Basic Accounting

Answer Section

MULTIPLE CHOICE
1. A
2. B
3. C
4. D
5. B
6. D
7. B
8. B
9. C
10. A
11. B
12. A
13. D
14. A
15. D
16. D
17. C
18. C
19. C
20. B
21. D
22. B
23. B
24. D
25. C
26. A
27. C
28. B
29. D
30. A
31. A
32. B
33. D
34. B
35. C
36. A
37. A
38. D
39. D
40. A
41. C
SOL:
 Transportation to customers is correct because the revenue transaction (sales of goods to customers) directly
causes the incurrence of the expense (transportation to customers).
42. B
SOL:
UVW has provided P10,000 in advertising services and has a receivable for the travel and lodging services.
43. B
SOL:
Accrued liability results from recording an expense that has been incurred but not paid. Wages payable is an
example of an expense incurred but not paid.
44. B
SOL:
One-fifth of the cabinet costs would be reported as depreciation expense in selling, general, and
administrative expenses. Four-fifths of the cabinet cost would remain capitalized as fixed assets at the end of
2017.
45. C
SOL:
Based on the information given, Key has only one prepaid insurance policy at 12/31/2017. The 3-year policy
acquired on 11/1/2017 has been in force for 2 months, so 34 months remain unexpired. Therefore, 12/31/2017
prepaid insurance is P3,400 (P3,600 x 34/36). Key must make an adjusting entry to transfer P3,310 (P3,400 -
P90) from insurance expense to prepaid insurance. This will leave the account balances at P3,400 for prepaid
insurance (P90 + P3,310) and P1,100 for insurance expense (P4,410 - P3,310). (Apparently, Key Co. records
policy payments as charges to insurance expense during the year and adjusts the prepaid insurance account at
the end of the year.)
46. B
SOL:
The following formula is used to adjust service revenue from the cash basis to the accrual basis:

Accrual basis Beg. End.

service = Cash fees + End. – Beg. + unearned – unearned
revenue collected AR AR fees fees

Therefore, Dr. Lee's patient service revenue for 2017 is P109,000 (P100,000 + P30,000 – P20,000 + P0 -
P1,000). As an alternative, T-accounts can be used.

Service revenue Acct. receivable

110,000 1/1/2017 20,000
1,000 100,000 Cash received
109,000 12/31/2017 110,000
30,000

Unearned revenue
0 1/1/2017
1,000
1,000 12/31/2017
47. C
SOL:
 The installment method of recognizing revenue is not acceptable for financial reporting purposes unless the
circumstances are such that the collection of the sales price is not reasonably assured. Since the property was
sold to a triple-A rated company and the value of the property is appreciating, collection can be assumed to be
reasonably assured. Therefore, the entire gain should be recognized for financial reporting purposes at the
date of sale:

Sales price – Cost of building = Gain recognized

P1,200,000 – P1,000,000 = P200,000
48. D
SOL:
The requirement is to determine which of the following outflows should be expensed as incurred by the
franchisee. Continuing franchise fees, based on revenues, should be reported as expenses when incurred.
49. A
SOL:
Initial franchise fees are recognized as revenue when all of the initial services required of the franchisor have
been substantially performed. Continuing franchise fees are reported as revenue as the fees are earned and
become receivable. In this case, since all the initial services were performed by 7/1/2017, the initial fee
(P50,000) is recognized as revenue in 2017. Also, continuing fees of P20,000 (5% x P400,000) should be
recognized. Therefore, the total franchise fee revenue to be recognized in 2017 is P70,000 (P50,000 +
P20,000).
50. D