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IX – CASH TO ACCRUAL BASIS, SINGLE ENTRY AND CORRECTION OF ERRORS PROBLEM NO. 1 Zamboanga Enterprises records all transactions on the cash basis. The company’s accountant prepared the following income statement at the end of the company’s first year of operations: Zamboanga Enterprises Income Statement For the Year Ended December 31, 2006 Sales Selling and administrative expenses: Salaries expense Rent expense Utilities expense Equipment Commission expense Insurance expense Interest expense Net income

P2,016,000 P624,000 360,000 232,000 240,000 302,400 48,000 24,000

1,830,400 P 185,600

You have been asked to prepare an income statement on the accrual basis. the following information is given to you to assist in the preparation: (a)

Amounts due from customers at year-end were P224,000. amount, P24,000 will probably not be collected.

(b)

Salaries of P88,000 for December 2006 were paid on January 5, 2007.

(c)

Zamboanga rents its building for P24,000 a month, payable quarterly in advance. The contract was signed on January 1, 2006.

(d)

The bill for December’s utility costs of P21,600 was paid January 10, 2007.

(e)

Equipment of P240,000 was purchased on January 1, 2006. The expected life is 5 years, no salvage value. Assume straight-line depreciation.

(f)

Commissions of 15% of sales are paid on the same day cash is received from customers.

1

Of this

(g)

A 1-year insurance policy was issued in company assets on July 1, 2006. Premiums are paid annually in advance.

(h)

Zamboanga barrowed P400,000 for one year on May 1, 2006. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1, 2006.

QUESTION: How much is the net income before income tax under the accrual basis of accounting? a. P526,000 c. P514,000 b. P286,000 d. P574,000 Suggested Solution: Net income before income tax - cash basis Add (deduct) adjustments: AJE No. a AJE AJE AJE AJE

No. No. No. No.

b c d e

AJE No. f AJE No. g AJE No. h Net income before income tax - accrual basis

P185,600 224,000 (24,000) (88,000) 72,000 (21,600) 240,000 (48,000) (30,000) 24,000 (8,000) P526,000

Adjusting journal entries (AJE) to convert cash to accrual basis: a) Accounts receivable Doubtful accounts expense Sales Allowance for doubtful accounts

P224,000 24,000

b) Salaries expense Salaries payable

P 88,000

c) Prepaid rent [P360,000 - (P24,000 x 12)] Rent expense

P 72,000

d) Utilities expense Utilities payable

P 21,600

P224,000 24,000 P 88,000 P 72,000 P 21,600

2

e) Depreciation expense (P240,000/5) Accumulated depreciation

P 48,000 P 48,000

Note: The cost of the equipment should be added back to the reported net income since it was expensed totally in 2006. f) Commission expense [(P224,000-P24,000)x15%] P 30,000 Commission payable P 30,000 Note: No commission on doubtful accounts g) Prepaid insurance (P48,000 x 6/12) Insurance expense

P 24,000

h) Interest expense (P400,000 x 12% x 2/12) P Interest payable

P 24,000 8,000 P

8,000

Answer: A PROBLEM NO. 2 You were able to gather the following in connection with your audit of the Bukidnon Company for the year ended December 31, 2006: 1/1/2006 P6,400,000 ? 85,000 35,000 14,250 25,000 -

Accounts receivable Unpaid merchandise invoices Accrued wages Advertising supplies inventory Accrued advertising Prepaid insurance Unexpired insurance

12/31/2006 P4,000,000 2,621,000 125,000 75,000 40,000 41,000

During the year: Amount collected from customers Total payments to suppliers of merchandise Total payments to suppliers of merchandise of prior years Wages paid Advertising paid which includes P40,000 applicable in 2006 Insurance premium paid

3

P10,000,000 13,618,000 4,632,000 3,050,000 300,000 125,000

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Net sales for 2006 a. P 6,400,000 b. P12,400,000

c. P 7,600,000 d. P14,000,000

2. Net purchases for 2006 a. P11,607,000 b. P15,629,000

c. P13,618,000 d. P16,239,000

3. Wages expense for 2006 a. P3,010,000 b. P3,090,000

c. P3,050,000 d. P3,100,000

4. Advertising expense for 2006 a. P245,750 b. P285,750

c. P260,000 d. P300,000

5. Insurance expense for 2006 a. P 84,000 b. P109,000

c. P100,000 d. P141,000

Suggested Solution: Question No. 1 Accounts receivable, 12/31/06 Add collections from customers Total Less accounts receivable, 1/1/06 Net sales for 2006

