Working Trial Balance

The field work pertinent to the audit of the accounts of Karkits Corporation, a close corporation, for the
year ended December 31, 2007 has been completed by the staff of Go and Associates, CPAs. Shown
below are the unaudited trial balance and certain additional information pertaining thereto appearing in
the working papers.

Petty Cash Fund

Cash in Bank
Trading Securities
Accounts Receivable
Allowance for Uncollectible Accounts
Advances to Officers and Employees
Inventories
Prepaid Insurance
Property, Plant, and Equipment, at cost
Accumulated Depreciation
Franchises
Licensing Agreement
Accounts Payable
Interest Payable
Accrued Expenses
Unearned Revenues
Income Taxes Payable
Dividends Payable
Current Portion of Long-Term Debt
Mortgage Payable
Bonds Payable
Discount on Bonds Payable
Ordinary Share Capital
Additional Paid in Capital
Retained Earnings, January 1, 2007
Sales
Cost of Goods Sold
Marketing and Administrative Expenses
Other Income
Interest Expense
Income Tax Expense
Dividends Declared

Unaudited Balances, 12/31/07

Debit
Credit
P
15,000
243,600
330,000
3,544,000
P
120,000
0
4,398,900
29,400
10,945,000
703,500
500,000
216,000
2,141,550
0
598,020
0
193,365
1,250,000
0
2,000,000
2,000,000
122,000
5,000,000
1,350,000
2,867,840
32,250,000
18,169,950
8,900,400
180,000
404,320
1,585,705
1,250,000
P 50,654,275 P 50,654,275

Additional Information:
1. A count of the petty cash fund on January 2, 2008 showed its composition as follows
Currency and coins
P 6,000
Petty cash vouchers, all dated 2007, except for
P1,500 which pertains to 2008
6,000
Employees postdated check
3,000
Total
P15,000

2. The following are some of the December 31, 2007 reconciling items noted for cash in bank:
a. Customers checks returned by the bank marked DAIF in December 2007, redeposited in
January 2008, P35,000.
b. A bank credit memo representing collection by bank from one of the companys major
customers, P40,000.
c. A check drawn by another company for P25,000 incorrectly charged by bank in December 2007.
d. Checks issued by the company in 2002 and not yet cleared by bank as of December 31, 2007,
P105,000.
e. The company wrote several checks at the end of 2007 for accounts payable that were held and
not mailed until January 15, 2008. These totaled P48,300 and were included in the outstanding
checks of December 31, 2007.
3. The trading securities portfolio for Karkits Corporation contained the securities listed below:

Smart Co. common stock

Globe Corp. common stock
Nokia Company common stock

Cost
P 70,000
100,000
210,000
P380,000

Market value
Dec. 31, 2006
Dec. 31, 2007
P 30,000
P 40,000
120,000
150,000
180,000
160,000
P330,000
P350,000

The above securities are listed in the stock exchanges.

4. The audit revealed that Accounts Receivable was composed of the following items:
Customers accounts
P2,799,000
Advances to officers and employees
120,000
Selling price of merchandise sent to Mobiline
Corp. on consignment at 125% of cost and not
yet sold by Mobiline Corp.
625,000
P3,544,000
The company has been providing an allowance for doubtful accounts at 5% of the outstanding
customers balances.
5. A physical inventory of merchandise as of December 31, 2007 amounted to P4,398,900.
following information has been found relating to certain inventory transactions:

The

a.

A P35,000 shipment of goods to a customer on December 31, 2007, terms FOB destination,
was not included in the yearend inventory. The goods cost P26,000 and were received by the
customer on January 8, 2008. The sale was properly recorded in 2008.

b.

An invoice for goods costing P35,000 was received and recorded as a purchase on December
31, 2007. The related goods, shippped FOB destination, were received on January 2, 2008
and, thus, were not included in the physical inventory.

c.

Goods costing P27,000 were received from a vendor on January 5, 2008. The related invoice
was received and recorded on January 12, 2008. The goods were shipped on December 31,
2007, terms FOB shipping point.

d.

Inventory cut-off tests indicate that P22,350 of inventory received on December 30, 2007 was
recorded as purchases and accounts payable in 2008.
These items were included in the
inventory count at year end.

e.

Inventory cut-off tests also indicate several sales invoices recorded in 2007 for goods that
were shipped in early 2008. The goods were not included in inventory, but were set aside in
a separate shipping area. The total amount of these shipments was P36,000. Cost is
P25,000.

6. The prepaid insurance account contains the premium costs of two policies:
Policy A. cost of P13,200, two-year term taken on September 1, 2007
Policy B. cost of P16,200, three-year term taken on April 1, 2007
7. The Property, Plant, and Equipment account of the company is composed of the following:
Land and Building
Furniture and Fixtures
Leasehold Improvements
Total

P 8,600,000
2,177,000
168,000
P10,945,000

At the beginning of 2007, the company purchased land and building for P8,600,000, which included
P180,000 of realty tax in arrears for prior years. A mortgage of P2,000,000 was assumed by the
company on the purchase. Twenty percent of the purchase price should be allocated to the land,
and the balance to the building. In order to make the building suitable for the use of the company,
remodeling costs in the amount of P900,000 were incurred and this was charged to Repairs and
Maintenance Expense. Such remodeling necessitates demolition of a portion of the building which
resulted in recovery of salvage materials, sold for P30,000 cash and recorded as Scrap Income.
No depreciation has been recognized on the building for 2007 which has an estimated useful life of
50 years and salvage value of P250,000.
On May 1, 2007, costs of P168,000 were incurred to improve leased office premises.
improvements have a useful life of 8 years. The related lease, which terminates on
2013 is renewable for an additional 6 year term. The decision to renew will be made
on office space needs at that time. No depreciation has been recorded yet on
improvements for 2007.

