Chapter 13
Operating segment
Problem 13-1
Timmy Company provided the following information in relation to revenue earned by
operating segments for the current year:
Segment
Alo
Bix
Cee
Dill
Combined
Elimination
Consolidated
Sales to
unaffiliated
customers
5,000
8,000
4,000
43,000
60,000
60,000
Intersegment sales
Total revenue
3,000
4,000
16,000
23,000
(23,000)
-
8,000
12,000
4,000
59,000
83,000
(23,000)
60,000
What total revenue should be disclosed by the reportable segments?
a.
b.
c.
d.
60,000
83,000
71,000
51,000
Answer:
Bix
Dill
Total revenue
12,000
59,000
71,000
Problem 13-2
Correy Company provided the following data relating to operating segments:
Industry
revenue
profit
total assets
A
10,000,000
1,750,000
20,000,000
B
8,000,000
1,400,000
17,500,000
C
6,000,000
1,200,000
12,500,000
D
3,000,000
550,000
7,500,000
E
4,250,000
675,000
7,000,000
F
1,500,000
225,000
3,000,000
How many reportable segments does Correy have?
a.
b.
c.
d.
Three
Four
Five
Six
Answer:
Revenue
30.53%
24.43%
18.32%
9.16%
12.98%
4.58%
100.00%
A
B
C
D
E
F
Profit
30.17%
24.14%
20.69%
9.48%
11.64%
3.88%
100.00%
Assets
29.63%
25.93%
18.52%
11.11%
10.37%
4.44%
100.00%
A, B, C, D and E reportable because their revenue or operating profit or asset is at least
10% of the combined amount.
Problem 13-3
Aurora Company provided the following profit (loss) relating to operating segments:
V
W
X
Y
Z
3,400,000
1,000,000
(2,000,000)
400,000
( 200,000)
What are the reportable segments based on profit or loss?
a.
b.
c.
d.
V, W, X and Y
V, W and X
V and W
V, W, X, Y and Z
Answer:
V
W
X
Y
Z
3,400,000
1,000,000
2,000,000
400,000
4,800,000
200,000
2,200,000
The total profit figure is the basis for identifying the reportable segments because it is
higher than the total loss figure. Accordingly, those segments with profit or loss of at
least 10% of P4,800,000 or P480,000 are reportable. Thus V, W and X are reportable
Problem 13-4
Macbeth Company, an entity listed on a recognized stock exchange, reports operating
results from a North American division to the chief operating decision maker.
The segment information for the current year is as follows:
Revenue
Profit
Assets
Number of employees
3,800,000
1,200,000
1,600,000
2,500
The entity’s result for all of the segments in total are:
Revenue
Profit
Assets
Number of employees
40,000,000
10,000,000
20,000,000
25,000
Which piece of information determines that the North American division is a reportable
segment?
a.
b.
c.
d.
Revenue
Profit
Assets
Number of employees
Answer:
1,200,000/10,000,000
12%
Problem 13-5
Aris Company provided the following information in relation to operating for the current
year:
Sales to unaffiliated customers
Intersegment sales of products similar to those sold
to unaffiliated customers
Interest earned on loans to other industry segments
20,000,000
5,000,000
1,000,000
The entity and all of its division are engaged solely in manufacturing operations.
Under the revenue test, what is the minimum revenue of a reportable segment?
a.
b.
c.
d.
2,500,000
2,600,000
2,100,000
2,000,000
Answer:
Sales to unaffiliated customers
Intersegment sales
Interest earned on loans
Total segment revenue
Revenue criterion (10% x 26,000,000)
20,000,000
5,000,000
1,000,000
26,000,000
2,600,000
Problem 13-6
Grum Company is subject to the requirements of segments reporting. In the income
statement for the current year, the intersegment sales of P10,000,000, expenses of
P47,000,000 and net income of P3,000,000. Expenses included payroll costs of
P15,000,000.
The combined total assets of all operating segments at year-end amounted to
P45,000,000.
1. What is the minimum amount of sales to a major customer?
a.
b.
c.
d.
5,000,000
4,000,000
6,000,000
4,500,000
Answer:
10% x 45,000,000
4,500,000
2. What is the minimum amount of external revenue to be disclosed by reportable
segments?
a. 22,500,000
b. 30,000,000
c. 33,750,000
d. 37,500,000
Answer:
75% x 45,000,000
33,750,000
Problem 13-7
Graf Company discloses supplemental operating segment information. The following
information is available for the current year:
Segment
X
Y
Z
Sales
5,000,000
4,000,000
3,000,000
Traceable expenses
3,000,000
2,500,000
1,500,000
Additional expenses
Indirect segment expenses
General corporate expenses
Interest expense
Income tax expense
1,800,000
1,200,000
600,000
400,000
The interest expense and income tax expense are regularly reviewed by the chief
operating decision maker as a measure of profit or loss.
Appropriate common expenses are allocated to segments based on the ratio of a
segment’s sales to total sales.
What is Segment Z’s operating profit?
a.
b.
c.
d.
900,000
950,000
800,000
500,000
Answer:
Sales
3,000,000
Traceable expenses
(1,500,000)
Indirect expenses (25% x 1,800,000)
( 450,000)
General Corporate expenses (25% x 1,200,000) ( 300,000)
Interest expense (25% x 600,000)
( 150,000)
Income tax expense (25% x 400,000)
( 100,000)
500,000
Problem 13-8
Clay Company has three lines of business, each of which was determined to be
reportable segment. Sales aggregated P7,500,000 in the current year, of which
Segment One contributed 40%.
Traceable costs were P1,750,000 for Segment One out of a total of P5,000,000 for the
entity as a whole.
The entity allocates common costs of P1,500,000 based on the ratio of a segment’s
income before common costs to the total income before common costs.
What amount should be reported as operating profit for Segment One?
a. 1,250,000
b. 1,000,000
c.
650,000
d. 500,000
Answer:
Segment 1
Sales
3,000,000
Traceable costs
(1,750,000)
Profit before common cost
1,250,000
Common cost (1,250,000/2,500,000 x1,500,000) ( 750,000)
Segment profit
500,000
Total revenue
7,500,000
(5,000,000)
2,500,000
(1,500,000)
1,000,000
Problem 13-9
Hyde Company has three reportable segments. Common costs are appropriately
allocated on the basis of sales.
In the current year, Segment A had sales of P3,000,000, which was 25% of Hyde’s total
sales, and had traceable costs of P1,900,000.
In the current year, the entity incurred segment costs of P500,000 that were not directly
traceable to any of the divisions.
Segment A incurred interest expense of P300,000 in the current year. Interest expense
is included in the measure of profit or loss.
What amount should be reported as Segment A’s profit for the current year?
a.
b.
c.
d.
875,000
900,000
975,000
675,000
Answer:
Sales – Segment A
Expenses:
Traceable cost
Allocated indirect cost (25% x 500,000)
Interest expense
Segment profit
3,000,000
1,900,000
125,000
300,000
2,325,000
675,000
Problem 13-10
Eagle Company operates in several different industries. Total sales for the entity totaled
P14,000,000, and total common costs amounted to P6,500,000 for the current year.
For internal reporting purposes, the entity allocates common costs based on the ratio of
a segment’s sales to total sales.
Segment
1
2
3
4
5
Contribution to total sales
25%
12%
31%
23%
9%
Costs specific to the segment
1,100,000
1,000,000
1,300,000
880,000
400,000
What is the operating profit of Segment 1?
a. 3,500,000
b. 1,875,000
c. 2,400,000
d. 775,000
Answer:
Sales – Segment 1 (25% x 14,000,000)
Specific cost – Segment 1
Allocated common costs (25% x 6,500,000)
Operating profit
3,500,000
(1,100,000)
(1,625,000)
775,000
Problem 13-11
Colt Company has four manufacturing divisions, each of which has been determined to
be a reportable segment. Common costs are appropriately allocated on the basis of
each division’s sales in relation to Colt’s aggregate sales. Colt’s Delta division
accounted for 40% of Colt’s total sales in the current year.
For the current year, Delta division had sales of P8,000,000 and traceable costs of
P4,800,000. In addition, the Delta division incurred interest expense of P640,000. In the
current year, Colt incurred costs of P800,000 that were not directly traceable to any of
the divisions.
It is an entity policy that interest expense is included in the measure of profit or loss that
is reviewed by the chief operating decision maker.
What amount should be disclosed as Delta’s profit for the current year?
a.
b.
c.
d.
3,200,000
3,000,000
2,880,000
2,240,000
Answer:
Sales – Delta’s
Traceable costs
Interest expense
Incurred cost (40% x 800,000)
Profit
8,000,000
(4,800,000)
( 640,000)
( 320,000)
2,240,000
Problem 13-12
Taylor Company assesses performance and makes operating decisions using the
following information for the reportable segments:
Total revenue
Total profit or loss
9,000,000
1,500,000
The total profit and loss included intersegment profit of P300,000. In addition, the entity
had P100,000 of common costs for the reportable segments that are not allocated in
reports provided to the chief operating decision maker.
For purposes of segment reporting, what amount should be reported as segment profit?
a.
b.
c.
d.
1,400,000
1,200,000
1,800,000
1,500,000
Answer:
Total profit or loss
Common cost
Segment profit
1,500,000
( 100,000)
1,400,000
Problem 13-13
Diversity Company had total assets of P65,000,000 at year-end and provided the
following condensed income statement for the current year:
Sales
Expenses
Income before income tax
Income tax expense
Net income
45,000,000
(33,000,000)
12,000,000
( 3,800,000)
8,200,000
The entity has two reportable segments and has developed the following related
information:
Sales
Segment expenses
Segment assets
Segment A
Segment B
Others
25,000,000
18,000,000
35,000,000
15,000,000
9,000,000
18,000,000
5,000,000
4,000,000
7,000,000
The total assets of P65,000,000 include general corporate assets of P5,000,000.
The total segment expenses of P33,000,000 include general corporate expenses of
P2,000,000.
The chief operating decision maker does not allocate income tax as a measure of profit
or loss.
Required:
1. Prepare the necessary disclosures for Diversity Company in relation to operating
segments.
2. Prepare the reconciliations between segment information and amount shown in the
entity’s financial statements.
Answer:
Disclosure of profit or loss and assets
Sales
Profit or loss
Total assets
Segment A
Segment B
Others
Total
25,000,000
7,000,000
35,000,000
15,000,000
6,000,000
18,000,000
5,000,000
1,000,000
7,000,000
45,000,000
14,000,000
60,000,000
Reconciliation
Revenue
Revenue of reportable segments
Revenue of nonreportable segments
Entity revenue shown in income statement
40,000,000
5,000,000
45,000,000
Profit and loss
Profit or loss of reportable segments
Profit or loss of nonreportable segments
Corporate expenses
Unallocated income tax expense
Entity net income shown in income statement
13,000,000
1,000,000
( 2,000,000)
( 3,800,000)
8,200,000
Total assets
Total assets of reportable segments
Total assets of nonreportable segments
General corporate assets
Entity total assets shown in statement of financial position
53,000,000
7,000,000
5,000,000
65,000,000
Problem 13-14
Congo Company does business in several different industries. The condensed income
statement for the entire entity for the current year is as follows:
Sales
Costs of goods sold
Gross income
Expenses
Depreciation
Income tax expense
Net income
60,000,000
(28,000,000)
32,000,000
(14,000,000)
( 4,000,000)
( 4,000,000)
10,000,000
The entity has two major reportable segments, X and Y. an analysis reveals that
P1,000,000 of the total depreciation expense and P2,000,000 of the expenses are
related to general corporate activities.
The chief operating decision maker allocates income tax expense to reportable
segments as a measure of profit or loss.
The expenses and sales are directly allocable to segment activities according to the
following percentages:
Segment X
Sales
Costs of goods sold
Expenses
Depreciation
Income tax expense
40%
35
40
40
50
Segment Y
45%
50
40
45
40
Others
15%
15
20
15
10
Required:
1. Prepare a schedule that reports the segment profit or loss.
2. Prepare the disclosures required for operating segments.
3. Prepare the reconciliations between segment information and amounts shown in the
entity’s financial statements.
Answer:
Segment X
Sales
24,000
Cost of goods sold ( 9,800)
Gross income
14,200
Segment expenses ( 4,800)
Depreciation
( 1,200)
Income tax expense ( 2,000)
Segment profit or loss 6,200
Segment Y
27,000
(14,000)
13,000
( 4,800)
( 1,350)
( 1,600)
5,250
Others
9,000
(4,200)
4,800
(2,400)
( 450)
( 400)
1,550
Total
60,000
(28,000)
32,000
(12,000)
( 3,000)
( 4,000)
13,000
Segment Y
27,000
5,250
1,350
Others
9,000
1,550
450
Total
60,000
13,000
3,000
Disclosure of segment profit or loss
Sales
Profit or loss
Depreciation
Segment X
24,000
6,200
1,200
Reconciliation
Revenue
Revenue of reportable segments
Revenue of nonreportable segments
Entity revenue shown in income statement
51,000,000
9,000,000
60,000,000
Profit and loss
Profit or loss of reportable segments
Profit or loss of nonreportable segments
Unallocated depreciation
General corporate expenses
Entity net income shown in income statement
11,450,000
1,550,000
( 1,000,000)
( 2,000,000)
10,000,000
Problem 13-15
Easy Company provided the following statement of financial position at year-end and
income statement for the current year:
Current assets
Property, plant and equipment
Goodwill
Investment in associate
130,000
500,000
100,000
70,000
Total assets
800,000
Current liabilities
Noncurrent liabilities
Share capital
Retained earnings
90,000
60,000
400,000
250,000
Total liabilities and equity
800,000
Revenue
Cost of goods sold
Gross profit
Other income
Distribution cost
Administrative expenses
Other expenses
Finance cost
Share in profit of associate
1,800,000
(1,200,000)
(
(
(
(
600,000
60,000
200,000)
100,000)
50,000)
60,000)
10,000
Income before tax
Income tax expense
(
Net income

170,000
The entity is organized for management purposes into three major operating
segments, namely furniture, stationery and computer products. There are other
smaller operating segments.
Furniture
Stationery
Computer products
Other segments



260,000
90,000)
External sales
Intersegment sales
800,000
500,000
400,000
100,000
200,000
150,000
50,000
The costs of goods sold, distribution cost, administrative expenses and finance cost
can be allocated as 50% to furniture, 25% to stationery, 20% to computer products,
and 5% to other segments.
The cost of sales related to intersegment sales amounted to P24,000,000 to be
allocated as 50% to furniture, 40% to stationery, and 10% to computer products
The segment assets and liabilities are as follows:
Furniture
Stationery
Computer products
others
Current
Asset
Property,
Plant and
Equipment
Goodwill
80,000
40,000
5,000
2,000
300,000
60,000
100,000
30,000
85,000
10,000
3,000
-
Total asset
440,000
170,000
100,000
5,000
45,000
30,000
8,000
1,000
30,000
20,000
7,000
2,000
Total liabilities 75,000
50,000
15,000
3,000
Current
Liabilities
Noncurrent
Liabilities
The remaining assets and liabilities are general corporate assets and liabilities are
general corporate assets and liabilities identified with the entity as a whole.


The other income and other expenses are not allocated to the operating segments
as a measure of profit or loss.
The chief operating decision maker does not allocate income tax expense to
reportable segments as a measure of profit or loss.
Required:
1. Determine the profit or loss for all the operating segments.
2. Prepare the disclosure required for operating segments.
3. Prepare the necessary reconciliations between the segment information and
amounts shown in the entity’s financial statements.
Answer:
Segment profit or loss
External
sales
Intersegment
sales
Total revenue
Cost of sales
– external
Cost of sales
– internal
Gross profit
Distribution
cost
Administrativ
e expense
Finance cost
Segment
profit or loss
Furniture
Stationery
Computer
Others
Total
800,000
500,000
400,000
100,000
1,800,000
200,000
150,000
50,000
-
400,000
1,000,000
(600,000)
650,000
(300,000)
450,000
(240,000)
100,000
(60,000)
2,200,000
(1,200,000)
(120,000)
(96,000)
(24,000)
-
(240,000)
280,000
(100,000)
254,000
(50,000)
186,000
(40,000)
40,000
(10,000)
760,000
(200,000)
(50,000)
(25,000)
(20,000)
(5,000)
(100,000)
(30,000)
100,000
(15,000)
164,000
(12,000)
114,000
(3,000)
22,000
(60,000)
400,000
Furniture
Stationery
Computer
Others
Total
800,000
500,000
400,000
100,000
1,800,000
200,000
150,000
50,000
-
400,000
100,000
164,000
114,000
22,000
400,000
Minimum disclosures
External
sales
Intersegmen
t sales
Profit or loss
Finance cost
Total assets
Total
liabilities
30,000
440,000
75,000
15,000
170,000
50,000
12,000
100,000
15,000
3,000
5,000
3,000
60,000
715,000
143,000
Reconciliation
Revenue
Sales of reportable segments
Sales of nonreportable segments
Elimination of intersegment sales
Entity sale in income statement
2,100,000
100,000
( 400,000)
1,800,000
Profit and loss
Profit or loss of reportable segments
Profit or loss of nonreportable segments
Elimination of intersegment profit
Share in profit of associate
Unallocated items:
Other income
Other expenses
Income tax expense
Entity net income in income statement
378,000
22,000
(160,000)
10,000
Intersegment sales
Cost of sales – intersegment sales
Intersegment gross profit
400,000
(240,000)
160,000
60,000
(50,000)
(90,000)
170,000
Total assets
Total assets of reportable segments
Total assets of nonreportable segments
Investment in associate
General corporate assets
Entity total assets
710,000
5,000
70,000
15,000
800,000
Total liabilities
Total liabilities of reportable segments
Total liabilities of nonreportable segments
General corporate liabilities
Entity total liabilities
140,000
3,000
7,000
150,000
Problem 13-16
Revlon Company provided the following data for the current year.
Segments
1
2
3
4
5
6
7
Others



