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# CHAPTER 1 - Accounting Process &

## Working Paper Preparation

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

d. P 150,500

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

d. P 244,800

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

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

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

3. a
13.a

4. c
14.c

5. b
15.c

6. a
16.d

7. d
17.c

8. d
18.a

9. c
19.c

10. a
20.d

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

Debit
120,000
280,000

Credit

2,800
800
240,000
48,000

640,800

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

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

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

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

c. P 75,200

a. P 156,800
b. P 157,200
c. P 196,800
3.

a. P 1,800
b. P 1,000
c. P

800

a. P 188,000
b. P 189,000
c. P 184,000

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

200

d. P 144,000

a. P 128,800
b. P 88,800

c. P 86,400

d. P 48,800

a. P 100,000
b. P 102,400

c. P 97,600

d. P 0

7.

## Abagon Capital, net of drawing at end of February is

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

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

a. P 142,800
b. P 142,400
c. P 140,400

d. P 140,000

## 10. Total Expenses of the Company at end of February is

a. P 52,600
b. P 41,800
c. P 41,400

d. P 41,000

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

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

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

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

102,400
2,400
24,000

a
b
c
d
e
f

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

10,000
16,000
400

10,000
16,000
400

400
4,000
1,000
800
1,200

400
4,000
1,000
800
1,200

TRIAL BALANCE

75,20
0

CASH
ACCNTS RECEIV

160,000
2,800

400

3,200

40,00
0

NOTES RECEIV
UNUSED SUPPLIES
SHOP EQUIPMENT

40,00
0

800

1,000

800

1,000

240,000

240,000

ACCUM. DEPN

48,000

ACCOUNTS PAY

88,800

NOTES PAYABLE

4,000

52,000
88,800

## ACC. INT. PAY

1,200

ABAGON, DRAWING

1,200

100,000

100,000

ABAGON, CAPITAL

400,000

REVENUE

140,000

INSURANCE EXP

12,000

RENT EXPENSE

24,000

SUPPLIES EXP

2,400

400,000
140,000

800

10,000

2,000

16,000

8,000

1,000

2,200

24,000

INTEREST EXP

24,000

2,400

_______

680,800

680,800

1,200

1,200

10,00
0
16,00
0

PREPAID INS
PREPAID RENT
INTEREST RECEI

10,00
0
16,00
0

400

400

INTEREST INC

400

400

400

DEPRECIATION

400

4,000 _______
33,80
33,80
0
0

4,000
41,800

NET INCOME

98,600
140,400

1. C
2. A

BALANCE SHEET
75,20
0

160,000

ALLOW. FOR BD

SALARIES

INCOME STATEMENT

3. B

4. A

5. B

5. D

8. A

9. A

9. C

________
140,400
________ _______
140,400

642,600

98,600
642,600

10. B

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

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

b.

## Borrowed P100,000 cash on 12%, one-year note, interest payable at maturity on

April 30, Year 2.

c.

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

d.

## Purchased merchandise for resale at cash cost of P140,000; paid cash.

periodic inventory system; therefore, debit Purchases.

e.

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

f.

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

g.

Assume a

## Paid P30,000 cash for operating expenses.

h.

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

i.

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

j.

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

k.

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

l.

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

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

b. P 157,400

c. P 157,250

d. P 149,900

a. P 15,000
b. P 10,000

c. P 7,700

d. P 7,500

a. P 600
b. P 400

c. P 300

d. P 200

a. P 227,000
b. P 164,000

c. P 101,000

d. P

63,000

a. P 227,000
b. P 164,000

c. P 101,000

d. P

63,000

a. P 2,650
b. P 2,500

c. P 2,450

d. P 2,150

a. P 112,000
b. P 109,000

c. P 100,000

d. P 88,000

a. P 300,000

b. P 280,000

c. P 200,000

d. P 20,000

a. P 300,000
b. P 280,000

c. P 200,000

d. P 20,000

b. P 160,000

c. P 100,000

d. P 80,000

b. P 149,600

c. P 150,000

d. P 150,200

c. P 40,000

d. P 38,800

## 2. Sales balance is:

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

## 4. Operating expenses and other expenses is:

a. P 49,800
b. P 40,200
Solution
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

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

Cash

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

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

3. a

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

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

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

5. b

_______
582,500
6. b

7. c

8. d

9. b

10. a

Problem 3
The post-closing trial balance of the general ledger of Wilson Corporation at December 31,
20I, reflected the following:
Account
Debit
Cash
27,000
Accounts receivable
21,000
Allowance for doubtful accounts
Inventory (perpetual inventory system)
35,000
Prepaid insurance (20 mos. remaining)
900
Equipment (20-year life, no salvage value) 50,000
Accumulated depreciation
Accounts payable
Wages payable
Income taxes payable (for 20I)
Common stock, par P1
Retained earnings
Sales revenue
Cost of goods sold
Operating expenses
Income tax expense
Income summary
-___
133,900
* Ending inventory, P45,000 (at 12/31/20J)

Credit
1,000

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

______
133,900

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

c. P 45,000

d. P 41,000

a. P 18,000
b. P 16,800

c. P 16,000

d. P 15,800

a. P 64,500
b. P 45,000

c. P 35,000

d. P 32,500

4.

a. P 360.00
b. P 562.50
c. P 900

a. P 95,000
b. P 60,000

d. P 540

c. P 50,900

d. P 50,000

a. P 30,000
b. P 25,000
c. P 22,500

d. P 20,000

a. P 15,000
b. P 14,500

d. P

c. P 10,500

8,500

a. P 9,600
b. P 9,427
c. P 5,651

d. P 4,000

a. P 39,300
b. P 38,933

c. P 30,909

d. P 27,400

a. P 110,500
b. P 128,000

c. P 130,000

d. P 132,000

## 11. Net income before taxes at December 20J is:

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

10

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

98,000

d. P 12,500

(11)
(12)
(13)

Cost of sales
63,700
Inventory
Cash
26,000
Accounts receivable
Accounts payable 28,000
Cash
Operating expenses
18,000
Cash

63,700
26,000
28,000
18,000

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

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

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

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

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

3. b

540

540

2,500
200
300

200
300

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

5. d

6. b

7. d

8. b

9. b

10.c

11.b

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

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

250,000
200,000
11

Accounts payable
Mortgage payable
Capital

_______
3,127,000

172,000
1,200,000
1,305,000
3,127,000

Dec.

