You are on page 1of 29

IX – CASH TO ACCRUAL BASIS, SINGLE ENTRY

AND CORRECTION OF ERRORS

PROBLEM NO. 1
Zamboanga Enterprises records all transactions on the cash basis. The
company’s accountant prepared the following income statement at the end
of the company’s first year of operations:

Zamboanga Enterprises
Income Statement
For the Year Ended December 31, 2006

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

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

(a) Amounts due from customers at year-end were P224,000. Of this


amount, P24,000 will probably not be collected.

(b) Salaries of P88,000 for December 2006 were paid on January 5,


2007.

(c) Zamboanga rents its building for P24,000 a month, payable quarterly
in advance. The contract was signed on January 1, 2006.

(d) The bill for December’s utility costs of P21,600 was paid January 10,
2007.

(e) Equipment of P240,000 was purchased on January 1, 2006. The


expected life is 5 years, no salvage value. Assume straight-line
depreciation.

(f) Commissions of 15% of sales are paid on the same day cash is
received from customers.

1
(g) A 1-year insurance policy was issued in company assets on July 1,
2006. Premiums are paid annually in advance.

(h) Zamboanga barrowed P400,000 for one year on May 1, 2006.


Interest payments based on an annual rate of 12% are made
quarterly, beginning with the first payment on August 1, 2006.

QUESTION:

How much is the net income before income tax under the accrual basis of
accounting?
a. P526,000 c. P514,000
b. P286,000 d. P574,000

Suggested Solution:

Net income before income tax - cash basis P185,600


Add (deduct) adjustments:
AJE No. a 224,000
(24,000)
AJE No. b (88,000)
AJE No. c 72,000
AJE No. d (21,600)
AJE No. e 240,000
(48,000)
AJE No. f (30,000)
AJE No. g 24,000
AJE No. h (8,000)
Net income before income tax - accrual basis P526,000

Adjusting journal entries (AJE) to convert cash to accrual basis:


a) Accounts receivable P224,000
Doubtful accounts expense 24,000
Sales P224,000
Allowance for doubtful accounts 24,000

b) Salaries expense P 88,000


Salaries payable P 88,000

c) Prepaid rent [P360,000 - (P24,000 x 12)] P 72,000


Rent expense P 72,000

d) Utilities expense P 21,600


Utilities payable P 21,600

2
e) Depreciation expense (P240,000/5) P 48,000
Accumulated depreciation P 48,000

Note: The cost of the equipment should be added back to the reported
net income since it was expensed totally in 2006.

f) Commission expense [(P224,000-P24,000)x15%] P 30,000


Commission payable P 30,000

Note: No commission on doubtful accounts

g) Prepaid insurance (P48,000 x 6/12) P 24,000


Insurance expense P 24,000

h) Interest expense (P400,000 x 12% x 2/12) P 8,000


Interest payable P 8,000

Answer: A

PROBLEM NO. 2
You were able to gather the following in connection with your audit of the
Bukidnon Company for the year ended December 31, 2006:

1/1/2006 12/31/2006
Accounts receivable P6,400,000 P4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising 14,250 40,000
Prepaid insurance 25,000 -
Unexpired insurance - 41,000

During the year:

Amount collected from customers P10,000,000


Total payments to suppliers of merchandise 13,618,000
Total payments to suppliers of merchandise of
prior years 4,632,000
Wages paid 3,050,000
Advertising paid which includes P40,000
applicable in 2006 300,000
Insurance premium paid 125,000

3
QUESTIONS:

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

1. Net sales for 2006


a. P 6,400,000 c. P 7,600,000
b. P12,400,000 d. P14,000,000

2. Net purchases for 2006


a. P11,607,000 c. P13,618,000
b. P15,629,000 d. P16,239,000

3. Wages expense for 2006


a. P3,010,000 c. P3,050,000
b. P3,090,000 d. P3,100,000

4. Advertising expense for 2006


a. P245,750 c. P260,000
b. P285,750 d. P300,000

5. Insurance expense for 2006


a. P 84,000 c. P100,000
b. P109,000 d. P141,000

Suggested Solution:

Question No. 1
Accounts receivable, 12/31/06 P 4,000,000
Add collections from customers 10,000,000
Total 14,000,000
Less accounts receivable, 1/1/06 6,400,000
Net sales for 2006 P 7,600,000

Question No. 2
Unpaid merchandise invoices, 12/31/06 P 2,621,000
Add payments to suppliers of 2006:
Total payments to suppliers in 2006 P13,618,000
Less payments in 2006 to suppliers
of prior years 4,632,000 8,986,000
Net purchases for 2006 P11,607,000

