Table of Contents

Topic 1: Accounting Equation and Double-entry System............................................................................1

Recognition and Derecognition principle....................................................................................................2
Elements of Financial Statements...............................................................................................................2
Exercises: Accounting Equation and Double-entry System..........................................................................9
Topic 2: Accounting Cycle of Service Entity...............................................................................................12
Analyzing Transactions..............................................................................................................................12
Exercises: Analyzing Transaction...............................................................................................................14
Journalizing transactions...........................................................................................................................15
Posting or Accumulating............................................................................................................................18
Exercises: Journalizing and Posting............................................................................................................20
Preparation of Unadjusted trial balance....................................................................................................23
LOCATING ERRORS IN THE TRIAL BALANCE...............................................................................................24
Exercises: Unadjusted Trial Balance..........................................................................................................26
Preparation of Adjustments......................................................................................................................29
ADJUSTING ENTRIES FOR ACCRUALS.........................................................................................................30
ADJUSTING ENTRIES FOR DEFERRALS........................................................................................................33
Exercises: Adjustments..............................................................................................................................44
Preparation of Financial Statements / Adjusted Trial Balance...................................................................48
The WORKSHEET.......................................................................................................................................48
Exercises: Worksheet................................................................................................................................53
Components of Financial Statements........................................................................................................55
Exercises: Statement of Cashflow..............................................................................................................62
Closing Entries...........................................................................................................................................64
Exercises: Closing Entries...........................................................................................................................67
Post-closing trial balance...........................................................................................................................68
Reversing Entries.......................................................................................................................................68
Key to Correction: Accounting Equation and Double-entry System..........................................................69
Key to correction: Analyzing Transaction..................................................................................................71
Key to Correction: Journalizing and Posting..............................................................................................72
Key to correction: Unadjusted Trial Balance..............................................................................................76
Key to correction: Adjustments.................................................................................................................78
Key to Correction: Worksheet...................................................................................................................89
Key to correction: Statement of cashflows................................................................................................91
Key to Correction: Closing Entries.............................................................................................................92
 Exercises: Accounting Equation and Double-entry System
Choose the best answer.
1. Which of the following accounting equations are correct?
1. Non-current assets + Current assets = Non-current liabilities – Current liabilities +
Capital
2. Assets – Liabilities = Capital + Revenue – Expenses
A=L+E(C, R, Exp.)
3. Capital + Non-current liabilities = Non-current assets + Working capital
Working Capital= CA-CL
a. (1) and (2) only
b. (1) and (3) only
c. (2) and (3) only
d. (1), (2) and (3)

2. Which of the following is correct under the double entry system?

a. Asset amount must be equal to liability account
b. The change in asset must be compensated by a change in liability
c. The change in a debit-side entry must be compensated by a change in credit-
side entry
d. An increase in asset must be compensated by a decrease in asset

3. Which of the following statements are correct?

1. The total amount of liabilities can be greater than the total amount of capital
2. Asset = Capital + Liabilities
3. The total amount of asset can be greater than the sum of liabilities and capital
(wrong, A=L+E)
a. (1) and (2) only
b. (1) and (3) only
c. (2) and (3) only
d. (1), (2) and (3)

4. Which of the following statements regarding the double-entry system is incorrect?

a. An increase in asset means a credit entry in assets account
Asset=Debit
b. A decrease in liability means a debit entry in liabilities account
c. An increase in drawings means a debit entry in capital account
d. A decrease in non-current asset means a credit entry in assets account

5. Which of the following is correct if the sole proprietor of an entity borrows P30,000
in the name of the entity and deposits it into the entity’s bank account?
a. assets of the entity increase by P30,000
Dr. Cash, Cr. Loan Payables

3|Page
 b. The liabilities of the entity decrease by P30,000
c. The capital of the entity increases by P30,000
d. The drawings of the entity increase by P30,000

6. Which of the following transactions affects the total value of liabilities of a firm?
a.) goods purchased from suppliers by cash Dr. SUPPLIES, Cr. CASH
b.) Interest received from a bank Dr. Cash, Cr. Interest revenue
c.) office equipment bought on credit
Dr. Office equipment, Cr. A/P
d.) goods sold to customers on credit Dr. A/R, Cr. Inventory

7. On May 1,2021, Chia Ohab sets up a business and brings office equipment of
P50,000 and inventory of P30,000 to the business. Chia puts up P80,000 into the
firm’s cash box and P100,000 into the firm’s bank account. Meanwhile, the firm
lends P50,000 cash to BCD Company and borrows P200,000 from You Do Note bank
to acquire a piece of premises.
What is the amount of total assets on May 1,2021?
a. P510,000
b. P210,000
c. P260,000
d. P460,000
Explain: Add All (Cash that was lended to BCD Company become A/R that's why it
is still an asset)

8. If during the accounting period the assets decreased by P10,000, and equity
increased by P2,000, then how did liabilities change?
a.) Increased by P12,000
b.) Increased by P8,000
c.) Decreased by P12,000
↓A=L?+↑E »» (A)-E=L?
(10,000)-2,000= -12,000

d.) Decreased by P8,000

9. If during the accounting period the assets increased by P14,000, and equity
increased by P4,000, then how did liabilities change?
a.) Increased by P10,000
↑A=L?+↑E »» A-E=L?
14,000-4,000= 10,000

b.) Increased by P4,000

c.) Decreased by P4,000
d.) Decreased by P10,000

4|Page
 10.If during the accounting period the assets increased by 30,000 and Liabilities
decreased by P8,000, then how did equity change?
a.) Increased by P22,000
b.) Increased by P38,000
↑A=↓L+E? »» A= (L)+E »» A+L=E?
30,000+8,000= 38,000

c.) Decreased by P22,000

d.) Decreased by P38,000

11. Which of the following statements is incorrect?

a. The settlement of a liability requires cash payment
Liability can be undeliver goods/service and payables. Also, not all liabilities are
cash basis

b. Liabilities can result from accepted trade practices or business commitments.

c. An estimated amount may be assigned to a liability when it is presented in the
balance sheet.
d. Liabilities represent present economic obligations that would future settlement

12.Which of the following statements is incorrect?

a. The term income encompasses both realized and unrealized gains.
b. The term income encompasses both revenues and gains.
c. Recognition of income is generally accompanied by a simultaneous recognition of
an asset.
d. Income is recognized only when cash is collected from the client or customer
Income is realized when service/goods is rendered
13.Which of the following transactions will increase the total assets of the business?
a. a customer’s payment, to apply on his open balance no effect
b. Bought an equipment, on cash basis no/zero effect(equipment & cash are both
asset)
c. Bought an equipment, on account basis
Dr, Equipment, Cr. A/P
d. Paid utilities expense incurred. Dr. Expense, Cr. Cash

14. An account has the following uses, except

a. Sorting device that is used to be able to group the business transactions by
accounting elements.
b. Sorting device that is used to summarize the net effect of the transactions one
each accounting element.

