Ais Reviewer

Chapter 13
Operating segment
Problem 13-1
Timmy Company provided the following information in relation to revenue earned by
operating segments for the current year:
Sales to
Segment unaffiliated Intersegment sales Total revenue
customers
Alo 5,000 3,000 8,000
Bix 8,000 4,000 12,000
Cee 4,000 - 4,000
Dill 43,000 16,000 59,000
Combined 60,000 23,000 83,000
Elimination - (23,000) (23,000)
Consolidated 60,000 - 60,000
What total revenue should be disclosed by the reportable segments?
a. 60,000
b. 83,000
c. 71,000
d. 51,000
Answer:
Total revenue
Bix 12,000
Dill 59,000
71,000
Problem 13-2
Correy Company provided the following data relating to operating segments:
Industry revenue profit total assets
A 10,000,000 1,750,000 20,000,000
B 8,000,000 1,400,000 17,500,000
C 6,000,000 1,200,000 12,500,000
D 3,000,000 550,000 7,500,000
E 4,250,000 675,000 7,000,000
F 1,500,000 225,000 3,000,000
How many reportable segments does Correy have?

a. Three
b. Four
c. Five
d. Six
Answer:
Revenue Profit Assets

A 30.53% 30.17% 29.63%
B 24.43% 24.14% 25.93%
C 18.32% 20.69% 18.52%
D 9.16% 9.48% 11.11%
E 12.98% 11.64% 10.37%
F 4.58% 3.88% 4.44%
100.00% 100.00% 100.00%
A, B, C, D and E reportable because their revenue or operating profit or asset is at least

10% of the combined amount.
Problem 13-3
Aurora Company provided the following profit (loss) relating to operating segments:
V 3,400,000
W 1,000,000
X (2,000,000)
Y 400,000
Z ( 200,000)
What are the reportable segments based on profit or loss?
a. V, W, X and Y
b. V, W and X
c. V and W
d. V, W, X, Y and Z
Answer:
V 3,400,000
W 1,000,000
X 2,000,000
Y 400,000
Z 200,000
4,800,000 2,200,000
The total profit figure is the basis for identifying the reportable segments because it is
higher than the total loss figure. Accordingly, those segments with profit or loss of at
least 10% of P4,800,000 or P480,000 are reportable. Thus V, W and X are reportable
Problem 13-4
Macbeth Company, an entity listed on a recognized stock exchange, reports operating

results from a North American division to the chief operating decision maker.
The segment information for the current year is as follows:
Revenue 3,800,000
Profit 1,200,000
Assets 1,600,000
Number of employees 2,500
The entity’s result for all of the segments in total are:
Revenue 40,000,000
Profit 10,000,000
Assets 20,000,000
Number of employees 25,000
Which piece of information determines that the North American division is a reportable
segment?
a. Revenue
b. Profit
c. Assets
d. Number of employees
Answer:
1,200,000/10,000,000 12%
Problem 13-5
Aris Company provided the following information in relation to operating for the current
year:
Sales to unaffiliated customers 20,000,000

Intersegment sales of products similar to those sold
to unaffiliated customers 5,000,000
Interest earned on loans to other industry segments 1,000,000
The entity and all of its division are engaged solely in manufacturing operations.
Under the revenue test, what is the minimum revenue of a reportable segment?
a. 2,500,000
b. 2,600,000
c. 2,100,000
d. 2,000,000
Answer:
Sales to unaffiliated customers 20,000,000

Intersegment sales 5,000,000
Interest earned on loans 1,000,000
Total segment revenue 26,000,000
Revenue criterion (10% x 26,000,000) 2,600,000
Problem 13-6
Grum Company is subject to the requirements of segments reporting. In the income

statement for the current year, the intersegment sales of P10,000,000, expenses of
P47,000,000 and net income of P3,000,000. Expenses included payroll costs of
P15,000,000.
The combined total assets of all operating segments at year-end amounted to

P45,000,000.
1. What is the minimum amount of sales to a major customer?
a. 5,000,000
b. 4,000,000
c. 6,000,000
d. 4,500,000
Answer:
10% x 45,000,000 4,500,000
2. What is the minimum amount of external revenue to be disclosed by reportable

segments?
a. 22,500,000
b. 30,000,000
c. 33,750,000
d. 37,500,000
Answer:
75% x 45,000,000 33,750,000
Problem 13-7
Graf Company discloses supplemental operating segment information. The following
information is available for the current year:
Segment Sales Traceable expenses

X 5,000,000 3,000,000
Y 4,000,000 2,500,000
Z 3,000,000 1,500,000
Additional expenses
Indirect segment expenses 1,800,000

General corporate expenses 1,200,000
Interest expense 600,000
Income tax expense 400,000
The interest expense and income tax expense are regularly reviewed by the chief
operating decision maker as a measure of profit or loss.
Appropriate common expenses are allocated to segments based on the ratio of a

segment’s sales to total sales.
What is Segment Z’s operating profit?
a. 900,000
b. 950,000
c. 800,000
d. 500,000
Answer:
Sales 3,000,000
Traceable expenses (1,500,000)
Indirect expenses (25% x 1,800,000) ( 450,000)
General Corporate expenses (25% x 1,200,000) ( 300,000)
Interest expense (25% x 600,000) ( 150,000)
Income tax expense (25% x 400,000) ( 100,000)
500,000
Problem 13-8
Clay Company has three lines of business, each of which was determined to be
reportable segment. Sales aggregated P7,500,000 in the current year, of which
Segment One contributed 40%.
Traceable costs were P1,750,000 for Segment One out of a total of P5,000,000 for the
entity as a whole.
The entity allocates common costs of P1,500,000 based on the ratio of a segment’s
income before common costs to the total income before common costs.
What amount should be reported as operating profit for Segment One?
a. 1,250,000
b. 1,000,000
c. 650,000
d. 500,000
Answer:
Segment 1 Total revenue

Sales 3,000,000 7,500,000
Traceable costs (1,750,000) (5,000,000)
Profit before common cost 1,250,000 2,500,000
Common cost (1,250,000/2,500,000 x1,500,000) ( 750,000) (1,500,000)
Segment profit 500,000 1,000,000
Problem 13-9
Hyde Company has three reportable segments. Common costs are appropriately
allocated on the basis of sales.
In the current year, Segment A had sales of P3,000,000, which was 25% of Hyde’s total
sales, and had traceable costs of P1,900,000.
In the current year, the entity incurred segment costs of P500,000 that were not directly
traceable to any of the divisions.
Segment A incurred interest expense of P300,000 in the current year. Interest expense
is included in the measure of profit or loss.
What amount should be reported as Segment A’s profit for the current year?
a. 875,000
b. 900,000
c. 975,000
d. 675,000
Answer:
Sales – Segment A 3,000,000

Expenses:
Traceable cost 1,900,000
Allocated indirect cost (25% x 500,000) 125,000
Interest expense 300,000 2,325,000
Segment profit 675,000
Problem 13-10
Eagle Company operates in several different industries. Total sales for the entity totaled
P14,000,000, and total common costs amounted to P6,500,000 for the current year.
For internal reporting purposes, the entity allocates common costs based on the ratio of
a segment’s sales to total sales.
Segment Contribution to total sales Costs specific to the segment
1 25% 1,100,000
2 12% 1,000,000
3 31% 1,300,000
4 23% 880,000
5 9% 400,000
What is the operating profit of Segment 1?
a. 3,500,000
b. 1,875,000
c. 2,400,000
d. 775,000
Answer:
Sales – Segment 1 (25% x 14,000,000) 3,500,000

Specific cost – Segment 1 (1,100,000)
Allocated common costs (25% x 6,500,000) (1,625,000)
Operating profit 775,000
Problem 13-11
Colt Company has four manufacturing divisions, each of which has been determined to
be a reportable segment. Common costs are appropriately allocated on the basis of
each division’s sales in relation to Colt’s aggregate sales. Colt’s Delta division
accounted for 40% of Colt’s total sales in the current year.
For the current year, Delta division had sales of P8,000,000 and traceable costs of
P4,800,000. In addition, the Delta division incurred interest expense of P640,000. In the
current year, Colt incurred costs of P800,000 that were not directly traceable to any of
the divisions.
It is an entity policy that interest expense is included in the measure of profit or loss that
is reviewed by the chief operating decision maker.
What amount should be disclosed as Delta’s profit for the current year?
a. 3,200,000
b. 3,000,000
c. 2,880,000
d. 2,240,000
Answer:
Sales – Delta’s 8,000,000

Traceable costs (4,800,000)
Interest expense ( 640,000)
Incurred cost (40% x 800,000) ( 320,000)
Profit 2,240,000
Problem 13-12
Taylor Company assesses performance and makes operating decisions using the
following information for the reportable segments:
Total revenue 9,000,000

Total profit or loss 1,500,000
The total profit and loss included intersegment profit of P300,000. In addition, the entity
had P100,000 of common costs for the reportable segments that are not allocated in
reports provided to the chief operating decision maker.
For purposes of segment reporting, what amount should be reported as segment profit?
a. 1,400,000
b. 1,200,000
c. 1,800,000
d. 1,500,000
Answer:
Total profit or loss 1,500,000

Common cost ( 100,000)
Segment profit 1,400,000
Problem 13-13
Diversity Company had total assets of P65,000,000 at year-end and provided the
following condensed income statement for the current year:
Sales 45,000,000
Expenses (33,000,000)
Income before income tax 12,000,000
Income tax expense ( 3,800,000)
Net income 8,200,000
The entity has two reportable segments and has developed the following related
information:
Segment A Segment B Others
Sales 25,000,000 15,000,000 5,000,000

Segment expenses 18,000,000 9,000,000 4,000,000
Segment assets 35,000,000 18,000,000 7,000,000
The total assets of P65,000,000 include general corporate assets of P5,000,000.
The total segment expenses of P33,000,000 include general corporate expenses of

P2,000,000.
The chief operating decision maker does not allocate income tax as a measure of profit
or loss.
Required:
1. Prepare the necessary disclosures for Diversity Company in relation to operating

segments.
2. Prepare the reconciliations between segment information and amount shown in the
entity’s financial statements.
Answer:
Disclosure of profit or loss and assets
Segment A Segment B Others Total
Sales 25,000,000 15,000,000 5,000,000 45,000,000

Profit or loss 7,000,000 6,000,000 1,000,000 14,000,000
Total assets 35,000,000 18,000,000 7,000,000 60,000,000
Reconciliation
Revenue
Revenue of reportable segments 40,000,000

Revenue of nonreportable segments 5,000,000
Entity revenue shown in income statement 45,000,000
Profit and loss
Profit or loss of reportable segments 13,000,000

Profit or loss of nonreportable segments 1,000,000
Corporate expenses ( 2,000,000)
Unallocated income tax expense ( 3,800,000)
Entity net income shown in income statement 8,200,000
Total assets
Total assets of reportable segments 53,000,000

Total assets of nonreportable segments 7,000,000
General corporate assets 5,000,000
Entity total assets shown in statement of financial position 65,000,000
Problem 13-14
Congo Company does business in several different industries. The condensed income
statement for the entire entity for the current year is as follows:
Sales 60,000,000
Costs of goods sold (28,000,000)
Gross income 32,000,000
Expenses (14,000,000)
Depreciation ( 4,000,000)
Income tax expense ( 4,000,000)
The entity has two major reportable segments, X and Y. an analysis reveals that
P1,000,000 of the total depreciation expense and P2,000,000 of the expenses are
related to general corporate activities.
The chief operating decision maker allocates income tax expense to reportable
segments as a measure of profit or loss.
The expenses and sales are directly allocable to segment activities according to the
following percentages:
Segment X Segment Y Others
Sales 40% 45% 15%

Costs of goods sold 35 50 15
Expenses 40 40 20
Depreciation 40 45 15
Income tax expense 50 40 10
Required:
1. Prepare a schedule that reports the segment profit or loss.

2. Prepare the disclosures required for operating segments.
3. Prepare the reconciliations between segment information and amounts shown in the
entity’s financial statements.
Answer:
Segment X Segment Y Others Total

Sales 24,000 27,000 9,000 60,000
Cost of goods sold ( 9,800) (14,000) (4,200) (28,000)
Gross income 14,200 13,000 4,800 32,000
Segment expenses ( 4,800) ( 4,800) (2,400) (12,000)
Depreciation ( 1,200) ( 1,350) ( 450) ( 3,000)
Income tax expense ( 2,000) ( 1,600) ( 400) ( 4,000)
Segment profit or loss 6,200 5,250 1,550 13,000
Disclosure of segment profit or loss
Segment X Segment Y Others Total

Sales 24,000 27,000 9,000 60,000
Profit or loss 6,200 5,250 1,550 13,000
Depreciation 1,200 1,350 450 3,000
Reconciliation
Revenue
Revenue of reportable segments 51,000,000

Revenue of nonreportable segments 9,000,000
Entity revenue shown in income statement 60,000,000
Profit and loss
Profit or loss of reportable segments 11,450,000

Profit or loss of nonreportable segments 1,550,000
Unallocated depreciation ( 1,000,000)
General corporate expenses ( 2,000,000)
Entity net income shown in income statement 10,000,000
Problem 13-15
Easy Company provided the following statement of financial position at year-end and
income statement for the current year:
Current assets 130,000

Property, plant and equipment 500,000
Goodwill 100,000
Investment in associate 70,000
Total assets 800,000
Current liabilities 90,000

Noncurrent liabilities 60,000
Share capital 400,000
Retained earnings 250,000
Total liabilities and equity 800,000
Revenue 1,800,000
Cost of goods sold (1,200,000)
Gross profit 600,000

Other income 60,000
Distribution cost ( 200,000)
Administrative expenses ( 100,000)
Other expenses ( 50,000)
Finance cost ( 60,000)
Share in profit of associate 10,000
Income before tax 260,000
Income tax expense ( 90,000)
Net income 170,000
 The entity is organized for management purposes into three major operating
segments, namely furniture, stationery and computer products. There are other
smaller operating segments.
External sales Intersegment sales
Furniture 800,000 200,000

Stationery 500,000 150,000
Computer products 400,000 50,000
Other segments 100,000
 The costs of goods sold, distribution cost, administrative expenses and finance cost
can be allocated as 50% to furniture, 25% to stationery, 20% to computer products,
and 5% to other segments.
 The cost of sales related to intersegment sales amounted to P24,000,000 to be
allocated as 50% to furniture, 40% to stationery, and 10% to computer products
 The segment assets and liabilities are as follows:
Furniture Stationery Computer products others
Current
Asset 80,000 40,000 5,000 2,000
Property,
Plant and
Equipment 300,000 100,000 85,000 3,000
Goodwill 60,000 30,000 10,000 -
Total asset 440,000 170,000 100,000 5,000
Current
Liabilities 45,000 30,000 8,000 1,000
Noncurrent
Liabilities 30,000 20,000 7,000 2,000
Total liabilities 75,000 50,000 15,000 3,000
The remaining assets and liabilities are general corporate assets and liabilities are
general corporate assets and liabilities identified with the entity as a whole.
 The other income and other expenses are not allocated to the operating segments
as a measure of profit or loss.
 The chief operating decision maker does not allocate income tax expense to
reportable segments as a measure of profit or loss.
Required:
1. Determine the profit or loss for all the operating segments.

2. Prepare the disclosure required for operating segments.
3. Prepare the necessary reconciliations between the segment information and
amounts shown in the entity’s financial statements.
Answer:
Segment profit or loss
Furniture Stationery Computer Others Total
External 800,000 500,000 400,000 100,000 1,800,000

sales
Intersegment 200,000 150,000 50,000 - 400,000
sales
Total revenue 1,000,000 650,000 450,000 100,000 2,200,000
Cost of sales (600,000) (300,000) (240,000) (60,000) (1,200,000)
– external
Cost of sales (120,000) (96,000) (24,000) - (240,000)
– internal
Gross profit 280,000 254,000 186,000 40,000 760,000
Distribution (100,000) (50,000) (40,000) (10,000) (200,000)
cost
Administrativ (50,000) (25,000) (20,000) (5,000) (100,000)
e expense
Finance cost (30,000) (15,000) (12,000) (3,000) (60,000)
Segment 100,000 164,000 114,000 22,000 400,000
profit or loss
Minimum disclosures
Furniture Stationery Computer Others Total
External 800,000 500,000 400,000 100,000 1,800,000

sales
Intersegmen 200,000 150,000 50,000 - 400,000
t sales
Profit or loss 100,000 164,000 114,000 22,000 400,000
Finance cost 30,000 15,000 12,000 3,000 60,000
Total assets 440,000 170,000 100,000 5,000 715,000
Total 75,000 50,000 15,000 3,000 143,000
liabilities
Reconciliation
Revenue
Sales of reportable segments 2,100,000

Sales of nonreportable segments 100,000
Elimination of intersegment sales ( 400,000)
Entity sale in income statement 1,800,000
Profit and loss
Profit or loss of reportable segments 378,000

Profit or loss of nonreportable segments 22,000
Elimination of intersegment profit (160,000)
Share in profit of associate 10,000
Unallocated items:
Other income 60,000
Other expenses (50,000)
Income tax expense (90,000)
Entity net income in income statement 170,000
Intersegment sales 400,000

Cost of sales – intersegment sales (240,000)
Intersegment gross profit 160,000
Total assets
Total assets of reportable segments 710,000

Total assets of nonreportable segments 5,000
Investment in associate 70,000
General corporate assets 15,000
Entity total assets 800,000
Total liabilities
Total liabilities of reportable segments 140,000

Total liabilities of nonreportable segments 3,000
General corporate liabilities 7,000
Entity total liabilities 150,000
Problem 13-16
Revlon Company provided the following data for the current year.
Segments Revenue Profit (loss) Assets
1 620,000 200,000 400,000

2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 ( 30,000) 140,000
5 180,000 ( 25,000) 180,000
6 70,000 10,000 120,000
7 120,000 ( 20,000) 140,000
Others 380,000 ( 25,000) 140,000
 The “others category includes five operating segments, none of which has revenue
or assets greater than P80,000 and none with an operating profit.
 Operating Segments 1 and 2 produce very similar products and use very similar
production processes, but serve different customer types and use quite different
product distribution system. These differences are due in part to the fact that
Segment 2 operates in a regulated environment while Segment 1 does not.
 Operating Segments 6 and 7 have similar products, production processes, product
distribution systems, but are organized as separate division since they serve
substantially different types of customers. Neither Segments 6 and 7 operate in a
regulated environment.
Required:
1. Determine the reportable segments without regard to aggregation criteria.

