FAR1 Chap 1 Exercises Answer Key

Bachelor of Science in Accountancy (BSA)

FAR 1: CHAPTER 1 EXERCISES

1-1 On December 31, 2019, Jag Company had total assets of P 640,000 and total liabilities of
P180,000. During 2020, the company had total revenues of P 560,000 and total expenses of

P 460,000. Also during 2020, the owner withdrew P 60,000. On December 31, 2020, total assets
were P 840,000.

___₱460,000___ 1. Compute the owner’s equity on December 31, 2019

Formula: Asset – Liabilities = Owner’s Equity

Solution: ₱640,000 - ₱180,000 = ₱460,000

Answer: Owner’s Equity, beg = ₱460,000

___₱100,000___2. Compute the net income for the year 2020.

Formula: Total Revenues – Total Expense = Net Income

Solution: ₱560,000 - ₱460,000 = ₱100,000

Answer: Net Income = ₱100,000

___₱340,000___3. Compute the total liabilities on December 31, 2020.

Formula: Total Assets – Owner’s Equity = Liabilities

Solution: ₱840,000 - ₱500,000 = ₱340,000

Answer: Total Liabilities = ₱340,000

___₱500,000___4. Compute the owner’s equity on December 31, 2020.

Formula: Owner’s Equity, beg + Net Income - Drawings = Owner’s Equity, end

Solution: ₱460,000 + ₱100,000 - ₱60,000 = ₱500,000

Answer: Owner’s Equity, end = ₱500,000

1-2 On March 1, 2020, Anthony Davis started his business, Davis Laundry Services, by investing

cash of P 140,000. During the month, he earned service revenue on account, P 100,000. He
also paid utilities expenses amounting to P 7,000; wages of P 20,000 and rent expense for the

month of P 12,000. He later collected partially the account of customers amounting to

P 30,000. At the end of the month, he received a bill for advertising for the month of March

payable in April, amounting to P 10,000.

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___₱191,000___5. Compute the owner’s equity on March 31, 2020
Formula: Beg. Capital + Net Profit – Drawings = End. Capital

Solution: Owner’s Equity, 03/01/20 + Income = Owner’s Equity, 03/31/20

₱140,000 + ₱51,000 = ₱191,000

Answer: Owner’s Equity, 03/31/20 = ₱191,000

___₱201,000___6. Compute the total assets on March 31, 2020

Formula: Assets = Liabilities + Owner’s Equity

Solution: ₱201,000 = ₱10,000 + ₱191,000

Answer: Total Assets, 03/31/20 = ₱201,000

___₱10,000___7. Compute the total liabilities on March 31, 2020.

Answer: ₱10,000 = He received a bill for advertising for the month of March PAYABLE IN APRIL
___₱500,000___8. Compute the net income for the month of March 2020

Formula: Revenues – Expenses = Income, 2020

Solution: ₱100,000 – (₱7,000 + ₱20,000 + ₱12,000 + ₱10,000) = Income, 2020

₱100,000 – ₱49,000 = ₱51,000

Answer: Income, 2021 = ₱51,000

1-3 During the current year, the assets of Clipper’s Company increased by P 232,000 and the
liabilities decreased by P 54,000. If the owner’s equity in the business is P 620,000 at the

end of the year, how much is the owner’s equity at the beginning of the year?

Formula: Assets = Liabilities + Owner’s Equity

Solution: 232,000 = (-54,000) + Owner’s Equity
232,000 + 54,000 = Owner’s Equity
286,000 = Increased in Owner’s Equity

End. Owner’s Equity - Increased in Owner’s Equity = Beg. Owner’s Equity

620,000 – 286,000 = Beg. Owner’s Equity
Answer: ₱334,000 = BEG. OWNER’S EQUITY

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1-4 The balance sheet of Miami Company shows owner’s equity of P 680,000, which is equal to
2/3 of the amount of total assets. What is the amount of total assets? Total liabilities?

GIVEN:
Owner’s Equity = 680,000
Assets = 680,000 is 2/3 of the amount of total assets
Liabilities =?
SOLUTION:
680,000 / (2/3) = Total amount of assets
1,020,000 = TOTAL AMOUNT OF ASSETS

Assets = Liabilities + Owner’s Equity

1,020,000 = Liabilities + 680,000
1,020,000 – 680,000 = Liabilities
ANSWER: ₱340,000 = LIABILITIES

1-5 The following data relates to Warriors Company:

Withdrawals by the owner P 56,000

Total revenues during the year 308,000
Owner’s equity, January 1 220,000
Additional investments 94,000
Total expenses during the year 232,000

How much is the owner’s equity at the end of the year?

