CHAPTER 3

Exercises

1. a . Relevance and materiality prescribe that information must be pertinent and useful to statement users. The waste basket, brooms, etc. should be immediately expensed as the amounts are not material to warrant recognition as assets.

b. Understandability and disclosure prescribe that information must be presented in such a way that users will be informed properly and completely so as to be able to come up with a correct judgment. Details of the revenues and expenses should be disclosed either within the income statement or as footnotes.

c. Materiality and Accrual dictate that this be capitalized and recognized as assetd. Timeliness e. Understandabilityf. Comparabilityg. Cost and Going Concern

2. a. Only business transactions under the Entity Principle should be recognized as assets of the business.b. Unit of measure should be consistent expressed in Philippine peso.c. Time Period assumption & IAS1 prescribes preparation of FS annually.d. Entity prescribes separate financial statements. Or if combined, use segment reporting.e. Going Concern requires that since these possess economic future benefits, then this should be

capitalized. f. Accrual is violated. Accrual relates to the time assets, liabilities, revenues and expenses must be

recognized and recorded..

3. A) Liabilities P 50,000 D). Liabilities P300,000B) Assets P800,000 E) Assets P4,000,000, Owner’s Equity P3,200,000C) Owner’s Equity P750,000

4. A. (250/300) x 100 = 83% D. (200/500) x 100 = 40%B. (350/800) x 100 = 44% E. (3,200/4,000) x 100 = 80%C. (750/900) x 100 = 83%

Company A and C are the most solvent at 83%. D is least solvent.

5. A. 200/250 = 80% D. 200/200 = 100%B. 200/350 = 57% E. 200/3,200 = 6.25%C. 200/750 = 27%

Company D has the highest ROE.

6. a. Liabilities P1,020,000b. Owner’s Equity P 600,000c. Assets P2,000,000d. Owner’s Equity P1,500,000 – P650,000= P 850,000

7. Financial Position:Cash P 7,000 Accounts Payable P 14,000Accounts Receivable 40,000 Note Payable 150,000Car 180,000 Orange, Capital 183,000Equipment 120,000 ________

347,000 P 347,000Capital, Beginning P 50,000Net Income 133,000Capital, End P183,000

8. a. He made no additional investment or withdrawal.

Cash, Beginning P 50,000Cash Sales (133,000 – 40,000) 93,000Payment of Notes Payable (150,000)Cash, End P 7,000

b. Income or profit caused the change in capital.

9. Cash 120,000 Accounts Payable 360,000Accounts Receivable 280,000 Loans Payable 440,000Furniture & Fixtures 156,000 Total Liabilities P800,000Equipment 500,000Car 892,000Supplies 10,000Total Assets P1,958,000

Net Worth (1,958,000-800,000) P1,158,000

10. No change in total assets, liabilities and owner’s equity.

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11. Assets and liabilities will increase by P50,000 but no effect on owner’s equity.

12. A L OEa) +500,000 NA +500,000b) NA NA NAc) NA NA NAd) -350,000

+350,000NA NA

e) +125,000 +125,000 NAf) -62,500 - 62,500 NAg) -5,000 -5,000

13. a) Transaction b) car is not for the business and c) no exchange of value yet. ENTITY PRINCIPLE b) Transactions e) and f) following entity principle since this is a business liability. c) Yes - entity principle since the cash used belongs to the business and the owner took it for personal use.

14. a)Transactions

a. Owner invested cash of P50,000.b. Purchased supplies for cash P5,000.c. Bought furniture on account P18,000.d. Paid account in cash P8,000.e. Owner withdrew P2,000 cash.f. Issued a note for an account due of P10,000.

b) Assets = Liabilities + Owner’s EquityCash 35,000 Notes Payable 10,000 Vega, Capital P50,000Supplies 5,000 Vega, Drawing ( 2,000)Furniture 18,000 ______ _____

P58,000 = 10,000 + P48,000

15. a. Zobel invested cash of P500,000 and electronic equipment of P1,500,000.b. Purchased supplies on account P15,000.c. Purchased furniture and fixtures, P25,000. Terms: P5,000 down, balance with a note.d. Additional investment in office equipment for P80,000.e. Total cash paid P15,000 for the note P10,000 and for the account P5,000.f. Zobel withdrew supplies worth P1,000 for personal use.

