ACCT 1A&B: Fundamentals of Accounting

BCSV

Fundamentals of Accounting Part I

ACCOUNTING CYCLE: Completion

I. CONCEPTUAL SKILLS

A. True or False
Write A if the statement is true otherwise, write B.

1. Accounts receivables not collectible within 12 months after reporting date is classified as
noncurrent assets.
2. Comprehensive income is the change in equity during a period resulting from transactions and
other events, other than changes resulting from transactions with owners in their capacity as
owners.
3. An income statement is a formal statement showing the financial position of an entity for a given
period of time.
4. The statement of changes in equity is a basic statement that shows the movements in the
elements of the owner’s net worth.
5. Financial statement users are assumed to have no reasonable knowledge of business and financial
accounting matters.
6. Notes to financial statements is not required since all information are stated already in the
statement of comprehensive income, changes in equity, and financial position.
7. Cash receipt from a sale of machine is an example of an investing activity. The business is engage
in manufacturing and selling of machines.
8. Accrued expense understates liabilities if not recorded or recognized in the period incurred.
9. Advances from customers account is an income from the perspective of a company using accrual
basis accounting.
10. Depreciation expense is an example of noncash expense that reduces company’s profit.
11. If a company wanted to determine its profit under cash basis, they would include prepaid
insurance expired in the computation.
12. Statement of changes in equity is usually prepared before statement of comprehensive income. B
13. Post-closing trial balance contains only real accounts.
14. Reversing entries brings about segregation of items within an accounting period.
15. Prepaid expenses initially recorded as assets and adjusted at yearend can be reversed at the
beginning of an accounting period.

B. Multiple Choice
Choose the letter of the best answer.

1. A document prepared to prove the equality of debits and credits after all adjustments have been
prepared is
A. Adjusted statement of financial position
B. Adjusted trial balance
C. Adjusted financial statements
D. Post-closing trial balance

2. An entity is preparing the annual financial statements based on the adjusted trial balance. Which
financial statement shall be prepared first?
A. Statement of financial position

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B. Balance sheet
C. Income statement
D. Choices A and B are correct

3. Closing entries
A. Are optional step in the accounting cycle.
B. Affect only real accounts.
C. Permit an entity to analyze routine and repetitive transactions the same way all the time.
D. Remove the balances from the temporary accounts.

4. The account income summary is a

A. Nominal account
B. Real account
C. Capital account
D. Mixed account

5. The income summary account

A. Generally has a credit balance after all the accounts that should be closed have been closed
B. Summarizes revenue, expense and net income or loss for the accounting period
C. Summarizes changes in assets, liabilities, and net earnings or loss for the accounting period
D. Is used to close the capital account

6. After the accounts have been closed

A. All the accounts have zero balances.
B. The asset, liability, and owner’s equity account have zero balances.
C. The revenue, expense, income summary, and capital accounts have zero balances.
D. The revenue, expense, and income summary accounts have zero balances.

7. The credit balance in the income summary account represent

A. Net income
B. Net loss
C. Liability
D. Capital

8. For sole proprietorship, the net income for the period is

A. Credited to capital account
B. Debited to capital account
C. Credited to drawing account
D. Debited to drawing account

9. Which of the following statements best describes the purpose of closing entries?
A. To facilitate posting and taking a trial balance.
B. To determine the amount of net income or net loss for the period.
C. To reduce the balances of temporary accounts to zero so that these are used to accumulate
the revenue, expenses and withdrawals of the next period.
D. To complete the record of various transactions that were started in a prior period.

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10. The closing process

A. Is done each time a transaction takes place and is journalized.
B. Transfers all income statement items to their related statement of financial position account.
C. Posts all closing entries to the appropriate general ledger account.
D. All of the choices are correct regarding the closing process.

11. The post-closing trial balance

A. Consists of statement of financial position accounts only.
B. Will balance if a transaction is not journalized and posted, or if a transaction is journalized
and posted twice.
C. Shows that the accounting equation is in balance at the end of the accounting period.
D. All of the above are correct.

