ACCT 1A&B: Fundamentals of Accounting

BCSV
Fundamentals of Accounting Part I
ACCOUNTING CYCLE: Adjusting Journal Entries
I.

CONCEPTUAL SKILLS

A. True or False
Write A if the statement is true otherwise, Write B.
1. It is unacceptable that some adjusting entries contain estimated amounts.
2. An incorrect debit to Accounts Receivable instead of the correct account Notes
Receivable does not require a correcting entry because total assets will not be
misstated.
3. A company's operating cycle and fiscal year are usually the same length of time.
4. Adjusting entries are made to apply the matching principle.
5. All adjustments affect both the Balance Sheet and the Income Statement.
6. Deferrals are revenues and expenses that have been recorded in the current
accounting period but are not earned or incurred until a future period.
7. When the allowance method of recognizing uncollectible accounts expense is used,
the entries at the time of collection of an account previously written off would
decrease the allowance.
8. Cash-basis accounting is not in accordance with the GAAP.
9. The residual value of an asset is often insignificant and therefore immaterial in the
calculation of the depreciable amount.
10.Time periods less than a year is called internal period.
11.Going concern concept assumes that a business will continue indefinitely in the
future, by accruing expenses and revenues, it is understood that the business has a
future.
12.Adjusting entries are entries made at the beginning of an accounting period.
13.Depreciation of plant assets falls into the category of prepaid expenses.
14.The residual value of an asset shall not exceed to an amount equal to or greater than
the carrying value of an asset.
15.Accrued salaries occur only when the last day of the payroll period and the last day of
the accounting period are the same days.
B. Multiple Choice
Choose the letter of the best answer.
1. The principle that efforts be matched with accomplishments is called
A. Going concern
B. Monetary unit
C. Matching
D. Accrual basis
2. An accounting period that usually begins on the first day of a month and ends twelve
months later on the last day of a month is called:
A. Fiscal
B. Calendar
C. Leap
D. Year
3. A company writes off as uncollectible an account receivable from a dead customer.
The company has an adequate amount in its allowance for bad debts. This
transaction will

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A.
B.
C.
D.

Decrease profit for the period

Decrease total assets
Decrease the amount of owners equity
Have no effect on total assets

4. Adjusting entries are needed for all of the following reasons except
A. Some events are not journalized daily
B. Some costs are not journalized during the accounting period
C. Some items may be unrecorded
D. All of the foregoing statements are true
5. Which of the following statements is false?
A. Adjusting entries to accrue revenue will affect an income statement account only.
B. Revenues are understated if accrual of revenue is omitted.
C. not all adjusting entries can be reversed
D. prepaid expenses is an asset account.
6. Adjusting entries involve
A. Only real accounts
B. Only nominal accounts
C. Only capital accounts
D. One real and one nominal account
7. Why are adjusting entries necessary?
A. Transactions take place over more than one accounting period
B. To make debits equal credits
C. To close nominal accounts at year-end
D. To correct erroneous balances in accounts
8. Which of the following statements best describes depreciation?
A. The removal of an asset from an entitys statement of financial position
B. The systematic allocation of an assets cost less residual value over its useful life
C. The amount by which the recoverable amount of an asset exceeds its carrying
amount
D. The amount by which the carrying amount of an asset exceeds its recoverable
amount
9. The adjusting entry for depreciation has the same effect as the adjusting entry for
A. An unearned income
B. A prepaid expense
C. An accrued expense
D. An accrued income
10.An
A.
B.
C.
D.

adjusting entry to accrue wages incurred but not yet paid is an example of
Aligning recorded costs with appropriate accounting periods.
Aligning recorded revenue with appropriate accounting periods.
Reflecting unrecorded expenses incurred during an accounting period
Reflecting unrecorded revenue earned during an accounting period

11.When the allowance method of recognizing doubtful accounts is used, the entry to
record the writeoff of a specific account would
A. Decrease both accounts receivable and the allowance for doubtful accounts
B. Decreases accounts receivable and increase allowance for doubtful accounts
C. Increase both accounts receivable and the allowance for doubtful accounts
D. Increase accounts receivable and decrease the allowance for doubtful accounts

