BASIC ACCOUNTING 1 Part I. CONCEPTUAL Multiple Choices Choose the letter of the best answer. 1. Unearned rent revenue would normally appear in the statement of financial position as A. Plant asset B. Current liability C. Non-current liability D. Current asset 2. On September 1, 2012, an entity borrowed cash and signed a two-year interestbearing note on which both the principal and interest are payable on September 1, 2014. How many months of accrued interest would be included in the liability for accrued interest on December 31, 2012 and December 31, 2013? December 31, 2012 December 31, 2013 A. 4 months 16 months B. 4 months 4 months C. 12 months 24 months D. 20 months 8 months 3. Under the accrual basis of accounting, cash receipts and disbursements may A. Precede, coincide with, or follow the period in which revenue and expenses are recognized. B. Precede or coincide with but never follow the period in which revenue and expenses are recognized. C. Coincide with or follow but never precede the period in which revenue and expenses are recognized. D. Only coincide with the period in which revenue and expenses are recognized. 4. Under the cash basis of accounting A. Revenue is recorded when earned. B. Accounts receivable would appear in the statement of financial position. C. Depreciation of assets having an economic life of more than one year is not recognized. D. The matching principle is ignored. 5. 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 and accrual basis. D. Not susceptible to measurement. 6. The premium on a three-year insurance policy expiring on December 31, 2014 was paid in total on January 1, 2012. If the entity has six-month operating cycle, then on December 31, 2012, the prepaid insurance reported as a current asset would be for A. 6 months B. 12 months C. 18 months D. 24 months
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7. The premium on a four-year insurance policy expiring on December 31, 2015 was paid in total on January 1, 2012. If the original payment was recorded as a prepaid asset, the balance in the prepaid asset account on December 31, 2013 would be A. Lower than the balance on December 31, 2012. B. Lower than the balance on December 31, 2014. C. The same as the balance on December 31, 2015. D. The same as the original payment. 8. Which of the following documents does not initiate an entry to be made in the accounts? A. Sales invoice B. Purchase invoice C. Purchase order D. Credit memorandum 9. What function do accounting journals serve in the accounting process? A. Recording B. Classifying C. Summarizing D. Reporting 10. Which is not true concerning use of special journals? A. Only sales of merchandise on account are recorded in the sales journals. Cash sales are recorded in the cash receipts journal. B. Purchases of any items on account are recorded in the purchases journal. Acquisitions of any items for cash are recorded in the cash disbursements journal. C. Transactions that cannot be appropriately recorded in a special journal are recorded in the general journal. D. Only cash purchases are recorded in the cash disbursements journal. 11. If an entity uses special journals, in which journal would the sale of merchandise for cash be recorded? A. Sales journal B. Cash receipts journal C. General journal D. Cash disbursements journal 12. When special journals are used, which of the following is true? A. A general journal is not used. B. All sales transactions should be recorded in the sales journal. C. All cash receipts should be recorded in the cash receipts journal. D. All purchase transactions should be recorded in the purchases journal. 13. When special journals are used, adjusting and closing entries are recorded in the A. Cash disbursements journal B. Cash receipts journal C. General journal D. Purchases journal 14. It is the presentation and classification of financial statement items on a uniform basis from one accounting period to the next. A. Comparable information B. Consistency of presentation C. Aggregation D. Accrual basis 2|Page
15. Items of dissimilar nature or function A. Must always be presented separately in financial statements. B. Must not be presented separately in financial statements. C. Must be presented separately in financial statements if those items are material. D. Must be presented separately in financial statements even if those items are immaterial. 16. The operating cycle of an entity A. Is the time between the acquisition of materials entering into a process and their realization in cash or cash equivalent. B. Causes the distinction between current and non-current items to depend on whether they will affect cash within one year. C. Is the period of time normally elapsed from the time the entity expends cash to the time it converts trade receivables back into ca sh. D. Is a period of one year. 17. A long-term debt that is due to be settled within twelve months after the end of the reporting period is classified as non-current when I. An agreement to refinance or reschedule payment on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issue. II. The entity has the discretion to refinance or roll over the obligation for at least twelve months after the end of the reporting period under an existing loan facility. A. B. C. D.