P 4,000,000 10,000,000 14,000,000 6,400,000 P 7,600,000

Question No. 2 Unpaid merchandise invoices, 12/31/06 Add payments to suppliers of 2006: Total payments to suppliers in 2006 P13,618,000 Less payments in 2006 to suppliers of prior years 4,632,000 Net purchases for 2006

4

P 2,621,000

8,986,000 P11,607,000

Question No. 3 Accrued wages, 12/31/06 Add wages paid in 2006 Total Less accrued wages, 1/1/06 Wages expense for 2006

P 125,000 3,050,000 3,175,000 85,000 P3,090,000

Question No. 4 Accrued advertising, 12/31/06 Advertising supplies inventory, 1/1/06 Advertising paid in 2006 Total Less: Accrued advertising, 1/1/06 Advertising supplies inventory, 12/31/06 Advertising paid applicable to 2007 Advertising expense for 2006

P 40,000 35,000 300,000 375,000 P14,250 75,000 40,000

129,250 P245,750

Question No. 5 Prepaid insurance, 1/1/06 Add insurance premium paid in 2006 Total Less prepaid insurance, 12/31/06 Insurance expense in 2006

P 25,000 125,000 150,000 41,000 P109,000

Answers: 1) C; 2) A; 3) B; 4) A, 5) B PROBLEM NO. 3 Your audit of Camiguin Company disclosed that your client kept very limited records. Purchases of merchandise were paid for by check, but most other items were out of cash receipts. The company’s collections were deposited weekly. 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 2, 2006 started business and issued common stock, 108,000 shares with P100 par, for the following considerations: Cash Building (useful life, 15 years) Land

P

900,000 8,100,000 2,700,000 P11,700,000

5

An analysis of the bank statements showed total deposits, including the original cash investment, of P6,300,000. The balance in the bank statement on December 31, 2006, was P450,000, but there were checks amounting to P90,000 dated in December but not paid by the bank until January 2007. Cash on hand on December 31, 2006 was P225,000 including customers’ deposit of P135,000. During the year, Camiguin Company borrowed P900,000 from the bank and repaid P225,000 and P45,000 interest. Disbursements paid in cash during the year were as follows: Utilities Salaries Supplies Dividends

P180,000 180,000 360,000 270,000 P990,000

An inventory of merchandise taken on December 31, 2006 showed P1,359,000 of merchandise. Tickets for accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid suppliers invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was purchased in early January on a one-year installment basis. During the year, checks for the down payment and all maturing installments totaled P801,000. The equipment has a useful life of 5 years. QUESTIONS: Based on the above and the result of your audit, determine the following: (Disregard income taxes) 1. Payments for merchandise purchases in 2006 a. P4,869,000 c. P3,654,000 b. P3,879,000 d. P3,969,000 2. Collections from sales in 2006 a. P6,480,000 b. P7,380,000

c. P5,580,000 d. P4,500,000 6

3. Net income for the year ended December 31, 2006 a. P2,430,000 c. P2,655,000 b. P1,440,000 d. P2,340,000 4. Stockholders’ equity as of December 31, 2006 a. P13,860,000 c. P14,085,000 b. P12,870,000 d. P13,770,000 5. Total assets as of December 31, 2006 a. P14,175,000 c. P14,374,800 b. P14,085,000 d. P14,310,000 Suggested Solution: Question No. 1 Total deposits Less adjusted cash in bank: Balance per bank statement Less outstanding checks Total check disbursements Less other check disbursements: Payment of loan Payment of interest on loan Payment for equipment Payments for merchandise purchases

P6,300,000 P450,000 90,000 225,000 45,000 801,000

360,000 5,940,000

1,071,000 P4,869,000

Question No. 2 Total deposits Less deposits other collections: Cash investment Proceeds from bank loan Collections deposited in the bank Add collections not deposited: Cash on hand, 12/31/06 Add disbursements in cash Total Less customers' deposit Total collections from sales

7

P6,300,000 P900,000 900,000 225,000 990,000 1,215,000 135,000

1,800,000 4,500,000

1,080,000 P5,580,000

Question No. 3 Sales (P3,360,000+P1,620,000) Less cost of sales: Purchases (P4,869,000 + P630,000) Less inventory, 12/31/06 Gross profit Less expenses: Utilities Salaries Supplies Doubtful accounts Depreciation–building (P8,100,000/15) Depreciation–equipment (P720,000/5) Interest expense [P45,000+(P801,000-P720,000)]