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

## Settled the accounts payable of P115,000 less 2% discount.

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

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

c. P 748,450

d. P 727,700

a. P 412,000
b. P 405,000
c. P 387,000

d. P 362,000

3.

a. P 625,700
b. P 453,000

c. P 426,000

d. P 212,000

4.

a. P 7,000
b. P 10,000

c. P 24,000

d. P 31,000

2.

5.

12

a. P 1,980,000
b. P 1,620,000
c. P 1,612,500

d. P 1,242,500

6.

a. P 3,253,950
b. P 3,250,950

c. P 3,203,950

d. P 3,153,950

7.

a. P 289,000
b. P 279,000
c. P 277,000

d. P 257,000

8.

a. P 97,000
b. P 73,000
c. P 24,000

d. P 9,000

9.

a. P 782,000
b. P 718,950

c. P 718,240

d. P 718,150

10.

a. P 232,000
b. P 212,000
c. P 199,700

d. P 197,700

11.

a. P 126,500
b. P 118,500
c. P 109,500

d. P 101,500

12.

a. P 482,800
b. P 426,950

c. P 419,040

d. P 418,950

13.

a. P 1,704,040
b. P 1,703,950

c. P 1,305,000

d. P 1,285,000

14.

a. P 1,704,040
b. P 1,703,950
c. P 1,305,000

d. P 1,285,000

## Total liabilities and capital at December 31, 2006 is:

a. P 3,253,950
b. P 3,250,950
c. P 3,203,950

d. P 3,153,950

15.

Solution
Dec 1

Dec 3

Dec 4

Accounts payable
115,000
Cash
112,700
Purchases (discount)
2,300
Cash
174,600
Sales (discount)
5,400
Accounts receivable
180,000
Accounts receivable
Transportation exp
Sales

207,000
3,000
210,000

Dec 5

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

Dec 7

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

Dec 9

Accounts payable
12,000
Purchases (returns)

12,000

## Dec 10 Interest expense

Cash

8,000
8,000

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

182,000

## Dec 12 Accounts receivable

Sales

330,000

Dec 18 Cash

330,000

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

Cash
Sales

247,000

Cash

9,000

5,000
242,000
9,000

## Dec 29Sales (returns)

18,000
Accounts receivable
18,000

13

Dec 30 Drawing

Purchases

20,000

20,000

1. Salaries expense
Accrued salaries

73,000

2. Insurance expense
Prepaid insurance

2,000

3. Depreciation
Accum. Depn bldg
Accum. Depn equip

7,500

2,000

4. Supplies expense
Office supplies

24,000

5. Inventory BS
Inventory IS

453,000

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

3. B
13. C

73,000

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

4. A
14. B

5. C
15. A

6. A

7. C

8. B

9. D

10. C

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

Supplies
Prepaid insurance
Wages payable
Unearned rent revenue

Nov. 30
Dr.
1,000
6,000

Cr.
10,000
2,000

Dec. 31
Dr.
3,000
4,250

Cr.
15,000
1,000

a.

## The December income statement (accrual basis) reported P2,000 in supplies

expense.
b.
No insurance payments were made in December.
c.
P10,000 was paid to employees during December for wages.
d.
On November 1, 2006, a tenant paid Righter P3,000 in advance rent for the
period November through January. Unearned revenue was credited.
Questions
1.
a. P 1,000
2.

14

## What was the cost of supplies purchased during December?

b. P 2,000
c. P 3,000
d. P 4,000

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

3.

What was the adjusting entry recorded at the end of December for
accrued wages?
a. Wages expense
15,000
Wages payable
15,000
b. Wages expense
10,000
Wages payable
10,000
c. Wages expense
5,000
Wages payable
5,000
d. No adjusting entry

4.
a. P 1,000
5.

## What was the amount of rent revenue earned in December?

b. P 2,000
c. P 3,000
d. P 4,000

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

Solution
1. D

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

2,000
3,000

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

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

4,760
215,930

3,190

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

15

Sales salaries
Commission expense
Miscellaneous expense
Rent expense
Office salaries
Light and Water
Insurance expense
General expense
Interest expense
Interest income

9,610
28,850
15,200
2,990
13,000
19,720
1,500
1,080
4,780
16,340
4,120

910

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

## The cash account included a customers check for P1,500 deposited on

September 25, 2006 but returned by the bank on September 29, 2006 for lack of
countersignature. No entry was made for the returned check.

b.

c.

## The allowance for doubtful accounts should be adjusted to 5% of the

outstanding accounts receivable balance on September 30, 2006.

d.

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

e.

## Goods received on consignment, still unsold costing P2,000 were included in

the physical inventory.

f.

g.

recognized.

h.

i.

## An insurance policy was taken on the inventory and equipment on March 1,

2006 with the annual insurance premium of P1,080 paid on that date.

j.

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

1.

16

## The adjusting entry on item A is

Cash
1,500
Accounts receivable
1,500
b. Accounts payable
1,500
Cash
1,500
c. Accounts receivable
1,500
Cash
1,500
a.

2.

## The adjusting entry on item B is

Cash
Accounts receivable
b. Cash
500
General expenses
c. General Expenses
500
Cash
a.

500
500
500
500

## 3. The adjusting entry on item C is

a. Accounts receivable
4,680
Allowance for Doubtful Accounts
4,680
b. Doubtful Accounts
1,565
Allowance for Doubtful Accounts
1,565
c. Allowance for Doubtful Accounts
1,490
Doubtful Accounts
1,490
d. Doubtful Accounts
1,490
Allowance for Doubtful Accounts
1,490
4. The adjusting entry on item D is
a. Merchandise Inv.
60,120
Income Summary
b. Merchandise Inv.
60,120
Purchases
c. Income summary
60,120
Merchandise inventory
5. The adjusting entry on item E
a. Income summary
Merchandise Inv.
b. Sales
Merchandise Inv.
c. Merchandise inventory
Income summary

60,120
60,120
60,120

2,000
2,000
2,000

## 6. The adjusting entry on item F is

a. Merchandise Inv.
56,890
Income summary
b. Merchandise Inv.
56,890
Purchases
c. Income summary
56,890
Merchandise inventory
7. The adjusting entry on item G is
a. Depreciation Exp.
6,180
Accumulated Depreciation
b. Accumulated Depreciation
6,180
Furniture and Equipment

2,000
2,000
2,000

56,890
56,890
56,890

6,180
6,180

17

c. Accumulated depreciation
Depreciation expense

6,180

## 8. The adjusting entry on item H is

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

6,180

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

630
630
450
450

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

11. Cash
a. P24,000

b. P21,000

c. P20,500

d. P20,000

a. P90,410
b. P90,345

c. P88,920

d. P88,845

a. P60,120
b. P56,890

c. P62,120

d. P58,120

a. P55,620
b. P36,870
c. P36.700

d. 36,890

a. P262,785
b. P250,845

c. P223,850

d. P262,700

a. P211,050
b. P210,050

c. P212,300

d. P212,280

18

a. P31,635
b. P31,625
c. P38,935

d. P38,115

a. P630

b. P450

c. P1,080

d. P600

## 19. Prepaid rent

a. P11,000

b. P2,000

c. P13,000

d. P10,000

1. C
2. C
11. C
12. B

3. B
13. D

4. A
14. B

5. A
15. A

6. D
16. A

7. A
17. D

8. D
18. B

9. D
19. A

10. C

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

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

1. Cost of inventory in the possession of consignee as of December 31, 2006, was not
included in the ending inventory balance, P33,600.

