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Ix - Cash To Accrual Basis, Single Entry and Correction of Errors Problem No. 1
Ix - Cash To Accrual Basis, Single Entry and Correction of Errors Problem No. 1
PROBLEM NO. 1
Zamboanga Enterprises records all transactions on the cash basis. The
company’s accountant prepared the following income statement at the
end of the company’s first year of operations:
Zamboanga Enterprises
Income Statement
For the Year Ended December 31, 2006
Sales P2,016,000
Selling and administrative expenses:
Salaries expense P624,000
Rent expense 360,000
Utilities expense 232,000
Equipment 240,000
Commission expense 302,400
Insurance expense 48,000
Interest expense 24,000 1,830,400
Net income P
185,600
(d) The bill for December’s utility costs of P21,600 was paid January 10,
2007.
(f) Commissions of 15% of sales are paid on the same day cash is
1
received from customers.
QUESTION:
How much is the net income before income tax under the accrual basis of
accounting?
a. P526,000 c. P514,000
b. P286,000 d. P574,000
Suggested Solution:
2
d) Utilities expense P 21,600
Utilities payable P 21,600
Answer: A
PROBLEM NO. 2
You were able to gather the following in connection with your audit of the
Bukidnon Company for the year ended December 31, 2006:
1/1/2006 12/31/2006
Accounts receivable P6,400,000 P4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising 14,250 40,000
Prepaid insurance 25,000 -
Unexpired insurance - 41,000
3
Insurance premium paid 125,000
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Suggested Solution:
Question No. 1
Accounts receivable, 12/31/06 P 4,000,000
Add collections from customers 10,000,000
Total 14,000,000
Less accounts receivable, 1/1/06 6,400,000
Net sales for 2006 P 7,600,000
Question No. 2
Unpaid merchandise invoices, 12/31/06 P 2,621,000
Add payments to suppliers of 2006:
Total payments to suppliers in 2006 P13,618,000
Less payments in 2006 to suppliers
of prior years 4,632,000 8,986,000
Net purchases for 2006 P11,607,000
4
Question No. 3
Accrued wages, 12/31/06 P 125,000
Add wages paid in 2006 3,050,000
Total 3,175,000
Less accrued wages, 1/1/06 85,000
Wages expense for 2006 P3,090,000
Question No. 4
Accrued advertising, 12/31/06 P 40,000
Advertising supplies inventory, 1/1/06 35,000
Advertising paid in 2006 300,000
Total 375,000
Less: Accrued advertising, 1/1/06 P14,250
Advertising supplies inventory, 12/31/06 75,000
Advertising paid applicable to 2007 40,000 129,250
Advertising expense for 2006 P245,750
Question No. 5
Prepaid insurance, 1/1/06 P 25,000
Add insurance premium paid in 2006 125,000
Total 150,000
Less prepaid insurance, 12/31/06 41,000
Insurance expense in 2006 P109,000
Answers: 1) C; 2) A; 3) B; 4) A, 5) B
PROBLEM NO. 3
Your audit of Camiguin Company disclosed that your client kept very
limited records. Purchases of merchandise were paid for by check, but
most other items were out of cash receipts. The company’s collections
were deposited weekly. 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.
5
Building (useful life, 15 years) 8,100,000
Land 2,700,000
P11,700,000
During the year, Camiguin Company borrowed P900,000 from the bank
and repaid P225,000 and P45,000 interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
(Disregard income taxes)
6
a. P6,480,000 c. P5,580,000
b. P7,380,000 d. P4,500,000
Suggested Solution:
Question No. 1
Total deposits P6,300,000
Less adjusted cash in bank:
Balance per bank statement P450,000
Less outstanding checks 90,000 360,000
Total check disbursements 5,940,000
Less other check disbursements:
Payment of loan 225,000
Payment of interest on loan 45,000
Payment for equipment 801,000 1,071,000
Payments for merchandise purchases P4,869,000
Question No. 2
Total deposits P6,300,000
Less deposits other collections:
Cash investment P900,000
Proceeds from bank loan 900,000 1,800,000
Collections deposited in the bank 4,500,000
Add collections not deposited:
Cash on hand, 12/31/06 225,000
Add disbursements in cash 990,000
Total 1,215,000
Less customers' deposit 135,000 1,080,000
Total collections from sales P5,580,000
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Question No. 3
Sales (P3,360,000+P1,620,000) P7,200,000
Less cost of sales:
Purchases (P4,869,000 + P630,000) P5,499,00
0
Less inventory, 12/31/06 1,359,000 4,140,000
Gross profit 3,060,000
Less expenses:
Utilities 180,000
Salaries 180,000
Supplies 360,000
Doubtful accounts 90,000
Depreciation–building (P8,100,000/15) 540,000
Depreciation–equipment (P720,000/5) 144,000
Interest expense
[P45,000+(P801,000-P720,000)] 126,000 1,620,000
Net income P1,440,000
Question No. 4
Common stock (108,000 shares x P100) P10,800,000
APIC (P11,700,000 - P10,800,000) 900,000
Retained earnings (P1,440,000 - P270,000) 1,170,000
Total stockholders' equity P12,870,000
Question No. 5
Current assets:
Cash (P360,000 + P225,000 ) P 585,000
Accounts receivable – net
(P1,620,000 - P90,000) 1,530,000
Inventory 1,359,000 P 3,474,000
Noncurrent assets:
Land 2,700,000
Building - net (P8,100,000 - P540,000) 7,560,000
Equipment - net (P720,000 - P144,000) 576,000 10,836,000
Total assets P14,310,00
0
Answers: 1) A; 2) C; 3) B; 4) B, 5) D
8
PROBLEM NO. 4
Misamis Company’s December 31, year end financial statement
contained the following errors:
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2005 net income?
