CHAPTER 14 CASH AND ACCRUAL BASIS TECHNICAL KNOWLEDGE To understand cash basis of accounting. To understand accrual basis of accounting. To describe the differences between cash basis and accrual basis of accounting. To be able to prepare adjustments in converting the cash basis financial statements to accrual basis financial statements. 375Methods of accounting Cash basis ; i dless of when e; ’ . received regar' are Income is respi ened when paid regardless of wet and exp! incurred. . oes not recognize account, 5 ach does . In other words, te oe accrued income, deferred income, receivable, prepaid expense. accrued expense and Accrual basis gardless of when received n earned re urred regardless of when ii ized whel , Income is recognized W/ 7 hen inc and expense is recognize paid. Thus, the essence of this approach is the recognition of accounts receivable, accounts payable, accrued income, deferred income, accrued expense and prepaid expense. Cash basis versus accrual basis Accrual basis Item Cash basis Sales Cash sales plus collections from Cash sales plus sales on customers. account. Purchases Cash purchases plus payments Cash purchases plus to trade creditors. purchases on account. Income other than sales Items received are considered Items earned are considered as income regardless of when _as income regardless of when earned. received. Expenses, in general _Items paid are treated as Items incurred are treated 85 expentes regardless of when expenses re ‘ gardless of whea incurred. paid. Depreciation Depreciation is provided Depreciation is provided er normally, normally. Nob bad debts are recorded Doubtful accounts are tres use trade receivables are as bad debts. ‘ot recognized. " 376stration gyut re c Company reported the following data which constitute @ gensed description of the business for the first year of onden f sporations ending December 31, 2020, sales sales on account 500,000 ollections from customers 3,000,000 Gor purchases 2,800,000 pases on account 7 bryos ments to trade creditors 41400 000 gelariesPad 6000 office supplies paid 200,000 r expenses paid 50,000 Interest received staal Equipment 400,000 ' The equipment was acquired on January 1 and has an* estimated useful life of 10 years with no residual value. ‘The following amounts.are properly determined on December 31: Accrued salaries payable 70,000 Office supplies unused 50,000 Accrued interest receivable 10,000 Doubtful accounts 90,000 400,000 Ending inventory $77tement Comparative income sta ABC Company income State ent a Year ended December 381, Cash basis Accrual bay is 3,300,000 3,59 Sales 8,300,000 0049 Id: Case | 200 me 23 0 Inventory December 31 (100,000 "S00 1,500,000 1,900,099 2,0000 —o.000 ; 1,800,000 1,600,099 Gross income 40,000 50,000 a Interest income 1,840,000 1,650,009 Cost of goods sold Total income * Expenses: Salaries expense -* 650,000 720,000 Office supplies expense 200,000 150,000 Other expenses 50,000 50,000 Doubtful accounts - 90,000 Depreciation 40,000 40,000 Total expenses 940,000 _1,050,000 Net income 900,000 600,000 378r Computation Cash sale Cash basis Accrual basis ‘ash sales 7 Sales on account : 500,000 . 600,000 Collections from customers 2,800. O00 3,000, am Le Total sales 3,500,000 g, Cash purchases Purchases on account _ 2, oe Payments to trade creditors 1,600,000 ee Total purchases 1,900,000 2,300,000 3, Interest received 40,000 40,000 ‘Accrued interest receivable a 10,000 Interest income 40,000 50,000 4, Salaries paid 650,000 650,000 ‘Accrued salaries payable = 70,000 Salaries expense 650,000 720,000 5. Office supplies paid 200,000 Office supplies unused (50,000), Office supplies expense 150,000 6. Depreciation (400,000/10) 40,000 40,000 Accounting problem More often than not, accounting records are maintained on a cash basis. period, adjustments are made for At the end of the accounting ° the cash basis accruals and prepayments in order to convert records to accrual records. from cash basis to accrual basis of To achieve the conversion mulas may be of help. accounting, the following for 879Computation of sales Cash sales ty Sales on account: 7 ‘Trade accounts and notes receivable, end atid Xx Collection of trade accounts and notes re Xxx Sales returns, discounts, and Pau Xx Accounts and notes receivable written 0} xXx ‘Trade notes receivable discounted (NR directly credited) akk | i Total : ve et | Less: Trade accounts and notes receivable, beginning _x x x | Total sales — accrual basis ae | Normally, the data concerning the cash sales and the Collections from customers are given. So the main problem in the formul, | is the computation of sales on account. | ‘The substance of the formula is the reconstruction of the accounts and notes receivable because the total accounts and notes receivable would represent the total sales on account. Thus, the approach is to add back all items that decreased trade receivables to the ending balance of accounts receivable and notes receivable. ‘The items that decreased receivables normally include: Collections from customers Sales returns, allowances and discounts Accounts and notes receivable written off Notes receivable discounted — when the notes receivable account is credited upon discounting, The beginning balances of accounts receivable and notes receivable are deducted because these items pertain to the preceding year and constitute sales of the prior year and that they might have been collected during the current year or some may be the subject of returns, allowances and discounts. 