COURSE FAR 3: INTERMEDIATE ACCOUNTING III

DEVELOPER AND THEIR This module is prepared by Mr. Jerry D. Mariano. He is a

BACKGROUND faculty member of Tarlac State University College of
Business and Accountancy-Accountancy Department. He is
a Certified Public Accountant. He teaches financial
accounting and tax courses.
COURSE DESCRIPTION This course is the culmination of financial accounting
courses. This will cover constructive accounting and special
topics in financial accounting. This course shall thoroughly
cover recognition, measurement and valuation,
presentation and disclosure requirements for special topics
such as leases, operating Segment, interim financial
reporting and events after reporting period, cash and
accrual basis and single entry, statement of cash flows and
applicability and salient differences from PFRS of SMES,
small entities and reporting for microenterprises.
COURSE OUTLINE 5. Leases (Lease Accounting for Lessee& Lessor)
6. Operating Segment, Interim Financial Reporting and
Events after reporting period
7. Cash and Accrual Basis and Single Entry
8. Statement of Cash Flows
9. Applicability and Salient Differences from PFRS of SMES,
small entities and reporting for microenterprises
CHAPTER # 7
TITLE Cash and Accrual Basis and Single Entry
RATIONALE This module covers the topic for Cash and Accrual Basis of
Accounting and Single Entry.

The highlights/technical knowledge of these topics are:

To describe the differences between cash basis and accrual
basis of accounting.

To understand the adjustments in converting the cash

basis financial statements to accrual basis of financial
statements and;

To understand the concept of single entry system in

INSTRUCTION TO THE USERS
contrast to double entry system.
This module helps to prepare adjustments in converting
the cash basis financial statements to accrual basis
financial statements and to be able to prepare the financial
statements based on single entry records. In this module,
illustrations and sample problems are also provided in an
informative and comprehensive manner to be able to
understand better the topics. To evaluate what the
students have learned, this module provides work
exercises (activity) at the closure activities section. To
ensure that learning objectives are attained at the end of
the semester, the learner/students are evaluated based on
attendance, portfolio journal (activity), formative

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 assessment and summative assessment. See evaluation
for the details. For further readings, see
assignment/agreement section.
PRE-TEST
LEARNING OBJECTIVES 1.Define and explain the difference between cash and
accrual basis of accounting and the concept of single entry
system in contrast to double entry system.
2.Identify the differences between cash basis and accrual
basis of accounting and the records kept under a single
entry system.
3.Solve and compute for the adjustments needed in
converting the cash basis financial statements to accrual
basis financial statements and solve and compute for the
net income using the single entry method.
4.Classify and report for the presentation of financial
statements based on single entry records.
CONTENT From Far 0 to FAR 2 the content/preparati on of the
PREPARATORY ACTIVITIES financial statements was already introduced. In this
module, the student would be able to distinguish the cash
basis and accrual basis of accounting in the preparation of
the financial statements and know the importance of the
double-entry system.
DEVELOPMENTAL ACTIVITIES
C a s h a n d A c c r u a l B a s i s M e t h o d s o f A c c o u n ti n g T h e
p r e p a r a ti o n o f fi n a n c i a l s t a t e m e n t s d e p e n d s l a r g e l y
o n t h e m e t h o d o f a c c o u n ti n g e m p l o y e d b y t h e
e n ti t y .

The following methods are commonly used in the practice in accounting for income and expenses:
1.Cash Basis
Income is recognized when received regardless of when earned, and expense is recognized when
paid regardless of when incurred.

In other words, this approach does not recognized accounts receivable, accounts payable,
accrued income, deferred income, accrued expense and prepaid expense.

2.Accrual Basis
Income is recognized when earned regardless of when received, and expense is recognized when
incurred regardless of when paid.

Thus, the essence of this approach is the recognition of accounts receivable, accounts payable,
accrued income, deferred income, accrued expense and prepaid expense.

Cash Basis versus Accrual Basis

Item Cash Basis Accrual Basis
Cash sales plus collection of trade Cash sales plus sales on
Sales receivables. account.
Cash purchases plus payments to Cash purchases plus
Purchases trade creditors. purchases on account.

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 Items earned are considered
Income other than Items received are considered as as income regardless of when
sales income regardless of when earned. received.

