Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:

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Professor:

P4-1.

Label each of the following transactions as increasing owner's equity (+);

decreasing owner's equity (), or as having no effect on owner's equity (0).
Write the appropriate symbol in the space provided.
+
a. Investment by owner
0
b. Purchase of supplies on credit
+
c. Revenue transaction
d. Expense transaction

0
e. Borrowing money on a note payable
f. Withdrawal by owner

P4-2.

Fill in the blanks below with the accounting principle that best applies.
A. Cost principle
F. Continuity of the business unit
B. Business entity
G. Consistency
C. Conservatism
H. Matching
D. Full disclosure
I. Unit of measurement
E. Materiality
J. Objective evidence
1. A restaurant records accrued wages at the end of the fiscal year
because of the matching principle.
2. A hotel reduces its inventory values to reflect the market value of its
food stocks, which are lower than the original cost, because of the
conservatism principle.
3. A motel does not reduce the value of its glassware to liquidation value
because of the cost principle.
4. The cost of ten replacement wastebaskets is expensed rather than
recorded as equipment due to the materiality principle.
5. The method of depreciation used is reflected in the financial report
because of the full disclosure principle.
6. When one method of inventory valuation is used at the end of 2005
and another method is used at the end of 2006, this violates the
consistency principle.
7. The cost of steaks taken home by the owner for personal use is
recorded as a withdrawal because of the business entity principle.
8. A boat dock is recorded at P22,500 (the amount paid) rather than the
original contract price of P25,000 because of the objective evidence
principle .

15

4-1

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:
P4-3.

Score:
Professor:

The following are the transactions in one month of operation of Rose

Restaurant. In the space provided, indicate which elements of the
16

Answers to Practical Exercises and Problems for CHAPTER 4

accounting equation are increased or decreased as a result of the

transaction. Transaction 1 is given as an example.
TRANSACTION 1: Rose Santos invested P10,000 in a small restaurant, called Rose
Restaurant.

ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES

Ex. Increase = __________ +
Increase - _______________ + _________ - __________
TRANSACTION 2: The Restaurant purchased P5,000 worth of food and beverage,
paying P4,000 of the amount and putting the other P1,000 on account.

ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES

________ = __________ + ____________ - _______________ + _________ - __________
TRANSACTION 3: The Restaurant sold food and beverage costing P4,000 for
P8,000 cash.

ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES

________ = __________ + ____________ - _______________ + _________ - __________
Increas
Increas
e/
e
ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES
Decrea
________ = __________ + ____________ - _______________ + _________ - __________
se
TRANSACTION 4: The Restaurant paid rent for the month, P1,000.

TRANSACTION 5: The Restaurant paid salaries of P1,500 for the month.

Increas - WITHDRAWALS + REVENUE - EXPENSES

ASSETS = LIABILITIES + INVESTMENT
e/Decre
________ = __________ + ____________ - _______________ + _________ - __________
ase

Increas
e

Increas
e

TRANSACTION 6: Rose made a withdrawal of P1,000 cash from the business for
Decrea
personal use.

Increas
e

Decrea
se
ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES
________ = __________ + ____________ - _______________ + _________ - __________

Increas
e

se
ASSETS = LIABILITIES + INVESTMENT - WITHDRAWALS + REVENUE - EXPENSES
________ = __________ + ____________ - _______________ + _________ - __________
TRANSACTION 7: Rose received a bill for P300 of advertising during the month.

TRANSACTION 8: The Restaurant paid the P1,000 balance owed for the food
Decrea
Increas
supplies bought earlier in the month
in transaction 2.

se - WITHDRAWALS + REVENUE - EXPENSES

e
ASSETS = LIABILITIES + INVESTMENT
________ = __________ + ____________ - _______________ + _________ - __________
Increas
e

Decrea
se

Increas
e

Decrea
se

17

4-2

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:
P4-4.

Score:
Professor:

Bebeng's Cafe sold two pieces of equipment during 2002.

information is as follows.
1. Sale of cooking range
Selling price
=
Original cost
=
Accumulated depreciation =
18

P 500
P3,000
P2,700

Relevant

(1) Selling price

Net book value:
Cost
P3,000
Less: Accum.
Depreciation 2,700
Gain on sale

P 50

(2) Selling price

Net book value:
Cost
P20,000
Less: Accum.
Depreciation 15,000
Loss on sale
P(1,500)

P3,50

30
P 20

5,00

Answers to Practical Exercises and Problems for CHAPTER 4

2. Sale of van
Selling price
= P 3,500
Original cost
= P20,000
Accumulated depreciation = P15,000
Required:
Determine the gain or loss on the sale of each piece of equipment.
ANSWER: (1) P 200 gain
P4-5.

