XI – CASH TO ACCRUAL BASIS, SINGLE ENTRY AND CORRECTION OF ERRORS

PROBLEM 1 – Cash to Accrual (Ocampo)

Zamboanga Enterprises records all the transactions on the cash basis. The company’s
accountant prepared the following income statement at the end of the company’s first year
of operations:

Zamboanga Enterprises
Income Statement
For the Year Ended December 31, 2010

Sales P2,016,000
Selling and administrative expenses:
Salaries expense P624,000
Rent expense 360,000
Utilities expense 232,000
Equipment 240,000
Commission expense 302,000
Insurance expense 48,000
Interest expense 24,000 1,830,400
Net Income P 185,600

You have been asked to prepare an income statement on the accrual basis. The following
information is given to you to assist in the preparation:

a) Amounts due from customers at year-end were P224,000. Of this amount, P24,000 will
probably not be collected.
b) Salaries of P88,000 for December 2010 were paid on January 5, 2011.
c) Zamboanga rents its building for P24,000 a month, payable uarterly in advance. The
contract was signed on January 1, 2010.
d) The bill for December’s utility costs of P21,000 was paid January 10, 2011.
e) Equipment of P240,000 was purchased on January 1, 2010. The expected life is 5 years,
no salvage value. Assume straight-line depreciation.
f) Commissions of 15% of sales are paid on the same day cash is received from customers.
g) A 1-year insurance was issued in the company assets on July 1, 2010. Premiums are paid
annually in advance.
h) Zamboanga borrowed P400,000 for one year on May 1, 2010. Interest payments based
on an annual rate of 12% are made quarterly, beginning with the first payment on
August 1, 2010.

QUESTION:

How much is the net income before income tax under the accrual basis of accounting?

a. P 526,000 c. P 514,000
b. P 286,000 d. P 574,000

Answer: A

Suggested Solution:

Net income before income tax – cash basis P 185,600

 Add (deduct) adjustments:
AJE No. a 224,000
(24,000)
AJE No. b (88,000)
AJE No. c 72,000
AJE No. d (21,600)
AJE No. e 240,000
(48,000)
AJE No. f (30,000)
AJE No. g 24,000
AJE No. h (8,000)
Net income before income tax – accrual basis P 526,000

Adjusting Journal Entries (AJE) to convert cash to accrual basis:

a) Accounts receivable P 224,000

Doubtful accounts expense 24,000
Sales P 224,000
Allowance for doubtful accounts 24,000

b) Salaries expense P 88,000

Salaries payable P 88,000

c) Prepaid rent [P360,000 – (P24,000x12)] P 72,000

Rent expense P 72,000

d) Utilities expense P 21,600

Utilities payable P 21,600

e) Depreciation expense (P240,000/5) P 48,000

Accumulated depreciation P 48,000

Note: The cost of the equipment should be added back to the reported net
income since it was expensed totally in 2010.

f) Commission expense [(P224,000- P 30,000

P24,000)x15%]
Commission payable P 30,000

Note: No commission on doubtful accounts

g) Prepaid insurance (P48,000x6/12) P 24,000

Insurance expense P 24,000

h) Interest expense (P400,000x12%x2/12) P 8,000

Interest payable P 8,000

PROBLEM 2 – Cash to Accrual

(Ocampo)

You were able to gather the following in connection with your audit of the Bukidnon
Company for the year ended December 31, 2010:
 1/1/ 12 / 31 /
2010 2010
Accounts receivable P P 4,000,000
6,400,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 125,000
85,000
Advertising supplies inventory 75,000
35,000
Accrued advertising 40,000
14,250
Prepaid insurance -
25,000
Unexpired insurance - 41,000

During the year:

Amount collected from customers P

Total payments to suppliers 10,000,000
Total payments to suppliers of merchandise of prior
years 13,618,000
Wages paid
Advertising paid which includes P 40,000 applicable in
2011 4,632,000
Insurance premium paid
3,050,000

300,000
125,000

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Net sales for 2010

a. P 6,400,000 c. P 7,600,000
b. P 12,400,000 d. P 14,000,000

2. Net purchases for 2010

a. P 11,607,000 c. P 13,618,000
b. P 15,629,000 d. P 16,239,000

3. Wages expense for 2010

a. P 3,010,000 c. P 3,050,000
b. P 3,090,000 d. P 3,100,000

4. Advertising expense for 2010

a. P 245,750 c. P 260,000
b. P 285,750 d. P 300,000

5. Insurance expense for 2010

a. P 84,000 c. P 100,000
 b. P 109,000 d. P 141,000

Answers: 1. C 2. A 3. B 4. A 5. B

Suggested Solutions:

Question No. 1

Accounts receivable, 12/31/10 P 4,000,000

Add: collections from customers 10,000,000
Total 14,000,000
Less: accounts receivable, 1/1/10 6,400,000
Net sales for 2010 P 7,600,000

Question No. 2

Unpaid merchandise invoices, 12/31/10 P 2,621,000

Add: payments to suppliers of 2010:
Total payments to suppliers in 2010 P 13,618,000
Less: payments in 2010 to suppliers of prior 8,986,000
years 4,632,000
Net purchases for 2010 P 11,607,000

Question No. 3

Accrued wages, 12/31/10 P 125,000

Add: wages paid in 2010 3,050,000
Total 3,175,000
Less: accrued wages, 1/1/10 85,000
Wages expense for 2010 P 3,090,000

Question No. 4

Accrued advertising, 12/31/10 P 40,000

Advertising supplies inventory, 1/1/10 35,000
Advertising paid in 2010 300,000
Total 375,000
Less: accrued advertising, 1/1/10 P 14,250
Advertising supplies inventory, 12/31/10 75,000
Advertising paid applicable to 2011 40,000 129,250
Advertising expense for 2010 P 245,000

