FINANCIAL ACCOUNTING & REPORTING

FAR.0747-Cash to Accrual and Single Entry FAR 747-Online

LECTURE NOTES

Income and Expense Recognition Decrease in unearned income xx

Accrual Accrual basis expense Pxx
Cash Basis Basis
Income Received Earned Cash to Accrual – Net Income
Expense Paid Incurred Cash basis net income (Receipts-
Disbursements) Pxx
Cash to Accrual – Income Assets, ending xx
Cash basis income (Receipts) Pxx Assets, beginning (xx)
Accrued income (Receivable), Liabilities, ending (xx)
ending xx Liabilities, beginning xx
Accrued income (Receivable), Accrual basis net income Pxx
beginning (xx)
Unearned income, ending (xx) Cash to Accrual – Net Income
Unearned income, beginning xx (Alternatives)
Accrual basis income Pxx Cash basis net income (Receipts-
Disbursements) Pxx
Cash to Accrual – Income Increase in assets xx
(Alternatives) Decrease in assets (xx)
Cash basis income (Receipts) Pxx Increase in liabilities (xx)
Increase in accrued income Decrease in liabilities xx
(Receivable) xx Accrual basis net income Pxx
Decrease in accrued income
(Receivable) (xx) Profit or Loss Computation:
Increase in unearned income (xx) Capital (Net Assets/Equity)
Decrease in unearned income xx Maintenance Approach
Accrual basis income Pxx Equity, ending pxx
Equity, beginning (xx)
Cash to Accrual – Expense Net change in equity - Increase
Cash basis expense (decrease) xx
(Disbursements) Pxx Contributions from owners (xx)
Accrued expense (Payable), Distribution from owners xx
ending xx Comprehensive income xx
Accrued expense (payable), Other comprehensive income
beginning (xx) (OCI) (xx)
Prepaid expense, ending (xx) Profit or loss Pxx
prepaid expense, beginning xx
Accrual basis expense Pxx

Cash to Accrual – Expense

(Alternatives)
Cash basis income (Receipts) Pxx
Increase in accrued income
(Receivable) xx
Decrease in accrued income
(Receivable) (xx)
Increase in unearned income (xx)

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relating to contribution from equity

participants.
Conceptual Framework Definitions Expenses are decreases in economic
Income is increases in economic benefits benefits during the accounting period in
during the accounting period in the form the form of outflow or depletions of
of inflows or enhancements of assets or assets or incurrences of liabilities that
decreases of liabilities that result in result in decreases in equity other than
increases in equity, other than those those relating to distributions to equity
participants.
-Done-

REVIEW QUESTONS

REVIEW QUESTION: PROBLEMS

1. The following relate to Panda Company’s patents assigned to other entities:

January 1 December 31
Royalties receivable P500,000 P 1,500,000
Unearned royalties 200,000 600,000

During the year, Panda received royalty remittance of P5,000,000. In its income
statement for the year ended December 31, 2010, Panda should report royalty
income of
a. P6,400,000 b. P5,600,000 c. P4,400,000 d. P3,600,000

2. Under the accrual basis, rental income of Macho Company for the current year is
P60,000. Additional information regarding rental income are:

Unearned rental income, Jan. 1, 2010 P5,000

Unearned rental income, Dec. 31, 2010 7,500
Accrued rental income, Jan. 1, 2010 3,000
Accrued rental income, Dec. 31, 2010 4,000

How much actual cash rental was received by Macho Company in the current
year?
a. P58,500 b. P61,500 c. P62,500 d. P65,50

3. Peak Company borrows money under various loan agreement involving notes
discounted and notes requiring interest payments at maturity. During the year
ended December 31, Peak paid interest totaling P5,000,000. The balance sheets
included the following:

December 31 January 1
Interest payable P 2,500,000 P2,000,000
Prepaid interest 1,500,000 500,000

How much interest expense should Peak report for 2010?

a. P4,500,000 b. P6,500,000 c. P3,500,000 d. P5,500,000

4. Lane Company acquires copyrights from authors, paying advance royalties in

some cases, and in others, paying royalties within 30 days of year-end. Lane

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reported royalty expense of P375,000 for the year ended December 31. The
following data are included in Lane’s balance sheet.

January 1 December 31
Prepaid royalties P60,000 P50,000
Royalties payable 75,000 90,000

During 2010, Lane made royalty payments totaling

a. P350,000 b. P370,000 c. P380,000 d. P400,000

Use the following information for the next three questions.