I only II only I and II Neither I nor II
18. An entity shall present an analysis of expenses using a classification ba sed on A. The nature of expenses B. The function of expenses C. Either A or B, whichever provides information that is reliable and more relevant. D. Either A or B, whichever the entity would prefer to present. 19. The internal control feature that is specific to petty cash is A. Separation of duties B. Assignment of responsibility C. Proper authorization D. Imprest system 20. In preparing a bank reconciliation, interest paid by the bank on the account is A. Added to the bank balance B. Subtracted from the bank balance C. Added to the book balance D. Subtracted from the book balance 21. Which of the following items must be added to the cash balance per ledger in preparing a bank reconciliation which ends with adjusted cash balance? A. Note receivable collected by bank in favor of the depositor and credited to the account of the depositor. B. NSF customer check C. Service charge D. Erroneous bank debit 3|Page
22. At the end of the current year, an entity had cash accounts at three different banks. One account is segregated solely for payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance. How should these accounts be reported? A. The segregated account should be reported as a non-current asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability. B. The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability. C. The segregated account should be reported as a non-current asset, and the regular account should be reported as a current asset net of the overdraft. D. The segregated and regular accounts should be reported as current assets net of the overdraft. 23. Bank reconciliations are normally prepared on a monthly basis to identify adjustments needed in the depositor’s records and to identify bank errors. Adjustments on the part of the depositor should be recorded for A. Bank errors, outstanding checks, and deposits in transit. B. All items except bank errors, outstanding checks and deposits in transit. C. Book errors, bank errors, deposits in transit and outstanding checks. D. Outstanding checks and deposits in transit. 24. Which of the following is not a basic characteristic of a system of cash control? A. Use of a voucher system B. Combined responsibility for handling and recording cash. C. Daily deposit of all cash received D. Internal audits at irregular intervals 25. Which of the following statement is false? A. A certified check is a liability of the bank certifying it. B. A certified check will be accepted by many persons who would not otherwise accept a personal check. C. A certified check is one drawn by a bank upon itself. D. A certified check should not be included in the outstanding checks. 26. Credit balances in accounts receivable shall be classified as A. Current liabilities B. Part of accounts payable C. Long term liabilities D. Deduction from accounts receivable 27. A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on A. Aging the receivables B. Direct write-off C. Gross sales D. Credit sales less returns and allowances 28. An entity uses the allowance method to recognize doubtful accounts expense. What is the effect of a collection of an account previously written off? A. No effect on both allowance for doubtful accounts and doubtful accounts expense. B. No effect on allowance for doubtful accounts and decrease in doubtful accounts expense. 4|Page
C. Increase in allowance for doubtful accounts and no effect on doubtful accounts expense. D. Increase in allowance for doubtful accounts and decrease in doubtful a ccounts expense. 29. Depreciation is best described as a method of A. Asset valuation B. Current value allocation C. Cost allocation D. Useful life determination 30. Which of the following statements regarding depreciation is not false? A. An asset must be depreciated from the date of its purchase to the date of sale. B. The annual depreciation charge shall be constant over the life of the asset. C. The total cost of an asset must eventually be depreciated. D. If the carrying amount of an asset is less than the residual value, depreciation is not charged. 31. Which of the following statements is the assumption on which straight line depreciation is based? A. The operating efficiency of the asset decreases in later years. B. Service value declines as a function of time rather than use. C. Service value declines as a function of obsolescence rather than time. D. Physical wear and tear are more important than economic obsolescence. 32. The principle of objectivity includes the concept of A. Summarization B. Classification C. Conservatism D. Verifiability 33. Which of the following costs is not always considered to be expired immediately upon being recognized? A. Salesmen’s commission B. Depreciation expense for factory equipment C. Cost of goods sold D. Salary of the company president 34. Product costs or inventoriable costs A. Are charged to expense when products become part of the finished goods inventory. B. Include only prime costs of producing a product. C. Are treated as assets before the products are sold. D. Include only the conversion costs of producing a product. 35. For product costing purposes, an indirect factory cost A. Is not directly chargeable to the company. B. Is chargeable to prime costs C. Is chargeable to conversion costs D. Is never included in the computation of product cost. 36. Which of the following is not among the first five steps in the accounting cycle? A. Record transactions in journals B. Financial statements are prepared C. Adjust the general ledger accounts D. Post entries to general ledger accounts 5|Page
37. Which of the following types of accounts measure economic flows over a period of time? A. Real accounts B. Nominal accounts C. Mixed accounts D. Contra accounts 38. What functions do general ledgers serve in the accounting process? A. Reporting B. Summarizing C. Classifying D. Recording 39. Why are adjusting entries necessary? A. Transactions take place over more than one accounting period. B. To make debits equal credits C. To close nominal accounts at year-end D. To correct erroneous balances in accounts 40. Which one of the following items least resembles a typical adjusting entry? A. Debit an asset and credit revenue B. Debit an expense and credit liability C. Debit revenue and credit liability D. Debit an asset and credit liability 41. Which of the following best describes the conditions that must be present for the recognition of revenue? A. The revenue must be earned, measurable, and collected. B. The revenue must be earned, measurable, and collectible. C. The revenue must be earned and collectible. D. The revenue must be measurable and collectible. 42. Which of the following is an example of the expense recognition principle of associating cause and effect? A. Allocation of insurance cost B. Sales commission C. Depreciation of PPE D. Officer’s salaries 43. The allowance for doubtful accounts which appears as a deduction from accounts receivable is an application of A. Going concern assumption B. Revenue recognition principle C. Matching principle D. Materiality constraint 44. Which of the following statements in relation to expense is false ? A. All expenses and losses are expired costs, but not all expired costs are expenses or losses. B. All expenses decrease owner’s equity, but not all decreases in owner’s equity are expenses. C. Expense is synonymous with expenditure. D. Entities do not incur expenses per se but they initially acquire assets.