Question No. 5

Prepaid insurance, 1/1/10 P 25,000

Add: insurance premium paid in 2010 125,000
Total 150,000
Less: prepaid insurance, 12/31/10 41,000
Insurance expense in 2010 P 109,000

PROBLEM 3 – Cash to Accrual

(Ocampo)

The income statement of Cagayan Corporation for 2010 included the following items:
 Interest income P 2,101,000
Salaries expense 1,650,000
Insurance expense 277,200
The following balances have been excerpted from Cagayan Corporation’s statements of
financial position:

12/31/200 12/31/201
9 0
Accrued interest receivable P 165,000 P 200,200
Accrued salaries payable 92,400 195,800
Prepaid insurance 33,000 24,200

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. The cash received for interest during 2010 was

a. P 1,900,000 c. P 2,065,800
b. P 2,101,000 d. P 2,136,000

2. The cash paid for salaries during 2010 was

a. P 1,753,400 c. P 1,546,600
b. P 1,557,600 d. P 1,845,800

3. The cash paid for insurance premiums during 2010 was

a. P 253,000 c. P 244,200
b. P 286,000 d. P 268,400

Answers: 1. C 2. C 3. D

Suggested Solution:

Question No. 1

Interest income P 2,101,000

Accrued interest receivable, 12/31/09 165,000
Accrued interest receivable, 12/31/10 ( 200,200)
Cash received for interest during 2010 P 2,065,800

Question No. 2

Salaries expense P 1,650,000

Accrued salaries payable, 12/31/09 92,400
Accrued salaries payable, 12/31/10 ( 195,800)
Cash received for interest during 2010 P 1,546,600

Question No. 3

Insurance expense P 227,200

Prepaid insurance, 12/31/09 ( 33,000)
Prepaid insurance, 12/31/10 24,200
Cash received for interest during 2010 P 268,400
PROBLEM 4 – Cash to Accrual
(Ocampo)

Gingoog Company paid or collected during 2010 the following items:

Insurance premiums paid P 462,000

Interest collected 927,000
Salaries paid 4,056,000

The following balances have been excerpted from Gingoog’s statements of financial position:

12/31/2009 12/31/201
0
Prepaid insurance P 45,000 P 36,000
Interest receivable 87,000
111,000
Salaries payable 318,000
369,000

QUESTIONS:

Based on the above and the results of your audit, determine the following:

1. The insurance expense on the income statement for 2010 was

a. P 381,000 c. P 543,000
b. P 543,000 d. P 471,000

2. The interest income on the income statement for 2010 was

a. P 729,000 c. P 903,000
b. P 951,000 d. P 1,125,000

3. The salary expense on the income statement for 2010 was

a. P 3,369,000 c. P 4,005,800
b. P 4,107,000 d. P 4,743,000

Answers: 1. D 2. B 3. B

Suggested Solution:

Question No. 1

Insurance premiums paid P 462,000

Prepaid insurance, 12/31/09 45,000
Prepaid insurance, 12/31/10 ( 36,000)
Insurance expense in 2010 P 471,000

Question No. 2

Interested collected P 927,000

Interest receivable, 12/31/09 ( 87,000)
Interest receivable, 12/31/10 111,000
 Interest income in 2010 P 951,000

Question No. 3

Salaries paid P 4,056,000

Salaries payable, 12/31/09 ( 318,000)
Salaries payable, 12/31/10 369,000
Salary expense in 2010 P 4,107,000

PROBLEM 5 – Cash to Accrual

(Ocampo)

Iligan & Associates maintains its records on the cash basis. You have been engaged to
convert its cash basis income statement to the accrual basis. The cash basis income
statement, along with additional information follows:

Iligan & Associates

Income Statement (Cash Basis)
For the Year Ended December 31, 2010

Cash receipts from customers P 2,800,000

Cash payments:
Wages P 1,200,000
Taxes 520,000
Insurance 320,000
Interest 200,000 2,240,000
Net Profit P 560,000

Additional information:
12/31/2009 12/31/2010
Accounts receivable P 240,000 P 400,000
Wages payable 160,000 120,000
Taxes payable 152,000 112,000
Prepaid insurance 32,000 64,000
Accumulated depreciation 600,000 760,000
Interest payable 72,000 24,000

No plant assets were sold during 2010.

QUESTIONS:

How much is the profit before income tax under the accrual basis of accounting?
a. P 3,369,000 c. P 4,005,800
b. P 4,107,000 d. P 4,743,000

Answer: C

Suggested Solution:

Revenue (P2,800,000 – P240,000 + P400,000) P

2,960,000
Expenses:
 Wages (P1,200,000 – P160,000 + P120,000) P
1,160,000
Taxes (P520,000 – P152,000 + P112,000)
480,000
Insurance (P320,000 + P32,000 – P64,000)
288,000
Depreciation (P760,000 – P600,000)
160,000
Interest (P200,000 – P72,000 + P24,000)
152,000 2,240,000
Profit before income tax P
720,000

PROBLEM 6 – Cash to Accrual

(Ocampo)

Presented below is information pertaining to Malay Specialty Foods, a calendar-year sole

proprietorship, maintaining its books on the cash basis during the year. At year-end,
however, Ms. Balay Malay’s accountant adjusts the books to the accrual basis only for sales,
purchases, and cost of sales and records depreciation to more clearly reflect the business
income for income tax purposes.

Malay Specialty Foods

Trial Balance
December 31, 2010

Debit Credit
Cash P
185,000
Accounts receivable, 12/31/09
45,000
Inventory, 12/31/09
200,000
Equipment
350,000
Accumulated depreciation, 12/31/09 P
90,000
Accounts payable, 12/31/09
48,000
Withholding tax payable
8,500
Balay Malay, drawing
240,000
Balay Malay, capital, 12/31/09
336,500
Sales
1,870,000
Purchases
827,000
Salaries
295,000
Taxes and licenses
29,000
Rent
84,000
Miscellaneous
39,000
Insurance
24,000
Utilities ___________
35,000
P P
2,353,000 2,353,000

During 2010, Malay signed a new eight-year lease for the store premises and is in the
process of negotiating a loan for remodeling purposes. The bank requires Malay to present
financial statements for 2010 prepared on the accrual basis. During the course of the
engagement, Malay’s accountant obtained the following additional information:

1. Amounts due from customers totaled P79,000 at December 31, 2010

2. A review of the receivables at December 31, 2010 disclosed that an allowance for
doubtful accounts of P11,000 should be provided. Malay had no bad debt losses from
inception of the business through the December 31, 2010.