19

2. After preparing an analysis of aged accounts receivable, a decision was made to increase
the allowance for bad debts to a percentage of the ending account receivable balance to
3%. Accounts totaling P7,480 were written off as uncollectible during the year.
3. Purchase returns and allowances amounting to 6% of purchases (not including freightin) were not recorded at year-end.
4. Sales commission for the last day of the year had not been accrued. Total sales for the
day, P3,600. Average sales commission as a percent of sales is 3%.
5. No accrual has been made for a freight bill received on January 3, 2007, for goods
received on December 29, 2006, P800.
6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was
recorded as prepaid advertising and should be amortized over a 6-month period. No
amortization was recorded.
7. Freight charges paid on sold merchandise and not passed to the buyer were netted
against sales. Freight charges on sales during 2006 is P4,200.
8. Interest earned but not accrued, P690.
9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800
on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage
value and the SLM is used. Depreciation is calculated to the nearest month.)
10. A real account is debited upon the receipt of supplies. Supplies on hand at year-end is
P1,600.
11. Income tax rate (on all items) is 32%.
Questions
1. Net Sales is
a. P 499,200

c. P 488,500

d. P 487,320

## 2. Purchases net of returns and allowances is

a. P 165,200
b. P 164,000

c. P 162,620

d. P 161,200

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

c. P 5,000

d. P 4,125

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

c. P 53,600

d. P 52,200

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

c. P 204,495

d. P 114,795

## 6. Sales salaries and commission is

a. P 35,108
b. P 35,100

c. P 35,000

d. P 34,700

7. Advertising expense is
a. P 24,696

c. P 16,750

d. P 16,606

20

b. P 489,300

b. P 5,200

b. P 205,350

b. P 16,800

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

c. P 12,000

d. P 11,550

9. Supplies expense is
a. P 670

c. P 560

d. P 480

a. P 7,500
b. P 7,460

c. P 7,300

d. P 7,200

a. P 1,540

b. P 1,390

c. P 1,300

d. P 1,290

a. P 58,554

b. P 54,605

c. P 53,722

d. P 53,693

a. P 115,586

b. P 115,558

c. P 114,159

d. P 104,445

b. P 580

Solution
Per book

Per Audit

Sales

495,200

## Sales ret. And allow.

(11,200)

(11,200)

(880)

(880)

Sales discount

4,200

499,400

483,120

487,320

89,700

89,700

Cost of Sales
Beginning inventory
Purchases

173,000

173,000

## Purch. Ret and allow.

10,380

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

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

(10,380)
-

5,525

800

6,325

268,225
20,550

258,645
33,600

54,150

247,675

204,495

235,445

282,825

700

690

1,390

7,150

7,150

18,500

18,500

261,795

309,865

35,000

108

35,108

16,000

606

16,606

Legal services

2,225

2,225

## Insurance and licenses

8,500

8,500

Travel expense

4,560

Depreciation expense
Utilities expense

10,900
6,400

4,560
650

11,550
6,400

21

1,475

1,475

## Misc. selling expense

2,200

2,200

Officers' salaries

36,600

36,600

Interest expense

4,520

4,520

7,460

7,460

Transportation expense

4,200

4,200

Supplies expense

580

580
141,984

## Income before tax

167,881

Income tax

53,721.92

Net Income

114,159

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

3. A
13. C

4. B

5. C

6. A

7. D

8. D

9. B

10. B

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

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

Credit

6,750,000
600,000

95,000

a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors
amounting to P300,000. A number of checks amounting to P150,000 were mailed on
January 3, 2007.
b. On December 28, 2006, Baluyot purchased and received goods amounting to P100,000,
terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net
amounts. This particular invoice was recorded and paid on January 4, 2007.
c. On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed
at P80,000 on December 3, 2006. The goods were returned on December 30, 2006.
The suppliers credit memo was received and recorded on January 5, 2007.
d. Goods amounting to P50,000 were invoiced for the account of Palmes Company and
recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods
were shipped to Palmes on December 30, 2006.

22

e. The bank returned on December 29, 2006, a customer check for P5,000 marked No
Sufficient Fund but no entry was made.
f.

Baluyot estimates that allowance for uncollectible accounts should be one and one-half
percent (1%) of the accounts receivable balance as of year-end. No provision has yet
been made for 2006.

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

c. P 500,000

d. P 495,000

a. P 1,355,000
b. P 1,350,000
c. P 1,305,000

d. P 1,300,000

a. P 6,840,000
b. P 6,800,000

c. P 6,750,000

d. P 6,700,000

a. P 4,448,000
b. P 4,368,000

c. P 4,350,000

d. P 4,270,000

## 5. The adjusted amount of Bad Debts Expense is:

a. P 36,325
b. P 28,325
c. P 20,325

d. P 12,325

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

d. P 600,000

Solution
(a)
Cash

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

Problem 9
The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the
fiscal year-ended September 30, 2006 follows:
DEBIT
CREDIT

23

Cash
Accounts receivable
Allowance for doubtful accounts
Notes receivable
Merchandise inventory, Sept. 30, 2005
Furniture and Equipment
Acc. Depreciation Furniture & Equipment
Goodwill
Accounts payable
Notes payable
Capital stock
Retained earnings
Sales
Sales returns and allowances
Purchases
Purchase returns and allowances
Sales salaries
Commission expense
Miscellaneous selling expenses
Rent expense
Office salaries
Light and water
Insurance expense
Miscellaneous general expenses
Interest expense
Interest income

225,000
936,000
155,000
568,900
618,000
300,000

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

31,900

187,500
536,000
100,000
1,000,000
552,500
3,728,200
36,500

9,100
6,181,700

Your examination of the companys accounts had indicated the need for adjustments based
on the following information:
1. The Cash account include a customers check for P15,000 deposited on September 25,
2006, but returned by the bank on September 29, 2006 for lack of countersignature. No
entry was made by the company for the return of the check or for its redeposit on
October 5, 2006.
2. The Allowance for Doubtful Accounts should be adjusted to 5% of the customers
outstanding balances on September 30, 2006.
3. A physical inventory taken of the merchandise stock as of the end of the fiscal year
amounted to P601,200.
4. A purchase of merchandise FOB shipping point, for which goods costing P40,000 were
still in transit on September 30, 2006 was neither taken as a liability nor included in the
inventory on that date.
5. Goods received on consignment, still unsold, were included in the inventory at the
agreed selling price of P24,000.
6. The merchandise inventory at September 30, 2005 was correctly stated.

