Time Value of Money Concepts PDF

Time Value of Money Concepts Time value of money supports the comparison of cash flows recorded at different time period by Using either a or b Time value of money indicates that A unit of money obtained today is worth more than a unit of money obtained in future Natur...

Time Value of Money Concepts Time value of money supports the comparison of cash flows recorded at different time period by Using either a or b Time value of money indicates that A unit of money obtained today is worth more than a unit of money obtained in future Nature of Interest - Simple and Compound What percentage of simple interest per annum did Tommy pay to Macar? (check if data sufficient to get answer) I. Tommy borrowed Rs. 8000 from Macar for four years. II. Tommy returned Rs. 8800 to Macar at the end of two years and settled the loan. Both I and II are necessary to answer At what rate of compound interest per annum will a sum of P 1,200 become P 1,348.32 in 2 years? 6% Simple interest on a certain sum of money for 3 years at 8% per annum is half the compound interest on P 4,000 for 2 years at 10% per annum. The sum placed on simple interest is: 1,750 What is the compound interest earned at the end of 3 years? (check if each data is necessary to get answer) I. Simple interest earned on that amount at the same rate and for the same period is P 4,500. II. The rate of interest is 10% compounded annually. III. Compound interest for 3 years is more than the simple interest for that period by P 465. Either II or III only Interest paid (earned) on only the original principal borrowed (lent) is often referred to as __________. simple interest An amount of money was lent for 3 years. What will be the difference between the simple and the compound interest earned on it at the same rate? (check if data sufficient to get answer) I. The rate of interest was 8% compounded annually II. The total amount of simple interest was P 1,200. Both I and II are necessary to answer What is the sum which earned interest? (check if data sufficient to get answer) I. The total simple interest was P 7,000 after 7 years. II. The total of sum and simple interest was double of the sum after 5 years. Both I and II are necessary to answer Ms. Santos borrowed a sum of money on compound interest. What will be the amount to be repaid if he is repaying the entire amount at the end of 2 years? (check if each data is necessary to get answer) I. The rate of interest is 5% compounded annually. II. Simple interest fetched on the same amount in one year is P 600. III. The amount borrowed is 10 times the simple interest in 2 years. II and Either I or III only There is 60% increase in an amount in 6 years at simple interest. What will be the compound interest of P 12,000 after 3 years at the same rate? 3,972 What is the compound interest earned at the end of 3 years? (check if each data is necessary to get answer) I. Simple interest earned on that amount at the same rate and for the same period is P 4,500. II. The rate of interest is 10% compounded annually. III. Compound interest for 3 years is more than the simple interest for that period by P 465. Either II or III only What will be the compound interest on a sum of P 25,000 after 3 years at the rate of 12%? 10,123.20 The simple interest on a sum of money is P 50. What is the sum? (check if data sufficient to get answer) I. The interest rate is 10% p.a. II. The sum earned simple interest in 10 years. Both I and II are necessary to answer What is the rate of simple interest? (check if data sufficient to get answer) I. The total interest earned was P 4,000. II. The sum was invested for 4 years Both I and II are not sufficient to answer What is the rate of compound interest? (check if data sufficient to get answer) I. The principal was invested for 4 years. II. The earned interest was P 1,491. Both I and II are not sufficient to answer What will be compounded amount? (check if data sufficient to get answer) I. P 200 was borrowed for 192 months at 6% compounded annually. II. P 200 was borrowed for 16 years at 6%. Either I or II alone sufficient to answer The compound interest on Rs. 30,000 at 7% per annum is Rs. 4347. The period (in years) is: 2 Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as __________. compound interest Future Value You decide to begin saving toward the purchase of a new car in five years. If you put $1,000 at the end of each of the next 5 years in a savings account paying 6 percent com-pounded annually, how much will you accumulate after 5 years? $5,637.10 Assume that you purchase a 6-year, 8 percent savings certificate for $1,000. If interest is compounded annually, what will be the value of the certificate when it matures? $1,586.90 Present Value On November 1, 2017, a company purchased a new machine that it does not have to pay for until November 1, 2019. The total payment on November 1, 2019, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? Present value of P1 On July 1, 2017, James Pogi signed an agreement to operate as a franchisee of Fast Foods, Inc. for an initial franchise fee of P60,000. Of this amount, P20,000 was paid when the agreement was signed and the balance is payable in four equal annual payments of P10,000 beginning July 1, 2018. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. Pogi’s credit rating indicates that he can borrow money at 14% for a loan of this type. Information on present and future value factors is as follows: Present value of P1 at 14%for four periods 0.59 Future amount of P1 at 14% for four periods 1.69 Present value of an ordinary annuity of P1 at 14% for four periods 2.91 On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange for a P600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017 income statement, what amount should be reported as gain (loss) on sale of machinery? P49,100 Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in twenty-four equal monthly amounts, which include 12% interest. What is an installment note’s receivable balance six months after the sale? The present value of the remaining monthly payments discounted at 12% For which of the following transactions would the use of the present value of an annuity due concept be appropriate in calculating the present value of the asset obtained or liability owed at the date of incurrence? A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange for a P600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017 income statement, what amount should be reported as gain (loss) on sale of machinery? P(30,000) loss On December 30, 2017, Timex Co. sold a machine to Fossil Co. in exchange for a noninterest- bearing note requiring ten annual payments of P10,000. Fossil made the first payment on December 30, 2017. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows: Period 9 10 Present value of P1 at 8% 0.50 0.46 Present value of ordinary annuity of P1 at 8% 6.25 6.71 In its December 31, 2017 balance sheet, what amount should Timex report as note receivable? P62,500 On December 30, 2017, Chang Co. sold a machine to Door Co. in exchange for a noninterest- bearing note requiring ten annual payments of P10,000. Door made the first payment on December 30, 2017. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows: Present value of ordinary Period Present value of P1 at 8% annuity of P1 at 8% 9 0.50 6.25 10 0.46 6.71 In its December 31, 2017 balance sheet, what amount should Chang report as note receivable? P62,500 On January 1, 2017, Parke Company borrowed P360,000 from a major customer evidenced by a noninterest-bearing note due in three years. Parke agreed to supply the customer’s inventory needs for the loan period at lower than fair value. At the 12% imputed interest rate for this type of loan, the present value of the note is P255,000 at January 1, 2017. What amount of interest expense should be included in Parke’s 2017 income statement? P30,600 On January 2, 2017, Emme Co. sold equipment with a carrying amount of P480,000 in exchange for a P600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, 2017, was 10%. The present value of P1 at 10% for three periods is 0.75. In Emme’s 2017 income statement, what amount should be reported as interest income? P45,000 On December 31, 2017, Jet Co. received two P10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding balance at the interest rate of 3% compounded annually and payable at maturity. The note from Hart Corp., made under customary trade terms, is due in nine months and the note from Maxx, Inc. is due in five years. The market interest rate for similar notes on December 31, 2017, was 8%. The compound interest factors are as follows: Future value of P1 due in nine months at 3% 1.0225 Future value of P1 due in five years at 3% 1.1593 Present value of P1 due in nine months at 8%.944 Present value of P1 due in five years at 8%.680 Jet does not elect the fair value option for reporting its financial assets. At what amounts should these two notes receivable be reported in Jet’s December 31, 2017 balance sheet? Hart, Maxx P10,000, P7,883 Maricar Co. is investing in a machine with a three-year life. The machine is expected to reduce annual cash operating costs by P30, 000 in each of the first two years and by P20,000 in year three. Present values of an annuity of P1 at 14% are Period 1 0.88 2 1.65 3 2.32 Using a 14% cost of capital, what is the present value of these future savings? P62,900 Cash Basis vs. Accrual Basis An entity wants to convert its financial statement from the accrual basis , Both supplies inventories and office salaries payable increase between January 1 and December 31. To obtained cash basis net income how should these increase be added to or deducted from accrual basis net income? Supplies Inventory, Office salaries payable Deducted, Added Compared to the accrual basis of accounting to the cash basis of accounting understates income by the net decrease during the accounting period of? Accrued expenses but not of accounts receivable Which of the following transactions will not be recognized in cash basis accounting? Unsold inventory at the end of the period Incomplete accounting record using only a cash books is a characteristic of? Single entry system Under the accrual basis of accounting , cash receipts and disbursement may? Proceeds, coincide with, or follow the period in which revenue and expenses are recognized. Compare to its cash basis net income for the current year , an entity’s accrual basis net income increase when it? Had lower accrued expenses on