5 Items Financial Accounting And Reporting Problems

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| By Catherine Halcomb
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Catherine Halcomb
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5 Items Financial Accounting And Reporting Problems - Quiz

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Questions and Answers
  • 1. 

    Presented below are changes in all the account balances of Basic Company for 2018, except for Retained Earnings: Increase (Decrease) Cash P      790,000 Accounts receivable (net) 240,000 Inventory 1,270,000 Investments    (470,000) Accounts payable        (380,000) Bonds payable                              820,000 Share capital                              1,250,000 Share premium                            130,000 What amount should net income for 2018 be, assuming that there were no entries in the Retained Earnings account except for net income and a dividend declaration of P190,000 which was paid in the current year?

    • A.

      P1, 140, 000

    • B.

      P1, 080, 000

    • C.

      P200, 000

    • D.

      P10, 000

    Correct Answer
    C. P200, 000
    Explanation
    The correct answer is P200,000. This can be determined by calculating the change in the Retained Earnings account. The increase in Share Capital and Share Premium accounts indicates that the company raised additional capital through issuing shares. The decrease in Bonds Payable suggests that the company repaid some of its long-term debt. The increase in Cash, Accounts Receivable, and Inventory indicates that the company generated more revenue and increased its assets. The decrease in Accounts Payable suggests that the company paid off some of its short-term liabilities. Therefore, the net income for 2018 should be P200,000.

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  • 2. 

    On December 3 of the previous year 2018, Oliver Company purchased inventory listed at P8,600 from Laurel Corp. Terms of the purchase were 3/10, n/20. Oliver Company also purchased inventory from Tommy Company on December 10 for a list price of P7,500. Terms of the purchase were 3/10, n/30. On December 16, Oliver paid both suppliers for these purchases. If Oliver uses the net method of recording purchases, the journal entry to record the payment on December 16 will include

    • A.

      A debit to Accounts payable of P15,875.

    • B.

      A debit to Purchase Discounts Lost of P258.

    • C.

      A credit to Purchase Discounts of P258.

    • D.

      A credit to cash of P15,617.

    Correct Answer
    B. A debit to Purchase Discounts Lost of P258.
    Explanation
    When Oliver Company uses the net method of recording purchases, it means that they take advantage of any available purchase discounts. In this case, both suppliers offer a discount of 3% if payment is made within a certain period. Since Oliver paid both suppliers on December 16, which is within the discount period, they are eligible to receive the discount. However, the journal entry to record the payment will include a debit to Purchase Discounts Lost of P258. This is because Oliver did not take advantage of the discount and therefore lost it. The debit to Purchase Discounts Lost represents the amount of the discount that was not taken.

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  • 3. 

    A physical inventory taken on December 31, 2012 resulted in an ending inventory of P1,440,000. Thea Company suspects some inventory may have been taken by employees. To estimate the cost of missing inventory the following were gathered: Inventory, Dec. 31, 2018 P   1,280,000 Purchased during 2018 5,640,000 Cash sales during 2018 1,400,000 Shipment received on December 26, 2018 included in physical inventory, but not recorded as purchases                40,000 Deposits made with suppliers, entered as Purchases. Goods were not received in 2018                                              80,000 Collections on accounts receivable, 2018  7,200,000 Accounts receivable, January 1, 2018 1,000,000 Accounts receivable, Dec. 31, 2018 1,200,000 Gross profit percentage on sales is 40%. At December 31, 2018 what is the estimated cost of missing inventory?

    • A.

      P 160,000

    • B.

      P 200,000

    • C.

      P 240,000

    • D.

      P 320,000

    Correct Answer
    A. P 160,000
    Explanation
    The estimated cost of missing inventory can be calculated by using the gross profit method. According to the information given, the cost of goods sold can be calculated as follows:

    Cost of Goods Sold = Cash Sales + Collections on Accounts Receivable - Accounts Receivable (Jan 1, 2018) + Accounts Receivable (Dec 31, 2018)
    Cost of Goods Sold = 1,400,000 + 7,200,000 - 1,000,000 + 1,200,000
    Cost of Goods Sold = 8,800,000

    The estimated missing inventory can be calculated by multiplying the cost of goods sold by the gross profit percentage:

    Estimated Missing Inventory = Cost of Goods Sold * Gross Profit Percentage
    Estimated Missing Inventory = 8,800,000 * 40%
    Estimated Missing Inventory = 3,520,000

    However, we need to adjust this amount by considering the purchases and shipment received but not recorded as purchases. Therefore, the estimated cost of missing inventory is:

    Estimated Cost of Missing Inventory = Estimated Missing Inventory - Purchased during 2018 - Shipment received on Dec 26, 2018
    Estimated Cost of Missing Inventory = 3,520,000 - 5,640,000 - 40,000
    Estimated Cost of Missing Inventory = -2,160,000

    Since the result is negative, it means that there is an overstatement of inventory. Therefore, the estimated cost of missing inventory is P 160,000.

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  • 4. 

    Estimated normal shrinkage is 4% of sales. How much is the estimated inventory shortage assuming the company uses the average retail inventory method?

    • A.

      P 4,000

    • B.

      P 104,000

    • C.

      P 130,000

    • D.

      P 200,000

    Correct Answer
    B. P 104,000
    Explanation
    The estimated inventory shortage can be calculated by multiplying the estimated normal shrinkage (4% of sales) by the average retail inventory. Since the question mentions that the company uses the average retail inventory method, we can assume that the average retail inventory is the total sales. Therefore, the estimated inventory shortage would be 4% of the total sales, which is P 104,000.

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  • 5. 

    During your review of the records of X Factor Corporation for the year 2016, you noted that X Factor sold a machine with carrying amount of P640,000 (cost is P1.6M) on June 30, 2016. X Factor received an P800,000 noninterest bearing note due in 3 years. There is no established market value for the machine. The yield rate for this type of note is 12%. X Factor recorded the transaction by debiting Note receivable for P800,000 and crediting Machinery for P640,000 and Gain on sale for the difference. Because of this, X Factor’s Profit for the year ended December 31, 2018 had been overstated by

    • A.

      P 230,576

    • B.

      P 196,410

    • C.

      P 81,125

    • D.

      P -0-

    Correct Answer
    C. P 81,125
    Explanation
    The correct answer is P 81,125. X Factor Corporation recorded the transaction by debiting Note receivable for P800,000 and crediting Machinery for P640,000 and Gain on sale for the difference. However, the carrying amount of the machine was P640,000, which means that there was no gain on the sale. As a result, the gain of P81,125 was incorrectly recorded, causing X Factor's profit for the year ended December 31, 2018 to be overstated by that amount.

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