Basic Accounting

1. Ottawa Electronics Inc. reported the following items on its December 31, 2019 trial balance:
Accounts Payable P108,900
Advances to Employees 4,500
Unearned Rent Revenue 28,800
Estimated Liability Under Warranties 25,800
Cash Surrender Value of Officers’ Life Insurance 7,500
Bonds Payable 555,000
Discount on Bonds Payable 22,500
Trademarks 3,900

The amount that should be recorded on Ottawa’s statement of financial position as total liabilities is

a. P696,000
b. 700,500
c. 703,500
d. 741,000

2. Based on the information:

Credit Sales 1,720,000
Collections on accounts receivable 1,700,000
Cash Sales 8,100,000
Unadjusted balance in Allowance for doubtful accounts 500 debit
Sales return and allowances for credit sales 40,000
Accounts Receivable, beginning of the year 140,000

If bad debts are estimated to be 1 ½% of accounts receivable, ending, in the adjusting entry to recognize bad
debts, you would debit bad debt expense for:

a. 2,300
b. 1,900
c. 1,300
d. 1,800

3. Which of the following accounts would not be subject to closing entries at the end of the accounting period?
a. Write-down of inventories
b. Loss on factoring of receivables
c. Loss on conversion of preference shares
d. Dividends paid on preference shares with mandatory redemption

4. Wewe Company reported the following current assets on December 31, 2019:
Cash in Bank, net of P500,000 bank overdraft in another bank P4,000,000
Accounts Receivable 7,500,000
Notes Receivable, current 2,000,000
Inventory, including P300,000 expected to be sold within the
normal operating cycle but beyond 12 months 4,500,000
Trading Securities 1,000,000
Investments in shares of stock 1,500,000
Prepaid Expenses, including cash surrender value of P200,000 500,000
Deferred tax asset 2,500,000
Equipment classified as “held for sale” 3,000,000

The accounts receivable included customers’ accounts P5,000,000, net of customers’ credit balances of
P600,000 (customers paid more than their debt), allowance for doubtful accounts of P500,000, and selling
 price of unsold goods out on consignment at a markup of 50% on cost and exclude from ending inventory,
P3,000,000.

At what amount should the current assets be reported on December 31, 2018? 22,400,000

5. Use the following information:

Revenues P1,200,000 Income from operations P330,000
Income from continuing operations 150,000 Selling and Admin Expenses 750,000
Net Income 135,000 Income before tax 300,000

Determine the net amount of other income and expenses. (30,000)

6. Owner’s equity was understated and liabilities were overstated. Which of the following errors could have
been the cause?
a. Recording the adjustment entry twice.
b. Failure to record interest on accrued note payable.
c. Failure to make an adjusting entry to record revenue which has been earned but not yet billed to
customers.
d. Failure to record the earned portion of rent received in advance.

7. The purpose of the adjusting entries is to

a. Prepare revenue and expense accounts for recording the transaction of the next period.
b. Apply the realization principle and the matching principle to transactions affecting two or more
accounting periods.
c. Adjust daily the balances in asset, liability, revenue, and expense accounts for the effects of business
transactions.
d. Adjust the capital account for the revenue, expense, and withdrawal transactions which occurred
during the year.

8. Solane LPG had a total of P5,800,000 disbursements for purchases, an increase in trade accounts payable of
P500,000, and a decrease in merchandise inventory amounting to P200,000. What is the cost of goods sold
for the current year? 6,500,000

9. The failure to record a purchase of merchandise on account even though the goods are properly included in
the physical inventory results in
a. an overstatement of assets and net income.
b. an understatement of assets and net income.
c. an understatement of cost of goods sold and liabilities and an overstatement of assets.
d. an understatement of liabilities and an overstatement of owners' equity

10. If the adjusting entry at year-end includes a debit to Service Revenue and a credit to Unearned Service
Revenue, which of the following is incorrect?
a. The entry is made to recognize the unearned portion of revenue.
b. The income method for recording deferrals was used in the original entry.
c. Failure to record the entry will cause capital to be understated.
d. All of the statements are correct.

11. At December 31, 2019, the following require inclusion in a company’s financial statements:
i. On January 1, 2019, the company made a loan of P12,000 to an employee, repayable on January
1, 2018, charging interest at 2% per year. On the due date she repaid the loan and paid the
whole interest due on the loan to that date.
 ii. The company paid an annual insurance premium of P9,000 in 2019, covering the year ending
August 31, 2020.
iii. In January 2020, the company received rent from a tenant of P4,000 covering a period of six
months until December 31, 2019.