4
Question No. 3
Accrued wages, 12/31/06 P 125,000
Add wages paid in 2006 3,050,000
Total 3,175,000
Less accrued wages, 1/1/06 85,000
Wages expense for 2006 P3,090,000

Question No. 4
Accrued advertising, 12/31/06 P 40,000
Advertising supplies inventory, 1/1/06 35,000
Advertising paid in 2006 300,000
Total 375,000
Less: Accrued advertising, 1/1/06 P14,250
Advertising supplies inventory, 12/31/06 75,000
Advertising paid applicable to 2007 40,000 129,250
Advertising expense for 2006 P245,750

Question No. 5
Prepaid insurance, 1/1/06 P 25,000
Add insurance premium paid in 2006 125,000
Total 150,000
Less prepaid insurance, 12/31/06 41,000
Insurance expense in 2006 P109,000

Answers: 1) C; 2) A; 3) B; 4) A, 5) B

PROBLEM NO. 3
Your audit of Camiguin Company disclosed that your client kept very
limited records. Purchases of merchandise were paid for by check, but
most other items were out of cash receipts. The company’s collections were
deposited weekly. No record was kept of cash in the bank, nor was a
record kept of sales. Accounts receivable were recorded only by keeping a
copy of the ticket, and this copy was given to the customer when he paid
his account.

On January 2, 2006 started business and issued common stock, 108,000


shares with P100 par, for the following considerations:
Cash P 900,000
Building (useful life, 15 years) 8,100,000
Land 2,700,000
P11,700,000

5
An analysis of the bank statements showed total deposits, including the
original cash investment, of P6,300,000. The balance in the bank
statement on December 31, 2006, was P450,000, but there were checks
amounting to P90,000 dated in December but not paid by the bank until
January 2007. Cash on hand on December 31, 2006 was P225,000
including customers’ deposit of P135,000.

During the year, Camiguin Company borrowed P900,000 from the bank
and repaid P225,000 and P45,000 interest.

Disbursements paid in cash during the year were as follows:


Utilities P180,000
Salaries 180,000
Supplies 360,000
Dividends 270,000
P990,000

An inventory of merchandise taken on December 31, 2006 showed


P1,359,000 of merchandise.

Tickets for accounts receivable totaled P1,620,000 but P90,000 of that


amount may prove uncollectible.

Unpaid suppliers invoices for merchandise amounted to P630,000.

Equipment with a cash price of P720,000 was purchased in early January


on a one-year installment basis. During the year, checks for the down
payment and all maturing installments totaled P801,000. The equipment
has a useful life of 5 years.

QUESTIONS:

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

1. Payments for merchandise purchases in 2006


a. P4,869,000 c. P3,654,000
b. P3,879,000 d. P3,969,000

2. Collections from sales in 2006


a. P6,480,000 c. P5,580,000
b. P7,380,000 d. P4,500,000

6
3. Net income for the year ended December 31, 2006
a. P2,430,000 c. P2,655,000
b. P1,440,000 d. P2,340,000

4. Stockholders’ equity as of December 31, 2006


a. P13,860,000 c. P14,085,000
b. P12,870,000 d. P13,770,000

5. Total assets as of December 31, 2006


a. P14,175,000 c. P14,374,800
b. P14,085,000 d. P14,310,000

Suggested Solution:

Question No. 1
Total deposits P6,300,000
Less adjusted cash in bank:
Balance per bank statement P450,000
Less outstanding checks 90,000 360,000
Total check disbursements 5,940,000
Less other check disbursements:
Payment of loan 225,000
Payment of interest on loan 45,000
Payment for equipment 801,000 1,071,000
Payments for merchandise purchases P4,869,000

Question No. 2
Total deposits P6,300,000
Less deposits other collections:
Cash investment P900,000
Proceeds from bank loan 900,000 1,800,000
Collections deposited in the bank 4,500,000
Add collections not deposited:
Cash on hand, 12/31/06 225,000
Add disbursements in cash 990,000
Total 1,215,000
Less customers' deposit 135,000 1,080,000
Total collections from sales P5,580,000

7
Question No. 3
Sales (P3,360,000+P1,620,000) P7,200,000
Less cost of sales:
Purchases (P4,869,000 + P630,000) P5,499,000
Less inventory, 12/31/06 1,359,000 4,140,000
Gross profit 3,060,000
Less expenses:
Utilities 180,000
Salaries 180,000
Supplies 360,000
Doubtful accounts 90,000
Depreciation–building (P8,100,000/15) 540,000
Depreciation–equipment (P720,000/5) 144,000
Interest expense
[P45,000+(P801,000-P720,000)] 126,000 1,620,000
Net income P1,440,000

