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PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE – subsidiary ledger
5. FALSE
6. TRUE
7. FALSE – credit to a liability account for ₱7. The AJE is
as follows:
Income…………………….7
Unearned income…………….7
8. TRUE
9. FALSE – Asset method
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. C
3. B
Selected explanation:
Statement III is incorrect - Transaction approach refers
to the computation of profit or loss as the difference
between income and expenses.

4. D
5. E
6. B
7. D – choice (c) refers to chart of accounts
8. C
9. B
10. D
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PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Trial balance
Dr. Cr.
Corresponding
Erroneous cash 54,000 45,000 credit
Corresponding
Debit to accounts credit of the debit
receivable to accounts
omitted 5,000 5,000 receivable

Prepaid rent Corresponding

omitted and listed credit of the debit
as credit 34,000 34,000 to Prepaid rent

Prepaid assets
34,000 listed as a credit
Corresponding
debit of the credit Interest payable
to Interest omitted and listed
payable 4,000 4,000 as debit

Interest payable 4,000

listed as debit
118,00
Total Debits 62,000 0 Total Credits
Difference, excess
56,00 of total credits
0 over total debits

2. B
Dr. Cr.
58,76 58,762 "Should
I. "Should be" 2 be"
"Entry
58,726 made"
II. Sales discount not 52
posted 52
III. No net effect on trial
balance - -
IV. Accounts receivable
posted twice 250 250
250
59,26
Totals 2 59,028
Excess debits 234
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3. A
Solution:
Trial balance
Dr. Cr.
Unadjusted balance 15,100 14,500 Unadjusted balance
(a) debit to AR not
posted 2,100
(b) credit to (10,500 (10,50 (b) erroneous credit
purchases not made ) 0) to accounts payable
(c) erroneous credit
to accounts (c) credit to sales
receivable 26,000 26,000 unrecorded
(d) overstatement of
prepaid rent (18,500 -
15,800) (2,700)
30,00
Adjusted balance 30,000 0

4. A
Solution:
Total credits in adjusted TB (which is equal to
2,376,0
total debits)
00
composed of real and nominal accounts
Total debits in statement of financial position
(1,440,8
columns
00)
composed of real accounts only
Total debits representing nominal accounts 935,20
only 0
(1,234,00
Total credits of nominal accounts
0)
Profit – excess of nominal credits over 298,8
nominal debits 00

5. D

6. A
Expense

prepayment 35,00 adjustment

s 80,000 0 (squeeze)
45,000 adjusted balance
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AJE:
Prepaid asset 35,000
Expense 35,000

7. A

8. C
Solution:
Dr. Cr.
Cash 7,540
Accounts receivable 8,060
Equipment 42,120
Accumulated
depreciation 21,762 a
Accounts payable 6,370
Owner's equity 29,588 b
Totals 57,720 57,720

Accumulated depreciation -
beg. 21,060

Depreciation expense 702

Accumulated
a
depreciation - end. 21,762

Owner's equity - beg. 28,600

Sales 12,480
Depreciation expense (702)
Advertising expense (390)
Other expense (4,940)
Owner's drawings (5,460)
29,5
Owner's equity - end. 88 b

9. D In a post-closing trial balance, all nominal accounts

are zeroed-out.

10. B
Solutions:
 The transactions in 20x2 are recorded as follows:
Sept. Cash 500,00
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1, Note receivable (2M ÷ 4) 0 500,000

20x2 to record the first installment
payment of principal on the note
Sept. Cash (2M x 12%) 240,00
1,
Interest income 0 240,000
20x2
to record the collection of
interest using nominal account (i.e.,
income method)

 Adjusted interest income for 20x2:

Interest income from Jan. 1 to Aug. 31, 20x2 160,00
(2M x 12% x 8/12) 0
Interest income from Sept. 1 to Dec. 31, 20x2
(2M – 500K) x 12% x 4/12 60,000
Adjusted balance of interest income in 220,0
20x2 00

 Adjusted balance of interest receivable as of Dec.

31, 20x2:
(2,000,000 – 500,000) x 12% x 4 /12
60,000

Adjusting entry:
Dec. 31, Interest income 20,000
20x2
Interest receivable 20,000
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PROBLEM 4: CLASSROOM ACTIVITY

Requirement (a): Adjusting entries

1
. Bad debts expense 1,000

Allowance for bad debts 1,000

2 Depreciation expense (100K

. ÷ 10) 10,000

Accumulated depreciation 10,000

3 Interest expense (24K x 10%

. x 3/12) 600

Interest payable 600

4
. Rent expense 2,000

Rent payable 2,000

Requirement (b): Worksheet

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PROBLEM 5: FOR CLASSROOM DISCUSSION

1. C
2. A
3. C – an external transaction (e.g., sale, purchase, etc.) is
less likely to be overlooked compared to an internal
transaction (e.g., growth of biological asset, etc.)
because external transactions are usually evidenced by
supporting business documents (e.g., O.R., purchase
invoice, billing statement, etc.).

