Key to Correction: Accounting Equation and Double-entry System

1. C
Statement 1 is wrong because the Current Liabilities are deducted instead of being
added to the equation
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is correct; Working Capital means Current Asset less Current Liability

2. C
A is wrong, Asset must be equal to Liabilities + Equity
B is wrong, change in assets is not always connected to change in liability
C is correct, it is the definition of Double Entry System
D Is wrong, an increase in some assets are not always connected to decrease of other
assets

3. A
Statement 1 is correct; liabilities can be greater or lesser than the capital
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is wrong, the total amount of Asset must be equal to the sum of liabilities
and Capital

4. A – Use the concept of Normal Balances

5. A- The entry would be

Cash 30,000
Loans Payable 30,000
Take note that even though the owner is the one who borrowed cash the transaction
was made under the name of the business; thus, it is a transaction of the business itself

6. C – credit means no cash payment was made.

7. D
Office Equipment 50,000
Inventory 30,000
Cash
(80,000+100,000-50,000+200,000) 330,000
Receivable 50,000
Total Assets 460,000

8. C
Asset = Liabilities + Equity
(10,000) = Liabilities + 2,000
(10,000) – 2000 = Liabilities
(12,000) = Liabilities

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9. A
Asset = Liabilities + Equity
14,000= Liabilities + 4,000
14,000 – 4,000 = Liabilities
10,000 = Liabilities

10. B
Assets = Liabilities + Equity
30,000= (8,000) + Equity
30,000 + 8,000 = Equity
38,000 = Equity
11. A
A is wrong because Liability can be paid using Non cash asset such as Building, Inventory
etc.
B is correct, liabilities can arise from contract
C is correct, liabilities can be estimated, example is Provision for warranty liability.
D is correct, it is in the definition of liability

12. D
A is correct, realized and unrealized gains are within the scope of income
B is correct, both terms are under the concept of Income
C is correct, the word “Generally” made the statement correct because most of the time
when there is an increase in income there is also an increase in asset. C will be wrong if the
paragraph uses the word “Always” instead of the word “Generally”
D is wrong, income is recognized when earned not when cash is collected

13. C
A = It has no effect in the total assets because the receivable was reduced and at the
same time the cash was reduced
B = No effect in total assets because the Equipment was increased at the same amount
the cash was decreased
C = Increase in total assets and increase in total liabilities
D = Decrease in asset and increase in expense

14. D
A is correct, an account is used to sort business transaction
B is correct, it is also one of the uses of accounts
C is correct, financial statements are made using the accounts
D is wrong, account title cannot be used to detect errors

15. D
A is correct, it is the definition of owner’s equity
B is correct, it increases because of those two items

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 C is correct, it is the composition of equity
D is wrong, normal balance will dictate the increase and decrease of a specific account
title

Key to correction: Analyzing Transaction

1. Accountable event
Accounts Affected: Equipment and Accounts Payable
Monetary Value: P10,000,000

2. Non-Accountable Event
Accounts Affected: None, signing of contract will not result to any changes in accounts
Monetary Value: P8,000,000
Account titles and Monetary Value should both be present in order to be an
accountable event

3. Non-Accountable Event
Accounts Affected: None, filing a lawsuit will not result to any changes in accounts
Monetary Value: P5,000,000
Account titles and Monetary value should both be present in order to be an accountable
event

4. Accountable Event
Accounts Affected: Cash and Income, the Lawsuit was already given a final judgment
that is why there is already an effect to the accounts
Monetary Value: P5,000,000

5. Non-Accountable Event
Accounts Affected: None, even if the offer was highly probable to be accepted there is
still no accounts affected until the proposal is actually accepted.
Monetary Value: P2,500,000

6. Non-Accountable event
Accounts Affected: None, increase in future rents has nothing to do with the account
titles
Monetary Value: P50,000

7. Accountable Event
Accounts Affected: Utilities Expense and Utilities Payable. The electricity was incurred
last month; therefore, accounts was already affected even if payment is due next month.
Monetary Value: 40,000

