IX – CASH TO ACCRUAL BASIS, SINGLE ENTRY AND CORRECTION OF ERRORS PROBLEM NO. 1 Zamboanga Zamboanga Enterpri Enterprises ses records records all transactio transactions ns on the cash basis. basis. The company’s accountant prepared the following income statement at the end of the company’s first year of operations: Zamboanga Enterprises Income Statement For the Year Ended ecember !"# $%%& Sales Selling and administrati(e e)penses: Salaries e)pense +ent e)pense ,tilities e)pense E-uipment ommission e)pense Insurance e)pense Interest e)pense 0et income
'$#%"&#%%% '&$*#%%% !&%#%%% $!$#%%% $*%#%%% !%$#*%% */#%%% $*#%%%
"#/!%#*%% ' "/1#&%%
You ha(e been as2ed to prepare an income statement on the accrual basis. the following information is gi(en to you to assist in the preparation: 3a4 3a4
5mou 5mount nts s due due fro from m cust custom omer ers s at year year6e 6end nd wer were e '$$ '$$*# *#%% %%%. %. amount# '$*#%%% will probably not be collected.
3b4
Salar alariies of '//# '//#% %%% for for ece ecem mber ber $%%& %%& were were pai paid on 8an 8anuary uary 1# $%%9.
3c4 3c4
Zamb Zamboa oang nga a rents rents its its buil buildi ding ng for for '$*#% '$*#%%% %% a mont month# h# paya payabl ble e -uarte -uarterl rly y in ad(ance. ad(ance. The contract was signed signed on 8anuary "# $%%&.
3d4 3d4
The The bill bill for for ecem ecembe ber’s r’s uti utili lity ty cost costs s of '$"# '$"#&% &%% % was was paid paid 8anua 8anuary ry "%# "%# $%%9.
3e4
E-ui -uipm pmen entt of '$* '$*%#%% %#%%% % was was purc purch hase ased on 8an 8anua uary ry "# "# $%%& $%%&.. The e)pec e)pected ted life life is 1 years years## no sal(age sal(age (alue. (alue. 5ssume 5ssume straig straight6 ht6li line ne depreciation.
3f4
ommissions of "1 of sales are paid on the same day cash is recei(ed from customers.
"
7f thi this s
3g4 3g4
5 "6yea "6yearr insur insuran ance ce poli policy cy was was issu issued ed in in compa company ny asse assets ts on 8uly 8uly "# "# $%%&. 'remiums are paid annually annually in ad(ance.
3h4
Zamboanga barrowed '*%%#%%% for one year on ;ay "# $%%&. Inte Intere rest st paym paymen ents ts base based d on an annu annual al rate rate of "$ "$ are are ma made de -uarterly# beginning with the first payment on 5ugust "# $%%&.
QUESTION: ustments: 58E 0o. a 58E 58E 58E 58E
0o. 0o. 0o. 0o.
b c d e
58E 0o. f 58E 0o. g 58E 0o. h 0et income before income ta) 6 accrual basis
'"/1#&%% $$*#%%% 3$*#%%%4 3//#%%%4 9$#%%% 3$"#&%%4 $*%#%%% 3*/#%%%4 3!%#%%%4 $*#%%% 3/#%%%4 '1$&#%%%
Adjusting journal entries (AJE) to convert cash to accrual basis: a4
b4
5ccounts recei(able oubtful accounts e)pense Sales 5llowance for doubtful accounts
'$$*#%%% $*#%%%
Salaries e)pense Salaries payable
' //#%%%
'$$*#%%% $*#%%% ' //#%%%
c4 'repai 'repaid d rent rent ?'!&%# ?'!&%#%%% %%% 6 3'$*# 3'$*#%%% %%% ) "$4@ "$4@ +ent e)pense
' 9$#%%% 9$#%%%
d4
' $"#&%%
,tilities e)pense ,tilities payable
' 9$#%%% ' $"#&%%
$
e4
epreciation e)pense 3'$*%#%%%A14 5ccumulated depreciation
' */#%%% ' */#%%%
Note: The cost o the e!ui"#ent should be added bac$ to the re"orted net inco#e since it %as e&"ensed totall' in *+ f4
ommission e)pense ?3'$$*#%%%6'$*#%%%4)"1@ ' !%#%%% ommission payable ' !%#%%%
Note: No co##ission on doubtul accounts g4 h4
'repaid insurance 3'*/#%%% ) &A"$4 Insurance e)pense
' $*#%%%
Interest e)pense 3 '*%%#%%% ) "$ ) $A"$4 ' Interest payable
' $*#%%% /#%%% '
/#%%%
Ans%er: A
PROBLEM NO. 2 You were able to gather the following in connection with your audit of the Bu2idnon ompany for the year ended ecember !"# $%%&: "A"A$%%& '&#*%%#%%% = /1#%%% !1#%%% "*#$1% $1#%%% 6
5ccounts recei(able ,npaid merchandise in(oices 5ccrued wages 5d(ertising supplies in(entory 5ccrued ad(ertising 'repaid insurance ,ne)pired insurance
"$A!"A$%%& '*#%%%#%%% $#&$"#%%% "$1#%%% 91#%%% *%#%%% 6 *"#%%%
uring the year: 5mount collected from customers Total payments to suppliers of merchandise Total payments to suppliers of merchandise of prior years Cages paid 5d(ertising paid which includes '*%#%%% applicable in $%%& Insurance premium paid
!
'"%#%%%#%%% "!#&"/#%%% *#&!$#%%% !#%1%#%%% !%%#%%% "$1#%%%
QUESTIONS: Based on the abo(e and the result of your audit# determine the following: ".
