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Chapter 47

Cash Basis to Accrual Basis of Accounting

PROBLEM 47-1: MULTIPLE CHOICE – THEORY


1. B

2. A

3. D

4. B

5. C

6. D

7. C

8. D

9. D

Proof:

Case 1: Accounts increase during the period.


Accounts payable Inventory
- beg. -
COGS – COGS –
50,000 150,000 150,000 70,000
Cash basis Accrual basis
100,000 80,000

Case 2: Accounts decrease during the period.


Accounts payable Inventory
100,000 beg. 80,000
COGS – COGS –
150,000 50,000 50,000 130,000
Cash basis Accrual basis
end. - - end.

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10. B

Proof:
Accounts receivable
beg.
-
Sales - Sales -
Accrual Basis 150,000 70,000 Cash Basis

80,000

PROBLEM 47-2: THEORY & COMPUTATIONAL


1. D

2. C

3. C

4. Solutions:
Requirement (a):

Accounts/Trade notes receivable


beg. (0 + 200K) 200,000
Gross credit sales 3,710,000 1,000,000 Collections on A/R
Recoveries 10,000 2,000,000 Collections on trade N/R
100,000 Write-offs
20,000 Sales returns
800,000 end. (800K + 0)

Gross credit sales 3,710,000


Sales returns (20,000)
Net sales - accrual 3,690,000

Requirement (b):

Collections on A/R 1,000,000


Collections on trade N/R 2,000,000
Net sales - cash basis 3,000,000

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5. Solutions:
Requirements (a) & (b):

Accounts payable
- beg.
COGS - cash basis 2,000,000 2,800,000 Net purchases (squeeze)

end. 800,000

Inventory
beg. 200,000
Net purchases 2,800,000 3,000,000 COGS - accrual basis

- end.

6. Solution:
Prepaid/Accrued
beg. - Prepaid utilities 100,000 80,000 beg. - Accrued payable

Payments for utilities Utilities expense


(Cash basis) 270,000 220,000 (Accrual basis)

end. - Accrued payable 50,000 120,000 end. - Prepaid utilities

7. Solution:
Receivable/Unearned
beg. - Rent receivable 1,000,000 600,000 beg. - Unearned rent
Rent income Collections on rent
(Accrual basis) 2,100,000 2,420,000 (Cash basis)

end. - Unearned rent 720,000 800,000 end. - Rent receivable

8. Solution:

Net income under accrual basis (squeeze) ₱ 50,000


Adjustments:
Depreciation expense ................ ₱ 25,000
Increase in accounts receivable ..... (8,000)
Decrease in merchandise inventory ... 13,000
Decrease in accounts payable ........ (10,000) 20,000
Net cash provided by operating
activities ........................... (start) ₱70,000

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PROBLEM 47-3: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Receivable/ Unearned
beg. - Receivable 90,000 60,000 beg. - Unearned
Royalty income
215,000 200,000
(squeeze) Collection remittances
end. - Unearned 40,000 85,000 end. - Receivable

2. C
Solution:
Receivable/Unearned
beg. A/R 40,000 - beg. Unearned
Service revenue (squeeze) 215,000 200,000 Collections
end. Unearned 5,000 60,000 end. A/R

3. B
Solution:
Prepaid/Payable
beg. Prepaid 55,000 80,000 beg. Payable
Payments 300,000 305,000 Royalty expense (squeeze)
end. Payable 75,000 45,000 end. Prepaid

4. D
Solution:
Accrual basis profit 95,000 (squeeze)
Increase in accounts receivable (20,000)
Decrease in accounts payable (15,000)
Cash basis profit 60,000 (start)

5. C
Solution:
Cash basis revenue 30,000
Payments received but not earned (2,100)
Services performed but not yet collected 3,400
Revenue - accrual basis 31,300

6. C
 Effect on 20x3 profit: overstated – understatement in beginning
inventory (‘cannot be determined’) causes overstatement in profit
– inverse relationship.
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 Effect on 12/31/x3 equity: none – the error in beginning inventory
has already counter-balanced.