8. Accountable Event
Accounts Affected: Purchases and Accounts Payable

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 Monetary Value: P4,000,000

9. Accountable Event
Accounts Affected: Land and Cash
Monetary Value: P1,000,000

10. Accountable Event

Accounts Affected: Unearned Income and Cash. The cash was received for service to be
rendered next month that is why the income is not yet earned.
Monetary Value: P50,000

Key to Correction: Journalizing and Posting

Multiple Choice
1. A
2. C
3. D
4. C
5. E
6. D
7. A
8. D
9. D
10. B

Problem Solving
Journal Entry
April 1 Cash 77,000
Arc, Capital 77,000
The owner withdrew cash in its personal account to put in the business. A common
misconception is that treating these kinds of transaction as withdrawal which is a
terrible blunder. Always remember that you are recording the transaction of the
business, that is why this transaction is an investment in your eyes.

2 Service Vehicle 81,000

Notes Payable 63,500
Cash 17,500
Use the notes payable not the accounts payable because it was specifically mentioned
in the transaction that the entity made a note.

3 Rent Expense 7,150

Cash 7,150

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 6 Plumbing Supplies 55,700
Accounts Payable 55,700
The problem doesn't state that there is a note given unlike in April 2, that is why in this
scenario Accounts payable was used.

10 Cash 18,350
Plumbing Revenue 18,350

12 Plumbing Supplies 8,050

Cash 8,050

14 Salaries Expense 11,600

Cash 11,600

17 Accounts Receivable 42,200

Plumbing Revenues 42,200
Billing doesn't mean that there is a cash payment. If the problem doesn't say that a
billing was paid in cash, then use the Accounts receivable

18 Accounts Payable 15,700

Cash 15,700

21 Miscellaneous Expense 4,300

Cash 4,300

23 Cash 21,000
Accounts Receivable 21,000

25 Arc, Withdrawals 14,500

Cash 14,500

26 Notes Payable 3,850

Cash 3,850

30 Telephone Expense 1,250

Cash 1,250

Posting

Cash _______ Arc, Capital___

Debit Credit Debit Credit
April 1 77,000 April 1 77,000
2 17,500 Balance 77,000
3 7,150

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 10 18,350
12 8,050
14 11,600
18 15,700
21 4,300
23 21,000
25 14,500
26 3,850
30 1,250
Balance 32,450
The total of Debit is higher than the total of credit, that is why the cash has a debit balance of
22,450.

Service Vehicle____ Notes Payable___

Debit Credit Debit Credit
April 2 81,000 April 2 63,500
Balance 81,000 26 3,850___________
Balance 59,650

Rent Expense___ Plumbing Supplies___

Debit Credit Debit Credit
April 3 7,150 April 6 55,700
Balance 7,150 12 8,050______________
Balance 63,750

Accounts Payable___ Plumbing Revenue____

Debit Credit Debit Credit
April 6 55,700 April 10 18,350
18 15,700 17 42,200
Balance 40,000 Balance 60,550

Salaries Expense___ Accounts Receivable___

Debit Credit Debit Credit
April 14 11,600 April 17 42,200
Balance 11,600 23 21,000
Balance 21,200

Miscellaneous Expense__ Arc, Withdrawals__

Debit Credit Debit Credit

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April 21 4,300 April 25 14,500 ________________
Balance 4,300 Balance 14,500

Telephone Expense___
Debit Credit
April 30 1,250_____________
Balance 1,250

Checking:
Asset = Liability + Owner's equity

Assets
Cash 32,450
Accounts Receivable 21,200
Plumbing Supplies 63,750
Service Vehicle 81,000
Total assets 198,400

Liabilities
Accounts Payable 59,650
Notes Payable 40,000
Total Liabilities 99,650

Owner's Equity
Arc, Capital 77,000
Arc, Withdrawals (14,500)
Telephone expense ( 1,250)
Miscellaneous Expense ( 4,300)
Salaries Expense (11,600)
Plumbing Revenue 60,550
Rent expense ( 7,150)
Total Owner's Equity 98,750

Assets = Liabilities + Owner's Equity

198400= 99650 + 98750
198400= 198400
Using the accounting equation, we can check whether our posting is correct or not. If the debit
and credit is equal there is a high chance that what you've done is correct. Since we all know

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that even if debit and credit are equal there is no absolute assurance that what you've done is
correct because there are errors that still makes your debit and credit equal.

