Financial Accounting Reporting Fundamentals Test Bank Additional Problems For Seatwork or Assignment Zeus Vernon B Millan Compress

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FINANCIAL ACCOUNTING &

REPORTING
(Fundamentals)
TEST BANK
(ADDITIONAL PROBLEMS FOR
SEATWORK OR ASSIGNMENT)
ZEUS VERNON B. MILLAN

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Dear Fellow Teacher,

The book is designed for a 3-unit course (as suggested by CHED). However, I am aware
that many schools have increased the course credits to 6 units. For those schools, the end-of-
chapter problems in the book may be inadequate. To address this, I am providing this TEST BANK
to be used as additional seatwork or assignment. The problems in this test bank are not included
in the book because that would increase the number of pages, and consequently, the price.
I would like to suggest the following sequence of teaching using the book:
1. Discussion of concepts using the LECTURE AID (PowerPoint presentation);
2. Application of concepts using the end-of-chapter problems in the book labeled as “FOR
CLASSROOM DISCUSSION” – the teacher solves the problems on the board and discusses
the solutions;
3. Seat work or homework using the other end-of-chapter problems in the book – the teacher
gives the students opportunity to apply, on their own, the concepts that have just been taught
to them;
4. Use this TEST BANK as additional seat work or homework (for schools having 6 units for FAR);
5. QUIZ or QUIZZES – I have included two quizzes for some chapters (see ‘quizzes’ files
included in the Teacher’s Manual); and
6. Periodic EXAMS (see ‘exam’ files included in the Teacher’s Manual).
I wish you well in your teaching journey and I thank you for making me part of it. If later
on you have queries, comments, or suggestions on how I can improve my work, I would be glad if
you inform me. Here are my contact details: zeusvernonmillan@gmail.com and (0917) 870 6962.
Sincerely,
Zeus Vernon B. Millan
“A good teacher can inspire hope, ignite imagination, and instill

a love of learning.” – Brad Henry
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TABLE OF CONTEN
CONTENTS
TS
CHAPTER 1 INTRODUCTION TO ACCOUNTING ............................................................................................................. 6

MULTIPLE CHOICE .......................................................................................................................................................... 6
ANSWERS: .................................................................................................................................................................. 7
CHAPTER 2 ACCOUNTING CONCEPTS AND PRINCIPLES ................................................................................................ 8
MULTIPLE CHOICE .......................................................................................................................................................... 8
ANSWERS: .................................................................................................................................................................. 9
CHAPTER 3 THE ACCOUNTING EQUATION ................................................................................................................. 10
MULTIPLE CHOICE ........................................................................................................................................................ 10
ANSWERS: ................................................................................................................................................................ 11
CHAPTER 4 TYPES OF MAJOR ACCOUNTS ..................................................................................................................12
4-1: MULTIPLE CHOICE ................................................................................................................................................. 12
ANSWERS: ................................................................................................................................................................ 13
4-2: MULTIPLE CHOICE ................................................................................................................................................. 14
ANSWERS: ................................................................................................................................................................ 15
CHAPTER 5 BOOKS OF ACCOUNTS & DOUBLE-ENTRY SYSTEM ................................................................................... 16
5-1: TRUE OR FALSE ...................................................................................................................................................... 16
ANSWERS: ................................................................................................................................................................ 16
5-2: MULTIPLE CHOICE ................................................................................................................................................. 17
ANSWERS: ................................................................................................................................................................ 18
5-3: EXERCISE ................................................................................................................................................................ 19
ANSWERS: ................................................................................................................................................................ 19
CHAPTER 6 BUSINESS TRANSACTIONS AND THEIR ANALYSIS ..................................................................................... 20
6-1: MULTIPLE CHOICE ................................................................................................................................................. 20
ANSWERS: ................................................................................................................................................................ 21
6-2: EXERCISE ................................................................................................................................................................ 22
ANSWERS: ................................................................................................................................................................ 23
6-3: EXERCISE ................................................................................................................................................................ 24
ANSWERS: ................................................................................................................................................................ 25
6-4: EXERCISE ................................................................................................................................................................ 26
ANSWERS: ................................................................................................................................................................ 27
CHAPTER 7 POSTING TO THE LEDGER ........................................................................................................................28
7-1: MULTIPLE CHOICE ................................................................................................................................................. 28
ANSWERS: ................................................................................................................................................................ 29
7-2: EXERCISE ................................................................................................................................................................ 30
ANSWERS: ................................................................................................................................................................ 32
7-2: EXERCISE ................................................................................................................................................................ 34
ANSWERS: ................................................................................................................................................................ 38
CHAPTER 8 ADJUSTING ENTRIES ................................................................................................................................ 42
8-1: MULTIPLE CHOICE ................................................................................................................................................. 42
ANSWERS: ................................................................................................................................................................ 44
8-2: MULTIPLE CHOICE ................................................................................................................................................. 45
ANSWERS: ................................................................................................................................................................ 47
CHAPTER 9 ACCOUNTING CYCLE OF A SERVICE BUSINESS .......................................................................................... 48
9-1: TRUE OR FALSE ...................................................................................................................................................... 48
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ANSWERS: ................................................................................................................................................................ 49
9-2: MULTIPLE CHOICE ................................................................................................................................................. 50
ANSWERS: ................................................................................................................................................................ 52
9-3: MULTIPLE CHOICE ................................................................................................................................................. 53
ANSWERS: ................................................................................................................................................................ 54
9-4: MULTIPLE CHOICE ................................................................................................................................................. 55
ANSWERS: ................................................................................................................................................................ 57
9-5: EXERCISE ................................................................................................................................................................ 58
ANSWERS: ................................................................................................................................................................ 60
9-6: EXERCISE ................................................................................................................................................................ 62
ANSWERS: ................................................................................................................................................................ 64
CHAPTER 10 ACCOUNTING CYCLE OF A MERCHANDISING BUSINESS ......................................................................... 65
10-1: MULTIPLE CHOICE ............................................................................................................................................... 65
ANSWERS: ................................................................................................................................................................ 67
10-2: MULTIPLE CHOICE ............................................................................................................................................... 68
ANSWERS: ................................................................................................................................................................ 70
10-3: MULTIPLE CHOICE ............................................................................................................................................... 71
ANSWERS: ................................................................................................................................................................ 73
10-4: EXERCISE .............................................................................................................................................................. 74
ANSWERS: ................................................................................................................................................................ 76
10-5: EXERCISE .............................................................................................................................................................. 78
ANSWERS: ................................................................................................................................................................ 79
10-6: EXERCISE .............................................................................................................................................................. 80
ANSWERS: ................................................................................................................................................................ 83
CHAPTER 11 PARTNERSHIP FORMATION ................................................................................................................... 86
11-1: MULTIPLE CHOICE ............................................................................................................................................... 86
ANSWERS: ................................................................................................................................................................ 89
11-2: EXERCISE .............................................................................................................................................................. 90
ANSWER: .................................................................................................................................................................. 91
CHAPTER 12 PARTNERSHIP OPERATIONS ..................................................................................................................92
12-1: MULTIPLE CHOICE ............................................................................................................................................... 92
ANSWERS: ................................................................................................................................................................ 95
12-2: EXERCISE .............................................................................................................................................................. 97
ANSWER: .................................................................................................................................................................. 98
CHAPTER 13 PARTNERSHIP DISSOLUTION .................................................................................................................99
13-1: MULTIPLE CHOICE ............................................................................................................................................... 99
ANSWERS: .............................................................................................................................................................. 101
13-2: EXERCISE ............................................................................................................................................................ 102
ANSWERS: .............................................................................................................................................................. 103
CHAPTER 14 PARTNERSHIP LIQUIDATION ................................................................................................................ 104
14-1: MULTIPLE CHOICE ............................................................................................................................................. 104
ANSWERS: .............................................................................................................................................................. 106
14-2: EXERCISE ............................................................................................................................................................ 108
ANSWERS: .............................................................................................................................................................. 109
CHAPTER 15 ACCOUNTING FOR CORPORATIONS ..................................................................................................... 110
15-1: TRUE OR FALSE .................................................................................................................................................. 110
ANSWERS: .............................................................................................................................................................. 111
15-2: MULTIPLE CHOICE ............................................................................................................................................. 112
ANSWERS: .............................................................................................................................................................. 114
15-3: EXERCISE ............................................................................................................................................................ 115
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ANSWERS: .............................................................................................................................................................. 116

15-4: EXERCISE ............................................................................................................................................................ 117
ANSWERS: .............................................................................................................................................................. 118
CHAPTER 16 ACCOUNTING FOR DIVIDENDS ............................................................................................................. 119
16-1: TRUE OR FALSE .................................................................................................................................................. 119
ANSWERS: .............................................................................................................................................................. 120
16-2: MULTIPLE CHOICE ............................................................................................................................................. 121
ANSWERS: .............................................................................................................................................................. 124
16-3: EXERCISE ............................................................................................................................................................ 125
ANSWERS: .............................................................................................................................................................. 126
16-4: EXERCISE ............................................................................................................................................................ 127
ANSWER: ................................................................................................................................................................ 128
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Chapter 1 Introduction to Accounting

MULTIPLE CHOICE
1. It is a business that is organized under an operation of law and has a separate legal entity.
a. Sole proprietorship c. Partnership
b. Corporation d. All of these
2. It is a type of business that changes basic inputs into products that are sold to customers.
a. Service c. Manufacturing
b. Trading d. Sole proprietorship
3. It is an information system that provides reports to stakeholders about the economic activities and
condition of a business.
a. Accounting information system c. Bookkeeping system
b. Language of business d. Science and art system
4. It is a specialized field of accounting that provides information primarily intended to aid

management in running day-to-day operations and in planning future operations.
a. Financial accounting c. Managerial or Management accounting
b. Auditing d. Taxation
5. It is a type of business that purchases products from other businesses and sells them to customers.
a. Service c. Manufacturing
b. Merchandising d. Sole proprietorship
6. It is a business that is owned by one individual.

a. Sole proprietorship c. Partnership
b. Corporation d. All of these
7. It is the field of accounting that is primarily concerned with the recording and reporting of
economic data and activities to stakeholders outside the business.
a. Financial accounting c. Managerial or Management accounting
b. Accounting research d. Cost accounting
8. Accounting is often characterized as

a. the “language of business.” c. an information system.
b. both a science and an art. d. all of these
9. Which of the following is not considered an external user of accounting information?

a. investor c. creditor
b. lender d. management
10. Accounting systems (choose the incorrect statement)

a. provide information on business transactions for use by management in directing operations.
b. provide information that is needed in preparing financial statements.
c. consists of inputs, processes and outputs.
d. are optional for most businesses.
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ANSWERS:
1. B
2. C
3. A
4. C
5. B
6. A
7. A
8. D
9. D
10. D
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Chapter 2 Accounting Concepts and Principles

MULTIPLE CHOICE
1. It is the concept in accounting that requires economic data to be recorded in terms of pesos.
a. going concern c. consistency
b. materiality d. unit of measure or stable monetary unit
2. The amounts for recording properties and services purchased by a business are determined using
the
a. business entity concept c. matching principle
b. cost concept d. proprietorship principle
3. It is the concept of accounting that limits the economic data in the accounting system to data related
directly to the activities of the business.
a. business entity concept/ separate entity concept c. accrual basis
b. matching d. going concern
4. It is the authoritative body in the Philippines that has the primary responsibility for developing
accounting standards?
a. FASB c. FRSC
b. PFRS d. IASB
5. An accounting or reporting period is normally

a. 6 months. c. 2 years.
b. 1 year. d. 3 years.
6. Under this concept, income is recognized in the period in which it is earned, rather than when it is
collected.
a. going concern c. historical cost
b. cash basis d. accrual basis of accounting
7. This concept supports the reporting of expenses in the same period in which the related revenues
are recognized.
a. materiality c. historical cost
b. matching d. entity concept
8. This accounting concept assumes that the economic life of the business can be divided into several
reporting periods.
a. fiscal year period c. calendar year period
b. accounting period d. division period
9. An annual accounting period that starts on a date other than January 1.

a. fiscal year period c. interim period
b. calendar year period d. first period
10. Which of the following statements is correct?

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a. Under the accrual basis of accounting, income and expenses are reported in the income
statement in the period in which cash is received or paid.
b. The concept that expenses incurred in generating revenue should be matched against the
revenue in determining profit or loss is called the cost concept.
c. The concept of materiality prohibits the rounding-off of amounts when presenting financial
reports.
d. Most businesses use the accrual basis of accounting.
ANSWERS:
1. D
2. B
3. A
4. C
5. B
6. D
7. B
8. B
9. A
10. D
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Chapter 3 The Accounting Equation

MULTIPLE CHOICE
1. “Assets = Liabilities + Owner’s Equity” is referred to in accounting as

a. the basic accounting equation. c. the accountant’s creed.
b. the balance sheet. d. the accountant’s motto.
2. The liabilities are ₱85,000 and owner’s equity is ₱45,000, the amount of the assets is
a. ₱130,000 c. ₱85,000
b. ₱40,000 d. ₱45,000
3. If liabilities are ₱85,000 and owner’s equity is ₱295,000, the amount of the assets is
a. ₱380,000 c. ₱85,000
b. ₱210,000 d. ₱295,000
4. If assets are ₱375,000 and owner’s equity is ₱295,000, the amount of the liabilities is
a. ₱670,000 c. ₱80,000
b. ₱375,000 d. ₱295,000
5. The owner’s equity at the beginning of the period was ₱19,000; at the end of the period, assets were
₱98,000 and liabilities were ₱41,000. The owner made no additional investments or withdrawals
during the period. The profit (loss) for the period is
a. ₱18,000 c. ₱38,000
b. ₱28,000 d. (₱38,000)
6. If total assets increased by ₱85,000 and liabilities decreased by ₱9,000 during the period, the change
in owner’s equity was
a. ₱74,000 decrease c. ₱94,000 decrease
b. ₱74,000 increase d. ₱94,000 increase
7. Another way of writing the accounting equation is:

a. Assets + Liabilities = Owner’s Equity
b. Owner’s Equity + Assets = Liabilities
c. Assets = Owner’s Equity – Liabilities
d. Assets – Liabilities = Owner’s Equity
8. If owner’s equity is ₱46,000 and liabilities are ₱34,000, the amount of assets is
a. ₱12,000 c. ₱46,000
b. ₱34,000 d. ₱80,000
9. If total assets increased by ₱21,500 and owner’s equity increased by ₱8,000 during a period, the
amount and direction (increased or decreased) of the period’s change in total liabilities was
a. ₱13,500 increase c. ₱29,500 increase
b. ₱13,500 decrease d. ₱29,500 decrease
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10. If total liabilities increased by ₱20,000 during a period of time and owner’s equity increased by
₱5,000 during the same period, the amount and direction (increase or decrease) of the period’s
change in total assets is:
a. ₱20,000 increase c. ₱25,000 decrease
b. ₱20,000 decrease d. ₱25,000 increase
ANSWERS:
1. A
2. A
3. A
4. C
5. C
6. D
7. D
8. D
9. A
10. D
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Chapter 4 Types of Major Accounts
4-1: MULTIPLE CHOICE
1. In accounting, these refer to the resources owned or controlled by a business.

