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Intermediate accounting 3 Milan solutions chapter 10
Accountancy (Saint Louis College)
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Chapter 10
Cash Basis to Accrual Basis of Accounting
PROBLEM 1: FOR CLASSROOM DISCUSSION
1. D
2. C
3. C
4.Solutions:
Requirement (a):
beg. (0 + 200K)
Gross credit
sales
Accounts/Trade notes receivable
200,000
3,710,000
1,000,000
10,000
2,000,000
Recoveries
100,000
20,000
800,000
Gross credit sales
Sales returns
Net sales - accrual
Collections on A/R
Collections on trade
N/R
Write-offs
Sales returns
end. (800K + 0)
3,710,000
(20,000)
3,690,000
Requirement (b):
Collections on A/R
1,000,000
Collections on trade N/R
2,000,000
Net sales - cash basis
3,000,000
5.Solutions:
Requirements (a) & (b):
1
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Accounts payable
COGS - cash
basis
2,000,00
0
end.
800,000
beg.
200,000
2,800,00
0
2,800,00
0
beg.
Net purchases (squeeze)
Inventory
Net purchases
3,000,00
0
COGS - accrual basis
-
end.
6.Solution:
Prepaid/Accrued
beg. - Prepaid
utilities
100,000
80,000
beg. - Accrued payable
Payments for
utilities
(Cash basis)
270,000
220,00
0
Utilities expense
(Accrual basis)
50,000
120,00
0
end. - Prepaid utilities
end. - Accrued
payable
7.Solution:
beg. - Rent
receivable
Rent income
(Accrual basis)
end. - Unearned
rent
Receivable/Unearned
1,000,00
0
600,000 beg. - Unearned rent
2,100,00 2,420,00 Collections on rent
0
0
(Cash basis)
720,000
800,000
end. - Rent receivable
8.Solution:
Net income under accrual basis
(squeeze)
Adjustments:
Depreciation expense ................
Increase in accounts receivable .....
Decrease in merchandise inventory ...
₱ 50,000
₱ 25,000
(8,000)
13,000
2
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Decrease in accounts payable ........
Net cash provided by operating
activities ........................... (start)
(10,000)
20,000
₱70,000
3
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PROBLEM 2: EXERCISES
1.Solutions:
Requirement (a):
beg. (0 + 240K)
Credit sales gross
Accounts/Trade notes receivable
240,000
4,452,000
1,200,000
12,000
2,400,000
Recoveries
Collections on A/R
Collections on trade
N/R
Write-offs
120,000
24,000
Sales returns
960,000
Gross credit sales
end. (960K + 0)
4,452,000
Sales returns
(24,000)
Net sales - accrual
4,428,000
Requirement (b):
Collections on A/R
1,200,000
Collections on trade N/R
2,400,000
Net sales - cash basis
3,600,000
2.Solutions:
Requirements (a) & (b):
COGS - cash
basis
Accounts payable
3,000,00
4,200,00
0
0
end.
1,200,00
0
beg.
Net purchases
Inventory
300,000
4,200,00
4,500,00
0
0
-
beg.
Net purchases (squeeze)
COGS - accrual basis
end.
4
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3.Solution:
beg. - Prepaid
utilities
Prepaid/Accrued
120,00
150,000
0 beg. - Accrued payable
Payments for
utilities
(Cash basis)
405,000
330,00
0
Utilities expense
(Accrual basis)
75,000
180,00
0
end. - Prepaid utilities
end. - Accrued
payable
4.Solution:
beg. - Rent
receivable
Rent income
(Accrual basis)
Receivable/Unearned
1,800,00
1,080,00
0
0 beg. - Unearned rent
3,780,00 4,356,00 Collections on rent
0
0
(Cash basis)
end. - Unearned
rent
1,296,00
0
1,440,00
0
end. - Rent receivable
5.Solution:
Accrual basis profit (squeeze)
Depreciation expense (900K - 800K)
Decrease in trade and other receivables
Increase in inventory
Increase in prepaid supplies
Decrease in trade and other payables
Increase in deferred tax liability
860,000
100,000
40,000
(50,000)
(20,000)
(10,000)
80,000
1,000,000
Cash basis profit
5
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PROBLEM 3: MULTIPLE CHOICE – THEORY
1.
B
2.
A
3.
D
4.
B
5.
C
6.
D
7.
C
8.
D
9.
D
Proof:
Case 1: Accounts increase during the period.
Accounts
payable
COGS –
Cash
basis
50,000
Inventory
beg.
150,00
0
150,000
100,00
0
70,000
COGS –
Accrual
basis
80,000
Case 2: Accounts decrease during the period.
Accounts
payable
Inventory
100,000 beg. 80,000
COGS –
Cash
basis
end.
150,00
0
50,000
50,000
-
130,00
0
-
COGS –
Accrual
basis
end.
6
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10. B
Proof:
Accounts receivable
beg.
Sales Accrual Basis
150,00
0
Sales Cash Basis
70,000
80,000
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
beg. - Receivable
Royalty income
(squeeze)
end. - Unearned
2.
Receivable/
Unearned
90,000
60,000
215,000
200,000
40,000
85,000
beg. - Unearned
Collection
remittances
end. - Receivable
C
Solution:
beg. A/R
Service revenue
(squeeze)
end. Unearned
3.
Receivable/Unearne
d
40,000
-
beg. Unearned
215,000
5,000
Collections
end. A/R
200,000
60,000
B
Solution:
beg. Prepaid
Payments
end. Payable
Prepaid/Payabl
e
55,000 80,000
300,00 305,00
0
0
75,000 45,000
beg. Payable
Royalty expense
(squeeze)
end. Prepaid
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4.
D
Solution:
Accrual basis profit
Increase in accounts receivable
Decrease in accounts payable
Cash basis profit
5.
95,000
(20,000)
(15,000)
60,000


7.
(start)
C
Solution:
Cash basis revenue
Payments received but not earned
Services performed but not yet collected
Revenue - accrual basis
6.
(squeeze)
30,000
(2,100)
3,400
31,300
C
Effect on 20x3 profit: overstated – understatement in beginning
inventory (‘cannot be determined’) causes overstatement in profit
– inverse relationship.
Effect on 12/31/x3 equity: none – the error in beginning inventory
has already counter-balanced.
C
Solution:
Initial investment
Collection on services performed
Drawings
Capital - 3/31/x3
2,000
5,000
(1,000)
6,000
The expenses incurred are not accounted for because they were paid
in the second quarter.
8.
D
Solution:
beg. A/R
Accounts receivable
40,000
Net cash & credit sale
(80K - 4K + 120K - 6K)
190,000
200,000
Collections - cash
& credit
(squeeze)
8
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30,000
9.
end. A/R
D
Solution:
Rent receivable
beg. bal.
Rent revenue
(squeeze)
800,000
2,500,000
30,000
Write-offs
2,210,000
Collections
1,060,000
end. bal.
10. D
Solution:
Accounts receivable
beg. A/R
1,000,000
Net sales
4,600,000
20,000
4,280,000
Write-offs
Collections
(squeeze)
1,300,000
end. A/R
9
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