a. Understated by P130,000 c. Overstated by P70,000
b. Understated by P155,000 d. No effect
2. What is the total effect of the errors on the 2006 net income?
a. Overstated by P55,000 c. Overstated by P215,000
b. Overstated by P30,000 d. Understated by P45,000
3. What is the total effect of the errors on the company’s working capital
at December 31,2006?
a. Understated by P95,000 c. Overstated by P90,000
b. Understated by P70,000 d. No effect
4. What is the total effect of the errors on the balance of the company’s
retained earnings at December 31, 2006?
a. Understated by P75,000 c. Overstated by P110,000
b. Understated by P50,000 d. No effect
9
5. What is the total effect of the errors on the company’s working capital
at December 31,2007?
a. Overstated by P65,000 c. Understated by P160,000
b. Understated by P95,000 d. No effect
Suggested Solution:
Question Nos. 1 to 5
NI NI WC RE WC
2005 2006 12/31/06 12/31/06 12/31/07
12/31/05
inventory
understated (100,000) 100,000 - - -
12/31/06
inventory
overstated - 90,000 90,000 90,000 -
2005
depreciation
understated 20,000 - - 20,000 -
Insurance
paid in 2005
for 3 years (50,000) 25,000 (25,000) (25,000) -
Sale of a fully
depreciated
machinery in
2006
recorded in
2007 - (160,000 (160,000) (160,000) -
)
Over (under) (130,000) 55,000 ( 95,000) ( 75,000) -
Answers: 1) A; 2) A; 3) A; 4) A, 5) D
PROBLEM NO. 5
You were engaged by Lanao Company to audit its financial statements for
the first time. In examining the books, you found out that certain
adjustments had been overlooked at the end of 2005 and 2006. You also
discovered that other items had been improperly recorded. These
omissions and other failures for each year are summarized below:
12/31/06 12/31/05
Salaries payable P780,000 P873,600
10
12/31/06 12/31/05
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
Advances from customers (Collections from 561,000 470,400
customers had been recorded as sales
but should have been recognized as
advances from customers because goods
were not shipped until the following year)
Machinery 522,000 564,000
(Capital expenditures had been recorded
as repairs but should have been charged
to Machinery; the depreciation rate is
10% per year, but depreciation in the
year of expenditure is to be recognized at
5%)
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2005 net income?
a. Understated by P775,800 c. Understated by P1,236,600
b. Overstated by P165,000 d. Overstated by P80,400
2. What is the total effect of the errors on the 2006 net income?
a. Understated by P376,500 c. Understated by P320,100
b. Overstated by P324,300 d. Overstated by P380,700
3. What is the total effect of the errors on the company’s working capital
at December 31,2006?
a. Understated by P301,800 c. Understated by P265,800
b. Overstated by P119,400 d. Overstated by P820,200
4. What is the total effect of the errors on the balance of the company’s
retained earnings at December 31, 2006?
a. Understated by P155,100 c. Understated by P265,800
b. Overstated by P930,900 d. Understated by P855,900
Suggested Solution:
Question Nos. 1 to 4
NI NI WC RE
2005 2006 12/31/06 12/31/06
Salaries payable
11
NI NI WC RE
2005 2006 12/31/06 12/31/06
2005 873,600 (873,600)
2006 780,000 780,000 780,000
Interest receivable
2005 (259,200) 259,200
2006 (213,000) (213,000) (213,000)
Prepaid insurance
2005 (384,000) 384,000
2006 (307,800) (307,800) (307,800)
Advances from
customers
2005 470,400 (470,400)
2006 561,000 561,000 561,000
Machinery
2005 (564,000) (564,000)
28,200 56,400 84,600
2006 (522,000) (522,000)
. 26,100 . 26,100)
Over (under) 165,000 (320,100) 820,200 (155,100)
Answers: 1) B; 2) C; 3) D; 4) A
PROBLEM NO. 6
The Davao Company engaged you in 2006 to examine its books and
records and to make whatever adjustments are necessary.