a. Cash c. Capital
b. Assets d. Liabilities
2. The simplest form of an account is the

a. T-account c. V-account
b. Tea account d. Z-account
3. The claims of a business owner over the assets of a business are referred to in accounting as
a. Receivables c. Owner’s equity
b. Liabilities d. Personal assets
4. The amount a business earns by selling goods to customers is recorded as

a. Sales revenue c. Customer’s fee
b. Service fees d. Customer income
5. Equipment, machinery, buildings, and land, collectively, are referred to as

a. property, plant and equipment. c. capital assets.
b. fixed assets. d. All of these
6. The residual claim against the assets of a business after the total liabilities are deducted is called
a. Equity c. Net assets
b. Capital d. All of these
7. These are debts owed by an entity to outsiders (creditors).

a. assets c. expenses
b. liabilities d. equity
8. This account represents the cost of unused supplies that are available for the business’ use in the
future.
a. accounts receivable c. supplies expense
b. prepaid supplies d. office surprise
9. Which of the following is an asset account?

a. accounts payable c. office supplies expense
b. inventory d. sales
10. Which of the following is a liability account?

a. accounts receivable c. utilities expense
b. prepaid supplies d. accounts payable
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ANSWERS:
1. B
2. A
3. C
4. A
5. D
6. D
7. B
8. B
9. B
10. D
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1. The rights of creditors that represent debts of the business are called
a. expenses c. assets
b. income d. liabilities
2. This represents an entity’s claim against a customer.

a. owner’s equity c. liability
b. accounts receivable d. assets
3. It is list of all the accounts used by a business.

a. chart of accounts c. ledger
b. organizational chart d. T-account
4. It is an accounting form that is used to record the increases and decreases in each financial
statement item.
a. account c. credit
b. debit d. income
5. This represents the business owner’s claim over the assets of the business.
a. accounts receivable c. assets
b. accounts payable d. owner’s equity
6. Increases in owner’s equity as a result of rendering services to customers.

a. expenses c. gains
b. sales revenue d. service fees revenue
7. Salaries payable is a (an)

a. asset account. c. expense account.
b. equity account. d. liability account.
8. If assets are ₱98,000 and liabilities are ₱32,500, the amount of owner’s equity is
a. ₱130,500 c. ₱65,500
b. ₱98,000 d. ₱32,500
9. These are claims against debtors evidenced by written promise to pay a certain sum of money at a
definite date to the order of a specified person or bearer.
a. Accounts receivable c. Notes receivable
b. Cash d. Written payables
10. Which of the following does not connote an expense account?

a. Utilities c. Depreciation
b. Supplies d. Accumulated depreciation
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ANSWERS:
1. D
2. B
3. A
4. A
5. D
6. D
7. D
8. C
9. C
10. D
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Chapter 5 Books of Accounts & Double-entry System
5-1: TRUE OR FALSE

1. An account title that has the word “payable” is most likely an asset account.
2. The Accumulated Depreciation account is a contra asset account.
3. Every business transaction affects a minimum of one account.
4. A claim against a customer for sales made on credit is an account payable.
5. The debts of a business are called its accounts receivable.
6. Amounts entered on the left side of an account, regardless of the account title, are called credits or
charges to the account.
7. The difference between the total debits and the total credits posted to an account yields a figure
called the ending balance of that account.
8. To debit an asset account means to decrease its balance.
9. The left side on an account is called credit.
10. Expense accounts have a normal credit balance.
ANSWERS:
1. FALSE
2. TRUE
3. FALSE
4. FALSE
5. FALSE
6. FALSE – “debits” not “credits”
7. TRUE
8. FALSE
9. FALSE
10. FALSE
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1. The recording of a transaction in a journal is called
a. journalinging. c. debiting.
b. posting. d. journalizing.
2. Amounts entered on the left side of an account are

a. debits. c. leftists.
b. credits. d. abnormal balances.
3. The normal balance of the prepaid supplies account is

a. debit. c. zero.
b. credit. d. medium balance.
4. The normal balance of the insurance expense account is

a. debit. c. zero.
b. credit. d. asset balance.
5. The normal balance of the service fees account is

a. debit. c. income.
b. credit. d. new balance.
6. The amount of the difference between the debits and the credits that have been entered into an
account is called the account’s
a. normal balance . c. ending balance.
b. net debit balance. d. difference balance.
7. Resources that are controlled by the business are called

a. equity. c. capital.
b. income. d. assets.
8. Amounts entered on the right side of an account are

a. debits. c. right amounts.
b. credits. d. additions.
9. A group of accounts for a business is called a (an).

a. journal. c. many, many T-accounts
b. ledger. d. association of accounts
10. Transactions not recordable in special journals are recorded in the

a. general journal. c. note book.
b. general ledger. d. scrap paper.
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ANSWERS:
1. D
2. A
3. A
4. A
5. B
6. C
7. D
8. B
9. B
10. A
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5-3: EXERCISE
Instruction: On the blanks provided, write DEBIT or CREDIT as appropriate
1. An increase in Accounts Receivable is recorded by a ________ entry in the account.
2. A decrease in Accounts Payable is recorded by a _______ entry in the account.
3. A decrease in Salaries Expense is recorded by a _______entry in the account.
4. A decrease in Cash is recorded by a _______entry in the account.
5. A decrease in Notes Payable is recorded by a ________ entry in the account.
6. A decrease in Accounts Receivable is recorded by a _______ entry in the account.
7. An increase in Cash is recorded by a _______entry in the account.
8. An increase in Depreciation Expense is recorded by a _______entry in the account.
9. A decrease in Owner’s Equity is recorded by a _______entry in the account.
10. An increase in Accounts Payable is recorded by a _______entry in the account.
ANSWERS:
1. DEBIT
2. DEBIT
3. CREDIT
4. CREDIT
5. DEBIT
6. CREDIT
7. DEBIT
8. DEBIT
9. DEBIT
10. CREDIT
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Chapter 6 Business Transactions and their Analysis

1. An economic transaction or event that affects an entity’s assets, liability, equity, income or expense
is
a. recorded in the books of accounts.
b. posted in the ledger.
c. an accountable event.
d. all of these
2. Credits to cash result in:

a. an increase in owner’s equity
b. a decrease in assets
c. an increase in liabilities
d. an increase in revenue
3. Carson offered for sale at ₱75,000 land that had been purchased for ₱45,000. If Zimmer paid Carson
₱70,000 for the land, the amount that Zimmer would record for the purchase of the land in the
accounting records is
a. ₱75,000
b. ₱45,000
c. ₱70,000
d. ₱0
4. In accounting, the phrase to “to recognize” means (choose the incorrect statement)
a. to record.
b. to journalize.
c. to include in the totals of the balance sheet or income statement.
d. to say “hi.”
5. The complete sequence of accounting procedures for an accounting period is frequently called the:
a. work sheet process
b. opening and closing cycle
c. accounting cycle
d. fiscal cycle
6. When payment is made to a supplier for goods previously purchased on account, the debit is to:
a. an asset account
b. a liability account
c. an owner’s equity account
d. an expense account
7. Debits to expense accounts signify:

a. increases in owner’s equity
b. decreases in owner’s equity
c. increases in assets
d. increases in liabilities
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8. The receipt of cash from customers in payment of their accounts would be recorded by a:
a. debit to Cash and a credit to Accounts Payable
b. debit to Cash and a credit to Accounts Receivable
c. debit to Accounts Receivable and a credit to Retained Earnings
d. debit to Accounts Payable and a credit to Cash
9. When an asset is purchased on account, the credit is to:

a. an owner’s equity account
b. a revenue account
c. a liability account
d. an expense account
10. A business paid ₱6,000 to a creditor in payment of an amount owed. The effect of the transaction on
the accounting equation was:
a. an increase in an asset and a decrease in another asset
b. a decrease in an asset and an increase in a liability
c. a decrease in an asset and a decrease in a liability
d. an increase in an asset and an increase in owner’s equity
ANSWERS:
1. D
2. B
3. C
4. D
5. C
6. B
7. B
8. B
9. C
10. C
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6-2: EXERCISE
Instructions: For each transaction, indicate the increase (+), the decrease (-), or no change (0) in Assets,
Liabilities, and Equity by placing the appropriate signs in the appropriate columns. More than one sign
may have to be placed in the Assets, Liabilities, or Equity column for a given transaction.
ASSETS LIABILITIES EQUITY

1. Received cash from owner as initial investment to business.
2. Purchased supplies on account.
3. Charged customers for goods sold on account.
4. Received cash from cash customers.
5. Paid cash for rent on building.
6. Collected an account receivable in full.
7. Paid cash for supplies.
8. Returned supplies purchased on account and not yet paid for.
9. Paid cash to creditors on account.
10. The business owner withdrew cash from the business.
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ANSWERS:
ASSETS LIABILITIES EQUITY
1. Received cash from owner as initial investment to business. + 0 +
2. Purchased supplies on account. + + 0
3. Charged customers for goods sold on account. + 0 +
4. Received cash from cash customers. + 0 +
5. Paid cash for rent on building. - 0 -
6. Collected an account receivable in full. +,- 0 0
7. Paid cash for supplies. +,- 0 0
8. Returned supplies purchased on account and not yet paid for. - - 0
9. Paid cash to creditors on account. - - 0
10. The business owner withdrew cash from the business. - 0 -
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6-3: EXERCISE
Instructions: The assets, liabilities, and owner’s equity of Fender Repair Shop, owned and managed by
Mr. Fender Elite, are expressed in equation form below. Following the equation are ten transactions
completed by Fender Repair Shop. On the columns, write the monetary effects of each of the
transactions on the equation. Write negative or minus amounts in parentheses. On the rows labeled
“Balance,” compute for the cumulative balances of the equation resulting from the transactions. (Hint:
Income and expenses increase and decrease, respectively, the owner’s equity.)
OWNER'S
ASSETS LIABILITIES
EQUITY
1. Fender Elite invested ₱40,000 cash in the business.
2. Purchased ₱2,000 of supplies on account.
(The business uses a prepaid asset account.)
Balance
3. Purchased land for a future building site for ₱14,000
cash.
Balance
4. Paid creditors ₱1,800 on account.
Balance
5. Received ₱5,000 service fees.
Balance
6. Incurred delivery expenses of ₱900 on credit
Balance
7. Fender Elite invested another ₱10,000 cash in the
business
Balance
8. Paid ₱2,800 rent expense for the month
Balance
9. Fender Elite withdrew ₱200 cash from the business
Balance
10. Used ₱600 worth of supplies.
Balance
P a g e | 25
ANSWERS:
OWNER'S
ASSETS LIABILITIES
EQUITY
1. Fender Elite invested ₱40,000 cash in the business. 40,000 40,000
2. Purchased ₱2,000 of supplies on account.
2,000 2,000
(The business uses a prepaid asset account.)
Balance 42,000 2,000 40,000
3. Purchased land for a future building site for ₱14,000
14,000
cash.
(14,000)
Balance 42,000 2,000 40,000
4. Paid creditors ₱1,800 on account. (1,800) (1,800)
Balance 40,200 200 40,000
5. Received ₱5,000 service fees. 5,000 5,000
Balance 45,200 200 45,000
6. Incurred various expenses of ₱900 on credit 900 (900)
Balance 45,200 1,100 44,100
7. Fender Elite invested another ₱10,000 cash in the
business 10,000 10,000
Balance 55,200 1,100 54,100
8. Paid ₱2,800 rent expense for the month (2,800) (2,800)
Balance 52,400 1,100 51,300
9. Fender Elite withdrew ₱200 cash from the business (200) (200)
Balance 52,200 1,100 51,100
10. Used ₱600 worth of supplies. (600) (600)
Balance 51,600 1,100 50,500
P a g e | 26
6-4: EXERCISE
The inexperienced bookkeeper of Friday Co. committed errors in recording the following transactions:
a. The owner’s investments to the business consisting of ₱5,000 cash and ₱35,500 in equipment were
recorded as debit to Depreciation expense of ₱40,500 and a credit to Owner’s equity of ₱40,500.
b. A ₱1,000 insurance premium paid in advance was debited to Prepaid Rent and credited to Cash.
c. A cash purchase of equipment worth ₱5,500 was debited to Equipment and credited to Accounts
receivable.
d. A ₱200 payment of accounts payable was recorded as a debit to Cash and a credit to Accounts
Receivable.
e. A ₱1,500 cash withdrawal of the owner from the business was debited to Cash and credited to the
Owner’s equity account.
Instructions: Prepare the correct entries (not correcting entries) in journal provided below.
JOURNAL
DATE ACCOUNT TITLES DEBIT CREDIT
P a g e | 27
ANSWERS:
JOURNAL
(a) Cash 5,000
Equipment 35,500
Owner’s equity 40,500
(b) Prepaid insurance 1,000
Cash 1,000
(c) Equipment 5,500
Cash 5,500
(d) Accounts payable 200
Cash 200
(e) Owner’s drawings 1,500
Cash 1,500
P a g e | 28
Chapter 7 Posting to the Ledger
1. It is the book of account in which the effects of a transaction are initially recorded.
a. Account c. Ledger
b. Journal d. Trial balance
2. A recording error caused by the erroneous rearrangement of digits, such as writing ₱627 as ₱672, is
called a
a. slide error. c. transplacement error.
b. transposition error. d. interchange error.
3. A summary listing the titles and balances of accounts in the general ledger is called a
a. special journal. c. T-account
b. chart of accounts. d. trial balance
4. An error in which the entire number is mistakenly moved one or more spaces to the right or the left,
such as writing ₱542.00 as ₱54.20 or ₱5,420.00, is called a
a. slide error. c. transplacement error.
b. transposition error. d. moving error.
5. The process of recording a transaction in the journal is called

a. posting. c. entrying
b. journalizing. d. writinging
6. It is a system of accounting for recording transactions, based on recording increases and decreases
in accounts so that debits equal credits.
a. accrual basis of accounting c. single-entry accounting
b. accounting information system d. double-entry accounting
7. Which of the following is considered a transposition error?

a. ₱542 as ₱452 c. ₱22,300 as ₱2,230
b. ₱1,000 as ₱10,000 d. accounting as akawnting
8. The process of transferring the debits and credits from the journal entries to the accounts is called
a. journalizing c. posting
b. trial balancing d. transplacing
9. Of the following errors, the one that will cause an inequality in the trial balance totals is:
a. incorrectly computing an account balance
b. failure to record a transaction
c. recording the same transaction more than once
d. posting a transaction to the wrong account with same normal balance as the correct account
P a g e | 29

a. The process of recording a transaction in a journal is called posting.
b. A group of accounts for a business entity is called a Journal.
c. A listing of all the accounts in a ledger is called a chart of accounts.
d. All the statements above are correct.
ANSWERS:
1. B
2. B
3. D
4. A
5. B
6. D
7. A
8. C
9. A
10. C
P a g e | 30
7-2: EXERCISE
During June of the current year of 20x1, Joan Star started Star Service Co.
Instructions: Using the forms provided below:

1. Record the following transactions (you may omit narrative descriptions for the entries):
June 1. Joan invested ₱5,000 in cash, equipment valued at ₱14,500, and a van (use
‘Vehicles’ account) worth ₱21,000 to the business.
16. Purchased additional equipment worth ₱5,500 on account (use ‘Accounts
payable’ account).
28. Purchased supplies worth ₱500 on account. (use ‘Prepaid supplies’ and
‘Accounts payable’ accounts)
30. Paid ₱2,100 to creditors on account.
2. Post to the appropriate ledger accounts using T-accounts.

