Upload
aldrin-jade-castillo
View
42
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Solution manual
Citation preview
19-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Comprehensive Audit of Balance Sheet and Income Statement Accounts 19-7
19-1.Daffodil, Inc.
Adjusting Journal Entries
12.31.07
AJE (1)
Share donation
60,000
Treasury shares
35,000
Land
10,000
Building
15,000
(2)
Accumulated depreciation - machinery
1,000
Loss on sale of machinery
2,000
Machinery
3,000
Cost
P 5,000
Less: AD (20%)
1,000
NBV
P 4,000
Proceeds
2,000
Loss
P 2,000
(3)
(a)Accumulated depreciation - building
300
Retained earnings
300
(b)Factory operating expenses
21,300
Accumulated depreciation - building
6,300
Accumulated depreciation - machinery
15,000
Building (P315,000 x 2%)
Machinery:
5,000 x 10% =
P 500
145,000 x 10% =
14,500
P15,000
(4)
Merchandise inventory, 12.31.07 B/S
175,000
Merchandise inventory, 12.31.07 I/S
175,000
(5)
Administrative expenses
1,000
Allowance for doubtful accounts
1,000
(6)
Factory operating expenses
3,000
Unexpired insurance
3,000
(7)
Retained earnings
2,500
Bond interest expense
2,500
Unamortized bond discount
5,000
(8)
Sinking fund assets
23,500
First Mortgage SF Bonds
23,500
(9)
Sinking fund assets
1,500
Sinking fund income
1,500
19-1.Daffodil, Inc. (continued)
Daffodil, Inc.
Working Trial Balance
12.31.07
Trial Balance
Adjustments
Income Statement
Balance Sheet
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Cash
P 64,000
P 64,000
Accounts receivable
200,000
200,000
Provision for doubtful accounts
P 1,000
(5) 1,000
P 2,000
Inventories, 12.31.06
223,000
P 223,000
Unexpired insurance, 12.31.06
6,000
(6) 3,000
3,000
Land
220,000
(1) 10,000
210,000
Buildings
330,000
(1) 15,000
315,000
Accumulated Depreciation - Buildings
6,600
(3a) 300
(3b) 6,300
12,600
Machinery
148,000
(2) 3,000
145,000
Accumulated Depreciation - Machinery
15,000
(2) 1,000
(3b)15,000
29,000
Sinking fund assets
25,000
(8) 23,500
(9) 1,500
50,000
Unamortized bond discount
25,000
(7) 5,000
20,000
Treasury shares, ordinary
35,000
(1) 35,000
-
Accounts payable
88,000
88,000
Bond interest accrued
3,750
3,750
1st Mortgage, 6% SF Bonds
226,500
(8) 23,500
250,000
Ordinary shares
500,000
500,000
Premium on ordinary shares
50,000
50,000
Share donation
60,000
(1) 60,000
-
Retained earnings, 12.31.06
74,150
(7) 2,500
(3a) 300
71,950
Sales
875,000
P 875,000
Purchases
283,500
283,500
Payroll
169,000
169,000
Factory operating expenses
121,500
(3b)21,300
(6) 3,000
145,800
Administrative expenses
35,000
(5) 1,000
36,000
Bond interest expense
15,000
(7)2,500
17,500
P1,900,000
P1,900,000
Loss on sale of machinery
(2) 2,000
2,000
Merchandise inventory 12.31.07
(4) 175,000
(4)175,000
175,000
175,000
Sinking fund income
(9) 1,500
1,500
P 293,600
P 293,600
P 876,800
P1,051,500
P1,182,000
P1,007,300
Net Income
174,700
174,700
P1,051,500
P1,051,500
P1,182,000
P1,182,000
19-2.