Key to correction: Unadjusted Trial Balance

Multiple Choice
1. D

2. C
A is wrong, trial balance can’t ensure that the FS is correct
B is wrong, Balance sheet can’t give an absolute assurance about the correctness of
journals and posting.
C is correct, the sole purpose of Balance sheet is to ensure the equality of debit and
credit

3. A
A is correct, it is the definition of unadjusted trial balance
B is wrong, it is done to ensure that debit and credit are equal
C is wrong, even if debit and credit are equal it doesn’t mean that the journals are
correct
D is wrong, it is required because it is part of the accounting cycle

4. C
A is wrong, the credit is higher than debit
B is wrong, credit is higher by 36,000. Credit is higher than debit because the debit to
equipment was lower than the right amount
C- Debit is higher because a credit balance was posted to debit
D is wrong, just wrong name of the debtor will not make the trial balance not balance

5. B
A- Creditor's account is Accounts payable, debit is higher because accounts payable was
posted in the debit
B- Debit is lower because the Accounts receivable was posted 100 lower than the right
amount
C- Debit is higher because sales was put in the debit side of the ledger
D- Wrong account title, the trial balance is still equal

6. B
A is wrong, the trial balance is unequal because the error was committed only in debit.
B is correct, wrong account title in the journal will not result in inequality of trial balance
C is wrong, a debit balance was posted as credit, making credit higher than debit
D is wrong, a credit balance was posted as debit, resulting to debit higher than the
credit

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7. B
A is wrong, it is traceable because only one account has an error, resulting to inequality
of debit and credit
B is correct, since the error happened in the journal entry, both debit and credit were
misstated which means that the debit and credit are equal
C is wrong, it is traceable because when an amount is misstated in the trial balance it is
usually happens in one of the accounts resulting to inequality of debit and credit

8. E
A is wrong, it is traceable because the error only happens in one account resulting to
inequality of the trial balance when the trial balance is done
B is wrong, it is untraceable because the error happens in both debit and credit resulting
to equality of the trial balance when the trial balance is done
C is correct, it is the definition of sliding error
D is correct

9. D

10. D
A is wrong, adjusted trial balance is the one used directly in making the Financial
Statements
B is wrong, it doesn’t give an assurance that the debits and credits are correct
C is wrong, trial balance can’t reduce the risk of error to zero because of the undetected
errors even if the trial balance is equal
D is correct, it is the main purpose of trial balance, whether unadjusted or adjusted

11. A
A is true, when the trial balance is imbalance it is a conclusive evidence that there is an
error in the books
B is false, when the trial balance is balance it doesn’t give an assurance that there is no
error because of the presence of untraceable errors
C is false, when the trial balance is balance it doesn’t mean that there is an error.

12. D

Problem Solving
Unadjusted Trial Balance
No. Account Title Debit Credit
110 Cash 3,000,000
120 Accounts Receivable 1,000,000
130 Notes Receivable 1,000,000
140 Prepaid Expense 1,000,000

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 150 Land 3,000,000
160 Equipment 4,000,000
170 Accumulated depreciation 1,000,000
180 Loans Receivable 2,000,000
210 Accounts Payable 1,200,000
220 Notes Payable 1,500,000
230 Loans Payable 4,000,000
310 Reyes, Capital 3,500,000
320 Reyes, Withdrawal 500,000
410 Rent Revenue 5,000,000
510 Utilities Expense 400,000
520 Telephone Expense 300,000
Total 16,200,000 16,200,000