FORMULA: Beg. OE + Revenues + Add. Investment- Withdrawals = End. OE

SOLUTION:
Beg. OE, Jan. 1 + (Revenues – Exp) + Add. Investment- Withdrawals = End. OE. Jan. 31
220,000 + (308,000 – 232,000) + 94,000 – 56,000 = Ending Owner’s Capital, January 31
220,000 + 76,000 + 94,000 – 56,000 = End. Owner’s Capital, January 31
ANSWER: ₱334,000 = ENDING OWNER’S CAPITAL, JANUARY 31

1-6 Given are the following selected data of Thunder Repair Service Company

Revenue from professional services rendered for cash P 490,000

Revenue from professional services rendered on account 160,000
Additional investment by the owner 104,000

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 Cash collected from account customers 230,000
Operating expenses incurred on account 48,000
Operating expenses incurred for cash 140,000
Cash withdrawn by the owner 76,000

Compute for the net income of the company.

FORMULA: Revenues – Expenses = Income

SOLUTION:
(Revenues Cash + Revenues Account) – (Expenses Account + Expenses Cash) = Income
(490,000 + 160,000) – (48,000 + 140,000) = Income
650,000 – 188,000 = Income
ANSWER: ₱462,000 = INCOME

1-7 You are given the following data:

December 31, 2019 December 31, 2020

Assets P 520,000 P 670,000
Liabilities ₱105,000 P 300,000

During 2020: Net loss, P 20,000; Additional investment, P 35,000; Drawings, P 60,000
Compute for the beginning balance of liabilities.

FORMULA: Beg, Owner’s Equity + Add Investment + Net Income - Withdrawals = End, Owner’s Equity

SOLUTION:
? + 35,000 – 20,000 – 60,000 = 370,000
End, Owner’s Equity – Investment, Net Income + Withdrawals
370,000 – 35,000 + 20,000 + 60,000 = ₱415,000 Beg, Owner’s Equity
Asset - Owner’s Equity = Liabilities
520,000 – 415,000 = ₱105,000
ANSWER: ₱105,000 = Beg, Liabilities

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1-8. The following trial balance did not balance.
JERRY WEST, CPA
Trial Balance
December 31, 2020
Debit Credit

Cash 31,100
Accounts receivable 19,610

Supplies 6,600
Office equipment 73,400

Accounts payable 47,140

Jerry West, Capital 90,000

Jerry West, Drawing 13,000

Professional fees 50,670

Salaries expense 25,000

Advertising expense 4,100

Rent expense 4,000

Utilities expense 10,000

Miscellaneous expense 1,000

Total: ₱187,810 ₱187,810

The following errors were detected:

1. Cash received from a customer on account was debited for P 4,700 and Accounts Receivable
was credited for the same amount. The actual collection was for P 7,400.

2. The purchase of a computer on account for P 23,400 was recorded as a debit to supplies for
P 23,400 and a credit to Accounts payable for P 23,400.

3. Services were performed on account to a client for P 8,900. Accounts receivable was debited
for P 8,900 while Professional fees was credited for P 890.

4. A debit posting to Salaries expense of P 6,000 was omitted.

5. A payment on account for P 2,060 was credited to Cash for P 2,060 but debited to Accounts

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payable for P 2,600.
6. The withdrawal of P 5,000 cash by the owner for his personal use was debited Salaries

expense.
7. Utilities expense of P 2,500 was posted as a credit rather than a debit.

8. The balance of Advertising expense is P 4,100 but it was listed as P 9,100 on the trial balance.
Required: Prepare a corrected trial balance.

1-9 Given the following independent cases, answer the following:

1. On June 1, 2020, ABC Company collected a total of P 43,200 as payment in advance of a

one-year subscription contract to a monthly magazine from a client beginning June 1,

2020. Give the entries needed to record (a) the receipt of the subscription fees and (b) to
adjust the accounts on December 31, 2020 using the liability method and the revenue

method.
(a) the receipt of the subscription fees

(Liability Method)
2020, June 1 Cash P43,200

Unearned Subscription Revenue P43,200

• To record receipt of one-year subscription in advance

(Revenue Method)

2020, June 1 Cash P43,200

Subscription Revenue P43,200

• To record receipt of one-year subscription in advance

(b) to adjust the accounts on December 31, 2020 using the liability method and the revenue
method.
Adjusting entries (Liability Method)

2020, Dec. 31 Unearned Subscription Revenue P25,200

Subscription Revenue P25,200

• To recognize the earned portion of the one-year subscription in advance

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Adjusting entries (Revenue Method)

2020, Dec. 31 Subscription Revenue P18,000

Unearned Subscription Revenue P18,000

• To recognize the earned portion of the one-year subscription in advance

2. Sincere Company incurs salaries at the rate of P 12,600 per day. It pays the employees

every Saturday for a 6-day work-week. The last payday was January 27. Give the adjusting
entry on January 31.