3. Prepare the June 30 trial balance.
REQUIREMENT 1: JOURNAL ENTRIES

JOURNAL
REQUIREMENT 2: POSTING
GENERAL LEDGER
ASSETS
Cash Prepaid supplies
Bal. Bal.
Equipment Vehicles
Bal. Bal.
P a g e | 31
LIABILITIES
Accounts payable
Bal.
EQUITY
Owner’s equity
Bal.
REQUIREMENT 3: TRIAL BALANCE
Accounts Debits Credits

P a g e | 32
ANSWERS:

JOURNAL
June 1 Cash 5,000
Equipment 14,500
Vehicles 21,000
16 Equipment 5,500
Accounts payable 5,500
28 Prepaid supplies 500
Accounts payable 500
30 Accounts payable 2,100
Cash 2,100
GENERAL LEDGER
ASSETS
Cash Prepaid supplies
June 1 5,000 June 28 500
2,100 June 30
Bal. 2,900 Bal. 500
Equipment Vehicles
June 1 14,500 June 1 21,000
June 16 5,500
Bal. 20,000 Bal. 21,000
LIABILITIES
Accounts payable
5,500 June 16
June 30 2,100 500 June 28
3,900 Bal.
EQUITY
Owner’s equity
40,500 June 1
40,500 Bal.
P a g e | 33
Star Service Co.

Trial Balance
June 30, 20x1

Cash 2,900
Prepaid supplies 500
Equipment 20,000
Vehicles 21,000
Owner's equity 40,500
Totals 44,400 44,400
P a g e | 34
7-2: EXERCISE
On January 2, 20x1, Judy Turner, an attorney, opened a law office as Turner Law Office, a professional
services company. The following transactions were completed during the month.
a. Judy invested ₱20,000 cash and ₱13,200 worth of office equipment in the business. (Use ‘Office
equipment’ account)
b. Paid the current month’s rent of ₱2,500. (Use ‘Rent expense’ account)
c. Paid ₱1,000 for office supplies. (Use ‘Supplies expense’ account)
d. Collected legal fees of ₱19,600. (Use ‘Service fees’ account)
e. Paid secretary a salary of ₱1,100.
f. Purchased ₱200 worth of office supplies on account. (Use ‘Accounts payable’ account)
g. Bought a vehicle for business use (Use ‘Transportation equipment’ account). The cost of the vehicle
is ₱13,000. The business paid ₱2,600 down payment and charged the balance on account. (Use
‘Accounts payable’ account)
h. Judy withdrew ₱5,000 cash from the business.
i. Paid ₱800 for auto repairs and maintenance.
j. Received a ₱240 telephone bill. The bill is not yet paid. (Use ‘Communications expense’ and
‘Accounts payable’ account)
k. Paid the ₱240 telephone bill.
l. Paid premiums of ₱1,700 on property insurance. (Use ‘Insurance expense’ account)
m. Paid ₱2,000 on accounts payable.
n. Paid ₱5,000 cash for books for the law library. (Use ‘Books’ account)
o. Paid ₱500 cash for janitor service. (Use ‘Janitorial expense’ account)

1. Provide the journal entries for the transactions. (You may omit narrative descriptions for the entries.)
2. Post the entries using T-accounts.
3. Prepare the January 31, 20x1 trial balance.

JOURNAL
(a)
(b)
(c)
(d)
(e)
(f)
(g)
P a g e | 35
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
GENERAL LEDGER
ASSETS
Cash Office equipment
Bal.
Bal.
Transportation equipment Books
Bal. Bal.
P a g e | 36
LIABILITIES
Accounts payable
Bal.
EQUITY
Owner’s equity Owner’s drawings
Bal. Bal.
INCOME
Service fees
Bal.
EXPENSES
Rent expense Supplies expense
Bal. Bal.
Salaries expense Repairs & maintenance
Bal. Bal.
Communications expense Insurance expense
Bal. Bal.
Janitorial expense
Bal.
P a g e | 37

P a g e | 38
ANSWERS:

JOURNAL
(a) Cash 20,000
Office equipment 13,200
(b) Rent expense 2,500
Cash 2,500
(c) Supplies expense 1,000
Cash 1,000
(d) Cash 19,600
Service fees 19,600
(e) Salaries expense 1,100
Cash 1,100
(f) Supplies expense 200
(g) Transportation equipment 13,000
Cash 2,600
(h) Owner’s drawings 5,000
Cash 5,000
(i) Repairs and maintenance 800
Cash 800
(j) Communications expense 240
(k) Accounts payable 240
Cash 240
(l) Insurance expense 1,700
Cash 1,700
(m) Accounts payable 2,000
Cash 2,000
(n) Books 5,000
Cash 5,000
(o) Janitorial expense 500
Cash 500
P a g e | 39
GENERAL LEDGER
ASSETS
Cash Office equipment
(a) 20,000 (a) 13,200
(d) 19,600 2,500 (b)
1,000 (c)
1,100 (e) Bal. 13,200
2,600 (g)
5,000 (h)
800 (i)
240 (k)
1,700 (l)
2,000 (m)
5,000 (n)
500 (o)
Bal. 17,160
Transportation equipment Books

(g) 13,000 (n) 5,000
Bal. 13,000 Bal. 5,000
LIABILITIES
Accounts payable
200 (f)
10,400 (g)
(k) 240 240 (j)
(m) 2,000
8,600 Bal.
EQUITY
Owner’s equity Owner’s drawings
33,200 (a) (h) 5,000
33,200 Bal. Bal. 5,000

P a g e | 40
INCOME
Service fees
19,600 (d)
19,600 Bal.
EXPENSES
Rent expense Supplies expense
(b) 2,500 (c) 1,000
(f) 200
Bal. 2,500 Bal. 1,200
Salaries expense Repairs & maintenance

(e) 1,000 (i) 800
Bal. 1,100 Bal. 800
Communications expense Insurance expense

(j) 240 (l) 1,700
Bal. 240 Bal. 1,700
Janitorial expense
(o) 500
Bal. 500
P a g e | 41
Turner Law Office

Trial Balance
January 31, 20x1

Cash 17,160
Office equipment 13,200
Transportation equipment 13,000
Books 5,000
Owner's drawings 5,000
Service fees 19,600
Rent expense 2,500
Supplies expense 1,200
Salaries expense 1,100
Repairs and maintenance 800
Communications expense 240
Insurance expense 1,700
Janitorial expense 500
Totals 61,400 61,400
P a g e | 42
Chapter 8 Adjusting Entries

1. The portion of the cost of a fixed asset that is charged as expense during the period.
a. depreciation expense c. fixed cost
b. freight-out d. expense cost
2. Income that has been earned but not yet collected.

a. accrued income c. unearned income
b. prepaid income d. all of these
3. If the debit amount of an adjusting entry adjusts an income statement account, the credit amount
of the adjusting entry must adjust a (an)
a. balance sheet account. c. nominal account.
b. income statement account. d. a or b
4. If the credit amount of an adjusting entry adjusts an asset account, the debit amount of the
adjusting entry must adjust a (an)
a. real account c. income account
b. liability account d. expense account
5. If the balance of the prepaid supplies account on January 1 was ₱500, supplies purchased during
the year were ₱1,750 (initially recorded as asset), and the supplies on hand at December 31 (per
physical count) were ₱300, the amount for the appropriate adjusting entry at December 31 is
a. ₱200. c. ₱1,950.
b. ₱1,550. d. ₱300.
6. The prepaid insurance account has a debit balance of ₱3,600 at the end of the year. If unexpired
insurance at the end of the year is ₱2,800, the amount of insurance expense that should be reported
on the income statement is
a. ₱800. c. ₱6,400.
b. ₱2,800. d. ₱1,200.
7. An analysis and updating of the accounts when financial statements are prepared is called the
a. journalizing process. c. adjusting process.
b. posting process. d. closing process.
8. Items that have been initially recorded as liabilities but are expected to become revenues over time
or through the normal operations of the business are called
a. prepaid assets or prepaid expenses.
b. unearned revenues or unearned income.
c. accrued income.
d. accrued expenses.
9. This account is credited when recording depreciation of a fixed asset.

a. depreciation expense c. fixed asset.
b. accumulated depreciation d. all of these
P a g e | 43
10. This account is debited for the amount of accrued interest expense at the end of the period.
a. interest payable c. interest receivable
b. interest expense d. interest income
11. This account is credited for the amount of prepaid rent that has expired during the period.
a. prepaid rent c. rent payable
b. rent expense d. unearned rent
12. This account is debited for the amount of depreciation on equipment during the period.
a. depreciation expense c. fixed asset.
b. accumulated depreciation d. depreciation payable.
13. This account is credited for the amount of accrued service fees at the end of the period.
a. service fees c. accounts payable
b. unearned income d. accounts receivable
14. It is the liability created by collecting income in advance.

a. advanced income c. prepaid income
b. unearned income d. all of these
15. Under the asset method of initial recording of prepayments of items of expenses, rent that is
prepaid for several months in advance is debited to:
a. an expense account c. a liability account
b. an owner’s equity account d. an asset account
P a g e | 44
ANSWERS:
1. D
2. A
3. B
4. D
5. C
6. A
7. C
8. B
9. B
10. B
11. A
12. B
13. A
14. B
15. D
P a g e | 45
1. An adjusting entry would necessarily include a debit or a credit to

a. a statement of financial position account.
b. a statement of comprehensive income account.
c. a and b
d. a or b
2. These entries bring the accounts up to date at the end of the accounting period.
a. adjusting entries c. reversing entries
b. closing entries d. compound entries
3. Items that have been initially recorded as assets but are expected to become expenses over time or
through the normal operations of the business are called
a. deferred expenses. c. utilities expenses.
b. accrued expenses. d. all of these
4. Expenses that have been incurred but not yet paid.

a. prepaid expenses c. accrued expenses
b. insurance expenses d. accounts payable
5. This account is debited for the amount of prepaid advertising expense expired during the period.
a. prepaid asset c. advertising payable
b. accrued expense d. advertising expense
6. This account is credited for the amount of depreciation of equipment during the period.
a. allowance for bad debts c. depreciation expense
b. bad debts expense d. accumulated depreciation
7. An entity initially records advance collections of income using the liability method. At the end of
the period, the entity makes an adjusting entry to recognize the income earned during the period by
debiting which of the following accounts?
a. unearned income c. earned income account
b. income account d. receivable account
8. This account is credited for taxes accrued at the end of the period.
a. tax expense c. accounts payable
b. taxes payable d. any of these
9. If the balance of the prepaid supplies account on January 1 is ₱2,500, supplies purchased during the
year were ₱10,000 (debited to an asset account), and the supplies on hand at December 31 were
₱1,800, the amount for the appropriate adjusting entry at December 31 is
a. ₱10,700 debit to prepaid supplies
b. ₱1,800 credit to supplies expense
c. ₱1,800 debit to prepaid supplies
d. ₱10,700 debit to supplies expense
P a g e | 46
10. The prepaid insurance account has a debit balance of ₱1,200 at the end of the year. If unexpired
insurance at the end of the year is ₱800, the amount of prepaid insurance that should be reported on
the end-of-year balance sheet is
a. ₱400 c. ₱800
b. ₱1,200 d. ₱0
11. Physical resources that are owned and used by a business and are permanent or have a long life are
referred to as
a. fixed assets c. property, plant and equipment
b. capital assets d. all of these
12. The portion of the cost of a fixed asset that is recorded as an expense each year of its useful life is
called
a. accumulated depreciation c. repairs and maintenance
b. depreciation d. bad debts
13. The difference between the cost of a fixed asset and its accumulated depreciation is called the
asset’s
a. book value c. depreciation
b. carrying amount d. a or b
14. The profit reported on the income statement is ₱90,000. However, adjusting entries have not been
made at the end of the period for insurance expense of ₱550 and accrued salaries of ₱750. The
correct profit should have been
a. ₱90,000 c. ₱91,300
b. ₱88,700 d. ₱90,200
15. This trial balance is prepared after all the adjusting entries have been posted.
a. post-closing c. unadjusted
b. adjusted d. income statement
P a g e | 47
ANSWERS:
1. C
2. A
3. A
4. C
5. D
6. D
7. A
8. B
9. D
10. C
11. D
12. B
13. D
14. B
15. B
P a g e | 48
Chapter 9 Accounting Cycle of a Service Business