3. The inventory amounted to P230,000 at December 31, 2010 based on a physical count of
goods priced at cost. No reduction to net realizable value was required.

4. On signing the new lease on October 1, 2010, Malay paid P84,000 representing one
year’s rent in advance for the lease year ending October 1. 2011. The P75,000 annual
rental under the old lease was paid on October 1, 2009, for the lease year ended October
1, 2010.
5. On April 1, 2010, Malay paid P24,000 to renew the comprehensive insurance coverage
for one year. The premium was P21,600 on the old policy which expired on April 1, 2010.

6. Depreciation on equipment was computed at P58,000 for 2010.

7. Unpaid vendor’s invoices for food purchases totaled P88,000 at December 31, 2010

8. Accrued expenses at December 31, 2009 and December 31, 2010 were as follows:

12/31/09 12/31/10
Salaries P 3,750 P 5,100
Taxes and licenses 2,500 4,000
Utilities 2,750 4,500

QUESTIONS:

Based on the above and the result of your engagement, you are asked to provide the
following information under the accrual basis:

1. Balay Malay, capital, 12/31/09

a. P 389,150 c. P 339,250
b. P 391,900 d. P 336,500

2. Profit for the year ended December 31, 2010

a. P 485,750 c. P 547,400
 b. P 494,750 d. P 534,750

3. Balay Malay, capital, 12/31/10

a. P 646,650 c. P 643,900
b. P 591,250 d. P 634,900

4. Total assets at December 31, 2010

a. P 685,000 c. P 724,000
b. P 765,000 d. P 754,000

5. Total liabilities at December 31, 2010

a. P 10,100 c. P 105,500
b. P 101,600 d. P 96,500

Answers: 1. A 2. B 3. C 4. D 5. A

Suggested Solution:

Question No. 1

Unadjusted Balay Malay, capital, 12/31/09 P 336,500

Prepaid rent, 12/31/09 (P75,000x9/12) 56,250
Prepaid insurance, 12/31/09 (P21,600x3/12 5,400
Accrued expenses, 12/31/09 ( 9,000)
Adjusted Balay Malay, capital, 12/31/09 P 389,150

Question No. 2

Sales (P1,870,000 – P45,000 + P79,000) P

1,904,000
Less: Cost of sales (see schedule) 837,00
0
Gross profit 1,067,00
0
Expenses:
Salaries (P295,000 – P3,750 + P5,100) P 296,350
Taxes and licenses (P29,000 – P2,500 + P4,000) 30,500
Rent [P84,000 + (P75,000x9/12) – (P84,000x9/12)] 77,250
Miscellaneous 39,000
Insurance [P24,000 + (P21,6090x3/12) – 23,400
(P24,000x3/12)]
Utilities (P35,000 – P2,750 + P4,500) 36,750
Doubtful accounts 11,000
Depreciation 58,000 572,25
0
Profit P
494,750

Cost of sales schedule:

Inventory, 1/1/10 P 200,000
Purchases (P827,000 – P48,000 + P88,000) 867,000
Total goods available for sale 1,067,000
Less: inventory, 12/31/10 230,000
Cost of sales P 837,000

Question No. 3

Adjusted Balay Malay, capital, 12/31/09 P 389,150

Profit for 2010 (see no. 2) 494,750
Balay Malay, drawing ( 240,000)
Adjusted Balay Malay, capital, 12/31/10 P 643,900

Question No. 4

Cash P 185,000
Accounts receivable, net (P79,000 – P11,000) 68,000
Inventory 230,000
Prepaid rent (P84,000x9/12) 63,000
Prepaid insurance (P24,000x3/12) 6,000
Equipment, net [P350,000 + (P90,000 + P58,000)] 202,000
Total assets, 12/31/10 P 754,000

Question No. 5

Accounts payable P 88,000

Withholding tax payable 8, 500
Salaries payable 5 ,100
Taxes and licenses payable 4,000
Utilities payable 4,500
Total liabilities, 12/31/10 P 110,100

Alternative computation:

Total assets, 12/31/10 P 754,000

Less: Balay Malay, capital, 12/31/10 643,900
Total liabilities, 12/31/10 P110,100

PROBLEM 7 – Cash to Accrual

(Ocampo)

Presented below is the information pertaining to PRTC Stationery Supply, a calendar-year

sole proprietorship owned by Mr. Excel. The business maintains its books on the cash basis
except that, at year-end, the closing inventory and depreciation are recorded. On December
31, 2010, after recording the ending inventory and depreciation, and closing the nominal
accounts, Excel had the following general ledger trial balance:

PRTC Stationery Supply

Trial Balance
December 31, 2010

Debit Credit
Cash P 165,000
Merchandise inventory 390,000
Equipment 525,000
Accumulated depreciation P 205,000
Note payable, bank 100,000
Withholding tax payable 13,000
Excel, capital ___________ 762,000
P 1,080,000 P 1,080,000

During the last quarter of 2010, Mr. Excel and Ms. You, an outside investor, agreed to
incorporate the business under the name of You Excel Stationers, Inc. Excel will receive
10,000 shares for his business, and You will pay P860,000 cash for her 10,000 shares. On
January 1, 2011, they received the certificate of incorporation for You Excel Stationers, Inc.
and the corporation issued 10,000 of ordinary shares each to Excel and You for the above
consideration. The agreement between Excel and You requires that the December 31, 2010
statement of financial position of the proprietorship should be converted to the accrual
basis, with all assets and liabilities stated at the current fair values, including Excel’s
goodwill implicit in the terms of the ordinary shares issuance.

