CHAPTER 1 Caselette - Accounting Cycle

CHAPTER 1 - Accounting Process & Working Paper Preparation

Exercises: Indicate your answer by encircling the letter that contains your choice in each of the following questions. 1. One is using periodic inventory system. For the year, its total purchases amounted to P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is 80% of its beginning inventory. One’s cost of sale is a. P 250,000 b. P 251,250 c. P 249,000 d. P 248,750 2. Two’s purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30. Freight is P500, FOB shipping point collect. The net purchase amounts under net method is a. P P147,000 b. P 147,500 c. P 148,500 d. P 150,500 3. Using the information in Item 2, the amount paid by the buyer is a. P P147,000 b. P 147,500 c. P 148,500

d. P 150,500

4. The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination collect, P200. If the account is paid 15 days after the invoice date, the net payment should be a. P 245,000 b. P 247,500 c. P 247,300 d. P 244,800 5. Using the information in Item 4, the net purchase is a. P 245,000 b. P 247,500 c. P 247,300

d. P 244,800

6. Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination collect. The merchandise was sold at 120% of cost. The gross profit is a. P 1,000 b. P 1,040 c. P 6,000 d. P 6,240 7. The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is P176. The sale is at mark-up of 10%. The gross profit is a. P 117.60 b. P 88.24 c. P 115.25 d. P 100.00 8. The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If the account is paid on the 25th day from the invoice date, the total payment would be a. P 294,000 b. P 299,700 c. P 294,300 d. P 300,300 9. Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The journal entry in both books of Four and Five would be Books of Four Books of Five a. Freight-out 200 Freight-in 200 Cash 200 Accounts payable 200 b. Freight-in 200 No entry Accounts receivable 200 c. Freight-in 200 No entry Cash 200 d. Freight-in 200 Freight-out 200 Cash 200 Accounts receivable 200

1

10. Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting to P10,000 was returned due to defect. The amount to be collected by Six is a. P 205,200 b. P 203,750 c. P 204,000 d. P 195,200 11. Amar Company received P96,000 on April 1, 2002 for one year’s rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2002 adjusting entry is a. Debit rent revenue and credit unearned rent revenue, P24,000. b. Debit rent revenue and credit unearned rent revenue, P72,000. c. Debit unearned rent revenue and credit rent revenue, P24,000. d. Debit unearned rent revenue and credit rent revenue, P72,000. 12. Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and recorded the entire amount as insurance expense. The December 31, 2002 adjusting entry is a. Debit insurance expense and credit prepaid insurance, P21,000. b. Debit insurance expense and credit prepaid insurance, P51,000. c. Debit prepaid insurance and credit insurance expense, P21,000. d. Debit prepaid insurance and credit insurance expense, P51,000. 13. Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month, 9% note with a face value of P480,000. The December 31, 2002 adjusting entry is a. Debit interest expense and credit interest payable, P7,200. b. Debit interest expense and credit interest payable, P10,800. c. Debit interest expense and credit cash, P7,200. d. Debit interest expense and credit interest payable, P43,200. 14. On December 31, 2002, Asilo Company’s bookkeeper made an adjusting entry debiting supplies expense and credit supplies inventory for P12,600. The supplies inventory accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002 balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was made during the month, on account. The entry for that purchase was a. Debit supplies inventory and credit cash, P8,700. b. Debit supplies expense and credit accounts payable, P8,700. c. Debit supplies inventory and credit accounts payable, P8,700. d. Debit supplies inventory and credit accounts payable, P16,500. 15. Astillo Company loaned P300,000 to another company on December 1, 2002 and received a 3-month, 15%, interest-bearing note with a face value of P300,000. What adjusting entry should Astillo Company make on December 31, 2002? a. Debit interest receivable and credit interest income, P7,500. b. Debit cash and credit interest income, P3,750. c. Debit interest receivable and credit interest income, P3,750. d. Debit cash and credit interest receivable, P7,500. . 16. The supplies inventory account balance at the beginning of the period was P66,000. Supplies totaling P128,250 were purchased during the period and debited to supplies inventory. A physical count shows P38,250 of supplies inventory at the end of the period. The year-end adjusting entry is a. Debit supplies inventory and credit supplies expense, P90,000. b. Debit supplies expense and credit supplies inventory, P128,250. c. Debit supplies inventory and credit supplies expense, P156,000. d. Debit supplies expense and credit supplies inventory, P156,000.

2

17. At the end of 2002, Avila Company made four adjusting entries for the following items: (1) depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as prepaid insurance); (3) interest payable, P9,000; and (4) rental revenue receivable, P10,000. In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is/are a. Entry 1 c. Entries 3 and 4 b. Entry 4 d. Entries 2, 3, and 4 18. Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at December 31, 2002 before performing an aging of accounts receivable. As a result of the aging, Bagaipo Company determined that an estimated P20,000 of the December 31, 2002 accounts receivable would prove uncollectible. The adjusting entry at December 31, 2002 would be a. Doubtful accounts expense 8,000 Allowance for doubtful accounts 8,000 b. Doubtful accounts expense 20,000 Accounts receivable 20,000 c. Allowance for doubtful accounts 8,000 Doubtful accounts expense 8,000 d. Doubtful accounts expense 8,000 Interest revenue 8,000 19. Assuming that the company does not reverse the adjusting entries, what should be made on April 1, 200 when the annual interest payment is received? a. Debit cash and credit interest revenue, P9,375. b. Debit cash and credit interest receivable, P28,125. c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue, P9,375. d. Debit cash and credit interest revenue, P37,500. 20. Using the data of No. 19, but assuming that the company does reverse its adjusting entries, what entry should be made on April 1, 2003 when the annual interest payment is received? a. Debit cash and credit interest revenue, P9,375. b. Debit cash and credit interest receivable, P28,125. c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue, P9,375. d. Debit cash and credit interest revenue, P37,500. Answer: 1. b 2. b 11.a 12.d

3. a 13.a

4. c 14.c

5. b 15.c

6. a 16.d

7. d 17.c

8. d 18.a

9. c 19.c

10. a 20.d

3

Problem 1 The following is the post-closing trial balance of Abagon Shop dated February 1, 2006: Cash Accounts Receivable Allowance for doubtful accounts Unused shop supplies Shop Equipment Accumulated depreciation - shop equipment Accounts payable Notes payable Accrued interest payable Abagon, Capital Total

Debit 120,000 280,000

Credit

2,800 800 240,000 48,000

640,800

88,800 100,000 1,200 400,000 640,800

For the month of February, the following are the transactions of Abagon Shop. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Abagon withdrew P100,000 cash from the business for her personal use. Paid P12,000 insurance premium. Paid P24,000 rent. Total service rendered to various customers, P140,000, 40% of total sales are on cash basis and the balance on open account. Received promissory note from customer to replace P40,000 accounts receivable. Collected in cash P164,000 of accounts receivable. Paid the notes payable of P100,000 plus the P2,400 interest. Purchased P2,400 shop supplies on cash basis. Paid salaries, P24,000.

At the end of the month, the following information are available to effect adjustments. a. The insurance in number 2 for P12,000 is applicable for six months starting February. b. The rent of P24,000 paid in number 3 is for 3 months, starting February. c. The note receivable is number 5 is earning 12% interest per year. The note is dated February 1, and is due on April 30. d. Bad debts expense is estimated at 2% of accounts receivable balance. e. The annual depreciation is P48,000. f. The unused supplies balance is P1,000. Questions 1. Cash at end of February is: a. P 103,200 b. P 85,200

c. P 75,200

2. Net Realizable value of Accounts Receivable at end of February is a. P 156,800 b. P 157,200 c. P 196,800 3.

Unused shop supplies at end of February is a. P 1,800 b. P 1,000 c. P

800

4. Net book value of Shop Equipment at end of February is a. P 188,000 b. P 189,000 c. P 184,000

4

d. P 72,800 d. P 197,200 d. P

200

d. P 144,000

5. Accounts Payable at end of February is a. P 128,800 b. P 88,800

c. P 86,400

d. P 48,800

6. Notes Payable at end of February is a. P 100,000 b. P 102,400

c. P 97,600

d. P 0

7.

Abagon Capital, net of drawing at end of February is a. P 398,600 b. P 397,400 c. P 397,800 8. Net income of the company at end of February is a. P 98,600 b. P 97,400 c. P 97,800

d. P 388,600 d. P 88,600

9. Total Revenue of the company at end of February is a. P 142,800 b. P 142,400 c. P 140,400

d. P 140,000

10. Total Expenses of the Company at end of February is a. P 52,600 b. P 41,800 c. P 41,400

d. P 41,000

Solution 1 Abagon, drawing Cash 2 Insurance expense Cash 3 Rent expense Cash 4 Cash Accounts receivable Revenue 5 Notes receivable Accounts receivable 6 Cash Accounts receivable 7 Notes payable Interest expense Cash 8 Supplies expense Cash 9 Salaries Cash

100,000 12,000 24,000 56,000 84,000 40,000 164,000

100,000 12,000 24,000 140,000 40,000 164,000

100,000 2,400 2,400 24,000

102,400 2,400 24,000

Adjusting Entry: a b c d e f

g

Prepaid Insurance Insurance expense Prepaid rent Rent expense Interest receivable Interest income (P40,000 x 12% x 1/12) Bad debts Allowance for bad debts Depreciation Accum. depreciation Unused supplies Supplies expense Supplies expense Unused supplies Accrued interest payable Interest expense To reverse the beg. accrued interest payable

10,000 16,000 400

10,000 16,000 400

400 4,000 1,000 800 1,200

400 4,000 1,000 800 1,200

5

TRIAL BALANCE

INCOME STATEMENT

75,200

160,000

160,000

ALLOW. FOR BD

2,800

NOTES RECEIV

400

3,200

40,000

UNUSED SUPPLIES SHOP EQUIPMENT

BALANCE SHEET

75,20 0

CASH ACCNTS RECEIV

ADJUSTMENTS

40,000

800

1,000

800

1,000

240,000

240,000

ACCUM. DEPN

48,000

ACCOUNTS PAY

88,800

NOTES PAYABLE

4,000

52,000 88,800

-

ACC. INT. PAY

1,200

ABAGON, DRAWING

1,200

-

100,000

100,000

ABAGON, CAPITAL

400,000

REVENUE

140,000

400,000 140,000

INSURANCE EXP

12,000

10,000

2,000

RENT EXPENSE

24,000

16,000

8,000

SUPPLIES EXP

2,400

1,000

2,200

SALARIES

800

24,000

INTEREST EXP

24,000

2,400

_______

680,800

680,800

1,200

1,200

PREPAID INS

10,000

10,000

PREPAID RENT

16,000

16,000

INTEREST RECEI

400

400

INTEREST INC

400

BAD DEBTS

400

400

DEPRECIATION

4,000 33,800

400 _______

4,000 ________

33,800

41,800

NET INCOME

140,400

Answer: 1. C 2. A

140,400

98,600 ________ _______

3. B

4. A

5. B

5. D

8. A

9. A

9. C

140,400

642,600

98,600 642,600

10. B

Problem 2 The following selected transactions were completed during Year 1 of operations by Vicar Corporation: a.

Sold of its 20,000 shares of its own common stock, par P1 per share, for P15 per share and received cash in full.

b.

Borrowed P100,000 cash on 12%, one-year note, interest payable at maturity on April 30, Year 2.

c.