December 31, of the current year than on January 1 The following books of account are used in single-entry bookkeeping Cashbook and subsidiary ledger Which of the following best describes the double-entry concept Events and transactions are analyzed and recorded using the principle of duality and equality Total net income over the life of an entity is? The same under the cash basis as under the accrual basis When converting an income statement from a cash basis to an accrual basis which of the following is incorrect? An adjustment for bad debts increases the net income Which of the following accounts is recognized under single-entry bookkeeping? Cash Prior to the current year , an entity used the cash basis of accounting. As of December 31 of the current year, the entity change to the accrual basis. The entity cannot determined the beginning balance of supplies inventories. What is the effect of the entity’s inability to determined beginning supply inventory on its accrual basis net income and December 31, accrual basis owner ‘s equity? Net income, Owners equity Overstated, No effect Under the cash basis of accounting The matching principal is ignored An entity inventory and accounts payable balances increase. Should these increase be added to or deducted from cash payment to supplier to arrive at cost of goods sold for the current year? Increase in Inventory, Increase in Accounts Payable Deducted, Added Which of the following regarding accrual versus cash basis accounting is true? The cash basis is less useful in predicting the timing and amounts of future cash flow of an entity Compared to the accrual basis of accounting, the cash basis of accounting produces a higher amount of income by the net decrease during the accounting period of Accrued income, Accrued expense No, No Compared to the accrual basis of accounting to the cash basis of accounting understates income by the net decrease during the accounting period of? Accrued expenses but not of accounts receivable Single-Entry Computation of Profit and Reconciling Transaction vs. Net Asset Approach On February 1, 2016, Tory began a service proprietorship with an initial cash investment of P2,000. The proprietorship provided P5,000 of services in February and received full payment in March. The proprietorship incurred expenses of P3,000 in February, which were paid in April. During March, Tory drew P1,000 against the capital account. In the proprietorship’s financial statements for the two months ended March 31, 2016, prepared under the cash basis method of accounting, what amount should be reported as capital? P6,000 Ricky Cornel, a retired engineer, formed Upland Cress Trading on July 1, 2018, investing his retirement pay of P400,000 in the business. To cut on operating expenses, he did not hire an accountant; as a consequence, his accounting records were incomplete. On January 1, 2019, his cash balance was P410,000 and on December 31, 2019, it was P430,000. He wanted to have an idea of the result of his operations for the year ended December 31, 2019. The following information and other data were gathered for the year 2019: Jan. 1 Dec. 31 Accounts receivable – trade P 130,000 P 170,000 Money market placement 20,000 15,000 Accrued interest on money market placement 800 600 Merchandise inventory 175,300 280,400 Prepaid rent expense 6,000 4,500 Delivery equipment (at cost) 120,000 120,000 Store fixtures (at cost) 50,000 50,000 Rent deposit 12,000 6,000 Other assets 1,000 1,000 Accounts payable – trade 390,000 480,000 Notes payable (delivery equipment) 100,000 60,000 Accrued interest on notes payable 12,000 8,000 Accrued operating expenses (excluding rent) 8,000 10,000 Cornel was able to arrange with the owner of the building that his rental deposit be reduced by 50% and the amount applied against rentals in 2019. From the 2019 cash memoranda of Ricky Cornel, you were able to extract the following: Cash received from: Sales P 380,000 Interest on money market placement 4,000 Collections of accounts receivable 1,328,000 Matured money market placement, not rolled 5,000 over Total P1,717,000 Cash payments for: Merchandise purchases P 210,000 Interest on notes payable 25,000 Trade payables 940,000 Notes payable (delivery equipment) 40,000 Operating expenses 470,000 Ricky Cornel, drawing 12,000 Total P1,697,000 You have established that the fixed assets have not been depreciated since they were acquired on July 1, 2018. Estimated life of these assets is ten years. Determine the Rocky Cornel, Capital, December 31, 2019 (Ignore income taxes) P494,000 Determine the cost of sales for the year 2019 (Ignore income taxes) P1,134,900 Determine the total operating expenses for the year 2019 (Ignore income taxes) P496,500 Determine the net profit for the year 2019 (Ignore income taxes) P 99,400 Determine the total sales for the year 2019 (Ignore income taxes) P1,748,000 Your audit of Colluccus 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 bank, nor was a record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and this company was given to the customer when he paid his account. On January 2, 2019, Colluccus started business and issued 108,000 ordinary shares with P100 par, for the following considerations: Cash P 900,000 Building (useful life, 15 years) 8,100,000 Land 2,700,000 P11,700,000 An analysis of the bank statements showed total deposits, including the original cash investment, of P6,300,000. The balance in the bank statement in December 31, 2019, was P450,000, but there were checks amounting to P90,000 dated in December but not paid by the bank until January 2020. Cash on hand on December 31, 2019 was P225,000 including customers’ deposit of P135,000. During the years, Colluccus Company barrowed P900,000 from the bank and repaid P225,000 and P45,000 interest. Disbursement paid in cash during the year was as follows: Utilities P 180,000 Salaries 180,000 Supplies 360,000 Dividends 270,000 P 990,000 An inventory of merchandise taken on December 31, 2019 showed P1,359,000 of merchandise. Tickets for accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid supplies invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was purchased in early January on one-year installment basis. During the year, checks for the down payment and all maturing installments totaled P801,000. The equipment has useful life of 5 years. Determine the payment for merchandise purchase in 2019 (Disregard income taxes) P4,869,000 Determine the collections from sales in 2019 (Disregarding income taxes). P5,580,000 Determine the equity a of December 31, 2019 (Disregarding income taxes) P12,870,000 Determine the total assets as of December 31, 2019 (Disregarding income taxes). P14,310,000 All of the following are disadvantages of the single-entry bookkeeping system except for the fact that It is simple and less costly to apply. We were given the following information which were obtained from the single-entry records of ASH Company: January 1 June 30 Interest receivable P 12,000 P 9,600 Accounts receivable 540,000 1,056,000 Notes receivable 180,000 144,000 Merchandise inventory 456,000 120,000 Store and office equipment 390,000 360,000 (net) Prepaid operating expenses 30,000 26,400 Interest payable 3,600 6,000 Accounts payable 420,000 300,000 Notes payable 120,000 144,000 Accrued operating expenses 32,400 60,000 An analysis of the cashbook shows the following: Balance, January 1 P180,000 Receipts: Interest income P 24,000 Accounts receivable 432,000 Notes receivable 180,000 Investment by Ash 72,000 708,000 888,000 Disbursements: Interest expense P 18,000 Accounts payable 624,000 Notes payable 96,000 Operating expenses 204,000 942,000 Balance, June 30 – bank overdraft (P 54,000) Determine the Operating expenses, excluding depreciation for the six months ended June 30, 2019: P235,200 Determine the Net Loss for the six months ended June 30, 2019: P 132,000 Determine the Purchases for the six months ended June 30, 2019: P624,000 Determine the Sales for the six months ended June 30, 2019: P1,092,000 Which of the following statements is/are true? I. The primary distinction between double-entry and single- entry bookkeeping system is the use of duality and equilibrium approach in double-entry while single entry recognizes only the duality principle. II. Single – entry bookkeeping recognizes only cash transactions and personal accounts. III. Single – entry bookkeeping and cash basis of accounting are one and the same. II only The capital account of Thirst Company decrease by P15,000 in 2013. During the year, Jim Water, the owner issued a personal check to settle Thirst Company’s obligation amounting to P20,000. At the end of the year, Jim Water took merchandise costing P10,000 for personal use. At year-end, Thirst Company’s net income (loss) is (25,000) On February 1, 2016, Tory began a service proprietorship with an initial cash investment of P2,000. The proprietorship provided P5,000 of services in February and received full payment in March. The proprietorship incurred expenses of P3,000 in February, which were paid in April. During March, Tory drew P1,000 against the capital account. In the proprietorship’s financial statements for the two months ended March 31, 2016, prepared under the cash basis method of accounting, what amount should be reported as capital? P6,000 Libunao Company disclosed the following changes in the account balances for the current year: Cash 37,500 decrease Accounts receivable 10,000 increase Inventory 250,000 increase Accounts payable 17,000 decrease During the year, the entity borrowed P250,000 in notes from a bank and paid off notes of P100,000 and interest of P15,000. Interest of P7,500 is accrued at year-end. There was no accrued interest at the beginning of the year. The owner transferred trading securities to the business and these were sold for P65,000 to finance purchase of inventory. The owner also made withdrawals of P20,000 in the current year. What is the Profit or loss for the year? Select one: 37,000 income Total Profit over the life of an entity is The same under the cash basis as under the accrual basis Changes in account balances of Agamata Business Consultancy (ABC) for 2013 are as follows:  Increase (Decrease) Cash P2,500,000 Accounts receivable net 1,750,000 Inventory 1,000,000 Investments (250,000) Accounts payable (1,500,000) Bonds payable 2,000,000 Share capital 3,000,000 Share premium 500,000 Unrestricted Retained Earnings 750,000 Restricted Retained Earnings 250,000 What should be the 2013 net income, assuming there were