CHAPTERCOMPREHENSIVE AUDIT OF BALANCE SHEET AND INCOME STATEMENT ACCOUNTS 23 23-1. Daffodil, Inc. Adjusting Journal Entries 12.31.16 AJE (1) (2) Share donation Treasury shares Land Building 35,000 10,000 15,000 Accumulated depreciation - machinery Loss on sale of machinery Machinery Cost Less: AD (20%) NBV Proceeds Loss (3) 60,000 (b) Factory operating expenses Accumulated depreciation - building Accumulated depreciation - machinery (4) 3,000 P 5,000 1,000 P 4,000 2,000 P 2,000 (a) Accumulated depreciation - building Retained earnings Building (P315,000 x 2%) Machinery: 5,000 x 10% = 145,000 x 10% = 1,000 2,000 300 300 21,300 6,300 15,000 P 500 14,500 P15,000 Merchandise inventory, 12.31.16 B/S Merchandise inventory, 12.31.16 I/S 175,000 175,000 23-2 Applied Auditing 2014 Edition Solutions Manual (5) (6) (7) (8) (9) Administrative expenses Allowance for doubtful accounts 1,000 Factory operating expenses Unexpired insurance 3,000 Retained earnings Bond interest expense Unamortized bond discount 2,500 2,500 Sinking fund assets First Mortgage SF Bonds Sinking fund assets Sinking fund income 1,000 3,000 5,000 23,500 23,500 1,500 1,500 700 P1.000 35.000 200.300 174.000 220.31.000 P1.182. ordinary Accounts payable Bond interest accrued 1st Mortgage.000 88.000 50.000 .007.000 315.000 121.950 300 P 875.000 35.000 74.500 (3a) 3.000 15.000 1.31.000 (4) (9) 175.000 (8) 23.15 Land Buildings Accumulated Depreciation .500 P1. 6% SF Bonds Ordinary shares Premium on ordinary shares Share donation Retained earnings.000 (5) Balance Sheet Dr Cr P 64.15 Unexpired insurance.600 148.000 200.900.16 Sinking fund income Trial Balance Dr Cr P 64.000 P 1.182.000 15.000 175.000 23.000 2.500 175.000 3.500 169. Working Trial Balance 12.500 (1) (7) 60. Inc.600 145. 12. Inc.000 12.000 10.600 Net Income 1.000 P1.000 Adjustments Dr 283.000 Income Statement Dr Cr Cr 2.000 35.000 15.000 145.051.051.000 1.500 (3a) (2) (8) (9) 300 1. 12.900.000 15.500 500.000 29.300 3.000 88.000 50. (continued) Daffodil.500 (6) (1) (1) (3b) (2) (3b) 3.Comprehensive Audit Cases and Problems 23-1.000 71.000 283.31.Buildings Machinery Accumulated Depreciation .500 (2) (4) 2.000 (7) (1) 5.000 6.300 3.000 P 293.Machinery Sinking fund assets Unamortized bond discount Treasury shares.000 25.000 6.750 250.500 169.500 P1.000 P1.800 174.000 210.000 P1.16 Cash Accounts receivable Provision for doubtful accounts Inventories.000 P 223.31.500 1.750 226. 12.500 P1.800 36.000 1.000 25.000 (3b) (6) (5) 21.000 P 2.000 (7) 2.000 60.000 223.700 P1.500 17.150 875.000 50.000 6.000 3.31.600 175.000 330. 23-3 Daffodil.000 20.051.15 Sales Purchases Payroll Factory operating expenses Administrative expenses Bond interest expense Loss on sale of machinery Merchandise inventory 12.000 500.000 P 876.500 P 293.182. 000 3.000 550 900 Retained earnings Commissions expense Accrued commissions payable 730 240 Cash in bank Miscellaneous income 650 Purchases Accounts payable 800 (10) Income from Investment Investment (11) Prepaid advertising and promotions Advertising and promotions expense (12) 5.778 1. IS or Cost of Sales 3. 12-31-16.100 1.000] 9 (2) (3) (4) (5) (6) (7) (8) (9) Prepaid interest Retained earnings Interest expense Merchandise inventory.000 167 167 20.000 Retained Earnings Purchases 6.000 .23-4 Applied Auditing 2014 Edition Solutions Manual 23-2.000 90.000 Store supplies inventory Store supplies expense Retained earnings 1.000 3.000 970 650 800 3.778 [(P22.000 – P2.000 90.000 NO AJE (13) Machinery Depreciation expense – machinery Allowance for depreciation – machinery Repairs and maintenance 20. Part I Adjusting Journal Entries.900 15.000) – P4.000 Prepaid insurance Insurance expense 3. 12-31-14 AJE (1) Depreciation expense Accumulated depreciation 1. 12-31-16 BS Merchandise inventory.000 15.450 6. 500 9.200 3.200 19.500 Part II Column B – Adjustment.000 (15) Doubtful accounts expense Allowance for uncollectible accounts 14.500 Required allowance as of 12-31-07 – on past due accounts (5% x P30.000 19. xx xx xx xx xx International Company AJE (1) (2) Depreciation expense Accumulated depreciation – delivery vehicle Cost of sales Retained earnings 3. 12-31-16 AJE (a) Retained earnings Purchases xx (b) NONE xx (c) Retained Earnings Allowance for depreciation xx Retained Earnings Allowance for depreciation xx Machinery Retained earnings xx Depreciation Allowance for depreciation xx Retained earnings Taxes xx xx xx (d) (e) (f) (g) 23-3.000 .000 14.000 P14.000 5.000) Total Unadjusted debit balance of the “Allowance” account Additional Provision 23-5 2.000 P 5.Comprehensive Audit Cases and Problems (14) Miscellaneous income Gain on sale of treasury shares Land Additional paid-in capital arising from Treasury Share transactions 2.500 P 1.500 4.000 5.000) – on current accounts (1% x P400. Requirement (1) AJE (1) (2) (3) Inventory.760 . 