CHAPTER39

ACCRUAL BASIS
Basic problems
.Problem39-1 (AICPA-Adapted)

Reid Company, [Link] o~rations on January 1, 2020, has

elected to use cash basis accounting for tax purposes and accrual
basis accounting for the financial state~ents.

The _entity reported sales of P1, 759,-000 and P800,000 in the tax
returns for the.· years ended Decemb~r 31, 2Q21 and 2020
. '
· '
respectively.
• I

Th~ entity reported accoun{s receivable 6.f P300,000 and P500,000

. qn December 31, 2021 and 2020, ~espe~tively.
. .
What amount should ~-e reported as sales in the income statement
for 2021 under accrual basis? -

a. 1,450,000
b. f ,s·so,ooo.
C. 1,950,000
)
d._ 2,050~000 ·

Solution· 39-1 Answer b

Accounts receivable - December 31 ,- 2021 300,000

Sales i-n 2021 under cash basis - collections 1,750,000
Total 2,050,000
Accounts receivabl-e
. .
- December 31 ' 2020
. ( 500,000)
Sa les • accrual basis 1,550.000

~8 8
 39-2 (AICPA Adapted)
probeI 01 . .
t,.'rt cornpanY provided the followmg information:
. 2821 2022 '?023
receipts from customers:
cash
. from year 2i~} sales . 950,000 1,200,000
Frotn year 2023 sales - 2,000,000 750,000
Frotn year 2 sa es · 500,000 2,250,000

\. What amount was reported as accrual basis income for 2021?

a. 1,200,000
b. 2,150,000
c. 950-,000
d. 900,000
2. What amount was reported as accrual basis. income for 2022?
'

a. 3,700,000 ·
b. 3,200,000
C. 2,000,000 .
d: 2,750,000

Solution 39-2
Question 1 ·. Answer b
950,000
Cash receipts - ·2021 sales 1,200,000
Cash receipts in 2022 pertaining to 2021 sales
2,150,000
. Total sale_s .2021 - accrual basis

Question 2 Answer d
2,000,000
Cash receipts - 202+ sales 750,-000
Cash receipts in 2023 pertaining to 2022 sales
2,750,000
Total sales 2022 - accrual basis ·
 Problem 39-3 (AICPA ~dapted)
Class Company·maintained the accounting records on the cash b .
but restated the financial statements ·to the accrual methodas1s
· accoUllting. 'rhe entity had P6,000,000 in cash basis pretax inco~!
for 2021. ·
.The e~tity provided the following infonnation at y~ar-ei:id:
-2021
2,020.
Accounts .rec•eivable 4,000,000 .2,000,000·
Acct,unts payable 1.,500i000 3,000,000
. .

Unde:t accrual basis, what amount of inc_oine before tax should be

[Link] 1ncome statement for 2021? ,. ·· ·
a. ._4,?00,000 .
b. _5,50_0,000 ·
c. 6,sou;ooo . ·
d. 9,500,000.
· Solution 39~3 Answe, d
Cash basis incom
,.:. '
e .· . 6,000,000
..
Add: ·Accoin1ts feceivable - 2021 · 4,'0Q0,00_0
-. Acco~nts.p~y~ble .- 202.0.. · . 3,000,000 · 7,000,000
Total
.
· . . . .. 13,000,000
Less: Accciu'1tS receivable·- 2020 2,0Q0,000
. Acc~uRtS payable - 2021 1,500,000 3,500,000
Accru·al .ba·sis income 9,500,000

Guideline - ·cash basis income to accrual basis

Ending asset -balance is added to cash b~sis income ·

Beginning asset balance is deducted from cash basis income
Ending liabilitr bafanee is deducted from cash basis income
Beginning liability balance is added to cash basis incume
 9-4 (A l C PA Adapted)
1113 .
proble .
~M ny repo rted the follo
. .
wmg balances••
C0u.1.y--
f\1aJJ
[Link] 31 January 1
2,600,000 2,900,000
Inventory b1 750,000 500,900
.Accounts paya e·

rs P4 ,900 ,0 00 du ring the current year.