Revenue
Profit (loss)
620,000
100,000
340,000
190,000
180,000
70,000
120,000
380,000
200,000
20,000
70,000
( 30,000)
( 25,000)
10,000
( 20,000)
( 25,000)
Assets
400,000
80,000
300,000
140,000
180,000
120,000
140,000
140,000
The “others category includes five operating segments, none of which has revenue
or assets greater than P80,000 and none with an operating profit.
Operating Segments 1 and 2 produce very similar products and use very similar
production processes, but serve different customer types and use quite different
product distribution system. These differences are due in part to the fact that
Segment 2 operates in a regulated environment while Segment 1 does not.
Operating Segments 6 and 7 have similar products, production processes, product
distribution systems, but are organized as separate division since they serve
substantially different types of customers. Neither Segments 6 and 7 operate in a
regulated environment.
Required:
1. Determine the reportable segments without regard to aggregation criteria.
2. If the 75% overall size test for reportable segments is not yet met, identify additional
reportable segments.
3. What are the reportable segments after considering all factors?
Answer:
Segments
1
2
3
4
5
6
7
Others
Revenue
Profit (loss)
620,000
100,000
340,000
190,000
180,000
70,000
120,000
380,000
200,000
20,000
70,000
( 30,000)
( 25,000)
10,000
( 20,000)
( 25,000)
Assets
400,000
80,000
300,000
140,000
180,000
120,000
140,000
140,000
Total
2,000,000
200,000
1,500,000
1. The information above shows that any operating segment with revenue equal to
or greater than P200,000 is a reportable segment (segments 1 and 3). Any
segment with identifiable assets greater than P150,000 is a reportable segments
1, 3, and 5). The total profit for all segments with profit totals P300,000. As a
result, any segment with an operating profit or loss equal to or greater than an
absolute amount of P30,000 is a reportable segment (segments 1, 3 and 4).
Thus, Segments 1, 3, 4 and 5 are reportable segments.
2. The revenue of the reportable segment
Segment 1
3
4
5
Total revenue
620,000
340,000
190,000
180,000
1,330,000
Percentage (1,330,000 / 2,000,000)
If the total external revenue attributable to reportable segments constitutes less
than 75% of the total entity revenue, additional segment shall be identified even if
they do not meet the 10%, threshold segments that are below the 10% threshold
can be aggregated as one segment if they share a majority of the five factors in
identifying a business segment, namely:
a.
b.
c.
d.
e.
Nature of product
Nature of production process
Class of customer
Method of distributing product
Regulated environment
Since segments 6 and 7 are similar in four of the five criteria, they can be
aggregated as one reportable segment.
Revenue
Profit (loss)
Segment assets
Segment 6 Segment &
70,000
120,000
10,000
( 20,000)
120,000
140,000
Total
190,000
( 10,000)
260,000
With segments 6 and 7 considered as one reportable segment, the total segment
revenue increases to P1,520,000 or 76% of the total. The 75% requirement has
been met.
Revenue of reportable segments before aggregation
Revenue of additional reportable segments
Total
1,330,000
190,000
1,520,000
Percentage (1,520,000 / 2,000,000)
76%
3. In conclusion, Segments 1, 3, 4, 5, and Segments 6 and 7 (combined) shall be
considered reportable segments.
Problem 13-17
Universal Company has two different product lines and makes significant sales both in
the Philippines and Japan.
The entity has compiled the following information
Product A
Philippines
Japan
Revenue
1,000,000
Segment profit or loss 250,000
Depreciation
150,000
Property, plant and
Equipment
500,000
Segment assets
1,200,000
Segment liabilities
700,000
Capital expenditures
200,000
Product B
Philippines
Japan
1,500,000
400,000
200,000
4,000,000
500,000
800,000
2,000,000
200,000
500,000
600,000
1,400,000
600,000
400,000
2,500,000
6,000,000
4,000,000
1,000,000
1,500,000
4,000,000
2,000,000
300,000
Required:
1. Universal Company has structured its operations internally into two division based
on two products, A and B
Prepare the disclosures required in relation to operating segments.
2. Prepare the entity-wide disclosure about geographical areas to conform with the
requirement of segment reporting.
Answer:
1. Minimum disclosures under PFRS:
Revenue
Segment profit or loss
Depreciation
Total assets
Total liabilities
Capital expenditures
Product A
2,500,000
650,000
350,000
2,600,000
1,300,000
600,000
Product B
6,000,000
700,000
1,300,000
10,000,000
6,000,000
1,300,000
Total
8,500,000
1,350,000
1,650,000
12,600,000
7,300,000
1,900,000
2. Entity-wide disclosure about geographical areas:
Revenue
Noncurrent assets - PPE
Philippines
5,000,000
3,000,000
Japan
3,500,000
2,100,000
Total
8,500,000
5,100,000
Problem 13-18
1. If a financial report contains both the consolidated financial statements of a parent
and the parent’s separate financial statements, segment information is required in
a.
b.
c.
d.
The separate financial statements
The consolidated financial statements
Both the separate and consolidated financial statements.
Neither the separate nor the consolidated financial statements
2. When an operating segment is reportable?
a. The segment external and internal revenue is 10% or more of the combined
external and internal revenue of all operating segments
b. The segment profit or loss is 10% or more of the greater between the
combined profit of all profitable operating segments and the combined loss
of all unprofitable operating segments
c. The assets of the segment are 10% or more of the total assets of all operating
segments
d. Under all of these circumstances.
3. In financial reporting for operating segments, and entity shall disclose all of the
following, except
a. Types of products and services from which each reportable segment derives
revenue
b. The title of the chief operating decision maker of each reportable segment.
c. Factors used to identify the reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.
4. Which statement is not true with respect to a chief operating decision maker?
a. The term chief operating decision maker identifies a function and not necessarily
a manager with specific title.
b. In some cases, the chief operating decision maker could be the chief operating
officer.
c. The board of directors acting collectively could qualify as the chief operating
decision maker.
d. The chief internal auditor would generally qualify as chief operating
decision maker.
5. What is the quantitative threshold for the revenue that must be disclosed by
reportable operating segments?
a. The total external and internal revenue of all reportable segments is 75% or more
of the entity external revenue.
b. The total external revenue of all reportable segments is 75% or more of entity
external and internal revenue.
c. The total external revenue of all reportable segments is 75% or more of the
entity external revenue.
d. The total internal revenue of all reportable segments is 75% or more of the entity
internal revenue.
6. Two or more operating segments may be aggregated into a single operating
segment if all of the following conditions are satisfied, except
a. The segments have similar characteristics.
b. The segments share a majority of the nature of product or service, nature of
production process, class of customer, method of product distribution and
regulatory environment.
c. The aggregation is consistent with the core principles of segment reporting.
d. The segments have dissimilar characteristics.
7. Operating segments that do not meet any of the quantitative thresholds
a. Cannot be considered reportable.
b. May be considered reportable and separately disclosed if management
believes that information about the segment would be useful to the users
of the financial statements.
c. May be considered reportable and separately disclosed if the information is for
internal use.
d. May be considered reportable and separately disclosed if this is the practice
within the economic environment in which the entity operates
8. Which of the following is a required enterprise-wide disclosure regarding external
customers?
a. The entity of any external customer considered to be major by management
b. The identity of any external customer providing 10% or more of a particular
operating segment revenue
c. Information on major customers is not required in segment reporting
d. The fact that transactions with a particular external customer constitute at
least 10% of the total entity revenue
9. IFRS 8 requires that an entity should provide reconciliations of segment information.
Which of following is not a required reconciliation?
a. The total of the reportable segments’ revenue to the entity’s revenue
b. The total of the reportable segments’ profit or loss to the entity’s profit or loss
before tax expense and discontinued operating
c. The total number of major customers of all segments to the total number of
major customers of the entity
d. The total of the reportable segments’ assets to the entity’s assets
10. An operating segment is considered reportable when any of the following conditions
is met, except
a. Segment revenue is 10% or more of the combined revenue of all of the entity’s
segments.
b. Segment assets are 10% or more of the combined assets of all segments.
c. Segment liabilities are 10% or more of the combined liabilities of all
segments.
d. Segment’s operating profit or operating loss is 10% or more of the combined
operating profit of all segments that did not incur an operating loss.
Chapter 14
Cash and Accrual basis
Problem 14-1
Zeta Company reported sales revenue of P4,600,000 in the income statement for the
year ended December 31, 2019
The entity wrote off uncollectible accounts totaling P50,000 during the current year.
Accounts receivable
Allowance for uncollectible accounts
Advances from customers
2018
2019
1,000,000
60,000
200,000
1,300,000
110,000
300,000
Under cash basis, what amount should be reported as sales for the current year?
a.
b.
c.
d.
4,400,000
4,350,000
4,300,000
4,250,000
Answer:
Accounts receivable – 2018 (1,000,000 – 60,000)
Advances from customers – 2019
Sales
Total
Less:account receivable – 2019(1,300,000 – 110,000)1,190,000
Advances from customers – 2018
200,000
Wrote off
50,000
Cash basis sales revenue
940,000
300,000
4,600,000
5,840,000
1,440,000
4,400,000
Problem 14-2
During 2019, Kew Company, a service organizations, had P200,000 in cash sales and
P3,000,000 in credit sales.
The accounts receivable balances were P400,000 and P485,000 on December 31,
2018 and 2019 respectively.
If the entity desires to prepare a cash basis income statement, what amount should be
reported as sales for the current year?
a.
b.
c.
d.
3,285,000
3,200,000
3,115,000
2,915,000
Answer:
Account receivable – December 31, 2018
Credit sales
Total
Less: account receivable – December 31, 2019
Collections
Cash sales
Total sales – cash basis
400,000
3,000,000
3,400,000
485,000
2,915,000
200,000
3,115,000
Problem 14-3
Spee Company provided the following information for the current year:
Cash sales
Gross
Returns and allowances
Credit sales
Gross
Discounts
2,000,000
100,000
3,000,000
150,000
On January 1, customers owed P1,000,000. On December 31, customers owed
P750,000. The entity used the direct write off method for bad debts. No bad debts were
recorded in the current year.
Under cash basis, what amount of revenue should be reported for the current year?
a.
b.
c.
d.
5,000,000
4,750,000
4,250,000
1,900,000
Answer:
Accounts receivable – January 1
Credit sales
Total
Less: accounts receivable – December 31
Sales discount
Collections
Cash sales – net (2,000,000 – 100,000)
Total sales – cash basis
1,000,000
3,000,000
4,000,000
750,000
150,000
900,000
3,100,000
1,900,000
5,000,000
Problem 14-4
Jacqueline Company began the current year with accounts receivable of P1,000,000
and allowance for doubtful accounts of P80,000. During the current year, the following
events occurred:
Accounts written off
Cash sales
Sales on account
Doubtful accounts expense recognized
120,000
500,000
3,000,000
200,000
At the end of the current year, the entity showed a balance in accounts receivable of
P1,680,000.
Under cash basis, what amount should be reported as sales?
a.
b.
c.
d.
2,700,000
2,200,000
3,500,000
3,320,000
Answer:
Accounts receivable – January 1
Sales on account
Total
Less: Accounts receivable – December 31
Accounts written off
Collections
Cash sales
Total sales – cash basis
1,000,000
3,000,000
4,000,000
1,680,000
120,000
1,800,000
2,200,000
500,000
2,700,000
Problem 14-5
Easter Company reported that all insurance premiums paid are debited to prepaid
insurance. For interim reporting, the entity made monthly charges to insurance expense
with an offset to prepaid insurance. The entity provided the following information for the
current year:
Prepaid insurance on January 1
Charges to insurance expense during the year
Including year-end adjustment of P25,000
Prepaid insurance on December 31
150,000
625,000
175,000
What was the amount of insurance premium paid in the current year?
a.
b.
c.
d.
625,000
475,000
600,000
650,000
Answer:
Insurance expense – adjusted
Prepaid insurance – January
Prepaid insurance – December 31
Insurance premium paid
625,000
(150,000)
175,000
625,000
Problem 14-6
Seaside Company provided the following data for the current year:
Operating expenses:
Depreciation
Insurance
Salaries
1,000,000
700,000
1,500,000
Total operating expenses
3,200,000
December 31
Prepaid insurance
Accrued salaries payable
200,000
100,000
January 1
150,000
120,000
What amount was paid for operating expenses?
a.
b.
c.
d.
3,270,000
2,270,000
2,130,000
2,230,000
Answer:
Operating expenses
Depreciation
Prepaid insurance – December 31
Prepaid insurance – January 1
Accrued salaries payable – December 31
Accrued salaries payable – January 1
Cash paid for operating expenses
3,200,000
(1,000,000)
200,000
( 150,000)
( 100,000)
120,000
2,270,000
Problem 14-7
On February 1, 2019, Tory began a service proprietorship with an initial cash
investment of P200,000. The proprietorship provided P500,000 of services on February
and received full payment in March.
The proprietorship incurred expenses of P300,000 in February which were paid in April.
During March, Tory drew P100,000 against the capital account
In the proprietorship’s statement of financial position on March 31, 2019 prepared under
cash basis, what amount should be reported as capital?
a.
b.
c.
d.
100,000
300,000
600,000
700,000
Answer:
Capital – February 1
Cash basis income for February and March
Total
Less: withdrawals during March
Capital – March 31
200,000
500,000
700,000
100,000
600,000
Problem 14-8
Reid Company, which began operations on January 1, 2018, has elected to use cash
basis accounting for the financial statements.
The entity reported sales of P1,750,000 and P800,000 in the tax returns for the years
ended December 31, 2019 and 2018, respectively.
The entity reported accounts receivable of P300,000 and P500,000 in the statement of
financial position on December 31, 2019 and 2018 respectively.
What amount should be reported as sales in the income statement for the year ended
December 31, 2019?
a.
b.
c.
d.
1,450,000
1,550,000
1,950,000
2,050,000
Answer:
Accounts receivable – December 31, 2019
Add: Sales in 2019 under cash basis
Total
Less: account receivable – December 31, 2019
Sales – accrual basis
300,000
1,780,000
2,050,000
500,000
1,550,000
Problem 14-9
Hard Company maintained accounting records on the cash basis but restated the
financial statements to the accrual basis of accounting. The entity had P6,000,000 in
cash basis income for 2019.
The entity provided the following information at year-end:
Accounts receivable
Accounts payable
2019
2018
4,000,000
1,500,000
2,000,000
3,000,000
Under accrual basis, what amount of income should be reported in the 2019 income
statement?
a.
b.
c.
d.
2,500,000
5,500,000
6,500,000
9,500,000
Answer:
Cash basis income
Add: Accounts receivable – 2019
Accounts payable – 2018
Total
Less: Accounts receivable – 2018
Accounts payable – 2019
Accrual basis income
6,000,000
4,000,000
3,000,000
2,000,000
1,500,000
7,000,000
13,000,000
3,500,000
9,500,000
Problem 14-10
Mall Company reported the following balances at the end of each year:
Inventory
Accounts payable
2019
2018
2,600,000
750,000
2,900,000
500,000
The entity paid suppliers P4,900,000 during the year ended December 31, 2019.
What amount should be reported for cost of goods sold in 2019?
a.
b.
c.
d.
5,450,000
4,950,000
4,850,000
4,350,000
Answer:
Accounts payable – December 31, 2019
Payment to suppliers
Total
Less: Accounts payable – December 31, 2018
Purchases
750,000
4,900,000
5,650,000
500,000
5,150,000
Inventory – December 31, 2018
2,900,000
Add: Purchases
Goods available for sale
Less: inventory – December 31, 2019
Cost of goods sold
5,150,000
8,050,000
2,600,000
5,450,000
Problem 14-11
Calapan Company provided the following data at year-end:
Accounts receivable
Accounts payable
2018
2019
1,200,000
1,500,000
1,350,000
1,850,000
In 2019, accounts written off amounted to P100,000. Sales returns amounted to
P250,000, of which an amount of P50,000 was paid to customers.
Cash receipts from customers after P500,000 discounts totaled P8,000,000.
Purchases returns amounted to P400,000, of which an amount of P100,000 was
received from suppliers.
Cash payments to trade creditors amounted to P5,000,000 after discounts of P200,000.
1. Under accrual, what is the amount of gross sales?
a.
b.
c.
d.
9,600,000
8,950,000
8,250,000
8,850,000
Answer:
Accounts receivable – 2019
Accounts written off
Sales returns
Cash receipts from customers
Sales discounts
Total
Accounts receivable – 2018
Erroneous debit to accounts receivable
Gross sales
2. Under accrual, what is the amount of net sales?
a. 8,250,000
b. 8,200,000
1,350,000
100,000
250,000
8,000,000
500,000
10,200,000
(1,200,000)
( 50,000)
8,950,000
c. 8,100,000
d. 8,150,000
Answer:
Gross sales
Less: sales returns
Cash receipts discount
Erroneous debit to account receivable
Net sales
8,950,000
250,000
500,000
50,000
800,000
8,150,000
3. Under accrual, what is the amount of gross purchased?
a.
b.
c.
d.
5,850,000
5,950,000
5,750,000
5,650,000
Answer:
Accounts payable – 2019
Purchase returns
Payment to trade creditors
Purchase discounts
Total
Accounts payable – 2018
Gross purchases
1,850,000
400,000
5,000,000
100,000
7,350,000
(1,500,000)
5,850,000
4. Under accrual, what is the amount of net purchased?
a.
b.
c.
d.
5,250,000
5,200,000
5,650,000
5,450,000
Answer:
Gross purchases
Less: purchase returns
Net purchased
5,850,000
400,000
5,450,000
Problem 14-12
Emmyrelle Company provided the following selected accounts, cash receipts and
disbursements for the current year:
December 31
January 1
250,000
150,000
120,000
200,000
30,000
300,000
100,000
160,000
150,000
10,000
Cash sales
Collections of accounts receivable, net of discounts
Of P40,000
Collections of notes receivable
Bank loan – one year, dated December 31
Purchase returns and allowances
500,000
Accounts receivable
Notes receivable
Accounts payable
Notes payable
Prepaid insurance
Cash receipts for current year
1,800,000
80,000
100,000
60,000
Cash disbursements for current year
Cash purchases
Payments on accounts payable, net of discounts
Of P20,000
Payments on notes payable
Insurance
Other expenses
Sales returns and allowances
130,000
1,500,000
400,000
220,000
650,000
50,000
1. Under accrual basis, what is the amount of gross sales for the current year?
a.
b.
c.
d.
2,420,000
2,470,000
1,920,000
1,970,000
Answer:
Accounts receivable- December 31
Notes receivable – December 31
Collections of accounts receivable
Sales discount
Collections of notes receivable
Total
Accounts receivable – January 1
Notes receivable – January 1
Sales on account
Cash sales
Gross sales
250,000
150,000
1,800,000
40,000
80,000
2,320,000
( 300,000)
( 100,000)
1,920,000
500,000
2,420,000
2. Under accrual basis, what is the amount of gross purchase for the current year?
a.
b.
c.
d.
1,960,000
2,020,000
1,830,000
1,890,000
Answer:
Accounts payable – December 31
Note payable – trade
Balance – December 31
Bank loan on December 31
Payment of accounts payable
Purchase discounts
Payments on notes payable
Total
Accounts payable – January 1
Note payable – January 1
Purchase on account
Cash purchases
Gross purchases
120,000
200,000
(100,000)
100,000
1,500,000
20,000
400,000
2,140,000
( 160,000)
( 150,000)
1,830,000
130,000
1,960,000
Problem 14-13
Otis Company acquired rights to a patent under a licensing agreement that required an
advance royalty payment when the agreement was signed. The entity remitted royalties
earned and due under the agreement on October 31 each year.
Additionally, on the same date, the entity paid, in advance, estimated royalties for the
next year. The entity adjusted prepaid royalties at year end. The entity provided the
following information for the current year:
Jan. 1 Prepaid royalties
Oct. 31 Royalty payment charged to royalty expense
Dec.31 Year-end credit adjustment to expense
650,000
1,100,000
250,000
What amount should be reported as prepaid royalties at year-end?
a.
b.
c.
d.
250,000
400,000
850,000
900,000
Answer:
Oct. 31 Royalty payment charged to royalty expense
Dec.31 Year-end credit adjustment to expense
Prepaid royalties
1,100,000
250,000
850,000
Problem 14-14
Thrift Company reported that the unadjusted prepaid expense account on December
31, 2019 comprised the following:



An opening balance of P15,000 for a comprehensive insurance policy. The entity
had paid an annual premium of P30,000 on July 1, 2018.
A P32,000 annual insurance premium payment made July 1, 2019.
A P20,000 advance rental payment for a warehouse that was leased for one year
beginning January 1, 2019.
On December 31, 2019 what amount should be reported as prepaid expenses?
a.
b.
c.
d.
52,000
36,000
20,000
16,000
Answer:
Prepaid insurance (32,000 x 6/12)
Prepaid rent
Prepaid expense
16,000
20,000
36,000
Problem 14-15
Rara Company paid P72,000 to renew an insurance policy for three years on March 1,
2018.
On March 31, 2019, the unadjusted trial balance showed P3,000 for prepaid insurance
and P72,000 for insurance expense.
1. What amount should be reported for prepaid insurance on March 31, 2019?
a.
b.
c.
d.
70,000
71,000
72,000
73,000
Answer:
Prepaid insurance – March 31, 2019 (72,000 x 35/36)
70,000
2. What amount should be reported for insurance expense for the three months ended
March 31, 2019?
a.
b.
c.
d.
5,000
3,200
2,000
1,000
Answer:
Insurance expense per book
Prepaid insurance before adjustment
Total
Less: Prepaid insurance – March 31, 2019
Insurance expense
72,000
3,000
75,000
70,000
5,000
Problem 14-16
On July 1, 2019, Roxy Company obtained fire insurance at an annual premium of
P72,000 payable on July 1 of each year. The first premium payment was made July 1,
2019.
On October 1, 2019, the entity paid P24,000 for real estate taxes to cover the period
ending September 30, 2020.
On December 31, 2019, what amount should be reported as prepaid expenses?
a.
b.
c.
d.
60,000
54,000
48,000
36,000
Answer:
Prepaid insurance (72,000 x 6/12)
Prepaid taxes (24,000 x 9/12)
Total prepaid expenses
36,000
18,000
54,000
Problem 14-17
Clay Company borrowed money under various loan agreements involving notes
discounted and notes requiring interest payments at maturity. During the year ended
December 31, 2019. The entity paid interest totaling P100,000.
The December 31 statement financial position included the following information:
Prepaid interest
Interest payable
2018
2019
23,500
45,000
18,000
53,500
What amount of interest expense should be reported in the income statement for the
current year?
a. 86,000
b. 97,000
c. 103,000
d. 114,000
Answer:
Interest paid
Add: Prepaid interest – 2018
Interest payable – 2019
Total
Less: Prepaid interest – 2019
Interest payable – 2018
Interest expense
100,000
23,500
53,500
177,000
18,000
45,000
63,000
114,000
Problem 14-18
On December 31, 2019, Ashe Company had a P990,000 balance in the advertising
expense account before any year-end adjustments relating to the following:


Radio advertising spots broadcast during December 2019 were billed to the entity on
January 4, 2020. The invoice cost of P50,000 was paid on January 15, 2020.
Included in the P990,000 is P60,000 for newspaper advertising for a January 2020
sales promotional campaign.
What amount should be reported as advertising expense for the year December 31,
2019?
a.
b.
c.
d.
900,000
980,000
1,000,000
1,040,000
Answer:
Balance per book
Add: Radio advertising accrued on December 31
Total
Less: Prepaid newspaper advertising
Advertising expense
990,000
50,000
1,040,000
60,000
980,000
Problem 14-19
Doren Company reported that the compensation expense account had a balance of
P490,000 on December 31, 2019 before any appropriate year-end adjustment relating
to the following:


No salary accrual was made for the week of December 25-31, 2019. Salaries for this
period totaled P18,000 and were paid on January 5, 2020.
Bonus for 2019 was paid on January 31, 2020 in the total amount of P175,000.
What amount should be reported for compensation expense for 2019?
a.
b.
c.
d.
683,000
665,000
508,000
490,000
Answer:
Compensation expense per book
Add: Accrued salaries
Accrued bonus
Total compensation expense
490,000
18,000
175,000
683,000
Problem 14-20
Park Company reported that the professional fees expense account had a balance of
P820,000 on December 31, 2019, before considering year-end adjustments relating to
the following:

Consultants were hired for a special project at a total fee not to exceed P650,000.
The entity has recorded P550,000 of this fee based on billings for work performed in
2019.