2015 (BS) Inventory.000 7. Sunshine Cosmetics.000 4.000 125. Dec.500 Cash Accounts receivable 5.920 Accounts payable Purchase returns and allowances 20.920 20.200 14. 31.000 5.800 4.800 Depreciation expense Equipment Repairs expense Accumulated depreciation – equipment (10) Insurance expense Prepaid insurance Retained earnings 2.600 22.000 18.000 Unrealized holding gain or loss – Income Allowance for decline in value of securities 2. Trademark has indefinite life and no amortization need be made.200 Doubtful accounts expense Allowance for doubtful accounts (15.000 Accrued salaries payable Salaries expense 3.500 5. Dec.000 32.500 (11) No adjusting entry. 31.600 Accumulated depreciation – equipment Equipment Gain on sale of equipment Estimated litigation loss Estimated litigation liability 8.700 125.660 – 740) 14.000 32. 205 (IS) or Cost of sales 67. Inc.23-6 Applied Auditing 2014 Edition Solutions Manual (3) (4) (5) (6) (7) (8) (9) Cost of sales Inventory 8.000 12. 23-4.300 3.000 3.760 67. 160 (11) Provision for Income tax expense Income tax payable 107.400 P346. 2015 Revenue from sales: Sales Less: Sales returns and and allowances Sales discounts Cost of goods sold: Inventory.386 107.760 24.400 1.Comprehensive Audit Cases and Problems (4) (5) (6) (7) (8) (9) Sales commissions Accrued commissions payable 23-7 216 216 Freight-in Accounts payable 1.650 .300 (10) Supplies expense Unused Supplies 1.290 108.000 20.386 Requirement (2) Sunshine Cosmetics.600 1.650 (b) P517.800 (a) P 22.400 1.300 1.300 (d) 408.990 P565.160 P974.212 Freight-out or Expense Sales 8.380 1.760 (c) 325.600 Advertising expense Prepaid advertising 1.400 Interest receivable Interest income 1.212 8. January 1 Net purchases: Purchases Less purchase returns and allowances Freight-in Cost of goods available for sale Less Inventory.240 12.640 P179. December 31 Gross profit on sales P998.160 1.380 Depreciation expense Accumulated depreciation 1. Income Statement For the Year Ended December 31. Inc. 400 9.400 P251.392 (f) 13.000 9.120 4.450 17.080 P619.160 (k) 73.382 92.730 P 70.500 (g) 8.600 12.040 45.080 (275.400 P P139.600) Net income P 2.460 54.200 (54.000 54.108) P 9.200 14.300 37.23-8 Applied Auditing 2014 Edition Solutions Manual Other income: Interest revenue Dividend revenue Gain on sale of assets Total income Operating expenses: Selling expenses: Sales salaries and commissions Advertising expense Depreciation expense – Sales/delivery equipment Freight expense Travel expense – sales representatives Miscellaneous selling expenses General and administrative expenses: Legal services Insurance and licenses Depreciation expense – office equipment Utilities Telephone and postage Supplies expense Officers’ salaries Doubtful accounts expense Total operating expenses Other expense and losses: Interest expense Loss on sale of equipment Income from continuing operations before income taxes Income taxes Income from continuing operations Discontinued operations: Gain from discontinued operations (net of income taxes of P25.028 4.216 (e) 33.950 1.860 .920 (h) 136.780 (i) 14.240) P290.800 2.922 (j) P197. .860 P1..53 0.............000 shares) Gain from discontinued operations (P54. (b) 75...200 Deduct dividends paid Retained earnings....600 = P12..... Other Assets ...........650 Purchase returns and allowances: P346. .. . Corrected Balance Sheet Debit Credit .380 = P2..387 Supplies expense: P4.000 x 6% = P20........200 = P108.. 2016 Account Title Current Assets ....... ...........415 .. ........415 (c) 29.......500 Doubtful accounts expense: (P522. ..300 Sales salaries and commissions: P70..360 – P3.100 + P67.. .....120 (d) 3..... Inc..340 251................ Retained Earnings Statement For the Year Ended December 31. Del Bakery Working papers are not required......636 x 2/6) = P33............ .935 .... Del Bakery Working Papers for Corrected Balance Sheet December 31.......Comprehensive Audit Cases and Problems Earnings per ordinary share: Income from continuing operations (P197.. 2015 Retained earnings.760 Inventory: P41. ..400 78..........600 .133......... ...400 + P1. Other Liabilities .... December 31 23-5.70 P3.. January 1 Add net income per income statement P 881.... 