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12.When the allowance method of recognizing bad debt expense is used, the allowance
for doubtful accounts would decrease when
A. Specific account receivable is collected
B. Account previously written off is collected
C. Account previously written off becomes collectible
D. Specific uncollectible account is written off
13.Which of the following is not acceptable in estimating uncollectible accounts
receivable?
A. The estimate of uncollectible accounts is based on percentage of sales for the
period
B. The estimate of uncollectible accounts is based on a percentage of the accounts
receivable at the end of a period
C. The estimate of uncollectible accounts is based on an aging schedule
D. No estimate of uncollectible accounts is made but accounts are written off when it
is determined that the accounts cannot be collected
14.Which of the following items represents a deferral?
A. Salaries payable
B. Prepaid insurance
C. Fees earned
D. Accumulated depreciation
15.Which of the following least resembles a typical adjusting entry?
A. Debit an asset and credit revenue
B. Debit an expense and credit liability
C. Debit revenue and credit liability
D. Debit an asset and credit liability
16.An adjusting entry in which a revenue is recognized before the related cash receipt
occurs is called
A. Deferral
B. Nominal
C. Accrual
D. Special item
17.The journal entries that bring the accounts up to date at the end of the accounting
period
A. Adjusting amounts
B. Adjusting process
C. Adjusting entries
D. Adjusting journals
18.Which of the following best defines an accrual?
A. Adjusting entries where cash flow precedes revenue or expense recognition.
B. Adjusting entries where revenue or expense recognition precedes cash flow.
C. Adjusting entries where cash flow and revenue or expense recognition are
simultaneous.
D. Adjusting entries where revenue or expenses are recognized in the absence of
cash flow evidence.
19.Adjusting entries are based primarily on the accounting principles of
A. Revenue realization and materiality
B. Revenue realization and matching

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C. Matching and historical cost
D. Matching and monetary unit
20.Which of the following statements is incorrect regarding adjusting entries?
A. Cash is neither debited nor credited as a result of adjusting entries.
B. Each adjusting entry affects one statement of financial position account and one
income statement account.
C. Each adjusting entry affects one revenue account and one expense account
D. Adjusting entries involves accruals or deferrals
21.When an item of expense is paid and recorded in advance, it is normally called
A. Prepaid expense
B. Accrued expense
C. Estimated expense
D. Cash expense
22.A prepaid expense can best be described as an amount
A. Paid and currently matched with earnings
B. Paid and not currently matched with earnings
C. Not paid and currently matched with earnings
D. Not paid and not currently matched with earnings
23.An
A.
B.
C.
D.

accrued expense can best be described as an amount

Paid and currently matched with earnings
Paid and not currently matched with earnings
Not paid and currently matched with earnings
Not paid and not currently matched with earnings

24.An
A.
B.
C.
D.

accrued revenue can best be described as an amount

Collected and currently matched with expenses
Collected and not currently matched with expenses
Not collected and currently matched with expenses
Not collected and not currently matched with expenses

25.An
A.
B.
C.
D.

unearned revenue can best be described as an amount

Collected and currently matched with expenses
Collected and not currently matched with expenses
Not collected and currently matched with expenses
Not collected and not currently matched with expenses

II.
COMPUTATIONAL AND ANALYTICAL SKILLS
Supply the answer.
Problem 1: The following information was provided by the records of KQ Apartments (a sole
proprietorship business) at the end of December 31, 2015.
Rent revenue:
Rent revenue collected during 2015 for 2015 occupancy
Rent revenue earned for occupancy in December 2015 will not
collected until 2016
On December 2015, collected rent revenue in advance for January
2016

P
512,000
25,000
33,000

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Salary Expense:
Cash payment made on January 2015 for employee salaries earned
on December 2014
Salaries incurred and paid during 2015
Salaries earned by employees on December 2015 will not be paid
until January 2016
Cash advance to employees on December 2015 for salaries that will
be earned on January 2016.
Supplies used:
Maintenance supplies inventory, December 31, 2014
Maintenance supplies purchased for cash during 2015
Maintenance supplies inventory, December 31, 2015

