CHAPTER COMPREHENSIVE AUDIT OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS
23 23-1.
Daffodil, Inc. Adjusting Journal Entries 12.31.16 AJE (1)
(2)
Share donation Treasury shares Land Building
35,000 10,000 15,000
Accumulated depreciation - machinery Loss on sale of machinery Machinery Cost Less: AD (20%) NBV Proceeds Loss
(3)
60,000
(b) Factory operating expenses Accumulated depreciation - building Accumulated depreciation - machinery
(4)
3,000
P 5,000 1,000 P 4,000 2,000 P 2,000
(a) Accumulated depreciation - building Retained earnings
Building (P315,000 x 2%) Machinery: 5,000 x 10% = 145,000 x 10% =
1,000 2,000
300 300 21,300 6,300 15,000
P 500 14,500 P15,000
Merchandise inventory, 12.31.16 B/S Merchandise inventory, 12.31.16 I/S
175,000 175,000
23-2
Applied Auditing 2014 Edition Solutions Manual (5)
(6)
(7)
(8)
(9)
Administrative expenses Allowance for doubtful accounts
1,000
Factory operating expenses Unexpired insurance
3,000
Retained earnings Bond interest expense Unamortized bond discount
2,500 2,500
Sinking fund assets First Mortgage SF Bonds Sinking fund assets Sinking fund income
1,000
3,000
5,000 23,500 23,500 1,500 1,500
Comprehensive Audit Cases and Problems 23-1.
23-3
Daffodil, Inc. (continued) Daffodil, Inc. Working Trial Balance 12.31.16
Cash Accounts receivable Provision for doubtful accounts Inventories, 12.31.15 Unexpired insurance, 12.31.15 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, 12.31.15 Sales Purchases Payroll Factory operating expenses Administrative expenses Bond interest expense Loss on sale of machinery Merchandise inventory 12.31.16 Sinking fund income
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
(3a) (2) (8) (9)
300 1,000 23,500 1,500
(1) (7)
60,000 2,500
(6) (1) (1) (3b) (2) (3b)
3,000 10,000 15,000 6,300 3,000 15,000
(7) (1)
5,000 35,000
(8)
23,500
(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
(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
1,000
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
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
23-4
Applied Auditing 2014 Edition Solutions Manual
23-2. Part I
Adjusting Journal Entries, 12-31-14
AJE (1)
Depreciation expense Accumulated depreciation
1,778 1,778
[(P22,000 – P2,000) – P4,000] 9 (2)
(3)
(4) (5) (6)
(7)
(8) (9)
Prepaid interest Retained earnings Interest expense Merchandise inventory, 12-31-16 BS Merchandise inventory, 12-31-16, IS or Cost of Sales
3,100 1,900 15,000 15,000
Retained Earnings Purchases
6,000
Prepaid insurance Insurance expense
3,000
Store supplies inventory Store supplies expense Retained earnings
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
(10) Income from Investment Investment (11) Prepaid advertising and promotions Advertising and promotions expense (12)
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
Comprehensive Audit Cases and Problems (14) Miscellaneous income Gain on sale of treasury shares Land Additional paid-in capital arising from Treasury Share transactions
2,000 5,000
(15) Doubtful accounts expense 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
23-5
2,000 5,000 14,500
P 1,500 4,000 P 5,500 9,000 P14,500
Part II Column B – Adjustment, 12-31-16 AJE (a)
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)
23-3.
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
23-6
Applied Auditing 2014 Edition Solutions Manual (3)
(4)
(5)
(6)
(7)
(8)
(9)
Cost of sales Inventory
8,500
Cash Accounts receivable
5,600
Accumulated depreciation – equipment Equipment Gain on sale of equipment Estimated litigation loss Estimated litigation liability
8,500
5,600 22,000 18,300 3,700 125,000 125,000
Unrealized holding gain or loss – Income Allowance for decline in value of securities
2,000
Accrued salaries payable Salaries expense
3,800
Depreciation expense Equipment Repairs expense Accumulated depreciation – equipment
(10) Insurance expense Prepaid insurance Retained earnings
2,000
3,800 4,000 32,000 32,000 4,000 5,000 7,000 12,500
(11) No adjusting entry. Trademark has indefinite life and no amortization need be made. 23-4.
