Chaper 1 - FS Audit

Chapter 1 Basic Concepts of Financial Statement Audit Multiple Choice 1. C 6. D

2. D 7 C

3. A 8. D

4. C 9. B

5. A 10. C

Problem 1 Audit Adjusting Entries: Equipment Acquisition Fund Cash

60,000

Purchases Accounts Payable

50,000

Treasury Shares Investments

30,000

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

39,200

60,000 50,000 30,000 39,200

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 Prepaid Expenses

1,200

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

2,800

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

3,000

1,200 2,800

3,000

Inventory, end Cost of Goods Sold Purchases Inventory, beg.

650,000 2,408,000 2,474,000 584,000

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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 Debit Credit Cash Accounts receivable Allowance for doubtful accounts Inventory, Dec. 31, 2011 Prepaid expenses Investments Furniture and equipment Miscellaneous equipment Accumulated depreciation Accounts payable Accrued expenses Unearned rent income Ordinary share capital Retained earnings Sales Rent income Purchases Salaries expense Advertising expense Commission expense Utilities expense Supplies expense Transportation expense Repairs and maintenance Miscellaneous expenses

Adjustments Debit

191,000 615,000

Profit or Loss Debit

Credit

60,000 21,000

76,400 543,000 51,000 12,800 600,000 182,800 3,500,000 48,000

Financial Position Debit Credit 131,000 615,000

9,750 584,000 1,200 30,000

584,000 8,000 110,000 312,000 90,000

2,424,000 400,000 124,000 80,000 32,000 12,000 14,000 16,000 23,000 5,035,000

Credit

30,750 6,800 80,000 312,000 90,000

39,200 50,000 3,000

115,600 593,000 54,000 10,000 600,000 182,800

2,800

3,500,000 50,800

2,800 50,000

2,474,000

400,000 124,000 80,000 32,000 12,000 14,000 16,000 26,000

3,000 5,035,000

Equipment acquisition fund Doubtful accounts expense Inventory, Dec. 31, 2012 Cost of goods sold Treasury shares Depreciation expense Insurance expense

60,000 9,750 650,000

9,750

2,408,000

2,408,000

30,000 39,200 1,200 3,253,950

Profit before income tax Profit before income tax Income tax expense Income tax payable Profit

60,000 650,000 30,000

3,253,950

39,200 1,200 3,162,150 388,650 3,550,800

3,550,800 3,550,800 388,650

116,595 272,055 388,650

Problem 2 Audit Adjusting Entries: Accounts receivable Cash in bank

15,000

Doubtful accounts expense Allowance for doubtful accounts

15,650

15,000 15,650

2

388,650

1,974,800

116,595 272,055 1,974,800

Chapter 1 Basic Concepts of Financial Statement Audit Purchases Accounts payable

50,000

Cost of goods sold Inventory, end (601,200 + 50,000 – 30,000) Purchase returns and allowances Purchases (2,159,300 + 50,000) Inventory, beginning

2,120,500 621,200 36,500

50,000

2,209,300 568,900

Accumulated depreciation – equipment *11,000 Gain on sale of equipment Furniture and equipment (40,000 – 35,000) • 40,000 x 10% x 2.75 years) = 11,000 Depreciation expense – furniture and equipment 64,300 Accumulated depreciation – furniture and equipment Furniture and equipment, per client P618,000 Adjustment above ( 5,000) Furniture and equipment, per audit P613,000

6,000 5,000

64,300

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) Insurance expense

4,200 4,200

Prepaid rent 130,000 x 1/13 Rent expense

10,000

Discount on notes payable Interest expense 100,000 x 12% x 11/12

11,000

10,000 11,000

Retained earnings Goodwill

300,000 300,000

3

Chapter 1 Basic Concepts of Financial Statement Audit CIELO CORPORATION WORKING TRIAL BALANCE FOR THE YEAR ENDED SEPTEMBER 30, 2012 Trial Balance Debit Credit Cash Accounts receivable Allowance for doubtful accounts Notes receivable Merchandise inventory Furniture and equipment Accumulated depreciation Goodwill Accounts payable Notes payable Common stock Retained earnings Sales Sales returns and allowances Purchases Purchase returns and allowances Advertising expense Sales salaries Commission expense Miscellaneous selling expense Rent expense Office salaries Light and water Insurance expense Taxes and licenses General expenses Interest expense Interest income

