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CHAPTER

18
18-1.

PREPARATION OF AUDITED
FINANCIAL STATEMENTS

Salve Company
Requirement (1)
Salve Company
For the Year Ended December 31, 2006
Schedule 1: Cost of Goods Sold
Inventory, 1/1/2006
Purchases
Transportation-in
Cost of purchases
Less: Purchases discounts taken
Purchases returns and allowances
Net purchases
Cost of goods available for sale
Less: Inventory, 12/31/2006
Cost of goods sold

P 37,800
P173,000
13,500
P186,500
P4,100
6,200

(10,300)
176,200
P214,000
(34,100)
P179,900

Schedule 2: Selling Expenses


Sales commissions and salaries
Sales supplies used
Delivery expense
Promotion and advertising expense
Total selling expenses

P 18,200
5,600
7,700
17,000
P 48,500

Schedule 3: General and Administrative Expenses


Bad debt expense
Office supplies expense
Insurance and property tax expense
Office and administrative salaries expense
Total general and administrative expenses

P 2,700
1,400
8,500
32,000
P 44,600

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Schedule 4: Depreciation Expense
Buildings and office equipment
Sales equipment
Total depreciation expense

P 14,500
9,600
P 24,100

Requirement (2)
Salve Company
Income Statement
For the Year Ended December 31, 2006
Sales
Less: Sales discounts taken
Sales returns and allowances
Net sales
Cost of goods sold (Schedule 1)
Gross profit
Operating expenses
Selling expenses (Schedule 2)
General and administrative expenses (Schedule 3)
Depreciation expense (Schedule 4)
Total operating expenses
Operating income
Other items
Rent revenue
Interest expense
Loss on sale of office equipment
Loss from flood
Pretax income from continuing operations
Income tax expense (P7,440 P3,600)
Income from continuing operations
Results from discontinued operations
Loss from operations of discontinued segment R
(net of P2,610 income tax credit)
Gain on disposal of segment R (net of P3,000
income taxes)
Net income
Components of Income
Income from continuing operations
Results from discontinued operations
Net income

P340,700
P 4,900
12,100

(17,000)
P323,700
(179,900)
P143,800

P48,500
44,600
24,100
(117,200)
P 26,600
P 6,900
(3,700)
(5,000)
(12,000)

(13,800)
P 12,800
(3,840)
P 8,960

P(6,090)
7,000

910
P 9,870

Earnings per Ordinary Share


(8,000 ordinary shares)
P1.12
0.11
P1.23

Preparation of Audited Financial Statements

18-3

Note: Due to recently increased obsolescence, the sales equipment is being


depreciated over a shorter useful life. The related P9,600 depreciation expense for
2006 is P2,500 more than the amount that would have been reported using the
original useful life. This caused a decrease in 2006 income from continuing
operations and net income of P1,750 (after taxes) and a decrease in earnings per
share of P0.22.
Requirement (3)
Salve Company
Statement of Retained Earnings
For the Year Ended December 31, 2006
Retained earnings, 1/1/2006
Less: Prior period adjustment, correction of
understatement of 2005 depreciation expense (net
of P3,300 income tax credit)
Adjusted retained earnings, 1/1/2006
Add: Net income

P183,700
(7,700)
P176,000
9,870
P185,870
(4,800)
P181,070

Less: Cash dividends (P0.60 per share)


Retained earnings, 12/31/2006
18-2.

Mindanao Manufacturing Company


Requirement (1)
Mindanao Manufacturing Company
For the Year Ended December 31, 2006
Schedule 1: Cost of Goods Sold
Raw materials used
Direct labor
Factory overhead:
Factory superintendence salaries expense
Factory maintenance expense
Factory utilities expense
Factory indirect labor expense
Depreciation expense: factory
Current manufacturing costs
Add: Goods in process, 1/1/200
Less: Goods in process, 12/31/2006
Cost of goods manufactured
Add: Finished goods inventory, 1/1/2006
Cost of goods available for sale
Less: Finished goods inventory, 12/31/2006
Cost of goods sold

P 70,200
81,000
P25,000
7,000
21,000
23,000
18,000

94,000
P245,200
19,900
(22,000)
P243,100
32,000
P275,100
(36,000)
P239,100

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Schedule 2: Selling Expenses
Sales salaries expense
Delivery expenses
Sales personnel travel expenses
Depreciation expense: sales equipment
Advertising expense
Total selling expenses

