CHAPTER 2

Q1
Typical statement of financial position classifications are as follows:
a. Long Term Investments f. Share Capital
b. Plant Assets g. Share Premium
c. Intangible Assets h. Retained Earnings
d. Non - Current Assets i. Non-Current Liabilities
e. Current Assets j Current Liabilities
Indicate by use of the above letters how each of the following items would be
classified on a statement of financial position prepared at December 31 st,
2019. If a contra account, or any amount that is negative or opposite the
normal balance, put parentheses around the letter selected. A letter may be
used more than once or not at all.
1. Accrued salaries and wages
2. Rental revenues for 3 months collected in advance
3. Land used as plant site
4. Equity securities classified as trading
5. Cash
6. Accrued interest payable due in 30 days
7. Share premium–preference shares
9. Petty cash fund
10. Ordinary shares
11. Allowance for doubtful accounts:
12. Accumulated depreciation:
13. Goodwill:
14. 90 day notes payable
15. Investment in bonds of another company; will be held to 2023 maturity
16. Current maturity of bonds payable
17. Trade accounts payable
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18. Preference shares ($10 par)
19. Prepaid rent for next 12 months
20. Copyright
21. Accumulated amortization, patents
22. Earnings not distributed to shareholders

Q2
Let’s look a business where capital at the end of 2004 was $20,000. During
2005, there have been no drawings, and no extra capital has been brought for
the owner. At the end of 2005, the capital was $30,000.
Required:
a. Determine net income (loss) for business for year 2005.
b. Determine net income (loss) for business for year 2005 if drawings had been
$7,000.
Q3
Lee started a business on 1st January 2002 with $35,000 in a bank account.
Unfortunately, he did not keep proper books of account.
He must submit a calculation of profit for the year ending 31 st Dec 2002 to
the inspector of Taxes. At 31 st December 2002, he had inventory valued at
cost of $6,200, a van which had cost $6,400 during the year and which had
depreciated during the year by $1,600, A/R of $15,200, expense prepaid $310,
a bank balance of $33,490, a cash balance $270, A/P $7,100 and expenses
owing $640.
His drawings were: cash $400 per week for 50 weeks, cheque payment $870
Required:
Draw up statements to show the profit or loss for the year.
Q4
Which of the following items meet the recognition criteria of FS’s elements?

+ Meet all the criteria – recognize: √

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 + Does not meet any criteria – does not recognize: 0
Part A: Which items/transactions satisfy asset recognition criteria?
Future
Reliable Result of
Controlla economi Recognition
measureme past
Items/ Transactions ble c of asset
nt events
benefits
(1) (2) (3) (4) (5) (6)
1. Company’s
reputation; ability of x 0
employees
2. Value of goods
that is committed to
x 0
be bought in the
future
3. Tools, goods
stocked on behalf of x 0
other parties
4. Financing lease
v v v v v
asset
5. Operating lease
x 0
asset
6. Cost of goods sold
x 0
in the period
7. Ordinary repair of
fixed assets
8. Extraordinary
repair of fixed assets
(Overhauls)
9. Obsolete goods
x 0
cannot be sold
10. Goods from trial
x 0
test cannot be sold
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11.Prepayment of
leased assets for
v v v v v
future accounting
period
12. Stolen
x 0
technology secret
...

Part B: Which items/transactions satisfy liability recognition criteria?

Reliable Past
Present Recognize
measureme transaction
Items/Transactions obligation d liability
nt s
(1) (2) (3) (5) (6)
1. Share dividend (stock
dividend) declared, not yet v v v 0
issued
2. Cash dividend declared, v
v v 0
not yet paid

3. Bonds/ debentures v v v 0
4. Receipt in advance from
v v v 0
customers
5. Interest received in
v v v v
advance
6. Lease payment received in
v v v v
advance from lessee
7. Provision for warranty v v v v

Part C: Which items/transactions satisfy revenue recognition according to

accrual basis?
Items/Transactions Reliable Increase Completed Income
measure equity obligation recognition