380Goniputation of purchases geh purchases jf Pure accounts and fe Permenetadeameeemgend aX Purchases returns, discounts, and alpbahcay x x Total a Less: Trade accounts and notes payable, beginning x x Ae Total purchases — accrual basis ie zx Normally, the data pertaining to cash purchases and payments of trade payables are given, So the main problem is the computation of purchases on account. ‘The substance of the formula is the reconstruction of the accounts and notes payable because the total accounts and notes payable would represent the total purchases on account. Thus, the approach is to add back all items that decreased trade payables to the ending balance of accounts payable and notes payable. ‘The items that decreased trade payables normally include: a. Payment of accounts payable b. Payment of trade notes payable ¢c, Purchase returns d. Purchase allowances e. Purchase discounts The beginning balances of accounts and notes payable are deducted because these items pertain to the preceding year and constitute purchases of the preceding year. The beginning balances of accounts and notes payable might have been paid during the current year or some may be the Subject of discounts, returns and allowances. 381 kK.Income other than sales Income received cash basis : : ‘Add: Deferred income ~beg! n Accrued income — ending a ’ x Total : ‘s Less: Deferred inom ~ ending a Accrued income — beginning - EX oy asis Income for the current year ~ accrual x Note that the formula involves deferred income and accrued income. ‘Deferred income Deferred income or unearned income or recollected income is income already received but not yet earned. Thus, deferred income is.a liability account. Examples are unearned rental income ahd unearned interes, income. The deferred income — beginning is added because this is received in the preceding year and earned in the current year. The deferred income — ending is deducted because this is received in advance in the current year and to be earned only in the next year. Accrued income Accrued income is income already earned but not yet received. is a receivable and therefore an asset. Examples are accrued interest receivable, accrued renté! receivable or accrued royalties receivable. Acornied income — beginning is deducted because this is alread! recugnized as income in the precedi hit i8 received only in the current Ween. ceding year althoug! inthe caren enc onig is added because this is already earn next year. ‘ough not yet received. It is to be rece! 382Expenses xpenses paid ~cash basis ‘Add: Prepaid ‘expenses ~ beginning ___ Accrued expenses—ending 2 : we “xx ess: Prepaid expenses—ending a Accrued expenses — beginning ees Expenses — accrual basis 7 = Note that the formula invoh i expenses. Ives prepaid expenses and accrued Prepaid expenses Prepaid expenses are expenses paid in advance but not yet incurred and therefore are assets, " ee Examples are prepaid-insurance, prepaid taxes, prepaid rent, prepaid interest and prepaid salaries. Prepaid expense — beginning is added because this is paid in the preceding year and only expensed in the current year. Prepaid expense — ending is deducted because this is paid in the current year and to be expensed next yéar. Accrued expenses Accrued expenses are expenses already incurred but not yet paid. These are liabilities. Examples are accrued salaries payable, accrued interest payable and accrued rental payable. Accrued expense — beginning is deducted because this is incurred in the preceding year although only paid in the current year. Accrued expense — ending is added because this is incurred in the current year and to be paid next year. 383tration otis ions on January 1, 2019, ti Bacolod Company began opera! nee per 31, 2020, the accountin ed on ‘a double entry basis but A During the year en' been employed. records have been ma cash basis of accounting has ed the following trial balance prepared from The entity provided tl a1 2 these records on December 81, 1,800,000 Cask 730,000 a 100 Equipment ; pee Purchases 4 090,000 Expenses , Interest expense 180,000 Note payable 1,500,000 Sales 5,500,000 Share capital 2,000,000 500,000 Retained earnings i ‘9,500,000 9,500,000 The entity decided to convert the accounting records to the accrual basis on December 31, 2020. 384Additional information 1. Accounts receivable December 31, 2020 December 31, 2019 sented 350,000 2, Included in sales was P100,000 deposited by a customer for merchandise to be delivered in 2020. 7 3. Accounts payable December 31, 2020 450,000 December 31, 2019 400,000 4 ce include P30,000 one-year insurance dated May 1, 5. The note payable of P1,500,000 is a one-year note issued and discounted at 12% on November 1, 2020. 