CHAPTER 5

CASH AND

3.
4.
5.
6‘
ACCRUAL BASIS

Chapter Outline:

1. Cash
basis

2. Accrual
accounting
basis accounting
Comparison of cash
T-accounts approach
Guidelines in using
basis

T-accounts of accounts
customers.
7. T-accounts of
and

T-account apPrOaCh
.
_______‘____-_____._________._

’
accrual baSlS accounting

receivable / notes receivables / advances fro

allowance for bad debts

payable / advances to suppli
m
“‘
m
M
chapter

Purchases

Expenses,
general

Depreciation
5 _ cash

in
and Accrual Basis

Includes the following;

0
°
0

0
Cash purchase
Payment

su - liers
lnCIUdeS

_
0f
accounts payable

payable

only
trade

Payment of trade notes

Payment in advance to

expenses that are paid

thOSe

“in C05“
DepreCIation is typically
provided except when the
Includes:
0

0
'
Cash purchases
Purchase on account
I

Includes those items that

are incurred regardless of
when aid
Depreciation is typically
provided.
I
5.

.i‘

,3

‘J
)

i’
g
i
t
‘

accounts payable / notes cost of equipment was 1:,

8. T—accounts of er“
merchandise inventory treated as exense
9. T-accounts of
5

10. T-accounts of
property, plant and equipment Bad debts No bad debts expense is Doubtful accounts are
accumulated depreciation recognized since cash basis treated as bad debts.
11. T-accounts of
receivable / unearned rent income To $011: does not
4:;

12. T-accounts of rent recognlze

13. T-accounts of prepaid
rent/rent payable Eceivables. Although some

WML—m____
14. T-accounts of capital problem may give an
15 T—accounts of retained earnings indication that the accounts
written off were charged to I
f
bad debts ex ense. £

I,
Cash Basis Accounting //
T-ACCOUNTS APPROACH g

Lash U‘dSlS 'dCCOUHUllg SYSIEII] [Hal FBCUgIllLCb

\S a l'cvcuuc wuc‘u Luau 1::
In order to compute for the cash payments or collections for certain
received and expenses when cash is paid. account, it is suggested that the T~account approach will be used on the
Accrual Basis Accounting following: E
l
1) Accounts receivable /notes receivables/advances from customers;
It is an accounting SYStem that recognizes revenue when eai ned rather 2) Allowance for doubtful accounts; i
when cash is received and recognizes expenses as it is incurred Father tthan 3) Accounts payable / notes payable/ advances to supplier;
when cash is paid. g
4) Merchandise inventory;
'i
Com 3 arison of Cash Basis and 5) Property, plant and equipment;
Accrual Basis Accountin 3

Items of 6] Accumulated depreciation; i-

1

‘ I
5

Comarison Cash Basis 7) Rent receivable / Unearned rent income; ?

I
Sales Accrual BaSis 8) Prepaid rent/Rent payable;
Includes:
Includes: 9) Capital;
1

Z
- Cash sales 0
Cash Sales on; 10) Retained earnings;
g3

Collection of
0 trade o Credit sales (Sale ‘
11) Net Assets.
accounts receivable
account) i

0 Collection of trade Gui - . I

“5mg T-account approach
notes recivlable
‘ 1m.“ m
Income W112: are:
usmg T,-account. the procedures
other Includes 1-
items
n those Includes those P1 0t the gwen data in the T-account
74 75
 9W / \
W 5
f, ’
/
I ‘I
5 cash and Accrual Basis 005k
- r
only those 5 . S and
alloy/yam:ct r .
*mcludidreceivable. If the
sales returns and mgaltal‘e deducted from
2. To facilitate computation, the beginning balance iS Placed m the n9rmal aCcougt-w custB—mcr, it should not be
the
balance of an account and the ending balance will be at the Other S'de of included inatfies arise from cash
its normal balana? (e.g- the normal balance 0fthe aCCOU”ts .recewable is
lawn files.
rfcciva ( ‘3 t-account of the

debit so the beginning balance will be placed at the debit Side while the are no notes ’ c an d adVan from
‘ roccivwble
\. ending balance will be placed at the credit side.) When tthoefrtehe Account receivable is: ces Customers, the T.
‘ 3. Compute the total debit and the total credit. ac coun
4. The difference between the total debit and the total credit is th
squeezed figure. 6 T—A /-————--——\
CCOUNT: ACCOUNTS RECEIVABLE

Accounts receivable
t

For example, let's use T-account ofaccounts receivable, notes receivable a

advances from supplier below. "d
balance - AR XX Balance end - AR

/WEN
When computing for sales on account, plot the given data on the T-account
get the sum of the credits (this is the total of the balance end of the accounts.
I
Beg
leg on
account
iicoveries
xx XX Sales returnsand
sales discounts
allowance,“
/
/ i

and notes receivable, beginning balance of the advances from customer

}
- Collections includin ‘
grecoveries/
5,

sales returns and allowance, sales discounts and collection and accounts l
I I XX 1

Write-off l

written off) then deduct the sum of the debits (this includes the beginnin |
i

i
balances of the accounts and notes receivable, balance end of the advance:
from customers and recoveries). The difference is the squeezed figure in the l
debit side which is the sales on account. . T.ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS
l
The same procedures are to be applied when computing for the collections Allowance for doubtful accounts
from customers. Get the sum of the debits [this includes the beginning
balances of the accounts and notes receivable, balance end of the advances
E

t
\.
Accounts written Off - XX XX Beginning balance
from customers and recoveries and sales on account) and deduct the sum of Balance end XX XX Doubtful accounts expense
the credits (this is the total of the balance end of the accounts and notes . . .. XX, RCCOVerieS . ,. _ ._ , ,

receivable, beginning balance of the advances from customer sales returns

and allowance, sales discounts and accounts written off]. The difference is
the squeezed figure in the credit side which is the total amount of The format of the T-accounts was derived from the following journal
.

collections from customers. entries:

1. To record sales on account g; cr
T-ACCOUNT: ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND Accounts receivable ;,

_______ it ng
XX

________________’I___
ADVANCES FROM SUPPLIER
customers
A
Sales

record receipt of note from sales on account

I;

Accounts receivable {Notes receivable trade /Advances from

2. To XX
Notes receivable 4 xx
Beg. balance - AR XX XX Balance end AR —

Sales /
Beg. balance — NR XX XX Balance end - NR
Balance end - Advances XX XX Beg- balance - Advances 3. To record sales return from a cus:omer
Sales rmums and allowance* XX
Sales on account XX XX Sales returns and allowance / XX
Sales discounts
E
:‘V
k
Recoveries XX Accounts receivable t L
XX Collections including recoveries mad
4. To record collection wrthm ' un
the (11560 P 52’

XX. erteioff , ,
- ~

XX
/
. . 1:1?

Cash r XX
‘33::

i?
/
X

Sales discount XX Q ,

Accounts receivable g‘
76
77
[/Qf ‘
 r5ebabua'w’m”'uu. ucl b l5

:Eesle'lgjcggatw
‘
N. "
l
te
n:
l Chapter 5 ivabug/Notes receivable
written . ‘ .

accounts 0/7
l 5_
To record
accounts XX
trade/Adm"
Allowance for doubtful 1

100,000
5

Accounts receivable
xx balance - GER
R 150,000
i

6' rc—cstublishment of accounts previously written of

Beg,
balance
Beg. C6
- dvances 210,000
55,000
120,000
Balance end AR
Balance end » NR
—

To record end - A
E

40,000 Beg.
XX
?
Accounts receivable XX
Balanon account , ' 500,000- 3,000 balance -
accounts Sales ret. and Advances
Allowancrz for doubtful Sales
‘ .
E
1,000 ii
previously written off Recoveries Sales allowance
accounts discounts
3

7. To record collection of Collections

E.

i
Cash xx 547,000
recoveries
including I .

Accounts receivable
xx 4,000
Write-off
customers 865,000 865,000
1. .

advances receivedfrom th
To record Total
:

8.
xx

W
E

Cosh «’/
Advances from customers
xx
“[ustrationl
~
1

.11 Complxzrt'grzported by
advances data Helium Company during
goods to customers with The f0 How1 g the current
To record delivery of
l
9.
g

Advances from customers 7 xx Year:

F
Sales xx AIIOWan cc for do”btful accounts-Ia!nuary 1
during the year for doubthI acco untS-December' 31 5
H). To record the provision for bad debts Ilowance nts the 30.000
000
collectible accou written; off durmg fcurrent year
Bad debts xx Un
A
ts '
XX Recoveries ofaCCOun p reViOUSIY Wnttend 0f . L000
Allowance for bad debts te bts nt
- d; Comp”
for the total bad e expense during the curre
Note: ‘ Requ're
example sales on account, the
~/ Observe that in the journal entries, for year-7
T-account of the accounts
accounts receivable is debited, so in the
Solution:
receivable, that same amount is also debited
\ Allowance for bad debts
5

1":

Illustration: Computation of Collections Ending balance 30,000 20,000 Beginning balance

The following data were reported by
Hydrogen Company during the current Write-off 5,000 14,000 Bad debts expense i

year: 1,000 Recoveries i

100,000 x

Accounts receivable - January 1

150,000
Accounts receivable ~ December 31 4

210.000 T-ACCOUNT: ACCOUNTS PAYABLE, NOTES PAYABLE AND

Notes receivable - January 1
120,000 ADVANCES T0 SUPPLIER
Notes receivable - December 31
Advances from customers — January 1
40.000
Advances from customers - December 31
55.000 Accounts Pazable {Notes Paxable TradelAdvances to SuBElier {V

't.

