

Question 27

Which of the following is a correct computation?
1. Liabilities - Equity = Assets
2. Income + Expenses = Profit or loss
3. Equity, beg. + Profit = Equity, end.
4. Equity, beg. - Income + Expenses = Equity, end.

Answer 27

3
Equity, beg. + Profit = Equity, end.

Question 28

Which of the following statements is corrct regarding income and expenses?
1. Income results in decreases in equity, while expenses results increases in equity.
2. If income exceeds expenses, the excess represents loss.
3. Contributions and distributions between the business owner and the business are not income and expenses.
4. If expenses exceeds income, the excess represents profit.

Answer 28

3
Contributions and distributions between the business owner and the business are not income and expenses.

Question 29

What is the effect on an entity’s financial statement elements when an owner invests money to the business?
1. Total assets increases
2. Total equity increases
3. Total assets and total liabilities both increase
4. Total assets and total equity both increase

Answer 29

4
Total assets and total equity both increase

Question 30

In the expanded basic accounting equation, why is income added to equity?
1. because income increases equity
2. because income decreases equity
3. because income are increasrs in assets
4. because income are decreases in liabilities

Answer 30

1
because income increases equity

Question 31

Entity A’s total liabilities are Php50M, while its total equity is Php10. Entity A’s total assets are
1. Php60M.
2. Php50M.
3. Php40M.
4. Any of these

Answer 31

1
Php60M.

Question 32

Entity A’s total assets are Php120M, while its total liabilities are Php90M. Entity’s total equity is
1. Php210M
2. Php30M.
3. Php90M.
4. Php50M.

Answer 32

2
Php30M.

Question 33

Equity A’s total assets are Php40M, while its total equity is Php9M. Entity’s total liabilities are
1. Php31M.
2. Php49M.
3. Php40M.
4. Php94M.

Answer 33

1
Php31M.

Question 34

Entity A earned total income of Php40M and incurred total expenses of Php9M. Entity A’s profit (loss) is
1. Php31M.
2. (Php31M).
3. Php49M.
4. (Php49M).

Answer 34

1
Php31M.

Question 35

Entity A earned total income of Php40M and incurred total expenses of Php59M. Entity’s profit (loss) is
1. Php49M.
2. Php19M.
3. (Php19M).
4. (Php99M).

Answer 35

3
(Php19M).

Question 36

Entity A earned total income of Php60M and reported a profit of Php16M. Entity A’s total expenses were
1. Php44M.
2. Php76M.
3. Php12M.
4. Php16M.

Answer 36

1
Php44M.

Question 37

Entity A earned total income of Php50M and reported a loss of Php8M. Entity A’s total expenses were
1. Php42M.
2. Php58M.
3. Php16M
4. Sorry, I don’t know.

Answer 37

2
Php58M.

Question 38

Entity A incurred total expenses of Php60M and reported a profit of Php16M. Entity A’s total income was
1. Php72M.
2. Php44M.
3. Php76M.
4. I’m tired and I want to sleep.

Answer 38

3
Php76M.

Question 39

Entity A incurred total expenses of Php40M and reported a loss of Php12M. Entity A’s total income was
1. Php42M.
2. Php28M.
3. Php52M.
4. Stop making me solve problems.

Answer 39

2
Php28M.

Question 40

Entity A’s beginning equity was Php60M. If during the year, Entity A earned total income of Php16M and incurred total expenses of Php8M, how much is Entity A’s ending equity?
1. Php68M.
2. Php76M.
3. Php84M.
4. I’ll ask me classmate later.

Answer 40

1
Php68M.

Question 41

Entity A’s beginning equity as Php80M. If during the year, Entity A earned total income of Php10M and incurred total expenses of Php18M, how much is Entity A’s ending equity?
1. Php88M.
2. Php72M.
3. Php90M.
4. Php52M.