Items incurred are treated as

Items paid are treated as expenses expenses regardless of when
Expenses, in general regardless of when incurred. paid.
Depreciation is provided
Depreciation Depreciation is provided normally. normally.
No bad debts are recorded because Doubtful accounts are
Bad Debts trade receivables are not recognized. treated as bad debts.

Accounting Problem
More often than not, accounting records are maintained on a cash basis.

At the end of the accounting period, adjustments are made for accruals and prepayments in order
to convert the cash basis records to accrual records.

To achieve the conversion from cash basis to accrual basis of accounting, the following formulas
may be of help.

Computation of Sales
Cash Sales xx
Sales on account:
Trade accounts and notes receivable, end xx
Collection of trade accounts and notes receivable xx
Sales returns, discounts, and allowances xx
Accounts and notes receivable written off xx
Trade notes receivable discounted
(NR directly credited) xx
Total xx
Less: Trade accounts and notes receivable, beginning xx xx
Total sales-accrual basis xx

Computation of Purchases
Cash purchases xx
Purchases on account:
Trade accounts and notes payable, end xx
Payment of trade accounts and notes payable xx
Purchases returns, discounts, and allowances xx
Total xx
Less: Trade accounts and notes payable, beginning xx xx
Total purchases- accrual basis xx

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Income other than sales

Income received- cash basis xx

Add: Deferred income-beginning xx
Accrued income- ending xx

Total xx
Less: Deferred income- ending xx
Accrued income- beginning xx xx

Income for the current year- accrual basis xx

Expenses in general

Expenses paid- cash basis xx

Add: Prepaid expenses-beginning xx

Accrued expenses- ending xx
Total xx
Less: Prepaid expenses- ending xx
Accrued expenses- beginning xx xx

Expenses- accrual basis xx

Illustrations:
#1-Jacqueline Company began the current year with the following:
Accounts receivable 1,000,000
Allowance for doubtful accounts 80,000
Net accounts receivable 920,000

During the current year, the following events

occurred:
Accounts written off 120,000
Cash sales 500,000
Sales on account 3,000,000
Bad debt expense recognized 200,000

At the end of the current year, the entity showed a balance in accounts receivable of P1,680,000
before the allowance for doubtful accounts.

Under the cash basis, what amount should be reported as sales for the current year? 2,700,000
AR-Jan 1 1,000,000
Sales on account 3,000,000
Total 4,000,000
AR-Dec 31 (1,680,000)
Accounts w-off (120,000)
Collection of AR 2,200,000
Cash Sales 500,000
Total Sales-cash basis 2,700,000

#2-Royal Company provided the following data for the current year:

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 Sales 10,000,000
Cost of goods sold 5,300,000
Operating expenses 3,800,000

31-Dec 1-Jan
Prepaid operating expenses 1,000,000 700,000
Accounts payable 1,350,000 1,200,000
Inventory 2,500,000 2,100,000
Accounts receivable 1,400,000 1,375,000

Under cash basis, what amount should be reported as purchases for the current year? 5,550,000

Inventory-Jan 1. 2,100,000
Purchases under accrual basis (squeeze) 5,700,000
Goods Available for Sale 7,800,000
Inventory-Dec. 31 (2,500,000)
COGS 5,300,000

AP-Jan 1 1,200,000
Purchases-accrual basis 5,700,000
Total 6,900,000
AP-Dec 31 (1,350,000)
Cash paid for Purchases-Cash basis 5,550,000

#3-During the current year, Seawall Company reported total operating expenses of P3,200,000,
consisting of P1,000,000 depreciation, P700,000 insurance and P1,500,000 salaries. The prepaid
insurance is P150,000 on January 1 and P200,000 on December 31. The accrued salaries payable
totaled P120,000 on January 1 and P100,000 on December 31.

