chapter 1 caselette - accounting cycle

Problem 1-1 Accounting Cycle

CHAPTER 1 - Accounting Process &Working Paper Preparation

Exercises: Indicate your answer by encircling the letter that contains your choice in each of the following questions.

1. One is using periodic inventory system. For the year, its total purchases amounted to P250,000. Its unsold merchandise at the end of the year has a cost of P5,000 which is 80% of its beginning inventory. Ones cost of sale is

a.P 250,000

b. P 251,250

c. P 249,000

d. P 248,750

2. Twos purchase per purchase invoice is P150,000. The purchase discount is 2/10, n/30. Freight is P500, FOB shipping point collect. The net purchase amounts under net method is

a.P P147,000

b. P 147,500

c. P 148,500

d. P 150,500

3. Using the information in Item 2, the amount paid by the buyer is

a.P P147,000

b. P 147,500

c. P 148,500

d. P 150,500

4. The purchase invoice shows the amount of P250,000, 2/10, 1/20, n/30; FOB destination collect, P200. If the account is paid 15 days after the invoice date, the net payment should be

a.P 245,000

b. P 247,500

c. P 247,300

d. P 244,800

5. Using the information in Item 4, the net purchase is

a.P 245,000

b. P 247,500

c. P 247,300

d. P 244,800

6. Three purchased merchandise for P5,000 and paid P200 for freight, FOB destination collect. The merchandise was sold at 120% of cost. The gross profit is

a.P 1,000

b. P 1,040

c. P 6,000

d. P 6,240

7. The total purchase is P1,176, net of 2% cash discount. Unsold portion of purchase is P176. The sale is at mark-up of 10%. The gross profit is

a.P 117.60

b. P 88.24

c. P 115.25

d. P 100.008. The term of a P300,000 purchase is 2/20, n/60, FOB shipping point prepaid, P300. If the account is paid on the 25th day from the invoice date, the total payment would be

a.P 294,000

b. P 299,700

c. P 294,300

d. P 300,3009. Four paid freight for P200 on its purchase on account from Five, FOB shipping point. The journal entry in both books of Four and Five would be

Books of Four

Books of Five

a.Freight-out

200

Freight-in

200

Cash

200 Accounts payable

200

b.Freight-in

200

No entry

Accounts receivable200

c.Freight-in

200

No entry

Cash

200

d.Freight-in

200

Freight-out

200

Cash

200 Accounts receivable200

10. Six sold merchandise at list price of P250,000; 10; 5; n/30. Part of the sale amounting to P10,000 was returned due to defect. The amount to be collected by Six is

a.P 205,200

b. P 203,750

c. P 204,000

d. P 195,200

11. Amar Company received P96,000 on April 1, 2002 for one years rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2002 adjusting entry is

a. Debit rent revenue and credit unearned rent revenue, P24,000.

b. Debit rent revenue and credit unearned rent revenue, P72,000.

c. Debit unearned rent revenue and credit rent revenue, P24,000.

d. Debit unearned rent revenue and credit rent revenue, P72,000.

12. Andoy Company paid P72,000 on June 1, 2002 for a two-year insurance policy and recorded the entire amount as insurance expense. The December 31, 2002 adjusting entry is

a. Debit insurance expense and credit prepaid insurance, P21,000.

b. Debit insurance expense and credit prepaid insurance, P51,000.

c. Debit prepaid insurance and credit insurance expense, P21,000.

d. Debit prepaid insurance and credit insurance expense, P51,000.

13. Antipuesto Company purchase equipment on November 1, 2002 and gave a 12-month, 9% note with a face value of P480,000. The December 31, 2002 adjusting entry is

a. Debit interest expense and credit interest payable, P7,200.

b. Debit interest expense and credit interest payable, P10,800.

c. Debit interest expense and credit cash, P7,200.

d. Debit interest expense and credit interest payable, P43,200.

14. On December 31, 2002, Asilo Companys bookkeeper made an adjusting entry debiting supplies expense and credit supplies inventory for P12,600. The supplies inventory accounts had a P15,300 debit balance on December 31, 2001. The December 31, 2002 balance sheet showed supplies inventory of P11,400. Only one purchase of supplies was made during the month, on account. The entry for that purchase was

a. Debit supplies inventory and credit cash, P8,700.

b. Debit supplies expense and credit accounts payable, P8,700.

c. Debit supplies inventory and credit accounts payable, P8,700.

d. Debit supplies inventory and credit accounts payable, P16,500.

15. Astillo Company loaned P300,000 to another company on December 1, 2002 and received a 3-month, 15%, interest-bearing note with a face value of P300,000. What adjusting entry should Astillo Company make on December 31, 2002?

a. Debit interest receivable and credit interest income, P7,500.

b. Debit cash and credit interest income, P3,750.

c. Debit interest receivable and credit interest income, P3,750.

d. Debit cash and credit interest receivable, P7,500.

.

16. The supplies inventory account balance at the beginning of the period was P66,000. Supplies totaling P128,250 were purchased during the period and debited to supplies inventory. A physical count shows P38,250 of supplies inventory at the end of the period. The year-end adjusting entry is

a. Debit supplies inventory and credit supplies expense, P90,000.

b. Debit supplies expense and credit supplies inventory, P128,250.

c. Debit supplies inventory and credit supplies expense, P156,000.

d. Debit supplies expense and credit supplies inventory, P156,000.

17. At the end of 2002, Avila Company made four adjusting entries for the following items: (1) depreciation expense, P35,000; (2) expired insurance, P2,200 (originally recorded as prepaid insurance); (3) interest payable, P9,000; and (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

a.Entry 1

c. Entries 3 and 4

b.Entry 4

d. Entries 2, 3, and 4

18. Bagaipo Company reported an allowance for doubtful accounts of P12,000 (credit) at December 31, 2002 before performing an aging of accounts receivable. As a result of the aging, Bagaipo Company determined that an estimated P20,000 of the December 31, 2002 accounts receivable would prove uncollectible. The adjusting entry at December 31, 2002 would be

a.Doubtful accounts expense

8,000

Allowance for doubtful accounts

8,000

b.Doubtful accounts expense

20,000

Accounts receivable

20,000

c.Allowance for doubtful accounts 8,000

Doubtful accounts expense 8,000

d.Doubtful accounts expense

8,000

Interest revenue

8,000

19. Assuming that the company does not reverse the adjusting entries, what should be made on April 1, 200 when the annual interest payment is received?

a. Debit cash and credit interest revenue, P9,375.

b. Debit cash and credit interest receivable, P28,125.

c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue, P9,375.

d. Debit cash and credit interest revenue, P37,500.

20. Using the data of No. 19, but assuming that the company does reverse its adjusting entries, what entry should be made on April 1, 2003 when the annual interest payment is received?

a. Debit cash and credit interest revenue, P9,375.

b. Debit cash and credit interest receivable, P28,125.

c. Debit cash, P37,500; credit interest receivable, P28,125; and interest revenue, P9,375.

d. Debit cash and credit interest revenue, P37,500.

Answer:

1. b2. b3. a4. c5. b6. a7. d8. d9. c10. a

11.a12.d13.a14.c15.c16.d17.c18.a19.c20.d

Problem 1The following is the post-closing trial balance of Abagon Shop dated February 1, 2006:

Debit Credit

Cash120,000

Accounts Receivable280,000

Allowance for doubtful accounts 2,800

Unused shop supplies 800

Shop Equipment240,000

Accumulated depreciation - shop equipment 48,000

Accounts payable 88,800

Notes payable 100,000

Accrued interest payable 1,200

Abagon, Capital 400,000

Total 640,800 640,800

For the month of February, the following are the transactions of Abagon Shop.

1. Abagon withdrew P100,000 cash from the business for her personal use.

2. Paid P12,000 insurance premium.

3. Paid P24,000 rent.

4. Total service rendered to various customers, P140,000, 40% of total sales are on cash basis and the balance on open account.

5. Received promissory note from customer to replace P40,000 accounts receivable.

6. Collected in cash P164,000 of accounts receivable.

7. Paid the notes payable of P100,000 plus the P2,400 interest.

8. Purchased P2,400 shop supplies on cash basis.

9. Paid salaries, P24,000.

At the end of the month, the following information are available to effect adjustments.

a. The insurance in number 2 for P12,000 is applicable for six months starting February.

b. The rent of P24,000 paid in number 3 is for 3 months, starting February.

c. The note receivable is number 5 is earning 12% interest per year. The note is dated February 1, and is due on April 30.

d. Bad debts expense is estimated at 2% of accounts receivable balance.

e. The annual depreciation is P48,000.

f. The unused supplies balance is P1,000.

