m
M
chapter
CHAPTER 5
ACCRUAL BASIS
CASH AND
_ cash
Purchases
_______‘____-_____._________._
Chapter Outline:
5
customers.
in
Expenses,
general
Bad debts
To $011:
WML—m____
15 T—accounts of retained earnings
//
SYSIEII] [Hal FBCUgIllLCb
received and expenses when cash is paid.
\S a
l'cvcuuc wuc‘u
Luau
Com 3 arison of Cash Basis and
Items of
‘
I
Comarison
Sales
-
1
Z
0
Cash sales
Collection
of
trade
accounts receivable
Collection
of
notes recivlable
‘
Includes
0
Income
other
when eai ned rather
it is incurred Father tthan
Accrual Basis Accountin
Cash Basis
Includes:
n
74
1
Accrual BaSis
Includes:
0
Cash Sales
o
Credit sales (Sale
account)
on;
Includes
those
payable
Payment in advance to
0
su - liers
lnCIUdeS
only
thOSe
expenses that are paid
“in C05“
'
‘
i
items
-
.
I
T-account approach
“5mg
1m.“ m
W112:
are:
1usmg T,-account. the procedures
P1 0t
the gwen data in the T-account
75
‘
I
0
Cash purchases
0
Purchase on account
t
i
5.
.i‘
Includes those items that
are incurred regardless of
when aid
Depreciation is typically
provided.
K
,3
t
I
‘J
)
i’
g
1:,
5
Doubtful
accounts
treated as bad debts.
are
I
following:
1) Accounts receivable /notes receivables/advances from customers;
2) Allowance for doubtful accounts;
3) Accounts payable / notes payable/ advances to supplier;
4) Merchandise inventory;
5) Property, plant and equipment;
6] Accumulated depreciation;
7) Rent receivable / Unearned rent income;
8) Prepaid rent/Rent payable;
9) Capital;
10) Retained earnings;
11) Net Assets.
Gui
trade
those
Payment
0f
trade
accounts payable
Payment of trade notes
Includes:
T-ACCOUNTS APPROACH
In order to compute for the cash payments or collections for certain
account, it is suggested that the T~account approach will be used on the
1::
Accrual Basis Accounting
It is an accounting SYStem that recognizes revenue
when cash is received and recognizes expenses as
when cash is paid.
°
Cash purchase
DepreCIation is typically
provided except when the
cost of equipment was
treated as exense
No bad debts expense is
recognized since cash basis
not
does
recognlze
Eceivables. Although some
problem may give an
indication that the accounts
written off were charged to
bad debts ex ense.
Depreciation
m
Lash U‘dSlS 'dCCOUHUllg
0
_
allowance for bad debts
7. T-accounts of
payable / advances to suppli
accounts payable / notes
8. T—accounts of
er“
merchandise inventory
9. T-accounts of
property, plant and equipment
10. T-accounts of
accumulated depreciation
11. T-accounts of
receivable / unearned rent income
12. T-accounts of rent
rent/rent payable
13. T-accounts of prepaid
14. T-accounts of capital
Cash Basis Accounting
Includes the following;
0
“‘
accounting
basis
1. Cash
.
’
basis accounting
accrual baSlS accounting
2. Accrual
and
basis
Comparison of cash
3.
approach
T-accounts
4.
T-account apPrOaCh
Guidelines in using
5.
receivable / notes receivables / advances fro
6‘
T-accounts of accounts
and Accrual Basis
4:;
f
£
I,
g
E
l
i
g
'i
3
i-
I
5
?
g3
9W / \
W
f,
________________’I___
_______ it ng
A
customers
Accounts receivable {Notes receivable trade /Advances from
XX XX Balance end AR
Beg. balance - AR
XX XX Balance end - NR
Beg. balance — NR
ac coun
Recoveries
r
XX
XX
XX
XX
XX
XX
.
XX.
Beg- balance - Advances
Sales rmums and allowance*
Sales discounts
Collections including recoveries
erteioff
X
.
,
,
/-————--——\
balance - AR
XX
I
xx
XX
iicoveries
}
I
l
|
l
Balance end - AR
Sales returnsand
/WEN
Beg
account
leg on
XX
I
1
allowance,“
sales discounts
Collections includin
‘
grecoveries/
Write-off
i
5,
l
i
i
Allowance for doubtful accounts
E
t
\.
Accounts
-
written Off
Balance end
.
.
XX
XX
XX
XX
Beginning balance
Doubtful accounts expense
XX,
RCCOVerieS
..
.
,.
._
_
,
,
.
The format
of the T-accounts was derived from the following journal
1.
To
g;
record sales on account
Accounts receivable
cr
Sales
2.
To
record receipt of note from sales on account
Notes receivable
Sales
3.
xx
/
record sales return from a cus:omer
/
returns and allowance
Accounts receivable
t
To
To
' un
the (11560
record collection wrthm
Cash
~
r
/
I;
XX
4
XX
Sales
4.
;,
XX
XX
L
mad
P
E
:‘V
52’
XX
1:1?
‘33::
XX
/
i?
XX
Q
g‘
77
‘
/
/
T.ACCOUNT: ALLOWANCE FOR DOUBTFUL ACCOUNTS
l
Accounts receivable
[/Qf
t
Accounts receivable
Sales discount
76
.
CCOUNT: ACCOUNTS RECEIVABLE
T—A
—
k
alloy/yam:ct
entries:
T-ACCOUNT: ACCOUNTS RECEIVABLE, NOTES RECEIVABLE AND
ADVANCES FROM SUPPLIER
Balance end - Advances
Sales on account
and
S
.
If the
‘I
‘ roccivwble
’ c an d adVan from
are no notes
ces
When tthoefrtehe Account receivable is:
Customers, the T.
.
collections from customers.
5
I
005k
(
rfcciva
For example, let's use T-account ofaccounts receivable, notes receivable a
"d
advances from supplier below.
The same procedures are to be applied when computing for the collections
from customers. Get the sum of the debits [this includes the beginning
balances of the accounts and notes receivable, balance end of the advances
from customers and recoveries and sales on account) and deduct the sum of
the credits (this is the total of the balance end of the accounts and notes
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
cash and Accrual Basis
sales returns and mgaltal‘e deducted from
the
aCcougt-w custB—mcr, it should not be
included inatfies arise from cash
lawn files.
‘3 t-account of the
To facilitate computation, the beginning balance iS Placed m the n9rmal
balance of an account and the ending balance will be at the Other S'de of
its normal balana? (e.g- the normal balance 0fthe aCCOU”ts .recewable is
debit so the beginning balance will be placed at the debit Side while the
ending balance will be placed at the credit side.)
‘ 3. Compute the total debit and the total credit.
4. The difference between the total debit and the total credit is th
6
squeezed figure.
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.
and notes receivable, beginning balance of the advances from customer
sales returns and allowance, sales discounts and collection and accounts
written off) then deduct the sum of the debits (this includes the beginnin
balances of the accounts and notes receivable, balance end of the advance:
from customers and recoveries). The difference is the squeezed figure in the
debit side which is the sales on account.
r
-
’
only those
*mcludidreceivable.
2.
\.
5
/
5
,
l
l
l
Chapter 5
i
6'
To record
XX
Accounts receivable
accounts
Allowancrz for doubtful
?
E
accounts
record collection of
3
‘
xx
customers
advances receivedfrom
To record
8.
l
«’/
Cosh
Advances from customers
1
xx
~
advances
goods to customers with
To record delivery of
xx
7
Advances from customers
9.
g
Sales
F
To
H).
of
during the year
record the provision for bad debts
Bad debts
xx
'
500,000-
547,000
4,000
865,000
865,000
th
Balance end AR
Balance end » NR
Beg.
balance Sales ret. and Advances
allowance
Sales
discounts
Collections
including
—
recoveries
Write-off
W
ii
E.
I
.
1.
.
Year:
xx
for do”btful accounts-Ia!nuary 1
'
doubthI acco untS-December
31
5
for
Ilowance
30.000
the
nts
000
written;
off
accou
durmg
f
current
collectible
year
'
ts
Un
A
L000
.
p reViOUSIY Wnttend 0f
Recoveries ofaCCOun
nt
te
bts
for
the total bad e
- d; Comp”
expense during the curre
Requ're
AIIOWan cc
xx
year:
Advances from customers - December 31
Sales returns and allowance
Sales discounts
Uncollectible accounts written off during the current year
Recoveries of accounts previously written off
Sales - accrual basis
.
“[ustrationl
.11 Complxzrt'grzported by
Helium Company during
data
the current
The f0 How1 g
Illustration: Computation of Collections
Hydrogen Company during the current
The following data were reported by
1
,
Total
‘
example sales on account, the
Observe that in the journal entries, for
T-account of the accounts
accounts receivable is debited, so in the
receivable, that same amount is also debited
Accounts receivable - January 1
Accounts receivable ~ December 31
Notes receivable - January 1
Notes receivable - December 31
Advances from customers — January
N. "
trade/Adm"
150,000
120,000
40,000
3,000
1,000
xx
Note:
~/
- dvances
Sales
Recoveries
XX
Allowance for bad debts
100,000
210,000
55,000
- GER
R
end - A
Balanon account
previously written off
Accounts receivable
E
balance
XX
.
‘
ivabug/Notes receivable
‘
Beg,
balance
Beg. C6
XX
To
Cash
7.
i
:
n:
ucl b l5
1
xx
rc—cstublishment of accounts previously written
r5ebabua'w’m”'uu.
.
written
0/7
accounts
To record
accounts
doubtful
Allowance for
Accounts receivable
5_
5
E
:Eesle'lgjcggatw
te
100,000
150,000
210.000
120,000
40.000
55.000
3000
1,000
4,000
500,000
Required: Determine the gross sales under the cash basis of accounting
year-7
Solution:
\ Allowance for bad debts
Ending balance
Write-off
30,000
5,000
20,000
14,000
1,000
5
1":
Beginning balance
Bad debts expense
Recoveries
i
i
x
4
PAYABLE, NOTES PAYABLE AND
ADVANCES T0 SUPPLIER
T-ACCOUNT: ACCOUNTS
Accounts Pazable {Notes Paxable TradelAdvances to SuBElier
Payments
PUrChase
returns and allow.
