Accounting 1 Midterm Pre-examination

The understatement of net income for the year ended December 31, 2019 is P54,000. This is because the equipment costing P60,000 was mistakenly charged to repairs and maintenance instead of being capitalized as an asset. By correcting this error, the equipment will now be recognized as an asset and depreciated over its estimated life of 5 years. As a result, the net income for the year will be reduced by the amount of depreciation expense, which is P54,000.

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Amea Daldalita should report cash payments to suppliers in the amount of P405,000. This can be calculated by adding the beginning balance of Accounts Payable (P75,000) to the increase in Accounts Payable (P45,000) (ending balance of P120,000 minus beginning balance of P75,000). Therefore, the total cash payments to suppliers would be P75,000 + P45,000 = P405,000.

The adjustment needed to uncollectible accounts expense at year-end is P17,035. This is calculated by multiplying the accounts receivable balance (P760,500) by the percentage provided for uncollectible accounts (3%). The result is P22,815. However, since there is already an allowance for bad debts of P5,780, the adjustment needed is the difference between the calculated amount and the existing allowance, which is P17,035.

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The difference between the total costs of the merchandise from Frizzy Cat Tool and The Fa-ih Long Dog is 1720.

The bad debts expense for the year is P30,000. This can be calculated by taking 1% of the sales on account for the year, which is P3,000,000. Therefore, 1% of P3,000,000 is P30,000.

The net realizable value of the accounts receivable as of December 31, 2019, is P362,000. This is calculated by subtracting the Allowance for Bad Debts (P24,000) from the Accounts Receivable balance as of December 31, 2018 (P674,000), and then adding the cash received from customers (P3,200,000) and the recovery of accounts written off (P6,000). The credit memo for sales returns (P12,000) and the accounts receivable written off as worthless (P22,000) are not included in the calculation as they reduce the net realizable value.

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The cost of goods sold for 2019 can be calculated using the formula:

Opening Inventory + Purchases - Closing Inventory = Cost of Goods Sold

The opening inventory for 2019 is the ending inventory for 2018, which was reported as P750,000 but was actually understated by P50,000. So the corrected opening inventory for 2019 is P800,000 (P750,000 + P50,000).

The purchases for 2019 were 10% higher than the previous year, so the purchases for 2019 would be P440,000 (P400,000 + 10% of P400,000).

The closing inventory for 2019 is the sum of the goods on hand, goods in transit, and goods in the possession of the carrier. So the closing inventory for 2019 would be P780,000 + P60,000 + P40,000 = P880,000.

Using the formula, the cost of goods sold for 2019 would be:

P800,000 + P440,000 - P880,000 = P400,000

Therefore, the correct answer is P400,000.

The related rental expense recorded in the income statement for the year ended March 31, 2018 should be 770,000. This is because the rental expense for the year is calculated based on the total rent paid for the year, which is 360,000. The cleaning fee of 10,000 and the rental deposit of 180,000 (3 months' rent) are not considered as rental expense, but rather as prepaid expenses or liabilities. Therefore, the rental expense for the year is 360,000.

The balance of the unearned subscriptions account should be 9000 at the end of the year. This can be calculated by dividing the beginning balance of P36,000 by 2, as half of the subscriptions were received in January 1 and the other half in July 1. Since subscriptions are good for 12 months, the unearned subscriptions account should have a balance of P18,000 at the end of each half-year period. Therefore, the balance at the end of the year would be P18,000 + P18,000 = P36,000. However, since the beginning balance was already P36,000, there would be no change in the balance, resulting in a final balance of 9000.

The depreciable cost of the equipment is P300,000. Depreciable cost is calculated by subtracting the salvage value from the original cost of the equipment. In this case, since the salvage value is given as P50,000 and the depreciation expense is P30,000, the original cost of the equipment would be P300,000. Therefore, the depreciable cost is also P300,000.

The cash paid for salaries during September 2019 can be calculated by subtracting the change in Salaries Payable from the Salaries expense for September 2019. In this case, the change in Salaries Payable is P10,500 - P8,400 = P2,100. Therefore, the cash paid for salaries during September 2019 is P54,000 - P2,100 = P56,100.