5|Page
 c. Source of the balances that are reported in the financial statements.
d. Accounting device used to detect errors committed
Account title/device cannot detect errors

15.Which of the following statements is incorrect?

a. The owner’s equity represents the claim of the owner over the assets of the
business.
b. The owner’s equity increases as a result of additional investments and net
income of the business.
c. The income and expenses of the business enterprise affect the owner’s equity.
d. Debit means increase, and credit means decrease
Increase/Decrease depends on normal balance of the account (DC ADE LER)

Exercises: Analyzing Transaction

Instruction: Choose which of the following transactions are Accountable and Non-Accountable
events.
1. The entity purchased an equipment amounting to P10,000,000
2. An entity sign a contract amounting to P8,000,000
3. An entity file a lawsuit to collect P5,000,000 for copyright violations
4. An entity was awarded P5,000,000 for successfully defending a Patent
5. ABC company offers to purchase a piece of land for P2,500,000 there is a high likelihood
that the offer will be accepted
6. An entity receives notice that its rentals for an office space will increase by P50,000 per
month effective next month
7. An entity receives its electricity bill for the last month amounting to P40,000. The bill is due
for payment next month
8. The entity purchase inventory amounting to P4,000,000. The payment is due next month
9. ABC company paid P1,000,000 for land
10. An entity received P50,000 for services to be rendered next month

Exercises: Journalizing and Posting

Multiple Choice
Instruction: Choose the best answer
1. Posting refers to the process of transferring information from
a. a journal to the general ledger accounts
b. general ledger accounts to journal
c. source of documents to a journal
d. a journal to source documents

6|Page
2.____ refers to the process of transferring the debit and credit amounts from journals to
ledger accounts.
a. Balancing off
b. transferring
c. Posting
d. Closing

3. What is post reference?

a. Found initially in the chart of accounts
b. Use to easily know where to post a specific journal entry
c. Found in the heading of every ledger account
d. All of the above

4. Which of the statements is false?

a. The ledger is the book of final entry because it is the final book done before making the
Financial Statements
b. The ledger is used to make the Trial balance
c. The ledger is made before journal
d. The journal is made before the ledger

5. Which of the following is true?

a. The balance computed in the ledger is the amount used in making the trial balance
b. When the general ledger and the subsidiary ledger has conflict in the amount, the latter
prevails
c. General ledger is required accounting book, while subsidiary ledger is not required
d. Subsidiary ledger is more of a supporting document that is why it prevails in case of conflict
with the general ledger
e. All of the above

6. A journal entry that contains more than just two accounts is called
a. A posted journal entry
b. An adjusting journal entry
c. An erroneous journal entry
d. Compound journal entry

7. A journal entry that contains two accounts is called

a. A simple journal entry
b. An adjusting journal entry
c. An erroneous journal entry
d. Compound journal entry

7|Page
8. A journal entry that contains one account is called
a. A posted journal entry
b. An adjusting journal entry
c. Simple journal entry
d. None of the above
9. Which of the following transactions results in an increase in revenues?
a. Collection of cash on account
b. Receipt of cash form bank loan
c. Sale of land at cost for cash
d. Services rendered on credit

10. Which of the following has a debit normal balance?

a. Accumulated depreciation
b. Prepaid rent
c. Unearned rent
d. Bonds Payable

Problem Solving
April 1 Withdrew P77,000 from a personal savings account and used it to
open a new account in the name of Katipunan Services.
2 Acquired a service vehicle costing P81,000. A payment of P17,500
in cash was made and a note payable given for the P63,500 remainder
3 Paid rent for the month, P7,150.
6 Acquired plumbing supplies on account P55,700.
10 Cash in the amount of P18,350 was received for plumbing services rendered.
12 Acquired additional plumbing supplies for cash, P8,050.
14 Paid salaries, P11,600.
17 Rendered plumbing services and billed the customer, P42,200.

8|Page
 18 Paid P15,700 of the amount owed from the transaction of Apr. 6.
21 Paid miscellaneous expenses, P4,300.
23 Collected P21,000 from the customer on the Apr. 17 transaction
25 Withdrew P14,500 from the business.
26 Paid the first installment of the note payable, P3,850.
30 Paid telephone expense, P1,250.

Chart of accounts: Cash; Accounts Receivable; Plumbing supplies; Service Vehicle; Notes
Payable; Accounts payable; Arc, Capital; Arc, Withdrawals; Plumbing revenues; Salaries
expense; Rent expense; Telephone expense; and Miscellaneous expense

Requirement: Prepare the necessary journal entry and post the transaction to the ledger

Exercises: Unadjusted Trial Balance

Multiple Choice
Instruction: Choose the best answer

1. Without the use of a trial balance, _________

a. double-entry system will not be applied in accounting
b. there are no other ways to identify whether there is any problem
c. accounting ratios cannot be calculated
d. inequality between debit and credit balances cannot be easily found

2. What is the purpose of trial balance?

a. To ensure that your Financial statements are correct
b. To absolutely assure that your journal and posting is correct
c. To check the equality of debit and credit

9|Page
d. None of the above

3. Unadjusted Trial balance

a. A listing of the account with their respective balance before adjustments
b. Done to make sure that your posting is correct
c. If equal, means that all your journal entries are correct
d. Is not required to be equal because it is still unadjusted

4. Which of the following situations will cause the total debit balance to be greater than the
total credit balance?
a. The amount extracted from Accounts receivable is posted to the wrong side of the trial
balance.
b. the amount extracted from the machinery account is posted wrongly as P4,000 instead of
P40,000
c. The amount extracted from Accounts Payable is posted in the wrong side of the trial balance
d. the sales of goods to a debtor, Mr K are recorded in the account of another debtor Mr. L

5. Which of the following situations will cause total debit balance to be smaller than the total
credit balance?
a. The amount extracted from a creditor's account is posted to the wrong side of the trial
balance.
b. the amount extracted from the account of a debtor, Mr.K,is posted as P1,000 instead of
P1,100
c. Sales of goods are recorded as purchased of goods in the ledger accounts.
d. The purchased of fixture is recorded in furniture account.