Sunshine Cosmetics, Inc. Requirement (1) AJE (1)
(2)
(3)
Inventory, Dec. 31, 2015 (BS) Inventory, Dec. 31, 205 (IS) or Cost of sales
67,200
Doubtful accounts expense Allowance for doubtful accounts (15,660 – 740)
14,920
Accounts payable Purchase returns and allowances
20,760
67,200
14,920
20,760
Comprehensive Audit Cases and Problems (4)
(5)
(6)
(7)
(8)
(9)
Sales commissions Accrued commissions payable
23-7
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
(10) Supplies expense Unused Supplies
1,160 1,160
(11) Provision for Income tax expense Income tax payable
107,386 107,386
Requirement (2) Sunshine Cosmetics, Inc. Income Statement For the Year Ended December 31, 2015 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
23-8
Applied Auditing 2014 Edition Solutions Manual Other income: Interest revenue Dividend revenue Gain on sale of assets Total income Operating expenses: Selling expenses: Sales salaries and commissions Advertising expense Depreciation expense – Sales/delivery equipment Freight expense Travel expense – sales representatives Miscellaneous selling expenses General and administrative expenses: Legal services Insurance and licenses Depreciation expense – office equipment Utilities Telephone and postage Supplies expense Officers’ salaries Doubtful accounts expense Total operating expenses Other expense and losses: Interest expense Loss on sale of equipment Income from continuing operations before income taxes Income taxes Income from continuing operations Discontinued operations: Gain from discontinued operations (net of income taxes of P25,600) Net income
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
P
P139,028
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
Comprehensive Audit Cases and Problems Earnings per ordinary share: Income from continuing operations (P197,460 78,000 shares) Gain from discontinued operations (P54,400 78,000 shares) Net income (P251,860 78,000 shares)
23-9
P2.53 0.70 P3.23
Computations: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)
Sales: P990,400 + P8,400 = P998,800 Freight-in: P11,050 + P1,600 = P12,650 Purchase returns and allowances: P346,000 x 6% = P20,760 Inventory: P41,100 + P67,200 = P108,300 Sales salaries and commissions: P70,000 + (P7,200 x 3%) = P70,216 Advertising expense: P32,180 + (P3,636 x 2/6) = P33,392 Depreciation expense: P12,200 + (P15,600 x 10/120) = P13,500 Doubtful accounts expense: (P522,000 x 3%) – P740 = P14,920 Interest revenue: P1,400 + P1,380 = P2,780 Income taxes: P335,582 x 32% = P107,387 Supplies expense: P4,360 – P3,200 = P1,160 Sunshine Cosmetics, Inc. Retained Earnings Statement For the Year Ended December 31, 2015
Retained earnings, January 1 Add net income per income statement
P 881,340 251,860 P1,133,200 66,000 P1,067,200
Deduct dividends paid Retained earnings, December 31 23-5.
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, 2016 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 ............. .............. .............
Corrected Balance Sheet Debit Credit ............. .............. ............. .............. ............. .............. ............. .............. ............. .............. ............. ..............
23-10
Applied Auditing 2014 Edition Solutions Manual Cash ..................................... Investment Securities – trading (at market value) .... Trade Accounts Receivable . Inventory............................... Supplies Inventory................ Delivery Truck ...................... Fixtures................................. Accumulated Depreciation – Fixtures............................... Cash Surrender Value of Insurance on Officers’ Lives ................................... Retained Earnings................
Land ..................................... Buildings ............................... Accumulated Depreciation – Buildings [2 ½ (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
To restate current assets To restate other assets To restate current liabilities
2,575 12,500 8,040 425 2,100 12,500
(d) (e)
To restate other liabilities To restate owners’ equity accounts
Del Bakery Corrected Balance Sheet December 31, 2016 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
Comprehensive Audit Cases and Problems Investments: Cash surrender value of life insurance .................... Land, buildings and equipment: Land ........................................................................ Buildings.................................................. P62,000 Less accumulated depreciation .......... 7,750 Fixtures .................................................... P12,500 Less accumulated depreciation .......... 2,100 Delivery truck ......................................................... Total assets ................................................................... Liabilities Current liabilities: Mortgage payable, portion due this year ................ Accounts payable .................................................... Interest payable ....................................................... Miscellaneous accrued liabilities ............................ 11% Mortgage payable (noncurrent portion) ............... Total liabilities.............................................................. Owners’ Equity Contributed capital: Share capital, P5 stated value, 5,000 shares ....................................... P25,000 Paid-in capital from sale of ordinary shares at more than stated value ........................................ 30,000 Retained earnings ......................................................... Total owners’ equity..................................................... Total liabilities and owners’ equity .............................. 23-6.