9-1: TRUE OR FALSE
1. The income statement shows an entity’s income and expenses for a specific period of time, such as a
month or a year.
2. If the Income Statement Debit column is greater than the Income Statement Credit column, the
difference is profit.
3. A type of working paper frequently used by accountants prior to the preparation of financial
statements is called a post-closing trial balance.
4. At the end of the period, the balances are removed from the temporary accounts and the net effect
is recorded in the permanent account by means of closing entries.
5. The balance of Accumulated Depreciation –Equipment is extended to the Income Statement

columns of the worksheet.
6. The difference between Debit and Credit columns of the Income Statement section of the work sheet
is normally larger than the difference between the Debit and Credit columns of the Balance Sheet
section.
7. The balances of the account accounts reported in the balance sheet are carried from year to year and
are called Temporary accounts.
8. If the debit portion of an adjusting entry debits an expense, the credit portion must credit either a
contra asset or a liability account.
9. The adjusting entry to record depreciation of fixed assets consists of a debit to a depreciation
expense account and a credit to an accumulated depreciation account.
10. When services are not paid for until after they have been performed, the accrued expense is
recorded in the accounts by an adjusting entry at the end of the accounting period.
11. A deferral is an expense that has not been paid or a revenue that has not been received.
12. Accrued expenses may be described on the balance sheet as accrued liabilities.
13. The amount of accrued revenue is recorded by debiting a liability account and crediting a revenue
account.
14. Assets used up or services consumed in the process of generating revenues are reported as
expenses.
15. A customer’s written promise to pay an amount on a specified date is recorded as note receivable.
P a g e | 49
ANSWERS:
1. TRUE
2. FALSE
3. FALSE – worksheet
4. TRUE
5. FALSE
6. FALSE
7. FALSE – Permanent or Real accounts
8. TRUE
9. TRUE
10. TRUE
11. FALSE
12. TRUE
13. FALSE – by debiting an asset account
14. TRUE
15. TRUE
P a g e | 50
1. The portion of the cost of a fixed asset that is charged as expense as the asset is used is called
a. consumption.
b. deterioration.
c. depreciation.
d. contra asset.
2. All changes in the owner’s equity that have occurred during the accounting period are closed to the
a. Owner’s equity account. c. Owner’s summary account.
b. Owner’s drawings account. d. Owner’s manual.
3. Which of the following actions comes first when recording a transaction in a journal?
a. list the account to be credited c. list the amount to be debited
b. list the amount to be credited d. list the account to be debited
4. The equality of debits and credits in the ledger should be verified at the end of each accounting
period by preparing a (an):
a. accounting statement
b. balance report
c. trial balance
d. account verification report
5. Entries required at the end of an accounting period to bring the accounts up to date and to assure
the proper matching of revenues and expenses are called:
a. matching entries
b. adjusting entries
c. contra entries
d. correcting entries
6. The amount of accrued but unpaid expenses at the end of the fiscal period is both an expense and a
(an):
a. liability
b. asset
c. deferral
d. revenue
7. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense
account, which of the following describes the effect of the credit portion of the entry?
a. Decreases the balance of a contra asset account
b. Increases the balance of an asset account
c. Decreases the balance of an asset account
d. Increases the balance of an expense account
8. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account,
which of the following describes the effect of the debit portion of the entry?
a. Increases the balance of a contra asset account
b. Increases the balance of an asset account
P a g e | 51
c. Decreases the balance of an asset account

d. Increases the balance of an expense account
9. The balance in the prepaid rent account before adjustment at the end of the year is ₱12,000, which
represents three month’s rent paid on December 1. The adjusting entry required on December 31 is:
a. debit Prepaid Rent, ₱4,000; credit Rent Expense, ₱4,000
b. debit Rent Expense, ₱4,000; credit Prepaid Rent, ₱4,000
c. debit Prepaid Rent, ₱8,000; credit Rent Expense, ₱8,000
d. debit Rent Expense, ₱8,000; credit Prepaid Rent, ₱8,000
10. The difference between the fixed asset account and the related accumulated depreciation account is
called the:
a. book value or carrying amount of the asset
b. fair value of the asset
c. current cost of the asset
d. contra account balance of the asset
P a g e | 52
ANSWERS:
1. C
2. A
3. D
4. C
5. B
6. A
7. C
8. D
9. B
10. A
P a g e | 53

1. The service fees account is closed at the end of the period by
a. debiting it. c. pressing the power button.
b. crediting it. d. any of these.
2. The depreciation expense account is closed at the end of the period by

a. debiting it. c. erasing it.
b. crediting it. d. This account is not closed.
3. The profit reported on the income statement is ₱50,000. However, adjusting entries have not been
made at the end of the period for supplies expense of ₱500 and accrued salaries of ₱1,300. Profit, as
corrected, is:
a. ₱48,200
b. ₱48,700
c. ₱50,500
d. ₱51,800
4. In completing the work sheet, the adjusted amount for depreciation expense is extended to the
a. income statement credit column c. income statement debit column
b. balance sheet credit column d. balance sheet debit column
5. In completing the work sheet, the adjusted amount for the service fees account is extended to the
6. It is a working paper that accountants may use to summarize adjusting entries and the account
balances for the financial statements.
a. worksheet c. accounting scratch paper
b. accountant’s notes d. balance sheet
7. In completing the work sheet, the adjusted amount for office equipment is extended to the
8. After all of the account balances have been extended to the Income Statement columns of the work
sheet, the totals of the Debit and Credit columns are ₱89,900 and ₱99,500, respectively. The
difference of ₱9,600 represents
a. profit or net income. c. owner’s drawings
b. loss or net loss. d. net asset.
9. Income and expense account balances are transferred to this account at the end of a period.
a. income statement c. profit or loss
b. net income d. income summary
10. The salaries expense account is closed at the end of the period by crediting it and debiting the
a. income statement. c. owner’s drawings
b. balance sheet. d. income summary account.
P a g e | 54
ANSWERS:
1. A
2. B
3. A
4. C
5. A
6. A
7. D
8. A
9. D
10. D
P a g e | 55
1. An annual reporting period that starts on January 1 and ends on December 31 is called a (an)
a. calendar year period. c. interim financial reporting period.
b. fiscal year period. d. accounting cycle period.
2. After all of the account balances have been extended to the Balance Sheet columns of the work
difference of ₱16,200 is
3. The service fees account is closed at the end of the period by debiting it for its balance and crediting
the
a. income statement. c. post-closing trial balance.
b. balance sheet. d. income summary account.
4. The income summary account (net income or profit) is closed at the end of the period by debiting it
for its balance and crediting the
a. owner’s equity account. c. balance sheet account.
b. owner’s drawings account. d. closing account.
5. The trial balance prepared after the closing entries have been posted is called the
a. unadjusted trial balance. c. pre-closing trial balance.
b. adjusted trial balance. d. post-closing trial balance.
6. This begins with analyzing and journalizing transactions and ends with the post-closing trial
balance.
a. accountant’s cycle c. accounting cycle
b. worksheet d. B.S. Accountancy
7. After all the account balances have been extended to the Income Statement columns of the work
difference of ₱5,000 is
8. After all the account balances have been extended to the Balance Sheet columns of the work sheet,
the totals of the Debit and Credit columns are ₱280,000 and ₱240,000, respectively. The difference of
₱40,000 is the
9. These are used to transfer the balances of the income, expense, and owner’s drawings accounts to
the owner’s equity account.
a. adjusting entries c. closing entries
b. reclassification entries d. transfer entries
P a g e | 56
10. Income and expense account balances are transferred to this account at the end of a period.
a. income summary c. accounts receivable
b. accumulated depreciation d. cash
P a g e | 57
ANSWERS:
1. A
2. B
3. D
4. A
5. D
6. C
7. B
8. A
9. C
10. A
P a g e | 58
9-5: EXERCISE
Instructions: Prepare the adjusting and closing entries and complete the worksheet of Saturday Co. for
the period ended July 31, 20x1. Use the forms provided below.
 Information for adjusting entries:

a. Salaries incurred but not yet paid amount to ₱2,000.
b. The ₱8,712 debit in the prepaid rent account is the payment of one year’s rent on July 1, 20x1.
c. The supplies on hand as of July 31, 20x1 cost ₱1,000.
d. Depreciation of the equipment amounting to ₱400 is not yet recorded.
e. Fees for a service rendered in July 20x1 but collected in August 20x1 amount to ₱2,100.
ADJUSTING ENTRIES:
JOURNAL
CLOSING ENTRIES:
JOURNAL
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P a g e | 60
ANSWERS:
ADJUSTING ENTRIES:
JOURNAL
(a) Salaries expense 2,000
Salaries payable 2,000
(b) Rent expense (8,712 x 1/12) 726
Prepaid rent 726
(c) Supplies expense (2,750 - 1,000) 1,750
Office supplies 1,750
(d) Depreciation expense 400
Accumulated depreciation 400
(e) Accounts receivable 2,100
Service fees 2,100
CLOSING ENTRIES:
JOURNAL
Service fees 30,799
Miscellaneous expense 5,819
Rent expense 726
Depreciation expense 400
Income summary 4,175

Owner’s drawings 3,234
P a g e | 61
P a g e | 62
9-6: EXERCISE
The trial balance of Uncle Roy’s Guitar Repair Shop for the year ended October 31, 20x1 is as follows:
Uncle Roy’s Guitar Repair Shop

Adjusted trial balance
October 31, 20x1
Debit Credit
Cash 10,050
Accounts receivable 8,950
Supplies 4,000
Owner's drawings 1,000
Service fees 27,450
Advertising expense 4,825
Rent expense 1,525
Utilities expense 700
Miscellaneous expense 1,400
Totals 37,900 37,900
Instructions: Prepare the balance sheet and income statement using the forms below. Be mindful of the
correct headings for the financial statements.
ASSETS
TOTAL ASSETS
LIABILITIES
TOTAL LIABILITIES
EQUITY
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY

P a g e | 63
INCOME
EXPENSES
TOTAL EXPENSES
PROFIT FOR THE PERIOD

P a g e | 64
ANSWERS:

Balance Sheet
As of October 31, 20x1
ASSETS
Cash ₱10,050
Supplies 4,000
TOTAL ASSETS ₱23,000
LIABILITIES
TOTAL LIABILITIES 4,450
EQUITY
Owner's equity (6,000 – 1,000 drawings + 13,550 profit) 18,550
TOTAL EQUITY 18,550
TOTAL LIABILITIES & EQUITY ₱23,000

Income Statement
For the year ended October 31, 20x1
INCOME
Service Fees ₱27,450
EXPENSES
Supplies expense (5,450)
Advertising expense (4,825)
Rent expense (1,525)
Utilities expense (700)
Miscellaneous expense (1,400)
TOTAL EXPENSES (13,900)
PROFIT FOR THE PERIOD ₱13,550

P a g e | 65
Chapter 10 Accounting Cycle of a Merchandising Business
1. A buyer uses this account to record defective goods returned to the seller.
a. inventory loss account c. sales invoice
b. sales returns d. purchase returns
2. A seller sends this document to a buyer.

a. sales order c. sales invoice
b. purchase invoice d. check
3. The cost that is reported as an expense when merchandise inventory is sold is called
a. depreciation. c. gross profit.
b. cost of goods sold or cost of sales. d. sales returns.
4. Unsold goods at the end of an accounting period are reported in the balance sheet as
a. cost of goods sold. c. inventory.
b. accounts receivable d. accounts payable.
5. The sum of the balances of subsidiary accounts in the subsidiary ledger should be equal to the
a. total debits in the trial balance.
b. balance of the related controlling account in the general journal.
c. balance of the income summary account that is closed at the end of the period.
d. balance of the related controlling account in the general ledger.
6. If operations for an accounting period resulted in cash sales of ₱60,000, sales on account of ₱150,000,
and total expenses of ₱195,000, the profit (loss) for the period is
a. ₱15,000 c. ₱45,000
b. (₱15,000) d. (₱45,000)
7. The amounts used in the process of earning revenue are

a. expenses. c. assets
b. owner’s drawings. d. owner’s equity.
8. A work sheet is completed by:

a. extending the adjusted trial balance amounts to the Income Statement and Balance Sheet
columns
b. totaling the Adjustment columns
c. extending the work sheet adjustments to the Adjusted Trial Balance columns.
d. all the above
9. If the Income Statement Credit column is greater than the Income Statement Debit column:
a. a net income or profit exits
b. a net loss or loss exists
c. an asset account is debited
d. a liability account is credited
P a g e | 66
10. After all the account balances have been extended to the Balance Sheet columns of the work sheet,
the totals of the Debit and Credit columns are ₱377,750 and ₱387,750, respectively. What is the
amount of net income (or profit) or net loss (or loss) for the period?
a. ₱10,000 net income or profit
b. ₱10,000 net loss or loss
c. ₱377,750 net income or profit
d. ₱388,750 net income or profit
11. After all of the account balances have been extended to the Income Statement columns of the work
sheet, the totals of the Debit and Credit columns are ₱62,300 and ₱67,600, respectively. What is the
amount of the net income (or profit) or net loss (or loss) for the period?
a. ₱5,300 net income or profit
b. ₱5,300 net loss or loss
c. ₱119,300 net income or profit
d. ₱119,300 net loss or loss
12. Which of the following accounts should be closed to Income Statement at the end of the fiscal year?
a. Owner’s drawings
b. Accumulated Depreciation - Equipment
c. Sales
d. Accounts Payable
13. This is used in conjunction with subsidiary ledgers and contains all of the income statement and
balance sheet accounts.
a. trial balance c. general journal
b. chart of accounts d. general ledger
14. This inventory system does not show the amount available for sale or sold during the period.
a. periodic c. journal
b. perpetual d. reversing
15. A seller uses this account to record cash discounts offered to buyers for early payment.
a. sales discounts c. sales returns
b. purchase discounts d. cost of goods sold
P a g e | 67
ANSWERS:
1. D
2. C
3. B
4. C
5. D
6. A
7. A
8. D
9. A
10. B
11. A
12. C
13. D
14. A
15. A
P a g e | 68
1. The counting of unsold goods at the end of the period is referred to as

a. physical count of inventory. c. periodic inventory system.
b. inventory accounting. d. perpetual inventory system.
Use the following information for the next six questions:

Uncle Roy’s Saturday Sale Co.’s records show the following:
Sales ₱340,000
Sales returns 25,000
Sales discounts 15,000
Purchases 190,000
Freight-in 2,000
Purchase returns 7,000
Purchase discounts 19,000
Other operating expenses 92,000
Inventory, beg. 10,000
Inventory, end. 25,000
2. How much is the net sales?