Questions1.Cash at end of February is:

a. P 103,200

b. P 85,200

c. P 75,200

d. P 72,800

2.Net Realizable value of Accounts Receivable at end of February is

a.P 156,800

b. P 157,200

c. P 196,800

d. P 197,200

3. Unused shop supplies at end of February is

a. P 1,800

b. P 1,000

c. P 800

d. P 200

4.Net book value of Shop Equipment at end of February is

a.P 188,000

b. P 189,000

c. P 184,000

d. P 144,000

5.Accounts Payable at end of February is

a.P 128,800

b. P 88,800

c. P 86,400

d. P 48,800

6.Notes Payable at end of February is

a.P 100,000

b. P 102,400

c. P 97,600

d. P 0

7. Abagon Capital, net of drawing at end of February is

a.P 398,600

b. P 397,400

c. P 397,800

d. P 388,600

8. Net income of the company at end of February is

a.P 98,600

b. P 97,400

c. P 97,800

d. P 88,600

9.Total Revenue of the company at end of February is

a. P 142,800

b. P 142,400

c. P 140,400

d. P 140,000

10.Total Expenses of the Company at end of February is

a. P 52,600

b. P 41,800

c. P 41,400

d. P 41,000

Solution1Abagon, drawing

100,000

Cash100,000

2Insurance expense12,000

Cash12,000

3Rent expense24,000

Cash 24,000

4Cash 56,000

Accounts receivable 84,000

Revenue

140,000

5Notes receivable

40,000

Accounts receivable40,000

6Cash164,000


7Notes payable100,000

Interest expense

2,400

Cash102,400

8Supplies expense

2,400

Cash 2,400

9Salaries 24,000

Cash 24,000

Adjusting Entry:

aPrepaid Insurance10,000

Insurance expense10,000

bPrepaid rent16,000

Rent expense16,000

cInterest receivable400

Interest income400

(P40,000 x 12% x 1/12)

dBad debts400

Allowance for bad debts400

eDepreciation4,000

Accum. depreciation4,000

fUnused supplies1,000

Supplies expense1,000

Supplies expense800

Unused supplies800

gAccrued interest payable1,200

Interest expense1,200

To reverse the beg. accrued interest payable

TRIAL BALANCE ADJUSTMENTS INCOME STATEMENT BALANCE SHEET

CASH 75,200 75,200

ACCNTS RECEIV 160,000 160,000

ALLOW. FOR BD 2,800 400 3,200

NOTES RECEIV 40,000 40,000

UNUSED SUPPLIES 800 1,000 800 1,000

SHOP EQUIPMENT 240,000 240,000

ACCUM. DEPN 48,000 4,000 52,000

ACCOUNTS PAY 88,800 88,800

NOTES PAYABLE - -

ACC. INT. PAY 1,200 1,200 -

ABAGON, DRAWING 100,000 100,000

ABAGON, CAPITAL 400,000 400,000

REVENUE 140,000 140,000

INSURANCE EXP 12,000 10,000 2,000

RENT EXPENSE 24,000 16,000 8,000

SUPPLIES EXP 2,400 800 1,000 2,200

SALARIES 24,000 24,000

INTEREST EXP 2,400 _______ 1,200 1,200

680,800 680,800

PREPAID INS 10,000 10,000

PREPAID RENT 16,000 16,000

INTEREST RECEI 400 400

INTEREST INC 400 400

BAD DEBTS 400 400

DEPRECIATION 4,000 _______ 4,000 ________

33,800 33,800 41,800 140,400

NET INCOME 98,600 ________ _______ 98,600

140,400 140,400 642,600 642,600

Answer:

1. C2. A3. B4. A5. B5. D8. A9. A9. C10. B

Problem 2

The following selected transactions were completed during Year 1 of operations by Vicar Corporation:

a. Sold of its 20,000 shares of its own common stock, par P1 per share, for P15 per share and received cash in full.

b. Borrowed P100,000 cash on 12%, one-year note, interest payable at maturity on April 30, Year 2.

c. Purchased equipment for use in operating the business at a net cash cost of P164,000; paid in full.

d. Purchased merchandise for resale at cash cost of P140,000; paid cash. Assume a periodic inventory system; therefore, debit Purchases.

e. Purchased merchandise for resale on credit terms of 2/10, n/60. The merchandise will cost P9,800 if paid within 10 days; after 10 days, the payment will be P10,000. The company always takes the discount; therefore, such purchased are recorded at net of the discount.

f. Sold merchandise for P180,000; collected P165,000 cash, and the balance is due in one month.

g. Paid P30,000 cash for operating expenses.

h. Paid of the balance for the merchandise purchased in (e) within 10 days; the balance remains unpaid.

i. Collected 50% of the balance due on the sale in (f); the remaining balance is uncollected.

j. Paid cash for an insurance premium, P600; the premium was for two years coverage (debit Prepaid insurance).

k. Purchased a tract of land for a future building for company operations, P63,000 cash.

l. Paid damages to a customer who was injured on the company premises, P10,000 cash.

Questions

Using the unadjusted trial balance, answer the following:

1.Cash balance is:

a.P 157,550

b. P 157,400

c. P 157,250

d. P 149,900

2.Accounts receivable balance is:

a. P 15,000

b. P 10,000

c. P 7,700

d. P 7,500

3.Prepaid insurance balance is:

a.P 600

b. P 400

c. P 300

d. P 200

4.Land account balance is:

a.P 227,000

b. P 164,000

c. P 101,000

d. P 63,000

5.Equipment account balance is:

a.P 227,000

b. P 164,000

c. P 101,000

d. P 63,000

6.Accounts payable balance is:

a.P 2,650

b. P 2,500

c. P 2,450

d. P 2,150

7.Notes payable balance is:

a. P 112,000

b. P 109,000

c. P 100,000

d. P 88,000

8.Common stock balance is:

a.P 300,000

b. P 280,000

c. P 200,000

d. P 20,000

1. Premium on capital stock balance is:

a.P 300,000

b. P 280,000

c. P 200,000

d. P 20,000

2. Sales balance is:

a.P 180,000

b. P 160,000

c. P 100,000

d. P 80,000

3. Purchases balance is:

a.P 149,800

b. P 149,600

c. P 150,000

d. P 150,200

4. Operating expenses and other expenses is:

a. P 49,800

b. P 40,200

c. P 40,000

d. P 38,800

Solution

(a)Cash

300,000

Common stock

20,000

Premium on capital stock280,000

(b)Cash

100,000

Notes payable

100,000

(c) Equipment

164,000

Cash

164,000

(d)Purchases

140,000

Cash

140,000

(e)Purchases

9,800

Accounts payable

9,800

(f)Cash

165,000


Sales

180,000

(g)Operating expenses 30,000

Cash

30,000

(h)Purchase disc. lost 200

Accounts payable

200


Cash

7,500

(i)Cash

7,500


(j)Prepaid insurance

600

Cash

600

(k)Land

63,000

Cash

63,000

(l)Loss on damages

10,000

Cash

10,000

Cash

157,400

Accounts receivable

7,500

Prepaid insurance

600

Land

63,000

Equipment

164,000

Accounts payable

2,500

Notes payable

100,000

Common stock

20,000

Premium on capital stock

280,000

Sales

180,000

Purchases

149,800

Operating expenses

30,000

Purchase disc. lost

200

Loss on damages

10,000

_______

Total

582,500

582,500ANSWER

1. b2. d3. a4. d5. b6. b7. c8. d9. b10. a11. a12. b

Problem 3

The post-closing trial balance of the general ledger of Wilson Corporation at December 31, 20I, reflected the following:

Account

Debit

Credit

Cash

27,000

Accounts receivable

21,000


1,000

Inventory (perpetual inventory system)

35,000

Prepaid insurance (20 mos. remaining)

900

Equipment (20-year life, no salvage value)50,000

Accumulated depreciation

22,500

Accounts payable

7,500

Wages payable

-

Income taxes payable (for 20I)

4,000

Common stock, par P1

80,000

Retained earnings

18,900

Sales revenue

-

Cost of goods sold

-

Operating expenses

-

Income tax expense

-

Income summary

-_________

133,900133,900* Ending inventory, P45,000 (at 12/31/20J)

The following transactions occurred during 20J in the order given (use the number at the left to indicate the date):

1.Sales revenue at P30,000, of which P10,000 was on credit; cost provided by perpetual inventory record, P19,500.

2.Collected P17,000 on accounts receivable.

3.Paid income taxes payable (20I), P4,000.

4.Purchased merchandise, P40,000, of which P8,000 was on credit.

5.Paid accounts payable, P6,000.

6.Sales revenue of P72,000 (in cash); cost, P46,800.

7.Paid operating expenses, P19,000.

8.On January 1, 20J, sold and issued 1,000 shares of common stock, par P1, for P1,000 cash.

9.Purchased merchandise, P100,000, of which P27,000 was on credit.

10.Sales revenue of P98,000, of which P30,000 was on credit; cost P63,700.

11.Collected cash on accounts receivable, P26,000.

5. Paid cash on accounts payable, P28,000.

6. Paid various operating expenses in cash, P18,000.

Assume a bad debt rate of % of credit sales for the period and a 32% income tax rate. At December 31, 20J, accrued wages were P300. Use straight-line depreciation.

