Cash and Accrual Basis, Single Entry System

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DLSU Accountancy Department

Practical Accounting One

AUDIT OF CASH BASIS, ACCRUAL BASIS, SINGLE ENTRY, ACCOUNTING CHANGES AND CORRECTION OF ERROR

I. Cash Basis Accounting

Problem 1. The following transactions affecting the accounts receivable of WON Inc. took place during the year ended

December 31,2010:

Sales P5,900,000

Sales discount 126,000

Cash received from cash customers 2,100,000

Accounts receivable written off as worthless 50,000 Credit memo issued to credit customers for sales returns 250,000 Cash refunds given to cash customers for sales returns 20,000 Recoveries on accounts receivable written off as uncollectible as

uncollectible in prior periods (not included in cash amount stated above) 80,000 The following balances were taken from the January 1,2010 Statement of Financial Position:

Accounts Receivable 950,000 Allow. For Bad Debts 100,000

The entity provided for bad debt expense by crediting allowance for bad debts in the amount of 70,000 for the year. The net realizable value of Accounts Receivable on December 31,2010 is P1,100,000.

What is the cash basis revenue for the year ended December 31,2010?

Problem 2. The following information appears in ION Inc.’s records for the year ended December 31,2010:

Inventory, January 1 P 650,000 Purchase returns 80,000 Freight In 60,000

Sales 3,400,000

Sales returns 30,000 Accounts Payable, Jan. 1 300,000 Accounts Payable, Dec. 31 200,000

On December 31,2010, a physical inventory revealed that the ending inventory was only P571,000. The gross profit on sales has remained constant at 30% in recent years.

What is the cash basis cost of sales for the year ended December 31,2010?

Problem 3. The following information appears in NEO Inc.’s records for the year ended December 31,2010:

Inventory, January 1 P 520,000 Purchase returns 60,000

Freight In 100,000

Sales 4,900,000

Sales returns 400,000

Accounts Payable, Jan. 1 2,000,000 Accounts Pay. Dec. 31 2,500,000

On December 31,2010 a physical inventory revealed that the ending inventory was only P200,000. The gross profit based on cost has remained at 50% in recent years.

What is the cash basis cost of sales?

Problem 4. On December 31,2011, EMO Inc. presented the following information: 1/1/2011 12/31/2011

Raw Materials 300,000 600,000 Goods in Process 1,000,000 1,300,000 Finished Goods 1,400,000 1,000,000 Accounts Payable 2,200,000 2,000,000 Data for 2010 were:

Sales 3,000,000

Freight In 1,000,000

Purchase Return 100,000

Direct Labor 100,000

Manufacturing Overhead 50% of Direct Labor Average Gross Profit Rate 30% based on sales

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Problem 5. The financial statements of ZEN Inc. included the following:

1/1/2010 12/31/2010

Accounts Receivable at Net Realizable Value 1,200,000 1,640,000

Allowance for bad debts 60,000 ?

Sales 8,000,000

Sales Discount 100,000

Sales Return 200,000

The cash collections included a recovery of P100,000 from a customer whose account had been written off as worthless in 2009. During 2010, it was necessary to recognize bad debt expense of P100,000 and write off worthless customer’s account of P30,000. On December 1,2010, a customer settled an account by issuing a 12%, six-month note for P400,000.

What is the cash basis sales revenue?

Problem 6. WAY Inc. kept its records on accrual basis accounting. At the end of 2010, the accountant prepared the

following accrual basis income statement:

Revenue 1,910,000

Expenses 809,000 The following data are also available:

2009 2010

Accrued revenue 91,000 73,000 Unearned revenue 66,000 108,000 Accrued expenses 49,000 65,000 Prepaid expenses 46,000 56,000

What is the cash basis net income based on the foregoing data? Problem 7. The following information are provided by NY Inc for 2010:

December 31 January 1

Accounts Receivable 200,000 300,000

Trade Notes Receivable 150,000 100,000

Accounts payable 60,000 160,000

Trade notes payable 200,000 150,000

The Accrual Basis Accounting Records for 2010 provided the following:

Gross Sales 2,420,000

Cash Sales 500,000

Sales Discount 40,000

Sales returns on credit sales 50,000

Gross Purchases 1,960,000

Cash purchases 130,000

Purchase return on credit purchase 60,000 Purchase discounts 20,000

What is the cash basis sales revenue?