no entries in the retained earnings account except for the net income and a dividend declaration of P1,000,000 which was paid in the current year? P2,000,000 Prior Period Errors Which of the following errors could result in an overstatement of both current assets and stockholders’ equity? Holiday pay expense for administrative employees is misclassified as manufacturing overhead. The ending inventory for an entity was overstated in 2009. The overstatement will cause the entity’s 2010 statement of financial position not to be misstated In single period statement , which of the following should be reflected as an adjustment of the opening balance of retained earnings resulting from corrections of an error? Effect of a failure to provide for uncollectible accounts the previous periods Che Che Company’s December 31, year end financial statement contained the following errors: December 31,2012 December 31,2013 Ending inventory P100,000 understated P90,000 overstated Depreciation expense 20,000 understated An insurance premium of P75,000 was prepaid in 2012 covering the years 2012, 2013, and 2014. The same was charged to expense in full in 2012. In addition, on December 31, 2013, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2014. There were no other errors during 2012, 2013 and 2014 and no corrections have been made for any of the errors. Ignore income tax considerations. What is the net effect of the errors on the 2013 profit? Overstated by P55,000 What is the net effect of the errors on the 2012 profit? Understated by P130,000 Which of the following would cause income of the current period to be understated? Underestimating estimate of residual value Which of the following statements regarding prior period errors is incorrect? The gain or loss recognized on the outcome of a contingency which previously could not be estimated reliably constitute a correction of a prior period error Justin Corporation discovered an error in their 2017 financial statements after the statements were issued. This requires that The financial statements are restated to reflect the correction of period-specific effects of the error. Where single period statements are being presented prior period adjustments should: Be shown as adjustments of the opening balance of retained earnings. Failure to record accrued salaries at the end of an accounting period result in Overstated retained earnings Failure to record the expired amount of prepaid rent expense would not Understate liabilities Which of the following is a counter balancing error? Prepaid expensed adjusted incorrectly Prior period error include all of the following except Effect of a change in the estimated useful life of an asset At the end of Year 1, SOS Company failed to accrue sales commissions during Year 1 but paid in Year 2. The error was not repeated in Year 2. What was the effect of this error on Year 1 ending working capital and on the Year 2 ending retained earnings balance? No effect, Overstated The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current. Retained earnings statement as an adjustment of the opening balance. Failure to record the expired amount of prepaid rent expense would not Understate liabilities At the end of Year1, SOS Company failed to accrue sales commissions during Year1 but paid in Year2. The error was not repeated in Year2. What was the effect of this error on Year1ending working capital and on the Year2 ending retained earnings balance? Year1 ending working capital; Year2 ending retained earnings No effect, Overstated At the beginning of the current year , an entity signed a 5- year contract enabling it to used a patented manufacturing process beginning in the current year. A royalty is payable for each product produce , subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date , the entity prepaid a sum equal to two years minimum annual fee, in the current year , only minimum fees were incurred , The royalty prepayment shall be reported in the entity current year end financial statement as A current asset and expense The general principle in PAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by: Either a or b. For an entity with a periodic inventory system , which of the following would cause income to be overstated in the period of occurrence Understating beginning inventory On December 31, 2004, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2004 balance sheet? Accrued liabilities, Retained earnings Understated, No effect An example of an item that should be reported as a prior period adjustment is the correction of an error in financial statements of a prior year. Jackson Company uses IFRS to report its financial results. During the current year, the company discovered it had overstated sales in the prior year. How should the company handle this issue? Restate the prior year financial statements presented for comparative purposes. If an inventory account is understated at year- end , the effect will be to Overstate the cost of goods sold A company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidated last year. This result in An accounting change that should be reported by restating the FS of all prior periods presented At the middle of the year , an entity paid for insurance premium for the current year and debited the amount to prepaid insurance. At year end , the book keeper forgot to record the amount expired. In the financial statement prepaid prepared at year – end , the omission Overstate owners’ equity Failure to record depreciation expense at the end of an accounting period result in Overstated assets The premium on a three –year insurance policy expiring on December 31, 20Y3 was paid in total on January 1, 20Y1. Assuming that the original payment was recorded as a prepaid assets , how would total assets and shareholder equity be affected during 20Y1? Both total asset and shareholder equity would decrease An entity changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this changed shall be reported in the financial statements as a Prior period adjustment resulting from the corrections of an error Statement of financial position extracts for Peter Company show the following: December 31, 2009 December 31, 2008 Development costs 8,160,000 5,840,000 Amortization (1,800,000) (1,200,000) The capitalized development costs relate to a single project that commenced in 2006. It has now been discovered that one of the criteria for capitalization has never been met. The adjustment required to restate retained earnings at December 31, 2008 is 4,640,000 During 2017, Kelly Corporation discovered that ending inventory reported in its 2016 financial statements was understated by P10,000. How should Kelly account for this understatement? Restate the financial statements with corrected balances for all periods presented. Which of the following errors will not self- correct in the next year? Depreciation expense overstated for the year On January 1, 2013, Aker Company acquired a machine at a cost of P2, 000,000. The machine is depreciated on the straight line method over a five-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Aker’s 2013 financial statements. Depreciation expense on this machine for 2014 should be 400,000 This means “correcting the recognition measurement and disclosure of amounts of elements of financial statement as if a prior period error had ever occurred. Retrospective restatement In reviewing J Company’s draft financial statements for the year ended December 31, 2009, management decided that market conditions were such that the provision for inventory obsolescence at December 31, 2009 should be increased by P3,000,000. If the same basis of calculating inventory obsolescence had been applied in 2008, the provision would have been P1,800,000 higher than the amount recognized in the statement of financial position. The adjustments to the draft profit for the year ended December 31, 2009 and the profit for the year ended December 31, 2008 presented as a comparative figure in the 2009 financial statements are Draft profit for 2009 Profit for 200 Draft profit for 2009 Profit for 2008 3,000,000 decrease 0 The draft financial statement for an entity for the year ended December 31, 2009 have been prepared.A final review of the draft reveal that closing inventory at December 31, 2008 included items which had been sold in December 2008. What is the effect of the adjustment to be made to the profit for the year ended December 31, 2009 and to the profit for the year ended December 31, 2009 presented as the comparative figure in the 2009 financial statement? Draft profit for 2009, Profit for 2008 Increase, Decrease Universal Company failed to accrue warranty cost of P100, 000 in its December 31, 2013 financial statements. In addition, a change from straight line or accelerated depreciation made at the beginning of 2014 resulted in a cumulative effect of P60, 000 on Universal’s retained earnings. What amount before tax should Universal report as prior period error in 2014? 100,000 Arlene Company discovered the following errors in its financial records at the beginning of the year 2014: A. The physical inventory count on December 31, 2013 excluded a merchandise with a cost of 38,000 that had been temporarily stored in a public warehouse. Everlasting uses the periodic inventory system. B. During 2014, a competitor filed a patent infringement suit against Arlene claming damages of 440,000. The company’s legal counsel has indicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is 250,000. The company has not reflected or disclosed this situation in the financial statements. C. A trademark was acquired at the beginning of 2012 for 100,000. No amortization has been recorded since acquisition. It is the company’s policy to amortize all intangibles with a definite life for a maximum of 20 years. At the time of acquisition, the trademark was estimated to have a definite life of 20 years. What is the effect of the above errors on the January 1, 2014 accumulated profits? 222,000 overstated Galaxy Corporation had the following financial statement information: 2015 2014 Revenue P135,000 P100,000 Expenses 98,000 65,000 Net Income 37,000 35,000 12/31/15 12/31/2014 Total assets P157,000 105,000 Total Liabilities 50,000 35,000 Total Owners’ equity 107,000 70,000 Galaxy failed to record P12,000 of accrued wages at the end of 2014. The wages were recorded and paid in January 2015. Assuming that the correct accruals were made on December 31, 2015, what are the corrected balances in the 2014 and 2015 restated financial statements? 