Professional Documents
Culture Documents
02 Lecture W Theory
02 Lecture W Theory
CASH/ACCRUAL AND
SINGLE ENTRY
FINANCIAL ACCOUNTING REVIEW:
ERROR CORRECTION
(Reference: PAS 8)
Prior Period Errors – omissions, misstatements in the financial statements of prior periods
arising from a failure to use or misuse information that:
(a) was available when financial statements for those periods were authorized
for issue and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial statements.
The entity shall correct material prior period errors retrospective in the first set of financial
statements authorized for issue after their discovery by restating the net income and retained
earnings of prior period.
B. BALANCE SHEET ERRORS – errors affecting at least 2 balance sheet (real) accounts
only, thus will also have no effect to the net income.
C. MIXED ERRORS –errors affecting at least 1 income statement (nominal) account and at
least 1 balance sheet (real) account, the combination of which results to an erroneous
net income.
* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and
the year following the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued Income, DIRECT INDIRECT
Inventory, end, AR/Sales)
Counter Balancing Error in a LIABILITY
(e.g. Unearned Income, Accrued INDIRECT DIRECT
expense, AP/Purchases)
- Where the requirement is the EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER
CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’
net income)
5. The error in the current asset is DIRECTLY related to the WC (overstated current asset
means overstated WC, and vice versa)
6. The error in the current liability is INVERSELY related to the WC (overstated current
liability means understated WC, and vice versa)
The formula for converting records from cash to accrual or accrual to cash is actually derived
from the transaction analysis of the balance sheet account being used as a result of the accrual
basis of accounting (other than cash).
Thus, for sales, the formula is derived from the transaction analysis of the account Accounts
Receivable. Where, applicable, other balance sheet related accounts to sales such as Notes
Receivable – Trade and Advances from Customers, should also be included in the formula
derivation. For simplicity purposes, the accounts receivable and notes receivable are simply
added on the debit side of the T-account (beginning and ending), while the advances from
customer balances (beginning and ending) are kept on the credit side of the T-account.
(receivables being an asset while advances from customers being a liability). The rest are
simple transaction analysis which are either debited or credited to the accounts receivable
account.
For purchases, the formula is derived from the transaction analysis of the account Accounts
Payable. Where, applicable, other balance sheet related accounts to purchases such as Notes
Payable – Trade and Advances to Suppliers, should also be included in the formula derivation.
For simplicity purposes, the accounts payable and notes payable are simply added on the credit
side of the T-account (beginning and ending), while the advances to suppliers balances
(beginning and ending) are kept on the debit side of the T-account. (payables being a liability
while advances to suppliers being an asset). The rest are simple transaction analysis which are
either debited or credited to the accounts payable account.
Accounts Payable and
Advances to Suppliers Notes Payable - Trade
Beg. Bal (Advanc.) XXX XXX Beg. Bal (AP/NP)
Payments XX XX Purchase on Acc.
(Cash basis) (Accrual basis)
Purchase discounts XX
Purchase returns* XX
Purchase allowance XX
Finally, in converting operating expenses from cash to accrual, or vice versa, the formula is
derived from the transaction analysis of the account Accrued Expense (credit side) and/or
Unearned Income (debit side).
DISCUSSION PROBLEMS
CHAPTER 11-PROBLEM 1:
You have been engaged to audit the accounts of Safari Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
Ommission of: 2016 2017 2018
a. Accrued expenses P15,000 P7,000 P22,000
b. Accrued income 8,000 9,000 5,000
c. Prepaid expense 16,000 12,000 6,000
d. Unearned income 11,000 13,000 10,000
Requirements:
CHAPTER 11-PROBLEM 2:
You have been engaged to audit the accounts of Masigla Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
2016 2017 2018
a. Ending inventory overstated as a result of
over counting items at year-end. P50,000 P30,000 P40,000
b. Ending inventory understated as a result of
wrong pricing and computational errors 12,000 14,000 8,000
Requirements:
CHAPTER 11-PROBLEM 3:
You have been engaged to audit the accounts of Amici Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
2017 2018
a. The following were omitted at each year-end:
Salaries payable P12,000 P5,000
Accrued interest income 4,000 3,000
Unearned rental income 14,000 15,000
Prepaid insurance 3,000 5,000
b. Collections from customer at year end, recorded as
sales but deliveries were not made until the
following year 31,000 25,000
c. Payments to suppliers at year end, recorded as
purchases but merchandise were not received
until the following year 10,000 7,000
d. Routinary repairs cost charged to equipment
account at the beginning of each year.
Depreciation rate on fixed asset was at 20% 60,000 80,000
e. Unadjusted net income 245,000 310,000
Requirements:
3. What is the retroactive adjustement to the retained earnings at the beginning of 2018?
4. Assuming that annual dividends were paid to stockholders at P75,000, what is the
correct retained earnings at the end of 2018?
CHAPTER 11-PROBLEM 4:
Solid Company reported in its cash basis financial statements, a total sales of P1,980,000 for
the year ended December 31, 2018. Your audit of the related accounts revealed the following
information:
Additional information:
a. Total discounts taken by customers during the year was at P80,000.
b. Sales returns during the year was at P100,000, P40,000 of which was refunded to
customers since return happened before any collections of receivables.
Required:
1. Assuming that there were no uncollectible accounts were written off in 2018, what is the
accrual basis gross sales for the year?
2. Assuming that the company wrote-off P25,000 and subsequently recovered P20,000,
what is the accrual basis gross sales for the year?
CHAPTER 11-PROBLEM 5:
Deisel Corp. reported total purchases of P2,500,000 in its cash basis financial statement on
December 31. 2018. Additional information revealed the following:
Accounts payable, January 1, 2018 P600,000
Accounts payable, December 31, 2018 800,000
Inventory, January 1, 2018 250,000
Inventory, December 31, 2018 325,000
Additional information:
a. Total discounts taken by the company from suppliers during the year was at P45,000.
b. Purchase returns during the year was at P80,000, P25,000 of which was received as
cash refund from the suppliers since return happened before any payments were made.
