Illustrative Case Analysis 1:

Juancho Company is under your audit of the year ended December 31, 2023. The company's ac
following statement of comprehensive income at the end of the company's first year of op

Juancho Company
Income Statement
For the period ending December 31, 2023

Sales
Selling and Administrative expenses:
Salaries
Rent
Utilities
Equipment
Commission
Insurance
Interest
Net income before tax

During the course of your audit, the following information was gathered. You were asked by your sen
perform analytical procedure and present your findings

[1]. Amounts due from customers at year-end were P140,000. Of this amount, P15,000 will probably not
the company’s policy on estimating bad debts. The company does not provide any allowance yet for this
it is not yet recorded in the book as the sales invoice is missing.

Audit Analysis:
[1] Based on the presented findings in no.1, the sales invoice is missing probably because the assigned department
the Accounting department failed to record the sales on account. As we all noticed, the Accounts Receivable and Sa
were both understated. Therefore, the auditor shall establish the balance in the company's books by recognizing th
receivables and sales. Since based on the company's policy, P15,000 of which is probably uncollective, a provision s
made. The propose adjusting journal entry should be:

Accounts Receivables 140,000

Sales 140,000
To record the missing sales invoice.
Bad Debt Expense 15,000
Allowance for Doubtful Accounts 15,000
To recognize the estimated uncollectible receivable

[2]. Salaries of P55,000 for December 2023 were paid on January 10, 2024. Record shows that payment
expense when paid and no accrual is paid at yeaar-end.

Audit Analysis:
[2]. Since salaries expense is recorded when actual payment is made, the P55,000 salaries paid in January 2024 is an
expense for the month of December 2023, accrual shall be made on thses salaries. The proposed adjusting entry sh

Salaries Expense 55000

Salaries Payable 55000
To accrue the December 2021 salaries expense paid on January 2022

[3]. Juancho rents its building for P15,000 a month, payable quarterly in advance. The contract was signe
Adjustments are yet to be made.

Audit Analysis:
[3]. The P225,000 rent expense in the statement of comprehensive income represents the entire amount paid for r
monthly rent is P15,000 as stated in the contract, therefore, the annual rent expense shall be P180,000 (P15,000 X
payment is made on advance on a quarterly basis, the 2024 first quarter’s rent was paid last quarter of 2023, hence
be recognized as an asset (prepaid rent) and not an expense. In this case, asset is understated and expense is overs
The Proposed adjusting journal entry should be:

Prepaid rent 45,000

Rent Expense 45,000
To correct the recognition of rent expense paid in advance

[4]. The bill for December’s utility costs of P13,500 was recorded when paid in January 10,

Audit Analysis:
[4]. Utilities expense was recorded when actually paid. The P13,500 utility expense in December 2023 that was paid
2024 shall be included in 2023 expenses since it is incurred in December 2023. An accrual shall be made on this util
this case, the expense and liability are both understated. The proposed adjusting journal entry should be:
Utilities expense 13,500
Utilities payable 13,500
To accrue the utilities expense paid in January 2022 pertaining to December 2021

[5]. Equipment of P150,000 was purchased on January 1, 2023. The expected life is 5 years, no salva
Incorporated used straight-line depreciation. Upon inspection of record, the entire cost of equipment is c
the date of purchase.

Audit Analysis:
[5]. The purchase of equipment shall be recognized initially as an asset and reported as an expense due to deprecia
entire cost of the asset in 2023 was charged to expense upon purchase, the expense during the period is overstated
expense based on the statement of comprehensive income prepared by the accountant). A depreciation shall be re
year-end for the same asset as part of the company’s policy. The amount of depreciation expense that should have
recognized is P30,000 (P150,000/5). Note that this was not recorded since the asset was expensed upon purchase i
2023. The proposed adjusting journal entry should be:

Equipment 150,000
Equipment Expense 150,000
To correct the equipment expense recognized in January 2023 and reclass it to equipment (asset)

Depreciation Expense (P150,000/5) 30,000

Accumulated Depreciation 30,000
To recognize the depreciation expense for the year

[6]. Commission of 15% for unrecorded sales net of doubtful account is paid on January 15, 2024 when t
account.

Audit Analysis:
[6]. The sales occurred in 2023, therefore, the related expense (commissions expenses) shall also be recognized in 2
amount of P18,750 and shall be accrued by the end of 2023. The company’s policy is that commission is based on th
sales net of uncollectible accounts, that is why the P15,000 uncollectible account is deducted to compute the accru
expense. In this case, the failure to accrue the commission resulted to understatement of both the expense and lia
proposed adjusting journal entry should be:

Commission Expense [(P140,000-P15,000) X 15%] 18,750

Commission Payable 18,750
To recognize the commission expense paid in January 2022 for the sales that has occurred in 2023.