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 for income
ment (indirect)
transactions
(1) (2) (3) (4) (5)
1. Contributions from
owners or liabilities
reclassification
2. Receipt in advance
3. Interest/ lease payment,
etc received in advance
4. Revenue from delivering
goods/rendering services on
credit
5. Interest, dividend earned,
not yet received.
Part D: Which items/transactions satisfy income recognition criteria in
accordance with cash basis?
Reliable Equity Received cash Income
measurem increase from the recognitio
Items/ Transactions
ent (indirect) transaction n
(1) (2) (3) (4) (5)
1. Contributions from owners
by assets or liabilities
reclassification
2. Receipt in advance
3. Selling goods on credit
4. Interest, dividend on due
date but not received
5. Interest/ asset lease
payment received in advance

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 Part E: Which items/transactions satisfy expense recognition criteria in
accordance with accrual basis?
Matching
Reliable Equity decrease with Expense
Items/transactions measure (indirect) current recognition
period
(1) (2) (3) (4) (5)
1. Equity withdrawal from
owners:
Distribution to owners
Payments utilized from funds
(e.g Bonus and Welfare
Fund..)
2. Goods available for sale
3. Cost of goods sold in the
period
4. Obsolete goods cannot sell
5. Revenue in the period
6. Salary payable to
employees

Part F: Which items/transactions satisfy expense recognition criteria in

accordance with cash basis?
Reliable Cash paid out Expense
Equity decrease
measure from the recognitio
Items/transactions (indirect)
ment transactions n
(1) (2) (3) (4) (5)
1. Equity withdrawal of
owners
Profit distribution to owners
Payments utilized from funds
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(e.g Bonus and Welfare Fund,
etc)
2. Goods decrease due to
unknown reason
3. Purchase goods on credit,
sold in the period
4. Interest/ asset lease paid in
advance
5. Salary paid in cash during
the period
6. Salary payable for
employees during the period

Q5
Caren Smith Corporation, supplies a medical practice. During July 2020, the
first month of operation, the business experienced the following events:
Jul 6 Caren Smith received $55,000 cash from shareholders and
issued common stock.
9 Paid $46,000 cash for land.
12 Purchased medical supplies of $1,800 on account
15 Officially opened for business
15-31 During the rest of the month, Caren Smith treated patients and
earned service revenue $ 8,000, receiving cash.
29 Paid cash expense employees’ salaries, $1,600; office rent,
$900, utilities, $100
30 Returned supplies purchased on the 12th for the cost of those
supplies, $700
31 Paid $1,100 on account
Required:

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Analyze the effects of these events on the accounting equation of business of
Caren Smith Corporation.
Q6
Indicate the effects of the following business transactions on the accounting
equation of Video Store Corporation. Transaction (a) is answer as a guide.
a. Received cash of $8,000 and issued common stock.
Answer: increase asset (Cash)
Increase stockholders’ equity (Common stock)
b. Earned video rental revenue on account, $1,800
c. Purchased office furniture on account, $400.
d. Received cash on account, $100
e. Paid cash on account, $100
f. Rented videos and received cash of $100
g. Paid monthly office rent expense of $900.
h. Paid $200 cash to purchase supplies that will be used in the future
Q7
Hongha Corporation has got following information on August 31, 2013.
Unit: $
Cash 2,300 Land 14,000
A/R 1,800 A/P 8,000
RE 7,100 Common stock 3,000
During Sept 2013, the business completed the following transaction:
a. Issued common stock and received cash of $13,000.
b. Performed service for client and received cash of $900.
c. Paid off the beginning balance of accounts payable.
d. Purchased supplies on account, $600.
e. Collected cash from customer on account, $700.
f. Received cash of $1,600 and issued common stock.
g. Consulted and billed the client for service rendered, $3,500.
h. Recorded the following business expenses for the month:

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 1. Paid office rent, $1,200.
2. Paid advertising, $600
i. Paid cash dividends of $2,000
Required:
1. Analyze the effects of these events on the accounting equation of business of
Hongha Corporation.
2. Prepare the following financial statements for the month ended 30 Sept
2013:
a. Income statement
b. Statement of RE
c. Balance sheet
Q8
  Cash + + A/P + Common + -
A/R Equipment = Stock Revenu Expense
e
31,0         31,000    
1 00
  3,8         3,8  
2 00 00
    13,400   13,4      
3 00
1 -            
4 90 190
-       4      
5 410 10
-       -      
6 8,000 8,000
-             -
7 1,500 1,500
Required:
Describe each transaction.
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Q9
On 1/1/Y, Company X signed a contract to supply products ordered by
Company Y with the total contract value of $ 3,000 and received in advance
$1,000 by cash in bank. On 1/5/Y, Company X delivered finished goods to
Company Y with total production cost was $2,500. After finished goods were
delivered, the remaining amount of the contract will be paid in the following
period.
Required:
With the given transactions, please identify:
A/ How does X record for elements of financial statement if the accrual basis is
applied?
- At the time of receiving in advance.
- At the time of delivery to customer;
- At the time of receiving the remaining amount.
B/ How does Y record for elements of financial statement if the accrual basis is
applied?
- At the time of advance payment;
- At the time of receiving goods;
- At the time of paying the remaining amount
Q10
On January 1/Year, Company P gave a loan of VND 500 million in two-year
term and at 12%/year interest to Company Q. On January 4th, the borrower
prepaid the full interest of VND120 million in two years. On 1/04/Y + 1 the
borrower paid the principal to Company P, the interest received for the last 3
quarters of year (Y + 1) was repaid by the Company P and by deducting from
the principal.
Required: With the given transactions, please identify:

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A/ How does P’s accountant record for elements of financial statement if the
accrual basis is applied and the accounting period is quarterly?
- At the time of transfering to the borrower;
- At the time of receiving 02-year interest;
- By the end of each quarter in year Y;
- At the time of receiving the principal
B/ How does Q’s accountant record for elements of financial statement if the
accrual basis is applied and the accounting period is quarterly?
- At the time of receiving from the lender
- At the time of paying 02-year interest;
- By the end of each quarter in year Y;
- At the time of paying the principal.
Q11
In January/Y, A Company sold and handed over to B Company a batch of
products of total VND 900 million and received by cash on hand VND 500
million, the remaining amount will be received in May/Y. Free warranty
service was provided for 02 years since the products were delivered to
customer. Based on historical data, the cost of warranty coverage was about
2% of revenue. Accordingly, A Company extracted a product warranty amount
for Jan/Y over of the products sold in this month which was VND 18 million.
Required: With given transactions, please identify:
A / Company A’s Accountant:
A1- How does she/he record elements of financial statement if accrual basis is
applied with the accounting period of month?
- At the time of delivery and receipt the first payment;
- At the time of receipt of the second payment;
- At the time of deducting warranty costs.

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A2- How to record sales and expenses of January Y from the above events if the
cash basis is applied?
A3-It is assumed that the accounting period is quarterly. In Q1/Y, A Company
applied the money accounting method, quarter 2/Y changed to accrual
accounting and did not conduct retroaction. Whether sales of the above product
batch were omitted or duplicated? how much?
B/ Company B’s Accountant: How to record the financial statement elements
if accrual principle is applied with the accounting period of month?
- At the time of receiving goods and making the first payment;
- At the second payment;
- At the time the seller extracted warranty cost.
Q12
ABC Catering Company, completed the following selected transactions during
May, 2019.
May 1 Prepaid rent for three months since 1/May, $1,500
5 Paid electricity expense, $400
9 Received cash for meals served to customers, $2,600
14 Paid cash for kitchen equipment, $2,400
23 Served a banquet on account, $3,000
31 Determine rent expense for May
31 Accrued expense, $1,400
31 Recorded depreciation for May on kitchen equipment, $40
Required
a. Indicate which accounts were increased or decreased and by what amounts
from the transactions above, according the accrual basis accounting.
b. Show whether each transaction would be handled as a revenue or an expense
using both the accrual basic and cash basic by completing the following table:
Amount of Revenue (Expense) for May
Date Cash basic amount of Accrual basic amount of

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 Revenue (Expense) Revenue (Expense)
c. Calculate the amount of net income or net loss for ABC Catering Company
under cash basic and accrual basis.
Q13
Quoc Viet Company completed the following transaction during June, 2020:
June 1 Prepaid rent for June through September, $3,600
2 Purchased computer for cash, $900
3 Performed catering service on account, $2,300
5 Paid internet service provider invoice, $100
6 Catered wedding event for customer and received cash,
$1,500
8 Purchased $150 of supplies on account.
10 Collected $1,200 on account
14 Paid account payable from June 8
15 Paid salary expense, $1,200
30 Calculate rent expense (see June 1)
30 Depreciation expense for June, $25
30 There are $40 of supplies still on hand
Required
a. Indicate which accounts were increased or decreased and by what amounts
from the transactions above, according the accrual basic accounting.
b. Show whether each transaction would be handled as a revenue or an expense
using both the accrual basic and cash basic by completing the following table:
Amount of Revenue (Expense) for June
Date Cash basic amount of Accrual basic amount of
Revenue (Expense) Revenue (Expense)
c. Calculate the amount of net income or net loss for Quoc Viet Company
under cash basic and accrual basis.
Q14

