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COMPREHENSIVE AUDIT OF
BALANCE SHEET AND INCOME
STATEMENT ACCOUNTS
19
19-1.
Daffodil, Inc.
Adjusting Journal Entries
12.31.07
AJE (1)
(2)
Share donation
Treasury shares
Land
Building
35,000
10,000
15,000
(3)
60,000
(4)
3,000
P 5,000
1,000
P 4,000
2,000
P 2,000
1,000
2,000
300
300
21,300
6,300
15,000
P 500
14,500
P15,000
175,000
175,000
19-2
(6)
(7)
(8)
(9)
Administrative expenses
Allowance for doubtful accounts
1,000
3,000
Retained earnings
Bond interest expense
Unamortized bond discount
2,500
2,500
1,000
3,000
5,000
23,500
23,500
1,500
1,500
Cash
Accounts receivable
Provision for doubtful accounts
Inventories, 12.31.06
Unexpired insurance, 12.31.06
Land
Buildings
Accumulated Depreciation - Buildings
Machinery
Accumulated Depreciation - Machinery
Sinking fund assets
Unamortized bond discount
Treasury shares, ordinary
Accounts payable
Bond interest accrued
1st Mortgage, 6% SF Bonds
Ordinary shares
Premium on ordinary shares
Share donation
Retained earnings, 12.31.06
Sales
Purchases
Payroll
Factory operating expenses
Administrative expenses
Bond interest expense
Loss on sale of machinery
Merchandise inventory 12.31.07
Sinking fund income
Daffodil, Inc.
Working Trial Balance
12.31.07
Trial Balance
Dr
Cr
P 64,000
200,000
P 1,000
223,000
6,000
220,000
330,000
6,600
148,000
15,000
25,000
Adjustments
Dr
283,500
169,000
121,500
1,000
(6)
(1)
(1)
(3b)
(2)
(3b)
3,000
10,000
15,000
6,300
3,000
15,000
(3a)
(2)
(8)
(9)
300
1,000
23,500
1,500
(7)
(1)
5,000
35,000
(8)
23,500
(1)
(7)
60,000
2,500
(3a)
3,000
210,000
315,000
12,600
145,000
29,000
50,000
20,000
88,000
3,750
250,000
500,000
50,000
71,950
300
P 875,000
283,500
169,000
35,000
15,000
P1,900,000
(5)
Balance Sheet
Dr
Cr
P 64,000
200,000
P 2,000
P 223,000
25,000
35,000
88,000
3,750
226,500
500,000
50,000
60,000
74,150
875,000
Income Statement
Dr
Cr
Cr
(3b)
(6)
(5)
21,300
3,000
1,000
145,800
36,000
(7)
2,500
17,500
(2)
(4)
2,000
175,000
P1,900,000
P 293,600
Net Income
19-3
2,000
(4)
(9)
175,000
1,500
P 293,600
175,000
1,500
175,000
P 876,800
174,700
P1,051,500
P1,182,000
P1,007,300
174,700
P1,051,500
P1,051,500
P1,182,000
P1,182,000
19-4
19-2.
Part I
AJE (1)
Depreciation expense
Accumulated depreciation
1,778
1,778
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Prepaid interest
Retained earnings
Interest expense
Merchandise inventory, 12-31-07, BS
Merchandise inventory, 12-31-07, IS or
Cost of Sales
3,100
1,900
15,000
15,000
Retained Earnings
Purchases
6,000
Prepaid insurance
Insurance expense
3,000
1,450
6,000
3,000
550
900
Retained earnings
Commissions expense
Accrued commissions payable
730
240
Cash in bank
Miscellaneous income
650
Purchases
Accounts payable
800
5,000
970
650
800
3,000
3,000
90,000
90,000
NO AJE
(13) Machinery
Depreciation expense machinery
Allowance for depreciation machinery
Repairs and maintenance
20,000
167
167
20,000
2,000
5,000
14,500
19-5
2,000
5,000
14,500
P 1,500
4,000
P 5,500
9,000
P14,500
Retained earnings
Purchases
xx
(b)
NONE
xx
(c)
Retained Earnings
Allowance for depreciation
xx
Retained Earnings
Allowance for depreciation
xx
Machinery
Retained earnings
xx
Depreciation
Allowance for depreciation
xx
Retained earnings
Taxes
xx
xx
xx
(d)
(e)
(f)
(g)
19-3.