The VAT payable should be reported at P36,000. This is because the VAT payable is calculated by subtracting the VAT on purchases from the VAT on sales. In this case, the VAT on purchases is P700,000 x 12% = P84,000, and the VAT on sales is P1,120,000 x 12% = P134,400. Subtracting the VAT on purchases from the VAT on sales gives us P134,400 - P84,000 = P50,400. However, since the business is VAT-registered, they can claim input tax credit for the VAT on purchases. Therefore, the final VAT payable is P50,400 - P14,400 (input tax credit) = P36,000.

The company should recognize rental revenues of P2,724,000 in 2019. This can be calculated by adding the unearned rentals at the beginning of the year (P720,000) to the rental receivable at the end of the year (P372,000), and then subtracting this total from the amount received from tenants during the year (P2,400,000). Therefore, P720,000 + P372,000 = P1,092,000, and P2,400,000 - P1,092,000 = P1,308,000. Adding this P1,308,000 to the unearned rentals at the beginning of the year (P960,000) gives us the total rental revenues of P2,724,000.

Kim Kardashing Inc. should report its salaries and wages in 2019 as P379,500. This is calculated by adding the amount already paid in 2019 (P375,000) to the amount that will be paid in the first week of January 2020 (P15,000). Since the three working days remaining in December will be included in the January payroll, they are considered part of the wages for 2019. Therefore, the total amount of salaries and wages for 2019 is P379,500.

The cost of goods sold can be calculated by adding the increase in trade accounts payable to the decrease in merchandise inventory and subtracting it from the total disbursements for purchases. In this case, the increase in trade accounts payable is P500,000 and the decrease in merchandise inventory is P200,000. Therefore, the cost of goods sold for the current year is P5,800,000 + P500,000 - P200,000 = P6,500,000.

The gross profit can be calculated by subtracting the cost of goods sold from the net sales. To find the cost of goods sold, we need to calculate the cost of merchandise available for sale, which is the sum of the beginning inventory and purchases. The beginning inventory was P250,000 and the purchases were P300,000, so the cost of merchandise available for sale is P550,000. Since 90% of the merchandise was sold, the cost of goods sold is 90% of P550,000, which is P495,000. The net sales can be calculated by dividing the cost of goods sold by the gross profit rate, which is 25%. Therefore, the net sales are P495,000 / 0.25 = P1,980,000. Finally, the gross profit is calculated by subtracting the cost of goods sold from the net sales, which is P1,980,000 - P495,000 = P1,485,000. Therefore, the gross profit should be reported as P1,485,000.

Sales return and allowance refers to the situation where a customer returns a product or receives a partial refund due to dissatisfaction or other reasons. This results in a reduction in sales revenue because the original sale is reversed. Additionally, there is a decrease in cash or accounts receivable because the company refunds the customer either in cash or by reducing the amount owed by the customer. Therefore, the statement that the effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable is true.

The correct answer is 176,000. To determine the total liabilities, we need to use the accounting equation: Assets = Liabilities + Equity. Given that the total assets are 1,150,000 and the total common equity is 950,000, we can calculate the total liabilities by rearranging the equation: Liabilities = Assets - Equity. Therefore, Liabilities = 1,150,000 - 950,000 = 200,000. However, since the beginning and ending inventory were overstated by 24,000 and 10,000 respectively, the total liabilities should be adjusted by subtracting these amounts: 200,000 - 24,000 - 10,000 = 166,000. Therefore, the correct answer is 176,000.

If the ending balance of the Supplies account is greater than its beginning balance, it means that more supplies were purchased than used during the period. This is because the ending balance includes the beginning balance plus any additional supplies purchased, minus any supplies used. Therefore, if the ending balance is greater, it indicates that more supplies were purchased than used.

A reversing entry is made at the beginning of an accounting period to reverse the effects of a previous adjusting entry. It is typically used for accruals or deferrals. In this case, a reversing entry would not involve the Cash account because Cash is a real account and does not require adjusting entries. Adjusting entries are only made for nominal accounts such as Salaries Payable, Interest Income, and Interest Expense.