12
than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500
2006
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 P434,00
0
g. The merchandise inventories at the end of 2005 and 2006 did not
include merchandise that was then in transit shipped FOB shipping
point. These shipments of P43,400 and P32,600 were recorded as
purchases in January 2006 and 2007, respectively.
QUESTIONS:
13
Based on the above audit findings, the adjusted balances of the following
are: (Disregard tax implications)
Suggested Solution:
Questions No. 1 to 7
RE NI NL NL
2003 2004 2005 2006
Unadjusted balances P580,000 P310,000 (P205,000) (P165,500)
(b.1) Prepaid expense
2003 8,500 (8,500)
2004 6,200 (6,200)
2005 7,400 (7,400)
2006 9,500
(b.2) Accrued expense
2003 (5,400) 5,400
2004 (7,300) 7,300
14
RE NI NL NL
2003 2004 2005 2006
2005 (8,700) 8,700
2006 (9,000)
(b.3) Unearned income
2003 (6,900) 6,900
2004 (7,800) 7,800
2005 (8,900) 8,900
2006 (9,600)
15
)
Net loss for 2005 ( 349,700) (4
)
Dividends declared ( 100,000)
Retained earnings, 12/31/05 481,000 (5
)
Net loss for 2006 ( 228,300) (6
)
Retained earnings, 12/31/06 P 252,700 (7
)
Answers: 1) C; 2) C; 3) C; 4) C, 5) A; 6) B; 7) C
PROBLEM NO. 7
Cotabato Corporation’s current assets and liabilities section of the
balance sheet as of December 31, 2006 appear as follows:
Current assets
Cash P1,200,000
Accounts receivable P2,670,000
Less allowance for doubtful accounts 210,000 2,460,000
Inventories 5,130,000
Prepaid expenses 270,000
Total current assets P9,060,000
Current liabilities
Accounts payable P1,830,000
Notes payable 2,010,000
Total current liabilities P3,840,000
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received on consignment; the remainder was purchased f.o.b.
destination, terms 2/10, n/30.
c. Sales for the first four days in January 2007 in the amount of
P900,000 were entered in the sales book as of December 31, 2006.
Of these, P645,000 were sales on account and the remainder were
cash sales.
d. Cash, not including cash sales, collected in January 2007 and entered
as of December 31, 2006, totaled P1,059,720. Of this amount,
P699,720 was received on account after cash discounts of 2% had
been deducted; the remainder represented the proceeds of a bank
loan.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
5. Net misstatement in the reported net income for the year ended
December 31, 2006 as a result of the errors
a. P1,269,120 c. P1,719,120
b. P1,700,880 d. P1,250,880
Suggested Solution:
Question No. 1
Unadjusted cash balance P1,200,000
January cash payments (P1,170,000 x .98) 1,146,600
January cash sales (P900,000 – P645,00) (255,000)
17
January cash collections and loan proceeds (1,059,720)
Adjusted cash balance P1,031,880
Question No. 2
Unadjusted accounts receivable P2,670,000
January sales on account (645,000)
January collections on AR (P699,720/.98) 714,000
Adjusted accounts receivable P2,739,000
Question No. 3
Unadjusted accounts payable P1,830,000
January payments on AP 1,170,000
Unrecorded purchases (P810,000 – P360,000) 450,000
Adjusted accounts payable P3,450,000
Question No. 4
Current assets:
Cash (see no. 1) P1,031,88
0
Accounts receivable (see no. 2) 2,739,000
Allowance for doubtful accounts (210,000)
Inventories (P5,130,000- P360,000) 4,770,000
Prepaid expenses 270,000 P8,600,880
Less current liabilities:
Accounts payable (see no. 3) 3,450,000
Notes payable [P2,010,000 –
(P1,059,720 - P699,720)] 1,650,000 5,100,000
Working capital P3,500,880
Question No. 5
Over (under)
January purchase discounts (P1,170,000 x .02) P 23,400
Goods held on consignment 360,000
Unrecorded purchases (P810,000 – P360,000) 450,000
January sales 900,000
January sales discounts [(P699,720/.98) x .02] ( 14,280)
Net misstatement P1,791,120
Answers: 1) A; 2) A; 3) D; 4) B, 5) C
18
PROBLEM NO. 8
The bookkeeper for Maguindanao Computers, Inc., reports the following
balance sheet amounts as of June 30, 2006.
