Chapter16 Substantive Tests of Income Statement Accounts - Unlocked

CHAPTER
SUBSTANTIVE TESTS OF
16 INCOME STATEMENT ACCOUNTS
16-1. a
16-2. d
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16-3. Red Company
co
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Requirement (1)
o.
2006 2005
rs e
ou urc
Reported net income P 35,000 P 27,000
Subtract ending inventory overstatement (2,000) (5,000)
Add beginning inventory overstatement 5,000
o
Subtract wages payable when incurred (800) (700)

Add wages payable when expensed 700
aC s
Subtract bad debts (400)* (1,300)

vi y re
Add back prepayments in year recorded as expense 200 500

Subtract prepayments in year expense is incurred (500)
Correct net income P 37,200 P 20,500
ed d
* P1,700 – P1,300
ar stu
Requirement (2)
2007
sh is
Jan. 1 Retained Earnings 4,300

Insurance Expense 200
Th
Inventory 2,000
Wages Expense 800
Allowance for Doubtful Accounts 1,700
https://www.coursehero.com/file/10288423/Chapter16-Substantive-Tests-of-Income-Statement-Accountsunlocked/
16-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
16-4. Orange Corporation
Requirement (1)
(1) Allowance for Uncollectible Accounts 17,400

Administrative Expenses (37,000 – 19,600) 17,400
To reflect reduction in loss experience
rate.
(2) Unrealized Holding Loss on Trading Marketable
Securities 19,000
Valuation Allowance 16,000
m
Retained Earnings 3,000
er as
To reduce marketable securities to
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market valuation and correct prior
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year’s profit.
o.
(3) Retained Earnings 4,000
rs e Cost of Sales
Merchandise Inventory
2,100
6,100
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To adjust for overstatements in opening
and closing inventories.
(4) a. Equipment 12,000
o
Operating Expenses 1,100

aC s

vi y re
Accumulated Depreciation: Equipment 2,200

To adjust for error in recording of
equipment purchase in 2005 and
related depreciation for 2005 and
2006.
ed d
ar stu
b. Accumulated Depreciation: Equipment 17,500

Equipment 15,000
Other Income 2,500
To adjust for misposting of
equipment sale.
sh is
(5) Prepaid Expenses 900

Th
Operating Expenses 900

To adjust for nonrecognition of prepaid
expense in 2005 and 2006.
(6) Ordinary Shares 60,000
Capital in Excess of Par 60,000
To adjust for capital contributed in
excess of par value.
Substantive Tests of Income Statement Accounts 16-3
Requirement (2)
Orange Corporation
Computation of Corrected Net Income
For Years Ended December 31, 2006 and 2005
2006 2005
Debit (Credit) Debit (Credit)
Reported income P(220,000) P(195,000)
Change in accounts receivable loss
experience rate (17,400) ---
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Unrealized loss (gain) on marketable securities 19,000 (3,000)
er as
Ending merchandise inventories overstated:
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December 31, 2005 (4,000) 4,000
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December 31, 2006 6,100
Misposting of equipment purchase:
o.
Decrease in operating expenses – 2005 (10,900)
rs e Increase in operating expenses – 2006 1,100

ou urc
Misposting of proceeds of equipment sold (2,500)
Recognition of prepaid insurance 900 (1,800)
Corrected net income P(216,800) P(206,700)
o
aC s
vi y re
ed d
ar stu
sh is
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16-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition
16-5. XOR Corporation
XOR Corporation
a
Worksheet to Correct Net Profit and Balance Sheet Accounts
vi
From 2004 to 2006
Net Profit Adjustments to Balance Sheet Accounts
Retained Prepaid Prepaid Accrued Accrued
d
2004 2005 2006 Inventory Earnings Expenses Income Expenses Income
re
Unadjusted balance P 7,500 P 6,500 P 5,500 P25,000 P27,000 ⎯ ⎯ ⎯ ⎯
Add (Deduct) Adjustments
(1) Overvaluation of inventory
ha
2004 (7,000) 7,000
2005 (8,000) 8,000
(2) Undervaluation of inventory
s
2003 (6,000)
2006 9,000 9,000 9,000
as
(3) Prepaid expenses omitted at
end of year
w
2003 (900)
2004 700 (700)
2005 500 (500)
2006 600 600 600
m e
(4) Prepaid income omitted at
end of year
2004
2006 co rc (400) 400
(300) (300) 300
o. ou
(5) Accrued expenses omitted at
end of year
2003 200
er res
2004 ( 75) 75
2005 (100) 100
2006 ( 50) ( 50) 50
(6) Accrued income omitted at
eH y
end of year
2004 125 (125)
rs ud
2006 150 150 150

⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯ ⎯⎯⎯
ou st
is
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Adjusted amount P(5,850) P 5,550 P22,500 P34,000 P36,400 P 600 P 300 P 50 P 150
a
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d
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s ha
as
w
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co rc
o. ou
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rs ud
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is
Th
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rs e
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aC s
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Substantive Tests of Income Statement Accounts 16-7
16-6. Sun Freight Company
1. a P107,700 (P112,500 – P4,800)

2. c P376,800
3. c P159,000 (P204,000 – P45,000)
4. a P320,550
5. a P25,000
6. c P125,000
7. a P68,600
8. d P179,650
9. a P703,250
10. a P144,250 (P9,500 + P25,000 + P16,250 + P18,250 + P75,250)
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CHAPTER

Subtract wages payable when incurred (800) (700)

Subtract bad debts (400)* (1,300)

Add back prepayments in year recorded as expense 200 500

Jan. 1 Retained Earnings 4,300

16-4. Orange Corporation

(1) Allowance for Uncollectible Accounts 17,400

Operating Expenses 1,100

Retained Earnings 10,900

Accumulated Depreciation: Equipment 2,200

b. Accumulated Depreciation: Equipment 17,500

(5) Prepaid Expenses 900

Operating Expenses 900

rs e Increase in operating expenses – 2006 1,100

2006 150 150 150

1. a P107,700 (P112,500 – P4,800)

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