P 27,400
11,700
8,300
9,000
15,700
P 72,100

Schedule 3: General and Administrative Expenses


Depreciation expense: buildings and office equipment
Office and administrative salaries
Property taxes and insurance expense
Miscellaneous administrative expense
Total general and administrative expenses

P 14,400
30,000
9,000
3,000
P 56,400

Requirement (2)
Mindanao Manufacturing Company
Income Statement
For the Year Ended December 31, 2006
Sales
Less: Sales returns
Net sales
Cost of goods sold (Schedule 1)
Gross profit
Operating expenses
Selling expenses (Schedule 2)
General and administrative expenses (Schedule 3)
Total operating expenses
Operating income
Other items
Interest revenue
Miscellaneous rent revenue
Loss on sale of factory equipment
Loss from expropriation
Pretax income from continuing operations
Income tax expense (P31,350 P9,000)
Income from continuing operations
Results from discontinued operations
Loss from operations of discontinued segment E
(net of P4,800 income tax credit)
Gain on disposal of segment E (net of P12,600
income taxes)
Net income

P472,100
(5,000)
P467,100
(239,100)
P228,000
P72,100
56,400
(128,500)
P 99,500
P 3,200
5,900
(4,100)
(27,000)

(22,000)
P 77,500
(22,350)
P 55,150

P(11,200)
29,400

18,200
P 73,350

Preparation of Audited Financial Statements

Components of Income
Income from continuing operations
Results from discontinued operations
Net income

18-5

Earnings per Ordinary Share


(20,000 ordinary shares)
P2.71
0.91
P3.62

Requirement (3)
Mindanao Manufacturing Company
Statement of Retained Earnings
For the Year Ended December 31, 2006
Retained earnings, 1/1/2006
Less: Prior period adjustment, correction of
understated depreciation expense of 2005 (net of
P3,030 income tax credit)
Adjusted retained earnings, 1/1/2005
Add: Net income
Less: Cash dividends (P1.20 per share)
Retained earnings, 12/31/2006

P197,800
(7,700)
P190,730
73,350
P264,080
(24,000)
P240,080

Requirement (4)
Return on shareholders equity

=
=
=

Net income
Average shareholders equity
P73,350
P500,000
14.67%

Mindanao Manufacturing Companys return on shareholders equity for 2006 of


14.67% was below its target of 15%.

18-6

Solutions Manual to Accompany Applied Auditing, 2006 Edition

18-3.
1.

Income statement; disclose as Other Items. Although the earthquake is


unusual in nature in this area and it is of infrequent occurrence, PAS 1 does
not allow presentation of extraordinary gain or loss in the Income Statement.

2.

Income statement; disclose as Other Items. Same rationale as in (1).

3.

Income statement; include in current depletion expense because it is a change


in accounting estimate. Disclose effect of change on net income and earnings
per share in a note.

4.

Income statement; disclose as part of Other Items. Same reason as in (1).

5.

Income statement; disclose as Other Items. Same reason as in (1).

6.

Income statement; disclose as part of Other Items. Same reason as in (1).

7.

Retained earnings statement; as a cumulative effect on prior years income of


a change in accounting principle.

8.

Note; disclosure of the change in depreciation method may be made.

9.

Income statement; disclose as part of Other Items.

10. Income statement; disclose in Results from Discontinued Operations. Since


the segment constitutes a major line of business and is distinguishable from
the remainder of the business, the gain (as well as the operating profit or loss)
is shown separately in Results from Discontinued Operations.
11. Statement of retained earnings; since it is a correction of last years income, it
should be disclosed as a prior period adjustment.
12. Income statement; disclose as Other Items.

Preparation of Audited Financial Statements


18-4.

18-7

Tigger Company
Tigger Company
Comparative Statements of Income
For the Year Ended December 31

Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
Other items:
Loss from obsolete inventory
Casualty loss
Gain on early retirement of bonds
Miscellaneous
Pretax income from continuing
operations
Income tax expense (30%)
Income from continuous operations
Results from discontinued operations
Income (loss) from operations of
discontinued segment (net of
P90,000 income tax credit in
2006 and P90,000 income taxes
in 2005)
Net income

2006
P 2,900,000
(980,000)
P 1,920,000
(970,000)
P 950,000

a
c

2005
P 3,900,000
(2,310,000)
P 1,590,000
(1,390,000)
P 200,000

b
d

(150,000)
(50,000)