P7,200,000 P5,499,000 1,359,000

4,140,000 3,060,000

180,000 180,000 360,000 90,000 540,000 144,000 126,000

Net income

1,620,000 P1,440,000

Question No. 4 Common stock (108,000 shares x P100) APIC (P11,700,000 - P10,800,000) Retained earnings (P1,440,000 - P270,000) Total stockholders' equity

P10,800,000 900,000 1,170,000 P12,870,000

Question No. 5 Current assets: Cash (P360,000 + P225,000 ) Accounts receivable – net

P 585,000

(P1,620,000 - P90,000)

Inventory Noncurrent assets: Land Building - net (P8,100,000 - P540,000) Equipment - net (P720,000 - P144,000) Total assets Answers: 1) A; 2) C; 3) B; 4) B, 5) D

8

1,530,000 1,359,000 2,700,000 7,560,000 576,000

P 3,474,000

10,836,000 P14,310,00 0

PROBLEM NO. 4 Misamis Company’s December 31, year end financial statement contained the following errors: Ending inventory Depreciation expense

December 31,2005 P100,000 understated 20,000 understated

December 31,2006 P90,000 overstated

An insurance premium of P75,000 was prepaid in 2005 covering the years 2005, 2006, and 2007. The same was charged to expense in full in 2005. In addition, on December 31, 2006, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2007. There were no other errors during 2005, 2006 and 2007 and no corrections have been made for any of the errors. Ignore income tax considerations. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the total effect of the errors on the 2005 net income? a. Understated by P130,000 c. Overstated by P70,000 b. Understated by P155,000 d. No effect 2. What is the total effect of the errors on the 2006 net income? a. Overstated by P55,000 c. Overstated by P215,000 b. Overstated by P30,000 d. Understated by P45,000 3. What is the total effect of the errors on the company’s working capital at December 31,2006? a. Understated by P95,000 c. Overstated by P90,000 b. Understated by P70,000 d. No effect 4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2006? a. Understated by P75,000 c. Overstated by P110,000 b. Understated by P50,000 d. No effect 5. What is the total effect of the errors on the company’s working capital at December 31,2007? a. Overstated by P65,000 c. Understated by P160,000 b. Understated by P95,000 d. No effect

9

Suggested Solution: Question Nos. 1 to 5 NI 2005 12/31/05 inventory understated 12/31/06 inventory overstated 2005 depreciation understated Insurance paid in 2005 for 3 years Sale of a fully depreciated machinery in 2006 recorded in 2007 Over (under)

NI 2006

WC 12/31/06

RE 12/31/06

WC 12/31/07

(100,000)

100,000

-

-

-

-

90,000

90,000

90,000

-

20,000

-

-

20,000

-

(50,000)

25,000

(25,000)

(25,000)

-

(130,000)

(160,000) 55,000

(160,000) ( 95,000)

(160,000) ( 75,000)

-

Answers: 1) A; 2) A; 3) A; 4) A, 5) D PROBLEM NO. 5 You were engaged by Lanao Company to audit its financial statements for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end of 2005 and 2006. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: Salaries payable Interest receivable Prepaid insurance Advances from customers (Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not 10

12/31/06 P780,000 213,000 307,800 561,000

12/31/05 P873,600 259,200 384,000 470,400

shipped until the following year) Machinery (Capital expenditures had been recorded as repairs but should have been charged to Machinery; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%)

12/31/06

12/31/05

522,000

564,000

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the total effect of the errors on the 2005 net income? a. Understated by P775,800 c. Understated by P1,236,600 b. Overstated by P165,000 d. Overstated by P80,400 2. What is the total effect of the errors on the 2006 net income? a. Understated by P376,500 c. Understated by P320,100 b. Overstated by P324,300 d. Overstated by P380,700 3. What is the total effect of the errors on the company’s working capital at December 31,2006? a. Understated by P301,800 c. Understated by P265,800 b. Overstated by P119,400 d. Overstated by P820,200 4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2006? a. Understated by P155,100 c. Understated by P265,800 b. Overstated by P930,900 d. Understated by P855,900 Suggested Solution: Question Nos. 1 to 4 NI 2005 Salaries payable 2005 2006 Interest receivable 2005 2006 Prepaid insurance 2005

873,600 (259,200)