For these items, what amount should be included as current assets in the company’s statement of financial
position as at December 31, 2019?

a. P22,240
b. P19,240
c. P18,240
d. P15,240

12. The following information for 2019 is provided by Rockets company:

Sales 20,000,000
Cost of Goods Sold 12,000,000
Selling Expenses 1,200,000
General and Administrative Expenses 1,800,000
Interest Expense 1,500,000
Gain on early extinguishment of debt 500,000
Correction of inventory error, net of income tax – credit 800,000
Investment income – equity method 600,000
Gain on Sale of investment 2,000,000
Income tax expense 2,100,000
Dividends declared 2,500,000

What was the 2019 income from continuing operations?

a. 4,900,000
b. 4,500,000
c. 6,600,000
d. 7,000,000

13. The expenses other than interest expense of John Company for the current year is 40% of cost of sales but
only 20% of sales. Interest expense is 5% of sales. The amount of purchases is 120% of cost of sales. Ending
inventory is twice as much as the beginning inventory. The income after tax of 30% for the current year is
P350,000. What is the amount of sales for the current year?
a. 1,625,000
b. 1,300,000
c. 2,000,000
d. 2,500,000

14. Clark Co. maintains records under cash basis and only keeps records of its cash receipts and cash
disbursements. You were requested to convert the records to accrual basis. You were able to gather the
following information:

12/31/16 12/31/17
Outstanding sales invoices P 536,000 P 835,000
Advance collections from customers 0 125,000
Unpaid merchandise invoices 544,000 423,000
Advance payments to suppliers 98,000 0
The cash receipt and disbursement records revealed the following information:
 Amount collected from customers, P9,890,000
 Total payments to suppliers of merchandise, P5,615,000
 What is the total sales for 2017 under accrual basis?

a. 10,064,000
b. 9,716,000
c. 10,314,000
d. 10,189,000

15. The December 31 year-end financial statements of Samoca Company contained the following errors:
12/31/14 12/31/15
Ending Inventory P48,000 understated P40,500 overstated
Depreciation Expense P11,500 understated ---

An insurance premium of P330,000 was prepaid in 2014 covering 2014, 2015, and 2016. The entire amount
was charged to expense in 2014. In addition, on December 31, 2015, a fully depreciated machinery was sold
for P75,000 cash, but the sale was not recorded until 2016. There were no other errors during 2014 and
2015, and no corrections have been made for any of the errors. Ignore income tax effects.

What is the total effect of the errors on Samoca’s 2015 net income?
a. P123,500 overstatement
b. P27,500 overstatement
c. P192,500 understatement
d. P177,500 understatement

16. A portion of Spark Company’s statement of financial position appears as follows:

12/31/15 12/31/14
Assets:
Cash P353,300 P100,000
Notes Receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts Payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on credit. During 2015,
cash totalling P471,700 was paid on accounts payable. Operating expenses for 2015 totalled P220,000. All
sales are cash sales. The inventory was restocked by purchasing 1,500 units per month and valued using
periodic FIFO. The unit cost of inventory was P32.60 during January 2015 and increased by P0.10 per month
during the year. Spark sells only one product. All sales are made for P50 per unit. The ending inventory for
2014 was valued at P32.50 per unit.
Determine the cost of goods sold during the year.
a. 609,125
b. 609,700
c. 606,915
d. 603,625

17. At Mastermind Company, events and transactions during 2019 included the following:
i. Depreciation for 2017 was found to be understated by P45,000.
ii. A strike by the employees of a supplier resulted in a loss of P30,000.
iii. The inventory on December 31, 2017 was overstated by P60,000.
iv. A flood destroyed a building that had a carrying amount of P600,000. Floods are very uncommon in
that area.

