Chaper 1 - FS Audit

Chapter 1 Basic Concepts of Financial Statement Audit

1

Multiple Choice 1. C 2. D 3. A 4. C 5. A 6. D 7 C 8. D 9. B 10. C Problem 1 Audit Adjusting Entries: Equipment Acquisition Fund 60,000 Cash 60,000 Purchases 50,000 Accounts Payable 50,000 Treasury Shares 30,000 Investments 30,000 Depreciation Expense 39,200 Accumulated Depreciation 39,200 Total Furniture and Equipment P402,000 Acquired June 30, 2011 20,000 Acquired at inception P382,000 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 1,200 Prepaid Expenses 1,200 Unearned Rent Income 2,800 Rent Income 2,800 12,800 – 10,000 = 2,800 decrease Miscellaneous Expenses 3,000 Accrued Expenses 3,000 54,000 – 51,000 = 3,000 increase Inventory, end 650,000 Cost of Goods Sold 2,408,000 Purchases 2,474,000 Inventory, beg. 584,000


2

CLARITY COMPANY WORKING TRIAL BALANCE

FOR THE YEAR ENDED DECEMBER 31, 2012

Trial Balance Adjustments Profit or Loss Financial Position Debit Credit Debit Credit Debit Credit Debit Credit Cash 191,000 60,000 131,000 Accounts receivable 615,000 615,000 Allowance for doubtful accounts 21,000 9,750 30,750 Inventory, Dec. 31, 2011 584,000 584,000 Prepaid expenses 8,000 1,200 6,800 Investments 110,000 30,000 80,000 Furniture and equipment 312,000 312,000 Miscellaneous equipment 90,000 90,000 Accumulated depreciation 76,400 39,200 115,600 Accounts payable 543,000 50,000 593,000 Accrued expenses 51,000 3,000 54,000 Unearned rent income 12,800 2,800 10,000 Ordinary share capital 600,000 600,000 Retained earnings 182,800 182,800 Sales 3,500,000 3,500,000 Rent income 48,000 2,800 50,800 Purchases 2,424,000 50,000 2,474,000 Salaries expense 400,000 400,000 Advertising expense 124,000 124,000 Commission expense 80,000 80,000 Utilities expense 32,000 32,000 Supplies expense 12,000 12,000 Transportation expense 14,000 14,000 Repairs and maintenance 16,000 16,000 Miscellaneous expenses 23,000 3,000 26,000 5,035,000 5,035,000 Equipment acquisition fund 60,000 60,000 Doubtful accounts expense 9,750 9,750 Inventory, Dec. 31, 2012 650,000 650,000 Cost of goods sold 2,408,000 2,408,000 Treasury shares 30,000 30,000 Depreciation expense 39,200 39,200 Insurance expense 1,200 1,200 3,253,950 3,253,950 3,162,150 3,550,800 Profit before income tax 388,650 3,550,800 3,550,800 Profit before income tax 388,650 Income tax expense 116,595 Income tax payable 116,595 Profit 272,055 272,055 388,650 388,650 1,974,800 1,974,800

Problem 2 Audit Adjusting Entries: Accounts receivable 15,000 Cash in bank 15,000 Doubtful accounts expense 15,650 Allowance for doubtful accounts 15,650


3

Purchases 50,000 Accounts payable 50,000 Cost of goods sold 2,120,500 Inventory, end (601,200 + 50,000 – 30,000) 621,200 Purchase returns and allowances 36,500 Purchases (2,159,300 + 50,000) 2,209,300 Inventory, beginning 568,900 Accumulated depreciation – equipment *11,000 Gain on sale of equipment 6,000 Furniture and equipment (40,000 – 35,000) 5,000

• 40,000 x 10% x 2.75 years) = 11,000

Depreciation expense – furniture and equipment 64,300 Accumulated depreciation – furniture and equipment 64,300 Furniture and equipment, per client P618,000 Adjustment above ( 5,000) Furniture and equipment, per audit P613,000 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) 4,200 Insurance expense 4,200 Prepaid rent 130,000 x 1/13 10,000 Rent expense 10,000 Discount on notes payable 11,000 Interest expense 11,000 100,000 x 12% x 11/12 Retained earnings 300,000 Goodwill 300,000