Question No. 4
Common stock (108,000 shares x P100) P10,800,000
APIC (P11,700,000 - P10,800,000) 900,000
Retained earnings (P1,440,000 - P270,000) 1,170,000
Total stockholders' equity P12,870,000

Question No. 5
Current assets:
Cash (P360,000 + P225,000 ) P 585,000
Accounts receivable – net
(P1,620,000 - P90,000) 1,530,000
Inventory 1,359,000 P 3,474,000
Noncurrent assets:
Land 2,700,000
Building - net (P8,100,000 - P540,000) 7,560,000
Equipment - net (P720,000 - P144,000) 576,000 10,836,000
Total assets P14,310,00
0

Answers: 1) A; 2) C; 3) B; 4) B, 5) D

8
PROBLEM NO. 4
Misamis Company’s December 31, year end financial statement contained
the following errors:

December 31,2005 December 31,2006


Ending inventory P100,000 understated P90,000 overstated
Depreciation expense 20,000 understated

An insurance premium of P75,000 was prepaid in 2005 covering the years


2005, 2006, and 2007. The same was charged to expense in full in 2005.
In addition, on December 31, 2006, a fully depreciated machinery was sold
for P160,000 cash, but the sale was not recorded until 2007. There were
no other errors during 2005, 2006 and 2007 and no corrections have been
made for any of the errors. Ignore income tax considerations.

QUESTIONS:

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

1. What is the total effect of the errors on the 2005 net income?
a. Understated by P130,000 c. Overstated by P70,000
b. Understated by P155,000 d. No effect

2. What is the total effect of the errors on the 2006 net income?
a. Overstated by P55,000 c. Overstated by P215,000
b. Overstated by P30,000 d. Understated by P45,000

3. What is the total effect of the errors on the company’s working capital
at December 31,2006?
a. Understated by P95,000 c. Overstated by P90,000
b. Understated by P70,000 d. No effect

4. What is the total effect of the errors on the balance of the company’s
retained earnings at December 31, 2006?
a. Understated by P75,000 c. Overstated by P110,000
b. Understated by P50,000 d. No effect

5. What is the total effect of the errors on the company’s working capital
at December 31,2007?
a. Overstated by P65,000 c. Understated by P160,000
b. Understated by P95,000 d. No effect

9
Suggested Solution:

Question Nos. 1 to 5
NI NI WC RE WC
2005 2006 12/31/06 12/31/06 12/31/07
12/31/05
inventory
understated (100,000) 100,000 - - -
12/31/06
inventory
overstated - 90,000 90,000 90,000 -
2005
depreciation
understated 20,000 - - 20,000 -
Insurance
paid in 2005
for 3 years (50,000) 25,000 (25,000) (25,000) -
Sale of a fully
depreciated
machinery in
2006
recorded in
2007 - (160,000) (160,000) (160,000) -
Over (under) (130,000) 55,000 ( 95,000) ( 75,000) -

Answers: 1) A; 2) A; 3) A; 4) A, 5) D

PROBLEM NO. 5
You were engaged by Lanao Company to audit its financial statements for
the first time. In examining the books, you found out that certain
adjustments had been overlooked at the end of 2005 and 2006. You also
discovered that other items had been improperly recorded. These
omissions and other failures for each year are summarized below:

12/31/06 12/31/05
Salaries payable P780,000 P873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
Advances from customers (Collections from 561,000 470,400
customers had been recorded as sales but
should have been recognized as advances
from customers because goods were not

10
12/31/06 12/31/05
shipped until the following year)
Machinery 522,000 564,000
(Capital expenditures had been recorded as
repairs but should have been charged to
Machinery; the depreciation rate is 10%
per year, but depreciation in the year of
expenditure is to be recognized at 5%)

QUESTIONS:

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

1. What is the total effect of the errors on the 2005 net income?
a. Understated by P775,800 c. Understated by P1,236,600
b. Overstated by P165,000 d. Overstated by P80,400

2. What is the total effect of the errors on the 2006 net income?
a. Understated by P376,500 c. Understated by P320,100
b. Overstated by P324,300 d. Overstated by P380,700

3. What is the total effect of the errors on the company’s working capital
at December 31,2006?
a. Understated by P301,800 c. Understated by P265,800
b. Overstated by P119,400 d. Overstated by P820,200

4. What is the total effect of the errors on the balance of the company’s
retained earnings at December 31, 2006?
a. Understated by P155,100 c. Understated by P265,800
b. Overstated by P930,900 d. Understated by P855,900