8. Using the same data provided in Number 7, What is the cash basis cost of sales?

Problem 9. The following balances are provided by TB Inc.:

12/31/2010 12/31/2011

Trade Accounts Receivable 2,000,000 3,000,000 Trade Note Receivable 3,000,000 1,000,000 Advances from Customers 2,000,000 3,000,000

The total sales revenue for 2011 is P20,000,000. The cash sales for 2011 is P5,000,000.

What is the cash basis sales revenue?

Problem 10. The following information are provided by LA Inc. concerning its interest expense: 12/31/2010 12/31/2011

Prepaid Interest 100,000 150,000

Accrued Interest Payable 250,000 100,000 Discount on Bonds Payable 300,000 150,000 Premium on Bonds Payable 250,000 50,000 The following data are also provided:

a. During 2011, LA extinguished some Bonds Payable originally issued at a discount with a face value of P1,000,000 through asset swap. The book value of the land given up is P1,100,000 and the fair value is P1,200,000. The extinguishment of Bonds Payable resulted to a loss of P150,000.

b. During 2011, LA extinguished some Bonds Payable originally issued at a premium with a face value of P2,000,000 by payment of P2,000,000. The extinguishment resulted to a gain of P100,000.

c. The total interest expense for the year is P2,000,000.

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Problem 11. The following information are provided concerning the taxes of TR Inc. for 2011: 12/31/2010 12/31/2011

Prepaid Taxes 1,000,000 2,000,000 Income Tax Payable 3,000,000 5,000,000 Deferred Tax Asset 5,000,000 1,000,000 Deferred Tax Liability 4,000,000 2,000,000 Current Tax Expense 10,000,000

Deferred Tax Expense 5,000,000

What is the income taxes paid during 2011?

Problem 12. The following information are provided concerning the interest income of AT Inc. for 2011: 12/31/2010 12/31/2011

Unearned Interest Income 200,000 100,000 Accrued Interest Income 400,000 500,000 Discount on Bonds Rec. 500,000 300,000 Premium on Bonds Rec. 400,000 100,000 The following data are also provided:

a. During 2011, AT sold the Bonds Rec. with a face value of P1,000,000 and which was originally purchased at a discount. The net proceeds of the sale was P950,000. Gain on derecognition of Bonds Receivable was P100,000. b. During 2011, AT sold the Bonds Rec. with a face value of P1,000,000 and which was originally purchased at a premium. The net proceeds of the sale was P1,100,000. Loss on derecognition of Bonds Receivable was P50,000.

c. The total interest revenue for the year was P3,000,000.

What is the cash basis interest income for the year ended December 31, 2011?

Problem 13. The following information are provided concerning the operating expenses of TY Inc.: 12/31/2010 12/31/2011

Prepaid Expenses 1,000,000 3,000,000 Accrued Expenses 2,000,000 2,500,000 Total Operating Expenses 10,000,000 Acc. Depreciation 3,000,000 4,000,000 Acc. Amortization 2,000,000 2,500,000 The following notes are also provided:

a. Non-cash expenses such as amortization expense and depreciation expense are included in the total operating expenses.

b. During the year, TY sold equipment with a cost of P2,000,000. The net proceeds from the sale of equipment is P2,100,000 and the gain on disposal is P500,000.

c. During the year, TY sold patent with a cost of P1,000,000. The net proceeds from the sale of patent is P600,000 and the loss on disposal is P200,000.

What is the cash basis operating expenses for the year ended December 31, 2011?

Problem 14. The following information are provided regarding the Retained Earnings of AIM Inc.: 12/31/2010 12/31/2011

Retained Earnings 2,500,000 2,000,000 Cash Dividends Payable 3,500,000 1,000,000 The following notes are also provided:

1. On January 1,2011, AIM changed its inventory costing method from FIFO to Weighted Average. The FIFO cost on January 1, 2011 is P1,000,000 while the Weighted Average Cost is P2,000,000. The tax rate is 30%.