24

7. On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000
on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited
to the Furniture and Equipment account.
8. Depreciation for the fiscal year 2005-2006 has not been recorded.
being used is 10% annually.

Depreciation rate

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

d. P 240,000

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

d. P 0

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

d. P 347,750

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

25

1.

Accounts Receivable
Cash

15,000

2.

## Doubtful Accounts Expense

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

15,650

3.

15,650

Merchandise Inventory
Income Summary

601,200

Purchases
Merchandise Inventory
Accounts Payable
Income Summary

40,000
40,000

Income Summary
Merchandise Inventory

24,000

6.

Income Summary
Merchandise Inventory

568,900

7.

## Accumulated Depreciation Fur. & Eqpt.

Gain on sale of equipment
Furniture & Equipment

4.

5.

601,200

40,000
40,000
24,000

Depreciation expense
Acc. Depr. Fur. & Equip

6,000
5,000
P40,000
11,000
P29,000
35,000
P 6,000
64,300
64,300

## Depr. for year ended 9.30.03

On eqpt sold (40,000 x 10% x 9/12)
On remaining eqpt. (613,000 x 10%)
9.

Prepaid Insurance
Insurance expense

10.

Prepaid rent
Rent expense

11.

## Discount on notes payable

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

12.

Retained Earnings
Goodwill

568,900

11,000

## Cost (P32,000 / 80%)

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

15,000

P 3,000
61,300
P64,300
5,400
5,400
10,000

10,000

3,000
3,000
P4,000
1,000
P3,000

300,000
300,000
TRANQUILAN CORPORATION
WORKING TRIAL BALANCE
September 30, 2003

26

Cash
AR
All. for DA
NR
MI
F/E
Goodwill
AP
NP
CS
RE
Sales
Sales R& A
Purchases
Purch R&A.
Sales sal
Com. exp
Misc.sell
Rent exp
Office sal
Light & W
Ins. exp
Tax & licen
Misc. Ge
Int. exp
Int inc

Trial Balance
Debit
Credit
225,000
936,000
31,900
155,000
568,900
618,000
187,500
300,000
536,000
100,000
1,000,000
552,500
3,728,200
47,600
2,159,300
36,500
96,100
288,500
152,000
29,900
130,000
197,200
15,000
10,800
47,800
163,400
41,200
9,100
6,181,700
6,181,700

Debit

15,000

Credit
15,000
15,650

11,000

5,000
64,300
300,000
40,000

568,900

47,600
2,199,300

40,000

10,000
5,400
3,000

15,650
64,300
5,400
10,000
3,000
464,350

6,000

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

15,650

464,350

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

4. A

5. B

6. D

7. D

8. D

9. B

Balance Sheet
Debit
Credit
210,000
951,000
47,550
155,000
617,200*
613,000
240,800
-0576,000
100,000
1,000,000
252,500

3,728,200
36,500

9,100

6,000

64,300

NET INC

3. D

617,200

300,000

DA
Gain
Depren
Pre ins
Pre rent
Disc on NP

1. B
2. C

Income Statement
Debit
Credit

4,397,00
0
4,397,000

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

2,216,850

2,564,600

347,750
2,564,600

10. A

Problem 10
Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown
below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal
year.
TORTOR CORPORATION
June 30, 2006
Cash
721,800
200,000
Accounts receivable
2,128,000
Inventory, June 30, 2005
5,194,300
Invest. in associates (Equity Method)
1,200,000
Equipment
1,621,000
Prepaid expenses
116,200
Goodwill
500,000

27

Accounts payable
Accrued expenses
Accrued interest payable
Allowance for bad debts
Allowance for depreciation
Loans payable
Capital stock
Retained earnings
Sales
Interest income
Purchases
Salaries and wages
Rent, light and water
Supplies
Taxes
Miscellaneous expenses
Interest expense

13,928,000
3,250,000
750,000
400,000
300,000
250,000
1,793,300
250,000
32,602,600

2,426,400
152,600
226,000
36,100
450,700
2,500,000
3,000,000
260,000
1,808,800
21,602,000
140,000

_________
32,602,600

## Your examination of the accounts disclosed the following information:

1.

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

2.

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

3.

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

4.

## A physical inventory taken by management personnel of the merchandise stock at

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

5.

## Equipment no longer needed (cost, P150,000; accumulated depreciation, P45,000)

was sold for P100,000 cash on June 29, 2006; the cash proceeds were credited to the
Equipment account. Equipment is depreciated at 10% a year on a monthly basis
computed at year-end.

6.

## Prepaid expenses included insurance premium of P30,000 paid on April 1, 2006 on a

one-year fire insurance policy.

7.

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

8.

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

28

9.

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

10.

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

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

d. P 695,300

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

d. P 210,000

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

d. P 2,084,000

4.

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

## 5. Inventory for the fiscal year-ended June 30, 2006 is:

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

d. P 1,566,000

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

c. Qualified Opinion

Solution
TORTOR CORPORATION
WORKING TRIAL BALANCE
June 30, 2006

Cash
TS
AR
Inven.
Invest. Ass.
Equip.
Prepaid exp.

Trial Balance
Debit
Credit
721,800
200,000
2,128,000
5,194,300
1,200,000
1,621,000
116,200

Debit
Credit
70,500
10,000
44,000
50,000
7,500

Income Statement
Debit
Credit

5,194,300

5,751,900

Balance Sheet
Debit
Credit
651,300
210,000
2,172,000
5,751,900
1,200,000
1,571,000
108,700

29

Goodwill
AP
Acc. Exp.
Acc. int. pay
Allow.
For
BD
Acc.
for
depr.
Loans
payable
Capital stock
APIC
RE
Sales
Int. inc.
Purch.
Sal. & wages
Rent, light
Supplies
Taxes
Mis. exp.
Int. exp.
Holding gain
BD expense
Gain on sale
Dep exp
Ins. expense
Div. payable
RE-appro.

