Chapter 1

Basic Concepts of Financial Statement Audit

Multiple Choice
1. C
6. D

2. D
7 C

3. A
8. D

4. C
9. B

5. A
10. C

Problem 1
Audit Adjusting Entries:
Equipment Acquisition Fund
Cash

60,000

Purchases
Accounts Payable

50,000

Treasury Shares
Investments

30,000

Depreciation Expense
Accumulated Depreciation
Total Furniture and Equipment P402,000
Acquired June 30, 2011
20,000
Acquired at inception
P382,000

39,200

60,000
50,000
30,000
39,200

Annual depreciation

=
P 76,400/2
=
P38,200
Annual depreciation rate = 38,200/382,000 = 10%
2012 Depreciation:
on beginning balance
P38,200
on new (10% x 20,000 x 6/12) = 1,000
Total
P39,200
Insurance Expense
Prepaid Expenses

1,200

Unearned Rent Income

Rent Income
12,800 10,000 = 2,800 decrease

2,800

Miscellaneous Expenses
Accrued Expenses
54,000 51,000 = 3,000 increase

3,000

1,200
2,800

3,000

Inventory, end
Cost of Goods Sold
Purchases
Inventory, beg.

650,000
2,408,000
2,474,000
584,000

Chapter 1
Basic Concepts of Financial Statement Audit
CLARITY COMPANY
WORKING TRIAL BALANCE
FOR THE YEAR ENDED DECEMBER 31, 2012
Trial Balance
Debit
Credit
Cash
Accounts receivable
Allowance for doubtful accounts
Inventory, Dec. 31, 2011
Prepaid expenses
Investments
Furniture and equipment
Miscellaneous equipment
Accumulated depreciation
Accounts payable
Accrued expenses
Unearned rent income
Ordinary share capital
Retained earnings
Sales
Rent income
Purchases
Salaries expense
Advertising expense
Commission expense
Utilities expense
Supplies expense
Transportation expense
Repairs and maintenance
Miscellaneous expenses

Adjustments
Debit

191,000
615,000

Profit or Loss
Debit

Credit

60,000
21,000

76,400
543,000
51,000
12,800
600,000
182,800
3,500,000
48,000

Financial Position
Debit
Credit
131,000
615,000

9,750
584,000
1,200
30,000

584,000
8,000
110,000
312,000
90,000

2,424,000
400,000
124,000
80,000
32,000
12,000
14,000
16,000
23,000
5,035,000

Credit

30,750
6,800
80,000
312,000
90,000

39,200
50,000
3,000

115,600
593,000
54,000
10,000
600,000
182,800

2,800

3,500,000
50,800

2,800
50,000

2,474,000

400,000
124,000
80,000
32,000
12,000
14,000
16,000
26,000

3,000
5,035,000

Equipment acquisition fund

Doubtful accounts expense
Inventory, Dec. 31, 2012
Cost of goods sold
Treasury shares
Depreciation expense
Insurance expense

60,000
9,750
650,000

9,750

2,408,000

2,408,000

30,000
39,200
1,200
3,253,950

Profit before income tax

Profit before income tax
Income tax expense
Income tax payable
Profit

60,000
650,000
30,000

3,253,950

39,200
1,200
3,162,150
388,650
3,550,800

3,550,800
3,550,800
388,650

116,595
272,055
388,650

Problem 2
Audit Adjusting Entries:
Accounts receivable
Cash in bank

15,000

Doubtful accounts expense

Allowance for doubtful accounts

15,650

15,000
15,650

388,650

1,974,800

116,595
272,055
1,974,800

Chapter 1
Basic Concepts of Financial Statement Audit
Purchases
Accounts payable

50,000

Cost of goods sold

Inventory, end (601,200 + 50,000 30,000)
Purchase returns and allowances
Purchases (2,159,300 + 50,000)
Inventory, beginning

2,120,500
621,200
36,500

50,000

2,209,300
568,900

Accumulated depreciation equipment

*11,000
Gain on sale of equipment
Furniture and equipment (40,000 35,000)
40,000 x 10% x 2.75 years) = 11,000
Depreciation expense furniture and equipment
64,300
Accumulated depreciation furniture and equipment
Furniture and equipment, per client
P618,000
Adjustment above
( 5,000)
Furniture and equipment, per audit
P613,000