2. If the 75% overall size test for reportable segments is not yet met, identify additional
reportable segments.
3. What are the reportable segments after considering all factors?
Answer:
Segments Revenue Profit (loss) Assets
1 620,000 200,000 400,000

2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 ( 30,000) 140,000
5 180,000 ( 25,000) 180,000
6 70,000 10,000 120,000
7 120,000 ( 20,000) 140,000
Others 380,000 ( 25,000) 140,000
Total 2,000,000 200,000 1,500,000
1. The information above shows that any operating segment with revenue equal to
or greater than P200,000 is a reportable segment (segments 1 and 3). Any
segment with identifiable assets greater than P150,000 is a reportable segments
1, 3, and 5). The total profit for all segments with profit totals P300,000. As a
result, any segment with an operating profit or loss equal to or greater than an
absolute amount of P30,000 is a reportable segment (segments 1, 3 and 4).
Thus, Segments 1, 3, 4 and 5 are reportable segments.
2. The revenue of the reportable segment
Segment 1 620,000
3 340,000
4 190,000
5 180,000
Total revenue 1,330,000
Percentage (1,330,000 / 2,000,000)
If the total external revenue attributable to reportable segments constitutes less

than 75% of the total entity revenue, additional segment shall be identified even if
they do not meet the 10%, threshold segments that are below the 10% threshold
can be aggregated as one segment if they share a majority of the five factors in
identifying a business segment, namely:
a. Nature of product
b. Nature of production process
c. Class of customer
d. Method of distributing product
e. Regulated environment
Since segments 6 and 7 are similar in four of the five criteria, they can be
aggregated as one reportable segment.
Segment 6 Segment & Total

Revenue 70,000 120,000 190,000
Profit (loss) 10,000 ( 20,000) ( 10,000)
Segment assets 120,000 140,000 260,000
With segments 6 and 7 considered as one reportable segment, the total segment
revenue increases to P1,520,000 or 76% of the total. The 75% requirement has
been met.
Revenue of reportable segments before aggregation 1,330,000

Revenue of additional reportable segments 190,000
Total 1,520,000
Percentage (1,520,000 / 2,000,000) 76%
3. In conclusion, Segments 1, 3, 4, 5, and Segments 6 and 7 (combined) shall be

considered reportable segments.
Problem 13-17
Universal Company has two different product lines and makes significant sales both in
the Philippines and Japan.
The entity has compiled the following information
Product A Product B
Philippines Japan Philippines Japan
Revenue 1,000,000 1,500,000 4,000,000 2,000,000

Segment profit or loss 250,000 400,000 500,000 200,000
Depreciation 150,000 200,000 800,000 500,000
Property, plant and
Equipment 500,000 600,000 2,500,000 1,500,000
Segment assets 1,200,000 1,400,000 6,000,000 4,000,000
Segment liabilities 700,000 600,000 4,000,000 2,000,000
Capital expenditures 200,000 400,000 1,000,000 300,000
Required:
1. Universal Company has structured its operations internally into two division based
on two products, A and B
Prepare the disclosures required in relation to operating segments.
2. Prepare the entity-wide disclosure about geographical areas to conform with the
requirement of segment reporting.
Answer:
1. Minimum disclosures under PFRS:
Product A Product B Total

Revenue 2,500,000 6,000,000 8,500,000
Segment profit or loss 650,000 700,000 1,350,000
Depreciation 350,000 1,300,000 1,650,000
Total assets 2,600,000 10,000,000 12,600,000
Total liabilities 1,300,000 6,000,000 7,300,000
Capital expenditures 600,000 1,300,000 1,900,000
2. Entity-wide disclosure about geographical areas:
Philippines Japan Total

Revenue 5,000,000 3,500,000 8,500,000
Noncurrent assets - PPE 3,000,000 2,100,000 5,100,000
Problem 13-18
1. If a financial report contains both the consolidated financial statements of a parent

and the parent’s separate financial statements, segment information is required in
a. The separate financial statements

b. The consolidated financial statements
c. Both the separate and consolidated financial statements.
d. Neither the separate nor the consolidated financial statements
2. When an operating segment is reportable?
a. The segment external and internal revenue is 10% or more of the combined
external and internal revenue of all operating segments
b. The segment profit or loss is 10% or more of the greater between the
combined profit of all profitable operating segments and the combined loss
of all unprofitable operating segments
c. The assets of the segment are 10% or more of the total assets of all operating
segments
d. Under all of these circumstances.
3. In financial reporting for operating segments, and entity shall disclose all of the
following, except
a. Types of products and services from which each reportable segment derives
revenue
b. The title of the chief operating decision maker of each reportable segment.
c. Factors used to identify the reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.
4. Which statement is not true with respect to a chief operating decision maker?
a. The term chief operating decision maker identifies a function and not necessarily
a manager with specific title.
b. In some cases, the chief operating decision maker could be the chief operating
officer.
c. The board of directors acting collectively could qualify as the chief operating
decision maker.
d. The chief internal auditor would generally qualify as chief operating
decision maker.
5. What is the quantitative threshold for the revenue that must be disclosed by
reportable operating segments?
a. The total external and internal revenue of all reportable segments is 75% or more
of the entity external revenue.
b. The total external revenue of all reportable segments is 75% or more of entity
external and internal revenue.
c. The total external revenue of all reportable segments is 75% or more of the
entity external revenue.
d. The total internal revenue of all reportable segments is 75% or more of the entity
internal revenue.
6. Two or more operating segments may be aggregated into a single operating

segment if all of the following conditions are satisfied, except
a. The segments have similar characteristics.

b. The segments share a majority of the nature of product or service, nature of
production process, class of customer, method of product distribution and
regulatory environment.
c. The aggregation is consistent with the core principles of segment reporting.
d. The segments have dissimilar characteristics.
7. Operating segments that do not meet any of the quantitative thresholds
a. Cannot be considered reportable.

b. May be considered reportable and separately disclosed if management
believes that information about the segment would be useful to the users
of the financial statements.
c. May be considered reportable and separately disclosed if the information is for
internal use.
d. May be considered reportable and separately disclosed if this is the practice
within the economic environment in which the entity operates
8. Which of the following is a required enterprise-wide disclosure regarding external

customers?
a. The entity of any external customer considered to be major by management

b. The identity of any external customer providing 10% or more of a particular
operating segment revenue
c. Information on major customers is not required in segment reporting
d. The fact that transactions with a particular external customer constitute at
least 10% of the total entity revenue
9. IFRS 8 requires that an entity should provide reconciliations of segment information.

Which of following is not a required reconciliation?
a. The total of the reportable segments’ revenue to the entity’s revenue

b. The total of the reportable segments’ profit or loss to the entity’s profit or loss
before tax expense and discontinued operating
c. The total number of major customers of all segments to the total number of
major customers of the entity
d. The total of the reportable segments’ assets to the entity’s assets
10. An operating segment is considered reportable when any of the following conditions
is met, except
a. Segment revenue is 10% or more of the combined revenue of all of the entity’s
segments.
b. Segment assets are 10% or more of the combined assets of all segments.
c. Segment liabilities are 10% or more of the combined liabilities of all
segments.
d. Segment’s operating profit or operating loss is 10% or more of the combined
operating profit of all segments that did not incur an operating loss.
Chapter 14
Cash and Accrual basis
Problem 14-1
Zeta Company reported sales revenue of P4,600,000 in the income statement for the
year ended December 31, 2019
The entity wrote off uncollectible accounts totaling P50,000 during the current year.
2018 2019
Accounts receivable 1,000,000 1,300,000

Allowance for uncollectible accounts 60,000 110,000
Advances from customers 200,000 300,000
Under cash basis, what amount should be reported as sales for the current year?
a. 4,400,000
b. 4,350,000
c. 4,300,000
d. 4,250,000
Answer:
Accounts receivable – 2018 (1,000,000 – 60,000) 940,000

Advances from customers – 2019 300,000
Sales 4,600,000
Total 5,840,000
Less:account receivable – 2019(1,300,000 – 110,000)1,190,000
Advances from customers – 2018 200,000
Wrote off 50,000 1,440,000
Cash basis sales revenue 4,400,000
Problem 14-2
During 2019, Kew Company, a service organizations, had P200,000 in cash sales and
P3,000,000 in credit sales.
The accounts receivable balances were P400,000 and P485,000 on December 31,
2018 and 2019 respectively.
If the entity desires to prepare a cash basis income statement, what amount should be
reported as sales for the current year?
a. 3,285,000
b. 3,200,000
c. 3,115,000
d. 2,915,000
Answer:
Account receivable – December 31, 2018 400,000

Credit sales 3,000,000
Total 3,400,000
Less: account receivable – December 31, 2019 485,000
Collections 2,915,000
Cash sales 200,000
Total sales – cash basis 3,115,000
Problem 14-3
Spee Company provided the following information 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 P1,000,000. On December 31, customers owed

P750,000. The entity used the direct write off method for bad debts. No bad debts were
recorded in the current year.
Under cash basis, what amount of revenue should be reported for the current year?
a. 5,000,000
b. 4,750,000
c. 4,250,000
d. 1,900,000
Answer:
Accounts receivable – January 1 1,000,000

Credit sales 3,000,000
Total 4,000,000
Less: accounts receivable – December 31 750,000
Sales discount 150,000 900,000
Cash sales – net (2,000,000 – 100,000) 1,900,000
Problem 14-4
Jacqueline Company began the current year with accounts receivable of P1,000,000
and allowance for doubtful accounts of P80,000. During the current year, the following
events occurred:
Accounts written off 120,000

Cash sales 500,000
Sales on account 3,000,000
Doubtful accounts expense recognized 200,000
At the end of the current year, the entity showed a balance in accounts receivable of
P1,680,000.
Under cash basis, what amount should be reported as sales?
a. 2,700,000
b. 2,200,000
c. 3,500,000
d. 3,320,000
Answer:
Accounts receivable – January 1 1,000,000

Total 4,000,000
Less: Accounts receivable – December 31 1,680,000
Accounts written off 120,000 1,800,000
Cash sales 500,000
Problem 14-5
Easter Company reported that all insurance premiums paid are debited to prepaid
insurance. For interim reporting, the entity made monthly charges to insurance expense
with an offset to prepaid insurance. The entity provided the following information for the
current year:
Prepaid insurance on January 1 150,000

Charges to insurance expense during the year
Including year-end adjustment of P25,000 625,000
Prepaid insurance on December 31 175,000
What was the amount of insurance premium paid in the current year?
a. 625,000
b. 475,000
c. 600,000
d. 650,000
Answer:
Insurance expense – adjusted 625,000

Prepaid insurance – January (150,000)
Prepaid insurance – December 31 175,000
Insurance premium paid 625,000
Problem 14-6
Seaside Company provided the following data for the current year:
Operating expenses:
Depreciation 1,000,000
Insurance 700,000
Salaries 1,500,000
Total operating expenses 3,200,000
December 31 January 1
Prepaid insurance 200,000 150,000

Accrued salaries payable 100,000 120,000
What amount was paid for operating expenses?
a. 3,270,000
b. 2,270,000
c. 2,130,000
d. 2,230,000
Answer:
Operating expenses 3,200,000

Depreciation (1,000,000)
Prepaid insurance – December 31 200,000
Prepaid insurance – January 1 ( 150,000)
Accrued salaries payable – December 31 ( 100,000)
Accrued salaries payable – January 1 120,000
Cash paid for operating expenses 2,270,000
Problem 14-7
On February 1, 2019, Tory began a service proprietorship with an initial cash

investment of P200,000. The proprietorship provided P500,000 of services on February
and received full payment in March.
The proprietorship incurred expenses of P300,000 in February which were paid in April.
During March, Tory drew P100,000 against the capital account
In the proprietorship’s statement of financial position on March 31, 2019 prepared under
cash basis, what amount should be reported as capital?
a. 100,000
b. 300,000
c. 600,000
d. 700,000
Answer:
Capital – February 1 200,000

Cash basis income for February and March 500,000
Total 700,000
Less: withdrawals during March 100,000
Capital – March 31 600,000
Problem 14-8
Reid Company, which began operations on January 1, 2018, has elected to use cash
basis accounting for the financial statements.
The entity reported sales of P1,750,000 and P800,000 in the tax returns for the years
ended December 31, 2019 and 2018, respectively.
The entity reported accounts receivable of P300,000 and P500,000 in the statement of
financial position on December 31, 2019 and 2018 respectively.
What amount should be reported as sales in the income statement for the year ended
December 31, 2019?
a. 1,450,000
b. 1,550,000
c. 1,950,000
d. 2,050,000
Answer:
Accounts receivable – December 31, 2019 300,000

Add: Sales in 2019 under cash basis 1,780,000
Total 2,050,000
Less: account receivable – December 31, 2019 500,000
Sales – accrual basis 1,550,000
Problem 14-9
Hard Company maintained accounting records on the cash basis but restated the
financial statements to the accrual basis of accounting. The entity had P6,000,000 in
cash basis income for 2019.
The entity provided the following information at year-end:
2019 2018

Accounts payable 1,500,000 3,000,000
Under accrual basis, what amount of income should be reported in the 2019 income
statement?
a. 2,500,000
b. 5,500,000
c. 6,500,000
d. 9,500,000
Answer:
Cash basis income 6,000,000

Add: Accounts receivable – 2019 4,000,000
Accounts payable – 2018 3,000,000 7,000,000
Total 13,000,000
Less: Accounts receivable – 2018 2,000,000
Accounts payable – 2019 1,500,000 3,500,000
Accrual basis income 9,500,000
Problem 14-10
Mall Company reported the following balances at the end of each year:
2019 2018
Inventory 2,600,000 2,900,000

Accounts payable 750,000 500,000
The entity paid suppliers P4,900,000 during the year ended December 31, 2019.
What amount should be reported for cost of goods sold in 2019?
a. 5,450,000
b. 4,950,000
c. 4,850,000
d. 4,350,000
Answer:
Accounts payable – December 31, 2019 750,000
Payment to suppliers 4,900,000
Total 5,650,000
Less: Accounts payable – December 31, 2018 500,000
Purchases 5,150,000
Inventory – December 31, 2018 2,900,000

Add: Purchases 5,150,000
Goods available for sale 8,050,000
Less: inventory – December 31, 2019 2,600,000
Cost of goods sold 5,450,000
Problem 14-11
Calapan Company provided the following data at year-end:
2018 2019

In 2019, accounts written off amounted to P100,000. Sales returns amounted to

P250,000, of which an amount of P50,000 was paid to customers.
Cash receipts from customers after P500,000 discounts totaled P8,000,000.
Purchases returns amounted to P400,000, of which an amount of P100,000 was

received from suppliers.
Cash payments to trade creditors amounted to P5,000,000 after discounts of P200,000.
1. Under accrual, what is the amount of gross sales?
a. 9,600,000
b. 8,950,000
c. 8,250,000
d. 8,850,000
Answer:
Accounts receivable – 2019 1,350,000

Sales returns 250,000
Cash receipts from customers 8,000,000
Sales discounts 500,000
Total 10,200,000
Accounts receivable – 2018 (1,200,000)
Erroneous debit to accounts receivable ( 50,000)
Gross sales 8,950,000
2. Under accrual, what is the amount of net sales?
a. 8,250,000
b. 8,200,000
c. 8,100,000
d. 8,150,000
Answer:

Less: sales returns 250,000
Cash receipts discount 500,000
Erroneous debit to account receivable 50,000 800,000
Net sales 8,150,000
3. Under accrual, what is the amount of gross purchased?
a. 5,850,000
b. 5,950,000
c. 5,750,000
d. 5,650,000
Answer:
Accounts payable – 2019 1,850,000

Purchase returns 400,000
Payment to trade creditors 5,000,000
Purchase discounts 100,000
Total 7,350,000
Accounts payable – 2018 (1,500,000)
Gross purchases 5,850,000
4. Under accrual, what is the amount of net purchased?
a. 5,250,000
b. 5,200,000
c. 5,650,000
d. 5,450,000
Answer:

Less: purchase returns 400,000
Net purchased 5,450,000
Problem 14-12
Emmyrelle Company provided the following selected accounts, cash receipts and
disbursements for the current year:
Accounts receivable 250,000 300,000

Notes receivable 150,000 100,000
Notes payable 200,000 150,000
Cash receipts for current year
Cash sales 500,000

Collections of accounts receivable, net of discounts
Of P40,000 1,800,000
Collections of notes receivable 80,000
Bank loan – one year, dated December 31 100,000
Purchase returns and allowances 60,000
Cash disbursements for current year
Cash purchases 130,000

Payments on accounts payable, net of discounts
Of P20,000 1,500,000
Payments on notes payable 400,000
Insurance 220,000
Other expenses 650,000
Sales returns and allowances 50,000
1. Under accrual basis, what is the amount of gross sales for the current year?
a. 2,420,000
b. 2,470,000
c. 1,920,000
d. 1,970,000
Answer:
Accounts receivable- December 31 250,000

Notes receivable – December 31 150,000
Collections of accounts receivable 1,800,000
Sales discount 40,000
Total 2,320,000
Accounts receivable – January 1 ( 300,000)
Notes receivable – January 1 ( 100,000)
Cash sales 500,000
2. Under accrual basis, what is the amount of gross purchase for the current year?
a. 1,960,000
b. 2,020,000
c. 1,830,000
d. 1,890,000
Answer:
Accounts payable – December 31 120,000

Note payable – trade
Balance – December 31 200,000
Bank loan on December 31 (100,000) 100,000
Payment of accounts payable 1,500,000
Purchase discounts 20,000
Payments on notes payable 400,000
Total 2,140,000
Accounts payable – January 1 ( 160,000)
Note payable – January 1 ( 150,000)
Purchase on account 1,830,000
Problem 14-13
Otis Company acquired rights to a patent under a licensing agreement that required an
advance royalty payment when the agreement was signed. The entity remitted royalties
earned and due under the agreement on October 31 each year.
Additionally, on the same date, the entity paid, in advance, estimated royalties for the
next year. The entity adjusted prepaid royalties at year end. The entity provided the
following information for the current year:
Jan. 1 Prepaid royalties 650,000

Oct. 31 Royalty payment charged to royalty expense 1,100,000
Dec.31 Year-end credit adjustment to expense 250,000
What amount should be reported as prepaid royalties at year-end?
a. 250,000
b. 400,000
c. 850,000
d. 900,000
Answer:
Oct. 31 Royalty payment charged to royalty expense 1,100,000