Due to these events, the 2019 income should be decreased/increased by _______. Decreased by 630,000
18. The following information pertains to Mar Company for the year ended 2019:
Cash Sales 1,500,000
Cash collected on accounts receivable 6,500,000
Accounts receivable, January 1 400,000
Accounts receivable, December 31 600,000
Bad debts written off 100,000
Purchases 5,225,000
Inventory, December 31 900,000

Summary of prior sales:

2018 2017 2016

Sales 7,000,000 6,500,000 5,500,000

Gross Profit 1,820,000 1,755,000 1,210,000

The inventory on January 1, 2019 was

a. 1,843,000
b. 1,675,000
c. 1,925,000
d. 1,900,000

19. Catty Company provided the following adjusted balances on December 31, 2016, except for income tax
expense.

Cash 550,000
Accounts Receivable 1,650,000
Prepaid Taxes 300,000
Accounts Payable 120,000
Share Capital 500,000
Share Premium 680,000
Retained Earnings 630,000
Foreign currency translation adjustment – debit 430,000
Revenue 3,600,000
Expenses 2,600,000

During the current year, estimated tax payments of P300,000 were charge to prepaid taxes. The entity has
not yet recorded income tax expense. There were no differences between financial statement and income
tax income, and the tax rate is 30%. Included in accounts receivable is P500,000 due from a customer.
Special terms granted to this customer require payment in equal semi-annual installments of P125,000 every
April 1 and October 1.

On December 31, 2016, what amount should be reported as total current assets?
a. 1,950,000
b. 2,500,000
c. 2,200,000
d. 2,250,000

20. Dawin Corp. had beginning inventory of P250,000, and ending inventory of 200,000 in 2017. The entity
purchased merchandise during 2018 on credit for P300,000; terms 2/10, n/30. All of the gross liabilities
except P60,000 were paid within the discount period. The remainder was paid within the 30-day term. At the
end of the annual accounting period, December 31, 2018, 90% of the merchandise had been sold. The gross
profit rate is 25%. At what amount should the gross profit be reported in 2018? 148,560
21. The physical inventory of Golden State Company as of December 26, 2019 totalled 1,965,000. In trying to
establish the December 31 inventory, the accountant note the following transactions from December 27 to
December 31, 2019.
Sales (20% markup on cost) 600,000
Credit memo issued:
For goods returned on:
December 15 27,000
December 20 35,000
December 29 36,000
For goods to be delivered to customers not in accordance
with specifications 9,500
Credit memo received:
For goods returned on:
December 10 17,000
December 26 23,000
December 28 8,000
Purchases:
Placed in stock 120,000
In transit, FOB shipping point 50,000
In transit, FOB destination 33,000

The inventory as of December 31, 2019 is

a. 1,675,800
b. 1,657,000
c. 1,663,000
d. 1,668,667

22. In 2018, the Dugan Co. has net credit sales of P700,000. On January 1, 2018, Allowance for Doubtful
Accounts had a credit balance of P16,000. During 2018, P30,000 of uncollectible accounts were written off.
Past experience indicates that the allowance should be 10% of accounts receivable. If the receivable balance
at December 31 was P200,000, what is the required adjustment to the Allowance for Doubtful Accounts at
December 31, 2018?
a. 20,000
b. 30,000
c. 34,000
d. 36,000

23. You were assigned to audit the receivables of Ruby Merchandising Company. As instructed by your audit
manager, you have performed a cut-off test of sales. The results of the cut-off test revealed the following:

Recorded as Sales in December 2018

Sales
Selling Shipment Received by
Invoice Cost Terms
Price Date Customers
No.

1029 P 18,000 P 16,500 FOB Shipping Point 12/26/2018 12/29/2018

1030 20,000 14,000 Shipped to Consignee 12/26/2018 12/29/2018

 1031 8,680 7,240 FOB destination* 12/28/2018 1/02/2019

1032 9,000 7,500 FOB shipping point* 12/30/2018 1/02/2019

1033 10,000 7,750 FOB destination 12/31/2018 1/03/2019

1034 7,800 6,100 FOB shipping point 12/31/2018 1/02/2019

1035 14,000 12,000 Shipped to consignee 12/31/2018 1/02/2019

*Cash has been collected from the customer in advance

Recorded Sales in January 2019

Sales
Selling Shipment Received by
Invoice Cost Terms
Price Date Customers
No.

1036 P 21,000 P 18,200 FOB Shipping Point 12/30/2018 1/03/2019

1037 10,500 8,800 FOB Shipping Point 12/31/2018 1/03/2019

1038 4,500 3,200 FOB destination 01/02/2019 1/03/2019

1039 6,500 5,000 FOB Shipping Point 01/02/2019 1/05/2019

A count of all inventories within the premises was made in the morning of December 31, 2018 after any
shipments were made during the day. The total cost of the count was recorded as inventories as of
December 31, 2018. Half of the goods shipped to consignee on December 26 are still unsold at December 31,
while shipments to consignee on December 31 were yet to be sold. The agreed commission on consignment
sales is 20% of the sales price.
The unadjusted ledger balances show the following:
Accounts Receivable P 376,500
Inventories 525,000
Sales 1,520,000
Cost of Sales 942,000

Determine the adjusted balances of accounts receivable and inventories.