Required:
CHAPTER 11-PROBLEM 6:
Becker Company assigns some of its patents to other enterprises under a variety of licensing
agreements. In some instances advance royalties are received when the agreements are
signed and, in others, royalties are remitted within 60 days after each license year-end. The
following data included in Becker’s December 31, balance sheets:
December 31, 2017 December 31, 2018
Royalties receivable P90,000 P85,000
Unearned royalties 60,000 40,000
During 2018 Becker received royalty remittances of P200,000. In its income statement for the
year ended December 31, 2018 Becker should report royalty income of:
CHAPTER 11-PROBLEM 7:
XYZ Company acquires patent rights from other enterprises and pays advance royalties in some
cases, and in others, royalties are paid within 90 days after year-end. The following data are
included in XYZ’s December 31, balance sheets:
December 31, 2017 December 31, 2018
Prepaid royalties P55,000 P45,000
Royalties payable 80,000 75,000
During 2018 XYZ remitted royalties of P300,000. In its income statement for the year ended
December 31, 2018, XYZ should report royalty expense of:
CHAPTER 11-PROBLEM 8:
You were assigned to audit the books of BACOLOD CORP. for the period ended December 31,
2018. The bookkeeper of the client provided you the following summarized data taken directly
from its records:
Additional information:
The furniture and equipment which had an estimated useful life of 10 years were
acquired on July 1, 2015 and were estimated to have a 10% salvage value based on cost. The
company uses the double declining balance method in computing the depreciation.
Requirements:
CHAPTER 11-PROBLEM 9:
Cutting Edge Co. is engaged in a small export business. The company maintains limited
records. Most of the company’s transactions are summarized in a cash journal; non-cash
transactions are recorded by making memo entries. The following are abstracted from the
company’s records:
Accounts receivable, increase P1,480,000
Notes receivable, decrease 800,000
Accounts payable, decrease 600,000
Notes payable –trade, increase 800,000
Notes payable – bank, increase 1,200,000
Sales return (P200,000 was refunded) 320,000
Sales discounts 80,000
Purchase returns (P120,000 was refunded) 320,000
Purchase discounts 140,000
Accounts written-off 240,000
Recovery of accounts written-off 72,000
Cash sales 1,200,000
Cash purchases 1,000,000
Cash received from account customers 6,000,000
Cash payment to trade creditors 4,800,000
Requirements:
Glass Co., organized on March 1, 2018, has a very poor internal control system. The company’s
cashier is also its accountant. After 9 months of operations, the company’s manager suspects
that the cashier-accountant has been misappropriating company collections. You have been
engaged to audit the company’s accounts to determine the extent of fraud, if any.
You started the audit on November 15. On that date, the cash on hand per your surprise count
was P5,140. Also on that date, the bank confirmed that the balance of the company’s current
account was P26,328. Your examination of the records reveals that a check for P1,852 was
outstanding on November 15. The company’s mark up is 40% of sales.
Further examination of the company’s records reveals the following balances at November 15,
2018:
Ordinary shares P300,000
Share premium from ordinary shares 20,000
Real property purchased for cash 200,000
Mortgage payable 80,000
Furniture and fixtures (of the acquisition cost,
P6,000 remains unpaid as of November 15) 29,000
Notes payable – bank 32,000
Accounts payable – trade 46,284
Expenses paid (excluding purchases) 60,756
Merchandise inventory at cost 93,920
Accounts receivable – trade 85,380
Total sales 340,000
Your audit of Edu Company revealed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in the bank, nor was
a record kept of sales. Accounts receivable were recorded only by keeping copy of tickets, and
these copies were given to the customers when paying their accounts.
Audit notes:
a. The company started its operations on January 2, 2018 and issue common stock,
216,000 shares with 100 par, for the following considerations:
Cash P1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000
b. An analysis of the bank statements showed total deposits, including original cash
investment, of P12,600,000. The balance in the bank statement on December 31,
2018, was P900,000. but there were checks amounting to P180,000 dated in December
but not paid by the bank until January 2019. Cash on hand on December 31, 2018 was
P450,000 including customers’ deposit of P135,000.
c. During the year, Edu borrowed P1,800,000 from the bank and repaid P450,000 and
P90,000 interest. P30,000 in accrued interest is unpaid by the end of the year.
d. Disbursements paid in cash during the year were as follows: Utilities, P360,000;
Salaries, P360,000; Supplies, P720,000, and; Dividends, P540,000. Year-end balances
of related accounts are: Utilities payable, P40,000; Salaries payable, P25,000; Unused
supplies, P150,000; Dividends payable, P60,000.
f. Tickets for accounts receivable totaled P3,240,000 but P180,000 of that amount may
prove uncollectible.
h. Equipment with a cash price of P1,440,000 was purchased in early January on one-year
installment basis. During the year, checks for the down payment and all maturing
installments totaled P1,602,000. The equipment has a useful life of 5 years.
Based on the above and the result of your audit, determine the following:
Bee Co.’s net income for 2016, 2017 and 2018 were P100,000, P145,000 and P185,000;
respectively. The following items were not handled properly.
a. Rent of P6,500 for 2019 was received from a lessee on December 23, 2018, and recorded
as outright income in 2018.
c. The following unused office supplies were omitted in the accounting records:
d. On January 1, 2016, the company completed major repairs on the company’s machinery
and equipment totaling P220,000, which was expensed outright. The said equipment is 5
years old as of January 1, 2016. As of December 31, 2018, the equipment had an original
cost of P500,000 and a carrying value of P250,000.
5. The effect of the above errors on the 2018 beginning retained earnings is:
a. 176,200 understatement c. 116,200 understatement
b. 136,200 understatement d. 3,800 overstatement
CHAPTER 11-EXERCISE 2:
Log Corp.. reported pretax incomes of P4,545,000 and P3,483,000 for the years ended
December 31, 2017 and 2018, respectively. Your audit however revealed the following errors:
a. Sales for 2017 included a P1,719,000 collection pertaining to a delivery made in January
of 2018 under an FOB Shipping point freight term.
c. Interest expenses on Bonds for both years were recorded as payments were made
every December 31. The bonds have a face value of P11,250,000 and pay a nominal
interest rate of 6%. They were issued at a discount of P675,000 on January 1, 2016 to
yield an effective interest rate of 7%.
d. Ordinary repairs to equipment had been charged to the Equipment account during 2017
to 2018. Repairs of P382,500 and P423,000 had been incurred in 2017 and 2018,
respectively. In determining depreciation charges, Log uses the double declining
balance method over 10 a ten-year asset useful life. The rate is being applied to the
balance of the asset account at the end of each year.
