Chapter 2
The Conceptual Framework for Financial Reporting
52.
Under a financial capital maintenance concept, a profit is earned if
a.
The Accounting Process
the financial amount of the net assets at the beginning exceeds the financial
amount of the assets at the end.
b.
the financial amount of the net assets at the end exceeds the financial
amount of the net assets at the beginning.
Learning Outcomes
the financial amount of net assets at the beginning exceeds the financial
amount of net assets at the end after excluding any distribution and
After reading this chapter, you should be able to:
c.
contribution from owners. •
d. the financial amount of the net assets at the end exceeds the financial
(a) enumerate the steps in the accounting processing cycle;
(b) understand the means of processing the accountable events from one
arnount of the net assets at the beginning after excluding any distribution
and contribution from owners.
accounting cycle to another;
(c) acquire proficiency and accuracy in answering theoretical and problem-solving
questions about the accounting process.
This concept should be used if the main concern of users is with the operating
53.
capability of the entity.
a. Financial capital concept
b. Invested capital concept
Accounting
c. Operating capital concept
>
d. Physical capital concept
The Accounting Process
".
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Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is
intended to be useful in making economic decisions,in making reasoned choices
among alternative courses ofaction.
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During the accounting period
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about each transaction to the accountant
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Source documents such as sales Invoices, bills from suppliers,
and cash register tapes serve this need.
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Step 3 - Record the transaction in a journal.
o The third step in the process is to record the transaction in a
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journal. A journal provides a chronological record of all
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A mechanism is needed to relay the essential information
Step 2 - Anal5^e the transaction.
o Transaction analysis is the process of reviewing the source
documents to determine the dual effect on the accounting
equation and the specific elements involved.
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Step 1 - Obtain information about external transactions from source
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economic events affecting a firm,
Special journals include:
^ Sales journal - record sales on account
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Purchases journal - record purchases of inventory on
account.
Cash receipts journal - record all transactions
involving receipts of cash
Cash disbursements journal - record all transactions
involving payments of cash.
32
\
Chapter 3
The-Accounting Process
Chapter 3
The Accounting Process
o
Step 7- Prepare an adjusted trial balance.
o The term adjusted refers to the fact that adjusting entries have
now been posted to the accounts.
General journal - record transactions not recorded in the
specizd journals. All transactions are recorded in the general
journal ifspecial journals are not used.
Step 8- Prepare financial statements.
o The financial statements are the primary means of
communicating financial information to external parties.
Step 4- Post from the journal to the general ledger accounts.
o
Step 4 is to periodically transfer or post the debit and credit
o
information from the journal to individual ledger accounts,
Each account provides a summary of the effects of all events
>
At the end ofthe year
and transactions on that individual account
o
o
This process is.called posting. Posting involves transferring
debits and credits recorded in individual journal entries to the
•
specific accounts affected,
Kinds of Ledgers
General ledger - one which contains appearing in the
✓
Step 9- Close the temporary accounts to retained earnings.
o The closing process serves a dual purpose:
^ the temporary accounts (revenues, expenses, gains
and losses) are reduced to zero balances, ready to
measure activity in the upcoming accounting period,
financial statements.
and
Subsidiaiy ledger - a supporting ledger consisting ofa
which is in agreement with the balance of the related
these temporary account balances are closed
(transferred) to retained earnings to reflect the
changes that have occurred in that account during the
controlling account in the general ledger.
period.
group of accounts with similar nature, the total of
>
Atthe end ofthe accounting period
•
• -Step 5- Prepare an unadjusted trial balance.
® ^ trial, balance is simply a list of the general ledger accounts
along with their balances at a particular date, listed in the
order that they appear in the ledger.
°
purpose of the trial balance is to allow us to check for
and to verify that the sum of the accounts with
>
Step 10- Prepare a ppst-clqsing trial balance.
o The purpose of this trial balance is to verify that the closing
entries were prepared and posted correctly and that the
accounts are now ready for next year's transactions.
Optional Steps
•
debit balances equals the, sum of the accounts with credit
Use of a Worksheet
6
balances.
^
and the financial statements. It is an informal tool only and is
not part ofthe accounting system.
the debits and credits are equal,though,does not
^®®®ssarily ensure that the equal balances are correct. The
trial balance could contain offsetting errors.
o
. Step 6 - Record adjusting entries and post to the general ledger
accounts. :
o
.