PurChase
Beg.
discount
balance - Advances
Balance end
Balance 0nd
_
XX
XX
XX
XX
XX
XX
XX
XX
XX
_
Beg. balance - AP
Beg- balance ' NP
79
[3
f
‘
Balance and Advances
Purchases
i‘:
I“
‘/’,/
_
78
{V
't.
I
V,
,,
I
92:;th
and advances t
notes payable
are no
there
When
0
payable is:
Account
of the
PAYABLE TRADE
T-ACCOUNT:
Suppliers the T-acc0u
ACCOUNTS
‘
xx
xx
and allow.
Purchase returns
Purchase discounts
Balance
J
AD
GDd'AP
‘
,,
_‘
‘
The
1.
’_"‘ IL
-
=
N
To
XX
Purchases
XX
XX
Notes payable
To record return
3.
of merchandise to supplier
XX
Purchase returns and allowances
4.
To
record payment within the discount period.
XX
Accounts payable
Purchase discount
XX
XX
Cash
To record advances to suppliers
hH
Advances to suppliers
XX
xx
Cash
6.
To record receipt ofgoods from
Purchases
Advances to suppliers
suppliers arising from advances
XX
AM»
XX
T-ACCOUNT: MERCHANDISE INVENTORY
7,
_
Merchandise lnvento
Beg. Balance
Net Purchases
Total
XX
XX
AA
XX
'1
:
XX
AA
80
Balance end
Cost 0r
LOSI
Of bales
Sales
Less:
Cost of sales
computed as follow5;===
Net purchases is
TX
xx
Gross purchases
XX
Freight-in
Add;
discount
XX
Purchase
Less:
allowance
Purchase
xx
Purchase returns
Net Purchases
presented is applicable to finished goods inventory of
The T-account
merchandising company. Kindly refer to Chapter 12 inventories for
discussion of T—accounts of the Work-in-Process and Raw Materials:
/
Tor
Illustration: Computation of Purchases
following data were reported by Lithium
The
year:
XX
Accounts payable
6
‘
XX
account
record issuance of note for purchase on
_
*XT
H
c_ll_...:..n :nnrnnl nnfrincfrom the following journal entries:
T-accounts were derived
To
I
entries,
it follows m
,
.
account
record purchase on
I
‘
7%
Accounts payable
5.
/
,
Purchases
2.
m
XX
.
Total
,,
'“
3
following form” the computation ofthe Co StofSales;
xx
Merchandise inventory, beginning
purchases
XX
Add; Net
for
available
sale
TOT
Total goods
Merchandise inventory, end
XX
\
Accounts Pa able Trade
balance AP
Burchases [gross]
xx xx peg.
xx
Payments
s:
got?“ using this T—account, aside frOm the joum
w
“WWW
rflfl/
___.—I
Company during the current
100,000
150,000
210,000
120,000
40,000
55,000
3.000
1,000
500,000
Accounts payable - lanuary 1
Accounts payable — December 31
Notes payable - January 1
Notes payable - December 31
Advances to suppliers Ianuary 1
Advances to suppliers - December 31
Purchase returns and allowance
Purchase discounts
Payment
—
under the
Required: Determine the gross purchases
/
accounting.
Accounts Pa able
Payments
Purchase ret. and allow.
Purchase discount
Beg. balance - Advances
Balance end - AP
Balance end - NP
/
/
/
’
accrual basis of
YMW,
Advances to Su hers
Notes Pa able
balance ' AP
100,000 Beg500,000
balance— N:
es)
210,000 Beg.
3,000
end - Aos‘snc
Balance
55,000
1,000
Purchases (gr
40,000 {9,000
150,000
120,000
81
\
_
W
y
.
1"]
;
11125531221;
year:
nts
ring the CUrrEn
Cost of Sales
Com utation of
t
Beryllium Company d”
reported
by
datapwere
ayable-Ianuary
100 I 000
1
December 31
2:231:15 Sayable January
Merchandise inventory
1
120'000
3’000
1,000
500,000
20,000
Dec- 31
Merchandise inventoI'Y‘
allowance
Purchase returns and
Purchase discounts
'
Paymem
:
.ACCOUNT A
D DEP
I/w———«-v~-~*---—-—--——~—~~~.~._.JEE951§on
Accum.
Solution:
Notes Pa able NP
Accounts Pa able AP
100,000 Beg. balance - AP
500,000
Payments
NP
3,000
- Beg. balance Purchase ret and allow.
(gross)
Purchases
554,000
1,000
Purchase discount
150,000
Balance end - AP
Balance 6nd,,
W
210,000
570,000
120,000
660,000
Computation of the net purchases:
purchases on account
Ending balance
Cost ofsales
554,000
on nnn
Ithuuu
3,000
11011
570,000
D
Total
Less: Purchase returns and allowances
Purchase discount
Net purchases
T-ACCOUNT: PROPERTY, PLANT AND EQUIPMENT
!
Prnnertz, Plant, and Equipment
Hag:nr»irr.;{k,gnanccv-~-~.
_
a
-r
(105101
UM f)? ix’YJEt qunirml
X]
[NEH
I
2mmdefémfi’fiyéa,
‘
BuI/gmU: (-1.”
:IV
82
'I.
Be
/
,, ,
.,
.,,,XX
1“
"M
m“
gmmng balance
xx
.
‘1
f,,
1
L
xx
Do
.
.
r
1'.
PPE
Cash
2
I
3
.
T-accounts were derived from the fou - Journal
entries:
owmg
acquisition
of
cash
PPE
record
To
To
XX
|
w
XX
'
.
record derecognition (cg. sale, do nation,
retirementggofppg
cash
Accumulated depreciation
Loss on sale
or Gain on sale
x);
xx
XX
XX
illustration: Computation of Cost of Machine Acquired and Sold
information in relation to its property,
Boron Co. provided you the following
account:
equipment
plant, and
01/01[16
Merchandise lnvento
Beginning balance
Net urchases
XX
PPE
/_____—__———
V,
*
L
;
\
-
Balance end - NP
degreciation of asset
derecogmzed
Cash purchases
accounting?
ww-
1‘
The
1,
under the accrual basis of
total cost of sales
Required. How much is the
CCUMULARH”
Machinery
Accumulated depreciation
P135000
50,000
12[31[1_6__
P150000
45,000
Additional information:
a) Depreciation is 10% per annum. As a company policy, newly acquired
of purchase and no
assets are depreciated for a whole year at the year
year of'disposal.
depreciation is provided for assets disposed at the
value
b) At the start of the year, a fully depreCiated machine without scrap
acquired.
machine was
was sold for P5,000, at the same date, a new
following:
Required: Based on above data, answer the
acquired?
How much is the cost of the machine
50W
2) How much is the historical cost of the machine
1)
SOLUTION:
Machiner
Beginning balance
c0“ of asset act uired
Total
135,000
20,000
35,000
150.000
170,000
170,000
83
C(istofznsset
den-609.“Zed
Balance end
Accumulated
depreciation of asset
derecognized
Balance end
50.000
15,000
20,000
45,000
Beginning balance
Depreciation expms
3
(150,000 x 10%)
65,000
65,000
{Unearned rent income
Rent receivable
Balance end — Rent rece-
Beg. balance
—
balance end —
I XX
Unearned rent
XX
XX
Beg. balance
Unearnediaeble
560,000
60,000
500,000
Total
710.000
710,000
following journal entries:
Prepaid RentzRent Bazable
Ce — Prepaid
bCadZIlld — Accrued
N 0 te:
XX
XX
XX
XX
XX
XX
XX
2.
3.
XX
Prepaid rent/ Rent payable
.
.
‘
xx
~.
To record adjusting entry for the expired portion of rent
XX
XX
XX
of rent expense
XX
XX
Illustration: Computation of Rent Expense
The following data were reported by Nitrogen
Illustration: Computation of Rent Income
The following data were reported by Carbon Company during the current
year:
100,000
150,000
60,000
50,000
500,000
Required: How much is the total rent income
under the accrual basis
To record accrual
XX
Rent expense
Rent payable
To record accrual of rent receivable
Rent receivable-lanuary 1
Rent receivable-December 31
Unearned rent income - January 1
Uneamed rent income - December 31
Collection of rent
..
a
payable.
This T-account is also applicable to prepaid salaries/salaries
‘
Rent expense
Prepaid rent
XX
Rent receivable
Rent income
a.
Cash
of the rent income
Unearned rent income
Rent income
:
Balance end — Prepaid aaset
Beg. balance — Accrued llab.
Expense ,
h T—accounts were derived from the following journal entries:
To record payment of rent in advance
XX
Ie
XX
Unearned rent income / Rent receivable
accounting?
asset
liab.
12L—————————___________
I
Cash
_
Beg. balance - URI
Collections
T_ACCOUNT: PREPAID RENT / RENT PAYABLE
l
The T-accounts were derived from the
To record collection of rent
1.
3.
Unearned Rent income
URI
150,000 Balance end RR
100,000
50,000
Ea'filems
receivable/unearned interest
applicable to interest
This T-account is also
receivable/unearned royalty income and other deferred
income, royalty
assets.
To record adjusting entry
- RR
,
Rent income
Beg.
—
______—
2.
Cash and Accrual Basis
Beginning balance
Balance end - URI
RENT INCOME
RECEIVABLE / UNEARNED
RENT
T-ACCOUNT:
XX
—
Rent Receivable RR
\\
Total
Rent receivable
WIII-fix.“
Chapter 5
reciation
Accumulated De
year:
Prepaid Rent - January 1
Prepaid Rent - December 31
Rent payable - January 1
Rent payable - December 31
Payment of rent
Requh‘ed:
of
Company during the current
100,000
150,000
60,000
50,000
500,000
accrual
expense under the
How much is the total rent
i
1
i
b23515
of
E
e
‘f
i.
s
accounting?
i
5
w
RentPa able RP
Rent PR
Pre aid 100,000
Beginningbalanca~PR
50,000
500,000
Balunceend—RP
mentol‘rent
650,000
Solution:
[)a
Total
T-ACCOUNT:
if
Balance end_PR
150,000
60.000
T-ACCOUNT: RETAINED EARNINGS
,
Beg. balance_RP
650,000
V
W,
XX]
XX
.VA
inventories or other
withdrew merchandise
2,
n
owner
debited to an amoum equaloh
Note: When the
account should be
drawings
the
cash assets,
the merchandise or “OM l0
of
value
selling price or fair
the cost, not the
ash
asset withdrawn.
l
‘aiita
2.
