Chapter 1

Basic Concepts of Financial Statement Audit

Multiple Choice

1. C 2. D 3. A 4. C 5. A
6. D 7 C 8. D 9. B 10. C

Problem 1
Audit Adjusting Entries:

Equipment Acquisition Fund 60,000

Cash 60,000

Purchases 50,000
Accounts Payable 50,000

Treasury Shares 30,000

Investments 30,000

Depreciation Expense 39,200

Accumulated Depreciation 39,200
Total Furniture and Equipment P402,000
Acquired June 30, 2011 20,000
Acquired at inception P382,000

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 1,200

Prepaid Expenses 1,200

Unearned Rent Income 2,800

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

Miscellaneous Expenses 3,000

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

Inventory, end 650,000

Cost of Goods Sold 2,408,000
Purchases 2,474,000
Inventory, beg. 584,000

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 Chapter 1
Basic Concepts of Financial Statement Audit

CLARITY COMPANY
WORKING TRIAL BALANCE
FOR THE YEAR ENDED DECEMBER 31, 2012

Trial Balance Adjustments Profit or Loss Financial Position

Debit Credit Debit Credit Debit Credit Debit Credit
Cash 191,000 60,000 131,000
Accounts receivable 615,000 615,000
Allowance for doubtful accounts 21,000 9,750 30,750
Inventory, Dec. 31, 2011 584,000 584,000
Prepaid expenses 8,000 1,200 6,800
Investments 110,000 30,000 80,000
Furniture and equipment 312,000 312,000
Miscellaneous equipment 90,000 90,000
Accumulated depreciation 76,400 39,200 115,600
Accounts payable 543,000 50,000 593,000
Accrued expenses 51,000 3,000 54,000
Unearned rent income 12,800 2,800 10,000
Ordinary share capital 600,000 600,000
Retained earnings 182,800 182,800
Sales 3,500,000 3,500,000
Rent income 48,000 2,800 50,800
Purchases 2,424,000 50,000 2,474,000
Salaries expense 400,000 400,000
Advertising expense 124,000 124,000
Commission expense 80,000 80,000
Utilities expense 32,000 32,000
Supplies expense 12,000 12,000
Transportation expense 14,000 14,000
Repairs and maintenance 16,000 16,000
Miscellaneous expenses 23,000 3,000 26,000
5,035,000 5,035,000
Equipment acquisition fund 60,000 60,000
Doubtful accounts expense 9,750 9,750
Inventory, Dec. 31, 2012 650,000 650,000
Cost of goods sold 2,408,000 2,408,000
Treasury shares 30,000 30,000
Depreciation expense 39,200 39,200
Insurance expense 1,200 1,200
3,253,950 3,253,950 3,162,150 3,550,800
Profit before income tax 388,650
3,550,800 3,550,800
Profit before income tax 388,650
Income tax expense 116,595
Income tax payable 116,595
Profit 272,055 272,055
388,650 388,650 1,974,800 1,974,800

Problem 2

Audit Adjusting Entries:

Accounts receivable 15,000

Cash in bank 15,000

Doubtful accounts expense 15,650

Allowance for doubtful accounts 15,650

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Basic Concepts of Financial Statement Audit

Purchases 50,000
Accounts payable 50,000

Cost of goods sold 2,120,500

Inventory, end (601,200 + 50,000 – 30,000) 621,200
Purchase returns and allowances 36,500
Purchases (2,159,300 + 50,000) 2,209,300
Inventory, beginning 568,900

Accumulated depreciation – equipment *11,000

Gain on sale of equipment 6,000
Furniture and equipment (40,000 – 35,000) 5,000
• 40,000 x 10% x 2.75 years) = 11,000

Depreciation expense – furniture and equipment 64,300

Accumulated depreciation – furniture and equipment 64,300
Furniture and equipment, per client P618,000
Adjustment above ( 5,000)
Furniture and equipment, per audit P613,000

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) 4,200

Insurance expense 4,200

Prepaid rent 130,000 x 1/13 10,000

Rent expense 10,000

Discount on notes payable 11,000

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

Retained earnings 300,000

Goodwill 300,000

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 Chapter 1
Basic Concepts of Financial Statement Audit