Questions

1.Cash at December 31, 20J is:

a.P 51,000

b. P 50,000

c. P 45,000

d. P 41,000

2.Accounts receivable at December 31, 20J is:

a. P 18,000

b. P 16,800

c. P 16,000

d. P 15,800

3.Inventory at December 31, 20J is:

a.P 64,500

b. P 45,000

c. P 35,000

d. P 32,500

4. Prepaid insurance at December 31, 20J is:

a.P 360.00

b. P 562.50

c. P 900

d. P 540

5.Equipment at December 31, 20J is:

a. P 95,000

b. P 60,000

c. P 50,900

d. P 50,000

6.Accumulated depreciation at December 31, 20J is:

a. P 30,000

b. P 25,000

c. P 22,500

d. P 20,000

7.Accounts payable at December 31, 20J is:

a. P 15,000

b. P 14,500

c. P 10,500

d. P 8,500

8.Income taxes payable at December 31, 20J is:

a.P 9,600

b. P 9,427

c. P 5,651

d. P 4,000

9.Retained earnings at December 31, 20J is:

a. P 39,300

b. P 38,933

c. P 30,909

d. P 27,400

10. Cost of goods sold at December 31, 20J is:

a. P 110,500

b. P 128,000

c. P 130,000

d. P 132,000

11. Net income before taxes at December 20J is:

a.P 30,000

b. P 29,460

c. P 17,660

d. P 12,500

Solution

(1)Cash

20,000


Sales

30,000

Cost of sales

19,500

Inventory

19,500

(2)Cash

17,000


(3)Income taxes payable 4,000

Cash

4,000

(4)Inventory

40,000

Cash

32,000


(5)Accounts payable 6,000

Cash

6,000

(6)Cash

72,000

Sales

72,000

Cost of sales

46,800

Inventory

46,800

(7)Operating expenses19,000

Cash

19,000

(8)Cash

1,000

Common stock

1,000

(9)Inventory

100,000

Cash

73,000

Accounts payable27,000

(10)Cash

68,000


Sales

98,000

Cost of sales

63,700

Inventory

63,700

(11)Cash

26,000


(12)Accounts payable28,000

Cash

28,000

(13)Operating expenses18,000

Cash

18,000

Adjusting Entry:

(a)Operating expenses (ins. Exp)

540

Prepaid insurance

540

(P900 x 12/20)

(b)Operating expenses (depreciation)2,500


2,500

(c)Operating expenses (bad debts)

200

Allowance for bad debts

200

(d)Operating expenses

300

Wages payable

300

FINANCIAL STATEMENTS

Cash

51,000

Accounts receivable

18,000


(1,200)

Inventory

45,000

Prepaid insurance

360

Equipment

50,000

Accumulated depreciation (25,000)

Total Assets

138,160

Accounts payable

8,500

Wages payable

300

Income taxes payable

9,427

Common stock

81,000

Retained earnings 38,933

Total Liability/SHE 138,160Sales revenue

200,000

Cost of sales

130,000Gross profit

70,000

Operating expenses

40,540Income before taxes

29,460

Income taxes expense

9,427Net income

20,033

Retained earnings beg

18,900Retained earnings end

38,933Answer:

1. a2. b3. b4. a5. d6. b7. d8. b9. b10.c11.b

Problem 4

The account of PEQUIT COMPANY as at December 1, 2006 are listed below:

Cash

214,000

Accounts receivable

338,000

Marketable securities

426,000

Office supplies

31,000

Prepaid insurance

48,000

Land

370,000

Building

900,000

Accum. depreciation bldg

250,000

Equipment

800,000

Accum. depreciation equip.

200,000

Accounts payable

172,000

Mortgage payable

1,200,000

Capital

_______1,305,000

3,127,0003,127,000The following transactions occurred during the month of December 2006:

Dec. 1Settled the accounts payable of P115,000 less 2% discount.

3Collected the accounts receivable of P180,000 less 3% discount.

4Sold merchandise on account to PAPACOY SUPPLIES, P210,000. Terms: FOB destination, 3/10, n/30. PAPACOY SUPPLIES paid the freight for P3,000.

5Received returns from PAPACOY SUPPLIES, P25,000.

7Purchased merchandise from OSTIQUE PRODUCTS, P232,000. Terms: FOB shipping point, 2/10, n/30. PEQUIT COMPANY paid P2,000 for the transportation cost.

9Returned goods to OSTIQUE PRODUCTS, P12,000 acquired on December 7.

10Paid interest on mortgage payable, P8,000.

11Received payment from PAPACOY SUPPLIES for the amount due.

12Sold merchandise to OANI SHOPPERS, P330,000. Terms: FOB shipping point, 3/10, n/30.

18Received payment from OANI SHOPPERS from the December 12 sales.

19Sold merchandise to NAVALES SHOP, P242,000. Term: FOB shipping point, 3/10, n/30. PEQUIT COMPANY paid P5,000 for the freight.

20Paid P9,000 for representation expense.

29Received from NAVALES SHOP returned merchandise in the amount of P18,000 from the December 19 sales.

30The owner, Genevieve, withdraw merchandise for personal use. Cost P20,000; Selling price P30,000.

Additional information

1. Salaries in the amount of P73,000 have accrued on December 31.

2. Insurance coverage with premium of P2,000 has expired at month-end.

3. Depreciation on the building and on the equipment for the month amounted to P3,000 and P4,500, respectively.

4. Office supplies on hand at month-end amounted to P7,000.

5. A count of the inventory amounted to P453,000 on December 31, 2006.

Questions

1. Cash balance at December 31, 2006 is:

a.P 773,750

b. P 772,700

c. P 748,450

d. P 727,700

2. Accounts receivable at December 31, 2006 is:

a.P 412,000

b. P 405,000

c. P 387,000

d. P 362,000

3. Inventory at December 31, 2006 is:

a.P 625,700

b. P 453,000

c. P 426,000

d. P 212,000

4. Office supplies at December 31, 2006 is:

a.P 7,000

b. P 10,000

c. P 24,000

d. P 31,000

5. Net carrying value of Fixed Assets at December 31, 2006 is:

a.P 1,980,000

b. P 1,620,000c. P 1,612,500d. P 1,242,500

6. Total assets at December 31, 2006 is:

a.P 3,253,950

b. P 3,250,950c. P 3,203,950d. P 3,153,950

7. Accounts payable at December 31, 2006 is:

a.P 289,000

b. P 279,000

c. P 277,000

d. P 257,000

8. Accrued expenses at December 31, 2006 is:

a.P 97,000

b. P 73,000

c. P 24,000

d. P 9,000

9. Net sales at December 31, 2006 is:

a.P 782,000

b. P 718,950

c. P 718,240

d. P 718,150

10. Total purchases at December 31, 2006 is:

a.P 232,000

b. P 212,000

c. P 199,700

d. P 197,700

11. Operating expenses at December 31, 2006 is:

a.P 126,500

b. P 118,500

c. P 109,500

d. P 101,500

12. Net income at December 31, 2006 is:

a.P 482,800

b. P 426,950

c. P 419,040

d. P 418,950

13. Capital balance at December 1, 2006 is:

a.P 1,704,040

b. P 1,703,950c. P 1,305,000d. P 1,285,000

14. Capital balance at December 31, 2006 is:

a.P 1,704,040

b. P 1,703,950c. P 1,305,000d. P 1,285,000

15. Total liabilities and capital at December 31, 2006 is:

a.P 3,253,950

b. P 3,250,950c. P 3,203,950d. P 3,153,950

Solution

Dec 1Accounts payable

115,000

Dec 10Interest expense

8,000

Cash

112,700

Cash

8,000

Purchases (discount) 2,300

Dec 11Cash

176,450

Dec 3Cash

174,600

Sales (discount) 5,550

Sales (discount) 5,400



Dec 12Accounts receivable330,000


Sales

330,000

Transportation exp 3,000

Sales

210,000

Dec 18Cash

320,100

Sales (discount) 9.900

Dec 5Sales (returns)

25,000




Dec 7Purchases

232,000

Cash

5,000

Freight-in

2,000

Sales

242,000

Cash

2,000

Accounts payable

232,000

Dec 20Representation exp 9,000

Cash

9,000

Dec 9Accounts payable

12,000

Purchases (returns) 12,000

Dec 29 Sales (returns)

18,000


Dec 30Drawing

20,000

Purchases

20,000

Adjusting entry:

1. Salaries expense

73,000

Accrued salaries

73,000

2. Insurance expense

2,000

Prepaid insurance

2,000

3. Depreciation

7,500

Accum. Depn bldg

3,000

Accum. Depn equip

4,500

4. Supplies expense

24,000

Office supplies

24,000

5. Inventory BS

453,000

Inventory IS

453,000

ANSWER:

1. C2. C3. B4. A5. C6. A7. C8. B9. D10. C

11. A12. D13. C14. B15. A

Problem 5

The Righter Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, 2006, trial balances contained the following information:

Nov. 30 Dec. 31

Dr.

Cr. Dr. Cr.

Supplies

1,000

3,000

Prepaid insurance

6,000

4,250

Wages payable

10,000

15,000

Unearned rent revenue

2,000

1,000

The following information also is known:

a. The December income statement (accrual basis) reported P2,000 in supplies expense.

b. No insurance payments were made in December.

c. P10,000 was paid to employees during December for wages.

d. On November 1, 2006, a tenant paid Righter P3,000 in advance rent for the period November through January. Unearned revenue was credited.

Questions

1. What was the cost of supplies purchased during December?

a.P 1,000

b. P 2,000

c. P 3,000

d. P 4,000

2. What was the adjusting entry recorded at the end of December for prepaid insurance?

a.Prepaid insurance

4,250

Insurance expense

4,250

b.Insurance expense

4,250

Prepaid insurance

4,250

c.Insurance expense

1,750

Prepaid insurance

1,750

d.No adjusting entry

3. What was the adjusting entry recorded at the end of December for accrued wages?

a.Wages expense

15,000

Wages payable

15,000

b.Wages expense

10,000

Wages payable

10,000

c.Wages expense

5,000

Wages payable

5,000

d.No adjusting entry

4. What was the amount of rent revenue earned in December?

a.P 1,000

b. P 2,000

c. P 3,000

d. P 4,000

5. What adjusting entry was recorded at the end of December for unearned rent?

a.Unearned rent rev.

3,000

Rent revenue

3,000

b.Rent revenue

2,000

Unearned rent rev.

