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PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE – subsidiary ledger
5. FALSE
6. TRUE
7. FALSE – credit to a liability account for ₱7. The AJE is as
follows:
Income…………………….7
Unearned income…………….7
8. TRUE
9. FALSE – Asset method
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. C
3. B
Selected explanation:
Statement III is incorrect - Transaction approach refers to the
computation of profit or loss as the difference between income
and expenses.

4. D
5. E
6. B
7. D – choice (c) refers to chart of accounts
8. C
9. B
10. D
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Trial balance
Dr. Cr.

Erroneous cash 54,000 45,000 Corresponding credit

Corresponding credit of
Debit to accounts the debit to accounts
receivable omitted 5,000 5,000 receivable

Corresponding credit of
Prepaid rent omitted the debit to Prepaid
and listed as credit 34,000 34,000 rent

Prepaid assets listed as

34,000 a credit

Corresponding debit Interest payable

of the credit to omitted and listed as
Interest payable 4,000 4,000 debit
Interest payable
listed as debit 4,000
Total Debits 62,000 118,000 Total Credits
Difference, excess of
total credits over total
56,000 debits

2. B
Dr. Cr.
I. "Should be" 58,762 58,762 "Should be"
"Entry
58,726 made"
II. Sales discount not posted 52 52
III. No net effect on trial
balance - -
IV. Accounts receivable posted
twice 250 250
250
Totals 59,262 59,028
Excess debits 234
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3. A
Solution:
Trial balance
Dr. Cr.
Unadjusted balance 15,100 14,500 Unadjusted balance
(a) debit to AR not
posted 2,100
(b) credit to purchases (b) erroneous credit to
not made (10,500) (10,500) accounts payable
(c) erroneous credit to (c) credit to sales
accounts receivable 26,000 26,000 unrecorded
(d) overstatement of
prepaid rent (18,500 -
15,800) (2,700)
Adjusted balance 30,000 30,000

4. A
Solution:
Total credits in adjusted TB (which is equal to total
debits) 2,376,000
composed of real and nominal accounts
Total debits in statement of financial position
columns (1,440,800)
composed of real accounts only
Total debits representing nominal accounts only 935,200
Total credits of nominal accounts (1,234,000)
Profit – excess of nominal credits over nominal debits 298,800

5. D

6. A
Expense

prepayments 80,000 35,000 adjustment (squeeze)

45,000 adjusted balance
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AJE:
Prepaid asset 35,000
Expense 35,000

7. A

8. C
Solution:
Dr. Cr.
Cash 7,540
Accounts receivable 8,060
Equipment 42,120
Accumulated depreciation 21,762 a
Accounts payable 6,370
Owner's equity 29,588 b
Totals 57,720 57,720

Accumulated depreciation -
beg. 21,060
Depreciation expense 702
Accumulated depreciation - end. 21,762 a

Owner's equity - beg. 28,600

Sales 12,480
Depreciation expense (702)
Advertising expense (390)
Other expense (4,940)
Owner's drawings (5,460)
Owner's equity - end. 29,588 b

9. D In a post-closing trial balance, all nominal accounts are

zeroed-out.

10. B
Solutions:
 The transactions in 20x2 are recorded as follows:
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Sept. Cash 500,000

1,
Note receivable (2M ÷ 4) 500,000
20x2
to record the first installment payment
of principal on the note
Sept. Cash (2M x 12%) 240,000
1,
Interest income 240,000
20x2
to record the collection of interest using
nominal account (i.e., income method)

 Adjusted interest income for 20x2:

Interest income from Jan. 1 to Aug. 31, 20x2
(2M x 12% x 8/12) 160,000
Interest income from Sept. 1 to Dec. 31, 20x2
(2M – 500K) x 12% x 4/12 60,000
Adjusted balance of interest income in 20x2 220,000

 Adjusted balance of interest receivable as of Dec. 31, 20x2:

(2,000,000 – 500,000) x 12% x 4 /12 60,000

Adjusting entry:
Dec. 31, Interest income 20,000
20x2
Interest receivable 20,000
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PROBLEM 4: CLASSROOM ACTIVITY

Requirement (a): Adjusting entries

1. Bad debts expense 1,000

Allowance for bad debts 1,000

2. Depreciation expense (100K ÷ 10) 10,000

Accumulated depreciation 10,000

3. Interest expense (24K x 10% x 3/12) 600

Interest payable 600

4. Rent expense 2,000

Rent payable 2,000

Requirement (b): Worksheet

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PROBLEM 5: FOR CLASSROOM DISCUSSION

1. C
2. A
3. C – an external transaction (e.g., sale, purchase, etc.) is less likely
to be overlooked compared to an internal transaction (e.g.,
growth of biological asset, etc.) because external transactions are
usually evidenced by supporting business documents (e.g., O.R.,
purchase invoice, billing statement, etc.).