Part IAdjusting Journal Entries, 12-31-05
AJE (1)
Depreciation expense
1,778
Accumulated depreciation
1,778
(2)
Prepaid interest
5,000
Retained earnings
3,100
Interest expense
1,900
(3)
Merchandise inventory, 12-31-07, BS
15,000
Merchandise inventory, 12-31-07, IS or Cost of Sales
15,000
(4)
Retained Earnings
6,000
Purchases
6,000
(5)
Prepaid insurance
3,000
Insurance expense
3,000
(6)
Store supplies inventory
1,450
Store supplies expense
550
Retained earnings
900
(7)
Retained earnings
730
Commissions expense
240
Accrued commissions payable
970
(8)
Cash in bank
650
Miscellaneous income
650
(9)
Purchases
800
Accounts payable
800
(10)
Income from Investment
3,000
Investment
3,000
(11)
Prepaid advertising and promotions
90,000
Advertising and promotions expense
90,000
(12)
NO AJE
(13)
Machinery
20,000
Depreciation expense machinery
167
Allowance for depreciation machinery
167
Repairs and maintenance
20,000
(14)
Miscellaneous income
2,000
Gain on sale of treasury shares
5,000
Land
2,000
Additional paid-in capital arising from
Treasury Share transactions
5,000
(15)
Doubtful accounts expense
14,500
Allowance for uncollectible accounts
14,500
Required allowance as of 12-31-07
on past due accounts (5% x P30,000)
on current accounts (1% x P400,000)
Total
Unadjusted debit balance of the Allowance
account
Additional Provision
P 1,500
4,000
P 5,500
9,000
P14,500
Part IIColumn B Adjustment, 12-31-07
AJE (a)
Retained earnings
xx
Purchases
xx
(b)
NONE
xx
xx
(c)
Retained Earnings
xx
Allowance for depreciation
xx
(d)
Retained Earnings
xx
Allowance for depreciation
xx
(e)
Machinery
xx
Retained earnings
xx
(f)
Depreciation
xx
Allowance for depreciation
xx
(g)
Retained earnings
xx
Taxes
xx
19-3.International Company
AJE (1)
Depreciation expense
3,200
Accumulated depreciation delivery vehicle
3,200
(2)
Cost of sales
19,000
Retained earnings
19,000
(3)
Cost of sales
8,500
Inventory
8,500
(4)
Cash
5,600
Accounts receivable
5,600
(5)
Accumulated depreciation equipment
22,000
Equipment
18,300
Gain on sale of equipment
3,700
(6)
Estimated litigation loss
125,000
Estimated litigation liability
125,000
(7)
Unrealized holding gain or loss Income
2,000
Allowance for decline in value of securities
2,000
(8)
Accrued salaries payable
3,800
Salaries expense
3,800
(9)
Depreciation expense
4,000
Equipment
32,000
Repairs expense
32,000
Accumulated depreciation equipment
4,000
(10)
Insurance expense
5,000
Prepaid insurance
7,000
Retained earnings
12,500
(11)
No adjusting entry. Trademark has indefinite life and no amortization need be made.
19-4.Sunshine Cosmetics, Inc.
Requirement (1)
AJE (1)
Inventory, Dec. 31, 2006 (BS)
67,200
Inventory, Dec. 31, 2006 (IS) or
Cost of sales
67,200
(2)
Doubtful accounts expense
14,920
Allowance for doubtful accounts
(15,660 740)
14,920
(3)
Accounts payable
20,760
Purchase returns and allowances
20,760
(4)
Sales commissions
216
Accrued commissions payable
216
(5)
Freight-in
1,600
Accounts payable
1,600
(6)
Advertising expense
1,212
Prepaid advertising
1,212
(7)
Freight-out or Expense
8,400
Sales
8,400
(8)
Interest receivable
1,380
Interest income
1,380
(9)
Depreciation expense
1,300
Accumulated depreciation
1,300
(10)
Supplies expense
1,160
Unused Supplies
1,160
(11)
Provision for Income tax expense
107,386
Income tax payable
107,386
Requirement (2)
Sunshine Cosmetics, Inc.