The attorney’s letter requested by the auditors dated January 31, 2020 indicated that
legal fees of P60,000 were billed on January 15, 2020 for work performed in
November 2019, and unbilled fees for December 2019 were P70,000.
What amount should be reported for professional fees expense for the year ended
December 31, 2019?
a. 1,050,000
b. 950,000
c.
880,000
d. 820,000
Answer:
Balance per book
Accrued legal fees:
November
December
Total professional fees expense
820,000
60,000
70,000
130,000
950,000
Problem 14-21
Tara Company owns an office building and leases the offices under a variety of rental
agreements involving rent paid in advance monthly or annually.
Not all tenants make timely payments of their rent. During 2019, the entity received
P8,000,000 cash from tenants.
The statement of financial position contained the following data at year-end:
2018
Rental receivable
Unearned rental income
Uncollectible rent written off
960,000
3,200,000
2019
1,240,000
2,400,000
500,000
What amount of rental revenue should be reported for the current year?
a.
b.
c.
d.
9,080,000
9,580,000
8,580,000
7,980,000
Answer:
Cash received from tenants
Rental receivable -2019
8,000,000
1,240,000
Unearned rentals – 2018
Total
Less: Rentals receivable – 2018
Unearned rentals – 2019
Rental revenue for 2019
3,200,000
12,440,000
960,000
2,400,000
3,360,000
9,080,000
Problem 14-22
Carey Company assigns patent rights for which royalties are received. During 2019, the
entity received royalty remittance of P2,500,000.
The following data are available at year-end:
2018
Royalties receivable
Unearned royalties
750,000
450,000
2019
800,000
650,000
What amount should be reported as royalty revenue for the current year?
a.
b.
c.
d.
2,250,000
2,300,000
2,350,000
2,550,000
Answer:
Royalties received
Royalties receivable – 2019
Unearned royalties – 2018
Total
Less: Royalties receivable – 2018
Unearned royalties – 2019
Royalty revenue
2,500,000
800,000
450,000
3,750,000
750,000
650,000
1,400,000
2,350,000
Problem 14-23
Zamboanga Company began operations on January 1, 2018. During the year ended
December 31, 2019, the accounting records have been maintained on a double entry
basis but the cash basis of accounting has been employed.
The trial balance prepared from these records on December 31, 2019 appeared as
follows:
Cash
1,500,000
Sales
Purchases
Expenses
Equipment
Share capital
Land
Building
Mortgage payable
Retained earnings
4,000,000
2,000,000
1,500,000
200,000
2,000,000
800,000
1,500,000
7,500,000
900,000
600,000
7,500,000
The entity decided to convert the accounting records to the accrual basis on December
31, 2019.
Additional information
1. Accounts receivable
December 31, 2018
December 31, 2019
200,000
250,000
2. The sales of 2018 included P40,000 deposited by a customer for merchandise to be
delivered in 2019.
3. Accounts payable
December 31, 2018
December 31, 2019
350,000
280,000
4. Accrued expenses
December 31, 2018
December 31, 2019
70,000
100,000
5. Merchandise inventory
December 31, 2018
December 31, 2019
150,000
210,000
6. The purchases included P100,000 cash advance to a supplier for merchandise to be
delivered in 2020.
7. The equipment was acquired on July 1, 2018. The estimated life is 10 years.
8. The land and building were acquired on January 1, 2018. The life of the building is 5
years.
9. It is estimated that 10% of the outstanding accounts receivable on December 31,
2019 may prove uncollectible.
10. The mortgage was on the land and building and was obtained on September 1, 2019
The interest rate is 12% per annum payable semiannually on September 1 and
March 1. The mortgage will mature after 4 years.
Required:
1. Prepare adjusting entries on December 31, 2019.
2. Prepare an income statement for the year ended December 31, 2019.
3. Prepare a statement of financial position on December 31, 2019.
Answer:
1. Adjusting Entries
1. Sales
200,000
Retained earnings
200,000
2. Accounts receivable
Sales
250,000
3. Retained earnings
Purchases
350,000
Purchases
Accounts payable
4. Retained earnings
Expenses
Expenses
Accrued expenses
5. Merchandise inventory, January 1, 2019
Retained earnings
Merchandise inventory, December 31, 2019
Income summary
6. Advances to supplier
250,000
350,000
280,000
280,000
70,000
70,000
100,000
100,000
150,000
150,000
210,000
210,000
100,000
Purchases
100,000
7. Depreciation – equipment
Retained earnings
Accumulated depreciation – equipment
8. Depreciation – building
Retained earnings
Accumulated depreciation – building
20,000
10,000
30,000
300,000
300,000
600,000
9. Doubtful accounts (10% x 250,000)
Allowance for doubtful accounts
25,000
10. Interest expense (900,000 x 12% x 4/12)
Accrued interest payable
36,000
25,000
36,000
2. income statement for the year ended December 31, 2019
Zamboanga Company
Income statement
Year ended December 31, 2019
Sales
Cost of sales:
Merchandise inventory, January 1
Purchases
Goods available for sale
Less: merchandise inventory, December 31
Gross income
Expenses:
Expenses
Depreciation – equipment
Depreciation – building
Doubtful accounts
Interest expense
Net income
4,090,000
150,000
1,830,000
1,980,000
210,000
1,530,000
20,000
300,000
25,000
36,000
3.
Zamboanga Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash
1,500,000
1,770,000
2,320,000
1,911,000
409,000
Accounts receivable, net allowance
Advances to supplier
Merchandise inventory
225,000
100,000
210,000
Noncurrent assets:
Land
Building
1,500,000
Less: Accumulated depreciation
600,000
Furniture and equipment
200,000
Less: Accumulated depreciation
30,000
Total assets
2,035,000
800,000
900,000
170,000
1,870,000
3,905,000
Liabilities and Equity
Current liabilities:
Accounts payable
Accrued expenses
Accrued interest payable
Noncurrent liability:
Mortgage payable
Equity:
Share capital
Retained earnings (note1)
Total liabilities and equity
Note 1 – retained earnings
Adjusted retained earnings – January 1
Net income
Retained earnings – December 31
280,000
100,000
36,000
416,000
900,000
2,000,000
589,000
2,589,000
3,905,000
180,000
409,000
589,000
Problem 14-24
Evelyn Company recorded transactions on a cash basis but prepared adjustments at
the end of accounting period to conform with accrual basis.
The entity provided the following account balances for the year ended December 31,
2019:
Cash
Accounts receivable
Inventory
Land
Building
Accumulated depreciation
200,000
250,000
150,000
300,000
1,000,000
200,000
Equipment
Accumulated depreciation
Accounts payable
Share capital
Retained earnings
Sales
Purchases
Office expenses
Rent
Insurance
Supplies expense
400,000
40,000
100,000
1,500,000
345,000
2,000,000
1,200,000
255,000
240,000
50,000
140,000
Additional information
1. Inventory on December 31, 2019 amounted to P230,000
2. Accounts receivable
December 31, 2019
December 31, 2018
290,000
250,000
3. It is estimated that P15,000 of the outstanding accounts receivable on December 31,
2019 may prove uncollectible.
4. Depreciation rate
Building
Equipment
5%
10%
5. Accounts payable
December 31, 2019
December 31, 2018
130,000
100,000
6. Accrued rent on December 31, 2018 was unrecorded in the amount of P5,000.
7. Accrued rent on December 31, 2019 amounted to P10,000.
8. Prepaid insurance on December 31, 2018 in the amount of P7,000 was not
recognized.
9. Prepaid insurance on December 31, 2019 amounted to P12,000.
Required:
a. Prepare adjusting entries on December 31, 2019.
b. Prepare an income statement.
c. Prepare a statement of financial position.
Answer:
1. Inventory – December 31, 2019
Income summary
230,000
230,000
2. Accounts receivable
Sales
40,000
3. Doubtful accounts
Allowance for doubtful accounts
15,000
4. Depreciation
Accumulated depreciation – building
Accumulated depreciation – equipment
90,000
5. Purchases
Accounts payable
30,000
40,000
6. Retained earnings
Rent
15,000
50,000
40,000
30,000
5,000
5,000
7. Rent
10,000
Accrued rent payable
8. Insurance
Retained earnings
9. Prepaid insurance
Insurance
10,000
7,000
7,000
12,000
12,000
Evelyn Company
Income statement
Year ended December 31, 2019
Sales
Cost of sales:
Inventory – January 1
Purchases
Goods available for sale
Less: inventory – December 31
2,040,000
150,000
1,230,000
1,380,000
230,000
1,150,000
Gross income
Expenses:
Office expenses
Rent
Insurance
Supplies
Doubtful accounts
Depreciation
Net income
890,000
255,000
245,000
45,000
140,000
15,000
90,000
790,000
100,000
Evelyn Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash
Accounts receivable, net allowance
Inventory
Prepaid insurance
Noncurrent assets:
Land
Building
1,000,000
Less: accumulated depreciation
250,000
Equipment
400,000
Less: Accumulated depreciation
80,000
Total
200,000
275,000
230,000
12,000
717,000
300,000
750,000
320,000
1,370,000
2,087,000
Liabilities and Equity
Current liabilities:
Accounts payable
Accrued rent payable
Equity:
Share capital
Retained earnings (note 1)
Total liabilities and equity
130,000
10,000
1,500,000
447,000
Note 1 – Retained earnings
Retained earnings per book
Unrecorded accrued rent – December 31, 2018
Unrecorded prepaid insurance – December 31, 2018
Corrected beginning balance
Net income for 2019
Retained earnings – December 31, 2019
140,000
1,947,000
2,087,000
345,000
(
5,000)
7,000
347,000
100,000
447,000
Problem 14-25
Civic Company began business operations on January 1, 2019. During the year, the
accounting records are kept on a double entry system but on the cash basis of
accounting. The entity decided to use the accrual basis. On December 31, 2019, the
account balances are:
Cash
Purchases
Expenses
Notes payable
Sales
Share capital
840,000
4,200,000
560,000
200,000
4,400,000
1,000,000
1. Merchandise inventory on December 31, at cost, P500,000.
2. On December 31, accounts receivable amounted to P100,000 and accounts payable
totaled P80,000.
3. Accrued expenses on December 31, P20,000
4. The purchases included merchandise in the amount of P10,000 bought for the
president. The president had not reimbursed the entity.
5. The sales included P25,000 deposit given by a customer for merchandise to be
delivered in 2020.
6. It is estimated that 5% of the outstanding accounts receivable on December 31 may
turn out to be uncollectible.
7. Expenses included the following:
a. P25,000 for office supplies of which P5,000 is unused as of December 31.
b. P100,000 for the purchase of equipment on July 1, 2019. It was estimated that
this property would have an estimated useful life of 10 years without residual
value.
c. P20,000 for a one-year insurance premium on a fire insurance policy dated
October 1, 2019.
8. The notes payable comprised a noninterest- bearing note of P100,000 dated August
1, 2019, due on February 1, 2020 and a one-year note of P100,000, dated
September 1, 2019, bearing an interest of 12% payable of maturity.
Required:
Prepare adjusting entries, an income statement and a statement of financial position.
Answer:
1. Merchandise inventory – December 31
Income summary
500,000
2. Accounts receivable
Sales
100,000
Purchases
Accounts payable
500,000
100,000
80,000
80,000
3. Expenses
Accrued expenses
20,000
4. Receivable from officer
Purchases
10,000
5. Sales
25,000
20,000
10,000
Advances from customer
25,000
6. Doubtful accounts (5% x 100,000)
Allowance for doubtful accounts
5,000
7. Office supplies unused
Expenses
5,000
Equipment
Expenses
5,000
5,000
100,000
100,000
Depreciation (100,000 / 10 x 6/12)
Accumulated depreciation
5,000
Prepaid insurance (20,000 x 9/12)
Expenses
15,000
5,000
8. Interest expense
4,000
Accrued interest payable (100,000x12%x4/12)
15,000
4,000
Civic Company
Income statement
Year ended December 31, 2019
Sales
Cost of sales:
Purchases
Less: Inventory – December 31
Gross income
Expenses:
Expenses
Doubtful accounts
Depreciation
Interest expense
Net income
4,475,000
4,270,000
500,000
460,000
5,000
5,000
4,000
3,770,000
705,000
474,000
231,000
Civic Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash
Accounts receivable (note 1)
Receivable from officer
Inventory
Prepaid expenses (note 2)
Noncurrent asset:
Equipment
Less: Accumulated depreciation
Total assets
840,000
95,000
10,000
500,000
20,000
100,000
5,000
Liabilities and Equity
Current liabilities:
Accounts payable
Note payable
Accrued expenses
Advances from customer
80,000
200,000
20,000
25,000
1,465,000
95,000
1,560,000
Accrued interest payable
Equity:
Share capital
Retained earnings
Total liabilities and equity
Note 1 – Accounts receivable
Accounts receivable
Allowance for doubtful accounts
Net realizable value
4,000
1,000,000
231,000
329,000
1,231,000
1,560,000
100,000
( 5,000)
95,000
Note 2 – Prepaid expenses
Office supplies unused
Prepaid insurance
Total prepaid expenses
5,000
15,000
20,000
Problem 14-26
1. Under accrual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses
are recognized.
b. Precede or coincide with but never follow the period in which revenue and
expenses are recognized.
c. Coincide with or follow but never precede the period in which revenue and
expenses are recognized.
d. Only coincide with the period in which revenue and expenses are recognized.
2. Which statement regarding accrual basis versus cash basis of accounting is true?
a. The cash basis is appropriate for smaller entities.
b. The cash basis is less useful in predicting the timing and amount of future cash
flows of an entity.
c. Application of the cash basis results in an income statement reporting
revenue and expenses.
d. The cash basis requires a complete set of double entry records.
3. Under cash basis of accounting
a.
b.
c.
d.
Revenue is recorded when earned.
Accounts receivable would be recorded.
Depreciation is not recognized.
The matching principle is ignored.
4. Under the cash basis of accounting, revenue is recorded
a.
b.
c.
d.
When earned and realized
When earned and realizable
When earned
When realized
5. Total net income over the life of an entity is
a.
b.
c.
d.
Higher under the cash basis than under the accrual basis
Lower under the cash basis than under the accrual basis
The same under the cash basis as under the accrual basis
Not susceptible to measurement
6. Under International Financial Reporting Standards
a.
b.
c.
d.
The cash basis of accounting is accepted
Events are recorded in the period the events occur.
Net income is lower under the cash basis than accrual basis.
All of the choices are correct.
7. Accrual accounting adheres to which of the following?
a.
b.
c.
d.
Matching principle
Historical cost principle
Matching principle and historical cost principle
Neither matching principle nor historical cost
8. Under accrual accounting, which of the following does not describe a deferral?
a. Deferral of revenue occurs when cash is received and recognized in
financial income.
b. Deferral typically results in the recognition of a liability or prepaid expense.
c. Cash collected in advance of services being rendered.
d. Cash paid up front for a one-year insurance policy.
9. Under accrual basis, a deferral is a transaction that impacts
a.
b.
c.
d.
Cash and the income statement at the same time
The income statement before impacting cash
Cash before impacting the income statement
The statement of financial position before impacting cash
10. Which statement is true about accrual and cash basis?
a. Under accrual, if the earning process is not complete, revenue is nevertheless
recorded.
b. Under cash basis, if cash has been collected, revenue is recorded regardless of
earning process.
c. Under cash basis, revenue is recognized when the receivable is initially
recorded.
d. All of these statements are true.
Chapter 15
Single entry
Problem 15-1
On January 1, 2019, the statement of financial position of Racel Company showed total
assets of P5,000,000, total liabilities of P2,000,000 and contributed capital of
P2,000,000.
During the current year, the entity issued share capital of P500,000 par value at a
premium of P300,000. Dividend of P250,000 was paid on December 31, 2019.
The statement of financial position on December 31, 2019 showed total assets of
P7,500,000 and total liabilities of P3,200,000.
What is the net income for the current year?
a. 1,750,000
b. 1,000,000
c. 750,000
d. 500,000
Answer:
Total assets- January 1
Less: total liabilities
Contributed capital
Retained earnings – January 1
5,000,000
2,000,000
2,000,000
Total assets – December 31
Less: total liabilities
Contributed capital
(2,000,000+500,000+300,000)
Retained earnings – December 31
Add: Dividend paid
Total
Less: Retained earnings – January 1
Net income
4,000,000
1,000,000
7,500,000
3,200,000
2,800,000
6,000,000
1,500,000
250,000
1,750,000
1,000,000
750,000
Problem 15-2
Aubrey Company provided the following date at year-end:
Share capital (P100 par value)
Share premium
Retained earnings
2018
2019
5,000,000
1,000,000
3,500,000
5,750,000
1,500,000
4,500,000
During the current year, the entity declared and paid cash dividend of P1,000,000 and
also declared and issued a share dividend.
There were no other changes in share issued and outstanding during the year.
What is the net income for the current year?
a.
b.
c.
d.
3,250,000
2,000,000
1,000,000
2,750,000
Answer:
Increase in share capital (5,750,000 – 5,000,000)
750,000
Increase in share premium (1,500,000 – 1,000,000)
Stock dividend
500,000
1,250,000
Retained earnings – 2019
Stock dividend
Cash dividend
Total
Retained earnings – 2018
Net income
4,500,000
1,250,000
1,000,000
6,750,000
(3,500,000)
3,250,000
Problem 15-3
On December 31, 2019 Zeus Company showed shareholders’ equity of P4,000,000.
During the current year, the shareholders’ equity was affected by:





An adjustment to retained earnings for overstatement of inventory on December 31,
2018 in the amount of P200,000.
Declared dividend of P400,000 of which P300,000 was paid in 2019.
The share capital was split five for one.
Net income for the year amounted to P700,000.
The share capital of P3,000,000 remained unchanged during the year.
What is the retained earnings balance on January 1, 2019?
a.
b.
c.
d.
700,000
900,000
800,000
500,000
Answer:
Retained earnings – December 31 (4,000,000 – 3,000,000)
Add: Dividend declared
Total
Less: Net income
1,000,000
400,000
1,400,000
700,000
Corrected beginning balance
Overstatement of inventory – 2018
Retained earnings – January 1
700,000
200,000
900,000
Problem 15-4
On December 31, 2019, Melissa Company showed shareholders’ equity of P5,000,000.
The share capital of P3,000,000 remained unchanged during the year. The transactions
which affected the equity were:




An adjustment of retained earnings for 2018 overdepreciation
Gain on sale of treasury shares
Dividend declared of which P400,000 was paid
Net income for the current year
100,000
300,000
600,000
800,000
What is the retained earnings balance on January 1, 2019?
a.
b.
c.
d.
1,400,000
1,700,000
1,200,000
1,600,000
Answer:
Retained earnings – December 31
Add: Dividend declared
Total
Less: Net income
Retained earnings overdepreciation
Retained earnings – January 1
Total shareholders’ equity – December 31
Less: Share capital
Share premium from treasury shares
Retained earnings – December 31
1,700,000
600,000
2,300,000
800,000
100,000
900,000
1,400,000
5,000,000
3,000,000
300,000
3,300,000
1,700,000
Problem 15-5
Vela Company reported the following increases in accounting balance during the
current year:
Assets
Liabilities
Share capital
Share premium
8,900,000
2,700,000
6,000,000
600,000
There were no changes in retained earnings other than for a dividend payment of
P1,300,000.
What was the net income for the current year?
a. 1,700,000
b. 1,300,000
c. 900,000
d. 400,000
Answer:
Increase in assets
Increase in liabilities
Net increase
Add: Dividend payment
Total
Less: Share capital
Share premium
Net income
8,900,000
2,700,000
6,200,000
1,300,000
7,500,000
6,000,000
600,000
6,600,000
900,000
Problem 15-6
Lanao Company showed the following increase (decrease) in ledger account balances
during the current year:
Cash
Accounts receivable
Inventory
Equipment
Note payable – bank
Accounts payable
Share capital
800,000
(400,000)
300,000
950,000
500,000
(600,000)
700,000
Share premium
300,000
There were no transactions affecting retained earnings other than a P1,500,000 cash
dividend and a P250,000 prior period error from understatement of ending inventory.
What was the net income for the current year?
a.
b.
c.
d.
2,000,000
2,500,000
3,250,000
3,000,000
Answer:
Increase in Cash
Decrease in Accounts receivable
Increase in Inventory
Increase in Equipment
Increase in Note payable – bank
Decrease in Accounts payable
Increase in assets
Dividend paid
Total
Increase in share capital
Increase in share premium
Error
Net income
800,000
(400,000)
300,000
950,000
(500,000)
600,000
1,750,000
1,500,000
3,250,000
( 700,000)
( 300,000)
( 250,000)
2,000,000
Problem 15-7
Easy Company reported that the beginning and ending total liabilities were P840,000
and P1,000,000, repectively.
At year-end, owners’ equity was P2,600,000 and total assets were P200,00 larger than
at the beginning of the year.
During the year, the new share capital issued exceeded dividends by P240,000
What was the net income or loss for the year?
a. 280,000 income
b. 280,000 loss
c. 200,000 loss
d. 40,000 income
Answer:
Increase in assets
Increase in liabilities (1,000,000 – 840,000)
Net increase in equity
Share capital issued exceeded dividends
Net loss
200,000
160,000
40,000
(240,000)
(200,000)
Problem 15-8
Camadillo Company reported the following changes in the account balances for the
current year, except for retained earnings:
Increase
(Decrease)
Cash
Accounts receivable, net
Inventory
Investment
Accounts payable
Bonds payable
Share capital
Share premium
800,000
250,000
1,250,000
( 500,000)
( 400,000)
900,000
1,000,000
100,000
There are no entries in the retained earnings account except for net income and a
dividend declaration of P300,000 which was paid in the current year.
What was the net income for the current year?
a. 1,300,000
b. 1,600,000
c. 500,000
d. 200,000
Answer:
Increase in cash
Increase in accounts receivable, net
Increase in inventory
Decrease in Investment
Decrease in Accounts payable
Increase in Bonds payable
Net increase in equity
Add: Dividend declared
Total
Less: Share capital
Share premium
Net income
800,000
250,000
1,250,000
( 500,000)
400,000
( 900,000)
1,300,000
300,000
1,600,000
1,000,000
100,000
1,100,000
500,000
Problem 15-9
Jolo Company reported the following increase (decrease) in the account balances for
the current year:
Cash
Accounts receivable
Inventory
Investments
Equipment
Accounts payable
Bonds payable
1,500,000
3,500,000
3,900,000
(1,000,000)
3,000,000
( 800,000)
2,000,000
During the year, the entity sold for cash 100,000 shares with P20 par for P30 per share.
Dividend of P4,500,000 was paid in cash. The entity borrowed P4,000,000 from the
bank and paid off note of P1,000,000 and interest of P600,000. The entity had no other
loan payable.
Interest of P400,000 was payable at the end of year. Interest payable at the beginning
of year was P100,000. Equipment of P2,000,000 was donated by a shareholder during
the year.
What was the net income for the current year?
a. 7,900,000
b. 8,900,000
c. 5,900,000
d. 6,900,000
Answer:
Increase in Cash
Increase in Accounts receivable
Increase in Inventory
Decrease in Investments
Increase in Equipment
Decrease in Accounts payable
Increase in Bonds payable
Increase in bank loan payable
Increase in accrued interest payable
Net increase in equity
Add: Dividend paid
Total
Less: Increase in share capital (100,000 x 30)
Increase in donated capital
Net income
1,500,000
3,500,000
3,900,000
(1,000,000)
3,000,000
800,000
(2,000,000)
(3,000,000)
( 300,000)
6,400,000
4,500,000
10,900,000
3,000,000
2,000,000
5,000,000
5,900,000
Problem 15-10
Elaine Company disclosed the following changes in account balances for current year:
Cash
Accounts receivable
Merchandise inventory
Accounts payable
Prepaid expenses
Accrued expenses
Unearned rental income
450,000 increase
300,000 decrease
200,000 increase
100,000 increase
20,000 increase
40,000 increase
30,000 decrease
In the current year, the owner transferred financial assets to the business and these
were sold for P500,000 to finance the purchase of merchandise. The owner made
withdrawals during the year of P100,000.
What was the net income or net loss for the current year?
a.
b.
c.
d.
360,000 income
360,000 loss
140,000 income
140,000 loss
Answer:
Increase
Decrease
Cash
Accounts receivable
Merchandise inventory
Accounts payable
Prepaid expenses
Accrued expenses
Unearned rental income
Total
450,000
300,000
200,000
100,000
20,000
40,000
30,000
700,000
440,000
Net increase (700,000 – 440,000)
Add: Withdrawals
Total
Less: Additional investment
Net loss
260,000
100,000
360,000
500,000
140,000
Problem 15-11
At the beginning of current year, Crispin Santos started a retail merchandise business.
During the current year, the business paid trade creditors P2,000,000 in cash and
suffered a net loss of P350,000.
The ledger preclosing balances at year-end included the following:
Accounts receivable
Accounts payable
Capital (total investment in cash)
Expenses (paid in cash)
Merchandise (unadjusted debit balance)
600,000
750,000
2,000,000
100,000
700,000
There were no withdrawals. All sales and purchases were on credit.
The merchandise account is debited for purchase and credited for sales.
1. What is the amount of purchases for the year?
a.
b.
c.
d.
2,000,000
2,750,000
1,250,000
2,050,000
Answer:
Accounts payable
Payments to trade creditors
Total purchases
750,000
2,000,000
2,750,000
2. What is the amount of sales for the year?
a. 2,750,000
b. 2,050,000
c. 2,650,000
d. 700,000
Answer:
Total purchases
Less: Unadjusted debit balance of merchandise
Sales
2,750,000
700,000
2,050,000
3. What is the cash balance at year-end?
a.
b.
c.
d.
1,350,000
2,000,000
1,450,000
3,450,000
Answer:
Cash (investment)
Collection of accounts payable (2,050,000 – 600,000)
Total
Less: Payment of accounts payable
2,000,000
Payment of expense
100,000
Cash – December 31
4. What is the merchandise inventory at year-end?
a.
b.
c.
d.
700,000
450,000
750,000
0
Answer:
2,000,000
1,450,000
3,450,000
2,100,000
1,350,000
Sales
Cost of sales:
Purchases
Merchandise inventory – December 31(squeeze)
Gross loss
Expenses
Net loss
2,050,000
2,750,000
( 450,000)
2,300,000
( 250,000)
( 100,000)
( 350,000)
Problem 15-12
Lancer Company provided the following data obtained from the single entry records for
2019:
Cash
Notes receivable
Accounts receivable
Merchandise inventory
Equipment
Notes payable
Accounts payable
Accrued interest payable
Unearned rent income
December 31
January 1
1,600,000
1,200,000
2,000,000
960,000
1,120,000
480,000
1,040,000
40,000
40,000
1,200,000
400,000
1,600,000
1,600,000
1,200,000
720,000
1,200,000
80,000
120,000
Cash receipts
Accounts receivable (after sales
Discounts of P100,000)
Notes receivable
Cash sales
Rent income
Sale of equipment costing P200,000
And carrying amount of P100,000
3,000,000
960,000
800,000
80,000
120,000
Investment
600,000
Cash payments
Accounts payable
Notes payable
Cash purchases
Interest expense
Expenses
Equipment
Withdrawals
1,520,000
1,280,000
600,000
160,000
800,000
400,000
400,000
Accounts receivable of P120,000 were written off as uncollectible. Returns of P320,000
were made on merchandise sales. Allowances of P80,000 were received on
merchandise purchases.
Required:
Compute the net income or loss during the single entry method and prepare an income
statement.
Answer:
Total assets
Total liabilities
Capital
Capital – December 31
Add: Withdrawals
Total
Less: Capital – January 1
Investment
Net income
Notes receivable – December 31
Accounts receivable – December 31
Collections of accounts receivable
Collections of notes receivable
Sales discount
Bad debts (accounts written off)
Sales returns
Total
Less: Notes receivable – January 1
Accounts receivable – January 1
Sales on account
December 31
6,880,000
1,600,000
5,280,000
January 1
6,000,000
2,120,000
3,880,000
5,280,000
400,000
5,680,000
3,880,000
600,000
4,480,000
1,200,000
1,200,000
2,000,000
3,000,000
960,000
100,000
120,000
320,000
7,700,000
400,000
1,600,000
2,000,000
5,700,000
Cash sales
Total sales
800,000
6,500,000
Notes payable – December 31
Accounts payable – December 31
Payment of accounts payable
Payments of notes payable
Purchase allowances
Total
Less: Notes payable – January 1
Accounts payable – January 1
Purchases on account
Cash purchases
Total purchases
480,000
1,040,000
1,520,000
1,280,000
80,000
4,400,000
720,000
1,200,000
Rent received
Add: Unearned rent income – January 1
Total
Less: Unearned rent income – December 31
Rent income
Sales price
Less: Carrying amount of equipment sold
Gain on sale of equipment
Equipment – January 1
Add: Acquisition
Total
Less: Equipment – December 31
Carrying amount of equipment sold
Depreciation
1,920,000
2,480,000
600,000
3,080,000
80,000
120,000
200,000
40,000
160,000
120,000
100,000
20,000
1,200,000
400,000
1,600,000
1,120,000
100,000
Interest paid
Add: Accrued interest payable – December 31
Total
Less: Accrued interest payable – January 1
Interest expense
1,220,000
380,000
160,000
40,000
200,000
80,000
120,000
Lancer Company
Income statement
December 31, 2019
Net sales (Note 1)
Cost of sales (Note 2)
Gross income
6,080,000
3,640,000
2,440,000
Other income (Note 3)
Total income
Expenses:
Expenses
Bad debts
Depreciation
Interest expense
Net income
180,000
2,620,000
800,000
120,000
380,000
120,000
1,420,000
1,200,000
Note 1 – Net sales
Sales
Sales discount
Sales return
Net sales
6,500,000
( 100,000)
( 320,000)
6,080,000
Note 2 – Cost of sales
Inventory – January 1
Purchases
Purchase allowances
Goods available for sale
Less: Inventory – December 31
Cost of sales
Note 3 – Other income
1,600,000
3,080,000
( 80,000)
Rent income
Gain on sale of equipment
Total
3,000,000
4,600,000
960,000
3,640,000
160,000
20,000
180,000
Problem 15-13
Corolla Company prepared the following comparative statement of financial position on
December 31, 2019:
Assets
Cash
Notes receivable
Accounts receivable
Inventory
Prepaid expenses
Investment (at cost)
Equipment (net)
December 31
750,000
210,000
950,000
1,500,000
100,000
100,000
1,200,000
January 1
330,000
200,000
740,000
1,600,000
120,000
400,000
1,000,000
4,810,000
4,390,000
580,000
750,000
30,000
50,000
1,300,000
1,500,000
600,000
750,000
600,000
40,000
500,000
1,000,000
1,000,000
500,000
4,810,000
4,390,000
Liabilities and equity
Notes payable
Accounts payable
Interest payable
Accrued expenses
Bonds payable
Share capital, P100 par
Share premium
Retained earnings
Cash receipts
Cash disbursements
Issue of share capital
800,000
Trade debtors – notes
And accounts
2,950,000
Note receivable discounted:
Face value, P200,000,
Proceeds
190,000
12% one-year note issued to
Bank on March 1, 2019
300,000
Sales of investment
250,000
4,490,000
Trade creditors – notes
and accounts
Expenses
Dividends
Equipment
Bonds
2,100,000
790,000
400,000
280,000
500,000
4,070,000
Required:
Determine the net income or net loss using the single entry method and prepare an
income statement.
Answer:
Retained earnings – December 31
Add: Dividends
Total
Less: Retained earnings – January 1
Net income
600,000
400,000
1,000,000
500,000
500,000
Notes receivable – December 31
Accounts receivable – December 31
Collection of notes and accounts
Note receivable discounted
Total
Less: Notes receivable – January 1
Accounts receivable – January 1
Sales on account
210,000
950,000
2,950,000
200,000
4,310,000
200,000
740,000
940,000
3,370,000
Loss on note discounted (200,00 – 190,000)
10,000
Accrued interest expense on note issued to bank (300,000 x 12%x 10/12)
30,000
Sales price
Less: Cost of investment sold
Loss on sale of investment
250,000
300,000
( 50,000)
Notes payable – December 31
Less: Note payable – bank
Notes payable – trade
Accounts payable – December 31
Payments of notes and accounts
Total
Less: Notes payable – January 1
Accounts payable – January 1
Purchases on account
580,000
300,000
280,000
750,000
2,100,000
3,130,000
Expenses paid
Add: Prepaid expenses – January 1
Accrued expenses – December 31
Total
Less: Prepaid expenses – December 31
Accrued expenses – January 1
Expenses
Equipment – January 1
Add: Acquisition
Total
Less: Equipment – December 31
Depreciation
750,000
600,000
1,350,000
1,780,000
790,000
120,000
50,000
960,000
100,000
40,000
140,000
820,000
1,000,000
280,000
1,280,000
1,200,000
80,000
Corolla Company
Income statement
December 31, 2019
Sales
Cost of sales:
Inventory – January 1
Purchases
Goods available for sale
Less: Inventory – December 31
Gross income
Expenses:
Expenses
Depreciation
Loss on sale of investment
Loss on notes discounted
Interest expense
Net income
3,370,000
1,600,000
1,780,000
3,380,000
1,500,000
820,000
80,000
50,000
10,000
30,000
1,880,000
1,490,000
990,000
500,000
Problem 15-14
Camry Company, a sole proprietorship, did not have complete records on a double
entry basis.
However, an investigation of the records established that the assets and liabilities on
January 1, 2019 were:
Cash
Accounts receivable
Allowance for doubtful accounts
Equipment
Accumulated depreciation – equipment
Prepaid supplies
Accounts payable
Accrued salaries payable
Merchandise inventory
Note payable

200,000
420,000
20,000
350,000
100,000
40,000
250,000
10,000
700,000
200,000
A summary of the transactions for the current year as recorded in the checkbook
showed the following:
Deposits for the year
Check drawn during the year
Bank service charge
3,930,000
3,360,000
10,000

The following information related to accounts payable:
Purchases on account during the year
Returns of merchandise
Payments of accounts by check

Information about accounts receivable is as follows:
Accounts written off
Accounts collected
Accounts receivable on December 31, 2019
(of this balance P50,000 is estimated
To be uncollectible)

2,280,000
70,000
2,200,000
30,000
1,720,000
450,000
Check drawn during the year included checks for the following:
Salaries
Supplies
Taxes
Drawings of proprietor
Miscellaneous expense
Note payable
Other operating expenses
400,000
75,000
45,000
240,000
35,000
120,000
245,000

Cash sales for the year are assumed to account for all cash received other than that
collected on accounts.

Equipment is to be depreciated at the rate of 10% per annum.

Other financial information on December 31, 2019:
Merchandise inventory
Supplies on hand
Accrued salaries payable
650,000
20,000
15,000
Required:
Prepare an income statement for 2019 and a statement of financial position on
December 31, 2019.
Answer:
Total assets
Less: total liabilities
Capital – January 1
1,590,000
460,000
1,130,000
Cash balance – January 1
Add: Deposits
Total
Less: Checks drawn
Bank service charge
Cash balance – December 31
Accounts payable – January 1
Add: Purchases
Total
Less: Purchase returns
Payments
Accounts payable – December 31
200,000
3,930,000
4,130,000
3,360,000
10,000
3,370,000
760,000
250,000
2,280,000
2,530,000
70,000
2,200,000
2,270,000
260,000
Salaries paid
Accrued salaries – December 31
Total
Less: Accrued salaries – January 1
Salaries expense
400,000
15,000
415,000
10,000
405,000
Supplies paid
Add: Prepaid supplies – January 1
Total
Less: Prepaid supplies – December 31
Supplies expense
75,000
40,000
115,000
20,000
95,000
Taxes paid
45,000
Miscellaneous expense paid
35,000
Other expenses paid
245,000
Note payable – January 1
Less: Payment
Note payable – December 31
200,000
120,000
80,000
Accounts receivable – December 31
Accounts collected
Accounts written off
Total
Less: Accounts receivable – January 1
Sales on account
Allowance for doubtful accounts – January 1
Add: Doubtful accounts expense (squeeze)
Total
450,000
1,720,000
30,000
2,200,000
420,000
1,780,000
20,000
60,000
80,000
Less: Accounts written off
Allowance for doubtful accounts – December 31
30,000
50,000
Total deposits
Less: Accounts receivable collected
Cash sales
Add: Sales on accounts
Total sales
3,930,000
1,720,000
2,210,000
1,780,000
3,990,000
Depreciation (350,000 x 10%)
35,000
Camry Company
Income statement
December 31, 2019
Sales
Cost of sales:
Merchandise inventory – January 1
Purchases
2,280,000
Less: Purchases returns
70,000
Goods available for sale
Less: Merchandise inventory – December 31
Gross income
Expenses:
Salaries
Supplies
Taxes
Other expenses
Doubtful accounts
Depreciation
Bank service charge
Miscellaneous expense
Net income
3,990,000
700,000
2,210,000
2,910,000
650,000
405,000
95,000
45,000
245,000
60,000
35,000
10,000
35,000
2,260,000
1,730,000
930,000
800,000
Camry Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash
Accounts receivable, net (50,000)
Merchandise inventory
Prepaid supplies
Noncurrent assets:
Equipment
Less: Accumulated depreciation
Total assets
760,000
400,000
650,000
20,000
350,000
135,000
1,830,000
215,000
2,045,000
Liabilities and Equity
Current liabilities:
Accounts payable
Note payable
Accrued salaries payable
Equity:
Capital – January 1
Add: Net income
Total
Less: Drawings
Total liabilities and equity
260,000
80,000
15,000
1,130,000
800,000
1,930,000
240,000
355,000
1,690,000
2,045,000
Problem 15-15
Complex Company kept very limited records.
Purchases of merchandise were paid for by check, but most other items of cost were
paid out of cash receipts.
Weekly the amount of cash on hand was deposited in a bank account.
No record was kept of cash in the bank, nor was a record kept of sales.
Accounts receivable were recorded only by keeping a copy of the ticket, and this copy
was given to the customer when he paid his account.
On January 1, 2019, the entity started business and issued share capital, 60,000 share
with P100 par, for the following considerations:
Cash
Building (useful life, 15 years)
Land
500,000
4,500,000
1,500,000
An analysis of the bank statements showed total deposits, including the original cash
investment, of P3,500,000.
The balance in the bank statement on December 31, 2019, was P250,000.
There were checks amounting to P50,000 dated in December 2019 but not paid by the
bank until January 2020.
Cash on hand on December 31, 2019 was P125,000 including customer deposit of
P75,000.
During the year, the entity borrowed P500,000 from the bank and repaid P125,000 and
P25,000 interest.
Additional information
Disbursements paid in cash during the year were:
Utilities
Salaries
Supplies
Taxes
Dividends
100,000
100,000
175,000
25,000
150,000
An inventory of merchandise taken on December 31, 2019 showed P755,000 of
merchandise.
Tickets for accounts receivable totaled P900,000 but P50,000 of that amount may prove
uncollectible.
Unpaid suppliers invoices for merchandise amounted to P350,000.
Equipment with a cash price of P400,000 was purchased in early January on a one-year
installment basis.
During the year, checks for the down payment and all maturing installments totaled
P445,000.
The equipment has a useful life of 5 years.
Required:
a. Prepare an income statement for the year ended December 31, 2019.
b. Prepare a statement of financial position on December 31, 2019.
Answer:
Balance per bank
Less: Outstanding checks
Adjusted bank balance
250,000
50,000
200,000
Cash investment
Proceeds of bank loan
Collection of accounts receivable (Squeeze)
Total deposits
Less: Disbursements in check:
Payment of loan
Interest on loan
Equipment
Interest on equipment
Payment of accounts payable (squeeze)
Cash in bank – December 31
Customers’ deposit
Collections of accounts receivable (squeeze)
Total
Less: Disbursement in cash
Cash on hand – December 31
500,000
500,000
2,500,000
3,500,000
125,000
25,000
400,000
45,000
2,705,000
3,300,000
200,000
75,000
600,000
675,000
550,000
125,000
Accounts receivable – December 31
Collection deposited
Collection not deposited
Total sales
900,000
2,500,000
600,000
4,000,000
Accounts payable – December 31
Payments of accounts payable
Total purchases
350,000
2,705,000
3,055,000
Complex Company
Income statement
December 31, 2019
Sales
Cost of sales:
Purchases
Less: Inventory – December 31
Gross income
Expenses:
Utilities
Salaries
Supplies
Taxes
Doubtful accounts
Depreciation – building (4,500,000 / 15)
Depreciation – equipment (400,000 / 5)
Interest expense (25,000 + 45,000)
Net income
4,000,000
3,055,000
755,000
100,000
100,000
175,000
25,000
50,000
300,000
80,000
70,000
2,300,000
1,700,000
900,000
800,000
Complex Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash (Note 1)
Accounts receivable (Note 2)
Inventory
Noncurrent assets:
Land
Building
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total assets
325,000
850,000
755,000
1,930,000
1,500,000
4,500,000
300,000
400,000
80,000
4,200,000
320,000
6,020,000
7,950,000
Liabilities and equity
Current liabilities:
Accounts payable
Loan payable – bank
Customers’ deposit
Equity:
Share capital
Share premium
350,000
375,000
75,000
6,000,000
500,000
800,000
Retained earnings (Note 3)
Total liabilities and equity
650,000
7,150,000
7,950,000
Note 1 – Cash
Cash in bank
Cash on hand
Total cash
200,000
125,000
325,000
Note 2 – Accounts receivable
Accounts receivable
Allowance for doubtful accounts
Net realizable value
900,000
( 50,000)
850,000
Note 3 – Retained earnings
Net income
Dividends
Total
800,000
( 150,000)
650,000
Problem 15-16
Ultimate Company provided the following information for the preparation of financial
statements for 2019:
Balances – January 1, 2019
Cash
Accounts receivable
Inventory
Prepaid insurance
Land
Building
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Accrued salaries payable
Advances from customers
Share capital
Retained earnings

400,000
120,000
230,000
35,000
500,000
2,000,000
700,000
800,000
240,000
170,000
20,000
90,000
2,500,000
365,000
Cash receipts for 2019
Advances from customers
70,000
Cash sales and collections on accounts receivable
Sale of equipment on December 31, 2019 costing
P50,000 on which P30,000 of depreciation
Had been accumulated
2,960,000
45,000
3,075,000

Cash disbursement for 2019
Insurance premium
Purchase of equipment on October 1
Cash purchases and payments on accounts payable
Salaries
Dividends paid
Other expenses
80,000
200,000
1,640,000
390,000
125,000
135,000
2,570,000

Dividends of 5% were declared on June 30 and on December 31, 2019.