12. Reversing entries

A. Are normally prepared for accruals and prepayments.
B. Are necessary to achieve a proper matching of revenue and expense.
C. Are desirable to exercise consistency and establish standardized procedures.
D. Must be made at year-end.

13. Which of the following statements regarding reversing entries is false?

A. Deferrals entered in the statement of financial position accounts make reversing entries
unnecessary.
B. All accruals should be reversed.
C. Adjusting entries for depreciation and doubtful accounts are never reversed.
D. Reversing entries change amounts reported in the statement of financial position for the
previous period.

14. Reversing entries apply to all of the following, except

A. Unearned revenue
B. Accrued wages
C. Prepaid insurance
D. Depreciation

15. Reversing entries apply to

A. All adjusting entries
B. All deferrals
C. All accruals
D. All closing entries

16. A reversing entry should never be made for an adjusting entry that
A. Accrues unrecorded revenue.
B. Adjusts expired costs from an asset account to an expense account.
C. Accrues unrecorded expenses.
D. Adjusts unexpired costs from an expense account to an asset account.

17. Adjusting entries that should be reversed include those for prepaid or unearned items that
A. Create an asset or a liability account.

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B. Were originally entered in a revenue or expense account.

C. Were originally entered in an asset or liability account.
D. Create an asset or a liability account and were originally entered in a revenue or expense
account.

18. An entity initially records prepayments in real accounts and makes reversing entries when
appropriate. Which of the following year-end adjusting entries should be reversed?
A. The adjusting entry to record depreciation for the period.
B. The adjusting entry to record the portion of service fees received in advance that is earned by
year-end.
C. The adjusting entry to record supplies used during the period.
D. The adjusting entry to record service fees earned by year-end but not billed.

19. The trial balance debit or credit amount of each account is combined with the amount of any
debit or credit adjustment to that account to determine the new balance of the account. This
process is known as
A. Footing
B. Cross-footing
C. Balancing
D. Totaling

20. Which of the following statements is incorrect in relation to a worksheet?

A. The worksheet is included as part of the published financial statements.
B. The worksheet provides a place where adjusting entries can be made formally before these
are journalized and posted.
C. The worksheet provides a balancing mechanism that helps to uncover accounting errors.
D. The worksheet helps facilitate the preparation of financial statements.

21. The balancing figure in the worksheet is net loss if

A. The total of the credits exceeds the total of the debits in the income statement columns.
B. In the statement of financial position columns, the total of the debits exceeds the total of the
credits.
C. The total of credits is the same as the total of the debits in the income statement columns.
D. In the statement of financial position columns, the total of the credits exceeds the total of the
debits.

22. Financial statements must be prepared at least

A. Annually
B. Quarterly
C. Semi-annually
D. Every two years

23. In the Philippines, the common practice is to present in the statement of financial position
A. Current assets before non-current assets, current liabilities before non-current liabilities and
equity after liabilities.
B. Non-current assets before current assets, non-current liabilities before current liabilities and
equity after liabilities.

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C. Current assets before non-current assets, non-current liabilities before current liabilities and
equity after liabilities.
D. Non-current assets before current assets, current liabilities before non-current liabilities and
equity after liabilities

24. The income statement would help in which of the following?

A. Evaluate liquidity
B. Evaluate solvency
C. Estimate amount, timing and uncertainty of future cash flows
D. Estimate future financial flexibility

25. Accrued revenue would normally appear in the statement of financial position under
A. Non-current assets
B. Current liabilities
C. Long-term liabilities
D. Current assets

II. COMPUTATIONAL AND ANALYTICAL SKILLS

Supply the answer.