Income Statement
For the Year Ended December 31, 2006
Revenue from sales:
Sales
P998,800(a)
Less: Sales returns and
and allowances
P 22,400
Sales discounts
1,760
24,160
P974,640
Cost of goods sold:
Inventory, January 1
P179,400
Net purchases:
Purchases
P346,000
Less purchase returns
and allowances
20,760(c)
325,240
Freight-in
12,650(b)
Cost of goods available
for sale
P517,290
Less Inventory, December 31
108,300(d)
408,990
Gross profit on sales
P565,650
Other income:
Interest revenue
P 2,780(i)
Dividend revenue
14,300
Gain on sale of assets
37,000
54,080
Total income
P619,730
Operating expenses:
Selling expenses:
Sales salaries and
commissions
P 70,216(e)
Advertising expense
33,392(f)
Depreciation expense
Sales/delivery equipment
13,500(g)
Freight expense
8,400
Travel expense sales
representatives
9,120
Miscellaneous selling
expenses
4,400
P139,028
General and administrative
expenses:
Legal services
P 4,450
Insurance and licenses
17,000
Depreciation expense
office equipment
9,600
Utilities
12,800
Telephone and postage
2,950
Supplies expense
1,160(k)
Officers salaries
73,200
Doubtful accounts expense
14,920(h)
136,080
Total operating expenses
(275,108)
Other expense and losses:
Interest expense
P 9,040
Loss on sale of equipment
45,200
(54,240)
Income from continuing
operations before income taxes
P290,382
Income taxes
92,922(j)
Income from continuing
operations
P197,460
Discontinued operations:
Gain from discontinued
operations (net of income
taxes of P25,600)
54,400
Net income
P251,860
Earnings per ordinary share:
Income from continuing operations (P197,460 ( 78,000 shares)
P2.53
Gain from discontinued operations (P54,400 ( 78,000 shares)
0.70
Net income (P251,860 ( 78,000 shares)
P3.23
Computations:
(a)Sales: P990,400 + P8,400 = P998,800
(b)Freight-in: P11,050 + P1,600 = P12,650
(c)Purchase returns and allowances: P346,000 x 6% = P20,760
(d)Inventory: P41,100 + P67,200 = P108,300
(e)Sales salaries and commissions: P70,000 + (P7,200 x 3%) = P70,216
(f)Advertising expense: P32,180 + (P3,636 x 2/6) = P33,392
(g)Depreciation expense: P12,200 + (P15,600 x 10/120) = P13,500
(h)Doubtful accounts expense: (P522,000 x 3%) P740 = P14,920
(i)Interest revenue: P1,400 + P1,380 = P2,780
(j)Income taxes: P335,582 x 32% = P107,387
(k)Supplies expense: P4,360 P3,200 = P1,160
Sunshine Cosmetics, Inc.
Retained Earnings Statement
For the Year Ended December 31, 2006
Retained earnings, January 1
P 881,340
Add net income per income statement
251,860
P1,133,200
Deduct dividends paid
66,000
Retained earnings, December 31
P1,067,200
19-5.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
Balance Sheet
Corrections
Corrected Balance Sheet
Account Title
Debit
Credit
Debit
Credit
Debit
Credit
Current Assets
53,415
(a)53,415
Current Liabilities
29,000
(c)29,000
Other Assets
75,120
(b)75,120
Other Liabilities
3,600
(d)3,600
Investment in Business
95,935
(e)95,935
128,535
128,535
Cash
(a)10,600
10,600
Investment Securities
trading (at market value)
(a)2,575
2,575
Trade Accounts Receivable
(a)12,500
12,500
Inventory
(a)8,040
8,040
Supplies Inventory
(a)425
425
Delivery Truck
(a)2,100
2,100
Fixtures
(a)12,500
12,500
Accumulated Depreciation Fixtures
(a)2,100
2,100
Cash Surrender Value of Insurance on Officers
Lives
(a)4,100
4,100
Retained Earnings
(a)2,675
(b)7,750
(d)350
30,160
(e)40,935
Land
(b)30,000
30,000
Buildings
(b)62,000
62,000
Accumulated Depreciation Buildings [2 (P62,000 ( 20)]
(b)7,750
7,750
11% Mortgage Payable
(b)12,000
12,000
11% Mortgage Payable (current portion)
(b)4,000
4,000
Interest Payable
(b)880
880
Trade Accounts Payable
(c)29,000
29,000
Miscellaneous Liabilities
(d)3,950
3,950
Share Capital, P5 stated value, 5,000 shares
(e)25,000
25,000
Paid-in Capital from Sale of Shares at More Than Stated Value
(e)30,000
30,000
284,150
284,150
144,840
144,840
Corrections:(a)To restate current assets(d)To restate other liabilities
(b)To restate other assets(e)To restate owners equity accounts
(c)To restate current liabilities
Del Bakery
Corrected Balance Sheet
December 31, 2007
Assets
Current assets:
Cash
P10,600
Investment securities trading (reported at
market; cost P4,250)
2,575
Trade accounts receivable (fully collectible)
12,500
Inventory
8,040
Supplies inventory