6. Which of the following will make the trial balance equal even if there is an error committed
a. P1234 debit in the Journal entry was posted as P1243 in the ledger
b. Wrong account title was used in making journal entry
c. A debit in the ledger was transfer to the trial balance as credit
d. A credit balance in the ledger was transfer to the trial balance as debit

7. Which of the following error is untraceable in the trial balance

a. Transposition error in one account in the ledger
b. Transposition error in the journal entry
c. Transposition error in the trial balance
d. All transposition error is untraceable

8. A sliding error
a. Is untraceable if committed in one of the accounts in posting
b. Is traceable if committed in the journal entry

10 | P a g e
c. Is a kind of error arising from wrong placement of decimal
d. Is untraceable If done in the journal entry
e. Both C and D

9. Unadjusted trial balance

a. Is done before adjustments
b. Is done to ensure that debit and credits are equal
c. Cannot give an absolute assurance that your journal and ledger is correct
d. All of the above

10. Unadjusted trial balance

a. Is used directly in making the Financial Statements
b. Is made to ensure that the debits and credits are correct
c. Is made to reduce the risk of error to zero
d. Is made just to check whether debits and credits are equal

11. Which of the following is true?

a. If the trial balance is not balance it means that there is an error
b. If the trial balance is balance it means that there is no error
c. If the trial balance is balance it means that there is an error
d. Both a and b

12. Which of the following is true about an imbalance trial balance?

a. If the discrepancy in trial balance is divisible by 9 it might be a a result of transposition or
sliding error
b. Dividing the discrepancy by 2 might lead you to the source of error
c. An imbalance trial balance is a conclusive evidence of a presence of error
d. All of the above

Problem Solving
Instruction: Prepare the Unadjusted trial balance using the following data

Chart of Accounts
Cash 110
Accounts Receivable 120
Notes Receivable 130
Prepaid Expense 140
Land 150
Equipment 160
Accumulated Depreciation 170
Loans Receivable 180
Accounts Payable 210
Notes Payable 220

11 | P a g e
Loans Payable 230
Taray, Capital 310
Taray, Withdrawal 320
Rent Revenue 410
Utilities Expense 510
Telephone Expense 520

After posting, the entity reported the following in the Ledger

Drawing 500,000
Rent revenue 5,000,000
Telephone expense 300,000
Utilities expense 400,000
Cash 3,000,000
Accounts Receivable 1,000,000
Loans Payable 4,000,000
Capital 3,500,000
Notes Payable 1,500,000
Equipment 4,000,000
Land 3,000,000
Accumulated depreciation 1,000,000
Loans receivable 2,000,000
Prepaid expense 1,000,000
Notes receivable 1,000,000
Accounts Payable 1,200,000

Exercises: Adjustments

Multiple Choice
Instruction: Choose the best answer

1. One of the following is subject to reclassifying entry

a. Wrong amount
b. Wrong account title
c. Wrong amount and wrong account title
d. All of the above is subject to reclassifying entry

2. Which of the following is an adjusting entry

a. Increase in asset and increase in liability
b. Increase in asset and increase in expense
c. Increase in asset and decrease in expense
d. Increase in asset and decrease in liability

12 | P a g e
3. Adjustments
a. Usually done after the reporting period but dated as of the end of the reporting period
b. Involves correcting, reclassifying, and adjusting entries
c. Is required to be done every year
d. All of the above is a concept of adjustments

4. Accrual
a. Recording income when earned not when received
b. Recording expense when incurred not when paid
c. Recording the transaction even if there is no cash involvement
d. All of the above is correct about accrual

5. Deferral
a. Recording income when received not when earned
b. Recording expense when paid not when incurred
c. Is not allowed by accounting standards
d. All of the above is correct about deferral

6. Which of the following is essential in computing the interest income

a. Principal – the total amount of receivable, this serves as basis of interest
b. Interest rate – the agreed rate of interest per annum
c. Time – the period in which the receivable is outstanding for one period
d. All of the following

7. Which of the following is an expense

a. Increase in asset and increase in equity
b. Increase in liability and increase in equity
c. Increase in liability and decrease in equity
d. Decrease in asset and decrease in equity
e. Both C and D

8. Which of the following is an Adjusting entry

Debit Credit
a. Asset Liability
b. Liability Asset
c. Liability Income
d. Income Expense

9. Which of the following is a deferred revenue?

a. Billing customer for service given to them
b. Paying in advance for the company's insurance
c. Receiving cash in advance for future service to customer
d. None of the above

13 | P a g e
10. Which of the following is an accrued revenue?
a. Receiving cash in advance
b. Billing customer for service already provided
c. Paying the rent in advance
d. Both b and c

11. On Jan.2021, a P120,000 check was paid for rental expense of twenty- four months. The
amount was recorded in the rent expense account. How much is the rent expense incurred for
the year ended Dec.31,2021?
a.P10,000
b.P20,000
c.P120,000
d.P60,000

12. On Nov.2019, five months of insurance amounting to P130,000 were paid for the period
from Nov.1, 2019 to Mar.31,2020. the amount was debited to the insurance expense account.
How much was the insurance expense incurred for the year ended Dec.31,2019?
a.P26,000
b.P52,000
c. P78,000
d.P130,000

13. For the year ended Mar.31 ,2019 a business that offers yoga lessons received P15,000 in
yoga fees, which was recorded in the yoga fees revenue account. The amount included P2,500
for Apr.2019 lesson. Assuming there are no other transactions relating to yoga fee revenue
during the financial year, how much is the yoga fee earned for the year ended Mar.31,2019?
a.P2,500
b.P12,500
c.P15,000
d.P17,500

14. An amount of P235,000 was received in December 2020, the 55,000 is for December and
the rest is for January 2021, the amount was recorded in the commission income account. It
was discovered that commission income earned in November amounting to P40,000 was not
yet received as of Dec.31,2020. How much is the commission earned for the year ended
Dec.31,2020?
a.P55,000
b.P180,000
c.P235,000
d.P95,000

15. Suppose an entity recorded an expense when paid, but the expense was incurred one year
before the payment date. Which of the following accounting principles has been violated?

14 | P a g e
a. Consistency concept
b. Historical cost concept
c. Accrual concept
d. Entity concept

Problem Solving
Instruction: Prepare the necessary adjusting entries

1. On May 31, 2020 the entity paid P48,000 for insurance covering the period May 31,2020 to
May 31,2022.
Use Asset Method and Expense Method

2. On February 29,2020 the entity received P72,000 for an advance rent covering the period
February 29,2020 to February 28,2022.
Use Liability Method and Income Method

3. On December 1,2020 the entity received a 12% P1,000,000 note to a client for the plumbing
service rendered. The note with interest will be paid on December 1,2022.
Prepare the necessary journal entry
A. At the initial date of transaction
B. At December 31,2020
C. At December 31,2021
D. At December 1, 2022

4. On November 1,2020 the entity issued a 24% P4,000,000 note for purchase of furniture and
fixtures. The note with the interest will be paid on November 1,2022.