Answer 41

2
Php72M.

Question 42

Entity A’s equity had beginning and ending balances of Php80M and Php100M, respectively. If there were no contributions from, or distributions to, the owner during the period, which of the following is most likely to be true?
1. Entity A earned profit of Php20M.
2. Entity A incurred loss of Php20M.
3. Entity A earned total income of Php20M.
4. Entity A incurred total expenses of Php20M.

Answer 42

1
Entity A earned profit of Php20M.

Question 43

Entity A had total assets, liabilities, and equity of Php120M, Php75M and Php45M, respectively, at the beginning of the period. During the period, Entity A’s total liabilities decreased by Php20M, while its profit was Php25M. There were no other transactions or events that affected equity during the period. How much is Entity A’s ending total assets?
1. Php70M
2. Php85M
3. Php95M
4. Php125M

Answer 43

4
Php125M

Question 44

Entity A had total assets, liabilities, and equity of Php140M, Php90M and Php50M, respectively, at the beginning of the period. During the period, Entity A’s total liabilities decreased to Php40M, while its profit was Php25M. There were no other transactions or events that affected equity during the period. How much is Entity A’s ending total assets?
1. Php75M
2. Php95M
3. Php115M
4. Php125M

Answer 44

3
Php115M

Question 45

Entity A had total assets of Php100M and total liabilities of Php60M at the beginning of the period. If at the end of the period, total assets increased by Php30M, while total liabilities remained the same, Entity A’s total equity at the end of the period would be
1. Php70M
2. Php60M
3. Php90M
4. Php80M

Answer 45

1
Php70M

Question 46

Entity a had total assets and total liabilities of Php120M and Php75M, respectively, at the beginning of the period. During the perod, Entity A earned total income of Php60M and incurred total expenses of Php45M. How much is Entity A’s ending total equity?
1. Php60M
2. Php80M
3. Php90M
4. Php120M

Answer 46

1
Php60M

Question 47

Entity A had total assets and total liabilities of Php120M and Php70M, respectively, at the beginning of the period. During the period, Entity A earned total income of Php60M and incurred total expenses of Php40M. Entity A’s total assets increased to 130M by year-end. There were no additional contributions by, or distributions to, the owner during the period. How much is Entity A’s ending total liabilities?
1. Php60M
2. Php70M
3. Php80M
4. Php90M

Answer 47

1
Php60M

Question 48

Entity A has ending total assets of Php60M and ending tota liabilities of Php45M. Entity A had a beginning equity of Php10M. If the Entity A earned total income of Php25M during the year, how much were the total expenses?
1. Php0
2. Php15M
3. Php20M
4. Php25M

Answer 48

3
Php20M.

Question 49

Entity A has ending total assets of Php160M and ending total liabilities of Php90M. Entity A had a beginning equity of Php30M. If Entity A incurred total expenses of Php50M during the year, how much was the total income?
1. Php70M
2. Php80M
3. Php90M
4. Php120M

Answer 49

3
Php90M

Question 50

At year-end, Entity A’s total assets and total liabilities are Php180M and Php70M, repectively. If Entity A had a beginning equity of Php75M and there were no contributions from, or distributions to, the owner during hte period, how much profit (loss) did Entity A earn (incur) during the year?
1. Php35M
2. (Php35M)
3. Php25M
4. (Php25M)

Answer 50

1
Php35M

Question 51

Yesterday, you cooked siopao asado for a total cost of Php4,000. The total cost consists of the costs of the ingredients, including transportation costs from the market, and allocated overhead costs for liquefied petroleum gas, electricity, and depreciation of steamer and other kitchen utensils. Today, you sold all the siopaos to your classmates for a total sales price of Php15,000, on credit. Your classmates promised to pay next week. You incurred additional Php100 in transporting the siopaos from your house to the school. If you prepare financial statements today, how much would be your profit (loss) under the accrual basis of accounting?
1. 10,900
2. (4,100)
3. 11,000
4. 0