What total amount was paid for operating expenses? 2,270,000

Operating expense per book 3,200,000

Depreciation (1,000,000)
PI-Dec 31 200,000
PI- Jan 1 (150,000)
Accrued sal payable-Dec 31 (100,000)
Accrued sal payable- Jan 1 120,000
Cash paid for operating expenses 2,270,000

#4-Under the accrual basis, rental income of Hamtikan Company for the current year is P600,000.
Additional information regarding rental income is as follows:
Unearned rental income, January 1 50,000
Unearned rental income, December 31 75,000
Accrued rental income, January 1 30,000
Accrued rental income, December 31 40,000

What total amount of cash was received from rental in the current year?
615,000

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 Rental income-Accrual Basis 600,000
Unearned RI-Jan 1 (50,000)
Unearned RI- Dec 31 75,000
Accrued RI-Jan 1 30,000
Accrued RI- Dec 31 (40,000)
Rental earned-Cash Basis 615,000

#5-Calapan Company provided the following year:

12/31/2019 12/31/2020
Physical inventory, at cost 600,000 1,000,000
Sales 4,000,000
Cost of sales 2,400,000
Accounts receivable-trade 1,200,000 1,350,000
Accounts payable-trade 1,500,000 1,850,000

In 2020, accounts written off amounted to P100,000. Sales returns with credit memo amounted
to P150,000 and purchase returns, P50,000. Cash receipts from customers after P200,000
discounts totaled P6,000,000 while cash payments to trade creditors amounted to P4,000,000
after discounts of P300,000. Cash paid to customers for goods returned was P50,000. On this
transaction, accounts receivable was debited.
Under the accrual basis, what amount should be reported as gross sales for the current year?
6,550,000

AR-Dec 31, 2020 1,350,000

Accounts w-off 100,000
Sales Return 150,000
CR fr customers 6,000,000
Sales discount 200,000
Total 7,800,000
AR-Dec 31, 2019 (1,200,000)
Erroneous debit to AR (50,000)
Gross sales 6,550,000

Under the accrual basis, what amount should be reported as gross purchases for the current
year? 4,700,000

AP- Dec 31, 2020 1,850,000

PR 50,000
Payments to trade creditors 4,000,000
PD 300,000
Total 6,200,000
AP-Dec 31, 2019 (1,500,000)
Gross purchases 4,700,000

#6-Cookie Company acquired patent right from other entities. During 2020, Cooke remitted
royalties of P3,000,000. The following data are available at year-end.

2019 2020
Prepaid royalties 550,000 450,000

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 Royalties payable 800,000 750,000

What amount should be reported as royalty expense for 2020? 3,050,000

Royalties paid 3,000,000

Prepaid royalties-2019 550,000
Royalties payable-2020 750,000
Total 4,300,000
Less: Prepaid royalties-2020 450,000
Royalties payable-2019 800,000 1,250,000
Royalty expense for 2020 3,050,000

Single Entry
Characteristic of single entry
The very heart of the accounting process is the analysis of the dual effect of each transaction on
the basis accounting model “Assets=Liabilities + Capital.”

All transactions are normally analyzed and recorded in terms of debits and credits. This system is
called the double entry system of bookkeeping.

A system of record keeping in which transactions are not analyzed and recorded in the double
entry framework is called a single entry system. Where the records are incomplete, they are said
to be maintained on a single entry basis.

Under the single entry system, the records maintained are represented only by the so-called
“bare essentials” and normally these include a record of cash, accounts receivable, accounts
payable, property and equipment, and taxes paid.

The major record under the single entry system is the cash book. The cashbook is maintained
showing all receipts and disbursements. And because in a single entry no specific accounts for the
receipts and disbursements are debited or credited, only a description thereof is made.

With respect to accounts receivable and accounts payable, only a list of customers and creditors
is made with their corresponding balances.

Accounting problem
Because of the single entry nature of the data, the financial information is muddled as a
consequence of which the CPA is called upon to sift through the single entry records and gather
enough information for preparation and presentation of financial statements.

Among others, the single entry problems include:

a.Single entry method of determining net income or loss
b.Preparation of income statement
c.Preparation of statement of financial position

The computation procedure followed in determining net income or loss is simply to compare the
capital or retained earnings at the beginning of the year and capital or retained earnings at the
end of the same year after taking into consideration withdrawals or dividends and additional
investments.

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Formula for proprietorship or partnership

Capital, end of the year xx

Add: Withdrawals xx
Total xx
Less: Capital, beginning of the year xx
Additional investments xx xx
Net income (loss) xx

Formula for Corporation

Retained earnings, end xx

Add: Dividends declared or paid xx
Other items that decrease retained earnings but not profit xx
Total xx
Less: Retained earnings, beginning xx
Other items that increase retained earnings but not profit or loss xx
Net income (loss) xx

Illustration I
An entity provided the following data for the current year:

1-Jan 31-Dec
Total assets 200,000 3,000,000
Total liabilities 1,200,000 1,800,000
Additional investments 600,000
Withdrawals 900,000

Capital, December 31 1,200,000

Add: Withdrawals 900,000
Total 2,100,000
Less: Capital, January 1 800,000
Additional investments 600,000 1,400,000
Net income 700,000

Illustration II
An entity provided the following information in relation to retained earnings for the current year:

Retained earnings-December 31 4,000,000

Retained earnings- January 1 4,500,000

During the current year, the entity issued share capital with par value of P2,000,000 and fair value
of P2,500,000 as 10% stock dividend.