23-11 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, 2016 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
23-12
Applied Auditing 2014 Edition Solutions Manual (4) (5) (6) (7)
(8) (9)
Cash Accounts receivable
75,000 75,000
Operating expenses Cash
1,500
Cash Other income
16,000
Accounts receivable – others (2,000 + 3,000) Operating expenses Cash
1,500 16,000 5,000 2,000 7,000
Marketable securities Other income
40,000
Other income Marketable securities
54,000
(10) Marketable securities Other income (10.a) Valuation allowance – Marketable securities – Trading Other income – Unrealized holding gain
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
(13) Accounts receivable – others (30,000 – 15,000) Accounts receivable
15,000
(14) Accounts receivable – others Accounts receivable
55,000
(15) Accounts receivable Other current liabilities
50,000
(16) Operating expenses Allowance for doubtful accounts
21,900
(17) Other income Discount on notes receivable
54,545
(18) Discount on notes receivable Other income
15,000 55,000 50,000 21,900 54,545 4,545 4,545
Comprehensive Audit Cases and Problems (19) Cost of sales Accounts payable
60,000
(20) Cost of sales Accounts payable
25,000
(21) Inventory Cost of sales
25,000
(22) Accounts receivable – others Inventory
16,000
(23) Sales Accounts receivable
13,000
(24) Operating expenses Prepaid expenses
46,250
(25) Operating expenses Prepaid expenses
5,000
(26) Other assets Operating expense Prepaid expenses
60,000 120,000
23-13 60,000
25,000
25,000
16,000
13,000
46,250
5,000
180,000
(27) Long-term bond investment Other income
5,777
(28) Accounts receivable – others Other income
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
(31) Operating expenses Land and building
20,000
(32) Operating expenses Prepaid expenses Land and building
27,500 27,500
4,250,000
425,000
20,000
55,000
23-14
Applied Auditing 2014 Edition Solutions Manual (33) Land and building Operating expenses Accumulated depreciation – building
237,500 115,578 121,922
(34) Prepaid expenses Operating expenses Equipment
10,000 10,000
(35) Operating expenses Accumulated depreciation – equipment
55,400
(36) Accounts payable Other current liabilities
50,000
(37) Operating expenses Estimated liability on warranties
15,000
(38) Other current liabilities Other expenses
50,000
20,000
55,400
50,000
15,000
50,000
(39) Income taxes payable Provision for income tax
115,290 115,290
MASIPAG CORPORATION Balance Sheet December 31, 2016 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
Comprehensive Audit Cases and Problems Equipment Accumulated depreciation – Equipment
P1,654,000 (235,400)
23-15
1,418,600
Total property, plant and equipment Other assets Total assets
5,971,678 110,000 P11,296,288
Liabilities and Shareholders’ Equity Current liabilities Accounts payable Bank loan payable Accrued expenses payable Other current liabilities Income taxes payable Estimated liability on warranties Total current liabilities
P 877,000 1,100,000 59,000 100,000 130,558 70,000
Shareholders’ equity Ordinary shares Additional paid-in capital Retained Earnings Total shareholders’ equity Total liabilities and shareholders’ equity
P5,000,000 1,655,250 2,304,480
P 2,336,558
8,959,730 P11,296,288
MASIPAG CORPORATION Income Statement For the Year Ended December 31, 2016 Sales Cost of sales Gross profit Other income Operating expenses Other expenses Income before taxes Provision for income tax Net Income
23-7.