The leasehold
December 31,
in 2008 based
the leasehold

8. A franchise agreement was acquired at the beginning of 2007 for P500,000. No amortization has
been recorded for 2007. A ten-year amortization period is to be used.
9. The companys Licensing Agreement account has a balance of P216,000. Original amount was
P360,000 and is being amortized on a five year basis starting in January 2005. As of year end,
amortization has not been recorded.
10. You were furnished with the schedule of Accounts Payable and Accrued Expenses as of December 31,
2007. Your verification disclosed the following:
a.

Payment to Dela Cruz Company, a supplier, amounting to P126,000 was erroneously debited to
the account of De Leon Corporation, another supplier.

b.

The following unpaid vouchers have not been recorded as of year-end:

Light, telephone, and water bills for December totaling P22,800.
Property taxes for the last quarter of 2007 due on the first week of
January, 2008, P10,000.
Various payroll taxes, P18,000.

11. Rent was received from a tenant in December 2007. The amount of P130,000, was recorded as
income at that time even though the rental pertains to 2008.
12. The mortgage on land and building assumed by the company is payable in installment of P500,000
every January 1, starting on January 1, 2008. Interest of 20% per annum is payable semiannually
every January 1 and July 1.
13. The bonds payable represented a 9%, P2,000,000 face value bonds which were issued on January 1,
2007 to yield 10%. The company uses the interest method of amortizing bond discount. Interest is
payable annually on January 1. No interest accrual nor bond discount amortization was recorded
during 2007.
14. Assume that there are no reconciling items between book income and taxable income. The tax rate
is 32%.
Prepare a list of audit adjusting entries and compute for the adjusted balances of the following:
1. Petty Cash Fund
2. Cash in Bank
3. Trading Securities
4. Accounts Receivable
5. Allowance for Uncollectible Accts.
6. Advances to Officers and Empl.
7. Inventories
8. Prepaid Insurance
9. Land
10. Building
11. Accumulated Deprn-Building
12. Net book value of Leasehold
Improvements
13. Franchise
14. Licensing Agreement, net
15. Accounts Payable
16. Accrued Expenses
17. Unearned Revenues
18. Interest Payable
19. Income Taxes Payable
20. Dividends Payable
21. Current Portion of LT Debt
22. Discount on Bonds Payable
23. Common Stock
24. Retained Earnings
25. Sales
26. Cost of Goods Sold
27. Marketing & Adm. Expenses
28. Other Income
29. Interest Expense
30. Net Income

A
P
15,000
P 296,900
P
380,000
P 3,198,000
P
159,900
Zero
P 4,451,900
P
12,850
P 1,864,000
P 7,780,000
P
155,000

P
P
P
P
P
P
P
P
P
P
P

B
9,000
326,900
350,000
2,798,500
139,925
3,000
4,476,900
21,125
1,720,000
7,750,000
150,000

P
168,000
P
500,000
P
72,000
P 2,239,200
P
547,220
Zero
P
180,000
P
163,477
Zero
Zero
P
129,800
P 5,000,000
P 7,192,630
P32,214,000
P17,659,300
P 8,386,800
P
40,000
P 1,392,120
P 3,306,113

P 154,000
P 450,000
P 144,000
P2,212,200
P 598,020
P
21,667
P 200,000
P 203,365
P 250,000
P 500,000
P 122,000
P 4,000,000
P 7,091,630
P31,625,000
P17,631,300
P 8,372,470
P
45,000
P 792,120
P 4,872,160

P
P
P
P
P
P
P
P
P
P
P

C
7,500
353,600
330,000
2,794,000
139,700
120,000
4,964,250
23,150
1,690,000
7,636,000
150,600

P 151,200
P 400,000
P 288,000
P 2,204,200
P 648,820
P
65,000
P 380,000
P 210,943
P 625,000
P 1,000,000
P 114,200
P 3,500,000
P 4,923,953
P31,600,000
P17,606,300
P 8,368,650
P
50,000
P 624,620
P 4,640,913

P
P
P
P
P
P
P
P
P
P
P

D
6,000
401,900
300,000
2,758,000
137,900
123,000
4,976,900
23,700
1,684,000
7,606,000
147,120

P 150,600
P 350,000
P 428,000
P 2,155,900
P 848,820
P 130,000
P 580,000
P 759,620
P 1,250,000
P 1,500,000
P 109,800
P 3,000,000
P 4,240,165
P31,589,000
P17,579,300
P 8,220,450
P
70,000
P 504,320
P 2,921,834