6. It is estimated that 5% of the outstanding accounts receivable on December 31, 2020 may prove uncollectible. 7. Accrued expenses December 31, 2020 75,000 December 31, 2019 60,000 8. Inventory December 31, 2020 600,000 December 31, 2019 450,000 9. The equipment was acquired on January 1, 2019. The estimated life is 10 years. Adjustments are necessary on December 31, 2020 for the ‘preparation of accrual basis financial statements. 385Adjusting entries - December 31, 2020 1. Sales 350,000 Retained earnings 250.4 Unrecorded accounts receivable on December 81, 2019 collected in 2020 and credited to sales. Accounts receivable 500,000 Sales ‘ 500,00 Unrecorded accounts receivable on December 31, 2020. 2. Sales 4 100,000 Advances from customer 100,000 Customer deposit erroneously credited tosales 3. Retained earnings ‘ 400,000 Purchases 400,000 Unrecorded accounts payable on Dedember 31, 2019 paid in 2020.and debited to purchases. Purchases 450,000 Accounts payable 450,000 Unrecorded accounts payable on December 31, 2020. 4. Prepaidinsurance (30,000 x 4/12) 10,000 . Expenses 10,000 Unexpired premium from January 1, 2021 to May 1, 2021 5. Prepaid interest ; 150,000 Interest expense ‘ Prepaid interest from January 1 to November 1, 2021 (180,000x 10/12) 150,000 |. Doubtfulaccounts (5% x P500,000) 25,000 Allowance for doubtful accounts : 25,000 2 386‘Accrued expenses > 76,000 Accrued expenses on December 31, 2020 Retained earnings Expenses Unrecorded accrued ex; Penses December 31, 2019 paid in 2020 and charged to expenses, 60,000 g, Inventory -December 31, 2020 600,000 Income summary Unrecorded inventory on December 31, 2020. Inventory — December 31, 2019 450,000 Retained earnings Unrecorded inventory on December 31, 2019. 9, Retained earnings 300,000 Depreciation 300,000 ‘Accumulated depreciation Depreciation for 2020 and unrecorded depreciation for 2019 (P3,000,000 divided by 10 years, equals P300,000 per year). 387 75,000 60,000 600,000 450,000 600,000N Computation of sales 5,5 Salesper book ber 31, 2020 son ‘Add: Accounts receivable - Decem Foon 000,009 ant Accounts receivable December 3, 2090 hoa ; ‘Advances from customer — 12/31 — io 550, Computation of purchases 4 3,000,009 Purchases per book 009 Add: Accounts payable — December 31, 2020 450,009 Total 3,450,000 Less: Accounts payable — December 31, 2019 400,000 Purchases 3,050,000 Computation of expenses Expenses per book 790,000 ‘Add: Accrued expenses December 31, 2020 75,000 Total 865,000 Less: Accrued expenses— December 31, 2019 60,000 Prepaid insurance—December 31,2020 10,000 Expenses Computation of retained earnings Retained earnings per book 500,000 Add: Unrecorded accounts receivable — 12/31/2019 850,000 Unrecorded inventory - 12/31/2019 450,000 _ 800,000 Total 1,300,000 Less: Unrecorded accounts payable — 12/31/2019 Unrecorded accrued expenses — Sau 12/31/2019 60,000 , Unrecorded 2019 depreciation 300,000 _ 760,008 ected retained earnings— arn retained earnings January, 2020 540,088 388 pier BACOLOD COMPANY Thoome Statement Year Ended December 81, 2020 1 6,660,000 Sales . t of goods sold: ae acento ~ January 1 450,000 Purchases 3,050,000 i 000 Goods available for sale 3,600, 000 Inventory ~ December 31 (600,000) eden 2,650, Gross income enses: . ae epences 796,00 Doubtful accounts aov'ot reciation X iso‘000 patent expense 30,000 =o oto Net income =[PANY | BACOLOD COM. a Statement of Financial Position December 81, 2020 Assets Corrent araety, 1,800,000 s 01 Accounts receivable 500.0 00) Allowance for doubtful.accounts —( donee Inventory 10,000 Prepaid insurance , Prepaid interest 150,000 3,035,099 Nonsurrent assets: 730,000 Equipment 3,000,000 Accumulated depreciation * (600,000) 8,130,000 Total assets 8:165,000 Liabilities and Equity Current liabilities: Accounts payable 450,000 Advances from customer 100,000 Accrued expenses 75,000 Note payable 1,500,000 2,125,000 Equity: / Share capital 2,000,000 Retained earnings , 2,040,000 4,040,000 Total liabilities and equity 6,165,000 Corrected retained earnings — January | Net income for the year 1,500,000 Retained earnings — December 31 2,040,000 390..QUESTIONS 1. Explain cash basis of accounting 2, Explain accrual basis of accounting. 3, What is the formula in computing sales under cash basis? hat is tl . : - re is the formula in computing sales under ce 7 ae the formula in computing purchases under cash 6. What is the formula in computing purchases under accrual basis? 7. Explain the formula in computing income other sales under accrual basis. : 8. Define accrued income and deferred income. 9.Explain the formula in computing expenses under accrual basis? 