Requirements:
CHAPTER 11-EXERCISE 3:
b. Equipment UVW cost P393,750 and was acquired on January 1, 2016. On the date of
acquisition, the expected useful life was 12 years with no residual value. The straight
line depreciation method was used. On January 2, 2018, it was estimated that the
remaining life of the asset would be 6 years and that there would be an P18,750
residual value. In addition, 150% declining balance method will be used to fairly reflect
the mode of use of the asset.
c. A building was purchased on January 3, 2015, for P4,500,000. The building was
expected to have a useful life of 20 years with no residual value. The straight-line
depreciation method was used. On January 1, 2018, a change was made to the sum-of-
years’ digits method of depreciation. Total life of the asset was estimated to be at 15
years with P50,000 residual value.
Requirements:
1. How much is the adjustment to the accumulated depreciation account and the related
depreciation expense for the current year for the Equipment XYZ?
a. 15,000 and 63,000; c. 165,000 and 56,000
b. 135,000 and 63,000 d. 135,000 and 56,000
2. How much is the depreciation expense for the current year for the Equipment UVW?
a. 82,031 b. 77,344 c. 82,813 d. 87,500
CHAPTER 11-EXERCISE 4:
In the course of your examination of the December 31, 2018, financial statements of Insular
Corp, you discovered certain errors that had occurred during 2017 and 2018. No errors were
corrected during 2017. The errors are summarized below:
b. Merchandise costing P72,000 was sold for P120,000 to Naval Company on December
28, 2017, but the sale was recorded in 2018. The merchandise was shipped FOB
shipping point and was not included in ending inventory. Insular uses the periodic
inventory system.
c. A two-year fire insurance policy was purchased on May 1, 2017, for P172,800. The
whole amount was charged to Prepaid Insurance. No adjusting entry was prepared in
2017 and 2018.
d. A one-year note receivable of P288,000 was held by Insular beginning October 1, 2017.
Payment of the 10% note and accrued interest was received upon maturity. No
adjusting entry was made on December 31, 2017.
e. Equipment with a 10 year useful life was purchased on January 1, 2017, for P1,176,000.
No depreciation expense was recorded during 2017 or 2018. Assume that the
equipment has no residual value and that Insular uses the straight-line method for
recording depreciation.
f. The company reported a P1,500,000 net income in 2017 and a P1,750,000 net income
in 2018.
Requirements:
1. What is the net adjustment to the beginning retained earnings account in 2018?
a. 69,600 b. 175,200 c. 127,200. d. 48,000
CHAPTER 11-EXERCISE 5:
You were engaged by Kuting Corp. to audit its financial statements for the first time. In
examining the company’s books, you discovered that certain adjustments had been overlooked
at the end of 2017 and 2018. Moreover, you also discovered that other items had been
erroneously recorded. The said omissions and other failures for each year are noted below:
2017 2018
Prepaid insurance 256,000 205,200
Accrued salaries and wages 582,400 520,000
Accrued interest income 172,800 142,000
Advances from customers 313,600 374,000
Capital expenditures charged as repairs expense 376,000 348,000
Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized
as advances from customers because goods were not shipped until the following year.
b. Capital expenditures had been recorded as repairs but should have been charged to the
Machinery account; the depreciation rate is 10% per year, but depreciation in the year
of expenditures is to be recognized at 5%.
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2018 net income?
a. Understated by 251,000 c. Understated by 213,400
b. Overstated by 216,200 d. Overstated by 253,800
2. What is the total effect of the errors on the company’s working capital as of December 31,
2018?
a. Understated by 202,200 c. Understated by 177,200
b. Overstated by 79,600 d. Overstated by 546,800
3. If remained unadjusted, what will be the effect of the errors to the company’s December 31,
2018 accumulated profits?
a. Understated by 103,400 c. Understated by 177,200
b. Overstated by 620,600 d. Overstated by 570,600
CHAPTER 11-EXERCISE 6:
The income statement of GHI Inc. showed the following net income:
2017 P1,750,000
2018 2,000,000
An examination of the accounting records for the year ended December 31, 2018 revealed that
several errors were made. The following errors were discovered:
b. The footings and extensions showed that the inventory on December 31, 2017 was
overstated by P190,000.
e. On December 26, 2018 an equipment costing P400,000 was sold for P220,000. At the
date of sale, the equipment had an accumulated depreciation of P240,000. The cash
received was recorded as miscellaneous income in 2018.
f. A building which had a fair value of P1,200,000 was accepted from the city government
as a donation on January 1, 2017. The building that was estimated to be useful for
another 10 years was to be used as a factory site as a condition on the grant. Legal
fees incurred in relation to the donation was at P100,000 and was charged to 2017
operating expenses. Another P200,000 was incurred to remodel and renovate the
building prior to use. The building was capitalized at P200,000 (renovation cost) and
was depreciation over remaining life using straight line.
Requirements:
1. What is the correct net income in 2017?
a. 1,550,000 c. 1,490,000
b. 1,520,000 d. 1,430,000
4. What is the correct carrying value of the building as of December 31, 2018?
a. 240,000 c. 1,120,000
b. 960,000 d. 1,200,000
CHAPTER 11-EXERCISE 7:
You were assigned to audit for the first the time the financial statements of Baby Inc. as of and
for the year ended December 31, 2018. Baby Inc. is a merchandiser of office and school
supplies and has started operations in early 2016. No audit has been made on its financial
statements from its inception. The following was as a result of your audit investigations:
The retained earnings general ledger entries from 2016 to current year appears below:
Date Particulars Debit Credit Balance
12/31/16 Net Income P600,000 P600,000
7/1/17 Land donated by a 400,000 1,000,000
stockholder at fair value
12/31/17 Net Income 750,000 1,750,000
4/2/18 Loss on inventory due to P50,000 1,700,000
flood
12/31/18 Net Income 300,000 2,000,000
Audit notes:
a. The following were omitted at each year end:
2016 2017 2018
Accrued operating expenses P90,000 P110,000 P98,000
Accrued rental income 40,000 45,000 50,000
Prepaid advertising expense 20,000 30,000 35,000
c. Cash dividends declared and paid for each year were charged to other operating
expenses.