Purchased equipment for use in operating the business at a net cash cost of P164,000; paid in full.

d.

Purchased merchandise for resale at cash cost of P140,000; paid cash. periodic inventory system; therefore, debit Purchases.

6

Assume a

e.

Purchased merchandise for resale on credit terms of 2/10, n/60. The merchandise will cost P9,800 if paid within 10 days; after 10 days, the payment will be P10,000. The company always takes the discount; therefore, such purchased are recorded at net of the discount.

f.

Sold merchandise for P180,000; collected P165,000 cash, and the balance is due in one month.

g.

Paid P30,000 cash for operating expenses.

h.

Paid ¾ of the balance for the merchandise purchased in (e) within 10 days; the balance remains unpaid.

i.

Collected 50% of the balance due on the sale in (f); the remaining balance is uncollected.

j.

Paid cash for an insurance premium, P600; the premium was for two years’ coverage (debit Prepaid insurance).

k.

Purchased a tract of land for a future building for company operations, P63,000 cash.

l.

Paid damages to a customer who was injured on the company premises, P10,000 cash.

Questions Using the unadjusted trial balance, answer the following: 1. Cash balance is: a. P 157,550

b. P 157,400

c. P 157,250

d. P 149,900

2. Accounts receivable balance is: a. P 15,000 b. P 10,000

c. P 7,700

d. P 7,500

3. Prepaid insurance balance is: a. P 600 b. P 400

c. P 300

d. P 200

4. Land account balance is: a. P 227,000 b. P 164,000

c. P 101,000

d. P

63,000

5. Equipment account balance is: a. P 227,000 b. P 164,000

c. P 101,000

d. P

63,000

6. Accounts payable balance is: a. P 2,650 b. P 2,500

c. P 2,450

d. P 2,150

7. Notes payable balance is: a. P 112,000 b. P 109,000

c. P 100,000

d. P 88,000

8. Common stock balance is: a. P 300,000 b. P 280,000

c. P 200,000

d. P 20,000

1. Premium on capital stock balance is: a. P 300,000 b. P 280,000

c. P 200,000

d. P 20,000

7

2. Sales balance is: a. P 180,000 3. Purchases balance is: a. P 149,800

b. P 160,000

c. P 100,000

d. P 80,000

b. P 149,600

c. P 150,000

d. P 150,200

c. P 40,000

d. P 38,800

4. Operating expenses and other expenses is: a. P 49,800 b. P 40,200 Solution (a) (b) (c) (d) (e) (f) (g) (h)

(i) (j) (k) (l)

Cash

300,000 Common stock 20,000 Premium on capital stock 280,000 Cash 100,000 Notes payable 100,000 Equipment 164,000 Cash 164,000 Purchases 140,000 Cash 140,000 Purchases 9,800 Accounts payable 9,800 Cash 165,000 Accounts receivable 15,000 Sales 180,000 Operating expenses 30,000 Cash 30,000 Purchase disc. lost 200 Accounts payable 200 Accounts payable 7,500 Cash 7,500 Cash 7,500 Accounts receivable 7,500 Prepaid insurance 600 Cash 600 Land 63,000 Cash 63,000 Loss on damages 10,000 Cash 10,000

Cash Accounts receivable Prepaid insurance Land Equipment Accounts payable Notes payable Common stock Premium on capital stock Sales Purchases Operating expenses Purchase disc. lost Loss on damages Total ANSWER 1. b 2. d 11. a 12. b

Problem 3

8

3. a

157,400 7,500 600 63,000 164,000

2,500 100,000 20,000 280,000 180,000

149,800 30,000 200 10,000 582,500 4. d

5. b

_______ 582,500 6. b

7. c

8. d

9. b

10. a

The post-closing trial balance of the general ledger of Wilson Corporation at December 31, 20I, reflected the following: Account Debit Cash 27,000 Accounts receivable 21,000 Allowance for doubtful accounts Inventory (perpetual inventory system) 35,000 Prepaid insurance (20 mos. remaining) 900 Equipment (20-year life, no salvage value) 50,000 Accumulated depreciation Accounts payable Wages payable Income taxes payable (for 20I) Common stock, par P1 Retained earnings Sales revenue Cost of goods sold Operating expenses Income tax expense Income summary -___ 133,900 * Ending inventory, P45,000 (at 12/31/20J)

Credit 1,000

22,500 7,500 4,000 80,000 18,900 -

______ 133,900

The following transactions occurred during 20J in the order given (use the number at the left to indicate the date): 1. Sales revenue at P30,000, of which P10,000 was on credit; cost provided by perpetual inventory record, P19,500. 2. Collected P17,000 on accounts receivable. 3. Paid income taxes payable (20I), P4,000. 4. Purchased merchandise, P40,000, of which P8,000 was on credit. 5. Paid accounts payable, P6,000. 6. Sales revenue of P72,000 (in cash); cost, P46,800. 7. Paid operating expenses, P19,000. 8. On January 1, 20J, sold and issued 1,000 shares of common stock, par P1, for P1,000 cash. 9. Purchased merchandise, P100,000, of which P27,000 was on credit. 10. Sales revenue of P98,000, of which P30,000 was on credit; cost P63,700. 11. Collected cash on accounts receivable, P26,000. 5. Paid cash on accounts payable, P28,000. 6. Paid various operating expenses in cash, P18,000. Assume a bad debt rate of ½% of credit sales for the period and a 32% income tax rate. At December 31, 20J, accrued wages were P300. Use straight-line depreciation. Questions 1. Cash at December 31, 20J is: a. P 51,000 b. P 50,000

c. P 45,000

d. P 41,000

2. Accounts receivable at December 31, 20J is: a. P 18,000 b. P 16,800

c. P 16,000

d. P 15,800

9

3. Inventory at December 31, 20J is: a. P 64,500 b. P 45,000 4.

c. P 35,000

Prepaid insurance at December 31, 20J is: a. P 360.00 b. P 562.50 c. P 900

5. Equipment at December 31, 20J is: a. P 95,000 b. P 60,000

d. P 32,500 d. P 540

c. P 50,900

d. P 50,000

6. Accumulated depreciation at December 31, 20J is: a. P 30,000 b. P 25,000 c. P 22,500

d. P 20,000

7. Accounts payable at December 31, 20J is: a. P 15,000 b. P 14,500

d. P

c. P 10,500

8,500

8. Income taxes payable at December 31, 20J is: a. P 9,600 b. P 9,427 c. P 5,651

d. P 4,000

9. Retained earnings at December 31, 20J is: a. P 39,300 b. P 38,933

c. P 30,909

d. P 27,400

10. Cost of goods sold at December 31, 20J is: a. P 110,500 b. P 128,000

c. P 130,000

d. P 132,000

11. Net income before taxes at December 20J is: a. P 30,000 b. P 29,460 c. P 17,660 Solution (1) Cash 20,000 Accounts receivable 10,000 Sales Cost of sales 19,500 Inventory (2) Cash 17,000 Accounts receivable (3) Income taxes payable 4,000 Cash (4) Inventory 40,000 Cash Accounts payable 8,000 (5) Accounts payable 6,000 Cash (6) Cash 72,000 Sales Cost of sales 46,800 Inventory (7) Operating expenses 19,000 Cash (8) Cash 1,000 Common stock (9) Inventory 100,000 Cash Accounts payable 27,000 (10) Cash 68,000 Accounts receivable 30,000 Sales Cost of sales 63,700 Inventory (11) Cash 26,000 Accounts receivable

10

30,000 19,500 17,000 4,000 32,000 6,000 72,000 46,800 19,000 1,000 73,000

98,000 63,700 26,000

d. P 12,500

(12) (13)

Accounts payable 28,000 Cash 28,000 Operating expenses 18,000 Cash 18,000

Adjusting Entry: (a) Operating expenses (ins. Exp) Prepaid insurance (P900 x 12/20) (b) Operating expenses (depreciation) 2,500 Accumulated depreciation (c) Operating expenses (bad debts) Allowance for bad debts (d) Operating expenses Wages payable FINANCIAL STATEMENTS Cash Accounts receivable Allowance for bad debts Inventory Prepaid insurance Equipment Accumulated depreciation Total Assets

51,000 18,000 (1,200) 45,000 360 50,000 (25,000) 138,160

Accounts payable Wages payable Income taxes payable Common stock Retained earnings Total Liability/SHE

8,500 300 9,427 81,000 38,933 138,160

Sales revenue Cost of sales Gross profit Operating expenses Income before taxes Income taxes expense Net income Retained earnings – beg Retained earnings – end Answer: 1. a 2. b

3. b

540

540

2,500 200 300

200 300

200,000 130,000 70,000 40,540 29,460 9,427 20,033 18,900 38,933 4. a

5. d

6. b

7. d

8. b

9. b

10.c

11.b

Problem 4 The account of PEQUIT COMPANY as at December 1, 2006 are listed below: Cash Accounts receivable Marketable securities Office supplies Prepaid insurance Land Building Accum. depreciation – bldg Equipment Accum. depreciation – equip. Accounts payable Mortgage payable Capital

214,000 338,000 426,000 31,000 48,000 370,000 900,000 800,000

_______

250,000 200,000 172,000 1,200,000 1,305,000

11

3,127,000

3,127,000

The following transactions occurred during the month of December 2006: Dec.

1 3 4 5 7 9 10 11 12 18 19 20 29 30

Settled the accounts payable of P115,000 less 2% discount. Collected the accounts receivable of P180,000 less 3% discount. Sold merchandise on account to PAPACOY SUPPLIES, P210,000. Terms: FOB destination, 3/10, n/30. PAPACOY SUPPLIES paid the freight for P3,000. Received returns from PAPACOY SUPPLIES, P25,000. Purchased merchandise from OSTIQUE PRODUCTS, P232,000. Terms: FOB shipping point, 2/10, n/30. PEQUIT COMPANY paid P2,000 for the transportation cost. Returned goods to OSTIQUE PRODUCTS, P12,000 acquired on December 7. Paid interest on mortgage payable, P8,000. Received payment from PAPACOY SUPPLIES for the amount due. Sold merchandise to OANI SHOPPERS, P330,000. Terms: FOB shipping point, 3/10, n/30. Received payment from OANI SHOPPERS from the December 12 sales. Sold merchandise to NAVALES SHOP, P242,000. Term: FOB shipping point, 3/10, n/30. PEQUIT COMPANY paid P5,000 for the freight. Paid P9,000 for representation expense. Received from NAVALES SHOP returned merchandise in the amount of P18,000 from the December 19 sales. The owner, Genevieve, withdraw merchandise for personal use. Cost – P20,000; Selling price – P30,000.

Additional information 1. Salaries in the amount of P73,000 have accrued on December 31. 2. Insurance coverage with premium of P2,000 has expired at month-end. 3. Depreciation on the building and on the equipment for the month amounted to P3,000 and P4,500, respectively. 4. Office supplies on hand at month-end amounted to P7,000. 5. A count of the inventory amounted to P453,000 on December 31, 2006. Questions 1. Cash balance at December 31, 2006 is: a. P 773,750 b. P 772,700

c. P 748,450

d. P 727,700

2.

Accounts receivable at December 31, 2006 is: a. P 412,000 b. P 405,000 c. P 387,000

d. P 362,000

3.

Inventory at December 31, 2006 is: a. P 625,700 b. P 453,000

c. P 426,000

d. P 212,000

4.