a. 300,000 c. 315,000
b. 380,000 d. 325,000
3. How much is the net purchases?

a. 124,000 c. 158,000
b. 146,000 d. 166,000
4. How much is the total goods available for sale?

a. 142,000 c. 158,000
b. 176,000 d. 166,000
5. How much is the cost of goods sold?

a. 124,000 c. 151,000
b. 176,000 d. 166,000
6. How much is the gross profit?

a. 164,000 c. 158,000
b. 146,000 d. 149,000
7. How much is the profit (loss)?

a. 54,000 c. 58,000
b. 46,000 d. 57,000
8. If the gross profit is less than the sum of all the other expenses incurred during the period, there is
a. profit. c. sales discount.
b. loss. d. income summary.
P a g e | 69
9. Balances of selected accounts at the end of the year, before adjustments, are as follows: Sales,
₱900,000; Sales Returns and Allowances, ₱50,000; Sales Discounts, ₱10,000; Cost of Merchandise
Sold, ₱600,000; Selling Expenses, ₱80,000; Administrative Expenses, ₱25,500; Interest Revenue,
₱5,000; Interest Expense, ₱2,000. The gross profit is
a. ₱240,000. c. ₱420,000.
b. ₱260,000. d. ₱137,500.
10. Unearned revenue or unearned income is a (an)

a. asset account. c. income account.
b. liability account. d. expense account.
11. If operations for an accounting period resulted in cash sales of ₱90,000, sales on account of ₱40,000,
and total expenses of ₱135,000, the profit (loss) is
a. ₱5,000 c. ₱45,000
b. (₱5,000) d. (₱45,000)
12. Sales minus cost of goods sold is called

a. net sales. c. gross profit.
b. profit or loss. d. total goods available for sale.
13. This ledger contains individual accounts with a common characteristic.

a. trial balance c. general ledger
b. chart of accounts d. subsidiary ledger
14. Under this inventory system each purchase and sale of merchandise is recorded in an inventory
account when the transactions occur.
a. periodic c. double
b. perpetual d. single
15. A buyer records cash discounts taken for early payment of an invoice as
a. purchases discounts. c. gain.
b. sales discounts. d. loss.
P a g e | 70
ANSWERS:
1. A
2. A (See solution below)
3. D (See solution below)
4. B (See solution below)
5. C (See solution below)
Solution:
Net sales (340K - 25K - 15K) 300,000
Cost of goods sold:
Net purchases (190K + 2K - 7K - 19K) 166,000
Total goods available for sale 176,000
Inventory, end. (25,000) (151,000)
Gross profit 149,000
Other operating expenses (92,000)
Profit 57,000
8. B
9. A
10. B
11. B
12. C
13. D
14. B
15. A
P a g e | 71
1. Which of the following statements correctly describe the difference between the financial
statements of a merchandising business and a service business?
a. A merchandising business reports inventory in its balance sheet and cost of goods sold in its
income statement.
b. A merchandising business reports profit, while a service business reports loss.
c. A merchandising business reports revenue, while a service business does not.
d. A merchandising business reports expenses, while a service business does not.
2. Beginning inventory plus Net purchases equals

a. Cost of goods sold. c. Ending inventory.
b. Gross profit. d. Total goods available for sale.
3. Total goods available for sale less Ending inventory equals

a. Cost of goods sold. c. Net purchases.
b. Gross profit. d. Beginning inventory.
4. If the gross profit exceeds the sum of all the other expenses incurred during the period, there is
a. profit. c. sales discount.
b. loss. d. income summary.
5. A seller uses this account to record goods returned by buyers.

a. sales return c. sales discount
b. purchase return d. freight in
6. Balances of selected accounts at the end of the year, before adjustments, are as follows: Sales,
₱750,000; Sales Returns and Allowances, ₱25,000; Sales Discounts, ₱10,000; Cost of Merchandise
Sold, ₱500,000; Selling Expenses, ₱80,000; Administrative Expenses, ₱20,000; Interest Revenue,
₱5,000; Interest Expense, ₱2,000. The gross profit is
a. ₱185,000 c. ₱215,000
b. ₱195,000 d. ₱250,000
7. The account that appears in the chart of accounts for merchandising business but not for a service
business is:
a. Accounts Receivable
b. Advertising Expense
c. Sales Returns and Allowances
d. Accumulated Depreciation
8. The excess of net revenue from sales over the cost of merchandise sold is called:
a. gross profit
b. operating profit
c. net profit from operations
d. merchandising income
9. After all adjusting entries are posted, the balances of all asset, liability, income, and expense
accounts correspond exactly to the amounts in the:
P a g e | 72
a. work sheet trial balance

b. general journal
c. post-closing trial balance
d. financial statements
10. Beginning inventory plus Net purchases minus Ending inventory equals
a. Cost of goods sold. c. Ending inventory.
b. Gross profit. d. Total goods available for sale.
P a g e | 73
ANSWERS:
1. A
2. D
3. A
4. A
5. A
6. C
7. C
8. A
9. D
10. A
P a g e | 74
10-4: EXERCISE
Zevrek Co. had the following purchases and sales transactions during the month of January.
Jan. 3 Purchased goods worth ₱25,000 from Athena Co., on account. Freight paid (outright in cash) on
the shipment was ₱2,000.
Jan. 5 Returned damaged goods worth ₱5,000 from the purchase on Jan. 3.
Jan. 12 Sold goods on account to Devin Co. The sale price was ₱50,000 and the cost of the merchandise
sold was ₱35,000.
Jan. 13 Paid Athena Co. for purchase on Jan. 3 net of the cost of the goods returned.
Jan. 15 Received goods returned by Devin Co. The goods returned had a sale price of ₱8,000 and cost
of ₱5,600.
Jan. 22 Received payment from Devin Co. net of the return.
Additional information:
 Beginning inventory, ₱15,600.
 Ending inventory (per physical count), ₱8,200.

a. Prepare the journal entries under the (1) periodic and (2) perpetual inventory systems; and
b. Complete the pro-forma income statements.
PERIODIC INVENTORY SYSTEM

JOURNAL
P a g e | 75
PERPETUAL INVENTORY SYSTEM

JOURNAL
PRO-FORMA INCOME STATEMENT
PERIODIC PERPETUAL
Net sales
Cost of goods sold
Beginning inventory
Net purchases
Total goods available for sale
Ending inventory
Gross profit
Other operating expenses (2,800) (2,800)
Profit
P a g e | 76
ANSWERS:
PERIODIC INVENTORY SYSTEM

JOURNAL
Jan.3 Purchases 25,000
Freight-in 2,000
Cash 2,000
Jan.5 Accounts payable 5,000
Jan.12 Accounts receivable 50,000
Sales 50,000
Cash 20,000
Jan.15 Sales returns 8,000
Jan.22 Cash 42,000
PERPETUAL INVENTORY SYSTEM

JOURNAL
Jan.3 Inventory 27,000
Cash 2,000
Inventory 5,000
Jan.12 Accounts receivable 50,000
Sales 50,000
Cost of goods sold 35,000

Inventory 35,000
Cash 20,000
Jan.15 Sales returns 8,000
Inventory 5,600
Jan.22 Cash 42,000
P a g e | 77
PRO-FORMA INCOME STATEMENT
PERIODIC PERPETUAL
Net sales 42,000 42,000
Cost of goods sold (29,400)
Beginning inventory 15,600
Net purchases 22,000
Ending inventory (8,200) (29,400)
Gross profit 12,600 12,600
Other operating expenses (2,800) (2,800)
Profit 9,800 9,800

P a g e | 78
10-5: EXERCISE
Instructions: Prepare the journal entries under the (1) perpetual and (2) periodic inventory systems
using the journals provided below.
1. Sold merchandise on nonbank credit cards and reported accounts to the card company, ₱3,150. The
cost of the merchandise sold was ₱2,000.
2. Sold merchandise for cash, ₱2,850. The cost of the merchandise sold was ₱1,380.
3. Received cash from card company for nonbank credit card sales, less ₱100 service fee (Use ‘Service
charges’ account).
4. Sold merchandise on account to Rask Co., ₱4,500. Paid delivery expense (freight-out) of ₱150. The
freight is borne by the seller. The cost of the merchandise sold was ₱3,100.
5. Received merchandise returned by Rask Co., ₱400. The cost of the merchandise returned was ₱275.
6. Received cash in account from Rask Co. less the returns.
PERPETUAL PERIODIC
Date ACCOUNT TITLES Dr. Cr. Date ACCOUNT TITLES Dr. Cr.
P a g e | 79
ANSWERS:
PERPETUAL PERIODIC
Date ACCOUNT TITLES Dr. Cr. Date ACCOUNT TITLES Dr. Cr.
Accounts receivable 3,150 Accounts receivable 3,150
Sales 3,150 Sales 3,150
Inventory 2,000
Cash Cash
Inventory 1,380
Cash Cash
Service charges Service charges
Accounts receivable Accounts receivable
Freight out Freight out
Cash 150 Cash 150

Inventory 3,100
Sales returns Sales returns
Accounts receivable 400 Accounts receivable 400
Inventory 275
Cost of goods sold 275
Cash Cash
P a g e | 80
10-6: EXERCISE
Instructions: Using the forms provided, prepare the adjusting and closing entries, complete the
worksheet and prepare the balance sheet and income statement of Tea Co. for the year ended Dec. 31,
20x1.
 Information for adjusting entries:

a. Ending inventory amount to ₱7,500.
b. Bad debts expense of ₱500 should be recognized.
c. Depreciation of ₱4,000 is not yet recorded.
ADJUSTING ENTRIES:
JOURNAL
CLOSING ENTRIES:
JOURNAL
WORKSHEET
P a g e | 81
P a g e | 82
BALANCE SHEET
ASSETS
Accounts receivable
Allowance for bad debts
Equipment
Accumulated depreciation
TOTAL ASSETS
LIABILITIES
TOTAL LIABILITIES
EQUITY
TOTAL EQUITY
TOTAL LIABILITIES & EQUITY
INCOME STATEMENT
Sales
Sales returns
Net sales
Cost of sales:
Inventory, beg.
Purchases
Freight-in
Purchase returns
Total goods available for sale
Inventory, end.
Gross profit
Salaries expense
Bad debts expense
Depreciation expense
Profit
P a g e | 83
ANSWERS:
ADJUSTING ENTRIES:
JOURNAL
(a) Inventory, end. 7,500
(b) Bad debt expense 500
Allowance for bad debts 500
(c) Depreciation expense 4,000
Accumulated depreciation 4,000
CLOSING ENTRIES:
JOURNAL
Sales 88,000
Sales returns 1,600
Purchases 54,800
Freight-in 1,000
Bad debts expense 500
Depreciation expense 4,000

Owner’s drawings 2,000
WORKSHEET
P a g e | 84
P a g e | 85
BALANCE SHEET
Tea Co.
Balance Sheet
As of December 31, 20x1
ASSETS
Cash ₱1,300
Allowance for bad debts (500)
Inventory 7,500
Equipment 40,000
Accumulated depreciation (12,000)
TOTAL ASSETS ₱42,300
LIABILITIES
TOTAL LIABILITIES 5,000
EQUITY
TOTAL EQUITY 37,300
TOTAL LIABILITIES & EQUITY ₱42,300
INCOME STATEMENT
Tea Co.
Income statement
For the year ended December 31, 20x1
Sales 88,000
Sales returns (1,600)
Net sales 86,400
Cost of sales:
Purchases 54,800
Freight-in 1,000
Purchase returns (3,000)
Inventory, end. (7,500) (47,600)
Gross profit 38,800
Salaries expense (22,000)
Bad debts expense (500)
Depreciation expense (4,000)
Profit 12,300
P a g e | 86
Chapter 11 Partnership Formation


a. A partnership must not be owned by more than four individuals.
b. Unlike for a corporation, a partnership is formed through an operation of law.
c. The balance sheet of a partnership differs from that of a sole proprietorship in respect of assets
and liabilities.
d. The partners’ contributions to the partnership are initially measured at fair value.
2. An advantage of a partnership business would include:

a. Being able to raise capital through share issues
b. Greater power than a sole trader for decision making
c. Access to a larger amount of initial capital
d. Limited liability for all partners
3. The legal characteristic of a partnership whereby each partner is an agent of the partnership and is
able to bind the partnership to contracts within the normal scope of the partnership business is
known as:
a. unlimited liability
b. partnership accounting
c. a partnership contract
d. mutual agency
4. Which of the following is not true regarding a partnership?

a. The expulsion of one partner from a partnership does not dissolve the partnership.
b. A partnership is a voluntary association.
c. Partnerships have limited life.
d. Partners in general partnerships have unlimited liability.
5. A and B formed a partnership. Although A and B contributed equal amounts of cash, it was agreed
that the initial credit to A’s capital account should be greater than that of B. If the bonus method is
used, which of the following statements is correct?
a. A capital bonus is given to B.
b. The initial capital of the partnership is equal to the sum of A and B’s contributions.
c. Partner B’s account is not affected by the agreement.
d. Goodwill must be recorded.
6. Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the
partnership’s formation:
Roberts Smith
Cash 20,000 30,000
Inventory - 15,000
Building - 40,000
Furniture & equipment 15,000 -
P a g e | 87
The building is subject to a mortgage of ₱10,000, which the partnership has assumed. The partnership
agreement also specifies that profits and losses are to be distributed evenly. What amounts should be
recorded as capital for Roberts and Smith at the formation of the partnership?
Roberts Smith
a. 35,000 85,000
b. 35,000 75,000
c. 55,000 55,000
d. 60,000 60,000
7. A and B agreed to form a partnership. A shall contribute ₱60,000 cash while B shall contribute
₱120,000 cash. However due to the expertise that A will be bringing to the partnership, the partners
agreed that they should initially have equal interests in the partnership capital. Under the bonus
method, how much is the adjusted capital balance of B immediately after the formation of the
partnership?
a. 60,000
b. 90,000
c. 120,000
d. none of these
8. Mang and Ming agreed to form a partnership. The partnership agreement stipulates that Mang
shall contribute a noncash asset with fair value of ₱1,000 while Ming shall contribute cash of ₱1,000.
However, since Ming will be bringing in a special skill to the partnership, the partners agreed that
Ming shall be entitled to a 70% interest in the partnership initial net assets and in subsequent
partnership profits and losses. Which of the following statements is correct?
a. Mang’s noncash asset contribution shall be debited at ₱300.
b. The net credit to Ming’s capital account is ₱1,400.
c. Mang is given a bonus.
d. The partnership’s total equity immediately after the formation is ₱2,400.
Use the following information for the next two questions:

A, B and C formed a partnership. Their contributions are as follows:
A B C
Cash 80,000 20,000 200,000
Equipment 160,000
Totals 80,000 180,000 200,000
Additional information:
 Although C has contributed the most cash to the partnership, he did not have the full amount of
₱200,000 available and was forced to borrow ₱80,000.
 The equipment contributed by B has an unpaid mortgage of ₱40,000, the repayment of which is
assumed by the partnership.
 The partners agreed to equalize their interest. Cash settlements among the partners are to be made
outside the partnership.

a. A receives ₱60,000 from C.
b. A and B pays C a total of ₱60,000.
P a g e | 88
c. A pays B ₱60,000.
d. A pays C ₱60,000.
10. The simple journal entries to record the partners’ contributions include
a. a ₱60,000 cash receipt from C.
b. a debit to B’s mortgage for ₱40,000.
c. a ₱60,000 debit to C’s capital account.
d. a credit to A’s loan payable for ₱80,000.
P a g e | 89
ANSWERS:
1. D
2. C
3. D
4. A
5. B
6. B
7. B (60K + 120K) ÷ 2 = 90K
8. B
9. D
Solution:
A B C Partnership
Cash 80,000 20,000 200,000 300,000
Equipment 160,000 160,000
Mortgage payable (40,000) (40,000)
80,000 140,000 200,000 420,000
Equal interest (420 ÷ 3) 140,000 140,000 140,000 420,000
Cash receipt (payment) (60,000) - 60,000 -
Answer: C shall receive 60,000 from A.
10. C
Solution:
Date Cash 80,000
A, Capital 80,000
to record A’s contribution
Date Cash 20,000
Equipment 160,000
Mortgage payable 40,000
B, Capital 140,000
to record B’s contribution 140,000
Date Cash 200,000
C, Capital 200,000
to record C’s contribution
Date C, Capital 60,000
A, Capital 60,000
to equalize the partners’ capital
P a g e | 90
11-2: EXERCISE
On January 1, 20x1, Mr. Ann and Ms. Buoy agreed to form a partnership. The partners’ contributions
are listed below:
Mr. Ann Ms. Buoy
Cash 50,000 120,000
Accounts receivable 360,000 1,080,000
Inventories 216,000 360,000
Land 1,080,000
Building 900,000
Equipment 90,000 90,000
Accounts payable 336,000 450,000
Capital 1,460,000 2,100,000
The partners agreed to the following:

a. The recoverable amounts of the partners’ respective accounts receivable are ₱300,000 for Mr. Ann
and ₱760,000 for Ms. Buoy.
b. The inventory contributed by Ms. Buoy includes obsolete items with a recorded cost of ₱20,000.
c. The land has an attached mortgage of ₱180,000, which the partnership will assume.
d. The equipment contributed by Ms. Buoy has a fair value of ₱130,000.
e. Mr. Ann has an unrecorded accounts payable of ₱100,000. The partnership assumes the obligation
of settling that account.
Requirement: Compute for the adjusted capital balances of the partners at the partnership formation
date.
P a g e | 91
ANSWER:
Mr. Ann Ms. Buoy Totals
Cash 50,000 120,000 170,000
Accounts receivable 300,000 760,000 1,060,000
Inventories 216,000 340,000 556,000
Land 1,080,000 1,080,000
Building 900,000 900,000
Equipment 90,000 130,000 220,000
Total assets 1,736,000 2,250,000 3,986,000
Accounts payable 436,000 450,000 886,000

Mortgage payable 180,000 180,000
Total liabilities 616,000 450,000 1,066,000
Adjusted capital balances 1,120,000 1,800,000 2,920,000

P a g e | 92
Chapter 12 Partnership Operations
1. According to the Philippine Civil Code, in the absence of an agreement, profit and loss are divided
by partners in the ratio of:
a. Capital contributions
b. Equally
c. Time devoted by each of the partners
d. Goodwill
2. Which of the following is not a component of the formula used to distribute partnership profits to
the partners?
a. Salary allocation to those partners working.
b. After all other allocation, the remainder divided according to the profit and loss sharing ratio.
c. Interest on the average capital investments.
d. Interest on notes to partners.
3. The partnership agreement provided for a salary allowance of ₱6,000 per month to partner X, and
the balance to be divided equally between partners X and Y. X made no additional partnership
investments during the year, but withdrew ₱7,000 per month. Profit for the year was ₱120,000. The
net change in X's capital account was a:
a. ₱12,000 increase
b. ₱60,000 increase
c. ₱54,000 decrease
d. ₱12,000 decrease
4. A and B are partners who share profits and losses on a 2:1 basis, respectively, after a salary
allowance of ₱12,000 is allocated to partner B. Earnings for the period total ₱39,000. What will be the
amount credited to the Capital account of partner A when the books are closed?
a. ₱7,000
b. ₱9,000
c. ₱18,000
d. ₱19,500
5. C and D are partners who share profits and losses on a 3:1 basis, respectively, after a salary
allowance of ₱15,000 is allocated to partner C. Earnings for the period total ₱51,000. What will be
the total amount credited to the Capital account of partner C when the Income Summary account is
closed?
a. ₱15,000
b. ₱20,000
c. ₱42,000
d. ₱32,000
6. A and B formed a partnership. The partnership agreement stipulates the following:

 First, A shall receive 2% of profit up to ₱200,000 and 5% over ₱200,000.
 Second, B shall receive 1% of the remaining profit over ₱200,000.
P a g e | 93
 Any remainder shall be shared equally.
During the year, the partnership earned profit of ₱500,000.
How much is the share of A in the profit?

a. 258,095 c. 241,095
b. 268,885 d. 241,905
7. A and B formed a partnership. The partnership agreement stipulates the following:

 Annual salary allowance of ₱40,000 for A.
 Interest of 10% on the weighted average capital balance of B.
 The partners share profits and losses in a 80:20 ratio.
During the period the partnership earned profit of ₱100,000.
The movements in B’s capital account are as follows:

B, Capital
60,000 beg.
Aug. 1 withdrawal 30,000 20,000 Mar. 31 additional investment
40,000 Oct. 1 additional investment
10,000 Dec. 1 additional investment
end. 100,000
How much is the share of B in the partnership profit?

a. 82,134
b. 82,200
c. 17,866
d. 83,167
8. A&B Partnership earns profit of ₱240,000 in 20x1. The movements in the capital accounts of the
partners are shown below:
A, capital B, capital
Dr. Cr. Dr. Cr.
Jan. 1 120,000 80,000
May 1 20,000 10,000
July 1 20,000
Aug. 1 10,000
Oct. 1 10,000 5,000
How much is the share of A in the profit if the partners are entitled to 20% interest on the ending
balances of their capital accounts and any remainder is shared equally.
a. 82,083
b. 118,500
c. 121,500
d. 129,417
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9. The ABC Co., in which A, B and C are partners, reported profit of ₱90,000. A, B and C’s profit-
sharing agreement is 1:2:3, respectively. How much is C’s share in the profit?
a. 15,000
b. 30,000
c. 45,000
d. 90,000
10. The partnership agreement of A, B and C stipulates the following:

 A, the managing partner, shall receive a bonus of 10% of profit.
 Each partner shall receive a 6% interest on average capital investments.
 Any remaining profit or loss shall be shared equally.
The average capital investments of the partners during the year were ₱80,000 for A, ₱50,000 for B, and
₱30,000 for C. The partnership earned profit of ₱100,000 during the period. How much was A’s share?
a. 23,800
b. 29,800
c. 28,600
d. 41,600
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ANSWERS:
1. A
2. D
3. A - The distribution of net income would be: ₱72,000 to X for the salary allowance, ₱24,000 each to X
and Y of the remaining ₱48,000 (₱120,000 - ₱72,000). X's capital was credited for ₱96,000 and debited
for ₱84,000 (12 x ₱7,000), a net increase of ₱12,000.
4. C - After the salary allowance is paid to partner B, ₱27,000 remains to be shared by the partners.
Partner A will receive 2/3 of the ₱27,000, or ₱18,000.
5. C - After the salary allowance is paid to partner C, ₱36,000 remains to be shared by the partners.
Partner C will receive 3/4 of the ₱36,000, or ₱27,000. The ₱15,000 salary plus the ₱27,000 share will
total ₱42,000.
6. C Solution:
A B Total
Amount being allocated 500,000
Allocation:
1. Bonus to A
First 200K: (200K x 2%) 4,000 4,000
Over 200K: [(500K - 200K) x 5%] 15,000 15,000
2. Bonus to B
(500K - 4K - 15K – 200K) x 1% 2,810 2,810
3. Allocation of remaining profit
(500K - 4K - 15K - 2.810K) ÷ 2 239,095 239,095 478,190
As allocated 258,095 241,905 500,000
7. C
Solution:
The weighted average balance of B’s capital account is computed as follows:
Months outstanding ÷ Weighted
Balances Total months in a year average
Beg. Balance 60,000 12/12 60,000
Mar. 31 additional investment 20,000 9/12 15,000
Aug. 1 withdrawal (30,000) 5/12 (12,500)
Oct. 1 additional investment 40,000 3/12 10,000
Dec.1 additional investment 10,000 1/12 833
Weighted average capital balance 73,333
A B Total
Allocation:
1. Salaries 40,000 - 40,000
2. Interest on weighted ave. capital
- 7,333 7,333
balance (73,333 x 10%)
3. Allocation of remaining loss
(100K – 40K – 7,333) = 52,667
(52,667 x 80%); (52,677 x 20%)
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As allocated 82,134 17,866 100,000
8. C
Solution:
A B Total
Allocation:
1. Interest on cap. (see computations below) 20,000 17,000 37,000
2. Allocation of remainder
101,500 101,500 203,000
(240K - 37K) = 203K ÷ 2
As allocated 121,500 118,500 240,000
Partner A Partner B
Balance, Jan. 1, 20x1 120,000 80,000
Withdrawal, May 1 (20,000) (10,000)
Additional investment, July 1 20,000
Additional investment, Aug. 1 10,000
Withdrawal, Oct. 1 (10,000) (5,000)
Ending balances 100,000 85,000
Multiply by: 20% 20%
Interest on ending balance 20,000 17,000
9. C
Solution:
Partners Allocation of profit
A (90,000 x 1/6) 15,000
B (90,000 x 2/6) 30,000
C (90,000 x 3/6) 45,000
Total 90,000
10. D
Solution:
A B C Total
Allocation:
1. Bonus (10% x 100,000) 10,000 10,000
2. Interest on cap.
(80K x 6%); (50K x 6%); (30K x 6%) 4,800 3,000 1,800 9,600
3. Allocation of remainder
(100K - 10K - 9.6K) = 80.4K ÷ 3 26,800 26,800 26,800 80,400
As allocated 41,600 29,800 28,600 100,000
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12-2: EXERCISE
Adam, Bevan & Charlie are partners. Their capital balances at the beginning of the year were ₱120,000,
₱100,000 and ₱80,000, respectively. The partnership agreement states the following:
a. Each partner is entitled to a monthly salary of ₱2,000.
b. Bevan and Charlie are entitled to a monthly commission of ₱3,000.
c. The partners are entitled to 10% interest on the opening balances of their capital accounts.
d. The remaining profit or loss, if any, will be shared equally among them.
Profit for the period is ₱198,000
Requirements:
a. Prepare a schedule showing the distribution of the profit to the partners.
b. Prepare the journal entry to close the income summary account to the partners’ respective capital
accounts
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ANSWER:
Requirement (a):
Adam Bevan Charlie Total
Allocation:
1. Monthly salaries (2K x 12) 24,000 24,000 24,000 72,000
2. Monthly commission (3K x 12) 36,000 36,000 72,000
3. Interest on beg. capital
[10% x (120K; 100K; & 80K) 12,000 10,000 8,000 30,000
4. Allocation of remaining profit
(198K – 72K – 72K – 30K) = 24K
(24K ÷ 3) 8,000 8,000 8,000 24,000
As allocated 44,000 78,000 76,000 198,000
Requirement (b):
Closing entry Income summary 198,000
Adam, Capital 44,000
Bevan, Capital 78,000
Charlie, Capital 76,000
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Chapter 13 Partnership Dissolution