Dec.31 Year-end credit adjustment to expense 250,000
Prepaid royalties 850,000
Problem 14-14
Thrift Company reported that the unadjusted prepaid expense account on December
31, 2019 comprised the following:
 An opening balance of P15,000 for a comprehensive insurance policy. The entity

had paid an annual premium of P30,000 on July 1, 2018.
 A P32,000 annual insurance premium payment made July 1, 2019.
 A P20,000 advance rental payment for a warehouse that was leased for one year
beginning January 1, 2019.
On December 31, 2019 what amount should be reported as prepaid expenses?

a. 52,000
b. 36,000
c. 20,000
d. 16,000
Answer:
Prepaid insurance (32,000 x 6/12) 16,000

Prepaid rent 20,000
Prepaid expense 36,000
Problem 14-15
Rara Company paid P72,000 to renew an insurance policy for three years on March 1,
2018.
On March 31, 2019, the unadjusted trial balance showed P3,000 for prepaid insurance
and P72,000 for insurance expense.
1. What amount should be reported for prepaid insurance on March 31, 2019?
a. 70,000
b. 71,000
c. 72,000
d. 73,000
Answer:
Prepaid insurance – March 31, 2019 (72,000 x 35/36) 70,000
2. What amount should be reported for insurance expense for the three months ended
March 31, 2019?
a. 5,000
b. 3,200
c. 2,000
d. 1,000
Answer:
Insurance expense per book 72,000

Prepaid insurance before adjustment 3,000
Total 75,000
Less: Prepaid insurance – March 31, 2019 70,000
Insurance expense 5,000
Problem 14-16
On July 1, 2019, Roxy Company obtained fire insurance at an annual premium of

P72,000 payable on July 1 of each year. The first premium payment was made July 1,
2019.
On October 1, 2019, the entity paid P24,000 for real estate taxes to cover the period
ending September 30, 2020.
On December 31, 2019, what amount should be reported as prepaid expenses?
a. 60,000
b. 54,000
c. 48,000
d. 36,000
Answer:

Prepaid taxes (24,000 x 9/12) 18,000
Total prepaid expenses 54,000
Problem 14-17
Clay Company borrowed money under various loan agreements involving notes
discounted and notes requiring interest payments at maturity. During the year ended
December 31, 2019. The entity paid interest totaling P100,000.
The December 31 statement financial position included the following information:
2018 2019
Prepaid interest 23,500 18,000

Interest payable 45,000 53,500
What amount of interest expense should be reported in the income statement for the
current year?
a. 86,000
b. 97,000
c. 103,000
d. 114,000
Answer:
Interest paid 100,000

Add: Prepaid interest – 2018 23,500
Interest payable – 2019 53,500
Total 177,000
Less: Prepaid interest – 2019 18,000
Interest payable – 2018 45,000 63,000
Problem 14-18
On December 31, 2019, Ashe Company had a P990,000 balance in the advertising
expense account before any year-end adjustments relating to the following:
 Radio advertising spots broadcast during December 2019 were billed to the entity on
January 4, 2020. The invoice cost of P50,000 was paid on January 15, 2020.
 Included in the P990,000 is P60,000 for newspaper advertising for a January 2020
sales promotional campaign.
What amount should be reported as advertising expense for the year December 31,
2019?
a. 900,000
b. 980,000
c. 1,000,000
d. 1,040,000
Answer:
Balance per book 990,000

Add: Radio advertising accrued on December 31 50,000
Total 1,040,000
Less: Prepaid newspaper advertising 60,000
Advertising expense 980,000
Problem 14-19
Doren Company reported that the compensation expense account had a balance of
P490,000 on December 31, 2019 before any appropriate year-end adjustment relating
to the following:
 No salary accrual was made for the week of December 25-31, 2019. Salaries for this
period totaled P18,000 and were paid on January 5, 2020.
 Bonus for 2019 was paid on January 31, 2020 in the total amount of P175,000.
What amount should be reported for compensation expense for 2019?
a. 683,000
b. 665,000
c. 508,000
d. 490,000
Answer:
Compensation expense per book 490,000

Add: Accrued salaries 18,000
Accrued bonus 175,000
Total compensation expense 683,000
Problem 14-20
Park Company reported that the professional fees expense account had a balance of
P820,000 on December 31, 2019, before considering year-end adjustments relating to
the following:
 Consultants were hired for a special project at a total fee not to exceed P650,000.
The entity has recorded P550,000 of this fee based on billings for work performed in
2019.
 The attorney’s letter requested by the auditors dated January 31, 2020 indicated that
legal fees of P60,000 were billed on January 15, 2020 for work performed in
November 2019, and unbilled fees for December 2019 were P70,000.
What amount should be reported for professional fees expense for the year ended
December 31, 2019?
a. 1,050,000
b. 950,000
c. 880,000
d. 820,000
Answer:
Balance per book 820,000

Accrued legal fees:
November 60,000
December 70,000 130,000
Total professional fees expense 950,000
Problem 14-21
Tara Company owns an office building and leases the offices under a variety of rental
agreements involving rent paid in advance monthly or annually.
Not all tenants make timely payments of their rent. During 2019, the entity received
P8,000,000 cash from tenants.
The statement of financial position contained the following data at year-end:
2018 2019
Rental receivable 960,000 1,240,000

Unearned rental income 3,200,000 2,400,000
Uncollectible rent written off 500,000
What amount of rental revenue should be reported for the current year?
a. 9,080,000
b. 9,580,000
c. 8,580,000
d. 7,980,000
Answer:
Cash received from tenants 8,000,000

Rental receivable -2019 1,240,000
Unearned rentals – 2018 3,200,000
Total 12,440,000
Less: Rentals receivable – 2018 960,000
Unearned rentals – 2019 2,400,000 3,360,000
Rental revenue for 2019 9,080,000
Problem 14-22
Carey Company assigns patent rights for which royalties are received. During 2019, the
entity received royalty remittance of P2,500,000.
The following data are available at year-end:
2018 2019
Royalties receivable 750,000 800,000

Unearned royalties 450,000 650,000
What amount should be reported as royalty revenue for the current year?
a. 2,250,000
b. 2,300,000
c. 2,350,000
d. 2,550,000
Answer:
Royalties received 2,500,000

Royalties receivable – 2019 800,000
Unearned royalties – 2018 450,000
Total 3,750,000
Less: Royalties receivable – 2018 750,000
Unearned royalties – 2019 650,000 1,400,000
Royalty revenue 2,350,000
Problem 14-23
Zamboanga Company began operations on January 1, 2018. During the year ended
December 31, 2019, the accounting records have been maintained on a double entry
basis but the cash basis of accounting has been employed.
The trial balance prepared from these records on December 31, 2019 appeared as
follows:
Cash 1,500,000
Sales 4,000,000
Purchases 2,000,000
Expenses 1,500,000
Equipment 200,000
Share capital 2,000,000
Land 800,000
Building 1,500,000
Mortgage payable 900,000
7,500,000 7,500,000
The entity decided to convert the accounting records to the accrual basis on December
31, 2019.
Additional information
1. Accounts receivable
December 31, 2018 200,000

December 31, 2019 250,000
2. The sales of 2018 included P40,000 deposited by a customer for merchandise to be

delivered in 2019.
3. Accounts payable
December 31, 2018 350,000

December 31, 2019 280,000
4. Accrued expenses
December 31, 2018 70,000

December 31, 2019 100,000
5. Merchandise inventory
December 31, 2018 150,000

December 31, 2019 210,000
6. The purchases included P100,000 cash advance to a supplier for merchandise to be

delivered in 2020.
7. The equipment was acquired on July 1, 2018. The estimated life is 10 years.
8. The land and building were acquired on January 1, 2018. The life of the building is 5
years.
9. It is estimated that 10% of the outstanding accounts receivable on December 31,
2019 may prove uncollectible.
10. The mortgage was on the land and building and was obtained on September 1, 2019
The interest rate is 12% per annum payable semiannually on September 1 and
March 1. The mortgage will mature after 4 years.
Required:
1. Prepare adjusting entries on December 31, 2019.

2. Prepare an income statement for the year ended December 31, 2019.
3. Prepare a statement of financial position on December 31, 2019.
Answer:
1. Adjusting Entries
1. Sales 200,000
2. Accounts receivable 250,000

Sales 250,000
3. Retained earnings 350,000

Purchases 350,000
Purchases 280,000
Accounts payable 280,000

Expenses 70,000
Expenses 100,000
Accrued expenses 100,000
5. Merchandise inventory, January 1, 2019 150,000

Merchandise inventory, December 31, 2019 210,000

Income summary 210,000
6. Advances to supplier 100,000

Purchases 100,000
7. Depreciation – equipment 20,000

Accumulated depreciation – equipment 30,000
8. Depreciation – building 300,000

Accumulated depreciation – building 600,000
9. Doubtful accounts (10% x 250,000) 25,000

Allowance for doubtful accounts 25,000
10. Interest expense (900,000 x 12% x 4/12) 36,000

Accrued interest payable 36,000
2. income statement for the year ended December 31, 2019
Zamboanga Company
Income statement
Year ended December 31, 2019
Sales 4,090,000
Cost of sales:
Merchandise inventory, January 1 150,000
Purchases 1,830,000
Less: merchandise inventory, December 31 210,000 1,770,000
Expenses:
Expenses 1,530,000
Depreciation – equipment 20,000
Depreciation – building 300,000
Doubtful accounts 25,000
Net income 409,000
3.
Zamboanga Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash 1,500,000
Accounts receivable, net allowance 225,000
Advances to supplier 100,000
Merchandise inventory 210,000 2,035,000
Noncurrent assets:
Land 800,000
Building 1,500,000
Less: Accumulated depreciation 600,000 900,000
Furniture and equipment 200,000
Less: Accumulated depreciation 30,000 170,000 1,870,000
Total assets 3,905,000
Liabilities and Equity

Current liabilities:
Accrued interest payable 36,000 416,000
Noncurrent liability:
Mortgage payable 900,000
Equity:
Retained earnings (note1) 589,000 2,589,000
Total liabilities and equity 3,905,000
Note 1 – retained earnings

Adjusted retained earnings – January 1 180,000
Net income 409,000
Retained earnings – December 31 589,000
Problem 14-24
Evelyn Company recorded transactions on a cash basis but prepared adjustments at

the end of accounting period to conform with accrual basis.
The entity provided the following account balances for the year ended December 31,
2019:
Cash 200,000
Accounts receivable 250,000
Inventory 150,000
Land 300,000
Building 1,000,000
Accumulated depreciation 200,000
Equipment 400,000
Sales 2,000,000
Purchases 1,200,000
Office expenses 255,000
Rent 240,000
Insurance 50,000
Supplies expense 140,000
1. Inventory on December 31, 2019 amounted to P230,000
2. Accounts receivable
December 31, 2019 290,000

December 31, 2018 250,000
3. It is estimated that P15,000 of the outstanding accounts receivable on December 31,

2019 may prove uncollectible.
4. Depreciation rate
Building 5%
Equipment 10%
5. Accounts payable
December 31, 2019 130,000

December 31, 2018 100,000
6. Accrued rent on December 31, 2018 was unrecorded in the amount of P5,000.
7. Accrued rent on December 31, 2019 amounted to P10,000.
8. Prepaid insurance on December 31, 2018 in the amount of P7,000 was not
recognized.
9. Prepaid insurance on December 31, 2019 amounted to P12,000.

Required:
a. Prepare adjusting entries on December 31, 2019.

b. Prepare an income statement.
c. Prepare a statement of financial position.
Answer:
1. Inventory – December 31, 2019 230,000


Sales 40,000
3. Doubtful accounts 15,000

4. Depreciation 90,000
Accumulated depreciation – building 50,000
5. Purchases 30,000

Rent 5,000
7. Rent 10,000
Accrued rent payable 10,000
8. Insurance 7,000
9. Prepaid insurance 12,000

Insurance 12,000
Evelyn Company
Income statement
Sales 2,040,000
Cost of sales:
Inventory – January 1 150,000
Purchases 1,230,000
Less: inventory – December 31 230,000 1,150,000
Gross income 890,000
Expenses:
Office expenses 255,000
Rent 245,000
Insurance 45,000
Supplies 140,000
Depreciation 90,000 790,000
Net income 100,000
Evelyn Company
December 31, 2019
Assets
Current assets:
Cash 200,000
Accounts receivable, net allowance 275,000
Inventory 230,000
Noncurrent assets:
Land 300,000
Building 1,000,000
Less: accumulated depreciation 250,000 750,000
Equipment 400,000
Total 2,087,000

Accrued rent payable 10,000 140,000
Equity:
Retained earnings (note 1) 447,000 1,947,000
Note 1 – Retained earnings

Retained earnings per book 345,000
Unrecorded accrued rent – December 31, 2018 ( 5,000)
Unrecorded prepaid insurance – December 31, 2018 7,000
Corrected beginning balance 347,000
Net income for 2019 100,000
Retained earnings – December 31, 2019 447,000
Problem 14-25
Civic Company began business operations on January 1, 2019. During the year, the
accounting records are kept on a double entry system but on the cash basis of
accounting. The entity decided to use the accrual basis. On December 31, 2019, the
account balances are:
Cash 840,000
Purchases 4,200,000
Expenses 560,000
Notes payable 200,000
Sales 4,400,000
1. Merchandise inventory on December 31, at cost, P500,000.

2. On December 31, accounts receivable amounted to P100,000 and accounts payable
totaled P80,000.
3. Accrued expenses on December 31, P20,000
4. The purchases included merchandise in the amount of P10,000 bought for the
president. The president had not reimbursed the entity.
5. The sales included P25,000 deposit given by a customer for merchandise to be
delivered in 2020.
6. It is estimated that 5% of the outstanding accounts receivable on December 31 may
turn out to be uncollectible.
7. Expenses included the following:
a. P25,000 for office supplies of which P5,000 is unused as of December 31.

b. P100,000 for the purchase of equipment on July 1, 2019. It was estimated that
this property would have an estimated useful life of 10 years without residual
value.
c. P20,000 for a one-year insurance premium on a fire insurance policy dated
October 1, 2019.
8. The notes payable comprised a noninterest- bearing note of P100,000 dated August
1, 2019, due on February 1, 2020 and a one-year note of P100,000, dated
September 1, 2019, bearing an interest of 12% payable of maturity.
Required:
Prepare adjusting entries, an income statement and a statement of financial position.

Answer:
1. Merchandise inventory – December 31 500,000


Sales 100,000
Purchases 80,000
3. Expenses 20,000
4. Receivable from officer 10,000

Purchases 10,000
5. Sales 25,000
Advances from customer 25,000
6. Doubtful accounts (5% x 100,000) 5,000

7. Office supplies unused 5,000

Expenses 5,000
Equipment 100,000
Expenses 100,000
Depreciation (100,000 / 10 x 6/12) 5,000


Expenses 15,000
8. Interest expense 4,000

Accrued interest payable (100,000x12%x4/12) 4,000
Civic Company
Income statement
Sales 4,475,000
Cost of sales:
Purchases 4,270,000
Less: Inventory – December 31 500,000 3,770,000
Gross income 705,000
Expenses:
Expenses 460,000
Depreciation 5,000
Interest expense 4,000 474,000
Net income 231,000
Civic Company
December 31, 2019
Assets
Current assets:
Cash 840,000
Accounts receivable (note 1) 95,000
Receivable from officer 10,000
Inventory 500,000
Prepaid expenses (note 2) 20,000 1,465,000
Noncurrent asset:
Equipment 100,000

Note payable 200,000
Equity:
Retained earnings 231,000 1,231,000
Note 1 – Accounts receivable

Allowance for doubtful accounts ( 5,000)
Net realizable value 95,000
Note 2 – Prepaid expenses
Office supplies unused 5,000

Prepaid insurance 15,000
Total prepaid expenses 20,000
Problem 14-26
1. Under accrual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses
are recognized.
b. Precede or coincide with but never follow the period in which revenue and
expenses are recognized.
c. Coincide with or follow but never precede the period in which revenue and
expenses are recognized.
d. Only coincide with the period in which revenue and expenses are recognized.
2. Which statement regarding accrual basis versus cash basis of accounting is true?
a. The cash basis is appropriate for smaller entities.

b. The cash basis is less useful in predicting the timing and amount of future cash
flows of an entity.
c. Application of the cash basis results in an income statement reporting
revenue and expenses.
d. The cash basis requires a complete set of double entry records.
3. Under cash basis of accounting
a. Revenue is recorded when earned.

b. Accounts receivable would be recorded.
c. Depreciation is not recognized.
d. The matching principle is ignored.
4. Under the cash basis of accounting, revenue is recorded
a. When earned and realized

b. When earned and realizable
c. When earned
d. When realized
5. Total net income over the life of an entity is
a. Higher under the cash basis than under the accrual basis
b. Lower under the cash basis than under the accrual basis
c. The same under the cash basis as under the accrual basis
d. Not susceptible to measurement
6. Under International Financial Reporting Standards
a. The cash basis of accounting is accepted

b. Events are recorded in the period the events occur.
c. Net income is lower under the cash basis than accrual basis.
d. All of the choices are correct.
7. Accrual accounting adheres to which of the following?
a. Matching principle
b. Historical cost principle
c. Matching principle and historical cost principle
d. Neither matching principle nor historical cost
8. Under accrual accounting, which of the following does not describe a deferral?
a. Deferral of revenue occurs when cash is received and recognized in

financial income.
b. Deferral typically results in the recognition of a liability or prepaid expense.
c. Cash collected in advance of services being rendered.
d. Cash paid up front for a one-year insurance policy.
9. Under accrual basis, a deferral is a transaction that impacts
a. Cash and the income statement at the same time

b. The income statement before impacting cash
c. Cash before impacting the income statement
d. The statement of financial position before impacting cash
10. Which statement is true about accrual and cash basis?

a. Under accrual, if the earning process is not complete, revenue is nevertheless
recorded.
b. Under cash basis, if cash has been collected, revenue is recorded regardless of
earning process.
c. Under cash basis, revenue is recognized when the receivable is initially
recorded.
d. All of these statements are true.
Chapter 15
Single entry
Problem 15-1
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?
a. 1,750,000
b. 1,000,000
c. 750,000
d. 500,000
Answer:
Total assets- January 1 5,000,000
Less: total liabilities 2,000,000
Contributed capital 2,000,000 4,000,000
Retained earnings – January 1 1,000,000
Total assets – December 31 7,500,000

Less: total liabilities 3,200,000
Contributed capital
(2,000,000+500,000+300,000) 2,800,000 6,000,000
Retained earnings – December 31 1,500,000
Add: Dividend paid 250,000
Total 1,750,000
Less: Retained earnings – January 1 1,000,000
Net income 750,000
Problem 15-2
Aubrey Company provided the following date at year-end:
2018 2019
Share capital (P100 par value) 5,000,000 5,750,000

Share premium 1,000,000 1,500,000
Retained earnings 3,500,000 4,500,000
During the current year, the entity declared and paid cash dividend of P1,000,000 and
also declared and issued a share dividend.
There were no other changes in share issued and outstanding during the year.
a. 3,250,000
b. 2,000,000
c. 1,000,000
d. 2,750,000
Answer:
Increase in share capital (5,750,000 – 5,000,000) 750,000

Increase in share premium (1,500,000 – 1,000,000) 500,000
Stock dividend 1,250,000
Retained earnings – 2019 4,500,000

Stock dividend 1,250,000
Cash dividend 1,000,000
Total 6,750,000
Retained earnings – 2018 (3,500,000)
Problem 15-3
On December 31, 2019 Zeus Company showed shareholders’ equity of P4,000,000.