Suggested Solution:

Question Nos. 1 to 4
NI NI WC RE
2005 2006 12/31/06 12/31/06
Salaries payable
2005 873,600 (873,600)
2006 780,000 780,000 780,000
Interest receivable
2005 (259,200) 259,200
2006 (213,000) (213,000) (213,000)
Prepaid insurance
2005 (384,000) 384,000

11
NI NI WC RE
2005 2006 12/31/06 12/31/06
2006 (307,800) (307,800) (307,800)
Advances from customers
2005 470,400 (470,400)
2006 561,000 561,000 561,000
Machinery
2005 (564,000) (564,000)
28,200 56,400 84,600
2006 (522,000) (522,000)
. 26,100 . 26,100)
Over (under) 165,000 (320,100) 820,200 (155,100)

Answers: 1) B; 2) C; 3) D; 4) A

PROBLEM NO. 6
The Davao Company engaged you in 2006 to examine its books and records
and to make whatever adjustments are necessary.

Your examination disclosed following:


a. Prior to any adjustments, the Retained Earnings account is reproduced
below:
RETAINED EARNINGS

Date Particulars Debit Credit Balance


2004
Jan. 1 Balance P580,000
Dec. 31 Net income for the year 310,000 890,000
2005
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of 90,000 840,000
par
Aug. 30 Gain on retirement of
preferred stock at less
than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500
2006
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 P434,000

b. The company failed to properly recognize accruals and prepayments.


Selected accounts revealed the following information:

12
2003 2004 2005 2006
1. Prepaid expenses P8,500 P6,200 P7,400 P9,500
2. Accrued expenses 5,400 7,300 8,700 9,000
3. Unearned income 6,900 7,800 8,900 9,600
4. Accrued income 4,700 5,600 6,200 7,800

c. Dividends had been declared on December 31 in 2004 and 2005 but


had not been entered in the books until paid.

d. The company purchased a machine worth P270,000 on April 30, 2003.


The company charged the purchase to expense. The machine has an
estimated useful life of 3 years. The company uses the straight line
method and residual values are deemed immaterial.

e. The company received a transportation equipment as donation from


one of its stockholders on September 30, 2005. The equipment was
used to deliver goods to customers. The equipment costs P750,000 and
has a remaining life of 3 years on the date of donation. The equipment
has a fair value of P240,000 and P30,000 was incurred for registering
the transfer of ownership. The company did not record the donation on
its books. The expenses paid related to the donated equipment were
charged to expense.

f. The physical inventory of merchandise had been understated by


P64,000 and by P44,500 at the end of 2004 and 2006, respectively.

g. The merchandise inventories at the end of 2005 and 2006 did not
include merchandise that was then in transit shipped FOB shipping
point. These shipments of P43,400 and P32,600 were recorded as
purchases in January 2006 and 2007, respectively.

QUESTIONS:

Based on the above audit findings, the adjusted balances of the following
are: (Disregard tax implications)

1. Retained earnings, 12/31/03


a. P580,900 c. P790,900
b. P850,900 d. P760,900

2. Net income for 2004


a. P369,800 c. P279,800

13
b. P215,800 d. P373,100

3. Retained earnings, 12/31/04


a. P976,700 c. P930,700
b. P860,700 d. P720,700

4. Net loss for 2005


a. P269,700 c. P349,700
b. P379,700 d. P359,700

5. Retained earnings, 12/31/05


a. P481,000 c. P341,000
b. P411,000 d. P241,000

6. Net loss for 2006


a. P118,300 c. P148,300
b. P228,300 d. P178,300

7. Retained earnings, 12/31/06


a. P302,700 c. P252,700
b. P362,700 d. P332,700

Suggested Solution:

Questions No. 1 to 7
RE NI NL NL
2003 2004 2005 2006
Unadjusted balances P580,000 P310,000 (P205,000) (P165,500)
(b.1) Prepaid expense
2003 8,500 (8,500)
2004 6,200 (6,200)
2005 7,400 (7,400)
2006 9,500
(b.2) Accrued expense
2003 (5,400) 5,400
2004 (7,300) 7,300
2005 (8,700) 8,700
2006 (9,000)
(b.3) Unearned income
2003 (6,900) 6,900
2004 (7,800) 7,800
2005 (8,900) 8,900
2006 (9,600)