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45. An adjusting entry in which a revenue is recognized before the related cash receipt occurs is called A. Deferral B. Nominal C. Accrual D. Special item 46. Closing entries A. Are optional step in the accounting cycle B. Affect only real accounts C. Permit an entity to analyze routine and repetitive transactions the same way all the time. D. Remove the balances from the entity’s temporary accounts. 47. The manufacturing summary account A. Summarizes all revenue and expenses. B. Is a substitute for the income summary. C. Summarizes all accounts that enter into the computation of cost of goods manufactured. D. Summarizes all accounts that enter into the computation of cost of goods sold. 48. In presenting a statement of financial position, an entity A. Must make the current and non-current presentation. B. Must present assets and liabilities in order of liquidity. C. Must choose either the current and non-current or the liquidity presentation, meaning free choice of presentation. D. Must make the current and non-current presentation, except when a presentation based on liquidity provides information that is reliable and more relevant. 49. In the Philippines, the common practice is to present in the statement of financial position A. Current assets before non-current assets, current liabilities before non-current liabilities and equity after liabilities. B. Non-current assets before current assets, non-current liabilities before current liabilities and equity after liabilities. C. Current assets before non-current assets non-current liabilities before current liabilities, and equity after liabilities. D. Non-current assets before current assets, current liabilities before non-current liabilities and equity after liabilities. 50. The eff ects of transactions and other events on an entity’s economic resources and claims are depicted in the periods in which those effects occur even if the resulting cash receipts and payments occur in a different period. A. Accrual accounting B. Cash accounting C. Modified cash accounting D. Modified accrual accounting Part II. COMPUTATIONAL AND ANALYTICAL Supply the answer. I Your examination of the cash account of Three Star Company disclosed the following information:
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Cash in bank balance per books, Dec. 31, 2012 Bank statement balance, Dec. 31, 2012 Note collected by bank in December (Principal plus interest of P 800, less collection fee of P 200) Debit memo for a checkbook Deposit in transit, Dec. 31, 2012 Transposition error made by bank in recording deposit of Dec. 28: Correct amount Recorded as Erroneous bank debit Included in the cash in bank account is petty cash fund of P 10,000. Your count on Dec. 31, 2012, revealed the following fund items: Currency and coins Supplies Transportation IOUs Erroneous bank credit Outstanding checks (including a certified check of P 10,000)
P 35,000 60,000 27,600 ? 15,200
P 45,000 54,000
P 3,000 2,400 100 4,000
9,000 26,700
9,500 11,000 39,400
1. WHAT IS THE PRINCIPAL AMOUNT OF THE NOTE COLLECTED BY BANK IN DECEMBER? 2. WHAT IS THE ADJUSTED CASH IN BANK BALANCE AT DECEMBER 31, 2012? 3. THE COST OF CHECKBOOK IS… 4. WHAT IS THE AMOUNT OF PETTY CASH SHORTAGE OR OVERAGE AT DECEMBER 31, 2012? 5. WHAT IS THE ADJUSTED PETTY CASH BALANCE? II KSL Co. started its operations on January 6, 2013. The following selected transactions occurred during the year ended 2013. Gross Sales (cash and credit) Collections from credit customers, net of 3% cash discount Credit memos received Cash sales Uncollectible accounts written off Credit memos issued Cash refunds given to non-credit customers for sales returns and allowances Recoveries on accounts receivable written off in prior years (not included in cash collections stated above)
P 880,000 407,400 3,000 30% of Gross sales 9,600 6,200 8,000 2,300
At year-end, the company provides for estimated bad debt losses by crediting the Accounts receivable reserves account by ½ of 2.5% of its net credit sales for the year. 6. 7. 8. 9.