Adjustments Debit

225,000 936,000

Profit or Loss Debit

Credit

15,000 31,900

Financial Position Debit Credit 210,000 951,000

15,000 15,650

155,000 568,900 618,000

47,550 155,000

187,500

11,000

300,000 536,000 100,000 1,000,000 552,500 3,728,200

568,900 5,000 64,300 300,000 50,000

613,000 240,800 586,000 100,000 1,000,000 252,500

300,000 3,728,200

47,600 2,159,300

47,600 50,000 36,500

36,500 96,100 288,500 152,000 29,900 130,000 197,200 15,000 10,800 47,800 163,400 41,200 6,181,700

Credit

2,209,300

10,000

4,200

11,000

96,100 288,500 152,000 29,900 120,000 197,200 15,000 6,600 47,800 163,400 30,200

9,100 6,181,700

9,100

Doubtful accounts expense Cost of goods sold Merchandise inventory Gain on sale of equipment Depreciation expense Prepaid insurance Prepaid rent Discount on notes payable

15,650 2,120,500 621,200

15,650 2,120,500 621,200 6,000

64,300 4,200 10,000 11,000 3,259,350

6,000 64,300 4,200 10,000 11,000

3,259,350 3,394,750 348,550 3,743,300

Income before income tax

Income before income tax Income tax expense Income tax payable Profit

3,743,300 3,743,300 348,550

104,565 243,985 348,550

4

348,550

2,575,400

104,565 243,985 2,575,400

Chapter 1 Basic Concepts of Financial Statement Audit Problem 3 Audit adjusting entries: Inventory, December 31, 2012 (addition) Income summary

67,200

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

14,920

67,200 14,920

Sales salaries and commission Accrued expenses 3% x 27,200 = 816

816 816

Freight in Accounts payable

1,500

Advertising expense Prepaid advertising

4,200

Freight out Sales

18,400

Depreciation expense – Office Equipment Accumulated depreciation – office equipment 15,600/10 x 10/12

1,300

Other operating expenses – Loss from flood Extraordinary loss

145,200

1,500 4,200 18,400 1,300

145,200

(Function of expense method) Flawless, Inc. Statement of Comprehensive Income For the Year Ended December 31, 2012 Net Sales Cost of goods sold Gross profit Other operating income Total income Operating expenses Selling expenses General and administrative expenses Other operating expenses Total operating expenses Profit before interest and income tax Interest expense Profit before income tax

5

P984,640 429,650 P554,990 52,700 P607,690 P130,916 154,620 145,200 P430,736 P176,954 9,040 P167,914

Chapter 1 Basic Concepts of Financial Statement Audit Income tax expense ( 30% x 167,914) Profit Schedules:

50,374 P117,540

Net Sales Sales 990,400 + 18,400 Sales returns and allowances Sales discounts Net sales

P1,008,800 (22,400) (1,760) P984,640

Cost of Goods Sold Inventory, January 1, 2012 Net cost of purchases: Purchases Freight in Total goods available for sale Less: inventory, December 31, 2012 Cost of goods sold

P179,400 P346,000 12,550

Other operating income Interest revenue Dividend revenue Gain on sale of equipment Total other operating income

358,550 P537,950 108,300 P 429,650 P

1,400 14,300 37,000 P 52,700

Selling Exp. Sales salaries and commissions P 70,816 Advertising expense 36,380 Legal services Insurance and licenses Salesmen’s traveling expenses 7,120 Depreciation expense – delivery Equipment 12,200 Depreciation expense – office Equipment Utilities expense Telephone and postage Officers’ salaries Doubtful accounts expense Freight out Miscellaneous selling 4,400 Loss from flood Total P130,916

