REVIEW OF THE ACCOUNTING PROCESS

STRAIGHT PROBLEMS
PROBLEM 1
On January 1, 2014, Edz opened Scents Company, a perfume shop with an initial of P650, 000.
Scents Company borrowed a total of P270, 000 to finance its initial operation. In early June, Edz
issued a personal check for P40, 000 in payment for one of the Scents Company’s loan. In mid
December, Edz took merchandise costing P35, 000 which were marked to sell for P50, 000 for
personal use. Sales and other income in 2014 amounted to P885, 000 while total expenses totaled
P575, 000. Scents Company’s liabilities decreased to P185, 000.
Required:
The asset of Scents Company at December 31, 2014 is P1, 150,000.

PROBLEM 2
Barney Company was incorporate on January 1, 2014 issuing 20,000, P5 ordinary shares for a
total consideration of P360, 000 and borrowed funds totaling P220,000. Operations in 2014
resulted in an excess of income over expenses of P210, 000. Additional 10,000 ordinary shares
were issued for a total cash consideration of P190, 000. On December 1, 2014, Barney Company
declared cash dividends of P100,000 for holders on record as of December 31,2014 to be
distributed in January 15, 2015.
At December 31, 2014 total assets increased by P370,000.
Required:
The liabilities of Barney Company at December 31, 2014 is P290, 000.

PROBLEM 3
Rocky Company’s account balances during the year showed the following changes:
Current assets P250,000 Decrease
Non-current assets 510,000 Increase
Current liabilities 140,000 Increase
Non-current liabilities 350,000 Decrease
Ordinary shares 110,000 Increase
Premium on ordinary shares 40,000 Increase
There were no other changes in the retained earnings account other than a P120, 000 dividend
payment and the current year’s net income.

Required:
Rocky Company’s current year’s net income (loss) is P440, 000.

PROBLEM 4
The following data were obtained from an analysis of the accounts of Super Distributor
Company as of March 31, 2014, in the process of preparing its annual financial statements. Super
records current transactions in nominal accounts.
(a) Prepaid insurance has a balance of P14,100. Super has the following policies in force.
Policy Date Term Cost Coverage
A 1/1/14 2 years P3, 600 Shop equipment
B 12/1/13 6 months 1,800 Delivery equipment
C 7/1/13 3 years 12,000 Buildings

(b) Unearned Subscription Income has a balance of P56, 250. The following subscriptions
were collected in the current year. There are no other unexpired subscriptions.
Effective Date Amount Term
July 1, 2013 P27, 000 1 year
October 1, 2013 22,200 1 year
January 1, 2014 28,800 1 year
April 1, 2014 20,700 1 year

(c) Interest Payable has a balance P825. Super owes a 10%, 90-day note for P45,000 dated
March 1, 2014.

(d) Supplies has a balance of P2, 190. An inventory of supplies revealed a total of P1,410.

(e) Salaries Payable has a balance of P9, 750. The payroll for the 5-day workweek ended
April 3 totaled P11,250.
Required:
Prepare the necessary adjusting entries as of March 31, 2014.
(a) Insurance Expense 1,350
Prepaid Insurance 1,350

(b) Income 3,900

Unearned Subscription Income 3,900

(c) Interest Payable 450

Interest Expense 450

(d) Salaries Payable 5,250

Salaries Expense 5,250

PROBLEM 5
1. Salaries Payable:

Balance beginning of the year P42,680

Balance end of the year 34,760

Salaries are paid biweekly. All salary payments during the year were debited to Salaries
Expense.

2. Interest Receivable at 1/1/14 was P1, 000. During 2014 cash received from debtors for
interest on outstanding note receivable amounted to P5, 000. The 2014 income statement
showed interest income in the amount of P4, 900.

3. Prepaid Insurance:
Balance beginning of year P5,600
Balance end of year 6,400

During the year, an additional business insurance policy was purchased. A 2-year
premium of P2,500 was paid and charged to Prepaid Insurance.

4. Unearned Rent:
Balance beginning of year P11,000
Balance end of year 15,000

Warehouse quarterly rent received in advance is P18, 000. During the year, equipment
was rented to another company at an annual rent of P9, 000. The quarterly rent payments
were credited to Rent Income; the annual equipment rental was credited to Unearned
Rent.
 5. Accumulated Depreciation:

Balance beginning of year P85,200

Balance end of year 88,700

During the year, a depreciable asset that cost P7, 500 and had a carrying value of P1,600
was sold for P2,400. The disposal of the asset was recorded correctly.