Accounts Receivable Inventories
a. 372,000 558,990
b. 329,620 506,800
c. 361,120 547,440
d. 389,320 549,500

24. You were engaged for the first time audit of Frank Corp.’s financial statements, as of and for the period
ended December 31, 2018. The company, which started operations at the beginning of 2016 is in the
business of pharmaceutical products distribution. Your examination of the company’s books revealed the
following:
 i. The company reported net income amounting to P368,500, P616,300, and P525,800 for 2016, 2017,
an 2018 respectively.
ii. The following accruals and deferrals were consistently omitted at the end of each year.

2016 2017 2018

Prepaid Rent Expense 2,500 - 1,600
Accrued Salaries Expense - 2,000 1,500

iii. The following deliveries were made to customers at each year-end, but were recorded as “sales”
only upon cash collection the following year. All sales were made FOB shipping point and the related
inventories were included in the physical count conducted every December 31:

2016 2017 2018

Sales Price 25,000 20,000 34,000
Cost of Goods 15,000 12,000 20,400

iv. The following goods were received from suppliers as of each year-end, but were recorded as
purchases only upon cash payment the following year. All purchases were made FOB destination and
the related inventories were included in the physical count since they were already on hand as of
the count date.

2016 2017 2018

Purchase Price 25,000 22,000 24,000

What is the adjusted net income for 2018?

a. 549,399
b. 559,700
c. 531,500
d. 533,500

25. You were assigned to audit the financial statements of Adelaida Corporation in application for a bank loan.
Adelaida Corp. maintains accounting records under cash-basis accounting. All sales and purchases
transactions were made on account. The following were discovered in line with your investigations:
i. Summary of cash transactions were as follows:
CASH RECEIPTS
Total collections from customers 28,950,000
Collections of interest on notes 260,000
Purchase Returns and Allowances 420,000

CASH DISBURSEMENTS
Payments to suppliers of merchandise 17,590,000
Sales Returns and Allowances 390,000
Insurance 700,000
Salaries 5,000,000
Equipment 800,000
Miscellaneous Expenses 1,500,000
Dividends 1,000,000
ii. The following changes in account balances would have been observed had accrual basis been used.
INCREASES
Cash ?
Accounts Receivable 1,980,000
Prepaid Insurance 200,000
Inventory 840,000
 Equipment, net 100,000

DECREASES
Interest Receivable 60,000
Notes Receivable- trade 600,000
Accounts Payable 720,000
Accrued Salaries Expense 300,000
Advances to Suppliers 970,000
iii. Additional information:
Total purchase returns and allowances amounted to P950,000 (including the refunded portion) while
the total sales returns and allowances amounted to P1,280,000 (including the refunded portion).
Sales and purchase discounts were P326,000 and P224,000, respectively.

Determine the audited balance of net sales.

a. 31,564,000
b. 29,940,000
c. 30,266,000
d. 29,666,000

26. Merchandise Inventory is valued at P6,050,000 prior to any adjustments. The following information has been
found relating to certain inventory transactions:
i. The invoice for goods costing P175,000 was received and recorded as a purchase on December 31,
2015. The related goods, shipped FOB destination, were received on January 4, 2016, and thus were
not included in the physical inventory.
ii. A P182,000 shipment of goods to a customer on December 30, 2015, terms FOB destination, are not
included in the year-end inventory. The goods cost P130,000 and were delivered to the customer on
January 3, 2016. The sale was properly recorded in 2016.
iii. Goods costing P637,500 were shipped on December 31, 2015, and were delivered to the customer
on January 3, 2016. The terms of the invoice were FOB shipping point. The goods were included in
the 2015 ending inventory even though the sale was recorded in 2016.
iv. Goods costing P217,500 were received from a vendor on January 4, 2016. The related invoice was
received and recorded on January 6, 2016. The goods were shipped on December 31, 2015, FOB
shipping point.
v. Goods valued at P275,000 are on consignment. These goods are not included in the inventory figure.
vi. Goods valued at P612,800 are on consignment from a vendor. These goods are not included in the
physical inventory.