7. C
Solution:
Initial investment 2,000
Collection on services performed 5,000
Drawings (1,000)
Capital - 3/31/x3 6,000

The expenses incurred are not accounted for because they were paid
in the second quarter.

8. D
Solution:
Accounts receivable
beg. A/R 40,000
Net cash & credit sale Collections - cash
(80K - 4K + 120K - 6K) 190,000 200,000 & credit (squeeze)
30,000 end. A/R

9. D
Solution:
Rent receivable
beg. bal. 800,000
Rent revenue (squeeze) 2,500,000 30,000 Write-offs
2,210,000 Collections
1,060,000 end. bal.

10. D
Solution:

Accounts receivable
beg. A/R 1,000,000
Net sales 4,600,000 20,000 Write-offs
4,280,000 Collections (squeeze)
1,300,000 end. A/R

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11. B
Solution:
Insurance paid on July 1, 20x3 3,200
Less: Expired portion (3,200 x 6/12) (1,600)
Prepaid - Dec. 31, 20x3 1,600
Advanced rental payment 2,000
Total prepayments - 12/31/x3 3,600

12. B ₱810,000 + ₱563,000 – (₱225,000 + ₱125,000) – X = ₱654,000


X = ₱369,000.

13. D
Solution:
Cash basis Accrual basis
Revenue 3,200 3,200
Expenses - (1,500)
Profit 3,200 1,700

14. D
Solution:
Accrual basis profit (squeeze) 85,000
Increase in inventory (6,000)
Decrease in receivables 2,000
Increase in payables 6,000
Cash basis profit 87,000

15. C
Solution:
Current tax payable
150,000 beg.
Income tax paid 280,000 530,000 Current tax expense

end. 400,000

Income tax expense 570,000


Less: Increase in deferred tax liability (60,000)
Add: Increase in deferred tax asset 20,000
Current tax expense 530,000

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PROBLEM 47-5: EXERCISES – COMPUTATIONAL

1. Solutions:
Requirement (a):
Accounts/Trade notes receivable
beg. (0 + 240K) 240,000
Credit sales - gross 4,452,000 1,200,000 Collections on A/R
Recoveries 12,000 2,400,000 Collections on trade N/R
120,000 Write-offs
24,000 Sales returns
960,000 end. (960K + 0)

Gross credit sales 4,452,000


Sales returns (24,000)
Net sales - accrual 4,428,000

Requirement (b):
Collections on A/R 1,200,000
Collections on trade N/R 2,400,000
Net sales - cash basis 3,600,000

2. Solutions:
Requirements (a) & (b):

Accounts payable
- beg.
COGS - cash basis 3,000,000 4,200,000 Net purchases (squeeze)

end. 1,200,000

Inventory
beg. 300,000
Net purchases 4,200,000 4,500,000 COGS - accrual basis

- end.

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3. Solution:
Prepaid/Accrued
beg. - Prepaid utilities 150,000 120,000 beg. - Accrued payable

Payments for utilities Utilities expense


(Cash basis) 405,000 330,000 (Accrual basis)

end. - Accrued payable 75,000 180,000 end. - Prepaid utilities

4. Solution:
Receivable/Unearned
beg. - Rent receivable 1,800,000 1,080,000 beg. - Unearned rent
Rent income Collections on rent
(Accrual basis) 3,780,000 4,356,000 (Cash basis)

end. - Unearned rent 1,296,000 1,440,000 end. - Rent receivable

5. Solution:

Accrual basis profit (squeeze) 860,000


Depreciation expense (900K - 800K) 100,000
Decrease in trade and other receivables 40,000
Increase in inventory (50,000)
Increase in prepaid supplies (20,000)
Decrease in trade and other payables (10,000)
Increase in deferred tax liability 80,000
Cash basis profit 1,000,000