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, 2016 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
23-16
Applied Auditing 2014 Edition Solutions Manual (2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Cash Accounts payable and others
2,000 2,000
Investments in SMC shares – available for sale (non-current) Marketable securities
72,000
Unrealized loss due to decline in value of non-current investment (equity) Operating expenses
20,000
Allowance for doubtful accounts Operating expenses Accounts receivable Operating expenses
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
(10) Accumulated depreciation Operating expenses
36,000
(11) Operating expenses Accumulated depreciation
48,000
(12) Revaluation increment Retained earnings
24,000
(13) Property and equipment Operating expenses
30,000
(14) Retained earnings Cumulative effect of change in accounting principle
13,000
(15) Accounts receivable – others Cash
22,000
36,000
48,000
24,000
30,000
13,000
22,000
Comprehensive Audit Cases and Problems (16) Provision for income tax Income tax payable
23-17
25,445 25,445
FELICITY COMPANY Balance Sheet December 31, 2016 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
P
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
Liabilities and Shareholders’ Equity Accounts payable and others (including current portion of bank loan of P24,000) ............................................................... Income tax payable ............................................................................ Long-term debt .................................................................................. Ordinary share capital ....................................................................... Retained earnings .............................................................................. Unrealized loss due to decline in value of investment in SMC ......... Revaluation increment ....................................................................... Total Liabilities and Shareholders’ Equity
P
434,616 100,205 72,000 2,042,000 978,599 (20,000) 96,000 P 3,703,420
FELICITY COMPANY Income Statement For the Year Ended December 31, 2016 Sales .................................................................................................. Cost of sales ...................................................................................... Gross profit ........................................................................................ Operating expenses ........................................................................... Other charges.....................................................................................
P 2,757,124 2,257,604 P 499,520 (83,522) (102,000)
23-18
Applied Auditing 2014 Edition Solutions Manual Income from continuing operations before tax .................................. Provision for income tax (35%) ........................................................ Income from continuing operations after tax .................................... Discontinued operations (net) ........................................................... Net income ........................................................................................
23-8.
P
313,998 109,899 204,099 (6,500) 197,599
P P
Learn Company Condensed Comparative Income Statements
Construction revenue Construction expense Other expenses Income before income taxes Income tax expense Net income
2018
2017
2016
P900,000 (420,000) (80,000) P400,000 (120,000) P280,000
P420,000 (182,000) (70,000) P168,000 (50,400) P117,600
P200,000 (80,000) (50,000) P 70,000 (21,000) P 49,000
Comparative Statements of Retained Earnings 2018 Balance at beginning of year, as previously reported 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) Balance at beginning of year, as adjusted Net income Balance at end of year
2017
P 77,000
89,600
P
b
2016
7,000
42,000
P
a
0
0
P166,600
P 49,000
P
0
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 2018, 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
Comprehensive Audit Cases and Problems
23-19
of the accounting change on income of 2018 and on income as previously reported in 2016 and 2017 is as follows:
Net income Earnings per ordinary share
2018 P112,000 P11.20
c
Increase 2017 P47,600 P4.76
2016 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.
23-9.
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)]
Goody Construction Company Requirement (1) 2016 Jan. 1
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)
Income before income taxes Income taxes at 30% Net income Earnings per ordinary share (100,000 shares)
2016 P400,000 (120,000) P280,000
P2.80
2015 P200,000 (60,000) P140,000
P1.40
2014 P220,000 (66,000) P154,000
P1.54
23-20
Applied Auditing 2014 Edition Solutions Manual Comparative Statements of Retained Earnings 2016 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
2015
2014
P245,000
c
P 70,000
b
49,000
e
84,000
d
P294,000 280,000 P574,000
P154,000 140,000 P294,000
P
0
0 P 0 154,000 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 2016 and on income as previously reported in 2014 and 2015 is as follows:
Net income Earnings per ordinary share
2016 P(49,000) P(0.49)
h
Increase 2015 P(35,000) P(0.35)
g
2014 P84,000 P0.84
f
The balances of retained earnings and deferred taxes for 2015 and 2016 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)
Comprehensive Audit Cases and Problems
23-21
Items Restated: On the 2014 and 2015 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. 23-10.
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
a
60,000
P60,000 x 0.683013
Depreciation Expense: Building Interest Expense Accumulated Depreciation Discount on Notes Payable b
P40,981 30
c
Interest computed using effective interest method: 10% x P40,981
Entries to correct error: Discount on Notes Payable Building Accumulated Depreciation: Building Interest Expense Depreciation Expense: Building Discount on Notes Payable b.