Office supplies at December 31, 2006 is: a. P 7,000 b. P 10,000

c. P 24,000

d. P 31,000

5.

Net carrying value of Fixed Assets at December 31, 2006 is: a. P 1,980,000 b. P 1,620,000 c. P 1,612,500

d. P 1,242,500

Total assets at December 31, 2006 is: a. P 3,253,950 b. P 3,250,950

d. P 3,153,950

6.

12

c. P 3,203,950

7.

Accounts payable at December 31, 2006 is: a. P 289,000 b. P 279,000 c. P 277,000

d. P 257,000

8.

Accrued expenses at December 31, 2006 is: a. P 97,000 b. P 73,000 c. P 24,000

d. P 9,000

9.

Net sales at December 31, 2006 is: a. P 782,000 b. P 718,950

c. P 718,240

d. P 718,150

10.

Total purchases at December 31, 2006 is: a. P 232,000 b. P 212,000 c. P 199,700

d. P 197,700

11.

Operating expenses at December 31, 2006 is: a. P 126,500 b. P 118,500 c. P 109,500

d. P 101,500

12.

Net income at December 31, 2006 is: a. P 482,800 b. P 426,950

c. P 419,040

d. P 418,950

13.

Capital balance at December 1, 2006 is: a. P 1,704,040 b. P 1,703,950

c. P 1,305,000

d. P 1,285,000

14.

Capital balance at December 31, 2006 is: a. P 1,704,040 b. P 1,703,950 c. P 1,305,000

d. P 1,285,000

15.

Total liabilities and capital at December 31, 2006 is: a. P 3,253,950 b. P 3,250,950 c. P 3,203,950

d. P 3,153,950

Solution Dec 1

Accounts payable 115,000 Cash 112,700 Purchases (discount) 2,300

Dec 3

Cash 174,600 Sales (discount) 5,400 Accounts receivable 180,000

Dec 4

Accounts receivable Transportation exp Sales

207,000 3,000

210,000

Dec 5

Sales (returns) 25,000 Accounts receivable 25,000

Dec 7

Purchases 232,000 Freight-in 2,000 Cash 2,000 Accounts payable 232,000

Dec 9

Accounts payable 12,000 Purchases (returns)

12,000

Dec 10 Interest expense Cash

8,000

Dec 11 Cash 176,450 Sales (discount) 5,550 Accounts receivable

182,000

Dec 12 Accounts receivable Sales

330,000

Dec 18 Cash

330,000

320,100 Sales (discount) 9.900 Accounts receivable 330,000

Dec 19 Accounts receivable Cash Sales

247,000

Dec 20 Representation exp Cash

9,000

5,000 242,000 9,000

Dec 29Sales (returns) 18,000 Accounts receivable 18,000 Dec 30 Drawing

Adjusting entry:

8,000

20,000 Purchases

20,000

13

1. Salaries expense Accrued salaries

73,000

2. Insurance expense Prepaid insurance

2,000

3. Depreciation Accum. Dep’n – bldg Accum. Dep’n – equip

7,500

2,000

4. Supplies expense Office supplies

24,000

5. Inventory – BS Inventory – IS

453,000

ANSWER: 1. C 2. C 11. A 12. D

3. B 13. C

73,000

3,000 4,500 24,000 453,000

4. A 14. B

5. C 15. A

6. A

7. C

8. B

9. D

10. C

Problem 5 The Righter Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, 2006, trial balances contained the following information:

Supplies Prepaid insurance Wages payable Unearned rent revenue

Nov. 30 Dr. 1,000 6,000

Cr. 10,000 2,000

Dec. 31 Dr. 3,000 4,250

Cr. 15,000 1,000

The following information also is known: a.

The December income statement (accrual basis) reported P2,000 in supplies expense. b. No insurance payments were made in December. c. P10,000 was paid to employees during December for wages. d. On November 1, 2006, a tenant paid Righter P3,000 in advance rent for the period November through January. Unearned revenue was credited. Questions 1. a. P 1,000

What was the cost of supplies purchased during December? b. P 2,000 c. P 3,000 d. P 4,000

2.

What was the adjusting entry recorded at the end of December for prepaid insurance? a. Prepaid insurance 4,250 Insurance expense 4,250 b. Insurance expense 4,250 Prepaid insurance 4,250 c. Insurance expense 1,750 Prepaid insurance 1,750 d. No adjusting entry

3.

What was the adjusting entry recorded at the end of December for accrued wages? a. Wages expense 15,000

14

Wages payable b. Wages expense Wages payable c. Wages expense Wages payable d. No adjusting entry 4. a. P 1,000 5.

10,000 5,000

15,000 10,000 5,000

What was the amount of rent revenue earned in December? b. P 2,000 c. P 3,000 d. P 4,000

What adjusting entry was recorded at the end of December for unearned rent? a. Unearned rent rev. 3,000 Rent revenue 3,000 b. Rent revenue 2,000 Unearned rent rev. 2,000 c. Unearned rent revenue 1,000 Rent revenue 1,000 d. Unearned rent revenue 2,000 Rent revenue 2,000

Solution 1. D

Supplies on Hand 1,000 Adjustment 4,000 * Ending bal. * squeezed figure 2. C 3. A 4. A 5. C Beg. Bal Purchases

2,000 3,000

Problem 6 The trial balance of ANN CO., prior to the closing of its account for the fiscal year ended September 30, 2006 follows: Cash Accounts receivable Allowance for doubtful accounts Note receivable Merchandise inventory, 9/30/02 Furniture and equipment Accumulated depreciation Goodwill Accounts payable Notes payable Capital Stock Retained Earnings Sales Sales return and allowances Purchases Purchase return and allowances Advertising Sales salaries Commission expense Miscellaneous expense

P22,500 93,600 15,500 56,890 61,800 30,000

4,760 215,930

P

3,190

18,750 53,600 10,000 100,000 55,250 372,000 3,650

9,610 28,850 15,200 2,990

15

Rent expense Office salaries Light and Water Insurance expense Taxes and licenses General expense Interest expense Interest income

13,000 19,720 1,500 1,080 4,780 16,340 4,120

910

Your examination of the company’s account has the need for adjustments based on the following items: a.

The cash account included a customer’s check for P1,500 deposited on September 25, 2006 but returned by the bank on September 29, 2006 for lack of countersignature. No entry was made for the returned check.

b.

Unrecorded bank charge for September 2006, P500

c.

The allowance for doubtful accounts should be adjusted to 5% of the outstanding accounts receivable balance on September 30, 2006.

d.

A physical inventory of merchandise taken at the end of the fiscal year 2006 amounted to P60,120.

e.

Goods received on consignment, still unsold costing P2,000 were included in the physical inventory.

f.

The merchandise inventory on September 30, were correctly stated.

g.

Depreciation of furniture and equipment at 10% annually has not been recognized.

h.

Accrued salesmen’s salaries not recorded P5,000

i.

An insurance policy was taken on the inventory and equipment on March 1, 2006 with the annual insurance premium of P1,080 paid on that date.

j.

Rent expense account considered of rent for the store and office space for thirteen months starting August 1, 2006.

Based on the aforementioned data, answer the following questions; 1.

The adjusting entry on item A is Cash 1,500 Accounts receivable 1,500 b. Accounts payable 1,500 Cash 1,500 c. Accounts receivable 1,500 Cash 1,500 d. No adjustment a.

2. a.

16

The adjusting entry on item B is Cash

500

Accounts receivable b. Cash General expenses c. General Expenses Cash d. No adjustment

500 500

500 500 500

3. The adjusting entry on item C is a. Accounts receivable 4,680 Allowance for Doubtful Accounts 4,680 b. Doubtful Accounts 1,565 Allowance for Doubtful Accounts 1,565 c. Allowance for Doubtful Accounts 1,490 Doubtful Accounts 1,490 d. Doubtful Accounts 1,490 Allowance for Doubtful Accounts 1,490 4. The adjusting entry on item D is a. Merchandise Inv. 60,120 Income Summary b. Merchandise Inv. 60,120 Purchases c. Income summary 60,120 Merchandise inventory d. No adjustment 5. The adjusting entry on item E a. Income summary Merchandise Inv. b. Sales Merchandise Inv. c. Merchandise inventory Income summary d. No adjustment

60,120 60,120 60,120

2,000 2,000 2,000

6. The adjusting entry on item F is a. Merchandise Inv. 56,890 Income summary b. Merchandise Inv. 56,890 Purchases c. Income summary 56,890 Merchandise inventory d. No adjustment 7. The adjusting entry on item G is a. Depreciation Exp. 6,180 Accumulated Depreciation b. Accumulated Depreciation 6,180 Furniture and Equipment c. Accumulated depreciation 6,180 Depreciation expense d. No adjustment

2,000 2,000 2,000

56,890 56,890 56,890

6,180 6,180 6,180

17

8. The adjusting entry on item H is a. Accrued Salaries Expense 5,000 Sales salaries b. Accrued salaries exp. 5,000 Office salaries c. Office salaries 5,000 Depreciation expense d. Sales salaries 5,000 Accrued salaries expense 9. The adjusting entry on item I is a. Insurance Exp. 630 Prepaid insurance b. Prepaid insurance 630 insurance exp. c. Insurance expense 450 Prepaid insurance d. Prepaid insurance 450 Insurance expense 10. The adjusting entry on item J is a. Rent expense 11,000 Prepaid rent b. Prepaid rent 2,000 Rent expense c. Prepaid rent 11,000 Rent expense d. Rent expense 2,000 Prepaid rent

5,000 5,000 5,000 5,000

630 630 450 450

11,000 2,000 11,000 2,000

After making the adjustments compute the following: 11. Cash a. P24,000

b. P21,000

c. P20,500

d. P20,000

12. Net realizable value of accounts receivable a. P90,410 b. P90,345

c. P88,920

d. P88,845

13. Merchandise inventory, September 30, 2006 a. P60,120 b. P56,890

c. P62,120

d. P58,120

14. Furniture and Equipment, net of accumulated depreciation a. P55,620 b. P36,870 c. P36.700

d. 36,890

15. Total assets, September 30, 2006 a. P262,785 b. P250,845

c. P223,850

d. P262,700

16. Cost of goods sold, September 30, 2006 a. P211,050 b. P210,050

c. P212,300

d. P212,280

17. Net income, September 30, 2006 (disregard tax effect) a. P31,635 b. P31,625 c. P38,935

18

d. P38,115

18. Prepaid insurance a. P630

b. P450

c. P1,080

d. P600

19. Prepaid rent a. P11,000

b. P2,000

c. P13,000

d. P10,000

Answer: 1. C 2. C 11. C 12. B

3. B 13. D

4. A 14. B

5. A 15. A

6. D 16. A

7. A 17. D

8. D 18. B

9. D 19. A

10. C

Problem 7 Selected pre-adjustment account balances and adjusting information of NAPPY COMPANY for the year ended December 31, 2006, are as follows: Retained earnings, January 1, 2006 Sales Salaries and Commissions Advertising Expense Legal Services Insurance and Licenses Travel Expense – Sales Representative Depreciation Expense Interest Revenue Utilities expense Telephone and Postage Expense Supplies inventory Miscellaneous Selling Expense Dividends Dividend Revenue Interest expense Allowance for bad debts (Cr. Balance) Officers’ Salaries Expense Sales Sales returns and allowances Sales discounts Gain on sales of assets Inventory, January 1, 2006 Inventory, December 31, 2006 Purchases Freight-in Accounts Receivable, December 31, 2006 Shares of common stock outstanding

440,670 35,000 16,000 2,225 8,500 4,560 10,900 700 6,400 1,475 2,180 2,200 33,000 7,150 4,520 370 36,600 495,200 11,200 880 18,500 89,700 20,550 173,000 5,525 261,000 39,000

Adjusting information: 1. Cost of inventory in the possession of consignee as of December 31, 2006, was not included in the ending inventory balance, P33,600. 2. After preparing an analysis of aged accounts receivable, a decision was made to increase the allowance for bad debts to a percentage of the ending account receivable balance to 3%. Accounts totaling P7,480 were written off as uncollectible during the year. 3. Purchase returns and allowances amounting to 6% of purchases (not including freightin) were not recorded at year-end.