2014 Net Income Dec. 31, 2014 total Liabilities Dec. 31, 2015 total Owners’ equity 23,000 47,000 107,000 An entity shall correct material prior period error retrospectively in the first set of financial statement after their discovery by I. Restating the comparative amounts for the prior period presented in which the error occued II. Restating the opening balances of asset , liability and equity for the earliest prior period presented Either I or II Where financial statement for a single year are being presented , a prior period error recognized in the current year ordinarily would Be showed as an adjustment of the balance of retained earnings at the start of the current year These are omissions from, and misstatements in, an entity's financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into account in preparing those statements. Prior period errors Where single period statements are being presented prior period adjustments should: Be shown as adjustments of the opening balance of retained earnings. The premium on a three year insurance policy expiring on December 31, 2021 was paid in total on January 1, 20Y1. If the entity has six months operating cycle , then on December 31, 20Y1, the prepaid insurance reported as a current assets would be for 12 months Prior period error are omission from end misstatement in the financial statement or one or more period arising from a failure to use or misuse of reliable information that I. Was available when financial statement for those period were authorized for issue II. Could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statement. Both I and II Types of Errors based on Periods Affected At the end of 2014, Ritzcar Co. failed to accrue sales commissions earned during 2014 but paid in 2015. The error was not repeated in 2015. What was the effect of this error on 2014 ending working capital and on the 2015 ending retained earnings balance? Straight-line method Production or use method b. Yes Yes Conn Co. reported a retained earnings balance of P400,000 at December 31, 2014. In August 2015, Conn determined that insurance premiums of P60,000 for the three-year period beginning January 1, 2014, had been paid and fully expensed in 2014. Conn has a 30% income tax rate. What amount should Conn report as adjusted beginning retained earnings in its 2015 statement of retained earnings? P428,000 The premium on a three year insurance policy expiring on December 31, 2021 was paid in total on January 1, 2019. If the entity has six months operating cycle , then on December 31, 2019, the prepaid insurance reported as a current assets would be for 12 months On December 31, 2015, special insurance costs were incurred and unpaid, but were not recorded. If these insurance costs were related to a particular job order in work in process that was not completed during the period, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2015 balance sheet? Accrued Liabilities Retained Earnings Understated Overstated The draft financial statements for Savior Company for the year ended December 31, 2014 have been prepared. A final review of the draft reveals an overvaluation of the ending inventory of P2, 000,000 at December 31, 2013. Further investigation shows that there was overvaluation of ending inventory at December 31, 2012 of P1, 200,000. What adjustment should be made to the profit for the year ended December 31, 2013 presented as the comparative figure in the 2014 financial statements? 800,000 decrease The premium on a three year insurance policy expiring on December 31, 2021 was paid in total on January 1, 2019. The original payment was initially debited to a prepaid asset account. The appropriate journal entry had been recorded on December 31, 2019. The balance in the prepaid asset account on December 31,2019 should be The same as it would have been if the original payment had been debited initially to an expense account The December 31,2009 physical inventory of an entity appropriately included merchandise purchases on account that was not recorded in purchases until January 2010. What effect will this error have on December 31, 2009, assets liabilities , retained earnings and earnings for the year then ended, respectively? No effect , understate , overstate, overstate During 2015, Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2013 P60,000 understated 2014 75,000 overstated Paul uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, Paul’s retained earnings at January 1, 2015, would be P 75,000 overstated Statement of financial position extracts for Animus Company show the following: December 31, 2014 December 31, 2013  Development costs 8,160,000 5,840,000 Amortization (1,800,000) (1,200,000) The capitalized development costs relate to a single project that commenced in 2012. It has now been discovered that one of the criteria for capitalization has never been met. What adjustment is required to restate earnings at December 31, 2013? 4,640,000 On December 27, 2009, An entity ordered merchandized for resale. The merchandized was shipped f.o.b. shipping point on December 28, 2009, and the goods arrived on January 2, 2010. The invoice was received on December 30, 2009.The entity did not record the purchase in 2009 and did not include the goods in ending inventory. The effect on the entity’s 2009 financial statement were Income and owners equity were correct assets and liabilities were incorrect Tack, Inc. reported a retained earnings balance of P150,000 at December 31, 2014. In June 2015, Tack discovered that merchandise costing P40,000 had not been included in inventory in its 2014 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 2015? P178,000 Bren Co.’s beginning inventory at January 1, 2015, was understated by P26,000, and its ending inventory was overstated by P52,000. As a result, Bren’s cost of goods sold for 2015 was Understated by P78,000 At the end of current year , special insurance cost incurred but unpaid , were not recorded. If these insurance cost were related to work in process , what is the effect of the omission on accrued liabilities and retained earnings in the current year – end statement of financial positions? Accrued liabilities, Retained earnings Understated, No effect Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the Straight-line method Production or use method b. Yes Yes An entity uses a periodic inventory system. If the entity beginning inventory in the current year is overstated , and that is the only error in the current year , then the entity’s income for the current year would be Understated and asset correct An entity uses a periodic inventory system and neglected to record a purchase of merchandised on account at year end. This merchandised was omitted from the year –end physical count. How will these errors affect assets liabilities , and shareholder s’ equity at year – end and the net earnings for the year? Assets, Liabilities, Equity, Net Earnings Understate, Understate, No effect, No effect The premium on a four year insurance policy expiring on December 31,2021 was paid in total on January 1, 2018. Assuming that the original payment was recorded as a prepaid asset, the balance in the prepaid balance account on December 31,2019 would be Lower than the balance on December 31, 2018 Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable maturity. Loeb repaid each loan on its scheduled maturity date. Date of loan Amount Maturity date Term of loan 11/1/18 P5,000 10/31/19 1 year 2/1/19 15,000 7/31/19 6 months 5/1/19 8,000 1/31/20 9 months Loeb records interest expense when the loans are repaid. As a result, interest expense of P1,500 was recorded in 2019. If no correction is made, by what amount would 2019 interest expense be understated? P540 Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 2011. The cumulative effect of this change should be reported in Lore’s 2011 financial statements as a Prior period adjustment resulting from the correction of an error. On January 2, 2015, Air, Inc. agreed to pay its former president P300,000 under a deferred compensation arrangement. Air should have recorded this expense in 2014 but did not do so. Air’s reported income tax expense would have been P70,000 lower in 2014 had it properly accrued this deferred compensation. In its December 31, 2015 financial statements, Air should adjust the beginning balance of its retained earnings by P230,000 debit Which of the following should not be reported retroactively? Correction of an overstatement of ending inventory made two years ago. Which of the following errors could result in an overstatement of both current assets and shareholder equity? Holiday pay expense for administrative employees is miss classified as manufacturing overhead The premium on a three –year insurance policy expiring on December 31,2021 was paid in total on January 1, 2019. Assuming that the original payment was recorded as a prepaid assets , how would total assets and shareholder equity be affected during 2019? Both total asset and shareholder equity would decrease On January 1, year 1, Newport Corp. purchased a machine for 100,000. The machine was depreciated using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Newport’s year 1 financial statements, resulting in a 10,000 overstatement of the book value of the machine on December 31, year 1. The oversight was discovered during the preparation of Newport’s year 2 financial statements. What amount should Newport report for depreciation expense on the machine in the year 2 financial statements? Cost 100,000.00 Divide by: Estimated useful life 10 yrs Annual depreciation/depreciation expense, year 2 10,000.00 If at end of period an entity erroneously excluded some goods from its ending inventory and also erroneously did not record the purchase of these goods in its accounting records , these error would cause No effect on net income , working capital and retained earnings to be understated Types of Errors based on Financial Statements Affected An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries expense. The error had been discovered when all temporary accounts were already closed to the capital account. The correcting entry will require a No correcting entry is necessary An audit of Angelina Company has revealed the following four errors that have occurred but have not been corrected: Inventory at December 31, 20Y1-P40,000, understated Inventory at December 31, 20Y2-P15,000, overstated Depreciation for 20Y1-P7,000, understated Accrued expenses at December 31, 