Assets P2,099,000 less Liabilities of P20,000 = Owner’s Equity of P2,079,000.

16. Date Cash Furn Equipt Supplies Leasehold Imp Dep for Rent Notes Pay De Jesus Captl1) 350,000 350,000

10) (10,000) 10,00015) (15,000) 15,000

(8,000) 8,000(45,000) 45,000

20) (1,500) 1,50025) (125,000) 250,000 125,000

145,500 8,000 295,000 1,500 15,000 10,000 125,000 P350,000 Assets P475,000 Liabilities P125,000 Owner's Equity P350,000

Playnet.ComStatement of Financial Position

March 31, 2012

Cash P145,500 Notes Payable 125,000Supplies 1,500 De Jesus, Capital 350,000Leasehold Improvement 15,000Rent Deposit 10,000Equipment 295,000Furniture & Fixtures 8,000 Total Liabilities & _______Total Assets P475,000 Owner's Equity P475,000

17. A s s e t s = Liabilities + Owner’s Equity

Feb. Cash EquipmentArt

SuppliesOffice

SuppliesFurn. & Fix.

AccountsPayable

Notes Payable Kalaw, Capital

05 150,000 150,00009 ( 15,000) 15,00016 ( 35,000) 105,000 70,00020 6,000 6,00022 ( 1,500) 1,50025 8,000 8,000

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28 ( 35,000) ______ ______ _____ _____ (70,000) 35,000 ______P 63,500 P111,000 P15,000 P 1,500 P8,000 14,000 P35,000 P150,000

a) P150,000 using the Entity Conceptb) P 6,000 using the Cost Principlec) Straight & True Advertising

Statement of Financial PositionFebruary 28, 2010

Cash P 63,500 Accounts Payable 14,000Supplies 16,500 Notes Payable 35,000Equipment 111,000 Kalaw, Capital 150,000Furniture & Fixtures 8,000 Total Liabilities & _______Total Assets P199,000 Owner's Equity P199,000

18. a)

Date Cash Supplies LotFurn. & Fix. Bldg. Equipment

Accounts Payable

Loan Payable

Valdez, Capital

Jan. 4 1,500,000 300,000 1,800,0008 ( 915,000) 15,000 900,000

10 80,000 80,00014 (1,000) ( 1,000)15 2,500,000 2,500,00017 ( 40,000) (40,000)30 (1,500,000) 1,500,000

1,545,000 14,000 300,000 80,000 1,500,000 900,000 40,000 2,500,000 1,799,000

b) June 10 – Entity Concept to recognize assets of business

June 14 – Entity Concept to recognize recovery of capital

June 30 – Cost Principle to recognize value of constructed clinic only although loan is worth P2,500,000

c) Jo’s Health SpaStatement of Financial Position

June 30, 2011

Cash P1,545,000 Accounts Payable P 40,000Supplies 14,000 Loan Payable 2,500,000Lot 300,000Furniture & Fixtures 80,000Building 1,500,000 Valdez, Capital 1,799,000Equipment 900,000 Total Liabilities & ________Total Assets P4,339,000 Owner's Equity P 4,339,000

19 a) Assets Liabilities Owner’s Equity

Apr Cash Supplies Equipment Furn. & Fix CarNotes

PayableAccounts Payable

Narvaez, Capital

Narvaez, Drawing

1 300,000 300,0002 ( 50,000) 100,000 50,000

10 300,000 300,00015 (100,000) 100,00020 ( 25,000) 25,00023 ( 75,000) 150,000 75,00025 ( 500) (500)30 ( 10,000) _____ ______ ______ ______ (10,000) ______ _______ ____

P 40,0000 24,500 300,000 200,000 150,000 40,000 75,000 P600,000 (500)

b) Cavite Day Care CenterStatement of Financial Position

April 30, 2012Assets Liabilities & Owner’s Equity

Cash P 40,000) Notes Payable P 40,000Supplies 24,500 Accounts Payable 75,000Equipment 300,000 Narvaez, Capital 599,500Furniture & Fixtures 200,000Car 150,000 ______Total P 714,500 Total P 714,500