425
P 34,140
Investments:
Cash surrender value of life insurance
4,100
Land, buildings and equipment:
Land
P30,000
BuildingsP62,000
Less accumulated depreciation 7,750
54,250
FixturesP12,500
Less accumulated depreciation 2,100
10,400
Delivery truck
2,100
96,750
Total assets
P134,990
Liabilities
Current liabilities:
Mortgage payable, portion due this year
P 4,000
Accounts payable
29,000
Interest payable
880
Miscellaneous accrued liabilities
3,950
P 37,830
11% Mortgage payable (noncurrent portion)
12,000
Total liabilities
P 49,830
Owners Equity
Contributed capital:
Share capital, P5 stated value,
5,000 sharesP25,000
Paid-in capital from sale of
ordinary shares at more than
stated value 30,000
P55,000
Retained earnings
30,160
Total owners equity
85,160
Total liabilities and owners equity
P134,990
19-6.Masipag Corporation
Adjusting Journal Entries, Dec. 31, 2007
AJE (1)
Cash
200,000
Accounts payable
200,000
(2)
Accounts receivable
10,000
Cash
10,000
(3)
Bank loan payable
400,000
Other expenses
12,500
Cash
412,500
(4)
Cash
75,000
Accounts receivable
75,000
(5)
Operating expenses
1,500
Cash
1,500
(6)
Cash
16,000
Other income
16,000
(7)
Accounts receivable others (2,000 + 3,000)
5,000
Operating expenses
2,000
Cash
7,000
(8)
Marketable securities
40,000
Other income
40,000
(9)
Other income
54,000
Marketable securities
54,000
(10)
Marketable securities
32,000
Other income
32,000
(10.a)
Valuation allowance Marketable securities
Trading
145,600
Other income Unrealized holding gain
145,600
(11)
Sales
500,000
Accounts receivable
500,000
(12)
Inventory
400,000
Cost of sales
400,000
(13)
Accounts receivable others (30,000 15,000)
15,000
Accounts receivable
15,000
(14)
Accounts receivable others
55,000
Accounts receivable
55,000
(15)
Accounts receivable
50,000
Other current liabilities
50,000
(16)
Operating expenses
21,900
Allowance for doubtful accounts
21,900
(17)
Other income
54,545
Discount on notes receivable
54,545
(18)
Discount on notes receivable
4,545
Other income
4,545
(19)
Cost of sales
60,000
Accounts payable
60,000
(20)
Cost of sales
25,000
Accounts payable
25,000
(21)
Inventory
25,000
Cost of sales
25,000
(22)
Accounts receivable others
16,000
Inventory
16,000
(23)
Sales
13,000
Accounts receivable
13,000
(24)
Operating expenses
46,250
Prepaid expenses
46,250
(25)
Operating expenses
5,000
Prepaid expenses
5,000
(26)
Other assets
60,000
Operating expense
120,000
Prepaid expenses
180,000
(27)
Long-term bond investment
5,777
Other income
5,777
(28)
Accounts receivable others
5,333
Other income
5,333
(29)
Land
1,062,500
Building
3,187,500
Land and building
4,250,000
(30)
Building
425,000
Land and building
425,000
(31)
Operating expenses
20,000
Land and building
20,000
(32)
Operating expenses
27,500
Prepaid expenses
27,500
Land and building
55,000
(33)
Land and building
237,500
Operating expenses
115,578
Accumulated depreciation building
121,922
(34)
Prepaid expenses
10,000
Operating expenses
10,000
Equipment
20,000
(35)
Operating expenses
55,400
Accumulated depreciation equipment
55,400
(36)
Accounts payable
50,000
Other current liabilities
50,000
(37)
Operating expenses
15,000
Estimated liability on warranties
15,000
(38)
Other current liabilities
50,000
Other expenses
50,000
(39)
Income taxes payable
115,290
Provision for income tax
115,290
MASIPAG CORPORATION
Balance Sheet
December 31, 2007
Assets
Current assets
Cash
P 734,000
Marketable securities
P 400,000
Valuation allowance
145,600
545,600
Accounts receivable
P 442,000
Allowance for doubtful accounts
(33,150)
408,850
Notes receivable
P 600,000
Discount on notes receivable
(50,000)
550,000
Accounts receivable others
96,333
Inventory, December 31, 2007
1,960,500
Prepaid expenses
175,250
Total current assets
P4,470,533
Investments
Long-term bond investment
744,077
Property, plant and equipment
Land
P1,062,500
Building
P3,612,500
Accumulated depreciation Building
(121,922)
3,490,578
Equipment
P1,654,000
Accumulated depreciation Equipment
(235,400)
1,418,600
Total property, plant and equipment
5,971,678
Other assets
110,000
Total assets
P11,296,288
Liabilities and Shareholders Equity
Current liabilities
Accounts payable
P 877,000
Bank loan payable
1,100,000
Accrued expenses payable
59,000