10. Define accrued expense and prepaid expense.PROBLEMS Problem 14-1 (AICPA Adapted). les revenue of P4,600,000 in the ar ended December 31, 2029, Zeta Company reported sal income statement for the ye The entity wrote off uncollectible accounts totaling P50,099 during the current year. 2019 2020 Accounts receivable i 100 O00 1,800,000 ‘Allowance for uncollectible accounts 300 10,000 Advances from customers _ 200, 300,000 Under cash basis, what amount should be reported as sales for the current year? 4,400,000 4,350,000 4,300,000 4,250,000 Problem 14-2 (AICPA Adapted) Boop During 2020, Kew Company, a service organization, had 200,000 in cash sales and P3,000,000 in credit sales. The accounts receivable balances were P400,000 and 485,000 on December 31, 2019 and 2020, respectively. If the entity desires to prepare a cash basis income statement, what amount should be reported as sales for the current year? 3,285,000 3,200,000 3,115,000 2,915,000 Be spro CO _—————L———_ problem 14-3 (aIcpa Adapted) Spee Company provided current year: the following information for the Cash sales roe on Returns and all 2,000, Credit sales cuartee 100,000 Bisa 3,000,000 iscounts | | a 160,000 On January 1, customers owed P1,000,000. ,000,000. On December 31, nod for. a #750,000. The entity used the direct writeoff arrent year. ts. No bad debts were recorded in the Under cash basis, what amount of revenue should be reported for the current year? a. 5,000,000, b. 4,750,000 c, 4,250,000 d. 1,900,000 Problem 14-4 (IAA) Jacqueline Company began the current year with accounts receivable of P1,000,000 and allowance for doubtful accounts’ of P50,000. During the current year, the following events occurred: Accounts written off 100,000 Cash sales 500,000 Sales on account 3,000,000 200,000 Doubtful accounts expense recognized At the end of the current year, the entity showed a balance in accounts receivable of P1,700,000. Under cash basis, what amount should be reported as sales? & 2,700,000 b. 2,200,000 : & 8,500,000 / 4. 3,320,000Problem 14-5 (AICPA Adapted) JJ insurance premium, | Easter reported that al Ses M8 pa: are dablted be wropaid jnaurance. For interim reportin, "id ‘ insurance expense With an rai? entit de monthly charges to inst . Offs to prepaid renee ‘The entity provided the Following information for the current year: id i ‘ 1500 Prepaid insurance on January 1 | 009 Charges to insurance expense during the year ; including year-end adjustment 0! i £25.09 Prepaid insurance on December 31 5.009 What was the amount of insurance premium paid in the current year? , a. 625,000 b. 475,000 c. 600,000 d. 650,000 Problem i4-6 (IAA) Seaside Company provided the following data for the current year: Operating expenses: ; Depreciation 1,000,000 Insurance 700,000 Salaries 1,500,000 Total operating expenses 3,200,000 December 31° January! Prepaid insurance 200,000 -150,000 Accrued salaries payable 100,000 120,000 What amount was paid for operating expenses? 3,270,000 2,270,000 ' 2,130,000 i 2,230,000 Bo sp 394problem 14-7 (AICPA Adapt) Under accrual basis, jncome for the current Hamtikan Company reported rental year at P600,000. The entity provided the f low; ea he > regarding rental income: ollowing additional information Unearned rental income, Januar i ° ‘yl ,000 Unearned rental income, December 31 Be 8 Accrued rental income, January 1 a at ‘Acorued rental income, December 31 40,000 What total amount of cash was received from rental in the current year? 585,000 615,000 625,000 655,000 Bese Problem 14-8 (IAA) Royal Company provided the following data for the current year: Sales 10,000,000 Cost of goods sold 5,300,000 Operating expenses 3,800,000 December 31 January 1 Prepaid operating expenses 1,000,000 700,000 - Accounts payable 1,350,000 1,200,000 Inventory 2,500,000 2,100,000 Accounts receivable 1,400,000 1,375,000 Under cash basis, what amount should be reported as purchases for the current year? @ 5,550,000 b. 5,700,000 ¢, 4 - 5,850,000 1 - 5,150,000 395et AN Problem 14.9 (AICPA Adapted) On February 1, Tory began @ service propritorship With initial cash investment of P200 prwoxy and recess provided P500,000 of services 1” 7 eceived ful payment in March. urred expenses of P300,9 nein April. During March, Tory ge!® unt. " The proprietorship i cu February which were paid in P100,000 against the capital acco ment of financial position I ri ip’s state: n the proprietorship’ fh basis, what amount shout March 31 prepared under cas! be reported as capital? a. 100,000 b. 300,000 ce. 600,000 d. 700,000 Problem 14-10 (AICPA Adapted) Reid Company, which began operations on January. 1, 2019, has elected to use cash basis accounting for tax purposes and accrual basis accounting for the financial statements, The entity reported sales of P1,750,000 and P800,000 in the tax returns for the years ended December 31, 2020 and 2019, respectively. The entity reported accounts receivable of P300,000 and 500,000 in the statement of financial position on December » 31, 2020 and 2019, respectively. Under accrual basis, what amount should be reported 2% sales in the income statement for the year ended December! 31, 2020? a, 1,460,000 b. 1,550,000 c. 1,950,000 d. 2,050,000 396r Boe eee ot oo problem 14-11 (AICPA Adapted) Hard Company maintained pasis but restated the finana.