Adjusting entries
✓
✓
•
help ensure that all revenues are recognized in the
period goods or services are transferred to customers,
6 Reversing entries are used at the beginning of a reporting
period.
o -These optional entries remove the effects of some of the
adjusting entries recorded atthe end ofthe previous reporting
period for the sole purpose of simplifying jounial entries
recorded during the new period.
regardless of when the cash is received,
enable a company to recognize all expenses incurred
The worksheet is utilized in conjunction with Step 5 in the
processing cycle, preparation of an unadjusted trial balance.
Reversing Entries
are required to implement the accrual accounting
model.
A worksheet often is used to organize the accounting
information heeded to prepare adjusting and closing entries
o If reversing entries are used,these entries are recorded in the
during a period, regardless of when cash payment is
general journal and posted to the general ledger accounts on
made.
the first day ofthe new period.
Adjusting entries are necessaiy for three situations:
o
Reversing entries are used most often with:
^ Prepa3mients,sometimes referred to as deferrals
^ accruals;
^ Accruals
^ prepa5nhents (expense method was initially used);
^ Estimates (i.e. depreciation,bade debts,etc.)
and
- ^ dsferred revenues(income method was initially used).
34
35
Chapter 3
The Accounting Process
^Chapter 3
The Accounting Process
TRUE OR FALSE QUESTIONS
1.
In a T-Account, this T format graphically depicts the debits on the left side of
the T and the credits on the right side.
19.
For a profitable company, the entry to close the income summaiy account is
debit income summary and credit retained earnings.
20.
The accumulated depreciation account is not closed to income summary
account at the end of^e accounting period.
2.
An unadjusted trial balance is a listing ofall the business accounts that are going
to appear on the financial statements after year-end adjusting journal entries
21.
A worksheet is nota formal statement
22.
Ifthe total ofthe debits exceeds the total ofthe credits in the income statement
columns ofa worksheet,there is a net loss.
23.
A simple journal entry consists oftwo ore more debits or two or more credits.
24.
The debit and credit analysis of a transaction normally takes place before an
are made.
3.
Accrued expenses are goods or services that have been paid for by a company
but have not been consumed yet.
4.
An accounting cycle is always equal to one calendar period.
5.
The primaiy objective ofthe accounting activity is to state an opinion regarding
entry is recorded in a journal.
the fairness offinancial statements.
25.
6.
When the trial balance is balanced, it proves the accuracy of the bookkeeping
The left side of an account is always the debit side and the right side is always
the credit side.
records.
7.
Adjusting entries should be made at the beginning of an accounting record.
8.
Reversing entries are done at the start ofa new accounting period.
(
9.
After closing entries, the debit side ofan expense account is equal to its credit
side.
10.
To accrue means to paythe expenses when this became due.
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11.
All ^set accounts are nominal accounts.
12.
Not all of die adjusting entries may be reserved.
f 13.
14.
The accounting cycle starts with the analysis ofbusiness transaction.
After proper analysis, the .business transaction is Recorded iri journal
chronological order.
15..
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In acc:c)un1ing/bookkeeping,the term posting refers to transfer ofentries from
journal to ledger.
16.
The collection or group of accounts in an organization is known as general
ledger.
17.
A credit may signify an increase in an expense account
la
The income statement is generally prepared first among the financial
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statenients.
36
37
C^iapter 3
Tlie Accounting Process
Chapter 3
The Accounting Process
FINANCIAL ACCOUNTING THEORY QUESTIONS
6.
Which ofthe following statements about accounting is false?
a.
Accounting is a practical art.
b. Accounting is a social science.
c. Accounting is a service activity.
d. The function of accounting is to provide qualitative information, primarily
financial in nature, about economic entities, that is intended to be useful in
making economic decision.
7.
b.
a.
Account
b.
Journal
c.
d.
Trial balance
Worksheet
An account in financial reporting that increases the book value of a liability account
a. Adjunct account
Which of the following describes accounting as a science?
a.
It is an accounting device for accumulating increases and decreases relating to
a particular accounting value such as an asset or a liability.
b.
It requires creative judgment and skills.
It follows a systematic and organized path to understanding the economic
Contra account
c.
Nominal adjunct account
d.
Nominal contra account
status of the entity.
c.
d.
It presents the financial findings by following and implementing
a universally accepted method (GAAPJ.