19

4. Sales commission for the last day of the year had not been accrued. Total sales for the day, P3,600. Average sales commission as a percent of sales is 3%. 5. No accrual has been made for a freight bill received on January 3, 2007, for goods received on December 29, 2006, P800. 6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was recorded as “prepaid advertising” and should be amortized over a 6-month period. No amortization was recorded. 7. Freight charges paid on sold merchandise and not passed to the buyer were netted against sales. Freight charges on sales during 2006 is P4,200. 8. Interest earned but not accrued, P690. 9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800 on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage value and the SLM is used. Depreciation is calculated to the nearest month.) 10. A “real” account is debited upon the receipt of supplies. Supplies on hand at year-end is P1,600. 11. Income tax rate (on all items) is 32%. Questions 1. Net Sales is a. P 499,200

c. P 488,500

d. P 487,320

2. Purchases net of returns and allowances is a. P 165,200 b. P 164,000

c. P 162,620

d. P 161,200

3. Freight-in is a. P 6,325

c. P 5,000

d. P 4,125

4. Inventory – 12/31/02 is a. P 54,700 b. P 54,150

c. P 53,600

d. P 52,200

5. Cost of sales is a. P 265,440

c. P 204,495

d. P 114,795

6. Sales salaries and commission is a. P 35,108 b. P 35,100

c. P 35,000

d. P 34,700

7. Advertising expense is a. P 24,696

b. P 16,800

c. P 16,750

d. P 16,606

8. Depreciation expense is a. P 14,600 b. P 12,500

c. P 12,000

d. P 11,550

9. Supplies expense is a. P 670

c. P 560

d. P 480

20

b. P 489,300

b. P 5,200

b. P 205,350

b. P 580

10. Doubtful accounts expense is a. P 7,500 b. P 7,460

c. P 7,300

d. P 7,200

11. Interest revenue is a. P 1,540

b. P 1,390

c. P 1,300

d. P 1,290

12. Income tax expense is a. P 58,554

b. P 54,605

c. P 53,722

d. P 53,693

13. Net income is a. P 115,586

b. P 115,558

c. P 114,159

d. P 104,445

Solution Per book

Adjust ments

Per Audit

Sales

495,200

Sales ret. And allow.

(11,200)

(11,200)

(880)

(880)

Sales discount

4,200

483,120

499,400

487,320

Cost of Sales Beginning inventory Purchases

89,700

89,700

173,000

173,000

Purch. Ret and allow.

10,380

Purch. Discount Freight-in Total Goods Avail. For Sale Ending inventory

Gross Profit Interest revenue Dividends revenue Gain on sale of assets Total Revenue

(10,380) -

5,525

800

6,325

268,225 20,550

258,645 33,600

54,150

247,675

204,495

235,445

282,825

700

690

1,390

7,150

7,150

18,500

18,500

261,795

309,865

Sales Salaries and Commission

35,000

108

35,108

Advertising Expense

16,000

606

16,606

Legal services

2,225

2,225

Insurance and licenses

8,500

8,500

Travel expense Depreciation expense

4,560 10,900

4,560 650

11,550

Utilities expense

6,400

6,400

Telephone and postage

1,475

1,475

Misc. selling expense

2,200

2,200

Officers' salaries

36,600

36,600

Interest expense

4,520

4,520

Bad debts

7,460

7,460

Transportation expense

4,200

4,200

21

Supplies expense

580

580 141,984

Income before tax

167,881

Income tax

53,721.92

Net Income

114,159

ANSWER: 1. D 2. C 11. B 12. C

3. A 13. C

4. B

5. C

6. A

7. D

8. D

9. B

10. B

Problem 8 Presented below are unaudited balances of selected accounts of Baluyot Company as at December 31, 2006 – its first year of operation. During the course of your audit of Baluyot’s books you obtained additional information affecting these accounts: Cash Accounts receivable Allowance for bad debts Sales (net) Accounts payable Purchases (net) Cars and trucks Machinery and equipment Accumulated depreciation

Debit 500,000 1,300,000 8,000 4,350,000 1,200,000 950,000

Credit

6,750,000 600,000

95,000

Additional information: a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors amounting to P300,000. A number of checks amounting to P150,000 were mailed on January 3, 2007. b. On December 28, 2006, Baluyot purchased and received goods amounting to P100,000, terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net amounts. This particular invoice was recorded and paid on January 4, 2007. c. On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed at P80,000 on December 3, 2006. The goods were returned on December 30, 2006. The supplier’s credit memo was received and recorded on January 5, 2007. d. Goods amounting to P50,000 were invoiced for the account of Palmes Company and recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods were shipped to Palmes on December 30, 2006. e. The bank returned on December 29, 2006, a customer check for P5,000 marked “No Sufficient Fund” but no entry was made. f.

22

Baluyot estimates that allowance for uncollectible accounts should be one and one-half percent (1½%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006.

g. All the cars and trucks were acquired on May 1, 2006 at a total cost of P1,200,000. Baluyot estimates the useful life of the cars and trucks at five-years and depreciates these assets based on 150% declining balance. As a policy, depreciation is computed to the nearest month and rounded-off to the nearest peso. No depreciation has been recorded for cars and trucks as at December 31, 2006. Questions 1. The adjusted amount of Cash is: a. P 650,000 b. P 645,000

c. P 500,000

d. P 495,000

2. The adjusted amount of Accounts Receivable is: a. P 1,355,000 b. P 1,350,000 c. P 1,305,000

d. P 1,300,000

3. The adjusted amount of Sales – net is: a. P 6,840,000 b. P 6,800,000

c. P 6,750,000

d. P 6,700,000

4. The adjusted amount of Purchases – net is: a. P 4,448,000 b. P 4,368,000

c. P 4,350,000

d. P 4,270,000

5. The adjusted amount of Bad Debts Expense is: a. P 36,325 b. P 28,325 c. P 20,325

d. P 12,325

6. The adjusted amount of 2006 Depreciation Expense – Machinery and Equipment is: a. P 95,550 b. P 95,500 c. P 95,417 d. P 95,000 7. The adjusted amount of Accounts payable is: a. P 818,000 b. P 800,000 c. P 768,000

d. P 600,000

Solution (a) Cash

150,000 Accounts payable 150,000 (b) Purchases 98,000 Accounts payable 98,000 (c) Accounts payable 80,000 Purchase returns 80,000 (d) Accounts receivable 50,000 Sales 50,000 (e) Accounts receivable 5,000 Cash 5,000 (f) Bad debts 28,325 Allowance for bad debts 28,325 (1,355,000 x 1½% = P 20,325 + P8,000 debit balance of Allowance) ANSWER: 1. B 2. A 3. B 4. B 5. B 6. D 7. C

Problem 9 The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the fiscal year-ended September 30, 2006 follows: DEBIT CREDIT Cash 225,000 Accounts receivable 936,000 Allowance for doubtful accounts 31,900 Notes receivable 155,000 Merchandise inventory, Sept. 30, 2005 568,900 Furniture and Equipment 618,000 Acc. Depreciation – Furniture & Equipment 187,500

23

Goodwill Accounts payable Notes payable Capital stock Retained earnings Sales Sales returns and allowances Purchases Purchase returns and allowances Advertising Sales salaries Commission expense Miscellaneous selling expenses Rent expense Office salaries Light and water Insurance expense Taxes and licenses Miscellaneous general expenses Interest expense Interest income

300,000

536,000 100,000 1,000,000 552,500 3,728,200

47,600 2,159,300 96,100 288,500 152,000 29,900 130,000 197,200 15,000 10,800 47,800 163,400 41,200 ________ 6,181,700

36,500

9,100 6,181,700

Your examination of the company’s accounts had indicated the need for adjustments based on the following information: 1. The Cash account include a customers’ check for P15,000 deposited on September 25, 2006, but returned by the bank on September 29, 2006 for lack of countersignature. No entry was made by the company for the return of the check or for its redeposit on October 5, 2006. 2. The Allowance for Doubtful Accounts should be adjusted to 5% of the customers’ outstanding balances on September 30, 2006. 3. A physical inventory taken of the merchandise stock as of the end of the fiscal year amounted to P601,200. 4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were still in transit on September 30, 2006 was neither taken as a liability nor included in the inventory on that date. 5. Goods received on consignment, still unsold, were included in the inventory at the agreed selling price of P24,000. 6. The merchandise inventory at September 30, 2005 was correctly stated. 7. On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000 on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited to the Furniture and Equipment account. 8. Depreciation for the fiscal year 2005-2006 has not been recorded. being used is 10% annually.

24

Depreciation rate

9. An insurance policy was taken on the inventory and equipment on April 1, 2006 with the annual premium of P10,800 paid on that date. 10. Rent expense account consisted of rent paid for stock and office space for thirteen (13) months ending October 31, 2006. 11. The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the bank on September 1, 2006. 12. The Goodwill account was set-up by a credit to Retained Earnings under a resolution of the Board of Directors. Questions 1. Cash for the fiscal year-ended September 30, 2006 is: a. P 195,000 b. P 210,000 c. P 225,000

d. P 240,000

2. Accounts receivable for the fiscal year-ended September 30, 2006 is: a. P 906,000 b. P 921,000 c. P 951,000 d. P 936,000 3. Allowance for doubtful accounts for the fiscal year-ended September 30, 2006 is: a. P 15,650 b. P 46,800 c. P 45,300 d. P 47,550 4. Merchandise inventory for the fiscal year-ended September 30, 2006 is: a. P 617,200 b. P 641,200 c. P 677,200 d. P 561,200 5. Book value of the Furniture and Equipment for the fiscal year-ended September 30, 2006 is: a. P 360,200 b. P 372,200 c. P 375,200 d. P 489,800 6. Goodwill for the fiscal year-ended September 30, 2006 is: a. P 300,000 b. P 292,500 c. P 285,000

d. P 0

7. Accounts payable for the fiscal year-ended September 30, 2006 is: a. P 496,000 b. P 536,000 c. P 552,000 d. P 576,000 8. Net income for the fiscal year-ended September 30, 2006 is: a. P 326,750 b. P 332,750 c. P 346,750

d. P 347,750

9. Retained earnings for the fiscal year-ended September 30, 2006 is: a. P 252,500 b. P 600,250 c. P 885,250 d. P 900,250 10. Insurance expense for the fiscal year-ended September 30, 2006 is: a. P 5,400 b. P 9,200 c. P 10,800 d. P 16,200 Solution 1.

Accounts Receivable Cash

15,000

2.

Doubtful Accounts Expense Allowance for doubtful accounts {5% x (936,000 + 15,000) = 47,550 - 31,900}

15,650

3.