2,000

c.Unearned rent revenue1,000

Rent revenue

1,000

d.Unearned rent revenue2,000

Rent revenue

2,000

Solution1. D

Supplies on Hand

Beg. Bal 1,000Adjustment 2,000

Purchases 4,000 *

Ending bal. 3,000

* squeezed figure

2. C3. A4. A5. C

Problem 6The trial balance of ANN CO., prior to the closing of its account for the fiscal year ended September 30, 2006 follows:

Cash

P22,500

Accounts receivable

93,600


P 3,190

Note receivable

15,500

Merchandise inventory, 9/30/02

56,890

Furniture and equipment

61,800


18,750

Goodwill

30,000

Accounts payable

53,600

Notes payable

10,000

Capital Stock

100,000

Retained Earnings

55,250

Sales

372,000

Sales return and allowances

4,760

Purchases

215,930

Purchase return and allowances

3,650

Advertising

9,610

Sales salaries

28,850

Commission expense

15,200

Miscellaneous expense

2,990

Rent expense

13,000

Office salaries

19,720

Light and Water

1,500

Insurance expense

1,080

Taxes and licenses

4,780

General expense

16,340

Interest expense

4,120

Interest income

910

Your examination of the companys account has the need for adjustments based on the following items:

a. The cash account included a customers check for P1,500 deposited on September 25, 2006 but returned by the bank on September 29, 2006 for lack of countersignature. No entry was made for the returned check.

b. Unrecorded bank charge for September 2006, P500

c. The allowance for doubtful accounts should be adjusted to 5% of the outstanding accounts receivable balance on September 30, 2006.

d. A physical inventory of merchandise taken at the end of the fiscal year 2006 amounted to P60,120.

e. Goods received on consignment, still unsold costing P2,000 were included in the physical inventory.

f. The merchandise inventory on September 30, were correctly stated.

g. Depreciation of furniture and equipment at 10% annually has not been recognized.

h. Accrued salesmens salaries not recorded P5,000

i. An insurance policy was taken on the inventory and equipment on March 1, 2006 with the annual insurance premium of P1,080 paid on that date.

j. Rent expense account considered of rent for the store and office space for thirteen months starting August 1, 2006.

Based on the aforementioned data, answer the following questions;

1. The adjusting entry on item A is

a. Cash

1,500

Accounts receivable

1,500

b. Accounts payable 1,500

Cash

1,500

c.Accounts receivable

1,500

Cash

1,500

d.No adjustment

2. The adjusting entry on item B is

a. Cash

500

Accounts receivable

500

b. Cash

500

General expenses

500

c.General Expenses

500

Cash

500

d.No adjustment

3.The adjusting entry on item C is

a. Accounts receivable

4,680

Allowance for Doubtful Accounts

4,680

b. Doubtful Accounts

1,565


1,565

c.Allowance for Doubtful Accounts1,490

Doubtful Accounts

1,490

d.Doubtful Accounts

1,490


1,490

4.The adjusting entry on item D is

a. Merchandise Inv.

60,120

Income Summary

60,120

b. Merchandise Inv.

60,120

Purchases

60,120

c.Income summary

60,120

Merchandise inventory

60,120

d.No adjustment

5.The adjusting entry on item E

a. Income summary

2,000

Merchandise Inv.

2,000

b. Sales

2,000

Merchandise Inv.

2,000

c.Merchandise inventory2,000

Income summary

2,000

d.No adjustment

6.The adjusting entry on item F is

a. Merchandise Inv.

56,890

Income summary

56,890

b. Merchandise Inv.

56,890

Purchases

56,890

c.Income summary

56,890

Merchandise inventory

56,890

d.No adjustment

7.The adjusting entry on item G is

a. Depreciation Exp. 6,180

Accumulated Depreciation

6,180

b. Accumulated Depreciation6,180

Furniture and Equipment

6,180

c.Accumulated depreciation6,180

Depreciation expense

6,180

d.No adjustment

8.The adjusting entry on item H is

a. Accrued Salaries Expense 5,000

Sales salaries

5,000

b. Accrued salaries exp. 5,000

Office salaries

5,000

c.Office salaries

5,000

Depreciation expense

5,000

d.Sales salaries

5,000

Accrued salaries expense

5,000

9.The adjusting entry on item I is

a. Insurance Exp. 630

Prepaid insurance

630

b. Prepaid insurance 630

insurance exp.

630

c.Insurance expense

450

Prepaid insurance

450

d.Prepaid insurance

450

Insurance expense

450

10.The adjusting entry on item J is

a. Rent expense

11,000

Prepaid rent

11,000

b. Prepaid rent

2,000

Rent expense

2,000

c.Prepaid rent

11,000

Rent expense

11,000

d.Rent expense

2,000

Prepaid rent

2,000

After making the adjustments compute the following:

11.Cash

a. P24,000

b. P21,000

c. P20,500

d. P20,000

12.Net realizable value of accounts receivable

a. P90,410

b. P90,345

c. P88,920

d. P88,845

13.Merchandise inventory, September 30, 2006

a. P60,120

b. P56,890

c. P62,120

d. P58,120

14.Furniture and Equipment, net of accumulated depreciation

a. P55,620

b. P36,870

c. P36.700

d. 36,890

15.Total assets, September 30, 2006

a. P262,785

b. P250,845

c. P223,850

d. P262,700

16.Cost of goods sold, September 30, 2006

a. P211,050

b. P210,050

c. P212,300

d. P212,280

17.Net income, September 30, 2006 (disregard tax effect)

a. P31,635

b. P31,625

c. P38,935

d. P38,115

18.Prepaid insurance

a. P630

b. P450

c. P1,080

d. P600

19.Prepaid rent

a. P11,000

b. P2,000

c. P13,000

d. P10,000

Answer:

1. C2. C3. B4. A5. A6. D7. A8. D9. D10. C

11. C12. B13. D14. B15. A16. A17. D18. B19. A

Problem 7Selected pre-adjustment account balances and adjusting information of NAPPY COMPANY for the year ended December 31, 2006, are as follows:

Retained earnings, January 1, 2006

440,670

Sales Salaries and Commissions

35,000

Advertising Expense

16,000

Legal Services

2,225

Insurance and Licenses

8,500

Travel Expense Sales Representative

4,560

Depreciation Expense

10,900

Interest Revenue

700

Utilities expense

6,400

Telephone and Postage Expense

1,475

Supplies inventory

2,180

Miscellaneous Selling Expense

2,200

Dividends

33,000

Dividend Revenue

7,150

Interest expense

4,520

Allowance for bad debts (Cr. Balance)

370

Officers Salaries Expense

36,600

Sales

495,200

Sales returns and allowances

11,200

Sales discounts

880

Gain on sales of assets

18,500

Inventory, January 1, 2006

89,700

Inventory, December 31, 2006

20,550

Purchases

173,000

Freight-in

5,525

Accounts Receivable, December 31, 2006

261,000

Shares of common stock outstanding

39,000

Adjusting information:

1. Cost of inventory in the possession of consignee as of December 31, 2006, was not included in the ending inventory balance, P33,600.

2. After preparing an analysis of aged accounts receivable, a decision was made to increase the allowance for bad debts to a percentage of the ending account receivable balance to 3%. Accounts totaling P7,480 were written off as uncollectible during the year.

3. Purchase returns and allowances amounting to 6% of purchases (not including freight-in) were not recorded at year-end.

4. Sales commission for the last day of the year had not been accrued. Total sales for the day, P3,600. Average sales commission as a percent of sales is 3%.

5. No accrual has been made for a freight bill received on January 3, 2007, for goods received on December 29, 2006, P800.

6. An advertising campaign for P1,818 was initiated November 1, 2006. This amount was recorded as prepaid advertising and should be amortized over a 6-month period. No amortization was recorded.

7. Freight charges paid on sold merchandise and not passed to the buyer were netted against sales. Freight charges on sales during 2006 is P4,200.

8. Interest earned but not accrued, P690.

9. Depreciation expense on a new forklift (estimated life is 10 years) purchased for P7,800 on March 1, 2006 had not been recognized. (Assume all equipment will have no salvage value and the SLM is used. Depreciation is calculated to the nearest month.)

10. A real account is debited upon the receipt of supplies. Supplies on hand at year-end is P1,600.

11. Income tax rate (on all items) is 32%.

Questions12. Net Sales is

a. P 499,200

b. P 489,300

c. P 488,500

d. P 487,320

13. Purchases net of returns and allowances is

a. P 165,200

b. P 164,000

c. P 162,620

d. P 161,200

14. Freight-in is

a.P 6,325

b. P 5,200

c. P 5,000

d. P 4,125

15. Inventory 12/31/02 is

a. P 54,700

b. P 54,150

c. P 53,600

d. P 52,200

16. Cost of sales is

a. P 265,440

b. P 205,350

c. P 204,495

d. P 114,795

17. Sales salaries and commission is

a. P 35,108

b. P 35,100

c. P 35,000

d. P 34,700

18. Advertising expense is

a. P 24,696

b. P 16,800

c. P 16,750

d. P 16,606

19. Depreciation expense is

a. P 14,600

b. P 12,500

c. P 12,000

d. P 11,550

20. Supplies expense is

a. P 670

b. P 580

c. P 560

d. P 480

21. Doubtful accounts expense is

a.P 7,500

b. P 7,460

c. P 7,300

d. P 7,200

22. Interest revenue is

a.P 1,540

b. P 1,390

c. P 1,300

d. P 1,290

23. Income tax expense is

a. P 58,554

b. P 54,605

c. P 53,722

d. P 53,693

24. Net income is

a. P 115,586

b. P 115,558

c. P 114,159

d. P 104,445

Solution Per book Adjustments Per Audit

Sales 495,200 4,200 499,400

Sales ret. And allow. (11,200) (11,200)

Sales discount (880) (880)

483,120 487,320

Cost of Sales

Beginning inventory 89,700 89,700

Purchases 173,000 173,000

Purch. Ret and allow. 10,380 (10,380)