14
RE NI NL NL
2003 2004 2005 2006

(b.4) Accrued income


2003 4,700 (4,700)
2004 5,600 (5,600)
2005 6,200 (6,200)
2006 7,800
(d) Purchase of
machinery, expensed
on April 30, 2003 270,000
Unrecorded depr. (60,000) (90,000) (90,000) (30,000)
(e) Unrecorded transpo
equipm't. received as
donation on 9/30/05
Expenses paid 30,000
Unrecorded depr. (20,000) (80,000)
(f) Understatement of
inventory
2004 64,000 (64,000)
2006 44,500
Understatement of
inventory and
purchases
2005 43,400 (43,400)
(43,400) 43,400
2006 32,600
. . . (32,600)
Adjusted balances P790,900 P279,800 (P349,700) (P228,300)

Retained earnings, 1/1/04, as adjusted P 790,900 (1


)
Net income for 2004 279,800 (2
)
Dividends declared ( 140,000)
Retained earnings, 12/31/04 930,700 (3
)
Net loss for 2005 ( 349,700) (4
)
Dividends declared ( 100,000)
Retained earnings, 12/31/05 481,000 (5
)
Net loss for 2006 ( 228,300) (6
)
Retained earnings, 12/31/06 P 252,700 (7
)

15
Answers: 1) C; 2) C; 3) C; 4) C, 5) A; 6) B; 7) C

PROBLEM NO. 7
Cotabato Corporation’s current assets and liabilities section of the balance
sheet as of December 31, 2006 appear as follows:

Current assets
Cash P1,200,000
Accounts receivable P2,670,000
Less allowance for doubtful accounts 210,000 2,460,000
Inventories 5,130,000
Prepaid expenses 270,000
Total current assets P9,060,000

Current liabilities
Accounts payable P1,830,000
Notes payable 2,010,000
Total current liabilities P3,840,000

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

a. January 2007 cash disbursements entered as of December 2006


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

b. The inventory included P810,000 of merchandise that have been


received at December 31 but for which no purchase invoices have been
received or entered. Of this amount P360,000 had been received on
consignment; the remainder was purchased f.o.b. destination, terms
2/10, n/30.

c. Sales for the first four days in January 2007 in the amount of P900,000
were entered in the sales book as of December 31, 2006. Of these,
P645,000 were sales on account and the remainder were cash sales.

d. Cash, not including cash sales, collected in January 2007 and entered
as of December 31, 2006, totaled P1,059,720. Of this amount,
P699,720 was received on account after cash discounts of 2% had been
deducted; the remainder represented the proceeds of a bank loan.

16
QUESTIONS:

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

1. Adjusted cash balance as of December 31, 2006


a. P1,031,880 c. P1,055,280
b. P 641,880 d. P1,286,880

2. Adjusted accounts receivable balance as of December 31, 2006


a. P2,739,000 c. P2,724,720
b. P2,529,000 d. P3,129,000

3. Adjusted accounts payable balance as of December 31, 2006


a. P3,000,000 c. P2,976,600
b. P2,190,000 d. P3,450,000

4. Adjusted working capital as of December 31, 2006


a. P4,160,880 c. P3,950,880
b. P3,500,880 d. P3,524,280

5. Net misstatement in the reported net income for the year ended
December 31, 2006 as a result of the errors
a. P1,269,120 c. P1,719,120
b. P1,700,880 d. P1,250,880

Suggested Solution:

Question No. 1
Unadjusted cash balance P1,200,000
January cash payments (P1,170,000 x .98) 1,146,600
January cash sales (P900,000 – P645,00) (255,000)
January cash collections and loan proceeds (1,059,720)
Adjusted cash balance P1,031,880

Question No. 2
Unadjusted accounts receivable P2,670,000
January sales on account (645,000)
January collections on AR (P699,720/.98) 714,000
Adjusted accounts receivable P2,739,000

Question No. 3
Unadjusted accounts payable P1,830,000

17
January payments on AP 1,170,000
Unrecorded purchases (P810,000 – P360,000) 450,000
Adjusted accounts payable P3,450,000

Question No. 4
Current assets:
Cash (see no. 1) P1,031,880
Accounts receivable (see no. 2) 2,739,000
Allowance for doubtful accounts (210,000)
Inventories (P5,130,000- P360,000) 4,770,000
Prepaid expenses 270,000 P8,600,880
Less current liabilities:
Accounts payable (see no. 3) 3,450,000
Notes payable [P2,010,000 –
(P1,059,720 - P699,720)] 1,650,000 5,100,000
Working capital P3,500,880

Question No. 5
Over (under)
January purchase discounts (P1,170,000 x .02) P 23,400
Goods held on consignment 360,000
Unrecorded purchases (P810,000 – P360,000) 450,000
January sales 900,000
January sales discounts [(P699,720/.98) x .02] ( 14,280)
Net misstatement P1,791,120
Answers: 1) A; 2) A; 3) D; 4) B, 5) C

PROBLEM NO. 8
The bookkeeper for Maguindanao Computers, Inc., reports the following
balance sheet amounts as of June 30, 2006.