0et sales for $%%& a. ' &#*%%#%%% b. '"$#*%%#%%%
c. ' 9#&%%#%%% d. '"*#%%%#%%%
$. 0et purchases for $%%& a. '""#&%9#%%% b. '"1#&$D#%%%
c. '"!#&"/#%%% d. '"&#$!D#%%%
!. Cages e)pense for $%%& a. '!#%"%#%%% b. '!#%D%#%%%
c. '!#%1%#%%% d. '!#"%%#%%%
*. 5d(ertising e)pense for $%%& a. '$*1#91% b. '$/1#91%
c. '$&%#%%% d. '!%%#%%%
1. Insurance e)pense for $%%& a. ' /*#%%% b. '"%D#%%%
c. '"%%#%%% d. '"*"#%%%
Suggested Solution: Question No+ , 5ccounts recei(able# "$A!"A%& 5dd collections from customers Total ess accounts recei(able# "A"A%& 0et sales for $%%&
' *#%%%#%%% "%#%%%#%%% "*#%%%#%%% &#*%%#%%% ' 9#&%%#%%%
Question No+ ,npaid merchandise in(oices# "$A!"A%& 5dd payments to suppliers of $%%&: Total payments to suppliers in $%%& ess payments in $%%& to suppliers of prior years 0et purchases for $%%&
*
' $#&$"#%%% '"!#&"/#%%% *#&!$#%%%
/#D/&#%%% '""#&%9#%%%
Question No+ - 5ccrued wages# "$A!"A%& 5dd wages paid in $%%& Total ess accrued wages# "A"A%& Cages e)pense for $%%&
' "$1#%%% !#%1%#%%% !#"91#%%% /1#%%% '!#%D%#%%%
Question No+ . 5ccrued ad(ertising# "$A!"A%& 5d(ertising supplies in(entory# "A"A%& 5d(ertising paid in $%%& Total ess: 5ccrued ad(ertising# "A"A%& 5d(ertising supplies in(entory# "$A!"A%& 5d(ertising paid applicable to $%%9 5d(ertising e)pense for $%%&
' *%#%%% !1#%%% !%%#%%% !91#%%% '"*#$1% 91#%%% *%#%%%
"$D#$1% '$*1#91%
Question No+ / 'repaid insurance# "A"A%& 5dd insurance premium paid in $%%& Total ess prepaid insurance# "$A!"A%& Insurance e)pense in $%%& Ans%ers: "4 C $4 A !4 B *4 A#
' $1#%%% "$1#%%% "1%#%%% *"#%%% '"%D#%%%
14 B
PROBLEM NO. 3 Your audit of amiguin ompany disclosed that your client 2ept (ery limited records. 'urchases of merchandise were paid for by chec2# but most other items were out of cash receipts. The company’s collections were deposited wee2ly. 0o record was 2ept of cash in the ban2# nor was a record 2ept of sales. 5ccounts recei(able were recorded only by 2eeping a copy of the tic2et# and this copy was gi(en to the customer when he paid his account. 7n 8anuary $# $%%& started business and issued common stoc2# "%/#%%% shares with '"%% par# for the following considerations: ash Building 3useful life# "1 years4 and
'
D%%#%%% /#"%%#%%% $#9%%#%%% '""#9%%#%%%
1
5n analysis of the ban2 statements showed total deposits# including the original cash in(estment# of '&#!%%#%%%. The balance in the ban2 statement on ecember !"# $%%&# was '*1%#%%%# but there were chec2s amounting to 'D%#%%% dated in ecember but not paid by the ban2 until 8anuary $%%9. ash on hand on ecember !"# $%%& was '$$1#%%% including customers’ deposit of '"!1#%%%. uring the year# amiguin ompany borrowed 'D%%#%%% from the ban2 and repaid '$$1#%%% and '*1#%%% interest. isbursements paid in cash during the year were as follows: ,tilities Salaries Supplies i(idends
'"/%#%%% "/%#%%% !&%#%%% $9%#%%% 'DD%#%%%
5n in(entory of merchandise ta2en on ecember !"# $%%& showed '"#!1D#%%% of merchandise. Tic2ets for accounts recei(able totaled '"#&$%#%%% but 'D%#%%% of that amount may pro(e uncollectible. ,npaid suppliers in(oices for merchandise amounted to '&!%#%%%. E-uipment with a cash price of '9$%#%%% was purchased in early 8anuary on a one6year installment basis. uring the year# chec2s for the down payment and all maturing installments totaled '/%"#%%%. The e-uipment has a useful life of 1 years. QUESTIONS: Based on the abo(e and the result of your audit# determine the following: (0isregard inco#e ta&es) ". 'ayments for merchandise purchases in $%%& a. '*#/&D#%%% c. '!#&1*#%%% b. '!#/9D#%%% d. '!#D&D#%%% $. ollections from sales in $%%& a. '&#*/%#%%% b. '9#!/%#%%%
c. '1#1/%#%%% d. '*#1%%#%%%
&
!. 0et income for the year ended ecember !"# $%%& a. '$#*!%#%%% c. '$#&11#%%% b. '"#**%#%%% d. '$#!*%#%%% *. Stoc2holders’ e-uity as of ecember !"# $%%& a. '"!#/&%#%%% c. '"*#%/1#%%% b. '"$#/9%#%%% d. '"!#99%#%%% 1. Total assets as of ecember !"# $%%& a. '"*#"91#%%% c. '"*#!9*#/%% b. '"*#%/1#%%% d. '"*#!"%#%%% Suggested Solution: Question No+ , Total deposits ess ad>usted cash in ban2: Balance per ban2 statement ess outstanding chec2s Total chec2 disbursements ess other chec2 disbursements: 'ayment of loan 'ayment of interest on loan 'ayment for e-uipment 'ayments for merchandise purchases
'&#!%%#%%% '*1%#%%% D%#%%%
$$1#%%% *1#%%% /%"#%%%
!&%#%%% 1#D*%#%%%