fhe entity paid supplie
ou ld be re po rte d as pu ii:ha ses under accrual basi1?
I. What amount sh
. a. 4;900,000
b; 5,-150,000
c.. 5,650,000
d. 4,650,00Q ' .
'
porte~ for [Link]
.

ha t ould be re
z. . Under ·[Link]~sies,cuwrrent [Link]? . . · ·
an iol)llt sh
·
of°goods ·sol
s
a. · ,45Q,.OOO
·b.. 4,950,000,
I ·Co . 4,850,000
-

d. 4,350,000 .
Solution 39-4
Question 1 Ai,swe~ b -·.
. '75. 0'000
ember J l
\

Accounts•payable .. Dec 4,900,000

Paymen. t to.' .[Link]:rs· . . ·. 5,650,000
· .
TQtal . ( 500,000.)
ary I
Accounts payable - Janu '
. 5, 150,000
'
i~
,s_
Purchases - accrual ba

Question 2 Answer a
2,900,000
Inventory - Jan_uary I· 5,150~000
Purchases · 8,050,000
Goods ava11able tor s~rle31 (2,69@,000)
lnve:,ntory _ Decembe
-S,450}000'
Coat of 10 00 1 aold
! 91
 Problem39-5 (AICPA Adapted)
. · Cooke Company acquired patent right and
Dunng 2021 ,
. royalties of P3,000,000. rellli
. lted
. . ported prepaid royalties of P550,000 and p
· ;:;a~~~ty;:yable of PS00,000 and P750,000, respecti45
veto0o,
.December 31 , 2020 and 2021.
' on
What amount should be reported as royalty expense for
2021?
a. 2,950,000
b. 3,050,000
c. 3, 100;000
d. 3,300,000

Solution 39-5 Answer b

Royalties paid 3,000,000
Prepaid royalties - 2020 550,000
Prepaid royalties_.- 2021 ( 450,000)
Royalties·p·ayable - 2021 750,000
Royalties payable- 2040 · ( 800,000)
Royalty expense for 2·021 . 3,050,000
Problem39-6 (AICPA Adapted)
Based on 2021 sales-of compact discs recorded·by an
artist under
a c·c,ntract with Laser co·mpany, the artist earned Pl ,000
,000 after
an adjustment o_ f P80~000for anticipated returns.
The entity paid the artist P750,[Link] 2021 as a reasonable
estimat~ .of
the amount recoverable from future royalties to be earned
by the artist.
What amount shouid be reported as royalty .expense for
2021?
a. 1,000,000
b. 1,080,000 .
C. 1,750~000
d. 1,830,000
Solution 39-6 Answer a
Royalty _expense for 2021 (earned by arti st in 202 1)
1,000,000

592
 9_7 (Al CPA Adapted)
3
yroblel11 . . .
. C rnpanY acqurred nghts to a patent under a licensing agreement
Ot1 5 0 uired an advance ~oyalty payment when the agreement was
t••\.,~rreq
ed Jbe entity . earned and due tmder the agreement
. renu·tted royalties
sigtl ~~ber 31 each year. .
on oc
· dditionallY, ~e e~tity'paid in advance es:tnnated royalties_ for the n~xt
~ar- The entity did not pref!are reversing entry. Preprud royalties
~e adjusted at year end.
The entity provided the following informati<;>n for the year ended
oece~ber 31: · ·.. -- . .
.,
650,000
· Jan. 1 ,Prepaid royalties . .
I, I00,000
Oct. 31 Rotalty •payment charged to royalty .expense
250,000
oec. 3_1 . Year-end credit adjustment to exp~nse,
. • '

What amount shou,ld _be .reported as prepaid royalties on

[Link] 3_1? ·
a. 250,000 _
b. 400,000
c. ·sso,noo
d. . 900;000

Solu(ion 39- 7 Answer d

650,000
Prepaid royalties - January 1 . · · 250,000
Add: In~re_ase ·in _prepaid royalties on December_31
900,000
Prepaid royalties - December 31
-·
Journal entries during the year