Merchandise Inventory Income Summary

15,000 15,650

601,200 601,200

25

4.

Purchases Merchandise Inventory Accounts Payable Income Summary

40,000 40,000

5.

Income Summary Merchandise Inventory

24,000

6.

Income Summary Merchandise Inventory

568,900

7.

Accumulated Depreciation – Fur. & Eqpt. Gain on sale of equipment Furniture & Equipment

11,000

P29,000 35,000 P 6,000 64,300

Depr. for year ended 9.30.03 On eqpt sold (40,000 x 10% x 9/12) On remaining eqpt. (613,000 x 10%) Prepaid Insurance Insurance expense

10.

Prepaid rent Rent expense

11.

64,300 P 3,000 61,300 P64,300

5,400

5,400

10,000 10,000

Discount on notes payable Interest expense

3,000

Total discount (100,000 x 12% x 120/360) Less portion applicable to year ended 9.30. Unamortized, 9.30.

12.

6,000 5,000

P40,000 11,000

Depreciation expense Acc. Depr. – Fur. & Equip

9.

24,000 568,900

Cost (P32,000 / 80%) Less acc. depr. to date of sale (P40,000 x 10% x 2 + (40,000 x 10% x 9/12) Book value Selling price Gain on sale of equipment 8.

40,000 40,000

3,000

P4,000 1,000 P3,000

Retained Earnings Goodwill

300,000

300,000

TRANQUILAN CORPORATION WORKING TRIAL BALANCE September 30, 2003

Cash AR All. for DA NR MI F/E AD– F/E.

26

Trial Balance Debit Credit 225,000 936,000 31,900 155,000 568,900 618,000 187,500

Adjustments Debit

Credit 15,000 15,000

Income Statement Debit Credit

15,650 568,900

11,000

5,000 64,300

617,200

Balance Sheet Debit Credit 210,000 951,000 47,550 155,000 617,200* 613,000 240,800

Goodwill AP NP CS RE Sales Sales R& A Purchases Purch R&A. Adv Sales sal Com. exp Misc.sell Rent exp Office sal Light & W Ins. exp Tax & licen Misc. Ge Int. exp Int inc

300,000

300,000 40,000

536,000 100,000 1,000,000 552,500 3,728,200

300,000

47,600 2,159,300 96,100 288,500 152,000 29,900 130,000 197,200 15,000 10,800 47,800 163,400 41,200 6,181,700

3,728,200

40,000

10,000 5,400 3,000

96,100 288,500 152,000 29,900 120,000 197,200 15,000 5,400 47,800 163,400 38,200

9,100 6,181,700

64,300 5,400 10,000 3,000 464,350

15,650 6,000

464,350

NET INC

64,300

4,049,250 347,750 4,397,000

4. A

5. B

36,500

9,100

15,650

3. D

576,000 100,000 1,000,000 252,500

47,600 2,199,300

36,500

DA Gain Depren Pre ins Pre rent Disc on NP

ANSWER: 1. B 2. C

-0-

6. D

7. D

8. D

9. B

6,000

4,397,00 0 4,397,000

5,400 10,000 3,000 2,564,600

2,216,850

2,564,600

347,750 2,564,600

10. A

Problem 10 Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal year. TORTOR CORPORATION Unadjusted Trial Balance June 30, 2006 Cash 721,800 Trading Securities 200,000 Accounts receivable 2,128,000 Inventory, June 30, 2005 5,194,300 Invest. in associates (Equity Method) 1,200,000 Equipment 1,621,000 Prepaid expenses 116,200 Goodwill 500,000 Accounts payable 2,426,400 Accrued expenses 152,600 Accrued interest payable 226,000 Allowance for bad debts 36,100 Allowance for depreciation 450,700 Loans payable 2,500,000 Capital stock 3,000,000

27

Additional paid-in capital Retained earnings Sales Interest income Purchases Salaries and wages Rent, light and water Advertising Supplies Taxes Miscellaneous expenses Interest expense

260,000 1,808,800 21,602,000 140,000 13,928,000 3,250,000 750,000 400,000 300,000 250,000 1,793,300 250,000 32,602,600

_________ 32,602,600

Your examination of the accounts disclosed the following information: 1.

The cash account included an NSF check returned by the bank on June 30, 2006, but recorded as a cash reduction in July, 2006, P44,000, and a voucher for suppliers paid in cash on June 27, 2006 but not entered in the books, P26,500.

2.

Marketable Securities which cost P200,000 have a market value of P210,000. LongTerm Investments have a market value of P1,250,000 as at balance sheet date.

3.

The company has been providing an allowance for bad debts at 5% of the outstanding customers’ balances. Uncollectible accounts were charged off against the allowance during the year.

4.

A physical inventory taken by management personnel of the merchandise stock at June 30, 2006 totaled P5,751,900. You were unable to observe the inventory-taking as your services were engaged only on July 15, 2006. Due to the condition of the accounting records and internal accounting controls, you were also unable to satisfy yourself as to the inventory.

5.

Equipment no longer needed (cost, P150,000; accumulated depreciation, P45,000) was sold for P100,000 cash on June 29, 2006; the cash proceeds were credited to the Equipment account. Equipment is depreciated at 10% a year on a monthly basis computed at year-end.

6.

Prepaid expenses included insurance premium of P30,000 paid on April 1, 2006 on a one-year fire insurance policy.

7.

Salaries unpaid as of June 30, 2006, P13,000 were not taken up under accrued expenses.

8.

The Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution of the Board of Directors.

9.

A 10% cash dividend declared on June 15, 2006, payable on July 31, 2006, has not been recorded.

10.

The Board of Directors approved a resolution on June 25, 2006 appropriating out of Retained Earnings the amount of P300,000 to meet possible future losses on inventories.

28

Questions 1. Cash for the fiscal year-ended June 30, 2006 is: a. P 633,800 b. P 651,300 c. P 677,800

d. P 695,300

2. Marketable securities for the fiscal year-ended June 30, 2006 is: a. P 0 b. P 190,000 c. P 200,000

d. P 210,000

3. Accounts receivable for the fiscal year-ended June 30, 2006 is: a. P 2,172,000 b. P 2,128,000 c. P 2,100,000

d. P 2,084,000

4.

Allowance for doubtful accounts for the fiscal year-ended June 30, 2006 is: a. P 72,500 b. P 104,200 c. P 106,400 d. P 108,600

5. Inventory for the fiscal year-ended June 30, 2006 is: a. P 5,751,900 c. P 4,636,700 b. P 5,194,300 d. Cannot be determined. 6. Equipment for the fiscal year-ended June 30, 2006 is: a. P 1,671,000 b. P 1,571,000 c. P 1,621,000

d. P 1,566,000

7. Accumulated depreciation for the fiscal year-ended June 30, 2006 is: a. P 390,700 b. P 552,800 c. P 562,800 d. P 622,800 8. Retained earnings before net income for the fiscal year-ended June 30, 2006 is: a. P 708,800 b. P 1,008,800 c. P 1,308,800 d. P 1,508,000 9. Retained earnings after net income for the fiscal year-ended June 30, 2006 is: a. P 2,639,700 b. P 2,405,500 c. P 1,840,500 d. P 1,805,500 10. The auditor should issue a(an): a. Unqualified Opinion b. Unqualified Opinion with explanatory paragraph

c. Qualified Opinion d. Adverse Opinion

Solution TORTOR CORPORATION WORKING TRIAL BALANCE June 30, 2006

Cash TS AR Inven. Invest. Ass. Equip. Prepaid exp. Goodwill AP Acc. Exp. Acc. int. pay Allow. For BD Acc. for depr. Loans

Trial Balance Debit Credit 721,800 200,000 2,128,000 5,194,300 1,200,000 1,621,000 116,200 500,000 2,426,400 152,600 226,000 36,100 450,700

Adjustments Debit Credit 70,500 10,000 44,000

Income Statement Debit Credit

72,500

Balance Sheet Debit Credit 651,300 210,000 2,172,000 5,751,900 1,200,000 1,571,000 108,700 -----------2,426,400 165,600 226,000 108,600

172,100

562,800

5,194,300 50,000 7,500 500,000 13,000

60,000

5,751,900

2,500,000

2,500,000

29

payable Capital stock APIC RE Sales Int. inc. Purch. Sal. & wages Rent, light … Advertising Supplies Taxes Mis. exp. Int. exp.

3,000,000 260,000 1,808,800

13,928,000 3,250,000 750,000

3.

4.

5.

30

708,800

400,000 300,000 250,000 1,793,300 250,000 32,602,600

21,602,000 140,000 13,928,000 3,263,000 750,000

13,000

400,000 326,500 250,000 1,793,300 250,000

26,500

32,602,600

NET INC.

2.

500,000 300,000 300,000

21,602,000 140,000

Holding gain BD expense Gain on sale Dep exp Ins. expense Div. payable RE-appro.

1.

3,000,000 260,000

Accounts receivable Supplies Cash Trading Securities (Valuation Allow.) Holding gain - TS Bad debts expense Allowance for bad debts 5% x (2,128,000 + 44,000) = 108,600 - 36,100 To be considered in the preparation of the audit report. Failure to observe the inventory taking results in a limitation in the scope of examination. Depending on the materiality of the amount of Inventory in relation to other accounts, the auditor will either issue a qualified opinion or disclaimer of opinion. Allowance for depreciation Equipment Gain on sale of equipment Cost P150,000 Less acc. depr. (45,000+15,000) 60,000 Book value P 90,000 Selling price 100,000 Gain P 10,000 Depreciation expense Allowance for depreciation

10,000

72,500 172,100 7,500

1,505,600

10,000 300,000 300,000 1,505,600

72,500 172,100 7,500

26,407,200 1,106,700 27,513,900

44,000 26,500 10,000

70,500 10,000

72,500

60,000

72,500

50,000 10,000

172,100 172,100

10,000 10,000

27,513,900

11,654,900

27,513,900

11,664,900

300,000 300,000 10,558,200 1,106,700 11,664,900

10% x (1,621,000 + 100,000) Insurance expense Prepaid expenses (30,000 x 3/12) 7. Salaries and wages Accrued expenses 8. Retained earnings Goodwill 9. Retained earnings Dividends payable (10% x P3,000,000) 10. Retained earnings RE Appropriated for Possible Losses in Inv. ANSWER: 1. B 2. C 3. A 4. D 5. A 6. B 6.

7,500 7,500 13,000 500,000 300,000

13,000 500,000 300,000

300,000 300,000 7. C

8. A

9. D

10. C

Problem 11 Erasmo Corporation was incorporated on December 1, 2005, and began operations one week later. Jesus is a nonpublic enterprise. Before closing the books for the fiscal year ended November 30, 2006, Erasmo Corporation’s controller prepared the following financial statements: Balance Sheet November 30, 2006 ASSETS Current Assets: Cash Marketable securities, at cost Accounts receivable Allowance for doubtful accounts Inventories Prepaid insurance Total current assets Property, plant and equipment Accumulated depreciation Research and developments Total assets

150,000.00 60,000.00 450,000.00 (59,000.00) 430,000.00 15,000.00 1,046,000.00 426,000.00 (40,000.00) 120,000.00 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable & accrued expenses Income tax payable Total current liabilities Stockholders’ Equity Common stock, P10 par value Retained earnings Total stockholders’ Equity Total liabilities & Stockholders’ Equity

592,000.00 224,000.00 816,000.00 400,000.00 336,000.00 736,000.00 1,552,000.00

Statement of Income For the year ended November 30, 2006 Net sales

2,950,000.00

31

Cost & expenses: Cost of sales Selling and Administrative Depreciation Research and Development Income before income taxes Provision for income taxes Net income

1,670,000.00 650,000.00 40,000.00 30,000.00 2,390,000.00 560,000.00 224,000.00 336,000.00

Erasmo is in the process of negotiating a loan for expansion purposes and the bank has requested audited financial statements. During the course of the audit, the following additional information was obtained: 1.