Additional information is as follows:

1. Amounts due from customers totaled P235,000 at December 31, 2010. A review of
collectability disclosed that an allowance for doubtful accounts of P33,000 is required.

2. The P390,000 merchandise inventory is based on a physical count of goods priced at

cost. Unsalable damaged goods costing P25,000 are included in the count. The current
fair value of the total merchandise inventory is P 450,000.

3. On July 1, 2010, Excel paid P38,000 to renew comprehensive insurance coverage for one
year.

4. The P100,000 note payable is dated July 1, 2010, bears interest at 12%, and is due July
1, 2011.

5. Unpaid vendors’ invoices totaled P305,000 at December 31, 2010.

6. During January 2011, final payroll tax returns filed for PRTC Stationery Supply required
remittances totaling P21,000.

7. Not included in the trial balance is the P35,000 principal balance at December 31, 2010
of the three-year loan to purchase the delivery van on December 31, 2008. The debt was
assumed by the corporation on January 1, 2011. The current fair value of the used
equipment is P400,000, including the delivery van.

8. You Excel Stationers, Inc. has P75,000, P50 par, authorized shares.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. Excel’s goodwill implicit in the issuance of 10,000 ordinary shares for his business is
a. P 116,000 c. P 85,000
b. P 91,000 d. P 50,000

2. The share premium on the issuance of the 20,000 ordinary shares is

a. P 635,000 c. P 670,000
b. P 720,000 d. P 664,000

3. The total assets of You Excel Stationers, Inc. on January 1, 2011 is

a. P 2,181,000 c. P 2,187,000
b. P 2,146,000 d. P 1,162,000
4. The total liabilities of You Excel Stationers, Inc. on January 1, 2011 is
a. P 467,000 c. P 426,000
b. P 461,000 d. P 432,000

5. The total equity of You Excel Stationers, Inc. on January 1, 2011 is

a. P 1,720,000 c. P 1,635,000
b. P 1,000,000 d. P 1,670,000

Answers: 1. B 2. B 3. C 4. A 5. A

Suggested Solutions:

Fair value of 10,000 shares issued

(equal to the cash paid by Ms. You) P 860,000
Less: fair value of Mr. Excel’s net assets:
Fair value of identifiable assets transferred:
Cash P 165,000
Accounts receivable, net (P235,000 – P33,000) 202,000
Merchandise inventory 450,000
Prepaid insurance (P38,000x6/12) 19,000
Equipment 400,000 1,236,000
Less: fair value of liabilities assumed:
Note payable, bank P 100,000
Accounts payable 305,000
Withholding tax payable 21,000
Loan payable (delivery van) 35,000
Interest payable (P100,000x12%x6/12) 6,000 467,000
769,000
Goodwill P 91,000

Question No. 2

Cash paid by Ms. You P

860,000
Fair value of his net assets of Mr. Excel, including 860,00
goodwill 0
Total consideration received 1,720,00
0
Less: par value of shares issued (20,000 shares x P50) 1,000,00
0
Share premium P
720,000

Question No. 3

Cash (P165,000 + P860,000) P

1,025,000
Accounts receivable, net (P235,000 – P33,000) 202,00
0
Merchandise inventory 450,00
0
Prepaid insurance (P38,000x6/12) 19,00
0
Equipment 400,00
 0
Goodwill 91,00
0
Total assets, 1/1/11 P
2,187,000

Question No. 4

Note payable, bank P 100,000

Accounts payable 305,000
Withholding tax payable 21,000
Loan payable (delivery van) 35,000
Interest payable (P100,000 x 12% x 6/12) 6,000
Total liabilities, 1/1/11 P 467,000

Question No. 5

Share capital P
1,000,000
Share premium 720,00
0
Total equity, 1/1/11 P
1,720,000

PROBLEM 8 – Single Entry (Ocampo)

We were given the following information which were obtained from the single-entry records
of Poging Bagsik:

January 1 June 30
Interest receivable P 12,000 P 9,600
Accounts receivable 540,000 1,056,000
Notes receivable 180,000 144,000
Merchandise inventory 456,000 120,000
Store and office equipment (net) 390,000 360,000
Prepaid operating expense 30,000 26,400
Interest payable 3,600 6,000
Accounts payable 420,000 300,000
Notes payable 120,000 144,000
Accrued operating expenses 32,400 60,000

An analysis of the cashbook shows the following:

Balance, January 1 P 180,000

Receipts:
Interest income P 24,000
Accounts receivable 432,000
Notes receivable 180,000
Investment by Bagsik 72,000 708,000
888,000

Disbursements:
Interest expense P 18,000
Accounts payable 624,000
Notes payable 96,000
 Operating expense 204,000 942,000
Balance, June 30 – bank overdraft (P 54,000)

QUESTIONS:

Based on the above and the result of your audit, determine the following for the six months
ended June 30, 2010:

1. Sales
a. P 948,000 c. P 1,092,000
b. P 132,000 d. P 1,164,000

2. Purchases
a. P 624,000 c. P 816,000
b. P 576,000 d. P 504,000

3. Operating expense, excluding depreciation

a. P 172,800 c. P 228,000
b. P 231,600 d. P 235,200

4. Net loss
a. P 4,800 c. P 152,400
b. P 132,000 d. P 1,221,600

Answers: 1. C 2. A 3. D 4. B

Suggested Solution:

Question No. 1
Receipts from accounts receivable P 432,000
Receipts from notes receivable 180,000
Accounts receivable, 1/1 ( 540,000)
Accounts receivable, 6/30 1,056,000
Notes receivable, 1/1 ( 180,000)
Notes receivable, 6/30 144,000
Sales P 1,092,000
Question No. 2