8.
a. is the same as the account with which it is paired.
Accounting is the application of knowledge comprising of some accepted
b. is always the opposite of the account with which it is paired.
c. couldn't be the opposite of the account with which it is paired.
theories, rules, concept and conventions.
3.
Which of the following describes accounting as an art?
a. Accounting includes rules, principles, concepts, conventions, and
b.
d. may or may not be the opposite of the account with which it is paired.
i
9.
Which ofthe following documents is generated by the vendor when a company
standards.
purchases goods on account?
Accounting requires gaining knowledge about the economic status of an
a.
b.
entity by systematic study.
0.
The natural balance of a contra account
Recording, classifying and summarizing of business transaction is done on
the basis of certain principles of double entry book-keeping system which
Collection letter
Official receipts
c.
Purchase Journal
d.
Sales invoice
are universally applicable.
d.
It tells us the manner through which some special objectives, like
10.
ascertaining the operating result for an accounting period and the financial
position of the business on a particular date, can be achieved.
department?
Which ofthe following is not an economic entity?
a. Cardo Cruz Massage Spa and Other Services
Mr. Leonard Bryan G., owner offacial and skin care clinic.
Philippine Review Institute for Accountancy,Inc.(PRIA)
PDAC & Co., CPAs [Certified Public Accountants and Management
When the manufacturing department is in need of goods or materials to
complete its upcoming jobs, what document will it issue to the purchasing
a.
Billing statement
b.
Cash advance summary
*0.
d.
11.
Consultants)
In terms of debits and credits, which types of accounts will have the same
normal balances?
a.
5.
Purchase requisition
Sales order
Ma C.Si[MCS]is the owner and manager of Masipag Construction Services. MCS
Dividends,expenses,assets
b. Assets, capital stock, revenues
c. Expenses,liabilities, capital stock
purchased a condominium unit for personal use and a pick-up truck to be used
in the construction business. Which ofthe following assumptions,principles,or
d.
Retained earnings, dividends,liabilities
constraints would be violated if both the condominium unit and the pick-up
truck are recorded as assets of the business?
12.
Every transaction will affect how many accounts?
Continuity assumption
Materiality constraint
a.
b.
Only one
Only two
c.
Two or more
Separate entity assumption
d.
At least three
Conservatism constraint
38
39
^
Chapter 3
Chapter 3
The Accounting Process
13.
The Accounting Process
When special journals are used,a General Journal is
a.
not needed.
b.
still required.
used only to record sales returns and allowances.
used only to record cash deposits of owner investments.
c.
d.
:if'
Which of the following statements is true regarding debits and credits?
a. Before adjustments, debits will not equal credits in the trial balance.
b.
statement of fi nancial position, retained earnings account is increased by a
credit
c.
14.
Which of the following transactions is recorded in a cash receipts journal?
15.
a.
Credit sales
b.
Inventories are received
c.
d.
Collection of accounts receivable
Sales revenue is billed to the customers
account balances.
A debit balance in the nominal "income summary" account represents
a. capital
b. liability
is a book of original entry.
d. is a collection ofthe entire group of accounts maintained by a company.
This ledger may contain transactions about receipts into stock, movements
of stock to the production floor, conversion into finished goods, scrap and
rework reporting, write-offs for obsolete items, and sales to customers.
a. Accounts payable ledger
b. Fixed assets ledger
c. Inventory ledger
d.
net loss
Certain accounts are closed at the end of an accounting period to
a. reduce the number of accounts that appear in the ledger.
b.
transfer the effect of transactions recorded in the real accounts to owner's
equity.
d.
c. posting to the correct debit or credit side of a wrong account.
d. a journal entry for salaries paid amounting to P180,000 was not posted
Which ofthe following statements is false regarding adjusting entries?
a.
net income
reduce the number of items that get reported in the general-purpose
financial statements.
An error which is disclosed by a trial balance is
a. double-posting a credit to Sales amounting to P15,000.
b. an omission of a journal entry on purchases on account.
18.
c.
c.
d. Purchases ledger
17.
The rules for debit and credit and the normal balance of share capital are
the same as the liabilities.
b. contains only asset and liability accounts.
0. should show accounts in alphabetical order.
16.
In the income statement, debits are used to increase account balances
whereas in the statement of financial position, credits are used to increase
d.
A ledger
a.