During the current year, the shareholders’ equity was affected by:
 An adjustment to retained earnings for overstatement of inventory on December 31,

2018 in the amount of P200,000.
 Declared dividend of P400,000 of which P300,000 was paid in 2019.
 The share capital was split five for one.
 Net income for the year amounted to P700,000.
 The share capital of P3,000,000 remained unchanged during the year.
What is the retained earnings balance on January 1, 2019?
a. 700,000
b. 900,000
c. 800,000
d. 500,000
Answer:
Retained earnings – December 31 (4,000,000 – 3,000,000) 1,000,000

Add: Dividend declared 400,000
Total 1,400,000
Less: Net income 700,000
Corrected beginning balance 700,000
Overstatement of inventory – 2018 200,000
Retained earnings – January 1 900,000
Problem 15-4
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?
a. 1,400,000
b. 1,700,000
c. 1,200,000
d. 1,600,000
Answer:

Total 2,300,000
Less: Net income 800,000
Retained earnings overdepreciation 100,000 900,000
Retained earnings – January 1 1,400,000
Total shareholders’ equity – December 31 5,000,000

Less: Share capital 3,000,000
Share premium from treasury shares 300,000 3,300,000
Problem 15-5
Vela Company reported the following increases in accounting balance during the
current year:
Assets 8,900,000
Liabilities 2,700,000
Share premium 600,000
There were no changes in retained earnings other than for a dividend payment of
P1,300,000.
What was the net income for the current year?
a. 1,700,000
b. 1,300,000
c. 900,000
d. 400,000
Answer:
Increase in assets 8,900,000

Increase in liabilities 2,700,000
Net increase 6,200,000
Add: Dividend payment 1,300,000
Total 7,500,000
Share premium 600,000 6,600,000
Net income 900,000
Problem 15-6
Lanao Company showed the following increase (decrease) in ledger account balances
during the current year:
Cash 800,000
Accounts receivable (400,000)
Inventory 300,000
Equipment 950,000
Note payable – bank 500,000
Accounts payable (600,000)
There were no transactions affecting retained earnings other than a P1,500,000 cash
dividend and a P250,000 prior period error from understatement of ending inventory.
a. 2,000,000
b. 2,500,000
c. 3,250,000
d. 3,000,000
Answer:
Increase in Cash 800,000

Decrease in Accounts receivable (400,000)
Increase in Inventory 300,000
Increase in Equipment 950,000
Increase in Note payable – bank (500,000)
Decrease in Accounts payable 600,000
Increase in assets 1,750,000
Dividend paid 1,500,000
Total 3,250,000
Increase in share capital ( 700,000)
Increase in share premium ( 300,000)
Error ( 250,000)
Problem 15-7
Easy Company reported that the beginning and ending total liabilities were P840,000
and P1,000,000, repectively.
At year-end, owners’ equity was P2,600,000 and total assets were P200,00 larger than
at the beginning of the year.
During the year, the new share capital issued exceeded dividends by P240,000
What was the net income or loss for the year?
a. 280,000 income
b. 280,000 loss
c. 200,000 loss
d. 40,000 income
Answer:
Increase in assets 200,000

Increase in liabilities (1,000,000 – 840,000) 160,000
Net increase in equity 40,000
Share capital issued exceeded dividends (240,000)
Net loss (200,000)
Problem 15-8
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
Investment ( 500,000)
Accounts payable ( 400,000)
Bonds payable 900,000
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.
a. 1,300,000
b. 1,600,000
c. 500,000
d. 200,000
Answer:
Increase in cash 800,000

Increase in accounts receivable, net 250,000
Increase in inventory 1,250,000
Decrease in Investment ( 500,000)
Increase in Bonds payable ( 900,000)
Net increase in equity 1,300,000
Total 1,600,000
Share premium 100,000 1,100,000
Net income 500,000
Problem 15-9
Jolo Company reported the following increase (decrease) in the account balances for
the current year:
Cash 1,500,000
Accounts receivable 3,500,000
Inventory 3,900,000
Investments (1,000,000)
Equipment 3,000,000
Bonds payable 2,000,000
During the year, the entity sold for cash 100,000 shares with P20 par for P30 per share.
Dividend of P4,500,000 was paid in cash. The entity borrowed P4,000,000 from the
bank and paid off note of P1,000,000 and interest of P600,000. The entity had no other
loan payable.
Interest of P400,000 was payable at the end of year. Interest payable at the beginning
of year was P100,000. Equipment of P2,000,000 was donated by a shareholder during
the year.
a. 7,900,000
b. 8,900,000
c. 5,900,000
d. 6,900,000
Answer:
Increase in Cash 1,500,000

Increase in Accounts receivable 3,500,000
Increase in Inventory 3,900,000
Decrease in Investments (1,000,000)
Increase in Equipment 3,000,000
Increase in Bonds payable (2,000,000)
Increase in bank loan payable (3,000,000)
Increase in accrued interest payable ( 300,000)
Net increase in equity 6,400,000
Add: Dividend paid 4,500,000
Total 10,900,000
Less: Increase in share capital (100,000 x 30) 3,000,000
Increase in donated capital 2,000,000 5,000,000
Problem 15-10
Elaine Company disclosed the following changes in account balances for current year:
Cash 450,000 increase

Accounts receivable 300,000 decrease
Merchandise inventory 200,000 increase
Accounts payable 100,000 increase
Prepaid expenses 20,000 increase
Accrued expenses 40,000 increase
Unearned rental income 30,000 decrease
In the current year, the owner transferred financial assets to the business and these
were sold for P500,000 to finance the purchase of merchandise. The owner made
withdrawals during the year of P100,000.
What was the net income or net loss for the current year?
a. 360,000 income
b. 360,000 loss
c. 140,000 income
d. 140,000 loss
Answer:
Increase Decrease
Cash 450,000
Merchandise inventory 200,000
Prepaid expenses 20,000
Unearned rental income 30,000
Total 700,000 440,000
Net increase (700,000 – 440,000) 260,000

Add: Withdrawals 100,000
Total 360,000
Less: Additional investment 500,000
Net loss 140,000
Problem 15-11
At the beginning of current year, Crispin Santos started a retail merchandise business.
During the current year, the business paid trade creditors P2,000,000 in cash and
suffered a net loss of P350,000.
The ledger preclosing balances at year-end included the following:

Capital (total investment in cash) 2,000,000
Expenses (paid in cash) 100,000
Merchandise (unadjusted debit balance) 700,000
There were no withdrawals. All sales and purchases were on credit.
The merchandise account is debited for purchase and credited for sales.
1. What is the amount of purchases for the year?
a. 2,000,000
b. 2,750,000
c. 1,250,000
d. 2,050,000
Answer:
Payments to trade creditors 2,000,000
Total purchases 2,750,000
2. What is the amount of sales for the year?
a. 2,750,000
b. 2,050,000
c. 2,650,000
d. 700,000
Answer:

Less: Unadjusted debit balance of merchandise 700,000
Sales 2,050,000
3. What is the cash balance at year-end?
a. 1,350,000
b. 2,000,000
c. 1,450,000
d. 3,450,000
Answer:
Cash (investment) 2,000,000

Collection of accounts payable (2,050,000 – 600,000) 1,450,000
Total 3,450,000
Less: Payment of accounts payable 2,000,000
Payment of expense 100,000 2,100,000
Cash – December 31 1,350,000
4. What is the merchandise inventory at year-end?
a. 700,000
b. 450,000
c. 750,000
d. 0
Answer:
Sales 2,050,000
Cost of sales:
Purchases 2,750,000
Merchandise inventory – December 31(squeeze) ( 450,000) 2,300,000
Gross loss ( 250,000)
Expenses ( 100,000)
Net loss ( 350,000)
Problem 15-12
Lancer Company provided the following data obtained from the single entry records for
2019:
Cash 1,600,000 1,200,000

Notes receivable 1,200,000 400,000
Merchandise inventory 960,000 1,600,000
Equipment 1,120,000 1,200,000
Unearned rent income 40,000 120,000
Cash receipts
Accounts receivable (after sales

Discounts of P100,000) 3,000,000
Notes receivable 960,000
Cash sales 800,000
Rent income 80,000
Sale of equipment costing P200,000
And carrying amount of P100,000 120,000
Investment 600,000
Cash payments
Accounts payable 1,520,000

Notes payable 1,280,000
Expenses 800,000
Equipment 400,000
Withdrawals 400,000
Accounts receivable of P120,000 were written off as uncollectible. Returns of P320,000

were made on merchandise sales. Allowances of P80,000 were received on
merchandise purchases.
Required:
Compute the net income or loss during the single entry method and prepare an income
statement.
Answer:
Total assets 6,880,000 6,000,000
Total liabilities 1,600,000 2,120,000
Capital 5,280,000 3,880,000
Capital – December 31 5,280,000

Add: Withdrawals 400,000
Total 5,680,000
Less: Capital – January 1 3,880,000
Investment 600,000 4,480,000
Notes receivable – December 31 1,200,000

Accounts receivable – December 31 2,000,000
Collections of accounts receivable 3,000,000
Sales discount 100,000
Bad debts (accounts written off) 120,000
Sales returns 320,000
Total 7,700,000
Less: Notes receivable – January 1 400,000
Accounts receivable – January 1 1,600,000 2,000,000
Cash sales 800,000
Total sales 6,500,000
Notes payable – December 31 480,000

Accounts payable – December 31 1,040,000
Payment of accounts payable 1,520,000
Payments of notes payable 1,280,000
Purchase allowances 80,000
Total 4,400,000
Less: Notes payable – January 1 720,000
Accounts payable – January 1 1,200,000 1,920,000
Purchases on account 2,480,000
Rent received 80,000

Add: Unearned rent income – January 1 120,000
Total 200,000
Less: Unearned rent income – December 31 40,000
Rent income 160,000
Sales price 120,000
Less: Carrying amount of equipment sold 100,000
Gain on sale of equipment 20,000
Equipment – January 1 1,200,000

Add: Acquisition 400,000
Total 1,600,000
Less: Equipment – December 31 1,120,000
Carrying amount of equipment sold 100,000 1,220,000
Depreciation 380,000
Interest paid 160,000

Add: Accrued interest payable – December 31 40,000
Total 200,000
Less: Accrued interest payable – January 1 80,000
Lancer Company
Income statement
December 31, 2019
Net sales (Note 1) 6,080,000

Cost of sales (Note 2) 3,640,000
Other income (Note 3) 180,000
Total income 2,620,000
Expenses:
Expenses 800,000
Bad debts 120,000
Note 1 – Net sales
Sales 6,500,000
Sales discount ( 100,000)
Sales return ( 320,000)
Net sales 6,080,000
Note 2 – Cost of sales
Inventory – January 1 1,600,000

Purchases 3,080,000
Purchase allowances ( 80,000) 3,000,000
Less: Inventory – December 31 960,000
Cost of sales 3,640,000
Note 3 – Other income
Rent income 160,000

Total 180,000
Problem 15-13
Corolla Company prepared the following comparative statement of financial position on

December 31, 2019:
Assets December 31 January 1
Cash 750,000 330,000

Notes receivable 210,000 200,000
Inventory 1,500,000 1,600,000
Prepaid expenses 100,000 120,000
Investment (at cost) 100,000 400,000
Equipment (net) 1,200,000 1,000,000
4,810,000 4,390,000
Liabilities and equity

Interest payable 30,000 -
Accrued expenses 50,000 40,000
Bonds payable - 500,000
Share capital, P100 par 1,300,000 1,000,000
Share premium 1,500,000 1,000,000
Retained earnings 600,000 500,000
4,810,000 4,390,000
Cash receipts Cash disbursements
Issue of share capital 800,000 Trade creditors – notes

Trade debtors – notes and accounts 2,100,000
And accounts 2,950,000 Expenses 790,000
Note receivable discounted: Dividends 400,000
Face value, P200,000, Equipment 280,000
Proceeds 190,000 Bonds 500,000
12% one-year note issued to
Bank on March 1, 2019 300,000
Sales of investment 250,000
4,490,000 4,070,000
Required:
Determine the net income or net loss using the single entry method and prepare an
income statement.
Answer:

Add: Dividends 400,000
Total 1,000,000
Less: Retained earnings – January 1 500,000
Net income 500,000
Notes receivable – December 31 210,000
Accounts receivable – December 31 950,000
Collection of notes and accounts 2,950,000
Note receivable discounted 200,000
Total 4,310,000
Less: Notes receivable – January 1 200,000
Accounts receivable – January 1 740,000 940,000
Loss on note discounted (200,00 – 190,000) 10,000
Accrued interest expense on note issued to bank (300,000 x 12%x 10/12) 30,000
Sales price 250,000

Less: Cost of investment sold 300,000
Loss on sale of investment ( 50,000)
Notes payable – December 31 580,000

Less: Note payable – bank 300,000
Notes payable – trade 280,000
Payments of notes and accounts 2,100,000
Total 3,130,000
Less: Notes payable – January 1 750,000
Accounts payable – January 1 600,000 1,350,000
Purchases on account 1,780,000
Expenses paid 790,000

Add: Prepaid expenses – January 1 120,000
Accrued expenses – December 31 50,000
Total 960,000
Less: Prepaid expenses – December 31 100,000
Accrued expenses – January 1 40,000 140,000
Expenses 820,000
Equipment – January 1 1,000,000

Add: Acquisition 280,000
Total 1,280,000
Less: Equipment – December 31 1,200,000
Depreciation 80,000
Corolla Company
Income statement
December 31, 2019
Sales 3,370,000
Cost of sales:
Inventory – January 1 1,600,000
Purchases 1,780,000
Less: Inventory – December 31 1,500,000 1,880,000
Expenses:
Expenses 820,000
Depreciation 80,000
Loss on sale of investment 50,000
Loss on notes discounted 10,000
Interest expense 30,000 990,000
Net income 500,000
Problem 15-14
Camry Company, a sole proprietorship, did not have complete records on a double
entry basis.
However, an investigation of the records established that the assets and liabilities on
January 1, 2019 were:
Cash 200,000
Equipment 350,000
Prepaid supplies 40,000
Accrued salaries payable 10,000
 A summary of the transactions for the current year as recorded in the checkbook
showed the following:
Deposits for the year 3,930,000

Check drawn during the year 3,360,000
Bank service charge 10,000
 The following information related to accounts payable:
Purchases on account during the year 2,280,000

Returns of merchandise 70,000
Payments of accounts by check 2,200,000
 Information about accounts receivable is as follows:

Accounts collected 1,720,000
Accounts receivable on December 31, 2019
(of this balance P50,000 is estimated
To be uncollectible) 450,000
 Check drawn during the year included checks for the following:
Salaries 400,000
Supplies 75,000
Taxes 45,000
Drawings of proprietor 240,000
Miscellaneous expense 35,000
Other operating expenses 245,000
 Cash sales for the year are assumed to account for all cash received other than that
collected on accounts.
 Equipment is to be depreciated at the rate of 10% per annum.
 Other financial information on December 31, 2019:

Supplies on hand 20,000
Required:
Prepare an income statement for 2019 and a statement of financial position on

December 31, 2019.
Answer:

Less: total liabilities 460,000
Capital – January 1 1,130,000
Cash balance – January 1 200,000
Add: Deposits 3,930,000
Total 4,130,000
Less: Checks drawn 3,360,000
Bank service charge 10,000 3,370,000
Cash balance – December 31 760,000
Accounts payable – January 1 250,000

Add: Purchases 2,280,000
Total 2,530,000
Less: Purchase returns 70,000
Payments 2,200,000 2,270,000
Salaries paid 400,000

Accrued salaries – December 31 15,000
Total 415,000
Less: Accrued salaries – January 1 10,000
Salaries expense 405,000
Supplies paid 75,000

Add: Prepaid supplies – January 1 40,000
Total 115,000
Less: Prepaid supplies – December 31 20,000
Supplies expense 95,000
Taxes paid 45,000
Miscellaneous expense paid 35,000
Other expenses paid 245,000
Note payable – January 1 200,000

Less: Payment 120,000
Note payable – December 31 80,000

Accounts collected 1,720,000
Total 2,200,000
Less: Accounts receivable – January 1 420,000
Allowance for doubtful accounts – January 1 20,000

Add: Doubtful accounts expense (squeeze) 60,000
Total 80,000
Less: Accounts written off 30,000
Allowance for doubtful accounts – December 31 50,000
Total deposits 3,930,000

Less: Accounts receivable collected 1,720,000
Cash sales 2,210,000
Add: Sales on accounts 1,780,000
Depreciation (350,000 x 10%) 35,000
Camry Company
Income statement
December 31, 2019
Sales 3,990,000
Cost of sales:
Merchandise inventory – January 1 700,000
Purchases 2,280,000
Less: Purchases returns 70,000 2,210,000
Less: Merchandise inventory – December 31 650,000 2,260,000
Expenses:
Salaries 405,000
Supplies 95,000
Taxes 45,000
Depreciation 35,000
Bank service charge 10,000
Miscellaneous expense 35,000 930,000
Net income 800,000
Camry Company
December 31, 2019
Assets
Current assets:
Cash 760,000
Accounts receivable, net (50,000) 400,000
Prepaid supplies 20,000 1,830,000
Noncurrent assets:
Equipment 350,000