NI 2006

WC 12/31/06

RE 12/31/06

(873,600) 780,000

780,000

780,000

259,200 (213,000)

(213,000)

(213,000)

(384,000)

384,000

11

NI 2005 2006 Advances from customers 2005 2006 Machinery 2005

470,400 (564,000) 28,200

WC 12/31/06 (307,800)

RE 12/31/06 (307,800)

(470,400) 561,000

561,000

561,000

. 820,200

(564,000) 84,600 (522,000) 26,100) (155,100)

56,400 (522,000) 26,100 (320,100)

2006 Over (under)

NI 2006 (307,800)

. 165,000

Answers: 1) B; 2) C; 3) D; 4) A PROBLEM NO. 6 The Davao Company engaged you in 2006 to examine its books and records and to make whatever adjustments are necessary. Your examination disclosed following: a. Prior to any adjustments, the Retained Earnings account is reproduced below: RETAINED EARNINGS Date 2004 Jan. 1 Dec. 31 2005 Jan. 31 Apr. 3 Aug. 30 Dec. 31 2006 Jan. 31 Dec. 31

Particulars

Debit

Balance Net income for the year

Credit

Balance

310,000

P580,000 890,000

90,000

750,000 840,000

Dividends paid Paid in capital in excess of par Gain on retirement of preferred stock at less than issue price Net loss for the year

140,000

205,000

904,500 699,500

Dividends paid Net loss for the year

100,000 165,500

599,500 P434,000

64,500

b. The company failed to properly recognize accruals and prepayments. Selected accounts revealed the following information: 12

c.

1.

Prepaid expenses

2003 P8,500

2004 P6,200

2005 P7,400

2006 P9,500

2. 3.

Accrued expenses Unearned income

5,400 6,900

7,300 7,800

8,700 8,900

9,000 9,600

4.

Accrued income

4,700

5,600

6,200

7,800

Dividends had been declared on December 31 in 2004 and 2005 but had not been entered in the books until paid.

d. The company purchased a machine worth P270,000 on April 30, 2003. The company charged the purchase to expense. The machine has an estimated useful life of 3 years. The company uses the straight line method and residual values are deemed immaterial. e.

The company received a transportation equipment as donation from one of its stockholders on September 30, 2005. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred for registering the transfer of ownership. The company did not record the donation on its books. The expenses paid related to the donated equipment were charged to expense.

f.

The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the end of 2004 and 2006, respectively.

g.

The merchandise inventories at the end of 2005 and 2006 did not include merchandise that was then in transit shipped FOB shipping point. These shipments of P43,400 and P32,600 were recorded as purchases in January 2006 and 2007, respectively.

QUESTIONS: Based on the above audit findings, the adjusted balances of the following are: (Disregard tax implications) 1. Retained earnings, 12/31/03 a. P580,900 b. P850,900

c. P790,900 d. P760,900

2. Net income for 2004 a. P369,800

c. P279,800 13

b. P215,800

d. P373,100

3. Retained earnings, 12/31/04 a. P976,700 b. P860,700

c. P930,700 d. P720,700

4. Net loss for 2005 a. P269,700 b. P379,700

c. P349,700 d. P359,700

5. Retained earnings, 12/31/05 a. P481,000 b. P411,000

c. P341,000 d. P241,000

6. Net loss for 2006 a. P118,300 b. P228,300

c. P148,300 d. P178,300

7. Retained earnings, 12/31/06 a. P302,700 b. P362,700

c. P252,700 d. P332,700

Suggested Solution: Questions No. 1 to 7

Unadjusted balances (b.1) Prepaid expense 2003 2004 2005 2006 (b.2) Accrued expense 2003 2004 2005 2006 (b.3) Unearned income 2003 2004 2005 2006

RE 2003 P580,000

NI 2004 P310,000

8,500

(8,500) 6,200

(5,400)

5,400 (7,300)

(6,900)

6,900 (7,800)

14

NL 2005 (P205,000) (6,200) 7,400

7,300 (8,700)

7,800 (8,900)

NL 2006 (P165,500)

(7,400) 9,500

8,700 (9,000)

8,900 (9,600)

RE 2003 (b.4) Accrued income 2003 2004 2005 2006 (d) Purchase of machinery, expensed on April 30, 2003 Unrecorded depr.