6,000
5,000

64,300

Depreciation expense:
On remaining equipment 613,000 x 10% =P61,300
On equipment sold: 40,000 x 10% x 9/12
3,000
Depreciation for the year
P64,300
Prepaid insurance (8,400 x 6/12)
Insurance expense

4,200
4,200

Prepaid rent 130,000 x 1/13

Rent expense

10,000

Discount on notes payable

Interest expense
100,000 x 12% x 11/12

11,000

10,000
11,000

Retained earnings
Goodwill

300,000
300,000

Chapter 1
Basic Concepts of Financial Statement Audit
CIELO CORPORATION
WORKING TRIAL BALANCE
FOR THE YEAR ENDED SEPTEMBER 30, 2012
Trial Balance
Debit
Credit
Cash
Accounts receivable
Allowance for doubtful accounts
Notes receivable
Merchandise inventory
Furniture and equipment
Accumulated depreciation
Goodwill
Accounts payable
Notes payable
Common stock
Retained earnings
Sales
Sales returns and allowances
Purchases
Purchase returns and allowances
Advertising expense
Sales salaries
Commission expense
Miscellaneous selling expense
Rent expense
Office salaries
Light and water
Insurance expense
Taxes and licenses
General expenses
Interest expense
Interest income

Adjustments
Debit

225,000
936,000

Profit or Loss
Debit

Credit

15,000
31,900

Financial Position
Debit
Credit
210,000
951,000

15,000
15,650

155,000
568,900
618,000

47,550
155,000

187,500

11,000

300,000
536,000
100,000
1,000,000
552,500
3,728,200

568,900
5,000
64,300
300,000
50,000

613,000
240,800
586,000
100,000
1,000,000
252,500

300,000
3,728,200

47,600
2,159,300

47,600
50,000
36,500

36,500
96,100
288,500
152,000
29,900
130,000
197,200
15,000
10,800
47,800
163,400
41,200
6,181,700

Credit

2,209,300

10,000

4,200

11,000

96,100
288,500
152,000
29,900
120,000
197,200
15,000
6,600
47,800
163,400
30,200

9,100
6,181,700

9,100

Doubtful accounts expense

Cost of goods sold
Merchandise inventory
Gain on sale of equipment
Depreciation expense
Prepaid insurance
Prepaid rent
Discount on notes payable

15,650
2,120,500
621,200

15,650
2,120,500
621,200
6,000

64,300
4,200
10,000
11,000
3,259,350

6,000
64,300
4,200
10,000
11,000

3,259,350
3,394,750
348,550
3,743,300

Income before income tax

Income before income tax

Income tax expense
Income tax payable
Profit

3,743,300
3,743,300
348,550

104,565
243,985
348,550

348,550

2,575,400

104,565
243,985
2,575,400

Chapter 1
Basic Concepts of Financial Statement Audit
Problem 3
Audit adjusting entries:
Inventory, December 31, 2012 (addition)
Income summary

67,200

Doubtful accounts expense

Allowance for doubtful accounts
3% x 522,000 = 15,660
15,660 740 = 14,920

14,920

67,200
14,920

Sales salaries and commission

Accrued expenses
3% x 27,200 = 816

816
816

Freight in
Accounts payable

1,500

Advertising expense
Prepaid advertising

4,200

Freight out
Sales

18,400

Depreciation expense Office Equipment

Accumulated depreciation office equipment
15,600/10 x 10/12

1,300

Other operating expenses Loss from flood

Extraordinary loss

145,200

1,500
4,200
18,400
1,300

145,200

(Function of expense method)

Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2012
Net Sales
Cost of goods sold
Gross profit
Other operating income
Total income
Operating expenses
Selling expenses
General and administrative expenses
Other operating expenses
Total operating expenses
Profit before interest and income tax
Interest expense
Profit before income tax

P984,640
429,650
P554,990
52,700
P607,690
P130,916
154,620
145,200
P430,736
P176,954
9,040
P167,914

Chapter 1
Basic Concepts of Financial Statement Audit
Income tax expense ( 30% x 167,914)
Profit
Schedules:

50,374
P117,540

Net Sales
Sales 990,400 + 18,400
Sales returns and allowances
Sales discounts
Net sales

P1,008,800
(22,400)
(1,760)
P984,640

Cost of Goods Sold

Inventory, January 1, 2012
Net cost of purchases:
Purchases
Freight in
Total goods available for sale
Less: inventory, December 31, 2012
Cost of goods sold

P179,400
P346,000
12,550

Other operating income

Interest revenue
Dividend revenue
Gain on sale of equipment
Total other operating income

358,550
P537,950
108,300
P 429,650
P

1,400
14,300
37,000
P 52,700

Selling Exp.
Sales salaries and commissions P 70,816
Advertising expense
36,380
Legal services
Insurance and licenses
Salesmens traveling expenses
7,120
Depreciation expense delivery
Equipment
12,200
Depreciation expense office
Equipment
Utilities expense
Telephone and postage
Officers salaries
Doubtful accounts expense
Freight out
Miscellaneous selling
4,400
Loss from flood
Total
P130,916

Gen. and Adm. Other Operating Exp.

