PROBLEM 1.

The trial balance of Cielo Corporation prior to the closing of its accounts for the fiscal
year ended September 30, 2019, is as follows:

Account name Debit Credit

Cash 225,000.00
Accounts receivable 936,000.00
Allowance for doubtful accounts 31,900.00
Notes receivable 155,000.00
Merchandise Inventory 568,900.00
Furniture and equipment 618,000.00
Accumulated depreciation – furniture and
187,500.00
equipment
Goodwill 300,000.00
Accounts payable 536,000.00
notes payable 100,000.00
ordinary share capital 1,000,000.00
retained earnings 552,500.00
sales 3,728,200.00
sales returns and allowances 47,600.00
purchases 2,159,300.00
purchase returns and allowances 36,500.00
advertising expense 96,100.00
sales salaries 288,500.00
commission expense 152,000.00
miscellaneous selling expense 29,900.00
Rent expense 130,000.00
office salaries 197,200.00
light and water 15,000.00
insurance expense 10,800.00
taxes and licenses 47,800.00
general expenses 163,400.00
interest expense 41,200.00
other income 9,100.00
6,181,700.00 6,181,700.00

Your examination of the company’s accounts has indicated the need for adjustments
based on the following information:
1. The cash account includes a customer’s check for P15,000 deposited on
September 25, 2019 but returned by the bank on September 29, 2019 for lack of
countersignature. No entry was made by the company for the return of the check
or its redeposit on October 5, 2019.
2. The allowance for doubtful accounts should be adjusted to 5% of the customers’
outstanding balance as of September 30, 2019.
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Basic Concepts of Audit of Financial Statements
Homework

3. A physical inventory taken of the merchandise stock as of the close of the fiscal
year amounted to P601,200.
4. A purchase of merchandise, FOB shipping point, for which goods costing
P50,000 were in transit on September 30, 2019, was neither taken as a liability
nor included in the inventory on that date.
5. Goods received on consignment, still unsold, were included in the inventory at
the agreed selling price of P30,000.
6. The merchandise inventory at September 30, 2019, was correctly stated.
7. On July 1, 2019, equipment acquired on October 1, 2014 with a carrying value of
P32,000 on September 30, 2018, was sold for P35,000 cash. The sales
proceeds were credited to the furniture and equipment account.
8. Depreciation for the fiscal year 2018-2019 has not yet been recorded.
Depreciation is 10%.
9. An insurance policy was renewed on the inventory and equipment on April 1,
2019 with the annual premium of P8,400 paid on that date.
10. The rent expense account consisted of rent paid for store and office space for
thirteen months ending October 31, 2019.
11. The one-year Note Payable of P100,000 was discounted at the bank at 12% on
August 31, 2019.
12. The Goodwill account was set up by a credit to Retained Earnings under a
resolution of the board of directors.

REQUIRED:
Prepare a one-section trial balance, providing columns for trial balance,
adjustments, profit or loss, and financial position. The company is subject to
income tax rate 30%. Ignore the deferred portion of the income tax.

PROBLEM 2
Selected account balances (before adjustments) taken from the books of Flawles, Inc.
for the year ended December 31, 2019, are as follows:.

Retained earnings, January 1, 2019 881,340

Sales salaries and commissions 70,000
Advertising expense 32,180
Legal services 4,450
Insurance and licenses 17,000
Salemen’s traveling expense 7,120
Depreciation expense – delivery equipment 12,200
Depreciation expense – office equipment 9,600
Interest revenue 1,400
Utilities 12,800
Telephone and postage 2,950
Supplies inventory 4,360
Miscellaneous selling expense 4,400
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Basic Concepts of Audit of Financial Statements
Homework

Dividends 66,000
Dividend revenue 14,300
Interest expense 9,040
Alllowance for doubtful accounts (credit balance) 740
Officers’ salaries 73,200
Sales 990,400
Sales returns and allowances 22,400
Sales discounts 1,760
Gain on sale of equipment 37,000
Inventory, January 1, 2019 179,400
Inventory, December 31, 2019 41,100
Purchases 346,000
Freight in 11,050
Accounts receivable 522,000
Extraordinary loss, before income tax 145,200
Ordinary share capital 78,000

Data for adjustment:

1. Cost of inventory in the possession of consignees as of December 31, 2019 was
not included in the ending inventory balance, P67,200.
2. After aging the accounts receivable, a decision was made to increase the
allowance for doubtful accoutns to 3% of the ending accounts receivable
balance.
3. Sales commission for the last day of the year had not been accrued. Total sales
on December 31 were P27,200. Sales commission averages to 3% of sales.
4. No accrual had been made for a freight bill received on January 4, 2020, for
goods received on December 29, 2019, P1,500.
5. An advertising campaign was initiated November 1, 2019. The cost of P4,200
incurred in November and December was debited to prepaid advertising.
6. Freight charges of P18,400 paid on sold merchandise and not passed on to the
buyers were netted against sales.
7. Depreciation on a new equipment purchased on March 1, 2019 had not been
recognized. Equipment are depreciated on a straight-line bais, salvage value
being ignored. This equipment was purchased for P15,600 and is estimated to
be useful for 10 years.
8. The Extraordinary Loss represents loss from supplies lost and unsalable
inventories heavily damaged by flood in August.
9. Income tax rate is 30%.

REQUIRED:
a. Prepare adjusting entries
b. Prepare a statement of comprehensive income following the function of
expense method
 Chapter 1
Basic Concepts of Audit of Financial Statements
Homework

c. Prepare a statement of comprehensive income following the nature of

expense method.
d. Prepare a statement of retained earnings for the year ended December 31,
2019