XX
I
To record withdrawal by the
3.
Cash
xx
3.
or any other appropriate account
To close the drawing account to
4.
XX
net income to capital account
Income summary
To close the
Capital
5.
To close the net loss to
E
9.
e;
g.
‘r
E
i
1
3
¢
i
i
XX
XX
To close net loss to retained earnings
/
/
XX
XX
Capital -]anuary1
Capital - December 31
Cost of merchandise withdrawn by Oxygen
Sales value of merchandise withdrawn by Oxygen
Principal amount of Notes payable paid by Oxygen with her
personal checking account
No. of months on the notes payable also paid by Oxygen
Interest rate of notes payable paid by Oxygen
xx
XX
Drawings
XX
/
E
Illustration: Computation of Net Income or Loss
.
The following data were reported by Oxygen Company during the current
year:
XX
capital
Capital
”
/
:
To close net income to retained earnings
Retained earnings
Income summary
owner
Drawings
‘
Prior perfiiyoddezl'x:
Net income
:
To record
Cash
‘ ML
BLrigmnm
'
' I b!
Income summary
Retained earnings
journal entries;
derived from the following
'l‘he 'F-ziccounts were
investment made by the owner
1.
,,
,
XX
XX
XX
I
The T-accounts were derived from the following journal entries:
To record declaration ofdiw'dends
1.
Retained earnings
XX
Dividends payable (cash, stocks, property, etc.)
XX
.
M I] A“
Balance and
Prior period error
Dividends declared
Netlosfi
,,
XX
,
XX
XX
Total
Begmnjng balance
lel
~m‘uw
mm—
end
Balance
i
’
CAPITW
W'
Wunurdwg.
lUldl '2 '
l
’
Retained earnings
Rent ex enSe
440,000
I
C
XX
XX
Required: How much
100,000
400,000
60,000
80,000
200,000
6
12%
is the Net income (or loss) during the year?
capital account
Capital
Income summary
Balance end
Withdrawal at cost
Net loss
Total
,
L'a ital
400,000 I 100,000
212,000
60,000
148,000
460,000
460,000
Beginning balance
Additional investment
Net income
i
I
l
i
9
5
,r
'r
[
?
“Sm,
F
86
87
l
w’
Chapter 5
—
Accrual Basns
Cash and
T-ACCOUNT: NET
,
V
r
i
ASSETS
Statement of
_
increase 1.”
la l
Decreasemaft-aims
Dividends declared
/
,
:
Net Assets
Financial Position
xx xx DecreaSe in asset '
IncreaSe in liabilities r
XX
xx
xx XX / Increase in share ca pital
xx XX Increase 1n share premi
Illustration: Computation of Net Income or Loss
\
Changes in the accounts of Neon Co. for 2016 are as follows:
~
Cash
_
w
¥
XX,“
Net "’55
Accounts receivable
Allowance for bad debts
Merchandise inventory
Investment in associate
Property, plant and equipment
Accumulated depreciation
Notes payable
Bonds payable
Discount on bonds payable /
Ordinary share capital
Share premium
r_
W
Net. income,
<
Note:
'
,
.
_
J This T-account follows the ba51c rule In making )ournal enny th
its normal balance while it is decreasatfi
account is increased through
normal balance, for example increase in as eds,
the other side of the
deeresett
4
balance of an asset while
debited which is the normal
normal balance.
of
credited which is at other side the
Illustration: Computation of Net Income or Loss
Company for the current year
Changes in the accounts of Fluorine
follows:
Total Assets
Total liabilities
Share capital
Share Premium
Retained earnings
Jan. 1
,
2,000,000
800,000
1,500,000
450,000
7
Dec. 31
3,000,000
1,100,000
asel
a
g
093
6
/
'
.
OJ
fie
%
capiti'
currrent ysar,dthe company issued 80,000, P10 par
per 5 are- ivi ends paid on December 31
the Current yea]
0f
amounted to P750000.
fDourilnlgsthe
.
.
. . .
Decrease in
liabilities
. .
DiVidends
declared
Net loss
Total
.
-
300,000
75 0,000
/ 800,000
_
-
'
.
.5"
400.000
250,000
1,750,000
1,750,000
800,000 12/
2,600,000 /
(2,800,000)
[600,000] /
3,900,000
200,000
2,600,000
320,000
‘
Solution:
\
Net Assets SFP
-
Increase in asset (Cash
Net Assets SFP
- Decrease in asse
2_400,000
/
Solution:
1,000,000
m"
3000300
Required: Compute for the net loss during the year.
Required: How much is the net income (or loss) during the year?
Increase in asset (3 M2M)
"
Additional information:
o
On December 31, 2016, Neon Co. declared Cash dividends amounting to
P500000 and share dividends amounting to P800000. Also during the
year, the company appropriatedytained earnings for the retirement of
'
bonds amounting to P100,000.
paid off
and
P2,000,000
of
loan
bank
0
obtained
a
Neon
year,
During the
lnterest
of
0F?100,000.
interest
and
P1,600,000
of
amortization
loan
interest
no
was
There
2016.
31,
December
on
accrued
is
P180000
payable at the end of 2015. In 2016, Neon Company acquired treasury
gm, 5*
shares from its existing shareholders.
reas
duo
7
é
1102
/
Revaluation surplus
Treasury shares
(g0
/
/
Lucrease
1.0951359)
500,000
(4.600300)
(460,000)
.
4,800,000
5,760,000
to PPE)
t
Decrease in liabilities
Dividends declared -
Increase in liabilities
(1.1M_800’000)
' Share Cal"Ital
Increase m
(80,000 x 10)
Increase in share
premium (80,000 x 5)
Net income
caSh
Treasury shares
N“ 1055
.
—
‘
(
500,000
320,000
1,100,000
400,000
3,900,000
200,000
2,600,000
400,000
180,000
__T0tal
,
7,680,000
7,680,000
89
88
I
H
Decrease in asset
Increase in NP, Net
value ofBP (2.6M2.8M+600,000)
increase in share capital
increase in share premium
Increase in reval'n surplus
lncrease in loans payable
[2M — 1.6M)
lncrease in int. 3 able
'
/
We» My
fl’h"
‘VH
N—h‘w'fiwfl' -"""‘"""”“"“"“~‘-‘“MAJ-v4.2. 4_.A_4 __,_‘{W_._W‘V“ MM _
VL
‘ '12“
________.__,_2_____'.
5= REV‘.
,
Chapter
'
Computation of Sales
Company during the Current y
were reported by Franz
e
The following data
PROBLEM 5-1
January 1
Accounts receivable December 31
receivable
Accounts
January 1
Notes receivable December 31
reCeivable
Notes
January 1
Advances from customers
December 31
customers
—
Advances from
allowance
Sales returns and
'
180,000
240,000
V
1
170,000
55,000
40.000
—
-
'
.
.000
Sales discounts
,
3:000
600 00.
Determine the gross sales under the cash basis ofaccounting
P666,000\
b.
P668,000
I
.
PROBLEM 5-5 Computation of Income Other Than Sales
The following data were reported by Chaste Company during the current year:
0
c. 19696300
PROBLEM 5-2 Computation of Bad Debts
The following data were reported by Azul Company during the current year,
Allowance for doubtful accounts—January 1
Allowance for doubtful accounts-December 31
Uncollectible accounts written off during the current year
Recoveries of accounts previously written off
p 25
000
How much is the total rent income under the agrual basis ofaccounting?
C. P800,000
P650,000
a.
d. P970,000
b. P770,000
40’000
8,000
2:000
How much is the total bad debts expense during the current year?
c. P21,000 \_
P9,000
a.
d. P23,000
b. P15,000
PROBLEM 5-6 Computation of Expenses in General
The following data were reported by Chessy Company during the current year:
PROBLEM 5-3 Computation of Purchases
200,000
250,000
400,000
2100.000
50,000
68,000
6,000
3,000
800,000
P
\
Determine the gross purchases under the accrual basis ofaccounting
21.
P651000
c. P687,000
b. 13654000
d_ p678,000
200,000
250,000
80,000
65,000
850,000
Prepaid Rent - January 1
Prepaid Rent - December 31
Rent payable - January 1
Rent payable - December 31
Payment of rent
The following data were reported by Sipag Company during the current year:
—
200,000
250,000
90,000
30,000
660,000
Rent receivable-January 1
Rent receivable-December 31
Unearned rent income - January 1
Unearned rent income - December 31
'
Collection ofrent
d. P699,000
Aceounts payable - January 1
Accounts payable December 31
Notes payable - January 1
Notes payable - December 31
Advances to suppliers ~1anuary 1
Advances to suppliers - December 31
Purchase returns and allowance
Purchase discounts
Payment
fi" 4
How much is the total cost of sales under the accrual basis of accounting?
C. P1,040,000
P859,000
3.
d. P1,049,000
.
b., 191,050,000 \_
2'000
Sales - accrual basis
a.
FROBLEM 5-4 Computation of Cost of Sales
The following data were reported by Haste Company during the current year:
200,000
Accounts payable January 1
250,000
Accounts payable - December 31
Merchandise inventory - January 1
400,000
Merchandise inventory — Dec. 31
210,000
6,000
Purchase returns and allowance
3000
Purchase discounts
Payment
' 800,000
10,000
Cash purchases
,
4,000
the current year
Uncollectible accounts written off during
off
written
Recoveries of accounts previously
5 — Cash and Accrual Basis
—
an
P 200
'
.
I
‘
'A
CHAPTER
[VIM
(19:57.13:
r
How much is the total rent expense under the accrual basis ofaccounting?
a. P785,000
c. P850.000
b. P820,000
d. P915,000
'\
I
PROBLEM 5-7 Computation of Cost ofMachine Acquired and Sold
Phosphorus Co. provided you the following information in relation to its
Property, plant, and equipment account:
End
Beginning
.
-'.