2016 2017 2018
Dividends declared and paid P100,000 P150,000 P200,000
Requirements:
1. What is the correct net income in 2016?
a. 890,000 c. 990,000
b. 850,000 d. 950,000
3. What is the retroactive adjustment to the retained earning beginning balance in 2018?
a. 250,000 credit c. 125,000 debit
b. 150,000 credit d. 195,000 debit
CHAPTER 11-EXERCISE 8:
The income statements of Roxas Inc. indicate the following net income:
2016 P1,500,000
2017 1,750,000
2018 2,000,000
An examination of the accounting records for the year ended December 31, 2018 indicates that
several errors were made. The following errors were discovered:
a. The footings and extensions showed that the inventory on December 31, 2017 was
overstated by P190,000.
a. On January 1, 2018 an equipment costing P400,000 was sold for P220,000. At the date
of sale the equipment had accumulated depreciation of P240,000. The cash received
was recorded by the company as miscellaneous income.
b. You also discovered that on July 1, 2016, the company completed the construction of
the left wing of its factory building incurring a total cost of P750,000, which it had
charged to repairs expense. The said building has been used in operations for 5 years
as of July 1, 2016 and its life was unaffected by the extension. The building which had
an original cost of P3,000,000 had an accumulated depreciation of P1,125,000 as of
December 31, 2018.
Required:
b. 1,590,000 d. 1,690,000
CHAPTER 11-EXERCISE 9:
You are performing, for the first time, the audit for the year ended December 31, 2018 of GKNB
CORP. financial statements. The company reported the following amounts of net income for the
years ended December 31, 2016, 2017 and 2018:
2016 P381,000
2017 450,000
2018 385,500
a. You observed that there were errors in the physical count: December 31, 2017
inventories were understated by P42,000 and December 31, 2018 were overstated by
P69,000.
b. On December 30, 2018, GKNB recorded on account, merchandise in transit which cost
P45,000. The merchandise was shipped FOB Destination and had not arrived by
December 31. The merchandise was not included in the ending inventory.
e. On March 5, 2017, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P30,000 and market value was P39,000. The stock dividend
was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
f. On July 1, 2017, GKNB paid a three-year rent. The three-year premium of P18,000 was
paid on that date, and the entire premium was recorded as rent expense.
g. On January 1, 2018, GKNB retired bonds with a book value of P360,000 for P318,000.
The gain was deferred and amortized over 10 years as a reduction of interest expense
on other outstanding bonds.
Requirements:
4. What is the retroactive adjustment to the beginning retained earnings in 2018 to correct the
prior years’ errors?
a. 21,000 cr. b. 21,000 dr. c. 69,000 dr. d. 69,000 cr.
5. What is the adjusting entry in 2018 to correct the error in item e above?
a. Accumulated profits 39,000
Other expense 30,000
Share premium 9,000
d. no adjustment is necessary
You are auditing the financial statements of WWEE Company. The company’s accountant
provided you with the following comparative statements of income and accumulated profits for
the years 2018 and 2017:
2018 2017
Sales 6,000,000 4,500,000
Cost of goods sold (2,800,000) (2,400,000)
Gross income 3,200,000 2,100,000
Operating expenses (1,500,000) (1,800,000)
Net profit 1,700,000 300,000
Audit notes:
a. The management, with your concurrence, opined that changing the company’s
inventory costing from FIFO to Weighted Average is justified as it will present a more
relevant and reliable financial information given the prevailing current circumstance.
The following summarizes the inventory costs at year end under both methods:
2018 2017
FIFO 625,000 727,500
Weighted Average 715,000 827,500
The said change has not been implemented by the accountant as of the audit period.
b. The company decided to change its method of depreciation from the double declining
balance method to the straight line. The depreciable assets had a 10 year useful life
and has been depreciated for five years at the end of 2017. The salvage value of the
said assets was estimated to be P50,000. Expenses in the income statements included
P350,000 and P437,500 depreciation expenses in 2018 and 2017, respectively,
computed based on double declining balance method.
c. On August 31, 2017, the company started the construction of a building it plans to use
as a second factory. As of the current balance sheet date, the construction is yet to be
done. Total accumulated costs incurred on the construction and recorded in its
Construction-in-progress account, amounted to P1,250,000, which excluded a P25,000
borrowing cost in 2017 which has been charged to expense. You have ascertained that
such borrowing cost should have been capitalized following the PAS 23. Actual
borrowing cost in 2018 amounted to P75,000 which have been charged to expense.
1. What is the restated net income in 2017 to be presented in the comparative income
statements?
a. 425,000 b. 400,000 c. 300,000 d. 275,000
5. What is the necessary adjusting entry a result of the change described in item c?
a. No adjustment necessary
Kris Company presented to you the following income statement in line with the same company’s
audit of the financial statements:
KRIS COMPANY
INCOME STATEMENT
For the Year Ended December 31, 2018
Sales P10,350,000
Cost of Goods Sold 7,050,000
Gross profit P3,300,000
Operating expenses:
Selling P675,000
Administrative 1,050,000 1,725,000
Net income P1,575,000
Requirements:
1. What is the total amount of cash received form customers during the year?
a. 10,980,000 c. 9,810,000
b. 10,350,000 d. 10,477,500
2. What is the total amount of cash paid to suppliers during the year?
a. 6,600,000 c. 7,012,500
b. 7,912,500 d. 6,187,500
3. What is the total amount of cash paid for operating expenses during the year?
a. 1,740,000 c. 2,130,000
b. 1,530,000 d. 2,040,000
Porter Company is in its first year of operation and is using the cash basis of accounting. The
company presented the following cash receipts and disbursement records for 2018:
The management requested you to compute its income under accrual basis.
a. Depreciation of plant assets for 2018 computed by the straight-line method is P31,500.
b. Prepaid insurance of P5,400, two-thirds of which relates to 2019, is included in the 2018
cash disbursement figure. This amount was recognized as insurance expense when it
was paid.
c. Porter Company received P36,000 in advance rent for space in its building. The entire
amount is included in the cash receipts figure and was recognized as rent revenue when
received. However, P21,000 of it was for space that will be provided in 2019.
f. You estimate that your 2018 fee for accounting services that have not been billed will be
P1,500.
Requirements:
1. What is the correct net income under the accrual basis of accounting?
a. 88,710 b. 87,210 c. 77,700 d. 68,190
2. What is the total liabilities to be reported as of the balance sheet date under the accrual
basis?
a. 34,500 b. 44,010 c. 40,410 d. 30,900
You are auditing the financial statements of UKG INC. for the year ended December 31, 2018.