NI 2004

4,700

(4,700) 5,600

270,000 (60,000)

(90,000)

(e) Unrecorded transpo equipm't. received as donation on 9/30/05 Expenses paid Unrecorded depr. (f) Understatement of inventory 2004 2006 Understatement of inventory and purchases 2005

64,000

NL 2005

(5,600) 6,200

(6,200) 7,800

(90,000)

(30,000)

30,000 (20,000)

(80,000)

(64,000) 44,500

43,400 (43,400)

2006 Adjusted balances

NL 2006

. P790,900

. P279,800

Retained earnings, 1/1/04, as adjusted Net income for 2004

. (P349,700)

P 790,900 279,800

Dividends declared Retained earnings, 12/31/04

( 140,000) 930,700

Net loss for 2005

( 349,700)

Dividends declared Retained earnings, 12/31/05

( 100,000) 481,000

Net loss for 2006

( 228,300)

Retained earnings, 12/31/06

P 252,700 15

(43,400) 43,400 32,600 (32,600) (P228,300) (1 ) (2 ) (3 ) (4 ) (5 ) (6 ) (7 )

Answers: 1) C; 2) C; 3) C; 4) C, 5) A; 6) B; 7) C

PROBLEM NO. 7 Cotabato Corporation’s current assets and liabilities section of the balance sheet as of December 31, 2006 appear as follows: Current assets Cash Accounts receivable Less allowance for doubtful accounts Inventories Prepaid expenses Total current assets Current liabilities Accounts payable Notes payable Total current liabilities

P1,200,000 P2,670,000 210,000

2,460,000 5,130,000 270,000 P9,060,000 P1,830,000 2,010,000 P3,840,000

The following errors in the corporation’s accounting have been discovered: a. January 2007 cash disbursements entered as of December 2006 included payment of accounts payable in the amount of P1,170,000, on which a cash discount of 2% was taken. b. The inventory included P810,000 of merchandise that have been received at December 31 but for which no purchase invoices have been received or entered. Of this amount P360,000 had been received on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30. c.

Sales for the first four days in January 2007 in the amount of P900,000 were entered in the sales book as of December 31, 2006. Of these, P645,000 were sales on account and the remainder were cash sales.

d. Cash, not including cash sales, collected in January 2007 and entered as of December 31, 2006, totaled P1,059,720. Of this amount, P699,720 was received on account after cash discounts of 2% had been deducted; the remainder represented the proceeds of a bank loan. 16

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Adjusted cash balance as of December 31, 2006 a. P1,031,880 c. P1,055,280 b. P 641,880 d. P1,286,880 2. Adjusted accounts receivable balance as of December 31, 2006 a. P2,739,000 c. P2,724,720 b. P2,529,000 d. P3,129,000 3. Adjusted accounts payable balance as of December 31, 2006 a. P3,000,000 c. P2,976,600 b. P2,190,000 d. P3,450,000 4. Adjusted working capital as of December 31, 2006 a. P4,160,880 c. P3,950,880 b. P3,500,880 d. P3,524,280 5. Net misstatement in the reported December 31, 2006 as a result of the a. P1,269,120 b. P1,700,880

net income for the year ended errors c. P1,719,120 d. P1,250,880

Suggested Solution: Question No. 1 Unadjusted cash balance January cash payments (P1,170,000 x .98) January cash sales (P900,000 – P645,00) January cash collections and loan proceeds Adjusted cash balance

P1,200,000 1,146,600 (255,000) (1,059,720) P1,031,880

Question No. 2 Unadjusted accounts receivable January sales on account January collections on AR (P699,720/.98) Adjusted accounts receivable

P2,670,000 (645,000) 714,000 P2,739,000

Question No. 3 Unadjusted accounts payable

P1,830,000 17

January payments on AP Unrecorded purchases (P810,000 – P360,000) Adjusted accounts payable

1,170,000 450,000 P3,450,000

Question No. 4 Current assets: Cash (see no. 1) Accounts receivable (see no. 2) Allowance for doubtful accounts Inventories (P5,130,000- P360,000) Prepaid expenses Less current liabilities: Accounts payable (see no. 3) Notes payable [P2,010,000 – (P1,059,720 - P699,720)] Working capital

P1,031,880 2,739,000 (210,000) 4,770,000 270,000

P8,600,880

3,450,000 1,650,000

5,100,000 P3,500,880

Question No. 5 Over (under) P 23,400 360,000 450,000 900,000 ( 14,280) P1,791,120

January purchase discounts (P1,170,000 x .02) Goods held on consignment Unrecorded purchases (P810,000 – P360,000) January sales January sales discounts [(P699,720/.98) x .02] Net misstatement Answers: 1) A; 2) A; 3) D; 4) B, 5) C PROBLEM NO. 8

The bookkeeper for Maguindanao Computers, Inc., reports the following balance sheet amounts as of June 30, 2006. Current assets Noncurrent assets Current liabilities Noncurrent liabilities Owners’ equity

P2,440,500 6,285,500 1,386,000 900,000 6,440,000

A review of account balances reveals the following data.