At year-end, the entity declared a cash dividend of P3,000,000.

Solution
The net income for the current year is computed as follows:

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 Retained earnings-December 31 4,000,000
Stock dividend at fair value 2,500,000
Cash dividend 3,000,000
Total 9,500,000
Retained earnings- January 1 (4,500,000)
Net income 5,000,000

The stock dividend is recognized at fair value because it is less than 20%.

Illustration III
An entity reported the following changes in account balances during the current year:

Increase
(Decrease)
Cash 1,500,000
Accounts receivable 500,000
Merchandise inventory 2,000,000
Prepaid expenses (100,000)
Land 5,000,000
Accounts payable (1,100,000)
Bonds payable 4,000,000
Share capital 4,000,000
Share premium 1,000,000

Solution
Effect on net assets
Increase Decrease
Increase in cash 1,500,000
Increase in accounts receivable 500,000
Increase in merchandise inventory 2,000,000
Decrease in prepaid expenses 100,000
Increase in land 5,000,000
Decrease in accounts payable 1,100,000
Increase in bonds payable 4,000,000
10,100,000 4,100,000
Net increase in net assets 4,100,000) 6,000,000
Add: Dividend paid 1,500,000
Total 7,500,000
Less: Increase in share capital 4,000,000
Increase in share premium 1,000,000 5,000,000
Net income 2,500,000

Preparation of financial statements

The preparation of the income statement involves the computation of individual revenue and
expense balances by reference to the cash receipts and disbursements and the changes in assets
and liabilities.

The formulas used in converting cash basis to accrual basis of accounting are useful in this case.
These formulas involve the computation of:

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a. Sales
b. Purchases
c. Income other than sales
d. Expenses in general

Formula for Depreciation

Carrying amount of property, plant and equipment, beginning xx

Add: Cost of property acquired xx
Total xx
Less: Carrying amount of property, plant and equipment, ending xx
Carrying amount of property sold xx xx
Depreciation xx

Illustration I
Negros Store provided the following data obtained from the single entry records for the current
year.

31-Dec 1-Jan
Cash 890,000 600,000
Notes receivable 600,000 200,000
Accounts receivable 1,000,000 800,000
Merchandise inventory 500,000 800,000
Equipment 550,000 600,000
Notes payable 250,000 350,000
Accounts payable 500,000 600,000
Accrued interest payable 20,000 40,000
Unearned rent income 20,000 60,000

The cash book showed the following information:

Balance, January 1 600,000

Receipts:
Accounts receivable 1,500,000
Notes receivable 500,000
Cash sales 400,000
Rent income 80,000
Sale of equipment costing P100,000 and with
carrying amount of P50,000 60,000
Investment 300,000 2,840,000
Total 3,440,000

Payments:
Accounts payable 750,000
Notes payable 650,000
Cash purchases 300,000
Interest expense 50,000
Expenses 400,000
Equipment 200,000
Withdrawals 200,000 2,550,000

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 Balance, December 31 890,000

Supplementary information
Sales discounts granted to customers 50,000
Sales returns made by customers 150,000
Accounts receivable written off as uncollectible 30,000
Purchase discounts on accounts payable paid 40,000

Solution
The first step is to determine the capital balance at the beginning at the end of the year. The
formula is “total assets minus total liabilities equals capital balance”.
31-Dec 1-Jan
Assets:
Cash 890,000 600,000
Notes receivable 600,000 200,000
Accounts receivable 1,000,000 800,000
Merchandise inventory 500,000 800,000
Equipment 550,000 600,000
3,540,000 3,000,000

Liabilities:
Notes payable 250,000 350,000
Accounts payable 500,000 600,000
Accrued interest payable 20,000 40,000
Unearned interest income 20,000 60,000
790,000 1,050,000

