CHAPTER 3

Exercises
1.

a . Relevance and materiality prescribe that information must be pertinent and useful to statement users.
The waste basket, brooms, etc. should be immediately expensed as the amounts are not material to
warrant recognition as assets.
b. Understandability and disclosure prescribe that information must be presented in such a way that users
will be informed properly and completely so as to be able to come up with a correct judgment. Details
of the revenues and expenses should be disclosed either within the income statement or as footnotes.
c. Materiality and Accrual dictate that this be capitalized and recognized as asset
d. Timeliness
e. Understandability
f. Comparability
g. Cost and Going Concern

2.

a.
b.
c.
d.
e.

3.

A) Liabilities
P 50,000
B) Assets
P800,000
C) Owners Equity P750,000

Only business transactions under the Entity Principle should be recognized as assets of the business.
Unit of measure should be consistent expressed in Philippine peso.
Time Period assumption & IAS1 prescribes preparation of FS annually.
Entity prescribes separate financial statements. Or if combined, use segment reporting.
Going Concern requires that since these possess economic future benefits, then this should be
capitalized.
f. Accrual is violated. Accrual relates to the time assets, liabilities, revenues and expenses must be
recognized and recorded..
D). Liabilities P300,000
E) Assets P4,000,000, Owners Equity P3,200,000

4. A. (250/300) x 100 = 83%

D. (200/500) x 100 = 40%
B. (350/800) x 100 = 44%
E. (3,200/4,000) x 100 = 80%
C. (750/900) x 100 = 83%
Company A and C are the most solvent at 83%. D is least solvent.
5. A. 200/250 = 80%
B. 200/350 = 57%
C. 200/750 = 27%

D. 200/200 = 100%
E. 200/3,200 = 6.25%
Company D has the highest ROE.

6.

a.
b.
c.
d.

Liabilities
Owners Equity
Assets
Owners Equity

7.

Financial Position:
Cash
Accounts Receivable
Car
Equipment

P1,020,000
P 600,000
P2,000,000
P1,500,000 P650,000= P 850,000

Capital, Beginning
Net Income
Capital, End

P 7,000
40,000
180,000
120,000
347,000
P 50,000
133,000
P183,000

Accounts Payable
Note Payable
Orange, Capital

P 14,000
150,000
183,000
________
P 347,000

8. a. He made no additional investment or withdrawal.

Cash, Beginning
Cash Sales (133,000 40,000)
Payment of Notes Payable
Cash, End

P 50,000
93,000
(150,000)
P 7,000

b. Income or profit caused the change in capital.

9.

Cash
120,000
Accounts Payable
Accounts Receivable
280,000
Loans Payable
Furniture & Fixtures
156,000
Total Liabilities
Equipment
500,000
Car
892,000
Supplies
10,000
Total Assets
P1,958,000
Net Worth (1,958,000-800,000)
P1,158,000

10.

No change in total assets, liabilities and owners equity.

3

360,000
440,000
P800,000

11.

Assets and liabilities will increase by P50,000 but no effect on owners equity.

12.

A
+500,000
NA
NA
-350,000
+350,000
+125,000
-62,500
-5,000

a)
b)
c)
d)
e)
f)
g)

L
NA
NA
NA
NA

OE
+500,000
NA
NA
NA

+125,000
- 62,500

NA
NA
-5,000

13. a) Transaction b) car is not for the business and c) no exchange of value yet. ENTITY PRINCIPLE
b) Transactions e) and f) following entity principle since this is a business liability.
c) Yes - entity principle since the cash used belongs to the business and the owner took it for personal use.
14. a)
Transactions
a.
b.
c.
d.
e.
f.
b)

15. a.
b.
c.
d.
e.
f.

Owner invested cash of P50,000.

Purchased supplies for cash P5,000.
Bought furniture on account P18,000.
Paid account in cash P8,000.
Owner withdrew P2,000 cash.
Issued a note for an account due of P10,000.

Assets
Cash
35,000
Supplies
5,000
Furniture 18,000
P58,000

Liabilities
+
Notes Payable 10,000
______
10,000 +

Owners Equity
Vega, Capital
P50,000
Vega, Drawing
( 2,000)
_____
P48,000

Zobel invested cash of P500,000 and electronic equipment of P1,500,000.