All depreciable assets should be depreciated at 10% per year.

Doubtful accounts are estimated to be 5% of year0end accounts receivable. The
accounts receivable totaled P200,000 on December 31, 2019.

Additional data on December 31, 2019
Inventory
Prepaid insurance
Advances from customers
Accrued salaries
Accounts payable
245,000
25,000
50,000
30,000
100,000
Required:
a. Prepare an income statement for 2019.
b. Prepare a statement of financial position on December 31, 2019.
Answer:
Accounts receivable – December 31
Cash sales, collection and advances
Advances from customers – January 1
Total
200,000
3,030,000
90,000
3,320,000
Less: Accounts receivable – January 1
Advances from customers – December 31
Sales
120,000
50,000
Sales price
Less: Carrying amount of equipment sold
Gain on sale of equipment
170,000
3,150,000
45,000
20,000
25,000
Accounts payable – December 31
Cash purchases and payments
Total
Less: Accounts payable – January 1
Purchases
100,000
1,640,000
1,740,000
170,000
1,570,000
Insurance paid
Prepaid insurance – January 1
Total
Less: Prepaid insurance – December 31
Insurance expense
80,000
35,000
115,000
25,000
90,000
Depreciation:
Building (2,000,000 x 10%)
Equipment (800,000 x 10%)
Equipment – new (200,000 x 10% x 3/12)
Total
200,000
80,000
5,000
285,000
Salaries paid
Accrued salaries – December 31
Total
Less: Accrued salaries – January 1
Salaries expense
390,000
30,000
420,000
20,000
400,000
Doubtful accounts (5% x 200,000)
10,000
Ultimate Company
Income statement
December 31, 2019
Sales
Cost of sales:
Inventory – January 1
Purchases
Goods available for sale
Less: Inventory – December 31
3,150,000
230,000
1,570,000
1,800,000
245,000
1,555,000
Gross income
Gain on sale of equipment
Total income
Expenses:
Insurance
Depreciation
Salaries
Doubtful accounts
Other expenses
Net income
1,595,000
25,000
1,620,000
90,000
285,000
400,000
10,000
135,000
920,000
700,000
Ultimate Company
Statement of Financial Position
December 31, 2019
Assets
Current assets:
Cash
Accounts receivable, net (10,000)
Inventory
Prepaid insurance
Noncurrent assets:
Land
Building
2,000,000
Less: Accumulated depreciation
900,000
Equipment
950,000
Less: Accumulated depreciation
295,000
Total assets
905,000
190,000
245,000
25,000
1,365,000
500,000
1,100,000
655,000
2,255,000
3,620,000
Liabilities and equity
Current liabilities:
Accounts payable
Accrued salaries
Advances from customers
Dividends payable
Equity:
100,000
30,000
50,000
125,000
305,000
Share capital
Retained earnings
Total liabilities and equity
2,500,000
815,000
Accumulated depreciation – January 1
Add: Depreciation for 2019
Total
Less: Accumulated depreciation on equipment sol
Accumulated depreciation – December 31
Retained earnings – January 1
Net income
Total
Less: Dividends – June 30 (5%x 2,500,000)
Dividends – December 31
Retained earnings – December 31
3,315,000
3,620,000
240,000
85,000
325,000
30,000
295,000
365,000
700,000
1,065,000
125,000
125,000
250,000
815,000
Chapter 16
Error correction
Problem 16-1
Roxas Company reported the following net income:
2018
2019
1,750,000
2,000,000
An examination of the accounting records for the year ended December 31, 2019
revealed that several errors were made. The following errors were discovered:
Salary accrued at year-end was consistently omitted:
2018
2019
100,000
140,000
The footing and extensions showed that the inventory on December 31, 2018 was
overstated by P190,000.
Prepaid insurance of P120,000 applicable to 2020 was expensed in 2019.
Interest receivable of P20,000 was not recorded on December 31, 2019.
On January 1, 2019 an equipment costing P400,000 was sold for P220,000. At the date
of sale, the equipment had accumulated depreciation of P240,000.
The cash received was recorded as miscellaneous income in 2019.
In addition, depreciation was recorded for the equipment for 2019 at the rate of 10%.
Required:
a. Prepare worksheet showing corrected net income for 2018 and 2019.
b. Prepare adjusting entries on December 31, 2019.
a. Assuming books are still open
b. Assuming books are closed.
Answer:
2018
Net income
1,750,000
Salary accrued omitted:
2018
( 100,000)
2019
Inventory – December 31, 2018 overstated
( 190,000)
Prepaid insurance unrecorded on December 31, 2019
Interest receivable unrecorded on December 31 ,2019
Other income overstated
Depreciation overstated
Corrected net income
1,460,000
2019
2,000,000
100,000
( 140,000)
190,000
120,000
20,000
( 160,000)
40,000
2,170,000
Adjusting entries – December 31, 2019 – Book open
1. Retained earnings
Salaries
100,000
100,000
Salaries
Accrued salaries payable
140,000
2. Retained earnings
Inventory – January 1, 2019
190,000
3. Prepaid insurance
Insurance
120,000
140,000
190,000
120,000
4. Accrued interest receivable
Interest income
5. Miscellaneous income
Accumulated depreciation
Equipment
Gain on sale of equipment
20,000
20,000
220,000
240,000
400,000
60,000
Accumulated depreciation
Depreciation
40,000
40,000
Adjusting entries – December 31, 2019 – Book closed
1. Retained earnings
Accrued salaries payable
2. No adjustment
3. Prepaid insurance
Retained earnings
140,000
140,000
120,000
120,000
4. Accrued interest receivable
Retained earnings
20,000
5. Retained earnings
Accumulated depreciation
Equipment
160,000
240,000
Accumulated depreciation
Retained earnings
40,000
Problem 16-2
Susan Company reported the following net income:
20,000
400,000
40,000
2018
2019
3,000,000
4,000,000
In an audit for the current year, the following errors are discovered:
December 31, 2018 inventory understated
20,000
December 31, 2019 inventory overstated
18,000
Depreciation for 2018 understated
4,000
Insurance premium for a three-year period
Was charged to expense on January 1, 2018
No prepayment was recorded.
15,000
A fully depreciated machinery was sold on
December 31, 2019 but the sale was not recorded
Until 2020.
The cost of the machinery is P200,000
And the proceeds from sale amounted to
32,000
Required:
a. Prepare worksheet for correction of net income for 2018 and 2019.
b. Prepare adjusting entries on December 31, 2019.
Answer:
2018
Net income
3,000,000
December 31, 2018 inventory understated
20,000
December 31, 2019 inventory overstated
Depreciation for 2018 understated
(
4,000)
Prepaid insurance unrecorded on December 31,2018
10,000
Gain on sale of machinery
Corrected net income
3,026,000
2019
4,000,000
( 20,000)
( 18,000)
(
5,000)
32,000
3,989,000
Adjusting entries – December 31, 2019
1. Inventory – January 1, 2019
Retained earnings
20,000
2. Profit and loss
18,000
20,000
Inventory – December 31, 2019
18,000
3. Retained earnings
Accumulated depreciation
4,000
4. Prepaid insurance
Insurance
Retained earnings
5,000
5,000
5. Cash
Accumulated depreciation
Machinery
Gain on sale of machinery
4,000
10,000
32,000
200,000
200,000
32,000
Problem 16-3
Atlanta company reported net income for 2018 P4,000,000 and 2019 P5,000,000. An
audit revealed certain errors.
A collection of P100,000 from a customer was received on December 29, 2019 but not
recorded until January 4, 2020.
Supplier’s invoice on account of P160,000 for inventory received in December 2019 was
not recorded until January 2020.
Inventories on December 31, 2018 and 2019 were correctly stated.
Depreciation for 2018 was understated by P90,000.
In September 2019, a P20,000 invoice for office supplies was charged to purchases.
Office supplies are expensed when incurred,
Sales on account of P300,00 in December 2019 were recorded in 2020.
Required:
a. Determine the correct net income for 2018 and 2019
b. Prepare adjusting entries on December 31, 2019.
Answer:
2018
Net income
Unrecorded purchases in 2019
Depreciation for 2018 understated
Unrecorded sales in 2019
Corrected net income
4,000,000
(
2019
5,000,000
( 160,000)
90,000)
3,910,000
300,000
5,140,000
Adjusting entries – December 31, 2019
1. Cash
100,000
Accounts receivable
2. Purchases
Accounts payable
100,000
160,000
160,000
3. Retained earnings
Accumulated depreciation
90,000
4. Office supplies
Purchases
20,000
5. Accounts receivable
Sales
90,000
20,000
300,000
300,000
Problem 16-4
Upon inspection of the records of Emerald Company, the following facts were
discovered for the year ended December 31, 2019.
A fire insurance premium of P40,000 was paid an charged as insurance expense for
2019.
The fire insurance policy covers one year from April 1, 2019.
Inventory on January 1, 2019 was understated by P80,000.
Inventory on December 31, 2019 was understated by P120,000.
Taxes of P60,000 for the fourth quarter of 2019 were paid on January 20, 2020 and
charged as expense of 2020.
On December 5, 2019 a cash advance of P100,000 by a customer was received for
goods to be delivered in January, 2020.
The amount of P100,000 was credited to sales. The gross profit on sales is 40%.
The net income for the year ended December 31, 2019 before any adjustments is
P1,550,000.
Required:
a. Determine the correct net income for 2019
b. Prepare adjusting entries on December 31, 2019.
Answer:
Net income
Prepaid insurance – December 31, 2019
Inventory on January 1, 2019 understated
Inventory on December 31, 2019 understated
Accrued taxes – December 31, 2019
Advances from customer – December 31, 2019
Corrected net income
1,550,000
10,000
( 80,000)
120,000
( 60,000)
( 100,000)
1,440,000
Adjusting entries – December 31, 2019
1. Prepaid insurance
Insurance
10,000
2. Inventory – January 1, 2019
Retained earnings
80,000
10,000
80,000
3. Inventory – December 31, 2019
Profit and loss
4. Taxes
120,000
120,000
60,000
Accrued taxes payable
5. Sales
60,000
100,000
Advances from customer
100,000
Problem 16-5
Tower Company failed to recognized accruals and prepayments during the first year of
operations. The income before tax is P5,000,000.
The accruals and prepayments not recognized at the end of the year are:
Prepaid insurance
Accrued wages
Rent revenue collected in advance
Interest receivable
200,000
250,000
300,000
100,000
What is the corrected income before tax?
a.
b.
c.
d.
4,750,000
5,250,000
5,000,000
4,950,000
Answer:
Income before tax per book
Prepaid insurance
Accrued wages
Rent revenue collected in advance
Interest receivable
Corrected income before tax
5,000,000
200,000
( 250,000)
( 300,000)
100,000
4,750,000
Problem 16-6
Victoria Company revealed the following errors in the financial statements:
2018
2019
Ending inventory
Depreciation
200,000 understated
300,000 overstated
50,000 understated
100,000 overstated
At what amount should retained earnings be retroactively adjusted on January 1, 2020?
a.
b.
c.
d.
250,000 increase
250,000 decrease
400,000 decrease
200,000 decrease
Answer:
2018 inventory understated
2019 inventory overstated
2018 depreciation understated
2019 depreciation overstated
Net decrease
2018
2019
200,000
(200,000)
(300,000)
( 50,000)
100,000
retained earnings
Jan. 1, 2020
(300,000)
( 50,000)
100,000
(250,000)
Problem 16-7
During 2019, Paul Company discovered that the ending inventories reported in the
financial statements were incorrect by the following amounts:
2018
2019
60,000 understated
75,000 overstated
The entity used the periodic inventory system to ascertain year-end quantities that are
converted to peso amounts using the FIFO cost method.
Prior to any adjustments for these errors and ignoring income tax, what is the effect of
the errors on retained earnings on January 1, 2020?
a. Correct
b. 15,000 overstated
c. 75,000 overstated
d. 135,000 overstated
Answer:
2018 inventory understated
2019 inventory overstated
Net correction
2018
2019
60,000
( 60,000)
( 75,000)
(135,000)
60,000
retained earnings
Jan. 1, 2020
( 75,000)
( 75,000)
Problem 16-8
Crescendo Company revealed the following errors in the financial statements:
2018
Ending inventory
Rent expense
2019
140,000 overstated
48,000 understated
200,000 understated
66,000 overstated
If none of the errors were detected or corrected, by what amount will 2019 net income
be overstated or understated?
a.
b.
c.
d.
134,000 overstated
278,000 understated
358,000 understated
406,000 understated
Answer:
Ending inventory
2018
2019
Rent expense
2018
2019
Net correction
2018
2019
(140,000)
140,000
200,000
( 48,000)
(188,000)
66,000
406,000
Problem 16-9
Glory Company reported the following errors in the financial statements:
2018
2019
Ending inventory
Depreciation
200,000 under
50,000 under
300,000 over
An insurance premium of P150,000 was prepaid in 2018 to cover 2018, 2019 and 2020.
The entire amount was charged to expense in 2018.
On December 31, 2019, fully depreciated machinery was sold for P250,000 cash but
the sale was not recorded until 2020.
There were no other errors during 2018 and 2019 and no corrections have been made
for any of the errors.
1. What is the effect of the errors on 2018 net income?
a. 250,000 understated
b. 250,000 overstated
c. 350,000 understated
d. 350,000 overstated
Answer:
2018 ending inventory under
2018 depreciation under
Insurance premium
Net correction
2018
200,000
( 50,000)
100,000
250,000
2. What is the effect of the errors on 2019 net income?
a.
b.
c.
d.
300,000 understated
300,000 overstated
200,000 understated
200,000 overstated
Answer:
2018 ending inventory under
2019 ending inventory over
Insurance premium
Gain on sale of machinery
Net correction
2019
(200,000)
(300,000)
( 50,000)
250,000
(300,000)
3. What is effect of the errors on retained earnings on December 31, 2019?
a. 300,000 overstated
b. 250,000 understated
c. 50,000 overstated
d. 50,000 understated
Answer:
2018 net correction – understated
2019 net correction – overstated
Retained earnings overstated
250,000
(300,000)
( 50,000)
Problem 16-10
Shannon Company began operations on January 1, 2018. The financial statement
contained the following errors:
2018
Ending inventory
Depreciation expense
Insurance expense
Prepaid insurance
160,000 understated
60,000 understated
100,000 overstated
100,000 understated
2019
150,000 overstated
100,000 understated
On December 31, 2019, fully depreciated machinery was sold for P108,000 cash but
the sale was not recorded until 2020.
No corrections have been made for any of the errors.
Ignore income tax, what is the total effect of the errors on
1. Net income for 2018?
a. 200,000 over
b. 200,000 under
c. 260,000 under
d.
0
Answer:
2018 inventory understated
2018 depreciation understated
2018 prepaid insurance understated
Net correction
2. Net income for 2019?
160,000
( 60,000)
100,000
200,000
a.
b.
c.
d.
302,000 over
302,000 under
410,000 over
410,000 under
Answer:
2018 inventory understated
2019 inventory overstated
2018 prepaid insurance understated
2019 gain on sale of machinery
Net correction
(160,000)
(150,000)
(100,000)
108,000
(302,000)
3. Retained earnings on December 31, 2019?
a.
b.
c.
d.
102,000 over
102,000 under
200,000 over
200,000 under
Answer:
2018 net correction
2019 net correction
Retained earnings
200,000
(302,000)
(102,000)
4. Working capital on December 31, 2019?
a.
b.
c.
d.
42,000 over
58,000 under
60,000 under
98,000 under
Answer:
2019 inventory overstated
2019 gain on sale of machinery
Working capital
(150,000)
108,000
( 42,000)
Problem 16-11
Rebecca Company revealed the following information on December 31, 2019:

The entity failed to accrue sales commissions at the end of each year as follows:
2017
2018
220,000
140,000
In each case, the sales commissions were paid and expensed in January of the
following year.

Errors in ending inventories for the last three years were discovered to be as follows:
2017
2018
2019
400,000 understated
540,000 overstated
150,000 understated
The unadjusted retained earnings balance on January 1, 2019 is P12,600,000 and the
unadjusted net income for 2019 was P3,000,000.
Dividends of P1,750,000 were declared during 2019.
1. What is the adjusted net income for 2019?
a.
b.
c.
d.
3,830,000
3,150,000
3,680,000
3,530,000
Answer:
Unrecorded commissions:
2017
2018
Ending inventory:
2017 understated
2018 overstated
2019 understated
Net correction to income
Net income per book for 2019
Net correction to income
Adjusted net income 2019
2017
2018
2019
(220,000)
220,000
(140,000)
140,000
400,000
180,000
(400,000)
(540,000)
(860,000)
540,000
150,000
830,000
3,000,000
830,000
3,830,000
2. What is the adjusted balance of retained earnings on December 31, 2019?
a.
b.
c.
d.
14,000,000
13,320,000
13,850,000
11,000,000
Answer:
Net correction 2017
Net correction 2018
Net correction of prior years
180,000
(860,000)
(680,000)
Retained earnings
Prior period error
Corrected beginning balance
Net income for 2019
Dividends declared in 2019
Retained earnings – December 31, 2019
12,600,000
( 680,000)
11,920,000
3,830,000
( 1,750,000)
14,000,000
Problem 16-12
Holden Company reported the following errors in the financial statements:
Over (under) statement for ending inventory
Depreciation understatement
Failure to accrue salaries at year-end
2018
2019
(100,000)
40,000
80,000
40,000
60,000
120,000
As a result of the errors, what was the effect on net income for 2019?
a.
b.
c.
d.
240,000 understated
240,000 overstated
320,000 understated
320,000 overstated
Answer:
2018 ending inventory – under
2019 ending inventory – over
Depreciation understatement
Accrued salaries unrecorded:
2018
2019
Net correction to income
2018
2019
100,000
100,000
( 40,000)
(60,000)
(40,000)
(80,000)
(20,000)
80,000
(120,000)
(240,000)
Problem 16-13
During the course of an audit of the financial statements of Julie Company for the year
ended December 31, 2019, the following data are discovered:

Inventory on January 1, 2019 had been overstated by P300,000.