"#%9"#%%% '*#/&D#%%%
Question No+ Total deposits ess deposits other collections: ash in(estment 'roceeds from ban2 loan ollections deposited in the ban2 5dd collections not deposited: ash on hand# "$A!"A%& 5dd disbursements in cash Total ess customersG deposit Total collections from sales
9
'&#!%%#%%% 'D%%#%%% D%%#%%%
$$1#%%% DD%#%%% "#$"1#%%% "!1#%%%
"#/%%#%%% *#1%%#%%%
"#%/%#%%% '1#1/%#%%%
Question No+ - Sales 3'!#!&%#%%%H'"#&$%#%%%4 ess cost of sales: 'urchases 3'*#/&D#%%% H '&!%#%%%4 ess in(entory# "$A!"A%& ross profit ess e)penses: ,tilities Salaries Supplies oubtful accounts epreciationJbuilding 3'/#"%%#%%%A"14 epreciationJe-uipment 3'9$%#%%%A14 Interest e)pense ?'*1#%%%H3'/%"#%%%6'9$%#%%%4@ 0et income
'9#$%%#%%% '1#*DD#%%% "#!1D#%%%
*#"*%#%%% !#%&%#%%%
"/%#%%% "/%#%%% !&%#%%% D%#%%% 1*%#%%% "**#%%% "$&#%%%
"#&$%#%%% '"#**%#%%%
Question No+ . ommon stoc2 3"%/#%%% shares ) '"%%4 5'I 3'""#9%%#%%% 6 '"%#/%%#%%%4 +etained earnings 3'"#**%#%%% 6 '$9%#%%%4 Total stoc2holdersG e-uity
'"%#/%%#%%% D%%#%%% "#"9%#%%% '"$#/9%#%%%
Question No+ / urrent assets: ash 3'!&%#%%% H '$$1#%%% 4 5ccounts recei(able J net 3'"#&$%#%%% 6 'D%#%%%4 In(entory 0oncurrent assets: and Building 6 net 3'/#"%%#%%% 6 '1*%#%%%4 E-uipment 6 net 3'9$%#%%% 6 '"**#%%%4 Total assets
Ans%ers: "4 A $4 C !4 B *4 B#
14 D
/
' 1/1#%%% "#1!%#%%% "#!1D#%%% $#9%%#%%% 9#1&%#%%% 19&#%%%
' !#*9*#%%%
"%#/!&#%%% '"*#!"%#%% %
PROBLEM NO. 4 ;isamis ompany’s ecember !"# year end financial statement contained the following errors: Ending in(entory epreciation e)pense
ecember !"#$%%1 '"%%#%%% understated $%#%%% understated
ecember !"#$%%& 'D%#%%% o(erstated
5n insurance premium of '91#%%% was prepaid in $%%1 co(ering the years $%%1# $%%&# and $%%9. The same was charged to e)pense in full in $%%1. In addition# on ecember !"# $%%&# a fully depreciated machinery was sold for '"&%#%%% cash# but the sale was not recorded until $%%9. There were no other errors during $%%1# $%%& and $%%9 and no corrections ha(e been made for any of the errors. Ignore income ta) considerations. QUESTIONS: Based on the abo(e and the result of your audit# answer the following: ". Chat is the total effect of the errors on the $%%1 net income= a. ,nderstated by '"!%#%%% c. 7(erstated by '9%#%%% b. ,nderstated by '"11#%%% d. 0o effect $. Chat is the total effect of the errors on the $%%& net income= a. 7(erstated by '11#%%% c. 7(erstated by '$"1#%%% b. 7(erstated by '!%#%%% d. ,nderstated by '*1#%%% !. Chat is the total effect of the errors on the company’s wor2ing capital at ecember !"#$%%&= a. ,nderstated by 'D1#%%% c. 7(erstated by 'D%#%%% b. ,nderstated by '9%#%%% d. 0o effect *. Chat is the total effect of the errors on the balance of the company’s retained earnings at ecember !"# $%%&= a. ,nderstated by '91#%%% c. 7(erstated by '""%#%%% b. ,nderstated by '1%#%%% d. 0o effect 1. Chat is the total effect of the errors on the company’s wor2ing capital at ecember !"#$%%9= a. 7(erstated by '&1#%%% c. ,nderstated by '"&%#%%% b. ,nderstated by 'D1#%%% d. 0o effect
D
Suggested Solution: Question Nos+ , to / 0I $%%1 "$A!"A%1 in(entory understated "$A!"A%& in(entory o(erstated $%%1 depreciation understated Insurance paid in $%%1 for ! years Sale of a fully depreciated machinery in $%%& recorded in $%%9 7(er 3under4
0I $%%&
C "$A!"A%&
+E "$A!"A%&
C "$A!"A%9
3"%%#%%%4
"%%#%%%
6
6
6
6
D%#%%%
D%#%%%
D%#%%%
6
$%#%%%
6
6
$%#%%%
6
31%#%%%4
$1#%%%
3$1#%%%4
3$1#%%%4
6
6 3"!%#%%%4
3"&%#%%%4 11#%%%
3"&%#%%%4 3 D1#%%%4
3"&%#%%%4 3 91#%%%4
6 6
Ans%ers: "4 A $4 A !4 A *4 A#
14 D
PROBLEM NO. 5 You were engaged by anao ompany to audit its financial statements for the first time. In e)amining the boo2s# you found out that certain ad>ustments had been o(erloo2ed at the end of $%%1 and $%%&. You also disco(ered that other items had been improperly recorded. These omissions and other failures for each year are summariKed below: Salaries payable Interest recei(able 'repaid insurance 5d(ances from customers 3ollections from customers had been recorded as sales but should ha(e been recogniKed as ad(ances from customers because goods were not
"%
"$A!"A%& '9/%#%%% $"!#%%% !%9#/%% 1&"#%%%
"$A!"A%1 '/9!#&%% $1D#$%% !/*#%%% *9%#*%%
shipped until the following year4 ;achinery 3apital e)penditures had been recorded as repairs but should ha(e been charged to ;achinery the depreciation rate is "% per year# but depreciation in the year of e)penditure is to be recogniKed at 14