15 | P a g e
Prepare the necessary journal entry for the following dates
A. November 1,2020
B. December 31,2020
C. December 31,2021
D. November 1,2022

5. On December 1,2020 an entity purchases an equipment costing P40,000,000. The entity

expects to use the equipment for 3 years. The expected selling price of the asset after the end
of its useful life is P4,000,000.
Requirements:
1. Prepare the adjusting entry for 3 years
2. Compute for the book value of equipment every year

Exercises: Worksheet
Multiple Choice
Choose the best answer

1. Which of the following is true?

16 | P a g e
 a. Worksheet is required, and is part of Accounting cycle
b. Without worksheet it is impossible to make an FS
c. Worksheet is optional because it is a mere tool to simplify the making of FS
d. None of the Above

2. Which of the following is correct?

a. The first step in making a worksheet is by entering the amount of the Unadjusted
trial balance
b. The last step of worksheet is the computation of profit and using the same to
balance the income statement and balance sheet column
c. The worksheet has 10 columns composed of Unadjusted trial balance,
Adjustments, Adjusted Trial Balance, Income Statement and Balance sheet.
d. All of the Above

3. The income statement debit column of the worksheet contains

a. Asset from the Adjusted trial balance
b. Expense from the Unadjusted trial balance
c. Asset from the Unadjusted Trial Balance
d. Expense from the Adjusted Trial Balance

4. Adjusted trial balance

a. Is made after the Adjustment column
b. Is computed by combining the balance of Adjustments column and Unadjusted
trial balance
c. Serves as the basis of making the Financial Statements
d. All of the above

5. The Balance sheet credit column of the worksheet contains

a. Asset from the adjusted trial balance
b. Liability and Equity from the unadjusted trial balance
c. Revenue from the Adjusted trial balance
d. Liability and Equity from the Adjusted trial balance

Problem Solving
Acts Company has the following data(unadjusted) for the year 2020

Cash 100,000
Accounts receivable 200,000
Prepaid Rent 50,000
Prepaid Insurance 40,000
Equipment 150,000
Acc.Depreciation 70,000
Accounts Payable 100,000
Unearned Revenue 300,000

17 | P a g e
Acts, withdrawal 100,000
Acts, Capital 300,000
Rent Expense 100,000
Insurance Expense 30,000

Additional info
A. Out of the 50,000 prepaid rent, 40,000 is still unused at the end of the period
B. Out of the 40,000 prepaid insurance, 30,000 was already used during 2020
C. Equipment’s depreciation is 10,000 per year
D. Out of the 300,000 unearned revenue, 200,000 worth of service was already given
to the client

Exercises: Statement of Cashflow

Multiple Choice
1. Which of the following statement is true?
a. Direct method is required to be used to compute for the cashflow
b. Indirect method is required to be used to compute for the cashflow
c. Statement of cashflow is the only component of FS that is not following
accrual concept
d. None of the above

2. Which of the following is false?

a. In computing the Cashflow provided by the Operating activities, Direct
method and Indirect method are two different approach that results to the
same figures
b. In computing the cashflow provided by the Financing Activities, you just need
to deduct the cash outflow from cash inflow
c. In computing the cashflow provided by the Investing Activities, there are two
different ways that yields the same results
d. All of the above

3. Which of the following is included in the computation of cashflow from operating

activities?
a. Net income, non-cash expense, changes in current items
b. Current assets and current liabilities
c. Non-current liabilities and Equity
d. Both A and B

4. Which of the following is true?

18 | P a g e
 a. Buying a land on account is part of Cashflow from investing activities
b. Buying short term investment on cash is part of cashflow from investing
activities
c. Buying equipment partly on cash and on account are part of cashflow from
operating activities
d. Buying land on account partly on cash and on account are part of cashflow
from investing activities

5. Which of the following is true?

a. Investment of owners in the form of equipment is part of Cashflow from
Financing Activities
b. Withdrawals of owner in the form of equipment is part of Cashflow from
Investing Activities
c. Receipt of bank loan is part of Cashflow from Operating activities
d. Investment of owners of cash is part of Financing activities

Problem Solving
1. The entity has the following data during the year

Revenue 100,000
Expense* (60,000)
Net Income 40,000

*Expense is composed of
Rent Expense 50,000
Depreciation Expense 10,000

2019 2020
Cash 50,000 ?
Accounts Receivable 100,000 150,000
Prepaid Rent 60,000 30,000
Equipment 100,000 90,000
Land 200,000 150,000
Accounts Payable 100,000 200,000
Notes Payable 30,000 50,000
Loans Payable 0 40,000
Mortgage Payable 100,000 50,000
Capital 280,000 ?

Additional info:
- There is no investment nor withdrawals during the year.
Compute for
- The decrease in Equipment is the result of depreciation expense.

19 | P a g e
 - The decrease in land is a result of sale of land
- Increase in loans payable is a result of a cash receipt from the bank
- Decrease in mortgage is a result of payment of the payable.

a) Cashflow provided by Operating Activities

b) Cashflow provided by Investing Activities
c) Cashflow provided by Financing Activities
d) Cash Balance for 2020
e) Capital Balance for 2020

Exercises: Closing Entries

Multiple Choice
Choose the best answer

1. Which of the following is true?

a. Closing entries are made at the end of the year
b. Closing entries are made to make all nominal account zero
c. The goal of closing entry is to transfer all nominal accounts in to the capital
d. All of the above

2. Which of the following is true?

a. Income related accounts are first closed to Income summary account then to the
Capital account
b. Withdrawals are directly close to the Capital account
c. Income summary account has no normal balance because it is just used as a
balancing figure in closing income related account
d. All of the Above

3. Which of the following is true?

a. Closing the Income will result in Debit to Income summary account
b. Closing the expense will result in Credit to Income summary account
c. Closing the withdrawal will result to debit to Income summary account
d. Closing the income will result to Credit to Income Summary account

4. Which of the following is a correct closing entry?

a. Cash 100,000
Income Summary 100,000
b. Income Summary 100,000
Revenue 100,000

20 | P a g e
 c. Income Summary 100,000
Expense 100,000
d. Income Summary 100,000
Withdrawals 100,000

Key to Correction: Accounting Equation and Double-entry System

1. C
Statement 1 is wrong because the Current Liabilities are deducted instead of being
added to the equation
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is correct; Working Capital means Current Asset less Current Liability

2. C
A is wrong, Asset must be equal to Liabilities + Equity
B is wrong, change in assets is not always connected to change in liability

21 | P a g e
 C is correct, it is the definition of Double Entry System
D Is wrong, an increase in some assets are not always connected to decrease of other
assets

3. A
Statement 1 is correct; liabilities can be greater or lesser than the capital
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is wrong, the total amount of Asset must be equal to the sum of liabilities
and Capital

4. A – Use the concept of Normal Balances

5. A- The entry would be

Cash 30,000
Loans Payable 30,000
Take note that even though the owner is the one who borrowed cash the transaction
was made under the name of the business; thus, it is a transaction of the business itself

