MIDTERM EXAM – SOLUTIONS TO THE PROBLEMS

1. At the start of the period, a business has total assets of ₱500,000 and total liabilities of ₱300,000. During the period, the
business earned total income of ₱1,000,000 and total expenses of ₱640,000. No additional investments or withdrawals
were made by the owner. Total assets at the end of the period were ₱830,000. How much is the total liabilities at the
end of the period?
a. 280,000
b. 270,000
c. 260,000
d. 240,000

Solution:
500,000 – 300,000 = 200,000 + 1,000,000 – 640,000 = 560,000 equity, end.
830,000 – 560,000 = 270,000

2. At the start of 2021, Entity ABC had the following machinery and equipment in its PPE sub-ledger:
Machinery A – ₱240,000 cost purchased on cash basis, 10-year remaining useful life, ₱40,000 residual value
Machinery B – ₱480,000 cost purchased on cash basis, 5-year remaining useful life, ₱80,000 salvage value
Machinery C – ₱360,000 cost purchased on account, 15-year remaining useful life, ₱60,000 salvage value
How much is the depreciation expense to be recorded for 1 year on December 31, 2021?
a. 160,000
b. 120,000
c. 144,000
d. 100,000

Solution:
Machinery A – 240,000-40,000 = 200,000/10 = 20,000
Machinery B – 480,000-80,000 = 400,000/5 = 80,000
Machinery C – 360,000-60,000 = 300,000/15 = 20,000
Total = ₱120,000

3. On September 1, 2021, Entity ABC obtained the following interest-bearing loans:

 Loan A - ₱240,000 face value, 6% interest p.a.
 Loan B - ₱480,000 face value, 5% interest p.a.
 Loan C - ₱360,000 face value, 2% interest p.a.
How much is the total interest expense to be recorded on December 31, 2021?
a. 45,600
b. 15,200
c. 11,400
d. 14,400

Solution:
Loan A - ₱240,000 x 6% interest p.a. x 4/12 = 4,800
Loan B - ₱480,000 x 5% interest p.a. x 4/12 = 8,000
Loan C - ₱360,000 x 2% interest p.a. x 4/12 = 2,400
Total = ₱15,200

4. A business has total assets of ₱640,000 and total equity of ₱360,000 at the beginning of the period. The business earns
income of ₱220,000 during the period and reports profit of ₱80,000. There were no transactions with the owner during
the period. Total liabilities increased by ₱40,000 by the end of the period. How much is the total assets at the end of the
period?
a. 560,000

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 b. 440,000
c. 860,000
d. 760,000

Solution:
640,000 – 360,000 = 280,000 beg liabilities
280,000 beg liabilities + 40,000 = 320,000 end liabilities
320,000 end liabilities + 360,000 (beg equity) + 80,000 profit = 760,000 end assets

5. On February 1, 2021, Entity ABC’s owner invested ₱150,000 into the company and the business started operations
immediately. The business also obtained a minimal ₱10,000 loan at the start on February 2021. It has a calendar year
reporting and would need to produce financial statements on December 31, 2021. After 11 months of operation, Entity
ABC has total assets as of December 31, 2021 amounting to ₱780,000, and incurred ₱120,000 total expenses. There was
no additional investment from the owner and no withdrawals were made during the period. How much is the total
ending equity and in what financial statement/s will it appear, assuming that the business earned ₱480,000 total
revenue?
a. 510,000, balance sheet
b. 510,000, statement of changes in equity and balance sheet
c. 510,000, income statement, statement of changes in equity and balance sheet
d. 630,000, statement of changes in equity and balance sheet

Solution: 150,000 beginning equity + 480,000 revenues – 120,000 expenses = 510,000 appearing in SCE and B/S

6. Entity A has accounts receivable of ₱500,000 and a related allowance for bad debts of ₱120,000. How much is the
carrying amount of the accounts receivable?
a. 620,000
b. 500,000
c. 480,000
d. 380,000

Solution: 500,000 – 120,000 = 380,000

7. At the end of the calendar reporting period on December 31, 2021, the following adjustments were recorded by Entity
ABC:
i. Prepaid insurance covering 12 months purchased on December 1, 2021 - ₱240,000 total, recorded ₱40,000 insurance
expense on December 31, 2021
ii. Prepaid insurance covering 2 years purchased on October 1, 2020 - ₱720,000 total, recorded ₱90,000 insurance
expense on December 31, 2021
How much will the entry to correct the above errors impact the insurance expense for the year 2021?
a. No correcting entry needed, the above transactions have been correctly recorded
b. Dr. 250,000
c. Cr. 20,000
d. Dr. 270,000

Solution:
i. 240,000 / 12 x 1 = 20,000 correct amount, correcting entry would credit insurance expense by 20,000
ii. 720,000 / 24 x 12 = 360,000 correct amount, correcting entry would debit insurance expense by 270,000
NET DEBIT of 250,000

8. At the end of the reporting period on December 31, 2021, Entity ABC’s balance sheet shows there is total current assets
of ₱900,000 and total non-current assets of ₱120,000. Total current liabilities amount to ₱30,000, and equity shows
₱780,000. Total revenues earned during the period is ₱120,000 and total expenses incurred is ₱48,000. Total
withdrawals amount to ₱50,000 and additional investment during the period totals ₱10,000.