Inventory on December 31, 2019 was understated by P500,000.

An insurance policy covering three years had been purchased on January 1, 2018
for P150,000. The entire amount was charged as an expense in 2018.
During 2019, the entity received a P100,000 cash advance from a customer for
merchandise to be manufactured and shipped during 2020. The amount had been
credited to sales revenue. The gross profit on sales is 50%.
Net income for 2019 per book was P2,000,000.
What is the proper net income for 2019?
a.
b.
c.
d.
2,650,000
2,350,000
1,650,000
2,050,000
Answer:
Net income per book
Overstatement of beginning inventory
Understatement of ending inventory
Unrecorded insurance for 2019
Cash advance credited to sales
Proper net income for 2019
2,000,000
300,000
500,000
( 50,000)
( 100,000)
2,650,000
Problem 16-14
Emma Company revealed the following errors in the financial statements:
December 31, 2018 inventory understated
December 31, 2019 inventory overstated
Depreciation for 2018 overstated
December 31, 2019 accrued rent income overstated
December 31, 2019 accrued salaries understated
500,000
800,000
250,000
300,000
150,000
The understatement of the 2018 ending inventory pertains to goods in transit purchased
FOB shipping point which were not recorded on 2018 but paid on 2019.
On December 31, 2019, fully depreciated machinery was sold for P100,000 cash but
the sale was not recorded until 2020.
1. What is the effect of the errors on net income for 2018?
a. 250,000 understated
b. 250,000 overstated
c. 500,000 understated
d.
0
Answer:
2018 inventory understated
2018 depreciation overstated
Net income for 2018
500,000
(250,000)
250,000
2. What is the effect of the errors on net income for 2019?
a.
b.
c.
d.
1,150,000 understated
1,150,000 overstated
1,250,000 understated
1,250,000 overstated
Answer:
2019 inventory overstated
2019 accrued rent income overstated
2019 accrued salaries understated
Gain on sale of machinery
Net income for 2019
( 800,000)
( 300,000)
( 150,000)
100,000
(1,150,000)
3. What is the effect of the errors on retained earnings on December 31, 2019?
a. 1,150,000 understated
b. 1,150,000 overstated
c.
900,000 understated
d. 900,000 overstated
Answer:
Net income for 2019
Net income for 2018
Retained earnings
(1,150,000)
250,000
( 900,000)
Problem 16-15
Taal Company revealed the following errors in the financial statements:
December 31, 2018 inventory overstated
December 31, 2019 inventory understated
Depreciation for 2018 overstated
Depreciation for 2019 understated
December 31, 2018 prepaid insurance understated
December 31, 2019 unearned rent income overstated
December 31, 2019 accrued salaries understated
35,000
10,000
25,000
8,000
5,000
4,000
20,000
1. What is the effect of the errors on net income for 2018?
a. 10,000 understated
b. 10,000 overstated
c. 5,000 understated
d. 5,000 overstated
Answer:
2018 inventory overstated
2018 depreciation overstated
2018 prepaid insurance understated
Net correction of income for 2018
2. What is the effect of the errors on net income for 2019?
a.
b.
c.
d.
16,000 understated
16,000 overstated
12,000 understated
12,000 overstated
Answer:
(35,000)
25,000
5,000
( 5,000)
2018 inventory overstated
2019 inventory understated
2019 depreciation understated
2018 prepaid insurance
2019 unearned rent income overstated
2019 accrued salaries understated
Net correction of income for 2019
35,000
10,000
( 8,000)
( 5,000)
4,000
(20,000)
16,000
3. What is the effect of the errors on retained earnings on December 31, 2019?
a.
b.
c.
d.
11,000 understated
11,000 overstated
16,000 understated
16,000 overstated
Answer:
Net correction of income for 2018
Net correction of income for 2019
Retained earnings
(5,000)
16,000
11,000
4. What is the effect of the errors on working capital on December 31, 2019?
a. 24,000 understated
b. 24,000 overstated
c. 6,000 understated
d. 6,000 overstated
Answer:
2019 inventory understated
2019 unearned rent income
Working capital
(10,000)
4,000
( 6,000)
Problem 16-16
Malampaya Company showed income before tax of P6,500,000 on December 31, 2019.
The year-end verification of the transactions revealed the following errors:

P1,000,000 worth of merchandise was purchased in 2019 and included in the ending
inventory. However, the purchase was recorded only in 2020.

A merchandise shipment valued at P1,500,000 was properly recorded as purchase
at year-end.
Since the merchandise was still at the port area, it was inadvertently omitted from
the inventory on December 31, 2019.

Advertising for December 2019, amounting to P500,000, was recorded when
payment was made in January 2020.

Rent of P300,000 on an equipment applicable for six months was received on
November 1, 2019. The entire amount was reported as income upon receipt.

Insurance premium covering the period from July 1, 2019 to July 1, 2020 amount to
P200,000 was paid and recorded as expense on July 31, 2019. The entity did not
make any adjustment at the end of the year.
What is the corrected income before tax for 2019?
a.
b.
c.
d.
6,900,000
6,400,000
6,500,000
6,300,000
Answer:
Income per book
Unrecorded purchase
Understatement of ending inventory
Unrecorded advertising
Unearned rent income (300,000 x 4/6)
Prepaid insurance (200,000 6/12)
Corrected income
Problem 16-17
1. When the current year’s ending inventory is overstated
a.
b.
c.
d.
The current year’s cost of goods sold is overstated.
The current year’s total assets are understated.
The current year’s net income is overstated.
The next year’s income is overstated.
6,500,000
(1,000,000)
1,500,000
( 500,000)
( 200,000)
100,000
6,400,000
2. If the beginning inventory in the current year is overstated, and that is the only error
in the current year, the income for the current year would be.
a.
b.
c.
d.
Understated and assets correctly stated.
Understated and assets overstated
Overstated and assets overstated
Understated and assets understated
3. Which of the following would result if the current year’s ending inventory is
understated in the cost of goods sold calculation?
a.
b.
c.
d.
Cost of goods sold would be overstated
Total assets would be overstated
Net income would be overstated
Retained earnings would be overstated
4. Which of the following is a counterbalancing error?
a.
b.
c.
d.
Understated depletion expense
Bond premium underamortized
Prepaid expense adjusted incorrectly
Overstated depreciation expense
5. Which error will not self-correct in the next year?
a.
b.
c.
d.
Accrued expense not recognized at year-end
Accrued revenue not recognized at year-end
Depreciation expense overstated for the current year
Prepaid expenses not recognized at year-end
6. The overstatement of ending inventory in the current year would cause
a. Retained earnings to be understated in the current year-end statement of
financial position.
b. Cost of goods sold to be understated in the income statement of next year.
c. Cost of goods sold to be overstated in the income statement of the current
year.
d. Statement of financial position not to be misstated in the next year-end.
7. Failure to record the expired amount of prepaid rent expense would not
a.
b.
c.
d.
Understate expense
Overstate net income
Overstate owners’ equity
Understate liabilities
8. Failure to record accrued salaries at the end of an accounting period results in
a.
b.
c.
d.
Overstated retained earnings
Overstated assets
Overstated revenue
Understated retained earnings
9. Failure to record depreciation at the end of an accounting period results in
a.
b.
c.
d.
Understated income
Understated assets
Overstated expense
Overstated assets
10. If at the end of current reporting period, an entity erroneously excluded some goods
from ending inventory and also erroneously did not record the purchase of these
goods, these errors would cause
a.
b.
c.
d.
The ending inventory to be overstated
The retained earnings to be understated
No effect on net income, working capital and retained earnings
Net income to be understated
Chapter 17
Statement of cash flows
Problem 17-1
Mountain Company reported the following income statement for the year ended
December 31, 2019:
Sales
Cost of goods sold:
Inventory – January 1
Purchases
Goods available for sale
Inventory – December 31
Gross income
Expenses:
Salaries
4,500,000
750,000
2,850,000
3,600,000
( 600,000)
3,000,000
1,500,000
600,000
Rent
Insurance
Doubtful accounts expense
Other expenses
Depreciation
250,000
20,000
30,000
100,000
50,000
Net income
1,050,000
450,000
Additional information
December 31
Accounts receivable
Allowance for doubtful accounts
Inventory
Prepaid insurance
Accounts payable
Accrued salaries payable
Equipment
Accumulated depreciation
540,000
40,000
600,000
15,000
280,000
50,000
1,200,000
290,000
January 1
440,000
20,000
750,000
10,000
160,000
80,000
1,200,000
240,000
During the year, the entity recognized doubtful accounts expense of P30,000 and wrote
off uncollectible accounts of P10,000.
Required:
Determine the cash flow from operating activities using the direct method and indirect
method.
Answer:
Accounts receivable – January 1
Add: Sales
Total
Less: Accounts receivable – December 31
Writeoff
Collections from customers
Accounts payable – January 1
Purchases
Total
Less: Accounts payable – December 31
Payment to merchandise creditors
Salaries
Add: Accrued salaries – January 1
440,000
4,500,000
4,940,000
540,000
10,000
550,000
4,390,000
160,000
2,850,000
3,010,000
280,000
2,730,000
600,000
80,000
Total
Less: Accrued salaries – December 31
Payment for salaries
680,000
50,000
630,000
Insurance
Add: Prepaid insurance – December 31
Total
Less: Prepaid insurance – January 1
Payment for insurance
20,000
15,000
35,000
10,000
25,000
Direct method
Cash received from customers
Cash payment to creditors
Salaries paid
Insurance paid
Rent paid
Other expenses paid
Net cash provided by operating activities
4,390,000
(2,730,000)
( 630,000)
( 25,000)
( 250,000)
( 100,000)
655,000
Indirect method
Net income
Increase in net accounts receivable
Decrease in inventory
Increase in prepaid insurance
Increase in accounts payable
Decrease in accrued salaries payable
Depreciation
Net cash provided by operating activities
450,000
( 80,000)
150,000
( 5,000)
120,000
( 30,000)
50,000
655,000
Problem 17-2
Hill Company provided the following comparative statement of financial position.
Assets
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Property, plant and equipment
Accumulated depreciation
2019
2018
750,000
1,750,000
2,550,000
100,000
5,300,000
(1,150,000)
950,000
1,100,000
1,800,000
150,000
4,300,000
( 800,000)
9,300,000
7,500,000
Liabilities and equity
Accounts payable
Accrued expenses
Share capital
Retained earnings
1,250,000
50,000
4,750,000
3,250,000
1,000,000
200,000
4,250,000
2,050,000
9,300,000
7,500,000
Additional information
1. The statement of retained earnings for 2019 showed net income of P1,500,000 and
cash dividend paid of P300,000.
2. During the year, the entity purchased equipment for cash and issued share capital
for cash.
Required:
Prepare a statement of cash flows for the current year using the indirect method.
Answer:
Hill Company
Statement of Cash Flows
December 31, 2019
Cash flow from operating activities:
Net income
Increase in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Increase in accounts payable
Decrease in accrued expenses
Depreciation
Cash flow from investing activities:
Purchase of equipment
Cash flow from financing activities:
Issue of share capital
Payment of cash dividend
Decrease in cash and cash equivalents
1,500,000
( 650,000)
( 750,000)
50,000
250,000
( 150,000)
350,000
600,000
(1,000,000)
500,000
( 300,000)
200,000
( 200,000)
Cash and cash equivalents – January 1
Cash and cash equivalent – December 31
950,000
750,000
Problem 17-3
Sandy Company reported the following comparative statement of financial position at
year-end.
Assets
2019
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Property, plant and equipment
Accumulated depreciation
2018
120,000
370,000
1,090,000
80,000
4,300,000
( 840,000)
150,000
210,000
860,000
90,000
3,620,000
( 720,000)
5,120,000
4,210,000
400,000
70,000
35,000
5,000
600,000
3,050,000
1,100,000
( 140,000)
5,120,000
345,000
40,000
15,000
3,050,000
760,000
4,210,000
Liabilities and equity
Accounts payable
Salaries payable
Income tax payable
Accrued interest payable
Bonds payable
Share capital
Retained earnings
Treasury shares
The income statement for the year ended December 31, 2019 showed the following:
Sales
Cost of goods sold:
Inventory – January 1
Purchases
Goods available for sales
Inventory – December 31
4,450,000
860,000
2,630,000
3,490,000
(1,090,000)
2,400,000
Gross income
Gain on sales of equipment
2,050,000
60,000
Total income
2,110,000
Expenses:
Salaries
Insurance
Rent
Depreciation
Bad debt writeoff
Interest expense
640,000
100,000
350,000
260,000
20,000
40,000
Income before tax
Income tax
Net income
1,410,000
700,000
200,000
500,000
Additional information
1. Cash dividends of P160,000 were declared and paid during the year.
2. Equipment costing P190,000 and with accumulated depreciation of P140,000 was
sold for P110,000 cash.
3. New equipment was purchased for cash.
4. Bonds payable were issued for cash at the face value of P600,000.
5. The treasury shares were purchased at cost P140,000.
Required:
a. Prepare a statement of cash flows using the direct method.
b. Compute the cash flow operating activities using the indirect method.
Answer:
Sandy Company
Statement of Cash Flows
December 31, 2019
Cash flows from operating activities:
Collections from customers
Payments to creditors
Salaries paid
Insurance paid
Rent paid
Cash generated from operations
Interest paid
Income tax paid
4,270,000
(2,575,000)
( 610,000)
( 90,000)
( 350,000)
645,000
( 35,000)
( 180,000)
Net cash provided by operating activities
Cash flow from investing activities:
Sale of equipment
Purchase of equipment
Cash flow from financing activities:
Issue of bonds payable
Payment of cash dividend
Payment of treasury shares
Decrease in cash and cash equivalents
Cash and cash equivalents – January 1
Cash and cash equivalents – December 31
430,000
100,000
( 870,000) ( 760,000)
600,000
( 160,000)
( 140,000)
300,000
( 30,000)
150,000
120,000
Indirect method
Net income
Increase in net accounts receivable
Increase in inventory
Decrease in prepaid insurance
Increase in accounts payable
Decrease in salaries payable
Increase in income tax payable
Increase in accrued interest payable
Depreciation
Gain on sale of equipment
Net cash provided by operations
500,000
( 160,000)
( 230,000)
10,000
55,000
30,000
20,000
5,000
260,000
( 60,000)
430,000
Problem 17-4
Forest Company provided the following information for the preparation of a statement of
cash flows for the current year:
2019
Cash and cash equivalents
Trading securities
Accounts receivable, net of allowance
Inventory
Property, plant and equipment (net)
Goodwill
Discount on bonds payable
Accounts payable
Accrued expenses
Bonds payable
Preference share capital, P100 par, each share
2018
603,000
300,000
600,000
900,000
2,000,000
200,000
72,000
300,000
200,000
520,000
840,000
2,100,000
200,000
100,000
4,675,000
4,260,000
490,000
310,000
800,000
800,000
210,000
1,000,000
Convertible into two ordinary shares
Ordinary share capital, P20 par
Share premium
Retained earnings
400,000
820,000
500,000
1,355,000
500,000
700,000
400,000
650,000
4,675,000
4,260,000
Additional information
1. Net income for the current year was P1,705,000.
2. Cash dividend paid during the year totaled P1,000,000.
3. The bonds mature on January 1, 2024. On December 31, 2019 bonds with face of
P200,000 were retired at 105.
4. The entity sold 4,000 ordinary shares at P30 per share.
5. The decrease in preference share capital resulted from the exercise of the
conversion privilege by preference shareholders.
6. The increase in trading securities is due to increase in market value during the year.
Required:
Prepare a statement of cash flows for the current year.
Answer:
Requirements
Entries
1. Profit and loss
Retained earnings
1,705,000
2. Retained earnings
Cash
1,000,000
3. Interest expense (100,000/10)
Discount on bonds payable
Bonds payable
Loss on retirement
1,705,000
1,000,000
10,000
10,000
200,000
28,000
Cash (200,000 x 105)
Discount on bonds payable
(90,000 x 200 / 1,000)
210,000
18,000
4. Cash (4,000 x 30)
Ordinary share capital (4,000 x 20)
Share premium
120,000
5. Preference share capital (1,000 x 100)
Ordinary share capital (2,000 x 20)
Share premium
100,000
6. Trading securities
Unrealized gain
100,000
80,000
40,000
40,000
60,000
100,000
7. Accounts receivable
Sales
80,000
8. Inventory
Cost of sales
60,000
80,000
60,000
9. Depreciation
Accumulated depreciation
100,000
10. Accounts payable
Cash
310,000
11. Expenses
Accrued expenses
100,000
100,000
310,000
100,000
Operating
1. Net income
1,705,000
2. Cash dividend
3. Amortization of discount on bonds payable
10,000
Retirement of bonds payable
Loss on retirement
28,000
4. Issuance of ordinary share capital
5. Conversion of preference share into ordinary share – no cash effect
6. Unrealized gain
( 100,000)
7. Increase in accounts receivable
( 80,000)
8. Increase in inventory
( 60,000)
9. Depreciation
100,000
10. Decrease in accounts payable
( 310,000)
Financing
(1,000,000)
( 210,000)
120,000
11. Increase in accrued expenses
Net cash provided (used)
100,000
1,393,000
(1,090,000)
1,705,000
10,000
28,000
( 80,000)
( 60,000)
100,000
( 100,000)
( 310,000)
100,000
1,393,000
Forest Company
Statement of Cash Flows
December 31, 2019
Cash flow from operating activities:
Net income
Amortization of discount
Loss on retirement
Increase in accounts receivable
Increase in inventory
Depreciation
Unrealized gain
Decrease in accounts payable
Increase in accrued expenses
Cash flow from financing activities:
Issue of ordinary share capital
Payment of cash dividend
Bond retirement
Increase in cash and cash equivalents
Add: Cash and cash equivalents – January 1
Cash and cash equivalents – December 31
120,000
(1,000,000)
( 210,000) (1,090,000)
303,000
300,000
603,000
Problem 17-5
Fearsome Company showed the following comparative statement of financial position:
2019
Cash and cash equivalents
Accounts receivable, net of allowance
Inventory
Investment in Hall Company at equity
Land
Property, plant and equipment
Accumulated depreciation
Goodwill
Accounts payable
Note payable – long term
Bonds payable
Share capital, P100 par
2018
2,350,000
600,000
1,000,000
2,200,000
2,000,000
5,000,000
( 1,050,000)
400,000
350,000
700,000
850,000
2,000,000
1,500,000
4,000,000
( 800,000)
400,000
12,500,000
9,000,000
600,000
500,000
1,600,000
5,250,000
550,000
2,100,000
4,000,000
Share premium
Retained earnings
Treasury shares, at cost
2,700,000
1,850,000
-
1,750,000
1,300,000
( 700,000)
12,500,000
9,000,000
Additional information
1. The net income for the current year was P3,050,000.
2. Cash dividend paid amounted to P2,500,000.
3. The entity sold equipment costing P200,000, with carrying amount of P50,000, for
P70,000 cash.
4. The entity issued 10,000 shares of capital for P150 per share cash.
5. The entity sold all of its treasury shares for P900,000 cash.
6. Individuals holding P500,000 face value bonds exercised their conversion privilege.
Each of the 500 bonds was converted into 5 shares of capital.
7. The entity purchased equipment for P1,200,000.
8. Land with a fair value of P500,000 was purchased through the issuance of a long
term note.
Required:
Prepare a statement of cash flows for the current year.
Answer:
Requirements
Entries
1. Profit and loss
Retained earnings
3,050,000
2. Retained earnings
Cash
2,500,000
3. Cash
Accumulated depreciation
Equipment
3,050,000
2,500,000
70,000
150,000
200,000
Gain on sale of equipment
20,000
4. Cash (10,000 x 150)
Share capital
Share premium
1,500,000
1,000,000
500,000
5. Cash
900,000
Treasury share
Share premium
700,000
200,000
6. Bonds payable
Share capital (2,500 x 100)
Share premium
500,000
250,000
250,000
7. Equipment
Cash
1,200,000
1,200,000
8. Land
500,000
Note payable – long term
500,000
9. Cash
100,000
Accounts receivable
100,000
10. Inventory
Cost of sales
150,000
11. Investment in Hall Company
Investment income
200,000
150,000
200,000
12. Purchases
Accounts payable
50,000
50,000
Operating
1. Net income
2. Cash dividend
3. Sale of equipment
Gain on sale of equipment
Depreciation
4. Issuance of share capital
5. Sale of treasury shares
6. Conversion of bonds payable into
Ordinary share- no cash effect
7. Purchase of equipment
Investing
Financing
3,050,000
(2,500,000)
70,000
(
20,000)
400,000
1,500,000
900,000
(1,200,000)
8. Purchase of land by issuing a note
- No cash effect
9. Decrease in accounts receivable
10. Increase in inventory
11. Investment income
12. Increase in accounts payable
Net cash provided (used)
100,000
( 150,000)
( 200,000)
50,000
3,230,000
(1,130,000) ( 100,000)
Fearsome Company
Statement of Cash Flows
December 31, 2019
Cash flow from operating activities:
Net income
Gain on sale of equipment
Depreciation
Decrease in net accounts receivable
Increase in inventory
Investment income
Increase in accounts payable
Cash flow from investing activities:
Sale of equipment
Purchase of equipment
Cash flow from financing activities:
Issue of share capital
Sale of treasury shares
Payment of cash dividend
Increase in cash and cash equivalents
Add: Cash and cash equivalents – January 1
Cash and cash equivalents – December 31
3,050,000
( 20,000)
400,000
100,000
( 150,000)
( 200,000)
50,000
3,230,000
70,000
(1,200,000) (1,130,000)
1,500,000
900,000
(2,500,000) ( 100,000)
2,000,000
350,000
2,350,000
Problem 17-6
Kenwood Company provided the following comparative statement of financial position:
2019
Cash
Accounts receivable, net of allowance
Inventory
Land
Property, plant and equipment
Accumulated depreciation
Patent
Accounts payable
Accrued expense
Bonds payable
Share capital, P5 par
Share premium
Retained earnings
500,000
1,050,000
1,300,000
1,625,000
2,900,000
( 450,000)
150,000
1,350,000
1,300,000
1,000,000
1,250,000
1,165,000
1,010,000
2018
450,000
700,000
1,200,000
1,000,000
3,165,000
( 500,000)
165,000
1,000,000
1,050,000
1,500,000
1,050,000
850,000
730,000
Additional information
1. The net income for the current year was P1,095,000.
2. On February 2, the entity issued a 10% stock dividend to shareholders of record on
January 15. The market price per share was P15.
3. On March 1, the entity issued 19,000 shares for land. The land had a fair value of
P200,000.
4. The entity purchased long term bonds with face of P500,000. A gain on retirement of
bonds was reported in the income statement in the amount of P50,000.
5. The entity sold equipment costing P265,000, with carrying amount of P115,000, for
P95,000 cash.
6. On September 30, the entity declared and paid a P2.00 per share cash dividend to
shareholders of record on August 1.
7. The entity purchased land for P425,000 cash.
Required:
Prepare a statement of cash flows for the current year.
Answer:
Requirements
Entries
1. Profit and loss
Retained earnings
1,095,000
1,095,000
2. Retained earnings (21,000 x 15)
Share capital (21,000 x 5)
Share premium
315,000
3. Land
200,000
105,000
210,000
Share capital (19,000 x 5)
Share premium
95,000
105,000
4. Bonds payable
Cash
Gain on bond retirement
500,000
5. Cash
Accumulated depreciation
Loss on sale of equipment
Equipment
95,000
150,000
20,000
6. Retained earnings (250,000 x 2)
Cash
500,000
7. Land
425,000
450,000
50,000
265,000
500,000
Cash
425,000
8. Accounts receivable
Sales
350,000
9. Inventory
Cost of sales
100,000
10. Depreciation (450,000 – 350,000)
Accumulated depreciation
100,000
11. Amortization of patent
Patent
350,000
100,000
100,000
15,000
15,000
12. Purchases
Accounts payable
350,000
13. Expenses
Accrued expenses
250,000
350,000
250,000
Operating
1. Net income
2. Stock dividend – no cash effect
3. Issuance of share capital for land –
No cash effect
4. Retirement of bonds payable
Gain on bond retirement
5. Sale of equipment
Loss on sale of equipment
6. Cash dividend
7. Purchase of land
8. Increase in accounts receivable
9. Increase in inventory
10. Depreciation
11. Amortization of patent
12. Increase in accounts payable
13. Increase in accrued expenses
Net cash provided (used)
Investing
Financing
1,095,000
( 450,000)
(
50,000)
95,000
20,000
( 500,000)
( 425,000)
( 350,000)
( 100,000)
100,000
15,000
350,000
250,000
1,330,000
( 330,000)
( 950,000)
Kenwood Company
Statement of Cash Flow
December 31, 2019
Cash flow from operating activities:
Net income
Gain on bond retirement
Loss on sale of equipment
Increase in net accounts receivable
Increase in inventory
Depreciation
Amortization of patent
Increase in accounts payable
Increase in accrued expenses
Cash flow from investing activities:
Sale of equipment
Purchase of land
Cash flow from financing activities:
Retirement of bonds payable
Cash dividend
Increase in cash and cash equivalents
Add: cash and cash equivalents – January 1
Cash and cash equivalents – December 31
1,095,000
( 50,000)
20,000
( 350,000)
( 100,000)
100,000
15,000
350,000
250,000
1,330,000
95,000
( 425,000)
( 330,000)
( 450,000)
( 500,000)
( 950,000)
50,000
450,000
500,000
Problem 17-7
Sandra Company provided the following comparative statement of financial position.
2019
Cash and cash equivalents
Accounts receivable, net of allowance
Inventory
Investment in Word Company, at equity
Property, plant and equipment
Accumulated depreciation
Patent, net
Accounts payable and accrued liabilities
Note payable, long-term debt
Deferred tax liability
Share capital, P100 par value
Share premium
Retained earnings
1. The net income for the current year is P305,000.
640,000
550,000
810,000
400,000
1,145,000
( 345,000)
100,000
815,000
600,000
220,000
850,000
230,000
585,000
2018
300,000
515,000
890,000
390,000
1,070,000
( 280,000)
350,000
950,000
900,000
200,000
650,000
170,000
365,000
2. The entity paid a cash dividend of P85,000 on October 26.
3. On January 2, the entity sold equipment costing P45,000, with a carrying amount of
P28,000 for P18,000.
4. On April 15, the entity issued 2,000 shares of capital for cash at P130 per share.
5. On July 1, the entity purchased equipment for P120,000 cash.
6. The entity acquired a 20% interest in Word Company at the end of 2018. There was
no goodwill attributable to the investment. The investee reported net income of
P150,000 for 2019 and paid cash dividend of P100,000 on December 31, 2019.
Required:
Prepare a statement of cash flows for the current year.
Answer:
Requirements
Entries
1. Profit and loss
Retained earnings
Retained earnings
Cash
2. Cash
Accumulated depreciation
Loss on sale of equipment
Equipment
3. Cash
305,000
305,000
85,000
85,000
18,000
17,000
10,000
45,000
260,000
Share capital
Share premium
4. Equipment
200,000
60,000
120,000
Cash
120,000
5. Investment in Word Company
Investment income
30,000
30,000
Cash
20,000
Investment in Word Company
20,000
6. Accounts receivable
Sales
35,000
7. Cost of sales
Inventory
80,000
8. Depreciation
Accumulated depreciation
82,000
35,000
80,000
82,000
Accumulated – 2019
Accumulated – 2018 (280,000 – 17,000)
Depreciation for 2019
345,000
263,000
82,000
9. Amortization
Patent
250,000
10. Accounts payable
Cash
135,000
11. Note payable – long term
Cash
300,000
250,000
135,000
300,000
12. Income tax
Deferred tax liability
20,000
20,000
Operating
1. Net income
Cash dividend
2. Sale of equipment
Loss on sale of equipment
3. Issue of share capital
4. Purchase of equipment
5. Investment income
Cash dividend received from equity
Investee
6. Increase in net accounts receivable
Investing
Financing
305,000
( 85,000)
18,000
10,000
260,000
(120,000)
( 30,000)
20,000
( 35,000)
7. Decrease in inventory
8. Depreciation
9. Amortization of patent
10. Decrease in accounts payable
11. Payment of long term note
12. Increase in deferred tax liability
Net cash provided (used)
80,000
82,000
250,000
(135,000)
(300,000)
20,000
567,000
(102,000)
(125,000)
305,000
10,000
( 30,000)
20,000
( 35,000)
80,000
82,000
250,000
(135,000)
20,000
567,000
18,000
(120,000)
(102,000)
Sandra Company
Statement of Cash Flows
December 31, 2019
Cash flow from operating activities:
Net income
Loss on sale of equipment
Investment income
Cash dividend received from equity investee
Increase in accounts receivable
Decrease in inventory
Depreciation
Amortization of patent
Decrease in accounts payable
Increase in deferred tax liability
Cash flow from investing activities:
Sale of equipment
Purchase of equipment
Cash flow from financing activities:
Cash dividend
Issue of share capital
Payment of long term note
Increase in cash and cash equivalents
Cash and cash equivalents – January 1
Cash and cash equivalents – December 31
( 85,000)
260,000
(300,000)
(125,000)
340,000
300,000
640,000
Problem 17-8
On December 31, 2019, Kale Company had the following balances in the bank
accounts with First Bank:
Checking account #101
Checking account #201
Time deposit
Commercial papers
1,750,000
( 100,000)
250,000
1,000,000
90-day treasury bill, due February 28, 2020
180-day treasury bill, due March 15, 2020
500,000
800,000
On December 31, 2019, what amount should be reported as cash and cash equivalent
a.
b.
c.
d.
3,400,000
2,000,000
2,400,000
3,200,000
Answer:
Checking account #101
Checking account #201
Time deposit
90-day treasury bill, due February 28, 2020
Total cash and cash equivalents
1,750,000
( 100,000)
250,000
500,000
3,400,000
Problem 17-9
Oakwood Company provided the following data for the current year:
Cash balance, beginning of year
Cash flow from financing activities
Total shareholders’ equity, end of year
Cash flow from operating activities
Cash flow from investing activities
Total shareholders’ equity, beginning of year
1,300,000
1,000,000
2,300,000
400,000
(1,500,000)
2,000,000
What is the cash balance at the end of current year?
a.
b.
c.
d.
1,200,000
1,600,000
1,400,000
1,700,000
Answer:
Cash balance, beginning of year
Cash flow from financing activities
1,300,000
1,000,000
Cash flow from operating activities
Cash flow from investing activities
Cash balance – ending
400,000
(1,500,000)
1,200,000
Problem 17-10
Seawall Company provided the following data for the preparation of the statement of
cash flows for the current year:
Dividends declared and paid
Cash flow from investing activities
Cash flow from financing activities
800,000
(2,500,000)
( 800,000)
December 31
Cash
Other assets
Liabilities
Share capital
Retained earnings
2,100,000
21,000,000
10,500,000
2,000,000
10,600,000
January 1
1,200,000
22,700,000
11,700,000
2,000,000
10,200,000
What amount should be reported as cash flow from operating activities?
a.
b.
c.
d.
4,200,000
2,400,000
4,500,000
5,400,000
Answer:
Cash – January 1
Cash flow from operating activities (squeeze)
Cash flow from investing activities
Cash flow from financing activities
Cash – December 31
1,200,000
4,200,000
(2,500,000)
( 800,000)
2,100,000
Problem 17-11
Santana Company provided the following information for the current year:
December 31
January 1
Cash
Retained earnings
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Dividends declared and paid
Net income
1,500,000
7,000,000
?
(4,800,000)
1,800,000
2,000,000
3,600,000
1,000,000
5,400,000
What amount should be reported as cash flow from operating activities?
a.
b.
c.
d.
3,500,000
2,500,000
4,500,000
3,600,000
Answer:
Cash – January 1
Cash flow from operating activities (squeeze)
Cash flow from investing activities
Cash flow from financing activities
Cash – December 31
1,000,000
3,500,000
(4,800,000)
1,800,000
1,500,000
Problem 17-12
Moon Company reported net income of P5,000,000 for the current year. Depreciation
expense was P1,900,000.
The following working capital accounts changed:
Accounts receivable
Nontrading equity investment
Inventory
Nontrade note payable
Accounts payable
1,100,000 increase
1,600,000 increase
730,000 increase
1,500,000 increase
1,220,000 increase
Under the indirect method, what net amount of adjustments is required to reconcile net
income to net cash provided by operating activities?
a. 4,950,000
b. 1,050,000
c. 1,290,000
d. 310,000
Answer:
Depreciation expense
Increase in accounts receivable
Increase in inventory
Increase in accounts payable
Adjustment to reconcile net income to net cash provided
By operating activities
1,900,000
(1,100,000)
( 730,000)
1,220,000
1,290,000
Problem 17-13
Kresley Company reported net income of P750,000 for the current year:
The entity provided the following account balances for the preparation of statement of
cash flows for the current year:
Accounts receivable
Allowance for uncollectible accounts
Prepaid rent expense
Accounts payable
January 1
December 31
115,000
4,000
62,000
97,000
145,000
5,000
41,000
112,000
What is the net cash provided by operating activities for the current year?
a.
b.
c.
d.
727,000
743,000
755,000
757,000
Answer:
Net income
Increase in net accounts receivable (140,000 – 111,000)
Decrease in prepaid rent
Increase in accounts payable
Cash provided by operating activities
750,000
( 29,000)
21,000
15,000
757,000
Problem 17-14
Kentucky Company reported net income of P1,500,000 for the current year:
The entity provided the following changes in several accounts during the current year.
Investment in Videogold Company share carried
On the equity basis
55,000 increase
Accumulated depreciation, caused by major
Repair to project equipment
Premium on bonds payable
Deferred tax liability
21,000 decrease
14,000 decrease
18,000 increase
In the statement of cash flows, what is the net cash provided by operating activities?
a.
b.
c.
d.
1,504,000
1,483,000
1,449,000
1,428,000
Answer:
Net income
Increase in investment carried on the equity
Amortization of premium on bonds payable
Increase in deferred tax liability
Cash provided by operating activities
1,500,000
( 55,000)
( 14,000)
18,000
1,449,000
Problem 17-15
Albay Company provided the following information:
Accounts receivable, January 1, net of allowance
Of P100,000
Accounts receivable, December 31, net of allowance
Of P300,000
Sales for the current year – all on credit
Uncollectible accounts written off during the year
Recovery of accounts written off
Bad debt expense for the year
Cash expenses for the year
Net income for the year
What is the net cash flow from operating activities?
a.
b.
c.
d.
2,100,000
2,350,000
2,080,000
2,150,000
1,200,000
1,600,000
8,000,000
70,000
20,000
250,000
5,250,000
2,500,000
Answer:
Net income
Increase in accounts payable
Net cash provided – operating
2,500,000
( 400,000)
2,100,000
Problem 17-16
Balcktown Company reported the following account balances:
Accounts payable
Inventory
Accounts receivable
Prepaid expenses
December 31
January 1
500,000
300,000
800,000
400,000
650,000
250,000
900,000
600,000