The company maintains its books on a semi-accrual and semi-cash basis. Purchases and sales
are recognized on an accrual basis while other operating expenses are kept on cash basis. The
company bookkeeper presented to you a draft of its income statements for the year under
audit:
Sales P600,000
Cost of sales 360,000
Gross profit P240,000
Depreciation expense (29,000)
Other expenses (166,000)
Interest expense (20,000)
Net income P25,000
b. All purchases of inventory are on account and other expenses reflect those expenses
paid in cash during the period.
c. The company had open invoice (unpaid invoices) from suppliers amounting to P120,000
on December 31, 2018 and P116,000 on January 1, 2018.
e. Inventory taking at the end of each year revealed that inventory on hand on December
31, 2003 amounted to 186,000 while inventory on December 31, 2018 was at
P174,000.
f. Accrued utilities at the beginning and at the end of the year amounted to P5,000 and
7,000, respectively while prepaid rentals at the beginning and at the end of the year
amounted to P10,000 and 14,000, respectively.
Based on the information available and as a result of your audit, determine the following:
3. What is the carrying value of the bonds payable on December 31, 2018?
a. 225,318 b. 226,267 c. 226,840 d. 227,180
You were able to gather the following in connection with our audit of the Wowie Corp. for the
year ended December 31, 2018:
December 31, 2017 December 31, 2018
Accounts receivable P6,400,000 P4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising expense 14,250 40,000
Prepaid insurance 25,000 0
Unexpired insurance 0 41,000
Requirements:
ACCOUNT INCREASES
Cash 4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000
Prepaid insurance 200,000
ACCOUNT DECREASES
Inventory 1,000,000
Equipment 100,000
Notes receivable 600,000
Accrued salaries payable 300,000
DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000
Additional information:
a. Total purchase returns and allowances amounted to P800,000
1. Net sales
a. 35,800,000 c. 36,600,000
b. 36,200,000 d. 37,000,000
2. Net purchases
a. 17,900,000 c. 17,400,000
b. 17,700,000 d. 17,000,000
3. Cost of sales
a. 18,000,000 c. 18,700,000
b. 18,400,000 d. 18,900,000
4. Depreciation expense
a. 100,000 c. 900,000
b. 800,000 d. 1,000,000
5. Net income
a. 5,000,000 c. 5,200,000
b. 5,150,000 d. 5,900,000
Alaska Inc. uses the direct method in preparing its statement of cash flows. The trial balance for
the 2018 and 2017 are presented as follows:
Audit notes:
A. Alaska Inc. purchased additional equipment during the year for cash at P45,000.
C. Bad debt expense in 2018 was at P45,000. During the year, uncollectible accounts
amounting to P43,200 were written off. The company reports bad debts as selling
expenses.
Requirements:
4. How much is the cash payments made for selling expenses in 2018?
a. 1,228,500 c. 1,269,000
b. 1,215,000 d. 1,224,000
Alamat Company began business operations on January 1, 2018. During 2018, the accounting
records are kept on a double entry system but on the cash basis accounting.
On December 31, 2018, the trial balance prepared from these records appeared as follows:
Cash 840,000
Purchases 4,200,000
Expenses 560,000
Notes payable 200,000
Sales 4,400,000
Share capital 1,000,000
Total 5,600,000 5,600,000
The management decided to use the accrual basis and other date as of December 31 are as
follows:
2. Net purchases
a. 4,280,000 c. 4,200,000
b. 4,270,000 d. 4,190,000
3. Cost of sales
a. 3,780,000 c. 3,700,000
b. 3,770,000 d. 3,690,000
4. Net income
a. 236,000 c. 231,000
b. 240,000 d. 250,000
You obtain the following information form the available subsidiary journals, ledgers, and other
data.
A check for P300,000 had been cashed by the bookkeeper shortly before the audit. Although
the signature on the check had been obviously forged, it was paid by the bank and returned
with other canceled checks.
A statement of financial position prepared from the books and other files follows:
Titanium Company
Statement of Financial Position
December 31, 2017:
ASSETS
Cash P98,010
Accounts receivable 678,690
Inventory (cost) 1,321,050
Furniture P223,680
Accumulated depreciation (95,400) 128,280
Total Assets P2,226,030
Required:
1. What is the total amount paid for merchandise purchases?
a. 10,845,780 b. 9,879,720 c. 10,568,040 d. 11,123,520
3. What is the total amount of cash disbursements from January 1 to April 16?
a. 16,572,270 b. 15,606,210 c. 16,294,530 d. 16,297,530
4. What is the cashier’s accountability (correct cash balance before shortage) on April 16,
2018?
a. 728,040 b. 296,490 c. 431,550 d. 131,550
AUDITING PROBLEMS
Accounting for Changes and Correction of Errors
Definition of Terms
Accounting policies - specific principles, bases, conventions, rules and
practices adopted by an enterprise in preparing and presenting the financial
statements.
Fundamental errors - are errors discovered in the current period with such
significance, that the financial statements of one or more prior periods can no
longer be considered to have been reliable at the date of their issue.
Accounting Procedure:
Benchmark treatment
A change in accounting policy/principle should be applied retroactively unless
the amount of any resulting adjustment that relates to prior periods is not reasonably
determinable. Any resulting adjustment should be reported as an adjustment to the
opening balance of the retained earnings. Comparative information should be restated
unless it is impracticable to do so.
Accounting Procedure:
a. Report current and future financial statements on the new basis.
b. Present prior period financial statements as previously reported.
c. Make no adjustment to current period opening balances.
CORRECTION OF ERRORS
The risk of material errors may be minimized through the installation of good
internal control and the application of sound accounting procedures. Prior period
adjustments, also called fundamental errors are reported in the current year as
adjustment in the beginning balance of the Retained Earnings account. Prior period
statements should be restated to correct the error when comparative statements are
prepared.
Accounting Procedure:
1. If detected in the period the error occurred, correct the accounts through
normal accounting cycle adjustments.
2. If detected in subsequent period, adjust errors by making prior period
adjustments directly to Retained Earnings or restate the beginning
balance of the Retained Earnings account.