Jan . . 1 . No reversing entry

1,100,000
Oct. 31 Royalty experise l, 100,000
Cash

Dec. 31 Prepaid royalties 250,000

Royalty expense 250,000

593
 Problem 39-8 (AICPA Adapted)
2021 Roxx Company obtained fire insurance at an
On Ju_l~, of P72 ·ooo payable on July 1 of each year. Th~Ua!
prem}
premium paymen't was made July I, 2021. •rst
0 0 t ber I 2021 the entity paid P24,000 for real estate ta
to~o:e~the p~riod dnding September 30, 2022. · Xes
On Decenlber 31, 202 l, what amount should be reported as prepaid
expenses? ·
a~ 60,000
b. 54,000
c. 48,000
d. 36,000
Solution·39-8 A~er b
Prepaid :insurance (72,000 x 6/12) - 36,ooo
Prepaid taxes (24,000 x 9/12) 1s,00
• • I • •
-----.:.0
Total prepaid expenses _-·December 31, 2021 54,0_QQ.,
I

Probiem 39-9 (~CPAAdapted). _ , -

Thrift Comp,any reported ~pat the ~nadju~te~ prepaid e~pense on
December 31, 202T comprtsed the _follpwing. ·
· • An opening bal~nce of Pl,0,000 for anjnsutance policy. The
entity ha~ pai~ an ~ual premium ofP30~,090 on July 1, 2020.
_• .· A ~120,00naajlual insurance pr~mium payment July 1, 2021. 1

~ A P200,000 advance rental payment fq.r a warehouse leased

for one year beginning January 1, 2022. · _
, ~. ' ' • I I •

On _December 31~ 2021,,· what amount should be reported as p~paid

expenses-?
I ·•
. ·
• . •
. •
· · •
•

a~ 520;000
b. 360,000
c. 200,000
d. ·160~000
Solution 39-9 Answer b -
Prepaid insurance (320,000 x·6/l 2)
Prepaid rent . · J60,000
200,000
Total prepaid expens~s-- December 31, 2021
360,000
fhe prep~id insura~ce of P150,000 on January 1 2021 is already
expensed ID 2021. '

!94
 rU 39-10
(Al CPA Adapted)
yroble . ,,
company paid P72 ,000 to renew the only insurance policy
Il~~ee years on March 1,202.1, the effective date of the policy.
fo fv{arch 31 , 2021_, t~e unadjusted trial balance showed a balance
~fOP ,ooO for preprud msurance and P72,000 for insurance expense.
3
W}lat amount shoul~ be reported for prepaid insurance on March ,
1· 1, 2021? . ~ . · . . ·
3
a. 67,000.
b. 7Q,000
c. 72,000
d. 73,000
What amurit should be reported for insurance expense for the three
. 2. '
months e~ded_M~ch 31, 2021? ·
a. 4,000
b~ 3,000
c. 5,000 ·___,
d. 2,000 .

Solution .39.:1,0
·Question 1 Answer b
70,000
Prepaid tnsurance.- March 3t 2021 (72,000 x 3~/36~

Question 2 Answer·c .
'
· 72,000·
Insurance expense per book . 3,000
Prepaid insurance befor~ adjustment
. 75,000
Total (70,000)
· Prepaid insurance - March 3 1, 2021
. '
5,0-00
lnsuranc.e expense

Adjusting entry
67,000
Prepaid insurance (70,000 .- 3,000)
67,000
Insurance exp·ense .
595
 f>roblem-39-11 (IAA) ·
'
Airene Company paid p 1,000,000 for supplies during 202 I
The full amount of P 1,000,000 was debited to supplies inventory:
The January I, 2021 baiance of supplies inventory was P360,ooo.
A physical count of the supplies on hand _on December 31, 2021
revealed an amount of P600,000.
Wh~t is the adjusting entry for supplies ex_pense on December 31, .
2021? ;
a. Debit supplies expense and credit supplie~ inventory P760,000.
b. Debit supplies expense and credit supplies inventory P600,000.
C. Debit supplie~ inventory·ano credit supplies expense P600,000.
d. D~bit supplies jnventory ap.d-~redit [Link].e P~40,000.