3...535 128............160 Sunshine Cosmetics................ .. 29...000 shares) 23-9 P2.....000 + (P7..23 Computations: (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) Sales: P990.000 P1.....920 Interest revenue: P1. ......067....216 Advertising expense: P32..... Current Liabilities ..400 + P8....... (a) 53............. Balance Sheet Debit Credit 53. (e) 95.000 shares) Net income (P251. ....800 Freight-in: P11...200 x 3%) = P70.200 + (P15. 95.. ...600 .......400 = P998.... ...200 66...........000 .....200 = P1.780 Income taxes: P335.460 78.. .......582 x 32% = P107.000 75. but they facilitate the preparation of a corrected balance sheet......... ................050 + P1...... Investment in Business ......................860 78..120 .........935 128....................392 Depreciation expense: P12........600 x 10/120) = P13...... ...........180 + (P3.......535 Corrections Debit Credit .000 x 3%) – P740 = P14................ ..... (a) 10..........675 (b) 7..... ..........040 425 2........... Supplies Inventory............... 2..... Paid-in Capital from Sale of Shares at More Than Stated Value..............................100 ................................ Fixtures.... ............... .750 12.. ...... ............................600 . Delivery Truck .......................... Inventory.......100 12........ ........................840 30............ ........ ....................... ............. ...... Buildings . ............... ...........000 (b) 62. .......... ......250) .. 30. ................................. 2016 Assets Current assets: Cash ........................ P5 stated value......... Corrections: (a) (b) (c) ... ...150 .. .. .....000 .......100 ....500 (d) (e) To restate other liabilities To restate owners’ equity accounts Del Bakery Corrected Balance Sheet December 31................. ...................575 12.............. .. .. Share Capital......................................................000 ...........950 ......... ........... 144..500 8........000 144.......... 10................. ... ..840 To restate current assets To restate other assets To restate current liabilities 2.....575 12..................... Accumulated Depreciation – Buildings [2 ½ (P62...... ................................... ........... 30....... 7. Cash Surrender Value of Insurance on Officers’ Lives ....... ........ (e) 40...935 .............. (a) 2............. 4.......000 ....................150 (e) 30... .......... ................ ........23-10 Applied Auditing 2014 Edition Solutions Manual Cash .. .. .................. ......100 ................................................................ .......... ...575 12.... ........000 .................500 8.. ........... ..........000 880 29......................... 284. Supplies inventory ...... ................000 (b) 880 (c) 29...........000 shares ......... Trade Accounts Payable .... 5.. P10.. ..... (a) (a) (a) (a) (a) (a) ...... .... Investment Securities – trading (at market value) ...... .............. cost P4................ ....... (b) 7..... .............................................160 ........ .. 2............................... ..... Trade accounts receivable (fully collectible) ............................750 (d) 350 ............. ...100 (a) 2..........600 2....................040 425 2........ Investment securities – trading (reported at market...... ............................ .. ..... ...... .. (e) 25....... (b) 4... . .. ..140 .. (b) 30........000 3................ Accumulated Depreciation – Fixtures........................................ .................. (a) 4. . ................................. ....... Interest Payable .......................................... .... Trade Accounts Receivable ................ ..... ............. .......000 62........100 12............... 25... Miscellaneous Liabilities .950 ................................. Land ........................................ ........... ..... Inventory.. ..500 ............................. 11% Mortgage Payable (current portion)........................................ ......... Retained Earnings...... ......... ........000 284............................................500 8....000 ...............000 20)] 11% Mortgage Payable ......... ..... . .................040 425 P 34.................. .................... ............... 