6

Gen. and Adm. Other Operating Exp. P

4,450 17,000

10,900 12,800 2.950 73,200 14,920 18,400 P154,620

P145,200 P145,200

Chapter 1 Basic Concepts of Financial Statement Audit Flawless, Inc. Statement of Comprehensive Income For the Year Ended December 31, 2012 Net Sales Other operating income Total income Operating expenses Net cost of purchases Decrease in inventory Sales salaries and commissions Advertising expense Legal services Insurance and licenses Salesmen’s traveling expenses Depreciation expense – delivery equipment Depreciation expense – office equipment Utilities expense Telephone and postage Officers’ salaries Doubtful accounts expense Freight out Miscellaneous selling Other expenses - Loss from flood Total operating expenses Profit before interest and income tax Interest expense Profit before income tax Income tax expense ( 30% x 167,914) Profit

P984,640 52,700 P1,037,340 P 358,550 71,100 70,816 36,380 4,450 17,000 7,120 12,200 10,900 12,800 2.950 73,200 14,920 18,400 4,400 P145,200 P430,736 P176,954 9,040 P167,914 50,374 P117,540

MULTIPLE CHOICE – Karkits Corporation Audit adjusting Entries: 1. Advances to officers & employees Marketing and administrative expense Petty Cash

3,000 4,500 7,500

2. A. Accounts Receivable Cash in Bank

35,000 35,000

B. Cash in Bank Accounts Receivable

40,000

E. Cash in bank Accounts Payable

48,300

40,000 48,300

3. Trading Securities Unrealized gain on Trading Securities

7

20,000 20,000

Chapter 1 Basic Concepts of Financial Statement Audit 4. A. Advances to Officers and Employees Accounts Receivable

120,000 120,000

B. Sales Inventories Accounts Receivable Cost of good sold

625,000 500,000 625,000 500,000

5. A Inventories Cost of good sold

26,000 26,000

B. Accounts Payable Cost of good sold

35,000

C. Inventories Accounts Payable

27,000

D. Cost of good sold Accounts Payable

22,350

E. Sales Inventories Accounts Receivable Cost of good sold

36,000 25,000

35,000 27,000 22,350

36,000 25,000

* Marketing and Administrative Expense Allowance for uncollectible accounts 6. Marketing and Administrative Expense Prepaid Insurance

17,900 17,900 6,250 6,250

A. Land Building Other income Land and Building Marketing and Administrative Expense

1,864,000 7,606,000 30,000 8,600,000 900,000

B. Marketing and Administrative Expense 166,800 Accumulated Depreciation-Building 150,000 Accumulated Depreciation-Leasehold Improvements 16,800 8. Marketing and Administrative Expense Accumulated Amortization - Franchise

50,000 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 Accounts payable – De Leon

8

126,000 126,000

Chapter 1 Basic Concepts of Financial Statement Audit B. Marketing and Administrative Expense Accrued expense

50,800 50,800

11. Other Income Unearned Revenue

130,000

12. Interest Expense Interest Payable

200,000

130,000 200,000

Mortgage Payable Current portion of long term debt

500,000 500,000

13. Interest Expense Interest Payable Discount on Bonds Payable

187,800

14. Income Tax Payable Income Tax Expense 1,458,579-1,585,705

127,126

180,000 7,800 127,126

Karkits Corporation Statement of Comprehensive Income For the year ended December 31, 2012 Sales Cost of Good Sold Gross profit Other Income Total income Marketing and Administrative Expense Income before Interest and taxes Interest expense Profit before Tax Income Tax (4,861,930 * 32%) Profit

P 31,589,000 (17,606,300) 13,982,700 40,000 14,022,700 (8,368,650) 5,654,050 (792,120) 4,861,930 (1,555,817) P 3,306,113

Karkits Corporation Statement of Financial Position As of December 31, 2012 Assets CURRENT ASSETS Cash and Cash Equivalents Trading Securities, market value Accounts receivable, net Inventories Prepaid Insurance