Disbursements from accounts payable P 624,000

Disbursements from notes payable 96,000
Accounts payable, 1/1 ( 420,000)
Accounts payable, 6/30 300,000
Notes payable, 1/1 ( 120,000)
Notes payable, 6/30 144,000
Purchases P 624,000

Question No. 3

Disbursements for operating expenses P 204,000

Prepaid operating expenses, 1/1 30,000
Prepaid operating expenses, 6/30 ( 26,400
)
Accrued operating expenses, 1/1 ( 32,400
)
 Accrued operating expenses, 6/30 60,000
Operating expenses, excluding depreciation P 1,092,000

Question No. 4

Sales P
1,092,000
Less: cost of sales:
Merchandise inventory, 1/1 P 456,000
Purchases 624,000
Total goods available for sale 1,080,000
Less: merchandise inventory, 6/30 120,000 960,00
0
Gross profit 132,00
0
Operating expenses ( 235,000
)
Depreciation expense (P390,000-P360,000) ( 30,000
)
Interest income (P24,000-P12,000+P9,600) 21,60
0
Interest expense (P18,000-P3,600+P6,000) ( 20,400
)
Net loss (P
132,000)

PROBLEM 9 – Single Entry (Ocampo)

Your audit of Camiguin Company disclosed 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 for sales. Accounts receivable were recorded only by
keeping a copy of the ticket, and this copy was given to the customer when he paid his
account.

On January 2, 2010 Camiguin started business and issued 108,000 ordinary shares with
P100 par, for the following considerations:

Cash P
900,000
Building (useful life, 15 years) 8,100,00
0
Land 2,700,00
0
P11,700,00
0

An analysis of the bank statement showed total deposits, including the original cash
investment, of P6,300,000. The balance in the bank statement on December 31, 2010, was
P450,000, but there were checks amounting to P90,000 dated in December but not paid by
the bank until January 2011. Cash on hand on December 31, 2010 was P225,000 including
customers’ deposit of P135,000.

During the year, Camiguin Company borrowed P900,000 from the bank and repaid P225,000
and P45,000 interest.
Disbursements paid in cash during the year were as follows:

Utilities P 180,000
Salaries 180,000
Supplies 360,000
Dividends 270,000
P 990,000

An inventory of merchandise taken on December 31, 2010 showed P1,359,000 of

merchandise.

Tickets for accounts receivable totaled P1620,000 but P90,000 of that amount may prove
uncollectible.

Unpaid suppliers invoices for merchandise amounted to P630,000.

Equipment with a cash price of P720,000 was purchased in early January on a one-year
installment basis. During the year, checks for the down payment and all maturing
installments totaled P801,000. The equipment has a useful life of 5 years.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Disregard income
taxes)

1. Payments for merchandise purchases in 2010

a. P 4,869,000 c. P 3,654,000
b. P 3,879,000 d. P 3,969,000

2. Collections from sales in 2010

a. P 6,480,000 c. P 5,580,000
b. P 7,380,000 d. P 4,500,000

3. Net income for the year ended December 31, 2010

a. P 2,430,000 c. P 2,655,000
b. P 1,440,000 d. P 2,340,000

4. Equity as of December 31, 2010

a. P 13,860,000 c. P 14,085,000
b. P 12,870,000 d. P 13,770,000

5. Total assets as of December 31, 2010

a. P 14,175,000 c. P 14,6374,800
b. P 14,085,000 d. P 14,310,000

Answers: 1. A 2. C 3. B 4. B 5. D
Suggested Solutions:

Question No.1

Total deposits P 6,300,000

Less: adjusted cash in bank:
Balance per bank statement P 450,000
 Less: outstanding checks 90,000 360,000
Total check disbursements 5,940,000
Less: other check disbursements:
Payment of loan 225,000
Payment of interest loan 45,000
Payment for equipment 801,000 1,071,000
Payments for merchandise purchases P 4,869,000

Question No. 2

Total deposits P 6,300,000

Less: deposits other than collections:
Cash investment P 900,000
Proceeds from bank loan 900,000 1,800,000
Collections deposits in the bank 4,500,000
Add: collections not deposited:
Cash on hand, 12/31/10 225,000
Add: disbursements in cash 990,000
Total 1,215,000
Less: customers’ deposit 135,000 1,080,000
Total collections from sales P5,580,000

Question No. 3

Sales (P5,580,000+P1,620,000) P 7,200,000

Less: cost of sales:
Purchases (P4,869,000+P630,000) P 5,499,000
Less: inventory, 12/31/10 1,359,000 4,140,000
Gross profit 3,060,000
Less: expenses:
Utilities 180,000
Salaries 180,000
Supplies 360,000
Doubtful accounts 90,000
Depreciation-building (P8,100,000/15) 540,000
Depreciation-equipment (P720,000/5) 114,000
Interest expense [P45,000+(P801,000-P720,000)] 126,000 1,620,000
Net income P1,440,000

Question No. 4

Share capital (P108,000 shares x P100) P

10,800,000
Share premium (P11,700,000 – P10,800,000) 900,00
0
Retained earnings (P1,440,000 – P270,000) 1,170,00
0
Total equity P
12,870,000

Question No. 5

Current assets:
Cash (P360,000 + P225,000) P 585,000
Accounts receivable, net (P1,620,000 – P90,000) 1,530,000
 Inventory 1,359,000 P 3,474,000
Noncurrent assets:
Land 2,700,000
Building, net (P8,100,000 – P540,000) 7,560,000
Equipment, net (P720,000 – P144,000) 576,000 10,836,00
0
Total assets P
14,310,000

PROBLEM 10 – Single Entry

(Ocampo)