750,000
(225,000)
P 525,000

(60,000)
250,000
(90,000)

(210,000) i
315,000

P
P

300,000
(90,000)
210,000

210,000
420,000

P3,500,000 P400,000 P200,000

P4,600,000 P700,000

P1,600,000 P320,000 P300,000

P2,600,000 P290,000

P1,300,000 P180,000 P100,000

P1,500,000 P110,000

P(200,000) + P150,000 (disclosed in same section but as a separate line item)

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


h

P100,000 + P60,000 P250,000

(P600,000 P620,000 P280,000) x 70%

(P700,000 P290,000 P110,000) x 70%

Note: The properties of the discontinued segment should be reclassified as


Noncurrent Assets Held for Sale and valued at the lower of carrying value and fair
value less selling costs. Since the Expected Selling Price as of March 21, 2007 far
exceeds the carrying value, there is no indication that the company will incur loss
in write-down of assets of discontinued segment.
18-5.

Inee Company
Requirement (1)
Inee Company
Income Statement
For the Year Ended December 31, 2006
Sales revenues (net)
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Administrative expenses
Depreciation expense
Total operating expenses
Operating income
Other items
Interest revenue
Interest expense
Loss due to flood
Pretax income before extraordinary item
Income tax expense
Net income
Earnings per share (5,000 ordinary shares)

P200,000
(121,120)
P 78,880
P26,000
16,000
7,000
(49,000)
P 29,880
P 1,000
(4,880)
(5,000)

(8,880)
P 21,000
(6,300)
P 14,700
P2.94

Preparation of Audited Financial Statements

18-9

Requirement (2)
Inee Company
Working Paper for Segment Reporting
For Year Ended December 31, 2006
(not required)
1
Total revenues (sales)
Operating expenses
Cost of goods sold
Sales salaries
Sales commissions
Delivery costs
Advertising expense
Misc. selling expenses
Bad debts expense
Administrative salaries
Property taxes
Misc. administrative
expenses
Depreciation expense
Total operating
expenses
Segment profit / operating
income
Segments assets

All Operating Segments


2
Remaining

Segment
Totals

P 98,000

P60,000

P42,000

P200,000

P 60,760
3,000
1,960
3,000
4,600
0
980
4,000
560

P36,000
2,000
1,200
1,500
3,200
0
600
2,300
490

P24,360
1,000
840
500
1,500
0
420
1,600
350

P121,120
6,000
4,000
5,000
9,300
0
2,000
7,900
1,400

0
2,240

0
1,680

0
1,680

P 81,100

P48,970

P 16,900
P138,000

Unallocate
d
P
0
P

Totals
P200,000

0
0
0
0
1,200
500
0
2,100
1,600

P121,120
6,000
4,000
5,000
10,500
500
2,000
10,000
3,000

0
5,600

1,000
1,400

1,000
7,000

P32,250

P162,320

P 7,800

P170,120

P11,030

P 9,750

P 37,680

P(7,800)

P 29,880

P84,000

P54,000

P276,000

P24,000

P300,000

Inee Company
Industry Segment Financial Results
For Year Ended December 31, 2006
Reportable Operating Segments
1
2

All Other
Segments

Total
Results

Segment revenues (sales)

P 98,000

P 60,000

P 42,000

P200,000

Segment profit (pretax)

P 16,900

P 11,030

P 9,750

P 37,680

General corporate expenses


Interest revenue
Interest expense
Loss due to flood
Identifiable assets at
December 31, 2006
General corporate assets

(7,800)
1,000
(4,880)
(5,000)
P 21,000
P138,000

P 84,000

P 54,000

P276,000
24,000

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Total assets at
December 31, 2006

P300,000

Requirement (3)
Segment profit is total revenue less operating expenses. In computing segment
profit, none of the following items has been added or deducted: general corporate
expenses, interest revenue, interest expense, income taxes, or the flood loss
(relating to the companys operations in Division 1).
Depreciation for Divisions 1 and 2 was P2,240 and P1,680, respectively. Capital
expenditures amounted to P25,000 in Division 1 and P6,000 in Division 2 during
2006 and are included in the total assets on December 31, 2006.
18-6.