Solution 39-1 j A-nswer a

Supplies inventory.:_ Jan~1ary I , . . . . ·: 360,000
Payment for supplies .debited t_!) supplies inventoriy . 1,000,000
Total I,360,000
Supplies inyentory- D~ceniber 31 - . ( 600,000)
Supplies'expense 760,000
' ,

The ass_et titeth9d was·used in _record.ing'purchase of supplies.

Supplies inventory 1,000,000

· Cash
1,000,000
.Adjusting entry_
..
:Supplies expense
Supplies·inventory 760,000
760,000
 I fll 39-12 (iAA) .
p~be
su pp lies in ve nt ory at the be ginning o f the
JllO company reported th e re ve rsin g entry. Pa ments
P4 0,00 0 _befor e
Re wit~ a bal~nce o f ou nted to P2 50 ,0 00 an d w ere r~orded
ye~upphes dunng t~e year am _at ~he ~nd of year revealed supplies
forexpense_. A physical :cou
nt
~. Re':'ersm g en tries are m ade by the entity. What
as used costmg PS~,OO try at ye ar -e nd ? _ . ·
~ebited in ~ e adJust1ng en
supplies _expe1:15e P 10,000
~- supplies · - P 10,000
c.· Suppl~es ~xpe~s.e P240,000
d. supplies P1ve~tory -P 50,000
.
Solution 39-12 An~wer d
pense me~hod is used re cording supplies.
The ex
250,000
supplies expense · · 250,000
Cash ·

Adjusting entry
50,000
SuppJ°ies inventory 50,000
Supplies expense
. .

Problem 39-13 (IAA)

rt lo ca ted in Pa law
. an. The entity collects cash
Lake Company is a reso ion. During December, _the entity coll~ted
when gu~sts inake a reservatrded the receipt by re~ognizing unearned
P600,000 of cash and reco ed one-third of this amount and the other ·
rn
revenue. The entity had ea year. [Link] the impact o fthe adjusting
xt
two-thirds will be earned ne ·
entry at ):ear~erid?
ty
a. 400,090 ihcr~se in equi bility
b. 200,000 decrease in lia t
c. 600,000 increase in as se
· d. 200,000 decrease in
equify .

Solution 39-13 A ns w er b
in recording income.
The liability method is used 600,000
Cash 600,000
Unearned revenue
Adjusting entry
200,000
Unearned revenue 200,000
I
Revenue (600,000 x I/3)
59 7
 Problem 39-14 (IAA)
Karen Company reported in the income statement for the c11-
y~ar P1,100,000 of wages expens~.. An ana lysis. Of '4-11ent
the payro)l
record~showed wage payments during the year of P~50,ooo. ·
The previous year's staternent of financial position report
.
. Pl00,00? ofwag~s payable. The pr v1o~s y~ar ,s [Link] entcy ed
for unpaid wages was reversed at the7beg1nmng of current year.
' .
What amount sh9uld be recognized as _adjusting entry_for accrued
wages payable at year-end?
a. 250,000
b. 400,000
C. .150,000
d. 850,000

Solution '3 9-J 4 Answer a

Wages _payable-:- January· l 100,000
Wages expense for curre!'}t_year 1,100,000
Total l,2_00,000
·Wage payments during the year ( 950,000)
' • I

Wages pay~ble - December'3 I · 250,000

Adjusting entry on Dec·ember_31

Wages expense 250,000

Accrued wages .payable
250,000
Ass11;ming no reversing entry was made

Wages expense
150,000
Wagt,S payable
150,000
Wages payable - December 31
Wages payable - Janua(y l 250,000
l00.000
Increase in wages payab1e
150,000

598
 ' I

yrobledl 39-15 -(AICPA Adapted)

any's , salaried ~mployees are paid biweekly. Advrulces
){ice comp
ductions.
Jllade to employees are paid back ,by payroll de
January 1 December 31
. .
· 240,000 360rOOO
Employee ad~anc~s ? .
Accrued salanes pay_able . 400,000
4,200,000
salaries ~xpense_durmg the year 3,900,000
Salaries pai~ during the year at gross

at amou ~t sh [Link] reported as:a

· ccrued sal~ries payable,on
Wh
Dece_mber 3.1 ?-·
a. 9~0,000 ·
b. 820,000 ·
c. 700,000
d. 300~000 .

