Cash Basis

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Exercises
Cash Basis
Exercise 1
 Speed of Light Company provided the following
information for the current year:
Cash sales
Gross 2,000,000
Returns and allowances 100,000
Credit Sales
Gross 3,000,000
Discounts 150,000
 Customers owed P1,000,000 on January 1 and
P750,000 on December 31. The entity used direct
write off method for bad debts. No bad debts were
recorded in the current year.
 Under cash basis of accounting, what amount of sales
revenue should be reported for the current year?
a. 5,000,000. c.
4,750,000
b. 4,250,000 d.
1,900,000
Accounts receivable, January 1 1,000,000
Add: Credit sales 3,000,000
Less: Sales discounts 150,000 2,850,000
Total 3,850,000
Less: Accounts receivable, Dec 31 750,000
Collection of AR during the year 3,100,000
Cash Sales 2,000,000
Less: Returns & allowances 100,000 1,900,000
Total Collections for the year 5,000,000
Exercise 2
 Alpha Gamma Company reported sales revenue of
P4,600,000 in the income statement for the current
year:
January 1 December 31
Accounts receivable 1,000,000 1,300,000
Allowance for uncollectible accounts 60,000 110,000
Advances from customers 200,000 300,000

 The entity wrote off uncollectible accounts P50,000

during the current year.
 Under cash basis of accounting, what amount should
be reported as sales revenue for the current year?
a. 4,400,000
b. 4,350,000.
c. 4,300,000
d. 4,250,000
Accounts receivable, January 1 1,000,000
Add: Sales for the current year – accrual 4,600,000
basis
Advances from customers – 300,000 4,900,000
December 31
Total 5,900,000
Less: Accounts receivable, Dec 31 1,300,000
Write off 50,000
Advances from customers – 200,000 1,550,000
January 1
Collections – cash basis sales revenue 4,350,000

The advances from customers on December 31 are

received in the current year and therefore included in
cash basis as sales revenue.
However, the advances from customers on January 1 are
received in prior year and properly included in accrual
sales revenue but should be excluded from cash basis
sales revenue for the current year.
Exercise 3
 Jack and Jill Company began the current year with the
following:
Accounts receivable 1,000,000
Allowance for doubtful accounts 50,000
 During the current year, the following events occurred:
Accounts written off 100,000
Cash sales 500,000
Sales on Account 3,000,000
Bade debt expense recognized 200,000
 At the end of the current year, the entity showed a
balance in accounts receivable of P1,700,000 before the
allowance for doubtful accounts.
 Under cash basis, what amount should be reported as
sales for the current year?
a. 2,700,000.
b. 2,200,000
c. 3,500,000
d. 2,900,000
Accounts receivable, January 1 1,000,000
Add: Sales on account 3,000,000
Total 4,000,000
Less: Accounts receivable, Dec 31 1,700,000
Accounts written off 100,000 1,800,000
Collection of receivables 2,200,000
Add: Cash sales 500,000
Total sales - Cash basis 2,700,000

Bad debts expense and allowance for doubtful accounts

are not considered because these do not affect the cash
under cash basis.
Exercise 4
 Orange Company provided the following data for the
current year:
Sales10,000,000
Cost of goods sold 5,300,000
Operating expenses 3,800,000
Dec 31 Jan 01
Prepaid operating expenses 1,000,000 700,000
Accounts payable 1,350,000 1,200,000
Inventory 2,500,000 2,100,000
Accounts receivable 1,400,000 1,375,000

 Under cash basis, what amount should be reported as

purchases for the current year?
a. 5,550,000.
b. 5,700,000
c. 5,850,000
d. 5,150,000
Inventory, January 1 2,100,000
Add: Purchases (squeeze figure) 5,700,000
Goods available for sale 7,800,000
Inventory, December 31 (2,500,000)
Cost of Good Sold 5,300,000

Accounts payable January 1 1,200,000

Purchases – accrual basis 5,700,000
Total 6,900,000
Less: Accounts payable December 31 (1,350,000)
Cash paid for purchases – cash basis 5,550,000
Exercise 5
 Under Cerelac Company’s accounting system, all
insurance premiums paid are debited to prepaid
insurance.
 For interim financial statements, the entity made monthly
estimated charges to insurance expense with an offset to
prepaid insurance
Prepaid insurance – January 1 150,000
Charges to insurance expense during the
current year including a year-end
adjustment of 25,000 625,000
Prepaid insurance – December 31175,000

 What was the amount of insurance premium paid during

the current year?
a. 625,000
b. 475,000
c. 600,000
d. 650,000
Prepaid insurance, January 1 150,000
Add: Insurance paid (squeeze figure) 650,000
Total 800,000
Prepaid insurance – December 31 (175,000)
Insurance expense 625,000