xx
xx
xx
xx
xx
International Company
AJE (1)
(2)
Depreciation expense
Accumulated depreciation delivery vehicle
Cost of sales
Retained earnings
3,200
3,200
19,000
19,000
19-6
(4)
(5)
(6)
(7)
(8)
(9)
Cost of sales
Inventory
8,500
Cash
Accounts receivable
5,600
8,500
5,600
22,000
18,300
3,700
125,000
125,000
2,000
3,800
Depreciation expense
Equipment
Repairs expense
Accumulated depreciation equipment
2,000
3,800
4,000
32,000
32,000
4,000
5,000
7,000
12,500
(2)
(3)
67,200
14,920
Accounts payable
Purchase returns and allowances
20,760
67,200
14,920
20,760
(5)
(6)
(7)
(8)
(9)
Sales commissions
Accrued commissions payable
19-7
216
216
Freight-in
Accounts payable
1,600
Advertising expense
Prepaid advertising
1,212
Freight-out or Expense
Sales
8,400
Interest receivable
Interest income
1,380
Depreciation expense
Accumulated depreciation
1,300
1,600
1,212
8,400
1,380
1,300
1,160
1,160
107,386
107,386
Requirement (2)
Sunshine Cosmetics, Inc.
Income Statement
For the Year Ended December 31, 2006
Revenue from sales:
Sales
Less: Sales returns and
and allowances
Sales discounts
Cost of goods sold:
Inventory, January 1
Net purchases:
Purchases
Less purchase returns
and allowances
Freight-in
Cost of goods available
for sale
Less Inventory, December 31
Gross profit on sales
P998,800 (a)
P 22,400
1,760
24,160
P974,640
P179,400
P346,000
20,760 (c)
325,240
12,650 (b)
P517,290
108,300 (d)
408,990
P565,650
19-8
P 2,780 (i)
14,300
37,000
54,080
P619,730
P 70,216 (e)
33,392 (f)
13,500 (g)
8,400
9,120
4,400
P139,028
P 4,450
17,000
9,600
12,800
2,950
1,160 (k)
73,200
14,920 (h)
136,080
(275,108)
P 9,040
45,200
(54,240)
P290,382
92,922 (j)
P197,460
54,400
P251,860
19-9
P2.53
0.70
P3.23
Computations:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
P 881,340
251,860
P1,133,200
66,000
P1,067,200
Del Bakery
Working papers are not required, but they facilitate the preparation of a corrected
balance sheet.
Del Bakery
Working Papers for Corrected Balance Sheet
December 31, 2007
Account Title
Current Assets .....................
Current Liabilities .................
Other Assets ........................
Other Liabilities ....................
Investment in Business ........
Balance Sheet
Debit
Credit
53,415
..............
.............
29,000
75,120
..............
.............
3,600
.............
95,935
128,535
128,535
Corrections
Debit
Credit
..............
(a) 53,415
(c) 29,000
.............
..............
(b) 75,120
(d) 3,600
.............
(e) 95,935
.............
..............
.............
19-10
Land .....................................
Buildings...............................
Accumulated Depreciation
Buildings [2 (P62,000
20)]
11% Mortgage Payable........
11% Mortgage Payable
(current portion)..................
Interest Payable ...................
Trade Accounts Payable......
Miscellaneous Liabilities ......
Share Capital, P5 stated
value, 5,000 shares............
Paid-in Capital from Sale of
Shares at More Than
Stated Value.......................
Corrections:
(a)
(b)
(c)
.............
..............
(a) 10,600
.............
10,600
..............
.............
.............
.............
.............
.............
.............
..............
..............
..............
..............
..............
..............
(a)
(a)
(a)
(a)
(a)
(a)
.............
.............
.............
.............
.............
.............
2,575
12,500
8,040
425
2,100
12,500
..............
..............
..............
..............
..............
..............
.............
..............
..............
(a) 2,100
.............
2,100
.............
.............
.............
.............
.............
.............
.............
..............
..............
..............
..............
..............
..............
..............
(a) 4,100
(a) 2,675
(b) 7,750
(d)
350
..............