_
Equ1pment
Accumulated depreciation
100,000
15,000
120,000
18,000
-
91
90
,';5
Chapter 5
a)
b)
—
Cash and Accrual Basis
W
f
.
Depreciation is 15% per annumAt the Start Of the year: Phosphorus C0"achIred a.“ eqmpment
same time disposed of an equxpment With a carrying amount a“dah
of P250“:
accumulated depreciation of P15,000 for P35,000.
5
~
"7
Questions:
1.
'
How much is the cost of the machine disposed?
c. P120,000
a. P60,000
b_
d. P40,000
[3160,000
b-
\
2.
\\
i
12/31/16
12/31/15
6,000
3,700
61,500
550,000
40,000
14500
53,000
415,000
2 5,000
items:
Additional dam:
Accounts receivable written off
Cash received from customers
Cash paid to creditors
Sales discounts
Sales returns and allowances
:urcgase discounts
~
P 41,500
123,500
481,000
1,980,000
Sales
Questions;
Based on the above data, answer the following:
1.
How much IS the insurance expense on the income statement for 2016?
a.
b.
P40,000
_
2.
,
'
3.
C2; iiifggrfrrim tenants
d. P55,000
p
‘
Questions:
questions:
Based on the above data, answer the following
1. What is the amount of gross sales?
c. 4,210,000
4,110,000
a.
4'160'000
d' 4’260'000\
How much 15 the interest reVEnue on the income statement for 2016?
P90,500.
C. P117500.
b. P112,700. m
d. P156500.
How much is the salary expense on the income statement for 2016?
a. P366,500_
C_ 13489500$
b. P472500.
d. 9595,500
No uncollectible accounts
2.
were written off during 2016. Had the cash bag.
of accounting been used instead, how much would have been reported;
receipts for 2016?
it:
‘
'
400,000
Interest
,
4.
10,000
4,200,000
2,800,000
30,000
20,000
C.
a.
Cl
P1383000
d. P2,115,000
b'
What is the amount of gross purchases?
c. 2,600,000
3,000,000
:1).
.
3,050,000
.
,650 ,00 0
\
d 2
What IS the amount of the cost of sales for the year?
.
3.
i:-
I:g.
.
balances have been excerpted from Chlorine's Statement of
The following
for the year 2016:
Position
Financial
P100000
Accounts receivable, decrease
25.000
Merchandise inventory, decrease
200,000
decrease
Accounts payable,
100,000
Notes receivable-trade, increase
14,000
Rental receivables, increase
40,000
decrease
income,
Unearned rental
5.500
decrease
interest,
Prepaid
8500
IntereSt payable, Increase
7,500
Sulfur Com p an y rep0 rte d th e fo ll owmg
'
d urmg
'
2 016 the followmg
‘
Insurance premiums paid
Interest collected
Salaries paid
\
PROBLEM 5-9
The following balances have been excerpted from Sulfur’s statement Off
maml
Posmon:
Prepaid Insurance
Interest Receivable
Salaries Payable
Accounts receivable
Allowance for bad debts
recovered
Assuming that the company wrote-off P25,000 and subsequently
much
how
instead,
used
accounting
been
of
basis
p20,000. Had the cash
2016?
receipts
for
as
reported
been
would have
“£25,000
c_ p1I390'000
a_
d. P1,905,000
P1,840,000
b.
PROBLEM 5-8
J
\
6.
How much is the cost of the machine acquired?
P60,000
a.
6- P120.000
d. P40,000
b. P160,000
5..
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
a. Ellingooo
P1,820,000
a, P1343000
'
’ 8 ’000
c. 2.673000
§:2251000\
75,000
(1.
.
93
2,725,000
(.
I
Chapter
1
5 —
BaSIS
Cash and Accrual
rePOrt for the
year,
Mental revenue should the company
What amount
a, 454,000
b. 426,000
\‘
‘
'
222%?)
5'
'
report for the year?
company
expense should the
How much interest
103,000
1
5
'
i)‘
.
86 000
c.
97'000
,
(1.
January 1
200'000
,
Accounts receivable
NotIes receiva M e
C,
:ielVCd {ralllncfgorilclgs
urns an a v
c
.
300 I 000
_
Si:
15031352”?
Account1 5811:)?“er
5,1303
200 0
' 00
50,000
100,000
6
NoteSpa} able
p
p:::h::: 3:353:55“
allowances
Payments to suppliers
Accrued rem receivable
unearned rent income
Collection ofrent
prepaid salaries
Accrued salaries payable
payment “salaries
70 000
80'000
'
100 000
75.000
'
‘
.
QUCSUOHS: Determine the following:
1. The Gross Sales for the year 2016.
1,000,000
:
.
2_
b.
6501000
600,000
:1.
The Gross income fort
a.
b,
4.
1,030,000
The net purchases for the year 2016'
3'
3.
c, 970,000
d. 1,240,000
300 000
350’000
he
550
500,00?)
Year 2016-
"
C-
d~
270,000
320000
, 00
b.
300 ' 000
d-
c. 460,000
d. 500,000
.
“l
I
I
mm”
StatememS
D
°C- 31
250
,000
100000
1,120,000
20 , 00 0
10000
100:000
25,000
75,000
40,000
6&0'000
40'000
0’000
40'000
4801000
125,000
50'000
350'000
é
P
:
I
I
l
.
|
Additional information:
o
Collections from customers included customer’s deposit of P80,000 ol
which P20,000 selling price ofgoods were already shipped and received by
the customer. The shipment of goods was not recorded by the company
although the cost of merchandise was properly excluded in the count.
. Collections from customers also included P30,000 payment from customer
of accounts receivable in which a check dated January 15, 2017 was
received.
- Collections also included recovery of accounts previously written off
amounting to 138.000included in the payment to trade creditors was a check drawn and recorded
0
by the company to the supplier in December 2016 amounting to P20,000
which was delivered to the payee on Ianuary 10, 2017.
the company did not record payment to supplier amounting to
- Also
P30'000'
|
i
I
I
i
"l
i:
|
ii
‘I
II
ll
QuesuonS:
Determine the accrual balance ofthe following as ofDecember 31, 2016:
1.
.
c. 350,%%%
450'
“AM
have Egon excerpted from Potassium’s Statement of
The {01lowmg balzfancels
16:
.
' 1Position ortieyear
January 1
DCC' 31
.
200,000
300,000
Accounts receivable
20,000
30,000
Allowance for bad debts
380,000
330,000
Merchandise inventory
100,000
150,000
.
Accounts payable
50,000
Accounts receivable written off
1,498,000
customers
from
received
Cash
creditors
1 200 000
.
,
Cash pal-dt O trade
20,000
discounts
Sales
10,000
Purchase returns
80.000
70.000
receivables
Rental
35,000
60,000
Rental payable
120,000
tenants
Cash received from
Theiglggies expense for the year 2016.
3'
-
“(0131301541
7
-
income for the year 2010.
The rent
a, 470.000
490,000
1),
114,000.\
PROBLEM 5-10
- u r
have been excerpted from Argon's financial
gift?“o:vttgbol;2lanccs
In ytdl
W
""
ll
2.
Net Sales
a.
1,400,000
1'550'000
b'
55
i!
fl
|
1,470,000
d' 1'570'000
c.
Net Purchases
1,130,000
b. 1,160,000
all
1:
:Fl
55!
c. 1,140,000
d. 1,170,000
a.
_a!
15
'r.
I'
g
I
‘I
u'.
,
I.
o'.
94
95
.
Chapter 5
3,
b.
5.
ofsales
1,180,000
1,210,000
C.
b.
Bad
debts expense
'
5)
of
1,
d.
'
d.
00
233‘”
12,000
c-
2_
Comprehensive
PROBLEM 5-12
basis. The balance sheet 0 December
statements on the cash
Calcium prepares
n
the year 2016 are as follows;
income statement for
31, 2016 and
Statement of Financial Position:
1,500,000
'7 r'nn nnn
“35"
3.
Balance, January
Add: Net income
Total
5.
Income Statement:
5'000'000
7.
1,200,000
800,000
750,000
You decided that the
statements should be
you assemble the
prepared on the accrual basis and
information below:
The furniture and
equipment were acquired on July 1, 2015. The estimated
life is 10 years.
The 12% Promissory
note is
2)
Year”
were“ is PaYable on the datedated April 1, 2016 and matures in one
of maturity.
3) Accounts receivable:
1)
,
2
l
4)
:
.
32::2lger311016
"3112015
AC “mad
rent on
750,000
500,000
[/Tf‘ \\
2,400,000
d. 2,200,000
c.
Noncurrent asset
2,125,000
3.
b. 2,225,000
C.
(1.
Total Asset
2,600,000
2,200,000
2,400,000
4,800,000
d. 4,600,000
4,625,000
4,525,000
c.
Current liabilities
1,000,000
a.
b. 1,090,000
'
c.
(1.
Total Owner's equity
1,190,000
1,200,000
;
F
3,610,000
d. 3,400,000
3,625,000
3,435,000
c.
5
PROBLEM 5-13 Comprehensive
financial statements of JULIE ANN
You are engaged in the audit of the
The following information
Corporation for the year ended December 31, 2016.
was prepared by the bookkeeper.
receipts:
Collection on accounts receivable
Less: Cash discounts taken
Cash sales of merchandise
Sale of warehouse equipment
Insurance proceeds from boiler explosion
Sale ofland on November 3
Cash
Cash
December 31, 2016,
13100000.
96
c.
Current Asset
2,500,000
b. 2,300,000
b.
2,750,000
2,250,000
a
I
d. 2,210,000
a.
Expenses:
'
2,010,000
b.
Total
Rent
Supplies
Other operating expenses
Netincome
I
] b alance
Net income
a.
6.
Professional fees
'
3_
1,600,000
2,250,000
3,850,000
1
-
V~\\-\
250,000
300.000
The Professional fees
5,000,000
a.
5,250,000
b.
b.
1,000,000
Capital:
Cash and Accrual Basis
9 supplles unuse
OffiCDecember 31, 2016
December 31. 2015
aI
4.
Note payable
—
Questions:
above and the result of
.
audlt,
determine the accru
Based on the
as of December 31' 203;?”
following
the
145,000
c. 135,000
130,000
155,000
2'
1,490,000
1,220,000
d.