Adjusting entries (Accruals - Expense)

2020, June 31 Accounts Payable P37,800

Accrued Salaries Expense P37,800

• To accrue salaries expense incurred but not yet paid

(P12,600 per day for 6-day work-week) (3days) = P37,800 (Jan. 29, Monday to Jan. 31, Wednesday)

3. Gonzales and Mendoza, a law firm, performed legal services in late December, 2020 for

clients. The P 42,000 of the services will be billed to the clients in January, 2021. Give the
adjusting entry that is necessary on December 31, 2020 if the financial statements are

prepared at the end of each month.

2020, Dec 31 Accounts Receivable P42,000

Service Revenue P42,000

4. Assume that a company acquires a building on January 1, 2020 at a cost of P 1,410,000.

The building has an estimated useful life of 25 years and an estimated residual value of
P 150,000. What adjusting entry is needed on December 31, 2020 to record the

depreciation for the entire year?

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2020, Dec 31 Depreciation Expense P50,400
Accumulated Depreciation P50,400

Depreciation Expense = Cost – Salvage Value

Estimated Useful life
= P1,410,000 – P150,000
25
= P50,400

5. Give the adjusting entries needed as of December 31, the last day of the current year. Show
your computations after each entry.

(a) The balance of the supplies account is a debit of P 14,125. The inventory of supplies on

December 31 amounts to P 4,220.

Supplies Expense 9,905

Supplies 9,905
COMPUTATION: 14,125 – 4,220 = P9,905

(b) The insurance expense account has a debit balance of P 46,800 which represent a one-

year insurance premium paid in advance on October 1.

Prepaid Insurance 35,100

Insurance Expense 35,100

COMPUTATION: 45,800 x 9/12 = P35,100

(c) The balance of the prepaid rent account is a debit of P 27,000 which represent a 6-

month rent received in advance on October 15.

Rent Expense 11,250

Prepaid Rent 11,250

COMPUTATION: 27,000 x 2.5/6 = P11,250

(d) The taxes expense account includes a debit of P 64,800 which represent an advance

payment of taxes for one year beginning April 30.

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 Prepaid Tax 21,600
Tax Expense 21,600

COMPUTATION: 64,800 x 4/12 = P21,600

(e) The advertising expense account includes a debit of P 111,072 which represent the cost

of an advertising contract to publish the company ad in 52 consecutive issues of weekly

magazine. As of December 31, advertisements had appeared in 32 issues already.

Prepaid Advertisement 42,720

Tax Expense 42,720

COMPUTATION: 111,072 x 20/52 = P42,720

(f) The balance of the equipment account is a debit of P 235,200 which represent the cost
of office equipment purchased at the beginning of the year. This equipment was

estimated to have a life of 15 years with a residual value of P 9,600.

Depreciation Expense - Equipment 15,040

Accumulated Depreciation - Equipment 15,040

COMPUTATION: 235,200 – 9,600 = P15,040
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(g) An automobile was acquired on July 1 at a cost of P 720,000. This automobile was
estimated to have a life of 8 years with a residual value of P 90,000.

Depreciation Expense - Automobile 39,375

Accumulated Depreciation – Automobile 39,375

COMPUTATION: 720,200 – 90,000 = P630,000

630,000 x 6/96 = P39,375

6. Give the adjusting entries needed as of December 31, the end of the current fiscal year.

Show your computations after each entry.

(a) The rent revenue account showed a credit balance of P 48,000 which represent a 6-

month rent received in advance from a tenant on October 31.

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 Rent Revenue 32,000
Unearned Rent 32,000

COMPUTATION: 48,000 / 6 = 8 000

(8,000) (4) = P32 000

(b) The balance of the unearned commissions account is a credit of P 35,100 which

represent commissions received in advance for selling one dozen computer sets. As of
December 31, only 5 computer sets were sold.