Sales returns and allowance 3000

Payments XX XX Beg. balance - AP
1,000
Beg- balance ' NP
Sales discounts PUrChase
[3

4,000 returns and allow. XX XX

Uncollectible accounts written off during the current year
f

Recoveries of accounts previously written off -

PurChase discount XX XX Balance and Advances ‘
i‘:
Beg. balance - Advances Purchases
Sales - accrual basis 500,000 XX XX
Balance end XX I“

‘/’,/
_
Required: Determine the gross sales under the cash basis of accounting Balance 0nd _ _ I V, ,, I

78
79
92:;th
When
of the
there are no
Account

T-ACCOUNT:
notes payable
payable is:
ACCOUNTS
and advances t

PAYABLE TRADE
0
Suppliers the T-acc0u

m
s:
got?“ using this T—account, aside frOm the joum
'“
following form” the computation ofthe Co StofSales;
Merchandise inventory, beginning
Add; Net
purchases
xx
XX
3
I I
entries, it follows m
_

Payments
Purchase returns
and allow.
Accounts Pa able Trade

xx xx peg.
xx
balance AP
Burchases [gross]
xx
xx
‘
\ /
Total goods
Less:
available

Cost of sales
Net purchases is
for sale
Merchandise inventory, end
TOT
XX

computed as follow5;===
TX
Purchase discounts xx
J AD
GDd'AP ,, XX
’_"‘ IL Gross purchases
Balance ‘ ‘ _‘ . ,
-
Add; Freight-in XX ‘

7% Purchase discount XX ,
Total = Less:
,,
c_ll_...:..n :nnrnnl nnfrinc-
N H

Purchase allowance *XT

from the following journal entries:
.

The T-accounts were derived Purchase returns xx ‘

1. To record purchase on
account
XX Net Purchases Tor
Purchases
XX / The T-account
presented is applicable to finished goods inventory of
Accounts payable
merchandising company. Kindly refer to Chapter 12 inventories for
account
2. To record issuance of note for purchase on discussion of T—accounts of the Work-in-Process and Raw Materials:
XX
Purchases
XX
Notes payable Illustration: Computation of Purchases
Company during the current
3. To record return of merchandise to supplier The following data were reported by Lithium
Accounts payable XX year:
Purchase returns and allowances XX 100,000
Accounts payable - lanuary 1
150,000
4. To record payment within the discount period. Accounts payable — December 31
210,000
Accounts payable XX Notes payable - January 1
120,000
Purchase discount XX Notes payable - December 31
40,000
Cash XX Advances to suppliers Ianuary 1
—

55,000
Advances to suppliers - December 31
’

5. To record advances to suppliers

hH
3.000
Advances to suppliers XX
Purchase returns and allowance
Purchase discounts 1,000
Cash xx 500,000
Payment
6. To record receipt ofgoods from suppliers arising from advances accrual basis of
under the
Purchases XX Required: Determine the gross purchases
Advances to suppliers XX accounting. / YMW,

AM»
T-ACCOUNT: MERCHANDISE INVENTORY

Beg. Balance
Net Purchases

Total
Merchandise lnvento
XX
XX
AA
:
'1
XX
XX
AA
7,

Balance end
LOSI Of bales
Cost 0r Sales
_

w
“WWW rflfl/
___.—I
Accounts Pa able
Payments
Purchase ret. and allow.
Purchase discount
Beg. balance - Advances /
Notes Pa able
500,000
3,000
1,000
Advances to Su hers
100,000 Beg-
210,000 Beg.
55,000
40,000 {9,000
balance ' AP
balance— N:
Balance end - Aos‘snc
Purchases (gr
es)
\

Balance end - AP / 150,000 _

Balance end - NP / 120,000

80 81
y

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1"]

year:
nts
.

11125531221;

2:231:15 Sayable -
;

Merchandise inventory

Purchase returns and

Purchase discounts
Paymem
Cash purchases

Required. How much is the

accounting?
Com utation of
datapwere

ayable-Ianuary
December 31
January
Merchandise inventoI'Y‘
Dec- 31
allowance
1
Cost of Sales
reported

total cost of sales

by Beryllium Company d”

1
ring the CUrrEn

100 I 000

120'000
3’000
1,000
500,000
20,000
under the accrual basis of
t
.ACCOUNT A

Accum.

The
1,

2
derecogmzed
Balance 6nd,,

I
To
PPE

To
record

Cash

cash
:

cash
CCUMULARH”
D DEP
I/w———«-v~-~*---—-—--——~—~~~.~._.JEE951§on

degreciation of asset

/ ,, , .,
xx
.,,,XX

T-accounts were derived from the fou - Journal

acquisition of PPE
owmg
.
XX

xx
Be

Do

entries:

record derecognition (cg. sale, do nation,

' .
m“
.
gmmng balance

retirementggofppg
.

XX
XX
"M
*
ww-

V,

1‘

‘1

f,,
1

L
;
r
1'.

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Solution:
Accounts Pa able AP
Notes Pa able NP \ Accumulated depreciation
Loss on sale
x);
xx
500,000 100,000 Beg. balance - AP or Gain on sale XX
- Beg. balance -
Payments NP
3,000 PPE XX
Purchase ret and allow. Purchases (gross)
1,000 554,000
Purchase discount
Balance end - AP
150,000 illustration: Computation of Cost of Machine Acquired and Sold
Boron Co. provided you the following
information in relation to its property,

/_____—__———
Balance end - NP -
plant, and equipment account:

W
01/01[16 12[31[1_6__
Merchandise lnvento
Machinery P135000 P150000
210,000 120,000 Ending balance
Beginning balance Accumulated depreciation 50,000 45,000
570,000 660,000 Cost ofsales
Net urchases
Additional information:
a) Depreciation is 10% per annum. As a company policy, newly acquired
Computation of the net purchases: of purchase and no
assets are depreciated for a whole year at the year
554,000 year of'disposal.
purchases on account
on nnn depreciation is provided for assets disposed at the value
b) At the start of the year, a fully depreCiated machine without scrap
Total D Ithuuu machine was acquired.
was sold for P5,000, at the same date, a new
Less: Purchase returns and allowances 3,000
following:
Purchase discount 11011 Required: Based on above data, answer the
acquired?
Net purchases 570,000 1)How much is the cost of the machine
2) How much is the historical cost of the machine
50W
T-ACCOUNT: PROPERTY, PLANT AND EQUIPMENT
SOLUTION:
!
Hag:nr»irr.;{k,gnanccv-~-~.
Prnnertz, Plant, and Equipment
-r Beginning balance 135,000
Machiner
C(istofznsset
_ a
(105101 den-609.“Zed
2mmdefémfi’fiyéa, 20,000
UM f)? ix’YJEt qunirml X] BuI/gmU: (-1.” ‘ Balance end
c0“ of asset act uired 35,000 150.000
[NEH I :IV
'I. 1“ 170,000
Total 170,000
82 83
Accumulated
depreciation of asset
derecognized
Balance end
Total

T-ACCOUNT: RENT

Beg. balance

balance end —

______—
—
Accumulated De

20,000
45,000
65,000

RECEIVABLE / UNEARNED

Rent receivable
Rent receivable
Unearned rent

This T-account is also

income, royalty
reciation
50.000
15,000

65,000
RENT INCOME

{Unearned rent income

XX
XX

applicable to interest
Beginning balance
Depreciation expms
(150,000 x 10%)

Balance end — Rent rece-

I XX
XX Beg. balance —
\\
3

Unearnediaeble

receivable/unearned interest
receivable/unearned royalty income and other deferred
W-
Chapter 5

III-fix.“
Beg.

Ea'filems
—

Beginning balance
Balance end - URI
Rent income
Total
Cash and Accrual Basis

Rent Receivable RR

Ce — Prepaid
bCadZIlld — Accrued

12L—————————___________
l

N 0 te:
- RR

T_ACCOUNT: PREPAID RENT / RENT PAYABLE

100,000
50,000
560,000
710.000
60,000
500,000
710,000

Prepaid RentzRent Bazable

asset
liab.
XX
XX
XX
:
XX
XX
XX
,

Unearned Rent income

URI
150,000 Balance end -
RR
Beg. balance - URI
Collections

Balance end — Prepaid aaset

Beg. balance — Accrued llab.
Expense ,

This T-account is also applicable to prepaid salaries/salaries

h T—accounts were derived from the following journal entries:
‘
a.

payable.
.. . .
a
_

assets.
following journal entries:
Ie To record payment of rent in advance XX ‘

The T-accounts were derived from the I Prepaid rent/ Rent payable ~.
xx
1. To record collection of rent Cash
Cash XX
Unearned rent income / Rent receivable XX 2. To record adjusting entry for the expired portion of rent
Rent expense XX
2. To record adjusting entry of the rent income Prepaid rent XX
Unearned rent income XX
Rent income XX 3. To record accrual of rent expense
Rent expense XX
3. To record accrual of rent receivable Rent payable XX
Rent receivable XX
Rent income XX Illustration: Computation of Rent Expense
Company during the current
Illustration: Computation of Rent Income The following data were reported by Nitrogen
The following data were reported by Carbon Company during the current year:
year: 100,000
Prepaid Rent - January 1
150,000
Rent receivable-lanuary 1 Prepaid Rent - December 31
100,000 60,000
Rent receivable-December 31 Rent payable - January 1
150,000 50,000
i

Rent payable - December 31

1

Unearned rent income - January 1 60,000 500,000 i

Uneamed rent income - December 31 Payment of rent
50,000 accrual b23515 of E

expense under the

e

How much is the total rent

‘f
Collection of rent 500,000 Requh‘ed: i.
s

Required: How much is the total rent income accounting?

under the accrual basis of
accounting? i
5
 w
Solution:

Beginningbalanca~PR
Balunceend—RP

[)a

W'
mentol‘rent

Total

T-ACCOUNT:

W,
Wunurdwg.lel
lUldl '2 '
Balance and

Note: When the

cash assets, the
the cost, not the
asset withdrawn.
owner
Rent PR
Pre aid 100,000

drawings

'l‘he 'F-ziccounts were

1.

2.