Rentlncome
a.
Chap ter 5
Accrual Basis
Cost
3.
4.
r
Cash and
a"
at
P1,513,000
13,000
I
2
_
P15001000
160'000
12'000
42'000
20‘000
l:
i'
disbursements:
:
Payments to trade creditors
General and administrative expenses
I
'
97
f.
.
[II/"w"
.0:
A”
929329.19?” 3"" “We”
%
Cash
Bas's
x—x
’
mers
merchandise
warranty contracts
on May 1
Purchase of land
November 10
purchase on
pter
Accounts receivable
P
inventory
admin. Expenses
Prepaid gen. and
Expenses
gen. and admin.
expenses
Total Operating
p 146
b.
7'
0
.000
8-
3.000
Gain
9-
5
10,
b.
2.
Cash
3.
4.
co
P12341100
h.
P1,178,000
P1,522,000
c. P1,682,000
d. P1,349,000
C~
."
5
‘1
a,
F3000 gain
136,000 1055'
C-
P14,000 gam
d-
/
/‘
ACE:“m8 payable
a
'
(1.
I
-
“2'000
1
gain
1347.400
740,000
100,000
x
z'
i
'5:
\
n
.
30.000
'J
l,
.7
518,000
200,000
and there
h
fi
200,000
220,000
180,000
99
_
5
400,000
are also available:
\
1
I
‘
c. P35,400
lecemble
:4???“
“‘59 i“ventory
..
?
13283001055
12/31/2016
P1,174,000
d. P1.358,000
c.
_/
i!
receipts:
The following data
98
A
or loss as a result ofjanuary 15, explosion.
(“the sales 0“ account, P10,000 was returned because of poor quality
return of P8,000.
’4
K
9
d' P12,000
gain
was a Purchase
c. P1,298,000
d. P1,354.000
P1.350,000
P1,230,000
p16,0001055
(1 Nil
[)5'0001055
P13,000 '055
Cost of Sales
3‘
b.
P295200
.
Total purchases
a.
'
Cash disbursements:
Purchase ofland and building on April 1, 2016
Full payment of furniture and fixtures
purchased on July 1, 2016.
On accounts payable and administrative expenses
Selling expenses
d. P1,362,000
P1,522,000
P1,509,000
6-
P211200
P204300
Collection on sale on account
Cash Sales
2016 and due
Proceeds of a note payable dated Oct b
0 er 1’
October 1, 2018, discounted at 18%
Net Sales
b.
3.
P1,S35,000
P1,695,000
P4,000 33‘“
P4300 loss
Netilrlcome
955,400
b, P61,800
Cit
Gross sales
a.
"1+-
pROBLEM 5-14 Comprehensive
in your second annu
engaged
.
daglvixammaunn
of the financial
You have been
The
Co.
following
Scandlum
PmVlded to you by the
statements of
ere
company accountant:
Questions:
adjusted balances of the following
Based on the above information, compute the
accounts as of December 31, 2016:
J
(1.
a_
2016.
1.
a.
b.
.5
I
a.
b.
V
f
'
sale of warehouse equipment
Gain or loss on
(8,400
-'
’ 2016 and Was used as a Storage facili
Land was purchased on Mav 1
this purpose and “’35 501d on Novembgr
for
unsuitable
be
to
was found
a.
b.
00
190'
P291200
sale of land
Gain or [055 on
.v
e
explosion.
5]
d.
24,000
Accrued
4 10,000
Accounts payable
z) Depreciation for 2016was meson.
acquired in 2009
3]
equipment sold during 2016 was
ata Cost
The warehouse
method of depreciation wa
double—declining
and
"Fed
The
of P25,000.
P16,000 at date of sale, If the S: raight—line
accumulated charges were
the accumulated depreciation at date f Sale Wou|d
method had been used,
0
have been P10i000.
4)
occurred on January 15, 2016 in which a b ‘1 er' not the
An explosion
01
dest
building. was completely
It was
depreciatiODFSVYed.
structural component of a
P48,000,
of
cost
chrde
gughased inhlalnuary 2008 at a
had accumulated at theasdate of th:
straig t— ine method and P20.000
I
C-
16.000
W
Ls
‘
P2040008
1220720
b.
information:
ledger:
Supplementary
were taken from the general
1)
account balances
12¢;ng
following
‘
December
The
124,000
186,000
9,600
7,000
382,000
3
5'
6,400
Co. stock
Drum shares of Tommy
Cash and Accrual Basis
5
and
120,000
purchases of
made on
,
chap/f“?
admlnlStrath
12/31/2015
150,000
190,000
230,000
1:
5:
I,
_
3
pter 5
40,000
30,000
expenses .
Accrued rent
allocated to the
and
buildin
Land
the
purchase price of
is
0f the total depreciation is 5% on the building andgl’o‘f;% the fumlture an d
Land. Annual
on
fixtures.
O
de
The Depreciation
gross profit
P200,000 are 40% of
amount.
expenses of
expense
administrative
Selling
preciafiOn
part of the
expenses are to be
administratiVe expenses. There are no UH pald Selimg
total
ofthe
31.
expense is 20%
of December
administrative expenses as
2.
d.
c. 528,000
d. 520,000
I
3.
Payment ofaccounts payable
462,000
3.
b. 470,000
478,000
d. 486,000
4.
5.
6.
c.
e:
f.
'
,
40000
.
ed
made on March 31,
108n em
The -bank
2016. A note
of
paym
umng
'
° - interest and principal on March 31,$331571?“
.
Fetirest rate IS 12/3
furniture were purchased
'llPhe equipments:
on January
2016. and
useful
life- of 10 years Wlth “0 anuclp‘Eited
‘3
estima
have an
salvage
per year Is p4,000.
value- DEPT.eciation
at the end 0 fthe y earrecost P100000or; hand
Inventories
at
as
s
I
December 31, 2016 We
follows:
P20
Amountners ofinventory
000
To
i
i
To :hlggtility compban-ilding
1,000D
re U1
PLOOO per month. On 8C ember 1’ 2016'
Rent on the S“) t was -d is
m
P31
advance.
ths ren
four.n:;(())rrlne for the year was P7
in
t
Ne
_
y
.
g
h.
Questions:
for the fouowmgl
data co
Based on the above
mpme
Total selling and administrative expenses
c. 260,000
718,000
3.
d. 248,000
b. 710,000
1.
Cost of furniture and fixtures
a.
60,000
2,
Cash
3.
b.
c. 120,000
d. 240,000
PROBLEM 5-15 Comprehensive
The I WANT TO HOLD YOUR HAND Company was started by Paul McCartney
early in 2016. Initial capital was acquired by issuing shares of ordinary Shares
to various investors and by obtaining a bank
loan. The company operates a
retail store that sells records, tapes, and compact
discs. Business was so good
during the first year of operations that Paul
is considering opening a second
store on the other side of town. The funds
necessary for expansion will come
bank loan. In order to approve the loan, the bank
requires financial
:zzgnziergi:
Paul aSkS for your he‘ll in preparing the
balance sheet and presents you
following information for the year ending
December 31, 2016:
a.
Cash receipts consisted ofthe
following:
100
000
15,000
30,000
and furniture
PurChaseo fequipment
as
c.
30,000
’
P300
Utilities
Insurance
d.
Payment ofadministrative expenses
c. 56,000
48,000
3.
d. 40,000
b. 60,000
b.
100,000
v
ent
Salaries
900,000
790,000
Net Purchases
420,000
b. 428,000
a.
P360000
of Inventory
Signage
1
1"
audit, determine the balance of the fOnowing
data and your
above
the
Based on
31,2016:
as ofDecember
c.
as
155“
1
Questions:
account
m
bank loan
Fro d_
is bursements were as follows:
and
Gross Sales on
a. 800,000
b. 890,000
cash and Accrual Basis
From
m
_
1.
’
/
//
'
3.
l
i
!
i
c. 532,000
306,000
393.000
Current Liabilities
70,000
b. 100,000
(1.
699,000
C.
121,000
d. 130,000
g
i
I
i
1
Shareholders' equity
3.
176,000
b. 323,000
l
with the
I
101
l
i
i
a.
5.
1
i
496,000
d. 663.000
c.
Total Assets
b.
z
i
Current Assets
103,000
a.
b. 270,000
a.
4.
393'000
3'. 560,000
Nil
167,000
I
c. 411,000
l
d. 599,000
s
,
.j_
I‘
i
Prepared in
201
Volks Company
Entry
the
Hon
Single
for
5-16
PROBLEM
P051
6
Fmancnal
The Statement of‘
lances:
Han
report the followmg ba
31-Dec
330,000
750,000
P
Assets
p
200,000
210,000
6‘35"
740,000
950 000
Notes Receivable
1,600,000
1 500'000
Accounts Receivable
120,000
Inventory
:
' 00
1000
400 000
Prepaid Expenses
1001000
000'000
Investment (at cost)
Equipment
Liabilities and Equity
Notes payable
Accounts payable
W
P
Interest payable
Accrued expenses
Bonds payable
par
Share capital, P100
Share Premium
Retained earnings
580,000
750,000
30,000
50,000
P
-
750,000
600,000
-
1,300,000
1,500,000
40,000
500,000
1,000,000
1,000,000
P4,810,000
P4,390,000
—
M
r5
—
.
Cash an d Accrual BaSls
data, compute for the
2016
in
sales
total
Baserlghe
Quesfi:::;,e above
370,000
P1170 000
b. P
I
purchases in 2016
total
The
3' PNBO'OOO
1’
a.
1
2.
b.
132,080,000
4
The
3_
.
b.
5
.
interest expenses in 2016
Nil.
P10.000
income in 2016
The total net
a, P1,000,000
P1.550.000
b.
.
.
Wing:
133,570,000
:-
I
.
C-
(1.
'\
P1.880,ooo
[32,380,000
depreciation in 2016
The total
3_
Nil.
b, P100,000.
3:
£0110
‘«.. a"
.
c. PBO'OOO
d. P480000
E“
1330300
c.
d. 1340.000
x
E
C.
d_
13950300
P5001000
\.