4. D
Choice (a) is incorrect – Posting not transposition
Choice (b) is incorrect – Journal not ledger
Choice (c) is incorrect – Business or source documents not trial
balance

5. B
6. B
7. Solution:
Trial balance
Dr. Cr.
Corresponding
Debit to A/R credit of the debit
omitted 6,000 6,000 to A/R

Corresponding
Cash omitted and credit of the debit
listed as credit 36,000 36,000 to cash

Cash listed as a
36,000 credit
Corresponding
debit of the credit Accounts payable
to Accounts omitted and listed
payable 15,000 15,000 as debit

Accounts payable 15,000

listed as debit
Total Debits 30,000 78,000 Total Credits

Difference,
excess of total
48,00 credits over total
0 debits
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8. Solution:
Trial balance
Dr. Cr.
Unadjusted total Unadjusted total
debits 71,850 71,550 credits
(a) credit to
inventory omitted (660)
(b) debit to A/R (b) erroneous debit to
not made 6,000 6,000 A/P
(c) erroneous
credit to interest (c) credit to interest
receivable 3,600 3,600 income unrecorded
(d) overstatement of
unearned rent (5,400 -
(360) 5,040)
Adjusted 80,79
balance 80,790 0

9. Solution:

Journal entries:
Liability method Income method
May 1, 20x1 May 1, 20x1
Cash 30,000 Cash 30,000
Unearned rent Rent income
30,000 30,000

Adjusting entries:
Liability method Income method
Dec. 31, 20x1 Dec. 31, 20x1
Unearned rent 20,000 Rent income 10,000
Rent income (30K x 8/12) Unearned rent (30K x 4/12)
20,000 10,000

10. Solution:
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Journal entries:
Asset method Expense method
Sept. 1, 20x1 Sept. 1, 20x1
Prepaid insurance 90,000 Insurance expense 90,000
Cash Cash
90,000 90,000

Adjusting entries:
Asset method Expense method
Dec. 31, 20x1 Dec. 31, 20x1
Insurance expense 30,000a Prepaid insurance 60,000b
Prepaid insurance Insurance expense
30,000 60,000
a b
(90,000 x 4/12) = 25,000; (90,000 x 8/12) = 75,000

11. Solution:
Requirement (a):
Dec. 31 Sales 800,00
Gain on sale of equipment 0
Inventory – end. 30,000
Inventory - beg. 40,000 65,000
Purchases 200,000
Freight-in 10,000
Salaries expense 400,000
Depreciation expense 18,000
Income summary 177,00
0
Dec. 31 Income summary 177,00
Retained earnings 0 177,000

Requirement (b):
Dec. 31 Retained earnings 28,000
Dividends 28,000

162,00
Retained earnings - Jan. 1
0
177,00
Income summary
0
(28,000
Dividends
)
311,00
Retained earnings - Dec. 31
0

12. Solutions:
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The transactions in 20x2 are recorded as follows:

Sept Note payable (3.2M ÷ 4 annual 800,00
. 30, installments) 0 800,000
20x2
Cash
to record the first installment
payment of principal on the note
Sept Interest expense (3.2M x 12%) 384,00
. 30,
Cash 0 384,000
20x2
to record the cash payment for
interest from Sept. 30, 20x1 to Sept. 30,
20x2 using nominal account (i.e.,
expense method)

 Adjusted interest expense for 20x2:

Interest expense from Jan. 1 to Sept. 30, 20x2 288,00
(3.2M x 12% x 9/12) 0
Interest expense from Oct. 1 to Dec. 31, 20x2
(3.2M – 800K) x 12% x 3/12 72,000
360,00
Adjusted interest expense - 20x2 0

 Adjusted interest payable as of Dec. 31 20x2:

(3,200,000 – 800,000) x 12% x 3/12
72,000

Requirement (a): No reversing entries made

Adjusting entry:
Dec. Interest payable 24,000
31,
Interest expense 24,000
20x2

Requirement (b): Reversing entries are made

Reversing entry
Jan. 1, Interest payable 96,000
20x2
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(Rev. Interest expense 96,000

JE) to record the reversing entry

Adjusting entry:
Dec. Interest expense 72,000
31,
Interest payable 72,000
20x2