2. On June 1,2011, AIM reissued treasury shares with a total cost of P1,000,000 in the amount of P500,000. There was no share premium arising from treasury shares transaction at the time of re-issuance of treasury shares. 3. On December 31,2011, AIM declared cash dividends and property dividends. The book value of property

dividends at that date is P400,000 while the fair value is P600,000. 4. The adjusted net income for 2011 was P1,500,000.

What is the amount of dividends paid in cash for 2011?

Problem 15. The income statement of PRTC Inc. for 2010 included the following items:

Interest income P2,101,000 Salaries expense 1,650,000 Insurance expense 277,200

The following balances have been excerpted from PRTC Inc.’s Statement of Financial Position:

12/31/2009 12/31/2010

Accrued interest receivable P165,000 P200,200 Accrued salaries payable 92,400 195,800

Prepaid insurance 33,000 24,200

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__________1. The cash received for interest during 2010 __________2. The cash paid for salaries during 2010

__________3. The cash paid for insurance premiums during 2010

II. Accrual Basis and Single Entry

Problem 16. You were able to gather the following in connection with your audit of the CPAR Inc. for the year ended

December 31,2010:

1/1/2010 12/31/2010

Accounts receivable 6,400,000 4,000,000 Unpaid merchandise invoices ? 2,621,000

Accrued wages 85,000 125,000

Advertising supplies inventory 35,000 75,000 Accrued advertising 14,250 40,000 Prepaid insurance 25,000 -Unexpired insurance - 41,000 During the year:

Amount collected from customers 10,000,000

Total payments to suppliers of merchandise 13,618,000 Total payments to suppliers of merchandise of prior year 4,632,000

Wages paid 3,050,000

Advertising paid which includes P40,000 applicable in 2011 300,000

Insurance premium paid 125,000

Required: Based on the above and the result of your audit, determine the following:

__________1. Net sales for 2010 __________2. Net purchases for 2010 __________3. Wages expense for 2010 __________4. Advertising expense for 2010 __________5. Insurance expense for 2010

Problem 17. The income statement of PRTC Inc. for 2010 included the following items:

Interest income P2,101,000 Salaries expense 1,650,000 Insurance expense 277,200

The following balances have been excerpted from PRTC Inc.’s Statement of Financial Position:

12/31/2009 12/31/2010

Accrued interest receivable P165,000 P200,200 Accrued salaries payable 92,400 195,800

Prepaid insurance 33,000 24,200

Required: Based on the above and the result of your audit, determine the following:

__________1. The cash received for interest during 2010 __________2. The cash paid for salaries during 2010

__________3. The cash paid for insurance premiums during 2010

Problem 18. RESA company paid or collected during 2010 the following items:

Insurance premiums paid P 462,000 Interest collected 927,000

Salaries paid 4,056,000

The following balances have been excerpted from RESA’s Statement of Financial Position: 12/31/2009 12/31/2010

Prepaid Insurance P 45,000 P 36,000

Interest Receivable 87,000 111,000

Salaries payable 318,000 369,000

Required: Based on the above and the result of your audit, determine the following:

__________1. The insurance expense on the income statement for 2010 __________2. The interest income on the income statement for 2010 __________3. The salary expense on the income statement for 2010

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Problem 19. CRC-ACE & Associates maintains its records on the cash basis. You have been engaged to convert its cash

basis income statement to the accrual basis. The cash basis income statement, along with additional information follows: CRC-ACE & Associates

Income statement

For the year ended December 31,2010

Cash receipts from customers 2,800,000

Cash payments: Wages 1,200,000 Taxes 520,000 Insurance 320,000 Interest 200,000 2,240,000 Net Profit 560,000 Additional information: 12/31/2009 12/31/2010 Accounts receivable 240,000 400,000 Wages payable 160,000 120,000 Taxes payable 152,000 112,000 Prepaid insurance 32,000 64,000 Accumulated depreciation 600,000 760,000 Interest payable 72,000 24,000

* No plant assets were sold during 2010.