20Y2-P10,000, understated The errors cause the reported retained earnings at December 31, 20Y2 to be Overstated by P32,000 The errors cause the reported net income for the year ending December 31, 20Y2 to be Overstated by P65,000 The errors cause the reported Profit for the year ending December 31, 20Y2 to be Overstated by P65,000 Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31, 20Y1 financial statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of 20Y2 resulted in a cumulative effect of P30,000 on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related income taxes. What amount should Colasissi report as prior period adjustments in 20Y2? P 50,000 Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to cash of P50,500 and notes receivable of P50,500. This error will Understate assets by P500 and understate revenue by P500 A sale of merchandise on account of P3,200 was recorded as P2,300. The error had been discovered when nominal accounts were already closed. The correcting would require a P900 debit to accounts receivable The 20Y1 financial statements of Hershey Company reported net income for the year ended December 31, 20Y1 of 2 million. On July 1, 20Y2, subsequent to the issuance of the 20Y1 financial statements, Hershey changed from an accounting principle that is not generally accepted to one that is generally accepted. If the generally accepted accounting principle had been used in 20Y1, net income for the year ended December 31, 20Y1 would have been decreased by 1 million. On August 1, 20Y2, Hershey discovered a mathematical error relating to its 20Y1 financial statements. If this error had been discovered in 20Y1, net income for the year ended would have been increased by P500,000. What amount, if any, should be included in net income for the year ended December 31, 20Y2 because of the items noted above? P 1,000,000 decrease The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of its machines recorded as follows: Cash 270,000 Accumulated depreciation - machine 30,000 Machine 300,000 If the actual cash proceeds is P300,000, the correcting entry would be: DR: Cash 30,000; CR: Gain on Sale of Machine 30,000 Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts payable and credit to cash for P23,000. The working capital. Has no effect A sales discount of P5,000 was recorded as purchase discount. The error had been discovered when nominal accounts were still open. The correcting entry would require a P5,000 credit to purchase discount On October 1, 20Y1, Yuri Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Yuri recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 20Y1. Yuri’s 20Y1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, 20Y2. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly? Retained Earnings 12/31/Y1, Interest Payable 12/31/Y1 No, Yes A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit to cash P5,500 and credit to notes receivable P5,500. The error had been discovered when nominal accounts were still open. The correcting entry would require a P500 debit to accounts receivable On October 1, 20Y1, Yuri Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Yuri recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 20Y1. Yuri’s 20Y1 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, 20Y2. Yuri’s 20Y1 cost of goods sold for the holiday merchandise was Overstated by the difference between the note’s face amount and the note’s October 1, 20Y1 present value. Yuri’s 20Y1 cost of goods sold for the holiday merchandise was Overstated by the difference between the note’s face amount and the note’s October 1, 20Y1 present value. You were hired by X-Men Company as a staff member of its newly created internal auditing department. While reviewing the company’s records for 2010 and 2011, you discover the errors that have occurred but have not been corrected:  Inventory at December 31, 2010: P 120,000 understated  Inventory at December 31, 2011: P 75,000 overstated  Depreciation for 2010: P 35,000 understated  Accrued expenses at December 31, 2011: P 50,000 understated The errors will cause the retained earnings balance at December 31, 2011 to be Solution: Overstated ending inventory 75,000.00 O Understated depreciation 35,000.00 O Understated accrued expense 50,000.00 O Net effect in retained earnings 160,000.00 O Edcelle Company reported a retained earnings balance of P400,000 at December 31, 20Y1. In August 20Y2, Edcelle determined that insurance premiums of P60,000 for the 3-year period beginning January 1, 20Y1 had been paid and fully expensed in 20Y1. Edcelle has a 30% income tax rate. What amount should Edcelle report as adjusted beginning retained earnings in its 20Y2 statement of retained earnings? P 428,000 For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by workers during the last week of the year. The amounts omitted, which are considered material, were as follows: December 31, 20Y1 P56,000 December 31, 20Y2 51,000 December 31, 20Y3 64,000 The entry on December 31, 20Y3 to correct for these omissions would include a Debit to wage expense for P13,000 Under the periodic inventory system, the ending inventory of P65,000 was erroneously recorded as P56,000. The error had been discovered when all nominal and temporary accounts were already closed to the real account. The correcting entry would require a Credit to cost of sale Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to cash of P50,500 and notes receivable of P50,500. This error will Understate assets by P500 and understate revenue by P500 An audit of Funny Co. for 20Y1, its first year of operations, detected the following errors made at December 31, 20Y1: · Failed to accrue P50,000 interest expense · Failed to record depreciation expense on office equipment of P80,000 · Failed to amortize prepaid rent expense of P100,000 · Failed to delay recognition of prepaid advertising expense of P60,000 The net effect of these errors was to overstate net income for 20Y1 by P 170,000 A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when nominal accounts were already closed to income summary, but not yet closed to the capital account. The correcting entry will require a P2,700 debit to purchases At the end of 2015, Ritzcar Co. failed to accrue sales commissions earned during 2015 but paid in 2016. The error was not repeated in 2016. What was the effect of this error on 2015 ending working capital and on the 2016 ending retained earnings balance? (2015 ending working capital, 2016 ending retained earnings) Overstated, No effect A return of merchandise amounting to P4,500 which was previously purchased on account was recorded as  Accounts payable 5,400 Purchases 5,400 If the error had been discovered when the nominal accounts were still open, the correcting entry would require a P900 credit to accounts payable The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of its machines recorded as follows: Cash 270,000 Accumulated depreciation - machine 30,000 Machine 300,000 The actual cash proceeds is P300,000. Assume that the nominal accounts had been closed. The effect of the error to the accounting elements, if not corrected, is P30,000 understatement of asset and P30,000 understatement of owner’s equity. A payment of P20,000 rent was recorded as a debit to rent income. The error had been discovered when nominal accounts were already closed. The correcting entry would require a No adjustment entry is necessary While preparing its 20Y3 financial statements, Falfact Corp. discovered computational errors in its 20Y2 and 20Y1 depreciation expense. These errors resulted in overstatement of each year’s income by P25,000, net of income taxes. The following amounts were reported in the previously issued financial statements: 20Y2 20Y1 Retained earnings, 1/1 P 700,000 P 500,000 Net income 150,000 200,000 Retained earnings, 12/31 P 850,000 P 700,000 Falfact’s 20Y3 net income is correctly reported at P180,000. Which of the following amounts should be reported as prior-period adjustments and net income in Falfact’s 20Y3 and 20Y2 comparative financial statements? Year Prior period adjustment Net Income 20Y2 (25,000) 125,000 20Y3 - 180,000 A cash collection of P5,000 from customer’s open account was recorded as P500. The error had been discovered when nominal accounts were still open. The correcting entry would require a P4,500 debit to cash The following information appeared on Blight Inc.’s December 31 financial statements: 20Y2 20Y1 Assets P 1,000,000 P  1,200,000 Liabilities 750,000 800,00 0 Contributed capital 120,000 120,00 0 Dividends paid 100,000 60,00 0 In preparing its 20Y2 financial statements, Blight discovered that it had misplaced a decimal in calculating depreciation for 20Y1. This error overstated 20Y1 depreciation by P10,000. In addition, changing technology had significantly shortened the useful life of Blight’s computers. Based on this information, Blight determined that depreciation should be P30,000 higher in 20Y2 financial statements. Assuming that no correcting or adjusting entries have been made and ignoring income taxes, how much should Blight report as 20Y2 net income? P 180,000 Accounting Cycle Which among the following is the last step in the accounting cycle? Preparation of the post-closing trial balance Which of the following accounting tool exemplifies the ledger? T-account The accounts in the ledger of CD Company contain the following balances at yearend: Accounts receivable, P30,240; Cash, P50,985; Equipment, P172,760; Gas and oil expense, P2,650; Insurance expense, P1,830; Notes payable, P64,575; Prepaid insurance, P6,880; Repair expense, P3,360; Service revenue, P37,130; CD drawing, P2,450; CD capital (beg), P156,290; Salaries expense, P15,490; Salaries payable, P2,850. Assuming no error committed during the fiscal period, the balance of Accounts payable is 25,800 The general ledger of Ivory Corporation, a merchandising firm includes the following accounts: 1/1/2013 12/31/2013 Supplies inventory P 8,500 P 9,600 Accumulated depreciation 80,200 89,500 Accounts payable 45,000 98,000 Supplies used during the year was P28,200; Purchases of merchandise during the year was P360,000; A depreciable asset with a cost of P53,900, was sold for P10,000 which resulted in a gain of P8,300. In reconstructing the transactions posted to the Supplies Inventory account, the missing item is? Purchase of supplies of P29,300 In reconstructing the transactions posted to the Accumulated Depreciation account, the missing item is Depreciation expense of P61,500 In reconstructing the transactions