Current assets P2,440,500


Noncurrent assets 6,285,500
Current liabilities 1,386,000
Noncurrent liabilities 900,000
Owners’ equity 6,440,000

A review of account balances reveals the following data.

18
(a) An analysis of current assets discloses the following:
Cash P 422,500
Investment securities – trading 600,000
Trade accounts receivable 568,000
Inventories, including advertising
supplies of P20,000 850,000
P2,440,500

(b) Noncurrent assets include the following:


Property, plant and equipment:
Depreciated book value (cost P6,560,000) P5,490,000
Deposit with a supplier for merchandise ordered
for August delivery 21,500
Goodwill recorded on the books to cancel losses
incurred by the company in prior years 774,000
P6,285,500

(c) Current liabilities include the following:


Payroll payable P 71,500
Taxes payable 41,500
Rent payable 114,000
Trade accounts payable (net of P15,000, 6-month
note, received from a supplier who purchased
some used equipment on June 29, 2006, 999,000
Notes payable 160,000
P1,386,000

(d) Noncurrent liabilities include the following:


9% mortgage on property, plant, and equipment,
payable in semiannual installment of P90,000
through to June 30, 2011 P900,000

(e) Owners’ equity includes the following:


Preferred stock: 190,000 shares outstanding
(P20 par value) P3,800,000
Common stock: 1,600,000 shares
at P1 par value 1,600,000
Additional paid-in capital 1,040,000
P6,440,000

19
(f) Common shares were originally issued for P3,910,000, but the losses of
the company for the past years were charged against additional paid-in
capital.

QUESTIONS:

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

1. Current assets
a. P2,462,000 c. P2,477,000
b. P2,440,500 d. P2,435,500

2. Noncurrent assets
a. P5,490,000 c. P6,560,000
b. P5,511,500 d. P6,264,000

3. Current liabilities
a. P1,401,000 c. P1,602,500
b. P1,581,000 d. P1,491,000

4. Noncurrent liabilities
a. P720,000 c. P900,000
b. P810,000 d. P880,000

5. Owners’ equity
a. P7,710,000 c. P6,440,000
b. P8,750,000 d. P5,666,000

Suggested Solution:

Question No. 1
Cash P 422,500
Investment securities—trading 600,000
Note receivable 15,000
Accounts receivable 568,000
Inventory (P850,000 - P20,000) 830,000
Advertising supplies 20,000
Deposit with supplier 21,500
Current assets P2,477,000

PAS 1 par. 57 states that an asset shall be classified as current when it


satisfies any of the following criteria:

20
a) it is expected to be realized in, or is intended for sale or consumption
in, the entity’s normal operating cycle;
b) it is primarily held for the purpose of being traded;
c) it is expected to be realized within twelve months after the balance
sheet date; or
d) it is cash or a cash equivalent (as defined in PAS 7 Cash Flow
Statements) unless it is restricted from being exchanged or used to
settle a liability for at least twelve months after the balance sheet
date.

All other assets shall be classified as non-current.

Question No. 2
Property, plant, and equipment P6,560,000
Less accumulated depreciation 1,070,000
Noncurrent assets P5,490,000

Question No. 3
Notes payable P 160,000
Accounts payable (P999,000 + P15,000) 1,014,000
Mortgage payable-current portion (P90,000 x 2) 180,000
Payroll payable 71,500
Taxes payable 41,500
Rent payable 114,000
Current liabilities P1,581,000

PAS 1 par. 60 states that a liability shall be classified as current when it


satisfies any of the following criteria:
a) it is expected to be settled in the entity’s normal operating cycle;
b) it is held primarily for the purpose of being traded;
c) it is due to be settled within twelve months after the balance sheet
date;
d) the entity does not have an unconditional right to defer the
settlement of the liability for at least twelve months after the balance
sheet date.

All other liabilities shall be classified as non-current.