In the income statement, revenues are increased by debit whereas in the
Adjusting entries involve accruals or deferrals.
b. Cash is neither debited nor credited as a result of adjusting entries.
c. Each adjusting entry affects one revenue account and one expense account.
d. Each adjusting entry affects one statement of financial position and one
prepare those accounts for recording of transactions of the subsequent
accounting period.
What is the normal order of accounts in preparing a post-closing trial balance?
a. Asset, liability and equity
b. Asset, liability, equity, income and expenses
c.
Asset, equity, income, expenses and liability
d.
All accounts with debit balances and then all accounts with credit balances
Which of the following items would appear in the post-closing trial balance?
a.
Distribution cost
b.
c.
Increase in the fair value of trading securities
Loss" from write-down of inventory to net realizable value
d.
Cumulative balance of unrealized fair value gain of FA-FVOCI
income statement account.
19.
Which is an optional step in the accounting cycle?
Which ofthese items least resembles a typical adjusting entry?
a.
Debit an asset, credit a liability
a.
b.
Adjusting entries
Closing entries
b.
Debit an asset, credit a revenue.
c.
d.
Debit an expense,credit a liability
Debit a revenue, credit a liability
c.
Financial statements
d.
Reversing entries
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An appropriate reversing entry
a. is dated the first day of the next accounting period.
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b.
c.
must be made because they are required by accounting standards.
is usually made for adjusting entries that affect deferred items only.
d.
is often used to correct entries which were initially based on estimates.
.
•
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'{pii
ri jjyl
Chapter 3
The Accoanting Process
Chapters
The Acxoimtiiig Process
PRACTICAL nNANCIAL PROBLEMS
C.
and 3%.
Muntinlupa Enterprise reported the following events to its bookkeeper that
occurred on April 15,2021:
•
Parahaque Inc., a VAT registered entity, issued Sales Invoice No. 35 for an item
sold on credit for P250,000 and granted multiple discounts to the client at 15%
(4) The correct entry to record this transaction Includes a debit to Account
Receivablefor
P20S,000.
P206,12S.
Hired five (5) employees who will be assigned to handle the deliveiy
a.
b.
operations of the company. Each employee signed a P15,000 monthly
salary contract
c.
d.
• The purchasing officer prepared a purchase order (PO) for inventory
P229,600.
P230,860.
amounting to P85,000. The said PO has been mailed to the supplier on the
(5) TheJournal entryfor the above transaction would Include a credit to Salesfor
same date.
•
Muntinlupa's chairman, Mr. Hini M. Atay, suffered a heart attack and
immediately died. The expected loss for this to Muntinlupa is estimated at
P10,000,000.
a.
b.
c.
P20S,000.
P206,12S.
P229,600.
d.
P2S0,000.
• Billing for electricity for the month of March 2021 received today
D.
amounting to P13,600.
• Delivered P300,000 worth ofinventories to customer with selling price of
Makati Cleaning Services is a manpower firm that provides housekeeping,
janitorial and laundry services.
As the bookkeeper of Makati, the follovvang
documents were provided to you:
P350,000.
(1) How much is the total accountable eventthat occurred on April 15,2021?
fl.
P323,600
b.
P663,600
c.
P748,600
• ^Official Receipt(OR)
d., P833,600
o
o
OR No.254- P35,000(paymentfor SI No.1117)
OR No.255 - P26,500(payment for SI No.1119)
o
OR No.256- P38,950(paymentfor SI No.1118)
o
OR No.257-P15,000(Cash sales)
• Acknowledgment Receipt(AR)
B.
Marikina Trading Corporation recorded the journal entries for the following:
o
AR No.143- P300,000(pa3nnent ofsharesubscribed)
OR No.255 - P200,000(refund ofsecurity deposit for rent)
• Accrual ofwater consumption ofP35,000.
Service Invoice (SI)
•
Declaration ofP800,000 cash dividends.
• Sales on account ofP350,000.
o
o
SI No.1120 - P55,000
SINo.ll21-P35,000
o
SINo.ll22-P85,000
• Purchase ofcomputer equipmentfor P350,000 cash.
• Issuance ofcapftal stock for cash at par amounting to P400,000.
(2) Whatrieteffect do these entries have on equity?
d.
b.
Decrease ofP85,000
Decrease ofP450,000
c.
d.
Decrease cfP50,000
Increase ofP85,000
How much Is the total debit to cash In the cash receipts books?
a.
b.
c.
d.
