FINANCIAL ACCOUNTING & REPORTING 2

SEC – 6 – SQ1 SOLUTION

1) Denver Corporation’s accounts payable at December 31, 2019, totaled P1,600,000 before any necessary year-
end adjustments relating to the following transactions:
• On December 27, 2019, Denver wrote and recorded checks to creditors totaling P700,000 causing an
overdraft of P200,000 in Denver’s bank account at December 31, 2019. The checks were mailed out on
January 10, 2020.
• On December 28, 2019, Denver purchased and received goods for P300,000, term 2/10, n/30. Denver
records purchases and accounts payable at net amount. The invoice was recorded and paid January 2, 2020.
• Goods shipped FOB destination on December 20, 2019 from a vendor was received January 2, 2020. The
invoice price was P130,000.

At December 31, 2019, what amount should Cowboy report as total accounts payable?
A. 1,900,000 B. 2,100,000 C. 2,594,000 D. 2,724,000

SOLUTIONS: C
Unadjusted Accounts payable 1,600,000
1. Reversal of unreleased check 700,000
2. Unrecorded purchases as of 12/31/19 (300,000 x 98%) 294,000
3. No adjustments --
Adjusted Accounts payable 2,594,000

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2) The balance in Orani Co.’s accounts payable account at December 31, 2019 was P400,000 before any

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necessary adjustments relating to the following:
a. On December 28, 2019, Orani purchased and received goods for P40,000, terms 2/10, n/30. Orani records

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purchases and accounts payable at net amounts. The invoice was recorded and paid January 3, 2020.
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b. Goods were in transit to Orani from a vendor on December 31, 2019. The invoice cost was P50,000. The
goods were shipped FOB shipping point on December 29, 2019 and were received on January 4, 2020.
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c. Goods shipped FOB destination on December 21, 2019 from a vendor to Orani were received on January 6,
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2020. The invoice cost was P25,000.

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d. Goods shipped to Orani, FOB shipping point on December 20, 2019, from a vendor were lost in transit. The
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invoice price was P20,000. On January 5, 2020, Orani filed a P20,000 claims against the common carrier.
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In Orani’s December 31, 2019 statement of financial position, the accounts payable should be
A. 439,200 C. 509,200
B. 489,200 D. 534,200
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SOLUTIONS: C
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Recorded Accounts Payable – 12/31/19 400,000

a. Unrecorded purchases as of 12/31/19 39,200
b. Unrecorded purchases as of 12/31/19 50,000
c. No adjustment ---
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d. Unrecorded purchases as of 12/31/19 20,000

Adjusted Accounts Payable – 12/31/19 509,200

3) Popo Company pays its outside salespersons fixed monthly salaries and commissions based on net sales. Sales
commissions are computed and paid on a monthly basis (in the month following the month of sale) and the fixed
salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their
sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of
December for the three salespersons are as follows:
Salesperson Fixed Salaries Net Sales Commission Rate
A P100,000 P 900,000 10%
B 150,000 2,500,000 10%
C 250,000 4,000,000 15%

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 What should Popo Company accrue for sales commissions at December 31?
A. 940,000 C. 450,000
B. 500,000 D. 440,000

SOLUTIONS: C
Commission A (900,000 x 10%) 90,000
Payment to A (100,000)
Excess payment to A (10,000)

Commission B (2,500,000 x 10%) 250,000

Payment to B (150,000)
Payable to B 100,000

Commission C (4,000,000 x 15%) 600,000

Payment to C (250,000)
Payable to C 350,000

Total commission payable (100,000 + 150,000) 450,000

4) Ox King Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume
the tax rate of 30% and the correct income before bonus and tax is P9,600,000. How much is the bonus payable
to the president? (Round off to the nearest hundred)
A. 722,600 C. 395,000

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B. 2,240,000 D. 628,000

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SOLUTIONS: D
T = 0.30 (9,600,000 – B – T)
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B = 0.10 (9,600,000 – B – T)
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B = 0.10 [9,600,000 – B – (0.30 (9,600,000 – B)]
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B = 0.10 [9,600,000 – B – 2,880,000 + 0.30B]

B = 960,000 – 0.10B – 288,000 + 0.03B
B = 672,000 – 0.07B
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1.07B = 672,000
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B = 628,000
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5) Acme Company reported accounts payable of P850,000 on December 31, 2018 before necessary year-end
adjustments related to the following information:
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On December 31, 2018, Acme has a P50,000 debit balance in accounts payable resulting from a payment to a
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supplier for goods to be manufactured to Acme’s specifications.

Goods shipped FOB destination on December 20, 2018 were received and recorded by Acme on January 2,
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2019. The invoice cost was P45,000.