The investment portfolio consist of short-term investments in marketable equity securities with a total market valuation of P55,000 as of November 30, 2006.

2.

Based on aging of the accounts receivable as of November 30, 2006, it was estimated that P36,000 of the receivables will be uncollectible. There were no Bad Debt write-offs during the year.

3.

Inventories at November 30, 2006, did not include work in process inventory costing P12,000 sent to an outside processor on November 29, 2006.

4. A P3,000 insurance premium paid on November 30, 2006, on a policy expiring one year later was charged insurance expense. 5. On June 1, 2006, a machine purchased for P24,000 was charged to repairs and maintenance. Erasmo depreciates machines of this type on the straight-line method over a five year life, with no salvage value, for financial and tax purposes. 6. Research and development costs of P150,000 were incurred in the development of a patent which Erasmo expects to be granted during the fiscal year ending November 30, 2003. Erasmo initiated a five year amortization of the P150,000 total cost during the fiscal year ended November 30, 2006. 7. During November 2006, a competitor company filed suit against Erasmo for patent infringement claiming P200,000 in damages. Erasmo Corporation’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is P50,000. 8. The 40% effective tax rate was determined to be appropriate for calculating the provision for income taxes for the fiscal year ended November 30, 2006. Ignore computation of deferred income taxes. Questions 1. In the income statement for the year ended November 30, 2006, Erasmo should report for the marketable securities a. A realized loss of P5,000. c. A realized gain of P5,000 b. An unrealized loss of P5,000. d. An unrealized gain of P5,000 2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the investment portfolio

32

a. b. c. d.

Marketable Securities P55,000 P55,000 P60,000 P60,000

Valuation Allowance P -0P5,000 P -0P5,000

3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for doubtful accounts at a. P23,000 b. P36,000 c. P59,000 d. P69,000 4. Bad debts expense for the year ended November 30, 2006, is a. P -0b. P23,000 c. P36,000

d. P59,000

5. Inventories at November 30, 2006, should be reported at a. P418,000 b. P430,000 c. P442,000

d.P450,000

6. Cost of goods sold for the year ended November 30, 2006, reported as a. P1,643,000 b. P1,645,000 c. P1,658,000 d. P1,670,00 7. Prepaid insurance at November 30, 2006, should be reported at a. P -0b. P12,000 c.P15,000

d. P18,000

8. At November 30, 2006, property, plant and equipment should be reported at a. P402,000 b. P426,000 c. P447,500 d. P450,000 9. Depreciation expense for the year ended November 30, 2006, should be reported at a. P16,000 b. P37,600 c. P40,000 d. P42,400 10. At November 30, 2006, accumulated depreciation should be reported at a. P37,600 b. P40,000 c. P42,400 d. P44,800 11. In the November 30, 2006 balance sheet, research and development costs should be reported at a. P -0b. P120,000 c. P135,000 d. P150,000 12. Research and development expense for the year ended November 30, 2006 is a. P -0b. P15,000 c. P30,000 d. P150,000 13. In the November 30, 2006 balance sheet, Erasmo should report an estimated liability from lawsuit at a. P -0b. P50,000 c. P100,000 d. P200,000 14. For the year ended November 30, 2006, which one of the following adjustments increases the Unadjusted income, before income taxes of P560,000? a. Pension expense b. Work in process inventory at outside processor c. Estimated loss from lawsuit d. Research and development cost 15. For the year ended November 30, 2006, which of the following adjustments decreases the unadjusted income, before income taxes, of P560,000? a. Recognition of prepaid insurance

33

b. Reduction in allowance for doubtful accounts c. Depreciation on machine purchased June 1,2006 d. Recognition of research and development cost Solution 1. 2. 3. 4. 5.

6. 7.

Unrealized holding loss 5,000 Valuation allowance Allowance for bad debts 23,000 S & A Expense (Bad debts) Inventory 12,000 Cost of sales Prepaid insurance 3,000 S & A Expense Property and equipment 24,000 S & A Expense Depreciation 2,400 Accum. Depreciation RD cost – IS 120,000 RD cost – BS Est. loss on damages 50,000 Est. liab on damages

ANSWER: 1. B 2. D 3. B 11. A 12. D

4. C 13. B

5. C 14. B

6. C 15. C

5,000 23,000 12,000 3,000 24,000 2,400 120,000 50,000 7. D

8. D

9. D

10. C

Problem 12 In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the following balance sheet: Eddie Vic Farms Corp. Balance sheet December 31, 2006 Assets Cash P 493,000 Marketable securities 630,000 Accounts receivable 540,000 Inventories 1,002,000 Total current assets 2,665,000 Land, buildings, and equipment 2,904,000 Total assets P5,569,000 Liabilities and Stockholders’ Equity Accounts payable P 684,840 Estimated losses from future crop failures 670,000 Salaries payable 300,000 Total current liabilities 1,654,840 10% Bonds payable (due in 10 years) 1,050,000 Capital stock 900,000 Retained earnings 1,964,160 Total liabilities and stockholder’s equity P 5,569,000 Additional information: a. Cash is held in a checking account and a savings account with balances of P130,700 and P362,300, respectively. The cash in the savings account will be used to support operations in the event of a crop failure.

34

b. The marketable securities represents the cost of treasury bills with a total market value of P600,000 at year-end. c. A loan to the president for P360,000 that is to be repaid in quarterly installments of P30,000 is included in “Accounts Receivable”. The balance of accounts receivable are considered to be 95 percent collectible. d. Inventories include: Finished products Supplies Storage buildings (net of P60,960 depreciation) Total

780,000 39,000 183,000 1,002,000

e. “Land, buildings, and equipment” includes 5 tractors that were purchased near the end of the year for P720,000 (shown net of a P600,000, 5-year loan used to buy the tractors). The balance of the account consists of land that was purchased for P2,400,000 and buildings that were purchased for P510,000 (shown net of depreciation of P126,000). f.

Included in “Accounts Payable” are P210,000 of deposits to suppliers for delivery of goods in February of the next year.

g. The company has 180,000 shares of P5 par common stock issued and outstanding. The common stock was originally sold for P7 per share, and the premium was included in “Retained Earnings.” h. After reading a PAGASA report, the president believes that next year will be a bad crop year due to prolonged “El Nino” phenomenon and estimates the company will lose about P670,000. An appropriation of Retained Earnings has been made for this amount. Questions Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2006: 1.

Cash a. P 130,700

b. P 231,600

c. P 362,300

d. P 493,000

2.

Accounts receivable a. P 171,000 b. P 513,000

c. P 531,000

d. P 540,000

3.

Current assets a. P 2,443,000

b. P 2,233,000

c. P 2,080,700

d. P 2,050,700

4.

Land, Buildings, and Equipment a. P 3,873,960 b. P 3,687,000

c. P 3,657,960

d. P 3,087,000

5.

Noncurrent assets a. P 4,409,300

b. P 4,289,300

c. P 4,047,000

d. P 3,927,000

Total assets a. P 6,642,300

b. P 6,490,000

c. P 6,340,000

d. P5,977,700

6.

35

7.

Current liabilities a. P 1,194,840

b. P 1,654,840

c. P 984,840

d. P 774,840

8.

Total liabilities a. P 3,514,840

b. P 2,844,840

c. P 2,634,840

d. P 2,424,840

9.

Total retained earnings a. P 2,265,160 b. P 2,235,160

c. P 1,604,160

d. P 1,595,160

10.

Total stockholders’ equity a. P 3,495,160 b. P 3,797,460

c. P 3,429,160

d. P 2,462,860

Solution a. Cash – restricted 362,300 Cash 362,300 b. Holding loss 30,000 Allowance for holding loss 30,000 c. Other receivable – noncurrent 360,000 Accounts receivable 360,000 Other receivable – current 120,000 Other receivable – noncurrent 120,000 Bad debts 9,000 Allowance for bad debts 9,000 (180,000 x 5%) d. Supplies 39,000 Land, building & equipment 183,000 Inventories 222,000 e. Land, building & equipment 600,000 Long-term liability 600,000 f. Advances to suppliers 210,000 Accounts payable 210,000 g. OE: Retained earnings 670,000 Est. liability 670,000 CE: Retained earnings 670,000 Retained earnings – appropriated 670,000 Adj: Estimated liability 670,000 Retained earnings 670,000 Answer: 1. A 2. A 3. D 4. B 5. B 6. C 7. A 8. B 9. B 10. A

Problem 13 M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION. On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the attorney’s bill of P700, the attorney advised her to hire an accountant to keep his records. M. Senajon was so busy that it was March 31 before she asked you to straighten out his records. Your task is to develop the financial statements on the March transactions. After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from the bank. She later paid P260, including interest of P60, on this loan. She also purchased a used pickup truck in the company’s name, paying P2,500 down and financing P7,400. The first payment on the truck is due April 15. M. Senajon then rented an office and paid three months’ rent P900, in advance. Credit purchases of office equipment of P800 and repair tools of P500 must be paid by April 10. In March,SENAJON REPAIR SERVICE CORPORATION completed repairs of P1,300, of which P400 were cash transactions. Of the credit transactions, P300 were collected during March.

36

Wages of P450 were paid to employees. On March 31, the company received a P75 bill for the March utilities expense and a P50 check from a customer for work to be completed in April. Questions 1. The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P12,390 b. P12,315 c. P12,440 d. P11,500 2.

The Accounts Receivable balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P900 b. P800 c. P700 d. P600

3.

The Total Current Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P13,715 b. P13,565 c. P13,515 d. P13,640

4.

The Total Non-current assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P11,900 b. P11,888 c. P11,388 d. P11,200

5.

The Total Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P25,528 b. P25,415 c. P24,840 d. P24,915

6.

The Total Stockholders’ Equity of SENAJON REPAIR SEVICE CORPORATION at March 31 is: a. P11,215 b. P11,903 c. P(85) d. P(285)

7.

The Total Liability of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P16,025 b. P14,725 c. P13,625 d. P6,225

8.

The Total Liability and Stockholders’ Equity of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P25,528 b. P25,415 c. P24,840 d. P24,915

9.

The Total Operating expenses and other expenses of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P1,585 b. P1,035 c. P1,015 d. P897

10.