posted to the Accounts Payable account, the missing item is Payment of accounts of P307,000 In which journal will an acquisition of merchandise by issuing note payable be recorded? General journal Which statement about the trial balance is incorrect? A trial balance proves that all amounts have been posted to the correct amounts. Closing entries Remove the balances from the entity’s temporary accounts The trial balance prepared at December 31 did not balance. Dr total was P159,250 and Cr total was P153,200. In determining the cause of the difference, you discovered the following errors: a credit to cash of P650 was not posted; a P2,000 credit to be made to the Sales account was credited to the Accounts receivable account instead; the wages payable account balance of P9,300 was listed in the trial balance as P3,900. The correct trial balance is? 160,600 General ledger serves what phase of the accounting process? Classifying Which is not correct on the use of special journals? Only cash purchases are recorded in the cash disbursements journal Which of the following is a “source document” and which source document requires an entry in the books? Sales invoice An accounting record into which the essential facts and figures in connection with all transactions are initially recorded and in chronological order is called? Journal On January 1 of the current year a group of stockholders set up AB Corporation. They contributed cash of P4,250,000 and borrowed P950,000. During the year, revenues from sales totaled P1,400,000, while total costs and expenses were P750,000. AB Corporation declared a cash dividend of P300,000 on December 20, payable to the stockholders on January 30 of the following year. There were no additional activities affecting stockholders’ equity. By December 31 of current year, liabilities decreased to P880,000. Total assets at the end of the current year is? 5,480,000 Income summary is a? Nominal account Premium on bonds payable is an example of? Choice 1 The trial balance of HI Company does not balance. The debit column totaled P588,600 while the credit column totaled P598,300. An examination of the ledger shows these errors · Cash received from customer on account was recorded (both debit and credit) as P46,900 instead of P49,600 · Check issued to supplier was recorded (both debit and credit) as P24,800 instead of P28,400 · The purchase on account of a computer table worth P22,000 was recorded as a debit to Office Expense and a credit to accounts payable. · Services performed on account for a client, for P12,250 were recorded both as a debit to Accounts receivable and a credit to service revenue of P21,250 · A payment of P2,500 for telephone charges was posted as a credit to Office Expense and a credit to Cash · The unearned rent account was totaled at P15,200 instead of P12,200 · The debit footings to purchases and interest income were both understated by P1,000 The correct debit/credit column totals should be 582,000 The manufacturing summary account Summarizes all accounts that enter into the computation of cost of goods manufactured After the accounts have been closed The revenue, expense, and income summary accounts have zero balances Which among the rules on debit and credit below is not correct? Debit means increase, and credit means decrease. When special journals are used, which of the following is correct? Adjusting and closing entries are recorded in the general journal. The following items were taken from Domino Company’s adjusted trial balance; except for its land and building accounts Accounts receivable P Inventory 300,000 200,000 Accounts payable 120,000 Rosalyn, capital 420,000 Accrued Interest 35,000 Prepaid supplies 11,000  Expenses Accrued Interest 20,000 Rent revenue 11,500 Revenue Advances from 49,500 Salaries expense 75,000 customers Cost of sales 400,000 Sales 800,000 Furniture and 410,000 Sales returns and 23,000 fixtures allowances Interest expense 65,000 Unearned rent 35,000 income Interest revenue 90,000 Utilities expense 45,000 In Domino Company’s post-closing trial balance, the credit total would amount to P953,000 Premium on bonds payable is an example of? Real and adjunct account It measures economic flows over a period of time. Nominal account The balancing figure in the worksheet is net loss if? In the statement of financial position columns, the total of the credits exceeds the total of the debits General ledger serves what phase of the accounting process? Choice 1 Reversing entries apply to? All accruals An entity initially records prepayments in real accounts and makes reversing entries when appropriate. Which of the following year- end adjusting entries should be reversed? The entry to record service fees earned by year-end but not billed The trial balance of HI Company does not balance. The debit column totaled P588,600 while the credit column totaled P598,300. An examination of the ledger shows these errors Cash received from customer on account was recorded (both debit and credit) as P46,900 instead of P49,600 · Check issued to supplier was recorded (both debit and credit) as P24,800 instead of P28,400 · The purchase on account of a computer table worth P22,000 was recorded as a debit to Office Expense and a credit to accounts payable. · Services performed on account for a client, for P12,250 were recorded both as a debit to Accounts receivable and a credit to service revenue of P21,250 · A payment of P2,500 for telephone charges was posted as a credit to Office Expense and a credit to Cash · The unearned rent account was totaled at P15,200 instead of P12,200 · The debit footings to purchases and interest income were both understated by P1,000 The correct debit/credit column totals should be 582,000 An example of a nominal and a contra account is? Sales return An entity initially records prepayments in nominal accounts. Which of the following year- end adjusting entries may be reversed? The entry to record the portion of rental received in advance that is unearned at year-end In preparing a 10-column worksheet The ending inventory is extended as a credit in the income statement columns and as a debit in the statement of financial position columns The worksheet helps facilitate the preparation of financial statements? Smaller than the total of the statement of financial position debit column Which of the choices that follow is not a “book of original entry”? General ledger The following errors were made in preparing a trial balance, the P1,350 balance of inventory was omitted; the P450 balance of Prepaid Insurance was listed as a credit; and the P300 balance of Salaries Expense was listed as Utilities Expense. The debit and credit totals of the trial balance would differ by? P2,250 On March 31, the ledger for GH Services consists of the following: Cleaning equipment, P27,800; Accounts payable, P15,700; Gail, capital, P20,000; Office equipment, P11,500; Accrued interest on note, P1,500; Cleaning supplies, P2,600; Accounts receivable, P21,000; Accumulated depreciation, P2,000; Cash, P7,900; Note payable, P22,000; Accrued salaries P9,600. In a trial balance prepared on March 31, the total of the credit column is? 70,800 Journalizing is performed in what phase of the accounting process? Recording During the year Incredible Hulk Company, in its trial balance reported revenues of P130,000 and expenses of P80,000 before adjustments for the following items: P20,000 which was collected in advance, recorded initially as a liability was earned by yearend; P10,000 of rentals initially recorded under prepaid rent expires by yearend; P8,000 unrecorded and uncollected services rendered to customers; P3,500 employees salaries incurred by yearend, remains unrecorded and unpaid. After adjusting and closing entries have been posted, the balance of the Income Summary account is 0 The assets of BC Company amounted to P70,000 on January 1, but increased by P80,000 by December 31. During this same period liabilities decreased to P20,000. The owner’s equity on January 1, amounted to P35,000. The amount of owner’s equity at December 31 is 135,000 It helps localize accounting errors within a period of time. Trial balance Peter Company received P45,600 on May 1, 2012 for one year's rent in advance and recorded the transaction with a credit to a real account. The December 31, 2012 adjusting entry is? Dr Unearned rent 30,400; Cr Rent revenue 30,400 An analysis of the records of Alden Company disclosed changes in account balances for the current year and the supplementary data listed below: Cash 600,000 increase Accounts receivable 350,000 decrease Merchandise inventory 1,320,000 increase Accounts payable 560000 increase Accrued expenses 90,000 decrease During the year Alden borrowed P2,000,000 from the bank and paid off P1,750,000 plus interest of P200,000. Interest of P50,000 is accrued on December 31. There was no interest payable at the beginning of the year. Furthermore, Alden transferred equity securities to the business which were sold for P900,000 to finance the acquisition of merchandise. Alden made weekly withdrawals in the current year of P15,000. The net income for the current year is? 680,000 Adjusting entries that are reversed include those for prepaid or unearned items that? Create an asset or a liability account and were originally entered in a revenue or expense account Arrange the following steps in their correct order: I. Financial statements are prepared. II. Adjusting entries are recorded. III. Nominal accounts are closed. II, I and III Which of the following is not true of a worksheet? The worksheet is included as part of the published financial statements Adjusting Entries The accountant of Mutya Company made the following adjusting entry on December 31, 2009. Rent Income P 900 Unearned Rent Income P 900 Gehrig Corporation renewed an insurance policy for 3 years beginning July 1, 2009 and recorded the P81,000 premium in the prepaid insurance account. The P81,000 premium represents an increase of P23,400 from the P57,600 premium charged 3 years ago. Assuming Gehrig’s records its insurance adjustments only at the end of the calendar year, the adjusting entry required to reflect the proper balances in the insurance accounts at December 31, 2009, Gehrig’s year-end is to? Debit Cash and credit Rent Income, P5,400. Gehrig Corporation renewed an insurance policy for 3 years beginning July 1, 2009 and recorded the P81,000 premium in the prepaid insurance account. The P81,000 premium represents an increase of P23,400 from the P57,600 premium charged 