18

(a) An analysis of current assets discloses the following: Cash Investment securities – trading Trade accounts receivable Inventories, including advertising supplies of P20,000

P 422,500 600,000 568,000 850,000 P2,440,500

(b) Noncurrent assets include the following: Property, plant and equipment: Depreciated book value (cost P6,560,000) Deposit with a supplier for merchandise ordered for August delivery Goodwill recorded on the books to cancel losses incurred by the company in prior years

P5,490,000 21,500 774,000 P6,285,500

(c) Current liabilities include the following: Payroll payable Taxes payable Rent payable Trade accounts payable (net of P15,000, 6-month note, received from a supplier who purchased some used equipment on June 29, 2006, Notes payable

P

71,500 41,500 114,000

999,000 160,000 P1,386,000

(d) Noncurrent liabilities include the following: 9% mortgage on property, plant, and equipment, payable in semiannual installment of P90,000 through to June 30, 2011

P900,000

(e) Owners’ equity includes the following: Preferred stock: 190,000 shares outstanding (P20 par value) Common stock: 1,600,000 shares at P1 par value Additional paid-in capital

19

P3,800,000 1,600,000 1,040,000 P6,440,000

(f) Common shares were originally issued for P3,910,000, but the losses of the company for the past years were charged against additional paid-in capital. QUESTIONS: Based on the above and the result of the audit, determine the adjusted amounts of the following: 1. Current assets a. P2,462,000 b. P2,440,500

c. P2,477,000 d. P2,435,500

2. Noncurrent assets a. P5,490,000 b. P5,511,500

c. P6,560,000 d. P6,264,000

3. Current liabilities a. P1,401,000 b. P1,581,000

c. P1,602,500 d. P1,491,000

4. Noncurrent liabilities a. P720,000 b. P810,000

c. P900,000 d. P880,000

5. Owners’ equity a. P7,710,000 b. P8,750,000

c. P6,440,000 d. P5,666,000

Suggested Solution: Question No. 1 Cash Investment securities—trading Note receivable Accounts receivable Inventory (P850,000 - P20,000) Advertising supplies Deposit with supplier Current assets

P 422,500 600,000 15,000 568,000 830,000 20,000 21,500 P2,477,000

PAS 1 par. 57 states that an asset shall be classified as current when it satisfies any of the following criteria: 20

a) it is expected to be realized in, or is intended for sale or consumption in, the entity’s normal operating cycle; b) it is primarily held for the purpose of being traded; c) it is expected to be realized within twelve months after the balance sheet date; or d) it is cash or a cash equivalent (as defined in PAS 7 Cash Flow Statements) unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date. All other assets shall be classified as non-current. Question No. 2 Property, plant, and equipment Less accumulated depreciation Noncurrent assets

P6,560,000 1,070,000 P5,490,000

Question No. 3 Notes payable Accounts payable (P999,000 + P15,000) Mortgage payable-current portion (P90,000 x 2) Payroll payable Taxes payable Rent payable Current liabilities

P 160,000 1,014,000 180,000 71,500 41,500 114,000 P1,581,000

PAS 1 par. 60 states that a liability shall be classified as current when it satisfies any of the following criteria: a) it is expected to be settled in the entity’s normal operating cycle; b) it is held primarily for the purpose of being traded; c) it is due to be settled within twelve months after the balance sheet date; d) the entity does not have an unconditional right to defer the settlement of the liability for at least twelve months after the balance sheet date. All other liabilities shall be classified as non-current. Question No. 4 Mortgage payable-noncurrent portion (P900,000 - P180,000)

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P720,000

Question No. 5 Preferred stock, P20 par value, 190,000 shares Common stock, P1 par value, 1,600,000 shares Additional paid-in capital (P3,910,000 - P1,600,000) Deficit [(P2,310,000 - P1,040,000)+P774,000] Owners’ equity