Capital balance 2,750,000 1,950,000

The net income may now be computed using the single entry
formula for a proprietorship:

Capital- December 31 2,750,000

Add: Withdrawals 200,000
Total 2,950,000
Less: Capital- January 1 1,950,000
Additional investment 300,000 2,250,000
Net income 700,000

Computation of sales
Notes receivable- December 31 600,000
Accounts receivable-December 31 1,000,000
Collections of accounts receivable 1,500,000
Collections of notes receivable 500,000
Sales discounts 50,000
Sales returns 150,000
Accounts written off- bad debts 30,000

Total 3,830,000
 Less: Notes receivable-January 1 200,000
Accounts receivable-January 1 800,000 1,000,000
Sales on account 2,830,000
Cash sales 400,000
Total sales 3,230,000

Computation of purchases
Notes payable-December 31 250,000
Accounts payable- December 31 500,000
Payment of accounts payable 750,000
Payment of notes payable 650,000
Purchase discounts 40,000

Total 2,190,000
Less: Notes payable- January 1 350,000
Accounts payable- January 1 600,000 950,000
Purchases on account 1,240,000
Cash purchases 300,000
Total purchases 1,540,000

Computation of interest expense

Interest paid 50,000
Add: Accrued interest payable- December 31 20,000
Total 70,000
Less: Accrued interest payable- January 1 40,000
Interest expense 30,000

Computation of rent
income Rent received 80,000
Add: Unearned rent income-January 1 60,000
Total 140,000
Less: Unearned rent income- December 31 20,000
Rent income 120,000

Computation of gain on
sale Sale price 60,000
Less: Carrying amount of equipment sold 50,000
Gain on sale of equipment 10,000

Computation of
depreciation Equipment- 600,000
Add: Equipment acquired 200,000
Total 800,000
Less: Equipment- December 31 550,000
Carrying amount of equipment sold 50,000 600,000
Depreciation 200,000

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 Negros Store
Income Statement
Year ended December 31, 2019

Net sales (Note 1) 3,030,000

Cost of goods sold (Note 2) 1,800,000
Gross income 1,230,000
Other income (Note 3) 130,000

Total income 1,360,000

Expenses:
Expenses 400,000
Depreciation 200,000
Bad debts 30,000
Interest expense 30,000 660,000
Net income 700,000

Note 1- Net Sales

Sales 3,230,000
Sales discounts (50,000)
Sales returns (150,000)
Net sales 3,030,000

Note 2- Cost of goods sold

Merchandise inventory- January 1 800,000
Purchases 1,540,000
Purchase discounts (40,000) 1,500,000
Goods available for sale 2,300,000
Merchandise inventory- December 31 (500,000)
Cost of goods sold 1,800,000

Note 3- Other Income

Rent income 120,000
Gain on sale of equipment 10,000
Total other income 130,000
Negros Store
Statement of Financial
Position 31-Dec-19

Assets
Current Assets:
Cash 890,000
Notes receivable 600,000
Accounts receivable 1,000,000
Merchandise inventory 500,000 2,990,000

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 Noncurrent asset:
Equipment 550,000

Total assets 3,540,000

Liabilities and Equity
Current liabilities:
Notes payable 250,000
Accounts payable 500,000
Accrued interest payable 20,000
Unearned interest income 20,000 790,000

Equity:
Capital-January 1 1,950,000
Add: Net income 700,000
Additional investment 300,000
Total 2,950,000
Less: Withdrawals 200,000 2,750,000
Total liabilities and equity 3,540,000

Illustration 2
Dakak Company produced the following information from the incomplete records for the current
year:

Increases
Cash 390,000
Accounts receivable 140,000
Inventory 160,000
Equipment 40,000
Accounts payable 100,000
Accrued office expense 20,000
Accrued interest receivable 40,000

Decreases
Notes receivable 50,000
Unexpired insurance 10,000
Unearned interest income 60,000

Summary of cash transactions

Receipts
Cash sales 1,000,000
Collections from customers 2,960,000
Collections on notes receivable 490,000
Interest 110,000
Purchase returns and allowances (total
purchase returns and allowances,
P130,000) 30,000

Additional investment 50,000

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15
 Disbursements
Cash purchases 600,000
Sales returns and allowances
(total sales returns and
allowances,
P140,000) 20,000
Payments on accounts payable 1,700,000
Insurance premium 40,000
New equipment 180,000
Office expenses 1,380,000
Other expenses 130,000
Withdrawals 200,000

Introduction to solution
In this illustration, only increases and decreases in assets and liabilities are provided.
Actually, the same formulas for computing income and expenses will be used with the following
modification.