Lawin Company
Lawin Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Temporary investments in
marketable securities
Accounts receivable
P590,000
Less: Allowance for doubtful
accounts
(80,000)
Inventory
Prepaid items:
Insurance
P120,000
Office supplies
80,000
Total current assets
Long-term Investments
Investment in held-to-maturity bonds
Plant and Equipment
Land
Buildings and equipment
P3,560,000
Less: Accumulated depreciation
(920,000)
Total plant and equipment
Intangible Assets
Patents (net)
Total Assets
Liabilities
Current Liabilities

P 190,000
280,000
510,000
600,000
200,000
P1,780,000
1,030,000
P 810,000
2,640,000
3,450,000
470,000
P6,730,000

Preparation of Audited Financial Statements


Accounts payable
Salaries payable

P1,020,000
150,000

Taxes payable
Unearned rent
Total current liabilities
Long-Term Liabilities
Bonds payable (due 2012)
Less: Discount on bonds payable
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Ordinary shares, P10 par
Premium on ordinary shares
Total contributed capital
Retained Earnings
Total contributed capital and retained
earnings
Less: Treasury shares (at cost)
Total Shareholders Equity
Total Liabilities and Shareholders Equity
18-7.

18-11

250,000
90,000
P1,510,000
P1,100,000
(100,000)
1,000,000
P2,510,000

P1,200,000
930,000
P2,130,000
2,420,000
P4,550,000
(330,000)
P4,220,000
P6,730,000

Blue Manufacturing Company


Blue Manufacturing Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Marketable securities (short-term)
Accounts receivable
P15,300
Less: Allowance for doubtful
accounts
(1,000)
Inventory
Raw materials
P10,100
Goods in process
14,700
Finished goods
23,800
Prepaid insurance
Total current assets
Long-term Investments
Bond sinking fund
Investment in available-for-sale shares

P 6,100
8,400
14,300
6,000
48,600
2,600
P 80,000
P 7,700
16,400

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Total long-term investments
Plant and Equipment
Land
Buildings
Less: Accumulated depreciation
Machinery and equipment
Less: Accumulated depreciation
Total property, plant and
equipment
Intangible Assets
Patents (net)
Total Assets

24,100

P17,000
P92,500
(32,400)
P57,800
(30,000)

Liabilities
Current Liabilities
Notes payable
Accounts payable
Interest payable
Wages payable
Dividends payable
Income taxes payable
Unearned rent
Total current liabilities
Long-Term Liabilities
Bonds payable (due 2020)
P28,000
Less: Discount on bonds payable
(2,500)
Accrued pension cost
Total long-term liabilities
Other Liabilities
Deferred taxes payable
Total Liabilities
Shareholders Equity
Contributed Capital
Preference shares, P100 par
Ordinary shares, P10 par
Premium on preference shares
Premium on ordinary shares
Total contributed capital
Retained Earnings
Accumulated Other Comprehensive
Income
Unrealized increase in value of
available-for-sale shares

60,100
27,800
104,900
8,600
P217,600

P 4,900
20,900
500
2,700
5,600
8,900
5,000
P 48,500
P 25,500
13,300
38,800
2,800
P 90,100

P 30,000
44,100
7,000
16,300
P 97,400
28,100

2,000

Preparation of Audited Financial Statements


Total Shareholders Equity
Total Liabilities and Shareholders Equity

18-13
P127,500
P217,600

Additional parenthetical or note disclosures which might be made include:


1. Inventory costing and valuation method(s) for raw materials, goods in
process, and finished goods.
2. Valuation method for marketable securities and investment in shares.
3. Number of preference and common shares authorized and issued.
4. Pension plan information.
5. Bond indenture provisions, including sinking fund information.

18-8.

Working capital =
P31,500 =

Current assets Current liabilities


P80,000 P48,500

Current ratio =
1.65 =

Current assets Current liabilities


P80,000 P48,500

Nick Company
Nick Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Temporary investments in
available-for-sale securities
Accounts receivable
Less: Allowance for doubtful accounts
Inventory
Prepaid insurance
Total current assets
Noncurrent Investments
Notes receivable (due 2013)
Investment in Day Company bonds
Sinking fund for bond retirement
Total long-term investments
Property, Plant and Equipment
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total property, plant and
equipment
Intangible Assets
Patents (net)

P 3,800
4,600
P18,500
(700)

17,800
30,500
2,900
P 59,600
P 10,000
9,000
7,000
26,000
P 12,000

P63,400
(21,000)
P29,600
(13,000)

42,400
16,600
71,000
P 5,900

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Trademarks (net)
Total intangible assets
Total Assets

3,700
9,600
P166,200

Liabilities
Current Liabilities
Accounts payable
Income taxes payable
Wages payable
Current portion of mortgage payable
Total current liabilities
Long-Term Liabilities
Mortgage payable
Bonds payable (due 2017)
P40,000
Add: Premium on bonds payable
4,300
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Preference shares, P100 par
Ordinary shares, P5 par
Premium on preference shares
Premium on ordinary shares
Total contributed capital
Retained Earnings
Accumulated Other Comprehensive
Income
Unrealized increase in value of
available-for-sale securities
Total contributed capital, retained
earnings and accumulated other
comprehensive income
Less: Treasury shares (at cost)
Total Shareholders Equity
Total Liabilities and Shareholders Equity
18-9.