WHAT IS THE COMPANY’S NET CREDIT SALES IN 2013? WHAT IS THE BAD DEBT EXPENSE FOR 2013? WHAT IS THE ACCOUNTS RECEIVABLE BALANNCE AS OF DECEMBER 31, 2013? WHAT IS THE AMORTIZED COST OF ACCOUNTS RECEIVABLES ON DECEMBER 31, 2013? III
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The following long-term receivables were reported in the December 31, 2011, statement of financial position of BCSV Company: Note receivable from sale of a plant asset Note receivable from Madison (CEO)
P 3,000,000 800,000
The following transactions during 2012 and other information relate to the company’s long-term receivables:
The note receivable from sale of a plant asset dated April 1, 2011 bears interest at 12%. The note is payable in three annual installments of P 1 Million plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2012. The note receivable from Madison is dated December 31, 2011, earns interest at 10% per annum, and is due on December 31, 2014. The 2012 interest was received on December 31, 2012. A tract of land was sold by BCSV to BFN Company on July 1, 2012, for P 2 Million under an installment sale contract. BFN signed a 4-year 11% note for P 1.4 Million on July 1, 2012, in addition to the down payment of P 600,000. The equal annual payments of principal and interest on the note will be P 451,250 payable on July 1 of 2013 through 2016. The land had an established cash price of P 2 Million, and its cost to BCSV was P 1.5 Million. The collection of the installments on this note is reasonably assured.
10.THE AMOUNT REPORTED AS NON-CURRENT RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 2011 IS… 11.THE AMOUNT REPORTED AS CURRENT ASSETS RELATED TO THE RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 2011 IS… 12.THE AMOUNT TO BE REPORTED AS NON-CURRENT RECEIVABLES IN THE STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 2012 IS… 13.THE CURRENT PORTION OF NOTES RECEIVABLE ON DECEMBER 31, 2012 SHOULD BE… 14.THE ACCRUED INTEREST RECEIVABLE ON DECEMBER 31, 2012 SHOULD BE… 15.THE TOTAL INTEREST INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 SHOULD BE… IV Bahrain Company records its purchases at gross amounts but wishes to change to recording purchases net of purchase discounts. Discounts on purchases recorded from January 1, 2012 to December 31, 2012, totaled P 80,000. 10% of this amount is still available in the accounts payable balance. The balances in Bahrain’s accounts as of and for the year ended December 31, 2012, before conversion: Purchases Purchase discounts Accounts payable
P 4,000,000 32,000 1,200,000
16.THE AMOUNT OF PURCHASE DISCOUNTS LOST TO BE RECOGNIZED IS… 17.THE ACCOUNTS PAYABLE BALANCE SHOULD BE REDUCED BY… 18.THE PURCHASES ACCOUNT SHOULD BE REDUCED BY… V 9|Page
Columbia Company must determine the December 31, 2012, year-end accruals for advertising and rent expenses. A P 50,000 advertising bill was received January 10, 2013, comprising costs of P 37,500 for advertisements in December 31, 2012 issues, and P 12,500 for advertisements in January 2013 issues of the newspaper. A store lease, effective December 16, 2012, calls for fixed rent of P 120,000 per month, payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over P 6,000,000 per calendar year is payable on January 31 of the following year. net sales for 2012 were P 7,500,000. 19.WHAT IS THE TOTAL ACCRUED LIABILITIES THAT SHOULD BE REPORTED BY THE COMPANY IN ITS STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2012? VI Canada Company has the following three loans payable scheduled to be repaid in February of next year. The company’s accounting year ends on December 31.
The company intends to repay Loan 1 for P 100,000 when it comes due in February. In the following October, the company intends to get a new loan which is 80% of the previous loan from the same bank. The company intends to refinance Loan 2 for P 150,000 when it comes due in February. The refinancing agreement for P 180,000, will be signed in April, after the financial statements for this year have been authorized for issue. The company intends to refinance Loan 3 for P 200,000 before comes due in February. The actual refinancing for P 175,000, took place in January, before the financial statements for this year have been authorized for issue.