4. D
Choice (a) is incorrect – Posting not transposition
Choice (b) is incorrect – Journal not ledger
Choice (c) is incorrect – Business or source documents not trial balance

5. B
6. B
7. Solution:
Trial balance
Dr. Cr.
Corresponding credit
Debit to A/R omitted 6,000 6,000 of the debit to A/R

Cash omitted and Corresponding credit

listed as credit 36,000 36,000 of the debit to cash

36,000 Cash listed as a credit

Corresponding debit Accounts payable

of the credit to omitted and listed as
Accounts payable 15,000 15,000 debit
Accounts payable
listed as debit 15,000
Total Debits 30,000 78,000 Total Credits

Difference, excess of
total credits over
48,000 total debits
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8. Solution:
Trial balance
Dr. Cr.
Unadjusted total
debits 71,850 71,550 Unadjusted total credits
(a) credit to inventory
omitted (660)
(b) debit to A/R not
made 6,000 6,000 (b) erroneous debit to A/P
(c) erroneous credit to (c) credit to interest income
interest receivable 3,600 3,600 unrecorded
(d) overstatement of
unearned rent (5,400 -
(360) 5,040)
Adjusted balance 80,790 80,790

9. Solution:

Journal entries:
Liability method Income method
May 1, 20x1 May 1, 20x1
Cash 30,000 Cash 30,000
Unearned rent 30,000 Rent income 30,000

Adjusting entries:
Liability method Income method
Dec. 31, 20x1 Dec. 31, 20x1
Unearned rent 20,000 Rent income 10,000
Rent income (30K x 8/12) 20,000 Unearned rent (30K x 4/12) 10,000
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10. Solution:

Journal entries:
Asset method Expense method
Sept. 1, 20x1 Sept. 1, 20x1
Prepaid insurance 90,000 Insurance expense 90,000
Cash 90,000 Cash 90,000

Adjusting entries:
Asset method Expense method
Dec. 31, 20x1 Dec. 31, 20x1
Insurance expense 30,000a Prepaid insurance 60,000b
Prepaid insurance 30,000 Insurance expense 60,000
a
(90,000 x 4/12) = 25,000; b (90,000 x 8/12) = 75,000

11. Solution:
Requirement (a):
Dec. 31 Sales 800,000
Gain on sale of equipment 30,000
Inventory – end. 40,000
Inventory - beg. 65,000
Purchases 200,000
Freight-in 10,000
Salaries expense 400,000
Depreciation expense 18,000
Income summary 177,000
Dec. 31 Income summary 177,000
Retained earnings 177,000

Requirement (b):
Dec. 31 Retained earnings 28,000
Dividends 28,000

Retained earnings - Jan. 1 162,000

Income summary 177,000
Dividends (28,000)
Retained earnings - Dec. 31 311,000
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12. Solutions:
The transactions in 20x2 are recorded as follows:
Sept. Note payable (3.2M ÷ 4 annual 800,000
30, installments) 800,000
20x2
Cash
to record the first installment payment of
principal on the note
Sept. Interest expense (3.2M x 12%) 384,000
30,
Cash 384,000
20x2
to record the cash payment for interest
from Sept. 30, 20x1 to Sept. 30, 20x2 using
nominal account (i.e., expense method)

 Adjusted interest expense for 20x2:

Interest expense from Jan. 1 to Sept. 30, 20x2
(3.2M x 12% x 9/12) 288,000
Interest expense from Oct. 1 to Dec. 31, 20x2
(3.2M – 800K) x 12% x 3/12 72,000
Adjusted interest expense - 20x2 360,000

 Adjusted interest payable as of Dec. 31 20x2:

(3,200,000 – 800,000) x 12% x 3/12 72,000

Requirement (a): No reversing entries made

Adjusting entry:
Dec. 31, Interest payable 24,000
20x2
Interest expense 24,000
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Requirement (b): Reversing entries are made

Reversing entry
Jan. 1, Interest payable 96,000
20x2
Interest expense 96,000
(Rev. JE)
to record the reversing entry

Adjusting entry:
Dec. 31, Interest expense 72,000
20x2
Interest payable 72,000