3.
To record

Cash
‘aiita
l
I
50,000
500,000

CAPITW
650,000

XX]

account should be
selling price or fair
value
RentPa able RP
150,000

XX

M I] A“
60.000
440,000
650,000

withdrew merchandise

of

derived from the following

investment made by the owner

To record withdrawal by the

Drawings
Cash
owner

or any other appropriate account

To close the drawing account to capital
.VA.
Balance end_PR
Beg. balance_RP
Rent ex enSe

Begmnjng balance

inventories or other
debited to an amoum equaloh
the merchandise or “OM l0

journal entries;

XX

xx
ash

XX

xx
n
,

mm—
V
T-ACCOUNT: RETAINED EARNINGS

Balance

1.

2,

3.
i

Netlosfi
Total
end
’
Prior period error
Dividends declared
,, , ,,

To record declaration ofdiw'dends

Retained earnings
Retained earnings
XX
XX
XX
XX
,

Dividends payable (cash, stocks, property, etc.)

To close net income to retained earnings
Income summary
Retained earnings
To close net loss to retained earnings
Retained earnings
Income summary
/
/
Illustration: Computation of Net Income or Loss
XX
XX
XX

XX

.
XX
'

The following data were reported by Oxygen Company during the current
year:
Capital -]anuary1
Capital - December 31
Cost of merchandise withdrawn by Oxygen
Sales value of merchandise withdrawn by Oxygen
I

' I b!
BLrigmnm
‘ ML

Prior perfiiyoddezl'x:
Net income

The T-accounts were derived from the following journal entries:

1
‘

XX

XX
”
/
/
’

~m‘uw

XX

XX
if
C

100,000
400,000
60,000
80,000
l
I

: E

E
9.

e;

g.

‘r

3
¢

Capital XX
Drawings XX Principal amount of Notes payable paid by Oxygen with her
personal checking account 200,000
4. net income to capital account
To close the
No. of months on the notes payable also paid by Oxygen 6
Income summary XX Interest rate of notes payable paid by Oxygen 12%
Capital XX
Required: How much is the Net income (or loss) during the year?
5. To close the net loss to capital account
Capital
Income summary L'a ital
Balance end 400,000 I 100,000 Beginning balance
Withdrawal at cost 60,000 212,000 Additional investment i

-
I
Net loss 148,000 Net income l

Total , 460,000 460,000 i

,r

'r
[ ?
“Sm, F

86 87 l
 Accrual Basns
w’
, V r

Chapter 5 —
Cash and i
ASSETS :
T-ACCOUNT: NET
Financial Position Net Assets \
Illustration: Computation of Net Income or Loss
Statement of
Changes in the accounts of Neon Co. for 2016 are as follows:
_
xx xx DecreaSe in asset ' Lucrease
IncreaSe in liabilities r
increase 1.”
Decreasemaft-aims
la l
Dividends declared
/ , xx XX
xx XX / Increase in share ca pital ~

Cash
1.0951359)
500,000 1102
é

xx XX Increase 1n share premi m"

_

Accounts receivable r_

/ (4.600300)
"

w
Net "’55 XX,“ Net. income, W Allowance for bad debts <
(460,000)
Merchandise inventory . 4,800,000
Investment in associate 3000300
Property, plant and equipment 2_400,000
Note: , Accumulated depreciation 800,000 12/
J This T-account follows the ba51c rule In making )ournal enny th
' . _
2,600,000 /
4

Notes payable
account is increased through
its normal balance while it is decreasatfi Bonds payable (2,800,000)
normal balance, for example increase in as eds, Discount on bonds payable / [600,000] /
the other side of the deeresett
balance of an asset while 3,900,000
debited which is the normal asel
Ordinary share capital
normal balance. 200,000
credited which is at other side the
of Share premium
Revaluation surplus 2,600,000
Illustration: Computation of Net Income or Loss
Company for the current year
Treasury shares 320,000 /
Changes in the accounts of Fluorine a
reas
Additional information:
follows:
Jan. 1 Dec. 31 duo o On December 31, 2016, Neon Co. declared Cash dividends amounting to
3,000,000 g P500000 and share dividends amounting to P800000. Also during the

‘
Total Assets 2,000,000
Total liabilities 800,000 1,100,000 093 year, the company appropriatedytained earnings for the retirement of
1,500,000 (g0 bonds amounting to P100,000. '
Share capital ,
paid off
During the year, Neon obtained bank loan of P2,000,000 and
Share Premium 450,000 / 6 OJ
0
loan amortization of P1,600,000
a
and interest 0F?100,000. lnterest of
Retained earnings 7 / 7 / P180000 is accrued on December 31, 2016. There was no interest
.
currrent ysar,dthe company issued 80,000, P10 par
fDourilnlgsthe capiti'
' %
fie payable at the end of 2015. In 2016, Neon Company acquired treasury
per 5 are- ivi ends paid on December 31 the Current yea] shares from its existing shareholders. gm, 5*

¥
amounted to P750000. 0f
Required: Compute for the net loss during the year. \

Required: How much is the net income (or loss) during the year? Solution:
Solution: Net Assets SFP
Net Assets SFP Increase in asset (Cash - Decrease in asset
Increase in asset (3 M- to PPE) 5,760,000 Increase in NP, Net
. - t
2M) 1,000,000 - Decrease in asse Decrease in liabilities —
value ofBP (2.6M-
Dividends declared - ‘ 400,000 2.8M+600,000) '

Decrease in
. . . . .
liabilities - ' Increase in liabilities caSh 500,000 3,900,000 increase in share capital
300,000
(1.1M_800’000) Treasury shares ( 320,000 200,000 increase in share premium
DiVidends
. . declared 75 0,000 / 800,000
. ' Share Cal"Ital
Increase m .
N“ 1055 1,100,000 2,600,000 Increase in reval'n surplus
(80,000 x 10) lncrease in loans payable
Net loss _ .5" Increase in share 400,000 [2M — 1.6M)
400.000 180,000 lncrease in int. 3 able
premium (80,000 x 5)
250,000 Net income __T0tal 7,680,000 7,680,000
Total
1,750,000 1,750,000 ,
89
88
I
H
/ We» My
CHAPTER

PROBLEM 5-1
5= REV‘. ________.__,_2_____'.
Computation of Sales
The following data
were reported by Franz

Accounts receivable -
January 1
,

Company during the Current y

e
'

P 200
180,000
an
.
fl’h"
Chapter
r
‘VH N—h‘w'fiwfl' -"""‘"""”“"“"“~‘-‘“MAJ-v4.2. 4_.A_4 __,_‘{W_._W‘V“ MM _

5 — Cash and Accrual Basis

FROBLEM 5-4 Computation of Cost of Sales

'A

The following data were reported by Haste Company during the current year:
Accounts payable January 1
—

Accounts payable - December 31

200,000
250,000
‘
VL ‘ '12“ [VIM I

(19:57.13:

fi" 4

receivable - December 31 ' ' Merchandise inventory - January 1 400,000

Accounts 240,000
January 1 Merchandise inventory — Dec. 31 210,000
Notes receivable -
V 1

170,000
reCeivable - December 31 Purchase returns and allowance 6,000
Notes 55,000 .
Advances from customers
January 1
— Purchase discounts 3000
40.000
customers December 31 - ' Payment ' 800,000 ,
Advances from —
4,000
allowance Cash purchases 10,000
Sales returns and .000
Sales discounts 2'000 How much is the total cost of sales under the accrual basis of accounting?
Uncollectible accounts written off during
the current year P859,000 C. P1,040,000
3:000 3.
b., 191,050,000 \_
Recoveries of accounts previously written off , . d. P1,049,000
Sales - accrual basis 600 00. .

PROBLEM 5-5 Computation of Income Other Than Sales

Determine the gross sales under the cash basis ofaccounting I 0
The following data were reported by Chaste Company during the current year:
a. P666,000\ c. 19696300
P668,000 d. P699,000 Rent receivable-January 1 200,000
b.
Rent receivable-December 31 250,000
PROBLEM 5-2 Computation of Bad Debts Unearned rent income - January 1 90,000
The following data were reported by Azul Company during the current year, Unearned rent income - December 31 30,000
Collection ofrent ' 660,000
Allowance for doubtful accounts—January 1 p 25 000

Allowance for doubtful accounts-December 31 40’000 How much is the total rent income under the agrual basis ofaccounting?
Uncollectible accounts written off during the current year 8,000 a. P650,000 C. P800,000

Recoveries of accounts previously written off 2:000 b. P770,000 d. P970,000

How much is the total bad debts expense during the current year? PROBLEM 5-6 Computation of Expenses in General
a. P9,000 c. P21,000 \_ The following data were reported by Chessy Company during the current year:
b. P15,000 d. P23,000
Prepaid Rent - January 1 200,000
Prepaid Rent - December 31 250,000
PROBLEM 5-3 Computation of Purchases
Rent payable - January 1 80,000
The following data were reported by Sipag Company during the current year: 65,000
Rent payable - December 31
Aceounts payable - January 1 P 200,000 Payment of rent 850,000
Accounts payable December 31
— 250,000 How much is the total rent expense under the accrual basis ofaccounting?
Notes payable - January 1
Notes payable - December 31
400,000 a. P785,000 c. P850.000 '\ I

2100.000 b. P820,000 d. P915,000

Advances to suppliers ~1anuary 1 50,000
Advances to suppliers - December 31 68,000 PROBLEM 5-7 Computation of Cost ofMachine Acquired and Sold
Purchase returns and allowance 6,000 Phosphorus Co. provided you the following information in relation to its
Purchase discounts 3,000 Property, plant, and equipment account: .

Payment 800,000 -'. _ Beginning End

Equ1pment 100,000 120,000

21. P651000
b. 13654000
\
Determine the gross purchases under the accrual basis ofaccounting

-
c. P687,000
d_ p678,000
Accumulated depreciation 15,000 18,000

91
90 ,';5
 Chapter 5

a)
b)

Questions:
1.

2.
b_

a.
—

[3160,000

P60,000
b. P160,000

PROBLEM 5-8
Cash and Accrual Basis

Depreciation is 15% per annum-

At the Start Of the year: Phosphorus C0"achIred a.“ eqmpment
same time disposed of an equxpment With a carrying amount a“dah
accumulated depreciation of P15,000 for P35,000.