P3,800,000 1,600,000 2,310,000 (2,044,000) P5,666,000

Answers: 1) C; 2) A; 3) B; 4) A, 5) D

PROBLEM NO. 9 In connection with your audit of the financial statements Sulu Corporation, you were provided with the following balance sheet as of December 31, 2006: Sulu Corporation Balance Sheet December 31, 2006 Assets Current assets: Cash Trading securities Accts rec., net Inventory Other current assets Total Noncurrent assets: Property, plant, and equip., net Treasury stock Other noncurrent assets Total Total assets

P 250,000 160,000 427,000 620,000 284,000 P1,741,000

Liabilities and Stockholders’ Equity Current liabilities: Accounts payable P 68,000 Other current liabs. 40,000 Total P 108,000 Long-term liabilities Total liabilities

655,000 P 763,000

Owners’ equity: P1,296,000 90,000 272,000 P1,658,000 P3,399,000

Common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity

P1,000,000 1,636,000 P2,636,000 P3,399,000

The following additional information relates to the December 31, 2006, balance sheet. (a)

Cash includes P80,000 that has been restricted for the purchase of manufacturing equipment (a noncurrent asset).

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(b)

Trading securities include P55,000 of stock that was purchased in order to give the company significant ownership and a seat on the board of directors of a major supplier.

(c)

Other current assets include a P80,000 advance to the president of the company. No due date has been set.

(d)

Long-term liabilities also include bonds payable of P200,000. Of this amount, P50,000 represents bonds scheduled to be redeemed in 2007.

(e)

Long-term liabilities also include a P140,000 bank loan. On May 15, 2007, the loan will become due on demand.

(f)

On December 21, dividends in the amount of P300,000 were declared to be paid to shareholders of record on January 25. These dividends have not been reflected in the financial statements.

(g)

Cash in the amount of P380,000 has been placed in a restricted fund for the redemption of preferred stock in 2007. Both the cash and the stock have been removed from the balance sheet.

(h)

Property, plant, and equipment includes land costing P160,000 that is being held for investment purposes and that is scheduled to be sold in 2007.

QUESTIONS: Based on the above and the result of your audit, determine the adjusted amounts of the following as of December 31, 2006: 1. Total current assets a. P1,526,000 b. P1,821,000

c. P1,686,000 d. P1,606,000

2. Total noncurrent assets a. P2,163,000 b. P2,003,000

c. P1,488,000 d. P2,083,000

3. Total current liabilities a. P548,000 b. P298,000

c. P458,000 d. P598,000

4. Total noncurrent liabilities a. P515,000

c. P605,000 23

b. P665,000

d. P465,000

5. Total liabilities a. P1,063,000 b. P 763,000

c. P1,263,000 d. P1,443,000

6. Total stockholders’ equity a. P2,926,000 b. P2,246,000

c. P2,626,000 d. P2,716,000

7. Total liabilities and stockholders’ equity a. P3,309,000 c. P3,609,000 b. P3,689,000 d. P3,779,000 Suggested Solution: Question No. 1 Cash (P250,000 - P80,000) Trading securities (P160,000 - P55,000) Accounts receivable, net Inventory Land held for resale Other current assets (P284,000 - P80,000) Current assets

P 170,000 105,000 427,000 620,000 160,000 204,000 P1,686,000

Note: If the problem is silent, advances to officers and employees are normally classified as current. However, since the advances to the president has no due date, it will be classified as noncurrent. Question No. 2 Investment in associate Property, plant and equipment, net (P1,296,000 - P160,000) Restricted cash - for preferred stock Restricted cash - for equipment Advance to company president Other noncurrent assets Noncurrent assets

P

55,000

1,136,000 380,000 80,000 80,000 272,000 P2,003,000

Question No. 3 Accounts payable

P 68,000 24

Current portion of bonds payable Loan due on demand Dividends payable Other current liabilities Current liabilities

50,000 140,000 300,000 40,000 P598,000

Question No. 4 Bonds payable (P200,000 - P50,000) Other noncurrent liabilities (P655,000-P200,000-P140,000) Noncurrent liabilities

P150,000 315,000 P465,000

Question No. 5 Current liabilities (see no. 3) Noncurrent liabilities (see no. 4) Total liabilities

P 598,000 465,000 P1,063,000

Question No. 6 Preferred stock Common stock Retained earnings (P1,636,000 - P300,000) Treasury stock Total stockholders’ equity

P 380,000 1,000,000 1,336,000 ( 90,000) P2,626,000

Question No. 7 Total liabilities (see no. 5) Total stockholders’ equity (see no. 6) Total liabilities and stockholders' equity