4......000 (d) 3..... ...750 (b) 12.....000 ...600 . . P25.... P5 stated value.... Miscellaneous accrued liabilities ................................000 Retained earnings .........Comprehensive Audit Cases and Problems Investments: Cash surrender value of life insurance .500 ...............160 P134..................... Accounts payable ............................. Land....... Owners’ Equity Contributed capital: Share capital............ 2........500 Less accumulated depreciation .............................. Buildings.........000 Paid-in capital from sale of ordinary shares at more than stated value .....990 P 37...............000 880 3...................000 10......... Total liabilities...............990 Masipag Corporation Adjusting Journal Entries....................000 29...750 Fixtures ...................................160 85........... buildings and equipment: Land ............... 30.000 P 49.. 11% Mortgage payable (noncurrent portion) ............000 54........... Total liabilities and owners’ equity ..........000 30.... Dec....750 P134.000 400.........................830 12.. 2016 AJE (1) (2) (3) Cash Accounts payable Accounts receivable Cash Bank loan payable Other expenses Cash 200............830 P55....... 23-6................................................... Total owners’ equity..... Liabilities Current liabilities: Mortgage payable................... Interest payable ..... Total assets ........................................................................ 23-11 4........... 5.....100 P30.000 Less accumulated depreciation .. 31.....400 2.....500 412.......... 7........100 P 4..........000 200...... P12................250 10.....................100 Delivery truck .....000 shares .........................................000 12........... P62...................................................................000 10..........950 96............... portion due this year .... 000 Operating expenses Cash 1.000 2.600 145.000) Accounts receivable 15.000 Other income Marketable securities 54.000 75.000 55.000 21.000 32.23-12 Applied Auditing 2014 Edition Solutions Manual (4) (5) (6) (7) (8) (9) Cash Accounts receivable 75.000 5.000 (15) Accounts receivable Other current liabilities 50.000 7.000 Accounts receivable – others (2.000 + 3.000 (12) Inventory Cost of sales 400.a) Valuation allowance – Marketable securities – Trading Other income – Unrealized holding gain 40.000 50.500 Cash Other income 16.000 (10) Marketable securities Other income (10.000 145.000 54.000 (16) Operating expenses Allowance for doubtful accounts 21.000 – 15.000 (13) Accounts receivable – others (30.000 500.600 (11) Sales Accounts receivable 500.545 4.545 .000 Marketable securities Other income 40.545 (18) Discount on notes receivable Other income 15.000 400.000 (14) Accounts receivable – others Accounts receivable 55.900 (17) Other income Discount on notes receivable 54.500 16.545 4.000 32.900 54.000) Operating expenses Cash 1. 000 13.000 (22) Accounts receivable – others Inventory 16.062.000 (21) Inventory Cost of sales 25.500 3.000 (20) Cost of sales Accounts payable 25.000 23-13 60.000 (31) Operating expenses Land and building 20.333 (29) Land Building Land and building 1.250 (25) Operating expenses Prepaid expenses 5.250.250 5.000 55.000 25.000 16.000 46.000 120.333 5.000 (27) Long-term bond investment Other income 5.000 (24) Operating expenses Prepaid expenses 46.777 5.Comprehensive Audit Cases and Problems (19) Cost of sales Accounts payable 60.000 (23) Sales Accounts receivable 13.777 (28) Accounts receivable – others Other income 5.000 25.000 .500 4.500 (30) Building Land and building 425.000 425.000 180.000 (26) Other assets Operating expense Prepaid expenses 60.000 20.500 27.000 (32) Operating expenses Prepaid expenses Land and building 27.187. 922) 3.333 1.490.000 (39) Income taxes payable Provision for income tax 115.600 P 442.500 (121.062.500 115. plant and equipment Land Building Accumulated depreciation – Building P P 400.600 408.533 744.23-14 Applied Auditing 2014 Edition Solutions Manual (33) Land and building Operating expenses Accumulated depreciation – building 237.400 (36) Accounts payable Other current liabilities 50.000 (50.000 15.500 175.000 20.400 50.250 P4.000 (33.000) 734. 2007 Prepaid expenses Total current assets Investments Long-term bond investment Property.000 545.000 50. December 31.000 145.612.578 121. 