6. Allowance for doubtful accounts on 1/1/14 was P50, 000. The balance in the allowance
account on 12/31/14 after making the annual adjusting entry was P60, 000 and during
2014 bad debts written off amounted to P30,000.

Required:
For each situation, reconstruct the adjusting entry that was made to arrive at the ending
balance. Assume statements and adjusting entries are prepared only once each year

1. Salaries Payable 7,920

Salaries Expense 7,920

2. Interest Income 100

Interest Receivable 100

3. Insurance Expense 1,700

Prepaid Insurance 1,700

4. Unearned rent 5,000

Rent income 5,000

5. Depreciation expense 9,400

Accumulated Depreciation 9,400

6. Doubtful Account Expense 40,000

Allowance for Doubtful Accounts 40,000

PROBLEM 6
Presented below is the December 31 trial balance of On Line Studios.
On Line Studios
Trial Balance
December 31, 2014
Debit Credit
Cash P14,800
Account Receivable 33,600
Allow. For Doubtful Accounts P 2,160
Inventory, January 1 62,400
Furniture and Equipment 67,200
Accumulated Depreciation-Furniture and Equipment 26,880
Prepaid Insurance 4,080
Notes Payable 22,400
Owner, Capital 72,000
Sales 480,000
Purchases 320,000
Sales Salaries Expense 40,000
Advertising Expense 5,360
Administrative Salaries Expense 52,000
Office Expense 4,000
P603, 440 P603, 440

Required:
1. Prepare adjusting entries for the following items.
a. Adjust the allowance for Doubtful Accounts to 8 percent of the accounts receivable.

-Doubtful Account Expense 528

Allowance for Doubtful Accounts 528

b. Furniture and equipment is depreciated at 20 percent per year.

-Doubtful Expense 13,440

Accumulated Depreciation 13,440

c. Insurance expired during the year, P2,040

-Insurance Expense 2,040

Prepaid Insurance 2,040

d. Interest accrued on note payable, P 2, 688

-Interest Expense 2,688

Interest Payable 2,688

e. Sales salaries earned but not paid, P 1,920

-Salaries Expense 1,920

Salaries Payable 1,920

f. Advertising paid in advance, P560

-Prepaid advertising 560

 Advertising expense 560

g. Office supplies on hand, P1, 200, charged to Office Expense when purchased.

-Office Supplies 1,200

Office Supplies Expense 1,200

2. Prepare closing entries for On Line after the above adjusting entries have been made.
Additional information shows the inventory on December 31 was P64,000.

-Income Summary 62,400

Inventory, beg. 62,400

Inventory, end 64,000

Income Summary 64,000

PROBLEM 7

When the accounts of Daniel Barenboim Inc. are examined, the adjusting data listed below are
uncovered on December 31, the end of an annual fiscal period.

1. The prepaid insurance account shows a debit of $5,280, representing the cost of a 2-year
fire insurance policy dated August 1 of the current year.
2. On November 1, Rent Receivable was credited for $1,800 representing revenue from a
sub rental for a 3-month period beginning on that date.
3. Purchase of advertising materials for $800 during the year was recorded in the
advertising Expense account. On December 31, advertising materials of $290 are on
hand.
4. Interest of $770 ahs accrued on notes payable.

Required: Prepare the following in general journal form

(a) The adjusting entry for each item
(b) The reversing entry for each item where appropriate.

ADJUSTING REVERSING

1. Insurance Expense 1,100 no reversing entry

Prepaid insurance 1,100

2. Rent Revenue 600 Unearned rent 600

Unearned rent 600 Rent Revenue 600

3. Advertising 290 Advertising Expense 290

Advertising Expense 290 Advertising 290
 4. Interest Expense 770 Interest payable 770
Interest payable 770 Interest Expense 770

PROBLEM 8
On September 1, 2013, AY Company receives a P700,000, 12%, 4-year note. Principal of
P175,000 plus interest is collected every September. At December 31, 2013 the following
adjusting entry was made to take up accrued interest.
Interest receivable 28,000
Interest income 28,000
AY Company records all collections using nominal accounts.
Required:
1. Assuming AY Company does not prepare reversing entries, what adjusting entry should
be made on December 31,2014 to take up accrued interest?