The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is: a. P415 b. P403 c. P(85) d. P(285)

Solution Cash Common stock Pre-operating cost Cash Cash Notes payable Interest expense Notes payable Cash Equipment Cash Notes payable Rent expense Prepaid rent Cash

11,500 700 5,000 60 200 9,900 300 600

11,500 700 5,000 260 2,500 7,400 900

37

Equipment 800 AP – others Tools 500 Accrued expenses Cash 400 Accounts receivable 900 Revenue Cash 300 Accounts receivable Wages 450 Cash Utilities 75 Accrued expenses Cash 50 Advances from customer Answer: 1. C 2. D 3. D 4. D

800 500

1,300 300 450 75 50 5. C

6. A

7. C

8. C

9. A

10. D

Problem 14 OMANDAC CORPORATION has just completed its third year of operations, December 31, 2006. The newly selected president was amazed, to say the least, when told that the “company’s books have never been in balance.” In fact, he has learned that they are P14,800 out of balance. Consequently, he has decided to ask an independent CPA to “get things straightened out.” You are the lucky CPA! While getting an overview of the situation you learn that the bookkeeper journalize and posts all of the daily transactions, but the adjusting and closing entries are entered directly into the ledger accounts. A worksheet is not used. After recording the adjusting entries, the bookkeeper prepares an adjusted trial balance, which is then used to prepare the financial statements. At your request the bookkeeper prepared the following post-closing trial balance following his usual procedures: OMANDAC CORPORATION Post-closing Trial Balance December 31, 2006 Cash 17,800 Accounts receivable 55,000 Note receivable 6,000 Merchandise inventory (periodic system) 120,000 Prepaid insurance 2,400 Equipment 240,000 Land (future site) 40,000 Accounts payable Income tax payable Mortgage payable Common stock, par P10 (20,000 shares outstanding) Dividends declared and paid 4,000 Retained earnings To balance 14,800 Total 500,000

20,000 10,000 100,000 320,000 50,000 _______ 500,000

After spending considerable time digging into the records and files of the company, you discovered the following:

38

a. Estimates of bad debts expense that total P5,000 have been credited directly to Accounts Receivable. b. Accrued interest expense of P4,000 was recorded, but the credit was omitted. b.

Depreciation expense, on a straight-line basis (no residual value), is P30,000 per year. Depreciation for 2001 and 2002 was credited directly to the asset account.

c.

The 2006 ending inventory of P140,000 was not recorded; the beginning inventory was P120,000.

d.

Prepaid insurance of P2,400 was for two full years, 2006 and 2007.

e.

Depreciation was not recorded in 2006.

f.

Accounts payable of P2,000 were paid, but the debit was not recorded.

g.

The common stock account needs scrutiny.

Questions 1. Cash at December 31, 2006 is: a. P 11,800 b. P 13,800

c. P 15,800

d. P 17,800

2. Accounts receivable at December 31, 2006 is: a. P 65,000 b. P 60,000 c. P 55,000

d. P 50,000

3. Notes receivable at December 31, 2006 is: a. P 10,000 b. P 8,000

d. P 0

4.

c. P 6,000

Merchandise inventory at December 31, 2006 is: a. P 260,000 b. P 140,000 c. P 120,000

d. P 110,000

5. Prepaid insurance at December 31, 2006 is: a. P 2,400 b. P 1,800

c. P 1,200

d. P 0

6. Equipment at December 31, 2006 is: a. P 210,000 b. P 240,000

c. P 270,000

d. P 300,000

7. Land (future site) at December 31, 2006 is: a. P 40,000 b. P 30,000

c. P 20,000

d. P 0

8. Accounts payable at December 31, 2006 is: a. P 22,000 b. P 20,000

c. P 18,000

d. P 16,000

9. Income taxes payable at December 31, 2006 is: a. P 38,016 b. P 28,016 c. P 10,384

d. P 10,000

10. Mortgage payable at December 31, 2006 is: a. P 100,000 b. P 95,000

c. P 90,000

d. P 80,000

11. Common stock at December 31, 2006 is: a. P 320,000 b. P 200,000

c. P 180,000

d. P 120,000

39

14. Retained earnings at December 31, 2006 is: a. P 50,000 b. P 35,200

c. P 18,000

d. P 24,000

Solution Cash

17,800

Accounts receivable

60,000

Allowance for bad debts

5,000

Note receivable

6,000

Merchandise inventory

140,000

Prepaid insurance

1,200

Equipment

300,000

Accumulated depreciation

90,000

Land

40,000

Accounts payable

18,000

Interest payable

4,000

Income tax payable

10,000

Mortgage payable

100,000

Common stock

200,000

APIC

120,000

Retained earnings

________ 565,000

Answer 1. D 2. C 11. B 12. C

3. C

4. B

5. C

6. A

18,000 squeezed figure 565,000

7. A

8. C

9. D

10. A

Problem 15 Your new audit client, Capiz Company, prepared the trial balance below as of December 31, 2006. The company started its operations on January 1, 2005. Your examination resulted in the necessity of applying the adjusting entries indicated in the additional data below. Capiz Company TRIAL BALANCE December 31, 2006 Cash Accounts receivable, net allowance of P20,000 Inventories, December 31, 2005 Land Buildings Accumulated depreciation, building Machinery Accumulated depreciation, machinery Sinking fund assets Bond discounts Treasury stock, common Accounts payable Accrued bond interest First mortgage, 6% sinking fund bonds Common stock

40

Debits P510,000 600,000 669,000 660,000 990,000 444,000 75,000 75,000 105,000

Credits

P19,800 45,000

567,000 11,250 679,500 1,500,000

Premium on common stock Stock donation Retained earnings, December 31, 2005 Net sales Purchases Salaries and wages Factory operating expenses Administrative expenses Bond interest

150,000 180,000 222,450 2,625,000 850,500 507,000 364,500 105,000 45,000 P6,000,000

_________ P6,000,000

Additional data are as follows: (1)

The 1,500,000 common stock was issued at a 10 percent premium to the owners of the land and buildings on December 31, 2004, the date of organization. Stock with a par value of P180,000 was donated back by the vendors. The following entry was made: (Debit) Treasury stock (Credit) Stock donation

P180,000

P180,000

The stock was donated because the proceeds from its subsequent sale were to be considered as an allowance on the purchase price of land and buildings in proportion to their values as first recorded. The treasury stock was sold in 2006 for P75,000, which was credited to treasury Stock. (2)

On December 31, 2006, a machine costing P15,000 when the business started was removed. The machine had been depreciated at 10 percent during the first year. The only entry made was one crediting the Machinery account with its sales price of P6,000.

(3)

Depreciation is to be provided on the straight-line basis, as follows: buildings, 2 percent of cost; machinery, 10 percent of cost. Ignore salvage values.

(4)

The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten years from January 1, 2005, interest payable April 1 and October 1. The bonds were sold on January 1, 2005, at 90; the discount is to be amortized over the life of the bonds on straight-line basis.

(5)

A sinking fund is built up on the straight-line basis, with a provision that each installment after the first shall be decreased y the amount of the annual 6 percent interest, which interest is to be added to the fund. The audit disclosed that the proper installment to the sinking fund was paid by the company on December 31, 2006, but that the amount was charged in error o the firs Mortgage, 6% Sinking Fund Bonds account.

(6)

The trustee of the sinking fund reported an addition of P4,500 interest to the fund on December 31, 2006. this had not been recorded by the company.

(7)

Inventories at December 31, 2006, were P525,000.

Questions Based on the above and the result of your audit, you are to provide the answers to the following: 1.

The correct balance of Land account as of December 31, 2006 was

41

a.

P660,000

b. P630,000

c. P588,000

d. P0

2.

The adjusted net book value of the Building as of December 31, 2006 was a. P 907,200 b. P905,400 c. P950,400 d. P945,000

3.

The correct net book value of the machinery as of December 31, 2006 was a. P399,000 b. P354,000 c. P345,000 d. P348,000

4.

The correct amount of total depreciation expense for 2006 was a. P648,000 b. P63,900 c. P62,400 d. P63,000

5.

How much was the gain or loss on sale of machinery on December 31, 2006? a. P6,000 loss b. P6,000 gain c. P7,500 loss d. P7,500 gain

6.

The adjusted net carrying amount of 6% sinking fund bonds as of December 31, 2006 was a. P675,000 b. P679,500 c. P690,000 d. P735,000

7.

The correct balance of sinking fund assets as of December 31, 2006 was: a. P75,000 b. P79,500 c. P150,000 d. P154,500

8.

The correct balance of Treasury Stock as of December 31, 2006 was: a. P0 b. P105,000 c. P180,000 d. P75,000

9.

The correct balance of Common Stock as of December 31, 2006 was: a. P1,320,000 b. P1,500,000 c. P1,650,000 d. P1,395,000

10.

The correct balance of stock donation as of December 31, 2006 was: a. P180,000 b. P105,000 c. P0 d. P75,000

Solution 1. OE: Treasury stock 180,000 Stock donation 180,000 CE: Memo entry Adj: Stock donation 180,000 Treasury stock 180,000 --------------------------------------------------------OE: Cash 75,000 Treasury stock 75,000 CE: Cash 75,000 Land 30,000 Building 45,000 Adj: Treasury stock 75,000 Land 30,000 Building 45,000 2. OE: Cash 6,000 Machinery 6,000 CE: Cash 6,000 Accum. Dep’n 3,000 Loss on sale 6,000 Machinery 15,000 Adj: Accum. Dep’n: mach 3,000 Loss on sale 6,000 Machinery 9,000 3. Depreciation 63,900 Accum. Dep’n – Mach 45,000 * Accum. dep’n - bldg 18,900

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* 444,000 + 6,000 – 15,000 x 10% = 45,000 ** 990,000 – 45,000 = 945,000 x 2% = 18,900 Accum. Dep’n – bldg 900 Retained earnings 900 4. Discount on bonds 75,000 Sinking fund bonds 75,000 Retained earnings 7,500 Interest expense 7,500 Discount on bonds 15,000 P 75,000/10 yrs = P7,500 – 2002 7,500 – 2003 5. OE: Sinking fund bond 70,500 Cash 70,500 CE: Sinking fund 70,500 Cash 70,500 Adj: Sinking fund 70,500 Sinking fund bond 70,500 6. Sinking fund 4,500 Interest income 4,500 Answer: 1. B 2. A 3. D 4. B 5. A 6. C 7. C

8. A

9. B

10. C

Problem 16 Instructions: 1. Prepare the audit adjustments required in the problems. 2. Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and Loss (WPL). 3. Compute the final balances of each account on your WBS and WPL, proceed to the questionnaires and transfer all answers to the final answer sheet. 4. Assume no other issues, except those discussed on the problem. On November 20, 2006 you have substantially completed your fieldwork relative to your audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store and office is located in Davao City. Based on your review of the records you have found out that the company’s financial statements at the end of its fiscal year September 30, 2006 submitted by their account is subject to the adjustments you noted in your audit. Audit finding No. 1 Included in the Cash account is a customer’s check for P1,100 deposited on September 30, 2006 but returned by the bank on September 30, 2006 for insufficiency of drawer’s funds. The check was redeposited on October 3, 2006. No entry was made by the company for the return nor the redeposit of the check. Audit finding No. 2 The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of uncollectible accounts in excess of the beginning balance of the allowance. Further analysis of the customer’s accounts disclosed the need for setting up an allowance as at September 30, 2006 to 5% of outstanding balance as of date. Audit finding No. 3 Goods shipped out on consignment basis in September 2006, still unsold as at the end of the month, were recorded as sales for P4,900 which included 40% gross profit on cost. This was not included in the physical inventory.