1. The retirement or death of a partner

a. dissolves the partnership agreement.
b. liquidates the partnership
c. may or may not dissolve the partnership agreement.
d. requires the consent of all the other partners.
2. In a partnership, revaluation of assets is done due to:

a. admission
b. retirement
c. death
d. all of the above
3. A new partner can be entered into the partnership with the consent of:
a. a single partner.
b. at least two partners.
c. a majority of the existing partners.
d. all the existing partners.
4. In the partnership of Maxwell and Slade, Maxwell's capital balance is ₱40,000 and Slade's capital
balance is ₱60,000. Maxwell sold 50% of his partnership interest to Norton, who paid ₱24,000 for the
50% interest. The journal entry on the partnership books related to this transaction would include:
a. a debit to Cash for ₱24,000
b. a debit to Cash for ₱20,000
c. a debit to Maxwell, Capital for ₱24,000
d. a debit to Maxwell, Capital for ₱20,000
5. Norton invested ₱30,000 in the partnership of Maxwell and Slade. The capital balance of Maxwell
and Slade were ₱30,000 and ₱60,000, respectively. Norton was to receive a 25% interest in the new
partnership. The journal entry to record this transaction would NOT include:
a. a debit to cash for ₱30,000
b. a credit to Norton's capital account for ₱30,000
c. a credit to Slade's capital account for ₱7,500
d. none of these; the transaction is not recorded in the partnership books
6. The partners’ capital accounts in AB Partnership before the admission of a new partner are as
follows:
Capital accounts P/L ratios
A, Capital 200,000 60%
B, Capital 120,000 40%
320,000
C acquires 25% interest in the partnership by investing ₱120,000 to the business. Under the bonus
method, how much is the capital balance of A after the admission of C?
a. 194,000
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b. 204,000
c. 206,000
d. 212,000
and Slade were ₱40,000 and ₱60,000, respectively. Income and loss is shared according to the ratio
of equity balances. Norton was to receive 25% interest in the new partnership. The journal entry to
record this transaction would include:
a. a credit to cash for ₱20,000
b. a credit to Maxwell's capital account for ₱4,000
d. a credit to Norton's capital account for ₱30,000
and Slade were ₱40,000 and ₱60,000, respectively. Income and loss is shared according to the ratio
of equity balances. Norton was to receive 25% interest in the new partnership. The journal entry to
record this transaction would NOT include:
b. a credit to Maxwell's capital account for ₱2,000
d. a credit to Norton's capital account for ₱30,000
9. Norton was paid ₱25,000 from the partnership cash account for his withdrawal from the
partnership of Maxwell, Slade, and Norton. Their capital balances were ₱40,000, ₱60,000, and
₱35,000, respectively. Income and loss is shared according to the ratio of equity balances. The
journal entry to record the withdrawal of Norton would NOT include:
a. a credit to cash for ₱25,000
b. a debit to Maxwell's capital account for ₱2,000
d. a debit to Norton's capital account for ₱35,000
10. Norton was paid ₱40,000 from the partnership cash account for his withdrawal from the
partnership of Maxwell, Slade, and Norton. Their capital balances were ₱40,000, ₱60,000, and
₱35,000, respectively. The journal entry to record the withdrawal of Norton would include:
b. a debit to Maxwell's capital account for ₱5,000
c. a debit to Slade's capital account for ₱5,000
d. a debit to Norton's capital account for ₱35,000
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ANSWERS:
1. A
2. D
3. D
4. D - The transaction is a purchase of interest, a personal transaction between Slade and Norton. The
cash is paid directly to Maxwell. The journal entry would be a debit to Maxwell's capital account for
₱20,000 (1/2 x ₱40,000) and a credit to Norton's capital account for ₱20,000.
5. C - The new equity balance would be ₱120,000 (₱30,000 + ₱60,000 + ₱30,000). A 25% interest is
₱30,000 (₱120,000 x .25). There is no bonus. The journal entry would be a debit to Cash for ₱30,000
and a credit to Norton, Capital for ₱30,000, a 25% interest in the partnership.
6. C
Date Cash 100,000
C, Capital [(320K + 120K) x 25%] 110,000
A, Capital (10K x 60%) 6,000
B, Capital (10K x 40%) 4,000
A’s capital bal. after C’s admission: (200K beg. + 6K credit) = 206,000
7. D
Date Cash 20,000
Maxwell, Capital (10K x 60%) 6,000
Slade, Capital (10K x 40%) 4,000
Norton, Capital [(20K investment + 40K + 60K) x 25%] 30,000
8. D
Date Cash 40,000
Norton, Capital [(40K investment + 40K + 60K) x 25%] 35,000
Maxwell, Capital (5K x 40K/100K) 2,000
Slade, Capital (5K x 60K/100K) 3,000
9. B
Date Norton, Capital 35,000
Cash 25,000
10. D
Date Norton, Capital 35,000
Cash 40,000
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13-2: EXERCISE
PURCHASE OF INTEREST
1. X, Y, and Z have capital balances of ₱10,000, ₱15,000 and ₱20,000 respectively. Z sells half of his
capital interest to P for the sum of ₱12,000.
Requirement: Provide the journal entry.
2. X, Y, and Z have capital balances of ₱10,000, ₱15,000 and ₱20,000 respectively. P purchases a one-
fourth interest from all the partners for ₱11,250.
INVESTMENT IN THE PARTNERSHIP

3. A and B have capital balances of ₱10,000 and ₱20,000 respectively, and share profits and losses
equally. C invests ₱10,000 to the partnership for a 25% interest.
WITHDRAWAL, RETIREMENT OR DEATH OF A PARTNER

Fact pattern:
ABC Partnership’s equity of ₱60,000 consists of the following:
A, Capital (40%), ₱10,000
B, Capital (40%), ₱20,000
C, Capital (20%), ₱30,000
6. A withdraws from the partnership after B bought A’s interest for ₱16,000.
7. A withdraws from the partnership. The partnership paid A ₱16,000 for his partnership interest.
8. A withdraws from the partnership. The partnership paid A ₱7,000 for his partnership interest.

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ANSWERS:
1. Solution:
Date Z, Capital 10,000
P, Capital 10,000
2. Solution:
Date A, Capital (10,000 x ¼) 2,500
B, Capital (15,000 x ¼) 3,750
Z, Capital (20,000 x ¼) 5,000
P, Capital 11,250
3. Solution:
Date Cash 10,000
C, Capital [(10K investment + 10K + 20K) x 25%] 10,000
4. Solution:
Date Cash 18,000
A, Capital (6K ÷ 2) 3,000
B, Capital (6K ÷ 2) 3,000
5. Solution:
Date Cash 9,000
A, Capital (750 ÷ 2) 375
B, Capital (750 ÷ 2) 375
6. Solution:
Date A, Capital 10,000
B, Capital 10,000
7. Solution:
B, Capital (6K x 4/6) 4,000
C, Capital (6K x 2/6) 2,000
Cash 16,000
8. Solution:
Cash 7,000
B, Capital (3K x 4/6) 2,000
C, Capital (3K x 2/6) 1,000
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Chapter 14 Partnership Liquidation

1. In partnership liquidation, which of the following accounts is settled first?

a. receivable from a partner
b. payable to a partner
c. accounts payable
d. partner’s capital balance
2. The financial position of A’s and B’s partnership before liquidation is as follows:
Assets = Liabilities A, Capital (50%) B, Capital (50%)

₱40,000 ₱5,000 ₱20,000 ₱15,000
All the assets are converted into ₱32,000 cash. After settling the liabilities, how much is the share of B in
the remaining cash?
a. 27,000
b. 16,000
c. 11,000
d. 9,000
3. The financial position of A’s and B’s partnership before liquidation is as follows:
Assets = Liabilities A, Capital (60%) B, Capital (40%)

₱60,000 ₱10,000 ₱35,000 ₱15,000
All the assets are converted into ₱40,000 cash. After settling the liabilities, how much is the share of A in
the remaining cash?
a. 23,000
b. 7,000
c. 11,000
d. 9,000
4. Maxwell, Slade and Norton are business partners sharing in profits and losses equally. The
partnership’s financial condition immediately before the start of liquidation is as follows:
Capital Balances
Cash Other Assets = Liabilities Maxwell Slade Norton
₱20,000 ₱81,000 ₱20,000 ₱30,000 ₱40,000 ₱11,000
The other assets were sold for ₱60,000 and the liabilities were paid. Which of the following is NOT true?
a. The loss on liquidation was ₱21,000.
b. Maxwell's share of the ending cash balance was ₱23,000
c. Slade's share of the ending cash balance was ₱33,000
d. Norton's share of the ending cash balance was ₱7,000
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5. Maxwell, Slade and Norton are business partners sharing in profits and losses equally. The
partnership’s financial condition immediately before the start of liquidation is as follows:
Capital Balances
Cash Other Assets = Liabilities Maxwell Slade Norton
₱10,000 ₱71,000 ₱20,000 ₱30,000 ₱26,000 ₱5,000
The other assets were sold for ₱50,000 and the liabilities were paid. Any deficient partner will be unable
to pay the deficiency. Which of the following is NOT true?
a. The loss on liquidation was ₱21,000.
b. The cash balance before final distribution was ₱40,000.
c. Maxwell's share of the ending cash balance was ₱22,000
d. Slade's share of the ending cash balance was ₱19,000
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ANSWERS:
1. C
2. C
Step 1: Compute for the gain or loss on the sale

Sale of Assets 32,000
Less: Carrying amount of Assets (40,000)
Loss on sale (8,000)
Step 2: Allocate the gain or loss to the partners’ capital balances (include their right of offset)
A (50%) B (50%) Totals
Capital balances 20,000 15,000 35,000
Allocation of loss
[-8K ÷ 2] (4,000) (4,000) (8,000)
Amts. received by the partners 16,000 11,000 27,000
3. A

Sale of Assets 40,000
Less: Carrying amount of Assets (60,000)
A (60%) B (40%) Totals
Allocation of loss
[-20K x 60% & 40%] (12,000) (8,000) (20,000)
4. D

Sale of Other Assets 60,000
Less: Carrying amount of Others Assets (81,000)
Maxwell (1/3) Slade (1/3) Norton (1/3) Totals
Capital balances 30,000 40,000 11,000 81,000
Allocation of loss
[-21K ÷ 3] (7,000) (7,000) (7,000) (21,000)
Amts. received by the partners 23,000 33,000 4,000 60,000
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5. D

Sale of Other Assets 50,000
Less: Carrying amount of Others Assets (71,000)
Maxwell (1/3) Slade (1/3) Norton (1/3) Totals
Capital balances 30,000 26,000 5,000 61,000
Allocation of loss
[-21K ÷ 3] (7,000) (7,000) (7,000) (21,000)
Total 23,000 19,000 (2,000) 40,000
Alloc. of deficiency (2K ÷ 2) (1,000) (1,000) 2,000 -
Amts. received by the partners 22,000 18,000 - 40,000
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14-2: EXERCISE
The financial position of A’s and B’s partnership before liquidation is as follows:
Cash -
Non-cash assets 80,000
Total Assets 80,000

Loan payable to A 10,000
Loan payable to B 17,000
A, Capital (80%) 20,000
B, Capital (20%) 18,000
Total liabilities & equity 80,000
The non-cash assets were sold for ₱50,000.
Requirement: Compute for the final cash distributions to the partners by completing the tables below.
Net proceeds from sale of non-cash assets

Less: Carrying amount of non-cash assets
Gain (Loss) on sale
A B Totals
Capital balances
Loan payable to partner
Total
Allocation of loss
Amts. received by the partners
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ANSWERS:
Net proceeds from sale of non-cash assets 50,000

Less: Carrying amount of non-cash assets (80,000)
Gain (Loss) on sale (30,000)
A B Totals
Loan payable to partner 10,000 17,000 27,000
Total 30,000 35,000 65,000
Allocation of loss (30K x 80% & 20%) (24,000) (6,000) (30,000)
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Chapter 15 Accounting for Corporations
15-1: TRUE OR FALSE

1. Ordinary shares are also called Common stocks.
2. The costs of issuing shares of stocks are recognized as expenses.
3. Reissuances of treasury shares result in a net decrease in total shareholders’ equity.
4. A corporation may acquire, own, and dispose of property in its corporate name.
5. The two main sources of stockholders’ equity are paid-in Capital and long-term debt.
6. The specified minimum stockholders’ contribution that a corporation is required by law to retain
for protection of its creditors is called legal capital.
7. When par stock is issued for more than par, the excess of the contract price over par is termed a
premium.
8. A commonly used method for accounting for the purchase and resale of treasury stock is the
derivative method.
9. A major objective of a stock split is to increase stockholders’ equity.
10. Paid-in capital (or Share capital) and retained earnings are two major sub-divisions of stockholders’
equity.
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ANSWERS:
1. TRUE
2. FALSE
3. FALSE
4. TRUE
5. FALSE
6. TRUE
7. TRUE
8. FALSE – cost method
9. FALSE – stock splits do not affect total stockholders’ equity
10. TRUE
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1. A person or an entity that has an interest in a corporation is called a
a. proprietor
b. partner
c. stockholder or shareholder
d. entrepreneur
2. A corporation reissues 10,000 treasury shares for ₱35 per share. The treasury shares have a par
value per share of ₱20 and have been reacquired in the previous period for ₱25 per share. The
reacquisition has been accounted for using the cost method. What will be the effect of the reissuance
on the total stockholders’ equity?
a. increase, ₱200,000
b. increase, ₱350,000
c. increase, ₱100,000
d. decrease, ₱50,000
3. The entry to record the receipt of donated shares from a shareholder involves a credit to:
a. Donated Capital
b. Retained Earnings
c. Treasury Stock
d. None of these
4. Which of the following is not a characteristic of the corporate form of organization?

a. ownership represented by shares of stock
b. separate legal existence
c. unlimited liability of stockholders
d. can be easily dissolved by the incapacity of one of the owners
5. The amount printed on a stock certificate is known as:

a. stated value
b. premium
c. discount
d. par value
6. When a corporation purchases its own stock, what account is debited for the cost of the stock?
a. Common Stock Subscribed
b. Treasury Stock
c. Preferred Stock
d. Common Stock Receivable
7. The excess of the proceeds from selling treasury stock over its cost should be credited to:
a. Retained Earnings
b. Premium on Capital Stock
c. Gain from Sale of Treasury Stock
d. Paid-In Capital (Share premium) from Sale of Treasury Stock
8. Which of the following claims must first be satisfied upon liquidation of a corporation?
a. preferred stockholders
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b. cumulative preferred stockholders

c. common stockholders
d. creditors
9. The entry to record the issuance of common stock at a price above par would include a credit to:
a. Donated Capital
b. Retained Earnings
c. Treasury Stock
d. Paid-In Capital in Excess of Par-Common Stock (Share premium)
10. A corporation purchases 10,000 shares of its own ₱20 par common stock for ₱35 per share,
recording it at cost. What will be the effect on total stockholders’ equity?
a. increase, ₱200,000
b. increase, ₱350,000
c. decrease, ₱200,000
d. decrease, ₱350,000
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ANSWERS:
1. C
2. B – increase equal to the net cash proceeds from reissuance, i.e., 10,000 sh. x ₱35 = ₱350,000
3. D – None – only a memo entry is made. Donated capital is recorded only when the donated shares
are reissued.
4. C
5. D
6. B
7. D
8. D
9. D
10. D – decrease equal to the reacquisition cost, i.e., 10,000 sh. x ₱35 = ₱350,000
P a g e | 115
15-3: EXERCISE
Instruction: Using the forms provided below, prepare the entries under the memorandum method to
record each of the following transactions and prepare the shareholders’ equity portion of Cutting
Corporation’s balance sheet. You may omit the narrative descriptions for the entries.
1. Cutting Corporation received authorization from the SEC to issue share capital of ₱10,000,000
divided into 2,000,000 shares with par value per share of ₱5.
2. Cutting Corp. received subscription for 600,000 shares at par value. Fifty per cent of the total
subscription price was paid on subscription date.
3. Cutting Corp. received full payment of 400,000 subscribed shares from transaction (2) above.
4. Cutting Corp. issued 20,000 shares for cash at ₱25 per share.
5. Cutting Corp. issued 50,000 shares for cash at ₱40 per share.
6. Cutting Corp. issued 10,000 shares in exchange for equipment with a fair value of ₱145,000.
JOURNAL
Share capital
Subscribed share capital
Share premium
Subscription receivable
Retained earnings
Total shareholders' equity
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ANSWERS:
JOURNAL
(1) Memo entry
(2) Cash (600,000 x ₱5 x 50%) 1,500,000
Subscription receivable 1,500,000
Subscribed share capital (600,000 x ₱5) 3,000,000
(3) Cash (400,000 x ₱5 x 50%) 1,000,000
Subscription receivable 1,000,000
Subscribed share capital 2,000,000

Share capital (400,000 x ₱5) 2,000,000
(4) Cash (20,000 x ₱25) 500,000
Share capital (20,000 x ₱5) 100,000
Share premium 400,000
(5) Cash (50,000 x ₱40) 2,000,000
Share capital (50,000 x ₱5) 250,000
Share premium 1,750,000
(6) Equipment 145,000
Share capital (10,000 x ₱5) 50,000
Share capital 2,400,000

Subscribed share capital 1,000,000
Share premium 2,245,000
Subscription receivable (500,000)
Retained earnings -
Total shareholders' equity 5,145,000
P a g e | 117
15-4: EXERCISE
Instruction: Prepare the entries in the journal provided below to record each of the following
transactions of Pinell Corp. using the cost method. (Omit explanations and appropriations of retained
earnings.)
(1) On October 1, Pinell purchased 2,000 shares of treasury stock at ₱75.

