Ateneo de Davao University

School of Business and Governance

ACFAR 1130 – Financial Accounting and Reporting

General Instruction: Write all your answers on the separate answer sheets provided.

I. Theory. Multiple Choice - Part 1. Choose the correct answer and write the letter of your choice.
A. Only statement 1 is correct. C. Both statements are correct.
B. Only statement 2 is correct. D. Both statements are incorrect.

1 1. Salaries to partners as a general rule is treated as distribution of income and not as operating
expense of the partnership.
2. In the absence of stipulation, partnership losses will be shared in the same ratio as how the profit is
shared.
2 1. The going concern assumption underlies the depreciation of assets over their useful lives.
2. Expense recognition principle dictates that expenses should be recognized in the accounting period in
which goods and services are paid and not when it is used up to produce revenue.
3 1. Adequate disclosure dictates that firms should use the same accounting method from period to period
to achieve comparability over time within a single enterprise.
2. Materiality in financial reporting is only concerned with information that is significant enough to affect
evaluations and decisions.
4 1. A professional accountant’s responsibility is exclusively to satisfy the needs of an individual client or
employer.
2. The entity concept allows transactions of different companies to be accounted for together
5 1. The core competencies of accountants identify knowledge, skills and professional values.
2. Values is concerned with the right and wrong in a business situation, while professional ethics tells the
same thing regarding a profession.
6 1. Computer-based transaction system utilize paper-based journals (general and special) and ledgers
(general and subsidiary).
2. A professional accountant is required to observe integrity, objectivity, confidentiality and professional
behavior.
7 1. Asset considers the right, potential to produce economic benefits and control.
2. Liability is the residual interest in the assets of the entity after deducting all its liabilities.
8 1. Accounting is based on a single-entry system which means that the dual effects of business
transaction is recorded.
2. For purposes of reporting to outsiders, six months is the usual accounting period.
9 1. The rules of debit and credit for income and expense accounts are based on the relationship of these
accounts to owner’s withdrawal account.
2. Accrual is the recognition of an expense already incurred but not yet paid.
10 1. A general ledger is the “reference book” of the accounting system that is used to classify and
summarize transactions.
2. Mortgage payable is recognized when a business organization obtains substantial sum of money from
lenders through issuance of bonds.

I. Theory. Multiple Choice - Part 2. Choose the correct answer of your choice.
11.The purpose of the post-closing trial balance is to
a.) provide the account balances for the preparation of the balance sheet.
b.) ensure that the ledger is in balance for the completion of the worksheet.
c.)ensure that the ledger is in balance for the start of the next period.
d.) aid the journalizing and posting of the closing entries.
12.When there is a loss, the entry to close Income Summary account is
a.) debit Loss and credit Income Summary.
b.) debit Owner’s Capital and credit Income Summary.
c.)debit Income Summary and credit Loss.
d.) Debit Income Summary and credit Owner’s Capital
13. The primary objective of reversing entries is to
a.) place the expenses for the current period in the proper accounts.
b.) correct errors.
c.) simplify the bookkeeping associated with accruals from the prior period.
d.) transfer the balance of the expense accounts to the Owner’s Capital & set the accounts equal to zero.
14. What is the meaning of transportation out?
a.) the amount spent on carrying the goods purchased from suppliers to the entity.
b.) the amount spent on carrying the goods sold to customers.
c.) the amount spent on carrying the returned goods from customers.
d.) the amount spent on carrying the goods returned to suppliers.

15. When seller advances the transportation costs and the term of sale is FOB shipping point, the seller records the
payment of the transportation costs by debiting
a.) accounts receivable c.) sales
b.) accounts payable d.) transportation in.
16. The closing entries for a merchandising entity using the perpetual inventory system
a.) are fewer in number than if the periodic system were used.
b.) are the same regardless of inventory system used.
c.) calculate the gross profit in the Income Summary account.
d.) do not affect the Merchandise Inventory account.
17. Which of the following is true of a voucher system?
a.) The check register replaces the cash receipts journal.
b.) The voucher register contains a debit column for voucher payable.
c.) Transactions are first entered in the check register, and later, when payment is made, in the voucher
register.
d.) Checks are only drawn upon a written authorization in the form of a voucher approved by responsible
officials.
18. Each time an entry is recorded in the purchases journal, the credit would be entered in the
a.) purchases column. c.) accounts payable column.
b.) supplies column. d.) accounts receivable column.
19. A special journal that contains columns for cash, purchase discounts, and accounts payable is
a.) cash receipts journal c.) purchase journal
b.) cash disbursements journal d.) sales journal
20. The type of transaction that would appear in the cash receipts journal would be a
a.) purchase of equipment for cash. c.) loan from a bank.
b.) sale of merchandise on account. d.) return of merchandise from a customer.