[7]. A 1-year insurance policy was issued in company assets on July 1, 2023. Premiums are paid annually in
 of P30,000.

Audit Analysis:
[7] The amount paid for one-year insurance of P30,000 was recorded as expense when paid. However, the insuran
year period and starts on July 1, 2023. Therefore, as of December 31, 2023, an adjustment shall be made using the
method, recognizing a prepaid asset (Prepaid Insurance) for the unused portion (P30,000 X 6/12) = P15,000. It is cle
adjustment is made yet since the statement of comprehensive income shows a total of P30,000 in insurance expen
proposed adjusting journal entry should be:

Prepaid Insurance (P30,000 X 6/12) 15,000

Insurance Expense 15,000
To recognize the unused portion of insurance as part of asset as of December 31, 2023.

[8]. Juancho borrowed P250,000 for 1 year on May 1, 2023. Interest payments based on the annual rate of
beginning with the first payment on August 1, 2023.

Audit Analysis:
[8]. A loan made on May 1, 2023 pays interest every quarter starting August 1, 2023. Therefore, payments of intere
on these dates based on the 12% annual interest rate: August 1, 2023 – P7,500 (P250,000 X 12% X 3/12) and Novem
P7,500 (P250,000 X 12% X 3/12). The next payment is scheduled on February 1, 2024 hence the interest for two mo
(November and December) shall be accrued in the amount of P5,000 (P250,000 X 12% X 2/12). It is clear that no acc
or the interest since the comprehensive income shows a total of P15,000 interest expense for the period
(August - P7,500 + November – P7,500). This failure to record the accrual of interest expense understate both the e
and liability. Your proposed adjusting journal entry should be:

Interest Expense (P250,000 X 12% X 2/12) 5,000

Interest Payable 5,000
To accrue the interest expense for November and December 2021.

Below is the working paper to effect the necessary proposed adjusting journal entries that affects the comp
ncome before tax:

Unadjusted net income before income tax

Add (deduct) adjustments:
PAJE [1]

PAJE [2]
PAJE [3]
PAJE [4]
PAJE [5]
 PAJE [6]
PAJE [7]
PAJE [8]
Adjusted net income before income tax

The Income Statement of Juancho Company shall report a P548,750, adjusted net income before ta
31, 2023. The company's accountant prepared the
he company's first year of operation:

P1,480,000
P390,00
225,000
145,000
150,000
189,000
30,000
15,000
-1,144,000
P336,000

You were asked by your senior auditor to

our findings

nt, P15,000 will probably not be collected based on

ide any allowance yet for this transaction because
s invoice is missing.

use the assigned department which is

he Accounts Receivable and Sales Reveneu
any's books by recognizing the accounts
bly uncollective, a provision shall be
Record shows that payment is debited to salaries
d at yeaar-end.

aries paid in January 2024 is an actual

e proposed adjusting entry should be:

vance. The contract was signed on January 1, 2023.

ade.

s the entire amount paid for rent in 2023. The

shall be P180,000 (P15,000 X 12). Since
id last quarter of 2023, hence, it should
erstated and expense is overstated.

ded when paid in January 10, 2024.

December 2023 that was paid in January

rual shall be made on this utility. In
nal entry should be:
 ected life is 5 years, no salvage value. Juancho
e entire cost of equipment is charged to expense on

as an expense due to depreciation. Since the

during the period is overstated (equipment
nt). A depreciation shall be recognized at
tion expense that should have been
as expensed upon purchase in January

t to equipment (asset)

d on January 15, 2024 when the customer paid the

s) shall also be recognized in 2023 in the

hat commission is based on the unrecorded
ducted to compute the accrued commission
nt of both the expense and liability. Your

at has occurred in 2023.

remiums are paid annually in advance in the amount

 n paid. However, the insurance covers one-
ment shall be made using the expense
000 X 6/12) = P15,000. It is clear that no
of P30,000 in insurance expense. Your

ber 31, 2023.

s based on the annual rate of 12% are made quarterly,

ugust 1, 2023.

Therefore, payments of interest were made

000 X 12% X 3/12) and November 1, 2023 -
hence the interest for two months
% X 2/12). It is clear that no accrual is made
ense for the period
xpense understate both the expense

entries that affects the computation of 2023 net

P336,000

140,000
-15,000
-55,000
45,000
-13,500
150,000
 -30,000
-18,750
15,000
-5,000 212,750
P548,750

sted net income before tax.