500,000

450,700

13,928,000
3,250,000
750,000
400,000
300,000
250,000
1,793,300
250,000
32,602,600

500,000

2,426,400
152,600
226,000
36,100

72,500

2,426,400
165,600
226,000
108,600

172,100

562,800

13,000

60,000

2,500,000

2,500,000

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

3,000,000
260,000

21,602,000
140,000

500,000
300,000
300,000
13,928,000
3,263,000
750,000

13,000

32,602,600

10,000
72,500

10,000

172,100
7,500

1,505,600

2.
3.

4.

5.

30

Accounts receivable
Supplies
Cash
Allow.)
Holding gain - TS
Allowance for bad debts
5% x (2,128,000 + 44,000) =
108,600 - 36,100
To be considered in the preparation
of the audit report.
Failure to
observe the inventory taking results
in a limitation in the scope of
examination.
Depending on the
materiality of the amount of
Inventory in relation to other
accounts, the auditor will either
issue
a
qualified
opinion
or
disclaimer of opinion.
Allowance for depreciation
Equipment
Gain on sale of equipment
Cost

708,800

21,602,000
140,000

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

26,500

10,000
72,500

10,000

172,100
7,500
300,000
300,000
1,505,600

NET INC.

1.

------------

44,000
26,500

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

70,500

10,000
72,500

10,000
72,500

60,000
50,000
10,000

27,513,900

11,654,900

27,513,900

11,664,900

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

P150,000
Less acc. depr.
(45,000+15,000)
60,000
Book value
P 90,000
Selling price
100,000
Gain
P 10,000
Depreciation expense
Allowance for depreciation
10% x (1,621,000 + 100,000)
6.
Insurance expense
Prepaid expenses
(30,000 x 3/12)
7.
Salaries and wages
Accrued expenses
8.
Retained earnings
Goodwill
9.
Retained earnings
Dividends payable (10% x
P3,000,000)
10.
Retained earnings
RE Appropriated for Possible
Losses in Inv.
1. B
2. C
3. A
4. D
5. A
6. B

172,100
172,100
7,500

7,500

13,000
500,000
300,000

13,000
500,000
300,000

300,000

7. C

8. A

300,000
9. D

10. C

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

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

## LIABILITIES & STOCKHOLDERS EQUITY

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

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

31

## Total liabilities & Stockholders Equity

1,552,000.00

Statement of Income
For the year ended November 30, 2006
Net sales
Cost & expenses:
Cost of sales
Depreciation
Research and Development
Income before income taxes
Provision for income taxes
Net income

2,950,000.00
1,670,000.00
650,000.00
40,000.00
30,000.00
2,390,000.00
560,000.00
224,000.00
336,000.00

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

## The investment portfolio consist of short-term investments in marketable equity

securities with a total market valuation of P55,000 as of November 30, 2006.

2.

## Based on aging of the accounts receivable as of November 30, 2006, it was

estimated that P36,000 of the receivables will be uncollectible. There were no Bad Debt
write-offs during the year.

3.

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

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

32

1. In the income statement for the year ended November 30, 2006, Erasmo should report
for the marketable securities
a. A realized loss of P5,000.
c. A realized gain of P5,000
b. An unrealized loss of P5,000.
d. An unrealized gain of P5,000
2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the
investment portfolio
Marketable Securities
Valuation Allowance
a.
P55,000
P -0b.
P55,000
P5,000
c.
P60,000
P -0d.
P60,000
P5,000
3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for
doubtful accounts at
a. P23,000
b. P36,000
c. P59,000
d. P69,000
4. Bad debts expense for the year ended November 30, 2006, is
a. P -0b. P23,000
c. P36,000

d. P59,000

## 5. Inventories at November 30, 2006, should be reported at

a. P418,000
b. P430,000
c. P442,000

d.P450,000

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

d. P18,000

## 8. At November 30, 2006, property, plant and equipment should be reported at

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

33

## b. Work in process inventory at outside processor

c. Estimated loss from lawsuit
d. Research and development cost
15. For the year ended November 30, 2006, which of the following adjustments
decreases the unadjusted income, before income taxes, of P560,000?
a. Recognition of prepaid insurance
b. Reduction in allowance for doubtful accounts
c. Depreciation on machine purchased June 1,2006
d. Recognition of research and development cost
Solution
1.
2.
3.
4.
5.

6.
7.

## Unrealized holding loss

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

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

4. C
13. B

5. C
14. B

6. C
15. C

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

8. D

9. D

10. C

Problem 12
In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the
following balance sheet:
Eddie Vic Farms Corp.
Balance sheet
December 31, 2006
Assets
Cash
P 493,000
Marketable securities
630,000
Accounts receivable
540,000
Inventories
1,002,000
Total current assets
2,665,000
Land, buildings, and equipment
2,904,000
Total assets
P5,569,000
Liabilities and Stockholders Equity
Accounts payable
P 684,840
Estimated losses from future crop failures
670,000
Salaries payable
300,000
Total current liabilities
1,654,840
10% Bonds payable (due in 10 years)
1,050,000
Capital stock
900,000
Retained earnings
1,964,160
Total liabilities and stockholders equity
P 5,569,000

34

a. Cash is held in a checking account and a savings account with balances of P130,700 and
P362,300, respectively. The cash in the savings account will be used to support
operations in the event of a crop failure.
b. The marketable securities represents the cost of treasury bills with a total market value
of P600,000 at year-end.
c. A loan to the president for P360,000 that is to be repaid in quarterly installments of
P30,000 is included in Accounts Receivable. The balance of accounts receivable are
considered to be 95 percent collectible.
d. Inventories include:
Finished products
Supplies
Storage buildings (net of P60,960 depreciation)
Total

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

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

## Included in Accounts Payable are P210,000 of deposits to suppliers for delivery of

goods in February of the next year.

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

Cash
a. P 130,700

b. P 231,600

c. P 362,300

d. P 493,000

2.

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

c. P 531,000

d. P 540,000

3.

Current assets
a. P 2,443,000

b. P 2,233,000

c. P 2,080,700

d. P 2,050,700

## Land, Buildings, and Equipment

a. P 3,873,960
b. P 3,687,000

c. P 3,657,960

d. P 3,087,000

4.

35

5.

Noncurrent assets
a. P 4,409,300

b. P 4,289,300

c. P 4,047,000

d. P 3,927,000

6.