Basic rule- all increases are added and all decreases are deducted except the changes in the
following items.

a. Merchandise inventory- in the computation of cost of sales.

b. Property, plant and equipment- in the computation of depreciation.
c. Prepaid expenses- in the computation of expenses.
d. Deferred or unearned income – in the computation of income other than sales.

In other words, with respect to the four foregoing items, the rule is the

reverse: All increases are deducted and all decreases are added.

Computation of sales

Collections from customers 2,960,000

Collections on notes receivable 490,000
Sales returns and allowances (see note) 120,000
Increase in accounts receivable 140,000
Total 3,710,000
Decrease in notes receivable (50,000)
Sales on account 3,660,000
Cash sales 1,000,000
Total sales 4,660,000

Computation of purchases

Payment of accounts payable 1,700,000

Purchase returns and allowances (see note) 100,000
Increase in accounts payable 100,000
 Purchases on 1,900,000
account Cash 600,000
purchases Total 2,500,000
purchases

Interest received 110,000

Increase in accrued interest receivable 40,000
Decrease in unearned interest income 60,000
Interest income 210,000

Computation of insurance expense

Insurance premium paid 40,000
Decrease in unexpired insurance 10,000
Insurance expense 50,000

Computation of depreciation
New equipment acquired 180,000
Less: Increase in equipment 40,000
Depreciation 140,000

Computation of office expenses

Office expenses paid 1,380,000
Increase in accrued office expenses 20,000
Office expenses 1,400,000

Dakak Company
Income Statement
Year ended December 31, 2019

Net sales (Note 1) 4,520,000

Cost of goods sold (Note 2) 2,210,000
Gross income 2,310,000
Interest income 210,000

Total income 2,520,000

Expenses:
Insurance expense 50,000
Depreciation 140,000
Office expenses 1,400,000
Other expenses 130,000 1,720,000

Net income 800,000

Note 1- Net sales

Sales 4,660,000
Sales returns and allowances (140,000)

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 Net sales 4,520,000

Note 2- Cost of goods sold

Purchases 2,500,000
Purchase returns and allowances (130,000)
Net purchases 2,370,000
Increase in inventory (160,000)
Cost of goods sold 2,210,000

Single entry method

Effect on equity
Increase Decrease
Increases:
Cash 390,000
Accounts receivable 140,000
Inventory 160,000
Equipment 40,000
Accounts payable 100,000
Accrued office expenses 20,000
Accrued interest receivable 40,000

Decreases:
Notes receivable 50,000
Unexpired insurance 10,000
Unearned interest income 60,000

Total 830,000 180,000

Net increase (830,000- 180,000) 650,000

Add: Withdrawals 200,000
Total 850,000
Less: Additional investment 50,000
Net income 800,000

Additional Illustrations:
#1-On January 1, 2019, the statement of financial position of Racel Company showed total assets
of P5,000,000, total liabilities of P2,000,000 and contributed capital of P2,000,000. During the
current year, the entity issued share capital of P500,000 par value at a premium of P300,000.
Dividend of P250,000 was paid on December 31, 2019. The statement of financial position on
December 31, 2019 showed total assets of P7,500,000 and total liabilities of P3,200,000.

What is the net income for the current year? 750,000

1-Jan Dec 31
Total Assets 5,000,000 7,500,000
Total Liabilities 2,000,000 3,200,000
Equity 3,000,000 4,300,000

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 Inc in Equity (4.3m -3m) 1,300,000
Dividends paid 250,000
Total 1,550,000
Issue price of SC at a premium (800,000)
NI 750,000

* SC at par 500,000 + SP 300,000 = 800,000

#2-On December 31, 2019, Melissa Company showed shareholders’ equity of P5,000,000. The
share capital of P3,000,000 remained unchanged during the year. The transactions which affected
the equity were:

• An adjustment of retained earnings for 2018 overdepreciation 100,000

• Gain on sale of treasury shares 300,000
• Dividend declared, of which P400,000 was paid 600,000
• Net income for the current year 800,000

What is the retained earnings balance on January 1, 2019? 1,400,000

RE-Jan 1 1,400,000
NI 800,000
PPE-overdepreciation 100,000
Total 2,300,000
Div declared (600,000)
RE-Dec 31 1,700,000

#3-Camadillo Company reported the following changes in the account balances for the current
year, except for retained earnings:

Increase (Decrease)
Cash 800,000
Accounts receivable, net 250,000
Inventory 1,250,000
Investments (500,000)
Accounts payable (400,000)
Bonds payable 900,000
Share capital 1,000,000
Share premium 100,000

There are no entries in the retained earnings account except for net income and a dividend
declaration of P300,000 which was paid in the current year.