Problem 1: AB Company reported the following balances of accounts:

Cash P 80,000 Accounts payable P 40,000
Supplies expense 10,000 Service income 100,000
Advances from customers 30,000 Rent expense 10,000
Accounts receivable 20,000 Allowance for bad debts 1,000
Furniture 60,000 AB, Capital 9,000

You found out the following upon audit examination:

 Actual supplies used amounted to P 8,000.
 Advances already rendered but not yet recorded as service income.
 Allowance for bad debts is to be increased by 100%.

1. How much is the correct balance of AB, Capital?

Problem 2: The unadjusted trial balance of V Manpower Services is as follows:

V Manpower Services
Unadjusted Trial Balance
December 31, 2015
Debit: Credit:
Cash P 120,000
Accounts receivable 80,000
Office supplies 20,000
Office equipment 50,000
Accumulated Depreciation – Office equipment 5,000
Janitorial equipment 200,000

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Accumulated Depreciation – Janitorial equipment 20,000

Service revenue 650,000
Salaries expense 170,000
Supplies expense 24,000
Transportation expense 36,000
V, Capital 25,000
700,000 700,000

Adjustments to be made:
 Accrued salary expense, P 30,000
 Unrecorded service revenue, P 150,000
 From P 20,000 supplies, used office supplies = P 12,000
 Depreciation, 10% of cost
 Personal drawings of Mr. V, P 10,000

2. What is the adjusted trial balance total?

3. How much is the total expenses to be reported for the year 2015?
4. How much is the net income to be reported for the year 2015?
5. What amount of total receivables is to be reported for the year 2015?
6. How much is the total current assets?
7. How much is the working capital of the business?
8. What is the amount of the owner’s capital to be reported at the end of the year?
9. What is the post-closing trial balance total?

Problem 3: The following is the post-closing trial balance of IT Company dated March 31, 2014:

Debit: Credit:
Cash P 60,000
Accounts receivable 140,000
Allowance for uncollectible accounts P 1,400
Unused supplies 400
Equipment 120,000
Accum. Depreciation – Equipment 24,000
Accounts payable 44,400
Notes payable 50,000
Accrued interest payable 600
IT, Capital 200,000
P 320,400 P 320,400

For the month of April, he following are the transactions of IT Company:

1) The owner withdrew P 50,000 cash from the business for his personal use.
2) Paid P 6,000 insurance premium. The company debited prepaid insurance for this transaction.
3) Paid P 12,000 rent. The company debited rent expense for this transaction.
4) Total services rendered to various customers, P 70,000. 40% of which are on cash basis and the
balance on open account.
5) Received promissory note from customer to replace P 20,000 accounts receivable.
6) Collected in cash P 82,000 of accounts receivable.
7) Paid the notes payable of P 50,000 plus the P 1,200 interest.

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8) Purchased P 1,200 supplies on cash basis. The company debited unused supplies for this
transaction.
9) Paid salaries, P 15,000

At the end of the month, the following information is available to effect adjustments:
A. The insurance in #2 for P 6,000 is applicable for six months starting April 1.
B. The rent of P 12,000 paid in #3 is for 3 months, starting April 1.
C. The promissory note in #5 is earning 12% interest per annum. The note is dated April 1 and is due
on June 30.
D. Uncollectible accounts expense is estimated at 2% of accounts receivable balance.
E. The annual depreciation is 20% of cost.
F. The unused supplies balance is P 500.

Determine the pre-adjustment amounts of the following:

10. Total current assets.
11. Trial balance total.
Determine the following:
12. Post-adjustments trial balance total.
13. Adjusted net income (loss).
14. Adjusted total current assets.
15. Adjusted total liabilities.
16. Adjusted owner’s equity.
17. Working capital.
18. Post-closing trial balance.