3. Correct all previously presented prior period statements.
TYPES OF ERRORS
1. Financial Position Errors
This type of error refers to improper classification of real accounts such as
assets, liabilities or stockholders' equity accounts. They have no effect on net income
2. Income Statement Errors
This type of error affects only the presentation of nominal accounts in the
Income Statement. It involves the improper classification of revenues and expenses
accounts, hence, only the details of the Income Statement are misstated. A
reclassifying entry is necessary only if the error is discovered in the same year it is
committed. It has no effect on the Balance sheet and in the Income Statement. If the
error is discovered in a subsequent year, no classification entry is necessary.
3. Combined Financial Position and Income Statement errors
This affects both the balance Sheet and the Income Statement because they
result in the misstatement of net income.
GUIDELINES
Books are open
END
2-6. Soar Study Lounge started its operations on Jan. 1, 2o17. It has not properly
established accruals and deferrals since its inception. Audit of its financial statements
for the year 2018 has revealed the following:
Additional Information: Cash expenditures relating to supplies for 2017 and 2018 are
P45,000 and P43,000 respectively. (Expense Method is used)
7-11. On July 1, 2018 Riverdale Inc. issued a 4 year note payable in 4 equal annual
installments of P250,000 every June 30 starting 2019. The transaction was recorded
by crediting notes payable by the face value of P1,000,000. During the audit for the
year 2018, it was discovered that the prevailing interest rate on this type of note were
10% on July 1,2018 and 8% on Dec. 31, 2018.
11. Pro forma entry to adjust an overstatement in the Ending Inventory of 2017,
assume audit year is 2018?
Prepare the audit adjusting entries assuming that these errors were discovered in the
course of your examination of the 2015 financial statements.
13. Accrued interest income of P48,000 in 2013 was recorded only when collected in
January 2014.
14. An insurance premium covering three years (2014,2015 and 2016) was paid in
January 2014. All of the P60,000 premium had been charged to insurance expense in
2014. No adjustments were made in 2014 and 2015 related to this transaction.
15. Failed to record P25,000 and P28,000 unused office supplies at December 31,
2014 and 2015, respectively. Cash expenditures of P45,000 and P52,000 were charged
to an office supplies expense account during the year 2014 and 2015, respectively.
16. Research and Development costs of P120,000 were incurred early in 2014. They
were capitalized and were being amortized over a three-year period. Amortization was
recorded in 2014 and 2015. None of the development costs meet the criteria for
depreciation.
17. At the beginning of 2014, the company received P120,000 cash from a customer
for services the company is to perform evenly over a three year period. Full amount
was recorded as revenue in 2014 and no adjustment was taken up at year-end.
18. Unearned rent of P36,000 was not recorded at the end of 2014.
19. A capital expenditure of 1,500,000 at January 1, 2013 for office equipment (useful
life, 5 years) was erroneously charge to maintenance expense.
20-21. Rabbit Corporation reported profit for the years 2014 and 2015 at P550,000
and P700,000, respectively. Your audit of the company’s accounts disclosed the need
for adjustments as follows:
2014 2015
Overstatement of ending inventories due to error in pricing 29,000 33,000
Omission of depreciation on newly-acquired equipment 15,000 15,000
Understatement of commission receivable 22,000 18,000
A purchase of merchandise was not recorded until the
following year and also was not included in the ending
inventory 60,000
CORRECTION OF ERRORS
COUNTERBALANCING ERRORS
• Misstatement in prepaid expense that expires or is consumed in the Commented [JdR1]: For example, a company failed to
subsequent year; recognize prepaid rent of ₱4,000 in 2017. Instead of
recording the prepaid rent (asset), this ₱4,000 prepaid rent
• Misstatement in unearned revenue that is earned in the subsequent year; was recorded as rent expense in 2017(expense method of
• Misstatement in accrued expense that is paid in the subsequent year; recording deferred expenses). Thus, expense for 2017 was
• Misstatement in accrued income that is collected in the subsequent year; overstated. Net income in 2017 was understated.
If the year under audit is 2017, rent expense must be
• Misstatement in ending inventory; credited to reduce its balance and prepaid rent must be
• Error in sales cutoff; and debited.
• Error in purchases cutoff
During the year 2018: The ₱4,000 prepaid rent should have
been recorded as expense (consumed in 2018), but since it
was mistakenly recorded as expense in 2017, expense in
* The effect of a COUNTERBALANCING ERROR to net income of the year of 2018 would be understated and thus overstating profit.
incurrence and the year following the year of incurrence shall be:
If the year under audit is 2018: Rent expense must be
debited to increase its balance and retained earnings must
ERRORS NET INCOME OF NET INCOME OF be credited. Note that this is a prior period error (occurred in
THE YEAR OF THE 2017), thus, instead of crediting the asset account (prepaid
rent), retained earnings shall be credited instead.
INCURRENCE SUBSEQUENT
YEAR If the year under audit is 2019: Then the balances were
already corrected. The error resulted to understatement of
Counter Balancing Error in an ASSET DIRECT INDIRECT profit in 2017 but was offset by an overstatement of profit in
2018. Thus, when the profits in 2017 and 2018 were closed
(e.g.' Prepayments, Accrued income, to retained earnings, the balance of retained earnings,
Inventory, end, AR/Sales Advances to 01/01/2019 is already corrected.
suppliers Commented [JdR2]: Refer to the previous example.
Prepaid rent in 2017 was understated, thus net income in
Counter Balancing Error in a LIABILITY INDIRECT DIRECT 2017 is also understated but net income in 2018 (subsequent
year) is overstated.
(e.g. Unearned income, Accrued
expense, AP/Purchases Advances from
customers
ASSET To adjust:
Debit repairs expense. ₱5,000
Non-Counter Balancing Error in a INDIRECT IT DEPENDS Credit equipment ₱5,000
LIABILITY
Debit accumulated depreciation ₱500
Credit depreciation expense ₱500
To adjust:
1. Consider all Current Period Errors (CB or NCB)
Debit Retained earnings, ₱5,000 (Prior period error, thus
2. Ignore all Prior Year Counter Balancing Errors instead of repairs expense, you must debit retained earning)
Credit equipment ₱5,000
3. Consider all Prior Years' Non-counter balancing Errors (as they affected
the prior years' net income) Debit Accumulated depreciation ₱1,000 (for years 2017 and
2018)
Credit depreciation expense ₱500 (Overstated depreciation
Where the requirement is the EFFECT OF ERRORS TO WORKING CAPITAL 2018)
(CURRENT ASSETS - CURRENT LIAB) Credit retained earnings ₱500 (overstated depreciation 2017
- prior period)
1. Consider ail errors affecting current assets and current liabilities as of the
If the year under audit is 2019, then the error is still
end of the current period only. uncorrected (non-counter balancing error) and adjusting