P 19,400
7,200
4,100
4,000
P 34,700
P 16,000
44,300
60,300
P 95,000

P 6,000
11,000
2,400
14,700
P 34,100
37,800

1,100

P 73,000
(1,800)
P 71,200
P166,200

Hera Manufacturing Corporation


Hera Manufacturing Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Accounts receivable (net)

P 109,000
317,700

a
b

Preparation of Audited Financial Statements


Inventories
Total current assets
Long-term Investment, at market value
Property, Plant, and Equipment at cost
Land
Buildings
Machinery and equipment
Total
Less: Accumulated depreciation
Total property, plant and
equipment
Intangible Asset
Goodwill
Other Assets
Cash restricted for building
purposes
Officers note receivable 1
Land held for future building site
Total Assets

18-15

560,000
P 926,700
47,000
P 200,000
P1,750,000
1,964,000
P3,714,000
(420,000)

3,294,000
3,494,000
37,000
P 100,000
30,000
250,000

Liabilities and Shareholders Equity


Current Liabilities
Accounts payable
P 119,800
Current installments of long-term
debt
200,000
Lawsuit liability
80,000
Income taxes payable
21,200
Deferred tax liability
5,000
Total current liabilities
Long-Term Debt
Mortgage payable
P 800,000
Note payable
400,000
Deferred tax liability
23,000
Total long-term debt
Total Liabilities
Shareholders Equity
Ordinary shares, authorized
100,000 shares of P50 par
value; issued 40,000 shares;
outstanding 39,800 shares
P2,000,000
Additional paid-in capital
231,000
Total paid-in capital
P2,231,000
Accumulated Other Comprehensive
Loss
Unrealized decrease in value of
long-term investment
(4,300)
Retained Earnings
1,075,400
Total
P3,302,100
Less: Cost of treasury shares
(6,400)
Total Shareholders Equity

a
b
d

380,000
P4,944,700

f, g

P 426,000
f
g

1,223,000
P1,649,000

i
i

3,295,700

c, j

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Solutions Manual to Accompany Applied Auditing, 2006 Edition


Total Liabilities and Shareholders Equity
1

P4,944,700

Alternatively, this could be reported under Long-Term Investments

Explanation of Amounts
a

Cash, per unaudited balance sheet


Less: Unrecorded checks in payment of accounts
payable
NSF check not recorded
Cash restricted for building purposes
(reported in other assets)
Corrected balance

P225,000

Accounts receivable (net), per unaudited balance sheet


Add charge-back for NSF check [see (a)]
Less: Officers note receivable (reported in other
assets)
Corrected balance

P345,700
2,000

Investments, per unaudited balance sheet


Less: Long-term investment [reported separately,
see (j)]
Treasury shares (reported in shareholders
equity)
Corrected balance

P 57,700

Land, per unaudited balance sheet


Less: Land acquired for future building site
(reported in other assets)
Corrected balance

P450,000

Accounts payable, per unaudited balance sheet


Less: Unrecorded payments [see (a)]
Corrected balance

P133,800
(14,000)
P119,800

Mortgage payable, per unaudited balance sheet


Less: Current portion (P50,000 x 2)
Refinanced as long-term mortgage payable

P900,000
(100,000)
P800,000

Note payable, per unaudited balance sheet


Less: Current portion
Long-term note payable

P500,000
(100,000)
P400,000

Income taxes payable, per unaudited balance sheet


Less: Prepaid income taxes
Corrected balance

P 61,200
(40,000)
P 21,200

Ordinary shares, per unaudited balance sheet


Less: Additional paid-in capital in excess of par value
Corrected balance

(14,000)
(2,000)
(100,000)
P109,000

(30,000)
P317,700

(51,300)
P

(6,400)
0

(250,000)
P200,000

P2,231,000
(231,000)
P2,000,000

Preparation of Audited Financial Statements


j

18-10.