Interest Income 7,000

Interest Receivable 7,000

2. Assuming AY Company prepares reversing entries, what adjusting entry should be made
on December 31,2014 to take up accrued interest?

PROBLEM 9
The trial balance of Blue Traveler Corporation does not balance.
BLUES TRAVELER CORPORATION
TRIAL BALANCE
APRIL 30, 2014
DEBIT CREDIT
Cash P 5,912
Accounts Receivable 5,240
Supplies 2,967
Equipment 6,100
Accounts Payable P 7,044
 Common Stock 8,000
Retained Earnings 2,000
Service Revenue 5,200
Office Expense 4,320
P 24,539 P 22, 244

An examination of the ledger shows these errors.

1. Cash received from a customer on account was recorded (both debit and credit) as P1,380
instead of P1,830.
2. The purchase on account of a computer costing P3,200 was recorded as a debit to Office
Expense and a credit to Accounts Payable.
3. Services were performed on account for a client, P2,250, for which Accounts Receivable
was debited P2,250 and Service Revenue was credited P225.
4. A payment of P95 for telephone charge was entered as a debit to Office Expense and a
debit to Cash.
5. The Service Revenue account was totaled at P5,200 instead of P5,280.

Required:
From this information prepare a corrected trial balance.

PROBLEM 10
The trial balance of Watteau Co. does not balance.

WATTEAU CO.
TRIAL BALANCE
JUNE 30, 2014

DEBIT CREDIT
Cash P 2,870
Accounts receivable P 3,231
Supplies 800
Equipment 3,800
Accounts Payable 2,666
Unearned Service revenue 1,200
Common Stock 6,000
Retained Earnings 3,000
Service Revenue 2,380
Salaries and Wages Expense 3,400
Office Expense 940
P 13, 371 P16,916

Each of the listed accounts should have a normal balance per the general ledger. An examination
of the ledger and journal reveals the following errors:

1. Cash received form a customer on account was debited for P570, and Accounts
Receivable was credited for the same amount. The actual collection was for P750.
2. The purchase of a computer printer on account of P500 was recorded as to Supplies for
P500 and a credit to Accounts Payable for P500.
3. Services were performed on account for a client for P890. Accounts Receivable was
debited for P890 and service revenue was credited for P89.
4. A payment of P65 for telephone charges was recorded as a debit to Office Expense for
P65 and a debit to Cash for P65.
5. When the Unearned Service revenue account was reviewed, it was found that service
revenue amounting to P325 was performed prior to June 30 (related to Unearned Service
Revenue). A debit posting to Salaries and Wages Expense of P670 was omitted.
6. A payment on account for P206 was credited to Cash for P206 and credited to Accounts
Payable for P260.
7. A dividend of P575 was debited to Salaries and Wages Expense for P575 and credited to
Cash for P575.

Required:
Prepare a correct trial balance. (Note: it may be necessary to add one or more accounts to the
trial balance.)

PROBLEM 11
Jill Accardo, M.D., maintains the accounting records of Accardo Clinic on a cash basis. During
2014, Dr. Accardo collected $142,600 from her patients and paid $55,470 in expenses. At
January 1, 2014, and December 31, 2014, she had accounts receivable, unearned service revenue,
accrued expenses, and prepaid expenses as follows.(all long-lived assets are rented.)
January 1, 2014 December 31,2014
Accounts Receivable $9,250 $15,927
Unearned Service Revenue 2,840 4,111
Accrued expenses 3,435 2,108
Prepaid Expenses 1,917 3,232

Required:
Compute the 2014 Net Income using:
a. Cash basis $87,130
b. Accrual basis $95,178

MULTIPLE CHOICE QLUESTIONS

1. The beginning-of-the-year total equity for a firm was P40, 000. During the year, the firm
issued ordinary shares for a total proceeds of P20, 000, earned P20, 000 net income, and
paid P5,000 in cash dividends. If ending total liabilities are P100, 000 what is the ending
total assets?