3 years ago. Assuming Gehrig’s records its insurance adjustments only at the end of the calendar year, the adjusting entry required to reflect the proper balances in the insurance accounts at December 31, 2009, Gehrig’s year-end is to? Debit insurance expense for P23,100 and credit prepaid insurance for P23,100 Tayum received P12,000 from a tenant on December 1 for four months' rent of an office. This rent was for December, January, February, and March. If Lane debited Cash and credited Unearned Rental Income for P12,000 on December 1, the necessary adjustment December 31 would include Solution: Rent Received 12,000.00 Divide by: Coverage (Dec- 4 mos Mar) Monthly Rent/Rent Earned 3,000.00 Unearned Rental Income 3,000.00 Rental Income 3,000.00 Which of the following is an example of an adjusting entry? Recording depreciation of a truck A company receives interest on a P30,000, 8%, 5-year note receivable each April 1. At December 31, 2008, the proper adjusting entry was made to accrue interest receivable. Assuming that the company does not use reversing entries, what entry should be made on April 1, 2009 when the annual interest payment is received? Cash P2,400 Interest Receivable P1,800 Interest Income 600 An analysis of Hotel Efemela’s unadjusted prepaid expense account at December 31, 2013, revealed the following: An opening balance of P3,000 for Hotel Efemela’s comprehensive insurance policy. Hotel Efemela had paid an annual premium of P6,000 on July 1, 2012. A P6,400 annual insurance premium payment made July 1, 2013. A P4,000 advance rental payment for a warehouse Hotel Efemela leased for one year beginning January 1, 2013. An enterprise has made all necessary adjusting entries and is now closing its accounts for the period. Dividends of 30,000 were declared and distributed during the year. The entry to close the dividends account would be? Retained earnings P30,000 Dividends P30,000 In its December 31, 2013 statement of financial position, what amount should Hotel Efemela report as prepaid expenses? Solution: Annual insurance premium 6,400.00 Divide by: Total coverage 12 months Monthly insurance premium 533.33 Multiply by: Unexpired 6 months portion Prepaid insurance 3,200.00 Paul Company paid P110,400 on June 1, 2012 for a one-year insurance policy and recorded the entire amount in a real account The December 31, 2012 adjusting entry is Solution: Expired: Jun 1, 2012-Dec 31, 2012 7 months Insurance expense (110,400 x 7/12) 64,400.00 Adjusting entry: Insurance expense 64,400.00 Prepaid insurance 64,400.00 At the end of 2009, Tayum Company made four adjusting entries for the following items: 1. Depreciation expense, P25,000. 2. Expired insurance, P2,200 (originally recorded as prepaid insurance). 3. Interest payable, P6,000. 4. Rental revenue receivable, P10,000. In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is (are) Entries No. 3 and No. 4. The general ledger of Ivory Corporation, a merchandising firm includes the following accounts: 1/1/2013 12/31/2013 Supplies inventory P 8,500 P 9,600 Accumulated 80,200 89,500 depreciation Accounts payable 45,000 98,000 Supplies used during the year was P28,200; Purchases of merchandise during the year was P360,000; A depreciable asset with a cost of P53,900, was sold for P10,000 which resulted in a gain of P8,300. In reconstructing the transactions posted to the Accounts Payable account, the missing item is Solution: Purchases of merchandise 360,000.00 Accounts payable, 1/1/2013 45,000.00 Accounts payable, 12/31/2013 -98,000.00 Payment of accounts 307,000.00 On December 31 of the current year, Holmgren Company's bookkeeper made an entry debiting Supplies Expense and crediting Supplies on Hand for P12,600. The Supplies on Hand account had a P15,300 debit balance on January 1. The December 31 balance sheet showed Supplies on Hand of P11,400. Only one purchase of supplies was made during the month, on account. The entry for that purchase was? Solution: Supplies used 12,600.00 Supplies on hand, Dec 31 11,400.00 Supplies available for use 24,000.00 Less: Supplies on hand, Jan 1 15,300.00 Supplies purchased 8,700.00 Supplies on Hand 8,700.00 Accounts payable 8,700.00 Adjusting entries involve At least one real and one nominal account Adjusting entries are needed because an entity? Uses the accrual basis of accounting The work sheet of Pilar Company shows Income Tax Expense of P9,000 and Income Tax Payable of P9,000 in the Adjustments columns. What will be the ultimate disposition of these items on the work sheet? Income Tax Expense will appear as a debit of P9,000 in the Income Statement columns and Income Tax Payable as credit in the Balance Sheet columns. Havok Company adjusts and closes its books on December 31 and does not reverse adjusting entries. At December 31, 2011, Havok Company reported accrued salaries of P31,000 on its balance sheet. Salary payments to employees during 2012 were P262,000 and this amount was debited to salaries expense. At December 31, 2012 accrued salaries amounted to P28,000. The salaries expense to be reported in the 2012 income statement is P259,000 Rice Corporation loaned P60,000 to another corporation on December 1, 2009 and received a 3- month, 8% interest-bearing note with a face value of P60,000. What adjusting entry should Rice make on December 31, 2009? Debit Interest Receivable and credit Interest Income, P400. Accruals are? Adjusting entries where revenue or expense recognition precedes cash flow Moon Company purchased equipment on November 1, 2009, by giving its supplier a 12- month, 9 percent note with a face value of P48,000. The December 31, 2009, adjusting entry is? Principal 48,000.00 Multiply by: Interest 9% Annual interest 4,320.00 Multiply by: Coverage (Nov-Dec 2 mos/12 mos 2009) Accrued interest expense 720.00 Interest expense 720.00 Interest payable 720.00 Tineg Company paid P12,960 for a four-year insurance policy on September 1 and recorded the P12,960 as a debit to Prepaid Insurance and a credit to Cash. What adjusting entry should Tineg make on December 31, the end of the accounting period? Insurance Expense P 1,080 Prepaid Insurance P 1,080 Quicksilver Company renewed an insurance policy for 3 years beginning September 1, 2006 and recorded the P 90,000 premium in the prepaid insurance account. The P 90,000 premium represents an increase of P 25,200 from the P 64,800 premium charged 3 years ago. Quicksilver Company records its insurance adjustments at the end of the calendar year. The adjusting entry at December 31, 2006 will debit insurance expense for owed Supplies on Hand of P11,400. Only one purchase of supplies was made during the month, on account. The entry for that purchase was? debit Supplies on Hand, P8,700 and credit Accounts Payable, P8,700 Quicksilver Company renewed an insurance policy for 3 years beginning September 1, 2006 and recorded the P 90,000 premium in the prepaid insurance account. The P 90,000 premium represents an increase of P 25,200 from the P 64,800 premium charged 3 years ago. Quicksilver Company records its insurance adjustments at the end of the calendar year. The adjusting entry at December 31, 2006 will debit insurance expense for P 24,400 Caddis Co. had these unadjusted account balances on December 31, 2009: Inventory, January 1, 2009 P188,250 Purchases 142,700 Freight-In 12,880 Purchase Discounts 2,140 Purchase Returns 26,710 Assuming that the ending inventory is P97,900, the entry to adjust the inventory accounts would include A debit to Cost of Goods Sold of P217,080 Daguioman Company received P9,600 on April 1, 2009 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2009 adjusting entry is? debit Rent Income and credit Unearned Rent, P2,400 Meiji Company acquired rights to a patent from Novie Co. under a licensing agreement that required an advance royalty payment when the agreement was signed. Meiji remits royalties earned and due under the agreement on October 31 each year. Additionally on the same date, Meiji pays in advance estimated royalties for the next year. Meiji adjusts prepaid royalties at year-end. Information for the year ended December 31, 2014 are shown below: Date Amount 01/01/14 Prepaid royalties P130,000 10/31/14 Royalties payment (charged to royalties expense) 220,000 12/31/14 Year-end credit adjustment to royalty expense 50,000 In its December 31, 2014 balance sheet, Meiji should report prepaid royalties of P180,000 Dunlap Company sublet a portion of its warehouse for 5-years at an annual rental of P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Dunlap recorded as a credit to unearned rental income. Dunlap reports on a calendar-year basis. The adjustment on December 31, of the first year should be? Unearned rental income P12,500 P12,500 Rental income An unearned revenue can best be described as an amount Collected and not currently matched with expense The accountant of Review Company made the following adjusting entry on December 31, 2009. Prepaid Rent P1,800 Rent Expense P1,800 If annual rent is paid in advance every October 1, the original transaction entry made was? Debit Rent Expense and credit Cash, P2,400. John Company received cash of P77,400 on September 1, 2012 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2012 adjusting entry is? Dr Rent revenue; Cr Unearned rent P51,600 Which of the following least resembles a typical adjusting entry? Debit asset, credit liability Development of Financial Reporting Framework and Standard-Setting Bodies The process of establishing financial accounting standard Is a social process which incorporate political actions of various interested user group as well as profession research and logic The singularly unique functions performed by Certified Public Accountant is The attest functions The purposed of the international Financial Reporting Standard is to Promote uniform accounting standard among countries of the world Once an accounting standard has been established The standard is continually reviewed to see if modifications is necessary The international accounting standard board was formed to Develop word wide accounting standard Which ONE of the following bodies is responsible for reviewing accounting issues that are likely to receive divergent or unacceptable treatment in the absence of authoritative guidance, with a view to reaching consensus as to the appropriate accounting treatment? International Financial Reporting Interpretations Committee (IFRIC) As independent or external auditor , CPA are primarily responsible for Expressing an opinion as to the fairness of