Question No. 4
Mortgage payable-noncurrent portion
(P900,000 - P180,000) P720,000

21
Question No. 5
Preferred stock, P20 par value, 190,000 shares P3,800,000
Common stock, P1 par value, 1,600,000 shares 1,600,000
Additional paid-in capital (P3,910,000 - P1,600,000) 2,310,000
Deficit [(P2,310,000 - P1,040,000)+P774,000] (2,044,000)
Owners’ equity P5,666,000

Answers: 1) C; 2) A; 3) B; 4) A, 5) D

PROBLEM NO. 9
In connection with your audit of the financial statements Sulu Corporation,
you were provided with the following balance sheet as of December 31,
2006:
Sulu Corporation
Balance Sheet
December 31, 2006
Assets Liabilities and Stockholders’ Equity
Current assets: Current liabilities:
Cash P 250,000 Accounts payable P 68,000
Trading securities 160,000 Other current liabs. 40,000
Accts rec., net 427,000 Total P 108,000
Inventory 620,000
Other current
assets 284,000 Long-term liabilities 655,000
Total P1,741,000 Total liabilities P 763,000

Noncurrent assets: Owners’ equity:


Property, plant,
and equip., net P1,296,000 Common stock P1,000,000
Treasury stock 90,000 Retained earnings 1,636,000
Other noncurrent Total stockholders’
assets 272,000 equity P2,636,000
Total P1,658,000 Total liabilities and
Total assets P3,399,000 stockholders’ equity P3,399,000

The following additional information relates to the December 31, 2006,


balance sheet.

(a) Cash includes P80,000 that has been restricted for the purchase of
manufacturing equipment (a noncurrent asset).

22
(b) Trading securities include P55,000 of stock that was purchased in
order to give the company significant ownership and a seat on the
board of directors of a major supplier.

(c) Other current assets include a P80,000 advance to the president of


the company. No due date has been set.

(d) Long-term liabilities also include bonds payable of P200,000. Of this


amount, P50,000 represents bonds scheduled to be redeemed in
2007.

(e) Long-term liabilities also include a P140,000 bank loan. On May 15,
2007, the loan will become due on demand.

(f) On December 21, dividends in the amount of P300,000 were declared


to be paid to shareholders of record on January 25. These dividends
have not been reflected in the financial statements.

(g) Cash in the amount of P380,000 has been placed in a restricted fund
for the redemption of preferred stock in 2007. Both the cash and the
stock have been removed from the balance sheet.

(h) Property, plant, and equipment includes land costing P160,000 that
is being held for investment purposes and that is scheduled to be
sold in 2007.

QUESTIONS:

Based on the above and the result of your audit, determine the adjusted
amounts of the following as of December 31, 2006:

1. Total current assets


a. P1,526,000 c. P1,686,000
b. P1,821,000 d. P1,606,000

2. Total noncurrent assets


a. P2,163,000 c. P1,488,000
b. P2,003,000 d. P2,083,000

3. Total current liabilities


a. P548,000 c. P458,000
b. P298,000 d. P598,000

4. Total noncurrent liabilities


a. P515,000 c. P605,000

23
b. P665,000 d. P465,000

5. Total liabilities
a. P1,063,000 c. P1,263,000
b. P 763,000 d. P1,443,000

6. Total stockholders’ equity


a. P2,926,000 c. P2,626,000
b. P2,246,000 d. P2,716,000

7. Total liabilities and stockholders’ equity


a. P3,309,000 c. P3,609,000
b. P3,689,000 d. P3,779,000

Suggested Solution:

Question No. 1
Cash (P250,000 - P80,000) P 170,000
Trading securities (P160,000 - P55,000) 105,000
Accounts receivable, net 427,000
Inventory 620,000
Land held for resale 160,000
Other current assets (P284,000 - P80,000) 204,000
Current assets P1,686,000

Note: If the problem is silent, advances to officers and employees are


normally classified as current. However, since the advances to the
president has no due date, it will be classified as noncurrent.

Question No. 2
Investment in associate P 55,000
Property, plant and equipment, net
(P1,296,000 - P160,000) 1,136,000
Restricted cash - for preferred stock 380,000
Restricted cash - for equipment 80,000
Advance to company president 80,000
Other noncurrent assets 272,000
Noncurrent assets P2,003,000

Question No. 3
Accounts payable P 68,000

24
Current portion of bonds payable 50,000
Loan due on demand 140,000
Dividends payable 300,000
Other current liabilities 40,000
Current liabilities P598,000

Question No. 4
Bonds payable (P200,000 - P50,000) P150,000
Other noncurrent liabilities
(P655,000-P200,000-P140,000) 315,000
Noncurrent liabilities P465,000

Question No. 5
Current liabilities (see no. 3) P 598,000
Noncurrent liabilities (see no. 4) 465,000
Total liabilities P1,063,000

Question No. 6
Preferred stock P 380,000
Common stock 1,000,000
Retained earnings (P1,636,000 - P300,000) 1,336,000
Treasury stock ( 90,000)
Total stockholders’ equity P2,626,000

Question No. 7
Total liabilities (see no. 5) P1,063,000
Total stockholders’ equity (see no. 6) 2,626,000
Total liabilities and stockholders' equity P3,689,000

Answers: 1) C; 2) B; 3) D; 4) D, 5) A; 6) C; 7) B

PROBLEM NO. 10
The following balance sheet is submitted to you for inspection and review.