Other current liabilities
100,000
Income taxes payable
130,558
Estimated liability on warranties
70,000
Total current liabilities
P 2,336,558
Shareholders equity
Ordinary shares
P5,000,000
Additional paid-in capital
1,655,250
Retained Earnings
2,304,480
Total shareholders equity
8,959,730
Total liabilities and shareholders equity
P11,296,288
MASIPAG CORPORATION
Income Statement
For the Year Ended December 31, 2007
Sales
P 6,437,000
Cost of sales
(4,060,000)
Gross profit
P 2,377,000
Other income
225,710
Operating expenses
(1,511,509)
Other expenses
(37,500)
Income before taxes
P 1,053,701
Provision for income tax
(342,441)
Net Income
P 711,260
19-7.Felicity Company
Adjusting Journal Entries, Dec. 31, 2007
AJE (1)
Cash
31,000
Prepaid interest
3,000
Other charges
2,000
Long-term debt (current portion)
24,000
Long-term debt
12,000
(2)
Cash
2,000
Accounts payable and others
2,000
(3)
Investments in SMC shares available for sale
(non-current)
72,000
Marketable securities
72,000
(4)
Unrealized loss due to decline in value of
non-current investment (equity)
20,000
Operating expenses
20,000
(5)
Allowance for doubtful accounts
41,100
Operating expenses
41,100
(6)
Accounts receivable
8,000
Operating expenses
8,000
(7)
Inventory
12,000
Cost of sales
12,000
(8)
Sales
14,400
Accounts receivable
14,400
(9)
Revaluation increment
120,000
Accumulated depreciation
80,000
Property and equipment
200,000
(10)
Accumulated depreciation
36,000
Operating expenses
36,000
(11)
Operating expenses
48,000
Accumulated depreciation
48,000
(12)
Revaluation increment
24,000
Retained earnings
24,000
(13)
Property and equipment
30,000
Operating expenses
30,000
(14)
Retained earnings
13,000
Cumulative effect of change in accounting
principle
13,000
(15)
Accounts receivable others
22,000
Cash
22,000
(16)
Provision for income tax
25,445
Income tax payable
25,445
FELICITY COMPANY
Balance Sheet
December 31, 2007
Assets
Current Assets:
CashP 123,600
Accounts receivable1,751,820
Allowance for doubtful accounts (27,000)
Accounts receivable -others62,000
Inventories262,000
Prepaid interest3,000
Non-current Assets:
Advances to affiliate48,000
Investments in SMC shares available for sale72,000
Allowance for decline in value of non-current investment(20,000)
Property and equipment2,600,000
Accumulated depreciation (1,172,000)
Total AssetsP 3,703,420
Liabilities and Shareholders Equity
Accounts payable and others (including current portion of
bank loan of P24,000) P 434,616
Income tax payable100,205
Long-term debt72,000
Ordinary share capital2,042,000
Retained earnings978,599
Unrealized loss due to decline in value of investment in SMC(20,000)
Revaluation increment 96,000
Total Liabilities and Shareholders EquityP 3,703,420
FELICITY COMPANY
Income Statement
For the Year Ended December 31, 2007
Sales P 2,757,124
Cost of sales 2,257,604
Gross profitP 499,520
Operating expenses(83,522)
Other charges (102,000)
Income from continuing operations before taxP 313,998
Provision for income tax (35%) 109,899
Income from continuing operations after taxP 204,099
Discontinued operations (net) (6,500)
Net income P 197,599
19-8.Learn Company
Condensed Comparative Income Statements
2009
2008
2007
Construction revenue
P900,000
P420,000
P200,000
Construction expense
(420,000)
(182,000)
(80,000)
Other expenses
(80,000)
(70,000)
(50,000)
Income before income taxes
P400,000
P168,000
P 70,000
Income tax expense
(120,000)
(50,400)
(21,000)
Net income
P280,000
P117,600
P 49,000
Comparative Statements of Retained Earnings
2009
2008
2007
Balance at beginning of year,
as previously reported
P 77,000
P 7,000
P 0
Add: Adjustment for the cumulative effect on prior years of applying retroactively the new method of accounting for long-term contracts (net of income taxes)
89,600b
42,000a
0
Balance at beginning of year,
as adjusted
P166,600
P 49,000
P 0
Net income
280,000
117,600
49,000
Balance at end of year
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 of the accounting change on income of 2009 and on income as previously reported in 2007 and 2008 is as follows:
Increase
2009
2008
2007
Net income
P112,000c
P47,600
P42,000
Earnings per ordinary share
P11.20
P4.76
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.