‘g
Y.
i
1
discloses the following:
receipts and disbursements
An analysis of cash
Receipts
800,000
issue of share capital
accounts
Trade debtors-notes and
discounted:
receivable
Note
Face value, P200,000, proceeds
12% one-year note issued to bank,
issued and discounted on March 1, 2016
Sale of investment
13
1.
2,9 50,000
190,000
300,000
250 0 00
4,49 0,000
Tm
Disbursements:
Trade creditors-notes and accounts
P2,100,000
790,000
400,000
280,000
500,000
4,070,000
Expenses
Dividends
Equipment
Bonds
Total
102
103
I,
("1),
g
I
g
;
r
.
-
Chapter
“wees.”
6
—
CHAPTER 6
CORRECTION OF
I
ll
COM
EM
“‘-
iii
»
Chapter Outline:
i
1.
'
2.
3.
4-.
5.
6.
7.
Errors
Prior Period Errors
ofprior period error
Accounting treatment
oferrors
concepts in the correction
Cha
Accounting
.
'l‘i'cillmC"t or P 1‘10!“ Period lirroi-
Accordingr m
i
“‘5. 8.1])2Fr
i'ctl‘OSPCC“,vL y m
I'
U‘
"
~»
~
"v
i
w
.dh Lm'ty Shall correct m'
‘
r'rSt Set Ofl'inancizil rrtat ,. Mum pm)" period
x
(.mcnts authorized for
,‘rors
-'
discovery by:
qftcr their
“Sue
_.
.
,
comparative
amounts for thC prior
‘rcsmung the
l'5
’
Presented
me‘ltS)
(a)
occurred;
or
error
the
in which
error occurred before the earliest prior ier‘ t presented,
[b] if the.
dim
restating the opening balances 0f assets, liabilities
equlty lor the
‘m
Cal-[jest prior period presented.
_
retrospective restatement
.
.
error shall be corrected b retrospective
restate:"erdt
A prior
p eriod
.
.
.
I
Y
is
it
that
impracticable
to determine either the
extent
except to the
p m effects or the GumUlathC Effect 0fthe error.
Limitations on
Basic
Working capital
Types oferrors
offinanciai position errors
Balance sheet or statement
specific
errors
8. income statement
I
offinancial position «1nd inc01ne statemen errors
statement
9. Combined
errors
t
10. Counterbaiancmg
errors
Non-counterbalancing
11.
Errors
Auditing No. 240, “error refers to an
According to Philippine Standards on
statements including the omission
financial
in
unintentional misstatement
including:
of an amount or a disclosure,
processing data from which financial
1. A mistake in gathering or
statements are prepared;
estimate arising from oversight or
2. An incorrect accounting
misinterpretation of facts;
accounting principles relating to
3. A mistake in the application of
measurement, recognition,classification, presentation or disclosure."
impracticable to determine the period-specific effects of an error
When it is
Comparative information for one or more prior periods presented, the
on
restate the opening balances of assets, liabilities and equity
entity shall
earliest period for which retrospective restatement is practicable
for the
current period).
(which may be the
impracticable to determine the cumulative effect at the beginning
When it is
anerror on all prior periods, the entity shat] restate
ofthe current period of
information to correct the error prospectively from the
the comparative
earliest date practicable.
Basic Concepts in
Correction of Errors
entity’s
Prior period errors are omissions from, and misstatements in, the
to
failure
from
a
financial statements for one or more prior periods arising
use or misuse of reliable information that:
were
(a) was available when financial statements for those periods
authorized for issue; and
into
(b) could reasonably be expected to have been obtained and taken
financial
account in the preparation and presentation of those
statements.
mistakes, mistakes in
Such errors include the effects of mathematical
misinterpretations
of facts, and
or
oversights
applying accounting policies,
fraud.
,r
’,r—'~-\
\.
\Effect in the
Relationship
Direct
Inverse
Net Income
Errors affecting net income:
Overstated
Understated
Understated
IfSales are overstated
IfCost of sales is overstated
lexpenses are overstated
Prior Period Errors
104
'- I
~“‘“N~—~W‘RWM
i
Effect in
Cost of Sales
Errors affecting cost of sales:
IfBeginning inventories are overstated
If Net purchases are overstated
IfEnding inventories are overstated
Working capital
Inverse
I
I
Relationship
Direct
Direct
Inverse
Overstated
Overstated
Understated
.
.
,
capital:
Errors affecting working
If the current assets are overstated
Ifthe current liabilities are overstated
105
Effectin
'
a ital
woglfgftgtepd
U
\derstated
n
i
t
-
da uto-day
working capital is the capital of a busmess that Is ltlsesiilnnu; the)current
trading Operations_ computed as the current asse s
liabllltles.
a
i
~ts
R
E
Iatjonsmp'
Direct
Inverse
I
g
Y
813.23: 6
2.
3;
tic!“
Samuiremcl‘t N0" 1
TYPES OF ERRORS
3.
(J13?
- Ccrrectisn of Errars
Bsiaztce she-ct or statement
Income statement errors
statement errors
Combined statement of financial position and income
a. Counterbalancing errors
b. Non-counterbalancing errors
Statement ofFinancial Position or Balance Sheet Errors
Statements of Financial Position or baiance sheet errors affect only the
presentation ofan asset. Iiabifity, or stockholders’ equity account
the error is discovered in the error year, the company reclassifies th
6
item to its proper position.
\“a'hen
I
f
NR
unaffected
ha
0V
over
Ni) under and AP
unaffected
NI
:30 Nl is
3) Land unde“
.nvesgment Property
unaffecwd
but N1 is
lover
Adjusted baiance
entries
Eggsting
I
Example:
£314:
Land ofP1,0G,OOO in 2015 was erroneously debited to notes receivabl e.
i
balances
Unadjust ed
R
\
under and A
,
the error in a prior year is discovered in a subsequent pericd th
e
ccmpany should restate the statement of financial position of the prior.
year
for comparative purposes.
If
x
uireme“t NO' 2
31‘
Reclassifi'ing entries:
g
Land
Notes receivable
f
1,000,000
1,000,000
V
O
I
2014
5,000,000
2015
6,000,000
(
l
1) Notes receivable of P10,000 was
receivable.
erroneously debited to accounts
2) Notes payable ofP15,000 was erroneously credited to accounts payable.
3} Land of P100,000 was erroneously debited to
investment property
account
Required:
'
1.
2‘
0
0
Compute for the adjusted net incomes in
2014 and 2015 and Retained
earnings as ofthe years ended December 31,
2014 and 2015.‘
Prepare adjusting entries assuming
errors were discovered In (a) 2014,
[b] 2015, and (c) 2016,
.
0
0
O
53001000
3000900
5000000
11 000 003
.
if errors are
dlSCOVETEd in:
.
Notes recewable
Accounts receivable
10,000
Accounts payable
Notes payable
15909
10’000
15000
100,000
100’000
Land
100,000
100000
Land
100,000
Investment property
100,000
Note:
In 2015 and 2016,
there are no adjusting entries for the errors on the notes
receivable and payable because they are assumed to have been settled or
received at the end of those years.
Income Statement
Errors
statement
the :fififtssztjfg ent errors are errors affecting. only
131W include impmper CEaSSlficauon 0 “avenues
d- mmgxreexpenses.
vers the error in
L
,
A company must make a reclassification entry When it xsco
the error year.
the
If the error
I
‘ ear) company Should restate
dlscovered pertams t0
the income
.
statement of the prior
year for CO m p amtwe pu p
7
.
l/
1139091900
_
I
106
Earnings
2015
0
Investment property
2016:
In an audit ofthe financial statement for the year ended December 31,
2015,
the following errors are discovered (all errors were made in 2014):
5300 000
’
g
0
anestment property
2015:
Ret ,
201421111811
0
Land
[Hustrationz Statement ofFinan cial Position Error
U Can Be A Topnotcher Company reported net income for the first two years
ofoperan'on as follows:
.
W
Net Income
2014.
2015
5,000,000 600000
Reg
offinancial position errors
'
\y\
107
W
\V‘J/
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
“I.I.‘-.
Rent income amounting to P10,000 in 2015 was credited instead of [mer
est
income.
Effect of the error:
um:
0 - Overstated
Legend:
U
- Understated
Reclassifying entries on:
2015
Rent Income
Interest income
J
!
j
chap
sol
ter 6
ution:
“irement No.
x - No effect
No adjusting entry
14
3,000,000
20
40001300
'
N1
expense
.and rent
under
0:”,
1‘”
expense
o
Supplies
and
over
2)
NI
n derI
NI
over'
lPjurchaseS
Reta-lne
.
Earnings
2014 ‘1
3‘0001000
7 2015
'000’000
0
0
0
0
0
under,
undfient income
miscellaneous
under,
:3]
NI over
over,
income
balance
Adjusted
Year
0
0
0
0
0
3900000
40001000
3 000
000
.
Office supplies expense
Purchases
25,000
In an audit of the financial statement for the year ended December 31,
2015,
the following errors are discovered:
Miscellaneous income
Rent income
30,000
1) Interest expenSe of P20,000 in 2014 was erroneously debited to rent
2015:
No adjusting entries
2016:
No adjusting
2014
3,000,000
2015
4,000,000
expense.
Office
supplies expense of P25,000 in 2014 was erroneously debited to
2)
purchases.
3) Rent income of P30,000 in 2014 was erroneously credited to
miscellaneous income.
Required:
1.
2.
Compute for the adjusted net incomes in 2014 and 2015 and Retained
earnings as of the years ended December 31, 2014 and 2015.
Prepare adjusting entries assuming errors were discovered in (a) 2014,
(b) 2015, and [c] 2016.
108
,
,-
A/
.4”... —“\
'. \x
.
)I
‘/
20
000
25,000
30,000
entries
Note:
In 2015 and 2016, there are no adjusting entries for the errors because
when these are closed to the retained earnings, the balance have already
been corrected.
Combined Statement
of Financial Position
Errors
and Income Statement
~
‘ '
and mcome
Posmon
Errors affecting both the statement of financ1al
Statement can be classified as:
1. Counterbalancing errors and
2.
I. .4“
t
7 000 000
if error 15 discovered in:
20,000
2014:
0
.