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Tropical View Company applies accrual basic accounting. Consider the facts
presented in the following table for the company:
Situation
A B C D
Beg prepaid rent $1,200 $900 $200 $700
(Bắ t đầ u trả trướ c tiền
thuê)
Payments for prepaid rent 1,400 B (500) 1,800 D (800)
during the year
(thanh toá n tiền thuê trả
trướ c trong nă m)
Total amount to account for 2,600 1,400 ? ? (1500)
(tổ ng số tiền cầ n hạ ch toá n) (2000)

Subtract: ending prepaid 600 500 C (100) 400

rent
(Trừ đi: tiền thuê trả trướ c
cuố i kì)
Rent expense (Chi phí thuê) $ a (2000) $900 $1,900 $1,100
Required
Complete the table by filling in the missing values.
Q15
The following are changes in all account balances of XYZ Furniture Co. During
the current year, except for retained earnings.
Increase (Decrease)
Cash $69,000
Account receivables 45,000
Inventory 127,000
Investments (47,000)
Account Payables (51,000)

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 Share capital 138,000
Required
Compute the net income for the current year, assuming that there were no
entries in the RE account except for net income and a dividend declaration of
$24,000 which was paid in the current year.

Q16
Case 1: Sales salaries paid during 2019 were €70,000. Sales salaries accrued
were €1,360 on January 1, 2019, and €1,380 on December 31, 2019. Show the
computation of sales salaries on an accrual basis for 2019.
Case 2:
The records for Todd Inc. showed the following for 2019:
Jan. 1 Dec. 31
Accrued expenses R$1,800 R$2,150
Prepaid expenses 720 870
Cash paid during the year for expenses, R$55,500
Show the computation of the amount of expense on accrual basic 2019.
Case 3:
The records for Kiley Company showed the following for 2019:
Jan. 1 Dec. 31
Accrued revenue HK$1,260 HK$920
Cash collected during the year for revenue, HK$75,000
Show the computation of the amount of revenue that should be reported on
the income statement.
Case 4
The records for Kiley Company showed the following for 2019:
Jan. 1 Dec. 31
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Unearned revenue HK$1,600 HK$2,160
Cash collected during the year for revenue, HK$75,000

Show the computation of the amount of revenue that should be reported on

the income statement.
Case 5
Revenue for the year on accrual basic was €135,800. Account receivable were
€4,500 on January 1 and €3,540 on December 31.
Show the computation of revenue for the year on a cash basis.

REVIEW CHAPTER 2
Question 1
1. Resources owned by a company (such as cash, accounts receivable, vehicles)
are reported on the balance sheet and are referred to as __________
2. Obligations (amounts owed) are reported on the balance sheet and are referred
to as __________
3. Which of the following characteristics does not describe an asset? Requires the
payment of cash or Controlled by an entity?
4. Which of the following characteristics does not describe a liability? Present
obligation or must be legally enforceable?
5. If you receive a telephone bill, is your expense increasing or decreasing?
6. If you purchase a motor vehicle, is your asset value increasing or decreasing?
7. If you are informed that your last insurance bill was overstated and that you
will receive a credit, is your expense increasing or decreasing
8. If you receive notification from the bank that you have been charged bank fees,
is your asset (the bank account) increasing or decreasing?

Question 2
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Business transactions during December of XYZ Company are presented as
follows:
1. The owner invested $30,000 cash in the corporation
2. Purchased $5,500 of equipment with cash
3. Purchased a new truck for $8,500 cash
4. Purchased $500 in supplies on account
5. Paid $300 for supplies previously purchased/
6. Paid February and March Rent in advance for $1,800
7. Performed work for customers and received $50,000 cash
8. Performed work for customers and billed them $10,000
9. Received $5,000 from customers from work previously billed
10. Paid office salaries $900
11. Paid utility bill $1,200
Required: Prepare a tabular analysis which shows the effects of these
transactions on the expanded accounting equation

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