CIELO CORPORATION
WORKING TRIAL BALANCE
FOR THE YEAR ENDED SEPTEMBER 30, 2012

Trial Balance Adjustments Profit or Loss Financial Position

Debit Credit Debit Credit Debit Credit Debit Credit
Cash 225,000 15,000 210,000
Accounts receivable 936,000 15,000 951,000
Allowance for doubtful accounts 31,900 15,650 47,550
Notes receivable 155,000 155,000
Merchandise inventory 568,900 568,900
Furniture and equipment 618,000 5,000 613,000
Accumulated depreciation 187,500 11,000 64,300 240,800
Goodwill 300,000 300,000
Accounts payable 536,000 50,000 586,000
Notes payable 100,000 100,000
Common stock 1,000,000 1,000,000
Retained earnings 552,500 300,000 252,500
Sales 3,728,200 3,728,200
Sales returns and allowances 47,600 47,600
Purchases 2,159,300 50,000 2,209,300
Purchase returns and allowances 36,500 36,500
Advertising expense 96,100 96,100
Sales salaries 288,500 288,500
Commission expense 152,000 152,000
Miscellaneous selling expense 29,900 29,900
Rent expense 130,000 10,000 120,000
Office salaries 197,200 197,200
Light and water 15,000 15,000
Insurance expense 10,800 4,200 6,600
Taxes and licenses 47,800 47,800
General expenses 163,400 163,400
Interest expense 41,200 11,000 30,200
Interest income 9,100 9,100
6,181,700 6,181,700
Doubtful accounts expense 15,650 15,650
Cost of goods sold 2,120,500 2,120,500
Merchandise inventory 621,200 621,200
Gain on sale of equipment 6,000 6,000
Depreciation expense 64,300 64,300
Prepaid insurance 4,200 4,200
Prepaid rent 10,000 10,000
Discount on notes payable 11,000 11,000
3,259,350 3,259,350
3,394,750 3,743,300
Income before income tax 348,550
3,743,300 3,743,300

Income before income tax 348,550

Income tax expense 104,565
Income tax payable 104,565
Profit 243,985 243,985
348,550 348,550 2,575,400 2,575,400

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Chapter 1
Basic Concepts of Financial Statement Audit

Problem 3

Audit adjusting entries:

Inventory, December 31, 2012 (addition) 67,200

Income summary 67,200

Doubtful accounts expense 14,920

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

Sales salaries and commission 816

Accrued expenses 816
3% x 27,200 = 816

Freight in 1,500
Accounts payable 1,500

Advertising expense 4,200

Prepaid advertising 4,200

Freight out 18,400

Sales 18,400

Depreciation expense – Office Equipment 1,300

Accumulated depreciation – office equipment 1,300
15,600/10 x 10/12

Other operating expenses – Loss from flood 145,200

Extraordinary loss 145,200

(Function of expense method)

Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2012

Net Sales P984,640

Cost of goods sold 429,650
Gross profit P554,990
Other operating income 52,700
Total income P607,690
Operating expenses
Selling expenses P130,916
General and administrative expenses 154,620
Other operating expenses 145,200
Total operating expenses P430,736
Profit before interest and income tax P176,954
Interest expense 9,040
Profit before income tax P167,914
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Chapter 1
Basic Concepts of Financial Statement Audit

Income tax expense ( 30% x 167,914) 50,374

Profit P117,540
Schedules:

Net Sales
Sales 990,400 + 18,400 P1,008,800
Sales returns and allowances (22,400)
Sales discounts (1,760)
Net sales P984,640

Cost of Goods Sold

Inventory, January 1, 2012 P179,400
Net cost of purchases:
Purchases P346,000
Freight in 12,550 358,550
Total goods available for sale P537,950
Less: inventory, December 31, 2012 108,300
Cost of goods sold P 429,650

Other operating income

Interest revenue P 1,400
Dividend revenue 14,300
Gain on sale of equipment 37,000
Total other operating income P 52,700

Selling Exp. Gen. and Adm. Other Operating Exp.