6. C – credit means no cash payment was made.

7. D
Office Equipment 50,000
Inventory 30,000
Cash
(80,000+100,000-50,000+200,000) 330,000
Receivable 50,000
Total Assets 460,000

8. C
Asset = Liabilities + Equity
(10,000) = Liabilities + 2,000
(10,000) – 2000 = Liabilities
(12,000) = Liabilities

9. A
Asset = Liabilities + Equity
14,000= Liabilities + 4,000
14,000 – 4,000 = Liabilities
10,000 = Liabilities

10. B
Assets = Liabilities + Equity
30,000= (8,000) + Equity
30,000 + 8,000 = Equity

22 | P a g e
 38,000 = Equity
11. A
A is wrong because Liability can be paid using Non cash asset such as Building, Inventory
etc.
B is correct, liabilities can arise from contract
C is correct, liabilities can be estimated, example is Provision for warranty liability.
D is correct, it is in the definition of liability

12. D
A is correct, realized and unrealized gains are within the scope of income
B is correct, both terms are under the concept of Income
C is correct, the word “Generally” made the statement correct because most of the time
when there is an increase in income there is also an increase in asset. C will be wrong if the
paragraph uses the word “Always” instead of the word “Generally”
D is wrong, income is recognized when earned not when cash is collected

13. C
A = It has no effect in the total assets because the receivable was reduced and at the
same time the cash was reduced
B = No effect in total assets because the Equipment was increased at the same amount
the cash was decreased
C = Increase in total assets and increase in total liabilities
D = Decrease in asset and increase in expense

14. D
A is correct, an account is used to sort business transaction
B is correct, it is also one of the uses of accounts
C is correct, financial statements are made using the accounts
D is wrong, account title cannot be used to detect errors

15. D
A is correct, it is the definition of owner’s equity
B is correct, it increases because of those two items
C is correct, it is the composition of equity
D is wrong, normal balance will dictate the increase and decrease of a specific account
title

Key to correction: Analyzing Transaction

1. Accountable event
Accounts Affected: Equipment and Accounts Payable
Monetary Value: P10,000,000

2. Non-Accountable Event

23 | P a g e
 Accounts Affected: None, signing of contract will not result to any changes in accounts
Monetary Value: P8,000,000
Account titles and Monetary Value should both be present in order to be an
accountable event

3. Non-Accountable Event
Accounts Affected: None, filing a lawsuit will not result to any changes in accounts
Monetary Value: P5,000,000
Account titles and Monetary value should both be present in order to be an accountable
event

4. Accountable Event
Accounts Affected: Cash and Income, the Lawsuit was already given a final judgment
that is why there is already an effect to the accounts
Monetary Value: P5,000,000

5. Non-Accountable Event
Accounts Affected: None, even if the offer was highly probable to be accepted there is
still no accounts affected until the proposal is actually accepted.
Monetary Value: P2,500,000

6. Non-Accountable event
Accounts Affected: None, increase in future rents has nothing to do with the account
titles
Monetary Value: P50,000

7. Accountable Event
Accounts Affected: Utilities Expense and Utilities Payable. The electricity was incurred
last month; therefore, accounts was already affected even if payment is due next month.
Monetary Value: 40,000

8. Accountable Event
Accounts Affected: Purchases and Accounts Payable
Monetary Value: P4,000,000

9. Accountable Event
Accounts Affected: Land and Cash
Monetary Value: P1,000,000

10. Accountable Event

Accounts Affected: Unearned Income and Cash. The cash was received for service to be
rendered next month that is why the income is not yet earned.
Monetary Value: P50,000

24 | P a g e
Key to Correction: Journalizing and Posting

Multiple Choice
1. A
2. C
3. D
4. C
5. E
6. D
7. A
8. D
9. D
10. B

Problem Solving
Journal Entry
April 1 Cash 77,000
Arc, Capital 77,000
The owner withdrew cash in its personal account to put in the business. A common
misconception is that treating these kinds of transaction as withdrawal which is a
terrible blunder. Always remember that you are recording the transaction of the
business, that is why this transaction is an investment in your eyes.

2 Service Vehicle 81,000

Notes Payable 63,500
Cash 17,500
Use the notes payable not the accounts payable because it was specifically mentioned
in the transaction that the entity made a note.

3 Rent Expense 7,150

Cash 7,150

6 Plumbing Supplies 55,700

Accounts Payable 55,700
The problem doesn't state that there is a note given unlike in April 2, that is why in this
scenario Accounts payable was used.

10 Cash 18,350
Plumbing Revenue 18,350

12 Plumbing Supplies 8,050

Cash 8,050

14 Salaries Expense 11,600

25 | P a g e
 Cash 11,600

17 Accounts Receivable 42,200

Plumbing Revenues 42,200
Billing doesn't mean that there is a cash payment. If the problem doesn't say that a
billing was paid in cash, then use the Accounts receivable

18 Accounts Payable 15,700

Cash 15,700

21 Miscellaneous Expense 4,300

Cash 4,300

23 Cash 21,000
Accounts Receivable 21,000

25 Arc, Withdrawals 14,500

Cash 14,500

26 Notes Payable 3,850

Cash 3,850

30 Telephone Expense 1,250

Cash 1,250

Posting

Cash _______ Arc, Capital___

Debit Credit Debit Credit
April 1 77,000 April 1 77,000
2 17,500 Balance 77,000
3 7,150
10 18,350
12 8,050
14 11,600
18 15,700
21 4,300
23 21,000
25 14,500
26 3,850
30 1,250
Balance 32,450
The total of Debit is higher than the total of credit, that is why the cash has a debit balance of
22,450.

26 | P a g e
 Service Vehicle____ Notes Payable___
Debit Credit Debit Credit
April 2 81,000 April 2 63,500
Balance 81,000 26 3,850___________
Balance 59,650

Rent Expense___ Plumbing Supplies___

Debit Credit Debit Credit
April 3 7,150 April 6 55,700
Balance 7,150 12 8,050______________
Balance 63,750

Accounts Payable___ Plumbing Revenue____

Debit Credit Debit Credit
April 6 55,700 April 10 18,350
18 15,700 17 42,200
Balance 40,000 Balance 60,550

Salaries Expense___ Accounts Receivable___

Debit Credit Debit Credit
April 14 11,600 April 17 42,200
Balance 11,600 23 21,000
Balance 21,200

Miscellaneous Expense__ Arc, Withdrawals__

Debit Credit Debit Credit
April 21 4,300 April 25 14,500 ________________
Balance 4,300 Balance 14,500

Telephone Expense___
Debit Credit
April 30 1,250_____________
Balance 1,250

27 | P a g e
Checking:
Asset = Liability + Owner's equity

Assets
Cash 32,450
Accounts Receivable 21,200
Plumbing Supplies 63,750
Service Vehicle 81,000
Total assets 198,400

Liabilities
Accounts Payable 59,650
Notes Payable 40,000
Total Liabilities 99,650

Owner's Equity
Arc, Capital 77,000
Arc, Withdrawals (14,500)
Telephone expense ( 1,250)
Miscellaneous Expense ( 4,300)
Salaries Expense (11,600)
Plumbing Revenue 60,550
Rent expense ( 7,150)
Total Owner's Equity 98,750

Assets = Liabilities + Owner's Equity

198400= 99650 + 98750
198400= 198400
Using the accounting equation, we can check whether our posting is correct or not. If the debit
and credit is equal there is a high chance that what you've done is correct. Since we all know
that even if debit and credit are equal there is no absolute assurance that what you've done is
correct because there are errors that still makes your debit and credit equal.