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Audit finding No. 4 A physical inventory taken of the merchandise on September 30, 2006 amounted to P41,500. Audit finding No. 5 Notes receivable included a 120-day 8% for P9,000 dated July 1, 2006 from J. Ramos, interest due on maturity date (assume 30 days per month). Audit finding No. 6 Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of P2,400 at September 30, 2005, was sold for P2,000 cash on October 1, 2006. The sales price was credited to Furniture and Equipment. Audit finding No. 7 Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and equipment is 10 years. Audit finding No. 8 A one-year insurance policy was taken by the company on June 30, 2006 and paid the annual of P1,200. Audit finding No. 9 The company paid P11,700 representing rent for 13 months ending on October 31, 2006. Audit finding No. 10 The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on August 15, 2006. Interest expense was debited. Audit finding No. 11 The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited to retained earnings. Audit finding No. 12 Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution of the Board of Directors. Audit finding No. 13 Office salaries unpaid as of September 30, 2006, P1,200, were not taken up as accrued expense. Audit finding No. 14 Patents were acquired by purchase on September 30, 2005 for P20,000. It has as estimated useful life of 4 years. Audit finding No. 15 An analysis of the investment account shows that on September 2006 25 shares were sold for P200 per share. This was recorded as a debit balance to Cash, P5,000 and a credit to Investments in A Co., P5,000. Audit finding No. 16 A repayment of non-interest bearing note payable for P5,000 was erroneously debited to Advertising.

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Audit finding No. 17 A payment of P1,000 for Taxes on September 29, 2006 was not recorded in the books. Audit finding No. 18 On September 30, 2006 RUCHELL Company declared a 10% stock dividend distributable on October 21, 2006. The market value per share is P120 at the time of declaration. This has not been taken up in the books. Audit finding No. 19 On September 30, 2006 a Land was donated by a stockholder. The stockholder bought the Land in 1998 for P26,000. The appraised value of the land at present is P50,000. Audit finding No. 20 Marketable Securities which cost P15,000 has a market value of P16,000. Audit finding No. 21 A payment to supplier within the discount period was made on June 20, 2006. The discount of P20 was credited to Sales discounts instead of purchase discounts. Audit finding No. 22 RUCHELL Corporation has a pending lawsuit from a customer, asking for a P100,000 damages. The lawyers of the company believe that it is remote that the case of the customer will prosper in court. RUCHELL Corporation Working Balance Sheet September 30, 2006

Current Cash Marketable Securities Account Receivable – trade Allowance for doubtful accounts Notes Receivable Inventories Investment in A, Co. –100 shares Interest Receivable Prepayments TOTAL

PER BOOK

AUDIT ADJUSTMENT

FINAL BALANCES

10,500 15,000 57,200 1,500 dr. 21,500 39,500 25,000 1,750 171,950

Land Furniture & Equipment Accumulated Depreciation TOTAL

50,850 (12,170) 38,680

Goodwill Patents TOTAL Total Assets

10,000 20,000 30,000 240,630

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Liabilities Accounts payable Accrued expenses Notes payable Stockholders’ equity Capital Stock, P100 Additional paid in capital Stock dividend distributable Donated capital Retained Earnings Total Liab. & S. E

35,420 31,000 75,000 99,210 240,630 RUCHELL CORPORATION Working Profit and Loss Year Ended September 30, 2006 PER AUDIT FINAL BOOKS ADJUSTMENT BALANCES

Sales Sales returns Sales discounts Net sales

269,810 ( 1,950) ( 1,700) 266,160

Cost of sales Inventory, beg. Purchases Purchase returns Purchase discounts Inventory, end Gross Profit Advertising Doubtful Accounts Salesman’s Salaries Miscellaneous Selling expenses Rent expense Insurance expense Light and water Taxes Office salaries Miscellaneous office expense Loss on sale Amortization of Intangibles Interest Expense Other Income Net Income

39,500 189,360 ( 3,700) ( 1,970) (41,500) 181,690 84,470 ( 7,210) (21,650) ( 1,940) (11,700) ( 1,200) ( 300) ( 1,510) ( 3,330) ( 1,560) ( 4,060) 430 30,440

Questions 1. 2.

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Cash a. P 9,500

b. P8,400

Accounts receivable – trade

c. P10,600

d. P5,800

a. P57,200

b. P53,400

3.

Allowance for doubtful accounts a. P1,500 b. P2,670 4. Interest Receivable a. P60 b. P180 5.

c. P50,000

d. P58,300

c. P2.860

d. P4,115

c. P240

d. 90

Inventories a. P41,500

b. P46,400

c. P45,000

d. 40,000

6.

Doubtful accounts a. P2,980

b. P2,670

c. P4,170

d. P4,000

7.

Prepayments a. P2,980

b. P3,700

c. p2,050

d. P2,650

8.

Furniture and Equipment a. P57,850 b. P62,850

c. P60,850

d. P50,850

9.

Depreciation a. P5,085

b. P6,285

c. P6,085

d. P4.985

10.

Accounts payable a. P35,420

b. P34,420

c. P36,000

d. P32,988

11.

Capital Stock a. P75,000

b. P77,000

c. P0

d. P73,000

12.

Sales a. P269,810

b. P274,710

c. P264,910

d. P260,100

13.

Purchases a. P189,360

b. P187,360

c. P180,000

d. P200,160

14.

Interest expense a. P4,030

b. P4.060

c. P4,090

d. P3,910

15.

Other Income P430

b. P610

c. P400

d. 0

16.

Goodwill a. P0

b. P10,000

c. P5,000

d. P6,000

17.

Office salaries a. P2,130

b. P22,850

c. P4,530

d. P1,200

18.

Patents a. P0

b. P10,000

c. P15,000

d. P5,000

19.

Additional Paid in Capital a. P3,500 b. P500

c. P2,000

d. P200

20.

Investment in a Co.

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a. P0 21.

Advertising a. P7,210 22. Light and Power a. P500 23.

Taxes a. P1,970

b. P26,000

c. P24,000

d. P25,000

b. P5,210

c. P2,210

d. P5,000

b. P5,300

c. P300

d. P0

b. P2,510

c. P1,000

d. P300

24.

RUCHELL Company should record stock dividend payable at a. P7,500 b. P9,000 c. P0

d. P1,500

25.

Land a. P0

d. P24,000

b. P50,000

c. p26,000

26.

The appropriate account to be credited for the donation is a. Retained Earnings c. Donated Capital b. Capital Stock d. Other Income

27.

Marketable securities, net of any allowance for decline a. P14,000 b. P15,000 c. P16,000

d. P0

28.

Sales discount a. P1,680

b. P1,720

c. P1,200

d. P1,500

29.

Salesman’s salaries a. P21,650

b. P22,850

c. P20,000

d. P25,000

30.

RUCHELL Company should recognize liability from damages for a. P0 b. P100,000 c. P50,000 d.P200,000

Answer: 1. B 2. B 11. A 12. C 21. C 22. C

3. B 13. A 23. B

4. B 14. D 24. A

Entries: Finding 1 Accounts receivable 1,100 Cash Finding 2 Bad debts 4,170 Allow. For BD Finding 3 Sales 4,900 Accounts receivable Inventory 3,500 COS Finding 4 COS 39,500 Inventory Inventory 41,500 COS Finding 5 Interest receivable 180 Interest income Finding 6

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5. C 15. B 25. B

1,100 4,170 4,900 3,500 39,500 41,500 180

6. C 16. A 26. C

7. B 17. C 27. B

8. D 18. C 28. B

9. A 19. A 29. A

10. A 20. C 30. A

Finding 8 Prepayments 900 Insurance expense Finding 9 Prepayments 900 Rent expense Finding 10 Prepayment 150 Interest expense Finding 11 Retained earnings 2,000 APIC Finding 12 Retained earnings 10,000 Goodwill Finding 13 Office salaries 1,200 Accrued expenses Finding 14 Amortization 5,000

900 900 150 2,000 10,000 1,200

No adjustments Finding 7 Depreciation AD Finding 15 Loss on sale Investment Finding 16 Note payable Advertising

Patents 5,085

1,000

5,085 Finding 18 Retained earnings Stock div. distr. APIC Finding 19 Land Donated capital

1,000

5,000

Finding 17 Taxes 1,000 Cash Finding 21 Sales discount 20 Purchase discount

5,000

5,000

9,000

50,000

7,500 1,500 50,000

Finding 20 No adjustment

1,000 20

WORKING PAPER Per books Cash

10,500.00

Marketable securities

15,000.00

Accounts receivable - trade

57,200.00

Allow.for bd - debit balance

21,500.00

Inventories

39,500.00

Investment in A. Co. - 100 shares

25,000.00

Prepayments Land Furniture & Equipment

1,750.00 -

Accumulated depreciation

50,850.00 (12,170.0 0)

Goodwill

10,000.00

Patents

20,000.00 240,630.0 0

Accounts payable

35,420.00

Accrued expenses

-

Notes payable

31,000.00

Capital stock, P100

75,000.00

Additional paid in capital

-

Stock dividend distributable

-

Donated capital

-

Retained earnings

99,210.00 240,630.0 0

Per audit 8,400.00 15,000.00

1,100.0 0

4,900.0 0 4,170.0 0

45,000.0 0

39,500.0 0 1,000.0 0

1,500.00

Notes receivable

Interest receivable

2,100.0 0

180.00 1,950.0 0 50,000.0 0

21,500.00 45,000.00 24,000.00 180.00 3,700.00 50,000.00

5,085.0 0 10,000.0 0 5,000.0 0

5,000.0 0

53,400.00 (2,670.0 0)

1,200.0 0

50,850.00 (17,255.0 0) 15,000.00 267,105.0 0 35,420.00 1,200.00 26,000.00 75,000.00

3,500.0 0 7,500.0 0 50,000.0 0

3,500.00 7,500.00 50,000.00 68,485.00 267,105.0 0

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Sales

Sales discounts

269,810.00 (1,950.0 0) (1,700.0 0)

Net sales

266,160.00

Cost of sales ***

181,690.00

Sales returns

Gross profit Other income TOTAL Operating expenses Advertising Doubtful accounts Salesmen's salaries Miscellaneous selling expenses Rent expenses Insurance expense Light and water Taxes Office salaries Miscellaneous office expenses

(7,210.0 0) (21,650.0 0) (1,940.0 0) (11,700.0 0) (1,200.0 0) (300.00 ) (1,510.0 0) (3,330.0 0) (1,560.0 0)

-

Interest expense

34,500.00 (4,060.0 0)

Net income

30,440.00

Retained beginning

68,770.00

Retained end

39,500.0 0

-

Purchase returns Purchase discounts

50

39,500.00 189,360.00 (3,700.0 0) (1,970.0

176,170.00 85,070.00 610.00 85,680.00

4,170.0 0

5,000.0 0

900.00 900.00 1,000.0 0 1,200.0 0 1,000.0 0 5,085.0 0 5,000.0 0

150.00

(2,210.0 0) (4,170.0 0) (21,650.0 0) (1,940.0 0) (10,800.0 0) (300.00 ) (300.00 ) (2,510.0 0) (4,530.0 0) (1,560.0 0) (1,000.0 0) (5,085.0 0) (5,000.0 0) 24,625.00 (3,910.0 0) 20,715.00

12,000.0 0 9,000.0 0

56,770.00 (9,000.0 0)

99,210.00

*** COS Purchases

20.00 41,500.0 0 3,500.0 0 180.00

68,485.00 186,105.0 0

Inventory - beg.

261,240.00

84,900.00

Depreciation

Dividends

20.00

430.00

-

Amortization of intangibles

264,910.00 (1,950.0 0) (1,720.0 0)

84,470.00

Loss on sale

Income from operations

4,900.0 0

186,105.0 0

0) TGAS Inventory - end

223,190.00 (41,500.0 0)

COS

181,690.00

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