CLASSROOM EXERCISES

CASH AND ACCRUAL BASIS OF ACCOUNTING

Problem 1 – Accrual, cash and modified cash basis journal entries

Fried Company had the following transactions for the current year:
(a) Purchased merchandise from Steamed Company, P20,000. terms: on account.
(b) Paid the amount due to Steamed Company. Discount of P200 was taken.
(c) Sold merchandise to Grilled Company P15,000. terms: on account.
(d) Collected the account of Grilled Company. Discount of P150 was granted.
(e) Purchased adding machine and calculators by paying P15,000.
(f) Purchased furniture and fixtures on account from Carpenters Company, P7,500.
(g) Purchase of prepaid insurance, P1,440.
(h) Advance collection of interest, P300
(i) Salaries accrued as of the end of the period, P1,500.
(j) Prepaid insurance as of the end of the period, P1,200.
(k) Rent income accrued as of the end of the period, P2,000.
(l) Unearned interest as of the end of the period, P260.
(m) Depreciation for the period, P2,000.

Required: Prepare the journal entries to record the transactions above under the (1) accrual basis of
accounting, (2) modified-cash basis and (3) pure-cash basis. (Kimwell E8.1)

Problem 2 – Accrual, cash and modified cash basis effects

On the blanks provided, indicate the effects of the items listed below on the cash balance of the current period
and on the amount of net income of the same period. Use + to indicate increase, - to indicate decrease, 0 to
indicate no effect. (Kimwell E8.23)

Effect
Effect on Net
Effect on
Income
on Cash Income
Transaction (Modified-
Balance (Accrual
cash basis)
Basis)
(a) Cash sales.
(b) Credit sales to be collected next period.
(c) Credit sales of last period collected this period.
(d) Receipt of an advance from a customer.
(e) Return of goods from a credit customer.
(f) Cash refund to a customer.
(g) Merchandise bought for cash.
(h) Merchandise bought on account last period but paid this
period.
(i) Merchandise bought on account this period but to be paid next
period.
(j) Other income earned and collected this period.
(k) Other income earned last period but collected this period.
(l) Administrative expenses incurred last period but paid this
period.
(m) Marketing expenses incurred this period but to be paid next
period.
(n) Advance payment of taxes for the following period.
(o) Purchases of supplies for cash, still unused at the end of this
period.
(p) Unpaid sales commission.
(q) Acquired equipment for cash at the beginning of the period.
Estimated life of equipment is 10 years.
(r) Annual depreciation of equipment.
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 (s) Sale of equipment for cash at above carrying amount.
(t) Sale of investment for cash, at a loss.

Problem 3 – Cash to accrual, income statement without depreciation

The condensed income statement of Celia Mercado, prepared under the pure-cash basis of accounting, is as
follows:

Cecilia Mercado
Income Statement
For the year ended December 31, 2017

Sales P1,200,000
Add: Cost of Sales 800,000
Gross Profit 400,000
Add: Other income 15,000
Total Income 415,000
Less: Operating Expenses 250,000
Net Income before tax 165,000
Less: Income tax expense 10,000
Net income after tax P155,000

Following are the additional information about the assets and liabilities of Cecilia Mercado as of January 1
and December 31:

Jan. 1 Dec. 31
Accounts Receivable 100,000 P110,000
Notes Receivable 10,000 -
Merchandise Inventory 80,000 95,000
Accounts Payable 70,000 50,000
Accrued Operating Expenses 12,000 25,000
Accrued Other Income 1,000 -
Prepaid Operating Expenses 6,000 1,000
Unearned Other Income 800 1,200
Income Tax Payable 10,000 15,000

Required: Prepare an income statement under accrual basis of accounting. (Kimwell E8.22)

Problem 4 – Cash to accrual, income statement with depreciation

The following information were taken from the books of Elizabeth’s Store:

Jan. 1 Dec. 31
Cash P 20,000 P ?
Accounts Receivable 102,000 110,000
Notes Receivable 20,000 10,000
Merchandise Inventory 56,000 76,000
Prepaid Operating Expenses 7,000 9,000
Accrued Other Income 500 200
Furniture and Equipment 150,000 170,000
Accumulated Depreciation 30,000 ?
Accounts Payable 60,000 70,000
Accounts Payable (furniture) - 20,000
Accrued Operating Expenses 5,000 4,000

Receipts:
Collections on accounts receivable P500,000
Collections on notes receivable 30,000
Collections of other income 800

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 Disbursements:
Payments to suppliers P300,000
Payments of operating expenses 100,000
Withdrawals for personal use 60,000

Additional information:
(a) Furniture and equipment are depreciated at an annual rate of 10% of the cost.
(b) Additional furniture and equipment of P20,000 were acquired on October 1, 2017, terms: on account.
(c) Purchase discounts taken, P5,000.
(d) Sales discounts granted, P2,000.

Required: Prepare an income statement under accrual basis of accounting. (Kimwell P8.1)

Problem 5 – Cash basis of accounting

David Corporation began its operations during the current year with the following transactions:

Sales (90% collected) P15,000,000

Uncollectible accounts written off 600,000
Disbursements for costs and expenses 12,000,000
Disbursements for income taxes 900,000
Purchases of fixed assets 4,000,000
Depreciation of fixed assets 800,000
Proceeds from issuance of ordinary shares 5,000,000
Payments on short-term borrowings 500,000

How much is the cash balance at the end of the current year? (Kimwell E8.21)

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