How much is the cost of the machine disposed?

a. P60,000

\\
c. P120,000
d. P40,000

How much is the cost of the machine acquired?

6- P120.000
d. P40,000
\
of P250“:

The following balances have been excerpted from Sulfur’s statement Off
. f
~

"7
W
5

6.
'
Assuming that the company wrote-off P25,000. Had the cash basis of
accounting been used instead, how much would have been reported as
receipts for 20167

b-
P1,820,000
a, P1343000

p20,000. Had the cash

would have
a_

PROBLEM 5-9
b.

The following
Financial
been
“£25,000
P1,840,000
\

\
basis
reported as
of
a. Ellingooo
' ’ 8 ’000
Assuming that the company wrote-off P25,000 and subsequently
accounting
receipts for
been
2016?
used

c_ p1I390'000
d. P1,905,000
instead,

balances have been excerpted from Chlorine's Statement of

Position for the year 2016:
P100000
recovered
how much
5..

I:g.

Posmon: maml Accounts receivable, decrease

J
Merchandise inventory, decrease 25.000
12/31/16 12/31/15
decrease 200,000
Prepaid Insurance 6,000 7,500 Accounts payable,
100,000
Interest Receivable 3,700 14500 Notes receivable-trade, increase
14,000
Rental receivables, increase
i
Salaries Payable 61,500 53,000 40,000
Unearned rental income, decrease
Accounts receivable 550,000 415,000 decrease 5.500
Prepaid interest,
Allowance for bad debts 40,000 2 5,000 8500
IntereSt payable, Increase
Sulfur Com p an y rep0 rte d th e fo ll owmg
' d urmg
' 2 016 the followmg
‘ items:
~
Additional dam:
Accounts receivable written off 10,000
Insurance premiums paid P 41,500
Cash received from customers
4,200,000
Interest collected 123,500 2,800,000
Salaries paid 481,000 Cash paid to creditors
Sales discounts 30,000
Sales 1,980,000 20,000
Sales returns and allowances
Questions; :urcgase discounts
Based on the above data, answer the following:
1. How much IS the insurance expense on the income statement for 2016? C2; iiifggrfrrim tenants 400,000
a. C. Interest
b. P40,000 , d. P55,000 p ‘
_ ' Questions:
2. How much 15 the interest reVEnue on the income statement for 2016? Based on the above data, answer the following questions:
a. P90,500. C. P117500. 1. What is the amount of gross sales?
b. P112,700. m d. P156500. a. 4,110,000 c. 4,210,000
4'160'000 d' 4’260'000\
3. How much is the salary expense on the income statement for 2016? b'
a. P366,500_ C_ 13489500$ 2.
What is the amount of gross purchases?

4.
b. P472500.

No uncollectible accounts
d. 9595,500

were written off during 2016. Had the cash bag.

,

3.
:1).
.
3,000,000
3,050,000
.
c. 2,600,000
.
d 2
,650 ,00 0
What IS the amount of the cost of sales for the year?
\
of accounting been used instead, how much would have been reported;
§:2251000\ c. 2.673000
receipts for 2016? i:- 2,725,000
75,000 (1.

Cl
P1383000 .
it:
‘ ' d. P2,115,000 93
(.
ll

Chapter
1

5
'

PROBLEM 5-10
What amount
a, 454,000
b. 426,000

- u r
gift?“o:vttgbol;2lanccs
In ytdl

Accounts receivable
NotIes receiva M e
C,
5 —

How much interest

1
i)‘
.
86 000
97'000
,
Cash and Accrual

\‘
BaSIS

expense should the

‘ '
company
103,000

have been excerpted from Argon's financial

:ielVCd {ralllncfgorilclgs
,
-
7
I

Mental revenue should the company

report for the year?

rePOrt for the

c.
'

(1.
year,
222%?)

114,000.\

January 1
200'000
300 I 000
StatememS
D
°C- 31
250
100000
,000
W
5'

mm”
The rent

1),
income for the year 2010.
a, 470.000
490,000

“(0131301541
The {01lowmg balzfancels
' 1Position ortieyear

Accounts payable
.
Accounts receivable
Allowance for bad debts
Merchandise inventory
.

Accounts receivable written off

received from customers
16:
c. 460,000
d. 500,000

January 1
200,000
""

20,000
380,000
150,000
-

“AM

have Egon excerpted from Potassium’s Statement of

DCC' 31
300,000
30,000
330,000
100,000
50,000
1,498,000
.

“l
I

:
I
I

Si:
c
.
urns an a v
1,120,000
20 , 00 0
Cash
Cash pal-dt O trade
creditors 1 200 000
. , l

discounts 20,000 .

15031352”? 10000 Sales |

200 0 Purchase returns 10,000

Account1 5811:)?“er ' 00
50,000
100:000
receivables 70.000 80.000
5,1303 6 25,000 Rental
NoteSpa} able
p 100,000 Rental payable 60,000 35,000
75,000
allowances tenants 120,000
40,000 Cash received from
p:::h::: 3:353:55“ 6&0'000
Payments to suppliers Additional information:
40'000 o Collections from customers included customer’s deposit of P80,000 ol
Accrued rem receivable 70 000
unearned rent income 0’000 which P20,000 selling price ofgoods were already shipped and received by
80'000 40'000 the customer. The shipment of goods was not recorded by the company
Collection ofrent ' 4801000 although the cost of merchandise was properly excluded in the count.
prepaid salaries 100 000 |

125,000 . Collections from customers also included P30,000 payment from customer i
Accrued salaries payable 75.000
50'000 of accounts receivable in which a check dated January 15, 2017 was I

payment “salaries '

. ‘ 350'000 received. I

QUCSUOHS: Determine the following: - Collections also included recovery of accounts previously written off
1. The Gross Sales for the year 2016.
:
1,000,000 c, 970,000 0
amounting to 138.000-
included in the payment to trade creditors was a check drawn and recorded i:
i
"l

by the company to the supplier in December 2016 amounting to P20,000

|
. 1,030,000 d. 1,240,000
2_ which was delivered to the payee on Ianuary 10, 2017. ii
The net purchases for the year 2016' ‘I
3' the company did not record payment to supplier amounting to
6501000 550 - Also
P30'000'
b. 600,000 :1.
500,00?) II
QuesuonS: ll
3. The Gross income fort Year 2016-
he
Determine the accrual balance ofthe following as ofDecember 31, 2016: 55

a. 300 000 270,000 1. Net Sales i!

fl
b,
350’000" C-
d~ 320000 a. 1,400,000 c. 1,470,000 all
|

4. Theiglggies expense for the year 2016. b'

1'550'000 d' 1'570'000 1:
:Fl
3' , 00
Net Purchases 55!
.

b. 300 ' 000 c. 350,%%%

450' 2.
d- a. 1,130,000 c. 1,140,000 _a!

b. 1,160,000 d. 1,170,000
'r.
15
I' g

I ‘I
o'.
I.

u'. ,

94 95 .
 Accrual Basis Chap ter 5 — Cash and Accrual Basis V~\\-\ -
Cash and
Chapter 5 r 9 supplles unuse
1,490,000
3, ofsales 5) OffiCDecember 31, 2016
Cost C.
1,220,000 250,000
1,180,000 December 31. 2015
3. d. 300.000
1,210,000
b.
Questions:
145,000
Rentlncome above and the result of
Based on the audlt,
.
4. c. 135,000 determine the accru ] b alance
a. 130,000 following as of December 31' 203;?”
d. of
1,the
155,000
b. The Professional fees ' a

debts expense a. 5,000,000

5. Bad
12,000 b. 5,250,000 I ' I
' ' d.
2'
233‘”
00 c-
2_ Net income
Comprehensive aI c. 2,400,000
PROBLEM 5-12 basis. The balance sheet 0 December 2,010,000 d. 2,210,000
statements on the cash b.
Calcium prepares
the year 2016 are as follows; n
income statement for Current Asset
31, 2016 and 3.
Statement of Financial Position: 3_ 2,500,000 c. 2,600,000
1,500,000 b. 2,300,000
d. 2,200,000
“35" '7 r'nn nnn

4.
Noncurrent asset
2,125,000 C. 2,200,000
3.
2,400,000
b. 2,225,000
(1.
1,000,000
Note payable
Capital: 5. Total Asset
Balance, January 1 1,600,000 4,625,000 c. 4,800,000
a.
Add: Net income 2,250,000 b. 4,525,000 d. 4,600,000
Total 3,850,000
6. Current liabilities '

1,000,000 c. 1,190,000 ;

a.
Total 1,200,000
b. 1,090,000 (1. F

Income Statement:
7. Total Owner's equity
Professional fees 5'000'000 3,625,000 c. 3,610,000 5

a.
d. 3,400,000
Expenses:
b. 3,435,000
Rent 1,200,000
Supplies 800,000 PROBLEM 5-13 Comprehensive
Other operating expenses 750,000 2,750,000 financial statements of JULIE ANN
You are engaged in the audit of the
Netincome The following information
2,250,000 Corporation for the year ended December 31, 2016.
You decided that the
statements should be was prepared by the bookkeeper. a"

prepared on the accrual basis and

you assemble the
information below: Cash receipts: I
at

The furniture and P1,513,000

equipment were acquired on July 1, 2015. The estimated Collection on accounts receivable
2
1)
life is 10 years. 13,000 _ P15001000
The 12% Promissory
Less: Cash discounts taken 160'000 l:
note is Year”
were“ is PaYable on the datedated April 1, 2016 and matures in one
2) Cash sales of merchandise 12'000
, of maturity. Sale of warehouse equipment 42'000 i'
3) Accounts receivable:
Insurance proceeds from boiler explosion
2

20‘000
l 32::2lger311016 750,000 Sale ofland on November 3
4) "3112015
:
AC “mad rent on 500,000
. December 31, 2016, Cash disbursements: :
13100000.
Payments to trade creditors I

General and administrative expenses ' f. .