4

CIELO CORPORATION WORKING TRIAL BALANCE

FOR THE YEAR ENDED SEPTEMBER 30, 2012

Trial Balance Adjustments Profit or Loss Financial Position Debit Credit Debit Credit Debit Credit Debit Credit Cash 225,000 15,000 210,000 Accounts receivable 936,000 15,000 951,000 Allowance for doubtful accounts 31,900 15,650 47,550 Notes receivable 155,000 155,000 Merchandise inventory 568,900 568,900 Furniture and equipment 618,000 5,000 613,000 Accumulated depreciation 187,500 11,000 64,300 240,800 Goodwill 300,000 300,000 Accounts payable 536,000 50,000 586,000 Notes payable 100,000 100,000 Common stock 1,000,000 1,000,000 Retained earnings 552,500 300,000 252,500 Sales 3,728,200 3,728,200 Sales returns and allowances 47,600 47,600 Purchases 2,159,300 50,000 2,209,300 Purchase returns and allowances 36,500 36,500 Advertising expense 96,100 96,100 Sales salaries 288,500 288,500 Commission expense 152,000 152,000 Miscellaneous selling expense 29,900 29,900 Rent expense 130,000 10,000 120,000 Office salaries 197,200 197,200 Light and water 15,000 15,000 Insurance expense 10,800 4,200 6,600 Taxes and licenses 47,800 47,800 General expenses 163,400 163,400 Interest expense 41,200 11,000 30,200 Interest income 9,100 9,100 6,181,700 6,181,700 Doubtful accounts expense 15,650 15,650 Cost of goods sold 2,120,500 2,120,500 Merchandise inventory 621,200 621,200 Gain on sale of equipment 6,000 6,000 Depreciation expense 64,300 64,300 Prepaid insurance 4,200 4,200 Prepaid rent 10,000 10,000 Discount on notes payable 11,000 11,000 3,259,350 3,259,350 3,394,750 3,743,300 Income before income tax 348,550 3,743,300 3,743,300 Income before income tax 348,550 Income tax expense 104,565 Income tax payable 104,565 Profit 243,985 243,985 348,550 348,550 2,575,400 2,575,400


5

Problem 3 Audit adjusting entries: Inventory, December 31, 2012 (addition) 67,200 Income summary 67,200 Doubtful accounts expense 14,920 Allowance for doubtful accounts 14,920 3% x 522,000 = 15,660 15,660 – 740 = 14,920 Sales salaries and commission 816 Accrued expenses 816 3% x 27,200 = 816 Freight in 1,500 Accounts payable 1,500 Advertising expense 4,200 Prepaid advertising 4,200 Freight out 18,400 Sales 18,400 Depreciation expense – Office Equipment 1,300 Accumulated depreciation – office equipment 1,300 15,600/10 x 10/12 Other operating expenses – Loss from flood 145,200 Extraordinary loss 145,200 (Function of expense method)

Flawless, Inc. Statement of Comprehensive Income

For the Year Ended December 31, 2012

Net Sales P984,640 Cost of goods sold 429,650 Gross profit P554,990 Other operating income 52,700 Total income P607,690 Operating expenses Selling expenses P130,916 General and administrative expenses 154,620 Other operating expenses 145,200 Total operating expenses P430,736 Profit before interest and income tax P176,954 Interest expense 9,040 Profit before income tax P167,914