2016 Assets Current assets Cash Marketable securities Valuation allowance Accounts receivable Allowance for doubtful accounts Notes receivable Discount on notes receivable Accounts receivable – others Inventory.000 (37) Operating expenses Estimated liability on warranties 15.850 550.000 (38) Other current liabilities Other expenses 50.290 MASIPAG CORPORATION Balance Sheet December 31.960.000 96.500 P3.000 10.290 115.000 55.077 P1.150) P 600.000 (35) Operating expenses Accumulated depreciation – equipment 55.578 .470.922 (34) Prepaid expenses Operating expenses Equipment 10. Dec.730 P11.053.418.437.441) P 711.701 (342.710 (1.655.288 Liabilities and Shareholders’ Equity Current liabilities Accounts payable Bank loan payable Accrued expenses payable Other current liabilities Income taxes payable Estimated liability on warranties Total current liabilities P 877.000 Shareholders’ equity Ordinary shares Additional paid-in capital Retained Earnings Total shareholders’ equity Total liabilities and shareholders’ equity P5.000.558 8.511.000 P11.500) P 1.959.000 (4.000 100.480 P 2.000 24. plant and equipment Other assets Total assets 5. 31.296.678 110.971.296.558 70.060.509) (37.288 MASIPAG CORPORATION Income Statement For the Year Ended December 31.000 2.000 3.000 130.600 Total property.250 2.000) P 2.000 (235. 2016 AJE (1) Cash Prepaid interest Other charges Long-term debt (current portion) Long-term debt 31.000 59.Comprehensive Audit Cases and Problems Equipment Accumulated depreciation – Equipment P1.100.336.000 225. P 6.000 .654.000 12. 2016 Sales Cost of sales Gross profit Other income Operating expenses Other expenses Income before taxes Provision for income tax Net Income 23-7.000 1.304.000 1.377.400) 23-15 1.260 Felicity Company Adjusting Journal Entries. 000 30.000 41.000 (10) Accumulated depreciation Operating expenses 36.100 8.000 14.000 Allowance for doubtful accounts Operating expenses Accounts receivable Operating expenses 72.100 41.000 (12) Revaluation increment Retained earnings 24.000 22.000 Inventory Cost of sales 12.000 20.000 13.000 .000 (13) Property and equipment Operating expenses 30.000 Unrealized loss due to decline in value of non-current investment (equity) Operating expenses 20.000 Investments in SMC shares – available for sale (non-current) Marketable securities 72.000 24.000 200.000 Sales Accounts receivable 14.400 Revaluation increment Accumulated depreciation Property and equipment 12.000 (15) Accounts receivable – others Cash 22.000 48.400 120.000 80.000 36.23-16 Applied Auditing 2014 Edition Solutions Manual (2) (3) (4) (5) (6) (7) (8) (9) Cash Accounts payable and others 2.000 2.000 (11) Operating expenses Accumulated depreciation 48.000 (14) Retained earnings Cumulative effect of change in accounting principle 13.000 8. Revaluation increment ....000) .....................751.................................. Other charges................................205 72.......................... Operating expenses ..... Allowance for decline in value of non-current investment .........000) ....................042..............................000 262..........................................445 25............................520 (83.......................................600 1....000) 2........................................................................... Ordinary share capital .. Prepaid interest ............ Investments in SMC shares – available for sale ..........................................000 48.........703...000) P 3.....................................257.................. Allowance for doubtful accounts .600......703.............................................................................................................................................522) (102..172..124 2...................... Gross profit ..............000 978........ Unrealized loss due to decline in value of investment in SMC ..................... Accounts receivable ................. Non-current Assets: Advances to affiliate ...420 FELICITY COMPANY Income Statement For the Year Ended December 31.....000 (20.......................Comprehensive Audit Cases and Problems (16) Provision for income tax Income tax payable 23-17 25...................................................... 2016 Assets Current Assets: Cash........000 (1.......000) 96.....................................420 Liabilities and Shareholders’ Equity Accounts payable and others (including current portion of bank loan of P24... Long-term debt ...........................................757.......................................................... Income tax payable ................................. Accumulated depreciation ..000) 62..............................................................................000 3........................................000 72.............. Retained earnings ........................ Total Liabilities and Shareholders’ Equity P 434...............000 2........599 (20................................................................. Inventories .......................................000 P 3.............. 2016 Sales ..............................................................................................616 100......445 FELICITY COMPANY Balance Sheet December 31............... Property and equipment .. P 2......................................... Total Assets P 123............................ Accounts receivable -others ..........................604 P 499.................... Cost of sales ....820 (27...................... ....... P 313....600 P 49.......... Discontinued operations (net) ..600 P b 2016 7.......000) (80........000) P168........... as previously reported Add: Adjustment for the cumulative effect on prior years of applying retroactively the new method of accounting for long-term contracts (net of income taxes) Balance at beginning of year... as adjusted Net income Balance at end of year 2017 P 77..000 Comparative Statements of Retained Earnings 2018 Balance at beginning of year.000 42...000 117.....000 89....500) 197........... Provision for income tax (35%) .........000 (120............899 204... 23-8......000 (420.............000) P400.000 Note: The company has accounted for revenue and costs for long-term construction contracts by the percentage-of-completion method in 2018.......... Net income .000) (50.000 P 0 280...000 (80..........000) P 49........600 P200........000 (50.599 P P Learn Company Condensed Comparative Income Statements Construction revenue Construction expense Other expenses Income before income taxes Income tax expense Net income 2018 2017 2016 P900... whereas in prior years revenues and costs were determined by the completed-contract method........600 49.000 (182.....000 P446.000 (21.....400) P117.......000 P a 0 0 P166.....099 (6..............000) (70............................600 P166.... Income from continuing operations after tax ....23-18 Applied Auditing 2014 Edition Solutions Manual Income from continuing operations before tax ..000) P280.............998 109..........600 P 49.......000) P 70.....................000 P420. The effect ........... The new method of accounting for long-term contracts was adopted to (state justification for change in accounting principle) and financial statements of prior years have been restated to apply the new method retroactively. 000) P140. a P49.000 + P70.20 c Increase 2017 P47.000 P4.000 – P280.000 P11.000 21.30)] Deferred Tax Asset a [(P100.000 Requirement (2) GOODY CONSTRUCTION COMPANY Condensed Comparative Income Statements (Partial) Income before income taxes Income taxes at 30% Net income Earnings per ordinary share (100. 23-9.000 b (P49.000) c P280.600 P4.600) – (P7.000 – P80.000) x (1 – 0. 1 Construction in Progress Retained Earnings [P70.54 .000 + P117.000 shares) 2016 P400.000) P154.000 P1.76 2016 P42.20 The balances of retained earnings for 2008 and 2009 have been adjusted for the after-tax effect of applying the new method of accounting retroactively.000 + P75.000 x (1 – 0.40 2014 P220.000 P1.000 P2.000 + P250.000 – P7.000 + P120.000) P280.000 – [(P600.000 (60.Comprehensive Audit Cases and Problems 23-19 of the accounting change on income of 2018 and on income as previously reported in 2016 and 2017 is as follows: Net income Earnings per ordinary share 2018 P112.30)] Goody Construction Company Requirement (1) 2016 Jan.000 (66.000)] – (P100.000) 70.000 a 49.000 (120.000) + (P125.80 2015 P200. 000) x (1 – 0.000 P574.000 x (1 – 0.000) x (1 – 0.000) – P100.000 b 49. The new method of accounting for long-term contracts was adopted to (state justification for change in accounting principle) and financial statements of prior years have been restated to apply the new method retroactively. as previously reported Add: Adjustment for the cumulative effect on prior years of applying retroactively applying the new method of accounting for long-term contracts (net of income taxes) Balance at beginning of year.000 280.000 + P250.000 – P100.000 d P294.000] x (1 – 0.30) Note: The company has accounted for revenue and costs for long-term construction contracts by the percentage-of-completion method in 2007.000 – P350.000) P(0.000 e 84.000) – (P100.000 d [(P100.30) + P70.000 140.30) .30) h [P400.23-20 Applied Auditing 2014 Edition Solutions Manual Comparative Statements of Retained Earnings 2016 Balance at beginning of year.30) e [(P100.30) c