Recto Legarda, a retired engineer, formed Ralph Loren Trading on July 1, 2009, investing his
retirement pay of P400,000 in the business. To cut on operating expenses, he did not hire an
accountant; as a consequence, his accounting records were incomplete. On January 1, 2010,
his cash balance was P410,000 and on December 31, 2010, it was P430,000. He wanted an
idea of the result of his operations for the year ended December 31, 2010. The following
information and other data were gathered for the year 2010:

Jan. 1 Dec. 31
Accounts receivable – trade P130,000 P170,000
Money market placement 20,000 15,000
Accrued interest on money market placement 800 600
Merchandise inventory 175,300 280,400
Prepaid rent expense 6,000 4,500
Delivery equipment (@ cost) 120,000 120,000
Store fixtures (@ cost) 50,000 50,000
Rent deposits 12,000 6,000
Other assets 1,000 1,000
Accounts payable – trade 390,000 480,000
Notes payable (delivery equipment) 100,000 60,000
Accrued interest on notes payable 12,000 8,000
Accrued operating expenses (excluding rent) 8,000 10,000

Legarda was able to arrange with the owner of the building that his rental deposit be
reduced by 50% and the amount applied against rentals in 2010.
From the 2010 cash memoranda of Recto Legarda, you were able to extract the following:

Cash received from:

Sales P380,000
Interest on money market placement 4,000
Collections of accounts receivable 1,328,000
Matured money market placement, not rolled over 5,00
0
Total P1,717,00
0
Cash payments for:
Merchandise purchases P210,000
Interest on notes payable 25,000
Trade payables 940,000
Notes payable (delivery equipment) 40,000
Operating expenses 470,000
Recto Legarda, drawing 12,00
0
Total P1,697,00
 0

You have established that the fixed assets have not been depreciated since they were
acquired on July 1, 2009. Estimated life of these assets is ten years.

QUESTIONS:

Based on the above and the result of your audit, determine the following for 2010:
(Disregard income taxes)

1. Total sales
a. P 1,368,000 c. P 1,668,000
b. P 1,748,000 d. P 988,000

2. Cost of sales
a. P 1,134,900 c. P 850,000
b. P 1,060,000 d. P 924,900

3. Total operating expenses

a. P 479,500 c. P 492,500
b. P 489,000 d. P 496,500

4. Net profit
a. P 99,400 c. P 106,900
b. P 116,600 d. P 384,300

5. Recto Legarda, Capital, December 31, 2010

a. P 406,600 c. P 494,000
b. P 499,400 d. P 519,500

Answers: 1. B 2. A 3. D 4. A 5. C

Suggested Solutions:

Question No. 1

Cash sales P 380,000

Receipts from accounts receivable 1,328,000
Accounts receivable, 1/1 ( 130,000)
Accounts receivable, 12/31 170,00
0
Total sales P 1,748,000

Question No. 2

Merchandise inventory, 1/1 P 175,300

Purchases:
Cash purchases P 210,000
Disbursements for accounts payable 940,000
Accounts payable, 1/1 (390,000)
Accounts payable, 12/31 480,000 1,240,000
Total goods available for sale 1,415,300
Less: merchandise inventory, 12/31 280,400
Cost of sales P1,134,900
 Question No. 3

Operating expenses (P470,000-P8,000+P10,000) P 472,000

Rent [P6,000+(P12,000x50%)+P4,500] 7,500
Depreciation – delivery equipment (P120,000/10) 12,000
Depreciation – store fixtures (P50,000/10) 5,000
Total operating expenses P 496,500

Question No. 4

Sales P 1,748,000
Less: cost of sales 1,134,900
Gross profit 613,100
Operating expenses ( 496,500)
Interest income (P4,000-P800+P600) 3,800
Interest expense (P25,000-P12,000+8,000) ( 21,000)
Net profit P 99,400

Question No. 5

Cash P 430,000
Accounts receivable – trade 170,000
Money market placement 15,000
Accrued interest on money market placement 600
Merchandise inventory 280,400
Prepaid rent expense 4,500
Delivery equipment (@ cost) 120,000
Accumulated depreciations – delivery equipment
(P120,000 x 1.5/10) ( 18,000)
Store fixtures (@ cost) 50,000
Accumulated depreciations – store fixtures
(P50,000 x 1.5/10) ( 7,500)
Rent deposit 6,000
Other assets 1,000
Total assets, 12/31/10 P1,052,000

Accounts payable – trade P 480,000

Notes payable (delivery equipment) 60,000
Accrued interest on notes payable 8,000
Accrued operating expense 10,000
Total liabilities, 12/31/10 P 558,000

Recto Legarda, Capital, 12/31/10 P 494,000

PROBLEM 11 – Correction of Errors

(Ocampo)

Misamis Company’s December 31, year-end financial statement contained the following
errors:
 December 31, 2009 December 31, 2010
Ending inventory P 100,000 understated P90,000 overstated
Depreciation expense P 20,000 understated

An insurance premium of P75,000 was prepaid in 2009 covering the years 2009, 2010, and
2011. The same was charged to expense in full in 2009. In addition, on December 31, 2010,
a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded
until 2011. There were no other errors during 2009, 2010, and 2011 and no corrections have
been made for any of the errors. Ignore income tax considerations.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. What is the net effect of the errors on the 2009 profit?

a. Understated by P 130,000 c. Overstated by P 70,000
b. Understated by P 155,000 d. No effect

2. What is the net effect of the errors on the 2010 profit?

a. Overstated by P 55,000 c. Overstated by P 215,000
b. Overstated by P 30,000 d. Understated by P 45,000

3. What is the net effect of the errors on the company’s working capital at December 31,
2010?
a. Understated by P P95,000 c. Overstated by P 90,000
b. Understated by P 70,000 d. No effect

4. What is the net effect of the errors on the balance of the company’s retained earnings at
December 31, 2010?
a. Understated by P 75,000 c. Overstated by P 110,000
b. Understated by P 50,000 d. No effect

5. What is the net effect of the errors on the company’s working capital at December 31,
2011?
a. Overstated by P 65,000 c. Understated by P 160,000
b. Understated by P 95,000 d. No effect