I. Theory. Part 3. Answer the following questions

21. What are the factors to consider in arriving at a plan for dividing profits or losses?
a. Money c. industry
b. Property d. all of the above
22. What is the basis in measuring a partner’s non-cash investment?
a. Based on agreement c. Both a and b
b. Fair market values at the time of transfer d. Neither a nor b
23. What is the appropriate account to use when a partner withdraws a substantial amount of money with the
intention of repaying it?
a. Loans Payable - Partner c. Loans Receivable - Partner
b. Drawing account d. Capital account
24. What is this special compensation given to a managing partner when results of operations of the partnership
are favorable?
a. Bonus c. Interest
b. Salaries d. All of the above
25. What is the minimum subscription at the time of incorporation and the minimum stated value?
a. 80% - 20% rule, P1.00 c. 25% - 20% rule, P5.00
b. 25% - 25% rule, P5.00 d. None of the above
26. What are the two components of shareholders’ equity?
a. Legal capital and share premium c. Share Capital and Retained Earnings
b. Legal capital and retained earnings d. Share premium and Retained Earnings
27. What are the two classes of share capital?
a. Ordinary and Preference c. Issued and Outstanding shares
b. Voting and Non-voting shares d. Subscribed shares and treasury stock
28. What is the scheme of sharing the profit based on the partner’s capital contributions
a. ratio on the original and of average capital c. Choices A and B
b. ratio on either beginning or end d. Only B

29. What shares are entitled to dividends?

a. All issued and fully paid shares c. All subscribed shares except treasury shares
b. All subscribed shares d. choices a and c
30. What is the operating cycle of a merchandiser on a Sales on Account?
a. Cash-inventory c. Cash-Accounts Receivable-Inventory
b. Inventory – Accounts Receivable - Cash d. Sales on account – collection - purchases

II. Short Problems. Use the SEPARATE ANSWER SHEET for your final answer. (2points each)

1. The following errors occurred in posting transactions from the journal to the ledger:
a.) A receipt of P5,000 from a client on account was posted as P5,000 debit to cash and a P5,000 credit to
sales.
b.) A payment of P1,800 for advertising was posted as a P8,100 debit to advertising expense and a P1,800
credit to sales.
c.) The purchase of supplies on account for P1,000 was posted twice as a debit to supplies and once as a
credit to accounts payable.
Which column of the trial balance total (Debit or Credit) is larger? By how much?

2. Marvel Training for the year ended December 31, 2018 report a net income of P245,000. The entity did not
include an accrued expense of P 64,000 and a prepayment of P38,000. Marvel Training regularly applies the
Asset Method. What is the correct net income?

3. An entity has P32,000 of supplies on hand at the end of 2017. During 2018, P 44,800 of supplies were
purchased. A count of supplies on hand at the end of 2018 found an inventory of P18,100.
What was the amount of supplies expense for 2018?

4. Duty MoNa Estate owns an office building and leases the office under a variety of rental agreements
involving rent paid in advance monthly or annually. Not all tenants make timely payments of their rent. Balance
sheet contained the following data:
2018 2017
Rental receivable 230,000 190,000
Unearned rentals 410,000 550,000
During 2018, Duty MoNa received P1,800,000 as rent income from tenants
What amount of rental revenues should Duty MoNa record for 2018?

5. An entity that pays employees every two weeks has paid workers P487,500 in wages and salaries for work
completed during 2018. In addition, the employees earned one week’s salary of P9,360 at the end of
December that will be paid as part of the P18,720 payroll at the end of the first week of January in 2018.
How much should the company report as salaries and wages expense for 2018?

