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Chapter 10
Cash to Accrual Basis of Accounting

1. An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 20x3,
revealed the following:
 An opening balance of ₱1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an
annual premium of ₱3,000 on July 1, 20x2.
 A ₱3,200 annual insurance premium payment made July 1, 20x3.
 A ₱2,000 advance rental payment for a warehouse

Thrift leased for one year beginning January 1, 2004. In its December 31, 20x3 balance sheet, what
amount should Thrift report as prepaid expenses?
a. 5,200 b. 3,600 c. 2,000 d. 1,600

2. The balance in retained earnings at December 31, 2003 was ₱810,000 and at December 31, 2004
was ₱654,000. Net income for 2004 was ₱563,000. A stock dividend was declared and distributed
which increased common stock ₱225,000 and paid-in capital ₱125,000. A cash dividend was
declared and paid. The amount of the cash dividend was
a. ₱279,000. c. ₱494,000.
b. ₱369,000. d. ₱719,000.

3. On April 1, 2008, Ivy began operating a service proprietorship with an initial cash investment of
₱1,000. The proprietorship provided ₱3,200 of services in April and received full payment in
May. The proprietorship incurred expenses of ₱1,500 in April which were paid in June. During
May, Ivy drew ₱500 against her capital account.

What was the proprietorship's income for the two months ended May 31, 2008, under the following
methods of accounting?
Cash basis Accrual basis
a. 1,200 1,200
b. 1,700 1,700
c. 2,700 1,200
d. 3,200 1,700

4. Entity Co. uses the cash basis of accounting and reported income of ₱87,000 in 20x1. The
following items were considered in the computation of the cash basis net income.

Inventory, beginning 12,000

Inventory, ending 18,000
Receivables, beginning 40,000
Receivables, ending 38,000
Payables, beginning 19,000
Payables, ending 25,000
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The accrual basis income is

a. 97,000 b. 73,000 c. 89,000 d. 85,000

5. Information on an entity’s accounts is shown below:

Current tax payable, beg. 150,000
Current tax payable, end. 400,000
Increase in deferred tax
liability 60,000
Increase in deferred tax asset 20,000
Income tax paid 280,000

How much is the income tax expense for the period?

a. 530,000 b. 540,000 c. 570,000 d. 610,000

“The fear of the LORD is the beginning of knowledge, but fools despise wisdom and instruction.” (Proverbs
1:7)
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SOLUTIONS:

1. B

Solution:
Insurance paid on July 1, 20x3 3,200
Less: Expired portion (3,200 x 6/12) (1,600)
Prepaid - Dec. 31, 20x3 1,600
Advanced rental payment 2,000
Total prepayments - 12/31/x3 3,600

2. B ₱810,000 + ₱563,000 – (₱225,000 + ₱125,000) – X = ₱654,000

X = ₱369,000.

3. D

Solution:
  Cash basis Accrual basis

Revenue 3,200 3,200

Expenses - (1,500)

Profit 3,200 1,700

4. D

Solution:
Accrual basis profit (squeeze) 85,000
Increase in inventory (6,000)
Decrease in receivables 2,000
Increase in payables 6,000
Cash basis profit 87,000

5. C
Solution:

Current tax payable

  150,000 beg.
Income tax paid 280,000 530,000 Current tax expense
 
end. 400,000  

Income tax expense 570,000

Less: Increase in deferred tax
liability (60,000)
Add: Increase in deferred tax asset 20,000
Current tax expense 530,000