Problem 4: The following accounts were taken from the trial balance of Gunther Enterprises as of
December 31, 2015:

Debit: Credit:
Cash P 160,000
Notes receivable – trade 150,000
Accounts receivable 72,000
Allowance for bad debts P 4,000
Ammunitions 38,000
Guns 250,000
Accumulated depreciation – Guns 12,500
Furnitures and fixtures 40,000
Accumulated depreciation – Furniture and fixtures 8,000
Office equipment 70,000
Accumulated depreciation – Office equipment 7,000
Accounts payable 20,000
Notes payable – Trade 50,000
Service income 990,000
Miscellaneous income 8,500
Salaries expense 200,000
Rent expense 30,000
Gunther, Capital
Gunther, Drawings 90,000

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P 1,100,000 P 1,100,000

Additional information gathered:

(a) The notes receivable is a one year 12% interest bearing note due on March 31, 2016.
(b) The accounts receivable is net of P 8,000 customer’s advances.
(c) The allowance for bad debts is 5% of outstanding accounts receivable.
(d) The annual depreciation is 10% of the cost of fixed assets.
(e) The notes payable is 2 year 18% interest bearing due on April 30, 2017. Interest is payable every
April 30.
(f) Accrued salaries, P 50,000.
(g) Unused ammunition, P 25,000.
(h) Unused rent is P 7,500.
(i) Cash drawings were erroneously made to P 90,000. It should be P 9,000 only.

Determine the following:

19. Net adjustments made to total assets.
20. Adjusted trial balance total.
21. Total revenue to be reported for the year 2015.
22. Net income (loss) to be reported for the year 2015.
23. Total current assets.
24. Total non-current assets.
25. Total liabilities.
26. Owner’s equity as of December 31, 2015.
27. The balance of drawings account to be closed to capital.
28. Post-closing trial balance total.

Problem 5: The accountant of Deckard Shaw Services made the following erroneous closing entry:

Service income 60,000

Allowance for bad debts 500
Accumulated depreciation 17,500
Interest income 500
Salaries expense 21,500
Depreciation expense 8,500
Bad debts expense 200
Supplies expense 4,800
Utilities expense 12,500
Deckard Shaw Drawing 5,000
Income Summary 26,000

The erroneous post-closing trial balance was made as follows:

Deckard Shaw Services

Post-closing Trial Balance
Year ended, December 31, 2015
Cash 33,000
Accounts receivable 53,000
Equipment 70,000

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Accounts payable 30,000

Deckard Shaw, Capital 100,000
Income summary 26,000
156,000 156,000

Compute for the following:

29. Correct net income (loss) for the period.
30. Correct Income Summary balance.
31. Correct post-closing trial balance.
32. Correct current assets balance.
33. Correct owner’s equity.
34. Correct working capital.

Problem 6: On December 31, 2015, Franco Rental Services prepared a Statement of Comprehensive
Income and Statement of Financial Position and failed to take into account certain adjusting entries.

The Statement of Comprehensive Income, prepared on this incorrect basis, reflected P 20,400 net income,
after income taxes.

The Statement of Financial Position after closing entries and income taxes reflected total assets of P
90,000; total liabilities of P 40,000; and owner’s equity of P 50,000. The data for the adjusting entries that
the company failed to take into account were:

(a) Recorded depreciation for the year on an equipment that costs P 85,000 with an estimated useful
life of 10 years and a residual value of P 5,000 was P 800.
(b) Wages amounting to P 17,000 for the last three days of December 2015 were not paid and not
recorded (the next payroll will be on January 10, 2016).
(c) Rent revenue of P 4,800 was collected on December 1, 2015 for office space for the period of
December 1, 2015 to February 28, 2016. The P 4,800 was credited in full to rent revenue when
collected.
(d) Income tax rate is 32%.

35. What amount of adjustment was made to reflect the correct depreciation for 2015?
36. What amount of adjustment was made to reflect the correct income tax expense for 2015?
37. How much is the correct net income (loss) after taxes for the year 2015?
38. What is the correct amount of liabilities?
39. If the adjusting entries were not taken into account, by how much is the owner’s equity be
under- or over-stated?