96 [/Tf‘ \\ 97 [II/"w"
 ,
chap/f“?
A”
.0:

%
929329.19?” 3"" “We”
merchandise
Bas's ’ x—x
120,000
6,400 5'
admlnlStrath
pter

3
5
Cash and Accrual Basis
and
P2040008 C-
P211200
‘ '
"1+-

purchases of 1220720
Cash warranty contracts 16.000 b.
d.
P204300
mers made on
expenses
'

Purchase of land
on May 1
Drum shares of Tommy
Co. stock 24,000 Total Operating
November 10
purchase on
information: ledger: P291200 (1.
were taken from the general
W
Supplementary b. P295200
1)
following account balances December 12¢;ng sale of land
Gain or [055 on
‘
The
Ls P4,000 33‘“ 6-
7' a. p16,0001055
124,000 p 146 0
P4300 loss (1 Nil
b.
Accounts receivable P 186,000 190' 00
.000 sale of warehouse equipment
Gain or loss on
."

inventory 9,600 (8,400

5

admin. Expenses
‘1

Prepaid gen. and 7,000 8- [)5'0001055 C~

F3000 gain
a,

Expenses 3.000 a. K

gen. and admin.

9

Accrued 382,000
4 10,000 P13,000 '055 d' P12,000 A

i!
b. gain
Accounts payable ?
‘
z) Depreciation for 2016was meson. or loss as a result ofjanuary 15, explosion.
I

Gain
acquired in 2009
equipment sold during 2016 was
-
3] ata Cost 9- 136,000 1055' C- 1

The warehouse method of depreciation wa

a. 13283001055
The double—declining "Fed and P14,000 gam d- “2'000 gain
of P25,000. b.
P16,000 at date of sale, If the S: raight—line
accumulated charges were Netilrlcome
method had been used,
the accumulated depreciation at date f Sale Wou|d 10,
a_ 955,400 c. P35,400
have been P10i000. 0
b, P61,800
occurred on January 15, 2016 in which a b ‘1 er' not the
(1. 1347.400
4)
An explosion 01
building. was completely dest
depreciatiODFSVYed. It was
structural component of a
cost of P48,000, chrde pROBLEM 5-14 Comprehensive
gughased inhlalnuary 2008 at a engaged in your second annu
had accumulated at theasdate of th: You have been daglvixammaunn
- -
of the financial
straig t— ine method and P20.000
.
.v e
statements of Scandlum Co. The following PmVlded to you by the
explosion. ere
I
’ 2016 and Was used as a Storage facili company accountant:
Land was purchased on Mav 1
5] V -'

was found to be unsuitable for this purpose and “’35 501d on Novembgr Cit
receipts:
Cash
f 2016. Collection on sale on account 740,000 x

z'

Cash Sales i
.5

Questions: 100,000
I adjusted balances of the following Proceeds of a note payable dated Oct b 2016 and due
Based on the above information, compute the
'5:

0 er 1’
\

October 1, 2018, discounted at 18%

5 n
.
accounts as of December 31, 2016: 30.000 'J
.

1. Gross sales Cash disbursements:

P1,S35,000 P1,522,000
a. co
Purchase ofland and building on April 1, 2016
5

400,000
J
b. P1,695,000 d. P1,362,000 Full payment of furniture and fixtures
l,

2. Net Sales purchased on July 1, 2016. .7

3. P1,522,000 c. P1,682,000 On accounts payable and administrative expenses 518,000

b. P1,509,000 d. P1,349,000 Selling expenses 200,000

3. Total purchases (“the sales 0“ account, P10,000 was returned because of poor quality and there
h
a. P12341100 c. P1,298,000 was a Purchase return of P8,000.
h. P1,178,000 d. P1,354.000 The following data are also available: fi

4. Cost of Sales 1:
12/31/2016 12/31/2015
3‘ P1.350,000 c. P1,174,000 150,000 5:
lecemble 200,000
b. P1,230,000 d. P1.358,000 :4???“ 190,000
“‘59 i“ventory
ACE:“m8 payable
220,000
180,000 230,000
’4 .. a \

98 _/ ' 1 99
/‘
/ I _
I,
’
_
cash and Accrual Basis
pter 5 as
3 m

expenses .
40,000 30,000 155“
P360000
Accrued rent From
m
Land and buildin allocated to the bank loan
purchase price of
the Fro d_ 100,000
is
0f the total depreciation is 5% on the building andgl’o‘f;% the fumlture an d is bursements were as follows:
v ’
Land. Annual
1

on 1" Signage of Inventory P300

fixtures. 1
000
gross profit
O
de
The Depreciation
P200,000 are 40% of ent
_

expenses of expense amount. 15,000

Selling administrative preciafiOn Salaries
part of the 30,000
expenses are to be administratiVe expenses. There are no UH pald Selimg Utilities '
ofthe total
expense is 20% of December
31. Insurance
administrative expenses as PurChaseo fequipment and furniture , .
and as 40000 ed
audit, determine the balance of the fOnowing
Questions: 108n em made on March 31,
The -bank of 2016. A note
i

data and your c. i

-
Based on the above umng paym
' ° - interest and principal on March 31,$331571?“
31,2016: .
as ofDecember Fetirest rate IS 12/3
account furniture were purchased
1. Gross Sales on 900,000 'llPhe equipments: on January
c. d. 2016. and
a. 800,000 790,000 have an estima ‘3 useful life- of 10 years Wlth “0 anuclp‘Eited
d. salvage
b. 890,000 value- DEPT.eciation per year Is p4,000.
Inventories or; hand
at at the end 0 fthe y earrecost P100000-
2. Net Purchases c. 528,000 e: s as I
420,000 December 31, 2016 We follows:
a. P20
d. 520,000 f.
I b. 428,000 Amountners ofinventory
To 000

Payment ofaccounts payable To :hlggtility compban-ilding

re U1 1,000D
3.
c. 478,000 Rent on the S“) t was -d is
_
PLOOO per month. On 8C ember 1’ 2016'
3. 462,000 y m
d. 486,000 . ths ren P31 advance.
b. 470,000 g four.n:;(())rrlne for the year was P7
h. Ne t in
4. Payment ofadministrative expenses
3. 48,000 c. 56,000 Questions:
d. 40,000 data co for the fouowmgl
b. 60,000 Based on the above mpme I

Cash
5. Total selling and administrative expenses 1.
393'000
z

c. 260,000 3. Nil
718,000
1

3.
b. 167,000 3'. 560,000
d. 248,000
i
b. 710,000
i

6. Cost of furniture and fixtures 2, Current Assets i

l

a. 60,000 c. 120,000 a. 103,000 c. 496,000

i

b. 30,000 d. 240,000 b. 270,000 d. 663.000 !

i
3. Total Assets i
PROBLEM 5-15 Comprehensive
a. 306,000 c. 532,000 g

The I WANT TO HOLD YOUR HAND Company was started by Paul McCartney
b. 393.000 (1. 699,000 i
early in 2016. Initial capital was acquired by issuing shares of ordinary Shares I

to various investors and by obtaining a bank

loan. The company operates a 4. Current Liabilities
retail store that sells records, tapes, and compact 121,000
discs. Business was so good a. 70,000 C.
during the first year of operations that Paul
is considering opening a second b. 100,000 d. 130,000
store on the other side of town. The funds i
necessary for expansion will come
bank loan. In order to approve the loan, the bank Shareholders' equity
1

5.
:zzgnziergi: requires financial l
l
3. 176,000 c. 411,000
s

Paul aSkS for your he‘ll in preparing the b. 323,000 d. 599,000

balance sheet and presents you
following information for the year ending with the
December 31, 2016:
a. Cash receipts consisted ofthe
following:
//
/
100 ' I

101
l
.j_
I‘
i

PROBLEM

6‘35"
5-16 Single
The Statement of‘

Notes Receivable
Accounts Receivable
Inventory
Prepaid Expenses
Investment (at cost)
Equipment

Liabilities and Equity

Notes payable
Entry
Fmancnal

report the followmg ba

Assets
P051
lances:
Hon

W
p

P
for the

31-Dec
750,000
210,000
950 000
1 500'000

:
1000
Volks Company

' 00
1001000

580,000
750,000
P

-
Han
330,000
200,000
740,000
1,600,000
120,000
400 000
000'000

P
Prepared in

750,000
600,000
201
6
,
M
Quesfi:::;,e above
Baserlghe
1’

2.

3:

5
.
total
a.
b. P

The
r5

sales in

3' PNBO'OOO

b.

The total
3_ Nil.
—

2016
370,000
P1170 000
total
I1
Cash an d Accrual BaSls

data, compute for the

purchases in 2016

132,080,000

b, P100,000.

The
3_

b.
depreciation in 2016

interest expenses in 2016

Nil.
P10.000

The total net

income in 2016
.

£0110

:-

C-
(1.
.
.
Wing:

133,570,000

P1.880,ooo
[32,380,000

c. PBO'OOO
d. P480000

c.
1330300
d. 1340.000
‘«.. a"
.
.

E“

E
'\
I

Accounts payable 30,000 - . a, P1,000,000 C. 13950300

\.
Interest payable 50,000 40,000 P5001000
P1.550.000 d_ ‘g

Accrued expenses 500,000 b.

Y.
Bonds payable 1,300,000
—
1,000,000
Share capital, P100
par 1,000,000
1,500,000
Share Premium i
Retained earnings P4,390,000
P4,810,000
1

discloses the following:

receipts and disbursements
An analysis of cash 1.

