Comprehensive

Problem:

Accounting
Cycle
Ms. Ma U. T ak, CPA, decided to venture into the public practice of her profession and established her own
accounting firm in the City of T arlac with the business name, “MAUT AK, Accounting Services”. T he following
transactions transpired during the month of December 2017:

December 01
Invested Php 100,000 cash and computer sets originally costing Php 80,000 which Ms. T ak previously acquired on
account. Ms. T ak still owes Php 25,000 to the supplier of the computers. T he computer sets had a fair value of Php
50,000 at the time of investment. T he liability related to the computer sets is to be assumed by the business.(OR 001;
JV 001)

IMPORTANT NOTES: The fair value at the time of investment is used in measuring the
noncash investment. The assumption of the liability attached to the invested asset
automatically converts the same from being a personal liability to a business liability
which consequently reduces the capital credit for the owner.
December 02
Established a petty cash fund with an imprest balance of Php 2,000. (CV 001; CK 001)
Hired 2 accounting and audit staff to be paid a monthly salary of Php 20,000 each.
Signed engagement contracts with Mr. Nego Syo, Ms. Biz Ness and Mr. Mada Yah.

IMPORTANT NOTES: The hiring of the 2 accounting and audit staff and the signing of
engagement contracts with clients do not qualify as accountable events (no exchange
of values yet between the concerned parties). Hence, no formal entry is prepared for
those 2 events. The establishment of the PCF will be accompanied by the update of the
Petty Cash Book as show below:
December 03
Paid Php 20,000 to the lessor of the office space representing rental security deposit, refundable at the end of the
lease contract, and Php 30,000 representing advance rentals for the months of December 2017, January 2018 and
February 2018. The business uses the expense method in recording prepayments. (CV 002; CK No. 002)

IMPORTANT NOTES: The Rental Security Deposit represents the amount deposited by the
Lessee to the Lessor that is intended to cover possible damages that may be inflicted to
the leased asset or to answer for utilities and other commitments left unpaid by the lessee
at the end of the lease term. The amount is refundable in the absence of the
aforementioned cases.

The advance rentals paid are intended to be applied against future incurrence of rent
and are accounted for using the expense method, hence, the amount was debited in
full to an EXPENSE account at the time of payment.
IMPORTANT NOTES: The cost of repairs, a BUSINESS EXPENSE, was paid from the PERSONAL
CASH of the owner without the intent of having it reimbursed. Accordingly, the amount is
treated as an additional investment by the owner.
IMPORTANT NOTES: The cost of the tuition fee of the owner’s son, a PERSONAL EXPENSE,
was paid from the CASH OF THE BUSINESS without the intent of paying back the business.
Accordingly, the amount is treated as a withdrawal by the owner.
IMPORTANT NOTES: The premiums withheld by the business from the salaries of the
employees will be remitted (along with the share of the employer) in the immediately
succeeding month. Pending remittance, the contributions are reported as current
liabilities. The employer’s share on the benefits of the employees shall be treated as an
expense of the business.
IMPORTANT NOTES: Since the promissory note received from the customer is interest
bearing, the collection on the maturity date will include the principal plus the interest
earned on the note. The interest is computed as follows:

Interest = P40,000 x 12% x 10/360

= P 133
IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, no formal
journal entry is required when the fund is charged. Each charge against the PCF must be
supported by a Petty Cash Voucher (PCV) which serves as authorization for the
disbursement from the PCF. The charge against the PCF will be recorded, informally, in
the Petty Cash Book which is used to monitor the PCF balance.
IMPORTANT NOTES: The transaction pertains to advance collections from a customer
where the related service will be rendered on a future date. Since the income method is
used in accounting for the advance collection, an income account “Professional fees” is
credited at the time of collection. This amount shall be adjusted should there be an
outstanding unearned portion (related service has not been rendered yet) as at the end
of the year.
IMPORTANT NOTES: The term BILLED indicates the act of sending a statement of account
to the concerned customer for whom service was already rendered. Hence, the right to
collect (Accounts receivable) must be established.
IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, no formal
journal entry is required when the fund is charged. Each charge against the PCF must be
supported by a Petty Cash Voucher (PCV) which serves as authorization for the
disbursement from the PCF. The charge against the PCF will be recorded, informally, in
the Petty Cash Book which is used to monitor the PCF balance.
IMPORTANT NOTES: The premiums withheld by the business from the salaries of the
employees will be remitted (along with the share of the employer) in the immediately
succeeding month. Pending remittance, the contributions are reported as current
liabilities. The employer’s share on the benefits of the employees shall be treated as an
expense of the business.
IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, charges against the fund and
any resulting overage or shortage are recorded through a formal journal entry upon replenishment of
the fund. Replenishment means to bring back to fund balance to its imprest balance(originally
established or subsequently adjusted balance).
IMPORTANT NOTES: No depreciation was provided on the office equipment acquired on Dec 27 since it
was acquired after the middle of the month (assumed to have been acquired at the end of the month,
See B.2)
IMPORTANT NOTES: The adjustment for a prepayment accounted for under the Expense Method
includes a debit to an ASSET account (opposite the method) and a credit to an EXPENSE account at
the UNEXPIRED portion of the prepayment.
IMPORTANT NOTES: The note received from Ms. Kuh Pitt for P30,000 is interest bearing and
is outstanding as at year-end. As at end of the year, 11 days of interest (Dec 31 – Dec
20) has already ACCRUED (already earned but remain uncollected) to the benefit of the
business. Hence, accrued interest income is recognized at year end based on the
following computation:

Interest receivable ( P30,000 x 12% x 11/360) = P110

IMPORTANT NOTES: The note issued to Du Tong for P30,000 is interest bearing and is
outstanding as at year-end. As at end of the year, 26 days of interest (Dec 31 – Dec 5)
has already ACCRUED (already incurred but remain unpaid) to the benefit of the
supplier. Hence, accrued interest expense is recognized at year end based on the
following computation:

Interest payable ( P30,000 x 10% x 26/360) = P217

IMPORTANT NOTES: The adjustment for advance collections accounted for under the Income Method
includes a debit to an INCOME account (the same as the method) and a credit to a LIABILITY account
at the UNEARNED portion of the advance collections.
IMPORTANT NOTES: The adjustment for a prepayment accounted for under the Expense Method
includes a debit to an ASSET account (opposite the method) and a credit to an EXPENSE account at
the UNEXPIRED portion of the prepayment.
IMPORTANT NOTES: The employer’s share on the benefits of the employees shall be
treated as an expense of the business. The premiums withheld by the business from the
salaries of the employees will be remitted (along with the share of the employer) in the
immediately succeeding month. Pending remittance, the contributions are reported as
current liabilities.