Answers: 1. A 2. A 3. A 4. A 5. D

Suggested Solutions:

Questions No. 1 to 5

Profit Profit WC RE WC
2009 2010 12/31/10 12/31/10 12/31/11
12/31/09
inventory
understated (100,000) 100,000 - -
12/31/10
inventory
overstated - 90,000 90,000 90,000
2009 depreciation
understated 20,000 - - 20,000
Insurance paid in
 2009 in 3 years (50,000) 25,000 (25,000) (25,000)
Sale of a fully
depreciated
machinery in
2010
recorded in 2011 - (160,000) (160,000) (160,000)
Over (under) (130,000) 55,000 (95,000) (75,000)

PROBLEM 12 – Correction of Errors

(Ocampo)

You were engaged by Lanao Company to audit its financial statements for the first time. In
examining the books, you found out that certain adjustments had been overlooked at the
end of 2009 and 2010. You also discovered that other items had been improperly recorded.
These ommissions and other failures for each year are summarized below:

12/31/10 12/31/09
Salaries payable P 780,000 P 873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
Advances form customers (Collections from 561,000 470,400
customers had been recorded as sales but
should have been recognized as advances
from customers because goods were not
shipped until the following year)
Machinery (Capital expenditure had been 522,000 564,000
recorded as repairs but should have been
charged to Machinery; the depreciation
rate is 10% per year, but depreciation in
the year of expenditure is to be recognized
At 5%)

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. What is the net effect of the errors on the 2009 profit?

a. Understated by P 775,800 c. Understated by P 1,236,600
b. Overstated by P 165,000 d. Overstated by P 80,400

2. What is the net effect of the errors on the 2010 profit?

a. Understated by P 376,500 c. Understated by P 320,100
b. Overstated by P 324,300 d. Overstated by P 380,700

3. What is the net effect of the errors on the company’s working capital at December 31,
2010?
a. Understated by P 301,800 c. Understated by P 265,800
b. Overstated by P 119,400 d. Overstated by P820,200

4. What is the net effect of the errors on the balance of the company’s retained earnings at
December 31, 2010?
a. Understated by P 155,100 c. Understated by P 265,800
b. Overstated by P 930,900 d. Understated by P 855,900
Answers: 1. B 2. C 3. D 4. A
Suggested Solutions:

Question No. 1 to 4

Profit Profit WC RE
2009 2010 12/31/10 12/31/10
Salaries payable
2009 873,600 (873,600)
2010 780,000 780,000 780,000
Interest receivable
2009 (259,200) 259,200
2010 (213,000) (213,000) (213,000)
Prepaid insurance
2009 (384,000) 384,000
2010 (307,800) (307,800) (307,800)
Advances from customers
2009 470,400 (470,400)
2010 561,000 561,000 561,000
Machinery
2009 (564,000) (564,000)
28,200 56,400 84,600
2010 (522,000) (522,000)
26,100 26,100
Over (under) 165,000 (320,100) 820,200 (155,100)

PROBLEM 13 – Correction of Errors

(Ocampo)

The Davao Company engaged you in 2010 to examine its books and records and to make
whatever adjustments are necessary.

Your examination disclosed the following:

a) Prior to any adjustments, the Retained earnings account is reproduced below:

RETAINED EARNINGS

Date Particulars Debit Credit Balance

2008
Jan. 1 Balance P 580,000
Dec. 31 Profit for the year 310,000 890,000
2009
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of par 90,000 840,000
Aug. 30 Gain on retirement of preferred
Stock at less than issue price 64,500 904,500
Dec. 31 Loss for the year 205,000 699,500
2010
Jan.31 Dividends paid 100,000 599,500
Dec. 31 Loss for the year 165,500 P 434,000

b) The company failed to properly recognize accruals and prepayments. Selected accounts
revealed. The following information:
 2007 2008 2009 2010
1. Prepaid expenses P 8,500 P 6,200 P 7,400 P 9,500
2. Accrued expenses 5,400 7,300 8,700 9,000
3. Unearned income 6,900 7,800 8,900 9,600
4. Accrued income 4,700 5,600 6,200 7,800

c) Dividends had been declared on December 31 in 2008 and 2009 but had not been
entered in the books until paid.

d) The company purchased a machine worth P270,000 on April 30, 2007. The company
charged the purchase to expense. The machine has an estimated useful life of 3 years.
The company uses the straight line method and residual values are deemed immaterial.

e) The company received a transportation equipment as donation from one of its

shareholders on September 30, 2009. The equipment was used to deliver goods. To
customers. The equipment costs P750,000 and has a remaining life of 3 years on the
date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred
for registering the transfer of ownership. The company did not record the donation on its
books. The expenses paid related to the donated equipment were charged to expense.

f) The physical inventory of merchandise had been understated by P64,000 and by P44,500
at the end of 2008 and 2010, respectively.

g) The merchandise inventories at the end of 2009 and 2010 did not include merchandise
that was then in transit shipped FOB shipping point. These shipments of P43,400 and
P32,600 were recorded as purchases in January 2010 and 2011, respectively.