Long-term investment, at cost [see (c)]


Less: Unrealized decrease in value
Long-term investment, at market value

18-17
P 51,300
(4,300)
P 47,000

Kiko Company
Kiko Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Accounts receivable (net)
Inventory
Total current assets

P 2,900
5,000
4,200

a
b
c

P12,1
00
Property, Plant and Equipment
Land
Buildings and equipment
Less: Accumulated depreciation
Total property, plant and
equipment
Total Assets

P 6,800
P 82,800
(16,000)

e
f

66,800
73,600
P85,7
00

Liabilities
Current Liabilities
Accounts payable
Salaries payable
Total current liabilities
Long-Term Liabilities
Bonds payable
Less: Discount on bonds payable
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Ordinary shares, P5 par
Additional paid-in capital
Total contributed capital
Retained Earnings
Total Shareholders Equity

P 3,000
1,500

g
h

P 4,500
P 6,000
(300)

5,700
P10,200

P16,500
12,700

j
k

P29,200
46,300
P75,500

18-18

Solutions Manual to Accompany Applied Auditing, 2006 Edition


Total Liabilities and Shareholders Equity
a
b
c
d
e
f
g
h
i
j
k
l

18-11.

P85,700

Last item on statement of cash flows


P5,000 = P3,900 + P1,100
P4,200 = P4,700 P500
P6,800 = P9,800 P3,000 sold
P82,800 = P68,900 + P13,900 purchased
P16,000 = P14,100 + P1,900 annual depreciation
P3,000 = P4,000 P1,000
P1,500 = P1,100 + P400
P300 = P6,000 face value P5,700 issue price
P16,500 = P13,500 + P3,000 issued
P12,700 = P11,200 + P1,500 in excess
P46,300 = P44,400 + P5,000 net income P3,100 dividends

Lifer Company
Lifer Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Accounts receivable
Inventories
Prepaid items
Total current assets
Property, Plant and Equipment
Land
Buildings
P103,000
Equipment
18,100
P121,100
Less: Accumulated
depreciation
(32,520)
Total property, plant and equipment
Patents (net)
Total Assets

P 1,200
4,000
10,890
1,420
P 17,510
P 13,600

88,580
102,180
5,500
P125,190

Liabilities
Current Liabilities
Accounts payable
Income taxes payable
Miscellaneous payable

P 5,100
4,290
1,400

Preparation of Audited Financial Statements


Total current liabilities
Long-Term Liabilities
10% bonds payable
Less: Discount on bonds payable
Mortgage payable
Total long-term liabilities
Total Liabilities

18-19
P 10,790

P15,000
(900)

P14,100
20,000
34,100
P 44,890

Shareholders Equity
Preference shares, P100 par
Premium on preference shares
Ordinary shares, P10 par
Premium on ordinary shares
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity

P 21,000
2,300
P17,500
14,300

P23,300
31,800
25,200
80,300
P125,190

Supporting calculations (for Balance Sheet):


Account
Cash

Balance
1/1/06
P 1,900

Calculations

Balance
12/31/06

Decreased (P700) from 1/1/06

P 1,200

Accounts
receivable

5,100

Decreased (P1,100) from 1/1/06

4,000

Inventories

13,900

Decreased (P3,010) from 1/106

10,890

Prepaid items
Land

Buildings

Equipment
Accumulated
depreciation

1,300
12,000

60,000

20,000

Increased P120 from 1/1/06


Received for land
Add loss on sale
Cost of land sold
Land purchased by shares
Net change in land

1,420
P(2,800)
(400)
P(3,200)
4,800
P 1,600

Purchase of building
P43,000
* Note: Mortgage account
will be included under
long-term liabilities
Cost of equipment sold

P(1,900)

Change in accumulated depreciation:


(29,000)
Cost of equipment sold P(1,900) Cr
Gain on sale of equipment
(180) Cr

13,600

103,000
18,100

18-20

Solutions Manual to Accompany Applied Auditing, 2006 Edition


Proceeds from sale
500 Dr
Reduction in accumulated
depreciation
P 1,580 Dr
Current depreciation
(5,100) Cr
Increase in accumulated
depreciation
P(3,520) Cr
Patents (net)

7,100

Amount received for


patent
Less: Gain on sale
Carrying value sold
Add: Patents amortized
Net decrease