(2) P 1,500 loss

The following transactions were completed by Sun Company, a catering

service, during the first month of operation.
(b)
1. Shawn Briggs, owner, invested P10,000 in the business.
(a)
2. Purchased kitchen equipment on credit for P2,500.
(c)
3. Purchased additional equipment with cash, P300.
4. Provided catering service to customers and collected
(b)
cash, P600.
(d)
5. Paid P1,000 of amount owed to creditor in (2) above.
Indicate the effect of each of these transactions on the basic accounting
equation by inserting the appropriate letter from the following list in the
space provided to the right of each transaction.
(a) increase in asset, increase in liability
(b) increase in asset, increase in equity
(c) increase in one asset, decrease in another asset
(d) decrease in asset, decrease in liability
(e) decrease in asset, decrease in equity

19

4-3

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:
P4-6.

Score:
Professor:

Island Grill Restaurant began operations in January 2001. During its first
month of operations the following transactions occurred:
a. Sold 1,000 shares of no-par common stock for cash of P10,000.
b. Borrowed P12,000 from Standard Bank. A promissory note was
signed stating that the loan plus 12% interest would be repaid in 18
months.
c. Purchased P7,500 worth of food supplies for cash.
d. Purchased equipment costing P11,000, paying P2,000 down with the
balance on account.
e. Received cash of P7,500 for catering services performed during
January. Cost of food served - P4,000.
f. Billed customers P9,000 for catering services performed during
January. Cost of food served - P5,000.
20

Answers to Practical Exercises and Problems for CHAPTER 4

g.
h.
i.
j.

Paid P2,500 rent for January 2001.

Paid P1,500 for utilities for January 2001.
Paid P2,000 to part-time employees for wages.
Paid a cash dividend to shareholders in the amount of P500.

Required:
In the table below, indicate the effect of each transaction on the financial
statement items listed. Indicate whether the item is increased or decreased
by entering a "+" or a "".
Financial Statement
Item
Cash
Food Supplies
Equipment
Accounts Receivable
Notes Payable
Accounts Payable
Common Stock
Dividends
Catering Service Revenue
Cost of Food Served
Rent Expense
Utilities Expense
Wage Expense

Transaction
e
f
g

+
+
+
+
+
+

+
+
+

21

4-4

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:
P4-7.

Score:
Professor:

Refer to the transactions listed in Problem 4-6.

Required:
In the table below, identify which accounting elements are affected by each
transaction. Indicate whether the accounting element is increased or
decreased by entering a "+" or a "". If the transactions causes an
increase and a decrease in a single accounting element, place both a "+"
and a "" in the appropriate box.
Accounting
Element
Assets
Liabilities
Equity
Revenues
Expenses

+
+

Transaction
d
e
f
g

+
+

+
+

22

Answers to Practical Exercises and Problems for CHAPTER 4

P4-8.

Refer to the transactions listed in Problem 4-6.

Required:
In the table below, indicate with an "X" which financial statements are
affected by the transactions listed.
Financial
Statement
Income Statement
Statement of Retained Earnings
Balance Sheet

P4-9.

Transaction
e
f
g

j
X
X

Fill in the missing numbers in the accounting equation for each of the
items in the following table:
Items
a.
b.
c.
d.
e.
f.

ASSETS
10,000
15,000
37,000
40,000
47,000
26,000

LIABILITIES
6,000
7,000
13,000
19,000
22,000
10,000

OWNERS' EQUITY
4,000
8,000
24,000
21,000
25,000
16,000

23

4-5

Answers to Practical Exercises and Problems for CHAPTER 4

4,000
8,000

Name:
Subject / Section:

Score:
Professor:

P4-10. The following information is available for Len Santos:

Assets
Liabilities
Common Stock
Retained Earnings

January 1
P12,000
8,000
0

January 31
P20,000
7,000
5,000

Required:
a. Determine the missing numbers which belong in the boxes above.
b. How much is net income for the month of January if there were no
dividends? P 5,000 .
c. How much is net income for the month of January if there were
dividends of P4,000? P 9,000 .
d. If net income for the month of January was P11,000, how much were
dividends? P 6,000 .