> pasis of accounting. Th jncome for 2020. fi counting records on the cash nancial statements to the accrual © entity had P6,000,000 in cash basis The entity provided the following information at year-end: Fee 2020 2019 gcounta receivable 4,000,000 2,000,000 Accounts payable 1/500,000 3,000,000 Under accrual basis, what amount of income should be seported in the 2020 income statement? a. 2,500,000 b. 5,500,000 c. 6,500,000 d. 9,500,000 Problem 14-12 (AICPA Adapted) Mall Company reported the following balances at the end of each year: 2020 2019 Inventory 2,600,000 2,900,000 Accounts payable 750,000 500,000 The entity paid suppliers P4,900,000 during the year ended December 31, 2020. Under accrual basis, what amount should be reported for cost of goods sold in 2020? a 5,450,000 4. 4950,000 & 4,850,000 4 4,350,000 397| Problem 14-13 (IAA) : | : jded thé following data at Vern, | Calapan Company provi i) , 1,200,000 th Accounts receivable 1,500,000 j ‘Bo. Accounts payable ‘ ff amounted to P100,000, Sal In 2020, accounts written 0 u . returns amounted to 250,000, of ‘which an amount of P50 oq was paid to customers. “8 N) Cash receipts from customers after P500,000 discounts totaleg P8,000,000. Purchase returns amounted to 400,000, of which an amouy, of P100,000 was received from suppliers. Cash payments to trade creditors amounted to P5,000,009 after discounts of P200,000. 1. Under accrual, what is the amount of gross sales? a. 9,600,000 b. 8,950,000 c. 8,250,000 d. 8,850,000 2. Under accrual, what is the amount of net sales? a. 8,250,000 b. 8,200,000 c. 8,100,000 d. 8,150,000 3. Under accrual, what is the amount of gross purchases? a. 5,850,000 b. 5,950,000 ce. 5,750,000 d. 5,650,000 4, Under accrual, what is the amount of net purchases’ | a. 5,250,000 b. 5,200,000 c. 5,650,000 d. 5,450,000 398problem 14-14 (IAA) gmmyrelle Company provided the following selected accounts, receipts and disbursements for the current year? : December 31 January 1 ‘Aocounts receivable ” 300,000 Notes receivable 150,000 100,000 Accounts payable 120,000 ‘160,000 Notespayable 200,000 150,000 Prepaid insurance 30,000 10,000 Cash receipts for current year Cash sales : 500,000 Collections of accounts receivable, net of discounts of P40,000 1,800,000 Collections of notes receivable 80,000 Bank loan —one year, dated December 31 100,000 Purchase returns and allowances 60,000 Cash disbursements for current year Cash purchases 130,000 Payments on accounts payable, net of discounts of P20,000 1,500,000 Payments on notes payable 400,000 Insurance 220,000" Other expenses . 650,000 Sales returns and allowances 50,000 1. Under accrual basis, what is the amount of gross sales for the current year? : a. 2,420,000 b. 2,470,000 c. 1,920,000 d. 1,970,000 . 2 Under accrual basis, what is the amount of gross purchases for the current year? 1,960,000 2,020,000 1,830,000 | 1,890,000 ; 399 Be opAN Problem 14-15 (AICPA Adapted) Otis Company acquired rights to é patent nade a liceng a agreement that required an @ i The catity Payment when the agreement was py eae Temitte, royalties earned and due under the ag n October 31 each year. iti he entity paid, in ady, Additionally, on the same date, t : vance, estimated ec altigs for the next year. The entity adjust, prepaid royalties at year end. The entity provided 4, following information for the current year: : i 650,0 Jan. 1 Prepaid royalties 000 Oct. 31 Royalty payment charged to royalty expense 1,100,009 Dec. 31 Year-end credit adjustment to expense 250,000 What amount should be reported as prepaid royalties at year-end? a. 250,000 b. 400,000 c. 850,000 d. 900,000 Problem 14-16 (AICPA Adapted) Thrift Company, reported that the unadjusted prepaid expense account on December 31, 2020 comprised the following: An opening balance of P15,000 for a comprehensive insurance policy. The entity had paid an annual premium of P30,000 on July 1, 2019. + A P32,000 annual insurance premium payment made July 1,2020. - A P20,000 advance rental payment for a warehouse that was leased for one year beginning January 1, 2021. On December 31, 2020, what amount should be reported 2 prepaid expenses? : 52,000 36,000 20,000 . 16,000 peop 400problem 14-17 (AICPA Adapted) Rara Company paid : three years on Manet 1009 *2 renew an insurance policy for h m On Marek 3, 2020, the unadjusted trial balance showed P3,000 r prepaie insurance and P72,000 for insurance expense. * it L est ee be reported for prepaid insurance on a. 70,000 b. 71,000 c. 72,000 d. 73,000 2. What amount should be reported for insurance expense for the three months ended March 31, 2020? a. 5,000 b. 3,200 ce. 2,000 ad. 1,000 Problem 14-18 (AICPA Adapted) On July 1, 2020, Roxy Company obtained fire insurance at an annual premium of P72,000 payable on July 1 of each year. The first premium payment was made duly 1, 2020. On October 1, 2020, the entity paid P24,000 for real estate taxes to cover the period ending September 30, 2021. On December 31, 2020, what amount should be reported as prepaid expenses? | 60,000 ' 54,000 48,000 . 