All purchases of inventory were on account.

Depreciation expense of P900,000 was recognized.

Equipment was sold during the year and a gain of P300,000 was recognized
The entity provided the following cash flow information:
Cash collected from customers
Cash paid for inventory
Cash paid for other expenses
Cash flow from operations
9,500,000
(4,100,000)
(1,400,000)
4,000,000
What is the net income for the current year?
a.
b.
c.
d.
3,300,000
3,400,000
3,000,000
3,900,000
Answer:
Net income (squeeze)
Decrease in accounts payable
Increase in inventory
Decrease in accounts receivable
Decrease in prepaid expenses
Depreciation
3,300,000
( 150,000)
( 50,000)
100,000
200,000
900,000
Gain on sale of equipment
Cash flow from operations
( 300,000)
4,000,000
Problem 17-17
Rumulus Company reported the following information in the financial statements for the
current year:
Capital expenditures
Finance lease payments
Income taxes paid
Dividends paid
Net interest payments
1,000,000
125,000
325,000
200,000
220,000
What total amount should be reported as supplemental disclosures in the statement of
cash flows prepared using the indirect method?
a. 1,125,000
b. 1,870,000
c. 545,000
d. 745,000
Answer:
Income taxes paid
Net interest payment
Total amount to be disclosed
325,000
220,000
545,000
Problem 17-18
Stone Company provided the following information at year-end:
Accounts receivable
Inventory
Accounts payable
Accrued expenses
2019
2018
620,000
1,960,000
380,000
500,000
680,000
1,840,000
520,000
340,000
The income statement for the current year showed:
Net income
Depreciation
2,120,000
240,000
Amortization of patent
Gain on sale of land
80,000
200,000
What amount should be reported as net cash provided by operating activities?
a.
b.
c.
d.
2,200,000
2,400,000
2,440,000
2,600,000
Answer:
Net income
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in accrued expenses
Deprecation
Amortization of patent
Gain on sale of land
Cash provided by operating activities
2,120,000
60,000
( 120,000)
( 140,000)
160,000
240,000
80,000
( 200,000)
2,200,000
Problem 17-19
Brown Company reported the following information for the current year:
Sales
Cost of goods sold
Distribution costs
Administrative expenses
Depreciation
Interest expense
Income tax expense
2,800,000
1,000,000
400,000
350,000
250,000
80,000
280,000
All sales were made for cash and all expenses other than depreciation and bond
premium amortization of P20,000 were paid in cash. All current assets and current
liabilities remained unchanged.
What is the net cash provided by operating activities for the current year?
a.
b.
c.
d.
440,000
690,000
670,000
710,000
Answer:
Sales
Cost of goods sold
Distribution costs
Administrative expenses
Interest expense
Income tax expense
Amortization of premium bonds payable
Cash provided by operating activities
2,800,000
(1,000,000)
( 400,000)
( 350,000)
( 80,000)
( 280,000)
( 20,000)
670,000
Problem 17-20
Matthew Company provided the following information for the current year:
Purchase of inventory
Purchase of land, with the vendor financing P1,000,000
For 2 years
Purchase of plant for cash
Sale of plant:
Carrying amount
Cash proceeds
Buyback of ordinary shares
1,950,000
3,500,000
2,500,000
500,000
400,000
700,000
What amount of investing net cash outflows should be reported in the statement of cash
flows for the current year?
a.
b.
c.
d.
5,600,000
4,600,000
6,550,000
5,300,000
Answer:
Purchase of land
Vendor financing
Cash payment
Purchase of plant for cash
Cash proceeds
Net cash outflows
(3,500,000)
1,000,000
(2,500,000)
(2,500,000)
400,000
(4,600,000)
Problem 17-21
Nellie Company provided the following information at the end of each year:
Borrowings
Share capital
Retained earnings
2019
2018
2,500,000
3,500,000
950,000
800,000
2,000,000
750,000
Borrowings of P300,000 were repaid during 2019 and new borrowings include P200,000
vendor financing arising on the acquisition of a property.
The movement in retained earnings comprised profit for 2019 of P900,000, net of
dividends of P700,000. The movement in share capital arose from issuance of share
capital for cash during the year.
What amount should be reported as financing net cash inflows for the current year?
a.
b.
c.
d.
2,400,000
2,200,000
2,500,000
2,300,000
Answer:
Net increase in borrowings
Vendor financing of property
Net cash inflow from borrowings
Issuance of share capital
Dividend paid
Net cash flow – financing
1,700,000
( 200,000)
1,500,000
1,500,000
( 700,000)
2,300,000
Problem 17-22
Riverside Company provided the following data for the current year:

Purchased a building for P1,200,000.
Paid P400,000 and signed a mortgage with the seller for the remaining P800,000.

Executed a debt-equity swap and replaced a P600,000 load by giving the lender
ordinary shares worth P600,000 on the date the swap was executed.

Purchased land for P1,000,000. Paid P350,000 and issued ordinary share worth
P650,000.

Borrowed P550,000 under a long-term loan agreement.
Used the cash from the loan proceeds to purchase additional inventory P150,000, to
pay cash dividend P300,000 and to increase the cash balance P100,000.
1. What amount should be reported as net cash used in investing activities?
a. 1,200,000
b. 2,200,000
c.
400,000
d. 750,000
Answer:
Cash paid for purchase of building
Cash paid for purchase of land
Net cash used – investing
400,000
350,000
750,000
2. What amount should be reported as net cash provided by financing activities?
a.
b.
c.
d.
350,000
850,000
250,000
550,000
Answer:
Proceeds to purchase inventory
Increase cash balance
Dividend paid
Net cash provided by financing activities
150,000
(100,000)
300,000
350,000
Problem 17-23
Karr Company reported net income of P3,000,000 for the current year. The following
changes occurred in several accounts:
Equipment
Accumulated depreciation
Note payable
250,000 increase
400,000 increase
300,000 increase

During the year, the entity sold equipment costing P250,000, with accumulated
depreciation of P120,000 at a gain of P50,000.