Purch. Discount -

Freight-in 5,525 800 6,325

Total Goods Avail. For Sale 268,225 258,645

Ending inventory 20,550 33,600 54,150

247,675 204,495

Gross Profit 235,445 282,825

Interest revenue 700 690 1,390

Dividends revenue 7,150 7,150

Gain on sale of assets 18,500 18,500

Total Revenue 261,795 309,865

Sales Salaries and Commission 35,000 108 35,108

Advertising Expense 16,000 606 16,606

Legal services 2,225 2,225

Insurance and licenses 8,500 8,500

Travel expense 4,560 4,560

Depreciation expense 10,900 650 11,550

Utilities expense 6,400 6,400

Telephone and postage 1,475 1,475

Misc. selling expense 2,200 2,200

Officers' salaries 36,600 36,600

Interest expense 4,520 4,520

Bad debts 7,460 7,460

Transportation expense 4,200 4,200

Supplies expense 580 580

141,984

Income before tax 167,881

Income tax 53,721.92

Net Income 114,159

ANSWER:

1. D2. C3. A4. B5. C 6. A7. D8. D9. B10. B

11. B12. C13. C

Problem 8Presented below are unaudited balances of selected accounts of Baluyot Company as at December 31, 2006 its first year of operation. During the course of your audit of Baluyots books you obtained additional information affecting these accounts:

Debit Credit

Cash

500,000

Accounts receivable

1,300,000

Allowance for bad debts 8,000

Sales (net)

6,750,000

Accounts payable

600,000

Purchases (net)

4,350,000

Cars and trucks

1,200,000

Machinery and equipment 950,000


95,000

Additional information:

a. On December 31, 2006, Baluyot recorded and wrote check payments to creditors amounting to P300,000. A number of checks amounting to P150,000 were mailed on January 3, 2007.

b.On December 28, 2006, Baluyot purchased and received goods amounting to P100,000, terms 2/10, n/30. As a policy, Baluyot records purchases in accounts payable at net amounts. This particular invoice was recorded and paid on January 4, 2007.

c.On December 26, 2006, a supplier authorized Baluyot to return goods shipped and billed at P80,000 on December 3, 2006. The goods were returned on December 30, 2006. The suppliers credit memo was received and recorded on January 5, 2007.

d.Goods amounting to P50,000 were invoiced for the account of Palmes Company and recorded on January 2, 2007 with terms of net 60 days, FOB shipping point. The goods were shipped to Palmes on December 30, 2006.

e.The bank returned on December 29, 2006, a customer check for P5,000 marked No Sufficient Fund but no entry was made.

f.Baluyot estimates that allowance for uncollectible accounts should be one and one-half percent (1%) of the accounts receivable balance as of year-end. No provision has yet been made for 2006.

g.All the cars and trucks were acquired on May 1, 2006 at a total cost of P1,200,000. Baluyot estimates the useful life of the cars and trucks at five-years and depreciates these assets based on 150% declining balance. As a policy, depreciation is computed to the nearest month and rounded-off to the nearest peso. No depreciation has been recorded for cars and trucks as at December 31, 2006.

Questions1.The adjusted amount of Cash is:

a.P 650,000

b. P 645,000

c. P 500,000

d. P 495,000

2.The adjusted amount of Accounts Receivable is:

a.P 1,355,000

b. P 1,350,000c. P 1,305,000d. P 1,300,000

3.The adjusted amount of Sales net is:

a.P 6,840,000

b. P 6,800,000c. P 6,750,000d. P 6,700,000

4.The adjusted amount of Purchases net is:

a.P 4,448,000

b. P 4,368,000c. P 4,350,000d. P 4,270,000

5.The adjusted amount of Bad Debts Expense is:

a.P 36,325

b. P 28,325

c. P 20,325

d. P 12,325

6.The adjusted amount of 2006 Depreciation Expense Machinery and Equipment is:

a.P 95,550

b. P 95,500

c. P 95,417

d. P 95,000

7.The adjusted amount of Accounts payable is:

a.P 818,000

b. P 800,000

c. P 768,000

d. P 600,000

Solution

(a)Cash

150,000

Accounts payable

150,000

(b)Purchases

98,000

Accounts payable

98,000

(c)Accounts payable 80,000

Purchase returns

80,000

(d)Accounts receivable 50,000

Sales

50,000

(e)Accounts receivable 5,000

Cash

5,000

(f)Bad debts

28,325


(1,355,000 x 1% = P 20,325 + P8,000 debit balance of Allowance)

ANSWER:

1. B2. A3. B4. B5. B6. D7. C

Problem 9The trial balance of TRANQUILAN CORPORATION, prior to the closing of is accounts for the fiscal year-ended September 30, 2006 follows:

DEBIT

CREDIT

Cash

225,000

Accounts receivable

936,000


31,900

Notes receivable

155,000

Merchandise inventory, Sept. 30, 2005

568,900

Furniture and Equipment

618,000

Acc. Depreciation Furniture & Equipment

187,500

Goodwill

300,000

Accounts payable

536,000

Notes payable

100,000

Capital stock

1,000,000

Retained earnings

552,500

Sales

3,728,200

Sales returns and allowances

47,600

Purchases

2,159,300

Purchase returns and allowances

36,500

Advertising

96,100

Sales salaries

288,500

Commission expense

152,000

Miscellaneous selling expenses

29,900

Rent expense

130,000

Office salaries

197,200

Light and water

15,000

Insurance expense

10,800

Taxes and licenses

47,800

Miscellaneous general expenses

163,400

Interest expense

41,200

Interest income

________ 9,100

6,181,700 6,181,700Your examination of the companys accounts had indicated the need for adjustments based on the following information:

1. The Cash account include a customers check for P15,000 deposited on September 25, 2006, but returned by the bank on September 29, 2006 for lack of countersignature. No entry was made by the company for the return of the check or for its redeposit on October 5, 2006.

2.The Allowance for Doubtful Accounts should be adjusted to 5% of the customers outstanding balances on September 30, 2006.

3.A physical inventory taken of the merchandise stock as of the end of the fiscal year amounted to P601,200.

4.A purchase of merchandise FOB shipping point, for which goods costing P40,000 were still in transit on September 30, 2006 was neither taken as a liability nor included in the inventory on that date.

5.Goods received on consignment, still unsold, were included in the inventory at the agreed selling price of P24,000.

6.The merchandise inventory at September 30, 2005 was correctly stated.

7.On July 1, 2006, equipment acquired on October 1, 2003 with a book value of P32,000 on September 30, 2005 was sold for P35,000 in cash. The sales proceeds were credited to the Furniture and Equipment account.

8.Depreciation for the fiscal year 2005-2006 has not been recorded. Depreciation rate being used is 10% annually.

9.An insurance policy was taken on the inventory and equipment on April 1, 2006 with the annual premium of P10,800 paid on that date.

10.Rent expense account consisted of rent paid for stock and office space for thirteen (13) months ending October 31, 2006.

11.The 120-day Note Payable of P100,000 bearing interest of 12% was discounted at the bank on September 1, 2006.

12.The Goodwill account was set-up by a credit to Retained Earnings under a resolution of the Board of Directors.

Questions1.Cash for the fiscal year-ended September 30, 2006 is:

a.P 195,000

b. P 210,000

c. P 225,000

d. P 240,000

2.Accounts receivable for the fiscal year-ended September 30, 2006 is:

a. P 906,000

b. P 921,000

c. P 951,000

d. P 936,000

3.Allowance for doubtful accounts for the fiscal year-ended September 30, 2006 is:

a. P 15,650

b. P 46,800

c. P 45,300

d. P 47,550

4.Merchandise inventory for the fiscal year-ended September 30, 2006 is:

a.P 617,200

b. P 641,200

c. P 677,200

d. P 561,200

5.Book value of the Furniture and Equipment for the fiscal year-ended September 30, 2006 is:

a. P 360,200

b. P 372,200

c. P 375,200

d. P 489,800

6.Goodwill for the fiscal year-ended September 30, 2006 is:

a.P 300,000

b. P 292,500

c. P 285,000

d. P 0

7.Accounts payable for the fiscal year-ended September 30, 2006 is:

a.P 496,000

b. P 536,000

c. P 552,000

d. P 576,000

8.Net income for the fiscal year-ended September 30, 2006 is:

a. P 326,750

b. P 332,750

c. P 346,750

d. P 347,750

9.Retained earnings for the fiscal year-ended September 30, 2006 is:

a. P 252,500

b. P 600,250

c. P 885,250

d. P 900,250

10.Insurance expense for the fiscal year-ended September 30, 2006 is:

a.P 5,400

b. P 9,200

c. P 10,800

d. P 16,200

Solution

1.Accounts Receivable15,000

Cash15,000

2.Doubtful Accounts Expense15,650

Allowance for doubtful accounts15,650

{5% x (936,000 + 15,000) = 47,550 - 31,900}

3.Merchandise Inventory601,200

Income Summary601,200

4.Purchases40,000

Merchandise Inventory40,000

Accounts Payable40,000

Income Summary40,000

5.Income Summary24,000


6.Income Summary568,900


7.Accumulated Depreciation Fur. & Eqpt.11,000

Gain on sale of equipment6,000

Furniture & Equipment5,000

Cost (P32,000 / 80%) P40,000

Less acc. depr. to date of sale11,000

(P40,000 x 10% x 2 + (40,000 x 10% x 9/12)