Unearned Commissions 14,625

Commissions 14,625

COMPUTATION: 35,100 / 12 = 2 925

(2,925) (5) = P14 625

(c) Service fees of P 264,000 were collected for one year in advance on April 1. These are

credited to Unearned Service Fees when received.

Unearned Service Fees 198,000

Service fees 198,000

COMPUTATION: 26,000 / 12 = 22 000

(22,000) (9) = P198 000

(d) Subscriptions income has a credit balance of P 14,040 which represent a one-year
subscription to a monthly magazine received in advance on May 31.

Subscription Income 5,850

Unearned Subscription 5,850

COMPUTATION: 14,040 / 12 = 1,170

(1,170) (5) = P5,850

(e) The company pays a total of P 90,000 every Friday for a 5-day work week ending

Friday. Assume that the last day of the year falls on a Wednesday.

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 Salaries Expense 54,000
Salaries Payable 54,000

COMPUTATION: 90,000 / 5 = 18 000

18,000 X 3 (Wednesday, end) = P54,000

(f) The company had rendered services to a client towards the end of December. The bill

for P 14,100 will be sent in January of the following year.

Accounts receivable 14,100

Service revenue 14,100

1-10 Prepare the adjusting entries on December 31, 2020, the end of the annual accounting
period, on the following independent data. Show your computations after each entry.

1. The Insurance Expense account had a debit balance on December 31, 2020 of P 72,000

representing premium for a 2-year fire insurance policy effective October 1, 2020.
Prepaid Insurance 63,000

Insurance Expense 63,000

COMPUTATION: 72,000 x (21/24) = P63,000

2. Rent Income was credited for P 58,500 on November 1, 2020 representing 9 months’ rent

collected in advance.
Rent Income 45500

Unearned rent 45500

COMPUTATION: (58,500/9) x 7 = P45,500

3. Machinery per general ledger on December 31, 2020 shows a balance of P 558,000.

Machinery acquired during the year was P 78,000 on March 1, 2020. All machinery is to
be depreciated at the rate of 25% per annum.

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 Depreciation Expense - Machinery 136,250
Accumulated Depreciation - Machinery 136,250

COMPUTATION: 558,000 – 78,000 = 480,000

(78,000 (.25) (10/25) = 16,250

480,000 x .25 + 16,250 = P136,250

4. As of December 31, 2020, commissions already earned but not yet collected amounted
to P 18,000.

Accounts receivable 18,000

Commissions 18,000

5. Supplies costing P 18,000 bought during the period was debited to the Supplies account.

Of the amount, P8,000 were consumed during the year.

Supplies Expense 8,000

Supplies 8,000

6. Unearned Subscriptions account showed a credit balance of P 76,000 per general ledger
on December 31. Of this, 40% had been actually earned during the period.

Unearned Subscription 30,400

Subscription Income 30,400

COMPUTATION: 76,000 (.40) = P30,400

7. On December 31, 2020 a 60-day, 9% Notes Payable has a balance of P 360,000 per
general ledger. The note was issued on December 5, 2020. No interest has been taken

on this note.
Interest Expense 2,340

Interest Payable 2,340

COMPUTATION: 360,000 (.09) (26/360) = P2,340

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 8. Fees Collected in Advance has a balance of P 600,000 of which 60% has been earned.
Fees Collected in Advance 360,000

Fees Earned 360,000

COMPUTATION: 600,000 (.60) = P360,000

9. Notes Receivable has a balance of P 300,000 received from a customer in settlement of

an open account on November 16, 2020. The note is a 90-day, 12% note. No interest
has been taken on this note.

Interest Receivable 4,500

Interest Income 4,500

COMPUTATION: 360,000 (.12) (45/360) = P4,500

10. The Prepaid Insurance account has balance of P 105,000 on December 31, 2020. The
balance represented two fire insurance policies acquired during 2020. The first policy,

Policy I for P 60,000 was acquired on March 1, 2020 and the second policy, Policy II was
acquired on August 1, 2020 for P 45,000. Policy I is payment for a 2-year plan while

Policy II is for a one-year plan.

Insurance Expense 43,750

Prepaid Insurance 43,750

COMPUTATION: Policy 1: (60,000) (10/24) = 25,000

Policy 2: (45,000) (5/12) = 18,750

25,000 + 18,750 = P43,750

I-11. Compute for the missing items as indicated by a letter below.