Key to correction: Adjustments

Multiple Choice
1. B
A is subject to correcting entries
B is subject to reclassifying entry because the error is in the account title
C is subject to correcting entries because the error is combination of two errors

2. C
A is wrong because the two affected accounts are both real account
B is wrong because even if it is composed of one real and one nominal account, the
entry to be made is both debits.
C is correct, one nominal account and one real account. It also follows that a journal
entry must have at least one debit and one credit
D is wrong, the two affected accounts are real accounts

3. D

4. D

5. D

6. D

7. E
A is an income
B is not a journal entry, both credit entry

10 | P a g e
 C is an expense
D is an expense

8. C
A is wrong, both are real accounts
B is wrong, both are real accounts
C is correct, one nominal and one real account
D is wrong, both are nominal accounts

9. C
A is an accrued revenue, the income was already earned
B is an advance payment, a deferred expense

10. B
A is a deferred revenue because the cash was received in advance
B is an accrued income because the income was already earned
C is an advance payment, a deferred expense

11. D
120,000/24 months = 5,000 per month
5,000 x 12(January to December) = 60,000

12. B
130,000/5 months= 26,000 per month
26,000 x 2(November 1 to December 31) = 52,000

13. B – Out of 15,000 cash received, the 2500 is for the month of April therefore 15,000 less
2,500 is the revenue for the month of March.

14. D – Out of 235,000 cash received on December only 45,000 is for December, but don't
forget the Income earned in November amounting to 50,000. The question is Income earned
for the year ended meaning the whole income earned during the year
November Income 55,000
December Income 40,000
Total Income 95,000

15. C
The accrual concept was violated because the expense was recorded when paid not
when incurred

Problem Solving

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1.
Date Asset Method Expense Method
May Prepaid Insurance 48,000 Insurance Expense 48,000
31,2020 Cash 48,000 Cash 48,000

Asset method should record an asset in Expense method should record an

the original entry expense in the original entry
Decembe Insurance Expense 14,000 Prepaid Insurance 34,000
r 31, 2020 Prepaid Insurance 14,000 Insurance Expense 34,000

Solution: Solution:

48,000/ 24 months (May 31,2020 to 48,000/24 months = 2,000 expense

May 31,2022) = 2000 expense per per month
month
2,000 x 7= 14,000 expense to be
2,000 x 7(May 31,2020 to December recognized
31,2020)
= 14,000 expense to be recognized Expense to be recognized 14,000
Initial recorded expense (48,000)
Expense to be recognized 14,000 Adjustments for expense (34,000)
Initial recorded expense 0
Adjustments for expense 14,000 Alternative Solution:
2,000 x 17 months (Unexpired portion
Under asset method you need to as of December 31, 2020)
record the unrecorded expense at the = 34,000 adjustments for expense
end of the period that is why expense Note: Either way you will get the
is debited. The expense should be amount 34,000.
deducted to the asset that is why
prepaid insurance was credited. Under asset method you need to
record the unrecorded asset at the
end of the period that is why prepaid
insurance is debited. Only 14,000
expense is incurred at the end of the
period that is why 34,000 is deducted
to the initial recorded expense to
arrive in 14,000 expense.
Dec. 31, Insurance Expense 24,000 Insurance Expense 24,000
2021 Prepaid Insurance 24,000 Prepaid Insurance 24,000

Solution: Same solution and explanation with

the Asset method. Always remember

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 48,000 / 24 months = 2,000 expense that after one adjusting entry, the
per month Expense method will become the
2,000 x 12(January 1,2021 to same with the analysis of Asset
December 31,2021) = 24,000 expense method because in the first adjusting
to be recognized entry, the expense method will start
to recognized an asset making it like
Expense to be recognized 24,000 an Asset method.
Initial recorded expense 0
Adjustment for expense 24,000

Expense is a nominal
account/temporary account, that is
why the expense recorded in 2020 is
not included in the computation in the
expense for 2021. The expense for
2021 is for the whole year because the
entity used the insurance from January
1, 2021 to December 31,2021