Book value P29,000

Selling price 35,000

Gain on sale of equipment P 6,000

8.Depreciation expense64,300

Acc. Depr. Fur. & Equip64,300

Depr. for year ended 9.30.03

On eqpt sold (40,000 x 10% x 9/12) P 3,000

On remaining eqpt. (613,000 x 10%) 61,300

P64,300

9.Prepaid Insurance5,400

Insurance expense5,400

10.Prepaid rent10,000

Rent expense10,000

11.Discount on notes payable3,000

Interest expense3,000

Total discount

(100,000 x 12% x 120/360)P4,000

Less portion applicable to year ended 9.30.1,000

Unamortized, 9.30.P3,000

12.Retained Earnings300,000

Goodwill300,000

TRANQUILAN CORPORATION

WORKING TRIAL BALANCE

September 30, 2003

Trial BalanceAdjustmentsIncome StatementBalance Sheet

DebitCreditDebitCreditDebitCreditDebitCredit

Cash225,00015,000210,000

AR936,00015,000951,000

All. for DA31,90015,65047,550

NR155,000155,000

MI568,900568,900617,200617,200*

F/E618,0005,000613,000

AD F/E.187,50011,00064,300240,800

Goodwill300,000300,000 -0-

AP536,00040,000576,000

NP100,000100,000

CS1,000,0001,000,000

RE552,500300,000252,500

Sales3,728,2003,728,200

Sales R& A47,60047,600

Purchases2,159,30040,0002,199,300

Purch R&A.36,50036,500

Adv96,10096,100

Sales sal288,500288,500

Com. exp152,000152,000

Misc.sell29,90029,900

Rent exp130,00010,000120,000

Office sal197,200197,200

Light & W15,00015,000

Ins. exp10,8005,4005,400

Tax & licen47,80047,800

Misc. Ge163,400163,400

Int. exp41,2003,00038,200

Int inc9,1009,100

6,181,7006,181,700

DA 15,65015,650

Gain 6,0006,000

Depren 64,30064,300

Pre ins5,4005,400

Pre rent10,00010,000

Disc on NP 3,0003,000

464,350464,3504,049,250 4,397,0002,564,6002,216,850

NET INC347,750347,750

4,397,0004,397,0002,564,6002,564,600

ANSWER:

1. B2. C3. D4. A5. B6. D7. D8. D9. B10. A

Problem 10Your audit client, Tortor Corporation, presents to you the unadjusted trial balance shown below, which was drawn from its general ledger as at June 30, 2006, the end of its fiscal year.

TORTOR CORPORATION

Unadjusted Trial Balance

June 30, 2006

Cash

721,800

Trading Securities

200,000

Accounts receivable

2,128,000

Inventory, June 30, 2005

5,194,300

Invest. in associates (Equity Method) 1,200,000

Equipment

1,621,000

Prepaid expenses

116,200

Goodwill

500,000

Accounts payable

2,426,400

Accrued expenses

152,600

Accrued interest payable

226,000


36,100

Allowance for depreciation

450,700

Loans payable

2,500,000

Capital stock

3,000,000

Additional paid-in capital

260,000

Retained earnings

1,808,800

Sales

21,602,000

Interest income

140,000

Purchases

13,928,000

Salaries and wages

3,250,000

Rent, light and water

750,000

Advertising

400,000

Supplies

300,000

Taxes

250,000

Miscellaneous expenses

1,793,300

Interest expense

250,000 _________

32,602,600 32,602,600

Your examination of the accounts disclosed the following information:

1. The cash account included an NSF check returned by the bank on June 30, 2006, but recorded as a cash reduction in July, 2006, P44,000, and a voucher for suppliers paid in cash on June 27, 2006 but not entered in the books, P26,500.

2. Marketable Securities which cost P200,000 have a market value of P210,000. Long-Term Investments have a market value of P1,250,000 as at balance sheet date.

3. The company has been providing an allowance for bad debts at 5% of the outstanding customers balances. Uncollectible accounts were charged off against the allowance during the year.

4. A physical inventory taken by management personnel of the merchandise stock at June 30, 2006 totaled P5,751,900. You were unable to observe the inventory-taking as your services were engaged only on July 15, 2006. Due to the condition of the accounting records and internal accounting controls, you were also unable to satisfy yourself as to the inventory.

5. Equipment no longer needed (cost, P150,000; accumulated depreciation, P45,000) was sold for P100,000 cash on June 29, 2006; the cash proceeds were credited to the Equipment account. Equipment is depreciated at 10% a year on a monthly basis computed at year-end.

6. Prepaid expenses included insurance premium of P30,000 paid on April 1, 2006 on a one-year fire insurance policy.

7. Salaries unpaid as of June 30, 2006, P13,000 were not taken up under accrued expenses.

8. The Goodwill account was set-up with a credit to Retained Earnings on the basis of a resolution of the Board of Directors.

9. A 10% cash dividend declared on June 15, 2006, payable on July 31, 2006, has not been recorded.

10. The Board of Directors approved a resolution on June 25, 2006 appropriating out of Retained Earnings the amount of P300,000 to meet possible future losses on inventories.

Questions1.Cash for the fiscal year-ended June 30, 2006 is:

a. P 633,800

b. P 651,300

c. P 677,800

d. P 695,300

2.Marketable securities for the fiscal year-ended June 30, 2006 is:

a. P 0

b. P 190,000

c. P 200,000

d. P 210,000

3.Accounts receivable for the fiscal year-ended June 30, 2006 is:

a.P 2,172,000

b. P 2,128,000c. P 2,100,000d. P 2,084,000

4. Allowance for doubtful accounts for the fiscal year-ended June 30, 2006 is:

a. P 72,500

b. P 104,200

c. P 106,400

d. P 108,600

5. Inventory for the fiscal year-ended June 30, 2006 is:

a.P 5,751,900

c. P 4,636,700

b. P 5,194,300

d. Cannot be determined.

6.Equipment for the fiscal year-ended June 30, 2006 is:

a. P 1,671,000

b. P 1,571,000c. P 1,621,000d. P 1,566,000

7.Accumulated depreciation for the fiscal year-ended June 30, 2006 is:

a. P 390,700

b. P 552,800

c. P 562,800

d. P 622,800

8.Retained earnings before net income for the fiscal year-ended June 30, 2006 is:

a.P 708,800

b. P 1,008,800c. P 1,308,800d. P 1,508,000

9.Retained earnings after net income for the fiscal year-ended June 30, 2006 is:

a. P 2,639,700

b. P 2,405,500c. P 1,840,500d. P 1,805,500

10.The auditor should issue a(an):

a.Unqualified Opinion

c. Qualified Opinion

b.Unqualified Opinion with explanatory paragraphd. Adverse Opinion

Solution

TORTOR CORPORATION

WORKING TRIAL BALANCE

June 30, 2006

Trial BalanceAdjustmentsIncome StatementBalance Sheet

DebitCreditDebitCreditDebitCreditDebitCredit

Cash721,80070,500651,300

TS200,00010,000210,000

AR2,128,00044,0002,172,000

Inven.5,194,3005,194,3005,751,9005,751,900

Invest. Ass.1,200,0001,200,000

Equip.1,621,00050,0001,571,000

Prepaid exp.116,2007,500108,700

Goodwill500,000500,000------------

AP2,426,4002,426,400

Acc. Exp.152,60013,000165,600

Acc. int. pay226,000226,000

Allow. For BD36,10072,500108,600

Acc. for depr.450,70060,000172,100562,800

Loans payable2,500,0002,500,000

Capital stock3,000,0003,000,000

APIC260,000260,000

RE1,808,800500,000

300,000

300,000708,800

Sales21,602,00021,602,000

Int. inc.140,000140,000

Purch.13,928,00013,928,000

Sal. & wages3,250,00013,0003,263,000

Rent, light 750,000750,000

Advertising400,000400,000

Supplies300,00026,500326,500

Taxes250,000250,000

Mis. exp.1,793,3001,793,300

Int. exp.250,000250,000

32,602,60032,602,600

Holding gain 10,00010,000

BD expense72,50072,500

Gain on sale10,00010,000

Dep exp172,100172,100

Ins. expense7,5007,500

Div. payable300,000300,000

RE-appro.300,000300,000

1,505,6001,505,60026,407,20027,513,90011,654,90010,558,200

NET INC.1,106,7001,106,700

27,513,90027,513,90011,664,90011,664,900

1.Accounts receivable44,000

Supplies26,500

Cash70,500

2.Trading Securities (Valuation Allow.)10,000

Holding gain - TS10,000

3.Bad debts expense72,500

Allowance for bad debts72,500

5% x (2,128,000 + 44,000) = 108,600 - 36,100

4.To be considered in the preparation of the audit report. Failure to observe the inventory taking results in a limitation in the scope of examination. Depending on the materiality of the amount of Inventory in relation to other accounts, the auditor will either issue a qualified opinion or disclaimer of opinion.