P100,450
PUS,450
P615,450
P790,450
(7) How much should be recorded In the sales books?
(3) What neteffect do these entries have on assets?
a. Decrease ofP400,000
/
b. Decrease ofP435,000
c. Increase ofP50,000
d.
(6)
a.
b.
P175,000
P190,000
c.
d.
P290,45q
P790,450
increase ofP400,000 .
42
43
Chapter 3
The Accomiting-Process
Chapters
The Accounting Process
E.
The Navotas Wholesale Company began operations on September 1,2021. The
following transactions occurred during the monA ofSeptember.
•
Inventories ^
o
o
o
The stockholders of Navotas paid P100,000 cash in exchange for 10,000
ordinary shares.
•
This account has a balance of nil atthe beginning,
Inventory worth PI8,000 was purchased on credit
Sold inventoiy worth P13,000.
Equipment
o
o
Rent.on ofhce space was paid on September 1 amounting to P12,000,
applicable to September and October rent
Purchased office equipment oh credit amounting to P80,000.
Sold for PI0,000 an old laptop acquired three years aga for
P25,000.
A photocopying machine was purchased for P40,000 cash.
A note payable is signed for P30,000 representing loans payable to a bank.
(9) Whatis the correct ending balance ofCash?
On September S, 2021, Navotas purchased inventory on account costing
P76,000.
a.
P82,50d
b.
c.
d.
P92,500
P102,500
P112,500
P44,000 worth of merchandise was sold on account for P80,000.
(10) Whatis the correct ending balance ofall assets above?
Customers paid P30,000.
Navotas paid its suppliers amounting to P40,000.
Salaries and wages of P14,000 for the month of September were paid on
a.
b.
c.
P112,500
P262,500
P280,500
d.
P290,500
.
September 30,2021.
The president of Navotas Borrowed P40,000Jrom Ae company.
(8) Whatis the correctending balance ofCash^
a.
P14,000
b.
PIS.OOO
c.
P22,000
d.
P30,000
You received the unadjusted trial balance of.Las Pihas Merchandising for the
month ended January 31,2021:
Pgbjt
35,000
Cash
Accounts Receivable
Merchandise Inventories
85,000
28,500
15,000
Prepaid expenses
150,000
Land
F.
The following T-accounts for assets are available in the records of Man Company:
Cash
10,000
■
Accounts Receivable
85,000
75,000
18,000
1 17,500
Inventories
13,000 18,000
93,000
Equipment
80,000
10,000
.
Cash
o
The beginning balance ofqash is PI7,500.
G
The credit to caSh pertains to cash sales.
Credit
Machinery - net of depreciation
85,700
Accounte Payable
Interest Payable
98,500
Retained Earnings
15,000
224,000
185,000
Sales
340,400
Ordinary Shares
71,000
35,000
Cost of Goods Sold
Rent expense
Salaries and wages
38,7b0
Interest expense
44,000
552,900
TOTAL
897,900
The following information are also available: .
Account Receivable
o The beginning balance of this account is P75,006 and the ending
•
balance is P93,000.
b
Credit sales ofP18,000 was recorded and posted.
44
Company checks amounting to P85,000 were already recorded but
remained in the possession of Las Pihas as ofJanuary 31,2021.
45
Chapter 3
Chapter 3
The Accoiinting Process
•
!The Accouhting Process
Prepaid rent
Insurance expense
Creditsales amounting to P561,000 was recorded as PI56,000. The related
debit to accounts receivable was correctly recorded.
•
The balance of furniture and equipment amounting to P350,000 was not
included in the list above.
•
•
Owner's investment
95,000
Rent and Rates Expense
Accumulated Depreciation - Equipment
400
14,000
Accrued Revenue
15,000
Share Premium of P285,000 from issuance ofshares was recorded as part
Machineiy
25,000
of Retained Earnings.
Drawings
Equipment
Maintenance expense
3,500
40,000
5,000
4,800
1,500
2,000
8,500
500
Based on inventory records, the balance of cost of goods sold should be
P471,000.
Miscellaneous expense
Accrued expenses
Depreciation expense - Equipment
Unexpired insurance
Vendor's payable
(11) Whatis the correct trial balance tx)ta!?
a.
H.
2,000
7,300
P1^S2,900
b.
Pl,4S2,9dO
c.