Solution -39-15 ·Answer -c •

,400,000
Accrued salaries payable ~January l 4,200,000
.Salaries expense
4;600,000
Total (3,900,000)
Salaries paid durin~ t\le-year
1 .. 700,000
Accrued ~alaries payable -·oecemb~r -,3

. '
 · Problem39-16 (AICPA Adapted)
.

Doren Company had a balance of P490,000 in the compensatio

expense account on December 31, 2021 before year-end adjustm~
·for the following:
• No salary accrual was m~de for the week December 25-3}
2021 . Salaries for this period totaled ~20,000 and were paid
on Ja~uary 5, 2022.
• Bonus for 2021 was p~id on Januarf_31, 2022 in the total amount ·
of Pl 7?,000. ·
. .

What amount should be reported as compensation expense for 2021?

a. 685,000
b. 665,000
C. 510,000
. . .

d. 490,00b .

Solution 39-16. Answer a ·

. .
Cq1npensation expense per book .
490,000
Accrued sal~rie~ - December 3~1, 2021 ~
20,000
Accrued bonus - Decernber 3 I, 2021
. . l 7_5,000
:otal compensation expense
685,000
 .

lell139-17 (Al CPAAdap'ted}'

pro b
ance in
on pece~~r 31, 2021, AShe Company had a P1,500,000 balnts
me .
the advert1smg ex~nse accoW1t before any year-end adjust
December
• Radio and television advertising spots broadcast during
cost of
2021 were billed to Ashe on January 4, 2022. The invoice
P200,000 was paid on January 15, 2022.
ertising
• Included in the Pl ;500,000 is P300,000 for newspaper adv
for a January 2022 sale~ promotional campaign.
202 1?.
What amount s~ould be report~d as advertising expense for
a. 1,500,000
b. 1,400,000
c. ·1,700,000 .
d. 2,000,-000

Solution 39~ 17 Answer b_

1'500 '000
Balance per book .
·-200,000
· Radio advertising accrued _on December 31- , 2021
,·
.,
1,700,000
'

Total 1 . ( 300,000) .
Rrepaid new- spaper_advertising. - December 31, 202.
l,~00,000
. Advertising expense ~or_2021
ed hecause it
The newspaper advertising of P3 00,000 is not yet incurr
·
pertains to a January 2022 sal~s [Link].
 Problem 3.9-18 (AICPA Adapted)
Pak Company had a balance of P820,000 in the p~ofessioiia
expense account on December 31, 2021 before cons1derin I fees
· fc 11 •ng.. . gYear
. ents relating to the o owi '"end
adjustm
• Consult~t&.were hired for [Link] project at a total fe 001
- eXceed P650,000. · , . ~ to
· _.
The entity h~[Link] PS50,000 ofthis fee based on billin
, __ _. gs for
work performed .in2021. · _
uary
-• _the a~o~ey's lett~r requested by the auditor~ ~te d Jan 31
'
2042, 1nd1~ated that legal_fees of~~0,000 wer~ billed on Jan
i':;
15, 2022 for w_ork perfoqned ill Novetn~er 2021, and urib
d
_fees for December 2021 were P70,000.
What ainotmtshouJ~ ,be,reWrted for pfOfessional fees ex
~ for the
· ye~ ended J;)ecember 31, 2021 ?- . · - · · -

· .a. · 1,05.0"00_0
b... . ,.9150~000
. C. , : ' 880;000 t .• .