36,000 pes 401aN Problem 14-19 (AICPA Adapted) Clay Company borrowed money under various loan green, involving notes discounted and notes requiring i payments at maturity. During the vest a i ece: 2020, the entity paid interest totaling 000. The December 31 statement of financial position inchudeg the following information: Ntereg mMbey 1 2019 2% Prepaid interest aai0 Bot Interest payable x 53,500 What amount of interest expense should be reported in the income statement for the current year? a. 86,000 b. 97,000 c. 103,000 d. 114,000 Problem 14-20 (AICPA Adapted) On December 31, 2020, Ashe Company had a P990,000 balance in the advertising expense account before any year-end adjustments relating to the following: + Radio advertising spots broadcast during December 2020 were billed to the entity on January 4, 2021. The invoice cost of P50,000 was paid on January 15, 2021. + Included in the P990,000 i: advertising for a Januar campaign. 's P60,000 for newspaper 'Y 2021 sales promotional What amount should be reported as a dvertisi ense for the year ended December 31, 20207 TNSIRS oP a. 930,000 b. 980,000 ce. 1,000,000 d. 1,040,000 402Fr OV ——————_— problem 14-21 (AICPA. Adapted) C Dorunt had. 2 baleported that the compensation expense aerate ANY Appropriate sage 120,000 on December 31, 2020 following: year-end adjustment relating to the : Me ORO Sei ee meas for the week of December were paid on January 3 ope period totaled P18,000 and nus for 202 i * * omunt of P175 Oop O January 31, 2021 in the total Oo should be reported for compensation expense a. 683,000 b. 665,000 c, 508,000 4. 490,000 Problem 14-22 (AICPA Adapted) Pak Company reported that the professional fees expense account had a balance of P820,000 on December 31, 2020, before considering. year-end adjustments relating to the following: Consultants were hired for a special project at a total fee not to exceed P650,000. The entity has recorded P550,000 of this fee based on billings for work performed in 2020. + The attorney's letter requested by the auditors dated January 31, 2021 indicated that legal fees of P60,000 were billed on January 15, 2021 for work performed in November 2020, and unbilled fees for December 2020 were P70,000. What amount should be reported for professional fees expense for the year ended December 31, 2020? a 1,050,000 . "950,000 | & 880,000 4 820,000 403 -—cpa Adapted) acquired patent right 9, Problem 14-23 (Al i ” y During 2020, Cooke Company remitted royalties of 3,000,000. 1 31, 2019 550,000 1, 2020 450,000 800,000 750,000 Prepaid royalties Decembe! : Prepaid royalties December oP 5019 Royalties payable December x p20 Royalties payable December 31, Under accrual basis what amount should be reported a, royalty expense for 2020? 2,950,000 3,050,000 3,100,000 3,300,000 Problem 14-24 (AICPA Adapted) po rp Rice Company's salaried employees are paid biweekly, ‘Advances made to employees are paid back by payroll deductions. January 1 December 31 Employee advances 240,500. 360,000 Accrued salaries payable 400,000 2 Salaries.expense during the year 4,200,000 Salaries paid during the year at gross 8,900,000 What amount should be reported as accrued salaries payable on December 31? 940,000 820,000 700,000 300,000 Bop 404problem 14-25 AA) Airene Company paid current year. The full supplies inventory, P1,000;000 for supplies during the amount of P1,000,000 was debited to The beginning balance of supplies inventory was P360,000. Aphysical count of the suppli an amount of P600,000, ipplies on hand at year-end revealed What is the adjusting ¢ ; 7 year-end? ‘ing entry for supplies expense a a. Debit supplies expense and credit supplies inventor P760,000. nd credit supplies inventory b. mono nie expense and credit supplies inventory c. Debit supplies inventory and credit supplies expense 600,000. Se d. Debit supplies inventory and credit supplies expense P240,000. Problem 14-26 (IAA) Karen Company reported in the income statement for the current year P1,100,000 of wages expense. The previous year’s statement of financial position reported P100,000 of wages payable. An analysis of the payroll records showed wage payments during the year of P950,000. The previous year’s adjusting entry for unpaid wages was reversed at the beginning of current year. What is the amount of the adjusting entry for accrued wages payable at year-end? . 250,000 ». 400,000 150,000 . 850,000 Beep 405 kk:aN Problem 14-27 (AICPA Adapted) pbuilding and leases the off, se 5 Tara Company owns an offic e involving rent vies in under a variety of rental agreement advance monthly or annually. i ts of their rent, Dy. Ne ts make timely paymen' . Dai, 2020 the cai received P8,000,000 cash from tenants, "8 The statement of financial position contained the following data at year-end: 2019 : 2099 Rental receivable opened 1,240,009 Unearned rental income 3,200, 2,400,009, Uncollectible rent written off 500,009 Under accrual basis, what amount of rental revenue show be reported for the current year? a. 9,080,000 b. 9,580,000 c. 8,580,000 d. 7,980,000 Problem 14-28 (AICPA Adapted) Carey Company assigns patent rights for which royalties are received, During 2020, the entity received royalty remittance of P2,500,000. The following data are available at year-end: 2019 2000 Royalties receivable | t 750,000 800,000 Unearned royalties 450,000 650,000 Under accrual basis, what amount should be reported #8 royalty revenue for the current year? a. 2,250,000 bi,. 