financial statement It is a global phenomenon intended to bring about transparency and a higher degree of comparability in financial reporting , both of which will benefit the investors and are essential to achieved the goal of one uniform and globally accepted financial reporting standard IFRS Are the following statements true or false? Statement 1: The Norwalk Agreement outlines the commitment of the IASB and FASB towards harmonisation of International and US Accounting Standards. Statement 2: IOSCO requires mandatory preparation of financial statements in accordance with IFRS True, False Are the following statements about the Norwalk Agreement true or false? Statement 1: The Norwalk Agreement requires the consolidated financial statements of all listed United States companies, starting after 1 January 2005, to be prepared in accordance with International Accounting Standards. Statement 2: The Norwalk Agreement was an agreement for short-term financial reporting convergence between the European Commission and the United States government False, False Objectives of Financial Statements One element of the objective of financial reporting is to provide information that is useful in assessing cash flows prospects. Qualitative Characteristics What is the concept that supports the issuance of interim reports? Relevance To achieve faithful representation, the financial statements Must be complete, neutral and reasonably free from error What is the underlying concept that supports estimating a fixed asset impairment charge? Faithful representation Underlying Assumptions Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? Monetary unit assumption When a parent and subsidiary relationships exist, consolidated financial statement are prepared in recognitions of Economic entity The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include Periodicity Which basic assumption may not be followed when a firm in bankruptcy reports financial results? Going concern assumption The economic entity assumption Is applicable to all forms of business organizations Valuing assets at their liquidation values rather than their cost is inconsistent with the Historical cost principle Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the Economic entity assumption Proponents of historical cost ordinarily maintain that in comparison with all other valuation alternatives for general purpose financial reporting, statements prepared using historical costs are more Verifiable Which of the following basic assumptions of accounting (used by the International Accounting Standards Board) makes depreciation and amortization policies justifiable and appropriate Going concern Identify the pervasive constraint and underlying assumption mentioned in the Conceptual Framework. Pervasive constraint Underlying assumption Cost Going concern During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of Objectivity Periodicity No Yes The assumption that a business enterprise will not be sold or liquidated in the near future is known as the none of these Which accounting assumption or principle is being violated if a company provides financial reports in connection with a new product introduction? Economic entity Under current IFRS, inflation is ignored in accounting due to the monetary unit assumption The basic assumptions of accounting used by the International Accounting Standards Board (IASB) include all of the following except: Materiality Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? Monetary unit assumption Which basic assumption is illustrated when a firm reports financial results on an annual basis? Periodicity assumption Which of the following is not a basic assumption underlying the financial accounting structure? Historical cost assumption Which of the following is an implication of the going concern assumption? All of these During the lifetime of an entity, accountants produce financial statements at arbitrary points in time in accordance with which basic accounting concept? Periodicity assumption Elements of FS (Definition, Recognition, and Measurement) Generally, revenue from sales should be recognized at a point when None of these Which of the following is not a required component of financial statements prepared in accordance with generally accepted accounting principles? President's letter to shareholders What is the general approach as to when product costs are recognized as expenses? In the period when the related revenue is recognized. When should an expenditure be recorded as an asset rather than an expense? When future benefit exits The Allowance for Doubtful Accounts, which appears as a deduction from Accounts Receivable on a statement of financial position and which is based on an estimate of bad debts, is an application of the Expense recognition principle Which of the following is not a basic element of financial statements? Statement of financial position Issuance of common stock for cash affects which basic element of financial statements? Equity. Which of the following are the two components of the revenue recognition principle? It is probable that future economic benefits will flow to the company and it is possible to reliably measure the amount The International Accounting Standards Board (IASB) defines five interrelated elements of financial statements. Which of the following is not one of those elements? All of the choices are elements defined by the IASB Which of the following practices may not be an acceptable deviation from recognizing revenue at the point of sale? Upon receipt of order. Application of the full disclosure principle Is demonstrated by the use of supplementary information presenting the effects of changing prices. The International Accounting Standards Board (IASB) defines one of the 5 elements as follows: “the residual interest in the assets of the entity after deducting all its liabilities” Which element matches this description? Equity. The accounting principle of expense recognition is best demonstrated by associating effort (expense) with accomplishment (revenue). Revenue is generally recognized when a sale occurs. This statement describes the Revenue recognition principle Under the physical capital concepts, a profit is earned only if The physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period after excluding any distributions to and contributions from owners Which of the following basic elements of financial statements is not associated with the statement of financial position? Income. Recognition of expense related to amortization of an intangible asset illustrates which principle of accounting? Expense recognition. Which of the following is an argument against using historical cost in accounting? Fair values are more relevant. Revenue generally should be recognized When a sale occurs. Which of the following is not a time when revenue may be recognized? All of these are possible times of revenue recognition. When is revenue generally recognized? When the sale occurs. Not adjusting the amounts reported in the financial statements for inflation is an example of which basic principle of accounting? Historical cost. Concepts of Capital and Capital Maintenance The financial capital concepts requires that net assets shall be stated at Historical cost Which of the following statements is incorrect? The selection of the appropriate concept of capital by an entity should be based on the needs of the management of its financial statements. Which of the following statements regarding the concept of capital maintenance is incorrect? Only outflows of assets in excess of amounts needed to maintain capital may be regarded as profit and therefore as a return on capital. Which of the following statements is incorrect? Selection of the basis under this concept is independent on the type of financial capital that the entity is seeking to maintain. Which of the following statements is incorrect? And upward change in the value of its assets is profit. The physical capital maintenance concept required the adoptions of which measurements basis? The physical productive capacity of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period after excluding any distributions to and contributions from owners Which of the following statements is incorrect? The concepts of capital maintenance include the financial capital maintenance and unit capital maintenance. The physical capital maintenance concept required the adoptions of which measurements basis? Current cost The following statements are correct with regard to the concept of financial capital maintenance, except: Holding gains may not be recognised as such, however, until the assets are recognized in an exchange transaction. Under the financial capital concepts, a profit is earned only if The monetary amount of net asset at the end of the period exceeds the monetary amount of net asset at the beginning of the period , after excluding any distributions to and contributions from owners General Features of FS Which of the following statements is incorrect in relation to fair presentation? An entity can rectify in appropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material An entity decided to extend the report period from a 12-month period to a 15-month period. Which of the following is.not required in case of change in reporting period? The entity should change the reporting period only if other similar entities in the geographical area in which it generally operates have done so in the current year. When the classification of items in its financial statements is changed, the entity Must reclassify the comparative amounts, unless it is impracticable to do so Items of dissimilar nature or function Must be presented separately in financial statements if those items are material Statement of Comprehensive Income -Income Statement/ Profit or Loss from Continuing Operations Which of the following terms cannot be used to describe a line item in the statement of comprehensive income? Extraordinary item Rica Company reported the following changes in all the account balances for the current year, except for retained earnings: Increase (Decrease) Cash 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 There were no entries in the retained earnings account except for Profit and a dividend declaration of P190,000 which was paid in the current year. What is the Profit for the current year? 200,000 The following information provided by Maricar Company in preparing this year’s comprehensive income statement: Sales 8,000,000 Cost of sales