20. AS OF DECEMBER 31 OF THIS YEAR, THE TOTAL CURRENT LIABILITIES TO BE REPORTED IN THE COMPANY’S STATEMENT OF FINANCIAL POSITION SHOULD BE… 21. AS OF DECEMBER 31 OF THIS YEAR, THE TOTAL NON-CURRENT LIABILITIES TO BE REPORTED IN THE COMPANY’S STATEMENT OF FINANCIAL POSITION SHOULD BE… VII The following selected information pertains to Alaska Company: Cash, December 31, 2011 Accounts receivable, December 31, 2011 Collections from customers in 2012 Capital, December 31, 2011 Total assets, December 31, 2011 Cash investment, July 1, 2012 Total assets, December 31, 2012 Cash, December 31, 2012 Accounts receivable, December 31, 2012 Withdrawals made during 2012 Total liabilities, December 31, 2012
P 65,000 95,000 1,050,000 190,000 375,000 25,000 505,000 100,000 180,000 55,000 205,000
22.HOW MUCH NET INCOME SHOULD ALASKA REPORT IN ITS INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2012? VIII 10 | P a g e
In the course of your examination of the December 31, 2012, financial statements of Singapore Company, you discovered certain errors that had occurred during 2011 and 2012. No errors were corrected during 2011. The errors are summarized below:
Beginning merchandise inventory was understated stated by P 259,200. Merchandise costing P 72,000 was sold for P 120,000 to Belgium Company on December 28, 2011, but the sale was recorded in 2012. The merchandise was shipped FOB shipping point and was not included in ending inventory. Singapore uses a periodic inventory system. A two-year fire insurance policy was purchased on May 1, 2011, for P 172,800. The whole amount was charged to prepaid insurance. No adjusting entry was prepared in 2011 and 2012. A one-year note receivable of P 288,000 was held by Singapore beginning October 1, 2011. Payment of the 10% note and accrued interest was received upon maturity. No adjusting entry was made on December 31, 2011. Equipment with a 10-year life was purchased on August 2, 2011, for P 1,176,000. No depreciation expense was recorded during 2011 or 2012. Assume that the equipment has no salvage value and that Singapore uses the straight-line method for recording depreciation.
23.COMPUTE FOR THE NET ADJUSTMENTS MADE TO THE CAPITAL ACCOUNT AT THE BEGINNING OF 2012. IX NY Company has used the accrual basis of accounting for several years. A review of the records, however, indicates that some revenues and expenses have been handled on a cash basis because of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper reported P 870,000 net income for 2011 and P 1,110,000 net income for 2012. Further examinations of the records reveals that the following items were handled improperly.
Rent was received from a tenant in December 2011. The amount, P 30,000, was recorded as income at that time even though the rental pertained to 2012. Wages payable on December 31 have been consistently omitted from the records of that date and have been entered as expenses when paid in the following year. the amounts of accruals recorded in this manner were: December 31, 2010 P 33,000 December 31, 2011 36,000 December 31, 2012 28,200 Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them. December 31, 2010 P 39,000 December 31, 2011 28,200 December 31, 2012 42,600
24.WHAT IS THE CORRECTED NET INCOME FOR THE YEAR 2011? 25.WHAT IS THE CORRECTED NET INCOME FOR THE YEAR 2012? X 11 | P a g e
The bank statement for the current account of Hong Kong Co. sowed a December 31, 2012, balance of P 585,284. Information that might be useful in preparing a bank reconciliation is as follows:
Outstanding checks were P 52,810. The December 31, 2012, cash receipts of P 23,000 were not deposited in the bank until January 2, 2013. One check written in payment of rent, P 8,940, was correctly recorded by the bank but was recorded by the company as a P 9,840 disbursement. In accordance with prior authorization, the bank withdrew a P 18,000 directly from the current account as payment on a mortgage note payable. The interest portion of that payment was P 14,000. The company has made no entry to record the automatic payment. Bank service charges of P 740 were listed on the bank statement. A deposit of P 35,000 was recorded by the bank on December 12, but it did not belong to Hong Kong Co. The bank statement included a charge of P 3,400 for a not-sufficient-fund check. The company will seek payment from the customer. Hong Kong Co. maintains an P 8,000 petty cash fund that was appropriately reimbursed at the end of December. According to the instructions from the company on December 30, the bank withdrew P 400,000 from the account and purchased Treasury bills for the company. The company recorded the transaction in its books on December 31 when it received the notice from the bank. Half of the treasury bills mature in three months and the other half in six months.