P(2,100)
1,100
P(1,000)
(600)
P(1,600)

(32,520)

5,500

Accounts payable

5,500

Decreased P(400) from 1/1/06

5,100

Income taxes
payable

4,100

Increased P190 from 1/1/06

4,290

Misc. payables

1,200

Increased P200 from 1/1/06

1,400

10% bonds payable

15,000

Discount on bonds
payable

(1,000) Amortization P100

Mortgage payable
Preference shares
Premium on
preference
shares
Ordinary shares,
P10 par

Premium on
ordinary shares

0
17,000

1,500

14,000

11,200

No change

15,000
(900)

Incurred in purchase of building,


P20,000

20,000

Issued 40 shares for land


40 x P100 par = P4,000

21,000

Value from issuance for land P 4,800


Less: Par value of issue
(4,000)
Increase in premium
P 800

2,300

Issue 150 shares @ P10 par = P1,500


Share dividend 200 shares
@ P10 par
= 2,000
Total increase
P3,500

17,500

Value of shares issued


for cash
Par value of shares issued
Increase in premium
Value of share dividend
200 @ P18
Par value of shares issued
Increase in premium

P3,000
(1,500)
P1,500
P3,600
(2,000)
P1,600

Preparation of Audited Financial Statements


Total increase:
P1,500 + P1,600
Retained earnings

23,800

= P3,100

Add: Net income


P10,000
Less: Cash dividend
(5,000)
Less: Share dividend
(3,600)
Increase in retained earnings P 1,400

18-21
14,300

25,200

Preparation of Audited Financial Statements


18-12.

18-22

Harry Company

Requirement (1)
Harry Company
Worksheet for Statement of Cash Flows
For Year Ended December 31, 2006

Accounts
Cash
Accounts receivable
Inventory
Investment in bonds
Property and equipment
Accumulated depreciation
Accounts payable
Salaries payable
Interest payable
Notes payable
Ordinary shares, no par
Retained earnings
Sales
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
Interest revenue
Interest expense
Income tax expense

12/3/1/05 Post-Closing
Trial Balance
Debit
Credit
2,700
7,300
8,100
10,000
105,300
42,400
8,100
1,300
0
0
43,600
38,000

12/31/06 Adjusted
Trial Balance
Debit
Credit
3,300
6,200
9,900
18,600
133,300
49,200
8,500
700
300
9,000
58,100
31,500

Change
Debit
600

1,100
1,800
8,600
28,000
6,800
400
600
300
9,000
14,500
6,500

89,000
48,800
6,800
12,000
1,700

Worksheet Entries
Debit
Credit
(s)
600
(i)
1,100
(j)
1,800
(n)
8,600
(o) 28,000
(h)
6,800
(k)
400
(l)
600
(m)
300
(p)
9,000
(r) 14,500
(q)
6,500

89,000
48,800
6,800
12,000
1,700

1,200
900
6,000

Credit

(c)
(h)
(d)
(f)

48,800
6,800
12,000
1,700

(e)
(g)

900
6,000

1,200
900
6,000

(a)

89,000

(b)

1,200

Preparation of Audited Financial Statements


Totals

133,400

133,400

247,500

247,500

122,300

122,300

122,300

18-23
122,300

(Worksheet continued on next page)


18-12.

Harry Company (continued. . . . .)

Requirement (1) continued . . . . .


Worksheet Entries
Debit
Credit
Cash Flows From Operating Activities
Collections from customers
Interest and dividends collected
Other operating receipts
Payments to suppliers

(a)
(i)
(b)
(k)

89,000
1,100
1,200
-400

(m)

300

Payments to employees
Payments of interest
Other operating payments
Payments of income taxes
Cash Flows From Investing Activities
Payment for purchase of investments
Payment for purchase of building
Cash Flows From Financing Activities
Proceeds from issuance of note payable
Proceeds from issuance of ordinary shares
Payment of dividends
Net Increase in Cash

(p)
(r)

(c)
(j)
(d)
(l)
(e)
(f)
(g)

48,800
1,800
12,000
600
900
1,700
6,000

(n)
(o)

8,600
28,000

(q)

6,500

(s)

600

9,000
14,500

18-24
Totals

Solutions Manual to Accompany Applied Auditing, 2006 Edition


115,500

115,500

18-25

Preparation of Audited Financial Statements


18-12.

Harry Company (continued. . . . .)