Answer 51

3
11,000

Question 52

manong Magba Balut sells balut. At the beginning of the day, Manong Balut had Php1,000 cash. Manong used that amount to buy “balut” (uncooked), cook the “balut” and sell the “balut” online. At the end of the day, Manong Balut had Php1,700 cash. Assuming all other expenses were accounted for and Manong Balut did not incur any liabilities during the day, which of the following is most likely to be a valid statement?
1. Manong Balut earned profit of Php700, representing the increase in Manong’s assets (i.e., cash) resulting to an increase in his equity.
2. Manong Balut earned profit og Php1,700, representing the increase in Manong’s assets (i.e., cash) resulting to an increase in his equity.
3. Sorry I can’t solve this because I don’t know what a “balut” is.
4. I don’t know. I think I’d better ask Manong Balyt to teach me accounting.

Answer 52

1
Manong Balut earned profit of Php700, representing the increase in his equity.

Question 53

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

You spent Php18. Which of the following statements is correct?
1. Your profit for the week is Php20.
2. You incurred a loss of Php18.
3. Your profit for the week is Php2.
4. Papa is kuripot.

Answer 53

3
Your profit for the week is Php2.

Question 54

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

To earn a profit of Php10 in a month, your weekly spending should be (use 4weeks per month)
1. Php17.5
2. Php71.5
3. Php70
4. That is impossible! I would starve myself first before I can earn that profit.

Answer 54

1
Php17.5

Question 55

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

You spent all your allowance for the week. In addition, you purchased 1 “balut” worth Php16 from Mang Balut, on credit. You told Mang Balut you will pay him next week. Under the accrual basis of accounting, your profit (loss) for the current week is
1. Php16
2. 0
3. (Php16)
4. 1 balut

Answer 55

3
(Php16)

Question 56

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

If your total spending for the year was Php936, your profit (loss) would be (use 52 weeks per year)
1. Php0.
2. Php104
3. Php1,040
4. I don’t know. Accounting is so complicated!

Answer 56

2
Php104

Question 57

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

on Day 1 of the first week of the year, your accounting equation will show which of the following? (Note: The allowance is nonrefundable to Papa.)
1. Php20 assets = 0 liabilities + Php20 equity
2. Php20 assets = Php20 liabilities + 0 equity
3. Php20 assets = Php20 liabilities + Php20equity
4. 0 assets = 0 liabilities + 0 equity

Answer 57

1
Php20 assets = 0 liabilities + Php20 equity

Question 58

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

You spent all your allowance for the first week. Your accounting equation at the end of Week 1 will show which of the following?
1. Php20 assets = 0 liabilities + Php20 equity
2. Php20 assets = Php20 liabilities + 0 equity
3. Php20 assets = Php20 liabilities + Php20equity
4. 0 assets = 0 liabilities + 0 equity

Answer 58

4
0 assets = 0 liabilities + 0 equity

Question 59

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

You spent only Php18 of your allowance for the first week. Your accounting equation at the end of Week 1 will show which of the following
1. Php20 assets = 0 liabilities + Php20 equity
2. Php18 assets = 0 liabilities + Php18 equity
3. Php2 assets = 0 liabilities + Php2 equity
4. 0 assets = 0 liabilities + 0 equity

Answer 59

3
Php2 assets = 0 liabilities + Php2 equity

Question 60

Papa gives you a weekly allowance of Php20. In the next questions, we will treat your weekly allowance as your weekly income and the amount you spend out of the allowance as your expenses. Any unspent amount (i.e., savings) represents your profit.

Your accounting equation at the end of week for #55 above (‘balut’) will show which of the following? (Note: You already ate the ‘balut’ and now its gone.
1. Php16 assets = 1Php6 liabilities + 0 equity
2. Php16 assets = 0 liabilities + Php16 equity
3. 0 assets = Php16 liabilities + (Php16) equity
4. 0 assets = 0 liabilities + 0 equity

Answer 60

3
0 assets = Php16 liabilities + (Php16) equity