26.WHAT IS THE CASH IN BANK BALANCE PER BOOKS ON DECEMBER 31, 2012? 27.WHAT IS THE ADJUSTED CASH IN BANK BALANCE ON DECEMBER 31, 2012? 28.WHAT AMOUNT WOULD HONG KONG CO. REPORT AS CASH AND CASH EQUIVALENTS IN THE CURRENT ASSET SECTION OF THE DECEMBER 31, 2012, STATEMENT OF FINANCIAL POSITION? XI The following balances pertain to China Company. Accounts payable: January 1, 2012 December 31, 2012 Inventory balance: January 1, 2012 December 31, 2012 Cost of sales – 2012
P 286,924 737,824 815,386 488,874 1,859,082
29.HOW MUCH WAS PAID BY CHINA TO ITS SUPPLIERS IN 2012? XII A recent fire severely damaged Tennessee Company’s administration building and destroyed many of its financial records. You have been contracted by Tennessee’s management to reconstruct as much financial information as possible for the month of July. You learn that Tennessee makes a physical inventory count at the end of each month to determine monthly ending inventory values. You are able to gather the following information by examining various documents: Inventory, July 31
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150,000 units
Cost of goods available for sale in July Cost of sales during July Gross profit on sales for July Cost of inventory, July 1
P 356,400 297,000 P 303,000 0.35 per unit
The following are Tennessee’s July purchases of merchandise: Date: July 6 July 12 July 16 July 17
Quantity: 180,000 150,000 120,000 150,000
Unit cost: P 0.40 0.41 0.42 0.45
Tennessee’s management has asked you to provide the following information: 30.NUMBER OF UNITS ON HAND, JULY 1. 31.UNITS SOLD DURING JULY. 32.UNIT COST OF INVENTORY AT JULY 31. 33.VALUE OF INVENTORY AT JULY 31. XIII Ukraine Company incurred the following costs and expenses during 2014: Raw material purchases Direct labor Indirect labor – factory Factory repairs and maintenance Taxes on factory building Depreciation – factory building Taxes on salesroom Taxes on general office Depreciation – sales equipment Advertising Sales salaries Office salaries Utilities (60% is applicable to factory)
Raw materials Work-inprogress Finished goods
P 4,000,000 1,500,000 800,000 200,000 100,000 300,000 75,000 75,000 50,000 400,000 500,000 700,000 500,000
Beginning 300,000 400,000
Ending 450,000 350,000
500,000
700,000
34.WHAT IS THE COST OF GOODS MANUFACTURED DURING 2014? XIV Baghdad Company reported that the operating expenses other than interest expense for the current year amount to 40% of cost of goods sold but only 20% of sales. Finance cost is 5% of sales. The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as the beginning inventory. The income after tax of 30% for the current year is P 560,000. 35.WHAT IS THE AMOUNT OF SALES FOR THE CURRENT YEAR? XV
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Cavite Company was incorporated on January 1, 2010. In preparing the financial statements for the year ended December 31, 2012, the entity used the following original cost and useful life for the property, plant, and equipment:
Building Machine Furniture
Original cost P 15 Million 10.5 Million 6 million
Economic life 15 years 10 years 8 years
Acquisition date Mar. 31, 2010 Aug. 31, 2011 May 31, 2012
On January 1, 2013, the entity determined that the remaining life is 10 years for the building, 7 years for the machine and 5 years for the furniture. The entity used the straight line method of depreciation with no salvage value. 36.WHAT IS THE TOTAL ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2012? 37.WHAT IS THE TOTAL DEPRECIATION FOR 2013? XVI The financial statements of Iceland Company included the following information for 2013:
Accounts receivable Allowance for bad debts Sales Cash collected from customers
January 1 P 1,200,000 60,000
December 31
8 Million 7,000,000
30% of the sales were made on cash. The cash collections included a recovery of P 10,000 from a customer whose account had been written off as worthless in 2009 and collections from non-credit customers. During 2013, it was necessary to recognize doubtful accounts expense of P 100,000 and write off worthless customers’ account of P 30,000. On December 1, 2013, a customer settled an account by issuing a 12%, six month note for P 400,000. 38.WHAT IS THE NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE ON DECEMBER 31, 2013? 39.WHAT AMOUNT OF CURRENT ASSETS SHOULD BE REPORTED IN THE DECEMBER 31, 2013 STATEMENT OF FINANCIAL POSITION? XVII Baguio Company operates a retail store. All items are sold subject to a 12% value added tax, which the entity collects and records as sales. The entity files quarterly sales tax return when due by the 20th day following the end of the sales quarter. However, in accordance with state requirements, the entity remits value added tax collected by the 20th day of the month following any month such collections exceed P 50,000. The entity takes these payments as credits on the quarterly sales tax return. The value added taxes paid by the entity are charged against sales. Following is a monthly summary appearing in the first quarter 2013 sales account: Debit January February March