Key to correction: Unadjusted Trial Balance

Multiple Choice
1. D

2. C
A is wrong, trial balance can’t ensure that the FS is correct

28 | P a g e
 B is wrong, Balance sheet can’t give an absolute assurance about the correctness of
journals and posting.
C is correct, the sole purpose of Balance sheet is to ensure the equality of debit and
credit

3. A
A is correct, it is the definition of unadjusted trial balance
B is wrong, it is done to ensure that debit and credit are equal
C is wrong, even if debit and credit are equal it doesn’t mean that the journals are
correct
D is wrong, it is required because it is part of the accounting cycle

4. C
A is wrong, the credit is higher than debit
B is wrong, credit is higher by 36,000. Credit is higher than debit because the debit to
equipment was lower than the right amount
C- Debit is higher because a credit balance was posted to debit
D is wrong, just wrong name of the debtor will not make the trial balance not balance

5. B
A- Creditor's account is Accounts payable, debit is higher because accounts payable was
posted in the debit
B- Debit is lower because the Accounts receivable was posted 100 lower than the right
amount
C- Debit is higher because sales was put in the debit side of the ledger
D- Wrong account title, the trial balance is still equal

6. B
A is wrong, the trial balance is unequal because the error was committed only in debit.
B is correct, wrong account title in the journal will not result in inequality of trial balance
C is wrong, a debit balance was posted as credit, making credit higher than debit
D is wrong, a credit balance was posted as debit, resulting to debit higher than the
credit

7. B
A is wrong, it is traceable because only one account has an error, resulting to inequality
of debit and credit
B is correct, since the error happened in the journal entry, both debit and credit were
misstated which means that the debit and credit are equal
C is wrong, it is traceable because when an amount is misstated in the trial balance it is
usually happens in one of the accounts resulting to inequality of debit and credit

8. E

29 | P a g e
 A is wrong, it is traceable because the error only happens in one account resulting to
inequality of the trial balance when the trial balance is done
B is wrong, it is untraceable because the error happens in both debit and credit resulting
to equality of the trial balance when the trial balance is done
C is correct, it is the definition of sliding error
D is correct

9. D

10. D
A is wrong, adjusted trial balance is the one used directly in making the Financial
Statements
B is wrong, it doesn’t give an assurance that the debits and credits are correct
C is wrong, trial balance can’t reduce the risk of error to zero because of the undetected
errors even if the trial balance is equal
D is correct, it is the main purpose of trial balance, whether unadjusted or adjusted

11. A
A is true, when the trial balance is imbalance it is a conclusive evidence that there is an
error in the books
B is false, when the trial balance is balance it doesn’t give an assurance that there is no
error because of the presence of untraceable errors
C is false, when the trial balance is balance it doesn’t mean that there is an error.

12. D

Problem Solving
Unadjusted Trial Balance
No. Account Title Debit Credit
110 Cash 3,000,000
120 Accounts Receivable 1,000,000
130 Notes Receivable 1,000,000
140 Prepaid Expense 1,000,000
150 Land 3,000,000
160 Equipment 4,000,000
170 Accumulated depreciation 1,000,000
180 Loans Receivable 2,000,000
210 Accounts Payable 1,200,000
220 Notes Payable 1,500,000
230 Loans Payable 4,000,000
310 Reyes, Capital 3,500,000
320 Reyes, Withdrawal 500,000

30 | P a g e
 410 Rent Revenue 5,000,000
510 Utilities Expense 400,000
520 Telephone Expense 300,000
Total 16,200,000 16,200,000

Key to correction: Adjustments

Multiple Choice
1. B
A is subject to correcting entries
B is subject to reclassifying entry because the error is in the account title
C is subject to correcting entries because the error is combination of two errors

2. C
A is wrong because the two affected accounts are both real account
B is wrong because even if it is composed of one real and one nominal account, the
entry to be made is both debits.
C is correct, one nominal account and one real account. It also follows that a journal
entry must have at least one debit and one credit
D is wrong, the two affected accounts are real accounts

3. D

4. D

5. D

6. D

7. E
A is an income
B is not a journal entry, both credit entry
C is an expense
D is an expense

8. C
A is wrong, both are real accounts
B is wrong, both are real accounts
C is correct, one nominal and one real account
D is wrong, both are nominal accounts

31 | P a g e
9. C
A is an accrued revenue, the income was already earned
B is an advance payment, a deferred expense

10. B
A is a deferred revenue because the cash was received in advance
B is an accrued income because the income was already earned
C is an advance payment, a deferred expense

11. D
120,000/24 months = 5,000 per month
5,000 x 12(January to December) = 60,000

12. B
130,000/5 months= 26,000 per month
26,000 x 2(November 1 to December 31) = 52,000

13. B – Out of 15,000 cash received, the 2500 is for the month of April therefore 15,000 less
2,500 is the revenue for the month of March.

14. D – Out of 235,000 cash received on December only 45,000 is for December, but don't
forget the Income earned in November amounting to 50,000. The question is Income earned
for the year ended meaning the whole income earned during the year
November Income 55,000
December Income 40,000
Total Income 95,000

15. C
The accrual concept was violated because the expense was recorded when paid not
when incurred

Problem Solving
1.
Date Asset Method Expense Method
May Prepaid Insurance 48,000 Insurance Expense 48,000
31,2020 Cash 48,000 Cash 48,000

Asset method should record an asset Expense method should record an

in the original entry expense in the original entry
December Insurance Expense 14,000 Prepaid Insurance 34,000
31, 2020 Prepaid Insurance 14,000 Insurance Expense 34,000