5.Allowance for depreciation60,000

Equipment50,000

Gain on sale of equipment10,000

Cost P150,000

Less acc. depr. (45,000+15,000) 60,000

Book value P 90,000

Selling price 100,000

Gain P 10,000

Depreciation expense172,100

Allowance for depreciation172,100

10% x (1,621,000 + 100,000)

6.Insurance expense7,500

Prepaid expenses(30,000 x 3/12)7,500

7.Salaries and wages13,000

Accrued expenses13,000

8.Retained earnings500,000

Goodwill500,000


Dividends payable (10% x P3,000,000)300,000


RE Appropriated for Possible Losses in Inv.300,000

ANSWER:

1. B2. C3. A4. D5. A6. B7. C8. A9. D10. C

Problem 11Erasmo Corporation was incorporated on December 1, 2005, and began operations one week later. Jesus is a nonpublic enterprise. Before closing the books for the fiscal year ended November 30, 2006, Erasmo Corporations controller prepared the following financial statements:

Balance Sheet

November 30, 2006ASSETS

Current Assets:

Cash

150,000.00

Marketable securities, at cost

60,000.00

Accounts receivable

450,000.00


(59,000.00)

Inventories

430,000.00

Prepaid insurance

15,000.00

Total current assets

1,046,000.00

Property, plant and equipment

426,000.00


(40,000.00)

Research and developments

120,000.00

Total assets

1,552,000.00

LIABILITIES & STOCKHOLDERS EQUITY

Current Liabilities

Accounts payable & accrued expenses

592,000.00

Income tax payable

224,000.00

Total current liabilities

816,000.00

Stockholders Equity

Common stock, P10 par value

400,000.00

Retained earnings

336,000.00

Total stockholders Equity

736,000.00

Total liabilities & Stockholders Equity

1,552,000.00

Statement of Income

For the year ended November 30, 2006Net sales

2,950,000.00Cost & expenses:

Cost of sales

1,670,000.00

Selling and Administrative

650,000.00

Depreciation

40,000.00

Research and Development

30,000.00

2,390,000.00

Income before income taxes

560,000.00

Provision for income taxes

224,000.00Net income

336,000.00Erasmo is in the process of negotiating a loan for expansion purposes and the bank has requested audited financial statements. During the course of the audit, the following additional information was obtained:

1. The investment portfolio consist of short-term investments in marketable equity securities with a total market valuation of P55,000 as of November 30, 2006.

2. Based on aging of the accounts receivable as of November 30, 2006, it was estimated that P36,000 of the receivables will be uncollectible. There were no Bad Debt write-offs during the year.

3. Inventories at November 30, 2006, did not include work in process inventory costing P12,000 sent to an outside processor on November 29, 2006.

4. A P3,000 insurance premium paid on November 30, 2006, on a policy expiring one year later was charged insurance expense.

5. On June 1, 2006, a machine purchased for P24,000 was charged to repairs and maintenance. Erasmo depreciates machines of this type on the straight-line method over a five year life, with no salvage value, for financial and tax purposes.

6. Research and development costs of P150,000 were incurred in the development of a patent which Erasmo expects to be granted during the fiscal year ending November 30, 2003. Erasmo initiated a five year amortization of the P150,000 total cost during the fiscal year ended November 30, 2006.

7. During November 2006, a competitor company filed suit against Erasmo for patent infringement claiming P200,000 in damages. Erasmo Corporations legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the courts award to the plaintiff is P50,000.

8. The 40% effective tax rate was determined to be appropriate for calculating the provision for income taxes for the fiscal year ended November 30, 2006. Ignore computation of deferred income taxes.

Questions 1. In the income statement for the year ended November 30, 2006, Erasmo should report for the marketable securities

a. A realized loss of P5,000.

c. A realized gain of P5,000

b. An unrealized loss of P5,000.

d. An unrealized gain of P5,000

2. In the November 30, 2006, balance sheet, Erasmo should report in respect of the investment portfolio

Marketable Securities

Valuation Allowance

a. P55,000

P -0-

b. P55,000

P5,000

c. P60,000

P -0-

d. P60,000

P5,000

3. In the November 30, 2006, balance sheet, Erasmo should report the allowance for doubtful accounts at

a. P23,000

b. P36,000

c. P59,000

d. P69,000

4. Bad debts expense for the year ended November 30, 2006, is

a. P -0-

b. P23,000

c. P36,000

d. P59,000

5. Inventories at November 30, 2006, should be reported at

a. P418,000

b. P430,000

c. P442,000 d.P450,000

6. Cost of goods sold for the year ended November 30, 2006, reported as

a. P1,643,000 b. P1,645,000 c. P1,658,000

d. P1,670,00

7. Prepaid insurance at November 30, 2006, should be reported at

a. P -0-

b. P12,000

c.P15,000

d. P18,000

8. At November 30, 2006, property, plant and equipment should be reported at

a. P402,000

b. P426,000

c. P447,500

d. P450,000

9. Depreciation expense for the year ended November 30, 2006, should be

reported at

a. P16,000

b. P37,600

c. P40,000

d. P42,400

10. At November 30, 2006, accumulated depreciation should be reported at

a. P37,600

b. P40,000

c. P42,400

d. P44,800

11. In the November 30, 2006 balance sheet, research and development costs

should be reported at

a. P -0-

b. P120,000

c. P135,000

d. P150,000

12. Research and development expense for the year ended November 30, 2006 is

a. P -0-

b. P15,000

c. P30,000

d. P150,000

13. In the November 30, 2006 balance sheet, Erasmo should report an estimated

liability from lawsuit at

a. P -0-

b. P50,000

c. P100,000

d. P200,000

14. For the year ended November 30, 2006, which one of the following adjustments

increases the Unadjusted income, before income taxes of P560,000?

a. Pension expense

b. Work in process inventory at outside processor

c. Estimated loss from lawsuit

d. Research and development cost

15. For the year ended November 30, 2006, which of the following adjustments

decreases the unadjusted income, before income taxes, of P560,000?

a. Recognition of prepaid insurance

b. Reduction in allowance for doubtful accounts

c. Depreciation on machine purchased June 1,2006d. Recognition of research and development cost

Solution1.Unrealized holding loss5,000

Valuation allowance

5,000

2.Allowance for bad debts23,000

S & A Expense (Bad debts)23,000

3.Inventory

12,000

Cost of sales

12,000

4.Prepaid insurance

3,000

S & A Expense

3,000

5.Property and equipment24,000

S & A Expense

24,000

Depreciation

2,400

Accum. Depreciation

2,400

6.RD cost IS

120,000

RD cost BS

120,000

7.Est. loss on damages

50,000

Est. liab on damages

50,000

ANSWER:

1. B2. D3. B4. C5. C6. C7. D8. D9. D10. C

11. A12. D13. B14. B15. C

Problem 12In connection with your audit of the Eddie Vic Farms Corp., the accountant prepared the following balance sheet:

Eddie Vic Farms Corp.

Balance sheet

December 31, 2006

Assets

Cash

P 493,000

Marketable securities

630,000

Accounts receivable

540,000

Inventories

1,002,000

Total current assets

2,665,000

Land, buildings, and equipment

2,904,000

Total assets

P5,569,000

Liabilities and Stockholders Equity

Accounts payable

P 684,840

Estimated losses from future crop failures

670,000

Salaries payable

300,000

Total current liabilities

1,654,840

10% Bonds payable (due in 10 years)

1,050,000

Capital stock

900,000

Retained earnings

1,964,160

Total liabilities and stockholders equity P 5,569,000

Additional information:

a. Cash is held in a checking account and a savings account with balances of P130,700 and P362,300, respectively. The cash in the savings account will be used to support operations in the event of a crop failure.

b. The marketable securities represents the cost of treasury bills with a total market value of P600,000 at year-end.

c. A loan to the president for P360,000 that is to be repaid in quarterly installments of P30,000 is included in Accounts Receivable. The balance of accounts receivable are considered to be 95 percent collectible.

d. Inventories include:

Finished products

780,000

Supplies

39,000

Storage buildings (net of P60,960 depreciation)

183,000

Total

1,002,000

e.Land, buildings, and equipment includes 5 tractors that were purchased near the end of the year for P720,000 (shown net of a P600,000, 5-year loan used to buy the tractors). The balance of the account consists of land that was purchased for P2,400,000 and buildings that were purchased for P510,000 (shown net of depreciation of P126,000).

f.Included in Accounts Payable are P210,000 of deposits to suppliers for delivery of goods in February of the next year.

g.The company has 180,000 shares of P5 par common stock issued and outstanding. The common stock was originally sold for P7 per share, and the premium was included in Retained Earnings.

h.After reading a PAGASA report, the president believes that next year will be a bad crop year due to prolonged El Nino phenomenon and estimates the company will lose about P670,000. An appropriation of Retained Earnings has been made for this amount.

Questions

Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2006:

1. Cash

a.P 130,700

b. P 231,600

c. P 362,300

d. P 493,000

2. Accounts receivable

a.P 171,000

b. P 513,000

c. P 531,000

d. P 540,000

3. Current assets

a.P 2,443,000

b. P 2,233,000c. P 2,080,700d. P 2,050,700

4. Land, Buildings, and Equipment

a.P 3,873,960

b. P 3,687,000c. P 3,657,960d. P 3,087,000

5. Noncurrent assets

a.P 4,409,300

b. P 4,289,300c. P 4,047,000d. P 3,927,000

6. Total assets

a.P 6,642,300

b. P 6,490,000c. P 6,340,000d. P5,977,700

7. Current liabilities

a.P 1,194,840

b. P 1,654,840c. P 984,840

d. P 774,840

8. Total liabilities

a.P 3,514,840

b. P 2,844,840c. P 2,634,840d. P 2,424,840

9. Total retained earnings

a.P 2,265,160

b. P 2,235,160c. P 1,604,160d. P 1,595,160

10. Total stockholders equity

a.P 3,495,160

b. P 3,797,460c. P 3,429,160d. P 2,462,860

Solutiona.Cash restricted

362,300

Cash

362,300

b.Holding loss

30,000

Allowance for holding loss

30,000

c.Other receivable noncurrent360,000

Accounts receivable

360,000

Other receivable current120,000

Other receivable noncurrent120,000

Bad debts

9,000


9,000

(180,000 x 5%)

d.Supplies

39,000

Land, building & equipment183,000

Inventories

222,000

e.Land, building & equipment600,000

Long-term liability

600,000

f.Advances to suppliers

210,000

Accounts payable

210,000

g.OE: Retained earnings670,000

Est. liability

670,000

CE: Retained earnings

670,000

Retained earnings appropriated670,000

Adj: Estimated liability670,000

Retained earnings

670,000

Answer:

1. A2. A3. D4. B5. B

6. C7. A8. B9. B10. A

Problem 13M. Senajon hired an attorney to help her start SENAJON REPAIR SERVICE CORPORATION. On March 1, M. Senajon deposited P11,500 cash in bank account in the name of the corporation in exchange for 1,150 shares of P10 par value common stock. When he paid the attorneys bill of P700, the attorney advised her to hire an accountant to keep his records. M. Senajon was so busy that it was March 31 before she asked you to straighten out his records. Your task is to develop the financial statements on the March transactions.