d. . .820~000 .
,·
Sol~tiorz 39-.1 s° Answer b
" I , ,

~~Janee per book · . . . 1

820,000
Ac9r~red)egai fees: . · , _:
··November·· · · : . · ·
_; ,Deceinber. . : -·: . -. . 60,000
. 70,000 130,000
,
. Tot~I professional·fees expense ~~~
.
.
. .
:he consultants' fee of P550 000 .
had already been recorded and
included in the professional ;[Link] expense.
The balance of p I 00,000 is [Link] because the·work is not yet
performed. · ·
I
. 9.i9 (AICPA Adapted)
1113 ,
yroble ,
o!llPan~ pays the outside salespersons fixed monthly salaries
faY C rn(ss1ons on•net sales.
dcolfl ·. . .
all Jes cotllfllissio~s are computed and paid on a monthly basis (in
sa onth following th~ month of sale), and [Link] salaries are
tbe 01das advances against commissions. . . .
treate . . . . . ..
flowever; if the fixed salaries for salesperson~ exceed their sales

w-
corniniss1ons earned fo~ a month, such excess ,s not charged back
. .

pertinent data for the month of March for the three salespersons
.
areasfollows: . .. . . ·. : · .
F'ixed '
Net sales .. Commission
satesperso.n salary ·
· ·200'·000. 4%
A
..
·10,000 '

400,000 6%
B. ·141000 .
600~000 6%
C ~ . 18,000 I

· Total 42;000 ,. , ..
I 122002000
• • I • . •

What amourit
.'
should kaccrued forsal~
. .
Coi:runissions on. March
'

,31? .
a. · 7·0,000 I
b.. ,68,000 ,
C. 28,000 ·. · .·
d. 26,000 .
Solution ·39-19· Answer
' ..
,. .
c
_. Accrued commission
Salary Commission
A ·10,000 8,000 ·
24,000 10,000 .
B 14,000 18,000
C 18,000 36,000
28,000
 I

· Problem 39-20 (IAA)

Bianca Company maintaitted the accounting records u~ing the cash
·. basis of accounting. During the .current year, t~e entity collected
. P5,000,000 in fees from clif>:1ts.
• _On January 1,- accounts receivable of P800,000 an~ uneaf!ted fees
of PS00,000 had been rerorded. . ·
On December 31, [Link]~s recejvable increased to-P 1,500,0oo
while unearned fees i-ncreas~d to P900,000 . .
' .

Unper ~~crual basi~, what is the service revenue for the current
yeat? · )• ·
a: 5,000,000
~- ··4, 100,000· /

. C.· 6,l 00,000

d. 5,300,000

Soluti~n 39-20 Ans111er d

, ..
Collections fro1n cl,ie1its 5,000,000
Accounts receivable ~ December 31 . 1,500,000
Unearneq fees ·- January J . · 500,000'
. Total• 7,000,000
Accounts .rece·ivable - January I ( 800,000)
Unearned fees-· Decen1ber 31 ( 900,000)
Service revenue - accrual basis 5,300,000
 - l fll39.21 (AICPA Adai>ted)
probe .
g the curre~t year, ~ara Company r~ceived PS,000,000 from
V000
....ts. the entity provided the following data for the current
tell""·
, year: 960,000
eceivable - January 1 1,240,000
Reo t r ·
(lent recetvable:.. December •31 · 3,200,000
unearned rent revenue - January J. 2,400,000
unearned rent revenue - DeGeinber 31 · · 500,000
uncollectible rept written off during the year

What amol.!Ilt of Fent revenue sliould be reported for the current yeall .
- . f

a: -9,080,000
b. ·9~s8·0,o·oo
c. ·s,sso,ooo
d. 7,980-,000

· Solution 39-2I Answer

. . b
8,000,000
Cash received from: tenants 1,240,000
Rent rl ceivable - December 31 · 3,200,000
Une'arned rent revenue - January 1 ; 500,000
Rent written off during the year
12~940;000
Total : . . '

Less: Rent receivable - January I 960,000 l ~360,000.

. Unearned rent revenue - Oecembe~31 2,400,000
'
9,580,000
R_ent .revenue for current year -
 P.-oblem 3~-22 (AICPA Adapted)

RiH Company owned a 20% royalty interest in an oil Well. The

entity received royalty payments on January 31 for the'tliJ sold
between the previous June 1 an4 November 30, and on July
for oil between December 1 and May_31. . . 31
.
Production reports revealed ~he foUowirig,- safes:
I

June I., 2020 - .November 30, 2020 . ~,000-,0~0

December I, 2020 - Dece1rib~r.3 ~ -, 2020 . s.00,000
[Link] 'l, 2020 - May' 3 l,,202f . · 4,000,000
June 1; 202.l'- November 3.0~,,202..1 .· , , 3,259,ooo
· Dece.'mber f, 202 { - December 31, 202 _I , 100,000
• I

What amountshould be report~d as royalty reyenue for 2021?