Note payable 80,000
Equity:
Capital – January 1 1,130,000
Add: Net income 800,000
Total 1,930,000
Less: Drawings 240,000 1,690,000
Problem 15-15
Complex Company kept very limited records.
Purchases of merchandise were paid for by check, but most other items of cost were
paid out of cash receipts.
Weekly the amount of cash on hand was deposited in a bank account.
No record was kept of cash in the bank, nor was a record kept of sales.
Accounts receivable were recorded only by keeping a copy of the ticket, and this copy
was given to the customer when he paid his account.
On January 1, 2019, the entity started business and issued share capital, 60,000 share
with P100 par, for the following considerations:
Cash 500,000
Building (useful life, 15 years) 4,500,000
Land 1,500,000
An analysis of the bank statements showed total deposits, including the original cash
investment, of P3,500,000.
The balance in the bank statement on December 31, 2019, was P250,000.
There were checks amounting to P50,000 dated in December 2019 but not paid by the
bank until January 2020.
Cash on hand on December 31, 2019 was P125,000 including customer deposit of
P75,000.
During the year, the entity borrowed P500,000 from the bank and repaid P125,000 and
P25,000 interest.
Disbursements paid in cash during the year were:
Utilities 100,000
Salaries 100,000
Supplies 175,000
Taxes 25,000
Dividends 150,000
An inventory of merchandise taken on December 31, 2019 showed P755,000 of

merchandise.
Tickets for accounts receivable totaled P900,000 but P50,000 of that amount may prove
uncollectible.
Unpaid suppliers invoices for merchandise amounted to P350,000.
Equipment with a cash price of P400,000 was purchased in early January on a one-year
installment basis.
During the year, checks for the down payment and all maturing installments totaled
P445,000.
The equipment has a useful life of 5 years.
Required:
a. Prepare an income statement for the year ended December 31, 2019.
b. Prepare a statement of financial position on December 31, 2019.
Answer:
Balance per bank 250,000

Less: Outstanding checks 50,000
Adjusted bank balance 200,000
Cash investment 500,000

Proceeds of bank loan 500,000
Collection of accounts receivable (Squeeze) 2,500,000
Total deposits 3,500,000
Less: Disbursements in check:
Payment of loan 125,000
Interest on loan 25,000
Equipment 400,000
Interest on equipment 45,000
Payment of accounts payable (squeeze) 2,705,000 3,300,000
Cash in bank – December 31 200,000
Customers’ deposit 75,000

Collections of accounts receivable (squeeze) 600,000
Total 675,000
Less: Disbursement in cash 550,000
Cash on hand – December 31 125,000

Collection deposited 2,500,000
Collection not deposited 600,000

Payments of accounts payable 2,705,000
Complex Company
Income statement
December 31, 2019
Sales 4,000,000
Cost of sales:
Purchases 3,055,000
Expenses:
Utilities 100,000
Salaries 100,000
Supplies 175,000
Taxes 25,000
Depreciation – building (4,500,000 / 15) 300,000
Depreciation – equipment (400,000 / 5) 80,000
Interest expense (25,000 + 45,000) 70,000 900,000
Net income 800,000
Complex Company
December 31, 2019
Assets
Current assets:
Cash (Note 1) 325,000
Accounts receivable (Note 2) 850,000
Inventory 755,000 1,930,000
Noncurrent assets:
Land 1,500,000
Building 4,500,000
Less: Accumulated depreciation 300,000 4,200,000
Equipment 400,000

Loan payable – bank 375,000
Customers’ deposit 75,000 800,000
Equity:
Retained earnings (Note 3) 650,000 7,150,000
Note 1 – Cash
Cash in bank 200,000

Cash on hand 125,000
Total cash 325,000
Note 2 – Accounts receivable

Allowance for doubtful accounts ( 50,000)
Net realizable value 850,000
Note 3 – Retained earnings
Net income 800,000

Dividends ( 150,000)
Total 650,000
Problem 15-16
Ultimate Company provided the following information for the preparation of financial
statements for 2019:
Balances – January 1, 2019
Cash 400,000
Inventory 230,000
Land 500,000
Building 2,000,000
Equipment 800,000
Advances from customers 90,000
 Cash receipts for 2019

Cash sales and collections on accounts receivable 2,960,000
Sale of equipment on December 31, 2019 costing
P50,000 on which P30,000 of depreciation
Had been accumulated 45,000
3,075,000
 Cash disbursement for 2019
Insurance premium 80,000

Purchase of equipment on October 1 200,000
Cash purchases and payments on accounts payable 1,640,000
Salaries 390,000
Dividends paid 125,000
2,570,000
 Dividends of 5% were declared on June 30 and on December 31, 2019.
 All depreciable assets should be depreciated at 10% per year.
 Doubtful accounts are estimated to be 5% of year0end accounts receivable. The

accounts receivable totaled P200,000 on December 31, 2019.
 Additional data on December 31, 2019
Inventory 245,000
Accrued salaries 30,000
Required:
a. Prepare an income statement for 2019.
b. Prepare a statement of financial position on December 31, 2019.
Answer:

Cash sales, collection and advances 3,030,000
Advances from customers – January 1 90,000
Total 3,320,000
Less: Accounts receivable – January 1 120,000
Advances from customers – December 31 50,000 170,000
Sales 3,150,000
Sales price 45,000

Less: Carrying amount of equipment sold 20,000

Cash purchases and payments 1,640,000
Total 1,740,000
Less: Accounts payable – January 1 170,000
Purchases 1,570,000
Insurance paid 80,000

Prepaid insurance – January 1 35,000
Total 115,000
Less: Prepaid insurance – December 31 25,000
Insurance expense 90,000
Depreciation:
Building (2,000,000 x 10%) 200,000
Equipment (800,000 x 10%) 80,000
Equipment – new (200,000 x 10% x 3/12) 5,000
Total 285,000
Salaries paid 390,000

Accrued salaries – December 31 30,000
Total 420,000
Less: Accrued salaries – January 1 20,000
Salaries expense 400,000
Doubtful accounts (5% x 200,000) 10,000
Ultimate Company
Income statement
December 31, 2019
Sales 3,150,000
Cost of sales:
Purchases 1,570,000
Expenses:
Insurance 90,000
Salaries 400,000
Other expenses 135,000 920,000
Net income 700,000
Ultimate Company
December 31, 2019
Assets
Current assets:
Cash 905,000
Accounts receivable, net (10,000) 190,000
Inventory 245,000
Prepaid insurance 25,000 1,365,000
Noncurrent assets:
Land 500,000
Building 2,000,000
Less: Accumulated depreciation 900,000 1,100,000
Equipment 950,000

Accrued salaries 30,000
Dividends payable 125,000 305,000
Equity:
Retained earnings 815,000 3,315,000
Accumulated depreciation – January 1 240,000

Add: Depreciation for 2019 85,000
Total 325,000
Less: Accumulated depreciation on equipment sol 30,000
Accumulated depreciation – December 31 295,000
Retained earnings – January 1 365,000

Net income 700,000
Total 1,065,000
Less: Dividends – June 30 (5%x 2,500,000) 125,000
Dividends – December 31 125,000 250,000
Chapter 16
Error correction
Problem 16-1
Roxas Company reported the following net income:
2018 1,750,000
2019 2,000,000
An examination of the accounting records for the year ended December 31, 2019
revealed that several errors were made. The following errors were discovered:
Salary accrued at year-end was consistently omitted:
2018 100,000
2019 140,000
The footing and extensions showed that the inventory on December 31, 2018 was
overstated by P190,000.
Prepaid insurance of P120,000 applicable to 2020 was expensed in 2019.
Interest receivable of P20,000 was not recorded on December 31, 2019.
On January 1, 2019 an equipment costing P400,000 was sold for P220,000. At the date
of sale, the equipment had accumulated depreciation of P240,000.
The cash received was recorded as miscellaneous income in 2019.
In addition, depreciation was recorded for the equipment for 2019 at the rate of 10%.
Required:
a. Prepare worksheet showing corrected net income for 2018 and 2019.
b. Prepare adjusting entries on December 31, 2019.
a. Assuming books are still open

b. Assuming books are closed.
Answer:
2018 2019
Net income 1,750,000 2,000,000

Salary accrued omitted:
2018 ( 100,000) 100,000
2019 ( 140,000)
Inventory – December 31, 2018 overstated ( 190,000) 190,000
Prepaid insurance unrecorded on December 31, 2019 120,000
Interest receivable unrecorded on December 31 ,2019 20,000
Other income overstated ( 160,000)
Depreciation overstated 40,000
Corrected net income 1,460,000 2,170,000
Adjusting entries – December 31, 2019 – Book open

Salaries 100,000
Salaries 140,000

Inventory – January 1, 2019 190,000

Insurance 120,000
4. Accrued interest receivable 20,000

Interest income 20,000
5. Miscellaneous income 220,000

Equipment 400,000

Depreciation 40,000
Adjusting entries – December 31, 2019 – Book closed

2. No adjustment
4. Accrued interest receivable 20,000


Equipment 400,000

Problem 16-2
Susan Company reported the following net income:

2018 3,000,000
2019 4,000,000
In an audit for the current year, the following errors are discovered:
December 31, 2018 inventory understated 20,000
December 31, 2019 inventory overstated 18,000
Depreciation for 2018 understated 4,000
Insurance premium for a three-year period

Was charged to expense on January 1, 2018
No prepayment was recorded. 15,000
A fully depreciated machinery was sold on

December 31, 2019 but the sale was not recorded
Until 2020.
The cost of the machinery is P200,000

And the proceeds from sale amounted to 32,000
Required:
a. Prepare worksheet for correction of net income for 2018 and 2019.

Answer:
2018 2019
Net income 3,000,000 4,000,000

December 31, 2018 inventory understated 20,000 ( 20,000)
December 31, 2019 inventory overstated ( 18,000)
Depreciation for 2018 understated ( 4,000) -
Prepaid insurance unrecorded on December 31,2018 10,000 ( 5,000)
Gain on sale of machinery 32,000
Adjusting entries – December 31, 2019
1. Inventory – January 1, 2019 20,000

2. Profit and loss 18,000

Inventory – December 31, 2019 18,000


Insurance 5,000
5. Cash 32,000
Machinery 200,000
Problem 16-3
Atlanta company reported net income for 2018 P4,000,000 and 2019 P5,000,000. An
audit revealed certain errors.
A collection of P100,000 from a customer was received on December 29, 2019 but not
recorded until January 4, 2020.
Supplier’s invoice on account of P160,000 for inventory received in December 2019 was
not recorded until January 2020.
Inventories on December 31, 2018 and 2019 were correctly stated.
Depreciation for 2018 was understated by P90,000.
In September 2019, a P20,000 invoice for office supplies was charged to purchases.
Office supplies are expensed when incurred,

Sales on account of P300,00 in December 2019 were recorded in 2020.
Required:
a. Determine the correct net income for 2018 and 2019
Answer:
2018 2019
Net income 4,000,000 5,000,000

Unrecorded purchases in 2019 ( 160,000)
Depreciation for 2018 understated ( 90,000)
Unrecorded sales in 2019 300,000
1. Cash 100,000
2. Purchases 160,000

4. Office supplies 20,000

Purchases 20,000

Sales 300,000
Problem 16-4
Upon inspection of the records of Emerald Company, the following facts were
discovered for the year ended December 31, 2019.
A fire insurance premium of P40,000 was paid an charged as insurance expense for
2019.
The fire insurance policy covers one year from April 1, 2019.
Inventory on January 1, 2019 was understated by P80,000.

Inventory on December 31, 2019 was understated by P120,000.
Taxes of P60,000 for the fourth quarter of 2019 were paid on January 20, 2020 and
charged as expense of 2020.
On December 5, 2019 a cash advance of P100,000 by a customer was received for

goods to be delivered in January, 2020.
The amount of P100,000 was credited to sales. The gross profit on sales is 40%.
The net income for the year ended December 31, 2019 before any adjustments is
P1,550,000.
Required:
a. Determine the correct net income for 2019
Answer:

Prepaid insurance – December 31, 2019 10,000
Inventory on January 1, 2019 understated ( 80,000)
Inventory on December 31, 2019 understated 120,000
Accrued taxes – December 31, 2019 ( 60,000)
Advances from customer – December 31, 2019 ( 100,000)
Corrected net income 1,440,000

Insurance 10,000
2. Inventory – January 1, 2019 80,000

3. Inventory – December 31, 2019 120,000
Profit and loss 120,000
4. Taxes 60,000
Accrued taxes payable 60,000
5. Sales 100,000
Problem 16-5
Tower Company failed to recognized accruals and prepayments during the first year of
operations. The income before tax is P5,000,000.
The accruals and prepayments not recognized at the end of the year are:

Accrued wages 250,000
Rent revenue collected in advance 300,000
Interest receivable 100,000
What is the corrected income before tax?
a. 4,750,000
b. 5,250,000
c. 5,000,000
d. 4,950,000
Answer:
Income before tax per book 5,000,000

Accrued wages ( 250,000)
Rent revenue collected in advance ( 300,000)
Interest receivable 100,000
Corrected income before tax 4,750,000
Problem 16-6
Victoria Company revealed the following errors in the financial statements:
Ending inventory Depreciation
2018 200,000 understated 50,000 understated

2019 300,000 overstated 100,000 overstated
At what amount should retained earnings be retroactively adjusted on January 1, 2020?
a. 250,000 increase
b. 250,000 decrease
c. 400,000 decrease
d. 200,000 decrease
Answer:
2018 2019 retained earnings

Jan. 1, 2020
2018 inventory understated 200,000 (200,000) -

2019 inventory overstated (300,000) (300,000)
2018 depreciation understated ( 50,000) ( 50,000)
2019 depreciation overstated 100,000 100,000
Net decrease (250,000)
Problem 16-7
During 2019, Paul Company discovered that the ending inventories reported in the
financial statements were incorrect by the following amounts:
2018 60,000 understated

2019 75,000 overstated
The entity used the periodic inventory system to ascertain year-end quantities that are
converted to peso amounts using the FIFO cost method.
Prior to any adjustments for these errors and ignoring income tax, what is the effect of
the errors on retained earnings on January 1, 2020?
a. Correct
b. 15,000 overstated
c. 75,000 overstated
d. 135,000 overstated
Answer:
2018 2019 retained earnings

Jan. 1, 2020
2018 inventory understated 60,000 ( 60,000)

2019 inventory overstated ( 75,000) ( 75,000)
Net correction 60,000 (135,000) ( 75,000)
Problem 16-8
Crescendo Company revealed the following errors in the financial statements:
2018 2019
Ending inventory 140,000 overstated 200,000 understated

Rent expense 48,000 understated 66,000 overstated
If none of the errors were detected or corrected, by what amount will 2019 net income
be overstated or understated?
a. 134,000 overstated
b. 278,000 understated
c. 358,000 understated
d. 406,000 understated
Answer:
2018 2019
Ending inventory
2018 (140,000) 140,000
2019 200,000
Rent expense
2018 ( 48,000)
2019 66,000
Net correction (188,000) 406,000
Problem 16-9
Glory Company reported the following errors in the financial statements:
2018 2019
Ending inventory 200,000 under 300,000 over
Depreciation 50,000 under
An insurance premium of P150,000 was prepaid in 2018 to cover 2018, 2019 and 2020.
The entire amount was charged to expense in 2018.
On December 31, 2019, fully depreciated machinery was sold for P250,000 cash but
the sale was not recorded until 2020.
There were no other errors during 2018 and 2019 and no corrections have been made
for any of the errors.
1. What is the effect of the errors on 2018 net income?

a. 250,000 understated
Answer:
2018
2018 ending inventory under 200,000
2018 depreciation under ( 50,000)
Insurance premium 100,000
Net correction 250,000
2. What is the effect of the errors on 2019 net income?
Answer:
2019
2018 ending inventory under (200,000)
2019 ending inventory over (300,000)
Insurance premium ( 50,000)
Net correction (300,000)
3. What is effect of the errors on retained earnings on December 31, 2019?
a. 300,000 overstated
b. 250,000 understated
c. 50,000 overstated
d. 50,000 understated
Answer:
2018 net correction – understated 250,000

2019 net correction – overstated (300,000)
Retained earnings overstated ( 50,000)
Problem 16-10
Shannon Company began operations on January 1, 2018. The financial statement

contained the following errors:
2018 2019
Ending inventory 160,000 understated 150,000 overstated

Depreciation expense 60,000 understated
Insurance expense 100,000 overstated 100,000 understated
Prepaid insurance 100,000 understated
No corrections have been made for any of the errors.
Ignore income tax, what is the total effect of the errors on
1. Net income for 2018?
a. 200,000 over
b. 200,000 under
c. 260,000 under
d. 0
Answer:
2018 inventory understated 160,000

2018 depreciation understated ( 60,000)
2018 prepaid insurance understated 100,000
Net correction 200,000
2. Net income for 2019?

a. 302,000 over
b. 302,000 under
c. 410,000 over
d. 410,000 under
Answer:
2018 inventory understated (160,000)

2019 inventory overstated (150,000)
2018 prepaid insurance understated (100,000)
2019 gain on sale of machinery 108,000
Net correction (302,000)
3. Retained earnings on December 31, 2019?
a. 102,000 over
b. 102,000 under
c. 200,000 over
d. 200,000 under
Answer:
2018 net correction 200,000

2019 net correction (302,000)
Retained earnings (102,000)
4. Working capital on December 31, 2019?
a. 42,000 over
b. 58,000 under
c. 60,000 under
d. 98,000 under
Answer:

2019 gain on sale of machinery 108,000
Working capital ( 42,000)
Problem 16-11
Rebecca Company revealed the following information on December 31, 2019:

 The entity failed to accrue sales commissions at the end of each year as follows:
2017 220,000
2018 140,000
In each case, the sales commissions were paid and expensed in January of the
following year.
 Errors in ending inventories for the last three years were discovered to be as follows:

2018 540,000 overstated
The unadjusted retained earnings balance on January 1, 2019 is P12,600,000 and the
unadjusted net income for 2019 was P3,000,000.
Dividends of P1,750,000 were declared during 2019.
1. What is the adjusted net income for 2019?
a. 3,830,000
b. 3,150,000
c. 3,680,000
d. 3,530,000
Answer:
2017 2018 2019

Unrecorded commissions:
2017 (220,000) 220,000
2018 (140,000) 140,000
Ending inventory:
2017 understated 400,000 (400,000)
2018 overstated (540,000) 540,000
2019 understated 150,000
Net correction to income 180,000 (860,000) 830,000
Net income per book for 2019 3,000,000