May Insurance Expense 10,000 Insurance Expense 10,000

31,2022 Prepaid Insurance 10,000 Prepaid Insurance

Solution: Same analysis and explanation with

48,000/ 24 months = 2,000 expense the Asset method.
per month
2,000 x 5(Jan.1,2022 to May 31,2022) Checking
= 10,000 expense to be recognized Expense for 2020: 14,000
Expense for 2021: 24,000
Expense to be recognized 10,000 Expense for 2022: 10,000
Initial recorded expense 0 Total Expense 48,000
Adjustment for expense 10,000
Note: The total expense should equal
It is important to note that the year the total prepaid insurance, because
2022 is the year of expiration of the the expense every year is only
Prepaid Insurance. The expense for computed by dividing the prepaid
2022 is from January 1 to May 31 only insurance over its life
because the insurance will expire on
May 31, 2022.

2.
Date Liability Method Income Method
February Cash 72,000 Cash 72
29,2020 Unearned Rent Income 72,000 Rent Income 60,000

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 Liability method requires a recognition Income method requires a
of liability at the date of receipt of cash. recognition of income at the date of
Using the word “Unearned” means that receipt of cash.
the rent income is still a liability
Decembe Unearned Rent Income 30,000 Rent Income
r 31, 2020 Rent Income 30,000 Unearned Rent Income

Computation: Computation:

72,000 / 24 months (February 29,2020 72,000 / 24 months = 3,000 per

to February 28,2022) = 3,000 per month month

3,000 x 10 months (February 29, 2020 3,000 x 10 months = 30,000 income to

to December 31, 2020) = 30,000 income be recognized
to be recognized
Income to be recognized 30,000
Income to be recognized 30,000 Initial recorded income (72,000)
Initial recorded income 0 Adjustment for income (42,000)
Adjustment for income 30,000
Alternative Computation:
Under liability method, income is 3,000 per month x 14 months
recorded at the end of the year as part (Unexpired portion as of December
of Adjustments that is why Income was 31, 2020) = 42,000 adjustment for
credited. income
Note: Either way you will get the
42,000 adjustments to income

Under income method, liability is

recorded at the end of the year as
part of adjustments that is why
Liability was credited
Decembe Unearned Rent Income 36,000 Unearned Rent Income 36,000
r 31, 2021 Rent Income 36,000 Rent Income 36,000

Same analysis and computation with

the Liability method, because after
Solution: one adjusting entry, the income
3,000 x 12 months (January 1,2021 to method will become like the liability
December 31,2021) = 36,000 income to method
be recognized

Income to be recognized 36,000

Initial recorded income 0
Adjustments to income 36,000

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 Income is a nominal account, that is
why the income recorded in 2020 is not
included in 2021’s computation of
adjustments for income.
February Unearned Rent Income 6,000 Unearned Rent Income 6,000
28, 2022 Rent Income 6,000 Rent Income 6,000

Solution: Same solution and explanation with

3,000 x 2 months (January 1, 2022 to the liability method
February 28,2022) = 6,000 income to be
recognized Checking:
Income recognized in 2020 30,000
Income to be recognized 6,000 Income recognized in 2021 36,000
Initial recorded income 0 Income recognized in 2022 6,000
Adjustments to income 6,000 Total recognized income 72,000

It is important to take note that the Always remember that the total
expiration of the unearned income is recognized income must be equal to
February 28,2022. During the year 2022, the original cash received by the
the rent income is only for the month of entity.
January and February.

3. A. December 1, 2020
Note Receivable 1,000,000
Plumbing Revenue 1,000,000

B. December 31, 2020

Interest Receivable 10,000
Interest Income 10,000

Solution:
Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 1/12 = 10,000

Adjustments is necessary to affect the unrecorded interest income as of the year end.
During 2020, the entity holds the credit for only 1-month period (From December 1,2020 to
December 31,2020), thus the interest is computed for only 1 month.