A. P165,000 C. P175,000
B. P 45,000 D. P100,000

2. MOON Company purchased equipment on November 1, 2009, by giving its supplier a

12-month, 9 percent note with a face value of P48,000. The December 31, 2009,
adjusting entry is

A. Debit Interest Expense and credit Cash, P720.

B. Debit Interest Expense and credit Interest Payable, P720.
C. Debit Interest Expense and credit Interest Payable, P1, 080.
D. Debit Interest Expense and credit Interest Payable, P4,320

3. Rice Corporation loaned P60, 000 to another corporation on December 1, 2009 and
received a 3-month, 8% interest-bearing note with a face value of P60, 000. What
adjusting entry should rice make on December 31, 2009?
 A. Debit Interest Receivable and credit Interest Income, P1, 200.
B. Debit Cash and credit Interest Income, P400.
C. Debit Interest Receivable and credit Interest Income, P400.
D. Debit Cash and credit Interest Receivable, P1, 200.

4. Gehrig Corporation renewed an insurance policy for 3 years beginning July 1, 2009 and
recorded the P81, 000 premium in the prepaid insurance account. The P81, 000 premium
represents an increase of P23, 400 from the P57,600 premium charged 3 years ago.
Assuming Gehrig’s records its insurance adjustments only at the end of the calendar year,
the adjusting entry required to reflect the proper balances in the insurance accounts at
December 31, 2009, Gehrig’s year-end is to

A. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
B. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
C. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
D. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.

5. Daguioman Company received P9,600 on April 1, 2009 for one year’s rent in advance
and recorded the transaction with a credit to a nominal account. The December 31, 2009
adjusting entry is

A. Debit Rent income and credit Unearned Rent, P2, 400.

B. Debit Rent income and credit Unearned Rent, P7, 200.
C. Debit Unearned Rent and credit Rent Income, P2, 400.
D. Debit Unearned Rent and credit Rent Income, P7, 200.

6. Dunlap Company sublet a portion of its warehouse for 5-years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Dunlap
recorded as a credit to unearned rental income. Dunlap reports on a calendar-year basis.
The adjustment on December 3, of the first year should be

A. No entry.
B. Unearned rental income P2,500
Rental income P2,500
C. Rental income P2,500
Unearned rental income P2,500
D. Unearned rental income P12,500
Rental income P12,500

7. On December 31 of the current year, Holmgren Company’s bookkeeper made an entry

debiting Supplies Expense and crediting Supplies on Hand for P12,600. The Supplies on
Hand account had a P15,300 debit balance on January 1. The December 31 balance sheet
showed Supplies on Hand of P11,400. Only one purchase of supplies was made during
the month, on account. The entry or that purchase was
 A. Debit Supplies on Hand, P8,700 and credit Cash P8,700.
B. Debit Supplies Expense, P8,700 and credit Accounts Payable, P8,700.
C. Debit Supplies on Hand, P8,700 and credit Accounts Payable, P8,700.
D. Debit Supplies on Hand, P16,500 and credit Accounts Payable, P16,500.

8. A 3-year insurance policy was purchased on October 1 for P6,000 and prepaid insurance
was debited. Assuming a December 31, year-end, what is the reversing entry at the
beginning of the next period?
A. None is required.
B. Prepaid Insurance P5,500
Prepaid Insurance P5,500
C. Prepaid Insurance P500
Insurance expense P500
D. Insurance expense P500
Prepaid Insurance P500

Use the following information for questions 9 to 11:

XS Company paid or collected during 2103 the following items:
Insurance premiums paid P25,450
Insurance collected P53, 750
Salaries paid P116, 300
The following balances have been excerpted from XS Company’s balance sheets:
December 31, 2013 December 31, 2012
Prepaid insurance P 2,400 P 1,700
Interest receivable 4,700 3,200
Salaries payable 12,300 10,600

9. The insurance expense on the income statement for 2013 was

A. 25,450 C. 24,750
B. 26,150 D. 23,750

10. The interest revenue on the income statement for 2013 was
A. 53,750 C. 52,250
B. 55, 250 D. 50,550
 11. The salary expense on the income statement for 2013 was
A. 116,300 C. 114,600
B. 118,000 D. 105,700

Use the following information for questions 12-14:

December 31, 2012 December 31, 2013
Interest receivable P 7,500 P 9,100
Salaries Payable 4,200 8,900
Prepaid insurance 1,500 1,100

12. The cash received for interest during 2013 was

A. 66,400 C. 75,500
B. 73,900 D. 77,100

13. The cash paid for salaries during 2013 was

A. 60,300 C. 69,700
B. 60,800 D. 73,900

14. The cash paid for insurance premiums during 2013 was
A. 8,100 C. 9,200
B. 8,500 D. 10,000