For items 6 and 7

The income statement of Darling Company included the following expenses for 2018:
Rent expense P520,000
Interest expense 78,000
Listed below are the related balance sheet account balances at year end for the current year and previous year.
2017 2018
Prepaid rent P13,000 P15,000
Interest payable 18,500 20,000

6. What is the amount of cash paid for rent during the year?

7. What is the amount of cash paid for interest during the year?

8. Happy Company, owned by Beauty Ko, provided the following data for the current year:
Cash balance, January 1 1,300,000
Cash flow from financing activities 1,000,000
Ko, Capital, December 31 2,300,000
Cash flow from operating activities 400,000
Cash flow from investing activities (1,500,000)
Ko, Capital, January 1 2,000,000

What is the cash balance at the end of the current year?

9. Smile Company provided the following information for the current year:

Cash received from customers 6,300,000

Cash paid to suppliers and employees 4,100,000
Cash received from sale of equipment 210,000
Cash received from bank loan 500,000
What was the net cash provided by operating activities for the current year?

10.Pretty Traders purchased merchandise from a supplier for P196,000, including 12% VAT, on account. A 2%
cash discount is available if the account is settled within 10 days from invoice date.
If payment is made within the discount period, how much is the output tax?

11.On May 1, 2018, the Bright Book Distributors acquired for resale books on account with a list price of
P150,000. The supplier allowed a 15% trade discount as well as credit terms of 2/10, n/30. Bright paid the
invoice within the discount period.
How much cash was paid?

12.Assume that the beginning inventory balance of Faith Company for the year is P185,000. On January 10 of the
current year, Faith purchased P18,000 worth of merchandise from a supplier: terms 1/10, n/30. FOB shipping
point. On January 12, Faith paid P500 freight on the shipment. On January 15, Faith returned P2,000 of
merchandise for credit. Final payment was made on January 21. Faith uses the perpetual inventory system,
meaning all entries to Purchases, Returns, Discounts and Freight Costs are changed to Inventory.
What is the balance of Inventory account as of January 21?

For items 13 to 14

Amanda Page Company completed the following purchase and cash disbursement transactions during the
month of January 2018. All credit purchases are 2/10, n/30.

Jan. 1 Amanda invested P1,000,000 of her funds in the business.

5 Acquired office supplies for cash, P70,000. Issued check no.101.
10 Purchased merchandise on account from Nice Company, P200,000.
13 Paid freight charges on merchandised purchased from Nice Company, P1,500. Issued
check no. 102.
 18 Purchased merchandise on account from Bright Company, P260,000.
10 Purchased merchandise for cash, P75,000. Issued check no. 103.
19 Paid Nice Company. Issued check no. 104.
25 Paid salaries, P48,000. Issued check no. 105.
30 Amanda withdrew P50,000 from the business. Issued check no. 106.

Assume the use of special journals.

13.In the purchases journal for the month of January, how much is the total purchases figure?

14.In the cash payments journal for the month of January, how much is the total credit to cash?

For items 15 and 17

Agot Lao Company completed the following sales and cash receipts transactions during the month of June 2018.
All credit sales have terms of 2/10, n/30 and all invoices are dated as at the transaction date.

June 1 Agot Lao invested P500,000 of her funds in the business.

5 Sold merchandise on account to Adorable Company, P65,000.
10 Sold merchandise on account to Beautiful Company, P80,000.
12 Sold P40,000 of merchandise for cash.
14 Received payment from Adorable Company.
20 Sold merchandise to Care Company on account, P50,000.
25 Care returned P5,000 of merchandise from June 20 sale.
26 Borrowed P300,000 from BPI by issuing a 12% note payable due in 1 year.
28 Received payment from Care Company.
30 Sold merchandise on account to Darling Company, P32,000.

Assume the use of special journals.

15.In the sales journal for the month of June, how much is the total sales figure?

16.In the cash receipts journal for the month of June, how much is the total debit to cash?

17. In the cash receipts journal for the month of June, how much is the total credit to accounts
receivable?

For items 18 to 21 (Partnership formation)

18.Angelica Panganiban contributed land, inventory and P500,000 cash to a partnership. The land has a book
value of P350,000 and a market value of P500,000. The inventory has a book value of P180,000 and a market
value of P220,000. Carlo Aquino agreed to put up cash equivalent to Panganiban’s net investment.
How much is the total initial capital of the partnership?