• • • • • • : _1 ' ' • •
~ / I I . ' ,

a. .' 1,400,000 _ ·:· ..

b. . l,44p~ooo·
. c~ ~ ,490~000 . ,
d. 1,59(!,000 .· · . .,
• I , •

Solution 39-22 Answer c · ,· ·

. ,

December :i, 2020 - fytay 31, 2021 _. . .

4,000,000
December 'I, 2020.- December 3 l' 2020
. .
. . ,' . . .. ' ' . ' ) ' ' ( 590,000)
Salc·s_-}anuary 1 to .May ·31, 202.l
Jun,e I, 2021 . . Noye,mber 30; 2021 .
3,500,000 ·
3,250,000
. De9ember l, 2~2.1 ,_·December,) i, 2021
700,000
Total sales in 2021
7,450,000
Royalty revenue for 2021 .(20% ~ 7,450,000)
1,490,000
 bleI1139-23 (AICPA Adapted)
pro . _ .
At t1ie begi~ning of current_ year, _Penver Company entered into a .
_ -~ll,. licensmg agreement
4-Y~ , - ·-
with
..
Akins Company
- -
a11·o·wm· Aki
g nstouse
penvers cartoon characters on aUthe lunchboxes that Akins
ufactureS- . .
man -
pJ<lns is requfr~d to pay Deriver royalties equal to 10% of annual sales.
Akins gu~an~eq D~nver a P1,200,000;~inimum royalty over the
tife of the agreeme~t and paid Denver the minimum amount at the·
beginning ofcurrent year. - / , _· ·
· Akins' sal~s t~taled P5.,000,000 for the current
. . .
year.
'
·
• . f, .... '

. '

- What amount o_froyalty income should-Denver report for the current

year? . _- _- . ,_

·a. 300,000
b. .soo,ooo·
C. . 800,000
d. 1,200,000· -

Solution 39-23 Answer b .

· · ( 10% X 5,000,000) 500,000
Royalty revenu~ ,for cijrrent year . _ _ _
.. . .

. . d m1·n1·mum ann~al royalty is P300,000

s·ince·_ th~ guarantee ·
. . h - . alty revenue for current year is
(1,200,000 I 4 years), t e roy _. _ _- ·
PS00,000.
 Problem 39-24 (IAA)
•. Reina Company mai~tains its books on a
, current year, the entity collected PS0,000,00cash basis. Durin
paid P42,000,000 in expense_s. ·
0 from customer~:e
d
January Dec~mber 31 _Increase
(Decrease)
Accounts tec~ivable · 2,000,000 1,700,000
Prepaid expen:ses ( 300,000)
200,000 300,000
' Adwances from custo·mers 500,000 900,000 100,000
Ace,rued expenses 400,00()
1,000,000 800,000 ( 200,000)
Accounts ·payable 1,400,000 2,500,000
Depreciation for current year - 1,100,000
500,000·

. What amount should be reported as_acc~u

al basis net income?
a. 6,'500,000 . ·.
b. r-'6;000,000
C. - 8,Q'0Q,000.
d. 7 ,500,ff00