Reversing entries are not made to correct errors in the accounts. They are made to cancel out the effects of certain adjusting entries that were recorded in the previous accounting period. These entries are typically made at the beginning of a new accounting period and are used to simplify the recording process and ensure that the correct balances are carried forward. Therefore, the statement that reversing entries are made to correct errors in the accounts is false.

A revenue account, with a credit normal balance, shall be closed with a debit to revenue and a credit to income summary. This is because revenue accounts have a credit balance, and to close them, we need to decrease the balance by debiting the revenue account and transferring the amount to the income summary account, which has a credit balance.

Distribution costs or selling expenses are directly related to the entity's efforts to generate sales. These costs include expenses such as advertising, sales commissions, transportation costs, and packaging costs, which are all incurred in order to promote and sell the entity's products or services. Therefore, these costs are directly linked to the entity's sales activities and are necessary to generate sales. Hence, the statement that distribution costs or selling expenses may not be directly related to the entity's efforts to generate sales is false.

The cost of goods sold is not equal to the cost of inventory at the end of the period plus net purchases minus the cost of inventory at the beginning of the period. The correct calculation for the cost of goods sold is the cost of inventory at the beginning of the period plus net purchases minus the cost of inventory at the end of the period.

When a supplier ships goods f.o.b. (free on board) destination, it means that the supplier is responsible for the goods until they reach the buyer's specified destination. Therefore, title to the goods does not pass to the buyer when the supplier delivers the goods to the common carrier. The correct answer is False.

When the seller offers a sales discount, it is advantageous for the buyer to borrow cash in order to settle its obligation within the discount period. This is because the discount reduces the amount owed by the buyer, so borrowing cash to take advantage of the discount can result in cost savings for the buyer. Therefore, the statement is false.

Inventories are included in the computation of net income because they represent the cost of goods that have been sold during a specific period. By subtracting the cost of goods sold from the sales revenue, the company can determine its gross profit. This is an important component in calculating the net income, as it represents the overall profitability of the business after accounting for the cost of producing and selling its products. Therefore, including inventories in the computation of net income allows for a more accurate reflection of the company's financial performance.

Deferrals cannot be reversed in any case. This means that once a deferral is made, it cannot be undone or changed. Therefore, the statement "In no case shall deferrals be allowed to be reversed" is true.

After journalizing and posting the closing entries, the balance of the owner's capital account represents the cumulative net result of income, expense, and withdrawal transactions. This means that the balance in the capital account reflects the total amount of income earned, expenses incurred, and withdrawals made by the owner throughout the accounting period. Therefore, the statement is true.

Raw materials should be classified as inventory on the balance sheet because they are the materials that a company has purchased but has not yet used in the production process. Inventory represents assets that a company intends to sell or use in the production of goods or services. Therefore, raw materials, which are essential for the production process, should be categorized as inventory on the balance sheet.

In the perpetual inventory system, inventory balances are continuously updated in real-time. This means that there is no need to transfer the beginning inventory balance to the income summary account at the start of a new accounting period. The perpetual inventory system automatically keeps track of inventory purchases, sales, and adjustments, allowing for accurate and up-to-date inventory records. Therefore, no entry is required to transfer the beginning inventory balance to the income summary account in this system.

A post-closing trial balance is prepared after all the closing entries have been made and the temporary accounts have been closed. It includes only the permanent accounts, such as assets, liabilities, and equity accounts. Since a balance sheet shows the financial position of a company at a specific point in time, it includes information from permanent accounts. Therefore, a post-closing trial balance provides sufficient information to prepare a balance sheet.

In the perpetual inventory system, all costs associated with acquiring inventory are recorded directly into the inventory account. This includes freight charges on goods purchased, which are considered part of the cost of acquiring the inventory. Therefore, freight charges on goods purchased are debited to the inventory account in the perpetual inventory system.

The statement is false because not all freight charges are included in the computation of the cost of goods sold. While some freight charges may be included, others may be classified as separate expenses such as shipping or delivery costs. Therefore, it is incorrect to say that all freight charges are included in the computation of the cost of goods sold.