a P49,000 P7,000
b (P49,000 + P117,600) (P7,000 + P70,000)
c P280,000 [(P600,000 P280,000 P80,000) x (1 0.30)]
19-9.Goody Construction Company
Requirement (1)
2007
Jan. 1
Construction in Progress
70,000 a
Retained Earnings [P70,000 x (1 0.30)]
49,000
Deferred Tax Asset
21,000
a [(P100,000 + P120,000) + (P125,000 +
P75,000)] (P100,000 + P250,000)
Requirement (2)
GOODY CONSTRUCTION COMPANY
Condensed Comparative Income Statements (Partial)
2007
2006
2005
Income before income taxes
P400,000
P200,000
P220,000
Income taxes at 30%
(120,000)
(60,000)
(66,000)
Net income
P280,000
P140,000
P154,000
Earnings per ordinary share
(100,000 shares)
P2.80
P1.40
P1.54
Comparative Statements of Retained Earnings
2007
2006
2005
Balance at beginning of year,
as previously reported
P245,000c
P 70,000b
P 0
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)
49,000e
84,000d
0
Balance at beginning of year,
as adjusted
P294,000
P154,000
P 0
Net income
280,000
140,000
154,000
Balance at end of year
P574,000
P294,000
P154,000
b P100,000 x (1 0.30)
c P250,000 x (1 0.30) + P70,000
d [(P100,000 + P120,000) P100,000] x (1 0.30)
e [(P100,000 + P120,000 + P125,000 + P75,000) (P100,000 + P250,000)]
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:
Increase
2007
2006
2005
Net income
P(49,000)h
P(35,000)g
P84,000f
Earnings per ordinary share
P(0.49)
P(0.35)
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 (P220,000 P100,000) x (1 0.30)
g (P200,000 P250,000) x (1 0.30)
h [P400,000 (P820,000 P350,000)] x (1 0.30)
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
60,000
Notes Payable
60,000
Depreciation Expense: Building
(P60,000 ( 30)
2,000
Accumulated Depreciation: Building
2,000
Correct entries:
Building
40,981a
Discount on Notes Payable
19,019
Notes Payable
60,000
a P60,000 x 0.683013
Depreciation Expense: Building
1,366b
Interest Expense
4,098c
Accumulated Depreciation
1,366
Discount on Notes Payable
4,098
b P40,981 ( 30
c Interest computed using effective
interest method: 10% x P40,981
Entries to correct error:
Discount on Notes Payable
19,019
Building
19,019
Accumulated Depreciation: Building
634
Interest Expense
4,098
Depreciation Expense: Building
634
Discount on Notes Payable
4,098
b.Retained Earnings
40,000
Cost of Goods Sold
40,000
To correct error from prior year.
Cost of Goods Sold
15,000
Inventory
15,000
To correct error in current year.
c.The error from 2005 was counterbalanced at the end of 2006, so it can be ignored.
Retained earnings
18,000
Salaries and Wages Expense
18,000
To correct error in salary and wage accrual in 2006.
Salaries and Wages Expense
10,000
Salaries and Wages Payable
10,000
To accrue salaries and wages at December 31, 2007.
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)
14,921
Accumulated Depreciation: Building
634
Retained Earnings
3,464d
Building
19,019
d Correction of interest expense
understatement of P4,098 less
depreciation overstatement of P634
b.The error from 2006 was counterbalanced by the end of 2005, so it can be ignored.
Retained Earnings
15,000
Inventory
15,000
c.The errors from 2005 and 2006 were counterbalanced by the end of 2006 and 2007; respectively, so they can be ignored.