Net correction to income 830,000
Adjusted net income 2019 3,830,000
2. What is the adjusted balance of retained earnings on December 31, 2019?

a. 14,000,000
b. 13,320,000
c. 13,850,000
d. 11,000,000
Answer:
Net correction 2017 180,000
Net correction 2018 (860,000)
Net correction of prior years (680,000)
Retained earnings 12,600,000

Prior period error ( 680,000)
Corrected beginning balance 11,920,000
Net income for 2019 3,830,000
Dividends declared in 2019 ( 1,750,000)
Retained earnings – December 31, 2019 14,000,000
Problem 16-12
Holden Company reported the following errors in the financial statements:
2018 2019
Over (under) statement for ending inventory (100,000) 40,000

Depreciation understatement 40,000 60,000
Failure to accrue salaries at year-end 80,000 120,000
As a result of the errors, what was the effect on net income for 2019?
Answer:
2018 2019
2018 ending inventory – under 100,000 100,000

2019 ending inventory – over ( 40,000)
Depreciation understatement (40,000) (60,000)
Accrued salaries unrecorded:
2018 (80,000) 80,000
2019 (120,000)
Net correction to income (20,000) (240,000)
Problem 16-13
During the course of an audit of the financial statements of Julie Company for the year
ended December 31, 2019, the following data are discovered:
 Inventory on January 1, 2019 had been overstated by P300,000.
 Inventory on December 31, 2019 was understated by P500,000.
 An insurance policy covering three years had been purchased on January 1, 2018
for P150,000. The entire amount was charged as an expense in 2018.
During 2019, the entity received a P100,000 cash advance from a customer for
merchandise to be manufactured and shipped during 2020. The amount had been
credited to sales revenue. The gross profit on sales is 50%.
Net income for 2019 per book was P2,000,000.
What is the proper net income for 2019?
a. 2,650,000
b. 2,350,000
c. 1,650,000
d. 2,050,000
Answer:
Net income per book 2,000,000

Overstatement of beginning inventory 300,000
Understatement of ending inventory 500,000
Unrecorded insurance for 2019 ( 50,000)
Cash advance credited to sales ( 100,000)
Proper net income for 2019 2,650,000
Problem 16-14
Emma Company revealed the following errors in the financial statements:

Depreciation for 2018 overstated 250,000
December 31, 2019 accrued rent income overstated 300,000
December 31, 2019 accrued salaries understated 150,000
The understatement of the 2018 ending inventory pertains to goods in transit purchased
FOB shipping point which were not recorded on 2018 but paid on 2019.
1. What is the effect of the errors on net income for 2018?
d. 0
Answer:
2018 depreciation overstated (250,000)
a. 1,150,000 understated
b. 1,150,000 overstated
c. 1,250,000 understated
d. 1,250,000 overstated
Answer:
2019 inventory overstated ( 800,000)

2019 accrued rent income overstated ( 300,000)
2019 accrued salaries understated ( 150,000)
Net income for 2019 (1,150,000)
3. What is the effect of the errors on retained earnings on December 31, 2019?
a. 1,150,000 understated
b. 1,150,000 overstated
Answer:
Net income for 2019 (1,150,000)

Retained earnings ( 900,000)
Problem 16-15
Taal Company revealed the following errors in the financial statements:

Depreciation for 2018 overstated 25,000
Depreciation for 2019 understated 8,000
December 31, 2018 prepaid insurance understated 5,000
December 31, 2019 unearned rent income overstated 4,000
December 31, 2019 accrued salaries understated 20,000
d. 5,000 overstated
Answer:
2018 depreciation overstated 25,000
2018 prepaid insurance understated 5,000
Net correction of income for 2018 ( 5,000)
Answer:
2018 inventory overstated 35,000
2019 depreciation understated ( 8,000)
2018 prepaid insurance ( 5,000)
2019 unearned rent income overstated 4,000
2019 accrued salaries understated (20,000)
Net correction of income for 2019 16,000
3. What is the effect of the errors on retained earnings on December 31, 2019?
Answer:
Net correction of income for 2018 (5,000)
Net correction of income for 2019 16,000
4. What is the effect of the errors on working capital on December 31, 2019?
d. 6,000 overstated
Answer:
2019 inventory understated (10,000)
2019 unearned rent income 4,000
Working capital ( 6,000)
Problem 16-16
Malampaya Company showed income before tax of P6,500,000 on December 31, 2019.
The year-end verification of the transactions revealed the following errors:
 P1,000,000 worth of merchandise was purchased in 2019 and included in the ending
inventory. However, the purchase was recorded only in 2020.
 A merchandise shipment valued at P1,500,000 was properly recorded as purchase

at year-end.
Since the merchandise was still at the port area, it was inadvertently omitted from
the inventory on December 31, 2019.
 Advertising for December 2019, amounting to P500,000, was recorded when

payment was made in January 2020.
 Rent of P300,000 on an equipment applicable for six months was received on

November 1, 2019. The entire amount was reported as income upon receipt.
 Insurance premium covering the period from July 1, 2019 to July 1, 2020 amount to
P200,000 was paid and recorded as expense on July 31, 2019. The entity did not
make any adjustment at the end of the year.
What is the corrected income before tax for 2019?
a. 6,900,000
b. 6,400,000
c. 6,500,000
d. 6,300,000
Answer:
Income per book 6,500,000
Unrecorded purchase (1,000,000)
Understatement of ending inventory 1,500,000
Unrecorded advertising ( 500,000)
Unearned rent income (300,000 x 4/6) ( 200,000)
Prepaid insurance (200,000 6/12) 100,000
Corrected income 6,400,000
Problem 16-17
1. When the current year’s ending inventory is overstated
a. The current year’s cost of goods sold is overstated.

b. The current year’s total assets are understated.
c. The current year’s net income is overstated.
d. The next year’s income is overstated.
2. If the beginning inventory in the current year is overstated, and that is the only error
in the current year, the income for the current year would be.
a. Understated and assets correctly stated.

b. Understated and assets overstated
c. Overstated and assets overstated
d. Understated and assets understated
3. Which of the following would result if the current year’s ending inventory is
understated in the cost of goods sold calculation?
a. Cost of goods sold would be overstated

b. Total assets would be overstated
c. Net income would be overstated
d. Retained earnings would be overstated
4. Which of the following is a counterbalancing error?
a. Understated depletion expense

b. Bond premium underamortized
c. Prepaid expense adjusted incorrectly
d. Overstated depreciation expense
5. Which error will not self-correct in the next year?
a. Accrued expense not recognized at year-end

b. Accrued revenue not recognized at year-end
c. Depreciation expense overstated for the current year
d. Prepaid expenses not recognized at year-end
6. The overstatement of ending inventory in the current year would cause
a. Retained earnings to be understated in the current year-end statement of

financial position.
b. Cost of goods sold to be understated in the income statement of next year.
c. Cost of goods sold to be overstated in the income statement of the current
year.
d. Statement of financial position not to be misstated in the next year-end.
7. Failure to record the expired amount of prepaid rent expense would not
a. Understate expense
b. Overstate net income
c. Overstate owners’ equity
d. Understate liabilities
8. Failure to record accrued salaries at the end of an accounting period results in
a. Overstated retained earnings

b. Overstated assets
c. Overstated revenue
d. Understated retained earnings
9. Failure to record depreciation at the end of an accounting period results in
a. Understated income
b. Understated assets
c. Overstated expense
d. Overstated assets
10. If at the end of current reporting period, an entity erroneously excluded some goods
from ending inventory and also erroneously did not record the purchase of these
goods, these errors would cause
a. The ending inventory to be overstated

b. The retained earnings to be understated
c. No effect on net income, working capital and retained earnings
d. Net income to be understated
Chapter 17
Statement of cash flows
Problem 17-1
Mountain Company reported the following income statement for the year ended
December 31, 2019:
Sales 4,500,000
Cost of goods sold:
Purchases 2,850,000

Inventory – December 31 ( 600,000) 3,000,000

Expenses:
Salaries 600,000
Rent 250,000
Insurance 20,000
Doubtful accounts expense 30,000
Depreciation 50,000 1,050,000
Net income 450,000

Allowance for doubtful accounts 40,000 20,000
Inventory 600,000 750,000
Equipment 1,200,000 1,200,000
Accumulated depreciation 290,000 240,000
During the year, the entity recognized doubtful accounts expense of P30,000 and wrote
off uncollectible accounts of P10,000.
Required:
Determine the cash flow from operating activities using the direct method and indirect
method.
Answer:
Accounts receivable – January 1 440,000

Add: Sales 4,500,000
Total 4,940,000
Less: Accounts receivable – December 31 540,000
Writeoff 10,000 550,000
Collections from customers 4,390,000

Purchases 2,850,000
Total 3,010,000
Less: Accounts payable – December 31 280,000
Payment to merchandise creditors 2,730,000
Salaries 600,000
Add: Accrued salaries – January 1 80,000
Total 680,000
Less: Accrued salaries – December 31 50,000
Payment for salaries 630,000
Insurance 20,000
Add: Prepaid insurance – December 31 15,000
Total 35,000
Less: Prepaid insurance – January 1 10,000
Payment for insurance 25,000
Direct method
Cash received from customers 4,390,000

Cash payment to creditors (2,730,000)
Salaries paid ( 630,000)
Insurance paid ( 25,000)
Rent paid ( 250,000)
Other expenses paid ( 100,000)
Net cash provided by operating activities 655,000
Indirect method
Net income 450,000

Increase in net accounts receivable ( 80,000)
Decrease in inventory 150,000
Increase in prepaid insurance ( 5,000)
Increase in accounts payable 120,000
Decrease in accrued salaries payable ( 30,000)
Depreciation 50,000
Problem 17-2
Hill Company provided the following comparative statement of financial position.
Assets 2019 2018
Cash and cash equivalents 750,000 950,000

Inventory 2,550,000 1,800,000
Property, plant and equipment 5,300,000 4,300,000
Accumulated depreciation (1,150,000) ( 800,000)
9,300,000 7,500,000

Share capital 4,750,000 4,250,000
9,300,000 7,500,000
1. The statement of retained earnings for 2019 showed net income of P1,500,000 and
cash dividend paid of P300,000.
2. During the year, the entity purchased equipment for cash and issued share capital
for cash.
Required:
Prepare a statement of cash flows for the current year using the indirect method.
Answer:
Hill Company
Statement of Cash Flows
December 31, 2019
Cash flow from operating activities:

Increase in accounts receivable ( 650,000)
Increase in inventory ( 750,000)
Decrease in prepaid expenses 50,000
Decrease in accrued expenses ( 150,000)
Depreciation 350,000 600,000
Cash flow from investing activities:
Purchase of equipment (1,000,000)
Cash flow from financing activities:
Issue of share capital 500,000
Payment of cash dividend ( 300,000) 200,000
Decrease in cash and cash equivalents ( 200,000)
Cash and cash equivalents – January 1 950,000
Cash and cash equivalent – December 31 750,000
Problem 17-3
Sandy Company reported the following comparative statement of financial position at

year-end.
Assets 2019 2018

Inventory 1,090,000 860,000
Accumulated depreciation ( 840,000) ( 720,000)
5,120,000 4,210,000

Salaries payable 70,000 40,000
Income tax payable 35,000 15,000
Accrued interest payable 5,000 -
Bonds payable 600,000 -
Share capital 3,050,000 3,050,000
Retained earnings 1,100,000 760,000
Treasury shares ( 140,000) -
5,120,000 4,210,000
The income statement for the year ended December 31, 2019 showed the following:
Sales 4,450,000
Cost of goods sold:
Purchases 2,630,000
Goods available for sales 3,490,000

Inventory – December 31 (1,090,000) 2,400,000

Gain on sales of equipment 60,000

Expenses:
Salaries 640,000
Insurance 100,000
Rent 350,000
Bad debt writeoff 20,000
Income before tax 700,000

Income tax 200,000
Net income 500,000
1. Cash dividends of P160,000 were declared and paid during the year.
2. Equipment costing P190,000 and with accumulated depreciation of P140,000 was

sold for P110,000 cash.
3. New equipment was purchased for cash.
4. Bonds payable were issued for cash at the face value of P600,000.
5. The treasury shares were purchased at cost P140,000.
Required:
a. Prepare a statement of cash flows using the direct method.
b. Compute the cash flow operating activities using the indirect method.
Answer:
Sandy Company
December 31, 2019
Cash flows from operating activities:

Collections from customers 4,270,000
Payments to creditors (2,575,000)
Salaries paid ( 610,000)
Insurance paid ( 90,000)
Rent paid ( 350,000)
Cash generated from operations 645,000
Interest paid ( 35,000)
Income tax paid ( 180,000)
Sale of equipment 100,000
Purchase of equipment ( 870,000) ( 760,000)
Issue of bonds payable 600,000
Payment of cash dividend ( 160,000)
Payment of treasury shares ( 140,000) 300,000
Decrease in cash and cash equivalents ( 30,000)
Cash and cash equivalents – December 31 120,000
Indirect method
Net income 500,000

Decrease in prepaid insurance 10,000
Decrease in salaries payable 30,000
Increase in income tax payable 20,000
Increase in accrued interest payable 5,000
Gain on sale of equipment ( 60,000)
Net cash provided by operations 430,000
Problem 17-4
Forest Company provided the following information for the preparation of a statement of
cash flows for the current year:
2019 2018

Trading securities 300,000 200,000
Accounts receivable, net of allowance 600,000 520,000
Inventory 900,000 840,000
Property, plant and equipment (net) 2,000,000 2,100,000
Goodwill 200,000 200,000
Discount on bonds payable 72,000 100,000
4,675,000 4,260,000

Bonds payable 800,000 1,000,000
Preference share capital, P100 par, each share
Convertible into two ordinary shares 400,000 500,000
Ordinary share capital, P20 par 820,000 700,000
Share premium 500,000 400,000
4,675,000 4,260,000
1. Net income for the current year was P1,705,000.
2. Cash dividend paid during the year totaled P1,000,000.
3. The bonds mature on January 1, 2024. On December 31, 2019 bonds with face of
P200,000 were retired at 105.
4. The entity sold 4,000 ordinary shares at P30 per share.
5. The decrease in preference share capital resulted from the exercise of the
conversion privilege by preference shareholders.
6. The increase in trading securities is due to increase in market value during the year.
Required:
Prepare a statement of cash flows for the current year.
Answer:
Requirements
Entries
1. Profit and loss 1,705,000

2. Retained earnings 1,000,000

Cash 1,000,000
3. Interest expense (100,000/10) 10,000

Discount on bonds payable 10,000

Loss on retirement 28,000
Cash (200,000 x 105) 210,000
Discount on bonds payable
(90,000 x 200 / 1,000) 18,000
4. Cash (4,000 x 30) 120,000

Ordinary share capital (4,000 x 20) 80,000
5. Preference share capital (1,000 x 100) 100,000

Ordinary share capital (2,000 x 20) 40,000
6. Trading securities 100,000

Unrealized gain 100,000

Sales 80,000
8. Inventory 60,000
Cost of sales 60,000
10. Accounts payable 310,000

Cash 310,000
11. Expenses 100,000

Operating Financing
1. Net income 1,705,000

2. Cash dividend (1,000,000)
3. Amortization of discount on bonds payable 10,000
Retirement of bonds payable ( 210,000)
4. Issuance of ordinary share capital 120,000
5. Conversion of preference share into ordinary share – no cash effect
6. Unrealized gain ( 100,000)
7. Increase in accounts receivable ( 80,000)
8. Increase in inventory ( 60,000)
10. Decrease in accounts payable ( 310,000)
11. Increase in accrued expenses 100,000
Net cash provided (used) 1,393,000 (1,090,000)
Forest Company
December 31, 2019

Amortization of discount 10,000
Unrealized gain ( 100,000)
Decrease in accounts payable ( 310,000)
Increase in accrued expenses 100,000 1,393,000
Issue of ordinary share capital 120,000
Payment of cash dividend (1,000,000)
Bond retirement ( 210,000) (1,090,000)
Increase in cash and cash equivalents 303,000
Add: Cash and cash equivalents – January 1 300,000
Problem 17-5
Fearsome Company showed the following comparative statement of financial position:
2019 2018
Cash and cash equivalents 2,350,000 350,000

Inventory 1,000,000 850,000
Investment in Hall Company at equity 2,200,000 2,000,000
Land 2,000,000 1,500,000
Accumulated depreciation ( 1,050,000) ( 800,000)
Goodwill 400,000 400,000
12,500,000 9,000,000

Note payable – long term 500,000 -
Bonds payable 1,600,000 2,100,000
Share premium 2,700,000 1,750,000
Treasury shares, at cost - ( 700,000)
12,500,000 9,000,000
1. The net income for the current year was P3,050,000.
2. Cash dividend paid amounted to P2,500,000.
3. The entity sold equipment costing P200,000, with carrying amount of P50,000, for
P70,000 cash.
4. The entity issued 10,000 shares of capital for P150 per share cash.
5. The entity sold all of its treasury shares for P900,000 cash.
6. Individuals holding P500,000 face value bonds exercised their conversion privilege.
Each of the 500 bonds was converted into 5 shares of capital.
7. The entity purchased equipment for P1,200,000.
8. Land with a fair value of P500,000 was purchased through the issuance of a long
term note.
Required:
Answer:
Requirements
Entries

2. Retained earnings 2,500,000

Cash 2,500,000
3. Cash 70,000
Equipment 200,000
4. Cash (10,000 x 150) 1,500,000

5. Cash 900,000
Treasury share 700,000
6. Bonds payable 500,000

Share capital (2,500 x 100) 250,000
7. Equipment 1,200,000
Cash 1,200,000
8. Land 500,000
Note payable – long term 500,000
9. Cash 100,000
10. Inventory 150,000

11. Investment in Hall Company 200,000

Investment income 200,000

Operating Investing Financing
1. Net income 3,050,000

2. Cash dividend (2,500,000)
3. Sale of equipment 70,000
4. Issuance of share capital 1,500,000
5. Sale of treasury shares 900,000
6. Conversion of bonds payable into
Ordinary share- no cash effect
7. Purchase of equipment (1,200,000)
8. Purchase of land by issuing a note
- No cash effect
9. Decrease in accounts receivable 100,000
11. Investment income ( 200,000)
12. Increase in accounts payable 50,000
Net cash provided (used) 3,230,000 (1,130,000) ( 100,000)
Fearsome Company
December 31, 2019