"$A!"A%&
"$A!"A%1
1$$#%%%
1&*#%%%
QUESTIONS: Based on the abo(e and the result of your audit# answer the following: ". Chat is the total effect of the errors on the $%%1 net income= a. ,nderstated by '991#/%% c. ,nderstated by '"#$!&#&%% b. 7(erstated by '"&1#%%% d. 7(erstated by '/%#*%% $. Chat is the total effect of the errors on the $%%& net income= a. ,nderstated by '!9%% c. ,nderstated by '!$%#"%% b. 7(erstated by '!$*#!%% d. 7(erstated by '!/%#9%% !. Chat is the total effect of the errors on the company’s wor2ing capital at ecember !"#$%%&= a. ,nderstated by '!%"#/%% c. ,nderstated by '$&1#/%% b. 7(erstated by '""D#*%% d. 7(erstated by '/$%#$%% *. Chat is the total effect of the errors on the balance of the company’s retained earnings at ecember !"# $%%&= a. ,nderstated by '"11#"%% c. ,nderstated by '$&1#/%% b. 7(erstated by 'D!%#D%% d. ,nderstated by '/11#D%% Suggested Solution: Question Nos+ , to . 0I $%%1 Salaries payable $%%1 $%%& Interest recei(able $%%1 $%%& 'repaid insurance $%%1
/9!#&%%
3$1D#$%%4
0I $%%&
C "$A!"A%&
+E "$A!"A%&
3/9!#&%%4 9/%#%%%
9/%#%%%
9/%#%%%
$1D#$%% 3$"!#%%%4
3$"!#%%%4
3$"!#%%%4
3!/*#%%%4
!/*#%%%
""
0I $%%1 $%%& 5d(ances from customers $%%1 $%%& ;achinery $%%1
*9%#*%%
31&*#%%%4 $/#$%%
C "$A!"A%& 3!%9#/%%4
+E "$A!"A%& 3!%9#/%%4
3*9%#*%%4 1&"#%%%
1&"#%%%
1&"#%%%
. /$%#$%%
31&*#%%%4 /*#&%% 31$$#%%%4 $&#"%%4 3"11#"%%4
1&#*%% 31$$#%%%4 $&#"%% 3!$%#"%%4
$%%& 7(er 3under4
0I $%%& 3!%9#/%%4
. "&1#%%%
Ans%ers: "4 B $4 C !4 D *4 A
PROBLEM NO. 6 The a(ao ompany engaged you in $%%& to e)amine its boo2s and records and to ma2e whate(er ad>ustments are necessary. Your e)amination disclosed following: a.
'rior to any ad>ustments# the +etained Earnings account is reproduced below: +ET5I0E E5+0I0S
ate $%%* 8an. " ec. !" $%%1 8an. !" 5pr. ! 5ug. !%
ec. !" $%%& 8an. !" ec. !"
'articulars
ebit
Balance 0et income for the year
redit
Balance
!"%#%%%
'1/%#%%% /D%#%%%
D%#%%%
91%#%%% /*%#%%%
i(idends paid 'aid in capital in e)cess of par ain on retirement of preferred stoc2 at less than issue price 0et loss for the year
"*%#%%%
$%1#%%%
D%*#1%% &DD#1%%
i(idends paid 0et loss for the year
"%%#%%% "&1#1%%
1DD#1%% '*!*#%%%
&*#1%%
b. The company failed to properly recogniKe accruals and prepayments. Selected accounts re(ealed the following information: "$
c.
$%%!
$%%*
$%%1
$%%&
'/#1%%
'&#$%%
'9#*%%
'D#1%%
".
'repaid e)penses
$.
5ccrued e)penses
1#*%%
9#!%%
/#9%%
D#%%%
!.
,nearned income
&#D%%
9#/%%
/#D%%
D#&%%
*.
5ccrued income
*#9%%
1#&%%
&#$%%
9#/%%
i(idends had been declared on ecember !" in $%%* and $%%1 but had not been entered in the boo2s until paid.
d. The company purchased a machine worth '$9%#%%% on 5pril !%# $%%!. The company charged the purchase to e)pense. The machine has an estimated useful life of ! years. The company uses the straight line method and residual (alues are deemed immaterial. e.
The company recei(ed a transportation e-uipment as donation from one of its stoc2holders on September !%# $%%1. The e-uipment was used to deli(er goods to customers. The e-uipment costs '91%#%%% and has a remaining life of ! years on the date of donation. The e-uipment has a fair (alue of '$*%#%%% and '!%#%%% was incurred for registering the transfer of ownership. The company did not record the donation on its boo2s. The e)penses paid related to the donated e-uipment were charged to e)pense.
f.
The physical in(entory of merchandise had been understated by '&*#%%% and by '**#1%% at the end of $%%* and $%%&# respecti(ely.
g.
The merchandise in(entories at the end of $%%1 and $%%& did not include merchandise that was then in transit shipped F7B shipping point. These shipments of '*!#*%% and '!$#&%% were recorded as purchases in 8anuary $%%& and $%%9# respecti(ely.
QUESTIONS: Based on the abo(e audit findings# the ad>usted balances of the following are: (0isregard ta& i#"lications) ". +etained earnings# "$A!"A%! a. '1/%#D%% b. '/1%#D%% $.
c. '9D%#D%% d. '9&%#D%%
0et income for $%%* a. '!&D#/%%
c. "!
'$9D#/%%
b.
'$"1#/%%
d.
!. +etained earnings# "$A!"A%* a. 'D9 %% b. '/&%#9%% *.
c. 'D!%#9%% d. '9$%#9%%
0et loss for $%%1 a. '$&D#9%% b. '!9D#9%%
c. '!*D#9%% d. '!1D#9%%
1. +etained earnings# "$A!"A%1 a. '*/"#%%% b. '*""#%%% &.