Required: Determine the following under the accrual basis of accounting for the year ended 2010:

__________1. Service revenue __________2. Wages expense __________3. Taxes expense __________4. Insurance expense __________5. Depreciation expense __________6. Interest expense __________7. Profit before income tax

Problem 20. ADMU Co. provided the following data regarding its financial position: January 1,2013

Current Asset P2,000,000 Current Liability 1,000,000 Noncurrent Asset 5,000,000 Noncurrent Liability 3,000,000

The following changes occurred during the year:

1. Current Asset increased to P3,000,000. 2. Current Liability increased by P500,000. 3. Noncurrent Asset decreased by P1,000,000. 4. Noncurrent Liability decreased to P1,500,000.

5. ADMU issued 10,000 ordinary shares with par value of P10 at P20/share. 6. Cash dividends of P300,000 were declared during the year.

Note: No other transactions affect the equity except those stated.

__________Required: What is the profit/(loss) for the year ended December 31,2013?

Problem 21. UST Co. provided the following changes regarding its assets and liabilities: Increase/(Decrease)

Cash P2,000,000

Accounts payable 1,000,000

Accounts receivable 3,000,000 Allowance for bad debts 500,000

Inventory (800,000)

Property, plant and equipment (600,000) Accumulated depreciation 200,000 Bonds payable 4,000,000 Accrued expenses (3,000,000) Bonds receivable 5,000,000 Unamortized discount on BP (100,000) Unamortized premium on BR (200,000)

The following changes occurred during the year:

1. ADMU issued 20,000 ordinary shares with par value of P10 at P25/share. 2. Cash dividends of P800,000 were declared during the year.

Note: No other transactions affect the equity except those stated.

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III. CORRECTION OF ERRORS

Problem 22. Careless Inc. is a very negligent company as regards to its inventory, accruals and deferrals. The following

errors and unadjusted balances are provided by the company:

Account Error 12/31/2010 12/31/2011 12/31/2012

Prepaid Asset under (over) 20,000 (10,000) (30,000)

Unearned Revenue

under(over) 30,000 (40,000) 50,000

Accrued Expense under (over) (40,000) 50,000 (60,000) Accrued Receivable under(over) (80,000) (60,000) 70,000 Merchandise Inventory under(over) 50,000 (100,000) 150,000

Unadjusted Net Income 1,000,000 1,500,000 2,000,000

Unadjusted Retained

Earnings 1,500,000 2,000,000 2,500,000

Note: No correcting entries were made for these errors during the three year period.

Required: Based on the result of your audit, determine the following (Ignore Income Tax Implications):

____________1. Adjusted Net Income for 2010

____________2. Adjusted Balance of Retained Earnings on December 31,2010 ____________3. Adjusted Net Income for 2011

____________4. Adjusted Balance of Retained Earnings on December 31,2011 ____________5. Adjusted Net Income for 2012

____________6. Adjusted Balance of Retained Earnings on December 31,2012

Problem 23. Negligent Inc. is a very careless company. The following errors are discovered during the audit: 12/31/2011 12/31/2012

Prepaid Asset under (over) P 200,000 P (100,000)

Unearned Revenue under (over) 100,000 (300,000) Accrued Revenue under (over) (400,000) 600,000 Accrued Expense under (over) (500,000) 300,000 Merchandise Inventory, Beginning (200,000) ?

Merchandise Inventory, End (400,000) 500,000

Acquired Depreciable Asset during the year 2,000,000 1,000,000

Note: Negligent Inc. fully expensed the purchased depreciable asset during the year of acquisition. Based on the result of

the audit, it was determined that the depreciation rate of the depreciable asset is 10% on year of acquisition and 20% on subsequent years. No correcting entries were made for these errors during the three year period.

Required: Based on the result of your audit, determine the following (Ignore Income Tax Implications):

____________1. Understatement or (overstatement) of 2011 Net Income

____________2. Understatement or (overstatement) of December 31,2011 Retained Earnings ____________3. Understatement or (overstatement) of December 31,2011 Working Capital ____________4. Understatement or (overstatement) of 2012 Net Income

____________5. Understatement or (overstatement) of December 31,2012 Retained Earnings ____________6. Understatement or (overstatement) of December 31,2012 Working Capital

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