P250. The effect of the accounting change on income of 2016 and on income as previously reported in 2014 and 2015 is as follows: Net income Earnings per ordinary share 2016 P(49.000 + P120.000 + P75.000 P154.000 P 0 0 P 0 154. whereas in prior years revenues and costs were determined by the competed-contract method.000 x (1 – 0. as adjusted Net income Balance at end of year 2015 2014 P245.49) h Increase 2015 P(35.35) g 2014 P84.000 + P120.000 c P 70.000 – P250.000 P0.000)] x (1 – 0.000) P(0.000 + P125.000 P154.000 – (P820.30) g (P200.000 P294.000 b P100.84 f The balances of retained earnings and deferred taxes for 2015 and 2016 have been adjusted for the after-tax effect of applying the new method of accounting retroactively: f (P220.000)] x (1 – 0. Sand Company Requirement (1) a.019 634 4. 23-10. 1. and retained earnings on the balance sheets would also be restated. 60.000 40. Incorrect entries: Building Notes Payable Depreciation Expense: Building (P60.000 . deferred income taxes.000 30) Accumulated Depreciation: Building Correct entries: Building Discount on Notes Payable Notes Payable a 60. The construction in progress.000 40.366 4.000 P60. construction revenues and expenses would be restated to the appropriate amounts for the percentage of completion method.098 634 4.981 19.098 b c 1.098 40.019 19.981 Entries to correct error: Discount on Notes Payable Building Accumulated Depreciation: Building Interest Expense Depreciation Expense: Building Discount on Notes Payable b.366 4.981 30 c Interest computed using effective interest method: 10% x P40.000 2.098 19.000 Retained Earnings Cost of Goods Sold To correct error from prior year.683013 Depreciation Expense: Building Interest Expense Accumulated Depreciation Discount on Notes Payable b P40.Comprehensive Audit Cases and Problems 23-21 Items Restated: On the 2014 and 2015 income statements.019 a 60.000 x 0.000 2. 098 amortized for 2016) Accumulated Depreciation: Building Retained Earnings Building d b.000 .23-22 Applied Auditing 2014 Edition Solutions Manual Cost of Goods Sold Inventory To correct error in current year.000 10.000 Requirement (2) a.000 The errors from 2014 and 2015 were counterbalanced by the end of 2015 and 2016. c. 10.019 less amount of P4. respectively. so it can be ignored.464 15.000 18.a. 14.000 15. Retained Earnings Salaries and Wages Payable 10. so they can be ignored. Retained earnings Salaries and Wages Expense To correct error in salary and wage accrual in 2015. Retained Earnings Inventory c.921 634 3. Discount on Notes Payable (total discount of P19.000 10.000 15. 2016. 15.098 less depreciation overstatement of P634 The error from 2015 was counterbalanced by the end of 2014. See Requirement 1. 18.019 Correction of interest expense understatement of P4. d 19.000 Salaries and Wages Expense Salaries and Wages Payable To accrue salaries and wages at December 31. of this solution for the incorrect entries that were made and the correct entries that should have been made. so it can be ignored.000 The error from 2014 was counterbalanced at the end of 2015. 2%) Increase estimated warranty liability Effect of change in accounting principle from expensing to capitalizing relining costs in the year of the change (Schedule 2) Furnace A (Jan.000 (117.330.000 x 0.000 (125. Therefore. Any resulting adjustment should be reported as an adjustment to the opening balance of retained earnings.000 Schedule 1: Computation of Adjusted Depreciation Cost of equipment (no salvage value) P1.000) 180.000 52.000) .000.000) (56. 2015) Furnace B (Jan.000 Depreciation based on 10-year life Depreciation based on 8-year life Adjustment P 100. Any other information with respect to prior periods. Comparative information should be restated unless it is impracticable to do so. such as historical summaries of financial data. including the comparative information for prior periods.500. before adjustments Adjustments: Depreciate certain equipment over 8-year life instead of 10-year life (Schedule 1) Correct 2015 error Record 2016 provision for doubtful accounts (P58.000 -(180.000) P (25.000) 240.000 P3. 13 paragraphs 42 and 43 state that “a change in accounting policy should be applied retroactively unless the amount of any resulting adjustment that relates to prior periods is not reasonably determinable. The amount of the adjusting relating to periods prior to those included in the financial statements is adjusted against the opening balance of retained earnings of the earliest period presented.030.082. 