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
23-22
Applied Auditing 2014 Edition Solutions Manual Cost of Goods Sold Inventory To correct error in current year. c.
15,000 15,000
The error from 2014 was counterbalanced at the end of 2015, so it can be ignored. Retained earnings Salaries and Wages Expense To correct error in salary and wage accrual in 2015.
18,000
Salaries and Wages Expense Salaries and Wages Payable To accrue salaries and wages at December 31, 2016.
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 2016) Accumulated Depreciation: Building Retained Earnings Building d
b.
d
19,019
Correction of interest expense understatement of P4,098 less depreciation overstatement of P634
The error from 2015 was counterbalanced by the end of 2014, so it can be ignored. Retained Earnings Inventory
c.
14,921 634 3,464
15,000 15,000
The errors from 2014 and 2015 were counterbalanced by the end of 2015 and 2016; respectively, so they can be ignored. Retained Earnings Salaries and Wages Payable
10,000 10,000
Comprehensive Audit Cases and Problems 23-11.
23-23
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
Income before income taxes, before adjustments Adjustments: Depreciate certain equipment over 8-year life instead of 10-year life (Schedule 1) Correct 2015 error Record 2016 provision for doubtful accounts (P58,500,000 x 0.2%) Increase estimated warranty liability Effect of change in accounting principle from expensing to capitalizing relining costs in the year of the change (Schedule 2) Furnace A (Jan. 2015) Furnace B (Jan. 2016) Net adjustments Income before income taxes
Year Ended December 31 2016 2015 P4,030,000 P3,330,000
(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
Depreciation based on 10-year life Depreciation based on 8-year life Adjustment
P 100,000 (125,000) P (25,000)
23-24
Applied Auditing 2014 Edition Solutions Manual 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 Depreciation on Furnace B based on 5-year life (P300,000 x 20%) Depreciation on Furnace A based on 5-year life (P280,000 x 20%) Adjustment
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, 2016 Capitalization of Furnace A Depreciation on Furnace A based on 5-year life (P280,000 x 20%) Adjustment 23-12.
P280,000 (56,000) P224,000
Jo Francisco, Inc.
Item 1. 2. 3. 4. 5. 6.
Net Income for 2014 Understated Overstated P14,100 0 P 7,000 0 0 P22,000 P33,000 0 0 P20,000 P18,200 0
Retained Earnings 12/31/15 Understated Overstated 0 0 P 5,000 0 0 P11,000 P33,000 0 0 P10,000 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 2014 because interest income is understated. The net income would be overstated in 2015 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 2015.
Comprehensive Audit Cases and Problems
23-13.
23-25
2.
The depreciation expense in 2014 should be P1,000 for this machine. Since the machine was bought on July 1, 2014, only one-half of a year should be taken in 2014 (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 2015. An additional P2,000 of depreciation expense should have been taken in 2015. At the end of 2015, 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 2014 is overstated P22,000 (P33,000 research and development costs capitalized less P11,000 amortized). By the end of 2015, 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 month’s rent is also an asset, called prepaid rent. The net income of 2014 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 month’s rent should be expensed.
5.
P10,000 or one-third of P30,000 should be reported as income each year. In 2014, 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 2014 is overstated. At the end of 2015, 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 2014 would be understated. The ending inventory of 2014 becomes the beginning inventory of 2015. If beginning inventory of 2015 is understated, then net income of 2015 is overstated (inverse relationship). The omission in inventory over the two-year period will counterbalance, and retained earnings at the end of 2015 will be correct.
JC Patrick Corporation
Net income, as reported Rent received in 2015, earned in 2016 Wages not accrued, 12/31/14 Wages not accrued, 12/31/15 Wages not accrued, 12/31/16 Inventory of supplies, 12/31/14 Inventory of supplies, 12/31/15 Inventory of supplies, 12/31/16 Corrected net income
2015 P29,000 (1,300) 1,100 (1,500) (1,300) 740 P26,740
2016 P37,000 1,300 1,500 (940) (740) 1,420 P39,540