The insurance paid is simply squeezed by working back from the

insurance expense during the current period.
Prepaid insurance – December 31 175,000
Add: Insurance Expense recognized 625,000
during the year
Total Insurance for the whole year 800,000
Less: Prepaid Insurance – January 1 (150,000)
Insurance paid during the year 650,000
Exercise 6
 Marimar Company used the accrual basis of accounting:
December 31 January 1
Inventory 8,000,000 9,000,000
Prepaid expenses 100,000 50,000
Accounts payable 7,500,000 7,000,000
Accrued expenses 500,000 300,000
Cost of goods sold 15,000,000
Expenses 3,000,000

 The expenses for the current year included depreciation

of P200,000 and amortization of P100,000.
 What total amount was paid for expenses during the
current year?
a. 2,550,000
b. 2,850,000
c. 2,700,000
d. 3,150,000
Expenses recorded for the current year 3,000,000
Depreciation (200,000)
Amortization (100,000)
Prepaid expenses – December 31 100,000
Prepaid expenses – January 1 (50,000)
Accrued expenses – December 31 (500,000)
Accrued expenses – January 1 300,000
Cash paid for expenses 2,550,000
Exercise 7
 Under accrual basis, Hamtikan Company reported rental
income for the current year at P600,000.
 The entity provided the following additional information
regarding rental income:
Unearned rental income, January 1 50,000
Unearned rental income, December 31 75,000
Accrued rental income, January 1 30,000
Accrued rental income, December 31 40,000
 What total amount of cash was received from rental in the
current year?
a. 585,000
b. 615,000.
c. 625,000
d. 655,000
Rental income – accrual basis 600,000
Unearned rental income – January 1 (50,000)
Unearned rental income – December 31 75,000
Accrued rental income – January 1 30,000
Accrued rental income – December 31 (40,000)
Rental received – cash basis 615,000
 Exercises
Accrual Basis
Exercise 1
 Redemption Company, which began operations on January
1, 2018, has elected to use cash basis accounting for tax
purposes and accrual basis for the financial statements.
 The entity reported sales of P1,750,000 and P800,000 in
the tax returns for the years ended December 31, 2019
and 2018, respectively.
 The entity reported accounts receivable of P300,000 and
P500,000 on December 31, 2019 and 2018, respectively.
 What amount should be reported as sales in the income
statement for 2019?
a. 1,450,000
b. 1,550,000.
c. 1,950,000
d. 2,050,000
Accounts receivable – December 31, 2019 300,000
Sales in 2019 under cash basis 1,750,000
Total 2,050,000
Less: Accounts receivable December 31, 2018 (500,000
Sales – accrual basis 1,550,000
Exercise 2
 Babe Company provided the following information:

Cash receipts from customers 2019 2020 2021

From year 2019 sales 950,000 1,200,000
From year 2020 sales 2,000,000 750,000
From year 2021 sales 500,000 2,250,000

 What amount should be reported as accrual basis income

for 2019?
a. 1,200,000
b. 2,150,000.
c. 950,000
d. 900,000
 What amount was reported as accrual basis income for
2020?
a. 3,700,000
b. 3,200,000
c. 2,000,000
d. 2,750,000.
Cash receipts from customers 2019 2020 2021
From year 2019 sales 950,000 1,200,000
From year 2020 sales 2,000,000 750,000
From year 2021 sales 500,000 2,250,000

Cash receipts from 2019 sales 950,000

Cash receipts in 2020 pertaining to 2019 sales 1,200,000
Total sales 2019 – accrual basis 2,150,000

Cash receipts from 2020 sales 2,000,000

Cash receipts from 2021 pertaining to 2020 sales 750,000
Total sales for 2020 – accrual basis 2,750,000

What does the cash receipt of P500,000 in 2020

pertaining to 2021 sales represent?
Exercise 3
 Section Company maintained the accounting records on
the cash basis but restated the financial statements to
the accrual method of accounting.
 The entity provided the following information at year-end:
 The entity had P6,000,000 in cash basis pretax income for
2019
2019 2018
Accounts receivable 4,000,000 2,000,000
Accounts payable 1,500,000 3,000,000

 Under the accrual basis, what amount of income before

tax should be reported in the income statement for 2019?
a. 2,500,000
b. 5,500,000
c. 6,500,000
d. 9,500,000.
 Cash basis income 6,000,000
Add: Accounts receivable – 2019 4,000,000
Accounts payable- 2018 3,000,000 7,000000
Total 13,000,000
Less: Accounts receivable – 2018 2,000,000
Accounts payable 2019 1,500,000 3,500,000
Accrual basis income 9,500,000