When merchandise is returned using the perpetual inventory method, the inventory account is debited to increase the inventory balance and the cost of goods sold account is credited to decrease the cost of goods sold. This is because the returned merchandise is added back to the inventory and the cost associated with it is deducted from the cost of goods sold. Therefore, the statement is true.

When there is a loss, the closing entries are made to transfer the balances of temporary accounts (such as revenue and expense accounts) to the income summary account. The income summary account acts as a temporary holding account to summarize the net income or loss for the period. Since a loss decreases the net income, a credit entry is made to the income summary account to reflect the decrease in net income due to the loss. Therefore, the statement is true.

The statement of changes in equity may not consider the profit or loss figure from the income statement as one of the determining factors that explains the change in owner's equity. This means that the statement of changes in equity may not directly include the profit or loss figure when calculating the change in owner's equity. Instead, it may consider other factors such as contributions from shareholders or distributions to shareholders.

Solvency refers to the entity's ability to settle its long-term financial commitments as they fall due. It indicates whether the entity has enough assets to cover its liabilities in the long run. Liquidity, on the other hand, refers to the entity's ability to meet its short-term obligations. Financial flexibility refers to the entity's ability to adapt to changing financial circumstances. Profitability refers to the entity's ability to generate profits. Therefore, solvency is the most appropriate term to describe the entity's ability to settle its long-term financial commitments.

If Monsters Inc. omitted the entry to convert unearned revenues to earned revenues, it means that they did not recognize the portion of the unearned revenues that should have been recognized as earned revenues. This would result in liabilities being overstated because the unearned revenues that should have been recognized as earned would still be classified as liabilities. Additionally, revenues would be understated because the portion of the unearned revenues that should have been recognized as earned would not be included in the revenue figure.

Cash discounts are not deductions allowed to wholesalers and retailers from the price of merchandise listed in catalogues. Cash discounts are reductions in price given to customers who pay their bills within a specified time period. The correct term for deductions allowed to wholesalers and retailers from the price of merchandise listed in catalogues is trade discounts.

The terms FOB destination and FOB shipping point do not indicate who paid the transaction cost. Instead, they refer to the point at which the ownership and responsibility for the goods transfer from the seller to the buyer. FOB destination means that the seller is responsible for the goods until they reach the buyer's specified destination, while FOB shipping point means that the buyer assumes responsibility once the goods are shipped from the seller's location.

When profit or loss is zero, it means that the company's revenue is equal to its expenses, resulting in neither profit nor loss. In this scenario, there is no need to make any closing entries related to profit or loss because there is no amount to be transferred to the retained earnings account. Therefore, one of the usual closing entries will be avoided when profit or loss is zero.

The amount of profit will appear on the credit side of the Income Statement column on a worksheet if total revenues exceed total expenses for the period. This statement is false. In accounting, profit is calculated by subtracting total expenses from total revenues. If total revenues exceed total expenses, there will be a net profit, which will appear on the debit side of the Income Statement column on a worksheet, not the credit side.

If the total credits exceed the total debits in the balance sheet columns of a worksheet, it indicates that there is a loss. This is because credits represent income or gains, while debits represent expenses or losses. When the total credits are higher than the total debits, it means that the company has incurred more expenses or losses than it has gained in income or profits. Therefore, there is a loss.

When there is a loss, the entry to close the Income Summary account is to debit owner's capital and credit income summary. This is because the loss represents a decrease in the owner's equity, which is reflected by debiting the owner's capital account. The income summary account is used to summarize the revenue and expense accounts before closing them to the owner's capital account. Since the loss is a decrease in revenue, it is closed by crediting the income summary account.

A perpetual inventory system is a method of tracking inventory in real-time, where inventory records are constantly updated with each purchase and sale. In this system, the cost of goods sold is recorded with each sale, meaning that the cost of the items sold is immediately deducted from the inventory account. This allows for accurate and up-to-date tracking of inventory levels and cost of goods sold.

The credit portion of the adjusting entry increases the balance of a liability account. This means that there is an increase in the amount owed by the company to external parties. This could be for things like loans, accounts payable, or accrued expenses.