'!9!#"%%
c. '!*"#%%% d. '$*"#%%%
0et loss for $%%& a. '""/#!%% b. '$$/#!%%
c. '"*/#!%% d. '"9/#!%%
9. +etained earnings# "$A!"A%& a. '!%$#9%% b. '!&$#9%%
c. '$1$#9%% d. '!!$#9%%
Suggested Solution: Questions No+ , to 1
,nad>usted balances 3b."4 'repaid e)pense $%%! $%%* $%%1 $%%& 3b.$4 5ccrued e)pense $%%! $%%* $%%1 $%%& 3b.!4 ,nearned income $%%! $%%* $%%1 $%%&
+E $%%! '1/%#%%%
0I $%%* '!"%#%%%
/#1%%
3/#1%%4 &#$%%
31#*%%4
1#*%% 39#!%%4
3&#D%%4
&#D%% 39#/%%4
"*
0 $%%1 3'$%1#%%%4
3&#$%%4 9#*%%
9#!%% 3/#9%%4
9#/%% 3/#D%%4
0 $%%& 3'"&1#1%%4
39#*%%4 D#1%%
/#9%% 3D#%%%4
/#D%% 3D#&%%4
+E $%%! 3b.*4 5ccrued income $%%! $%%* $%%1 $%%& 3d4 'urchase of machinery# e)pensed on 5pril !%# $%%! ,nrecorded depr.
0I $%%*
*#9%%
3*#9%%4 1#&%%
$9%#%%% 3&%#%%%4
3D%#%%%4
3e4 ,nrecorded transpo e-uipmGt. recei(ed as donation on DA!%A%1 E)penses paid ,nrecorded depr. 3f4 ,nderstatement of in(entory $%%* $%%& ,nderstatement of in(entory and purchases $%%1
&*#%%%
0 $%%1
31#&%%4 &#$%%
3&#$%%4 9#/%%
3D%#%%%4
3!%#%%%4
!%#%%% 3$%#%%%4
3/%#%%%4
3&*#%%%4 **#1%%
*!#*%% 3*!#*%%4
$%%& 5d>usted balances
0 $%%&
. '9D%#D%%
. '$9D#/%%
+etained earnings# "A"A%*# as ad>usted 0et income for $%%*
. 3'!*D#9%%4
' 9D%#D%% $9D#/%%
i(idends declared +etained earnings# "$A!"A%*
3 "*%#%%%4 D!%#9%%
0et loss for $%%1
3 !*D#9%%4
i(idends declared +etained earnings# "$A!"A%1
3 "%%#%%%4 */"#%%%
0et loss for $%%&
3 $$/#!%%4
+etained earnings# "$A!"A%&
' $1$#9%%
"1
3*!#*%%4 *!#*%% !$#&%% 3!$#&%%4 3'$$/#!%%4 (, ) ( ) (- ) (. ) (/ ) (* ) (1 )
Ans%ers: "4 C $4 C !4 C *4 C# 14 A &4 B 94 C
PROBLEM NO. 7 otabato orporation’s current assets and liabilities section of the balance sheet as of ecember !"# $%%& appear as follows: urrent assets ash 5ccounts recei(able ess allowance for doubtful accounts In(entories 'repaid e)penses Total current assets urrent liabilities 5ccounts payable 0otes payable Total current liabilities
'"#$%%#%%% '$#&9%#%%% $"%#%%%
$#*&%#%%% 1#"!%#%%% $9%#%%% 'D#%&%#%%%
'"#/!%#%%% $#%"%#%%% '!#/*%#%%%
The following errors in the corporation’s accounting ha(e been disco(ered: a. 8anuary $%%9 cash disbursements entered as of ecember $%%& included payment of accounts payable in the amount of '"#"9%#%%%# on which a cash discount of $ was ta2en. b. The in(entory included '/"%#%%% of merchandise that ha(e been recei(ed at ecember !" but for which no purchase in(oices ha(e been recei(ed or entered. 7f this amount '!&%#%%% had been recei(ed on consignment the remainder was purchased f.o.b. destination# terms $A"%# nA!%. c.
Sales for the first four days in 8anuary $%%9 in the amount of 'D%%#%%% were entered in the sales boo2 as of ecember !"# $%%&. 7f these# '&*1#%%% were sales on account and the remainder were cash sales.
d. ash# not including cash sales# collected in 8anuary $%%9 and entered as of ecember !"# $%%&# totaled '"#%1D#9$%. 7f this amount# '&DD#9$% was recei(ed on account after cash discounts of $ had been deducted the remainder represented the proceeds of a ban2 loan. "&
QUESTIONS: Based on the abo(e and the result of your audit# determine the following: ". 5d>usted cash balance as of ecember !"# $%%& a. '"#%!"#//% c. '"#%11#$/% b. ' &*"#//% d. '"#$/&#//% $. 5d>usted accounts recei(able balance as of ecember !"# $%%& a. '$#9!D#%%% c. '$#9$*#9$% b. '$#1$D#%%% d. '!#"$D#%%% !. 5d>usted accounts payable balance as of ecember !"# $%%& a. '!#%%%#%%% c. '$#D9&#&%% b. '$#"D%#%%% d. '!#*1%#%%% *. 5d>usted wor2ing capital as of ecember !"# $%%& a. '*#"&%#//% c. '!#D1%#//% b. '!#1%%#//% d. '!#1$*#$/% 1.
0et misstatement in the reported ecember !"# $%%& as a result of the a. '"#$&D#"$% b. '"#9%%#//%
net income for the year ended errors c. '"#9"D#"$% d. '"#$1%#//%
Suggested Solution: Question No+ , ,nad>usted cash balance 8anuary cash payments 3'"#"9%#%%% ) .D/4 8anuary cash sales 3'D%%#%%% J '&*1#%%4 8anuary cash collections and loan proceeds 5d>usted cash balance
'"#$%%#%%% "#"*&#&%% 3$11#%%%4 3"#%1D#9$%4 '"#%!"#//%
Question No+ ,nad>usted accounts recei(able 8anuary sales on account 8anuary collections on 5+ 3'&DD#9$%A.D/4 5d>usted accounts recei(able
'$#&9%#%%% 3&*1#%%%4 9"*#%%% '$#9!D#%%%
Question No+ - ,nad>usted accounts payable
'"#/!%#%%% "9
8anuary payments on 5' ,nrecorded purchases 3'/"%#%%% J '!&%#%%%4 5d>usted accounts payable
"#"9%#%%% *1%#%%% '!#*1%#%%%
Question No+ . urrent assets: ash 3see no. "4 5ccounts recei(able 3see no. $4 5llowance for doubtful accounts In(entories 3'1#"!%#%%%6 '!&%#%%%4 'repaid e)penses ess current liabilities: 5ccounts payable 3see no. !4 0otes payable ?'$#%"%#%%% J 3'"#%1D#9$% 6 '&DD#9$%4@ Cor2ing capital
'"#%!"#//% $#9!D#%%% 3$"%#%%%4 *#99%#%%% $9%#%%%
'/#&%%#//%
!#*1%#%%% "#&1%#%%%
1#"%%#%%% '!#1%%#//%
Question No+ / 7(er 3under4 ' $!#*%% !&%#%%% *1%#%%% D%%#%%% 3 "*#$/%4 '"#9D"#"
%$ 8anuary purchase discounts 3'"#"9%#%%% ) .%$4 oods held on consignment ,nrecorded purchases 3'/"%#%%% J '!&%#%%%4 8anuary sales 8anuary sales discounts ?3'&DD#9$%A.D/4 ) .%$@ 0et misstatement Ans%ers: "4 A $4 A !4 D *4 B# 14 C PROBLEM NO.