19.Soberano and Gil have just formed a partnership. Soberano contributed cash P850,000 and office equipment
that cost P580,000. The fair value of the equipment is P420,000. Soberano has notes payable on the
equipment of P180,000 to be assumed by the partnership. Soberano is to have 40% capital interest in the
partnership. Gil contributed only P1,200,000.
Soberano should make an additional investment or withdrawal of __________.

For items 20 to 21
Yap operated a shop that sells various merchandise. His post-closing trial balance on Dec. 31, 2017 shows
the following accounts: Cash, P43,200; Accounts receivable, P180,000; Allowance for doubtful accounts, P19,200;
Inventory, P528,000; Equipment, P162,000; Accumulated depreciation, P90,000; Accounts payable, P36,000 and
Yap, Capital, P768,000.
Yap plans to enter into a partnership with Santa Maria, effective January 1, 2018. Profits or losses will be
shared equally. Yap is to transfer all assets and liabilities of his shop to the partnership after revaluation.
Santa Maria will invest cash equal to Yap’s investment after revaluation. The agreed values are as follows:
Accounts receivable (net), P168,000; inventory, P490,000 and equipment (net), P150,000.

20.In the books of Yap, how much is the required adjustment to capital to consider the revaluation?
21.How much is the total assets of the partnership?

For items 22 to 25 (Distribution of Profit)

22.Gutierrez, a partner in the Gutierrez and Lahbati Partnership has a 60% share in the partnership profit and
loss. His capital account had a net increase of P120,000 in 2018. In 2018, he withdrew P150,000 against his
capital and invested property valued at P180,000. What is the profit of the partnership?

23.If a partnership has a profit of P658,000 and Partner Angel Locsin is to be allocated a bonus of 5% of profit
after the bonus, Locsin’s bonus would be _________.

24.Dingdong Dantes and Marian Rivera established a partnership in 2018. Dantes made an initial investment of
P750,000 and Rivera, P650,000. They are considering the following the following scheme of dividing profit:
 Salary allowance of P150,000 for Dantes and P120,000 for Rivera
 10% interest on their capital balance at the beginning of the year
 Remainder to be divided equally.
How much would be the share of Rivera if the profit for the period is P850,000.

25.Lustre, Bernardo, Barreto are partners with average capital balances during 2018 of P540,000, P450,000, and
P360,000, respectively. Partners receive 10% interest on their average capital balances. After deducting
salaries of P100,000 to Lustre and P75,000 to Bernardo, the residual profit or loss is divided equally. In 2018,
the firm sustained a P120,000 loss.

By what amount should Lustre’s capital account change?

Indicate increase or decrease by ___________________.

III. Comprehensive Problems

1.) Lovely O’ Brien, an architect, opened an office on January 1, 2018. During the month, she completed the
following transactions connected with professional practice:
 a.) Transferred cash from a personal bank account to an account to be used for the business,
P1,500,000.
b.) Paid January rent for office and workroom, P175,000.
c.) Purchased an automobile for P1,250,000, paying P250,000 cash and giving a note payable for the
remainder.
d.) Purchased office and computer equipment on account, P450,000.
e.) Paid cash for supplies, P60,000.
f.) Paid cash for annual insurance policies, P120,000.
g.) Received cash from client plans delivered, P407,500.
h.) Paid cash for miscellaneous expenses, P15,000.
i.) Paid cash to creditors on account, P125,000.
j.) Paid installment due on note payable, P20,000.
k.) Received invoice for blueprint service, due in February, P60,000.
l.) Recorded fees earned on plans delivered, payment to be received in February, P645,000.
m.) Paid salary of assistant, P90,000.
n.) Paid gas, oil and repairs on automobile for January, P30,000.

Required:
a.) Journalize each transaction referring to the following chart of accounts in selecting the
accounts to be debited and credited: Cash; Accounts Receivable, Supplies, Prepaid
Insurance; Automobiles; Equipment; Notes Payable; Accounts Payable; Lovely O’
Brien, Capital; Professional Fees; Rent Expense; Salary Expense; Blueprint Expense;
Automobile Expense; Miscellaneous Expense.