P 60,000
Credit P 560,000 392,000 448,000
40.ON MARCH 31, 2013, WHAT AMOUNT SHOULD BE REPORTED AS VALUE ADDED TAXES PAYABLE? XVIII 14 | P a g e
Pennsylvania Company had the following items at December 31, 2011: Accounts payable Notes payable – Metrobank, due July 1, 2012 Accrued expenses Bonds payable, due March 31, 2012
P 500,000 1,000,000 600,000 5,000,000
The company has an existing loan facility arrangement with Metrobank where in the bank can not cancel unilaterally the loan and the scheduled maturity of this facility is on December 31, 2014. The company intends to roll over this loan through the three-year facility arrangement. 41.WHAT AMOUNT OF CURRENT LIABILITIES SHOULD THE COMPANY REPORT IN ITS DECEMBER 31, 2012 STATEMENT OF FINANCIAL POSITION? XIX As of December 31, 2014, the current liabilities of Hiroshima Company totaled P 1,500,000 before any year-end adjustment relating to the following:
On December 19, 2014, a supplier authorized Hiroshima Company to return, for full credit, goods shipped and billed at P 45,000 (Ignore VAT) on December 9, 2014. The returned credit memo was received and recorded by Hiroshima on January 2, 2015. During December 2014, Hiroshima received P 75,000 from a customer as an advance payment for a merchandise which Hiroshima will make according to the customer’s specifications. For this transaction, Hiroshima has a P 75,000 credit balance in its accounts receivable from the said customer on December 31, 2014. On December 28, 2014, the company wrote and recorded checks to creditors totaling P 400,000 which would cause a bank overdraft of P 100,000 in the company’s bank account on December 31, 2014. The checks were mailed on January 9, 2015.
42.WHAT AMOUNT SHOULD HIROSHIMA COMPANY REPORT AS TOTAL CURRENT LIABILITIES IN ITS DECEMBER 31, 2014 STATEMENT OF FINANCIAL POSITION? XX Presented below are certain account balances of Kiyomizu-dera Company: Ending inventory Rental income Finance cost Purchase returns and allowances Beginning capital Ending capital Freight inward Bad debt recovery Sales returns Sales discounts Selling expenses Sales Income tax rate Beginning inventory Purchases Purchase discounts Administrative expenses
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P 48,000 6,500 12,700 10,500 114,400 134,000 10,100 71,000 12,400 7,800 99,400 390,000 32% 45,300 190,000 2,500 82,500
43.BASED ON THE DATA GIVEN, HOW MUCH WOULD BE THE NET INCOME DURING THE CURRENT YEAR? XXI The net sales of Kamakura Mfg. Company in 2014 is P 580,000. The cost of manufactured goods is P 480,000. The beginning inventories of Goods-in-Progress and finished Goods are P 82,000 and P 65,000, respectively. The ending inventories are: Goods-in-progress – P 75,000; Finished Goods – P 55,000. The selling and Administrative expenses are 5% and 2.5% of cost of goods sold, respectively. 44.HOW MUCH WOULD BE THE NET PROFIT BEFORE INCOME TAX IN THE YEAR 2014? XXII Golden Pavilion Company purchased a machine on July 1, 2013 for P 750,000. The machine had a useful life of 10 years with salvage value of P 42,000. During 2016, it became apparent that the machine would become uneconomical after December 31, 2020. And that the machine would have no salvage value. 45.WHAT IS THE CHARGE FOR DEPRECIATION IN 2016? XXIII The financial records of Todaiji Temple Company were destroyed by fire at the end of the current year. However, certain statistical data related to the income statement are available: Interest expense Cost of sales Sales discount
P 20,000 2,000,000 100,000
The beginning inventory was P 400,000 and decreased 20% during the year. Administrative expenses are 25% of cost of sales but only 10% of gross sales. Four-fifths of the operating expenses relate to sale activities. 46.WHAT IS THE GROSS MARGIN RATIO? 47.IGNORING INCOME TAX, WHAT IS THE NET INCOME FOR THE CURRENT YEAR? XXIV The following data were taken from the records of Tokyo Company for the year ended December 31, 2013: Sales on account Notes received to settle accounts Provision for doubtful accounts Accounts receivable determined to be worthless Purchases on account Payments to creditors Discounts allowed by creditors Merchandise returned by customers Collections received to settle accounts Notes given to creditors in settlement of accounts Merchandise returned to suppliers Payments on notes payable Discounts taken by customers Collections received in settlement of notes