The boo22eeper for ;aguindanao omputers# Inc.# reports the following balance sheet amounts as of 8une !%# $%%&. urrent assets 0oncurrent assets urrent liabilities 0oncurrent liabilities 7wners’ e-uity
'$#**%#1%% &#$/1#1%% "#!/&#%%% D%%#%%% &#**%#%%%
5 re(iew of account balances re(eals the following data.
"/
3a4 5n analysis of current assets discloses the following: ash In(estment securities J trading Trade accounts recei(able In(entories# including ad(ertising supplies of '$%#%%%
'
*$$#1%% &%%#%%% 1&/#%%%
/1%#%%% '$#**%#1%%
3b4 0oncurrent assets include the following: 'roperty# plant and e-uipment: epreciated boo2 (alue 3cost '&%#%%%4 eposit with a supplier for merchandise ordered for 5ugust deli(ery oodwill recorded on the boo2s to cancel losses incurred by the company in prior years
'1#*D%#%%% $"#1%% 99*#%%% '&#$/1#1%%
3c4 urrent liabilities include the following: 'ayroll payable Ta)es payable +ent payable Trade accounts payable 3net of '"1#%%%# &6month note# recei(ed from a supplier who purchased some used e-uipment on 8une $D# $%%&# 0otes payable
'
9"#1%% *"#1%% ""*#%%%
DDD#%%% "&%#%%% '"#!/&#%%%
3d4 0oncurrent liabilities include the following: D mortgage on property# plant# and e-uipment# payable in semiannual installment of 'D%#%%% through to 8une !%# $%""
'D%%#%%%
3e4 7wners’ e-uity includes the following: 'referred stoc2: "D%#%%% shares outstanding 3'$% par (alue4 ommon stoc2: "#&%%#%%% shares at '" par (alue 5dditional paid6in capital
"D
'!#/%%#%%% "#&%%#%%% "#%*%#%%% '&#**%#%%%
3f4 ommon shares were originally issued for '!#D"%#%%%# but the losses of the company for the past years were charged against additional paid6in capital. QUESTIONS: Based on the abo(e and the result of the audit# determine the ad>usted amounts of the following:
".
$.
urrent assets a. '$#*&$#%%% b. '$#**%#1%%
c. '$#*99#%%% d. '$#*!1#1%%
0oncurrent assets a. '1#*D%#%%% b. '1#1""#1%%
c. '&%#%%% d. '&#$&*#%%%
!. urrent liabilities a. '"#*%"#%%% b. '"#1/"#%%%
c. '"#&%$#1%% d. '"#*D"#%%%
*. 0oncurrent liabilities a. '9$%#%%% b. '/"%#%%%
c. 'D%%#%%% d. '//%#%%%
1.
7wners’ e-uity a. '9#9"%#%%% b. '/#91%#%%%
c. '&#**%#%%% d. '1#&&&#%%%
Suggested Solution: Question No+ , ash In(estment securitiesLtrading 0ote recei(able 5ccounts recei(able In(entory 3'/1%#%%% 6 '$%#%%%4 5d(ertising supplies eposit with supplier urrent assets
' *$$#1%% &%%#%%% "1#%%% 1&/#%%% /!%#%%% $%#%%% $"#1%% '$#*99#%%%
2AS , "ar+ /1 states that an asset shall be classiied as current %hen it satisies an' o the ollo%ing criteria:
%$ a)
it is e&"ected to be reali3ed in4 or is intended or sale or consu#"tion in4 the entit'5s nor#al o"erating c'cle6 b) it is "ri#aril' held or the "ur"ose o being traded6 c) it is e&"ected to be reali3ed %ithin t%elve #onths ater the balance sheet date6 or d) it is cash or a cash e!uivalent (as deined in 2AS 1 7ash 8lo% State#ents) unless it is restricted ro# being e&changed or used to settle a liabilit' or at least t%elve #onths ater the balance sheet date+ All other assets shall be classiied as non9current+ Question No+ 'roperty# plant# and e-uipment ess accumulated depreciation 0oncurrent assets
'&%#%%% "#%9%#%%% '1#*D%#%%%
Question No+ - 0otes payable 5ccounts payable 3'DDD#%%% H '"1#%%%4 ;ortgage payable6current portion 3'D%#%%% ) $4 'ayroll payable Ta)es payable +ent payable urrent liabilities
'
"&%#%%% "#%"*#%%% "/%#%%% 9"#1%% *"#1%% ""*#%%% '"#1/"#%%%
2AS , "ar+ * states that a liabilit' shall be classiied as current %hen it satisies an' o the ollo%ing criteria: a) it is e&"ected to be settled in the entit y’ s nor#al o"erating c'cle6 b) it is held "ri#aril' or the "ur"ose o being traded6 c) it is due to be settled %ithin t%elve #onths ater the balance sheet date6 d) the entit' does not have an unconditional right to deer the settle#ent o the liabilit' or at least t%elve #onths ater the balance sheet date+ All other liabilities shall be classiied as non9current+ Question No+ . ;ortgage payable6noncurrent portion 3'D%%#%%% 6 '"/%#%%%4
$"
'9$%#%%%
Question No+ / 'referred stoc2# '$% par (alue# "D%#%%% shares ommon stoc2# '" par (alue# "#&%%#%%% shares 5dditional paid6in capital 3'!#D"%#%%% 6 '"#&%%#%%%4 eficit ?3'$#!"%#%%% 6 '"#%*%#%%%4H'99*#%%%@ 7wners’ e-uity Ans%ers: "4 C $4 A !4 B *4 A#
'!#/%%#%%% "#&%%#%%% $#!"%#%%% 3$#%**#%%%4 '1#&&&#%%%
14 D
PROBLEM NO. ! In connection with your audit of the financial statements Sulu orporation# you were pro(ided with the following balance sheet as of ecember !"# $%%&: S"#" C$%&$%'()$* B'#'*+ S-( D+/% 31, 2006 5ssets urrent assets: ash Trading securities 5ccts rec.# net In(entory 7ther current assets Total 0oncurrent assets: 'roperty# plant# and e-uip.# net Treasury stoc2 7ther noncurrent assets Total Total assets
' $1%#%%% "&%#%%% *$9#%%% &$%#%%% $/*#%%% '"#9*"#%%%