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 How much is the total ending non-current liabilities?
a. ₱210,000
b. ₱138,000
c. ₱178,000
d. ₱250,000

Solution:
CA + NCA = CL + NCL + E
900,000 + 120,000 = 30,000 + NCL + 780,000
NCL = 210,000

9. The equipment of ABC Co. has a historical cost of ₱500,000 and an accumulated depreciation of ₱120,000. How much
is the carrying amount of the equipment?
a. 620,000
b. 500,000
c. 480,000
d. 380,000

Solution: 500,000 – 120,000 = 380,000

10. As of December 31, 2021 entity ABC’s accounts receivable subledger shows the customer balances below:
 Customer A - ₱120,000 balance, ₱100,000 was deemed doubtful of collection
 Customer B - ₱480,000 balance, 10% of total balance was deemed doubtful of collection
 Customer C - ₱360,000 balance, half of the amount was deemed doubtful
How much is the doubtful accounts expense at the end of the year?
a. None
b. ₱184,000
c. ₱328,000
d. ₱148,000

Solution:
Customer A – 100,000
Customer B – 48,000
Customer C – 180,000
Total 328,000

11. Company ABC had the following prepaid insurance transactions for the year 2021:
 Prepaid insurance recorded using the asset method - ₱240,000 total insurance purchased September 1, 2021,
covering 4 years
 Prepaid insurance recorded using the expense method - ₱360,000 total insurance purchased July 31, 2021,
covering 1 year
How much will insurance expense be impacted when Company ABC records its adjusting entries at year-end on
December 31, 2021?
a. Dr. 170,000
b. Cr. 190,000
c. Cr. 160,000
d. Dr. 200,000

Solution:
 Asset method = 240,000/48*4 = Dr. 20,000
 Expense method = 360,000/12*5 = 150,000; 360,000 – 150,000 = Cr. 210,000
 Net Cr. of 190,000

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12. Company ABC had the following unearned rent revenue transactions for the year 2021:
 Unearned rent revenue recorded using the income method - ₱360,000 advance rent received from the
customer on September 30, 2021, covering 1 year
 Unearned rent revenue recorded using the liability method - ₱480,000 advance rent received from the customer
on June 1, 2021, covering 4 years
How much will rent revenue be impacted when Company ABC records its adjusting entries at year-end on December
31, 2021?
a. Cr. 160,000
b. Dr. 180,000
c. Cr. 180,000
d. Dr. 200,000

Solution:
 Income method = 360,000/12*3 = 90,000; 360,000 – 90,000 = Dr. 270,000
 Liability method = 480,000/48*7 = Cr. 70,000
 Net Dr. of 200,000s

13. Which of the following would result to income of ₱320,000?

a. Total expenses of ₱280,000 and loss of ₱40,000
b. Total expenses of ₱360,000 and profit of ₱40,000
c. Total expenses of ₱220,000 and loss of ₱100,000
d. Total expenses of ₱360,000 and loss of ₱40,000

Solution: 360,000 – 40,000 = 320,000 income (checking: 320,000 income – 360,000 expenses = -40,000 loss)

14. After 1 year of successful operation, Company ABC had the following balances in its accounts: Cash - ₱12,000; Service
revenue- ₱36,000; Doubtful Accounts expense - ₱3,000; Notes payable - ₱30,000; Owner’s Drawings - ₱2,000; Utilities
expense - ₱4,000; Equipment - ₱18,000; Depreciation expense – ₱2,000; Accounts receivable, net - ₱20,000; Interest
income - ₱6,000. How will the income summary be impacted when closing the profit or loss accounts?

a. Cr. 33,000
b. Dr. 31,000
c. Cr. 31,000
d. Dr. 33,000

Solution: 36,000 – 3,000 – 4,000 – 2,000 + 6,000 = 33,000 net income

15. At the start of the 2021 calendar year, Entity ABC acquired an equipment costing ₱2,400,000 on account. The equipment
had a total useful life of 4 years. During the period of operation, Entity ABC had successful operations in the business
as well as completed its corporate social responsibility drives for the community where it belongs. During all of these,
Entity ABC’s accountant has been continuing on recording adjusting entries on a monthly basis, and was being
reviewed by the Chief Financial Officer before recording the entries into the journal and posting it in the ledger. One
afternoon, the CFO was interested to know how much is the total depreciation expense recorded during June 1, 2021 to
December 31, 2021. The accountant would answer:
a. 600,000
b. 300,000
c. 350,000
d. No depreciation expense will be recorded since the equipment was bought on account

Solution: 2,400,000 / 48 months = 50,000 depreciation expense per month;

50,000 x 7 months = 350,000