6

Income tax expense ( 30% x 167,914) 50,374 Profit P117,540 Schedules: Net Sales Sales 990,400 + 18,400 P1,008,800 Sales returns and allowances (22,400) Sales discounts (1,760) Net sales P984,640 Cost of Goods Sold Inventory, January 1, 2012 P179,400 Net cost of purchases: Purchases P346,000 Freight in 12,550 358,550 Total goods available for sale P537,950 Less: inventory, December 31, 2012 108,300 Cost of goods sold P 429,650 Other operating income Interest revenue P 1,400 Dividend revenue 14,300 Gain on sale of equipment 37,000 Total other operating income P 52,700 Selling Exp. Gen. and Adm. Other Operating Exp. Sales salaries and commissions P 70,816 Advertising expense 36,380 Legal services P 4,450 Insurance and licenses 17,000 Salesmen’s traveling expenses 7,120 Depreciation expense – delivery Equipment 12,200 Depreciation expense – office Equipment 10,900 Utilities expense 12,800 Telephone and postage 2.950 Officers’ salaries 73,200 Doubtful accounts expense 14,920 Freight out 18,400 Miscellaneous selling 4,400 Loss from flood P145,200 Total P130,916 P154,620 P145,200


7

Flawless, Inc. Statement of Comprehensive Income

For the Year Ended December 31, 2012

Net Sales P984,640 Other operating income 52,700 Total income P1,037,340 Operating expenses Net cost of purchases P 358,550 Decrease in inventory 71,100 Sales salaries and commissions 70,816 Advertising expense 36,380 Legal services 4,450 Insurance and licenses 17,000 Salesmen’s traveling expenses 7,120 Depreciation expense – delivery equipment 12,200 Depreciation expense – office equipment 10,900 Utilities expense 12,800 Telephone and postage 2.950 Officers’ salaries 73,200 Doubtful accounts expense 14,920 Freight out 18,400 Miscellaneous selling 4,400 Other expenses - Loss from flood P145,200 Total operating expenses P430,736 Profit before interest and income tax P176,954 Interest expense 9,040 Profit before income tax P167,914 Income tax expense ( 30% x 167,914) 50,374 Profit P117,540 MULTIPLE CHOICE – Karkits Corporation

Audit adjusting Entries: 1. Advances to officers & employees 3,000 Marketing and administrative expense 4,500

Petty Cash 7,500 2. A. Accounts Receivable 35,000 Cash in Bank 35,000

B. Cash in Bank 40,000 Accounts Receivable 40,000 E. Cash in bank 48,300 Accounts Payable 48,300

3. Trading Securities 20,000 Unrealized gain on Trading Securities 20,000


8

4. A. Advances to Officers and Employees 120,000 Accounts Receivable 120,000

B. Sales 625,000 Inventories 500,000 Accounts Receivable 625,000 Cost of good sold 500,000

5. A Inventories 26,000

Cost of good sold 26,000 B. Accounts Payable 35,000 Cost of good sold 35,000 C. Inventories 27,000 Accounts Payable 27,000 D. Cost of good sold 22,350 Accounts Payable 22,350

E. Sales 36,000 Inventories 25,000 Accounts Receivable 36,000 Cost of good sold 25,000 * Marketing and Administrative Expense 17,900 Allowance for uncollectible accounts 17,900

6. Marketing and Administrative Expense 6,250 Prepaid Insurance 6,250

A. Land 1,864,000 Building 7,606,000 Other income 30,000 Land and Building 8,600,000

Marketing and Administrative Expense 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 50,000 Accumulated Amortization - Franchise 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 126,000 Accounts payable – De Leon 126,000


9

B. Marketing and Administrative Expense 50,800 Accrued expense 50,800 11. Other Income 130,000 Unearned Revenue 130,000 12. Interest Expense 200,000 Interest Payable 200,000 Mortgage Payable 500,000 Current portion of long term debt 500,000 13. Interest Expense 187,800 Interest Payable 180,000 Discount on Bonds Payable 7,800 14. Income Tax Payable 127,126 Income Tax Expense 127,126 1,458,579-1,585,705

Karkits Corporation Statement of Comprehensive Income

For the year ended December 31, 2012

Sales P 31,589,000 Cost of Good Sold (17,606,300) Gross profit 13,982,700 Other Income 40,000 Total income 14,022,700 Marketing and Administrative Expense (8,368,650)

Income before Interest and taxes 5,654,050 Interest expense (792,120) Profit before Tax 4,861,930 Income Tax (4,861,930 * 32%) (1,555,817) Profit P 3,306,113