Surigao Corporation
Balance Sheet
December 31, 2006
Assets
Cash P 180,200
Accounts receivable 450,000
Inventories 816,000

25
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P2,988,600

Liabilities and Owners’ Equity


Miscellaneous liabilities P 14,400
Loan payable 304,800
Accounts payable 301,000
Capital stock 536,000
Paid-in capital 1,832,400
Total liabilities and owners’ equity P2,988,600

In the course of the review, you find the following data:

(a) The possibility of uncollectible accounts on accounts receivable has


not been considered. It is estimated that uncollectible accounts will
total P19,200.

(b) The amount of P180,000 representing the cost of large-scale news


paper advertising campaign completed in 2006 has been added to the
inventory because it is believe that this campaign will benefit sales of
2007. It is also found that inventories include merchandise of
P65,000 received on December 31 and has not been recorded as a
purchase.

(c) The books show that property, plant and equipment have a cost of
P2,227,200 with accumulated depreciation of P720,000. However,
these balances include fully depreciated equipment of P340,000 that
has been scrapped and is no longer on hand.

(d) Miscellaneous liabilities of P14,400 represent salaries payable of


P38,000, less non current advances of P23,600 made to company
officials.

(e) Loan payable represents a loan from the bank that is payable in
regular quarterly installments of P25,000.

(f) Income tax payable not shown is estimated at P73,000.

(g) Deferred tax liability arising from temporary differences totals


P178,200. This liability was not included in the balance sheet.

(h) Capital stock consists of 25,000 shares of preferred 6% stock, par


P20, and 36,000 shares of common stock, par value P1.

26
(i) Capital stock have been issued for a total consideration of
P1,134,400; the amount received in excess of the par values of the
stock has been reported as paid-in capital. Net income and dividends
were recorded in Paid-In Capital.

QUESTIONS:

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

1. Current assets
a. P1,347,200 c. P1,217,200
b. P1,282,200 d. P1,462,200

2. Noncurrent assets
a. P1,530,800 c. P1,507,200
b. P1,190,800 d. P1,167,200

3. Total assets
a. P2,878,000 c. P2,473,000
b. P2,789,400 d. P2,813,000

4. Current liabilities
a. P512,000 c. P577,000
b. P504,000 d. P600,600

5. Noncurrent liabilities
a. P383,000 c. P204,800
b. P406,600 d. P433,000

6. Total liabilities
a. P983,600 c. P895,000
b. P716,800 d. P960,000

7. Owners’ equity
a. P1,853,000 c. P2,096,200
b. P1,918,000 d. P2,368,400

Suggested Solution:

Question No. 1
Cash P 180,200
Accounts receivable, net (P450,000 - P19,200) 430,800

27
Inventory (P816,000 - P180,000) 636,000
Prepaid insurance 35,200
Current assets P1,282,200

Question No. 2
Property, plant and equipment, net
[(P2,227,200-P340,000) -(P720,000-P340,000)] P1,507,200
Advances to officers 23,600
Noncurrent assets P1,530,800

Question No. 3
Current assets (see no. 1) P1,282,200
Noncurrent assets (see no. 2) 1,530,800
Total assets P2,813,000

Question No. 4
Accounts payable (P301,000+P65,000) P366,000
Salaries payable 38,000
Income tax payable 73,000
Loan payable to bank, current portion (P25,000x4) 100,000
Current liabilities P577,000

Question No. 5
Loan payable (P304,800-P100,000) P204,800
Deferred tax liability 178,200
Noncurrent liabilities P383,000

Question No. 6
Current liabilities (see no. 4) P577,000
Noncurrent liabilities (see no. 5) 383,000
Total liabilities P960,000

Question No. 7
6% Preferred stock, P20 par, 25,000 shares P 500,000
Common stock, P1 par value, 36,000 shares 36,000
Paid-in capital in excess of par
(P1,134,400-P500,000-P36,000) 598,400
Retained earnings
(P1,832,400-P598,400-P19,200-P180,000-
P65,000-P73,000-P178,200) 718,600
Total owners’ equity P1,853,000

28
Answers: 1) B; 2) A; 3) D; 4) C, 5) A; 6) D; 7) A

29