C. December 31,2021
Interest Receivable 120,000
Interest Income 120,000

Solution:

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 Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 12/12 = 120,000

During the year 2021, the entity held the credit for one whole year (from January 1,2021
to December 31,2021) that is why the interest is computed for 12 months.

D. December 1,2022
To Record the payment of the notes
Cash 1,000,000
Notes Receivable 1,000,000

To record the Payment of the interest

Cash 240,000
Interest Receivable* 130,000
Interest Income** 110,000

Solution
*Interest Receivable in 2020 10,000
Interest Receivable in 2021 120,000
Total Interest Receivable 130,000
The interest receivable was computed the recorded interest receivable during 2020 and 2021.
The reason why adjusting entry is required for interest is not just because to record the interest
income at year end, but also to record the respective interest receivable during those periods.

**Interest Income = Principal X Interest Rate X Time

Interest Income = 1,000,000 x 12% x 11/12
Interest Income = 110,000
Interest income for the year 2022 is computed only for the month of January 1 to
December 1 and not December 31 because the receivable was already paid at December 1,
meaning the entity only held the receivable for 11 months that is why the interest is computed
for 11 months as well.

Alternative Compound Journal Entry

Cash 1,240,000
Interest receivable 130,000
Interest Income 110,000
Notes receivable 1,000,000

4. A. November 1,2020
Furniture and fixtures 4,000,000
Notes Payable 4,000,000

B. December 31,2020
Interest Expense 160,000

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 Interest Payable 160,000
Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 2/12
Interest Expense = 160,000

Interest is computed for only 2 months because the entity only incurred expense from
November 1 to December 31.
C. December 31,2021
Interest Expense
Interest Payable

Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 12/12
Interest Expense = 960,000

Interest is computed for 12 months because during 2021, the liability was outstanding
for the whole year.

D. November 1,2022

To record the payment of principal

Notes Payable 4,000,000
Cash 4,000,000

To record the payment of interest

*Interest Expense 800,000
**Interest Payable 1,120,000
Cash 1,920,000

Solution
*Interest expense = Principal x Interest rate x Time
Interest expense = 4,000,000 x 24 % x 10/12
Interest expense = 800,000
Interest expense was computed for 10 months only, because the liability is outstanding
only for 10 months during the 2022. The liability was paid on November 1, that is why interest
expense is computed for the period of January 1 to November 1 only.

**Interest payable in 2020 160,000

Interest payable in 2021 960,000
Total Interest Payable 1,120,000

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Alternative compound journal entry
Interest Expense 800,000
Interest Payable 1,120,000
Notes Payable 4,000,000
Cash 5,920,000

5. December 31,2020
Depreciation Expense 1,000,000
Accumulated Depreciation 1,000,000
Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 1/12---December 1 to December 31
Depreciation Expense 1,000,000

Cost 40,000,000
Accumulated Depreciation (1,000,000)
Book Value as of 12/31/2020 39,000,000

December 31,2021
Depreciation Expense 12,000,000
Accumulated Depreciation 12,000,000

Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 12/12---January 1 to December 31
Depreciation Expense 12,000,000

Cost 40,000,000
Accumulated Depreciation (13,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2021 27,000,000 Accumulated Depreciation 2021 12,000,000
Total Accumulated Depreciation 14,000,000

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 December 31,2022
Depreciation Expense 12,000,000
Accumulated Depreciation 12,000,000
Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 12/12---January 1 to December 31
Depreciation Expense 12,000,000

Cost 40,000,000
Accumulated Depreciation (25,000,000)-- Depreciation Expense 2020 1,000,000
Book Value as of 12/31/2022 15,000,000 Depreciation Expense 2021 12,000,000
Depreciation Expense 2022 12,000,000
Total Accumulated Depreciation 25,000,000

December 31,2023
Depreciation Expense 11,000,000
Accumulated Depreciation 11,000,000

Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
Depreciation per year 12,000,000
X 11/12---January 1 to December 1. The equipment’s
Depreciation Expense 11,000,000 useful life is only up to December 1,2023

Cost 40,000,000
Accumulated Depreciation (36,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2022 4,000,000 Accumulated Depreciation 2021 12,000,000
Accumulated Depreciation 2022 12,000,000
Accumulated Depreciation 2023 11,000,000
Total Accumulated Depreciation 36,000,000

At the end of the useful life of the asset, the book value is always equal to the salvage
value because it is the estimated value of the asset after using it.