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On December 31, 2018, what amount should be reported as accounts payable?

A. 945,000 C. 900,000
B. 850,000 D. 895,000
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SOLUTIONS: C
Unadjusted Accounts Payable 850,000
Add back advances to supplier (it was netted) 50,000
Adjusted Accounts Payable 900,000
*No adjustment for the goods in transit, assume not recorded until received.

6) Life, Inc. is preparing its financial statements for the year ended December 31, 2019. Accounts payable amounted
to P200,000 before any necessary year-end adjustment related to the following:
• At December 31, 2019, Life has a P50,000 debit balance in its accounts payable to Twist, a supplier, resulting
form a P50,000 advance payment for goods to be manufactured to Life’s specifications.

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 • Checks in the amount of P25,000 were written to vendors and recorded on December 29, 2019. The checks
were dated January 5, 2020.

What amount should Life report as accounts payable in its December 31, 2019 statement of financial position?
A. 275,000 C. 200,000
B. 250,000 D. 125,000

SOLUTIONS: A
Recorded Accounts Payable – 12/31/19 200,000
a. Add back debit balance 50,000
b. Reversal of postdated check 25,000
Adjusted Accounts Payable – 12/31/19 275,000

Use the following information for the next two (2) questions:
Hello Company is considering two different proposals for computing the bonus for its new company president. The
first plan states that the bonus be equal to 6% of profits after the bonus but before tax have been deducted. The
second method is based on profit after both tax and bonus have been deducted at the rate of 12%. Income before
income tax and bonus for 2019 is P9,000,000. Income tax rate is 35%

QUESTIONS:
7) How much is the amount of bonus under the first plan?
A. 540,000 C. 337,825
B. 358,529 D. 509,434

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8) How much is the amount of bonus under the second plan?

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A. 651,206
B. 702,024
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C. 964,286
D. 732,777

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SOLUTIONS: D, A
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B = 0.06 (9,000,000 – B)
B = 540,000 – 0.06B
1.06B = 540,000
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B = 509,434
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T = 0.35 (9,000,000 – B – T)
B = 0.12 (9,000,000 – B – T)
B = 0.12 [9,000,000 – B – (0.35 (9,000,000 – B)]
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B = 0.12 [9,000,000 – B – 3,150,000 + 0.35B]

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B = 1,080,000 – 0.12B – 378,000 + 0.042B

B = 702,000 – 0.078B
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1.078B = 702,000
B = 651,209
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9) Bacolor Products Corporation provides an incentive compensation plan under which its president receives a
bonus equal to 20% of the corporation’s income in excess of P500,000 before income tax but after the bonus. If
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income before tax and bonus is P2,000,000 and the effective tax rate is 30%, the amount of the bonus would be
A. 210,000 C. 300,000
B. 250,000 D. 400,000
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SOLUTIONS: B
B = 0.20 (1,500,000 – B)
B = 300,000 – 0.2B
1.2B = 300,000
B = 250,000

10) Tatay Company is preparing its December 31, 2019 financial statements. The following information was gathered:
• The bill for December’s utility cost of P120,000 was received and paid on January 10, 2020.
• A P80,000 advertising bill was received on January 2, 2020. Of the total billing, P60,000 pertain to
advertisements in December 2019 and P20,000 pertain to advertisements in January 2020.

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 • A lease, effective December 16, 2018, calls for a fixed rent of P400,000 per month, payable one month after
the commencement of the lease and every month after thereafter. In addition, rent equal to 5% of net sales
over P4,000,000 per year is payable on January 31 of the following year.
• Total cash sales and collections on accounts amounted to P4,000,000 and accounts receivable has a net
increase of P800,000 Commissions of 15% of sales are paid on the same day cash is received from
customers.

What is the accrued liabilities on December 31, 2019?

A. 420,000 C. 540,000
B. 340,000 D. 620,000

SOLUTION: B
Utility expense for December 2019 120,000
Advertising costs incurred in December 2019 60,000
Rent expense from December 16 to 31, 2019 (400,000 / 2) 200,000
Contingent rent expense (*4,800,000 – 4,000,000) x 5% 40,000
Commission expense not yet paid **120,000
Total accrued liabilities 540,000

Accounts receivable
Beginning - 4,000,000 Collections
Sales SQUEEZE *4,800,000
Ending (increase 800,000

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Total commission expense (4,800,000 total sales x 15%) 720,000

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Commission expense paid (4,000,000 cash collections x 15%)
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Commission not yet paid **120,000

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J END OF SEC – 6 – SHORT QUIZ 1 SOLUTION J
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