2. The error in the current asset is DIRECTLY related to the Working Capital entries must also be prepared.
THEORIES
TRUE OR FALSE
1. Under cash basis, revenue is recorded when earned and realized. False
2. The cash basis is less useful in predicting the timing and amounts of future cash True
flows
3. Under the cash basis of accounting, depreciation of assets having an economic False
life of more than one year is not recognized
4. The net income over the life of an entity is the same under the cash basis and True
accrual basis
5. Under IFRS, events are recorded in the period in which the event occurs True
6. Under cash basis, no bad debts are recorded True
7. Under accrual basis, depreciation is provided normally True
8. The same as depreciation, discount or premium on financial instruments is
recognized under cash basis False
9. Under accruals basis of accounting, the effects of transactions and other events
are recognized when they occur (and not as cash or its equivalent is received or True
paid) and they are recorded in the accounting records and reported in the
financial statements of the periods to which they relate.
10 Under cash basis of accounting, income is recognized only when cash is received
. and expense is recognized only when cash is paid True
11 Under single entry system, increases in net assets and decrease in liabilities
increase net assets while increase in liabilities and decrease in assets decrease net True
assets.
12 Under single entry system, cash on hand and cash records reconciled with bank True
. statements are possible sources for generating cash account balance
13 A single entry system is a system of record keeping in which transactions are not
. analyzed and recorded in the double entry framework True
14 Cashbook is the major record under the single entry system True
.
15 Any set of procedures that does not provide for a debit-credit analysis is referred True
. to as single-entry accounting system.
MULTIPLE CHOICE
1. The inventory and accounts payable balances decreased. Should these decreases be added or
deducted from cash payments to suppliers to arrive at cost of goods sold for the current year?
Decrease in Inventory Decrease in Accounts Payable
a. Added Deducted
b. Added Added
c. Deducted Deducted
d. Deducted Added
2. Compared to the accrual basis of accounting, the cash basis overstates income by the net decrease
during the accounting period of:
a. Both accounts receivable and accrued expenses
b. Accrued expenses but not of accounts receivable
c. Neither accounts receivable nor of accrued expenses
d. Accounts receivable but not of accrued expenses
3. When converting from cash basis to accrual basis of accounting, which of the following adjustments
should be made to cash collections from customers to determine accrual basis service revenue?
a. Subtract ending accounts receivable
b. Add ending accounts receivable
c. Subtract beginning unearned service revenue
d. Add cash sales
CASH TO ACCRUAL ACCOUNTING & SINGLE ENTRY SYTEM
4. When converting from cash basis to accrual basis of 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
6. The net worth method , otherwise known as the capital maintenance approach, is a concept in which
a. Profit = Change in fair value of net assets during a period
b. Profit = Amount that an enterprise could distribute to its owners and be as well
off at the end of the period as it was at the beginning of the period
c. The financial statements effects of business events classified as revenues, gains,
expenses and losses, which are used to measure and define profit
d. Fair value adjusted for the effects of inflation or deflation are used to measure profit
STRAIGHT PROBLEMS
1. Data:
Requirements:
1.1 Compute the gross sales under accrual basis P 7,850,000.00
1.2 Compute the net sales under accrual basis P 7,810,000.00
2. Data:
CASH TO ACCRUAL ACCOUNTING & SINGLE ENTRY SYTEM
Requirements:
2.1 Compute the gross sales under accrual basis P 4,850,000.00
2.2 Compute the net sales under accrual basis P 4,805,000.00
3. Karen Company reported total purchases of P2, 500,000 in its cash basis financial statement on
December 31, 2019.
Requirements: Compute purchases and cost of sales under accrual basis under each of the following
assumptions
4. Under the cash basis, rent income and rent expense of Diesel Company for the calendar year 2019 is
P615, 000.00 and P500, 000, respectively. Additional information are presented below:
5. Under the cash basis, interest expense of Millan Company for the calendar year 2019 is P 800,000.00
Additional information are presented below:
January 1 December 31
Accounts receivable 1,200,000 1,350,000
Accounts payable 1,500,000 1,850,000
During the current year, accounts written off amounted to P100, 000. Sales return totaled P250,
000, of which P50, 000 was paid to customer. Cash receipts from customers after P500, 000 sales
discounts amounted to P8, 000,000. Cash payments to trade creditors totaled P5, 000,000 after
purchase discounts of P200, 000. Purchase returns amounted to P400, 000, of which P100, 000
was received from supplier.
Questions:
5.1 Under accrual, what is the amount of gross sales? P 8,950,000.00
5.2 Under accrual, what is the amount of net sales? P 8,200,000.00
5.3 Under accrual, what is the amount of gross purchases? P 5,850,000.00
5.4 Under accrual, what is the amount of net purchases? P 5,250,000.00
7. Eros Company kept the records on a cash basis. The entity reported the following cash basis income
statement for 2019:
Revenue 1,910,000
Expenses 809,000
Net Income 1,101,000
The following amounts of accrued, prepaid, and unearned items were ignored at the end of 2018 and
2019:
2018 2019
Accrued revenue 91,000 73,000
Unearned revenue 66,000 108,000
Accrued expenses 49,000 65,000
Prepaid expenses 46,000 56,000
What is the net income under accrual basis for 2019? P 1,035,000.00
8. During the current year, Tara Company received P8, 000,000 from tenants. The statement of financial
position contained the following data:
What amount of revenue should be reported for the current year? P 9,580,000.00
9. During 2018, Cooke Company acquired patent right and remitted royalties of P3, 000,000. The entity
reported prepaid royalties of P550, 000 and P450, 000, royalties payable of P800, 000 and P750, 000,
respectively, on December 31, 2017 and 2018.
10. Vela Company reported the following increases in account balances during the current year:
Assets 10,000,000
Liabilities 2,700,000
Share Capital 6,000,000
Share Premium 600,000
Except for a P1, 300,000 dividend payment and the year’s earnings, there were no changes in retained
earnings for the year.
11. Camadillo Company reported the following changes in all the account balances for the current year,
except for retained earnings:
Increase (Decrease)
Cash 700,000
Accounts receivable, net 550,000
Inventory 500,000
Investments (500,000)
Accounts payable (400,000)
Bonds payable 800,000
Share capital 1,500,000
Share premium 100,000
There were no entries in the retained earnings account except for net income (loss) and a dividend
declaration of P300, 000 which was paid in the current year.