9

Notes 3 4

P

304,400 350,000 2,743,100 4,976,900 23,150

Chapter 1 Basic Concepts of Financial Statement Audit CURRENT ASSETS

P 8,397,550

NON CURRENT ASSETS Property, Plant and Equipment Intangibles, Net NON CURRENT ASSETS Total assets

5 6

P 11,124,700 594,000 11,538,700 P 19,936,250

Liabilities and Shareholders’ Equity CURRENT LIABILITIES Trade And Other Payables 7 Unearned Revenues Income Tax Payable CURRENT LIABILITIES NON CURRENT LIABILITIES Mortgage Payable Bonds Payable NON CURRENT LIABILTIES Total liabilities SHAREHOLDERS’ EQUITY Ordinary Share Capital Additional Paid-in Capital Retained Earnings SHAREHOLDERS’ EQUITY Total Liabilities and Shareholders’ Equity

8

P 4,983,020 130,000 66,239 P 5,179,259 P 1,500,000 1,885,800 3,385,800 P 8,565,059 P 5,000,000 1,350,000 5,021,191 11,371,191 19,936,250

NOTES 3. Cash Petty Cash Cash in bank Cash and Cash Equivalents 4. Trade and other receivables Accounts receivable, net Advance to Officers and Employees Allowance for uncollectible account Trade and Other Receivables

10

P

7,500 296,900 P 304,400

2,758,000 123,000 (137,900) P 2,743,100

Chapter 1 Basic Concepts of Financial Statement Audit 5. Property, plant and equipment Land Building P 7,750,000 Accumulated Depreciation - Building (150,000 Furniture and Fixtures P2,177,000 Accumulated depreciation – Furniture and Fixtures (703,500 Leasehold Improvements P 168,00 Accumulated depreciation – Leasehold Improvements (16,800) Total Property, Plant and Equipment, Net 6.

Intangible Assets Franchise P500,000 Accumulated Amortization – Franchise (50,000) Licensing Agreements P 360,000 Accumulated Amortization – Licensing Agreements (216,000 Total Intangible Assets

P 1,720,000 7,600,000 1,473,500 151,200 P 11,124,700

P

450,000 144,000 P 594,000

7. Trade and Other Payables Accounts Payable Accrued Expense Interest Payable Dividends Payable Current portion of Long Term Debt Trade and Other Payables

P 2,204,200 648,820 380,000 1,250,000 500,000 P 4,983,020

8. Amortized cost of bonds payable Bonds Payable Discount on Bonds payable Bonds Payable, Net of Discount

P 2,000,000 (114,200) P 1,885,800

11

Chapter 1 Basic Concepts of Financial Statement Audit

Answers: 1. Petty Cash 2. Cash in bank 3. Trading Securities 4. Accounts Receivable 5. Allowance for doubtful accounts 6. Advances to Officers & Employees 7. Inventories 8. Prepaid Insurance 9. Land 10. Building 11. Accumulated Depreciation – Building 12. Net book Value of Leasehold Improvement 13. Franchise 14. Licensing agreement, net 15. Accounts Payable 16. Accrued Expenses 17. Unearned Revenues 18. Interest Payable 19. Income Taxes Payable 20. Dividends Payable 21. Current portion of long term debt 22. Discount on Bonds Payable 23. Ordinary share capital 24. Retained Earnings 25. Sales 26. Cost of Good Sold 27. Marketing & administrative expense 28. Other income 29. Interest expense 30. Net income

12

7,500 296,900 350,000 2,758,900 137,900 123,000 4,976,900 23,150 1,720,000 7,750,000 150,000 151,200 500,000 144,000 2,204,200 648,820 130,000 380,000 163,477 1,250,000 500,000 114,200 5,000,000 5,021,191 31,589,000 17,606,300 8,368,650 40,000 792,120 3,306,113

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