ANALYSIS:
Accounts receivable ending is added because this pertains to the
accrued sales recorded in 2019.
Accounts receivable beginning is deducted because it has already been
recognized as sales in 2018.
Accounts payable ending is deducted because the expense pertains to
the current year and has an effect of reducing your income being an
expense.
Accounts payable beginning is added back because this pertains to an
expense that has already been recognized in prior years.
Exercise 4
 Grocery Company reported the following balances:
December 31 January 1
Inventory 2,600,000 2,900,000
Accounts payable 750,000 500,000

 The entity paid suppliers P4,900,000 during the current

year.
 What amount should be reported as purchases under
accrual basis?
a. 4,900,000
b. 5,150,000.
c. 5,650,000
d. 4,650,000
 Under accrual basis, what amount should be reported for
cost of goods sold in the current year?
a. 5,450,000.
b. 4,950,000
c. 4,850,000
d. 4,350,000
Accounts payable, December 31 750,000
Add: Payments to suppliers 4,900,000
Total 5,650,000
Less: Accounts payable, January 1 (500,000)
Purchases accrual basis 5,150,000

Inventory, January 1 2,900,000

Add: Purchases 5,150,000
Total 8,050,000
Inventory, December 31 2,600,000
Cost of goods sold 5,450,000
Exercise 5
 During 2019, Cooke Company acquired patent right and
remitted royalties of P3,000,000.
 The entity reported prepaid royalties of P550,000 and
P450,000, royalty payable of P800,000 and P750,000,
respectively, on December 31, 2018 and 2019.
 What amount should be reported as royalty expense for
2019?
a. 2,950,000
b. 3,050,000.
c. 3,100,000
d. 3,300,000

Royalties paid 3,000,000

Prepaid royalties, 2018 550,000
Prepaid royalties, 2019 (450,000)
Royalty payable, 2018 (800,000)
Royalty payable, 2019 750,000
Royalty expense for 2019 3,050,000
Exercise 6
 Bataan Company provided the following data:
January 1 December 31
Accounts receivable 1,200,000 1,,350,000
Accounts payable 1,500,000 1,850,000

 During the current year, accounts written off amounted to

P100,000.
 Sales returns totalled P250,000, of which P50,000 was
paid to customer.
 Cash receipts from customers after P500,000 sales
discounts amounted to P8,000,000.
 Cash payments to trade creditors totaled P5,000,000 after
purchase discounts of P200,000.
 Purchase returns amounted to P400,000, of which
P100,000 was received supplier.
 Under accrual, what amount should be reported as gross
sales?
a. 9,600,000 b. 8,950,000 c. 8,250,000 d. 8,850,000
Accounts receivable, December 31 1,350,000
Accounts written off 100,000
Sales returns (250,000 – 50,000) 200,000
Cash receipts from customers 8,000,000
Sales discounts 500,000
Total 10,150,000
Accounts receivable – January 1 (1,200,000)
Gross Sales 8,950,000

 The sales return of P50,000 paid to customer is

no longer considered in computing gross sales
because presumably this amount is already
included in the cash receipts from customers.
 Bataan Company provided the following data:
January 1 December 31
Accounts receivable 1,200,000 1,,350,000
Accounts payable 1,500,000 1,850,000

 During the current year, accounts written off amounted to

P100,000.
 Sales returns totalled P250,000, of which P50,000 was
paid to customer.
 Cash receipts from customers after P500,000 sales
discounts amounted to P8,000,000.
 Cash payments to trade creditors totaled P5,000,000 after
purchase discounts of P200,000.
 Purchase returns amounted to P400,000, of which
P100,000 was received supplier.
 Under accrual, what amount should be reported as net
sales?
a. 8,250,000 b. 8,200,000 c. 8,100,000 d. 8,150,000
Gross sales 8,950,000
Sales returns (250,000)
Sales discounts (500,000
Net sales 8,200,000
 Bataan Company provided the following data:
January 1 December 31
Accounts receivable 1,200,000 1,,350,000
Accounts payable 1,500,000 1,850,000

 During the current year, accounts written off amounted to

P100,000.
 Sales returns totalled P250,000, of which P50,000 was
paid to customer.
 Cash receipts from customers after P500,000 sales
discounts amounted to P8,000,000.
 Cash payments to trade creditors totaled P5,000,000 after
purchase discounts of P200,000.
 Purchase returns amounted to P400,000, of which
P100,000 was received supplier.
 Under accrual, what amount should be reported as gross
purchases?
a. 5,850,000 b. 5,950,000 c. 5,750,000 d. 5,650,000
Gross sales 8,950,000
Sales returns (250,000)
Sales discounts (500,000
Net sales 8,200,000