Sales salaries and commissions P 70,816
Advertising expense 36,380
Legal services P 4,450
Insurance and licenses 17,000
Salesmen’s traveling expenses 7,120
Depreciation expense – delivery
Equipment 12,200
Depreciation expense – office
Equipment 10,900
Utilities expense 12,800
Telephone and postage 2.950
Officers’ salaries 73,200
Doubtful accounts expense 14,920
Freight out 18,400
Miscellaneous selling 4,400
Loss from flood P145,200
Total P130,916 P154,620 P145,200

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Chapter 1
Basic Concepts of Financial Statement Audit

Flawless, Inc.
Statement of Comprehensive Income
For the Year Ended December 31, 2012

Net Sales P984,640

Other operating income 52,700
Total income P1,037,340
Operating expenses
Net cost of purchases P 358,550
Decrease in inventory 71,100
Sales salaries and commissions 70,816
Advertising expense 36,380
Legal services 4,450
Insurance and licenses 17,000
Salesmen’s traveling expenses 7,120
Depreciation expense – delivery equipment 12,200
Depreciation expense – office equipment 10,900
Utilities expense 12,800
Telephone and postage 2.950
Officers’ salaries 73,200
Doubtful accounts expense 14,920
Freight out 18,400
Miscellaneous selling 4,400
Other expenses - Loss from flood P145,200
Total operating expenses P430,736
Profit before interest and income tax P176,954
Interest expense 9,040
Profit before income tax P167,914
Income tax expense ( 30% x 167,914) 50,374
Profit P117,540

MULTIPLE CHOICE – Karkits Corporation

Audit adjusting Entries:

1. Advances to officers & employees 3,000
Marketing and administrative expense 4,500
Petty Cash 7,500

2. A. Accounts Receivable 35,000

Cash in Bank 35,000

B. Cash in Bank 40,000

Accounts Receivable 40,000

E. Cash in bank 48,300

Accounts Payable 48,300

3. Trading Securities 20,000

Unrealized gain on Trading Securities 20,000

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Chapter 1
Basic Concepts of Financial Statement Audit

4. A. Advances to Officers and Employees 120,000

Accounts Receivable 120,000

B. Sales 625,000
Inventories 500,000
Accounts Receivable 625,000
Cost of good sold 500,000

5. A Inventories 26,000
Cost of good sold 26,000

B. Accounts Payable 35,000

Cost of good sold 35,000

C. Inventories 27,000
Accounts Payable 27,000

D. Cost of good sold 22,350

Accounts Payable 22,350

E. Sales 36,000
Inventories 25,000
Accounts Receivable 36,000
Cost of good sold 25,000

* Marketing and Administrative Expense 17,900

Allowance for uncollectible accounts 17,900

6. Marketing and Administrative Expense 6,250

Prepaid Insurance 6,250

A. Land 1,864,000
Building 7,606,000
Other income 30,000
Land and Building 8,600,000
Marketing and Administrative Expense 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 50,000

Accumulated Amortization - Franchise 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 126,000

Accounts payable – De Leon 126,000
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Chapter 1
Basic Concepts of Financial Statement Audit

B. Marketing and Administrative Expense 50,800

Accrued expense 50,800

11. Other Income 130,000

Unearned Revenue 130,000

12. Interest Expense 200,000

Interest Payable 200,000

Mortgage Payable 500,000

Current portion of long term debt 500,000

13. Interest Expense 187,800

Interest Payable 180,000
Discount on Bonds Payable 7,800

14. Income Tax Payable 127,126

Income Tax Expense 127,126
1,458,579-1,585,705

Karkits Corporation
Statement of Comprehensive Income
For the year ended December 31, 2012

Sales P 31,589,000
Cost of Good Sold (17,606,300)
Gross profit 13,982,700
Other Income 40,000
Total income 14,022,700
Marketing and Administrative Expense (8,368,650)
Income before Interest and taxes 5,654,050
Interest expense (792,120)
Profit before Tax 4,861,930
Income Tax (4,861,930 * 32%) (1,555,817)
Profit P 3,306,113