32 | P a g e
 Solution:
48,000/ 24 months (May 31,2020 to
May 31,2022) = 2000 expense per
month
2,000 x 7(May 31,2020 to December
31,2020)
= 14,000 expense to be recognized
Expense to be recognized 14,000
Initial recorded expense 0
Adjustments for expense 14,000
Under asset method you need to
record the unrecorded expense at the
end of the period that is why expense
is debited. The expense should be
deducted to the asset that is why
prepaid insurance was credited.
Dec. 31, Insurance Expense 24,000
2021 Prepaid Insurance 24,000
Solution:
48,000 / 24 months = 2,000 expense
per month
2,000 x 12(January 1,2021 to
December 31,2021) = 24,000 expense
to be recognized
Expense to be recognized 24,000
Initial recorded expense 0
Adjustment for expense 24,000
33 | P a g e
Solution:
48,000/24 months = 2,000 expense
per month
2,000 x 7= 14,000 expense to be
recognized
Expense to be recognized 14,000
Initial recorded expense (48,000)
Adjustments for expense (34,000)
Alternative Solution:
2,000 x 17 months (Unexpired
portion as of December 31, 2020)
= 34,000 adjustments for expense
Note: Either way you will get the
amount 34,000.
Under asset method you need to
record the unrecorded asset at the
end of the period that is why prepaid
insurance is debited. Only 14,000
expense is incurred at the end of the
period that is why 34,000 is
deducted to the initial recorded
expense to arrive in 14,000 expense.
Insurance Expense 24,000
Prepaid Insurance 24,000
Same solution and explanation with
the Asset method. Always remember
that after one adjusting entry, the
Expense method will become the
same with the analysis of Asset
method because in the first adjusting
entry, the expense method will start
to recognized an asset making it like
an Asset method.
 Expense is a nominal
account/temporary account, that is
why the expense recorded in 2020 is
not included in the computation in the
expense for 2021. The expense for
2021 is for the whole year because the
entity used the insurance from
January 1, 2021 to December 31,2021

May Insurance Expense 10,000 Insurance Expense 10,000

31,2022 Prepaid Insurance 10,000 Prepaid Insurance

Solution: Same analysis and explanation with

48,000/ 24 months = 2,000 expense
per month
2,000 x 5(Jan.1,2022 to May 31,2022)
= 10,000 expense to be recognized
Expense to be recognized 10,000
Initial recorded expense 0 Total Expense
Adjustment for expense 10,000
It is important to note that the year
2022 is the year of expiration of the
Prepaid Insurance. The expense for
2022 is from January 1 to May 31 only
because the insurance will expire on
May 31, 2022.
the Asset method.
Checking
Expense for 2020: 14,000
Expense for 2021: 24,000
Expense for 2022: 10,000
48,000
Note: The total expense should equal
the total prepaid insurance, because
the expense every year is only
computed by dividing the prepaid
insurance over its life

2.
Date Liability Method Income Method
February Cash 72,000 Cash 72
29,2020 Unearned Rent Income 72,000 Rent Income 60,000

Liability method requires a recognition Income method requires a

of liability at the date of receipt of recognition of income at the date of
cash. Using the word “Unearned” receipt of cash.
means that the rent income is still a
liability
December Unearned Rent Income 30,000 Rent Income
31, 2020 Rent Income 30,000 Unearned Rent Income

34 | P a g e
 Computation: Computation:

72,000 / 24 months (February 29,2020 72,000 / 24 months = 3,000 per

to February 28,2022) = 3,000 per
month
3,000 x 10 months (February 29, 2020
to December 31, 2020) = 30,000
income to be recognized
Income to be recognized 30,000
Initial recorded income 0
Adjustment for income 30,000
Under liability method, income is
recorded at the end of the year as part
of Adjustments that is why Income was
credited.
month
3,000 x 10 months = 30,000 income
to be recognized
Income to be recognized 30,000
Initial recorded income (72,000)
Adjustment for income (42,000)
Alternative Computation:
3,000 per month x 14 months
(Unexpired portion as of December
31, 2020) = 42,000 adjustment for
income
Note: Either way you will get the
42,000 adjustments to income

Under income method, liability is

recorded at the end of the year as
part of adjustments that is why
Liability was credited
December Unearned Rent Income 36,000 Unearned Rent Income 36,000
31, 2021 Rent Income 36,000 Rent Income 36,000

Same analysis and computation with

the Liability method, because after
Solution: one adjusting entry, the income
3,000 x 12 months (January 1,2021 to method will become like the liability
December 31,2021) = 36,000 income to method
be recognized

Income to be recognized 36,000

Initial recorded income 0
Adjustments to income 36,000

Income is a nominal account, that is

why the income recorded in 2020 is not
included in 2021’s computation of
adjustments for income.
February Unearned Rent Income 6,000 Unearned Rent Income 6,000
28, 2022 Rent Income 6,000 Rent Income 6,000

35 | P a g e
 Solution: Same solution and explanation with
3,000 x 2 months (January 1, 2022 to the liability method
February 28,2022) = 6,000 income to
be recognized Checking:
Income recognized in 2020 30,000
Income to be recognized 6,000 Income recognized in 2021 36,000
Initial recorded income 0 Income recognized in 2022 6,000
Adjustments to income 6,000 Total recognized income 72,000

It is important to take note that the
expiration of the unearned income is
February 28,2022. During the year
2022, the rent income is only for the
month of January and February.
Always remember that the total
recognized income must be equal to
the original cash received by the
entity.

3. A. December 1, 2020
Note Receivable 1,000,000
Plumbing Revenue 1,000,000

B. December 31, 2020

Interest Receivable 10,000
Interest Income 10,000

Solution:
Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 1/12 = 10,000

Adjustments is necessary to affect the unrecorded interest income as of the year end.
During 2020, the entity holds the credit for only 1-month period (From December 1,2020 to
December 31,2020), thus the interest is computed for only 1 month.

C. December 31,2021
Interest Receivable 120,000
Interest Income 120,000

Solution:
Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 12/12 = 120,000

During the year 2021, the entity held the credit for one whole year (from January 1,2021
to December 31,2021) that is why the interest is computed for 12 months.

D. December 1,2022

36 | P a g e
 To Record the payment of the notes
Cash 1,000,000
Notes Receivable 1,000,000

To record the Payment of the interest

Cash 240,000
Interest Receivable* 130,000
Interest Income** 110,000

Solution
*Interest Receivable in 2020 10,000
Interest Receivable in 2021 120,000
Total Interest Receivable 130,000
The interest receivable was computed the recorded interest receivable during 2020 and 2021.
The reason why adjusting entry is required for interest is not just because to record the interest
income at year end, but also to record the respective interest receivable during those periods.

**Interest Income = Principal X Interest Rate X Time

Interest Income = 1,000,000 x 12% x 11/12
Interest Income = 110,000
Interest income for the year 2022 is computed only for the month of January 1 to
December 1 and not December 31 because the receivable was already paid at December 1,
meaning the entity only held the receivable for 11 months that is why the interest is computed
for 11 months as well.