19
(d) Noncurrent liabilities include the following:
9% mortgage on property, plant, and equipment,
payable in semiannual installment of P90,000
through to June 30, 2011 P900,000
(f) Common shares were originally issued for P3,910,000, but the losses
of the company for the past years were charged against additional
paid-in capital.
QUESTIONS:
Based on the above and the result of the audit, determine the adjusted
amounts of the following:
1. Current assets
a. P2,462,000 c. P2,477,000
b. P2,440,500 d. P2,435,500
2. Noncurrent assets
a. P5,490,000 c. P6,560,000
b. P5,511,500 d. P6,264,000
3. Current liabilities
a. P1,401,000 c. P1,602,500
b. P1,581,000 d. P1,491,000
4. Noncurrent liabilities
a. P720,000 c. P900,000
b. P810,000 d. P880,000
5. Owners’ equity
a. P7,710,000 c. P6,440,000
b. P8,750,000 d. P5,666,000
Suggested Solution:
20
Question No. 1
Cash P 422,500
Investment securities—trading 600,000
Note receivable 15,000
Accounts receivable 568,000
Inventory (P850,000 - P20,000) 830,000
Advertising supplies 20,000
Deposit with supplier 21,500
Current assets P2,477,000
Question No. 2
Property, plant, and equipment P6,560,000
Less accumulated depreciation 1,070,000
Noncurrent assets P5,490,000
Question No. 3
Notes payable P 160,000
Accounts payable (P999,000 + P15,000) 1,014,000
Mortgage payable-current portion (P90,000 x 180,000
2)
Payroll payable 71,500
Taxes payable 41,500
Rent payable 114,000
Current liabilities P1,581,000
21
b) it is held primarily for the purpose of being traded;
c) it is due to be settled within twelve months after the balance
sheet date;
d) the entity does not have an unconditional right to defer the
settlement of the liability for at least twelve months after the
balance sheet date.
Question No. 4
Mortgage payable-noncurrent portion
(P900,000 - P180,000) P720,000
Question No. 5
Preferred stock, P20 par value, 190,000 shares P3,800,000
Common stock, P1 par value, 1,600,000 shares 1,600,000
Additional paid-in capital (P3,910,000 - P1,600,000) 2,310,000
Deficit [(P2,310,000 - P1,040,000)+P774,000] (2,044,000)
Owners’ equity P5,666,000
Answers: 1) C; 2) A; 3) B; 4) A, 5) D
PROBLEM NO. 9
In connection with your audit of the financial statements Sulu
Corporation, you were provided with the following balance sheet as of
December 31, 2006:
Sulu Corporation
Balance Sheet
December 31, 2006
Assets Liabilities and Stockholders’ Equity
Current assets: Current liabilities:
Cash P 250,000 Accounts payable P 68,000
Trading securities 160,000 Other current liabs. 40,000
Accts rec., net 427,000 Total P 108,000
Inventory 620,000
Other current
assets 284,000 Long-term liabilities 655,000
Total P1,741,000 Total liabilities P 763,000
22
Property, plant,
and equip., P1,296,000 Common stock P1,000,000
net
Treasury stock 90,000 Retained earnings 1,636,000
Other noncurrent Total stockholders’
assets 272,000 equity P2,636,000
Total P1,658,000 Total liabilities and
Total assets P3,399,000 stockholders’ equity P3,399,000
(a) Cash includes P80,000 that has been restricted for the purchase of
manufacturing equipment (a noncurrent asset).
(e) Long-term liabilities also include a P140,000 bank loan. On May 15,
2007, the loan will become due on demand.