P1,063,000 2,626,000 P3,689,000

Answers: 1) C; 2) B; 3) D; 4) D, 5) A; 6) C; 7) B PROBLEM NO. 10 The following balance sheet is submitted to you for inspection and review. Surigao Corporation Balance Sheet December 31, 2006 Assets Cash Accounts receivable Inventories

P 180,200 450,000 816,000 25

Prepaid insurance Property, plant, and equipment Total assets Liabilities and Owners’ Equity Miscellaneous liabilities Loan payable Accounts payable Capital stock Paid-in capital Total liabilities and owners’ equity

35,200 1,507,200 P2,988,600 P

14,400 304,800 301,000 536,000 1,832,400 P2,988,600

In the course of the review, you find the following data: (a)

The possibility of uncollectible accounts on accounts receivable has not been considered. It is estimated that uncollectible accounts will total P19,200.

(b)

The amount of P180,000 representing the cost of large-scale news paper advertising campaign completed in 2006 has been added to the inventory because it is believe that this campaign will benefit sales of 2007. It is also found that inventories include merchandise of P65,000 received on December 31 and has not been recorded as a purchase.

(c)

The books show that property, plant and equipment have a cost of P2,227,200 with accumulated depreciation of P720,000. However, these balances include fully depreciated equipment of P340,000 that has been scrapped and is no longer on hand.

(d)

Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current advances of P23,600 made to company officials.

(e)

Loan payable represents a loan from the bank that is payable in regular quarterly installments of P25,000.

(f)

Income tax payable not shown is estimated at P73,000.

(g)

Deferred tax liability arising from temporary differences totals P178,200. This liability was not included in the balance sheet.

(h)

Capital stock consists of 25,000 shares of preferred 6% stock, par P20, and 36,000 shares of common stock, par value P1.

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(i)

Capital stock have been issued for a total consideration of P1,134,400; the amount received in excess of the par values of the stock has been reported as paid-in capital. Net income and dividends were recorded in Paid-In Capital.

QUESTIONS: Based on the above and the result of the audit, determine the adjusted amounts of the following: 1. Current assets a. P1,347,200 b. P1,282,200

c. P1,217,200 d. P1,462,200

2. Noncurrent assets a. P1,530,800 b. P1,190,800

c. P1,507,200 d. P1,167,200

3. Total assets a. P2,878,000 b. P2,789,400

c. P2,473,000 d. P2,813,000

4. Current liabilities a. P512,000 b. P504,000

c. P577,000 d. P600,600

5. Noncurrent liabilities a. P383,000 b. P406,600

c. P204,800 d. P433,000

6. Total liabilities a. P983,600 b. P716,800

c. P895,000 d. P960,000

7. Owners’ equity a. P1,853,000 b. P1,918,000

c. P2,096,200 d. P2,368,400

Suggested Solution: Question No. 1 Cash Accounts receivable, net (P450,000 - P19,200) 27

P 180,200 430,800

Inventory (P816,000 - P180,000) Prepaid insurance Current assets

636,000 35,200 P1,282,200

Question No. 2 Property, plant and equipment, net [(P2,227,200-P340,000) -(P720,000-P340,000)]

Advances to officers Noncurrent assets

P1,507,200 23,600 P1,530,800

Question No. 3 Current assets (see no. 1) Noncurrent assets (see no. 2) Total assets

P1,282,200 1,530,800 P2,813,000

Question No. 4 Accounts payable (P301,000+P65,000) Salaries payable Income tax payable Loan payable to bank, current portion (P25,000x4) Current liabilities

P366,000 38,000 73,000 100,000 P577,000

Question No. 5 Loan payable (P304,800-P100,000) Deferred tax liability Noncurrent liabilities

P204,800 178,200 P383,000

Question No. 6 Current liabilities (see no. 4) Noncurrent liabilities (see no. 5) Total liabilities

P577,000 383,000 P960,000

Question No. 7 6% Preferred stock, P20 par, 25,000 shares Common stock, P1 par value, 36,000 shares Paid-in capital in excess of par (P1,134,400-P500,000-P36,000) Retained earnings (P1,832,400-P598,400-P19,200-P180,000P65,000-P73,000-P178,200)

Total owners’ equity 28

P 500,000 36,000 598,400 718,600 P1,853,000

Answers: 1) B; 2) A; 3) D; 4) C, 5) A; 6) D; 7) A

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