P 5,000
64,000
2,000
3,000
3,000
8,000
2,500

In conformity with the revenue and matching principles, compute the following amounts for
the year 2015.
1. Rent revenue.
2. Salary expense.
3. Maintenance supplies expense.
Problem 2: At December 31, 2013, the advertising expense account of Minions Company
had a balance of P155,000 prior to yearend adjustment relating to the following:
Brochures and leaflets for a sales promotional campaign in January 2014 amounting
to P25,000 was included in the above balance.
Airtime for the radio advertisements during December 2013 for P12,500 was billed to
Minions on Jan. 2, 2014. Minions paid the full amount on January 6, 2014.
4.

What amount should Minions report as advertising expense in its profit or

loss for the year ended December 31, 2013?

Problem 3: Oracle Company owns an office building and leases the offices under a variety
of rental agreements involving rent paid in advance monthly or annually. Not all tenants
make timely payments of their rent. The following data were taken from the balance sheets
of Oracle:
Rentals receivable were P96,000 and P124,000 for 2012 and 2013, respectively. Deferred
rentals were P320,000 and P240,000 for 2012 and 2013, respectively.
During 2013, Oracle received P800,000 cash from tenants.
5.

What amount of rental revenue should Oracle record for 2013?

Problem 4: The accountant for XDA Inc. mistakenly omitted adjusting entries for unearned
income now earned, P10,390 and accrued salaries, P2,440.
6.

If the profit for the current year had been P437,720 prior to adjustments
above, what would be the correct profit if proper entries had been made?

Problem 5: GG company borrows money under various loans agreements involving notes
discounted and notes requiring interest payments at maturity. During the year ended
December 31, 2013, GG paid interest totaling P100,000. GGs December 31 balance sheets
included the following information:

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Prepaid interest
Interest payable
7.

2012
23,500
45,000

2013
18,000
53,500

How much interest expense should GG report for 2013?

Problem 6: WR Co. uses the allowance method of recognizing uncollectible accounts. The
following summary schedule was prepared from an aging of accounts receivable outstanding
on December 31, 2013:
# of days outstanding:
0 15 days
16 30 days
31 60 days
61 90 days
Over 90 days

Amount
P 220,000
485,200
117,300
187,700
739,800

Probability of collection
97 %
94 %
88 %
80 %
76 %

The following information is available for 2013:

Service income (all are on credit)
Allowance for bad debts, Jan. 1
Allowance for bad debts, Dec. 31 (prior
to adjustments)

P 986,400
93,700
45,600 (debit)

8.

What amount that is to be reported as uncollectible accounts expense for

2013?
9. What is the amount of amortized cost of accounts receivable as of Dec. 31,
2013?
Problem 7: On January 1, 2013, Passion Company purchased a machine for P504,000.
Additional costs incurred to bring the asset to its location and prepare for its intended use
were: shipping, P4,000 and installation and testing cost, P6,000. The estimated useful life of
the machine was 10 years and has an estimated salvage value of P34,000.
10. What is the total cost of the machine?
11. What is the depreciable cost of the machine?
12. What amount of depreciation should be recognize for the year ended
December 31, 2013?
13. What is the book value of the asset on August 31, 2014?
14. Assuming the machine is to be sold on Sept. 30, 2016 at P290,700, How
much is the gain (loss) on sale?
Problem 8: For the year 2013, P1,500,000 of salaries expense was reported in the income
statement. The previous years statement of financial position reported P175,000 of salaries
payable. An analysis of the payroll records showed salary payments during the year of
1,290,000.
15. What is the amount of accrued salaries on December 31, 2013?
Problem 9: ES company maintains the accounting records using the cash basis of
accounting. During 2013, the company collected P5,000,000 in fees from clients. On
December 31, 2012, accounts receivable of P800,000 and deferred revenue of P500,000 had
been recorded. On December 31, 2013, accounts receivable increased to P1,500,000 while
deferred revenue increased by P400,000