Problem 7: the adjusted trial balance for Cham Services as of June 30, 2014 is presented below:

Cash P 21,700
Accounts receivable – Trade* 4,200
Supplies 1,800
Prepaid Insurance 6,300
Land 43,500
Buildings 132,000
Accum. Depreciation – Bldg. P 25,000

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Accounts payable 3,700

Notes payable** 10,300
Salaries payable 6,600
Deferred income 2,600
Loans payable*** 100,000
Cham, Capital ?
Service income 78,600
Wages expense 14,800
Utilities expense 8,100
Insurance expense 6,700
Supplies expense 5,100
Depreciation expense 8,800
Interest expense 13,200
Miscellaneous expense 1,200
P 267,400 P 267,400
* Semi-annual payments of P 700 is due every February 1 and June 30 of every year for three years.
** Classified as trade.
*** Quarterly payments of P 5,000 is due every March 31, June 30, September 30 and December 31 of
every year for five years.

Compute the following:

40. Total current assets.
41. Total non-current liabilities.
42. Total current liabilities.
43. Net income (loss).
44. Owner’s equity.

Problem 8: Ser Corp. failed to recognize accruals and prepayments since the inception of its business six
years ago. The accruals and prepayments at the end of 2013 are given below:

Prepaid insurance 60,000

Accrued wages 75,000
Rent income collected in advance 96,000
Interest receivable 81,000

45. What is the net effect of the above errors in the 2013 income statement?
46. What is the net effect of the above errors on assets?
47. What is the net effect of the above errors on liabilities?

Problem 9: Red horse Corporation’s accounting records provided the following information:

12/31/13 12/31/2012
Current Assets ? 240,000
Property, Plant, and Equipment 1,700,000 1,600,000
Current Liabilities 130,000 ?
Noncurrent Liabilities ? 580,000

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All assets and liabilities of the entity are reported at yearend. Working capital of P102,500 remained
unchanged from 2012 to 2013. Profit in 2013 was P73,000. There were no other changes in owner’s equity.

Compute for:
48. Noncurrent liabilities, December 31, 2013
49. Current Assets, December 31, 2013

Problem 10: Demon Company had the following assets at December 31, 2013:

Cash P520,000
Accounts receivable, net 1,760,000
Notes receivable 3,050,000
Prepaid expenses 120,000
Property, plant, and Equipment, net 10,800,000

An analysis of accounts takes place on December 31, 2013 and returned the following results:

o Included in the cash account is a P20,000 which is earmarked for payment of bonds due in early
2014 and a P 180,000 which is earmarked for the acquisition of a machine, it is expected to be
disbursed on January 21, 2014.

o An open account receivable from an executive officer of the company, in the amount of P140,000.
Collectible within 30 days. This amount is not included in the above accounts receivable.

o Notes receivable is classified as trade. It is due in equal quarterly installments of P381,250 starting
April 1, 2014.

50. How much is the current assets?

51. How much is the noncurrent assets?

Problem 11: On May 3, 2013, Lucky Co. received a 180 day, 15% promissory note from El Tzi, a customer.
The note has a face value of P230,000. Company’s fiscal yearend falls on September 30, 2014.

52. How much is the accrued interest on the note at yearend?

53. Assuming Lucky made a reversing entry on Oct. 1, How much will be credited to interest
income on maturity date?
54. Assuming Lucky made no reversing entry on Oct. 1, How much will be credited to interest
income on maturity date?

Problem 12: Swine Co. sells office equipment contracts agreeing to service equipment for a two – year
period. Cash receipts from contracts are credited to unearned service contract revenue and service
contract costs are charged to service contract expense as incurred. Revenue from service contract is
recognized as earned over the lives of the contracts.

Additional information for the year ended December 31, 2013 is as follows:

Unearned service contract, January 1, 2013 P600,000

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Cash receipts from service contracts sold 980,000

Service contract revenue recognized 860,000
Service contract expense 520,000

55. What amount should Swine report as unearned service contract on its 2013 statement of
financial position?

Problem 13: On December 31, 2013, the bookkeeper of Vector Co. provided the following information:
Accounts payable P2,500,000
Notes payable - short term 2,000,000
Serial bonds 10,000,000
Accrued interest on bonds, to be paid on 300,000
January 17, 2014
Deferred rental 100,000

o Deposits and advances from customers in the amount of P500,000 is included in accounts
payable.
o Annual Interest on notes payable is 9%. It was dated October 31, 2013. No interest has been
accrued on this note.
o Serial bonds is payable in quarterly installments of P500,000 per year starting 2014.