Problems1. a. Substance Over Form f. Accrual

b. Cost g. Accrual/Substance Over Formc. Objectivity/Reliabilityd Recognition/Accrual/Going Concerne. Unit of Measure

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2. A. Assets = Liabilities + Owner’s Equity6,150,000 2,650,000 3,500,0001,500,000 1,500,000( 750,000) 750,000( 750,000) ( 750,000) ________6,900,000 - 3,400,000 = 3,500,000

B. Assets = Liabilities + Owner’s Equity2,200,000 1,050,000 1,150,000 700,000 300,000 400,0002,900,000 1,350,000 1,550,000

C. Assets = Liabilities + Owner’s EquityBeg. 1,380,000 660,000 720,000During 800,000 (100,000) 900,000 End 2,180,000 = 560,000 + 1,620,000

3.Cash Supplies

RentDeposit Equipment

Furn. & Fixtures

Notes Payable

Accounts Payable

Eow, Capital

May1 500,000 500,0002 (150,000) 150,0003 68,500 68,5004 ( 45,000) 245,000 200,0008 ( 15,000) 15,00010 ( 25,000) 50,000 25,00019 ( 500) ( 500)25 ( 25,000) (25,000)30 (100,000) (100,.000)

139,500 15,000 150,000 313,500 50,000 0 100,000 568,000

Claire’s Step and SwayStatement of Financial Position

May 31, 2012Assets Liabilities & Owner’s Equity

Cash P139,500 Accounts Payable P 100,000Supplies 15,000Equipment 313,500 Eow, Capital 568,000Furniture & Fixtures 50,000 1Rent Deposit 150,000 ______Total P668,000 Total P668,000

4.March Cash Equipment

Lease Right

Furniture & Fixture

Loans Payable

Notes Payable

Ocampo, Capital

1 500,000 500,0003 250,000 250,0009 ( 60,000) 200,000 140,000

10 ( 10,000) ( 10,000)15 250,000 250,00020 (200,000) 200,00025 (130,000) (130,000)

110,000 200,000 500,000 190,000 250,000 0 750,000

Green Golf LaneStatement of Financial Position

March 31, 2012Assets Liabilities & Owner’s Equity

Cash P 110,000 Loans Payable P 250,000Equipment 200,000 Ocampo, Capital 750,00Furniture & Fixtures 190,000Lease Right 500,000Total P1,000,000 Total P1,000,000

5. Bersoza Playhouse

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Statement of Financial PositionSeptember 30, 2011

Cash P16,900 Accounts Payable 19,000Accounts Receivable 7,200 Notes Payable 20,000Props & Costumes 50,000 Salaries Payable 29,200

68,200Helen Bersoza, Capital 5,900

Total Assets P74,100 Total Liabilities & Capital P74,100The business is unstable with liabilities of P68,200 vs. cash of P16,900 only plus receivable of P7,200.

Debt ratio is already very high (68,200/74,100) x 100 = 92%

1. P5,000 is personal and should be excluded.2. P125,000 is a violation of the accrual rule. It cannot be recognized immediately.3. This should be recognized in full with a corresponding liability for the unpaid portion.4. The P270,000 are expired costs to be recognized as expenses.5. The automobile should not be reflected in the books since it is for personal use.6. Personal liability should be excluded.

CASE STUDIES

1. Cash 5,000Furniture & Fixtures 30,000Equipment 60,000Supplies 5,000Car 500,000

P600,000The Business Entity Concept Principle was applied in recording the assets of the Eatery.

2. Cash Investment 50,000 Less amount to be used as working fund 10,000 Cash balance to be used to acquire assets 40,000 Assets to be acquired: Furniture & Fixtures 30,000 Equipment 60,000 Supplies 5,000 95,000

Amount to be borrowed P55,000

Cesar EateryStatement of Financial Position

------, 2012Cash P10,000 Loan Payable 55,000Furniture & Fixtures 30,000Equipment 60,000Supplies 5,000Car 500,000 Cesar Vasquez, Capital 550,000

P605,000 Total Liabilities & Capital P605,000

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