Total assets
a. P 6,642,300

b. P 6,490,000

c. P 6,340,000

d. P5,977,700

7.

Current liabilities
a. P 1,194,840

b. P 1,654,840

c. P 984,840

d. P 774,840

8.

Total liabilities
a. P 3,514,840

b. P 2,844,840

c. P 2,634,840

d. P 2,424,840

9.

a. P 2,265,160
b. P 2,235,160

c. P 1,604,160

d. P 1,595,160

10.

## Total stockholders equity

a. P 3,495,160
b. P 3,797,460

c. P 3,429,160

d. P 2,462,860

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

Problem 13
M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION.
On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the
corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the
attorneys bill of P700, the attorney advised her to hire an accountant to keep his records.
M. Senajon was so busy that it was March 31 before she asked you to straighten out his
records. Your task is to develop the financial statements on the March transactions.
After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from
the bank. She later paid P260, including interest of P60, on this loan. She also purchased a
used pickup truck in the companys name, paying P2,500 down and financing P7,400. The

36

first payment on the truck is due April 15. M. Senajon then rented an office and paid three
months rent P900, in advance. Credit purchases of office equipment of P800 and repair
tools of P500 must be paid by April 10.
In March,SENAJON REPAIR SERVICE CORPORATION completed repairs of P1,300, of which
P400 were cash transactions. Of the credit transactions, P300 were collected during March.
Wages of P450 were paid to employees. On March 31, the company received a P75 bill for
the March utilities expense and a P50 check from a customer for work to be completed in
April.
Questions
1.
The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:
a. P12,390
b. P12,315
c. P12,440
d. P11,500
2.

March 31 is:
a. P900
b. P800
c. P700
d. P600

3.

is:
a. P13,715
b. P13,565
c. P13,515
d. P13,640

4.

31 is:
a. P11,900
b. P11,888
c. P11,388
d. P11,200

5.

a. P25,528
b. P25,415
c. P24,840
d. P24,915

6.

31 is:
a. P11,215
b. P11,903
c. P(85)
d. P(285)

7.

a. P16,025
b. P14,725
c. P13,625
d. P6,225

8.

## The Total Liability and Stockholders Equity of SENAJON REPAIR SERVICE

CORPORATION at March 31 is:
a. P25,528
b. P25,415
c. P24,840
d. P24,915

9.

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

10.

## The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P415
b. P403
c. P(85)
d. P(285)

Solution
Cash
Common stock
Pre-operating cost
Cash
Cash
Notes payable
Interest expense
Notes payable

11,500
700
5,000
60
200

11,500
700
5,000

37

Cash
Equipment
9,900
Cash
Notes payable
Rent expense
300
Prepaid rent
600
Cash
Equipment
800
AP others
Tools
500
Accrued expenses
Cash
400
Accounts receivable
900
Revenue
Cash
300
Accounts receivable
Wages
450
Cash
Utilities
75
Accrued expenses
Cash
50
1. C
2. D
3. D
4. D

260
2,500
7,400
900
800
500

1,300
300
450
75
50
5. C

6. A

7. C

8. C

9. A

10. D

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

38

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

After spending considerable time digging into the records and files of the company, you
discovered the following:
a. Estimates of bad debts expense that total P5,000 have been credited directly to
Accounts Receivable.
b. Accrued interest expense of P4,000 was recorded, but the credit was omitted.
b.

## Depreciation expense, on a straight-line basis (no residual value), is P30,000 per

year. Depreciation for 2001 and 2002 was credited directly to the asset account.

c.

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

d.

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

e.

## Depreciation was not recorded in 2006.

f.

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

g.

## The common stock account needs scrutiny.

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

c. P 15,800

d. P 17,800

a. P 65,000
b. P 60,000
c. P 55,000

d. P 50,000

a. P 10,000
b. P 8,000

d. P 0

4.

c. P 6,000

a. P 260,000
b. P 140,000
c. P 120,000

d. P 110,000

a. P 2,400
b. P 1,800

c. P 1,200

d. P 0

a. P 210,000
b. P 240,000

c. P 270,000

d. P 300,000

a. P 40,000
b. P 30,000

c. P 20,000

d. P 0

a. P 22,000
b. P 20,000

c. P 18,000

d. P 16,000

a. P 38,016
b. P 28,016
c. P 10,384

d. P 10,000

a. P 100,000
b. P 95,000

d. P 80,000

c. P 90,000

39

a. P 320,000
b. P 200,000

c. P 180,000

d. P 120,000

## 14. Retained earnings at December 31, 2006 is:

a. P 50,000
b. P 35,200

c. P 18,000

d. P 24,000

Solution
Cash

17,800

Accounts receivable

60,000

## Allowance for bad debts

5,000

Note receivable

6,000

Merchandise inventory

140,000

Prepaid insurance

1,200

Equipment

300,000

Accumulated depreciation

90,000

Land

40,000

Accounts payable

18,000

Interest payable

4,000

## Income tax payable

10,000

Mortgage payable

100,000

Common stock

200,000

APIC

120,000

Retained earnings

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

3. C

4. B

________

18,000

565,000

565,000

5. C

6. A

7. A

squeezed figure

8. C

9. D

10. A

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

40

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

Credits

P19,800
45,000

Accounts payable
Accrued bond interest
First mortgage, 6% sinking fund bonds
Common stock
Premium on common stock
Stock donation
Retained earnings, December 31, 2005
Net sales
Purchases
Salaries and wages
Factory operating expenses
Bond interest

567,000
11,250
679,500
1,500,000
150,000
180,000
222,450
2,625,000
850,500
507,000
364,500
105,000
45,000
P6,000,000

_________
P6,000,000

## Additional data are as follows:

(1)

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

P180,000

P180,000

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

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

(3)

## Depreciation is to be provided on the straight-line basis, as follows: buildings, 2

percent of cost; machinery, 10 percent of cost. Ignore salvage values.

(4)

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

(5)

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

(6)

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

(7)

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

Questions

41

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

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

P660,000
b. P630,000
c. P588,000

d. P0

2.

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

3.

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

4.

## The correct amount of total depreciation expense for 2006 was

a. P648,000
b. P63,900
c. P62,400
d. P63,000

5.

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

6.

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

7.

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

8.

a. P0
b. P105,000
c. P180,000
d. P75,000

9.

a. P1,320,000
b. P1,500,000
c. P1,650,000
d. P1,395,000

10.