Alternative Compound Journal Entry

Cash 1,240,000
Interest receivable 130,000
Interest Income 110,000
Notes receivable 1,000,000

4. A. November 1,2020
Furniture and fixtures 4,000,000
Notes Payable 4,000,000

B. December 31,2020
Interest Expense 160,000
Interest Payable 160,000
Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 2/12
Interest Expense = 160,000

37 | P a g e
 Interest is computed for only 2 months because the entity only incurred expense from
November 1 to December 31.
C. December 31,2021
Interest Expense
Interest Payable

Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 12/12
Interest Expense = 960,000

Interest is computed for 12 months because during 2021, the liability was outstanding
for the whole year.

D. November 1,2022

To record the payment of principal

Notes Payable 4,000,000
Cash 4,000,000

To record the payment of interest

*Interest Expense 800,000
**Interest Payable 1,120,000
Cash 1,920,000

Solution
*Interest expense = Principal x Interest rate x Time
Interest expense = 4,000,000 x 24 % x 10/12
Interest expense = 800,000
Interest expense was computed for 10 months only, because the liability is outstanding
only for 10 months during the 2022. The liability was paid on November 1, that is why interest
expense is computed for the period of January 1 to November 1 only.

**Interest payable in 2020 160,000

Interest payable in 2021 960,000
Total Interest Payable 1,120,000

Alternative compound journal entry

Interest Expense 800,000
Interest Payable 1,120,000
Notes Payable 4,000,000
Cash 5,920,000

38 | P a g e
5. December 31,2020
Depreciation Expense 1,000,000
Accumulated Depreciation 1,000,000
Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 1/12---December 1 to December 31
Depreciation Expense 1,000,000

Cost 40,000,000
Accumulated Depreciation (1,000,000)
Book Value as of 12/31/2020 39,000,000

December 31,2021
Depreciation Expense 12,000,000
Accumulated Depreciation 12,000,000

Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 12/12---January 1 to December 31
Depreciation Expense 12,000,000

Cost 40,000,000
Accumulated Depreciation (13,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2021 27,000,000 Accumulated Depreciation 2021 12,000,000
Total Accumulated Depreciation 14,000,000

December 31,2022
Depreciation Expense 12,000,000
Accumulated Depreciation 12,000,000
Solution:
Cost 40,000,000

39 | P a g e
 Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 12/12---January 1 to December 31
Depreciation Expense 12,000,000

Cost 40,000,000
Accumulated Depreciation (25,000,000)-- Depreciation Expense 2020 1,000,000
Book Value as of 12/31/2022 15,000,000 Depreciation Expense 2021 12,000,000
Depreciation Expense 2022 12,000,000
Total Accumulated Depreciation 25,000,000

December 31,2023
Depreciation Expense 11,000,000
Accumulated Depreciation 11,000,000

Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 11/12---January 1 to December 1. The equipment’s
Depreciation Expense 11,000,000 useful life is only up to December 1,2023

Cost 40,000,000
Accumulated Depreciation (36,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2022 4,000,000 Accumulated Depreciation 2021 12,000,000
Accumulated Depreciation 2022 12,000,000
Accumulated Depreciation 2023 11,000,000
Total Accumulated Depreciation 36,000,000

At the end of the useful life of the asset, the book value is always equal to the salvage
value because it is the estimated value of the asset after using it.

40 | P a g e
Key to Correction: Worksheet
1. C
A is false, worksheet Is not required
B is false, Financial statements can be made even without the worksheet
C is true, it is the definition of worksheet
2. D
3. D
4. D
5. D
Problem Solving
Acts Company
Worksheet
For the year ended December 31,2020
Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet
Balance Balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 10,000 10,000 10,000
Accounts Receivable 20,000 20,000 20,000
Prepaid Rent 5,000 A 1,000 4,000 4,000
Prepaid Insurance 4,000 B 3,000 1,000 1,000
Equipment 45,000 45,000 45,000
Acc. Depreciation 7,000 C 5,000 12,000 12,000
Accounts Payable 10,000 10,000 10,000
Unearned Rent 30,000 D 20,000 10,000 10,000
Acts, Capital 30,000 30,000 30,000
Acts, Withdrawals 10,000 10,000 10,000
Rent Revenue 30,000 D 20,000 50,000 50,000
Rent Expense 10,000 A 1,000 11,000 11,000
Insurance Expense 3,000 B 3,000 6,000 6,000
Depreciation Expense C 5,000 5,000 5,000

41 | P a g e
 107,000 107.000 29,000 29,000 112,000 112,000 22,000 50,000 90,000 62,000
Profit 28,000 28,000
50,000 50,000 90,000 90,000

42 | P a g e
Key to correction: Statement of cashflows

1. C
A and B are wrong, there is no required method
C is correct, all other components of FS are following the accrual, only Statement
of Cashflow used the Cash basis.
2. C
A is correct, Indirect method and Direct method will yield the same result
B is correct, in Financing Activity and Investing Activity the only way to compute
the cashflow is by deducting the outflow from the inflow
C is wrong, there is only one method to compute the Cashflow from the
investing activity
3. D
A is correct, it is use under the indirect method
B is correct, it is use under the direct method
C is false, it is included in the computation of cashflow for Financing Activities.

4. D
A is false, it is not included because it is on account, no cash involvement
B is false, it is part of operating activities because it is a short-term investment
C is false, it is part of investing activities
D is correct, the amount paid in cash is included in the cashflow from investing
activities
5. D
A is false, it is not part of any activity under the Cashflow statement because
there is no cash involved
B is false, no cash involve therefore it is not part of Cashflow
C is false, it is part of Financing Activities
D is correct, it is a financing activity

Problem solving

1. A. Net Income 40,000

Add: Depreciation Expense 10,000
Total 50,000
Increase in Accounts Receivable (50,000)
Decrease in Prepaid Rent 30,000
Increase in Accounts Payable 100,000
Increase in Notes Payable 20,000
Cashflow provided by Operating Activities 150,000

B. Sale of Land 50,000

43 | P a g e
 C. Receipt from Loans Payable 40,000
Payment of Mortgage (50,000)
Cashflow used by Financing Activities (10,000)

D. Cashflow from Operating Activities 150,000

Cashflow from Investing Activities 50,000
Cashflow used in Financing Activities (10,000)
Cashflow during the year 190,000
Add: beginning cash balance (2019) 50,000
Cash balance for 2020 240,000

E. Capital,2019 280,000
Net Income (2020) 40,000
Capital,2020 320,000

Key to Correction: Closing Entries

1. D
2. D
3. D
4. C
A is wrong, cash is a real account, therefore it is not subject to closing entries
B is wrong, the proper way to close the Income is by debiting income and crediting the
income summary account
D is wrong, Withdrawals are not income related account that is why the proper way to
close it is by closing it directly to capital

44 | P a g e