2,300,000 c. 2,350,000 d. 2,550,000 406Problem 14-29 (AA) the cash basis of accounting has been employed. The trial balance re] 31, 2020 appeare dae fey from these records on December h eae 1,500,000 Purchases 4,000,000 Expenses 2,000,000 Equipment moyen Share capital 7 2,000,000 Lan ae Eling 18 Mortgage payable “tu 900,000 Retained earnings _ 600,000 7,500,000 The entity decided to convert the accounting records to the accrual basis on December 31, 2020. Additional information 1. Accounts receivable December 31, 2019 200,000 December 31, 2020 250,000 2. The sales of 2019 included P40,000 deposited by a customer for merchandise to be delivered in,2020. 8. Accounts payable December 31, 2019 350,000 December 31, 2020 280,000 4. Accrued expenses , December 31, 2019 70,000 December 31, 2020 100,000 5. Merchandise inventory December 31, 2019 150,000 210,000 December 31, 2020 407h P100,000 cash advang, 6. The purehase se be delivered in 2021, x for Cty, supplie: 7. The equipment was acquired on July 1, 2019. A estimated life is 10 years: 8, The land and building were acquired on January 1, 201, The life of the building 18 5 years. hat 10% of the outstanding account, i i d tl 9. It is estimate mber 31, 2020 may prove uncollectibj, receivable on Dece! 10. The mortgage was on the land and building and way obtained on September 1, 2020. 2% per annum payable semiannually The interest rate is 1 au March 1. The mortgage will mature on September 1 and after 4 years. Required: 1. Prepare adjusting entries on December 31, 2020. 2. Prepare an income statement for the year ended December 31, 2020. 3. Prepare a statement of. financial position on December 31, 2020. 408problem 14-30 (aa) pvelyn Compan; repared adjustments oc (ranssctions on a cash basis but conform with accrual basis, le end of accounting period to he entity provided th _ year ended December 31, oyovine aeeount balances for the Cash Accounts receivable 206,000 Inventory 250,000 Land 150,000 Building 300,000 ‘Accumulated depreciation 1,000,000 Equipment 200,000 ‘Accumulated depreciation 400,000 ‘Accounts payable 40,000 Share capital 100,000 Retained earnings 1,500,000 Sales 345,000 Purchases 2,000,000 Office expenses 1,200,000 Rent : 255,000 Insurance 240,000 Supplies expense = 50,000 140,000 409Additional information 1. Inventory on December 31, 2020 amounted to P 230,099, 2. Accounts receivable December 31, 2020 290,09) December 31, 2019 250,099 is esti f tstandin, 3. It is estimated that P15,000 of the out B account, receivable on December 31, 2020 may prove uncollectibj, 4. Depreciation rate “Building 5% Equipment 10% 5. Accounts payable December 31, 2020 130,000 December 31, 2019 100,000 6. Accrued rent on December 31, 2019 was unrecorded in the amount of P5,000. 7. Accrued rent on December 31, 2020 amounted to P10,000. 8. Prepaid insurance on December 31, 2019 in the amount of P7,000 was not recognized. 9. Prepaid insurance on December 31, 2020 amounted to P12,000. Required: a. Prepare adjusting. entries on December 31, 2020. b. Prepare an income statement. c. Prepare a statement of financial Position. 410F | problem 14-31 (IAA) ivi any bey a . Gi the year, an business operations on January 1, 2020. try system but on the cash basi tity Gecided to use the accrual basin: th of accounting. The ent dersunt balances are: . Cash . 840,000 purchases 4,200,000 Expenses 560,000 Notes payable 200,000 sales 4,400,000 hare capital 1,000,000 Merchandise inventory on December 31, at cost, P500,000. On December 31, accounts receivable amounted to P100,000 and accounts payable totaled P80,000. = Acerued expenses on December 31, P20,000. The purchases included merchandise in the amount of P10,000 | bought for the president. The president had not reimbursed the entity. 5, The sales included P25,000 deposit given by a customer for merchandise to be delivered in 2021. 6. It is estimated that 5% of the outstanding accounts receivable on December 31 may turn out to be uncollectible. | | 1, Expenses included the following: | : | ee pr a. P25,000 for office supplies of which P5,000 is unused as of December 31. b. P100,000 for the purchase of equipment on July 1, 2020. It was estimated that this property would have an estimated useful life of 10 years without residual value. c. P20,000 for a one-year insurance premium on a fire insurance policy dated October 1, 2020. . The notes payable comprised a noninterest-bearing note of P100,000, dated August 1, 2020, due on February 1, 2021 and a one-year note of P100,000, dated September 1, 2020, bearing an interest of 12% payable at maturity. — +# Required: Prepare adjusting entries, an income statement and a Statement of financial position. 