In December, the entity purchased equipment costing P500,000 with P200,000 cash
and a 12% note payable of P300,000.
1. What is the depreciation expense for the year?
a.
b.
c.
d.
520,000
400,000
280,000
120,000
Answer:
Increase in accumulated depreciation
Accumulated depreciation of equipment sold
Depreciation
400,000
120,000
520,000
2. What amount should be reported as net cash used in investing activities?
a. 350,000
b. 120,000
c. 220,000
d. 20,000
Answer:
Sale of equipment (250,000 – 120,000=130,000 + 50,000)
Payment of equipment
Net cash used in investing activities
180,000
(200,000)
( 20,000)
3. What amount should be reported as net cash provided by operating activities?
a. 3,400,000
b. 3,470,000
c. 3,520,000
d. 3,570,000
Answer:
Net income
Gain on sale of equipment
Depreciation
Cash flow from operations
3,000,000
( 50,000)
520,000
3,470,000
Problem 17-24
Reve Company provided the following data for the current year:
Gain on sale of equipment
Proceeds from sale of equipment
Purchase of Ace bonds, face amount, P2,000,000
Amortization of bond discount
Dividend declared
Dividend paid
Proceeds from sale of treasury shares with
Carrying amount of P650,000
60,000
100,000
1,800,000
20,000
450,000
380,000
750,000
1. What is net cash provided by financing activities?
a.
b.
c.
d.
200,000
270,000
300,000
370,000
Answer:
Proceeds from sale of equipment
Proceeds from sale of treasury share – Carrying amount
Dividend paid
Net cash provided by financing activities
2. What is net cash used in investing activities?
a.
b.
c.
d.
1,700,000
1,760,000
1,880,000
1,940,000
100,000
650,000
(380,000)
370,000
Answer:
Sale of equipment
Purchase of equipment – Face amount
Net cash used – investing
60,000
(2,000,000)
1,940,000
Problem 17-25
Zoe Company reported net income of P3,400,000 for the current year. The net income
included depreciation of P840,000 and a gain on sale equipment of P170,000.
The equipment had an original cost of P4,000,000 and accumulated depreciation of
P2,400,000. All of the following accounts increased during the current year.
Patent
Prepaid rent
Financial asset at fair value through other
Comprehensive income (FVOCI)
Bonds payable
450,000
680,000
100,000
500,000
What amount should be reported as net cash flow from investing activities?
a. 1,720,000 provided
b. 1,220,000 provided
c.
540,000 provided
d. 380,000 used
Answer:
Proceeds from sale of equipment
Increase in patent
Increase in financial asset at FVOCI
Net cash provided by investing activities
1,770,000
( 450,000)
( 100,000)
1,220,000
Original cost
Accumulated depreciation
Carrying amount
Gain on sale of equipment
Proceeds from sale of equipment
4,000,000
(2,400,000)
1,600,000
170,000
1,770,000
Problem 17-26
Mountain Company provided the following information:
2019
Cash and cash equivalents
Accounts receivable
Inventory
Prepaid expenses
Property, plant and equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Note payable – bank (current)
Note payable – bank (noncurrent)
Ordinary share capital
Retained earnings
2018
5,600,000
7,400,000
3,000,000
3,500,000
8,000,000
6,500,000
400,000
600,000
55,000,000 42,000,000
(20,000,000) (16,000,000)
6,000,000
9,500,000
1,500,000
500,000
2,000,000
5,000,000
10,000,000
30,000,000 30,000,000
2,500,000
(1,000,000)
Cash needed to purchase new equipment was raised by borrowing from the bank with a
long-term note.
Equipment costing P2,000,000 and carrying amount of P1,500,000 was sold for
P1,800,000.
The entity paid cash dividend of P3,000,000 in 2019.
1. What is the net cash provided by operating activities?
a.
b.
c.
d.
7,400,000
6,900,000
8,000,000
7,700,000
Answer:
Net income
Decrease in accounts receivable
Increase in inventory
Decrease in prepaid expenses
Gain on sale of equipment
Depreciation
Decrease in accounts payable
Increase in accrued expenses
Net cash provided by operating activities
Retained earnings -2019
Retained earnings – 2018 (deficit)
Net increase in retained earnings
Add: Dividend paid
6,500,000
500,000
( 1,500,000)
200,000
( 300,000)
4,500,000
( 3,500,000)
1,000,000
7,400,000
2,500,000
1,000,000
3,500,000
3,000,000
Net income
Accumulated depreciation – 2018
Depreciation for 2019 (squeeze)
Total
Accumulated depreciation on equipment sold
(2,000,000 – 1,500,000)
Accumulated depreciation – 2019
6,500,000
16,000,000
4,500,000
20,500,000
( 500,000)
20,000,000
2. What is the net cash used in investing activities?
a.
b.
c.
d.
15,000,000
13,200,000
14,800,000
13,000,000
Answer:
Payment for new equipment
Proceeds from sale of equipment
Net cash used in investing activities
Property, plant and equipment – 2018
Payment for new equipment (squeeze)
Total
Cost of equipment sold
Property, plant and equipment – 2019
3. What is the net cash provided by financing activities?
a.
b.
c.
d.
(15,000,000)
1,800,000
(13,200,000)
42,000,000
15,000,000
57,000,000
( 2,000,000)
4,000,000
7,000,000
6,000,000
4,000,000
3,000,000
Answer:
Proceeds from borrowing on a long-term note payable
Dividend paid
Payment of current bank note payable (5,000,000 – 2,000,000)
Net cash provided by financing activities
10,000,000
( 3,000,000)
( 3,000,000)
4,000,000
Problem 17-27
Rosalynne Company reported the following statement of financial position at year-end:
2019
Cash
Accounts receivable
Investments, at cost
Plant
Accumulated depreciation
Accounts payable
Share capital
Retained earnings
2018
2,750,000
2,000,000
7,000,000
4,600,000
1,000,000
1,750,000
9,000,000
6,500,000
(3,000,000) (2,250,000)
4,750,000
3,750,000
7,500,000
5,000,000
4,500,000
3,850,000
An investment was sold for P1,250,000 during the year. There was no disposal of plant
during the year.
The net income for the year was P3,000,000, after income tax expense of P1,200,000.
A dividend of P2,350,000 was paid on December 31, 2019.
1. What is the net cash provided by operating activities?
a.
b.
c.
d.
1,850,000
2,350,000
2,850,000
1,100,000
Answer:
Net profit
Gain on sale of investment (1,250,000 – 75,000)
Increase in accounts receivable
Depreciation (3,000,000 – 2,250,000)
Increase in accounts payable
Net cash provided – operating
2. What is the net cash used in investing activities?
a. 2,500,000
b. 1,250,000
c. 1,750,000
d. 500,000
Answer:
3,000,000
( 500,000)
(2,400,000)
750,000
1,000,000
1,850,000
Sale of equipment
Purchase of plant (9,000,000 – 6,500,000)
Net cash used – investing
1,250,000
(2,500,000)
(1,250,000)
3. What is the net cash provided by financing activities?
a. 2,500,000
b. 2,350,000
c.
650,000
d. 150,000
Answer:
Issue of share capital (7,500,000 – 5,000,000)
Dividend paid
Net cash provided – financing
2,500,000
(2,350,000)
150,000
Problem 17-28
Weaver Company provided the following data:
Trade accounts receivable, net
Inventory
Accounts payable
2018
2019
840,000
1,500,000
950,000
780,000
1,400,000
980,000

Total sales were P12,000,000 for 2019 and P11,000,000 for 2018. Cash sales were
20% of total sales each year. Cost of goods sold was P8,400,000 for 2019.

Variable general and administrative expenses for 2019 were P1,200,000. They have
varied in proportion to sales, 50% have been paid in the year incurred and 50% the
following year. Unpaid expenses are not included in accounts payable.

Fixed general and administrative expenses, including P350,000 depreciation and
P50,000 bad debt expense, totaled P1,000,000 each year.
Eighty percent of fixed expenses involving cash were paid in the year incurred and
20% the following year.
Each year there was a P50,000 bad debt estimate and a P50,000 writeoff. Unpaid
expenses are not included in accounts payable.
1. What is the cash collected from customers during 2019?
a.
b.
c.
d.
12,010,000
12,060,000
11,960,000
11,890,000
Answer:
Accounts receivable – 2018
Sales – 2019
Total
Less: Accounts receivable – 2019
Writeoff
Cash collections in 2019
840,000
12,000,000
12,840,000
780,000
50,000
830,000
12,010,000
2. What is the cash disbursed for purchases during 2019?
a.
b.
c.
d.
8,500,000
8,270,000
8,300,000
8,200,000
Answer:
Inventory – 2018
Purchase (squeeze)
Goods available for sale
Less: inventory – 2019
Cost of goods sold
1,500,000
8,300,000
9,800,000
1,400,000
8,400,000
Accounts payable – 2018
Purchases
Total
Less: Accounts payable – 2019
950,000
8,300,000
9,250,000
980,000
Cash disbursed for purchase
8,270,000
3. What is the cash disbursed for expenses during 2019?
a.
b.
c.
d.
1,800,000
1,200,000
1,750,000
1,450,000
Answer:
Fixed expenses
Depreciation
Bad debt expense
Fixed expenses paid in 2019
Variable expenses paid in 2019
2019 (1,200,000 x 50%)
2018 (1,100,000 x 50%)
Total cash disbursement for expenses
1,000,000
( 350,000)
( 50,000)
600,000
Variable ratio (1,200,000 / 12,000,000)
2018 variable expenses (10% x 11,000,000)
10%
1,100,000
600,000
550,000
1,750,000
Problem 17-29
Haze Company provided the following information for the current year:
Cash
Accounts receivable
Merchandise inventory
Accounts payable
January 1
December 31
620,000
670,000
860,000
530,000
?
900,000
780,000
480,000
The sales and cost of goods sold were P7,980,000 and P5,830,000 respectively. All
sales and purchases were on credit.
Various expenses of P1,070,000 were paid in cash. There were no other pertinent
transactions.
1. What is the amount of collections from customers?
a.
b.
c.
d.
7,980,000
8,600,000
7,750,000
8,210,000
Answer:
Accounts receivable – January 1
Sales
Total
Accounts receivable – December 31
Cash collected from customers
670,000
7,980,000
8,650,000
( 900,000)
7,750,000
2. What is the payment of accounts payable?
a.
b.
c.
d.
5,750,000
5,880,000
5,800,000
5,700,000
Answer:
Merchandise inventory – January 1
Purchases (squeeze)
Available for sale
Merchandise inventory – December 31
Cost of goods sold
860,000
5,750,000
6,610,000
( 780,000)
5,830,000
Accounts payable – January 1
Purchases
Total
Accounts payable – December 31
Cash paid for accounts payable
530,000
5,750,000
6,280,000
( 480,000)
5,800,000
3. What is the cash balance on December 31?
a.
b.
c.
d.
1,090,000
1,500,000
2,570,000
3,050,000
Answer:
Cash – January 1
Cash collected from customers
Less: Payments of accounts payable
Expense
Cash balance – December 31
620,000
7,750,000
5,800,000
1,070,000
1,500,000
Problem 17-30
Mega Company gathered the following information about changes which took place
during the current year:
Cash
Accounts receivable, net
Inventory
Property, plant and equipment
Accumulated depreciation
Intangible asset, net of amortization
Accrued expenses
Accounts payable
Note payable – short-term debt
Bonds payable
Ordinary share capital, P10 par
Share premium
Retained earnings
( 150,000)
300,000
1,500,000
500,000
( 180,000)
275,000
( 50,000)
( 320,000)
( 700,000)
( 250,000)
( 125,000)
( 200,000)
( 600,000)
Equipment with had originally cost P200,000 and had a carrying amount of zero was
thrown away.
Equipment with a cost of P150,000 and accumulated depreciation of P100,000 was sold
for P50,000. Some new equipment was purchased during the year.
An intangible asset was acquired during the year for 25,000 ordinary shares. Each
share was selling for P13 at that time.
The entity retired P2,500,000 of 10% bonds at par and issued P2,750,000 of 8% bonds
at par. The income statement reported revenue of P7,000,000 and expenses of
P5,000,000.
1. What is the net cash provided by operating activities?
a. 1,000,000
b. 1,800,000
c. 1,050,000
d. 1,100,000
Answer:
Net income (7,000,000 – 5,000,000)
Depreciation
Increase in accounts receivable
Increase in inventory
Amortization (325,000 – 275,000)
Increase in accrued expenses
Increase in accounts payable
Net cash provided – operating
Net increase in accumulated depreciation
Add: Accumulated depreciation of equipment thrown away
Accumulated depreciation of equipment sold
Total depreciation
2,000,000
480,000
( 300,000)
(1,500,000)
50,000
50,000
320,000
1,100,000
180,000
200,000
100,000
480,000
2. What is the net cash used in investing activities?
a.
b.
c.
d.
850,000
800,000
900,000
950,000
Answer:
Sale of equipment
Purchase of equipment
Net cash used – investing
50,000
( 850,000)
( 800,000)
Net increase in PPE
Add: Cost of equipment thrown away
Cost of equipment sold
Purchase of equipment
500,000
200,000
150,000
850,000
Patent acquired (25,000 shares x 13)
Less: Increase in intangible asset
Amortization
325,000
275,000
50,000
3. What is the net cash used in financing activities?
a.
b.
c.
d.
250,000
450,000
950,000
125,000
Answer:
Retirement of bonds payable
Issuance of bonds payable
Dividend paid
Proceeds from note payable – short term debt
Net cash used – financing
(2,500,000)
2,750,000
(1,400,000)
700,000
450,000
Net income
Less: Retained earnings
Dividend paid
2,000,000
600,000
1,400,000
Problem 17-31
Beal Company reported the following changes in the statement of financial position
accounts during the current year:
Increase (Decrease)
Assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Long-term investments
Property, plant and equipments
Accumulated depreciation
120,000
300,000
80,000
(100,000)
700,000
1,100,000
Liabilities and Shareholders’ Equity
Accounts payable and accrued liabilities
(
5,000)
Dividend payable
Short-term bank debt
Long-term debt
Ordinary share capital, P10 par
Share premium
Retained earnings
160,000
325,000
110,000
100,000
120,000
290,000
1,100,000
The following additional information relates to the current year:






Net income for the current year was P790,000.
Cash dividend of P500,000 was declared.
Equipment costing P600,000 and having a carrying amount of P350,000 was sold
for P350,000.
Equipment costing P110,000 was acquired through issuance of long-term debt.
A long-term investment was sold for P135,000. There were no other transactions
affecting long-term investments.
10,000 ordinary shares were issued for P22 a share.
1. What amount should be reported as net cash provided by operating activities?
a. 1,600,000
b. 1,040,000
c. 920,000
d. 705,000
Answer:
Net income
Increase in inventory
Decrease in accounts payable
Gain on sale of long-term investment (135,000 – 100,000)
Depreciation expense (600,000 – 350,000)
Cash provided by operating activities
(
(
(
790,000
80,000)
5,000)
35,000)
250,000
920,000
2. What amount should be reported as net cash used in investing activities?
a. 1,005,000
b. 1,190,000
c. 1,275,000
d. 1,600,000
Answer:
Purchased of short-term investments
Sale of long-term investments
Purchased of PPE
Sale of equipment
Net cash used in investing activities
( 300,000)
135,000
(1,190,000)
350,000
(1,005,000)
PPE net increase
Cost of equipment sold
Equipment acquired through issuance of long term debt
Cash paid for PPE
700,000
600,000
( 110,000)
1,190,000
3. What amount should be reported as net cash provided by financing activities?
a. 20,000
b. 45,000
c. 150,000
d. 205,000
Answer:
Cash dividend paid (500,000 – 160,000)
Proceeds from short-term debt
Issuance of ordinary share (10,000 x 22)
Net cash provided in financing activities
( 340,000)
325,000
220,000
205,000
Problem 17-32
New World Company recorded the following transactions during the current year.

Net income was P2,900,000, which included P300,000 loss resulting from the
condemnation of land by the city government.
The entity received P3,300,000 for the land carried at P3,600,000.

Patent account increased by P560,000 during the year, representing acquisition of
P680,000 and amortization of P120,000.

Property, plant and equipment had a net increase of P2,200,000.

Accumulated depreciation:
Ending balance
Beginning balance
4,200,000
3,270,000

Cash dividends of P250,000 were declared and paid.

Treasury shares with par value of P400,000 were acquired for P620,000 cash.

Convertible bonds issued at face amount of P2,000,000 were converted into share
capital during the year.
The par value of the share capital issued was P1,500,000.

All current assets and current liabilities, other than cash remained unchanged during
the year.

Working capital increased by P200,000 during the year.
1. What amount should be reported as net cash provided by operating activities?
a.
b.
c.
d.
2,900,000
4,250,000
4,130,000
3,950,000
Answer:
Net income
Amortization patent
Accumulated depreciation
Net cash provided by operating activities
2,900,000
120,000
930,000
3,950,000
2. What amount should be reported as net cash used in investing activities?
a.
b.
c.
d.
2,500,000
2,620,000
3,180,000
2,200,000
Answer:
Condemnation of land – loss
Gain on sale of land (3,300,000 – 3,600,000)
Property, plant and equipment
( 300,000)
300,000
(2,200,000)
Net cash used in investing activities
(2,200,000)
3. What amount should be reported as net cash used in financing activities?
a. 620,000
b. 250,000
c. 870,000
d.
0
Answer:
Proceeds from issuance of share capital (1,500,000 -2,000,000)
Cash dividends paid
Treasury share
Net cash used in financing activities
500,000
( 250,000)
620,000
870,000
Problem 17-33
1. All can be classified as cash and cash equivalents, except
a.
b.
c.
d.
Redeemable preference share due in 60 days
Treasury bill due for repayment in 90 days
Equity investments
Bank overdraft
2. When an entity purchased a three-month Treasury bill, how would the purchase be
treated in preparing the statement of cash flow?
a.
b.
c.
d.
Not reported
An outflow for financing activities
An outflow for lending activities
An outflow for investing activities
3. In a statement of cash flows, if used equipment is sold at a gain, the amount shown
as cash inflow from investing activities equals the carrying amount of the equipment
a. Plus the gain
b. Plus the gain and less the amount of tax
c. Plus both the gain and the amount of tax
d. With no addition or subtraction
4. In a statement of cash flows, if used equipment is sold at a loss, the amount shown
as a cash inflow from investing activities equals the carrying amount of the
equipment
a.
b.
c.
d.
Less the loss and plus the amount of tax
Less both the loss and the amount of tax
Less the loss
With no addition or subtraction
5. In a statement of cash flows using indirect method, a decrease in prepaid expense is
a.
b.
c.
d.
Reported as an outflow and inflow of cash
Reported as an outflow of cash
Deducted from net income
Added to net income
6. In a statement of cash flows, depreciation is treated as an adjustment to net income
because depreciation
a.
b.
c.
d.
Is a direct source of cash
Reduces income but does not involve cash outflow
Reduces net income and involves an inflow of cash
Is an inflow of cash for replacement of asset
7. Using indirect method for operating activities, an increase in inventory is presented
as
a.
b.
c.
d.
Outflow of cash
Inflow and outflow of cash
Addition to net income
Deduction from net income
8. Which of the following should not be disclosed in the statement of cash flows using
the indirect method?
a.
b.
c.
d.
Interest paid
Income taxes paid
Cash flow per share
Dividends paid on preference shares
9. Dividends received from an equity investee should be presented in the statement of
cash flows as
a.
b.
c.
d.
Deduction from cash flows from operating activities
Addition to cash flows from investing activities
Addition to cash flows from operating activities
Deduction from cash flows from investing activities
10. In a statement of cash flows, which of the following should be reported as cash flow
from financing activities?
a.
b.
c.
d.
Payment to retire mortgage note
Interest payment on mortgage note
Dividend payment
Payment to retire mortgage note and dividend payment
Problem 17-34
1. Which statement about the method of preparing the statement of cash flows is true?
a. The indirect method starts with income before tax.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement
of cash flows.
d. All of these statements are true.
2. Which of the following is not disclosed in the statement of cash flows when prepared
under the direct method?
a.
b.
c.
d.
The major classes of gross cash receipts and gross cash payments
The amount of income taxes paid
A reconciliation of net income to net cash flow from operations
A reconciliation of ending retained earnings to net cash flow from operations
3. Required disclosures of a statement of cash flows prepared using the direct method
include a reconciliation of net income to net cash provided by
a.
b.
c.
d.
Operating activities
Financing activities
Investing activities
Operating, financing and investing activities
4. Noncash investing and financing activities are
a. Reported only if the direct method is used.
b. Reported only if the indirect method is used.
c. Disclosed in a note or separate schedule accompanying the statement of cash
flows.
d. Not reported.
5. Supplemental disclosures required only when the using the indirect method include
a.
b.
c.
d.
Reconciling net income with operating activities.
Amounts paid for interest and taxes.
Amounts deducted for depreciation and amortization
Significant noncash investing and financing activities.