Contribution Midterm Quiz 2

1. On January 1, 20x1, Rome Company purchased a machine for P8,000,000. The machine has a
useful life of 10 years and a residual value of P800,000. On January 1, 20x5, the entity
determined that the useful life of the equipment was 12 years from the date of acquisition and
the residual value was P 920,000
What is the amount of accumulated depreciation on December 31, 20x5 ?
Answer : 3,405,000
Solution : Cost 8,000,000
Less : Accumulated depreciation-1/1/x5 2,880,000
Carrying amount, 1/1/x5 5,120,000

Depreciation for 20x5 ( 5,120,000-920,000)/8 525,000

Accum dep as of 1/1/x5 2,880,000
Accumulated depreciation, 12/31/x5 3,405,000

2. Marvel Company provided the following data for the year :

Cash balance, Jan 1 260,000
Accounts receivable, Jan 1 380,000
Collections from customers 4,200,000
Shareholders’ equity, Jan 1 760,000
Total assets, Jan 1 1,500,000
Total assets, December 31 1,760,000
Cash balance, Dec 31 320,000
Accounts receivable, Dec 31 720,000
Total liabilities, Dec 31 780,000
What is the net income for the current year ?
Answer : 220,000
Solution:
Total assets, Dec 31 1,760,000
Total liabilities, Dec 31 780,000
Shareholders’ equity, Dec 31 980,000
Shareholders’ equity, Jan 1 760,000
Net income 220,000

3. Zeus Company reported sales revenue of P4,600,000 in the income statement for the current
year, Addiitonal data follows :
January 1 December 31
Accounts receivable 1,000,000 1,300,000
Allowance for uncollectible accounts 60,000 110,000
Advances from customers 200,000 300,000

The entity wrote off uncollectible accounts of P50,000 during the current year.
Under the cash basis of accounting, what amount should be reported as sales revenue
for the current year ?
Answer : 4,350,000
Solution :
Accounts receivable, Jan 1 1,000,000
 Add: Sales for the current year- accrual basis 4,600,000
Advances from customers, 12/31 300,000
Total 5,900,000
Less: Accounts receivable, Dec 31 1,300,000
Write off 50,000
Advances from customers, Jan 1 200,000 1,550,000
Collections-cash basis sales revenue 4,350,000

4. Abe Company provided the following information :

20x1 20x2 20x3
Cash receipts from customers:
From Year 20x1 sales 950,000 1,200,000
From year 20x2 sales 2,000,000 750,000
From Year 20x3 sales 500,000 2,250,000

What is the accrual basis revenue for 20x2 ?

Answer : 2,750,000

Solution :
Cash receipts- 20x2 sales 2,000,000
Cash receipts in 20x3 from 20x2 sales 750,000
Total sales in 20x2, accrual basis 2,750,000

Question 1 and 2:

The following information pertains to Karama Inc.’s 2021 Sales:

Cash Sales
Gross 80,000
Returns & Allowances 4,000
Credit Sales
Gross 120,000
Discounts 6,000

Customers owed Karama P40,000 on January 1, 2021, and P30,000 on December 31, 2021. Karama
owed the suppliers P50,000 on January 1, 2021, and P40,000 on December 31, 2021.

Question 1 – What is the Net Sales under Cash Basis Accounting? Ans: 200,000
Gross Cash Sales 80,000
Sales returns from Cash sales (4,000)
Net Cash Sales 76,000
Collections on receivables 124,000*
Total Net Sales- Cash Basis 200,000

*Accounts receivable, end 30,000

 Add/(Less):
Collections (extract) 124,000
Sales discounts 6,000
Accounts receivable, beginning (40,000)
Gross Credit Sales 120,000

Question 2 – What is the Net Sales under Accrual Basis Accounting? Ans: 190,000
Gross Cash Sales 80,000
Sales returns from Cash sales (4,000)
Net Cash Sales 76,000
Gross Credit Sales 120,000
Sales discounts – credit sales (6,000)
Net Credit Sales 114,000
Total Sales- Accrual Basis 190,000

Question 3:

Jaffliya Corp reported Rental revenue of P2,210,000 in its cash basis federal income tax return for the
year ended November 30,2021. Additional information is as follows:
Rent Receivable , November 30,2021 1,060,000
Rent Receivable , November 30,2020 800,000
Uncollectible Rents written off during the period 30,000
Rent Expense Paid 500,000