(b) 30,000
(b) 62,000
.............
.............
.............
.............
(e) 40,935
.............
.............
4,100
.............
.............
.............
.............
30,000
62,000
..............
..............
..............
30,160
..............
..............
..............
.............
.............
..............
..............
..............
..............
(b) 7,750
(b) 12,000
.............
.............
7,750
12,000
.............
.............
.............
.............
..............
..............
..............
..............
..............
..............
..............
..............
(b) 4,000
(b)
880
(c) 29,000
(d) 3,950
.............
.............
.............
.............
4,000
880
29,000
3,950
.............
..............
..............
(e) 25,000
.............
25,000
.............
..............
..............
284,150
(e) 30,000
284,150
.............
144,840
30,000
144,840
2,575
12,500
8,040
425
2,100
12,500
(d)
(e)
Del Bakery
Corrected Balance Sheet
December 31, 2007
Assets
Current assets:
Cash ........................................................................
Investment securities trading (reported at
market; cost P4,250) .........................................
Trade accounts receivable (fully collectible)..........
Inventory.................................................................
Supplies inventory ..................................................
P10,600
2,575
12,500
8,040
425
P 34,140
19-11
4,100
P30,000
54,250
10,400
2,100
P 4,000
29,000
880
3,950
96,750
P134,990
P 37,830
12,000
P 49,830
P55,000
30,160
85,160
P134,990
Masipag Corporation
Adjusting Journal Entries, Dec. 31, 2007
AJE (1)
(2)
(3)
Cash
Accounts payable
Accounts receivable
Cash
Bank loan payable
Other expenses
Cash
200,000
200,000
10,000
10,000
400,000
12,500
412,500
19-12
(8)
(9)
Cash
Accounts receivable
Operating expenses
Cash
Cash
Other income
Accounts receivable others (2,000 + 3,000)
Operating expenses
Cash
75,000
75,000
1,500
1,500
16,000
16,000
5,000
2,000
7,000
Marketable securities
Other income
40,000
Other income
Marketable securities
54,000
40,000
54,000
32,000
32,000
145,600
145,600
(11) Sales
Accounts receivable
500,000
(12) Inventory
Cost of sales
400,000
500,000
400,000
15,000
55,000
50,000
21,900
54,545
15,000
55,000
50,000
21,900
54,545
4,545
4,545
60,000
25,000
(21) Inventory
Cost of sales
25,000
16,000
(23) Sales
Accounts receivable
13,000
46,250
5,000
60,000
120,000
19-13
60,000
25,000
25,000
16,000
13,000
46,250
5,000
180,000
5,777
5,333
5,777
5,333
(29) Land
Building
Land and building
1,062,500
3,187,500
(30) Building
Land and building
425,000
20,000
27,500
27,500
4,250,000
425,000
20,000
55,000
19-14
237,500
115,578
121,922
10,000
10,000
55,400
50,000
15,000
50,000
20,000
55,400
50,000
15,000
50,000
115,290
115,290
MASIPAG CORPORATION
Balance Sheet
December 31, 2007
Assets
Current assets
Cash
Marketable securities
Valuation allowance
Accounts receivable
Allowance for doubtful accounts
Notes receivable
Discount on notes receivable
Accounts receivable others
Inventory, December 31, 2007
Prepaid expenses
Total current assets
Investments
Long-term bond investment
Property, plant and equipment
Land
Building
Accumulated depreciation Building
P
P 400,000
145,600
P 442,000
(33,150)
P 600,000
(50,000)
734,000
545,600
408,850
550,000
96,333
1,960,500
175,250
P4,470,533
744,077
P1,062,500
P3,612,500
(121,922)
3,490,578
P1,654,000
(235,400)
19-15
1,418,600
5,971,678
110,000
P11,296,288
P 877,000
1,100,000
59,000
100,000
130,558
70,000
P 2,336,558
P5,000,000
1,655,250
2,304,480
8,959,730
P11,296,288
MASIPAG CORPORATION
Income Statement
For the Year Ended December 31, 2007
Sales
Cost of sales
Gross profit
Other income
Operating expenses
Other expenses
Income before taxes
Provision for income tax
Net Income
19-7.