Solution J.-9:..24 Answer :b

I ,
[Link] from customers
Expenses paid 50,000,000
r- .
·Depreciation - . (42,000,000)
( 500,000)
Net-'inc01ne - cash basis ·
[Link]·e-in. accounts receivable 7,Soo,ooo
lric-~ease in prepaid exp~nses ( 300,000)
Increase in advances from customers 100,000
Decrease .in accrued expenses ( 400,000)
In_crease in accounts payable 200,000
( 1,100~000)
-Net iricome - accrual basis
6,000,000
Depreciation should be recognized even un
der cash basis.
Guideline- cash basis income to accru
al basis
Increase in asset - increase·in net income
Decrease in asset - decrease in net incom
e
Increase in liability - decrease in net incom
Decrease in liability - increase in net incomee
 ill 39 ..25 (IAA)
bie . .
ff..O dard Company · d ec~ded
·
to convert . .
. nts to accrual basis financial st t
th e cash basis financial
5t~Ilterfle a ements:
st~ omprehens1ve · · .
insurance polic
, Ac the upcoming year. The las£pr:1UJres a payment every year
:!de oil September 1, 2021. Yment of Pi,200,000 was
the end of the current year; Vario . ..
, At dard Company P650,000. At th~s cre~it card entities owed
5tandi·t card charges outstanding -- . epnd of last year, customer
ere · . were 500,000. . .
Emplo_Yees .are paid.o1;1ce .a mcinth, ·on -~he 10th of the month
• following the wo~k p~nod. . . . · .
cash disbursements to employ~es were P800,000 and P700,000
for January 10, 2022 and ~anuary 10, 2021, respectively. ·
: Utili~,y bills out~tanding to~aled P1o·o 000 at the end of 2021
• . and P250,.QOO atthe·end of 2020. . ' _ · ·
,

• the merchandise on_ha~d at tJ1e end of202 I was P3,500,000

and atthe·en~·of2020, inventory qn hand was P3,200,000.·
• At the end of 2020, the eritity:didnot have any bills outstanding
_·to'suppliers· of m~rchandise. However, a.t' the end 202 C the
entity owed supplier's P4QO:,OOO. ·
. . . . .

• C,ash basis net •income before depreciat~on of P100,000

amounted to P2,600,000. · .
.
. . '

, . \ . '-

1. What amount should be reported as net income under cash

basis? ·
a. 2,600,000 ·
b. 2,700,000
C. 2,500,000
C'. 2,400,000 .
·2. What amount should be [Link] as net income ,under accrual
basis?
a. 3,400,000
b. 3,500,000
C. 3,200,000
d. 2,500,000
· 609
 ·_ .·.,
1

: • i . Solution 3~-25
•

. n 1 Answer c ·
.Ques110 ·

. t •ncome before depreciation

cash basis ne ' . .. - 2,600,00o
Depreciation . · ~
Casll bl'sii net_l®olile - ~

-~~w
. .· .
1
, · . .·
n shoutd°be ·rec'ogniz(!d even under cash bas·

Question 2 Answer a_
~

Cash basis net income before depreciation _· 2,600,000

.Oepre~i~doh . · -_ _· · .· _ :· · · ·( I00,000)
Prepaid insurance - ?ecemb~r J l ,,_2021
,_- -
- {1~290,900 X 8 f' 12) . _ . . ·, . . -·. . . . . soo,ooo
· Accounts receivable '- ·Decemb~~ 31 ,-2021 ~ 650,000·
Accounts r~ceivable - Decerri{ber 31, 2020 ( soo,ooo)
Accrued sala~ies :;_ Oecember .-31 / 2021 _; ( soo,ooo)
Accrued s~laries·- Dec~~~er: 31, :~,Q~O - 700,000
A~[Link]~ -~•Dece~h,~.r )·l ,:2~021-- · ( 100,000)
A~crued utility bills~ be·ceinb~r 31, 2020 . _- 250,000
Inventory - -December 3.1, 29~1 . 3,500,000 .
Inventory'.:.. -Oecem~:er_ 31, 2020 (3,200,000) .
Ac~ounts_payable - _I?e~e~ber 31, 2021 · · ( 400,000) -
. _·Accrual basis net -iiicclme ., 3,400,000 _

~ I
· ·Guideline~ cash to accrual
·E~ding asset balance-is added to cash basis income.
_- Beginning asset bala.n.ce_is-deductedfrom ·cash basis income.
__ Ending liability balance is deducted from cash bqsis income·.
- Beginning liability balance is added to cash basis income.
•' OR
lncrt:ase in asset is added to cash basis income.
D~~reas~ in ass~t is deducted from qash basis income.
ln~rease in.!z'ability is ·deductedfrom cash b·asis income.
De'(:rease in liability is (Jdded to cash basis income.

6th