Question 3 – What is the Rent Revenue under Accrual Basis Accounting? Ans: 2,500,000

Rent income – cash basis 2,210,000

Rent Receivable, end 1,060,000
Uncollectible Rents written off during the period 30,000
Rent Receivable, beg (800,000)
Rent Income – Accrual basis 2,500000

Question 4:

Satwa Company reported sales revenue of P4,600,000 in its income statement for the year ended
December 31, 2021. Additional information as follows:

December 31 January 1
Accounts Receivable 1,300,000 1,000,000
 Allowance for doubtful accounts (110,000) (60,000)
Advances to Suppliers 500,000 200,000

Satwa wrote off uncollectible accounts totaling P20,000 during 2021.

Question 4 – What is the Sales under Cash Basis Accounting? Ans: 4,280,,000

Accounts receivable, end 1,300,000

Add/(Less):
Collections (extract) 4,280,000
Accounts written off 20,000
Accounts receivable, beginning (1,000,000)
Gross Credit Sales 4,600,000

On January 1, 2018, Con Waterbeds, Inc., purchased some equipment for P3,900,000. The
estimated life was five years, after which there would be a residual value of P200,000. On
January 1, 2021, the estimated total economic life from the original purchase date was changed
to six years and the estimated residual value was increased by P100,000.
1. What is the amount of depreciation expense for the year 2021?

In 2021, Maxwell Corporation changed its method of inventory pricing from WEIGHTED
AVERAGE to FIFO. Net income reported and the ending inventory under WEIGHTED
AVERAGE and FIFO method for the four years involved were:
NET INCOME WEIGHTED AVERAGE FIFO
2018 P 1,450,000 P 78,200 P 83,700
2019 1,800,000 84,500 88,100
2020 2,420,000 87,000 91,400
2021 2,830,000 92,500 94,700
In preparing the comparative income statement for 2021, how much would be the net income to
be reported under FIFO for:
2. 2020
3. 2021

The statement of financial position of Chick and Babe, Inc. as of December 31, 2021 showed
increase in the following account balances:
Increases
Assets P 267,000
Liabilities 81,000
Share Capital 180,000
Share Premium 18,000
There were no changes in the retained earnings account except for a dividend payment of
P39,000.
4. The net income for the year ended December 31, 2021 should be ______.
Answer key:
1) 460,000
2) 2,420,800
3) 2,830,000
4) 27,000

1)

Book Value 1/1/21 (3,900,000 - 200,000) X 2/5 + 200,000 1,680,000.00

Less Residual Value 300,000.00

Remaining Depreciable Value 1/1/21 1,380,000.00

Remaining revised useful life (6 - 3) 3.00

Depreciation Expense for the year 2021 460,000.00

2)

2020 net income under weighted average 2,420,000.00

-
Increased in beginning inventory as a result of change in policy 3,600.00

Increased in Ending Inventory as a result of change in policy 4,400.00

2020 Net income under FIFO 2,420,800.00

3)

Net income for 2021 2,830,000.00

Since the given was the net income reported for the given years, it is assumed that company
appropriately applied the specific method applicable to the given year/s.

4)

Increase in Assets 267,000.00

-
Increase in Liabilities 81,000.00
Increase in Net
Assets 186,000.00
Add/(Deduct)
-
Increase in share capital 180,000.00
-
Increase in share premium 18,000.00

Dividend payment 39,000.00

Net Income 27,000.00

Use the following information in answering the next item(s):

An analysis of incomplete records of HAWK CORP. produced the following
information applicable to 2014:

ACCOUNT INCREASES:
Cash P4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000
Prepaid insurance 100,000

ACCOUNT DECREASES:
Inventory 1,200,000
Equipment 100,000
Notes receivable 600,000
Accrued salaries payable 300,000

Summary of cash transactions were as follows:

RECEIPTS:
Cash sales P3,000,000
Collections on accounts receivable 30,000,000
Collections on notes receivable 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 300,000

DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 200,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expense 1,500,000
Dividends 1,000,000