Pl,487,900
d
P155Z900
(13) Whatis the correct trial balance total?
a. P120,000
b. P123,000
c. ^ P130,S00
d. P132,000
The following transactions for Novaliches Design have been journalized and
posted to the proper accounts:
•
Mr.Arid Tekto invested P8,000 cash in Novaliches.
•
Novaliches paid the first months'rent with P300 cash.
J.
• Purchased equipment by pa3dng P2,000 cash and executing a note payable
Prepaid Insurance account began the year with a balance of P23,000. During the
year,insurance in the amount of P57,000 was purchased. At the end ofthe year
March 31®^, 2021,the amount ofinsurance still unexpired was P35,000.
for P3,000.
(14)Ifthe asset method is used,the adjusting entry willinclude a debitto insurance
• Purchased supplies for P200 cash.
expense of
a.
b.
c.
d.
• Novaliches billed clients for a total ofP1,000 for design services rendered.
• Received P750 cash front clients for services rendered above.
•
Mr.Tekto took a withdrawal ofP2,000
K.
(12J Whatis the correct trial balance total?
a.
b.
c.
d.
I.
P35,000
P45,000
P57,000
P69,000
P10,000
P12,000
PHOOO
P16,000
The following information is available for Val Services at March 31,2021:
Description
On July 3, a deposit in the amount of P5,000 was received for services to be
performed. By the end of the month, services in the amount of Pl,200 were
performed.
(15) Using the liability method, the initial entry will include a
a. credit to cashfbrPl,200
b. credit to revenuefor P5,000
c. credit to unearned revenuefor P5,000
d. credit to earned revenuefor Pl,200
Amount
Bank Loan
Financial Asset at FVPL
14,000
6,500
1,000
3,500
Bill Payable
Unearned Revenue
Sundry Debtors
Outstanding salaries
12,000
2,500
46
(16) Using the revenue method, the adjusting entry will include a
a. debit to revenuefor Pl,200
b. debit to revenuefor P3,800
c. credit to unearned revenuefor Pl,200
d. credit to revenuefor Pl,200
47
Chapter 3
The Accounting Process
Chapter 3
The Accounting Process
L.
The following information are available for the month ofJune 2021 for the three
(3)outside salespersons:
Bacoor Realty Co. pays weekly salaries ofP125,000 on Friday for a five-day week
ending on that day.
(17) The adjusting entry at the end of the accounting period, assuming that the
M.
period ends on Thursday, will include a
Donna
a.
b.
Regine
Mikey
c.
debit to salaries payablefor PI00,000.
creditto salaries payablefor P125,000.
debit to salaries expensefor P100,000.
d.
debit to salaries expensefor P125,000.
Fixed salaries
Net sales
Commissibn'rate
25,000
37,500
62,500
225,000
10%'
10%
625,000
1,000,000
15%'
(20)Whatshould Sta. Rosa Enterprise accrue for sales commissions at June 2021?
For the year ending December 31, 2021, Imus Janitorial Services mistakenly
omitted adjusting entries for P86,000 of unearned revenue that was earned,
a.
P110,000
b.
P112,500
c.
d.
P125,000
P235,000
'
'
earned revenue that was not billed ofP125,000 and accrued wages of P29,000. '
(18) Whatis the combined effectofthe errors on revenue,expenses and net income,
P.
respectively?
a. P39,000 understated,P29,000 understated, P182,000 understated
b. P39,000 understated,P29,000 understated, P96,000 understated
c.
d.
N.
•
The adjustment for accrued fees of P267,000 was journalized as a debit to,
Accoi^nts Payable for P267,000 and a credit to Se^ce Revenue of P267,000. In
addition, Ae adjustment for depreciation ofP163/b00 was journalized as a debit
'
forP163,000.
Excluding the error in the adjusting entry for depreciation, the trial
balance totals are equal.
The debit total ofthe trial balance is higher by P27,000.
d.
Excluding the error in the adjusting entry for accrued fees, the trial
Q.
balance totalsdre equal
O.
Sta. Rosa Enterprise hires outside salespersons with the following terms on
salaries and commissions:
•
A P360,000 annual insurance premium payment made July 1,2021.
•
A P1,000,000 advance rental pa5mient for a warehouse Cabujrao leased for
one year beginning January 1, 2022.
(21) Whatamountshould Cabuyao report as prepaid expense in its December 31,
2021 statement offinancial position?