Purchased supplies on account P15,000.
Purchased furniture and fixtures, P25,000. Terms: P5,000 down, balance with a note.
Additional investment in office equipment for P80,000.
Total cash paid P15,000 for the note P10,000 and for the account P5,000.
Zobel withdrew supplies worth P1,000 for personal use.

Assets P2,099,000 less Liabilities of P20,000 = Owners Equity of P2,079,000.

16.

Date
1)
10)
15)
20)
25)

Cash
350,000
(10,000)
(15,000)
(8,000)
(45,000)
(1,500)
(125,000)
145,500

Assets P475,000

Furn

Equipt

Supplies

Leasehold Imp

Dep for Rent

Notes Pay

De Jesus Captl
350,000

10,000
15,000
8,000
45,000
1,500
250,000
8,000

125,000

295,000

Liabilities P125,000

1,500

15,000

10,000

125,000

P350,000

Owner's Equity P350,000

Playnet.Com
Statement of Financial Position
March 31, 2012
Cash
Supplies
Leasehold Improvement
Rent Deposit
Equipment
Furniture & Fixtures
Total Assets
17.
Feb.
05
09
16
20
22
25
28

Cash
150,000
( 15,000)
( 35,000)
(

P145,500
1,500
15,000
10,000
295,000
8,000
P475,000

125,000
350,000

Total Liabilities &

Owner's Equity

_______
P475,000

Assets
=
Liabilities
+
Art
Office
Furn.
Accounts
Equipment Supplies Supplies & Fix.
Payable

Owners Equity
Notes
Payable Kalaw, Capital
150,000

15,000
105,000
6,000

70,000
6,000

1,500)

( 35,000)

Notes Payable
De Jesus, Capital

1,500
______

______

8,000
_____

_____
4

8,000
(70,000)

35,000

______

P 63,500
P111,000
P15,000 P 1,500 P8,000
14,000
a) P150,000 using the Entity Concept
b) P 6,000 using the Cost Principle
c)
Straight & True Advertising
Statement of Financial Position
February 28, 2010
Cash
Supplies
Equipment
Furniture & Fixtures
Total Assets

P 63,500
16,500
111,000
8,000
P199,000

P35,000

Accounts Payable
Notes Payable
Kalaw, Capital
Total Liabilities &
Owner's Equity

P150,000

14,000
35,000
150,000
_______
P199,000

18. a)
Date
Jan. 4
8
10
14
15
17
30

Cash
1,500,000
( 915,000)

Supplies

Furn.
& Fix.

Lot
300,000

Bldg.

15,000

Equipment

Accounts
Payable

Loan
Payable

Valdez,
Capital
1,800,000

900,000
80,000

80,000

(1,000)
2,500,000
( 40,000)
(1,500,000)
1,545,000

1,000)

2,500,000
(40,000)
14,000

300,000

80,000

1,500,000
1,500,000

900,000

40,000

2,500,000

1,799,000

b) June 10 Entity Concept to recognize assets of business

June 14 Entity Concept to recognize recovery of capital
June 30 Cost Principle to recognize value of constructed clinic only although loan is worth P2,500,000
c)

Jos Health Spa

Statement of Financial Position
June 30, 2011
Cash
Supplies
Lot
Furniture & Fixtures
Building
Equipment
Total Assets

19 a)

P1,545,000
14,000
300,000
80,000
1,500,000
900,000
P4,339,000

Accounts Payable
Loan Payable

P 40,000
2,500,000

Valdez, Capital
Total Liabilities &
Owner's Equity

1,799,000
________
P 4,339,000

Assets

Apr

Cash

1
2
10
15
20
23
25
30

300,000
( 50,000)

Supplies

Liabilities

Equipment

Furn. & Fix

Car

Notes
Payable

300,000
100,000

25,000
150,000
500)
_____
24,500

75,000

(
( 10,000)
P 40,0000

______
300,000

Assets
Cash
Supplies
Equipment
Furniture & Fixtures
Car
Total

______
200,000

______
150,000

(10,000)
40,000

Substance Over Form

f. Accrual
Cost
g. Accrual/Substance Over Form
Objectivity/Reliability
Recognition/Accrual/Going Concern
Unit of Measure

2. A. Assets =

Liabilities

______
75,000

_______
P600,000

(500)
____
(500)

Cavite Day Care Center

Statement of Financial Position
April 30, 2012
Liabilities & Owners Equity
P 40,000)
Notes Payable
P 40,000
24,500
Accounts Payable
75,000
300,000
Narvaez, Capital
599,500
200,000
150,000
______
P 714,500
Total
P 714,500

Problems
a.
b.
c.
d
e.