Karkits Corporation
Statement of Financial Position
As of December 31, 2012

Assets Notes
CURRENT ASSETS
Cash and Cash Equivalents 3 P 304,400
Trading Securities, market value 350,000
Accounts receivable, net 4 2,743,100
Inventories 4,976,900
Prepaid Insurance 23,150
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Chapter 1
Basic Concepts of Financial Statement Audit

CURRENT ASSETS P 8,397,550

NON CURRENT ASSETS

Property, Plant and Equipment 5 P 11,124,700
Intangibles, Net 6 594,000
NON CURRENT ASSETS 11,538,700
Total assets P 19,936,250

Liabilities and Shareholders’ Equity

CURRENT LIABILITIES
Trade And Other Payables 7 P 4,983,020
Unearned Revenues 130,000
Income Tax Payable 66,239
CURRENT LIABILITIES P 5,179,259

NON CURRENT LIABILITIES

Mortgage Payable P 1,500,000
Bonds Payable 8 1,885,800
NON CURRENT LIABILTIES 3,385,800
Total liabilities P 8,565,059

SHAREHOLDERS’ EQUITY
Ordinary Share Capital P 5,000,000
Additional Paid-in Capital 1,350,000
Retained Earnings 5,021,191
SHAREHOLDERS’ EQUITY 11,371,191
Total Liabilities and Shareholders’ Equity 19,936,250

NOTES

3. Cash
Petty Cash P 7,500
Cash in bank 296,900
Cash and Cash Equivalents P 304,400

4. Trade and other receivables

Accounts receivable, net 2,758,000
Advance to Officers and Employees 123,000
Allowance for uncollectible account (137,900)
Trade and Other Receivables P 2,743,100

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Chapter 1
Basic Concepts of Financial Statement Audit

5. Property, plant and equipment

Land P 1,720,000
Building P 7,750,000
Accumulated Depreciation - Building (150,000 7,600,000
Furniture and Fixtures P2,177,000
Accumulated depreciation – Furniture and Fixtures (703,500 1,473,500
Leasehold Improvements P 168,00
Accumulated depreciation – Leasehold
Improvements (16,800) 151,200
Total Property, Plant and Equipment, Net P 11,124,700

6. Intangible Assets
Franchise P500,000
Accumulated Amortization – Franchise (50,000) P 450,000
Licensing Agreements P 360,000
Accumulated Amortization – Licensing Agreements (216,000 144,000
Total Intangible Assets P 594,000

7. Trade and Other Payables

Accounts Payable P 2,204,200
Accrued Expense 648,820
Interest Payable 380,000
Dividends Payable 1,250,000
Current portion of Long Term Debt 500,000
Trade and Other Payables P 4,983,020

8. Amortized cost of bonds payable

Bonds Payable P 2,000,000
Discount on Bonds payable (114,200)
Bonds Payable, Net of Discount P 1,885,800

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Chapter 1
Basic Concepts of Financial Statement Audit

Answers:
1. Petty Cash 7,500 c
2. Cash in bank 296,900 a
3. Trading Securities 350,000 b
4. Accounts Receivable 2,758,900 d
5. Allowance for doubtful accounts 137,900 d
6. Advances to Officers & Employees 123,000 d
7. Inventories 4,976,900 d
8. Prepaid Insurance 23,150 c
9. Land 1,720,000 b
10. Building 7,750,000 b
11. Accumulated Depreciation – Building 150,000 b
12. Net book Value of Leasehold Improvement 151,200 c
13. Franchise 500,000 a
14. Licensing agreement, net 144,000 b
15. Accounts Payable 2,204,200 c
16. Accrued Expenses 648,820 c
17. Unearned Revenues 130,000 d
18. Interest Payable 380,000 c
19. Income Taxes Payable 163,477 a
20. Dividends Payable 1,250,000 d
21. Current portion of long term debt 500,000 b
22. Discount on Bonds Payable 114,200 c
23. Ordinary share capital 5,000,000 a
24. Retained Earnings 5,021,191 c
25. Sales 31,589,000 d
26. Cost of Good Sold 17,606,300 c
27. Marketing & administrative expense 8,368,650 c
28. Other income 40,000 a
29. Interest expense 792,120 b
30. Net income 3,306,113 a

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