iabilities and Stoc2holders’ E-uity urrent liabilities: 5ccounts payable ' &/#%%% 7ther current liabs. *%#%%% Total ' "%/#%%%
ong6term liabilities Total liabilities
&11#%%% ' 9&!#%%%
7wners’ e-uity: '"#$D&#%%% D%#%%% $9$#%%% '"#&1/#%%% '!#!DD#%%%
ommon stoc2 +etained earnings Total stoc2holders’ e-uity Total liabilities and stoc2holders’ e-uity
'"#%%%#%%% "#&!&#%%% '$#&!&#%%% '!#!DD#%%%
The following additional information relates to the ecember !"# $%%&# balance sheet. 3a4
ash includes '/%#%%% that has been restricted for the purchase of manufacturing e-uipment 3a noncurrent asset4.
$$
3b4
Trading securities include '11#%%% of stoc2 that was purchased in order to gi(e the company significant ownership and a seat on the board of directors of a ma>or supplier.
3c4
7ther current assets include a '/%#%%% ad(ance to the president of the company. 0o due date has been set.
3d4
ong6term liabilities also include bonds payable of '$%%#%%%. 7f this amount# '1%#%%% represents bonds scheduled to be redeemed in $%%9.
3e4
ong6term liabilities also include a '"*%#%%% ban2 loan. 7n ;ay "1# $%%9# the loan will become due on demand.
3f4
7n ecember $"# di(idends in the amount of '!%%#%%% were declared to be paid to shareholders of record on 8anuary $1. These di(idends ha(e not been reflected in the financial statements.
3g4
ash in the amount of '!/%#%%% has been placed in a restricted fund for the redemption of preferred stoc2 in $%%9. Both the cash and the stoc2 ha(e been remo(ed from the balance sheet.
3h4
'roperty# plant# and e-uipment includes land costing '"&%#%%% that is being held for in(estment purposes and that is scheduled to be sold in $%%9.
QUESTIONS: Based on the abo(e and the result of your audit# determine the ad>usted amounts of the following as of ecember !"# $%%&: ". Total current assets a. '"#1$&#%%% b. '"#/$"#%%%
c. '"#&/&#%%% d. '"#&%&#%%%
$. Total noncurrent assets a. '$#"&!#%%% b. '$#%%!#%%%
c. '"#*//#%%% d. '$#%/!#%%%
!. Total current liabilities a. '1*/#%%% b. '$D/#%%%
c. '*1/#%%% d. '1D/#%%%
*. Total noncurrent liabilities a. '1"1#%%%
c. $!
'&%1#%%%
b. 1.
'&&1#%%%
d.
Total liabilities a. '"#%&!#%%% b. ' 9&!#%%%
'*&1#%%%
c. '"#$&!#%%% d. '"#**!#%%%
&. Total stoc2holders’ e-uity a. '$#D$&#%%% b. '$#$*&#%%%
c. '$#&$&#%%% d. '$#9"&#%%%
9. Total liabilities and stoc2holders’ e-uity a. '!#!%D#%%% c. '!#&%D#%%% b. '!#&/D#%%% d. '!#99D#%%% Suggested Solution: Question No+ , ash 3'$1%#%%% 6 '/%#%%%4 Trading securities 3'"&%#%%% 6 '11#%%%4 5ccounts recei(able# net In(entory and held for resale 7ther current assets 3'$/*#%%% 6 '/%#%%%4 urrent assets
'
"9%#%%% "%1#%%% *$9#%%% &$%#%%% "&%#%%% $%*#%%% '"#&/&#%%%
Note: I the "roble# is silent4 advances to oicers and e#"lo'ees are nor#all' classiied as current+ o%ever4 since the advances to the "resident has no due date4 it %ill be classiied as noncurrent+ Question No+ In(estment in associate 'roperty# plant and e-uipment# net 3'"#$D&#%%% 6 '"&%#%%%4 +estricted cash 6 for preferred stoc2 +estricted cash 6 for e-uipment 5d(ance to company president 7ther noncurrent assets 0oncurrent assets
'
11#%%%
"#"!&#%%% !/%#%%% /%#%%% /%#%%% $9$#%%% '$#%%!#%%%
Question No+ - 5ccounts payable
' &/#%%%
$*
urrent portion of bonds payable oan due on demand i(idends payable 7ther current liabilities urrent liabilities
1%#%%% "*%#%%% !%%#%%% *%#%%% '1D/#%%%
Question No+ . Bonds payable 3'$%%#%%% 6 '1%#%%%4 7ther noncurrent liabilities 3'&11#%%%6'$%%#%%%6'"*%#%%%4 0oncurrent liabilities
'"1%#%%% !"1#%%% '*&1#%%%
Question No+ / urrent liabilities 3see no. !4 0oncurrent liabilities 3see no. *4 Total liabilities
'
1D/#%%% *&1#%%% '"#%&!#%%%
Question No+ * 'referred stoc2 ommon stoc2 +etained earnings 3'"#&!&#%%% 6 '!%%#%%%4 Treasury stoc2 Total stoc2holders’ e-uity
'
!/%#%%% "#%%%#%%% "#!!&#%%% 3 D%#%%%4 '$#&$&#%%%
Question No+ 1 Total liabilities 3see no. 14 Total stoc2holders’ e-uity 3see no. &4 Total liabilities and stoc2holdersG e-uity Ans%ers: "4 C $4 B !4 D *4 D#
'"#%&!#%%% $#&$&#%%% '!#&/D#%%%
14 A &4 C 94 B
PROBLEM NO. 10 The following balance sheet is submitted to you for inspection and re(iew. S"%)'$ C$%&$%'()$* B'#'*+ S-( D+/% 31, 2006 5ssets ash 5ccounts recei(able In(entories
'
$1
"/%#$%% *1%#%%% /"&#%%%
'repaid insurance 'roperty# plant# and e-uipment Total assets iabilities and 7wners’ E-uity ;iscellaneous liabilities oan payable 5ccounts payable apital stoc2 'aid6in capital Total liabilities and owners’ e-uity
!1#$%% "#1%9#$%% '$#D//#&%%
'
"*#*%% !%*#/%% !%"#%%% 1!&#%%% "#/!$#*%% '$#D//#&%%
In the course of the re(iew# you find the following data: 3a4
The possibility of uncollectible accounts on accounts recei(able has not been considered. It is estimated that uncollectible accounts will total '"D#$%%.