Receipts 800,000
issue of share capital
13

accounts 2,9 50,000

Trade debtors-notes and
Note receivable discounted:
190,000
Face value, P200,000, proceeds
12% one-year note issued to bank,
300,000
issued and discounted on March 1, 2016
Sale of investment 250 0 00
Tm 4,49 0,000

Disbursements:
Trade creditors-notes and accounts P2,100,000
Expenses 790,000
Dividends 400,000
Equipment 280,000
Bonds 500,000
Total 4,070,000

102 103 ("1),

I,
iii

I
g

;
“wees.”
Chapter

CHAPTER 6
CORRECTION OF
6 — COM
EM »
“‘- . -
Cha
Accounting
.
Accordingr m
,‘rors
“Sue
l'5
(a)
i
“‘5. 8.1])2Fr
i'ctl‘OSPCC“,vL y m
qftcr their
‘rcsmung the
_.

in which
the error
I'
U‘
discovery by:
"v

comparative
. - ,
occurred;
i
~“‘“N~—~W‘RWM
'l‘i'cillmC"t or P 1‘10!“ Period lirroi-
.dh Lm'ty Shall correct m'
-

-'
amounts for thC prior
or
’
me‘ltS)
‘

_
-
x
w
r'rSt Set Ofl'inancizil rrtat ,. Mum pm)" period
(.mcnts authorized for

Presented
" ~» ~
'- I

Chapter Outline: error occurred before the earliest prior ier‘ t presented,
[b] if the.
ll

dim
restating the opening balances 0f assets, liabilities equlty lor the
Errors ‘m
Cal-[jest prior period presented.
i 1.
Prior Period Errors
ofprior period error
'
2.
Accounting treatment retrospective restatement
3. oferrors Limitations on
Basic concepts in the correction error shall be corrected b retrospective .
p eriod restate:"erdt
.
4-. A prior . . . I Y
5. Working capital extent that it is impracticable to determine either the
Types oferrors except to the
6.
offinanciai position errors specificeffects or the GumUlathC Effect 0fthe error. p m -
7. Balance sheet or statement
errors impracticable to determine the period-specific effects of an error
8. income statement When it is
I
statement offinancial position «1nd inc01ne statemen errors Comparative information for one or more prior periods presented, the
9. Combined on
10. Counterbaiancmg
errors t restate the opening balances of assets, liabilities and equity
entity shall
11.
Non-counterbalancing errors earliest period for which retrospective restatement is practicable
for the current period).
(which may be the
Errors impracticable to determine the cumulative effect at the beginning
When it is
Auditing No. 240, “error refers to an anerror on all prior periods, the entity shat] restate
According to Philippine Standards on ofthe current period of
financial statements including the omission information to correct the error prospectively from the
unintentional misstatement in the comparative
of an amount or a disclosure,
including: earliest date practicable.
1. A mistake in gathering or
processing data from which financial
statements are prepared; Basic Concepts in Correction of Errors
estimate arising from oversight or \Effect in the
2. An incorrect accounting
Net Income Relationship
misinterpretation of facts; Errors affecting net income:
accounting principles relating to Overstated Direct
3. A mistake in the application of IfSales are overstated
Inverse
measurement, recognition,classification, presentation or disclosure." IfCost of sales is overstated
Understated
Understated Inverse
lexpenses are overstated
Prior Period Errors i
Effect in I
I
Prior period errors are omissions from, and misstatements in, the
entity’s
Cost of Sales Relationship a

from failure Errors affecting cost of sales: i

financial statements for one or more prior periods arising a to

Overstated Direct i
IfBeginning inventories are overstated
use or misuse of reliable information that: Overstated Direct
were If Net purchases are overstated
(a) was available when financial statements for those periods Understated Inverse
authorized for issue; and IfEnding inventories are overstated t

(b) could reasonably be expected to have been obtained and taken

into
Working capital . .
da uto-day
-
~ts I
financial
account in the preparation and presentation of those working capital is the capital of a busmess that Is ltlsesiilnnu; the)current g

statements. trading Operations_ computed as the current asse s

Such errors include the effects of mathematical
mistakes, mistakes in
liabllltles.
oversights or misinterpretations of facts, and Effectin R
applying accounting policies, Iatjonsmp'
fraud. Errors affecting working ,
capital:
' a ital E
Direct
If the current assets are overstated woglfgftgtepd
U Inverse
Ifthe current liabilities are overstated \derstated
n

104 ,r ’,r—'~-\ \.
105
 W
Y

(J13?
813.23: 6 - Ccrrectisn of Errars tic!“
Samuiremcl‘t N0" 1
TYPES OF ERRORS Reg Net Income
Bsiaztce she-ct or statement
offinancial position errors 2014.
Ret ,
3. 2015 201421111811
Earnings
2. Income statement errors balances 5,000,000 600000
3; Combined statement of financial position and income
statement errors ,
Unadjust ed R 2015
g 5300 000
a. Counterbalancing errors \
NR
under and A ’ 1139091900
unaffected 0 0
b. Non-counterbalancing errors ha NI
0V
Ni) under and AP
over 0 0

Statement ofFinancial Position or Balance Sheet Errors unaffected 0 0 0

:30 Nl is
Statements of Financial Position or baiance sheet errors affect only the 3) Land unde“ O
presentation ofan asset. Iiabifity, or stockholders’ equity account .nvesgment Property
unaffecwd
\“a'henthe error is discovered in the error year, the company reclassifies th loverbut N1 is
53001000
item to its proper position. 6
Adjusted baiance 3000900 5000000 11 000 003
x
If the error in a prior year is discovered in a subsequent pericd th uireme“t NO' 2 .
ccmpany should restate the statement of financial position of the prior. e entries if errors are dlSCOVETEd in:
year Eggsting
I
for comparative purposes.
I

31‘ .
f
Example: £314: Notes recewable 10,000
Land ofP1,0G,OOO in 2015 was erroneously debited to notes receivabl e. Accounts receivable
10’000
i
g Reclassifi'ing entries: Accounts payable 15909
Land 1,000,000 Notes payable
f
15000
Notes receivable 1,000,000
Land 100,000
[Hustrationz Statement ofFinan cial Position Error
anestment property 100’000
. U Can Be A Topnotcher Company reported net income for the first two years
V
2015: Land 100,000
O

ofoperan'on as follows: Investment property

I
100000
2014 5,000,000 2015 6,000,000 2016: Land 100,000
In an audit ofthe financial statement for the year ended December 31, Investment property 100,000
2015,
(
l
the following errors are discovered (all errors were made in 2014): Note:
1) Notes receivable of P10,000 was erroneously debited to accounts In 2015 and 2016, there are no adjusting entries for the errors on the notes
receivable. receivable and payable because they are assumed to have been settled or
2) Notes payable ofP15,000 was erroneously credited to accounts payable. received at the end of those years.
3} Land of P100,000 was erroneously debited to investment property
account Income Statement Errors
statement
:fififtssztjfg ent errors are errors affecting. only
Required: I
_the -
1. Compute for the adjusted net incomes in 131W include impmper CEaSSlficauon 0 “avenuesd- mmgxreexpenses.
' 2014 and 2015 and Retained vers the error in
earnings as ofthe years ended December 31, ,
A company must make a reclassification entry When it xsco
L
2014 and 2015.‘
Prepare adjusting entries assuming the error year.
2‘ errors were discovered In (a) 2014,
[b] 2015, and (c) 2016, If the error the
dlscovered pertams t0 I ‘ ear) company Should restate 7

the income
statement of the prior
.
year for CO m p amtwe pu p
.

106 . '
l/ \y\
107
 W
Chapter 6 — Correction of Errors
Since these errors involve two nominal accounts, net income and retained
earnings during the period are unaffected.

Illustration: Income statement Error

Effect of the error:

Legend: 0 - Overstated U
“I.I.‘-
Rent income amounting to P10,000 in 2015 was credited instead of [mer
income.

-.
- Understated
est
\V‘J/

um:

x - No effect
f
chap

sol

0:”,
o
2)
ter 6
ution:
“irement No.

.and rent
1] 61::

1‘”
under
Supplies
n derI
lPjurchaseS

:3]
NI

r
undfient income
under,
over,
,

djusted balances
una t
expenSe under'
expense

expense
over
over'
and
NI

under,
miscellaneous
NI over
1
.
correction of Errors

N1
14
3,000,000

0
20
40001300
'

0
Reta-lne
2014 ‘1
3‘0001000

0
.
Earnings
7 2015
I

'000’000
‘ I“
‘

0
\

income
Reclassifying entries on: balance 3900000
Adjusted 40001000 3 000
2015 2016 000 7 000 000

J Rent Income 10,000 No adjusting entry Requirement N0“ 2 . .

!
Interest income 10,000 Adjusting entries if error 15 discovered in:
Year
j Illustration: Income statement Errors 2014: Interest expense 20,000
Dare to Dream Company reported net income for the first two Rent expense 20
years of 000
operation as follows:
Office supplies expense 25,000
2014 3,000,000 2015 4,000,000 Purchases
25,000
In an audit of the financial statement for the year ended December 31, Miscellaneous income 30,000
2015,
the following errors are discovered: Rent income 30,000
1) Interest expenSe of P20,000 in 2014 was erroneously debited to rent 2015: No adjusting entries
expense.
2016: No adjusting entries
2) Office supplies expense of P25,000 in 2014 was erroneously debited to
purchases. Note:
3) Rent income of P30,000 in 2014 was erroneously credited to In 2015 and 2016, there are no adjusting entries for the errors because
miscellaneous income. when these are closed to the retained earnings, the balance have already
!

been corrected.
Required:
1. Compute for the adjusted net incomes in 2014 and 2015 and Retained
Combined Statement of Financial Position and Income Statement
earnings as of the years ended December 31, 2014 and 2015.
Errors ~

2. Prepare adjusting entries assuming errors were discovered in (a) 2014, ‘ ' and mcome
-
Errors affecting both the statement of financ1al Posmon
(b) 2015, and [c] 2016.
Statement can be classified as:
1. Counterbalancing errors and
2. Non-counterbalancing errors
Counterbalancin g Errors ,
reaed over tWO
.4”... —“\ Counterbalancing errors are errors that W111 offset f” be Cor
I. .4“ '. \x accounting periods. Examples include the followmg.
)I
I

108
A/
,
,- t
.
‘/
109 ‘
 ._ Kiwi? .7 r6 , Correction of Errors -‘.

Chapter 6 Correction of Errors . nmES: .