Decrease in net accounts receivable 100,000
Investment income ( 200,000)
Increase in accounts payable 50,000 3,230,000
Purchase of equipment (1,200,000) (1,130,000)
Issue of share capital 1,500,000
Sale of treasury shares 900,000
Payment of cash dividend (2,500,000) ( 100,000)
Increase in cash and cash equivalents 2,000,000
Add: Cash and cash equivalents – January 1 350,000
Cash and cash equivalents – December 31 2,350,000
Problem 17-6
Kenwood Company provided the following comparative statement of financial position:
2019 2018
Cash 500,000 450,000

Accounts receivable, net of allowance 1,050,000 700,000
Inventory 1,300,000 1,200,000
Land 1,625,000 1,000,000
Patent 150,000 165,000
Accrued expense 1,300,000 1,050,000
Bonds payable 1,000,000 1,500,000
Share premium 1,165,000 850,000
1. The net income for the current year was P1,095,000.
2. On February 2, the entity issued a 10% stock dividend to shareholders of record on

January 15. The market price per share was P15.
3. On March 1, the entity issued 19,000 shares for land. The land had a fair value of
P200,000.
4. The entity purchased long term bonds with face of P500,000. A gain on retirement of
bonds was reported in the income statement in the amount of P50,000.
5. The entity sold equipment costing P265,000, with carrying amount of P115,000, for
P95,000 cash.
6. On September 30, the entity declared and paid a P2.00 per share cash dividend to
shareholders of record on August 1.
7. The entity purchased land for P425,000 cash.
Required:
Answer:
Requirements
Entries
2. Retained earnings (21,000 x 15) 315,000

Share capital (21,000 x 5) 105,000
3. Land 200,000
Share capital (19,000 x 5) 95,000
4. Bonds payable 500,000

Cash 450,000
Gain on bond retirement 50,000
5. Cash 95,000
Loss on sale of equipment 20,000
Equipment 265,000
6. Retained earnings (250,000 x 2) 500,000

Cash 500,000
7. Land 425,000
Cash 425,000

Sales 350,000
9. Inventory 100,000
10. Depreciation (450,000 – 350,000) 100,000

11. Amortization of patent 15,000

Patent 15,000
13. Expenses 250,000

1. Net income 1,095,000

2. Stock dividend – no cash effect
3. Issuance of share capital for land –
No cash effect
4. Retirement of bonds payable ( 450,000)
Gain on bond retirement ( 50,000)
6. Cash dividend ( 500,000)
7. Purchase of land ( 425,000)
8. Increase in accounts receivable ( 350,000)
12. Increase in accounts payable 350,000
13. Increase in accrued expenses 250,000
Net cash provided (used) 1,330,000 ( 330,000) ( 950,000)
Kenwood Company
Statement of Cash Flow
December 31, 2019

Gain on bond retirement ( 50,000)
Amortization of patent 15,000
Increase in accrued expenses 250,000 1,330,000
Purchase of land ( 425,000) ( 330,000)
Retirement of bonds payable ( 450,000)
Cash dividend ( 500,000) ( 950,000)
Add: cash and cash equivalents – January 1 450,000
Problem 17-7
Sandra Company provided the following comparative statement of financial position.
2019 2018

Inventory 810,000 890,000
Investment in Word Company, at equity 400,000 390,000
Patent, net 100,000 350,000
Accounts payable and accrued liabilities 815,000 950,000
Note payable, long-term debt 600,000 900,000
Deferred tax liability 220,000 200,000
Share capital, P100 par value 850,000 650,000
Share premium 230,000 170,000
1. The net income for the current year is P305,000.

2. The entity paid a cash dividend of P85,000 on October 26.
3. On January 2, the entity sold equipment costing P45,000, with a carrying amount of
P28,000 for P18,000.
4. On April 15, the entity issued 2,000 shares of capital for cash at P130 per share.
5. On July 1, the entity purchased equipment for P120,000 cash.
6. The entity acquired a 20% interest in Word Company at the end of 2018. There was
no goodwill attributable to the investment. The investee reported net income of
P150,000 for 2019 and paid cash dividend of P100,000 on December 31, 2019.
Required:
Answer:
Requirements
Entries
1. Profit and loss 305,000


Cash 85,000
2. Cash 18,000
Equipment 45,000
3. Cash 260,000
4. Equipment 120,000
Cash 120,000
5. Investment in Word Company 30,000

Investment income 30,000
Cash 20,000
Investment in Word Company 20,000

Sales 35,000
7. Cost of sales 80,000

Inventory 80,000
Accumulated – 2019 345,000

Accumulated – 2018 (280,000 – 17,000) 263,000
Depreciation for 2019 82,000
9. Amortization 250,000
Patent 250,000
10. Accounts payable 135,000

Cash 135,000
11. Note payable – long term 300,000

Cash 300,000
12. Income tax 20,000

Deferred tax liability 20,000
1. Net income 305,000

Cash dividend ( 85,000)
3. Issue of share capital 260,000
4. Purchase of equipment (120,000)
5. Investment income ( 30,000)
Cash dividend received from equity
Investee 20,000
6. Increase in net accounts receivable ( 35,000)
7. Decrease in inventory 80,000
10. Decrease in accounts payable (135,000)
11. Payment of long term note (300,000)
12. Increase in deferred tax liability 20,000
Net cash provided (used) 567,000 (102,000) (125,000)
Sandra Company
December 31, 2019

Net income 305,000
Investment income ( 30,000)
Cash dividend received from equity investee 20,000
Decrease in inventory 80,000
Depreciation 82,000
Decrease in accounts payable (135,000)
Increase in deferred tax liability 20,000 567,000
Purchase of equipment (120,000) (102,000)
Cash dividend ( 85,000)
Issue of share capital 260,000
Payment of long term note (300,000) (125,000)
Problem 17-8
On December 31, 2019, Kale Company had the following balances in the bank
accounts with First Bank:
Checking account #101 1,750,000

Checking account #201 ( 100,000)
Time deposit 250,000
Commercial papers 1,000,000
90-day treasury bill, due February 28, 2020 500,000
180-day treasury bill, due March 15, 2020 800,000
On December 31, 2019, what amount should be reported as cash and cash equivalent
a. 3,400,000
b. 2,000,000
c. 2,400,000
d. 3,200,000
Answer:
Checking account #101 1,750,000
Checking account #201 ( 100,000)
Time deposit 250,000
90-day treasury bill, due February 28, 2020 500,000
Total cash and cash equivalents 3,400,000
Problem 17-9
Oakwood Company provided the following data for the current year:
Cash balance, beginning of year 1,300,000

Cash flow from financing activities 1,000,000
Total shareholders’ equity, end of year 2,300,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Total shareholders’ equity, beginning of year 2,000,000
What is the cash balance at the end of current year?
a. 1,200,000
b. 1,600,000
c. 1,400,000
d. 1,700,000
Answer:
Cash balance, beginning of year 1,300,000

Cash flow from operating activities 400,000
Cash balance – ending 1,200,000
Problem 17-10
Seawall Company provided the following data for the preparation of the statement of
Dividends declared and paid 800,000

Cash flow from financing activities ( 800,000)
Cash 2,100,000 1,200,000

Other assets 21,000,000 22,700,000
Liabilities 10,500,000 11,700,000
Share capital 2,000,000 2,000,000
What amount should be reported as cash flow from operating activities?
a. 4,200,000
b. 2,400,000
c. 4,500,000
d. 5,400,000
Answer:
Cash – January 1 1,200,000

Cash flow from operating activities (squeeze) 4,200,000
Cash flow from financing activities ( 800,000)
Problem 17-11
Santana Company provided the following information for the current year:
Cash 1,500,000 1,000,000
Cash flow from operating activities ?
Dividends declared and paid 2,000,000
What amount should be reported as cash flow from operating activities?
a. 3,500,000
b. 2,500,000
c. 4,500,000
d. 3,600,000
Answer:
Cash – January 1 1,000,000

Cash flow from operating activities (squeeze) 3,500,000
Problem 17-12
Moon Company reported net income of P5,000,000 for the current year. Depreciation
expense was P1,900,000.
The following working capital accounts changed:
Accounts receivable 1,100,000 increase

Nontrading equity investment 1,600,000 increase
Inventory 730,000 increase
Nontrade note payable 1,500,000 increase
Accounts payable 1,220,000 increase
Under the indirect method, what net amount of adjustments is required to reconcile net
income to net cash provided by operating activities?
a. 4,950,000
b. 1,050,000
c. 1,290,000
d. 310,000
Answer:
Depreciation expense 1,900,000
Increase in accounts receivable (1,100,000)
Increase in accounts payable 1,220,000
Adjustment to reconcile net income to net cash provided
By operating activities 1,290,000
Problem 17-13
Kresley Company reported net income of P750,000 for the current year:
The entity provided the following account balances for the preparation of statement of
January 1 December 31

Allowance for uncollectible accounts 4,000 5,000
Prepaid rent expense 62,000 41,000
What is the net cash provided by operating activities for the current year?
a. 727,000
b. 743,000
c. 755,000
d. 757,000
Answer:
Net income 750,000

Increase in net accounts receivable (140,000 – 111,000) ( 29,000)
Decrease in prepaid rent 21,000
Cash provided by operating activities 757,000
Problem 17-14
Kentucky Company reported net income of P1,500,000 for the current year:
The entity provided the following changes in several accounts during the current year.
Investment in Videogold Company share carried

On the equity basis 55,000 increase
Accumulated depreciation, caused by major
Repair to project equipment 21,000 decrease
Premium on bonds payable 14,000 decrease
Deferred tax liability 18,000 increase
In the statement of cash flows, what is the net cash provided by operating activities?
a. 1,504,000
b. 1,483,000
c. 1,449,000
d. 1,428,000
Answer:

Increase in investment carried on the equity ( 55,000)
Amortization of premium on bonds payable ( 14,000)
Increase in deferred tax liability 18,000
Cash provided by operating activities 1,449,000
Problem 17-15
Albay Company provided the following information:
Accounts receivable, January 1, net of allowance

Of P100,000 1,200,000
Accounts receivable, December 31, net of allowance
Of P300,000 1,600,000
Sales for the current year – all on credit 8,000,000
Uncollectible accounts written off during the year 70,000
Recovery of accounts written off 20,000
Bad debt expense for the year 250,000
Cash expenses for the year 5,250,000
Net income for the year 2,500,000
What is the net cash flow from operating activities?
a. 2,100,000
b. 2,350,000
c. 2,080,000
d. 2,150,000
Answer:

Increase in accounts payable ( 400,000)
Net cash provided – operating 2,100,000
Problem 17-16
Balcktown Company reported the following account balances:

Inventory 300,000 250,000
 All purchases of inventory were on account.
 Depreciation expense of P900,000 was recognized.
 Equipment was sold during the year and a gain of P300,000 was recognized
The entity provided the following cash flow information:
Cash collected from customers 9,500,000

Cash paid for inventory (4,100,000)
Cash paid for other expenses (1,400,000)
Cash flow from operations 4,000,000
a. 3,300,000
b. 3,400,000
c. 3,000,000
d. 3,900,000
Answer:
Net income (squeeze) 3,300,000

Decrease in accounts receivable 100,000
Problem 17-17
Rumulus Company reported the following information in the financial statements for the
current year:
Capital expenditures 1,000,000

Finance lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payments 220,000
What total amount should be reported as supplemental disclosures in the statement of

cash flows prepared using the indirect method?
a. 1,125,000
b. 1,870,000
c. 545,000
d. 745,000
Answer:
Income taxes paid 325,000

Net interest payment 220,000
Total amount to be disclosed 545,000
Problem 17-18
Stone Company provided the following information at year-end:
2019 2018

Inventory 1,960,000 1,840,000
The income statement for the current year showed:

Gain on sale of land 200,000
What amount should be reported as net cash provided by operating activities?
a. 2,200,000
b. 2,400,000
c. 2,440,000
d. 2,600,000
Answer:

Increase in accrued expenses 160,000
Deprecation 240,000
Gain on sale of land ( 200,000)
Cash provided by operating activities 2,200,000
Problem 17-19
Brown Company reported the following information for the current year:
Sales 2,800,000
Distribution costs 400,000
Administrative expenses 350,000
Income tax expense 280,000
All sales were made for cash and all expenses other than depreciation and bond
premium amortization of P20,000 were paid in cash. All current assets and current
liabilities remained unchanged.
What is the net cash provided by operating activities for the current year?
a. 440,000
b. 690,000
c. 670,000
d. 710,000
Answer:
Sales 2,800,000
Cost of goods sold (1,000,000)
Distribution costs ( 400,000)
Administrative expenses ( 350,000)
Interest expense ( 80,000)
Income tax expense ( 280,000)
Amortization of premium bonds payable ( 20,000)
Problem 17-20
Matthew Company provided the following information for the current year:
Purchase of inventory 1,950,000

Purchase of land, with the vendor financing P1,000,000
For 2 years 3,500,000
Purchase of plant for cash 2,500,000
Sale of plant:
Carrying amount 500,000
Cash proceeds 400,000
Buyback of ordinary shares 700,000
What amount of investing net cash outflows should be reported in the statement of cash
flows for the current year?
a. 5,600,000
b. 4,600,000
c. 6,550,000
d. 5,300,000
Answer:
Purchase of land (3,500,000)

Vendor financing 1,000,000
Cash payment (2,500,000)
Purchase of plant for cash (2,500,000)
Cash proceeds 400,000
Net cash outflows (4,600,000)
Problem 17-21
Nellie Company provided the following information at the end of each year:
2019 2018
Borrowings 2,500,000 800,000

Share capital 3,500,000 2,000,000
Borrowings of P300,000 were repaid during 2019 and new borrowings include P200,000
vendor financing arising on the acquisition of a property.
The movement in retained earnings comprised profit for 2019 of P900,000, net of
dividends of P700,000. The movement in share capital arose from issuance of share
capital for cash during the year.
What amount should be reported as financing net cash inflows for the current year?
a. 2,400,000
b. 2,200,000
c. 2,500,000
d. 2,300,000
Answer:
Net increase in borrowings 1,700,000

Vendor financing of property ( 200,000)
Net cash inflow from borrowings 1,500,000
Issuance of share capital 1,500,000
Dividend paid ( 700,000)
Net cash flow – financing 2,300,000
Problem 17-22
Riverside Company provided the following data for the current year:
 Purchased a building for P1,200,000.
Paid P400,000 and signed a mortgage with the seller for the remaining P800,000.
 Executed a debt-equity swap and replaced a P600,000 load by giving the lender
ordinary shares worth P600,000 on the date the swap was executed.
 Purchased land for P1,000,000. Paid P350,000 and issued ordinary share worth
P650,000.
 Borrowed P550,000 under a long-term loan agreement.
Used the cash from the loan proceeds to purchase additional inventory P150,000, to
pay cash dividend P300,000 and to increase the cash balance P100,000.
1. What amount should be reported as net cash used in investing activities?
a. 1,200,000
b. 2,200,000
c. 400,000
d. 750,000
Answer:
Cash paid for purchase of building 400,000

Cash paid for purchase of land 350,000
Net cash used – investing 750,000
2. What amount should be reported as net cash provided by financing activities?
a. 350,000
b. 850,000
c. 250,000
d. 550,000
Answer:
Proceeds to purchase inventory 150,000

Increase cash balance (100,000)
Dividend paid 300,000
Net cash provided by financing activities 350,000
Problem 17-23
Karr Company reported net income of P3,000,000 for the current year. The following
changes occurred in several accounts:
Equipment 250,000 increase

Accumulated depreciation 400,000 increase
Note payable 300,000 increase
 During the year, the entity sold equipment costing P250,000, with accumulated
depreciation of P120,000 at a gain of P50,000.
 In December, the entity purchased equipment costing P500,000 with P200,000 cash
and a 12% note payable of P300,000.
1. What is the depreciation expense for the year?
a. 520,000
b. 400,000
c. 280,000
d. 120,000
Answer:
Increase in accumulated depreciation 400,000

Accumulated depreciation of equipment sold 120,000
a. 350,000
b. 120,000
c. 220,000
d. 20,000
Answer:
Sale of equipment (250,000 – 120,000=130,000 + 50,000) 180,000

Payment of equipment (200,000)
Net cash used in investing activities ( 20,000)
3. What amount should be reported as net cash provided by operating activities?
a. 3,400,000
b. 3,470,000
c. 3,520,000
d. 3,570,000
Answer:

Problem 17-24
Reve Company provided the following data for the current year:

Proceeds from sale of equipment 100,000
Purchase of Ace bonds, face amount, P2,000,000 1,800,000
Amortization of bond discount 20,000
Dividend declared 450,000
Dividend paid 380,000
Proceeds from sale of treasury shares with
Carrying amount of P650,000 750,000
1. What is net cash provided by financing activities?
a. 200,000
b. 270,000
c. 300,000
d. 370,000
Answer:
Proceeds from sale of equipment 100,000

Proceeds from sale of treasury share – Carrying amount 650,000
Dividend paid (380,000)
Net cash provided by financing activities 370,000
2. What is net cash used in investing activities?
a. 1,700,000
b. 1,760,000
c. 1,880,000
d. 1,940,000
Answer:

Purchase of equipment – Face amount (2,000,000)
Net cash used – investing 1,940,000
Problem 17-25
Zoe Company reported net income of P3,400,000 for the current year. The net income
included depreciation of P840,000 and a gain on sale equipment of P170,000.
The equipment had an original cost of P4,000,000 and accumulated depreciation of

P2,400,000. All of the following accounts increased during the current year.
Patent 450,000
Prepaid rent 680,000
Financial asset at fair value through other
Comprehensive income (FVOCI) 100,000
What amount should be reported as net cash flow from investing activities?
a. 1,720,000 provided
b. 1,220,000 provided
c. 540,000 provided
d. 380,000 used
Answer:
Proceeds from sale of equipment 1,770,000

Increase in patent ( 450,000)
Increase in financial asset at FVOCI ( 100,000)
Net cash provided by investing activities 1,220,000
Original cost 4,000,000

Accumulated depreciation (2,400,000)
Carrying amount 1,600,000
Problem 17-26
Mountain Company provided the following information:

2019 2018
Cash and cash equivalents 5,600,000 7,400,000

Inventory 8,000,000 6,500,000
Accumulated depreciation (20,000,000) (16,000,000)
Accrued expenses 1,500,000 500,000
Note payable – bank (current) 2,000,000 5,000,000
Note payable – bank (noncurrent) 10,000,000 -
Ordinary share capital 30,000,000 30,000,000
Retained earnings 2,500,000 (1,000,000)
Cash needed to purchase new equipment was raised by borrowing from the bank with a
long-term note.
Equipment costing P2,000,000 and carrying amount of P1,500,000 was sold for
P1,800,000.
The entity paid cash dividend of P3,000,000 in 2019.
1. What is the net cash provided by operating activities?
a. 7,400,000
b. 6,900,000
c. 8,000,000
d. 7,700,000
Answer:

Increase in inventory ( 1,500,000)
Depreciation 4,500,000
Decrease in accounts payable ( 3,500,000)
Increase in accrued expenses 1,000,000
Net cash provided by operating activities 7,400,000
Retained earnings -2019 2,500,000

Retained earnings – 2018 (deficit) 1,000,000
Net increase in retained earnings 3,500,000
Add: Dividend paid 3,000,000
Accumulated depreciation – 2018 16,000,000

Depreciation for 2019 (squeeze) 4,500,000
Total 20,500,000
Accumulated depreciation on equipment sold
(2,000,000 – 1,500,000) ( 500,000)
Accumulated depreciation – 2019 20,000,000
2. What is the net cash used in investing activities?
a. 15,000,000
b. 13,200,000
c. 14,800,000
d. 13,000,000
Answer:
Payment for new equipment (15,000,000)
Net cash used in investing activities (13,200,000)
Property, plant and equipment – 2018 42,000,000

Payment for new equipment (squeeze) 15,000,000
Total 57,000,000
Cost of equipment sold ( 2,000,000)
Property, plant and equipment – 2019 4,000,000
3. What is the net cash provided by financing activities?
a. 7,000,000
b. 6,000,000
c. 4,000,000
d. 3,000,000
Answer:
Proceeds from borrowing on a long-term note payable 10,000,000

Dividend paid ( 3,000,000)
Payment of current bank note payable (5,000,000 – 2,000,000) ( 3,000,000)
Net cash provided by financing activities 4,000,000
Problem 17-27
Rosalynne Company reported the following statement of financial position at year-end:

2019 2018
Cash 2,750,000 2,000,000

Investments, at cost 1,000,000 1,750,000
Plant 9,000,000 6,500,000
Accumulated depreciation (3,000,000) (2,250,000)
Share capital 7,500,000 5,000,000
An investment was sold for P1,250,000 during the year. There was no disposal of plant
during the year.
The net income for the year was P3,000,000, after income tax expense of P1,200,000.
A dividend of P2,350,000 was paid on December 31, 2019.
a. 1,850,000
b. 2,350,000
c. 2,850,000
d. 1,100,000
Answer:
Net profit 3,000,000

Gain on sale of investment (1,250,000 – 75,000) ( 500,000)
Increase in accounts receivable (2,400,000)
Depreciation (3,000,000 – 2,250,000) 750,000
Increase in accounts payable 1,000,000
a. 2,500,000
b. 1,250,000
c. 1,750,000
d. 500,000
Answer:
Sale of equipment 1,250,000
Purchase of plant (9,000,000 – 6,500,000) (2,500,000)
Net cash used – investing (1,250,000)
3. What is the net cash provided by financing activities?
a. 2,500,000
b. 2,350,000
c. 650,000
d. 150,000
Answer:
Issue of share capital (7,500,000 – 5,000,000) 2,500,000

Dividend paid (2,350,000)
Net cash provided – financing 150,000
Problem 17-28
Weaver Company provided the following data:
2018 2019
Trade accounts receivable, net 840,000 780,000

Inventory 1,500,000 1,400,000
 Total sales were P12,000,000 for 2019 and P11,000,000 for 2018. Cash sales were
20% of total sales each year. Cost of goods sold was P8,400,000 for 2019.
 Variable general and administrative expenses for 2019 were P1,200,000. They have
varied in proportion to sales, 50% have been paid in the year incurred and 50% the
following year. Unpaid expenses are not included in accounts payable.
 Fixed general and administrative expenses, including P350,000 depreciation and

P50,000 bad debt expense, totaled P1,000,000 each year.
Eighty percent of fixed expenses involving cash were paid in the year incurred and
20% the following year.
Each year there was a P50,000 bad debt estimate and a P50,000 writeoff. Unpaid
expenses are not included in accounts payable.
1. What is the cash collected from customers during 2019?
a. 12,010,000
b. 12,060,000
c. 11,960,000
d. 11,890,000
Answer:
Accounts receivable – 2018 840,000

Sales – 2019 12,000,000
Total 12,840,000
Less: Accounts receivable – 2019 780,000
Writeoff 50,000 830,000
Cash collections in 2019 12,010,000
2. What is the cash disbursed for purchases during 2019?
a. 8,500,000
b. 8,270,000
c. 8,300,000
d. 8,200,000
Answer:
Inventory – 2018 1,500,000

Purchase (squeeze) 8,300,000
Less: inventory – 2019 1,400,000
Accounts payable – 2018 950,000

Purchases 8,300,000
Total 9,250,000
Less: Accounts payable – 2019 980,000
Cash disbursed for purchase 8,270,000
3. What is the cash disbursed for expenses during 2019?
a. 1,800,000
b. 1,200,000
c. 1,750,000
d. 1,450,000
Answer:
Fixed expenses 1,000,000

Depreciation ( 350,000)
Bad debt expense ( 50,000)
Fixed expenses paid in 2019 600,000
Variable expenses paid in 2019
2019 (1,200,000 x 50%) 600,000
2018 (1,100,000 x 50%) 550,000
Total cash disbursement for expenses 1,750,000
Variable ratio (1,200,000 / 12,000,000) 10%

2018 variable expenses (10% x 11,000,000) 1,100,000
Problem 17-29
Haze Company provided the following information for the current year:
January 1 December 31
Cash 620,000 ?
Merchandise inventory 860,000 780,000
The sales and cost of goods sold were P7,980,000 and P5,830,000 respectively. All
sales and purchases were on credit.
Various expenses of P1,070,000 were paid in cash. There were no other pertinent
transactions.
1. What is the amount of collections from customers?

a. 7,980,000
b. 8,600,000
c. 7,750,000
d. 8,210,000
Answer:
Accounts receivable – January 1 670,000

Sales 7,980,000
Total 8,650,000
Accounts receivable – December 31 ( 900,000)
2. What is the payment of accounts payable?
a. 5,750,000
b. 5,880,000
c. 5,800,000
d. 5,700,000
Answer:
Merchandise inventory – January 1 860,000

Purchases (squeeze) 5,750,000
Available for sale 6,610,000
Merchandise inventory – December 31 ( 780,000)

Purchases 5,750,000
Total 6,280,000
Accounts payable – December 31 ( 480,000)
Cash paid for accounts payable 5,800,000
3. What is the cash balance on December 31?
a. 1,090,000
b. 1,500,000
c. 2,570,000
d. 3,050,000
Answer:
Cash – January 1 620,000

Less: Payments of accounts payable 5,800,000
Expense 1,070,000
Cash balance – December 31 1,500,000
Problem 17-30
Mega Company gathered the following information about changes which took place
during the current year:
Cash ( 150,000)
Accounts receivable, net 300,000
Inventory 1,500,000
Property, plant and equipment 500,000
Accumulated depreciation ( 180,000)
Intangible asset, net of amortization 275,000
Accrued expenses ( 50,000)
Note payable – short-term debt ( 700,000)
Bonds payable ( 250,000)
Ordinary share capital, P10 par ( 125,000)
Share premium ( 200,000)
Retained earnings ( 600,000)
Equipment with had originally cost P200,000 and had a carrying amount of zero was
thrown away.
Equipment with a cost of P150,000 and accumulated depreciation of P100,000 was sold
for P50,000. Some new equipment was purchased during the year.
An intangible asset was acquired during the year for 25,000 ordinary shares. Each
share was selling for P13 at that time.
The entity retired P2,500,000 of 10% bonds at par and issued P2,750,000 of 8% bonds
at par. The income statement reported revenue of P7,000,000 and expenses of
P5,000,000.
a. 1,000,000
b. 1,800,000
c. 1,050,000
d. 1,100,000
Answer:
Net income (7,000,000 – 5,000,000) 2,000,000

Increase in inventory (1,500,000)
Amortization (325,000 – 275,000) 50,000
Increase in accrued expenses 50,000
Net increase in accumulated depreciation 180,000

Add: Accumulated depreciation of equipment thrown away 200,000
Accumulated depreciation of equipment sold 100,000
Total depreciation 480,000
a. 850,000
b. 800,000
c. 900,000
d. 950,000
Answer:

Purchase of equipment ( 850,000)
Net cash used – investing ( 800,000)
Net increase in PPE 500,000

Add: Cost of equipment thrown away 200,000
Cost of equipment sold 150,000
Purchase of equipment 850,000
Patent acquired (25,000 shares x 13) 325,000

Less: Increase in intangible asset 275,000
Amortization 50,000
3. What is the net cash used in financing activities?

a. 250,000
b. 450,000
c. 950,000
d. 125,000
Answer:
Retirement of bonds payable (2,500,000)

Issuance of bonds payable 2,750,000
Dividend paid (1,400,000)
Proceeds from note payable – short term debt 700,000
Net cash used – financing 450,000

Less: Retained earnings 600,000
Dividend paid 1,400,000
Problem 17-31
Beal Company reported the following changes in the statement of financial position
accounts during the current year:
Increase (Decrease)
Assets
Cash and cash equivalents 120,000

Short-term investments 300,000
Accounts receivable, net -
Inventory 80,000
Long-term investments (100,000)
Property, plant and equipments 700,000
Accumulated depreciation -
1,100,000
Liabilities and Shareholders’ Equity
Accounts payable and accrued liabilities ( 5,000)

Dividend payable 160,000
Short-term bank debt 325,000
Long-term debt 110,000
Ordinary share capital, P10 par 100,000
1,100,000
The following additional information relates to the current year:
 Net income for the current year was P790,000.

 Cash dividend of P500,000 was declared.
 Equipment costing P600,000 and having a carrying amount of P350,000 was sold
for P350,000.
 Equipment costing P110,000 was acquired through issuance of long-term debt.
 A long-term investment was sold for P135,000. There were no other transactions
affecting long-term investments.
 10,000 ordinary shares were issued for P22 a share.
a. 1,600,000
b. 1,040,000
c. 920,000
d. 705,000
Answer:
Net income 790,000

Gain on sale of long-term investment (135,000 – 100,000) ( 35,000)
Depreciation expense (600,000 – 350,000) 250,000
a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000
Answer:
Purchased of short-term investments ( 300,000)

Sale of long-term investments 135,000
Purchased of PPE (1,190,000)
PPE net increase 700,000

Cost of equipment sold 600,000
Equipment acquired through issuance of long term debt ( 110,000)
Cash paid for PPE 1,190,000
3. What amount should be reported as net cash provided by financing activities?
a. 20,000
b. 45,000
c. 150,000
d. 205,000
Answer:
Cash dividend paid (500,000 – 160,000) ( 340,000)

Proceeds from short-term debt 325,000
Issuance of ordinary share (10,000 x 22) 220,000
Net cash provided in financing activities 205,000
Problem 17-32
New World Company recorded the following transactions during the current year.
 Net income was P2,900,000, which included P300,000 loss resulting from the
condemnation of land by the city government.
The entity received P3,300,000 for the land carried at P3,600,000.
 Patent account increased by P560,000 during the year, representing acquisition of

P680,000 and amortization of P120,000.
 Property, plant and equipment had a net increase of P2,200,000.

 Accumulated depreciation:
Ending balance 4,200,000

Beginning balance 3,270,000
 Cash dividends of P250,000 were declared and paid.
 Treasury shares with par value of P400,000 were acquired for P620,000 cash.
 Convertible bonds issued at face amount of P2,000,000 were converted into share
capital during the year.
The par value of the share capital issued was P1,500,000.
 All current assets and current liabilities, other than cash remained unchanged during
the year.
 Working capital increased by P200,000 during the year.
a. 2,900,000
b. 4,250,000
c. 4,130,000
d. 3,950,000
Answer:

Amortization patent 120,000
Net cash provided by operating activities 3,950,000
a. 2,500,000
b. 2,620,000
c. 3,180,000
d. 2,200,000
Answer:
Condemnation of land – loss ( 300,000)

Gain on sale of land (3,300,000 – 3,600,000) 300,000
Property, plant and equipment (2,200,000)
3. What amount should be reported as net cash used in financing activities?
a. 620,000
b. 250,000
c. 870,000
d. 0
Answer:
Proceeds from issuance of share capital (1,500,000 -2,000,000) 500,000

Cash dividends paid ( 250,000)
Treasury share 620,000
Net cash used in financing activities 870,000
Problem 17-33
1. All can be classified as cash and cash equivalents, except
a. Redeemable preference share due in 60 days

b. Treasury bill due for repayment in 90 days
c. Equity investments
d. Bank overdraft
2. When an entity purchased a three-month Treasury bill, how would the purchase be
treated in preparing the statement of cash flow?
a. Not reported
b. An outflow for financing activities
c. An outflow for lending activities
d. An outflow for investing activities
3. In a statement of cash flows, if used equipment is sold at a gain, the amount shown
as cash inflow from investing activities equals the carrying amount of the equipment
a. Plus the gain

b. Plus the gain and less the amount of tax
c. Plus both the gain and the amount of tax
d. With no addition or subtraction
4. In a statement of cash flows, if used equipment is sold at a loss, the amount shown
as a cash inflow from investing activities equals the carrying amount of the
equipment
a. Less the loss and plus the amount of tax

b. Less both the loss and the amount of tax
c. Less the loss
d. With no addition or subtraction
5. In a statement of cash flows using indirect method, a decrease in prepaid expense is
a. Reported as an outflow and inflow of cash

b. Reported as an outflow of cash
c. Deducted from net income
d. Added to net income
6. In a statement of cash flows, depreciation is treated as an adjustment to net income

because depreciation
a. Is a direct source of cash

b. Reduces income but does not involve cash outflow
c. Reduces net income and involves an inflow of cash
d. Is an inflow of cash for replacement of asset
7. Using indirect method for operating activities, an increase in inventory is presented

as
a. Outflow of cash
b. Inflow and outflow of cash
c. Addition to net income
d. Deduction from net income
8. Which of the following should not be disclosed in the statement of cash flows using
the indirect method?
a. Interest paid
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preference shares
9. Dividends received from an equity investee should be presented in the statement of

cash flows as
a. Deduction from cash flows from operating activities
b. Addition to cash flows from investing activities
c. Addition to cash flows from operating activities
d. Deduction from cash flows from investing activities
10. In a statement of cash flows, which of the following should be reported as cash flow
from financing activities?
a. Payment to retire mortgage note

b. Interest payment on mortgage note
c. Dividend payment
d. Payment to retire mortgage note and dividend payment
Problem 17-34
1. Which statement about the method of preparing the statement of cash flows is true?
a. The indirect method starts with income before tax.

b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement
of cash flows.
d. All of these statements are true.
2. Which of the following is not disclosed in the statement of cash flows when prepared
under the direct method?
a. The major classes of gross cash receipts and gross cash payments
b. The amount of income taxes paid
c. A reconciliation of net income to net cash flow from operations
d. A reconciliation of ending retained earnings to net cash flow from operations
3. Required disclosures of a statement of cash flows prepared using the direct method
include a reconciliation of net income to net cash provided by
a. Operating activities
b. Financing activities
c. Investing activities
d. Operating, financing and investing activities
4. Noncash investing and financing activities are
a. Reported only if the direct method is used.

b. Reported only if the indirect method is used.
c. Disclosed in a note or separate schedule accompanying the statement of cash
flows.
d. Not reported.
5. Supplemental disclosures required only when the using the indirect method include
a. Reconciling net income with operating activities.

b. Amounts paid for interest and taxes.
c. Amounts deducted for depreciation and amortization
d. Significant noncash investing and financing activities.

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Chapter 13

What total revenue should be disclosed by the reportable segments?

How many reportable segments does Correy have?

Revenue Profit Assets

A, B, C, D and E reportable because their revenue or operating profit or asset is at least

What are the reportable segments based on profit or loss?

Macbeth Company, an entity listed on a recognized stock exchange, reports operating

The segment information for the current year is as follows:

The entity’s result for all of the segments in total are:

Sales to unaffiliated customers 20,000,000

Sales to unaffiliated customers 20,000,000

Revenue criterion (10% x 26,000,000) 2,600,000

Grum Company is subject to the requirements of segments reporting. In the income

The combined total assets of all operating segments at year-end amounted to

1. What is the minimum amount of sales to a major customer?

10% x 45,000,000 4,500,000

2. What is the minimum amount of external revenue to be disclosed by reportable

75% x 45,000,000 33,750,000

Segment Sales Traceable expenses

Indirect segment expenses 1,800,000

Appropriate common expenses are allocated to segments based on the ratio of a

What is Segment Z’s operating profit?

What amount should be reported as operating profit for Segment One?

Segment 1 Total revenue

Sales – Segment A 3,000,000

Segment Contribution to total sales Costs specific to the segment

What is the operating profit of Segment 1?

Sales – Segment 1 (25% x 14,000,000) 3,500,000

Sales – Delta’s 8,000,000

Total revenue 9,000,000

Total profit or loss 1,500,000

Segment A Segment B Others

Sales 25,000,000 15,000,000 5,000,000

The total assets of P65,000,000 include general corporate assets of P5,000,000.

The total segment expenses of P33,000,000 include general corporate expenses of

1. Prepare the necessary disclosures for Diversity Company in relation to operating

Disclosure of profit or loss and assets

Segment A Segment B Others Total

Sales 25,000,000 15,000,000 5,000,000 45,000,000

Revenue of reportable segments 40,000,000

Profit and loss

Profit or loss of reportable segments 13,000,000

Total assets of reportable segments 53,000,000

Segment X Segment Y Others

Sales 40% 45% 15%

1. Prepare a schedule that reports the segment profit or loss.

Segment X Segment Y Others Total

Disclosure of segment profit or loss

Segment X Segment Y Others Total

Revenue of reportable segments 51,000,000

Profit and loss

Profit or loss of reportable segments 11,450,000

Current assets 130,000

Total assets 800,000

Current liabilities 90,000

Total liabilities and equity 800,000

Gross profit 600,000

Net income 170,000

External sales Intersegment sales

Furniture 800,000 200,000

Furniture Stationery Computer products others

Total asset 440,000 170,000 100,000 5,000

Total liabilities 75,000 50,000 15,000 3,000