Narvaez,
Drawing

50,000

300,000
(100,000)
( 25,000)
( 75,000)

Owners Equity
Narvaez,
Capital

300,000
100,000

b)

1.

Accounts
Payable

Owners Equity
5

6,150,000
1,500,000
( 750,000)
750,000
( 750,000)
6,900,000 -

2,650,000
1,500,000

B. Assets =
2,200,000
700,000
2,900,000

Liabilities
1,050,000
300,000
1,350,000

3,500,000

( 750,000)
3,400,000

C.
Assets
=
Beg.
1,380,000
During 800,000
End
2,180,000 =

May
1
2
3
4
8
10
19
25
30

Supplies

500,000
(150,000)
( 45,000)
( 15,000)
( 25,000)
(
500)
( 25,000)
(100,000)
139,500

Owners Equity
1,150,000
400,000
1,550,000

Liabilities
660,000
(100,000)
560,000

3.
Cash

________
3,500,000

+
+

Rent
Deposit

Owners Equity
720,000
900,000
1,620,000
Equipment

Furn. &
Fixtures

Notes
Payable

Accounts
Payable

Eow,
Capital
500,000

150,000
68,500
245,000

68,500
200,000

15,000
50,000

25,000
(

500)

(25,000)
15,000

150,000

313,500

50,000

(100,.000)
100,000

568,000

Claires Step and Sway

Statement of Financial Position
May 31, 2012
Assets
Liabilities & Owners Equity
Cash
P139,500
Accounts Payable
P 100,000
Supplies
15,000
Equipment
313,500
Eow, Capital
568,000
Furniture & Fixtures
50,000
1
Rent Deposit
150,000
______
Total
P668,000
Total
P668,000
4.
March
Cash
1
3 250,000
9 ( 60,000)
10
15 250,000
20 (200,000)
25 (130,000)
110,000

Equipment

Furniture
& Fixture
200,000
( 10,000)

200,000
200,000

Assets
Cash
Equipment
Furniture & Fixtures
Lease Right
Total

5.

Lease
Right
500,000

500,000

190,000

Loans
Payable

250,000
250,000

Notes
Payable

Ocampo,
Capital
500,000
250,000

140,000
( 10,000)
(130,000)
0

750,000

Green Golf Lane

Statement of Financial Position
March 31, 2012
Liabilities & Owners Equity
P 110,000
Loans Payable
P 250,000
200,000
Ocampo, Capital
750,00
190,000
500,000
P1,000,000
Total
P1,000,000

Bersoza Playhouse
Statement of Financial Position
September 30, 2011
6

Cash
Accounts Receivable
Props & Costumes

19,000
20,000
29,200
68,200
Helen Bersoza, Capital
5,900
Total Assets
P74,100
Total Liabilities & Capital
P74,100
The business is unstable with liabilities of P68,200 vs. cash of P16,900 only plus receivable of P7,200.
Debt ratio is already very high (68,200/74,100) x 100 = 92%
1.
2.
3.
4.
5.
6.

P16,900
7,200
50,000

Accounts Payable
Notes Payable
Salaries Payable

P5,000 is personal and should be excluded.

P125,000 is a violation of the accrual rule. It cannot be recognized immediately.
This should be recognized in full with a corresponding liability for the unpaid portion.
The P270,000 are expired costs to be recognized as expenses.
The automobile should not be reflected in the books since it is for personal use.
Personal liability should be excluded.

CASE STUDIES
1.

Cash
Furniture & Fixtures
Equipment
Supplies
Car

5,000
30,000
60,000
5,000
500,000
P600,000
The Business Entity Concept Principle was applied in recording the assets of the Eatery.
2. Cash Investment
Less amount to be used as working fund
Cash balance to be used to acquire assets
Assets to be acquired:
Furniture & Fixtures
Equipment
Supplies

50,000
10,000
40,000
30,000
60,000
5,000
95,000

Amount to be borrowed

Cash
Furniture & Fixtures
Equipment
Supplies
Car

95,000
P55,000

Cesar Eatery
Statement of Financial Position
------, 2012
P10,000
Loan Payable
30,000
60,000
5,000
500,000
Cesar Vasquez, Capital
P605,000
Total Liabilities & Capital

55,000

550,000
P605,000