Beginning Net Ending Cost of Gross Operating Net

Sales Inventory Purchases Inventory Goods Profit Expenses Income
sold (Net Loss)
175,000 60,000 85,000 60,000 85,000 90,000 28,000 62,000
268,000 62,000 164,000 68,000 158,000 110,000 40,000 70,000
280,000 72,000 217,000 109,000 180,000 100,000 151,000 (51,000)
440,000 90,000 200,000 110,000 180,000 260,000 170,000 90,000

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 A. (𝐶𝑂𝐺𝑆 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) − 𝑁𝑒𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝑃60,000
• (85,000 + 60,000) – 85,000 = 𝑃60,000
B. 𝑆𝑎𝑙𝑒𝑠 − 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃85,000
• 175,000 – 90,000 = P85,000
C. 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝑃28,000
• 90,000 – 62,000 = 𝑃28,000
D. 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐶𝑂𝐺𝑆 = 𝑃268,000
• 110,000 + 158,000 = 𝑃268,000
E. (𝐶𝑂𝐺𝑆 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝑃164,000
• (158,000 + 68,000) – 62,000 = 𝑃164,000
F. (𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑁𝑒𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠) − 𝐶𝑂𝐺𝑆 = 𝑃109,000
• (72,000 + 217,000) – 180,000 = 𝑃109,000
G. 𝑆𝑎𝑙𝑒𝑠 − 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃180,000
• 280,000 – 100,000 = 𝑃180,000
H. 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝑁𝑒𝑡 𝐿𝑜𝑠𝑠 = 𝑃151,000
• 100,000 + (51,000) = 𝑃151,000
I. (𝐶𝑂𝐺𝑆 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) − 𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = 𝑃200,000
• (180,000 + 110,000) – 90,000 = 𝑃200,000
J. 𝑆𝑎𝑙𝑒𝑠 − 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 = P180,000
• 440,000 – 260,000 = P180,000
K. 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝑃260,000
• 90,000 + 170,000 = 𝑃260,000

1-12. Given the following data, solve for the following:

Debit Credit
Sales P 425,000

Sales returns and allowances P 14,000

Accounts receivable 43,000

Allowance for bad debts 760

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1. If the estimate of uncollectible is made by taking 10% of outstanding accounts
receivable, the amount of the adjustment is _______________________.

COMPUTATION: 43,000 x .10 = 4,300

4,300 – 760 = P 3,540

2. The following accounts were abstracted from Lakers Co.’s unadjusted trial balance at
December 31, 2020.

Debit Credit

Accounts receivable P 700,000

Allowance for bad debts 8,000

Net credit sales P 3,000,000

Lakers estimates that 1% of the gross account receivable will become uncollectible.
After adjustment at December 31, 2020, the Allowance for Bad Debts should have a credit

balance of ___________________.

COMPUTATION: 700,000 x 1% = P 7,000

1-13. The following accounts were found in the ledger of Blondie Company on December 31,
2020:

Debit Credit
Accounts receivable P 356,800

Allowance for bad debts 8,760

Cash Sales P 913,800

Credit Sales 1,851,000

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Instructions:
1.) Prepare the adjusting entry to take up the provision for bad debts account on the books

of Blondie Company under each of the following independent assumptions:

a) Analysis indicates that 5% of the outstanding accounts receivable will not be collected.

Bad debts expense 26,600

Allowance for bad debts 26,600

COMPUTATION: 356,800 x 5% = 17,840

17,840 + 8,760 = P26,600

b) Accounts receivable of P 40,000 will become uncollectible.

Bad debts expense 48,760

Allowance for bad debts 48,760

COMPUTATION: 40,000 + 8,760 = P48,760

c) Accounts receivable of P 10,000 is to be written off, and that the allowance for bad debts is to
be adjusted to 10% of the outstanding accounts receivable.

Bad debts expense 53,440

Allowance for bad debts 53,440

COMPUTATION: 356,800 -10,000 = P346,500

the AR will be reduced (credited) by the amount written off while the allowance will be debited for
10,000, so the allowance will now have a debit balance of 18,760 therefore
Accounts Receivable BALANCE

(346,800 x .10) = 34,680

34,680 + allowance (dr) 18,760 = P53,440

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2.) Show how the Accounts Receivable and the Allowance for Bad Debts would appear on the
December 31, 2020 Statement of Financial Position.

Accounts receivable xxx

less allowance for bad debts xxx

Net Realizable Value xxx

a. Accounts receivable 356,800

less allowance for bad debts 17,840

Net Realizable Value = P338,960

b Accounts receivable 356,800

less allowance for bad debts -40,000

Net Realizable Value = P316,800

c. Accounts receivable 346,800

less allowance for bad debts - 34,680

Net Realizable Value = P312,120

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