24

Answers to Practical Exercises and Problems for CHAPTER 4

P4-11. The following information is available for the partnership of Pat & Jay, who
share profits and losses equally:

January 1
Assets
Liabilities
Pat, Capital
Jay, Capital

P16,000
7,000
13,000

January 31
P50,000
12,000
18,000

Required:
a. Determine the missing numbers which belong in the boxes above.
b. How much is net income for the month of January if there were no
additional investments and no withdrawals? P 10,000 . (20,000 + ? =
30,000)

c. How much is net income for the month of January if Pat and Jay each
withdrew P3,000? P 16,000 . (20,000 + ? - 6,000 = 30,000)
d. If net income for the month of January was P34,000, how much did
Pat and Jay withdraw from the partnership during January?
P 24,000 . (20,000 + 34,000 - ? = 30,000 )

36,000
20,000

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4-6

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:

Score:
Professor:

P4-12. Mountain Lake Inn had the following account balances at the beginning and
end of September, 2001:

Total Assets
Total Liabilities

September 1
P100,000
60,000

September 30
P150,000
100,000

Required:
a. How much is owners' equity at September 1 and at September 30?
September 1 P 40,000 .
September 30 P 50,000 .
b. How much is net income if the owner made no investments and no
withdrawals in September? P 10,000 . (40,000 + ? = 50,000)
c. How much is net income if the owner had withdrawals of P5,000 in
September, and no additional investments were made in September?
P 15,000 . (40,000 + ? - 5,000 = 50,000)
d. If net income for September was P12,000, and the owner made no
additional investments, how much were withdrawals in September?
P 2,000 . (40,000 + 12,000 - ? = 50,000)
e. If the owner withdrew P7,000 and invested an additional P10,000
during September, how much was net income for September?
P 7,000 . (40,000 + ? - 7,000 + 10,000 = 50,000)
P4-13. Here are some typical transactions of the Slade Company. Indicate, using
plus and minus signs as well as the amounts, the increase (+) or decrease
26

Answers to Practical Exercises and Problems for CHAPTER 4

(-) in any of the five classifications of accounts that results from each of
the transactions.
Transaction
A
L
OE
R
E
0. Paid wages for the week, P750.
-750
+750
1. Owner invested equipment in the business,
P1,200.
+1,200
+1,200
2. Billed customers for services rendered, P2,000. +2,000
+2,000
3. Received bill for minor repairs to equipment,
P320.
+320
+320
4. Received P900 from charge customers on
+900
account.
-900
5. Owner withdrew cash for personal use, P500. -500
-500
6. Paid creditors on account, P200.
-200
-200
7. Paid rent for the month, P900.
-900
+900

27

4-7

Answers to Practical Exercises and Problems for CHAPTER 4

Name:
Subject / Section:

Score:
Professor:

P4-14. Here are selected transactions of Eat All Restaurant. Record the
transactions in the fundamental accounting equation form below. The first
transaction is given as an example.
0.
1.
2.
3.
4.
5.
6.
7.

E. B. C. invested P18,000 cash in the business.

Bought equipment for cash, P2,400.
Received P3,600 in cash for services performed.
Bought supplies on account, P800.
Billed customers for services performed, P4,000.
Received and paid electric bill, P120.
Paid wages for the month, P1,800.
Returned P180 worth of supplies, receiving credit or a reduction in
the bill.
8. Paid creditors on account, P400.
9. E. B. C. withdrew P800 for personal use.
10. Received P3,440 from charge customer to apply on account.

0.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

ASSETS
=
LIABILITIES
+
OWNER'S EQUITY
Accounts
Accounts E. B. C.,
Cash + Receivable + Equipment + Supplies
Payable Capital + Revenue - Expenses
+ 18,000
+18,000
2,400
+ 2,400
+ 3,600
+ 3,600
+ 800
+
800
+ 4,000
+ 4,000
120
+ 120
1,800
+1,800
180

180
400

400
800
800
+ 3,440
3,440

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Answers to Practical Exercises and Problems for CHAPTER 4

29

4-8