## The correct balance of stock donation as of December 31, 2006 was:

a. P180,000
b. P105,000
c. P0
d. P75,000

Solution
1. OE: Treasury stock
180,000
Stock donation
180,000
CE: Memo entry
180,000
Treasury stock
180,000
--------------------------------------------------------OE: Cash
75,000
Treasury stock
75,000
CE: Cash
75,000
Land
30,000
Building
45,000
75,000
Land
30,000
Building
45,000
2. OE: Cash
6,000
Machinery
6,000
CE: Cash
6,000
Accum. Depn
3,000
Loss on sale
6,000
Machinery
15,000
Adj: Accum. Depn: mach
3,000

42

Loss on sale
6,000
Machinery
9,000
3. Depreciation
63,900
Accum. Depn Mach
45,000 *
Accum. depn - bldg
18,900
* 444,000 + 6,000 15,000 x 10% = 45,000
** 990,000 45,000 = 945,000 x 2% = 18,900
Accum. Depn bldg
900
Retained earnings
900
4. Discount on bonds
75,000
Sinking fund bonds
75,000
Retained earnings
7,500
Interest expense
7,500
Discount on bonds
15,000
P 75,000/10 yrs = P7,500 2002
7,500 2003
5. OE: Sinking fund bond
70,500
Cash
70,500
CE: Sinking fund
70,500
Cash
70,500
70,500
Sinking fund bond
70,500
6. Sinking fund
4,500
Interest income
4,500
1. B
2. A
3. D
4. B
5. A
6. C
7. C

8. A

9. B

10. C

Problem 16
Instructions:
1.
Prepare the audit adjustments required in the problems.
2.
Post the net adjustment at the Working Balance Sheet (WBS) and Working Profit and
Loss (WPL).
3.
Compute the final balances of each account on your WBS and WPL, proceed to the
questionnaires and transfer all answers to the final answer sheet.
4.
Assume no other issues, except those discussed on the problem.
On November 20, 2006 you have substantially completed your fieldwork relative to your
audit of RUCHELL Corporation, engaged in the sale of rechargeable lamps. Its rented store
and office is located in Davao City.
Based on your review of the records you have found out that the companys financial
statements at the end of its fiscal year September 30, 2006 submitted by their account is
subject to the adjustments you noted in your audit.
Audit finding No. 1
Included in the Cash account is a customers check for P1,100 deposited on September 30,
2006 but returned by the bank on September 30, 2006 for insufficiency of drawers funds.
The check was redeposited on October 3, 2006. No entry was made by the company for the
return nor the redeposit of the check.
Audit finding No. 2
The debit balance of P1,500 in the allowance for bad debts resulted from write-offs of
uncollectible accounts in excess of the beginning balance of the allowance. Further analysis
of the customers accounts disclosed the need for setting up an allowance as at September
30, 2006 to 5% of outstanding balance as of date.

43

## Audit finding No. 3

Goods shipped out on consignment basis in September 2006, still unsold as at the end of
the month, were recorded as sales for P4,900 which included 40% gross profit on cost. This
was not included in the physical inventory.
Audit finding No. 4
A physical inventory taken of the merchandise on September 30, 2006 amounted to
P41,500.
Audit finding No. 5
Notes receivable included a 120-day 8% for P9,000 dated July 1, 2006 from J. Ramos,
interest due on maturity date (assume 30 days per month).
Audit finding No. 6
Furniture and equipment costing P3,000 acquired on October 1, 2003, and a book value of
P2,400 at September 30, 2005, was sold for P2,000 cash on October 1, 2006. The sales
price was credited to Furniture and Equipment.
Audit finding No. 7
Depreciation for the fiscal year has not been recorded. Estimated life of the furniture and
equipment is 10 years.
Audit finding No. 8
A one-year insurance policy was taken by the company on June 30, 2006 and paid the
annual of P1,200.
Audit finding No. 9
The company paid P11,700 representing rent for 13 months ending on October 31, 2006.
Audit finding No. 10
The 120-day note payable of P6,000, bearing 12% interest was discounted with the bank on
August 15, 2006. Interest expense was debited.
Audit finding No. 11
The excess of P110 issue price over the 100 par value upon sale of 200 shares was credited
to retained earnings.
Audit finding No. 12
Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution
of the Board of Directors.
Audit finding No. 13
Office salaries unpaid as of September 30, 2006, P1,200, were not taken up as accrued
expense.
Audit finding No. 14
Patents were acquired by purchase on September 30, 2005 for P20,000. It has as estimated
useful life of 4 years.
Audit finding No. 15
An analysis of the investment account shows that on September 2006 25 shares were sold
for P200 per share. This was recorded as a debit balance to Cash, P5,000 and a credit to
Investments in A Co., P5,000.

44

## Audit finding No. 16

A repayment of non-interest bearing note payable for P5,000 was erroneously debited to
Audit finding No. 17
A payment of P1,000 for Taxes on September 29, 2006 was not recorded in the books.
Audit finding No. 18
On September 30, 2006 RUCHELL Company declared a 10% stock dividend distributable on
October 21, 2006. The market value per share is P120 at the time of declaration. This has
not been taken up in the books.
Audit finding No. 19
On September 30, 2006 a Land was donated by a stockholder. The stockholder bought the
Land in 1998 for P26,000. The appraised value of the land at present is P50,000.
Audit finding No. 20
Marketable Securities which cost P15,000 has a market value of P16,000.
Audit finding No. 21
A payment to supplier within the discount period was made on June 20, 2006. The discount
of P20 was credited to Sales discounts instead of purchase discounts.
Audit finding No. 22
RUCHELL Corporation has a pending lawsuit from a customer, asking for a P100,000
damages. The lawyers of the company believe that it is remote that the case of the
customer will prosper in court.
RUCHELL Corporation
Working Balance Sheet
September 30, 2006

Current
Cash
Marketable Securities
Allowance for doubtful accounts
Notes Receivable
Inventories
Investment in A, Co. 100 shares
Interest Receivable
Prepayments
TOTAL
Land
Furniture & Equipment
Accumulated Depreciation
TOTAL
Goodwill

PER
BOOK

AUDIT

FINAL
BALANCES

10,500
15,000
57,200
1,500 dr.
21,500
39,500
25,000
1,750
171,950
50,850
(12,170)
38,680
10,000

45

Patents
TOTAL
Total Assets

20,000
30,000
240,630

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

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

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

46

269,810
( 1,950)
( 1,700)
266,160
39,500
189,360
( 3,700)
( 1,970)
(41,500)
181,690
84,470
( 7,210)
(21,650)
( 1,940)
(11,700)
( 1,200)
(
300)
( 1,510)
( 3,330)
( 1,560)
( 4,060)
430
30,440

1.