' a.
b.
c.
d.
(19) Which ofthefollowing statements is true?
a. The trial balance totals are e^qual.
c.
An opening balance ofP120,000 for an insurance policy^ Cabuyao had paid
an annual premium of P240,000 on July 1,2020.
P211,000 understated,P29,000 understated,P182,000 understated
P211,00 overstated,P29,000 understated, P240,000 understated
to Depreciation Expense for P136,000 and a credit to Accumulated Depreciation
Cabuyao Leasing's unadjusted prepaid expense account at December 31, 2021,
revealed the following:
P180,000
Pl,180,000
Pl,300,000
P1,360,0Q0
San Pedro Company presented the following data for 202i:'
Assets,January 1
5,400,000
Liabilities, January 1
3,240,000
Shareholders' equity,Januaiy 1
Dividends paid in 2013
Increase in share capital-ordinaiy
1,080,000
972,000
Shareholders' equity, December 31
•
Fixed monthly salaries and commissions based on net sales.
•
Sales commissions are computed and paid-on; a monthly basis [in the
advances against commissions.
.
•
.
.
.
,
,
,
r
'
Ifthe fixed salaries for salespersons exceed their sales commissions earned
for a month,such excess is not charged back to them.
48
?
1,080,000
Net income
month following the month of sale) and the fixed salaries are treated aS
7
(22) What is the shareholders' equity at December 31,2021?
a.
Pl,890,000
b.
jPl,998,000
c.
P3,132,000
d.
P3,186,000
49
Chapter 3
The Accounting Process
Bocaue Trading provided the following information for the year:
Accounts receivable, January 1
Cash and Cash Equivalents
190,000
2,100,000
380,000
750,000
880,000
Collections from customers
Shareholders' equity,January I
Total assets,January 1
Total assets, December 31
Learning Outcomes
After reading this chapter, you should be able to:
360,000
Accounts receivable, December 31
Total liabilities, December 31
(a] understand the definition and nature of cash and cash equivalents and identify
its composition;
(b) know the proper presentation of cash and cash equivalents in the statement of
390,000
(23) What is the net income for the current year?
a.
P70.000
h.
PI10,000
c.
PI50,000
d.
P490,000
financial position;
(c] explain the basic features of a cash control system;
(d) understand how a petty cash system works and be able to solve problems
involving the petty cash fund;
(e] solve simple and complex problems relating to bank reconciliation and proof of
cash; and
The adjusted trial balance of Malolos Fabrication for the month ended January 31,
(f) attain proficiency in solving problems relating to cash and cash equivalents.
2021 shows the following:
Debit
Cash
Accounts Receivable
Prepaid expenses
250,000
Machinery - net of depreciation
Accounts Payable
Interest Payable
Ordinary Shares
Retained Earnings
185,700
Depreciation expense
Rent expense
Utilities expense
Interest expense
Cash is any item that can be used as a medium ofexchange and which is acceptable
by bank at face value upon deposit. Cash or cash on hand and in banks include
>
8,000
350,000
>
450,000
peso or foreign currency deposits in bank - savings,checking or money market
accounts
585,100
185,000
157,000
>
•
13,300
cash items on hand - undeposited cash collections and cash items awaiting
deposit such as bills and coins, bank drafts, customers' checks, manager's
checks,cashier's checks and postal money orders
198,500
Revenue
Direct Materials
Definition and Nature
88,000
Land
Direct Labor
Credit
150,000
355,000
working funds - petty cash fund, change fund, payroll fund,and dividend fund
\
These items should be unrestricted and immediately available for use in the current
operations.
115,000
78,600
14,000
❖ Cash Equivalents
TOTAL
1,591,600
1,591,600
(24) What is the correct trial balance total after all closing entries are made?
a.
b.
c.
d.
Pl,028,700
PI,050,900
Pl,569,400
Pl,591,600
These are short term and highly liquid investments that are both readily marketable
to known amounts of cash and are subject to Insignificant risk of change in value.
> Examples are Bangko Sentral ng Pilipinas (BSPJ treasury bills, commercial
papers, and money market instruments with original maturities of three
months or less.
>
The determination of original maturity date starts from the date of acquisition
ofthe instrument and not from the date indicated on the face ofthe instrument.
> Trading equity securities cannot qualify as cash equivalents because these
equity securities do not have maturity dates.
V
>
f
■