3b4
The amount of '"/%#%%% representing the cost of large6scale news paper ad(ertising campaign completed in $%%& has been added to the in(entory because it is belie(e that this campaign will benefit sales of $%%9. It is also found that in(entories include merchandise of '&1#%%% recei(ed on ecember !" and has not been recorded as a purchase.
3c4
The boo2s show that property# plant and e-uipment ha(e a cost of '$#$$9#$%% with accumulated depreciation of '9$%#%%%.
3d4
;iscellaneous liabilities of '"*#*%% represent salaries payable of '!/#%%%# less non current ad(ances of '$!#&%% made to company officials.
3e4
oan payable represents a loan from the ban2 that is payable in regular -uarterly installments of '$1#%%%.
3f4
Income ta) payable not shown is estimated at '9!#%%%.
3g4
eferred ta) liability arising from temporary differences totals '"9/#$%%. This liability was not included in the balance sheet.
3h4
apital stoc2 consists of $1#%%% shares of preferred & stoc2# par '$%# and !&#%%% shares of common stoc2# par (alue '".
$&
3i4
apital stoc2 ha(e been issued for a total consideration of '"#"!*#*%% the amount recei(ed in e)cess of the par (alues of the stoc2 has been reported as paid6in capital. 0et income and di(idends were recorded in 'aid6In apital.
QUESTIONS: Based on the abo(e and the result of the audit# determine the ad>usted amounts of the following:
".
$.
!.
urrent assets a. '"#!*9#$%% b. '"#$/$#$%%
c. '"#$"9#$%% d. '"#*&$#$%%
0oncurrent assets a. '"#1!%#/%% b. '"#"D%#/%%
c. '"#1%9#$%% d. '"#"&9#$%%
Total assets a. '$#/9/#%%% b. '$#9/D#*%%
c. '$#*9!#%%% d. '$#/"!#%%%
*. urrent liabilities a. '1"$#%%% b. '1%*#%%%
c. '199#%%% d. '&%%#&%%
1. 0oncurrent liabilities a. '!/!#%%% b. '*%&#&%%
c. '$%*#/%% d. '*!!#%%%
&.
9.
Total liabilities a. 'D/!#&%% b. '9"&#/%%
c. '/D1#%%% d. 'D&%#%%%
7wners’ e-uity a. '"#/1!#%%% b. '"#D"/#%%%
c. '$#%D&#$%% d. '$#!&/#*%%
Suggested Solution: Question No+ , ash 5ccounts recei(able# net 3'*1%#%%% 6 '"D#$%%4 $9
'
"/%#$%% *!%#/%%
In(entory 3'/"&#%%% 6 '"/%#%%%4 'repaid insurance urrent assets
&!&#%%% !1#$%% '"#$/$#$%%
Question No+ 'roperty# plant and e-uipment# net ?3'$#$$9#$%%6'!*%#%%%4 63'9$%#%%%6'!*%#%%%4@ 5d(ances to officers 0oncurrent assets
'"#1%9#$%% $!#&%% '"#1!%#/%%
Question No+ - urrent assets 3see no. "4 0oncurrent assets 3see no. $4 Total assets
'"#$/$#$%% "#1!%#/%% '$#/"!#%%%
Question No+ . 5ccounts payable 3'!%"#%%%H'&1#%%%4 Salaries payable Income ta) payable oan payable to ban2# current portion 3'$1#%%%)*4 urrent liabilities
'!&&#%%% !/#%%% 9!#%%% "%%#%%% '199#%%%
Question No+ / oan payable 3'!%*#/%%6'"%%#%%%4 eferred ta) liability 0oncurrent liabilities
'$%*#/%% "9/#$%% '!/!#%%%
Question No+ * urrent liabilities 3see no. *4 0oncurrent liabilities 3see no. 14 Total liabilities
'199#%%% !/!#%%% 'D&%#%%%
Question No+ 1 & 'referred stoc2# '$% par# $1#%%% shares ommon stoc2# '" par (alue# !&#%%% shares 'aid6in capital in e)cess of par 3'"#"!*#*%%6'1%%#%%%6'!&#%%%4 +etained earnings 3'"#/!$#*%%6'1D/#*%%6'"D#$%%6'"/%#%%%6 '&1#%%%6'9!#%%%6'"9/#$%%4 Total owners’ e-uity $/
'
1%%#%%% !&#%%% 1D/#*%%
9"/#&%% '"#/1!#%%%
Ans%ers: "4 B $4 A !4 D *4 C#
14 A &4 D 94 A
$D