Requirement (2)
Harry Company
Statement of Cash Flows
For Year Ended December 31, 2006
Cash Flows From Operating Activities
Cash Inflows:
Collections from customers
Interest collected
Cash inflows from operating activities
Cash Outflows:
Payments to suppliers
Payments to employees
Payments of interest
Other operating payments
Payments of income taxes
Cash outflows from operating activities
Net cash provided by operating activities

P 90,100
1,200
P 91,300
P(50,200)
(12,600)
(600)
(1,700)
(6,000)
(71,100)
P 20,200

Cash Flows From Investing Activities


Payment for purchase of investments
Payment for purchase of building
Net cash used for investing activities

P (8,600)
(28,000)

Cash Flows From Financing Activities


Proceeds from issuance of note payable
Proceeds from issuance of ordinary shares
Payment of dividends
Net cash provided by financing activities

P 9,000
14,500
(6,500)

Net Increase in Cash


Cash, January 1, 2006
Cash, December 31, 2006

(36,600)

17,000
P

600
2,700

P 3,300

18-26
18-13.

Solutions Manual to Accompany Applied Auditing, 2006 Edition


Serene Company
Serene Company
Statement of Changes in Shareholders Equity
For Year Ended December 31, 2006

Balances, 1/1/06
Unrealized increase in
value of available-forsale securities
Ordinary shares issued
Preference shares issued
Ordinary shares
reacquired
Net income
Cash dividend paid on
preference*
Cash dividend paid on
ordinary
Balances, 12/31/06

Preference
Shares
P100 par
P50,000

Ordinary
Shares
P10 par
P100,000

Additional
Paid-in
Capital on
Preference
Shares
P6,000

Additional
Paid-in
Capital on
Ordinary
Shares
P130,000

Retained
Earnings
P224,000

Accumulated
Other
Comprehensiv
e Income

Treasury
Shares

P9,000
20,000
11,000

30,000
1,760
P(10,400)

P61,000

P120,000

P7,760

P160,000

* Preference dividend: P7 x (500 + 110 shares) = P4,270.


* Ordinary dividend: P1.25 x (10,000 + 2,000 400 treasury shares) = P14,500.

Total
P510,000
9,000
50,000
12,760
(10,400)

57,000

57,000

(4,270)

(4,270)

(14,500)

(14,500)

P262,230

P9,000

P(10,400)

P609,590

18-27
18-14.

Solutions Manual to Accompany Applied Auditing, 2006 Edition


Circle Company
CIRCLE COMPANY
Schedule to Analyze Effects of Errors
Balance Sheet
Dec. 31, 2007
Income 2006 Income 2007
Amount
Debit Credit Debit Credit Debit Credit

1.

2.
3.
4.

Income 2005
Explanation
Debit Credit
Sales tax accrual omitted:
December 31, 2005
2,000a
2,000
December 31, 2006
5,000
5,000
December 31, 2007
9,000
Accounts payable and inventory omitted: No correction because errors offset each other
Inventory recorded twice
4,000
4,000
Bad debtsb
5,000
1,000
2,200

5. Bond premium
6. Travel advances
7. Salary accrual
8. Cost misclassification
a

1,200

1,200 12,000

18,000 18,000
10,000
11,000 10,000 7,000 11,000
5,000c 25,000 5,000
5,000

Account

9,000 Sales taxes payable


8,200 Allowance for doubtful
accounts
9,600 Additional paid-in
capital, Bond premium
7,000 Salaries payable
15,000 Accumulated depreciation

The correct sales tax expense for 2005 is P12,000 (P200,000 x 6%). Since P10,000 was recorded in 2005, the correcting amount is
P2,000. However, this P2,000 would have been recorded by the company in 2006, so the total recorded sales tax expense of
P15,000 includes only P13,000 for sales made in 2006. Therefore the correct balance of P18,000 (P300,000 x 6%) is obtained by a
correcting amount of P5,000. Similarly, in 2007 the P5,000 would have been recorded by the company, so the total recorded sales
tax expense of P26,000 includes only P21,000 for sales made in 2004. Therefore the correct balance of P30,000 (P500,000 x 6%)
is obtained by a correcting amount of P9,000.
Since bad debts were written off each year directly to bad debts expense, the increase in the Allowance for Doubtful Accounts
balance each year represents the additional bad debts expense.

18-28
c

Solutions Manual to Accompany Applied Auditing, 2006 Edition


The residual value is ignored because it would have been included in the computation of the depreciation on the machine.

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