Poole Company paid or collected during the current year the following items:

Insurance premium paid P 15,400

Interest collected 30,900
Salaries paid 135,200

The following balances have been excerpted from Poole’s balance sheets:

December 31 January 1
Prepaid insurance P1,200 P 1,500
Interest receivable 3,700 2,900
Salaries payable 12,300 10,600

5. The insurance expense on the income statements for the current year was
a. P12,700 b. P15,700 c. P15,100 d. P18,100

6. The interest revenue on the income statements for the current year was
a. P24,300 b. P31,700 c. P30.100 d. P37,500

7. The salary expense on the income statements for the current year was
a. P112,300 b. P136,900 c. P133,500 d. P158,100

8. The following balances were reported by Mall Co. at December 31, 2015 and
2014:
12/31/15 12/31/14
Inventory P260,000 P290,000
Accounts payable 75,000 50,000

Mall paid supplier P490,000 during the year ended December 31, 2015. What
amount should Mall report for cost for goods sold in 2015?
a. P545,000 b. P495,000 c. P285,000 d. P435,000

9. the following data are from a comparison of the balance sheet of Alyssa company
as December 31, 2015, and December 31, 2014:

Accounts Receivable Increase P 7.600

Inventory Decrease 4,500
Accounts Payable Increase 2,400

The following data are from Alyssa’s 2015 income statement:

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Sales P220,000
Cost of goods sold 110,000

How much cash was paid for inventory purchases?

a. P116,900 b. P103,100 c. P112,100 d. P107,900

10. Class Corp. maintain its accounting records on the cash basis bur restates its
financial statements to the accrual method of accounting. Class had p60,000 in
cash-basis pretax income for 2015. The following information pertains to Class’s
operation for the years ended December 31, 2015 to 2014:

2015 2014
Accounts receivable P 40,000 P20,000
Accounts payable 15,000 30,000

Under the accrual method, what amount of income before taxes should class
report in its 2015 income statements
a. P25,000 b. P55,000 c. P65,000 d. P95,000

11. The Retry Company uses cash-basis accounting for their records. During 2015,
Retry collected P500,000 from its customers, made payments of P200,000 to its
suppliers for inventory, and paid P140,000 for operating costs. Retry wants to
prepare accrual-basis statements. In gathering information for the accrual-basis
financial statements, retry discovered the following:
a. Customers owed retry P50,000 at the beginning and P35,000 at the end of the
year.
b. Retry owed suppliers P20,000 at the beginning and P27,000 at the end of the
year.
c. Retry’s beginning inventory was P42,000, and its ending inventory was
P44,000
d. Retry had prepaid expenses of P5,000 at the beginning and P7,400 at the end
of the year.
e. Retry had accrued expenses of P12,000 at the beginning and P19,000 at the
end of the year.
f. Depreciation for the year was P51,000.

Determine the accrual basis net income of Retry company for the year ended
December 31, 2015.
a. P79,600 b. P84,400 c. P91,400 d. P98,400

Use the following information for the next three questions.

You were given the following information obtained from the single-entry records of
Jessie Company:
January 1 April 30
Interest receivable P 1,500 P 1,200
Accounts receivable 67,500 132,000
Notes receivable 22,500 18,000
Merchandise inventories 57,000 15,000
Store and office equipment (net) 48,750 45,000
Prepaid operating expenses 3,750 3,300
Interest payable 450 750

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Accounts payable 52,500 37,500

Notes payable 15,000 18,000
Accrued operating expenses 4,050 7,500

An analysis of the cashbook shows the following:

Balance, January 1 P22,500

Receipts:
Interest income P 3,000
Accounts receivable 54,000
Notes receivable 22,500
Investment by Una __9,000 _88,500
111,000
Disbursements:
Interest expense P 2,250
Accounts payable 78,000
Notes payable 12,000
Operating expenses 25,500 117,750
Balance, April 30 – bank overdraft (P6,750)

Questions:

12. Sales
a. P141,000 b. P145,000 c. P118,500 d. P136,500

13. Cost of goods sold

a. P120,000 b. P150,000 c. P105,000 d. P78,000

14. Operating expenses, excluding depreciation

a. P24,900 b. P28,950 c. P28,500 d. P29,400

15. Interest income

a. P2,700 b. P2,250 c. P28,500 d. P29,400

16. Loss before tax

a. P12,000 b. P12,750 c. P16,500 d. P10,200

17. The following information relates to the Gates Corporation:

Sales revenue P9,000,000

Net assets, end of year 500,000
Net assets, beginning of year 300,000
Additional investment by
shareholders 100,000
Profit for the year 200,000
Other comprehensive income for
the year 50,000

Compute the amount of dividends paid during the year.

a. P200,000 b. P550,000 c. P150,000 d. P 50,000

Equity, ending Pxx

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Equity, beginning (xx)

Net change in equity - Increase (decrease) xx
Contribution from owners (xx)
Distribution to owners xx
Comprehensive income xx
Other comprehensive income (OCI) (xx)
Profit or loss Pxx

18. Changes in the statements of financial position account balances for the Peak
Sales Co. during 2015 follow .Dividends declared during 2015 were P25,000.

increase
(decrease)
Cash P95,500
Accounts receivable, net 92,000
Inventory (30,000)
Buildings and equipment (net) 190,000
Patents (5,000)
Accounts payable (75,000)
Bonds payable 150,000
Share capital 100,000
Share premium 50,000

Calculate the net income for the year assuming that no transactions other than
the dividends affected retained earnings.
a. P117,500 b. P267,500 c. P142,500 d. P292,500

REVIEW QUESTION: THEORIES

1. Under the cash basis of accounting, revenues are recorded
a. When they are earned and realized.
b. When they are earned and realizable.
c. When they are earned.
d. When they are realized.

2. Under the cash basis of accounting

a. Revenues are recorded when they are earned.
b. Accounts receivable would appear on the balance sheet.
c. Depreciation of assets having an economic life of more than one year is
recognized.
d. The matching principle is ignored.

3. When converting from cash basis to accrual basis accounting, which of the
following adjustments should be made to cash receipts from customers to
determine accrual basis service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service revenue.
c. Add ending accounts receivable.
d. Add cash sales.

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4. When converting from cash basis to accrual basis accounting, which of the
following adjustments should be made to cash paid for operating expenses to
determine accrual basis operating expenses?
a. Add beginning accrued liabilities.
b. Subtract beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.

5. When converting an income statement from a cash basis to an accrual basis,

expenses:
a. Exceed cash payments to suppliers.
b. Equal cash payments to suppliers.
c. Are less than cash payments to suppliers.
d. May exceed or be less than cash payments to suppliers.

6. When the amount of revenue collected in advance decreases during an

accounting period:
a. Accrual-basis revenues exceed cash collections from customers.
b. Accrual-basis net income exceeds cash-basis net income.
c. Accrual-basis revenues are less than cash collections from customers.
d. Accrual-basis net income is less than cash-basis net income.

7. When converting an income statement from a cash basis to an accrual basis,

which of the following is incorrect?
a. An adjustment for depreciation reduces the net income.
b. An adjustment for bad debts increases the net income.
c. A reduction in prepaid expenses decreases net income.
d. An increase in accrued payables decreases net income.

8. When the amount of interest receivable decreases during an accounting period:

a. Accrual-basis interest revenues exceed cash collections from borrowers.
b. Accrual-basis net income exceeds cash-basis net income.
c. Accrual-basis interest revenues are less than cash collections from borrowers.
d. Accrual-basis net income is less than cash-basis net income.

9. When converting an income statement from a cash basis to an accrual basis,

cash received for services:
a. Exceed service revenue.
b. May exceed or be less than service revenue.
c. Is less than service revenue.
d. Equals service revenue.

10. Compared to the accrual basis of accounting, the cash basis of accounting
produces a higher amount of income by the net decrease during the accounting
period of

Accrued income Accrued expense

a. Yes Yes
b. Yes No
c. No Yes
d. No No

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11. If ending accounts receivable exceeds the beginning accounts receivable:

a. Cash collections during the period exceed the amount of revenue earned.
b. Net income for the period is less than the amount of cash basis income.
c. No cash was collected during the period.
d. Cash collections during the year are less than the amount of revenue earned.

12. Total net income over the life of an entity is

a. Higher under the cash basis than under the accrual basis.
b. Lower under the cash basis than under the accrual basis.
c. The same under the cash basis as under the accrual basis.
d. Not susceptible to measurement.

 - end - 

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