Interest expense
Rent expense
Illustration: Income statement Errors
Dare to Dream Company reported net income for the first two
years of
operation
I“
‘
1] 61::
Adjusting entries
‘
\
Requirement N0“ 2
10,000
I
1
djusted balances
una t
expenSe under'
as follows:
!
,
.
correction of Errors
r
2016
10,000
f
Non-counterbalancing errors
Counterbalancin g Errors
,
reaed over tWO
Counterbalancing errors are errors that W111 offset f” be Cor
accounting periods. Examples include the followmg.
I
109
‘
Kiwi?
._
Chapter 6
.7
Correction of Errors
4
Accrued Expenses
Accrued Revenues
"t
I
Omission of deferred expense
insurance premium of P12,000 effective April
The Company paid one-year
1, 2015. The entire amount was debited to expense account and no
adjustment was made at the end of 2015.
nn
Effect of the error:
‘
‘
'
2015
.'
J-_
f
;
;
_5
i
,
’
‘
'
Adjusting entries:
2015
3,000
Prepaid insurance“
Insurance expense
3,000
2016
Insurance expense
Retained earnings
‘
i
.
x . No effect
"160
me '
' 2015
etamed earnings
Rent Income
R
4 00
v
0
>
4.000
4000
{Accrued Expense
-
ecordmfg 0
salanes expense 0f P4'000 was “or l"ecorded at the end f
1:22:1th
.
0 2015.
Effect of the
’1 .
‘.
S
“2:6
.
e
a a
'
.
4'
550mm
'-
“&$
u
error'
.
fter closin
at the end of the ear
Oversmted
U ' U"derst’a‘ted
ca - ital
0'
entries:
Ad).usting
2015
Salaries expense
Salaries payable
iegend=
'
2016
Retained earnings
4,000
4,000
ffEC t
4.000
Salaries expense
4,000
Nonrecording of Accrued Revenue
rent receivable of P8,000 was not recorded at the end of 2015.
u
Accrued
Effect of the
error:
3,000
3,000
*(12,000/12x3)
Omission of Deferred Income
The company leased a pomon of its building for P12,000. The term of the
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
unearned portion of the amount collected.
Effect of the
”
n
n-
error:
m2015
-
2016
Retained earnins after closin
5. Workin ca ital at the end ofthe ear
U - Understated
Legend:
0 - Overstated
4.
-
4000
inCome
Rgneamed rent
412,000/12 x 4)
7.
5
.
'ustmg 6
2015*
Ad]
of the followmg:
Overstatement 0r Understatement
subsequently recorded the
recorded in the first year and
5. Sales not
following year (or vice versa).
subsequently recorded
recorded in the first year and
6. Purchases not
versa).
the following year (or vice
inventory.
ending
Error affecting
3
-‘.
nmES:
.
_
3.
5
Correction of Errors
— —
M“
—
Omissions of the following:
Prepayments under the expense method.)
1,
Deferred expense (or
(Precollection under the revenue method.)
2
Deferred income
I:
,
r6
Retained earnins after closin
Workin caital at the end of the ear
understated
Legend:
0 - Overstated
U-
4.
S.
110
2016
Adjusting entries:
2015
Rent receivable
X - No effect
.
8,000
Rent income
Sales
X - No effect
U - Understated
0 - Overstated
Legend:
not recorded in the
2016 after closmg
Rentlncome
Retained earnings
_
8,000
first year and
000
8'
8 000
1
subsequently rewrded the
f0|lowing year.
unting to
Sale of
merchandise on atcount on December 29; zoiiaiyosz" The
P20,000 was not recorded until it was COH‘?‘3t‘3.d ont}:
in 2015.
merChandise was properly excluded in the ending “We” ry
Y.
‘9:
J
'i
i1
:5?
'
/
W
M
KM“ “u 0,,
Effect of the
“
error:
—
I‘M“
“
—““
2.
Accounts receivable
:. waged earnit;
s :Eter CIESlfn
o
e
or 'n caita at een
Overstated
Legend:
0-
Adjusting entries:
2015
bl e
'
Accou tsreceiva
ear
U-
Understated
2016
5a];
Retained earnings
20,000
Purchases not recorded in the
ect
20,000
Sales '
20,000
x _ No eff
first ear
and
20 00
subsequently recorded
' 0
y
the following year.
.
amounting
account on December 27, 2
to
Purchase of merchandise on
1512::
On
paid
was
it
until
1130316. The
P50,000 lNaS not recorded
inventory
merchandise was properly included in the ending
Effect of the error:
Legend:
n
In
U - Understated
0 - Overstated
x - No effect
Adjusting entries:
2016
2015
Purchases
50,000
Accounts payable
50,000
Retained earnings
Purchases
50,000
50,000
Error affecting ending inventory (e.g. overstatement)
On December 31, 2015, the ending inventory was overstated by P5,000.
I.
n
Effect of the error:
2015
1.
Cost of sales
2.
Endin invento
4.
Retained earnins after closin
5- workin ca ital at the end of the ear
Legend:
0 - Overstated
U - Understated
112
2016
Chapter 6
Correction of ErrOrS
—
3‘
V
A
4m
Adjusting entries:
2015
C
20
5000
ost of Sales
Merchandise invento W
.
Notes
/
/
5,000
.
16
Retained,earnings
Mdse Invent
-
s
S
adjusting entries:
on
000
i
'ou mal entries in
. the
’
The ad'ustin
)
g
Year
error will .
of
Inclu
‘
real
account.
account. and. a .
nomma]
iournal entries during the se
de a
:I‘he adjusting
c0nd Year after th
account
momma]
and
year of Errol.
retained
mdUde a .
_
1
earnings_
I
é
50
'
Umbeg.
.
k
g
8
I”
For comparative purposlesl mstatement is necessary EVen -f
journal entry 15 not requn'ed.
E
g
Illustration 1: Combined and Counterbalancing Errors
Se]f_53crifice Company reported net income for a
two_year
follows:
2014
120,000
2015
i
p
mod
as
i
I
180,000
l
1
In an audit of the financial statement for the Year ended December 31 2014
'
'
the following errors are discovered:
§
i‘
s
paid one-Year insurance premium of
P18,000 effective
May 1, 2014. The entire amount was debited to expense account and no
adjustment was made at the end of 2014.
2) The company leased a portion of its building for P24,000. The term of
the lease is one year ending June 1, 2015. Collection of rent was credited
to rent revenue account. At the end of 2014, no entry was made to take
up the unearned portion of the amount collected.
3) Accrued salaries expense of P12,000 was not recorded at the end of
1) The company
2014.
4] Accrued interest receivable of P15,000 was not recorded at the end of
2014.
3.
e.
E
S
I
i
i
t
A
g
l
i
ffqlégrfigute for the adjusted net incomes in 2014 and 20151'cénd RetamEd
earnings as of the years ended December 31f 2014 end 20 2. Give the effect of the error in the 2014 worklng Cagltal'
d -n
[a]
2014 .
3_ prepare adjusting entries assuming errors were dlscovere
(b) 2015, and (c) 2016.
1
i-
E.
i
i;E.
K
¥
3:
if
g
E3
g
x ' No effect
3
€-
113
WK
xi”
‘
iI
Chapter 6
- Correction of Errors
Illusfiafi?"
1
Net Income
2015
2014
under
Adjusted balance
working
Effect on the
Retained Earnings
(10,000)
180900
(6.000)
10,000
2014
120,000
6,000
(10,000)
(11000]
121000
[12,000]
120.000
6.000
Unadjusted balances
1)
under
ins. Exp. over, NI
over
2)Rev over, Ni
expense
3)
Salaries
under. N1 over
4) int income under, Ni
15,000
15,000
.
capital (WC)
y
Requirement No. 2
discovered in:
Adjusting entries if error is
(18,000/12
x 4)
Ins.
Prepaid
2014:
i
insurance Expense
Rent Revenue (24,000/12 x 5)
Uneamed Rent Revenue
i
)
Salaries expense
Accrued salaries payable
3
1:
5'
a
2015:
3
’.
Insurance Expense [18,000/12 x 4)
Retained earnings
3
E
\'
201:
6
\.
1
15
.
'
'
'
No adjustmg
Journal
the Year Ended
December 31
.0000
00
ory
Reqmred:
9
by
for the ad-lusted net Incom
.
Compute
.
Decersgelfszlolet
and 2015
th
of
.
earmngs as
and Retamed
oftizaerfrgnqed
2014 énd 2015effect
the 2 014 working
2. GiVe the
c
warezmtal.
lusung enmesI‘m
assum' errors
3. Pre are , (1'
lscoveredi (a) 2014
lng
002015a and (c) 2016'
1.
_
~
Solution:
Requirement No. 1
’
10 000
‘
6.
000
10,000
Unadjusted balances
1] Purchases over,
under
NI
3)
over, NI over
Ending inventory over,
12,000
N1
over
Adjusted balance
6,000
Effect on the working
2015
120,000
300,000
20,000
(50,000)
(20,000)
50,000
20,000
{25,000}
65,000
25,000
{25,000}
235,000
65,000
(50,000)
300,000
capital (WC)
over, Advances to supplier under, WC under
Sales
over,
advances from customer under, WC over
2)
1) Purchases
3) Ending
12,000
2014
;,
Z:
2
5
37
i;
‘
a
i
.
ll
'
(5
I:
4.‘
i':
Over or (under)
6,000
10.000
%_
Retained Earnings
180,000
120,000
2]Sa1es
12,000
“
Net Income
2014
2015
6 000
12,000
inventary over. WC 0V8"
capital —overstated by
Effect on the W
orking
15.000
2014
(20.000)
50300
5&2.
15,000
entries
114
'\
a
12 ’000
Retained earnings
Salaries expense
Interest income
Retained earnings
i
f
'
errors are discovered?r
as s
5 In
Were delivered.
‘ 2014 but the
. 2m the
Yea£30003 es m
014
31
December
ending
On
the
P25,000'
was Overstat d
00
(2%14
00)
16 ,000
10,000
D,
~.