P 6,437,000
(4,060,000)
P 2,377,000
225,710
(1,511,509)
(37,500)
P 1,053,701
(342,441)
P 711,260
Felicity Company
Adjusting Journal Entries, Dec. 31, 2007
AJE (1)
Cash
Prepaid interest
Other charges
Long-term debt (current portion)
Long-term debt
31,000
3,000
2,000
24,000
12,000
19-16
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Cash
Accounts payable and others
2,000
2,000
72,000
20,000
72,000
20,000
41,100
41,100
8,000
8,000
Inventory
Cost of sales
12,000
Sales
Accounts receivable
14,400
Revaluation increment
Accumulated depreciation
Property and equipment
12,000
14,400
120,000
80,000
200,000
36,000
48,000
24,000
30,000
13,000
22,000
36,000
48,000
24,000
30,000
13,000
22,000
19-17
25,445
25,445
FELICITY COMPANY
Balance Sheet
December 31, 2007
Assets
Current Assets:
Cash............................................................................................
Accounts receivable ...................................................................
Allowance for doubtful accounts ...............................................
Accounts receivable -others .......................................................
Inventories..................................................................................
Prepaid interest...........................................................................
Non-current Assets:
Advances to affiliate ..................................................................
Investments in SMC shares available for sale .........................
Allowance for decline in value of non-current investment ........
Property and equipment .............................................................
Accumulated depreciation..........................................................
Total Assets
123,600
1,751,820
(27,000)
62,000
262,000
3,000
48,000
72,000
(20,000)
2,600,000
(1,172,000)
P 3,703,420
19-18
19-8.
313,998
109,899
204,099
(6,500)
197,599
Learn Company
Condensed Comparative Income Statements
Construction revenue
Construction expense
Other expenses
Income before income taxes
Income tax expense
Net income
2008
P420,000
(182,000)
(70,000)
P168,000
(50,400)
P117,600
2009
P900,000
(420,000)
(80,000)
P400,000
(120,000)
P280,000
2007
P200,000
(80,000)
(50,000)
P 70,000
(21,000)
P 49,000
2009
2008
P 77,000
P 7,000
89,600
42,000
2007
P
P166,600
P 49,000
280,000
117,600
49,000
P446,600
P166,600
P 49,000
Note: The company has accounted for revenue and costs for long-term
construction contracts by the percentage-of-completion method in 2009, whereas
in prior years revenues and costs were determined by the completed-contract
method. The new method of accounting for long-term contracts was adopted to
(state justification for change in accounting principle) and financial statements of
prior years have been restated to apply the new method retroactively. The effect
19-19
Net income
Earnings per ordinary share
2009
P112,000
P11.20
Increase
2008
P47,600
P4.76
2007
P42,000
P4.20
The balances of retained earnings for 2008 and 2009 have been adjusted for the
after-tax effect of applying the new method of accounting retroactively.
19-9.
P49,000 P7,000
Construction in Progress
Retained Earnings [P70,000 x (1 0.30)]
Deferred Tax Asset
a
[(P100,000 + P120,000) + (P125,000 +
P75,000)] (P100,000 + P250,000)
70,000 a
49,000
21,000
Requirement (2)
GOODY CONSTRUCTION COMPANY
Condensed Comparative Income Statements (Partial)
2007
P400,000
(120,000)
P280,000
P2.80
2006
P200,000
(60,000)
P140,000
P1.40
2005
P220,000
(66,000)
P154,000
P1.54
19-20
2007
Balance at beginning of year,
as previously reported
Add: Adjustment for the
cumulative effect on prior years
of applying retroactively
applying the new method of
accounting for long-term
contracts (net of income taxes)
Balance at beginning of year,
as adjusted
Net income
Balance at end of year
2005
P245,000
P 70,000
49,000
84,000
P294,000
280,000
P574,000
P154,000
140,000
P294,000
0
P
0
154,000
P154,000
P100,000 x (1 0.30)
Note: The company has accounted for revenue and costs for long-term
construction contracts by the percentage-of-completion method in 2007, whereas
in prior years revenues and costs were determined by the competed-contract
method. The new method of accounting for long-term contracts was adopted to
(state justification for change in accounting principle) and financial statements of
prior years have been restated to apply the new method retroactively. The effect
of the accounting change on income of 2007 and on income as previously reported
in 2005 and 2006 is as follows:
Net income
Earnings per ordinary share
2007
P(49,000)
P(0.49)
Increase
2006
P(35,000)
P(0.35)
2005
P84,000
P0.84
The balances of retained earnings and deferred taxes for 2006 and 2007 have been
adjusted for the after-tax effect of applying the new method of accounting
retroactively:
f
19-21
Items Restated:
On the 2005 and 2006 income statements, construction revenues and expenses
would be restated to the appropriate amounts for the percentage of completion
method. The construction in progress, deferred income taxes, and retained
earnings on the balance sheets would also be restated.