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16. Under Accrual basis, what is the service revenue for 2013?
17. Assuming the company earned service revenue on account of P7,800,000,
and that deferred revenue increased by P390,000, how much cash was
received during 2013?
Problem 10: Tink Company kept its records on a cash basis. At the end of 2013, the
accountant prepared the following cash basis income statement.
Revenue
1.910,000
Expenses
809,000
Profit
1,101,000
The following amounts were ignored at the end of 2012 and 2013:
2012
Accrued income
91,000
Deferred income
66,000
Accrued expenses
49,000
Prepaid expenses
46,000

2013
73,000
108,000
65,000
56,000

18. What is the amount of expense under accrual basis?

19. What is the net income under accrual basis for 2013?
Problem 11: On January 1, 2008, Hope Company acquired a machine. It was estimated that
the machine has a salvage value of P20,000 and a 10-year economic life. On January 1,
2013, the carrying value of this machine is P170,000.
20. What was the acquisition cost of the machine?
21. If the machine is to be sold on October 31, 2013 for P150,000, How much is
the gain (loss) on sale?
Problem 12: Balances at January 1 were taken from Assuming companys prior period
balance sheet: Accounts receivable P726,000; Allowance for doubtful accounts P56,000.
During 2013, accounts totaling P72,000 were written off. Revenues earned P2,160,000 (all
on account). Collected 40% of revenues from credit customers. Accounts written off in prior
years amounting to P13,000 were recovered during the year (excluded from the collections
above). Assuming company estimated that 7% of accounts receivable is uncollectible.
Assuming no other relevant transactions incurred during the year.
22. What is the amount of bad debts expense for 2013?
23. What is the amortized cost of accounts receivable as of Dec. 31?
Problem 13: CK Co. paid P600,000 for supplies during 2013. the January 1, 2013 balance
of supplies inventory was P440,000. A physical count of the supplies on hand on December
31, 2013 revealed an amount of 325,120. Assume the use of Asset method.
24. What amount should be reported as Supplies expense for the year ended
December 31, 2013?
Problem 14: On January 2, 2013, Alive Company purchased a transportation equipment
costing P2,400,000. The new asset has an estimated useful life of 8 years with no residual
value. On January 2, 2015, Alive Company determined that the machine had a useful life of 6
years from the date of acquisition with no residual value.
25. What is the carrying value of the equipment on August 31, 2014?

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26. What is its carrying amount on Dec. 31, 2014? (prior to the change in
accounting estimate)
27. What is the new annual depreciation of the equipment subsequent to the
change in accounting estimate?
28. What is its carrying value on Nov. 30, 2016 assuming there is no change in
accounting estimate?
Problem 15: Big Boss Corporation had the following information relating to its accounts
receivables (Assume the use of allowance method):
Accounts receivables, Dec. 31, 2012
Service income for 2013
Collections from customers for 2013
(including recoveries of account written off in
prior years)
Accounts written off, Aug. 30, 2013
Recoveries of accounts written off in prior
years
Estimated uncollectible accounts per aging,
Dec. 31, 2013

P1,950,000
8,100,000
7,250,000
187,500
125,000
247,500

29. What amount of cash was collected from current year service income?
30. What is the Jan. 1 balance of allowance for bad debts?
31. What is the amortized cost of accounts receivable, Dec. 31?
Problem 16: As of January 1, 2014, ABC Shops has the following balance of its equipment:
Equipment
Less: Accumulated Depreciation (for 3
years)
Carrying value

P 120,000
45,000
75,000

On June 1, 2015, the shop sold its old equipment for P 45,000. Three months after, the shop
purchased a new machine for P 200,000 with an estimated life of 10 years.
32.How much is the gain (loss) on sale of the equipment?
33.How much is the depreciation expense for the year 2015?
34.How much is the book value of the equipment as of December 31, 2015?
Problem 17: Shaik Company provided the following information:
CUSTOMER NO.
0001

ACCOUNTS RECEIVABLE,
DEC. 31, 2014
P 35,180

0002

DATE:

INVOICE:
AMOUNT:

12/06/14
11/29/14

P 14,000
21,180

20,920

09/27/14
08/20/14

12,000
8,920

0003

30,600

12/08/14
10/25/14

20,000
10,600

0004

45,140

11/17/14
10/09/14

23,140
22,000

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0005

31,600

12/12/14
12/02/14

19,200
12,400

0006

17,400

09/12/14

17,400

The estimated bad debt rates below are based on Shaiks receivable collection experience.
Age of
accounts:
0 30 days
31 60 days
61 90 days
91 120 days
Over 120 days

Rat
e:
1%
1.5
%
3%
10
%
50
%

The allowance for bad debts account had a debit balance of P 5,500 on December 31, 2014,
before adjustment.
35.How much is the bad debts expense for the year 2014?
36.What is the net realizable value of accounts receivble at December 31,
2014?
Problem 17: Marielle Co. is completing the accounting process for the year just ended
December 31, 2014. The transactions in 2014 have been journalized and posted. The
following data with respect to adjusting entries were available:
Office supplies inventory at December 31, 2013, was P 2,500. Office supplies
purchased and debited to supplies expense during the year amounted to P 6,000.
The year-end inventory showed P 3,000 of supplies on hand.
Wages earned by workers on December 2014, unpaid and unrecorded on December
31, 2014, amounted to P 27,000. The last payroll was December 28; next payroll will
be on January 6, 2015.
Three-fourths of the basement of the store is rented for P 11,000 a month to another
merchant, Bartolome Enterprises. Bartolome sells comparable, but not competitive,
merchandise. On November 1, 2014, Marielle collected six months rent in advance
from Bartolome, which was credited in full to rent revenue when collected.
The remaining basement space is rented to Lumba Specialties for P 5,200 per
month, payable monthly. On December 31, 2014, the rent for November and
December was neither collected nor recorded. Collection is expected on January
2015.
Delivery equipment that cost P 300,000 was being used by Marielle. The equipment
was acquired on April 2, 2014 and estimated to have a useful life of four years and a
salvage value of P 6,000 at the end of its useful life. The asset will be depreciated
evenly over its useful life.
On July 1, 2014, a two-year insurance premium amounting to P 30,000 was paid in
cash and debited in full to prepaid insurance. Coverage began on July 1, 2014.

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Marielle operates a repair shop to meet its own needs. Also, the shop does repairs
for Bartolome. At the end of December 31, 2014, Bartolome did not pay for repairs
completed amounting to P 7,500. This amount has not been recorded as Repairs
shop revenue. Collection is expected on January 2015.
Below are some information lifted from the December 31, 2014 unadjusted trial
balance of Marielle: assets, P 400,000; liabilities, P 220,000; revenues, P 276,000;
expenses, P 112,000.
Determine the following for the year ended 2014:
37.Adjusted net income (loss).
38.Increase (decrease) in total liabilities.
39.Adjusted total assets.
40.Adjusted owners equity.
Nothing is impossible, the word itself says 'I'm possible'
~Audrey Hepburn Read

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Suggested Key
I.
A.
1.
2.
3.
4.
5.
6.
7.
8.

CONCEPTUAL SKILLS
True or False
B
B
B
A
A
A
B
A

B.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.

Multiple choice
C
A
D
D
A
D
A
B
B
C
A
D
A

II.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

P
P
P
P
P
P
P
P
P
P
P
P
P
P
P
P

9. A
10. B
11. A
12. B
13. A
14. B
15. B

14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.

B
D
C
C
B
B
C
A
B
C
C
B

COMPUTATIONAL AND ANALYTICAL SKILLS

537,000
21. P 5,000 gain
66,000
22. P 139,500
8,500
23. P 1,813,500
142,500
24. P 714,880
908,000
25. P 1,900,000
445,670
26. P 1,800,000
114,000
27. P 450,000
301,130
28. P 1,225,000
1,494,470
29. P 7,125,000
514,000
30. P 310,000
480,000
31. P 2,490,000
48,000
32. (P 8,750)
434,000
33. P 12,917
(43,300) loss
34. P 193,333
385,000
35. P 15,199
5,300,000
36. P 171,141

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17.
18.
19.
20.

P
P
P
P

7,490,000
815,000
1,035,000
320,000

37.
38.
39.
40.

P
P
P
P

48,775
71,000 increase
355,775
64,775

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