P

4,450
17,000

10,900
12,800
2.950
73,200
14,920
18,400
P154,620

P145,200
P145,200

Chapter 1
Basic Concepts of Financial Statement Audit
Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2012
Net Sales
Other operating income
Total income
Operating expenses
Net cost of purchases
Decrease in inventory
Sales salaries and commissions
Advertising expense
Legal services
Insurance and licenses
Salesmens traveling expenses
Depreciation expense delivery equipment
Depreciation expense office equipment
Utilities expense
Telephone and postage
Officers salaries
Doubtful accounts expense
Freight out
Miscellaneous selling
Other expenses - Loss from flood
Total operating expenses
Profit before interest and income tax
Interest expense
Profit before income tax
Income tax expense ( 30% x 167,914)
Profit

P984,640
52,700
P1,037,340
P 358,550
71,100
70,816
36,380
4,450
17,000
7,120
12,200
10,900
12,800
2.950
73,200
14,920
18,400
4,400
P145,200
P430,736
P176,954
9,040
P167,914
50,374
P117,540

MULTIPLE CHOICE Karkits Corporation

Audit adjusting Entries:
1. Advances to officers & employees
Marketing and administrative expense
Petty Cash

3,000
4,500
7,500

2. A. Accounts Receivable
Cash in Bank

35,000
35,000

B. Cash in Bank
Accounts Receivable

40,000

E. Cash in bank
Accounts Payable

48,300

40,000
48,300

3. Trading Securities
Unrealized gain on Trading Securities

20,000
20,000

Chapter 1
Basic Concepts of Financial Statement Audit
4. A. Advances to Officers and Employees
Accounts Receivable

120,000
120,000

B. Sales
Inventories
Accounts Receivable
Cost of good sold

625,000
500,000
625,000
500,000

5. A Inventories
Cost of good sold

26,000
26,000

B. Accounts Payable
Cost of good sold

35,000

C. Inventories
Accounts Payable

27,000

D. Cost of good sold

Accounts Payable

22,350

E. Sales
Inventories
Accounts Receivable
Cost of good sold

36,000
25,000

35,000
27,000
22,350

36,000
25,000

* Marketing and Administrative Expense

Allowance for uncollectible accounts
6. Marketing and Administrative Expense
Prepaid Insurance

17,900
17,900
6,250
6,250

A. Land
Building
Other income
Land and Building
Marketing and Administrative Expense

1,864,000
7,606,000
30,000
8,600,000
900,000

B. Marketing and Administrative Expense

166,800
Accumulated Depreciation-Building
150,000
Accumulated Depreciation-Leasehold Improvements
16,800
8. Marketing and Administrative Expense
Accumulated Amortization - Franchise

50,000
50,000

9. Marketing and Administrative Expense

72,000
Licensing Agreement
144,000
Accumulated Amortization - Licensing Agreement
216,000
10. A. Accounts Payable De la Cruz
Accounts payable De Leon

126,000
126,000

Chapter 1
Basic Concepts of Financial Statement Audit
B. Marketing and Administrative Expense
Accrued expense

50,800
50,800

11. Other Income

Unearned Revenue

130,000

12. Interest Expense

Interest Payable

200,000

130,000
200,000

Mortgage Payable
Current portion of long term debt

500,000
500,000

13. Interest Expense

Interest Payable
Discount on Bonds Payable

187,800

14. Income Tax Payable

Income Tax Expense
1,458,579-1,585,705

127,126

180,000
7,800
127,126

Karkits Corporation
Statement of Comprehensive Income
For the year ended December 31, 2012
Sales
Cost of Good Sold
Gross profit
Other Income
Total income
Marketing and Administrative Expense
Income before Interest and taxes
Interest expense
Profit before Tax
Income Tax (4,861,930 * 32%)
Profit