What was the net income for the current year? 500,000

Effect on Equity
Inc in cash 800,000
Inc in AR 250,000
Inc in Invty 1,250,000

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Dec in investments (500,000)
Dec in AP 400,000
Inc in BP (900,000)
Net increase in Equity 1,300,000
Add: Dividend declared 300,000
Total 1,600,000
Less: Inc in SC 1,000,000
Inc in SP 100,000 1,100,000
NI 500,000

CLOSURE ACTIVITIES
Part I - Theories: Encircle the letter of the correct answer. Any form of erasures will render your
answers invalid.

1. Under the cash basis of accounting (a) revenue is recorded when earned (b) accounts
receivable would appear in the statement of financial position (c) depreciation of assets having an
economic life of more than one year is not recognized (d) the matching principle is ignored.

2. Incomplete accounting records using only a cash book is characteristic of (a) cash basis (b)
accrual basis (c) single entry system (d) double entry system

3. Compared to the accrual basis of accounting, the cash basis understates income by the net
decrease during the accounting period of (a) both accounts receivable and accrued expenses (b)
accrued expenses but not of accounts receivable (c) neither accounts receivable nor of accrued
expenses (d) accrued receivable but not of accrued expenses

4. The premium on a four-year insurance policy expiring on December 31, 2021 was paid in total
on January 1, 2018. If the original payment was recorded as a prepaid asset, the balance in the
prepaid asset account on December 31, 2019 would be (a) lower than the balance on December
31, 2018 (b)lower than the balance on December 31, 2020 (c) the same as the balance on
December on December 31, 2021 (d) the same as the original payment

5. Which can qualify as cash equivalent? (a) one-year BSP treasury bill (b) six-month money
market placement (c) equity securities (d) preference shares with specified redemption date and
acquired three months before redemption date

6. Cash receipts from royalties, fees, commissions and other revenue are (a) cash outflows for
operating activities (b) cash inflows from operating activities (c) cash inflows from investing
activities (d) cash outflows for financing activities

7. Cash receipts from issuing shares and other equity instruments are (a) cash inflows from
investing activities (b) cash outflow for investing activities (c) cash inflows from financing activities
(d) cash outflows for financing activities

8. Cash payments to acquire equity instruments of other entities and interests in joint venture
are (a) cash outflows for financing activities (b) cash inflows from investing activities (c) cash
outflows from investing activities (d) cash inflows from financing activities

9. In the statement of cash flows, alternatively interest received and dividend received may be

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classified as cash flow from (a) operating activities (b) investing activities (c) financing activities (d)
revenue activities

10. Cash flows arising from income taxes shall be separately disclosed and classified as cash flows
from (a) operating activities (b) investing activities (c) financing activities (d) extraordinary
activities

Part II – Problems: Write your answers on the blank provided for each item number. Final
answers with any form of erasures or the like will be considered incorrect. Answers with no
solutions will not be considered.

Problem A- The following information pertains to Kadali Naman Company sales for the current
year:

Cash sales
Gross 2,000,000
Returns and allowances 100,000

Credit sales
Gross 3,000,000
Discounts 150,000

On January 1, customers owed Kadali Naman P1,000,000. On December 31, customers owed
Kadali Naman P750,000. Kadali Naman uses direct writeoff method for bad debts. No bad debts
were recorded in the current year.

1. Under the cash basis accounting, what amount of sales revenue should Kadali Naman report
for the current year?

Problem B- Bonusto Company reported sales revenue of P4,600,000 in its income statement for
the year ended December 31, 2019. Additional information is as follows:

December 31, 2018 December 31, 2019

Accounts receivable 1,000,000 1,300,000
Allowance for uncollectible accounts 60,000 110,000

Bonusto wrote off uncollectible accounts totaling P20,000 during 2019.