23-23 Play Company Requirement (1) SFAS No. comparative information is restated in order to reflect the new accounting policy.Comprehensive Audit Cases and Problems 23-11.000) --- 224.000 P3.000 -44. are presented as if the new accounting policy had always been in use. The financial statements.000 P4.374.” PLAY COMPANY Worksheet to Correct Income Before Income Taxes Income before income taxes. 2016) Net adjustments Income before income taxes Year Ended December 31 2016 2015 P4.000) (170. is also restated.000 (25. The net income would be understated in 2014 because interest income is understated.000 0 0 P22. 4.000) P184.000 x 20%) Adjustment 23-12.000 P33.000 x 20%) Depreciation on Furnace A based on 5-year life (P280.000 0 0 P10. they are included below for your interest.000 Jo Francisco.23-24 Applied Auditing 2014 Edition Solutions Manual Schedule 2: Computation of Effect of Change in Accounting Principle From Expensing to Capitalizing Relining Costs on the Year of the Change Capitalization of Furnace B Depreciation on Furnace B based on 5-year life (P300. P280.000) (56.000 Requirement (2) PLAY COMPANY Effect Before Income Taxes of Change in Accounting Principle From Expensing to Capitalizing Relining Costs For Year Ended December 31. however. 6.000 0 0 P11. Explanations: 1. .200 0 Retained Earnings 12/31/15 Understated Overstated 0 0 P 5. The errors.000 (60. 2016 Capitalization of Furnace A Depreciation on Furnace A based on 5-year life (P280. The net income would be overstated in 2015 because interest income is overstated.100 0 P 7.000 x 20%) Adjustment P300. 5. would counterbalance (wash) so that the Balance Sheet (Retained Earnings) would be correct at the end of 2015. Net Income for 2014 Understated Overstated P14.000 P33.000 0 0 P20. 3.000 P18. Inc.000 (56. Item 1.000 0 0 Although explanations were not required in answering the question.000) P224. 2. 420 P39.000 too much was reported. By the end of 2015.000) because these amounts were expensed.000/4 X 1/2 = P1.000 until the last year of the lease. The ending inventory of 2014 becomes the beginning inventory of 2015.000 should have been reported as income.300) 1. earned in 2016 Wages not accrued.100 (1.000 research and development costs – P22. and the last month’s rent should be expensed.000 research and development costs capitalized less P11.000 (P30. 12/31/15 Inventory of supplies. The depreciation expense in 2014 should be P1. retained earnings would be understated by P5.000 + P8.000 was reported as income when only P10.000 should be reported as income each year.000 of the research and development costs would remain as an asset.000 (P33.000 for this machine. 5. 23-25 2.300) 740 P26. 2014. The ending inventory would be understated since the merchandise was omitted. JC Patrick Corporation Net income. 12/31/15 Wages not accrued. The net income of 2014 is understated by P33. P10.000 or one-third of P30.300 1. so retained earnings is still overstated by P10. net income in 2014 would be understated. 6. At the end of 2015. called refundable deposits. as reported Rent received in 2015. paragraphs 54 to 57 govern the accounting for research and development costs. called prepaid rent. If beginning inventory of 2015 is understated. 3.000 in 2015. The security deposit should be a long-term asset.000 amortized). The security deposit will then be refunded.500 (940) (740) 1. Net income in 2014 is overstated P22.000 – P2.000).000 (1. 12/31/14 Wages not accrued.000 1. Because P20.000 of depreciation expense should have been taken in 2015. 12/31/16 Corrected net income 2015 P29.Comprehensive Audit Cases and Problems 23-13.000). In 2014.000). only one-half of a year should be taken in 2014 (P8. then net income of 2015 is overstated (inverse relationship). The omission in inventory over the two-year period will counterbalance.000 so net income is understated by P7. 4. and retained earnings at the end of 2015 will be correct.000 – P20. Therefore. An additional P2.540 . Retained earnings will continue to be understated by P33.000 should have been reported. P30. P20.000 (P7.000 instead of P1.000 (P25. only P11. 12/31/14 Inventory of supplies. the net income of 2014 is overstated.500) (1. retained earnings would be overstated by P11.000 of last month’s rent is also an asset.000 (P33. At the end of 2015.740 2016 P37. Because ending inventory and net income have a direct relationship. PAS 38. Since the machine was bought on July 1.000 amortized). 12/31/16 Inventory of supplies. The company expensed P8. The P8.