19-10.
Sand Company
Requirement (1)
a.
Incorrect entries:
Building
Notes Payable
Depreciation Expense: Building
(P60,000 30)
Accumulated Depreciation: Building
Correct entries:
Building
Discount on Notes Payable
Notes Payable
a
60,000
2,000
2,000
40,981
19,019
60,000
P60,000 x 0.683013
P40,981 30
60,000
Retained Earnings
Cost of Goods Sold
To correct error from prior year.
1,366
4,098
b
c
1,366
4,098
19,019
19,019
634
4,098
634
4,098
40,000
40,000
19-22
15,000
15,000
18,000
10,000
18,000
10,000
Requirement (2)
a.
See Requirement 1.a. of this solution for the incorrect entries that were made
and the correct entries that should have been made.
Discount on Notes Payable (total discount
of P19,019 less amount of P4,098
amortized for 2007)
Accumulated Depreciation: Building
Retained Earnings
Building
d
b.
19,019
c.
14,921
634
3,464
15,000
15,000
The errors from 2005 and 2006 were counterbalanced by the end of 2006 and
2007; respectively, so they can be ignored.
Retained Earnings
Salaries and Wages Payable
10,000
10,000
19-23
Play Company
Requirement (1)
SFAS No. 13 paragraphs 42 and 43 state that a change in accounting policy
should be applied retroactively unless the amount of any resulting adjustment that
relates to prior periods is not reasonably determinable. Any resulting adjustment
should be reported as an adjustment to the opening balance of retained earnings.
Comparative information should be restated unless it is impracticable to do so.
The financial statements, including the comparative information for prior periods,
are presented as if the new accounting policy had always been in use. Therefore,
comparative information is restated in order to reflect the new accounting policy.
The amount of the adjusting relating to periods prior to those included in the
financial statements is adjusted against the opening balance of retained earnings of
the earliest period presented. Any other information with respect to prior periods,
such as historical summaries of financial data, is also restated.
PLAY COMPANY
Worksheet to Correct Income Before Income Taxes
(25,000)
180,000
(117,000)
(170,000)
(56,000)
240,000
52,000
P4,082,000
-(180,000)
---
224,000
-44,000
P3,374,000
Schedule 1:
Computation of Adjusted Depreciation
Cost of equipment (no salvage value)
P1,000,000
P 100,000
(125,000)
P (25,000)
19-24
P300,000
(60,000)
(56,000)
P184,000
Requirement (2)
PLAY COMPANY
Effect Before Income Taxes
of Change in Accounting Principle From
Expensing to Capitalizing Relining Costs
For Year Ended December 31, 2007
Capitalization of Furnace A
Depreciation on Furnace A based on 5-year life
(P280,000 x 20%)
Adjustment
19-12.
P280,000
(56,000)
P224,000
Jo Francisco, Inc.
Item
1.
2.
3.
4.
5.
6.
Although explanations were not required in answering the question, they are
included below for your interest.
Explanations:
1.
19-13.
19-25
2.
The depreciation expense in 2005 should be P1,000 for this machine. Since
the machine was bought on July 1, 2005, only one-half of a year should be
taken in 2005 (P8,000/4 X 1/2 = P1,000). The company expensed P8,000
instead of P1,000 so net income is understated by P7,000 in 2006. An
additional P2,000 of depreciation expense should have been taken in 2006. At
the end of 2006, retained earnings would be understated by P5,000 (P7,000
P2,000).
3.
4.
5.
6.
JC Patrick Corporation
2006
P29,000
(1,300)
1,100
(1,500)
(1,300)
740
P26,740
2007
P37,000
1,300
1,500
(940)
(740)
1,420
P39,540