2. Under the cash basis of accounting, what amount should be reported as sales revenue for
2019?

Problem C- Alamkoto Company began the current year with the following:

Net accounts receivable 900,000

Allowance for doubtful accounts 100,000

During the current year, the following events occurred:

Accounts written off 120,000

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 Cash sales 700,000
Sales on account 3,000,000
Bad debt expense recognized 200,000
Written off-recoveries 50,000

At the end of the current year, the entity showed a balance in accounts receivable of P1,680,000
after the allowance for doubtful accounts.

3. Under the cash basis, what amount should be reported as sales for the current year?

Problem D- Data below were taken from the comparative trial balance of Kayakoto Company.
The books are kept on the accrual basis. The expenses included depreciation of P200,000 and
amortization of P100,000.

2019 2018
Accounts receivable 4,500,000 5,000,000
Interest receivable 20,000 50,000
Inventories 8,000,000 9,000,000
Prepaid insurance 100,000 50,000
Accounts payable 7,500,000 7,000,000
Accrued expenses 500,000 300,000
Net sales 25,000,000
Interest revenue 150,000
Cost of goods sold 15,000,000
Insurance expense 1,000,000
Other expenses 2,000,000

4.What total amount was paid for expenses during the current year?

5.What total amount of cash payment was made during the current year?

Problem E- Selected accounts, cash receipts and disbursements of Kayato Company for 2019 are
as follows:

December 31 January 1
Accounts receivable 250,000 300,000
Notes receivable 150,000 100,000
Accounts payable 120,000 160,000
Notes payable 200,000 150,000
Prepaid insurance 30,000 10,000

Cash receipts for 2019 include:

Cash sales 500,000

Collections of accounts, net of discounts of P40,000 1,800,000
Collections of notes receivable 80,000
Bank loan- one year, dated December 31, 2019 100,000
Purchase returns and allowances 60,000

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Cash disbursements for 2019 include:

Cash purchases 130,000

Payments of accounts payable, net of discounts of P20,000
1,500,000
Payments of notes payable 400,000
Insurance 220,000
Other expenses 650,000
Sales returns and allowances 50,000

6. Under accrual basis, what amount should be reported as net sales?

7. Under accrual basis, what amount should be reported as net purchases?

Problem F- YorWelcome was incorporated on January 1 of the current year by issuing share
capital with par value of P50,000,000 for P60,000,000.

The other transactions that affected the cash account during January were:

Land and building were purchased for P25,000,000 with a downpayment of P10,000,000. A one-
year note was signed for the remainder.

A check was written for P4,500,000 to pay for equipment.

A check of P1,500,000 was written to acquire software.

One piece of computer equipment was sold at its original price and the cash collected was
deposited in the entity’s checking account.

The balance of the checking account on January 31 was P45,000,000.

8. What was the sale price of the computer equipment?

Problem G- Easy Round Company had total assets of P4,000,000 and shareholder’s equity of
P2,080,000 at the beginning of the year. During the year, assets increased by P520,000 and
liabilities decreased by P820,000.

9. What is the shareholder’s equity at the end of the year?

Problem H- On January 1, 2019, Gibawey Company showed total assets of P5,000,000, total
liabilities of P2,000,000 and contributed capital of P2,000,000. During the current year, the
corporation issued share capital of P500,000 par value at a premium of P300,000. Dividend of
P250,000 was paid on December 31, 2019. On December 31, 2019, total assets amounted to
P7,500,000 and total liabilities amounted to P3,200,000.

SYNTHESIS / GENERALIZATION

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EVALUATION

The student/learner’s performance in the module is evaluated as follows:

20% Attendance (Active participation in the class)

20% Portfolio Journal (Answers to Portfolio Journal)
20% Formative Examination (One online/offline written quiz covering Chapter 7)
Summative Examination (This topic is included in the Online/Offline Written
40%
Midterm Examination)
ASSIGNMENT / AGREEMENT The next topic is the Statement of Cash Flows. Student is
advised to read in advance the topic in the book of Valix,
Peralta, Financial Accounting 3, 2019 edition.
For further reading: Milan Financial Accounting 3, 2019
edition

REFERENCES Valix, Peralta, Financial Accounting Volumes 3, 2019

edition
Millan, Intermediate Accounting Part 3, 2019 edition

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