After investing in her business and paying her attorney, M. Senajon borrowed P5,000 from the bank. She later paid P260, including interest of P60, on this loan. She also purchased a used pickup truck in the companys name, paying P2,500 down and financing P7,400. The first payment on the truck is due April 15. M. Senajon then rented an office and paid three months rent P900, in advance. Credit purchases of office equipment of P800 and repair tools of P500 must be paid by April 10.

In March,SENAJON REPAIR SERVICE CORPORATION completed repairs of P1,300, of which P400 were cash transactions. Of the credit transactions, P300 were collected during March. Wages of P450 were paid to employees. On March 31, the company received a P75 bill for the March utilities expense and a P50 check from a customer for work to be completed in April.

Questions

1. The Cash balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P12,390

b. P12,315

c. P12,440

d. P11,500

2. The Accounts Receivable balance of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P900

b. P800

c. P700

d. P600

3. The Total Current Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P13,715

b. P13,565

c. P13,515

d. P13,640

4. The Total Non-current assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P11,900

b. P11,888

c. P11,388

d. P11,200

5. The Total Assets of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P25,528

b. P25,415

c. P24,840

d. P24,915

6. The Total Stockholders Equity of SENAJON REPAIR SEVICE CORPORATION at March 31 is:

a. P11,215

b. P11,903

c. P(85)

d. P(285)

7. The Total Liability of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P16,025

b. P14,725

c. P13,625

d. P6,225

8. The Total Liability and Stockholders Equity of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P25,528

b. P25,415

c. P24,840

d. P24,915

9. The Total Operating expenses and other expenses of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P1,585

b. P1,035

c. P1,015

d. P89710. The Net Income of SENAJON REPAIR SERVICE CORPORATION at March 31 is:

a. P415

b. P403

c. P(85)

d. P(285)

Solution

Cash

11,500

Common stock

11,500

Pre-operating cost700

Cash

700

Cash

5,000

Notes payable

5,000

Interest expense

60

Notes payable

200

Cash

260

Equipment

9,900

Cash

2,500

Notes payable

7,400

Rent expense

300

Prepaid rent

600

Cash

900

Equipment

800

AP others

800

Tools

500

Accrued expenses500

Cash

400


Revenue

1,300

Cash

300


Wages

450

Cash

450

Utilities

75

Accrued expenses75

Cash

50

Advances from customer50

Answer:

1. C2. D3. D4. D5. C6. A7. C8. C9. A10. D

Problem 14OMANDAC CORPORATION has just completed its third year of operations, December 31, 2006. The newly selected president was amazed, to say the least, when told that the companys books have never been in balance. In fact, he has learned that they are P14,800 out of balance. Consequently, he has decided to ask an independent CPA to get things straightened out. You are the lucky CPA! While getting an overview of the situation you learn that the bookkeeper journalize and posts all of the daily transactions, but the adjusting and closing entries are entered directly into the ledger accounts. A worksheet is not used. After recording the adjusting entries, the bookkeeper prepares an adjusted trial balance, which is then used to prepare the financial statements.

At your request the bookkeeper prepared the following post-closing trial balance following his usual procedures:

OMANDAC CORPORATION

Post-closing Trial Balance

December 31, 2006

Cash

17,800

Accounts receivable

55,000

Note receivable

6,000

Merchandise inventory (periodic system) 120,000

Prepaid insurance

2,400

Equipment

240,000

Land (future site)

40,000

Accounts payable

20,000

Income tax payable

10,000

Mortgage payable

100,000

Common stock, par P10 (20,000 shares outstanding) 320,000

Dividends declared and paid

4,000

Retained earnings

50,000

To balance

14,800_______

Total

500,000 500,000After spending considerable time digging into the records and files of the company, you discovered the following:

a. Estimates of bad debts expense that total P5,000 have been credited directly to Accounts Receivable.

b.Accrued interest expense of P4,000 was recorded, but the credit was omitted.

b. Depreciation expense, on a straight-line basis (no residual value), is P30,000 per year. Depreciation for 2001 and 2002 was credited directly to the asset account.

c. The 2006 ending inventory of P140,000 was not recorded; the beginning inventory was P120,000.

d. Prepaid insurance of P2,400 was for two full years, 2006 and 2007.

e. Depreciation was not recorded in 2006.

f. Accounts payable of P2,000 were paid, but the debit was not recorded.

g. The common stock account needs scrutiny.

Questions

1.Cash at December 31, 2006 is:

a. P 11,800

b. P 13,800

c. P 15,800

d. P 17,800

2.Accounts receivable at December 31, 2006 is:

a.P 65,000

b. P 60,000

c. P 55,000

d. P 50,000

3.Notes receivable at December 31, 2006 is:

a. P 10,000

b. P 8,000

c. P 6,000

d. P 0

4. Merchandise inventory at December 31, 2006 is:

a. P 260,000

b. P 140,000

c. P 120,000

d. P 110,000

5. Prepaid insurance at December 31, 2006 is:

a. P 2,400

b. P 1,800

c. P 1,200

d. P 0

6. Equipment at December 31, 2006 is:

a. P 210,000

b. P 240,000

c. P 270,000

d. P 300,000

7.Land (future site) at December 31, 2006 is:

a.P 40,000

b. P 30,000

c. P 20,000

d. P 0

8.Accounts payable at December 31, 2006 is:

a.P 22,000

b. P 20,000

c. P 18,000

d. P 16,000

9.Income taxes payable at December 31, 2006 is:

a.P 38,016

b. P 28,016

c. P 10,384

d. P 10,000

10. Mortgage payable at December 31, 2006 is:

a.P 100,000

b. P 95,000

c. P 90,000

d. P 80,000

11. Common stock at December 31, 2006 is:

a. P 320,000

b. P 200,000

c. P 180,000

d. P 120,000

25. Retained earnings at December 31, 2006 is:

a. P 50,000

b. P 35,200

c. P 18,000

d. P 24,000

Solution

Cash 17,800



Note receivable 6,000

Merchandise inventory 140,000

Prepaid insurance 1,200

Equipment 300,000

Accumulated depreciation 90,000

Land 40,000


Interest payable 4,000

Income tax payable 10,000

Mortgage payable 100,000

Common stock 200,000

APIC 120,000

Retained earnings ________ 18,000 squeezed figure

565,000 565,000

Answer1. D2. C3. C4. B5. C6. A7. A8. C9. D10. A

11. B12. C

Problem 15Your new audit client, Capiz Company, prepared the trial balance below as of December 31, 2006. The company started its operations on January 1, 2005. Your examination resulted in the necessity of applying the adjusting entries indicated in the additional data below.

Capiz Company

TRIAL BALANCE

December 31, 2006

Debits

Credits

Cash

P510,000

Accounts receivable, net allowance of P20,000 600,000

Inventories, December 31, 2005

669,000

Land

660,000

Buildings

990,000

Accumulated depreciation, building

P19,800

Machinery

444,000

Accumulated depreciation, machinery

45,000

Sinking fund assets

75,000

Bond discounts

75,000

Treasury stock, common

105,000

Accounts payable

567,000

Accrued bond interest

11,250

First mortgage, 6% sinking fund bonds

679,500

Common stock

1,500,000

Premium on common stock

150,000

Stock donation

180,000

Retained earnings, December 31, 2005

222,450

Net sales

2,625,000

Purchases

850,500

Salaries and wages

507,000

Factory operating expenses

364,500

Administrative expenses

105,000

Bond interest

45,000 _________

P6,000,000 P6,000,000

Additional data are as follows:

(1) The 1,500,000 common stock was issued at a 10 percent premium to the owners of the land and buildings on December 31, 2004, the date of organization. Stock with a par value of P180,000 was donated back by the vendors. The following entry was made:

(Debit) Treasury stock

P180,000

(Credit) Stock donation

P180,000

The stock was donated because the proceeds from its subsequent sale were to be considered as an allowance on the purchase price of land and buildings in proportion to their values as first recorded. The treasury stock was sold in 2006 for P75,000, which was credited to treasury Stock.

(2) On December 31, 2006, a machine costing P15,000 when the business started was removed. The machine had been depreciated at 10 percent during the first year. The only entry made was one crediting the Machinery account with its sales price of P6,000.

(3) Depreciation is to be provided on the straight-line basis, as follows: buildings, 2 percent of cost; machinery, 10 percent of cost. Ignore salvage values.

(4) The first mortgage, 6% sinking fund bonds, par value P750,000 will mature in ten years from January 1, 2005, interest payable April 1 and October 1. The bonds were sold on January 1, 2005, at 90; the discount is to be amortized over the life of the bonds on straight-line basis.

(5) A sinking fund is built up on the straight-line basis, with a provision that each in

chapter 1 caselette - accounting cycle

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