411Problem 14-32 Multi 1, Under ace: ple choice (IAA) ual basis of accounting, cash receipt, ang Y disbursements may a. b. c. da. 2, Which statement regarding accru Precede, coincide with, oF foo i period in hig ’ are Tt . revenue and expenses h but never follow the Period i i e and expenses are recognized. otieh fe with or follow but never precede the Petia iy are recognized, hich revenue: and expenses are e Only coincide with the period in which revenue an expenses are recognized. al basis versus cash basis of accounting is true? a. b. c. d. ‘The cash basis is appropriate for smaller entities. The cash basis is less useful in predicting the timing “and amount of future cash flows of an entity. Application of the cash basis results in an income statement reporting revenue and expenses. The cash basis requires a complete set of double entry records. 3. Under cash basis of accounting po op Revenue is recorded when earned. Accounts receivable would be recorded. Depreciation is not recognized. . The matching principle-is ignored. 4, Under the cash basis of accounting, revenue is recorded a. b. c, a. 5. Total net income over the life of an entity is . When earned and realized When earned and realizable When earned When realized a. Higher under the cash basis than al basis b. Lower under the cash basis than. under te acorual basi c. ‘The same under the cas] a. h basi basis . Not susceptible to measurement the accrual 412rr 6. a 2 der I i : Under Internationa} Financial Reporting Standards Browatt basis of accounting is accepted. ®corded in the period the events occur. c. Net income is} ‘i hasta Ower under the cash basis than accrual d. All of the choices are correct, Accrual accounting adheres to which of the following? a. Matching principle b Historical cost principle . Matching principle and historical cost principle . Neither matching principle nor historical cost * , Under accrual accounting, which of the following does not describe a deferral? a. Deferral of revenue occurs when cash is received and recognized in financial income. b. Deferral typically results in the Fecognition of a liability or prepaid expense. c. Cash collected in advance of services being rendered. d. Cash paid up front for a one-year insurance policy. Under accrual basis, a deferral is a transaction that impacts a. Cash and the income statement at the same time b. The income statement before impacting cash c. Cash before impacting the income statement d. The statement of financial position before impacting cash 10. Which statement is true about accrual and cash basis? a. Under accrual, if the earning process is not complete, revenue is nevertheless recorded. b. Under cash basis, if cash has been collected, revenue is recorded regardless of earning process. c. Under cash basis, revenue is recognized when the receivable is initially recorded. 4. All of these statements are true. 413i CPA 1433 Multiple choice (AT Adaptea) Problem . -year insurance policy expitin, on: - oo aid jn total on January 1, 2099°% 2022 ating cycle, then on Dec, month oper Me, id insurance reported as a current ane 1. The premium December 31, 2! > the entity has su 31, 2020, the prepay would be for a. 6months b. 12 months c. 18 months d. 24 months 2. The premium on a three-year insurance policy expiring o, December 31, 2022 was paid in total on January 1, 2029, The original payment was initially debited to a prepaid asset account, The appropriate adjusting entry had been recorded on December 31, 2020: The balance in the prepaid asset account on December 31, 2020 should be a. Zero b. The same as it would have been if the original payment had been debited initially to an expense account c. The same as the original payment d. Higher than if the original payment had been debited initially to an expense account . The premium on a three-yéar insurance policy expiring 01 December 31, 2022 was paid in total on January 1, 2020.!! the original payment was recorded as a prepaid asset, hov would total assets and sh ” i ted ro al ‘areholders’ equity be affec a. Total assets would h would increase 2 Both rl asoets and shareholders’ equity would des? @. Neither totat n= 2nd shareholders’ equity would iner™™ assets nor shareholders’ equity would cha" decrease and shareholders’ a _ 414= a premium on a four-year ing i iring On ei surance policy expiring © December $1, 2028 was paid in total on January 1, 2020. If the ongina’ Payment was recorded as a prepaid asset, the balance in prepaid asset on December 31, 2021 would be Lower than the bal: 7 ‘ance on December 31, 2020 p. Lower than the balance on December 31, 2022 e, The same as the balance on December 31, 2022 dg. The same as the original payment At the beginning of the current year, an entity signed @ 5-year contract enabling it to use a patented manufacturing process beginning in the current year. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, the entity prepaid a sum equal to two years’ minimum annual fees. In the current year, only minimum fees were incurred. The royalty prepayment shall be reported in the current year-end financial statement as a. An expense only b. A current asset and an expense c. Acurrent asset and noncurrent asset d. A noncurrent asset