Determine the adjusted balance of the inventory.

a. P6,035,000
b. P6,080,000
c. P5,860,000
d. P5,010,000

27. The following shareholders’ equity accounts are included in the statement of financial position of Condeca
Co. on December 31, 2014.
Preference share capital, 8%, P100 par (200,000 shares authorized,
60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share Premium 3,750,000
Retained Earnings 3,500,000
 Total P16,250,000

During 2015, Condeca took part in the following transactions concerning equity.

i. Paid the annual 2014 P8 per share dividend on preference shares and a P2 per share dividend on
ordinary shares. These dividends had been declared on December 31, 2014.
ii. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
iii. Reissued 21,000 treasury shares for land valued at P900,000.
iv. Issued 15,000 preference shares at P105 per share.
v. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are selling for
P45 per share.
vi. Issued the stock dividend.
vii. Declared the annual 2015 P8 per share dividend on preference shares and the P2 per share dividend
on ordinary shares. These are payable in 2016.
viii. Reported net income of P9,900,000 for the current year.

What amount should be reported as total shareholders’ equity on December 31, 2015?

a. 25,997,000
b. 23,597,000
c. 21,197,000
d. 14,415,000

28. Presented below are changes in all the account balances of Marigold Company for 2018, except for retained
earnings:
Increase (Decrease)
Cash P 790,000
Accounts Receivable, net 240,000
Inventory 1,270,000
Investments (470,000)
Accounts Payable (380,000)
Bonds Payable 820,000
Share Capital 1,250,000
Share Premium 130,000

What amount should the net income for 2018 be, assuming that there were no entries in the retained
earnings account except for net income and a dividend declaration of P190,000 which was paid in the
current year? 200,000

29. Astrid Co. incurred the following costs and expenses during the current year:

Raw material purchases 4,000,000

Direct labor cost 1,500,000
Indirect labor cost – factory 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation – factory building 300,000
Taxes on sales room and general offices 150,000
Depreciation – sales equipment 50,000
Advertising 400,000
Sales salaries 500,000
 Office salaries 700,000
Utilities (50% applicable to factory, 30% to salesroom, 20% to office) 1,000,000

Beginning Ending
Raw Materials 200,000 450,000
Work in process 500,000 350,000
Finished goods 400,000 700,000

What was Astrid Co.’s cost of goods sold?

a. 7,000,000
b. 7,300,000
c. 7,400,000
d. 7,700,000

30. Clippers Company began operations on January 1, 2017. The accountant prepared the following:

Statement of Financial Position (Cash Basis)

January 1, 2017

Assets Liabilities and Equity

Cash 49,600 Accounts Payable 28,000
Parts Inventory 24,000 Share Capital, P100 par 265,600
Equipment 220,000 _______
Total Assets P293,600 Total Liabilities & Equity P293,600

The company has developed plans to expand its business, and is in the process of negotiating a bank loan to
finance the expansion. The bank is requesting 2017 financial statements on the accrual basis of accounting.
As the company’s external auditor, you were called upon to assist in preparing the financial statements.
During the course of your engagement, you obtained the following information:
Transactions for 2017
Cash Sales 232,000
Collections from credit customers 80,000
Payment on account for parts 80,800
Wages paid to employees 124,000
Payment to the utility company 22,000

 Uncollected customers’ bills totaled P69,800 at December 31, 2017.

 On March 1, 2017, a supplier advanced the company P40,000 on a 1-year, 12% note payable with
semiannual interest payments to be made on September 1, 2017 and at maturity on March 1, 2018.
 Unpaid bills to suppliers totaled P11,200 at December 31, 2017.
 Parts costing P8,000 were on hand at year-end.
 Wages owed at year-end were P5,600.
 Utility expense of P1,950 was unpaid at year-end.
 The P18,000 insurance premium was paid for a 1-year policy effective February 1, 2017.
 The rent of P3,000 was paid on the first day of every month.
  The company’s equipment, purchased at the time the company was founded, should be depreciated
over its useful life of 10 years using the straight line method with no residual value.
 The effective tax rate is 40%. No taxes have been paid.

Based on the above and the result of your engagement, determine the total assets and total current
liabilities at year-end.

Asset Current Liabilities

a. 417,700 90,650
b. 395,700 88.250
c. 307,450 60,350
d. 197,700 48,250