Karkits Corporation Statement of Financial Position

As of December 31, 2012

Assets Notes CURRENT ASSETS

Cash and Cash Equivalents 3 P 304,400 Trading Securities, market value 350,000 Accounts receivable, net 4 2,743,100 Inventories 4,976,900 Prepaid Insurance 23,150


10

CURRENT ASSETS P 8,397,550

NON CURRENT ASSETS Property, Plant and Equipment 5 P 11,124,700 Intangibles, Net 6 594,000 NON CURRENT ASSETS 11,538,700

Total assets P 19,936,250 Liabilities and Shareholders’ Equity

CURRENT LIABILITIES Trade And Other Payables 7 P 4,983,020 Unearned Revenues 130,000 Income Tax Payable 66,239 CURRENT LIABILITIES P 5,179,259

NON CURRENT LIABILITIES Mortgage Payable P 1,500,000 Bonds Payable 8 1,885,800 NON CURRENT LIABILTIES 3,385,800 Total liabilities P 8,565,059

SHAREHOLDERS’ EQUITY

Ordinary Share Capital P 5,000,000 Additional Paid-in Capital 1,350,000 Retained Earnings 5,021,191 SHAREHOLDERS’ EQUITY 11,371,191

Total Liabilities and Shareholders’ Equity 19,936,250

NOTES

3. Cash Petty Cash P 7,500

Cash in bank 296,900 Cash and Cash Equivalents P 304,400

4. Trade and other receivables Accounts receivable, net 2,758,000

Advance to Officers and Employees 123,000 Allowance for uncollectible account (137,900) Trade and Other Receivables P 2,743,100


11

5. Property, plant and equipment Land P 1,720,000

Building P 7,750,000 Accumulated Depreciation - Building (150,000 7,600,000 Furniture and Fixtures P2,177,000 Accumulated depreciation – Furniture and Fixtures (703,500 1,473,500 Leasehold Improvements P 168,00 Accumulated depreciation – Leasehold Improvements (16,800) 151,200

Total Property, Plant and Equipment, Net P 11,124,700 6. Intangible Assets Franchise P500,000 Accumulated Amortization – Franchise (50,000) P 450,000 Licensing Agreements P 360,000 Accumulated Amortization – Licensing Agreements (216,000 144,000 Total Intangible Assets P 594,000 7. Trade and Other Payables Accounts Payable P 2,204,200 Accrued Expense 648,820 Interest Payable 380,000 Dividends Payable 1,250,000 Current portion of Long Term Debt 500,000 Trade and Other Payables P 4,983,020 8. Amortized cost of bonds payable Bonds Payable P 2,000,000 Discount on Bonds payable (114,200) Bonds Payable, Net of Discount P 1,885,800


12

Answers:

1. Petty Cash 7,500 c 2. Cash in bank 296,900 a 3. Trading Securities 350,000 b 4. Accounts Receivable 2,758,900 d 5. Allowance for doubtful accounts 137,900 d 6. Advances to Officers & Employees 123,000 d 7. Inventories 4,976,900 d 8. Prepaid Insurance 23,150 c 9. Land 1,720,000 b 10. Building 7,750,000 b 11. Accumulated Depreciation – Building 150,000 b 12. Net book Value of Leasehold Improvement 151,200 c 13. Franchise 500,000 a 14. Licensing agreement, net 144,000 b 15. Accounts Payable 2,204,200 c 16. Accrued Expenses 648,820 c 17. Unearned Revenues 130,000 d 18. Interest Payable 380,000 c 19. Income Taxes Payable 163,477 a 20. Dividends Payable 1,250,000 d 21. Current portion of long term debt 500,000 b 22. Discount on Bonds Payable 114,200 c 23. Ordinary share capital 5,000,000 a 24. Retained Earnings 5,021,191 c 25. Sales 31,589,000 d 26. Cost of Good Sold 17,606,300 c 27. Marketing & administrative expense 8,368,650 c 28. Other income 40,000 a 29. Interest expense 792,120 b 30. Net income 3,306,113 a

Documents

Chaper 1 - FS Audit