What is the net income for the current year? P0.00 but net loss of P 450,000.00
12. Java Company reported the following increase (decreases) in the accounts for the current year:
Cash 1,500,000
Accounts receivable (net) 3,500,000
Inventory 3,900,000
Investments (1,000,000)
Equipment 3,000,000
Accounts payable (800,000)
Bonds payable 2,000,000
During the year, the entity sold 100,000 shares with P20 par value for P30 per share and received
cash in full. Dividend of P1, 500,000 was paid in cash during the year. Equipment with fair value of
P2, 000,000 was donated by a shareholder during the year.
13. At the beginning of current year, Crispin Santos started a retail merchandise business. During the
current year, the entity paid trade creditors P2, 000,000 and suffered a net loss of P350, 000. The
ledger account preclosing balances at year-end included the following:
All sales and purchases were on credit. The merchandise account is debited for purchases and
credited for sales.
Questions:
13.1 What is the amount of purchases for the year? P 2,750,000.00
13.2 What is the amount of sales for the year? P 2,050,000.00
13.3 What is the cash balance on December 31? P 1,350,000.00
13.4 What is the merchandise inventory on December 31? P 450,000.00
CASH TO ACCRUAL ACCOUNTING & SINGLE ENTRY SYTEM
14. On December 31, 2019 and 2018 comparative financial statements of World Gallery Company
showed equipment with an original cost of P379, 000.00 and P344, 000.00 with accumulated
depreciation of P153, 000.00 and P 128,000.00, respectively. During 2019, the company purchased
equipment costing P50, 000, and sold equipment with a carrying value of P9, 000.00.
Question: What amount should the company report as depreciation expense for the year ended
December 31, 2019? P 31,000.00
15. The following information is relevant to the calculation of the sales figure for Paulo, a sole trader who
does not keep proper accounting records:
Question: What amount of sales revenue should appear in Paulo’s profit or loss for the year ended
December 31, 2019? P 5,289,000.00
COMPREHENSIVE PROBLEMS
1. Veronica Company, a proprietorship , which maintained the accounting records on the cash basis
provided the following information during the current year:
Cash 320,000
Accounts receivable 1,600,000
Inventory- January 1 600,000
Furniture & fixtures 1,200,000
Accumulated depreciation – January 1 300,000
Accounts payable – January 1 200,000
Veronica, Capital- January 1 2,000,000
Sales 6,500,000
Purchases 3,050,000
Salaries 1,750,000
Payroll taxes 110,000
Insurance expense 90,000
Utilities Expense 150,000
Living Expenses 130,000
P 9,000,000 P 9,000,000
Additional Information:
Accounts receivable totaled P 3,600,000 on December 31
An analysis of the total accounts receivable revealed that an allowance for doubtful accounts of
P400,000 should be provided
Accounts payable totaled P300,000 on December 31
The inventory totaled P750,000 at cost based on a physical count of the goods on December 31
On May 1, the entity paid P90, 000 to renew the insurance policy for one year. The premium on
the previous policy which expired on April 30 was P75,000.00
Depreciation on furniture and fixtures was P120,000
Accrued expenses on January 1 and December 31 were:
January 1 December 31
Utilities 10,000 15,000
Payroll taxes 20,000 30,000
CASH TO ACCRUAL ACCOUNTING & SINGLE ENTRY SYTEM
The entity is being sued for P4, 000,000. The coverage under the comprehensive income policy is
limited to P2, 500,000. The attorney believed that an unfavorable outcome is probable and that a
reasonable estimate of the settlement is P3, 000,000. The liability is expected to be settled in the
following year.
The salaries included P40, 000 per month paid to the owner. The owner also received P2, 500 per
week for living expenses.
Questions:
1.1 What amount of sales should be reported under accrual basis? P 8,500,000.00
1.2 What amount of cost of goods sold should be reported under accrual basis? P 3,000,000.00
1.3 What total amount of expenses should be reported under accrual basis? P 2,650,000.00
1.4 What is the net income for the year under accrual basis? P 2,850,000.00
1.5 What is the capital on December 31? P 4,235,000.00
2. Emmyrelle Company provided the following selected accounts, cash receipts and disbursements for
the current year:
December 31 January 1
Accounts receivable 250,000 300,000
Notes receivable 150,000 100,000
Accounts payable 120,000 160,000
Notes payable 200,000 150,000
Prepaid insurance 30,000 10,000
Questions:
2.1 Under accrual basis, what amount should be reported as gross sales? P 2,420,000
2.2 Under accrual basis, what amount should be reported as gross purchases? P 1,960,000
3 At the beginning of current year, Complex Company started business and issued share capital, 60,000
shares with P100 par value, for the following considerations:
Cash 500,000
Building with useful life of 15 years 4,500,000
Land 1,500,000
6,500,000
An analysis of the bank statement showed total deposits, including the original cash investment, of
P3, 500,000. The balance in the bank statement on December 31 was P250, 000 but there were checks
amounting to P50, 000 dated in December but not paid by the bank until January of next year. Cash
on hand on December 31 was P125, 000 including customers’ deposit of P75, 000. During the year,
the entity borrowed P500, 000 from the bank and repaid P125, 000 and P25, 000 interest. The
proceeds of the loan were credited to the bank account of the entity.
Utilities 100,000
Salaries 100,000
Supplies 175,000
Taxes 25,000
Dividends 150,000
550,000
An inventory of merchandise taken on December 31 showed P755, 000 of merchandise. Tickets for
accounts receivable totaled P900, 000 but P50, 000 of that amount may prove uncollectible. Unpaid
suppliers invoices for merchandise amounted to P350, 000. Equipment with a cash price of P400, 000
was purchased in early January on a one-year installment basis. During the year, checks for the down
payment and all maturing installments totaled P445, 000. The equipment has a useful life of 5 years.
Questions:
3.1 What is the amount of sales for the year? P 4,000,000.00
3.2 What is the amount of purchases for the year? P 3,055,000.00
3.3 What is the net income for the year? P 800,000.00
3.4 What is the amount of total assets on December 31? P 7,950,000.00
3.5 What is the total amount of shareholder’s equity on December 31? P 7,150,000.00