chapter19 - answer

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


xx

(e)

Machinery

xx

Retained earnings

xx

(f)

Depreciation

xx


xx

(g)

Retained earnings

xx

Taxes

xx

19-3.International Company

AJE (1)


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)


4,000

Equipment

32,000

Repairs expense

32,000


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)


14,920


(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)


1,300


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)


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


office equipment

9,600

Utilities

12,800

Telephone and postage

2,950

Supplies expense

1,160(k)

Officers salaries

73,200


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


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


54,000

(10)


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


21,900

(17)

Other income

54,545

Discount on notes receivable

54,545

(18)


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)


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)


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


55,400

(36)

Accounts payable

50,000


50,000

(37)

Operating expenses

15,000

Estimated liability on warranties

15,000

(38)


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


P 400,000

Valuation allowance

145,600

545,600

Accounts receivable

P 442,000


(33,150)

408,850

Notes receivable

P 600,000


(50,000)

550,000


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


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


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


(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


72,000

(4)

Unrealized loss due to decline in value of

non-current investment (equity)

20,000

Operating expenses

20,000

(5)


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


80,000

Property and equipment

200,000

(10)


36,000

Operating expenses

36,000

(11)

Operating expenses

48,000


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)


22,000

Cash

22,000

(16)


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


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


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


P400,000

P200,000

P220,000

Income taxes at 30%

(120,000)

(60,000)

(66,000)

Net income

P280,000

P140,000

P154,000


(100,000 shares)

P2.80

P1.40

P1.54

Comparative Statements of Retained Earnings

2007

2006

2005


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


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


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


1,366b

Interest Expense

4,098c

Accumulated Depreciation

1,366


4,098

b P40,981 ( 30

c Interest computed using effective

interest method: 10% x P40,981

Entries to correct error:


19,019

Building

19,019


634

Interest Expense

4,098


634


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


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


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


(1,500)

1,500


(940)

Inventory of supplies, 12/31/05

(1,300)


740

(740)


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

chapter19 - answer

Documents

loss p

cost p

depreciation expense

retained earnings

doubtful accounts p

insurance expense

merchandise inventory

sinking fund income