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Key to Correction: Worksheet
1. C
A is false, worksheet Is not required
B is false, Financial statements can be made even without the worksheet
C is true, it is the definition of worksheet
2. D
3. D
4. D
5. D
Problem Solving
Acts Company
Worksheet
For the year ended December 31,2020
Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet
Balance Balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 10,000 10,000 10,000
Accounts Receivable 20,000 20,000 20,000
Prepaid Rent 5,000 A 1,000 4,000 4,000
Prepaid Insurance 4,000 B 3,000 1,000 1,000
Equipment 45,000 45,000 45,000
Acc. Depreciation 7,000 C 5,000 12,000 12,000
Accounts Payable 10,000 10,000 10,000
Unearned Rent 30,000 D 20,000 10,000 10,000
Acts, Capital 30,000 30,000 30,000
Acts, Withdrawals 10,000 10,000 10,000
Rent Revenue 30,000 D 20,000 50,000 50,000
Rent Expense 10,000 A 1,000 11,000 11,000
Insurance Expense 3,000 B 3,000 6,000 6,000
Depreciation Expense C 5,000 5,000 5,000

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 107,000 107.000 29,000 29,000 112,000 112,000 22,000 50,000 90,000 62,000
Profit 28,000 28,000
50,000 50,000 90,000 90,000

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Key to correction: Statement of cashflows

1. C
A and B are wrong, there is no required method
C is correct, all other components of FS are following the accrual, only Statement
of Cashflow used the Cash basis.
2. C
A is correct, Indirect method and Direct method will yield the same result
B is correct, in Financing Activity and Investing Activity the only way to compute
the cashflow is by deducting the outflow from the inflow
C is wrong, there is only one method to compute the Cashflow from the
investing activity
3. D
A is correct, it is use under the indirect method
B is correct, it is use under the direct method
C is false, it is included in the computation of cashflow for Financing Activities.

4. D
A is false, it is not included because it is on account, no cash involvement
B is false, it is part of operating activities because it is a short-term investment
C is false, it is part of investing activities
D is correct, the amount paid in cash is included in the cashflow from investing
activities
5. D
A is false, it is not part of any activity under the Cashflow statement because
there is no cash involved
B is false, no cash involve therefore it is not part of Cashflow
C is false, it is part of Financing Activities
D is correct, it is a financing activity

Problem solving

1. A. Net Income 40,000

Add: Depreciation Expense 10,000
Total 50,000
Increase in Accounts Receivable (50,000)
Decrease in Prepaid Rent 30,000
Increase in Accounts Payable 100,000
Increase in Notes Payable 20,000
Cashflow provided by Operating Activities 150,000

B. Sale of Land 50,000

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 C. Receipt from Loans Payable 40,000
Payment of Mortgage (50,000)
Cashflow used by Financing Activities (10,000)

D. Cashflow from Operating Activities 150,000

Cashflow from Investing Activities 50,000
Cashflow used in Financing Activities (10,000)
Cashflow during the year 190,000
Add: beginning cash balance (2019) 50,000
Cash balance for 2020 240,000

E. Capital,2019 280,000
Net Income (2020) 40,000
Capital,2020 320,000

Key to Correction: Closing Entries

1. D
2. D
3. D
4. C
A is wrong, cash is a real account, therefore it is not subject to closing entries
B is wrong, the proper way to close the Income is by debiting income and crediting the
income summary account
D is wrong, Withdrawals are not income related account that is why the proper way to
close it is by closing it directly to capital

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