3] goods
Retained earnings
Rent Revenue (24,000 / 12 x 5)
J
.3
15,000
15,000
9
:2
audit of the statement
In an
following
,
2014, the
Advances to supplier in 2_014 were
'
follow‘i‘gcorded as pu
merchandise was receiv 1T1 the
rchases b
2)
gYear,p20
cuStom:;1
ut the
{000
2014
r
Advances from
followingeCorded
15,000
Interest receivable
Interest income
i
i
0
-
over
4]
Rent receivable under, WC under
Int. income under,
capital —overstated by
Effect on the Working
f
300.00
OVer or (und er)
Salaries expense
g
fouowsz
2015
‘
Err01's
net incomemfg0r
1
a m0~year Period
as
80,000
1)
under, WC under
1)
Prepaid insurance
ins. Exp. over,
revenue under, WC over
2)Rev over, Uneamed
3)
under, Salaries payable under, wc
i
Ompany reported
Self-Sacrl Ice
Solution:
Requirement No.
zEcombimd and count
erbalanc.
115
V
«I
.v—,_
w-«g./
—
‘es:
ting enm
AdluS
Correction of
2014-:
20,00O
Advances to supplier
Purchases
50,000
Advances from customers
25,000
25,000
Cost of sales
Merchandise inventory end
20,000
Purchases
Retained earnings
50.000
25,000
journal entries
No adjusting
offset in the next accounting period
Non-counter balancing errors do not
entries, even if they hava'
correcting
make
must
Therefore, companies
closed the books.
Examples:
1. Prepayments under the asset method
2. Precoiiection under the liability method
3. Error in recording depreciation
4. Improper capitalization of expense
5. improper expensing of capital expenditures
6. Error in recording of proceeds of sale of an asset (e.g. PPE) as other
income
Prepayments under the Asset Method
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
was made at the end of 2015.
Effect of the error:
2015
2.
Preco
2016
“suiance expenseh
Retained earningsm
9,000
**
(
2016
Insurance ex ense
Pre aid insurance
A
‘
l
000
3,300
PFEpaid
insurance
/ 12 x 3)
.
I
12,000
*u(12‘000/12 x 9)
“ectjon under the Liability Method
of its buudin g f0 r P
any leased a. portion
.
12,000 Th
The ec‘i’sm
ending April 30.
:ne year
2016.
Collection of rent w:st:rr$of the
rned rent revenue account. At the end of 2015, no
lted to
entry Wa
uniaup the earned portion of the amount collected.
5 made to
Effect of the
error:
“
Rent revenue
Unearned rent revenue
.1
Retained earnin s after closin
workm ca - ital at the end of the ear
U - Understated
Legend;
0 - Overstated
45.
Non-counterbalancing Errors
1.
I
000/12 x 9)
*(12
25,000
Retained earnings
Mdse. inventory beginning
9
Prep
ta 9
50,000
Sales
2015
*
expense
Ce
Insurazid insurance
leaS
20.000
Retained earnings
2016:
20.000
50,000
Sales
2015:
\L‘
-
Requirement No. 2
Adjusting entries if error is discovered in:
Adjusting entries:
2015
Uneamed
x _ No effect
2016
rent income
8,000
Unearned rent income
8,000
Rent income*
Rent income“
12,000
4,000
3,000
Retained earnings***
*(12,000/12 x 8)
**(12,000/12 x 4)
***(12,000/12 x 8]
Error in Recording Depreciation (e.g. understated)
Depreciation expense in 2015 was understated by P2,000.
Effect of the
error:
2015
2.
Accumulated de - reciation
4-
Retained
Legend:
n
earnins after closin
0-
overstated
U - Understated
2016
'
X No effect
Adjusting entries:
D
4.
1
-- —~-v-v
H
—
—
Chapter 6
I
M
Inn-UV"
Retained earnin s after closin
5. Workin caital at the
end of the ear
ted
undersm
Legend:
0 - Overstated
U
'
X - No effect
2015
:p n expense
2016
Retained earnings
’
2,000
ccumulated depreciation
2:900
Accumulated deprec1atlon
2,000
2 000
,
116
117
"(rim-1
fl
,.,_,.
1.7...7.”
J
.l
Chapter 6
W
i“
__
,
“X” Ely“
J7
7
Chap
recording 0f proceeds 0f sale 0f an asset (e g
. .
in
Error
Correction of Errors
clkilarged to
had been
Capitalization “Experzfimmg to P10,000 expense _35 been
‘mpmi’e'
Depreciation
the building a 1 2015
useful llfe of the
Repairs expense on
Januaryd O'n
year remaining
on
account
the
4
the building
2016 base
recorded in 2015 and
building.
!
—
Effect of the
E
In“
In
2016
error:
—“
after Closm
Retained earnins
' i
BUllCllIl net
derecration
6 Accumulated
Overstated
Légend:
o4.
5.
'
'
“ s:
Adjustiznglesntne
Repairs expense
Building
d
U
t d
"5” e
2016
Retained earnings
10.000
2,500
X - No
4.
5'
f.
after closin _
Retamed earm'n s
the end of the ear
at
ital
Workin ca
other mcome
Accumulated dep n
(squeeze)
Loss on sale
Equipment
2014
1)
2)
Adjusting entries:
Building
Repairs expense
3)
50,000
_
50,000
(50,000/4)
-I
..
.ml
p
4)
50
,
000
5)
12,500
Dep.n expense. 5
‘
;
Retained earmng
dEPTCClatlon
Accumulated
,000
15,000
3
5000
50.000
2016
Retamed
'
earnmgs“
Accumulated dep’n
Equipment
*[30,000 + 5 , 0 00)
i
‘
50 000
‘
as
01” a
6,000,000
2015
8,000,000
The Company paid one-year insurance premium of P240,000 effective
April 1, 2014. The entire amount was debited to asset account and no
adjustment was made at the end of 2014.
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
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.
Depreciation expense in 2014 was understated by P12,000.
Depreciation expense in 2015 was overstated by P14,000.
Bad debts expense of P11,000 was not recorded in 2014-
COmpute for the adjusted net incomes in 2014 and 2015 and
gimmgs as 0fthe years ended December 31, 2014 and 2015.
2.
We the effect of
2014 working capital“
the
1"
25,000
error in the
118
1
Required:
5
Dep'n expense
12,500
Accumulated de reciation
Building
Retained earnmgs
50000
1
r
0
follows:
x - No effect
U - Understated
x ‘ No effe ct
Combined and Noncount er Balancin gErrors
Illustration:
. .
Self-Sacrifice Company reported net income f
two-year period
earnins after closin
Accumulated dereciation
0 - Overstated
'
U understated
0'
entrles:
Adjusting
In an audit of the statement for the year ended December 31, 2014, the
following errors are discovered:
2°16
“W” “t
agend:
I
Accumulated de reciation
Overstated
7
.
Reairs exense
Retained
“E'-
LMOSSO“53‘E
2015
to repairs
mm_
error:
Legend=
Expenditures
Improper Expensing of Capital
amounting to P50,000 had been charged
building
Major improvements on
Improvements have a life of 4 years.
2015.
January
1,
expense on
1.
Effect of the
,
2,500
Other
2015
trhe Cash
1;
2 500
PP E
2015, an equipment costi PSO’OOO
) as
Was sold f0
January '1
ng
the eqmpment
On
P30,000. At
d had an accumulated
demee.latlon
, r of
of 521 .e,
he date recelved was recor ed as other income
P15I000_
in
2
effect
.
1
Other income
10,000
[10,000/4)
2°15
inc"me
10,000
5,000
Accumulated dep'n
Retained earnings
Depreciation expense
Effect of the error:
_
g
Burldmg
10,000
2,500
Accumulated dep’n
expense
Depreciation
' U"
W
I”
119
Retained
//>-//
I-
LI...u-
I
'
of
of Errors
Correction
an OwanCe fOr
maintain the allowance
mpany Should
hould mamtaln
company's
for
,J- outstandmg
. experience,
__..~oriPnCey the C0
nurcfnnr‘linfl balances.
balances,
ast
CUStomer 5
at 5% of the
_
5‘
l
Chapter 5
6
6)
—
_
5315103131” agcounts
stions:
_
answer the folloimng:
2016?
above data,
the
on
unadjusted net loss in
3:5;
1
' How much is the
c. 253,200
a.
b.
2.
73,200
33,200
How much is
282,250
a.
281,250
0.
110,000
d.
loss in 2016?
net
adjusted
the
287,900
c. 280,850
d.
as ofDecember 31, 2016?
assets
adjusted total
the
is
much
1,108,750
3. How
C.
1,176,750
1,140,100
3.
1,150,150
d,
b.
December 3 2016?
4,
adjusted current liabilities as of
1.
How much is the
436,000
C.
a. 418,000
336,000
d_
b. 318,000
shareholders' e ui
December 31'
total
adjusted
is the
of
5. How much
as
2016?
214,150 q W
222,100
C_
a.
190,750
d_
b. 240,750
'
W
H
«um;
,
tantive Test of
chapter Ontline:
'
.
-
.
“a
I
-"u-n-“n-
‘
“fljhtroductlon t0 aUdi_t 0f Cash and cash equivaleng-I“-..-‘..-'-"""“"""
I
3.
Management assertions
Audit objectives .
Primary Substantlve procedures
1;.
Additional audit consideration
6.
Special audit consideration
7' Summary ofaudit procedures per assertion
'
3.
'
IntrodUCtion
'
most
the
of
assets of a business.
important
one
is
Cash
Almost all the entity's
transactions ultimately result in either receipt or
payment of cash Cash
usually includes cash in bank, cash on hand and cash
equivalents. Cash
equivalents are short-term, highly liquid instruments
that are both easily
convertible to known amount of cash. Examples of
cash and cash
equivalents include, but not limited to, petty cash fund,
payroll fund, money
orders, cashier's checks, treasury bills and others.
Because of the
';
i
very nature of cash, it is
considered a high-risk area — most
vulnerable to misappropriation than other assets that requires good
internal controls and careful monitoring. Due to its high
degree of inherent
risk, more audit time is devoted to the audit of the account
than is indicated
by its peso amount.
F
I
i;
5
Management Assertions
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.
if
;
'
.
.
.
The auditor
uses assertions in assessing risks by conSidenng
the different
types of potential misstatements that may occur, and thereby deSignlng
and“ Procedures that
i
,2
,_
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:
Occurrence transactions and events that have been recorded have
3Occurred and pertain to the entity—
'
130
131
if
.