(2) On October 31, Pinell sold 800 shares of the treasury stock it purchased on October 1 at ₱82.
(3) On November 20, Pinell sold 100 shares of the treasury stock it purchased on October 1 at ₱70. (Hint:
The transactions are interdependent or correlated.)
JOURNAL
P a g e | 118
ANSWERS:
JOURNAL
(1) Treasury stocks (Treasury shares) 150,000
Cash 150,000
(2) Cash (800 x ₱82) 65,600
Treasury stocks (800 x ₱75) 60,000
Share premium – Treasury stocks 5,600
(3) Cash (100 x ₱70) 7,000
Share premium – Treasury stocks (arising from #2) 500
Treasury stocks (100 x ₱75) 7,500
P a g e | 119
Chapter 16 Accounting for Dividends

16-1: TRUE OR FALSE
1. The dividends account is closed to the income summary account.
2. Preference shares for which the dividend entitlement accumulates each year are referred to as
‘participating’.
3. A 10% preference share with par value of ₱100 is entitled to a dividend of ₱10 when the
corporation’s board of directors declares cash dividends.
4. The balance that is transferred from the income summary account to the retained earnings account
is the profit or loss for the period.
5. A liability for a dividend is normally recorded in the accounting records on the date of record.
6. An accounting entry is required to record a stock dividend.
7. Preferred stock for which dividend rights are limited to a certain amount is said to be
noncumulative.
8. The common stockholders (ordinary shareholders) have a greater chance of receiving regular
dividends than do preferred stockholders (preference shareholders).
9. The board of directors has the sole authority to distribute earnings to the stockholders in the form
of dividends.
10. An account titled Income Summary is normally used for transferring the income and expense
account balances to retained earnings account at the end of the period.
P a g e | 120
ANSWERS:
1. FALSE
2. FALSE – cumulative
3. TRUE
4. TRUE
5. FALSE
6. TRUE
7. FALSE – non-participating
8. FALSE
9. TRUE
10. TRUE
P a g e | 121
1. If a corporation does not directly debit retained earnings for the dividends it declares, the
corporation may debit an account called
a. Dividends.
b. Income summary.
c. Dividends expense.
d. Dividends income.
2. The Dividends account of a corporation is debited when:

a. the stockholders invest cash
b. cash is paid to stockholders from earnings retained in the business
c. a liability is paid
d. an expense is paid
3. An increase in the Dividends account is recorded by

a. debiting it.
b. crediting it.
c. accruing an income.
d. accruing a loss.
4. In completing the work sheet, the adjusted amount for the Dividends account is extended to the
a. income statement credit column
b. income statement debit column
c. balance sheet credit column
d. balance sheet debit column
5. Which of the following accounts will be closed at the end of the fiscal year by debiting Retained
Earnings?
a. Salaries Expense
b. Sales
c. Dividends
d. Accounts Receivable
6. The normal balance of Retained Earnings is

a. debit.
b. credit.
c. negative.
d. zero.
7. If income was ₱70,000, expenses were ₱59,000, and the dividends were ₱25,000, the amount of profit
(loss) was:
a. ₱11,000
b. ₱36,000
c. (₱59,000)
d. ₱70,000
P a g e | 122
8. The charter of a corporation (articles of incorporation) provides for the issuance of 100,000
shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were
subsequently reacquired. What is the number of shares outstanding?
a. 5,000
b. 55,000
c. 60,000
d. 100,000
9. Assume that a corporation has outstanding 5,000 shares of ₱6 cumulative preferred stock
(preference shares) of ₱100 par and dividends have been passed for the preceding four years. What
is the amount of preferred dividends that must be declared in the current year before a dividend
can be declared on common stock (ordinary shares)?
a. ₱90,000
b. ₱120,000
c. ₱150,000
d. ₱180,000
10. A company with 20,000 authorized shares of ₱20 par common stock (ordinary shares) issued
12,000 shares at ₱50. Subsequently, the company declared a 5% stock dividend on a date when the
market price (fair value) was ₱60 per share. What is the amount transferred from the retained
earnings account to paid-in capital accounts (share capital and share premium accounts) as a result
of the stock dividend?
a. ₱36,000
b. ₱30,000
c. ₱12,000
d. ₱6,000
11. The dividends account is closed at the end of the period by crediting it for its balance and debiting
the
a. retained earnings account.
b. income summary account.
c. dividends payable account.
d. dividends expense.
12. An increase in Retained Earnings is recorded by a

a. debiting it.
b. crediting it.
c. earning profit.
d. declaring dividends.
13. Which of the following accounts will ordinarily appear in the post-closing trial balance?
a. Salaries Expense
b. Dividends
c. Sales
d. Capital Stock
14. An income summary account with a balance representing loss is closed at the end of the period by
a. debiting the retained earnings account.
P a g e | 123
b. crediting the retained earnings account.

c. debiting the share premium account.
d. crediting the share capital account.
15. Equity at the beginning of the period was ₱46,000; at the end of the period, assets were ₱99,000
and liabilities were ₱2,000. If additional capital stock (share capital) of ₱10,000 was issued and
dividends of ₱8,000 were paid during the period, the net income (profit) or net loss (loss) for
the period is
a. ₱59,000 net income
b. ₱59,000 net loss
c. ₱49,000 net loss
d. ₱49,000 net income
16. The total assets and the total liabilities of a particular business enterprise at the beginning and
at the end of the year are state below. During the year, dividends of ₱30,000 were paid, and
additional capital stock of ₱25,000 was issued.
Assets Liabilities
Beginning of year………….. ₱290,000 ₱190,000
End of year……………………. 355,000 220,000
The amount of net income for the year was:

a. ₱5,000
b. ₱25,000
c. ₱30,000
d. ₱40,000
P a g e | 124
ANSWERS:
1. A
2. B
3. A
4. D
5. C
6. B
7. A – 70,000 income – 59,000 expenses = 11,000 profit
8. B – 60,000 – 5,000 = 55,000
9. C – 5,000 shares x ₱6 dividend rate x 5 yrs.* = 150,000

* (preceding 4 yrs. + current yr. = 5 yrs.)
10. A – (12,000 x 5% x ₱60) = 36,000
11. A
12. B
13. D
14. A
15. D
Equity
46,000 beg.
Dividends 8,000 10,000 Issuance of shares
49,000 Profit (squeeze)
end. (99K - 2K) 97,000
16. D
Equity
100,000 beg. (290k – 190K)
Dividends 30,000 25,000 Issuance of shares
40,000 Profit (squeeze)
end. (355K - 220K) 135,000
P a g e | 125
16-3: EXERCISE
Instructions: Journalize the following transactions of Copper Corp. (Omit explanations.)
1. On February 20, Copper declared a ₱60,000 cash dividend. (Copper Corp. uses the Retained
earnings account to record all dividends declared.)
2. On March 22, Copper paid the cash dividend declared on February 20.
3. On December 15, Copper declared a 5% stock dividend on 160,000 shares of ₱20 par value common
stock with a market value (fair value) of ₱25 per share.
4. On January 14, Copper issued the stock certificates for the stock dividend declared on December 15.
5. On February 20, Copper declared a 2 for 1 stock split, exchanging 380,000 shares of ₱10 par
common stock for 190,000 shares of ₱20 par common stock.
JOURNAL
(1)
(2)
(3)
(4)
(5)
P a g e | 126
ANSWERS:
JOURNAL
(1) Retained earnings 60,000
Dividends payable 60,000
(2) Dividends payable 60,000
Cash 60,000
(3) Retained earnings (5% x 160,000 x 25 fair value) 200,000
Stock dividends payable (5% x 160,000 x 20 par) 160,000
(4) Stock dividends payable 160,000
Share capital 160,000
(5) None – memo entry only
P a g e | 127
16-4: EXERCISE
Pattering Corp. has 4,000 shares of ₱10 par common stock outstanding and 1,000 shares of ₱100 par 8%
preferred stock outstanding. Pattering expects to pay annual dividends of ₱7,000, ₱9,000, ₱28,000 and
₱48,000 respectively for the next four years.
Instructions: By completing the following forms, indicate how the dividends should be distributed in
each case if the preferred stock is given the rights or the restrictions indicated.
(1) The preferred stock is noncumulative and nonparticipating.

Yr. 1 Yr. 2 Yr. 3 Yr. 4
Total dividends declared
Allocation:
① Allocation to preference shares
② Excess allocated to ordinary shares
As allocated
(2) The preferred stock is cumulative and nonparticipating.

Yr. 1 Yr. 2 Yr. 3 Yr. 4
Total dividends declared
Allocation:
① Allocation to preference shares
② Excess allocated to ordinary shares
As allocated
P a g e | 128
ANSWER:
(1) The preferred stock is noncumulative and nonparticipating.

Yr. 1 Yr. 2 Yr. 3 Yr. 4
Total dividends declared 7,000 9,000 28,000 48,000
Allocation:
① Allocation to preference shares (1K sh. x ₱100 x 8%) 7,000* 8,000 8,000 8,000
② Excess allocated to ordinary shares - 1,000 20,000 40,000
As allocated - - - -
* The amount of dividends declared of ₱7,000 is less than the basic dividend of PS of ₱8,000 (1K sh. x ₱100 x
8%); thus, only the PS are paid.
(2) The preferred stock is cumulative and nonparticipating.
Yr. 1 Yr. 2 Yr. 3 Yr. 4

Total dividends declared 7,000 9,000 28,000 48,000
Allocation:
① Allocation to preference shares (1K sh. x ₱100 x 8%) 7,000** 9,000** 8,000 8,000
② Excess allocated to ordinary shares - - 20,000 40,000
As allocated - - - -
** Since the PS are cumulative, the ₱1,000 deficiency in Yr. 1 is carried over to Yr. 2 [1,000 deficiency in Yr. 1 +
8,000 basic dividend in Yr. 2 = 9,000 dividends to PS in Yr. 2.)

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Page |1

FINANCIAL ACCOUNTING &

ZEUS VERNON B. MILLAN

Dear Fellow Teacher,

Zeus Vernon B. Millan

“A good teacher can inspire hope, ignite imagination, and instill

CHAPTER 1 INTRODUCTION TO ACCOUNTING ............................................................................................................. 6

ANSWERS: .............................................................................................................................................................. 116

Chapter 1 Introduction to Accounting

4. It is a specialized field of accounting that provides information primarily intended to aid

6. It is a business that is owned by one individual.

8. Accounting is often characterized as

9. Which of the following is not considered an external user of accounting information?

10. Accounting systems (choose the incorrect statement)

Chapter 2 Accounting Concepts and Principles

5. An accounting or reporting period is normally

9. An annual accounting period that starts on a date other than January 1.

10. Which of the following statements is correct?

Chapter 3 The Accounting Equation

1. “Assets = Liabilities + Owner’s Equity” is referred to in accounting as

7. Another way of writing the accounting equation is:

Chapter 4 Types of Major Accounts

4-1: MULTIPLE CHOICE

1. In accounting, these refer to the resources owned or controlled by a business.

2. The simplest form of an account is the

4. The amount a business earns by selling goods to customers is recorded as

5. Equipment, machinery, buildings, and land, collectively, are referred to as

7. These are debts owed by an entity to outsiders (creditors).

9. Which of the following is an asset account?

10. Which of the following is a liability account?

4-2: MULTIPLE CHOICE

2. This represents an entity’s claim against a customer.

3. It is list of all the accounts used by a business.

6. Increases in owner’s equity as a result of rendering services to customers.

7. Salaries payable is a (an)

10. Which of the following does not connote an expense account?

Chapter 5 Books of Accounts & Double-entry System

5-1: TRUE OR FALSE

2. The Accumulated Depreciation account is a contra asset account.

3. Every business transaction affects a minimum of one account.

4. A claim against a customer for sales made on credit is an account payable.

5. The debts of a business are called its accounts receivable.

8. To debit an asset account means to decrease its balance.

9. The left side on an account is called credit.

10. Expense accounts have a normal credit balance.

5-2: MULTIPLE CHOICE

2. Amounts entered on the left side of an account are

3. The normal balance of the prepaid supplies account is

4. The normal balance of the insurance expense account is

5. The normal balance of the service fees account is

7. Resources that are controlled by the business are called

8. Amounts entered on the right side of an account are

9. A group of accounts for a business is called a (an).

10. Transactions not recordable in special journals are recorded in the

1. An increase in Accounts Receivable is recorded by a ________ entry in the account.

2. A decrease in Accounts Payable is recorded by a _______ entry in the account.

3. A decrease in Salaries Expense is recorded by a _______entry in the account.

4. A decrease in Cash is recorded by a _______entry in the account.

5. A decrease in Notes Payable is recorded by a ________ entry in the account.

6. A decrease in Accounts Receivable is recorded by a _______ entry in the account.

7. An increase in Cash is recorded by a _______entry in the account.

8. An increase in Depreciation Expense is recorded by a _______entry in the account.

9. A decrease in Owner’s Equity is recorded by a _______entry in the account.