— —
—
Ad]
'ustmg 6
2015*
Omissions of the following: 4000 R ' 2015
Prepayments under the expense method.)
>

1, etamed earnings
Deferred expense (or "t inCome . me ' 4 00
2 (Precollection under the revenue method.) Rgneamed rent
"160 v 0 Rent Income 4.000
Deferred income

_
Accrued Expenses 412,000/12 x 4) 4000
3.
4 Accrued Revenues I
{Accrued Expense
of the followmg: -
Overstatement 0r Understatement ecordmfg 0
recorded in the first year and
subsequently recorded the salanes expense 0f P4'000 was “or l"ecorded at the end f

'-
5. Sales not 1:22:1th . 0 2015.
following year (or vice versa).

u
subsequently recorded error'
Effect of the
6. Purchases not

Error affecting
7.
recorded in the first year and
the following year (or vice
ending

Omission of deferred expense

versa).
inventory.
’1 . ‘. S “2:6
.
a a e “&$
insurance premium of P12,000 effective April ' . fter closin
The Company paid one-year
I:
5 .

M“
1, 2015. The entire amount was debited to expense account and no at the end of the ear
ca - ital
3
4'

nn
adjustment was made at the end of 2015.
550mm Oversmted U ' U"derst’a‘ted ffEC t
5
iegend= 0' '
Effect of the error: entries:
‘ 2015 2016 Ad).usting
2015 2016
4,000 Retained earnings
Salaries expense
-
4.000
‘
4,000 Salaries expense
Salaries payable 4,000
'

Retained earnins after closin Nonrecording of Accrued Revenue

Y.
4.
-
5. Workin ca ital at the end ofthe ear rent receivable of P8,000 was not recorded at the end of 2015. ‘9: '

u
x . No effect Accrued
.' Legend: 0 - Overstated U - Understated J

Effect of the error:

Adjusting entries:
'i
J-_
2015 2016
f Prepaid insurance“ 3,000 Insurance expense 3,000 i1

:5?

; Insurance expense 3,000 Retained earnings 3,000

; *(12,000/12x3)
_5
Omission of Deferred Income
The company leased a pomon of its building for P12,000. The term of the X - No effect
U - Understated
i

Legend: 0 - Overstated
, lease 15 one year ending April 30, 2016. Collection of rent was credited to
’ rent revenue account. At the end of 2015, no entry was made to take up the Adjusting entries: .

”
‘ unearned portion of the amount collected. 2015 2016 after closmg 000

n
Rent receivable 8,000 Rentlncome _ 8' 8 000
' Effect of the error: Retained earnings
8,000

m- 2016 Rent income 1

2015
-

4.
S.
Retained earnins after closin
Workin caital at the end of the ear
n- Sales
f0|lowing year.
Sale of
not recorded in the first year and

merchandise on atcount on December 29; zoiiaiyosz" The

P20,000 was not recorded until it was COH‘?‘3t‘3.d ont}:
unting to

in 2015.
subsequently rewrded the

understated X - No effect merChandise was properly excluded in the ending “We” ry

Legend: 0 - Overstated U-

110
/
W
M Effect of the
error:

“
KM“ “u 0,,
Chapter 6 —

Adjusting entries:
2015
ost of Sales
Correction of ErrOrS

5000 20
16
Retained,earnings
3‘ V A 4m

—
é

C Merchandise invento W 5,000 Mdse Invent

50
. ' s

Accounts receivable
. - Umbeg. S
2. 000 i
on
adjusting entries: .

Notes
:. waged earnit; s :Eter CIESlfn / The ad'ustin
) g
'ou mal entries in
_ . the
Year ’ k

ear 1
error will .
or 'n caita at een o e Understated x _ No eff account. and. a -real account..
of Inclu ‘
nomma]
Overstated U-
Legend: 0- ect / :I‘he adjusting
iournal entries during the se de a
c0nd Year after th
Adjusting entries: mdUde a . momma] account and retained year of Errol.
2016 earnings_ 8

I‘M“
2015 20,000 I”

Sales '
Accou tsreceiva
' bl e 20,000 For comparative purposlesl mstatement is necessary EVen -f
Retained earnings 20 00 E

5a];
20,000 journal entry 15 not requn'ed. g

first ear subsequently recorded

' 0
Purchases not recorded in the and Illustration 1: Combined and Counterbalancing Errors i
the following year. y
account on December 27, 2 amounting Se]f_53crifice Company reported net income for a

“
. to
Purchase of merchandise on two_year mod
until it was paid On 1512:: follows: p as
P50,000 lNaS not recorded 1130316. The i

merchandise was properly included in the ending

inventory 120,000 2015 180,000
I
l
2014

—““
1

Effect of the error: In an audit of the financial statement for the Year ended December 31 2014 §

the following errors are discovered: ' '

n
i‘
s

1) The company paid one-Year insurance premium of 3.

P18,000 effective
May 1, 2014. The entire amount was debited to expense account and no

In
e.

adjustment was made at the end of 2014.

2) The company leased a portion of its building for P24,000. The term of
E

U - Understated x - No effect the lease is one year ending June 1, 2015. Collection of rent was credited
Legend: 0 - Overstated i
to rent revenue account. At the end of 2014, no entry was made to take
Adjusting entries: up the unearned portion of the amount collected. i
2015 2016 3) Accrued salaries expense of P12,000 was not recorded at the end of
Purchases 50,000 Retained earnings 50,000 2014.
Accounts payable 50,000 Purchases 50,000 4] Accrued interest receivable of P15,000 was not recorded at the end of t A

2014. g

l
Error affecting ending inventory (e.g. overstatement) i

I.
On December 31, 2015, the ending inventory was overstated by P5,000. i-
ffqlégrfigute for the adjusted net incomes in 2014 and 20151'cénd RetamEd E.

Effect of the error: i

earnings as of the years ended December 31f 2014 end 20 -

n
2015 2016 2. Give the effect of the error in the 2014 worklng Cagltal' d -n i;E.

1. Cost of sales [a]

2014 .
K

3_ prepare adjusting entries assuming errors were dlscovere 1

¥
2. Endin invento (b) 2015, and (c) 2016. 3:

if
g

4. Retained earnins after closin E3

5- workin ca ital at the end of the ear

g

Legend: 0 - Overstated U - Understated x ' No effect 3

€-

112 113
xi”
‘ iI Chapter 6
Solution:
- Correction of Errors
Requirement No.

Unadjusted balances
1)
1

ins. Exp. over, NI

2)Rev over, Ni
3) Salaries
over
under

expense
Net Income
2014
120.000
6.000
(10,000)

(11000]
2015
180900
(6.000)
10,000

121000
Retained Earnings
2014
120,000
6,000
(10,000)

[12,000]
2015
300.00
0
WK
Illusfiafi?"
Self-Sacrl Ice
fouowsz

In an
following
1)

2)
zEcombimd and count
Ompany reported

audit of the statement

erbalanc.

errors are discovered?r

Advances to supplier in 2_014 were
merchandise was receiv 1T1 the
'
f
1
80,000
the Year Ended

follow‘i‘gcorded as pu
Err01's
net incomemfg0r
a m0~year Period

December 31

'
2014, the

rchases b
as
‘ , ~.

under. N1 over cuStom:;1 gYear,p20 ut the

Advances from 2014 r
followingeCorded {000
4) int income under, Ni 15,000 5 In
as s
15,000 15,000 3] goods Were delivered.
. 2m the ‘ 2014 but the
under December 31 014 Yea£30003 es m
On ending

a
00 the
Adjusted balance . -
OVer or (und er) P25,000- ' was Overstat d
working capital (WC)
Effect on the ory
(2%14 Reqmred:
1) Prepaid insurance
under, WC under Compute
. for the ad-lusted net Incom
- . 9 by
ins. Exp. over, 00) 1. Decersgelfszlolet and 2015
revenue under, WC over 16 ,000
earmngs as of th and Retamed
2)Rev over, Uneamed oftizaerfrgnqed .
3)
Salaries expense
under, Salaries payable under, wc effect 2014 énd 2015-
2. GiVe the the 2 014 working c
lusung enmesI‘m warezmtal.
i
over 12 ’000 3. Pre are , (1' assum' errors
Rent receivable under, WC under
~ _
1
4]
Int. income under, .0000 002015a and (c) 2016' lng lscoveredi (a) 2014 “
capital —overstated by
g 15
00
Effect on the Working
.
y
Solution:

%_
Requirement No. 2 Requirement No. 1
discovered in:
f
Adjusting entries if error is Net Income
i
2014: Prepaid Ins. (18,000/12 x 4) 6 000 Retained Earnings
2014 2015
insurance Expense ’ 6. 2014 2015
000 Unadjusted balances 120,000 180,000 120,000 300,000
i
)
Rent Revenue (24,000/12 x 5) 10 000 1] Purchases over, NI ;,

Uneamed Rent Revenue ‘ 10,000 under 20,000 (20,000) 20,000

Z:
2

2]Sa1es over, NI over (50,000) 50,000

Salaries expense 12,000 (50,000) 5
3) Ending inventory over,
Accrued salaries payable
3 37

12,000 i; ‘

N1 over {25,000} 25,000 a

{25,000} i
i Interest receivable 15,000 Adjusted balance 65,000 ll
.