(h) Property, plant, and equipment includes land costing P160,000 that
is being held for investment purposes and that is scheduled to be
sold in 2007.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
amounts of the following as of December 31, 2006:
23
1. Total current assets
a. P1,526,000 c. P1,686,000
b. P1,821,000 d. P1,606,000
5. Total liabilities
a. P1,063,000 c. P1,263,000
b. P 763,000 d. P1,443,000
Suggested Solution:
Question No. 1
Cash (P250,000 - P80,000) P 170,000
Trading securities (P160,000 - P55,000) 105,000
Accounts receivable, net 427,000
Inventory 620,000
Land held for resale 160,000
Other current assets (P284,000 - P80,000) 204,000
Current assets P1,686,000
24
Question No. 2
Investment in associate P 55,000
Property, plant and equipment, net
(P1,296,000 - P160,000) 1,136,000
Restricted cash - for preferred stock 380,000
Restricted cash - for equipment 80,000
Advance to company president 80,000
Other noncurrent assets 272,000
Noncurrent assets P2,003,000
Question No. 3
Accounts payable P 68,000
Current portion of bonds payable 50,000
Loan due on demand 140,000
Dividends payable 300,000
Other current liabilities 40,000
Current liabilities P598,000
Question No. 4
Bonds payable (P200,000 - P50,000) P150,000
Other noncurrent liabilities
(P655,000-P200,000-P140,000) 315,000
Noncurrent liabilities P465,000
Question No. 5
Current liabilities (see no. 3) P 598,000
Noncurrent liabilities (see no. 4) 465,000
Total liabilities P1,063,000
Question No. 6
Preferred stock P 380,000
Common stock 1,000,000
Retained earnings (P1,636,000 - P300,000) 1,336,000
Treasury stock ( 90,000)
Total stockholders’ equity P2,626,000
Question No. 7
Total liabilities (see no. 5) P1,063,000
Total stockholders’ equity (see no. 6) 2,626,000
Total liabilities and stockholders' equity P3,689,000
25
Answers: 1) C; 2) B; 3) D; 4) D, 5) A; 6) C; 7) B
PROBLEM NO. 10
The following balance sheet is submitted to you for inspection and
review.
Surigao Corporation
Balance Sheet
December 31, 2006
Assets
Cash P 180,200
Accounts receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P2,988,600
(c) The books show that property, plant and equipment have a cost of
P2,227,200 with accumulated depreciation of P720,000. However,
these balances include fully depreciated equipment of P340,000
that has been scrapped and is no longer on hand.
26
(d) Miscellaneous liabilities of P14,400 represent salaries payable of
P38,000, less non current advances of P23,600 made to company
officials.
(e) Loan payable represents a loan from the bank that is payable in
regular quarterly installments of P25,000.
QUESTIONS:
Based on the above and the result of the audit, determine the adjusted
amounts of the following:
1. Current assets
a. P1,347,200 c. P1,217,200
b. P1,282,200 d. P1,462,200
2. Noncurrent assets
a. P1,530,800 c. P1,507,200
b. P1,190,800 d. P1,167,200
3. Total assets
a. P2,878,000 c. P2,473,000
b. P2,789,400 d. P2,813,000
4. Current liabilities
a. P512,000 c. P577,000
b. P504,000 d. P600,600
5. Noncurrent liabilities
a. P383,000 c. P204,800
b. P406,600 d. P433,000
27
6. Total liabilities
a. P983,600 c. P895,000
b. P716,800 d. P960,000
7. Owners’ equity
a. P1,853,000 c. P2,096,200
b. P1,918,000 d. P2,368,400
Suggested Solution:
Question No. 1
Cash P 180,200
Accounts receivable, net (P450,000 - P19,200) 430,800
Inventory (P816,000 - P180,000) 636,000
Prepaid insurance 35,200
Current assets P1,282,200
Question No. 2
Property, plant and equipment, net
[(P2,227,200-P340,000) -(P720,000- P1,507,200
P340,000)]
Advances to officers 23,600
Noncurrent assets P1,530,800
Question No. 3
Current assets (see no. 1) P1,282,200
Noncurrent assets (see no. 2) 1,530,800
Total assets P2,813,000
Question No. 4
Accounts payable (P301,000+P65,000) P366,000
Salaries payable 38,000
Income tax payable 73,000
Loan payable to bank, current portion (P25,000x4) 100,000
Current liabilities P577,000
Question No. 5
Loan payable (P304,800-P100,000) P204,800
Deferred tax liability 178,200
Noncurrent liabilities P383,000
28
Question No. 6
Current liabilities (see no. 4) P577,000
Noncurrent liabilities (see no. 5) 383,000
Total liabilities P960,000
Question No. 7
6% Preferred stock, P20 par, 25,000 shares P 500,000
Common stock, P1 par value, 36,000 shares 36,000
Paid-in capital in excess of par
(P1,134,400-P500,000-P36,000) 598,400
Retained earnings
(P1,832,400-P598,400-P19,200-P180,000-
P65,000-P73,000-P178,200) 718,600
Total owners’ equity P1,853,000
Answers: 1) B; 2) A; 3) D; 4) C, 5) A; 6) D; 7) A
29