Cash
a. P 9,500

2.

a. P57,200
b. P53,400

b. P8,400

3.

## Allowance for doubtful accounts

a. P1,500
b. P2,670
4.
Interest Receivable
a. P60
b. P180
5.

c. P10,600

d. P5,800

c. P50,000

d. P58,300

c. P2.860

d. P4,115

c. P240

d. 90

Inventories
a. P41,500

b. P46,400

c. P45,000

d. 40,000

6.

Doubtful accounts
a. P2,980

b. P2,670

c. P4,170

d. P4,000

7.

Prepayments
a. P2,980

b. P3,700

c. p2,050

d. P2,650

8.

a. P57,850
b. P62,850

c. P60,850

d. P50,850

9.

Depreciation
a. P5,085

b. P6,285

c. P6,085

d. P4.985

10.

Accounts payable
a. P35,420

b. P34,420

c. P36,000

d. P32,988

11.

Capital Stock
a. P75,000

b. P77,000

c. P0

d. P73,000

12.

Sales
a. P269,810

b. P274,710

c. P264,910

d. P260,100

13.

Purchases
a. P189,360

b. P187,360

c. P180,000

d. P200,160

14.

Interest expense
a. P4,030

b. P4.060

c. P4,090

d. P3,910

15.

Other Income
P430

b. P610

c. P400

d. 0

16.

Goodwill
a. P0

b. P10,000

c. P5,000

d. P6,000

17.

Office salaries
a. P2,130

b. P22,850

c. P4,530

d. P1,200

Patents
a. P0

b. P10,000

c. P15,000

d. P5,000

18.

47

19.

## Additional Paid in Capital

a. P3,500
b. P500

c. P2,000

d. P200

20.

Investment in a Co.
a. P0
b. P26,000

c. P24,000

d. P25,000

b. P5,210

c. P2,210

d. P5,000

b. P5,300

c. P300

d. P0

b. P2,510

c. P1,000

d. P300

21.

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

Taxes
a. P1,970

24.

a. P7,500
b. P9,000
c. P0

d. P1,500

25.

Land
a. P0

d. P24,000

b. P50,000

c. p26,000

26.

## The appropriate account to be credited for the donation is

a. Retained Earnings
c. Donated Capital
b. Capital Stock
d. Other Income

27.

## Marketable securities, net of any allowance for decline

a. P14,000
b. P15,000
c. P16,000

d. P0

28.

Sales discount
a. P1,680

b. P1,720

c. P1,200

d. P1,500

29.

Salesmans salaries
a. P21,650

b. P22,850

c. P20,000

d. P25,000

30.

## RUCHELL Company should recognize liability from damages for

a. P0
b. P100,000
c. P50,000
d.P200,000

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

3. B
13. A
23. B

4. B
14. D
24. A

Entries:
Finding 1
Accounts receivable
1,100
Cash
Finding 2
4,170
Allow. For BD
Finding 3
Sales
4,900
Accounts receivable
Inventory
3,500
COS
Finding 4
COS
39,500
Inventory
Inventory
41,500

48

5. C
15. B
25. B

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

6. C
16. A
26. C

7. B
17. C
27. B

8. D
18. C
28. B

9. A
19. A
29. A

10. A
20. C
30. A

Finding 8
Prepayments
900
Insurance expense
Finding 9
Prepayments
900
Rent expense
Finding 10
Prepayment
150
Interest expense
Finding 11
Retained earnings
2,000
APIC
Finding 12
Retained earnings
10,000
Goodwill

900
900
150
2,000
10,000

COS
Finding 5
Interest receivable
Interest income
Finding 6
Finding 7
Depreciation
Finding 15
Loss on sale
Investment
Finding 16
Note payable

41,500
180

Finding 13
Office salaries
1,200
Accrued expenses
Finding 14
Amortization
5,000
Patents

180

1,200
5,000

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

1,000
1,000
5,000

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

5,000

9,000
7,500
1,500
50,000
50,000

Finding 20

1,000
20

WORKING PAPER
Per books

Per audit

Cash

10,500.00

Marketable securities

15,000.00

57,200.00

Notes receivable

## Investment in A. Co. - 100 shares

25,000.00

Land
Furniture & Equipment

1,750.00
-

Accumulated depreciation

50,850.00
(12,170.0
0)

Goodwill

10,000.00

Patents

20,000.00
240,630.0
0

Accounts payable
Accrued expenses

4,900.0
0
4,170.0
0

45,000.0
0

39,500.0
0
1,000.0
0

1,500.00

39,500.00

Prepayments

1,100.0
0

21,500.00

Inventories

Interest receivable

2,100.0
0

180.00
1,950.0
0
50,000.0
0

31,000.00
75,000.00

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

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

50,850.00
(17,255.0
0)
15,000.00
267,105.0
0
35,420.00

1,200.0
0

## Capital stock, P100

53,400.00
(2,670.0
0)
21,500.00

35,420.00

Notes payable

8,400.00
15,000.00

5,000.0
0

1,200.00
26,000.00

3,500.0
0
7,500.0
0

75,000.00
3,500.00
7,500.00

49

Donated capital
Retained earnings

99,210.00
240,630.0
0

Sales

Sales discounts

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

Net sales

266,160.00

Sales returns

## Cost of sales ***

Gross profit
Other income
TOTAL

50,000.0
0

181,690.00

50,000.00
68,485.00
267,105.0
0

4,900.0
0

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

20.00

261,240.00
39,500.0
0

20.00
41,500.0
0
3,500.0
0

84,470.00

176,170.00
85,070.00

430.00

180.00

84,900.00

610.00
85,680.00

Operating expenses
Doubtful accounts
Salesmen's salaries
Miscellaneous selling expenses
Rent expenses
Insurance expense
Light and water
Taxes
Office salaries
Miscellaneous office expenses

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

Loss on sale

Depreciation

Amortization of intangibles
Income from operations

Interest expense

34,500.00
(4,060.0
0)

Net income

30,440.00

Retained beginning
Dividends
Retained end

*** COS

50

68,770.00
99,210.00

5,000.0
0
4,170.0
0

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

150.00

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

12,000.0
0
9,000.0
0
186,105.0
0

56,770.00
(9,000.0
0)
186,105.0
0

68,485.00

Inventory - beg.
Purchases
Purchase returns
Purchase discounts
TGAS

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

Inventory - end

223,190.00
(41,500.0
0)

COS

181,690.00

51