P 31,589,000
(17,606,300)
13,982,700
40,000
14,022,700
(8,368,650)
5,654,050
(792,120)
4,861,930
(1,555,817)
P 3,306,113

Karkits Corporation
Statement of Financial Position
As of December 31, 2012
Assets
CURRENT ASSETS
Cash and Cash Equivalents
Trading Securities, market value
Accounts receivable, net
Inventories
Prepaid Insurance

Notes
3
4

304,400
350,000
2,743,100
4,976,900
23,150

Chapter 1
Basic Concepts of Financial Statement Audit
CURRENT ASSETS

P 8,397,550

NON CURRENT ASSETS

Property, Plant and Equipment
Intangibles, Net
NON CURRENT ASSETS
Total assets

5
6

P 11,124,700
594,000
11,538,700
P 19,936,250

Liabilities and Shareholders Equity

CURRENT LIABILITIES
Trade And Other Payables
7
Unearned Revenues
Income Tax Payable
CURRENT LIABILITIES
NON CURRENT LIABILITIES
Mortgage Payable
Bonds Payable
NON CURRENT LIABILTIES
Total liabilities
SHAREHOLDERS EQUITY
Ordinary Share Capital
Additional Paid-in Capital
Retained Earnings
SHAREHOLDERS EQUITY
Total Liabilities and Shareholders Equity

P 4,983,020
130,000
66,239
P 5,179,259
P 1,500,000
1,885,800
3,385,800
P 8,565,059
P 5,000,000
1,350,000
5,021,191
11,371,191
19,936,250

NOTES
3. Cash
Petty Cash
Cash in bank
Cash and Cash Equivalents
4. Trade and other receivables
Accounts receivable, net
Advance to Officers and Employees
Allowance for uncollectible account
Trade and Other Receivables

10

7,500
296,900
P 304,400

2,758,000
123,000
(137,900)
P 2,743,100

Chapter 1
Basic Concepts of Financial Statement Audit
5. Property, plant and equipment
Land
Building
P 7,750,000
Accumulated Depreciation - Building
(150,000
Furniture and Fixtures
P2,177,000
Accumulated depreciation Furniture and Fixtures (703,500
Leasehold Improvements
P 168,00
Accumulated depreciation Leasehold
Improvements
(16,800)
Total Property, Plant and Equipment, Net
6.

Intangible Assets
Franchise
P500,000
Accumulated Amortization Franchise
(50,000)
Licensing Agreements
P 360,000
Accumulated Amortization Licensing Agreements (216,000
Total Intangible Assets

P 1,720,000
7,600,000
1,473,500
151,200
P 11,124,700

450,000
144,000
P 594,000

7. Trade and Other Payables

Accounts Payable
Accrued Expense
Interest Payable
Dividends Payable
Current portion of Long Term Debt
Trade and Other Payables

P 2,204,200
648,820
380,000
1,250,000
500,000
P 4,983,020

8. Amortized cost of bonds payable

Bonds Payable
Discount on Bonds payable
Bonds Payable, Net of Discount

P 2,000,000
(114,200)
P 1,885,800

11

Chapter 1
Basic Concepts of Financial Statement Audit

Answers:
1. Petty Cash
2. Cash in bank
3. Trading Securities
4. Accounts Receivable
5. Allowance for doubtful accounts
6. Advances to Officers & Employees
7. Inventories
8. Prepaid Insurance
9. Land
10. Building
11. Accumulated Depreciation Building
12. Net book Value of Leasehold Improvement
13. Franchise
14. Licensing agreement, net
15. Accounts Payable
16. Accrued Expenses
17. Unearned Revenues
18. Interest Payable
19. Income Taxes Payable
20. Dividends Payable
21. Current portion of long term debt
22. Discount on Bonds Payable
23. Ordinary share capital
24. Retained Earnings
25. Sales
26. Cost of Good Sold
27. Marketing & administrative expense
28. Other income
29. Interest expense
30. Net income

12

7,500
296,900
350,000
2,758,900
137,900
123,000
4,976,900
23,150
1,720,000
7,750,000
150,000
151,200
500,000
144,000
2,204,200
648,820
130,000
380,000
163,477
1,250,000
500,000
114,200
5,000,000
5,021,191
31,589,000
17,606,300
8,368,650
40,000
792,120
3,306,113

c
a
b
d
d
d
d
c
b
b
b
c
a
b
c
c
d
c
a
d
b
c
a
c
d
c
c
a
b
a