Retained Earnings
10,000
Salaries and Wages Payable
10,000
19-11.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
Year Ended December 31
2007
2006
Income before income taxes, before adjustments
P4,030,000
P3,330,000
Adjustments:
Depreciate certain equipment over 8-year life
instead of 10-year life (Schedule 1)
(25,000)
--
Correct 2006 error
180,000
(180,000)
Record 2007 provision for doubtful accounts
(P58,500,000 x 0.2%)
(117,000)
--
Increase estimated warranty liability
(170,000)
--
Effect of change in accounting principle from
expensing to capitalizing relining costs in the
year of the change (Schedule 2)
Furnace A (Jan. 2006)
(56,000)
224,000
Furnace B (Jan. 2007)
240,000
--
Net adjustments
52,000
44,000
Income before income taxes
P4,082,000
P3,374,000
Schedule 1:
Computation of Adjusted Depreciation
Cost of equipment (no salvage value)
P1,000,000
Depreciation based on 10-year life
P 100,000
Depreciation based on 8-year life
(125,000)
Adjustment
P (25,000)
Schedule 2:
Computation of Effect of Change in Accounting
Principle From Expensing to Capitalizing
Relining Costs on the Year of the Change
Capitalization of Furnace B
P300,000
Depreciation on Furnace B based on 5-year life
(P300,000 x 20%)
(60,000)
Depreciation on Furnace A based on 5-year life
(P280,000 x 20%)
(56,000)
Adjustment
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
P280,000
Depreciation on Furnace A based on 5-year life
(P280,000 x 20%)
(56,000)
Adjustment
P224,000
19-12.Jo Francisco, Inc.
Net Income for 2005
Retained Earnings 12/31/06
Item
Understated
Overstated
Understated
Overstated
1.
P14,100
0
0
0
2.
P 7,000
0
P 5,000
0
3.
0
P22,000
0
P11,000
4.
P33,000
0
P33,000
0
5.
0
P20,000
0
P10,000
6.
P18,200
0
0
0
Although explanations were not required in answering the question, they are included below for your interest.
Explanations:
1.The net income would be understated in 2005 because interest income is understated. The net income would be overstated in 2006 because interest income is overstated. The errors, however, would counterbalance (wash) so that the Balance Sheet (Retained Earnings) would be correct at the end of 2006.
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.PAS 38, paragraphs 54 to 57 govern the accounting for research and development costs. Net income in 2005 is overstated P22,000 (P33,000 research and development costs capitalized less P11,000 amortized). By the end of 2006, only P11,000 of the research and development costs would remain as an asset. Therefore, retained earnings would be overstated by P11,000 (P33,000 research and development costs P22,000 amortized).
4.The security deposit should be a long-term asset, called refundable deposits. The P8,000 of last months rent is also an asset, called prepaid rent. The net income of 2005 is understated by P33,000 (P25,000 + P8,000) because these amounts were expensed. Retained earnings will continue to be understated by P33,000 until the last year of the lease. The security deposit will then be refunded, and the last months rent should be expensed.
5.P10,000 or one-third of P30,000 should be reported as income each year. In 2005, P30,000 was reported as income when only P10,000 should have been reported. Because P20,000 too much was reported, the net income of 2005 is overstated. At the end of 2006, P20,000 should have been reported as income, so retained earnings is still overstated by P10,000 (P30,000 P20,000).
6.The ending inventory would be understated since the merchandise was omitted. Because ending inventory and net income have a direct relationship, net income in 2005 would be understated. The ending inventory of 2005 becomes the beginning inventory of 2006. If beginning inventory of 2006 is understated, then net income of 2006 is overstated (inverse relationship). The omission in inventory over the two-year period will counterbalance, and retained earnings at the end of 2006 will be correct.
19-13.JC Patrick Corporation
2006
2007
Net income, as reported
P29,000
P37,000
Rent received in 2006, earned in 2007
(1,300)
1,300
Wages not accrued, 12/31/05
1,100
Wages not accrued, 12/31/06
(1,500)
1,500
Wages not accrued, 12/31/07
(940)
Inventory of supplies, 12/31/05
(1,300)
Inventory of supplies, 12/31/06
740
(740)
Inventory of supplies, 12/31/07
1,420
Corrected net income
P26,740
P39,540
CHAPTER
19
COMPREHENSIVE AUDIT OF
BALANCE SHEET AND INCOME STATEMENT ACCOUNTS
[(P22,000 P2,000) P4,000]
9