235,000 65,000 300,000 (5 '

i
Interest income 15,000 I:
4.‘

Effect on the working capital (WC) i':

1:
5' a 2015: Insurance Expense [18,000/12 x 4) 6,000
6,000 Over or (under)
3 Retained earnings
9 2014
Retained earnings 10,000 1) Purchases over, Advances to supplier under, WC under (20.000)
:2
’. Rent Revenue (24,000 / 12 x 5) 10.000 2) Sales over, advances from customer under, WC over 50300

5&2.
J 3) Ending inventary over. WC 0V8"
.3 Retained earnings 12,000
Effect on the W
3 12,000 orking capital —overstated by
Salaries expense
D,

Interest income 15.000

i 15,000
Retained earnings

201:
\'
E

6 ' '
No adjustmg '
Journal entries
'\
114 115 V

.v—,_ «I
\.
 w-«g./
M Inn-UV" -- —~-v-v

H
\L‘

‘es:
A

Chapter 6 — Correction of -
AdluS
ting enm ‘

2015 * 9
000 l
Requirement No. 2 2016
Ce
expense I “suiance expenseh
Adjusting entries if error is discovered in: 20,00O 9,000
20.000 Insurazid insurance Retained earningsm
2014-: Advances to supplier Prep ** 3,300
Purchases PFEpaid
50,000 insurance I
*(12
000/12 x 9) ( . / 12 x 3) 12,000
Sales 50,000 *u(12‘000/12 x 9)
Advances from customers 25,000 “ectjon under the Liability Method
Preco
Cost of sales 25,000 any leased a. portion
.
of its buudin g f0 r P
Merchandise inventory end The ec‘i’sm ending April 30. 12,000 Th
20,000 leaS
:ne year 2016.
Collection of rent w:st:rr$of the
2015: Purchases rned rent revenue account. At the end of 2015, no lted to
20.000 entry Wa
Retained earnings uniaup the earned portion of the amount collected. 5 made to
50,000 ta 9
Retained earnings error:

“
50.000 Effect of the
Sales

—
25,000
Retained earnings .1 Rent revenue
25,000
Mdse. inventory beginning Unearned rent revenue
2016: No adjusting
journal entries
45. Retained earnin s after closin
Non-counterbalancing Errors workm ca - ital at the end of the ear

—
Non-counter balancing errors do not
offset in the next accounting period U - Understated
Legend; 0 - Overstated x _ No effect
Therefore, companies must make correcting entries, even if they hava'
Adjusting entries:
closed the books.
2015 2016
Examples: Uneamed rent income 8,000 Unearned rent income
12,000
1. Prepayments under the asset method Rent income* 8,000 Rent income“ 4,000
2. Precoiiection under the liability method Retained earnings*** 3,000
3. Error in recording depreciation *(12,000/12 x 8) **(12,000/12 x 4) ***(12,000/12 x 8]
4. Improper capitalization of expense
5. improper expensing of capital expenditures Error in Recording Depreciation (e.g. understated)
6. Error in recording of proceeds of sale of an asset (e.g. PPE) as other
Depreciation expense in 2015 was understated by P2,000.
income
Effect of the error:
Prepayments under the Asset Method
2015 2016

n
The Company paid one-year insurance premium of P12,000 effective April
1, 2015. The entire amount was debited to asset account and no adjustment
2.
was made at the end of 2015. Accumulated de - reciation

Effect of the error: Retained

4- earnins after closin
2015 2016 Legend: 0- '
X No effect
overstated U - Understated
1. Insurance ex ense
Adjusting entries:
2. Pre aid insurance
I D ’ 2015 2016
4. Retained earnin s after closin :p n expense 2,000 Retained earnings 2:900 2 000

5. Workin caital at the

ccumulated depreciation 2,000 Accumulated deprec1atlon ,
end of the ear ted X - No effect
1
Legend: 0 - Overstated U
undersm '
116
117 "(rim-1
fl
J
.l
!
1.7...7.” ,.,_,.

Chapter 6

‘mpmi’e'
__

Repairs expense on
the building
account
recorded in 2015 and
building.

Effect of the
,
i“

Correction of Errors

the building a 1 2015

on Januaryd O'n
2016 base

error:
the 4
W
had been
Capitalization “Experzfimmg to P10,000 expense _35 been
Depreciation
year remaining
“X” Ely“

clkilarged to

useful llfe of the

E
In“
In
2016
J7
7
W
I”
Chap

Error
inc"me
On
in

trhe Cash
recording 0f proceeds 0f sale 0f an asset (e g

January '1
of 521 .e,
_

2015, an equipment costi PSO’OOO

1
the eqmpment
d had an accumulated
ng
he date recelved was recor ed as other income

Effect of the

2
Other income
LMOSSO“53‘E
error:

Retamed earm'n s
- ,
after closin _
in
. .

Was sold f0
) as
P30,000. At
, r of
demee.latlon
P15I000_
2015

“E'-
.

PP E
Other

—“
1;
Workin ca ital at the end of the ear
after Closm
4. Retained earnins g I
5. BUllCllIl net ' i
Accumulated de reciation
derecration d t d 7
6 Accumulated
Overstated U ' U" "5” e X - No
effect
Legend= 0'
Overstated '
U understated x ‘ No effe ct
Légend: o- 1

' ' “ s:
Adjustiznglesntne 2016 Adjusting entrles: r
1

10,000 2015 0 2016

Retained earnings
i
10.000 . 3 ,000 Retamed
' earnmgs“
-
Repairs expense Burldmg 10,000 other mcome
10,000 Accumulated dep n 15,000 Accumulated dep’n
Building 5000
Accumulated dep'n 5,000 Loss on sale
(squeeze) Equipment ‘ 50 000
Accumulated dep’n 2,500 50.000 *[30,000 + 5 , 0 00) ‘
2,500 Retained earnings 2 500 Equipment
Depreciation expense
Depreciation expense 2,500
[10,000/4) Illustration:
. . Combined and Noncount er Balancin gErrors
Expenditures Self-Sacrifice Company reported net income f two-year period as
Improper Expensing of Capital 01” a
building amounting to P50,000 had been charged follows:
Major improvements on
January 1, 2015. Improvements have a life of 4 years.
expense on
to repairs 2014 6,000,000 2015 8,000,000

mm_
Effect of the error: In an audit of the statement for the year ended December 31, 2014, the
2°15 2°16
following errors are discovered:
1. Reairs exense
1) The Company paid one-year insurance premium of P240,000 effective
April 1, 2014. The entire amount was debited to asset account and no
4. Retained earnins after closin adjustment was made at the end of 2014.
5' “W” “t 2) The company leased a portion of its building for P480,000. The term of
the lease is one year ending April 30, 2015. Collection of rent was
f. Accumulated dereciation
agend: 0 - Overstated U - Understated x - No effect credited to unearned rent revenue account. At the end of 2014, no entry
was made to take up the earned portion of the amount collected.
Adjusting entries:
3) Depreciation expense in 2014 was understated by P12,000.
50000 4) Depreciation expense in 2015 was overstated by P14,000.
Building 50,000 Building _ 50
000 Bad debts expense of P11,000 was not recorded in 2014-
5)
Repairs expense 50,000 Retained earnmgs ,
5 Required:
Dep'n expense 12,500 Dep.n expense. 5 Retained
1" COmpute for the adjusted net incomes in 2014 and 2015 and
Accumulated de reciation 12,500 Retained earmng ‘ ;
dEPTCClatlon
(50,000/4) p Accumulated 25,000 gimmgs as 0fthe years ended December 31, 2014 and 2015.
2.
We the effect of
the 2014 working capital“
error in the
-I 118 119
..
.ml
I-
5‘

l
Chapter 5
6)

3:5;
1

2.

3. How

4,
3.
b.
6
//>-//
—

How much is
a.
0.
282,250
281,250

much

a. 418,000
b. 318,000

5. How much
2016?
a. 222,100
b. 240,750
is
1,176,750
1,150,150
ast
5315103131” agcounts

stions:
on the above data,
' How much is the
a.
b.
73,200
33,200

the

How much is the

is the
the
'
Correction of Errors
of
-

at 5% of the

adjusted total

adjusted
assets

total
company's
__..~oriPnCey the C0
. experience,

answer the folloimng:

unadjusted net loss in

adjusted net
_

d.

C.

d,

C.

d_

C_

d_
2016?
c. 253,200

d.
110,000

loss in 2016?
287,900
c. 280,850
I

hould mamtaln
mpany Should
,J- outstandmg
CUStomer 5
_

as ofDecember 31, 2016?

1,108,750
1,140,100

adjusted current liabilities as of

436,000
336,000
shareholders' e ui
_

maintain the allowance

December 3 2016?

214,150 q W
190,750
as
of
1.
an OwanCe fOr
balances,
nurcfnnr‘linfl balances.

December 31'
for
LI...u- '

H
W
1;.
6.

Cash
,

chapter Ontline:
tantive Test of

-"u-n-“n-

Primary Substantlve procedures

Additional audit consideration
Special audit consideration
7' Summary ofaudit procedures per assertion

IntrodUCtion
is one of the most
'
important assets of a business.
transactions ultimately result in either receipt or
usually includes cash in bank, cash on hand and cash
equivalents are short-term, highly liquid instruments
convertible to known amount of cash. Examples of
equivalents include, but not limited to, petty cash fund,
«um;

“fljhtroductlon t0 aUdi_t 0f Cash and cash equivaleng-I“-..-‘..-'-"""“"""

3.

'
3.
Management assertions
Audit objectives .
'

Almost all the entity's

payment of cash Cash
equivalents. Cash
that are both easily
cash and cash
payroll fund, money
- . .

“a

'
I

';

orders, cashier's checks, treasury bills and others. i

F
Because of the very nature of cash, it is
considered a high-risk area — most I
vulnerable to misappropriation than other assets -
that requires good i;
internal controls and careful monitoring. Due to its high
degree of inherent 5

risk, more audit time is devoted to the audit of the account

than is indicated
by its peso amount.

Management Assertions if
When auditing an account balance, the auditor should
use assertions for
classes of transactions, account balances, and
presentation and disclosures
1n sufficient detail
to form a basis for the assessment of risks of material
misstatement and the design and performance of further audit procedures. ;
'
The auditor . .
uses assertions in assessing risks by conSidenng . i
the different ,2

types of potential misstatements that may occur, and thereby deSignlng ,_

and“ Procedures that

are responsive to the assessed risks.
Assertions used by the auditor fall into the following three broad
categori-eséi
1' Assertions about classes of transactions and events for the per10
under audit:
3- Occurrence transactions and events that have been recorded have
—

Occurred and pertain to the entity-

'
if
130 131 .