QUESTIONS:

Based on the above and the result of your audit, determine the following for 2010:
(Disregard income taxes)

1. Retained earnings, 12/31/07

a. P 580,900 c. P 790,900
b. P 850,900 d. P 760,900

2. Profit for 2008

a. P 369,800 c. P 279,800
b. P 215,800 d. P 373,100

3. Retained earnings, 12/31/08

a. P 976,700 c. P 930,700
b. P 860,700 d. P 720,700

4. Loss for 2009

a. P 269,700 c. P 349,700
b. P 379,700 d. P 359,700

5. Retained earnings, 12/31/09

a. P 481,000 c. P 341,000
b. P 411,000 d. P 241,000
6. Loss for 2010
a. P 118,300 c. P 148,300
b. P 228,300 d. P 178,300

7. Retained earnings, 12/31/10

a. P 302,700 c. P 252,700
b. P 362,700 d. P 332,700

Answers: 1. C 2. C 3. C 4. C 5. A 6. B 7. C

Suggested Solutions:

Questions No. 1 to 7

RE Profit Loss Loss

2007 2008 2009 2010
Unadjusted balances P 580,000 P 310,000 (P (P
205,000) 165,500)
(b.1) Prepaid expenses
2007 8,500 (8,500)
2008 6,200 (6,200)
2009 7,400 (7,400
)
2010 9,500

(b.2) Accrued expenses

2007 (5,400) 5,400
2008 (7,300) 7,300
2009 (8,700) 8,700
2010 (9,000
)

(b.3) Unearned income

2007 (6,900) 6,900
2008 (7,800) 7,800
2009 (8,900) 8,900
2010 (9,600
)

(b.4) Accrued income

2007 4,700 (4,700)
2008 5,600 (5,600)
2009 6,200 (6,200
)
2010 7,800

(d) Purchase of machinery,

Expensed on April 30, 2007 270,000
Unrecorded depreciation (60,000) (90,000) (90,000) (30,000)

(e) Unrecorded transportation

Equipment received as donation on
9/30/09
Expenses paid 30,000
Unrecorded depreciation (20,000) (80,000)
 (f) Understatement of inventory
2008 64,000 (64,000)
2010 44,500
Understatement of inventory
and
purchases
2009 43,400 (43,400)
(43,400) 43,400
2010 32,600
(32,600)
Adjusted balances P 790,900 P 279,800 (P (P
349,700) 228,300)

Retained earnings, 1/1/08, as adjusted P 790,900 (1)

Net income for 2008 279,800 (2)
Dividends declared ( 140,000)
Retained earnings, 12/31/08 930,700 (3)
Net loss for 2009 ( 349,700) (4)
Dividends declared ( 100,000)
Retained earnings, 12/31/09 481,000 (5)
Net loss for 2010 ( 228,300) (6)
Retained earnings, 12/31/10 P 252,700 (7)

PROBLEM 14 – Correction of Errors

(Ocampo)

Cotabato Corporation’s current assets and liabilities section of the statement of financial
position as of December 31, 2010 appear as follows:

Current assets
Cash P 1,200,000
Accounts receivable P 2,670,000
Less: allowance for doubtful accounts 210,000 2,460,000
Inventories 5,130,000
Prepaid expenses 270,000
Total current assets P 9,060,000

Current liabilities
Accounts payable P 1,830,000
Notes payable 2,010,000
Total current liabilities P 3,840,000

The following errors in the corporation’s accounting have been discovered:

a) January 2011 cash disbursements entered as of December 2010 included payments of

accounts payable in the amount of P1,170,000 , on which a cash discount of 2% was
taken.

b) The inventory included P810,000 of merchandise that have been received at December
31 but for which no purchase invoices have been received or entered. Of this amount
P360,000 had been received on consignment; the remainder was purchased F.O.B.
destination, terms 2/10, n/30.
c) Sales for the first four days in January 2011 in the amount of P900,000 were entered in
the sales book as of December 31, 2010. Of these, P645,000 were sales on account and
the remainder were cash sales.

d) Cash, not including cash sales, collected in January 2011 and entered as of December
31, 2010, totaled P1,059,720. Of this amount, P699,720 was received on account after
cash discounts of 2% had been deducted; the remainder represented the proceeds of a
bank loan.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. Adjusted cash balance as of December 31, 2010

a. P 1,031,880 c. P 1,055,280
b. P 641,880 d. P 1,286,880

2. Adjusted accounts receivable balance as of December 31, 2010

a. P 2,739,000 c. P 2,724,720
b. P 2,529,000 d. P 3,129,000

3. Adjusted accounts payable balance as of December 31, 2010

a. P 3,000,000 c. P 2,976,600
b. P 2,190,000 d. P 3,450,000

4. Adjusted working capital as of December 31, 2010

a. P 4,160,880 c. P 3,950,880
b. P 3,500,880 d. P 3,524,280

5. Net misstatement in the reported profit for the year ended December 31, 2010 as a
result of the errors
a. P 1,269,120 c. P 1,719,120
b. P 1,700,880 d. P 1,250,880

Answers: 1. A 2. A 3. D 4. B 5. C

Suggested Solutions:

Question No. 1
Unadjusted cash balance P 1,200,000
January cash payments (P1,170,000 x .98) 1,146,600
January cash sales (P900,000 – P645,000) (255,000)
January cash collections and loan proceeds (1,059,720)
Adjusted cash balance P 1,031,880

Question No. 2
Unadjusted accounts receivable P 2,670,000
January sales on account (645,000)
January collections on AR (P699,720/.98) 714,000
Adjusted accounts receivable P 2,739,000

Question No. 3
Unadjusted accounts payable P 1,830,000
January payments on accounts payable 1,170,000
 Unrecorded purchases (P810,000 – P360,000) 450,000
Adjusted accounts payable P 3,450,000

Question No. 4
Current assets
Cash (see no. 1) P 1,031,880
Accounts receivable (see no. 2) 2,739,000
Allowance for doubtful accounts (210,000)
Inventories (P5,130,000 – P360,000) 4,770,000
Prepaid expenses 270,000 P 8,600,880
Less: current liabilities
Accounts payable (see no. 3) 3,450,000
Notes payable [2,010,000 – (P1,059,720 – 1,650,000 5,100,000
P699,720)]
Working capital P 3,500,880

Question No. 5
Over (under
January purchase discounts (P1,170,000 x .02) P 23,400
Goods held on consignment 360,000
Unrecorded purchases (P810,000 – P360,000) 450,000
January sales 900,000
January sales discounts [(P699,720/.98) x .02) ( 14,280)
Net misstatement P 1,719,120