2. On December 31, 2018, the balances of the accounts appearing in the ledger of Passion Company
are as follows:

Cash P 915,000 Sales Discounts 400,000

Accounts Receivable 3,600,000 Purchases 35,000,000
Merchandise Inventory, Jan.1 4,500,000 Purchases Returns and Allowances 300,000
Office Supplies 150,000 Purchases Discounts 200,000
Prepaid Insurance 225,000 Freight In 1,500,000
Land 15,000,00 Sales Salaries Expense 15,000,000
0
Store Equipment 13,500,00 Advertising Expense 2,750,000
0
Accum. Depreciation – Store Equip. 2,795,000 Delivery Expense 450,000
Office Equipment 3,925,000 Depreciation Expense – Store Equipment 300,000
Accum. Depreciation – Office Equip. 800,000 Miscellaneous Selling Expense 500,000
Accounts Payable 1,390,000 Office Salaries Expense 7,500,000
Salaries Payable 150,000 Rent Expense 1,500,000
Notes Payable (due in 2 years) 2,915,000 Insurance Expense 150,000
Bree Richards, Capital 17,765,00 Office Supplies Expense 100,000
0
Bree Richards, Drawing 1,750,000 Depreciation Expense – Office Equip 75,000
Sales 83,350,00 Miscellaneous Administrative Expense 275,000
0
Sales Returns and Allowances 600,000

Required:
a.) Prepare a multiple-step Income Statement for Passion Company for the year ended December 31,
2018. The merchandise inventory as of December 31, 2018, was P4,000,000.
b.) Prepare the Statement of Changes in Equity for the year ended December 31, 2018.
c.) Prepare the Balance Sheet as of December 31, 2018.
3. Abby, Connor and Kevin, who are partners in the Chesapeake Novelty Store. The adjusted trial balance on
December 31, 2018 follows:
Debit Credit
Cash P 176,000
Accounts Receivable 128,000
Merchandise Inventory 1,280,000
Prepaid Rent 32,000
Prepaid Insurance 24,000
Accounts Payable P 80,000
Notes Payable 184,000
Abby, Capital 200,000
Connor, Capital 440,000
Kevin, Capital 176,000
Abby, Drawing 40,000
Connor, Drawing 30,000
Kevin, Drawing 27,000
Sales 4,000,000
Cost of Sales 2,223,000
Salaries Expense 720,000
Rent Expense 320,000
Insurance Expense 48,000
Utilities Expense 32,000
Total P 5,080,000 P 5,080,000
Required:
a.) Prepare the 2018 statement of financial performance. Show the division of profit at the lower portion of
the statement according to the partnership agreement that profit or loss is divided among the partners
as follows:
 Salaries of P100,000 for Abby, P50,000 for Connor and P50,000 for Kevin.
 Interest at 5% on the beginning capital balances.
 The remainder to be divided among Abby, Connor and Kevin in a ratio of 3:2:5.
b.) Prepare the statement of changes in partners’ equity for 2018. Assume the following additional
information:

Abby Connor Kevin

Capital, Jan. 1 P 120,000 P480,000 P 240,000
Additional Investment 80,000 40,000 -
Permanent Withdrawals - 80,000 64,000
c.) Prepare the statement of financial position as at December 31, 2018.

4.) The shareholders’ equity of Pretty Corporation at January 1, 2018, appeared below:
Ordinary Shares, P50 par, 200,000 shares authorized P4,800,000
Share Premium 6,468,000
Retained Earnings 3,420,000
During 2018, the following transactions occurred:
April 1 - Declared a 20% share dividend; market value of the ordinary shares was
P120 per share.
April 30 Issued the share dividend declared on April 1.
Nov. 30 Declared a cash dividend of P10 per share.
Dec. 5 Paid the cash dividend declared on Nov. 30.
Dec. 10 Purchased 2,000 ordinary shares for the treasury at P130 per share.
Dec. 20 Issued 5,000 shares for P650,000 cash.
Dec. 31 Closed profit of P2,856,000 from the income summary account to
retained earnings.

Required: a.) Prepare the statement of changes in shareholders’ equity for 2018.
b.) Present the shareholders’ equity section of the balance sheet December 31, 2018.