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P 3,600,000 400,000 90,000 25,000 3,900,000 3,200,000 260,000 15,000 2,450,000 250,000 70,000 100,000 40,000 180,000
48.WHAT IS THE NET REALIZABLE VALUE OF ACCOUNTS RECEIVABLE ON DECEMBER 31, 2013? XXV On August 1, 2014, Zambales Company recorded purchases of P 800,000 and P 1,000,000 under credit terms of 2/15, net 30. The payment due on the P 800,000 purchase was remitted on August 16. The payment due on the P 1,000,000 purchase was remitted on August 31. 49.UNDER GROSS METHOD, WHAT AMOUNT OF PURCHASES SHOULD BE INCLUDED IN THE DETERMINATION OF COST OF GOODS AVAILABLE FOR SALE? 50.UNDER NET METHOD, WHAT AMOUNT OF PURCHASES SHOULD BE INCLUDED IN THE DETERMINATION OF COST OF GOODS AVAILABLE FOR SALE? -END-
Problem 1-1
Chemical Company failed to recognize accruals and prepayments since the inception of its business three years ago. The accruals and prepayments at the end o f 2014 are given below: Prepaid insurance Accrued wages Rent revenue collected in advance Interest receivable
P 60,000 75,000 96,000 81,000
The net income (loss) before adjustments is (P 67,000). Question: 1. What is the correct net income (loss) of the business for the year 2014? Answer: (97,000) Problem 1-2
Cadillac Company provided you the following information for the current year: Interest receivable, April 1 Accrued Salaries & Wages, March 31 Deferred interest revenue, April 1 Prepaid Salaries & Wages, March 31 Accrued Salaries & Wages, April 1 Interest receivable, March 31 Prepaid Salaries & Wages, April 1 Deferred interest revenue, March 31
P 80,400 112,500 97,300 144,700 132,100 67,800 155,900 92,600
The Company also provided you the Cash ledger balance composition: Cash Beg. Bal 730,200 1,200,800 1,666,700 Salaries & Wages Interest
End Bal
264,300
Aside from the information provided, there are no other relevant transactions incurred during the current year.
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Questions: 2. How much is the interest revenue earned during the current year? 3. How much is the Salaries & Wages expense incurred during the current year? 4. What net amount relating to the above transactions shall be included in the income statement for the current year ended? Answers: 1,192,900 1,658,300 (465,400) Problem 1-3
Aby Company started its operations during 2008 and provided you the following information as of May 31, 2011: Liabilities Equity
P 630,000 65% of the total resources of the company
You noted the following: A machine costing P 350,000 was recognized as maintenance expense on January 1, 2009. It was ascertained that the cost should have been recognized as an asset and depreciated under straight-line over a 10 year useful life to P 80,000 residual value. The following items are omitted:
June 2008 – May 2009
Wages payable Prepaid insurance
June 2009 – May 2010
June 2010 – May 2011
P 20,000 66,000
P 14,000 P 24,000
P 51,000
Customer cash advances amounting to P 70,000 and P 90,000 were received at the end of fiscal yearend 2010 and 2011 respectively, and were recorded as outright revenues. Net income (loss) during the fiscal yearend 2009, 2010, and 2011 were (P 160,000), P 270,000, and P 180,000, respectively.
Questions: 5. What is the adjusted net income (loss) for the fiscal year-end 2008 - 2009? 6. What is the adjusted net income (loss) for the fiscal year-end 2009 - 2010? 7. What is the adjusted net income (loss) for the fiscal year-end 2010 - 2011? 8. What is the adjusted capital of the company as of May 31, 2011? Answers: 224,750 151,000 146,000 1,401,750
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ANSWER KEY Part I. THEORIES
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
A
B
C
D
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
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26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
Part II. PROBLEMS
A
B
C
D
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
O O O O O O O O O O O O O O O O O O O O O O O O O
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
P 27,000 P 52,500 P 100 P 500 SHORTAGE P 3,000 P 597,200 P 7,465 P 180,200 P 180,035 P 2,800,000 P 1,270,000 P 2,902,750 P 1,297,250 P 257,000 P 427,000 P 40,000 P 8,000 P 80,000 P 172,500 P 450,000 -0P 140,000 P 279,800 P 826.200 P 1,162,200
26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50.
P 541,714 P 520,474 P 728,474 P 1,081,670 300,000 750,000 P 0.396 P 59,400 P 7,100,000 P 3,200,000 P 4,587,500 P 3,637,500 P 1,640,000 P 2,044,000 P 90,000 P 6,100,000 P 1,930,000 P 46,444 P 53,250 P 114,600 60% P 380,000 P 605,000 P 1,784,000 P 1,764,000