56. In the Dec. 31, 2013 statement of financial position, how much current liabilities should be
reported?
57. In the Dec. 31, 2013 statement of financial position, how much noncurrent liabilities, if any,
should be reported?

Problem 14: Sequiola Co. reported the following real accounts for the past two years of operation:

2014: 2015:
Current assets P 365,000 P 450,000
Non-current assets 1,435,000 1,350,000
Total assets P 1,800,000 P 1,800,000

Current liabilities 400,000 200,000

Non-current liabilities 400,000 500,000
Total liabilities P 800,000 P 700,000

During 2015, the owner invested additional P 1,200,000 cash and withdrew P 900,000 cash.

58. What is the amount of net income (loss) for the calendar year 2015?

Problem 15: Under the accrual basis, rental income of Vin Company for the calendar year 2014 is P
600,000. Additional information regarding rental income are presented below:

Unearned rental income, January 1 P 50,000

Unearned rental income, December 31 75,000
Accrued rental income, December 31 40,000
Accrued rental income, January 1 30,000

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59. Under the cash basis, how much rental income should be reported by Vin in year 2014?

Problem 16: The following information was obtained from the incomplete records of Tinker related to its
expenses:

12/31/13: 12/31/14:
Total payments made P 670,000
Total expenses 690,000
Prepaid expenses P 120,000 ?
Accrued expenses 230,000 190,000

60. What is the balance of the prepaid expenses account on December 31, 2014?

“You are capable of more than you know. Choose a goal that seems right for
you and strive to be the best, however hard the path. Aim high. Behave
honorably. Prepare to be alone at times, and to endure failure. Persist! The
world needs all you can give.”
~ E.O. Wilson

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Suggested Key
I. CONCEPTUAL SKILLS
A. True or False
1. B 9. B
2. A 10. A
3. B 11. B
4. A 12. B
5. B 13. A
6. B 14. B
7. B 15. B
8. A

B. Multiple Choice
1. B 14. D
2. C 15. C
3. D 16. B
4. A 17. D
5. B 18. D
6. D 19. B
7. A 20. A
8. A 21. D
9. C 22. A
10. C 23. A
11. D 24. C
12. C 25. D
13. D

II. COMPUTATIONAL AND ANALYTICAL SKILLS

1. P 120,000 31. P 156,000
2. P 905,000 32. P 85,500
3. P 297,000 33. P 108,000
4. P 503,000 34. P 55,500
5. P 230,000 35. P 7,200 increase
6. P 228,000 36. P 8,768 decrease
7. P 198,000 37. P 1,768
8. P 518,000 38. P 51,432
9. P 598,000 39. P 18,632 overstated
10. P 140,800 40. P 34,000
11. P 339 800 41. P 80,000
12. P 342,127 42. P 43,200
13. P 46,227 43. P 20,700
14. P 146,627 44. P 61,300
15. P 44,400 45. P30,000 overstated
16. P 196,227 46. P141,000 understated
17. P 102,227 47. P171,000 understated

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18. P 268,227 48. P607,000

19. P 61,000 increase 49. P232,500
20. P 1,213,500 50. P5,410,000
21. P 1,012,000 51. P10,980,000
22. P 684,500 52. P14,375
23. P 513,000 53. P17,250
24. P 296,500 54. P2,875
25. P 134,000 55. P720,000
26. P 675,500 56. P6,930,000
27. P 675,500 57. P8,000,000
28. P 877,000 58. P (200,000)
29. P 13,000 59. P 615,000
30. 0 60. P 60,000

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