Additional information:
Total sales returns and allowances amounted to 800,000.
Total purchase returns and allowances amounted to P1,000,000.
REQUIREMENTS: Determine the accrual basis balances of the following:
1. Net Sales
2. Net Purchases
3. Cost of Sales
4. Net Income
SOLUTION:
Collections on accounts receivable P30,000,000
Collections on notes receivable 2,400,000
Sales returns and allowances (no refund) (P800,000 – P200,000) 600,000
Increase in accounts receivable 1,400,000
Decrease in notes receivable (600,000)
Credit sales 33,800,000
Cash sales 3,000,000
Total gross sales 36,800,000
Total sales returns and allowances (800,000)
Net sales P36,000,000

SOLUTION:
Payments on accounts payable P16,500,000
Increase in accounts payable 400,000
Purchase returns and allowances (no refund) (P1,200,000 – P300,000) 900,000
 Credit purchases 17,800,000
Cash purchases 1,000,000
Total purchases 18,800,000
Total purchase returns and allowances (1,200,000)
Net purchases P17,600,000

SOLUTION:
Net purchases P17,400,000
Decrease in inventory 1,200,000
Cost of sales P18,600,000

SOLUTION:
Net sales P36,000,000
Cost of sales (18,600,000)
Gross profit 17,400,000
Interest income 200,000
Depreciation expense (900,000)
Other expense (1,500,000)
Salaries expense (P10,000,000 – P300,000) (9,700,000)
Insurance expense (P700,000 – P100,000) (600,000)
Net income P4,900,000

PARROT CORP. reported the following accounts in the year-end trial balance:
Equipment 192,000
Accumulated depreciation 60,000
Note payable 90,000
Admission revenue 380,000
Advertising expense 13,680
Salaries expense 57,600
Interest expense 1,400
The equipment has an estimated life of 16 years and a residual value of P40,000. The
note payable is a 90-day note given to the bank October 20 and bearing interest at 10%.
In December, two thousand coupon admission books were sold at P25 each. The coupons
could be used for admission any time after January 1 of next year. Advertising expense
paid in advance and included in advertising expense was P1,100. Salaries accrued but
unpaid amounted to P4,700. What is the net income for the current year?

SOLUTION:

Admission revenue (380,000 – 50,000) P330,000

Salaries expense (57,600 + 4,700) (62,300)
Advertising expense (13,680 – 1,100) (12,580)
Interest expense (1,400 + 1,800) (3,200)
Depreciation (152,000 / 16) (9,500)
Net income P242,420

Accrued interest expense (90,000 x 10% x 72/360) P1,800

During 2018, TRAXEX CORP. decided to change its inventory cost flow method from Average
to FIFO Method. Inventory balances under each method were as follows:
AVERAGE FIFO
January 1 P2,500,000 P2,200,000
December 31 P2,900,000 P2,400,000
 If the income tax rate is 30%, what amount should be reported in the statement of
retained earnings for 2018 as the cumulative effect of the change in accounting
policy?

SOLUTION:
(P2,500,000 – P2,200,000) x 70% = P210,000 decrease.
KARDEL CORP. had used the FIFO method of inventory valuation since it began operations in
2011. The entity decided to change to the weighted average method for determining
inventory costs at the beginning of 2014. The following schedule shows year-end inventory
balances under the FIFO and weighted average method:
Year FIFO Weighted average
2011 4,500,000 5,400,000
2012 7,800,000 7,100,000
2013 8,300,000 7,800,000
What amount, before income tax, should be reported in the statement of retained
earnings for 2014 as the cumulative effect of the change in accounting policy?
SOLUTION:
(P8,300,000 – P7,800,000) = P500,000 decrease

YURNERO CORP.. purchased a machine on January 1, 2011 for P6,000,000. At the date of
acquisition, the machine had a life of six years with no residual value. The machine is being
depreciated on a straight line basis. On January 1, 2014, the entity determined that the
machine had a useful life of eight years from the date of acquisition with no residual value.
What is the depreciation of the machine for 2014?
SOLUTION:
Cost P6,000,000
Accumulated depreciation (6,000,000 / 6 x 3) 3,000,000
Carrying amount - January 1, 2014 3,000,000

Revised life 8 years

Years expired
Remaining revised life 5 years

Depreciation (3,000,000 / 5 years) P600,000

This is a change in accounting estimate. The procedure is to allocate the remaining
depreciable amount over the remaining revised life.